-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Ws5SEUY10jfvcVELh/X7Hsef19F2hxDGJxklf7TcTUrdGlkplEQGzTSNNq6bga1e joAWJVLsBve685tjWdJSWw== 0000317891-06-000013.txt : 20060630 0000317891-06-000013.hdr.sgml : 20060630 20060630060122 ACCESSION NUMBER: 0000317891-06-000013 CONFORMED SUBMISSION TYPE: 20-F PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 20060630 FILED AS OF DATE: 20060630 DATE AS OF CHANGE: 20060630 FILER: COMPANY DATA: COMPANY CONFORMED NAME: RICOH CO LTD CENTRAL INDEX KEY: 0000317891 STANDARD INDUSTRIAL CLASSIFICATION: PHOTOGRAPHIC EQUIPMENT & SUPPLIES [3861] IRS NUMBER: 000000000 STATE OF INCORPORATION: M0 FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 20-F SEC ACT: 1934 Act SEC FILE NUMBER: 002-68279 FILM NUMBER: 06935531 BUSINESS ADDRESS: STREET 1: 13-1, GINZA 8-CHOME STREET 2: CHUO-KU CITY: TOKYO 104-8222 JAPAN STATE: M0 ZIP: 00000 BUSINESS PHONE: 81-3-6278-5241 MAIL ADDRESS: STREET 1: 13-1, GINZA 8-CHOME STREET 2: CHUO-KU CITY: TOKYO 104-8222 JAPAN STATE: M0 ZIP: 00000 20-F 1 r20f.txt FORM 20-F SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 20 - F ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended March 31, 2006 -------------- Commission file number 2 - 68279 --------- KABUSHIKI KAISHA RICOH ---------------------- (Exact name of registrant as specified in its charter) RICOH COMPANY, LTD. ------------------- (Translation of registrant's name into English) Japan ----- (Jurisdiction of incorporation or organization) 13-1, Ginza 8-chome, Chuo-ku, Tokyo 104-8222, Japan --------------------------------------------------- (Address of principal executive offices) Securities registered or to be registered pursuant to Section 12(b) of the Act. Name of each exchange on Title of each class which registered None None ---- ---- Securities registered or to be registered pursuant to Section 12(g) of the Act. None ---- (Title of Class) Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act. Common Stock* ------------- (Title of Class) *1,367,524 American Depositary Shares evidenced by American Depositary Receipts, each American Depositary Share representing 5 shares of Common Stock of Ricoh Company, Ltd. 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. Common stock outstanding as of March 31, 2006: 729,552,274 shares (excluding 15,359,804 shares of Treasury Stock) Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [X] No [_]. If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. Yes [_] No [X]. Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [_]. Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of "accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check one): Large accelerated filer [X] Accelerated filer [_] Non-accelerated filer [_]. Indicate by check mark which financial statement item the registrant has elected to follow. Item17 [_] Item18 [X]. 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). Yes [_] No [X]. Defined Terms, Conventions and Presentation of Financial Information - -------------------------------------------------------------------- On June 28, 2006, the noon buying rate for cable transfers in New York City as certified for customs purposes by the Federal Reserve Bank of New York for the Japanese Yen to the U.S. Dollar was Yen 116.42 = U.S.$1.00. In this document, the term "Company" refers to Ricoh Company, Ltd., the registrant, and "Ricoh" refers to the Company and its consolidated subsidiaries, unless the context otherwise indicates. Ricoh's fiscal year end is March 31. In this document "fiscal year 2006" refers to Ricoh's fiscal year ended March 31, 2006, and other fiscal years of Ricoh are referred to in a corresponding manner. As used in this annual report, "U.S. GAAP" means U.S. generally accepted accounting principles. Cautionary Statement With Respect to Forward-Looking Statements - --------------------------------------------------------------- Statements made in this annual report with respect to Ricoh's current plans, estimates, strategies and beliefs and other statements that are not historical facts are or may be deemed to be forward-looking statements, within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, about the future performance of Ricoh. These forward-looking statements are made in reliance upon the protections provided by such acts for forward-looking statements. Forward-looking statements include but are not limited to those using words such as "believe," "expect," "plans," "strategy," "prospects," "forecast," "estimate," "project," "anticipate," "may" or "might" and words of similar meaning in connection with a discussion of future operations or financial performance. From time to time, oral or written forward-looking statements may also be included in other materials released to the public. These statements are based on management's assumptions and beliefs in light of the information currently available to it. Ricoh cautions you that a number of important risks and uncertainties could cause actual results to differ materially from those discussed in the forward-looking statements, and therefore you should not place undue reliance on them. You also should not rely on any obligation of Ricoh to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Ricoh disclaims any such obligation. Risks and uncertainties that might affect Ricoh include, but are not limited to (i) general economic conditions in Ricoh's markets, particularly levels of consumer spending; (ii) exchange rates, particularly between the Japanese Yen and the U.S. Dollar, the Euro, and other currencies in which Ricoh makes significant sales or in which Ricoh's assets and liabilities are denominated; (iii) Ricoh's ability to continue to design and develop products and services, and win acceptance of its products and services which are offered in highly competitive markets characterized by continual introduction of new products, rapid development in new technology, and consumer preferences that are subjective and likely to change; (iv) Ricoh's ability to successfully implement strategies for its office equipment business, such as further globalization of its operations to increase account sales to corporate clients, reinforcement of the color printer line-up to meet growing demand for color products among its office users, implementation of optimal printing solutions for customers' digitally networked offices and enhancement of printing capabilities centered on multi-functional printers ("MFPs"), and implementation of optimal localization of manufacturing operations so that such operations are closer to the customer; (v) Ricoh's ability to continuously devote sufficient resources to research and development, and capital expenditures for digital and networking equipment, such as digital plain paper copiers ("PPCs"), MFPs and laser printers; (vi) the success of Ricoh's alliances with various computer manufacturers which Ricoh may engage in alliances with in the future; and (vii) the outcome of contingencies. Important information regarding risks and uncertainties is also set forth elsewhere in this annual report, including in "Risk Factors" included in "Item 3. Key Information," "Item 4. Information on the Company," "Item 5. Operating and Financial Review and Prospects" and "Item 11. Quantitative and Qualitative Disclosures About Market Risk." TABLE OF CONTENTS PART I Item 1. Identity of Directors, Senior Management and Advisers 1 Item 2. Offer Statistics and Expected Timetable 1 Item 3. Key Information 1 Item 4. Information on the Company 9 Item 4A. Unresolved Staff Comments 26 Item 5. Operating and Financial Review and Prospects 26 Item 6. Directors, Senior Management and Employees 70 Item 7. Major Shareholders and Related Party Transactions 88 Item 8. Financial Information 89 Item 9. The Offer and Listing 89 Item 10. Additional Information 92 Item 11. Quantitative and Qualitative Disclosures About Market Risk 106 Item 12. Description of Securities Other Than Equity Securities 109 PART II Item 13. Defaults, Dividend Arrearages and Delinquencies 109 Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds 109 Item 15. Controls and Procedures 109 Item 16 [RESERVED] 110 Item 16A. Audit Committee Financial Expert 110 Item 16B. Code of Ethics 110 Item 16C. Principal Accountant Fees and Services 110 Item 16D. Exemptions from the Listing Standards for Audit Committees 113 Item 16E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers 113 PART III Item 17. Financial Statements 113 Item 18. Financial Statements 113 Item 19. Exhibits 113 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 selected consolidated financial data have been derived from the audited consolidated financial statements of Ricoh prepared in accordance with U.S. generally accepted accounting principles as of each of the dates and for each of the periods indicated below. This information should be read in conjunction with Ricoh's audited consolidated balance sheets as of March 31, 2005 and 2006, the related consolidated statements of income, shareholders' investment and cash flows for the three years ended March 31, 2004, 2005 and 2006 and the notes thereto that appear elsewhere in this annual report.
Millions of Yen except per share amounts and number of shares Year ended March 31, ------------------------------------------------------------------------------ 2002 2003 2004 2005 2006 -------------- -------------- -------------- -------------- -------------- INCOME STATEMENT DATA: Net sales: 1,672,340 1,738,358 1,780,245 1,814,108 1,915,090 Operating income 129,695 133,654 150,006 135,506 152,014 Net income 61,614 72,513 91,766 83,143 97,057 PER AMERICAN DEPOSITARY SHARE: Net income (Basic) 441.35 498.95 618.15 563.20 661.65 Net income (Diluted) 412.30 484.05 618.15 563.20 661.65 BALANCE SHEET DATA: Total Assets 1,832,928 1,884,922 1,852,793 1,953,669 2,041,183 Shareholders' investment 633,020 657,514 795,131 862,998 960,245 Common Stock 120,461 135,364 135,364 135,364 135,364 Weighted Average Number of shares outstanding 698,025,167 726,659,698 742,292,806 738,160,042 733,434,414 Cash dividends declared Per American Depositary Share: Interim 30.00 35.00 40.00 50.00 60.00 ($0.24) ($0.28) ($0.36) ($0.49) ($0.50) Year-end 35.00 35.00 50.00 50.00 60.00 ($0.29) ($0.29) ($0.46) ($0.45) ($0.52)
-1-
Millions of Yen except per share amounts and number of shares Year ended March 31, ------------------------------------------------------------- 2002 2003 2004 2005 2006 ------------ ------------ ----------- ----------- ----------- At year-end: Cash and cash equivalents 170,172 189,243 203,039 186,857 187,055 Capital investments 75,676 73,956 75,507 84,701 102,054 Long-term indebtedness, excluding current installment 332,995 345,902 281,570 226,567 195,626
Notes: 1. Each American Depositary Share represents five shares of Ricoh Common Stock. 2. Long-term indebtedness includes convertible bonds and debentures in fiscal year 2002. In the preceding table, cash dividends declared in U.S. Dollars are based on the exchange rates at each respective payment date, using the noon buying rates for cable transfer in Japanese Yen in New York City as certified for customs purposes by the Federal Reserve Bank of New York. On June 28, 2006, the noon buying rate for cable transfers in New York City as certified for customs purposes by the Federal Reserve Bank of New York for the Japanese Yen to the U.S. Dollar was Yen 116.42 = U.S.$1.00. The following table sets forth the exchange rates for the Japanese Yen and the U.S. Dollar based on the noon buying rate for cable transfers in Japanese Yen in New York City as certified for customs purposes by the Federal Reserve Bank of New York during the previous six months and prior five fiscal years: December January February March April May 2005 2006 2006 2006 2006 2006 -------- ------- -------- ------ ------ ------ High 115.78 113.96 115.82 115.89 113.79 110.07 Low 120.93 117.55 118.95 119.07 118.66 113.46 Year ended March 31, ---------------------------------- 2002 2003 2004 2005 2006 ------ ------ ------ ------ ------ Year-end 132.70 118.07 104.18 107.22 117.48 Average* 125.64 121.10 112.75 107.28 104.64 High 115.89 115.71 104.18 102.26 104.41 Low 134.77 133.40 120.55 114.30 120.93 * The average Japanese Yen exchange rates represent average noon buying rate on the last business day of each month during the respective period. -2- B. Capitalization and Indebtedness. Not applicable. C. Reasons for the Offer and Use of Proceeds. Not applicable. D. Risk Factors. Ricoh is a global manufacturer of office equipment and conducts business on a global scale. As such, Ricoh is exposed to various risks which include the risks listed below. Although certain risks that may affect Ricoh's businesses are listed in this section, this list is not exhaustive. Ricoh's business may in the future also be affected by other risks that are currently unknown or that are not currently considered significant or material. In addition, this section contains forward-looking statements that are subject to the "Cautionary Statement with Respect to Forward-Looking Statements" appearing elsewhere in this annual report. RICOH'S SUCCESS WILL DEPEND ON ITS ABILITY TO RESPOND TO RAPID TECHNOLOGICAL CHANGES IN THE DOCUMENT IMAGING AND MANAGEMENT INDUSTRY The document imaging and management industry includes products such as copiers, printers, facsimile machines and scanners. The technology used in this industry changes rapidly and products in this industry will often require frequent and timely product enhancements or have a short product life cycle. Most of Ricoh's products are a part of this industry and as such Ricoh's success will depend on its ability to respond to such technological changes in the industry. To remain competitive in this industry, Ricoh invests a significant amount of resources and capital every year in research and development activities. Despite this investment, the process of developing new products or technologies is inherently complex and uncertain and there are a number of risks that Ricoh is subject to, including the following: . No assurances can be made that Ricoh will successfully anticipate whether its products or technologies will satisfy its customers' needs or gain market acceptance; . No assurances can be made that the introduction of more advanced products that also possess the capabilities of existing products will not adversely affect the sales performance of each such product; . No assurances can be made that Ricoh will be able to procure raw materials and parts necessary for new products or technologies from its suppliers at competitive prices; . No assurances can be made that Ricoh will be able to successfully manage the distribution system for its new products to eliminate the risk of loss resulting from a failure to take advantage of market opportunities; -3- . No assurances can be made that Ricoh will succeed in marketing any newly developed product or technology; and . No assurances can be given that Ricoh will be able to respond adequately to changes in the industry. Ricoh's failure to respond to any risks associated with this industry, including those described above, may reduce Ricoh's future growth and profitability and may adversely affect Ricoh's financial results and condition. In addition to the above general risks, Ricoh is exposed to the following specific risks relating to the document imaging and management industry: Digital Technology ------------------ Among the various technologies used in the document imaging and management industry, Ricoh believes the successful development of digital technology is one of the most essential factors in attaining a competitive advantage. Ricoh currently is a leader in digital technology and believes that the importance of digital technology used in office equipment, including copiers, printers, facsimiles and scanners, will continue to grow in the future. While most of Ricoh's PPCs sold in Japan and overseas are already digital, Ricoh believes that the digital technology used in connection with digital copiers and other digital products will continue to develop and that competition with respect to digital products will intensify. There is no assurance that Ricoh will continue to be in the forefront of digital technology despite its commitment to invest in research and development activities in this area. Failure of Ricoh to adequately develop digital technology may adversely affect Ricoh's financial results and condition. Multi-Functional Equipment -------------------------- Ricoh believes that the document imaging and management industry is moving towards a multi-functional office environment where various office equipment (including copiers, facsimile machines, printers, scanners and personal computers) become more interdependent on each other due to the increasing use of digital technology and initiatives taken by many offices to eventually become a "paperless office." As a result, certain existing office equipment may either be consolidated into multi-functional equipment or may be linked together electronically to perform various office functions. Although Ricoh already manufactures certain multi-functional equipment, as a result of this trend towards multi-functional equipment, some of Ricoh's products may become obsolete while other products may require substantial product enhancements, requiring technologies currently unavailable within Ricoh. No assurances can be made that Ricoh will be able to successfully adjust to such changes. RICOH MUST SUCCESSFULLY OPERATE IN HIGHLY COMPETITIVE MARKETS The document imaging and management industry, including the copier industry, is intensely competitive. Ricoh expects to face increased competition in the various markets in which it operates. Currently, Ricoh's competitors include other large -4- manufacturers and distributors of office equipment. In addition, as digital and other new technology develops and as new office equipment products using these newly developed technologies gain increased market acceptance, Ricoh may find itself competing with new competitors that develop such new technologies, including computer software and hardware manufacturers and distributors. Accordingly, it is possible that new competitors or alliances among existing and new competitors may emerge and rapidly acquire significant market share. While Ricoh believes it is a leading manufacturer and distributor in the document imaging and management industry and it intends to maintain its position, no assurances can be made that it will continue to compete effectively in the future. Pricing pressures or loss of potential customers resulting from Ricoh's failure to compete effectively may adversely affect Ricoh's financial results and condition. RICOH IS SUBJECT TO THE RISKS OF INTERNATIONAL OPERATIONS AND THE RISKS OF OVERSEAS EXPANSION A substantial portion of Ricoh's manufacturing and marketing activity is conducted outside of Japan, including in the United States, Europe, and in developing and emerging markets such as China. There are a number of risks inherent in doing business in such overseas markets, including the following: . unfavorable political or economical factors; . fluctuations in foreign currency exchange rates; . potentially adverse tax consequences; . unexpected legal or regulatory changes; . lack of sufficient protection for intellectual property rights; . difficulties in recruiting and retaining personnel, and managing international operations; and . less developed infrastructure. Ricoh's inability to manage successfully the risks inherent in its international activities could adversely affect its business, financial condition and operating results. In addition, while Ricoh plans to continue to expand its business worldwide and increase overseas sales, because of the risks associated with conducting an international operation (including the risks listed above), there can be no assurances that Ricoh's overseas expansion will be successful or have a positive effect on Ricoh's financial results and condition. ECONOMIC TRENDS IN RICOH'S MAJOR MARKETS MAY ADVERSELY AFFECT RICOH'S SALES Demand for Ricoh's products is affected by cyclical changes in the economies of Ricoh's major markets, including Japan, the United States and Europe. Economic downturns and declines in consumption in Ricoh's major markets may adversely affect Ricoh's financial results and condition. -5- FOREIGN EXCHANGE FLUCTUATIONS AFFECT RICOH'S RESULTS Local currency-denominated financial results in each of the Company's subsidiaries around the world are translated into Japanese Yen by applying the average market rate during each financial period and recorded on Ricoh's consolidated statements of income. Local currency-denominated assets and liabilities are translated into Japanese Yen by applying the market rate at the end of each financial period and recorded on Ricoh's consolidated balance sheets. Accordingly, the financial results, assets and liabilities are subject to foreign exchange fluctuations. In addition, operating profits and losses are highly sensitive to the appreciation in the value of the Japanese Yen because the high volume of Ricoh's production and sales activities in the Americas, Europe and Other, such as China, results in a large proportion of revenues and costs denominated in local currencies. Although Ricoh engages in hedging transactions such as forward contracts with several financial institutions having credit ratings satisfactory to Ricoh to minimize the negative effects of short-term fluctuations in foreign exchange rates among major currencies such as the U.S. Dollar, Euro and Japanese Yen, mid-to-long-term volatile changes in the exchange rate levels make it difficult for Ricoh to execute planned procurement, production, logistics, and sales activities and may adversely affect Ricoh's financial results and condition. CRUDE OIL PRICE FLUCTUATIONS AFFECT RICOH'S RESULTS Many of the parts or materials used in manufacturing Ricoh's products are made from oil. If the price of crude oil rises, the purchase price of such product parts or materials may increase as well. Furthermore, a rise in the price of crude oil may lead to an increase in shipping and handling costs due in part to a rise in the cost of fuel and the cost of utilities. Ricoh may not be able to pass these incremental costs onto the sales price of its products. Such fluctuations in crude oil prices may therefore adversely affect Ricoh's financial position and results of operations. RICOH IS SUBJECT TO GOVERNMENT REGULATION THAT CAN LIMIT ITS ACTIVITIES OR INCREASE ITS COST OF OPERATIONS Ricoh is subject to various governmental regulations and approval procedures in the countries in which it operates. For example, Ricoh may be required to obtain approvals for its business and investment plans, be subject to export regulations and tariffs, as well as rules and regulations relating to commerce, antitrust, patent, consumer and business taxation, exchange control, and environmental and recycling laws. Ricoh has established a Corporate Social Responsibility Office to heighten awareness of the importance of corporate social responsibility. Through this office, Ricoh involves its employees in various activities designed to ensure compliance with applicable regulations as part of its overall risk management and compliance program. However, if Ricoh is unable to comply with any of these regulations or fails to obtain the requisite approvals, Ricoh's activities in such countries may be restricted. In addition, even if Ricoh is able to comply with these regulations, compliance can result in increased costs. In either event, Ricoh's financial results and condition may be adversely affected. -6- RICOH IS SUBJECT TO INTERNAL CONTROL EVALUATIONS AND ATTESTATION OVER FINANCIAL REPORTING UNDER SECTION 404 OF THE SARBANES-OXLEY ACT OF 2002 The United States Securities and Exchange Commission (the "SEC"), as required by Section 404 of the Sarbanes-Oxley Act of 2002, adopted rules requiring every company that files reports with the SEC to include a management report on such company's internal controls over financial reporting in its annual report. In addition, the company's independent registered public accounting firm must publicly attest to the adequacy of management's assessment and the effectiveness of the company's internal control over financial reporting. Ongoing compliance with these requirements is complex, costly and time-consuming. If Ricoh fails to maintain effective internal control over financial reporting, Ricoh's management does not timely assess the adequacy of such internal control, or Ricoh's independent registered public accounting firm does not timely attest to the evaluation or issues a qualified opinion, Ricoh could be subject to regulatory sanctions or could face adverse reactions in the financial markets due to a loss of investor confidence. RICOH'S BUSINESS DEPENDS ON PROTECTING ITS INTELLECTUAL PROPERTY RIGHTS Ricoh owns or licenses a number of intellectual property rights in the field of office equipment automation and, when Ricoh believes it is necessary or desirable, obtains additional licenses for the use of other parties' intellectual property rights. If Ricoh fails to protect, maintain or obtain such rights, its performance and ability to compete may be adversely affected. Ricoh has a program in place under which company employees are compensated for any valuable intellectual property rights arising out of any inventions developed by them during the course of their employment with Ricoh. While unlikely, management believes that there could arise instances in the future where Ricoh may become the subject of legal actions or proceedings where claims alleging inadequate compensation are asserted by company employees. RICOH IS DEPENDENT ON SECURING AND RETAINING SPECIALLY SKILLED PERSONNEL Ricoh believes that it can continue to remain competitive by securing and retaining additional personnel who are highly skilled in the fields of management and information technology. However, the number of skilled personnel is limited and the competition for attracting and retaining such personnel is intense, particularly in the information technology industry. Securing and retaining skilled personnel in the information technology industry is especially important for Ricoh to compete effectively with its competitors as expectations and market standards for office equipment become more technologically advanced. Ricoh cannot assure that it will be able to successfully secure and retain additional skilled personnel. RICOH MAY BE ADVERSELY AFFECTED BY ITS EMPLOYEE BENEFIT OBLIGATIONS With respect to its employee benefit obligations and plan assets, Ricoh accrues the cost of such benefits based on applicable accounting policies and funds such benefits in accordance with governmental regulations. Currently, there is no immediate and -7- significant funding requirement; however, if returns from investment assets decrease due to market conditions, such as the fluctuations in the stock or bond markets, additional funding and accruals may be required. Such additional funding and accruals may adversely affect Ricoh's financial position and results of operations. RICOH'S OPERATIONS ARE SUBJECT TO ENVIRONMENTAL LAWS AND REGULATIONS Ricoh's operations are subject to many environmental laws and regulations governing, among other things, air emissions, wastewater discharges, the use and handling of hazardous substances, waste disposal, product recycling, and soil and ground-water contamination. Ricoh faces risks of environmental liability in our current and historical manufacturing activities. Costs associated with future additional environmental compliance or remediation obligations could adversely affect Ricoh's business, operating results, and financial condition. RISKS ASSOCIATED WITH RICOH'S EQUIPMENT FINANCING BUSINESS MAY ADVERSELY AFFECT RICOH'S FINANCIAL CONDITION Ricoh provides financing to some of its customers in connection with its equipment sales and leases. Ricoh evaluates the creditworthiness and the amount of credit extended to a customer prior to the financing arrangement and during the financing term on a regular basis. Depending on such evaluations, Ricoh makes adjustments to such extensions of credit as it deems necessary to minimize any potential risks of concentrating credit risk or non-payment of credit. Despite the application of these monitoring procedures, no assurances can be made that Ricoh will be able to fully collect on such extensions of credit due to unforeseeable defaults by its customers. In addition, these financing arrangements that Ricoh enters into with its customers result in long-term receivables bearing a fixed rate of interest. However, Ricoh finances these financing arrangements primarily with short-term borrowings subject to a variable interest rate. Although Ricoh engages in hedging activities, Ricoh is not able to fully hedge this interest rate mismatch. If Ricoh is unable to successfully manage these risks associated with its equipment financing business, Ricoh's financial results and condition may be adversely affected. RICOH MAY BE SUBJECT TO PRODUCT LIABILITY CLAIMS THAT COULD SIGNIFICANTLY AFFECT ITS FINANCIAL CONDITION Ricoh may be held responsible for any defects that occur with respect to its products and services. Based on the defect, Ricoh may be liable for significant damages, which may adversely affect its financial results and condition. Furthermore, as Ricoh increasingly provides products and services utilizing sophisticated and complex technologies, such defects may occur more frequently. Such potential increase in defects, which could result in an increase in Ricoh's liability, may adversely affect its financial results and condition. -8- In addition, negative publicity concerning these defects could make it more difficult for Ricoh to attract and maintain customers to purchase Ricoh products and services. As a result, Ricoh's financial results and condition may be adversely affected. RICOH'S PERFORMANCE CAN BE AFFECTED BY ALLIANCES WITH OTHER ENTITIES Ricoh engages in alliances with other entities to create various products and services to fulfill customer demands. Ricoh believes that an alliance is an effective method for timely development of new technology and products using management resources of both parties. However, if Ricoh's interest differs from other parties' interests due to financial or other reasons, Ricoh may be unable to maintain the alliance. Failure to maintain an on-going alliance and failure to establish a necessary alliance in the future may adversely affect Ricoh's financial position and results of operations. RICOH MAY SUFFER LOSS AS A RESULT OF CATASTROPHIC DISASTER, INFORMATION TECHNOLOGY PROBLEMS OR INFECTIOUS DISEASES Several of Ricoh's manufacturing facilities in Japan could be subject to a catastrophic loss caused by earthquakes as such facilities are located in areas with above average seismic activity. If any of these facilities were to experience a catastrophic loss, Ricoh could experience disruptions in its operations and delays in its production and shipments. If such occurred, Ricoh would likely record a decrease in revenue, and require large expenditures to repair or replace the damaged facility, which would be highly likely to affect Ricoh's financial results and condition. As Ricoh becomes increasingly dependent on information technology, software and hardware defects, computer viruses, as well as internal database problems ( E.G., leaks and falsifications or disappearance of information relating to our customers) pose a greater risk to its operations. Although Ricoh has taken various precautionary measures, such as installing firewalls and anti-virus software to detect and eliminate computer viruses, Ricoh may not be able to completely prevent or mitigate the effects of such problems, which may affect Ricoh's performance. In addition, the Ricoh Group is continually expanding its worldwide operations to set in place a global supply chain of its products and services so that we can satisfy our local customer needs faster, more effectively and on a regular basis. As Ricoh expands our operations worldwide, additional risks, such as infectious diseases and epidemics, may adversely affect Ricoh's operations and financial positions. Item 4. Information on the Company -------------------------- A. History and Development of the Company The Company was originally incorporated as a joint stock corporation (KABUSHIKI KAISHA) on February 6, 1936 in accordance with Japanese law under the name Riken Kankoshi Co., Ltd. as a manufacturer and distributor of sensitized paper for use in copiers. Since its incorporation, Ricoh has expanded its business into related businesses in the office equipment field. It now manufactures and markets copiers, facsimile machines, -9- MFPs, printers, optical discs, personal computers and servers, network related software and other equipment, including semiconductors, measuring equipment and cameras. Historical highlights --------------------- February 1936 Riken Kankoshi Co., Ltd. is formed in Kita-kyushu to manufacture and market sensitized paper. March 1938 The Company's name is changed to Riken Optical Co., Ltd., and starts manufacturing and selling optical devices and equipment. May 1949 The Company lists its securities on the Tokyo and Osaka Stock Exchanges. April 1954 The Company establishes an optical device and equipment plant in Ohmori, Ohta-ku, Tokyo (now known as the Ohmori plant). May 1955 The Company begins manufacturing and selling desktop copiers. May 1961 The Company establishes a sensitized paper plant in Ikeda, Osaka (now known as the Ikeda plant). October 1961 The Company lists its securities on the First Sections of the Tokyo and Osaka Stock Exchanges. June 1962 The Company starts operations of a paper plant in Numazu, Shizuoka, which featured a fully-integrated sensitized paper production system (now known as the Numazu plant). December 1962 The Company establishes Ricoh of America, Inc. (a subsidiary, now known as Ricoh Corporation). April 1963 The Company changes its corporate name to Ricoh Company, Ltd. July 1967 The Company establishes Tohoku Ricoh Co., Ltd. (a subsidiary) in Shibata-gun, Miyagi. May 1971 The Company completes its manufacturing facility in Atsugi, Kanagawa (now known as the Atsugi plant), to which it transfers some of its office equipment production from the Ohmori plant. June 1971 The Company establishes Ricoh Nederland B.V. (a subsidiary, now known as Ricoh Europe B.V.) in Netherlands. January 1973 The Company establishes Ricoh Electronics, Inc. (a subsidiary) in the United States. September 1973 The Company lists its securities on the Amsterdam Stock Exchange. December 1976 The Company forms Ricoh Credit Co., Ltd. (a subsidiary, now known as Ricoh Leasing Co., Ltd.). March 1977 The Company relocates its headquarters to Minato-ku, Tokyo. July 1978 The Company lists its securities on the Frankfurt Stock Exchange. December 1978 The Company establishes Ricoh Business Machines, Ltd. (a subsidiary, now known as Ricoh Hong Kong Ltd.). -10- March 1981 The Company builds the Ricoh Electronics Development Center at the Ikeda plant to develop and manufacture electronic devices. October 1981 The Company lists its securities on the Paris Stock Exchange. May 1982 The Company establishes a sensitized paper production facilities in Fukui (now known as the Fukui plant), which takes over some of the sensitized paper production from the Osaka plant. July 1982 The Company launches its information technology equipment facility in Hatano, Kanagawa (now known as the Hatano plant). December 1983 The Company establishes Ricoh UK Products Ltd. (a subsidiary). October 1985 The Company builds a copier manufacturing plant in Gotemba, Shizuoka (now known as the Gotemba plant). April 1986 The Company opens a research and development facility in Yokohama, Kanagawa (now known as the Ricoh Research and Development Center) in commemoration of Ricoh's 50th anniversary, to which it transfers some of its research and development operations from the Ohmori plant. April 1987 The Company establishes Ricoh Industrie France S.A. (a subsidiary, now known as Ricoh Industrie France S.A.S.). April 1989 The Company sets up an electronic devices facility in Yashiro-cho, Kato-gun, Hyogo (now known as the Yashiro plant). January 1991 The Company establishes Ricoh Asia Industry (Shenzhen) Ltd. (a subsidiary) in China. March 1995 Ricoh Corporation acquires Savin Corporation, an American office equipment sales company. September 1995 The Company acquires Gestetner Holdings PLC (now known as NRG Group PLC), a British office equipment sales company. January 1996 Ricoh Leasing Co., Ltd. lists its securities on the Second Section of the Tokyo Stock Exchange (currently listed on the First Section of the Tokyo Stock Exchange). December 1996 The Company establishes Ricoh Asia Pacific Pte. Ltd. (a subsidiary) in Singapore. March 1997 The Company establishes Ricoh Silicon Valley, Inc. (now known as Ricoh Innovations, Inc.) in the United States. August 1999 Ricoh Hong Kong Ltd. acquires Inchcape NRG Ltd., a Hong Kong-based office equipment sales company. March 2000 Tohoku Ricoh Co., Ltd. lists its securities on the Second Section of the Tokyo Stock Exchange. January 2001 Ricoh Corporation acquires Lanier Worldwide, Inc., an American office equipment sales company. -11- October 2002 The Company establishes Ricoh China Co., Ltd. (a subsidiary). April 2003 Tohoku Ricoh Co., Ltd. becomes a wholly-owned subsidiary of the Company. October 2004 The Company acquires Hitachi Printing Solutions, Ltd. (now known as Ricoh Printing Systems, Ltd.) in Japan. August 2005 The Company opens Ricoh Technology Center in Ebina, Kanagawa to integrate its domestic R&D facilities and offices. November 2005 The Company relocates its headquarters to Chuo-ku, Tokyo. Our registered office and head office are as follows: Address Telephone number --------------------------------------- ---------------- Registered Head office 3-6 Naka Magome 1-chome, Ohta-ku, Tokyo 143-8555, Japan +81-3-3777-8111 Executive office 13-1, Ginza 8-chome, Chuo-ku, Tokyo 104-8222, Japan +81-3-6278-2111 Principal Capital Investments ----------------------------- Ricoh's capital expenditures for the fiscal years 2004, 2005 and 2006 were Yen 75.5 billion, Yen 84.7 billion and Yen 102.0 billion, respectively. Ricoh directs a significant portion of its capital expenditures towards digital and networking equipment, such as digital plain paper copiers ("PPCs"), multi-functional printers ("MFPs") and laser printers, and manufacturing facilities to maintain or enhance its competitiveness in the industry. In fiscal year 2006, Ricoh also incurred capital expenditures to consolidate some of its operations at the headquarters and its domestic research and development facilities and offices at the Ricoh Technology Center, and to establish a color toner factory in Japan. Ricoh projects that for the fiscal year ending March 31, 2007, its capital expenditures will amount to approximately Yen 90.0 billion, principally for the following purposes: investment in facilities for the manufacturing of digital and networking equipment with a new engine having higher cost efficiency, quality, security and connectivity, a new polymerized toner factory, and new accounting, and sales force automation and marketing support systems. B. Business Overview Ricoh is a leading manufacturer of office automation equipment. Ricoh's products include copiers, printers, facsimile machines, and related supplies and services. Ricoh is also a prominent manufacturer of digital and advanced electronic devices. In recent years, Ricoh has been rapidly building a solid presence globally as a comprehensive document solutions provider that helps its customers streamline their businesses and decrease operating costs. -12- PRODUCTS - -------- As part of the 15th Medium-Term Management Plan, which covers the period from fiscal year 2006 through fiscal year 2008, 2006, Ricoh reclassified its business segments into the "Office Solutions", "Industrial Products" and "Other" segments. Presentation of business segments for prior periods has been restated to conform to current presentation. Its previous segments consisted of the "Office Equipment" and "Other Businesses" segments, effective as of and from April 1 2005. This segment change realigns Ricoh's operating segments in a manner that is consistent with the way in which Ricoh's management currently analyzes its business operations. For additional discussion regarding the 15th Medium-Term Management Plan, see Item 5. Operating and Financial Review and Prospects - OVERVIEW. The financial statements and the accompanying disclosure from previous years included in this Form 20-F have been restated in accordance with this new classification system described above.
SALES BY PRODUCT - ---------------------------------------------------------------------------------------- Millions of Yen (except for percentages) For the Year Ended March 31, - ---------------------------------------------------------------------------------------- 2004 2005 2006 ----------------------------------------------------------- OFFICE SOLUTIONS Imaging Solutions 1,271,882 71.4% 1,332,299 73.4% 1,446,635 75.5% Network System Solutions 188,514 10.6 199,129 11.0 190,593 10.0 INDUSTRIAL PRODUCTS 111,392 6.3 119,408 6.6 120,636 6.3 OTHER 208,457 11.7 163,272 9.0 157,226 8.2 - ---------------------------------------------------------------------------------------- Total 1,780,245 100.0% 1,814,108 100.0% 1,915,090 100.0%
OFFICE SOLUTIONS - ---------------- This segment consists of products that are widely used in the office environment, and is categorized as follows: (1) Imaging Solutions In fiscal year 2006, the Imaging Solutions product category accounted for 75.5% of Ricoh's net sales. The primary functions of products in this category are (i) to produce copies and (ii) to print or produce images using a network. Stand-alone copiers are representative of products in the first group, and MFPs and laser printers are representative of products in the second group. -13- The principal products in the Imaging Solutions product category include monochrome and color digital copiers, MFPs, laser printers, digital duplicators, facsimile machines, analog PPCs, and diazo copiers. Ricoh continues to be a global leader in PPCs and MFPs and has been a pioneer in the development of digital machines. Ricoh manufactures a wide range of PPCs and MFPs with a variety of copying speeds and functions such as double-sided printing, sorting, reducing and enlarging, and zoom adjustment of copy sizes. PPCs and MFPs use a drum or other medium coated with a photo conductive material on which an image of the original document is projected optically and developed by applying a dry powder form toner. In recent years, Ricoh has strengthened its digital PPC and MFP product line-up with new product offerings that range from low-end models to high-end models. Furthermore, in order to meet its customers' needs in the office environment, Ricoh continues to strengthen its capabilities in color laser printers, mid- and high-volume or high-speed printers that can be connected to a network. In fiscal year 2006, Ricoh had strong sales growth in printers as it greatly broadened its product line-up, reinforced its sales and distribution channels and expanded its marketing activities. Sales of MFPs and laser printers, designed to provide information technology support for all types of office environments by delivering enhanced basic features (i.e., reduction, enlargements, etc.), simpler operation, reduced paper consumption through electronic storage, and better connectivity with document distribution and storage systems, performed particularly well as such features satisfied the demands of customers. For example, in the MFP product line, Ricoh released its imagio MP C3000/C2500 Series in Japan. Further enhancements were made to the MP C3000/C2500 Series to enable users to easily connect to various document distribution and storage systems and to provide protective measures to ensure the security of the content of the documents being produced. Sales of laser printers also increased with the IPSiO CX9800 and IPSiO CX8800 laser printers performing favorably in the domestic market as these products also met the needs of customers. In fiscal year 2005, Ricoh acquired a printing company in Japan, which is now known as Ricoh Printing Systems, Ltd. With this acquisition, Ricoh's printer product line-up expanded to include printers that have super high-speed printing capabilities, a product line in which Ricoh previously did not have any market share. In addition to such specialized super high-speed printers, Ricoh Printing Systems, Ltd. manufactures and markets low- and high-speed printers for the office environment. Ricoh offers a comprehensive line of copiers that can be attached to a network. These machines sold well in both the domestic and overseas markets in fiscal year 2006, mainly because the features of these copiers reflected the recent trends in customer needs. Customer demand has shifted toward increased printing speed, networking capabilities, colorization, lower costs of ownership, and enhanced office productivity. In the overseas markets, the release of a number of copier models under the Aficio brand has led to Ricoh's rapid achievement of a dominant position in the digital copier market. -14- With respect to facsimile equipment, Ricoh marketed the world's first high-speed facsimile equipment in 1973 with a transmission speed of one minute per page. Since then, Ricoh has been manufacturing various high-speed facsimile machines, including compact, low-priced models that feature multiple functions (such as copying capabilities) and higher memory capacities. The market for facsimile machines continues to mature, with demand shifting towards small and home offices seeking low-cost models as corporate users tend to prefer multifunctional, networkable machines and printers. In addition, corporate users also are moving towards electronic forms of transmitting images using portable document formats that were not widely used or available in the past. In response to these trends in the facsimile market, Ricoh has focused its efforts on offering MFPs with facsimile capability. (2) Network System Solutions The primary function of products in this category is to assist in establishing a network environment for customers. The principal products in this category include personal computers and servers, network systems, application software, and related services and support. For fiscal year 2006, this product category accounted for 10.0% of Ricoh's net sales. As in fiscal year 2005, Ricoh continues to enjoy steady growth in the sale of its document solutions software and support services, which allow customers to seamlessly manage electronic and paper-based information. Although sales in personal computers and servers decreased in fiscal year 2006 as compared to fiscal year 2005, customers continued to rely upon Ricoh's support and services to optimize their total printing costs. Through such support services Ricoh has been able to lower total printing costs for its customers by furnishing facility management assistance to its customers in Japan (where physical space is costly) and increasing the efficiency of the printing process. INDUSTRIAL PRODUCTS - ------------------- This segment consists of products that are used in the industrial sector. For fiscal year 2006, this segment accounted for 6.3% of Ricoh's net sales. Principal products in this category include thermal media, optical equipment, semiconductor devices, electronic components, and measuring equipment. Through technological enhancements in its thermal media business Ricoh was able to expand its business from the production of thermal paper for use in facsimiles to a variety of business areas, including the production of POS sheets, logistics management sheets, reward cards, identification cards, medical films, and other uses. Ricoh's optical equipment business utilizes technology originally developed by Ricoh for its copiers and cameras. This business supplies optical equipment and optical supply parts, such as lens units, to third parties. -15- Ricoh offers a various types of semiconductor devices. Such devices include application-specific integrated circuits (ASICs) and application specific standard products (ASSPs) that are often used in digital copiers, printers, personal computers and mobile and cellular phones. The electronic components business supplies parts to manufacturing plants of Ricoh in connection with the production of its own products, such as copiers and printers, as well as to third parties. Net sales to third parties have increased in response to increased demand for such electronic components. Ricoh is one of the leading companies in the measuring equipment business in Japan. Ricoh offers a wide range of measuring equipment such as water meters, gas meters, and gas leak detectors. Sales in the measuring equipment category are greatly affected by fluctuations in market demand. OTHER - ----- This segment, which accounted for 8.2% of Ricoh's net sales in fiscal year 2006, includes digital cameras, optical discs, financing and logistics services. Ricoh is one of the pioneers in commercializing digital cameras, which have tremendous potential as "image capturing devices." As digital cameras may be used in a variety of ways to input images, Ricoh expects that the sales of digital cameras will continue to grow in the future. With respect to optical discs, in fiscal year 2005, Ricoh decided to focus on its media business and withdrew from the self-developed drive business, which used proprietary technology developed by Ricoh, and the key-module/parts unit business. Ricoh's optical disc product line-up includes compact discs (CDs), CD-R/RW and DVD+RW/+R discs. Ricoh provides certain financing services through Ricoh Leasing Co., Ltd. Ricoh Leasing Co., Ltd. leases industrial equipment and medical equipment as well as office equipments, and offers loans, such as support loans, to small businesses and independent doctors. Ricoh Logistics System Co. Ltd. offers logistics services in the delivery, distribution and storage of products such as electronic products, office equipment, and electronic and machinery parts. SALES AND DISTRIBUTION - ---------------------- -16- Ricoh utilizes three channels in the distribution of its products to end-user customers in Japan: (1) direct sales by Ricoh to the end-user customer through approximately 40 domestic subsidiaries and affiliates; (2) sales through independent dealers of office machinery; and (3) sales through independent stationery wholesalers and retailers. Ricoh estimates that over one-half of its domestic unit sales of copiers are conducted through its direct sales channel to the end-user customer, with the remaining balance of unit sales being divided between sales through independent dealers of office machinery and independent stationery wholesalers and retailers. These sales channels are coordinated by Ricoh's seven regional sales subsidiaries located in the Hokkaido, Tohoku, Kanto, Chubu, Kansai, Chugoku and Kyushu areas. One of Ricoh's strategies in expanding its overseas marketing and sales channels has been to acquire office equipment sales companies in various locations around the world through which it can sell its products. Accordingly, in addition to selling Ricoh brand name products through its overseas sales subsidiaries, affiliates and independent dealers, similar to Japan, Ricoh also sells its products through the following two marketing and sales channels in the overseas market: (1) sales of products under brand names which Ricoh purchased through acquisitions (i.e., the "Savin" brand, the "Gestetner" brand and the "Lanier" brand) and (2) sales of Ricoh's products as the original equipment manufacturer ("OEM") of copiers and printers of other companies. Savin, Gestetner and Lanier were originally Ricoh's OEM distributors prior to their acquisition. Ricoh has organized sales and distribution channels to accommodate its four operating regions outside of Japan: (1) the Americas; (2) Europe, Africa, and the Middle East; (3) Asia and Oceania; and (4) China. Ricoh recognizes revenue for sales upon the delivery and installation of equipment to its end-user customers. Approximately 15% of Ricoh's total sales revenues is comprised of revenues from sales of equipment generated under sales-type leases. Important information regarding the methods by which Ricoh recognizes revenue is also set forth in Item 5. Critical Accounting Policies and Note 2 to the Consolidated Financial Statements which are a part of this annual report. AFTER-SALES SERVICE - ------------------- Ricoh provides repair and maintenance services for its products to Ricoh's end-user customers under the belief that periodic and timely maintenance services are essential in preserving Ricoh's market share in the relevant products. These maintenance services are provided to customers pursuant to maintenance service contracts customarily entered into at the time the equipment is sold. In Japan, repair and maintenance services are generally provided by Ricoh's service specialists. Ricoh's service network in Japan includes service centers operated by Ricoh and its affiliates and service outlets operated by other companies. Recently, Ricoh began building nationwide capabilities for its Customer Support System in order to enhance customer satisfaction and service efficiency. This system allows Ricoh to remotely monitor copiers that are in operation and provide immediate service to such copiers. The total number of Ricoh's sales and service personnel in Japan is -17- approximately 22,500. Similar to Japan, Ricoh employees and contracted maintenance providers provide repair and maintenance services to end-user customers in the overseas market who purchased Ricoh products. The total number of Ricoh's sales and service personnel overseas is approximately 20,700. Additional information regarding how Ricoh accounts for its after-sales services is set forth in Item 5. Critical Accounting Policies and Note 2 to the Consolidated Financial Statements which are a part of this annual report. PRINCIPAL MARKETS - ----------------- Ricoh distributes its products and competes in the following four geographic areas: Japan, the Americas, Europe and Other. In the aggregate, Ricoh's sales expanded in fiscal year 2006. As noted below, for the fiscal year 2006, sales in Japan, the Americas, Europe and Other as a percentage of total sales were 50.8%, 20.2%, 22.7% and 6.3%, respectively. The table below breaks down for each geographic area the total sales amount and percentage of such sales amount as compared against total net sales for the last three fiscal years. SALES BY GEOGRAPHIC AREA - -------------------------------------------------------------------------- Millions of Yen (except for percentages to net sales) For the Year Ended March 31, - -------------------------------------------------------------------------- 2004 2005 2006 ---------------------------------------------------------- JAPAN 914,060 51.3% 972,975 53.6% 972,076 50.8% THE AMERICAS 326,380 18.3 325,597 17.9 387,412 20.2 EUROPE 402,392 22.6 408,906 22.5 434,800 22.7 OTHER 137,413 7.8 106,630 6.0 120,802 6.3 - -------------------------------------------------------------------------- Total 1,780,245 100.0% 1,814,108 100.0% 1,915,090 100.0% - --------------------------------------------------------------------------- Note: Sales amounts set forth in the above table are based on the location of the purchaser of the product. For example, if the product is manufactured in Japan and sold to a purchaser located in the United States, such sale would be recorded as a sale in the Americas geographic segment. (1) Japan In Japan, the stock market, capital expenditures and corporate performance showed recovery; however the Japanese economy was affected by the escalating prices of raw materials and crude oil, and overall demand in the domestic market was below our expectations. Moreover, market competition in the types of products that Ricoh manufactures and markets has increased in recent years. In order to succeed in this environment, Ricoh has been working to gradually shift its product line-up in Japan from analog stand-alone equipment and monochrome products to digital networkable equipment and color products to respond to trends in customer preferences. Ricoh also offers business solutions with networking systems and equipment whose functions are optimized for the customer's business environment in order to help customers manage their Total Document Volume ("TDV") more effectively and increase efficiency in the -18- office. The acquisition of Ricoh Printing Systems, Ltd. in fiscal year 2005 further enhanced Ricoh's printer business. As discussed under the heading "PRODUCTS", Ricoh Printing Systems, Ltd. manufactures and markets low- and high-speed printers for the office environment, and the acquisition of this company has reinforced Ricoh's office color printer and print-on-demand product lines. As a result of these strategies, the sale of certain products, such as MFPs, color PPCs and color laser printers, increased despite intense competition in the domestic market. (2) The Americas In fiscal year 2006, Ricoh continued to broaden and reinforce its sales network, especially in North America, where the economy remained strong. Ricoh further enhanced its sales and marketing efforts in new printing systems to replace analog equipment in response to customer demands for networkable digital products, color copiers and printers. Ricoh also engaged in various marketing initiatives in an effort to expand its sales to major corporate accounts by taking advantage of its global production and distribution network, and high-quality products. As a result of these efforts, net sales in local currency increased by 13.0%. Net sales denominated in Japanese Yen increased by 19.0% due to the depreciation of the Japanese Yen against the U.S. Dollar. (3) Europe Economic conditions in Europe remained relatively stable in fiscal year 2006 and sales of MFPs and laser printers increased as Ricoh continued to exert its efforts to introduce new products in such product lines. The continuous enhancement and introduction of products in the Office Solutions segment enabled Ricoh to further improve its sales in Europe as customers were able to fulfill more of their office equipment needs through Ricoh. Ricoh was able to increase its sales in both monochrome and color MFPs and laser printers, since the features of these products satisfy the demands of customers and allow Ricoh to maximize its profits. These efforts allowed Ricoh to maintain its top market share position in Europe for copiers and MFPs in fiscal year 2006. (4) Other In fiscal year 2006, customer demand continued to shift from analog models to digital networkable and color models of business equipment in China and the other markets in Asia and Oceania. This led to an increase in sales of MFPs and laser printers in these markets, while sales in the optical discs business decreased. Because the Chinese market is expected to continue to expand, Ricoh continued to place significant importance on the Chinese market not only as a production site but also as a potential market to expand sales of its products in the future. In fiscal year 2006, Ricoh enhanced its Chinese production, sales and services and further reinforced its emphasis on the needs of its customers in order to strengthen its revenues and earnings. This emphasis on emerging markets, including China, is one of the means by which Ricoh plans to achieve growth under the 15/th/ Medium-Term Management Plan, which is discussed in more detail in Item 5. Operating and Financial Review and Prospects - OVERVIEW. -19- COMPETITION - ----------- The office equipment industry in which Ricoh primarily competes remains highly competitive and Ricoh continues to encounter intense competition in its Office Solutions segment. Furthermore, competition in each of the product categories in the Office Solutions segment is expected to increase in the future as Ricoh's competitors enhance and expand their product and service offerings. This increase in competition may result in price reductions and decreases in profitability as well as market share in these products. Ricoh cannot provide assurances that it will be able to compete successfully against existing or future competitors. Moreover, Ricoh may face competition from some of its current customers and companies with which Ricoh has strategic business relationships. The size and number of our competitors vary across our product categories, as do the resources allocated by our competitors to the markets Ricoh targets. Ricoh's competitors may have greater financial, personnel, and other resources than Ricoh has in a particular market or overall. These competitors may have greater resources available to them to respond quickly to new technologies and may be able to undertake more extensive marketing campaigns than Ricoh. Competitors may also adopt more aggressive pricing policies for their products and make more attractive offers to potential customers, employees, and strategic partners. These competitors may also make strategic acquisitions or establish cooperative relationships among themselves or with third parties to increase their ability to gain market share. Despite this intense competition in the office equipment industry, Ricoh's management believes that Ricoh will be able to maintain and enhance its position in the global market because of its experience, expertise and technical capabilities as a leading provider of office equipment, and dedication to meet customers' needs. SEASONALITY - ----------- Sales in the Office Solutions segment generally increase in March of each year, which is the end of the fiscal year for most Japanese companies. This is due to the increase in demand for these products as many Japanese companies and government entities try to expend their allotted capital expenditure budget for the fiscal year. Sales generated during the month of March each year due to this seasonality accounts for approximately 11% of Ricoh's domestic sales in Japan. However, the effect of this seasonality on a consolidated basis is minimal, as approximately 4% of Ricoh's total consolidated sales are generated during the month of March from domestic sales in Japan. SOURCES OF SUPPLY - ----------------- The raw materials, parts, and components used in the production of Ricoh's products are procured on a global basis. Generally, Ricoh maintains multiple suppliers for the most significant categories of raw materials, parts and components. Because very few of the raw materials required by Ricoh in manufacturing its products can be procured in Japan, most of the raw materials used by Ricoh come from outside of Japan. Ricoh -20- monitors the availability of raw materials on a regular basis to ensure that it will not encounter any shortages. Ricoh has not experienced any significant difficulty in obtaining the raw materials, parts and components necessary for it to manufacture its products and believes that it will be able to continue to obtain comparable raw materials, parts and components in sufficient quantities to meet its manufacturing needs in the future. The rise in crude oil prices may lead to an increase in the overall cost of procuring raw materials, parts and components. This is due to the fact that the cost of oil-based parts and components, the processing costs of raw materials and fuel costs of shipping and distributing such raw materials, parts and components may increase as a result of higher crude oil prices. However, Ricoh believes that the effect of price volatility with respect to obtaining raw materials, parts and components necessary in manufacturing its products can be managed. INTELLECTUAL PROPERTY - --------------------- Ricoh holds a large number of patents and trademark rights. While Ricoh considers such intellectual property rights to be valuable assets and important for its operations, it believes that its business is not dependent to any material extent upon any single patent or trademark right, or any related group of such rights it holds. Ricoh also has many licenses and technical assistance agreements covering a wide variety of products. Such agreements grant Ricoh the right to use certain Japanese and foreign patents or the right to receive certain technical information. However, Ricoh is not materially dependent on any single such license or agreement. In addition, Ricoh has granted licenses and technical assistance to various companies located in and outside of Japan. In certain instances, Ricoh has entered into cross-licensing agreements with other major international electronics and electrical equipment manufacturers. None of these agreements are likely to materially affect Ricoh's business or profitability. See Item 5.C. Patents and Licenses. GOVERNMENT REGULATIONS - ---------------------- Ricoh's business activities are subject to various government regulations in the various countries in which it operates, including regulations relating to business and investment approvals, export regulations, tariffs, antitrust, intellectual property, consumer and business taxation, exchange controls, and environmental and recycling requirements. Ricoh is also subject to environmental regulations in the jurisdictions in which it operates, particularly those jurisdictions in which it has manufacturing, research, or similar operations. Two recent environmental regulations which affect Ricoh's business are the European Union Directive on Waste Electrical and Electronic Equipment (WEEE Directive) and the European Union Directive on the Restriction on the Use of Certain Hazardous Substances in Electrical and Electronic Equipment (RoHS Directive). Beginning in August 2005, the WEEE Directive, as enacted by individual European -21- Union countries, makes manufacturers or distributors of electrical and electronic equipment in the European Union financially responsible for the collection, recycling, treatment, recovery and disposal of recovered electrical and electronic equipments. The RoHS Directive prohibits the use of various heavy metals, such as lead, mercury, cadmium, hexavalent chromium and brominated flame retardants (polybrominated biphenyls or polybrominated diphenyl ethers) in electrical and electronic equipment to be sold in the European Union market from July 2006. A variety of similar environmental regulations have been or are expected to be enacted in other jurisdictions where Ricoh operates. Ricoh is endeavoring to establish appropriate measures to comply with these new regulations. Ricoh currently operates, and hopes to continue operating, its business without significant difficulty in complying with applicable government regulations. C. Organizational Structure As of March 31, 2006, the Ricoh Group includes the Company and 298 subsidiaries and 20 affiliates located worldwide. Ricoh's research and development, manufacturing, sales, and service activities center on office equipment, optical equipment, and other devices. The Company is the parent of the Ricoh Group. The Company heads the research and development of Ricoh products with assistance from its subsidiaries. The Company and its subsidiaries and affiliates maintain an integrated domestic and international manufacturing and distribution structure. The following is a list of the principal subsidiaries and affiliates of Ricoh: - ------------------------------------------------------------------------------ Proportion Country of of ownership Company Name Formation interest Main businesses - ------------------------------------------------------------------------------ (SUBSIDIARIES) - ------------------------------------------------------------------------------ Ricoh Optical Industries Japan 100.0 Manufacturing optical Co., Ltd. equipment - ------------------------------------------------------------------------------ Tohoku Ricoh Co., Ltd. Japan 100.0 Manufacturing office equipment - ------------------------------------------------------------------------------ Ricoh Unitechno Co., Ltd. Japan 100.0 Manufacturing parts for office equipment - ------------------------------------------------------------------------------ Ricoh Elemex Corporation Japan 55.9 Manufacturing and sales of office equipment and minuteness equipment - ------------------------------------------------------------------------------ Ricoh Microelectronics Japan 100.0 Manufacturing parts for Co., Ltd. office equipment - ------------------------------------------------------------------------------ Ricoh Keiki Co., Ltd. Japan 100.0 Manufacturing parts for office equipment - ------------------------------------------------------------------------------ Ricoh Printing Systems, Japan 100.0 Manufacturing and sale of Ltd. office equipment - ------------------------------------------------------------------------------ Ricoh Tohoku Co., Ltd. Japan 100.0 Sale of office equipment - ------------------------------------------------------------------------------ Ricoh Chubu Co., Ltd. Japan 100.0 Sale of office equipment - ------------------------------------------------------------------------------ -22- - ------------------------------------------------------------------------------ Proportion Country of of ownership Company Name Formation interest Main businesses - ------------------------------------------------------------------------------ Ricoh Kansai Co., Ltd. Japan 100.0 Sale of office equipment - ------------------------------------------------------------------------------ Ricoh Chugoku Co., Ltd. Japan 100.0 Sale of office equipment - ------------------------------------------------------------------------------ Ricoh Kyushu Co., Ltd. Japan 100.0 Sale of office equipment - ------------------------------------------------------------------------------ Hokkaido Ricoh Co., Ltd. Japan 97.8 Sale of office equipment - ------------------------------------------------------------------------------ Ricoh Sales Co., Ltd. Japan 100.0 Sale of office equipment - ------------------------------------------------------------------------------ Ricoh Technosystems Co., Japan 100.0 Maintenance, service and Ltd. sale of office equipment - ------------------------------------------------------------------------------ Ricoh Logistics System Japan 100.0 Logistics services and Co., Ltd. custom clearances - ------------------------------------------------------------------------------ Ricoh Leasing Co., Ltd. Japan 51.5 General leasing (51.1) - ------------------------------------------------------------------------------ Ricoh Electronics, Inc. U.S.A. 100.0 Manufacturing office equipment and related supplies - ------------------------------------------------------------------------------ Ricoh UK Products Ltd. U.K. 100.0 Manufacturing office equipment - ------------------------------------------------------------------------------ Ricoh Industrie France France 100.0 Manufacturing office S.A.S. equipment and related supplies - ------------------------------------------------------------------------------ Ricoh Asia Industry China 91.0 Manufacturing office (Shenzhen) Ltd. (100.0) equipment and related supplies - ------------------------------------------------------------------------------ Shanghai Ricoh Facsimile China 94.5 Manufacturing and sale of Co., Ltd. office equipment - ------------------------------------------------------------------------------ Ricoh Corporation U.S.A. 100.0 Sale of office equipment - ------------------------------------------------------------------------------ Lanier Worldwide, Inc. U.S.A. 100.0 Sale of office equipment - ------------------------------------------------------------------------------ Ricoh Europe B.V. Netherlands 100.0 Sale of office equipment - ------------------------------------------------------------------------------ NRG Group PLC U.K. 100.0 Sale of office equipment - ------------------------------------------------------------------------------ Ricoh Asia Industry Ltd. Hong Kong, 90.0 Sale of office equipment China - ------------------------------------------------------------------------------ Ricoh Asia Pacific Pte, Singapore 100.0 Sale of office equipment Ltd. - ------------------------------------------------------------------------------ Ricoh China Co., Ltd. China 100.0 Sale of office equipment - ------------------------------------------------------------------------------ Ricoh Finance Nederland Netherlands 100.0 Corporate finance B.V. - ------------------------------------------------------------------------------ And 268 other subsidiaries - ------------------------------------------------------------------------------ (AFFILIATES) - ------------------------------------------------------------------------------ Coca-Cola West Japan Co., Japan 22.2 Manufacturing and sale of Ltd. (22.4) soft drink - ------------------------------------------------------------------------------ Sindo Ricoh Co., Ltd. Korea 20.0 Manufacturing and sale of office equipment - ------------------------------------------------------------------------------ And 18 other affiliates - ------------------------------------------------------------------------------ Notes: 1. Proportion of ownership interest includes indirect ownership. 