Tokyo Value up Partner
Annual Review 2005
For the year ended November 30, 2005

Profile

The Tosei Group corporate mission is tocreate new value in all real estate

Corporate Philosophy

business areas in order to enhance thewellbeing of the community. Under theslogan “Tokyo Value up Partner,” theMissionTo create new value in all real estateGroup focuses on quality as it works tobusiness areas in order to enhance thecontribute to society and increase its

wellbeing of the community

corporate value by restoring the value ofreal estate from a view 10 to 20 years inManagement Principles

the future through synergy among its six
businesses: revitalization, development,■

Fulfilling its promises

funds, rental, property management andalternative investment.

■

Placing a high priority on problem solving■

Strong will to meet goals and objectives

Contents
Financial Highlights ............................................... 1■

Persistent pursuit of quality

To Our Stakeholders ............................................. 2■

The Tosei Group at a Glance ................................ 5

Value of work =Review of Operations............................................ 6
Revitalization Business...................................... 6

quality of work × amount of work × pace of work

Development Business...................................... 7
Rental Business................................................. 8
Fund Business ................................................... 8
Property Management Business ....................... 9
Alternative Investment Business ....................... 9
Corporate Governance and Compliance .............. 10
Management’s Discussion and Analysis ofOperations and Finances .................................. 11
Consolidated Balance Sheets............................... 14
Consolidated Statements of Operations andRetained Earnings ............................................. 16
Consolidated Statements of Cash Flow ............... 17
Notes to Consolidated Financial Statements ....... 18
Corporate Data ..................................................... 24
Investor Information .............................................. 25

TOSEI CORPORATION

Forward-looking Statements
This annual report contains forward-looking statements regarding the Company’s plans,
outlook, strategies and results for the future. All forward-looking statements are based on
judgments derived from the information available to the Company at the time of publication.
Certain risks and uncertainties could cause the Company’s actual results to differ
materially from any projections presented in this report. These risks and uncertainties
include, but are not limited to, the economic circumstances surrounding the Company’sbusinesses; competitive pressures; related laws and regulations; product development
programs; and changes in exchange rates.

Financial Highlights
Tosei Corporation and its Consolidated Subsidiaries
Years ended November 30

Consolidated (Note 1)

Non-consolidated (Note 1)

Millions of yen

Thousands of
U.S. dollars (Note 3)

Millions of yen

Millions of yen

Change (%)

Thousands of
U.S. dollars (Note 3)

2005

2005

2005

2004

2005/2004

2005

17,644
3,536
1,593$147,453
29,552
13,309¥16,828 ¥
3,323
1,495

14,514
2,093
793

15.9%
58.8
88.6

$140,634
27,775
12,500$¥ 4,291.79 ¥ 2,577.65
450
120
23,739.56
19,829.73

66.5%

$

19.7

35.87
3.76
198.39

¥

30.2%
23.1

$320,369
68,507

Operating Results (For the year):

Revenues ................................ ¥Operating income ....................
Net income..............................
Per Share Data
(In yen and U.S. dollars):

Retained earnings:
Net income per share (Note 2) ..... ¥ 4,571.59
Cash dividends........................
—
Book value per share............... 24,018.05

38.20—
200.72Financial Position (At year-end):

Total assets ............................. ¥Shareholders’ equity................
Return on total assets (ROA) (%)
Return on equity (ROE) (%) .........
Number of employees.................

40,407
8,294$337,680
69,309

3.9%
19.2%
107

—
—
—

38,335 ¥8,197

29,438
6,658

4.4%
20.1%
68

3.3%
18.2%
44

Notes: 1. Both consolidated and non-consolidated figures are shown for the fiscal year ended November 30, 2005, as the Tosei Group commenced
consolidated financial reporting in that year.
2. Net income per share figures are fully diluted.
3. U.S. dollar amounts have been translated from yen, solely for the convenience of the reader, at the rate prevailing on November 30,
2005 of ¥119.66 to US$1.

Revenues

Operating Income/Net Income(Millions of yen)

20,00016,000(Millions of yen)

3,600

Total Assets/Shareholders' Equity(Millions of yen)

42,0003,000

35,0002,400

28,0001,800

21,0001,200

14,000600

7,000

12,000

8,000

4,000

0

0

0

2001 2002 2003 2004 2005 1 2005 2
Revitalization Business
Development Business
Rental Business
Fund Business
Property Management Business
Alternative Investment Business2001 2002 2003 2004 2005 1 2005 2
Operating Income
Net Income

2001 2002 2003 2004 2005 1 2005 2
Total Assets
Shareholders' Equity

Notes: 1. Non-consolidated
2. Consolidated
3. Both consolidated and non-consolidated figures are shown for the fiscal year ended November 30, 2005, as the Tosei Group commenced
consolidated financial reporting in that year.

Annual Review 2005

1

To Our Stakeholders

President and CEO

Seiichiro Yamaguchi

The Tosei Group established its new medium-term management plan, GROWING UP 2008, based on thefundamental principle that raising corporate value requires achieving a good balance between
expanding corporate earnings and improving operational quality. By promoting expansion in thescale of business and compliance in its operations while at the same time establishing its corporate brand,
the Tosei Group will lay the groundwork for further growth.

➤ Overview of Results for the Fiscal Year Ended November 30, 2005
Amid an overall recovery trend in the Japanese economy, despite concerns such as lower
yields in conjunction with the increase in real estate prices, surplus funds continued to flow into thereal estate investment market due to the function of rational market mechanisms that brought
earnings and cash flow to the forefront in the composition of real estate prices. As of November 30,
2005, a total of 28 J-REITs had been listed in the domestic market and overall fund assets, which
totaled approximately ¥6 trillion including private funds, continued to expand.
In this business environment, the Tosei Group worked to restore the value of real estate
mainly in the 23 wards of Tokyo by deploying its overall strengths to promote a broader range ofofferings. The Company achieved greater synergy among its six businesses: revitalization andfunds, which are Tosei Corporation’s growth areas; development and rental, in which theCompany has substantial expertise; property management, conducted by Tosei Community Co.,
Ltd.; and alternative investment, conducted by Tosei Revival Investment Co., Ltd., the latter two
which the Company added in the fiscal year under review. As a result of these efforts, the Tosei
Group achieved revenues of ¥17,644 million, operating income of ¥3,536 million and net incomeof ¥1,593 million.

2

TOSEI CORPORATION➤ The New Medium-Term Management Plan, GROWING UP 2008
The Tosei Group is working diligently to meet the targets of its new medium-term management
plan, GROWING UP 2008, which it established to cover the period from December 1, 2005 toNovember 30, 2008. Targets for the final year of the Plan include increasing consolidated revenues
130 percent and consolidated ordinary income 102 percent compared to the year ended November
30, 2005, as well as achieving a shareholders’ equity ratio of 30 percent through the accumulation of
profits and a real estate fund asset balance of ¥100,000 million, or ¥130,000 million including a J-REIT.
Central to GROWING UP 2008 is “quality and quantity of human resources,” which entails astrategic objective of securing capable personnel to double the scale of business, and promoting
personnel skills. Associated with this are three other strategic objectives. The first objective, under“business growth and finances,” is to double the scale of business in terms of revenues and ordinary
income; the second, under “business processes and organizational operations,” is to strengthen
corporate governance and compliance, and make business processes more efficient; and the third,
under “customers and transactions,” is to promote brand strategy while working to enhance thelineup of sellers and buyers.
Strategies under “business growth and finances” will entail expanding existing businesses bymaking effective use of “value up” capabilities, including taking an aggressive approach to real estatedevelopment with a firm focus on quality and increasing the real estate fund operating balance.
Another aim is to expand in new business areas such as higher value-added product development,
development of the non-performing loan (NPL) business by Tosei Revival Investment and expansionof our fee business by listing J-REITs. In addition, through ongoing research of financing methods, theCompany will promote more efficient financing by increasing employee consciousness regarding the

Objectives of the New Medium-Term Management Plan GROWING UP 2008 (Consolidated)Year ended
Nov. 30, 2005 (Actual)

Year ending
Nov. 30, 2008 (Targets)

Revenues¥17,644 million¥40,500 million

Ordinary income¥2,969 million¥6,000 million

Shareholders’equity ratio

20.5%

30.0%

Return on equity
(ROE)

19.2%

18.3%

Return on total
assets (ROA)

3.9%

5.5%

Fund asset
balance¥20,244 million¥130,000 million** Includes ¥30,000 million in a J-REIT.

