Form 6-K
Table of Contents

U.S. SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 6-K

 


REPORT OF FOREIGN PRIVATE ISSUER

PURSUANT TO RULE 13a-16 OR 15d-16 UNDER

THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number: 333-10486

For the Month of February 2007

Trend Micro Incorporated

(Translation of registrant’s name into English)

 


Shinjuku MAYNDS Tower, 1-1, Yoyogi 2-chome,

Shibuya-ku, Tokyo 151-0053, Japan

(Address of principal executive offices)

 


Indicate by check mark whether the registrant files or will file annual reports under cover Form 20-F or Form 40-F.

Form 20-F      X            Form 40-F            

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(1):    

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(7):    

Indicate by check mark whether by furnishing the information contained in this Form, the registrant is also thereby furnishing the information to the Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934.

Yes               No     X    

If “Yes” is marked, indicate below the file number assigned to the registrant in connection with Rule 12g3-2(b): 82-            

 



Table of Contents

Information furnished on this form:

Table of Contents

1. Press Release dated February 21, 2007, relating to the announcement of earnings results for the fourth quarter and consolidated revenue for fiscal year 2006 ended December 31, 2006.

2. Press Release dated February 21, 2007, relating to the announcement of earnings results for fiscal year ended December 31, 2006.

3. Press Release dated February 21, 2007, relating to the announcement of year-end cash dividends per share.

4. Press Release dated February 21, 2007, relating to the announcement of remuneration, etc. in the form of stock options of directors.

5. Press Release dated February 21, 2007, relating to the announcement of amendment of the part of the Articles of Incorporation.


Table of Contents

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

   

TREND MICRO INCORPORATED

Date:  

February 23, 2007

    By:  

/s/    MAHENDRA NEGI        

 

       

Mahendra Negi

Representative Director, Chief Operating Officer,

Chief Financial Officer and Executive Vice President


Table of Contents

Trend Micro Reports Results for 2006

Revenues up 17 percent annually, driven by strong sales in the small and mid-sized business market and overall US growth

Tokyo, Japan – February 21, 2007 – Trend Micro Incorporated (TSE: 4704, NASDAQ: TMIC), a leader in network antivirus and Internet content security software and services, today announced earnings results for the fourth quarter and consolidated revenue for fiscal year 2006 ended December 31, 2006.

For the fourth quarter, Trend Micro posted a record 23.386 billion Yen ($198.524 million, 117.80JPY=1USD) in net sales, representing 14 percent growth in Yen year-over-year and 11 percent growth over the third quarter in Yen. Operating income for the quarter was 6.705 billion Yen ($56.921 million) and net income was 5.030 billion Yen ($42.697 million).

For 2006, Trend Micro posted record consolidated net sales of 85.614 billion Yen (or U.S. $726.771 million), representing an annual growth rate of 17 percent. The company also reported operating income of 27.076 billion Yen (or U.S. $229.845 million) and net income of 17.236 billion Yen (or US $146.317 million). Revenues from products and services sold to enterprise, mid-sized, and small business customers worldwide comprised 76 percent of 2006 revenues; revenue from consumer products comprised the remaining 24 percent.

Trend Micro continued to experience double digit growth worldwide, most notably in North America where sales grew 25 percent annually while Europe saw a growth of 15 percent year on year. In the Japan and Asia-Pacific regions, annual sales increased 13 and 16 percent, respectively.

“2006 was a healthy year for our company, annual growth remained in double digits and our steadfast focus on delivering new products and services designed specifically to meet the needs of our different-sized customers helped fuel development,” said Eva Chen, CEO of Trend Micro. “In the past year, we delivered a number of new security solutions which prevent malicious content and attacks. During 2007, we will continue this momentum by focusing on protection against web-based threats that can result in data leakage and information theft. This approach is helping us to build a strong foundation to position us for the next stage of growth and our continued leadership.”

Based on information currently available to the company, consolidated net sales for the first quarter ending March 31, 2007, is expected to be 23.000 billion Yen (or U.S. $194.915 million, based on an exchange rate of 118JPY = 1USD). Operating income and net income are expected to be 5.500 billion Yen (or U.S. $46.610 million) and 2.850 billion Yen (or U.S. $24.153 million), respectively.

Growth rate figures are calculated from Japanese Yen results. Some discrepancy may therefore be noted in US Dollar comparisons owing to fluctuations in currency conversion rates.


Table of Contents

2006 Business Highlights

Awards and Recognition

Corporate

* Trend Micro was listed on the Dow Jones Sustainability Index for the third consecutive year.

* Trend Micro placed second in the Ziff Davis CIO Insight 2006 Vendor Value Study, ahead of all other security vendors. The study conducted among top IT managers and CIO’s ranked 40 of the most important information technology vendors by value, reliability and loyalty. Additionally, Trend Micro was the top-scoring Mid-Market vendor.

* Dave Rand, CTO for Trend Micro Internet Content Security, addressed the Messaging Anti-Abuse Working Group General Meeting in June 2006, where he presented validation that botnets are now the primary source of spam.

* In August, Trend Micro was recognized as number 9 on the Cape Horn Strategies “2006 Software Industry Sustained Success Honor Roll” having achieved 9 consecutive years of profitable growth.

* In November 2006, Trend Micro received the Taiwan International Achievement award at the Fourth Taiwan Business Awards.

* Independent research firm, Forrester Research acknowledged Trend Micro as a Leader in Enterprise Anti-Spyware in their report “The Forrester Wave: Enterprise Antispyware, Q1 2006”.

* In August 2006, U.S. based solution-provider readers of CMP Technology’s VARBusiness magazine recognized Trend Micro in the Annual Report Card (ARC) award program, for the outstanding satisfaction levels it provides. Trend Micro received the Product Innovation award, for the third consecutive year, and the Loyalty award in the Security Management Software category from the biweekly magazine that provides strategic insight to technology integrators

Products

• In March 2006, Trend Micro was named as CRN Channel Champion in both Client Security Software and Network Security Software Categories by the US edition of CRN Magazine.

• Trend Micro Internet Security and Trend Micro AntiVirus plus AntiSpyware were awarded the Certified for Windows Vista Logo.

• TechTarget’s SearchComputingMagazine.com named Trend Micro Mobile Security among its “Products of the Year” in January 2006.

• In early January, TechData’s TechSelect Channel Community awarded Trend Micro’s SMB Solutions “Best Solution.”

• During the fourth quarter, the Network VirusWall Enforcer underwent extensive comparative testing in the Infoworld magazine labs and came away with the top score. The reviewer noted that the “step-by-step policy configuration was simple to create thanks to the wizardlike interface.”


Table of Contents

Products and Innovation

New products Trend Micro introduced during 2006, included the following:

* Consumer:

Trend Micro Internet Security, incorporates Trend Micro’s well-known PC-cillin™ engine and anti-malware protection along with a host of new features addressing rootkits, spyware, phishing, spam, hackers, viruses, WiFi attacks, smartphone threats and the growing number of identity-theft threats. In addition, the Trend Micro Internet Security subscription includes TrendSecure™, Trend Micro’s new online security services.

* Small and Mid-sized Businesses.

InterScan Gateway Security Appliance is designed for mid-sized organizations looking for an easy to install, easy to maintain content security solution. While protecting corporate and personal data, the appliance supports employee productivity and it includes an anti-bot functionality to help prevent internal PC’s from becoming zombies.

Trend Micro™ Email Security Services were developed specifically with the small and medium businesses (SMB) in mind. This service protects their network and infrastructure by stopping threats before they reach the customer’s gateway.

* Enterprise:

InterScan Web Security Appliance is a new gateway-based hardware solution with unique capabilities designed to provide enterprise organizations with comprehensive front-line protection against malware and content security threats including spyware.

Network VirusWall™ Enforcer, is a second-generation enterprise-class Network Access Control (NAC) appliance that ensures that all devices — managed or unmanaged, local or remote — comply with security policies before they’re granted access to corporate networks.

InterScan™ Messaging Security Appliance is a comprehensive solution for enterprises to address email-based threats including spam, phishing, bots, spyware, and viruses, as well as content compliance.


Table of Contents

Patents

In 2006, Trend Micro was awarded the following patents:

• U.S. Patent No. 7,099,853, entitled “Configurable Hierarchical Content Filtering System” covers a content filtering scanning method that distributes the scanning of incoming data against a knowledge base to more than one computer. This technology advantageously allows a complete pattern file to be segmented, with different computers scanning incoming data using different segments of the pattern file.

• U.S. Patent No. 7,062,553, entitled “Virus Epidemic Damage Control System and Method for Network Environment” covers a method of early virus detection by analyzing whether identical sections of files have been modified over a certain time interval. According to a specific example of the patented technology, a network system finds all files having been modified within a predetermined time interval and analyzes the modifications. If the modified sections of the modified files are identical or similar, the network is alerted of a possible virus outbreak, allowing early containment and quarantine.

Business Highlights

* New customers in the fourth quarter included: Nova Information Systems in the United States and Eastern Norway Regional Health Authority, Statoil ASA and ISC Central (Dutch Police Force) in EMEA

Notice Regarding Forward-looking Statements

Certain statements that we make in this release are forward-looking statements. These forward-looking statements are based upon management’s current assumptions and beliefs in light of the information currently available to it, but involve known and unknown risks and uncertainties. Many important factors could cause our actual results to differ materially from those expressed in our forward-looking statements. These factors include:

* Difficulties in addressing new virus and other computer security problems

* Timing of new product introductions and lack of market acceptance for our new products

* The level of continuing demand for, and timing of sales of, our existing products

* Rapid technological change within the antivirus software industry

* Changes in customer needs for antivirus software

* Existing products and new product introductions by our competitors and the pricing of those products

* Declining prices for products and services

* The effect of future acquisitions on our financial condition and results of operations

* The effect of adverse economic trends on our principal markets

* The effect of foreign exchange fluctuations on our results of operations

* An increase in the incidence of product returns

* The potential lack of attractive investment targets and

* Difficulties in successfully executing our investment strategy

We assume no obligation to update any forward-looking statements. For more details regarding risk factors relating to our future performance, please refer to our filings with the U.S. Securities and Exchange Commission.


Table of Contents

About Trend Micro, Inc.

Trend Micro, Inc. is a leader in network antivirus and Internet content security software and services. The Tokyo-based corporation has business units worldwide. Trend Micro products are sold through corporate and value-added resellers and managed service providers. For additional information and evaluation copies of all Trend Micro products, visit our Web site, www.trendmicro.com.

# # #

Trend Micro and the t-ball logo are trademarks or registered trademarks of Trend Micro Incorporated. TrendLabs is a service mark of Trend Micro Incorporated. All other company or product names may be trademarks or registered trademarks of their owners.

For additional Information:

Mr. Mahendra Negi

Chief Financial Officer/IR Officer

Phone: +81-3-5334-4899

Fax: +81-3-5334-4874

ir@trendmicro.co.jp


Table of Contents

Supplementary Information

(1) CONSOLIDATED BALANCE SHEETS

 

     (Thousands of yen)
    

December 31,

2005

  

December 31,

2006

Account

   Amount     %    Amount     %

<Assets>

         

Current assets:

         

Cash and cash equivalents

   59,612,577        76,196,954    

Time deposits

   1,435,293        514,293    

Marketable securities

   22,395,365        25,958,661    

Notes and accounts receivable, trade

         

–less allowance for doubtful accounts

         

(Yen) 282,257 in FY2005 and

(Yen) 514,223 in FY2006, respectively

         

–less sales returns

         

(Yen) 422,453 in FY2005 and

(Yen) 208,275 in FY2006, respectively

   19,198,870        19,923,830    

Inventories

   359,897        685,952    

Deferred income taxes

   6,727,229        9,438,457    

Prepaid expenses and other current assets

   1,925,791        3,708,789    
                     

Total current assets

   111,655,022     84.0    136,426,936     81.6
                     

Investments and other assets:

         

Securities investments

   11,159,428        15,681,524    

Investment in and advances to affiliated companies

   321,569        254,308    

Software development costs

   1,174,691        1,167,079    

Other intangibles

   1,390,434        2,088,618    

Goodwill

   2,130,179        2,982,963    

Deferred income taxes

   2,033,488        4,370,672    

Other

   671,800        792,871    
                     

Total investments and other assets

   18,881,589     14.2    27,338,035     16.3
                     

Property and equipment:

         

Office furniture and equipment

   4,468,891        6,542,245    

Other properties

   1,539,195        2,249,875    
                 
   6,008,086        8,792,120    

Less: Accumulated depreciation

   (3,609,473 )      (5,292,452 )  
                     

Total property and equipment

   2,398,613     1.8    3,499,668     2.1
                     

Total assets

   132,935,224     100.0    167,264,639     100.0
                     


Table of Contents
     (Thousands of yen)
     

December 31,

2005

  

December 31,

2006

Account

   Amount     %    Amount     %

<Liabilities, minority interest and shareholders’ equity>

         

Current liabilities:

         

Notes payable, trade

   118,572        143,637    

Accounts payable, trade

   794,450        1,428,202    

Accounts payable, other

   3,208,625        3,753,566    

Withholding income taxes

   1,082,302        1,465,451    

Accrued expenses

   3,138,674        4,023,464    

Accrued income and other taxes

   5,476,791        10,100,431    

Deferred revenue

   31,506,315        45,093,703    

Other

   895,088        961,342    
                     

Total current liabilities

   46,220,817     34.8    66,969,796     40.1
                     

Long-term liabilities:

         

Deferred revenue

   3,874,936        7,681,730    

Accrued pension and severance costs

   889,774        1,149,219    

Other

   82,056        261,214    
                     

Total long-term liabilities

   4,846,766     3.6    9,092,163     5.4
                     

Minority interest

   4,531     0.0    6,632     0.0
                     

Shareholders’ equity:

         

Common stock

         

Authorized

         

-December 31, 2005 250,000,000 shares (no par value)

         

-December 31, 2006 250,000,000 shares (no par value)

         

Issued

         

-December 31, 2005 136,603,725 shares

   12,484,849         

-December 31, 2006 137,344,504 shares

        13,479,076    

Additional paid-in capital

   18,572,063        24,755,879    

Retained earnings

   55,971,955        63,386,138    

Accumulated other comprehensive income

         

Net unrealized gain (loss) on debt and equity securities

   657,885        1,012,828    

Cumulative translation adjustments

   1,459,600        2,910,707    

Unrecognized pension liabilities

   —          (181,855 )  
                 
   2,117,485        3,741,680    

Treasury stock, at cost

         

-December 31, 2005 2,513,231 shares

   (7,283,242 )       

-December 31, 2006 4,509,612 shares

        (14,166,725 )  
                     

Total shareholders’ equity

   81,863,110     61.6    91,196,048     54.5
                     

Total liabilities, minority interest and shareholders’ equity

   132,935,224     100.0    167,264,639     100.0
                     


Table of Contents

(2) CONSOLIDATED STATEMENTS OF INCOME

 

     (Thousands of yen)  
      For the year ended
December 31, 2005
   For the year ended
December 31, 2006
  

Increase
(Decrease)

%

 

Account

   Amount     %    Amount     %   

Net sales

   73,029,901     100.0    85,613,662     100.0    17.2  

Cost of sales:

            

Amortization of capitalized software, and Material

   2,598,603        4,138,033       

Maintenance

   1,671,320        3,259,764       

Customer Support

   6,857,901        8,496,171       
                      

Total Cost of sales

   11,127,824     15.2    15,893,968     18.6    42.8  
                        

Operating Expense:

            

Selling

   20,944,484        27,216,279       

Research and development

   4,395,207        4,719,313       

General and administrative

   8,990,611        10,708,306       
                        

Total operating expenses

   34,330,302     47.0    42,643,898     49.8    24.2  
                        

Operating income

   27,571,775     37.8    27,075,796     31.6    (1.8 )
                        

Other incomes (expenses):

            

Interest income and dividend received

   836,910        1,775,896       

Interest expense

   (3,709 )      (19,638 )     

Gain (loss) on sales of marketable securities

   370,326        464,055       

Foreign exchange gain (loss), net

   327,257        (37,955 )     

Other income (expense), net

   5,741        297,686       
                        

Total other income (expense)

   1,536,525     2.1    2,480,044     2.9    61.4  
                        

Net income before tax

   29,108,300     39.9    29,555,840     34.5    1.5  
                        

Income taxes:

            

Current

   11,863,127        16,012,347       

Deferred

   (1,358,568 )      (3,644,302 )     
                        
   10,504,559     14.4    12,368,045     14.4    17.7  
                        

Income before minority interest and equity in earnings of affiliated companies

   18,603,741     25.5    17,187,795     20.1    (7.6 )

Minority interest in income of consolidated subsidiaries

   (338 )   0.0    (812 )   0.0    140.2  

Equity in earnings (losses) of affiliated companies

   66,551     0.1    49,207     0.0    (26.1 )
                        

Net income

   18,669,954     25.6    17,236,190     20.1    (7.7 )
                        
     Yen          Yen             

Per share data:

            

Net income

            

-Basic

   139.85        128.65       

-Diluted

   137.83        128.11       


Table of Contents

(3) CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

 

     (Thousands of yen)  

Account

   For the year
ended
December 31,
2005
   

For the year

ended

December 31,

2006

 

Net income

   18,669,954     17,236,190  
            

Other comprehensive income (loss), before tax:

    

Unrealized gains (losses) on debt and equity securities:

    

Unrealized holding gains (loss) arising during period

   1,375,136     959,373  

Less reclassification adjustment for (gains) losses included in net income

   (704,199 )   (381,360 )
            
   670,937     578,013  

Foreign currency translation adjustments

   2,066,063     1,451,107  

Unrecognized pension liabilities;

    

Pension liability adjustment to initially apply SFAS No.158

   —       (164,786 )
            

Total

   2,737,000     1,864,334  

Tax effect of other comprehensive income (loss):

    

Income tax expense related to unrealized gains (losses) on debt and equity securities

   (297,400 )   (223,070 )

Income tax expense related to unrecognized pension liabilities

   —       (17,069 )
            
   (297,400 )   (240,139 )

Other comprehensive income (loss), net of tax

   2,439,600     1,624,195  
            

Comprehensive income

   21,109,554     18,860,385  
            


Table of Contents

(4) CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

 

     (Thousands of yen)  

Account

   For the year ended
December 31, 2005
    For the year ended
December 31, 2006
 

<Common stock>

    

Balance at beginning of period

   11,426,977     12,484,849  

Exercise of stock purchase warrants and stock acquisition rights

   1,057,872     994,227  
            

Balance at end of period

   12,484,849     13,479,076  
            

<Additional paid-in capital>

    

Balance at beginning of period

   17,359,335     18,572,063  

Tax benefit from exercise of non-qualified stock warrants

   155,323     140,089  

Tax recognition derived from elimination of reversed warrant related with stock option plan

   —       (59,091 )

Stock option compensation expense

   —       5,108,924  

Exercise of stock purchase warrants and stock acquisition rights

   1,057,405     993,894  
            

Balance at end of period

   18,572,063     24,755,879  
            

<Retained earnings>

    

Balance at beginning of period (Previously announced)

   42,165,026     55,971,955  

Cumulative-effect of the adjustment by applying SAB No.108

   —       (2,251,639 )

Balance at beginning of period (After adjusted)

   42,165,026     53,720,316  

Net income

   18,669,954     17,236,190  

Stock issue costs, net of tax

   (3,519 )   (3,761 )

Cash dividends

   (4,794,028 )   (7,509,068 )

Loss on sales of treasury stock, net of tax

   (65,478 )   (57,539 )
            

Balance at end of period

   55,971,955     63,386,138  
            

<Net realized gain (loss) on debt and equity securities>

    

Balance at beginning of period

   284,348     657,885  

Net change during the period

   373,537     354,943  
            

Balance at end of period

   657,885     1,012,828  
            

<Cumulative translation adjustments>

    

Balance at beginning of period

   (606,463 )   1,459,600  

Aggregate translation adjustments for the period

   2,066,063     1,451,107  
            

Balance at end of period

   1,459,600     2,910,707  
            

<Unrecognized pension cost>

    

Balance at beginning of period

   —       —    

Accumulated adjustments by applying SFAS No.158

   —       (181,855 )

Balance at end of period

   —       (181,855 )
            

<Treasury stock, at cost>

    

Balance at beginning of period

   (7,454,463 )   (7,283,242 )

Purchase of treasury stock

   (142,062 )   (7,117,842 )

Sales of treasury stock

   313,283     234,359  
            

Balance at end of period

   (7,283,242 )   (14,166,725 )
            

Total shareholders’ equity

   81,863,110     91,196,048  
            


Table of Contents

(5) CONSOLIDATED STATEMENTS OF CASH FLOWS

 

     (Thousands of yen)  

Account

   For the year
ended
December 31,
2005
    For the year
ended
December 31,
2006
 

Cash flows from operating activities:

    

Net income

   18,669,954     17,236,190  

Adjustments to reconcile net income to net cash provided by operating activities

    

Depreciation and amortization

   1,878,050     3,466,388  

Pension and severance costs, less payments

   207,109     248,564  

Deferred income taxes

   (1,358,568 )   (3,644,302 )

(Gain) loss on sales of marketable securities

   (370,326 )   (464,055 )

Equity in earnings of affiliated companies

   (66,551 )   (49,207 )

(Gain) loss on sale and disposal of fixed assets

   11,585     3,466  

Stock option compensation expense

   —       4,971,477  

Dividends received from affiliated company

   —       28,000  

Minority interest

   338     812  

Changes in assets and liabilities:

    

Increase (decrease) in deferred revenue

   6,209,680     12,960,443  

(Increase) decrease in accounts receivable, net of allowances

   (3,567,924 )   (84,956 )

(Increase) decrease in inventories

   (124,971 )   (303,254 )

Increase (decrease) in notes and accounts payable, trade

   (526,321 )   587,337  

Increase (decrease) in accrued income and other taxes

   (1,826,959 )   4,644,548  

(Increase) decrease in other current assets

   (34,426 )   (667,417 )

Increase (decrease) in accounts payable, other

   381,414     143,162  

Increase (decrease) in other current liabilities

   1,336,703     (61,823 )

(Increase) decrease in other assets

   (207,984 )   (931,569 )

Other

   34,809     (695,385 )
            

Net cash provided by operating activities

   20,645,612     37,388,419  
            

Cash flows from investing activities:

    

Payments for purchases of property and equipment

   (1,153,193 )   (1,942,091 )

Software development cost

   (1,446,248 )   (1,456,755 )

Payments for purchases of other intangibles

   (216,107 )   (1,395,220 )

Proceeds from sales of marketable securities

   22,079,575     20,648,519  

(Payment for)/Proceeds from marketable securities maturing within three months or less (net)

   (189,708 )   1,292,234  

Payments for purchases of marketable securities and security investments

   (28,043,534 )   (28,355,269 )

Payments for business acquisition

   (2,716,702 )   (816,655 )

(Payments for)/Proceeds from time deposits

   (1,052,017 )   921,000  
            

Net cash used in investing activities

   (12,737,934 )   (11,104,237 )
            

Cash flows from financing activities:

    

Issuance of common stock pursuant to exercise of stock purchase warrants and stock acquisition rights

   2,111,758     1,984,360  

Proceeds from sales of treasury stock

   247,805     176,820  

Payment for purchase of treasury stock

   (142,062 )   (7,117,842 )

Tax benefit from exercise of non-qualified stock warrants

   155,322     140,089  

Tax recognition derived from elimination of reversed warrant related with stock option plan

   —       (59,091 )

Capital contribution from minority interest

   4,193     —    

Dividends paid

   (4,782,764 )   (7,497,089 )
            

Net cash used in financing activities

   (2,405,748 )   (12,372,753 )
            

Effect of exchange rate changes on cash and cash equivalents

   1,202,290     2,672,948  
            

Net increase (decrease) in cash and cash equivalents

   6,704,220     16,584,377  

Cash and cash equivalents at beginning of period

   52,908,357     59,612,577  
            

Cash and cash equivalents at end of period

   59,612,577     76,196,954  
            

Supplementary information of cash flow:

    

Payment for interest expense

   3,709     19,638  

Payment for income taxes

   13,109,985     9,516,032  


Table of Contents

Feb 21, 2007

Report of Earning Results (Consolidated)

For Fiscal Year Ending December 31, 2006

[ Prepared in accordance with US GAAP ]

 

Company:    Trend Micro Incorporated    Tokyo Stock Exchange 1st Section
Code:    4704          Location: Tokyo
(URL http://www.trendmicro.co.jp/)      
Representative:       Title    Representative Director and Chief Executive Officer
      Name    Eva Chen
Contact:       Title    Representative Director (Chief Operating Officer and Chief Financial Officer)
      Name    Mahendra Negi    (Phone: 81-3-5334-4899)
Date of the board of directors authorizing the earning results: Feb 21, 2007   

 

1. Financial Highlights for FY 2006 (January 1, 2006 through December 31, 2006)

(All figures except for per share information are rounded to millions of yen.)

(1) Consolidated Results of Operations

 

     Net Sales    Growth rate   

Operating

income

   Growth rate    

Net income

before tax

   Growth rate
     Millions of yen    %    Millions of yen    %     Millions of yen    %

FY 2006

   85,614    17.2    27,076    (1.8 )   29,556    1.5

FY 2005

   73,030    17.7    27,572    5.7     29,108    10.6

 

     Net Income   

Growth

Rate

   

Net income

per share

(basic)

  

Net income

per share

(diluted)

  

Return on

shareholders’

equity

  

Net income before tax

/ total assets ratio

  

Net income

before tax ratio

     Millions of yen    %     Yen    Yen    %    %    %

FY 2006

   17,236    (7.7 )   128.65    128.11    19.9    19.7    34.5

FY 2005

   18,670    17.6     139.85    137.83    25.7    24.3    39.9

(Note)

1.      Equity in earnings of affiliated companies:

   49 million yen (67 million yen in FY 2005)

2.      The company made no changes in accounting principle that had material effects on the financial position, results of operations, and cash flow position, during the period.

3.      Weighted average number of shares outstanding:

   133,977,907 shares (133,498,438 shares in FY 2005)

4.      The percentage of net sales, operating income, net income before tax and net income are comparison to the prior fiscal year.

(2) Consolidated Financial Position

 

As of

   Total assets    Shareholders’ equity   

Shareholders’

equity ratio

  

Shareholders’ equity

per share

     Millions of yen    Millions of yen    %    Yen

December 31, 2006

   167,265    91,196    54.5    686.54

December 31, 2005

   132,935    81,863    61.6    610.51

(Note)

Number of shares outstanding :   132,834,892 shares as of December 31, 2006
  134,090,494 shares as of December 31, 2005

(3) Consolidated Cash Flow Information

 

    

Cash flows from

operating activities

  

Cash flows from

investing activities

   

Cash flows from

financing activities

    Ending balance of cash and
cash equivalents
     Millions of yen    Millions of yen     Millions of yen     Millions of yen

FY2006

   37,388    (11,104 )   (12,373 )   76,197

FY2005

   20,646    (12,738 )   (2,406 )   59,613

(4) Basis of consolidation and application of equity method:

 

The number of consolidated subsidiaries

   19

The number of unconsolidated subsidiaries accounted by equity method

   0

The number of affiliated companies

   2

(5) Change in the basis of consolidation and application of equity method:

 

The number of additional consolidated subsidiaries

   0

The number of excluded consolidated subsidiaries

   1

The number of additional consolidated affiliated companies

   0

The number of excluded consolidated affiliated companies

   0

 

1


Table of Contents

2. Projected consolidated earnings

Projected earnings for the next quarter (January 1, 2007 through March 31, 2007)

 

     Net Sales    Operating income    Net income
     Millions of yen    Millions of yen    Millions of yen

1st Qtr

   23,000    5,500    2,850

(Note)

Since the business environment surrounding Trend Micro Group tends to fluctuate in the short run, it is difficult to make the highly reliable projection figures on a yearly basis. We, therefore, decided to announce the earnings on a quarterly basis in the fiscal year ending December 31, 2007 as well as earnings projection of the succeeding quarter.

If we found through our calculation conducted from time to time that the net sales fluctuate from the most recent quarterly projection by more than 10%, or operating income or net income fluctuates by more than 30%, we will announce the revision of the earnings projection.

 

2


Table of Contents

Attachment to the Report

1. Condition of corporate group

Trend Micro Group consists of Trend Micro Inc. (Japan), and its subsidiaries which develop and sell anti-virus products and offer other related services. Affiliated companies are Soft Trend Capital Corporation which manages capital funds to be invested into Internet-related ventures and NetSTAR Inc. which develops and offers URL filtering products.

Products related to anti-virus:

PC client products    LAN server products    Internet server products    All Suite products    Other products

The business functions in Trend Micro Group are described below.

 

Function

   Operating Segment   

Main companies

Research and development    Japan    Trend Micro Inc. (Japan)
   North America    Trend Micro Inc. (U.S.A.)
   Europe    Trend Micro Deutschland GmbH (Germany)
      Trend Micro (UK) Limited
   Asia Pacific    Trend Micro Incorporated (Taiwan)
      Trend Micro (China) Incorporated
Manufacturing of the Products    Asia Pacific    Trend Micro Incorporated (Taiwan)
Sales of the Products    Japan    Trend Micro Inc. (Japan)
   North America    Trend Micro Inc. (U.S.A.)
   Europe    Trend Micro (EMEA) Limited (Ireland)
      Trend Micro Deutschland GmbH (Germany)
      Trend Micro Italy S.r.l.
      Trend Micro France SA
      Trend Micro (UK) Limited
   Asia Pacific    Trend Micro Incorporated (Taiwan)
      Trend Micro Korea Inc.
      Trend Micro Australia Pty. Ltd.
      Trend Micro Hong Kong Limited (China)
      Trend Micro (China) Incorporated
   Latin America    Trend Micro do Brasil Ltda.
      Trend Micro Latinoamerica S.A. de C.V. (Mexico)
Back office    Europe    Trend Micro (EMEA) Limited (Ireland)
   Latin America    Servicentro TMLA, S.A. de C.V. (Mexico)

In addition, Trend Micro Inc. (Japan) owns software copyrights and receives from its overseas subsidiaries royalties based on the respective sales of products to such subsidiaries.

 

3


Table of Contents

LOGO

(Note) All Subsidiaries are consolidated

 

4


Table of Contents

2. Management Policy and Business Performance

MANAGEMENT POLICY

(1). BASIC POLICY OF MANAGEMENT

Our Vision:                     To create a world safe for exchanging digital information.

Our Mission:                  We ensure digital operational continuity against unpredictable threats.

Computer networks, mainly those linked to the internet, have become a global infrastructure, as lifelines of the information society regardless of individual, business or national border. In the information society which is flooded with vast amounts of information, the computer network systems are used as communication methods comparable to telephones and faxes, and as a means to improve and rationalize business process for companies in recent years, and the systems play a roll in improving productivity and efficiency. Today many companies and individuals are being connected via the internet and it has produced various working styles, such as small offices and home offices, which enables employees to work at remote locations and business forms which establish data management operation and customer support operation, etc. in areas where labor cost is relatively low beyond the confines of country, industry, business form. The diffusion of networks on a global scale has already become the foundation for the global economy with eliminating the geological restrictions of business activities.

In typical homes there are many devices with internet functions and fusion of home appliance and IT is emerging as a result of the breadth of technologies deployed through Information Communications Technology devices, mobile phones, video game consoles, IP telephone, and peer-to-peer (P2P) as file-sharing program, broadband high-speed communication technology and wireless communication technology. In-home networks become popular, often with several internet devices in each household, and our daily life is evolving, influenced by the advanced information society.

In this way today’s computer network systems have much impact on the whole society to bring about changes in business forms and individual lifestyles around the world. When we think about the changes of our life from the viewpoint of information, the benefit of worldwide networking cannot be overestimated. Non standardized manufactures as the obstacle digital information exchanges in the past have gradually disappeared, and as a consequence, improvements in compatibility and convenience are achieved. On the other hand, with the disappearance of diversity, the possibility to use vulnerabilities for attacking the whole network system by computer viruses is acknowledged as a problem. With the standardization of the global infrastructure network, the convenience enabled by the internet and the risks associated with it are on two sides of the same coin. Crimes carried out through the manipulation of computer networks, such as phishing, theft of proprietary information and virus incidents, could have significant impact on our daily life and economic activities. Today the threats on the network such as computer viruses, spyware and spam are not of the nature that can be predicted beforehand and treated with all possible measures. It seems there is now a requirement for enterprises and individuals to deploy security measures against new network threats and crimes which are increasing, causing theft of proprietary information, monetary damages, flattening the networks and all the rest around the world.

For such a great responsibility to protect the global infrastructure, we will provide strongly supportive products and services promptly beyond national boundaries for every phase of operations in the network such as vulnerability prevention, risk management, outbreak prevention, timely update of virus/ spyware / spam pattern files, assessment and restoration. We are not only protecting enterprises and individual users from the threats over the networks without interrupting economic activities, but also would like to contribute to the further development of the information society by improving the safety of the whole network system.

(2). BASIC POLICY OF PROFIT SHARING

We intend to continue to return profits to shareholders based on the net profit on a consolidated basis while striving to enhance financial strength and secure internal reserve in order to deal with significantly changing business environment and maintain competitive edge against competitors. As our basic policy about dividend, we plan to pay a year-end dividend on the basis of the dividend ratio of 50% excluding the effect of stock option compensation expenses. We will add stock option expenses back to accounting net income for pay-out calculations.

(3). VIEWS AND POLICIES FOR INVESTMENT UNIT

While we recognize that securing liquidity of our shares is an important issue, we consider the current liquidity is at a satisfactory level. With that background, we have concluded that reducing the investment unit which will incur considerable expense is not necessarily beneficial to all shareholders.