2. Figures in parentheses indicate portion of voting power if different from portion of ownership interest. 3. Ricoh Leasing Co., Ltd. is the only subsidiary of Ricoh that is a "significant subsidiary" as defined in Rule 1-02(w) of Regulation S-X. -23- D. Property, Plant and Equipment Ricoh manufactures its products primarily in fifteen plants in Japan and six plants overseas. Ricoh owns all of the buildings and the land on which its plants are located, with the exception of certain leases of land and floor space of certain of its subsidiaries. None of these leased land and floor spaces have major encumbrances on them. The following table gives certain information as of March 31, 2006 regarding the Company's and its subsidiaries' principal production and other facilities. With the exception of GR Advanced Materials Ltd., the production and other facilities listed below have floor space exceeding 10,000 square meters. - ------------------------------------------------------------------------------ Principal activities and Name (Location) Floor space products manufactured - ------------------------------ ----------------- ----------------------------- (in thousands of square meters) Japan: Ricoh Company, Ltd. Ohmori Plant (Tokyo) 52 Parts relating to copiers Atsugi Plant (Kanagawa) 72 Office equipment and other products Numazu Plant (Shizuoka) 80 Paper and toner Ikeda Plant (Osaka) 17 Electronic devices Hatano Plant (Kanagawa) 15 Printed circuit boards and electronic components Fukui Plant (Fukui) 34 Papers and toner Gotenba Plant (Shizuoka) 70 Office equipment Yashiro Plant (Hyogo) 36 Electronic devices Ricoh Technology Center 69 Research and development (Kanagawa) ("R&D") Head Office (Tokyo) 21 Head office and marketing of office equipment Research & Development 17 Research and development Center (Kanagawa) ("R&D") System Center (Tokyo) 10 Information system center, marketing of office equipment and other business Ginza Office (Tokyo) 11 Marketing of office equipment and other business Shin-Yokohama office 40 Marketing of office (Kanagawa) equipment, other business and related services Subsidiaries: Ricoh Optical Industries 18 Photographic equipment Co., Ltd. (Iwate) Tohoku Ricoh Co., Ltd. 55 Office equipment, parts (Miyagi) relating to copiers and duplicators -24- - ------------------------------------------------------------------------------ Principal activities and Name (Location) Floor space products manufactured - ------------------------------ ----------------- ----------------------------- (in thousands of square meters) Hasama Ricoh , Inc. 14 Parts relating to copiers and (Miyagi) data processing equipment Ricoh Unitechno Co., Ltd. 18 Office equipment (Saitama) Ricoh Elemex Corporation. 47 Office equipment and (Aichi) measuring equipment Ricoh Microelectronics 11 Printed circuit boards and Co., Ltd. (Tottori) electronic components Ricoh Keiki Co., Ltd. 10 Printed circuit boards and (Saga) parts relating to copiers Overseas: Ricoh Electronics, Inc. 100 Copiers, parts relating to (Irvine, Santa Ana and copiers, toner and thermal Tustin, California and paper Lawrenceville, Georgia, U.S.A.) Ricoh UK Products Ltd. 41 Copiers, parts relating to (Telford, United Kingdom) copiers and toner Ricoh Industries France 42 Copiers, parts relating to S.A.S. copiers and thermal paper (Colmar, France) Ricoh Asia Industry 42 Copiers, parts relating to (Shenzhen) Ltd. copiers, and toner (Shenzhen, China) Shanghai Ricoh Facsimile 17 Copiers, facsimile equipment Co., Ltd. and parts relating to copiers (Shanghai, China) GR Advanced Materials Ltd. 7 Supplies relating to (Scotland, United Kingdom) duplicators - ------------------------------------------------------------------------------ Ricoh considers its manufacturing facilities to be well maintained and believes its plant capacity is adequate for its current needs, though successive investment in manufacturing facilities is being made for its long-term success. -25- Item 4A. Unresolved Staff Comments ------------------------- Not applicable. Item 5. Operating and Financial Review and Prospects -------------------------------------------- OVERVIEW Ricoh is engaged primarily in the development, manufacturing, sales and servicing of office automation equipment, as well as digital cameras, semiconductor devices and measuring equipment. Ricoh supports its office equipment business by offering customers various "solution" systems that work with personal computers and servers, and related product support and after-sales services to assist customers in fully utilizing the Ricoh products that they purchase. Ricoh's support services include assisting customers in setting up their information technology environment or network administration. Ricoh also offers various supplies and peripheral products to be used with its products and systems. As part of the 15th Medium-Term Management Plan, which covers the periods from fiscal year 2006 through fiscal year 2008, Ricoh reclassified its business segments into the following three segments beginning in fiscal year 2006: (i) Office Solutions, which includes Imaging Solutions and Network System Solutions, (ii) Industrial Products, which includes thermal media, optical equipments, semiconductor devices, electronic components and measuring equipments, and (iii) Other, which includes digital cameras, optical discs, financing and logistics services. Ricoh's business segments previously consisted of Office Equipment and Other Businesses. Presentation of business segments for prior periods has been restated to conform to current presentation. Ricoh's management believes that this reclassification realigns Ricoh's operating segments in a manner that is consistent with the way in which its management currently manages business operations. The products that are included within the Industrial Products segment have over time become an important source of revenue for Ricoh in terms of both sales and diversification. What these products have in common is that the products within this segment utilize various technologies developed internally by Ricoh for its Office Solutions business and products in this group present a potential niche market for Ricoh in the future. By manufacturing and selling products that utilize these technologies, Ricoh hopes to expand and diversify its revenue base. Ricoh distributes its products and competes in the following four geographic areas: (i) Japan, (ii) the Americas, (iii) Europe and (iv) Other, which includes China, Asia (exclusive of Japan) and Oceania. For additional details on Ricoh's business, see Item 4.B. Information on the Company - Business Overview. Because of the global nature of Ricoh's operations, Ricoh's results of operations and financial conditions are affected both by economic and political developments in Japan and the rest of the world, as well as by demand and competition in its lines of business. Although the Japanese economy displayed some upward momentum and the United States economy maintained its strength in fiscal year 2006, the business climate in -26- which Ricoh operates remains unpredictable as a result of the continuing depreciation of the Japanese Yen against the U.S. Dollar and the economic uncertainties of the emerging markets, such as Brazil, Russia, India and China (commonly known as "BRICs"). Furthermore, competition in the businesses we operate has increased significantly and is likely to continue increasing in the future. The two most significant trends in the office equipment market continues to be the movement towards digital networking systems from stand-alone models and the shift in customers' demands toward color products from monochrome products. In response to these accelerating trends, other companies are introducing color products and digital networking systems, increasing the level of competition in these products. Ricoh seeks to prevail over this intense competition in the office equipment market by continually providing customers with equipment that optimizes the total cost of ownership of such equipment and enhancing office productivity and efficiency. Historically, Ricoh's revenues have been derived mainly from the manufacturing and sale of equipment (such as copiers and printers). In the current competitive environment, the key factor to achieving revenue growth continues to be the expansion of available product-lines and areas of services to address the increase in customer demand for digitization, coloring and high print volume, which became possible upon the introduction of printers with high-speed printing capabilities. To achieve sustained growth in the current environment, Ricoh's goal is to broaden its revenue and earnings base by increasing the total copying or printing volume of its customers (which Ricoh refers to as "Building Total Document Volume") and the amount of revenue per copy or printed page. To attain this goal, Ricoh's strategies continue to include (1) replacing monochrome products with color models at prices comparable to those of monochrome models, (2) expanding sales of high-speed models, and (3) deploying printing solutions so that customers can optimize the total output costs of their copiers and printers. In fiscal year 2006, net sales of MFPs as a whole increased by 18.4% as compared to fiscal year 2005. A 23.6% increase in net sales of MFPs with color capabilities in fiscal year 2006 significantly contributed to this 18.4% increase in net sales of MFPs in fiscal year 2006. Despite this challenging environment, Ricoh recorded revenue growth for the 12th consecutive year in fiscal year 2006. Ricoh strove to remain competitive and achieve sustained growth by placing a high priority on creating products that added value for customers in new ways (for example, by increasing printing speeds or allowing easier network connectivity) and managing its operations in a highly efficient manner. To this end, Ricoh continues to reinforce its technological strengths by making capital expenditures and investments in research and development to create products and services that can provide new value for its customers. At the same time, Ricoh continues to achieve steady progress in increasing its operating efficiency through cost-cutting measures across its business units, which include the reduction of production costs and the streamlining of its business structure, as well as supply chain management. As part of its strict cost management policy, Ricoh now analyzes the cost structure of its products at the design phase in order to minimize the costs of production. Through such policy, Ricoh seeks to maximize profits. Ricoh also continues to pursue increased efficiency in -27- the use of financial resources by decreasing its interest-bearing debt by effectively managing and utilizing the funds available to it on a group-wide basis. Ricoh's consolidated net sales increased by 5.6% to Yen 1,915.0 billion for the fiscal year ended March 31, 2006, from Yen 1,814.1 billion for the fiscal year ended March 31, 2005, due primarily to the increase in net sales of higher-margin, value-added products such as MFPs and laser printers, and the positive effect in fiscal year 2006 of the appreciation of the U.S. Dollar and the Euro relative to the Japanese Yen, which was offset in part by a decline in sales of personal computers, servers and optical discs. Ricoh's operating income increased by 12.2%, while operating income as a percentage of net sales increased from 7.5% to 7.9%. As discussed above, sales in highly profitable product-lines contributed to the increase in operating income in fiscal year 2006. Fiscal year 2006 was the first year of the 15th Medium-Term Management Plan. The plan aims to increase corporate growth through an efficient and cost-effective management of Ricoh's business. Under this plan, Ricoh will allocate its business resources in an efficient manner to areas with growth potential and reduce its costs and expenses in order to maximize profits. Ricoh has identified the following business areas as the three key areas with future growth potential: (i) printing, (ii) emerging markets and (iii) the industrial sector. Ricoh plans to enhance its sales and profits by strengthening its position in business in which it currently operates and by expanding into new businesses in the above areas. In fiscal year 2006, Ricoh laid the groundwork to attain the goals of the 15th Medium-Term Management Plan. Having identified printing to be an area that presented opportunities for growth, Ricoh has taken steps to increase its offerings of MFPs, laser printers and color printers in fiscal year 2006 to further enhance its comprehensive offering of printers. Ricoh reallocated some of its resources to concentrate on the printing area in order to reinforce sales of its printing solutions, such as BC (black-color) conversion and TCO (total cost of ownership) reduction solution in the office environment. In addition, Ricoh will expand its business scope and size by entering into the high-end production printing market, focusing on low-end color laser printers and improving its sales of printers using Gel Jet technology. Furthermore, Ricoh enhanced its sales structure and solutions platform for document solutions that allow customers to comprehensively reduce work flow in order to promote the sales of such products to major companies, especially corporate customers with global operations. Ricoh also worked to promote the effective allocation of management resources to its business in the emerging markets, such as BRICs, as well as to its industrial sector business in fiscal year 2006. Ricoh has focused on the expansion of both its Office Solutions and Industrial Products segment businesses in the emerging markets. For example, Ricoh has established a thermal paper production and sales company in China in response to high market demand for thermal media products in that country. Ricoh considers the establishment of such company in China to be a strategic investment in a country with large growth potential. Ricoh has also focused on the potential niche market for products catering to the needs of the industrial sector, as opposed to individual retail customers. -28- Furthermore, in fiscal year 2006, Ricoh continued to emphasize capital expenditures in order to sustain its growth and improve its revenue base. As part of its investment strategy in the areas of sales and services, Ricoh consolidated the product maintenance and service functions of its domestic sales companies in Ricoh Technosystems Co., Ltd., a maintenance and service company. This consolidation allowed Ricoh to unify and enhance its client database system so that it could obtain a better understanding of its customers' needs and improve its ability to identify and offer various maintenance and service solutions tailored to such customers' needs. In addition, with respect to research and development activities, Ricoh consolidated all of its research and development facilities and offices relating to cutting-edge technology that it has developed for its Office Solutions products and established the Ricoh Technology Center, located in Ebina, Kanagawa. Through the integration of leading research and development, Ricoh expects that it will improve the efficiency of its research and development activities in its Office Solutions products. KEY PERFORMANCE INDICATORS The following table shows changes for the last three fiscal years in the key performance indicators that Ricoh's management uses in assessing its performance. - -------------------------------------------------------------------------------- For the year ended March 31, ----------------------------- 2004 2005 2006 -------- -------- --------- Net Sales (in billions of Yen) 1,780.2 1,814.1 1,915.0 Operating income to net sales ratio 8.4% 7.5% 7.9% Return on assets 7.7% 7.1% 7.8% Inventory turnover within months 1.72 1.90 1.82 Interest-bearing debt (in billions of Yen) 432.7 410.0 381.2 - -------------------------------------------------------------------------------- Note:Operating income to net sales ratio; Operating income divided by net sales. Return on Assets; Net income divided by average total assets for the fiscal year. Inventory turnover within months; Inventory divided by cost of sales, multiplied by 12. CRITICAL ACCOUNTING POLICIES The consolidated financial statements of Ricoh are prepared in conformity with U.S. generally accepted accounting principles. The preparation of these financial statements requires the use of estimates, judgments and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the periods presented. On an ongoing basis, Ricoh evaluates its estimates which are based on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. The results of these evaluations form the basis for making judgments about the carrying -29- values of assets and liabilities and the reported amounts of expenses that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions. Ricoh considers an accounting policy to be critical if it is important to its financial condition and results, and requires significant judgments and estimates on the part of management in its application. Ricoh believes that the following represent the critical accounting policies of the Company. For a summary of the significant accounting policies, including the critical accounting policies discussed below, please see Note 2 to the Consolidated Financial Statements. Revenue Recognition ------------------- Ricoh believes that revenue recognition is critical for its financial statements because net income is directly affected by the timing of revenue recognition. Ricoh generates revenue principally through the sale of equipment, supplies and related services under separate contractual arrangements for each. Generally, Ricoh recognizes revenue when (1) it has a firm contract, (2) the product has been shipped to and accepted by the customer or the service has been provided, (3) the sales price is fixed or determinable and (4) amounts are reasonably assured of collection. Most equipment sales require that Ricoh install the product. As such, revenue is recognized at the time of delivery and installation at the customer location. Equipment revenues are based on established prices by product type and model and are net of discounts. A sales return is accepted only when the equipment is defective and does not meet Ricoh's product performance specifications. Other than installation, there are no customer acceptance clauses in the sales contract. Service revenues result primarily from maintenance contracts that are normally entered into at the time the equipment is sold. Standard service fee prices are established depending on equipment classification and include a cost value for the estimated services to be performed based on historical experience plus a profit margin thereon. As a matter of policy, Ricoh does not discount such prices. On a monthly basis, maintenance service revenues are earned and recognized by Ricoh and billed to the customer in accordance with the contract and include a fixed monthly fee plus a variable amount based on usage. The length of the contract ranges up to five years; however, most contracts can be cancelled at any time by the customer upon a short notice period. Ricoh enters into contractual arrangements with multiple elements, which may include any combination of products, equipment, installation and maintenance. Ricoh allocates revenue to each element based on its relative fair value if such element meets the criteria for treatment as a separate unit of accounting as prescribed in the Emerging Issues Task Force Issue 00-21 ("EITF 00-21"), "Revenue Arrangements with Multiple Deliverables". Pursuant to EITF 00-21, the delivered item in a multiple element arrangement should be considered a separate unit of accounting if all of the following criteria are met: (1) a delivered item has value to customers on a stand-alone basis, (2) there is objective and reliable evidence of fair value of an undelivered item, and (3) the delivery of the undelivered item must be probable and controlled by Ricoh if the -30- arrangement includes the right of return. The price charged when the element is sold separately generally determines fair value. Otherwise, revenue is deferred until the undelivered elements are fulfilled as a single unit of accounting. Allowance for Doubtful Receivables ---------------------------------- Ricoh performs ongoing credit evaluations of its customers and adjusts credit limits based upon payment history and the customer's current creditworthiness, as determined by Ricoh's review of the customers' credit information. Ricoh continuously monitors collections and payments from its customers and maintains a provision for estimated credit losses based upon its historical experience and any specific customer collection issues that Ricoh has identified. While such credit losses have historically been within Ricoh's expectations and the provisions established, Ricoh 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 our customers could result in a material impact on Ricoh's consolidated results of operation and financial position. Pension Accounting ------------------ The total costs for employees' severance payments and pension plans represented approximately 2.0%, 0.8% and 1.1% of Ricoh's total costs and expenses for the fiscal years ended March 31, 2004, 2005 and 2006, respectively. The amounts recognized in the consolidated financial statements relating to employees' severance payments and pension plans are determined on an actuarial basis utilizing certain assumptions in the calculation of such amounts. The assumptions used in determining net periodic costs and liabilities for employees' severance payments and pension plans include expected long-term rate of return on plan assets, discount rate, rate of increase in compensation levels, average remaining years of service, and other factors. Among these assumptions, the expected long-term rate of return on assets and the discount rate are two critical assumptions. Assumptions are evaluated at least annually, and events may occur or circumstances may change that may have a significant effect on the critical assumptions. In accordance with accounting principles generally accepted in the United States of America, actual results that differ from the assumptions are accumulated and amortized over future periods, thereby reducing the year-to-year volatility in pension expenses. As of March 31, 2006, Ricoh's total amount of unrecognized net actuarial loss was Yen 64.7 billion. The entire amount of unrecognized net actuarial loss will be amortized over the average remaining years of employee service which is approximately 16 years, if such amount exceeds 10% of the greater of (1) the projected benefit obligation or (2) the fair value of the plan's assets. Such amortization will increase future pension costs. For the fiscal years ended March 31, 2004, 2005 and 2006, Ricoh used expected long-term rates of return on pension plan assets of 2.5%, 2.9% and 3.2%, respectively. In determining the expected long-term rate of return on pension plan assets, Ricoh considers the current and projected asset allocations, as well as expected long-term investment returns and risks for each category of the plan -31- assets based on Ricoh's analysis of historical results. The projected allocation of the plan assets is developed in consideration of the expected long-term investment returns for each category of the plan assets. To moderate the level of volatility in pension plan asset returns and to reduce risks, approximately 50%, 20%, 20% and 10% of the plan assets will be allocated to equity securities, debt securities, life insurance company general accounts and other financial instruments, respectively. As of March 31, 2006, the actual allocation of assets was generally consistent with the projected allocation stated above. The actual returns for fiscal years 2004, 2005 and 2006 were approximately 18.7% (gain), 4.1% (gain) and 20.9%(gain), respectively. The actual returns on pension plan assets may vary in future periods, depending on market conditions. The market-related value of plan assets is measured using fair values on the plan measurement date. With respect to the discount rate used in the annual actuarial valuation of the pension benefit obligations, the other critical assumptions, Ricoh's weighted average discount rates for the fiscal years ended March 31, 2004, 2005 and 2006 were 2.9%, 3.0% and 2.8%, respectively. In determining the appropriate discount rate, Ricoh considers available information about the current yield on high-quality fixed-income investments that are currently available and are expected to be available during the period corresponding to the expected duration of the pension benefit obligations. 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 Ricoh's pension plans as of March 31, 2006.
- ---------------------------------------------------------------------------------------------- CHANGE IN CHANGE IN PRE- PENSION BENEFIT TAX PENSION CHANGE IN ASSUMPTION OBLIGATIONS EXPENSES -------------------- ----------- -------- (Billions of Yen) 50 basis point increase / decrease in discount rate - /+ Yen 22 - /+ Yen 0 50 basis point increase / decrease in expected return on assets - - /+ Yen 1 - ----------------------------------------------------------------------------------------------
Impairment of Long-Lived Assets and Goodwill -------------------------------------------- As of March 31, 2006, the aggregate of Ricoh's property, goodwill and intangible assets was Yen 399.3 billion, which accounted for 19.6% of the total assets. Ricoh believes that impairment of long-lived assets and goodwill are critical to Ricoh's financial statements because the recoverability of the amounts or lack thereof, could significantly affect its results of operations. Ricoh periodically reviews the carrying value of its goodwill for continued appropriateness. This review is based upon Ricoh's projections of anticipated future cashflows and estimated fair value of the reporting units for which goodwill is assigned. Ricoh reviews long-lived assets and acquired intangible assets with a definite life for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset or group of assets may not be recoverable. The 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 net cashflows of the asset or group of assets. If an asset or group of assets is considered to be impaired, the impairment charge to be recognized is measured as the amount by which the carrying amount of the asset or -32- 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. While Ricoh believes that its estimates of future cashflows are reasonable, different assumptions regarding such cashflows could materially affect Ricoh's evaluations. Impairment of Securities ------------------------ Individual securities classified as available-for-sale securities are reduced to their fair market value by a charge to income for declines in value that are not temporary. Factors considered in assessing whether an impairment other than a temporary impairment exists include: (i) the length of time and extent of decline, (ii) the financial condition and near term prospects of the issuer and (iii) the intent and ability of Ricoh to retain such investment for a period of time sufficient to allow for any anticipated recovery in market value. Ricoh believes that impairment of securities is critical for its financial statements because it holds significant amounts of securities, the recoverability of which or lack thereof, could significantly affect its results of operations. Realizability of Deferred Tax Assets ------------------------------------ Ricoh records deferred tax assets and liabilities using the effective tax rate taking into consideration the effect of temporary differences between the book and tax bases of assets and liabilities. If the effective tax rate were to change, Ricoh would adjust its deferred tax assets and liabilities, through the provision for income taxes in the period of change, to reflect the effective tax rate expected to be in effect when the deferred tax items reverse. Ricoh records a valuation allowance to reduce Ricoh's deferred tax assets to an amount that is more likely than not to be recoverable. Ricoh considers future market conditions, forecasted earnings, future taxable income, the mix of earnings in the jurisdictions in which Ricoh operates, and prudent and feasible tax planning strategies in determining the need for a valuation allowance. In the event Ricoh were to determine that Ricoh would not be able to recover any portion of Ricoh's net deferred tax assets in the future, the unrecoverable portion of the deferred tax assets would be charged to earnings during the period in which such determination is made. Likewise, if Ricoh were to later determine that it is more likely than not that the net deferred tax assets would be recoverable, the previously recovered valuation allowance would be reversed. In order to recover its deferred tax assets, Ricoh must be able to generate sufficient taxable income in the tax jurisdictions in which the deferred tax assets are located. -33- A. Operating Results The following table sets forth selected consolidated financial data, including data expressed as a percentage of total consolidated net sales for the periods indicated, and the change in each consolidated financial line item between the indicated fiscal years:
- ---------------------------------------------------------------------------------------------------------------------------- Millions of Yen (except percentages) Thousands of % Change ------------------------------------------------------------ U.S. Dollars (1) ----------- 2004 2005 2006 2006 2005 2006 - ---------------------------------------------------------------------------------------------------------------------------- Net Sales Products 1,074,893 1,067,736 1,108,746 $ 9,476,462 (0.7) 3.8 Post sales and rentals 597,989 627,991 693,138 5,924,256 5.0 10.4 Other revenue 107,363 118,381 113,206 967,573 10.3 (4.4) - ---------------------------------------------------------------------------------------------------------------------------- Total 1,780,245 100.0% 1,814,108 100.0% 1,915,090 100.0% 16,368,291 1.9 5.6 - ---------------------------------------------------------------------------------------------------------------------------- Cost of Sales Products 693,087 713,057 738,962 6,315,915 2.9 3.6 Post sales and rentals 245,512 259,591 293,559 2,509,051 5.7 13.1 Other revenue 76,020 86,883 82,958 709,043 14.3 (4.5) - ---------------------------------------------------------------------------------------------------------------------------- Total 1,014,619 57.0% 1,059,531 58.4% 1,115,479 58.2% 9,534,009 4.4 5.3 - ---------------------------------------------------------------------------------------------------------------------------- Gross Profit 765,626 43.0% 754,577 41.6% 799,611 41.8% 6,834,282 (1.4) 6.0 Selling, General and Administrative Expenses 623,935 35.0% 619,071 34.1% 647,597 33.9% 5,535,017 (0.8) 4.6 Transfer of the substitutional portion of the Employee's Pension Fund: Settlement loss 48,657 -- -- -- Subsidy from government (56,972) -- -- -- - ---------------------------------------------------------------------------------------------------------------------------- Operating income 150,006 8.4% 135,506 7.5% 152,014 7.9% 1,299,265 (9.7) 12.2 - ---------------------------------------------------------------------------------------------------------------------------- Other (Income) Expenses: Interest and dividend income (1,925) (2,240) (2,896) (24,752) Interest expense 5,290 4,684 5,242 44,803 Foreign currency exchange (gain) loss, net 6,136 (1,547) (3,748) (32,034) Other, net (2,558) (774) (2,783) (23,786) - ---------------------------------------------------------------------------------------------------------------------------- Total 6,943 0.4% 123 0.0% (4,185) (0.3%) (35,769) (98.2) -- - ---------------------------------------------------------------------------------------------------------------------------- Income before Income Taxes, Minority Interests and Equity in earnings of Affiliates and Cumulative Effect of Accounting Change 143,063 8.0% 135,383 7.5% 156,199 8.2% 1,335,034 (5.4) 15.4 - ---------------------------------------------------------------------------------------------------------------------------- Provision for Income Taxes: 56,641 3.2% 50,634 2.8% 57,563 3.0% 491,991 (10.6) 13.7 - ---------------------------------------------------------------------------------------------------------------------------- Income before Minority Interests and Equity in Earnings of Affiliates and Cumulative Effect of Accounting Change 86,422 84,749 98,636 843,043 Minority Interests 4,094 4,726 4,185 35,769 Equity in Earnings of Affiliates 2,065 3,120 2,606 22,273 - ---------------------------------------------------------------------------------------------------------------------------- Income Before Cumulative Effect of Accounting Change 84,393 4.7% 83,143 4.6% 97,057 5.1% 829,547 (1.5) 16.7 - ---------------------------------------------------------------------------------------------------------------------------- Cumulative Effect of Accounting Change, Net of tax 7,373 0.5% -- -- -- - ---------------------------------------------------------------------------------------------------------------------------- Net Income 91,766 5.2% 83,143 4.6% 97,057 5.1% 829,547 (9.4) 16.7 - ----------------------------------------------------------------------------------------------------------------------------
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- ----------------------------------------------------------------------------------------------------------------------------------- Yen Change -------------------------------------------------------- ----------------- 2004 2005 2006 2005 2006 - ----------------------------------------------------------------------------------------------------------------------------------- Reference: Exchange Rates* US$ 1 113.09 107.58 113.26 (5.51) 5.68 EURO 1 132.65 135.25 137.86 2.60 2.61 * These rates are the annual average exchange rate of the daily average TTM rates published by The Bank of Tokyo-Mitsubishi UFJ, Ltd. These rates are used when consolidating the financial results of Ricoh's overseas subsidiaries with those of the Company. - -----------------------------------------------------------------------------------------------------------------------------------
(1)The above consolidated financial data set forth under the heading "Thousands of U.S. Dollars 2006" which has been translated from Japanese Yen into U.S. Dollar equivalents for the year ended March 31, 2006 is included solely for the convenience of readers outside Japan and has been made using the exchange rate of Yen 117 to US$1, the approximate rate of exchange prevailing at the Federal Reserve Bank of New York on March 31, 2006. -35-
SALES BY PRODUCT - ---------------------------------------------------------------------------------------------------------- Millions of Yen (except for percentages) Thousands of % Change ---------------------------------------------------------- U.S. Dollars (1) ----------- 2004 2005 2006 2006 2005 2006 - ---------------------------------------------------------------------------------------------------------- OFFICE SOLUTIONS Imaging Solutions 1,271,882 71.4% 1,332,299 73.4% 1,446,635 75.5% $12,364,402 4.8 8.6 Network System Solutions 188,514 10.6 199,129 11.0 190,593 10.0 1,629,000 5.6 (4.3) INDUSTRIAL PRODUCTS 111,392 6.3 119,408 6.6 120,636 6.3 1,031,077 7.2 1.0 OTHER 208,457 11.7 163,272 9.0 157,226 8.2 1,343,812 (21.7) (3.7) - ---------------------------------------------------------------------------------------------------------- Total 1,780,245 100.0% 1,814,108 100.0% 1,915,090 100.0% $16,368,291 1.9 5.6 - ----------------------------------------------------------------------------------------------------------
(1)The above consolidated financial data set forth under the heading "Thousands of U.S. Dollars 2006" which has been translated from Japanese Yen into U.S. Dollar equivalents for the year ended March 31, 2006 is included solely for the convenience of readers outside Japan and has been made using the exchange rate of Yen 117 to US$1, the approximate rate of exchange prevailing at the Federal Reserve Bank of New York on March 31, 2006. FISCAL YEAR 2006 COMPARED TO FISCAL YEAR 2005 NET SALES. Consolidated net sales of Ricoh for the fiscal year ended March 31, 2006 increased by 5.6% (or Yen 100.9 billion) to Yen 1,915.0 billion from Yen 1,814.1 billion for the fiscal year ended March 31, 2005. The increase in net sales was primarily due to the increase in net sales in the Office Solutions segment. Net sales from the Office Solutions segment accounted for 85.5% of consolidated net sales for fiscal year 2006. A significant portion of such net sales was derived from net sales from the Imaging Solutions category, which accounted for 75.5% of consolidated total net sales, up 2.1 percentage points from fiscal year 2005. The increase in net sales from the Imaging Solutions category was due primarily to the increase in net sales of MFPs and laser printers as a result of Ricoh's introduction of new products in response to the continuing shift in customer preference from stand-alone equipment to multi-functional equipment, which can improve the customer's operations by expanding the digital color networking capacity of their office environment. In particular, sales of MFPs continued to grow in double-digit percentage figures in the overseas markets. Compared to fiscal year 2005, net sales of MFPs increased by 7.4% in Japan and 25.6% overseas. The market in Japan for MFPs is more mature than the overseas markets, as domestic customers have preferred to use multifunctional products that provide network printing and document solution capabilities required to meet the needs of a Japanese office environment in which space and operations are costly. We see more opportunities in the overseas market for MFPs, as the overseas markets have not yet matured as compared to the domestic market, and Ricoh improved its marketing structure in order to develop momentum in sales in the overseas market. Similar to fiscal year 2005, sales of laser printers continued to grow in double-digit percentage figures in both the domestic and overseas markets. Compared to fiscal year 2005, net sales of laser printers increased by 18.9% in Japan and 18.5% overseas. Such increases were due primarily to the continuous release of new products that adequately addressed customer needs in terms of printing quality and speed in both the domestic and overseas markets. Ricoh's subsidiary, Ricoh Printing Systems, Ltd., also contributed to the growth in sales of the Imaging Solutions category as its high-speed printers performed favorably through OEM distributors. In response to customer demands, we offer management and workflow efficiency solutions that are fine-tailored to our customers' printing needs from the -36- operational administration of office network printers and mission-critical business printers to the creation of a high-speed, on-demand printing environment. We also offer professional services such as environment analysis, solutions, custom software design, and more in order to help improve our customers' printing process. The increase in net sales in the Imaging Solutions category was partially offset by the decrease in net sales in the Network System Solutions category. The decrease in net sales in the Network System Solutions category was mainly due to lower sales in personal computers and servers in Japan although the support and other services that optimize customers' total printing costs continued to be well-received by customers. Net sales in the Network System Solutions category decreased by 4.3% in fiscal year 2006 as compared to fiscal year 2005. In the Industrial Products segment, net sales increased by 1.0% in fiscal year 2006 as compared to fiscal year 2005. The sales of thermal media and electronic components increased due to stable market demand and the demand for semiconductor devices showed signs of recovery as a result of the sales of integrated circuits used in electronic devices such as mobile and cellular phones increased; however, such increase in sales was partially offset by the decrease in sales of optical equipments due to a sluggish demand. In the Other segment, net sales decreased by 3.7% mainly due to the decrease in sales of optical discs in the overseas markets as Ricoh completed its withdrawal from the self-developed drive business which used proprietary technology developed by Ricoh, and its key-module/parts unit. While net sales of digital cameras continued to perform favorably in fiscal year 2006, the increase in net sales from digital cameras was not enough to offset the decrease in net sales of the optical discs business. The appreciation of both the U.S. Dollar and the Euro in relation to the Japanese Yen contributed to an increase in consolidated net sales in fiscal year 2006 as compared to fiscal year 2005 in Japanese Yen. Had the foreign currency exchange rates remained the same as in fiscal year 2005, Ricoh's consolidated net sales would have increased by 3.8%. Ricoh has expanded the presentation of net sales and cost of sales in the consolidated statements of income to present separate line-items for (i) revenue derived from its products, (ii) revenue derived from post sale services and rentals of its equipment, including revenue derived from sale of suppliers for its products, and (iii) revenue derived from other sources. Products. An increase in net sales derived from products was mainly due to the increase in net sales of MFPs and laser printers as a result of Ricoh's introduction of new products in response to the continuing shift in customers' preference from stand-alone equipments to multi-functional equipments, which can improve the customers' operations by expanding the digital color networking capacity of their office environment. The increase in net sales of MFPs and laser printers completely offset the decrease in net sales of the personal computers and servers in Japan, the optical equipments and the optical -37- discs. In addition, Ricoh's new subsidiary, Ricoh Printing Systems, Ltd., contributed to the growth in the sales of this category. An increase in cost of sales of this category was mainly due to the increase in net sales of MFPs and laser printers. Post sales and rentals. An increase in net sales derived from post sales services and rentals of equipment was mainly due to an increase in revenue from post sale services such as maintenance services as well as increase in sales of supplies for MFPs and laser printers. Ricoh continued to direct its marketing and promotional efforts of its equipment rental services towards major corporate clients in Japan and overseas. Other revenue. A decrease in net sales derived from other sources was mainly due to the decrease in revenue from financing services. COST OF SALES. Consolidated cost of sales for the fiscal year ended March 31, 2006 increased by 5.3% (or Yen 55.9 billion) to Yen 1,115.4 billion from Yen 1,059.5 billion for the fiscal year ended March 31, 2005. This increase was due primarily to the increase in net sales of MFPs and laser printers, while cost of sales as a percentage of net sales decreased from 58.4% to 58.2%. GROSS PROFIT. Consolidated gross profit for the fiscal year ended March 31, 2006 increased by 6.0% to Yen 799.6 billion from Yen 754.5 billion for the fiscal year ended March 31, 2005. Gross profit as a percentage of net sales increased by 0.2 percentage point from 41.6% for the fiscal year ended March 31, 2005 to 41.8% for the fiscal year ended March 31, 2006. This increase in gross profit primarily reflects Ricoh's introduction of new products, and an increase in sales of value-added high-margin products such as MFPs and laser printers. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Consolidated selling, general and administrative expenses for the fiscal year ended March 31, 2006 increased by 4.6% (or Yen 28.5 billion) to Yen 647.5 billion from Yen 619.0 billion for the fiscal year ended March 31, 2005. Ricoh invested Yen 110.3 billion in research and development activity during fiscal year 2006 for the purposes of developing more advanced MFPs and laser printers with new capabilities to maintain Ricoh's large market share position in these products in the current competitive marketplace. Furthermore Ricoh incurred certain expenses relating to (1) the consolidation of some of its domestic operations at its headquarters in Tokyo, (2) the integration of its domestic R&D facilities and offices at the Ricoh Technology Center, (3) the enhancement of its overseas sales and marketing organization structure and (4) investments in information technologies in connection with the development of its core operating systems in its domestic and overseas. In addition, the appreciation of both the U.S. Dollar and the Euro in relation to the Japanese Yen resulted in an increase in selling, general and administrative expenses of approximately Yen 8.7 billion. OPERATING INCOME. Consolidated operating income for the fiscal year ended March 31, 2006 increased by 12.2% (or Yen 16.5 billion) to Yen 152.0 billion from Yen 135.5 billion for the fiscal year ended March 31, 2005. Operating Income as a percentage of net sales increased by 0.4 percentage point from 7.5% for the fiscal year ended March 31, 2005 to 7.9% for the fiscal year ended March 31, 2006. -38- INTEREST AND DIVIDEND INCOME. Consolidated interest and dividend income for the fiscal year ended March 31, 2006 increased by Yen 0.6 billion to Yen 2.8 billion from Yen 2.2 billion for the fiscal year ended March 31, 2005. The increase in interest and dividend income reflected the favorable financial market conditions and the positive change in economic conditions in Japan as dividend income from Japanese companies increased. INTEREST EXPENSE. Consolidated interest expense for the fiscal year ended March 31, 2006 increased by Yen 0.5 billion to Yen 5.2 billion from Yen 4.6 billion for the fiscal year ended March 31, 2005. This was due to the increase in short-term borrowings and a rise in interest rates. FOREIGN CURRENCY EXCHANGE (GAIN) LOSS, NET. Consolidated foreign currency exchange gain, net included in other (income) expenses for the fiscal year ended March 31, 2006 increased by Yen 2.2 billion to a gain of Yen 3.7 billion from a gain of Yen 1.5 billion for the fiscal year ended March 31, 2005. For additional information on Ricoh's foreign exchange hedging activities, see Item 11. OTHER, NET. Consolidated other, net included in other (income) expenses increased by Yen 2.0 billion to an income of Yen 2.7 billion for the fiscal year ended March 31, 2006 from an income of Yen 0.7 billion for the fiscal year ended March 31, 2005. This increase in income of the other, net in fiscal year 2006 was due to an increase in income derived from the sale of marketable securities and the a gain from nonmonetary exchange of marketable securities as compared to fiscal year 2005. PROVISION FOR INCOME TAXES. Total consolidated provision for income taxes for the fiscal year ended March 31, 2006 increased by 13.7% (or Yen 6.9 billion) to Yen 57.5 billion from Yen 50.6 billion for fiscal year ended March 31, 2005. The effective tax rate decreased by 0.5 percentage point to 36.9% for the fiscal year ended March 31, 2006 from 37.4% for the previous fiscal year. This 0.5 percentage point decrease in the effective tax rate was attributable to a Japanese tax credit resulting from (1) the increase in research and development expenses and (2) the investments made by Ricoh in information technologies hardware and software used by the Company. As a result of these tax credits, the effective tax rate was lower than the Japanese statutory tax rate. See Note 8 to the Consolidated Financial Statements for additional information. MINORITY INTERESTS. Consolidated minority interests for the fiscal year ended March 31, 2006 decreased by Yen 0.5 billion to Yen 4.1 billion from Yen 4.7 billion for the fiscal year ended March 31, 2005. This decrease was due primarily to provisioning necessitated by quality problems in its measuring equipment business. EQUITY IN EARNINGS OF AFFILIATES. Consolidated equity in earnings of affiliates for the fiscal year ended March 31, 2006 decreased by Yen 0.5 billion to Yen 2.6 billion from Yen 3.1 billion for the fiscal year ended March 31, 2005. This decrease was due primarily to deterioration in the business performance of Ricoh's affiliates. -39-
OPERATING SEGMENTS - ----------------------------------------------------------------------------------------------- Millions of Yen (except for percentages) Thousands of ------------------------------------------ U.S. Dollars (1) % Change 2005 2006 2006 - ----------------------------------------------------------------------------------------------- OFFICE SOLUTIONS Net sales 1,531,428 100.0% 1,637,228 100.0% $13,993,402 6.9 Operating expenses 1,335,059 87.2 1,434,279 87.6 12,258,795 7.4 Operating income 196,369 12.8% 202,949 12.4% $ 1,734,607 3.4 - ----------------------------------------------------------------------------------------------- INDUSTRIAL PRODUCTS Net sales 121,914 100.0% 123,200 100.0% $ 1,052,991 1.1 Operating expenses 121,872 100.0 124,108 100.7 1,060,752 1.8 Operating income 42 0.0% (908) (0.7)% $ (7,761) -- - ----------------------------------------------------------------------------------------------- OTHER Net sales 163,272 100.0% 157,226 100.0% $ 1,343,812 (3.7) Operating expenses 167,431 102.5 151,114 96.1 1,291,573 (9.7) Operating income (4,159) (2.5)% 6,112 3.9% $ 52,239 -- - ----------------------------------------------------------------------------------------------- CORPORATE AND ELIMINATION Net sales (2,506) (2,564) $ (21,914) Operating expenses 54,240 53,575 457,906 Operating income (56,746) (56,139) $ (479,820) - ----------------------------------------------------------------------------------------------- CONSOLIDATED Net sales 1,814,108 100.0% 1,915,090 100.0% $16,368,291 5.6 Operating expenses 1,678,602 92.5 1,763,076 92.1 15,069,026 5.0 Operating income 135,506 7.5% 152,014 7.9% $ 1,299,265 12.2 - -----------------------------------------------------------------------------------------------
(1)The above consolidated financial data set forth under the heading "Thousands of U.S. Dollars 2006" which has been translated from Japanese Yen into U.S. Dollar equivalents for the year ended March 31, 2006 is included solely for the convenience of readers outside Japan and has been made using the exchange rate of Yen 117 to US$1, the approximate rate of exchange prevailing at the Federal Reserve Bank of New York on March 31, 2006. Office Solutions Net sales in the Office Solutions segment for the fiscal year ended March 31, 2006 increased by 6.9% (or Yen 105.8 billion) to Yen 1,637.2 billion from Yen 1,531.4 billion for the fiscal year ended March 31, 2005. This increase was due primarily to the increase in sales of color PPCs, MFPs and laser printers in the Imaging Solutions category in both the domestic and overseas markets. Such products are equipped with advanced digital and networking technologies and were well-received by customers as such products addressed customers' needs for conducting business operations effectively and efficiently by digitalizing and colorizing documents and being capable of handling large volumes of information. Furthermore, Ricoh continued to offer solutions to optimize the total printing costs of its customers in fiscal year 2006 to assist customers manage their Total Document Volume ("TDV") more effectively and efficiently. The increase in net sales of the Imaging Solutions category was partially offset by the decrease in net sales of the Network System Solutions category, which decrease was due primarily to the decrease in net sales of personal computers and servers. More specifically, sales in the Imaging Solutions category for the fiscal year ended March 31, 2006 increased by 8.6% (or Yen 114.3 billion) to Yen 1,446.6 billion from Yen 1,332.2 billion for the fiscal year ended March 31, 2005. This increase was primarily due to the increase in net sales of MFPs and laser printers in both the domestic and overseas markets. Overseas sales of digital PPCs continued to perform well although the domestic sales of digital PPCs decreased primarily due to a shift in customer demand -40- from stand-alone equipment to multifunctional products, and from monochrome products to products with color capabilities at the same time. Sales of color PPCs increased in both Japan and overseas as Ricoh made significant strides to introduce new products to the global markets. Ricoh enjoyed a sales growth in the double-digit percentage figures overseas in fiscal year 2006. The double-digit percentage figures were due primarily to the strong sales of both MFPs and laser printers as well as digital and color PPCs as discussed above. With regards to MFPs, Ricoh introduced various new products that offer high-speed performance, networking capabilities and color printing such as "imagio Neo C600Pro (sold overseas as Aficio Color 5560)". This is a new generation of multifunctional color printers with a high-speed printing capability of 55 pages per minute. Moreover, other products arising from the new generation of color MFPs enable the printing of high-quality images by utilizing the Color PxP toner, which uses proprietary technology developed by Ricoh and have high security functions, such as protection to prevent unauthorized copying, etc. The acquisition of the printing company, Ricoh Printing Systems, Ltd., which manufactures and markets both low and high speed printers for the office environment, in fiscal year 2005 has reinforced Ricoh's office color printer and print-on-demand product lines in Japan and overseas. Sales in the Network System Solutions category for the fiscal year ended March 31, 2006 decreased by 4.3% (or Yen 8.5 billion) to Yen 190.5 billion from Yen 199.1 billion for the fiscal year ended March 31, 2005. Sales in the solutions business, such as support and services relating to Ricoh's imaging solutions products, continued to increase both in Japan and overseas in fiscal year 2006 due to successful promotional efforts to assist customers in optimizing their total printing costs. In connection with promoting Ricoh's printing solutions, Ricoh provided software and related services to aid in connecting Ricoh's digital MFPs to customers' host system in their office environment, provided the necessary support at customer sites, and strengthened its own sales infrastructure for such network system solutions products. While Ricoh's solutions business performed favorably during fiscal year 2006 as a result of these efforts, the increase in sales resulting from such business did not sufficiently offset the decrease in sales of personal computers and servers in Japan. On the whole, the increase in sales in the Imaging Solutions category exceeded the decrease in sales in the Network System Solutions category and net sales in the Office Solutions segment increased by 6.9% for the year ended March 31, 2006 as compared to the fiscal year ended March 31, 2005. Excluding the foreign currency exchange rate fluctuations, sales in the Office Solutions segment would have increased by 4.9% (or Yen 75.0 billion) for the fiscal year ended March 31, 2006 as compared to the fiscal year ended March 31, 2005. During fiscal year 2006, Ricoh incurred expenses relating to the following items: (i) research and development investments in its core products (i.e., MFPs and laser printers in the Image Solutions category), (ii) investments in operating systems relating to accounting and sales force automation and marketing support, (iii) realignment of headquarters functions through the consolidation of several domestic operations at Ricoh's headquarters and the integration of several key R&D facilities and offices in Japan, and (iv) enhancement of overseas sales organization structure. Ricoh integrated -41- the European Lanier operations into its other subsidiaries in Europe during fiscal year 2006. On the other hand, Ricoh continued to implement strict cost management controls at the product development stage and continued to improve the efficiency of its distribution and production systems based on supply chain management. Despite such cost reduction activities, operating expenses in the Office Solutions segment for the fiscal year ended March 31, 2006 increased by 7.4% (or Yen 99.2 billion) to Yen 1,434.2 billion from Yen 1,335.0 billion for the fiscal year ended March 31, 2005 as Ricoh's expenses exceeded the cost reductions. Notwithstanding the greater increase in operating expenses as compared to operating income, operating income for the Office Solutions segment for the fiscal year ended March 31, 2006 increased by 3.4% (or Yen 6.5 billion) to Yen 202.9 billion from Yen 196.3 billion for the fiscal year ended March 31, 2005. Operating income as a percentage of net sales for the fiscal year ended March 31, 2006 decreased by 0.4 percentage points to 12.4% from 12.8% as compared to the fiscal year ended March 31, 2005. Industrial Products Net sales in the Industrial Products segment for the fiscal year ended March 31, 2006 increased by 1.1% (or Yen 1.2 billion) to Yen 123.2 billion from Yen 121.9 billion for the fiscal year ended March 31, 2005. This increase was due primarily to the increase in sales in the thermal media products both in Japan and overseas and the increase in sales in the electronic component products overseas. In addition, the semiconductor business showed signs of recovery in the fourth quarter of fiscal year 2006 as compared to fiscal year 2005, due to the recovery in demand for integrated circuits used in electronic products, such as mobile and cellular phones. While sales in the optical equipment business decreased from the previous corresponding period due primarily to sluggish demand, such decrease in sales of the optical equipment business was sufficiently offset by the increase in sales resulting from thermal media, electric component and semiconductor businesses as discussed above. With respect to expenses during fiscal year 2006, Ricoh recorded additional expenses that were required to address the quality problems in its measuring equipment business in Japan. As a result of such expenses, operating expenses in the Industrial Products segment for the fiscal year ended March 31, 2006 increased by 1.8% (or Yen 2.2 billion) to Yen 124.1 billion from Yen 121.8 billion for the fiscal year ended March 31, 2005. As a result of the above factors, operating income for the Industrial Products segment for the fiscal year ended March 31, 2006 decreased by Yen 0.9 billion to Yen (0.9) billion as compared to the fiscal year ended March 31, 2005. Operating income as a percentage of net sales for the fiscal year ended March 31, 2006 decreased by 0.7 percentage point to (0.7)% from 0.0% as compared to the fiscal year ended March 31, 2005. Other Net sales in the Other segment for the fiscal year ended March 31, 2006 decreased by 3.7% (or Yen 6.0 billion) to Yen 157.2 billion from Yen 163.2 billion for the fiscal year ended March 31, 2005. In fiscal year 2006, sales of digital cameras increased primarily due to -42- the increase in demand for new digital camera products, such as the GR DIGITAL and the Caplio R4, that were well-received in the global market. Despite the fact that the digital camera business continued to perform well in fiscal year 2006, the increase in sales from such business was not sufficient to offset the decrease in sales of the optical discs business in the overseas market as Ricoh withdrew from the self-developed drive business, which used proprietary technology developed by Ricoh, and its key-module/parts unit business from the second half of fiscal year 2005. With respect to expenses, Ricoh's withdrawal from the key-module/parts unit business in fiscal year 2005 was attributable to the decrease in costs and expenses of the Other segment in the fiscal year 2006. As a result of such factors, operating income for the Other segment for the fiscal year ended March 31, 2006 increased by Yen 10.2 billion to Yen 6.1 billion as compared to the fiscal year ended March 31, 2005. Operating income as a percentage of net sales for the fiscal year ended March 31, 2006 increased by 6.4 percentage points to 3.9% from (2.5) % as compared to the fiscal year ended March 31, 2005.