Aiming to double scale ofbusiness in terms ofrevenues andordinary income

Business growthand finances

Quality and quantityof human resources
Business processes
and organizational
operations

Customers andtransactions

Cautionary Note Regarding Quantitative
Targets of GROWING UP 2008
The Company has set quantitative targets under GROWING UP 2008 based on
an analysis of information, conditions and other factors existing at the time ofplan formulation, and is monitoring progress toward their achievement. However,factors such as insufficient information and subsequent business changes could
prevent the Company from achieving those targets.

Promote brand strategy
while working toenhance lineup of sellers
and buyers

Secure capable personnel todouble the scale of business,and promote improvementof personnel skills

Strengthen corporate
governance and compliance,and make businessprocesses more efficient

Annual Review 2005

3

To Our Stakeholders

cost of capital and implementing thorough control of income and expenditures.
Strategies under “business processes and organizational operations” will include reinforcing
operational compliance by promoting activities of the Compliance Committee such as setting
compliance rules and formulating a compliance guidebook. The Company will also work to improve
corporate governance by promoting stronger internal controls and oversight and reviewing andimproving the evaluation system for directors. In addition, it will make business processes more
efficient by building a core system to improve account processing capabilities and upgrading work
manuals to standardize process flows.
Under “customers and transactions,” the Company will strengthen purchasing that builds growth
capacity by achieving an accurate grasp of property owner needs and by strengthening data
management and use. It will also expand the range of customers through diversified exit strategies by
expanding direct sales, enhancing the product lineup and improving the occupancy rate of revitalized
rental properties. In addition, the Company will promote brand development by maintaining corporate
brand image while building a range of product brands that respond to customer needs and bypromoting marketing that takes customer lifestyle into account.
Securing capable personnel and improving their skills to ensure “quality and quantity ofhuman resources” is vital to the success of GROWING UP 2008. To achieve this, the Company
will unify brand and media strategies to strengthen hiring capabilities aimed at efficiently hiring
and appropriately allocating personnel who can meet the challenge of expanding the scale ofbusiness. To promote improvement of real estate portfolio management skills, it will also takemeasures such as strengthening hierarchical education and training and further enhancing its
performance-based system.

➤ Further Strengthening Stakeholder Trust
By steadily achieving these objectives and targets and making full use of the Tosei Group’s
collective strengths and synergy, we will achieve continuous growth in earnings amid diversifying realestate needs and carry out our corporate mission, which is to create new value in all real estatebusiness areas in order to enhance the wellbeing of the community.
With regard to profit distribution, we consider stable shareholder returns to be the mostimportant management issue. In setting dividends, our fundamental policy is to comprehensively
consider business results, the future operating environment and progress of business plans in order tobalance shareholder returns with sufficient internal resources to provide highly profitable business
opportunities that raise corporate value over the long term. Based on steady implementation of
GROWING UP 2008 and expected performance for the next fiscal year and beyond, the Company isaiming for a payout ratio of 20 percent in the fiscal year ending November 30, 2007.
We look forward to your continuing support.
February 24, 2006
Seiichiro Yamaguchi
President and CEO

4

TOSEI CORPORATIONThe Tosei Group at a Glance

Business Segment

Percentage of Revenues

Revitalization Business➜ Conducts “value up” activities to increase asset value of
properties matched to local characteristics and needs andsells them as revitalized real estate➜ Specializes in small and medium-scale properties, primarily
in inner Tokyo➜ Uses planning and design capabilities of its first-classarchitectural office to offer superior revitalization activities
rooted in quality

58.9%

Development Business➜ Formulates development plans for purchased land, develops
and sells commercial facilities and residential dwellings forinvestors, end-users and others➜ Develops business largely in the 23 wards of Tokyo, witha priority on convenience➜ Offers “THE Palms Series” condominiums and “Palms Court
Series” single-family dwellings

25.3%

Rental Business➜ Positioned as a steady source of income in the Tosei
Group’s long-term growth strategy➜ As a lessor, further enhances revitalization plans by quickly
and accurately gathering information on tenant needs

9.3%

Fund Business➜ Structures and manages real estate funds, and Tokumei
Kumiai (private equity) investments➜ Generates fee revenues by increasing the value of properties
purchased by funds and by managing their assets➜ Positioned as an additional stable source of income

2.0%

Property Management Business➜ Conducted by Tosei Community Co., Ltd., which was madea subsidiary in April 2005
➜ Provides comprehensive property management, including
security and contracting for renovation and repair, forcondominiums, office buildings and other properties

3.2%

Alternative Investment Business➜ Conducted by Tosei Revival Investment Co., Ltd., a wholly
owned subsidiary established in March 2005
➜ Structures and invests in real estate-backed NPL funds,
structures and invests in similar funds for mortgage
guarantee companies, and offers advisory and asset
management services for each

1.2%

Major Initiatives in Fiscal Year Ended November 2005
➤ As Tosei Corporation’s core business, achieved further expansion ofrevitalization and trading by making full use of its expertise in quality
construction➤ Sold a total of 19 properties mostly located in five inner-city wards ofTokyo, including Central Daikanyama and Kanda Ekimae Building➤ Conducted aggressive purchasing through an industry information
network developed over many years➤ Achieved growth through large-scale properties while steadily expanding
business in small and medium-scale properties, where Tosei has anadvantage➤ Added commercial and office buildings to offer almost a full lineup of
properties➤ Built and sold 17 single-family dwellings to end-users and sold three
rental condominium complexes to investors➤ Commenced construction on a condominium complex in Sakura,
Setagaya Ward with estimated revenues of ¥5,500 million➤ Holdings included 44 buildings, of which 16 fixed asset properties
achieved high occupancy rates➤ Aimed for solid business development by considering overall asset
balance and avoiding rapid expansion of fixed assets over the
medium term

➤ Increased total fund asset balance by adding to existing funds andstructuring new funds➤ Achieved a fiscal year-end asset balance of over ¥20,244 million with
six funds➤ Established Tosei REIT Advisors, Inc. as a J-REIT asset
management company➤ During the fiscal year, the total number of managed office buildings,
parking lots and similar properties was 254, and the total number ofmanaged condominium complexes was 125➤ Only about 7 percent of all managed properties were Tosei
Corporation holdings➤ Promoted further growth of the property management business inconjunction with expansion of the fund and alternative investment
businesses➤ Achieved a fiscal year-end fund operating asset balance of ¥3,942
million➤ Provided turnaround assistance for Tokyo Onsen Co., Ltd. through aform of debtor in possession (DIP) financing and scheduled to acquireTokyo Onsen’s Ginza Wall Building in March 2007

Annual Review 2005

5

Review of Operations
Revitalization Business
Revenues/
Operating Income Ratio(Millions of yen / %)12,50030

10,000

24

7,500

18

5,000

12

2,500

6

0

0

2004
2005
Revenues
Operating Income Ratio➤ Extremely favorable market due toa rise in liquidity in the real estatemarket.

planning and design capabilities as a first-class architectural office. In➤ Achieved unique real estate value
restoration through “value up”
activities rooted in Tosei
Corporation’s expertise inconstruction

and trends as a property owner. This helps increase restoration value.

➤ Will continue to promote further
growth in the number ofproperties handled as the growth
driver of the Tosei Group

addition, because the Tosei Group is also involved in the real estate rental
business, it is able to achieve a real-time understanding of tenant needs
The real estate revitalization market is extremely favorable due to
growing momentum backed by a focus on investment in real estate
financial products that has increased the number of market participants
and capital inflow.
In addition, excluding certain high-rise districts, most of inner Tokyo
consists of an enormous number of small and medium-scale properties.
In this environment, Tosei Corporation has been leveraging the industry
information network it has built over many years to conduct real estate
restoration focused on these small and medium-scale properties, making

The revitalization business entails acquiring properties whose asset

use of its expertise in quality construction. For Tosei Corporation, which

value has declined and restoring value for resale by matching local

has differentiated itself from other companies in this way, the current realcharacteristics and user needs. It is the core business of the Tosei Group,

estate market environment will continue to offer high growth potential.

accounting for 60 percent of revenues. Value restoration includes

Backed by the above-mentioned advantages, the revitalization

increasing the physical value of the property itself in ways such as

business promoted aggressive development during the year ended

improving utilities and upgrading IT, communications and otherNovember 30, 2005 that resulted in the sale of a total of 19 properties

infrastructure. It also encompasses intangible improvements that increase

mostly located in five inner-city wards of Tokyo, including Central

the profitability of the property and satisfaction of the owner or user, such

Daikanyama in Shibuya Ward and the Kanda Ekimae Building in Chiyoda

as increasing the occupancy rate through lease up and resolving legal

Ward. Of the 19 properties, 13 were office buildings and six were

issues, and improving the aesthetic design. The Tosei Group successfully

condominium complexes.

restores the overall value of real estate by conducting “value up” activities

As the growth driver of the Tosei Group, the revitalization business willbased on a consideration of all these aspects and focused on cost

continue to conduct “value up” activities that make use of Tosei

performance. This success is largely due to our specialization in real

Corporation’s expertise in construction and promote further growth in theestate development and expertise in construction that incorporates ournumber of properties handled.

