20-F 1 k01178e20vf.htm MAKITA CORPORATION MAKITA CORPORATION
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 20-F
     
o   REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934
     
þ   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended March 31, 2006
     
o   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     
     
o   SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) THE SECURITIES EXCHANGE ACT OF 1934
 
    Date of event requiring this shell company report                      
For the transition period from April 1, 2005 to March 31, 2006
Commission file number 0-12602
KABUSHIKI KAISHA MAKITA
(Exact name of registrant as specified in its charter)
MAKITA CORPORATION
(Translation of registrant’s name into English)
Japan
(Jurisdiction of incorporation or organization)
3-11-8, Sumiyoshi-cho, Anjo City, Aichi Prefecture, Japan
(Address of principal executive offices)
Securities registered or to be registered pursuant to Section 12(b) of the Act.
     
Title of Class
  Name of each exchange on which registered
 
   
* American Depositary Shares
  Nasdaq Global Market
** Common Stock
 
 
*   American Depositary Receipts evidence American Depositary Shares, each American Depositary Share representing one share of the registrant’s Common Stock.
 
**   Effective October 1, 2001, no par value per share. Not for trading, but only in connection with the registration of American Depositary Shares, pursuant to the requirements of the Securities and Exchange Commission.
Securities registered or to be registered pursuant to Section 12(g) of the Act.
     
Title of each class   Name of each exchange on which registered
None
  None
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  
    March 31, 2006     March 31, 2006  
Title of Class   (Tokyo time)     (New York time)  
Common Stock, excluding 296,994 shares of Treasury Stock
    143,711,766          
 
               
American Depositary Shares, each representing one share of Common Stock
            3,160,984  
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
          þ Yes            o No
If this report is an annual or transition report, indicate by mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
          o Yes            þ No
Note – Checking the box above will not relieve any registrant required to the file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 from their obligations under those Sections.
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.
          þ Yes            o No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.
Large accelerated filer þ       Accelerated filer o      Non-accelerated filer o
Indicate by check mark which financial statement item the registrant has elected to follow.
          Item 17 o            Item 18 þ
If this 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).
          o Yes            þ No

 


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 EX-1.1 ARTICLES OF INCORPORATION, AS AMENDED AND EFFECTIVE AS OF JUNE 29, 2006 (ENGLISH TRANSLATION)
 EX-1.2 REGULATIONS OF BOARD OF DIRECTORS, AS AMENDED AND EFFECTIVE AS OF JUNE 29, 2006 (ENGLISH TRANSLATION)
 EX-1.3 THE SHARE HANDLING REGULATIONS, AS AMENDED AND EFFECTIVE AS OF JUNE 29, 2006 (ENGLISH TRANSLATION)
 EX-1.4 REGULATIONS OF BOARD OF STATUTORY AUDITORS EFFECTIVE AS OF JULY 7, 2006 (ENGLISH TRANSLATION)
 EX-12.1 302 CERTIFICATION OF PRESIDENT AND REPRESENTATIVE DIRECTORS
 EX-12.2 302 CERTIFICATION OF DIRECTORS, GENERAL MANAGER OF ADMINISTRATION HEADQUARTERS
 EX-13.1 906 CERTIFICATIONS OF PRESIDENT AND REPRESENTATIVE DIRECTOR AND DIRECTOR, GENERAL MANAGER OF ADMINISTRATION HEADQUARTERS

 


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As used in this annual report, the term “fiscal” preceding a year means the twelve-month period ended March 31 of the year referred to. For example, “fiscal 2006” or “FY2006” refers to the twelve-month period ended March 31, 2006. All other references to years refer to the applicable calendar year.
All information contained in this annual report is as of March 31, 2006 unless otherwise specified.
In parts of this annual report, amounts reported in Japanese yen have been translated into U.S. dollars for the convenience of readers. Unless otherwise noted, the rate used for this translation was ¥117 = U.S.$1.00, the approximate exchange rate on the noon buying rate for yen in New York City as certified for customs purposes by the Federal Reserve Bank of New York on March 31, 2006. On June 15, 2006 the noon buying rate for yen cable transfer in New York City as reported by the Federal Reserve Bank of New York was ¥115.06= $1.00.
As used herein, the “Company” refers to Makita Corporation and “Makita” or “Makita Group” refer to Makita Corporation and its consolidated subsidiaries unless the context otherwise indicates.
Cautionary Statement with Respect to Forward-Looking Statements
This annual report contains “forward-looking statements” that are based on current expectations, estimates, strategies and projections of the Company’s management in light of the information currently available to it. The Company and its representatives may, from time to time, make written or verbal forward-looking statements, including statements contained in the Company’s filings with the Securities and Exchange Commission and in its reports to shareholders, with respect to Makita’s current plans, estimates, strategies and beliefs and other statements that are not historical. Generally, the inclusion of the words “plan,” “strategy,” “believe,” “expect,” “intend,” “estimate,” “anticipate,” “will,” “may,” “might” and similar expressions identify statements that constitute “forward-looking statements” within the meaning of Section 27A of the United States Securities Act of 1933 and Section 21E of the United States Securities Exchange Act of 1934 and that are intended to come within the safe harbor protection provided by those sections. All statements addressing operating performance, events, or developments that Makita expects or anticipates to occur in the future, including statements relating to sales growth, earnings or earnings per share growth, and market share, as well as statements expressing optimism or pessimism about future operating results, are forward-looking statements. Makita undertakes no obligation to update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise.
By their nature, all forward-looking statements involve risks and uncertainties. Actual results may differ materially from those contemplated by the forward-looking statements for a number of reasons, including but not limited to:
  changes in economic conditions affecting the retail, housing and construction markets in different countries, particularly in Japan, the United States and Europe and, to a lesser extent, in Canada, Asia, Australia and the Middle East;
  Makita’s ability to maintain mutually beneficial relationships with key distributors and to penetrate new channels of distribution;
  circumstances relating to inventory adjustments or changes in purchasing patterns by major customers and their impact on Makita’s manufacturing volumes and inventory levels;
  uncertainties surrounding market acceptance of new products introduced in fiscal 2006 and scheduled for introduction in fiscal 2007, as well as the level of sales generated from these new products, in connection with Makita’s existing investments in productive capacity and commitments to fund its advertising and product promotions to introduce these new products;
  Makita’s ability to develop and introduce new products at favorable margins;
  adverse changes in currency exchange rates or raw material commodity prices, both in absolute terms and relative to competitors’ risk profiles;
  increased competition in both Japanese market and worldwide;
  changes in consumer preference or loyalties;
  price reductions taken by Makita in response to customer and competitive pressures, as well as price reductions or promotional actions taken in order to drive demand, which may not result in anticipated sales levels;
  Makita’s ability to achieve projected levels of efficiencies and cost reduction measures and to avoid delays in or inefficiencies resulting from manufacturing and administrative reorganization actions in progress or contemplated;
  the impact of various factors on Makita’s foreign operations such as tariffs, nationalization, exchange controls, interest rate fluctuations, civil unrest, governmental changes, restrictions on Makita’s foreign investment in local business and risks related to other political, economic, and regulatory instabilities;
  the effects of litigation, environmental remediation matters, and product liability exposures;

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  Makita’s ability to generate sufficient cash flows to support capital expansion, business acquisition plans and general operating activities, and Makita’s ability to obtain necessary financing at favorable interest rates;
  changes in laws and regulations, including changes in accounting standards, taxation requirements, including tax rate changes, new tax laws and revised tax law interpretations, and environmental laws, both in Japan and in foreign jurisdictions in which Makita operates;
  the impact of unforeseen events, including war or terrorist activities, on economic conditions and corporate and consumer confidence;
  fluctuations in stock market prices; and
  the effects of attestation on internal control over financial reporting to be expressed by the Company’s auditors.
The foregoing list is not exhaustive. There can be no assurance that Makita has correctly identified and appropriately assessed all factors affecting its business or that the publicly available and other information with respect to these matters is complete and correct. Additional risks and uncertainties not presently known to Makita or that it currently believes to be immaterial also may adversely impact Makita. Should any risks and uncertainties develop into actual events, these developments could have material adverse effects on Makita’s business, financial condition, and results of operations.

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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
A. Selected financial data
The following data for each of the five fiscal years ended March 31, 2006 has been derived from Makita’s audited consolidated financial statements. It should be read in conjunction with Makita’s audited consolidated balance sheets as of March 31, 2005 and 2006, the related consolidated statements of income, shareholder’s equity and cash flows for each of the three years ended March 31, 2006, and the notes thereto that appear elsewhere in this annual report. Makita’s consolidated financial statements were prepared in accordance with U.S. generally accepted accounting principles, or U.S. GAAP, and were included in its Japanese Securities Reports filed with the Director of the Kanto Local Finance Bureau.
                                                 
                                            U.S. Dollars  
    (Millions of yen, except per share amounts)     (thousands)  
    Fiscal year ended March 31,  
Income Statement Data:   2002     2003     2004     2005     2006     2006  
Net sales
  ¥ 166,169     ¥ 175,603     ¥ 184,117     ¥ 194,737     ¥ 229,075     $ 1,957,906  
Operating income
    5,873       12,468       14,696       31,398       45,778       391,265  
Net income
    133       6,723       7,691       22,136       40,411       345,393  
Net income per share of Common stock and per ADS:
                                               
Basic
    0.9       45.3       53.2       153.9       281.1       2.40  
Diluted
    0.9       44.2       51.9       148.8       281.1       2.40  
                                                 
                                            U.S. Dollars  
    (Millions of yen, except per share amounts)     (thousands)  
    Fiscal year ended March 31,  
Balance Sheet Data:   2002     2003     2004     2005     2006     2006  
Total assets
  ¥ 285,138     ¥ 278,600     ¥ 278,116     ¥ 289,904     ¥ 326,038     $ 2,786,650  
Cash and cash equivalents, time deposits and marketable securities
    63,393       64,083       92,616       91,189       88,672       757,880  
Net working capital
    144,929       141,759       147,822       149,666       181,808       1,553,914  
Short-term borrowings
    8,984       2,892       14,128       9,060       1,728       14,769  
Long-term indebtedness
    20,102       19,843       7,364       88       104       889  
Common stock
    23,803       23,803       23,803       23,805       23,805       203,462  
Treasury stock
    (2,229 )     (5,110 )     (3,316 )     (3,517 )     (258 )     (2,205 )
Shareholders’ equity
    189,939       182,400       193,348       219,640       266,584       2,278,496  
Total number of shares outstanding
    149,673,742       145,967,876       143,893,191       143,777,607       143,711,766       143,711,766  
Note: Net working capital equals current assets less current liabilities.

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Exchange rates (Japanese yen amounts per U.S. dollars)
The following table sets forth information concerning the exchange rates for Japanese yen and U.S. dollars based on the noon buying rates for cable transfers in Japanese yen in New York City as certified for customs purposes by the Federal Reserve Bank of New York. The average Japanese yen exchange rates represent average noon buying rates on the last business day of each month during the previous period.
                                 
    (Japanese Yen per U.S. $1.00)  
Fiscal year ended March 31,   High     Low     Average     Year-end  
2002
    115.89       134.77       125.64       132.70  
2003
    115.71       133.40       121.94       118.07  
2004
    104.18       120.55       113.07       104.18  
2005
    102.26       114.30       107.47       107.22  
2006
    104.41       120.93       113.15       117.48  
                                                 
    (Japanese Yen per U.S. $1.00)  
                                            June  
2006   January     February     March     April     May     (through June 15)  
High
    113.96       115.82       115.89       113.79       110.07       111.66  
Low
    117.55       118.95       119.07       118.66       113.46       115.06  
On June 15, 2006 the noon buying rate for yen cable transfer in New York City as reported by the Federal Reserve Bank of New York was ¥115.06 = U.S. $1.00
Cash dividends declared per share of common stock and per ADS:
                                 
    In Yen     In U.S. Dollars  
Fiscal year ended March 31,   Interim     Year-end     Interim     Year-end  
2002
    9.0       9.0       0.07       0.07  
2003
    9.0       9.0       0.07       0.07  
2004
    9.0       13.0       0.09       0.11  
2005
    11.0       36.0       0.10       0.34  
2006
    19.0       38.0       0.16       0.32  
Makita’s basic dividend policy on the distribution of profits is to maintain a dividend payout ratio of 30% or greater, with a lower limit on annual cash dividends of 18 yen per share. However, in the event special circumstances arise, computation of the amount of dividends will be based on consolidated net income after certain adjustments.
     
Note:
  Cash dividends in U.S. dollars are based on the exchange rates as of the respective payment date, using the noon buying rates for cable transfers in yen in New York City as certified for customs purposes by the Federal Reserve Bank of New York.
B. Capitalization and indebtedness
      Not applicable
C. Reasons for the offer and use of proceeds
      Not applicable

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D. Risk factors
The following is a summary of some of the significant risks that could affect Makita. Other risks that could affect Makita are also discussed elsewhere in this annual report. Additionally, some risks that may be currently unknown to Makita and other risks that are currently believed to be immaterial, may become material. Some of these statements are forward-looking statements that are subject to the “Cautionary Statement with Respect to Forward-Looking Statements” appearing elsewhere in this annual report.
Makita’s sales are affected by the levels of construction activities and capital investments in its markets.
The demand for power tools, Makita’s main products, is affected to a large extent by the levels of construction activities and capital investments in the relevant regions. Generally speaking, the levels of construction activities and capital investment depend largely on the economic conditions in the market. As a result, when economic conditions weaken in the principal markets for Makita’s activities, including Japan, North America, Europe, and Asia, this may have an adverse impact on Makita’s consolidated financial condition and results of operations.
Geographic concentration of Makita’s main facilities may have adverse effects on Makita’s business activities.
Makita’s principal management functions, including its headquarters, and the companies on which it relies for supplying major parts are located in Aichi Prefecture (“Aichi”), Japan. Makita’s manufacturing facilities in Aichi and Kunshan, Jiangsu Province, China, collectively account for approximately 76% of Makita’s total production volume on a consolidated basis in fiscal 2006. Due to this geographic concentration of Makita’s major functions, including plants and other operations in Japan and China, Makita’s performance may be significantly affected by major natural disasters and other catastrophic events, including earthquakes, floods, fires, power outages, and suspension of water supplies. In addition, Makita’s facilities in China may also be affected by changes in political and legal environments, changes in economic conditions, revisions in tariff rates, currency appreciation, labor disputes, emerging infections diseases, power outages resulting from inadequacies in infrastructure, and other factors. In the event that such developments cannot be foreseen or measures taken to alleviate their damaging impact are inadequate, Makita’s consolidated financial condition and results of operations may be adversely affected.
Makita’s overseas activities and entry into overseas markets entail risks, which may have a material adverse effect on Makita’s business activities.
Makita derives a majority of its sales in markets located outside of Japan, including North America, Europe, Asia, Oceania, the Middle East, and emerging markets such as Russia and Eastern Europe. In fiscal 2006, approximately 82% of Makita’s consolidated net sales were derived from products sold overseas. On a volume basis, Makita depended on overseas markets for 88% of units sold. The high percentage of overseas sales gives rise to a number of risks. If such risks occur, they may have a material adverse impact on Makita’s consolidated financial condition and results of operations. Such risks include the following:
     
(1)
  Unexpected changes in laws and regulations;
(2)
  Disadvantageous political and economic factors;
(3)
  The outflow of technical know-how and knowledge due to personnel turnover enabling Makita’s competitors to strengthen their position;
(4)
  Potentially unfavorable tax systems; and
(5)
  Terrorism, war, and other factors that lead to social turbulence.
Environmental or other government regulations may have a material adverse impact on Makita’s business activities.
Makita maintains strict compliance with environmental, commercial, export and import, tax, safety and other regulations that are applicable to its activities in all the countries in which Makita operates. If Makita is unable to continue its compliance with existing regulations or is unable to comply with any new or amended regulations, it may be subject to fines and other penalties and its activities may be significantly restricted. The costs related to compliance with any new or amended regulations may also result in significant increases in overall costs.
Beginning on July 1, 2006, a European directive entitled “Restriction of the Use of Certain Hazardous Substances” (“RoHS”) takes effect which forbids the sale in EU member countries of products containing six toxic substances, including lead. In addressing RoHS, we have abolished nearly all restricted substances through the cooperation of our parts suppliers. In addition, the Makita Group itself is constantly reinforcing its system for inspecting parts as they are delivered and has addressed this issue nearly fully at the present time. However, if Makita’s suppliers have not fully shifted to alternative materials and Makita is not able to detect the presence of the forbidden substances, then, if these substances are confirmed within the EU, Makita may face a number of risks, including the need to replace the defective parts, conduct recalls, and sustain damage to its brand image. In such cases, Makita’s consolidated financial condition and results of operations may be adversely affected.

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Currency exchange rate fluctuations may adversely affect Makita’s financial results.
The functional currency for all of Makita’s significant foreign operations is the local currency. The results of transactions denominated in local currencies of Makita’s subsidiaries around the world are translated into yen using the average market conversion rate during each financial period. Assets and liabilities denominated in local currencies are converted into yen at the rate prevailing at the end of each financial period. As a result, Makita’s operating results, assets, liabilities and shareholders’ equity are affected by fluctuation in values of the Japanese yen against these local currencies.
Sales denominated in foreign currencies accounted for approximately 76% of Makita’s consolidated net sales in fiscal 2006, and, accordingly, Makita’s operating income is significantly affected by foreign exchange fluctuations.
In an effort to minimize the impact of short-term exchange rate fluctuations between major currencies, mainly the U.S. dollar, the euro, and the yen, Makita engages in hedging transactions. Makita is also increasing the percentage of products that it manufactures in China, which has resulted in an increase in foreign-currency denominated production costs. While Makita believes that such measures may help reduce the impact of some exchange rate fluctuations, it cannot assure you that it will be able to successfully hedge its exchange rate risks. In addition, medium-to-long-term fluctuations of exchange rates may make it difficult for Makita to execute procurement, production, logistics, and sales activities as planned and may have an adverse impact on Makita’s consolidated financial condition and results of operations.
Fluctuations in stock market prices may adversely affect Makita’s financial statements.
Makita holds certain Japanese equities and equity-linked financial products and records these securities as marketable securities on its consolidated financial statements. The values of these investments are influenced by fluctuations in the quoted market prices. A significant depreciation in the value of these securities will have an adverse impact on Makita’s consolidated financial condition and results of operations.
If Makita cannot respond to changes in construction method and trends in demand, Makita’s sales may be materially and adversely affected.
In recent years, market trends in demand for various power tools have been changing significantly due to the adoption of new construction methods, especially in Japan. For example, as prefabricated housing construction becomes more common, the use of power tools at construction sites has been decreasing substantially, while demand for fastening tools has increased. If Makita does not or is unable to respond to these rapid shifts in demand for various power tools, Makita’s sales may decline and this may have an adverse effect on Makita’s consolidated financial condition and results of operations.
The rapidly growing presence of China-based power tool manufacturers may adversely affect Makita’s sales results.
In recent years, power tool companies in China have expanded their presence in the world market. In particular, in certain markets in Asia where purchasing power is relatively low, competition with power tools made in China has intensified, with respect to lower end products. As the technology of Chinese power tool manufacturers improves, competition in the markets for high-end products for professional use may also intensify. As a result, Makita’s market share, consolidated financial condition and results of operations may be adversely affected.
If Makita is not able to develop attractive products, Makita’s sales activities may be adversely affected.
Makita’s principal competitive strengths are its diverse range of high-quality, high-performance power tools for professional use, and the good reputation of the MAKITA brand, both of which depend in part on Makita’s ability to continue to develop attractive and innovative products that are well received by the market. There is no assurance that Makita will be able to continue to develop such products. If Makita is no longer able to quickly develop new products that meet the changing needs of the market for high-end, professional users, it may have an adverse impact on Makita’s consolidated financial condition and results of operations.
If Makita fails to maintain cooperative relationships with significant customers, Makita’s sales may be seriously affected.
Makita has a number of significant customers. If Makita loses these customers and is unable to develop new sales channels to take their place, sales may decline and have an adverse impact on Makita’s business performance and financial position. In addition, if major customers of Makita select power tools and other items made in China and sell them under their own brand, this may have an adverse impact on Makita’s consolidated financial condition and results of operations.

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If any of Makita’s suppliers fail to deliver materials or parts required for production as scheduled, Makita’s production activities may be adversely affected.
Makita’s production activities are greatly dependent on the on-schedule delivery of materials and parts from its suppliers. Makita purchases some of its component parts from sole suppliers. The largest single source supplier of the Company accounted for approximately 5% of its aggregate purchases of raw materials and parts in fiscal 2006. There is no assurance that Makita will be able to find alternate suppliers that can provide materials and parts of similar quality and price in a sufficient quantity and in a timely manner. In the event that any of these suppliers cannot deliver the required quality and quantity of parts on schedule, this will have an adverse effect on Makita’s production schedules and cause a delay in Makita’s own product deliveries. This may cause Makita to lose some customers or require Makita to purchase replacement materials or parts from alternate sources at a higher price. Any of these occurrences may have a detrimental effect on Makita’s consolidated financial condition and results of operations.
When the procurement of raw materials used by Makita becomes difficult or prices of these raw materials rise sharply, this may have an adverse impact on performance.
In manufacturing power tools, Makita Group purchases raw materials and components, including silicon steel plates, aluminum, steel products, copper wire, and electronic parts. In recent years, demand for these materials in China and the rest of the world has risen substantially, and some suppliers are experiencing a shortage of capacity. Under these circumstances, if the Makita Group is unable to obtain the necessary quantities of these materials, this may have an effect on production schedules. In addition, the shortage of capacity among suppliers is a factor leading to increased prices of production materials. If the Makita Group experiences increases in prices of production materials, greater than what can be absorbed by increased productivity or through other internal efforts and prices of final products cannot be raised sufficiently, such circumstance may have a detrimental impact on the performance and financial position of the Makita Group.
Product liability litigation or recalls may harm Makita’s financial statements and reputation.
Makita manufactures a wide range of power tools at factories worldwide according to ISO internationally accepted quality control standards. However, Makita cannot be certain that all of its products will be free of defects nor that it will be subject to product recalls in the future. A large-scale recall or a substantial product liability suit brought against Makita may result in severe damage to Makita’s brand image and reputation. In addition, a major product recall or product liability lawsuit is likely to be very costly and would require a significant amount of management time and attention. Any of these occurrences may have a major adverse impact on Makita’s consolidated financial condition and results of operations.
Investor confidence and the value of Makita’s ADRs and ordinary shares may be adversely impacted if Makita’s management concludes that Makita’s internal controls over financial reporting are not effective as of March 31, 2007, or if Makita’s independent registered public accounting firm is unable to provide adequate attestation on management’s assessment, or to provide unqualified opinion on the effectiveness of Makita’s internal controls over financial reporting, as required by Section 404 of the Sarbanes-Oxley Act of 2002.
The Securities and Exchange Commission, as directed by Section 404 of the Sarbanes-Oxley Act of 2002, adopted rule requiring public companies to include a report of management on Makita’s internal controls over financial reporting in its Annual Report on Form 20-F that contains an assessment by management of the effectiveness of Makita’s internal control over financial reporting. In addition, Makita’s independent registered public accounting firm must attest to and report on management’s assessment of the effectiveness of Makita’s internal control over financial reporting. These requirements will first apply to Makita’s Annual Report on Form 20-F for the fiscal year ending March 31, 2007. Although Makita intends to diligently and vigorously review its internal controls over financial reporting in order to ensure compliance with Section 404 requirements, Makita’s management may conclude that Makita’s internal controls over financial reporting are not effective. In addition, Makita’s independent registered public accounting firm may be unable to attest to Makita’s management’s assessment or may issue a report that concludes that Makita’s internal controls over financial reporting are not effective. Makita’s failure to achieve and maintain effective internal controls over financial reporting, or Makita’s independent registered public accounting firm’s inability to attest to Makita’s management’s assessment, or the issuance of a report that concludes that Makita’s internal controls over financial reporting are not effective, could result in the loss of investor confidence in the reliability of Makita’s financial reporting process, which in turn could harm Makita’s business and ultimately could negatively impact the market price of Makita’s ADRs and ordinary shares.

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Item 4. Information on the Company
A. History and development of the Company
The Company traces its origin to an electrical repair workshop founded in Nagoya in 1915, and was incorporated under the Commercial Code of Japan on December 10, 1938 under the name of Makita Electric Works, Ltd. as a joint stock corporation. Under the presidency of the late Mr. Jujiro Goto, in 1958, Makita commenced the manufacture of electric power tools and, by 1969, had reached its present leading position in the Japanese market. In 1970, the Company decided to take advantage of the large potential for growth in overseas markets for its products and established its first subsidiary in the United States. Since then, Makita has expanded its export activity and has established other overseas subsidiaries. In April 1991, the Company changed its name from Makita Electric Works, Ltd. to Makita Corporation. In April 1995, Makita established a holding company in the United Kingdom to better coordinate the overall activities of its European subsidiaries. At present, Makita sells its products in over 150 countries around the world.
As part of its efforts to minimize trade friction, Makita started manufacturing operations in Canada, Brazil and the United States in 1980, 1981 and 1985 respectively. Makita established a manufacturing subsidiary in the United Kingdom in 1989. In January 1991, Makita acquired all of the shares of Sachs-Dolmar GmbH, a German company, subsequently renamed Dolmar GmbH (Dolmar), which is primarily engaged in manufacturing engine driven chain saws. Makita established two manufacturing subsidiaries in China, Makita (China) Co., Ltd. and Makita (Kunshan) Co., Ltd. in December 1993 and in November 2000 respectively.
In May 2005, Makita established a new subsidiary, Makita EU S.R.L. in Romania, as a location from which it can serve growing markets in Eastern Europe, Russia, Western Europe and the Middle East. Construction began in April 2006 on a new Romanian factory in the suburbs of the capital, Bucharest, where production is scheduled to start by Summer 2007.
Makita presently manufactures power tools in seven countries globally: the United States, Canada, Brazil, the United Kingdom, Germany, China and Japan. By fiscal year 2008, when construction of the Romania factory is complete, Makita will have production facilities in eight countries, three of them in Europe.
During the fiscal year under review, Makita Ukraine LLC, and Makita EU S.R.L. were newly included within the scope of consolidation. On the other hand, golf course operator Joyama Kaihatsu Ltd. was dropped from the list of the company’s consolidated subsidiaries because of the transfer of its ownership interests in Joyama Kaihatsu Ltd. to a third party. As a result, the number of consolidated subsidiaries increased to 45.
Makita Corporation’s registered office is located at 3-11-8, Sumiyoshi-cho, Anjo, Aichi 446-8502, Japan, and its telephone number is +81-566-98-1711.
B. Business overview
Makita’s principal activity is the manufacturing and sale of a wide range of power tools for professional users worldwide. Makita’s power tools consist of portable general purpose tools, primarily drills, grinders and sanders and portable woodworking tools, primarily saws and planers. Makita also produces a line of stationary woodworking machines. For the fiscal year ended March 31, 2006, approximately 82% of Makita’s sales were outside of Japan. Makita estimates that most of its sales worldwide were made to commercial and professional users such as those engaged in timber and metal processing, carpentry, and concrete and masonry works.
Makita focuses on creating user and environment-friendly products that enhance the work environment, and have features such as low vibration, low noise and dust concentration.

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Products
The following table sets forth Makita’s consolidated net sales by product categories for the periods presented:
                                                         
    (Millions of yen, except for percentage amounts)     U.S. Dollars  
    Consolidated Net Sales by Product Categories     (thousands)  
    Fiscal year ended March 31,  
    2004     2005     2006     2006  
Portable woodworking tools
  ¥ 34,452       18.7 %   ¥ 34,507       17.7 %   ¥ 37,890       16.5 %     323,846  
Portable general purpose tools
    98,176       53.3 %     105,736       54.3 %     128,215       56.0 %     1,095,855  
Stationary woodworking machines
    1,711       1.0 %     1,573       0.8 %     2,009       0.9 %     17,171  
Other products
    19,548       10.6 %     21,763       11.2 %     26,696       11.7 %     228,171  
Parts, repairs and accessories
    30,230       16.4 %     31,158       16.0 %     34,265       14.9 %     292,863  
 
                                         
Total
    184,117       100.0 %     194,737       100.0 %     229,075       100.0 %     1,957,906  
 
                                         
Portable Woodworking Tools
Portable woodworking tools consist mainly of saws, planers, mortisers, groove cutters, routers, trimmers, nailers and tackers. Circular saws, which are primarily sold to carpenters in the homebuilding industry, account for a substantial portion of Makita’s sales of saws. The balance of saw sales is made up of jigsaws, sold primarily to carpenters and other woodworkers for delicate work, and recipro saws used for working in confined spaces unsuited to conventional saws. Planers, which are used exclusively for woodworking, are sold principally to carpenters. Apart from flat-surfaced planers, which are manufactured in varying widths, Makita also produces curved planers for use on concave surfaces. Mortisers are used for chiseling holes in wood and groove cutters are used to install sliding windows. Routers and trimmers are used principally by carpenters in the homebuilding industry for door and window cutting, pattern cutting and other interior decorative work. Nailers are used primarily for light woodwork in homebuilding. Tackers are used to make temporary attachments in house-finishing and for furniture-making. Almost all of the mortisers, groove cutters, routers and trimmers, nailers and tackers manufactured by Makita are sold within Japan.
Among Makita’s new products launched in Japan in the fiscal year under review was a 125mm rechargeable circular saw, featuring a small, lightweight, high-capacity lithium ion battery, a proprietary digital charge-optimization system, and a high-speed (4,300 rpm) motor.
Portable General Purpose Tools
Portable general purpose tools include drills, hammer drills, rotary hammers, electric breakers (jackhammers), grinders, sanders, cutters, cutting machines, nibblers and shears, screwdrivers and impact wrenches. Most of these tools are used for working on metal and materials other than wood, although many may be used in woodworking as well.
Drills are typical power tools used for drilling in metals, woods and plastics. They are classified into pistol-grip drills, D-handle drills, spade-handle drills and angle drills, according to their configuration. Makita also manufactures various kinds of cordless drills. Some of them are equipped with a screwdriving mechanism and are called cordless driver drills. Hammer drills are equipped with a hammering function, but can also be used as conventional drills; these drills are used principally on metal and masonry in the civil engineering and electrical contracting industries. Rotary hammers, which are used exclusively on concrete by the construction industry, are equipped with a rotary function, but can also be used as ordinary hammers. Breakers are used for shattering hard surfaces, principally concrete.
Grinders and sanders are used for smoothing and finishing. Sanders may also be used for polishing. Grinders are used on metal and sanders are used on metal, wood, stone and concrete. Grinders are divided into portable disc grinders and bench grinders and sanders are classified into portable disc sanders and belt sanders.
Cutters and cutting machines have similar functions, although cutters are designed to be hand-held and cutting machines are stationary. Cutters have a diamond cutting surface and are used on tile, brick, concrete and stone. Cutting machines have a carborundum cutting surface and are used principally on metal.
Impact wrenches are used mainly in the construction industry and screwdrivers are used in construction work and by electricians.
Among Makita’s new products launched in Japan in the fiscal year under review was a series of new products featuring lithium-ion batteries, including a high-cost-performance impact driver with a small, lightweight, high-capacity lithium ion battery, a newly developed four-pole motor, and a proprietary digital charge-optimization system. This series also includes a 16 mm rechargeable hammer drill that is 30% faster than any of our previous products, allowing the user to set the desired speed of rotation, impact, and fastening torque, and a 100 mm rechargeable disk grinder with a maximum speed of 10,000 rpm.

