20-F 1 d20f.htm ANNUAL REPORT Annual Report
Table of Contents

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


Form 20-F

 


 

¨ REGISTRATION STATEMENT PURSUANT TO SECTION 12(B) OR 12(G) OF THE SECURITIES EXCHANGE ACT OF 1934

OR

 

x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended March 31, 2006

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from              to             

OR

 

¨ SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

Date of event requiring this shell company report             

Commission file number 1-07294

 


KABUSHIKI KAISHA KUBOTA

(Exact name of registrant as specified in its charter)

 


KUBOTA CORPORATION

(Translation of registrant’s name into English)

JAPAN

(Jurisdiction of incorporation or organization)

2-47, SHIKITSUHIGASHI 1-CHOME, NANIWA-KU, OSAKA, JAPAN

(Address of principal executive offices)

 


Securities registered or to be 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

 

* Not for trading, but only in connection with the listing of American Depositary Receipts pursuant to the requirement of the New York Stock Exchange.

American Depositary Receipts evidence American Depositary Shares, each American Depositary Share representing five shares of the registrant’s common stock.

Securities registered or to be registered pursuant to Section 12(g) of the Act

None

(Title of Class)

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act.

None

(Title of Class)

 


Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report.

 

     Outstanding as of

Title of Class

   March 31, 2006
(Tokyo Time)
   March 31, 2006
(New York Time)

Common stock

   1,299,487,964 shares   

American Depositary Shares

      3,938,242 ADS

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  x    No  ¨

If this report is an annual report, indicate by checkmark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.    Yes  ¨    No  x

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.    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or non- accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):    Large accelerated filer  x    Accelerated filer  ¨    Non-accelerated filer  ¨

Indicate by check mark which financial statement item the registrant has elected to follow.    Item 17  x    Item 18  ¨

If it is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

 



Table of Contents

TABLE OF CONTENTS

 

          page
   PART I   

Item 1.

   Identity of Directors, Senior Management and Advisers    1

Item 2.

   Offer Statistics and Expected Timetable    1

Item 3.

   Key Information    1

3.A

   Selected Financial Data    1

3.B

   Capitalization and Indebtedness    2

3.C

   Reasons for the Offer and Use of Proceeds    2

3.D

   Risk Factors    2

Item 4.

   Information on the Company    6

4.A

   History and Development of the Company    6

4.B

   Business Overview    7

4.C

   Organization Structure    10

4.D

   Property, Plant and Equipment    11

Item 4A.

   Unresolved Staff Comments    12

Item 5.

   Operating and Financial Review and Prospects    13

5.A

   Operating Results    15

5.B

   Liquidity and Capital Resources    22

5.C

   Research and Development, Patents and Licenses, etc    24

5.D

   Trend Information    25

5.E

   Off-balance Sheet Arrangements    27

5.F

   Tabular Disclosure of Contractual Obligations    28

5.G

   Safe Harbor    29

Item 6.

   Directors, Senior Management and Employees    30

6.A

   Directors and Senior Management    30

6.B

   Compensation    38

6.C

   Board Practices    38

6.D

   Employees    39

6.E

   Share Ownership    39

Item 7.

   Major Shareholders and Related Party Transactions    40

7.A

   Major Shareholders    40

7.B

   Related Party Transactions    40

7.C

   Interests of Experts and Counsel    40

Item 8.

   Financial Information    41

8.A

   Consolidated Statements and Other Financial Information    41

8.B

   Significant Changes    41

Item 9.

   The Offer and Listing    42

9.A

   Offer and Listing Details    42

9.B

   Plan of Distribution    43

9.C

   Markets    43

9.D

   Selling Shareholders    43

9.E

   Dilution    43

9.F

   Expenses of the Issue    43

Item 10.

   Additional Information    44

10.A

   Share Capital    44

10.B

   Memorandum and Articles of Association    44

10.C

   Material Contracts    53

10.D

   Exchange Controls    53

10.E

   Taxation    54

10.F

   Dividends and Paying Agents    57

10.G

   Statement by Experts    57

 

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         10.H

   Documents on Display    57

         10.I

   Subsidiary Information    57

Item 11.

   Quantitative and Qualitative Disclosures about Market Risk    58

Item 12.

   Description of Securities other than Equity Securities    60
   PART II   

Item 13.

   Defaults, Dividend Arrearages and Delinquencies    61

Item 14.

   Material Modifications to the Rights of Security Holders and Use of Proceeds    61

Item 15.

   Controls and Procedures    61

Item 16A.

   Audit Committee Financial Expert    62

Item 16B.

   Code of Ethics    62

Item 16C.

   Principal Accountant Fees and Services    62

Item 16D.

   Exemptions from the Listing Standards for Audit Committees    63

Item 16E.

   Purchases of Equity Securities by the Issuer and Affiliated Purchasers    64
   PART III   

Item 17.

   Financial Statements    65

Item 18.

   Financial Statements    65

Item 19.

   Exhibits    66

All information contained in this Report is as of or for the 12 months ended March 31, 2006 unless otherwise specified.

“Unless otherwise specified, Japanese yen amounts in this Report have been translated for convenience into United States dollars at the rate of ¥117= US$1, the approximate rate of exchange on March 31, 2006, the date of the most recent balance sheet herein.”

“As used herein, “Kubota” and “the Company” refer to Kubota Corporation and its subsidiaries unless the context otherwise indicates.”

“The noon buying rate for yen in New York City as certified for customs purposes by the Federal Reserve Bank of New York on September 6, 2006 was ¥116.73 = US$1.”

<Cautionary Statements with Respect to Forward-Looking Statements>

Certain sections of this annual report on Form 20-F contain forward-looking statements that are based on management’s expectations, estimates, projections and assumptions. Words such as “expects”, “anticipates”, “believes”, “scheduled”, “estimates”, variations of these words and similar expressions are intended to identify forward-looking statements which include but are not limited to projections of revenues, earnings, segment performance, cash flows and so forth. These statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. Therefore, actual future results may differ materially from what is forecast in forward-looking statements due to a variety of factors, including, without limitation: general economic conditions in the Company’s markets, particularly government agricultural policies, levels of capital expenditures, both in public and private sectors, foreign currency exchange rates, continued competitive pricing pressures in the marketplace, as well as the Company’s ability to continue to gain acceptance of its products.

 

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PART I

Item 1. Identity of Directors, Senior Management and Advisers

Not applicable

Item 2. Offer Statistics and Expected Timetable

Not applicable

Item 3. Key Information

The information required by this item, except as stated below, appears on page 11 in the Financial Section of the Company’s 2006 Annual Report to Shareholders, which is incorporated herein by reference.

A. Selected Financial Data

 

     Years ended March 31 (millions of yen)
     2002    2003    2004    2005    2006

Capital stock

   78,156    78,156    78,156    78,156    84,070

Capital expenditures

   36,342    35,845    21,396    26,097    33,805

Depreciation and amortization

   40,535    38,804    27,755    25,808    25,821

R & D expenses

   30,186    26,405    23,261    21,963    22,731

Income from continuing operations per share

              

Basic

   7.00    6.56    9.31    80.72    62.14

Diluted

   6.88    6.56    9.09    78.67    61.67

Number of shares outstanding (in thousands)

   1,390,419    1,345,450    1,340,197    1,300,413    1,299,488
     Years ended March 31
     2002    2003    2004    2005    2006

Cash dividends declared per depositary share:

              

Interim (in yen)

   15    15    15    15    20

(in U.S. dollars)

   0.119    0.121    0.138    0.136    0.165

Year-end (in yen)

   15    15    15    25    30

(in U.S. dollars)

   0.125    0.125    0.138    0.233    0.258

Exchange rates (yen amounts per U.S. dollar):

              

Year-end

   132.70    118.07    104.18    107.22    117.48

Average

   125.64    121.10    112.75    107.28    113.67

High

   134.77    133.40    120.55    114.30    120.93

Low

   115.89    115.71    104.18    102.26    104.41

 

2006

   Feb.    Mar.    Apr.    May    Jun.    Jul.

High

   118.95    119.07    118.66    113.46    116.42    117.44

Low

   115.82    115.89    113.79    110.07    111.66    113.97

Period-end

   115.82    117.48    113.79    112.26    114.51    114.44

 

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Notes to Selected Financial Data:

1. Cash dividends in U.S. dollars are computed based on the exchange rates at each respective payment date.

2. Exchange rates are the noon buying rates for cable transfers between the yen and the U.S. dollar in New York City as certified for customs purposes by the Federal Reserve Bank of New York. The rate on September 6, 2006 was ¥116.73 = US$1.

B. Capitalization and Indebtedness

Not applicable

C. Reasons for the Offer and Use of Proceeds

Not applicable

D. Risk Factors

Declines in economic conditions in Kubota’s major markets, including private-sector capital expenditure, construction investment, and domestic public investment, may adversely impact the results of operations of the Company.

Industrial and capital goods make up a substantial portion of the Company’s products. Accordingly, sales of the Company’s products may be sensitive to declines in general economic conditions, including private-sector capital expenditure, construction investment, and domestic public investment. In addition, governmental agricultural policies, such as a reduction in rice acreage or a change in agricultural law, may affect domestic sales of agriculture-related products. In overseas markets, especially those of North America and Europe, sales of the Company’s products, such as utility/compact tractors, may also be adversely affected by declines in general economic conditions, including private consumption and residential construction investment in those regions.

Fluctuations of foreign exchange rates, including a stronger yen, may reduce net sales and adversely affect the results of operations of the Company.

The Company has overseas sales and manufacturing subsidiaries. The financial results of each overseas subsidiary are consolidated into the results of the parent company after translation into Japanese yen. In addition, the transactions between the parent company and overseas subsidiaries or customers are generally denominated in the local currencies. The payments received in local currencies on such transactions are converted to Japanese yen. As a result, fluctuations in foreign exchange rates will affect the consolidated financial results.

The Company is subject to the risks of international operations.

Some of the Company’s businesses involve substantial overseas operations. Accordingly, the Company is subject to a number of risks inherent in doing business in those markets. Such risks may affect sales and profitability of the Company or they may hinder growth of the Company in specific countries. The following risks are important concerns for the Company:

 

    Unexpected changes in international, or in an individual country’s, tax regulations

 

    Unexpected legal or regulatory changes in a country

 

    Difficulties in retaining qualified personnel

 

    Underqualified technological skills or instability between management and employee unions in developing countries

 

    Political instability in those countries

The major markets with the above risks are markets in the United States, the EU, and Asian countries. Among the United States, the EU, and Asian countries, which are major markets for the Company, risks in Asian countries seem to be relatively higher than those of other regions.

 

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The Company utilizes estimates on some accounts in the consolidated financial statements, which may require additional accruals due to unanticipated changes in the basis of assumptions.

The Company appropriately records its employee benefit obligations, valuation of inventories, valuation allowances for deferred tax assets, probability of collection of notes and accounts receivable, impairment losses on long-lived assets, and revenue recognition for long-term contracts in the consolidated financial statements based on the information that it has available. However, these are based on various assumptions about future economic results. If actual results differ from any of these assumptions, unanticipated additional accruals may be required.

Strategic alliances, mergers, and acquisitions may not generate successful results as planned.

The Company expects to use strategic alliances, mergers, and acquisitions to seek further growth. The success of these activities depends on such factors as the Company’s business environment, the ability of its business counterparts, and whether the Company and its counterparts share common goals. Therefore, if these activities are not successful and returns on related investments are lower than expected, the Company may lose competitiveness in relevant markets. Consequently, the Company’s profitability may deteriorate.

The Company may not be able to successfully create new businesses or businesses complementary to the current ones.

As part of its structural renovation, the Company is attempting to cultivate new businesses or businesses that are complementary to the current ones. However, in those markets, there are numerous competitors, and competition will be very harsh. If the Company fails to develop the required personnel or abilities to produce and market appropriate products, subsequent impairment charges may be taken, or there may be a negative impact on the Company’s financial position.

Impairment losses on investments in marketable securities may occur as a result of stock market fluctuations.

As of March 31, 2006, the Company owns securities with a fair value of approximately ¥225.4 billion. Most of these securities are equity securities, and, accordingly, depending on stock market fluctuations, unrealized and realized losses may occur.

In each of its businesses, Kubota is subject to intensifying competitive pressures. The Company must compete successfully to maintain sales and profits.

The Company is exposed to severe competition in each of its businesses. Unless the Company surpasses other companies in such areas as terms of trade, R&D, and quality, sales and/or net income may decrease in the future.

The Company may be required to incur significant financial expenses if its products and services have serious defects.

If the Company’s products and services have serious defects, the Company may incur a significant liability for reparation payments. Such payment and other associated expenses may have a material effect on the Company’s consolidated results of operations and financial position. Should such events occur, the Company may lose the trust of the public and suffer a reduction in its brand value, which may result in decreased sales and demand for its products.

The Company is subject to various environmental laws and regulations, and may be required to incur considerable expenses in order to comply with such laws and regulations.

The Company is subject to various environmental laws and regulations that apply to its products and activities. If these environmental laws and regulations, such as those that impose carbon dioxide emission controls, emission controls, and usage restrictions for certain materials which are used in the Company’s products, are strengthened or newly established in jurisdictions in which the Company conducts its businesses, the Company may be required to incur considerable expenses in order to comply with such laws and regulations. Such expenses may have a material effect on the Company’s consolidated results of operations and financial position. To the extent that the Company determines that it is not economical to continue to comply with such laws and regulations, the Company may have to curtail or discontinue its activities in the affected business areas.

 

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The Company may be required to incur significant financial expenses in connection with environmental damage it may cause in its activities.

The Company may cause environmental pollution while conducting its activities, such as the release of hazardous materials and causing air pollution, water pollution, and/or ground pollution. In such an event, the Company may have to implement corrective actions to resolve any problem associated with such hazardous materials or pollution with substantial expense and may face litigation regarding these issues. These factors may have a material effect on the Company’s consolidated results of operations and financial position.

The Company may be required to incur significant expenses relevant to asbestos-related issues.

The Company previously manufactured products containing asbestos from 1954 to 2001. The Company may be required to incur various expenses, including expenditures for environmental remediation payments or payments to the individual concerned or face lawsuits related to the asbestos-related health hazards of employees (including former employees) who engaged in the manufacturing of products containing asbestos, and residents who lived near the Company’s factory at which these products were manufactured. If such expenses become significant or any lawsuits result in judgments unfavorable to the Company, there may be a material adverse effect on the Company’s consolidated results of operations, financial position, and its liquidity.

The Company may experience a material effect on its consolidated results of operations and financial position if it faces issues related to compliance.

The Company declared its intention to conduct its corporate activities based on compliance with legal regulations and ethical principles, and to exert efforts to make all management and staff of the Company not to act in violation of various legal regulations, ethical standards, or internal regulations throughout all Group companies. However, in the event that the Company is confronted with compliance issues arising from such activities, there is a possibility that it may undergo disciplinary action by government ministries supervising its activities, may be subjected to lawsuits, and may suffer a loss of public confidence that could have a material effect on the Company’s consolidated results of operations and financial position.

Damage by Natural Disasters

Japan is a country with frequent earthquakes. In case of a strong earthquake or related tidal wave, the Company may be affected in the operation of its manufacturing, logistics, and sales activities, and may lose sales and profits depending on the severity of the earthquake or tidal wave. Japan also is hit by typhoons very frequently. In case major plants are struck by a large and powerful typhoon, the Company’s operations may suffer great losses.

In each business segment mentioned below, Kubota is subject to risks inherent to those businesses and markets.

Internal Combustion Engine and Machinery Segment

The domestic business condition for Farm Equipment and Machinery remains difficult. In the business of farm equipment, for example, national agricultural policies on supporting agricultural management by community, which intends to make efficient use of agricultural resources such as farming land, agricultural machinery and facilities, may lead farmers to refrain from purchasing new equipment.

Under such conditions, in order to compete with other companies, the Company must maintain marketing channels, develop new products that reflect consumers’ exact demands, and intensify appropriate after-sales services. To accomplish these objectives, substantial personnel and financing resources are required.

At the same time, the Company is also subject to severe competition in the United States. The pressures of reducing prices or shortening lead times are making business conditions more difficult. Consequently, the Company must take all possible steps to overcome the handicap of exporting products from Japan.

Specifically, it is very important for the Company to promote its retail sales by offering appropriate incentives to its dealers, and to introduce innovative products that address consumers’ needs, in advance of its competitors. The Company must continue to promote these operations and to compete with its competitors in the U.S. in order to develop the business. Otherwise, the decrease in sales may have a material effect on the Company’s consolidated results of operations and financial position.

 

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Pipes, Valves, and Industrial Castings Segment

The business of Pipes and Valves is basically dependent on public sector investments. Therefore, sales and profitability of this segment may be adversely affected by reductions in public investments by national or local governments.

In the business of ductile iron pipes and industrial casting, because of the relatively severe working environment, including the need to handle molten pig iron and steel scraps, it might be difficult to hire and retain qualified new employees. If the Company is not able to hire and retain qualified employees, nor to automate these processes, the Company may face difficulties in continuing its business.

In addition, increasing environmental restrictions on such items as noise, air pollution or bad smells caused by factories may require additional investments to cope with such restrictions and may reduce profitability as a result of an increase in production costs.

Certain of the Company’s competitors are located in China or India where personnel costs are extremely low compared with Japan. Accordingly, the Company must continue to reduce production costs. As for export of its products, negative factors such as stronger yen, increased competition in international competitive bidding, increasing cost of freight and insurance, may impair profitability of exportation.

Reductions in private capital expenditure or residential construction investment may adversely impact the business, financial condition or results of the Company.

Environmental Engineering Segment

In the business of Environmental Engineering, a large portion of the demand depends on public sector investments. If the Company is unable to manage adverse developments such as a decrease in demand due to a reduction in public investments, intensifying competition owing to an increase in competitors, or the need to maintain high quality R&D personnel to develop new technologies, the Company’s financial condition or results may be adversely affected. Furthermore, demands on product specification vary from customer to customer, which raise product cost.

Other Segment

Other segment consists of primarily vending machines, electronic-equipped machinery, air-conditioning equipment, septic tanks, condominiums, construction, and other equipments services. While the Company encounters market competition for these products, declining general economic conditions, including reduction in private capital expenditures, construction investment and public investment may also adversely affect the business and financial results of this segment.

Cautionary Statements with Respect to Forward-Looking Statements

Certain sections of this annual report on Form 20-F may contain forward-looking statements that are based on management’s expectations, estimates, projections and assumptions. These statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. Therefore, actual future results may differ materially from what is forecast in forward-looking statements due to a variety of factors, including, without limitation: general economic conditions in the Company’s markets, particularly government agricultural policies, levels of capital expenditures, both in public and private sectors, foreign currency exchange rates, continued competitive pricing pressures in the marketplace, as well as the Company’s ability to continue to gain acceptance of its products.

 

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Item 4. Information on the Company

A. History and Development of the Company

KUBOTA Corporation (KABUSHIKIKAISHA KUBOTA), the ultimate parent company of the Kubota group, was founded in 1890 by Gonshiro Kubota and incorporated in 1930 under the Commercial Code of Japan. In 1949, stocks of the Company were listed on Tokyo Stock Exchange and Osaka Securities Exchange. In 1976, stocks of the Company were also listed on New York Stock Exchange. Today, Kubota is a manufacturer of farm equipment, and producer of pipes, principally ductile iron pipes, and related equipment for water supply and other utilities. In addition, the Company manufactures and sells other items; engines, construction machinery, industrial castings, industrial machinery, environmental control plants.

The Company’s registered office is located at 2-47, Shikitsuhigashi 1-chome, Naniwa-ku, Osaka 556-8601, Japan, telephone +81-6-6648-2111.

The Company’s production network primarily comprises 20 plants in Japan and 7 plants in overseas countries. Kubota also has 12 sales subsidiaries in overseas countries.

Principal Capital Expenditures and Divestitures

Capital expenditures in fiscal 2006, 2005, and 2004 amounted to ¥33,805 million, ¥26,097 million, and ¥21,396 million, respectively. The funding requirements for these capital expenditures were mainly provided by internal operations, and partially provided by external debt financing.

The principal capital expenditures in progress as of March 31, 2006, 2005, and 2004 were as follows:

As of March 2006

 

Location

  

Industry segment included

  

Content

   Estimated amount
of expenditures
   Schedule
        

Total amount of
expenditures

(¥ billion)

   Commenced

Suzhou (Jiangsu, People’s Republic of China)

  

Internal Combustion

Engine and Machinery

   Building of new production facility for agricultural equipment in China    ¥1.7    Oct. 2005

Sakai (Osaka)

Okajima (Osaka)

Tsukuba (Ibaraki)

  

Internal Combustion

Engine and Machinery

   Production facilities for vertical diesel engines to increase production and developing new models    ¥8.0    Jan. 2006

Tsukuba (Ibaraki)

  

Internal Combustion

Engine and Machinery

   Addition to a building of a factory    ¥3.4    Jan. 2006

Jackson

(Georgia, U.S.A.)

  

Internal Combustion

Engine and Machinery

   Restructuring of production system    ¥1.6    Oct. 2005

As of March 2005

Location

  

Industry segment included

  

Content

   Estimated amount
of expenditures
   Schedule
        

Total amount of
expenditures

(¥ billion)

   Commenced

Jackson

(Georgia, U.S.A.)

  

Internal Combustion

Engine and Machinery

   Production facilities for implements attached to tractors    ¥5.0    Nov. 2004

Tsukuba (Ibaraki)

Sakai (Osaka)

  

Internal Combustion

Engine and Machinery

   Production equipment for vertical diesel engines    ¥0.9    Oct. 2004

As of March 2004

No principal expenditures were in progress.

 

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B. Business Overview

The Company classifies its products for revenue reporting purposes into the following 4 product segments: Internal Combustion Engine and Machinery (which includes farm equipment, engines and construction machinery); Pipes, Valves, and Industrial Castings (which includes pipes, valves, and industrial castings); Environmental Engineering (which includes environmental engineering and pumps); and Other.

Net Sales by Product Group

For the year ended March 31, 2006

 

    

Millions of yen

2006

   Thousands of
U.S. dollars
2006
     ¥    %    $

Internal Combustion Engine and Machinery

   658,776    62.7    5,630,564

Pipes, Valves, and Industrial Castings

   189,708    18.0    1,621,436

Environmental Engineering

   110,479    10.5    944,265

Other

   92,077    8.8    786,983
              

Total

   1,051,040    100.0    8,983,248

For the years ended March 31, 2005 and 2004

 

     Millions of yen
     2005    2004
     ¥    %    ¥    %

Internal Combustion Engine and Machinery

   582,664    59.3    501,551    53.9

Pipes, Valves, and Industrial Castings

   170,629    17.3    175,178    18.8

Environmental Engineering

   117,633    12.0    115,721    12.5

Other

   112,300    11.4    137,426    14.8
                   

Total

   983,226    100.0    929,876    100.0

 

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Operation of Each Segment

Internal Combustion Engine and Machinery

Internal Combustion Engine and Machinery includes farm equipment, engines and construction machinery. Kubota is Japan’s largest manufacturer of farm equipment and small engines for agricultural use based on market share. Sales in this market in Japan are dominated by 4 major manufacturers, and the Company possesses a substantially larger share than the second ranked company. Main products include tractors ranging from 10.5 to 125 horsepower, combine harvesters, rice transplanters, power tillers and reaper binders. The Company also manufactures and sells a line of construction machinery including mini-excavators and wheel loaders as well as engines for various industrial uses. Overseas sales of this segment accounted for 59.4% of the total sales of this segment in fiscal 2006.

Domestic sales of farm equipment, engines and construction machinery are made through wholesale-retail dealers, wholesalers and the National Federation of Agricultural Cooperative Associations. Overseas sales are made through trading companies, local distributors and the Company’s overseas subsidiaries and affiliates.

The products in this segment are manufactured at 6 domestic plants, and the Company has manufacturing subsidiaries in the United States, Germany, People’s Republic of China and Thailand, and minority equity interests in an overseas manufacturing company.

Pipes, Valves, and Industrial Castings

Pipes, Valves, and Industrial Castings is comprised of various kinds of pipes, valves, and industrial castings. Pipes and Valves consists of ductile iron pipes, spiral welded steel pipes, plastic pipes and fittings, filament winding (FW) pipes, and various valves. Most of these products are to municipalities and public utilities for use principally in water supply and sewage systems along with industrial water supply. These products are also used for gas supply, telecommunication and irrigation systems.

Industrial castings include various iron and steel castings. Iron castings encompass rolls for the steel industry, machinery parts, tunnel segments, and soil pipes and fittings. Steel castings include alloyed tubing and fittings for the petrochemical industry, rolls for the paper industry, centrifugal cast pipes used in oil tankers, and centrifugal cast steel columns and piles used in civil engineering and construction.

The products in this segment are manufactured at 11 plants in Japan, and the Company has a manufacturing subsidiary in Canada, and minority equity interest in an overseas manufacturing company.

Environmental Engineering

This segment develops and markets environmental control plants, pumps and related engineering. As for water treatment, the Company supplies water and sewage treatment plants, night soil treatment plants, landfill leachate treatment plants, submerged membrane systems and biogas production systems. Regarding solid waste treatment, the Company supplies refuse incineration plants, industrial waste treatment plants, pulverizing facilities. The Company is also engaged in related engineering, such as contaminated soil remediation and industrial waste treatment business.

This segment manufactures and supplies various pumps for waterworks, sewage facilities, irrigation system, rainwater drainage and power supplies.

At present, almost all the sales in this segment are to municipalities focusing on domestic environmental engineering market, which is competitive with many engineering companies. There are 2 manufacturing plants in Japan and no overseas plants.

Other

This segment encompasses all the other businesses that don’t belong to the aforementioned 3 segments. This segment consists of vending machines, electronic-equipped machinery, air-conditioning equipment, septic tanks, condominiums, construction, and other equipment and services.

The products in this segment are manufactured mainly at 4 plants in Japan, and the Company has a manufacturing subsidiary in Indonesia.

 

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Overseas Activities

The Company’s overseas sales (which represent sales to unaffiliated customers outside Japan) in fiscal 2006, 2005, and 2004 amounted to ¥420,229 million ($3,591,701 thousand), ¥345,324 million and ¥286,891 million, respectively. The ratios of such overseas sales to consolidated net sales in 2006, 2005, and 2004 were 40.0%, 35.1% and 30.9%, respectively. The sales of the Company’s subsidiaries outside Japan in fiscal 2006, 2005, and 2004 amounted to ¥391,978 million ($3,350,239 thousand), ¥323,943 million and ¥254,795 million, respectively. Its ratio to consolidated net sales in fiscal 2006, 2005, and 2004 were 37.3%, 32.9% and 27.4%, respectively.