BeforeAfterCompleted in 1981, THE Palms Gotanda in Shinagawa Ward was restored to newly built
condition through complete renovation of all common areas, including facades,
entrance and exterior.

BeforeAfter

Full occupancy was achieved for the Kanda Ekimae Building in Chiyoda Ward by taking
advantage of the property’s excellent location and undertaking large-scale renewal
featuring glass walls.

Note: Tosei Corporation commenced consolidated financial reporting as of the year ended November 30, 2005. Revenues and operating income figures in this Review of Operations for the fiscal year ended November 30,
2004 are shown for reference.

6

TOSEI CORPORATIONDevelopment Business
Revenues/
Operating Income Ratio(Millions of yen / %)
5,000

15

4,000

12

3,000

9

2,000

6

1,000

3

0

0

2004
2005
Revenues
Operating Income Ratio➤ Developed very convenient andcomfortable properties largely inthe 23 wards of Tokyo

Palms Court Series homes offer original plans and high quality with a focus➤ Favorable sales of properties toboth investors and end-users

In the year ended November 30, 2005, properties sold to investors➤ Plan to increase the number oflarge-scale properties handled in
the year ending November 30,
2006, including development ofenvironmentally conscious condominiums and new office buildings

In the development business, Tosei Corporation purchases land on

on homes that owners can take pride in, in addition to providing
convenience and functionality.
included three rental condominium complexes, New City Residence
Nihonbashi Ningyocho I and II, comprising 32 and 38 units, respectively,
and the DINKS and family-oriented THE Palms Yoyogi Uehara Cosmo
Terrace, comprising 30 units, which were sold to real estate funds. As forproperties targeting individuals, sales commenced of the 43 lots of THE
Premium Court Ota Chuo subdivision in Ota Ward, the largest residential
subdivision to be developed in that ward since 1983 (source: Real Estate
Economic Institute Co., Ltd.). In addition, the Group worked toaggressively expand its range of offerings with the development of awhich it develops office buildings and commercial facilities, and constructs

commercial building in the Shinjuku Station business district, and the start

new condominiums and single-family dwellings, for sale to investors, realof construction of an office building in Toranomon, Minato Ward. Withestate funds and end-users.

these new developments, the Tosei Group now offers almost a full lineup

The development business, which began in 1994 under the current
management framework, still accounts for approximately 25 percent of theof properties.
During the year ending November 30, 2006, development initiatives

Tosei Group’s total revenues. It is the expertise in construction

scheduled include construction of an environmentally conscious

accumulated over many years in this business that has given rise to ourcondominium complex in Sakura, Setagaya Ward with estimated revenues

original “value up” approach in the revitalization business.

in the area of ¥5,500 million and sales of units at a condominium complex

Realizing that the foremost need of investors and end-users iswith estimated revenues in the area of ¥1,100 million, both scheduled toconvenience, the Tosei Group selects land largely in the 23 wards ofcommence in spring 2006. Office properties include a revenue-producing

Tokyo. With THE Palms Series condominiums in particular, the intention

rental SOHO development in Nihonbashi, Chuo Ward with estimated

was to develop a product that reconciled comfort with convenience byrevenues of ¥3,400 million and a new large-scale office building

offering value-added services to meet the daily living needs of end-users

development in Kanda, Chiyoda Ward. Construction of this office building,while incorporating natural materials in an urban setting to create awhich will be the Company’s second such development following the

comforting environment. As urban-style single-family dwellings, THE

Toranomon Building, is scheduled to be completed in July 2006.

THE Premium Court Ota Chuo residential subdivision in Ota Ward features 43 large-scale
lots on a south-facing slope.

New City Residence Nihonbashi
Ningyocho II in Chuo Ward offers highquality condominium-standard utilities.

The Shinjuku Shogyo Building in Shinjuku Ward,
Tosei’s first commercial development project,takes maximum advantage of its location.

Annual Review 2005

7

Rental Business
Revenues/
Operating Income Ratio(Millions of yen / %)
2,000

75

1,600

60

1,200

45

800

30

400

15

0

0

Fund Business➤ Positioned as a steady source ofincome in the Group’s long-term
strategy➤ Aims for solid business growth by
avoiding rapid expansion of fixed
assets over the medium term
➤ Fixed asset properties maintained
high occupancy rates

2004
2005
Revenues
Operating Income Ratio➤ Achieved a high growth rate since
its start in 2003, backed by Tosei’s
original “value up” capabilities

Revenues/
Operating Income Ratio(Millions of yen / %)
400

100

320

80

240

60

160

40

80

20

0

0

➤ Accelerated growth in large-scale
properties handled, accelerated
growth of asset balance➤ Aims to list a J-REIT in the year
ending November 30, 2007 andachieve an asset balance of¥130,000 million in the year ending
November 30, 2008.

2004
2005
Revenues
Operating Income Ratio

The rental business is positioned as a steady source of income in

The fund business structures and manages real estate funds andthe Tosei Group’s business strategy. The recent real estate market is

Tokumei Kumiai (private equity) investments. The Tosei Group earns fee

extremely favorable, but the Tosei Group believes it is vital to establish arevenues by raising the physical and intangible value of properties

solid revenue base to respond to expected changes in the economy.

purchased by funds through its original “value up” method and by

Continuous growth in the real estate market is not possible, andmanaging their assets. In addition, the fund business receives dividends

economic cycles are a reality. Although a recession on the scale of thefrom Tokumei Kumiai (private equity) investments.

post-Bubble era is unlikely, factors such as real estate trading price

The fund business began in 2003, and since then the asset balanceadjustments, primarily in inner-city districts, are a concern. Based on

has grown at an extremely high rate, reaching ¥20,244 million in thethis outlook, the Tosei Group’s rental business does not target rapid

year ended November 30, 2005.

expansion, but instead aims for solid growth of the balance of fixed
assets held while considering the overall asset balance.

Looking ahead, the fund business aims to list a J-REIT during the
fiscal year ending November 30, 2007 and plans to accelerate growth

In the year ended November 30, 2005, the rental business held aof large properties handled in order to achieve a real estate fund asset

total of 44 properties, of which 16 fixed asset properties achieved highbalance of ¥100,000 million, or ¥130,000 million including the J-REIT, in

occupancy rates.

the fiscal year ending November 30, 2008.

Fund Asset Balance Targets(Billions of yen)150

130.0+α
+α

120
30.0

90

85.0

100.0

30
55.0

20.2
0

2005

8

TOSEI CORPORATION➤ Aim for an asset balance of¥41,300 million in the fiscal year
ending November 30, 2006 (a yearon-year increase of 104.5 percent)2006

Real Estate Funds
J-REIT

2007

Work toward listing a J-REIT➤ Aim to begin operating a J-REIT in
the fiscal year ending November 30,
2007 with an initial operating asset
target of at least ¥30,000 million.

41.3

The Ebisu Building in Shibuya Ward isappealing because of its close proximity
to Ebisu Station.

➤ Broaden the investor base anddiversify the product lineup

30.0

60

The Kanda Ogawamachi Tosei Building in
Chiyoda Ward is an office building featuring
glass facades.

Aggressively develop funds
structured by Tosei Corporation

2008➤ Established Tosei REIT Advisors, Inc.
in September 2005 as a J-REIT asset
management company

Review of Operations

Property Management Business
Revenues/
Operating Income Ratio(Millions of yen / %)
600

10

480

8

360

6

240

4

120

2

➤ Provides comprehensive property
management services for officebuildings, condominiums andother properties, based on many
years of experience

Revenues/
Operating Income Ratio➤ 93 percent of management contracts are for non-Group holdings➤ Aims to promote further growth ofthe property managementbusiness in conjunction withexpansion of the fund business

0

0

2005
Revenues
Operating Income Ratio

Alternative Investment Business

The property management business is handled by Tosei Community➤ Developed to diversify entry
strategies in real estate purchasing(Millions of yen / %)
250

100

200

80

150

60

100

40

50

20

➤ Makes use of expertise accumulated by Tosei Corporation inareas such as real estate funds,
leveraged buyouts (LBOs) andmergers and acquisitions (M&As)➤ Aims to expand turnaroundbusiness beyond real estate

0

0

2005
Revenues
Operating Income Ratio

The alternative investment business is handled by Tosei Revival

Co., Ltd., which was made a subsidiary in April 2005. Based on many

Investment Co., Ltd., a wholly owned subsidiary established in Marchyears of experience in managing condominiums, Tosei Community offers2005. Tosei Revival Investment invests in real estate-backed non-consulting and advice to holders of comparted-ownership andperforming loan (NPL) funds and mortgage guarantee companies,

condominium associations, and provides total support from the startup to

structures similar investment funds, and offers advisory and asset

the smooth operation of condominium associations. It also preserves the

management services for each.

asset value of office buildings by offering meticulous maintenance and

The business is currently being developed to diversify strategies infacility management services that help rationalize owners’ operations.

real estate purchasing. In the medium term, however, the Tosei Group isEfforts to acquire new contracts in the year ended November 30,

working aggressively to develop the turnaround business beyond the2005, resulted in the addition of four condominium complexes for a fiscal

boundaries of real estate to include new fields by making use of expertiseyear-end total of 125 managed condominiums, and a year-on-year

accumulated by Tosei Corporation in areas such as real estate funds,

increase of 105 managed office buildings and other properties to 254, for

LBOs, M&As and turnaround assistance.

a total of 379 managed properties.