GEOGRAPHIC SEGMENTS BY GEOGRAPHIC ORIGIN - ------------------------------------------------------------------------------------------- Millions of Yen (except for percentages) Thousands of ----------------------------------------- U.S. Dollars (1) % 2005 2006 2006 Change - ------------------------------------------------------------------------------------------- JAPAN Net sales 1,386,715 100.0% 1,411,884 100.0% $12,067,385 1.8 Operating expenses 1,298,640 93.6 1,312,655 93.0 11,219,274 1.1 Operating income 88,075 6.4% 99,229 7.0% $ 848,111 12.7 - ------------------------------------------------------------------------------------------- THE AMERICAS Net sales 330,461 100.0% 393,376 100.0% $ 3,362,188 19.0 Operating expenses 316,651 95.8 378,108 96.1 3,231,692 19.4 Operating income 13,810 4.2% 15,268 3.9% $ 130,496 10.6 - ------------------------------------------------------------------------------------------- EUROPE Net sales 415,643 100.0% 438,753 100.0% $ 3,750,026 5.6 Operating expenses 391,271 94.1 417,341 95.1 3,567,017 6.7 Operating income 24,372 5.9% 21,412 4.9% $ 183,009 (12.1) - ------------------------------------------------------------------------------------------- OTHER Net sales 173,948 100.0% 200,288 100.0% $ 1,711,863 15.1 Operating expenses 162,042 93.2 185,283 92.5 1,583,615 14.3 Operating income 11,906 6.8% 15,005 7.5% $ 128,248 26.0 - ------------------------------------------------------------------------------------------- CORPORATE AND ELIMINATION Net sales (492,659) (529,211) $(4,523,171) Operating expenses (490,002) (530,311) (4,532,572) Operating income (2,657) 1,100 $ 9,401 - ------------------------------------------------------------------------------------------- CONSOLIDATED Net sales 1,814,108 100.0% 1,915,090 100.0% $16,368,291 5.6 Operating expenses 1,678,602 92.5 1,763,076 92.1 15,069,026 5.0 Operating income 135,506 7.5% 152,014 7.9% $ 1,299,265 12.2 - -------------------------------------------------------------------------------------------
(1) The above consolidated financial data set forth under the heading "Thousands of U.S. Dollars 2006" which has been translated from Japanese Yen into U.S. Dollar equivalents for the year ended March 31, 2006 is included solely for the convenience of readers outside Japan and has been made using the exchange rate of Yen 117 to US$1, the approximate rate of exchange prevailing at the Federal Reserve Bank of New York on March 31, 2006. -43- Japan Sales in Japan for the fiscal year ended March 31, 2006 increased by 1.8% (or Yen 25.1 billion) to Yen 1,411.8 billion from Yen 1,386.7 billion for the fiscal year ended March 31, 2005. In the Office Solutions segment, sales of products in the Imaging Solutions category, including color PPCs, MFPs and laser printers, increased due to Ricoh's strategic sales promotion activities and marketing strategies designed to meet its customers' changing demand from stand-alone monochrome products to networkable color high-speed products. Moreover, the performance of super high-speed printers produced by Ricoh Printing Systems, Ltd., which was acquired in fiscal year 2005, contributed favorably to increased sales in Japan. In addition, sales of solution products such as support services, document management applications and other software increased due to Ricoh's successful promotion of such solutions to optimize the customers' total printing costs. Meanwhile, sales in analog type equipment decreased as such equipment was replaced by MFPs and color equipment, and sales of personal computers and servers also decreased during fiscal year 2006 in Japan. In the Industrial Products segment, sales of optical equipment decreased in Japan due to the sluggish market demand for such equipment compared to fiscal year 2005. Operating expenses in Japan for the fiscal year ended March 31, 2006 increased by 1.1% (or Yen 14.0 billion) to Yen 1,312.6 billion from Yen 1,298.6 billion for the fiscal year ended March 31, 2005. The increase in operating expenses was primarily due to the increase in sales volume, especially in exports to foreign countries. While net sales in this segment increased by 1.8% as compared to fiscal year 2005, operating expenses increased by only 1.1% as compared to fiscal year 2005 because of the increase in sales of value-added, high-margin products such as MFPs and laser printers. Although Ricoh was able to decrease its operating expenses as it performed various cost-cutting measures to streamline some of its businesses, the total operating expenses in Japan increased in fiscal year 2006, which is reflected in the 1.1% figure, as Ricoh incurred certain expenses relating to (1) research and development geared towards the development of core products having color printing capabilities, (2) the consolidation of certain operations at Ricoh's headquarters in Tokyo, (3) the integration of domestic research and development facilities and offices at the Ricoh Technology Center, and (4) investment in information technology for the development of Ricoh's core operating system. As the increase in net sales was greater than the increase in operating expenses, operating income in Japan for the fiscal year ended March 31, 2006 increased by 12.7% (or Yen 11.1 billion) to Yen 99.2 billion from Yen 88.0 billion for the fiscal year ended March 31, 2005. The Americas Net sales in the Americas for the fiscal year ended March 31, 2006 increased by 19.0% (or Yen 62.9 billion) to Yen 393.3 billion from Yen 330.4 billion for the fiscal year ended March 31, 2005. Ricoh continues to focus on increasing sales of MFPs, digital PPCs, color PPCs and laser printers which meet the customers' demand for networking capabilities, coloration, and high-speed products through our efforts to enhance and -44- expand its existing sales channels. In addition, Ricoh continued to focus its marketing and promotional efforts towards major corporate clients for the fiscal year ended March 31, 2006. Operating expenses in this geographic segment for the fiscal year ended March 31, 2006 increased by 19.4% (or Yen 61.4 billion) to Yen 378.1 billion from Yen 316.6 billion for the fiscal year ended March 31, 2005. The increase in operating expenses was due to the increase in sales volume and the depreciation of the Japanese Yen relative to the U.S. Dollar. The percentage change of operating expenses as compared to the previous fiscal year in the Americas was greater than the percentage change of net sales as compared to the previous fiscal year in the Americas as (1) Ricoh incurred marketing expenses to expand its market share in the increasingly competitive business environment in the Americas and (2) Ricoh made various investments in information technology to develop and enhance its core operating system. Europe Sales in Europe for the fiscal year ended March 31, 2006 increased by 5.6% (or Yen 23.1 billion) to Yen 438.7 billion from Yen 415.6 billion for the fiscal year ended March 31, 2005, due primarily to an increase in sales in the Imaging Solutions category for such products as MFPs and laser printers, reflecting Ricoh's continuing efforts to strengthen its sales networks and reinforce the strength of its brand in the European geographic segment. Sales of products with color capabilities increased in fiscal year 2006 as compared to the previous fiscal year due to the launch of new models and the BC (black-color) conversion strategy. Continuing from previous fiscal years, Ricoh maintained its dominance in the copiers and MFP product market in this geographic segment and was ranked number one in terms of market share in the sales of copiers and MFPs in Europe. Operating expenses in this geographic segment for the fiscal year ended March 31, 2006 increased by a higher percentage as compared to the percentage increase in net sales, due primarily to the nonrecurring expenses for integration of Lanier operations into its other subsidiaries in Europe. Other Net sales in the Other geographic segment, comprised of China, Asia and Oceania, for the fiscal year ended March 31, 2006, increased by 15.1% (or Yen 26.3 billion) to Yen 200.2 billion from Yen 173.9 billion for the fiscal year ended March 31, 2005. Sales in the Imaging Solutions category increased in this geographic segment due to active demand for digital, networkable and color products from stand-alone, analog and monochrome equipment. In addition, sales in the semiconductor business in the Industrial Products segment increased due to the recovery in demand for products utilizing semiconductor devices, such as mobile and cellular phones. An increase in demand for digital PPCs and MFPs led to an increase in global exports of products manufactured by Ricoh's manufacturing subsidiaries in China, which mainly manufacture low-end digital PPCs and MFPs. Such subsidiaries maintained a -45- high production level in China for the fiscal year ended March 31, 2006, and continued to contribute to the increase in net sales in this geographic segment. FISCAL YEAR 2005 COMPARED TO FISCAL YEAR 2004 NET SALES. Consolidated net sales of Ricoh for the fiscal year ended March 31, 2005 increased by 1.9% (or Yen 33.8 billion) to Yen 1,814.1 billion from Yen 1,780.2 billion for the fiscal year ended March 31, 2004. The increase in net sales was primarily due to the increase in net sales in the Office Solutions segment. More specifically, net sales from the Office Solutions segment accounted for 84.4% of the consolidated net sales for fiscal year 2005. A significant portion of such net sales was derived from net sales from the Imaging Solutions category, which accounted for 73.4% of consolidated total net sales, up 1.7 percentage points from fiscal year 2004. The increase in net sales from the Imaging Solutions category is because of the increase in net sales of MFPs and laser printers due to the acceleration of the change in customer preference from standalone equipment to multi-functional equipment, which can improve the customer's operations by expanding their digital color networking capacity. In particular, sales of MFPs continued to grow in double-digit percentage figures in both the domestic and overseas market places. Compared to fiscal year 2004, net sales of MFPs increased by 26.3% in Japan and 31.4% overseas. Similar to the increase in net sales of MFPs, sales of laser printers continued to grow in double-digit percentage figures in both the domestic and overseas market places. Compared to fiscal year 2004, net sales of laser printers increased by 35.1% in Japan and 11.9% overseas due primarily to the continuous release of new products responding to its customer needs. In addition, Ricoh's new subsidiary, Ricoh Printing Systems, Ltd., also contributed to the sales growth of the Imaging Solutions. In the Network System Solutions category, net sales of personal computers and servers recovered as compared to fiscal year 2004, as information technology investments by companies increased in Japan. Support and services relating to such products, such as document solutions software, application software and related services and support, were continuously well-received by customers throughout fiscal year 2005, as the increase in net sales of personal computers and servers generated sales in these products and such products assisted Ricoh's customers in optimizing their total printing costs. In the Industrial Products segment, net sales increased by 12.0% in fiscal year 2005 as compared to fiscal year 2004. Net sales of the optical equipment business, such as the parts unit, continued to perform favorably in fiscal year 2005, but the increase in net sales from these items was offset by the decrease in net sales of the measuring equipment business and semiconductor business. In the Other segment, net sales decreased by 21.7% mainly due to the lower sales in the optical discs business in Japan and overseas as Ricoh withdrew from the self-developed drive business, which used proprietary technology developed by Ricoh, and its key-module/parts unit business. In turn, Ricoh decided to place more focus on its media -46- business. In addition, Ricoh's divestiture of its subsidiaries in the optical-related analog business, such as Hanimex Australasia Pty Ltd. and its subsidiaries located in Australia and New Zealand, also contributed to the decrease in net sales of this segment. The depreciation of the U.S. Dollar in relation to the Japanese Yen also resulted in the lower Japanese Yen equivalent of U.S. Dollar denominated overseas net sales of office solution products for fiscal year 2005. While the increase in Euro-denominated net sales due to the appreciation of the Euro in relation to the Japanese Yen partially offset this decrease, the depreciation of the U.S. Dollar resulted in the lower increase of consolidated net sales as compared to fiscal year 2004. Had the foreign currency exchange rates remained the same as fiscal year 2004, Ricoh's consolidated net sales would have increased by 2.4%. Ricoh has expanded the presentation of net sales and cost of sales in the consolidated statements of income to present separate line-items for (i) revenue derived from its products, (ii) revenue derived from post sale services and rentals of its equipment, including revenue derived from sale of suppliers for its products, and (iii) revenue derived from other sources. Products. Net sales in MFPs and laser printers increased due to the acceleration of the change in customers' preference from standalone equipments to multi-functional equipments, which can improve the customers' operations by expanding their digital color networking capacity. On the other hand, the lower sales in the optical discs business in Japan and overseas and the divestiture of Ricoh's subsidiaries, such as Hanimex Australasia Pty Ltd. and its subsidiaries, in the optical-related analog business offset the increase of net sales of MFPs and laser printers. Despite a decrease in net sales derived from products, the cost of sales increased due primarily to sales promotion activities and Ricoh's partial withdrawal from the optical discs business. Ricoh's strategy to provide a significant discount on price of certain color products resulted in lower net sales as compared to its cost of sales. This strategy was one of the core strategies Ricoh used to promote BC (black-color) conversion and to increase its market share in color products so as to establish the basis for future growth in the color products business. Ricoh withdrew from the self-developed drive business, which used proprietary technology developed by Ricoh and its key-module/parts unit business, in order for more focus on its media business. Post sales and rentals. An increase in net sales derived from post sales services and rentals of equipment was mainly due to an increase in service revenue and an increase in net sales of related supplies for MFPs and laser printers, reflecting its increase in its market share. Other revenue. An increase in net sales from other sources was mainly derived from an increase in net sales from financing services. -47- COST OF SALES. Consolidated cost of sales for the fiscal year ended March 31, 2005 increased by 4.4% (or Yen 44.9 billion) to Yen 1,059.5 billion from Yen 1,014.6 billion for the fiscal year ended March 31, 2004. This increase was due primarily to the increase in net sales, which was partially offset by Ricoh's continuous cost-cutting activities similar to fiscal year 2004, which resulted in a reduction in net cost of sales of approximately Yen 12.0 billion. GROSS PROFIT. Consolidated gross profit for the fiscal year ended March 31, 2005 decreased by 1.4% to Yen 754.5 billion from Yen 765.6 billion for the fiscal year ended March 31, 2004. Gross profit as a percentage of net sales decreased by 1.4 percentage points from 43.0% for the fiscal year ended March 31, 2004 to 41.6% for the fiscal year ended March 31, 2005. In fiscal year 2005, Ricoh's strategy of significant discounting of certain color products resulted in lower net sales as compared to cost of sales. As a result, gross profit as a percentage of net sales decreased despite an increase in net sales. This strategy was one of the core strategies used by Ricoh to facilitate the replacement of monochrome products with color models at prices comparable to those of monochrome models and to increase its market share in color products as noted in "OVERVIEW" under Item 5. Ricoh also used this strategy to increase its market share in color products so as to establish the basis for future growth in the color products business. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Consolidated selling, general and administrative expenses for the fiscal year ended March 31, 2005 decreased by 0.8% (or Yen 4.8 billion) to Yen 619.0 billion from Yen 623.9 billion for the fiscal year ended March 31, 2004. Ricoh increased its research and development investments during fiscal year 2005 by 19.4% (or Yen 17.9 billion) to Yen 110.4 billion from Yen 92.5 billion for the fiscal year ended March 31, 2004 for purposes of developing more advanced products with new capabilities to maintain its high market share position in the competitive marketplace. Despite this increase in research and development investments during fiscal year 2005, such increase was completely offset by (i) the depreciation of the U.S. dollar in relation to the Japanese Yen which resulted in a decrease in selling, general and administrative expenses of approximately Yen 2.6 billion, (ii) the divestiture of its subsidiaries in the optical-related analog business, and (iii) the decrease in pension costs due to pension systems restructuring, such as the transfer to the Japanese government of the substitutional portion of the domestic employees' pension fund ("EPF"). For additional details as to expenditures on research and development activities, see Item 5.C. TRANSFER TO THE JAPANESE GOVERNMENT OF THE SUBSTITUTIONAL PORTION OF THE EMPLOYEE'S PENSION FUND. Ricoh completed its transfer to the Japanese government of the substitutional portion of the EPF pursuant to the Contributed Benefit Pension Plan Law during fiscal year 2004. As set forth under the heading "Pension Information" below, Ricoh accounted for the transfer in accordance with EITF 03-2. Ricoh recognized a one-time gain of Yen 56.9 billion from a Japanese government subsidy and a one-time settlement loss of Yen 48.6 billion for the transfer of such substitutional portion of the EPF during fiscal year 2004. -48- OPERATING INCOME. Consolidated operating income for the fiscal year ended March 31, 2005 decreased by 9.7% (or Yen 14.5 billion) to Yen 135.5 billion from Yen 150.0 billion for the fiscal year ended March 31, 2004. The decrease in operating income as compared to fiscal year 2004 was due primarily to the decrease in gross profit. In addition, the decrease in operating income was also due to the fact that Ricoh did not recognize during fiscal year 2005 the one-time gain that it recognized during fiscal year 2004 in connection with the transfer to the Japanese government of the substitutional portion of the EPF, and such non-recognition of one-time gain was not offset by the decrease in consolidated selling, general and administrative expenses in fiscal year 2005 as compared to fiscal year 2004 as described above. INTEREST AND DIVIDEND INCOME. Consolidated interest and dividend income for the fiscal year ended March 31, 2005 increased by Yen 0.3 billion to Yen 2.2 billion from Yen 1.9 billion for the fiscal year ended March 31, 2004. The increase in interest and dividend income reflected the favorable financial market conditions and the positive change in economic conditions in Japan as dividend income from Japanese companies increased. INTEREST EXPENSE. Consolidated interest expense for the fiscal year ended March 31, 2005 decreased by Yen 0.6 billion to Yen 4.6 billion from Yen 5.2 billion for the fiscal year ended March 31, 2004. This decrease in consolidated interest expense resulted primarily from the decrease in the amount of Ricoh's interest-bearing debt outstanding for the fiscal year ended March 31, 2005 as compared to the fiscal year ended March 31, 2004. Ricoh's interest-bearing debt as of March 31, 2005 decreased by Yen 22.6 billion to Yen 410.0 billion from Yen 432.7 billion as of March 31, 2004. Since the implementation of its group cash management system a few years ago, which provided Ricoh with an alternative to borrowing funds externally, Ricoh has been able to continuously decrease its interest-bearing debt each fiscal year. FOREIGN CURRENCY EXCHANGE (GAIN) LOSS, NET. Consolidated foreign currency exchange gain, net included in other (income) expenses for the fiscal year ended March 31, 2005 increased by Yen 7.6 billion to a gain of Yen 1.5 billion from a loss of Yen 6.1 billion for the fiscal year ended March 31, 2004. For additional information on Ricoh's foreign exchange hedging activities, see Item 11. OTHER, NET. Consolidated other, net included in other (income) expenses decreased by Yen 1.7 billion to an income of Yen 2.5 billion for the fiscal year ended March 31, 2004 from an income of Yen 0.7 billion for the fiscal year ended March 31, 2005. This decrease in income of the other, net in fiscal year 2005 was due to a decrease in income derived from the sale of marketable securities as compared to the previous corresponding period. PROVISION FOR INCOME TAXES. Total consolidated provision for income taxes for the fiscal year ended March 31, 2005 decreased by 10.6% (or Yen 6.0 billion) to Yen 50.6 billion from Yen 56.6 billion for fiscal year ended March 31, 2004. This decrease in provisions for income taxes as compared to the provisions in income before income taxes, minority interests, equity in earnings of affiliates and cumulative effect of accounting changes was primarily due to a decrease in the effective tax rate. -49- The effective tax rate decreased by 2.2 percentage points to 37.4% for the fiscal year ended March 31, 2005 from 39.6% for the previous fiscal year. This 2.6 percentage point decrease in the effective tax rate was attributable to a tax credit being applied in Japan to (1) the increase in research and development expenses and (2) the investments made by Ricoh in information technologies hardware and software used by the Company. As a result of these tax credits, the effective tax rate was lower than the Japanese statutory tax rate. See Note 8 to the Consolidated Financial Statements for additional information. MINORITY INTERESTS. Consolidated minority interests for the fiscal year ended March 31, 2005 increased by Yen 0.6 billion to Yen 4.7 billion from Yen 4.0 billion for the fiscal year ended March 31, 2004. This increase primarily resulted from an improvement in the business performance of both Ricoh Leasing Co., Ltd. and Ricoh Elemex Corporation. EQUITY IN EARNINGS OF AFFILIATES. Consolidated equity in earnings of affiliates for the fiscal year ended March 31, 2005 increased by Yen 1.0 billion to Yen 3.1 billion from Yen 2.0 billion for the fiscal year ended March 31, 2004. This increase was due primarily to an improvement in the business performance of its affiliates.
OPERATING SEGMENTS - ---------------------------------------------------------------------------------------------- Millions of Yen (except for percentages) Thousands of ------------------------------------------ U.S. Dollars (1) 2004 2005 2005 % Change - ---------------------------------------------------------------------------------------------- OFFICE SOLUTIONS Net sales 1,460,395 100.0% 1,531,428 100.0% $ 14,312,411 4.9 Operating expenses 1,261,444 86.4 1,335,059 87.2 12,477,187 5.8 Operating income 198,951 13.6% 196,369 12.8% $ 1,835,224 (1.3) - ---------------------------------------------------------------------------------------------- INDUSTRIAL PRODUCTS Net sales 113,854 100.0% 121,914 100.0% $ 1,139,383 7.1 Operating expenses 110,743 97.3 121,872 100.0 1,138,991 10.0 Operating income 3,111 2.7% 42 0.0% $ 392 (98.6) - ---------------------------------------------------------------------------------------------- OTHER Net sales 208,458 100.0% 163,272 100.0% $ 1,525,907 (21.7) Operating expenses 201,508 96.7 167,431 102.5 1,564,776 (16.9) Operating income 6,950 3.3% (4,159) (2.5)% $ (38,869) -- - ---------------------------------------------------------------------------------------------- CORPORATE AND ELIMINATION Net sales (2,462) (2,506) $ (23,421) Operating expenses 56,544 54,240 506,915 Operating income (59,006) (56,746) $ (530,336) - ---------------------------------------------------------------------------------------------- CONSOLIDATED Net sales 1,780,245 100.0% 1,814,108 100.0% $ 16,954,280 1.9 Operating expenses 1,630,239 91.6 1,678,602 92.5 15,687,869 3.0 Operating income 150,006 8.4% 135,506 7.5% $ 1,266,411 (9.7) - ----------------------------------------------------------------------------------------------
(1) The above consolidated financial data set forth under the heading "Thousands of U.S. Dollars 2006" which has been translated from Japanese Yen into U.S. Dollar equivalents for the year ended March 31, 2005 is included solely for the convenience of readers outside Japan and has been made using the exchange rate of Yen 107 to US$1, the approximate rate of exchange prevailing at the Federal Reserve Bank of New York on March 31, 2005. Office Solutions -50- Net sales in the Office Solutions segment for the fiscal year ended March 31, 2005 increased by 4.9% (or Yen 71.0 billion) to Yen 1,531.4 billion from Yen 1,460.3 billion for the fiscal year ended March 31, 2004. This increase was primarily due to the continuing increase in sales of high-margin value-added digital-based products in the Imaging Solutions category as printers with various functions, from input/output to sharing and administration as well as color capabilities, were introduced in a wide range of models from standard models to high-speed digital models. With further advancements being made in digital networking, the increase in the volume of information that is processed electronically and improvements being made in color products, Ricoh believes that its customers strongly desire methods through which they can effectively and efficiently conduct their operations. In an effort to help customers manage their Total Document Volume ("TDV") more effectively and efficiently, Ricoh continued to offer solutions to optimize the total printing costs of its customers in fiscal year 2005. As a result of such efforts, in fiscal year 2005, domestic and overseas sales of color PPCs, MFPs and laser printers, particularly color laser printer models, increased. In addition, net sales continued to increase for support services, software, and other solutions aimed at satisfying the diverse needs of customers. These net sales results were consistent with Ricoh's efforts to support the shift in customers' demand to digital networking and color-based products from monochrome analog-based stand-alone products. More specifically, sales in the Imaging Solutions category for the fiscal year ended March 31, 2005 increased by 4.8% (or Yen 60.4 billion) to Yen 1,332.2 billion from Yen 1,271.8 billion for the fiscal year ended March 31, 2004. Ricoh strengthened its product lineup from standard models to high-speed digital models in addition to introducing new color PPC products. In addition, sales of Imaging Solutions category increased in fiscal year 2005 as compared to fiscal year 2004 due to the shift in customer preference from standalone equipment to multi-functional equipment. The Imaging Solutions category was Ricoh's core business and generated approximately 75% of Ricoh's net sales, the MFP and laser printer product lines have seen an increase in sales volume in both Japan and overseas. This shift reflects the current trend towards products that are networkable and is especially noticeable from the increase in sales of color MFPs and color laser printers for the fiscal year ended March 31, 2005. Taking this trend into consideration, Ricoh introduced new MFP products, such as imagio Neo 752/602, imagio C245 and imagio Neo C385 in Japan, and Aficio 2035/2045 and Aficio 2232C/2238C overseas. Ricoh also introduced new laser printer models, IPSiO CX2500, IPSiO CX6100D and IPSiO CX400 in Japan, and AP410/410N and CL400DN overseas. All of these new products performed well in each of the markets in which they were introduced. While the acquisition of Ricoh Printing Systems, Ltd. has increased net sales, cost of sales, and selling, general and administrative expenses, this acquisition has not significantly affected operating income for the year ended March 31, 2005. During the fiscal year ended March 31, 2005, Ricoh continued its efforts to strengthen the sales of its solutions business in the Network System Solutions category relating to its office equipment products so as to assist its customers in optimizing their total printing costs. The Network System Solutions category includes sales generated from support services, document management applications and related software. Ricoh's continuing efforts to strengthen its Network System Solutions category has led to an -51- increase in domestic and overseas sales of its solutions products over the last few years. In particular, fiscal year 2005 was a year in which new systems solutions were in great demand as customers were in a transition period for replacing their personal computers or servers following Year 2000. As a result of this increase in demand for system solutions, net sales of Ricoh's Network System Solutions category picked up some momentum and increased by 5.6% for the fiscal year ended March 31, 2005 as compared to the fiscal year ended March 31, 2004. As a result, net sales in the Office Solutions segment increased by 4.5% for the year ended March 31, 2005 as compared to the fiscal year ended March 31, 2004. Excluding the foreign currency exchange rate fluctuations U.S. Dollar and the Euro to the Japanese Yen, sales in the Office Solutions segment would have increased by 5.4% (or Yen 78.8 billion) for the fiscal year ended March 31, 2005 as compared to the fiscal year ended March 31, 2004. With respect to expenses, Ricoh continued to lower operating expenses in the Office Solutions segment in fiscal year 2005 by engaging in the various cost-cutting activities it employed in fiscal year 2004, such as streamlining its supply chain management. On the other hand, Ricoh also made strategic research and development investments during fiscal year 2005 so as to produce new products in the upcoming fiscal year. As a result of such research and development investments, which exceeded the decrease in expenses that resulted from such cost-cutting activities, operating expenses in the Office Solutions segment for the fiscal year ended March 31, 2005 increased by 5.8% (or Yen 73.6 billion) to Yen 1,335.0 billion from Yen 1,261.4 billion for the fiscal year ended March 31, 2004. As a result of the above factors, operating income for the Office Solutions segment for the fiscal year ended March 31, 2005 decreased by 1.3% (or Yen 2.5 billion) to Yen 196.3 billion from Yen 198.9 billion for the fiscal year ended March 31, 2004. Operating income as a percentage of net sales for the fiscal year ended March 31, 2005 decreased by 0.8 percentage point to 12.8% from 13.6% as compared to the fiscal year ended March 31, 2004, due primarily to the appreciation of the Japanese Yen relative to the U.S. dollar, the increase in research and development investments, and the various sales promotions (e.g., discounting, customer specific modifications, etc.) that Ricoh provided to its customers to increase its sales volume and its market share of color products, which was partially offset by the increase in sales of higher-margin value-added products such as color products and MFPs. Industrial Products Net sales in the Industrial Products segment for the fiscal year ended March 31, 2005 increased by 7.1% (or Yen 8.0 billion) to Yen 121.9 billion from Yen 113.8 billion for the fiscal year ended March 31, 2004. The sales increase was due primarily to the thermal media business and the optical equipment business that continued to perform favorably during fiscal year 2005. In particular, sales of the optical equipment business continued to grow in double-digit percentage figures in domestic market place. -52- As a result of sales in the semiconductor business that were not sufficient to cover the fixed costs relating to its production costs and organization maintenance costs, operating expenses for the fiscal year ended March 31, 2005 increased by 10.0% (or Yen 11.1 billion) to Yen 121.8 billion from Yen 110.7 billion for the fiscal year ended March 31, 2004. Operating income for the fiscal year ended March 31, 2005 decreased by 98.6% (or Yen 3.0 billion) to Yen 0.0 billion from Yen 3.1 billion for the fiscal year ended March 31, 2004. The decrease in operating income under the Industrial Products segment was due primarily to the shortfall relating to its semiconductor business as discussed above. Other Net sales in the Other segment for the fiscal year ended March 31, 2005 decreased by 21.7% (or Yen 45.1 billion) to Yen 163.2 billion from Yen 208.4 billion for the fiscal year ended March 31, 2004. Ricoh withdrew its optical discs business to reorganize from the self-developed drive business, which used proprietary technology developed by Ricoh, and its key-module/parts unit business. In April 2004, Ricoh sold Hanimex Australasia Pty Ltd. and its subsidiaries that engaged in the optical-related analog business, such as cameras, film sales and film development services, in Australia and New Zealand. While the digital camera business performed favorably under the Other segment, the increase in operating income of such business did not completely offset the decrease in operating income of the self-developed drive business. As a result of the factors above, operating income for the fiscal year ended March 31, 2005 decreased by Yen 11.1 billion to Yen (4.1) billion from Yen 6.9 billion for the fiscal year ended March 31, 2004. -53-
GEOGRAPHIC SEGMENTS BY GEOGRAPHIC ORIGIN - --------------------------------------------------------------------------------------------- Millions of Yen (except for percentages) Thousands of ----------------------------------------- U.S. Dollars (1) 2004 2005 2005 % Change - --------------------------------------------------------------------------------------------- JAPAN Net sales 1,313,197 100.0% 1,386,715 100.0% $12,959,953 5.6 Operating expenses 1,215,875 92.6 1,298,640 93.6 12,136,822 6.8 Operating income 97,322 7.4% 88,075 6.4% $ 823,131 (9.5) - --------------------------------------------------------------------------------------------- THE AMERICAS Net sales 320,753 100.0% 330,461 100.0% $ 3,088,421 3.0 Operating expenses 305,284 95.2 316,651 95.8 2,959,356 3.7 Operating income 15,469 4.8% 13,810 4.2% $ 129,065 (10.7) - --------------------------------------------------------------------------------------------- EUROPE Net sales 404,416 100.0% 415,643 100.0% $ 3,884,514 2.8 Operating expenses 382,383 94.6 391,271 94.1 3,656,738 2.3 Operating income 22,033 5.4% 24,372 5.9% $ 227,776 10.6 - --------------------------------------------------------------------------------------------- OTHER Net sales 193,341 100.0% 173,948 100.0% $ 1,625,682 (10.0) Operating expenses 182,870 94.6 162,042 93.2 1,514,411 (11.4) Operating income 10,471 5.4% 11,906 6.8% $ 111,271 13.7 - --------------------------------------------------------------------------------------------- CORPORATE AND ELIMINATION Net sales (451,462) (492,659) $(4,604,290) Operating expenses (456,173) (490,002) (4,579,458) Operating income 4,711 (2,657) $ (24,832) - --------------------------------------------------------------------------------------------- CONSOLIDATED Net sales 1,780,245 100.0% 1,814,108 100.0% $16,954,280 1.9 Operating expenses 1,630,239 91.6 1,678,602 92.5 15,687,869 3.0 Operating income 150,006 8.4% 135,506 7.5% $ 1,266,411 (9.7) - ---------------------------------------------------------------------------------------------
(1) The above consolidated financial data set forth under the heading "Thousands of U.S. Dollars 2005" which has been translated from Japanese Yen into U.S. Dollar equivalents for the year ended March 31, 2005 is included solely for the convenience of readers outside Japan and has been made using the exchange rate of Yen 107 to US$1, the approximate rate of exchange prevailing at the Federal Reserve Bank of New York on March 31, 2005. Japan Sales in Japan for the fiscal year ended March 31, 2005 increased by 5.6% (or Yen 73.5 billion) to Yen 1,386.7 billion from Yen 1,313.1 billion for the fiscal year ended March 31, 2004. In terms of sales to external customers, Ricoh recorded an increase in sales of MFPs and laser printers, in this geographic segment. This increase reflects the results of Ricoh's strategic sales promotion activities (e.g., discounting, customer specific modifications, etc.) and marketing strategy in the Office Solutions segment, which focused on responding to the change in customer demands from stand-alone monochrome products to networkable color products. Moreover, sales from the newly consolidated subsidiary, Ricoh Printing Systems, Ltd., favorably contributed to the sales in Japan. In addition, sales of personal computers and servers increased during fiscal year 2005 in Japan as a result of a recovery in corporate spending on information technology equipment. This increase in net sales of computer hardware also generated sales of Ricoh's solution business products, such as support services, document management applications and other software. Meanwhile, sales in analog-typed equipment decreased as such equipment was replaced with MFPs and color equipments. In the Industrial Products segment, sales for measuring equipment and semiconductor devices decreased -54- in Japan due to the sluggish market for such products, although optical equipment continued to perform favorably compared to the previous fiscal year. Operating expenses in this geographic segment for the fiscal year ended March 31, 2005 increased by 6.8% (or Yen 82.7 billion) to Yen 1,298.6 billion from Yen 1,215.8 billion for the fiscal year ended March 31, 2004. The increase in operating expenses was primarily due to the increase in sales volume especially exports to foreign countries. Even though net sales in this segment only increased by 5.6% as compared to the previous fiscal year, operating expenses increased by 6.8% as compared to the previous fiscal year. During fiscal year 2005, Ricoh was able to decrease its operating expenses as it performed various cost-cutting measures to streamline some of its business lines and its pension costs decreased due to the pension systems restructuring (such as the transfer to the Japanese government of the substitutional portion of the EPF). Despite these factors, during fiscal year 2005 operating expenses in Japan increased to a greater extent than the increase in net sales due to Ricoh's strategy of providing discounts for certain color products, which resulted in lower net sales as compared to cost of sales, and Ricoh's strategy of making greater research and development investments geared for the development of color products. The above strategies which resulted in increasing operating expenses were performed to further promote Ricoh's shift in focus from black-and-white monochrome products to color products in order to lay the foundation of the 15th Medium-term Management Plan that starts from fiscal year 2006. Despite sales of value-added high-margin products increased, the increase in operating expenses was greater than the increase in net sales and operating income in Japan for the fiscal year ended March 31, 2005 decreased by 9.5% (or Yen 9.2 billion) to Yen 88.0 billion from Yen 97.3 billion for the fiscal year ended March 31, 2004. Excluding net gains recognized from the transfer to the Japanese government of the substitutional portion of the EPF, operating income in Japan would have decreased by 1.0%. The Americas Net sales in the Americas for the fiscal year ended March 31, 2005 increased by 3.0% (or Yen 9.7 billion) to Yen 330.4 billion from Yen 320.7 billion for the fiscal year ended March 31, 2004, despite the appreciation of the Japanese Yen against the U.S. Dollar. This increase in net sales was due primarily to Ricoh's continuing efforts to enhance and expand its existing sales channels and increase the retail sales of MFPs, color PPCs and laser printers, as these products are responsive to the customers' changing needs for networking, coloration, and high speed products. In addition, Ricoh continued to focus its marketing and promotional efforts towards major corporate clients for the fiscal year ended March 31, 2005. In contrast to the increase in net sales of MFPs, color PPCs and laser printers, sales in the optical discs business decreased in the Americas due to the reorganization of this business. Excluding foreign currency exchange fluctuations, net sales in the Americas would have increased by 8.3%. The percentage change of operating expenses as compared to the previous fiscal year in the Americas was greater than the percentage change of net sales as compared to the previous fiscal year in the Americas as (1) the increasingly competitive business -55- environment in the Americas which required Ricoh to increase its marketing efforts to maintain its market share, (2) Ricoh made various investments to develop and enhance its core operating systems, and (3) the appreciation of the Japanese Yen relative to the U.S. Dollar. Europe Sales in Europe for the fiscal year ended March 31, 2005 increased by 2.8% (or Yen 11.2 billion) to Yen 415.6 billion from Yen 404.4 billion for the fiscal year ended March 31, 2004, due primarily to the depreciation of the Japanese Yen against the Euro and an increase in sales of Printing Systems, such as MFPs and laser printers, which reflected Ricoh's continuing efforts to strengthen its sales networks and reinforce its brand power in this geographic segment. Sales of products with color capability increased in fiscal year 2005 as compared to the previous fiscal year. Continuing from previous fiscal years, Ricoh maintained its dominance in the copiers and MFP product lines in this geographic segment and was again ranked number one in terms of market share in the sales of copiers and MFPs in Europe. Operating expenses in this geographic segment for the fiscal year ended March 31, 2005 increased by a lower percentage as compared to the percentage increase in net sales, due primarily to (1) a greater portion of its sales being derived from higher-margin value-added digital-based office equipment, especially with color capabilities, (2) Ricoh's ability to relocate its production facilities for those products closer to its customers, thereby eliminating costs associated with transporting such finished products, and (3) the depreciation of the Japanese Yen against the Euro. Other Net sales in the Other geographic segment, such as China, Asia and Oceania, for the fiscal year ended March 31, 2005 decreased by 10.0% (or Yen 19.3 billion) to Yen 173.9 billion from Yen 193.3 billion for the fiscal year ended March 31, 2004. While sales of printing systems increased in this geographic segment reflecting a full-fledged shift to digital, networkable and color products from stand-alone, analog and monochrome equipment such increase was not sufficient to offset the decrease in sales of the optical-related analog business as Ricoh sold its subsidiaries in this business line in this geographic segment (Hanimex Autralasia Pty Ltd. and its subsidiaries) during fiscal year 2005. The sales operation in China has recovered its performance. Manufacturing subsidiaries in China, which mainly manufacture low-end digital PPCs and MFPs, continued to contribute to the increase in net sales in this geographic segment. The products manufactured by such subsidiaries have been exported to sales subsidiaries in Japan, the U.S. and Europe. Ricoh maintained a high production level in China for the fiscal year ended March 31, 2005 to respond to an increase in demand for digital PPCs and MFPs in the various markets around the world. -56- PENSION INFORMATION Ricoh, like many large corporations in Japan, had an Employee Pension Fund ("EPF"), which was a defined benefit pension fund established under the Japanese Welfare Pension Insurance Law ("JWPIL"). This fund was composed of (i) a substitutional portion based on the pay-related part of the old-age pension benefits prescribed by JWPIL (similar to social security benefits in the United States) and (ii) a corporate portion based on a contributory defined benefit pension arrangement established by Ricoh. The fund assets of the EPF are invested and managed as a single portfolio for the entire EPF and were not statutorily attributed to the substitutional and corporate portions. The substitutional portion represented 39% of the total projected benefit obligation of Ricoh's EPF as of March 31, 2003. On June 15, 2001, the JWPIL was amended to permit an employer to elect to separate the substitutional portion from the EPF and transfer the substitutional portion to the Japanese government. Upon completion of the separation and transfer, the employer and the EPF are released from paying the substitutional portion of the benefits to EPF beneficiaries. Pursuant to the Contributed Benefit Pension Plan Law, Ricoh received from the Minister of Health, Labor and Welfare, effective January 1, 2003, an exemption from its obligation to contribute to the substitutional portion of its EPF for future employee services. In January 2004, Ricoh received from the Japanese government an exemption from its obligation to contribute to the substitutional portion of its EPF relating to past employee services. The transfer to the Japanese government of the substitutional portion of the EPF was completed on March 16, 2004. With respect to the accounting treatment of this transfer under U.S. generally accepted accounting principles, Ricoh accounted for the transfer in accordance with Emerging Issues Task Force Issue No. 03-02 "ACCOUNTING FOR THE TRANSFER TO THE JAPANESE GOVERNMENT OF THE SUBSTITUTIONAL PORTION OF EMPLOYEE PENSION FUND LIABILITIES" ("EITF 03-02"). As specified in EITF 03-02, the entire separation process and transfer is to be accounted for at the time of completion of the transfer to the government of the substitutional portion of the benefit obligation and related plan assets in accordance with Statement of Financial Accounting Standards No. 88 "EMPLOYERS' ACCOUNTING FOR SETTLEMENTS AND CURTAILMENTS OF DEFINED BENEFIT PENSION PLANS AND FOR TERMINATION BENEFITS". As a result of the transfer in March 2004, Ricoh recognized as a subsidy from the Japanese government 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. The subsidy that Ricoh recognized amounted to Yen 56.9 billion. In addition, Ricoh recognized as a settlement loss the amount calculated as the ratio of the obligation settled to the total EPF 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 Yen 48.6 billion. In addition, during the fiscal year ended March 31, 2004, the Company modified its pension plan system from a seniority-based system wherein benefits increase relative to the number of years of employment to a performance-based system in which benefits -57- reflect the individual employee's performance. By implementing this new pension plan system, Ricoh believes that it can limit future retirement benefit expenses. While the Company has implemented a pension plan system that limits future retirement benefit expenses, Ricoh believes that changing to a performance-based system in which each employee's performance rather than seniority is evaluated will maintain employee morale and motivation. Employees of the Company who retired or left the Company prior to the implementation of this new pension plan system will still receive benefits based on the previous seniority-based system. B. Liquidity and Capital Resources Cashflows - --------- The following summarizes our cashflows for each of the three fiscal years ended March 31, 2004, 2005 and 2006, as reported in our Consolidated Statements of Cashflows in the accompanying Consolidated Financial Statements. - ----------------------------------------------------------------------------- (Billions of Yen) For the year ended March 31, ---------------------------- 2004 2005 2006 --------- --------- -------- Net cash provided by operating activities 154.9 132.7 176.8 Net cash used in investing activities (63.3) (96.1) (120.0) Net cash used in financing activities (74.8) (56.4) (59.9) Increase (Decrease) in cash and cash equivalents 13.7 (18.6) 0.1 Cash and cash equivalents at beginning of year 189.2 203.0 186.8 Adjustment for Change in Fiscal Year-end of Consolidated Subsidiaries -- 2.4 -- Cash and cash equivalents at end of year 203.0 186.8 187.0 - ----------------------------------------------------------------------------- Operating Cashflows For fiscal year 2006, net cash provided by operating activities consisted primarily of net income of Yen 97.0 billion and depreciation and amortization of Yen 84.4 billion and a decrease in trade receivables of Yen 13.4 billion, a decrease in inventories of Yen 3.7 billion, and an increase in accrued income taxes and accrued expenses and other of Yen 2.4 billion, which was partially offset by an increase in finance receivables of Yen 30.0 billion, and a decrease in trade payables of Yen 4.4 billion. As compared to fiscal year 2005, net cash provided by operating activities in fiscal year 2006 increased mainly because (1) the decrease in net sales in Japan during the fourth quarter as compared to such period during fiscal year 2005 resulted in a decrease in Ricoh's trade receivables for fiscal year 2006 -58- and (2) the increase in capital expenditures also resulted in an increase in depreciation costs as compared to fiscal year 2005. For fiscal year 2005, net cash provided by operating activities consisted primarily of net income of Yen 83.1 billion and depreciation and amortization of Yen 78.2 billion and an increase in trade payables of Yen 27.2 billion, which was partially offset by an increase in finance receivables of Yen 30.2 billion, an increase in trade receivables of Yen 26.4 billion, an increase in inventories of Yen 12.8 billion, and a decrease in accrued income taxes and accrued expenses and other of Yen 13.7 billion. As compared to fiscal year 2004, net cash provided by operating activities in fiscal year 2005 decreased mainly because (1) the increase in net sales in Japan from Ricoh's sales promotions resulted in an increase in trade receivables for fiscal year 2005 and (2) the increase in net sales also resulted in an increase in inventories as compared to fiscal year 2004. For fiscal year 2004, net cash provided by operating activities consisted primarily of net income of Yen 91.7 billion, depreciation and amortization of Yen 76.9 billion and an increase in trade payables of Yen 21.3 billion, which was offset by an increase in trade receivables of Yen 11.3 billion, an increase in finance receivables of Yen 32.6 billion, as well as a decrease in accrued income taxes and other of Yen 5.9 billion. As compared to fiscal year 2003, net cash provided from operating activities in fiscal year 2004 decreased because (1) the increase in net sales in the United States and Japan during the fourth quarter as compared to such period during fiscal year 2003 resulted in an increase in Ricoh's trade receivables for fiscal year 2004 and (2) the decrease in demand for optical discs resulted in an increase in the volume of such products being held as inventory. Investing Cashflows For fiscal year 2006, net cash used in investing activities consisted mainly of Yen 101.7 billion of expenditures for property, plant and equipment, and Yen 138.6 billion in payments for purchases of available-for-sale securities, as well as Yen 24.4 billion of other, net. Ricoh realized Yen 141.6 billion from the sale of available-for-sale securities that were held by the Company and certain subsidiaries. As compared to fiscal year 2005, net cash used in investing activities increased in fiscal year 2006 as Ricoh incurred capital expenditures for the consolidation of some of its operations at its headquarter in Tokyo, the consolidation of its domestic research and development facilities and offices, and the establishment of a new color toner factory in Japan. For fiscal year 2005, net cash used in investing activities consisted mainly of Yen 84.0 billion of expenditures for property, plant and equipment, Yen 79.4 billion in payments for purchases of available-for-sale securities and Yen 43.2 billion for acquisitions of new subsidiaries, net of cash acquired. Ricoh realized Yen 118.1 billion from the sale of available-for-sale securities that were held by the Company and certain subsidiaries. In fiscal year 2005, Ricoh reinforced its production lines to manufacture new products, which resulted in an increase in expenditure on property, plant and equipment. As compared to fiscal year 2004, net cash used in investing activities increased in fiscal year 2005 as the Company used cash to acquire Ricoh Printing Systems, Ltd. -59- For fiscal year 2004, net cash used in investing activities consisted mainly of Yen 75.4 billion of expenditures for property, plant and equipment and Yen 35.5 billion in payments for the purchase of available-for-sale securities, as well as Yen 8.0 billion of other, net. Ricoh realized Yen 45.4 billion from sales of available-for-sale securities that were held by the Company and certain subsidiaries and Yen 9.9 billion from a decrease in time deposits. As compared to fiscal year 2003, net cash used in investing activities decreased in fiscal year 2004 because Ricoh disposed of certain of its available-for-sale securities that were not performing as expected and did not make alternative investments. Financing Cashflows For fiscal year 2006, net cash used in financing activities consisted primarily of Yen 93.7 billion spent for the repayment of long-term indebtedness, Yen 52.0 billion used to repay long-term debt securities, Yen 16.1 billion used for dividend payments and Yen 10.6 billion used for the purchase of treasury stock. Ricoh received Yen 39.6 billion from increase in short-term borrowings. In total, Ricoh reduced its interest-bearing indebtedness provided by external parties by Yen 32.3 billion as it continued to use its group cash management system for its efficient cash management. As compared to fiscal year 2005, net cash used in financing activities increased in fiscal year 2006 as Ricoh continued to reduce its external borrowings. For fiscal year 2005, net cash used in financing activities consisted primarily of Yen 60.6 billion spent for the repayment of long-term indebtedness, Yen 38.0 billion used to reduce short-term borrowings, Yen 22.0 billion used to repay long-term debt securities, Yen 14.7 billion used for dividend payments and Yen 10.6 billion used for the purchase of treasury stock. Ricoh encouraged group companies to use the group cash management system to satisfy their cash needs rather than borrowing from external sources. As compared to fiscal year 2004, net cash used in financing activities decreased in fiscal year 2005 as proceeds received by Ricoh from its long-term indebtedness exceeded its repayments of long-term indebtedness. For fiscal year 2004, net cash used in financing activities consisted primarily of Yen 31.5 billion spent for the repayment of long-term loans, Yen 23.9 billion used for the repayment of long-term debt securities, Yen 10.7 billion used to reduce short-term borrowings, Yen 11.4 billion used for the purchase of treasury stock and Yen 11.1 billion used for dividend payment. Ricoh received Yen 13.3 billion as proceeds from long-term loans and Yen 1.0 billion from the issuance of long-term debt securities. During fiscal year 2004, Ricoh focused on reducing its long-term borrowings provided by external parties as its group cash management system developed. As compared to fiscal year 2003, net cash used in financing activities increased in fiscal year 2004 as Ricoh continued to reduce its external borrowings. Cash and Asset-Liability Management Ricoh has in recent years tried to achieve greater efficiencies in the utilization of cash balances held by its subsidiaries pursuant to its policy of ensuring adequate financing and liquidity for its operations and growth, and maintaining the strength of its -60- balance sheet. One of the methods that Ricoh has implemented to achieve greater efficiency is building up its cash management system in Japan, the United States, and the Netherlands. This cash management system functions as an arrangement whereby Ricoh's funds are pooled together and cash resources are lent and borrowed from one group company to another company, with finance companies located within each of the above countries coordinating this arrangement. This pooling-of-funds arrangement has reduced the occurrence of excess accumulation of cash in one group company while another group company engages in unnecessary borrowing from third party institutions to meet its cash requirements. As such, the pooling-of-funds arrangement has reduced interest expense and related costs which were previously paid to third parties. For the fiscal years ended March 31, 2005 and 2006, Ricoh managed to reduce interest-bearing debt by Yen 22.6 billion and Yen 28.8 billion, respectively, on a consolidated basis. Ricoh also enters into various derivative financial instrument contracts in the normal course of its business and in connection with the management of its assets and liabilities. In order to hedge against the potentially adverse impacts of foreign currency fluctuations on its assets and liabilities denominated in foreign currencies, Ricoh enters into foreign exchange contracts and foreign currency options. Another form of derivative financial contracts that Ricoh enters into is interest rate swap agreements to hedge against the potentially adverse impacts of fair value or cashflow fluctuations on its outstanding debt interests. Ricoh uses derivative instruments to reduce its risk and to protect the market value of its assets and liabilities in conformity with Ricoh's policy. Ricoh does not use derivative financial instruments for trading or speculative purposes, nor is it a party to leveraged derivatives. Detailed discussion of these derivative contracts is provided in Item 11. Quantitative and Qualitative Disclosures About Market Risk. Ricoh also engages in securitization activities through its domestic leasing affiliate, Ricoh Leasing Co., Ltd. For a discussion of such activities, please see Item 5.E. Off-Balance Sheet Arrangements below. Sources of Funding Ricoh's principal sources of funding are a combination of cash and cash equivalents on hand, various lines of credit and the issuance of commercial paper and medium-term notes. In assessing its liquidity and capital resources needs, Ricoh places importance on the net income figure in the income statement, balances of cash and cash equivalents in the balance sheet and operating cashflows in the cashflow statements. -61- As of March 31, 2006, lines of credit and short-term and medium-term borrowings were as follows: (Billions of Yen) - ------------------------------------------------------------------------------ Average Interest Rate (%) Amount Available ----------------- ---------------- Bank loans 3.8 296.6 Commercial paper 3.1 252.8 Medium-term notes 0.2 154.4 - ------------------------------------------------------------------------------ As of March 31, 2006, Ricoh had Yen 187.0 billion in cash and cash equivalents and Yen 801.6 billion in aggregate borrowing facilities. Of the Yen 801.6 billion in aggregate borrowing facilities, Yen 703.9 billion was available to be borrowed by Ricoh as of the fiscal year ended March 31, 2006. Ricoh Leasing Co., Ltd. has a Yen 57.0 billion committed credit line with several banks having credit ratings satisfactory to Ricoh. This Yen 57.0 billion committed credit line amount is included in the Yen 801.6 billion figure for aggregate borrowing facilities. Almost all such borrowings from financial institutions and outstanding securities are unsecured. The Company, Ricoh Leasing Co., Ltd. and certain overseas subsidiaries raise capital by issuing commercial paper and medium-term notes. Ricoh Leasing Co., Ltd. and certain foreign subsidiaries of the Company issue commercial paper to meet their short-term funding requirements. Of the Yen 703.9 billion available under the borrowing facilities as of March 31, 2006, capacity available under commercial paper programs and medium-term note programs consisted of Yen 252.8 billion and Yen 154.4 billion, respectively. Utilization of such capacity depends on Ricoh's financing needs, investor demand and market conditions, as well as the ratings outlook for Ricoh's securities, as discussed below. Interest rates for commercial paper and medium-term notes issued by the Company and its subsidiaries ranged from 0.08% to 4.83% and 0.14% to 0.31%, respectively, during fiscal year 2006. As discussed in "Cash and Asset-Liability Management," Ricoh has decreased its outstanding interest-bearing debt in recent years by using its cash management systems in Japan, the United States and the Netherlands. The Company obtains ratings from the following major rating agencies: Standard & Poor's Rating Services, a division of McGraw-Hill Companies, Inc. ("S&P"), Moody's Investors Services ("Moody's"), and another local rating agency in Japan. As of March 31, 2006, the long-term and short-term credit ratings for the Company were A+ and A-1, respectively, by S&P, and A1 and P-1, respectively by Moody's. As is customary in Japan, substantially all of the bank loans are subject to general agreements with each lending bank which provide, among other things, that the bank may request additional security for loans if there is reasonable and probable cause for the necessity of such additional security and the bank may treat any security furnished, as well as any cash deposited in such bank, as security for all present and future indebtedness. The Company has never been requested to furnish such additional security. -62- In some cases, the Company's long-term debt securities contain customary covenants, including a "limitation on liens" covenant. The Company was in compliance with the covenants in its bank agreements and securities as of March 31, 2006. The Company is not subject to any covenants limiting its ability to incur additional indebtedness. For additional detail regarding these securities, see Note 10 to the Consolidated Financial Statements. Cash Requirements and Commitments Ricoh believes that its cash and cash equivalents and funds expected to be generated from its operations are sufficient to meet its cash requirements at least through fiscal year 2007. Even if there were a decrease in cashflow from operations as a result of fluctuations in customer demands from one year to another, Ricoh believes current funds on hand along with funds available under existing borrowing facilities would be sufficient to finance its anticipated operations. In addition, Ricoh believes that it is able to secure adequate resources to fund ongoing operating requirements and investments related to the expansion of existing businesses and the development of new projects through its access to the financial and capital markets. Interest rates for long-term debt are expected to rise as the Japanese and U.S. economies begin to exhibit some upswing momentum and it is possible that such rise in interest rates may affect Ricoh's ability to maintain liquidity. However, Ricoh believes that the effect of such increase will not significantly affect Ricoh's liquidity, mainly due to the fact that Ricoh has sufficient amounts of cash and cash equivalents on hand, as well as a continuous cashflow generated from its operating activities. Ricoh expects that its capital expenditures for fiscal year 2007 will amount to approximately Yen 90.0 billion, principally for the following categories: research and development of digital and networking equipment and the implementation of new accounting and sales force automation and marketing support systems. In addition, Ricoh is obligated to repay long-term debt in the aggregate principal amount of Yen 103.1 billion during fiscal year 2007, and in the aggregate principal amount of Yen 185.1 billion during fiscal years 2008 through 2010. The Company and certain of its subsidiaries have various employee pension plans covering all of their employees. As described in Note 11 to the Consolidated Financial Statements, the unfunded portion of these employee pension plans amounted to Yen 73.8 billion, as of March 31, 2006. The unfunded amount of Yen 94.7 billion was recorded as a liability on the consolidated balance sheet of Ricoh, as of March 31, 2006. The amounts contributed for pension plans for the fiscal years ended March 31, 2006, 2005 and 2004 were Yen 13.8 billion, Yen 12.3 billion and Yen 16.4 billion, respectively. Ricoh believes that its free cashflow (from operating and investing activities) together with existing lines of credit and borrowing facilities provide sufficient means to satisfy its liquidity needs and future obligations as described above. -63- C. Research and Development, Patents and Licenses Research and Development - ------------------------ Since its formation, Ricoh's basic management philosophy has been to contribute to society by developing and providing innovative and effective products with an emphasis on the relationship between people and information. In order to develop new technologies, products and systems based upon this management philosophy, Ricoh undertakes a variety of research and development ("R&D") activities. The Research and Development Group and the Software R&D Group function as the headquarters of Ricoh's R&D activities which are conducted at its R&D facilities throughout Japan and certain satellite R&D facilities overseas. Ricoh conducts a wide range of R&D activities, including technological research, research in elemental technologies, research on product applications and research in manufacturing technologies, including environmental technologies. The R&D groups conduct research and development in connection with optics, new materials, devices, information technologies and environmental technologies. The R&D groups also conduct basic and application research in connection with the development of software technologies as well as elemental development for new products. In addition to the R&D facilities in Japan, Ricoh has established satellite R&D facilities in the United States and China. Ricoh seeks to realize image communications through the development of Imaging Solutions products that can adapt to changes in the working environment in the broadband era and the development of new technologies for multimedia. Ricoh also engages in R&D activities for environmental protection in a variety of fields. In fiscal year 2006, Ricoh spent Yen 110.3 billion in R&D activities on a consolidated basis. In fiscal year 2006, Ricoh spent Yen 82.6 billion in R&D activities related to the Office Solutions segment. Ricoh's R&D activities in the Office Solutions segment include R&D for the following: optical design for copiers and printers; imaging data processing technology; electrophotographic technology; technology for elements of image engines; development of leading software technology; and development of applications for the advancement of system solutions. Some of the specific significant R&D achievements for the Office Solutions segment for fiscal year 2006 include the following: the development and production of the "imagio MP C3000/C2500" series, a line of digital color MFPs with greatly enhanced basic capabilities and superior cost performance, which was the first in the industry to become eligible to use the Color Universal Design certification mark after being certified by the Color Universal Design Organization*; and the development and production of the "imagio MP 1350" series, a high-end, high-speed, mono digital MFP with a full-color scanner function and a printing capacity of 135 pages (A4-size horizontal line) per minute. With respect to printers that use the "GEL JET" technology, Ricoh produced the "imagio MP C1500" series, a low-end model which is designed to be used in the office environment. In connection with the imagio MP C1500 printer series, Ricoh also developed three document management systems with enhanced security features and an input/output equipment management software. Furthermore, Ricoh developed a technique to produce a toner ground to 5 -64- microns, which produces high quality images on par with polymeric toner at low cost, in order to produce images with better quality and to reduce overall costs. In fiscal year 2006, Ricoh incurred capital expenditures to consolidate its domestic research and development facilities and offices at the Ricoh Technology Center in Japan. *Note: Products or facilities that are designed with consideration to color universal design so as to be easily viewable to as many people as possible, regardless of individual differences in color vision, are certified by the Color Universal Design Organization, an NPO in Japan, and once a product or facilities is certified, such product or facilities may use the Color Universal Design certification mark. In fiscal year 2006, Ricoh spent Yen 10.2 billion on R&D activities relating to the Industrial Products segment. In the Industrial Products segment, Ricoh's R&D activities continued to include designing ASIC (Application Specific Integrated Circuit) and ASSP (Application Specific Standard Product) for purposes of imaging, audio and communication; developing methods to utilize EDA (Electronic Design Automation); developing optical technologies and methods of new recording; and research and development for supply parts. Through the adoption of a new miniaturization process for electronic devices, Ricoh developed the "RP150/RP151" series of voltage regulator ICs, which features high output voltage accuracy, low supply current, low dropout, and high ripple rejection. These voltage regulator ICs are able to lower power consumption, stabilize performance and decrease the size of a variety of information technology devices, including cellular phones. In fiscal year 2006, Ricoh spent Yen 2.0 billion on R&D activities relating to the Other segment. In this segment, Ricoh continued to develop its ICD (Image Capturing Device) technology for digital cameras and its related application technology, and conducted R&D activities for optical discs. In the digital camera business, Ricoh developed and produced the 6.04 mega pixel "Caplio R4" series which features a 7.1x optical zoom lens that can enlarge images to a size that would be produced if a 28-200mm telephoto lens was to be placed on a regular 35mm camera, as well as an image stabilizing function using the CCD shift method. In the optical discs business, Ricoh developed storage media, such as the "Blu-ray Disc" and "HD DVD", which are expected to be the next generation of DVDs. Ricoh commenced shipping samples of these DVDs to hardware manufacturers for their evaluation in fiscal year 2006. In addition, Ricoh also continues to engage in the development of its fundamental research fields, which focus on R&D activities that can be applied to various products. For fiscal year 2006, Ricoh spent Yen 15.4 billion on R&D activities in its fundamental research fields. Such R&D activities include R&D in nanotechnology; micro-machining; general technologies in measuring, analysis and simulation; materials and devices; production techniques; system software modules; photonics technology for high speed and high quality imaging solutions; the next generation office systems and office solutions; the technology to create the next generation of office systems and office solutions; and environmental technologies. Ricoh's total research and development expenses for fiscal years 2004, 2005 and 2006 were Yen 92.5 billion, Yen 110.4 billion and Yen 110.3 billion, respectively. For a summary -65- of Ricoh's research and development expenditures during each of the last three fiscal years, see Note 18 to the Consolidated Financial Statements. Patents and Licenses - -------------------- Ricoh owns approximately 22,500 patents on a worldwide basis, and has a large number of licenses under various agreements with Japanese and foreign companies. Although patents and licenses are important to Ricoh, it does not believe that the expiration of any single patent or group of related patents or of any license agreements will materially affect its business. The following table lists some of the important patent and licensing agreements which the Company is currently a party to:
- ------------------------------------------------------------------------------ Counterparty Country Summary of the Contract Contract Term - ------------------------------------------------------------------------------ International USA Comprehensive cross April 1, 2004 to Business Machines license patent agreement expiration date of the Corporation relating to the patent subject to the information processing agreement technology area (reciprocal agreement) - ------------------------------------------------------------------------------ Lemelson Medical, USA Patent licensing March 31, 1993 to Education & agreement relating to expiration date of the Research computer image analysis patent subject to the Foundation Limited and other products (the agreement Partnership Company as the licensee) - ------------------------------------------------------------------------------ Texas Instruments USA Comprehensive cross October 11, 1996 to Incorporated license agreement October 10, 2006 relating to copiers, etc. (reciprocal agreement) - ------------------------------------------------------------------------------ Sharp Corporation Japan Patent licensing April 1, 1997 to March agreement relating to 31, 2002 with automatic facsimile machines (the renewal every 5 years Company as licensor) thereafter - ------------------------------------------------------------------------------ Canon Inc. Japan Patent licensing October 1, 1998 to agreement relating to expiration date of the office equipment patent subject to the (reciprocal agreement) agreement - ------------------------------------------------------------------------------ Brother Japan Patent licensing October 1, 2004 to Industries, Ltd. agreement relating to September 30, 2009 digital photography (reciprocal agreement) - ------------------------------------------------------------------------------
D. Trend Information See "OVERVIEW" above and "Cautionary Statement with Respect to Forward-Looking Statements" elsewhere in this Annual Report. E. Off-Balance Sheet Arrangements As disclosed in Note 4 to the Consolidated Financial Statements, Ricoh, through its domestic leasing affiliate, has a certain procedure to sell lease receivables through securitization, however, no lease receivables were sold for the last three fiscal years. -66- Securitization involves the creation of SPEs (Special Purpose Entities) to hold the pooled assets. The SPEs are designed to place the pooled assets beyond the reach of Ricoh and its creditors in the event of bankruptcy and when structured in this manner (and subject to certain other conditions), the pooled assets are removed from Ricoh's consolidated balance sheets. The SPEs are also designed so that investors have no recourse to Ricoh in the event of any failure of payment on the pooled assets. Therefore, when securitizing assets in this manner, Ricoh does not have any exposed assets or contingent liabilities other than those recognized as subordinated residual interests on Ricoh's consolidated balance sheets. As of March 31, 2006, Ricoh had one such SPE that held assets it had sold in a securitization totaling Yen 44.5 billion. Ricoh does not dispose of troubled leases, loans or other problem assets by means of nonconsolidated SPEs. None of our officers, directors or employees holds any equity interests in our SPEs or receives any direct or indirect compensation from the SPEs. The SPEs do not own shares or equity interests in Ricoh or any of Ricoh's affiliates, and there are no agreements in place to do so. F. Tabular Disclosure of Contractual Obligations The following table sets forth Ricoh's contractual obligations as of March 31, 2006.