We intend to review in the future the investment unit as needed, taking into consideration the shareholders’ interest and influences to the liquidity of our shares.

 

5


Table of Contents

(4). TARGET MANAGEMENT INDEX

According to a research institute, the antivirus industry, which we belongs to, is estimated to expand at an annual growth rate of around 11% from 2005 to 2010 (December 2006, IDC, USA). Making the growth rate of our consolidated net sales to exceed the industry average without fail is an important index that tells us whether we can grow up to a leading company which can contribute to customers in the global market as well as the Japanese market or not.

In view of the fact that we have a relatively small amount of investments in physical fixed assets such as manufacturing equipment, have no significant time-lag between accounting profit and loss and cash flows as a characteristics of software companies, and have uncertainty about the long-term forecast of the whole industry which, including our company, has a relatively short history, we set target as operating income margin rate of 35 – 40% at this time.

(5). ISSUES TO DEAL WITH

In the antivirus industry which we belong to, there have been two competitors having higher market shares than ours in the U.S. In addition to this, Microsoft Corporation, a major operating system software vendor, announced that it has entered into the security market, so we will face a new, big competitor in the near future.

Microsoft Corporation has started the supply of “Windows LiveTM OneCareTM,” a security service for consumers since May 2006 in US and January 2007 in Japan, and also launched “Microsoft® Windows VistaTM,” a new OS which is said to have an enhanced security function, global launch in January 2007. It also announced that it plans to offer a service called “Forefront Client Security” for corporate users.

It is anticipated that the possibility of their entry into the security market will make the competition in the market more intense.

For such intense competition, we are enhancing our wide range of technologies to realize multifaceted security measures against new threats evolving day by day by acquiring InterMute Inc. which provides antispyware technologies and Kelkea Inc. which provides IP filtering and reputation services in 2005.

We, an expert in the antivirus area, have formed several alliances with some of the most respected names in the IT industry including Cisco Systems, Inc. in the U.S., the worldwide leader in networking for the internet. They have been delivering the advanced prevention solution named Cisco Incident Control System (ICS) which contains a part of our antivirus functions into Cisco’s routers, switches and security appliance products starting.

We believe this kind of alliance has important for our products and sales strategies, because it has potential effects from the fusion of competitive products in each other’s fields and the supplement of sales channels between affiliated vendors.

We would like to continue to develop original solutions faster than the competitors by concentrating our business resources and improve our superiority in products and services with advancing product specifications and performance from the viewpoint of customers. At the same time, we will aim at company growth for the future to strength our loyalty for customers with marketing development to be conscious of the customer attributes based on differences in each buying behaviour.

(6). PARENT COMPANY AND OTHER RELATED COMPANIES

Not Applicable

 

6


Table of Contents

OPERATING RESULTS AND FINANCIAL CONDITION

I. OPERATING RESULTS

(1). REVIEW OF CURRENT PERIOD

 

     (Unit: million yen)  
     Net Sales     Operating
income
   

Net income

before tax

    Net income  

FY2006

   85,614     27,076     29,556     17,236  

FY2005

   73,030     27,572     29,108     18,670  

Rate of Change

   17 %   D2 %   2 %   D8 %

 

     (Unit: million yen)  
     Net Sales  
   FY2006    FY2005   

Rate of Change

(%)

 

Japan

   33,248    29,416    13 %

North America

   19,295    15,417    25 %

Europe

   21,150    18,379    15 %

Asia and Pacific Reg.

   9,149    7,910    16 %

Latin America

   2,771    1,908    45 %

 

7


Table of Contents

[Overview of Current Business Performance]

The Japanese economy during this term has continued its expanding trend. The Cabinet Office’s economic report for November 2006 said, “The economy is recovering although weakness is seen in consumption.” The current Japan economic expansion has entered its 58th month without interruption to become the longest post-World War II boom, surpass-ing the 57-month-long Izanagi boom from November 1965 to July 1970. Also, according to the Short-term Economic Survey of Enterprise in Japan (Tankan) announced in December 2006, the business conditions of not only large enterprise and manufacturing, but also medium-sized and small enterprises has improved for 3 consecutive terms, and it has continuously led to proactive fixed investment and expanded employment. Such a recovery of business enterprise sectors ripple through the household sector, and leads to prolonged economic growth, but does not achieve a drastic improvement of consumer spending expansion. Under such a situation, the Bank of Japan decided to lift its zero-interest rate policy in July 2006. Though this was the first time in five years and four months that the Bank of Japan raised short-term interest rates, unfortunately there was no additional raise within 2006 at last. For the future, a positive growth cycle is anticipated with corporate profit increases leading to also increase in consumer spending, and growth in domestic demand. On the other hand, there are still possibilities of a bear tack again, the sharp U.S. economic downturn, and a slowdown in consumer spending. These several causes remind us that currently a cautious optimism should be taken.

The global economy is in the same situation. Though month-to-month rise base of the Composite Leading Indicator (CLI) for OECD in November 2006 has still gone up for the fourth consecutive month, there are concerns such as a slowdown of growth due to hovering at high price of crude oil, the possibility of the inflationary pressures increase, and the expansion of global economic imbalances and sharp U.S. economic downturns, but also there is an increased geopolitical risks owing to events such as the Iraqi situation and nuclear test carried out by North Korea, and others.

In the network security industry, the intent of malicious code flying around the web has shifted to the theft of proprietary information and getting concrete gains such as money since last year, both in Japan and overseas this year again. Also the attacking trend would be further strengthen the belief that it has shifted criminal for pleasure to the theft of proprietary information with the specific targets rather than general public since 2005. Under such a situation, the number of virus infection damage incidents in this term in Japan was 91,901 reports. This number is approximately double to the same period last year (45,208 reports).

Although the new types of threats as Spyware, Adware, and Bot attacks (where third parties other than the authorized users take control of machines by remote control, creating a network of infected computers that they use to commit misdeeds) , which were major causes for the incident reports, have been continuously harming users. On the other hand, the WORM type of malicious code, that is routed through both mail and network, used to be the main method to spread a computer virus, has recently been reported less often. However WORM_STRATION outbreak in the second half of this year, kick-started the revival of old-fashioned and mass-mailing type worms, the technology of which has been out off date for these years. There is a possibility that malicious code writers may come up with a new approach based on such an out-of-date technology in near future. As a result, the malicious code, that aims to get concrete gains such as money, has continued evolving its method of attack since last year. Also, recently Ransomware, a type of malware to encrypt the victim’s data and demand payment for the decryption key, has been reported overseas. The varying types and amount of damage caused by malicious codes will continue to increase further, as will the use of networking. Such a trend has been progressing and the cost of damate associated with fraud and identity theft will also become enormous.

 

8


Table of Contents

Under such an environment, our group’s business conditions are as follows:

First of all, in Japan, the virus which abuses Winny and Share, Japanese indigenous peer-to-peer (P2P) file-sharing program which has gained notoriety since 2003, has flourished from the beginning of this year. Though the numbers of infection reports have been decreasing, information leak cases caused by such a virus, show no sign of significant decline. At the same time, there have been many sensational headlines about the theft of proprietary information related to business enterprises. When businesses suffer security breaches by malicious attackers, it can have a direct impact on corporate reputation and trustworthiness. In this instance, consumers may be directly affected and public expectation regarding improved security measures is likely to increase. In addition, the demand for the security products continues to increase to the SMB market since the full enforcement of the personal information protection law from April 2005. Moreover, our flagship personal product “Virus Buster” has still seen healthy growth with the demand of personal users based on their strong awareness to protect against the theft of individual property. In those results, the amount of sales for this period in Japan was 33,248 million yen (13% increase from the same period in previous year).

In the North American region, amid concerns of a weak economy caused by housing market slowdown, the FRB has delayed interest rate hikes for 4 months since August. The consumer market in which we have expanded our sales channels since last year showed a substantial increase. Also, the security demands for especially the small companies in SMB business market increased continuously. The sales for this period in the area came to 19,295 million yen (25% increase from the previous period).

In the European region, according to IFO Business Climate Index, German business sentiment rose in June to its highest level in over 15 years. It is considered that opportunities such as the 2006 World Cup and incentives to spend before value-added tax’s expires at the beginning of 2007 are increasing and good for domestic and foreign demand. Many other European countries’ business economy have also seen a gradual recovery based on enterprise-driven with the brisk exports. At the same time, consumer spending growth which has been slow, started to show a gradual recovery and improved employment figures. The European Central Bank (ECB) as a result of reviewing its ultra-low interest policy at the end of 2005 (for the first time in the past 5 years), the annual growth rate of the European economy in 2006 recorded over 2% year-to-year. Under these circumstances, sales for the large enterprise market especially in France and Italy have increased. The sales for this period in the region came to 21,150 million yen (15% increase from the previous period).

In Asia and Pacific regions, especially in East Asia, mainland China’s GDP has recorded its growth rate for 4 consecutive years of double-digit year-to-year growth. Though the issue of inflationary pressure concerns has been reduced by exchange rate and oil price increasing levelling off at the end of this year, the weak US economy might be concerned about slow economic growth for any Asian countries in the background of brisk export stands out. According to such a situation, we have a growth of sales for large enterprise and SMB business market, and also Australia and mainland China have been showing steady performance of sales. The net sales for this period in the regions came to 9,149 million yen (16% increase from the previous period).

In the Latin America region, SMB business market boosted net sales and its growth rate is the highest across all regions for this period. In this region net sales came to 2,771 million yen (45% increase from the previous period).

Regarding 2006 sales achievement according to customer size, net sales of the Enterprise business was 24,740 million yen, Small and Mid-size business was 40,300 million yen, and Consumer was 20,574 million yen.

As a result, the consolidated net sales for this period came to 85,614 million yen (17% increase from the previous period). However, in spite of 1,700 million yen received through a one time payment (receipt) related to intellectual property usage, the company’s operating expenses totaled 58,538 million yen (this is a 29% increase from the previous period) due to the increases in stock option expense, which has no cash payment, as 5,000 million yen during 2006, and an increase in employee recruitment. The consolidated operating income for this period was 27,076 million yen (2% decrease from the previous period) and the consolidated net income for this period was 17,236 million yen (8% decrease from the previous period).

 

9


Table of Contents

(2). Projection for the First Quarter of the fiscal year 2007 (from January 1, 2007 to January 31, 2007)

The business environment tends to drastically change over a short term. Consequently, it is difficult to calculate highly reliable values about the projection for the whole fiscal year. Instead, we make it a rule to announce our business forecast for the coming quarter at the time of reporting quarterly results.

In the event the forecast numbers are revised by more than 10% for net sales or 30% for operating income and net income from the last forecast, we will announce a revision to the earnings forecast.

Business forecast for the First Quarter of FY2007 (January 1, 2007 – March 31, 2007)

 

Consolidated net sales

   23,000 million yen

Consolidated operating income

   5,500 million yen

Consolidated net income

   2,850 million yen

In development of the business forecasts the main assumed exchange rates are as follows.

 

1 US $    118 yen
1 Euro    156 yen

 

10


Table of Contents

II. FINANCIAL CONDITION

CASH FLOW

 

     (Unit: million yen)
     FY 2006    FY2005    Increase (Decrease)

Cash Flows from Operating Activities

   37,388    20,646    16,742

Cash Flows from Investing Activity

   D11,104    D12,738    1,634

Cash Flows from Financing Activity

   D12,373    D2,406    D9,967

Effect of Exchange Rate Changes on Cash and Cash Equivalents

   2,673    1,202    1,471

Net increase (Decrease) in Cash and Cash Equivalents

   16,584    6,704    9,880

Cash and Cash Equivalents at end of period

   76,197    59,613    16,584

[Overview of Cash Flow]

For the cash flows from operating activity for this period, cash inflows increased by 16,742 million yen compared with the previous period and the balance was ended with a surplus of 37,388 million yen. This increase in cash inflows is mainly due to a substantial increase in deferred revenue and in accrued income and other taxes, as well as stock option expenses which have no cash payment in spite of a slight decrease in net income.

For the cash flows from investing activity, cash outflows decreased by 1,634 million yen compared with the previous period and the balance was ended with a deficit of 11,104 million yen. This decrease in cash outflows is mainly due to decrease payments for acquisition of business and other payments in this period.

For the cash flows from financial activity, cash outflows increased by 9,967 million yen compared with the previous period and the balance was ended with a deficit of 12,373 million yen. This increase in cash outflows is mainly due to payments for purchase of treasury stock and a substantial increase in dividends paid.

Taking these increases and decreases and the effect of exchange rate changes on cash and cash equivalents into account, the cash and cash equivalents at the end of this period was 76,197 million yen and was increased by 16,584 million yen compared with the previous period.

 

11


Table of Contents

[Trends of Cash Flow Indexes]

 

     (US GAAP)
     FY2003    FY2004    FY2005    FY2006

Shareholder’s equity Ratio (%)

   54.1    59.2    61.6    54.5

Capital Adequacy Ratio on Market Value Basis (%)

   462.2    690.0    449.9    277.2

Debt Redemption Period (years)

   0.4    —      —      —  

Interest Coverage Ratio

   103.3    218.2    5,566.4    1,903.9

 

     (Japan GAAP)
     FY2001    FY2002

Shareholder’s equity Ratio (%)

   47.3    50.0

Capital Adequacy Ratio on Market Value Basis (%)

   626.7    360.4

Debt Redemption Period (years)

   1.2    0.8

Interest Coverage Ratio

   44.2    49.4

Note

Shareholder’s Equity Ratio    :    (Total shareholder’s Equity)/(Total Assets)
Capital Adequacy Ratio on Market Value Basis    :    Total Market Value of Shares)/( Total Assets)
Debt Redemption Period    :    (Interest-bearing Debt)/(Operating Cash Flow)
Interest Coverage Ratio    :    (Operating Cash Flow)/(Interest Payment)

*All indexes are calculated from the financial statement amounts on a consolidated basis.

*“Total Market Value of Shares” is calculated as follows; “closing share price at the term end” multiplies by “number of shares issued at the term end “(net of treasury shares).

*“Operating Cash Flow” is “Net cash flows provided by operating activity” in the consolidated statement of cash flows. “Interest-bearing Debt” is all debts with interest payments among the debts reported in the consolidated balance sheet. “Interest Payment” is the amount of payment for interest expense in the consolidated statement of cash flows

*With the enforcement of the revision of “Rules on the terms, forms and making method of a consolidated financial statement” in March 2002, the consolidated financial statements have been prepared based on US GAAP from the year ended December31, 2003.

 

12


Table of Contents

III. RISK FACTORS

The occurrence of any of the following risks could affect our business, financial condition or results of operations. In such case, the trading price of our shares and the ADSs could decline and you could lose all or part of your investment. Other risks and uncertainties not now known to us or that we think are immaterial may also impair our business.

MAJOR SOFTWARE AND HARDWARE VENDORS MAY INCORPORATE ANTIVIRUS PROTECTION IN THEIR PRODUCT OFFERINGS, WHICH COULD RENDER OUR PRODUCTS OBSOLETE OR UNMARKETABLE.

Major vendors of operating system software and other software such as firewall or e-mail software or computer hardware may decide to enhance or bundle their products with their other products to include antivirus functions. These companies may offer antivirus protection as a standard feature in their products, at minimal or no additional cost to customers. This could render our products obsolete or unmarketable, particularly if antivirus products offered by these vendors were comparable or superior to our products. In addition, even if these vendors’ antivirus products offered fewer functions than our products, or were less effective in detecting and cleaning virus-infected files, customers could still choose them over our products due to lower cost or for any other reasons.

Microsoft Corp., a major operating system vendor, has acquired several security vendors such as GeCAD Software Srl., an antivirus software vendor in Romania. Microsoft Corp. has launched antivirus products or services such as “ Windows LiveTM OneCareTM” for consumer users since May 2006 in US, January 2007 in Japan. Also they announced that they will have a plan to start the service for enterprise named “Forefront Client Security” since around 2007 to 2008. At this time, we do not know the details of those services or products, but if in fact Microsoft will launch those products or services, and/or, if antivirus functions were to be included in its operating system products, this could have a material adverse effect on our business, financial condition and results of operations.

BECAUSE WE GENERATE SUBSTANTIALLY ALL OF OUR SALES FROM A SINGLE PRODUCT LINE, WE ARE VULNERABLE TO DECREASED DEMAND FOR SUCH PRODUCTS.

Unlike software companies with diversified product lines, we derive substantially all of our net sales from licensing and selling antivirus software products. Although we have begun to offer more comprehensive network and internet security and management software and services, we expect antivirus products to continue to account for the largest portion of our net sales for the foreseeable future. If the demand for, or the prices of, antivirus products drop as a result of competition, technological change or other factors such as lower growth or a contraction in the worldwide antivirus software market, this could have a material adverse effect on our business, financial condition and results of operations.

DETERIORATION IN OUR RELATIONSHIP WITH SOFTBANK BB CORP. COULD RESULT IN A DECREASE IN SALES OF OUR PRODUCTS.