The asset balance of real estate-backed NPL funds as of November

The property management business is aiming for further growth in30, 2005 was ¥3,942 million.

conjunction with expansion of the Tosei Group’s fund business andpromotion of the alternative investment business.

PM
PM

BM
BM

プロパティ
Property
マネジメントmanagement

Building
ビルディmanagement
ング

／運営管理

マネジメント／建物管理

Maximizecash flow
LM
LM

CM
CM

リーシング
Leasing/
マネジメン
トTenantmanagement

コンストラクション
Construction
management／テナント運営管理

マネジメント／修繕・リニューアル工事

The property management business strategically provides services that maximize cash flow
and raise asset value.

As part of the turnaround assistance for Tokyo Onsen Co., Ltd., the Ginza Wall Building in
Chuo Ward is scheduled for acquisition in March 2007 following the implementation of aform of Debtor in Possession financing.

Annual Review 2005

9

Corporate Governance and Compliance(As of May 31, 2006)

The Tosei Group considers corporate governance to be an important management issue as it aims to achievesustainable growth by responding promptly to changes in its operating environment and practicing sound,highly transparent management.
Basic Thinking on Corporate Governance
The Tosei Group recognizes that meeting the expectations of all its
stakeholders by responding promptly and accurately to changes in theoperating environment and maintaining sound business activities is an
important management issue. Accordingly, the Group establishes
systems to quickly identify and formulate preventative measures for avariety of management risks, proactively and appropriately discloses
information beyond legal requirements, and actively promotes
enhancement of internal operational oversight and highly transparent
management.

As subsidiary organizations of the Corporate Governance Meeting,Tosei Corporation has established a Compliance Committee, which is
focused on enhancing Group awareness of compliance, and a Risk
Management Committee, which studies countermeasures for risks
throughout the Group. Each committee discusses and considers how toresolve matters identified by its members, not only in terms of legal
compliance, but from the perspective of corporate ethics and social
contribution as well.

➤ Internal Audits
The Internal Audit Department, established in March 2005 under the
direct supervision of the President, conducts Group-wide audits based

Corporate Governance Measures

on fiscal year plans, and makes recommendations for improvement to➤ Board of Directors

divisions where inadequacies have been found. It implements highly

Consisting of four directors, the Board of Directors of Tosei

effective audits by enhancing follow-up, such as discussing matters

Corporation is the topmost management decision-making body. In

requiring corrections with concerned divisions and giving specificaccordance with Board of Directors regulations, it convenes once a

guidance.

month and on an as-needed basis to decide management policies and➤ Basic Policy on Internal Control Systems

other important matters, and supervises the execution of directors’ duties.

➤ Corporate Auditors
Tosei Corporation has adopted a corporate auditor system. The
Board of Auditors, consisting of two full-time and two part-time
corporate auditors, meets once a month, as a general rule. All corporate

fair, prompt and sound management. Recognizing this, the Company isworking to develop and strengthen its internal control systems.
With regard to corporate governance, the Tosei Group has

auditors are from outside the Company to ensure highly objective andestablished and is working to publicize its Group Compliance Standards,

fair auditing.

which regulate the behavior of all Group directors and employees. At the➤ Executive Officer System
Tosei Corporation has introduced an executive officer system underwhich six executive officers appointed by the Board of Directors executebusiness tasks delegated by the President, who concurrently holds the
positions of Representative Director and Chief Executive Officer, in
accordance with Board decisions. The President convenes aManagement Meeting twice a month, as a general rule, to obtain advice
in advance of making important decisions.

➤ Corporate Governance Meetings

same time, it is working to enhance directors’ awareness of compliancethrough Corporate Governance Meetings.
To protect personal information, the Senior Executive Managing
Officer of the Management Division has been assigned responsibility for
managing personal information, and the Personal Information Protection
Office has been set up in the General Administration and Human
Resource Department. In addition, each division head has been
appointed as a personal information manager to enforce thoroughmanagement.
To promote comprehensive risk management throughout the Group

Corporate Governance Meetings are held twice a month, as aand clarify the risk management structure, the Risk Management

general rule, to ensure ongoing enhancement of corporate governance.

Committee has enacted Risk Management Standards which specify

Attended by directors and full-time corporate auditors, these meetings

responsible divisions for each risk category.

serve as a venue for identifying and discussing important matters

The basic policy for internal control systems outlined above wasrelated to governance and internal control that affect corporate value.

adopted by the Board of Directors of Tosei Corporation at its meeting on

When necessary, advice is also sought from outside professionals suchMay 25, 2006.

as lawyers and certified public accountants.

10

An important responsibility of Tosei Corporation’s directors is todevelop a framework that promotes not only legal compliance but also

TOSEI CORPORATION

Management’s Discussion and Analysis of Operations and Finances

Presentation of Consolidated Information

Revitalization BusinessTosei Corporation prepared consolidated financial statements forthe first time for the year ended November 30, 2005. Consolidated
performance and financial data for prior years is not available. All data
presented in the following discussion is consolidated unless otherwise

Against the backdrop of a lively real estate market, the Tosei Groupmade strong progress in aggressively developing this business throughoriginal “value up” activities that increase the value of real estate. The
Tosei Group sold 19 properties during the year ended November 30,
2005. As a result, segment revenues totaled ¥10,401 million, andnoted.

segment operating income totaled ¥2,222 million.

Income and Expenses

Development Business➤ Revenues

The Tosei Group sold 17 single-family dwellings and 3 rental

In the operating environment of Tosei Corporation and its
consolidated subsidiaries (the “Tosei Group”), against the backdrop of
the ongoing recovery of the domestic economy, real estate prices haverisen, causing returns on investment in real estate to decrease. Theseand other factors have led to concerns about a slowdown in some
sectors of the real estate market. However, capital continues to flow into
an active real estate investment market.
Given this environment, the Tosei Group has increased synergy
among its six businesses and made progress in expanding the products
and services they offer. As a result of concentrated efforts to enhance

condominium complexes. As a result, segment revenues totaled ¥4,467
million, and segment operating income totaled ¥548 million.

Rental Business
The occupancy rate improved at rental buildings owned by the
Tosei Group. In addition, inventory of buildings for rent for use in therevitalization business increased. Consequently, segment revenues
totaled ¥1,645 million, and segment operating income totaled ¥929
million.

Fund Businessthe comprehensive strengths of the Tosei Group, revenues totaled a

Increased acquisitions of new properties resulted in expansion insolid ¥17,644 million. Non-consolidated revenues represented 95.4

assets under management. Acquisition fees and asset management

percent of consolidated revenues, and increased 15.9 percent year-on-

fees also increased. In addition, strong asset management results

year to ¥16,828 million.

generated incentive fees for the Tosei Group. As a result of these andother factors, segment revenues totaled ¥349 million, and segment➤ Cost of Revenues, Selling, General and Administrative (SGA)
Expenses, and Operating Income
Overall, the real estate market was strong during the year ended
November 30, 2005. The Tosei Group emphasized profit margin
improvement, with the result that cost of revenues totaled ¥12,788
million and gross profit totaled ¥4,856 million. However, SGA expenses
totaled ¥1,320 million because the Tosei Group added employees withthe aim of achieving further growth. As a result, operating income
totaled ¥3,536 million, and the operating margin was 20.0 percent. On a
non-consolidated basis, operating income increased 58.8 percent year-

operating income totaled ¥295 million. Assets under management in thissegment as of November 30, 2005 totaled ¥20,244 million.

Property Management Business
Segment revenues to outside customers totaled ¥562 million, andsegment operating income totaled ¥40 million. Tosei Corporationacquired the shares of Tosei Community Co., Ltd. on May 31, 2005, theend of the first half of the fiscal year ended November 30, 2005. Tosei
Community therefore became a consolidated subsidiary, and its results
are consolidated with results of this segment for the six months ended
November 30, 2005.

on-year to ¥3,323 million.

