Annual Report 2010
Year ended March 31, 2010

TERAOKA SEISAKUSHO CO., LTD.

PROFILE
Since its establishment in 1921, Teraoka Seisakusho Co., Ltd. has developed into a leading manufacturer of highly functional packing, electricalinsulation, electronic equipment, other industrial and general home-use
adhesive tapes.
Along with the miniaturization and sophistication of cell phones andother electronic devices, the double-sided tapes used for attaching parts
to the ever more limited space inside these devices is also constantly
evolving. We continue to aggressively research and develop our tapes toimprove adhesive strength, ultra-thinness, transparency or opaqueness,and the recyclability and environmental-friendliness to meet the changing
demands of our clients.
One of our newest products is a thermal conductive double-sided tape which, when compared toconventional products, is both thinner and has excellent radiation properties making this tape perfectfor use in TV’s equipped with LED backlights, LED lighting and other next-generation devices.
Now and in the future, TERAOKA will continue to conduct research and development of new
products and technologies to meet the rapidly changing needs of our customers.

TERAOKA’s new thermal conductive double-sided adhesive tapes shown below were
exhibited at Lighting Japan, the 2nd LED/OLED Lighting Technology Expo.

CONTENTS
Consolidated Financial Highlights
To Our Stockholders
Review of Operations
Consolidated Five-year Summary
Financial Statements
Financial Review
Consolidated Balance Sheets
Consolidated Statements of Income
Consolidated Statements of Stockholders' Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Report of Independent Auditors
Company Data
Investor Information
10

Teraoka Seisakusho Co., Ltd.

1
2
4
6
7
8
10
12
13
14
15
21
22
24

Teraoka Seisakusho Co., Ltd. and Consolidated Subsidiaries

CONSOLIDATED FINANCIAL HIGHLIGHTS

For the years ended March 31,
Thosands of
U.S. dollars

Millions of yen

2010

2009

2010

¥22,909¥23,833$246,224

Operating Income

522

40

5,608

Income (Loss) before Income Taxes

575

(426)

6,178

Net Income (Loss)

359

(402)

3,859

Total Assets

32,09831,849345,000

Net Assets

23,66923,416254,396

Operating Income to Net Sales

2.3

0.2

Equity Ratio

73.7

73.5

Return on Average Assets (ROA)

1.1

(1.2)

Return on Average Stockholders’ Equity (ROE)

1.5

(1.7)

Net Sales

Ratio (%)

Per Share

Yen

U.S. dollars

Net Income (Loss)¥17.93¥(20.00)$0.19

Cash Dividends

7.00

10.00

0.08

The U.S. dollar amounts in this annual report are translated from yen, for convenience only,at the rate of ¥93.04 = U.S.$1, the rate prevailing on March 31, 2010.

Net Sales

Net Income (Loss)(¥ billions)

Total Assets(¥ millions)(¥ billions)
40

1,500

30

1,200
30
20
900
20
600
10
10
300

0

06

07

08

09

10

0

09
06

07

08

10

0

06

07

08

09

10

Teraoka Seisakusho Co., Ltd.

1TO OUR SHAREHOLDERS

Business Environment
We would like to announce that fiscal year 2010, the year ended March 31, 2010, marked
TERAOKA’s 100th business term. On behalf of all our employees I would like to sincerely
thank you for all your support.
Japan faced a serious financial and economic recession this term. However, due to thegovernment’s economic stimulus measures and the economic upturn of developing countries, Japan showed signs of a slow but steady recovery starting around spring 2009. Exports
and overall production increased, but the strong yen caused a downward trend in corporate
profits, contributing to further deterioration of employment. For this and other reasons thevisible recovery was subtle.
As for the Company’s business environment, the electronics hardware industry in Asiaand other overseas markets showed an upturn at an earlier stage than the domestic market.
As a result, subsequent demand for our relevant tape products increased. However, freight,
housing construction and company equipment spending decreased causing the packing
adhesive tape industry to remain severe. Under these circumstances, the general cost of
production decreased from the effect of price drops for raw materials. Despite more favorable raw material prices, overall profits still decreased due to slow sales and depreciation. To
tackle the upcoming economic challenges, we closed our Ohmiya factory and Fukuoka sales
office and took other measures to rationalize operations and lower operating costs at every
level of our organization. We also made a concerted effort to increase productivity, promote
overseas sales and expand our lineup of tape products for digital hardware and environmentally safe products.

Results for FY 2010
Consolidated net sales for this term were ¥22,909 million (US$246,224 thousand), a 3.9%
decrease from the previous term. On the other hand, consolidated operating income totaled¥522million (US$5,608 thousand), a substantial increase over the previous term. Consolidated income before income taxes for the term was ¥575 million (US$6,178 thousand). With aconsolidated net income of ¥359 million (US$3,859 thousand), we declared a profit for thisterm. An interim dividend of ¥3.00 (US$0.03) and a term-end dividend of ¥4.00 (US$0.04)
were paid to shareholders, totaling ¥7.00 (US$0.08) per share in dividend payouts for theperiod.

2

Teraoka Seisakusho Co., Ltd.

Future Focus
For the immediate future, even though some domestic industries are showing slightrecovery, company equipment spending and the employment situation still remain
severe. Currently there are no signs of a substantial upturn in consumer spending or
corporate performance, and furthermore, the price of raw materials is expected to rise,leading to a forecast of continuing business stagnation.
Under these austere conditions, TERAOKA will continue to enhance productdevelopment and marketing strategies, staying one step ahead of the rapidly evolving
market and environmentally safe product demand. Through even tighter management
and more effective production systems we believe we will move the Company in the
direction of profitability once again. Towards this goal, we have concentrated on the
reduction of overhead costs and have done our best to be prepared for unexpectedobstacles in order to further strengthen our corporate management and efficiency.
Through these and other efforts, we continue to heighten our corporate value,and during these endeavors we continue to ask for the support and patronage of ourshareholders, clients and friends.
June 25, 2010

Keishiro Teraoka,
President

Teraoka Seisakusho Co., Ltd.