The Company has manufacturing subsidiaries in the U.S.A., Canada, Germany, China, Indonesia and Thailand, and manufacturing affiliates in Indonesia and China. International sales subsidiaries are located in the U.S.A., Canada, France, the U.K., Germany, Spain, Australia, China and South Korea. In addition, a representative office is maintained in Beijing, and liaison offices are located in Torrance (California: U.S.A.), Flowery Branch (Georgia : U.S.A.), Argenteuil (France), Dubai (U.A.E.), Suzhou (China), Bangkok (Thailand), Selangor (Malaysia) and Cairo (Egypt).

Seasonality of the Company’s Businesses

In such businesses as ductile iron pipes, valves, environmental engineering, and pumps, which rely upon national government or municipalities for most of their sales, there is a tendency that sales in the second half of the fiscal year are much larger than those in the first half. Because the fiscal years of the national government or municipalities generally end in March, execution of public budgets in the second half is liable to be much larger than in the first half of the fiscal year.

Raw Materials and Source of Supply

The Company purchases raw materials or parts from numerous sources. The major materials purchased are steel scrap, polyvinyl chloride resin, rolled steel coils, non-ferrous metals and alloys and pig iron. Some of the purchase prices of the major materials such as steel scrap fluctuate significantly by supply and demand conditions of the market. The Company has historically had no difficulty in obtaining adequate supplies of all of its raw materials requirements.

Marketing Channels

Domestic sales of farm equipment, engines and construction machinery are made through wholesale-retail dealers, wholesalers and the National Federation of Agricultural Cooperative Associations. Overseas sales of those products are made through trading companies, local distributors and the Company’s overseas subsidiaries and affiliates.

A large portion of pipes, valves, environmental control plants, and a portion of industrial castings are sold to public-sector markets in Japan directly by the Company, as well as through dealers.

On the other hand, domestic sales of industrial machinery and part of industrial castings are made to private-sector markets through dealers and trading companies, directly to the end-users or, in the case of vending machines, to manufacturers of beverages or other products sold in vending machines. Overseas sales of those products are made directly by the Company or through trading companies, local distributors and the Company’s overseas subsidiaries and an affiliate.

Dependent Contract, License, Patent and Manufacturing Process

The Company has many contracts. Some of them, for example, are for technical cooperation with other manufacturers, or for financing from banks. These are relatively important to the Company, but the Company relies on no specific contracts.

With respect to licenses or patents, the Company does not rely on specific licenses or patents. As of March 31, 2006, the Company held 5,344 Japanese patent and utility model registrations, and 815 foreign patent and utility model registrations. A utility model registration is a right granted under Japanese law and in certain other countries to inventions of lesser originality than those which qualify for patents. Although patent rights are important to Kubota, the Company does not consider that the expiration of any single patent or group of related patents would materially affect the conduct of Kubota’s business. Kubota grants others licenses to use its technology including its patents, and obtains licenses under patents from third parties for technological assistance on a royalty basis. In fiscal 2006, royalty income and expenses were ¥643 million ($5,496thousand) and ¥118 million ($1,009 thousand), respectively, under such licensing arrangements.

 

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Competition

The Company is the largest manufacturer of farm equipment in Japan based on market share. There are 3 other major Japanese manufacturers of farm equipment and engines for agricultural use, all of which offer a complete line of machinery and engines in competition with the Company. The Company believes that foreign manufacturers do not at present produce the kind of machinery or, in the case of farm tractors, the size of tractors suited to Japanese agriculture and that the Company has the advantages that accrue from an established production and distribution system. In overseas markets, the Company experiences strong competition from Japanese and foreign companies in the sale of farm equipment and engines.

In Japan, there are 2 other major manufacturers of ductile iron pipes, 3 other major manufacturers of spiral welded steel pipes and 2 other major manufacturers of plastic pipes according to internal research. In export markets for ductile iron pipes, the Company faces strong competition with foreign manufacturers. The Company also encounters strong competition with Japanese and foreign companies in all of its product lines.

Governmental Regulations

Businesses of the Company tend to be affected by the regulations or restrictions in the countries where the Company or its subsidiaries operate. Those are, for example, regulations concerning investments, tariffs, anti-monopoly, intellectual property, foreign exchange, and environment.

Domestic sales of farm equipment, which are the mainstay of the Company’s business, are prone to be influenced by Japanese agricultural policies. For example, policies that decrease rice prices or reduce rice paddy acreage will adversely influence the sales of farm equipment.

In overseas markets, restrictions on exhausted gas may affect the engines business of the Company.

C. Organization Structure

As of March 31, 2006, the group of Kubota Corporation consists of Kubota Corporation, 122 subsidiaries and 25 affiliates. Kubota Corporation plays a leading role in the group. The main subsidiaries are as follows:

 

 

         Percentage
ownership (%)
Japan   Kubota-C.I. Co., Ltd.    70.0
  Kubota Construction Co., Ltd.    100.0
  Kubota Credit Co., Ltd.    72.8
  Kubota Environmental Service Co., Ltd.    100.0
  Kubota Maison Co., Ltd.    100.0
U.S.A.   Kubota Tractor Corporation    90.0
  Kubota Credit Corporation, U.S.A.    100.0
  Kubota Manufacturing of America Corporation    100.0
  Kubota Engine America Corporation    90.0
Canada   Kubota Metal Corporation    100.0
Germany   Kubota Baumaschinen GmbH    100.0
France   Kubota Europe S.A.S.    73.8

 

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D. Property, Plant and Equipment

The following table sets forth information with respect to Kubota’s principal manufacturing facilities:

 

Location

   Land    Floor space   

Principal products

     (Square meters)     
      Owned    Leased    Owned    Leased     

Japan

              
Amagasaki
(Hyogo)
   462,785    37,260    166,488    663    Ductile iron pipes, Filament winding pipes, Rolls for steel mills
Funabashi
(Chiba)
   561,265    14,711    143,153    6,496    Ductile iron pipes, Spiral welded steel pipes
Osaka
(Osaka)
   88,393    825    56,888    —      Cast iron products
Sakai
(Osaka)
   421,386    11,616    145,260    39,116    Farm equipment, Diesel engines
Utsunomiya
(Tochigi)
   154,281    —      77,031    1,367    Farm equipment
Tsukuba
(Ibaraki)
   334,496    19,577    117,139    12,886    Farm equipment, Diesel engines
Sakai
(Osaka)
   159,956    —      48,862    2,869    Diesel engines
Hirakata
(Osaka)
   306,102    —      142,966    2,065    Construction machinery, Cast steel products, Pumps, Valves
Konan
(Shiga)
   221,818    —      80,632    257    Septic tanks
Yao
(Osaka)
   38,102    —      27,756    —      Electronic machinery, Pulverizing equipment
Ryugasaki
(Ibaraki)
   84,795    —      30,820    —      Vending machines
U.S.A.               
Jackson
(Georgia)
   611,000    —      57,876    —      Lawn and garden tractors, Implements for tractors
Germany               
Zweibrücken
(Rheinlandpfalz)
   70,898    3,243    11,108    13,905    Mini-excavators

The Company considers its principal manufacturing facilities to be well maintained and suitable for the purpose for which they are employed and believes that its plant capacity is adequate for its current and near-term needs.

In addition, the Company owns 2,301,940 square meters of land (294,514 square meters of floor space) in Japan, used for the head office, branches, business offices and research facilities, and leases 3,625 square meters of land (68,206 square meters of floor space) used for sales offices, warehousing, employee housing and other purposes.

The Company plans its capital expenditures considering future business demand and cash flows. As of March 2006, the Company has planned to invest approximately ¥50.0 billion in the fiscal year ending March 31, 2007. The Company intends to fund the investment basically from cash and cash equivalents, and to also utilize available borrowings from financial institutions. Property, plant and equipment of the Company are not subject to material encumbrances thereon.

 

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Principal plans for new construction, expansion, reforming, and disposition as of March 31,2006 are as follows:

New Construction

 

              

Estimated amount of

expenditures

(¥billion)

   Schedule

Location

  

Industry segment included

  

Content

  

Total

amount of
expenditures

  

Amount

already

paid

   Commenced   

To be

completed

Suzhou (Jiangsu,

People’s Republic of China)

  

Internal Combustion

Engine and Machinery

   Building of new production facility for agricultural equipment in China    ¥1.7    —      Oct. 2005    Nov. 2006

Expansion

                 
              

Estimated amount of
expenditures

(¥billion)

   Schedule

Location

  

Industry segment included

  

Content

  

Total
amount of
expenditures

  

Amount
already
paid

   Commenced    To be
completed

Sakai (Osaka)

Okajima (Osaka)

Tsukuba (Ibaraki)

  

Internal Combustion

Engine and Machinery

   Production facilities for vertical diesel engines to increase production and developing new models    ¥8.0    —      Jan. 2006    Oct. 2007
Tsukuba (Ibaraki)   

Internal Combustion

Engine and Machinery

   Addition to a building of a factory    ¥3.4    ¥0    Jan. 2006    Oct. 2006
Hirakata (Osaka)   

Internal Combustion

Engine and Machinery

   Restructuring of production system for construction machinery    ¥1.7    —      May 2006    May 2007

Jackson

(Georgia, U.S.A.)

  

Internal Combustion

Engine and Machinery

   Restructuring of production system    ¥1.6    —      Oct. 2005    Nov. 2006

Reforming

No material reforming is planned.

Disposition

No material disposition is planned.

Item 4A. Unresolved Staff Comments

The Company is a large accelerated filer as defined in Rule 12b-2 under the Securities Exchange Act of 1934. There are no written comments which have been provided by the staff of the Securities and Exchange Commission regarding the Company’s periodic reports under that Act not less than 180 days before the end of the fiscal year ended March 31, 2006 and which remain unresolved as of the date of the filing of this Form 20-F with the Commission.

 

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Item 5. Operating and Financial Review and Prospects

Critical Accounting Policies and Estimates

The consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) with the exceptions described in Note 1 of the consolidated financial statements “SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES”. The preparation of the consolidated financial statements requires management to make estimates and assumptions on the selection and application of significant accounting policies. The Company reviews these estimates and assumptions periodically. Actual results may differ from estimated results. The following critical accounting policies that affect financial conditions and operations require management to make significant estimates and assumptions:

1) Inventory Valuation

Completed real estate projects are stated at the lower of acquisition cost or fair value, less estimated costs to sell. The fair values of those assets are estimated based on the appraised values in the market. Land to be developed and projects under development are carried at cost unless those assets are impaired. If carrying amounts of those assets exceed the undiscounted future cash flows expected to be realized from them, those assets are considered impaired, and an impairment loss is measured based on the amount by which the carrying value exceeds the fair value of those assets. If the market conditions and demand in the housing business are less favorable than management’s projection, additional writedowns may be required.

2) Impairment of Investments

The Company classifies all its debt securities and marketable equity securities as available for sale. When a decline in the value of the marketable security is deemed to be other than temporary, the Company recognizes an impairment loss to the extent of the decline. In determining if and when such a decline in value is other than temporary, the Company evaluates the extent to which cost exceeds market value, the duration of market declines, and other key measures. Other non-marketable securities are stated at cost and reviewed periodically for impairment. If equity markets decline or operating results of the issuer of the security become worse, additional impairment losses may be required in the future.

3) Allowance for Doubtful Receivables

The Company evaluates the collectibility of the notes and accounts receivable, with the estimate based on various judgments, including the customers’ financial conditions, historical experience, and the current economic circumstances. If the customers’ financial conditions or current economic circumstances become worse, additional allowances may be required in the future.

4) Deferred Tax Assets

The Company provides a valuation allowance for deferred tax assets with a valuation allowance to adjust the carrying amount when it is more likely than not that the deferred tax assets will not be realized. The valuation of deferred tax assets principally depends on the estimation of future taxable income and tax planning strategies. If future taxable income is lower than expected due to a change in economic circumstances and poor operating results, significant adjustments to deferred tax assets may be required.

5) Impairment of Long-Lived Assets

When events and circumstances indicate that the carrying amount of long-lived assets to be held and used may not be recoverable and the carrying amounts of those assets exceed the undiscounted future cash flows, an impairment loss is recognized based on the amount by which the carrying value exceeds the fair value of the long-lived assets. Fair value is determined primarily using anticipated future cash flows discounted at a rate commensurate with the risk involved. If estimates of future cash flows fall below management’s projection due to an unexpected change in economic circumstances, additional impairment may be required.

 

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6) Retirement and Pension Plans

Benefit obligations and periodic benefit cost are valued based on assumptions developed by the Company and used by actuaries in calculating such amounts. These assumptions include the discount rate, retirement rate, rate of compensation increase, timing of estimated average promotion, mortality rate, expected rate of return on plan assets, and other factors. These assumptions are based upon current statistical data and are reviewed every fiscal year. Differences in actual experience or changes in assumptions may affect the benefit obligations and future periodic benefit cost.

The Company recognizes actuarial gains and losses in excess of 20% of the larger of the projected benefit obligation or plan assets in the year following the year in which such gains and losses were incurred, and amortizes actuarial gains and losses between 10% and 20% over the participants’ remaining service period (approximately 15 years). Significant unrecognized actuarial gains or losses may have a material effect on periodic benefit cost in the next fiscal year.

To determine the discount rate, the Company considers current market interest rates. The Company assumed that the discount rate was 2.5% for the years ended March 31, 2004, 2005, and 2006. A further decrease of 50 basis points in the discount rate would increase the benefit obligations as of March 31, 2006 by approximately ¥8.3 billion ($71 million).

To determine the timing of estimated average promotion which is used in calculating benefit obligations under the point-based benefits system, the Company considers employees’ age, current job classification, official retirement age of 60, and past experiences.

To determine the expected rate of return on plan assets, the Company considers actual returns in the past 5 to 10 years and the current and expected components of plan assets, and anticipated market trends. Plan assets are managed by asset management companies and trust banks, and are invested primarily in fixed income and equity securities of Japanese and foreign issuers. The Company assumed that the long-term rate of return on plan assets was 3.5% for the years ended March 31, 2004 and 2005, and 3.0% for the year ended March 31, 2006. An actual return on plan assets in the past 10 years was 3.1%, and an asset allocation assumption was 55% on fixed income securities with an expected rate of return of 1.0%, and 45% on equity securities with an expected rate of return of 5.5% for the year ended March 31, 2006 and thereafter. A decrease of 50 basis points in the expected rate of return on plan assets would result in an increase of periodic benefit cost for the year ending March 31, 2007 of approximately ¥0.5 billion ($4 million).

In accordance with EITF No. 03-2, “Accounting for the Transfer to the Japanese Government of the Substitutional Portion of Employee Pension Fund Liabilities,” the Company recognized the difference of ¥58.6 billion between the substitutional portion of accumulated benefit obligation settled and the related plan assets transferred to the Japanese government as a government subsidy in other income (expenses) in the consolidated statement of income for the year ended March 31, 2005. The Company also recognized derecognition of previously accrued salary progression of ¥11.1 billion and a settlement loss for the proportionate amount of the net unrecognized loss of ¥13.4 billion. The net amount of ¥2.3 billion of derecognition of previously accrued salary progression and the settlement loss was allocated to cost of sales of ¥1.5 billion and selling, general, and administrative expenses of ¥0.7 billion.

7) Revenue Recognition for Long-Term Contracts

Long-term contracts are accounted for using the percentage of completion method. The Company believes that it is able to develop reasonably dependable estimates of the extent of progress toward completion of individual contracts. Concerning the method of measuring the extent of progress toward completion, the Company uses the cost-to-cost method in measuring the extent of progress toward completion.

Generally, output measures are considered to be the best measures of progress toward completion. But, in case of the Company, most contracts with customers include the delivery and installation of component units. Accordingly, measuring the extent of progress toward completion cannot be properly measured. The Company deems that the measuring method based on the accrual cost method is the most appropriate. Among the various input measure methods available, the Company believes the cost-to-cost method to be preferable rather than others, such as labor hours, labor cost, machine hours, or material quantities.

The Company’s senior management and the Board of Corporate Auditors had proactive discussions about these critical accounting policies, and they agreed that estimates and assumptions were appropriate in light of the current and expected market conditions, the Company’s businesses, and numerous other factors.

 

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New Accounting Standards

In November 2004, the FASB issued SFAS No. 151, “Inventory Costs, an amendment of ARB No. 43 (“ARB 43”), Chapter 4” in order to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material (spoilage). This statement requires that those items be recognized as current-period charges regardless of whether they meet the “so abnormal” criterion outlined in ARB 43. SFAS No. 151 also requires the allocation of fixed production overheads to inventory based on the normal capacity of the production facilities. Unallocated overheads must be recognized as an expense in the period in which they are incurred. This statement is effective for inventory costs incurred during fiscal years beginning after June 15, 2005. The adoption of this statement is not expected to have a material effect on the Company’s consolidated results of operations and financial position.

In December 2004, the FASB issued SFAS No. 153, “Exchanges of Nonmonetary Assets, an amendment to APB Opinion No. 29.” This statement eliminates the exception to measure exchanges at fair value for exchanges of similar productive assets and replaces it with a general exception for exchange transactions that do not have commercial substance. This statement is effective for nonmonetary exchanges in fiscal periods beginning after June 15, 2005. The adoption of this statement is not expected to have a material effect on the Company’s consolidated results of operations and financial position.

In May 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections, a replacement of APB Opinion No. 20 and FASB Statement No. 3” (“SFAS 154”). SFAS 154 changes the requirements for the accounting and reporting of a change in accounting principle by requiring that a voluntary change in accounting principle be applied retrospectively with all prior periods’ financial statements presented on the new accounting principle, unless it is impracticable to do so. SFAS 154 also requires that a change in depreciation or amortization for long-lived, nonfinancial assets be accounted for as a change in accounting estimate effected by a change in accounting principle and corrections of errors in previously issued financial statements should be termed a “restatement.” SFAS 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. The adoption of this statement is not expected to have a material effect on the Company’s consolidated results of operations and financial position.

In November 2005, the FASB issued FASB Staff Position (“FSP”) FAS 115-1 and FSP FAS 124-1, “The Meaning of Other-Than-Temporary Impairment and its Application to Certain Investments” (“FSP 115-1”). FSP 115-1 explains when investments in debt securities and equity securities are considered to be impaired, and how such impairment loss is measured. FSP 115-1 is effective for other-than-temporary impairment loss for debt and equity securities incurred during fiscal years beginning after December 15, 2005. The adoption of this statement is not expected to have a material effect on the Company’s consolidated results of operations and financial position.

A. Operating Results

(The fiscal year ended March 31, 2006 compared with the fiscal year ended March 31, 2005)

Sales

For the year under review, net sales of the Company rose 6.9%, to ¥1,051.0 billion ($8,983 million). In the domestic market, sales in Internal Combustion Engine and Machinery increased due to steady sales of engines and construction machinery, and sales in Pipes, Valves, and Industrial Castings increased due to favorable sales of industrial castings and business integration in the plastic pipes business. However, sales in Environmental Engineering decreased due to severe conditions of the public works related business, and sales in Other decreased, resulting from a sale of a subsidiary at the beginning of this fiscal year. Total domestic sales decreased 1.1%, to ¥630.8 billion ($5,392 million) from the prior year.

On the other hand, sales in overseas markets increased largely as a result of sustained high growth in the Company’s overseas operations in Internal Combustion Engine and Machinery. Sales in North America increased due to steady sales of tractors and brisk sales of engines and construction machinery. In Europe, sales of tractors, construction machinery, and engines increased largely from the prior year. In Asia, sales of rice-farming equipment rose substantially. As a consequence, overseas sales increased 21.7%, to ¥420.2 billion ($3,592 million) from the prior year. The percentage of overseas sales accounted for 40.0% of net sales, 4.9 percentage points higher than in the prior year.

Please refer to next “sales by industry segment” for details.

 

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Sales by industry segment

1) Internal Combustion Engine and Machinery

Sales in Internal Combustion Engine and Machinery were ¥658.8 billion ($5,631 million), 13.1% higher than in the prior year, comprising 62.7% of consolidated net sales. Domestic sales increased 4.0%, to ¥267.3 billion ($2,285 million), and overseas sales also increased 20.2%, to ¥391.5 billion ($3,346 million). This segment consists of farm equipment, engines, and construction machinery.

In the domestic market, sales of farm equipment increased from the prior year. Although the domestic farm equipment market did not report briskness against a background of declining numbers of farmers in Japan and the division of middle-scale farmers into large-scale and small-scale farmers, the Company executed an aggressive sales promotion with finely tuned marketing programs and solution-providing activities for individual farmers in response to the changing environment surrounding Japanese farmers. Additionally, there was an upward trend in the domestic construction machinery market, and sales of construction machinery increased due to expansion of sales for the major rental companies supplying high-quality products in terms of safety and convenience. Sales of engines increased largely due to expansion of sales of existing and new manufacturers of construction machinery and industrial machinery.

In overseas markets, sales of tractors in North America increased steadily due to a sales promotion called the “Thanks a million” campaign, which was carried out after achieving sales of one million tractors in the United States. Sales in European markets increased substantially due to launching new models of garden tractors and utility vehicles (4-wheel multi-purpose vehicles), which achieved a successful outcome in the United States. In Asian markets, sales of rice farming machinery continue to increase, especially tractors in Thailand and combine harvesters in China. As for construction machinery, sales in European markets expanded largely due to the introduction of new products and an increasing market share. Sales of construction machinery in North America increased significantly due to improved recognition of the usefulness of the Company’s mini-backhoes. With regard to engines, sales in the North American and European markets increased largely due to brisk business activities of existing major customers, the development of new customers, and the expansion of new applications.

2) Pipes, Valves, and Industrial Castings

Sales in Pipes, Valves, and Industrial Castings were ¥189.7 billion ($1,621 million), 11.2% higher than in the prior year, comprising 18.0% of consolidated net sales. Domestic sales increased 7.5%, to ¥167.2 billion ($1,429 million), and overseas sales increased 48.7%, to ¥22.5 billion ($192 million). This segment consists of pipes, valves, and industrial castings.

In the domestic market, sales of ductile iron pipes decreased due to declining demand. On the other hand, sales of plastic pipes steadily increased due to the business integration with C.I.Kasei Co., Ltd., from April 2005, and sales of industrial castings also increased largely due to the demand related to brisk capital expenditure in the steel and energy industries.

In overseas markets, sales of ductile iron pipes increased from the prior year due to steady sales in the Middle East against a background of raising price of oil, and sales of industrial castings also increased from the prior year for the same reason as the domestic market.

3) Environmental Engineering

Sales in Environmental Engineering were ¥110.5 billion ($944 million), 6.1% lower than the prior year, comprising 10.5% of consolidated net sales. Domestic sales decreased 7.4%, to ¥105.5 billion ($901 million), and overseas sales increased 32.4%, to ¥5.0 billion ($43 million). This segment consists of environmental control plants and pumps.

With regard to the domestic market, the Company operated this business in a difficult market where intensifying competition combined with price declines due to decreasing budgets for public works are in progress. Under such conditions, sales in the Water & Sewage Engineering Division increased, but sales in the Pumps Division slightly decreased and sales in the Waste Engineering Division decreased significantly. In overseas markets, sales of pumps and submerged membrane systems increased steadily.

4) Other

Sales in Other were ¥92.1 billion ($787 million), 18.0% lower than the prior year, comprising 8.8% of consolidated net sales. Domestic sales decreased 18.6%, to ¥90.8 billion ($776 million), and overseas sales increased 65.5%, to ¥1.2 billion ($11 million). This segment consists of vending machines, electronic-equipped machinery, air-conditioning equipment, construction, septic tanks, condominiums, and other business.

Sales of electronic-equipped machinery increased steadily. However, sales of vending machines slightly decreased, and sales of air-conditioning equipment, construction, septic tanks, and condominiums also declined. In particular, the Company coped with selecting and focusing the domain of its construction business and discontinued some part of construction business. In addition, there was a drop in sales due to the sale of a certain subsidiary. As a consequence, sales of this segment decreased substantially from the prior year.

 

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Operating Income

Operating income also rose, by 30.8%, to ¥113.5 billion ($970 million), exceeding ¥100 billion for the first time in the history of the Company The Company achieved higher operating income due to increased sales in Internal Combustion Engine and Machinery and a reduction in costs of the public works related business. The ratio of operating income to net sales also recorded a new high of 10.8%. Operating income or loss in each industry segment (before elimination of intersegment profits and corporate expenses) was as follows: Internal Combustion Engine and Machinery, operating income of ¥103.1 billion ($881 million), a 30.3% increase; Pipes, Valves, and Industrial Castings, operating income of ¥19.3 billion ($165 million), a 67.8% increase; Environmental Engineering, operating income of ¥4.2 billion ($36 million), a 26.3% decrease; and Other, operating income of ¥2.2 billion ($19 million), a 43.8% decrease.

Although there was a negative impact of high prices of raw materials, profitability of Internal Combustion Engine and Machinery improved from the prior year due to favorable sales in the European, Asian, and U.S. markets. Profitability of Pipes, Valves, and Industrial Castings improved from the prior year due to rigorous cost controls and the demand related to brisk capital expenditures in the steel and energy industries, while personnel expenses related to employee transfers to a subsidiary were recorded. Profitability in Environmental Engineering deteriorated because the Company is operating this business in a severe market in which intensifying competition together with price declines due to decreasing budgets for public works are in progress. Profitability in Other deteriorated mainly due to personnel expenses related to employee transfers to an affiliated company.

Cost of Sales

The cost of sales increased 4.8% from the prior year, to ¥747.4 billion ($6,388 million). As for material costs, while scrap metal for ductile iron pipes was cheaper than the Company’s expectations, steel products for Internal Combustion Engine and Machinery and resin for plastic pipe rose substantially. The cost of sales as a percentage of consolidated net sales decreased 1.4 percentage points, to 71.1%. The decrease in the ratio was attributable to thoroughgoing activities for cost reductions and controls, increased efficiency of the manufacturing process over past years, and a substantial decrease in pension costs.

SG&A Expenses

Selling, general, and administrative (SG&A) expenses increased 2.0% from the prior year, to ¥185.5 billion ($1,585 million). The ratio of SG&A expenses to net sales decreased 0.9 percentage point, to 17.6%. The decrease in pension costs as well as the Company’s efforts to control spending in all aspects of business operations contributed to the decrease in the ratio.