Alternative Investment Business
Revenues from arrangement fees related to real estate-backed NPL➤ Segment Information
Segment Revenues and Operating Income for the Year Ended
November 30, 2005
(Millions of yen)

Revitalization Business
Development Business
Rental Business
Fund Business
Property Management Business
Alternative Investment Businessfunds and credit management fees totaled ¥210 million. Interest
revenues received from CMOs held by Tosei Revival Investment Co.,

Revenues

Operating Income

Ltd. subsidiary Icarus Capital Co., Ltd. totaled ¥9 million. As a result,¥10,401
4,467
1,645
349
562
220

¥2,222
548
929
295
40
197

segment revenues totaled ¥220 million, and segment operating income
totaled ¥197 million. Assets under management in this segment totaled¥3,942 million as of November 30, 2005.

Note: Excludes intersegment revenues

Annual Review 200511➤ Other Income and Expenses and Income before Income Taxes
Other expenses, net totaled ¥554 million, primarily because interest

Cash Flow from Operating Activities
Net cash used in operating activities totaled ¥8,839 million. Income

expense totaled ¥534 million. Other income totaled ¥27 million, andbefore income taxes totaling ¥2,982 million was a primary source of

resulted primarily from one-time items including refund of earnest

cash. Increase in inventories, however, used cash totaling ¥7,062 million

money at cancellation.

as a result of acquisitions of buildings to which the Tosei Group will add

As a result of the above, income before income taxes totaled ¥2,982
million. The ratio of income before income taxes to revenues was 16.9
percent. Income before income taxes per employee as of November 30,
2005 was ¥28 million.

value and sell in expanding its revitalization business.

Cash Flow from Investing Activities
Net cash used in investing activities totaled ¥607 million. A primaryfactor was net investment in securities, which used cash totaling ¥545
million primarily to fund the alternative investment business and➤ Net Income
As a result of the above, net income for the year ended November
30, 2005 totaled ¥1,593 million. Diluted net income per share totaled¥4,571.59. On a non-consolidated basis, net income increased 88.5
percent year-on-year to ¥1,495 million.

investment in private equity in the fund business.
Tosei did not generate free cash flow during the year ended
November 30, 2005. The sum of net cash used in operating activities
and net cash used in investing activities totaled ¥9,446 million.

Cash Flow from Financing Activities

Shareholder Returns Policy

Net cash provided by financing activities totaled ¥9,361 million.
Proceeds from long-term debt net of repayments of long-term debt

Stable dividends are a key management priority for Tosei
Corporation. The Company’s fundamental policy is to comprehensively
consider operating results, the future operating environment andprogress in its business plan in balancing distributions of earnings andtotaled ¥8,308 million. The Tosei Group intends to deploy this capital toacquire new buildings in expanding its revitalization and development
businesses.

the need for internal capital resources to generate long-term growth incorporate value through the acquisition of highly profitable business
opportunities. Based on this fundamental policy, cash dividends per

As a result of the above, together with the effect of newly
consolidated subsidiaries, cash and cash equivalents at the end of the
fiscal year decreased ¥70 million from the beginning of the fiscal year toshare for the year ended November 30, 2005 totaled ¥450.

¥2,531 million.

Liquidity and Financial Position➤ Financial Position
Assets➤ Liquidity Management
The Tosei Group aims to secure sufficient capital for its businessTotal assets as of November 30, 2005 were ¥40,407 million, andactivities, maintain liquidity and achieve a sound financial position.

return on average total assets (ROA) was 3.9 percent.

➤ Cash Flowby real estate for sale and real estate for sale in progress, was the

Cash Flow Summary

Current assets totaled ¥32,569 million. Inventories, as represented(Millions of yen)
Year ended
November 30, 2005

principal component of current assets and are primarily the result of theacquisition of properties through expansion of the real estate tradingbusiness. Purchased receivables acquired in the alternative investment

Cash flow from operating activities¥(8,839)

Cash flow from investing activities(607)

Cash flow from financing activities

9,361

of land. Investments and other assets totaled ¥1,174 and consisted

Cash and cash equivalents at the end of the year

2,531

primarily of investments in securities, which encompass private equity

business were another notable component of current assets.
Property and equipment totaled ¥6,664 million and consisted mainly

investments in the fund business.

Liabilities
Current liabilities totaled ¥14,942 million. The sum of short-termborrowings and long-term debt due within one year was ¥12,398 million,
which accounted for most of current liabilities.

12

TOSEI CORPORATION

Management’s Discussion and Analysis of Operations and Finances

Long-term liabilities totaled ¥17,171 million, and consisted primarily

In procuring funds, the Tosei Group does not rely on a particularof long-term debt used to acquire properties. Total interest-bearing debt

financial institution. Rather, the Group negotiates with multiple financial

was ¥28,385 million.

institutions on a project-by-project basis, and as a matter of policy, only

Shareholders’ Equity
Shareholders’ equity as of November 30, 2005 was ¥8,294 million.
The ratio of shareholders’ equity to total assets was 20.5 percent.
Return on average total shareholders’ equity (ROE) was 19.2 percent.

Risk Information

initiates a project once its funding has been procured. Unexpectedchanges in the operating environment and other factors that might
impede access to funding could delay projects or render them
untenable, which would have the potential to affect the results andfinancial position of the Tosei Group.

Risks that have the potential to affect the performance, stock price(4) Risk of Changes in Accounting Standards for Special Purpose
Vehicles (SPVs)

and financial position of the Tosei Group include, but are not limited to,

The Tosei Group establishes SPVs in its fund business. However,

the issues discussed below. Forward-looking statements represent

accounting practices for SPVs have not been clearly delineated in

Tosei Group judgments as of November 30, 2005. The Tosei Group

Japan. At present, the Tosei Group therefore decides whether or not tomaintains a policy of recognizing the potential for risks to occur andconsolidate each particular SPV on the basis of factors including shareworking to preclude them or manage them if they arise.

of private equity ownership and level of control. As the fund businessexpands in the future, the Tosei Group may establish many similarly(1) Real Estate Market Risk
In the Tosei Group’s core businesses of revitalization andstructured SPVs, and definitive accounting practices for SPVs may bedelineated in Japan. Consequent changes in the Tosei Group’s

development, the acquisition of properties for the Group’s own account,accounting methods may cause changes in the scope of consolidation,

the acquisition of properties for ownership, time required for divestiture

which would have the potential to affect the results and financial

and interest rates have the potential to affect the Tosei Group’s results

position of the Tosei Group.

and financial position.

(5) Other Risks(2) Risk Associated with Competitive Conditions

The Tosei Group employs its Palms Quality Check (PQC) system for

The Tosei Group’s primary market is the Tokyo metropolitan area,

condominium buildings as part of its operational commitment to quality

and the Group invests primarily in small and medium-sized properties.

construction. In addition, the Group has established its own standards

Acquisition of properties has the potential to become increasingly

and specifications, including the 35 “Value Up” Points, as part of its

competitive because of the continuing recovery in real estate market

meticulous approach to quality control. Recently, problems have arisen

conditions in metropolitan Tokyo and the increase in recent years in thein Japan due to the falsification of structural design data. Since May

number of new entrants in the fund business. The Tosei Group has

1999, a private inspection organization has verified the construction ofstrengthened its competitiveness by enhancing business development

the Tosei Group’s condominium complexes. The Tosei Group

flexibility through subsidiaries operating in the property management

requested architectural firms other than the firms that handled thebusiness and the alternative investment business and is working todesign of these buildings to quickly confirm that there are nodifferentiate itself from competitors. However, failure by the Tosei Group

indications that structural design data was falsified. However, factors

to maintain its competitive advantages would have the potential to affectsuch as reduced willingness to buy among customers for residential

the Group’s results and financial position.

housing and increased costs that may result from more stringent(3) Risk Associated with Reliance on Interest-bearing Debt andInterest Rates

regulations have the potential to affect the results and financial position

The Tosei Group procures debt financing, including non-recourseof the Tosei Group.
In addition, issues associated with used properties, including failureloans, primarily from financial institutions to fund expenses associatedto save structural design blueprints for most buildings, asbestos

with business activities including acquisition of land and buildings andproblems, or soil contamination problems, could impede real estate

renovation. Consequently, the ratio of interest-bearing debt to total

investment activities over the medium term, which would have theassets is high. Conventionally, increases in interest rates have increased

potential to affect the results and financial position of the Tosei Group.

fund procurement costs, and therefore have the potential to affect theTosei Group’s results and financial position.