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Stationary Woodworking Machines
Makita’s stationary woodworking machines consist mainly of planer-jointers, wood surfacers, band saws and table saws, all of which are installed in workshops and used for surfacing and cutting wood.
Other Products
Makita’s other products include chain saws, hand-held vacuum cleaners for home use, industrial vacuum cleaners, submersible pumps and garden tools, such as hedge trimmers.
Parts, repairs and accessories
Makita manufactures and markets a variety of parts and accessories for its products and performs repair work as part of its after-sale services.
Principal Markets, Distribution and After-Sale Services
The following table sets forth Makita’s consolidated net sales by geographic area based on customers locations for the periods presented:
                                                         
    (Millions of yen, except percentage amount)     U.S. Dollars  
    Consolidated Net Sales by Geographic Area     (thousands)  
    Fiscal year ended March 31,  
    2004     2005     2006     2006  
Japan
  ¥ 39,142       21.3 %   ¥ 39,379       20.2 %   ¥ 41,600       18.2 %   $ 355,556  
North America
    41,853       22.7       38,490       19.8       47,673       20.8       407,462  
Europe
    66,369       36.0       75,263       38.6       90,504       39.5       773,538  
Asia
    14,245       7.7       16,341       8.4       16,993       7.4       145,239  
Other
    22,508       12.3       25,264       13.0       32,305       14.1       276,111  
 
                                         
Total
  ¥ 184,117       100.0 %   ¥ 194,737       100.0 %   ¥ 229,075       100.0 %   $ 1,957,906  
 
                                         
Japan
Makita believes that most of its domestic sales are made to commercial users. The Japanese Do-It-Yourself, or DIY, market for power tools is growing but the pace of growth is slow.
Makita attributes its leading position in the Japanese market to the close and frequent contact that it maintains with retailers and users of Makita products. While Makita’s major competitors rely primarily on wholesalers for all aspects of distribution and servicing, Makita has approximately 840 employees directly responsible for the promotion, sale and delivery and after-sale servicing of its products. These employees, operating from 113 sales offices throughout Japan, are assigned sales territories and visit retail outlets in their area on an average of once a week.
In addition, Makita has two distribution centers in Osaka and Saitama prefecture. These distribution centers strengthen Makita’s distribution and after-sale service functions.
The majority of Makita’s products are sold through its 14 wholesalers. Each wholesaler bears the risk of any bad debts of the retailers for which it has responsibility. The payments by the wholesalers to Makita are in most cases made within 30 to 60 days after sale. During the fiscal year ended March 31, 2006, Makita sold its products, directly or through wholesalers, to approximately 30,000 retail outlets, and no single retailer accounted for more than 2% of Makita’s domestic sales. During the year, Makita’s three largest wholesalers accounted, in the aggregate, for approximately 35% of Makita’s domestic net sales.
Repairs, including free repair service and after-sale services are carried out by Makita’s sales offices.
To strengthen its business in Pneumatic Tools, Makita purchased the nailer business of Kanematsu NNK Corp in January 2006
Overseas
In the fiscal year ended March 31, 2006, 82% of Makita’s net sales were made outside of Japan.
Overseas sales, distribution, and service are carried out through a network of 36 sales subsidiaries and 113 branch offices or service centers located in the United States, Canada, Brazil, Mexico, Argentina, Chile, Australia, New Zealand, Singapore, Taiwan, China, Korea, the United Kingdom, France, The Netherlands, Belgium, Italy, Greece, Germany, Denmark, Austria, Poland, the Czech Republic, Hungary, Spain,

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the United Arab Emirates, Romania, Switzerland, Finland, Russia, Ukraine and Slovakia. In addition, the Company exports directly, as well as through trading companies, to various countries throughout the world. Makita products are sold principally under the “Makita” brand name and the remaining products are sold under the “Dolmar” and “Maktec” brand names.
Makita offers warranties to overseas customers. After-sale services and repairs overseas are provided by local sales subsidiaries, service depots designated by Makita, or by service stores designated by the applicable local importers. As of March 31, 2006, Makita has over 100 service depots outside of Japan. As of the fiscal year ended March 31, 2006, 26 of these service depots were located in the United States and 21 of these service depots were located in China. The labor costs of service and repairs to products under warranty for overseas customers are borne by Makita and the local service agents, and parts are provided by Makita.
Seasonality
Makita’s business has no significant seasonality that affects sales or profits.
Competition
Both in Japan and overseas, the markets in which Makita sells its products are highly competitive. Makita believes that competition in the portable electric power tool market is based on price, product reliability, design and after-sale services and that its products are generally competitive as to price and enjoy competitive advantage due to their reputation for quality, product reliability and after-sale services. Makita is the largest manufacturer of portable electric power tools in Japan and, together with one other Japanese competitor, accounts for a substantial majority of the total sales of such products in Japan.
In overseas markets, Makita competes with a number of manufacturers, some of which are well established in their respective local markets as well as internationally. In recent years, in the U.S. power tool industry, some leading home centers have introduced their own brands of power tools for professionals, and a high level of M&A activity is in progress within the power tool industry. Moreover, in the Japanese market, U.S. and Japanese companies are forming business alliances, and competition is becoming more intense within a saturated market. Makita has also experienced increasing competition, particularly in countries with lower purchasing power, from China-based power tool manufacturers who often offer lower-priced products.
Raw Materials and Sources of Supply
Makita purchases raw materials and parts to manufacture its products. The principal raw materials and parts purchased by Makita include plastics, pressed steel plates, aluminum castings, copper wires, switches, gears, blades, batteries, and bearings. The Company procures most of its raw materials from multiple sources, although most components are obtained from single suppliers. The procurement cost of aluminum, copper, and certain other raw materials is affected by fluctuations in commodity markets, and these material prices were appreciated during fiscal 2006.
Makita’s purchases of raw materials and parts in the fiscal year ended March 31, 2006, amounted to ¥ 108,057 million. Raw materials and parts are purchased from approximately 250 suppliers in Japan and a number of local suppliers in each country in which Makita performs manufacturing operations, with the largest single source accounting for approximately 5% of Makita’s total purchases of raw materials and parts.
Makita also purchases from outside sources finished products such as vacuum cleaners, electric generators, brushcutters, cordless laser plumbs and levels, and wood surfacers.
Makita has not experienced any difficulty in obtaining raw materials, parts or finished products.
Government Regulations
Makita is subject to different government regulations in the countries in which it does business, such as required business and investment regulations approvals, export regulations based on national-security or other reasons, and other export and import regulations such as tariffs, as well as commercial, antitrust, patent, consumer and business taxation, exchange control, and environment and recycling laws and regulations.
If Makita is unable to comply with these regulations, it may be subject to significant fines or other penalties and its activities in such countries may be limited.
Intellectual Property Rights
As of March 31, 2006, Makita owned 391 patents and 52 utility model registrations in Japan and 311 patents outside Japan. A utility model registration is a right granted under Japanese law to inventions having a practical utility in terms of form, composition or assembly, but embodying less originality than that required for patents. As of March 31, 2006, Makita had made 536 applications for additional patents and utility model registrations in Japan as well as 252 patent applications outside Japan. While Makita considers all of its intellectual property to be important, it does not consider any one or group of patents, trademarks or utility model registrations to be so significant that their expiration or termination would materially affect Makita’s business.

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C. Organizational structure
As of March 31, 2006, the Makita Group consisted of 45 consolidated subsidiaries. Makita Corporation (“the Company”) is the parent company of the Makita Group. The Company heads the development of products. Domestic sales are made by the Company and overseas sales are made almost entirely through sales subsidiaries and wholesalers. The following is a list of significant subsidiaries of the Makita Group.
             
 
        Proportion of
    Country of   Ownership and
Company Name   Incorporation   Voting Interest
Makita U.S.A., Inc.
  U.S.A     100.0 %
Makita Corporation of America
  U.S.A     100.0  
Makita Canada Inc.
  Canada     100.0  
Makita Mexico, S.A. de C.V.
  Mexico     100.0  
Makita do Brasil Ferramentas Eletricas Ltda.
  Brazil     99.9  
Makita Herramientas Electricas de Argentina S.A.
  Argentine     100.0  
Makita Chile Ltda.
  Chile     100.0  
Makita (Australia) Pty. Ltd.
  Australia     100.0  
Makita (New Zealand) Ltd.
  New Zealand     100.0  
Makita International Europe Ltd.
  U.K.     100.0  
Makita (U.K.) Ltd.
  U.K.     100.0  
Makita Manufacturing Europe Ltd.
  U.K.     100.0  
Makita France S.A.
  France     55.0  
Makita Benelux B.V.
  The Netherlands     100.0  
Euro Makita Corporation B.V.
  The Netherlands     100.0  
S.A. Makita N.V.
  Belgium     100.0  
Makita S.p.A.
  Italy     100.0  
Makita Werkzeug GmbH
  Germany     100.0  
Dolmar GmbH
  Germany     100.0  
Makita Werkzeug Gesellschaft m.b.H.
  Austria     100.0  
Makita Sp. z o. o.
  Poland     100.0  
Makita SA
  Switzerland     100.0  
Makita, S.A.
  Spain     100.0  
Makita Gulf FZE
  U.A.E.     100.0  
Makita Oy
  Finland     100.0  
Makita Singapore Pte. Ltd.
  Singapore     100.0  
Makita (Taiwan) Ltd.
  Taiwan     100.0  
Makita Power Tools (HK) Ltd.
  China     100.0  
Makita (China) Co., Ltd.
  China     100.0  
Makita (Kunshan) Co., Ltd.
  China     100.0  
Makita Korea Co., Ltd.
  Korea     100.0  
Makita Ichinomiya Corporation and 13 other subsidiaries
  Japan and other countries     100.0  
 

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D. Property, plant and equipment
The following table sets forth information relating to Makita’s principal production facilities as of March 31, 2006.
             
 
    Floor space      
Location   (Square meters)     Principal products manufactured
In Japan;
           
Makita Corporation
           
Okazaki Plants
    71,804     Portable woodworking tools and portable general purpose tools
Makita Ichinomiya Corporation
    5,325     Stationary woodworking machines
Overseas;
           
Makita Corporation of America
    24,053     Portable woodworking tools and portable general purpose tools
Makita (China) Co., Ltd.
    33,100     Portable woodworking tools and portable general purpose tools
Makita (Kunshan) Co., Ltd.
    6,401     Portable woodworking tools and portable general purpose tools
Makita Manufacturing Europe Ltd.
    11,520     Portable woodworking tools and portable general purpose tools
Dolmar GmbH
    17,747     Engine powered equipment
 
In addition, the Company owns an aggregate of 213,286 square meters of floor space occupied by the head office, warehouse facilities, a training center, dormitories and sales offices.
Makita’s overseas manufacturing operations are conducted in the United States, Canada, Brazil, United Kingdom, Germany and China. All buildings and land in these countries, except for the properties in China, are owned by Makita.
None of the buildings or land that Makita owns in Japan is subject to any mortgage or lien. Makita leases 88 sales offices in Japan and all of its overseas sales offices and premises, except for the following locations, all of which are owned by the respective subsidiary companies;
         
 
    Head office and certain branch offices of Makita U.S.A., Makita Canada, and Makita Australia; and
 
 
    Head office of Makita Germany, Makita France, Makita Benelux (The Netherlands), Makita Belgium, Makita Italy, Makita Brazil, Makita Taiwan, and Makita Singapore.
Makita considers all of its principal manufacturing facilities and other significant properties to be in good condition and adequate to meet the needs of its operations. Makita adjusts production capacity based on its assessment of markets demands and prospects for demands, according to market conditions and Makita’s business objectives, by opening, closing, expanding or downsizing manufacturing facilities or by increasing or decreasing output from the facilities accordingly. Makita, therefore, believes that it is difficult and would require unreasonable effort to determine the exact productive capacity and the extent of utilization of each of its manufacturing facilities with a reasonable degree of accuracy. Makita, however, believes that its manufacturing facilities are currently operating at a normal capacity of production facility.
Makita believes that there are no material environmental issues that may affect Makita’s current use of its assets.
Item 4A. Unresolved Staff Comments
None

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Item 5. Operating and Financial Review and Prospects
A. Operating results
The following table sets forth a summary of our results of operations for each of the years ended March 31, 2004, 2005 and 2006.
                                                                 
    (Millions of yen, except for percentage amounts)   U.S. Dollars (thousands)
    2004   2005   2006   2006
                                                            Change
            %           %           %           %
NET SALES
  ¥ 184,117       100.0     ¥ 194,737       100.0     ¥ 229,075       100.0     $ 1,957,906       17.6  
Cost of sales
    110,322       59.9       113,323       58.2       132,897       58.0       1,135,872       17.3  
 
GROSS PROFIT
    73,795       40.1       81,414       41.8       96,178       42.0       822,034       18.1  
Selling, general and administrative expenses
    53,698       29.2       52,646       27.1       58,726       25.6       501,931       11.5  
Losses (Gains) on disposals or sales of property, plant and equipment
    (2,379 )     (1.3 )     1,234       0.6       (8,326 )     (3.6 )     (71,162 )      
Impairment of long-lived assets
    7,780       4.2       577       0.3                          
Transfer to the government of the substitutional portion of pension plan
                (4,441 )     (2.3 )                        
 
OPERATING INCOME
    14,696       8.0       31,398       16.1       45,778       20.0       391,265       45.8  
OTHER INCOME (EXPENSES)
                                                               
Interest and dividend income
    869       0.5       1,157       0.6       1,301       0.6       11,120       12.4  
Interest expense
    (605 )     (0.3 )     (588 )     (0.3 )     (364 )     (0.2 )     (3,111 )     (38.1 )
Exchange gains (losses) on foreign currency transactions, net
    (202 )     (0.1 )     37       0.0       (258 )     (0.1 )     (2,205 )      
Realized gains on securities, net
    555       0.3       453       0.2       2,918       1.3       24,940       544.2  
Other, net
    857       0.4       161       0.1       (232 )     (0.1 )     (1,983 )      
 
Total
    1,474       0.8       1,220       0.6       3,365       1.5       28,761       175.8  
 
INCOME BEFORE INCOME TAXES
    16,170       8.8       32,618       16.7       49,143       21.5       420,026       50.7  
PROVISION FOR INCOME TAXES
    8,479       4.6       10,482       5.3       8,732       3.8       74,633       (16.7 )
 
NET INCOME
    7,691       4.2       22,136       11.4       40,411       17.6       345,393       82.6  
 
                                                               
General Overview
In fiscal 2006, the U.S. economy showed a gradual expansion as personal consumption and capital investment remained firm. In Europe, personal consumption did not see a full-fledged recovery, but indications of a gradual recovery were evident as exports held firm and the Eastern European and Russian economies stabilized and expanded. In Asia, growth rates slowed in some areas, but the region’s overall economic growth remained high, especially in China where exports were strong. The Japanese economy experienced gradual recovery as capital investment increased along with the recovery in corporate profitability, and there was also an improvement in personal consumption and employment.
The principal business of Makita is the manufacture and sale of power tools and stationary woodworking machines. Principal products include circular saws, jigsaws, planers, drills, rotary hammers, grinders and slide compound saws. Makita has ten manufacturing centers, three located in Japan, two in China and one each in the United States, Canada, Brazil, the United Kingdom, and Germany.
In fiscal 2006, Makita worked diligently to develop high-value-added products that precisely reflect the needs of users. By combining lithium ion batteries with the Company’s proprietary optimum charging system, Makita created a series of rechargeable products featuring small size and high output, and released new products such as rotary hammers featuring newly developed low-vibration designs.

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On a consolidated basis, our net sales in fiscal 2006 amounted to ¥229,075 million, up 17.6% from the previous fiscal year. This was the first time sales exceeded ¥200 billion. In fiscal 2006, the company recorded a gain of ¥8,479 million from the sale of the golf course, and a gain of ¥5,238 million from the decrease in valuation allowance on a deferred income tax assets. Accordingly, year-on-year operating income climbed 45.8%, to ¥45,778 million and net income amounted to ¥40,411 million, 82.6% higher than the previous fiscal year.
Fiscal Year (FY) 2006 compared to FY2005
Net sales
Makita’s consolidated net sales for the fiscal year ended March 31, 2006 (“FY 2006”) amounted to ¥229,075 million, an increase of 17.6%, or ¥ 34,338 million, from the fiscal year ended March 31, 2005 (“FY 2005”). In FY 2006, the average yen-dollar exchange rate was ¥113.3 for $1.00, representing a 5.4% depreciation of the yen compared with the average level in FY 2005. The average level of the yen-euro exchange rate in FY 2006 was ¥137.8 for 1.00 euro, representing a 2.0% depreciation of the yen compared with the average level in FY 2005. Excluding the effect of currency fluctuations, consolidated net sales would have increased by 13.4% in FY 2006.
While Makita’s consolidated net sales increased by 17.6% in FY2006, the overall number of units of products sold also increased in FY 2006. Excluding the effect of the decrease in prices of products and the currency fluctuations, Makita’s consolidated net sales would have increased by 14.0%, or by ¥ 27,276 million. The significant increase in the quantity of goods sold in FY 2006 primarily reflected strong sales of Makita’s portable general purpose tools, such as grinders, rotary hammers and hammer drills. In Europe, competitiveness has improved due to the strength of euro against the yen. Further, demand for the rotary hammer in Europe has been strong. In North America, the sales has increased in part due to the introduction of lithium ion battery products, which were introduced as a major sales item to major hardware retailers during the Christmas sales season.
The average price of Makita’s products declined in FY 2006, and excluding the effect of the increase in the number of units sold, the drop of prices would have decreased Makita’s net sales by 1.9%, or by ¥ 3,704 million. The reduction in prices was caused by Makita’s sales strategy.
Sales of new products comprised 15.9% of consolidated net sales of Makita in FY 2006, or ¥ 36,378 million. Among others, a new series of rechargeable products combining lithium ion batteries with the Company’s proprietary optimum charging system and new products such as rotary hammers featuring newly developed low-vibration designs, were introduced during FY 2006 and contributed to the increase in Makita’s net sales in FY 2006. In North America in particular, the line of tools with rechargeable lithium battery was popular at major hardware retailers. The distinctive designs as well as the ability to develop new products quickly to match the changing needs of the market contributed to the popularity of these products. In Japan, due to the increasing demand for renovation-related products in the market, among the line of tools with rechargeable lithium ion battery, the sales of impact drivers and circular saws have been strong.
In terms of product type, there was an increase in the sales of portable general purpose tools by 21.3% or ¥22,479 million, portable woodworking machines by 9.8% or ¥3,383 million, stationary woodworking machines by 27.7% or ¥436 million, other products by 22.7% or ¥4,933 million and income from parts, repairs and accessories by 10.0% or ¥ 3,107 million, respectively. In particular, sales of cordless impact drivers, circular saws and rotary hammers increased.
Sales by region
The increase in consolidated net sales in FY 2006 can be attributed to an increase in sales in Japan by 5.6%, or ¥2,221 million, to ¥41,600 million, an increase in sales in North America, by 23.9%, or ¥9,183 million, to ¥47,673 million, an increase in sales in Europe by 20.3%, or ¥15,241 million, to ¥90,504 million and, to a lesser extent, increased sales in Asia (excluding Japan) by 4.0%, or ¥652 million, to ¥16,993 million and an increase in sales in other regions including Australia, Latin America and Middle East by 27.9% or ¥7,041 million, to ¥32,305 million.
The increased sales in Japan in FY 2006 primarily reflected the increased number of units sold with respect to its portable general purpose tools such as lithium ion battery based impact drivers and circular saws, partially offset by the decline in the number of units sold in stationary woodworking machines. In addition, the automatic nailer business acquired from Kanematsu-NNK Corp. contributed to the increased sales in Japan.
The increased sales in North America in FY 2006 primarily reflected strong sales of lithium ion battery based products to major home centers in North America. Excluding the effect of fluctuations of the local currencies, net sales in North America would have increased by 16.4%, or ¥6,325 million in FY 2006, compared with FY 2005.
The increased sales in Europe in FY 2006 primarily reflected the appreciation of the euro against the yen. Net sales in yen terms increased in Russia and Eastern Europe by 34.6%, in the United Kingdom by 10.4%, in Germany by 18.4% and in France by 24.0% compared to FY 2005. Among others, Makita’s products such as drills and rotary hammers

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were particularly popular in countries such as Germany and the United Kingdom, partly reflecting the lower sales price resulting from the strength of the euro. Drills and rotary hammers increased by 17.5% and 22.8% respectively. In addition, the introduction of new products, particularly drills and rotary hammers contributed to the increase of sales in Europe. Excluding the effect of fluctuations of the local currencies, net sales in Europe would have increased by 17.2%, or ¥12,920 million in FY 2006.
The increased sales in Asia (excluding Japan) in FY 2006 primarily reflected the increased sales in China and Taiwan, particularly with respect to portable general purpose tools, such as grinders and hammer drills. Net sales in yen terms increased in China by 18.8% over amounts recorded in FY 2005. The establishment of six branch stores and 15 direct sales service centers in China greatly improved the after-sales service and was a factor, contributing to the increase of sales in China. Excluding the effect of fluctuations of the local currencies, net sales in Asia excluding Japan would have increased by 0.6%, or ¥98 million in FY 2006.
The increased sales in other regions including Australia, Latin America and the Middle East in FY 2006 were primarily due to an increased number of units sold in Other regions, particularly with respect to portable general purpose tools such as grinders, impact drivers and rotary hammers sold. In FY 2006 Makita saw success in its sales efforts to new markets in the Middle East and Africa. The introduction of new products also contributed to the increase of sales in Other regions, in particular rotary hammers. The increased number of products sold in other regions was partially offset by the decreased price per product resulting from the reduced cost of production, especially in grinders. Overall, net sales of grinders increased by 33.0% from FY 2005. Excluding the effect of fluctuations of the local currencies, other net sales would have increased by 17.7%, or ¥4,471 million in FY 2006.
Review of Performance by Product Group
Portable General Purpose Tools
The Portable General Purpose Tools group offers a wide range of dependable cordless drills, hammer drills, rotary hammers, demolition hammers, grinders, sanders, screwdrivers, impact wrenches, shears, nibblers, and cutters. This group generates the largest portion of Makita’s consolidated net sales. In FY 2006, sales of portable general purpose tools grew 21.3%, to ¥128,215 million, accounting for 56.0% of consolidated net sales. In Japan, sales of portable general purpose tools increased 12.4%, to ¥15,880 million, accounting for 38.2% of total domestic sales. Overseas sales of portable general purpose tools increased 22.6%, to ¥112,335 million, or 59.9% of total overseas sales.
Portable Woodworking Tools
Principal products in Makita’s Portable Woodworking Tools group include circular saws, jigsaws, recipro saws, planers, routers, trimmers, and pneumatic nailers. In FY 2006, Makita recorded a 9.8% increase in sales of Portable Woodworking Tools, to ¥37,890 million, or 16.5% of consolidated net sales. Domestic sales of portable woodworking tools increased 2.0%, to ¥6,879 million, accounting for 16.5% of total domestic sales. Makita recorded an 11.7% increase in overseas sales of portable woodworking tools, to ¥31,011 million, which accounted for 16.5% of total overseas sales in FY 2006.
Stationary Woodworking Machines
Makita’s extensive lineup of Stationary Woodworking Machines encompasses table saws, planer-jointers, and band saws. Sales of Stationary Woodworking Machines in FY 2006 increased 27.7%, to ¥2,009 million, accounting for 0.9% of consolidated net sales. Domestic sales of Stationary Woodworking Machines dropped 5.6%, to ¥805 million, accounting for 1.9% of total domestic sales. Overseas sales of Stationary Woodworking Machines were ¥1,204 million, a 67.2% increase from the previous fiscal year, accounting for 0.6% of Makita’s total overseas sales.
Other Products
Makita’s Other Products category includes industrial-use dust collectors and generators as well as various products for garden and home use, including chain saws, brush cutters, grass cutters, hedge trimmers, blowers, and cordless cleaners. In FY 2006, sales of Other Products grew 22.7%, to ¥26,696 million, accounting for 11.7% of net sales. In Japan, Makita recorded a 1.3% fall in sales of Other Products, to ¥8,365 million, accounting for 20.2% of total domestic sales. Overseas sales of other products increased 37.9%, to ¥18,331 million, accounting for 9.9% of total overseas sales.
Parts, Repairs and Accessories
Makita’s after-sales services include the sale of parts and accessories and repairs. In FY 2006, parts, repairs, and accessories sales edged up 10.0%, to ¥34,265 million, accounting for 14.9% of consolidated net sales. Domestic sales of parts, repairs, and accessories increased 5.3% to ¥9,671 million accounted for 23.2% of total domestic sales. Overseas sales of parts, repairs, and accessories advanced 11.9%, to ¥24,594 million, accounting for 13.1% of total overseas sales.

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Cost of Sales
Cost of sales increased 17.3% (¥19,574 million) from FY2005 to ¥132,897 million. In terms of overseas sales, despite the rise in materials costs, the sales cost ratio improved slightly from 58.2% in FY2005 to 58.0% as a result of sales increase after yen conversion, reflecting the declining yen against the euro and the U.S. dollar.
Gross Profit
Gross profit on sales increased 18.1% 14,764 million) to ¥96,178 million. Gross profit margin improved 0.2 points from 41.8% in FY2005 to 42.0%, due to the weak yen and sales of high value-added products.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for FY2006 increased 11.5% (¥6,080 million) from FY2005 to ¥58,726 million. The main causes were increased personnel costs due to an increase in the number of employees, a rise in shipping costs due to increased sales and the sharp increase in the price of crude oil, and increased advertising costs due to a sponsorship contract in North America. Further, the decline of yen caused the yen conversion rate of selling expenses and administrative expenses of overseas subsidiaries to rise. Selling, general and administrative expenses excluding the effects of the low yen rose 9.7%.
On the other hand, the ratio of selling, general and administrative expenses to sales fell 1.5 points from 27.1% to 25.6%, due to increased sales.
Losses (Gains) on disposal or sales of property, plant and equipment
In FY 2004, Joyama Kaihatsu Ltd., our subsidiary that owned a golf course, wrote down the value of the golf course to its fair value, thereby recording ¥5,996 million in impairment losses. On April 11, 2005, the Nagoya District Court approved the civil rehabilitation plan for Joyama Kaihatsu Ltd. and such plan was affirmed on May 7, 2005. On May 31, 2005, Makita transferred its ownership interest in Joyama Kaihatsu Ltd., including the golf course property, to a third party. As a result, in FY2006, a gain of ¥8,479 million from the sale of the golf course was recognized, which included the release from its obligation for club membership of ¥ 6,461 million. In addition, the Company and certain subsidiaries recognized losses on disposal or sales of property, plant and equipment of ¥153 million. Accordingly, Makita recognized net gains on disposal or sales of property, plant and equipment of ¥8,326.
Operating Income
As a result of the above, operating income for FY2006 increased 45.8% to ¥45,778 million. Operating income margin improved 3.9 points, from 16.1% in FY2005 to 20.0% in FY2006.
Other Income (Expenses)
In FY2006, Other income was ¥3,365 million, a 175.8% increase from FY2005.
The reasons for the increase were as follows:
(1) Realized gains on securities increased ¥2,465 million to ¥2,918 million. As on October 1, 2005, UFJ Holdings Co., Ltd., and Mitsubishi Tokyo Financial Group Co., Ltd., merged. The shares of UFJ Holdings that the Company owned were exchanged for shares of the newly merged entity, Mitsubishi UFJ Financial Group Co., Ltd. As a result of this share exchange, the Company realized a gain on securities, net in the amount of ¥2,528 million.
(2) Interest expenses decreased by ¥224 million to ¥364 million. Interest expenses was reduced by ¥195 million due to the redemption of the Company’s 1.5% annual interest yen-based convertible bonds in the amount of ¥12,992 million in March 2005.
(3) Interest and dividend income increased by ¥144 million to ¥1,301 million. The main factor in the increase in interest and dividends income in FY2006 was the increase of dividends from certain investments in trusts due to the recovery in Japanese stock market.
(4) The amount of foreign exchange gains and losses fell by ¥295 million, from a gain of ¥37 million in FY2005 to a loss of ¥258 million in FY2006 due to exchange losses in China caused by the devaluation of yuan against the U.S. dollar.
Income before income taxes
Income before income taxes for FY2006 increased by 50.7% (¥16,525 million) as compared with the previous fiscal year to ¥49,143 million, while the ratio of income before income taxes to sales for current year increased from 16.7% in FY2005 to 21.5% in FY2006, an increase of 4.8%.
Provision for income taxes
Provision for income taxes for FY2006 was reduced by 16.7% as compared with the previous year primarily due to the realization of a tax benefit on impairment losses related to our golf course business.

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In 2006, following the completion of the civil rehabilitation proceedings and the sale of the golf course business, previously unrecognized deferred tax asset were realized in connection with the gain on sale of golf course business and the related valuation allowance of ¥ 5,782 million was reversed. Makita also provided valuation allowance of ¥ 402 million for deferred tax assets that existed at the beginning of the year because it was determined that such assets were more likely than not to be realized in future years. As a consequence, the net change in the total valuation allowance for the year ended March 31, 2006 was a decrease of ¥5,238 million, resulting in a reduction of income tax expense. This decrease in valuation allowance as well as a decrease due to the tax sparing and other miscellaneous adjustments had affect of decreasing Makita’s effective tax rate by 22.5% to the effective rate of 17.8% from the statutory tax rate of 40.3% for the year ended March 31, 2006.
Net income
As a result of a gain of ¥8,479 million from the sale of the golf course, which included the gain of release from its obligation for club membership of ¥ 6,461 million and other factors, net income for FY2006 rose by ¥18,275 million to ¥40,411 million, which is an 82.6% increase from the previous fiscal year.
Earnings per share
Basic earnings per share of common stock amounted to ¥281.1, compared with ¥153.9 in FY 2005. Diluted earnings per share amounted to ¥281.1, compared with ¥148.8 in FY 2005.
Regional Segments
Segment information described below is determined by the location of the Company and its relevant subsidiaries.
Japan Segment
In FY 2006, sales in the Japan segment grew 13.0%, to ¥111,614 million. Sales to external customers increased 5.6% to ¥53,788 million, which accounted for 23.5% of consolidated net sales. The increase reflects a 5.6% rise in sales in the domestic market as well as a 5.3% increase in export sales mainly to Middle East and Africa. Even though segment operation expenses increased by 5.6%, to ¥87,468 million, operating income climbed approximately 1.5 times, to ¥24,146 million in FY 2006. This was attributable to the ¥8,479 million gain on the sale of the golf course business in addition to strong sales of various new products with lithium ion batteries.
North America Segment
In FY 2006, sales in the North America segment climbed 24.0%, to ¥52,300 million. Sales to external customers increased 24.3% to ¥47,979 million, which accounted for 20.9% of consolidated net sales. This increase in sales to external customers was mainly due to better sales of lithium ion battery based products at major home centers in North America. As a result, operating income for FY2006 increased by 15.7%, to ¥1,863 million.
Europe Segment
In FY 2006, sales in the Europe segment grew 19.5% to ¥97,555 million. Sales to external customers increased 20.3%, to ¥91,249 million, which accounted for 39.8% of consolidated net sales. This increase is mainly due to strong sales of the rotary hammer, and the stable and steady economic growth in Eastern Europe and Russia. Segment operating income increased 19.0%, to ¥12,050 million.
Asia Segment
In FY 2006, sales in the Asia segment increased 24.4% to ¥52,624 million. The increase in sales in this segment is primarily due to higher sales from two factories in China to North America and Europe, where sales were favorable. Sales to external customers increased 17.2%, to ¥8,645 million, which accounted for 3.8% of consolidated net sales. This increase is primarily due to a increase in sales in Taiwan. Segment operating income grew 31.2%, to ¥6,462 million in FY 2006.
Other Segment
In FY 2006, sales in the Other segment increased 24.9% to ¥27,595 million. Sales to external customers increased by 25.0%, to ¥27,414 million, which accounted for 12.0% of consolidated net sales. Sales increase in this segment is primarily due to an increase in sales in Central and South American countries and Middle East. Segment operating income grew to approximately 2.7 times FY 2005’s to ¥2,547 million, in FY 2006. This increase is primarily due to a turnaround in Oceania result from cost reductions.