3REVIEW OF OPERATIONSTERAOKA is a technology-based enterprise with formidable research & development capabilities. As mentioned in ourcompany creed, our top priorities are always our service, product quality, and price. In order to compete in a rapidly evolving global marketplace, technological innovation and value-added product content is what has allowed the Company tomaintain a competitive lead in markets demanding highly advanced and environmentally safe tape products.
During the fiscal term in review, we continued to focus our efforts on developing increasingly specialized non-halogen
tapes, ultra-thin heat-resistant double-sided tapes, as well as P-Cut tapes and other environmentally conscious products.
Research & development expenses for the term amounted to ¥1,020 million (US$10,963 thousand), accounting for4.6% of total consolidated sales.
Consolidated net sales for the Company during FY 2010 amounted to ¥22,909 million (US$246,224 thousand). The
performance of the individual product segments is detailed below.

Packing Tapes
Sales of packing adhesive tapes faced hard times due to the continued weakness in the housing and freight industries as well as
price competition. As a result, consolidated sales for this productsegment amounted to ¥4,589 million (US$49,323 thousand), a
13.7% decrease from the previous term. This division accounted
for 20.0% of the total consolidated sales, a 2.3% decrease fromthe previous term.

Electrical Insulation and Electronic Equipment Tapes
Sales of the Company’s electrical insulation and electronic equipment tapes grew steadily from June due to the expanding international market for flat-screen TV’s and other digital hardware.
Sales of tapes for automotive parts increased as well. As a result,sales for this division recovered to levels comparable to before
the financial crisis.
The consolidated net sales of electrical insulation andelectronic equipment tapes amounted to ¥11,797 million(US$126,795 thousand), an increase of 3.0% over the previous
term. This division accounted for 51.5% of total consolidated
sales, 3.4% higher than the previous term.

BREAKDOWN OF SALES BY CATEGORY

20.0% Packing Tapes
Olive cloth tapes
OKraft paper tapes
OPolypropylene cloth/film adhesive tapes

O

51.5% Electrical Insulation andElectronic Equipment Tapes
Polyester cloth/film adhesive tapesO

Acetate cloth adhesive tapes
Combination adhesive tapes

O
O

Kapton film adhesive tapes
Nomex adhesive tapes

OO

28.5% Other Industrial Tapes
Double-sided adhesive tapesO

Corrosion-proof tapes
Masking cloth tapes

OO

Surface protection tapesO

4

Teraoka Seisakusho Co., Ltd.

Glass cloth adhesive tapes

O

EMI/RFI shielding tapes

OEXPORT MARKETS
Asia

93.5%

Europe2.8%

North America

2.7%

Other areas

1.0%

Other Industrial Tapes
The housing and construction industries showed no signs ofrecovery, causing the sales of the Company’s industrial tapes toremain stagnant. This was partially due to the reorganization of
non-environmentally friendly and unprofitable products. Sales ofpolyethylene cloth tapes, however, enjoyed continued growthduring the term.
As a result, the consolidated net sales of industrial tapes
amounted to ¥6,522 million (US$70,099 thousand), a decreaseof 7.6% over the previous term. This division accounted for
28.5% of total consolidated sales, 1.1% lower than the previous
term.

EXPORT RATIO
Domestic

70.7%

Overseas Sales

Export29.3%
CHANGES IN OVERSEAS SALES
Overseas Sales
Export Ratio (%)(%)(¥ billions)
8

30

7.32
6.70

6

6.03

During FY 2010, exports of electrical insulation and tape forelectronic equipment increased 9.5%, reflecting the recovery of
the Asian electronic device market. Even with a sales decreaseof 12.1% in industrial tapes and 0.8% in packaging tapes, total
overseas sales still amounted to ¥6,707 million (US$72,087
thousand), a 7.3% increase over the previous term. Overseas
sales accounted for 29.3% of TERAOKA’s total consolidated
sales, an increase of 3.1% over the previous term.

6.30

5.22

20

4
10
2

0

0

FY 2006

FY 2007

FY 2008

FY 2009

FY 2010

Teraoka Seisakusho Co., Ltd.

5

Teraoka Seisakusho Co., Ltd. and Consolidated Subsidiaries

CONSOLIDATED FIVE-YEAR SUMMARY

Thousands of
U.S. dollars

Millions of yen

2006

2007

2008

2009

2010

2010

¥21,829¥23,536¥25,945¥23,833¥22,909$246,224

Operating Income

1,399

1,424

1,540

40

522

5,608

Income (Loss) before Income Taxes

1,452

2,004

1,155

(426)

575

6,178

945

1,242

758

(402)

359

3,859

Total Assets

31,18432,271

32,696

31,84932,098345,000

Net Assets

23,94024,472

24,343

23,416

23,669254,396

Operating Income to Net Sales

6.4

6.1

5.9

0.2

2.3

Equity Ratio

76.8

75.8

74.5

73.5

73.7

3

3.9

2.3

(1.2)

1.1

4.1

5.1

3.1

(1.7)

1.5

Years ended March 31

Net Sales

Net Income (Loss)

Ratio (%)

Return on Average Assets (ROA)
Return on Average
Stockholders' Equity (ROE)Per Share

Yen

Net Income (Loss)¥45.62¥62.12¥37.93¥(20.00)¥17.93$0.19

Cash Dividends

14.00

14.00

14.00

10.00

7.00

0.08

The U.S. dollars are translated at the rate of ¥93.04 per U.S.$1, prevailing on March 31, 2010.

6

U.S. dollars

Teraoka Seisakusho Co., Ltd.

Financial Statements

Fiscal Year 2010
Year ended March 31, 2010

Teraoka Seisakusho Co., Ltd.

7

FINANCIAL REVIEWBusiness Performance
Net Assets(¥ billions)

80

30

60
20

40

10

In TERAOKA’s operating environment the packing and industrial tape markets
stayed stagnant owing to the ongoing difficulties within the housing andEquity Ratio
freight industries and capital expenditures for equipment. Fortunately, the(%)
electronics hardware industry in Asia and other overseas markets recovered
relatively quickly.
Despite our concerted efforts, consolidated net sales for the period in
review were ¥22,909 million (US$246,224 thousand), a decrease of 3.9% overthe previous term. Consolidated operating income, however, was ¥522 million(US$5,608 thousand), a significant increase from the previous term. Consolidated income before income taxes was ¥575 million (US$6,178 thousand), andconsolidated net income was ¥359 million (US$3,859 thousand).