Annual Review 2005

13

Consolidated Balance Sheets
Tosei Corporation and Consolidated Subsidiaries
As of November 30, 2005

Millions of yen

Thousands of
U.S. dollars (Note 1)

2005

2005

Cash (Note 3) ............................................................................................................

¥ 2,671$ 22,318

Marketable securities ................................................................................................

10

84

ASSETS
Current assets:

Notes and accounts receivable ................................................................................

147

1,230

Real estate for sale (Note 3)......................................................................................

12,607

105,355

Real estate for sale in progress (Note 3)...................................................................

13,977

116,805

Purchased receivables (Note 3) ................................................................................

1,723

14,399Supplies ....................................................................................................................

1

11

Deferred tax assets (Note 6) .....................................................................................

130

1,085

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

1,307

10,924

Less: allowance for doubtful accounts .....................................................................

(4)

(34)

Total current assets ...............................................................................................

32,569272,176

Property and equipment:
Buildings and structures (Note 3)..............................................................................

1,725

14,416

Tools and furniture ....................................................................................................

33

278

Land ..........................................................................................................................

4,906

41,000Total property and equipment ...............................................................................

6,664

55,694

Investments and other assets:
Investments in securities...........................................................................................

904

7,553

Loans receivable .......................................................................................................

4

30

Deferred tax assets (Note 6) .....................................................................................

68

569

Bond issue cost ........................................................................................................

7

54

Software....................................................................................................................

30

251

Telephone rights .......................................................................................................

2

19

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

160

1,340

Less: allowance for doubtful accounts .....................................................................

(1)

(7)

Total investments and other assets ......................................................................

1,174

9,810

Total assets ...........................................................................................................

¥40,407$337,680

The accompanying notes are an integral part of these statements.

14

TOSEI CORPORATION

LIABILITIES AND SHAREHOLDERS’ EQUITY

Millions of yen

Thousands of
U.S. dollars (Note 1)

2005

2005

Current liabilities:
Short-term borrowings (Note 3) ................................................................................

¥ 4,390$ 36,687

Bonds due within one year (Note 3) .........................................................................

194

1,621

Long-term debt due within one year (Note 3) ...........................................................

8,008

66,920Notes and accounts payable ....................................................................................

372

3,107

Income taxes payable ...............................................................................................

1,081

9,038

Advance received .....................................................................................................

383

3,204

Accrued bonuses to employees ...............................................................................

1082

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

504

4,211

Total current liabilities ...........................................................................................

14,942

124,869

Bonds (Note 3) ..........................................................................................................

322

2,691

Long-term debt (Note 3) ...........................................................................................

15,471

129,292

Deferred tax liabilities (Note 6) ..................................................................................

22

188

Long-term liabilities:

Accrued severance costs .........................................................................................

31

263

Accrued retirement benefits to officers ....................................................................

152

1,268

Consolidation adjustment .........................................................................................

6

46

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

1,167

9,754

Total long-term liabilities .......................................................................................

17,171

143,502

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

32,113

268,371

Shareholders’ equity (Notes 5 and 8):
Common stock:
Authorized:

800,000 shares

Issued:344,858 shares ..................................................................................

1,966

16,431

Additional paid-in capital ..........................................................................................

2,050

17,128Retained earnings .....................................................................................................

4,270

35,686

Unrealized gain on securities ....................................................................................

864

Total shareholders’ equity .....................................................................................

8,294

69,309Total liabilities and shareholders’ equity ...............................................................

¥40,407$337,680

Annual Review 2005

15

Consolidated Statements of Operations and Retained Earnings
Tosei Corporation and Consolidated Subsidiaries
Year ended November 30, 2005

Millions of yen

Thousands of
U.S. dollars (Note 1)

2005

2005

Revenues......................................................................................................................

¥17,644$147,453

Cost of revenues ..........................................................................................................

12,788106,869

Gross profit............................................................................................................

4,856

40,584

Selling, general and administrative expenses ..............................................................

1,320

11,032

Operating income ..................................................................................................

3,536

29,552Other income (expenses):
Interest and dividend income ...................................................................................

1

7

Refund of property tax ..............................................................................................

974

Refund of earnest money at cancellation .................................................................

7

61

Refund of insurance premium at cancellation ..........................................................

10

83

Interest expense .......................................................................................................

(534)(4,462)

Penalty at contract cancellation................................................................................

(17)

(141)

Other, net ..................................................................................................................
Income before income taxes ....................................................................................

(30)

(256)

(554)

(4,635)

2,982

24,917

1,434

11,988

Income taxes (Note 6):
Current ......................................................................................................................
Deferred ....................................................................................................................
Net income................................................................................................................

(45)

(380)

1,389

11,6081,593

13,3092,719

22,720Retained earnings:
Balance at beginning of the year ..............................................................................
Decrease due to newly consolidated subsidiaries....................................................

(1)

(6)

Cash dividends .........................................................................................................

(41)

(337)

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

¥ 4,270$ 35,686

Yen

U.S. dollars (Note 1)

Per share of common stock:
Net income: Basic ....................................................................................................

¥4,664.46$38.98

Diluted ..................................................................................................

4,571.59

38.20

Cash dividends applicable to the year......................................................................

450.00

3.76

The accompanying notes are an integral part of these statements.

16

TOSEI CORPORATION

Consolidated Statements of Cash Flow
Tosei Corporation and Consolidated Subsidiaries
Year ended November 30, 2005

Millions of yen

Thousands of
U.S. dollars (Note 1)

2005

2005

Cash flow from operating activities:
Income before income taxes ........................................................................................
Depreciation .................................................................................................................
Amortization of consolidation adjustment....................................................................
Increase in allowances .................................................................................................
Interest and dividend income .......................................................................................
Interest expenses .........................................................................................................
Tokumei Kumiai (private equity) investments ...............................................................
Increase in notes and accounts receivable ..................................................................
Increase in purchased receivables ...............................................................................
Increase in inventories..................................................................................................
Increase in advance payment ......................................................................................
Decrease in notes and accounts payable ....................................................................
Decrease in advance received .....................................................................................
Increase in deposits received.......................................................................................
Other.............................................................................................................................
Sub-total................................................................................................................
Receipts of interest and dividends ...............................................................................
Payments of interest ....................................................................................................
Payments of income taxes ...........................................................................................
Net cash used in operating activities....................................................................

¥ 2,982
181
(1)
38
(1)
534
(24)
(31)
(1,723)(7,062)(1,095)(1,082)
(453)
26
262
(7,449)
57
(542)
(905)
(8,839)$ 24,917
1,511
(5)
319
(7)
4,462
(205)
(258)
(14,399)(59,019)(9,148)(9,043)(3,787)
214
2,192(62,256)
480(4,528)(7,567)(73,871)

Cash flow from investing activities:
Decrease in time deposits ............................................................................................
Purchases of property and equipment.........................................................................
Purchases of intangible assets.....................................................................................
Investments in securities ..............................................................................................
Sales of investments in securities ................................................................................
Collection of investments in securities .........................................................................
Acquisition of equity in newly consolidated subsidiary................................................
Purchases of investments ............................................................................................
Other.............................................................................................................................
Net cash used in investing activities.....................................................................

45
(144)
(31)
(3,865)
3,320
77
(7)
(12)
10
(607)

376
(1,205)(257)(32,297)
27,745
645
(55)
(100)
81
(5,068)Cash flow from financing activities:
Net increase in short-term borrowings.........................................................................
Proceeds from long-term debt .....................................................................................
Repayments of long-term debt ....................................................................................
Redemption of bonds ..................................................................................................
Proceeds from new stock issue ...................................................................................
Cash dividends paid.....................................................................................................
Net cash provided by financing activities.............................................................

1,041
14,570(6,262)
(24)
76
(40)
9,361

8,700
121,765(52,333)
(201)
636
(337)
78,230

(85)

(709)

15
2,601
¥ 2,531125
21,734$ 21,150

Net decrease in cash and cash equivalents ............................................................
Cash and cash equivalents of newly consolidated subsidiaries
at beginning of the year..........................................................................................
Cash and cash equivalents at beginning of the year ..............................................
Cash and cash equivalents at end of the year.........................................................
The accompanying notes are an integral part of these statements.