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Fiscal Year (FY) 2005 compared to FY2004
Net sales
Makita’s consolidated net sales for the fiscal year ended March 31, 2005 (“FY 2005”) amounted to ¥194,737 million, an increase of 5.8%, or ¥ 10,620 million, from the fiscal year ended March 31, 2004 (“FY 2004”). In FY 2005, the average yen-dollar exchange rate was ¥107.5 for $1.00, representing a 5.5% appreciation of the yen compared with the average level in FY 2004. The average level of the yen-euro exchange rate in FY 2005 was ¥135.2 for 1.00 euro, representing a 1.9% depreciation of the yen compared with the average level in FY 2004. Excluding the effect of appreciation of the euro and the depreciation of the U.S. dollar, consolidated net sales would have increased by 6.2% in FY 2005.
While Makita’s consolidated net sales increased 5.8% in FY 2005, the overall number of units of products sold increased significantly in FY 2005, and excluding the effect of the decrease in prices of products, Makita’s consolidated net sales would have increased by 7.5%, or by ¥ 13,798 million. The significant increase in the quantity of goods sold in FY 2005 primarily reflected strong sales of Makita’s portable general-purpose tools, such as grinders, rotary hammers and hammer drills. Among others, Makita’s new line-up cordless driver drill #6270 series were popular especially in Europe over Makita’s competitors, in part reflecting the lower sales price resulting from the strength of the euro in FY 2005. The increase was partially offset by a decrease in sales in the North American market, as the North American home centers, as customers of Makita, continued to enhance their production and distribution of products under their own brand name. Among others, the number of drills sold in the North America market declined significantly in FY 2005.
The average price of Makita’s products declined in FY 2005, and excluding the effect of the increase in the number of units sold, the drop of prices would have decreased Makita’s net sales by 1.9%, or by ¥ 3,537 million. The reduction in prices was caused primarily by increased price competition in the markets and reduced cost of production, reflecting primarily the transfer of a part of Makita’s production from Japan to the People’s Republic of China, where the overall costs of production, including labor, parts and equipment, are significantly less expensive than in Japan. A second factor contributing to the decrease in Makita’s prices of goods was the increased sales volume of MAKTEC, Makita’s lower end brand, which continued to sell particularly well in Asia.
Sales of new products comprised 10.8% of consolidated net sales of Makita in FY 2005, or ¥21,119 million. Among others, new models of drills, hammer drills and circular saws were introduced during FY 2005 in most of Makita’s markets world-wide and contributed significantly to the increase of Makita’s net sales in FY 2005. In particular, in overseas markets, especially in Europe, Makita’s new products such as its new line-up cordless driver drill #6270 series proved very popular, in part because of the features and design and in part because of lower product prices reflecting the lower cost of production. In Japan, Makita’s new cordless impact drivers and new circular saws sold well, responding to the increasing demand for renovation-related products in the market.
In terms of product type, there was an increase in the sales of portable general-purpose tools and income from parts, repairs and accessories by 6.3% or ¥ 9,692 million and 3.1% or ¥ 928 million, respectively. In particular, sales increased significantly in cordless impact drivers, circular saws and rotary hammers.
Sales by region
The increase in consolidated net sales in FY 2005 can be attributed primarily to increased sales in Asia (excluding Japan) increasing 14.7%, or ¥2,096 million, to ¥16,341 million and to increased sales in Europe increasing 13.4%, or ¥8,894 million, to ¥75,263 million and, to a lesser extent, increased sales in other regions including Australia, Latin America and Middle East increasing 12.2% or ¥2,756 million, to ¥25,264 million and increased sales in Japan increasing 0.6%, or ¥237 million, to ¥39,379 million. The increase was offset partially by decreased sales in North America falling 8.0%, or ¥3,363 million, to ¥38,490 million.
The increased sales in Asia (excluding Japan) in FY 2005 primarily reflected the increased number of units sold in Asia, particularly with respect to portable general-purpose tools, especially grinders and hammer drills. The increased quantity of units sold were mostly offset by the decreased price per product, resulting from the increased popularity of Makita’s lower end brand, MAKTEC and, to a lesser extent, Makita’s reduced cost of production. Net sales in yen terms increased in the People’s Republic of China by 9.6% over amounts recorded in FY 2004. In addition, the introduction of new products contributed significantly to the increase of sales in Asia, in particular new models of drills and grinders. Excluding the effect of fluctuations of the local currencies, consolidated net sales would have increased by 16.6%, or ¥2,371 million in FY 2005.
The increased sales in Europe in FY 2005 primarily reflected the appreciation of the euro against the yen. In addition, the increased number of units sold in Europe, particularly with respect to portable general purpose tools, in especially Russia, Eastern European countries, the United Kingdom, Germany and France contributed to increased sales in Europe, partially offset by the decreased price per product resulting from reduced cost of production. Net sales in yen terms increased in Russia and Eastern Europe by 24.3%, in the United Kingdom by 14.1%, in Germany by 6.9% and in France by 15.1% over amounts recorded in FY 2004.

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Among others, Makita’s products such as drills and rotary hammers were particularly popular in countries such as Germany and the United Kingdom, partly reflecting the lower sales price resulting from the strength of the euro in FY 2005. Drills and rotary hammers increased by 13.5% and 13.6% respectively. In addition, the introduction of new products contributed significantly to the increase of sales in Europe, in particular new models of cordless driver-drills, rotary hammers and chain saws. Excluding the effect of fluctuations of the local currencies, consolidated net sales would have increased by 11.0%, or ¥7,304 million in FY 2005.
The increased sales in other regions including Australia, Latin America and the Middle East in FY 2005 were primarily due to an increased number of units sold in such other regions, particularly with respect to portable general purpose tools such as grinders, impact driver drills and rotary hammers sold in the Middle East, Africa and Australia. In FY 2005 Makita saw significant success in its sales efforts to new markets in the Middle East and Africa. The increased number of Makita products sold in other regions was partially offset by the decreased price per product resulting from the reduced cost of production, especially in grinders. Overall, net sales of grinders increased by 11.8% over amounts recorded in FY 2004. In addition, the introduction of new products contributed significantly to the increase of sales in other regions, in particular new models of rotary hammers and grinders. Excluding the effect of fluctuations of the local currencies, consolidated net sales would have increased by 14.3%, or ¥3,214 million in FY 2005.
The increased sales in Japan in FY 2005 primarily reflected the increased number of units sold with respect to its portable general purpose tools such as Makita’s mainstay impact driver drills and circular saws, partially offset by the decline in the number of units sold in stationary woodworking machines and parts for repairs. On the other hand, continuing low levels of housing construction in Japan restrained the growth of demand for Makita’s products and increased overall competition resulted in price pressure. In addition, the introduction of new products contributed significantly to the increase of sales in Japan, in particular new models of renovation-related products such as cordless impact driver drills and circular saws.
The decreased sales in North America in FY 2005 were primarily due to the depreciation of the dollar against the yen. To a lesser extent, decreased sales in North America were due to overall declining demand in North America, as home centers in the United States and Canada enhanced production and distribution of products under their own brand name and, as a result, Makita’s sales to home centers declined. In addition, a part of the decrease in sales was attributable to the increase in competitive pressures resulting in enhanced sales incentives offered to professional user customers. The decline in sales in North America was despite Makita’s successful marketing programs aimed at the professional user market in the United States and Canada, and Makita’s reorganization of its distribution networks in the United States. In the United States, sales in dollar terms declined by 4.0%, as a result of weaker sales volume reflecting mainly the decrease in sales to home centers, such as sales of drills, circular saws and sanders. Overall, net sales of drills in North America decreased by 20.0% as compared to the amounts recorded in FY 2004. Excluding the effect of fluctuations of the local currencies, consolidated net sales would have decreased by 4.2%, or ¥1,752 million in FY 2005.
Review of Performance by Product Group
Portable General Purpose Tools
The portable general purpose tools group offers a wide range of dependable cordless drills, hammer drills, rotary hammers, demolition hammers, grinders, drills, sanders, screwdrivers, impact wrenches, shears, nibblers, and cutters. This group generates the largest portion of Makita’s consolidated net sales. In FY 2005, sales of portable general purpose tools grew 7.7%, to ¥105,736 million, accounting for 54.3% of consolidated net sales. In Japan, sales of portable general purpose tools increased 1.5%, to ¥14,129 million, accounting for 35.9% of total domestic sales. Overseas sales of portable general purpose tools increased 8.7%, to ¥91,607 million, or 59.0% of total overseas sales.
Portable Woodworking Tools
Principal products in Makita’s portable woodworking tools group include circular saws, jigsaws, recipro saws, planers, routers, trimmers, and pneumatic nailers. In FY 2005, Makita recorded a 0.2% increase in sales of portable woodworking tools, to ¥34,507 million, or 17.7% of consolidated net sales. Domestic sales of portable woodworking tools decreased 4.8%, to ¥6,744 million, accounting for 17.1% of total domestic sales. Makita recorded a 1.5% increase in overseas sales of portable woodworking tools, to ¥27,763 million, which accounted for 17.9% of total overseas sales in FY 2005.
Stationary Woodworking Machines
Makita’s extensive lineup of stationary woodworking machines encompasses table saws, planer-jointers, and band saws. Sales of stationary woodworking machines in FY 2005 fell 8.1%, to ¥1,573 million, accounting for 0.8% of consolidated net sales. Domestic sales of stationary woodworking machines dropped 8.4%, to ¥853 million, accounting for 2.2% of total domestic sales. Overseas sales of stationary woodworking machines were ¥720 million, a 6.5% decrease from the previous fiscal year, accounting for 0.5% of Makita’s total overseas sales.

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Other Products
Makita’s other products category includes industrial-use dust collectors and generators as well as various products for garden and home use, including chain saws, brush cutters, grass cutters, hedge trimmers, blowers, and cordless cleaners. In FY 2005, sales of other products grew 11.3%, to ¥21,763 million, accounting for 11.2% of net sales. In Japan, Makita recorded a 3.8% rise in sales of other products, to ¥8,473 million, accounting for 21.5% of total domestic sales. Overseas sales of other products increased 16.7%, to ¥13,290 million, accounting for 8.6% of total overseas sales.
Parts, Repairs and Accessories
Makita’s after-sales services include the sale of parts and accessories and repairs. In FY 2005, parts, repairs, and accessories sales edged up 5.5%, to ¥31,158 million, accounting for 16.0% of consolidated net sales. Domestic sales of parts, repairs, and accessories increased 10.3% to ¥9,180 million and contributed 23.3% of total domestic sales. Overseas sales of parts, repairs, and accessories advanced 3.7%, to ¥21,978 million, accounting for 14.1% of total overseas sales.
Cost of sales
Cost of sales increased 2.7%, or ¥3,001 million, to ¥113,323 million, and the ratio of cost of sales to net sales decreased by 1.7 %, falling from 59.9% to 58.2%. The ratio of cost of sales to net sales improved mainly due to Makita’s strategy to expand production in China and to further develop high value-added products. As a result of this strategy, productivity in Makita’s factories in China and Japan improved, accounting for 1.3% out of the 1.7% improvement in the ratio of cost of sales to net sales.
Gross profit
In addition to cost reductions, the appreciation of the euro against the yen and the dollar increased the profitability of products manufactured in Japan and China and marketed in Europe. As a result, gross profit in FY 2005 increased 10.3%, to ¥81,414 million. The ratio of gross profit to net sales improved 1.7 percentage points, from 40.1% to 41.8%.
Selling, general and administrative expenses
Selling, general and administrative expenses dropped 2.0%, or ¥1,052 million, to ¥52,646 million, in FY 2005, principally as a result of a decrease in pension cost due to an amendment and the transfer to the government of the substitutional portion of domestic pension plan, and depreciation expenses. In addition, the ratio of SG&A expenses to net sales decreased 2.1 percentage point, from 29.2% to 27.1%, principally as a result of reduced personnel expenses due to restructuring in the U.S.A. with the aim to reduce personnel expenses and depreciation expenses to net sales.
Losses (Gains) on disposal or sales of property, plant and equipment
In FY2005, there was a loss of ¥1,234 million, versus a gain of ¥2,379 million in FY2004. In FY2004, the Company sold a portion of land and structures at its head office premises in Anjo, Aichi Prefecture in Japan. This gain is recorded in the Japan segment. In FY2005, Makita’s factories disposed of or sold some equipment, and the Company sold a portion of land in Sapporo, Hokkaido in Japan. These dispositions and sales were recorded as a loss in the Japan segment. Most of the dispositions and sales resulting in the loss were in connection with Makita’s ordinary course of business.
Impairment of long-lived assets
FASB Statement No. 144 “Accounting for the Impairment or Disposal of Long-Lived Assets” requires an asset impairment adjustment if the sum of the estimated asset’s related undiscounted future cash flows is less than the current carrying value of the asset. If an asset is deemed to be impaired, the value of the asset is written down to its estimated fair value.
Makita made a decision to discontinue the use of a certain information technology facility located in zoning area in Japan during FY 2005. In accordance with FASB No. 144, Makita recorded a ¥577 million impairment loss on this facility in the Japan segment. The estimated fair value of ¥196 million represents the fair value of the land as determined by a third party appraiser considering the estimated net cash flows from effecting the sale to a third party purchaser. Current zoning regulations require that a buyer utilize the facility on substantially the same basis. Therefore, the combination of the limitations imposed by the zoning rules and the fact that the facility is located in a rural, non industrial section of Japan has caused management to determine that the recoverable value on an as is basis will be most likely limited to the estimated fair value of the land.

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Transfer to the government of the substitutional portion of pension plan
Until June, 2004, Makita had an employee pension fund in Japan, which was a defined benefit pension fund established under the Japanese pension law. This domestic contributory plan was composed of a corporate defined benefit portion established by the Company and a substitutional portion based on benefits prescribed by the Japanese government. The Company was exempted from contributing to the Japanese Pension Insurance program that would otherwise have been required if it had not elected to fund the government substitutional portion of the benefit through a domestic contributory plan arrangement. The plan assets of the domestic contributory plan were invested and managed as a single portfolio for the entire domestic contributory plan and were not separately attributed to the substitutional and corporate portions. In June 2001, the Japanese pension law was amended to permit an employer to elect to transfer the entire substitutional portion benefit obligation from the domestic contributory plan to the government together with a specified amount of plan assets pursuant to a government formula. After such transfer, the employer would be required to make periodic contributions to the Japanese Pension Insurance program, and the Japanese government would be responsible for all benefit payments. The corporate portion of the domestic contributory plan would continue to exist exclusively as a corporate defined benefit pension plan. Makita has accounted for the transfer in accordance with EITF 03-02 “Accounting for the Transfer to the Japanese Government of the Substitutional Portion of Employee Pension Fund Liabilities”. As specified in EITF 03-02, the entire separation process has been accounted for at the time of completion of the transfer to the government of the benefit obligation and related plan assets as a settlement in accordance with SFAS No.88 “Employers’ Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits”. The aggregate effect of this separation was determined based on the Company’s pension benefit obligation as of the date the transfer was completed and the amount of plan assets required to be transferred.
The Company received an approval of exemption from the Minister of Health, Labor and Welfare in January 2003, from the obligation for benefits related to future employee service with respect to the substitutional portion of its domestic contributory plan. The Company received government approval of exemption from the obligation for benefits related to past employee service in April 2004 with respect to the substitutional portion of its domestic contributory plan. The transfer to the government was completed on June 28, 2004.
As a result of the transfer, the Company recognized a subsidy from the Japanese government equal to the difference between the fair value of the obligation deemed “settled” with the Japanese government and the assets required to be transferred to the government in the amount of ¥9,128 million in FY2005. In addition, the Company recognized a settlement loss equal to the amount calculated as the ratio of the obligation settled to the total employee’s pension fund obligation immediately prior to settlement, both of which exclude the effect of future salary progression relating to the substitutional portion, times the net unrecognized gain/loss immediately prior to settlement, which amounted to ¥ 4,687 million. The resulting net gain of ¥4,441 million was recorded as a “transfer to the government of the substitutional portion of pension plan” in the accompanying consolidated income statement in FY 2005.
Operating Income
As a result of the factors indicated above, operating income grew 113.6%, to ¥31,398 million, in FY 2005, and the ratio of operating income to net sales rose 8.1 percentage points, from 8.0% to 16.1%.
Other Income (Expenses)
Other income dropped 17.2%, or ¥254 million, to ¥1,220 million, in FY 2005. This decrease reflects a decrease in realized gains on securities and other income by 56.5%, or ¥798 million, to ¥614 million, in FY 2005. The foregoing decrease was partially offset by the following factors. (1) Interest and dividend income increased 33.1%, or ¥288 million, to ¥1,157 million, in FY 2005. This resulted from the increase in the amount of cash equivalents with foreign subsidiaries and the average balance of Securities. (2)As a result of decreases of weighted average interest rates on borrowings, interest expense decreased by 2.8%, or ¥17 million, to ¥588 million, in FY 2005. (3)The balance of foreign exchange gains and losses improved by ¥239 million to a ¥37 million gain in FY2005 from a ¥202 million loss in FY2004. This reflects the Euro appreciating against the Japanese yen and the U.S. dollar depreciating against the Japanese yen in this period.
Income before income taxes
Income before income taxes in FY 2005 increased by 101.7%, or ¥16,448 million, to ¥32,618 million, and the ratio of operating income to net sales rose 7.9 percentage points, from 8.8% in FY 2004 to 16.7% in FY 2005.
Provision for income taxes
Total provision for income taxes increased by 23.6% as compared with FY2004 and amounted to ¥10,482 million in FY 2005, mainly because of a rise in the taxable income of Makita.
The effective income tax rate was 32.1%, compared with the statutory income tax rate of 40.3%. The difference between these rates was mainly attributed to the effect of tax treaties, through which Japanese corporations can claim a tax credit against Japanese income taxes on income earned in certain countries, even though that income is exempted from income taxes or is reduced by special tax incentive measures in those countries, as if no special exemption or reduction was provided. The Company applied such “tax sparing” mainly to China with the indicated tax reduction effect.

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Net income
As a result of the foregoing, net income for FY 2005 increased 187.8% or ¥14,445 million, to ¥22,136 million.
Earnings per share
Basic earnings per share of common stock amounted to ¥153.9, compared with ¥53.2 in FY 2004. Diluted earnings per share amounted to ¥148.8, compared with ¥51.9 in FY 2004.
Regional Segments
Segment information described below is determined by the location of the Company and its relevant subsidiaries.
Japan Segment
In FY 2005, sales in the Japan segment grew 10.9%, to ¥98,741 million. Sales to outside customers advanced 5.3% to ¥50,955 million, which accounted for 26.2% of consolidated net sales. The increase reflects a 0.6% rise in sales in the domestic market as well as a 24.9% surge in export sales mainly to Asia. Segment operating income climbed 11.0 times, to ¥15,915 million, owing to a 5.4% fall in operation expenses to ¥82,826 million. The decrease in operating expenses resulted from a gain of ¥4,441 million in connection with the return of the substitutional portion of the Company’s Employee Pension Fund to the government in FY2005, versus an impairment loss of ¥5,996 million related to its golf course subsidiary in FY2004, and due to improved productivity in the Japanese factory and the Chinese factories.
North America Segment
In FY 2005, sales in the North America segment dropped 7.6%, to ¥42,190 million. Sales to outside customers fell 7.4% to ¥38,607 million, which accounted for 19.8% of consolidated net sales. This decline in sales to outside customers mainly due to overall declining demand in North America, as home centers in the United States and Canada enhanced production and distribution of products under their own brand name and, as a result, Makita’s sales to home centers declined. Segment operating income surged 123.9% to ¥1,610 million, principally owing to a 9.7% fall in operating expenses to ¥40,580 million. The decrease in operating expenses reflected lower expenses due to restructuring measures that reduced personnel expenses and due to improved productivity in the Chinese factories.
Europe Segment
In FY 2005, sales in the Europe segment grew 13.7% to ¥81,666 million. Sales to outside customers advanced 13.0%, to ¥75,864 million, which accounted for 39.0% of consolidated net sales. Segment operating income surged 35.4%, to ¥10,125 million, principally owing to a rise in net sales on a local currency basis as well as to a rise in operating profit rates resulting from the strength of the euro and the improved cost efficiency following the shift of a portion of our manufacturing processes to factories in China.
Asia Segment
In FY 2005, sales in the Asia segment increased 46.0% to ¥42,315 million. Sales to outside customers advanced 11.6%, to ¥7,378 million, which accounted for 3.8% of consolidated net sales. Segment operating income grew 68.2%, to ¥4,926 million in FY 2005. The decrease in operating expenses reflected improved productivity in the Chinese factories.
Other Segment
In FY 2005, sales in the other segment increased 8.3% to ¥22,101 million. Sales to outside customers increased by 8.1%, to ¥21,933 million, which accounted for 11.3% of consolidated net sales. Segment operating income fell 29.0%, to ¥955 million in FY 2005.
CRITICAL ACCOUNTING POLICIES
As disclosed in Note 3 of the Notes to the accompanying consolidated financial statements, the preparation of Makita’s consolidated financial statements in accordance with U.S. generally accepted accounting principles requires management to make certain estimates and assumptions. These estimates and assumptions were determined by management’s judgment based on currently known facts, situations and plans for future activities, which may change in the future. Certain accounting estimates are particularly sensitive because of their significance to the consolidated financial statements and accompanying notes and due to the possibility that future events affecting the estimates may differ significantly from management’s current judgments. Accordingly, any change in the facts, situations, future plans or other factors on which management bases its estimates may result in a significant difference between earlier estimates and the actual results achieved. Makita believes that the following are the critical accounting policies and related judgments and estimates used in the preparation of its consolidated financial statements and accompanying notes.

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Revenue Recognition
Makita believes that revenue recognition is critical for its financial statements because net income is directly affected by the estimation of sales incentives. In recognizing its sales incentives, Makita is required to make estimates based on assumptions about matters that are highly uncertain at the time the estimate is made. Makita principally generates revenue through the sale of power tool products. Makita’s general revenue recognition policy follows the provisions of Staff Accounting Bulletin No. 104 (“SAB 104”). In accordance with SAB 104 and as disclosed in the consolidated financial statements, Makita recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred or services are rendered, the sales price is fixed and determinable and collectibility is reasonably assured. Makita believes the foregoing conditions are satisfied upon the shipment or delivery of Makita’s product.
With respect to “Revenue Recognition,” Makita offers sales incentives to qualifying customers through various incentive programs. Sales incentives primarily involve volume-based rebates, cooperative advertising and cash discounts, and are accounted for in accordance with the Emerging Issues Task Force Issue No. 01-9.
Volume-based rebates are provided to customers only if customers attain a pre-determined cumulative level of revenue transactions within a specified period of a year or less. Liabilities for volume-based rebates are recognized within a corresponding reduction to revenue for the expected sales incentive at the time the related revenue is recognized, and are based on the estimation of sales volume reflecting the historical performance of individual customers.
If expected sales levels are not achieved or achieved in levels higher than anticipated resulting in a greater magnitude of incentive, the result could have a material impact on Makita’s financial statements.
Cooperative advertisings are provided to certain customers as a contribution to or as sponsored funds for advertisements. Under cooperative advertising programs, Makita does not receive an identifiable benefit sufficiently separable from its customers. Accordingly, cooperative advertisings are also accounted as a reduction of revenue.
Cash discounts are provided as a certain percentage of the invoice price as predetermined by spot contracts or based on contractually agreed upon amounts with customers. Cash discounts are recognized as a reduction of revenue at the time the related revenue is recognized based on Makita’s ability to reliably estimate such future discounts to be taken. Cash discounts are substantially all taken within 30 days following the date of sale. Estimates of expected cash discounts are evaluated and adjusted periodically based on actual sales transactions and historical trends.
The following table shows the changes in accruals for volume-based rebates, cooperative advertising and cash discounts for the years ended March 31, 2004, 2005 and 2006:
                                 
    Yen     U.S. Dollars  
    (millions)     (thousand)  
    For the year ended March 31,  
    2004     2005     2006     2006  
Volume-based rebates:
                               
Actual payment for the year
    (3,607 )     (3,836 )     (5,104 )     (43,624 )
Income statement impact for the year
    3,903       4,333       5,726       48,940  
Accrued expenses (BS) as of March 31,
    1,605       2,102       2,724       23,282  
Cooperative advertisings:
                               
Actual payment for the year
    (2,076 )     (1,900 )     (2,127 )     (18,179 )
Income statement impact for the year
    2,147       1,812       2,196       18,769  
Accrued expenses (BS) as of March 31,
    596       508       577       4,932  
Cash discounts:
                               
Actual payment for the year
    (3,503 )     (3,682 )     (4,311 )     (36,846 )
Income statement impact for the year
    3,661       3,684       4,371       37,359  
Accrued expenses (BS) as of March 31,
    429       431       491       4,197  
Inventory valuation and reserve
Inventories are valued at the lower of cost or market price, with cost determined based on the average cost method. The valuation of inventory requires Makita to estimate obsolete or excess inventory as well as inventory that is not of saleable quality. The determination of obsolete or excess inventory requires Makita to estimate the future demand for products taking into consideration such factors as macro and micro economic conditions, competitive pressures, technological obsolescence, changes in consumer buying habits and others. The estimates of future demand that Makita uses in the valuation of inventory are the basis for revenue forecasts, which are also consistent with short-term manufacturing plans. If demand forecast for specific products is greater than actual demand and Makita fails to reduce manufacturing output accordingly, Makita could be required to write down additional on-hand inventory, which would have a negative impact on gross profit and, consequently, a potential material adverse impact on net income.

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However, sales of previously written-down or written-off inventory is not significant to any of the periods presented and Makita believes that the gross profit of the resulting sales of such inventory items is similar to that realized on all of its sales for the respective periods presented. Accordingly, the impact on Makita’s consolidated gross profit margin by sales of previously written-down or written-off inventory is not material. Makita usually sells or scraps remaining inventory items within a few years after write off and/or write down.
Unrealized Losses on Securities
Makita holds marketable securities and investment securities, which are accounted for in accordance with SFAS No. 115. Makita believes that impairment on securities is critical because it holds significant amounts of securities and any resulting impairment loss could have a material adverse impact on net income. Makita utilizes significant judgment based on subjective as well as objective factors in determining when an investment is other-than-temporarily impaired. Makita regularly reviews available-for sale securities and held-to-maturity securities for possible impairment based on criteria that include, but are not limited to, the extent to which cost exceeds market value, the duration of a market decline, our intent and ability to hold to recovery and the financial health, specific prospects and creditworthiness of the issuer. Makita performs comprehensive market research and analysis and monitors market conditions to identify potential impairment losses.
Allowance for Doubtful Receivables
Makita performs ongoing credit evaluations of its customers and adjusts credit limits based upon payment history and the customer’s current creditworthiness, as determined by Makita’s review of their current credit information. Makita continuously monitors collections and payments from its customers and maintains a provision for probable estimated credit losses based upon its historical experience and any specific customer collection issues that Makita has identified. Such credit losses have historically been within Makita’s expectations and the provisions established. However, Makita cannot guarantee that it will continue to experience the same credit loss rates that it has in the past. Changes in the underlying financial condition of its customers could result in a material impact to Makita’s consolidated results of operations and financial condition.
Impairment of Long-Lived Assets
Makita believes that impairment of long-lived assets is critical for its financial statements because Makita has significant amounts of property, plant and equipment, the recoverability of which could significantly affect its operating results and financial condition.
Makita periodically performs an impairment review for long-lived assets held and used whenever events or changes in circumstances indicate that the carrying value of the assets may not be recoverable. This review is based upon Makita’s projections of expected undiscounted future cash flows. Estimates of the future cash flows are based on the historical trends adjusted to reflect the best estimate of future operating conditions. Makita believes that its estimates are reasonable. However, different assumptions regarding such cash flows could materially affect Makita’s evaluations. Recoverability of assets to be held and used is assessed by comparing the carrying amount of an asset or asset group to the expected future undiscounted cash flows of the asset or group of assets. If an asset or group of assets is considered to be impaired due to factors such as a significant decline in market value of an asset, current period operating or cash flow losses and significant changes in the manner of the use of an asset, the impairment charge to be recognized is measured as the amount by which the carrying amount of the asset or group of assets exceeds fair value. Long-lived assets meeting the criteria to be considered as held for sale are reported at the lower of their carrying amount or fair value less costs to sell.
Fair value is determined based on recent transactions involving sales of similar assets or on appraisals prepared internally or externally, or by discounting future expected cash flows, or by using other valuation techniques. If actual market and operating conditions under which assets are operated are less favorable than those projected by management, resulting in lower expected future cash flows or a shorter expected future period to generate such cash flows, additional impairment charges may be required. In addition, changes in estimates resulting in lower fair values due to unanticipated changes in business or operating assumptions could adversely affect the valuations of long-lived assets and in turn affect Makita’s consolidated results of operations and financial condition.
Accrued Retirement and Termination Benefits
Makita believes that pension accounting is critical for its financial statements because assumptions used to estimate pension benefit obligations and pension expenses can have a significant effect on its operating results and financial condition. Accrued retirement and termination benefits are determined based on consideration of the levels of retirement and termination liabilities and plan assets at the end of a given fiscal year. The levels of projected benefit obligations and net periodic benefit cost are calculated based on various annuity actuarial calculation assumptions. Principal assumptions include discount rates, assumed rates of increase in future compensation levels, mortality rates and some other assumed rates. Discount rates employed by Makita are reflective of rates available on long-term, high quality fixed-income debt instruments. Discount rates are determined annually on the measurement date.

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The expected long-term rate of return on plan assets is determined annually based on the composition of the pension asset portfolios and the expected long-term rate of return on these portfolios. The expected long-term rate of return on plan assets is designed to approximate the long-term rate of return actually earned on the plan assets over time to ensure that funds are available to meet the pension obligations that result from the services provided by employees.
A number of factors are used to determine the reasonableness of the expected long-term rate of return, including actual historical returns on the asset classes of the plans’ portfolios and independent projections of returns of the various asset classes.
Accordingly, these assumptions are evaluated annually and retirement and termination liabilities are recalculated at the end of each fiscal year based on the latest assumptions. In accordance with U.S. generally accepted accounting principles, actual results that differ from the assumptions are accumulated and amortized over the future periods and therefore, generally affect Makita’s results of operations in such future periods.
Makita has a contributory retirement plan in Japan, which covers substantially all of the employees of the Company. The discount rate assumed to determine the pension obligation for the pension plan was 2.2% for the year ended March 31, 2006.
As of March 31, 2006, Makita allocated 54.6%, and 30.8% of plan assets to equity securities and debt securities. The value of these plan assets are influenced by fluctuations in world securities market. Significant depreciation or appreciation will have an impact on future expenses.
The following table illustrates the sensitivity to changes in the discount rate and the expected return on pension plan assets, while holding all other assumptions constant, for Makita’s pension plans as of March 31, 2006.
                 
 
    Change in   Change in
Change in assumption   projected benefit   pre-tax pension
    obligation   expenses
    Yen (millions)
 
50 basis point increase / decrease in discount rate
    -2,300 / +2,600       -7 / +6  
50 basis point increase / decrease in expected return on assets
          -140/+140  
 
While Makita believes that the assumptions are appropriate, significant differences in its actual experience or significant changes in its assumptions may materially affect Makita’s accrued retirement and termination benefits and future expenses.
Realizability of Deferred Income Tax Assets
Makita is required to estimate its income taxes in each of the jurisdictions in which Makita operates. This process involves estimating Makita’s current tax provision together with assessing temporary differences resulting from differing treatment of items for income tax reporting and financial accounting and reporting purposes. Such differences result in deferred income tax assets and liabilities, which are included within Makita’s consolidated balance sheets. Makita must then assess the likelihood that Makita’s deferred income tax assets will be recovered from future taxable income, and to the extent Makita believes that recovery is not more likely than not, Makita must establish a valuation allowance.
Significant management judgment is required in determining our provision for income taxes, deferred income tax assets and liabilities and any valuation allowance recorded against our gross deferred income tax assets. We have recorded a valuation allowance of ¥2,973 million as of March 31, 2006 due to uncertainties about our ability to utilize certain deferred income tax assets mainly for net operating loss carry forwards before they expire. For the balance of deferred income taxes, although realization is not assured, management believes, judging from an authorized business plan, it is more likely than not that all of the deferred income tax assets, less the valuation allowance, will be realized. The amount of such net deferred income tax assets that are considered realizable, however, could change in the near term and any such change may have a material effect on Makita’s consolidated results of operations and financial position if estimates of future taxable income are different.
New Accounting Standards
In November 2004, the FASB issued SFAS No. 151, “Inventory Costs – an amendment of ARB No. 43, Chapter 4” (“SFAS No. 151”). SFAS No. 151 amends the guidance in ARB No. 43, Chapter 4, “Inventory Pricing,” to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material (spoilage). Among other provisions, the new statement requires that items such as idle facility expense, excessive spoilage, double freight, and rehandling costs be recognized as current period charges regardless of whether they meet the criterion of “so abnormal” as stated in ARB No. 43.

