Annual Report 2010

Annual Report 2010

Leopalace21 Corporation

Leopalace21

Responding to the Unmet Needs of Tenants and Landowners
Our basic business model is to build and rent
apartments on a property in great demand,
optimizing mutually beneficial needs for bothproperty owners and tenants.
Since there are various unmet housing needs
such as temporary housing in Japan, we havedeveloped products (apartments) and contract
types to respond to these needs. In addition,by constructing apartments on the property oflandowners who are interested in effective
utilization of land, we also have responded to
the needs of property owners.
This is the unique synergy between the Leasing
business and the Apartment Construction
Subcontracting business that enables us torealize high stability in our business operations.

Unchanging Principles,
Changing Strategies
However, following the sudden decline in theeconomy in the latter half of 2008, a drastic
number of rooms beyond expectation werevacated due to the sudden mass adjustment of
employment, particularly in major manufacturing
companies, and our occupancy rates also
inevitably saw an immoderate decline.
Occupancy rates in the Leasing business andorders in the Apartment Construction
Subcontracting business have an inseparable
relationship in our business. In the current
situation where rapid recovery of occupancy
rates is difficult, it is important to offer products
which can secure orders in the regions with solid
demand. In addition, it is also important toenhance and improve accuracy of leasing profit
management, which have been our company’s
issues.

Shifting from “Product Out” to “Market Out” ModelWe created a Medium-term Management Plan in May 2010, not only to adapt to a severe businessenvironment after the global financial crisis, but also to implement measures to enhance and improveaccuracy of leasing profit management, which have been our company’s issues, and to “shift to astable earnings structure with earnings balanced between the Apartment Construction Subcontracting
business and the Leasing business."
Changing our mindset to a "Market Out" business model based on our Leasing business, we will shift
our focus to “Stock” or units under our management. As the initial year for changing our businessmodel, during fiscal 2010, we will concentrate on proceeding with a series of reforms in order toreinforce our foundation for a profitable business.

Contents
Interview with the President

Financial Section

Consolidated Six-Year Summary

Management’s Discussion
and Analysis

P2

P10

P10

P11

Consolidated Financial Statements

Notes to Consolidated
Financial Statements

Report of Independent Auditors

Corporate Information

P18

P23

C3

C4

1

Leopalace21

Interview
with thePresident

Q1: Please summarize results for fiscal 2009.
A1: Due to stagnation in both the Apartment Construction Subcontractingb u s i n e s s a n d t h e L e a s i n g b u s i n e s s , w e p o s t e d o u r fi r s t o p e r a t i n g d e fi c i t i ncompany history.
In May 2009, we announced the Medium-term Management Plan “Change for NEXT”. However, to our greatest
regret, we posted operating deficit, due to the unexpected magnified impact given by the economic downturn
triggered by the global financial crisis to our core businesses. We are sincerely sorry for causing worry to all of ourvalued shareholders and investors.
With the slowdown in new orders and the high cancellation rates for past orders in the Apartment Construction
Subcontracting business, together with the depressed occupancy rate in the Leasing business, consolidated sales
for fiscal 2009 (ended March 2010) ended with ¥620.3 billion, a 15.4% decrease from the end of the previous fiscal
year.
Although we were able to reduce selling, general and administrative expenses by ¥14.0 billion during fiscal 2009
from comprehensive effor ts in cost reduc tion in the Apar tment Construc tion Subcontrac ting division andstreamlining management throughout the entire company, the measures were not enough to cover the reduction insales and profitability in both leasing and subcontracting businesses.
In addition, with more money allocated to the provision for apartment vacancy loss to prepare for future vacancies
due to a sudden change in the leasing environment, we marked our first operating deficit in the company's history.
And I regret to announce our decision to suspend payment of year-end dividend, in lieu of recorded losses which
led to negative retained earnings in fiscal 2009.
2

Consolidated operational profit/ordinary profit trend

Consolidated sales volume trend by sectors(billions of yen)(billions of yen)
80
70
60
50
40
30
20
10
0
-10
-20

800

631.6

673.0

620.4

600
500

564.7

464.5

400
300
200
100

-30
Consolidated sales(biliions of yen)

733.2

700

0

FY
FY
FY
FY
FY
FY
2006/3 2007/3 2008/3 2009/3 2010/3 2011/3(planned)

Consolidated sales

Subcontracting

FY
2006/3FY
2007/3FY
2008/3FY
FY
2009/3 2010/3

FY
2011/3

195.2

316.1

327.5

359.2

237.1

180.2

(planned)

Operating profit

40.8

76

71.4

50.2

-29.7

5.3

Leasing

249.7

277.2

302.8

346.1

342.7

363.8

Ordinary profit

44.2

70

60.8

46.8

-33.8

3.4

Hotel/Resort
others

10.9
12.1

10.8
31.2

10.3
36.6

12.6
20.2

9.7
34.3

9.6
14

Q 2 : What were the main causes of the decrease in sales in fiscal 2009?
A2: The main causes were the reduction in the order amount for the Apartment
Construction Subcontracting business and the fall in the occupancy rate for the
Leasing business.
The overall decline in sales revenue is largely due to the sales decline in the Apartment Construction Subcontracting business,
which accounted for about half of consolidated sales in the previous fiscal year.
Subcontracting business's profits as of the current term will be decided based on the amount of orders in the preceding fiscal
year. However, due to the difficult business environment which includes the financial institutions’ strict loan standards,
suspension of new nonrecourse loans because of the loss of the securitization market, order amount in the Apartment
Construction Subcontracting business showed an enormous drop (decreased by about 50% compared to the previous fiscal
year). As a result, sales for fiscal 2009 ended with ¥237.0 billion, a 34.0% decrease from the end of the previous fiscal year.
Meanwhile in the Leasing business division, following the sudden decline in the economy in the latter half of the previous year,
a drastic number of rooms beyond expectation
were vacated due to the sudden mass adjustment
Monthly leasing business occupancy rate trend for past 3 yearsof employment, particularly in major
FY 2009
FY 2010
FY 2011
manufacturing companies, and our occupancy
rates also inevitably saw an immoderate decline.
95％
In fiscal 2009, we have committed to strengthening
corporate client sales in addition to developing
90％
various campaigns to acquire individual and family
85％
tenants. Furthermore, we have been performing
revisions on the construction supply plan in order80％
to control increase in vacancies.However, with theemployment adjustment continuing over a long75％
Apr. May. Jun.
Jul. Aug. Sep. Oct. Nov. Dec. Jan. Feb. Mar.
period, it is taking a considerable period of time forcorporate profits to return to the growth path thanMonthly subcontract order results trend for past 3 years
initially predicted. On one hand, the number ofmanaged units increased along with the
FY 2009
FY 2011
FY 2010completion of apartments every month to make a(millions of yen)
total of 552 thousand units (increased by 45
30,000thousand units from the end of fiscal 2008). And on
the other hand, demand from corporate clients,
20,000which accounts for half of the number ofcontracted units, has been slowing down. As a
10,000result, the annual average occupancy rate of fiscal
2009 decreased by 6.2 points from the average of0fiscal 2008, to 82.3%.
Apr. May. Jun. Jul. Aug. Sep. Oct. Nov. Dec. Jan. Feb. Mar.
3

Leopalace21

Q3: What is your analysis of the cause of stagnation in the core businesses?
A3: Although the effects of the economic recession have been significant, I also
believe that structural problems were a root cause.
It is true that the influence of this recession has been great. For the Apar tment Construction Subcontracting
business, the loss of the securitization market and financial institutions' stricter loan standards following the
global financial crisis heavily affected its performance. And corporations' protracted employment adjustments
causing large scale reductions in new tenants for the Leasing business. However, I believe, this is not the only
reason.
To introduce my background with Leopalace21, it has been 33 years since I joined the company in 1977, and I
spent 14 of those years in leasing sales. I became involved with the leasing business when the current synergy
model between construction subcontracting and leasing was developed, and since necessity to commercialize
the leasing business emerged, I needed to specialize in the leasing business division to take on the
responsibilit y. At the time I took on the role in 1996, there were only 80 thousand units under management.
Currently, it is poles apart with 550 thousand units under management, which is close to seven times the units.
With an enormous stock of leased apartment units under management, I believe it is difficult to operate underconventional methods. We have been implementing measures to enhance and improve accurac y of leasing
p ro fi t m ana g e m e nt f o r th e p as t f ew ye ar s , b u t th ey we re m o re o f su p p o r ti ve m e asu re s to d e al w i th th e
financial crisis rather than to change our entire business structure. I believe this was the reason the revision to
the Medium-term Management Plan “Change for NEXT” became inevitable.

Q4: What are the key components of the Medium-term Management Plan
released in May, 2010?
A4: We will shift to a stable earnings structure with earnings balanced between
the Apartment Construction Subcontracting business and the Leasing business.

P r e v i o u s l y, o u r b u s i n e s s m o d e l h a d b e e ncentered on distinguishing ourselves from thecompetition by supplying good properties andproviding good ser vices. In other words, thekey to high per formance was to develop
leasing demand forecasts and utilize this datato generate orders for apartment construction
on a consignment basis.
Never theless, according to the Housing andLand Survey in 2008 by the Statistic Bureau of
M i n i s t r y o f I n t e r n a l A ff a i r s a n dCommunications, the proportion ofunoccupied houses (the vacant house rate) has
c l i m b e d t o a r e c o r d h i g h o f 13 .1% o f a l lresidences in Japan, up from 12.2% in 2004. In
such a down business environment, it isessential to shift the starting strategy for ourleasing business to cons truc ting rent als intenants' choice locations.
Base d on this way of think ing, for the ne x t
three years star ting with this fiscal year, ourcompany is changing our mindset in theinaugural year 2010 to a "Market Out" businessmodel based on our leasing business, and we will shift our focus to “Stock,” or units under our management whichcurrently are over 550 thousand units and scheduled to be over 620 thousand units by fiscal 2013. As the initial year
for changing our business model, we will concentrate on proceeding with a series of reforms in order to reinforce
our foundation for a profitable business.
4

By upgrading and increasing precision in handling our company's traditional task of revenue management forrent al prop er ties, we will move towards a s t able earnings s truc ture with earnings b alance d b et we en the
Apartment Construction Subcontracting business and the Leasing business.
In addition, the extraordinary loss of ¥45,5 billion on the balance sheet for fiscal 2009 includes the execution ofa dr as tic b usin ess res tr u c tur in g in a cco rdan ce w i th this M e dium - te r m M ana g e m e nt Plan that sh o ul d b e
implemented early in order to return to profitability.
* Please refer to MD&A section for details of extraordinary loss.

Q5: In what ways will the operational methods of the Leasing business bechanged?
A5:The main points will be the diversification of sales channels and evaluation of
the ability of each channel to attract new tenants, as well as the introduction ofstrategic commodities that fit with our regional strategies.
The important point is improving tenant recruitment capability of each sales channel, while at the same time introducing
new products that meet the strategic needs of specific areas.
There were six types of methods (=channels) through which we acquired tenants for our Leasing business, but in reality
the major channels were through offices under direct management and corporate sales, in other words, face-to-face sales
activities.
During the period of our new Medium-term Management Plan, we will newly introduce a new channel called “Leopalace
Partners” which includes outside franchises as well as independent franchises spun off from within the Company andoperated by former Company staff members, to attract potential tenants while keeping sales costs to a minimum.
Providing properties best suited to each area is another important point. We will provide apartment properties best
suited to the area in order to realize the “Market Out” for the New Area Strategy. As our first urban-type designer’s
condominium, we have introduced “VERDURE,” a new product in our LEONEXT series in urban areas, which are our key
markets. Furthermore, we will
introduce large 1Ｋ (one room
and kitchen) and family-t ype
rooms for the suburb area inorder to meet the needs ofsingle people in their 30’s aswell as families.
Fur thermore, in order tostrengthen earnings fromappropriate rent acquisitions,
we are planning to use theLeasing ALM system already inoperation in one department
since May of 2010.

Q6: How will the policy for the Apartment Construction Subcontracting
business change?
A6: We will focus on accepting orders from regions and properties with reliable
demand and strategically adjust the scale of operations to an appropriate level.
We may not be able to achieve previously seen high growth in terms of sales because this plan also includes a
strategic retrenchment/rectif ication in the Apar tment Construction Subcontracting business by focusing on
accepting orders from regions and properties with reliable demand for three years through fiscal 2012.
However, we will endeavor to realize a stable growth in profits through fixed cost reduction, elaborative costmanagement, and detailed earning management on our Leasing business.
5

Leopalace21
We will fundamentally revise the cost structure to allow us to generate profits even after strategic retrenchment of
the highly profitable Apartment Construction Subcontracting business.
To be specific, we will (1) reduce unit cost of apartment construction in the Apartment Construction Subcontracting
business, (2) rectify rents due on master lease agreements for the Apartment Construction Subcontracting business,(3) reduce sales costs in the Leasing business (shift to variable expenses), and (4) lower consolidated SG&A expenses
from ¥79.3 billion (SG&A ratio of 12.8%) in fiscal 2009, to ¥52.7 billion (9.6%) in fiscal 2012.
In addition, we will suspend all non-essential capital expenditures and freeze large-scale development projects inorder to return and drive-home “Motazaru Keiei (non-ownership management)” and reduce interest-bearing debt
and operate by emphasizing cash f low in operations. Par ts of the development projec ts have already been
terminated or been determined as sell out in fiscal 2009 , and an extraordinary loss resulting from this decision has
been posted.
Furthermore, we will manage related businesses with priority on synergy with core businesses, in order to maximize
consolidated earnings and efficiency.

Q7: What were the aims of the change in organization that was implemented
in April 2010?
A7: The aims were to shift to a strategy based around our Leasing business and theswift promotion of structural reform.
In order to conduct decision-making from a company-wide optimum viewpoint and to promote speedy businessrestructuring, we have made reforms to the organizational structure in April 2010.
To conduc t business struc ture reform quick ly, we have created an organiz ation in order to promote rapid
decision-making and to make further progress toward reforms by establishing a new organization called “Business
Structure Reform Headquarters” under the direct control of myself, the President and CEO, and by placing thecommittees, which were subsidiary organizations previously under the Corporate Management Council, under thisheadquarters.
In addition, we have newly established a “Cost Reduction Committee” as a subordinate committee under Business
Structure Reform Headquarters, and a “Purchasing Department” under Management Headquarters, and continue topromote a shift to a low-cost structure.
Our aim is to establish an earnings management structure that achieves balanced earnings in our core businesses and torealize a shift to our “Market Out
Supply Plan” business model,(As of April,2010)
based on our Leasing business．
Toward these goals, we made “Rent
Administration Department” and“A r e a St r a t e g i e s D e p a r t m e n t ”
independent from the Marketingand Sales Headquarters, placing it
under the Business Planning
Headquarters, and established an“A r e a St r a t e g i e s D e p a r t m e n t ”
under the Business Struc ture
Reform Headquarters.
Under the previous organization,
we had Real Estate, Silver (Elderly
Care) business, and Domestic Hotel& Resort Departments under theRelated business division. Under
the new organization restructure,
the Related business division has
been incorporated under theMarketing and Sales Headquarters
with the goal to manage related
businesses from the standpoint of“Concentrating Management
Resources on Core Businesses.”6Q8: What is the numerical target of the Medium-term Management Plan?
A8: Our plan is to aim to generally maintain the level of sales while improving thelevel of profits.
The basic policies of the Medium-term Management Plan are “Shift to a Stable Earnings Structure with Earnings
Balanced between the Apartment Construction Subcontracting Business and the Leasing Business” and “Shift to a
Low- cost Struc ture.” Toward these goals, we will strategically optimizing the highly profitable Apar tment
Construction Subcontracting business and fundamentally revising the cost structure.
In order to improve financial efficiency during the period of the new Medium-Term Management Plan, we will focus
management resources on our core businesses (Apartment Construction Subcontracting business and the Leasing
business).
Due to the shif t to a “Market Out Supply Plan” business model based on our Leasing business, the sales of our
Apartment Construction Subcontracting business will greatly decrease. However, a fundamental review of the cost
structure, making it possible to generate profits even after strategic retrenchment of highly profitable Apartment
Construction Subcontracting business, will enable a moderate operating profit decrease.
Estimation on numeric values for our consolidated performance is based on changes in business models concerning
the amount of orders received and occupancy rates, both of which are performance indicators. By estimating on thesafe side based on our current business environment, the consolidated net sales will be ¥546.7 billion in the last
fiscal year of the Medium-term Management Plan, but it is possible to measure definite improvements of the profit
level within the planned period.