Annual Review 2005

17

Notes to Consolidated Financial Statements
Tosei Corporation and Consolidated Subsidiaries
Year ended November 30, 2005

1. Basis of Presenting Consolidated Financial Statements
The accompanying consolidated financial statements have been prepared in accordance with the provisions set forth in theJapanese Securities and Exchange Law and its related accounting regulations, and in conformity with accounting principles
and practices generally accepted in Japan, which are different in certain respects as to application and disclosure requirements of International Accounting Standards. The consolidated financial statements are not intended to present the financial
position, results of operations and cash flows in accordance with accounting principles and practices generally accepted incountries and jurisdictions other than Japan.
In preparing these consolidated financial statements, certain reclassifications and rearrangements have been made to theconsolidated financial statements issued domestically in order to present them in a form which is more familiar to readers outside Japan.
The consolidated financial statements are stated in Japanese yen, the currency of the country in which Tosei Corporation(the “Company”) is incorporated and operates. The translations of Japanese yen amounts into U.S. dollar amounts are included solely for the convenience of readers outside Japan and have been made at the rate of ¥119.66 to $1, the approximate
rate of exchange at November 30, 2005. Such translations should not be construed as representations that the Japanese yenamounts could be converted into U.S. dollars at that or any other rate.

2. Summary of Significant Accounting Policies
a. Consolidation
The consolidated financial statements as of November 30, 2005 include the accounts of the Company and its 11 (7 in 2004)
significant subsidiaries (together, the “Companies”).
The Company has no unconsolidated subsidiaries and no affiliated companies in which investments are accounted for by
the equity method.
All assets and liabilities of subsidiaries are marked to fair value at the time of acquisition of control. Consolidation adjustment, a difference between investment and equity of subsidiary, is amortized on a straight-line basis over 5 years.
b. Cash Equivalents
Cash equivalents are short-term investments that are readily convertible into cash and that are exposed to insignificant riskof changes in value. Cash and cash equivalents at the end of the year in the consolidated statements of cash flows for theyear ended November 30, 2005 are reconciled with cash in the consolidated balance sheets as follows:

Cash .............................................................................................................................

Millions of yen

Thousands of
U.S. dollars

2005

2005

¥2,671$22,318

Time deposits with maturities of more than three months...........................................

(140)(1,168)Cash and cash equivalents ..........................................................................................

¥2,531$21,150c. Inventories
Real estate for sale, real estate for sale in progress and purchased receivables are stated at cost determined by the specificidentification method.
Supplies are stated at cost determined by the last purchase method.

18

TOSEI CORPORATION

d. Marketable and Investment Securities
Available-for-sale securities with market quotations are reported at fair value, with unrealized gains and losses, net of
applicable taxes, reported in a separate component of shareholders’ equity. Cost at the time of sale is determined by themoving-average method.
Available-for-sale securities without market quotations are stated at cost determined by the moving-average method.
e. Property, Plant and Equipment
Property and equipment are stated at cost.
Depreciation of property and equipment of the Companies is computed by the declining-balance method at rates based on
the estimated useful lives of the assets. However, buildings purchased on or after April 1, 1998 are depreciated by thestraight-line method.
f. Retirement Benefit Plans
The Companies have an unfunded retirement benefit plan for employees. Accrued severance costs are stated at theamount which would be required if all employees voluntarily terminated their employment at the balance sheet date.
Accrued retirement benefits to officers (directors and corporate auditors) are stated at the amount which would be required
if all directors and corporate auditors retired at the balance sheet date.
g. Leases
All leases are accounted for as operating leases. Under Japanese accounting standards for leases, finance leases thatdeem to transfer ownership of the leased property to the lessee are to be capitalized, while other finance leases are permitted
to be accounted for as operating lease transactions.
h. Income Taxes
The Companies apply an inter-period allocation of income taxes based on the asset and liability method. Deferred income
taxes are recorded to reflect the impact of temporary differences between assets and liabilities recognized for financial
reporting purposes and such amounts recognized for tax purposes.
i. Appropriations of Retained Earnings
Appropriations of retained earnings at each year end are reflected in the financial statements for the following year uponshareholders’ approval.

3. Short-term Borrowings and Long-term Debt
Short-term borrowings, amounting to ¥4,390 million (US$36,687 thousand) as of November 30, 2005, were loans frombanks with an average interest rate of 1.76% per year.
Bonds as of November 30, 2005 consisted of the following:
Millions of yen

Thousands of
U.S. dollars

IssuedDueInterest (%)

2005

2005

Unsecured bonds

3/31/04

3/31/09

0.19

¥ 250

$ 2,089

Unsecured bonds

6/10/04

6/10/09

0.31

96

802

Unsecured bonds

8/10/04

8/10/09

0.46

170

1,421

516

4,312

Less: current portion of bonds .....................................................................................

(194)(1,621)

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

¥ 322$ 2,691

Annual Review 2005

19

Annual maturities of bonds as of November 30, 2005 within four years were as follows:
Years ending November 30

Millions of yen

Thousands of U.S. dollars

2006

¥194

$1,621

2007

24

201

2008

24

201

2009

274

2,289

Long-term debt, amounting to ¥23,479 million (US$196,212 thousand) as of November 30, 2005, consisted of loans frombanks with an average interest rate of 1.95% per year. Annual maturities of bonds as of November 30, 2005 (except for current
portion of ¥8,008 million (US$66,920 thousand) within five years were as follows:
Years ending November 30

Millions of yen

Thousands of U.S. dollars

2007¥7,564$63,210

2008

2,765

23,106

2009

696

5,820

2010

480

4,015

The book values of assets pledged as collateral for debt as of November 30, 2005 were as follows:
Millions of yen

Thousands of
U.S. dollars

2005

2005

Cash .............................................................................................................................

¥

Real estate for sale .......................................................................................................

11,487

170$

95,992

1,421

Real estate for sale in progress ....................................................................................

13,235

110,606

Purchased receivables .................................................................................................

1,091

9,126

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

900

7,521

Buildings and structures ..............................................................................................

1,397

11,671

Land .............................................................................................................................

4,020

33,591

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

¥32,230$269,928

Millions of yen

Thousands of
U.S. dollars

2005

2005

¥ 4,370$ 36,520

Debt related to the above pledged assets as of November 30, 2005 was as follows:

Short-term borrowings .................................................................................................
Long-term debt due within one year ............................................................................

7,900

66,017Long-term debt ............................................................................................................

15,039125,682

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

¥27,309$228,219

4. Contingent Liabilities
As of November 30, 2005 the Company was contingently liable for guarantees on six customers’ housing loans from (株)アルカ, amounting, to ¥13 million (US$111 thousand).

20

TOSEI CORPORATION

5. Shareholders’ Equity
The Japanese Commercial Code (the “Code”) requires at least 50% of the issue price of new shares to be designated asstated capital as determined by resolution of the Board of Directors. Proceeds in excess of amounts designated as statedcapital are credited to additional paid-in capital.
A stock option plan for directors and employees of the Company was resolved by the shareholders’ meeting held on April
25, 2003. Details of the stock options are as follows:
Type of share:

Common stock

Number of shares:

Equal to or less than 11,100 shares in total

Grant price:¥8,500 per share

Effective period:

June 1, 2005 to May 31, 2008

6. Income Taxes
The Companies are subject to Japanese national and local income taxes which, in the aggregate, resulted in a normal effective statutory tax rate of approximately 40.7% for the year ended November 30, 2005.
Major components of deferred tax assets as of November 30, 2005 were as follows:
Millions of yen

Thousands of
U.S. dollars

2005

2005

Deferred tax assets (current):
Unpaid enterprise taxes ............................................................................................

¥ 72

$ 602

Excess depreciation..................................................................................................

41

338

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

17

145

130

1,085

Excess accrued severance costs .............................................................................

13

106

Excess accrued retirement benefits to officers ........................................................

62

516

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

11

94

Valuation allowance ..................................................................................................

(12)

(102)

74

614

204

1,699

(23)

(188)

Deferred tax assets (non-current):

Total deferred tax assets .......................................................................................
Deferred tax liabilities (non-current):
Valuation difference on assets and liabilities of subsidiaries....................................
Unrealized gain on securities ....................................................................................

(5)

(45)

Total deferred tax liabilities ...................................................................................

(28)

(233)

Net deferred tax assets ............................................................................................

¥176$1,466

Annual Review 2005

21

Deferred taxes are represented in the consolidated balance sheets as follows:
Millions of yen

Thousands of
U.S. dollars

2005

2005

Current assets ..............................................................................................................

¥130$1,085

Non-current assets.......................................................................................................

68

569

Non-current liabilities....................................................................................................

(22)

(188)

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

¥176$1,466

Reconciliation between the normal effective statutory tax rate for the year ended November 30, 2005 and the actual effective tax rate reflected in the accompanying consolidated statement of income was as follows:
Normal effective statutory tax rate .................................................. 40.7%
Expenses not deductible for income tax purposes ........................

0.2

Tax on undistributed income...........................................................

5.2

Other - net .......................................................................................