These SG&A expenses include an expense for covering costs related to the health hazard resulting from the use of asbestos. Please refer “Matters Related to the health hazard of Asbestos in Item5.D” for details.

Loss from Disposal and Impairment of Businesses and Fixed Assets

Loss from disposal and impairment of businesses and fixed assets increased 233.0% from the prior year, to ¥4.7 billion ($40 million). This loss increased mainly due to personnel expenses related to employee transfers to a subsidiary and an affiliated company.

Other Income (Expenses)

Other income, net, was ¥26.9 billion ($230 million), a decrease of ¥42.4 billion from the prior year. While there was a gain of ¥15.9 billion ($136 million) from the nonmonetary exchange of securities of UFJ Holdings, Inc., resulting from the merger of Mitsubishi Tokyo Financial Group, Inc., with UFJ Holdings, Inc., the gain on the transfer of the substitutional portion of the Company’s accumulated pension benefit obligations to the Japanese government, which amounted to ¥58.6 billion, was reported in the prior year.

 

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Income from Continuing Operations before Income Taxes, Minority Interests in Earnings of Subsidiaries, and Equity in Net Income of Affiliated Companies

Due to the factors described above, income from continuing operations before income taxes, minority interests in earnings of subsidiaries, and equity in net income of affiliated companies was ¥140.4 billion ($1,200 million), a decrease of ¥15.6 billion from the prior year.

Income Taxes

Income taxes increased 16.5% from the prior year, to ¥56.1 billion ($479 million). The increase of net income tax from the prior year was mainly due to the low level of income taxes for the prior year. The effective tax rate was 39.9%.

Minority Interests in Earnings of Subsidiaries and Equity in Net Income of Affiliated Companies

Minority interests in earnings of subsidiaries increased ¥1.5 billion, to ¥4.9 billion ($42 million). Equity in net income of affiliated companies decreased ¥0.7 billion from the prior year, to ¥1.6 billion ($14 million). This decrease was due to a drop of net income of Kubota Matsushitadenko Exterior Works, Ltd. (KMEW). Net income of KMEW for the prior year was extraordinarily high due to the low level of income taxes related to the merger.

Net Income from Continuing Operations

Due to the factors described previously, net income from continuing operations was ¥81.0 billion ($693 million), compared with ¥106.8 billion in the prior year.

Income from Discontinued Operations, Net of Taxes

Income from discontinued operations, net of taxes, was not recorded during the year under review. In the prior year, income from discontinued operations, net of taxes, was recorded aggregating ¥11.1 billion.

Net Income

Due to the factors described above, net income was ¥81.0 billion ($693 million), compared with ¥117.9 billion in the prior year. Return on shareholders’ equity decreased 12.1 percentage points, to 14.9%, from the prior year.

Basic net income per ADS (five common shares) was ¥311 ($2.66), as compared to ¥446 in the prior year.

Dividends

The Company’s basic policy for the allocation of profit is to maintain or raise dividends. To this end, the Company determines the most appropriate use of retained earnings by considering requirements of maintaining stable current business operations as well as the future business environment. A year-end cash dividend per ADS at the rate of ¥30 ($0.26) was approved at the general meeting of shareholders, held on June 23, 2006. The Company also paid a ¥20 ($0.17) per ADS interim dividend to each shareholder.

Comprehensive Income

Comprehensive income was ¥140.3 billion ($1,199 million), a ¥21.0 billion improvement from the prior year. This increase was mainly due to an increase in unrecognized gains on securities against a background of raising price of Japanese shares.

(The fiscal year ended March 31, 2005 compared with the fiscal year ended March 31, 2004)

General Economic Conditions

During the year ended March 31, 2005, although the Japanese economy initially maintained an upward trend, the tempo of economic growth slackened after the summer, reflecting slower growth of exports and higher prices of oil and raw materials. Overseas, while the U.S. economy expanded smoothly supported by active housing investment and private capital expenditures, the EU economy decelerated gradually, affected by the stronger Euro.

While the domestic market for Internal Combustion Engine and Machinery was sluggish, overseas markets, especially the small-sized tractors market in the U.S.A., were brisk due to active private consumption and the high level of housing starts. As for the public works related markets, the total amount of orders remained stagnant as ever due to the continuously declining public works spending. The domestic demand for ductile iron pipe, which is one of the mainstays in the public works related products, continued to decline although the pace of decrease declined. Environmental Engineering also faced a difficult operating environment in terms of receiving orders from public agencies.

 

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Sales

Under such conditions, net sales of the Company during the year under review were ¥983.2 billion, a 5.7% increase from the prior year, and domestic sales were ¥637.9 billion, a 0.8% decrease from the prior year. Although the negative impact from the sale of building materials operations in December 2003 (a decrease of ¥28.5 billion) was largely offset by a favorable increase in sales in other segments, domestic sales slightly declined from the prior year.

Overseas sales were ¥345.3 billion, a 20.4% increase from the prior year. This increase was mainly due to the continuing growth in sales of tractors in North America where a very promising new product was introduced, and brisk sales of construction machinery and engines principally in the U.S.A. and European markets. As a result, overseas sales accounted for 35.1% of net sales, 4.2 percentage points higher than in the prior year.

Sales by Industry Segment

1) Internal Combustion Engine and Machinery

Sales in Internal Combustion Engine and Machinery were ¥582.7 billion, 16.2% higher than in the prior year, comprising 59.3% of consolidated net sales. Domestic sales increased 5.8%, to ¥257.0 billion, and overseas sales increased 25.9%, to ¥325.7 billion. This segment consists of farm equipment and engines as well as construction machinery.

In the domestic market, due to the declining number of farmers and the negative impact of typhoons and earthquakes, market conditions were rather harsh. Accordingly, the Company executed aggressive sales promotion campaigns in connection with the introduction of new models of competitively priced farm equipment offering improved performance. By stimulating the market through these activities, the Company further diversified its customer base and increased its market share, which led to higher sales. Sales of construction machinery also increased due to the expansion of sales to rental companies and the introduction of new models supported by a recovery in demand. In overseas markets, sales of tractors in North America remained strong as a result of the introduction of new models and sales promotions, including promotions offering a 0% promotional interest rate. In particular, sales of a newly introduced product, the “utility vehicle” (multipurpose four-wheel vehicles), greatly exceeded expectations, fueling overall sales growth. In European markets, sales of tractors remained steady. In Asian and Oceanian markets, the Company recorded favorable sales, especially in Australia, South Korea, and Thailand. Sales of engines increased due principally to growth in demand from European and North American manufacturers of industrial machinery. Sales of construction machinery, underpinned by growing worldwide demand, also expanded sharply in Europe, our main market, and in the U.S.A., where the market for mini-excavators is growing rapidly.

2) Pipes, Valves, and Industrial Castings

Sales in Pipes, Valves, and Industrial Castings were ¥170.6 billion, 2.6% lower than in the prior year, comprising 17.3% of consolidated net sales. Domestic sales increased 2.0%, to ¥155.4 billion, but overseas sales declined 33.2%, to ¥15.2 billion. This segment consists of pipes and valves as well as industrial castings. As for domestic sales of ductile iron pipes and PVC pipes, prices of these products improved substantially. However, sales of ductile iron pipes decreased due to the lower demand from municipalities, while sales of PVC pipes increased, reflecting higher prices. Sales of industrial castings increased principally due to brisk demand from the steel, energy, and automobile industries.

On the other hand, overseas sales deteriorated significantly because shipments of large orders to Middle East countries were over in the prior fiscal year, although sales of industrial castings rose.

3) Environmental Engineering

Sales in Environmental Engineering were ¥117.6 billion, 1.7% higher than in the prior year, comprising 12.0% of consolidated net sales. Domestic sales increased 1.3%, to ¥113.9 billion, and overseas sales also increased, up 12.5%, to ¥3.7 billion. This segment consists of environmental control plants and pumps.

In the domestic market, Sales in the Water & Sewage Engineering Division decreased as a consequence of the lower level of bids accepted by local government in the prior year due to increased competition. Sales of pumps declined owing to reduced demand of large-sized pumps. On the other hand, sales in the Waste Engineering Division increased due to the progress in construction of large orders. Overall, total sales in Environmental Engineering increased in the domestic market. Overseas sales increased due to favorable sales in a subsidiary, which sells submerged membrane system.

4) Other

Sales in Other were ¥112.3 billion, 18.3% lower than in the prior year, comprising 11.4% of consolidated net sales. Domestic sales decreased 17.4%, to ¥111.6 billion, and overseas sales declined 67.5%, to ¥0.7 billion. This segment consists of vending machines, electronic-equipped machinery, air-conditioning equipment, septic tanks, condominiums, construction, and other equipment and services.

Sales of this segment decreased sharply, affected by the impact of the business transfer of building materials operations. However, sales of vending machines increased owing to brisk demand from the cigarette and bottling industries. Sales of air-conditioning equipment and condominiums also increased significantly. Additionally, sales of electronic-equipped machinery and septic tanks grew. On the other hand, revenues from construction services declined from the prior year.

 

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Operating Income

Operating income increased 283.8% from the prior year, to ¥86.8 billion. In spite of the appreciation of the yen and higher prices of raw materials, a significant decrease in pension costs (a decrease of ¥44.9 billion), increased sales centering on the Internal Combustion Engine and Machinery segment, and the reduction of costs and spending control in public works related business contributed to an increase in operating income. In the prior year, the Company recognized a large amount of unrecognized actuarial loss that resulted from unfavorable stock market conditions in Japan in the past few years before the prior year and a reduction of the discount rate used in pension plans in the year before the prior year.

The Company also had expenses related to reorganization of the building materials business in the prior year (¥4.8 billion). In contrast, the Company had non-recurring operating income in connection with the business transfer of a subsidiary in the year under review. As a result of these factors, operating income for the year under review expanded significantly. Operating income or loss in each industry segment (before elimination of intersegment profits and corporate expenses) was as follows: Internal Combustion Engine and Machinery, operating income of ¥79.2 billion, a 46.5% increase; Pipes, Valves, and Industrial Castings, operating income of ¥11.5 billion, as compared to an operating loss of ¥5.7 billion in the prior year; Environmental Engineering, operating income of ¥5.7 billion, a 4,262.6% increase; and Other, operating income of ¥3.9 billion, as compared to an operating loss of ¥7.1 billion in the prior year.

Profitability in Internal Combustion Engine and Machinery benefited from the brisk sales of lawn mowers as well as compact and utility tractors in the U.S. market, due to steady private consumption and strong housing construction, which was similar with that of the prior year. In addition to the above factors, the decrease in pension costs contributed to an increase in operating income in this segment. Profitability in Pipes, Valves, and Industrial Castings benefited from rigorous cost controls and the increased efficiency of the manufacturing process as well as the decrease in pension costs. In Environmental Engineering, profitability improved due to the decrease in pension costs.

Cost of Sales

The cost of sales increased 1.7% from the prior year, to ¥713.3 billion. The cost of sales as a percentage of net sales decreased 2.9 percentage points, to 72.6%. The decrease in the ratio was attributable to the substantial decrease in pension costs.

SG&A Expenses

Selling, general, and administrative (SG&A) expenses decreased 8.8% from the prior year, to ¥181.7 billion. The ratio of SG&A expenses to net sales decreased 2.9 percentage points, to 18.5%. The decrease in pension costs as well as the Company’s efforts for spending control in all aspects of business operations contributed to the decrease in the ratio.

Loss from Disposal and Impairment of Businesses and Fixed Assets

Loss from disposal and impairment of business and fixed assets decreased 77.8 % from the prior year, to ¥1.4 billion. This improvement was mainly due to the absence of impairment loss of the roofing and siding materials business in the prior year.

 

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Other Income (Expenses)

Other income (expenses), net, was income of ¥69.3 billion, an increase of ¥64.0 billion from the prior year. The increase is largely due to ¥58.6 billion from a government subsidy, which is the difference in the substitutional portion of accumulated benefit obligation settled and related plan assets transferred to the Japanese government. In addition, the foreign exchange gain improved ¥5.1 billion and interest and dividend income increased by ¥2.2 billion.

Income from Continuing Operations before Income Taxes, Minority Interests in Earnings of Subsidiaries, and Equity in Net Income of Affiliated Companies

Due to the factors described above, income from continuing operations before income taxes, minority interests in earnings of subsidiaries, and equity in net income of affiliated companies increased 459.4%, to ¥156.0 billion.

Income Taxes

Income taxes increased 251.2% from the prior year, to ¥48.1 billion. The effective tax rate decreased 18.3 percentage points, to 30.8%. The primary reason for the decrease in the effective tax rate was due to the deductibility of the historical impairment losses and net operating losses related to the sale and dissolution of the subsidiaries. Related deferred tax assets were fully reserved prior to the sale and dissolution of the subsidiaries. Income tax—current was ¥34.5 billion, an increase of ¥5.2 billion, and income tax—deferred (expense) was ¥13.6 billion as compared to income tax—deferred (benefit) of ¥15.6 billion in the prior year.

Minority Interests in Earnings of Subsidiaries and Equity in Net Income of Affiliated Companies

Minority interests in earnings of subsidiaries increased ¥1.0 billion, to ¥3.4 billion. Equity in net income of affiliated companies increased ¥1.5 billion from the prior year, to ¥2.3 billion. Increased profit of the joint venture Kubota Matsushitadenko Exterior Works, Ltd., contributed to increased equity in net income of affiliated companies.

Income (Loss) from Discontinued Operations, Net of Taxes

Income from discontinued operations, net of taxes was ¥11.1 billion, as compared to a loss of ¥0.8 billion in the prior year. This income resulted from a gain in connection with the sale of a subsidiary that operated a golf course.

Net Income

Due to the factors described previously, net income was ¥117.9 billion, compared with ¥11.7 billion in the prior year. Return on shareholders’ equity improved 23.7 percentage points, to 27.0%, from the prior year.

Income per ADS

Basic net income per ADS (5 common shares) was ¥446, as compared to ¥44 in the prior year. The number of shares of treasury stock held by the Company was 40.4 million as of March 31, 2005, and these shares were excluded from the calculation of net income per ADS.

Dividends

The Company’s basic policy for the allocation of profit is to maintain or raise dividends. To this end, the Company determines the most appropriate use of retained earnings by considering requirements of maintaining stable current business operations as well as the future business environment. A year-end cash dividend per ADS at the rate of ¥25 was approved at the general meeting of shareholders, held on June 24, 2005. The Company also paid a ¥15 per ADS interim dividend to each shareholder.

Comprehensive Income

Comprehensive income was ¥119.3 billion, a ¥33.5 billion improvement from the prior year. The increase resulted from the expansion of net income, to ¥117.9 billion. However, the increase was partially offset by a decrease in unrecognized gains on securities and adjustment to reduce the minimum pension liability.

 

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B. Liquidity and Capital Resources

Finance and Liquidity Management

The Company’s financial policy is to ensure adequate financing and liquidity for its operations and to maintain the strength of its balance sheet. Through cash and cash equivalents, other current assets, cash flows provided by operating activities, and borrowing, the Company is in a position to fully finance the expansion of its business, R&D, and capital expenditures for current and future business projects. The specific methods of obtaining financing available to the Company are borrowing from financial institutions, the securitization of trade notes and accounts receivable, establishing committed lines of credit, and the issuance of bonds and commercial paper (CP) in the capital markets.

Annual interest rates of short-term borrowings ranged primarily from 0.31% to 4.71% at March 31, 2006. The weighted average interest rate on such short-term borrowings was 4.02%. As for long-term debt, interest rates were primarily fixed, and the weighted average interest rate on such long-term debt at March 31, 2006, was 2.31%. With regard to maturity profile of these borrowings, please refer to Item 5.F “Tabular Disclosure of Contractual Obligations”.

In North America, the Company maintains an accounts receivable securitization program of trade receivables and finance receivables. The Company may sell both trade and finance receivables through independent securitization trusts. Trade receivables sold under the securitization program and finance receivables sold under the securitization program are excluded from receivables in the accompanying consolidated balance sheets. On the other hand, in the prior year, a subsidiary in the United States has decided to obtain borrowings using finance receivables as collateral instead of selling finance receivables under the securitization program.

Regarding the lines of credit, the Company has established committed lines of credit totaling ¥20.0 billion ($171 million) with some Japanese banks. However, the Company currently does not use these lines as it is focused on the reduction of interest-bearing debt. The Company recognizes issuing bonds as an important resource for raising long-term fund. During the year under review, the Company issued straight bond amounted ¥20.0 billion in Japan and the fund was used mainly for repayment of borrowings. The Company also maintains a CP program allowing for the issuance of CP of up to ¥100.0 billion ($855 million). The Company has not issued CP as of the end of March 2006.

The Company utilizes Group financing. With Group financing, the Company is centralizing and pursuing the efficiency of cash management domestically through the Kubota Cash Management System, under which the excess or shortage of cash at most of its subsidiaries in Japan is invested or funded, as necessary.

To maintain the strength of its balance sheet and help secure adequate funding resources, the Company is reducing its interest-bearing debt excluding debt related to sale financing programs. The Company is providing sale financing programs to support machinery sales in the United States and Japan. As the Company believes an increase of debt related to sales financing programs is a result of business expansion and it is not appropriate to target reduction of the related debt, the additional debt carried on its books to fund this program is excluded when determining the target. At the end of March 2006, the amount of interest-bearing debt excluding debt related to sale financing programs was ¥114.8 billion ($981 million), and the amount of total interest-bearing debt was ¥334.3 billion ($2,857 million). Of the ¥334.3 billion, ¥314.3 billion was borrowings from financial institutions, and the remaining ¥20.0 billion consisted of corporate bonds.

The amount of working capital increased ¥70.5 billion, to ¥241.8 billion ($2,067 million), from the prior year-end. Additionally, the ratio of current assets to current liabilities increased 12.8 percentage points, to 146.8%. The primary reason for this increase was a substantial decrease in the current portion of long-term debt due to repayment of corporate bonds during the year under review. There is some seasonality to the Company’s liquidity and capital resources because a high percentage of the notes and accounts receivable from local governments are collected during April through June each year.

All things considered, the Company believes that it can support its current and anticipated capital and operating expenditures for the foreseeable future. The currencies in which the Company has its debt are mainly Japanese yen and U.S. dollars. There are no restrictions regarding the manner in which the funds may be used.

Ratings

The Company has obtained a credit rating from Rating and Investment Information, Inc. (R&I), a rating agency in Japan, to facilitate access to funds from the capital market in Japan. The Company’s current rating is A+ as of March 2006 and its outlook is stable. The Company’s favorable credit rating provides it access to capital markets and investors.

 

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Assets, Liabilities, and Shareholders’ Equity

1) Assets

Total assets at the end of March 2006 amounted to ¥1,405.4 billion ($12,012 million), an increase of ¥212.3 billion (17.8%) from the end of the prior year. Current assets were ¥758.2 billion ($6,481 million), an increase of ¥82.9 billion from the end of the prior year. Current assets increased due mainly to increases in short-term finance receivables and inventories. The increases in short-term finance receivables and inventories were mainly due to a sales increase in overseas markets. Inventory turnover dropped 0.3 point, to 6.3 times. In addition to the increase in current assets, investments and long-term finance receivables increased due to increases in long-term finance receivables and other investments, which resulted from an increase in the unrealized gain on securities accompanied by a rise in Japanese stock prices. A substantial increase in short- and long-term finance receivables originated from a rapid expansion of business as well as a reduction in sales of finance receivables in North America. Property, plant, and equipment increased ¥6.6 billion, to ¥226.4 billion ($1,935 million). On the other hand, other assets decreased ¥11.9 billion, to ¥46.5 billion ($398 million). This decrease was due to the large decrease in long-term deferred tax assets, which was related to an increase in the unrealized holding gain on securities.

2) Liabilities

Total liabilities amounted to ¥770.0 billion ($6,581 million), an increase of ¥79.6 billion from the prior year-end. Long-term liabilities increased largely due to an increase in long-term debt and other long-term liabilities. Long-term liabilities includes ¥20.0 billion of corporate bonds. Other long-term liabilities increased mainly due to an increase in long-term deferred tax liabilities related to an increase in the unrealized holding gain on securities.

3) Minority Interests

Minority interests increased ¥7.3 billion, to ¥28.9 billion ($247 million), due to favorable results of operations of the subsidiaries and an increase in the number of subsidiaries that are not 100% owned, including Kubota C-I Co., Ltd.

4) Shareholders’ Equity

Total shareholders’ equity increased ¥125.5 billion, to ¥606.5 billion ($5,184 million). Shareholders’ equity substantially increased due to the recording of net income and an increase in accumulated other comprehensive income that mainly resulted from an increase in unrealized gains on securities and partial conversion of convertible bonds to common stock. The shareholders’ equity ratio* was 43.2%, 2.9 percentage points higher than at the prior year-end.

In order to reduce the number of outstanding shares and create more value for shareholders, the Company commenced a program for the purchase of shares of treasury stock in December 2001. During the year under review, the Company purchased 16.29 million shares of treasury stock (¥14.9 billion). The Company retired an aggregate of 56.3 million shares of treasury stock (¥36.3 billion), which consists of 39.0 million shares of treasury stock (¥20.9 billion) on June 30, 2005, and 17.3 million shares of treasury stock (¥15.4 billion) on March 31, 2006. For these purchases, the Company used net cash provided by operating activities. Next fiscal year, the Company plans to continue the purchase of treasury stock. The debt-to-equity ratio** was 55.1%, 8.1 percentage points lower than at the prior year-end, due to growth in shareholders’ equity that resulted from net income, conversion of bonds, and an increased unrealized gain on securities.

 


* Shareholders’ equity ratio = shareholders’ equity / total assets
** Debt-to-equity ratio = interest-bearing debt / shareholders’ equity

Cash Flows

Net cash provided by operating activities during the year under review was ¥87.9 billion ($751 million), an increase of ¥20.9 billion from the prior year. Although net income decreased sharply from the prior year, the Company’s cash position was not affected because the subsidy from the government recorded in the prior year, which was the primary reason for the year-over-year decrease, was a nonmonetary gain. The large increase in net cash provided by operating activities was mainly due to the favorable performance of business operations, especially due to operations in Internal Combustion Engine and Machinery.

Net cash used in investing activities was ¥61.3 billion ($524 million), a decrease of ¥16.9 billion from the prior year. The decrease in net cash used in investing activities was due to increases in the collection of finance receivables, in proceeds from sales of finance receivables in North America, and in proceeds from land and securities.

Net cash used in financing activities was ¥10.2 billion ($87 million), an increase of ¥14.7 billion from the prior year. The Company controlled an increase in interest-bearing debt, including short-term borrowings, and increased cash dividends. As a result of these activities, net cash used in financing activities increased.

As a result, including the effect of changes in exchange rates, cash and cash equivalents at the end of March 2006 were ¥91.9 billion ($785 million), an increase of ¥17.3 billion from the prior year-end.

 

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Derivatives

To offset currency and interest rate fluctuation risks, the Company uses various types of derivatives, including foreign exchange forward contracts, currency swaps, and interest rate swaps. As a basic policy, the Company conducts its derivative transactions within the range of its outstanding credit and obligations, and the Company does not engage in speculative derivative transactions. The counterparties for the Company’s derivative transactions are financial institutions with high creditworthiness; therefore, the Company does not anticipate any credit losses on such transactions. For more specific details, please refer to Note 15 to the consolidated financial statements.

C. Research and Development, Patents and Licenses, etc

Research and Development

The Company conducts its research and development activities with approximately 1,200 researchers and engineers. The following table shows the Company’s research and development expenses for the last 3 fiscal years.

 

     Millions of yen    

Thousands of
U.S. dollars

     2004     2005     2006     2006

R&D Expenses

   ¥ 23,261     ¥ 21,963     ¥ 22,731     $ 194,282

As a percentage of consolidated net sales

     2.5 %     2.2 %     2.2 %     —  

The R&D activities are conducted principally in R&D departments in each business division and subsidiary. In our business divisions and subsidiaries, there are 36 R&D departments. Each department promotes the R&D activities fortifying each business.

Examples of R&D activities in the Company’s 4 industrial segments are as follows:

In Internal Combustion Engine and Machinery, the Company developed new mid-sized tractors with completely novel design, named “M40” series for North America. A smooth and agile performance and ease of operations are achieved by its electronic panel, wet clutch, hydrostatic shuttle transmission and control lever concentrated to the right side. Total R&D expenses of this segment were ¥17.3 billion.

In Pipes, Valves, and Industrial Castings, the Company developed “SGE method” for piling steel pipe. This method realizes 40% reduction of construction cost by shortening work periods and reducing number of pile. Total R&D expenses of this segment were ¥1.9 billion.

In Environmental Engineering, the Company developed Methane Fermentation Unit Employing Submerged Membrane. This unit is substantially downsized comparing with predecessors and can be operated continuously. Total R&D expenses of this segment were ¥1.1 billion.

In Other segment, the Company developed new septic tank for a disposer of single-family house. This septic tank achieved a low price by simplification of structure and reduction of production costs. Total R&D expenses of this segment were ¥2.4 billion.

Patent and License

With respect to licenses or patents, the Company does not rely on specific licenses or patents. As of March 31, 2006, the Company held 5,344 Japanese patent and utility model registrations, and 815 foreign patent and utility model registrations. A utility model registration is a right granted under Japanese law and in certain other countries to inventions of lesser originality than those, which qualify for patents. Although patent rights are important to Kubota, the Company does not consider that the expiration of any single patent or group of related patents would materially affect the conduct of Kubota’s business. Kubota grants licenses to others to use its technology including its patents, and obtains licenses under patents from third parties for technological assistance on a royalty basis. In fiscal 2006, royalty income and expenses were ¥643 million ($5,496 thousand) and ¥118 million ($1,009 thousand), respectively, under such licensing arrangements.

 

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D. Trend Information

Outlook for the Next Fiscal Year

Financial Outlook

In the Company’s forecast of consolidated net sales for the year ending March 31, 2007, the Company believes that domestic sales are expected to be almost the same amount as those of the year under review. As for overseas sales, the Company expects increased sales due to sales expansion in the Pipes, Valves, and Industrial Castings segment and the Environmental Engineering segment as well as sales expansion in the Internal Combustion Engine and Machinery segment. The Company expects a steady improvement in operating income. Although the price increases in raw materials will cause downward pressure on operating income, an increase in overseas sales of Internal Combustion Engine and Machinery and corporate-wide cost reduction are expected to contribute to the increase in operating income. Net income is forecast to slightly decrease from the year under review due to the significant decrease in other income-net due to an absence of the gain on nonmonetary exchange of securities (¥15.9 billion) recorded in the year under review.