Millions of Yen CONTRACTUAL OBLIGATIONS Payments due by period - ------------------------------------------------------------------------------------------------------- Less than 1 More than 5 Total year 1-3 years 3-5 years years - ------------------------------------------------------------------------------------------------------- Long-term Debt Obligations 294,751 101,930 136,889 54,650 1,282 Interest Expense Associated with Long-term Debt Obligations 6,174 3,087 2,647 432 8 Capital (Finance) Lease Obligations 3,453 1,195 1,428 407 423 Operating Lease Obligations 57,916 14,693 22,904 10,464 9,855 Purchase Obligations 2,774 2,774 - - - - ------------------------------------------------------------------------------------------------------- TOTAL 365,068 123,679 163,868 65,953 11,568 - -------------------------------------------------------------------------------------------------------
Ricoh expects to contribute Yen13,080 million to its pension plan in the fiscal year ending March 31, 2007 and is currently unable to predict funding requirements for periods beyond fiscal year 2006 due to the uncertainty related to changes in actuarial assumptions, return on plan assets, and changes to plan membership. Ricoh had operating lease commitments with rental payments totaling Yen 42.0 billion for the fiscal year ended March 31, 2006. In addition to the above, Ricoh acts as a guarantor for some of its employees' housing loans. As of March 31, 2006, the total amount of such guarantees was Yen 175 million. G. New Accounting Standards In November 2004, the FASB issued SFAS No.151, "Inventory Costs, an amendment of ARB No. 43, Chapter 4" to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material (spoilage). Among -67- other provisions, the new rule requires that items such as idle facility expense, excessive spoilage, double freight, and rehandling cost be recognized as current period charges regardless of whether they meet the criterion of "so abnormal" as stated in ARB No. 43. In addition, SFAS 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 151 is effective for the fiscal years beginning after June 15, 2005 and is required to be adopted by Ricoh in the fiscal year beginning April 1, 2006. The adoption of SFAS 151 is not expected to have a material effect on the Company's consolidated results of operations and financial position. In December 2004, the FASB issued SFAS No. 153, "Exchanges of Nonmonetary Assets - an amendment of APB Opinion No. 29" ("SFAS 153"). SFAS 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 Nonmonetary Transactions", and replaces it with an exception for exchanges that do not have commercial substance. SFAS 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 153 is effective for the fiscal years beginning after June 15, 2005 and is required to be adopted by Ricoh in the fiscal year beginning April 1, 2006. The adoption of SFAS 153 is not expected to have a material effect on the Company's consolidated results of operations and financial position. In May 2005, the FASB issued No. 154, "Accounting Changes and Error Corrections - a replacement of APB Opinion No. 20 and SFAS No.3". SFAS 154 replaces APB 20, "Accounting Changes" and SFAS 3, "Reporting Accounting Changes in Interim Financial Statements", and requires retrospective applications to prior periods' financial statements of a voluntary change in accounting principle unless it is impracticable. SFAS 154 is effective for the fiscal years beginning after December 15, 2005 and is required to be adopted by Ricoh in the fiscal year beginning April 1, 2006. The adoption of SFAS 154 is not expected to have a material effect on the Company's consolidated results of operations and financial position. In February 2006, the FASB issued SFAS No. 155, "Accounting for Certain Hybrid Financial Instruments - an amendment of SFAS No. 133 and 140". SFAS 155 amends SFAS 133, "Accounting for Derivative Instruments and Hedging Activities" and SFAS 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities". SFAS 155 permits fair value re-measurement for any hybrid financial instrument that contains an embedded derivative, and establishes a requirement to evaluate interests in securitized financial assets to identify interests that are freestanding derivatives or that are hybrid financial instruments that contain an embedded derivative. SFAS 155 is effective for the fiscal years beginning after September 15, 2006 and is required to be adopted by Ricoh in the fiscal year beginning April 1, 2007. The Company is currently evaluating the effect that the adoption of SFAS 155 will have on its consolidated results of operations and financial condition but does not expect it to have a material impact. -68- In March 2006, the FASB issued SFAS No. 156, "Accounting for Servicing of Financial Assets - an amendment of FASB Statement No. 140". SFAS 156 amends SFAS 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities" to clarify the accounting for servicing assets and servicing liabilities. Among other provisions, the new accounting standard requires all separately recognized servicing assets and servicing liabilities to be initially measured at fair value, if practicable. SFAS 156 is effective for the fiscal years beginning after September 15, 2006 and is required to be adopted by Ricoh in the fiscal year beginning April 1, 2007. The Company is currently evaluating the effect that the adoption of SFAS 156 will have on its consolidated results of operations and financial condition but does not expect it to have a material impact. -69- Item 6. Directors, Senior Management and Employees ------------------------------------------ A. Directors and Senior Management Directors and Corporate Auditors of the Company as of June 28, 2006 were as follows: Name Current Position (Date of Birth) (Function/Business area) Date Business Experience - ----------------- ------------------------- ---------- --------------------- Masamitsu Sakurai Chairman of the Board Apr. 1966 Joined the Company (January 8, 1942) and Representative Director May 1984 President of Ricoh UK Products Ltd. June 1992 Director Apr. 1993 President of Ricoh Europe B.V. June 1994 Managing Director Apr. 1996 President and Representative Director (Current) Mar. 2005 Chairman of Coca-Cola West Japan Co., Ltd. (Current) June 2005 Representative Director (Current) June 2005 President (Current) June 2005 Chairman of the Board (Current) June 2005 CEO (Chief Executive Officer) (Current) Principal business activities and other principal directorships performed outside Ricoh: Vice Chairperson of Japan Association of Corporate Executives President of Japan Business Machine and Information System Industries Association Representative of Asahi Insurance Company Corporate Auditor of San-Ai Oil Co., Ltd. Director of Millea Holdings, Inc. Chairman of Coca-Cola West Japan Co., Ltd. - ----------------- ------------------------- --------- --------------------- Koichi Endo Director Apr. 1966 Joined the Company (February 16, Apr. 1987 President of Ricoh 1944) Electronics, Inc. June 1992 Director June 1997 Managing Director June 2000 Executive Managing Director June 2000 Executive Vice President Apr. 2004 General Manager of Fact Base Management Innovation Office (Current) June 2005 Director (Current) June 2005 Corporate Executive Vice President (Current) June 2005 CINO (Chief Innovation Officer) (Current) Apr. 2006 CSO (Chief Strategy Officer) (Current) Principal business activities and other principal directorships performed outside Ricoh: Director of Sindo Ricoh Co., Ltd. Director of San-Ai Plant Construction Co., Ltd. Corporate Auditor of TOYO KANETSU K.K. -70- Name Current Position (Date of Birth) (Function/Business area) Date Business Experience - ------------------ ------------------------ --------- ------------------------ Masayuki Matsumoto Director Apr. 1970 Joined the Company (December 10, July 1993 Manager of Tokyo Branch 1944) of Imaging Equipment Marketing Division of Marketing Group June 1994 Director Jan. 1996 Deputy General Manager of Marketing Division Oct. 1998 Managing Director Oct. 1998 General Manager of Marketing Group June 2000 Executive Vice President June 2002 Executive Managing Director Apr. 2005 General Manager of Corporate Social Responsibility Division (Current) June 2005 Director (Current) June 2005 Corporate Executive Vice President (Current) June 2005 CMO (Chief Marketing Officer) (Japan) (Current) - ------------------ ------------------------ --------- ------------------------ Katsumi Yoshida Director Apr. 1967 Joined the Company (August 20, 1944) Oct. 1990 President of Ricoh Electronics, Inc. Feb. 1996 Vice chairman of Ricoh Corporation Apr. 2000 President of Ricoh Corporation Apr. 2001 Executive Vice President June 2002 Managing Director Oct. 2003 General Manager of International Marketing Group Oct. 2003 Chairman of Ricoh China Co., Ltd. (Current) June 2005 Director (Current) June 2005 Corporate Executive Vice President and CMO (Chief Marketing Officer) (Overseas) (Current) Apr. 2006 In charge of Office Business Strategic Planning (Current) - ------------------ ------------------------ --------- ------------------------ Takashi Nakamura Director Apr. 1972 Joined the Company (September 2, Apr. 1990 President of Ricoh UK 1946) Products Ltd. Jan. 1995 President of Ricoh Europe B.V. June 1998 Director June 2000 Senior Vice President June 2002 President of Ricoh Elemex Corporation June 2004 Managing Director June 2005 Director (Current) June 2005 In charge of Legal Affairs and Intellectual Property (Current) June 2006 Corporate Executive Vice President (Current) Jan. 2006 CHO (Chief Human Resource Officer) (Current) Jan. 2006 CPO (Chief Production Officer) (Current) -71- Name Current Position (Date of Birth) (Function/Business area) Date Business Experience - ----------------- ------------------------ --------- ------------------------ Shiroh Kondoh Director Apr. 1973 Joined the Company (October 7, 1949) July 1999 Deputy General Manager of Imaging System Business Group June 2000 Senior Vice President Oct. 2000 General Manager of Imaging System Business Group June 2002 Executive Vice President June 2003 Managing Director Oct. 2004 In charge of Imaging Engine Solution Development (Current) Oct. 2004 General Manager of MFP Business Group (Current) June 2005 Director (Current) June 2005 Corporate Executive Vice President (Current) Principal business activity and other principal directorship performed outside Ricoh: Director of Sindo Ricoh Co., Ltd. - ----------------- ------------------------ --------- ------------------------ Kazunori Azuma Director Apr. 1971 Joined the Company (February 11, Oct. 2000 President of Ricoh 1949) Technosystems Co., Ltd. June 2003 Managing Director June 2003 Executive Vice President June 2003 In charge of Domestic Sales Planning Oct. 2003 Chairman of Ricoh Technosystems Co., Ltd. Nov. 2003 General Manager of Marketing Group (Current) June 2005 Director (Current) June 2005 Corporate Executive Vice President (Current) - ----------------- ------------------------ --------- ------------------------ Zenji Miura Director Apr. 1976 Joined the Company (January 5, 1950) Jan. 1993 President of Ricoh France S.A. Oct. 2000 Senior Vice President Oct. 2000 General Manager of Finance and Accounting Division June 2003 Executive Vice President June 2004 Managing Director June 2005 Director (Current ) June 2005 Corporate Executive Vice President (Current) June 2005 CFO (Chief Financial Officer) (Current) June 2005 In charge of IR (Current) Apr. 2006 CIO (Chief Information Officer) (Current) Apr. 2006 In charge of Corporate Communication and Management of Group Companies (Current) Apr. 2006 General Manager of Corporate Planning Division (Current) -72- Name Current Position (Date of Birth) (Function/Business area) Date Business Experience - ----------------- ------------------------ --------- ------------------------ Kiyoshi Sakai Director Apr. 1970 Joined the Company (December 25, Apr. 1994 General Manager of IPS 1945) Business Division of Imaging System Business Group Jan. 1996 General Manager of Corporate Planning Division June 1996 Director Apr. 1999 General Manager of Research and Development Group June 2000 Senior Vice President June 2002 Managing Director June 2002 Executive Vice President June 2005 Corporate Senior Vice President Apr. 2006 In charge of Corporate Environment (Current) June 2006 Director (Current) June 2006 Corporate Executive Vice President (Current) June 2006 Chief Technology Officer (Current) - ----------------- ------------------------ --------- ------------------------ Takaaki Wakasugi Director June 1985 Professor, Faculty of (March 11, 1943) Economics, the University of Tokyo Sep. 1990 Co-director of Mitsui Life Financial Research Center, University of Michigan Ross School of Business (Current) Apr. 2003 Director and General Manager of Japan Corporate Governance Research Institute, Inc. (Current) Apr. 2004 Professor, Faculty of Business Administration, Tokyo Keizai University (Current) June 2004 Professor Emeritus, the University of Tokyo June 2005 Director (Current) - ----------------- ------------------------ --------- ------------------------ Takuya Goto Director Apr. 1964 Joined Kao Soap Company (August 19, 1940) (renamed Kao Corporation in 1985) May 1987 General Manager of Tochigi Plant of Kao Corporation May 1990 General Manager of Chemical Business Division of Kao Corporation June 1990 Director of Kao Corporation July 1991 Managing Director of Kao Corporation June 1996 Executive Managing Director of Kao Corporation June 1997 President of Kao Corporation June 2004 Chairman of Kao Corporation (Current) June 2006 Director (Current) -73- Name Current Position (Date of Birth) (Function/Business area) Date Business Experience - ------------------ ------------------------ --------- ------------------------ Kohji Tomizawa Corporate Auditor Apr. 1971 Joined the Company (May 25, 1946) July 1988 President of Ricoh Finance Ltd. June 1997 Managing Director of Ricoh Logistics System Co., Ltd. July 2001 Director of Tokyo Ricoh Co., Ltd. June 2004 Corporate Auditor (Current) - ------------------ ------------------------ --------- ------------------------ Shigekazu Iijima Corporate Auditor Apr. 1972 Joined the Company (July 7, 1948) Oct. 1990 General Manager of Accounting Department of Finance and Accounting Division Apr. 1993 General Manager of Administration Department of Electronic Device Division June 1996 Leader of Management Planning Group of Corporate Planning Division June 1999 Director of Ricoh Elemex Corporation Apr. 2004 General Manager of Business Planning Department of International Business Group July 2005 General Manager of Business Strategy & Planning Center of International Business Group June 2006 Corporate Auditor (Current) - ------------------ ------------------------ --------- ------------------------ Kenji Matsuishi Corporate Auditor Apr. 1965 Graduated from the (July 24, 1937) National Legal Training and Research Institute. Apr. 1965 Legal registration as a Japanese attorney Apr. 1965 Joined Takano & Higuchi Legal Services Feb. 1972 General Manager of Matsuishi Legal Services (Current) June 1994 Corporate Auditor (Current) - ------------------ ------------------------ --------- ------------------------ Takehiko Wada Corporate Auditor Apr. 1958 Joined San-Ai Oil Co., (October 24, 1935) Ltd. June 1985 Director of said company June 1990 Managing Director of said company July 1994 Executive Managing Director of said company July 1999 President of said company (Current) June 2001 Corporate Auditor (Current) -74- Name Current Position (Date of Birth) (Function/Business area) Date Business Experience - ----------------- ------------------------ --------- ----------------------- Satoshi Itoh Substitute Corporate Jan. 1967 Joined Japan Office, (July 25, 1942) Auditor Arthur Anderson Mar. 1967 Finished Master's Course, Graduate School of Commerce, Chuo University Dec. 1970 Registered as Certified Public Accountant Aug. 1975 Served at London Office, Arthur Anderson Sep. 1978 Partner of Arthur Anderson Sep. 1993 Representative Partner of Asahi & Co. Aug. 2001 Retired from Arthur Anderson and Asahi & Co. Apr. 2002 Professor of Graduate School of International Accounting, Specialty Graduate School (presently Professional Graduate School), Chuo University (Current) Directors and Corporate Auditors are elected at a general meeting of shareholders for two and four years terms, respectively, and may serve any number of consecutive terms. The Board of Directors appoints from among its members a Chairman and one or more Representative Directors in accordance with Corporation Law of Japan. The Company maintains an executive officer system and under such system there are 44 such officers each with one of the following roles: . Executive officers: Oversee operations under the authority granted from the president and report to the president. . Group executive officers: Assist the president with the management of Ricoh Group. Executive Officers of the Company as of June 28, 2006 were as follows: Current Position Name (Function/Business area) Date Business Experience - --------------- ------------------------ --------- ------------------------- Masamitsu President and Chief See above for his business experience Sakurai Executive Officer and other information. - --------------- ------------------------ --------- ------------------------- Koichi Endo Corporate Executive Vice See above for his business experience President and other information. (Chief Strategy Officer) (Chief Innovation Officer) (General Manager of Fact Base Management Innovation Office) -75- Current Position Business Name (Function/Business area) Date Experience - ---------------- ------------------------ ------------ ---------------------- Masayuki Corporate Executive See above for his business experience Matsumoto Vice President and other information. (Chief Marketing Officer for Japan) (General Manager of Corporate Social Responsibility Division) - ---------------- ------------------------ ------------ ---------------------- Katsumi Yoshida Corporate Executive See above for his business experience Vice President and other information. (Chief Marketing Officer for Overseas) (Office Business Strategic Planning) (Chairman of Ricoh China Co., Ltd.) - ---------------- ------------------------ ------------ ---------------------- Takashi Nakamura Corporate Executive See above for his business experience Vice President and other information. (Chief Human Resource Officer) (Chief Production Officer) (Legal & Intellectual Property) - ---------------- ------------------------ ------------ ---------------------- Shiroh Kondoh Corporate Executive See above for his business experience Vice President and other information. (Imaging Engine Solution Development) (General Manager of MFP Business Group) - ---------------- ------------------------ ------------ ---------------------- Kazunori Azuma Corporate Executive See above for his business experience Vice President and other information. (General Manager of Marketing Group) - ---------------- ------------------------ ------------ ---------------------- Zenji Miura Corporate Executive See above for his business experience Vice President and other information. (Chief Financial Officer) (Chief Information Officer) (Investor Relation) (Corporate Communication and Management of Group Companies (General Manager of Corporate Planning Division) - ---------------- ------------------------ ------------ ---------------------- Kiyoshi Sakai Corporate Executive See above for his business experience Vice President and other information. (Chief Technology Officer) (Corporate Environment) -76- Current Position Name (Function/Business area) Date Business Experience - ------------------ ------------------------ --------- ------------------------ Kazuo Togashi Corporate Senior Vice Apr. 1972 Joined the Company (November 28, President Apr. 1998 President of Ricoh 1949) (General Manager of Europe B.V. International Business June 2000 Senior Vice President Group) Apr. 2002 Chairman of said company (General Manager of Apr. 2002 Chairman of NRG Group Regional Business PLC Support Center) June 2002 Executive Vice President June 2003 Managing Director June 2005 Corporate Senior Vice President (Current) Apr. 2006 General Manager of International Business Group (Current) Apr. 2006 General Manager of Regional Business Support Center (Current) - ------------------ ------------------------ --------- ------------------------ Terumoto Nonaka Corporate Senior Vice Jan. 1988 Joined the Company (October 28, 1947) President Jan. 1990 Deputy General Manager (President of Electronic of Electronic Devices Devices Company) Division June 2000 Senior Vice President Oct. 2000 President of Electronic Devices Company (Current) June 2002 Executive Vice President June 2005 Corporate Senior Vice President (Current) - ------------------ ------------------------ --------- ------------------------ Etsuo Kobayashi Corporate Senior Vice Apr. 1970 Joined the Company (July 4, 1947) President Apr. 1998 General Manager of (General Manager of Personnel Division Personnel Division) (Current) June 2000 Senior Vice President June 2003 Executive Vice President June 2005 Corporate Senior Vice President (Current) - ------------------ ------------------------ --------- ------------------------ Haruo Nakamura Corporate Senior Vice Aug. 2000 Joined the Company (April 29, 1952) President Nov. 2000 Leader of alpha Task (General Manager of GJ Force (GEL JET) Business Apr. 2004 Executive Vice President Division) Apr. 2004 General Manager of GJ (GEL JET) Business Division (Current) June 2005 Corporate Senior Vice President (Current) - ------------------ ------------------------ --------- ------------------------ Kenji Hatanaka Corporate Senior Vice Apr. 1969 Joined the Company (July 1, 1946) President June 2000 Senior Vice President (General Manager of June 2003 General Manager of Tokyo Branch) Tokyo Branch (Current) (General Manager of June 2003 General Manager of Kanto Branch) Kanto Branch (Current) (President of Ricoh June 2004 Executive Vice President Sales Co., Ltd.) Jan. 2005 President of Ricoh Sales Co., Ltd. (Current) June 2005 Corporate Senior Vice President (Current) -77- Current Position Name (Function/Business area) Date Business Experience - ------------------ ------------------------ --------- ------------------------ Hideko Kunii Corporate Senior Vice May 1982 Joined the Company (December 13, President Oct. 1999 General Manager of 1947) (General Manager of Software Research Software R&D Group) Center (Chairman of Ricoh June 2000 Senior Vice President Software Research Oct. 2000 Deputy General Manager Center (Beijing) Co., of P&S Products Ltd.) Division June 2002 Chairman of Ricoh Software Technology (Shanghai) Co., Ltd. Oct. 2002 General Manager of Software R&D Group (Current) Feb. 2004 Chairman of Ricoh Software Research Center (Beijing) Co., Ltd. (Current) June 2004 Executive Vice President June 2005 Corporate Senior Vice President (Current) - ------------------ ------------------------ --------- ------------------------ Hiroshi Kobayashi Corporate Senior Vice Apr. 1974 Joined the Company (July 2, 1948) President Apr. 2002 General Manager of (General Manager of LP Corporate Planning Business Group) Division June 2002 Senior Vice President Apr. 2003 General Manager of Corporate Communication Center June 2004 Executive Vice President Oct. 2004 General Manager of LP Business Group (Current) June 2005 Corporate Senior Vice President (Current) - ------------------ ------------------------ --------- ------------------------ Susumu Ichioka Corporate Senior Vice Apr. 1971 Joined the Company (April 23, 1948) President Oct. 2003 Senior Vice President (Chairman of Ricoh Oct. 2003 President of Ricoh Corporation) Finance Corporation (Current) June 2004 Executive Vice President June 2004 Chairman of Ricoh Corporation (Current) June 2005 Corporate Senior Vice President (Current) - ------------------ ------------------------ --------- ------------------------ Kiyoto Nagasawa Corporate Vice President Apr. 1973 Joined the Company (August 16, 1948) (General Manager of Apr. 2001 General Manager of C&F Quality of Management Business Division 2 Division) June 2002 Senior Vice President June 2005 General Manager of Quality of Management Division (Current) June 2005 Corporate Vice President (Current) - ------------------ ------------------------ --------- ------------------------ Yutaka Ebi Corporate Vice President Apr. 1972 Joined the Company (October 20, 1949) (General Manager of Apr. 2001 General Manager of Legal & Intellectual Imaging Technology Property Division) Division June 2002 Senior Vice President Oct. 2004 General Manager of Legal & Intellectual Property Division (Current) June 2005 Corporate Vice President (Current) -78- Current Position Name (Function/Business area) Date Business Experience - ------------------ ------------------------ --------- ----------------------- Hiroo Matsuda Corporate Vice President Apr. 1972 Joined the Company (April 19, 1948) (General Manager of Apr. 2002 General Manager of Printing Solution Major Accounts Division of Marketing Marketing Division Group) June 2002 Senior Vice President Apr. 2004 General Manager of Solution Partner Sales Division of Marketing Group Oct. 2004 General Manager of Solution Partner Sales Center of LP Business Group June 2005 Corporate Vice President (Current) Apr. 2006 General Manager of Printing Solution Division of Marketing Group (Current) - ------------------ ------------------------ --------- ----------------------- Hiroshi Adachi Corporate Vice President Apr. 1968 Joined the Company (January 8, 1946) (President of Thermal Oct. 2000 President of Thermal Media Company) Media Company (Chairman of Ricoh (Current) Electronic Technology Nov. 2001 Chairman of Ricoh (Beijing) Co., Ltd.) Electronic Technology (Chairman of Ricoh (Beijing) Co., Ltd. International (Current) (Shanghai) Co., Ltd.) June 2002 Senior Vice President (Chairman of Ricoh June 2004 Chairman of Ricoh Thermal Media (Wuxi) International Co., Ltd.) (Shanghai) Co., Ltd. (Current) June 2005 Corporate Vice President (Current) Dec. 2005 Chairman of Ricoh Thermal Media (Wuxi) Co., Ltd.(Current) - ------------------ ------------------------ --------- ----------------------- Kohji Sawa Corporate Vice President Apr. 1971 Joined the Company (June 5, 1948) (General Manager of Apr. 1998 General Manager of Information Technology Imaging System and Solution Division) Component Production Division Apr. 2000 General Manager of Procurement Control Center July 2001 General Manager of Optical Component Development Center June 2002 Senior Vice President June 2005 General Manager of Information Technology and Solution Division (Current) June 2005 Corporate Vice President (Current) - ------------------ ------------------------ --------- ----------------------- Yoshimasa Matsuura Corporate Vice President Apr. 1971 Joined the Company (June 23, 1947) (General Manager of May 1999 General Manager of Office Business Supply Chain Planning Center) Management Planning (Deputy General Manager Division of MFP Business Group) Apr. 2004 General Manager of (General Manager of Imaging System Business Strategy Business Strategy Center of MFP Business Center Group) June 2004 Senior Vice President Oct. 2004 General Manager of Office Business Planning Center (Current) June 2005 Deputy General Manager of MFP Business Group (Current) June 2005 General Manager of Business Strategy Center of MFP Business Group (Current) June 2005 Corporate Vice President (Current) -79- Current Position Name (Function/Business area) Date Business Experience - ----------------- ------------------------ --------- ----------------------- Sadahiro Arikawa Corporate Vice President Apr. 1971 Joined the Company (March 31, 1949) (General Manager of Dec. 2001 President of Ricoh Major Accounts Kyusyu Co., Ltd. Marketing Division) Apr. 2004 General Manager of Major Accounts Marketing Division (Current) June 2004 Senior Vice President June 2005 Corporate Vice President (Current) - ----------------- ------------------------ --------- ----------------------- Norio Tanaka Corporate Vice President Feb. 1978 Joined the Company (March 22, 1948) (Deputy General Manager Apr. 2004 Deputy General Manager of MFP Business Group) of Imaging System (General Manager of Business Strategy Products Management & Center Planning Center of MFP Apr. 2004 General Manager of Business Group) Imaging Products (General Manager of Business Center of Marketing Center of International MFP Business Group) Business Center June 2004 Senior Vice President June 2004 Deputy General Manager of International Business Group Oct. 2004 Deputy General Manager of MFP Business Group (Current) Oct. 2004 General Manager of Products Management & Planning Center of MFP Business Group (Current) Oct. 2004 General Manager of Marketing Center of MFP Business Group (Current) June 2005 Corporate Vice President (Current) - ----------------- ------------------------ --------- ----------------------- Kenichi Kanemaru Corporate Vice President Apr. 1973 Joined the Company (November 19, (General Manager of Apr. 1998 General Manager of 1952) Imaging System Production Strategic Production Business Center Group) June 1999 President of Ricoh UK (General Manager of Products Ltd. Procurement Control June 2004 Senior Vice President Center) June 2005 Deputy General Manager of Imaging System Production Business Group June 2005 General Manager of Procurement Control Center (Current) June 2005 Corporate Vice President (Current) Apr. 2006 General Manager of Imaging System Production Business Group (Current) - ----------------- ------------------------ --------- ----------------------- Daisuke Segawa Corporate Vice President Mar. 1980 Joined the Company (July 21, 1954) (General Manager of Dec. 1998 General Manager of Finance and Accounting Treasury Department Division) Oct. 2004 General Manager of Corporate Planning Division June 2005 Corporate Vice President (Current) Apr. 2006 General Manager of Finance and Accounting Division (Current) -80- Current Position Name (Function/Business area) Date Business Experience - ------------------ ------------------------ --------- ----------------------- Hisashi Takata Corporate Vice President Apr. 1974 Joined the Company (May 20, 1951) (Deputy General Manager Apr. 1999 General Manager of of GJ (GEL JET) Business Strategy Business Division) Division of (General Manager of International Marketing Center of GJ Marketing Group (GEL JET) Business Oct. 2004 Deputy General Manager Division) of GJ (GEL JET) (General Manager of GJ Business Division Marketing Division of (Current) Marketing Group) Oct. 2004 General Manager of Marketing Center of GJ (GEL JET) Business Division (Current) June 2005 Corporate Vice President (Current) Oct. 2005 General Manager of GJ Marketing Division of Marketing Group (Current) - ------------------ ------------------------ --------- ----------------------- Kenichi Corporate Vice President Apr. 1971 Joined the Company Matsubayashi (General Manager of RS Apr. 1995 Manager of RS Business (June 5, 1948) Products Division) Planning Department Oct. 2003 General Manager of RS Products Division (Current) June 2005 Corporate Vice President (Current) - ------------------ ------------------------ --------- ----------------------- Kunihiko Satoh Corporate Vice President Mar. 1979 Joined the Company (October 21, 1956) (General Manager of Apr. 2002 President of Hokkaido Business Strategic Ricoh Co., Ltd. Planning Office of Apr. 2004 General Manager of Marketing Group) Solution Marketing (General Manager of Center Business Partner June 2004 General Manager of Division of Marketing Customer Contact Group) Center (General Manager of Net June 2005 Corporate Vice RICOH Marketing President (Current) Division of Marketing Apr. 2006 General Manager of Group) Business Strategic Planning Office of Marketing Group (Current) Apr. 2006 General Manager of Business Partner Division of Marketing Group (Current) Apr. 2006 General Manager of Net RICOH Marketing Division of Marketing Group (Current) - ------------------ ------------------------ --------- ----------------------- Sohichi Nagamatsu Corporate Vice President July 2004 Joined the Company (March 25, 1951) (General Manager of July 2004 Vice General Manager of Research and Research and Development Group) Development Group (General Manager of Apr 2006 Corporate Vice Corporate Technology President (Current) Planning Division) Apr 2006 General Manager of Research and Development Group (Current) Apr 2006 General Manager of Corporate Technology Planning Division (Current) -81- Current Position Name (Function/Business area) Date Business Experience - ------------------ ------------------------ --------- ------------------------ Group Executive Officers of the Company as of June 28, 2006 were as follows: - ------------------ ------------------------ --------- ------------------------ Makoto Hashimoto Corporate Executive Vice Nov. 1972 Joined the Company (August 26, 1945) President Apr. 1993 General Manager of PPC (President and CEO of Division of Imaging Ricoh Elemex System Business Group Corporation) June 1994 Director Apr. 1998 General Manager of Imaging System Business Group June 1998 Managing Director June 2000 Executive Vice President Oct. 2000 President of Personal MultiMedia Products Company June 2003 General Manager of CSM (Customer Satisfaction Management) Division June 2005 Corporate Executive Vice President (Current) Jan. 2006 President and CEO of Ricoh Elemex Corporation (Current) - ------------------ ------------------------ --------- ------------------------ Yuji Inoue Corporate Senior Vice Apr. 1971 Joined the Company (April 4, 1948) President Apr. 1998 General Manager of (President of Ricoh Finance and Leasing Co., Ltd.) Accounting Division Apr. 2000 President of Ricoh Leasing Co., Ltd. (Current) June 2000 Senior Vice President June 2004 Managing Director June 2005 Corporate Senior Vice President (Current) - ------------------ ------------------------ --------- ------------------------ Shiroh Sasaki Corporate Senior Vice Apr. 1972 Joined the Company (December 23, President Apr. 2000 President of Gestetner 1949) (Chairman of Ricoh Holdings PLC Europe B.V.) Apr. 2002 President of NRG Group (Chairman of NRG Group PLC PLC) June 2004 Senior Vice President June 2005 Corporate Vice President (Current) Apr. 2006 Chairman of Ricoh Europe B.V.(Current) Apr. 2006 Chairman of NRG Group PLC (Current) - ------------------ ------------------------ --------- ------------------------ Peter E. Hart Corporate Vice President Mar. 1997 President of Ricoh (February 27, (Chairman and Silicon Valley, Inc. 1941) President of Ricoh (now Ricoh Innovations, Inc.) Innovations, Inc.) Feb. 2000 Chairman and President of Ricoh Silicon Valley, Inc. (now Ricoh Innovations, Inc.) (Current) June 2000 Senior Vice President June 2005 Corporate Vice President (Current) - ------------------ ------------------------ --------- ------------------------ Bernard Decugis Corporate Vice President Aug. 1993 President of Ricoh (October 23, 1942) (President of Ricoh France S.A. (Current) France S.A.) Apr. 2001 Senior Vice President June 2005 Corporate Vice President (Current) -82- Current Position Name (Function/Business area) Date Business Experience - ------------------ ------------------------- --------- ------------------------ Hiroshi Tsuruga Corporate Vice President Apr. 1971 Joined the Company (November 18, (President of Tohoku Apr. 1999 General Manager of 1948) Ricoh Co., Ltd.) Information Technology and Solution Division June 2002 Senior Vice President June 2005 Deputy President of Tohoku Ricoh Co., Ltd. June 2005 Corporate Vice President (Current) Apr. 2006 President of Tohoku Ricoh Co., Ltd. (Current) - ------------------ ------------------------- --------- ------------------------ Norihisa Goto Corporate Vice President Apr. 1972 Joined the Company (March 8, 1949) (Vice Chairman of Ricoh Oct. 1997 President of Ricoh Corporation) Deutschland GmbH (President of Lanier Mar. 2001 Chairman of Lanier Worldwide, Inc.) Worldwide, Inc. Jan. 2003 President of Lanier Worldwide, Inc. (Current) June 2003 Senior Vice President June 2005 Corporate Vice President (Current) June 2006 Vice Chairman of Ricoh Corporation (Current) - ------------------ ------------------------- --------- ------------------------ Shunsuke Nakanishi Corporate Vice President Apr. 1972 Joined the Company (October 12, 1948) (President of Ricoh May 1999 General Manager of Electronics Inc.) Production Strategic Center July 2001 President of Ricoh Electronics Inc. (Current) June 2004 Senior Vice President June 2005 Corporate Vice President (Current) - ------------------ ------------------------- --------- ------------------------ Mitsuhiko Ikuno Corporate Vice President May 1975 Joined the Company (March 26, 1953) (President of Shanghai June 2000 President of Ricoh Asia Ricoh Facsimile Co., Industry Ltd. Ltd.) June 2004 President of Shanghai Ricoh Facsimile Co., Ltd. (Current) June 2004 Senior Vice President June 2005 Corporate Vice President (Current) - ------------------ ------------------------- --------- ------------------------ Yoshihiro Niimura Corporate Vice President Apr. 1975 Joined the Company (May 22, 1951) (President of Ricoh June 2004 President of Ricoh China Co., Ltd.) China Co., Ltd. (Chairman and President (Current) of Ricoh Electronic June 2004 Chairman and President Technology (China) of Ricoh Electronic Co., Ltd.) Technology (China) June 2004 Co., Ltd. (Current) Senior Vice President June 2005 Corporate Vice President (Current) - ------------------ ------------------------- --------- ------------------------ Michel De Corporate Vice President June 1993 Managing Director of Bosschere (President of NRG Nashua/ tec Benelux (June 16, 1948) Benelux B.V.) Jan. 2000 President of NRG Benelux B.V. (Current) June 2004 Senior Vice President June 2005 Corporate Vice President (Current) - ------------------ ------------------------- --------- ------------------------ Toshiaki Katayama Corporate Vice President Oct. 2004 President of Ricoh (November 28, (President of Ricoh Printing Systems, 1947) Printing Systems, Ltd.) Ltd. (Current) June 2005 Corporate Vice President (Current) -83- Current Position Name (Function/Business area) Date Business Experience - ----------------- ------------------------ --------- ----------------------- Thomas Salierno Corporate Vice President Apr. 2003 President of Ricoh U.S. (June 29, 1954) (COO of Ricoh U.S. - Division - Ricoh Ricoh Corporation) Corporation Apr. 2006 Corporate Vice President (Current) June 2006 COO of Ricoh U.S. - Ricoh Corporation (Current) There are no family relationships between any Director, Corporate Auditor or Executive Officer and any other Director, Corporate Auditor or Executive Officer of the Company. There are no arrangements or understandings with major shareholders, customers, suppliers or others pursuant to which any person named above was selected as a Director, Corporate Auditor, Executive Officer, or a Group Executive Officer. B. Compensation The aggregate remuneration, including bonuses but excluding retirement allowances, paid by the Company for the fiscal year ended March 31, 2006 to all Directors, Corporate Auditors, Executive Officers and Group Executive Officers of the Company who served during the fiscal year ended March 31, 2006 was Yen 1,093 million. In accordance with customary Japanese business practice, annual bonuses are paid to the Directors and Corporate Auditors of the Company out of the profit of the Company available for dividends, as such profit is determined in accordance with the Corporation Law of Japan. Such bonuses are approved at the annual shareholders meeting customarily held in June of each year. Bonuses so paid are not deductible by the Company for tax purposes. Included in the figure for aggregate remuneration set forth above is a total of Yen 155 million in bonuses paid to Directors and Corporate Auditors as a group in their capacity as such (excluding bonuses for their services as employees) in respect of fiscal year 2005, as approved by the Company's shareholders at the General Meeting of Shareholders held on June 28, 2005. In accordance with customary Japanese business practice, when a Director or Corporate Auditor retires, a proposal to pay a lump-sum retirement allowance is submitted to the shareholders for their approval. After shareholders' approval is obtained, the amount of the retirement allowance for a Director or Corporate Auditor is fixed by the Board of Directors or Board of Corporate Auditors and generally reflects his remuneration and position at the time of retirement, the length of his service as a Director or Corporate Auditor and his contribution to the Company's performance. C. Board Practices Under the Corporation Law of Japan, all Directors and Corporate Auditors shall be elected at the General Meeting of Shareholders. In general, under the Articles of Incorporation of the Company, the terms of office of Directors shall expire at the conclusion of the Ordinary General Meeting of Shareholders held with respect to the last fiscal year ending within two years after their election, and the terms of office of Corporate Auditors shall expire at the conclusion of the Ordinary General Meeting of -84- Shareholders held with respect to the last fiscal year ending within four years after their election. However, both the Directors and Corporate Auditors may serve any number of consecutive terms. From among the Directors, the Board of Directors shall elect one or more Representative Directors. Each of the Representative Directors has the statutory authority to represent the Company in the conduct of its affairs. The Corporate Auditors of the Company are not required to be and are not certified public accountants. However, at least half of the Corporate Auditors must be a person who has not been a Director, executive officer, manager, or employee of the Company or any of its subsidiaries prior to his or her election as a Corporate Auditor. The Corporate Auditors may not at the same time be Directors, executive officers, managers, or employees of the Company or any of its subsidiaries. Each Corporate Auditor has the statutory duty to examine the financial statements and business reports to be submitted by the Board of Directors at the General Meeting of Shareholders and also to supervise the administration by the Directors of the Company's affairs. Corporate Auditors are entitled and obligated to participate in meetings of the Board of Directors but are not entitled to vote. Under the Corporation Law, the Board of Corporate Auditors has a statutory duty to prepare and submit its audit report to the Board of Directors each year. A Corporate Auditor may note his or her opinion in the audit report if it is different from the opinion of the Board of Corporate Auditors that is expressed in the audit report. The Board of Corporate Auditors is empowered to establish audit principles, the method of examination by the Corporate Auditors of the Company's affairs and financial position, and other matters concerning the performance of the Corporate Auditors' duties. The Company does not have an audit committee. There are no Director's service contracts with Ricoh providing for benefits upon termination of service. For additional information regarding director compensation, see Item 6.B. -85- D. Employees The table below provides information about employees. As of March 31, -------------------- 2004 2005 2006 - ------------------------------------------------------- Categorized by Operating Segment Office Solutions 65,586 67,710 68,685 Industrial Products 3,046 3,054 3,045 Other 3,398 3,384 3,401 Headquarters 1,107 949 1,019 Total 73,137 75,097 76,150 Categorized by Geographic Location Domestic 38,772 40,107 39,930 Overseas 34,365 34,990 36,220 Total 73,137 75,097 76,150 - ------------------------------------------------------- Ricoh believes it is one of the few companies with a base in Japan with a large labor force which is not unionized. There has been no significant labor dispute in the fiscal year 2006 and Ricoh knows of no efforts to organize a union. Ricoh generally believes its employee relations to be good. -86- E. Share Ownership The following table lists the number of Common Stock owned by each Director, Corporate Auditor and Executive Officer of the Company as of June 28, 2006. None of the Company's Directors, Corporate Auditors or Executive Officers is a beneficial owner of more than 1% of the Company's Common Stock. Collectively, the Directors, Corporate Auditors and Executive Officers beneficially own approximately 0.02% of the total Company Common Stock issued. Name Position Number of Shares - ------------------ ---------------------------------------- ---------------- Masamitsu Sakurai Chairman of the Board and Representative 9,000 Director Koichi Endo Director 13,747 Masayuki Matsumoto Director 4,000 Katsumi Yoshida Director 5,100 Takashi Nakamura Director 6,693 Shiroh Kondoh Director 5,000 Kazunori Azuma Director 6,000 Zenji Miura Director 6,000 Kiyoshi Sakai Director 5,000 Takaaki Wakasugi Director 3,000 Koji Tomizawa Corporate Auditor 4,000 Kazuo Togashi Corporate Senior Vice President 6,000 Terumoto Nonaka Corporate Senior Vice President 7,050 Etsuo Kobayashi Corporate Senior Vice President 8,000 Kenji Hatanaka Corporate Senior Vice President 3,000 Hideko Kunii Corporate Senior Vice President 6,000 Hiroshi Kobayashi Corporate Senior Vice President 3,000 Susumu Ichioka Corporate Senior Vice President 3,000 Kiyoto Nagasawa Corporate Vice President 4,000 Yutaka Ebi Corporate Vice President 2,000 Hiroshi Adachi Corporate Vice President 8,000 Kohji Sawa Corporate Vice President 4,000 Yoshimasa Matsuura Corporate Vice President 4,000 Sadahiro Arikawa Corporate Vice President 2,000 Norio Tanaka Corporate Vice President 1,000 Kenichi Kanemaru Corporate Vice President 3,000 Hisashi Takata Corporate Vice President 1,000 Kunihiko Satoh Corporate Vice President 1,000 Makoto Hashimoto Corporate Vice President 11,000 Yuji Inoue Corporate Vice President 10,000 Shiroh Sasaki Corporate Vice President 1,000 Hiroshi Tsuruga Corporate Vice President 3,000 Norihisa Goto Corporate Vice President 3,000 Yoshihiro Niimura Corporate Vice President 1,000 ---------------- Total 162,590 ================ All shares of Common Stock of the Company carry the same voting rights. -87- No options to purchase securities from the Company or any of its subsidiaries were outstanding on June 28, 2006. Item 7. Major Shareholders and Related Party Transactions ------------------------------------------------- A. Major Shareholders Major shareholders that are beneficial owners of 5% or more of the Common Stock as of March 31, 2006 are as follows:
Number of Percentage of Shares Owned Outstanding Title of Class Name (in thousands) Shares Owned - -------------- ------------------------------------ -------------- ------------- Common Stock The Master Trust Bank of Japan, Ltd. 66,722 9.14% Common Stock Japan Trustee Services Bank, Ltd. 44,460 6.09%
The Master Trust Bank of Japan, Ltd. is a joint venture managed by Mitsubishi UFJ Trust and Banking Corporation, Nippon Life Insurance Company, Meiji Yasuda Life Insurance Company and the Norinchukin Trust and Banking Co., Ltd. Japan Trustee Services Bank, Ltd. is a joint venture managed by Resona Bank, Ltd., the Sumitomo Trust and Banking Co., Ltd. and Mitsui Trust Holdings, Inc. As far as is known to the Company, there has not been any significant change in the percentage ownership held by any major shareholders during fiscal year 2006. The major shareholders do not have different voting rights. American Depositary Receipts ("ADRs") evidencing American Depositary Shares are issued by The Bank of New York. The normal trading unit is 5 American Depositary Shares. As of March 31, 2006, 1,367,524 American Depositary Shares were held of record by two institutional registered holders in the United States of America. As far as is known to the Company as of this date, it is not directly or indirectly owned or controlled by any other corporation or by the Japanese or any foreign government. As far as is known to the Company as of this date, there is no arrangement, the operation of which may at a subsequent date result in a change in control of the Company. B. Related Party Transactions Ricoh sells or purchases products, materials, supplies and services to or from affiliated companies on normal commercial terms and conditions. See Note 6 to the Consolidated Financial Statements. No Directors, Corporate Auditors or Executive Officers were indebted to the Company or its subsidiaries at any time during the latest three fiscal years. Neither the -88- Company nor its subsidiaries expect to make any loans to Directors, Corporate Auditors or Executive Officers in the future. C. Interest of Experts and Counsel Not applicable. Item 8. Financial Information --------------------- A. Consolidated Statements and Other Information See Item 18. Financial Statements and pages F-1 through F-42. Legal or arbitration proceedings -------------------------------- There are no material pending legal or arbitration proceedings to which Ricoh is a party. Dividend Policy --------------- Ricoh endeavors to provide stable dividends to its shareholders by boosting profitability. At the same time, Ricoh undertakes to increase retained earnings to reinforce its corporate structure and to cultivate new businesses. Ricoh uses such retained earnings to strengthen its core businesses and invest in new fields with medium- and long-term perspectives. See Item 10 "Dividends" for important information on the Company's dividend payment procedure and restrictions. B. Significant Changes On May 31, 2006, San-Ai Co., Ltd., a subsidiary of the Company, completed the sale of its content distribution business to Giga Networks Co., Ltd., a subsidiary of Faith, Inc. The sale price was Yen 12.0 billion. The Company expects to recognize a gain on this sale equal to Yen 5.0 billion. Item 9. The Offer and Listing --------------------- A. Offer and Listing Details The primary market for the Company's Common Stock is the Tokyo Stock Exchange (the "TSE") in the form of original Common Stock. The Company's Common Stock has been listed on the TSE since 1949, and in Japan it is also listed on the Osaka Stock Exchange, the Nagoya Stock Exchange, the Fukuoka Stock Exchange and the Sapporo Stock Exchange. In addition, the Company's Common Stock is listed outside of Japan on the following stock exchanges: Amsterdam, Frankfurt and Paris. -89- In the United States, the Company's American Depositary Shares are traded on the Over-the-Counter Market in the form of ADRs and are issued and exchanged by The Bank of New York, as depositary. The following table sets forth for the periods indicated the reported high and low sales prices of the Company's Common Stock on the TSE and the reported high and low sales prices per share of the Company's ADSs on the Over-the-Counter Market. -90-
Over-the-Counter Market Price Tokyo Stock Exchange Price Per American Depositary Share Per Share of Common Stock (5 shares of Common Stock) (Japanese Yen) (U.S. Dollars) -------------------------- ----------------------------- High Low High Low ------ ----- ------ ----- Annual highs and lows - --------------------- Fiscal Year 2002 2,735 1,563 108.00 77.50 Fiscal Year 2003 2,470 1,637 95.75 62.50 Fiscal Year 2004 2,365 1,607 104.50 68.55 Fiscal Year 2005 2,345 1,782 107.50 84.80 Fiscal Year 2006 2,360 1,646 110.00 73.00 Quarterly highs and lows - ------------------------ Fiscal Year 2005 1st quarter 2,345 2,045 107.50 92.50 2nd quarter 2,325 1,970 105.45 89.85 3rd quarter 2,255 1,782 102.40 85.97 4th quarter 2,010 1,802 96.50 84.80 Fiscal Year 2006 1st quarter 1,897 1,646 87.30 78.70 2nd quarter 1,855 1,651 110.00 75.55 3rd quarter 2,205 1,780 91.25 73.00 4th quarter 2,360 1,917 101.00 83.75 Monthly highs and lows - ---------------------- December 2005 2,205 1,981 91.25 73.00 January 2006 2,175 1,917 95.00 84.00 February 2006 2,210 1,988 94.50 83.75 March 2006 2,360 2,150 101.00 92.15 April 2006 2,335 2,100 100.50 92.25 May 2006 2,420 2,175 108.00 97.50
Notes: (1) Price per share of Common Stock is as reported by the TSE. (2)Price per ADSs is based upon one ADS representing 5 shares of Common Stock as reported by the Over-the-Counter Market Bulletin Board(R). B. Plan of Distribution Not applicable. C. Markets See Item 9.A. for a list of the stock exchanges on which the securities are listed. -91- See Item 10.B. for certain information relating to the Common Stock of the Company. 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 Ricoh Company, Ltd. was incorporated in Japan under the Commercial Code of Japan and is deemed to remain to exist under the Corporation Law (KAISHA-HO; Law No. 86 of 2005) which took effect as of May 1, 2006. It is registered in the Commercial Register (SHOGYO TOKIBO) maintained by the Tokyo Legal Affairs Bureau of the Ministry of Justice. OBJECTIVES AND PURPOSES Article 3 of the Articles of Incorporation of the Company provides that its purpose is to engage in the following business activities: 1. Manufacture, sale and installation work and electrical communication work of optical, office, audio, electric and measuring equipment, other general machinery and equipment and accessories and supplies therefor. 2. Manufacture and sale of photographic sensitive materials and duplicating papers. 3. Manufacture and sale of various raw materials for photographic sensitive materials, and various chemical materials for chemical industries. 4. Manufacture, processing and sale of papers, pulps, textiles, general merchandise and by-products thereof. 5. Investment in, or sale of the products of, other companies. -92- 6. Import and Export of the goods described in any of the foregoing items and other goods of every kind and description. 7. Brokerage business for casualty insurance and insurance brokerage under the Automobile Liability Security Law of Japan. 8. Direct marketing through the Internet, facsimile, telephone, etc. 9. Any and all business incidental or relating to any of the foregoing items. DIRECTORS Under the Corporation Law, the Board of Directors 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 Corporation 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 in such resolution. The total amount of remuneration to Directors and to Corporate Auditors is subject to approval at the General Meeting of Shareholders. Within such authorized amounts the Board of Directors and the Board of Corporate Auditors respectively determine the compensation to each Director and Corporate Auditor. Except as stated below, neither the Corporation Law nor the Company's Articles of Incorporation make a special provision as to the Director's or Corporate Auditor's power to vote in connection with their compensation, borrowing powers exercisable by a Representative Director (or a Director who is given power by a Representative Director to exercise such powers), their retirement age or requirement to hold any shares of capital stock of the Company. The Corporation Law specifically requires the resolution of the Board of Directors for a corporation to acquire or dispose of material assets; to borrow substantial amounts of money; to employ or discharge from employment important employees, such as managers (SHIHAININ); to establish, change or abolish a material corporate organization such as a branch office; to decide certain important matters related to the offering as to subscription of bonds; to establish a system necessary to ensure appropriateness of business operations of a joint stock corporation (KABUSHIKI KAISHA), including compliance with the laws and regulations and the Articles of Incorporation by the Directors in performing their duties. The Regulations of the Board of Directors of the Company require a resolution of the Board of Directors for the Company's borrowing or lending of a significant amount of money or giving of a guarantee in a large amount. Set forth below is certain information relating to the Common Stock of the Company, including brief summaries of certain provisions of the Company's Articles of Incorporation and Share Handling Regulations, as currently in effect, and of the Corporation Law of Japan relating to a joint stock company (KABUSHIKI KAISHA) and certain related legislation. -93- GENERAL The presently authorized capital stock of the Company is 1,500,000,000 shares. Under the Corporation Law, shares of the Company (which chose under Article 7 of its Articles of Incorporation to issue share certificates) are transferable by delivery of share certificates, but in order to assert shareholders' rights against the Company, the transferee must generally have his name registered in the Company's register of shareholders. Shareholders are required to file their names, addresses and seals with The Chuo Mitsui Trust & Banking Co., Ltd., the custodian of the shareholders' register (KABU-NUSHI MEIBO KANRININ), transfer agent for the Company's Common Stock, and shareholders not resident in Japan are required to file a mailing address in Japan or appoint a resident proxy in Japan. These requirements do not apply to the holders of ADRs. The central clearing system of share certificates under the Law Concerning Central Clearing of Share Certificates and Other Securities of Japan applies to the shares of Common Stock of the Company. Pursuant to this system a holder of shares of Common Stock is able to choose, at his discretion, to participate in this system and all certificates of shares of Common Stock elected to be put into this system are deposited with the central clearing system and all such shares are registered in the name of the clearing house in the Company's register of shareholders. Each participating shareholder is in turn registered in the register of beneficial shareholders and treated the same way as shareholders registered in the Company's register of shareholders. DIVIDENDS The Articles of Incorporation of the Company provide that the accounts shall be closed on March 31 of each year and that dividends, if any, shall be paid to the shareholders of record as of the end of such fiscal period. After the close of the fiscal period, the Board of Directors prepares, among other things, accounting documents (financial statements) and the attachments thereto for dividends and other purposes; these documents are to be submitted to the Corporate Auditors of the Company and to the Accounting Auditors and then submitted for approval by an annual Ordinary General Meeting of Shareholders, which is normally held in June of each year and the distribution of surplus (JOYO-KIN) is to be decided upon by shareholders at such Meeting. In addition to provisions for dividends, if any, and for the reserve, bonuses to Directors and Corporate Auditors will also be decided upon at this Meeting. In addition to a distribution of annual dividends, the Board of Directors of the Company may by its resolution declare an interim dividend pursuant to Article 454, paragraph 5 of the Corporation Law to shareholders who are registered in the Company's register of shareholders at the end of each September 30, subject to the limitations described below. The Corporation Law provides that the Company may not make any distribution of surplus by way of dividends in cash unless it has set aside in its reserve an amount equal to at least one-tenth of any amount paid out as an appropriation of retained earnings (including any payment by way of annual dividend and bonuses to Directors and Corporate Auditors) or equal to one-tenth of any interim dividend. The Corporation Law permits the Company to distribute surplus by way of dividends. First, surplus is -94- calculated by adding (i), (ii), (iii) and (iv) described below and subtracting (v), (vi) and (vii) described below from such aggregate of (i) through (iv): (i) amount determined by subtracting the aggregate of (c), (d) and (e) described below from the aggregate of (a) and (b) described below as of the final date of the last fiscal year; (a) amount of assets, (b) the aggregate amount of the book value of the treasury stock, (c) amount of liabilities, (d) the aggregate amount of the stated capital and the reserve and (e) the aggregate of each amount entered under respective accounting titles (KANJO KAMOKU) set forth under the relevant Ordinance of the Ministry of Justice, (ii) amount determined by subtracting the book value of the treasury stock from the consideration for the treasury stock disposed of, if any, after the final date of the last fiscal year, (iii) amount of reduction of the stated capital, if any, after the final date of the last fiscal year, (iv) amount of reduction of the reserve, if any, after the final date of the last fiscal year, (v) book value of the treasury stock, if any, cancelled after the final date of the last fiscal year, (vi) amount determined by adding (a) through (c) described below in the event that surplus is distributed after the final date of the last fiscal year: (a) the aggregate of the book value of assets for distribution set forth under Article 454, paragraph 1, item 1 of the Corporation Law (regarding distribution of surplus), (b) the aggregate of each sum of the money given to the shareholders who exercised the right to monetary distribution set forth under Article 454, paragraph 4, item 1 of the Corporation Law (regarding distribution in kind) and (c) the aggregate of each sum of the money given to each shareholder holding shares of which number is less than a certain number to be set forth by the Company pursuant to Article 454, paragraph 4, item 2 of the Corporation Law (regarding distribution in kind), (vii) the aggregate of each amount entered under respective accounting titles set forth under the relevant Ordinance of the Ministry of Justice. Second, the distributable amount is calculated by subtracting the aggregate of (iii), (iv), (v) and (vi) described below from the aggregate of (i) and (ii) described below: (i) surplus; (ii) the aggregate of the following items (a) and (b) in the event that extraordinary accounting documents are approved by the shareholders' meeting or by the Board of Directors, as the case may be; (a) the aggregate of each amount entered as profit under respective accounting titles set forth under the relevant Ordinance of the Ministry of Justice during a period of time in question, (b) consideration for the treasury stock disposed of, if any, during such period; (iii) the book value of the treasury stock; (iv) the consideration for treasury stock disposed of, if any, after the final date of the last fiscal year; (v) the aggregate of each amount entered as loss under respective accounting titles set forth under the relevant Ordinance of the Ministry of Justice during the same period as stated in (ii) above; and (vi) the aggregate of each amount entered under the respective accounting titles set forth under the relevant Ordinance of Ministry of Justice. The Company may distribute such distributable amount to shareholders. The Corporation Law does not provide for stock dividends but provides for "free share allotment" under Article 185. The Board of Directors may by resolution issue and allot new shares to the shareholders on a prorated basis without receiving any consideration/contribution as issue price. In addition, under the Corporation Law, the Board of Directors may by resolution issue additional shares by way of a stock split, while the General Meeting of Shareholders by resolution transfers any amount which is distributable as dividends to stated capital, and thus the same effect as a stock dividend can be achieved. -95- In Japan, the "ex-dividend" date and the record date for dividends precede the date of determination of the amount of the dividend to be paid. In accordance with the Company's Articles of Incorporation, once a right to any dividends is accrued and has become due and payable, such right to dividends will lapse after three years from the due date. TRANSFER OF RESERVE TO STATED CAPITAL AND STOCK SPLITS When the Company issues new shares of Common Stock, the entire amount of the issue price of such new shares is required to be accounted for as stated capital, although the Company may account for an amount not exceeding one-half of such issue price as capital surplus. The General Meeting of Shareholders may by resolution transfer the whole or any part of reserve to stated capital. On the other hand, the Board of Directors may by resolution issue to shareholders additional shares of Common Stock without receiving any consideration/contribution as issue price by way of free allotment of shares or stock split without referring to the whole or any part of the amount of reserve so transferred to stated capital. GENERAL MEETING OF SHAREHOLDERS The Ordinary General Meeting of Shareholders to settle accounts of the Company for each fiscal period is normally held in June each year in Ota-ku, Tokyo, Japan. In addition, the Company may hold an extraordinary General Meeting of Shareholders whenever necessary by giving at least two weeks' advance notice to shareholders. Notice of a Shareholders' Meeting setting forth the place, time and purpose thereof, must be mailed to each shareholder having voting rights (or, in the case of a non-resident shareholder, to his resident proxy or mailing address in Japan) at least two weeks prior to the date set for the meeting. Such notice may also be furnished to shareholders by electronic means with such shareholders' consent. Any shareholders' holding at least 300 voting shares or 1% of the total number of outstanding voting shares for six months or more may propose a matter to be considered at a General Meeting of Shareholders by submitting a written request to Directors at least eight weeks prior to the date set for such Meeting. Such request may be submitted by electronic means with the Company's consent. VOTING RIGHTS A shareholder is entitled to one vote per share subject to the limitations on voting rights set forth in the following paragraph below and in the sections entitled "'Unit share system" through "Voting rights of a holder of shares representing less than one unit" below. Except as otherwise provided by law or by the Company's Articles of Incorporation, a resolution can be adopted at a General Meeting of Shareholders by a majority of the shares having voting rights represented at the meeting. Special resolutions provided for in paragraph 2, Article 309 of the Corporation Law shall be adopted by the vote of the shareholders not less than two-thirds (2/3) of those present at a -96- meeting whereby one-third (1/3) of voting rights of all of the shareholders shall constitute a quorum. The Corporation Law and the Company's Articles of Incorporation provide, however, that the quorum for the election of Directors and Corporate Auditors shall not be less than one-third of the total number of outstanding shares having voting rights. The Company's shareholders are not entitled to cumulative voting in the election of Directors. A corporate shareholder, more than one-quarter of whose outstanding voting shares are directly or indirectly owned by the Company, may not exercise its voting rights in respect of the shares of the Company. The Company has no voting rights with respect to its own Common Stock. Shareholders may exercise their voting rights through proxies provided that the proxies are also shareholders holding voting rights. The Company's shareholders also may cast their votes in writing. The Corporation Law provides that in order to amend the Articles of Incorporation and in certain other instances, including an increase in the total number of shares authorized to be issued, a reduction of the stated capital, the removal of a Director or Corporate Auditor, dissolution, merger (with an exception of a merger with a company of very small business) or consolidation of a corporation, the transfer of the whole or an important part of the business, the taking over of the whole of the business of any other corporation (with an exception of a merger with a company of very small business), any offering of new shares at a "specially favorable" price (or any offering of convertible bonds or debentures with "specially favorable" conversion conditions or of bonds or debentures with warrants or rights to subscribe for new shares with "specially favorable" conditions) to persons other than shareholders, the quorum shall be one-third of the total number of shares having voting rights outstanding and the approval of the holders of at least two-thirds of the shares having voting rights represented at the Meeting