7

Leopalace21

Q9 : What is the outlook for fiscal 2010?
A9 : Concentrating on proceeding with a series of reforms, we will reinforce ourfoundation for a profitable business.
Fiscal 2010 is the year in which we have shifted our central strategy to a "Market Out" business model based on
our Leasing business, and the initial year for changing our business model to focus to “Stock.” This is a year
where we will concentrate on proceeding with a series of reforms.
Sales figures at the first quarter (the start of the Medium-Term Management Plan) suffered slightly from thefailure of the occupancy rate plan but through cost cutting efforts things are generally going according toplan. With rental fee adjustments and measures enacting in two core operations underway, we believe we are
well on our way towards recovery.
To explain the measures of the core business in detail, firstly, as for the Leasing business, it aims for occupancy
rate and an improvement in profitability according to the four measures stated below.
1. Narrow down the number of new apartments supplied to avoid stress on the occupancyrate, based on new area strategy (approximately 7,500 housing units which are 57%
compared to the same period last year)
2. As measures to strengthen our new channel strategy, move up the opening of Leopalace
Partners (franchise strategy) ahead of schedule, with a total of 22 offices (including 3 offices
by former employees) scheduled to open in August. In addition, we are aiming to open 150
offices, which is our goal for this year, before the start of the peak period for tenancy
applications from January to March (in other words, by the end of this year.)
3. Expansion of China business: Strengthen our sales channels in China through theestablishment of a four-office system by adding two offices in Guangzhou and Dalian in
October of this year.
4. As part of our pricing strategy in operating the “Leasing ALM System,” strengthen the areaauthority from July of this year, by allowing the branch offices closest to the market to set
rents and arrange campaigns, which will enable local areas to respond more effectively.
However, due to the effect of current economic trends and the state of the corporate job market on theoccupancy rate, a set period of time will be required before we will see the effects of our countermeasures.
Consequently, in regard to the Apartment Construction Subcontracting business, we are putting two
measures that are not based on the bulk leasing system into effect. It will increase the order amount while
not putting stress on the occupancy rate, even while operating in the current economic environment.
1. Accepting orders for “Built-for-sale (apartments not subject to master lease agreements withowners).” Product names are Lavo Villent and SELDEAR, etc., and we have already booked orders
received which account for 1/4 of the total for the first quarter.
2. Accepting orders for contract works of care facilities in our Silver (Elderly care) business from
August of this year, which is to match the needs of our owners with the needs of businesses inelderly care. Thus, we will establish a so-called business model “Care business matching system”
without using the bulk leasing system.
Future policy on dividend payouts to shareholders will be decided based on the current business climate
and progress of our Medium-Term Management Plan throughout the term. Currently, no future policy has
yet been decided.
We sincerely appreciate continuous understanding and support from our shareholders.
8Q10 : Please tell us about the CSR efforts undertaken by the Company.
A10 : CSR is the activities that further enhance
the social significance of the business itself, andwe are always pursuing the creation of newvalue.
Our basic business model is to build houses on a proper t y ingreat demand, optimizing mutually beneficial needs for higher
perspec tives for both landowners and tenants. We arec o n fi d e n t t h a t o u r b u s i n e s s p r a c t i c i n g i t s e l f r e v e a l s t h eCompany’s CSR.
As we run business implicating not only peoples’ life-styles andsocial environments but also “solution measures,” we are ver y
happy to offer the values including those of our CSR activities,
responding to the changes in lifestyle, society andenvironment, and to keep pace with the times.
I n c r e a s i n g n u m b e r o f co r p o r a t e c u s t o m e r s m ay b e a g o o de xample. During the re cent e conomic re cover y p erio d since
2 0 0 2 , L e o p a l a c e 21 w a s u t i l i z e d a s c o m p a n i e s ’ e m p l o y e eapar tments for both for families and singles to alternate theh o u s i n g b e n e fi t to r e d u ce t h e b u d g e t . T h is r e s u l te d i n t h emarket expansion of our corporate customers.
W i t h a s i g n i fi c a n t c h a n g e i n b u s i n e s s e n v i r o n m e n t , o u r
operation is at a turning point now. From CSR point of view, weare convince d that this is the tim e for refle c tion to give ourthoughts to what our stakeholders expect us to be.
We are always pursuing the creation of new value that is one
step ahead of the times and, by promoting CSR management
w hi ch re sp o n ds to th e Co r p o r ate S o cial R e sp o nsib ili t y as aCorp orate Citizen that is in our corp orate vision, we aim forcontinuous growth.

Q11: Can you please share a message with all the shareholders?
A11: We will strive to reform the business model and business structure with firm
determination.
My absolute mission is to put the Company back on the grow th path. There is p ossibilit y that recover y ofcorporate results will take some time, but our entire management will take on the reformation withindomitable resolve to respond to shareholders’ expec tations and realize continuous grow th as a company
indispensable to society.
When we look back in time, in 1985 we started leasing “Leopalace21” - urban-style, one-room rental apartmentbuildings - in a p erio d of e conomic grow th, and have achieve d sus tainable grow th by changing businessmodels through the adoption of changes in our business environment, such as switching to “Motazaru Keiei(non-ownership management)” after the bursting of the economic bubble.
The business model change this time will be one of the major turning points since the inauguration of the
Co m p a ny. T h e c h a n g e w i l l b e p a i n f u l to s ay t h e l e as t , b u t I b e l i e ve t h is r e f o r m w i l l b r i n g t h e Co m p a ny
sustainable grow th and allow us to live up to the expec tations of our customers, owners, shareholders andinvestors.
We sincerely appreciate continuous understanding and support for our management from our stakeholders.

9Leopalace21

Consolidated Six-Year Summary
Leopalace21 Corporation and consolidated subsidiaries
Years ended March 31
Thousands of U.S.
dollars, except
where noted

Millions of yen, except where noted

2010

2009

2008

2007

2006

2005

2010

¥620,376¥733,235¥672,974¥631,608¥465,387¥476,267$6,667,846

Apartment Construction Subcontracting

237,062

359,155

327,541

316,117

195,202

248,033

2,547,961

Leasing

For the year:
Net sales

342,316

334,561

302,731

277,163249,696

216,591

3,679,236

Hotel Resort

6,734

5,611

6,072

7,141

8,340

7,282

72,378Residential Sales

24,644

11,46911,281

14,1501,745

140

264,875

Other

9,620

22,43925,34917,037

10,404

4,221

103,396

Cost of sales

570,749

589,834

511,054474,713353,928

357,546

6,134,452

Selling, general and administrative expenses

79,35593,24490,51780,88870,68464,039852,910

Operating income(29,728)

50,157

71,40376,007

40,77554,682(319,517)

EBITDA(23,432)

55,93976,56680,56745,34060,538(251,850)

Net income (loss)(79,076)

9,952

342

37,358(16,582)

33,262(849,913)

At year-end:¥396,512¥467,300¥493,956¥454,820¥412,804¥453,434$4,261,736

Total net assets

70,979146,442

170,155

185,785

133,622

149,798

762,891

Interest-bearing debt

61,31844,18849,711

53,16064,513

108,786

659,053

Total net assets¥466.76¥967.40¥1,036.43¥1,054.99¥839.44¥941.06$5.02

Net income (loss)(521.91)

63.54

2.15

234.68(104.17)220.79(5.61)

−

30.00

80.00

50.00

15.00

15.00

−

Equity ratio (%)

17.9

31.3

33.4

37.0

32.4

33.0

Return on equity (ROE) (%)(72.8)

6.4

0.2

24.8

(11.7)

28.8

Return on assets (ROA) (%)(18.3)

2.1

0.1

8.6

(3.8)

7.6

Payout ratio (%)

−

47.2

3,720.9

21.3

−

6.8

Debt/equity ratio

0.9

0.3

0.3

0.3

0.5

0.7

8,582

9,926

8,678

7,409

6,868

6,457

Total assets

Amounts per share:

Cash dividends
Ratios:Number of employees

Notes:
1. U.S. dollar amounts are translated from yen at the rate of ¥93.04 = US$1, the approximate rate prevailing at March 31, 2010.
2. The Residential Sales division is classified separately from other divisions in the year ended March 31, 2009. Accordingly, the numbers for the years ended March, 2004, 2005, 2006,
2007 and 2008 were reclassified appropriately.
3. The amounts of total net assets for the years ended March 2004, 2005 and 2006 represent the value of total shareholders’ equity and do not include minority interests.
4. Net loss for the year ended March 31, 2006 is the result of impairment losses posted after adoption of new accounting standards for impairment of property, plant and equipment.
5. EBITDA = Operating income + depreciation
6. Return on assets (ROA) = Net income/total assets x 100
7. Debt/equity ratio = Interest-bearing debt/(net assets - minority interests)

10

Management’s Discussion and Analysis
Operating Environment
Although the economy showed some signs of improvement incorporate performance such as exports and production during FY2009 (the fiscal year ended March 31, 2010), with severe
employment, income insecurity and prolonged deflation, theprospect of economic recovery still remains uncertain.
In the housing industry where the Company belongs, the toughbusiness environment has been prolonged with commencementof new housing starts decreasing by 25.4%, of which houses forrent decreasing by 30.0% compared to the previous year.

As for the Hotel and Resort business, sales amount decreased to¥6,734 million, which was 15.9% decrease from the previous fiscal
year because of the decrease in tourists visiting the Guam islands
due to the H1N1 flu epidemic. The Residential Sales business sales
showed ¥24,643 million, a 114.9％ increase from the previous
fiscal year because of the administrative supports such as tax
exemption for housing acquisition and successful pricing strategy.
Sales from the Other division (Silver <elderly care> business,financing secured with real estate, small-claims and short-term
insurance businesses) increased to ¥9,619 million by 10.7% fromthe previous fiscal year.

Under these circumstances, influenced by the worse than
expected recession, consolidated net sales of Leopalace21 groupfell during the subject fiscal year due to the decrease in orderamount of the Apartment Construction Subcontracting businessand occupancy rate in the Leasing business. In terms of earnings,
despite strict cost management and company efforts to reduce
costs, reduced profit margins due to lower sales and recording ofadditional allowance reserves due to low occupancy rates, profits
decreased and the Company recorded a loss for the first timesince its establishment.

As a proportion of total sales by segment, the Apartment
Construction Subcontracting business accounted for 38.2% (down
10.8 percentage point year on year) and the Leasing business
55.2% (up 9.6 percentage point), with these two segments
accounting for 93.4% of total net sales. The Hotel Resort businessaccounted for 1.1% (up 0.3 percentage point), the Residential
Sales business 4.0% (up 2.4 percentage point), and the Other
Business 1.6% (down 1.5 percentage point).

Furthermore, due to the sharp downturn in performance, in orderto bring the Company back to profitability as early as possible byimplementing fundamental change in our business structure,
together with appropriating the restructuring costs as special
losses, and revisiting accounting policies as part of therestructuring, by allocating the provision for apartment vacancy
losses as an extraordinary loss, a much higher than originally
expected loss in net income was posted.

The cost of sales decreased 3.2% year on year to ¥570,749 million.
This was mainly due to insufficient cost reduction to keep up withthe sharp drop in the Apartment Construction Subcontracting
business’s completed number of constructions, as well as the
allocation of provision for apartment vacancy loss (¥16,765
million) in the Leasing business. As a result, the gross profit totaled¥49,626 million, falling ¥93,775 (-65.4%) year on year.

Net Sales
Consolidated net sales for the subject fiscal year was ¥620,376
million – a ¥112,859 million (15.4%) decrease from the previous
fiscal year. The main reason for this is that the sales in the
Apartment Construction Subcontracting business was ¥237,062
million– a ¥112,092 million (34.0%) decrease from the previous
fiscal year due to a decrease in the number of orders received
caused by the global financial crisis. Furthermore, due to theoccupancy rate drop, sales in the Leasing business also decreasedto ¥342,316 million, a ¥3,598 million (1.0％) decrease from theprevious fiscal year.
Net Sales

Earnings

Due to the cost reduction efforts, selling, general andadministrative (SG&A) expenses showed year-on-year decrease by¥13,889 million (-14.9%) to ¥79,354 million. However, this did not
greatly affect the decrease in gross profit, and the Company
posted operating loss of ¥29,727 million compared to ¥50,156
million profit of the previous fiscal year.
The current term net loss, after allocating the currency exchange
loss of ¥2,468 million and extraordinary loss of ¥45,551 million,
was ¥79,075 million (the previous fiscal year net profit was ¥9,951
million.)Operating Income and Operating Margin
Millions of yen
800,0076,007800,000
600,00

12

10.6
8.8
40,77540,000200,000

Operating Income
Operating Margin

71,40312.0
11.5
54,682600,000

400,000%
16

50,1578

6.8

20,000

4

0

0

-4

-20,000

(4.8)
0

2005

2006

2007

2008

2009

(29,728)2010

Note: Decline in operating income and operating margin for the year ended March 31, 2006
is the result of the postponement of scheduled construction contracts.

11

Leopalace21

Net Income and Net Margin
The extraordinary losses consist mainly in three areas: (1)losses on business restructuring (¥29,855 million), (2)provision for apartment vacancy losses (¥10,342 million) and(3) impairment losses (¥3,237 million). These losses are inline with the “Medium-Term Management Plan”, which aims
for fundamental change in our business structure in order tobring the Company back to profitability as early as possible.
The followings are the main items included in the losses on
business restructuring:

Millions of yen
40,000

7.0

Leopalace21 has decided to sell off or to halt developmentof some fixed assets, such as real estate, which the Company
owned mainly for the purpose of constructing our own
buildings. This is a part of the management policy of“Motazaru Keiei (non-ownership management)” in order tomaintain cash flow.
Therefore, the subject assets fall under “Implementation
Guidance for Accounting Standards for Impairment of Fixed
Assets”. Therefore, Leopalace21 reduced the book value ofthese assets to a level which the Company believes they cancollect, and posted the reduced amount as an impaired loss
for the current period.

2. Difference arising from a change inaccounting treatment relating to indirect
expenses in the Apartment Construction
Subcontracting business: ¥10,204 million
Starting from the 1st quarter of FY2010, the Company has
posted profits and direct costs for contracted work of theApartment Construction Subcontracting business division
based on percentage of completion method. However, thesecosts did not include indirect costs, such as labor costs for
management engineers, which was partly responsible forthe reduction in gross margin for FY2009.
In order to correct this problem and to improve accuracy inmanaging construction costs, Leopalace21 has revised themethod of calculating indirect costs. Specifically, theCompany has decided to cost and budget them when they
incur, just as profits or direct costs, and reduce them
together with sales and administrative costs. The difference
posted here is the results of these revisions.

3. Expenses relating to the closing of businesslocations: ¥511 million
4. Early cancellation penalties relating toterminated lease contracts: ¥297 million
In order to comply with the anticipated Medium-Term
Management Plan, Leopalace21 has closed out 99 Leasing
business locations during FY2009 as part of its efforts toshift some of our SG&A expenses to variable expenses, thus
making it possible to reduce fixed costs.
In addition, in order to reduce company-wide SG&A
expenses, the Company has closed out 14 Apartment
Construction Subcontracting business offices. These costs
include security deposits and labor costs for these premises
and cancellation of leases for company vehicles.
12

5.9

37,358Net Income
Net Margin4

20,0000.1

0-20,000

1. Impairment losses on cancelled development
projects and assets planned for sale: ¥18,761
million33,262

%
8

9,952
1.4
0

342
(16,582)-4(3.6 )-8-40,000-60,000-80,000(12.7)(79,076)
2005

2006

2007

2008

2009

-12

-16

2010

The extraordinary loss concerning provision for apartment
vacancy losses indicates the difference between the two
methods of estimating the provision amount. Previously, theCompany used historical occupancy rates to calculate theprovision, but it is now using projected occupancy rate.
An impairment loss was posted against some of the 622
apartment buildings the Company owns and rents out. The
profitability of these assets has diminished as a result of aslowdown in the rental market, the fall in land prices, andother factors.

Segment Information
Apartment Construction Subcontracting
Apartment Construction Subcontracting business, one of
Leopalace21 group’s core division, ended with order
received of ¥167,700 million (37.7% decrease from theprevious fiscal year) and with order outstanding of ¥183,660
million (27.4% decrease from the previous fiscal year end)
due to the suspension of new nonrecourse loans and thefinancial institutions’ strict loan standards, following theoccurrence of the global financial crisis.
In terms of sales, Leopalace21 has tried to recover order
receiving by introducing new products from its new
high-quality, high-added value brand series “LEONEXT” tomeet various needs of the rental apartment market. In
addition, after going through a review of the sites of sales
and the staff deployment, the Company reduced the numberof sites of sales at the end of FY2009 to 112 (14 sites ofdecrease from the previous fiscal year end).
In terms of profit, while Leopalace21 worked to reduce
operating expenses by thorough control of the cost and theprocess, the Company could not curb sales decline, and the
profit margin was narrowed. Among the construction
contracts of which actual works were undertaken during thisfiscal year, percentage of completion basis was applied tothe construction works of which certainty of the result wasrecognized for the part progressed before the end of
FY2009.
As a result, consolidated net sales was ¥237,062 million(34.0% decrease from the previous fiscal year), andoperating profit was ¥29,744 million (57.6% of decrease fromthe previous fiscal year).

Leasing

Financial Position

Leasing business, Leopalace21 group’s another core business,maintained 552,000 units under management (45,000 units ofincrease from end of the previous fiscal year), but the averageoccupancy rates for the term was 82.3% (6.2 percentage points
down from the previous fiscal year). This was mainly due to the
influence of large number of cancellation of corporate contracts
for dorms and company housing which occurred following the
production adjustment of mostly large manufacturers after
sudden recession in the second half of the previous fiscal year,
while the number of units under management increased by thecompletion of apartment construction work every month.

Total assets as of the end of FY2009 stood at ¥396,511 million, adecrease by ¥70,788 million compared with those as of the endof the previous fiscal year (15.1%).

In terms of sales, while different promotional campaigns were
implemented to obtain individual and family markets, revision of
the housing supply plan was taken in order to avoid further
spreading of vacancy. In addition, after going through a review ofthe point of sales and the staff deployment, the Company reduced
the number of sales sites at the end of FY2009 to 192 (decrease of
99 sites from the previous fiscal year end).
In terms of profit, although Leopalace21 has tried to minimize
operating expenses by reducing fixed cost with strengthened
partnership with real estate brokers, the Company posted
operating loss with allocation of ¥16,765 million of provision forapartment vacancy loss due to decreased occupancy rates.
As a result, net sales was ¥342,316 million (1.0% decrease from theprevious fiscal year), and operating loss was ¥47,875 million(increase in loss of ¥46,898 million compared with the previous
fiscal year).

Hotel and Resort
Although the resort facilities in Guam (sports resort complex“Leopalace Resort Manenggon Hills” and “Westin Resort”) has
been operated steadily, because of the impact of strong yen
during the term, the Company suffered exchange loss of ¥2,468
million due to year-end re-evaluation. Moreover, since there was adecrease in number of hotel guests throughout the year 2009
under the restriction of entrance into the Guam islands due to the
H1N1 flu epidemic, consolidated net sales was ¥6,734 million(15.9% decrease from the previous fiscal year), and operating loss
was ¥1,324 million (increase in loss of ¥851 million compared withthe previous fiscal year).

Residential Sales
Thanks to administrative supports such as tax exemption for
housing acquisition and successful pricing strategy, Residential
Sales division posted consolidated net sales of ¥24,643 million(114.9% increase from the previous fiscal year), and operating lossof ¥3,356 million (improvement of ¥738 million compared withthe previous fiscal year.)

Other

Number of subscribers for the Company’s broadband business has
steadily increased. Leopalace Insurance Co., Ltd. has grownsteadily by providing property and casualty insurance products tothe tenants of the Company’s rental housing. However, theCompany could not fill the deficit made by the operation of 57
facilities (as of March 31, 2010) in the Silver (elderly care) business.
As a result, Other division ended with ¥9,619 million of
consolidated net sales (10.7% increase from the previous fiscal
year) and ¥3,419 million of operating loss (increase in loss of ¥360
million compared with the previous fiscal year).