20

Segment Information
0

06 07 08 09 10

0

Net Income (Loss)
per Share (Yen)
5

60

4
40
3

2
20
1

0

09
06 07 08100

Cash Dividends
per Share (Yen)
15

6

10

4

5

0

8

2

06 07 08 09 10

Teraoka Seisakusho Co., Ltd.

0

Sales for TERAOKA’s Packing Tapes Division decreased by 13.7% comparedwith the previous term owing to a market contraction stemming from the continued stagnation of the housing and freight industries. Consolidated net sales
Return on Average
this segment
were ¥4,589 million (US$49,323 thousand).
(%)
Assetsfor(ROA)
The Electrical Insulation and Electronic Equipment Tapes Division saw
improvement in sales due to domestic and international market expansion indigital devices and automotive parts. Sales for this segment increased by 3.0%
to ¥11,797 million (US$126,795 thousand).
In the Other Industrial Tapes Division, sales of P-Cut Tapes (polyethylene
cloth tapes) continued to increase, but the downturn in home building andremodeling caused the overall sales of this segment to decrease. Sales for theterm were ¥6,522 million (US$70,099 thousand), a decrease of 7.6% from theprevious term.
By region, domestic total sales amounted to ¥16,202 million (US$174,140
thousand),09 a decrease of 7.9% from the previous term. Total export sales were
06 07¥6,707
08
10 (US$72,087 thousand), an increase of 7.3% over the previous
millionterm.
Return on Average
We export to global markets including Asian countries such as China andStockholders' Equity (ROE) (%)
Singapore, North America, and Europe. However, our focus remains on the
Asian markets which accounted for 93.5% of total exports, an increase of 1.1%
compared to the previous term.
06 07 08 09 10

Financial Position
Total assets at the end of the fiscal term were ¥32,098 million (US$345,000
thousand), an increase of 0.8% or ¥249 million (US$2,676 thousand). The
capital-to-asset ratio was 73.7%, up 0.2 points from the previous term.
Total current assets at the term-end amounted to ¥17,508 million(US$188,172 thousand), an increase of 15.7% or ¥2,375 million (US$25,527
thousand)
09 when compared with the previous term-end, owing in part to a
06 07¥1,167
08
10 (US$12,543 thousand) increase in notes and accounts
millionreceivable.

Total fixed assets decreased by 12.7%, or ¥2,126 million (US$22,850 thousand), to ¥14,591 million (US$156,825 thousand) during the term. This is dueto the decrease in value of depreciable assets.
Total current liabilities increased by 3.9% or ¥227 million (US$2,440 thousand), amounting to ¥6,048 million (US$65,001 thousand) at term-end, owing
to an increase in notes and accounts payable.
Total long-term liabilities decreased by 8.8% or ¥231 million (US$2,483
thousand) to ¥2,381 million (US$25,603 thousand), in part because long-termborrowings decreased by ¥500 million (US$5,374 thousand) during the term in
review.
Total net assets at year-end amounted to ¥8,429 million (US$90,604 thousand), representing a year-on-year decrease of ¥4 million (US$43 thousand).

Equity Ratio
(%)
80

60

40

20

Cash Flows
09 10

0

(Loss)

06 07 08 09 10

Return on Average
Assets (ROA) (%)

en)
5

4

3

2

1

09
10

0

nds

09
06 07 08

10

Return on Average
Stockholders' Equity (ROE) (%)en)
6

Dividends
During each term, TERAOKA’s basic policy is to continue a stable dividend payment to shareholders after careful consideration of its business results, including operating results for the period in review, its overall financial condition,
cash flow, dividend propensity and future business forecasts, in order to maintain a stable financial base. Under this basic policy, we implemented an interim
dividend of ¥3 (US$0.03) per share and a term-end dividend of ¥4 (US$0.04)
per share, for an annual dividend of ¥7 (US$0.08) per share. As a result, thedividend payout ratio was 51.9%.

4

2

09 10

0

Funds obtained through operating activities totaled ¥3,277 million (US$35,211
thousand), an increase of 69.7% or ¥1,346 million (US$14,467 thousand) fromthe previous term. This increase was due mainly to depreciation and amortization of ¥2,434 million (US$26,161 thousand).
Funds used for investment purposes amounted to ¥1,543 million(US$16,581 thousand), a decrease of 50.2% over the previous term. Thisdecrease reflected the payments of ¥1,636 million (US$17,584 thousand) for
purchase of property, plant and equipment during the term.
Funds used for finance activities amounted to ¥409 million (US$4,396
thousand) during the term under review. In the previous term, we obtained¥1,208 million (US$12,984 thousand) through these activities, however, in thisterm we primarily paid dividends totaling ¥120 million (US$1,295 thousand)and raised long-term borrowings from banks by ¥125 million (US$1,344 thousand).
Through these activities, consolidated cash and cash equivalents at the endof the term in review amounted to ¥7,420 million (US$79,754 thousand), an
increase of ¥1,292 million (US$13,887 thousand) when compared with the endof the previous consolidated accounting period.

09
06 07 08

10

Teraoka Seisakusho Co., Ltd.

9

Teraoka Seisakusho Co., Ltd. and Consolidated Subsidiaries

CONSOLIDATED BALANCE SHEETSMarch 31, 2010 and 2009

Thousands of
U.S. dollars

Millions of yen

2010

2009

2010

¥ 7,420¥ 6,129$ 79,754

6,447
(12)
3,205
275
173
17,508

5,280
(11)
3,191
164
380
15,13369,288(129)
34,446
2,959
1,854
188,172

Less: Accumulated depreciation ..................................................................
Property,plant and eqipment,net.................................................................

3,861
8,992
24,130131
37,114(24,951)
12,163

3,784
7,392
21,7794,117
37,072(23,148)
13,92441,50096,643259,356
1,406
398,905(268,171)
130,734

Intangible Assets.........................................................................................

124

197

1,341

Investments and Other Assets:
Investments in securities (Notes 2-b and 5) .................................................
Deferred income taxes (Note 2-f) ................................................................
Other .........................................................................................................
Less: Allowance for doubtful accounts (Note 2-g) .......................................
Total investments and other assets ..............................................................
Total assets...........................................................................................