Principal Business Policies for Continuous Profit Growth

To realize further development in the medium-to-long term as a company characterized by a combination of growth capabilities, profitability, and stability, Kubota is aggressively implementing the following 3 principal business policies: “Accelerating Business Expansion in Overseas Operations,” “Restructuring Public Works Related Businesses,” and “Corporate Social Responsibility for Attainment of Sustainable Development.”

Contingencies

Legal proceedings

In May 1998, the Company was investigated by the Fair Trade Commission of Japan (the “FTCJ”) for an alleged violation of the Law Concerning Prohibition of Private Monopoly and Preservation of Fair Trade (the “Anti-Monopoly Law”) relating to participation in fixing the shares of ductile iron straight pipe orders in Japan. The Company received a cease and desist recommendation from the FTCJ in March 1999, which was accepted by the Company in April 1999.

The FTCJ also brought a criminal accusation alleging violation of the Anti-Monopoly Law against the Company and 3 of its employees, who were indicted in the Tokyo High Court in March 1999. On February 24, 2000, the Company was fined ¥130 million, and the 3 employees were given 6-10 months prison sentences, suspended for 2 years.

In the meanwhile, the Company received a surcharge order of ¥7,072 million from the FTCJ. The Company has challenged this order and filed a petition for the initiation of hearing procedures that were started in March 2000. Under Section 49 of the then Anti-Monopoly Law, upon initiation of the procedures the surcharge order lost effect. In addition, Section 7-2 of the then Anti-Monopoly Law stipulates that surcharges are imposed in cases where price cartels or cartels that influence prices by curtailing the volume of supply are carried out. The Company believes that the alleged share cartel does not meet the requirement of Section 7-2, and has not established any provision for the ultimate liability, if any, which may result from the settlement of this matter. An unfavorable outcome from this issue could materially affect the Company’s results of operations or cash flows in a given year. The Company is not able to estimate the likelihood of such unfavorable outcome. As of this filing date, the Company is still in the process of the hearing procedures.

 

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Matters Related to the health hazard of Asbestos

Background

Until 1995, the Company’s plant in Amagasaki, Hyogo Prefecture, which is now a company office, had produced products containing asbestos. In April 2005, the Company was advised that some residents who lived near the former plant suffered from mesothelioma, a form of lung cancer that is said to be mainly caused by the aspiration of asbestos. After discussing this issue with those patients and their private support groups, and deliberating internally and consulting with outside advisers, the Company announced its intention in June 2005 to act seriously and faithfully concerning various issues of the health hazard of asbestos from the viewpoint of corporate social responsibility (CSR) as a company that had once manufactured products containing asbestos for a long time.

According to the Company’s basic policy, the Company started in August 2005 the program of consolation payments to patients with mesothelioma who lived near the former plant and to the families of residents who died from mesothelioma. After the Company established its internal policies and procedures of consolation payments, the Company has received claims for consolation payments from 101 residents and paid or accrued consolation payments to 88 of those residents after carefully reviewing those claims as of March 31, 2006.

Subsequently, the Company decided to establish the relief payment system in place of the consolation payment system and make additional payment to the residents to whom consolation payment were eligible to be paid or payable. The new supporting system will be applied to the residents who will claim for payment in the future. Based on this system, the Company accrued relief payments to above-mentioned 88 of residents who were eligible to be paid or acrued consolation payments as of March 31, 2006.

With regard to the procedures for making claims to the Company for consolation payments or relief payments, the Company has asked the residents or the bereaved family of the residents who lived close to our former plant to communicate with the Company through Amagasaki Occupational Safety and Health Center with the documents requested by the Company.

With regard to current and former employees who suffered and are suffering from asbestos-related disease, in accordance with the Company’s internal policies, the Company shall pay compensation which is not required by law. Upon certification of medical treatment compensation from the Workers’ Accident Compensation Insurance for asbestos-related diseases, the compensation for asbestos-related disease shall be paid. In case an employee dies during medical treatment and are certified for compensation from the Workers’ Accident Compensation Insurance for bereaved families, the compensation for asbestos-related disease for the bereaved family shall also be paid. In addition, the Company shall provide other financial aids, such as medical expenses during medical treatment which are incurred by the diseased employees or salary payments during the period of their absence from work. The cumulative number of current and former employees who are eligible for compensation in accordance with the Company’s internal policies that are not required by law is 83 as of the end of March 2004, 94 as of the end of March 2005, and 132 as of the end of March 2006.

As a further action, the Company proceeded to consider and attempt to implement forms of medical support, such as establishment of fund for medical treatment and research, support for early diagnosis method and medical treatment in cooperation with medical institutions and creating donation chairs. And the Company reached an agreement on medical support with two medical institutions. According to an agreement, the company will provide a total of ¥1.2 billion donation to Hyogo College of Medicine in 10 years and a total of ¥0.5 billion donation to Osaka Medical Center for Cancer and Cardiovascular Diseases in 5 years from the current year.

As a result of the asbestos issue becoming an object of public concern, the Japanese government newly established the Law for the Relief of Patients Suffering from Asbestos-Related Diseases (“New Asbestos Law”) in March 2006. This law was enacted for the purpose of promptly providing relief to people suffering from asbestos-related diseases who are not eligible for relief by compensation from the Workers’ Accident Compensation Insurance in accordance with the Workers’ Accident Compensation Insurance Law. Based on the New Asbestos Law, a Fund for the Relief of Patients Suffering from Asbestos-Related Diseases (the “Fund”) was established by the Environmental Restoration and Conservation Agency of Japan, which is an independent administrative institution, for the purpose of providing financial assistance to eligible patients. The Fund is to commence the supply of funds to those individuals with asbestos-related illnesses as soon as they are identified as eligible patients under the New Asbestos Law.

        Details of the terms of provision of funds by the Fund are as follows: When any such people are (i) identified as sufferers of asbestos-related diseases (the “Designated Diseases”), which fall within the categories designated by the Cabinet Order, including mesothelioma, malignant neoplasm of bronchi or lungs, or other diseases which are specified in Cabinet Orders, and (ii) are not covered by the Workers’ Accident Compensation Insurance Law, then the Fund shall provide funds to these people in an amount equivalent to medical expenses (to the extent of the amount actually incurred by the diseased people), recuperation benefits, funeral fees and adjustment of relief payments (the amount varies depending on the substance of the disease). To the bereaved family of the patients who died due to the Designated Diseases before the enforcement of the New Asbestos Law, who would have been eligible to receive the funds under the New Asbestos Law, special condolence money and special funeral fees shall be paid from the Fund. To the bereaved families of workers who died due to the Designated Diseases and whose right of claims under the Workers’ Accident Compensation Insurance Law ceased to exist because of prescription, a special survivors or special survivor’s compensation shall be paid by the Fund.

The Fund, from which the relief aid is paid, is funded by the national government, municipal governments, and business entities. With regard to the sharing of financial burden by each entity, the national government has already contributed ¥38.8 billion to the Fund, which also covered the initial operating costs at the time of the establishment of the Fund in the year ended March 31, 2006, and it will make additional contributions to cover half of the operating costs the year ending March 31, 2007 and thereafter. Municipal governments shall contribute a quarter of the government’s contribution amount excluding operating costs. As for business entities, all business entities that employ workers shall be imposed with a contribution burden in accordance with their total wage amount, and at the same time, business entities involved in asbestos-related business that meet certain conditions shall be imposed with an additional contribution burden.

The amount of contribution to be made by each business entity is now under consideration by the national government and is to be decided in the year ending March 31, 2007, and the business entities shall commence the payment of the contribution from the year ending March 31, 2008.

 

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Contingencies Regarding Asbestos-Related Matters

The Company expenses payments to certain residents and current and former employees when the Company determines that a payment is warranted based on the medical condition of the individual concerned and in accordance with the Company’s policies and procedures. The amounts of these expenses during the year under review were approximately ¥4.2 billion ($36 million). Of the ¥4.2 billion ($36 million), ¥3.2 billion ($27 million) were expenses related to the payment for the relief payment system established in April, 2006. The Company has no grounds to project the number of current and former employees and residents who lived close to the Company’s plants that are going to newly apply for payments. In addition, Kubota’s liability under the New Asbestos Law has not been determined yet, and, although the Company has not been involved in any lawsuits up to the present time related to the asbestos-related diseases of its current and former employees and residents who lived close to the Company’s plants, the Company recognizes the possibility that it may face lawsuits related to this issue. Therefore, the Company believes it is not possible to reasonably estimate the amount of its ultimate liability relating to this contingency. However, the Company believes asbestos-related issues contain potentially material risks for the Company’s consolidated results of operations, financial position, and its liquidity.

Subsequent events

On May 12, 2006, the Company’s Board of Directors resolved to pay a cash dividend to shareholders of record on March 31, 2006 of ¥6 per common share (¥30 per 5 common shares) or a total of ¥7.8 billion ($67 million). The cash dividend was approved at the general shareholders’ meeting held on June 23, 2006.

On June 23, 2006, the Company’s Board of Directors approved the purchase of up to 10,000,000 shares, or up to ¥11 billion ($94 million) of the parent company’s outstanding common stock on and after June 26, 2006 through September 19, 2006. Pursuant to such approval, 4,700,000 shares of the parent company were purchased for ¥4.4 billion ($37 million).

In addition, on September 20, 2006, the Company’s Board of Directors approved the purchase of up to 5,000,000 shares, or up to ¥5.0 billion ($43 million), of the parent company’s outstanding common stock on and after September 21, 2006 through December 14, 2006.

E. Off-balance Sheet Arrangements

The Company accounts for guarantees in accordance with FASB Interpretation No.45 (“FIN 45”), “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others.” Notes 17 and 18 of the financial statements, which are incorporated herein by reference, elaborate on commitments and contingencies.

The Company utilizes accounts receivable securitization programs, which are important for the Company to broaden its funding sources and raise cost-effective funds. In the programs, certain subsidiaries of Kubota sell the receivables to wholly-owned special purpose entites (“SPEs”), which in turn transfer the receivables to bankruptcy-remote independent securitization trusts (the “Trusts”). At the time the receivables are sold to the Trusts, the receivables are removed from the consolidated balance sheet of the Company. The Company retains servicing responsibilities and subordinated interests. The purchaser has no recourse to the Company’s other assets for failure of debtors to pay when due. The Company’s interest in sold receivables is subordinate to purchaser’s interest and serve as credit enhancements for the securities issued by the Trusts. The value of the Company’s interest in sold receivable is subject to credit, repayment, dilution, and interest rate risks on sold receivables.

The Company is obligated to repurchase any receivable if the interest of the administrative agent is materially adversely affected by a breach of representation or warranty made by the SPEs.

 

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F. Tabular Disclosure of Contractual Obligations

The following summarizes contractual obligations at March 31, 2006.

 

     Millions of Yen
          Payments Due by Period

Year Ended March 31, 2006

   Total   

Less than

year

   1-3 years    3-5 years   

More than

5 years

Contractual obligations:

              

Short-term borrowings

   ¥ 132,209    ¥ 132,209    ¥ —      ¥ —      ¥ —  

Capital lease obligations

     6,023      2,829      2,972      177      45

Long-term debt

     196,021      47,191      94,441      39,511      14,878

Deposits from customers

     2,609      2,609      —        —        —  

Operating lease obligations

     1,550      406      541      234      369

Commitments for capital expenditures

     1,336      1,336      —        —        —  

Interest payments

     9,564      3,906      4,237      1,037      384
                                  

Total

   ¥ 349,312    ¥ 190,486    ¥ 102,191    ¥ 40,959    ¥ 15,676
                                  
     Thousands of U.S. Dollars
          Payments Due by Period

Year Ended March 31, 2006

   Total   

Less than

year

   1-3 years    3-5 years   

More than

5 years

Contractual obligations:

              

Short-term borrowings

   $ 1,129,991    $ 1,129,991    $ —      $ —      $ —  

Capital lease obligations

     51,479      24,179      25,402      1,513      385

Long-term debt

     1,675,393      403,342      807,188      337,701      127,162

Deposits from customers

     22,299      22,299      —        —        —  

Operating lease obligations

     13,248      3,470      4,624      2,000      3,154

Commitments for capital expenditures

     11,419      11,419      —        —        —  

Interest payments

     81,744      33,385      36,214      8,863      3,282
                                  

Total

   $ 2,985,573    $ 1,628,085    $ 873,428    $ 350,077    $ 133,983
                                  

The Company’s contributions to pension plans for the year ending March 31, 2007 are expected to be ¥13,597 million ($116,214 thousand).

 

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Table of Contents

G. Safe Harbor

Projected results of operations and other future forecasts contained in this annual report are the estimates of the Company based on information available to the Company as of this published date. Therefore, those projections include certain potential risks and uncertainties. Accordingly, the users of this information are requested to note that the actual results could differ materially from those future projections. Major factors that could influence the ultimate outcome include the economic condition surrounding the Company, foreign exchange rates, agricultural policy in Japan, the trend of public investment and private capital expenditure in Japan, the price-competitive pressure in the market, the ability for the Company to manufacture or innovate products which will be accepted in the market. Finally the users of this information should note that the factors that could influence the ultimate outcome of the Company’s activities are not limited to the above.

 

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Table of Contents

Item 6. Directors, Senior Management and Employees

A. Directors and Senior Management

The information with respect to the directors and corporate auditors is as follows:

 

Name

(Birthday)

  

Number of

Company Shares
Owned

  

Current Positions and Brief Occupational History

(including responsibilities in other companies)

Daisuke Hatakake    45,000 Shares    President and Representative Director of the Company
(Jun. 29, 1941)    of the Company    Apr. 2003    President and Representative Director of the Company (to present)
      Jun. 2002    General Manager of Corporate Compliance Headquarters
      Jun. 2001    Managing Director of the Company, in charge of Corporate Planning & Control Dept., Finance & Accounting Dept., Corporate Information Systems Planning Dept. (assistant)
      Aug. 2000    In charge of PV Business Planning & Promotion Dept.
      Jun. 2000    In charge of Compliance Auditing Dept., Business Alliance Dept. (assistant), Corporate Information Systems Planning Dept. (assistant), General Manager of Corporate Planning & Control Dept.
      Jun. 1999    Director of the Company
      Dec. 1998    General Manager of Corporate Planning & Control Dept.
      Apr. 1964    Joined the Company

Moriya Hayashi

(May 7, 1944)

   29,000 Shares
of the Company
   Executive Vice President and Representative Director of the Company General Manager of
Farm & Industrial Machinery Consolidated Division, General Manager of International
Operations Headquarters in Farm & Industrial Machinery Consolidated Division
      Apr. 2006    Executive Vice President and Representative Director of the Company (to present)
      Apr. 2004    General Manager of Farm & Industrial Machinery Consolidated Division (to present)
      Apr. 2004    Executive Managing Director of the Company
      Apr. 2003    Managing Director of the Company, General Manager of Tractor Division
      Jan. 2002    General Manager of International Operations Headquarters in Farm & Industrial Machinery Consolidated Division (to present)
      Oct. 2001    Deputy General Manager of Tractor Division
      Jun. 2001    Director of the Company
      Jun. 1999    President of Kubota Tractor Corporation
      Apr. 1969    Joined the Company

 

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Table of Contents

Yoshihiro Fujio

(Sep. 6, 1944)

  

22,000 Shares

of the Company

  

Executive Managing Director of the Company

In charge of Tokyo Head Office, General Manager of Industrial & Material Systems Consolidated Division, General Manager of Tokyo Head Office

      Apr. 2006    In charge of Tokyo Head Office, General Manager of Tokyo Head Office (to present)
      Jun. 2004    General Manager of Coordination Dept. in Industrial & Material Systems Consolidated Division
      Apr. 2004    Executive Managing Director of the Company, General Manager of Industrial & Material Systems Consolidated Division (to present)
      Dec. 2003    In charge of Housing & Building Materials Business Coordination Dept.
      Apr. 2003    Managing Director of the Company, in charge of Secretary & Public Relations Dept., Health & Safety Planning & Promotion Dept.
      Oct. 2002    In charge of Environmental Protection and Health & Safety Promotion Dept. (assistant)
      Jun. 2002    In charge of Personnel Dept., General Manager of Head Office
      Jun. 2001    Director of the Company, in charge of Human Resources & Labor Relations Dept. (assistant)
      Jun. 2000    General Manager of Electronic Equipped Machinery Division and General Manager of Kyuhoji Plant
      Apr. 1967    Joined the Company

Toshihiro Fukuda

(Oct. 12, 1945)

   39,000 Shares of the Company   

Executive Managing Director of the Company

In charge of Environmental Protection Dept., CSR Planning & Coordination Dept., Secretary & Public Relations Dept., General Manager of Compliance Headquarters

      Apr. 2006    In charge of Secretary & Public Relations Dept., (to present)
      Apr. 2005    Executive Managing Director of the Company, in charge of CSR Planning & Coordination Dept., General Manager of Compliance Headquarters (to present)
      Apr. 2004    In charge of Environmental Protection Dept., (to present)
      Apr. 2004    Managing Director of the Company, in charge of General Affairs Dept., Corporate Compliance Headquarters
      Apr. 2003    General Manager of Farm Machinery Division
      Mar. 2003    In charge of Related Products Division
      Jun. 2002    Director of the Company
      Oct. 2001    Deputy General Manager of Sales Headquarters in Farm & Industrial Machinery Consolidated Division and General Manager of Sales Coordination Dept. in Farm & Industrial Machinery Consolidated Division
      Dec. 1998    General Manager of Coordination Dept. in Farm & Industrial Machinery Consolidated Division
      Apr. 1969    Joined the Company

Yasuo Masumoto

(Apr. 21, 1947)

  

20,000 Shares

of the Company

  

Executive Managing Director of the Company

In charge of Quality Assurance & Manufacturing Promotion Dept., Deputy General Manager of Industrial & Material Systems Consolidated Division, General Manager of Production Control Headquarters in Industrial & Material Systems Consolidated Division

      Apr. 2006    Executive Managing Director of the Company, (to present)
      Apr. 2005    Deputy General Manager of Industrial & Material Systems Consolidated Division (to present)
      Jan. 2005    In charge of Quality Assurance & Manufacturing Promotion Dept. (to present)
      Jun. 2004    General Manager of Purchasing Dept. in Industrial & Material Systems Consolidated Division
      Apr. 2004    Managing Director of the Company, in charge of Manufacturing Planning & Promotion Dept.
      Apr. 2003    General Manager of Production Control Headquarters in Industrial & Material Systems Consolidated Division (to present)
      Jun. 2002    Director of the Company
      Oct. 2001    General Manager of Farm Machinery Division
      Apr. 1999    General Manager of Utsunomiya Plant
      Apr. 1971    Joined the Company

 

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Table of Contents

Yoshiharu Nishiguchi

(Jan. 29, 1947)

   21,000 Shares
of the Company
   Managing Director of the Company
In charge of General Affairs Dept., Personnel Dept., Health & Safety Planning &
Promotion Dept., Tokyo Administration Dept., General Manager of Head Office
      Apr. 2006    In charge of General Affairs Dept., Tokyo Administration Dept., (to present)
      Apr. 2005    Managing Director of the Company, in charge of Personnel Dept., Health & Safety Planning & Promotion Dept., General Manager of Head Office (to present)
      Apr. 2004    In charge of Septic Tanks Division, Housing & Building Materials Business Coordination Dept., PV Business Planning & Promotion Dept., Secretary & Public Relations Dept.
      Jun. 2003    Director of the Company, in charge of Air Condition Equipment Division, Corporate Planning & Control Dept., Finance & Accounting Dept.
      Dec. 2002    General Manager of Compliance Auditing Dept.
      Jun. 2000    General Manager of Finance & Accounting Dept.
      Apr. 1970    Joined the Company

Eisaku Shinohara

(Aug. 25, 1947)

   18,000 Shares
of the Company
   Managing Director of the Company
In charge of Research & Development Planning & Promotion Dept., General Manager of R
& D Headquarters in Farm & Industrial Machinery Consolidated Division
      Apr. 2005    Managing Director of the Company, in charge of Research & Development Planning & Promotion Dept. (to present)
      Apr. 2004    General Manager of R & D Headquarters in Farm & Industrial Machinery Consolidated Division (to present)
      Jun. 2003    Director of the Company
      Oct. 2001    Deputy General Manager of R&D Headquarters in Farm & Industrial Machinery Consolidated Division and General Manager of Vehicle Technology Generalization Dept.
      Jun. 2000    General Manager of Construction Machinery Division and General Manager of Planning Dept. in Construction Machinery Division
      Apr. 1974    Joined the Company

Nobuo Izawa

(Feb. 28, 1948)

   12,000 Shares
of the Company
   Managing Director of the Company
General Manager of Environmental Engineering Consolidated Division
      Apr. 2006    General Manager of Environmental Engineering Consolidated Division (to present)
      Apr. 2005    Deputy General Manager of Environmental Engineering Consolidated Division
      Apr. 2005    Managing Director of the Company (to present)
      Jun. 2003    Director of the Company
      Apr. 2002    General Manager of Pumps Division and General Manager of Planning Dept. in Pumps Division
      Jun. 2001    General Manager of Pumps Division
      Apr. 1998    General Manager of Sales Dept. I in Pumps Division
      Apr. 1971    Joined the Company

 

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Table of Contents

Yoshihiko Tabata

(Mar. 23, 1946)

   19,000 Shares
of the Company
   Managing Director of the Company
General Manager of Engine Division
      Apr. 2006    Managing Director of the Company (to present)
      Jun. 2004    Director of the Company
      Oct. 2003    General Manager of Engine Division (to present)
      May 1998    President of Kubota Engine America Corporation
      Dec. 1976    Joined the Company

Kazunobu Ueta

(Jan. 1, 1947)

   18,000 Shares
of the Company
   Managing Director of the Company
General Manager of Sales Headquarters in Farm & Industrial Machinery Consolidated Division
      Apr. 2006    Managing Director of the Company (to present)
      Apr. 2005    In charge of Farm Facilities Division
      Apr. 2005    General Manager of Sales Headquarters in Farm & Industrial Machinery Consolidated Division (to present)
      Jun. 2004    Director of the Company, in charge of Related Products Division
      Apr. 2004    In charge of Related Products Division (assistant) and General Manager of Sales Control Dept. in Farm & Industrial Machinery Consolidated Division
      Apr. 2000    Deputy General Manager of Sales Headquarters in Farm & Industrial Machinery Consolidated Division
      Apr. 1969    Joined the Company

Tokuji Ohgi

(Jul. 25, 1947)

   12,000 Shares
of the Company
   Director of the Company
General Manager of Ductile Iron Pipe Division
      Apr. 2005    General Manager of Ductile Iron Pipe Division (to present)
      Jun. 2004    In charge of Personnel Dept., Health & Safety Planning & Promotion Dept., General Manager of Head Office
      Jun. 2004    Director of the Company (to present)
      Apr. 2004    In charge of Personnel Dept. (assistant), Health & Safety Planning & Promotion Dept. (assistant)
      Apr. 2003    General Manager of Secretary & Public Relations Dept.
      Jun. 2001    General Manager of Human Resources & Labor Relations Dept.
      Apr. 1972    Joined the Company

 

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Table of Contents

Morimitsu Katayama

(Jan. 17, 1948)

  

23,000 Shares

of the Company

  

Director of the Company

In charge of Quality Assurance & Manufacturing Promotion Dept. (assistant), General Manager of Manufacturing Headquarters in Farm & Industrial Machinery Consolidated Division, General Manager of Sakai Plant

      Jan. 2005    In charge of Quality Assurance & Manufacturing Promotion Dept. (assistant) (to present)
      Jun. 2004    In charge of Manufacturing Planning & Promotion Dept. (assistant)
      Jun. 2004    Director of the Company (to present)
      Apr. 2004    General Manager of Manufacturing Headquarters in Farm & Industrial Machinery Consolidated Division (to present)
      Apr. 2003    General Manager of Sakai Plant (to present)
      Oct. 2001    General Manager of Construction Machinery Manufacturing Dept. in Hirakata Plant and General Manager of Construction Machinery Division
      Apr. 1999    General Manager of Construction Machinery Manufacturing Dept. in Hirakata Plant
      Apr. 1963    Joined the Company

Nobuyuki Toshikuni

(Jan. 30, 1951)

  

11,000 Shares

of the Company

  

Director of the Company

General Manager of Tractor Division

      Jun. 2004    Director of the Company (to present)
      Apr. 2004    General Manager of Tractor Division (to present)
      Oct. 2001    President of Kubota Tractor Corporation
      Apr. 1999    General Manager of Tractor Engineering Dept.
      Apr. 1973    Joined the Company

Hirokazu Nara

(Oct. 2, 1948)

  

14,000 Shares

of the Company

  

Director of the Company

In charge of Septic Tanks Division, Corporate Planning & Control Dept., Finance & Accounting Dept.