Current assets were at ¥146,416 million (a decrease by ¥45,599
million compared with those as of the end of the previous fiscal
year) due to a decrease of ¥18,681 million in real estate for salein process and a decrease of ¥13,741 million in payment for
construction in progress, respectively. Additionally, fixed assets
were ¥250,006 million (a decrease by ¥25,274 million comparedwith those as of the end of the previous fiscal year) due to adecrease of ¥18,620 million in land and a decrease of ¥9,889
million in long-term prepaid expenses, respectively.
Total liabilities stood at ¥325,532 million, an increase by ¥4,674
million compared with those as of the end of the previous fiscal
year (1.5%). This increase is primarily because there wereincreases in provision for apartment vacancy loss by ¥27,108
million and short-and long-term borrowings by ¥12,372
million, although there were decreases in accounts payable
and accounts payable for completed projects by ¥16,507
million, amounts received for uncompleted works by ¥5,410
million and corporation taxes payable by ¥11,663 million,
respectively. Interest-bearing debts were ¥61,318 million (anInterest-Bearing Debt and Debt/Equity Ratio
Millions of yen
120,000

Interest-Bearing Debt
Debt/Equity Ratio

108,786%1.2

1100,000

0.9
80,0000.8

0.7
64,51360,0000.5

61,31853,16049,711

44,1880.4

40,000

0.3

0.3

0.3
0.2

20,000

0

0.6

0
2005

2006

2007

2008

2009

2010

Equity Ratio
%
40

37.0
33.0

33.4

32.4

31.3

30

20

17.9
10

0

2005

2006

2007

2008

2009

2010

13

Leopalace21

increase of ¥17,129 million compared with those as of the endof the previous fiscal year) due to an increase in short-and
long-term borrowings and bonds.
Total net assets were ¥70,979 million, a decrease of ¥75,463
million compared with those as of the end of the previous fiscal
year (51.5%). This is primarily due to a decrease in retained
earnings, after the allocation of ¥79,075 million as net loss for
FY2009.
As a result, equity ratio was 17.88 % (31.34% as of the end of
the previous fiscal year) and net asset per share was ¥466.76(¥967.40 as of the end of the previous fiscal year).

Cash Flows
Cash flows from operating activities were a loss of ¥12,990
million (an income of ¥62,843 million in the previous fiscal
year). This loss is primarily because there was an increase inprovision for apartment vacancy loss by ¥27,108 million, adecrease in real estate for sale by ¥24,221 million andbusiness restructuring cost for ¥29,855 million, although
there were decreases in loss before taxes and minority
interests by ¥77,526 million and trade accounts payable by¥15,357 million.
Cash flows from investing activities were a loss of ¥8,889
million (a decrease in loss by ¥1,159 million compared withthe previous fiscal year). This loss is primarily because there
were payments of ¥5,734 million from purchase of property,
plant and equipments and payments of ¥3,697 million frompurchase of intangible fixed assets, such as the Company’s
mission-critical system, although there was income of ¥1,536
million from sale of property, plant and equipments.
Cash flows from financing activities were an income of¥15,281 million (a loss of ¥33,885 million in the previous
fiscal year). This is primarily due to an income of ¥79,707
million from borrowings and issuance of bonds, although
there were payments of ¥63,707 million from loan
repayments and redemption of bonds.
As a result, the balance of cash and cash equivalents as ofthe end of FY2009 was ¥72,031 million, a decrease of ¥6,344
million compared with the end of the previous fiscal year
(8.1%).
Free Cash Flow
52,79550000

45,70547,378

40000
30000

31,37011,89410000
0-10000-20000(21,880)

14

Despite the policy, the Company regrets to announce its
decision to suspend payment of year-end dividend, in lieu ofrecorded losses which led to negative retained earnings in
FY2009.
Future policy on dividend payouts to shareholders will bedecided based on the current business climate and progressof the Mid-Term Management Plan throughout the term.
Currently, no future policy has yet been decided.

Governance
We position the establishment and enhancement of corporate
governance as one of our most critical management issues, and
it is our basic philosophy of corporate activities to pursue anefficient, fair and highly transparent operation in order toattain higher corporate values for the sake of all stakeholders.
Based on this philosophy, we endeavor to improve ourmanagement system and management organization mainly
through reinforcing our monitoring function of our decision
making, establishment of a compliance system, improvement
and strengthening of an internal control system andestablishment of good relations with stakeholders.

Ensuring Corporate Governance
At Leopalace21, the top executive of our Business Planning
Headquarters must unify the management of Leopalace21 andits affiliated companies to implement the optimalcomprehensive group-wide governance, and is responsible forfacilitating smooth information exchange and advancement ofgroup activities. Additionally, directors in charge of eachgovernance department in each affiliated company must
establish a CSR promotion system, compliance systems, andrisk management procedures in accordance with policies
arising from the management plan and consistent withefficient work flow methods.

Our Systems of the Board of Directors and theBoard of Auditors■Board of Directors

20000-30000

The Company regards the return of profits to shareholders
as one of its most important issues.

While we set up the Board of Directors to enhance businessperformance through appropriate and rapid decision making,responding dynamically to the changes within our businessand our management environment, we strive for thestrengthening of our management monitoring function by
setting up the Board of Auditors as a supervisory organ of thebusiness execution by directors.

Millions of yen

60000

Basic Policy on Distribution of Earnings

2005

2006

2007

2008

2009

2010

The Board of Directors which is composed of 8 directors
holds regular meetings once a month, while extraordinary
meetings are held at any time as required, in order for
decisions to be made on critical management issues as wellas to monitor the performance of business operations.
Furthermore, meetings of the Management Committee areheld as needed to discuss policies on execution of business
operations and to study measures for theirimplementation.

■Board of Auditors
The Board of Auditors is composed of four auditors including
two externally appointed auditors. We adopt a system toenhance the effectiveness of auditing by auditors’
participation in essential meetings such as the Board of
Directors meetings and by conducting operational statusinvestigations, based on an auditing plan prepared by the
Board of Auditors. (The company has no business connection
with the external auditors)

Four-headquarters system
We have been promoting the enhancement of the management
system, for instance by the reinforcement of controlling functions
and the establishment of a compliance system. The management
system is composed of four headquarters which consists of: theMarketing and Sales Headquarters controlling each businessdivision; the Management Headquarters, responsible foradministrative departments; and the Business Planning
Headquarters, responsible for the planning and management ofbusiness plans; and the Business Structure Reform Headquarters,
responsible for constitutional improvement and businessstructure reform.

Internal Control System
Our basic policy of the internal control system is to base ourcorporate activities on legal compliance and compliance withsocial ethics. Specifically, we adopt a system by which theBoard of Auditors, Compliance Committee, Legal Department
and the Auditing Department supervise if relevant laws andregulations have been complied, on the very basic internal
understanding of the Code of Corporate Ethics. Additionally,
we have established the Auditing Council to prepare
appropriate financial statements while aiming to comply withall laws and regulations, to safeguard the company's assets,
and to carry out our business activities efficiently. We have also
created the Risk Management Committee, establishing asystem to conduct research on all management risks within thecompany group and to conduct prior check of importance andnecessity of the outstanding issue. Furthermore, we opened awindow for the internal communication in order to grasp andimprove various other issues of problems to accomplish further
improvement and reinforcement of the internal control system.

CSR Promotion, Compliance System and Risk
Management System
CSR Promotion System
We position CSR activities as an important managerial issue
and pursue promotion of CSR by setting 4 basic principles.
With regard to the CSR promotion system, we created a CSR
Committee in order to aim at the sustainable developmentof society and our corporate group by performing our
accountability in response to explicit as well as implicit
requests from our stakeholders.
The CSR Committee, which is composed of the President andCEO as the chairman and executive officers of eachheadquarters as members, implements various measures intie-up with the Compliance Committee and the Risk
Management Committee, being conscious of how to
respond to requirements from society. In order to promote
the measures regarding CSR, a person in charge of CSR has
been assigned in each business division and office toassume the job responsibility.

Compliance System
With regard to the compliance system, along withestablishment of the Corporate Code of Ethics and theinternal reporting system, we have created the Compliance
Committee to strengthen its commitment.
As an advisory organ of the Board of Directors, theCompliance Committee is composed of the President andCEO as the chairman and external members (lawyers andexternal auditors). It plans and implements various measuresconcerning compliance such as educational training andimprovement and reinforcement of the information control
system.
As a system to aggressively implement such measures
regarding compliance, a person in charge of compliance has
been assigned at each business division and office toassume the job responsibility.

15

Leopalace21

Risk Management System

Business and Other Risks

With regard to the management system, the Risk Management
Committee has been created to grasp and manage the risks of
the whole company in a comprehensive manner. In
furtherance, the Internal Auditing Department conducts
auditing of the status of risk management of eachheadquarters together with auditors to report the results to theBoard of Directors and the Risk Management Committee, also
feeding back the results to the Administrative Headquarters toserve for the correction or preparation of the basis for further
measures.
As an advisory organ of the Board of Directors, the Risk
Management Committee, composed of President and CEO as
the chairman and external members (lawyers and CPA), notonly verifies status of risk management, but also plans andimplements educational training and others in order to realize
reduction and prevention of risk.

Listed below are the principal risks that we believe could
affect the Leopalace21 Group’s business performance andfinancial position. However, this list is not all-inclusive anddoes not cover all the risks that could affect Groupbusinesses. All forward-looking statements included hereinreflect the judgment of the Leopalace21 Group management
as of the end of the consolidated fiscal term under review.

Internal Auditing System
With regard to the internal auditing system, we have formed
the Auditing Department out of the independent internal
auditing units from each operations unit. In the past, theAuditing Department was aiming to strengthen its
capabilities by working under the direct supervision of thepresident, but we have recently set up a new Audit Council
with the aim of strengthening the department's capacities
even further. Based on our basic internal control system
policies, we are verifying and evaluating the efficacy of, as
well as making improvements in, the new system.

Information Security
We promote reinforcement of our information security
system in order to properly manage corporate information
as well as private information of apartment owners andtenants.
With regard to private information, the executive officer incharge of the Administrative Headquarters as supervisor of
the private information, together with the Compliance
Committee, make proper use and control of the informationin accordance with relevant laws and regulations including
the Private Information Protection Law, having prepared asystem which enable us to respond quickly in case of an
accident.

16

1. Revenue related risk
Leopalace21 apartments are primarily utilized by single
persons, and corporate contracts typically involve
short-term leases of apartments for use as company
dormitories by workers travelling on company business. As aresult, changes in the performance of the overall economy
and corporate business results could affect employment
rates or the demand for business trips, and this could
negatively impact occupancy rates at the Company’s
apartments.
In addition, we have included in our forecasts all
contracted orders for apartment construction, however the
possibility that the client may not be able to obtain thenecessary financing or loans from a financial institution is an
important risk factor. Changes in the willingness of financial
institutions to provide credit, changes in the assessed valueof real estate to be used as collateral, and fluctuations ininterest rates could affect Company revenues and adversely
affect the Company’s business results.

2. Cost of sales
Based on the Company’s apartment construction contract,
the Company concludes a master lease agreement withapartment owners to lease back the constructed apartment
for a period of time and at a rent level that are both fixed at
the time the contract is concluded. Therefore, fluctuations in
the amount of rental income received from tenants during
the contract period could adversely affect the Company’s
profitability.

3. Profit

7. Leasehold Deposits and Guarantee Deposits

The Leopalace21 Group includes overseas subsidiaries
involved in the hotel and resort business, and as a result ourbusiness results may be affected by exchange rate
fluctuations. Our consolidated subsidiary Leopalace Guam
Corporation has borrowed funds in the form of
yen-denominated loans from Leopalace21 for the purpose of
acquiring facilities and equipment. Because the value of thisdebt is calculated each year as of the date of accountsettlement, the Company is subject to foreign exchange gainor loss. Therefore it is possible that future fluctuations in
exchange rates could affect the Group’s businessperformance and financial position.

Leopalace21 has long-term deposits from property owners held
as an advance for apartment repair and renovation. These consist
mainly of deposits received from property owners as a portion of
future repair and renovation expenses, following the dissolutionof Leopalace21 Owners Mutual Insurance Association.
Leopalace21 makes a concerted effort as a leasing business
operator to ensure the soundness of the apartment maintenancestructure, through which properties fully leased from the owner
are operated and maintained. However, an unexpected,
large-scale repair or renovation could have an impact on
Leopalace21’s financial position.
Leopalace21 also has deposits for Leopalace Resort
memberships related to the Guam resort business, most of whichdate to the opening of the resort complex in July 1993. The
Leopalace21 Group works to increase member usage byimproving facilities and member services, but should there be an
unexpected number of requests for reimbursement of these
deposits, this could have an impact on Leopalace21’s financial
position.

4. Risks associated with tangible fixed assets andreal estate held for resale
Impairment losses or appraisal losses due to declines in the current
market value of marketable securities, property for sale, fixed assets,or other assets could adversely affect the Company’s businessperformance as well its financial position. Moreover, with regard to
the Company’s hotel and resort related businesses, there will be acontinuing need for regular investments in facility replacement andrenewal. As a result, changes in depreciation expenses could havean effect on the Company’s business performance.

5. Loan Losses, and Provision for Bad Debt
The Company conducts financing activities, and carries on
its books a balance for operating loans receivable
comprising apartment construction loans and real estate
equity loans. The Company also may guarantee the housing
loans and membership fee loans offered to its customers byfinancial institutions. Apartment and other loans where
repayment has become doubtful are accounted forseparately as doubtful receivables (tangible), and a provision
is made for bad debt in each such case; however, ourbusiness results could be affected if amounts ofuncollectible debt should increase, or if we should be
obliged to honor claims pertaining to these loan guarantees.

6. Provision for apartment vacancy loss

8. Information Leaks
The Leopalace21 Group holds a great deal of information,
including personal information obtained through the consent of,or as a result of non-disclosure agreements with, clientcompanies. To control information security, the Company has
drawn up the required information security guidelines, and set
up a Compliance Committee to thoroughly educate our executive
officers and employees about information security issues.
Nevertheless, in the unlikely event that a leak of information ofsome type should occur, there is a possibility that the Group’s
reputation could be damaged, and that business performancemight be affected.

9. Other Risks
The Group is aware that it incurs a variety of risks in the course ofpromoting its businesses, and it attempts to prevent, distributeor avoid risk whenever possible. Nevertheless, the Group’sbusiness performance and financial position may be affected bychanges in economic conditions, the real estate market, thefinancial and stock markets, legal regulations, natural disasters,
and a variety of other factors.

In order to prepare for a risk of losses due to an increase inapartment vacancies, Leopalace21 has established a “Provision
for apartment vacancy loss” reserve fund equal to the amount ofloss that may be expected to be incurred during a reasonably
estimable period. The amount of this provision is based on therent levels set for individual leased units, the number ofhouseholds, and occupancy rate forecasts calculated for eachapartment building. Should any of these figures fall below theestimated values it could become necessary to increase theamount of the reserve, and this could adversely affect the resultsof the Company’s leasing business.

17

Leopalace21

Consolidated Financial Statements
Leopalace21 Corporation and consolidated subsidiaries
March 31, 2010 and 2009
Millions of yen

Thousands of
U.S. dollars (Note1)

2010

2009

2010

¥ 72,432
8,180
4,737
5,482
10
1,371
2,584
1,184
594
27,8956,142
3,207
13,495(897)
146,416¥ 78,376
6,793
2,678
10,043
153
7,560
21,266
14,925598
27,6728,046
2,596
12,781(1,472)
192,015$ 778,503
87,91850,91258,926108
14,74027,775
12,727
6,382
299,81766,01834,470145,032(9,638)
1,573,690

112,741(49,303)
63,43896,294
5,923(1,546)
4,377
3,367
13,882(10,626)
3,256
170,732

112,758(46,228)
66,530114,915
3,990
(491)
3,499
2,884
13,088(9,572)
3,516
191,344

1,211,750(529,918)
681,832
1,034,972
63,665(16,626)
47,03936,190149,204(114,199)
35,005
1,835,038

6,385
6,931
1,102
5,204
51,243
7,482
5,984(4,967)

3,028
6,103
996
4,564
61,1325,474
8,127(5,483)

68,631
74,493
11,84055,930550,759
80,42264,316(53,383)

79,364

83,941

853,008¥396,512¥ 467,300$4,261,736

ASSETS
Current assets:
Cash and cash equivalents (Note 5)
Trade receivables
Accounts receivable for completed projects
Operating loans
Marketable securities
Real estate for sale/property inventories
Real estate for sale in process
Payment for construction in progress
Raw materials and supplies
Prepaid expenses
Deferred tax assets (Note 13)
Other accounts receivable
Other
Allowance for doubtful accounts
Total current assets

Fixed assets:
Property, plant and equipment (Notes 9,14):
Buildings and structures
Accumulated depreciation
Net
Land
Leased assets
Accumulated depreciation
Net
Construction in progress
Other
Accumulated depreciationNet
Total property, plant and equipment

Investments and other assets:
Intagible assets
Investment securities (Note 7)Long-term loans
Bad debt (Note 12)Long-term prepaid expenses
Deferred tax assets (Note 13)
Other
Allowance for doubtful accounts
Total investments and other assets
Total assets
The accompanying notes are an integral part of these statements.