2,102
37
195
(31)
2,303
¥ 32,098

1,900
443
283
(31)
2,595
¥ 31,849

22,589
398
2,101
(335)
24,753$ 345,000

ASSETS
Current Assets:
Cash and time deposits ..............................................................................
Notes and accounts receivable:
Trade ......................................................................................................
Less: Allowance for doubtful accounts (Note 2-g) .......................................
Inventories (Note 2-c) .................................................................................
Deferred income taxes (Note 2-f) ................................................................
Other current assets ...................................................................................
Total current assets...............................................................................

Property, Plant and Equipment (Note 2-d):Land ...........................................................................................................
Buildings ....................................................................................................
Machinery and equipment ..........................................................................
Construction in progress .............................................................................

The accompanying notes to consolidated financial statements are an integral part of these statements.

10

Teraoka Seisakusho Co., Ltd.

Millions of yen

Thousands of
U.S. dollars

2010

2009

2010

¥ 3,879
3
500
31
606
1,029
6,048

¥ 3,306
36
125
—
374
1,980
5,821

$ 41,692
37
5,374
332
6,509
11,05765,001

1,875

2,375

20,153

323
18
76
89
2,381

28
18
102
89
2,612

3,476
198
822
954
25,603

Total liabilities ......................................................................................

8,429

8,433

90,604

NET ASSETSStockholders’ Equity:
Common stock:
Authorized: 80,000,000 shares
Issued: 20,081,955 shares as of March 31, 2010
and 2009, respectively ................................................................
Additional paid-in capital ............................................................................
Retained earnings .......................................................................................
Less: Treasury stock, at cost ........................................................................
Total Stockholders’ equity ....................................................................

3,904
3,491
16,269(136)
23,5283,904
3,491
16,031(1)
23,42541,96537,524
174,861(1,466)
252,884

Valuation and Translation Adjustments:
Unrealized gains on securities (Notes 2-b and 5) .........................................
Foreign currency translation adjustments (Note 2-i) .....................................
Total valuation and translation adjustments ................................................
Total net assets ....................................................................................
Total liabilities and net assets ...............................................................

284
(143)
141
23,669¥ 32,098

83
(92)
(9)
23,416¥ 31,849

3,052(1,540)1,512
254,396$ 345,000

LIABILITIES AND STOCKHOLDERS' EQUITYCurrent Liabilities:
Notes and accounts payable:
Trade ......................................................................................................
Short-term borrowings ...............................................................................
Current portion of long-term borrowings....................................................
Accrued income taxes.................................................................................
Accrued expenses .......................................................................................
Other current liabilities ..............................................................................
Total current liabilities ..........................................................................
Long-term Liabilities:
Long-term borrowings ................................................................................
Retirement & severance benenfits (Note 2-h and 6)
Employees...............................................................................................
Deferred liabilities taxes (Note 2-f) ..............................................................
Negative Goodwill ......................................................................................
Other .........................................................................................................
Total long-term liabilities ......................................................................

Teraoka Seisakusho Co., Ltd.

11

Teraoka Seisakusho Co., Ltd. and Consolidated Subsidiaries

CONSOLIDATED STATEMENTS OF INCOME
For the years ended March 31, 2010 and 2009

Thousands of
U.S. dollars

Millions of yen

Net Sales .....................................................................................................
Cost of Sales ...............................................................................................
Gross profit .........................................................................................
Selling, General and Administrative Expenses .........................................
Operating income ................................................................................

2010¥ 22,909
17,156
5,753
5,231
522

2009
¥ 23,833
19,206
4,627
4,587
40

2010
$ 246,224
184,394
61,83056,222
5,608

Other Income and Expenses:
Interest and dividend income ......................................................................
Interest expenses .......................................................................................

55
(49)

79
(19)

589
(527)

Loss on disposal of inventory asset..............................................................
Loss on write-down of investment in securities ...........................................
Gain on sales of investment securities .........................................................
Loss on sales of investment securities..........................................................
Loss on disposal of property, plant and equipment......................................
Foreign exchange gains (losses), net ...........................................................
Other, net ...................................................................................................

—
—
14
(29)
(22)
(22)
106
53

(15)
(503)
—
—
(34)
(68)
94
(466)

—
—
154
(311)
(234)
(235)
1,134
570

Income (Loss) before income taxes .......................................................

575

(426)

6,178

Income taxes:
Current ......................................................................................................

58

67

625

158
216

(91)
(24)

1,694
2,319

Deferred .....................................................................................................

Net income (loss) .................................................................................

The accompanying notes to consolidated financial statements are an integral part of these statements.

12

Teraoka Seisakusho Co., Ltd.

¥

359

¥

(402)

$

3,859

Teraoka Seisakusho Co., Ltd. and Consolidated Subsidiaries

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
For the years ended March 31, 2010 and 2009

Thousands of
U.S. dollars

Millions of yen

2010

2009

2010

Common Stock:
Balance at beginning of year ......................................................................
Issuance during the year .............................................................................
Balance at end of year ................................................................................

¥ 3,904—
3,904¥ 3,904—
3,904$ 41,965—
41,965Additional Paid in Capital:
Balance at beginning of year ......................................................................
Net sales treasury stock ..............................................................................
Balance at end of year ................................................................................

3,491
—
3,491

3,491
—
3,491

37,524—37,524Retained Earnings:
Balance at beginning of year ......................................................................
Net income (loss) ........................................................................................
Cash dividends paid....................................................................................
Disposal of treasury stock ...........................................................................
Balance at end of year ................................................................................

16,031359(121)—
16,26916,732
(402)
(281)
(18)
16,031

172,296
3,859(1,294)—
174,861

Treasury Stock, at Cost:
Balance at beginning of year ......................................................................
Purchase of treasury stock ..........................................................................
Disposal of treasury stock ...........................................................................

(1)
(135)
—

(98)
—
97

(11)
(1,455)—

Balance at end of year ................................................................................

¥

(136)

¥

(1)

$

(1,466)

Unrealized Gains on Securities:
Balance at beginning of year ......................................................................
Net change during the year ........................................................................
Balance at end of year ................................................................................