is required (the "special shareholders resolution"). SUBSCRIPTION RIGHTS (KABUSHIKI WARIATEWO UKERU KENRI) Holders of the Company's Common Stock have no preemptive rights under its Articles of Incorporation. Authorized but unissued shares may be issued at such times and upon such terms as the Board of Directors determines, subject to the limitations as to the offering of new shares at a "specially favorable" price mentioned 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 and a notice must be given to shareholders not less than two weeks prior to the date when such rights are to be vested to shareholders. The Corporation Law provides that if a shareholder to whom such rights are given does not apply for subscription by a certain date of subscription, such shareholder will lose such rights. Rights to subscribe for new shares may be made generally transferable by the Board of Directors. In such case, such transferable right is called "call option of new shares (SHINKABU YOYAKUKEN). Whether the Company will make subscription rights generally transferable in future rights offerings will depend upon the circumstances at the time of such offerings. If subscription rights are not made generally transferable, transfers by a non-resident of Japan or a corporation organized under the laws of a -97- foreign country or whose principal office is located in a foreign country will be enforceable against the Company and third parties only if the Company's consent to each such transfer is obtained. When such consent is necessary in the future for the transfer of subscription rights, the Company intends to consent, on request, to all such transfers by such a non-resident or foreign corporation. DILUTION In the future it is possible that market conditions and other factors might make a rights offering to shareholders substantially below the market price of shares of Common Stock desirable. If the number of shares offered in a rights offering is substantial in relation to the number of shares outstanding and the market price exceeds the subscription price at the time of the offering, a shareholder who does not exercise and is unable otherwise to realize the full value of his subscription rights would suffer economic dilution of his equity interest in the Company. LIQUIDATION RIGHTS In the event of a liquidation of the Company, the assets remaining after payment of all debts and liquidation expenses and taxes will be distributed among the shareholders in proportion to the respective numbers of shares held. LIABILITY TO FURTHER CALLS OR ASSESSMENTS All the Company's presently outstanding shares of Common Stock including shares represented by the American Depository Shares are fully paid and non-assessable. CUSTODIAN OF THE SHAREHOLDERS' REGISTER The Chuo Mitsui Trust and Banking Co., Ltd. is the custodian of the shareholders' register of the Company's Common Stock; as such custodian, it keeps the Company's register of shareholders and register of the lost share certificates in its office at 33-1, Shiba 3-chome, Minato-ku, Tokyo, Japan, and makes transfer of record ownership upon presentation of the certificates representing the transferred shares. RECORD DATE March 31 is the record date for the Company's year-end dividends. The shareholders who are registered as the holders of 1,000 shares or more in the Company's register of shareholders 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 fiscal period 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 entitled to other rights and for other purposes by giving at least two weeks' public notice. The price of the shares generally goes ex-dividend or ex-rights on Japanese stock exchanges on the third business day prior to a record date (or if the record date is not a -98- business day, the fourth business day prior thereto), for the purpose of dividends or rights offerings. PURCHASE BY THE COMPANY OF ITS COMMON STOCK The Company may purchase its own shares only in case of the events falling under Article 155 of the Corporation Law. As a matter of manner of such purchase, the Company may purchase of its own shares (i) through the Tokyo Stock Exchange or other stock exchange on which the shares are listed or by way of tender offer, if authorized by a resolution of the Board of Directors, (ii) from a specific party, if authorized by a special resolution of an Ordinary General Meeting of Shareholders, or (iii) from the Company's own subsidiary, if authorized by a resolution of the Board of Directors. When a repurchase is made by the Company from a specified party pursuant to an authorization by a special resolution of an Ordinary General Meeting of Shareholders as noted above, shareholders may make a demand to a Representative Director, five days or more prior to the relevant Shareholders' Meeting, that the Company also repurchase the shares held by that shareholder. Purchase of shares falling under Article 461, paragraph 1 of the Corporation Law must satisfy, among others, the requirement that the total amount of the repurchase price (of book value) may not exceed the distributable amount as described in "Dividends" above. The Company may hold its own shares as treasury stock so purchased without restriction as to a period of time to hold. However, the Company is not entitled to any voting rights or right to dividends as to such treasury stock. The Company may cancel its treasury stock that it holds by a resolution of the Board of Directors. The Company may otherwise dispose of its treasury stock by a resolution of the Board of Directors. "UNIT" SHARE SYSTEM (TANGENKABU SEIDO) Pursuant to the Corporation Law the Company has adopted 1,000 shares as one unit of shares. TRANSFERABILITY OF SHARES REPRESENTING LESS THAN ONE UNIT As adopted in the Company's Articles of Incorporation, the Company will not issue certificates for shares representing less than one unit. Since the transfer of shares normally requires delivery of the certificates therefor, fractions of a unit for which no share certificates are issued are not transferable. Shares representing less than one unit for which share certificates have been issued continue to be transferable. RIGHT OF A HOLDER OF SHARES REPRESENTING LESS THAN ONE UNIT TO REQUIRE THE COMPANY TO PURCHASE SUCH SHARES A holder of shares representing less than one unit may at any time require the Company to purchase such shares at their last reported sale price on the Tokyo Stock Exchange on the day when such request is made less applicable brokerage commission. The usual securities transfer tax is applicable to such transactions. -99- RIGHT OF THE HOLDER OF SHARES TO DEMAND THE PURCHASE OF SHARES REPRESENTING LESS THAN ONE UNIT As adopted in the Company's Articles of Incorporation and set forth in the Share Handling Regulations, a holder of shares of less-than-one-unit may request the Company to sell additional shares so that their less-than-one-unit can share constitute one unit of shares. OTHER RIGHTS OF A HOLDER OF SHARES REPRESENTING LESS THAN ONE UNIT A holder of shares representing less than one unit has certain rights in respect of such shares, including the following: (i) the right to receive dividends (including interim dividends), (ii) the right to receive shares and/or cash by way of a stock split or upon consolidation or subdivision of shares or upon a capital decrease or merger of the Company, (iii) the right to be allotted subscription rights with respect to new shares, convertible bonds and bonds with warrants to subscribe for shares when such rights are granted to shareholders and (iv) the right to participate in the distribution of surplus assets in the event of the liquidation of the Company. Other rights, including voting rights, cannot be exercised with respect to shares representing less than one unit. VOTING RIGHTS OF A HOLDER OF SHARES REPRESENTING LESS THAN ONE UNIT A holder of shares representing less than one unit cannot exercise any voting rights with respect to such shares. A holder of shares representing one or more whole units will have one vote for each such unit, except as stated in "Voting rights" above. C. Material Contracts All contracts entered into by Ricoh or any member of the Ricoh Group during the two years preceding this report were entered into in the ordinary course of business. D. Exchange Controls The Foreign Exchange and Foreign Trade Law of Japan, as amended, and the cabinet orders and ministerial ordinances thereunder (the "Exchange Law") govern certain matters relating to the issuance of equity-related securities by the Company and the acquisition and holding of shares of Common Stock or ADSs representing such shares by "exchange non-residents" and by "foreign investors" as hereinafter defined. The Exchange Law currently in effect does not affect the right of an exchange non-resident to purchase or sell an ADS outside Japan. "Exchange non-residents" are defined under the Exchange Law as individuals who are not resident in Japan and corporations whose principal offices are located outside Japan. Generally branches and other offices of Japanese corporations located outside Japan are regarded as exchange non-residents, but branches and other offices located within Japan of non-resident corporations are regarded as residents of Japan. "Foreign investors" are defined to be (i) individuals not resident in Japan, (ii) corporations which are organized under the laws of foreign countries or whose principal offices are located -100- outside Japan, and (iii) corporations of which (a) 50% or more of the shares are held by (i) and/or (ii) above, (b) a majority of officers consists of non-resident individuals or (c) a majority of the officers having the power of representation consists of non-resident individuals. Dividends and Proceeds of Sales Under the Exchange Law, dividends paid on, and the proceeds of sales in Japan of, shares of Common Stock held by exchange non-residents in general may be converted into any foreign currency and repatriated abroad. The acquisition of shares of Common Stock by exchange non-resident shareholders by way of stock splits is not subject to any requirements under the Exchange Law. Acquisition of Shares Under the Exchange Law, acquisition of shares of a Japanese company listed on any Japanese stock exchange or traded on the over-the-counter market in Japan ("listed shares") by an exchange non-resident from a resident of Japan is generally not subject to a prior filing requirement. In case a foreign investor acquires listed shares (whether from a resident of Japan or an exchange non-resident, from another foreign investor or from or through a designated securities company) and as a result of such acquisition the number of shares held directly or indirectly by such foreign investor would become 10% or more of the total outstanding shares of the company, the foreign investor is required to make a subsequent report on such acquisition to the Minister of Finance and other Ministers having jurisdiction over the business of the subject company (the "Competent Ministers"). In certain exceptional cases, a prior filing is required and the Competent Ministers may recommend the modification or abandonment of the proposed acquisition and, if the foreign investor does not accept the recommendation, order its modification or prohibition. The deposit of shares of Common Stock by an exchange non-resident of Japan, the issuance of ADRs in exchange therefor and the withdrawal of the underlying shares of Common Stock by an exchange non-resident upon surrender of ADRs are not subject to any requirements under the Exchange Law, except where as a result of such deposit or withdrawal the aggregate number of shares of Common Stock held by the Depositary (or its nominee) or the holder surrendering ADRs, as the case may be, would be 10% or more of the total outstanding shares of Common Stock, in which event a subsequent reporting may be required as described above. E. Taxation JAPANESE TAXATION Generally, a non-resident of Japan or a non-Japanese corporation is subject to Japanese withholding tax on dividends paid by a Japanese corporation. Generally, stock splits are not subject to Japanese income tax. According to the Income Tax Law of Japan, the rate of Japanese national withholding tax applicable to dividends paid on listed shares issued by the Company to non-residents of Japan or non-Japanese corporations is (i) 7% for the period from January 1, 2004 to March 31, 2008, and (ii) 15% thereafter, except for -101- dividends paid to any individual shareholder who holds 5% or more of the outstanding total of the shares issued by the Company, for which the applicable rate is 20%. Under the new income tax convention between the U.S. and Japan (the "Convention") ratified in March 2004, the maximum rate of Japanese withholding tax that may be imposed on dividends paid to a U.S. resident or corporation not having a "permanent establishment" (as defined therein) in Japan is generally 10%. This 10% withholding tax rate is applicable to dividends declared on or after July 1, 2004. The 15% withholding tax rate under the old income tax convention is still applicable to dividends declared before July 1, 2004. If the tax rate under the domestic tax law is lower than that under the Convention, the domestic tax rate is still applicable. Gains derived by a non-resident of Japan or a non-Japanese corporation from the sale of Common Stock or ADRs outside Japan, or from the sale of Common Stock within Japan by a non-resident of Japan or by a non-Japanese corporation not having a permanent establishment in Japan, are in general not subject to Japanese income or corporation tax. Japanese inheritance or gift tax at progressive rates may be payable by an individual who has acquired Common Stock or ADRs as a legatee, heir or donee. For purposes of the Convention and the U.S. Internal Revenue Code of 1986, as amended (the "Code"), U.S. holders of ADRs will be treated as the owners of the Common Stock underlying the American Depositary Shares evidenced by the ADRs. U.S. TAXATION This summary describes the material U.S. federal income tax consequences for a U.S. holder (as defined below) of owning and disposing of shares of Common Stock or American Depositary Shares evidenced by the ADRs. This summary applies to you only if you hold shares of Common Stock or American Depositary Shares as capital assets for U.S. federal income tax purposes. This summary does not apply to you if you are a member of a class of holders subject to special rules, such as: . a dealer in securities or currencies; . a trader in securities that elects to use a mark-to-market method of accounting for securities holdings; . a bank; . a life insurance company; . a tax-exempt organization; . a person that holds shares of Common Stock or American Depositary Shares that are a hedge or that are hedged against interest rate or currency risks; . a person that is subject to the alternative minimum tax; . a person that holds shares of Common Stock or American Depositary Shares as part of a straddle or conversion transaction for tax purposes; -102- . a person whose functional currency for U.S. federal income tax purposes is not the U.S. Dollar; or . a person that actually or constructively owns or is deemed to own 10% or more of any class of our stock. This summary is based on laws, treaties, and regulatory interpretations in effect on the date hereof, all of which are subject to change, possibly on a retroactive basis. Moreover, this summary assumes that the Company will not be treated as a passive foreign investment company (a "PFIC") for U.S. federal income tax purposes. See the summary below under the heading "PFIC Rules." Please consult your own tax advisers concerning the U.S. federal, state, local, and other tax consequences of purchasing, owning, and disposing of shares of Common Stock or American Depositary Shares in your particular circumstances. For purposes of this summary, you are a "U.S. holder" if you are a beneficial owner of a share of Common Stock or an American Depositary Share that is for U.S. federal income tax purposes: (i) a citizen or a resident of the United States, (ii) a corporation or a partnership (including an entity treated as a corporation or a partnership for U.S. federal income tax purposes) created or organized in or under the laws of the United States, any state thereof or the District of Columbia (unless, in the case of a partnership, Treasury regulations are adopted that provide otherwise), (iii) an estate whose income is subject to U.S. federal income tax regardless of its source, or (iv) a trust if a court within the United States is able to exercise primary supervision over the administration of the trust and one or more United States persons have the authority to control all substantial decisions of the trust. Certain trusts not described in clause (iv) above in existence on August 20, 1996 that elect to be treated as a United States person will also be a U.S. holder for purposes of this discussion. In general, if you hold ADRs evidencing American Depositary Shares, you will be treated as the owner of the shares of Common Stock represented by those American Depositary Shares for U.S. federal income tax purposes, and no gain or loss will be recognized if you exchange an American Depositary Share for the shares of Common Stock represented by that American Depositary Share. DIVIDENDS The gross amount of cash dividends paid out of the Company's current or accumulated earnings and profits, as determined for U.S. federal income tax purposes, that a U.S. holder receives (prior to deduction of Japanese taxes) generally will be subject to U.S. federal income taxation as foreign source ordinary dividend income. However, in certain circumstances, all or a portion of the cash dividends paid by the Company may be treated as U.S. source dividend income. You should consult your tax advisers regarding the U.S. federal income tax consequences of all or a portion of the cash dividends paid by the Company being treated as U.S. source dividend income. -103- Dividends paid in Japanese Yen will be included in your income in a U.S. Dollar amount calculated by reference to the exchange rate in effect on the date of your (or, in the case of American Depositary Shares, the depositary's) receipt of the dividend, regardless of whether the payment is in fact converted into U.S. Dollars. If such a dividend is converted into U.S. Dollars on the date of receipt, you generally should not be required to recognize a foreign currency gain or loss in respect of the dividend income. You should consult your own tax adviser regarding the treatment of any foreign currency gain or loss realized with respect to any Japanese Yen received by you (or, in the case of American Depositary Shares, the depositary) that are converted into U.S. Dollars on a date subsequent to receipt. Dividends paid by the Company generally will not be eligible for the dividends-received deduction allowed to corporations that are U.S. holders. Notwithstanding the foregoing, pursuant to recently enacted legislation, certain dividends received by individual U.S. holders that constitute "qualified dividend income" will be subject to a reduced maximum marginal U.S. federal income tax rate. Qualified dividend income generally includes, among other dividends, dividends received during the taxable year from "qualified foreign corporations." In general, the term "qualified foreign corporation" includes a foreign corporation that is eligible for the benefits of a comprehensive income tax treaty with the United States which the U.S. Treasury Department determines to be satisfactory, and which includes an exchange of information program. In addition, a foreign corporation is treated as a qualified foreign corporation with respect to any dividend paid by the corporation with respect to stock of the corporation that is readily tradable on an established securities market in the United States. Notwithstanding this previous rule, dividends received from a foreign corporation that was a foreign investment company (as defined in section 1246(b) of the Code), a passive foreign investment company (as defined in section 1297 of the Code), or a foreign personal holding company (as defined in section 552 of the Code) in either the taxable year of the corporation in which the dividend was paid or the preceding taxable year will not constitute qualified dividend income. In addition, the term qualified dividend income will not include, among other dividends, any (i) dividends on any share of stock which is held by a taxpayer for 60 days or less during the 121-day period beginning on the date which is 60 days before the date on which such share becomes ex-dividend with respect to such dividends (as measured under section 246(c) of the Code) or (ii) dividends to the extent that the taxpayer is under an obligation (whether pursuant to a short sale or otherwise) to make related payments with respects to positions in substantially similar or related property. Moreover, special rules apply in determining a taxpayer's foreign tax credit limitation under section 904 of the Code in the case of qualified dividend income. Individual U.S. holders should consult their own tax advisors to determine whether or not amounts received as dividends from the Company will constitute qualified dividend income subject to a reduced maximum marginal U.S. federal income tax rate and, in such case, the effect, if any, on the individual U.S. holder's foreign tax credit. In addition to the foregoing, you should consult your own tax advisers to determine whether any rules limit your ability to make effective use of foreign tax credits, including the possible adverse impact of failing to take advantage of benefits under the income tax treaty between the United States and Japan. If no such rules apply, you -104- generally may claim a credit against your U.S. federal income tax liability for Japanese taxes withheld from dividends on shares of Common Stock or American Depositary Shares, so long as you have owned the shares of Common Stock or American Depositary Shares (and not entered into specified kinds of hedging transactions) for at least a 16-day period that includes the ex-dividend date. Instead of claiming a credit, you may, at your election, deduct such Japanese taxes in computing your taxable income, subject to generally applicable limitations under U.S. federal income tax law. The calculation of foreign tax credits and, in the case of a U.S. holder that elects to deduct foreign taxes, the availability of deductions involve the application of complex rules that depend, in part, on a U.S. holder's particular circumstances. You should consult your own tax advisers regarding the creditability or deductibility of such taxes. SALES AND OTHER DISPOSITIONS A U.S. holder will recognize a gain or loss on the sale or other disposition of shares of Common Stock or American Depositary Shares evidenced by ADRs in an amount equal to the difference between the U.S. Holder's adjusted tax basis in such shares of Common Stock or American Depositary Shares (in U.S. Dollars) and the amount realized on the disposition (in U.S. Dollars, generally determined at the spot rate on the date of disposition if the amount realized is denominated in a foreign currency). For U.S. federal income tax purposes, a gain or loss realized by a U.S. holder on a sale or other disposition of shares of Common Stock or American Depositary Shares will be a capital gain or loss, and will be a long-term capital gain or loss if the shares of Common Stock or American Depositary Shares were held for more than one year. Such gain or loss generally will be treated as U.S. source gain or loss for U.S. foreign tax credit purposes. Your ability to offset capital losses against ordinary income is limited. Long-term capital gain recognized by an individual U.S. holder generally is subject to taxation at a reduced maximum marginal U.S. federal income tax rate. PFIC RULES The Company believes that it will not be treated as a PFIC for U.S. federal income tax purposes. However, that is a factual determination made annually and therefore may be subject to change. If the Company was treated as a PFIC, a U.S. holder of shares of Common Stock or American Depositary Shares evidenced by ADRs would be subject to certain adverse U.S. federal income tax consequences. U.S. INFORMATION REPORTING AND BACKUP WITHHOLDING RULES Payments in respect of the shares of Common Stock or American Depositary Shares that are made within the United States or through certain U.S.-related financial intermediaries are subject to information reporting and may be subject to backup withholding unless the holder (i) is a corporation or other exempt recipient or (ii) provides a taxpayer identification number and certifies that no loss of exemption from backup withholding has occurred (and certain other conditions are met). -105- F. Dividends and Paying Agents Not applicable. G. Statement by Experts Not applicable. H. Documents on Display The Company is subject to the informational requirements of the Securities and Exchange Act of 1934, as amended. In accordance with these requirements, the Company files reports and other information with the U.S. Securities and Exchange Commission (the "SEC"). These materials, including this annual report and exhibits thereto, may be inspected and copied at the SEC's Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. Copies of the materials may be obtained from the SEC's Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549 at prescribed rates. The public may obtain information on the operation of the Public Reference Room by calling the SEC in the U.S. at 1-800-SEC-0330. The documents filed via the Electronic Data Gathering, Analysis, and Retrieval system are also available for inspection on the SEC's website (http://www.sec.gov). I. Subsidiary Information Not Applicable. Item 11. Quantitative and Qualitative Disclosures About Market Risk ---------------------------------------------------------- Ricoh is exposed to market risks primarily from changes in foreign currency exchange rates and interest rates, which affect outstanding debt and certain assets and liabilities denominated in foreign currencies. To a lesser extent, Ricoh is also exposed to equity price risk. In order to manage these risks that arise in the normal course of business, Ricoh enters into various hedging transactions pursuant to its policies and procedures covering such areas as counterparty exposure and hedging practices. Ricoh does not hold or issue derivative financial instruments for trading purposes or to generate income. Ricoh regularly assesses these market risks based on the policies and procedures established to protect against adverse effects of these risks and other potential exposures, primarily by reference to the market value of the financial instruments. As a result of the latest assessment, Ricoh does not anticipate any material losses in these areas for the fiscal year 2006, and there are no material quantitative changes in market risk exposure at March 31, 2006 when compared to March 31, 2005. In the normal course of business, Ricoh also faces risks that are either non-financial or nonquantifiable. Such risks principally include credit risk and legal risk, and are not represented in the following tables. -106- FOREIGN CURRENCY RISK In the ordinary course of business, Ricoh uses foreign exchange forward contracts to manage the effects of foreign currency exchange risk on monetary assets and liabilities denominated in foreign currencies. The contracts with respect to the operating activities generally have maturities of less than six months, while the contracts with respect to the financing activities have the same maturities as the underlying assets and liabilities. The table below provides information about Ricoh's material derivative financial instruments that are sensitive to foreign currency exchange rates. The table below relating to foreign exchange forward contracts presents the notional amounts, weighted average exchange rates and estimated fair value. These notional amounts generally are used to calculate the contractual payments to be exchanged under the contracts. Foreign Exchange Forward Contracts - ------------------------------------------------------------------------ Year Ended March 31, 2006 ---------------------------------------------------------------- Average contractual rates Contract amounts Estimated fair value (Millions of yen) (Millions of yen) ---------------------------------------------------------------- US$/Yen 118.37 592 6 EUR/Yen 140.40 2,359 (33) - ------------------------------------------------------------------------ INTEREST RATE RISK In the ordinary course of business, Ricoh enters into interest rate swap agreements to reduce interest rate risk and to modify the interest rate characteristics of its outstanding debt. These agreements primarily involve the exchange of fixed and floating rate interest payments over the life of the agreement without the exchange of the underlying principal amounts. The below table provides information about Ricoh's major derivative and other financial instruments that are sensitive to changes in interest rates, including interest rate swaps and debt obligations. For debt obligations, the table presents principal cash flows by expected maturity date, related weighted average interest rates and estimated fair value. For interest rate swaps, the table presents notional amounts by expected maturity date, weighted average interest rates. Notional amounts are generally used to calculate the contractual payments to be exchanged under the contract. -107-
LONG-TERM INDEBTEDNESS - ------------------------------------------------------------------------------------------------------------------------------ Year ended March 31, 2006 - ------------------------------------------------------------------------------------------------------------------------------ Millions of Yen --------------------------------------------------------------------------------------------- (Excluding Capital Expected maturity date Lease Obligations and -------------------------------------------------------------------------------- SFAS No. 133 fair Average Fair value adjustment) pay rate Total 2007 2008 2009 2010 2011 Thereafter Value - ------------------------------------------------------------------------------------------------------------------------------ Bonds 1.10% 100,000 45,000 10,000 25,000 20,000 -- -- 100,304 Medium-Term Notes 0.17 10,000 10,000 -- -- -- -- -- 10,000 Loans 1.43 184,751 46,930 68,186 33,703 26,638 8,012 1,282 184,553 - ------------------------------------------------------------------------------------------------------------------------------ TOTAL 294,751 101,930 78,186 58,703 46,638 8,012 1,282 294,857 - ------------------------------------------------------------------------------------------------------------------------------
INTEREST RATE SWAPS - ------------------------------------------------------------------------------------------------------------------------------ Year ended March 31, 2006 - ------------------------------------------------------------------------------------------------------------------------------ Millions of Yen -------------------------------------------------------------------------------------- Expected maturity date --------------------------------------------------------------------------- Notional Average Average amounts receive pay Fair (Millions) Type of swap rate rate Total 2007 2008 2009 2010 2011 Thereafter value - ------------------------------------------------------------------------------------------------------------------------------ Receive floating 37,000 /Pay fixed 0.37% 0.10% 37,000 22,000 10,000 5,000 -- -- -- 553 Receive fixed 25,000 /Pay floating 1.90 0.10 25,000 1,000 6,000 10,000 8,000 -- -- 129 - ------------------------------------------------------------------------------------------------------------------------------ Receive floating US$ 190 /Pay fixed 5.13% 4.64% 22,319 22,319 -- -- -- -- -- 493 - ------------------------------------------------------------------------------------------------------------------------------
CREDIT RISK Ricoh is also exposed to credit-related losses in the event of nonperformance by counterparties to the financial instrument; however, credit risk arising from the nonperformance of counterparties to meet the terms of financial instrument contracts is generally limited to the amounts by which the counterparties' obligations exceed the obligations of Ricoh. It is Ricoh's policy to only enter into financial instrument contracts with a diversified group of financial institutions having credit ratings satisfactory to Ricoh to minimize the concentration of credit risk. Therefore, Ricoh does not expect to incur material credit losses on its financial instruments. DEBT/EQUITY PRICE RISK Ricoh has a relatively small portion of marketable securities which are subject to equity price risk arising from changes in their market prices. Marketable securities consist of a diversified pool of Japanese equity securities. Ricoh's overall investment policy is to invest in highly-liquid, low risk investments. -108- The table below provides information about contractual maturities for available-for-sale securities and the fair values for market risk sensitive securities as of March 31, 2006. (Millions of Yen) - --------------------------------------------------------------------------- Year ended March 31, 2006 --------------------------------- Cost Fair Value --------------- ---------------- Debt Securities Due within one year 161 161 Due after one year through five years 6,000 6,050 Equity Securities 8,034 23,713 Other 172 172 --------------------------------- TOTAL 14,367 30,096 --------------------------------- 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 ----------------------- As of March 31, 2006, Ricoh performed an evaluation of the effectiveness of the design and operation of its disclosure controls and procedures under the supervision and with the participation of Ricoh's management, including the Chief Executive Officer and the Chief Financial Officer. Based on that evaluation, Ricoh's management, including the Chief Executive Officer and the Chief Financial Officer, concluded that its disclosure controls and procedures were effective as of the date of such evaluation. No significant changes in Ricoh's internal controls or in other factors have occurred that could significantly affect these controls subsequent to the date the Chief Executive Officer and the Chief Financial Officer completed their evaluation. -109- Item 16. [RESERVED] Item16A. Audit Committee Financial Expert -------------------------------- The Board of Directors of the Company has determined that it does not have an "audit committee financial expert" as defined in Item 16A. of Form 20-F serving on the Board of Corporate Auditors. The Company is considering the issues related to and the ramifications of such a designation. In Japan, there are limited numbers of qualified persons who meet all of the criteria established by the SEC for financial experts to be designated by issuers. Accordingly, it is taking some time for the Company to identify such a qualified person. Although the Board of Directors is satisfied that that members of the Board of Corporate Auditors possess the appropriate skills and experience, as a group, to carry out their duties as members of the Board of Corporate Auditors, the Company will continue to strive to identify potential candidates that might qualify for this position. The Board of Corporate Auditors will keep under active review the financial expert matter during the fiscal year 2006 as part of their overall risk management and compliance program. Item16B. Code of Ethics -------------- Ricoh has adopted a code of ethics that applies to its employees, including the President, Chief Executive Officer, Chief Operating Officer, and the senior management of accounting and finance. Such code of ethics of Ricoh is provided hereto as Exhibit 11. Item16C. Principal Accountant Fees and Services -------------------------------------- The aggregate fees for professional services and other services rendered by KPMG AZSA & Co. and the various member firms of KPMG International to Ricoh for the years ended March 31, 2005 and 2006, were: (Millions of Yen) - --------------------------------------- Year Ended March 31, -------------------- Type of Fees 2005 2006 - --------------------------------------- Audit Fees 697 697 Audit-related Fees 404 71 Tax Fees 53 84 All Other Fees 16 34 -------------------- TOTAL 1,170 886 -------------------- Audit Fees consist of fees for the annual audit of Ricoh's consolidated financial statements, and audit services that are normally provided by our independent accountants. -110- Audit-related Fees consist of fees for assurance and related services that are reasonably related to due diligence related to mergers and acquisitions and consultation concerning financial accounting and reporting standards. Tax Fees consist of fees for tax compliance, tax advice and tax consulting associated with international transfer prices. All Other Fees consist of fees for all other services not included in any of the categories noted above. -111- AUDIT COMMITTEE PRE-APPROVAL POLICIES AND PROCEDURES In accordance with Japanese law, the Company's independent accountants (KAIKEI KANSANIN) ("Accounting Auditors") are appointed by the shareholders at the Ordinary General Meeting of Shareholders with the consent of the Company's Board of Corporate Auditors. In addition, the Board of Corporate Auditors may, by its resolution, request the Company's Board of Directors to submit a proposal as to the appointment of Accounting Auditors at the Ordinary General Meeting of Shareholders. Subsequent to the appointment of the Accounting Auditors, the Board of Corporate Auditors is responsible, among other matters, for the oversight of the Accounting Auditors, subject to the requirements of Japanese law. No proposal was submitted to discharge KPMG AZSA & Co. as the Company's Accounting Auditors at the most recent Ordinary General Meeting of Shareholders held on June 28, 2006. The Board of Corporate Auditors has adopted policies and procedures to pre-approve all audit and permissible non-audit services provided by the Accounting Auditor ("Pre-approval Policies"). Under the Pre-approval Policies, proposed services either (i) may be pre-approved by the Board of Corporate Auditors without specific consideration on a case-by-case basis if such services do not exceed pre-approved fee levels ("general pre-approval"), or (ii) require the specific pre-approval of the Board of Corporate Auditors ("specific pre-approval"). The Board of Corporate Auditors may delegate its specific pre-approval authority to one or more of its independent members who shall be designated by the Board of Corporate Auditors. Under the Pre-approval Policies, the Accounting Auditors are not allowed to perform any non-audit services which may impair the auditors independence under the rules of the SEC. The appendices to the Pre-approval Policies set out the audit, audit-related, tax and other services, including those described above, that have received the general pre-approval of the Board of Corporate Auditors. The term of any general pre-approval is twelve months from the date of pre-approval, unless the Board of Corporate Auditors specifically provides for a different period and sets forth such different period in the relevant appendix to the Pre-approval Policies. The Board of Corporate Auditors will annually review the Pre-approval Policies and revise the list of services that it has provided general pre-approval. Requests or applications to provide services that require specific pre-approval by the Board of Corporate Auditors will be submitted to the Board of Corporate Auditors by the Chief Officer of a company or division to which services are provided, accompanied by a draft engagement letter from the Accounting Auditor. During fiscal year 2006, none of the services provided to the Company by KPMG AZSA & Co. were approved by the Board of Corporate Auditors pursuant to the de minimis exception to the pre-approval requirement provided by paragraph (c)(7)(i)(C) of Rule 2-01 of Regulation S-X. -112- Item16D. Exemptions from the Listing Standards for Audit Committees ---------------------------------------------------------- Not applicable. Item16E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers ---------------------------------------------------------------------- Not applicable. PART III Item 17. Financial Statements -------------------- Not applicable. Item 18. Financial Statements -------------------- See Consolidated Financial Statements and Schedule attached hereto. Item 19. Exhibits -------- Documents filed as exhibits to this annual report: 1.1 Articles of Incorporation, as amended (English translation) 1.2 Share Handling Regulations, as amended (English translation) 1.3 Regulations of the Board of Directors, as amended (English translation) 1.4 Regulation of the Board of Corporate Auditors, as amended (English translation) 8.1 List of Significant Subsidiaries (See "Organizational structure" in Item 4.C. of this Form 20-F) 11 Code of Ethics (English translation) 12.1 Certification Pursuant to Rule 13a-14(a)/15d-14(a) 12.2 Certification Pursuant to Rule 13a-14(a)/15d-14(a) 13.(a)(1) Certification Pursuant to Section 1350 of Chapter 63 of Title 18 of the United States Code 13.(a)(2) Certification Pursuant to Section 1350 of Chapter 63 of Title 18 of the United States Code -113- SIGNATURES ---------- Pursuant to the requirements of Section 12 of the Securities Exchange Act of 1934, the Company 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. RICOH COMPANY, LTD. ------------------- (Registrant) By: /s/ Zenji Miura ----------------------------- Zenji Miura Director, Corporate Executive Vice President and Chief Financial Officer Date: June 29, 2006 RICOH COMPANY, LTD. Consolidated Financial Statements and Schedule For the years ended March 31, 2004, 2005 and 2006 With Report of Independent Registered Public Accounting Firm Thereon RICOH COMPANY, LTD. AND CONSOLIDATED SUBSIDIARIES INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Page - ------------------------------------------------------------------------------ Report of Independent Registered Public Accounting Firm.......... F-2 Consolidated Balance Sheets as of March 31, 2005 and 2006........ F-3 to F-4 Consolidated Statements of Income for the years ended March 31, 2004, 2005 and 2006............................................ F-5 Consolidated Statements of Shareholders' Investment for the years ended March 31, 2004, 2005 and 2006...................... F-6 Consolidated Statements of Cash Flows for the years ended March 31, 2004, 2005 and 2006.................................. F-7 Notes to Consolidated Financial Statements....................... F-8 to F-41 Schedule: II. Valuation and Qualifying Accounts and Reserves............ F-42 All schedules not listed have been omitted because they are not applicable, or the required information has been otherwise supplied in the consolidated financial statements or the notes thereto. - ------------------------------------------------------------------------------ F-1 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Shareholders and the Board of Directors of Ricoh Company, Ltd.: We have audited the consolidated financial statements of Ricoh Company, Ltd. (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 Ricoh Company, Ltd. 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 2 to the consolidated financial statements. /s/ KPMG AZSA & Co. Tokyo, Japan April 26, 2006, except for note 19 which is as of May 31, 2006 F-2 RICOH COMPANY, LTD. AND CONSOLIDATED SUBSIDIARIES CONSOLIDATED BALANCE SHEETS MARCH 31, 2005 AND 2006
Thousands of Millions of Yen U.S. Dollars -------------------------- ------------ ASSETS 2005 2006 2006 - -------------------------------------------------------------------------------------------------------------- Current Assets: Cash and cash equivalents 186,857 187,055 $ 1,598,761 Time deposits 1,454 1,470 12,564 Marketable securities 138 162 1,385 Trade receivables- Notes 75,233 75,678 646,821 Accounts 396,150 391,972 3,350,188 Less- Allowance for doubtful receivables (17,451) (16,031) (137,017) Current maturities of long-term finance receivables, net 166,636 178,882 1,528,906 Inventories- Finished goods 109,224 104,218 890,752 Work in process and raw materials 58,141 65,027 555,786 Deferred income taxes and other 53,365 55,110 471,026 - -------------------------------------------------------------------------------------------------------------- Total current assets 1,029,747 1,043,543 8,919,172 - -------------------------------------------------------------------------------------------------------------- Property, Plant and Equipment, at cost: Land 43,077 46,721 399,325 Buildings 203,537 217,302 1,857,282 Machinery and equipment 643,386 622,038 5,316,564 Construction in progress 18,720 11,541 98,641 - -------------------------------------------------------------------------------------------------------------- 908,720 897,602 7,671,812 Less- Accumulated depreciation (661,310) (629,359) (5,379,137) - -------------------------------------------------------------------------------------------------------------- 247,410 268,243 2,292,675 - -------------------------------------------------------------------------------------------------------------- Investments and Other Assets: Long-term finance receivables, net 391,947 415,435 3,550,726 Investment securities 31,154 36,419 311,274 Investments in and advances to affiliates 49,316 52,028 444,684 Goodwill 47,502 51,934 443,880 Other intangible assets 69,414 79,175 676,709 Lease deposits and other 87,179 94,406 806,889 - -------------------------------------------------------------------------------------------------------------- 676,512 729,397 6,234,162 - -------------------------------------------------------------------------------------------------------------- 1,953,669 2,041,183 $ 17,446,009 - --------------------------------------------------------------------------------------------------------------
F-3
Thousands of Millions of Yen U.S. Dollars -------------------------- ------------ LIABILITIES AND SHAREHOLDERS' INVESTMENT 2005 2006 2006 - -------------------------------------------------------------------------------------------------------------- Current Liabilities: Short-term borrowings 38,710 82,520 $ 705,299 Current maturities of long-term indebtedness 144,808 103,131 881,462 Trade payables- Notes 29,686 25,591 218,726 Accounts 306,813 313,561 2,680,009 Accrued income taxes 24,074 40,936 349,880 Accrued expenses and other 127,423 118,289 1,011,018 - -------------------------------------------------------------------------------------------------------------- Total current liabilities 671,514 684,028 5,846,394 - -------------------------------------------------------------------------------------------------------------- Long-term Liabilities: Long-term indebtedness 226,567 195,626 1,672,017 Accrued pension and severance costs 92,672 97,020 829,231 Deferred income taxes 48,767 51,374 439,094 - -------------------------------------------------------------------------------------------------------------- 368,006 344,020 2,940,342 - -------------------------------------------------------------------------------------------------------------- Minority Interests 51,151 52,890 452,051 - -------------------------------------------------------------------------------------------------------------- Commitments and Contingent Liabilities (Note 15) Shareholders' Investment: Common stock; Authorized - 993,000,000 shares in 2005 and 1,500,000,000 shares in 2006 Issued and outstanding - 744,912,078 shares and 734,045,879 shares in 2005 and 744,912,078 shares and 729,522,274 shares in 2006 135,364 135,364 1,156,957 Additional paid-in capital 186,551 186,450 1,593,590 Retained earnings 584,515 665,394 5,687,128 Accumulated other comprehensive income (loss) (21,963) 4,099 35,034 Treasury stock at cost; 10,866,199 shares in 2005 and 15,359,804 shares in 2006 (21,469) (31,062) (265,487) - -------------------------------------------------------------------------------------------------------------- Total shareholders' investment 862,998 960,245 8,207,222 - -------------------------------------------------------------------------------------------------------------- 1,953,669 2,041,183 $ 17,446,009 - --------------------------------------------------------------------------------------------------------------
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL PART OF THESE BALANCE SHEETS. F-4 RICOH COMPANY, LTD. AND CONSOLIDATED SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME FOR THE YEARS ENDED MARCH 31, 2004, 2005 AND 2006
Thousands of Millions of Yen U.S. Dollars ---------------------------------------- ------------ 2004 2005 2006 2006 - ---------------------------------------------------------------------------------------------------------------- Net Sales: Products 1,074,893 1,067,736 1,108,746 $ 9,476,462 Post sales and rentals 597,989 627,991 693,138 5,924,256 Other revenue 107,363 118,381 113,206 967,573 - ---------------------------------------------------------------------------------------------------------------- Total 1,780,245 1,814,108 1,915,090 16,368,291 - ---------------------------------------------------------------------------------------------------------------- Cost of Sales: Products 693,087 713,057 738,962 6,315,915 Post sales and rentals 245,512 259,591 293,559 2,509,051 Other revenue 76,020 86,883 82,958 709,043 - ---------------------------------------------------------------------------------------------------------------- Total 1,014,619 1,059,531 1,115,479 9,534,009 - ---------------------------------------------------------------------------------------------------------------- Gross profit 765,626 754,577 799,611 6,834,282 Selling, General and Administrative Expenses 623,935 619,071 647,597 5,535,017 Transfer to the government of the substitutional portion of Employees' Pension Fund: Settlement loss 48,657 - - - Subsidy from government (56,972) - - - - ---------------------------------------------------------------------------------------------------------------- Operating income 150,006 135,506 152,014 1,299,265 - ---------------------------------------------------------------------------------------------------------------- Other (Income) Expenses: Interest and dividend income (1,925) (2,240) (2,896) (24,752) Interest expense 5,290 4,684 5,242 44,803 Foreign currency exchange (gain) loss, net 6,136 (1,547) (3,748) (32,034) Other, net (2,558) (774) (2,783) (23,786) - ---------------------------------------------------------------------------------------------------------------- Total 6,943 123 (4,185) (35,769) - ---------------------------------------------------------------------------------------------------------------- Income before Income Taxes, Minority Interests, Equity in Earnings of Affiliates and Cumulative Effect of Accounting Change 143,063 135,383 156,199 1,335,034 Provision for Income Taxes: Current 53,303 39,281 60,857 520,145 Deferred 3,338 11,353 (3,294) (28,154) - ---------------------------------------------------------------------------------------------------------------- Total 56,641 50,634 57,563 491,991 - ---------------------------------------------------------------------------------------------------------------- Income before Minority Interests, Equity in Earnings of Affiliates and Cumulative Effect of Accounting Change 86,422 84,749 98,636 843,043 Minority Interests 4,094 4,726 4,185 35,769 Equity in Earnings of Affiliates 2,065 3,120 2,606 22,273 - ---------------------------------------------------------------------------------------------------------------- Income before Cumulative Effect of Accounting Change 84,393 83,143 97,057 829,547 Cumulative Effect of Accounting Change, net of tax 7,373 - - - - ---------------------------------------------------------------------------------------------------------------- Net Income 91,766 83,143 97,057 $ 829,547 - ---------------------------------------------------------------------------------------------------------------- Yen U.S. Dollars ---------------------------------------- ------------ Per Share of Common Stock: - ---------------------------------------------------------------------------------------------------------------- Income before cumulative effect of accounting change 113.69 112.64 132.33 1.13 Cumulative effect of accounting change 9.94 - - - Net income 123.63 112.64 132.33 1.13 Weighted average common shares outstanding (Thousand of shares) 742,293 738,160 733,434 733,434 - ---------------------------------------------------------------------------------------------------------------- Cash dividends paid per share 15.00 20.00 22.00 $ 0.19 - ---------------------------------------------------------------------------------------------------------------- Per American Depositary Share, each representing 5 shares of common stock: - ---------------------------------------------------------------------------------------------------------------- Income before cumulative effect of accounting change 568.45 563.20 661.65 5.66 Cumulative effect of accounting change 49.70 - - - Net income 618.15 563.20 661.65 5.66 - ---------------------------------------------------------------------------------------------------------------- Cash dividends paid per share 75.00 100.00 110.00 $ 0.94 - ----------------------------------------------------------------------------------------------------------------
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL PART OF THESE STATEMENTS. F-5 RICOH COMPANY, LTD. AND CONSOLIDATED SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' INVESTMENT FOR THE YEARS ENDED MARCH 31, 2004, 2005 AND 2006
Thousands of Millions of Yen U.S. Dollars ---------------------------------- ------------ 2004 2005 2006 2006 - -------------------------------------------------------------------------------------------------------------- Common Stock: Beginning balance 135,364 135,364 135,364 $1,156,957 - -------------------------------------------------------------------------------------------------------------- Ending balance 135,364 135,364 135,364 $1,156,957 - -------------------------------------------------------------------------------------------------------------- Additional Paid-in Capital: Beginning balance 186,521 186,599 186,551 $1,594,453 Gain (loss) on disposal of treasury stock in exchange for subsidiary's stock 78 (48) (101) (863) - -------------------------------------------------------------------------------------------------------------- Ending balance 186,599 186,551 186,450 $1,593,590 - -------------------------------------------------------------------------------------------------------------- Retained Earnings: Beginning balance 434,748 515,372 584,515 $4,995,855 Adjustment for change in fiscal year end of consolidated subsidiaries - 777 - - Net income for the year 91,766 83,143 97,057 829,547 Dividends declared and approved (11,142) (14,777) (16,178) (138,274) - -------------------------------------------------------------------------------------------------------------- Ending balance 515,372 584,515 665,394 $5,687,128 - -------------------------------------------------------------------------------------------------------------- Accumulated other comprehensive income (loss): Beginning balance (94,733) (30,272) (21,963) $ (187,718) Adjustment for change in fiscal year end of consolidated subsidiaries - (1,665) - - Foreign currency translation adjustments (5,393) 9,041 14,876 127,145 Unrealized gains (losses) on securities, net of reclassification adjustment (4,556) 765 4,137 35,359 Unrealized gains on derivatives, net of reclassification adjustment 154 141 40 342 Minimum pension liability adjustments 74,256 27 7,009 59,906 - -------------------------------------------------------------------------------------------------------------- Ending balance (30,272) (21,963) 4,099 $ 35,034 - -------------------------------------------------------------------------------------------------------------- Treasury stock: Beginning balance (4,386) (11,932) (21,469) $ (183,496) Purchase of treasury stock; 5,731,150 shares in 2004, 6,179,522 shares in 2005 and 5,048,765 shares in 2006 (11,411) (12,178) (10,660) (91,111) Sales of treasury stock; 6,873 shares in 2004, 24,810 shares in 2005 and 33,760 shares in 2006 13 49 66 564 Issuance of treasury stock in exchange for subsidiary's stock; 2,010,533 shares in 2004, 1,305,700 shares in 2005 and 521,400 shares in 2006 3,852 2,592 1,001 8,556 - -------------------------------------------------------------------------------------------------------------- Ending balance (11,932) (21,469) (31,062) $ (265,487) - -------------------------------------------------------------------------------------------------------------- Comprehensive income: Net income for the year 91,766 83,143 97,057 $ 829,547 Other comprehensive income for the year, net of tax 64,461 9,974 26,062 222,752 - -------------------------------------------------------------------------------------------------------------- Total comprehensive income for the year 156,227 93,117 123,119 $1,052,299 - --------------------------------------------------------------------------------------------------------------
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL PART OF THESE STATEMENTS. F-6 RICOH COMPANY, LTD. AND CONSOLIDATED SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED MARCH 31, 2004, 2005 AND 2006
Thousands of Millions of Yen U.S. Dollars ----------------------------------- ------------ 2004 2005 2006 2006 - --------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income 91,766 83,143 97,057 $ 829,547 Adjustments to reconcile net income to net cash provided by operating activities- Depreciation and amortization 76,968 78,201 84,460 721,880 Equity in earnings of affiliates, net of dividends received (1,001) (1,966) (1,431) (12,231) Deferred income taxes 3,338 11,353 (3,294) (28,154) Losses on disposals and sales of property, plant and equipment 2,035 4,056 920 7,863 Pension and severance costs, less payments (609) 4,307 3,342 28,564 Cumulative effect of accounting change, net of tax (7,373) - - - Changes in assets and liabilities, net of effects from acquisition- (Increase) decrease in trade receivables (11,367) (26,429) 13,429 114,778 (Increase) decrease in inventories (4,317) (12,885) 3,726 31,846 Increase in finance receivables (32,650) (30,294) (30,029) (256,658) (Decrease) increase in trade payables 21,316 27,276 (4,495) (38,419) (Decrease) increase in accrued income taxes and accrued expenses and other (5,913) (13,719) 2,497 21,342 Other, net 22,718 9,737 10,687 91,343 - --------------------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 154,911 132,780 176,869 1,511,701 - --------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from sales of property, plant and equipment 190 721 3,085 26,368 Expenditures for property, plant and equipment (75,432) (84,076) (101,793) (870,026) Payments for purchases of available-for-sale securities (35,518) (79,431) (138,607) (1,184,675) Proceeds from sales of available-for-sale securities 45,464 118,120 141,620 1,210,427 (Increase) decrease in time deposits 9,915 (511) 61 521 Acquisitions of subsidiaries, net of cash acquired - (43,214) - - Other, net (8,002) (7,807) (24,431) (208,812) - --------------------------------------------------------------------------------------------------------------------- Net cash used in investing activities (63,383) (96,198) (120,065) (1,026,197) - --------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from long-term indebtedness 13,349 72,206 63,751 544,880 Repayment of long-term indebtedness (31,509) (60,613) (93,752) (801,299) (Decrease) increase in short-term borrowings, net (10,728) (38,052) 39,618 338,615 Proceeds from issuance of long-term debt securities 1,000 18,000 10,000 85,470 Repayment of long-term debt securities (23,910) (22,000) (52,000) (444,444) Dividend paid (11,136) (14,793) (16,178) (138,274) Payment for purchase of treasury stock (11,411) (10,624) (10,653) (91,051) Other, net (490) (563) (775) (6,623) - --------------------------------------------------------------------------------------------------------------------- Net cash used in financing activities (74,835) (56,439) (59,989) (512,726) - --------------------------------------------------------------------------------------------------------------------- EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS (2,897) 1,200 3,383 28,914 - --------------------------------------------------------------------------------------------------------------------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 13,796 (18,657) 198 1,692 CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 189,243 203,039 186,857 1,597,069 ADJUSTMENT FOR CHANGE IN FISCAL YEAR END OF CONSOLIDATED SUBSIDIARIES - 2,475 - - - --------------------------------------------------------------------------------------------------------------------- CASH AND CASH EQUIVALENTS AT END OF YEAR 203,039 186,857 187,055 $ 1,598,761 - --------------------------------------------------------------------------------------------------------------------- SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: CASH PAID DURING THE YEAR FOR- Interest 6,479 5,402 5,717 $ 48,863 Income taxes 66,914 40,803 44,854 383,368 - ---------------------------------------------------------------------------------------------------------------------