We depend on our relationship with SOFTBANK BB (formerly SOFTBANK COMMERCE CORP.), which has played an instrumental role in the development of our business in Japan. SOFTBANK BB also has close relationships with many resellers and systems integrators through which we sell our antivirus software to corporate end users in Japan. An adverse change in our relationship with SOFTBANK BB would result in decreased sales to SOFTBANK BB and could disrupt our relationship with many resellers of our products. This could make it difficult for us to market our products in Japan. Sales to SOFTBANK BB totaled approximately (Yen)10.4 billion, or 16.8%, of our net sales in fiscal 2004, approximately (Yen)10.6 billion, or 14.5%, of our net sales in fiscal 2005, and approximately (Yen)11.0 billion, or 12.9%, of our net sales in fiscal 2006. Because of our dependence on SOFTBANK BB, the price of shares and ADSs could fall as a result of adverse events affecting SOFTBANK BB, even if the events do not relate directly to us.

OUR PRODUCTS MAY BECOME OBSOLETE BECAUSE RAPID TECHNOLOGICAL CHANGE REGULARLY OCCURS IN THE ANTIVIRUS SOFTWARE MARKET.

The antivirus software market is characterized by:

 

rapid technological change;

 

the proliferation of new and changing computer viruses;

 

frequent product introductions and updates; and

 

changing customer needs.

These characteristics of our market create significant risks and uncertainties for our business success. For example, our competitors might introduce antivirus products that are technologically superior to our products. Additionally, new software operating system, network system or antivirus software industry standards could emerge. Emerging trends in these systems and standards currently include applications distributed over the Internet and the use of a web browser to access client-server systems. Our existing products might be incompatible with some or all of such standards. Our business, financial condition and results of operations could materially suffer unless we are able to respond quickly and effectively to these developments.

 

13


Table of Contents

OUR HARDWARE-BASED PRODUCTS FACE MANUFACTURING AND INVENTORY RISKS.

We rely on a small number of third parties to manufacture some of our hardware-based products, such as the Trend Micro Network VirusWall and InterScan Gateway Security Appliance. We expect our reliance on third-party manufacturers to become more important as the number of our hardware-based products increases. Reliance on third-party manufacturers involves a number of risks, including a lack of control over the manufacturing process and the potential absence or unavailability of adequate capacity. If any of our third-party manufacturers cannot or will not manufacture our products in required volumes in compliance with environmental and other regulations in the markets we serve, on a cost-effective basis, in a timely manner, or at all, we will have to secure additional manufacturing capacity. The unexpected loss of any of our manufacturers could disrupt our business. Furthermore, our hardware-based products contain critical components supplied by a single or a limited number of third parties. Any significant shortage of components or the failure of the third-party supplier to maintain or enhance these products could lead to cancellation of customer orders or delays in the placement of orders and adversely affect our financial condition and results of operation.

WE MAY NOT GENERATE EXPECTED RESULTS IN STRATEGIC ALLIANCES

Because we are mainly focusing our business on the field of antivirus software and do not offer other security products such as firewalls, we actively pursue strategic alliances with other companies that allow us to provide customers with integrated or other new products and services derived from the alliances. In fiscal year 2004, we began to provide a third party URL filtering solution and have signed contracts with Cisco Systems to integrate network worm and virus outbreak prevention services with Cisco’s products and services. To launch and provide such products and services, we may invest substantial cash and other resources in product developments, marketing promotions and support and maintenance activities. But we may not earn revenue successfully from alliances despite our efforts, and such alliance may be terminated or dissolved by various causes before generating revenue.

WE MAY NOT BE ABLE TO INCREASE OUR MARKET SHARE IN THE U.S. AND EUROPEAN MARKETS BECAUSE OUR COMPETITORS ARE MORE ESTABLISHED THAN WE ARE IN THESE MARKETS.

We believe that our share of the antivirus software market in the U.S. and Europe is significantly smaller relative to the market shares of our principal competitors, despite the growth of our sales in these markets in fiscal 2005 and 2006. Because our competitors are already well-established in these key markets and have greater financial and other resources and brand recognition, we may not be able to compete effectively for market share. If this happens, we may not be able to increase sales or our market share in these markets, which could materially hurt the prospects for growth in our business.

Some of our major competitors have the following advantages over us in the U.S. and European markets:

 

greater name recognition;

 

more diversified product lines;

 

larger customer bases; and

 

significantly greater financial, technical, marketing and other resources.

As a result, as compared to us, our competitors may be able to:

 

better withstand downturns in the antivirus software market and in the computer software market in general;

 

adapt more quickly to new or emerging technologies or changes in customer requirements; or

 

more effectively and profitably market, sell and support their products.

 

14


Table of Contents

THE POSIBILITY OF DECRESE SALES AND MARKET SHARE IN OUR CORE JAPANESE MARKET IF OUR COMPETITORS ACHIEVE SUCCESS IN JAPAN.

Our major competitors, McAfee, Inc. and Symantec Corporation, are active in the Japanese antivirus software market and have allocated significant resources to achieve success in the Japanese antivirus software market. Additionally, competition in our core Japanese market could intensify in the future if other competitors emerge. As a result of our competitors’ efforts, we may not be able to maintain our current leading market position in Japan in the future. Also, in order to respond effectively to increased competition, we may be required to devote more of our product development, marketing and other resources to the Japanese market, which could limit our ability to grow in other markets. A material loss of sales and market share in Japan as a result of our competitors’ success could have a material adverse effect on our business, financial condition and results of operations.

BECAUSE WE MAY ACQUIRE COMPANIES TO GROW OUR BUSINESS, FUTURE ACQUISITIONS MAY REDUCE OUR EARNINGS AND RESULT IN INCREASED COSTS IN OUR BUSINESS OPERATIONS.

In a rapidly changing industry, we occasionally review acquisition opportunities. Accordingly, we may seek to expand our business through acquisitions. Unlike some of our major competitors, we have limited experience in acquiring existing businesses. Future acquisitions could result in numerous risks and uncertainties, including:

 

   

our inability to retain customers, suppliers and other important business relationships of an acquired business;

 

   

difficulties in integrating an acquired company into Trend Micro, including the acquired company’s operations, personnel, products and information systems;

 

   

diversion of our management’s attention from other business concerns; and

 

   

adverse effects on our results of operations from acquisition-related charges, impairment of goodwill and purchased technology and possible recognition of impairment charge.

If we make such an acquisition using our stock, our current shareholders’ ownership interests will be diluted. Any of these factors could materially hurt our business, financial condition and results of operations.

For example, in 2000, we acquired ipTrend to start a new business selling a Linux based remotely managed server appliance solution to small and medium sized companies. However, ipTrend performed poorly and was liquidated in December 2001. Due to the liquidation of ipTrend, (Yen) 2.3 billion was booked as goodwill write-off in 2001.

IF HACKERS GAIN UNAUTHORIZED ACCESS TO OUR SYSTEMS, WE COULD SUFFER DISRUPTIONS IN OUR BUSINESS AND LONG-TERM DAMAGE TO OUR REPUTATION.

We may be more susceptible to problems caused by hackers than other software companies. As an antivirus software company that delivers virus protection products over the Internet, hackers specifically target us in order to cause us to transmit computer viruses or interrupt the delivery of our antivirus software monitoring and security services over the internet which could result in further interruptions. We could suffer substantial disruptions in our business and material damage to our reputation which could in turn result in a significant loss of our customers and other important business relationships. We could also incur costs for public relations efforts following attacks by hackers. Hacker activities could also force us to incur substantial costs to fix technical problems or result in hackers gaining access to our proprietary information.

 

15


Table of Contents

WE FACE NEW RISKS RELATED TO OUR ANTI-SPAM AND ANTI-SPYWARE SOFTWARE PRODUCTS.

Our anti-spam and anti-spyware products may falsely identify emails or programs as unwanted “spam” or “potentially unwanted programs,” or alternatively fail to properly identify unwanted emails or programs, particularly as “spam” emails or spyware are often designed to circumvent anti-spam or spyware products. Parties whose emails or programs are blocked by our products may seek redress against us for labeling them as “spammers” or spyware, or for interfering with their business. In addition, false identification of emails or programs as unwanted “spam” or “potentially unwanted programs” may reduce the adoption of these products.

WE MUST EFFECTIVELY MANAGE OUR GROWTH.

Our business has grown rapidly. This growth has placed, and any future growth would continue to place, a significant strain on our limited personnel, management and other resources. Our ability to manage any future growth in our business will require us to:

 

 

attract, train, retain, motivate and manage new employees successfully;

 

 

effectively integrate new employees into our operations; and

 

 

continue to improve our operational, financial, management and information systems and controls.

If we continue to grow, our management systems currently in place may be inadequate or we may not be able to effectively manage our growth. In particular, we may be unable to:

 

 

provide effective customer service;

 

 

develop and deliver products in a timely manner;

 

 

implement effective financial reporting and control systems; and

 

 

exploit new market opportunities and effectively respond to competitive pressures.

WE SELL OUR PRODUCTS THROUGH INTERMEDIARIES WHO MAY NOT VIGOROUSLY MARKET OUR PRODUCTS, OR MAY RETURN OUR PRODUCTS.

We market substantially all of our products to end users through intermediaries, including distributors, resellers and value-added resellers. Our distributors sell other products that are complementary to, or compete with, our products. While we encourage our distributors to focus on our products, these distributors may give greater priority to products of other suppliers, including competitors’. They may also return the products to us under certain circumstances.

OUR CUSTOMERS MAY CANCEL OR DELAY THEIR PURCHASES OF OUR PRODUCTS, WHICH COULD ADVERSELY AFFECT OUR BUSINESS.

Our products may be considered to be capital purchases by certain enterprise customers. Capital purchases are often uncertain and, therefore, are canceled or delayed if the customer experiences a downturn in its business prospects or as a result of unfavorable economic conditions. Any cancellation or delay could adversely affect our results of operations.

WEAK FINANCIAL CONDITIONS OF SOME OF OUR DISTRIBUTORS MAY ADVERSELY AFFECT OUR OPERATING RESULTS.

Some of our distributors are experiencing financial difficulties worldwide, which may adversely impact our collection of accounts receivable. We regularly review the collectability and creditworthiness of our distributors to determine an appropriate allowance for doubtful receivables. Our uncollectible accounts could exceed our current or future allowance for doubtful receivables, which would adversely impact our operating results.

 

16


Table of Contents

OUR RESULTS OF OPERATIONS MAY SUFFER IF WE ARE REQUIRED TO PAY SIGNIFICANT AMOUNTS OF PENALTY PAYMENTS PURSUANT TO THE TERMS OF OUR SERVICE LEVEL AGREEMENTS.

We guarantee a certain quality of product support to our customers through our service level agreements. Pursuant to the terms of these agreements, under some circumstances, we are required to make penalty payments to our customers. For example, if we fail to provide our customers a virus pattern file within two hours of our receipt of a virus from the customer, the terms of the agreement require us to make a penalty payment to the dissatisfied customer which may amount up to 20% of the initial sale price. We have established reserves based on our assumptions and estimates. However, our assumptions and estimates may be wrong and our actual total penalty payments could materially exceed our reserves and adversely affect our results of operations and financial condition.

WE RELY HEAVILY ON OUR MANAGEMENT AND TECHNICAL PERSONNEL, WHO MAY NOT REMAIN WITH US IN THE FUTURE.

We rely, and will continue to rely, on a number of key technical and management employees, including our Chief Executive Officer, Eva Yi-Fen Chen. While we require our employees to sign employment agreements, our employees are generally not otherwise subject to noncompetition covenants. If any of our key employees leave, our business, results of operations and financial condition could suffer.

FLUCTUATIONS IN OUR QUARTERLY FINANCIAL RESULTS COULD CAUSE THE MARKET PRICE FOR OUR SHARES AND OUR ADSs TO BE VOLATILE.

We believe that our quarterly financial results may fluctuate in ways that do not reflect the long-term trend of our future financial performance. It is likely that in some future quarterly periods, our operating results may be below the expectations of public market analysts and investors. In this event, the price of our shares and our ADSs could fall.

Factors which could cause our quarterly financial results to fluctuate include:

 

 

timing of sales of our products and services due to customers’ budgetary constraints, seasonal buying patterns and our promotional activities;

 

 

new product introductions by our competitors;

 

 

significant marketing campaigns, research and development efforts, employee hiring, and other capital expenditures by us to drive the growth of our business;

 

 

changes in customer needs for antivirus software; and

 

 

changes in economic conditions in our major markets.

WEAKNESS IN THE JAPANESE ECONOMY MAY HURT OUR BUSINESS PERFORMANCE BECAUSE JAPAN IS OUR LARGEST MARKET.

While our sales in the US and Europe have increased in recent years, we remain significantly dependent on the Japanese market. Net sales in Japan accounted for approximately 41% in fiscal 2004, approximately 40% in fiscal 2005 and approximately 39% of our net sales in fiscal 2006. Because of our dependence on the Japanese market, any deterioration in the condition of the Japanese economy could negatively impact our net sales.

FOREIGN EXCHANGE FLUCTUATIONS COULD LOWER OUR RESULTS OF OPERATIONS BECAUSE WE EARN REVENUES DENOMINATED IN SEVERAL DIFFERENT CURRENCIES.

Our reporting currency is the Japanese yen and the functional currency of each of our subsidiaries is the currency of the country in which the subsidiary is domiciled. However, a significant portion of our revenues and operating expenses is denominated in currencies other than the Japanese yen, primarily the US dollar, euro and the New Taiwan dollar. As a result, appreciation or depreciation in the value of other currencies as compared to the Japanese yen could result in material transaction or translation gains or losses which could reduce our operating results. These negative effects from currency fluctuations could become more significant if we are successful in increasing our sales in markets outside of Japan. We do not currently engage in currency hedging activities.

 

17


Table of Contents

INFRINGEMENT OF OUR INTELLECTUAL PROPERTY COULD HURT OUR BUSINESS.

Our success depends upon the development of proprietary software technology. We rely on a combination of contractual rights and patent, copyright, trademark and trade secret laws to establish and protect proprietary rights in our software. If we are unable to establish and protect these rights, our competitors may be able to use our intellectual property to compete against us. This could limit our growth and hurt our business. At present, we hold thirteen issued patents. It is possible that no additional patents will be issued to us or any of our subsidiaries. In addition, our issued patents may not prevent other companies from competing with us. On the other hand, there is the possibility of the suspension of our products and services sales, compensation, and royalty payment of licensee because of our patent infringement upon another company. Additionally, there is also a possibility that a case brought against a service invention and suit filed by employee. In the case of losing such a lawsuit, payment to compete the employee may be incurred.

PRODUCT LIABILITY CLAIMS ASSERTED AGAINST US IN THE FUTURE COULD HURT OUR BUSINESS.

Our products are designed to protect customers’ network systems and personal computers from damage caused by computer viruses. As a result, if a customer suffers damage from viruses, the customer could sue us on product liability or related grounds, claim damages for data loss or make other claims. Additionally, as viruses are constantly evolving, purchasers of our software products must regularly update the software they have purchased from us with virus protection files that we make available for download from our website. Should we fail to properly test these virus protection files and distribute a defective file, these files could cause damage to the personal computers of our customers who have downloaded a defective file. Our license agreements typically contain provisions, such as disclaimers of warranty and limitations of liability, which seek to limit our exposure to certain types of product liability claims. However, in some jurisdictions these provisions may not be enforceable on statutory, public policy or other grounds. In the case of losing such a law suit, there is a possibility that the case brought against it, and suit filed by our services and products user with brought an action for damages and recovery of pain and suffering damages, could have a material adverse effect on our business.

OUR BUSINESS FACES THE RISK OF EFFECT FROM VIOLATION OR AMMENDMENT OF THE LAW AND THE LEGAL ACT.

All our business would be under various laws, legal acts, and regulations in each country and each region. If we would fail to comply with those laws and regulations, it would provide more severe administrative guidance and penal regulations. In such a case, there is the possibility to have a material adverse effect on our operating results. Also, in the case of the laws and regulations legal amendments, there are the possibility to be tighten regulations and restrictions on our products and services and carry a cost in terms of relevant issues. In such a case, our business may have a material adverse effect on our operating results,

OUR BUSINESS FACES THE RISK OF INTERRUPTION FROM POWER SHORTAGES, EARTHQUAKES, OUTBREAK OF BIOLOGICAL VIRUSES AND OTHER HAZARDS.

We face a number of potential business interruption risks that are beyond our control. The State of California experienced intermittent power shortages in 2000, sharp increases in the cost of energy and even interruptions of service to some business customers. If power shortages continue to be a problem, our business may be materially adversely affected. Additionally, we may experience natural disasters that could interrupt our business.

Tokyo, where our corporate headquarter is located, is near a major earthquake fault. The impact of a major earthquake on our facilities, infrastructure and overall operations is not known. There is no guarantee that an earthquake would not seriously disturb our entire business operations. We are largely uninsured for losses and business disruptions caused by an earthquake and other natural disasters.