18

Thousands of
U.S. dollars (Note1)

Millions of yen

2010

2009

2010

2,705
43,3759,720
20,281560
1,196
10,4404
1,595
98,544
9,426
3,065
326
40
7,134
208,411¥ 3,587
59,001−
17,493−793
11,18720
13,25897,945
14,836
3,759
1,124
−
8,430
231,433

3,160
22,762
3,640
7,307
−
31,728
46,104
61
1,185
1,175

−
22,897
3,006
6,194
1,282
4,620
50,870−−556

33,964
244,644
39,12378,531−
341,016495,531657
12,73912,627

117,122

89,425

1,258,832¥ 325,533¥ 320,858$ 3,498,845¥ 55,641¥ 55,641$ 598,030

33,894(5,663)(6,143)

34,10573,413(6,543)364,295(60,868)(66,022)77,729156,616

835,435124(5)(6,958)(6,839)17(8)(10,183)(10,174)

1,337
(59)
(74,778)(73,500)

89

−

956

70,979146,442

762,891¥ 396,512¥ 467,300$ 4,261,736

LIABILITIES AND NET ASSETS
Current liabilities:
Accounts payable
Accounts payable for completed projects
Short-term borrowings (Note 14)
Current portion of long-term loans payable (Note 14)
Bonds due within one year
Lease obligations
Accounts payable-otherAccrued expenses
Accrued income taxes
Advances received
Customer advances for projects in progress
Allowance for employees' bonuses
Reserve for warranty obligations on completed projects
Asset retirement obligations
Other
Total current liabilities¥$

29,073466,201
104,471
217,977
6,019
12,855112,21347
17,141
1,059,154
101,307
32,9433,505
431
76,6762,240,013

Long-term liabilities:
Bonds
Long-term debt (Note 14)
Lease obligations
Retirement benefit reserves (Note 16)
Retirement benefit reserves for directors
Reserve for apartment vacancy loss
Lease/guarantee deposits received
Asset retirement obligations
Long-term other payable
Other
Total long-term liabilities
Total liabilities

Net assets
Shareholders' equity:
Common stock:
Authorized: 250,000,000 shares
Issued: 159,543,915 shares
Capital surplus
Retained earnings
Treasury Stocks - 7,667,387 shares
Total shareholders' equity

Valuation and translation adjustments:
Net unrealized gains on "other securities"
Deferred gains or losses on hedges
Translation adjustments
Total valuation and translation adjustments
Share subscription rights
Total net assets
Total liabilities and net assets

19Leopalace21

Consolidated Statements of Operations
Leopalace21 Corporation and consolidated subsidiaries
For the years ended March 31, 2010 and 2009
Thousands of
U.S. dollars (Note1)

Millions of yen

Net sales
Cost of sales
Gross profit

Selling, general and administrative expenses
Operating income (loss)

Other income (expenses):
Interest and dividend income
Equity in earnings of affiliated companies
Foreign exchange losses
Interest expenses
Commission fee
Gain on sale of property, plant and equipment (Note 18)
Gain on sale of investment securities
Gain from cancellation of contracted work
Rent income
Reversal of allowance for doubtful receivables
Reversal of allowance for retirement benefits for directors
Reversal of reserve for rents due on master lease agreement
Provision of reserve for apartment vacancy loss
Loss on sale of property, plant and equipment (Note 19)
Loss on disposal of property, plant and equipment (Note 20)
Loss on devaluation of real estate for saleImpairment loss (Note 9)
Loss on devaluation of investment securities
Loss on adjustment for changes of accounting standard
for asset retirement obligations
Provision for bad debt
Business structure reform expenses
Other-net

Income (loss) before taxes and minority interests
Income taxes
Income tax - current
Income tax - refund
Income taxed - previous period
Income taxes - deferred
Total income (loss) before taxes and minority interests

Net income (loss)
The accompanying notes are an integral part of these statements.

20

2010

2009

2010

¥ 620,376¥ 733,235$ 6,667,846

570,749
49,627

589,834
143,401

6,134,452
533,393

79,35593,244

852,910(29,728)

50,157(319,517)

176
146(2,468)(1,196)
(841)
130
2
105
137
1,633
92
−
(10,343)
(226)
(843)
−
(3,238)
−
(414)

297
325
(1,877)(1,224)
(780)
0
−
101
−
296
−
399
(4,313)(1)(162)(2,560)(2,808)(3,405)
−

1,896
1,568
(26,531)(12,857)(9,043)
1,400
16
1,129
1,477
17,550992−(111,164)(2,434)(9,058)−(34,800)−(4,445)(73)(29,856)
(722)

(786)
−
(213)

(782)
(320,891)(7,771)(77,527)

33,446(833,265)

330
−
1,359
(140)

21,503
(0)
(0)
1,991

3,543
−
14,605(1,500)1,549

23,494

16,6489,952$ (849,913)¥ (79,076)¥

Consolidated Statements of Shareholders’ Equity
Leopalace21 Corporation and consolidated subsidiaries
For the years ended March 31, 2010 and 2009
Millions of yen
Shareholders' equity

Valuation and translation adjustments

Net
Total
Share
Total
unrealized Deferred Translation valuation Subscription Minority
Common Capital Retained Treasury
interests
shareholders'gains
onlossesandrightsstock
surplus earnings stock
equity"otheron hedges adjustments translation
securities"
adjustments
Balance as ofMarch 31, 2008¥(763)¥(673)¥-¥4,970 ¥170,155¥(99) ¥165,858

Cash dividend(12,750)(12,750)(12,750)

Net income

9,952

9,952

9,952

(6,444)(6,444)Purchases oftreasury stock(6,444)

Net change of items
other thanshareholders’ equity
Total change during
periodBalance as ofMarch 31, 2009

¥55,641¥34,105¥90¥-¥76,211¥55,641¥34,105

Total
net
assets(73)(8)(9,420)(9,501)(4,970)(14,471)(9,420)(9,501)(4,970)(23,713)(2,798)(6,444)(9,242)(73)(8)¥73,413¥(6,543) ¥156,616¥17¥(8) ¥(10,183) ¥(10,174)(79,076)(79,076)(79,076)

(0)

(0)

(0)

400

189

189

¥-

¥ - ¥146,442

Cash dividend
Net income
Purchases oftreasury stock
Disposal of treasury
stocks(211)

Net change of items
other thanshareholders’ equity
Total change during
periodBalance as ofMarch 31, 2010

¥55,641

107

3

3,225

3,335

89

3,424
(75,463)(211)(79,076)

400(78,887)

107

3

3,225

3,335

89

¥33,894(¥5,663)(¥6,143)¥77,729

¥124

(¥5)

(¥6,958)(¥6,839)¥89¥-¥70,979

Thousands of U.S. dollars
Shareholders' equity

Valuation and translation adjustments

Net
Total
Subscription Minority
Total
unrealized Deferred Translation valuationrightsCommon Capital Retained Treasury
shareholders'gains
onlossesandto shares interests
surplus earnings stock
stock
equity"otheron hedges adjustments translation
securities"
adjustments
Balance as ofMarch 31, 2009

$598,030 $366,561 $789,045 ($70,313) $1,683,322$184($82) ($109,448) ($109,347)

$-

Total
net
assets$- $1,573,976

Cash dividend(849,913)

Net income
Purchases oftreasury stock
Disposal of treasury
stocks(2,266)(849,913)(849,913)

(2)

(2)

(2)

4,293

2,027

2,027

Net change of items
other thanshareholders’ equity
Total change during
periodBalance as ofMarch 31, 2010

1,153

23

34,67035,846956

36,802

23

34,67035,846956(811,086)($59) ($74,778) ($73,500)$956$- $726,891(2,266) (849,913)

4,291 (847,888)

1,153$598,030 $364,295 ($60,868)$66,022 $835,435$1,337

The accompanying notes are an integral part of these statements.

21

Leopalace21

Consolidated Statements of Cash Flows
Leopalace21 Corporation and consolidated subsidiaries
For the years ended March 31, 2010 and 2009
Millions of yen

2010

2009

2010

¥ (77,527)
6,296
(133)
(97)
27,108
(176)
1,196
2,468
(146)
96
843
−
3,238
(2)
−
29,856(991)
24,221
3,537
9,348(15,358)(5,410)621(4,870)(1,870)
177
2,425
184
(1,213)(14,387)¥ 33,446
5,782
3,638
(311)
4,620
(297)
1,224
1,877
(325)
0
162
2,560
2,808
−
3,405
−
35,868
4,941(3,133)(10,854)(26,860)(6,916)(506)
31,1801,549
2,492
86,350603(1,225)(22,885)$ (833,265)
67,667(1,433)(1,039)291,359(1,896)
12,857
26,531(1,568)
1,034
9,058
−
34,800(16)−
320,891(10,656)
260,329
38,017
100,477(165,066)(58,151)
6,677(52,342)(20,101)
1,895
26,0591,975(13,034)(154,624)(12,991)

62,843(139,624)(5,735)
1,536(3,697)
(836)
126
(110)
5
(178)
(8,889)(5,375)227(2,444)
(499)
80
(536)
301
(1,803)(10,049)(61,639)
16,514(39,737)(8,990)1,353(1,188)55(1,911)(95,543)

37,800(28,080)
38,000(35,348)
(906)
3,907
(280)
−
189
(1)
−
15,281
Effect of exchange rate changes on cash and cash equivalents
255
Net increase (decrease) in cash and cash equivalents(6,344)
Cash and cash equivalents at beginning of period
78,376
Cash and cash equivalents at end of period (Note5)¥ 72,032

29,000(29,000)
18,000(22,226)(401)−(5,094)(4,970)−(6,444)(12,750)(33,885)(1,498)17,41160,965¥ 78,376

406,277(301,806)
408,426(379,922)(9,742)
41,995(3,009)
−
2,027
(1)
−
164,245
2,736(68,186)
842,389$ 774,203

Cash flows from operating activities
Income(loss) before taxes and minority interests
Depreciation
Increase (decrease) in allowance for doubtful accounts
Increase (decrease) in retirement benefit reserves for directors
Increase (decrease) in reserve for apartment vacancy loss
Interest and dividend income
Interest expense
Foreign exchange loss (gain)
Equity in losses (earnings) of affiliated companies
Loss (gain) on sale of property, plant and equipment
Write-offs of property, plant and equipment
Loss on devaluation of real estate for saleImpairment loss
Loss (gain) on sale of investment securities
Loss (gain) on devaluation of investment securities
Business structure reform expenses
Decrease (increase) in accounts receivable
Decrease (increase) in real estate for sale
Decrease (increase) in work in process
Decrease (increase) in long-term prepaid expenses
Increase (decrease) in accounts payable
Increase (decrease) in customer advances for projects in progress
Increase (decrease) in advances received
Increase (decrease) in guarantee deposits received
Increase (decrease) in accrued consumption taxes
Other
SubtotalInterest and dividends received
Interest paid
Income taxes paid
Net cash provided by (used in) operating activities

Cash flows from investing activities:
Payment for purchase of property, plant and equipment
Proceeds from sale of property, plant and equipment
Payment for purchase of intangible assets
Payment for purchase of investment securities
Proceeds from sale of investment securities
Payment for loans
Proceeds from collection of loans
Other
Net cash used in (provide by) investing activities

Cash flows from financing activities:

Proceeds from short-term debt
Repayments for short-term debt
Proceeds from long-term debt
Repayments for long-term debt
Repayments of lease obligations
Proceeds from issuance of bonds
Payment for redemption of bonds
Refund of amount invested by minority interests
Proceeds from disposal of treasury stock
Payment for purchases of treasury stock
Dividends paid for shareholders
Net cash provided by (used in) financing activities

The accompanying notes are an integral part of these statements.

22

Thousands of
U.S. dollars (Note1)

Notes to Consolidated Financial Statements
Leopalace21 Corporation and consolidated subsidiaries
For the years ended March 31, 2010 and 2009

1.Basis of Presenting Consolidated
Financial Statements
The accompanying consolidated financial statements of
Leopalace21 Corporation (the “Company”) have been preparedin accordance with the provisions set forth in the Financial
Instruments and Exchange Act of Japan and its related
accounting regulations and in conformity with accounting
principles generally accepted in Japan, which are different incertain respects as to application and disclosure requirementsfrom International Financial Reporting Standards.
The accompanying consolidated financial statements havebeen reformatted and translated into English (with certain
expanded disclosure) from the consolidated financial
statements of the Company prepared in accordance withJapanese generally accepted accounting principles and filedwith the Financial Services Agency as required by the Financial
Instruments and Exchange Act of Japan. Some supplementary
information included in the statutory Japanese language
consolidated financial statements, but not required for fairpresentation, is not presented in the accompanying
consolidated financial statements.
The translation of the Japanese yen amounts into U.S. dollars is
included solely for the convenience of readers outside Japan,
using the prevailing exchange rate at March 31, 2010, whichwas ¥93.04 to US$1.00. Such translation should not be
construed as a representation that the Japanese yen amounts
have been, could have been, or could in the future be,converted into U.S. dollars at this or any other rate of exchange.
Certain amounts in the prior year’s financial statements havebeen reclassified to conform to the current year’s presentation.

2.Summary of Significant Accounting
Policies(1) Consolidation
The accompanying consolidated financial statements as of March
31, 2010 include the accounts of the Company and its 9 (7 as ofMarch 31, 2009) significant subsidiaries (together, the“Companies”). Affiliated companies over which the Company
exercises significant influence in terms of their operating andfinancial policies have been included in the consolidated financial
statements on an equity basis. Investments in 1 affiliate have been
included for the years ended March 31, 2010 and 2009. All
significant intercompany balances and transactions have been
eliminated.
Investments in subsidiaries and affiliates that are not consolidated
or accounted for by the equity method are carried at cost or less.
Where there has been a permanent decline in the value of suchinvestments, the Company has written down the investments.
Since the fiscal year end for certain consolidated subsidiaries is
December 31, their financial statements as of that date are used in
the preparation of the Company’s consolidated financial
statement. When significant transactions occur at thosesubsidiaries between their fiscal year end and the Company’s
fiscal year end, these transactions are included in consolidation asnecessary.

(2) Cash and cash equivalents
For the purpose of the statements of cash flows, the Company
considers all highly liquid investments with insignificant risk ofchange in value that have maturities of generally three months orless when purchased to be cash equivalents. Those include cashon hand, demand deposits at banks and highly liquid short-term
investments with negligible risk of fluctuation in value andmaturities of less than three months.

(3) Inventories
Inventories of the Companies are primarily stated at cost(reflecting write down due to decline in profitability) determinedby the specific identification method.
Ending inventories are amounts after book value devaluationaccompanying the decline in profitability and the following loss
on sales real estate revaluation is included in the cost of sales.
1,670 million yen(4) Marketable and investment securities
Held-to-maturity securities are stated at amortized cost(straight-line method).
“Other securities” with available fair market values are stated atfair market value at the end of the fiscal year of each consolidated
companies. “Other securities” without available fair market values
are stated at cost by the moving-average method.
Unrealized gains or losses on these securities are reported, net of
applicable income taxes, as a separate component of net assets.
Cost of securities sold is computed using the moving averagemethod.
Investments in limited investment partnerships are reported using
the equity method, based on the latest financial statements
available as at the closing dates stipulated by the respective
partnership contracts.

(5) Derivatives
Derivative transactions are accounted for using hedge accounting.
1. Hedge accounting method
The Company uses the deferred hedge accounting
method.
The interest rate swaps that meet specific matching
criteria are recognized and included in interest expense
or income.
2. Hedging method and hedge targets
Hedging method
Hedge targets
Interest rate swaps
Debt
3. Hedge policy
Interest rate swaps are utilized as a hedge against
possible future interest rate increases, in amounts thatfall within the range of the particular liability being
hedged.
4. Method used to evaluate the effectiveness of the hedge
Cumulative interest rate fluctuations and changes incash flows are compared to evaluate the effectiveness ofhedge targets and hedge methods. However, evaluation
as of the date of settlement of the effectiveness ofinterest rate swaps that meet specific matching criteria isomitted.
23

Leopalace21(6) Property, plant and equipment (except forleased assets)
Rental buildings of the Company and domestic consolidated
subsidiaries are stated at cost. Depreciation is computed
generally on the straight-line basis. The range of useful lives isprincipally from 22 to 47 years for rental buildings.
Property, plant and equipment other than rental buildings of theCompany and domestic consolidated subsidiaries are stated atcost. Depreciation is computed generally by the
declining-balance method. However, buildings (excluding
accompanying facilities) obtained on or after April 1, 1998 aredepreciated by the straight-line method. The range of useful lives
is principally from 40 to 50 years for buildings and structures and5 years for machinery and equipment.
Property, plant and equipment of the consolidated overseas
subsidiaries are depreciated by the straight-line method based on
the local GAAP. The range of useful lives is principally from 30 to
40 years for buildings and structures and from 3 to 5 years formachinery and equipment.

(7) Long-lived assets
The Companies review long-lived assets for impairment
whenever events or changes in circumstance indicate thecarrying amount of an asset or asset group may not berecoverable. An impairment loss would be recognized if thecarrying amount of an asset or asset group exceeded the sum of
the undiscounted future cash flows expected to result from thecontinued use and eventual disposition of the asset or asset
group. The impairment loss would be measured as the amount bywhich the carrying amount of the assets exceeds theirrecoverable amount, which is the higher of the discounted cash
flows from the continued use and eventual disposition of theassets, or the net selling price at disposition.

(8) Intangible assets
Intangible assets for internal use are stated at cost. Amortizationis computed generally on the straight-line basis. The range ofuseful lives is its availability in-house (5 years) for rental Software.

(9) Long-term prepaid expenses
Long-term prepaid expenses are amortized evenly over a period
mainly from 3 to 5 years.

(10) Allowance for doubtful accounts
The Companies provide the allowance for doubtful accounts by
the method that uses the percentage of its own actual experienceof bad debt loss written off against the balance of total
receivables plus the amount deemed necessary to coverindividual accounts estimated to be uncollectible.

(11) Allowance for employees’ bonuses
Allowance for employees’ bonuses is provided for the payment of
employees’ bonuses based on estimated amounts of future
payments attributed to the current fiscal year.

(12) Retirement benefit reserves
Retirement benefit reserves for employees are provided mainly at
an amount calculated based on the retirement benefit obligation
as of the balance sheet date.
24

The retirement benefit obligation is attributed to each period by
the straight-line method over the estimated years of service of theeligible employees.
Unrecognized gain and loss of the Companies are amortized in
the year following the year in which the gain or loss is recognizedby the straight-line method over a period (5 years), which iswithin the average of the estimated remaining years of service tobe performed by the employees at the time of accrual,commencing with the fiscal year following the accrual time.
Prior service cost is amortized by the straight line method over acertain number of years (5 years) within the average of theremaining years of service to be performed by the employees at
the time of accrual.
Some domestic consolidated subsidiaries calculate retirement
benefit reserves based on the simplified method.
(Changes in accounting policy)
The Company adopted “Partial Amendments to AccountingStandard for Retirement Benefits (Part3)” (ASBJ Statement No.19,
issued on July 31, 2008) from current fiscal year. This change has
had no effect on operating loss and loss before taxes andminority interests.

