UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K/A
Amendment No. 1
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES ACT OF 1934
(Mark One)
x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2003
or
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number 1-14601
Arch Chemicals, Inc.
(Exact name of registrant as specified in its charter)
Virginia | 06-1526315 | |
(State or other jurisdiction of Incorporation or organization) | (I.R.S. Employer Identification No.) | |
501 Merritt 7 Norwalk, CT | 06851 | |
(Address of principal executive offices) | (Zip Code) |
Registrant’s telephone number, including area code:
(203) 229-2900
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class | Name of Each Exchange on Which Registered | |
Common Stock | New York Stock Exchange | |
Series A Participating Cumulative | New York Stock Exchange | |
Preferred Stock Purchase Rights |
Securities Registered Pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yesx No¨.
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.x
Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2).
Yesx No¨.
As of June 30, 2004, the aggregate market value of registrant’s voting and non-voting common equity held by non-affiliates of registrant was approximately $672,413,193.
As of June 30, 2004, 23,409,034 shares of the registrant’s common stock were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the following documents are incorporated by reference in this Form 10-K as indicated herein:
Document | Part of 10-K into which incorporated | |
Proxy Statement relating to Arch’s 2004 | Part III | |
Annual Meeting of Shareholders |
EXPLANATORY NOTE
This amendment to the Annual Report on Form 10-K/A for the fiscal year ended December 31, 2003 of Arch Chemicals, Inc. (the “Company”) is being filed to include the audited financial statements of FUJIFILM Arch Co., Ltd. (the “FUJIFILM Arch joint venture”) for the fiscal year ended March 31, 2004 as required by Rule 3-09 of Regulation S-X. The Company has a 49% equity interest in the FUJIFILM Arch joint venture. In accordance with Rule 12b-15 under the Securities and Exchange Act of 1934, as amended, the text of the amended item is set forth in its entirety in the pages attached hereto.
A consent of KPMG Azsa & Co., independent auditors for the FUJIFILM Arch joint venture, is being filed as an exhibit hereto.
2
PART IV
Item 15. | Exhibits, Financial Statement Schedules, and Reports on Form 8-K |
(a) 1.Financial Statements
The following is a list of the Financial Statements included in Item 8 of this Report:
Page | ||
Independent Auditors’ Report | 42 | |
Management Report | 43 | |
Consolidated Balance Sheets as of December 31, 2003 and 2002 | 44 | |
Consolidated Statements of Income for the Years Ended December 31, 2003, 2002 and 2001 | 45 | |
Consolidated Statements of Cash Flows for the Years Ended December 31, 2003, 2002 and 2001 | 46 | |
Consolidated Statements of Shareholders’ Equity for the Years Ended December 31, 2003, 2002 and 2001 | 47 | |
Notes to Consolidated Financial Statements | 48 |
2.Financial Statement Schedules
Except as noted below, schedules not included herein are omitted because they are inapplicable or not required or because the required information is given in the consolidated financial statements and notes thereto.
Due to the significance of the Company’s FUJIFILM Arch joint venture, the Company has provided summarized financial statements within the Notes to the Consolidated Financial Statements and has filed audited consolidated financial statements for FUJIFILM Arch Co. Ltd. and its subsidiaries with this Report. Such financial statements are as follows:
Independent Auditors’ Report
Consolidated Balance Sheets as of March 31, 2003 (unaudited) and 2004
Consolidated Statements of Income for the Years Ended March 31, 2002 (unaudited), 2003 (unaudited) and 2004
Consolidated Statements of Stockholders’ Equity and Comprehensive Income for the Years Ended March 31, 2002 (unaudited), 2003 (unaudited) and 2004
Consolidated Statements of Cash Flows for the Years Ended March 31, 2002 (unaudited), 2003 (unaudited) and 2004
Notes to Consolidated Financial Statements
Additionally, the financial statements of the Company’s Nordesclor joint venture have been summarized within the Notes to the Consolidated Financial Statements due to the significance of Nordesclor’s results to the consolidated Company. Separate financial statements of the remaining 50% or less owned companies accounted for by the equity method are not summarized herein and have been omitted because they would not constitute a significant subsidiary.
3.Exhibits
Management contracts and compensatory plans and arrangements are listed as Exhibits 10.7 through 10.17(a) below.
2 | Share Purchase Agreement, dated August 11, 2003, among Hickson Limited, Greentag (8) Limited, Hickson International Limited, Arch Chemicals, Inc. and Hickson & Welch Chemical Products Limited — Exhibit 2 to the Company’s Current Report on Form 8-K, filed August 18, 2003.* | |
3.1 | Amended and Restated Articles of Incorporation of the Company — Exhibit 3.1 to the Company’s Current Report on Form 8-K, filed February 17, 1999.* | |
3.2 | Bylaws of the Company as amended September 1, 2003 — Exhibit 3 to the Company’s Quarterly Report on Form 10-Q for the period ending September 30, 2003.* | |
4.1 | Specimen Common Share certificate — Exhibit 4.1 to the Company’s Registration Statement on Form 10, as amended.* |
3
4.2 | Amended and Restated Articles of Incorporation of the Company (filed as Exhibit 3.1 hereto).* | |
4.3 | Bylaws of the Company (filed as Exhibit 3.2 hereto).* | |
4.4(a) | Rights Agreement dated as of January 29, 1999 between the Company and ChaseMellon Shareholder Services, L.L.C., as Rights Agent — Exhibit 4.1 to the Company’s Current Report on Form 8-K, filed February 17, 1999.* | |
4.4(b) | Amendment No. 1, dated July 25, 1999, to Rights Agreement, dated as of January 29, 1999 — Exhibit 4 to the Company’s Quarterly Report on Form 10-Q, for the period ending June 30, 1999.* | |
4.4(c) | Amendment No. 2, dated April 26, 2002, to Rights Agreement, dated as of January 29, 1999 — Exhibit 4 to the Company’s Quarterly Report on Form 10-Q for the period ending March 31, 2002.* | |
4.5 | Form of Rights Certificate (attached as Exhibit B to the Rights Agreement filed as Exhibit 4.4(a) hereto).* | |
4.6 | Revolving Credit Agreement, dated as of June 20, 2003 among Arch Chemicals, Inc., The Lenders Party hereto, JPMorgan Chase Bank, as Administrative Agent, J.P. Morgan Securities Inc., as Joint Lead Arranger and Joint Book Manager, Banc of America Securities, L.L.C., as Joint Lead Arranger and Joint Book Manager, Bank of America, National Association, as Documentation Agent, and Fleet National Bank, as Syndication Agent, — Exhibit 4 to the Company’s Quarterly Report on Form 10-Q for the period ending June 30, 2003.* | |
4.7 | Note Purchase Agreement, dated as of March 20, 2002, among the Company and the purchasers named therein, relating to the Company’s $149,000,000 Senior Notes, Series A, due March 20, 2007 and $62,000,000 Senior Notes, Series B, due March 20, 2009 — Exhibit 4.8 to the Company’s Annual Report on Form 10-K for the period ending December 31, 2001.* | |
10.1 | Distribution Agreement, dated as of February 1, 1999, between the Company and Olin — Exhibit 2 to the Company’s Current Report on Form 8-K, filed February 17, 1999.* | |
10.2 | Form of Employee Benefits Allocation Agreement between the Company and Olin — Exhibit 10.4 to the Company’s Annual Report on Form 10-K for the period ending December 31, 1998.* | |
10.3 | Form of Intellectual Property Transfer and License Agreement between the Company and Olin — Exhibit 10.9 to the Company’s Registration Statement on Form 10, as amended.* | |
10.4 | Form of Sublease between the Company and Olin — Exhibit 10.5 to the Company’s Registration Statement on Form 10, as amended.* | |
10.5 | Tax Sharing Agreement, dated as of February 8, 1999, between the Company and Olin — Exhibit 10.9 to the Company’s Annual Report on Form 10-K for the period ending December 31, 1998.* | |