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Additionally, SFAS No. 151 requires that the allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. SFAS No. 151 is effective for the year ended March 31, 2007. Makita does not expect the adoption of SFAS No. 151 will have a material impact on its consolidated results of operations and financial condition.
In December 2004, the FASB issued SFAS No. 153, “Exchanges of Non-monetary Assets – an amendment of APB Opinion No. 29.” SFAS No. 153 eliminates the exception from fair value measurement for non-monetary exchanges of similar productive assets in paragraph 21(b) of APB Opinion No. 29, “Accounting for Non-monetary Transactions,” and replaces it with an exception for exchanges that do not have commercial substance. SFAS No. 153 specifies that a non-monetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. SFAS No. 153 is effective for fiscal periods beginning after June 15, 2005 and is required to be adopted by Makita, in the fiscal year beginning April 1, 2006. Makita does not expect the adoption of SFAS No. 153 will have a material impact on its consolidated results of operations and financial condition.
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 No. 154 replaces APB Opinion No. 20, “Accounting Changes” and SFAS No. 3,“Reporting Accounting Changes in Interim Financial Statements,” and provides guidance on the accounting for and reporting of accounting changes and error corrections. SFAS No. 154 establishes retrospective application, or the latest practicable date, as the required method for reporting a change in accounting principle and the reporting of a correction of an error. SFAS No. 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005.
In June 2005, the FASB issued FASB Staff Position (FSP) FAS 143-1, “Accounting for Electronic Equipment Waste Obligations” (“FSP 143-1”). FSP 143-1 provides guidance on the accounting for certain obligations associated with the Waste Electrical and Electronic Equipment Directive (the “Directive”), adopted by the European Union (“EU”). Under the Directive, the waste management obligation for historical equipment (products put on the market on or prior to August 13, 2005) remains with the commercial user until the customer replaces the equipment. FSP 143-1 is required to be applied to the later of the first reporting period ending after June 8, 2005 or the date of the Directive’s adoption into law by the applicable EU member countries. Makita does not expect the adoption of FSP 143-1 will have a material impact on its consolidated results of operations and financial condition.
In November 2005, the FASB issued FSP FAS 115-1 and FAS 124-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments” (“FSP 115-1”). FSP 115-1 provides guidance on determining when investments in certain debt and equity securities are considered impaired, whether that impairment is other-than-temporary, and on measuring such impairment loss. FSP 115-1 also includes accounting considerations subsequent to the recognition of an other-than-temporary impairment and requires certain disclosures about unrealized losses that have not been recognized as other-than-temporary impairments. FSP 115-1 is required to be applied to reporting periods beginning after December 15, 2005. Makita does not expect the adoption of FSP 115-1 will have a material impact on its consolidated results of operations and financial condition.
B. Liquidity and capital resources
Makita’s principal sources of liquidity are cash on hand, cash provided by operating activities and borrowings within credit lines. As of March 31, 2006, Makita held cash and cash equivalents amounting to ¥39,054 million and the Company’s subsidiaries have credit lines up to ¥23,846 million. As of March 31, 2006, ¥1,638 million of its credit lines was used and ¥22,208 million was unused. As of March 31, 2006, Makita had ¥1,728 million in short-term borrowing, which included bank borrowings and capital lease obligations. For further information regarding our short-term borrowings, including the average interest rates see Note 11 to our accompanying consolidated financial statements.
As of March 31, 2006, Makita’s total short-term borrowings and long-term indebtedness amounted to ¥1,832 million, representing a decrease from the ¥9,148 million reported for the previous fiscal year-end. Makita’s ratio of indebtedness to shareholders’ equity declined by 3.5%, to 0.7%. The reduction in the balance of indebtedness and the decline in the ratio of total indebtedness to shareholders’ equity reflect the efforts of management to improve the efficiency of the usage of Makita’s capital by reducing the level of unused net cash provided by operating activities. As a result of these efforts, Makita repaid long-term indebtedness of ¥6,000 million in FY2006.
Except as disclosed above, Makita expects to continue to incur additional debt from time to time as required to finance working capital needs. Makita has no potentially significant refinancing requirements in fiscal 2006.
Makita has historically maintained a high level of liquid assets. Management estimates that the cash and cash equivalents level of ¥39,054 million as of March 31, 2006, together with Makita’s available credit facilities, cash flow from operations and funds available from long-term and short-term debt financing, will be sufficient to satisfy our future working capital needs, capital expenditure, research and

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development and debt service requirement through fiscal 2006 and thereafter.
Makita requires operating capital mainly to purchase materials required for production, to conduct research and development, to respond to cash flow fluctuations related to changes in inventory levels and to cover the payment cycle of receivables from wholesalers. Makita further requires funds for capital expenditures, mainly to expand production facilities and purchase metal molds. Makita also requires funds for financial expenditures, primarily to pay dividends and to repurchase treasury stock. Maintaining the level of Makita’s production and marketing activities requires capital investments of approximately ¥5 billion to ¥7 billion annually. Please see “– Fiscal Year 2006 – Capital Expenditures” below in this section for a description of our principal capital expenditures for fiscal 2006 and the main planned expenditures for fiscal 2006. At the Regular General Meeting of Shareholders held in June 2006, the Company’s shareholders approved a cash dividend of ¥38 per share. The total cash dividend payments amount to ¥5,461 million, which the Company paid in June 2006.
Makita believes it will continue to be able to access the capital markets on terms and for amounts that will be satisfactory to it and as necessary to support the business and to engage in hedging transactions on commercially acceptable terms.
Makita is rated at “A+” by Standard & Poor’s at March 31, 2006.
Fiscal year 2006
Cash Flows
Cash flow provided by operating activities is primarily composed of cash received from customers, and cash used in operating activities, principally payments by Makita for parts and materials, selling, general and administrative expenses, and income taxes.
For FY2006, cash inflow from cash received from customers increased by 16.3% to ¥224,064 million, as a result of an increase in net sales.
This increase was within the range of the increase in net sales, as there were no significant changes in Makita’s collection rates.
Cash used in operating activities increased by 13.1% to ¥198,997 million. This increase was caused by greater purchases of parts and raw materials, increased production as well as the increase in sales and administrative expenses.
As a result of these factors, net cash provided by operating activities increased 48.8% (¥8,225 million) from ¥16,842 million in FY2005 to ¥25,067 million in FY 2006.
In FY2006, cash outflow for capital expenditure increased ¥4,728 million to ¥11,383 million.
In addition, to strengthen its position in the automatic nailer business as a comprehensive supplier of tools for professional use, Makita acquired the automatic nailer business of Kanematsu-NNK Corp. as of January 1, 2006 for a total of ¥1,853 million. Of the ¥1,853 million purchase price including related costs, the Company paid ¥1,204 million during FY2006 and paid ¥649 million in April 2006.
The purchase of securities totaled ¥21,844 million during the previous fiscal year and ¥21,248 million during FY2006.
To engage in investing and financing activities, Makita increased its cash by ¥40,864 million from sales and maturities of securities in the amount of ¥34,350 million and the cancellation of a time deposit in the amount of ¥6,514 million.
In FY2006, net cash inflow from sales and maturities of securities increased by ¥6,168 million from ¥28,182 million.
As a result, net cash flow resulting from investing activities increased ¥7,501 million from the previous fiscal year’s ¥154 million to ¥7,655 million.
In FY2006, following the confirmation of the civil rehabilitation plan for Joyama Kaihatsu, Ltd., the Company paid ¥150 million towards ¥800 million in long-term indebtedness, and ¥6,375 million towards ¥12,836 million in club members’ deposits. In addition, the Company also repaid ¥6,000 million long-term indebtedness of its subsidiary. Cash used in repayments of long-term indebtedness and club members’ deposits totaled ¥12,525 million. This cash outflow was ¥674 million less than the ¥13,199 million cash used in repayment in FY2005, which included a total of ¥12,990 million for redemption of convertible bonds and ¥209 million for repayment of club members’ deposits. On the other hand, cash used in the payment of dividends increased ¥4,454 million from ¥3,453 million during the previous fiscal year to ¥7,907 million.
As a result, net cash used in financial activities increased ¥3,371 million from ¥16,177 million during previous fiscal year to ¥19,548 million.
As a result of these activities as well as the effect of exchange rate changes, our cash and cash equivalents as of March 31, 2006 amounted to ¥39,054 million, up ¥13,670 million from the end of fiscal 2005.

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Capital Expenditures
Makita has continued to allocate sizable amounts of funds for capital expenditures, which it believes is crucial for sustaining long-term growth. In light of the severity of the current market competition, however, Makita has focused its capital investments on expanding its plant in China and purchasing metal molds for new products to be manufactured, which required Makita to increase the amount of its capital expenditures in FY 2006 compared to FY 2005. Total capital expenditures amounted to ¥4,494 million, ¥6,655 million and ¥11,383 million for FY 2004, 2005 and 2006 respectively.
Capital expenditure in FY2006 was mainly for expansion and remodeling to reinforce the earthquake resistance of buildings at the main production factories in Japan, and for the purchase of facilities such as Chinese factories. Capital investments of the Company amounted to approximately ¥6.4 billion, while the capital investments of overseas subsidiaries including manufacturing subsidiaries amounted to approximately ¥5.0 billion. Capital expenditures for Makita’s consolidated subsidiaries consisted primarily of the purchase of metal molds for new products of Dolmar GmbH. and the acquisition of production equipment by Makita (China) Co., Ltd. and Makita (Kunshan) Co., Ltd. All of Makita’s capital expenditures in FY 2006 were funded through internal sources.
Under its investment plans for FY 2007, the Makita Group is scheduled to make capital investments totaling ¥15.5 billion, 36% higher than for FY 2006. Of this total, the Company plans to make direct investments of ¥9.9 billion and its consolidated subsidiaries will invest ¥5.6 billion.
In continuation from the FY2006, our Company’s main capital investment plan is to expand and renovate buildings to strengthen earthquake resistance in some of the head office buildings and main factories. The main facilities investments by consolidated subsidiaries include new factories in Europe and production facilities for Makita (China) Co., Ltd., and Makita (Kunshan) Co., Ltd. These are all scheduled to be funded with internal capital.
Fiscal year 2005
Cash Flows
Net cash provided by operating activities in FY 2005 decreased by ¥12,099 million to ¥16,842 million from ¥28,941 million in the previous fiscal year. The cash inflow is primarily composed of cash received from customers, and the cash outflow is primarily composed of payments by Makita for parts and materials, selling, general and administrative expenses, and income taxes.
For FY 2005, cash inflow from cash received from customers increased, as a result of an increase in net sales. This increase in cash inflow was within the range of the increase in net sales, as there were no significant changes in Makita’s collection rates. Cash inflow in operating activities increased by 5.6%, to ¥192,742 million, and cash outflow in operating activities increased by 14.5%, to ¥175,900 million.
Cash outflow for payments for parts and- materials increased as a result of increased production. This increase was greater than the increase in net sales. Cash outflow for income taxes payments increased due to an increase in taxable income.
Net cash inflow from investing activities was ¥154 million, compared with a ¥17,262 million cash outflow in the previous year. The increase in net cash inflow resulted mainly from the ¥13,510 million of proceeds from maturities of held to maturity securities. Net cash inflow from sales and maturities of securities of purchase of securities for FY 2005 was ¥7,172 million, compared with ¥16,762 million of net securities purchase to accumulate funds in preparation for the payments needed to redeem our outstanding convertible bonds maturing in March 2005. In addition, Makita spent less cash on time deposits, at ¥38 million for FY 2005 compared with ¥1,162 million for FY 2004. The foregoing was partially offset by reduced proceeds from sales of property, plants and equipment at ¥320 million for FY 2005 compared with ¥5,154 million for FY 2004, and the increase in cash used for capital expenditure by ¥2,161 million, to ¥6,655 million.
Net cash used in financing activities amounted to ¥16,177 million, compared with ¥6,596 million in the previous fiscal year. This included ¥12,990 million used to redeem our outstanding convertible bond and ¥3,453 million used to pay cash dividends. In FY 2005, net cash outflow from financing activities increased by ¥9,581 million to ¥16,177 million mainly due to an increase in redemption of convertible bond and an increase in payment of cash dividends.
As a result of these activities as well as the effects of exchange rate changes, our cash and cash equivalents as of March 31, 2005 amounted to ¥25,384 million, up ¥808 million from the end of fiscal 2004.

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Capital Expenditures
Makita has continued to allocate sizable amounts of funds for capital expenditures, which Makita believes is crucial for sustaining long-term growth. In the light of the severity of its current market competition however, Makita has focused its capital investments on expanding its plant in China and purchasing metal molds for new products to be manufactured in Japan and China and in certain other areas, which required Makita to increase the amount of its capital expenditures in FY 2005 compared to FY 2004. Total capital expenditures amounted to ¥5,691 million, ¥4,494 million and ¥6,655 million for FY 2003, 2004 and 2005, respectively. Capital expenditures in FY 2005 were mainly for the purchase of molds for new products, acquisition of production equipment in the Chinese plant and the construction of a headquarters building for Makita (Australia) Pty. Ltd.
Capital investments of the Company amounted to approximately ¥2.0 billion, while the capital investments of overseas subsidiaries including manufacturing subsidiaries in such countries as Germany, China, and the United States amounted to approximately ¥4.7 billion. Capital expenditures for Makita’s consolidated subsidiaries consisted primarily of the construction of a headquarters building for Makita (Australia) Pty. Ltd., the purchase of metal molds for new products of Dolmar GmbH, and the acquisition of production equipment by Makita (China) Co., Ltd. and Makita (Kunshan) Co., Ltd. All of Makita’s capital expenditures in FY 2005 were funded through internal sources.
Under its investment plans for FY 2006, the Makita Group is scheduled to make capital investments totaling ¥11.0 billion, 65% higher than for FY 2005, which is scheduled to be funded through internal sources. Of this total, the Company plans to make direct investments of ¥7.0 billion and its consolidated subsidiaries will invest ¥4.0 billion.
Financial Position
Total assets at the end of FY 2006 were ¥326,038 million, up 12.5% from the previous fiscal year-end. Total current assets increased 9.6% to ¥227,769 million, owing to such factors as an increase of inventories.
This increase was partially offset by a decrease in marketable securities.
Property, plant and equipment, at cost less accumulated depreciation, increased 12.1%, to ¥59,203 million. Investments and other assets increased 33.8%, to ¥39,066 million. Total current liabilities decreased 21.1%, to ¥45,961 million mainly due to decrease in club member’s deposit and short-term borrowing.
Long-term liabilities increased 11.5%, to ¥11,858 million, mainly due to an increase in deferred income tax liabilities incurred as a result of the increase in unrealized gains on securities we hold. The current ratio was 5.0 times, compared with 3.6 at the previous year-end. Shareholders’ equity increased 21.4%, to ¥266,584 million.
The main reasons for this increase are an increase in retained earning, and accumulated other comprehensive income of ¥5,345 million in FY2006, which compares to accumulated other comprehensive loss of (¥9,249) in FY2005. Fluctuations in the accumulated other comprehensive income (losses) are due to reductions in the minimum pension liabilities adjustment resulting from the increase in actual return on plan assets of defined benefit pension plan adopted by the Company, reductions in foreign currency translation adjustments due to the decline of yen against the US dollar and euro etc., and the increase in the unrealized gains on securities as a result of the appreciation of the market value of the Company’s securities holding.
As a result, the shareholders’ equity ratio rose to 81.8%, from 75.8% at the previous fiscal year-end.
C. Research and development, patents and licenses, etc.
Approximately 500 of Makita’s employees are engaged in research and development activities and product design. Makita also employs approximately 100 trained personnel in production engineering, and has developed a number of the machine tools currently used in its factories. The majority of such personnel are engaged in research and development of mechanical innovations, and the rest are engaged in the research and development of electric, electronic and other applications.
Makita places a high priority on R&D and believes that strong capability in R&D is crucial to its continuing development of high-quality, reliable products that meet users’ needs. In FY 2006, Makita allocated ¥4,826 million to R&D, approximately 2.1% of net sales. In FY 2005, Makita allocated ¥4,446 million for R&D, up 1.6% from the ¥4,377 million allocation in FY 2004. The ratio of R&D expenses to net sales was approximately 2.3% in FY 2004.
Makita is placing higher priority on designing power tools that are smaller and lighter, featuring electronic controls, and that have internal power sources allowing a cordless operation. Additional design priorities include developing units that feature low noise, low vibration, measures to restrain dust emissions and new safety features. Still another priority is to design units that can be recycled to address environmental concerns. In order to respond quickly to customers needs, Makita is also placing an emphasis on shortening the time needed for new product development. To strengthen initiatives that reduce costs, Makita focused development activities on a more limited range of items and

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set objectives for developing models that use more standard parts. New products developed in FY 2006 included cordless 4-mode impact driver, high-pressure air nailer and other products.
Makita developed a battery recharging system that employs digital communication functions to provide information on the state of a battery’s charge. Through the use of this new system, the total volume of work can be increased substantially by enabling batteries to be used up to their capacity. In addition, Makita adopted lithium ion batteries, which doubles the total volume of work in comparison with Makita’s batteries that must be inserted. Makita also developed an original battery checker system using the previously mentioned digital communication functions. Using this system, customers can check on the state of charge of their batteries and Makita can provide customers with information on how to make their batteries last longer.
In FY2006, by combining lithium ion batteries with the Company’s proprietary optimum charging system, Makita created a series of rechargeable products featuring small size and high output, and released new products such as rotary hammers featuring newly developed low-vibration designs.
Further, a line of products for the North American market was created through the development of circular saws and air tools among other product. In order to consolidate our product line, we are developing, among others, a rechargeable impact driver and slide compound saws.
On January 1, 2006, the Kanematsu-NNK Corporation’s automatic nailer business was acquired by the Company to reinforce the air tools business department. Due to this transfer of business, various air tools with superior quality are being developed. We are planning to develop competitively-priced air tools for overseas and high-pressure air tools for Japan.
D. Trend information
With regard to the outlook for the future, while the domestic economy is shrugging off deflation and heading for recovery, we anticipate that harsh conditions will continue. Given the escalation of raw material prices, including that of crude oil, and with the increasing trend to employ prefab/precut materials in residential construction, the demand for power tools will decline. A number of uncertainties also remain in the business environment. In addition to the global trend in interest rate hikes, there are also concerns about the US economy where we are starting to see a decline in personal consumption. There are also concerns regarding the future course of Asia, where changes in the economy tend to be severe.
Under these circumstances, we acquired the automatic nailer business from Kanematsu-NNK Corporation on January 1, 2006. We started the aggressive sales of air tools and the nails for nailers in Japan, and the automatic nailer business is expected to make a significant contribution throughout the FY2007.
In addition, tools with rechargeable lithium ion batteries introduced to the market in the second half of FY2006 contributed to the increased sales in FY2006. Inventory volume increased ¥13,818 million (¥8,646 million of the increase due to conversion of the weak yen is excluded) from March 31, 2006 to ¥79,821 million, in anticipation of orders and forecasts for the increased sales of lithium ion battery products in FY2007. These inventories are expected to decrease during FY2007.
We expect that demand for high-value-added products in the industrialized nations will continue, and competition will intensify in the global market for professional power tools, including the Japanese and North American markets.
Performance in the European market will be stable as the Company sustains its competitiveness and Chinese power tool manufacturers will work to expand their positions primarily in the Asian markets.
E. Off-balance sheet arrangements
Makita did not have any off-balance sheet arrangements as of March 31, 2006.

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F. Tabular disclosure of contractual obligations
                                                         
            Yen (millions)  
            Expected payment date, year ending March 31,  
    Total     2007     2008     2009     2010     2011     Thereafter  
Capital lease
    194       90       37       27       20       11       9  
Interest expenses on Capital lease
    18       9       4       2       2       1        
Operating lease
    1,680       546       401       275       166       86       206  
Contributions to defined benefit plan
    3,101       3,101                                
Derivative financial instruments
    24,498       24,498                                
Purchase Obligation
    6,373       6,373                                
 
                                         
Total
  ¥ 35,864     ¥ 34,617     ¥ 442     ¥ 304     ¥ 188     ¥ 98     ¥ 215  
 
                                         
                                                         
            U.S. Dollars (thousands)  
            Expected payment date, year ending March 31,  
    Total     2007     2008     2009     2010     2011     Thereafter  
Capital lease
    1,658       769       316       231       171       94       77  
Interest expenses on Capital lease
    154       77       34       17       17       9        
Operating lease
    14,359       4,667       3,427       2,350       1,419       735       1,761  
Contributions to defined benefit plan
    26,504       26,504                                
Derivative financial instruments
    209,385       209,385                                
Purchase Obligation
    54,470       54,470                                
 
                                         
Total
  $ 306,530     $ 295,872     $ 3,777     $ 2,598     $ 1,607     $ 838     $ 1,838  
 
                                         
 
Note:   Calculation of contributions to defined benefit plan after 2007 is not practicable.
G. Safe harbor
      All information that is not historical in nature disclosed under “Item 5. Operating and Financial Review and Prospect - Trend Information” and “ - tabular Disclosure of Contractual Obligations” is deemed to be a forward-looking Statements. See “Cautionary Statement with Respect to Forward-Looking Statements” for additional information.
Item 6. Directors, Senior Management and Employees
A. Directors and senior management
The Directors and Statutory Auditors of the Company as of June 29, 2006 are as follows:
Masahiko Goto
Current Position: President, Representative Director since May 1989
Date of Birth: November 16, 1946
Director since: May 1984
Masami Tsuruta
Current Position: Managing Director, General Manager of Domestic Sales Headquarters since June 2003
Date of Birth: December 26, 1942
Director since: June 1995
Business Experience:
June 1995: Director, Assistant General Manager of Domestic Sales Headquarters
June 1997: Director, General Manager of Domestic Sales Marketing Headquarters

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Yasuhiko Kanzaki
Current Position: Director, General Manager of International Sales Headquarters (Europe Area) since June 2003
Date of Birth: July 9, 1946
Director since: June 1999
Business Experience:
April 1995: Director of Makita International Europe Ltd.
June 1999: Director, Assistant General Manager of International Sales Headquarters 1
Kenichiro Nakai
Current Position: Director, General Manager of Administration Headquarters since June 2001
Date of Birth: November 17, 1946
Director since: June 2001
Business Experience:
October 2000: Assistant General Manager of Production Headquarters
April 2001: General Manager of Personnel Department
Tadayoshi Torii
Current Position: Director, General Manager of Production Headquarters since June 2003
Date of Birth: December 10, 1946
Director since: June 2001
Business Experience:
October 1998: General Manager of Production Department
June 2001: Director, General Manager of Quality Control Headquarters
Tomoyasu Kato
Current Position: Director, General Manager of Research and Development Headquarters since June 2001
Date of Birth: March 25, 1948
Director since: June 2001
Business Experience:
March 1999: General Manager of Technical Administration Department
Kazuya Nakamura
Current Position: Director, General Manager of International Sales Headquarters (Asia and Oceania Area) since June 2003
Date of Birth: April 13, 1948
Director since: June 2001
Business Experience:
October 2000: General Manager of Asia and Oceania Sales Department
June 2001: Director, General Manager of International Sales Headquarters 2
Masahiro Yamaguchi
Current Position: Director, General Manager of Purchasing Headquarters since June 2003
Date of Birth: May 9, 1945
Director since: June 2003
Business Experience:
April 1995: Assistant Manager of International Sales Department
August 1995: Transferred to Makita Manufacturing Europe Ltd.
May 2003: Assistant General Manager of Purchasing Headquarters (Makita Corporation)
Shiro Hori
Current Position: Director, General Manager of Overseas Sales Headquarters (America Area and International Administration) since June 2003
Date of Birth: February 24, 1948
Director since: June 2003
Business Experience:
April 1997: Assistant General Manager of Europe Sales Department
March 1999: General Manager of Europe Sales Department
Tadashi Asanuma
Current Position: Director, Assistant General Manager of Domestic Sales Marketing Headquarters since June 2003
Date of Birth: January 4, 1949
Director since: June 2003

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Business Experience:
April 1995: Manager of Saitama Branch Office
April 2001: General Manager of Osaka Sales Department
Hisayoshi Niwa
Current Position: Director, General Manager of Quality Control Headquarters since June 2003
Date of Birth: February 24, 1949
Director since: June 2003
Business Experience:
April 1995: Assistant General Manager of Production Control Department
October 1999: General Manager of Production Control Department
Zenji Mashiko
Current Position: Director, Assistant General Manager of Domestic Sales Marketing Headquarters since June 2003
Date of Birth: May 28, 1949
Director since: June 2003
Business Experience:
April 1995: Manager of Tokyo Branch Office
Motohiko Yokoyama
Current Position: Director, since June 2005
Date of Birth: May 13, 1944
Director since: June 2005
Business Experience:
June 2004: President and Representative Director of Toyoda Machine Works, Ltd.
January 2006: Vice President and Representative Director of JTEKT Corporation, which is the entity created by the merger of Toyoda Machine Works, Ltd. with Koyo Seiko Co., Ltd.
Akio Kondo
Current Position: Standing Statutory Auditor since June 2004
Date of Birth: February 3, 1946
Statutory Auditor since: June 2004
Business Experience:
October 1995: General Manager of Accounting & Finance Department
Hiromichi Murase
Current Position: Standing Statutory Auditor since June 2004
Date of Birth: April 5, 1946
Statutory Auditor since: June 2004
Business Experience:
June 1998: General Manager of General Affairs Department
Keiichi Usui
Current Position: Outside Statutory Auditor since June 1994
Date of Birth: August 9, 1933
Statutory Auditor since: June 1994
Shoichi Hase
Current Position: Outside Statutory Auditor since June 2001
(Patent attorney, Hase International Patent office)
Date of Birth: March 30, 1934
Statutory Auditor since: June 2001
April 1967: Established Hase Patent Attorney Office
The term of each director listed above expires in June 2007. The terms of Mr. Akio Kondo and Mr. Hiromichi Murase as Standing Statutory Auditors and Mr. Shoichi Hase as Statutory Auditor expire in June 2008. The term of Mr. Usui as Statutory Auditor expires in June 2007.
There is no family relationship between any of the persons named above. There is no arrangement or understanding with major shareholders, customers, suppliers, or others pursuant to which any person named above was selected as a Director or a Statutory Auditor.

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B. Compensation
The aggregate amount of remuneration, including bonuses but excluding retirement allowances, paid by the Company during the fiscal year ended March 31, 2006 to all Directors and Statutory Auditors, who served during the fiscal year ended March 31, 2006, totaled ¥ 163 million. Remuneration paid by the Company during the fiscal year ended March 31, 2005 to all Directors and Statutory Auditors, who served during the fiscal year ended March 31, 2005, totaled ¥ 152 million. Some of the fringe benefits provided by the Company to its employees in Japan, such as medical and dental service insurance and welfare pension insurance are also made available to Directors and Standing Statutory Auditors.
The Company had an unfunded retirement and termination allowances program for Directors and Statutory Auditors. Under such program, the aggregate amount set aside as retirement allowances for Directors and Statutory Auditors was ¥477 million as of March 31, 2005 and was increased to ¥490 million as of March 31, 2006. However, this Executive retirement and termination allowances program was abolished by the Annual General Meeting of Shareholders held in June 2006, because the program featured minimal correlation with Company results while presenting strong seniority-based elements. With regard to retirement bonuses accrued through that day, the accrued bonuses will be paid to eligible executives upon their retirement. Furthermore, beginning July 2006, amounts equal to the retirement benefit accruals will be added to their monthly compensation.
Beginning in July 2006, the Company introduced a new remuneration program which links the directors’ compensation to Makita’s stock prices. Under this remuneration program, a portion or all of the directors’ monthly compensation representing their retirement benefit will be contributed to the Executive Stock Ownership Plan, which in turn will acquire the Company’s stock. The acquired stock will be retained for the duration of the director’s tenure. The purpose of this system is to effectively link a portion of the directors’ remuneration to the stock price, and thereby provide further transparency of directors’ managerial responsibility with respect to improving the Company’s value.
C. Board practices
Under the Company Law, the Company has elected to structure its corporate governance system as a company with a Board of Statutory Auditors as set out below.
The Company’s Articles of Incorporation provide for 15 or less Directors and five or less Statutory Auditors. All Directors and Statutory Auditors are elected at general meetings of shareholders. In general, the term of offices of Directors expires at the conclusion of the ordinary general meeting of shareholders held with respect to the last business year ending within two years from their election, and in the case of Statutory Auditors, within four years from their election; however, Directors and Statutory Auditors may serve any number of consecutive terms. With respect to each expiration date of the term of offices of Directors and Statutory Auditors, see “A. Directors and senior management” in this Item above.
The Directors constitute the Board of Directors, which has the ultimate responsibility for administration of the affairs of the Company. The Board of Directors may elect from among its members a Chairman and Director, one or more Vice Chairmen and Directors, a President and Director, one or more Executive Vice Presidents and Directors, Senior Managing Directors and Managing Directors. From among the Directors referred to above, the Board of Directors elects one or more Representative Directors. Each Representative Director has the authority to individually represent the Company in the conduct of the affairs of the Company.
The Statutory Auditors of the Company are not required to be and are not certified public accountants. However, at least half of the Statutory Auditors are required to be persons who have never been in the past a director, accounting counselor, corporate executive officer, general manager or any other employee of the Company or any of its subsidiaries. The Statutory Auditors may not, while acting as such, be a director, accounting counselor, corporate executive officer, general manager or any other employee of the Company or any of its subsidiaries. Each Statutory Auditor has the statutory duty to supervise the administration by the Directors of the Company’s affairs and also to examine the Company’s annual consolidated and non-consolidated financial statements and business report proposed 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 individually prepare their audit reports. They are required to attend meetings of the Board of Directors but are not entitled to vote. In addition to Statutory Auditors, independent certified public accountants or an audit corporation must be appointed by a general meeting of shareholders as Accounting Auditor. Such Accounting Auditor has, as their primary statutory duties, a duty to examine the Company’s annual 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 Statutory Auditors designated by the Board of Statutory Auditors to receive such report (if such Statutory Auditors are not designated, all Statutory Auditors) and the Directors designated to receive such report (if such Directors are not designated, the Directors who prepared the financial statements).