0.5

Actual effective tax rate ................................................................... 46.6%

7. Segment Information
Information about industry segments of the Companies for the year ended November 30, 2005 was as follows:
Millions of yen
Revitalization Development
Business
Business

RentalBusiness

Fund
Business

Property
Management
Business

Alternative
Investment
Business

Total

Eliminations or
corporate
Consolidated

Sales and
operating income:Revenuefrom operations:¥10,401¥ 4,467¥1,645

¥349

¥562

¥ 220

¥17,644

Intersegment

Outside customers

—

—

—

—

96

—

96

¥

—

¥17,644(96)—

Total revenues

10,401

4,467

1,645

349

658

220

17,740(96)

17,644

Operating expenses

8,179

3,919

716

54

618

23

13,509599

14,108Operating income¥ 2,222

¥

548

¥ 929

¥295

¥ 40

¥ 197

¥ 4,231¥ (695)¥ 3,536

Assets, depreciationand capital
expenditures:
Assets22¥15,656¥12,300¥5,227¥905¥323¥2,017¥36,428¥3,979¥40,407

Depreciation

1

1

150

0

0

—

152

29

181

Capital expenditures

13

8

65

4

—

—

90

88

178

TOSEI CORPORATION

Thousands of U.S. dollars
Revitalization Development
Business
Business

RentalBusiness

Fund
Business

Property
Management
Business$ 86,916 $ 37,331$13,749$2,918$4,698

Alternative
Investment
Business

Eliminations or
corporate
Consolidated

Total

Sales and
operating income:Revenuefrom operations:
Outside customers$ 1,841 $147,453$—$147,453

Intersegment

—

—

—

—

802

—

802

(802)

—

Total revenues

86,91637,331

13,749

2,918

5,500

1,841

148,255(802)

147,453

Operating expenses

68,35032,748

5,983

456

5,164

194

112,895

5,006

117,901

Operating income$ 18,566 $4,583$ 7,767$2,462$ 336$ 1,647 $ 35,360$ (5,808) $ 29,552$130,838 $102,790$43,683$7,561$2,703$16,859 $304,433$33,247$337,680

8

5

1,256

2

1

—

1,273

238

1,511

109

71

540

30

—

—

750

741

1,491

Assets, depreciationand capital
expenditures:
AssetsDepreciation
Capital expenditures

8. Subsequent Events
a. Resolutions of Shareholders’ Meeting
At the general shareholders’ meeting held on February 24, 2006, the Company’s shareholders approved the following
appropriation of retained earnings for the year ended November 30, 2005 and issue of stock options.
(1) Appropriation of retained earnings
Appropriation of retained earnings for the year ended November 30, 2005 was as follows:
Millions of yen

Thousands of
U.S. dollars

2005

2005

Year-end cash dividends, ¥450 ($3.76) per share........................................................

¥155$1,297

Officers’ bonuses .........................................................................................................

1190(2) Stock option planA stock option plan for directors and employees of the Company and directors of its subsidiaries was resolved.
Details of the stock options are as follows:
Type of share:

Common stock

Number of shares:

Equal to or less than 5,000 shares in total

Grant price:

105 % of average of closing prices for the month prior to exercise of stock options

Effective period:

March 1, 2008 to February 28, 2011

b. New Stock Issue
The Board of Directors of the Company resolved to issue 30,000 shares of common stock outside Japan at the issue priceof ¥144,900 (US$1,211) per share, effective February 27, 2006. As a result, capital stock and additional paid-in capital of theCompany increased by ¥2,174 million (US$18,164 thousand), respectively.

Annual Review 200523

Corporate Data

Company namePresident and CEO

Tosei Corporation(Tosei Fudosan Co., Ltd.)History
1950 February

Established as Yukari Kogyo Co., Ltd.
(Head Office: Oita City, Oita Prefecture)

1952 April

Moved Head Office to Kameido, Koto-ku, Tokyo

Seiichiro Yamaguchi

Date of establishment

February 2, 1950

1964 June

Initiated real estate sales, brokerage, rental andproperty management businesses

Address

2-3 Kanda Awaji-cho,
Chiyoda-ku, Tokyo

1968 May

Moved Head Office to Soto-Kanda,
Chiyoda-ku, Tokyo

Capital¥1,966,096,500(As of November 30, 2005)

1969 July

Company name changed to Yukari Co., Ltd.

1983 MarchCompany name changed to Tosei Building Co., Ltd.

Employees

68 (As of November 30, 2005)

1994 June

Seiichiro Yamaguchi appointed as President
and CEO

Fields of business

Revitalization; Development; Rental;
Property management; Funds;
Alternative investment

Licenses

Real Estate Broker, Construction
Contractor, First-class Architect’s
Office, Real Estate Investment Advisor

October

Initiated residential condominium development(The Palms Series)

1995 September Kanda Awaji-cho Building Co., Ltd. established1996 March
DecemberCompany name changed to Tosei Fudosan Co., Ltd.
Moved Head Office to Kanda, Awaji-cho,
Chiyoda-ku, Tokyo

1997 December

Consolidated subsidiaries Tosei Revival Investment Co., Ltd.
Tosei Community Co., Ltd.
Tosei REIT Advisors, Inc.

Initiated construction contractor operations, including
repair and renovation, as part of the property
management business1999 July

Initiated single-family dwelling home developmentwith Palms Court Series

Management Team (As of February 24, 2006)

2001 February

Initiated asset management businessPresident and CEO

March

Acquired and merged three companies throughleveraged buyouts

April

Acquired First-class Architect’s Office License(License No. Tokyo Governor’s Registration (46219))

November

Building Management Division spun off toTosei Community Co., Ltd.

DecemberFormed Securitization Division aiming to enter realestate securitization businessSeiichiro Yamaguchi
Director and COO

Katsuhito Kosuge
Director and CFO

Noboru Hirano
Director and Executive Officer of Asset Solution Department

Syunichiro Naito

2002 August

Corporate Auditors

Yasuhiro Honda (full-time)
Kimio Harada (full-time)
Shigeru Yamagishi (part-time)
Eiji Sakomoto (part-time)
Executive Officer of Architect Planning Department

December
2004 February
December

Minoru Inatsuka
Officer of Corporate Planning Department

Ryohei Yasuda2005 March
April

Structured first private real estate investment trust
fund, the Argo Fund, targeting rental condominiums(commencement of real estate securitization business)
Acquired and merged Kanda Awaji-cho Building
Co., Ltd.
Listed on the JSDA Over-the-Counter Trading
Securities Market
Listed on JASDAQ following closure of the JSDA
Over-the-Counter Trading Securities Market
Established the subsidiary Tosei Revival Investment
to revive the company and the businessTosei Fudosan made Tosei Community aconsolidated subsidiary, to expand the coverage ofthe field for real estate business.

September Established the subsidiary Tosei REIT Advisors, Inc.

24

TOSEI CORPORATION

Investor Information

Authorized number of shares

800,000

Major Shareholders (As of November 30, 2005)

Issued number of shares

344,858

Shareholders(As of November 30, 2005)

Seiichiro Yamaguchi
Zeus Capital Limited
The Master Trust Bank of Japan, Ltd.
(Trust Account)
Japan Trustee Service Bank, Ltd.
(Trust Account)
Morgan Stanley and Company
International Limited
Nomura Trust and Banking Co., Ltd.
(Trust Account)
Japan Securities Finance Co., Ltd.
Sumitomo Life Insurance Company(Special Account)
Trust & Custody Services Bank., Ltd.
(Stock Investment Trust Account)
Nissin Co., Ltd.
Katsuhito Kosuge

Number of shareholders

5,582(As of November 30, 2005)

Shareholder composition
Other companies
18.17%

Foreign companies
6.45%

Individuals/
others
58.46%

Securities
companies
1.04%

Financial institutions
15.88%

Ticker code8923

Stock listing

Number ofshares held

Shareholding
ratio (%)

138,855
60,000

40.26
17.40

16,5704.80

13,205

3.83

9,275

2.68

6,632
6,028

1.92
1.74

3,113

0.90

2,904
2,000
2,000

0.84
0.57
0.57

JASDAQ Securities Exchange(Listed company shares on
February 27, 2004)

Closing of accounts

November

General stockholder
meeting

Every February

JASDAQ Monthly Closing Price（Yen）

150,000
120,000
90,00060,00030,0000

2004/ 04
03

05

06

07

08

09

10

11

12 2005/ 02
01

03

04

05

06

07

08

09

10

11

06

07

08

09

10

11

12 2005/ 02
01

03

04

05

06

07

08

09

10

11

Monthly Trading Volume（Shares）

120,000
90,00060,00030,0000

2004/ 04
03

05

Annual Review 2005

25

URL http://www.toseifudosan.co.jp/english/index.html
Printed in Japan