10.6 | Charleston Services Agreement, dated as of February 8, 1999, between the Company and Olin — Exhibit 10.10 to the Company’s Annual Report on Form 10-K for the period ending December 31, 1998.* | |
10.7 | Form of Executive Agreement — Exhibit 10.12 to the Company’s Annual Report on Form 10-K for the period ending December 31, 1999.* | |
10.8 | 1999 Stock Plan for Non-employee Directors, as amended and restated January 30, 2003 — Exhibit 10.11 to the Company’s Annual Report on Form 10-K for the period ending December 31, 2002.* | |
10.9 | 1999 Long Term Incentive Plan, as amended October 28, 1999 and December 14, 2000 — Exhibit 10.14 to the Company’s Annual Report on Form 10-K for the period ending December 31, 2000.* | |
10.10 | Supplemental Contributing Employee Ownership Plan, as amended and restated January 30, 2003. | |
10.11 | Supplementary and Deferral Benefit Pension Plan, as amended July 29, 1999 — Exhibit 10.16 to the Company’s Annual Report on Form 10-K for the period ending December 31, 1999.* | |
10.12 | Senior Executive Pension Plan, as amended and restated as of October 23, 2003. | |
10.13 | Employee Deferral Plan, as amended and restated January 30, 2003. | |
10.14 | Key Executive Death Benefits — Exhibit 10.19 to the Company’s Registration Statement on Form 10, as amended.* | |
10.15 | Form of Endorsement Split Dollar Agreement — Exhibit 10.20 to the Company’s Registration Statement on Form 10, as amended.* | |
10.16 | Arch Chemicals, Inc. Annual Incentive Plan, as amended December 9, 1999 and April 27, 2000 — Exhibit 10.21 to the Company’s Annual Report on Form 10-K for the period ending December 31, 2000.* | |
10.17 | Senior Management Incentive Compensation Plan, as amended January 27, 2000 — Exhibit 10.22 to the Company’s Annual Report on Form 10-K for the period ending December 31, 1999.* | |
10.17(a) | Tier II Change in Control Agreement, dated January 3, 2000, between Arch Chemicals, Inc. and Philippe Gouby — Exhibit 10.4 to the Company’s Quarterly Report on Form 10-Q for the period ending March 31, 2004.* |
4
10.18(a) | Receivables Sale Agreement, dated as of March 19, 2002, between the Company, Arch Specialty Chemicals, Inc., Arch Chemicals Specialty Products, Inc., Arch Electronic Chemicals, Inc., Arch Wood Protection, Inc., Arch Personal Care Products, L.P., and Arch Chemicals Receivables Corp. — Exhibit 10.25(a) to the Company’s Annual Report on Form 10-K for the period ending December 31, 2001.* | |
10.18(b) | Receivables Purchase Agreement, dated as of March 19, 2002, between Arch Chemicals Receivables Corp., the Company, Blue Ridge Asset Funding Corporation and Wachovia Bank, N.A., as agent — Exhibit 10.25(b) to the Company’s Annual Report on Form 10-K for the period ending December 31, 2001.* | |
10.18(c) | First Amendment, dated as of April 10, 2002, to Receivables Purchase Agreement, dated as of March 19, 2002, among Arch Chemicals Receivables Corp., Arch Chemicals, Inc., Blue Ridge Asset Funding Corporation, and Wachovia Bank, National Association — Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the period ending March 31, 2002.* | |
10.18(d) | Second Amendment, dated as of May 15, 2002, to Receivables Purchase Agreement, dated as of March 19, 2002, among Arch Chemicals Receivables Corp., Arch Chemicals, Inc., Blue Ridge Asset Funding Corporation and Wachovia Bank, National Association — Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the period ending June 30, 2002.* | |
10.18(e) | Third Amendment, dated as of March 18, 2003, to Receivables Purchase Agreement, dated as of March 19, 2002, among Arch Chemicals Receivables Corp., Arch Chemicals, Inc., Blue Ridge Asset Funding Corporation and Wachovia Bank, National Association. | |
21. | List of Subsidiaries. | |
23. | Consent of independent auditors. | |
23.1** | Consent of KPMG Azsa & Co. | |
31.1** | Certification of Chief Executive Officer pursuant to Rule 13a-14(a). | |
31.2** | Certification of Chief Financial Officer pursuant to Rule 13a-14(a). | |
32** | Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. 1350. |
* | Previously filed as indicated and incorporated herein by reference. Exhibits incorporated by reference are located in SEC File No. 1-14601 unless otherwise indicated. |
** | Filed with Amendment No. 1 to Company’s Annual Report on Form 10-K for the period ending December 31, 2003. |
(b)Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended December 31, 2003, except for a Form 8-K filed October 28, 2003 with respect to Item 7.
5
FUJIFILM ARCH CO., LTD. AND SUBSIDIARIES
Consolidated Financial Statements
March 31, 2003 (Unaudited) and 2004
(With Independent Auditors’ Report Thereon)
| ||||||
KPMG AZSA & Co. | ||||||
Marunouchi Trust Tower North 10F | Tel +81-3-5218-6300 | |||||
8-1, Marunouchi, 1-Chrome | Fax +81-3-5218-6301 | |||||
Chiyoda-ku, Tokyo 100-8250, Japan |
Independent Auditors’ Report
The Board of Directors and Stockholders
FUJIFILM Arch Co., Ltd.:
We have audited the accompanying consolidated balance sheet of FUJIFILM Arch Co., Ltd. (a Japanese corporation) and subsidiaries as of March 31, 2004, and the related consolidated statements of income, stockholders’ equity and comprehensive income, and cash flows for the year then ended. 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 audit.
We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether 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 made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides 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 FUJIFILM Arch Co., Ltd. and subsidiaries as of March 31, 2004, and the results of their operations and their cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America.
The accompanying consolidated financial statements as of and for the year ended March 31, 2004 have been translated into United States dollars solely for the convenience of the reader. We have recomputed the translation and, in our opinion, the consolidated financial statements expressed in yen have been translated into dollars on the basis set forth in note 2 of the consolidated financial statements.
Tokyo, Japan
June 4, 2004
KPMG AZSA & Co., an audit corporation incorporated under the Japanese Certified Public Accountants Law, is the Japan member firm of KPMG International, a Swiss cooperative. |
FUJIFILM ARCH CO., LTD. AND SUBSIDIARIES
Consolidated Balance Sheets
March 31, 2003 (unaudited) and 2004
(Unaudited) 2003 | 2004 | ||||||||||
(Thousands of yen) | (U.S. dollars) | ||||||||||
Assets | |||||||||||
Current assets: | |||||||||||
Cash and cash equivalents | ¥ | 2,675,300 | 2,659,622 | $ | 25,164,367 | ||||||
Accounts and notes receivable: | |||||||||||
Trade | 3,500,260 | 5,067,522 | 47,947,033 | ||||||||
Notes | 1,187,776 | 1,441,283 | 13,636,891 | ||||||||
FUJI and its subsidiaries (note 4) | 17,226 | 27,265 | 257,972 | ||||||||
Arch and its subsidiaries (note 4) | 246,579 | 696,350 | 6,588,608 | ||||||||
Allowance for doubtful accounts | (14,200 | ) | (25,328 | ) | (239,644 | ) | |||||
Net accounts and notes receivable | 4,937,641 | 7,207,092 | 68,190,860 | ||||||||
Inventories (note 3) | 1,626,931 | 2,162,967 | 20,465,200 | ||||||||
Deferred tax assets (note 8) | 211,804 | 305,710 | 2,892,516 | ||||||||
Other current assets | 200,526 | 388,415 | 3,675,041 | ||||||||
Total current assets | 9,652,202 | 12,723,806 | 120,387,984 | ||||||||
Property, plant, and equipment: | |||||||||||
Land | 212,060 | 207,106 | 1,959,561 | ||||||||
Buildings | 3,362,901 | 5,040,387 | 47,690,292 | ||||||||
Machinery and equipment | 7,528,584 | 7,968,472 | 75,394,758 | ||||||||
Vehicle, tools, furniture and fixtures | 2,640,485 | 2,412,099 | 22,822,396 | ||||||||
Construction in progress | 36,101 | 531,727 | 5,031,006 | ||||||||
13,780,131 | 16,159,791 | 152,898,013 | |||||||||
Less accumulated depreciation and amortization | (7,925,191 | ) | (8,574,731 | ) | (81,130,958 | ) | |||||
Net property, plant, and equipment | 5,854,940 | 7,585,060 | 71,767,055 | ||||||||
Deferred tax assets (note 8) | 71,204 | 69,008 | 652,928 | ||||||||
Other assets (note 9) | 186,437 | 352,021 | 3,330,693 | ||||||||
Total assets | ¥ | 15,764,783 | 20,729,895 | $ | 196,138,660 | ||||||
See accompanying notes to consolidated financial statements.