(13) Reserve for apartment vacancy loss
Reserve for vacancy losses on apartment units managed undermaster lease agreements is calculated according to the projected
loss that could occur during a logical predictable period toprepare for the risk of increased vacancies. It is based on
estimated losses resulting from historical rental income andoccupancy rates for each rental property managed by the leasing
division of the Company.
The provision for apartment vacancy loss is set according to theprojected loss that could occur due to the risk of increased
vacancies under Bulk leasing system.
Previously, the Company forecasted provision for vacancy losses
based on historical occupancy rates of properties. However,starting in FY2009, the Company changed to forecasting theamount provided for vacancy losses using the most recent
occupancy rates, and posted the balance amount.
(Changes in accounting policy)
In the leasing business of the Company, the projected amount ofloss that could occur during a logical predictable period wasrecorded as the reserve for apartment vacancy loss, based on
current monthly rent and past occupancy rate of individual
buildings.
However, as occupancy rates have been decreasing due to therecent sluggish economy, the calculation method based on thesepast occupancy rates have resulted in a time gap from the reality,
thus the difference in profit or loss caused by this time gap has
become larger and the need for proper accounting has become
more important.
In such surroundings, the Company has changed the accounting
method, from this fiscal year, to one where the projected amountof loss that could occur during a logical predictable period isrecorded as the reserve for apartment vacancy loss based oncurrent monthly rent and the future estimated occupancy rates.
This was made possible by the construction of a framework forforecasting and validating the occupancy rates for individual
buildings together with a firmer understanding of futureforecasted occupancy rates based on the reality and marketingmeasures.
As a result of this change, the loss of ¥16,765 million ($180,195
thousand) for this fiscal year was recorded as cost of sales withthe difference of ¥10,343 million ($111,164 thousand) recorded asother expenses. As a result, loss before taxes and minority
interests have increased by ¥10,343 million ($111,164 thousand),compared with the previous method.

(14) Reserve for warranty obligations oncompleted projects
Reserve for warranty obligations on completed projects isprovided in an amount based on the Company’s pastexperience, with an additional amount deemed necessary in
the future for execution of warranty obligations regarding
construction projects.

(15) Accounting policies for significant revenue
and expenses
In recognizing construction revenues of constructions inprocess, the percentage-of-completion method is applied tosuch contracts in which the outcome of the construction
activity is deemed certain by the end of fiscal year ended
March 31, 2010, while the completed contract method isapplied to other constructions. Progress of construction isestimated based on the method of the ratio of actual cost
incurred to total cost.
(Changes in accounting policy)
The Company had conventionally recognized its construction
revenues of subcontracting contracts by using the completed
contract method.
However, the Company, effective from fiscal year ended March
31, 2010, adopted “Accounting Standard for Construction
Contracts (the Accounting Standard Board of Japan (ASBJ)
Statement No. 15 issued on December 27, 2007)” and“Guidance on Accounting Standard for Construction Contracts(ASBJ Guidance No. 18 issued on December 27, 2007)” torecognize construction revenues.
This change increases consolidated net sales for FY2009 by¥6,350 million ($68,249 thousand), and decreases consolidated
operating loss and loss before taxes and minority interests, by¥1,614 million ($17,350 thousand), respectively.
The impact on segment information is stated in the applicablesections.

(16) Income taxes
Income taxes comprise corporate, inhabitant and enterprisetaxes.
The asset and liability approach is used to recognize deferred tax
assets and liabilities for the expected future tax consequences of
temporary differences between the carrying amounts of assets
and liabilities for financial reporting purposes and the amounts
used for income tax purposes.

(17) Leases
Finance leases that are deemed to transfer ownership of leased
property to the lessee (excluding leases that existed on or before
March 31, 2008) are accounted for in a manner similar to sales
transactions and depreciated by the straight-line method overthe lease term of respective assets as their useful lives with noresidual value.
Among leased assets concerning non-transfer ownership financelease transactions, lease transactions that commenced prior to
March 31, 2008 are reported by the same method applied tostandard lease and rental contracts.

(18) Foreign currency transactions
All monetary receivables and payables denominated in foreign
currencies are translated into Japanese yen at the current
exchange rates as of each balance sheet date. The foreignexchange gains and losses from translation are recognized in the
consolidated statements of income.
The assets and liabilities of consolidated overseas subsidiaries aretranslated into Japanese yen at the current exchange rates as ofeach balance sheet date and revenues and expenses aretranslated at the average exchange rates of the fiscal year.
Exchange differences are included in foreign currency translation
adjustments.

(19) Interest capitalization
Leopalace Guam Corporation, a consolidated subsidiary,
capitalized interest paid on borrowing for real estatedevelopment business for the development period intoacquisition cost of property, plant and equipment.
Capitalized interests included in carrying value of property, plantand equipment were ¥1,983 million ($21,317 thousand) and¥2,010 million for the years ended March 31, 2010 and 2009,
respectively.

(20) Consumption taxes
National and local consumption taxes are basically excluded fromtransaction amounts. However, Leopalace Insurance Co., Ltd, aconsolidated subsidiary, includes national and local consumption
taxes in operating expenses and general and administrative
expenses. The nondeductible portion of consumption taxes on
the purchase of assets is recorded as long-term prepaid expenses
and amortized evenly over 5 years.

(21) Net income per share
Basic net income per share of common stock is computed by net
income available to common shareholders divided by theweighted-average number of common shares outstanding for theperiod.

3. Changes in Significant Accounting Policies(1) Change in cost calculation for contracted work
The Company adopted the job-order costing method in the costaccounting of contracted works, and allocated job costs whichwere calculated by using the standard overhead rate for overhead
expenses not allocatable directly to the costs of individual works.

25

Leopalace21

However, the changes in the basis of recording profit to thepercentage-of-completion method, together with the impact of
economic downturn in recent years causing decreases in amountof orders received and sales, resulted in a pronounced decrease in
year-end balance of payment for construction in progress. At theend of this fiscal year, the Company has reviewed, from a
conservative perspective, the method of cost calculation, andchanged to a method by which overhead costs of the contracted
works for this fiscal year are charged to cost related to completed
constructions in the same period.
Because of this change, overhead costs of ¥21,704 million（$233,273 thousand）were recorded as cost of sales in the fiscal
year ended March 31,2010,and overhead costs of ¥10,204 million($109,677 thousand) ,which were carried forward and included inconstruction in progress at the beginning of the fiscal year wererecorded as other expenses in the fiscal year ended March
31,2010.
As a result, consolidated operating loss for FY2009 have decreasedby ¥620 million ($6,664 thousand), and consolidated loss before
taxes and minority interests has increased by ¥9,584 million($103,013 thousand), compared with the previous method.
The impact on segment information is stated in the applicablesections.

(2) Accounting Standard for Asset Retirement
Obligations
Starting with this fiscal year, the Company has decided to adopt“Accounting Standards for Asset Retirement Obligations” (ASBJ
Statement No.18, March 31, 2008) and “Guidance on AccountingStandards for Asset Retirement Obligations” (ASBJ Guidance
No.21 March 31, 2008) ahead of schedule.
As a result, consolidated operating loss for FY2009 have increasedby ¥66 million ($705 thousand), and consolidated loss before
taxes and minority interests has increased by ¥479 million ($5,149
thousand).
The impact on segment information is stated in the applicablesections.

4. Additional Information(1) Allowance for directors' retirement benefits

The Company has made provision for Director's retirement
benefits as per internal regulations to prepare for payment of
director's retirement benefits.
However, at the board meeting held on May 15, 2009, a resolution
was passed to abolish the retirement benefit program for directors
at the conclusion of the annual shareholders meeting on June 29,
2009, and it was also decided to pay the retirement benefits to thedirectors, according to the term of office until the date thisprogram would be abolished, at the annual shareholder’smeeting.
According to the resolution, the Company reversed the allowancefor directors’ retirement benefits, and recorded the long-termother payable of ¥1,185 million ($12,739 thousand) at the end of
this fiscal year.
In addition, at the time of the above resolution, the Company
recorded the difference of ¥92 million ($992 thousand) between
26

the allowance for Directors' retirement benefits and long-termother payable, as “reversal of allowance for retirement benefits for
directors” in other income.

(2) Employee stock ownership plan
For the fiscal year ended March 31, 2010, the Company implemented
the ESOP (Employee Stock Ownership Plan) in order to strengthen its
corporate value, by improving and strengthening corporate
governance through the encouragement of the employees’
willingness to participate in corporate decision-making, and by giving
incentives to the employees to increase their willingness to work.
In this plan, “Leopalace 21 Employee Stock Ownership Committee
Trust Account” (hereinafter referred to as the “Trust Account”) wasestablished for the purpose to transfer treasury stock to the Board for
Employees' Ownership. The Trust Account will acquire the number ofstocks requested by the Board for Employees' Ownership from theCompany in one lump during the trust period, and sell them off to
the Board for Employees’ Ownership.
As of September 18, 2009, the Company transferred 3,597,100
treasury stocks to the Trust Account.
For accounting treatment for the disposal of such stocks, any debt
incurred by the Trust Account is guaranteed by the Company, andaccounting treatment has been processed jointly as a single entity forboth the Company and the Trust Account with a conservative
perspective in mind focusing on economic realities.
Accordingly, treasury stocks, assets, liabilities, expenses and profits
held by the Trust Account has been recorded under the consolidatedbalance sheet, consolidated statements of income and consolidated
statements of cash flows.
The Trust Account held 3,098,500 treasury stocks as of the end of thisfiscal year.

5. Cash and Cash Equivalents

Difference between “Cash and cash equivalents” in the
consolidated balance sheet and “Cash and cash equivalents” inthe consolidated statements of cash flows are as follows:(Millions of yen)(Thousands of
U.S. dollars )Cash and cash equivalents in the consolidated balance sheet¥72,432$778,503

Time deposits with original maturities of more than three months(400)(4,300)¥72,032$774,203

March 31, 2010

Cash and cash equivalents in the consolidated statements of cash flows

6. Financial instruments(1) The financial instruments and related
disclosures
1) Policy for financial instruments
The Companies are mainly involved in raising funds (mostlybank borrowing and corporate bond issuance) needed forcapital investment to carry out Apartment Construction
Subcontracting Business and Leasing Business. Temporary
excess funds are invested in highly secure financial assets, andshort-term working capital is raised by borrowing from thebank. The Companies conduct derivative transactions primarily
for the purpose of avoiding the below mentioned risk, and hasa policy not to conduct speculative trading.

2) Nature and extent of risks arising fromfinancial instruments
Operating receivables such as trade receivables and accounts receivable

for completed projects are exposed to credit risk resulting from
customers’ default of payments.Foreign currencies denominated loans
originated in conjunction with overseas business development are
exposed to exchange risk.Securities and investment securities are mainly
held–to-maturity securities and shares acquired as a result ofrelationships with trading partner enterprises, and these securities are
exposed to market risk.

described below. Financial instruments whose fair values
appear to be extremely difficult to determine are notincluded in the table. (See (Note 2))

Almost all accounts payable and accounts payable for completed
projects which are operating liabilities are scheduled to be paid within
one year.
Loans payable, corporate bonds, and lease obligations related to financelease transactions are mainly for the purpose of raising funds necessary
for investment in facilities, and the longest repayment date is seven years
subsequent to fiscal year end.
Derivative transactions are interest rate swaps whose purpose is to hedge
against the risk of future interest rate fluctuations related to loans
payable. The interest rate swaps carry a risk of fluctuations in market
interest rates.
For details of hedging method, hedge targets, hedging policy and themethod for evaluating hedging effectiveness concerning hedge
accounting, please refer to aforementioned “Significant mattersproviding the basis for the preparation of consolidated financial
statements, 2. Summary of Significant Accounting Policies, (5) Derivatives.

3) Risk management for financial instruments
Credit risk management for operating receivables and loans
outstanding follows the “Receivables management rules.”While each business division manages the extension of credit
to its customers, it is also organized for early detection andloss reduction of accounts where collection is doubtful due
to worsening credit or similar problems.
Regarding securities and investment securities, the Company
periodically investigates and understands the share priceand the financial condition of the share issuing organization.
In addition, for items other than held-to-maturity securities,
the Company considers the relationship with the trading
partner companies and constantly re-evaluating its holdings.
The basic policy of derivatives trading is determined by theboard of directors, and the execution and administration ofderivatives transactions are conducted in accordance with
the Company’s "Derivatives Trading Management Rules." Thederivatives trading management situation is periodicallyreported to the board of directors for comprehensive risk
management. Furthermore, the contracted counter party toderivative trades is always a highly credit worthy Japanesefinancial institution, so it can be recognized that the risk ofcontract breach by the other party is close to zero.
Trade payables and debts are exposed to liquidity risk, but
this risk is monitored by various means such as the
preparation of a monthly financial plan by each company in
the Group.

Difference

Balance sheet

Fair value(1）Cash and cash equivalents¥72,432¥72,432¥−(2）Trade receivables and accounts receivables for

12,917

12,917−(3）Marketable securities and investment securities

3,201

3,189

(12)

(4) Operating loans

5,482
5,500

742

1,039

−

(Millions of yen)completed projects

Allowance for doubtful accounts (*1)
Net

(724)
4,758

(5) Long-term loans
Allowance for doubtful accounts (*1)
Net

1,102
(63)
1,039

(6) Bad debt

5,204

Allowance for doubtful accounts (*1)

(4,228)
976

976

−

¥95,323¥96,053¥730

46,08046,080−(2）Short-term borrowings

9,720

9,716

(4)

(3) Bonds

3,720

3,701

(19)

(4) Long-term debt (*2)

43,04243,016(26)(5) Lease obligations

4,836

4,696

(140)

¥107,398¥107,209¥(189)

−

−

−

−

−

−

−

−

−

Net
Total assets(1）Accounts payable and accounts payable forcompleted projects(*2)

Total liabilities
Derivatives transaction not subject to the applicationof hedge accounting
Derivatives transactions subject to the applicationof hedge accounting
Total derivative transactions

Difference

Balance sheet

Fair value(1）Cash and cash equivalents$778,503$778,503$−(2）Trade receivables and accounts receivables for

138,830

138,830−(3）Marketable securities and investment securities

34,40334,273(130)(4) Operating loans

58,926
59,119

7,977

11,166−(Thousands of U.S. dollars)completed projects

Allowance for doubtful accounts (*1)

(7,783)

Net

51,143(5) Long-term loans

11,840Allowance for doubtful accounts (*1)
Net

(674)
11,166(6) Bad debt

55,930Allowance for doubtful accounts (*1)

(45,440)
10,49010,490−$1,024,535$1,032,381$7,846495,274495,274−(2）Short-term borrowings

104,471

104,431(40)(3) Bonds

39,98339,775(208)(4) Long-term debt (*2)

462,621462,335(286)(5) Lease obligations

51,97850,473(1,505)$1,154,327$1,152,288$(2,039)

−

−

−

−

−

−

−

−

−

Net
Total assets(1）Accounts payable and accounts payable forcompleted projects4) Supplementary explanations on fair value offinancial instruments
Fair value of financial instruments are measured based on
the quoted market price, if available, or reasonably
assessedvalue if a quoted market price is not available.
Fair value of financial instruments which quoted market priceis not available is calculated based on fluctuating factor, andthe value might differ if different assumptions are used.In
addition, the contract amount of the derivative transactions
described in “8. Derivative Transactions” does not represent
the market risk of the derivative transactions.

(2) Fair value of financial instruments
The carrying amount on the consolidated balance sheet
and fair value of financial instruments as of March 31,
2010 as well as the differences between these values are(*2)

Total liabilities
Derivatives transaction not subject to theapplication of hedge accounting
Derivatives transactions subject to theapplication of hedge accounting
Total derivative transactions(*1) Operating loans, long-term loans and Bad debts have deductions of theirrespective allowance for doubtful accounts, which are recorded separately.
(*2) As per the consolidated balance sheet, the current portion of long-term debt(¥20,281 million, $217,977 thousand) and the bonds to be redeemed within
one year (¥560 million, $6,019 thousand) are respectively recorded as being
included within long-term debts and bonds.

27

Leopalace21(Note 1) Matters concerning the calculation method for the fairvalue of financial instruments, marketable securities and derivatives
transaction

As they have no market value, and as it is understood that it isextremely difficult to estimate their future cash flow, they are notincluded in [Assets (3) Marketable Securities & Investment Securities].

Assets(Note 3) The scheduled redemption amount of monetary claims andmarketable securities with maturity subsequent to fiscal year end(1)Cash and cash equivalents(2)Trade receivables and accounts receivable for completed
projects
These assets are stated at carrying amount as they aresettled in the short-term and their fair values approximate
their carrying amount.
(3) Marketable securities and investment securities
Shares are stated at the stock exchange quoted price; bonds
are stated at either the stock exchange quoted price or the
price presented by transacting financial institutions.
For notes to securities by holding purposes, please refer to“Notes to securities.”(4) Operating loans
The fair value of operating loans is stated at the net present
value, which is calculated by discounting the principal withinterest by the discount rate (i.e. the estimated interest rate
for new transaction).
(5) Long-term loans(6) Bad debt
The fiscal year-end outstanding balances are calculated
mainly using expected future cash flows of the potentially
recoverable principal and interest.

Due within 1 year Due after 1 year Due after 5 years Due after
through 5 years through 10 years 10 years
Cash and deposits¥72,432

¥

−

¥

−

¥

−

Trade receivables and12,917−(1) Government and municipal bonds

−

700

−

−

(2) Corporate bonds

−

−

300

200

(1) Government and municipal bonds

10

709

−

−

(2) Bonds

−

−

−

824
999

Accounts receivables for−−completed projects
Marketable securities andInvestment securities
Held-to-maturity bonds

Other marketable securities with maturities(Corporate bonds)(3) Others

−

−

290

Operating loans

941

2,303

1,404

834

Long-term loans

−

−

−

1,102

−

−

−

5,204

¥86,300¥3,712¥1,994¥9,163

Bad debts
Total

Liabilities

Thousands of U.S. dollars(1) Accounts payable and accounts payable for completed
projects
These liabilities are stated at carrying amount as they aresettled in the short-term and their fair values approximate
their carrying amount.