83
201
284

395
(312)
83

893
2,159
3,052

Foreign Currency Translation Adjustments:
Balance at beginning of year ......................................................................
Net change during the year ........................................................................
Balance at end of year ................................................................................

(92)
(51)
(143)

(81)
(11)
(92)

(986)
(554)
(1,540)Yen

Per Share of Common Stock
Net income (loss) ........................................................................................
Cash dividends paid....................................................................................

¥17.93
7.00

U.S. dollars¥(20.00)
10.00

$0.19
0.08

The accompanying notes to consolidated financial statements are an integral part of these statements.

Teraoka Seisakusho Co., Ltd.

13

Teraoka Seisakusho Co., Ltd. and Consolidated Subsidiaries

CONSOLIDATED STATEMENTS OF CASH FLOWSFor the years ended March 31, 2010 and 2009

Thousands of
U.S. dollars

Millions of yen

2010
Operating Activities:
Net income (loss) ........................................................................................
Adjustments to reconcile net income to net cash provided byoperating activities:
Depreciation and amortization ................................................................
Allowance for doubtful accounts.............................................................
Provision for retirement benefits ..............................................................
Deffered income taxes.............................................................................
Loss on disposal of property,plant and equipment ...................................
Loss on sales of investment securities ......................................................
Loss on write-down of investment in securities ........................................
Changes in assets and liabilities ...............................................................
(Increase) decrease in notes and accounts receivable ............................
(Increase) decrease in inventories .........................................................
Increase (Decrease) in notes and accounts payable ...............................
Increase (Decrease) in accrued income taxes payable ............................
Other, net ............................................................................................
Total adjustment...............................................................................
Net cash provided by operating activities ..........................................

359

¥

(402)

$

3,859

2,434
2
295
157
22
14
—

1,464
34
2
(91)
30
—
500

26,161
21
3,171
1,687
234
150
—

(1,186)
(20)
585
132
483
2,918
3,277

2,103
348
(1,466)
(425)
(166)
2,333
1,931

(12,747)
(215)
6,288
1,419
5,193
31,36235,221

Investing Activities:
Payment for purchases of property, plant and equipment ...........................
Payment for purchases of intangible assets .................................................
Payment for purchases of investment in securities .......................................
Proceeds from sales of investment in securities ...........................................
Other, net ...................................................................................................
Net cash used in investing activities ..................................................

(1,636)
(28)
(3)
124
—
(1,543)(3,058)
(40)
(3)
—
3
(3,098)(17,584)
(301)
(32)
1,333
—
(16,584)

Financing Activities:
Dividends paid ............................................................................................
Increase (Decrease) in short-term borrowings ..............................................
Increase (Decrease) in long-term borrowings ...............................................
Other, net ...................................................................................................
Net cash used in financing activities..................................................

(120)
(29)
(125)
(135)
(409)

(281)
(1,010)
2,500
(1)
1,208

(1,294)(312)(1,344)(1,446)(4,396)

Effect of Exchange Rate Changes on Cash and Cash Equivalents ...........
Net Increase (Decrease) in Cash and Cash Equivalents ............................
Cash and Cash Equivalents at Beginning of Year .....................................
Cash and Cash Equivalents of Newly Consolidated Subsidiaries ............
Cash and Cash Equivalents at End of Year ................................................

(31)
1,294
6,126
—
¥ 7,420

(5)
36
6,039
53
¥ 6,128(333)
13,90865,846—$ 79,754

Additional Cash Flow Information
Interest paid ...............................................................................................
Income taxes paid.......................................................................................

¥

The accompanying notes to consolidated financial statements are an integral part of these statements.

14

¥

2010

2009

Teraoka Seisakusho Co., Ltd.

49
(74)

¥

18
492

$

527
(795)

Teraoka Seisakusho Co., Ltd. and Consolidated Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended March 31, 2010 and 2009

1. Basis of Presenting Financial Statements
The accompanying consolidated financial statements of
TERAOKA SEISAKUSHO CO., LTD. (the “Company”) andits subsidiaries are prepared on the basis of accounting
principles generally accepted in Japan, which are different
in certain respects as to application and disclosure requirements from International Financial Reporting Standards,
and are compiled from the consolidated financial statements prepared by the Company, as required by the
Financial Instruments and Exchange Law of Japan.
However, certain account balances, as disclosed in thebasic consolidated financial statements in Japan, havebeen reclassified to the extent deemed necessary to enable

presentation in a form which is more familiar to readers
outside Japan.
The accounts of overseas consolidated subsidiaries are
based on their accounting records maintained in conformity with generally accepted accounting principles andpractices prevailing in the respective countries of domicile.
For the convenience of readers, the accompanying
consolidated financial statements are presented in U.S.
dollars by translating yen amounts at the rate of¥93.04=U.S.$1, the prevailing exchange rate on March 31,
2010.

2. Summary of Significant Accounting Policies
a. Consolidation
The accompanying consolidated financial statements
include the accounts of the Company and four
subsidiaries, TERAOKA SEISAKUSHO (Hong Kong)CO., LTD., TERAOKA SEISAKUSHO (Shanghai) CO.,LTD., TERAOKA SEISAKUSHO (Shenzhen) CO., LTD.
and SHIN-EI SHOJI CO., LTD.
Significant inter-company balances, unrealizedinter-company profits and losses among the companies are entirely eliminated. The assets and liabilities of
the consolidated subsidiaries are incorporated into thefinancial statements at fair value and the difference
between net assets at fair value and investment
amounts are amortized by the straight-line method
over a period of five years.
The fiscal years of overseas subsidiaries end December 31. Overseas subsidiaries’ financial statements are
based on temporary settlement dates of March 31,
2010 and 2009 and are used for the consolidation of
the Company.
b. Investments in securities
Debt securities that are intended to be held tomaturity (“held-to maturity debt securities”) aremeasured at amortized cost in the balance sheet.
Securities other than held-to maturity debt securities(“other securities”) are measured at fair value.
Other Securities that have fair values are stated atfair value, with unrealized gains and losses included in
the net assets, net of applicable income taxes. Realized
gains and losses on sales of securities are based on themoving average cost of the securities. Other securities
that do not have fair values are stated at cost determined by the moving average method.