F-2
FUJIFILM ARCH CO., LTD. AND SUBSIDIARIES
Consolidated Balance Sheets
March 31, 2003 (unaudited) and 2004
(Unaudited) 2003 | 2004 | ||||||||
(Thousands of yen) | (U.S. dollars) | ||||||||
Liabilities and Stockholders’ Equity | |||||||||
Current liabilities: | |||||||||
Short-term loans (notes 4 and 6): | |||||||||
Banks | ¥ | 2,584,232 | 1,065,811 | $ | 10,084,312 | ||||
FUJI | 300,000 | 900,000 | 8,515,470 | ||||||
2,884,232 | 1,965,811 | 18,599,782 | |||||||
Current installments of long-term debt (notes 4 and 7) | 240,000 | 780,000 | 7,380,074 | ||||||
Accounts and notes payable: | |||||||||
Trade | 567,333 | 1,289,820 | 12,203,804 | ||||||
FUJI and its subsidiaries (note 4) | 3,240,811 | 4,756,415 | 45,003,453 | ||||||
Arch and its subsidiaries (note 4) | 196,772 | 195,564 | 1,850,355 | ||||||
Other | 1,898,867 | 1,808,319 | 17,109,651 | ||||||
5,903,783 | 8,050,118 | 76,167,263 | |||||||
Income taxes payable | 697,628 | 1,054,672 | 9,978,919 | ||||||
Accrued expenses and other liabilities (note 5) | 874,961 | 1,240,407 | 11,736,276 | ||||||
Total current liabilities | 10,600,604 | 13,091,008 | 123,862,314 | ||||||
Long-term debt, excluding current installments (notes 4 and 7) | 750,000 | 1,650,000 | 15,611,695 | ||||||
Other liabilities (notes 5 and 9) | 297,615 | 183,666 | 1,737,780 | ||||||
Total liabilities | 11,648,219 | 14,924,674 | 141,211,789 | ||||||
Stockholders’ equity (notes 8 and 11): | |||||||||
Common stock, no par value. Authorized 20,000 shares; issued and outstanding 9,800 shares | 490,000 | 490,000 | 4,636,200 | ||||||
Legal reserve | 122,500 | 122,500 | 1,159,050 | ||||||
Retained earnings | 3,543,629 | 5,184,505 | 49,053,884 | ||||||
Accumulated other comprehensive income | (39,565 | ) | 8,216 | 77,737 | |||||
Total stockholders’ equity | 4,116,564 | 5,805,221 | 54,926,871 | ||||||
Commitments and contingencies (notes 5 and 12) | |||||||||
Total liabilities and stockholders’ equity | ¥ | 15,764,783 | 20,729,895 | $ | 196,138,660 | ||||
See accompanying notes to consolidated financial statements.
F-3
FUJIFILM ARCH CO., LTD. AND SUBSIDIARIES
Consolidated Statements of Income
Years ended March 31, 2002 (unaudited), 2003 (unaudited) and 2004
(Unaudited) | ||||||||||||||
2002 | 2003 | 2004 | ||||||||||||
(Thousands of yen) | (U.S. dollars) | |||||||||||||
Revenues: | ||||||||||||||
Products sales | ||||||||||||||
Third parties | ¥ | 7,641,922 | 10,035,335 | 12,822,056 | $ | 121,317,589 | ||||||||
FUJI and subsidiaries (note 4) | 174,922 | 201,087 | 126,133 | 1,193,424 | ||||||||||
ARCH and subsidiaries (note 4) | 348,372 | 620,040 | 1,195,863 | 11,314,817 | ||||||||||
Total net sales of products | 8,165,216 | 10,856,462 | 14,144,052 | 133,825,830 | ||||||||||
Merchandise sales: | ||||||||||||||
Third parties | 2,204,873 | 6,485,225 | 11,677,068 | 110,484,133 | ||||||||||
ARCH and subsidiaries (note 4) | 72,086 | 219,393 | 316,211 | 2,991,873 | ||||||||||
Total net sales of merchandise | 2,276,959 | 6,704,618 | 11,993,279 | 113,476,006 | ||||||||||
Total net sales | 10,442,175 | 17,561,080 | 26,137,331 | 247,301,836 | ||||||||||
Other (note 4) | 65,035 | 18,463 | 35,940 | 340,051 | ||||||||||
Total revenues | 10,507,210 | 17,579,543 | 26,173,271 | 247,641,887 | ||||||||||
Costs and expenses: | ||||||||||||||
Cost of goods sold (note 4): | ||||||||||||||
Cost of goods sold – products | 5,445,570 | 6,205,514 | 7,272,370 | 68,808,497 | ||||||||||
Cost of goods sold – merchandise | 2,118,954 | 6,411,604 | 11,524,716 | 109,042,634 | ||||||||||
Total cost of goods sold | 7,564,524 | 12,617,118 | 18,797,086 | 177,851,131 | ||||||||||
Selling, general, and administrative expenses (note 4) | 2,568,264 | 2,815,332 | 3,627,196 | 34,319,197 | ||||||||||
Loss on settlement of governmental pension plan (note 9) | — | 3,246 | — | — | ||||||||||
Loss on disposal of property, plant and equipment | 25,127 | 10,901 | 125,785 | 1,190,132 | ||||||||||
Interest expense (note 4) | 70,851 | 56,972 | 37,000 | 350,080 | ||||||||||
Foreign currency transaction (gain) loss, net | (18,136 | ) | 72,229 | 144,850 | 1,370,518 | |||||||||
Other | 25,050 | 26,678 | 29,096 | 275,295 | ||||||||||
Total costs and expenses | 10,235,680 | 15,602,476 | 22,761,013 | 215,356,353 | ||||||||||
Income before income taxes | 271,530 | 1,977,067 | 3,412,258 | 32,285,534 | ||||||||||
Income taxes (note 8) | ||||||||||||||
Current | 101,144 | 753,336 | 1,379,086 | 13,048,406 | ||||||||||
Deferred | 12,576 | (44,838 | ) | (91,824 | ) | (868,804 | ) | |||||||
Net income | ¥ | 157,810 | 1,268,569 | 2,124,996 | $ | 20,105,932 | ||||||||
See accompanying notes to consolidated financial statements.