Cash and deposits$778,503

Trade receivables and Accounts

138,830−(1) Government and municipal bonds

−

7,524

−

−

(2) Corporate bonds

−

−

3,224

2,150

107

7,620

−

−

−

−

−

8,859
10,735(2) Short-term borrowings(4) Long-term debt
(5) Lease obligations
These liabilities are stated at the net present value, which is
calculated by discounting the principal with interest by thediscount rate (i.e. the estimated interest rate for new
borrowings or lease transaction).
(3) Bonds
Bonds issued by the Company are privately offered, and its
fair value is stated at the net present value, which is
calculated by discounting the principal with interest by thediscount rate (i.e. the current market interest rate inconsideration of residual value and credit risk).
Derivatives transactions
Please refer to“Note to derivatives transaction”below.
(Note 2) Financial instruments whose fair value appear to be
extremely difficult to determine
Item

Balance Sheet(Millions of yen)
¥2,127

Unlisted shares

Due within 1 year Due after 1 year Due after 5 years Due after
through 5 years through 10 years 10 years
$

−

$

−

−

$

−

−

receivables for completed projects
Marketable securities andInvestment securities
Held-to-maturity bonds

Other marketable securities with maturities(1) Government and municipal bonds(2) Bonds(Corporate bonds)
−

−

3,120

Operating loans

10,11424,75715,088

8,968

Long-term loans

−

−

−

11,840(3)Others−−−

55,930$927,554$39,901$21,432$98,482

Bad debts
Total(Note 4)Scheduled repayment amount of bonds payable, long-term
debts and lease obligations subsequent to fiscal year end are as
follows:

Schedule of bonds(Milions of Yen)

Unlisted bonds (subordinate corporate bonds)

824

Subordinate beneficiary rights of loans and accounts receivable in trust499

Due within 1
year

Due after 1 year
through 2 years

Due after 2 years
through 3 years

Due after 3 years
through 4 years

Due after 4 years
through 5 years

290

¥560

560

560

560

560

Due after 2 years
through 3 years

Due after 3 years
through 4 years

Due after 4 years
through 5 years$6,019$6,019$6,019Contributions to limited investment partnerships¥3,740Total

Item
Unlisted shares

Balance Sheet(Thousands of U.S. dollars)$22,858

Unlisted bonds (subordinate corporate bonds)

8,859

Subordinate beneficiary rights of loans and monetary claims in trust

5,361

Contributions to limited investment partnerships
Total

28

Milions of Yen

3,120$40,198(Thousands of U.S. dollars)
Due after 1 year
Due within 1
through 2 years
year$6,019$6,019Schedule of loans

Milions of Yen
March 31, 2010

(Milions of Yen)
Balance at the end Balance at the end Average interestrate(%)of prior fiscal year of current fiscal year

Category¥

Short-term loans payable
Current portion of long-term

−

9,720

1.50

−

17,493

20,281

2.22

−

793

1,196

4.28

−

22,89722,762

2.25

From 2012 to 2013

obligations
Long-term loans payable(excluding current portion)
3,006

Lease obligations

3,640

From 2012 to 2017

4.39

(excluding current portion)¥44,189

Total−¥57,598

Balance at the end Balance at the end Average interestrate(%)of prior fiscal year of current fiscal year

Short-term loans payable
Current portion of long-term

Maturity─

Others

300

300

0

899

910

11

Government and municipal bonds, etc.

100

100

(0)

Corporate bonds

─

─

─

Others

200

178

(23)

Subtotal
Unrecognized loss items:

300

278

(23)

Total

¥1,199¥1,188¥(12)

March 31, 2009

Balance sheet

SubtotalMarket value

Unrecognized gain (loss)

104,471

1.50−

Government and municipal bonds, etc.

¥398

¥405

¥7

217,977

2.22−

Corporate bonds

─

─

─

Others

─

─

─

398

405

7

Government and municipal bonds, etc.

100

100

0

Corporate bonds

─

─

─

Others(13)

12,855−

4.28

Subtotal
Unrecognized loss items:

246,103

Long-term loans payable

244,644

2.25

From 2012
to 2013(excluding current portion)
32,309Lease obligations

39,123

4.39(excluding current portion)$474,946

Total

From 2012
to 2017−$619,070(Notes)
1. To calculate “Average interest rate,” weighted average rates and fiscal year-end
balances are used.
2. The redemption schedule of long-term loans payable and lease obligations(excluding current portion) for 5 years subsequent to March 31, 2010, issummarized as follows:

601

588

Subtotal

701

688

Total

¥1,099¥1,093

March 31, 2010

Balance sheet

Market value

Unrecognized gain (loss)$6,440$6,555

$115

─

─

─

3,225

3,225

Due after 1 year
through 2 years

Due after 2 years
through 3 years

Due after 3 years
through 4 years

Due after 4 years
through 5 years

0

9,665

9,780

115

¥17,841

4,921

−

−

1,075

1,072

(3)

─

─

¥1,171

1,171

854

319

─

2,150

1,908

(242)

(Thousands of U.S. dollars)
Due after 1 year
through 2 years

Due after 2 years
through 3 years

Due after 3 years
through 4 years

Due after 4 years
through 5 years$191,752

52,892−−$12,585

12,583

9,175

3,426

loans payable

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

3,225

2,980

(245)

Total

$12,890$12,760$(130)b) Marketable securities classified as “other securities” as of March
31, 2010 and 2009 were as follows:
Milions of Yen
March 31, 2010

(Additional Information)
Effective from the fiscal year, “Accounting Standard for Financial Instruments” (ASBJ
Statement No. 10, issued on March 10, 2008) and “Implementation Guidance on
Disclosures about Fair Value of Financial Instruments” (ASBJ Guidance No. 19, issued
on March 10, 2008) is applied.

7. Securities and Investment Securities(a) At March 31, 2010 and 2009, information with respect to“held-to-maturity securities” for which market prices wereavailable was summarized as follows:(6)

Unrecognized gain items:

Corporate bonds

loans payable(13)¥

Thousands of U.S. dollars

Others(Milions of Yen)

Lease obligations

¥11

─

−

obligations

Long-term¥610

─

188,014
8,520

Current portion of lease

Lease obligations¥599

Corporate bonds

Government and municipal bonds, etc.

Unrecognized gain items:

loans payable

Long-term

Unrecognized gain (loss)

Milions of Yen(Thousands of U.S. dollars)
Category

Market value

Unrecognized gain items:

Maturityloans payable
Current portion of lease

Balance sheet

Acquisition cost

Carrying value

Unrealized gain (loss)

¥730

¥447

¥283

Government and municipal bonds, etc.

10

10

0

Corporate bonds

─

─

─

Securities whose carrying value
exceeds their acquisition cost:
Stock
Bonds:

─

─

─

152

106

46

892

563

329

12

13

(1)

Government and municipal bonds, etc.

639

646

(7)

Corporate bonds

─

─

─

Others

318

345

(27)
(26)

OthersOthersSubtotal
Securities whose acquisition costexceeds their carrying value:
Stock
Bonds:

140

166

Subtotal

1,109

1,170

(61)

Total

¥2,001¥1,733¥268

Others29

Leopalace21

2010 and 2009, respectively.

Milions of Yen
March 31, 2009

Acquisition cost

Carrying value

Unrealized gain (loss)(d) In addition, amount of subsidiaries and affiliate’ stocks included ininvestment securities of the consolidated balance sheet are as
follows:
Investment securities（stocks） 1,020 million yen

Securities whose carrying value
exceeds their acquisition cost:
¥157

¥382

¥539

Government and municipal bonds, etc.

173

173

0

Corporate bonds

─

─

─

Others

─

─

─

Stock
Bonds:

OthersSubtotal

96

97

1

651

809

158

78

75

(3)

─

─

─

(e) Impaired securities that were written down to their fair values
during the current fiscal year (from April 2009 to March 31, 2010):
During this fiscal year, the Company did not report an impairment
loss. Impairment loss will be recognized on securities whose market
value had declined by 30% or more of acquisition cost at year-end.

Securities whose acquisition costexceeds their carrying value:
Stock

8. Derivative Transactions

Bonds:
Government and municipal bonds, etc.
Corporate bonds

─

─

─

Others

345

345

─

294

251

(43)

717

671

(46)

¥1,368¥1,480¥112

OthersSubtotal
Total(1) Derivatives transaction not subject to theapplication of hedge accounting
Not applicable.

(2) Derivatives transactions subject to theapplication of hedge accounting
Interest rate-related derivatives

Thousands of U.S. dollars
March 31, 2010

Acquisition cost

Carrying value

Unrealized gain (loss)(Milions of Yen)

Securities whose carrying valueHedge
accounting method

exceeds their acquisition cost:Stock$7,844$4,804$3,040

108

108

0

─

─

─

Bonds:
Government and municipal bonds, etc
Corporate bonds
OthersOthersSubtotal

─

─

─

1,630

1,137

493

9,582

6,049

3,533

Securities whose acquisition costexceeds their carrying value:
Stock

132

140

(8)

6,873

6,944

(71)

─

─

─

3,423

3,708

(285)
(282)

Bonds:
Government and municipal bonds, etc.
Corporate bonds
Others

1,505

1,787

Subtotal

11,933

12,579

(646)

Total

$21,515$18,628$2,887

Others¥2,127 billion ($22,858 thousand) of non-listed shares, ¥824 million($8,859 thousand)of non-listed bonds (subordinate corporate
bonds), ¥499 million ($5,361 thousand) of subordinate beneficiaryrights to loans and money in trust, and ¥290 million ($3,120
thousand) of contributions to investment business limited
partnerships are not included in the "other securities" amount on thepreceding financial statement because they have no market value
and assigning them fair market prices is recognized to be extremely
difficult.
Among the above items, the subordinate beneficiary rights to thesubordinate corporate bonds and the money on trust were acquiredby the Company in conjunction with the securitization of nonexempt
property type apartment loans, the financing executed primarily as
contract work fee payment loans from financial institutions to theCompany.
(c) Proceeds from sales of “other securities” for the years ended
March 31, 2010 and 2009 were ¥97 million ($1,044 thousand) and ¥42
million, respectively. Gross realized gains on these sales were ¥2
million ($16 thousand) and ¥0 million for the years ended March 31,
30

Exceptional accounting
treatments applied tointerest rate swaps

Type of derivatives

Major hedged
items

Contract amountAmount ofmore than 1
year-period contracts

Fair value

Long-term debt

¥2,607¥888(Note)

Interest-rate swaps
Pay fixed interest andreceive floating interest(Thousands of U.S. dollars)Hedge
accounting method

Type of derivatives

Major hedged
items

Contract amountAmount ofmore than 1
year-period contracts

Fair value

Exceptional accounting
treatments applied tointerest rate swaps

Interest-rate swaps

Long-term debt

$28,020$9,544(Note)（Note）
Interest rate swap subject to the application of exceptional
accounting treatments are recognized together with hedged items(i.e. long-term debt), therefore their fair value are included in the fairvalue of the relevant long-term debt.

9. Long-Lived Assets

The Companies recognized impairment loss of the following asset
groups for the years ended March 31, 2010 and 2009:(For the year ended March 31, 2010)
Impairment loss
PurposeCategory

Rental assets

Buildings andSetagaya-ku, Tokyo,(Apartment buildings

structuresetc.

and others, 111 units)

Land

Business properties

Software and others

Location

Nakano-ku, Tokyo

Total

Millions of yen

Thousands of U.S.
dollars¥268$2,883

2,935

31,54135

376¥3,238$34,800(For the year ended March 31, 2009)
Impairment loss
PurposeCategory

Rental assets

Buildings andSapporo City,(59 blocks ofstructures

Hokkaido, etc.

apartments)

Land

2,127

21656

Total

¥2,808$28,583

Location

Millions of yen

Thousands of U.S.
dollars¥681$6,927

The Companies recognized each property in domestic rental assets
as a unit and grouped overseas assets by managerial accounting
segmentation.
The Companies reduced book value of the rental assets and businessproperties whose profitability decreased seriously due to the slump
in the rental income market and continuous decline in land prices, torecoverable amounts and recognized the reduced values as
impairment losses.

13. Deferred Tax Assets and Liabilities(a) Significant components of deferred tax assets and liabilities as ofMarch 31, 2010 and 2009 were as follows:
Thousands of U.S.
dollars

Millions of yen
2010

2009

2010

Impairment loss

¥29,877¥20,986$321,124

Loss carried forward for tax purposes

25,691

11,523

276,133

Recoverable amounts of rental assets were measured by values incurrent use and net sales price, which were calculated based on thepresent values of future cash flows, using a discount rate of 4.6%.

Loss on devaluation of real estate for sale

2,067

4,757

22,221

Advances from customers for rent income

2,119

3,644

22,773Retirement benefit reserves

2,973

2,520

31,954

Subsidiaries’ foreign exchange loss

2,792

2,013

30,011

In addition, in consideration of the discontinued operation of thesubsidiary, the Company posted Impairment loss for the businessproperties.

Reserve for apartment vacancy loss

12,9101,880

138,759

Loss on devaluation of property,

1,630

1,630

17,516

Allowance for employees' bonuses

1,114

1,530

11,977

Allowance for doubtful accounts

1,229

1,369

13,212

10. Breakdown of Losses regarding
Business Structure Reform

Accrued business tax

45

1,015

484

Deposits received

739

811

7,941

Loss on devaluation of securities

705

705

7,573

In response to a sudden decline in business performance, theCompany recorded below mentioned items as part of promoting
business structural reforms for a more stable profit structure.

Sales promotion cost

610

−

6,552

Other payables

361

577

3,879

Retirement benefit reserves for directors

482

522

5,183

Reserve for warranty obligations

133

457

1,426

Excess amortization on software

348

293

3,743

Loss on devaluation of real estate

263

63

2,828

Excess depreciation

153

146

1,641

Sales discount for construction contracts

148

136

1,588

Elimination of unrealized gain

95

96

1,016

Low-value assets

23

55

245

Bad debt loss

34

41

368

Others

699

271

7,509

Amounts
Items

Thousands of U.S.
dollars¥18,761$201,648

10,204

109,677

planned for sale
Difference arising from a change in accounting treatment relating toindirect expenses in the Apartment Construction Subcontracting Business
Expenses relating to the closing of business locations

512

5,503

Early cancellation penalties relating to terminated lease contracts

297

3,195

Special extra retirement payments
Total

plant and equipment

on completed project

Millions of yen

Impairment losses on cancelled development projects and fixed assets

Deferred tax assets:

80

868

¥29,856$320,891

11. Reclassification from Current Assets
to Land and Construction in Progress
The Company has reclassified real estate for sale in process of ¥1,836
million ($19,736 thousand) that had been categorized as current
assets into land of ¥650 million ($6,986 thousand) and constructionin progress of ¥1,186 million ($12,750 thousand) due to change inpossession purpose as of March 31, 2010.

for investment

87,24057,041

937,656

Less: valuation allowance(73,522)(43,477)(790,210)

Total deferred tax assets

13,71813,564147,446(843)

Sub-total

Deferred tax liabilities:
Net unrealized gain on “other securities”

(78)

(44)

Others

(16)

−

(163)

Total deferred tax liabilities

(94)

(44)

(1,006)¥13,624¥13,520$146,440

Net deferred tax assets(b) Reconciliation of the differences between the statutory tax rate
and the effective income tax rate for the years ended March 31, 2010
and 2009 was as follows:
2010

2009

12. Bad debts

Statutory tax rate−

40.69%

Valuation allowances

−

17.76

Bad debts are claims as stipulated under Article 32, Paragraph 1, Item
10 of the Regulation concerning Financial Statements. Bad debt at
March 31, 2010 and 2009 consisted of the following:

Non-deductible expenses including entertainment expenses

−

9.84

Inhabitant tax

−

0.91

Others−1.05

Effective income tax rate−

70.25%

Thousands of U.S.
dollars

Millions of yen
2010
Claim in bankruptcy

¥

−

2010

2009
¥

10

$

−

Claim in the process of bankruptcy

2,390

3,488

25,689Bad debt

2,644

866

28,417

Others

170

200

1,823

Total

¥5,204¥4,564$55,929(Note)
As for the year ended March 31, 2010, statutory tax rate and theeffective income tax rate were not stated since the Company posted
loss before taxes and minority interests.

14. Short-Term Borrowings and Long-Term
Debt(a) Short-term borrowings, long-term debt and lease obligations at
March 31, 2010 and 2009 consisted of the following:31

Leopalace21

Thousands of
U.S. dollars

Millions of yen

Short-term borrowings

2010

2009

2010

¥9,720−$104,471

Current portion of long-term debt

20,281¥17,493

217,977

Current portion of lease obligations

1,196

793

12,855───

22,762

22,897

244,644

Unsecured corporate bonds due

Lease obligations, long term
Total

3,640

3,006

39,123¥57,598¥44,189$619,070

Pension assets
Projected benefit obligation
Difference(b) Assets pledged as collateral for short-term borrowings andlong-term debt at March 31, 2010 and 2009 were as follows:
Thousands of
U.S. dollars

Millions of yen

Real estate for sale/property inventories

2010

2009

2010

¥1,157−$12,438

Real estate for sale in process

2,289

−

24,598

Buildings and structures

32,880¥12,549

353,393Land

83,90843,858901,853

Investment securities

834

93

8,962

Others in Investments and other assets

420

420

4,514

¥121,488¥56,920$1,305,758¥35,982¥45,8042009$386,744

53,15250,403571,291¥(17,170)¥(4,599)$(184,547)

The main components of the difference are unrecognized priorservice costs of ¥2,285 million ($24,554 thousand) and insufficientamount carried forward of ¥14,886 million ($159,993 thousand). The
Company recognized the special annuity premium of ¥130 million($1,394 thousand) and ¥131 million as an expense in the years ended
March 31, 2010 and 2009, respectively. The ¥14,886 million ($159,993
thousand) of insufficient amount carried forward will be settled byincreasing the rate of special annuity premium based onrecalculation of the financial situation.

The Company has a welfare pension fund. In the welfare pension
fund, it cannot reasonably calculate the portion of the pension assets
attributed to the Company.

(c) Investment securities have been deposited with the Legal Affairs
Bureau as follows:(c) The components of retirement benefit expenses for the years
ended March 31, 2010 and 2009 were summarized as follows:

Millions of yen

Thousands of
U.S. dollars

¥35

$378

2010

2009

2010

Deposit for housing construction warranty

386

4,152

Service cost

¥3,256¥3,145$35,000

Deposit for housing defect warranty

89

958

Interest cost

156

123

1,676

Amortization of actuarial gain or loss

217

188

2,337

Amortization of prior service cost

18

−

196

¥3,647¥3,456$39,209

Deposit for operation stipulated in Building Lots and15. Commitment LineTotal

For efficient procurement of working capital, the Company
maintains commitment line contracts with two financial institutions.
As of the end of the current fiscal year, the unexercised portion offacilities based on the contract was as follows:

Amount of agreement for commitment line

Millions of yen

Thousands of
U.S. dollars¥16,500$177,343

Amount of borrowing
Balance−−

16,500177,343(a) The following table sets forth the funded and accrued status of
the plans, and the amounts recognized in the consolidated balance
sheets as of March 31, 2010 and 2009 for the Companies’ defined
benefit plans:

Assumptions used in accounting for
retirement benefits
Periodical allocation of estimatedretirement benefit
Discount rate
Amortization period of prior service costThousands of
U.S. dollars

Millions of yen
2010

2009

2010

¥(7,736)¥(6,815)$(83,146)

Unrecognized prior service cost

103

-

1,111

Unrecognized actuarial gain or loss

326

621

3,504

¥(7,307)¥(6,194)$(78,531)

Retirement benefit reserves(Notes) 1. In the year ended March 31, 2010, contributions to the welfare
pension fund were ¥1,975 million ($21,229 thousand), including ¥801
million ($8,606 thousand) of employee contribution were recorded
in service cost.
2. Other than the afore-mentioned retirement pension expenses,
additional severance pay of ¥81 million ($868 thousand) is recorded
as other expenses in the consolidated statements of income.
3. All the retirement benefit expenses of the domestic consolidated
subsidiaries adopting the simplified method were recorded inservice cost.