c. Inventories
The Company mainly applies the cost method basedon the periodic average method which determines theamount of the inventories shown on the balance sheet
by writing them down based on the decrease in theirprofitability.
d. Property, plant and equipment and depreciation
Property, plant and equipment are carried at cost.
Depreciation is computed principally by the decliningbalance method at a rate based on their estimateduseful lives, which range as follow:
Buildings .......................................... 3~50 years
Machinery and equipment ............... 4~8 years
Depreciation of buildings, machinery and equipment of overseas subsidiaries and buildings acquiredby the Company and its domestic subsidiary on orafter April 1, 1998 is computed by the straight-line
method due to changes in Japanese income tax
regulations.
e. Leased assets
Under accounting standards generally accepted inJapan, leased assets related to finance leases that do
not transfer ownership of the leased property to thelessee are depreciation on a straight-line basis, withlease period used as their useful lives and no residual
value. The accounting treatment for finance leases
that do not transfer ownership of the leased property
to the lessee which took place before March 31, 2009
continues to be in accordance with the method used
for operating lease transaction.

Teraoka Seisakusho Co., Ltd.

15

f. Income taxes
Income taxes are provided based on amounts requiredby the tax return for the period.
The Company has adopted the asset-liability
method of tax effect accounting 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 purpose, and the amounts used for income
tax purposes.
g. Allowance for doubtful accounts
Allowance for doubtful accounts provides for possible
losses on the uncollectability of receivables at theamount of estimated uncollectability, based on pastexperience of doubtful receivables and individual
evaluation of collectability of the receivables.
h. Retirement and severance benefits
Employees who terminate their services with theCompany are generally entitled to lump-sum severance payments based on their current basic rates of
pay and length of service. In addition, the Company
maintains tax-qualified pension plans with insurancecompanies and trust banks. The plans entitle employees with more than 10 years of services, uponretirement, to receive either lump-sum payments or
annuity payments over 10 years.
The provision for employees’ retirement benefits
recorded in the balance sheets, less the pension plan
assets, was sufficient to satisfy the projected benefit
obligation for employees’ services up to the balance
sheet dates.
The Company’s overseas subsidiaries do not havesuch retirement benefit plan.
(Changes in accounting policies)
Effective the year ended March 31, 2010 the Company and its domestic consolidated subsidiaries haveadopted “Revision (No. 3) of Accounting Standards for
Accrued Retirement Benefits” (Accounting Standards
Board of Japan (ASBJ) Statement No. 19 issued on July
31, 2008).
There is no impact on profit and loss as a result of
the adoption of this accounting standard.

16

Teraoka Seisakusho Co., Ltd.

i. Foreign currency translation
All receivables and payables denominated in foreign
currencies at the balance sheet date are translated into
yen at current exchange rates. The resulting exchange
gains or losses are charged to income.
Balance sheets of consolidated overseas subsidiaries
are translated into yen at the year-end rates except for
stockholders’ equity accounts, which are translated at
the historical rates. Income statements of consolidated
overseas subsidiaries are translated at average rates.
Translation differences are presented as “foreign
currency translation adjustments” in the accompanying consolidated financial statements.
j. Derivatives and hedge accounting
Derivative financial instruments are stated at fair value
unless they are used for hedging purposes.
If derivative financial instruments are used as hedges
and meet certain hedging criteria, the Company andits consolidated subsidiaries defer recognition of gains
or losses resulting from changes in fair value ofderivative financial instruments until the related losses
or gains on the hedged items are recognized.
However, in cases where forward foreign exchange
contracts are used as hedges and meet certain hedging
criteria, forward foreign exchange contracts and hedged
items are accounted for in the following manner:
If a forward foreign exchange contract is executedto hedge a future transaction denominated in aforeign currency, the future transaction will berecorded using the contracted forward rate, and nogains or losses on the forward foreign exchange
contract are recognized.
k. Cash and cash equivalents
Cash and cash equivalents in the consolidated
statements of cash flows include all highly liquid
investments, generally with original maturities of threemonths or less, that are readily convertible to known
amounts of cash and are so near maturity that theypresent insignificant risk of changes in value.

3. Contingent Liabilities
Contingent liabilities in respect of trade notes and export
bills discounted with banks with recourse in the ordinary
course of business, amounted to ¥43 million (US$462

thousand) and ¥12 million at March 31, 2010 and 2009.

4. Financial Instruments

To minimize the credit risk when entering into
derivative transactions, counterparties are limited tofinancial institutions with high ratings.
(b) Monitoring of market risks (the risks arising fromfluctuations in foreign exchange rates, interest rates
and others)
For equity securities included in investments insecurities, the fair values of these securities are
periodically reviewed and reported to the Board of
Directors.
In conducting and managing derivative transactions,the accounting department confirm the effectivenessof hedging and obtain approval from the responsible
person, depending on the notional contract value,
based on the internal policies and formal regulations
on market risk for financial instruments.
(c) Monitoring of liquidity risk for financing (the risk that
the Companies may not be able to meet its obligations
on the scheduled due dates)
The Companies manage the liquidity risk mainly
through the monthly cash-flow plans, which areprepared by each company.

Overview(1) Policy for financial instruments
The Companies raise the funds by bank borrowings.
The Companies manage funds only through shortterm time deposit and others. The Companies use
derivatives for the purposes of managing foreign
currency exchange risk related to trading receivables
and payables. The Companies do not enter into
derivatives for speculative or trading purposes.
(2) Types of financial instruments and related risk
Trade receivables – notes receivable and accounts
receivable – are exposed to credit risk in relation tocustomers. In addition, the Companies are exposed toforeign currency exchange risk arising from receivables
denominated in foreign currencies resulting from tradewith overseas customers.
Equity securities – the Companies hold equity
securities, which are mainly issued by companies who
have business relationships with the Companies, andthese securities are exposed to the risk of fluctuation inmarket prices. Trade payables – notes payable andaccounts payable – mostly have payment due dates
within one year. A portion of trade payables, which isdenominated in foreign currencies, is exposed toforeign currency exchange risk. Long-term debt istaken out principally for the purpose of capital
expenditure. Long-term debt with interest rate
fluctuation risks is carried out on fixed rate loans. Debt
is exposed to liquidity risk relating to the funding as
described below.