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL PART OF THESE STATEMENTS. F-7 RICOH COMPANY, LTD. AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. NATURE OF OPERATIONS Ricoh Company, Ltd. (the "Company") was established in 1936 and is headquartered in Tokyo, Japan. The Company and its consolidated subsidiaries ("Ricoh" as a consolidated group) is a world-wide supplier of office automation equipment, including copiers, facsimile machines, data processing systems, printers and related supplies. Ricoh is also well known for its state-of-the-art electronic devices, digital photographic equipment and other products. Ricoh distributes its products primarily through domestic (Japanese) and foreign sales subsidiaries. Overseas, Ricoh owns and distributes not only Ricoh brand products but also other brands, such as Gestetner, Lanier and Savin. Ricoh manufactures its products primarily in 15 plants in Japan and 6 plants overseas, which are located in the United States, United Kingdom, France and China. 2. SIGNIFICANT ACCOUNTING AND REPORTING POLICIES The accompanying consolidated financial statements of Ricoh have been prepared in conformity with U.S. generally accepted accounting principles. Significant accounting and reporting policies are summarized below: (A) BASIS OF PRESENTATION The accompanying consolidated financial statements for each of the years in the three year period ended March 31, 2006 are presented in Japanese yen, the functional currency of the Company and its domestic subsidiaries. The translation of Japanese yen into U.S. Dollar equivalents for the year ended March 31, 2006 is included solely for the convenience of readers outside Japan and has been made using the exchange rate of Yen 117 to US$1, the approximate rate of exchange prevailing at the Federal Reserve Bank of New York on March 31, 2006. The books of the Company and its domestic subsidiaries are maintained in conformity with Japanese accounting principles and practices, while foreign subsidiaries maintain their books in conformity with the standards of their country of domicile. The accompanying consolidated financial statements reflect necessary adjustments, not recorded in the books, to present them in conformity with U.S. generally accepted accounting principles. (B) PRINCIPLES OF CONSOLIDATION The accompanying consolidated financial statements include the accounts of Ricoh. Investments in entities in which Ricoh has the ability to exercise significant influence over the entities' operating and financial policies (generally 20 to 50 percent ownership) are accounted for on an equity basis. All significant intercompany balances and transactions have been eliminated in consolidation. The accounts of certain consolidated subsidiaries have been included on the basis of fiscal periods ended within three months prior to March 31. F-8 At the beginning of fiscal year 2005, the Company changed the year end of certain overseas subsidiaries from December 31 to March 31. As a result, unappropriated retained earnings increased by Yen 777 million and accumulated other comprehensive income (loss) in shareholders' investment decreased by Yen 1,665 million. (C) REVENUE RECOGNITION Ricoh generates revenue principally through the sale of equipment, supplies and related services under separate contractual arrangements for each. Ricoh recognizes revenue when (1) it has a firm contract, (2) the product has been shipped to and accepted by the customer or the service has been provided, (3) the sales price is fixed or determinable and (4) amounts are reasonably assured of collection. Products sales is recognized at the time of delivery and installation at the customer location. Equipment revenues are based on established prices by product type and model and are net of discounts. A sales return is accepted only when the equipment is defective and does not meet Ricoh's product performance specifications. Other than installation, there are no customer acceptance clauses in the sales contract. Post sales and rentals result primarily from maintenance contracts that are normally entered into at the time the equipment is sold. Standard service fee prices are established depending on equipment classification and include a cost value for the estimated services to be performed based on historical experience plus a profit margin thereon. As a matter of policy, Ricoh does not discount such prices. On a monthly basis, maintenance service revenues are earned and recognized by Ricoh and billed to the customer in accordance with the contract and include a fixed monthly fee plus a variable amount based on usage. The length of the contract ranges up to five-years, however, most contracts are cancelable at any time by the customer upon a short notice period. Leases not qualifying as sales-type leases or direct financing leases are accounted for as operating leases and related revenue is recognized over the lease term. Ricoh enters into arrangements with multiple elements, which may include any combination of products, equipment, installation and maintenance. Ricoh allocates revenue to each element based on its relative fair value if such element meets the criteria for treatment as a separate unit of accounting as prescribed in the Emerging Issues Task Force Issue 00-21("EITF 00-21"), "Revenue Arrangements with Multiple Deliverables". Pursuant to EITF 00-21, the delivered item in a multiple element arrangement should be considered a separate unit of accounting if all of the following criteria are met: 1) a delivered item has value to customers on a stand-alone basis, 2) there is objective and reliable evidence of fair value of an undelivered item, and 3) the delivery of the undelivered item must be probable and controlled by Ricoh if the arrangement includes the right of return. The price charged when the element is sold separately generally determines fair value. Otherwise, revenue is deferred until the undelivered elements are fulfilled as a single unit of accounting. EITF 00-21 was effective for revenue arrangements entered into after June 30, 2003. EITF 00-21 did not have a material effect on Ricoh's financial position or results of operations. Revenue from the sale of equipment under sales-type leases is recognized as product sales at the inception of the lease. Other revenue consists primarily of interest income on sales-type leases and direct-financing leases, which are recognized as Other revenue over the life of each respective lease using the interest method. F-9 (D) FOREIGN CURRENCY TRANSLATION For foreign operations with functional currencies other than the Japanese yen, assets and liabilities are translated at the exchange rates 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 resulting translation adjustments are included as a part of accumulated other comprehensive income (loss) in shareholders' investment. All foreign currency transaction gains and losses are included in other income and expenses in the period incurred. (E) CASH EQUIVALENTS Cash and cash equivalents include highly liquid investments with maturities of three months or less at the date of purchase such as time deposits and short-term investment securities which are available-for sale at any time, present insignificant risk of changes in value due to being readily convertible into cash and have an original maturity of three months or less, such as money management funds and free financial funds. (F) DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES As discussed further in Note 14, Ricoh manages its exposure to certain market risks, primarily foreign currency and interest rate risks, through the use of derivative instruments. As a matter of policy, Ricoh does not enter into derivative contracts for trading or speculative purposes. In accordance with Statement of Financial Accounting Standards ("SFAS") No.133 as amended, Ricoh recognized all derivative instruments as either assets or liabilities in the Consolidated Balance Sheets and measures those instruments at fair value. When Ricoh enters into a derivative contract, it makes a determination as to whether or not for accounting purposes the derivative is part of a hedging relationship. In general, a derivative may be designated as either (1) a hedge of the fair value of a recognized asset or liability or an unrecognized firm commitment ("fair value hedge"), (2) a hedge of the variability of the expected cash flows associated with an existing asset or liability or a forecasted transaction ("cash flow hedge"), or (3) a foreign currency fair value or cash flow hedge ("foreign currency hedge"). Ricoh formally documents all relationships between hedging instruments and hedged items, as well as its risk-management objective and strategy for undertaking various hedge transactions. This process includes linking all derivatives that are designated as fair value, cash flow, or foreign currency hedges to specific assets and liabilities on the consolidated balance sheet or to specific firm commitments or forecasted transactions. For derivative contracts that are designated and qualify as fair value hedges including foreign currency fair value hedges, the derivative instrument is marked-to-market with gains and losses recognized in current period earnings to offset the respective losses and gains recognized on the underlying exposure. For derivative contracts that are designated and qualify as cash flow hedges including foreign currency cash flow hedges, the effective portion of gains and losses on these contracts is reported as a component of accumulated other comprehensive income (loss) and reclassified into earnings in the same period the hedged item or transaction affects earnings. Any hedge ineffectiveness on cash flow hedges is immediately recognized in earnings. For all derivative instruments that are not designated as part of a hedging relationship and for designated derivative instruments that do not qualify for hedge accounting, the contracts are recorded at fair value with the gain or loss recognized in current period earnings. F-10 (G) ALLOWANCE FOR DOUBTFUL TRADE RECEIVABLES AND FINANCE RECEIVABLES Ricoh records allowances for doubtful receivables that are based upon historical experience and specific customer collection issues. The estimated amount of probable credit losses in its existing receivables is determined from write-off history adjusted to reflect current economic conditions and specific allowances for receivables including nonperforming leases, impaired loans or other accounts for which Ricoh has concluded it will be unable to collect all amounts due according to original terms of the lease or loan agreement. Account balances net of expected recovery from available collateral are charged-off against the allowances when collection is considered remote. (H) SECURITIES Ricoh applies 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 held-to-maturity, trading, or available-for-sale securities. As of March 31, 2005 and 2006, all of Ricoh's investments in debt and marketable equity securities are classified as available-for-sale securities. Those available-for-sale securities are reported at fair value with unrealized gains and losses, net of related taxes, excluded from earnings and reported in accumulated other comprehensive income (loss). Available-for-sale securities, which mature or are expected to be sold in one year, are classified as current assets. Individual securities classified as available-for-sale securities are reduced to fair market value by a charge to income for other than temporary declines in value. Factors considered in assessing whether an indication of other than temporary impairment exists with respect to available-for-sale securities include: length of time and extent of decline, financial condition and near term prospects of issuer and intent and ability of the Company to retain its investments for a period of time sufficient to allow for any anticipated recovery in market value. The cost of the securities sold is computed based on the average cost of each security held at the time of sale. Non-marketable equity securities owned by Ricoh primarily relate to less than 20% owned companies and are stated at cost. As discussed further in Note 5, Ricoh changed its accounting policy with respect to the recognition of unrealized gains and losses as realized in the statements of income on transfers of marketable equity securities. In relation to this change, Ricoh has recognized in its fiscal 2004 consolidated statement of income a cumulative effect of accounting change, net of tax, of Yen 7,373 million. (I) INVENTORIES Inventories are mainly stated at the lower of average cost or net realizable values. Inventory costs include raw materials, labor and manufacturing overheads. (J) PROPERTY, PLANT AND EQUIPMENT For the Company and its domestic subsidiaries, depreciation of property, plant and equipment is computed principally by using the declining-balance method over the estimated useful lives. Most of the foreign subsidiaries have adopted the straight-line method for computing depreciation, which currently accounts for approximately 34% of the consolidated depreciation expense. The depreciation period generally ranges from 5 years to 50 years for buildings and 2 years to 12 years for machinery and equipment. F-11 Effective rates of depreciation for the years ended March 31, 2004, 2005 and 2006 are summarized below: 2004 2005 2006 - ----------------------------------------------------------------------- Buildings 8.1% 8.5% 8.9% Machinery and equipment 42.9 43.8 40.5 - ----------------------------------------------------------------------- Certain leased buildings, 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 depreciation as of March 31, 2005 and 2006 were as follows: Thousands of Millions of Yen U.S. Dollars ----------------- ------------ 2005 2006 2006 - ------------------------------------------------------------------ Aggregate cost 7,051 6,895 $58,932 Accumulated depreciation 4,615 4,911 41,974 - ------------------------------------------------------------------ The related future minimum lease payments and the present value of the net minimum lease payments as of March 31, 2006 were Yen 3,615 million ($30,897 thousand) and Yen 3,453 million ($29,513 thousand), respectively. Ordinary maintenance and repairs are charged to expense as incurred. Major replacements and improvements are capitalized. When properties are retired or otherwise disposed of, the property and related accumulated depreciation accounts are relieved of the applicable amounts, and any differences are included in earnings. (K) CAPITALIZED SOFTWARE COSTS Costs incurred for computer software developed or obtained for internal use are capitalized and amortized on a straight line basis over their estimated useful lives in accordance with Statement of Position (SOP) 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." (L) GOODWILL AND OTHER INTANGIBLE ASSETS 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 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 annually for impairment based on its fair value until its life would be determined to no longer be indefinite. Ricoh completed its annual assessment of the carrying value of indefinite-lived intangible assets, including goodwill for the years ended March 31, 2004, 2005 and 2006 and determined that no goodwill impairment charge was necessary. F-12 (M) PENSION AND RETIREMENT ALLOWANCES PLANS The measurement of pension costs and liabilities is determined in accordance with SFAS No.87, "Employers' Accounting for Pensions." Under SFAS 87, changes in the amount of either the projected benefit obligation or plan assets resulting from actual results different from that assumed and from changes in assumptions can result in gains and losses not yet recognized in the consolidated financial statements. Amortization of an unrecognized net gain or loss is included as a component of the net periodic benefit plan cost for a year if, as of the beginning of the year, that unrecognized net gain or loss exceeds 10 percent of the greater of (1) the projected benefit obligation or (2) the fair value of that plan's assets. In such case, the amount of amortization recognized is the resulting excess divided by the average remaining service period of active employees expected to receive benefits under the plan. The expected long-term rate of return on plan assets used for pension accounting is determined based on the historical long-term rate of return on plan assets. The discount rate is determined based on the rates of return of high-quality fixed-income investments currently available and expected to be available during the period to maturity of the pension benefits. (N) INCOME TAXES Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences and carryforwards are expected to be realized or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. (O) RESEARCH AND DEVELOPMENT EXPENSES AND ADVERTISING COSTS Research and development expenses and advertising costs are expensed as incurred. (P) SHIPPING AND HANDLING COSTS Shipping and handling costs, which mainly include transportation to customers, are included in selling, general and administrative expenses on the consolidated statements of income. (Q) IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS Long-lived assets and acquired intangible assets with a definite life are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset or group of assets may not be recoverable. 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 net cash flows of the asset or group of assets. If an asset or group of assets is considered to be impaired, 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. (R) EARNINGS PER SHARE Basic net income per common share is calculated by dividing net income by the weighted-average number of shares outstanding during the period. The calculation of diluted net income per common share is similar to the calculation of basic net income per share, except that the weighted-average number of shares F-13 outstanding includes the additional dilution from potential common stock equivalents such as convertible bonds. Ricoh has no dilutive securities outstanding as of and for the years ended March 31, 2004, 2005 and 2006, and therefore there is no difference between basic and diluted net income per share. (S) NON-CASH TRANSACTIONS The following non-cash transactions have been excluded from the consolidated statements of cash flows:
Thousands of Millions of Yen U.S. Dollars -------------------------- ------------ 2004 2005 2006 2006 - --------------------------------------------------------------------------------------------------------------- Capital lease obligations incurred 75 865 261 $2,231 Issuance of treasury stock in exchange for subsidiary's stock 3,930 2,545 905 7,735 Transfer of marketable equity securities to employee retirement benefit trust 3,648 - - - - ---------------------------------------------------------------------------------------------------------------
(T) USE OF ESTIMATES Management of the Company has made a number of estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, including impairment losses of long-lived assets and the disclosures of fair value of financial instruments and contingent assets and liabilities, to prepare these financial statements in conformity with U.S. generally accepted accounting principles. Actual results could differ from those estimates. The Company has identified five areas where it believes assumptions and estimates are particularly critical to the consolidated financial statements. These are determination of the allowance for doubtful receivables, impairment of securities, impairment of long-lived assets including goodwill, realizability of deferred tax assets and pension accounting. (U) NEW ACCOUNTING STANDARDS In November 2004, the FASB issued SFAS No.151, "Inventory Costs, an amendment of ARB No. 43, Chapter 4" to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material (spoilage). Among other provisions, the new rule requires that items such as idle facility expense, excessive spoilage, double freight, and rehandling cost be recognized as current period charges regardless of whether they meet the criterion of "so abnormal" as stated in ARB No. 43. In addition, SFAS 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 151 is effective for the fiscal years beginning after June 15, 2005 and is required to be adopted by Ricoh in the fiscal year beginning April 1, 2006. The adoption of SFAS 151 is not expected to have a material effect on the Company's consolidated results of operations and financial position. In December 2004, the FASB issued SFAS No. 153, "Exchanges of Nonmonetary Assets - an amendment of APB Opinion No. 29" ("SFAS 153"). SFAS 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 Nonmonetary Transactions", and replaces it with an exception for exchanges that do not F-14 have commercial substance. SFAS 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 153 is effective for the fiscal years beginning after June 15, 2005 and is required to be adopted by Ricoh in the fiscal year beginning April 1, 2006. The adoption of SFAS 153 is not expected to have a material effect on the Company's consolidated results of operations and financial position. In May 2005, the FASB issued No. 154, "Accounting Changes and Error Corrections - - a replacement of APB Opinion No. 20 and SFAS No.3". SFAS 154 replaces APB 20, "Accounting Changes" and SFAS 3, "Reporting Accounting Changes in Interim Financial Statements", and requires retrospective applications to prior periods' financial statements of a voluntary change in accounting principle unless it is impracticable. SFAS 154 is effective for the fiscal years beginning after December 15, 2005 and is required to be adopted by Ricoh in the fiscal year beginning April 1, 2006. The adoption of SFAS 154 is not expected to have a material effect on the Company's consolidated results of operations and financial position. In February 2006, the FASB issued SFAS No. 155, "Accounting for Certain Hybrid Financial Instruments--an amendment of SFAS No. 133 and 140". SFAS 155 amends SFAS 133, "Accounting for Derivative Instruments and Hedging Activities" and SFAS 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities". SFAS 155 permits fair value re-measurement for any hybrid financial instrument that contains an embedded derivative, and establishes a requirement to evaluate interests in securitized financial assets to identify interests that are freestanding derivatives or that are hybrid financial instruments that contain an embedded derivative. SFAS 155 is effective for the fiscal years beginning after September 15, 2006 and is required to be adopted by Ricoh in the fiscal year beginning April 1, 2007. The Company is currently evaluating the effect that the adoption of SFAS 155 will have on its consolidated results of operations and financial condition but does not expect it to have a material impact. In March 2006, the FASB issued SFAS No. 156, "Accounting for Servicing of Financial Assets--an amendment of FASB Statement No. 140". SFAS 156 amends SFAS 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities" to clarify the accounting for servicing assets and servicing liabilities. Among other provisions, the new accounting standard requires all separately recognized servicing assets and servicing liabilities to be initially measured at fair value, if practicable. SFAS 156 is effective for the fiscal years beginning after September 15, 2006 and is required to be adopted by Ricoh in the fiscal year beginning April 1, 2007. The Company is currently evaluating the effect that the adoption of SFAS 156 will have on its consolidated results of operations and financial condition but does not expect it to have a material impact. 3. ACQUISITION In October 2004, the Company acquired all of the issued and outstanding capital stock of Hitachi Printing Solutions, Ltd. for total cash consideration of Yen 44,085 million including direct acquisition costs. The company made the acquisition to strengthen and expand its printing operations. The acquired company was a non-public manufacturer and a subsidiary of Hitachi, Ltd. and was renamed Ricoh Printing Systems, Ltd. ("RPS") upon acquisition by the Company. The Company used the purchase method of accounting to account for the acquisition of RPS and, accordingly, the purchase price has been allocated to the tangible and intangible net assets of RPS based on the estimated fair value of such net assets. The amount of consideration paid in excess of the estimated fair value of the net assets acquired of Yen 19,583 million was recorded as goodwill which is not tax deductible. Assets, liabilities and operations of RPS have been included in the accompanying consolidated financial statements since the acquisition date. F-15 The following table reflects the October 1, 2004 condensed balance sheet of RPS, as adjusted to give effect to the purchase method accounting adjustments: Millions of Yen - ------------------------------------------------------------------ Cash and cash equivalents 2,412 Receivables and other assets 31,463 Property and equipment 10,404 Identifiable intangible assets 20,400 Goodwill 19,583 Liabilities (40,177) - ------------------------------------------------------------------ 44,085 - ------------------------------------------------------------------ Identifiable intangible assets of RPS primarily comprise customer relationships of Yen 13,900 million, which are estimated to have a remaining useful life of 5 to 12 years. Goodwill arising from the acquisition of RPS has all been allocated to the Office Solutions segment. As a result of the goodwill impairment test, impairment loss has not been recognized. 4. FINANCE RECEIVABLES Finance receivables as of March 31, 2005 and 2006 are comprised primarily of lease receivables and installment loans. Ricoh's products are leased to domestic customers primarily through Ricoh Leasing Company, Ltd., a majority-owned domestic subsidiary and to overseas customers primarily through certain overseas subsidiaries. These leases are accounted for as sales-type leases in conformity with SFAS 13. Sales revenue from sales-type leases is recognized at the inception of the leases. Information pertaining to Ricoh's lease receivables as of March 31, 2005 and 2006 is as follows:
Thousands of Millions of Yen U.S. Dollars ------------------------ ------------ 2005 2006 2006 - ------------------------------------------------------------------------------------- Minimum lease payments receivable 568,911 603,698 $ 5,159,812 Estimated non-guaranteed residual value 3,030 4,144 35,419 Unearned income (48,290) (50,797) (434,162) Allowance for doubtful receivables (15,199) (15,023) (128,402) - ------------------------------------------------------------------------------------- Lease receivables, net 508,452 542,022 4,632,667 - ------------------------------------------------------------------------------------- Less: Current portion of lease receivable, net (165,295) (177,414) (1,516,359) - ------------------------------------------------------------------------------------- Amounts due after one year, net 343,157 364,608 $ 3,116,308 - -------------------------------------------------------------------------------------
As of March 31, 2006, the minimum lease payments receivable due in each of the next five years and thereafter are as follows: Thousands of Years ending March 31 Millions of Yen U.S. Dollars - ------------------------------------------------------ 2007 201,372 $1,721,128 2008 163,493 1,397,376 2009 123,527 1,055,786 2010 75,409 644,521 2011 30,851 263,684 2012 and thereafter 9,046 77,317 - ------------------------------------------------------ Total 603,698 $5,159,812 - ------------------------------------------------------ F-16 Ricoh Leasing Company, Ltd. has also extended certain other types of loans as part of its business activity, which are primarily residential housing loans to individuals in Japan secured by the underlying real estate properties. Loan terms range from 15 years to 30 years with monthly repayments. The total balance of these loans, net of allowance for doubtful receivables, as of March 31, 2005 and 2006 was Yen 50,131 million and Yen 52,295 million ($446,966 thousand), respectively. The current portions of loan receivables were Yen 1,341 million and Yen 1,468 million ($12,547 thousand), respectively, as of March 31, 2005 and 2006, and are included in short-term finance receivables, net in the accompanying balance sheet. Loan activity for the years ended March 31, 2004, 2005 and 2006 is as follow: Thousands of Millions of Yen U.S. Dollars -------------------------------- ------------ 2004 2005 2006 2006 - ---------------------------------------------------------------------------- Extension of new loans 13,686 12,456 12,657 $108,179 Repayment of outstanding loans 12,706 13,001 10,495 89,701 - ---------------------------------------------------------------------------- Ricoh sold finance lease receivables in prior years through securitization transactions. Servicing assets or liabilities related to securitization transactions initiated were not recorded, because the servicing fees adequately compensate Ricoh. Ricoh's retained interests are subordinate to the investor's interests. Their value is subject to credit and interest rate risk on the sold financial assets. The investors and Special Purpose Entities that hold the lease receivables have limited recourse to Ricoh's retained interest in such receivables for failure of debtors to pay. Ricoh determines the value of the retained interests by discounting the future cash flows. Those cash flows are estimated based on credit losses and other information as available and are discounted at a rate which Ricoh believes is commensurate with the risk free rate plus a risk premium. Key economic assumptions used in measuring the fair value of retained interests related to securitization transactions completed during the years ended March 31, 2005 and 2006 were as follows: 2005 2006 - -------------------------------------------------------------------- Expected credit losses 0.75% - 1.35% 0.35% - 0.50% Discount rate 2.00% - 3.00% 2.00% - 3.00% - -------------------------------------------------------------------- The impacts of 10% and 20% adverse changes to the key economic assumptions on the fair value of retained interests as of March 31, 2006 are presented below. Thousands of Millions of Yen U.S. Dollars --------------- ------------ 2006 2006 - ------------------------------------------------------------------------------- Carrying value of retained interests (included in lease deposits and other in the consolidated balance sheet) 5,914 $50,547 Expected credit losses: +10% 32 274 +20% 65 556 Discount rate: +10% 22 188 +20% 44 376 - ------------------------------------------------------------------------------- The hypothetical scenario does not reflect expected market conditions and should not be used as a prediction of future performance. As the figures indicate, changes in fair value may not be linear. Also, in the above table, the effect of a variation in a particular assumption on the fair value of the retained interest is calculated without changing any other assumption; in reality, changes in one factor may result in changes in another, which might magnify or counteract the sensitivities. F-17 The following table summarizes certain cash flows received from and paid to the Special Purpose Entities for all securitization activity for the years ended March 31, 2004, 2005 and 2006:
Thousands of Millions of Yen U.S. Dollars -------------------------- ------------ 2004 2005 2006 2006 - -------------------------------------------------------------------------------------- Servicing fees received 25 22 22 $ 188 Repurchases of delinquent or ineligible assets 4,643 4,060 2,575 22,009 - --------------------------------------------------------------------------------------
The components of all receivables managed and securitized, amounts of delinquencies and the components of net credit losses as of March 31, 2005 and 2006, and for the years then ended, are as follows:
Millions of Yen --------------------------------------------------------------------------------- 2005 2006 ---------------------------------------- ---------------------------------------- Principal Principal amount of amount of Total principal receivables Total principal receivables amount of 4 months or Net credit amount of 4 months or Net credit receivables more past due losses receivables more past due losses - ------------------------------------------------------------------------------------------------------------------- Principal amount outstanding 567,795 1,016 2,746 601,594 919 2,401 Less: Receivables securitized (44,145) (44,549) --------------- ----------- Receivables held in portfolio 523,650 557,045 - -------------------------------------------------------------------------------------------------------------------
Thousands of U.S. Dollars ---------------------------------------- 2006 ---------------------------------------- Principal amount of Total principal receivables amount of 4 months or Net credit receivables more past due losses - ------------------------------------------------------------------------------------------------------------------- Principal amount outstanding $5,141,829 $7,855 $20,521 Less: receivables securitized (380,761) --------------- Receivables held in portfolio $4,761,068 - -------------------------------------------------------------------------------------------------------------------
5. SECURITIES Marketable securities and investment securities as of March 31, 2005 and 2006 consist of the following:
Thousands of Millions of Yen U.S. Dollars --------------------- ------------ 2005 2006 2006 - ---------------------------------------------------------------------------- Marketable securities: Available-for-sale securities 138 162 $ 1,385 - ---------------------------------------------------------------------------- Investment securities: Available-for-sale securities 24,205 29,934 $255,846 Non-marketable equity securities 6,949 6,485 55,427 - ---------------------------------------------------------------------------- 31,154 36,419 $311,273 - ----------------------------------------------------------------------------
The current and noncurrent security types of available-for-sale securities, and the respective cost, gross unrealized holding gains, gross unrealized holding losses and fair value as of March 31, 2005 and 2006 are as follows: F-18
Millions of Yen ------------------------------------------------------------------------------------ 2005 2006 ------------------------------------------ ----------------------------------------- Gross Gross Gross Gross unrealized unrealized unrealized unrealized holding holding holding holding Fair Cost gains losses Fair value Cost gains losses value - ------------------------------------------------------------------------------------------------------------------- Current: Corporate debt securities 137 - - 137 161 - - 161 Other 1 - - 1 1 - - 1 - ------------------------------------------------------------------------------------------------------------------- 138 - - 138 162 - - 162 - ------------------------------------------------------------------------------------------------------------------- Non-current: Equity securities 7,479 9,021 49 16,451 8,034 15,716 37 23,713 Corporate debt securities 6,000 45 - 6,045 6,000 50 - 6,050 Other 1,229 480 - 1,709 171 0 0 171 - ------------------------------------------------------------------------------------------------------------------- 14,708 9,546 49 24,205 14,205 15,766 37 29,934 - -------------------------------------------------------------------------------------------------------------------
Thousands of U.S. Dollars ----------------------------------------- 2006 ----------------------------------------- Gross Gross unrealized unrealized holding holding Fair Cost gains losses value - ------------------------------------------------------------------------------------------------------------------- Current: Corporate debt securities $ 1,376 $ - $ - $ 1,376 Other 9 - - 9 - ------------------------------------------------------------------------------------------------------------------- $ 1,385 $ - $ - $ 1,385 - ------------------------------------------------------------------------------------------------------------------- Non-current: Equity securities $ 68,666 $ 134,325 $ 316 $ 202,675 Corporate debt securities 51,282 427 - 51,709 Other 1,462 0 0 1,462 - ------------------------------------------------------------------------------------------------------------------- $121,410 $134,752 $316 $ 255,846 - -------------------------------------------------------------------------------------------------------------------
Other non-current securities mainly include investment trusts consisting of investment in marketable debt and equity securities. Gross unrealized holding losses on available-for-sale securities and the fair value of the related securities, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at March 31, 2006 were as follows: Millions of Yen --------------------------------------- Less than 12 months 12 months or longer ------------------- ------------------- Gross Gross unrealized unrealized Fair holding Fair holding value losses value losses - --------------------------------------------------------------------------- 2006: Noncurrent: Available-for-sale: Equity securities 223 37 - - - --------------------------------------------------------------------------- Thousands of U.S. Dollars --------------------------------------- Less than 12 months 12 months or longer ------------------- ------------------- Gross Gross unrealized unrealized Fair holding Fair holding value losses value losses - --------------------------------------------------------------------------- 2006: Noncurrent: Available-for-sale: Equity securities $1,906 $316 - - - --------------------------------------------------------------------------- The contractual maturities of debt securities classified as available-for-sale as of March 31, 2006, regardless of their balance sheet classification, are as follows: Thousands of Millions of Yen U.S. Dollars ------------------- ------------------ Cost Fair value Cost Fair value - ---------------------------------------------------------------------------- Due within one year 161 161 $ 1,376 $ 1,376 Due after one year through five years 6,000 6,050 51,282 51,709 - ---------------------------------------------------------------------------- 6,161 6,211 $52,658 $ 53,085 - ---------------------------------------------------------------------------- Proceeds from the sales of available-for-sale securities were Yen 45,464 million, Yen 118,120 million and Yen 141,620 million ($1,210,427 thousand) for the years ended March 31, 2004, 2005 and 2006, respectively. F-19 The realized gain on the sales of available-for-sale securities for the year ended March 31, 2006 was Yen 1,053 million ($9,000 thousand). There were no significant realized losses of available-for-sale securities for the year ended March 31, 2006. There were no significant realized gains or losses of available-for-sale securities for the years ended March 31, 2004 and 2005 except the contributed marketable equity securities to the Company's employee benefit trust as discussed below. Effective October 1, 2005, UFJ holdings, Inc. ("UFJ") and Mitsubishi Tokyo Financial Group, Inc. completed a merger, in which the UFJ shares of common stock owned by the Company were exchanged for shares of common stock of the newly merged entity, Mitsubishi UFJ Financial Group, Inc. ("MUFG"). As a result of this merger and common share exchange, the Company recognized a gain on securities of Yen 992 million ($ 8,479 thousand) between the cost of UFJ shares surrendered and the current market value of MUFG shares in "Other, net" as other (income) expenses on its consolidated statements of income for the year ended March 31, 2006. In March 2000, the Company contributed certain marketable equity securities, not including those of its subsidiaries and affiliated companies, to its employee retirement benefit trust (the "Trust") fully administered and controlled by an independent bank trustee, with no cash proceeds thereon (the "2000 Transfer"). The 2000 Transfer of the available-for-sale securities was accounted for as a sale in accordance with SFAS No.125, "Accounting for Transfer and Servicing of Financial Assets and Extinguishments of Liabilities" and accordingly the pension liability was reduced by the fair market value of the transferred securities. The fair value of these securities at the time of transfer was Yen 20,760 million. The net unrealized gains on these available-for-sale securities amounting to Yen 13,095 million were initially included in "Accumulated other comprehensive income (loss)" on the consolidated balance sheets with the expectation of being reflected in realized gains in the statements of income upon the future sale of the transferred securities by the trustee. In March 2004, the Company contributed certain additional available-for-sale equity securities to the Trust, with no cash proceeds thereon (the "2004 Transfer"). The fair value and net unrealized gains on these available-for-sale securities at the time of transfer were Yen 3,648 million and Yen 2,658 million, respectively. In connection with the 2004 Transfer, Ricoh changed its accounting policy with respect to the recognition of unrealized gains and losses as realized in the statements of income on transfers of marketable equity securities to its employee retirement benefit trusts. Ricoh concluded that it is preferable to recognize in the statements of income unrealized gains or losses associated with marketable equity securities transferred to the Trust when Ricoh has effectively given up the economic rewards of ownership, that is, when the assets are no longer considered corporate assets and when the Trust has the irrevocable and unrestricted right to realize those benefits as and when it chooses. This generally occurs at the time the assets are transferred to the Trust and not upon future sale of the assets by the trustee. Accordingly, Ricoh recognized realized gains in the consolidated statement of income on the transfer of marketable equity securities to the Trust for fiscal 2004 of Yen 2,658 million. In addition, Ricoh recognized in its fiscal 2004 consolidated statement of income a cumulative effect of accounting change, net of tax, of Yen 7,373 million associated with the 2000 Transfer. F-20 6. INVESTMENTS IN AND ADVANCES TO AFFILIATES The investments in and advances to affiliates primarily relate to 20% to 50% owned companies. Included in these companies is Coca-Cola West Japan Co., Ltd., a 21.2% owned affiliate. The common stock of this company is publicly traded. The carrying value of the investment in this company was equal to its underlying book value and amounted to Yen 36,603 million and Yen 38,214 million ($326,615 thousand) as of March 31, 2005 and 2006, respectively. The quoted market value of Ricoh's investment in this company was Yen 46,155 million ($394,487 thousand) as of March 31, 2006. Ricoh's equity in the underlying net book values of the other 20% to 50% owned companies is approximately equal to their individual carrying values of Yen 12,713 million and Yen 13,814 million ($118,068 thousand) at March 31, 2005 and 2006 respectively. Summarized financial information for all affiliates as of March 31, 2005 and 2006 and for the years ended March 31, 2004, 2005 and 2006 is as follows: Thousands of Millions of Yen U.S. Dollars --------------------- ------------ FINANCIAL POSITION 2005 2006 2006 - ---------------------------------------------------------------------------- Assets- Current assets 116,247 112,312 $ 959,932 Other assets 164,170 174,529 1,491,700 - ---------------------------------------------------------------------------- 280,417 286,841 $2,451,632 - ---------------------------------------------------------------------------- Liabilities and shareholders' investment- Current liabilities 37,426 29,084 $ 248,581 Other liabilities 18,512 20,335 173,803 Shareholders' investment 224,479 237,422 2,029,248 - ---------------------------------------------------------------------------- 280,417 286,841 $2,451,632 - ---------------------------------------------------------------------------- Thousands of Millions of Yen U.S. Dollars -------------------------------- ------------ OPERATIONS 2004 2005 2006 2006 - ---------------------------------------------------------------------------- Sales 317,512 330,362 320,537 $2,739,632 Costs and expenses 307,665 315,729 309,164 2,642,427 - ---------------------------------------------------------------------------- Net income 9,847 14,633 11,373 $ 97,205 - ---------------------------------------------------------------------------- The significant transactions of Ricoh with these affiliates for the years ended March 31, 2004, 2005 and 2006, and the related account balances at March 31, 2005 and 2006 are summarized as follows: Thousands of Millions of Yen U.S. Dollars -------------------------------- ------------ 2004 2005 2006 2006 - ---------------------------------------------------------------------------- Transactions- Sales 19,534 19,365 20,205 $172,692 Purchases 18,714 27,286 25,617 218,949 Dividend income 1,064 1,154 1,175 10,043 - ---------------------------------------------------------------------------- F-21 Unrealized profits regarding the above transactions were eliminated in the consolidated financial statements. Thousands of Millions of Yen U.S. Dollars --------------------- ------------ 2005 2006 2006 - ---------------------------------------------------------------------------- Account balances- Receivables 3,416 3,493 $ 29,855 Payables 2,964 2,706 23,128 - ---------------------------------------------------------------------------- As of March 31, 2006, consolidated retained earnings included undistributed earnings of 20% to 50% owned companies accounted for by the equity method in the amount of Yen 44,209 million ($377,855 thousand). 7. GOODWILL AND OTHER INTANGIBLE ASSETS The information for intangible assets subject to amortization and for intangible assets not subject to amortization is as follows:
Millions of Yen --------------------------------------------------------------------------------- 2005 2006 ---------------------------------------- ---------------------------------------- Gross carrying Accumulated Net carrying Gross carrying Accumulated Net carrying amount amortization amount amount amortization amount - -------------------------------------------------------------------------------------------------------------------- Other intangible assets subject to amortization: Software 58,681 (28,277) 30,404 89,331 (43,593) 45,738 Trade name and customer base 29,937 (6,877) 23,060 30,799 (11,994) 18,805 Other 18,287 (3,848) 14,439 22,074 (8,940) 13,134 --------------------------------------------------------------------------------- Total 106,905 (39,002) 67,903 142,204 (64,527) 77,677 Other intangible assets not subject to amortization 1,511 1,498 ------------ ------------ Total other intangible assets 69,414 79,175 - --------------------------------------------------------------------------------------------------------------------
Thousands of U.S. Dollars ---------------------------------------- 2006 ---------------------------------------- Gross carrying Accumulated Net carrying amount amortization amount - -------------------------------------------------------------------------------------------------------------------- Other intangible assets subject to amortization: Software $ 763,513 $(372,590) $390,923 Trade name and customer base 263,239 (102,513) 160,726 Other 188,667 (76,410) 112,257 ---------------------------------------- Total 1,215,419 (551,513) 663,906 Other intangible assets not subject to amortization 12,803 ------------ Total other intangible assets $676,709 - --------------------------------------------------------------------------------------------------------------------
Gross carrying amount of software was increased for the year ended March 31, 2006 mainly due to the capitalization of costs to develop back-office information systems. F-22 The aggregate amortization expense of other intangible assets subject to amortization for the years ended March 31, 2004, 2005 and 2006 was Yen 9,284 million, Yen 11,405 million and Yen 16,992 million ($145,231 thousand). The future amortization expense for each of the next five years relating to intangible assets currently recorded in the consolidated balance sheets is estimated to be the following at March 31, 2006: Thousands of Years ending March 31 Millions of Yen U.S. Dollars - ---------------------------------------------------------------- 2007 17,449 $149,137 2008 14,984 128,068 2009 9,361 80,009 2010 4,838 41,350 2011 2,210 18,889 - ---------------------------------------------------------------- The changes in the carrying amounts of goodwill for the year ended March 31, 2005 and 2006, were as follows: Thousands of Millions of Yen U.S. Dollars ------------------- ------------ 2005 2006 2006 - ------------------------------------------------------------------------- Balance at beginning of year 25,298 47,502 $406,000 Goodwill acquired during the year 21,722 1,783 15,239 Foreign exchange impact 482 2,649 22,641 - ------------------------------------------------------------------------- Balance at end of year 47,502 51,934 $443,880 - ------------------------------------------------------------------------- As of March 31, 2006, most of the carrying value of goodwill was allocated to the Office Solutions segment. 8. INCOME TAXES Income before income taxes, minority interests, equity in earnings of affiliates and cumulative effect of accounting change and provision for income taxes for the years ended March 31, 2004, 2005 and 2006 are as follows:
Thousands of Millions of Yen U.S. Dollars -------------------------------- ------------ 2004 2005 2006 2006 - ----------------------------------------------------------------------------------------------------- Income before income taxes, minority interests, equity in earnings of affiliates and cumulative effect of accounting change: Domestic 98,162 88,562 109,218 $ 933,487 Foreign 44,901 46,821 46,981 401,547 - ----------------------------------------------------------------------------------------------------- 143,063 135,383 156,199 $1,335,034 - ----------------------------------------------------------------------------------------------------- Provision for income taxes- Current: Domestic 38,908 28,081 43,584 $ 372,513 Foreign 14,395 11,200 17,273 147,632 - ----------------------------------------------------------------------------------------------------- 53,303 39,281 60,857 520,145 - ----------------------------------------------------------------------------------------------------- Deferred: Domestic 1,951 8,737 (780) (6,667) Foreign 1,387 2,616 (2,514) (21,487) - ----------------------------------------------------------------------------------------------------- 3,338 11,353 (3,294) (28,154) - ----------------------------------------------------------------------------------------------------- Consolidated provision for income taxes 56,641 50,634 57,563 $ 491,991 - -----------------------------------------------------------------------------------------------------
F-23 Total income taxes are allocated as follows:
Thousands of Millions of Yen U.S. Dollars ------------------------------- ------------ 2004 2005 2006 2006 - ----------------------------------------------------------------------------------------- Provision for income taxes 56,641 50,634 57,563 $491,991 Shareholders' investment: Foreign currency translation adjustments (1,334) 3,378 1,266 10,821 Unrealized gains (losses) on securities (3,617) 407 2,472 21,128 Unrealized gains (losses) on derivatives 109 97 27 231 Minimum pension liability adjustment 49,733 129 5,195 44,402 Cumulative effect of accounting change 5,722 - - - - ----------------------------------------------------------------------------------------- 107,254 54,645 66,523 $568,573 - -----------------------------------------------------------------------------------------
The Company and its domestic subsidiaries are subject to a National Corporate tax of 30%, an inhabitant tax of approximately 6% and a deductible Enterprise tax approximately 8%, which in the aggregate resulted in the normal statutory tax rate of approximately 41%. Based on an enacted change in the Japanese tax laws in March 2003, the normal statutory tax rate was reduced to approximately 41% effective April 1, 2004, and such rate has been used in calculating the future expected tax effects of temporary differences and carryforwards expected to be settled or realized on or after April 1, 2004. The normal statutory tax rate differs from the effective tax rate for the years ended March 31, 2004, 2005 and 2006 as a result of the following:
2004 2005 2006 - -------------------------------------------------------------------------------------------------------- Normal statutory tax rate 42% 41% 41% Nondeductible expenses 1 1 0 Tax benefits not recognized on operating losses of certain consolidated subsidiaries 2 1 2 Utilization of net operating loss carryforward not previously recognized (1) (2) (2) Tax credit for increased research and development expense (3) (3) (3) Effect of change in enacted tax rate 1 - - Other, net (2) (1) (1) - -------------------------------------------------------------------------------------------------------- Effective tax rate 40% 37% 37% - --------------------------------------------------------------------------------------------------------
Nondeductible expenses include directors' bonuses and entertainment expenses. The tax effects of temporary differences and carryforwards giving rise to the consolidated deferred income tax assets and liabilities as of March 31, 2005 and 2006 are as follows:
Thousands of Millions of Yen U.S. Dollars ----------------------- ------------ 2005 2006 2006 - ------------------------------------------------------------------------------------------------------ Assets: Accrued expenses 20,717 21,417 $183,051 Property, plant and equipment 3,458 3,014 25,761 Accrued pension and severance costs 33,781 30,888 264,000 Net operating loss carryforwards 5,993 4,941 42,231 Other 27,400 29,601 253,000 - ------------------------------------------------------------------------------------------------------ 91,349 89,861 768,043 Less- Valuation allowance (7,079) (8,197) (70,060) - ------------------------------------------------------------------------------------------------------ 84,270 81,664 $697,983 - ------------------------------------------------------------------------------------------------------
F-24
Thousands of Millions of Yen U.S. Dollars ----------------------- ------------ 2005 2006 2006 - ------------------------------------------------------------------------------------------------------ Liabilities: Sales-type leases (6,548) (6,460) $ (55,214) Undistributed earnings of foreign subsidiaries and affiliates (17,092) (18,618) (159,128) Net unrealized holding gains on available-for-sale securities (4,592) (6,613) (56,521) Basis difference of acquired intangible assets (11,482) (9,372) (80,103) Other (13,765) (13,498) (115,367) - ------------------------------------------------------------------------------------------------------ (53,479) (54,561) $(466,333) - ------------------------------------------------------------------------------------------------------ Net deferred tax assets 30,791 27,103 $ 231,650 - ------------------------------------------------------------------------------------------------------
Net deferred tax assets as of March 31, 2005 and 2006 are included in the consolidated balance sheets as follows:
Thousands of Millions of Yen U.S. Dollars ----------------------- ------------ 2005 2006 2006 - ------------------------------------------------------------------------------------------------------ Deferred income taxes and other (Current Assets) 37,812 40,632 $ 347,282 Lease deposits and other (Non-current Assets) 42,393 38,053 325,239 Accrued expenses and other (Current Liabilities) (647) (208) (1,777) Deferred income taxes (Long-Term Liabilities) (48,767) (51,374) (439,094) - ------------------------------------------------------------------------------------------------------ 30,791 27,103 $ 231,650 - ------------------------------------------------------------------------------------------------------
The net changes in the total valuation allowance for the years ended March 31, 2004 and 2005 were a decrease of Yen 183 million and Yen 1,931 million respectively, and an increase of Yen 1,118 million ($9,556 thousand) for the year ended March 31, 2006. As a result of recording of operating losses in the past, certain subsidiaries of Ricoh have had valuation allowances against deferred tax assets for local taxes. However, based on both improved operating results in recent years and a sound outlook for the future operating performance of these subsidiaries, Ricoh reversed Yen 2,959 million ($25,291 thousand) of valuation allowance, resulting in a reduction of income tax expenses for the year ended March 31, 2006. The valuation allowance primarily relates to deferred tax assets of the consolidated subsidiaries with net operating loss carryforwards for tax purposes that are not expected to be realized. In assessing the realizability of deferred tax assets, Ricoh considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible and whether loss carryforwards are utilizable. Ricoh considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. Based upon the level of historical taxable income and projections for future taxable income over the periods in which the deferred tax assets are deductible, Ricoh believes it is more likely than not that the benefits of these deductible differences, net of the existing valuation allowance will be realized. The amount of the deferred tax asset considered realizable, however, would be reduced if estimates of future taxable income during the carryforward period are reduced. As of March 31, 2006, certain subsidiaries had net operating losses carried forward for income tax purposes of approximately Yen 15,337 million ($131,085 thousand) which were available to reduce future income taxes, if any. Approximately Yen 543 million ($4,641 thousand) of the operating losses will expire within 3 years and Yen 5,756 million ($49,197 thousand) will expire within 4 to 7 years. The remainder principally have an indefinite carryforward period. F-25 The Company has not recognized a deferred tax liability for certain portion of the undistributed earnings of its foreign subsidiaries of Yen 189,779 million ($1,622,043 thousand) as of March 31, 2006 because the Company considers these earnings to be permanently reinvested. Calculation of related unrecognized deferred tax liability is not practicable. 9. SHORT-TERM BORROWINGS Short-term borrowings as of March 31, 2005 and 2006 consist of the following:
Weighted average Thousands of interest rate Millions of Yen U.S. Dollars ---------------- --------------------- ------------ 2005 2006 2005 2006 2006 - --------------------------------------------------------------------------------------------- Borrowings, principally from banks 3.5% 3.8% 8,641 16,056 $137,231 Commercial paper 2.9 3.1 30,069 66,464 568,068 - --------------------------------------------------------------------------------------------- 38,710 82,520 $705,299 - ---------------------------------------------------------------------------------------------
These short-term borrowings included borrowings, principally from banks and commercial paper denominated in foreign currencies amounting to Yen 37,710 million and Yen 55,212 million ($471,897 thousand) as of March 31, 2005 and 2006, respectively. The Company and certain of its subsidiaries enter into the contracts with financial institutions regarding lines of credit and overdrawing. Those same financial institutions hold the issuing programs of commercial paper and medium-term notes. Ricoh had aggregate lines of credit of Yen 822,103 million and Yen 801,630 million ($6,851,538 thousand) as of March 31, 2005 and 2006, respectively. Unused lines of credit amounted to Yen 689,993 million and Yen 703,949 million ($6,016,658 thousand) as of March 31, 2005 and 2006, respectively, of which Yen 219,291 million and Yen 252,843 million ($2,161,051 thousand) related to commercial paper and Yen 128,346 million and Yen 154,458 million ($1,320,154 thousand) related to medium-term notes programs at prevailing interest rates and the unused portion is available for immediate borrowings. 10. LONG-TERM INDEBTEDNESS Long-term indebtedness as of March 31, 2005 and 2006 consists of the followings:
Thousands of Millions of Yen U.S. Dollars ------------------------ ------------ 2005 2006 2006 - ------------------------------------------------------------------------------------------------------------- Bonds- 2.075%, straight bonds, payable in yen, due April 2005 40,000 - $ - 0.87%, straight bonds, payable in yen, due March 2007 35,000 35,000 299,146 1.34%, straight bonds, payable in yen, due March 2009 25,000 25,000 213,675 0.73%, straight bonds, payable in yen, due June 2006 issued by a consolidated subsidiary 10,000 10,000 85,470 0.70%, straight bonds, payable in yen, due June 2007 issued by a consolidated subsidiary 10,000 10,000 85,470 2.10%, straight bonds, payable in yen, due October 2009 issued by a consolidated subsidiary 10,000 10,000 85,470 1.11%, straight bonds, payable in yen, due March 2010 issued by a consolidated subsidiary - 10,000 85,470 Medium-term notes, 0.17% weighted average, due through 2015 issued by a consolidated subsidiary 22,000 10,000 85,470 - ------------------------------------------------------------------------------------------------------------- Total bonds 152,000 110,000 940,171 - -------------------------------------------------------------------------------------------------------------
F-26
Thousands of Millions of Yen U.S. Dollars ------------------------- ------------ 2005 2006 2006 - ------------------------------------------------------------------------------------------------------------- Unsecured loans- Banks and insurance companies, 1.43% weighted average, due through 2009 212,416 183,956 1,572,273 - ------------------------------------------------------------------------------------------------------------- Secured loans- Banks, insurance companies and other financial institution, 1.02% weighted average, due through 2013 1,133 795 6,795 - ------------------------------------------------------------------------------------------------------------- Capital lease obligations (see Note 2(j)) 3,804 3,453 29,513 - ------------------------------------------------------------------------------------------------------------- Total 369,353 298,204 2,548,752 SFAS 133 fair value adjustment 2,022 553 4,727 Less- Current maturities included in current liabilities (144,808) (103,131) (881,462) - ------------------------------------------------------------------------------------------------------------- 226,567 195,626 $1,672,017 - -------------------------------------------------------------------------------------------------------------
Secured loans are collateralized by land, buildings and lease receivables with a book value of Yen3,167 million ($27,068 thousand) as of March 31, 2006. All bonds outstanding as of March 31, 2006 are redeemable at the option of Ricoh at 100% of the principal amounts under certain conditions as provided in the applicable agreements. Bonds are subject to certain covenants such as restrictions on certain additional secured indebtedness, as defined in the agreements. Ricoh presently is in compliance with such covenants as of March 31, 2006. Certain loan agreements provide, among other things, that the lender may request the Company to submit proposals for appropriations of earnings (including payment of dividends) to the lender for its review and approval prior to presentation to the shareholders. The Company has never been requested to submit such proposals for approval. In addition, as is customary in Japan, substantially all of the bank borrowings are subject to general agreements with each bank which provide, among other things, that the banks may request additional security for these loans if there is reasonable and probable cause and may treat any security furnished to the banks as well as cash deposited as security for all present and future indebtedness. The Company has never been requested to submit such additional security. The aggregate annual maturities of long-term indebtedness subsequent to March 31, 2006 are as follows: Thousands of Years ending March 31 Millions of Yen U.S. Dollars - ----------------------------------------------------------- 2007 103,125 $ 881,410 2008 79,173 676,692 2009 59,144 505,504 2010 46,868 400,581 2011 8,189 69,992 2012 and thereafter 1,705 14,573 - ----------------------------------------------------------- Total 298,204 $2,548,752 - ----------------------------------------------------------- F-27 11. PENSION AND RETIREMENT ALLOWANCE PLANS The Company and certain of its subsidiaries have various contributory and noncontributory employees' pension fund plans in trust 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. Contributions to above pension plans have been made to provide future pension payments in conformity with an actuarial calculation determined by the current basic rate of pay. Under the terms of the domestic employee's pension fund ("EPF") plan, the government mandated welfare pension insurance benefit was included and commingled with the primary corporate benefit provided by Ricoh. These contributory and non contributory plans were funded in conformity with governmental regulations which basically require an employer to contribute the unfunded benefit over 20 years. As noted above, the domestic EPF plan was composed of (1) a corporate defined benefit portion established by Ricoh and (2) a substitutional portion based on benefits prescribed by the government (similar to social security benefits in the United States). Ricoh had been exempted from contributing to the Japanese Pension Insurance ("JPI") program that would otherwise have been required if it had not elected to fund the government substitutional portion of the benefit through an EPF arrangement. The plan assets of the EPF were invested and managed as a single portfolio for the entire EPF and were not separately attributed to the substitutional and corporate portions. In June 2001, Contributed Benefit Pension Plan Law was newly enacted and permits an employer to elect to transfer the entire substitutional portion benefit obligation from the EPF 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 JPI, and the Japanese government would be responsible for all benefit payments. The corporate portion of the EPF would continue to exist exclusively as a corporate defined benefit pension plan. Pursuant to the new law, Ricoh received an approval of exemption from the Minister of Health, Labor and Welfare, effective January 1, 2003, from the obligation for benefits related to future employee service with respect to the substitutional portion of its EPF. Ricoh received government approval of exemption from the obligation for benefits related to past employee service in January 2004 with respect to the substitutional portion of its domestic contributory plan. The transfer to the government was completed on March 16, 2004. Ricoh accounted for the transfer in accordance with EITF Issue No. 03-2 "Accounting for the Transfer to the Japanese Government of the Substitutional Portion of Employee Pension Fund Liabilities" ("EITF 03-2"). As specified in EITF 03-2, the entire separation process is to be accounted for at the time of completion of the transfer to the government of the substitutional portion 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". As a result of the transfer, Ricoh recognized as a subsidy from the Japanese government an amount 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. The subsidy that Ricoh recognized amounted to Yen 56,972 million. In addition, Ricoh recognized as a settlement loss equal to the amount calculated as the ratio of the obligation settled to the total EPF 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 Yen 48,657 million. These gains and losses were included in operating income. F-28 In addition to the EPF plan, the Company had maintained a defined benefit plan for certain qualified employees. Effective January 1, 2004, the Company liquidated this plan and recorded a settlement loss of Yen 5,958 million which was included in selling, general and administrative expenses in its fiscal 2004 consolidated statement of income. The changes in the benefit obligation and plan assets of the pension plans for the years ended March 31, 2005 and 2006 are as follows:
Thousands of Millions of Yen U.S. Dollars ------------------------ ------------ 2005 2006 2006 - ------------------------------------------------------------------------------------------------------------- Change in benefit obligation: Benefit obligation at beginning of year 313,426 343,623 $2,936,949 Service cost 14,762 14,691 125,564 Interest cost 9,218 10,192 87,111 Plan participants' contributions 457 517 4,419 Amendments (91) - - Actuarial loss 2,697 10,437 89,205 Settlement (4,316) (654) (5,590) Benefits paid (19,818) (14,408) (123,145) Foreign exchange impact 3,572 4,415 37,735 Benefit obligation assumed in connection with business acquisition 23,716 - - - ------------------------------------------------------------------------------------------------------------- Benefit obligation at end of year 343,623 368,813 $3,152,248 - ------------------------------------------------------------------------------------------------------------- Change in plan assets: Fair value of plan assets at beginning of year 213,315 237,500 $2,029,915 Actual return on plan assets 9,401 49,560 423,590 Employer contribution 12,359 13,853 118,402 Plan participants' contributions 457 517 4,419 Settlement (3,192) - - Benefits paid (13,534) (9,855) (84,231) Foreign exchange impact 2,783 3,361 28,726 Plan assets acquired in connection with business acquisition 15,911 - - - ------------------------------------------------------------------------------------------------------------- Fair value of plan assets at end of year 237,500 294,936 $2,520,821 - ------------------------------------------------------------------------------------------------------------- Funded status (106,123) (73,877) $ (631,427) Unrecognized net actuarial loss 102,851 64,714 553,111 Unrecognized prior service cost (57,134) (54,212) (463,350) Unrecognized net asset at transition, net of amortization (984) (533) (4,556) - ------------------------------------------------------------------------------------------------------------- Net amount recognized (61,390) (63,908) $ (546,222) - ------------------------------------------------------------------------------------------------------------- Amounts recognized in the balance sheets consist of: Prepaid benefit cost 4,685 18,170 $ 155,299 Accrued benefit liability (91,022) (94,765) (809,957) Intangible assets 111 55 470 Accumulated other comprehensive income, gross of tax 24,836 12,632 107,966 - ------------------------------------------------------------------------------------------------------------- Net amount recognized (61,390) (63,908) $ (546,222) - ------------------------------------------------------------------------------------------------------------- Accumulated benefit obligations 313,715 354,060 $3,026,154 - -------------------------------------------------------------------------------------------------------------
F-29 Weighted-average assumptions used to determine benefit obligations at March 31, 2005 and 2006 were as follows: 2005 2006 - --------------------------------------------------------------- Discount rate 3.0% 2.8% Rate of compensation increase 5.0% 5.4% - --------------------------------------------------------------- Weighted-average assumptions used to determine the net periodic benefit cost for the years ended March 31, 2004, 2005 and 2006 were as follows: 2004 2005 2006 - --------------------------------------------------------------- Discount rate 2.6% 2.9% 3.0% Rate of compensation increase 3.4% 5.3% 5.0% Expected long-term return on plan assets 2.5% 2.9% 3.2% - --------------------------------------------------------------- The net periodic benefit costs of the pension plans for the three years ended March 31, 2006 consisted of the following components:
Thousands of Millions of Yen U.S. Dollars -------------------------------- ------------ 2004 2005 2006 2006 - ------------------------------------------------------------------------------ Service cost 15,694 14,762 14,691 $125,564 Interest cost 12,719 9,218 10,192 87,111 Expected return on plan assets (5,872) (6,571) (7,645) (65,342) Net amortization 10,805 1,648 1,833 15,667 Settlement benefit (2,537) (980) (140) (1,197) - ------------------------------------------------------------------------------ Total net periodic pension cost 30,809 18,077 18,931 $161,803 - ------------------------------------------------------------------------------
In accordance with the provisions of SFAS 87, Ricoh has recorded an adjustment for minimum pension liability at March 31, 2005 and 2006. This liability represents the excess of the accumulated benefit obligations over the fair value of plan assets and severance costs already recognized before recording the minimum pension liability. This excess is primarily attributable to a substantial reduction in the discount rate used in pension calculation and loss on plan assets. A corresponding amount was recognized as an intangible asset to the extent of the unrecognized prior service cost, and the balance was recorded as a component of accumulated other comprehensive income (loss), net of tax. The projected benefit obligations and the fair value of plan assets for the pension plans with projected benefit obligations in excess of plan assets, and the accumulated benefit obligations and the fair value of plan assets for the pension plans with accumulated benefit obligations in excess of plan assets are as follows:
Thousands of Millions of Yen U.S. Dollars --------------------- ------------ 2005 2006 2006 - ------------------------------------------------------------------------------------------------------- Plans with projected benefit obligations in excess of plan assets: Projected benefit obligations 338,201 222,095 $1,898,248 Fair value of plan assets 235,161 129,327 1,105,359 Plans with accumulated benefit obligations in excess of plan assets: Accumulated benefit obligations 281,411 190,144 $1,625,162 Fair value of plan assets 216,249 118,214 1,010,376 - -------------------------------------------------------------------------------------------------------