(d) The assumptions used in accounting for the above plans are as
follows:

16. Retirement Benefit Plans

Projected benefit obligation

Thousands of
U.S. dollars

Millions of yen

Buildings Transaction Business Act

Certain consolidated subsidiaries apply simplified methods incalculating their projected benefit obligations.
32

2009

As of March 31
2008

The annuity premium contributory proportion of the entire pension
plan is 41% and 43% as of March 31, 2010 and 2009, respectively.

(Membership right)
Total

Thousands of
U.S. dollars

Millions of yen

on September 30, 2008
Long-term debt(b) The following table sets forth the funded and accrued status of
the entire pension plan as of March 31, 2009 and 2008.

Amortization period of
actuarial gain or loss

2010

2009

Benefits-years-of-service
Benefits-years-of-service
approachapproach
2.2%
2.2%
5 years(Amortized evenly over a
period not exceeding the−
expected average remaining
working lives of the employee
from the time of occurrence.)
Same as right
5 years(Amortized evenly over a
period not exceeding the
expected average remaining
working lives of the employee
from the time of occurrence.)

17. Stock Option

1) Used evaluation method: Black–Scholes model2) Main fundamental parameters and the estimation method(1) Classification and amount of expenses
regarding stock option
Selling, general and administrative expenses (Directors'
compensation): ¥83 million ($891 thousand)Selling, general and administrative expenses (Salary and bonuses):¥6 million ($66thousand)(2) Contents and amount of stock options andits change
1) Contents of stock optionsFirst issue of new sharesubscription right(equity-compensation type)Type and number of
eligible persons
Class and number ofshares Granted (Note)

First issue of newshare subscription
rightDirectors of the Company: 9Former Director of the Company: 1

Executive officers (excluding Directors),
Employees, Directors andemployees of major subsidiaries: 33

Common stock: 107,600shares

Common stock: 71,000shares

Grant dateAugust 17, 2009

August 17, 2009

Vesting requirement−

Continuously employed from the grant
date (August 17, 2009) to thevesting date (August 17, 2011)

Vesting period
Exercise period−

From August 17, 2009 to August 17, 2011

From August 18, 2009 to August 17, 2039

From August 18, 2011 to June 27, 2019

(Note) Converted into number of shares.

2) Size of stock options and its fluctuation
Stock options which have been existed in this fiscal year are in
the scope, and the number of stock options is described byconverting to the number of shares.

First issue of new sharesubscription right(equity-compensation type)
Stock price volatility （Note 1）

55.6％

49.0％

Estimated remaining period（Note 2）

0.87 year

5.93 year

Estimated dividend(Note 3)¥30/share¥30/share

0.18％

0.81％

Risk free rate(Note 4)First issue of new share subscription right(equity-compensation type)First issue of new share subscription right(Notes)1. The evaluation is based on the actual stock
prices in the past period from Sep. 29 2008 to
Aug. 10 2009 corresponding to the estimatedremaining period.
2. An estimated average period until retirement of
the directors is adopted
3. The actual dividends in the fiscal year ended
March 2009 are used.
4. Yield rate on the expected remaining term ofgovernment bonds.

(Notes)1. The evaluation is based on the actual stock
prices in the past period from Sep. 8 2004 to Aug.
10 2009 corresponding to the estimatedremaining period.
2. Since accumulated data are not sufficient andreasonable estimation is difficult, the estimation isbased on an assumption that it is exercised at the
midpoint of the exercise period.
3. The actual dividends in the fiscal year ended
March 2009 are used.
4. Yield rate on the expected remaining term ofgovernment bonds.

(4) Method for estimating the number of vested
rights for stock options
Since it is generally difficult to make reasonable estimates of
future numbers of lapses, a method reflecting only the actual
number of lapses that have occurred has been used.

18. Gain on Sale of Property, Plant andEquipment
Gain on sale of property, plant and equipment for the years ended
March 31, 2010 and 2009 were as follows:
Thousands of
U.S. dollars

Millions of yen

a. Number of stock optionsFirst issue of new shareFirst issue of new
subscription rightshare subscription(equity-compensation type)right
Prior to vesting (shares)
At end of the prior fiscal year (shares)−−

107,600

71,000

Expired (shares)−−

Vested (shares)

107,600−−

71,000−−Granted (shares)

Unvested balance (shares)
After vesting (shares)
At end of the prior fiscal year (shares)
Vested (shares)

107,600−

Exercised (shares)−−

Expired (shares)

7,400

−

100,200−

Unexercised balance (shares)b. Price information
First issue of new shareFirst issue of new
subscription rightshare subscription(equity-compensation type)right
Exercise price (yen)1

Average stock price at exercise (yen)−−Grant-date fair value (yen)

827

277

870

(3) Method to estimate fair value of stock
options

First issue of newshare subscription
right

Buildings and structures
Land
Others
Total

2010
¥130
1
0
¥130

2009
¥−
−
0
¥0

2010
$1,3928
0$1,40019. Loss on Sale of Property, Plant andEquipment

Loss on sale of property, plant and equipment for the years ended
March 31, 2010 and 2009 were as follows:
Thousands of
U.S. dollars

Millions of yen
Buildings and structures
Land
Others
Total

2010
¥10
216
−
¥226

2009
¥−

2010
$111

1
¥1

2,323
$2,434

20. Loss on Disposal of Property, Plant andEquipment
Loss on disposal of property, plant and equipment for the years
ended March 31, 2010 and 2009 was as follows:

The estimation of per share fair value of stock options granted
during this fiscal year is as follows:33

Leopalace21

Millions of yen
2010
¥805
4
−
−
34
¥843

Buildings and structures
Leased assets
Construction in progress
Intangible assets
Others
Total

2009
¥96
−
20
33
13
¥162

Thousands of
U.S. dollars
2010$8,65439−−
365$9,05821. Rental properties
The Company possesses rental apartments in major cities andregions throughout Japan. Also, Leopalace Guam Corporation asa subsidiary company possesses rental housing within resorts. In
March 2010, income arising from these rental properties were
¥4,144 million ($44,537 thousand), and impairment losses were
¥2,942 million ($31,618 thousand).
Also, book value of rental properties recorded in the consolidatedbalance sheet, and this financial year's increases, decreases andfair value are as follows:（Millions of yen）
Balance as of March 31, 2009¥80,238

Book Value

Fair Value

Increase/Decrease Balance as of March 31, 2010
¥4,844¥85,082¥82,566（Thousands of U.S. dollars）
Balance as of March 31, 2009
$862,405

Book Value

Fair Value

Increase/Decrease Balance as of March 31, 2010
$52,060$914,465$887,423(3) Change in the total amount of the asset retirement obligations forthe current fiscal year
Balance at beginning of year (Note): ¥91 million ($981 thousands)
Increase due to acquisition of tangible fixed assets: ¥9 million ($96
thousands)
Adjustment due to the passage of time: ¥1 million ($10 thousands)
Balance at end of year: ¥101 million ($1,087 thousands)(Note) Balance at beginning of year is the amount after applying,from the current fiscal year, “Accounting Standards for Asset
Retirement Obligations" (ASBJ Statement No. 18, March 31, 2008) and"Guidance on Accounting Standards for Asset Retirement
Obligations" (ASBJ Guidance No. 21, March 31, 2008).

23. Shares Outstanding and Treasury
StocksShares outstanding and treasury stocks for the year ended March 31,
2010 were as follows:
Type of shares
Shares outstanding
Common stock
Total
Treasury stock
Common stock
Total

March 31, 2009
159,543,915

Increase−

Decrease−

March 31, 2010
159,543,915

159,543,915−−

159,543,915

8,165,714
8,165,714

273
273

498,600
498,600

7,667,387
7,667,387(Note)
1. Book value recorded on the consolidated balance sheets is the amount after
deducting Accumulated depreciation and Accumulated impairment loss fromAcquisition cost.
2. In increase/decrease for the current fiscal year, the main increase is an increase as aresult of change in intended use (¥9,453 million, $101,606 thousand) and the maindecrease is impairment loss (¥2,942 million, $31,618 thousand).
3. Fair value as of the end of the current fiscal year is calculated by the Company
mainly based on “Real-estate appraisal standards”.

(Note)
1. Breakdown of amounts of increase is as follows:
Purchase of shares of less than one unit
273 shares
2. Breakdown of amounts of decrease is as follows:
Sell off of shares from “Leopalace 21 Employee Stock Ownership Committee Trust
Account” to the Board for Employees’ Ownership
498,600 shares
3. Number of treasury stock includes 3,098,500 shares held by the Trust Account as ofthe end of this fiscal year.

(Additional information)
From the current fiscal year,” Accounting Standard for Disclosures about Fair Value ofInvestment and Rental Property” (ASBJ Statement No. 20, 28 November, 2008) and“Implementation Guidance on Accounting Standard for Disclosures about the Fair
Value of Investment and Rental Property” (ASBJ Guidance No. 23, 28 November,2008) are applied.

Shares outstanding and treasury stocks for the year ended March 31,
2009 were as follows:

22. Asset retirement obligations
Out of asset retirement obligations, item recorded on the
consolidated balance sheet are as follows:(1) Outline of the asset retirement obligations
It is restoration obligations under real estate rental agreement forshop and fixed-term land lease agreement for renting real estate.
(2) Calculation method of the asset retirement obligations
For the restoration obligations under real estate rental agreement forshop, the estimated period of use at 5 years from its acquisition andthe discount rate at 0.485% is used to calculate the amount of theasset retirement obligations.
For the restoration obligations under fixed-term land leaseagreement for renting real estate, the estimated period of use at
11–30 years depending on the period of the agreement (useful lives
34

of buildings according to the old Act on Land and Building Lease)and the discount rate at 1.329-2.301% is used to calculate the amountof the asset retirement obligations.

Type of shares
Shares outstanding
Common stock
Total
Treasury stock
Common stock
Total

March 31, 2008
159,543,915

Increase−

Decrease−

March 31, 2009
159,543,915

159,543,915−−

159,543,915

165,059
165,059

8,000,655
8,000,655−−

8,165,714
8,165,714(Note) 1. An increase of 8,000,655 shares was due to purchases of common stock(8,000,000 shares) by resolution of the Board of Directors’ meeting andpurchases of shares of less than one unit (655 shares).

Gross amountType of shares (millionsof yen)24. Cash Dividends

Resolution(a) Cash dividends for the year ended March 31, 2010:
Not applicable.

General shareholders’meeting on
June 27, 2008

Commonstock

Cash dividends for the year ended March 31, 2009 were as follows:

Board of Directors’
meeting on
November 4, 2008

Commonstock

Per share(yen)

Record date

Date in effect ofdividend¥7,969¥50

March
31, 2008

June
30, 2008

4,781

30

September
30, 2008

November25, 2008(b) There is no dividend that will be in effect in the year ended March
31, 2011 and recorded in the year ended March 31, 2010.

25. New Share Subscription Right and Own Share Option
As of March 31, 2010
Classification

The Company

Number of shares available for new share subscription rights (shares)

Detail of new sharesubscription rights

Type of shares available for
new share subscriptionrights

As of March 31,2009

Increase in FY2009

new share subscription
rights as stock option

−

−

−

−

−

−

Total

Decrease in FY2009(Millions of yen)(Thousands of U.S. dollars)

¥89

$956

¥89

$956

As of March 31,2010−−(Note) As for six million yen of the above, the first day of exercise period has not come.

26. Leases
The Companies primarily lease furniture and electronic
appliances, for apartments of their leasing business, and software.

(b) The amounts of outstanding future lease payments underfinance lease subsequent to March 31, 2010 including the interest
portion thereon were summarized as follows:(a) The following pro forma amounts represent the acquisition
cost, accumulated depreciation and net book value of leased
property as of March 31, 2010 and 2009, which would have beenreflected in the accompanying consolidated balance sheets if
finance accounting had been applied to the finance leases thatexisted on or before March 31, 2008 and are currently accounted
for as operating leases:

2010

2009

2010

Acquisition cost
VehiclesEquipment¥7
14,536¥11
17,466$77
156,237

Accumulated depreciation
VehiclesEquipment

¥4
8,728

¥5
8,836

$41
93,808Net book value
VehiclesEquipment

¥3
5,808

¥6
8,630

2010
¥2,535
3,722¥6,257

Due within one year
Due after one year
Total

2010
$27,249
40,000$67,249

2009¥2,834
6,307¥9,141

Annual lease expenses charged to income were ¥3,188 million($34,263 thousand) and ¥4,038 million for the years ended March
31, 2010 and 2009, respectively.

Thousands of
U.S. dollars

Millions of yen

Thousands of
U.S. dollars

Millions of yen(c) Future minimum lease payments (including the interest
portion thereon) subsequent to March 31, 2010 and 2009 forfinance lease transactions accounted for as operating leases weresummarized as follows:
Thousands of
U.S. dollars

Millions of yen
2010
Lease payment
Estimated amount of depreciation by thestraight-line method over the lease period
Estimated interest cost by the interest method$¥37
62,4292010¥3,1882,767

2009¥4,0373,494$34,263$28,772

359

540

3,862

(d) Future minimum lease payments related to non-cancelable operating leases subsequent to March 31, 2010 were as follows:
Millions of yen

Due within one year
Due after one year
Total

Future lease payments

Prepaid lease payments¥
279,727¥ (279,685)
1,183,488(1,183,477)¥ 1,463,215¥(1,463,162)¥ 25,395¥ (25,395)
50,300(50,300)¥ 75,695¥(75,695)

Thousands of U.S. dollars
Differences¥¥

254,332(254,291)
1,133,188(1,133,177)¥ 1,387,520¥(1,387,467)

Future lease payments

Prepaid lease payments

Differences$ 3,006,525$ (3,006,077)
12,720,208(12,720,089)$ 15,726,733$(15,726,166)$ 272,945$ (272,945)
540,631(540,631)$ 813,575$ (813,575)$ 2,733,581$ (2,733,132)
12,179,578(12,179,458)$ 14,913,158$(14,912,590)

Future operating lease payments fixed under master lease agreements in leasing business are shown in parentheses.

35

Leopalace21

27. Contingent Liabilities
Contingent liabilities for the years ended March 31, 2010 and 2009 were as follows:
Millions of yen
Contingent liabilities to financial institutions for customers who have a home mortgage
Contingent liabilities to financial institutions for customers who have a membership loan
Subordinated contingent liabilities to financial institutions for customers who have an apartment loan with nonexempt property
Total

Thousands of
U.S. dollars

2010¥1,71030−¥1,7402009¥1,81030
1¥1,841

2010$18,375323−$18,688

28. Segment Information(a) Business segments
Segment information by business groups for the years ended March 31, 2010 and 2009 was as follows:Year ended March 31, 2010

(1) Net sales and operating income (loss)
Sales
Sales to customers
Inter-segment sales and transfers
Total
Operating expenses
Operating income (loss)(2) Assets, depreciation, impairment
losses and capital expenditures
AssetsDepreciation
Impairment losses
Capital expenditures

Millions of yen
Apartment
Construction
Subcontracting
Division

Leasing
Division

Hotel
ResortDivision

Residential
Sales
Division

Other
Division

Segment
totalsEliminationor common
assetsConsolidated
totals¥237,062
237,062
207,317¥29,745¥342,316
398
342,714
390,590¥(47,876)¥6,734
2,972
9,706
11,030¥(1,324)¥24,644
24,64428,001¥(3,357)¥9,62036
9,656
13,076¥(3,420)¥620,376
3,406
623,782
650,014¥(26,231)(3,406)(3,406)90¥(3,496)¥620,376
620,376
650,104¥(29,728)¥30,735
1,033
41¥183,178
1,983
2,942
1,580

¥55,912
1,968
261
3,071

¥3,9962
3¥10,020
106
35
1,495

¥283,841
5,092
3,238
6,190

¥112,671
1,204
5,182

¥396,512
6,296
3,238
11,372

Apartment
Construction
Subcontracting
Division

Leasing
Division

Hotel
ResortDivision

Residential
Sales
Division

Other
Division

Segment
totalsEliminationor common
assetsConsolidated
totals¥359,155359,155
289,042¥70,113¥345,915
216
346,131
347,108¥ (977)¥8,004
4,605
12,60913,081¥ (472)¥11,469
11,46922,134¥(10,665)¥8,692
8,692
11,752¥ (3,060)¥733,235
4,821
738,056
683,117¥54,939¥(4,821)(4,821)(39)¥(4,782)¥733,235
733,235
683,078¥50,157¥41,900
537
278¥205,737
2,652
2,808
6,458

¥53,711
2,079
506¥28,90710
6¥16,14485
351¥346,399
5,363
2,808
7,599

¥120,901
419
4,155¥467,300
5,782
2,808
11,754

Apartment
Construction
Subcontracting
Division

Leasing
Division

Hotel
ResortDivision

Residential
Sales
Division

Other
Division

Segment
totalsEliminationor common
assetsConsolidated
totals$2,547,961
2,547,961
2,228,260
319,701$3,679,236
4,276
3,683,512
4,198,083(514,571)$72,378
31,945
104,323
118,558(14,235)$264,875
264,875
300,952(36,077)$103,396
387
103,783
140,540(36,757)$6,667,846
36,6086,704,454
6,986,393(281,939)$(36,608)(36,608)970(37,578)$6,667,846
6,667,846
6,987,363(319,517)

330,344
11,108443

1,968,805
21,31731,61816,983600,943
21,1492,806
33,00542,951
24
28

107,694
1,136
376
16,0673,050,737
54,73434,80066,526

1,210,999
12,93355,703

4,261,736
67,66734,800122,229

Year ended March 31, 2009

(1) Net sales and operating income (loss)
Sales
Sales to customers
Inter-segment sales and transfers
Total
Operating expenses
Operating income (loss)(2) Assets, depreciation, impairment
losses and capital expenditures
AssetsDepreciation
Impairment losses
Capital expenditures

Millions of yen

Year ended March 31, 2010

(1) Net sales and operating income (loss)
Sales
Sales to customers
Inter-segment sales and transfers
Total
Operating expenses
Operating income (loss)(2) Assets, depreciation, impairment
losses and capital expenditures
AssetsDepreciation
Impairment losses
Capital expenditures

36

Thousands of U.S. dollars

Notes: 1. The above segments are defined according to our own internalmanagement system.
2. Segments and business content(1) Apartment Construction Subcontracting Division ----- Contract
apartment construction(2) Leasing Division ----- Apartment leasing, management, related services
and repairs, company housing services and broadband business, etc.
(3) Hotel Resort Division ----- Hotel and resort management, sales of resortclub memberships, etc.
(4) Residential Sales Division ----- Sale of detached houses(5) Other Division ----- Silver Business, financial services, small amount andshort-term insurance businesses

3. Major items and amounts included in “Elimination or common assets” are as
follows.
Year ended March 31, 2010
Millions of yen

Thousands of U.S. dollars

Operating expenses unable to beallocated included in “Elimination orcommon assets”¥3,587$38,554

Amount of corporate assets
included in “Elimination orcommon assets”¥112,671$1,210,999

Main component
Management expensesof the General Affairs
Department of the Company.
Surplus funds under management at theCompany (cash and deposits,marketable securities, etc.), long-term
investment funds (investment securities, etc.),
and assets related to management operations.