F-4
FUJIFILM ARCH CO., LTD. AND SUBSIDIARIES
Consolidated Statements of Stockholders’ Equity and Comprehensive Income
Years ended March 31, 2002 (unaudited), 2003 (unaudited) and 2004
Common stock | Legal reserve | Retained earnings | Accumulated other comprehensive income | Total stockholders’ equity | ||||||||||
(Thousands of yen) | ||||||||||||||
Balances at April 1, 2001(unaudited) | ¥ | 490,000 | 122,500 | 2,665,070 | 21,179 | 3,298,749 | ||||||||
Net income | — | — | 157,810 | — | 157,810 | |||||||||
Net unrealized change in: | ||||||||||||||
Translation adjustments | — | — | — | 5,482 | 5,482 | |||||||||
Comprehensive income | — | — | — | — | 163,292 | |||||||||
Dividends declared, ¥46,300 per share | — | — | (453,740 | ) | — | (453,740 | ) | |||||||
Balances at April 1, 2002 (unaudited) | 490,000 | 122,500 | 2,369,140 | 26,661 | 3,008,301 | |||||||||
Net income | — | — | 1,268,569 | — | 1,268,569 | |||||||||
Net unrealized change in: | ||||||||||||||
Translation adjustments | — | — | — | (66,226 | ) | (66,226 | ) | |||||||
Comprehensive income | — | — | — | — | 1,202,343 | |||||||||
Dividends declared, ¥9,600 per share | — | — | (94,080 | ) | — | (94,080 | ) | |||||||
Balances at April 1, 2003 (unaudited) | 490,000 | 122,500 | 3,543,629 | (39,565 | ) | 4,116,564 | ||||||||
Net income | — | — | 2,124,996 | — | 2,124,996 | |||||||||
Net unrealized change in: | ||||||||||||||
Translation adjustments | — | — | — | 47,781 | 47,781 | |||||||||
Comprehensive income | — | — | — | — | 2,172,777 | |||||||||
Dividends declared, ¥49,400 per share | — | — | (484,120 | ) | — | (484,120 | ) | |||||||
Balances at March 31, 2004 | ¥ | 490,000 | 122,500 | 5,184,505 | 8,216 | 5,805,221 | ||||||||
Common stock | Legal reserve | Retained earnings | Accumulated other comprehensive income | Total Stockholders’ Equity | ||||||||||
(U.S. dollars) | ||||||||||||||
Balances at April 1, 2003 | $ | 4,636,200 | 1,159,050 | 33,528,518 | (374,350 | ) | 38,949,418 | |||||||
Net income | — | — | 20,105,932 | — | 20,105,932 | |||||||||
Net unrealized change in: | ||||||||||||||
Translation adjustments | — | — | — | 452,087 | 452,087 | |||||||||
Comprehensive income | — | — | — | — | 20,558,019 | |||||||||
Dividends declared, $464 per share | — | — | (4,580,566 | ) | — | (4,580,566 | ) | |||||||
Balances at March 31, 2004 | $ | 4,636,200 | 1,159,050 | 49,053,884 | 77,737 | 54,926,871 | ||||||||
See accompanying notes to consolidated financial statements.
F-5
FUJIFILM ARCH CO., LTD. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended March 31, 2002 (unaudited), 2003 (unaudited) and 2004
(Unaudited) | ||||||||||||||
2002 | 2003 | 2004 | ||||||||||||
(Thousands of yen) | (U.S. dollars) | |||||||||||||
Cash flows from operating activities: | ||||||||||||||
Net income | ¥ | 157,810 | 1,268,569 | 2,124,996 | $ | 20,105,932 | ||||||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||||
Depreciation and amortization | 1,028,974 | 1,103,502 | 1,444,238 | 13,664,850 | ||||||||||
Provision for deferred income taxes | 12,576 | (44,838 | ) | (91,824 | ) | (868,805 | ) | |||||||
Loss on disposal of property, plant and equipment | 19,134 | 10,192 | 123,906 | 1,172,353 | ||||||||||
Changes in operating assets and liabilities: | — | |||||||||||||
Notes and accounts receivable | (902,834 | ) | (1,344,961 | ) | (2,237,663 | ) | (21,171,946 | ) | ||||||
Inventories | 173,253 | (316,860 | ) | (539,911 | ) | (5,108,440 | ) | |||||||
Other current assets | 21,833 | 3,452 | (387,325 | ) | (3,664,727 | ) | ||||||||
Notes and accounts payable | 489,419 | 1,447,685 | 2,258,022 | 21,364,576 | ||||||||||
Income taxes payable | (88,251 | ) | 608,103 | 358,645 | 3,393,367 | |||||||||
Accrued expenses and other current liabilities | (87,101 | ) | 47,860 | 274,107 | 2,593,500 | |||||||||
Other | 42,280 | 51,917 | 180,853 | 1,711,165 | ||||||||||
Net cash provided by operating activities | 867,093 | 2,834,621 | 3,508,044 | 33,191,825 | ||||||||||
Cash flows from investing activities: | ||||||||||||||
Capital expenditures | (913,597 | ) | (849,174 | ) | (3,330,658 | ) | (31,513,464 | ) | ||||||
Other | (108,060 | ) | (31,578 | ) | (146,173 | ) | (1,383,035 | ) | ||||||
Net cash used in investing activities | (1,021,657 | ) | (880,752 | ) | (3,476,831 | ) | (32,896,499 | ) | ||||||
Cash flows from financing activities: | ||||||||||||||
Proceeds from issuance of short-term loans from FUJI | 300,000 | 300,000 | 900,000 | 8,515,470 | ||||||||||
Proceeds from issuance of short-term loans from banking facilities | 2,896,191 | 6,487,765 | 3,466,756 | 32,801,173 | ||||||||||
Principal payments on short-term debt to FUJI | (300,000 | ) | (300,000 | ) | (300,000 | ) | (2,838,490 | ) | ||||||
Principal payments on short-term debt to banking facilities | (3,092,626 | ) | (7,045,177 | ) | (4,983,445 | ) | (47,151,528 | ) | ||||||
Proceeds from issuance of long-term debt from FUJI | 600,000 | 300,000 | 1,760,000 | 16,652,474 | ||||||||||
Principal payments on long-term debt to FUJI | (360,000 | ) | (410,000 | ) | (230,000 | ) | (2,176,176 | ) | ||||||
Principal payments on long-term debt to banking facilities | (184,000 | ) | (164,000 | ) | (90,000 | ) | (851,547 | ) | ||||||
Principal payments on under capital lease obligations | (47,486 | ) | (86,691 | ) | (83,518 | ) | (790,217 | ) | ||||||
Dividends paid | (453,740 | ) | (94,080 | ) | (484,120 | ) | (4,580,566 | ) | ||||||
Net cash used in financing activities | (641,661 | ) | (1,012,183 | ) | (44,327 | ) | (419,407 | ) | ||||||
Effect of changes in exchange rate on cash and cash equivalents | 7,524 | (15,393 | ) | (2,564 | ) | (24,258 | ) | |||||||
Net increase (decrease) in cash and cash equivalents | (788,701 | ) | 926,293 | (15,678 | ) | (148,339 | ) | |||||||
Cash and cash equivalents at beginning of year | 2,537,708 | 1,749,007 | 2,675,300 | 25,312,706 | ||||||||||
Cash and cash equivalents at end of year | ¥ | 1,749,007 | 2,675,300 | 2,659,622 | $ | 25,164,367 | ||||||||
Supplemental disclosures of cash flow information: | ||||||||||||||
Cash paid for: | ||||||||||||||
Interest | ¥ | 103,186 | 42,992 | 46,536 | $ | 440,307 | ||||||||
Income taxes | 282,180 | 142,339 | 1,030,148 | 9,746,882 | ||||||||||
Non cash investing and financing activities: | ||||||||||||||
Increase in property, plant, and equipment through lease obligations | ¥ | — | 274,748 | — | — |
See accompanying notes to consolidated financial statements.
F-6
FUJIFILM ARCH CO., LTD. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 2003 (Unaudited) and 2004
(1) | Description of Business, Basis of Financial Statements and Summary of Significant Accounting Policies and Practices |
(a) | Description of Business |
FUJIFILM Arch Co., Ltd. (the Company) was incorporated in Japan on July 29, 1983 under a joint venture agreement between Fuji Photo Film Co., Ltd. (FUJI) and Arch Specialty Chemicals, Inc. (ASC), (a subsidiary of Arch Chemicals, Inc. (ARCH) which was spun off from Olin Corporation, a former shareholder, and became independent on February 9, 1999). FUJI has a 51% ownership interest and ASC has a 49% ownership interest in the Company.
The Company manufactures and distributes photo-resist products for semiconductor devices and color resist products for color filter array incorporated in flat panel display devices and color imaging devices. The Company also distributes FUJI TAC WV films for liquid crystal display panels and other microelectronic materials used in the manufacturing process for semiconductor devices, color filter array, photo-mask making and printed wire board. The Company has a manufacturing plant in Japan and wholly owned subsidiaries in Taiwan and Korea, which have been established for on-site production and reinforcement of marketing activities.
Total revenue consisted of photo-resist products, color resist products, FUJI TAC WV films and other microelectronic materials, representing 31%, 46%, 13%, and 10%, representing 25%, 37%, 30%, and 8%, and representing 22%, 32%, 39%, and 7%, respectively, of the total for the years ended March 31, 2002 (unaudited), 2003 (unaudited), and 2004. Approximately 57%, 65%, and 70% of the revenues were generated outside Japan, principally in the following Asian countries, Taiwan, Korea, China, and Singapore for the years ended March 31, 2002 (unaudited), 2003 (unaudited), and 2004, respectively.