In addition, many of the key countries and regions in which we operate have sustained negative economic impact from events such as the continued fear of future terrorist attacks and the outbreak of severe acute respiratory syndrome, or SARS. Prolonged continuation of these adverse factors may hurt our results of operations and financial condition.

 

18


Table of Contents

WE MAY HAVE TO CONSTRAIN OUR BUSINESS ACTIVITIES TO AVOID BEING DEEMED AN INVESTMENT COMPANY UNDER THE US INVESTMENT COMPANY ACT OF 1940.

In general, a company which is or holds itself out as being engaged primarily in the business of investing, reinvesting or trading in securities, may be deemed to be an investment company under the US Investment Company Act of 1940. We do not believe that we are an investment company as defined under the US Investment Company Act of 1940. However, if we were to be deemed an investment company, we would be prohibited from issuing our securities in the United States and may have to terminate our US listing or other sponsorship promoting a US trading market for our issued securities. In order to avoid these prohibitions, we may be forced to forego otherwise attractive business opportunities, potentially limiting our growth and our profitability.

BECAUSE OF THE INFLUENCE OF OUR PRINCIPAL SHAREHOLDERS, OUR OTHER SHAREHOLDERS MAY BE UNABLE TO INFLUENCE OUR BUSINESS.

Our principal shareholders, including major shareholders who beneficially own more than 5% of the issued shares of our common stock and directors, beneficially owned approximately 39.5% of our outstanding shares as of December 31, 2006. These shareholders, if they act together, would be able to significantly influence all matters requiring approval by our shareholders, including the election of directors and the approval of mergers or other business combination transactions. Our principal shareholders may have strategic or other interests that conflict with the interests of our other shareholders. As a result, the concentration in our shareholdings may have the effect of delaying or preventing a change in control of Trend Micro, which could result in the loss of a significant financial gain to our shareholders.

OUR STOCK PRICE IS VOLATILE, AND INVESTORS BUYING THE SHARES OR ADSs MAY NOT BE ABLE TO RESELL THEM AT OR ABOVE THEIR PURCHASE PRICE.

Shares of our common stock are traded on the Tokyo Stock Exchange, which is the principal market for our shares. Recently, the US and Japanese securities markets have experienced significant price and volume fluctuations. The market prices of securities of high-tech companies, and internet companies in particular, have been especially volatile. Since trading in our shares commenced on the Tokyo Stock Exchange on August 17, 2000, our stock price has fluctuated between a low of (Yen) 1,440 and a high of (Yen) 9,005. Since trading in our ADSs commenced on the Nasdaq National Market on July 8, 1999, the price of our ADSs has fluctuated between a low of $12.16 and a high of $159.38. The closing price on the Tokyo Stock Exchange for our stock on December 29, 2006 was (Yen) 3,490, and the closing price on the Nasdaq National Market for our ADSs on December 29, 2006 was $29.40 per ADS. The market price of our shares and ADSs is likely to fluctuate in the future.

BECAUSE OF DAILY PRICE RANGE LIMITATIONS UNDER JAPANESE STOCK EXCHANGE RULES, YOU MAY NOT BE ABLE TO SELL YOUR SHARES OF OUR COMMON STOCK AT A PARTICULAR PRICE ON ANY PARTICULAR TRADING DAY, OR AT ALL.

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

 

19


Table of Contents

3 CONSOLIDATED FINANCIAL STATEMENTS

(1) CONSOLIDATED BALANCE SHEETS

 

 

     (Thousands of yen)
     December 31, 2005    December 31, 2006

Account

   Amount     %    Amount     %

<Assets>

         

Current assets:

         

Cash and cash equivalents

   59,612,577        76,196,954    

Time deposits

   1,435,293        514,293    

Marketable securities

   22,395,365        25,958,661    

Notes and accounts receivable, trade

         

–less allowance for doubtful accounts

         

(Yen) 282,257 in FY2005 and (Yen) 514,223 in FY2006, respectively

         

–less sales returns

         

(Yen) 422,453 in FY2005 and (Yen) 208,275 in FY2006, respectively

   19,198,870        19,923,830    

Inventories

   359,897        685,952    

Deferred income taxes

   6,727,229        9,438,457    

Prepaid expenses and other current assets

   1,925,791        3,708,789    
                     

Total current assets

   111,655,022     84.0    136,426,936     81.6
                     

Investments and other assets:

         

Securities investments

   11,159,428        15,681,524    

Investment in and advances to affiliated companies

   321,569        254,308    

Software development costs

   1,174,691        1,167,079    

Other intangibles

   1,390,434        2,088,618    

Goodwill

   2,130,179        2,982,963    

Deferred income taxes

   2,033,488        4,370,672    

Other

   671,800        792,871    
                     

Total investments and other assets

   18,881,589     14.2    27,338,035     16.3
                     

Property and equipment:

         

Office furniture and equipment

   4,468,891        6,542,245    

Other properties

   1,539,195        2,249,875    
                 
   6,008,086        8,792,120    

Less: Accumulated depreciation

   (3,609,473 )      (5,292,452 )  
                     

Total property and equipment

   2,398,613     1.8    3,499,668     2.1
                     

Total assets

   132,935,224     100.0    167,264,639     100.0
                     

 

20


Table of Contents
     (Thousands of yen)
     December 31, 2005    December 31, 2006

Account

   Amount     %    Amount     %

<Liabilities, minority interest and shareholders’ equity>

         

Current liabilities:

         

Notes payable, trade

   118,572        143,637    

Accounts payable, trade

   794,450        1,428,202    

Accounts payable, other

   3,208,625        3,753,566    

Withholding income taxes

   1,082,302        1,465,451    

Accrued expenses

   3,138,674        4,023,464    

Accrued income and other taxes

   5,476,791        10,100,431    

Deferred revenue

   31,506,315        45,093,703    

Other

   895,088        961,342    
                     

Total current liabilities

   46,220,817     34.8    66,969,796     40.1
                     

Long-term liabilities:

         

Deferred revenue

   3,874,936        7,681,730    

Accrued pension and severance costs

   889,774        1,149,219    

Other

   82,056        261,214    
                     

Total long-term liabilities

   4,846,766     3.6    9,092,163     5.4
                     

Minority interest

   4,531     0.0    6,632     0.0
                     

Shareholders’ equity:

         

Common stock

         

Authorized

         

-December 31, 2005 250,000,000 shares (no par value)

         

-December 31, 2006 250,000,000 shares (no par value)

         

Issued

         

-December 31, 2005 136,603,725 shares

   12,484,849         

-December 31, 2006 137,344,504 shares

        13,479,076    

Additional paid-in capital

   18,572,063        24,755,879    

Retained earnings

   55,971,955        63,386,138    

Accumulated other comprehensive income

         

Net unrealized gain (loss) on debt and equity securities

   657,885        1,012,828    

Cumulative translation adjustments

   1,459,600        2,910,707    

Unrecognized pension liabilities

   —          (181,855 )  
                 
   2,117,485        3,741,680    

Treasury stock, at cost

         

-December 31, 2005 2,513,231 shares

   (7,283,242 )       

-December 31, 2006 4,509,612 shares

        (14,166,725 )  
                     

Total shareholders’ equity

   81,863,110     61.6    91,196,048     54.5
                     

Total liabilities, minority interest and shareholders’ equity

   132,935,224     100.0    167,264,639     100.0
                     

 

21


Table of Contents

(2) CONSOLIDATED STATEMENTS OF INCOME

 

     (Thousands of yen)  
     For the year ended
December 31, 2005
   For the year ended
December 31, 2006
  

Increase
(Decrease)

%

 

Account

   Amount     %    Amount     %   

Net sales

   73,029,901     100.0    85,613,662     100.0    17.2  

Cost of sales:

            

Amortization of capitalized software, and Material

   2,598,603        4,138,033       

Maintenance

   1,671,320        3,259,764       

Customer Support

   6,857,901        8,496,171       
                        

Total Cost of sales

   11,127,824     15.2    15,893,968     18.6    42.8  
                        

Operating Expense:

            

Selling

   20,944,484        27,216,279       

Research and development

   4,395,207        4,719,313       

General and administrative

   8,990,611        10,708,306       
                        

Total operating expenses

   34,330,302     47.0    42,643,898     49.8    24.2  
                        

Operating income

   27,571,775     37.8    27,075,796     31.6    (1.8 )
                        

Other incomes (expenses):

            

Interest income and dividend received

   836,910        1,775,896       

Interest expense

   (3,709 )      (19,638 )     

Gain (loss) on sales of marketable securities

   370,326        464,055       

Foreign exchange gain (loss), net

   327,257        (37,955 )     

Other income (expense), net

   5,741        297,686       
                        

Total other income (expense)

   1,536,525     2.1    2,480,044     2.9    61.4  
                        

Net income before tax

   29,108,300     39.9    29,555,840     34.5    1.5  
                        

Income taxes:

            

Current

   11,863,127        16,012,347       

Deferred

   (1,358,568 )      (3,644,302 )     
                        
   10,504,559     14.4    12,368,045     14.4    17.7  
                        

Income before minority interest and equity in earnings of affiliated companies

   18,603,741     25.5    17,187,795     20.1    (7.6 )

Minority interest in income of consolidated subsidiaries

   (338 )   0.0    (812 )   0.0    140.2  

Equity in earnings (losses) of affiliated companies

   66,551     0.1    49,207     0.0    (26.1 )
                        

Net income

   18,669,954     25.6    17,236,190     20.1    (7.7 )
                        

Per share data:

            
     Yen          Yen             

Net income

            

-Basic

   139.85        128.65       

-Diluted

   137.83        128.11       

 

22


Table of Contents

(3) CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

 

     (Thousands of yen)  

Account

   For the year
ended
December 31,
2005
    For the year
ended
December 31,
2006
 

Net income

   18,669,954     17,236,190  
            

Other comprehensive income (loss), before tax:

    

Unrealized gains (losses) on debt and equity securities:

    

Unrealized holding gains (loss) arising during period

   1,375,136     959,373  

Less reclassification adjustment for (gains) losses included in net income

   (704,199 )   (381,360 )
            
   670,937     578,013  

Foreign currency translation adjustments

   2,066,063     1,451,107  

Unrecognized pension liabilities;

    

Pension liability adjustment to initially apply SFAS No.158

   —       (164,786 )
            

Total

   2,737,000     1,864,334  

Tax effect of other comprehensive income (loss):

    

Income tax expense related to unrealized gains (losses) on debt and equity securities

   (297,400 )   (223,070 )

Income tax expense related to unrecognized pension liabilities

   —       (17,069 )
            
   (297,400 )   (240,139 )

Other comprehensive income (loss), net of tax

   2,439,600     1,624,195  
            

Comprehensive income

   21,109,554     18,860,385  
            

 

23


Table of Contents

(4) CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

 

     (Thousands of yen)  

Account

   For the year ended
December 31, 2005
    For the year ended
December 31, 2006
 

<Common stock>

    

Balance at beginning of period

   11,426,977     12,484,849  

Exercise of stock purchase warrants and stock acquisition rights

   1,057,872     994,227  
            

Balance at end of period

   12,484,849     13,479,076  
            

<Additional paid-in capital>

    

Balance at beginning of period

   17,359,335     18,572,063  

Tax benefit from exercise of non-qualified stock warrants

   155,323     140,089  

Tax recognition derived from elimination of reversed warrant related with stock option plan

   —       (59,091 )

Stock option compensation expense

   —       5,108,924  

Exercise of stock purchase warrants and stock acquisition rights

   1,057,405     993,894  
            

Balance at end of period

   18,572,063     24,755,879  
            

<Retained earnings>

    

Balance at beginning of period (Previously announced)

   42,165,026     55,971,955  

Cumulative-effect of the adjustment by applying SAB No.108

   —       (2,251,639 )

Balance at beginning of period (After adjusted)

   42,165,026     53,720,316  

Net income

   18,669,954     17,236,190  

Stock issue costs, net of tax

   (3,519 )   (3,761 )

Cash dividends

   (4,794,028 )   (7,509,068 )

Loss on sales of treasury stock, net of tax

   (65,478 )   (57,539 )
            

Balance at end of period

   55,971,955     63,386,138  
            

<Net realized gain (loss) on debt and equity securities>

    

Balance at beginning of period

   284,348     657,885  

Net change during the period

   373,537     354,943  
            

Balance at end of period

   657,885     1,012,828  
            

<Cumulative translation adjustments>

    

Balance at beginning of period

   (606,463 )   1,459,600  

Aggregate translation adjustments for the period

   2,066,063     1,451,107  
            

Balance at end of period

   1,459,600     2,910,707  
            

<Unrecognized pension cost>

    

Balance at beginning of period

   —       —    

Accumulated adjustments by applying SFAS No.158

   —       (181,855 )
            

Balance at end of period

   —       (181,855 )
            

<Treasury stock, at cost>

    

Balance at beginning of period

   (7,454,463 )   (7,283,242 )

Purchase of treasury stock

   (142,062 )   (7,117,842 )

Sales of treasury stock

   313,283     234,359  
            

Balance at end of period

   (7,283,242 )   (14,166,725 )
            

Total shareholders’ equity

   81,863,110     91,196,048  
            

 

24


Table of Contents

(5) CONSOLIDATED STATEMENTS OF CASH FLOWS

 

     (Thousands of yen)  

Account

   For the year
ended
December 31,
2005
    For the year
ended
December 31,
2006
 

Cash flows from operating activities:

    

Net income

   18,669,954     17,236,190  

Adjustments to reconcile net income to net cash provided by operating activities

    

Depreciation and amortization

   1,878,050     3,466,388  

Pension and severance costs, less payments

   207,109     248,564  

Deferred income taxes

   (1,358,568 )   (3,644,302 )

(Gain) loss on sales of marketable securities

   (370,326 )   (464,055 )

Equity in earnings of affiliated companies

   (66,551 )   (49,207 )

(Gain) loss on sale and disposal of fixed assets

   11,585     3,466  

Stock option compensation expense

   —       4,971,477  

Dividends received from affiliated company

   —       28,000  

Minority interest

   338     812  

Changes in assets and liabilities:

    

Increase (decrease) in deferred revenue

   6,209,680     12,960,443  

(Increase) decrease in accounts receivable, net of allowances

   (3,567,924 )   (84,956 )

(Increase) decrease in inventories

   (124,971 )   (303,254 )

Increase (decrease) in notes and accounts payable, trade

   (526,321 )   587,337  

Increase (decrease) in accrued income and other taxes

   (1,826,959 )   4,644,548  

(Increase) decrease in other current assets

   (34,426 )   (667,417 )

Increase (decrease) in accounts payable, other

   381,414     143,162  

Increase (decrease) in other current liabilities

   1,336,703     (61,823 )

(Increase) decrease in other assets

   (207,984 )   (931,569 )

Other

   34,809     (695,385 )
            

Net cash provided by operating activities

   20,645,612     37,388,419  
            

Cash flows from investing activities:

    

Payments for purchases of property and equipment

   (1,153,193 )   (1,942,091 )

Software development cost

   (1,446,248 )   (1,456,755 )

Payments for purchases of other intangibles

   (216,107 )   (1,395,220 )

Proceeds from sales of marketable securities

   22,079,575     20,648,519  

(Payment for)/Proceeds from marketable securities maturing within three months or less (net)

   (189,708 )   1,292,234  

Payments for purchases of marketable securities and security investments

   (28,043,534 )   (28,355,269 )

Payments for business acquisition

   (2,716,702 )   (816,655 )

(Payments for)/Proceeds from time deposits

   (1,052,017 )   921,000  
            

Net cash used in investing activities

   (12,737,934 )   (11,104,237 )
            

Cash flows from financing activities:

    

Issuance of common stock pursuant to exercise of stock purchase warrants and stock acquisition rights

   2,111,758     1,984,360  

Proceeds from sales of treasury stock

   247,805     176,820  

Payment for purchase of treasury stock

   (142,062 )   (7,117,842 )

Tax benefit from exercise of non-qualified stock warrants

   155,322     140,089  

Tax recognition derived from elimination of reversed warrant related with stock option plan

   —       (59,091 )

Capital contribution from minority interest

   4,193     —    

Dividends paid

   (4,782,764 )   (7,497,089 )
            

Net cash used in financing activities

   (2,405,748 )   (12,372,753 )
            

Effect of exchange rate changes on cash and cash equivalents

   1,202,290     2,672,948  
            

Net increase (decrease) in cash and cash equivalents

   6,704,220     16,584,377  

Cash and cash equivalents at beginning of period

   52,908,357     59,612,577  
            

Cash and cash equivalents at end of period

   59,612,577     76,196,954  
            

Supplementary information of cash flow:

    

Payment for interest expense

   3,709     19,638  

Payment for income taxes

   13,109,985     9,516,032  

 

25


Table of Contents

NOTES TO CONSOLIDATED FINANCIAL INFORMATION

1. Accounting Principles, Accounting Procedures and Methods for Presenting Consolidated Financial Statements

The accompanying consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”), including Accounting Principles Board Opinion (“APB”), Statement of Financial Accounting Standards (“SFAS”), Emerging Issues Task Force Consensus (“EITF”) and the American Institute of Certified Public Accountants Statement of Position (“SOP”). The Company listed on the NASDAQ in July 1999, and prepares its consolidated financial statements pursuant to the terminology, forms and preparation methods required in order to issue American Depositary Shares, which are registered with the U.S. Securities and Exchange Commission. The Company maintains its books and records in conformity with accounting principles and practices generally accepted in Japan (“Japan GAAP”), and its foreign subsidiaries in conformity with those in the respective countries of their domicile. Certain adjustments and reclassifications, including those relating to the tax effects of temporary differences, valuation of debt and equity securities and revenue on post-contract support, have been incorporated in the accompanying consolidated financial statements to conform with accounting principles generally accepted in the United States of America (“U.S. GAAP”). These adjustments were not recorded in the statutory books of account. In addition, certain reclassifications have been made in the 2005 consolidated financial statements to conform to the classifications used in 2006.