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The Statutory Auditors constitute the Board of Statutory Auditors. The Board of Statutory Auditors has a statutory duty to, based upon the reports prepared by respective Statutory 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 Statutory 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 Statutory Auditors shall elect one or more full-time Statutory Auditors from among its members. The Board of Statutory Auditors is empowered to establish audit principles, the method of examination by Statutory Auditors of the Company’s affairs, and the financial position and other matters concerning the performance of the Statutory Auditors’ duties. For names of the Statutory Auditors that constitute the Board of Statutory Auditors, see Item 6. A.
There are no contractual arrangements providing for benefits to Directors upon termination of service. Also see “B. Memorandum and articles of association – Directors” in Item 10.
Exemptions from certain NASDAQ Corporate Governance Rules
Pursuant to exemptions granted by the National Association of Securities Dealers Automated Quotations (the “NASDAQ”), the Company is permitted to follow certain corporate governance practices complying with Japanese laws, regulations, stock exchange rules, or generally accepted business practices in lieu of the NASDAQ rules on corporate governance (the “NASDAQ Rules”). Set forth below are the corporate governance exemptions the Company currently receives from NASDAQ.
1. Directors. The Company is exempt from the NASDAQ requirement relating to directors that currently requires the Company’s Board of Directors to be comprised of a majority of independent directors. Unlike the NASDAQ Rules, the Company Law of Japan and related legislation do not require Japanese companies with boards of statutory auditors such as the Company to have any independent directors on its board of directors.
2. Audit Committee. The Company plans to avail itself of paragraph (c)(3) of Rule 10A-3 of the Securities Exchange Act of 1934, as amended, which provides a general exemption from the audit committee requirements to a foreign private issuer with a board of statutory auditors, subject to certain requirements which continue to be applicable under Rule 10A-3. The Company is exempt from the NASDAQ requirement relating to audit committees that currently requires the Company to have, and certify that it has and will continue to have, an audit committee of at least three members, each of whom must be independent. Unlike the NASDAQ Rules, under the Company Law, at least half of the statutory auditors will be required to be persons who have not been a director, accounting counselor, corporate executive officer, general manager or any other employee of the Company or any of its subsidiaries at any time prior such statutory auditor’s election. Statutory auditors may not at the same time be a director, accounting counselor, corporate executive officer, general manager, or any other employee of the Company or any of its subsidiaries.
3. Meetings of Ordinary Shareholders. The Company is exempt from the quorum requirement of the NASDAQ, which currently requires each issuer to provide for a quorum as specified in its by-laws for any meeting of the holders of common stock, which shall in no case be less than 33 1/3 percent of the outstanding shares of a company’s common voting stock. In keeping with the Company Law and generally accepted business practices in Japan, the Company’s Articles of Incorporation provide that 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 total number of voting rights of all the shareholders represented at the meeting. The Company Law and the Company’s Articles of Incorporation provide, however, that the quorum for the election of Directors and Statutory Auditors shall not be less than one-third of the total number of voting rights of all the shareholders. The Company Law and the Company’s Articles of Incorporation also provide that in order to amend the Company’s Articles of Incorporation and in certain other instances, including:
     
(1)
  acquisition of its own shares from specific persons 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 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 Statutory Auditor;
(5)
  the exemption of liability of a Director, Statutory Auditor or Accounting Auditor with certain exceptions;
(6)
  a reduction of stated capital with certain exceptions in which a shareholders’ resolution is not required;
(7)
  a distribution of surplus in kind other than dividends which meets certain requirements;
(8)
  dissolution, merger, consolidation or corporate split with certain exceptions in which a shareholders’ resolution is not required;

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(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 percent parent-subsidiary relationships with certain exceptions in which a shareholders’ resolution is not required,
the quorum shall be one-third of the total number of voting rights of all the shareholders, and the approval by at least two-thirds of the voting rights of all the shareholders represented at the meeting is required.
D. Employees
The following table sets forth information about number of employees:
                         
      As of March 31,  
      2004       2005       2006  
Categorized by Geographic Areas
                       
Japan
    3,041       2,996       3,038  
Overseas
    5,392       5,564       5,591  
 
                       
Total
    8,433       8,560       8,629  
 
                       
During the fiscal year ended March 31, 2006, the Company hired on average approximately 1,300 temporary employees in China, and approximately 100 temporary employees in Japan who were not entitled to retirement or certain other fringe benefits which regular full-time employees receive.
The Company has a labor contract with the Makita Workers’ Union covering wages and conditions of employment. All full-time employees of the Company in Japan, except management and certain other employees, must be union members. The Makita Union is affiliated with the Japanese Electrical Electronic & Information Union. The Company has not been materially affected by any work stoppages or difficulties in connection with labor negotiations in the past.
The Company’s employees are members of the labor union formed on September 13, 1947 that comprises, starting February 9, 1989, the Japanese Electrical Electronic & Information Union. As of March 31, 2006, there are 2,742 members of the labor union and Makita considers its relationship with the labor union to be good.

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E. Share ownership
The total number of shares of the Company’s Common Stock owned by the Directors and Statutory Auditors as a group as of March 31, 2006 is as follows:
             
Identity of   Number of   Percentage of
Person or Group   Shares Owned   voting right
Directors and Statutory Auditors
    2,113,316     1.47 %
The following table lists the number of shares owned by the Directors and Statutory Auditors of the Company as of March 31, 2006.
             
Name   Position   Number of shares
Masahiko Goto
  President, Representative Director     1,974,143  
Masami Tsuruta
  Managing Director     16,022  
Yasuhiko Kanzaki
  Director     11,569  
Kenichiro Nakai
  Director     11,700  
Tadayoshi Torii
  Director     12,900  
Tomoyasu Kato
  Director     12,072  
Kazuya Nakamura
  Director     7,400  
Masahiro Yamaguchi
  Director     5,900  
Shiro Hori
  Director     8,400  
Tadashi Asanuma
  Director     4,900  
Hisayoshi Niwa
  Director     6,000  
Zenji Mashiko
  Director     5,900  
Akio Kondo
  Standing Statutory Auditor     6,400  
Hiromichi Murase
  Standing Statutory Auditor     4,610  
Keiichi Usui
  Outside Statutory Auditor     8,000  
Shoichi Hase
  Outside Statutory Auditor     17,400  
The shareholders listed above do not have voting rights that are different from other shareholders of the Company.
Item 7. Major Shareholders and Related Party Transactions
A. Major Shareholders
Except for Masahiko Goto holding 1.37% of the Company’s outstanding common stock as of March 31, 2006, none of the Company’s Directors and Statutory Auditors owns more than one percent of the Company’s Common Stock. Beneficial ownership of the Company’s common stock in the table below was prepared from publicly available records of the filings made by the Company’s shareholders regarding their ownership of the Company’s common stock under the Securities and Exchange Law of Japan.
Under the Securities and Exchange Law of Japan, any person who becomes beneficially, solely or jointly, a holder, including, but not limited to, a deemed holder who manages shares for another holder pursuant to a discretionary investment agreement, of more than 5% of the shares with voting rights of a company listed on a Japanese stock exchange (including ADSs representing such shares), must file a report concerning the shareholding with the Director of the relevant local finance bureau. A similar report must be filed, with certain exceptions, if the percentage of shares held by a holder, solely or jointly, of more than 5% of the total issued shares of a company increases or decreases by 1% or more, or if any change to a material matter set forth in any previously filed reports occurs.
Based on publicly available information, the following table sets forth the beneficial ownership of holders of more than 5% of the Company’s common stock as of the dates indicated in the reports described below.
                 
Name of Beneficial Owner   Number of Shares   Percentage
The Master Trust Bank of Japan, Ltd. (Trust account)
    9,041,000       6.27 %
 
Japan Trustee Services Bank, Ltd. (Trust account)
    8,902,500       6.18 %

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Based on information made publicly available on or after April 1, 2003, the following table describes transactions resulting in a 1% or more change in the percentage ownership held by major beneficial owners of the Company’s common stock.
                                             
        Shares Owned           Number of   Shares Owned    
    Date of   Prior to           Shares   After the    
Name of Shareholder   Transaction   Transaction   Percentage   Changed   Transaction   Percentage
Nippon Life Insurance Company
  April 30, 2004                       7,601,503       5.14 %
Barclays Global Investors, N.A.
  June 30, 2004                       7,855,003       5.31 %
Silchester International Investors Limited
  September 29, 2004     9,267,000       6.06 %     1,212,000       10,479,000       7.08 %
Goldman Sachs International
  September 30, 2004     6,332,900       4.14 %     2,567,079       8,899,979       6.01 %
Barclays Global Investors, N.A.
  December 31, 2004     7,855,003       5.31 %     (293,559 )     7,561,444       5.11 %
Nippon Life Insurance Company
  January 31, 2005     7,601,503       5.14 %     (3,503,000 )     4,098,503       2.77 %
Silchester International Investors Limited
  February 15, 2005     10,479,000       7.08 %     (1,520,000 )     8,959,000       6.05 %
Barclays Global Investors, N.A.
  March 31, 2005     7,561,444       5.11 %     222,000       7,783,444       5.26 %
Barclays Global Investors, N.A.
  June 30, 2005     7,783,444       5.26 %     (2,915,000 )     4,868,444       3.29 %
Silchester International Investors Limited
  September 23, 2005     8,959,000       6.05 %     (1,017,000 )     7,942,000       5.37 %
Goldman Sachs International
  September 30, 2005     8,899,979       6.01 %     1,591,162       10,491,141       7.08 %
Mitsubishi UFJ Financial Group
  October 31, 2005                       8,164,923       5.52 %
Goldman Sachs International
  November 30, 2005     10,491,141       7.08 %     (3,909,960 )     6,581,181       4.45 %
Silchester International Investors Limited
  January 6, 2006     7,942,000       5.37 %     (588,400 )     7,353,600       4.97 %
Mitsubishi UFJ Financial Group
  January 31, 2006     8,164,923       5.52 %     857,200       9,022,123       6.10 %
Barclays Global Investors, N.A.
  March 31, 2006     4,868,444       3.38 %     4,161,108       9,029,552       6.27 %
Mitsubishi UFJ Financial Group
  May 15, 2006     9,022,123       7.35 %     1,556,200       10,578,323       7.35 %
As of March 31, 2006, the Company had 143,711,766, outstanding shares of common stock, excluding 296,994 shares of Treasury Stock. According to the Bank of New York, depositary for the Company’s ADSs, as of March 31, 2006, 3,160,984 shares of the Company’s common stock were held in the form of ADRs and there were 49 ADR holders of record in the United States. According to the Company’s register of shareholders and register of beneficial owners as of March 31, 2006, there were 12,342 holders of common stock of record worldwide and the number of record holders in the United States was 94.
The major shareholders do not have voting rights that are different to the other shareholders of the Company.
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.
To the knowledge of the Company, it is not directly or indirectly owned or controlled by any other corporation or by the Japanese or any foreign government.
B. Related party transactions
Makita sells and purchases products, materials, supplies and services to and from affiliated companies in the ordinary course of business.
No Director or Statutory Auditor has been indebted to the Company or any of its subsidiaries at any time during the latest three fiscal years. Neither the Company nor any of its subsidiaries expects to make any loans to Directors or Statutory Auditors in the future.

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See Note 20 to the consolidated financial statements.
C. Interest of experts and counsel
     Not applicable
Item 8. Financial Information
A. Consolidated statements and other financial information
1-3. Consolidated Financial Statements.
Makita’s audited consolidated financial statements are included under “Item 18 – Financial Statements”. Except for Makita’s consolidated financial statements included under Item 18, no other information included in this annual report has been audited by Makita’s Independent Registered Public Accounting Firm.
4. Not applicable.
5. Not applicable.
6. Export Sales.
See “Information on the Company – Business Overview – Principal Markets, Distribution and After-Sale Services”.
7. Legal or arbitration proceedings
There are no material pending legal or arbitration proceedings to which Makita is a party and which may have, or have had in the recent past, significant effects on Makita’s financial position or profitability.
8. Dividend Policy
Makita’s basic policy on the distribution of profits is to maintain a dividend payout ratio of 30% or greater, with a lower limit on annual cash dividends of 18 yen per share. However, in the event special circumstances arise, computation of the amount of dividends will be based on consolidated net income after certain adjustments. In addition, Makita aims to implement a flexible capital policy, augment the efficiency of its capital employment, and thereby boost shareholder profit. Makita continues to consider repurchases of its outstanding shares in light of trends in stock prices. The Company intends to retire treasury stock when necessary based on consideration of the balance of treasury stock and its capital policy.
Makita intends to maintain a financial position strong enough to withstand the challenges associated with changes in its operating environment and other changes and allocate funds for strategic investments aimed at expanding its global operations.
According to this basic policy, the Company paid interim cash dividends in fiscal 2005 of ¥19.0 per share and ADS. The Company has declared a cash dividend of ¥38.0 per share and ADS, including a special dividend of ¥29 per share, all of which were approved by the shareholders’ meeting held on June 29, 2006.
The following table sets forth cash dividends per share of Common Stock declared in Japanese yen and as translated into U.S. dollars, the U.S. dollar amounts being based on the exchange rates at the respective payment date, using the noon buying rates for cable transfers in yen in New York City as certified for customs purposes by the Federal Reserve Bank of New York:
                                 
    In Yen     In U.S. Dollars  
Fiscal year ended March 31   Interim     Year-end     Interim     Year-end  
2002
    9.0       9.0       0.07       0.07  
2003
    9.0       9.0       0.07       0.07  
2004
    9.0       13.0       0.09       0.11  
2005
    11.0       36.0       0.10       0.34  
2006
    19.0       38.0       0.16       0.32  
Note: Cash dividends in U.S. dollars are based on the exchange rates at the respective payment date, using the noon buying rates for cable transfers in yen in New York City as certified for customs purposes by the Federal Reserve Bank of New York.

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B. Significant changes
      Not applicable
Item 9. The Offer and Listing
A. Offer and listing details
The shares of common stock of the Company were listed on the First Section of the Tokyo Stock Exchange, the Osaka Securities Exchange and the Nagoya Stock Exchange in 1970. The Company decided to discontinue its listing on the Osaka Securities Exchange due to the low level of trading volume in its shares on that exchange, and it was delisted from that exchange at the end of February 2003. The shares of common stock of the Company were listed on the Amsterdam Stock Exchange (Euronext Amsterdam) in 1973, initially in the form of Continental Depositary Receipts. The Company decided to discontinue its listing on the Euronext Amsterdam Stock Exchange due to the extremely low level of trading volume in its shares on that exchange, and it was delisted from that exchange at the end of January 2005.
The Company’s American Depositary Shares, each representing one share (prior to April 1, 1991, five shares) of common stock and evidenced by American Depositary Receipts (“ADRs”), have been quoted since 1977 through the National Association of Securities Dealers Automated Quotation (“NASDAQ”) System under “MKTAY”.
The following table shows the high and low sales prices of the Common Stock on the Tokyo Stock Exchange for the periods indicated and the reported high and low bid prices of American Depositary Shares through the NASDAQ system.
                                 
    Tokyo Stock Exchange Price     NASDAQ Price  
    Per Share of Common Stock     Per American Depositary Share  
    (Yen)   (U.S. Dollars)
Fiscal year ended March 31,   High     Low     High     Low
2002
    871       615       6.85       4.88  
2003
    909       654       7.55       5.35  
2004
    1,343       834       15.45       10.00  
2005
    2,115       1,315       20.27       12.00  
2006
    3,820       1,755       34.19       16.15  
 
                               
Quarterly
                               
                                 
Fiscal year 2005
                               
1 st quarter ended June 30, 2004
    1,686       1,315       15.34       12.00  
2 nd quarter ended September 30, 2004
    1,675       1,463       15.45       13.20  
3 rd quarter ended December 31, 2004
    1,874       1,379       17.75       13.17  
4 th quarter ended March 31, 2005
    2,115       1,705       20.27       16.56  
 
                               
Fiscal year 2006
                               
1 st quarter ended June 30, 2005
    2,355       1,755       21.75       16.15  
2 nd quarter ended September 30, 2005
    2,540       2,150       21.59       19.06  
3 rd quarter ended December 31, 2005
    3,070       2,255       24.40       19.55  
4 th quarter ended March 31, 2006
    3,820       2,830       34.9       24.22  
 
                               
Monthly
                               
                                 
January 2006
    3,420       2,830       28.90       24.22  
February 2006
    3,820       3,150       31.69       27.76  
March 2006
    3,690       3,180       31.49       27.62  
April 2006
    3,720       3,290       31.50       29.00  
May 2006
    3,830       3,260       34.34       29.82  
June 2006(through June 15)
    3,660       3,400       31.98       26.03  
B. Plan of distribution
     Not applicable
C. Markets
     See Item 9. A

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D. Selling shareholders
     Not applicable
E. Dilution
     Not applicable
F. Expenses of the issue
     Not applicable
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 Company Law (kaishaho) of Japan. It is registered in the Commercial Register (shogyo tokibo) maintained by the Kariya Branch Office of the Nagoya Legal Affairs Bureau of the Ministry of Justice of Japan.
Objects and purposes
Article 2 of the Articles of Incorporation of the Company provides that the purposes of the Company are to engage in the following businesses:
     
  Manufacture and sale of machine tools including electric power tools, pneumatic tools, etc., and wood-working tools;
  Manufacture and sale of electric machinery and equipment and various other machinery and equipment;
  Manufacture and sale of interior furnishings and household goods and their installation work;
  Purchase, sale, lease and management of real estate;
  Operation of sporting and recreational facilities;
  Casualty insurance agency and business relating to offering of life insurance;
  Tourist business under the Travel Agency Law;
  Acquisition, assignment and licensing of industrial property right, copyright and other intellectual property right and provision of technical guidance;
  Investment in various kinds of business; and
  All other business incidental or relative to any of the preceding items.
Directors
Under the Company Law, 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 Company Law, 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 material interest in the subject matter of a resolution to be taken by the Board of Directors cannot vote on such resolution. The total amount of remuneration to Directors and that to Statutory Auditors are subject to the approval of the general meeting of shareholders. Within such authorized amounts the Board of Directors and the Board of Statutory Auditors respectively determine the compensation to each Director and Statutory Auditor.
Except as stated below, neither the Company Law nor the Company’s Articles of Incorporation make special provisions as to:
     
  the Directors’ or Statutory Auditors’ power to vote in connection with their compensation;
  the borrowing power exercisable by a Representative Director (or a Director who is given power by a Representative Director to exercise such power);
  the Directors’ or Statutory Auditors’ retirement age; or
  requirement to hold any shares of capital stock of the Company.

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The Company 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 employ or discharge from employment important employees, such as general managers;
  to establish, change or abolish material corporate organization such as a branch office;
  to decline conditions concerning offering of corporate bonds; and
  to establish and maintain an internal control system.
The Regulations of the Board of Directors and operational regulations thereunder of the Company require a resolution of the Board of Directors for the Company to borrow money in an amount of ¥100 million or more or to give a guarantee in an amount of ¥10 million or more.
Common stock
General
Unless indicated otherwise, 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 Company Law, which came into effect on May 1, 2006, of Japan and related legislation.
All issued shares are fully-paid and non-assessable, and are in registered form. Transfer of shares is effected by delivery of share certificates, but in order to assert shareholders’ rights against the Company, a shareholder must have its name and address registered or recorded on the Company’s register of shareholders in writing or digitally (or electronically), 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 holder of shares may choose, at its discretion, to participate in the central clearing system for share certificates under the Law Concerning Central Clearing of Share Certificates and Other Securities of Japan. Participating shareholders must deposit certificates representing all of the shares to be included in this clearing system with the Japan Securities Depository Center, Inc. (“JASDEC”). If a holder is not a participating institution in JASDEC, it must participate through a participating institution, such as a securities company or a commercial bank having a clearing account with JASDEC. All shares of Common Stock deposited with JASDEC will be registered in the name of JASDEC on the Company’s register of shareholders. Each participating shareholder will in turn be registered on the Company’s register of beneficial shareholders and be treated in the same way as shareholders registered on the Company’s register of shareholders. For the purpose of transferring deposited shares, delivery of share certificates is not required. Entry of the share transfer in the books maintained by JASDEC for participating institutions, or in the book maintained by a participating institution for its customers, has the same effect as delivery of share certificates. The registered beneficial shareholders may exercise the rights attached to the shares, such as voting rights, and will receive dividends (if any) and notices to shareholders directly from the Company. The shares held by a person as a registered shareholder and those held by the same person as a registered beneficial shareholder are aggregated for these purposes. Beneficial shareholders may at any time withdraw their shares from deposit and receive share certificates.
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 five 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. The transfer of such shares will be effected through entry in the books maintained under the new central clearing system.
Authorized capital
Article 5 of the Articles of Incorporation of the Company provides that the total number of shares authorized to be issued by the Company is 496,000,000 shares.
As of March 31, 2006, 144,008,760 shares of Common Stock were in issue.
All shares of Common Stock of the Company have no par value.

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Dividends from Surplus
Dividends from Surplus – General
Under the Company Law, distributions of cash or other assets by joint stock corporations to their shareholders, so called “dividends”, are referred to as “dividends from Surplus” (“Surplus” is defined in “— Restriction on dividends from Surplus”). The Company may make dividends from Surplus to the shareholders any number of times per business year, subject to certain limitations described in “— Restriction on dividends from Surplus.” Dividends from Surplus are required in principle to be authorized by a resolution of a general meeting of shareholders, but may also be made pursuant to a resolution of the Board of Directors if:
     
(a)
  Articles of Incorporation of the Company so provide;
(b)
  the normal term of office of the Directors is no longer than one year; and
(c)
  its non-consolidated annual financial statements and certain documents
 
  for the latest business year present fairly its assets and profit or loss, as
required by ordinances of the Ministry of Justice.
Moreover, even if the requirements described in (a) through (c) are not met, the Company may make dividends from Surplus in cash to the shareholders by resolutions of the Board of Directors once per business year, but only if the Articles of Incorporation so provide. Such distribution of Surplus is called “interim dividends”.
Dividends from 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 Board of Directors authorizing a dividend from 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 dividend from 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 dividend from Surplus must be approved by a special shareholders resolution (see “- Voting Rights” with respect to a “special shareholders resolution”).
Under the 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 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.
Restriction on dividends from Surplus
When the Company makes a dividend from Surplus, the Company must, until the sum of its additional paid-in capital and legal reserve reaches one quarter of the 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)

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“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 business 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 the 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 Company 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 Statutory Auditors and Accounting Auditors, as required by ordinances of the Ministry of Justice.
Stock splits
The Company may at any time split shares of Common Stock in issue into a greater number of shares by resolution of the Board of Directors, and may amend its Articles of Incorporation to increase the number of the authorized shares to be issued to allow such stock split pursuant to a resolution of the Board of Directors rather than relying on a special shareholders resolution, 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 therefor, 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.

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General meeting of shareholders
The ordinary general meeting of shareholders of the Company for each business year is normally held in June in each year in or near Anjo, Aichi, 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 general meeting of shareholders 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. 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. Unless such general meeting of shareholders 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 general meeting of shareholders. Any shareholder or group of shareholders holding at least 300 voting rights or 1 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 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.
Voting rights
So long as the Company maintains the unit share system (see “–Unit share system” below; currently 100 shares of Common Stock 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. A corporate or certain other entity more than one-quarter 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 shares of Common Stock that it owns. If the Company eliminates from its Articles of Incorporation the provisions relating to the unit of shares, holders of shares 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 total number of voting rights of all the shareholders represented at the meeting. The Company Law and the Company’s Articles of Incorporation provide, however, that the quorum for the election of Directors and Statutory Auditors shall not be less than one-third of the total number of voting rights of all the shareholders. 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 of the Company holding voting rights. The Company’s shareholders also may cast their votes in writing, or exercise their voting rights by electronic means when the Board of Directors decides to permit such method of exercising voting rights.
The Company Law and the Company’s Articles of Incorporation provide that in order to amend the Company’s Articles of Incorporation and in certain other instances, including:
     
(1)
  acquisition of its own shares from specific persons 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 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 Statutory Auditor;
(5)
  the exemption of liability of a Director, Statutory Auditor or Accounting Auditor with certain exceptions;
(6)
  a reduction of stated capital with certain exceptions in which a shareholders’ resolution is not required;
(7)
  a distribution of surplus in kind other than dividends which meets certain requirements;
(8)
  dissolution, merger, consolidation or corporate split with certain exceptions in which a shareholders’ resolution is not required;

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(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 percent 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, and the approval by at least two-thirds of the voting rights of all the shareholders represented at the meeting is required (the “special shareholders resolutions”).
Issue of additional shares and pre-emptive rights
Holders of shares of Common Stock have no pre-emptive rights under the Articles of Incorporation of the Company. 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 of which not less than 2 weeks’ prior 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.
The Company may issue stock acquisition rights by a resolution of the Board of Directors, subject to the limitations as to the offering of stock acquisition rights on “specially favorable” exercise conditions mentioned under “Voting rights” above. 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.
In cases where a particular issue of new shares or stock acquisition rights (i) violates laws and regulations or the Company’s Articles of Incorporation, or (ii) will be performed in a manner materially unfair, and shareholders may suffer disadvantages therefrom, such shareholder may file an injunction to enjoin such issue with a court.
Liquidation rights
In the event of a liquidation of the Company, the assets remaining after payment of all debts, liquidation expenses and taxes will be distributed among shareholders in proportion to the respective numbers of shares of Common Stock held by them.
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 or recorded as the holders of one or more full units of shares in the Company’s registers of shareholders and/or beneficial shareholders in writing or digitally (or electronically) at the end of each March 31 are also 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 pertaining to the Common Stock and for other purposes, by giving at least 2 weeks’ prior public notice.
Acquisition by the Company of Common Stock
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 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 shareholders resolution), (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 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 Representative Director 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

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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).
The total amount of the purchase price of shares of Common Stock may not exceed the Distributable Amount, as described in “– Dividends from Surplus – Restriction on dividends from Surplus.”
Shares of Common Stock acquired by the Company may be held by it for any period or may be cancelled by resolution of the Board of Directors. The Company may also transfer to any person the shares of Common Stock 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.
Unit share system
The Articles of Incorporation of the Company provide that 100 shares of Common Stock constitute one unit of shares. 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 the 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 new 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 carries no voting rights.
Unless the Company’s shareholders amend the Articles of Incorporation of the Company by a special shareholders resolution to eliminate the provision not to issue share certificates for shares of Common Stock constituting less than a full unit, a share certificate for any number of shares of Common Stock constituting less than a full unit will in general not be issued. As the transfer of shares normally requires the delivery of the share certificates therefor, any fraction of a unit for which no share certificates are issued is not transferable. Moreover, holders of shares constituting less than a full unit will have no other shareholder rights if the Articles of Incorporation so provide, except that such holders may not be deprived of certain rights specified in the Company Law or an ordinance of the Ministry of Justice, including the right to receive dividends from Surplus.
A holder of shares of Common Stock constituting less than a full 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 of Common Stock constituting less than a full unit may request the Company to sell to such holder such amount of shares of Common Stock which will, when added together with the shares of Common Stock constituting less than a full unit, constitute a full unit of shares, in accordance with the provisions of the Share Handling Regulations of the Company.
A holder who owns ADRs evidencing less than 100 ADSs will indirectly own shares of Common Stock constituting less than a full unit. Although, as discussed above, under the unit share system holders of shares of Common Stock constituting less than a full unit have the right to require the Company to purchase such shares held by them or sell shares of Common Stock 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 constituting less than a 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 of Common Stock 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 shares of Common Stock constituting less than a full 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 a full unit. The unit share system does not affect the transferability of ADSs, which may be transferred in lots of any size.
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.

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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 from Surplus on the shares of Common Stock 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, by a resolution of the Board of Directors, sell or otherwise dispose of the shareholder’s shares at the then market price of shares of Common Stock and after giving at least 3 months’ prior public and individual notice, and hold or deposit the proceeds of such sale or disposal of shares of Common Stock for such shareholder.
Reporting of substantial shareholdings
The Securities and Exchange Law of Japan and regulations thereunder require any person, regardless of residence, who has become, beneficially and solely or jointly, a holder of more than 5 percent of the total issued shares of capital 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 the 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.
Except for the general limitation under Japanese anti-trust and anti-monopoly regulations against holding of shares of capital stock of a Japanese corporation which leads or may lead to a restraint of trade or monopoly, and except for general limitations under the Company 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.
C. Material contracts
In connection with the civil rehabilitation process of Makita’s consolidated subsidiary, Joyama Kaihatsu, Ltd. (“Joyama”), Makita entered into a Sponsorship Agreement (the “Sponsorship Agreement”) dated January 17, 2005 with Tokyo Tatemono, Ltd. (“Tokyo Tatemono”) and Joyama, in order to rehabilitate Joyama’s golf club. Under the Sponsorship Agreement, Joyama is to satisfy at least 50% of the outstanding debt obligations in connection with its rehabilitation, Joyama will retire and extinguish all Joyama shares held by Makita for no consideration to Makita, and, as a result of issuing new Joyama shares to Tokyo Tatemono, Makita will transfer its management of Joyama to Tokyo Tatemono. In addition, in order to execute the Joyama rehabilitation plan, a memorandum of understanding regarding the Sponsorship Agreement was executed on May 26, 2005.
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:
     
  individuals who do not reside in Japan; and
  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.

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Foreign investors are:
     
  individuals who are exchange non-residents;
  corporations that are organized under the laws of foreign countries or whose principal offices are located outside of Japan; and
  corporations (1) of which 50 percent 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 yen 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 percent 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.
E. Taxation
The discussion below is intended for general information only and does not constitute a complete analysis of all tax consequences relating to the ownership of shares of Common Stock or ADSs. Prospective purchasers of shares of Common Stock or ADSs should consult their own tax advisors concerning the tax consequences of their particular situations.
The following is a general summary of the principal U.S. federal income and Japanese national tax consequences of the acquisition, ownership and disposition of shares of Common Stock or ADSs. This summary does not address any aspects of U.S. federal tax law other than income taxation, and does not discuss any aspects of Japanese tax law other than such income taxation as limited to national taxes and inheritance and gift taxation. This summary also does not cover any state or local, or non-U.S. non-Japanese tax considerations. Investors are urged to consult their tax advisors regarding the U.S. federal, state and local and Japanese and other tax consequences of acquiring, owning and disposing of shares of Common Stock or ADSs. Also, this summary does not purport to address all the material tax consequences that may be relevant to the holders of shares of Common Stock or ADSs, and does not take into account the specific circumstances of any particular investors, some of which (such as tax-exempt entities, banks, insurance companies, broker-dealers, traders in securities that elect to use a mark-to-market method of accounting for their securities holdings, regulated investment companies, real estate investment trusts, partnerships and other pass-through entities, investors liable for alternative minimum tax, investors that own or are treated as owning 10 percent or more of the Company’s voting stock, investors that hold shares of Common Stock or ADSs as part of a straddle, hedge, conversion or constructive sale transaction or other integrated transaction, and U.S. Holders (as defined below) whose functional currency is not the U.S. dollar) may be subject to special tax rules. This summary is based on the federal income tax laws and regulations of the United States and tax laws of Japan, judicial decisions, published rulings and administrative pronouncements, all as in effect on the date hereof, as well as on the current income tax convention between the United States and Japan (the “Treaty”), all of which are subject to change (possibly with retroactive effect), and/or to differing interpretations.
For purposes of this discussion, a “U.S. Holder” is any beneficial owner of shares of Common Stock or ADSs that is, for U.S. federal income tax purposes:

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1.
  an individual citizen or resident of the United States;
2.
  a corporation (or other entity taxable as a corporation for U.S. federal income tax purposes) organized in or under the laws of the United States, any state thereof, or the District of Columbia;
3.
  an estate the income of which is subject to U.S. federal income tax without regard to its source; or
4.
  a trust that is subject to the primary supervision of a U.S. court and the control of one or more U.S. persons, or that has a valid election in effect under applicable Treasury regulations to be treated as a U.S. person.
An “Eligible U.S. Holder” is a U.S. Holder that:
     
1.
  is a resident of the United States for purposes of the Treaty;
2.
  does not maintain a permanent establishment in Japan (a) with which shares of Common Stock or ADSs are effectively connected and through which the U.S. holder carries on or has carried on business and (b) of which shares of Common Stock or ADSs form part of the business property; and
3.
  is eligible for benefits under the Treaty, with respect to income and gain derived in connection with shares of Common Stock or ADSs.
In addition, this summary is based in part upon the representations of the depositary and the assumption that each obligation in the deposit agreement for ADSs, and in any related agreement, will be performed in accordance with its terms.
In general, for purposes of the Treaty and for U.S. federal income and Japanese national income tax purposes, owners of ADRs evidencing ADSs will be treated as the owners of shares of Common Stock represented by those ADSs, and exchanges of shares of Common Stock for ADSs, and exchanges of ADSs for shares of Common Stock, will not be subject to U.S. federal income or Japanese national income tax.
Japanese Taxation
The following is a summary of the principal Japanese tax consequences (limited to national taxes) to holders of shares of Common Stock and of ADRs evidencing ADSs representing shares of Common Stock who are either individuals who are non residents of Japan or non-Japanese corporations, without a permanent establishment in Japan (“non-resident Holders”).
Generally, a non-resident of Japan or a non-Japanese corporation is subject to Japanese withholding tax on dividends paid by Japanese corporations. Stock splits are, in general, not a taxable event.
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 generally 20 percent, provided, with respect to dividends paid on listed shares issued by a Japanese corporation (such as shares of Common Stock) to any corporate or individual shareholders (including those shareholders who are non-Japanese corporations or Japanese non-resident individuals, such as non-resident Holders) other than any individual shareholder who holds 5 percent or more of the total shares issued by 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. As of 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 an Eligible U.S. Holder that is a portfolio investor is generally reduced to 10 percent of the gross amount actually distributed, and Japanese withholding tax with respect to dividends paid by a Japanese corporation to an Eligible 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 nonresident Holder is required to submit an Application Form for Income Tax Convention Regarding Relief from Japanese Income Tax on Dividends (together with any other required forms and documents) in advance through the Company to the relevant tax authority before the 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 two Application Forms (one before payment of