(4) Supplementary explanation of the estimated fair valueof financial instruments
The notional amounts of derivatives listed below are
not necessarily indicative of the actual market risk
involved in derivative transactions.

(3) Risk management for financial instruments(a) Monitoring of credit risk (the risk that customers may
default)
In accordance with the internal policies for managing
credit risk of the Companies, the Companies monitor
credit worthiness of their main customers periodically,
and monitors due dates and outstanding balances bycustomer.

Teraoka Seisakusho Co., Ltd.

17

Estimated Fair Value of Financial Instruments
The carrying value of the financial instruments on the
consolidated balance sheet as of March 31, 2010 and
unrealized gain (loss) are shown in the following table. The

table does not include financial instruments for which it isextremely difficult to determine the fair value. (Please refer
to (2) below).
Millions of yen(1) Cash and deposits ..........................................................................................

¥ 7,420

Estimate fairvalue
¥ 7,420

Carrying value¥—(2) Notes and accounts receivable........................................................................

6,446

6,442

(4)

(3) Marketable securities and investments in securities ........................................

2,082

2,082

—

(4) Notes and accounts payable ...........................................................................

(3,879)(3,879)—(5) Short-term debt..............................................................................................

(3)

(3)

—

(6) Long-term debt ..............................................................................................

(2,375)(2,400)(25)(7) Derivative transactions ....................................................................................

—

—

—

(1) Methods to determine the estimated fair value offinancial instruments and other matters related tosecurities and derivative transactions
Cash and deposits and notes and accounts receivable
Since these items are settled in a short period, theircarrying value approximates fair value.
Investment in securities
The fair value of equity securities is based on quoted
market prices.
Notes and accounts payable and short-term debt
Since these items are settled in a short period of time,
their carrying value approximates fair value.
Long-term debt
The fair value of long-term debt is based on thepresent value of the total amount including principal
and interest, discounted by the expected interest rate
to be applied if similar new loans with a similar
remaining period were entered into.
Derivatives transactions
Please refer to Note 2-j. Derivatives of the notes theconsolidated financial statements.
(2) Financial instruments for which it is extremely difficult
to determine the fair value were as follows:
As of March 31, 2010
Unlisted equity securities

18

Difference

Teraoka Seisakusho Co., Ltd.

Millions of yen¥18

Because no quoted market prices are available and it isextremely difficult to determine the fair value, the above
financial instruments are not included in the preceding table.
(3) Redemption schedule for receivables and marketablesecurities with maturities at March 31, 2010
Millions of yen

Due in One
Year or Less
Cash and deposits .......................................
¥ 7,420
Notes and accounts receivable.....................
6,446
Marketable securities andinvestments in securities ............................
—
Total.........................................................
¥13,866(4) The redemption schedule for short-term debt andlong-term debt at March 31, 2010 and 2009 was asfollows:
Average interest
rates (%)

Millions of yen

2010
2009
Short-term debt...................... ¥3 ¥ 35Long-term debt ...................... 1,875 2,375
Current portion of long-term debt ....
500
125
Total.................................... ¥2,378 ¥2,535

2010
4.3
1.9
1.9

The annual maturities of long-term debt for 5 years
subsequent to March 31, 2010 are summarized below:
Year ending March 31,

2011 ...........................................................
2012 ...........................................................
2013 ...........................................................
2014 ...........................................................
2015 ...........................................................

Millions of yen

¥500
500
500
500
375

(Additional information)
The “Accounting Standard for Financial Instruments”(ASBJ Statement No. 10, issued on March 10, 2008) andthe “Implementation Guidance on Disclosures about Fair

Value of Financial Instruments” (ASBJ Guidance No. 19,
issued on March 10, 2008) are applied effective the year
ended March 31, 2010.

5. Securities
Historical costs, fair value and gross unrealized gains andlosses for marketable securities as of March 31, 2010 and2009 are as follows.
Millions of yen

Historical costs

Fair value

2010
Net differences

Gross gains

Gross losses¥1,605¥2,082

¥477

¥518

¥(41)

0

0

0

Other securities:
Equity securities ...............................................
Corporate bonds .............................................
Other ...............................................................
¥1,605

Total ....................................................................

¥2,082

—

—

—

¥477

¥518

¥(41)

Millions of yen

Historical costs

Fair value

2009
Net differences

Gross gains

Gross losses¥1,740¥1,880

¥139

¥229

¥(89)

Other securities:
Equity securities ...............................................
Corporate bonds .............................................

0

0

0

Other ...............................................................

—

—

—

¥139

¥229

¥(89)

Total ....................................................................

¥1,740¥1,880Thousands of U.S. dollars

Historical costs

Fair value

2010
Net differences

Gross gains

Gross losses

Equity securities ...............................................

$17,251$22,377$5,126$5,567$(441)

00

0$5,126$5,567$(441)

Other securities:
Corporate bonds .............................................

0

0

Other ...............................................................

00

Total ....................................................................

$17,251$22,377

Securities that do not have fair values are as follows:
Thousands of
U.S. dollars

Millions of yen

Equity securities .............................................................................................

2010
¥18

2009
¥18

2010
$193

Others ...........................................................................................................

—

—

—

Total ..............................................................................................................

¥18

¥18

$193

Teraoka Seisakusho Co., Ltd.

19

6. Retirement and Severance Benefits
Employees who terminate their services with the Company
are generally entitled to lump-sum severance payments
based on their current basic rates of pay and length ofservice. In addition, the Company maintains tax-qualified
pension plans for employees with more than 10 years ofservices.

Provision for employees’ retirement benefit obligations as of March 31, 2010 and 2009 consisted of the following:Thousands of
U.S. dollars

Millions of yen

Benefit obligations .........................................................................................

2010¥(3,839)2009¥(3,771)2010$(41,262)

Pension assets ................................................................................................

3,199

2,854

34,383

Unrecognized actuarial differences .................................................................

317

941

3,403

Prepaid retirement benefits cost in consolidated balance sheets .....................

—

52

—

Provisions for retirement benefits ...................................................................

323

(28)

3,476

Employees’ retirement benefit expenses for the years ended March 31, 2010 and 2009 consisted of the following:Thousands of
U.S. dollars

Millions of yen

Service costs ..................................................................................................