(b) | Basis of Financial Statements |
The accompanying consolidated financial statements as of March 31, 2003 and for the years ended March 31, 2002 and 2003, and the related notes herein are unaudited and, in the opinion of management, include all necessary adjustments for the fair presentation of the Company’s financial position, results of operations and cash flows in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP) and are consistent in all material respects with those applied in the Company’s consolidated financial statements as of and for the year ended March 31, 2004. The Company maintains its book of accounts in conformity with financial accounting standards of Japan, and its foreign subsidiaries generally maintain their book of accounts in conformity with those of the countries of their domicile. The consolidated financial statements presented herein have been prepared in a manner and reflect certain adjustments which are necessary to conform them with U.S. GAAP. The major adjustments include those related to accounting for leases, post retirement benefits and accruals for certain expenses.
(c) | Principles of Consolidation |
The consolidated financial statements include the financial statements of FUJIFILM Arch Co., Ltd., and its wholly owned subsidiaries. All significant inter-company balances and transactions have been eliminated in consolidation.
F-7 | (Continued) |
FUJIFILM ARCH CO., LTD. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 2003 (Unaudited) and 2004
(d) | Foreign Currency Translation |
The Company’s foreign subsidiaries use the local currency as their functional currency. Accordingly, assets and liabilities are translated into the reporting currency, using exchange rates in effect at the balance sheet date and income and expenses are translated using the average exchange rate prevailing during the year. Adjustments resulting from this translation process are accumulated in other comprehensive income (loss), a separate component of stockholders’ equity. Foreign currency receivables and payables are translated at the applicable current rates on the balance sheet date. All revenue and expenses associated with foreign currencies are converted at the rates of exchange prevailing when such transactions occur. The resulting exchange gains or losses are reflected in foreign currency transaction (gain) or loss, net in the consolidated statements of income.
(e) | Cash Equivalents |
For purposes of the consolidated statements of cash flows, the Company considers all highly liquid debt instruments with original maturities of three months or less to be cash equivalents.
(f) | Notes and Trade Accounts Receivable |
Trade accounts receivable are recorded at the invoiced amount and do not bear interest. Notes receivable are accepted as promissory notes in settlement for trade accounts receivable and also do not bear interest. The allowance for doubtful accounts is the Company’s best estimate of the amount of probable credit losses in the Company’s existing accounts receivable. The Company determines the allowance based on past actual rates of bad debt losses over receivables as for general receivables and by examining the underlying financial conditions as for receivables from companies that have or will have serious problems in settlement of their payables and from bankrupted or substantially bankrupted companies. The Company does not have any off-balance-sheet credit exposure related to its customers.
(g) | Inventories |
Inventories are stated at the lower of cost or market. The cost is determined principally on the average cost method. Elements of costs in inventories include raw materials, direct labor, and manufacturing overhead.
(h) | Property, Plant, and Equipment |
Property, plant, and equipment are stated at cost. Plant and equipment under capital leases are stated at the present value of minimum lease payments.
Depreciation on plant and equipment is calculated on the declining balance method, and depreciation on buildings is calculated on the straight-line method, over the estimated useful lives of the assets. The estimated useful lives of property, plant, and equipment are as follows:
Buildings | 5 – 40 years | |
Machinery and equipment | 3 – 12 years | |
Vehicles, tools, furniture and fixtures | 3 – 8 years |
F-8 | (Continued) |
FUJIFILM ARCH CO., LTD. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 2003 (Unaudited) and 2004
Plant and equipment held under capital leases are amortized on the declining-balance method over estimated useful lives of the assets.
Total depreciation for the years ended March 31, 2002 (unaudited), 2003 (unaudited), and 2004, was ¥1,028,974 thousand, ¥1,054,217 thousand, and ¥1,365,243 thousand ($12,917,428), respectively.
(i) | Research and Development |
Research and development are expensed as incurred. Research and development costs amounted to ¥1,351,570 thousand, ¥1,513,604 thousand, and ¥2,119,222 thousand ($20,051,301) for the years ended March 31, 2002 (unaudited), 2003 (unaudited), and 2004, respectively, and are included in selling, general, and administrative expenses in the consolidated statements of income.
(j) | Income Taxes |
Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
(k) | Use of Estimates |
The preparation of the consolidated financial statements requires management of the Company to make a number of estimates and assumptions relating to the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the period. Significant items subject to such estimates and assumptions include the carrying amount of property, plant and equipment; valuation allowances for receivables, inventories, and deferred income tax assets, and assets and obligations related to employee benefits. Actual results could differ from those estimates.
(l) | Revenue Recognition |
The Company recognizes revenue when products are shipped and the customer takes ownership and assumes risk of loss, collection of the relevant receivable is probable, persuasive evidence of an arrangement exists and the sales price is fixed or determinable.
In the normal course of business, the Company frequently acts an intermediary or agent in executing transactions with third parties. In these arrangements, the Company determines whether to report revenue based on the “gross” amount billed to the ultimate customer for goods or services provided or on the “net” amount received from the customer after commissions and other payments to third parties. However, the amount of gross profit and net income are not affected by whether revenue is reported on a gross or net basis. Determining whether revenue should be reported gross or net is based on an assessment of whether the Company is acting as a “principal” or an “agent” in a transaction. Accordingly, to the extent that the Company is principal in a transaction, the Company reports revenue on a gross basis and to the extent that the Company acts as an agent in a transaction, the Company reports revenue on a net basis. The determination of whether the Company is acting as a principal or an agent in a transaction involves judgment and is based on an evaluation of the terms of an arrangement.
F-9 | (Continued) |
FUJIFILM ARCH CO., LTD. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 2003 (Unaudited) and 2004
(m) | Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of |
The Company’s long-lived assets and certain identifiable intangibles are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows (undiscounted and without interest charges) expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of by sale are reported at the lower of the carrying amount or fair value less costs to sell.
(n) | Employee Retirement Benefit |
The measurement of pension costs and liabilities is determined in accordance with SFAS No. 87,Employers’ Accounting for Pensions. Under SFAS No. 87, changes in the amount of either the projected benefit obligation or plan assets resulting from actual results different from that assumed and from changes in assumptions can result in gains and losses not yet recognized in the consolidated financial statements. Amortization of an unrecognized net gain or loss is included as a component of the net periodic benefit plan cost for a year if, as of the beginning of the year, that unrecognized net gain or loss exceeds 10% of the greater of (1) the projected benefit obligation or (2) the fair value of that plan’s assets. In such case, the amount of amortization recognized is the resulting excess divided by the average remaining service period of active employees expected to receive benefits under the plan. The expected long-term rate of return on plan assets used for pension accounting is determined based on the historical long-term rate of return on plan assets. The discount rate is determined based on the rates of return of high-quality fixed-income investments currently available and expected to be available during the period to maturity of the pension benefits.
(2) | US Dollar Amounts |
Solely for the convenience of the reader, the amounts in the consolidated financial statements as of and for the year ended March 31, 2004 have been translated from Japanese yen, reporting currency, into U.S. dollars at the rate of ¥105.69 = U.S. $1.00, the exchange rate prevailing on March 31, 2004. The translation should not be construed as a representation that Japanese yen could be converted into U.S. dollars at this rate.