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dividends and the other within 8 months after the Company’s business year-end or semi-business year-end). To claim this reduced rate or exemption, any relevant non-resident Holder of 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 rate which is 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 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 full amount of tax withheld (if such non-resident Holder is entitled to an exemption under the applicable income tax treaty) from the relevant Japanese tax authority.
Gains derived from the sale of shares of Common Stock or ADSs outside Japan by a non-resident Holder holding such shares of Common Stock or ADSs as portfolio investors are, in general, not subject to Japanese income tax or corporation tax. Eligible U.S. Holders are not subject to Japanese income or corporation tax with respect to such gains under the Treaty.
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 even though neither the individual nor the deceased nor donor is a Japanese resident.
Holders of shares of Common Stock 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.
U.S. Federal Income Taxation
U.S. Holders
The following discussion is a summary of the principal U.S. federal income tax consequences to holders of shares of Common Stock and ADSs that are U.S. Holders and that hold those shares or ADSs as capital assets (generally, for investment purposes).
Taxation of Dividends
Subject to the passive foreign investment company rules discussed below, under U.S. federal income tax law, the gross amount of any distribution made by us in respect of shares of Common Stock or ADSs (without reduction for Japanese withholding taxes) will constitute a taxable dividend to the extent paid out of current or accumulated earnings and profits, as determined under U.S. federal income tax principles. The U.S. dollar amount of such a dividend generally will be included in the gross income of a U.S. Holder, as ordinary income, when actually or constructively received by the U.S. Holder, in the case of shares of Common Stock, or by the depositary, in the case of ADSs.
Dividends paid by us will not be eligible for the dividends received deduction generally allowed to U.S. corporations in respect of dividends received from other U.S. corporation.
Subject to certain exceptions for short-term and hedged positions, and provided that we are not a passive foreign investment company (as discussed below), dividends received by certain U.S. Holders (including individuals) with respect to the Common Stock or ADSs will currently be subject to U.S. federal income taxation at a maximum rate of 15 percent. Investors should be aware that the U.S. Treasury Department has announced its intention to promulgate rules pursuant to which shareholders (and intermediaries) will be permitted to rely on certifications from issuers to establish that dividends qualify for the reduced rate of U.S. federal income taxation. Because such procedures have not yet been issued, we are not certain that we will be able to comply with them. U.S. Holders of ADSs or Common Stock should consult their own tax advisors regarding the availability of the reduced rate in the light of their own particular circumstances.
The U.S. dollar amount of a dividend paid in Japanese yen will be determined based on the Japanese yen/U.S. dollar exchange rate in effect on the date that dividend is included in the income of the U. S. Holder, regardless of whether the payment is converted into U.S. dollars on such date. Generally, any gain or loss resulting from currency exchange fluctuations during the period from the date the dividend payment is included in the gross income of a U.S. Holder through the date that payment is converted into U.S. dollars (or the U.S. Holder otherwise disposed of the Japanese yen) will be treated as U.S. source ordinary income or loss. U.S. Holders should consult their own tax advisors regarding the calculation and U.S. federal income tax treatment of foreign currency gain or loss.
To the extent, if any, that the amount of any distribution received by a U.S. Holder in respect of shares of Common Stock or ADSs exceeds our current and accumulated earnings and profits, as determined under U.S. federal income tax principles, the distribution first will be treated as a tax-free return of the U.S. Holder’s adjusted tax basis in those shares or ADSs, and thereafter as U.S. source capital gain. Distributions of additional shares of Common Stock that are made

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to U.S. Holders with respect to their shares of Common Stock or ADSs and that are part of a pro rata distribution to all the Company’s shareholders generally will not be subject to U.S. federal income tax.
For U.S. foreign tax credit purposes, dividends included in gross income by a U.S. Holder in respect of shares of Common Stock or ADSs will constitute income from sources outside the United States and will be subject to various classifications and other limitations U.S. federal law and the Treaty, any Japanese withholding tax imposed in respect of a company dividend may be claimed either as a credit against the U.S. federal income tax liability of a U.S. Holder or, if the U.S. Holder elects not to take a credit for any foreign taxes that year, as a deduction from that U.S. Holder’s taxable income. Special rules will generally apply to the calculation of foreign tax credits in respect of dividend income that qualifies for preferential U.S. federal income tax rates. Additionally, special rules may apply to individuals whose foreign source income during the taxable year consists entirely of “qualified passive income” and whose creditable foreign taxes paid or accrued during the taxable year do not exceed $300 ($600 in the case of a joint return). Further, under some circumstances, a U.S. Holder that:
     
  has held shares of Common Stock or ADSs for less than a specified minimum period, or
  is obligated to make payments related to our dividends,
will not be allowed a foreign tax credit for foreign taxes imposed on our dividends. The rules with respect to foreign tax credits are complex and involve the application of rules that depend on a U.S. Holder’s particular circumstances, and accordingly, U.S. Holders are urged to consult their tax advisors regarding the availability of the foreign tax credit under their particular circumstances. The Internal Revenue Service (“IRS”) has expressed concern that parties to whom ADSs are released may be taking actions that are inconsistent with the claiming of foreign tax credits by U.S. Holders of ADSs. Accordingly, investors should be aware that the discussion above regarding the creditability of Japanese withholding tax on dividends could be affected by future actions that may be taken by the IRS.
Taxation of Capital Gains and Losses
In general, upon a sale or other taxable disposition of shares of Common Stock or ADSs, a U.S. Holder will recognize gain or loss for U.S. federal income tax purposes in an amount equal to the difference between the amount realized on the sales or other taxable disposition and the U.S. Holder’s adjusted tax basis in those Common Stock or ADSs. A U.S. Holder generally will have an adjusted tax basis in a share of Common Stock or an ADS equal to its U.S. dollar cost. In general, subject to the passive foreign investment company rules discussed below, such gain or loss recognized on a sale or other taxable disposition of shares of Common Stock or ADSs will be capital gain or loss and, if the U.S. Holder’s holding period for those shares or ADSs exceeds one year, will be long-term capital gain or loss. Certain U.S. Holders, including individuals, are eligible for preferential rates of U.S. federal income tax in respect of long-term capital gains. Under U.S. federal tax law, the deduction of capital losses is subject to limitations. Any gain or loss recognized by a U.S. Holder in respect of the sale or other taxable disposition of shares of Common Stock or ADSs generally will be treated as derived from U.S. sources for U.S. foreign tax credit purposes.
Deposits and withdrawals of Common Stock in exchange for ADSs will not result in the realization of gain or loss for U.S. federal income tax purposes.
Passive Foreign Investment Companies
Based on current estimates of our income and assets, we do not believe that we are, for U.S. federal income tax purposes, a passive foreign investment company (a “PFIC”), and we intend to continue our operations in such a manner that it is highly unlikely that we would become a PFIC in the future. However, there can be no assurance in this regard, because the PFIC determination is made annually and is based on the portion of our assets (including goodwill) or the portion of our income that is characterized as passive under the PFIC rules. If we become a PFIC, unless a U.S. Holder elects to be taxed annually on a mark-to-market basis with respect to its shares of Common Stock or ADSs, any gain realized on a sale or other taxable disposition of shares of Common Stock or ADSs and certain “excess distributions” (generally distributions in excess of 125 percent of the average distribution over a three-year period, or shorter holding period for the shares of Common Stock or ADSs) would be treated as realized ratably over the U.S. Holder’s holding period for the shares of Common Stock or ADSs; amounts allocated to prior years while we are a PFIC would be taxed at the highest tax rate in effect for each such year, and an additional interest charge may apply to the portion of the U.S. federal income tax liability on such gains or distributions treated under the PFIC rules as having been deferred by the U.S. Holder. Amounts allocated to the year of sale and to any year before we became a PFIC would be taxed as ordinary income in the year of sale. Moreover, dividends that a U.S. Holder receives from us will not be eligible for the reduced U.S. federal income tax rates described above if we are a PFIC either in the taxable year of the distribution or the preceding taxable year (and instead will be taxable at rates applicable to ordinary income).
If a market-to-market election were made, a U.S. Holder would take into account each year the appreciation or depreciation in value of its shares of Common Stock or ADS, which would be treated as ordinary income or (subject to limitations) ordinary loss, as would gains or losses on actual dispositions of Common Stock or ADSs. Any U.S. Holder who owns shares of Common Stock or ADSs during any year that we are a PFIC would be required to file IRS Form 8621. U.S. Holders should consult their own tax advisors regarding the application of

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the PFIC rules to the shares of Common Stock or ADSs and the availability and advisability of making an election to avoid the adverse tax consequences of the PFIC rules should we be considered a PFIC for any taxable year.
Non-U.S. Holders
The following discussion is a summary of the principal U.S. federal income tax consequences to beneficial holders of shares of Common Stock or ADSs that are neither U.S. Holders nor partnerships for U.S. federal income tax purposes (“Non-U.S. Holders”).
Subject to the discussion below under “Backup Withholding and Information Reporting”, a Non-U.S. Holder generally will not be subject to any U.S. federal income or withholding tax on distributions received in respect of shares of Common Stock or ADSs unless the distributions are effectively connected with the conduct by the Non-U.S. Holder of a trade or business within the United States (and, if an applicable tax treaty requires, are attributable to a U.S. permanent establishment or fixed base of such Non-U.S. Holder).
Subject to the discussion below under “Backup Withholding and Information Reporting”, a Non-U.S. Holder generally will not be subject to U.S. federal income tax in respect of gain recognized on a sale or other disposition of shares of Common Stock or ADSs, unless:
     
(i)
  the gain is effectively connected with a trade or business conducted by the Non-U.S. Holder within the United States (and, if an applicable tax treaty requires, is attributable to a U.S. permanent establishment or fixed base of such Non-U.S. Holder), or
(ii)
  the Non-U.S. Holder is an individual who was present in the United States for 183 or more days in the taxable year of the disposition and other conditions are met.
Backup Withholding and Information Reporting
In general, except in the case of certain exempt recipients (such as corporations), information reporting requirements will apply to dividends on shares of Common Stock or ADSs paid to U.S. Holders in the United States or through certain U.S. related financial intermediaries and to the proceeds received upon the sale, exchange or redemption of shares of Common Stock or ADSs by U.S. Holders within the United States or through certain U.S. related financial intermediaries. Furthermore, backup withholding (currently at a rate of 28 percent) may apply to those amounts if a U.S. Holder fails to provide an accurate tax identification number, to certify that such holder is not subject to backup withholding or to otherwise comply with the applicable requirements of the backup withholding requirements.
Dividends paid to a Non-U.S. Holder in respect of shares of Common Stock or ADSs, and proceeds received in the sale, exchange or redemption of shares of Common Stock or ADSs by a Non-U.S. Holder, generally, are exempt from information reporting and backup withholding under current U.S. federal income tax law. However, a Non-U.S. Holder may be required to provide certification of non-U.S. status in order to obtain that exemption. Persons required to establish their exempt status generally must provide such certification on IRS Form W-9, entitled Request for Taxpayer Identification Number and Certification, in the case of U.S. persons, and on IRS Form W-8BEN, entitled Certificate of Foreign Status (or other appropriate IRS Form W-8), in the case of non-U.S. persons.
Backup withholding is not an additional tax. The amount of backup withholding imposed on a payment to a U.S. Holder will be allowed as a credit against the holder’s U.S. federal income tax liability provided that the required information is properly furnished to the IRS.
THE SUMMARY OF U.S. FEDERAL INCOME AND JAPANESE TAX CONSEQUENCES SET OUT ABOVE IS INTENDED FOR GENERAL INFORMATION PURPOSES ONLY. INVESTORS IN THE COMMON STOCK OR ADSs ARE URGED TO CONSULT WITH THEIR OWN TAX ADVISORS WITH RESPECT TO THE PARTICULAR TAX CONSEQUENCES TO THEM OF OWNING OR DISPOSING OF COMMON STOCK OR ADSs, BASED ON THEIR PARTICULAR CIRCUMSTANCES.
F. Dividends and paying agents
Not applicable
G. Statement by experts
Not applicable

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H. Documents on display
Makita files its annual report on Form 20-F and press releases or reports for shareholders or investors on Form 6-K with the SEC. You may read and copy documents referred to in this annual report on Form 20-F that have been filed with the SEC at the SEC’s public reference room located at 100F Street, N.E., Room 1580, Washington, D.C. 20549 or by accessing the SEC’s home page (http://www.sec.gov)
I. Subsidiary information
Not applicable
Item 11. Quantitative and Qualitative Disclosures about Market Risk
Market Risk Exposure
Makita is exposed to various market risks, including those related to changes in foreign exchange rates, interest rates, and the prices of marketable securities and investment securities. In order to hedge the risks of fluctuations in foreign exchange rates and interest rates, Makita uses derivative financial instruments. Makita does not hold or use derivative financial instruments for trading purposes. Although the use of derivative financial instruments exposes Makita to the risk of credit-related losses in the event of nonperformance by counterparties, Makita believes that its counterparties are creditworthy because they are required to have a credit rating of a specified level or above, and Makita does not expect credit-related losses, if any, to be significant.
Equity and Debt Securities Price Risk
Makita classified investments of debt securities for current operations as marketable securities within current assets. Other investments are classified as investment securities as a part of investments and other assets in the consolidated balance sheets. Makita does not hold marketable securities and investment securities for trading purposes. The fair value of certain of these investments expose Makita to equity price risks. These investments are subject to changes in the market prices of the securities. The maturities and fair values of such marketable securities and investment securities at March 31, 2005 and 2006 were as follows:
                                                 
    Yen (millions)   U.S. Dollars (thousands)
    2005   2006   2006
    Carrying   Fair   Carrying   Fair   Carrying   Fair
    Amount   Value   Amount   Value   Amount   Value
             
Due within one year
  ¥ 53,504     ¥ 53,504     ¥ 42,810     ¥ 42,810     $ 365,897     $ 365,897  
Due after one year through five years
    2,343       2,348       2,455       2,436       20,983       20,821  
Due after five years
    2,150       2,144       1,986       1,880       16,974       16,068  
Indefinite periods
    1,614       1,614                          
Equity securities
    20,433       20,433       30,961       30,961       264,624       264,624  
             
 
  ¥ 80,044     ¥ 80,043     ¥ 78,212     ¥ 78,087     $ 668,478     $ 667,410  
             

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Foreign Exchange Risk
Makita’s international operations and indebtedness denominated in foreign currencies expose Makita to the risk of fluctuation in foreign currency exchange rates. To manage this exposure, Makita enters into certain foreign exchange contracts with respect to a part of such international operations and indebtedness. The following table provides information about Makita’s major derivative financial instruments related to foreign currency transactions as of March 31, 2005 and March 31, 2006. Figures are translated into yen at the rates prevailing at March 31, 2005 and March 31, 2006, together with the relevant weighted average contractual exchange rates at March 31, 2006. All of the foreign exchange contracts listed in the following table have contractual maturities in FY 2006 and 2007.
                                                                 
    Yen (millions) (except average contractual rates)     U.S. Dollars (thousands)  
    2005     2006     2006  
                    Average                     Average              
    Contract             contractual     Contract             contractual     Contract        
    amounts     Fair Value     rates     amounts     Fair Value     rates     amounts     Fair Value  
Foreign currency contracts;
                                                               
U.S.$/Yen
  ¥ 3,934     ¥ (112 )   ¥ 104.09     ¥ 4,368     ¥ (11 )   ¥ 116.49     $ 37,333     $ (94 )
Euro/Yen
    3,166       (36 )     137.05       4,148       (67 )     140.14       35,453       (573 )
A$/Yen
    329       (9 )     80.12       344       10       85.91       2,940       85  
STG/Yen
    129       (2 )     197.94       8             201.98       68        
Euro/STG
    1,413       16             1,421       (10 )           12,145       (85 )
Other
    1,299       6             1,538       8             13,145       69  
                             
Total
  ¥ 10,270     ¥ (137 )           ¥ 11,827     ¥ (70 )           $ 101,084     $ (598 )
                             -
Foreign currency swaps:
                                                               
U.S.$/Yen
  ¥ 749     ¥     ¥ 107.02     ¥ 9,099     ¥ (88 )   ¥ 116.65     $ 77,769     $ (752 )
Euro/Yen
                      1,133       (12 )     141.68       9,684       (103 )
CAN$/Yen
    424       (19 )     84.74       305             101.8       2,607        
A$/Yen
    3,144       (187 )     78.60       1,661       (32 )     83.06       14,197       (274 )
SFr./Yen
    174       (5 )     86.99       173       (8 )     86.45       1,478       (68 )
                             
Total
  ¥ 4,491     ¥ (211 )           ¥ 12,371     ¥ (140 )           $ 105,735     $ (1,197 )
                             -
Options purchased to sell foreign currencies:
                                                               
U.S.$/Yen
  ¥ 406     ¥ 1     ¥ 101.56     ¥     ¥     ¥     $     $  
Euro/Yen
    298       1       135.51                                
Other
    63                                            
                             
Total
  ¥ 767     ¥ 2             ¥     ¥             $     $  
                             -
Options written to buy foreign currencies:
                                                               
U.S.$/Yen
  ¥ 424     ¥ (8 )   ¥ 106.12     ¥     ¥     ¥     $     $  
Euro/Yen
    305       (3 )     138.84                                
Other
    67                                            
                             
Total
  ¥ 796     ¥ (11 )           ¥     ¥             $     $  
                             -

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Item 12. Description of Securities Other than Equity Securities
     Not applicable
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
A. Disclosure controls and procedures
Makita performed an evaluation of the effectiveness of the design and operation of its disclosure controls and procedures as of the end of the fiscal 2006. Disclosure controls and procedures are designed to ensure that the material financial and non-financial information required to be disclosed in the reports that Makita files under the Exchange Act is accumulated and communicated to its management including the chief executive officer and the principal accounting and financial officer, to allow timely decisions regarding required disclosure.
The Company’s disclosure controls and procedures also ensure that the reports that it files or submits under the Exchange Act are recorded, processed, summarized and reported within the time periods specified in the Commission’s rules and forms. The evaluation was performed under the supervision of Masahiko Goto, Makita’s Chief Executive Officer, President and Representative Director and Kenichiro Nakai, Makita’s Principal Financial and Accounting Officer, Director. Makita’s disclosure and controls and procedures are designed to provide reasonable assurance of achieving its objectives. Managerial judgment was necessary to evaluate the cost-benefit relationship of possible controls and procedures. Masahiko Goto and Kenichiro Nakai have concluded that Makita’s disclosure controls and procedures are effective at the reasonable assurance level.
B. Changes in internal control over financial reporting
There have been no changes in Makita’s internal control over financial reporting during fiscal 2006 that have materially affected, or are reasonably likely to materially affect, Makita’s internal control over financial reporting.
Item 16A. Audit Committee Financial Expert
Makita’s Board of Directors has determined that Akio Kondo qualifies as an “audit committee financial expert” as defined by the rules of the SEC. Mr. Kondo is not independent, as that term is defined in the listing standards of Nasdaq applicable to the Company. Mr. Kondo began his career at Makita in 1969, and from May 1979 to June 2004 he has worked in the field of finance and accounting. From April 1991, he served as an Assistant General Manager of the Accounting & Finance Department, and from October 1995 he served as a General Manager of the Accounting & Finance Department, the division responsible for Makita’s consolidated reporting. Mr. Kondo was elected as one of Makita’s corporate auditors at an ordinary general meeting of shareholders held in June 2004. See Item 6.A. for additional information regarding Mr. Kondo.
Item 16B. Code of ethics
On May 20, 2003, Makita adopted a code of ethics. On March 17, 2004, Makita amended the code of ethics to: (1) ensure the protection of individuals who report questionable behavior to our board of statutory auditors and (ii) clarify that waivers to our code of ethics for employees must be requested in writing to our board of statutory auditors and for executive officers, directors and statutory auditors can only be granted by the board of directors, only if truly necessary and warranted, and must be promptly disclosed to shareholders.

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Makita’s code of ethics is publicly available on our website at www.makita.co.jp.
If we make any substantive amendments to the code of ethics or grant any waivers, including any implicit waiver, from a provision of this code to our directors and executive officers, including our principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions, we will disclose the nature of such amendment or waiver on our website.
Item 16C. Principal Accountant Fees and Services
KPMG AZSA & Co. have served as our independent public accountants for each of the financial years in the three-year period ended March 31, 2006, for which audited financial statements appear in this annual report on Form 20-F.
The following table presents the aggregate fees for professional services and other services rendered by KPMG AZSA & Co. and the various member firms of KPMG International, a Swiss Cooperative to Makita in fiscal 2006 and fiscal 2005:
                 
    Yen (millions)  
    2005     2006  
Audit Fees (1)
  ¥ 189       248  
Audit- related Fees (2)
    14       31  
Tax Fees (3)
    66       74  
All Other Fees (4)
    83       71  
 
           
Total
  ¥ 352     ¥ 424  
 
           
 
(1)   Audit Fees consist of fees billed for the professional services rendered by the Independent Registered Public Accounting Firm for the audit of Makita’s annual or interim financial statements and services that are normally provided by the Independent  Registered Public Accounting Firm in connection with statutory and regulatory filings or engagement.
(2)   Audit-related Fees consist of fees billed for assurance and related services by the Independent Registered Public Accounting Firm that are reasonably related to employee benefit plan audits, and consultation concerning financial accounting and reporting standards.
(3)   Tax Fees include fees billed for the professional services rendered by the Independent Registered Public Accounting Firm for tax compliance and transfer pricing documentation.
(4)   All Other Fees comprise fees for all other services not included in any of other categories noted above.
Policy on Pre-Approval of Audit and Non-Audit Services of Independent Registered Public Accounting Firm
The Board of Statutory Auditors of Makita Corporation consisting of four members, including two outside corporate auditors, is responsible for the oversight of its Independent Registered Public Accounting Firm’s work. The Board of Statutory Auditors has established “Audit and Non-Audit Services Pre-approval Policies and Procedures,” effective as of August 7, 2003. The policies and procedures stipulate three means by which audit and non-audit services may be pre-approved, depending on the content of and the fee for the services.
Under the United States Sarbanes-Oxley Act of 2002 (the “Act”), the Board of Statutory Auditors is required to pre-approve all audit and non-audit services to be provided by the Independent Registered Public Accounting Firm to the Company in order to assure that they do not impair their independence from the Company. To implement these provisions of the Act, the US Securities and Exchange Commission has issued rules specifying the types of services that an Independent Registered Public Accounting Firm may not provide to its audit client, as well as the Board of Statutory Auditors’ administration of the engagement of the Independent Registered Public Accounting Firm.
Accordingly, the Board of Statutory Auditors has adopted this Audit and Non-Audit Services Pre-approval Policy and Procedure, which sets forth the policies, procedures and the conditions for which such services proposed to be performed by the Independent Registered Public Accounting Firm may be pre-approved. Under this policy, the Board of Statutory Auditors authorizes general pre-approval of all such services, including Audit Services, Audit-related Services, Tax Services and All other Services. Under General Pre-approval protocol, the pre-approved services do not require specific pre-approval from the Board of Statutory Auditors or its delegated member on a case-by-case basis.
The term of any general pre-approval is 12 months from the date of pre-approval, unless the Board of Statutory Auditors considers a different period and states otherwise in the relevant appendix. The Board of Statutory Auditors

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will annually review this policy, including the services that may be provided by the Independent Registered Public Accounting Firm without obtaining specific pre-approval from the Board of Statutory Auditors, and make any necessary or appropriate changes to this policy. This policy is designed (1) to be detailed as to the particular services to be provided by the independent auditor, (2) to ensure that the Board of Statutory Auditors is informed of each service provided by the independent auditor and (3) to ensure that the policies and procedures set forth herein do not include delegation of the Board of Statutory Auditors’ responsibilities under the US Securities Exchange Act of 1934 to management. Nothing in this policy shall be interpreted to be a delegation of the Board of Statutory Auditors’ responsibilities under the Securities Exchange Act of 1934 to management of the Company.
Item 16D. Exemptions from the Listing Standards for Audit Committees
Makita does not have an audit committee and is relying on the general exemption contained in Rule 10A-3(c)(3) under the Exchange Act, which provides and exemption from NASDAQ’s listing standards relating to audit committees for foreign companies such as Makita, that has a board of corporate auditors. Makita’s reliance on Rule 10A-3(c)(3) does not, in its opinion, materially adversely affect the ability of its board of corporate auditors to act independently and to satisfy the other requirements of Rule 10A-3.
Item 16E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers
The following table sets out all purchases of common stock of the Company by the Company during the fiscal year ended March 31, 2006. The Company did not resolve any repurchase plan or program by the board of directors or Annual General Meeting of Shareholders, therefore, there is no publicly announced plan or program regarding repurchase of common stock. The reason for these repurchases of Common Stock is the purchase requests of holders of shares of common stock constituting less than one full unit in accordance with the provisions of the Share Handling Regulations of the Company.
                 
    Total Number of     Average Price Paid  
    Shares Purchased     per Share  
Period   (shares)     (¥)  
From April 1, 2005 to April 30, 2005
    2,377       1,928  
From May 1, 2005to May 31, 2005
    3,386       2,049  
From June 1, 2005 to June 30, 2005
    10,289       2,199  
From July 1, 2005 to July 31, 2005
    15,105       2,234  
From August 1, 2005 to August 31, 2005
    13,663       2,328  
From September 1, 2005 to September 30, 2005
    10,542       2,229  
From October 1, 2005 to October 30, 2005
    6,132       2,320  
From November 1, 2005 to November 30, 2005
    1,889       2,806  
From December 1, 2005 to December 31, 2005
    3,212       2,908  
From January 1, 2006 to January 31, 2006
    1,316       3,037  
From February 1, 2006 to February 28, 2006
    1,374       3,421  
From March 1, 2006 to March 31, 2006
    892       3,452  
 
           
Total Number of Shares Purchased and Average Price Paid per Share
    70,177       2,335  
 
           
PART III
Item 17. Financial Statements
We have responded to Item 18 in lieu of responding to this Item.
Item 18. Financial Statements
The following financial statements are filed as part of this annual report on Form 20-F.

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Item 19. Exhibits
     
1.1
  Articles of Incorporation, as amended and effective as of June 29, 2006 (English translation)
 
   
1.2
  Regulations of Board of Directors, as amended and effective as of June 29, 2006 (English translation)
 
   
1.3
  The Share Handling Regulations, as amended and effective as of June 29, 2006 (English translation)
 
   
1.4
  Regulations of Board of Statutory Auditors effective as of July 7, 2006 (English translation)
 
   
4.1
  Summary translation of the Sponsorship Agreement, dated January 17, 2005 and as supplemented on May 26, 2005, among Makita Corporation, Joyama Kaihatsu Ltd., and Tokyo Tatemono Co., Ltd., relating to the civil rehabilitation of Joyama Kaihatsu Ltd and the operation of Castle Hill Country Club. (incorporated by reference to Exhibit 4.1 of Makita’s annual report on Form 20-F filed with the SEC on July 5, 2005 (file no.000-12602))
 
   
12.1
  302 Certification of President and Representative Director
 
   
12.2
  302 Certification of Director, General Manager of Administration Headquarters
 
   
13.1
  906 Certifications of President and Representative Director and Director, General Manager of Administration Headquarters

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SIGNATURES
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.
         
  MAKITA CORPORATION    
       
  By:   /s/ Masahiko Goto    
  Name:   Masahiko Goto   
  Title:   President and Representative Director   
 
Date: July 7, 2006

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Makita Corporation and Consolidated Subsidiaries
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES
     
  F-2
  F-3 and F-4
  F-5
  F-6
  F-7 and F-8
  F-9 to F-45
 
   
(Financial Statements of 50% or less owned persons accounted for by the equity method have been omitted because they are not applicable.)
   
 
   
Schedules:
   
 
   
  F-47
(All schedules not listed above have been omitted because they are not applicable, or are not required, or the information has been otherwise supplied in the consolidated financial statements.)

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Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors
of Makita Corporation:
We have audited the consolidated financial statements of Makita Corporation (a Japanese corporation) and subsidiaries as listed in the accompanying index. In connection with our audits of the consolidated financial statements, we have also audited the financial statement schedule as listed in the accompanying index. These consolidated financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Makita Corporation and subsidiaries as of March 31, 2005 and 2006, and the results of their operations and their cash flows for each of the years in the three-year period ended March 31, 2006, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
The accompanying consolidated financial statements as of and for the year ended March 31, 2006, have been translated into United States dollars solely for the convenience of the reader. We have audited the translation and, in our opinion, the consolidated financial statements, expressed in yen, have been translated into dollars on the basis set forth in Note 4 to the consolidated financial statements.
/s/ KPMG AZSA & CO.


Tokyo, Japan
April 27, 2006

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MAKITA CORPORATION AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31, 2005 AND 2006
A S S E T S
                         
    Yen     U.S. Dollars  
    (millions)     (thousands)  
    2005     2006     2006  
CURRENT ASSETS:
                       
Cash and cash equivalents
  ¥ 25,384     ¥ 39,054     $ 333,795  
Time deposits
    7,867       1,845       15,769  
Marketable securities
    57,938       47,773       408,316  
Trade receivables-
                       
Notes
    1,687       1,936       16,547  
Accounts
    38,997       46,074       393,795  
Less- Allowance for doubtful receivables
    (1,178 )     (1,016 )     (8,684 )
Inventories
    66,003       79,821       682,231  
Deferred income taxes
    3,831       3,661       31,291  
Prepaid expenses and other current assets
    7,363       8,621       73,684  
 
                 
Total current assets
    207,892       227,769       1,946,744  
 
                 
PROPERTY, PLANT AND EQUIPMENT, AT COST:
                       
Land
    17,673       17,737       151,598  
Buildings and improvements
    51,085       55,470       474,103  
Machinery and equipment
    73,356       74,501       636,761  
Construction in progress
    790       2,340       20,000  
 
                 
 
    142,904       150,048       1,282,462  
Less- Accumulated depreciation
    (90,080 )     (90,845 )     (776,453 )
 
                 
 
    52,824       59,203       506,009  
 
                 
INVESTMENTS AND OTHER ASSETS:
                       
Investment securities
    22,106       30,439       260,162  
Goodwill
          779       6,658  
Other intangible assets, net
    841       1,354       11,573  
Deferred income taxes
    390       698       5,966  
Other assets
    5,851       5,796       49,538  
 
                 
 
    29,188       39,066       333,897  
 
                 
 
  ¥ 289,904     ¥ 326,038     $ 2,786,650  
 
                 
The accompanying notes to consolidated financial statements are
an integral part of these balance sheets.

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Table of Contents

 
MAKITA CORPORATION AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31, 2005 AND 2006
LIABILITIES AND SHAREHOLDERS’ EQUITY
                         
    Yen     U.S. Dollars  
    (millions)     (thousands)  
    2005     2006     2006  
CURRENT LIABILITIES:
                       
Short-term borrowings
  ¥ 9,060     ¥ 1,728     $ 14,769  
Trade notes and accounts payable
    10,574       13,908       118,872  
Other payables
    3,197       5,417       46,299  
Accrued expenses
    5,998       6,427       54,932  
Accrued payroll
    7,695       8,224       70,291  
Club members’ deposits
    12,836              
Income taxes payable
    5,695       6,701       57,274  
Deferred income taxes
    118       176       1,504  
Other liabilities
    3,053       3,380       28,889  
 
                 
Total current liabilities
    58,226       45,961       392,830  
 
                 
LONG-TERM LIABILITIES:
                       
Long-term indebtedness
    88       104       889  
Accrued retirement and termination benefits
    5,126       2,901       24,795  
Deferred income taxes
    4,538       7,923       67,718  
Other liabilities
    887       930       7,948  
 
                 
 
    10,639       11,858       101,350  
 
                 
MINORITY INTERESTS
    1,399       1,635       13,974  
 
                 
COMMITMENTS AND CONTINGENT LIABILITIES
                 
SHAREHOLDERS’ EQUITY:
                       
Common stock,
                       
Authorized - 287,000,000 shares in 2005
                       
496,000,000 shares in 2006
                       
Issued and outstanding
                       
- 148,008,760 shares and 143,777,607 shares in 2005
                       
144,008,760 shares and 143,711,766 shares in 2006
    23,805       23,805       203,462  
Additional paid-in capital
    45,430       45,437       388,350  
Legal reserve
    5,669       5,669       48,453  
Retained earnings
    157,502       186,586       1,594,752  
Accumulated other comprehensive income (loss)
    (9,249 )     5,345       45,684  
Treasury stock, at cost: - 4,231,153 shares in 2005
                       
296,994 shares in 2006
    (3,517 )     (258 )     (2,205 )
 
                 
 
    219,640       266,584       2,278,496  
 
                 
 
  ¥ 289,904     ¥ 326,038     $ 2,786,650  
 
                 
The accompanying notes to consolidated financial statements are
an integral part of these balance sheets.