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

The significant differences between accounting principles, accounting procedures and methods of presentation which are adopted by the Company and its subsidiaries (U.S. GAAP) and those in Japan (Japan GAAP) are as follows. However, the effect on income before income tax caused by the GAAP differences indicated below, are immaterial.

(1) Pension Accounting

The Company and subsidiaries account for the retirement benefit plan in accordance with SFAS No. 87 “Employers’ Accounting for Pensions” and SFAS No.158 “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plan – an amendment of FASB Statement No. 87, 88, 106, and 132(R)” .

The transitional difference, when SFAS No. 87 is first applied, shall be amortized on a straight-line basis over the average remaining service period. However, in our non-consolidated financial statements, the transitional difference was all charged to income in the first year of application of local pension accounting, in accordance with Japan GAAP.

By adopting SFAS No.158, unrecognized pension liability, which is not recognized in accordance with Japan GAAP, is recognized and booked in our consolidated balance sheet.

(2) Goodwill

The Company accounts for goodwill in accordance with SFAS 142, “Goodwill and Other Intangible Assets” which requires the discontinuance of amortization for goodwill and at least an annual test for impairment.

(3) Stock Option

The Company accounts for stock option in accordance with SFAS No. 123 (revised 2004), “Share-Based Payments”.

(4) Quantifying financial statement misstatements

The Company accounts for the Securities and Exchange Commission issued Staff Accounting Bulletin (“SAB”) No.108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements.”

2. Summary of significant accounting policies

Basis of consolidation

The consolidated financial statements include the accounts of the parent company and those of its majority-owned subsidiaries. All intercompany transactions and accounts are eliminated upon consolidation.

Investments in affiliated companies (20 to 50 percent-owned companies) in which the ability to exercise significant influence exists are stated at cost plus the equity in undistributed earnings (losses). Consolidated net income includes the Company’s equity in the current net earnings (losses) of such companies, after elimination of unrealized intercompany profit.

Consolidated subsidiaries :

All subsidiaries which are composed of the following 19 companies are consolidated:

[North America]

Trend Micro Inc. (USA)

[Europe]

Trend Micro (EMEA) Limited (Ireland)

Trend Micro France SA

Trend Micro Deutschland GmbH (Germany)

Trend Micro Italy S.r.l.

Trend Micro (UK) Limited

[Asia Pacific]

Trend Micro Australia Pty.Ltd.

Trend Micro (China) Incorporated

Trend Micro Hong Kong Limited (China)

Trend Micro India Private Limited

Trend Micro Korea Inc.

Trend Micro Malaysia Sdn. Bhd.

Trend Micro (NZ) Limited (NewZealand)

Trend Micro (Singapore) Private Limited

Trend Micro Incorporated (Taiwan)

Trend Micro (Thailand) Limited

[Latin America]

Trend Micro do Brasil Ltda. (Brazil)

Servicentro TMLA,S.A.de C.V. (Mexico)

Trend Micro Latinoamerica S.A.de C.V. (Mexico)

Affiliated companies :

The equity method of accounting is applied to investments in the following affiliated companies.

Soft Trend Capital Corporation (Japan)

Net STAR, Inc. (Japan)

 

26


Table of Contents

Translation of foreign currencies

All asset and liability accounts of foreign subsidiaries are translated into Japanese yen at year-end rates of exchange and all income and expense accounts are translated at rates of exchange that approximate to those prevailing at the time of transactions. The resulting foreign currency translation adjustments are included in accumulated other comprehensive income (loss).

Foreign currency denominated receivables and payables are translated into Japanese yen at the exchange rate of December 31, 2006 and the resulting translation gains or losses are taken into current income. Foreign currency transactions are translated at the approximate rates of exchange prevailing at the transaction dates.

Revenue recognition

The Company’s revenue is derived primarily from product sales, which includes software product license and post-contract customer support services. Other revenue is composed of hardware sales, royalty income and supplementary service income. Royalty is comprised of fees from ‘Application service providers’ and ‘Internet service providers’, and supplementary services are comprised of fees from services based on ‘Premium support program’ and ‘Service level agreement’. Product sales include sales of our products, under limited circumstances, to other companies for inclusion in their products.

The Company licenses its software products under perpetual licensing. The Company sells its products and services via its direct sales force and through domestic and foreign intermediaries.

The Company applies the provisions of SOP 97-2, “Software Revenue Recognition”, as amended by SOP 98-9 “Modification of SOP 97-2, Software Revenue Recognition, With Respect to Certain Transactions”, to all transactions involving the sale of software products and hardware transactions where software is not incidental. For hardware transactions where software is not incidental, the Company does not bifurcate the fee and apply separate accounting guidance to the hardware and software elements.

Revenue from the Company’s software product license and hardware where software is not incidental is recognized when persuasive evidence of an arrangement exists, the product has been delivered, the fee is fixed and determinable, and collection of the resulting receivable, net of allowances for doubtful accounts and sales returns, is reasonably assured. Post-contract customer support services revenue which includes virus pattern updates, unspecified product version updates, telephone and online technical support, and supplementary services revenue are deferred and recognized ratably over the service period. The Company allocates revenue to post-contract customer support services based on the fair value of the post-contract customer support services, which are determined based on separate sales of renewals to customers. Royalty income is recognized as earned unless collection of the related receivables is not assured in which case, it is recognized upon receipt of cash.

For all sales, the Company uses either a binding purchase order or signed license agreement as evidence of an arrangement. Sales through our intermediaries are evidenced by a master agreement governing the relationship together with binding purchase orders on a transaction-by-transaction basis.

At the time of the transaction, the Company assesses whether the fee associated with our revenue transactions is fixed and determinable and whether or not collection is reasonably assured. The Company assesses whether the fee is fixed and determinable based on the payment terms associated with the transaction. If a significant portion of a fee is due after our normal payment terms, which are 30 to 90 days from the invoice date, the Company accounts for the fee as not being fixed and determinable. In these cases, the Company recognizes revenue as the fees become due. The Company assesses collection based on a number of factors, including past transaction history with the customer and the credit-worthiness of the customer. The Company does not request collateral from our customers. If the Company determines that collection of a fee is not reasonably assured, the Company defers the fee and recognizes revenue until the time collection becomes reasonably assured, which is generally upon receipt of cash.

The Company recognizes revenue from sales to intermediaries when products are delivered to the intermediary. The Company primarily sells retail packages through intermediaries. After sale of a retail package, the Company may approve certain returns from intermediaries or end-users; therefore, the Company makes an estimate of sales returns from intermediaries or end-users based on its historical experience. The provision for estimated returns is recorded as a reduction of revenue at the time of sales.

The sales rebates to intermediaries are recognized as a reduction of revenue. Measurement of the sales rebates is based on two types of rebate arrangements. In one arrangement, the amount of the rebate is calculated by multiplying fixed contractual rebate rate by the actual sales amount to intermediaries. In another arrangement, the rebate is paid only if the intermediaries achieve a targeted level of quarterly sales. The rebate rates vary depending on the level of targets and the matrix table of targets and rebate rate is agreed with intermediaries at the beginning of each quarter.

The Company applies the provisions of EITF 01-9 “Accounting for consideration given by a vendor to a customer or a reseller of the vendor’s products” to all transactions where rebates are paid.

 

27


Table of Contents

Cash and cash equivalents

Cash and cash equivalents include cash on hand, cash on deposit with banks and all highly liquid investments, with original maturities of three months or less, that are readily convertible to known amounts of cash and are so near maturity that they present insignificant risk of changes in value because of changes in interest rates.

Marketable securities and investment securities

Marketable securities and investment securities consist of debt securities, equity securities and mutual funds. Debt securities, equity securities and mutual funds designated as available-for-sale are carried at fair value with unrealized holding gains or losses included in accumulated other comprehensive income (loss), net of applicable taxes. Debt securities designated as held-to-maturity are carried at amortized cost. The Company classifies “available-for-sale” debt securities with maturities longer than one year as investment securities in investments and other assets. Individual securities classified as either available-for-sale or held-to-maturity are reduced to their fair market value for other-than-temporary declines in market value. Realized gains and losses, which are determined on the average-cost method, are reflected in income.

Inventories

Finished products and raw materials are valued at the lower of weighted-average cost or net realizable value. Work in process is stated at accumulated production costs.

Property and equipment

Property and equipment are stated at cost less accumulated depreciation. Major renewals and improvements are capitalized; minor replacements, maintenance and repairs are charged to current income. Depreciation of property and equipment is computed on the declining-balance method for the parent company and on the straight-line method for foreign subsidiaries at rates based on estimated useful lives of the assets according to general class, type of construction and use. Estimated useful lives range mainly from 3 to 6 years for office furniture and equipment, and mainly from 3 to 6 years for other properties.

Intangible assets

Intangible assets, which mainly consist of software development costs and purchased software, are amortized on a straight-line basis over the estimated economic lives of the products, generally over twelve-month period for software development costs and a mainly five-year period for purchased software for internal use and other intangible assets.

Goodwill and other intangible assets

Goodwill is the excess of the purchase price of the acquired business over the fair value of its net tangible and identifiable intangible assets. Other intangible assets consist primarily of existing technology purchased through business acquisition.

We account for goodwill in accordance with SFAS No. 142, “Goodwill and Other Intangible Assets”. SFAS No. 142 requires, among other things, the discontinuance of amortization for goodwill and at least an annual test for impairment. An impairment review may be performed more frequently in the event circumstances indicate that the carrying value may not be recoverable.

SFAS No. 142 also requires that intangible assets with estimable useful lives be amortized over their respective estimated useful lives. Existing technology is amortized over 4 years.

Impairment of long-lived assets

The Company evaluates long-lived assets and definite-lived intangible assets to be held and used whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Determination of recoverability is based on the sum of expected future cash flows (undiscounted and without interest charges) from the use and eventual disposition of the asset. If the fair value is less than the carrying amount of the asset, an impairment loss is recognized, based on the fair value of the asset. Long-lived assets to be disposed of by sale are reported at the lower of their carrying amount or fair value less cost to sell.

Asset retirement obligations

The Company accounts for its asset retirement obligations in accordance with SFAS No.143 “Accounting for Asset Retirement Obligation” and FASB Interpretation No.47 “Accounting for Conditional Asset Retirement Obligation – an interpretation of FASB Statement No.143,” which require that a company to recognize the fair value of a legal obligation associated with the retirement of long-lived assets as a liability in the period in which it is incurred and period-to-period changes in the asset retirement liability resulting from the passage of time and revisions to either the timing or the amount of the original estimate of undiscounted cash flows in the subsequent periods. The associated asset retirement costs are capitalized and amortized to expense over an economic useful life of the related assets.

 

28


Table of Contents

Research and development costs and software development costs

All costs relating to research and development, to establish the technological feasibility of software products, are expensed as incurred. Under the Company’s software development process, technological feasibility is established on completing all substantial testing for the original English language version of the software. Local language versions of software, such as Japanese or Chinese, are produced from the English language version, by adding Japanese language or Chinese language related functions. Production costs for such local language versions of software product masters, incurred subsequent to the availability of original English language version software, are capitalized. Production costs of the local language software product masters, which include direct labor and overhead costs, are amortized to cost of sales using the straight-line method over the current estimated economic lives of the products, generally up to twelve months.

Management considers the Company’s capitalized software development costs to be fully recoverable from future product sales. Management estimates are based upon supporting facts and circumstances, and may be significantly impacted based upon subsequent changes in business conditions.

Advertising costs

Advertising costs are expensed as incurred.

Stock-based compensation

The Company previously accounted for its stock-based incentive awards in accordance with the intrinsic value method as prescribed by the Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees” and related interpretations. Effective January 1, 2006, the Company adopted the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 123 (revised 2004), “Share-Based Payments”.

Had compensation cost for the stock purchase warrants and the stock acquisition rights been determined based on the grant-date fair value, as prescribed by SFAS No. 123, the Company’s pro forma net income and net income per share for the year ended December 31, 2005 would have been as follows:

 

    

(Thousands of Yen,

except per share data)

 
    

For the year

ended

December 31, 2005

 

Net income:

  

As reported

   18,669,954  

Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects

   (3,594,158 )
      

Pro forma net income

   15,075,796  
      

Net income per share:

  

As reported

  

Basic

   (Yen)139.85  

Diluted

   137.83  

Pro forma net income

  

Basic

   (Yen)112.93  

Diluted

   111.30  

Income taxes

The provision for income taxes is computed based on the pretax income included in the consolidated statement of income. The asset and liability approach is used to recognize deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the carrying amounts and the tax bases of assets and liabilities, and net operating loss carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. The effect on deferred assets (including deferred tax assets and liabilities on net unrealized gain or loss on available-for-sale securities) of a change in tax rates is recognized in income in the period that includes the enactment date. Valuation allowances are recorded to reduce deferred tax assets when it is more likely than not that a tax benefit will not be realized.

Net income per share

Basic net income per share is computed based on the average number of common shares outstanding for the period. Diluted net income per share assumes the dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock, or resulted in the issuance of common stock. Net income per share is appropriately adjusted for any stock splits or free distributions of common stock.

Comprehensive income

Other comprehensive income refers to revenues, expenses, gains and losses that under U.S. GAAP are included in comprehensive income but are excluded from net income as these amounts are recorded directly as adjustments to shareholders’ equity. The Company’s other comprehensive income primarily comprises unrealized gain or loss on available-for-sale securities and foreign currency translation adjustments.

 

29


Table of Contents

Market and credit risks

The anti-virus software market is characterized by rapid technological changes and evolving industry standards in computer hardware and software technologies. In addition, the markets for the Company’s products are highly competitive and are rapidly changing. The Company could incur substantial operating losses if it is unable to offer products, which address technological and market place changes in the anti-virus software industry.

Other financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of cash equivalents, marketable securities and accounts receivable. The Company invests primarily in time deposits, money market funds and marketable securities, and places its investments with high rating financial institutions. The Company performs ongoing credit evaluations of its customers’ financial condition and maintains an allowance for uncollectible accounts receivable, if any, based upon the expected collectibility of accounts receivable.

Quantifying financial statement misstatements

In September 2006, the Securities and Exchange Commission issued Staff Accounting Bulletin (“SAB”) No.108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements.” SAB No. 108 requires the Company to quantify misstatements using both the balance-sheet and income-statement approach and to evaluate whether either approach results in quantifying an error that is material in light of relevant quantitative and qualitative factors. When the effect of initial adoption is determined to be material, SAB No. 108 allows the Company to record that effect as a transitional cumulative-effect adjustment to beginning-of-year retained earnings.