F-30 Ricoh's benefit plan asset allocation at March 31, 2005 and 2006 are as follows: 2005 2006 - ---------------------------------------------------------------- Equity securities 48.5% 51.7% Debt securities 27.1% 21.1% Life insurance company general accounts 14.8% 20.5% Other 9.6% 6.7% - ---------------------------------------------------------------- Total 100.0% 100.0% - ---------------------------------------------------------------- As discussed in Note 5, Ricoh contributed certain marketable equity securities to an employee retirement benefit trust. The securities held in this trust are qualified as plan assets under SFAS 87. Common stock and bonds of the Company and certain of its domestic subsidiaries included in plan assets were immaterial at March 31, 2005 and 2006. Ricoh's investment policies and strategies for the pension benefits do not use target allocations for the individual asset categories. Ricoh's investment goals are to maximize returns subject to specific risk management policies. Its risk management policies permit investments in mutual funds and debt and equity securities and prohibit direct investment in derivative financial instruments. Ricoh addresses diversification by the use of mutual fund investments whose underlying investments are in domestic and international fixed income securities and domestic and international equity securities. These mutual funds are readily marketable and can be sold to fund benefit payment obligations as they become payable. Ricoh uses a December 31 measurement date for the pension plans. Ricoh expects to contribute Yen 13,080 million ($111,795 thousand) to its pension plans for the year ending March 31, 2007. The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid: Thousands of Years ending March 31 Millions of Yen U.S. Dollars - ----------------------------------------------------- 2007 15,162 $129,590 2008 17,613 150,538 2009 18,622 159,162 2010 19,594 167,470 2011 18,856 161,162 2012- 2016 96,302 823,094 - ----------------------------------------------------- Employees of certain domestic subsidiaries not covered by the EPF plan and directors of the Company are primarily covered by unfunded retirement allowances plans. The payments to directors are subject to shareholders' approval. 12. SHAREHOLDERS' INVESTMENT The Japanese Commercial Code provides that an amount equal to at least 10% of cash dividends and other distributions from retained earnings paid by the Company and its domestic subsidiaries be appropriated as a legal reserve. No further appropriation is required when the total amount of the legal reserve and additional paid-in capital equals 25% of common stock. The Japanese Commercial Code also provides that to the F-31 extent that the sum of the additional paid-in capital and the legal reserve exceeds 25% of the stated capital, the amount of the excess (if any) is available for appropriations by the resolution of the shareholders. Certain foreign subsidiaries are also required to appropriate their earnings to legal reserves under the laws of the respective countries. Legal reserves included in retained earnings as of March 31, 2005 and 2006 were Yen 17,053 million and Yen 17,156 million ($146,632 thousand), respectively, and are restricted from being used as dividends. The Corporation Law of Japan ("the Law"), which has been in force since May 1, 2006, requires a company to obtain the approval of shareholders for transferring on amount between capital and additional paid-in capital. The Law also permits a company to transfer an amount of common stock or additional paid-in capital to retained earnings in principle upon approval of shareholders. Semiannual cash dividends are approved by the shareholders after the end of each fiscal period or are declared by the Board of Directors after the end of each interim six-month period. Such dividends are payable to shareholders of record at the end of each such fiscal or interim six-month period. At the general meeting to be held on June 28, 2006, the shareholders will be asked to approve the declaration of a cash dividend (Yen 12 per share) on the common stock totaling Yen 8,764 million ($74,906 thousand), which will be paid to shareholders of record as of March 31, 2006. The declaration of this dividend has not been reflected in the consolidated financial statements as of March 31, 2006. The amount of retained earnings legally available for dividend distribution is that recorded in the Company's non-consolidated books and amounted to Yen 354,858 million ($3,032,974 thousand) as of March 31, 2006. 13. OTHER COMPREHENSIVE INCOME (LOSS) Tax effects allocated to each component of other comprehensive income (loss) are as follows:
Millions of Yen ---------------------------------- Before-tax Tax Net-of-tax amount expense amount - ------------------------------------------------------------------------------------------------------------------- 2004: Foreign currency translation adjustments (6,727) 1,334 (5,393) Unrealized gains (losses) on securities: Cumulative effect of accounting change (13,095) 5,722 (7,373) Unrealized holding gains (losses) arising during the year 7,688 (3,227) 4,461 Less- Reclassification adjustment for (gains) losses realized in net income (2,766) 1,122 (1,644) Net unrealized gains (losses) (8,173) 3,617 (4,556) Unrealized gains (losses) on derivatives: Unrealized holding gains (losses) arising during the year (105) 42 (63) Less- Reclassification adjustment for (gains) losses realized in net income 368 (151) 217 Net unrealized gains (losses) 263 (109) 154 Minimum pension liability adjustment 123,989 (49,733) 74,256 - ------------------------------------------------------------------------------------------------------------------- Other comprehensive income (loss) 109,352 (44,891) 64,461 - -------------------------------------------------------------------------------------------------------------------
F-32
Millions of Yen ---------------------------------- Before-tax Tax Net-of-tax amount expense amount - ------------------------------------------------------------------------------------------------------------------- 2005: Foreign currency translation adjustments 12,419 (3,378) 9,041 Unrealized gains (losses) on securities: Unrealized holding gains (losses) arising during the year 1,024 (347) 677 Less- Reclassification adjustment for (gains) losses realized in net income 148 (60) 88 Net unrealized gains (losses) 1,172 (407) 765 Unrealized gains (losses) on derivatives: Unrealized holding gains (losses) arising during the year 45 (17) 28 Less- Reclassification adjustment for (gains) losses realized in net income 193 (80) 113 Net unrealized gains (losses) 238 (97) 141 Minimum pension liability adjustment 156 (129) 27 - ------------------------------------------------------------------------------------------------------------------- Other comprehensive income (loss) 13,985 (4,011) 9,974 - ------------------------------------------------------------------------------------------------------------------- 2006: Foreign currency translation adjustments 16,142 (1,266) 14,876 Unrealized gains (losses) on securities: Unrealized holding gains (losses) arising during the year 8,662 (3,308) 5,354 Less- Reclassification adjustment for (gains) losses realized in net income (2,053) 836 (1,217) Net unrealized gains (losses) 6,609 (2,472) 4,137 Unrealized gains (losses) on derivatives: Unrealized holding gains (losses) arising during the year (527) 216 (311) Less- Reclassification adjustment for (gains) losses realized in net income 594 (243) 351 Net unrealized gains (losses) 67 (27) 40 Minimum pension liability adjustment 12,204 (5,195) 7,009 - ------------------------------------------------------------------------------------------------------------------- Other comprehensive income (loss) 35,022 (8,960) 26,062 - ------------------------------------------------------------------------------------------------------------------- Thousands of U.S. Dollars ---------------------------------- 2006: Foreign currency translation adjustments $137,966 $(10,821) $127,145 Unrealized gains (losses) on securities: Unrealized holding gains (losses) arising during the year 74,034 (28,273) 45,761 Less- Reclassification adjustment for (gains) losses realized in net income (17,547) 7,145 (10,402) Net unrealized gains (losses) 56,487 (21,128) 35,359 Unrealized gains (losses) on derivatives: Unrealized holding gains (losses) arising during the year (4,504) 1,846 (2,658) Less- Reclassification adjustment for (gains) losses realized in net income 5,076 (2,076) 3,000 Net unrealized gains (losses) 572 (230) 342 Minimum pension liability adjustment 104,308 (44,402) 59,906 - ------------------------------------------------------------------------------------------------------------------- Other comprehensive income (loss) $299,333 $(76,581) $222,752 - -------------------------------------------------------------------------------------------------------------------
F-33 Changes in accumulated other comprehensive income (loss) are as follows:
Millions of Yen -------------------------------------------------------------------------- Total Foreign Accumulated currency Unrealized Unrealized Minimum other translation gains (losses) gains (losses) pension liability comprehensive adjustments on securities on derivatives adjustment income (loss) - ------------------------------------------------------------------------------------------------------------------- 2004: Beginning balance (14,018) 8,582 (178) (89,119) (94,733) Cumulative effect of accounting change - (7,373) - - (7,373) Change during the year (5,393) 2,817 154 74,256 71,834 - ------------------------------------------------------------------------------------------------------------------- Ending balance (19,411) 4,026 (24) (14,863) (30,272) - ------------------------------------------------------------------------------------------------------------------- 2005: Beginning balance (19,411) 4,026 (24) (14,863) (30,272) Adjustment for change in fiscal year end of consolidated subsidiaries (1,849) - - 184 (1,665) Change during the year 9,041 765 141 27 9,974 - ------------------------------------------------------------------------------------------------------------------- Ending balance (12,219) 4,791 117 (14,652) (21,963) - ------------------------------------------------------------------------------------------------------------------- 2006: Beginning balance (12,219) 4,791 117 (14,652) (21,963) Change during the year 14,876 4,137 40 7,009 26,062 - ------------------------------------------------------------------------------------------------------------------- Ending balance 2,657 8,928 157 (7,643) 4,099 - ------------------------------------------------------------------------------------------------------------------- Thousands of U.S. Dollars -------------------------------------------------------------------------- 2006: Beginning balance $(104,436) $40,949 $1,000 $(125,231) $(187,718) Change during the year 127,145 35,359 342 59,906 222,752 - ------------------------------------------------------------------------------------------------------------------- Ending balance $ 22,709 $76,308 $1,342 $ (65,325) $ 35,034 - -------------------------------------------------------------------------------------------------------------------
14. DERIVATIVE FINANCIAL INSTRUMENTS RISK MANAGEMENT POLICY Ricoh enters into various derivative financial instrument contracts in the normal course of business in connection with the management of its assets and liabilities. Ricoh uses derivative instruments to reduce risk and protect market value of assets and liabilities in conformity with the Ricoh's policy. Ricoh does not use derivative financial instruments for trading or speculative purposes, nor is it a party to leveraged derivatives. All derivative instruments are exposed to credit risk arising from the inability of counterparties to meet the terms of the derivative contracts. However, Ricoh does not expect any counterparties to fail to meet their obligations because these counterparties are financial institutions with satisfactory credit ratings. Ricoh utilizes a number of counterparties to minimize the concentration of credit risk. F-34 FOREIGN EXCHANGE RISK MANAGEMENT Ricoh conducts business on a global basis and holds assets and liabilities denominated in foreign currencies. Ricoh enters into foreign exchange contracts and foreign currency options to hedge against the potentially adverse impacts of foreign currency fluctuations on those assets and liabilities denominated in foreign currencies. INTEREST RATE RISK MANAGEMENT Ricoh enters into interest rate swap agreements to hedge against the potential adverse impacts of changes in fair value or cash flow fluctuations on interest of its outstanding debt. FAIR VALUE HEDGES Changes in the fair value of derivative instruments and the related hedged items designated and qualifying as fair value hedges are included in other (income) expenses on the consolidated statements of income. There is no hedging ineffectiveness nor are net gains or losses excluded from the assessment of hedge effectiveness for the years ended March 31, 2004, 2005 and 2006 as the critical terms of the interest rate swap match the terms of the hedged debt obligations. CASH FLOW HEDGES Changes in the fair value of derivative instruments designated and qualifying as cash flow hedges are included in accumulated other comprehensive income (loss) on the consolidated balance sheets. These amounts are reclassified into earnings as interest on the hedged loans is paid. There is no hedging ineffectiveness nor are net gains or losses excluded from the assessment of hedge effectiveness for the years ended March 31, 2004, 2005 and 2006 as the critical terms of the interest rate swap match the terms of the hedged debt obligations. Ricoh expects that it will reclassify into earnings through other (income) expenses during the next 12 months approximately Yen 82 million ($701 thousand) of the balance of accumulated other comprehensive income as of March 31, 2006. UNDESIGNATED DERIVATIVE INSTRUMENTS Derivative instruments not designated as hedging instruments are held to reduce the risk relating to the variability in exchange rates on assets and liabilities denominated in foreign currencies. Changes in the fair value of these instruments are included in other (income) expenses on the consolidated statement of income. 15. COMMITMENTS AND CONTINGENT LIABILITIES As of March 31, 2006, Ricoh had outstanding contractual commitments for acquisition or construction of plant, equipment and other assets aggregating Yen 2,774 million ($23,709 thousand). As of March 31, 2006, Ricoh was also contingently liable for certain guarantees including employees housing loans of Yen 1,193 million ($10,197 thousand). Ricoh made rental payments totaling Yen 40,339 million, Yen 39,000 million and Yen 42,046 million ($359,368 thousand) for the years ended March 31, 2004, 2005 and 2006, respectively, under cancelable and non-cancelable operating lease agreements for office space and machinery and equipment. The minimum rental payments required under operating lease that have lease terms in excess of one year as of March 31, 2006 are as follows; F-35 Thousands of Years ending March 31 Millions of Yen U.S. Dollars - ------------------------------------------------------------ 2007 14,693 $125,581 2008 12,804 109,436 2009 10,100 86,325 2010 6,350 54,274 2011 4,114 35,162 2012 and thereafter 9,855 84,231 - ------------------------------------------------------------ Total 57,916 $495,009 - ------------------------------------------------------------ As of March 31, 2006, the Company and certain of its subsidiaries were parties to litigation involving routine matters, such as patent rights. In the opinion of management, the ultimate liability, if any, resulting from such litigation will not materially affect the consolidated financial position or the results of operations of Ricoh. 16. DISCLOSURES ABOUT THE FAIR VALUE OF FINANCIAL INSTRUMENTS (A) CASH AND CASH EQUIVALENTS, TIME DEPOSITS, TRADE RECEIVABLES, SHORT-TERM BORROWINGS, CURRENT MATURITIES OF LONG-TERM INDEBTEDNESS, TRADE PAYABLES AND ACCRUED EXPENSES The carrying amounts approximate fair values because of the short maturities of these instruments. (B) MARKETABLE SECURITIES AND INVESTMENT SECURITIES The fair value of the marketable securities and investment securities is principally based on quoted market price. (C) INSTALLMENT LOANS The fair value of installment loans is based on the present value of future cash flows using the current rate for similar instruments of comparable maturity. (D) LONG-TERM INDEBTEDNESS The fair value of each of the long-term indebtedness instruments is based on the quoted price in the most active market or the present value of future cash flows associated with each instrument discounted using the current borrowing rate for similar instruments of comparable maturity. (E) INTEREST RATE SWAP AGREEMENTS The fair value of interest rate swap agreements is estimated by obtaining quotes from brokers. (F) FOREIGN CURRENCY CONTRACTS AND FOREIGN CURRENCY OPTIONS The fair value of foreign currency contracts and foreign currency options is estimated by obtaining quotes from brokers. The estimated fair value of the financial instruments as of March 31, 2005 and 2006 is summarized as follows: F-36
Millions of Yen Thousands of U.S. Dollars -------------------------------------------------- ------------------------- 2005 2006 2006 ------------------------ ------------------------ ------------------------- Carrying Estimated Carrying Estimated Carrying Estimated Amount Fair Value Amount Fair Value Amount Fair Value - ------------------------------------------------------------------------------------------------------------- Marketable securities and Investment securities 31,292 31,292 36,581 36,581 $ 312,658 $ 312,658 Installment loans 50,131 50,292 52,295 52,404 446,966 447,897 Long-term indebtedness (226,567) (228,839) (195,626) (195,731) (1,672,017) (1,672,915) Interest rate swap agreements, net 1,683 1,683 1,175 1,175 10,043 10,043 Foreign currency contracts, net 181 181 (1,147) (1,147) (9,803) (9,803) Foreign currency options, net (813) (813) (270) (270) (2,308) (2,308) - -------------------------------------------------------------------------------------------------------------
Limitations Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates. 17. SEGMENT INFORMATION The operating segments presented below are the segments of Ricoh for which separate financial information is available and for which a measure of profit or loss is evaluated regularly by Ricoh's management in deciding how to allocate resources and in assessing performance. The accounting policies of the segments are substantially the same as those described in the summary of significant accounting policies, as discussed in Note 2. Ricoh's operating segments are comprised of Office Solutions, including copiers and related supplies, communications and information systems, Industrial Products, including thermal media and semiconductors, and Other, including optical discs and digital cameras. In connection with the adoption of the 15th medium-term management plan on April 1, 2005, Ricoh revised its business segments for the year ended March 31, 2006. Presentation of business segments for each of the years ended March 31, 2004 and 2005 have also been revised to conform to current presentation. The following tables present certain information regarding Ricoh's operating segments and operations by geographic areas for the years ended March 31, 2004, 2005 and 2006. F-37 (A) OPERATING SEGMENT INFORMATION
Thousands of Millions of Yen U.S. Dollars ---------------------------------------- ------------ 2004 2005 2006 2006 - ------------------------------------------------------------------------------------------------------------- Sales- Office Solutions 1,460,395 1,531,428 1,637,228 $13,993,402 Industrial Products 113,854 121,914 123,200 1,052,991 Other 208,458 163,272 157,226 1,343,812 Intersegment transaction (2,462) (2,506) (2,564) (21,914) - ------------------------------------------------------------------------------------------------------------- Consolidated 1,780,245 1,814,108 1,915,090 $16,368,291 - ------------------------------------------------------------------------------------------------------------- Operating Expenses- Office Solutions 1,261,444 1,335,059 1,434,279 $12,258,795 Industrial Products 110,743 121,872 124,108 1,060,752 Other 201,508 167,431 151,114 1,291,573 Intersegment transaction (2,494) (2,475) (2,594) (22,171) Unallocated expense 59,038 56,715 56,169 480,077 - ------------------------------------------------------------------------------------------------------------- Consolidated 1,630,239 1,678,602 1,763,076 $15,069,026 - ------------------------------------------------------------------------------------------------------------- Operating Income- Office Solutions 198,951 196,369 202,949 $ 1,734,607 Industrial Products 3,111 42 (908) (7,761) Other 6,950 (4,159) 6,112 52,239 Elimination and unallocated expense (59,006) (56,746) (56,139) (479,820) - ------------------------------------------------------------------------------------------------------------- Consolidated 150,006 135,506 152,014 $ 1,299,265 - ------------------------------------------------------------------------------------------------------------- Other Income(Expenses) (6,943) (123) 4,185 $ 35,769 - ------------------------------------------------------------------------------------------------------------- Income before Income Taxes, Minority Interests, Equity in Earnings of Affiliates and Cumulative Effect of Accounting Change 143,063 135,383 156,199 $ 1,335,034 - ------------------------------------------------------------------------------------------------------------- Thousands of Millions of Yen U.S. Dollars ---------------------------------------- ------------ 2004 2005 2006 2006 - ------------------------------------------------------------------------------------------------------------- Total Assets- Office Solutions 1,184,913 1,358,136 1,426,635 $12,193,462 Industrial Products 76,295 72,406 84,595 723,034 Other 142,071 125,278 114,925 982,265 Elimination (8,047) (10,174) (2,088) (17,846) Corporate assets 457,561 408,023 417,116 3,565,094 - ------------------------------------------------------------------------------------------------------------- Consolidated 1,852,793 1,953,669 2,041,183 $17,446,009 - ------------------------------------------------------------------------------------------------------------- Expenditure for segment assets- Office Solutions 60,893 70,638 90,383 $ 772,504 Industrial Products 7,742 8,509 7,451 63,684 Other 5,443 3,451 2,366 20,222 Corporate assets 1,429 2,103 1,854 15,846 - ------------------------------------------------------------------------------------------------------------- Consolidated 75,507 84,701 102,054 $ 872,256 - -------------------------------------------------------------------------------------------------------------
F-38
Thousands of Millions of Yen U.S. Dollars ---------------------------------------- ------------ 2004 2005 2006 2006 - ------------------------------------------------------------------------------------------------------------- Depreciation- Office Solutions 55,521 53,439 57,326 $ 489,966 Industrial Products 7,134 7,450 6,631 56,675 Other 3,075 2,635 2,355 20,128 Corporate assets 1,954 3,272 1,156 9,881 - ------------------------------------------------------------------------------------------------------------- Consolidated 67,684 66,796 67,468 $ 576,650 - -------------------------------------------------------------------------------------------------------------
Unallocated expense represents expenses for corporate headquarters. Intersegment sales are not separated by operating segment because they are immaterial. Corporate assets consist primarily of cash and cash equivalents and marketable securities maintained for general corporate purposes. (B) GEOGRAPHIC INFORMATION Sales which are attributed to countries based on location of customers and long-lived assets by location for the years ended March 31, 2004, 2005 and 2006 are as follows:
Thousands of Millions of Yen U.S. Dollars -------------------------------------- ------------ 2004 2005 2006 2006 - ----------------------------------------------------------------------------------- Sales- Japan 914,060 972,975 972,076 $ 8,308,342 The Americas 326,380 325,597 387,412 3,311,214 Europe 402,392 408,906 434,800 3,716,239 Other 137,413 106,630 120,802 1,032,496 - ----------------------------------------------------------------------------------- Consolidated 1,780,245 1,814,108 1,915,090 $16,368,291 - ----------------------------------------------------------------------------------- Property, Plant and Equipment - Japan 183,763 195,052 210,973 $ 1,803,188 The Americas 20,198 17,744 18,111 154,795 Europe 26,020 25,352 26,783 228,915 Other 8,731 9,262 12,376 105,777 - ----------------------------------------------------------------------------------- Consolidated 238,712 247,410 268,243 $ 2,292,675 - -----------------------------------------------------------------------------------
(C) ADDITIONAL INFORMATION The following information shows net sales and operating income recognized by geographic origin for the years ended March 31, 2004, 2005 and 2006. In addition to the disclosure requirements under SFAS No. 131, "Disclosure about Segments of an Enterprise and Related Information", Ricoh discloses this information as supplemental information in light of the disclosure requirements of the Japanese Securities and Exchange Law, which a Japanese public company is subject to. F-39
Thousands of Millions of Yen U.S. Dollars ---------------------------------------- ------------ 2004 2005 2006 2006 - ---------------------------------------------------------------------------------------------------------------- Sales- Japan External customers 962,127 994,499 998,797 $ 8,536,726 Intersegment 351,070 392,216 413,087 3,530,659 - ---------------------------------------------------------------------------------------------------------------- Total 1,313,197 1,386,715 1,411,884 12,067,385 - ---------------------------------------------------------------------------------------------------------------- The Americas External customers 315,504 322,975 385,746 3,296,974 Intersegment 5,249 7,486 7,630 65,214 - ---------------------------------------------------------------------------------------------------------------- Total 320,753 330,461 393,376 3,362,188 - ---------------------------------------------------------------------------------------------------------------- Europe External customers 400,646 412,333 434,304 3,712,000 Intersegment 3,770 3,310 4,449 38,026 - ---------------------------------------------------------------------------------------------------------------- Total 404,416 415,643 438,753 3,750,026 - ---------------------------------------------------------------------------------------------------------------- Other External customers 101,968 84,301 96,243 822,590 Intersegment 91,373 89,647 104,045 889,273 - ---------------------------------------------------------------------------------------------------------------- Total 193,341 173,948 200,288 1,711,863 - ---------------------------------------------------------------------------------------------------------------- Elimination of intersegment sales (451,462) (492,659) (529,211) (4,523,171) - ---------------------------------------------------------------------------------------------------------------- Consolidated 1,780,245 1,814,108 1,915,090 $16,368,291 - ---------------------------------------------------------------------------------------------------------------- Operating Expenses- Japan 1,215,875 1,298,640 1,312,655 $11,219,274 The Americas 305,284 316,651 378,108 3,231,692 Europe 382,383 391,271 417,341 3,567,017 Other 182,870 162,042 185,283 1,583,615 - ---------------------------------------------------------------------------------------------------------------- Elimination of intersegment sales (456,173) (490,002) (530,311) (4,532,572) - ---------------------------------------------------------------------------------------------------------------- Consolidated 1,630,239 1,678,602 1,763,076 $15,069,026 - ---------------------------------------------------------------------------------------------------------------- Operating Income- Japan 97,322 88,075 99,229 $ 848,111 The Americas 15,469 13,810 15,268 130,496 Europe 22,033 24,372 21,412 183,009 Other 10,471 11,906 15,005 128,248 - ---------------------------------------------------------------------------------------------------------------- Elimination of intersegment profit 4,711 (2,657) 1,100 9,401 - ---------------------------------------------------------------------------------------------------------------- Consolidated 150,006 135,506 152,014 $ 1,299,265 - ---------------------------------------------------------------------------------------------------------------- Other Expenses (6,943) (123) 4,185 $ 35,769 - ---------------------------------------------------------------------------------------------------------------- Income before Income Taxes, Minority Interests, Equity in Earnings of Affiliates and Cumulative Effect of Accounting Change 143,063 135,383 156,199 $ 1,335,034 - ---------------------------------------------------------------------------------------------------------------- Total Assets- Japan 1,071,297 1,187,190 1,220,780 $10,434,017 The Americas 188,644 206,979 240,726 2,057,487 Europe 188,184 228,568 235,897 2,016,214 Other 63,701 66,319 79,102 676,085 Elimination (116,594) (143,410) (152,438) (1,302,889) Corporate assets 457,561 408,023 417,116 3,565,095 - ---------------------------------------------------------------------------------------------------------------- Consolidated 1,852,793 1,953,669 2,041,183 $17,446,009 - ----------------------------------------------------------------------------------------------------------------
F-40 Intersegment sales between geographic areas are made at cost plus profit. Operating income by geographic area is sales less expense related to the area's operating revenue. No single customer accounted for 10% or more of the total revenues for the periods ended as of March 31, 2004, 2005 and 2006. 18. SUPPLEMENTARY INFORMATION TO THE STATEMENT OF INCOME The following amounts were charged to selling, general and administrative expenses for the years ended March 31, 2004, 2005 and 2006:
Thousands of Millions of Yen U.S. Dollars ------------------------------- ------------ 2004 2005 2006 2006 - --------------------------------------------------------------------------- Research and development costs 92,515 110,478 110,385 $943,462 Advertising costs 17,950 16,442 15,732 134,462 Shipping and handling costs 12,352 14,043 16,058 137,248 - ---------------------------------------------------------------------------
19. SUBSEQUENT EVENT On May 31, 2006, San-Ai Co., Ltd., a subsidiary of the Company, completed the sale of its content distribution business to Giga Networks Co., Ltd., a subsidiary of Faith, Inc. The sale price was Yen 12.0 billion. The Company expects to recognize a gain on this sale equal to Yen 5.0 billion. F-41 RICOH COMPANY, LTD. AND CONSOLIDATED SUBSIDIARIES SCHEDULE II. - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES FOR THE THREE YEARS ENDED MARCH 31, 2006
(Millions of Yen) Additions --------------------- Balance at Charged to Charged to Deduction Balance at beginning costs and other from Translation end of Description of period expenses accounts reserves (2)(3) adjustment period - ------------------------------------------------------------------------------------------------------------ For the year ended March 31, 2004: Allowance for doubtful receivables/(1)/- Trade receivables 17,849 1,933 9 (2,179) (573) 17,039 Finance receivables 14,228 3,920 - (2,823) (86) 15,239 Deferred tax asset valuation allowance 9,193 2,280 - (2,133) (330) 9,010 For the year ended March 31, 2005: Allowance for doubtful receivables/(1)/- Trade receivables 17,039 1,822 (65) (1,729) 384 17,451 Finance receivables 15,239 3,584 - (2,280) 23 16,566 Deferred tax asset valuation allowance 9,010 1,212 (23) (3,298) 178 7,079 For the year ended March 31, 2006: Allowance for doubtful receivables/(1)/- Trade receivables 17,451 1,424 (27) (3,366) 549 16,031 Finance receivables 16,566 1,744 - (1,992) 76 16,394 Deferred tax asset valuation allowance 7,079 3,843 (56) (2,959) 290 8,197 - ------------------------------------------------------------------------------------------------------------
Notes: (1) See Note 2(g) to Consolidated Financial Statements. (2) Receivables - Write-offs. (3) Deferred tax - Realization of tax benefits F-42 EX-1 2 rex011.txt EX-1.1 ARTICLES OF INCORPORATION (ENGLISH TRANSLATION) Exhibit 1.1 (Translation) ARTICLES OF INCORPORATION OF RICOH COMPANY, LTD. (As amended on June 28, 2006) CHAPTER I. GENERAL PROVISIONS (Trade Name) Article 1. The name of the Company is Kabushiki Kaisha Ricoh and is expressed RICOH COMPANY, LTD. in English. (Location of Head Office) Article 2. The head office of the Company is to be located in Ohta-ku, Tokyo. (Objectives) Article 3. The objectives of the Company are to engage in the following businesses: 1. Manufacture, sale, installation work and electrical communication work of optical, office, audio, electric and measuring equipment, other general machinery and equipment and accessories and supplies therefor; 2. Manufacture and sale of photographic sensitive materials and duplicating papers; 3. Manufacture and sale of various raw materials for photographic sensitive materials, and various chemical materials for chemical industries; 4. Manufacture, processing and sale of papers, pulps, textiles, general merchandise and by-products thereof; 5. Investment in, or sale of the products of, other companies; 6. Import and export of the goods described in any of the foregoing items and other goods of every kind and description; 7. Brokerage business for casualty insurance and the insurance brokerage business under the Automobile Liability Security Law of Japan; 8. Direct marketing through the Internet, facsimile and telephone, etc.; and 1 9. Any and all business incidental or relating to any of the foregoing items. (Organizations) Article 4. In addition to the general meeting of shareholders and directors, the Company shall establish the following organizations: i) Board of Directors; ii) Corporate Auditors; iii) Board of Corporate Auditors; and iv) Accounting Auditors. (Method of Public Notices) Article 5. Public notices of the Company shall appear in the Nihon Keizai Shimbun. CHAPTER II. SHARES (Total Number of Issuable Shares) Article 6. The total number of issuable shares by the Company is one billion and five hundred million (1,500,000,000) shares. (Issuance of Share Certificates) Article 7. The Company shall issue share certificates for the shares. (Purchase of Treasury Stocks) Article 8. The Company may acquire the shares of its own stocks by a resolution of the Board of Directors pursuant to Paragraph 2, Article 165 of the Corporation Law. (Number of Shares Constituting One Unit and Non-Issuance of Certificates for Less-Than-One-Unit Shares) Article 9. 1. The number of shares constituting one unit of shares of the Company shall be one thousand (1,000) shares. 2. Notwithstanding the provisions of Article 7, the Company shall not issue any certificates for less-than-one-unit shares, unless otherwise provided for in the Share Handling Regulations. (Rights Concerning Less-Than-One-Unit Shares) Article 10. A shareholder (including the beneficial shareholder; the same applies hereinafter) of the Company shall not exercise any rights other than those described below with respect to the less-than-one-unit shares held by it. 2 i) Right described in each Item of Paragraph 2, Article 189 of the Corporation Law. ii) Right to make a request under the provision of Paragraph 1, Article 166 of the Corporation Law. iii) Right to receive allocation of offered shares and allocation of offered stock purchase warrants in accordance with the number of shares held by the shareholder. iv) Right to make a request provided for in the following Article. (Sale of Shares Constituting Less-Than-One-Unit Shares to Constitute One Unit) Article 11. A shareholder of the Company may request that the Company sell such number of shares as may, together with the number of less-than-one-unit shares held by the shareholder, constitute one unit of shares, in accordance with the Share Handling Regulations. (Administrator of Register of Shareholders) Article 12. 1. The Company shall have an administrator of the register of shareholders. 2. The administrator of the register of shareholders and its handling office shall be determined by resolution of the Board of Directors and public notice shall be given thereof. 3. The register of shareholders (including the register of beneficial shareholders; the same applies hereinafter), the register of stock purchase warrants and the register of the lost share certificates of the Company shall be prepared and kept, and all other business pertaining to the register of shareholders, the register of stock purchase warrants and the register of the lost share certificates shall be handled by the administrator of the register of shareholders and not by the Company. (Share Handling Regulations) Article 13. The business and the service charges pertaining to the shares of the Company shall be subject to laws, ordinances or these Articles of Incorporation and the Share Handling Regulations established by the Board of Directors. CHAPTER III. GENERAL MEETING OF SHAREHOLDERS (Calling of Meeting) Article 14. The ordinary general meeting of shareholders shall be called in June each year and an extraordinary general meeting of shareholders shall be called as the necessity arises. (Record Date of General Meeting of Shareholders) Article 15. The record date of voting rights for the Company's general meeting of shareholders shall be March 31 every year. 3 (Exercise of Voting Rights by Proxy) Article 16. 1. A shareholder may exercise his voting rights by proxy who shall be another shareholder of the Company that has voting rights. 2. Such shareholder or proxy shall submit a document certifying the power of attorney to the Company for each general meeting of shareholders. (Person with the Right to Call the Meeting and Chairman) Article 17. 1. A meeting of the shareholders shall be called and presided over by a Representative Director previously appointed by the Board of Directors. 2. In case the Representative Director is unable to act, one of the other directors shall call and preside over the meeting of the shareholders in accordance with the order determined in advance by resolution of the Board of Directors. (Disclosure and Deemed Provision of Reference Materials for General Meeting of Shareholders via the Internet) Article 18. In calling the general meeting of shareholders, the Company may deem that the information regarding the matters which should be described or shown in the reference materials for the general meeting of shareholders, business reports, financial documents and consolidated financial documents have been provided to the shareholders by disclosing them via the Internet in accordance with the Ministerial Ordinance of the Ministry of Justice. (Method of Adopting Resolutions) Article 19. 1. Except as otherwise provided for in laws, ordinances or these Articles of Incorporation, resolutions at a general meeting of shareholders shall be adopted by a majority of the votes of the shareholders present thereat who are entitled to vote. 2. Resolutions provided for in Paragraph 2, Article 309 of the Corporation Law shall be adopted by the vote of the shareholders not less than two-thirds (2/3) of those present at the meeting whereby not less than one-third (1/3) of voting rights of the shareholders entitled to exercise voting rights shall constitute a quorum. (Minutes) Article 20. The proceedings in outline, the resultant actions taken and other matters subject to laws and ordinances at a general meeting of shareholders shall be entered in the minutes, which shall bear the names and seals of the chairman of the meeting and the directors present and shall be kept by the Company. 4 CHAPTER IV. DIRECTORS AND BOARD OF DIRECTORS (Number) Article 21. The Company shall have not more than fifteen (15) directors. (Election) Article 22. 1. Directors shall be elected at a general meeting of shareholders. 2. Resolutions for the election of directors shall be adopted by a majority of the votes of the shareholders present who hold not less than one-third (1/3) of the voting rights of the shareholders entitled to exercise voting rights. 3. Cumulative voting shall not be used for the adoption of resolutions for the election of directors. (Term of Office) Article 23. 1. The term of office of directors shall be until the close of the ordinary general meeting of shareholders relating to the last fiscal year ending within two (2) years after their election. 2. The term of office of a director elected to fill a vacancy of a director who has resigned before the completion of his/her term, or elected to increase the number of directors, shall be for the remaining balance of the term of office of the other directors currently in office. (Representative Directors) Article 24. Representative Directors shall be elected by resolution of the Board of Directors. (Person with the Right to Call the Meeting of Board of Directors and Chairman) Article 25. 1. A meeting of the Board of Directors shall be called and presided over by a Director previously appointed by the Board of Directors. 2. In case the Director is unable to act, one of the other directors shall call and preside over the meeting of the Board of Directors in accordance with the order determined in advance by resolution of the Board of Directors. 5 (Calling Meetings of Board of Directors) Article 26. 1. Notice of a meeting of the Board of Directors shall be dispatched to each director and each corporate auditor three (3) days before the date of the meeting; provided, however, that such period may be shortened in case of emergency. 2. A meeting of the Board of Directors may be held without going through the procedure for calling, if so agreed by all the directors and the corporate auditors. (Resolutions of Meetings of Board of Directors) Article 27. 1. The Board of Directors shall decide important matters concerning the execution of business and affairs of the Company as well as such matters as are provided for in laws and ordinances. 2. Resolutions of the Board of Directors shall be adopted by the affirmative vote of a majority of the directors present at the meeting, whereby a majority of all directors shall constitute a quorum. (Omission of Resolution of Board of Directors) Article 28. The Company shall deem that the resolution of the Board of Directors has been adopted if the requirements under Article 370 of the Corporation Law are satisfied. (Remuneration and other interests) Article 29. Remuneration and bonus of directors and other property interests received by the directors from the Company in consideration of the performance of their duties (hereinafter referred to as the "Remuneration") shall be determined by resolution at a general meeting of shareholders. (Exemption of Liability of Outside Directors) Article 30. The Company may enter into an agreement with outside directors under which their liability for damages due to the failure in performing their duties shall be limited in accordance with the provisions of Paragraph 1, Article 427 of the Corporation Law; provided, however, that the limit of liability under such agreement shall be the higher of the predetermined amount of not less than ten million (10,000,000) yen, or the amount provided for under the laws and ordinances. CHAPTER V. CORPORATE AUDITORS AND BOARD OF CORPORATE AUDITORS (Number) Article 31. The Company shall have not more than five (5) corporate auditors. 6 (Election) Article 32. 1. Corporate auditors shall be elected at a general meeting of shareholders. 2. Resolutions for the election of corporate auditors shall be adopted by a majority of the votes of the shareholders present who hold not less than one-third (1/3) of the voting rights of the shareholders entitled to exercise voting rights. (Term of Office) Article 33. 1. The term of office of corporate auditors shall be until the close of the ordinary general meeting of shareholders relating to the last fiscal year ending within four (4) years after their election. 2. The term of office of a corporate auditor elected to fill a vacancy of an auditor resigned before the completion of the term shall be for the remaining balance of the term of office of the retired corporate auditor. (Person with the Right to Call the Meeting of Board of Corporate Auditors) Article 34. A meeting of the Board of Corporate Auditors shall be called by each corporate auditor. (Calling Meetings of Board of Corporate Auditors) Article 35. 1. Notice of a meeting of the Board of Corporate Auditors shall be dispatched to each corporate auditor three (3) days before the date of the meeting; provided, however, that such period may be shortened in case of emergency. 2. A meeting of the Board of Corporate Auditors may be held without going through the procedure for calling, if so agreed by all the corporate auditors. (Resolutions of Meetings of Board of Corporate Auditors) Article 36. 1. The Board of Corporate Auditors shall decide matters concerning the audit policy, the methods for investigating the state of the business and property and the execution of other duties of corporate auditors as well as such matters as are provided for in laws and ordinances. 2. Except as otherwise provided for in laws or ordinances, resolutions at a meeting of the Board of Corporate Auditors shall be adopted by a majority of the corporate auditors. 7 (Full-Time Corporate Auditor) Article 37. A full-time corporate auditor or auditors shall be elected by resolution of the Board of Corporate Auditors. (Remuneration and other interests) Article 38. Remuneration and other interests of corporate auditors shall be determined by resolution at a general meeting of shareholders. (Exemption of Liability of Outside Corporate Auditors) Article 39. The Company may enter into an agreement with outside corporate auditors under which their liability for damages due to the failure in performing their duties shall be limited in accordance with the provisions of Paragraph 1, Article 427 of the Corporation Law; provided, however, that the limit of liability under such agreement shall be the higher of the predetermined amount not less than five million (5,000,000) yen, or the amount provided for under the laws or regulations. CHAPTER VI. ACCOUNTS (Fiscal Year) Article 40. The fiscal year of the Company shall be one year from April 1 of each year to March 31 of the following year. (Record Date for Dividends at Fiscal Year End) Article 41. The record date for the dividends to be paid by the Company at the end of fiscal year shall be March 31 of each year. (Interim Dividends) Article 42. The Company may, by resolution of the Board of Directors, pay interim dividends by regarding September 30 of each year as the record date. (Period of Limitations for Dividends) Article 43. The Company shall be relieved from the obligation to pay any property available for distribution if such property available for distribution is cash and still remains unreceived after the lapse of three (3) full years from the date on which the same became due and payable. ----------------- 8 EX-1 3 rex012.txt EX-1.2 SHARE HANDLING REGULATIONS (ENGLISH TRANSLATION) Exhibit 1.2 (Translation) SHARE HANDLING REGULATIONS OF RICOH COMPANY, LTD. CHAPTER I. GENERAL PROVISIONS (Purpose) Article 1. Pursuant to Article 13 of the Articles of Incorporation, the business and the service charges pertaining to the shares of the Company shall be governed by these Regulations; provided, however, that in addition to these Regulations, handling procedures with respect to the beneficial shareholders shall be governed by the rules provided by Japan Securities Depository Center, Inc. (hereinafter referred to as the "Center"). (Administrator of Register of Shareholders) Article 2. The administrator of register of shareholders of the Company, its handling office and forwarding offices are as follows: Administrator of Register of Shareholders: The Chuo Mitsui Trust and Banking Company, Limited 33-1, Shiba 3-chome Minato-ku, Tokyo Handling Office: The Chuo Mitsui Trust and Banking Company, Limited (Head Office) 33-1, Shiba 3-chome Minato-ku, Tokyo Forwarding Offices: All branch offices in Japan of The Chuo Mitsui Trust and Banking Company, Limited and the head office and all branches offices in Japan of the Japan Securities Agents, Ltd. 1 (Types of Share Certificates) Article 3. The share certificates to be issued by the Company shall be in the following seven (7) denominations: one (1) share, five (5) shares, ten (10) shares, fifty (50) shares, one-hundred (100) shares, five-hundred (500) shares, and one-thousand (1,000) shares; provided, however, that share certificates representing any number of shares less than one-hundred (100) shares may be issued by stating the number of shares. 2. The shareholders shall not request the issuance of share certificates representing a number of shares constituting less than one unit, except as provided in Articles 13 (Request for Delivery of Non-Possessed Share Certificates), 21 (Re-issuance due to Defacement or Mutilation) and 22 (Re-issuance due to Filled Columns) hereof. (Request and Notification, etc.) Article 4. The procedures to submit a request, notification, submission or application with respect to the businesses delegated to the administrator of register of shareholders by the Company shall be addressed to the administrator of register of shareholders. 2. Any request, notification, submission or application to be made under these Regulations shall be in the form prescribed by the Company and shall be affixed with the seal, which seal impression has been registered with the Company in accordance with the provisions of Article 14 hereof. 3. In the case that any request, notification, submission or application hereunder is made or given by a proxy, a document certifying the power of the proxy must be submitted. In the event that any request, notification or application requires the consent of a curator or assistant, a document certifying such consent must be submitted. CHAPTER II. REGISTRATION OR RECORDING, ETC. IN REGISTER OF SHAREHOLDERS (Registration of Transfer) Article 5. In the case of registration or recording in the register of shareholders (hereinafter the "Registration of Transfer"), an application together with the share certificates on which 2 applicant name is appeared shall be requested. 2. In the case of an application for the Registration of Transfer of shares for the reasons other than an assignment, a document evidencing the acquisition thereof shall be requested in addition to the requirements provided for in the preceding Paragraph; provided, however, that in the case the share certificates have not been issued, submission of the share certificates thereof shall not be required. (Registration of Transfer pursuant to Specific Procedures under Laws and Ordinances) Article 6. In the event that a specific procedure is required by laws and ordinances for the Registration of Transfer of shares, an application together with the share certificates on which applicant name is appeared and a document certifying the completion of such procedure shall be submitted. (Registration in Register of Beneficial Shareholders) Article 7. Registration or recording in the register of beneficial shareholders shall be made based upon the notice from the Center relating to the beneficial shareholders and the beneficial ownership card. (Beneficial Ownership Card) Article 8. Beneficial shareholders shall submit a beneficial ownership card through a participant. (Aggregation) Article 9. In the event that a shareholder registered or recorded in the register of shareholders is recognized to be identical to a beneficial shareholder registered or recorded in the register of beneficial shareholders based on the address and the name of such shareholder, the number of shares held by such shareholder shall be aggregated for the purpose of exercising shareholder's rights. 3 CHAPTER III. REGISTRATION OF PLEDGE AND INDICATION OF TRUST PROPERTY (Registration or Cancellation of Pledge) Article 10. In the case of an application for registration, alteration or cancellation of a pledge on shares, an application therefore shall be requested under the joint signatures of the pledgor and the pledgee together with the share certificates on which the pledgee's name is appeared. (Indication or Cancellation of Trust Property) Article 11. In the case of an application for indication or cancellation of trust property on shares, the trustor or the trustee shall request an application together with the share certificates. CHAPTER IV. NON-POSSESSION OF SHARE CERTIFICATES (Submission of Non-Possession of Share Certificates) Article 12. In the case of a submission for the non-possession of share certificates, such request shall be submitted with the share certificates; provided, however, that in the case that the share certificates have not been issued, submission of the share certificates shall not be required. (Request for Delivery of Non-Possessed Share Certificates) Article 13. In the case that a shareholder, who has made a submission for non-possession of share certificates, requests for issuance of the share certificates, such shareholder shall be required to submit an application to that effect. CHAPTER V. VARIOUS NOTIFICATIONS (Notification of Name, Address and Seal Impression of Shareholder, etc.) Article 14. Shareholders, beneficial shareholders and registered share pledgees or their statutory representatives shall provide a notification of their names, address and seal impressions; provided, however, that foreigners who have the custom of signature may 4 substitute the seal impression with a specimen of their signature. 2. The same procedures shall apply when there are any changes in the items notified under the preceding Paragraph. (Notification of Addresses where Shareholders Residing Abroad, etc. Receive Notices) Article 15. In addition to the requirements provided for in the preceding Article, shareholders, beneficial shareholders and registered share pledgees or their statutory representatives residing abroad shall appoint resident standing proxies in Japan or provide notification of the addresses in Japan where they shall receive notices. 2. The provisions in the preceding Article shall apply MUTATIS MUTANDIS to resident standing proxies. (Representative of Corporation Shareholder) Article 16. In the case that a shareholder or beneficial shareholder is a corporation, notification of one (1) representative of such corporation shall be provided to the Company. 2. When the representative has been changed, a notification together with a certified copy of the commercial register shall be submitted. (Representative of Joint-owners of Shares) Article 17. Shareholders or beneficial shareholders who own shares jointly shall appoint one (1) representative and submit notification thereof. 2. The same procedure shall apply in the case of a change in such representative. (Change in Entries of Register of Shareholders, Register of Beneficial Shareholders and Share Certificates) Article 18. When a change is to be made in the entries in the register of shareholders, the register of beneficial shareholders or on share certificates for any of the following reasons, a notification thereof shall be submitted together with the share certificates and a document 5 evidencing such fact; provided, however, that submission of the share certificates shall not be required if such share certificates have not been issued or in the case of a change in the entries in the register of beneficial shareholders: 1. Change in the surname or given name; 2. Appointment, change or discharge of statutory representatives such as a person with parental authority or a guardian, etc.; 3. Change in the trade name or corporate name; and 4. Change in the organization of a legal entity. (Exception for Various Notifications by Beneficial Shareholders) Article 19. In the case of a notification by a beneficial shareholders set forth in this Chapter, such notification shall be made through a participant; provided, however, that in the case of only a change in the seal impression of the beneficial shareholders, such notification need not be made through a participant. CHAPTER VI. RE-ISSUANCE OF SHARE CERTIFICATES (Re-issuance of Share Certificates due to Split or Consolidation) Article 20. In the case of a request for the issuance of new share certificates due to a split or a consolidation of share certificates, an application thereof shall be submitted together with the share certificates. 2. Issuance of Less-Than-One-Unit Share Certificates due to a split or a consolidation of share certificates may not be made. (Re-issuance due to Defacement or Mutilation) Article 21. In the case of a request for the issuance of new share certificates due to defacement or mutilation, an application thereof shall be submitted together with the share certificates; provided, however, that when it is difficult to ascertain whether such share certificates are genuine, the provisions set forth in Chapter 7 shall apply. 6 (Re-issuance due to Filled Columns) Article 22. In the case that the columns for recording the names of ownership on the share certificates are completely filled out, the Company shall collect such share certificates and issue new share certificates. (Automatic Consolidation of Less-Than-One-Unit Share Certificates) Article 23. When Less-Than-One-Unit Share Certificates are submitted for the Registration of Transfer and such share certificates can be consolidated to constitute one (1) unit, the Company shall so consolidate the same, unless otherwise specifically requested by the applicant who has requested the Registration of Transfer. CHAPTER VII. REGISTRATION OF LOST SHARE CERTIFICATES, ETC. (Request for Registration of Lost Share Certificates) Article 24. An applicant who requests the registration of lost share certificates shall submit an application together with a document evidencing the acquisition of the share certificates, the loss of such share certificates and an identification of the applicant; provided, however, that in the case that the applicant who requests the registration of lost share certificates is a shareholder or a registered share pledgee pertaining to the lost share certificates, only a document evidencing the loss of share certificates shall be submitted, in addition to the application. (Application for Deregistration by a Registrant of Lost Share Certificates) Article 25. In the case that a registrant of the lost share certificates applies to deregister a registration stated in the preceding Article, an application shall be submitted. (Request for Deregistration by a Holder of Share Certificates) Article 26. In the case that an applicant, who requests to deregister the registration of lost share certificates, is a holder of such share certificates, an application together with such share certificates and an identification of the applicant shall be submitted; provided, however, that in the case that a shareholder or a registered share pledgee requests the deregistration, submission 7 of the identification of the applicant is not required. (Applicable Notifications) Article 27. In the case an applicant who requests the registration of lost share certificates is not a shareholder or a registered share pledgee and changes are to be made the entries or records in the register of lost share certificates, the provisions set forth in Articles 14 through 18 shall apply MUTATIS MUTANDIS. CHAPTER VIII. PURCHASE OF LESS-THAN-ONE-UNIT SHARES (Application for Request of Purchase) Article 28. In the case that a shareholder or beneficial shareholder who owns Less-Than-One-Unit Shares requests to the Company for the purchase of Less-Than-One-Unit Shares, an application shall be submitted together with the share certificates to the handling office or forwarding offices of the administrator of register of shareholders set forth in Article 2; provided, however, that in the case that the share certificates have not been issued, submission thereof shall not be required. 2. In the case that beneficial shareholders request an application set forth in the preceding Paragraph, the procedure shall be carried out through a participant and the Center. (Determination of Purchase Price) Article 29. The purchase price per share of Less-Than-One-Unit Share shall be the closing price of the stock of the Company at the market operated by the Tokyo Stock Exchange on the day on which the application and the share certificates are received at the handling office or a forwarding office of the administrator of register of shareholders set forth in Article 2; provided, however, that in the case that no trading is effected on that day or stock exchange is closed on that day, the purchase price shall be the price at which the shares of the Company are first traded thereafter. 2. The total purchase price for request of purchase pursuant to preceding Paragraph shall be the amount obtained by multiplying the purchase price by the number of shares requested to be purchased. 8 (Payment of Purchase Price) Article 30. Unless otherwise provided by the Company, the Company shall pay the amount obtained by deducting any fees stipulated in Article 41 from the purchase price calculated pursuant to the preceding Article to the applicant at the place where the request for purchase was filed on the date the Company designated within six (6) business days counting from the day following the day on which the purchase price in the preceding Article was determined; provided, however, that when such purchase price includes a premium due to dividends of surplus stock splits, etc., the purchase price shall be paid prior to the relevant record date. 2. The applicant requesting the purchase may request that payment of the purchase price be made by remittance/wire transfer to a bank account or post office account designated by such applicant. (Transfer of Shares Purchased) Article 31. Less-Than-One-Unit Shares for which a request for purchase has been made shall be transferred to the Company on the day on which the purchase price has been paid or the procedure for payment has been completed pursuant to the preceding Article. CHAPTER IX. SALE OF LESS-THAN-ONE-UNIT SHARES UPON A REQUEST FOR ADDITIONAL PURCHASE (Procedure for Request for Additional Purchase) Article 32. In the case that a request for the sale of additional shares is made to the Company by a shareholder or a beneficial shareholder who owns Less-Than-One-Unit Shares that, when added to the number of such shareholder's shares, would constitute for one unit of shares (hereinafter referred to as the "request for additional purchase"), a request for additional purchase shall be submitted together with the share certificates and the approximate amount for additional purchase set forth in the following Article to the handling office or forwarding offices of the administrator of the register of shareholders set forth in Article 2; provided, however, that in the case that the share certificates for such shares have not been issued, submission thereof shall not be required. 2. In the case that beneficial shareholders request for additional purchase set forth in 9 the preceding Paragraph, the procedure shall be carried out through a participant and the Center. (Approximate Amount for Additional Purchase) Article 33. The approximate amount for additional purchase shall be calculated by multiplying the closing price of the stock of the Company at the market operated by the Tokyo Stock Exchange on the business day (if there is no trading on such day, the closing price at which the shares of the Company are last traded prior to such day) immediate preceding the day on which the request for additional purchase and the share certificates set forth in the preceding Article are received at the handling office or a forwarding office of the administrator of register of shareholders set forth in Article 2 by the number of share requested to be additionally purchased and by 1.3; and any amount less than 1,000 yen arising out of such calculation shall be rounded up; provided, however, that in the case that beneficial shareholders request for additional purchase, such request shall be subject to the rules provided by the Center. 2. In the case that a request for additional purchase set forth in the preceding Article has been made, if the approximate amount for additional purchase actually received is less than the amount set forth in the preceding Paragraph, the Company shall not proceed with such request for additional purchase. (Requests for Additional Purchases which Exceed the Balance of the Shares of the Company Owned by Itself) Article 34. When the total number of shares for which requests for additional purchase are made in one day exceeds the number of the shares of the Company owned by itself that is transferable (excluding such shares owned for a specific purpose), none of the requests for additional purchase made on that day shall have any effect. (Effective Date of the Request for Additional Purchase) Article 35. The request for additional purchase shall become effective as of the day on which the request for additional purchase and the share certificates set forth in Article 32 and the approximate amount for additional purchase set forth in Article 33 are received at the handling office or a forwarding office of the administrator of register of shareholders set forth in Article 2 10 (Suspension Period for Acceptance of Requests for Additional Purchase) Article 36. The Company shall suspend to accept requests for additional purchase for the period from the day twelve (12) business days preceding March 31 to March 31 and the period from the day twelve (12) business days preceding September 30 to September 30 of each year. 2. Notwithstanding the preceding Paragraph, the Company may set an additional suspension period for acceptance of requests for additional purchase, if the Company deems it necessary. (Determination of the Price for Additional Purchase) Article 37. The purchase price per share for additional purchase of Less-Than-One-Unit Shares shall be the closing price of the stock of the Company at the market operated by the Tokyo Stock Exchange on the effective date of the request for additional purchase; provided, however, that in the case that no trading is effected on that day or such stock exchange is closed on that day, the purchase price per share shall be the price at which the shares of the Company are first traded thereafter. 2. The total purchase price for additional purchase of Less-Than-One-Unit Shares shall be the amount obtained by multiplying the purchase price per share for additional purchase of Less-Than-One-Unit Shares by the number of shares requested to be additionally purchased. 