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Table of Contents

 
MAKITA CORPORATION AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED MARCH 31, 2004, 2005 AND 2006
                                 
    Yen     U.S. Dollars  
    (millions)     (thousands)  
    2004     2005     2006     2006  
NET SALES
  ¥ 184,117     ¥ 194,737     ¥ 229,075     $ 1,957,906  
Cost of sales
    110,322       113,323       132,897       1,135,872  
 
                       
GROSS PROFIT
    73,795       81,414       96,178       822,034  
Selling, general and administrative expenses
    53,698       52,646       58,726       501,931  
Losses (gains) on disposals or sales of property, plant and equipment
    (2,379 )     1,234       (8,326 )     (71,162 )
Impairment of long-lived assets
    7,780       577              
Transfer to the government of the substitutional portion of pension plan
          (4,441 )            
 
                       
OPERATING INCOME
    14,696       31,398       45,778       391,265  
 
                       
OTHER INCOME (EXPENSES):
                               
Interest and dividend income
    869       1,157       1,301       11,120  
Interest expense
    (605 )     (588 )     (364 )     (3,111 )
Exchange gains (losses) on foreign currency transactions, net
    (202 )     37       (258 )     (2,205 )
Realized gains on securities, net
    555       453       2,918       24,940  
Other, net
    857       161       (232 )     (1,983 )
 
                       
Total
    1,474       1,220       3,365       28,761  
 
                       
INCOME BEFORE INCOME TAXES
    16,170       32,618       49,143       420,026  
 
                       
PROVISION FOR INCOME TAXES:
                               
Current
    8,745       10,071       9,365       80,043  
Deferred
    (266 )     411       (633 )     (5,410 )
 
                       
Total
    8,479       10,482       8,732       74,633  
 
                       
NET INCOME
  ¥ 7,691     ¥ 22,136     ¥ 40,411     $ 345,393  
 
                       
                                 
    Yen     U.S. Dollars  
    2004     2005     2006     2006  
PER SHARE OF COMMON STOCK AND ADS:
                               
Net income
                               
Basic
  ¥ 53.2     ¥ 153.9     ¥ 281.1     $ 2.40  
Diluted
    51.9       148.8       281.1       2.40  
Cash dividends paid for the year
    18.0       24.0       55.0       0.47  
The accompanying notes to consolidated financial statements are
an integral part of these statements.

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MAKITA CORPORATION AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
FOR THE YEARS ENDED MARCH 31, 2004, 2005 AND 2006
                                 
    Yen     U.S. Dollars  
    (millions)     (thousands)  
    2004     2005     2006     2006  
COMMON STOCK:
                               
Beginning balance
  ¥ 23,803     ¥ 23,803     ¥ 23,805     $ 203,462  
Conversion of convertible bonds; 1,768 shares in 2005
          2              
 
                       
Ending balance
  ¥ 23,803     ¥ 23,805     ¥ 23,805     $ 203,462  
 
                       
ADDITIONAL PAID-IN CAPITAL:
                               
Beginning balance
  ¥ 45,419     ¥ 45,421     ¥ 45,430     $ 388,290  
Conversion of convertible bonds
          2              
Gain on sales of treasury stock
    2       7       7       60  
 
                       
Ending balance
  ¥ 45,421     ¥ 45,430     ¥ 45,437     $ 388,350  
 
                       
LEGAL RESERVE:
                               
Beginning balance
  ¥ 5,669     ¥ 5,669     ¥ 5,669     $ 48,453  
 
                       
Ending balance
  ¥ 5,669     ¥ 5,669     ¥ 5,669     $ 48,453  
 
                       
RETAINED EARNINGS:
                               
Beginning balance
  ¥ 137,753     ¥ 138,819     ¥ 157,502     $ 1,346,171  
Net income
    7,691       22,136       40,411       345,393  
Cash dividends
    (2,610 )     (3,453 )     (7,907 )     (67,581 )
Retirement of treasury stock
    (4,015 )           (3,420 )     (29,231 )
 
                       
Ending balance
  ¥ 138,819     ¥ 157,502     ¥ 186,586     $ 1,594,752  
 
                       
ACCUMULATED OTHER COMPREHENSIVE INCOME, NET OF TAX:
                               
Beginning balance
  ¥ (25,134 )   ¥ (17,048 )   ¥ (9,249 )   $ (79,051 )
Other comprehensive income for the year
    8,086       7,799       14,594       124,735  
 
                       
Ending balance
  ¥ (17,048 )   ¥ (9,249 )   ¥ 5,345     $ 45,684  
 
                       
TREASURY STOCK:
                               
Beginning balance
  ¥ (5,110 )   ¥ (3,316 )   ¥ (3,517 )   $ (30,060 )
Purchases
    (2,227 )     (208 )     (164 )     (1,402 )
Retirement and sales
    4,021       7       3,423       29,257  
 
                       
Ending balance
  ¥ (3,316 )   ¥ (3,517 )   ¥ (258 )   $ (2,205 )
 
                       
DISCLOSURE OF COMPREHENSIVE INCOME:
                               
Net income for the year
  ¥ 7,691     ¥ 22,136     ¥ 40,411     $ 345,393  
Other comprehensive income for the year
    8,086       7,799       14,594       124,735  
 
                       
Total comprehensive income for the year
  ¥ 15,777     ¥ 29,935     ¥ 55,005     $ 470,128  
 
                       
The accompanying notes to consolidated financial statements are
an integral part of these statements.

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MAKITA CORPORATION AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED MARCH 31, 2004, 2005 AND 2006
                                 
    Yen     U.S. Dollars  
    (millions)     (thousands)  
    2004     2005     2006     2006  
CASH FLOWS FROM OPERATING ACTIVITIES:
                               
Net income
  ¥ 7,691     ¥ 22,136     ¥ 40,411     $ 345,393  
Adjustments to reconcile net income to net cash provided by operating activities-
                               
Depreciation and amortization
    7,963       5,381       5,922       50,615  
Deferred income taxes
    (266 )     411       (633 )     (5,410 )
Realized gains on securities, net
    (555 )     (453 )     (2,918 )     (24,940 )
Losses (gains) on disposals or sales of property, plant and equipment
    (2,379 )     1,234       (8,326 )     (71,162 )
Impairment of long-lived assets
    7,780       577              
Changes in assets and liabilities-
                               
Trade receivables
    (1,610 )     (1,995 )     (5,011 )     (42,829 )
Inventories
    6,193       (9,203 )     (8,646 )     (73,897 )
Trade notes and accounts payables and accrued expenses
    3,175       3,069       5,121       43,769  
Income taxes payable
    2,368       (770 )     272       2,325  
Accrued retirement and termination benefits
    (562 )     (4,900 )     (346 )     (2,957 )
Other, net
    (857 )     1,355       (779 )     (6,659 )
 
                       
Net cash provided by operating activities
    28,941       16,842       25,067       214,248  
 
                       
CASH FLOWS FROM INVESTING ACTIVITIES:
                               
Capital expenditures
    (4,494 )     (6,655 )     (11,383 )     (97,291 )
Purchases of available-for-sale securities
    (26,691 )     (20,091 )     (19,449 )     (166,231 )
Purchases of held-to-maturity securities
    (8,261 )     (1,753 )     (1,799 )     (15,376 )
Proceeds from sales of available-for-sale securities
    4,090       2,422       16,750       143,162  
Proceeds from maturities of available-for-sale securities
    14,100       12,250       17,400       148,718  
Proceeds from maturities of held-to-maturity securities
          13,510       200       1,709  
Proceeds from sales of property, plant and equipment
    5,154       320       1,012       8,650  
Decrease (increase) in time deposits
    (1,162 )     (38 )     6,514       55,675  
Cash paid for acquisition of business
                (1,204 )     (10,291 )
Other, net
    2       189       (386 )     (3,298 )
 
                       
Net cash provided by (used in) investing activities
    (17,262 )     154       7,655       65,427  
 
                       
CASH FLOWS FROM FINANCING ACTIVITIES:
                               
Increase (decrease) in short-term borrowings
    (882 )     693       1,073       9,171  
Redemption of bonds
          (12,990 )            
Repayment of long-term indebtedness
                (6,150 )     (52,564 )
Repayment of club members’ deposits
    (860 )     (209 )     (6,375 )     (54,487 )
Purchases of treasury stock, net
    (2,220 )     (194 )     (154 )     (1,316 )
Cash dividends paid
    (2,610 )     (3,453 )     (7,907 )     (67,581 )
Other, net
    (24 )     (24 )     (35 )     (300 )
 
                       
Net cash used in financing activities
    (6,596 )     (16,177 )     (19,548 )     (167,077 )
 
                       
The accompanying notes to consolidated financial statements are
an integral part of these statements.

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MAKITA CORPORATION AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED MARCH 31, 2004, 2005 AND 2006
                                 
    Yen     U.S. Dollars  
    (millions)     (thousands)  
    2004     2005     2006     2006  
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS
  ¥ (877 )   ¥ (11 )   ¥ 496     $ 4,240  
 
                       
NET CHANGE IN CASH AND CASH EQUIVALENTS
    4,206       808       13,670       116,838  
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR
    20,370       24,576       25,384       216,957  
 
                       
CASH AND CASH EQUIVALENTS, END OF YEAR
  ¥ 24,576     ¥ 25,384     ¥ 39,054     $ 333,795  
 
                       
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
                               
Cash paid during the year for-
                               
Interest
  ¥ 605     ¥ 593     ¥ 458     $ 3,915  
Income taxes
    6,377       10,841       9,093       77,718  
 
                       
NON-CASH INVESTING AND FINANCING ACTIVITIES:
                               
Amount due seller inconnect with business acquisition
  ¥     ¥     ¥ 649     $ 5,547  
Release from obligation for club members’ deposits
                6,461       55,222  
Reduction of short-term borrowings and long-term indebtedness by deconsolidation of a subsidiary
                2,177       18,607  
The accompanying notes to consolidated financial statements are
an integral part of these statements.

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MAKITA CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1.   DESCRIPTION OF BUSINESS
 
    Makita Corporation (the “Company”) is a recognized leader in manufacture and sale of portable electric power tools. The Company and its consolidated subsidiaries’ main products include impact drivers, circular saws, jig saws, planers, drills, rotary hammers, grinders and slide compound saws. The Company and its consolidated subsidiaries (collectively “Makita”) also manufacture and sell stationary woodworking machines and pneumatic tools as well as garden tools.
 
    Domestic sales in Japan are made by the Company, while overseas sales are made under the Makita or maktec brand name, almost entirely through sales subsidiaries and distributors. Approximately 81.8% of consolidated net sales for the year ended March 31, 2006, were generated from customers outside Japan, with 20.8% from North America, 39.5% from Europe and 21.5% from Asia and other areas.
 
    Makita’s manufacturing and assembly operations are conducted primarily at three plants in Japan and seven plants overseas, located in the United States, Germany, the United Kingdom, Brazil, China (two plants) and Canada.
 
2.   BASIS OF PRESENTING FINANCIAL STATEMENTS
 
    Foreign subsidiaries translate their financial statements into Japanese yen from each of their functional currencies. The accounts and the financial statements of the Company and domestic subsidiaries are maintained and reported in their functional currency, the Japanese yen.
 
    The books of the Company and its domestic subsidiaries are maintained in conformity with Japanese accounting principles, while foreign subsidiaries maintain their books in conformity with the standards of their country of domicile.
 
    The accompanying consolidated financial statements reflect all necessary adjustments, not recorded in the Company’s and its consolidated subsidiaries’ books, to present them in conformity with U.S. generally accepted accounting principles (“U.S. GAAP”).
 
3.   SIGNIFICANT ACCOUNTING AND REPORTING POLICIES
  (a)   Principles of Consolidation
 
      The accompanying consolidated financial statements include the accounts of the Company, all of its majority owned subsidiaries and those variable interest entities where Makita is the primary beneficiary under Financial Accounting Standards Board (“FASB”) Interpretation No. 46 (revised December 2003) (“FIN 46R”), “Consolidation of Variable Interest Entities.” All significant inter-company balances and transactions have been eliminated in consolidation. Makita currently does not have any consolidated Variable Interest Entities as set out in FIN 46R.
 
  (b)   Foreign Currency Translation
 
      Under the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 52, “Foreign Currency Translation,” overseas subsidiaries’ assets and liabilities denominated in their local foreign currencies are translated at the exchange rate in effect at each fiscal year-end and income and expenses are translated at the average rates of exchange prevailing during each fiscal year. The local currencies of the overseas subsidiaries are regarded as their functional currencies. The resulting currency translation adjustments are included in accumulated other comprehensive income in shareholders’ equity.

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      Gains and losses resulting from all foreign currency transactions, including foreign exchange contracts, and translation of receivables and payables denominated in foreign currencies are included in other income (expenses).
 
  (c)   Cash equivalents
 
      For purposes of the consolidated balance sheets and the consolidated statements of cash flows, Makita considers highly liquid investments with an original maturity of three months or less at the date of purchase to be cash equivalents.
 
  (d)   Marketable and Investment Securities
 
      Makita accounts for marketable and investment securities in accordance with SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities,” which requires all investments in debt and marketable equity securities to be classified as either trading, available-for-sale securities or held-to-maturity securities. Makita classifies investments in debt and marketable equity securities as available-for-sale, or held-to-maturity securities. Makita does not hold any marketable and investment securities, which are bought and held primarily for the purpose of sale in the near term.
 
      Except for non-marketable equity securities, available-for-sale securities are reported at fair value, and unrealized gains or losses are recorded as a separate component of accumulated other comprehensive income (loss), net of applicable income taxes. Non-marketable equity securities are carried at cost and reviewed periodically for impairment. Held-to-maturity securities are reported at amortized cost, adjusted for the amortization or accretion of premiums or discounts.
 
      A decline in fair value of any available-for-sale or held-to-maturity security below the amortized cost basis that is deemed to be other-than-temporary results in a write-down of the amortized cost basis to the fair value as a new cost basis and the amount of the write-down is included in earnings.
 
      Available-for-sale securities are periodically reviewed for other-than-temporary declines on criteria that include the length and magnitude of decline, the financial condition and prospects of the issuer, Makita’s intent and ability to retain the investment for a period of time to allow for recovery in market value and other relevant factors.
 
      Held-to-maturity securities are periodically evaluated for possible impairment by taking into consideration the financial condition, business prospects and credit worthiness of the issuer. Impairment to be recognized is measured based on the amount by which the carrying amount of the investment exceeds the fair value of the investment. Fair value is determined based on quoted market prices or other valuation techniques as appropriate.
 
      Makita classifies marketable securities in current assets which are available for current operations. Other investments are classified as investment securities as a part of non-current investments and other assets in the consolidated balance sheets.
 
      The cost of a security sold or the amount reclassified out of accumulated other comprehensive income (loss) into earnings is determined by the average cost method.

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  (e)   Allowance for Doubtful Receivables
 
      Allowance for doubtful receivables represents the Makita’s best estimate of the amount of probable credit losses in its existing receivables. The allowance is determined based on, but is not limited to, historical collection experience adjusted for the effects of the current economic environment, assessment of inherent risks, aging and financial performance. Account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote.
 
  (f)   Inventories
 
      Inventory costs include raw materials, labor and manufacturing overheads. Inventories are valued at the lower of cost or market price, with cost determined principally based on the average cost method. Makita estimates the obsolescence of inventory based on the difference between the cost of inventory and its estimated market value reflecting certain assumptions about anticipated future demand. The carrying value of inventory is then reduced to account for such obsolescence. Once inventory items are written-down or written-off, such items are not written-up subsequently. All existing and anticipated modifications to product models are evaluated against on-hand inventories, and are adjusted for potential obsolescence.
 
  (g)   Property, Plant and Equipment and Depreciation
 
      For the Company, depreciation of property, plant and equipment is computed principally by using the declining-balance method over the estimated useful lives. Most of the consolidated subsidiaries have adopted the straight-line method for computing depreciation. The depreciation period generally ranges from 10 years to 50 years for buildings and improvements and from 3 years to 10 years for machinery and equipment. The cost and accumulated depreciation and amortization applicable to assets retired are removed from the accounts and any resulting gain or loss is recognized. Betterments, renewals and extraordinary repairs that extend the life of the assets are capitalized. Other maintenance and repair costs are expensed as incurred.
 
      Depreciation expense for the years ended March 31, 2004, 2005 and 2006 amounted to ¥7,692 million, ¥5,175 million and ¥5,710 million, respectively, which included amortization of capitalized lease equipment.
 
      Certain leased buildings, improvements, machinery and equipment are accounted for as capital leases in conformity with SFAS No. 13, “Accounting for Leases.” The aggregate cost included in property, plant and equipment and related accumulated amortization as of March 31, 2005 and 2006, was as follows:
                         
    Yen   U.S. Dollars
    (millions)   (thousands)
    2005   2006   2006
Aggregate cost
  ¥ 677     ¥ 656     $ 5,607
Accumulated amortization
    533       510       4,359

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  (h)   Goodwill and Other Intangible Assets
 
      Makita follows the provisions of SFAS No. 141 and SFAS No. 142. SFAS No. 141, “Business Combinations” requires the use of only the purchase method of accounting for business combinations and refines the definition of intangible assets acquired in a purchase business combination. SFAS No. 142, “Goodwill and Other Intangible Assets” eliminates the amortization of goodwill and instead requires annual impairment testing thereof. SFAS No. 142 also requires acquired intangible assets with a definite useful life to be amortized over their respective estimated useful lives and reviewed for impairment in accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”. Any acquired intangible asset determined to have an indefinite useful life is not amortized, but instead is tested for impairment based on its fair value until its life would be determined to no longer be indefinite. In connection with the impairment evaluation, SFAS No. 142 requires Makita to perform an assessment of whether there is an indication that goodwill is impaired. To accomplish this, Makita identifies its reporting units, determines the carrying value of each reporting unit by assigning the assets and liabilities, including existing goodwill and intangible assets to those reporting units, and determines the fair value of each reporting unit.
 
  (i)   Environmental Liabilities
 
      Liabilities for environmental remediation and other environmental costs are accrued when environmental assessments or remedial efforts are probable and the costs can be reasonably estimated. Such liabilities are adjusted as further information develops or circumstances change. Costs of future obligations are not discounted to their present values.
 
  (j)   Research and Development Costs and Advertising Costs
 
      Research and development costs, included in selling, general and administrative expenses in the consolidated statements of income, are expensed as incurred and totaled ¥4,377 million, ¥ 4,446 million and ¥4,826 million ($41,248 thousand) for the years ended March 31, 2004, 2005 and 2006, respectively.
 
      Advertising costs are also expensed as incurred and totaled ¥3,797 million, ¥4,381 million and ¥5,138 million ($43,915 thousand) for the years ended March 31, 2004, 2005 and 2006, respectively.
 
  (k)   Shipping and Handling Costs
 
      Shipping and handling costs, which mainly include transportation to customers, are included in selling, general and administrative expenses in the consolidated statements of income. Shipping and handling costs were ¥4,418 million, ¥5,305 million and ¥6,774 million ($57,897 thousand) for the years ended March 31, 2004, 2005and 2006, respectively.
 
  (l)   Income Taxes
 
      Makita accounts for income taxes in accordance with the provision of SFAS No. 109, “Accounting for Income Taxes,” which requires an asset and liability approach for financial accounting and reporting for income taxes. Deferred income tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss carryforwards. Deferred income tax assets and liabilities are measured using the enacted tax rates expected to apply to taxable income in the years the temporary differences and carryforwards are expected to be recovered or settled. The effect on deferred income tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
 
  (m)   Product Warranties
 
      A liability for the estimated product warranty related cost is established at the time revenue is recognized and is included in accrued expenses and cost of sales. Estimates for accrued product warranty costs are primarily based on historical experience, and are affected by ongoing product failure rates, specific product class failures outside of the baseline experience, material usage and service delivery costs incurred in correcting a product failure.

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  (n)   Pension Plans
 
      Makita accounts for pension plans in accordance with the provisions of SFAS No. 87, “Employers’ Accounting for Pensions.” Under SFAS No. 87, changes in the amount of either the projected benefit obligation or plan assets resulting from actual results different from that assumed and from changes in assumptions can result in gains and losses to be recognized in the consolidated financial statements in the future periods. Amortization of an unrecognized net gain or loss is included as a component of the net periodic benefit plan cost for a year if, as of the beginning of the year, that unrecognized net gain or loss exceeds 10 percent of the greater of (1) the projected benefit obligation or (2) the fair value of that plan’s assets. In such cases, the amount of amortization recognized is the resulting excess divided by the average remaining service period of active employees expected to receive benefits under the plan.
 
  (o)   Earnings Per Share
 
      Basic earnings per share is computed by dividing net income available to common shareholders by the weighted-average number of common shares outstanding during each year. Diluted earnings per share reflects the potential dilution computed on the basis that all convertible bonds had been converted at the beginning of the year or at the time of issuance unless they were antidilutive.
 
  (p)   Impairment of Long-Lived Assets
 
      Makita accounts for impairment of long lived assets with finite useful lives in accordance with the provisions of SFAS No. 144, “Accounting for the Impairment or Disposal of Long-lived Assets.” Long-lived assets, such as property, plant and equipment, and certain intangible assets subject to amortization, are reviewed for impairment whenever events or charges in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to its estimated undiscounted future cash flow. An impairment charge is recognized in the amount by which the carrying amount of the asset exceeds the fair value of the asset. The fair value is determined by independent third party appraisal, projected discounted cash flows or other valuation techniques as appropriate. Assets to be disposed of are separately presented in the balance sheet and reported at the lower of the carrying amount or fair value less costs to sell, and are no longer depreciated.
 
  (q)   Derivative Financial Instruments
 
      Makita conforms to SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities” as amended. Makita recognizes all derivative instruments as either assets or liabilities in the consolidated balance sheets and measure those instruments at fair values. The accounting for changes in the fair value of a derivative instrument depends on whether it has been designated and qualifies as part of a hedging relationship, and on the type of hedging relationship.
 
      Makita employs derivative financial instruments, including forward foreign currency exchange contracts, foreign currency options, interest rate swaps and currency swap agreements to manage its exposure to fluctuations in foreign currency exchange rates and interest rates. Makita dose not use derivatives for speculation or trading purpose. Changes in the fair value of derivatives are recorded each period in current earnings depending on whether a derivative is designated as part of a hedge transaction and the type of hedge transaction. The ineffective portion of all hedges is recognized currently in operations.

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  (r)   Use of Estimates in the Preparation of Financial Statements
 
      The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosures of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
 
      Makita has identified the following areas where it believes assumptions and estimates are particularly critical to the consolidated financial statements. These are revenue recognition, determination of an allowance for doubtful receivables, impairment of long-lived assets, realizability of deferred income tax assets, the determination of unrealized losses on securities for which the decline in market value is considered to be other than temporary, the actuarial assumptions on retirement and termination benefit plans and valuation of inventories.
 
  (s)   Revenue Recognition
 
      Makita recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred or services are rendered, the sales price is fixed and determinable and collectibility is reasonably assured. Makita believes the foregoing conditions are satisfied upon shipment or delivery of the product depending on the terms of the sales arrangement.
 
      Makita sells its products outside of Japan directly to retail customers pursuant to sales contracts and purchase orders. Within Japan, the Company mainly utilizes wholesalers, which in turn, provide the products to their associated retail customers. Arrangements with wholesalers are subject to customary terms and conditions evidenced by signed contractual arrangements. The use of wholesalers is a customary point of sale business practice in Japan for which many companies across multiple industries participate.
 
      Makita recognizes revenue to its wholesale customers upon shipment. Makita believes recognition of revenue at this point is appropriate because (i) the title and risk of loss passes to the wholesaler upon shipment of a product to the wholesaler; (ii) Makita is not contractually obligated nor has Makita accepted returns of the product historically from the wholesaler other than in the event of product defect; (iii) payment terms are established consistent with Makita’s normal payment terms for all other customers; (iv) payment terms are not linked contractually nor practically to the payment of the wholesalers invoices by its retail customers and; (v) sales incentives are offered directly to wholesalers under terms and conditions similar to arrangements offered to other customers and are in no way established to provide relief in lieu of returned products.
 
      Furthermore, Makita periodically reviews readily available financial statements and other market data on certain of its wholesale customers in order to assess their overall financial viability for the purposes of establishing credit limits. Within Japan, the Company also requires on average, two months worth of estimated sales be held in the form of cash collateral with an independent third party or that the Company be granted a security interest in the wholesaler’s assets of an equivalent value.
 
      Makita offers sales incentives to qualifying customers through various incentive programs. Sales incentives primarily involve volume-based rebates, cooperative advertisings and cash discounts, and are accounted for in accordance with the Emerging Issues Task Force Issue No. 01-9 (“EITF 01-9”), “Accounting for Consideration by a Vendor to a Customer (including a Reseller of vendor’s product).”
 
      Volume-based rebates are provided to customers only if customers attain a pre-determined cumulative level of revenue transactions within a specified period of one year or less. Liabilities for volume-based rebates are recognized with a corresponding reduction of revenue for the expected sales incentive at the time the related revenue is recognized, and are based on the estimation of sales volume reflecting the historical performance of individual customers.

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      Cooperative advertisings are provided to certain customers as contribution or sponsored fund for advertisements. Under cooperative advertising programs, Makita does not receive an identifiable benefit sufficiently separable from its customers. Accordingly, cooperative advertisings are also accounted as a reduction of revenue.
 
      Cash discounts are provided as a certain percentage of the invoice price as predetermined by spot contracts or based on contractually agreed upon amounts with customers. Cash discounts are recognized as a reduction of revenue at the time the related revenue is recognized based on Makita’s ability to reliably estimate such future discounts to be taken. Cash discounts are substantially all taken within 30 days following the date of sale. Estimates of expected cash discounts are evaluated and adjusted periodically based on actual sales transactions and historical trend.
 
      When repairs are made and charged to customers, the revenue from this source is recognized when the repairs have been completed and the item is shipped to the customer.
 
  (t)   New Accounting Standards
 
      In November 2004, the FASB issued SFAS No. 151, “Inventory Costs – an amendment of ARB No. 43, Chapter 4” (“SFAS No. 151”). SFAS No. 151 amends the guidance in ARB No. 43, Chapter 4, “Inventory Pricing,” to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material (spoilage). Among other provisions, the new statement requires that items such as idle facility expense, excessive spoilage, double freight, and rehandling costs be recognized as current period charges regardless of whether they meet the criterion of “so abnormal” as stated in ARB No. 43. Additionally, SFAS No. 151 requires that the allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. SFAS No. 151 is effective for the year ended March 31, 2007. Makita does not expect the adoption of SFAS No. 151 will have a material impact on its consolidated results of operations and financial condition.
 
      In December 2004, the FASB issued SFAS No. 153, “Exchanges of Non-monetary Assets – an amendment of APB Opinion No. 29.” SFAS No. 153 eliminates the exception from fair value measurement for non-monetary exchanges of similar productive assets in paragraph 21(b) of APB Opinion No. 29, “Accounting for Non-monetary Transactions,” and replaces it with an exception for exchanges that do not have commercial substance. SFAS No. 153 specifies that a non-monetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. SFAS No. 153 is effective for fiscal periods beginning after June 15, 2005 and is required to be adopted by Makita, in the fiscal year beginning April 1, 2006. Makita does not expect the adoption of SFAS No. 153 will have a material impact on its consolidated results of operations and financial condition.
 
      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 No. 154 replaces APB Opinion No. 20, “Accounting Changes” and SFAS No. 3,“Reporting Accounting Changes in Interim Financial Statements,” and provides guidance on the accounting for and reporting of accounting changes and error corrections. SFAS No. 154 establishes retrospective application, or the latest practicable date, as the required method for reporting a change in accounting principle and the reporting of a correction of an error. SFAS No. 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005
 
      In June 2005, the FASB issued FASB Staff Position (FSP) FAS 143-1, “Accounting for Electronic Equipment Waste Obligations” (“FSP 143-1”). FSP 143-1 provides guidance on the accounting for certain obligations associated with the Waste Electrical and Electronic Equipment Directive (the “Directive”), adopted by the European Union (“EU”). Under the Directive, the waste management obligation for historical equipment (products put on the market on or prior to August 13, 2005) remains with the commercial user until the customer replaces the equipment. FSP 143-1 is required to be applied to the later of the first reporting period ending after June 8, 2005 or the date of the Directive’s adoption into law by the applicable EU member countries. Makita does not expect the adoption of FSP 143-1 will have a material impact on its consolidated results of operations and financial condition.
 
      In November 2005, the FASB issued FSP FAS 115-1 and FAS 124-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments” (“FSP 115-1”). FSP 115-1 provides guidance on determining when investments in certain debt and equity securities are considered impaired, whether that impairment is other-than-temporary, and on measuring such impairment loss. FSP 115-1 also includes accounting considerations subsequent to the recognition of an other-than-temporary impairment and

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      requires certain disclosures about unrealized losses that have not been recognized as other-than-temporary impairments. FSP 115-1 is required to be applied to reporting periods beginning after December 15, 2005. Makita does not expect the adoption of FSP 115-1 will have a material impact on its consolidated results of operations and financial condition.
 
  (u)   Reclassifications
 
      Certain reclassifications have been made to the prior years’ consolidated financial statements to conform with the presentation used for the year ended March 31, 2006.
4.   TRANSLATION OF FINANCIAL STATEMENTS
 
    Solely for the convenience of readers, the accompanying consolidated financial statement amounts for the year ended March 31, 2006, are also presented in U.S. Dollars by arithmetically translating all yen amounts using the approximate prevailing exchange rate at the Federal Reserve Bank of New York of ¥117 to US$1 at March 31, 2006. This translation should not be construed as a representation that the amounts shown could be or could have been converted into United States dollars at the rate.
 
5.   INVENTORIES
 
    Inventories as of March 31, 2005 and 2006 comprised the following:
                         
    Yen     U.S. Dollars  
    (millions)     (thousands)  
    2005     2006     2006  
Finished goods
  ¥ 53,425     ¥ 64,121     $ 548,043  
Work in process
    1,844       2,338       19,983  
Raw materials
    10,734       13,362       114,205  
 
                 
 
  ¥ 66,003     ¥ 79,821     $ 682,231  
 
                 
6.   IMPAIRMENT OF LONG LIVED ASSETS
 
    In December 2003, in connection with the ongoing strategic revenue growth and cost cutting initiatives, specifically including an evaluation of its corporate wide marketing, promotional activities, the cost benefit relationship therefrom, and the continued rationalization of certain personnel related costs, Makita made a decision to no longer consider a golf course owned by a consolidated subsidiary, Joyama Kaihatsu, Ltd., as a corporate asset and to curtail utilizing such golf course for promotional, entertainment and employee welfare purposes. As a result of this decision, Makita performed an impairment analysis by considering cash flows expected to be generated from the golf course on a stand alone basis and recorded an impairment charge of ¥ 5,996 million to reduce the carrying value to its estimated fair value, as determined on a discounted cash flow basis.
 
    On May 7, 2005, the Nagoya District Court confirmed a civil rehabilitation plan for Joyama Kaihatsu, Ltd. On May 31, 2005, upon confirmation of the civil rehabilitation plan, Makita transferred its ownership interests in Joyama Kaihatsu, Ltd., to a third party. In connection with this ownership transfer, Makita recorded a gain on sale of the golf course of ¥ 8,479 million including the release from its obligation for club membership deposits of ¥ 6,461 million in the consolidated income statement in the year ended March 31, 2006.
 
    During the year ended March 31, 2004, Makita made a decision to sell a part of its production facility in the United Kingdom rather than holding it for future use. As a result of this decision, Makita recorded an impairment charge of ¥243 million, based on the expected sales value less cost to sell the facility.
 
    The Company, as part of its facilities integration and cost cutting plans, decided to vacate a certain research and development facility in Japan and a related administrative facility during the year ended March 31, 2004, and a certain information technology facility (collectively the “Facility”) during the year ended March 31, 2005. The Company intends to continue to hold the Facility as is for the foreseeable future considering the expected difficulty in identifying a buyer with operating plans commensurating with the present zoning requirements. As discussed above, the Facility was principally used as a research and development facility and provides training and information technology

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    services. The current zoning regulations require that the buyer utilize the Facility on a substantially same basis. Therefore, the combination of the limitations imposed by the zoning rules and the fact that the Facility is located in a rural, non industrial section of Japan has caused management to determine that the recoverable value on an as-is basis will most likely be limited to the estimated fair value of the land.
 