SAB No. 108 is effective from the first annual period ending after November 16, 2006, however, as permitted, the Company has elected to adopt the provisions early from the first half period of this fiscal year. Upon adoption of SAB No. 108, the Company corrected prior year misstatements through a cumulative-effect adjustment to the beginning of the year retained earnings in the amount of (Yen) 2,251,639 thousand, which had previously been considered immaterial to the prior year consolidated financial statements. A breakdown of the cumulative-effect adjustment is as follows:

 

         (Thousands of Yen)  
   

Contents and reasons of the misstatements

   Fiscal year that
misstatements
occurred
  

Increase (decrease)

in the beginning of year

retained earnings

 

(1)

  Post-contract customer support service revenue should be deferred and recognized ratably over the service period. The Company corrected certain inconsistencies between the revenue recognition period and the actual service period that had occurred due to an operational limitation of tracking individual customer contract terms.    FY1999 -    (1,189,469 )

(2)

  In Japan, revenue for certain multi-year support service contracts was being recognized in a one-year period due to a system bug.    FY1999 -    (12,288 )

(3)

  Revenue of our North America operation had been dominated by the sales for the large corporate market and the deferral method used for sales in the large corporate market was also applied to the sales in the consumer market. However, the sales in the North America consumer market have increased in recent years. Therefore, the Company changed its deferral method in the consumer market to reflect a more accurate fair value.    FY1999 -    (143,845 )

(4)

  The fair value of post-contract customer support service in the Japanese consumer market had been determined in reference to the retail list price (the price for end-users) of each product component. To calculate more accurate fair value, the Company changed its deferral amounts to the ones which were based on the wholesale price (the price for distributors).    FY1999 -    (725,585 )

(5)

  The fair value of the legal obligation associated with the retirement of long-lived assets should be recognized as a liability as prescribed in SFAS No.143. However, the Company had not recorded certain such obligations that were considered immaterial. Therefore, the Company had provided an appropriate amount for all of its asset retirement obligations.    FY2005 -    (84,019 )

(6)

  In our North America operation, a subsidiary had applied the same deferral method for the major product line to the revenue from Intermute products and the products with a seat number of 50,001 or more, as well as the products bundled with a premium support program. However, the Company changed its method so that the entire sales amounts are deferred and recognized ratably over the service period since the fair value of the PCS component for those products could not be determined.    FY2005 -    (253,742 )

(7)

  In our North America operation, the start date and end date information for certain post-contract customer service arrangements was incorrectly entered into the system due to human processing errors. Accordingly, the Company corrected amortization of the related deferred revenue.    FY2005    23,212  

(8)

  In our North America operation, a subsidiary corrected its tax calculation with regard to the transfer of intellectual property which took place in 2005.    FY2005    284,830  

(9)

  In our North America operation, a subsidiary immediately expensed certain fixed assets with an acquisition cost of less than USD 3,000 or a useful life of less than 2 years. The Company has capitalized such fixed assets and recorded appropriate depreciation expense.    FY2003 -    133,594  

(10)

  In our European operation, the Company corrected certain inconsistencies between the revenue recognition period and the actual service period.    FY1999 -    (284,327 )
           
     Total    (2,251,639 )
           

 

30


Table of Contents

3. Reconciliation of the difference between basic and diluted net income per share (“EPS”)

Reconciliation of the differences between basic and diluted EPS for the year ended December 31, 2005 and 2006, is as follows:

 

    

For the year

ended

December 31, 2005

  

For the year

ended

December 31, 2006

     Thousands of Yen

Net income available to common stock holders

   18,669,954    17,236,190
     Thousands of Shares

Weighted-Average shares

   133,498    133,978

Effect of dilutive securities:

     

Stock options

   1,958    563

Weighted-Average shares for diluted EPS computation

   135,456    134,541
     Yen

Basic EPS:

   139.85    128.65

Diluted EPS:

   137.83    128.11

 

Shareholders’ equity per share as of December 31,2005 and 2006 were as follows:

 

     (Yen)
     December 31, 2005    December 31, 2006

Shareholders’ equity per share

   610.51    686.54

4. Cash and cash equivalents

Cash and cash equivalents as of December 31,2005 and 2006 were as follows:

 

     (Thousands of yen)
     December 31, 2005    December 31, 2006

Cash

   52,665,059    62,607,282

Time deposits with original maturities of three months or less

   6,947,518    13,589,672
         
   59,612,577    76,196,954
         

5. Time deposits

Our U.S. subsidiary had (Yen) 31,751 thousand and (Yen) 96,463 thousand of restricted cash set aside in accordance with the terms of building lease agreements as at December 31, 2005 and 2006, respectively. The restricted cash is included in time deposits.

 

31


Table of Contents

6. Marketable securities and securities investments

Marketable securities and securities investments include mutual funds and debt and equity securities for which the aggregate fair value, gross unrealized gains and losses and cost pertaining to “available-for-sale” investments as of December 31,2005 and 2006, were as follows:

< Available for sale: >

 

     (Thousands of yen)
     December 31, 2005
     Cost    Gains    Losses    Fair value

Mutual funds

   8,825,910    310,291    —      9,136,201

Equity securities

   —      —      —      —  

Debt securities

   22,985,181    263,558    138,138    23,110,601
                   

Total

   31,811,091    573,849    138,138    32,246,802
                   

< Available for sale: >

 

     (Thousands of yen)
     December 31, 2006
     Cost    Gains    Losses    Fair value

Mutual funds

   13,721,043    1,392,102    —      15,113,145

Equity securities

   —      —      —      —  

Debt securities

   26,054,713    433,213    85,206    26,402,720
                   

Total

   39,775,756    1,825,315    85,206    41,515,865
                   

The contractual maturities of available-for-sale debt securities as of December 31, 2006 were as follows:

 

     (Thousands of yen)
     Aggregated Par value    Estimated Fair Value

Due less than one year

   11,319,748    11,275,982

Due after one to two years

   6,645,968    6,641,441

Due after two to three years

   3,875,105    3,843,131

Due after three years

   4,626,200    4,642,166
         

Debt securities

   26,467,021    26,402,720
         

The net unrealized gain on “available-for-sale” securities included in the separate component of shareholders’ equity, net of applicable taxes, decreased by (Yen) 65,902 thousand and increased by (Yen) 402,863 thousand, for the year ended December 31, 2005 and 2006, respectively.

Proceeds from sales of “available-for-sale” securities for the year ended December 31,2005 and 2006 were (Yen) 22,079,575 thousand and (Yen) 20,648,519 thousand, respectively. Realized gains on sales of “available-for-sale” securities for the year ended December 31, 2005 and 2006 were (Yen) 370,326 thousand and (Yen) 464,055 thousand, respectively.

The following table shows our investment’s gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at December 31,2005 and 2006.

 

     (Thousands of yen)
     December 31, 2005
     Less than 12 months    12 Months or More    Total
     Fair Value    Unrealized
Losses
   Fair Value    Unrealized
Losses
   Fair Value    Unrealized
Losses

Available for sale:

                 

Mutual funds

   —      —      —      —      —      —  

Equity securities

   —      —      —      —      —      —  

Debt securities

   10,766,393    84,372    3,223,769    53,766    13,990,162    138,138
                             

Total

   10,766,393    84,372    3,223,769    53,766    13,990,162    138,138
                             

Investments, which were in an unrealized loss positions as of December 31, 2005, are comprised of U.S. dollar and Euro denominated public debts. The Company concluded that the impairments of these securities are not other than temporary in consideration of fluctuation of exchange rates and high credit rating of the issuers.

 

     (Thousands of yen)
     December 31, 2006
     Less than 12 months    12 Months or More    Total
     Fair Value    Unrealized
Losses
   Fair Value    Unrealized
Losses
   Fair Value    Unrealized
Losses

Available for sale:

                 

Mutual funds

   —      —      —      —      —      —  

Equity securities

   —      —      —      —      —      —  

Debt securities

   8,947,802    48,082    4,349,272    37,124    13,297,074    85,206
                             

Total

   8,947,802    48,082    4,349,272    37,124    13,297,074    85,206
                             

Investments, which were in an unrealized loss positions as of December 31, 2006, are comprised of U.S. dollar and Euro denominated public debts. The Company concluded that the impairments of these securities are not other than temporary in consideration of fluctuation of exchange rates and high credit rating of the issuers.

The aggregate cost of the Company’s cost method investments totaled (Yen) 124,320 thousand at December 31, 2006. All the cost method investments were not evaluated for impairment because (a) the Company did not estimate the fair value of those investments in accordance with paragraphs 14 and 15 of SFAS 107 and (b) the Company did not identify any events or changes in circumstances that may have had a significant adverse effect on the fair value of those investments.

 

32


Table of Contents

7. Research and development and maintenance costs, and software development costs

Research and development costs incurred up to the point where all substantial testing for the original English version product is complete, are charged to income as operating expense. Such research and development costs charged to income were (Yen) 4,395,207 thousand, (Yen) 4,719,313 thousand for the years ended December 31, 2005 and 2006, respectively.

Maintenance costs are fees, which relate to product version updates to enable product to cope with newly prevailing computer viruses and bug fixing, are recorded as cost of sales. The maintenance costs included in cost of sales were (Yen) 1,671,320 thousand, (Yen) 3,259,764 thousand, for the years ended December 31, 2005 and 2006, respectively.

Software development costs relating to the local language related functions (representing software development costs as shown in consolidated balance sheets) after netting the related accumulated amortization, are capitalized and amortized to cost of sales as follows:

 

     (Thousands of yen)  
    

For the year

ended

December 31,

2005

   

For the year

ended

December 31,
2006

 

Software development costs:

    

Balance at beginning of year

   438,464     1,174,691  

Additions, at cost

   1,446,248     1,456,756  

Amortization for the year

   (710,021 )   (1,464,368 )
            

Balance at end of year

   1,174,691     1,167,079  
            

8. Debt

Debt comprises the following:

 

     (Thousands of yen)
    

December 31,

2005

   

December 31,

2006

Unsecured 1.9% bonds, due April 18, 2006 with detachable warrants

   4,000,000     —  
   4,000,000     —  

Less—treasury bonds:

    

Unsecured 1.9% bonds, due April 18, 2006 with detachable warrants

   (4,000,000 )   —  
          
   —       —  
          

Based on the Company’s incentive plans, the parent company issued unsecured bonds with detachable warrants and bought all of the warrants at the same time for the purpose of distributing such instruments to the directors and certain employees of the parent company and its subsidiaries as a part of their remuneration.

The former Japanese Commercial Code restricts redemptions and extinguishments of these bonds in case the amount of each outstanding bond is less than the aggregate amount of exercise price of each outstanding warrant. Therefore, in order to reduce interest costs, the parent company repurchased a part of the bonds through the market with an intention to hold the treasury bonds until they can be extinguished legally. However, as the repurchase transaction is deemed as redemption of the bonds in substance, the treasury bonds are offset with the bonds on the face of consolidated balance sheets. There was no repurchase transaction for the year ended December 31, 2005 and 2006. The entire (Yen) 4,000,000 thousand of the bonds was redeemed during the year ended December 31, 2006.

 

33


Table of Contents

9. Stock Option

Based on the Company’s 2002 incentive plans, the Company issued the following bonds with detachable warrants to the public.

 

1.

   Board meeting approval    March 26,2002 and April 2,2002

2.

   Date of bond issuance    April 18, 2002

3.

   Maturity date    April 18, 2006

4.

   Amount of each bond (Thousands of yen)    4,000,000

5.

   Issued to    Public

6.

   Date on which the bonds were fully redeemed    —  

7.

   Exercise price per each warrant    (Yen)3,450

8.

   Warrant exercise period    From April 3, 2003 to April 11, 2006

9.

   Number of shares represented by warrants    1,159,420

10.

   Outstanding as of December 31, 2005    575,942

11.

   Outstanding as of December 31, 2006    —  

Upon issuance of the bond, the Company bought all of the warrants back and distributed such instruments to the directors and certain employees as their remuneration.

These transactions were accounted for as issuance of debt to the public, and as an issuance of stock purchase warrants to the directors and certain employees. The issuance of warrants to the directors and employees was accounted for under APB No. 25.

Warrant activity was as follows:

 

    

Thousands of

shares represented by

warrants

  

Thousands of

shares represented by

warrants

Outstanding at December 31, 2004

   737    3,450

Granted

   —      —  

Exercised

   161    3,450

Expired

   —      —  

Cancelled

   —      —  

Outstanding at December 31, 2005

   576    3,450

Granted

   —      —  

Exercised

   234    3,450

Expired

   342    3,450

Cancelled

   —      —  
         

Outstanding at December 31, 2006

   —      —  
         

Exercisable Stock warrants at December 31, 2006

   —      —  
         

The grants of April 18, 2002 did not result in deferred compensation.

Effective January 1, 2006, the Company adopted the provisions of SFAS No. 123 (revised 2004), “Share-Based Payments” to the stock option plans for certain directors and employees.

As of December 31, 2006, the Company had nine stock option plans as described below. Stock option compensation expense was (Yen)5,097,909 thousand and the tax benefit related to such compensation expense recognized in the statement of income was (Yen)140,089 thousand for the year ended December 31, 2006.

Based on the resolution of the extraordinary general shareholders’ meeting of the Company on September 12, 2002, Trend Micro adopted at the meeting of the board of directors on February 4, 2003 the following resolutions regarding Stock acquisition rights and its subsidiaries in order to introduce the stock option plan. In accordance with the terms of this plan, the Company granted options to purchase up to 1,999,500 shares of the Company’s common stock to certain directors and employees of the Company and its subsidiaries on February 12,2003. The options granted are exercisable from November 1, 2003 through October 31, 2007.

Based on the resolution of the fourteenth ordinary general shareholders’ meeting of the Company on March 26, 2003, Trend Micro adopted at the meeting of the board of directors on May 20, 2003 the following resolutions regarding Stock acquisition rights in order to introduce the stock option plan. In accordance with the terms of this plan, the Company granted options to purchase up to 2,500,000 shares of the Company’s common stock to certain directors and employees of the Company and its subsidiaries on May 28,2003. The options granted are exercisable from May 28, 2004 through May 27, 2008.

Based on the resolution of the fourteenth ordinary general shareholders’ meeting of the Company on March 26, 2003, Trend Micro adopted at the meeting of the board of directors on November 6, 2003 the following resolutions regarding Stock acquisition rights in order to introduce the stock option plan. In accordance with the terms of this plan, the Company granted options to purchase up to 1,500,000 shares of the Company’s common stock to certain directors and employees of the Company and its subsidiaries on November 14, 2003. The options granted are exercisable from November 14, 2004 through November 13, 2008.

Based on the resolution of the fifteenth ordinary general shareholders’ meeting of the Company on March 25, 2004, Trend Micro adopted at the meeting of the board of directors on April 20, 2004 the following resolutions regarding Stock acquisition rights in order to introduce the stock option plan. In accordance with the terms of this plan, the Company granted options to purchase up to 3,000,000 shares of the Company’s common stock to certain directors and employees of the Company and its subsidiaries on April 28, 2004. The options granted are exercisable from April 28, 2005 through April 27, 2009.

 

34


Table of Contents

Based on the resolution of the fifteenth ordinary general shareholders’ meeting of the Company on March 25, 2004, Trend Micro adopted at the meeting of the board of directors on October 20, 2004 the following resolutions regarding Stock acquisition rights in order to introduce the stock option plan. In accordance with the terms of this plan, the Company granted options to purchase up to 2,000,000 shares of the Company’s common stock to certain directors and employees of the Company and its subsidiaries on October 28, 2004. The options granted are exercisable from October 28, 2005 through October 27, 2009.

Based on the resolution of the sixteenth ordinary general shareholders’ meeting of the Company on March 25, 2005, Trend Micro adopted at the meeting of the board of directors on July 14, 2005 the following resolutions regarding Stock acquisition rights in order to introduce the stock option plan. In accordance with the terms of this plan, the Company granted options to purchase up to 3,457,500 shares of the Company’s common stock to certain directors and employees of the Company and its subsidiaries on July 22, 2005. The options granted are exercisable from July 22, 2006 through July 21, 2010.

Based on the resolution of the sixteenth ordinary general shareholders’ meeting of the Company on March 25, 2005, Trend Micro adopted at the meeting of the board of directors on December 6, 2005 the following resolutions regarding Stock acquisition rights in order to introduce the stock option plan. In accordance with the terms of this plan, the Company granted options to purchase up to 2,500,000 shares of the Company’s common stock to certain directors and employees of the Company and its subsidiaries on December 14, 2005. The options granted are exercisable from December 14, 2006 through December 13, 2010.

Based on the resolution of the seventeenth ordinary general shareholders’ meeting of the Company on March 28, 2006, Trend Micro adopted at the meeting of the board of directors on June 30, 2006 the following resolutions regarding Stock acquisition rights in order to introduce the stock option plan. In accordance with the terms of this plan, the Company granted options to purchase up to 1,451,000 shares of the Company’s common stock to certain directors and employees of the Company and its subsidiaries on July 10, 2006. The options granted are exercisable from July 10, 2007 through July 9, 2011.

Based on the resolution of the seventeenth ordinary general shareholders’ meeting of the Company on March 28, 2006, Trend Micro adopted at the meeting of the board of directors on October 31, 2006 the following resolutions regarding Stock acquisition rights in order to introduce the stock option plan. In accordance with the terms of this plan, the Company granted options to purchase up to 1,453,000 shares of the Company’s common stock to certain directors and employees of the Company and its subsidiaries on November 8, 2006. The options granted are exercisable from November 8, 2007 through November 7, 2011.

The exercise price per share for the stock acquisition rights granted of (Yen)2,230 issued on February 12, 2003, (Yen)1,955 issued on May 28, 2003, (Yen)2,695 issued on November 14, 2003, (Yen)4,310 issued on April 28, 2004, (Yen)5,090 issued on October 28, 2004, (Yen)3,840 issued on July 22, 2005, (Yen)3,950 issued on December 14, 2005, (Yen)3,995 issued on July 10, 2006 and (Yen) 3,610 issued on November 8, 2006, was determined as an amount equal to or less than the fair market value of the Company’s common share at the time of such grants.

These option awards generally vest based on 1 to 4 years of continuous service and have a total of 5-year contractual terms. Since the share awards vest on a graded vesting basis over the certain service periods, the Company recognizes the compensation cost with a straight-line method over the required service periods.