      Oct. 2005    In charge of Corporate Planning & Control Dept. (to present)
      Jun. 2005    In charge of Housing & Building Materials Business Coordination Dept., PV Business Planning & Promotion Dept., Air Condition Equipment Division
      Jun. 2005    Director of the Company, in charge of Septic Tanks Division, Finance & Accounting Dept. (to present)
      Apr. 2005    In charge of Air Condition Equipment Division (assistant), Septic Tanks Division (assistant), Housing & Building Materials Business Coordination Dept. (assistant), PV Business Planning & Promotion Dept. (assistant), Finance & Accounting Dept. (assistant)
      Apr. 2003    General Manager of Corporate Planning & Control Dept.
      Jun. 1996    General Manager of Planning Dept. in Vending Machinery Division
      Apr. 1971    Joined the Company

 

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Table of Contents

Masayoshi Kitaoka

(Dec. 11, 1949)

  

6,000 Shares

of the Company

   Director of the Company
General Manager of Farm Machinery Division
      Jun. 2005    Director of the Company (to present)
      Apr. 2004    General Manager of Farm Machinery Division (to present)
      Dec. 2002    General Manager of Electronic Equipped Machinery Division and General Manager of FA Sales Dept.
      Jun. 2001    General Manager of CAD Dept. and General Manager of Kyuhoji Plant and General Manager of Electronic Equipped Machinery Division
      Aug. 2000    General Manager of CAD Dept. and General Manager of Kyuhoji Plant
      Apr. 1998    General Manager of CAD Dept.
      Apr. 1973    Joined the Company

Tetsuji Tomita

(Mar. 6, 1950)

  

7,000 Shares

of the Company

   Director of the Company
President of Kubota Tractor Corporation
      Jun. 2005    Director of the Company (to present)
      Apr. 2004    President of Kubota Tractor Corporation (to present)
      Jan. 2003    President of Kubota Europe S.A.S.
      Oct. 1999    General Manager of Export Dept. in Tractor Division
      Apr. 1973    Joined the Company

Masatoshi Kimata

(Jun. 22, 1951)

  

15,000 Shares

of the Company

   Director of the Company
General Manager of Tsukuba Plant
      Jun. 2005    Director of the Company (to present)
      Oct. 2001    General Manager of Tsukuba Plant (to present)
      Apr. 1977    Joined the Company

Nobuyo Shioji

(Apr. 11, 1949)

  

2,000 Shares

of the Company

   Director of the Company
General Manager of Construction Machinery Division
      Jun. 2006    Director of the Company (to present)
      Apr. 2005    General Manager of Construction Machinery Division (to present)
      Apr. 2004    General Manager of Construction Machinery Division and General Manager of Construction Machinery Business Planning & Promotion Dept.
      Apr. 2003    General Manager of Construction Machinery Business Planning & Promotion Dept. and Vice General Manager of Construction Machinery Division
      Jun. 2001    General Manager of Construction Machinery Business Planning & Promotion Dept.
      Apr. 1973    Joined the Company

Takeshi Torigoe

(Apr. 8, 1950)

  

11,000 Shares

of the Company

   Director of the Company
General Manager of Steel Castings Division
      Jun. 2006    Director of the Company (to present)
      Apr. 2005    General Manager of Steel Castings Division (to present)
      Jan. 2004    General Manager of Steel Castings Manufacturing Dept. in Hirakata Plant
      Jan. 2001    President of Kubota Metal Corporation
      Apr. 1976    Joined the Company

 

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Table of Contents

Satoru Sakamoto

(Jul. 18, 1952)

  

4,000 Shares

of the Company

  

Director of the Company

General Manager of Air Condition Equipment Division, President of Kubota Air Conditioner, Ltd.

      Jun. 2006    Director of the Company (to present)
      Apr. 2006    President of Kubota Air Conditioner, Ltd. (to present)
      Apr. 2006    General Manager of Air Condition Equipment Division (to present)
      Oct. 2005    Vice General Manager in Air Condition Equipment Division
      Apr. 2003    General Manager of Planning Dept. in Ductile Iron Pipe Division
      Jun. 2001    General Manager of Corporate Planning & Control Dept.
      Apr. 1976    Joined the Company

Hideki Iwabu

(Oct. 21, 1952)

  

9,000 Shares

of the Company

  

Director of the Company

General Manager of Water & Sewage Engineering Division

      Jun. 2006    Director of the Company (to present)
      Apr. 2006    General Manager of Water & Sewage Engineering Division (to present)
      Apr. 2004    General Manager of Sewage Engineering Dept. II
      Jun. 2001    General Manager of Water & Sewage Engineering Dept.
      Apr. 2001    General Manager of Sewage Engineering Dept.
      Apr. 1975    Joined the Company
Susumu Sumikura    29,000 Shares    Corporate Auditor of the Company
(Jul. 1, 1943)    of the Company    Jun. 2003    Corporate Auditor of the Company (to present)
      Apr. 2002    Corporate Planning & Control Dept.
      Jun. 1999    General Manager of Business Alliance Dept.
      Dec. 1998    General Manager of Planning Dept of Electronic Equipped Machinery Division
      Apr. 1967    Joined the Company
Junichi Maeda    17,000 Shares    Corporate Auditor of the Company
(May 23, 1945)    of the Company    Jun. 2005    Corporate Auditor of the Company (to present)
      Jun. 2003    Director of the Company
      Apr. 2003    General Manager of Ductile Iron Pipe Division
      Jun. 2001    General Manager of Planning Dept. in Ductile Iron Pipe Division
      Apr. 2001    Ditto and General Manager of Production Management Dept. in Ductile Iron Pipe Division
      Jun. 2000    General Manager of Planning Dept. in Ductile Iron Pipe Division
      Sep. 1972    Joined the Company

 

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Table of Contents
Yuzuru Mizuno    0 Shares    Corporate Auditor of the Company
(Jan. 21, 1948)    of the Company    Jul. 2005    Executive Senior Councilor of Corporate Accounting & Finance of Matsushita Electric Industrial Co., Ltd.
      Jun. 2005    Corporate Auditor of the Company (to present)
      Jul. 2004    Executive Director of Matsushita Electric Industrial Co., Ltd., in charge of Corporate Finance & Investor Relations
      Feb. 2004    Director (non full-time) of Nippon Otis Elevator Company
      Oct. 2000    President (non full-time) of Panasonic Finance (Japan) Co., Ltd.
      Oct. 2000    General Manager of Corporate Finance Dept. of Matsushita Electric Industrial Co., Ltd.
      Jun. 1998    Managing Director of Matsushita Industrial Corporation Sdn. Bhd.
      Dec. 1995    General Manager of Accounting Dept. in Compressor Division of Matsushita Electric Industrial Co., Ltd.
      Apr. 1970    Joined Matsushita Electric Industrial Co., Ltd.
Teisuke Sono    6,000 Shares    Corporate Auditor of the Company
(May 10, 1934)    of the Company    Apr. 2004    Appointed as a visiting professor of Hokuriku University (to present)
      Jun. 2003    Corporate Auditor of the Company (to present)
      Apr. 2001    The professor of International Buddhist University
      Aug. 1996    Judge of Osaka High Court
      Oct. 1994    Chief Justice of Kobe Family Court
      Apr. 1973    Judge
      Apr. 1963    Deputy of Judge
Yoshio Suekawa    4,000 Shares    Corporate Auditor of the Company
(Sep. 1, 1937)    of the Company    Jun. 2004    Corporate Auditor of the Company (to present)
      Apr. 2004    Appointed as a special visiting professor, the Faculty of Commerce, Doshisha University (to present)
      Jun. 2003    Assumed statutory auditor of SUS-TECH Corporation
      Jul. 2002    Established Suekawa CPA Office (to present)
      Jun. 2002    Retired from Representative Partner of Deloitte Touche Tohmatsu, Osaka
      May 1989    Assumed Representative Partner of Deloitte Touche, Tohmatsu, Osaka
      Jul. 1984    Joined Sanwa Tokyo Marunouchi (currently, Deloitte Touche Tohmatsu)
      Oct. 1963    Registered as a CPA with the Japanese Institute of Certified Public Accountants
      Oct. 1959    Joined Lowe Bingham and Luckie (subsequently, PricewaterhouseCoopers, Osaka)

Between Directors or Corporate Auditors of the Company there is no family relationship. No Directors and Corporate Auditors, except Teisuke Sono and Yoshio Suekawa, Corporate Auditors, of the Company have business activities performed outside the Company. No Directors have directorship of another company.

There is not any arrangement or understanding with major shareholders, customers, suppliers or other pursuant to which any person named above was selected as a Director or a Corporate Auditor.

The Company is not dependent on specific Directors, researchers, or any other entity for its management.

 

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Table of Contents

B. Compensation

The aggregate remuneration, including bonuses, paid by the Company in fiscal 2006 to all Directors (some of whom are also the executive officers) and Corporate Auditors of the Company as a group (31persons) was ¥766 million. No options to purchase securities from the registrant or any of its subsidiaries were outstanding on March 31, 2006.

At the meeting of the Board of Directors of the Company held on May 13, 2005, the Company resolved that the retirement benefit systems for Directors and Corporate Auditors should be terminated as of the date of the ordinary general meeting of shareholders held on June 24, 2005 and retirement benefits should be paid to the then Directors and Corporate Auditors for the services rendered before the termination of the system. The Board of Directors also resolved that the timing of payment would be at the time of the retirement of each Director and/or Corporate Auditor from his/her office. The amount of the retirement benefits for the services rendered before the termination of the system was allocated to other long-term liabilities in the Company’s consolidated balance sheets.

C. Board Practices

The Company’s Articles of Incorporation as revised as of June 23, 2006 provide that the number of Directors of the Company shall be not more than 30 and that of the Corporate Auditors shall be not more than 6.

Directors and Corporate Auditors shall be elected by the general meeting of shareholders. The Board of Directors has ultimate responsibility for administration of the Company’s affairs. Directors may, by resolution of the Board of Directors, appoint a Chairman of the Board of Directors, a Vice Chairman of the Board of Directors, a President-Director, and one or more Executive Vice President-Directors, Executive Managing Directors and Managing Directors. The Chairman of the Board of Directors and President-Director are Representative Directors and severally represent the Company. In addition, the Board of Directors may by its resolution, appoint one or more additional Representative Directors. The term of office of Directors shall, under the Articles of Incorporation of the Company, expire at the conclusion of the ordinary general meeting of shareholders with respect to the last closing of accounts within one year from their assumption of office, and in the case of Corporate Auditors, within 4 years from their assumption of office. However, they may serve any number of consecutive terms.

Under the Corporate Law, which came in effect on May 1, 2006, the Corporate Auditors of the Company are not required to be and are not certified public accountants. However, at least half of the Corporate Auditors shall be a person who has not been a Director, accounting counselor, corporate executive officer, manager or any other employee of the Company or any of its subsidiaries at any time prior to his or her election as a Corporate Auditor.

The Corporate Auditors may not at the same time be Directors, accounting counselor, corporate executive officers, managers or any other employees of the Company or any of its subsidiaries. Each Corporate Auditor has the statutory duty to examine the Company’s consolidated and non-consolidated financial statements and business report to be submitted by a Representative Director at the general meeting of shareholders and, based on such examination and a report of an Accounting Auditor referred to below, to respectively prepare his or her audit report. Each Corporate Auditor also has the statutory duty to supervise the administration by the Directors of the Company’s affairs. They are required to attend in meetings of the Board of Directors and express opinions, if necessary, at such meetings, but they are not entitled to vote.

In addition to Corporate Auditors, an independent certified public accountant or an audit corporation must be appointed at general meetings of shareholders as Accounting Auditor of the Company. Such Accounting Auditor has the duties to examine the consolidated and non-consolidated financial statements proposed to be submitted by a Representative Director at general meetings of shareholders and to report their opinion thereon to certain Corporate Auditors designated by the Board of Corporate Auditors to receive such report (if such Corporate Auditors are not designated, all Corporate Auditors) and the Directors designated to receive such report (if such Directors are not designated, the Directors who prepared the financial statements).

The Corporate Auditors constitute the Board of Corporate Auditors. The Board of Corporate Auditors has a statutory duty to, based upon the reports prepared by respective Corporate Auditors, prepare and submit its audit report to the accounting auditor and certain directors designated to receive such report (if such Directors are not designated, the Directors who prepared the financial statements and the business report). A Corporate Auditor may note his or her opinion in the audit report if his or her opinion expressed in his or her audit report is different from the opinion expressed in the audit report. The Board of Corporate Auditors shall elect one or more full-time Corporate Auditors from among its members. The Board of Corporate Auditors is empowered to establish audit principles, method of examination by Corporate Auditors of the Company’s affairs and financial position and other matters concerning the performance of the Corporate Auditors’ duties.

There are no Director’s service contracts with Kubota Corporation providing for benefits upon termination of service.

The rights of ADR holders, including their rights relating to corporate governance practices, are governed by the Amended and Restated Deposit Agreement (incorporated by reference to the Registration Statement on Form F-6 (File No. 333-91654) filed on June 26, 2002).

 

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D. Employees

 

Head Count at the End of the Period

   2004    2005    2006
   22,198    22,916    23,049

Head Count in Each Segment

   2004    2005    2006

Internal Combustion Engine and Machinery

   10,803    12,026    12,383

Pipes, Valves, and Industrial Castings

   4,240    4,116    4,028

Environmental Engineering

   2,478    2,489    2,563

Other

   4,246    3,872    3,618

Corporate

   431    413    457
              

Total

   22,198    22,916    23,049

The number of full-time employees of Kubota as of March 31, 2006 was 23,049. Most employees of the Company in Japan, other than managerial personnel, are union members. The unions belong to the Federation of all Kubota Labor Union, which is affiliated with the Japanese Trade Union Confederation. The Company has not experienced any strikes or work stoppages for 57 years and believes its relations with its employees or union to be excellent.

Basic wage rates are reviewed annually in Spring. In addition, in accordance with Japanese custom, Kubota grants its full-time employees semiannual bonuses.

The parent company and its domestic subsidiaries have a number of unfunded severance indemnity plans and defined benefit pension plans covering substantially all Japanese employees. Most employees of overseas subsidiaries are covered by defined benefit pension plans or defined contribution pension plans. As is customary in Japan, the Company provides a wide range of fringe benefits to its employees.

E. Share Ownership

The total number of shares of the Company’s common stock beneficially owned by the Directors and Corporate Auditors as a group as of June 23, 2006 was as follows:

 

Title of Class

  

Identity of persons or group

   Number of shares owned    Percentage of class  
Common stock    Directors and Corporate Auditors    413,000    0.03 %

About individual shareholdings, see Item6.A “Directors and Senior Management.”

Employee Stock Ownership Association (Kubota Fund) owned 21,069 thousand shares as of March 31, 2006, which amounted to 1.6% of total shares issued.

The association consists of employees of the Company and some of its subsidiaries, and the members contribute a portion of their salaries to the association. The association purchases shares of Kubota’s common stock on behalf of members.

 

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Item 7. Major Shareholders and Related Party Transactions

A. Major Shareholders

As of March 31, 2006, 5 shareholders held more than 5 percent of the shares issued. The 10 largest shareholders are as follows:

 

     (As of March 31, 2006)

Name

  

Number of shares

(thousand)

   (%)

Japan Trustee Services Bank, Ltd.

   137,454    10.57

The Master Trust Bank of Japan, Ltd.

   117,769    9.06

Trust & Custody Services Bank, Ltd.

   97,705    7.51

Nippon Life Insurance Company

   85,188    6.55

Meiji Yasuda Life Insurance Company

   72,304    5.56

The Dai-ichi Mutual Life Insurance Company

   49,360    3.79

Sumitomo Mitsui Banking Corporation

   34,620    2.66

Sumitomo Life Insurance Company

   23,315    1.79

Kubota Fund (Employee Stock Ownership Plan)

   21,069    1.62

Moxley & Co.

   20,443    1.57

(Note) Although the Company possesses 23,271 of its treasury stocks, it is not included in the table above.

As far as is known to the Company, there is no arrangement, the operation of which may at a subsequent date result in a change in control of the Company. The major shareholders have the same voting rights as other common shareholders of the Company.

As of March 31, 2006, there were 1,299,869,180 shares of Common Stock issued, of which 20,443,263 shares were in the form of ADR and 145,726,294 shares were held by the residents in the U.S. The number of registered ADR holders was 43 and the number of registered holders of common stock in the U.S. was 113.

To the best knowledge of the Company, the Company is not, directly or indirectly, owned or controlled by other corporations or by the Japanese or any foreign government.

B. Related Party Transactions

In the ordinary course of business, the Company has transactions with numerous companies. During the fiscal year ended March 31, 2006, the Company had sales transactions with affiliates accounted under the equity method, aggregating ¥54,484 million ($465,675 thousand). As of March 31, 2006, the Company had trade notes and accounts receivable from affiliated companies of ¥19,355 million ($165,427 thousand). The Company does not consider the amounts involved in such transactions to be material to its business.

Refer to Note 3 of the Consolidated Financial Statements for additional information regarding the Company’s investments in and advances to affiliated companies.

C. Interests of Experts and Counsel

Not applicable

 

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Item 8. Financial Information

A. Consolidated Statements and Other Financial Information

The information required by this item, except as stated below, appears in the consolidated financial statements of this Form 20-F.

Legal Proceedings

Anti-Trust

In May 1998, the Company was investigated by the Fair Trade Commission of Japan (the “FTCJ”) for an alleged violation of the Law Concerning Prohibition of Private Monopoly and Preservation of Fair Trade (the “Anti-Monopoly Law”) relating to participation in fixing the shares of ductile iron straight pipe orders in Japan. The Company received a cease and desist recommendation from the FTCJ in March 1999, which was accepted by the Company in April 1999.

The FTCJ also brought a criminal accusation alleging violation of the Anti-Monopoly Law against the Company and 3 of its employees, who were indicted in the Tokyo High Court in March 1999. On February 24, 2000, the Company was fined ¥130 million, and the 3 employees were given 6 – 10 months prison sentences, suspended for 2 years.

In the meanwhile, the Company received a surcharge order of ¥7,072 million ($66,093 thousand) from the FTCJ. The Company has challenged this order and filed a petition for the initiation of hearing procedures that were started in March 2000. Under Section 49 of the then Anti-Monopoly Law, upon initiation of the procedures the surcharge order lost effect. In addition, Section 7-2 of the then Anti-Monopoly Law stipulates that surcharges are imposed in cases where price cartels or cartels that influence prices by curtailing the volume of supply are carried out. The Company believes that the alleged share cartel does not meet the requirement of Section 7-2, and has not established any provision for the ultimate liability, if any, which may result from the settlement of this matter. An unfavorable outcome from this issue could materially affect the Company’s results of operations or cash flows in a given year. The Company is not able to estimate the likelihood of such unfavorable outcome. As of March 31, 2006 the Company is still in the process of the hearing procedures.

Patent Infringement

In July 2003, Etesia, which manufactures mowers in France, filed a patent infringement lawsuit and a noise regulation infringement lawsuit against the Company to the French district court. The district court rendered a verdict in favor of the Company in January 2005.

Policy on Dividends Distributions

The Company’s basic policy for the allocation of profit is to “maintain or raise dividends.” The Company’s policy is to determine the most appropriate use of retained earnings, by considering current business operations as well as the future business environment.

B. Significant Changes

Except as disclosed in this annual report, there have been no significant changes since the date of latest annual financial statements of the Company.

 

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Item 9. The Offer and Listing

A. Offer and Listing Details

The primary market for Kubota’s common stock is the Tokyo Stock Exchange (the “TSE”) in the form of original common stock. Kubota’s common stock has been listed on the TSE since 1949, and has also been listed on the Osaka Securities Exchange since 1949.

Overseas, Kubota’s common stock is listed on the New York Stock Exchange (the “NYSE”) in the form of American Depositary Shares (“ADSs”) evidenced by American Depositary Receipts (“ADRs”). Prior to July 15, 2002, each ADS represented 20 shares of common stock. On July 15, 2002, the Company changed the unit of ADS from 20 common shares to 5 in order to help increase the number of ADS holders and improve the liquidity of its ADSs.

Kubota’s ADSs, which have been listed on the NYSE since 1976, are issued by JPMorgan Chase Bank, as Depositary. Kubota’s common stock is also listed on Frankfurt Stock Exchange.

The following table sets forth, for the periods indicated, the reported high and low sales prices of Kubota’s common stock on the TSE and of Kubota’s ADSs on the NYSE.

 

          

TSE price per share

of common stock

  

NYSE price per ADS

(5 common shares)

        

High

  

Low

  

High

  

Low

Annual Highs and Lows

           

2002

     ¥530    ¥308    $20    78    $12    25

2003

     444    280    17    25    11    90

2004

     517    260    24    15    11    06

Quarterly Highs and Lows

                 

2005

                   

1 st

 

quarter

   ¥596    ¥446    $27    90    $19    05

2 nd

 

quarter

   582    485    26    65    22    00

3 rd

 

quarter

   539    466    25    24    22    10

4 th

 

quarter

   595    510    28    46    24    41

2006

                   

1 st

 

quarter

   651    517    29    85    24    20

2 nd

 

quarter

   821    603    36    49    27    67

3 rd

 

quarter

   1,073    733    45    90    32    10

4 th

 

quarter

   1,295    930    55    21    40    58

2007

                   

1 st

 

quarter

   1,379    918    60    06    40    16

Monthly Highs and Lows

                 

February, 2006

   ¥1,156    ¥1,013    $49    08    $44    60

March

     1,295    1,057    55    21    45    20

April

     1,379    1,272    58    75    55    15

May

     1,370    1,002    60    06    45    60

June

     1,095    918    47    86    40    16

July

     1,123    952    48    95    40    88

August

     1,084    906    46    68    38    81

The Company has never experienced trade suspension, and keeps enough liquidity for trading.

 

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B. Plan of Distribution

Not applicable

C. Markets

The stocks of the Company are listed on 2 stock exchanges in Japan (Tokyo and Osaka), and 2 overseas stock exchanges (New York and Frankfurt). In May 1949, the stocks were listed on Tokyo Stock Exchange (the “TSE”) and Osaka Securities Exchange. The stocks were also listed on Frankfurt Stock Exchange in March 1974, and in November 1976 listed on New York Stock Exchange (the “NYSE”).

D. Selling Shareholders

Not applicable

E. Dilution

Not applicable

F. Expenses of the Issue

Not applicable

 

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Item 10. Additional Information

A. Share Capital

Not applicable

B. Memorandum and Articles of Association

Organization

The Company is a joint stock corporation (kabushiki kaisha) incorporated in Japan under the Corporate Law of Japan. The Company is registered in the Commercial Register (shogyo tokibo) maintained by the Osaka Legal Affairs Bureau.

Objects and Purposes

Article 2 of the Articles of Incorporation of the Company provides that its purpose is to engage in the following lines of business:

 

  1. Manufacture, sale and laying work of cast iron pipe, various kinds of pipe and fittings thereof;

 

  2. Manufacture and sale of castings, powder-metallurgy products and ceramic and other moldings;

 

  3. Manufacture and sale of internal combustion engines, automobiles, agricultural machinery and ancillary farming products;

 

  4. Manufacture, sale and installation of construction machinery, machine tools, pumps, valves, various kinds of industrial machinery and other machinery;

 

  5. Manufacture, sale and installation of weighing, measuring and control equipment, electrical, electronic and communication machinery and equipment, automatic vending machines and automatizing machinery and equipment;

 

  6. Manufacture and sale of various kinds of materials for civil engineering and construction as well as various kinds of machinery and equipment for houses;

 

  7. Construction and civil engineering, and planning, manufacture, supervision, performance and sale of, and contracting for, houses, building structures, steel-frame structures and storage facilities and equipment;

 

  8. Sale, purchase, lease and management of real estate and development of residential land;

 

  9. Planning, manufacture, engineering and construction of, and contracting for, various environmental control devices and equipment and various plants;

 

  10. Treatment, recovery and recycling business of various kinds of wastewater, exhaust gas and contaminated soil;

 

  11. Treatment, recovery and recycling business of municipal and industrial wastes;

 

  12. Manufacture and sale of chemicals for household use and for environmental control devices and equipment as well as bioproducts;

 

  13. Manufacture, processing and sale of synthetic resins and other chemical synthetic products;

 

  14. Development and sale of information processing and communication systems, and computer software;

 

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  15. Operation of facilities for sports, lodging, training, health and medical care, recuperation and recreation;

 

  16. Road cargo transportation business, water transportation business and warehousing business;

 

  17. General leasing business;

 

  18. Personnel dispatching agency business;

 

  19. Business of soliciting life insurance, casualty insurance agency business and insurance agency business pursuant to the Automobile Injury Compensation Law;

 

  20. Fee-charging employment agency;

 

  21. Accounting and payroll administration services;

 

  22. Copying, printing and bookbinding businesses;

 

  23. Any consulting business relating to each of the foregoing items; and

 

  24. Any other business ancillary to or relating to any of the foregoing items.

Directors

Each Director has executive powers and duties to manage the affairs of the Company and each Representative Director, who is elected from among the Directors by the Board of Directors, has the statutory authority to represent the Company in all respects. Under the Corporate Law, which came in effect on May 1, 2006, the Directors must refrain from engaging in any business competing with the Company unless approved by the Board of Directors and any Director who has a special interest in the subject matter of a resolution to be taken by the Board of Directors cannot vote on such resolution. The maximum aggregate amounts of remunerations, bonuses, and other financial benefits given in consideration of the performance of duties (the “remunerations, etc.”) for the Company’s Directors and that of the Company’s Corporate Auditors must be, approved, respectively, at a general meeting of shareholders. The Company must also obtain the approval at a general meeting of shareholders if the Company desires to change such maximum amount of remunerations, etc. The amount of remuneration for each class of Director is determined by the remuneration committee, which is not a statutory organization but is delegated to make such determination by the Board of Directors, and such amount of remuneration so determined by the remuneration committee is approved by the President. The same applies mutatis mutandis to the amount of bonus for each Director. The amount of remuneration for each Corporate Auditor is determined upon consultation among the Corporate Auditors.

Except as stated below, neither the Corporate Law nor the Company’s Articles of Incorporation make special provisions as to the Directors’ or Corporate Auditors’ power to vote in connection with their own compensation, the borrowing power exercisable by a Representative Director (or a Director who is given power by a Representative Director to exercise such power), their retirement age or requirements to hold any shares of Common Stock of the Company. The Corporate Law specifically requires the resolution of the Board of Directors for a company to acquire or dispose of material assets; to borrow a substantial amount of money; to appoint or dismiss important employees, such as executive officers; to establish, change or abolish material corporate organizations such as a branch office; to determine material conditions concerning offering of corporate bonds set forth in the ordinances of the Ministry of Justice; and to establish and maintain the internal control system set forth in the ordinances of the Ministry of Justice, such as the system to ensure the legitimacy of the performance of duties by Directors. The Regulations of the Board of Directors and the relevant internal regulation of the Company require a resolution of the Board of Directors for the Company’s borrowing in an amount more than 5 billion yen or guaranteeing in an amount more than one billion yen or its equivalent.

 

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Common Stock

General

Except as otherwise stated, set forth below is information relating to the Company’s Common Stock, including brief summaries of the relevant provisions of the Company’s Articles of Incorporation and Share Handling Regulations, as currently in effect, and of the Corporate Law of Japan and related legislation.

Under the Corporate Law, generally, shares may be transferred only by delivering share certificates. In order to assert shareholders’ rights against the Company, a shareholder must have its name and address registered on the Company’s register of shareholders, in accordance with the Company’s Share Handling Regulations. The registered beneficial holder of deposited shares underlying the ADSs is the Depositary for the ADSs. Accordingly, holders of ADSs will not be able to directly assert shareholders’ rights against the Company.

A law to establish a new central clearing system for shares of listed companies and to eliminate the issuance and use of certificates for such shares was promulgated in June 2004 and the relevant part of the law will come into effect within 5 years of the date of the promulgation. On the effective date, a new central clearing system will be established and the shares of all Japanese companies listed on any Japanese stock exchange, including the shares of common stock of the Company, will be subject to the new central clearing system. On the same day, all existing share certificates will become null and void and the companies are not required to withdraw those share certificates from shareholders. The transfer of such shares will be effected through entry in the books maintained under the new central clearing system.