    As a result of the decision to vacate the Facility, the Company performed an impairment assessment pursuant to the provisions of SFAS No. 144 and recorded an impairment charge of ¥1,541 million and ¥577 million for the years ended March 31, 2004 and 2005, respectively. This impairment charge reduced the carrying value of the administrative facility to its estimated fair value of ¥316 million in the year ended March 31, 2004 and the technology facility to ¥196 million in the year ended March 31, 2005. The estimated fair value of ¥316 million and ¥196 million represents the fair value of the land as determined by a third party appraiser considering the estimated net cash flows from effecting the sale to a third party purchaser. The carrying value of the building has been reduced to zero on the basis that the Company anticipates no future use from the Facility and the expectation of realizing only the value of the land upon sale. Presently, the Company has not decided how and when to dispose of the Facility. In addition, the Company currently has no plans regarding the use of the vacated Facility and as a result, the Company does not expect any future cash flows from the Facility.

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7.   MARKETABLE SECURITIES AND INVESTMENT SECURITIES
 
    Marketable securities and investment securities consisted of available-for-sale securities and held-to-maturity securities.
 
    The cost, gross unrealized holding gains and losses, fair value and carrying amount for such securities by major security type as of March 31, 2005 and 2006, were as follows:
                                         
    Yen (millions)  
            Gross Unrealized                
            Holding                
                                    Carrying  
As of March 31, 2005   Cost     Gains     Losses     Fair value     Amount  
Available-for-sale:
                                       
Marketable securities:
                                       
Japanese and foreign government debt securities
  ¥ 100     ¥ 1     ¥     ¥ 101     ¥ 101  
Corporate and bank debt securities
    5,580       151       1       5,730       5,730  
Investments in trusts
    48,391       1,098       14       49,475       49,475  
Marketable equity securities
    1,403       1,129             2,532       2,532  
 
                             
 
  ¥ 55,474     ¥ 2,379     ¥ 15     ¥ 57,838     ¥ 57,838  
 
                             
Investment securities:
                                       
Corporate and bank debt securities
  ¥ 1,594     ¥ 20     ¥     ¥ 1,614     ¥ 1,614  
Investments in trusts
    645       94             739       739  
Marketable equity securities
    7,837       9,481       7       17,311       17,311  
Non-marketable equity securities (carried at cost)
    590                   590       590  
 
                             
 
  ¥ 10,666     ¥ 9,595     ¥ 7     ¥ 20,254     ¥ 20,254  
 
                             
Held-to-maturity:
                                       
Marketable securities:
                                       
Japanese corporate debt securities
  ¥ 100     ¥     ¥     ¥ 100     ¥ 100  
 
                             
 
  ¥ 100     ¥     ¥     ¥ 100     ¥ 100  
 
                             
Investment securities:
                                       
Japanese government debt securities
  ¥ 300     ¥ 2     ¥     ¥ 302     ¥ 300  
Japanese corporate debt securities
    1,552       2       5       1,549       1,552  
 
                             
 
  ¥ 1,852     ¥ 4     ¥ 5     ¥ 1,851     ¥ 1,852  
 
                             
Total marketable securities
  ¥ 55,574     ¥ 2,379     ¥ 15     ¥ 57,938     ¥ 57,938  
 
                             
Total investment securities
  ¥ 12,518     ¥ 9,599     ¥ 12     ¥ 22,105     ¥ 22,106  
 
                             

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    Yen (millions)  
            Gross Unrealized                
            Holding                
                                    Carrying  
As of March 31, 2006   Cost     Gains     Losses     Fair value     Amount  
Available-for-sale:
                                       
Marketable securities:
                                       
Japanese and foreign government debt securities
  ¥ 1     ¥     ¥     ¥ 1     ¥ 1  
Corporate and bank debt securities
    4,376       77       78       4,375       4,375  
Investments in trusts
    36,874       1,691       57       38,508       38,508  
Marketable equity securities
    1,496       2,093             3,589       3,589  
 
                             
 
  ¥ 42,747     ¥ 3,861     ¥ 135     ¥ 46,473     ¥ 46,473  
 
                             
Investment securities:
                                       
Corporate and bank debt securities
  ¥ 42     ¥     ¥     ¥ 42     ¥ 42  
Investments in trusts
    666       109             775       775  
Marketable equity securities
    10,334       16,466             26,800       26,800  
Non-marketable equity securities (carried at cost)
    572                   572       572  
 
                             
 
  ¥ 11,614     ¥ 16,575     ¥     ¥ 28,189     ¥ 28,189  
 
                             
Held-to-maturity:
                                       
Marketable securities:
                                       
Japanese corporate debt securities
  ¥ 1,300     ¥     ¥     ¥ 1,300     ¥ 1,300  
 
                             
 
  ¥ 1,300                   1,300       1,300  
 
                             
Investment securities:
                                       
Japanese government debt securities
  ¥ 300     ¥     ¥ 3     ¥ 297     ¥ 300  
Japanese corporate debt securities
    1,950             122       1,828       1,950  
 
                             
 
  ¥ 2,250     ¥     ¥ 125     ¥ 2,125     ¥ 2,250  
 
                             
 
Total marketable securities
  ¥ 44,047     ¥ 3,861     ¥ 135     ¥ 47,773     ¥ 47,773  
 
                             
Total investment securities
  ¥ 13,864     ¥ 16,575     ¥ 125     ¥ 30,314     ¥ 30,439  
 
                             

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    U.S. Dollars (thousands)  
            Gross Unrealized                
            Holding                
                                    Carrying  
As of March 31, 2006   Cost     Gains     Losses     Fair value     Amount  
Available-for-sale:
                                       
Marketable securities:
                                       
Japanese and foreign government debt securities
  $ 9     $     $     $ 9     $ 9  
Corporate and bank debt securities
    37,402       658       667       37,393       37,393  
Investments in trusts
    315,162       14,453       487       329,128       329,128  
Marketable equity securities
    12,786       17,889             30,675       30,675  
 
                             
 
  $ 365,359     $ 33,000     $ 1,154     $ 397,205     $ 397,205  
 
                             
Investment securities:
                                       
Corporate and bank debt securities
  $ 358     $     $     $ 358     $ 358  
Investments in trusts
    5,692       932             6,624       6,624  
Marketable equity securities
    88,325       140,735             229,060       229,060  
Non-marketable equity securities (carried at cost)
    4,889                   4,889       4,889  
 
                             
 
  $ 99,264     $ 141,667     $     $ 240,931     $ 240,931  
 
                             
Held-to-maturity:
                                       
Marketable securities:
                                       
Japanese corporate debt securities
  $ 11,111     $     $     $ 11,111     $ 11,111  
 
                             
 
  $ 11,111     $     $     $ 11,111     $ 11,111  
 
                             
Investment securities:
                                       
Japanese government debt securities
  $ 2,564     $     $ 25     $ 2,539     $ 2,564  
Japanese corporate debt securities
    16,667             1,043       15,624       16,667  
 
                             
 
  $ 19,231     $     $ 1,068     $ 18,163     $ 19,231  
 
                             
 
Total marketable securities
  $ 376,470     $ 33,000     $ 1,154     $ 408,316     $ 408,316  
 
                             
Total investment securities
  $ 118,495     $ 141,667     $ 1,068     $ 259,094     $ 260,162  
 
                             
    Investments in trusts represent funds deposited with trust banks in multiple investor accounts and managed by the fund managers of the trust banks. As of March 31, 2005 and 2006, each fund consisted of marketable equity securities and interest-bearing bonds.

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    The following table shows our investments’ gross unrealized holding losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at March 31, 2006.
                                 
    Yen (millions)  
    Less than 12 months     12 months or more  
            Gross             Gross  
            Unrealized             Unrealized  
            Holding             Holding  
As of March 31, 2006   Fair value     Losses     Fair value     Losses  
Available-for-sale:
                               
Marketable securities:
                               
Corporate and bank debt securities
  ¥ 1,374     ¥ 78     ¥     ¥  
Investments in trusts
    3,792       57              
 
                       
 
  ¥ 5,166     ¥ 135     ¥     ¥  
 
                       
Held-to-maturity:
                               
Investment securities
                               
Japanese government debt securities:
    297       3              
Japanese corporate debt securities:
  ¥ 1,828     ¥ 122     ¥     ¥  
 
                       
 
  ¥ 2,125     ¥ 125     ¥     ¥  
 
                       
                                 
    U.S. Dollars (thousands)  
    Less than 12 months     12 months or more  
            Gross             Gross  
            Unrealized             Unrealized  
            Holding             Holding  
As of March 31, 2006   Fair value     Losses     Fair value     Losses  
Available-for-sale:
                               
Marketable securities:
                               
Corporate and bank debt securities
  $ 11,744     $ 667     $     $  
Investments in trusts
    32,410       487              
 
                       
 
  $ 44,154     $ 1,154     $     $  
 
                       
Held-to-maturity:
                               
Investment securities
                               
Japanese government debt securities:
    2,539       25              
Japanese corporate debt securities:
  $ 15,624     $ 1,043     $     $  
 
                       
 
  $ 18,163     $ 1,068     $     $  
 
                       

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    Maturities of debt securities classified as available-for-sale and held-to-maturity as of March 31, 2006, regardless of their balance sheet classification, were as follows:
 
    Maturities of debt securities based on Cost as of March 31, 2006
                                                 
    Yen (millions)     U.S. Dollars (thousands)  
    Available-     Held-to-             Available-     Held-to-        
    for-sale     maturity     Total     for-sale     maturity     Total  
Due within one year
  ¥ 2,925     ¥ 1,300     ¥ 4,225     $ 25,000     $ 11,111     $ 36,111  
Due after one to five years
    30       1,650       1,680       256       14,103       14,359  
Due after five to ten years
    100       600       700       855       5,128       5,983  
Due after ten years
    1,364             1,364       11,658             11,658  
 
                                   
Total
  ¥ 4,419     ¥ 3,550     ¥ 7,969     $ 37,769     $ 30,342     $ 68,111  
 
                                   
    Maturities of debt securities based on Fair Value as of March 31, 2006
                                                 
    Yen (millions)     U.S. Dollars (thousands)  
    Available-     Held-to-             Available-     Held-to-        
    for-sale     maturity     Total     for-sale     maturity     Total  
Due within one year
  ¥ 3,002     ¥ 1,300     ¥ 4,302     $ 25,658     $ 11,111     $ 36,769  
Due after one to five years
    30       1,631       1,661       256       13,940       14,196  
Due after five to ten years
    94       494       588       803       4,223       5,026  
Due after ten years
    1,292             1,292       11,043             11,043  
 
                                   
Total
  ¥ 4,418     ¥ 3,425     ¥ 7,843     $ 37,760     $ 29,274     $ 67,034  
 
                                   
    Gross realized gains on sales of marketable securities and investment securities for the years ended March 31, 2004, 2005 and 2006 amounted to ¥862 million and ¥543 million and ¥437 million ($3,736 thousand), respectively. Effective October 1, 2005, UJF Holdings Co., Ltd., and Mitsubishi Tokyo Financial Group Co., Ltd., completed a merge in which, the shares of common stock owned by the Company in UFJ Holdings were exchanged for shares of common stock of the newly merged entity, Mitsubishi UFJ Financial Group Co., Ltd. As a result of this merger and common share exchange, the Company realized a gain on securities of ¥2,528 million ($21,606 thousand) for the year ended March 31, 2006. Gross realized losses, which included the gross realized losses considered as other than temporary, during the years ended March 31, 2004, 2005 and 2006 amounted to ¥307 million, ¥90 million and ¥47 million ($402 thousand), respectively. The cost of the securities sold was computed based on the average cost of all the shares of each such security held at the time of sale. Gross unrealized losses on marketable securities and investment securities of which declines in market value are considered to be other than temporary were charged to earnings as realized losses on securities, amounting to ¥279 million, ¥82 million and ¥47 million ($402 thousand) for the years ended March 31, 2004, 2005 and 2006, respectively. Proceeds from the sales and maturities of available-for-sale securities were ¥18,190 million, ¥14,672 million and ¥34,150 million ($291,880 thousand) for the years ended March 31, 2004, 2005 and 2006, respectively. Proceeds from the held-to-maturity securities were ¥13,510 million and ¥200 million ($1,709 thousand) for the years ended March 31, 2005 and 2006, respectively.

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8.   ACQUISITIONS
 
    To strengthen its position in the automatic nailer business as a comprehensive supplier of tools for professional use, Makita acquired the automatic nailer business of Kanematsu-NNK Corporation (the “Business”) on January 1, 2006 for total cash consideration of ¥1,853 million ($15,838 thousand) including direct acquisition costs of which, ¥649 million was unpaid and included in other payables in the accompanying consolidated balance sheet at March 31, 2006 and which was paid in April 2006.
 
    The Company used the purchase method of accounting to account for the acquisition of the Business. Accordingly, the financial position and the results of the operation of the Business are included in the accompanying consolidated financial statements from the acquisition date. The financial position and the results of the operation of the Business are included in the Japan segment in Note 19. The Company has allocated the purchase price based on the fair value of the tangible and intangible assets acquired and liabilities assumed. The excess of purchase price compared to the fair value of the net assets acquired (the “Goodwill”) was ¥779 million ($6,658 thousand) as of March 31, 2006. The Goodwill is deductible for Japanese tax purpose.
 
    In connection with this acquisition, intangible assets of the Business comprised patents of ¥179 million ($1,530 thousand), which were estimated to have a remaining useful life of 8 years, and customer relationships of ¥135 million ($1,154 thousand), which were estimated to have a remaining useful life of 10 years. These assets were recorded and presented as other intangible assets, net in the accompanying consolidated balance sheets.
 
    Had the operating result of the Business been included as if the transaction had been consummated on April 1, 2005, the pro forma operating results for the Company for the year ended March 31, 2006 would not have been materially different.
 
9.   INCOME TAXES
 
    Income before income taxes and the provision for income taxes for the years ended March 31, 2004, 2005 and 2006 were as follows:
                                 
    Yen     U.S. Dollars  
    (millions)     (thousands)  
    2004     2005     2006     2006  
Income before income taxes:
                               
Domestic
  ¥ 3,237     ¥ 15,837     ¥ 26,895     $ 229,872  
Foreign
    12,933       16,781       22,248       190,154  
 
                       
 
  ¥ 16,170     ¥ 32,618     ¥ 49,143     $ 420,026  
 
                       
Provision for income taxes:
                               
Current-
                               
Domestic
  ¥ 5,264     ¥ 5,121     ¥ 3,171     $ 27,103  
Foreign
    3,481       4,950       6,194       52,940  
 
                       
 
    8,745       10,071       9,365       80,043  
 
                       
Deferred-
                               
Domestic
    26       589       (166 )     (1,419 )
Foreign
    (292 )     (178 )     (467 )     (3,991 )
 
                       
 
    (266 )     411       (633 )     (5,410 )
 
                       
Consolidated provision for income taxes
  ¥ 8,479     ¥ 10,482     ¥ 8,732     $ 74,633  
 
                       

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    Total income taxes were allocated as follows:
                                 
    Yen     U.S. Dollars  
    (millions)     (thousands)  
    2004     2005     2006     2006  
Provision for income taxes
  ¥ 8,479     ¥ 10,482     ¥ 8,732     $ 74,633  
Shareholders’ equity:
                               
Foreign currency translation adjustments
    (458 )     945       272       2,325  
Net unrealized holding gains on available-for-sale securities
    4,168       60       3,363       28,744  
Minimum pension liability adjustment
    4,392       3,403       1,360       11,623  
 
                       
 
  ¥ 16,581     ¥ 14,890     ¥ 13,727     $ 117,325  
 
                       
    As a result of the enactment of an amendment to the Japanese local tax law on March 31, 2003, the effective tax rate used for the calculation of deferred income tax assets and liabilities was reduced from 41.4% to 40.2% for the year ended March 31, 2003, and increased from 40.2% to 40.3% for the year ended March 31, 2004. The effect of this tax rate change for the year ended March 31, 2004 was an ¥11 million increase to total tax expense. For the years ended March 31, 2005 and 2006, residual tax effects of ¥168 million and ¥336 million ($2,872 thousand) previously recorded in accumulated other comprehensive income (minimum pension liability adjustments) were released and recorded as a reduction to income tax expense in the consolidated statements of income as a result of the elimination of the minimum pension liability adjustment.
 
    The Company and its domestic subsidiaries are subject to a National Corporate tax of 30.0%, an Inhabitant tax of approximately 5.6% and a deductible Enterprise tax of approximately 7.9%, which in the aggregate resulted in a combined statutory income tax rate of approximately 40.3% for the years ended March 31, 2005 and 2006.

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    A reconciliation of the combined statutory income tax rates to the effective income tax rates is as follows:
                         
    Year ended March 31,  
    2004     2005     2006  
Combined statutory income tax rate in Japan
    41.4 %     40.3 %     40.3 %
Non-deductible expenses
    0.6       0.6       0.6  
Non-taxable dividends received
    (0.2 )     (0.1 )     (0.2 )
Change in valuation allowance
    15.3       (2.1 )     (11.3 )
Impact of advance pricing agreement finalization
    (1.3 )            
Effect of changes in enacted tax rate
    0.1       (0.5 )     (0.7 )
Tax sparing impact
    (1.8 )     (5.5 )     (3.5 )
Effect of the foreign tax rate differential
    (1.3 )     (2.8 )     (6.7 )
Other, net
    (0.4 )     2.2       (0.7 )
 
                 
Effective income tax rate
    52.4 %     32.1 %     17.8 %
 
                 
    According to the provisions of the tax treaties which have been concluded between Japan and 15 countries, Japanese corporations can claim a tax credit against Japanese income taxes on income earned in one of those 15 countries, even though that income is exempted from income taxes or is reduced by special tax incentive measures in those countries, as if no special exemption or reduction was provided. The Company applied such “tax sparing” mainly to China with the indicated tax reduction effect. The effect of the “tax sparing” resulted in decrease of tax expense by ¥292 million or 1.8%, ¥1,790 million or 5.5% and ¥1,706 million or 3.5% ($14,701 thousand) for the years ended March 31, 2004, 2005 and 2006, respectively.
 
    The net change in the total valuation allowance for the year ended March 31, 2004, was an increase of ¥2,134 million, which was mainly caused by 100% valuation allowance against deferred income tax assets on the impairment loss on long-lived assets of the subsidiary that operates a golf course in Japan. This increase in valuation allowance, offset by a decrease due to the tax sparing and other miscellaneous adjustments, had the effect of increasing Makita’s effective tax rate by 11.0% to the effective tax rate of 52.4% from the statutory tax rate of 41.4% for the year ended March 31, 2004. The net change in the total valuation allowance for the year ended March 31, 2005, was a decrease of ¥617 million, which was mainly caused by a decrease in net operating losses carry forwards of certain consolidated subsidiaries. In addition to this decrease in valuation allowance, a decrease in tax sparing and other miscellaneous adjustments had the affect of decreasing Makita’s effective tax rate by 8.2% to the effective tax rate of 32.1% from the statutory tax rate of 40.3% for the year ended March 31, 2005. In 2006, following the completion of the civil rehabilitation proceedings and the sale of the golf course business, previously unrecognized deferred tax asset were realized in connection with the gain on sale of golf course business and the related valuation allowance of ¥ 5,782 million ($48,957 thousand) was reversed. Makita also provided a valuation allowance of ¥ 402 million ($3,436 thousand) against deferred tax assets that existed at the beginning of the year because it was determined that such assets were not more likely than not to be realized in future years. As a consequence, the net change in the total valuation allowance for the year ended March 31, 2006 was a decrease of ¥5,238 million ($ 44,769 thousand), net of effect of translation, resulting in a reduction of income tax expense. This decrease in valuation allowance as well as a decrease due to the tax sparing and other miscellaneous adjustments had affect of decreasing Makita’s effective tax rate by 22.5% to the effective rate of 17.8% from the statutory tax rate of 40.3% for the year ended March 31, 2006.

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    The significant components of deferred income tax expense attributable to income before income taxes for the years ended March 31, 2004, 2005 and 2006 are as follows:
                                 
    Yen     U.S. Dollars  
    (millions)     (thousands)  
    2004     2005     2006     2006  
Deferred tax expense (exclusive of the effects of other components below)
  ¥ (282 )   ¥ 619     ¥ (1,035 )   $ (8,846 )
 
Adjustment to deferred tax assets and liabilities for enacted changes in tax laws and rates
    16                    
 
Increase (decrease) in beginning-of-the-year balance of the valuation allowance for deferred tax assets
          (208 )     402       3,436  
 
                       
 
  ¥ (266 )   ¥ 411     ¥ (633 )   $ (5,410 )
 
                       

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    Significant components of deferred income tax assets and liabilities as of March 31, 2005 and 2006, were as follows:
                         
    Yen     U.S. Dollars  
    (millions)     (thousands)  
    2005     2006     2006  
Deferred income tax assets:
                       
Marketable securities and investment securities
  ¥ 2,432     ¥ 1,071     $ 9,154  
Accrued retirement and termination benefits and other accrued expenses
    407       256       2,188  
Minimum pension liability
    1,193       170       1,453  
Inventories
    1,331       1,764       15,077  
Property, plant and equipment
    7,647       1,750       14,957  
Accrued payroll
    1,951       1,989       17,000  
Net operating loss carryforwards
    854       868       7,419  
Other
    949       1,153       9,855  
 
                 
Total gross deferred income tax assets
    16,764       9,021       77,103  
Valuation allowance
    (8,211 )     (2,973 )     (25,410 )
 
                 
 
  ¥ 8,553     ¥ 6,048     $ 51,693  
 
                 
Deferred income tax liabilities:
                       
Undistributed earnings of overseas subsidiaries
  ¥ (3,128 )   ¥ (791 )   $ (6,761 )
Unrealized gain on available-for-sale securities
    (4,817 )     (8,181 )     (69,923 )
Property, plant and equipment
    (942 )     (809 )     (6,915 )
Other
    (101 )     (7 )     (59 )
 
                 
Total gross deferred income tax liabilities
  ¥ (8,988 )   ¥ (9,788 )   $ (83,658 )
 
                 
Net deferred income tax liabilities
  ¥ (435 )   ¥ (3,740 )   $ (31,965 )
 
                 
    Net deferred income taxes are recorded in the consolidated balance sheets as follows:
                         
    Yen     U.S. Dollars  
    (millions)     (thousands)  
    2005     2006     2006  
Deferred income taxes
                       
Current assets
  ¥ 3,831     ¥ 3,661     $ 31,291  
Investment and other assets
    390       698       5,966  
Current liabilities
    (118 )     (176 )     (1,504 )
Long-term liabilities
    (4,538 )     (7,923 )     (67,718 )
 
                 
 
  ¥ (435 )   ¥ (3,740 )   $ (31,965 )
 
                 

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    In assessing the realizability of deferred income tax assets, Makita considers whether it is more likely than not that some portion or all of the deferred income tax assets will not be realized. The ultimate realization of deferred income tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible and net operating loss carryforwards are utilized. Makita considers the scheduled reversal of deferred income tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. Based upon the level of historical taxable income and projections for future taxable income over the periods in which the deferred income tax assets are deductible, Makita believes it is more likely than not that the benefits of these deductible differences and net operating loss carryforwards, net of the existing valuation allowance, will be realized. The actual amount of the deferred income tax assets realizable, however, would be reduced if estimates of future taxable income during the carryforward period were not achieved. The valuation allowance principally relates to the tax effects of net operating losses recorded by certain subsidiaries.
 
    As of March 31, 2006, certain subsidiaries had net operating loss carryforwards for income tax purposes of ¥1,827 million ($15,615 thousand) which are available to reduce future income taxes. The net operating losses will expire as follows:
                 
    Yen     U.S. Dollars  
    (millions)     (thousands)  
Within 5 years
  ¥ 425     $ 3,632  
6 to 20 years
           
Indefinite periods
    1,402       11,983  
 
           
 
  ¥ 1,827     $ 15,615  
 
           
    Income taxes have not been accrued on undistributed earnings of domestic subsidiaries as the tax law provides a means by which the investment in a domestic subsidiary can be recovered tax free.
 
    Makita has not recognized deferred tax liabilities for certain portions of undistributed earnings of foreign subsidiaries in the total amount of ¥44,524 million ($380,547 thousand) as of March 31, 2006 because Makita considers these earnings to be permanently reinvested, and calculation of the unrecognized deferred tax liabilities is not practicable.
 
10.   RETIREMENT AND TERMINATION BENEFIT PLANS
 
    The Company and certain of its consolidated subsidiaries have various contributory and noncontributory employees benefit plans covering substantially all of their employees. Under the plans, employees are entitled to lump-sum payments at the time of termination or retirement, or to pension payments. A domestic contributory plan covers substantially all of the employees of the Company.
 
    The amounts of lump-sum or pension payments under the plans are generally determined on the basis of length of service and remuneration at the time of termination or retirement.
 
    Until June, 2004, the domestic contributory plan was composed of a corporate defined benefit portion established by the Company and a substitutional portion based on benefits prescribed by the Japanese government (similar to social security benefits in the United States). The Company has been exempted from contributing to the Japanese Pension Insurance program that would otherwise have been required if it had not elected to fund the government substitutional portion of the benefit through a domestic contributory plan arrangement. The plan assets of the domestic contributory plan are invested and managed as a single portfolio for the entire domestic contributory plan and are not separately attributed to the substitutional and corporate portions. In June 2001, the Japanese pension law was amended to permit an employer to elect to transfer the entire substitutional portion benefit obligation from the domestic contributory plan to the government together with a specified amount of plan assets pursuant to a government formula. After such transfer, the employer is required to make periodic contributions to the Japanese Pension Insurance program, and the Japanese government is responsible for all benefit payments. The corporate portion of the domestic contributory plan continues to exist exclusively as a corporate defined benefit pension plan. The Company accounted for the transfer in accordance with EITF 03-02, “Accounting for the Transfer to the Japanese Government of the Substitutional Portion of Employee Pension Fund Liabilities.” As specified in EITF 03-02, the entire separation process is accounted for at the time of completion of the transfer to the government of the benefit obligation and related plan assets as a settlement in accordance with SFAS No. 88, “Employers’ Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits.”

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    The aggregate effect of this separation was determined based on the Company’s pension benefit obligation as of the date the transfer was completed based on the determination of plan assets required to be transferred.
 
    The Company received an approval of exemption from the Minister of Health, Labor and Welfare in January 2003, from the obligation for benefits related to future employee service with respect to the substitutional portion of its domestic contributory plan. The Company received government approval of exemption from the obligation for benefits related to past employee service in April 2004 with respect to the substitutional portion of its domestic contributory plan. The transfer to the government was completed on June 28, 2004.
 
    As a result of the transfer, the Company recognized a subsidy from the Japanese government equal to the difference between the fair value of the obligation deemed “settled” with the Japanese government and the assets required to be transferred to the government in the amount of ¥ 9,128 million in the first fiscal quarter ended June 30, 2004. In addition, the Company recognized a settlement loss equal to the amount calculated as the ratio of the obligation settled to the total employee’s pension fund obligation immediately prior to the settlement, both of which exclude the effect of future salary progression relating to the substitutional portion, times the net unrecognized gain or loss immediately prior to the settlement, which amounted to ¥ 4,687 million. This resulting net gain of ¥4,441 million is included in operating income for the year ended March 31, 2005.
 
    Effective April 1, 2004, the Company’s employee pension plan was amended by a new defined benefit plan that provides benefits based on length of service and other factors in a manner similar to the predecessor defined benefit plan, however, at a reduced rate. The reduction in the pension benefit obligation as of the effective date in the amount of ¥3,089 million was accounted for as a negative plan amendment and is included in prior service cost which are being amortized into net periodic pension costs over the weighted average remaining service period of the plan participants.
 
    The net periodic pension costs (benefit) of the defined benefit plans for the years ended March 31, 2004, 2005 and 2006 consisted of the following components:
                                 
    Yen     U.S. Dollars  
    (millions)     (thousands)  
    2004     2005     2006     2006  
Service cost-benefit earned during the year
  ¥ 1,671     ¥ 1,332     ¥ 1,565     $ 13,376  
Interest cost on projected benefit obligation
    1,225       852       776       6,632  
Expected return on plan assets
    (643 )     (590 )     (635 )     (5,427 )
Amortization of prior service cost
    14       (176 )     (153 )     (1,308 )
Recognized actuarial loss
    975       518       482       4,120  
Net gain resulting from transfer to the government of the substitutional portion of pension plan
          (4,441 )            
 
                       
Net periodic pension costs (benefit)
  ¥ 3,242     ¥ (2,505 )   ¥ 2,035     $ 17,393  
 
                       

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    Reconciliations of beginning and ending balances of the benefit obligations and the fair value of the plan assets are as follows:
                         
    Yen     U.S. Dollars  
    (millions)     (thousands)  
    2005     2006     2006  
Change in benefit obligation:
                       
Benefit obligation at beginning of year
  ¥ 54,899     ¥ 35,853     $ 306,436  
Service cost
    1,332       1,565       13,376  
Interest cost
    852       776       6,632  
Employees’ contributions
    25       27       231  
Plan amendments
    (3,089 )            
Curtailment
          (32 )     (274 )
Actuarial losses
    (120 )     (239 )     (2,042 )
Transfer to the government of the substitutional portion of pension plan
    (17,276 )            
Business acquired
          530       4,530  
Benefits paid
    (938 )     (1,027 )     (8,778 )
Foreign exchange impact
    168       127       1,086  
 
                 
Benefit obligation at end of year
    35,853       37,580       321,197  
 
                 
Change in plan assets:
                       
Fair value of plan assets at beginning of year
    32,981       28,289       241,786  
Actual return on plan assets
    836       5,099       43,581  
Employer contributions
    2,354       2,265       19,359  
Employees’ contributions
    25       27       231  
Transfer to the government of the substitutional portion of pension plan
    (7,082 )            
Business acquired
          131       1,120  
Benefits paid
    (843 )     (926 )     (7,915 )
Foreign exchange impact
    18       37       317  
 
                 
Fair value of plan assets at end of year
    28,289       34,922       298,479  
 
                 
Funded status
    (7,564 )     (2,658 )     (22,718 )
Unrecognized net actuarial loss
    11,051       5,867       50,145  
Prior service cost not yet recognized in net periodic benefit cost
    (3,357 )     (3,141 )     (26,846 )
Unrecognized net transition obligation being recognized over 19 years
    139       78       667  
 
                 
Net amount recognized
  ¥ 269     ¥ 146     $ 1,248  
 
                 
Amounts recognized in the consolidated balance sheets consisted of;
                       
Accrued benefit cost
  ¥ (5,126 )   ¥ (2,901 )   $ (24,795 )
Prepaid benefit cost
    2,399       2,599       22,214  
Intangible assets
    23              
Accumulated other comprehensive loss, before income taxes
    2,973       448       3,829  
 
                 
Net amount recognized
  ¥ 269     ¥ 146     $ 1,248  
 
                 

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Table of Contents

 
    Measurement date
 
    The Company uses a December 31 measurement date for the majority of its plans.
 
    Assumptions
 
    The weighted-average assumptions used to determine benefit obligations at March 31, 2005 and 2006, were as follows:
                 
    2005     2006  
Discount rate
    2.2 %     2.2 %
The assumed rate of increase in future compensation levels
    3.3 %     3.3 %
    The weighted-average assumptions used to determine net periodic pension cost for each of the years in the three-year period ended March 31, 2006, were as follows:
                         
    2004     2005     2006  
Discount rate
    2.1 %     2.2 %     2.2 %
Assumed rate of increase in future compensation levels
    2.3 %     2.3 %     3.3 %
Expected long-term rate of return on plan assets
    2.0 %     2.1 %     2.3 %
    Makita determines the discount rate based on long-term high quality fixed income debt securities that have the same maturity period as the period over which pension benefits are expected to be settled. In addition, Makita also takes into account estimates with respect to future changes that are expected by management in the interest rates on its debt securities when determining the discount rate.
 
    Makita determines the expected long-term rate of return on plan assets based on the expected long-term return of the various asset categories in which the plan invests considering the current expectations for future returns and actual historical returns.
 
    Plan Assets
 
    The benefit plan weighted-average asset allocations at March 31, 2005, and 2006, by asset category were as follows:
                 
    2005     2006  
Asset Category
               
Equity securities
    43.9 %     54.6 %
Debt securities
    36.6