2010
¥213

2009
¥209

2010
$2,289Interest costs..................................................................................................

75

76

806

Expected return on pension assets .................................................................

(57)

(72)

(613)

Amortization of unrecognized actuarial difference .........................................

347

115

3,730

Benefits expenses total...................................................................................

¥578

¥328

$6,212Significant assumptions of pension plans used to determine these amounts are as follows:
Discount rate .............................................................................................................

2010
2.0 %

2009
2.0 %

Expected rate of return on pension assets ..................................................................

2.0 %

2.0 %

Years over which the actuarial differences obligations are allocated ............................

5 years

5 years

7. Subsequent EventAppropriation of retained earnings
Subsequent to March 31, 2010, the Company’s Board of
Directors, with the approval of stockholders on June 25,2010 declared a cash dividend of ¥78 million (US$848

20

Teraoka Seisakusho Co., Ltd.

thousand) equal to ¥4.00 (US$0.04) per share, applicableto earnings of the year ended March 31, 2010 andpayable to stockholders on the stockholders’ register on
March 31, 2010.

REPORT OF INDEPENDENT AUDITORSINOUE AUDITING CO., INC.
Shuhan Kaikan Bldg.
3-37, Kanda-sakuma-cho
Chiyoda-ku, Tokyo, JapanTo the Board of Directors of Teraoka Seisakusho Co., Ltd.
We have audited the accompanying consolidated balance sheets of Teraoka Seisakusho Co.,
Ltd. and consolidated subsidiaries as of March 31, 2009 and 2010, and the related consolidated statements of income, stockholders’ equity and cash flows for the years then ended, allexpressed in Japanese yen. These consolidated financial statements are the responsibility of
the Company’s management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in Japan.
Those standards require that we plan and perform the audit to obtain reasonable assurance
that the financial statements are free of material misstatement. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and significant estimates madeby management, as well as evaluating the overall financial statement presentation. We believethat our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Teraoka Seisakusho Co., Ltd. and consolidated subsidiaries as of March 31, 2009 and 2010, and the results of their operations and their cash flows
for the years then ended in conformity with accounting principles generally accepted in Japan,
consistently applied during the period.
The accompanying consolidated financial statements as of and for the year ended March 31,
2010 have been translated into U.S. dollars solely for the convenience of the readers. We
have recomputed the translation and, in our opinion, the consolidated financial statements
expressed in yen have been translated into U.S. dollars on the basis set forth in Note 1 of theNotes to Consolidated Financial Statements.
Tokyo, Japan
June 25, 2010

Inoue Auditing Co., Inc.

Teraoka Seisakusho Co., Ltd.

21

COMPANY DATA

Company Outline(as of March 31, 2010)

Company NameTERAOKA SEISAKUSHO CO., LTD.

Head Office

4-22, Hiromachi 1-chome, Shinagawa-ku, Tokyo 140-8711, Japan
Tel: 81-3-3491-1141
Fax: 81-3-3491-5316

FoundedFebruary 11, 1921

Incorporated

May 5, 1943

Paid-in Capital¥3,904 million

Employees

559 (600 consolidated)

Board of Directors and Auditors(as of June 25, 2010)

President

Keishiro Teraoka

Managing Directors

Kiyohiro Takagi
Takeo Kawaguchi

Directors

Jun Watanabe
Yutaka Nomiyama
Nobuo Ito
Hiroyoshi Ohbori

Standing Corporate Auditor

Motoaki Hattori

Corporate Auditors

Hirokazu Nakamura
Kazunori Shimamoto
Kohji Dohmoto

Operating Officers

Minoru Tanaka
Tadashi Shirota
Masao Mochizuki
Taiji Namekawa

22

Teraoka Seisakusho Co., Ltd.

Consolidated Subsidiaries
Teraoka Seisakusho (Hong Kong) Co., Ltd.

Hong Kong, China

Teraoka Seisakusho (Shanghai) Co., Ltd.

Shanghai, China

Teraoka Seisakusho (Shenzhen) Co., Ltd.

Shenzhen, China

Shin-ei Shoji Co., Ltd.

Tokyo, Japan

R&D Center, Factories and Offices

R&D Center

Shinagawa-ku, Tokyo

Factories
Ibaraki Factory

Kitaibaraki, Ibaraki Prefecture

Sano Factory

Sano, Tochigi Prefecture

Ohmiya Factory

Ohmiya, Saitama Prefecture

Kannami Factory

Kannami-cho, Shizuoka Prefecture(

Branch Offices

Tokyo, Osaka and Nagoya

Sales Offices

Sendai and Ohmiya

Teraoka Seisakusho Co., Ltd.

23

INVESTOR INFORMATION

Investor Information

Head Office(as of March 31, 2010)

Teraoka Seisakusho Co., Ltd.
4-22, Hiromachi 1-chome,Shinagawa-ku, Tokyo 140-8711, Japan
Telephone: 81-3-3491-1141
Facsimile: 81-3-3491-5316

Financial Year

April 1 to March 31

Common Stocks

Authorized Shares 80,000,000
Issued Shares 20,081,955

Stockholders

2,597

Stock Listing

Tokyo Stock Exchange, Second Section (Code: 4987)

Transfer Agency

Mitsubishi UFJ Trust and Banking Corporation
4-5, Marunouchi 1-chome, Chiyoda-ku, Tokyo
100-8212, Japan

Major Stockholders
Number of shares(thousand shares)

Voting rightratio (%)

1,865

9.45

Keishiro Teraoka

882

4.47

The Bank of Tokyo-Mitsubishi UFJ, Ltd.

854

4.33

Japan Trustee Services Bank, Ltd. (Trust Account)

774

3.92

The Nomura Trust and Banking Co., Ltd. (Trust Account)

747

3.78

Resona Bank, Ltd.

678

3.44

Kuniko Teraoka

526

2.66

Employees’ Stockholding Group

467

2.37

The Bank of New York Non-Treaty JASDEC Account

292

1.48

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

285

1.44

Stockholders

Customers’ Stockholding Group24

Teraoka Seisakusho Co., Ltd.

http://www.teraokatape.co.jp

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