Authorized capital

Article 6 of the Articles of Incorporation of the Company provides that the total number of shares authorized to be issued by the Company is 1,874,700,000 shares.

As of March 31, 2006, 1,299,869,180 shares of Common Stock were issued. All shares of Common Stock of the Company have no par value.

Distribution of Surplus

Distribution of Surplus – General

Under the Corporate Law, distributions of cash or other assets by joint stock corporations to their shareholders, so called “dividends”, are referred to as “distributions of Surplus” (“Surplus” is defined in “— Restriction on Distributions of Surplus”). The Company may make distributions of Surplus to the shareholders any number of times per business year, subject to certain limitations described in “— Restriction on Distributions of Surplus.” Distributions of Surplus are required in principle to be authorized by a resolution of a general meeting of shareholders, but the Company may also authorize distributions of Surplus by a resolution of the Board of Directors as long as its non-consolidated annual financial statements and certain documents for the last business year present fairly its assets and profit or loss, as required by ordinances of the Ministry of Justice.

Distributions of Surplus may be made in cash or in kind in proportion to the number of shares of common stock held by each shareholder. A resolution of a general meeting of shareholders or the board of directors authorizing a distribution of Surplus must specify the kind and aggregate book value of the assets to be distributed, the manner of allocation of such assets to shareholders, and the effective date of the distribution. If a distribution of Surplus is to be made in kind, the Company may, pursuant to a resolution of a general meeting of shareholders or (as the case may be) the Board of Directors, grant a right to the shareholders to require the Company to make such distribution in cash instead of in kind. If no such right is granted to shareholders, the relevant distribution of Surplus must be approved by a special resolution of a general meeting of shareholders (see “— Voting Rights” with respect to a “special resolution”).

Under the Company’s Articles of Incorporation, year-end dividends and interim dividends may be distributed to shareholders of record as of March 31 and September 30 each year, respectively, in proportion to the number of shares of common stock held by each shareholder following approval by the general meeting of shareholders or the Board of Directors. The Company is not obliged to pay any dividends in cash unclaimed for a period of three years after the date on which they first became payable.

In Japan, the ex-dividend date and the record date for dividends precede the date of determination of the amount of the dividends to be paid. The price of the shares of common stock generally goes ex-dividend on the third business day prior to the record date.

 

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Distribution of Surplus – Restriction on distribution of Surplus

In making a distribution of Surplus, the Company must, until the sum of its additional paid-in capital and legal reserve reaches one-quarter of its stated capital, set aside in its additional paid-in capital and/or legal reserve an amount equal to one-tenth of the amount of Surplus so distributed.

The amount of Surplus at any given time must be calculated in accordance with the following formula:

A + B + C + D - (E + F + G)

In the above formula:

“A” = the total amount of other capital surplus and other retained earnings, each such amount being that appearing on the non-consolidated balance sheet as of the end of the last business year

“B” = (if the Company has disposed of its treasury stock after the end of the last business year) the amount of the consideration for such treasury stock received by the Company less the book value thereof

“C” = (if the Company has reduced its stated capital after the end of the last business year) the amount of such reduction less the portion thereof that has been transferred to additional paid-in capital or legal reserve (if any)

“D” = (if the Company has reduced its additional paid-in capital or legal reserve after the end of the last business year) the amount of such reduction less the portion thereof that has been transferred to stated capital (if any)

“E” = (if the Company has cancelled its treasury stock after the end of the last business year) the book value of such treasury stock

“F” = (if the Company has distributed Surplus to its shareholders after the end of the last business year) the total book value of the Surplus so distributed

“G” = certain other amounts set forth in ordinances of the Ministry of Justice, including (if the Company has reduced Surplus and increased its stated capital, additional paid-in capital or legal reserve after the end of the last fiscal year) the amount of such reduction and (if the Company has distributed Surplus to the shareholders after the end of the last business year) the amount set aside in additional paid-in capital or legal reserve (if any) as required by ordinances of the Ministry of Justice.

The aggregate book value of Surplus distributed by the Company may not exceed a prescribed distributable amount (the “Distributable Amount”), as calculated on the effective date of such distribution. The Distributable Amount at any given time shall be equal to the amount of Surplus less the aggregate of the followings:

(a) the book value of its treasury stock;

(b) the amount of consideration for any of treasury stock disposed of by the Company after the end of the last business year; and

(c) certain other amounts set forth in ordinances of the Ministry of Justice, including (if the sum of one-half of goodwill and the deferred assets exceeds the total of stated capital, additional paid-in capital and legal reserve, each such amount being that appearing on the non-consolidated balance sheet as of the end of the last business year) all or certain part of such exceeding amount as calculated in accordance with the ordinances of the Ministry of Justice.

If the Company has become at its option a company with respect to which consolidated balance sheets should also be considered in the calculation of the Distributable Amount (renketsu haito kisei tekiyo kaisha), the Company shall further deduct from the amount of Surplus the excess amount, if any, of (x) the total amount of stockholders’ equity appearing on the non-consolidated balance sheet as of the end of the last business year and certain other amounts set forth by an ordinance of the Ministry of Justice over (y) the total amount of stockholders’ equity and certain other amounts set forth by an ordinance of the Ministry of Justice appearing on the consolidated balance sheet as of the end of the last business year.

If the Company has prepared interim financial statements as described below, and if such interim financial statements have been approved by the board of directors or (if so required by the Corporate Law) by a general meeting of shareholders, then the Distributable Amount must be adjusted to take into account the amount of profit or loss, and the amount of consideration for any of the treasury stock disposed of by the Company, during the period in respect of which such interim financial statements have been prepared. The Company may prepare non-consolidated interim financial statements consisting of a balance sheet as of any date subsequent to the end of the last business year and an income statement for the period from the first day of the current business year to the date of such balance sheet. Interim financial statements so prepared by the Company must be audited by the Corporate Auditors and the accounting auditor, as required by ordinances of the Ministry of Justice.

 

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Stock splits

The Company may at any time split shares in issue into a greater number of shares by resolution of the Board of Directors, and may in principle amend its Articles of Incorporation to increase the number of the authorized shares to be issued in proportion to the relevant stock split pursuant to a resolution of the Board of Directors rather than a special shareholders resolution (as defined in “—Voting Rights”) which is otherwise required for amending the Articles of Incorporation.

In the event of a stock split, generally, shareholders will not be required to exchange share certificates for new share certificates, but certificates representing the additional shares resulting from the stock split will be issued to shareholders. When a stock split is to be made, the Company must give public notice of the stock split, specifying the record date thereof, at least 2 weeks prior to such record date.

Consolidation of Shares

The Company may at any time consolidate shares in issue into a smaller number of shares by a special shareholders resolution (as defined in “ — Voting Rights”). When a consolidation of shares is to be made, the Company must give public notice and notice to each shareholder that, within a period of not less than one month specified in the notice, share certificates must be submitted to the Company for exchange. The Company must disclose the reason for the consolidation of shares at the general meeting of shareholders.

General meeting of shareholders

The ordinary general meeting of shareholders of the Company for each fiscal year is normally held in June in each year in Osaka, Japan. In addition, the Company may hold an extraordinary general meeting of shareholders whenever necessary by giving notice of convocation thereof at least 2 weeks prior to the date set for the meeting.

Notice of convocation of a shareholders’ meeting setting forth the place, time and purpose thereof, must be mailed to each shareholder having voting rights (or, in the case of a non-resident shareholder, to his or her standing proxy or mailing address in Japan) at least 2 weeks prior to the date set for the meeting. Under the Corporate Law, such notice may be given to shareholders by electronic means, subject to the consent of the relevant shareholders. The record date for an ordinary general meeting of shareholders is March 31 of each year.

Any shareholder or group of shareholders holding at least 3 percent of the total number of voting rights for a period of 6 months or more may require the convocation of a general meeting of shareholders for a particular purpose by submitting a written request to a Representative Director. Unless such shareholders’ meeting is convened promptly or a convocation notice of a meeting which is to be held not later than 8 weeks from the day of such demand is dispatched, the requiring shareholder may, upon obtaining a court approval, convene such shareholders’ meeting.

Any shareholder or group of shareholders holding at least 300 voting rights or one percent of the total number of voting rights for a period of 6 months or more may propose a matter to be considered at a general meeting of shareholders by submitting a written request to a Representative Director at least 8 weeks prior to the date set for such meeting.

If the Company’s Articles of Incorporation so provide, any of the minimum voting rights or percentages, time periods and number of voting rights necessary for exercising the minority shareholder rights described above may be decreased or shortened.

 

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Voting rights

So long as the Company maintains the unit share system (see Section B of this Item 10 – Memorandum and Articles of Association – Common StockUnit share system below; currently 1,000 shares constitute one unit) a holder of shares constituting one or more full units is entitled to one voting right per unit of shares subject to the limitations on voting rights set forth in the following 2 sentences. Any corporate or certain entity one-quarter or more of whose total voting rights are directly or indirectly owned by the Company may not exercise its voting rights with respect to shares of Common Stock of the Company that it owns. In addition, the Company may not exercise its voting rights with respect to its shares that it owns. If the Company eliminates from its Articles of Incorporation the provisions relating to the unit of shares, holders of Common Stock will have one voting right for each share they hold. Except as otherwise provided by law or by the Articles of Incorporation, a resolution can be adopted at a general meeting of shareholders by a majority of the number of voting rights of all the shareholders entitled to exercise their voting rights represented at the meeting. The Corporate Law and the Company’s Articles of Incorporation provide, however, that the quorum for the election of Directors and Corporate Auditors shall not be less than one-third of the total number of voting rights of all the shareholders entitled to exercise their voting rights. The Company’s shareholders are not entitled to cumulative voting in the election of Directors. Shareholders may exercise their voting rights through proxies, provided that the proxies are also shareholders holding voting rights. The Company’s shareholders also may cast their votes in writing. Shareholders may also exercise their voting rights by electronic means pursuant to the method determined by the Board of Directors.

The Corporate Law and the Company’s Articles of Incorporation provide that in order to amend the Articles of Incorporation and in certain other instances, including:

 

  (1) acquisition of its own shares from a specific party other than its subsidiaries;

 

  (2) consolidation of shares;

 

  (3) any offering of new shares at a “specially favorable” price (or any offering of stock acquisition rights to subscribe for or acquire shares of capital stock, or bonds with stock acquisition rights at “specially favorable” conditions) to any persons other than shareholders;

 

  (4) the removal of a corporate auditor;

 

  (5) the exemption of liability of a director, corporate auditor or accounting auditor to the amounts set forth in the Corporate Law;

 

  (6) a reduction of stated capital;

 

  (7) a distribution of in-kind dividends which meets certain requirements;

 

  (8) dissolution, merger, consolidation or corporate split with certain exceptions in which a shareholders’ resolution is not required;

 

  (9) the transfer of the whole or a material part of the business;

 

  (10) the taking over of the whole of the business of any other corporation with certain exceptions in which a shareholders’ resolution is not required; or

 

  (11) share exchange or share transfer for the purpose of establishing 100% parent-subsidiary relationships with certain exceptions in which a shareholders’ resolution is not required,

the quorum shall be one-third of the total voting rights of all the shareholders entitled to exercise their voting rights and the approval by at least two-thirds of the voting rights of all the shareholders entitled to exercise their voting rights represented at the meeting is required (the “special shareholders resolutions”).

Pursuant to the terms of the Amended and Restated Deposit Agreement relating to American Depositary Receipts (ADRs) evidencing American Depositary Shares (ADSs), each ADS representing 5 shares of Common Stock of the Company, as soon as practicable after receipt of notice of any meeting or solicitation of consents or proxies of shareholders of the Company, the Depositary (currently JPMorgan Chase Bank) will mail to the record holders of ADRs a notice which will contain the information in the original notice. The record holders of ADRs on a date specified by the Depositary will be entitled to instruct the Depositary as to the exercise of the voting rights pertaining to the shares of Common Stock of the Company represented by their ADSs, including instructions to give a discretionary proxy to a person designated by the Company. The Depositary will endeavor, in so far as practicable, to vote the number of shares of Common Stock of the Company represented by such ADSs in accordance with such instructions. The Depositary will not itself exercise any voting discretion in respect of any Deposited Shares.

 

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Issue of additional shares and pre-emptive rights

Holders of the Company’s shares of Common Stock have no pre-emptive rights under its Articles of Incorporation. Authorized but unissued shares may be issued at such times and upon such terms as the Board of Directors determines, subject to the limitations as to the offering of new shares at a “specially favorable” price mentioned under “Voting rights” above. The Board of Directors may, however, determine that shareholders shall be given subscription rights regarding a particular issue of new shares, in which case such rights must be given on uniform terms to all shareholders as at a record date at least 2 weeks prior to which public notice must be given. Each of the shareholders to whom such rights are given must also be given notice of the expiry thereof at least 2 weeks prior to the date on which such rights expire.

Rights to subscribe for new shares may be made generally transferable by a resolution of the Board of Directors. Whether the Company will make subscription rights generally transferable in future rights offerings will depend upon the circumstances at the time of such offerings.

Subject to certain conditions, the Company may issue stock acquisition rights or bonds with stock acquisition rights by a resolution of the Board of Directors. Holders of stock acquisition rights may exercise their rights to acquire a certain number of shares within the exercise period as prescribed in the terms of their stock acquisition rights. Upon exercise of stock acquisition rights, the Company will be obliged to issue the relevant number of new shares or alternatively to transfer the necessary number of treasury stock held by it.

Liquidation rights

In the event of a liquidation of the Company, the assets remaining after payment of all debts and liquidation expenses and taxes will be distributed among shareholders in proportion to the respective numbers of shares of Common Stock held.

Record date

As mentioned above, March 31 is the record date for the Company’s year-end dividends. So long as the Company maintains the unit share system, the shareholders and beneficial shareholders who are registered as the holders of one or more units of shares in the Company’s registers of shareholders and/or that of beneficial shareholders at the end of each March 31 are entitled to exercise shareholders’ rights at the ordinary general meeting of shareholders with respect to the business year ending on such March 31. September 30 is the record date for interim dividends. In addition, the Company may set a record date for determining the shareholders and/or beneficial shareholders entitled to other rights and for other purposes by giving at least 2 weeks’ prior public notice.

The price of shares generally goes ex-dividends or ex-rights on Japanese stock exchanges on the third business day prior to a record date (or if the record date is not a business day, the fourth business day prior thereto), for the purpose of dividends or rights offerings.

Acquisition by the Company of its Common Stock

Under the Corporate Law and the Company’s Articles of Incorporation, the Company may acquire shares of common stock (i) by soliciting all the shareholders to offer to sell shares held by them (in this case, the certain terms of such acquisition, such as the total number of shares to be purchased and the total amount of consideration, shall be set by (as long as its non-consolidated annual financial statements and certain documents for the last business year present fairly its assets and profit or loss, as required by ordinances of the Ministry of Justice) a resolution of the Board of Directors or an ordinary resolution of a general meeting of shareholders in advance, and acquisition shall be effected pursuant to a resolution of the Board of Directors), (ii) from a specific shareholder other than any of its subsidiaries (pursuant to a special resolution of a general meeting of shareholders), (iii) from any of its subsidiaries (pursuant to a resolution of the Board of Directors), or (iv) by way of purchase on any Japanese stock exchange on which the Company’s shares of common stock is listed or by way of tender offer (in either case pursuant to an ordinary resolution of a general meeting of shareholders or a resolution of the Board of Directors). In the case of (ii) above, any other shareholder may make a request to the Company that such other shareholder be included as a seller in the proposed purchase, provided that no such right will be available if the purchase price or any other consideration to be received by the relevant specific shareholder will not exceed the last trading price of the shares on the relevant stock exchange on the day immediately preceding the date on which the resolution mentioned in (ii) above was adopted (or, if there is no trading in the shares on the stock exchange or if the stock exchange is not open on such day, the price at which the shares are first traded on such stock exchange thereafter).

Shares acquired by the Company may be held by it for any period or may be cancelled by a resolution of the Board of Directors. The Company may also transfer to any person the shares held by it, subject to a resolution of the Board of Directors, and subject also to other requirements similar to those applicable to the issuance of new shares, as described in “Issue of additional shares and pre-emptive rights” above. The Company may also utilize its treasury stock for the purpose of transfer to any person upon exercise of stock acquisition rights or for the purpose of acquiring another company by way of merger, share exchange or corporate split through exchange of treasury stock for shares or assets of the acquired company.

 

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Unit share system

The Articles of Incorporation of the Company provide that 1,000 shares constitute one unit of shares of Common Stock. Although the number of shares constituting one unit is included in the Articles of Incorporation, any amendment to the Articles of Incorporation reducing (but not increasing) the number of shares constituting one unit or eliminating the provisions for the unit of shares may be made by a resolution of the Board of Directors rather than by a special shareholders resolution, which is otherwise required for amending the Articles of Incorporation. The number of shares constituting one unit, however, cannot exceed 1,000.

Under the unit share system, shareholders shall have one voting right for each unit of shares that they hold. Any number of shares less than a full unit will carry no voting rights. Moreover, holders of shares constituting less than one unit will have no other shareholder rights, except that such holders may not be deprived of certain rights specified in the Corporate Law or ordinances of the Ministry of Justice, or in the Company’s Articles of Incorporation, including the right to receive distribution of Surplus.

Unless the Company’s Board of Directors adopts a resolution to eliminate the provision for the unit shares from the Articles of Incorporation or the shareholders amend the Articles of Incorporation by a special shareholders resolution to eliminate the provision not to issue share certificates for less than a unit of shares, a share certificate for any number of shares less than one full unit will in general not be issued. As the transfer of shares normally requires the delivery of the share certificates thereof, any fraction of a unit for which no share certificates are issued is not transferable.

A holder of shares constituting less than one unit may require the Company to purchase such shares at their market value in accordance with the provisions of the Share Handling Regulations of the Company.

In addition, the Articles of Incorporation of the Company provide that a holder of shares constituting less than one full unit may request the Company to sell to such holder such amount of shares which will, when added together with the shares constituting less than one full unit held by such holder, constitute one full unit of Common Stock, in accordance with the provisions of the Share Handling Regulations of the Company.

A holder who owns ADRs evidencing less than 200 ADSs will indirectly own less than one full unit of shares of Common Stock. Although, as discussed above, under the unit share system holders of less than one full unit have the right to require the Company to purchase their shares or sell shares held by the Company to such holders, holders of ADRs evidencing ADSs that represent other than integral multiples of full units are unable to withdraw the underlying shares of Common Stock representing less than one full unit and, therefore, are unable, as a practical matter, to exercise the rights to require the Company to purchase such underlying shares or sell shares held by the Company to such holders unless the Company’s Articles of Incorporation are amended to eliminate the provision not to issue share certificates for the numbers of shares less than a unit. As a result, access to the Japanese markets by holders of ADRs through the withdrawal mechanism will not be available for dispositions of shares of Common Stock in lots less than one full unit. The unit share system does not affect the transferability of ADSs, which may be transferred in lots of any size.

 

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Sale by the Company of shares held by shareholders whose location is unknown

The Company is not required to send a notice to a shareholder if a notice to such shareholder fails to arrive at the registered address of the shareholder in the Company’s register of shareholders or at the address otherwise notified to the Company continuously for 5 years or more.

In addition, the Company may sell or otherwise dispose of shares of Common Stock for which the location of the shareholder is unknown. Generally, if (i) notices to a shareholder fail to arrive continuously for 5 years or more at the shareholder’s registered address in the Company’s register of shareholders or at the address otherwise notified to the Company, and (ii) the shareholder fails to receive dividends on the shares continuously for 5 years or more at the address registered in the Company’s register of shareholders or at the address otherwise notified to the Company, the Company may sell or otherwise dispose of the shareholder’s shares by a resolution of the Board of Directors and after giving at least 3 months’ prior public and individual notice, and holding or depositing the proceeds of such sale or disposal of shares at the then market price of the shares for the shareholder, the location of which is unknown.

Reporting of substantial shareholdings

The Securities and Exchange Law of Japan and regulations thereunder requires any person, regardless of his/her residence, who has become, beneficially and solely or jointly, a holder of more than 5 percent of the total issued shares of Common Stock of a company listed on any Japanese stock exchange or whose shares are traded on the over-the-counter market in Japan to file with the Director-General of a competent Local Finance Bureau of Ministry of Finance within 5 business days a report concerning such shareholdings.

A similar report must also be filed in respect of any subsequent change of one percent or more in any such holding or any change in material matters set out in reports previously filed, with certain exceptions. For this purpose, shares issuable to such person upon conversion of convertible securities or exercise of share subscription warrants or stock acquisition rights are taken into account in determining both the number of shares held by such holder and the issuer’s total issued share capital. Copies of such report must also be furnished to the issuer of such shares and all Japanese stock exchanges on which the shares are listed or (in the case of shares traded over-the-counter) the Japan Securities Dealers Association.

Except for the general limitations under Japanese anti-trust and anti-monopoly regulations against holding of shares of Common Stock of a Japanese corporation which leads or may lead to a restraint of trade or a monopoly, and except for general limitations under the Corporate Law or the Company’s Articles of Incorporation on the rights of shareholders applicable regardless of residence or nationality, there is no limitation under Japanese laws and regulations applicable to the Company or under its Articles of Incorporation on the rights of non-resident or foreign shareholders to hold the shares of Common Stock of the Company or exercise voting rights thereon.

There is no provision in the Company’s Articles of Incorporation that would have an effect of delaying, deferring or preventing a change in control of the Company and that would operate only with respect to merger, consolidation, acquisition or corporate restructuring involving the Company.

Daily Price Fluctuation Limits under Japanese Stock Exchange Rules

Stock prices on Japanese stock exchanges are determined on a real-time basis by the balance between bids and offers. These stock exchanges are order-driven markets without specialists or market makers to guide price formation. In order to prevent excessive volatility, these stock exchanges set daily upward and downward price range limitations for each listed stock, based on the previous day’s closing price. Although transactions may continue at the upward or downward limit price if the limit price is reached on a particular trading day, no transactions may take place outside these limits. Consequently, an investor wishing to sell at a price above or below the relevant daily limit on these stock exchanges may not be able to effect a sale at such price on a particular trading day, or at all.

 

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C. Material Contracts

Business division and integration of plastic pipes

The Company resolved at the Board of Directors’ Meeting held on May 27, 2004 that the Company would divide and transfer its plastic pipes business into a company which was jointly established with C.I. Kasei Company Limited (hereinafter “C.I. Kasei”) on April 1, 2005 in order to integrate the business operation with C.I. Kasei.

 

Method of integration:    The Company and C.I. Kasei divided their plastic pipes businesses, and the businesses were integrated into a newly established company, named “Kubota-C.I. Co., Ltd.”.
Scheduled date :    Business division and establishment of “Kubota-C.I. Co., Ltd.” : April 1, 2005
Share allotment ratio :   

42,000 common shares (70%) to the Company

18,000 common shares (30%) to C.I. Kasei

Capital stock :    ¥3.0 billion

D. Exchange Controls

The Foreign Exchange and Foreign Trade Law of Japan and its related cabinet orders and ministerial ordinances (the “Foreign Exchange Regulations”) govern the acquisition and holding of shares of Common Stock of the Company by “exchange non-residents” and by “foreign investors.” The Foreign Exchange Regulations currently in effect do not, however, affect transactions between exchange non-residents to purchase or sell shares outside Japan using currencies other than Japanese yen.

Exchange non-residents are:

 

  (i) individuals who do not reside in Japan; and

 

  (ii) corporations whose principal offices are located outside Japan.

Generally, branches and other offices of non-resident corporations that are located within Japan are regarded as residents of Japan. Conversely, branches and other offices of Japanese corporations located outside Japan are regarded as exchange non-residents.

Foreign investors are:

 

  (i) individuals who are exchange non-residents;

 

  (ii) corporations that are organized under the laws of foreign countries or whose principal offices are located outside of Japan; and

 

  (iii) corporations (1) of which 50% or more of their shares are held by individuals who are exchange non-residents and/or corporations (a) that are organized under the laws of foreign countries or (b) whose principal offices are located outside of Japan or (2) a majority of whose officers, or officers having the power of representation, are individuals who are exchange non-residents.

In general, the acquisition of shares of a Japanese company (such as the shares of Common Stock of the Company) by an exchange non-resident from a resident of Japan is not subject to any prior filing requirements. In certain limited circumstances, however, the Minister of Finance may require prior approval of an acquisition of this type. While prior approval, as described above, is not required, in the case where a resident of Japan transfers shares of a Japanese company (such as the shares of Common Stock of the Company) for consideration exceeding ¥100 million to an exchange non-resident, the resident of Japan who transfers the shares is required to report the transfer to the Minister of Finance within 20 days from the date of the transfer, unless the transfer was made through a bank, securities company or financial futures trader licensed under Japanese law.

If a foreign investor acquires shares of a Japanese company that is listed on a Japanese stock exchange (such as the shares of Common Stock of the Company) or that is traded on an over-the-counter market in Japan and, as a result of the acquisition, the foreign investor, in combination with any existing holdings, directly or indirectly holds 10% or more of the issued shares of the relevant company, the foreign investor must file a report of the acquisition with the Minister of Finance and any other competent Ministers having jurisdiction over that Japanese company within 15 days from and including the date of the acquisition, except where the offering of the company’s shares was made overseas. In limited circumstances, such as where the foreign investor is in a country that is not listed on an exemption schedule in the Foreign Exchange Regulations, a prior notification of the acquisition must be filed with the Minister of Finance and any other competent Ministers, who may then modify or prohibit the proposed acquisition.

Under the Foreign Exchange Regulations, dividends paid on and the proceeds from sales in Japan of shares of Common Stock of the Company held by non-residents of Japan may generally be converted into any foreign currency and repatriated abroad.

 

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E. Taxation

Japanese Taxation

The following is a summary of the major Japanese national tax consequences of the ownership, acquisition and disposition of shares of Common Stock of the Company and of ADRs evidencing ADSs representing shares of Common Stock of the Company by a non-resident Holder (as defined below). The summary does not purport to be a comprehensive description of all of the tax considerations that may be relevant to any particular investor depending on its individual circumstances. Accordingly, holders of shares of Common Stock of the Company including holders of ADRs evidencing ADSs are encouraged to consult their tax advisors regarding the application of the considerations discussed below to their particular circumstances.

This summary is based in part upon the representations of the Depositary and the assumption that each obligation in the deposit agreement, and in any related agreement, will be performed under its terms.