F-10 | (Continued) |
FUJIFILM ARCH CO., LTD. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 2003 (Unaudited) and 2004
(3) | Inventories |
Inventories at March 31, 2003 (unaudited) and 2004, consisted of the following:
(Unaudited) 2003 | 2004 | 2004 | ||||||
(Thousands of yen) | (U.S. dollars) | |||||||
Merchandise goods | ¥ | 225,473 | 479,619 | $ | 4,537,979 | |||
Finished goods | 471,157 | 520,244 | 4,922,358 | |||||
Work in process | 362,928 | 411,380 | 3,892,327 | |||||
Raw materials | 426,071 | 586,521 | 5,549,446 | |||||
Packaging materials | 141,302 | 165,203 | 1,563,090 | |||||
¥ | 1,626,931 | 2,162,967 | $ | 20,465,200 | ||||
(4) | Related Party |
In conducting its business, the Company has executed various agreements with FUJI and ASC. These agreements provide for royalty payments by the Company, principally as follows:
(a) | Under a tripartite agreement among the Company, ASC and FUJI for licensing certain technology on photo-resist products, which allows the Company to manufacture and distribute the products by using technical information and patents both ASC and FUJI have, the Company is liable to pay the royalty on net sales of the products to ASC and FUJI. The royalty agreement is effective through June 6, 2006. |
(b) | Under a royalty agreement with FUJI in relation to the technology license agreement on color resist products, which have colored photosensitive liquid compositions containing pigment or dye, the Company and subsidiaries are liable to pay a royalty on net sales of the products. The royalty agreement is effective thorough March 29, 2008. |
(c) | Under a royalty agreement with ARCH in relation to the technology license agreement on polyimide products, the Company is liable to pay a royalty to ARCH on net sales of the products manufactured in its facility. In relation to the articles of the agreement for technical alliance, which the Company provides technical supports on both facilities’ products in the Company’s sales territory, ARCH is liable to pay sales commissions to the Company on sales of the products which are directly sold to the customers by ARCH in the Company’s sales territory. The royalty agreement is effective through August 2012. |
The Company purchases raw materials used in their manufacturing operations and merchandise that it distributes from FUJI and Arch and their subsidiaries. The Company also sells its manufactured products to both FUJI and ARCH and their subsidiaries. The Company leases land and a portion of a building at its manufacturing facility from FUJI and a warehouse from one of FUJI’s subsidiaries. These transaction prices and expenses are the arms-length price.
F-11 | (Continued) |
FUJIFILM ARCH CO., LTD. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 2003 (Unaudited) and 2004
The following table is a summary of balances of receivables and payables as of March 31, 2003 (unaudited) and 2004 and transactions during the years ended March 31, 2002 (unaudited), 2003 (unaudited) and 2004:
(Unaudited) 2003 | 2004 | 2004 | ||||||
(Thousands of yen) | (U.S. dollars) | |||||||
Accounts receivable: | ||||||||
FUJI and its subsidiaries | ¥ | 17,226 | 27,265 | $ | 257,972 | |||
ARCH and its subsidiaries | 246,579 | 696,350 | 6,588,608 | |||||
Accounts payable: | ||||||||
FUJI and its subsidiaries | ¥ | 3,240,811 | 4,756,415 | $ | 45,003,453 | |||
ARCH and its subsidiaries | 196,772 | 195,564 | 1,850,355 | |||||
Short-term loans – FUJI (note 6) | ¥ | 300,000 | 900,000 | $ | 8,515,470 | |||
Long-term loans – FUJI (note 7) | 900,000 | 2,430,000 | 22,991,769 |
(Unaudited) | ||||||||||
2002 | 2003 | 2004 | 2004 | |||||||
(Thousands of yen) | (U.S. dollars) | |||||||||
FUJI and its subsidiaries: | ||||||||||
Sales | ¥ | 174,922 | 201,087 | 126,133 | $ | 1,193,424 | ||||
Royalty revenue | 49,711 | — | — | — | ||||||
Inventory purchases | 2,123,025 | 6,034,137 | 11,382,922 | 107,701,031 | ||||||
Royalty expenses | 215,897 | 288,293 | 281,966 | 2,667,859 | ||||||
Building and land leases payments (note 5) | 99,489 | 100,739 | 159,137 | 1,505,696 | ||||||
Interest expense | 9,612 | 9,579 | 16,851 | 159,438 | ||||||
Warehousing and related charges | 305,593 | 337,248 | 400,902 | 3,793,188 | ||||||
ARCH and its subsidiaries: | ||||||||||
Sales | ¥ | 420,458 | 839,433 | 1,512,074 | $ | 14,306,690 | ||||
Commission revenue | — | 3,915 | 8,993 | 85,088 | ||||||
Inventory purchases | 177,439 | 805,099 | 780,488 | 7,384,691 | ||||||
Royalty expenses | 46,037 | 53,166 | 68,622 | 649,276 |
F-12 | (Continued) |
FUJIFILM ARCH CO., LTD. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 2003 (Unaudited) and 2004
(5) | Leases |
The Company is obligated under capital leases covering certain equipment that expire at various dates during the next 6 years. At March 31, 2003 (unaudited) and 2004, the gross amount of equipment and related accumulated amortization included in property, plant, and equipment recorded under capital leases were as follows:
(Unaudited) 2003 | 2004 | 2004 | |||||||||
(Thousands of yen) | (U.S. dollars) | ||||||||||
Machinery and equipment | ¥ | 620,786 | 405,022 | $ | 3,832,170 | ||||||
Less accumulated amortization | (398,379 | ) | (283,465 | ) | (2,682,042 | ) | |||||
Net | ¥ | 222,407 | 121,557 | $ | 1,150,128 | ||||||
Amortization of assets held under capital leases is included with depreciation expense.
F-13 | (Continued) |
FUJIFILM ARCH CO., LTD. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 2003 (Unaudited) and 2004
Future minimum lease payments under noncancelable operating leases (with initial or remaining lease terms in excess of one year) and future minimum capital lease payments as of March 31, 2004 are:
Capital leases | Operating leases | |||||||||||||
(Thousands of yen) | (U.S. dollars) | (Thousands of yen) | (U.S. dollars) | |||||||||||
Year ending March 31: | ||||||||||||||
2005 | ¥ | 87,029 | $ | 823,436 | 433,353 | 4,100,227 | ||||||||
2006 | 59,440 | 562,399 | 427,871 | 4,048,358 | ||||||||||
2007 | 51,479 | 487,075 | 330,047 | 3,122,784 | ||||||||||
2008 | 7,065 | 66,846 | 236,161 | 2,234,469 | ||||||||||
2009 | 3,639 | 34,431 | 234,855 | 2,222,112 | ||||||||||
2010 | 2,426 | 22,955 | 233,400 | 2,208,345 | ||||||||||
Net minimum lease payments | 211,078 | 1,997,142 | ¥ | 1,895,687 | $ | 17,936,295 | ||||||||
Less amount representing interest (at rates ranging from 2.1% to 2.2%) | (6,586 | ) | (62,314 | ) | ||||||||||
Present value of net minimum capital lease payments | 204,492 | 1,934,828 | ||||||||||||
Less current installments of obligations under capital leases | 83,491 | 789,961 | ||||||||||||
Obligations under capital leases, excluding current installments | ¥ | 121,001 | $ | 1,144,867 | ||||||||||
The Company has no capital lease arrangements with related parties and has operating lease arrangements with related parties (note 4).
Rental expense under operating leases including those that are cancelable for the years ended March 31, 2002 (unaudited), 2003 (unaudited), and 2004 amounted to ¥248,280 thousand, ¥254,410 thousand and ¥241,258 thousand ($2,282,695), respectively, including rental payments made to FUJI and its subsidiaries (note 4).
Scheduled payments under operating leases for 2005 and 2006 reflect payments under leases that commenced in December 2003.
F-14 | (Continued) |
FUJIFILM ARCH CO., LTD. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 2003 (Unaudited) and 2004
(6) | Short -Term loans |
Short-term loans at March 31, 2003 (unaudited) and 2004 consists of the following:
(Unaudited) 2003 | 2004 | 2004 | ||||||
(Thousands of yen) | (U.S. dollars) | |||||||
Loans due to FUJI with interest rate at 0.42% through 0.44% (note 4) | ¥ | 300,000 | 900,000 | $ | 8,515,470 | |||
Unsecured bank loans | 1,284,232 | 965,811 | 9,138,149 | |||||
Overdraft | 1,300,000 | 100,000 | 946,163 | |||||
Net | ¥ | 2,884,232 | 1,965,811 | $ | 18,599,782 | |||
The weighted average annual interest rate on short-term loans outstanding at March 31, 2003 (unaudited) and 2004 was 0.76% and 0.66%, respectively.