4. Changes in business segments
From the subject fiscal year ended March 31, 2010, to properly reflect the current status of business content following changes in the business management structure, the domestic
hotel business that had been included in the Leasing Division segment was moved to the Hotel Resort Division segment, and the broadband business that had been included in the
Other Division segment was moved to the Leasing Division segment.
As a result of this change, compared to the previous method, sales for the subject fiscal year increased ¥12,334 million ($132,564 thousand) in the Leasing Division segment and¥2,219 million ($23,849 thousand) in the Hotel Resort Division segment, and decreased ¥14,553 million ($156,413 thousand) in the Other Division segment. Operating expenses
increased ¥9,328 million ($100,256 thousand) in the Leasing Division segment, and decreased ¥2,424 million ($26,053 thousand) in the Hotel Resort Division segment, and ¥11,752
million ($126,309 thousand) in the Other Division segment.
5. Changes in accounting policy(1) Accounting standard regarding construction contracts
The Company had conventionally recognized its construction revenues of subcontracting contracts by using the completed contract method. However, as discussed in “3-(1)Changes in Significant Accounting Policies,” the Company, effective from fiscal year ended March 31, 2010, adopted the “Accounting Standard for Construction Contracts (theAccounting Standard Board of Japan (ASBJ) Statement No. 15 issued on December 27, 2007)” and the “Guidance on Accounting Standard for Construction Contracts (ASBJ GuidanceNo. 18 issued on December 27, 2007)” to recognize construction revenues.
As a result of this change, net sales and operating income for Apartment Construction Subcontracting Division for fiscal year ended March 31, 2010 increased by ¥6,350 million($68,249 thousand) and ¥1,614 million ($17,350 thousand), respectively.
(2) Changes in cost calculation for contracted work
As discussed in“Changes in Significant Accounting Policies,”the Company, effective from fiscal year ended March 31, 2010, changed the cost accounting of contracted works to amethod by which overhead costs of the contracted works for this fiscal year are charged to costs related to completed constructions in the same period.
As a result of this change, operating expenses for the Apartment Construction Subcontracting Business for fiscal year ended March 31, 2010 decreased by ¥620 million ($6,664
thousand), and operating income increased by the same amount, respectively.
(3) Accounting standard for asset retirement obligations
As discussed in“Changes in Significant Accounting Policies,”the Company, effective from fiscal year ended March 31, 2010, adopted the “Accounting Standards for Asset Retirement
Obligations” (Corporate Accounting Standards No.18, March 31, 2008) and “Guidance on Accounting Standards for Asset Retirement Obligations” (Corporate Accounting Standards
No.21 March 31, 2008).”
As a result of this change, for fiscal year ended March 31, 2010, operating expenses and operating loss of Apartment Construction Subcontracting Division, Leasing Division, Hotel
Resort Division, Residential Sales Division, Other Division and Eliminations/Unallocated increased by ¥46 million ($492 thousand), ¥16 million ($157 thousand) , ¥2 million ($23
thousand), ¥0 million ($1 thousand), ¥2 million ($25 thousand) and ¥0 million ($7 thousand), respectively.
(b) Geographical segments
Segment information by geographic area for the years ended March 31, 2010 and 2009 was as follows:Year ended March 31, 2010
(1) Net sales and operating income (loss)
Sales
Sales to customers
Inter-segment sales and transfers
Total
Operating expenses
Operating income (loss)(2) Assets
AssetsMillions of yen
People's Republic
Segment totalsof ChinaJapan

Trust territory of
U.S.A. Guam

¥617,14288
617,230
643,316(26,086)¥3,234
3,184
6,418
6,560
(142)

¥19
19
23
(4)

241,546

42,27733

Elimination orcommon assets

Consolidated
totals¥620,376
3,291
623,667
649,899(26,232)¥(3,291)(3,291)205(3,496)¥620,376
620,376
650,104(29,728)

283,856

112,656

396,512

Millions of yen
Year ended March 31, 2009
(1) Net sales and operating income (loss)
Sales
Sales to customers
Inter-segment sales and transfers
Total
Operating expenses
Operating income (loss)(2) Assets
AssetsJapan

Trust territory of U.S.A. Guam

Segment totals

Elimination or common assets

Consolidated totals¥729,238
115
729,353
675,410¥53,943¥3,997
5,077
9,074
8,078
¥996

¥733,235
5,192
738,427
683,488¥54,939¥(5,192)(5,192)(410)¥(4,782)¥733,235
733,235
683,078¥50,157¥304,788¥41,610¥346,398¥120,902¥467,30037

Leopalace21(1) Net sales and operating income (loss)
Sales
Sales to customers
Inter-segment sales and transfers
Total
Operating expenses
Operating income (loss)(2) Assets
AssetsThousands of U.S. dollars
People's Republic
Segment totalsof ChinaJapan

Trust territory of
U.S.A. Guam

$6,633,088
944
6,634,032
6,914,399(280,367)$34,758
34,222
68,98070,505(1,525)

$−
203
203
250
(47)

2,596,153

454,400

349

Year ended March 31, 2010

Elimination orcommon assets

Consolidated
totals$6,667,846
35,3696,703,214
6,985,154(281,940)$−(35,369)(35,369)
2,209(37,578)$6,667,846−
6,667,846
6,987,363(319,517)

3,050,902

1,210,834

4,261,736

Millions of yen

Thousands of
U.S. dollars(Notes) 1. Geographic area is defined by geographic contiguity.
2. Effective from fiscal year ended March 31, 2010, Leopalace21 Business
Consulting (Shanghai) Co., Ltd. was newly included in the scope of
consolidation. As a result, “People's Republic of China” was added in thegeographical segments.
3. Major items and amounts included in “Elimination or common assets” arethe same as in Note in “Business segments.”（Changes in accounting policy）(1) Accounting standard regarding construction contracts
The Company had conventionally recognized its construction revenues ofsubcontracting contracts by using the completed contract method. However, as
discussed in “3-(1) Changes in Significant Accounting Policies,” the Company,
effective from fiscal year ended March 31, 2010, adopted the “Accounting Standard
for Construction Contracts (the Accounting Standard Board of Japan (ASBJ)
Statement No. 15 issued on December 27, 2007)” and the “Guidance on AccountingStandard for Construction Contracts (ASBJ Guidance No. 18 issued on December 27,2007)” to recognize construction revenues.
As a result of this change, net sales of Japan for fiscal year ended March 31, 2010
increased by ¥6,350 million ($68,249 thousand), and operating loss decreased by¥1,614 million ($17,350 thousand), respectively.
(2) Accounting standard regarding cost calculation for contracted work
As discussed in“Changes in Significant Accounting Policies,” the Company, effectivefrom fiscal year ended March 31, 2010, changed the cost accounting of contracted
works to a method by which overhead costs of the contracted works for this fiscal
year are charged to costs related to completed constructions in the same period.
As a result of this change, operating expenses of Japan for fiscal year ended March
31, 2010 decreased by ¥620 million ($6,664 thousand), and operating loss of Japandecreased by the same amount, respectively.
(3) Accounting standard for asset retirement obligations
As discussed in“Changes in Significant Accounting Policies,” the Company, effectivefrom fiscal year ended March 31, 2010, adopted the “Accounting Standards for Asset
Retirement Obligations” (Corporate Accounting Standards No.18, March 31, 2008)
and “Guidance on Accounting Standards for Asset Retirement Obligations”(Corporate Accounting Standards No.21 March 31, 2008).”
As a result of this change, for fiscal year ended March 31, 2010, operating expenses ofJapan, Trust territory of U.S.A. Guam, People's Republic of China andEliminations/Common assets increased by ¥64 million ($685 thousand), ¥1 million($12 thousand), ¥0million ($0 thousand)and ¥1 million ($7thousand), respectively. In
addition, operating loss increased by the same amount.

(c) Overseas sales
As overseas sales constituted less than 10% of consolidated net
sales for the years ended March 31, 2010 and 2009, overseas sales
information has been omitted.

29. Amounts per Share(a) The following table sets forth the net assets and net income
per share of common stock for the years ended March 31, 2010
and 2009.

38

Net assets
Net income (loss)
Basic

2010

2009

2010

¥466.76¥967.40$5.02(521.91)

63.54(5.61)

Diluted net income per share is not stated since the Company
posted net loss per share.
(b) Basis of computation of net assets per share at March 31, 2010
and 2009 was as follows:
Thousands of
U.S. dollars

Millions of yen
2010
Net assets
Amount not allocated to common stock（new share subscription right）
Net assets allocated to common stock
Shares issued outstanding at end of year
(Thousands of shares)¥70,979
89(89)
70,890151,8772009¥146,442−
146,442
151,3782010$762,891
956(956)
761,935−(c) Basis of computation of basic net income per share for theyears ended March 31, 2010 and 2009 was as follows:
Thousands of
U.S. dollars

Millions of yen
2010
Net income (loss)¥(79,076)
Amount not allocated to common stock−
Net income allocated to common stock(79,076)
Weighted-average shares during the year
151,512(thousands of shares)
Dilutive securities that did not havenew share
dilutive effects and therefore were notsubscription
included in the calculation of diluted
right
net income per share.
(1,712)

2009

2010

¥9,952−
9,952
156,620$(849,913)−(849,913)−−

The Company recognizes stocks held by “Leopalace 21
Employee Stock Ownership Committee Trust Account”(3,098,500 treasury stocks as of the end of this fiscal year) as
the treasury stock. As a result, those numbers are eliminated in
calculating “Number of common shares used to calculate net
assets per share at the end of the fiscal year” and “Weighted
average number of common shares during the fiscal year.”30. Related Party Transactions
The following table sets forth related party transactions for theyears ended March 31, 2010 and 2009.
(For the year ended March 31, 2010)(a) Unconsolidated subsidiaries and affiliates
Capital stock
Attribute

Name

Address

AffiliateToyo Miyama
Kogyo Co., Ltd.

Kisarazu
City, Chiba

Millions of yen

Thousands of
U.S. dollars

Business or position

Percentage of shareownershipof the Company

Relation￥100$1,075

Production and salesof building materials

50.0%–Purchases of building
materials and others–Interlocking directors

Transaction amountAttribute

Name

Transaction

AffiliateToyo Miyama
Kogyo Co., Ltd.

Purchases ofbuilding
materials andothersBalanceMillions of yen

Thousands of
U.S. dollars

Account¥25,511$274,194

Millions of yen

Thousands of
U.S. dollars

Accounts payable forcompleted projects¥5,690$61,159(b) Directors and major shareholders
Capital stock
Attribute

Director and close
relatives

Millions of yen

Thousands of
U.S. dollars

Business or position

Percentage of shareownershipof the Company

Relation

–

–

–

–

0.5%

Leasing of land and building

Toshiko Miyoshi

–

–

–

–

–

Subcontracting ofbuilding construction

Takeshi Yoshioka

–

–

–

–

–

Leasing of land and buildings

Name

Address

Yoshiteru Kitagawa

Leasing of land and building

Transaction amountAttribute

Director and close
relatives

Name

Transaction

Yoshiteru
Kitagawa

Leasing ofapartments
Apartment
construction
subcontracting

Toshiko Miyoshi

Takeshi
Yoshioka

BalanceMillions of yen

Thousands of
U.S. dollars

Account

¥10

$110

193

Leasing ofapartments
Leasing ofapartments

Millions of yen

Thousands of
U.S. dollars

–

–

–

2,074

–

–

–

15

165

Long-term prepaid
expenses

¥25

$271

13

140

–

–

–

(Notes) 1. Consumption taxes were not included in transaction amounts but included in balance.
2. Conditions of transactions:(a) Conditions of purchases of building material were the same as transactions with third parties.
(b) Conditions of leasing of apartments are the same as transactions with third parties.
(c) Conditions of sale of land are the same as transactions with third parties.
3. As of February 5, 2010, Yoshiteru Kitagawa resigned as a board member.
4. Toshiko Miyoshi is a close relative of Tadahiro Miyama, Executive Director of Management.
5. Takeshi Yoshioka is a close relative of Yoshikazu Miike, Director of the Company.

39

Leopalace21(For the year ended March 31, 2009)(a) Unconsolidated subsidiaries and affiliates

Capital stock
Attribute

Name

Address

AffiliateToyo Miyama
Kogyo Co., Ltd.

Kisarazu
City, Chiba

Millions of yen

Thousands of
U.S. dollars

Business or position

Percentage of shareownershipof the Company

Relation￥100$1,018

Production and salesof building materials

50.0%–Purchases of building
materials and others–Interlocking directors

Transaction amountAttribute

Name

Transaction

AffiliateToyo Miyama
Kogyo Co., Ltd.

Purchases ofbuilding
materials andothersBalanceMillions of yen

Thousands of
U.S. dollars

Account¥41,387$421,324

Accounts payable forcompleted projects

Millions of yen

Thousands of
U.S. dollars¥10,571$107,615(b) Directors and individual major shareholders
Attribute

Name

Capital stock

Address

Business or position

Percentage of share ownershipof the Company

President and CEO

0.5%

Millions of yen

Director and close
relatives

Yoshiteru Kitagawa––

Toshiko Miyoshi

–

–

–

–

Takeshi Yoshioka

–

–

–

–
Transaction amountAttribute

Name
Yoshiteru Kitagawa

Director and close
relatives

Transaction

Leasing of land and building
Sales of real estate
Leasing of land and buildings
Leasing of land and buildings
Balance
Account

Millions of yen

Millions of yen

Leasing of apartments

¥10

–

¥–

Sale of land

52

–

–

Leasing of apartments–

Long-term prepaid
expenses29

Leasing of apartments

13

–

–

Toshiko Miyoshi

Takeshi Yoshioka

Relation(Notes) 1. Consumption taxes were not included in transaction amounts but included in balance.
2. Conditions of transactions:(a) Conditions of purchases of building material were the same as transactions with third parties.
(b) Conditions of leasing of apartments are the same as transactions with third parties.
(c) Conditions of sale of land are the same as transactions with third parties.
3. Toshiko Miyoshi is a close relative of Tadahiro Miyama, Executive Director of Management.
4. Takeshi Yoshioka is a close relative of Yoshikazu Miike, Director of the Company.

31. Subsequent Events
Material assets pledged as collateral
The Company, in accordance with the request from transacting
financial institutions, is in mutual agreement with the offering of
the following assets as added security towards loans as of June25, 2010.

40

Buildings and structures
Land
Others
Total

Millions of yen

Thousands of U.S. dollars¥29,585
11,846
1,079¥42,510$317,980
127,322
11,600$456,902

Report of Independent Auditors

41

Leopalace21 Corporation
Head Office:

Board of Directors and Auditors

2-54-11 Honcho, Nakano-ku,Tokyo 164-8622, Japan
Tel: +81-3-5350-0001
http://eg.leopalace21.com(As of June 25, 2010)

Date of Establishment:

President and CEO

Eisei Miyama

Executive Director of Management

Tadahiro Miyama

Directors

Hiroyuki Miyata

August 17, 1973

Share Capital:¥55,640.66 million

Yoshikazu Miike

Operations:

Kou Kimura

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

Fumiaki Yamamoto
Yuzuru SekiyaGroup Companies:
Leopalace Guam Corporation, Leopalace Travel, Ltd.,
Leopalace Insurance Co., Ltd., Leopalace Leasing Corporation,
Leopalace Finance Co., Ltd.,
Leopalace21 Business Consulting (Shanghai) Co., Ltd.,
Leopalace Smile Co., Ltd., Leopalace Guam Distributing Corporation,
Leopalace Guam Service Corporation. Toyo Miyama Kogyo Co., Ltd.

Standing Auditors

Tetsuji Taya(outside)
Yoshinori Uehara
Shinya Watanabe
Koichi Fujiwara(outside)
Masahiko Nakamura(outside)

Auditors

Number of Employees:(As of March 31,2010)
8,582 (consolidated basis);
7,739 (non-consolidated basis)

Major Shareholders (Top 10)(As of March 31, 2010)

Name of shareholder

No. of shares held

% of shares held

Yusuke Miyama
Japan Trustee Service Bank, Ltd. (for trust)
The Master Trust of Japan, Ltd. (Trust Account)
Leopalace21 Corporation
Bank of New York GCM Client Account JPRDISGFEAC
Standing Proxy, Bank of Tokyo-Mitsubishi UFJ

18,135,774
8,783,300
8,549,500
4,568,887
4,089,086

11.37%
5.51%
5.36%
2.86%
2.56%

Trust & Custody Services Bank, Ltd.（Pension Trust Account）
Japan Trustee Service Bank, Ltd. (for trust 9)
Stockholding Association for Leopalace21's Business Connections
Sumitomo Mitsui Banking Corporation, Trust AccountToyo Kanetsu K.K.

3,975,700
3,775,100
3,125,100
3,098,500
2,745,900

2.49%
2.37%
1.96%
1.94%
1.72%

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

Number of Shareholders:Composition of Shareholders
Government andlocal public organizations
0.01%
Treasury stocks
2.86%(As of March 31, 2010)

Securities companies
1.78%

30,738Stock Exchange Listing:Tokyo Stock Exchange (ticker: 8848)

Business corporations
and other legal entities
3.77%

Foreign corporations
32.37%

Financial institutions
26.78%

Individuals and other
32.42%

Transfer agent:
Mitsubishi UFJ Trust and Banking Corporation