3. In the event that the approximate amount for additional purchase set forth in Article 33 is less than the sum of the total purchase price set forth in the preceding Paragraph and the fees for additional purchase set forth in Article 41 (hereinafter referred to as "Definitive Purchase Price for Additional Shares"), the shortfall shall be charged to the shareholder who made such request for additional purchase. In this case, such request for additional purchase shall be cancelled if such shortfall is not paid within five (5) business days following the day on which the shortfall was charged. (Receipt of Definitive Purchase Price for Additional Shares) Article 38. The Company shall receive the Definitive Purchase Price for Additional Shares out of the approximate amount for additional purchase on the day designated by the Company within six (6) business days either from the date on which the Definitive Purchase Price for 11 Additional Shares is determined or from the date immediate following the day on which the shortfall is paid in accordance with Paragraph 3 of the preceding Article; provided, however, that when such purchase price includes a premium due to dividends, stock splits, etc., the purchase price shall be received prior to the relevant record date. 2. The balance of the approximate amount for additional purchase and the Definitive Purchase Price for Additional Shares set forth in the preceding Paragraph shall be returned to the shareholder who made the request for additional purchase, by remittance/wire transfer to a bank account or post office account designated by such shareholder. (Transfer of Additionally Purchased Shares) Article 39. The Less-Than-One-Unit Shares for which a request for additional purchase has been made shall be transferred to the shareholder or a beneficial shareholder who made the request for additional purchase on the day which the Definitive Purchase Price for Additional Shares was received pursuant to the preceding Article. (Delivery of Share Certificate) Article 40. The Company shall issue a share certificate for shares that constitute one unit as a result of the request for an additional purchase without delay and deliver the same to the shareholder who made the request for the additional purchase; provided, however, that in the case that a request for additional purchase is made by a beneficial shareholder, this Article is not applied. CHAPTER X. FEES (Fees) Article 41. Fees for handling of the shares of the Company are as follows: (1) Delivery of share certificates pursuant to Article 13 (Request for Delivery of Non-Possessed Share Certificates) and Article 21 (Re-issuance due to Defacement of Mutilation) Yen 200 per share certificate 12 (2) Request for the registration of lost share certificates as set forth in Article 24 (Request for the Registration of Lost Share Certificates): Yen 8,600 per registration Yen 500 per share certificate (3) In the case of purchasing Less-Than-One-Unit Shares pursuant to Article 28 (Application for Request of Purchase) and additional purchase by the shareholders pursuant to Article 32 (Procedure for Request for Additional Purchase), an amount per unit calculated pursuant to the following formula, as equivalent to the brokerage commission for the sale and purchase of shares, which shall be proportionally dividend by the number of Less-Than-One-Unit Shares purchased. Formula: In respect of the total amount obtained by multiplying the purchase price per share specified in Article 29 (Determination of Purchase Price) and Article 37 (Determination of the Price for Additional Purchase) by the number of shares constituting one unit of shares: Amount equal to or less than 1 million yen: 1.150% Amount exceeding 1 million yen and equal to or less than 5 million yen: 0.900% Amount exceeding 5 million yen and equal to or less than 10 million yen: 0.700% Amount exceeding 10 million yen and equal to or less than 30 million yen: 0.575% Amount exceeding 30 million yen and equal to or less than 50 million yen: 0.375% (Any amounts less than Yen 1 are rounded down.) Provided, however, that if the amount so calculated for one unit of share is less than Yen 2,500, the amount for one unit shall be Yen 2,500. SUPPLEMENTARY PROVISION 1. Date of Enactment: June 28, 2006 2. Date of Amendment: June 28, 2006 3. Approved by: The Board of Directors 13 4. Established by: Head Office of the Department of Human Resources. Administrative Manager 5. Section in charge: Head Office of the Department of Human Resources. Department of General Affairs 14 EX-1 4 rex013.txt EX-1.3 REGULATIONS OF THE BOARD OF DIRECTORS (ENGLISH TRANSLATION) Exhibit 1.3 (Translation) REGULATIONS OF THE BOARD OF DIRECTORS (Purpose) Article 1. These Regulations shall set forth matters concerning the role and function of the Board of Directors of the Company, the management of the meeting of the Board of Directors of the Company and matters to be resolved thereof. (Application) Article 2. Any matters with regards to the Board of Directors shall be governed by these Regulations in addition to the applicable laws and ordinances and the Articles of Incorporation. (Role and Function) Article 3. The Board of Directors of the Company shall conduct decision-making activities as to important matters set forth in the applicable laws and ordinances, the Articles of Incorporation and these Regulations relating to the Company and the Ricoh group companies, as well as supervise the management of all Ricoh group companies. The Board of Directors shall allocate management resources through deliberation and approval of management policy and the decision-making activities of other important matters. The Board of Directors shall motivate senior management by supervising and evaluating the state of execution of management policy, and by making appointment and removal decisions as well as determining the compensation levels of senior management based on the state of execution of management policy. With respect to the deliberations of the Board of Directors, the Board of Directors shall place importance on social responsibility, compliance and increasing transparency in their deliberations. (Organization) Article 4. The Board of Directors shall consist of all Directors. (Attendance by Corporate Auditors) Article 5. Corporate Auditors shall attend the meetings of the Board of Directors and, when necessary, express their opinions at the meeting. (Types of Meetings of the Board of Directors) Article 6. Meetings of the Board of Directors shall consist of ordinary meetings of the Board of Directors and extraordinary meetings of the Board of Directors. Ordinary meetings of the Board of Directors shall be held periodically at least once every three (3) months, and extraordinary meetings of the Board of Directors shall be held whenever necessary. 1 (Committee) Article 7. The Company shall establish a Nomination and Compensation Committee as a committee within the Board of Directors. The composition, function, management, etc. of the Nomination and Compensation Committee shall be set forth separately. (Chairman) Article 8. The Chairman of the Board of Directors shall be appointed from the Directors by a resolution of the Board of Directors. If the Chairman of the Board of Directors is unable to act, another Director shall be appointed as the Chairman of the Board of Directors, in accordance with the order determined in advance by the Board of Directors. (Person Convening Meetings) Article 9. A meeting of the Board of Directors shall be convened by the Chairman of the Board of Directors. In case the Chairman is unable to act, one of the other Directors shall convene the meeting of the Board of Directors in accordance with the order determined in advance by resolution of the Board of Directors. Each Director and Corporate Auditor may request convocation of a meeting of the Board of Directors by submitting a document that includes an agenda and sets forth the reason for such meeting to the person with the right to convene such meeting. If a notice of convocation of a meeting of the Board of Directors to be held within two (2) weeks from the date of such request is not dispatched within five (5) days of such request, the Director or Corporate Auditor who requested such meeting may convene a meeting of the Board of Directors. (Convocation Notice) Article 10. Notice of a meeting of the Board of Directors shall be dispatched to each Director and each Corporate Auditor three (3) days before the date of meeting; provided, however, that such period may be shortened in case of emergency. A meeting of the Board of Directors may be held without going through the procedure for calling, if so agreed by all the Directors and the Corporate Auditors. (Resolution) Article 11. Resolutions of the Board of Directors shall be adopted by the affirmative vote of a majority of the Directors present at the meeting, whereby a majority of all Directors shall constitute a quorum. A Director who has a special interest in any proposal that is deliberated by the Board of Directors shall not be entitled to vote on such matter. (Omission of Resolution) Article 12. The Company shall deem that the resolution of the Board of Directors has been adopted if the requirements under Article 370 of the Corporation Law are satisfied 2 (Attendance by Third Parties) Article 13. The Board of Directors may request any person other than Directors and Corporate Auditors to attend a meeting of the Board of Directors and to provide reports or opinions whenever necessary. (Matters to be Resolved) Article 14. The following matters shall be resolved at a meeting of the Board of Directors: 1. Statutory matters 1-1 Establishment, relocation and closure of a branch and other important organizations; 1-2 Transfer and acquisition of business and disposal and acquisition of important assets; 1-3 A significant amount of borrowing, donation, capital contribution, loan, guarantee, furnishing of collateral and waiver of indebtedness; 1-4 Appointment and removal of a Representative Director, manager and other important employees; 1-5 Approval of transactions in competition with the Company by a Director, transactions between a Director and the Company, and transactions in which there is a conflict of interest between a Director and the Company; 1-6 Invitation of parties to underwrite new shares; 1-7 Stock splits; 1-8 Increase of the total number of shares to be issued by the Company at the ratio in accordance with a stock split and amendments to the Articles of Incorporation pursuant to such increase; 1-9 Interim dividends; 1-10 Issuance of corporate bonds and bonds with stock purchase warrants; 1-11 Approval of the financial documents and business reports, and other annexed specifications; 1-12 Determination regarding the convocation of a meeting of the shareholders and its agenda; 1-13 Determination regarding matters delegated by a resolution of the meeting of the shareholders; 1-14 Acquisition of its own stock by the Company based on a resolution adopted at the meeting of the shareholders; 3 1-15 Acquisition of its own stock owned by a subsidiary of the Company; 1-16 Elimination of the treasury stock by the Company; 1-17 Amendments to the Articles of Incorporation as a result of a decrease in the number of shares per unit or abolishment of the unit system; 1-18 Invitation of parties to underwrite new stock purchase warrants; 1-19 Computerization of exercising voting rights at a shareholders' meeting; 1-20 Development of a system tht ensures that the performance of their duties by Directors is in compliance with the law and ordinances and the Articles of Incorporation, and other systems as provided for by a Ministerial Ordinance of the Ministry of Justice as necessary to ensure the adequacy of the Company's operations; and 1-21 Other matters stipulated by the applicable laws and ordinances. 2. Matters authorized by the Articles of Incorporation 2-1 Acquisition of its own stock by the Company; 2-2 Designation of an administrator of the register of shareholders and its handling offices; and 2-3 Establishment, amendment or abolishment of the Share Handling Regulations. 3. Other important matters relating to the execution of business of the Company. (Business Affairs of Company) Article 15. Pursuant to the applicable laws and ordinances, the Articles of Incorporation and these Regulations, a Representative Director shall execute the business of the Company and act as a representative of the Company to third parties as part of his duties. In the event that there are more than one (1) Representative Directors, a Representative Director who is also the President shall be the chief executive officer of the Company. (Matters to be reported to the Board of Directors and the Board of Corporate Auditors) Article 16. The Board of Directors shall receive reports concerning the following matters: 1-1 The President shall report on the conditions of the execution of the business of the Company to the Board of Directors at least once every three (3) months. The President may cause any other person to provide a report on his/her behalf. 1-2 The Board of Directors shall receive reports on the following matters by the relevant Directors: (i) Transactions in competition with the Company by a Director, transactions between a Director and the Company, and transactions in which there is a 4 conflict of interest between a Director and the Company (Paragraph 1, Article 356 of the Corporation Law); and (ii) Other important matters. 1-3 The Board of Directors shall receive reports on the summary of the deliberations of a meeting of the Nomination and Compensation Committee and the results thereof. 2. The Board of Directors shall receive reports on matters set forth by the appicabe laws and ordinances (Article 382 of the Corporate Law) from the Corporaion Auditors. (Minutes) Article 17. The summary and results of the proceedings of a meeting of the Board of Directors and other matters set forth by the laws and ordinances shall be recorded in the minutes of the meeting of the Board of Directors, to which each Director and Corporate Auditor shall print his/her name and affix his/her seal, and which minutes shall be kept in safe-keeping by the Company, pursuant to the laws and ordinances. Such minutes shall be kept for ten (10) years at the principal office of the Company. (Board of Directors Clerical Office) Article 18. The Chief Secretary shall handle any administrative matters concerning the Board of Directors. (Other Matters) Article 19. Any matters relating to the administration of the meetings of the Board of Directors which are not provided for by the applicable laws and ordinances, the Articles of Incorporation or these Regulations shall be determined by the Chairman. (Amendment to or Abolition of These Regulations) Article 20. The amendment to or abolishment of these Regulations shall be subject to the resolution by the Board of Directors. SUPPLEMENTARY PROVISIONS Date of Establishment and October 1, 1982 Enactment: Date of Enactment of Amendment: July 1, 1977 February 7, 1978 September 21, 1982 October 1, 1987 Date of Confirmation: October 1, 1997 5 Date of Enactment of Amendment: June 26, 1998 June 29, 2000 October 1, 2001 May 1, 2002 June 25, 2004 June 28, 2005 November 1, 2005 May 1, 2006 June 28, 2006 Approved by: The Board of Directors Section in Charge: Secretariat Office 6 EX-1 5 rex014.txt EX-1.4 REGULATIONS OF THE BOARD OF CORPORATE AUDITORS (ENGLISH TRANSLATION) Exhibit 1.4 (Translation) REGULATIONS OF BOARD OF CORPORATE AUDITORS OF RICOH COMPANY, LTD. (Purpose) Article 1. Pursuant to laws, ordinances and the Articles of Incorporation, these Regulations shall set forth matters concerning the Board of Corporate Auditors of the Company. (Organization) Article 2. The Board of Corporate Auditors shall consist of all Corporate Auditors. (Objectives of Board of Corporate Auditors) Article 3. The Board of Corporate Auditors shall receive reports, discuss or resolve important matters relating to audits; provided, however, that each Corporate Auditor shall not be prevented from exercising its power. (Holding of Meetings) Article 4. Meetings of the Board of Corporate Auditors shall be held, as a general rule, at least once every three (3) months; provided, however, that meetings may be held from time to time whenever necessary. (Person Convening Meetings and Chairman) Article 5. (1) The Board of Corporate Auditors shall elect a Chairman of the Board of Corporate Auditors from among the Corporate Auditors. (2) The Chairman of the Board of Corporate Auditors shall convene and manage the meetings of the Board of Corporate Auditors and conduct the duties delegated thereto by the Board of Corporate Auditors; provided, however, that each Corporate Auditor shall not be prevented from exercising its powers. (3) The term of the Chairman of the Board of Corporate Auditors shall be one year from the meeting of the Board of Corporate Auditors held immediately after the completion of the Ordinary General Meeting of Shareholders. 1 (Convocation Notice) Article 6. (1) A notice of convocation of a meeting of the Board of Corporate Auditors shall be dispatched to each Corporate Auditor at least three (3) days prior to the date set forth for such meeting. (2) With the consent of all Corporate Auditors, a meeting of the Board of Corporate Auditors may be held without the convocation procedure. (Method of Adopting Resolutions) Article 7. (1) Resolutions of the Board of Corporate Auditors shall be adopted by the majority vote of all Corporate Auditors except for resolutions relating to the dismissal of Accounting Auditors provided in paragraph (2) of Article 14 and resolutions exempting Directors from liability, etc. provided in Article 17. (2) The resolutions shall be adopted after taking into deliberation all sufficient information and materials. (Resolutions relating to Audit Policies, etc.) Article 8. (1) Matters such as audit policy, audit plan, audit methods, assignment of audit work, budget for audit expenses and independent outside advisors' expenses, etc. shall be determined by a resolution of the Board of Corporate Auditors following discussions at a meeting of the Board of Corporate Auditors at the commencement of an audit. (2) All matters other than those referred to in the preceding paragraph, which any Corporate Auditor deems necessary in order to fulfill his/her duties, shall be determined by a resolution of the Board of Corporate Auditors. (Regular Meetings, etc. with the Representative Directors) Article 9. (1) The Board of Corporate Auditors shall hold regular meetings with the Representative Directors to exchange opinions on any issues to be addressed by the Company, the status of the preparation of the environment for the Corporate Auditor's audit, important audit items, etc. and to make any other requests as the Board of Corporate Auditors may deem necessary, so as to endeavor to deepen its mutual understanding with the Representative Directors. (2) The Board of Corporate Auditors shall explain the audit policy and the audit plan as well as the extent to which the audit has been conducted and the results thereof to the Representative Directors and, as deemed necessary, the Board of Directors. (3) In addition to the matters set forth by law, the Board of Corporate Auditors shall, upon discussion with the Directors, determine matters to be reported by the Directors and may receive reports on such matters from the Directors. 2 (Report by Corporate Auditors to the Board of Corporate Auditors) Article 10. (1) Each Corporate Auditor shall report to the Board of Corporate Auditors on the status of conducting its duties from time to time and whenever requested by the Board of Corporate Auditors. (2) Any Corporate Auditor who receives a report from an Accounting Auditor (KAIKEI KANSANIN), a Director or any other person shall make a report to the Board of Corporate Auditors. (3) Corporate Auditors may request the Accounting Auditors, Directors or any other related persons to attend the meeting of the Board of Corporate Auditors and to provide an opinion or a report to the Board of Corporate Auditors as it deems necessary. (Measures for Special Reports) Article 11. (1) In the case that the Board of Corporate Auditors receives a report from a Director that such Director has found a fact that may cause material damage to the Company, the Board of Corporate Auditors shall deliberate whether or not any investigation is necessary. (2) In the case that the Board of Corporate Auditors receives a report from an Accounting Auditor that such Accounting Auditor has discovered unfair practices of a Director pertaining to the duties of a Director or any material fact which is in violation of the laws, ordinances or the Articles of Incorporation, the Board of Corporate Auditors shall take the same measure as referred to in the preceding paragraph. (Measures for Internal and External Claims and Accusations) Article 12. (1) The Board of Corporate Auditors shall delegate a part of its business to accept, keep and handle claims and accusations of any flaws concerning accounting, internal accounting controls or auditing to the Corporate Social Responsibility (hereinafter the "CSR") Enhancement Section. (2) In the case that the Board of Corporate Auditors receives from the CSR Enhancement Section a report on the claims and accusations described in the previous paragraph concerning the matters stated below, Article 11, Paragraph 1 shall apply MUTATIS MUTANDIS: 1. Matters stated in the Corporate Auditors' audit report (relating to Article 133, Paragraph 1 of the Commercial Code Enforcement Rules); 2. Matters relating to derivative actions by shareholders; 3. Important matters affecting the corporate performance; and 3 4. Other material violations of compliance and important flaws concerning accounting, internal accounting controls or auditing. (Preparation of Audit Reports) Article 13. (1) The Board of Corporate Auditors shall receive financial documents, etc. from the Directors and the audit report, etc. from the Accounting Auditors. The Board of Corporate Auditors may cause a Full-Time Corporate Auditor to receive such documents. (2) The Board of Corporate Auditors shall receive a report from the Corporate Auditors on matters covered by the audit report, etc. and prepare its audit report through discussions among themselves. (3) If any Corporate Auditor expresses a different opinion, such opinion shall be stated in the audit report. (4) Each Corporate Auditor shall sign, and affix his/her seal to, the audit report manually or electronically. Full-Time Corporate Auditors shall be named as such in the audit report. (Resolutions on Appointment, Non-Reappointment and Discharge of Accounting Auditors) Article 14. (1) The following matters relating to the appointment, non-reappointment and discharge of Accounting Auditors shall be determined by a resolution of the Board of Corporate Auditors: 1. Consent to the proposal concerning the appointment, non-reappointment and discharge of Accounting Auditors to be submitted to the Meeting of the Shareholders; 2. Request to include the appointment, non-reappointment and dismissal of an Accounting Auditors in the agenda of the Meeting of the Shareholders; 3. Request to submit a proposal relating to the appointment of the Accounting Auditors to the Meeting of the Shareholders; and 4. Appointment of provisional Accounting Auditors, in case of an absence in the office of the Accounting Auditors. (2) In the case that the Board of Corporate Auditors shall discharge Accounting Auditors based upon any reason provided for by statute, a resolution of the Board of Corporate Auditors for such discharge shall be adopted unanimously. In such case, the Corporate Auditor designated by the Board of Corporate Auditors shall report such discharge and the reason thereof at the first Meeting of the Shareholders held immediately after such discharge. 4 (Resolutions of Appointment and Discharge of Independent Outside Advisors) Article 15. Independent Outside Advisors shall be appointed and discharged by a resolution of the Board of Corporate Auditors. (Right to Give Consent and Proposal concerning the Appointment of Corporate Auditors) Article 16. The following matters concerning the appointment of the Corporate Auditors shall be determined by a resolution of the Board of Corporate Auditors: (1) Consent to the proposal concerning the appointment of a Corporate Auditor to be submitted to the Meeting of the Shareholders; (2) Request to include the appointment of a Corporate Auditor in the agenda of the Meeting of the Shareholders; and (3) Request to submit a proposal relating to the appointment of a Corporate Auditor to the Meeting of the Shareholders. (Consent of the Board of Corporate Auditors Relating to Exempting Directors from Liability, etc.) Article 17. Consent of the Board of Corporate Auditors relating to the following matters shall be obtained by the unanimous resolution of the Board of Corporate Auditors: (1) Consent relating to a proposal exempting Directors from their liabilities that the Board of Directors plans to submit to the Ordinary General Meeting of Shareholders; (2) Consent relating to a proposal to amend the Articles of Incorporation to enable the Company to exempt Directors from their liabilities by a resolution of the Board of Directors that the Board of Directors plans to submit to the Ordinary General Meeting of Shareholders; (3) Consent relating to a proposal to exempt Directors from their liabilities that a Director plans to submit to a meeting of the Board of Directors pursuant to the provisions of the Articles of Incorporation; (4) Consent relating to a proposal to amend the Articles of Incorporation to enable the Company to enter into an agreement with any outside Director (SHAGAI TORISHIMARIYAKU) to exempt such outside Director from his/her liabilities that the Board of Directors plans to submit to the Ordinary General Meeting of Shareholders; and (5) Consent relating to the Company providing assistance to the defendant Director(s) in a shareholders' derivative action. 5 (Report and Confirmation of the Contents of the Securities Report and the Annual Report) Article 18. The Board of Corporate Auditors shall receive reports from the Disclosure Committee and confirm the contents of the Securities Report prepared pursuant to the Securities and Exchange Law and the Annual Report on Form 20-F prepared pursuant to the United States Securities Exchange Act of 1934, as amended. (Pre-Approval relating to the Independence of Accounting Auditors) Article 19. (1) The Board of Corporate Auditors shall pre-approve the Audit Services and Non-Audit Services to be provided to the Company and its subsidiaries by Accounting Auditors. (2) The Board of Corporate Auditors shall enact "Audit and Non-Audit Services Pre-Approval Policy" as its policy and procedures for pre-approval. (3) The Board of Corporate Auditors may, by resolution, delegate its business of pre-approval to an outside Corporate Auditor (SHAGAI KANSAYAKU). (Consultation concerning Exercising Powers of the Corporate Auditor) Article 20. The Corporate Auditor may consult each other at a meeting of the Board of Corporate Auditors prior to the performance of their duties or exercise of their powers on the following matters: 1. Providing an explanation to respond to inquiries posed in writing by a shareholder prior to the Meeting of the Shareholders; 2. Reporting to the Board of Directors and requesting to convene a meeting thereof, etc.; 3. Providing an opinion on proposals, documents and other material to be submitted to the Meeting of the Shareholders; 4. Requesting an injunction for an unlawful action by a Director; 5. Providing an opinion at the Meeting of the Shareholders as to the appointment, discharge, resignation of and remuneration for Corporate Auditors; 6. Matters concerning a litigation between the Company and a Director; and 7. Other matters relating to a filing of any litigation. 6 (Consultation Concerning the Election of Full-Time Corporate Auditors and Remuneration) Article 21. With the consent of all of the Corporate Auditors, the election of Full-Time Corporate Auditors from among the Corporate Auditors and remuneration therefor may be discussed at a meeting of the Board of Corporate Auditors. (Appointment of Full-Time Corporate Auditors) Article 22. The Corporate Auditors may elect Full-Time Corporate Auditors from among themselves. (Minutes) Article 23. (1) The summary of the proceedings at a meeting of the Board of Corporate Auditors and the results thereof shall be contained and recorded in the minutes of the meeting of the Board of Corporate Auditors, to which each Corporate Auditor present at such meeting shall print his/her name and affix his/her seal or provide a signature in electronic format. The minutes of the meeting of the Board of Corporate Auditors shall be treated in the same manner as the minutes of the meeting of the Board of Directors. (2) The minutes referred to in the preceding paragraph shall be kept for ten (10) years at the principal office of the Company. (Board of Corporate Auditors Office) Article 24. The Board of Corporate Auditors Office shall handle matters such as the convocation of meetings of the Board of Corporate Auditors, drafting of the minutes, and other work concerning the administration of the Board of Corporate Auditors meeting. (Audit Standards of Corporate Auditors) Article 25. All matters relating to the Board of Corporate Auditors and audits by the Corporate Auditors shall comply with the laws, ordinances, the Articles of Incorporation and the Regulations of the Board of Corporate Auditors, as well as the Audit Standards of the Corporate Auditors determined by the Board of Corporate Auditors. (Amendment to or Abolition of These Regulations) Article 26. The Board of Corporate Auditors is authorized and empowered to amend or abolish these Regulations. 7 SUPPLEMENTARY PROVISIONS 1. Date of Enactment: February 25, 2005 2. Approved by: The Board of Corporate Auditors 3. Established by: Chief of Audit Section 4. Section in Charge: Audit Section 5. History of Establishment and Amendments Date of Establishment and Enactment: November 1, 1978 (Chief of Audit Section) Date of Enactment of Amendments: June 29, 1982 (Chief of Audit Section) Date of Enactment of Amendments: June 29, 1994 (Chief of Audit Section) Date of Enactment of Amendments: May 1, 2002 (Chief of Audit Section) Date of Enactment of Amendments: May 1, 2003 (Chief of Audit Section) Date of Enactment of Amendments: October 17, 2003 (Chief of Audit Section) Date of Enactment of Amendments: February 25, 2005 (Chief of Audit Section) 8 EX-11 6 rex110.txt EX-11 CODE OF ETHICS (ENGLISH TRANSLATION) Exhibit 11 RICOH THE RICOH GROUP CODE OF CONDUCT 1 Ricoh Group Corporate Social Responsibility (CSR) Charter To grow as a respected enterprise, the Ricoh Group must fully discharge its corporate social responsibility (CSR) from a consistent global perspective and throughout every aspect of its operations. To ensure this, the following principles are to be observed, with the proper social awareness and understanding, compliant with both the letter and the spirit of national laws and the rules of international conduct. Integrity in Corporate Activities 1. Every company in the Ricoh Group will develop and provide useful products and services, with high quality, safety, reliability and ease of use, while maintaining security of information and giving proper consideration to the environment. 2. Every company in the Ricoh Group will compete fairly, openly and freely, maintaining normal and healthy relationships with political institutions, government administration, citizens and organizations. 3. Every company in the Ricoh Group will take responsibility for managing and safeguarding its own information and that of its customers. Harmony with the Environment 4. Every company in the Ricoh Group will take responsibility, as a citizen of the world, working voluntarily and actively to preserve the environment. 5. Every company in the Ricoh Group, and all employees of each company, will seek to implement technological innovations that reflect environmental concerns and will participate in ongoing activities to preserve the environment. Respect for People 6. Every company in the Ricoh Group will, quite apart from corporate group activities, maintain a working environment that is safe and that makes it easier for its staff to do perform their duties, respecting their richly individual characteristics and encouraging their autonomy and creativity. 7. Every company in the Ricoh Group will respect the rights of all those connected with it, and will seek to create a cheerful working environment, free of discrimination. 8. No company in the Ricoh Group will permit forced labor or child labor, and none will tolerate the infringement of human rights. Harmony with Society 9. Every company in the Ricoh Group will, as a good corporate citizen, actively 2 engage in activities that contribute to society. 10. Every company in the Ricoh Group will respect the culture and customs of its country or region, and will operate so as to contribute to their development. 11. Every company in the Ricoh Group will engage in the fullest possible communications with society, seeking actively to provide the proper and unbiased disclosure of corporate information. 3 Message from the CEO Ricoh, aiming at harmonizing with society and earning its trust, established the Ricoh Business Code of Conduct in April, 1993 as the standard for corporate behavior as well as individual behavior by each and every officer and employee of the Group. Furthermore, each group company also created a Code of Conduct based on the Ricoh model which helped to enhance the reputation of the entire Group. However, in recent years the company has stepped up its role and influence as a committed environmentalist and global citizen. With these new roles coming to the fore, it has now become essential for companies to step up their activity level from mere social contribution to one of responsibility to society, with a management oriented toward corporate social responsibility. Thus it behooves companies to carry out their corporate activities with a keener sense of ethics, morals and responsibility over and above compliance with regulations. Along with the globalization of our corporate activity and group management, the Ricoh Group has been increasingly composed of people with different sets of values in a variety of countries around the world and therefore the need to unite our thinking around common values and standard of behavior has become more and more urgent. I therefore decided that it was time to review the original Ricoh Business Code of Conduct from the viewpoint of " a corporation which has responsibility to harmonize with society and with the environment ". Then, we established " the Ricoh Group CSR Charter " to be shared globally by the Ricoh group and " the Ricoh Group Code of Conduct " that Ricoh group members should adopt as a mind set and behavior guide. This Code ensures that we will continue into the future to be " a good global corporate citizen with reliability and appeal ". I firmly believe that serious adherence to this Code and Charter will help us to be even more appreciated by customers and society alike. I expect every member of the Ricoh Group family to take these principles to heart. January 1, 2004 Masamitsu SAKURAI President and CEO, Ricoh Group 4 CONTENTS Page - ------------------------------------------------------------------------------ General Principles....................................................... 6 Integrity in Corporate Activities 1 Providing customer-centric products................................. 9 2 Free competition and fair trading................................... 10 3 Banning insider trading............................................. 11 4 Managing corporate secrets.......................................... 12 5 Limits on entertainment and gifts................................... 13 6 Doing business with public bodies and making political contributions 14 7 Strict control of exports and imports............................... 15 8 Protection and use of intellectual properties....................... 17 9 Participation in anti-social actions................................ 18 10 Individual actions against the interests of the company............. 19 11 Protection of corporate assets...................................... 20 Harmony with the Environment 12 Respecting the global environment................................... 21 Respect for People 13 Respect for human rights............................................ 23 Harmony with Society 14 Practical contributions to society.................................. 24 15 Harmonizing with society............................................ 25 Implementation........................................................... 26 5 General Principles OBJECTIVES The Ricoh Group Code of Conduct (abbrev. to "the Code" below) is intended to establish the basic standards to ensure that Officers and Employees of the company, when engaging in corporate activities to advance the Ricoh Group, shall act in accordance with social ethics and in full compliance with the law. DEFINITIONS The definitions of the terms used in this Code are as follows: 1. "Ricoh" means Ricoh Company, Ltd. 2. "Related Companies" means those whose accounts are consolidated with Ricoh's and those whose management is actually under Ricoh control. 3. "Ricoh Group" means Ricoh and Related Companies. 4. "Officers and Employees" means the directors, auditors, executive officers, board members, all those coming under the regulations governing employment and all others employed in any capacity (whether in part time or irregular employment). APPLICABILITY 1. This Code and its standards apply to Officers and Employees. 2. Related Companies shall appoint a responsible person to implement these standards, who must make every effort to ensure that they are observed. However, under the following circumstances, the board of directors of Related Companies are permitted to enact supplementary standards provided they are consistent with the Code. Related Companies shall report such standards to the central authority of this Code. (1) When changes are necessary in view of national or regional laws, commercial customs, employment practices, or systems of value. (2) When changes are necessary because of the nature of the company's business, type of products, or those with whom it does business. 6 THE BASIC ATTITUDES TO BE ADOPTED BY OFFICERS AND EMPLOYEES It is important that all Officers and Employees, as individuals, citizens, and business persons, shall understand the following basic concepts and seek to implement them in their daily activities. 1. Activities shall always be based on national and regional laws, properly understand, and strictly obeyed. 2. Activities shall be those that can be performed with a clear conscience as good citizens, aware of their social responsibilities, and maintaining high ethical and moral standards. 3. As business persons, they must act in a disciplined way, while at the same time respecting the individual differences and value systems of others, observing all basic rules and regulations established by the Ricoh Group, never confusing public and private interests, and acting with a full sense of their responsibility as representatives of the Ricoh Group. 4. Realizing that all corporate activities, not only those that involve direct contact with the customer such as sales and maintenance, are evaluated by our customers, every effort must be made to ensure the maximum possible customer satisfaction. 5. In order to stay keenly aware of the various changes and problems we face, we must act autonomously. Always seeking to maintain the creativity to freely generate a full range of ideas, we must think independently and create new values. 6. We must always put ourselves in the other person's place, whether they are fellow employees, customers, those with whom we do business, or cooperating companies, and make ourselves useful to them. 7. We must make every effort to ensure that the progress of the company is fully consistent with the personal happiness of its people, seeking to bring about a richly satisfying life for all. 7 THE BASIC ATTITUDE OF THE RICOH GROUP TO ITS EMPLOYEES The Ricoh Group is committed, as follows, to ensuring that all employees maintain the required basic attitudes in all their activities, making the fullest use of their abilities, and so making the best of themselves: 1. For all individual employees, the Ricoh Group seeks to create and provide a work place that caters for their broadest possible self-actualization, desiring their growth as human beings not only in work but also in making the best of themselves. For all individual employees, it seeks to create a free and generous corporate ethos in which they can feel that they are worthy, growing and fulfilled, and giving free reign to their creativity. 2. The specialized abilities of all individual employees are prized by the Ricoh Group, which seeks to make the fullest use of them while at the same time providing a systematic support structure that encourages them to hone existing skills and develop new ones. 3. A fair and impartial system of evaluating the degree to which all individual employees use their skills is a source of vitality within the group. All individual employees' success in meeting their targets are to be assessed fairly by clearly established standards when evaluating their abilities and contributions, and they are to be recognized accordingly. 4. Concern for the safety and health of all individual employees is to be reflected in a pleasant and functional working environment and equipment. And in order that employees may enjoy a wide variety of lifestyles, the Ricoh Group will provide a variety of working conditions, terms of employment, and working hours, etc. 8 Integrity in Corporate Activities 1 PROVIDING CUSTOMER-CENTRIC PRODUCTS .. Basic Policy The Ricoh Group's basic approach to developing the products and services it provides to its customers is that of adopting the customer's viewpoint. .. Actions (1) WE SOLVE THE CUSTOMER'S PROBLEMS. Officers and Employees shall actively seek to understand the customer's problems, and must devote themselves to solving or ameliorating those problems. (2) WE EARN THE CUSTOMER'S TRUST. Officers and Employees, in developing the products and services they provide to the customer, shall consider quality, safety, the security of information, reliability, environmental preservation and ease of use. (3) WE SEEK EVER HIGHER CUSTOMER SATISFACTION. Officers and Employees shall regularly assess the degree of customer satisfaction, and shall work to improve products and services so as to achieve higher satisfaction. .. Related Standards: Ricoh Group Quality Assurance Regulation (RGS-AQAA0001) Ricoh Group Product Safety Regulation (RGS-AQAA0002) 9 2 FREE COMPETITION AND FAIR TRADING .. Basic Policy The Ricoh Group will remain in strict compliance with the laws and regulations governing the banning of monopolies, fair competition, and fair trading, and will take no action seeking to evade them. .. Actions (1) WE WILL ENTER NO AGREEMENTS OR DISCUSSIONS FOR THE RECIPROCAL LIMITATION OF CORPORATE ACTIVITIES. Officers and Employees will not participate in discussions or agreements with competitors in the same industry to impose reciprocal limits on corporate freedom of action in connection with the conditions of competitive bids, product pricing, conditions of sale, profits, market share, sales areas, etc. (2) WE WILL NOT EXPLOIT OUR TRADING POSITION. Officers and Employees will not exploit our trading position to impose unprofitable transactions upon our trading partners, not will we impose limitations on trading between our trading partners and third parties. (3) WE WILL NOT MAKE INAPPROPRIATE DISPLAYS NOT OFFER INAPPROPRIATELY LARGE PREMIUMS OR PRIZES. Officers and Employees shall not provide displays nor offer inappropriately large premiums or prizes that might lead customers to a mistaken choice of product. .. Related Standards: "Manual for Compliance with Antimonopoly Law" 10 3 BANNING INSIDER TRADING .. Basic Policy The Ricoh Group shall not take advantage of insider information to which it gains access in the course of business to make profits nor do anything else that would undermine fair and healthy trading in securities. .. Actions (1) NO DISCLOSURES TO THIRD PARTIES Officers and Employees shall not, unless it is necessary in the ordinary course of business, obtain insider information concerning the Ricoh Group or other companies. Again, if officers or employees have come to know insider information in the ordinary course of business, they shall not disclose it to third parties who do not have a need to know it in the performance of their duties. (2) NO USE FOR PERSONAL GAIN Officers and Employees who have come to know insider information concerning the Ricoh Group or other companies either in the course of business or as a result of it, shall not trade the securities of the Ricoh Group nor or the other companies nor engage in any other related trades. * "Insider information" is unpublished information on increases (or reductions) in capitalization, agreements for business cooperation, sales figures, profits or other important internal information. 11 4 MANAGING CORPORATE SECRETS .. Basic Policy Information that the Ricoh Group has acquired or created in the course of business must, depending on its importance, be treated as a corporate secret and managed with all proper care. .. Actions (1) OBEY MANAGEMENT RULES. Officers and Employees, when they have received information, materials, or documents in the course of business, should notify their supervisor, and manage them in accordance with the applicable rules of the company concerned. Again, they must continue to obey these rules even after their employment has terminated. (2) ONLY THOSE AUTHORIZED SHOULD REVEAL CORPORATE SECRETS. Officers and Employees, when they are requested to answer questions or to provide materials, whether by someone inside or outside the company, unless they clearly have the required authority to reply to the question or to provide the materials, they should refer the request to a superior for instructions. (3) NO PRIVATE USE SHALL BE MADE OF SUCH SECRETS. Officers and Employees shall only use corporate secrets in the course of the company's business, and neither during their employment nor after it has terminated, shall they make any use of it for themselves or for others. (4) NO ACQUISITION OF COMPETITIVE SECRETS BY DISHONEST MEANS. Officers and Employees shall not acquire the secrets of other companies by dishonest means. Again, when Officers and Employees acquire the secrets of other companies in accordance with a contract, they must only use the secret information as specified in the contract. 12 5 LIMITS ON ENTERTAINMENT AND GIFTS .. Basic Policy The Ricoh Group, in giving entertainment or gifts shall not give bribes nor depart in any other way from general good business practice. .. Actions (1) GOVERNMENT EMPLOYEES (AND EX-EMPLOYEES) SHALL NOT BE ENTERTAINED NOR GIVEN GIFTS. Officers and Employees shall neither entertain nor give gifts to the employees (or former employees) of government departments nor of regional (local) authorities or other public bodies. (2) FOLLOW GENERAL GOOD BUSINESS PRACTICE Officers and Employees, when giving entertainment or gifts, shall not exceed the bounds of general good business practice. Again, Officers and Employees shall make every effort to inform those with whom they do business that they do not accept entertainment nor gifts, and if they find themselves unable to avoid being entertained, they shall immediately inform their superior and follow instructions. .. Related Standards: "Employment regulations" 13 6 DOING BUSINESS WITH PUBLIC BODIES AND MAKING POLITICAL CONTRIBUTIONS .. Basic Policy The Ricoh Group, in doing business with public bodies and making political contributions, shall be in compliance with the relevant laws. .. Actions (1) STRICT IMPARTIALITY Officers and Employees, when doing business with government departments or regional (local) authorities, shall comply strictly and impartially with the relevant legal requirements and regulations, always taking care to avoid legal problems. (2) NO IMPROPER POLITICAL CONTRIBUTIONS Officers and Employees, except where otherwise permitted by law, shall not in the course of business make contributions to politicians or candidates for political office, nor to political organizations, nor shall they cooperate directly or indirectly in political campaigning. 14 7 STRICT CONTROL OF EXPORTS AND IMPORTS .. Basic Policy The Ricoh Group shall not infringe laws intended to preserve international peace and safety, including those on foreign exchange transactions, those on overseas trading and export-related laws, and those on the countries with which to trade. .. Actions (1) PERFORM ASSESSMENT OF APPLICABILITY Officers and Employees shall follow the internal procedures in accordance with company regulations, carefully checking beforehand whether any restrictions apply to the import or export of products being planned, developed or designed, and on products, equipment and materials being purchased or sold. (2) CHECK THE RESULT OF THE ASSESSMENT OF THE APPLICABILITY OF IMPORT/EXPORT RESTRICTIONS Officers and Employees, when importing or exporting goods (products, components, equipment, materials, etc.) or technology (technical documentation, programs, engineering consultancy or other services), shall check beforehand in the light of the assessment of the applicability of restrictions whether such export or import would infringe the relevant laws and regulations. When restrictions are found to be applicable, transactions must conform with the restrictions. (3) PREVENTING CONVERSION FOR MILITARY USE When importing or exporting goods or technology, whether or not restrictions are found to be applicable, Officers and Employees shall voluntarily apply controls in the spirit of export restrictions for non-proliferation. When there is fear that the customer may convert items for military use, or when the destination country itself has inadequate implementation of import/export restrictions, or the country is one that is subject to international criticism on the grounds of offences against the maintenance of world order, or when the destination country or region is experiencing conflict or the threat of conflict, Officers and Employees shall check documents (contracts, memoranda, confirmations, etc.) to ascertain the ultimate user and the ultimate purpose for which the goods or technology will be used and shall submit to the ruling of the Ricoh Group Export Import Control Committee as to whether or not the transaction should proceed. 15 .. Related standards: Regulations requiring compliance with export-import laws (RGS-ATRA0001) Export-import controls and assessment of applicability, screening of customers and trading (RGS-ATRC0001) "Guidebook for Export & Import Control" (published by the Ricoh Group Export-Import Control Committee) 16 8 PROTECTION AND USE OF INTELLECTUAL PROPERTIES .. Basic Policy The Ricoh Group will encourage activities that create intellectual properties of value to the Ricoh Group and will seek to protect and utilize them appropriately. .. Actions (1) RAPID NOTIFICATION Intellectual properties created at work all belong to the company. Officers and Employees shall notify the company immediately of all intellectual properties created at work (with patents, this includes free patents). (2) RESPECT THE RIGHTS OF OUTSIDE PARTIES. Officers and Employees shall respect the rights of outside parties and ensure that, as they perform their duties, such rights are not infringed. (3) FOLLOW PROCEDURES FOR THEIR DISCLOSURE AND PROVISION. Officers and Employees, when announcing intellectual properties to academic conferences or disclosing and licensing intellectual properties to outside parties when implementing a new business model, shall follow both Ricoh Group policy and standard procedures before doing so. * The intellectual properties referred to here are patents, utility models, designs, registered trademarks, copyrights on programs, rights to use specific circuit configurations, etc. .. Related Standards: Ricoh Group Regulations on Intellectual Properties (RGS-ALAA2001) 17 9 PARTICIPATION IN ANTI-SOCIAL ACTIONS .. Basic Policy The Ricoh Group takes a firm attitude to anti-social activities and elements and will have nothing to do with them. .. Actions (1) HAVE NO DEALINGS WITH ANTI-SOCIAL ACTIVITIES AND ELEMENTS. Officers and Employees must have absolutely nothing to do with anti-social activities and elements that pose threats to the safety and good order of society and the lives of its citizens. (2) DO NOT COMPROMISE IN THE FACE OF EXTORTION FROM ANTI-SOCIAL ELEMENTS. Officers and Employees, if presented with extortion demands by anti-social elements, shall not compromise with them by paying money or in any other way. Officers and Employees shall immediately report such demands to their superior and the superior must contact the general administration of each company affected. (3) HAVE NO DEALINGS WITH ANTI-SOCIAL ELEMENTS. Officers and Employees must no have any dealings with anti-social elements. 18 10 INDIVIDUAL ACTIONS AGAINST THE INTERESTS OF THE COMPANY .. Basic Policy The Ricoh Group does not approve any actions by its officers or employees that would cause, or might threaten to cause, any disadvantage to the Ricoh Group in the performance of its normal business activities. .. Actions (1) INFORM THE COMPANY. Officers and Employees shall not take any actions that would conflict with the interests of the company, or that might lead to such a conflict of interest. When such a situation arises, the Officers and Employees shall immediately inform their superior of the fact. (2) OBTAIN PRIOR COMPANY APPROVAL. Officers and Employees must obtain prior company permission before accepting appointment as officers of other companies or organizations, and before entering into employment contacts. (3) NO COMPETITION WITHOUT PERMISSION. Officers and Employees shall not, without first obtaining company permission, engage in any personal activities that would constitute competition with the Ricoh Group, nor shall they accept appointment in the management of a competitive company. 19 11 PROTECTION OF CORPORATE ASSETS .. Basic Policy The Ricoh Group has established rules for the control of corporate assets (products, fixtures, information, and all other assets both tangible and intangible) and these must be rigorously implemented. .. Actions (1) APPROPRIATE CONTROLS Officers and Employees must control corporate assets appropriately in strict conformity with the rules. (2) NO IMPROPER USE Officers and Employees must make no private use of any of the company's assets outside the requirements of their normal duties. .. Related Regulations: "Employment regulations" 20 Harmony with the Environment 12 RESPECTING THE GLOBAL ENVIRONMENT .. Basic Policy The Ricoh Group, aware that environmental preservation is the solemn duty of every citizen of the world, will align corporate activities with environmental preservation activities, taking responsibility for ensuring that the entire group participates in them. .. Actions (1) SET HIGHER TARGETS FOR ENVIRONMENTAL ACTIVITIES AND MEET THEM. Officers and Employees will not only be in full compliance with all laws, but will take personal responsibility for establishing targets that reflect the concerns of society to reduce environmental impacts, and seek to create economic value in achieving these targets. (2) IMPLEMENT TECHNOLOGICAL REFORMS. Officers and Employees will make every effort to implement technological reforms that can reduce the impact on the environment, and make active use of such technologies. (3) OPERATE BUSINESSES IN HARMONY WITH THE ENVIRONMENT. Officers and Employees, in managing business operations, will always be aware of their environmental impact, and will participate responsibly in efforts to prevent pollution, to ensure the effective use of energy and other resources, and to reduce the volume of waste materials. They will also engage in ongoing efforts to maintain and improve the systems of environmental preservation. (4) PROVIDE PRODUCTS AND SERVICES THAT REFLECT ENVIRONMENTAL CONCERNS. Officers and Employees will provide products and services that have minimal impact on the environment at all stages of the product cycle, from procurement of materials, through production, sales, distribution, recycling and disposal. (5) ACT RESPONSIBLY TO ENHANCE ENVIRONMENTAL AWARENESS. Officers and Employees will keep their eyes on the wider society around them, and work actively through education and other means to enhance their awareness and personally shoulder their responsibility to work for environmental preservation. (6) MAKE SOCIAL CONTRIBUTIONS FOR THE ENVIRONMENT. Officers and Employees will ensure that the company works closely 21 with society in all countries and regions, actively disclosing information, and helping and supporting environmental preservation so as to contribute largely to society. .. Related Standards: "Ricoh General Principles on the Environment" Ricoh Group Environmental Conservation Regulation (RGS-AEP A0001) 22 Respect for People 13 RESPECT FOR HUMAN RIGHTS .. Basic Policy The Ricoh Group seeks always to respect fundamental human rights on the basis of mutual understanding. The Ricoh Group does not discriminate on the basis of race, religious faith, gender, social position, citizenship, sickness, handicaps, etc. .. Actions (1) ELIMINATE ALL DISCRIMINATION. Officers and Employees must respect all fundamental human rights, and must not engage in any actions that ignore human rights such as discriminatory language, violence, sexual harassment, power harassment, etc. (2) PROTECT PERSONAL PRIVACY When Officers and Employees acquire personal information in the performance of their duties, they must take full care in their handling of this information to protect the privacy of those concerned, and must exercise the proper management control over it. (3) DO AWAY WITH IMPROPER LABOR PRACTICES. Officers and Employees must not make improper demands for labor. Again, they must not employ children under the legal working age of the country or region concerned. Officers and Employees must also impose these same conditions on the Ricoh Group's sales outlets and cooperating companies. .. Related Standards: "Employment regulations" Basic regulations for the protection of personal information (RGS-AITA0004) Rules on internal group usage of personal information (RGS-AITA0003) 23 Harmony with Society 14 PRACTICAL CONTRIBUTIONS TO SOCIETY .. Basic Policy The Ricoh Group, aware of its role as a corporate citizen, joins in active partnership with like-minded people to make contributions to society. .. Actions (1) ENGAGE IN ACTIVITIES THAT CONTRIBUTE TO THE LOCAL COMMUNITY. Corporate activities take place in close contact with the local community. Officers and Employees, because they want the Ricoh Group to be welcome, familiar and trusted in local society, should strive to work closely with that community, making contributions to it that will further the local culture and economy. (2) FOSTER A CORPORATE ETHOS THAT PLACES IMPORTANCE ON CONTRIBUTIONS TO SOCIETY As well as making corporate contributions to society, each individual officer and employee should consider how to contribute to society, and take practical part in such activities in their immediate vicinity. Officers and Employees should, by voluntary participation in activities, strive foster a corporate ethos that puts the proper value on social contributions. 24 15 HARMONIZING WITH SOCIETY .. Basic Policy The Ricoh Group seeks to coexist harmoniously with society, and its business will be managed so as to contribute to the regions within which it operates, while working to deepen mutual understanding and build relationships of trust. .. Actions (1) RESPECT THE WORLD'S CULTURES AND CUSTOMS. There are many things that, although they may be perfectly acceptable in one country or region, are quite unacceptable in another. Officers and Employees must therefore act with the necessary respect for the history, culture and customs of the various nations and regions within which they operate. (2) ACTIVELY DISCLOSE INFORMATION. Accurately publicizing the Ricoh Group's corporate attitudes is the first prerequisite for deeper mutual understanding between the group and society. In order to ensure that as many people as possible have a proper understanding of the Ricoh Group, Officers and Employees must follow the normal procedures and actively provide fair and timely information. (3) KEEP ACCURATE RECORDS AND MAKE ACCURATE REPORTS. Officers and Employees must keep accounting and financial records in compliance with the relevant laws and company regulations. Again, such records must be prepared so that their content is complete, fair, accurate, timely and readily understandable. 25 Implementation ENACTMENT AND AMENDMENT These standards shall be enacted and if necessary, amended, by decision of the board of directors after full deliberation with the CSR Committee. ENSURING GENERAL AWARENESS The Ricoh Group section(s) responsible for CSR shall engage in an ongoing program of educational and leadership activities to ensure general awareness of these standards. Officers and Employees are required to affirm their strict adherence to these standards by signing a statement to that effect annually and submitting it to the company. PENALTIES Acts in contravention of these standards shall, in accordance with the employment regulations of the company concerned, be subject to the penalties prescribed therein. TREATMENT OF TEMPORARY AND OTHER EMPLOYEES (1) For employees on contracts from temporary employment agencies, the member of staff responsible for employing them in the section in which they work must explain the standards and require the employees to strictly adhere to these standards by signing a statement. (2) For those who are in the company on out-sourcing contracts or consultancy contracts, the member of staff responsible in each section must explain to that person the standards to the work being performed under the contract which incorporating a provision for their strict adherence into the contract itself. RELATED STANDARDS Regulations, group standards and manuals, etc., that supplement the various sections of these standards are itemized under "Related Standards." OTHERS Officers and Employees who become aware of contraventions of these standards, or the danger that they will be contravened, are required to contact the responsible CSR section either directly or via a superior, or to contact it via the "hotline (AVAILABLE ONLY IN JAPAN)." No person so making such contact shall suffer any disadvantage as a result of it. 26 "HOTLINE" INFORMATION (AVAILABLE ONLY IN JAPAN) Open: 10:00am to 5:00pm (closed on weekends and holidays) Apply to: Ricoh: CSR Office, CSR Division Tel: 0120-344-670 E-mail: ZPG_CSR@nts.ricoh.co.jp Letters: CSR Office, CSR Division, Ricoh Company, Ltd. 8-13-1 Ginza, Chuo-ku, Tokyo 104-8222 Law Office: Nakajima Transactional Law Office Tel: 03-3502-8763 (a dedicated Ricoh Group line) E-mail: rigrpcpl@proof.ocn.ne.jp FOR FURTHER INFORMATION Corporate activities are both vast in scale and complex in nature. It will not always be clear how these standards apply in individual cases. In such cases, please contact individual sections responsible or the central authority as listed below. When there is an organization change, please contact the new section or authority informed of the standards. INDIVIDUAL SECTIONS RESPONSIBLE 1 Providing customer-centric products .... Ricoh Quality of Management Division ------------------------------------ 2 Free competition and fair trading .... Ricoh Legal Division -------------------- 3 Banning insider trading .... Ricoh Corporate Planning Division --------------------------------- 4 Managing corporate secrets .... Ricoh Personnel Division ------------------------ 5 Limits on entertainment and gifts .... Ricoh Personnel Division ------------------------ 6 Doing business with public bodies .... Ricoh Personnel Division ------------------------ Making political contributions .... Ricoh Secretary Office ---------------------- 7 Strict control of exports and imports .... Ricoh International Marketing Group ----------------------------------- 8 Protection and use of intellectual properties .... Ricoh Legal Division -------------------- 9 Participation in anti-social actions .... Ricoh Personnel Division ------------------------ 10 Individual actions against the interests of the company .... Ricoh Personnel Division ------------------------ 11 Protection of corporate assets .... Ricoh Personnel Division ------------------------ 12 Respecting the global environment .... Ricoh Corporate Environment Division ------------------------------------ 27 13 Respect for human rights .... Ricoh Personnel Division ------------------------ 14 Practical contributions to society .... Ricoh Corporate Citizenship Promotion Office -------------------------------------------- 15 Harmonizing with society .... Ricoh Corporate Planning Division --------------------------------- CENTRAL AUTHORITY Ricoh Group Code of Conduct .... Ricoh CSR Division ------------------ 28 The Ricoh Group Code of Conduct Approved by the Board on November 4, 2003 Effective January 1, 2004 Ricoh Company, Ltd. CSR Office, CSR Division 8-13-1 Ginza, Chuo-ku, Tokyo 104-8222 Tel: 03-6278-5202 Copyright 2003 RICOH COMPANY, LTD. All rights reserved 29 EX-12 7 rex121.txt EX-12.1 CERTIFICATION PURSUANT TO RULE 13A-14(A)/15D-14(A) Exhibit 12.1 CERTIFICATION I, Masamitsu Sakurai, President and Chief Executive Officer of Ricoh Company, Ltd., certify that: 1. I have reviewed this annual report on Form 20-F of Ricoh Company, Ltd.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the company as of, and for, the periods presented in this report; 4. The company's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the company and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Evaluated the effectiveness of the company's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) Disclosed in this report any change in the company's internal control over financial reporting that occurred during the period covered by the annual report that has materially affected, or is reasonably likely to materially affect, the company's internal control over financial reporting; and 5. The company's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the company's auditors and the audit committee of the company's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the company's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the company's internal control over financial reporting. Date: June 29, 2006 By: /s/ Masamitsu Sakurai ---------------------------------- Masamitsu Sakurai President and Chief Executive Officer EX-12 8 rex122.txt EX-12.2 CERTIFICATION PURSUANT TO RULE 13A-14(A)/15D-14(A) Exhibit 12.2 CERTIFICATION I, Zenji Miura, Director, Corporate Executive Vice President and Chief Financial Officer of Ricoh Company, Ltd., certify that: 1. I have reviewed this annual report on Form 20-F of Ricoh Company, Ltd.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the company as of, and for, the periods presented in this report; 4. The company's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the company and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Evaluated the effectiveness of the company's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) Disclosed in this report any change in the company's internal control over financial reporting that occurred during the period covered by the annual report that has materially affected, or is reasonably likely to materially affect, the company's internal control over financial reporting; and 5. The company's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the company's auditors and the audit committee of the company's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the company's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the company's internal control over financial reporting. Date: June 29, 2006 By: /s/ Zenji Miura ---------------------------------- Zenji Miura Director, Corporate Executive Vice President and Chief Financial Officer EX-13 9 rex13a1.txt EX-13.A.1 CERTIFICATION PURSUANT TO SECTION 1350 OF CHAPTER 63 OF TITLE 18 OF USC Exhibit 13.(a)(1) CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ENACTED BY SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the annual report on Form 20-F of Ricoh Company, Ltd. (the "Company") for the period ended March 31, 2006 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Masamitsu Sakurai, President and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. ss. 1350, that: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: June 29, 2006 By: /s/ Masamitsu Sakurai ------------------------------------ Masamitsu Sakurai President and Chief Executive Officer EX-13 10 rex13a2.txt EX-13.A.2 CERTIFICATION PURSUANT TO SECTION 1350 OF CHAPTER 63 OF TITLE 18 OF USC Exhibit 13.(a)(2) CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ENACTED BY SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the annual report on Form 20-F of Ricoh Company, Ltd. (the "Company") for the period ended March 31, 2006 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Zenji Miura, Director, Corporate Executive Vice President and Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. (s) 1350, that: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: June 29, 2006 By: /s/ Zenji Miura ------------------------------------------- Zenji Miura Director, Corporate Executive Vice President and Chief Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----