(7) | Long -Term Loans |
Unsecured long-term loans payable at March 31, 2003 (unaudited) and 2004 consisted of the following:
(Unaudited) 2003 | 2004 | 2004 | ||||||
(Thousands of yen) | (U.S. dollars) | |||||||
Due July 2003, with interest rate 15 1.79% – SMBC | ¥ | 80,000 | — | $ | — | |||
Due July 2003, with interest rate at 1.75% – NLIC | 10,000 | — | — | |||||
Due September 2003, with interest rate at 1.24% – FUJI | 50,000 | — | — | |||||
Due September 2004, with interest rate at 0.62% – FUJI | 300,000 | 300,000 | 2,838,490 | |||||
Due March 2005, with interest rate at 0.78% – FUJI | 300,000 | 300,000 | 2,838,490 | |||||
Due March 2005, with interest rate at 0.52% – FUJI | — | 180,000 | 1,703,094 | |||||
Due September 2005, with interest rate at 0.59% – FUJI | 250,000 | 150,000 | 1,419,245 | |||||
Due March 2006, with interest rate at 0.61% – FUJI | — | 1,500,000 | 14,192,450 | |||||
Total | 990,000 | 2,430,000 | 22,991,769 | |||||
Less current portion | 240,000 | 780,000 | 7,380,074 | |||||
Long term loans excluding current portion | ¥ | 750,000 | 1,650,000 | $ | 15,611,695 | |||
SMBC: Sumitomo Mitsui Banking Corporation
NLIC: Nippon Life Insurance Company Ltd.
F-15 | (Continued) |
FUJIFILM ARCH CO., LTD. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 2003 (Unaudited) and 2004
The aggregate maturities of long-term debt for each of the two years subsequent to March 31, 2004 are: ¥780,000 thousand ($7,380,074) in 2005 and ¥1,650,000 thousand ($15,611,695) in 2006.
(8) | Income Taxes |
The Company is subject to a national corporate tax of 30%, an inhabitant tax of 6.15% and a deductible business tax of 10.08%, which in the aggregate resulted in a statutory income tax rate of approximately 42% for each of the years in the three-year period ended March 31, 2004. On March 24, 2003, the Japanese Diet approved the Amendments to Local Tax Law, which reduces standard business tax rates from 9.60% to 7.68% and levies an additional business tax based on corporate size. The amendment will be effective for fiscal years beginning on or after April 1, 2004. Consequently, the statutory income tax rate will be lowered to approximately 40.4% for deferred tax assets and liabilities expected to be settled or realized on or after April 1, 2004. The foreign subsidiaries are subject to taxes based on income at rates from 25% to 29.7%.
F-16 | (Continued) |
FUJIFILM ARCH CO., LTD. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 2003 (Unaudited) and 2004
Domestic and foreign components of income before income tax expense and current and deferred income tax expenses (benefits) for the years ended March 31, 2002 (unaudited), 2003 (unaudited), and 2004 are as follows:
Domestic | Foreign | Total | ||||||||
(Thousands of yen) | ||||||||||
2002 (unaudited): | ||||||||||
Income (loss) before income taxes | ¥ | 287,564 | (16,034 | ) | 271,530 | |||||
Income taxes: | ||||||||||
Current | ¥ | 100,000 | 1,144 | 101,144 | ||||||
Deferred | (8,722 | ) | 21,298 | 12,576 | ||||||
¥ | 91,278 | 22,442 | 113,720 | |||||||
Domestic | Foreign | Total | ||||||||
(Thousands of yen) | ||||||||||
2003 (unaudited): | ||||||||||
Income before income taxes | ¥ | 1,708,623 | 268,444 | 1,977,067 | ||||||
Income taxes: | ||||||||||
Current | ¥ | 750,000 | 3,336 | 753,336 | ||||||
Deferred | (47,643 | ) | 2,805 | (44,838 | ) | |||||
¥ | 702,357 | 6,141 | 708,498 | |||||||
Domestic | Foreign | Total | ||||||||
(Thousands of yen) | ||||||||||
2004: | ||||||||||
Income before income taxes | ¥ | 2,970,833 | 441,425 | 3,412,258 | ||||||
Income taxes: | ||||||||||
Current | ¥ | 1,273,692 | 105,394 | 1,379,086 | ||||||
Deferred | (105,734 | ) | 13,910 | (91,824 | ) | |||||
¥ | 1,167,958 | 119,304 | 1,287,262 | |||||||
Domestic | Foreign | Total | ||||||||
(U.S. dollars) | ||||||||||
2004: | ||||||||||
Income before income taxes | $ | 28,108,932 | 4,176,602 | 32,285,534 | ||||||
Income taxes: | ||||||||||
Current | $ | 12,051,206 | 997,200 | 13,048,406 | ||||||
Deferred | (1,000,415 | ) | 131,611 | (868,804 | ) | |||||
$ | 11,050,791 | 1,128,811 | 12,179,602 | |||||||
F-17 | (Continued) |
FUJIFILM ARCH CO., LTD. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 2003 (Unaudited) and 2004
A reconciliation of the differences between the Japanese statutory tax rate and the effective tax rates for the years ended March 31, 2002 (unaudited), 2003 (unaudited), and 2004 is as follows:
(Unaudited) | |||||||||
2002 | 2003 | 2004 | |||||||
Statutory tax rate | 42.0 | % | 42.0 | % | 42.0 | % | |||
Increase (decrease) in income taxes resulting from: | |||||||||
Entertainment expenses | 4.1 | 0.7 | 0.5 | ||||||
Tax credits – R&D and other | (7.5 | ) | (2.1 | ) | (4.6 | ) | |||
Changes in tax rates | — | (0.1 | ) | (0.3 | ) | ||||
Difference in statutory tax rates of foreign subsidiaries | — | (2.3 | ) | (2.2 | ) | ||||
Other | 3.3 | (2.4 | ) | 2.3 | |||||
Effective tax rates | 41.9 | % | 35.8 | % | 37.7 | % | |||
The significant components of deferred tax assets and liabilities at March 31, 2003 (unaudited) and 2004:
(Unaudited)2003 | 2004 | 2004 | ||||||||
(Thousands of yen) | (U.S. dollars) | |||||||||
Deferred tax assets: | ||||||||||
Enterprise tax | ¥ | 65,060 | 108,610 | $ | 1,027,628 | |||||
Accrued expense | 109,862 | 172,489 | 1,632,028 | |||||||
Inventory | 25,581 | 50,558 | 478,361 | |||||||
Capital leases | 25,514 | 25,482 | 241,101 | |||||||
Other | 56,991 | 84,494 | 799,451 | |||||||
Total deferred tax assets | 283,008 | 441,633 | 4,178,569 | |||||||
Deferred tax liabilities: | ||||||||||
Prepaid pension expenses | — | (22,153 | ) | (209,604 | ) | |||||
Undistributed earnings of foreign subsidiaries | — | (44,542 | ) | (421,440 | ) | |||||
Other | — | (220 | ) | (2,081 | ) | |||||
Total deferred tax liabilities | — | (66,915 | ) | (633,125 | ) | |||||
Net deferred tax assets | ¥ | 283,008 | 374,718 | $ | 3,545,444 | |||||
In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. Based upon the level of historical taxable income and projections for future taxable income over the periods in which the deferred tax assets are deductible, management believes it is more likely than not that the Company will realize the benefits of these deductible differences.
F-18 | (Continued) |
FUJIFILM ARCH CO., LTD. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 2003 (Unaudited) and 2004
(9) | Employee Retirement and Severance Benefits |
Employees of the Company who terminate their employment are entitled to lump-sum payments and/or pension payments determined by reference to their basic rate of pay, length of service and the conditions under which termination occurs. The Company also has funded noncontributory defined benefit pension plan whose assets are maintained at a trust bank and an insurance company. The pension benefits are determined based on years of service and compensation as stipulated in the pension plan’s regulation.
On March 18, 2003, the Company transferred the obligation to pay benefits for employee service related to the substitutional portion under the Japanese Welfare Pension Insurance Law and related plan assets to the Japanese government. Upon the transfer, the Company made a settlement payment of ¥267,374 thousand and eliminated accrued pension liability of ¥264,128 thousand. The difference of ¥3,246 thousand was charged to expense, which is included in the accompanying consolidated statements of income.