In general, taking into account the earlier assumption, for purposes of the income tax convention between Japan and the U.S.A. (the “Treaty”), and Japanese income tax purposes, U.S. holders of ADRs will be treated as owning the Common Stock underlying the ADSs evidenced by the ADRs. For the purposes of the following discussion, a “U.S. holder” is a holder that:

 

  (i) is a resident of the U.S. for purposes of the Treaty;

 

  (ii) does not maintain a permanent establishment in Japan (a) with which ADRs or shares of Common Stock are effectively connected or (b) of which ADRs or shares of Common Stock form part of the business property; and

 

  (iii) is eligible for benefits under the Treaty with respect to income and gain derived in connection with the ADRs or shares of Common Stock.

The following is a summary of the principal Japanese tax consequences (limited to national taxes) to holders of shares of Common Stock of the Company and of ADRs evidencing ADSs representing shares of Common Stock of the Company who are either individuals who are not residents of Japan or non-Japanese corporations, without a permanent establishment in Japan (“non-resident Holders”).

 

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Dividends and gains on sales

Generally, an individual who is a non-resident of Japan or a non-Japanese corporation is subject to Japanese withholding tax on dividends paid by Japanese corporations. The Company withholds taxes from dividends it pays as required by Japanese law. Stock splits in themselves are not, in general, subject to Japanese income tax.

In the absence of an applicable tax treaty, convention or agreement reducing the maximum rate of Japanese withholding tax or allowing exemption from Japanese withholding tax, the rate of Japanese withholding tax applicable to dividends paid by Japanese corporations to individuals who are non-residents of Japan or non-Japanese corporations is 20 percent. However, with respect to dividends paid on listed shares issued by a Japanese corporation (such as the shares of Common Stock of the Company) to any corporate or individual shareholders (including those shareholders who are non-Japanese corporations or Japanese non-resident individuals, such as non-resident Holders), except for any individual shareholder who holds 5 percent or more of the total issued shares of the relevant Japanese corporation, the aforementioned 20 percent withholding tax rate is reduced to (i) 7 percent for dividends due and payable on or before March 31, 2008, and (ii) 15 percent for dividends due and payable on or after April 1, 2008. At the date of this annual report, Japan has income tax treaties, conventions or agreements whereby the above-mentioned withholding tax rate is reduced, in most cases to 15 percent for portfolio investors with, among other countries, Australia, Belgium, Canada, Denmark, Finland, France, Germany, Ireland, Italy, Luxembourg, the Netherlands, New Zealand, Norway, Singapore, Spain, Sweden, Switzerland, and the U.K.

Under the Treaty, the maximum rate of Japanese withholding tax which may be imposed on dividends paid by a Japanese corporation to a U.S. holder that is a portfolio investor is generally limited to 10 percent of the gross amount actually distributed, and dividends paid by a Japanese corporation to a U.S. holder that is a pension fund is exempt from Japanese taxation by way of withholding or otherwise unless such dividends are derived from the carrying on of a business, directly or indirectly, by such pension fund.

If the maximum tax rate provided for in the income tax treaty applicable to dividends paid by the Company to any particular non-resident Holder is lower than the withholding tax rate otherwise applicable under Japanese tax law or any particular non-resident Holder is exempt from Japanese income tax with respect to such dividends under the income tax treaty applicable to such particular non-resident Holder, such non-resident Holder who is entitled to a reduced rate of or exemption from Japanese withholding tax on payment of dividends on the Company’s shares of Common Stock by the Company is required to submit, through the Company, an Application Form for Income Tax Convention Regarding Relief from Japanese Income Tax on Dividends in advance to the relevant tax authority before payment of dividends. A standing proxy for non-resident Holders of a Japanese corporation may provide this application service. With respect to ADSs, this reduced rate or exemption is applicable if the Depositary or its agent submits 2 Application Forms (one before payment of dividends, the other within 8 months after the Company’s fiscal year-end or semi-fiscal year-end). To claim this reduced rate or exemption, any non-resident Holder holding ADRs evidencing ADSs will be required to file a proof of taxpayer status, residence and beneficial ownership (as applicable) and to provide other information or documents as may be required by the Depositary. A non-resident Holder who is entitled, under an applicable income tax treaty, to a reduced treaty rate lower than the withholding tax rate otherwise applicable under Japanese tax law or an exemption from the withholding tax, but failed to submit the required application in advance will be entitled to claim the refund of withholding taxes withheld in excess of the rate under an applicable tax treaty (if such non-resident Holder is entitled to a reduced treaty rate under the applicable income tax treaty) or the whole of the withholding tax withheld (if such non-resident Holder is entitled to an exemption under the applicable income tax treaty) from the relevant Japanese tax authority. The Company does not assume any responsibility to ensure withholding at the reduced treaty rate or not withholding for shareholders who would be eligible under an applicable tax treaty but do not follow the required procedures as stated above.

Gains derived from the sale of shares of Common Stock of the Company or ADRs outside Japan by a non-resident Holder holding such shares or ADSs as a portfolio investor are, in general, not subject to Japanese income or corporation tax. U.S. holders are not subject to Japanese income or corporation tax with respect to such gains under the Treaty.

Inheritance and gift

Japanese inheritance and gift taxes at progressive rates may be payable by an individual who has acquired shares of Common Stock or ADSs as a legatee, heir or donee from an individual even though neither the individual nor the deceased nor donor is a Japanese resident.

Holders of shares of Common Stock of the Company or ADSs should consult their tax advisors regarding the effect of these taxes and, in the case of U.S. holders, the possible application of the Estate and Gift Tax Treaty between the U.S. and Japan.

 

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United States Federal Income Taxation

This section describes the material United States federal income tax consequences of owning Common Stock or ADSs. It applies to you only if you are a U.S. holder, as defined below, and you own your Common Stock or ADSs as capital assets for tax purposes. This section does not apply to you if you are a member of a special class of holders subject to special rules, including:

 

    a dealer in securities,

 

    a trader in securities that elects to use a mark-to-market method of accounting for your securities holdings,

 

    a tax-exempt organization,

 

    a life insurance company,

 

    a person liable for alternative minimum tax,

 

    a person that actually or constructively owns 10% or more of the voting stock of the Company,

 

    a person that holds Common Stock or ADSs as part of a straddle or a hedging or conversion transaction, or

 

    a person whose functional currency is not the U.S. dollar.

This section is based on the Internal Revenue Code of 1986, as amended (the “Code”), its legislative history, existing and proposed regulations, published rulings and court decisions, and as well as on the Treaty and the income tax convention between Japan and the United States of 1972 (“the Prior Treaty”). These laws are subject to change, possibly on a retroactive basis. In addition, this section is based in part upon the representations of the Depositary and the assumption that each obligation in the Deposit Agreement and any related agreement will be performed in accordance with its terms.

You are a U.S. holder if you are a beneficial owner of Common Stock or ADSs and you are:

 

    a citizen or resident of the U.S.A.,

 

    a domestic corporation,

 

    an estate whose income is subject to United States federal income tax regardless of its source, or

 

    a trust if a United States court can exercise primary supervision over the trust’s administration and one or more United States persons are authorized to control all substantial decisions of the trust.

You should consult your own tax advisor regarding the United States federal, state and local and other tax consequences of owning and disposing of Common Stock and ADSs in your particular circumstances.

This discussion addresses only United States federal income taxation.

In general, and taking into account the earlier assumptions, for United States federal income tax purposes, if you hold ADRs evidencing ADSs, you will be treated as the owner of the Common Stock represented by those ADSs. Exchanges of Common Stock for ADRs, and ADRs for Common Stock, generally will not be subject to United States federal income tax.

 

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Taxation of Dividends

Under the United States federal income tax laws, the gross amount of any dividend paid by the Company out of its current or accumulated earnings and profits (as determined for United States federal income tax purposes) is subject to United States federal income taxation. If you are a non-corporate U.S. holder, dividends paid to you in taxable years beginning before January 1, 2011 that constitute qualified dividend income will be taxable to you at a maximum rate of 15% provided that you hold the shares or ADSs for more than 60 days during the 121-day period beginning 60 days before the ex-dividend date and meet other holding period requirements. Dividends paid by the Company with respect to common stock or ADSs will be qualified dividend income.

You must include any Japanese tax withheld from the dividend payment in this gross amount even though you do not in fact receive it. The dividend is taxable to you when you, in the case of Common Stock, or the Depositary, in the case of ADSs, receive the dividend, actually or constructively. The dividend will not be eligible for the dividends-received deduction generally allowed to United States corporations in respect of dividends received from other United States corporations. The amount of the dividend distribution that you must include in your income as a U.S. holder will be the U.S. dollar value of the Japanese yen payments made, determined at the spot Japanese yen/U.S. dollar rate on the date the dividend distribution is includible in your income, regardless of whether the payment is in fact converted into U.S. dollars. Generally, any gain or loss resulting from currency exchange fluctuations during the period from the date you include the dividend payment in income to the date you convert the payment into U.S. dollars will be treated as ordinary income or loss and will not be eligible for the special tax rate applicable to qualified dividend income. This gain or loss generally will be income or loss from sources within the United States for foreign tax credit limitation purposes. Distributions in excess of current and accumulated earnings and profits, as determined for United States federal income tax purposes, will be treated as a non-taxable return of capital to the extent of your basis in the Common Stock or ADSs and thereafter as capital gain.

Subject to certain limitations, the Japanese tax withheld in accordance with both the Treaty and the Prior Treaty, and paid over to Japan will be creditable against your United States federal income tax liability. Special rules apply in determining the foreign tax credit limitation with respect to dividends that are subject to the maximum 15% tax rate. To the extent a refund of the tax withheld is available to you under Japanese law or under the Treaty or the Prior Treaty, the amount of tax withheld that is refundable will not be eligible for credit against your United States federal income tax liability. The rules governing foreign tax credits are complex and we urge you to consult your tax advisor regarding the foreign tax credit in your situation.

Dividends will be income from sources outside the United States, but dividends paid in taxable years beginning before January 1, 2007 generally will be “passive income” or “financial services income”, and dividends paid in taxable years beginning after December 31, 2006 will, depending on your circumstances, be “passive income” or “general income” which, in either case, is treated separately from other types of income for purposes of computing the foreign tax credit allowable to you.

Taxation of Capital Gains

If you are a U.S. holder and you sell or otherwise dispose of your Common Stock or ADSs, you will recognize capital gain or loss for United States federal income tax purposes equal to the difference between the U.S. dollar value of the amount that you realize and your tax basis, determined in U.S. dollars, in your Common Stock or ADSs. Capital gain of a noncorporate U.S. holder that is recognized in taxable years beginning before January 1, 2011 is generally taxed at a maximum rate of 15% where the holder has a holding period greater than one year. The gain or loss will generally be income or loss from sources within the United States for foreign tax credit limitation purposes.

F. Dividends and Paying Agents

Not applicable

G. Statement by Experts

Not applicable

H. Documents on Display

According to the Securities Exchange Act of 1934, as amended, the Company is subject to the requirements of informational disclosure. The Company files various reports and other information, including this annual report on Form 20-F, to the U.S. Securities and Exchange Commission. These reports may be inspected at the following sites.

U.S. Securities and Exchange Commission : 100 F Street, N.E., Washington D.C. 20549

Form 20-F is also available at the website of the Company. URL : http://www.kubota.co.jp

I. Subsidiary Information

Not applicable

 

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Item 11. Quantitative and Qualitative Disclosures about Market Risk

In order to manage potential adverse effects caused by market fluctuations in the financial assets and liabilities, the Company may hedge the market risk of the financial assets and liabilities by using derivative instruments which include foreign exchange forward contracts, foreign currency option contracts, interest swap agreements and currency swap agreements. The Company uses these derivative financial instruments solely for risk hedging purposes and no derivative transactions are held or used for speculative purposes. The financial institutions with which the Company enters derivative agreements are selected based on the defined criteria on credit ratings of those financial institutions. Among the market risks described below, no specific hedging activities are undertaken with regard to the price fluctuations of equity securities held by the Company as marketable securities.

And in the information stated below, there are no material changes between fiscal 2006 and 2005.

Foreign Currency Exchange Risks

The Company’s foreign currency exposure relates primarily to its foreign currency denominated assets in, and transactions with, its international operations. The Company utilizes foreign exchange forward contracts and foreign currency option contracts primarily to fix the value of cash flow resulting from accounts receivable and payable and future transactions denominated in foreign currencies (mainly U.S. Dollars, Euros, and Bahts).

The following tables provide information regarding the Company’s derivative financial instruments related to foreign exchange forward contracts and currency swaps as of March 31, 2006, which was translated into Japanese yen at the year-end spot rate.

Foreign Exchange Forward Contracts and Currency Swaps

Sell U.S. Dollar, Buy Yen (as of March 31, 2006)

 

     Millions of Yen    Thousands of Dollars
     Receive    Pay    Receive    Pay

Remaining Contract Term

           

1-3 months

   ¥ 35,160    ¥ 35,217    $ 300,513    $ 301,000

4-6 months

     9,771      9,828      83,513      84,000
                           

Total

   ¥ 44,931    ¥ 45,045    $ 384,026    $ 385,000
                           

 

Sell U.S. Dollar, Buy Canada Dollar (as of March 31, 2006)

 

     Millions of Yen    Thousands of Dollars
     Receive    Pay    Receive    Pay

Remaining Contract Term

           

1-3 months

   ¥ 282    ¥ 283    $ 2,410    $ 2,419
                           

Total

   ¥ 282    ¥ 283    $ 2,410    $ 2,419
                           

 

Sell Euro, Buy Yen (as of March 31, 2006)

 

     Millions of Yen    Thousands of Dollars
     Receive    Pay    Receive    Pay

Remaining Contract Term

           

1-3 months

   ¥ 7,726    ¥ 7,897    $ 66,034    $ 67,496

4-6 months

     2,522      2,560      21,556      21,880

7-9 months

     60      60      513      513
                           

Total

   ¥ 10,308    ¥ 10,517    $ 88,103    $ 89,889
                           

 

Sell Baht, Buy Yen (as of March 31, 2006)

 

     Millions of Yen    Thousands of Dollars
     Receive    Pay    Receive    Pay

Remaining Contract Term

           

1-3 months

   ¥ 2,363    ¥ 2,468    $ 20,197    $ 21,094

4-6 months

     2,779      2,865      23,751      24,488

7-9 months

     782      805      6,684      6,880
                           

Total

   ¥ 5,924    ¥ 6,138    $ 50,632    $ 52,462
                           

 

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Table of Contents

Sell Baht, Buy U.S. Dollar (as of March 31, 2006)

 

     Millions of Yen    Thousands of Dollars
     Receive    Pay    Receive    Pay

Remaining Contract Term

           

1-3 months

   ¥ 9    ¥ 9    $ 77    $ 77
                           

Total

   ¥ 9    ¥ 9    $ 77    $ 77
                           

 

Sell Baht, Buy Euro (as of March 31, 2006)

 

     Millions of Yen    Thousands of Dollars
     Receive    Pay    Receive    Pay

Remaining Contract Term

           

1-3 months

   ¥ 2    ¥ 2    $ 17    $ 17
                           

Total

   ¥ 2    ¥ 2    $ 17    $ 17
                           

 

Sell Canada Dollar, Buy Yen (as of March 31, 2006)

 

     Millions of Yen    Thousands of Dollars
     Receive    Pay    Receive    Pay

Remaining Contract Term

           

1-3 months

   ¥ 308    ¥ 303    $ 2,632    $ 2,590
                           

Total

   ¥ 308    ¥ 303    $ 2,632    $ 2,590
                           

 

Sell Won, Buy Yen (as of March 31, 2006)

 

     Millions of Yen    Thousands of Dollars
     Receive    Pay    Receive    Pay

Remaining Contract Term

           

1-3 months

   ¥ 213    ¥ 217    $ 1,821    $ 1,855
                           

Total

   ¥ 213    ¥ 217    $ 1,821    $ 1,855
                           

Interest Rate Risks

The Company is exposed to interest rate risks mainly inherent in its debt obligations with both fixed and variable rates. Debt obligations that are sensitive to changes in interest rates are disclosed in Note 7, “Short-Term Borrowings and Long-Term Debt” of the consolidated financial statements. The Company uses interest rate swap agreements to enable the Company to choose between fixed and variable interest rates depending on how the funds are used as well as diversifying funding methods and lowering funding costs.

The Company’s policies in contracting borrowings are as follows:

 

  1) to secure diversified financing resources

 

  2) to procure long-term borrowings in fixed rates for long-term funds, and short-term borrowings for short-term funds

 

  3) to maintain a balance between bonds and bank loans

 

  4) to reduce financing costs

Under these policies, the Company uses interest rate swap agreements.

The following table provides information, at March 31, 2006, about the Company’s interest rate swap contracts. The table represents notional principal amounts and weighted average interest rates by expected maturity dates. Notional principal amounts are used to calculate the contractual payments to be exchanged under the contracts as of March 31, 2006, which are translated into yen at the year-end spot rate.

Interest Rate Swap Contracts

 

     Weighted average rate     Notional amount

Maturities, years ending March 31.

(As of March 31, 2006)

   Receive     Pay     Millions of Yen    Thousands of
U.S. Dollars

2007

   2.36 %   2.06 %   ¥ 27,660    $ 236,410

2008

   1.84     2.04       15,900      135,897

2009

   1.83     2.15       10,183      87,034

2010

   1.32     1.79       3,313      28,316

2011

   3.07     4.00       505      4,316

 

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Table of Contents

Cash Flow Hedges

Changes in the fair value of foreign exchange contracts and interest rate swap agreements designated and qualifying as cash flow hedges are reported in other comprehensive income (loss). These amounts are subsequently reclassified into earnings through other income (expense) in the same period as the hedged items affect earnings. For most forward exchange contracts, the amounts are reclassified when products related to hedged transactions are sold from overseas subsidiaries to customers. In the case of interest rate swaps, the amounts are reclassified when the related interest expense is recognized. Substantially all of the net losses on derivatives included in accumulated other comprehensive income at March 31, 2006 will be reclassified into earnings within the next 12 months.

Equity Price Risk

The Company’s short-term and other investments are exposed to changes in equity price risks and consist mainly of available-for-sale securities. Fair value and other information for such equity securities are disclosed in Note 4, “Other Investments” of the consolidated financial statements.

Fair Value of Financial Instruments

The fair values of finance receivables, other investments, and long-term debt are based on quoted market prices when available or discounted cash flows using the current interest rate on similar financing investments or borrowings. The fair value estimates of the financial instruments are not necessarily indicative of the amounts the Company might pay or receive from actual market transactions.

The carrying amounts of cash equivalents, short-term investments, notes and accounts receivable and payable, and short-term borrowings approximate the fair value because of the short duration of those instruments.

The following tables provide information of fair value of finance instruments at the end of fiscal 2006.

 

     Millions of Yen     Thousands of U.S. Dollars  
     Carrying value     Fair value     Carrying value     Fair value  

Financial assets;

        

Financial receivables-net

   ¥ 203,625     ¥ 193,578     $ 1,740,385     $ 1,654,513  

Financial liabilities;

        

Long-term debt

     (196,021 )     (190,718 )     (1,675,393 )     (1,630,068 )

Derivative financial instruments recorded as (liabilities) assets;

        

Foreign exchange instruments

     (108 )     (108 )     (923 )     (923 )

Interest rate swaps and other instruments

     163       163       1,393       1,393  

Item 12. Description of Securities Other Than Equity Securities

Not applicable

 

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Table of Contents

PART II

Item 13. Defaults, Dividend Arrearages and Delinquencies

None

Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds

None

Item 15. Controls and Procedures

The Company’s management, with the participation of its chief executive and chief financial officers, evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the U.S. Securities Exchange Act of 1934) as of March 31, 2006. Based on that evaluation, the Company’s chief executive and chief financial officers concluded that the disclosure controls and procedures were not effective as of that date because of the material weaknesses in internal control over financial reporting (as defined in Rules 13a-15(f) under the U.S. Securities Exchange Act of 1934) described below.

In connection with the original filing of the Form 20-F for the year ended March 31, 2005, the Company’s management, with the participation of its chief executive and chief financial officers, evaluated the effectiveness of the Company’s disclosure controls and procedures. Based on that evaluation, the Company’s chief executive and chief financial officers concluded that the Company’s disclosure controls and procedures were effective as of that date.

In connection with the filing of Form 20-F/A for the fiscal year ended March 31, 2005, which was filed on June 27, 2006, the Company’s management, with the participation of its chief executive and chief financial officers, reevaluated the effectiveness of the Company’s disclosure controls and procedures as of March 31, 2005. This reevaluation included examination of the process and procedures for gathering and summarizing the information relating to the sale by the Company of a subsidiary, which operated a golf course, during the fiscal year ended March 31, 2005, for which restatements have been made to the Company’s consolidated financial statements in response to a comment from the staff of the U.S. Securities and Exchange Commission. In the consolidated financial statements included in the Form 20-F, the results of operations of the subsidiary were not accounted for as a discontinued operation as required by Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (SFAS 144). The Company’s management determined that the failure to ensure the correct application of that Statement with respect to the reporting of results of operation of the subsidiary was attributable to a material weakness in the Company’s internal control over financial reporting. Based on the reevaluation mentioned above, the Company’s chief executive and chief financial officers concluded that the Company’s disclosure controls and procedures were not effective as of March 31, 2005 solely due to such material weakness in its internal control over financial reporting.

To remediate the above-mentioned material weakness in the Company’s internal control over financial reporting, the Company has taken, or is taking, the following measures:

 

    The Company has been formulating an accounting staff’s checklist to ensure the correct application of SFAS 144 with respect to discontinued operations. With this checklist, the Company’s management will check whether there are any operations to be accounted for as a discontinued operation, and if there is any such discontinued operation, whether it is appropriately accounted for in accordance with SFAS 144.

 

    The Company has been preparing to implement management’s additional oversight controls to review and approve accounting treatment and related documentation to ensure SFAS 144 is appropriately applied with respect to discontinued operations.

 

    The disclosure committee of the Company now monitors and confirms whether the discontinued operations are accounted for correctly in accordance with SFAS 144 when the committee reviews the Company’s financial statements and its disclosures.

As of filing date of this Form 20-F, the Company has not yet completed the implementation of the remediation measures described above. The Company currently expects to complete the implementation by the end of the year ending March 31, 2007. Accordingly, as of March 31, 2006, the material weaknesses described above had not been remediated.

The Company has taken steps to confirm that, notwithstanding the material weakness described above, the financial statements included in this Annual Report on Form 20-F fairly present, in all material respects, its financial position, results of operations and cash flows for the periods presented in accordance with accounting principles generally accepted in the United States of America.

No change in the Company’s internal control over financial reporting occurred during the year ended March 31, 2006 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

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Table of Contents

Item 16A . Audit Committee Financial Expert

The Company’s Board of Corporate Auditors has determined that Yoshio Suekawa qualifies as an “audit committee financial expert” as defined by the rules of the SEC. He is a certified public accountant in Japan. He started his career at Lowe Bingham and Luckie (subsequently, PricewaterhouseCoopers, Osaka) in 1959. Since then he has worked in several major accounting firms including Deloitte Touche Tohmatsu as a public accountant for more than 40 years. From 1974 to 1976 he worked at the office of Price Waterhouse in Los Angeles. Currently he maintains Suekawa CPA Office and is a special visiting professor of the faculty of commerce at Doshisha University. He was elected as one of the Company’s Corporate Auditors at the ordinary general meeting of shareholders held on June 25, 2004. See Item 6.A. for information regarding his business experience. And he meets the independence requirements imposed on corporate auditors under the Corporate Law of Japan.

Item 16B . Code of Ethics

The Board of Directors of the Company adopted a “Code of Ethics”, which is applicable to its Chief Executive Officer, Chief Financial Officer, General Manager of Finance & Accounting Department. This Code requires the relevant Officers to act honestly and candidly, including the ethical handling of conflict of interest, and to comply with all applicable laws, accounting standards, rules and regulations of self-regulatory organization, and policies and internal regulation of the Company. The Code also requires the relevant Officers to conduct full, fair, accurate, timely and understandable disclosure in reports and documents which are filed with or submitted to the SEC, and in other communications with the public and prompt internal reporting of violations of this Code. The Code of Ethics has been incorporated by reference as exhibits to this Annual Report.

Item 16C. Principal Accountant Fees and Services

Policies for Pre-Approval of Audit and Non-Audit Services rendered by Independent Auditors

The Board of Corporate Auditors of the Company consists of 5 auditors, including 3 outside corporate auditors. The Board has adopted Pre-Approval Policies and Procedures for Audit and Non-Audit Services (the “Policies”) for the purpose of supervising its independent auditors’ work. The Policies govern external auditors to render audit or non-audit services to the Company. The Policies classify audit and non-audit services into 3 categories depending on the nature of services and regulate them differently.

The first category includes the following services and they are pre-approved comprehensively.

 

  All services necessary to perform audit or review of the Company and any subsidiaries to comply with the rules of the SEC, Corporate Law of Japan, Securities and Exchange Law of Japan, rules and regulation of Stock Exchanges in Japan and any other rules and regulation, and related consultation of accounting procedures and voluntary audit and examination of subsidiaries.

 

  Audit-related services, such as due diligence related to merger & acquisition activity, audit of employee benefit plans including audit of pension fund and audit or review of information systems related to accounting.

 

  Services and consultation related to the preparation of tax returns.

 

  Other services, such as consultation related to information systems other than accounting, consultation related to welfare of employees and training of employees regarding accounting practices.

The second category includes non-audit services which are restricted by the Sarbanes-Oxley act and the rules of SEC to be rendered by the same public accountants which renders audit services to the Company. The Policies prohibits such services to be rendered.

The third category includes additional services other than the above which may be pre-approved by the Board on an individual basis.

No services were provided for which pre-approval was waived pursuant to paragraph (c)(7)(i)(C) of Rule 2-01 of Regulation S-X.

 

62


Table of Contents

Fees and Services of Deloitte Touche Tohmatsu

The following table discloses the aggregate fees accrued or paid to Deloitte Touche Tohmatsu for each of the last 2 fiscal years:

 

     (Millions of yen)
     Year ended
March 31, 2006
   Year ended
March 31, 2005

Audit fees

   ¥ 263    ¥ 195

Audit-related fees

     15      17

Tax fees

     149      129

All other fees

     92      203
             

Total

   ¥ 519    ¥ 544
             

Audit fees include fees charged for professional services rendered for audits of the Company’s semi-annual and annual consolidated financial statements, statutory audits of the Company and its subsidiaries.

Audit-related fees include fees charged for assurance and related services such as due diligence, accounting consultations and audits in connection with mergers and acquisitions, employee benefit plan audits, internal control reviews, and consultations concerning financial accounting and reporting standards.