The following table sets forth aggregates amounts of benefit obligations, fair value of plan assets, and funded status for the Company’s retirement and severance benefit plans at March 31, 2003 (unaudited) and 2004:
(Unaudited) 2003 | 2004 | 2004 | |||||||||
(Thousands of yen) | (U.S. dollars) | ||||||||||
Benefit obligation | ¥ | 383,749 | 384,932 | $ | 3,642,085 | ||||||
Fair value of plan assets | 306,725 | 417,187 | 3,947,270 | ||||||||
Funded status | ¥ | (77,024 | ) | 32,255 | $ | 305,185 | |||||
Prepaid (accrued) benefit cost recognized in the consolidated balance sheets | ¥ | (62,421 | ) | (7,761 | ) | $ | (73,432 | ) |
The accumulated benefit obligation for the pension plan was ¥313,141 thousand ($2,962,825) at March 31, 2004.
Weighted average assumptions used to determine benefit obligations at March 31, 2003 (unaudited) and 2004 as follows:
(Unaudited) 2003 | 2004 | |||||
Discount rate | 1.5 | % | 1.5 | % | ||
Expected long-term rate of return on plan assets | 2.3 | % | 2.3 | % | ||
Rate of compensation increase | 2.0 | % | 2.0 | % |
F-19 | (Continued) |
FUJIFILM ARCH CO., LTD. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 2003 (Unaudited) and 2004
The Company’s overall expected long-term rate of return on assets is 2.3%. The expected long-term rate of return is based on the portfolio as a whole and not on the sum of the returns on individual asset categories.
(Unaudited) | ||||||||||
2002 | 2003 | 2004 | 2004 | |||||||
(Thousands of yen) | (U.S. dollars) | |||||||||
Benefit cost | ¥ | 177,145 | 225,644 | 42,142 | $ | 398,732 | ||||
Employer contributions | 106,579 | 49,747 | 54,707 | 517,618 | ||||||
Benefits paid | 856 | 32,917 | 47,407 | 448,548 |
The funding policy to make actuarially determined contributions to provide the plans with sufficient assets to meet future benefit payments.
Plan Assets
The weighted average asset allocation of the Company’s pension benefits at March 31, 2004 were as follows:
Asset category | (Unaudited) 2003 | 2004 | ||||
Equity securities | 42 | % | 51 | % | ||
Debt securities | 51 | 40 | ||||
Other | 7 | 9 | ||||
Total | 100 | % | 100 | % | ||
The Company’s investment policies and strategies for the pension do not use target allocations for the individual asset categories. The Company’s investment goals are to maximize returns subject to specific risk management policies.
Defined Contribution Plan
Since April 1, 2003, the Company has also sponsored a defined contribution pension plan for all employees and certain directors who are under the age of 60. Contribution amount is calculated as 2.3% of adjusted salary subject to a regulatory limit of JPY 18,000 per month for each employee or director. The Company funds the calculated pension contribution costs monthly. No contributions are made by eligible participants. For the year ended March 31, 2004, the Company funded ¥12,215 thousand ($115,574) for the plan.
(10) | Shareholders’ Equity |
The Commercial Code of Japan (the Code) provides that earnings in an amount equal to at least 10% of appropriations of retained earnings that are paid in cash shall be appropriated as a legal reserve until an aggregated amount of capital surplus and the legal reserve equals 25% of stated capital. The Code imposes certain limitations on the amount of retained earnings available for dividends, which is based on the amount recorded in the Company’s nonconsolidated books of account in accordance with financial accounting standards of Japan. Under the Code, the maximum amount of retained earnings available for dividends in the Company’s nonconsolidated books of account under the Code at March 3, 2004 was ¥5,085,590 thousand ($43,877,148).
F-20 | (Continued) |
FUJIFILM ARCH CO., LTD. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 2003 (Unaudited) and 2004
(11) | Fair Value of Financial Instruments |
The following tables present the carrying amounts and estimated fair values of the Company’s financial instruments at March 31, 2003 (unaudited) and 2004. The fair value of a financial instrument is the amount at which the instrument could be exchanged in a current transaction between willing parties.
(Unaudited) March 31, 2003 | March 31, 2004 | ||||||||
Carrying amount | Fair value | Carrying amount | Fair value | ||||||
(Thousands of yen) | |||||||||
Financial assets: | |||||||||
Cash and cash equivalents | ¥ | 2,675,300 | 2,675,300 | 2,659,622 | 2,659,622 | ||||
Trade accounts and notes receivable | 4,937,641 | 4,937,641 | 7,207,092 | 7,207,092 | |||||
Financial liabilities: | |||||||||
Accounts and notes payable | ¥ | 5,903,783 | 5,903,783 | 8,050,118 | 8,050,118 | ||||
Short-term loans | 2,884,232 | 2,884,232 | 1,965,811 | 1,965,811 | |||||
Accrued expenses | 874,961 | 874,961 | 1,240,407 | 1,240,407 | |||||
Income taxes payable | 697,628 | 697,628 | 1,054,672 | 1,054,672 | |||||
Total debt | 990,000 | 985,613 | 2,430,000 | 2,415,326 |
March 31, 2004 | |||||
Carrying amount | Fair value | ||||
(U.S. dollars) | |||||
Financial assets: | |||||
Cash and cash equivalents | $ | 25,164,367 | 25,164,367 | ||
Trade accounts and notes receivable | 68,190,860 | 68,190,860 | |||
Financial liabilities: | |||||
Accounts and notes payable | $ | 76,167,263 | 76,167,263 | ||
Short-term loans | 18,599,782 | 18,599,782 | |||
Accrued expenses | 11,736,276 | 11,736,276 | |||
Income taxes payable | 9,978,919 | 9,978,919 | |||
Long-term-debt | 22,991,769 | 22,852,928 |
The carrying amounts shown in the table are included in the accompanying consolidated balance sheets.
The following methods and assumptions were used to estimate the fair value of each class of financial instruments:
Cash and cash equivalents, accounts, and notes receivable, short-term loans, accounts, and notes payable, accrued expenses and income taxes payable.
F-21 | (Continued) |
FUJIFILM ARCH CO., LTD. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 2003 (Unaudited) and 2004
The carrying amounts approximate fair value because of the short maturity of these instruments.
Long-term debt: The fair value of the Company’s long-term debt is estimated by discounting the future cash flows of each instrument at rates currently offered to the Company for similar debt instruments of comparable maturities by the Company’s bankers.
(12) | Commitments and Contingencies |
Commitments outstanding at March 31, 2004 principally for purchases of property, plants and equipments amounted to ¥742,105 thousand ($7,021,525).
The Company was contingently liable relating to ¥205,164 million ($1,941,186) of export bills of exchange discounted with banks in the ordinary course of business at March 31, 2004.
(13) | Business and Credit Concentrations |
The Company manufactures its products and also purchases inventory from FUJI and ARCH, and sells products to domestic and foreign customers. Sales to the top 5 customers accounted for 57%, 65%, and 64% for the years ended March 31, 2002 (unaudited), 2003 (unaudited), and 2004, respectively. Related accounts receivable to top 5 customers accounted for 55% and 57% at March 31, 2003 (unaudited) and 2004, respectively. The Company performs periodic credit evaluations of its customers’ financial condition and generally does not require collateral. The Company has one significant customer, Opitimax Technology Corporation located in Taiwan who accounted for approximately 13%, 30%, and 38% of total sales for the years ended March 31, 2002 (unaudited), 2003 (unaudited), and 2004, respectively, and accounted for approximately 32% and 36% of accounts receivable at March 31, 2003 (unaudited) and 2004, respectively.
F-22 |
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
ARCH CHEMICALS, INC. (Registrant) | ||||||
By | /s/ LOUIS S. MASSIMO | |||||
Date: July 22, 2004 | Executive Vice President and Chief Financial Officer |
EXHIBIT INDEX
23.1 | Consent of KPMG Azsa & Co. | |
31.1 | Certification of Chief Executive Officer pursuant to Rule 13a-14(a) | |
31.2 | Certification of Chief Financial Officer pursuant to Rule 13a-14(a) | |
32 | Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. 1350 |