Tax fees include fees charged for services related to tax compliance, including the preparation of tax returns and claims for refund, tax planning and tax advice, including assistance with tax audits and appeals, advice related to mergers and acquisitions, tax services for employee benefit plans and assistance with respect to requests for rulings from tax authorities.

All other fees include fees charged for services rendered with respect to consultation, design and implementation relating to the Company’s reorganization.

Item 16D. Exemptions from the Listing Standards for Audit Committees

With respect to the requirements of Rule 10A-3 under the Securities Exchange Act of 1934 relating to listed company audit committees, which apply to the Company through Section 303A.06 of the New York Stock Exchange’s Listed Company Manual, the Company relies on an exemption provided by paragraph (c)(3) of that Rule available to foreign private issuers with boards of corporate auditors meeting certain requirements. For a New York Stock Exchange-listed Japanese company with a board of corporate auditors, the requirements for relying on paragraph (c)(3) of Rule 10A-3 are as follows:

 

  1. The board of corporate auditors must be established, and its members must be selected, pursuant to Japanese law expressly requiring such a board for Japanese companies that elect to have a corporate governance system with corporate auditors.

 

  2. Japanese law must and does require the board of corporate auditors to be separate from the board of directors.

 

  3. None of the members of the board of corporate auditors is elected by management, and none of the listed company’s executive officers is a member of the board of corporate auditors.

 

  4. Japanese law must and does set forth standards for the independence of the members of the board of corporate auditors from the listed company or its management.

 

  5. The board of corporate auditors, in accordance with Japanese law or the listed company’s governing documents, must be responsible, to the extent permitted by Japanese law, for the appointment, retention and oversight of the work of any registered public accounting firm engaged (including, to the extent permitted by Japanese law, the resolution of disagreements between management and the auditor regarding financial reporting) for the purpose of preparing or issuing an audit report or performing other audit, review or attest services for the listed company, including its principal accountant which audits its consolidated financial statements included in its annual reports on Form 20-F.

 

  6. To the extent permitted by Japanese law:

 

    the board of corporate auditors must establish procedures for (i) the receipt, retention and treatment of complaints received by us regarding accounting, internal accounting controls, or auditing matters, and (ii) the confidential, anonymous submission by our employees of concerns regarding questionable accounting or auditing matters;

 

    the board of corporate auditors must have the authority to engage independent counsel and other advisers, as it determines necessary to carry out its duties; and

 

    the listed company must provide for appropriate funding, as determined by its board of corporate auditors, for payment of (i) compensation to any registered public accounting firm engaged for the purpose of preparing or issuing an audit report or performing other audit, review or attest services for us, (ii) compensation to any advisers employed by the board of corporate auditors, and (iii) ordinary administrative expenses of the board of corporate auditors that are necessary or appropriate in carrying out its duties.

In the Company’s assessment, the Company’s Board of Corporate Auditors, which meets the requirements for reliance on the exemption in paragraph (c)(3) of Rule 10A-3 described above, is not materially less effective than an audit committee meeting all the requirements of paragraph (b) of Rule 10A-3 (without relying on any exemption provided by that Rule) at acting independently of management and performing the functions of an audit committee as contemplated therein.

 

63


Table of Contents

Item 16E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers

The following table sets forth the Company’s purchases of its common stock during fiscal 2006:

 

Period

 

(a) Total Number of

Shares Purchased

 

(b) Average
Price Paid

per Share

(Yen)

 

(c) Total Number of

Shares Purchased

as Part of Publicly

Announced Plans

or Programs

 

(d) Maximum Number

of Shares that

May Yet Be Purchased

Under the Plans

or Programs

April 1, 2005 – April 30, 2005

  8,218   556.39   0   0

May 1, 2005 – May 31, 2005

  6,147   567.24   0   0

June 1, 2005 – June 30, 2005

  11,002   612.77   0   10,000,000

July 1, 2005 – July 31, 2005

  23,901   622.74   0   10,000,000

August 1, 2005 – August 31, 2005

  19,594   670.84   0   10,000,000

September 1, 2005 – September 30, 2005

  21,078   722.42   0   10,000,000

October 1, 2005 – October 31, 2005

  3,039,431   756.71   3,027,000   6,973,000

November 1, 2005 – November 30, 2005

  14,024   902.12   0   6,973,000

December 1, 2005 – December 31, 2005

  5,078,375   954.09   5,060,000   10,000,000

January 1, 2006 – January 31, 2006

  8,109,235   943.04   8,100,000   1,900,000

February 1, 2006 – February 28, 2006

  18,245   1,062.21   0   1,900,000

March 1, 2006 – March 31, 2006

  13,290   1,143.17   0   0
               

Total

  16,362,540   —     16,187,000   —  

 

Note: 1) In accordance with the Commercial Code and its related legislations, all purchases other than purchases publicly announced were made as a result of holders of shares less than one unit, which is 1,000 shares of common stock, requesting the Company to purchase shares that are a fraction of a unit.

2) In fiscal 2006, the Company established 3 programs of purchasing its shares on market. The Company executed the programs pursuant to Article 211-3, Paragraph 1, item 2 of the Commercial Code. None of these programs was terminated prior to expiration. Details of each program are as follows:

(1) The program resolved at the Board of Directors’ Meeting held on June 24, 2005

 

i) Day of announcement:

  June 24, 2005   

ii) Type of shares to be purchased:

  Shares of common stock of the Company   

iii) Number of shares to be purchased:

  Not exceeding 10.0 million shares   

iv) Amount of shares to be purchased:

  Not exceeding ¥6.5 billion   

v) Term of validity:

  From June 27, 2005 to September 15, 2005   

(2) The program resolved at the Board of Directors’ Meeting held on September 16, 2005

 

i) Day of announcement:

  September 16, 2005   

ii) Type of shares to be purchased:

  Shares of common stock of the Company   

iii) Number of shares to be purchased:

  Not exceeding 10.0 million shares   

iv) Amount of shares to be purchased:

  Not exceeding ¥7.5 billion   

v) Term of validity:

  From September 20, 2005 to December 15, 2005   

(3) The program resolved at the Board of Directors’ Meeting held on December 16, 2005

 

i) Day of announcement:

  December 16, 2005   

ii) Type of shares to be purchased:

  Shares of common stock of the Company   

iii) Number of shares to be purchased:

  Not exceeding 10.0 million shares   

iv) Amount of shares to be purchased:

  Not exceeding ¥10.5 billion   

v) Term of validity:

  From December 19, 2005 to March 22, 2006   

 

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Table of Contents

PART III

Item 17. Financial Statements

See Consolidated Financial Statements attached hereto.

Item 18. Financial Statements

Not applicable

 

65


Table of Contents

Item 19. Exhibits

Documents filed as exhibits to this annual report are as follows:

The financial section of the Company’s 2006 Annual Report to Shareholders

 

    

Pages in the Financial Section of

2006 Annual Report to Shareholders

Five-Year Financial Summary of Operations

[Information with respect to Item 3 is included]

   11

Segment Information

   24 to 25

Consolidated Financial Statements as indicated in accompanying Index to Consolidated Financial Statements

   26 to 53

Independent Auditors’ Report

   54

 

1.1 Articles of Incorporation of the Registrant (English translation)

 

1.2 Share Handling Regulations of the Registrant (English translation)

 

2.1 Form of Amended and Restated Deposit Agreement among the Registrant, JPMorgan Chase Bank as Depositary and all owners and holders from time to time of American Depositary Receipts, including the form of American Depositary Receipt (incorporated by reference to the Registration Statement on Form F-6 (File No. 333-91654) filed on June 26, 2002)

 

8.1 List of Significant Subsidiaries (See “Organizational Structure” in Item 4.C. of this Form 20-F)

 

11.1 Code of Ethics for Senior Financial Officers of the Registrant (English translation)

 

12.1 Certification of the principal executive officer of the Company required by Rule 13a-14(a)

 

12.2 Certification of the principal financial officer of the Company required by Rule 13a-14(a)

13.1 Certification required by Rule 13a-14(b) and Section 1350 of Chapter 63 of Title 18 of the United States Code

(Note) The Company has not included as exhibits certain instruments with respect to its long-term debt, the amount of debt authorized under each of which does not exceed 10% of its total assets, and it agrees to furnish a copy of any such instrument to the Securities and Exchange Commission upon request.

 

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Table of Contents

SIGNATURE

The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this annual report on its behalf.

 

  KUBOTA CORPORATION
Date; September 21, 2006   By  

/s/ Hirokazu Nara

    Hirokazu Nara
    Director
    (Principal Financial and Accounting Officer)


Table of Contents

Kubota Corporation and Subsidiaries

Consolidated Financial Statements

Comprising Item 17 of Annual Report on Form 20-F

to Securities and Exchange Commission

for the Years Ended March 31, 2006, 2005, and 2004,

and Independent Auditors’ Report


Table of Contents

Kubota Corporation and Subsidiaries

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE

Consolidated Financial Statements and Independent Auditors’ Report Included in the Financial Section of the Company’s 2006 Annual Report to Shareholders Attached Hereto and Incorporated by Reference:

 

    

Page in Financial Section of

Annual Report to Shareholders

Five-Year Financial Summary    11
Segment Information (Years Ended March 31, 2006 and 2005)    24 and 25
Consolidated Balance Sheets (as of March 31, 2006 and 2005)    26 and 27
Consolidated Statements of Income (Years Ended March 31, 2006, 2005, and 2004)    28
Consolidated Statements of Comprehensive Income (Loss) (Years Ended March 31, 2006, 2005, and 2004)    29
Consolidated Statements of Shareholders’ Equity (Years Ended March 31, 2006, 2005, and 2004)    29
Consolidated Statements of Cash Flows (Years Ended March 31, 2006, 2005, and 2004)    30
Notes to Consolidated Financial Statements    31 to 53
Independent Auditors’ Report    54


Table of Contents

Five-Year Financial Summary

Kubota Corporation and Subsidiaries    Years Ended March 31, 2006, 2005, 2004, 2003, and 2002

 

    

Millions of Yen

(Except Per Share Information)

   

Thousands of
U.S. Dollars
(Except Per Share

Information)
(Note 1)

     2006     2005     2004     2003     2002     2006

For the year

            

Net sales

   ¥ 1,051,040     ¥ 983,226     ¥ 929,876     ¥ 925,788     ¥ 965,429     $ 8,983,248

Percentage of previous year

     106.9 %     105.7 %     100.4 %     95.9 %     98.1 %  

Cost of sales

     747,380       713,312       701,718       695,543       729,834       6,387,864

Selling, general, and administrative expenses

     185,451       181,727       199,189       180,857       188,112       1,585,051

Loss from disposal and impairment of businesses and fixed assets

     4,709       1,414       6,359       2,816       12,788       40,248

Operating income

     113,500       86,773       22,610       46,572       34,695       970,085

Income from continuing operations

     81,034       106,801       12,495       8,995       9,838       692,598

Income (loss) from discontinued operations, net of taxes

     —         11,100       (795 )     (16,999 )     (308 )     —  

Net income (loss):

     81,034       117,901       11,700       (8,004 )     9,530       692,598

Percentage of previous year

     68.7 %     1,007.7 %     —         —         97.3 %  

Percentage of net sales

     7.7 %     12.0 %     1.3 %     (0.9 )%     1.0 %  

Net income (loss) per common share
(Yen and U.S. Dollars):

            

Basic

   ¥ 62.14     ¥ 89.11     ¥ 8.72     ¥ (5.84 )   ¥ 6.78     $ 0.53

Diluted

     61.67       86.83       8.53       (5.84 )     6.67       0.53

Net income (loss) per 5 common shares
(Yen and U.S. Dollars):

            

Basic

   ¥ 311     ¥ 446     ¥ 44     ¥ (29 )   ¥ 34     $ 2.66

Diluted

     308       434       43       (29 )     33       2.63

Cash dividends per common share (Yen and U.S. Dollars):

   ¥ 9     ¥ 6     ¥ 6     ¥ 6     ¥ 6     $ 0.08

Cash dividends per 5 common shares (Yen and U.S. Dollars):

   ¥ 45     ¥ 30     ¥ 30     ¥ 30     ¥ 30     $ 0.38

At year-end

            

Total assets

   ¥ 1,405,402     ¥ 1,193,056     ¥ 1,124,225     ¥ 1,139,011     ¥ 1,200,117     $ 12,011,983

Working capital

     241,786       171,326       199,747       159,221       169,428       2,066,547

Long-term debt

     152,024       117,488       144,845       155,966       167,850       1,299,351

Total shareholders’ equity

     606,484       481,019       391,082       315,443       394,970       5,183,624

Shareholders’ equity per common share outstanding (Yen and U.S. Dollars):

   ¥ 466.71     ¥ 369.90     ¥ 291.81     ¥ 234.45     ¥ 284.07     $ 3.99

Shareholders’ equity per 5 common shares outstanding (Yen and U.S. Dollars):

   ¥ 2,334     ¥ 1,849     ¥ 1,459     ¥ 1,172     ¥ 1,420     $ 19.95

Notes: 1. The U.S. dollar amounts in this report represent translations of Japanese yen, for convenience only, at the rate of ¥117= US$1. See Note 1 to the consolidated financial statements.
            2. The Company has not accounted for a nonmonetary security exchange transaction that occurred during the year ended March 31, 1997 in accordance with accounting principles generally accepted in the United States of America. See Note 1 to the consolidated financial statements.
            3. Per share amounts have been calculated per common share and per 5 common shares since each American Depository Share represents 5 shares of common stock.
            4. Cash dividends per common share are based on dividends paid during the year.

 

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Table of Contents
  SEGMENT INFORMATION

The following segment information for the years ended March 31, 2006 and 2005, which is required under the regulations of the Securities and Exchange Law of Japan, is not consistent with accounting principles generally accepted in the United States of America.

Industry Segments

 

     Millions of Yen

Year Ended March 31, 2006

   Internal
Combustion
Engine &
Machinery
   Pipes,
Valves, &
Industrial
Castings
   Environmental
Engineering
   Other    Total   

Corporate

&

Eliminations

    Consolidated

Net sales:

                   

Unaffiliated customers

   ¥ 658,776    ¥ 189,708    ¥ 110,479    ¥ 92,077    ¥ 1,051,040    ¥ —       ¥ 1,051,040

Intersegment

     40      2,184      209      15,176      17,609      (17,609 )     —  
                                                 

Total

     658,816      191,892      110,688      107,253      1,068,649      (17,609 )     1,051,040

Cost of sales and operating expenses

     555,687      172,637      106,475      105,073      939,872      (2,332 )     937,540
                                                 

Operating income

   ¥ 103,129    ¥ 19,255    ¥ 4,213    ¥ 2,180    ¥ 128,777    ¥ (15,277 )   ¥ 113,500
                                                 

Identifiable assets at March 31, 2006

   ¥ 760,001    ¥ 181,740    ¥ 92,996    ¥ 81,461    ¥ 1,116,198    ¥ 289,204     ¥ 1,405,402

Depreciation

     15,284      5,308      798      1,492      22,882      2,508       25,390

Loss from impairment

     61      82      59      836      1,038      —         1,038

Capital expenditures

     25,482      3,585      389      1,479      30,935      2,870       33,805
                                                 
     Millions of Yen

Year Ended March 31, 2005

   Internal
Combustion
Engine &
Machinery
   Pipes,
Valves, &
Industrial
Castings
   Environmental
Engineering
   Other    Total   

Corporate

&
Eliminations

    Consolidated

Net sales:

                   

Unaffiliated customers

   ¥ 582,664    ¥ 170,629    ¥ 117,633    ¥ 112,300    ¥ 983,226    ¥ —       ¥ 983,226

Intersegment

     88      8,237      249      14,956      23,530      (23,530 )     —  
                                                 

Total

     582,752      178,866      117,882      127,256      1,006,756      (23,530 )     983,226

Cost of sales and operating expenses

     503,596      167,391      112,167      123,374      906,528      (10,075 )     896,453
                                                 

Operating income

   ¥ 79,156    ¥ 11,475    ¥ 5,715    ¥ 3,882    ¥ 100,228    ¥ (13,455 )   ¥ 86,773
                                                 

Identifiable assets at March 31, 2005

   ¥ 614,123    ¥ 190,669    ¥ 105,890    ¥ 100,874    ¥ 1,011,556    ¥ 181,500     ¥ 1,193,056

Depreciation

     14,154      6,368      930      1,678      23,130      2,338       25,468

Loss from impairment

     77      —        42      976      1,095      —         1,095

Capital expenditures

     17,482      1,823      358      1,388      21,051      5,046       26,097
                                                 
     Thousands of U.S. Dollars

Year Ended March 31, 2006

   Internal
Combustion
Engine &
Machinery
   Pipes,
Valves, &
Industrial
Castings
   Environmental
Engineering
   Other    Total    Corporate &
Eliminations
    Consolidated

Net sales:

                   

Unaffiliated customers

   $ 5,630,564    $ 1,621,436    $ 944,265    $ 786,983    $ 8,983,248    $ —       $ 8,983,248

Intersegment

     342      18,667      1,786      129,709      150,504      (150,504 )     —  
                                                 

Total

     5,630,906      1,640,103      946,051      916,692      9,133,752      (150,504 )     8,983,248

Cost of sales and operating expenses

     4,749,462      1,475,530      910,043      898,060      8,033,095      (19,932 )     8,013,163
                                                 

Operating income

   $ 881,444    $ 164,573    $ 36,008    $ 18,632    $ 1,100,657    $ (130,572 )   $ 970,085
                                                 

Identifiable assets at March 31, 2006

   $ 6,495,735    $ 1,553,333    $ 794,838    $ 696,248    $ 9,540,154    $ 2,471,829     $ 12,011,983

Depreciation

     130,632      45,368      6,821      12,752      195,573      21,436       217,009

Loss from impairment

     522      701      504      7,145      8,872      —         8,872

Capital expenditures

     217,795      30,641      3,325      12,641      264,402      24,530       288,932
                                                 

 

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Table of Contents

Geographic Segments

 

     Millions of Yen

Year Ended March 31, 2006

   Japan    North America    Other Areas    Total   

Corporate

& Eliminations

    Consolidated

Net sales:

                

Unaffiliated customers

   ¥ 659,062    ¥ 273,078    ¥ 118,900    ¥ 1,051,040    ¥ —       ¥ 1,051,040

Intersegment

     250,976      4,934      4,070      259,980      (259,980 )     —  
                                          

Total

     910,038      278,012      122,970      1,311,020      (259,980 )     1,051,040

Cost of sales and operating expenses

     807,788      257,080      111,547      1,176,415      (238,875 )     937,540
                                          

Operating income

   ¥ 102,250    ¥ 20,932    ¥ 11,423    ¥ 134,605    ¥ (21,105 )   ¥ 113,500
                                          

Identifiable assets at March 31, 2006

   ¥ 730,366    ¥ 390,122    ¥ 80,353    ¥ 1,200,841    ¥ 204,561     ¥ 1,405,402
                                          
     Millions of Yen

Year Ended March 31, 2005

   Japan    North America    Other Areas    Total   

Corporate

& Eliminations

    Consolidated

Net sales:

                

Unaffiliated customers

   ¥ 659,283    ¥ 232,135    ¥ 91,808    ¥ 983,226    ¥ —       ¥ 983,226

Intersegment

     193,242      3,000      2,792      199,034      (199,034 )     —  
                                          

Total

     852,525      235,135      94,600      1,182,260      (199,034 )     983,226

Cost of sales and operating expenses

     778,412      215,044      87,207      1,080,663      (184,210 )     896,453
                                          

Operating income

   ¥ 74,113    ¥ 20,091    ¥ 7,393    ¥ 101,597    ¥ (14,824 )   ¥ 86,773
                                          

Identifiable assets at March 31, 2005

   ¥ 746,627    ¥ 259,218    ¥ 64,737    ¥ 1,070,582    ¥ 122,474     ¥ 1,193,056
                                          
     Thousands of U.S. Dollars

Year Ended March 31, 2006

   Japan    North America    Other Areas    Total   

Corporate

& Eliminations

    Consolidated

Net sales:

                

Unaffiliated customers

   $ 5,633,009    $ 2,334,000    $ 1,016,239    $ 8,983,248    $ —       $ 8,983,248

Intersegment

     2,145,094      42,171      34,786      2,222,051      (2,222,051 )     —  
                                          

Total

     7,778,103      2,376,171      1,051,025      11,205,299      (2,222,051 )     8,983,248

Cost of sales and operating expenses

     6,904,171      2,197,265      953,393      10,054,829      (2,041,666 )     8,013,163
                                          

Operating income

   $ 873,932    $ 178,906    $ 97,632    $ 1,150,470    $ (180,385 )   $ 970,085
                                          

Identifiable assets at March 31, 2006

   $ 6,242,444    $ 3,334,376    $ 686,778    $ 10,263,598    $ 1,748,385     $ 12,011,983
                                          

Sales by Region

 

     Millions of Yen    

Thousands of

U.S. Dollars

2006

Years Ended March 31, 2006 and 2005

   2006     2005    

Japan

   ¥ 630,811    60.0 %   ¥ 637,902    64.9 %   $ 5,391,547

Overseas:

            

North America

     271,329    25.8       232,631    23.6       2,319,051

Other Areas

     148,900    14.2       112,693    11.5       1,272,650
                                

Subtotal

     420,229    40.0       345,324    35.1       3,591,701
                                

Total

   ¥ 1,051,040    100.0 %   ¥ 983,226    100.0 %   $ 8,983,248
                                

Sales by region represent sales to unaffiliated customers based on the customers’ locations.

 

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Table of Contents

CONSOLIDATED BALANCE SHEETS

Kubota Corporation and Subsidiaries    March 31, 2006 and 2005

 

     Millions of Yen    

Thousands of

U.S. Dollars

(Note 1)

2006

 
     2006     2005    

ASSETS

      

Current assets:

      

Cash and cash equivalents

   ¥ 91,858     ¥ 74,563     $ 785,111  

Notes and accounts receivable (Notes 3, 6, 7, 10 and 18):

      

Trade notes

     70,007       72,517       598,351  

Trade accounts

     242,865       248,338       2,075,769  

Less: Allowance for doubtful notes and accounts receivable (Note 6)

     (2,155 )     (2,257 )     (18,419 )

Short-term finance receivables—net (Notes 5, 7 and 18)

     79,116       50,921       676,205  

Inventories (Note 2)

     175,660       155,146       1,501,368  

Other current assets (Notes 12 and 18)

     100,873       76,143       862,162  
                        

Total current assets

     758,224       675,371       6,480,547  
                        

Investments and long-term finance receivables:

      

Investments in and advances to affiliated companies (Note 3)

     13,145       11,808       112,350  

Other investments (Notes 4 and 7)

     236,629       146,979       2,022,470  

Long-term finance receivables—net (Notes 5, 7 and 18)

     124,509       80,725       1,064,180  
                        

Total investments and long-term finance receivables

     374,283       239,512       3,199,000  
                        

Property, plant, and equipment (Note 7):

      

Land

     82,978       83,031       709,214  

Buildings

     203,985       200,173       1,743,462  

Machinery and equipment

     367,150       359,659       3,138,034  

Construction in progress

     6,236       4,499       53,299  
                        

Total

     660,349       647,362       5,644,009  

Accumulated depreciation

     (433,977 )     (427,612 )     (3,709,205 )
                        

Net property, plant, and equipment

     226,372       219,750       1,934,804  
                        

Other assets (Notes 6, 8 and 12)

     46,523       58,423       397,632  
                        

Total

   ¥ 1,405,402     ¥ 1,193,056     $ 12,011,983  
                        

See notes to consolidated financial statements.

 

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Table of Contents
     Millions of Yen    

Thousands of
U.S. Dollars
(Note 1)

2006

 
      2006     2005    

LIABILITIES AND SHAREHOLDERS’ EQUITY

      

Current liabilities:

      

Short-term borrowings (Note 7)

   ¥ 132,209     ¥ 119,802     $ 1,129,991  

Trade notes payable

     33,560       33,675       286,838  

Trade accounts payable

     186,901       183,367       1,597,444  

Advances received from customers

     7,311       4,104       62,487  

Notes and accounts payable for capital expenditures

     13,348       9,094       114,086  

Accrued payroll costs

     24,310       23,616       207,778  

Accrued expenses

     28,587       24,998       244,333  

Income taxes payable

     12,376       12,223       105,778  

Other current liabilities (Note 17)

     27,816       26,289       237,744  

Current portion of long-term debt (Note 7)

     50,020       66,877       427,521  
                        

Total current liabilities

     516,438       504,045       4,414,000  
                        

Long-term liabilities:

      

Long-term debt (Note 7)

     152,024       117,488       1,299,351  

Accrued retirement and pension costs (Note 8)

     53,633       65,836       458,402  

Other long-term liabilities (Note 12)

     47,925       3,093       409,615  
                        

Total long-term liabilities

     253,582       186,417       2,167,368  
                        

Commitments and contingencies (Note 17)

      

Minority interests

     28,898       21,575       246,991  

Shareholders’ equity (Notes 9 and 14):

      

Common stock, authorized 1,874,700,000 shares and 1,931,000,000 shares in 2006 and 2005, respectively outstanding 1,299,487,964 shares and 1,300,413,082 shares in 2006 and 2005, respectively

     84,070       78,156       718,547  

Capital surplus

     93,150       87,263       796,154  

Legal reserve

     19,539       19,539       167,000  

Retained earnings

     323,116       290,187       2,761,675  

Accumulated other comprehensive income

     86,769       27,507       741,615  

Treasury stock (381,216 shares and 40,395,896 shares in 2006 and 2005, respectively), at cost

     (160 )     (21,633 )     (1,367 )
                        

Total shareholders’ equity

     606,484       481,019       5,183,624  
                        

Total

   ¥ 1,405,402     ¥ 1,193,056     $ 12,011,983  
                        

 

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Table of Contents

CONSOLIDATED STATEMENTS OF INCOME

Kubota Corporation and Subsidiaries    Years Ended March 31, 2006, 2005, and 2004

 

     Millions of Yen    

Thousands of
U.S. Dollars
(Note 1)

2006

 
     2006     2005     2004    

Net sales (Note 3)

   ¥ 1,051,040     ¥ 983,226     ¥ 929,876     $ 8,983,248  

Cost of sales

     747,380       713,312       701,718       6,387,864  

Selling, general, and administrative expenses

     185,451       181,727       199,189       1,585,051  

Loss from disposal and impairment of businesses and fixed assets (Note 16)

     4,709       1,414       6,359       40,248  
                                

Operating income

     113,500