The fair values of the stock options with stock acquisition rights were estimated on the grant dates using the Black-Scholes option pricing model with the following assumptions used for the grants for the year ended December 31, 2005 and 2006.

 

    

For the year ended

December 31, 2005

   

For the year ended

December 31, 2006

 

Expected life (Years)

   3.06     3.10-3.27  

Expected Volatility

   47.69-48.77 %   40.69-44.88 %

Expected Dividend yield

   0.91-0.94 %   1.47-1.55 %

Risk-free interest rate

   0.16-0.47 %   0.98-1.14 %

The fair values per share of options granted during the year ended December 31, 2005 and 2006 were between (Yen)1,203 and (Yen)1,225 and between (Yen)962 and (Yen)1,040, respectively.

Expected volatilities are based on historical volatilities of the Company’s stock that are consistent with expected term of option granted. However the Company excludes the period before its stock was adopted as part of Nikkei225 from the measurement terms. The expected terms of options granted are analyzed and determined based on its past experiences of the exercise behaviors, and risk-free rates are based on the rate for 5 remaining years of 10-year government bonds. Expected dividend yield rates are based on the estimated dividend amounts that have been disclosed to the public.

Option activity under this plan was as follows:

 

     Thousands of shares
represented by options
  

Weighted-Average

Exercise Price

Outstanding at December 31, 2004

   9,037    3,565

Granted

   5,958    3,886

Exercised

   796    2,271

Expired

   —      —  

Cancelled

   1,289    3,131

Outstanding at December 31, 2005

   12,910    3,836

Granted

   2,904    3,802

Exercised

   585    2,319

Expired

   —      —  

Cancelled

   626    4,037
         

Outstanding at December 31, 2006

   14,603    3,882
         

Exercisable Stock acquisition rights at December 31, 2006

   6,537    3,849

 

35


Table of Contents

10. Employee benefit plans

Pension and severance plans

The parent company has an unfunded retirement allowance plan (“Plan”) covering substantially all of its employees who meet eligibility requirements under the Plan. Under the Plan, employees whose service with the company is terminated are, under most circumstances, entitled to lump-sum severance indemnities, determined by reference to current basic rate of pay, length of service and conditions under which the termination occurs.

Additionally, the parent company has been a member of Kanto IT Software welfare pension plan, which is categorized as multi-employer pension plan. Total pension expense for multi-employer pension plan was (Yen) 116,081 thousand in 2005 and (Yen) 131,109 thousand in 2006, respectively.

Effective from March 1, 1998, the Taiwan subsidiary introduced a defined benefit pension plan, which covers substantially all of its employees. Under the plan, only employees who are 55 years or older with services for more than 15 years or who have been employed for more than 25 years at the retirement date are entitled to receive benefits. Benefits awarded under the plan are based primarily on current rate of pay and length of service.

Effective from July 2005, Taiwan subsidiaries had a defined contribution pension plan called Labor Pension Act (LPA). Some employees who had joined a defined benefit pension plan transferred to the new plan. New employees who joined the Taiwan subsidiary after July 2005 can choose the new pension plan only.

Effective from July 1, 1998, the parent company’s U.S. subsidiary has a 401(k) retirement plan, which covers substantially all of its employees. Under the plan, employees contribute a certain percentage of their pre-tax salary up to the maximum dollar limitation prescribed by the United States Internal Revenue Code.

Total pension expense for the defined contribution pension plan was (Yen) 129,644 thousand in 2005 and (Yen) 393,513 thousand in 2006, respectively.

Certain other subsidiaries have defined benefit pension plans or retirement plans, which cover substantially all of their employees, under which the cost of benefits is currently funded or accrued. Benefits awarded under these plans are based primarily on current rate of pay and length of service.

Information regarding the Japanese defined benefit pension plans of the Company based on unfunded plan is shown below:

 

     (Thousands of yen)  
    

December 31,

2005

   

December 31,

2006

 

Change in benefit obligation:

    

Benefit obligation at beginning of year

   467,571     567,577  

Service cost

   128,935     140,858  

Interest cost

   6,731     5,474  

Actuarial (gain)/loss

   (7,486 )   (3,677 )

Benefits paid

   (28,174 )   (31,046 )
            

Projected benefit obligation at end of year

   567,577     679,186  

Unrecognized net actuarial gain (loss)

   37,984     —    

Unrecognized net transition obligation

   —       —    
            

Accrued benefit cost

   605,561     679,186  
            

 

36


Table of Contents

Amounts recognized in the consolidated balance sheets are as follows;

 

     (Thousands of yen)
    

December 31,

2005

  

December 31,

2006

Accrued benefit cost

     

Current liabilities

   —      47,288

Long-term liabilities

   605,561    631,898
         
   605,561    679,186
         

Amounts recognized in accumulated other comprehensive income consists of;

 

     (Thousands of yen)  
    

December 31,

2005

  

December 31,

2006

 

Unrecognized pension liabilities

   —      (24,593 )
           
   —      (24,593 )
           

Components of net periodic benefit cost are as follows;

 

     (Thousands of yen)
    

For the years

ended

December 31, 2005

  

For the years

ended

December 31, 2006

Components of net periodic benefit cost:

     

Service cost

   128,935    140,858

Interest cost

   6,731    5,474

Amortization of unrecognized transition obligation

   —      —  
         

Subtotal

   135,666    146,332
         

Amortization of unrecognized net gain (loss)

   —      —  
         

Subtotal

   —      —  
         

Net periodic pension cost

   135,666    146,332
         

 

Amounts recognized in accumulated other comprehensive income consists of;

 

     (Thousands of yen)  
    

December 31,

2005

  

December 31,

2006

 

Unrecognized pension liabilities

   —      (24,593 )
           

Amounts recognized in accumulated other comprehensive income

   —      (24,593 )
           

Total of net periodic pension cost and amounts recognized in accumulated other comprehensive income

   —      121,739  
           

 

 

     (Thousands of yen)  
    

December 31,

2005

   

December 31,

2006

 
     (Thousands of yen)  
    

December 31,

2005

   

December 31,

2006

 

Accumulated benefit obligation

   404,187     488,110  
            
    

December 31,

2005

   

December 31,

2006

 

Assumptions used to determine benefit obligations at December 31:

    

Discount rate

   1.00 %   1.50 %

Rate of compensation increase

   4.32 %   3.80 %
    

For the years

ended

December 31,

2005

   

For the years

ended

December 31,

2006

 

Assumptions used to determine net periodic benefit cost for years ended December 31:

    

Discount rate

   1.50 %   1.00 %

Rate of compensation increase

   5.50 %   4.32 %

 

37


Table of Contents

The expected net periodic pension cost for the fiscal year ended December 31, 2007 consists of;

 

     (Thousands of yen)

Service cost

   149,814

Interest cost

   9,833

Amortization of unrecognized net gain (loss)

   —  
    

Net periodic pension cost

   159,647
    

The following benefit payments, which reflected expected future service, as appropriate, are expected to be paid:

 

     Thousands of yen

Estimated Future Benefit Payments Year ending December 31:

  

2007

   47,288

2008

   60,133

2009

   75,720

2010

   76,749

2011

   94,213

2012-2016

   503,713

The measurement date used to determine above plans are November 30, 2005 and November 30, 2006, respectively.

Information regarding the defined benefit pension plans for consolidated foreign subsidiaries is shown below:

 

     (Thousands of yen)  
    

December 31,

2005

   

December 31,

2006

 

Change in benefit obligation:

    

Benefit obligation at beginning of year

   442,716     692,009  

Service cost

   56,546     36,972  

Interest cost

   16,135     17,195  

Actuarial (gain)/loss

   128,070     (70,106 )

Benefits paid

   —       —    

Foreign currency exchange impact

   48,542     16,026  
            

Projected benefit obligation at end of year

   692,009     692,096  
            

Change in plan assets:

    

Fair value of plan assets at beginning of year

   (124,552 )   (168,358 )

Actual return on plan assets

   (2,231 )   (6,026 )

Employer contribution

   (28,464 )   (4,716 )

Benefits paid

   —       —    

Foreign currency exchange impact

   (13,111 )   (3,772 )
            

Fair value of plan assets at end of year

   (168,358 )   (182,872 )
            

Funded status

   523,651     509,224  

Unrecognized prior service cost

   (31,059 )   —    

Unrecognized net actuarial loss

   (249,439 )   —    
            

Accrued benefit cost

   243,153     509,224  
            

Amounts recognized in the consolidated balance sheets are as follows;

 

     (Thousands of yen)
    

December 31,

2005

  

December 31,

2006

Accrued benefit cost

     

Current liabilities

   —      —  

Long-term liabilities

   243,153    509,224
         
   243,153    509,224
         

Amounts recognized in accumulated other comprehensive income consists of;

 

     (Thousands of yen)
    

December 31,

2005

  

December 31,

2006

Unrecognized pension liabilities

   —      206,448
         
   —      206,448
         

 

38


Table of Contents

Components of net periodic benefit cost are as follows;

 

     (Thousands of yen)  
    

For the years

ended

December 31, 2005

   

For the years

ended

December 31, 2006

 

Components of net periodic benefit cost:

    

Service cost

   56,546     36,972  

Interest cost

   16,135     17,192  

Expected return on plan assets

   (4,943 )   (5,521 )

Amortization of prior service cost

   2,953     1,741  

Recognized actuarial loss

   3,341     7,916  

Amendments

   20,220     —    
            

Net periodic pension cost

   94,252     58,300  
            

Amounts recognized in accumulated other comprehensive income consists of;

 

     (Thousands of yen)
    

December 31,

2005

  

December 31,

2006

Unrecognized pension liabilities

   —      206,448
         

Amounts recognized in accumulated other comprehensive income

   —      206,448
         

Total of net periodic pension cost and amounts recognized in accumulated other comprehensive income

   —      264,748
         

 

     (Thousands of yen)
    

December 31,

2005

  

December 31,

2006

Accumulated benefit obligation

   324,192    327,968

 

    

December 31,

2005

   

December 31,

2006

 

Assumption used to determine benefit obligation at December 31:

    

Discount rate

   2.50 %   2.75 %

Rate of compensation increase

   4.00 %   4.00 %

 

    

For the years

ended

December 31, 2005

   

For the years

ended

December 31, 2006

 

Assumptions used to determine net periodic benefit cost for years ended December 31:

    

Discount rate

   3.25 %   2.50 %

Expected return on plan assets

   3.25 %   3.00 %

Rate of compensation increase

   4.00 %   4.00 %

Asset Allocation

 

    

December 31,

2005

  

December 31,

2006

     Allocation (%)    Allocation (%)

Type of investment:

     

Cash

   49.32    100.00

Government Loan

   5.80    —  

Equity

   20.05    —  

Notes

   13.90    —  

Bonds

   10.93    —  
         

Total

   100.00    100.00
         

The Company has no control over the investment, since a government appointed manager and custodian manages them.

Expected return on assets of 3.00 % used to determine net periodic benefit cost for years ended December 31, 2006 was determined based on the information provided by the above-mentioned government appointed manager and custodian. Historical returns are taken into consideration.

The Company expects to contribute (Yen) 3,684 thousand to its pension plan in 2007.

 

39


Table of Contents

The expected net periodic pension cost for the fiscal year ended December 31, 2007 consists of;

 

     (Thousands of yen)

Service cost

   22,594

Interest cost

   18,476

Amortization of prior service cost

   1,770

Amortization of unrecognized net gain (loss)

   4,968
    

Net periodic pension cost

   47,808
    

The following benefit payments, which reflected expected future service, as appropriate, are expected to be paid:

 

     Thousands of yen

Estimated Future Benefit Payments Year ending December 31:

  

2007

   150

2008

   347

2009

   431

2010

   522

2011

   621

2012-2016

   12,826

The measurement date used to determine above plans are December 31, 2005 and December 31, 2006, respectively.

The changes in the balance sheet at December 31, 2006 arising from the adoption of SFAS No.158 are set out below:

 

     December 31, 2006
     Before implementation of
SFAS No. 158
   Change due to
SFAS No. 158
    After implementation of
SFAS No. 158
     Thousands of yen    Thousands of yen     Thousands of yen

Deferred income tax

   4,387,741    (17,069 )   4,370,672

Total Assets

   167,281,708    (17,069 )   167,264,639

Other current liabilities

   914,054    47,288     961,342

Accrued pension and severance costs

   1,031,720    117,499     1,149,219

Total liabilities

   75,897,172    164,787     76,061,959

Other comprehensive income

   3,923,535    (181,855 )   3,741,680

Total shareholders’ equity

   91,377,903    (181,855 )   91,196,048

Under the Japanese Commercial Code and local practice, the Company may make severance payments to a retired director or corporate auditor with shareholder approval, if the Company’s management proposes such payments based on a resolution of the Board of Directors. The Company does have an internal rule to determine the amounts of severance payments to corporate auditors, and in accordance with this rule, retirement benefits for corporate auditors are provided at an estimate of the amount to be paid if all eligible corporate auditors resigned at the balance sheet date.

Post-retirement benefits other than pensions and post-employment benefits

The Company does not provide health care or life insurance benefits to retired employees, nor does it provide benefits to former or inactive employees after employment but before retirement.

 

40


Table of Contents

11. Income taxes

Reconciliation of the differences between the statutory tax rate and the effective income tax rate is as follows:

 

    

For the year ended

December 31, 2005

   

For the year ended

December 31, 2006

 
     Thousands of yen  

Income before income taxes:

    

Domestic

   16,562,581     17,094,637  

Foreign subsidiaries

   12,545,719     12,461,203  
            
   29,108,300     29,555,840  
            

Income taxes, current:

    

Domestic

   8,626,580     12,218,130  

Foreign subsidiaries

   3,236,547     3,794,217  
            
   11,863,127     16,012,347  
            

Income taxes, deferred:

    

Domestic

   (336,252 )   (2,254,309 )

Foreign subsidiaries

   (1,022,316 )   (1,389,993 )
            
   (1,358,568 )   (3,644,302 )
            

Reconciliation of the differences between the statutory tax rate and the effective income tax rate is as below:

 

    

For the year ended

December 31, 2005

   

For the year ended

December 31, 2006

 

Statutory tax rate:

   41.0 %   41.0 %

Increase (reduction) in rate resulting from

    

Different tax rates applied to foreign subsidiaries

   (2.0 )   (2.4 )

State income taxes, net of federal tax

   (0.5 )   0.3  

Permanent difference

   1.2     1.9  

Stock option compensation expense

   —       4.2  

Tax credit relating to Tax law applied to Parent company

   (1.7 )   (1.9 )

Tax credit relating to Tax law applied to foreign subsidiaries

   (2.0 )   (1.4 )

Other

   0.1     0.1  
            

Effective income tax rate

   36.1 %   41.8 %
            

 

41


Table of Contents

The significant components of deferred income tax assets at December 31, 2005 and 2006 were as follows:

 

     December 31, 2005     December 31, 2006  
     Thousands of yen  

Deferred tax assets:

    

Deferred revenue

   6,741,968     10,269,418  

Allowance for doubtful accounts and sales returns

   172,096     184,856  

Accrued enterprise tax

   262,614     601,431  

Accrued liabilities

   617,593     1,022,924  

Stock option compensation expense

   —       638,140  

Tax loss carry forward

   99,907     —    

Amortization of intangibles

   410,444     621,144  

Impairment of securities investments

   242,676     242,676  

Allowance for retirement

   297,361     357,979  

Net unrealized gain on debt & equity securities

   (472,295 )   (733,527 )

Other

   409,183     614,667  
            

Gross deferred tax assets

   8,781,547     13,819,708  

Less: Valuation allowance

   (20,830 )   (10,579 )
            
   8,760,717     13,809,129  
            

Deferred tax assets are included in the consolidated balance sheets as follows:

 

     December 31, 2005    December 31, 2006
     Thousands of yen

Current assets – Deferred income taxes

   6,727,229    9,438,457

Investment and other assets – Deferred income taxes

   2,033,488    4,370,672
         

Deferred tax assets (Net)

   8,760,717    13,809,129
         

The valuation allowance relates to deferred tax assets of consolidated subsidiaries that are associated with temporary differences and tax carryforwards that reliabilities for the realization are less likely than not. The net changes in the total valuation allowance for the years ended December 31, 2005 and 2006 were a decrease of (Yen)160,627 thousand and (Yen)10,251 thousand, respectively.

Management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized and management evaluate to the realization. The ultimate realization of deferred tax asset is dependent upon the generation of future taxable income during the period in which those temporary differences and loss carryforwards become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. Based upon the level of historical taxable income and projections for future taxable income over the periods in which the deferred tax assets are deductible, management believes it is more likely than not that the Company will realize the benefits of these deductible differences and loss carryforwards, net of the existing valuation allowances at December 31, 2006.

There was no Operating loss carryforwards for tax purposes of consolidated subsidiaries at December 31, 2006

At December 31, 2006, no deferred income taxes have been provided on undistributed earnings of foreign subsidiaries not expected to be remitted in the foreseeable future totaling (Yen)22,718,155 thousand, as management of the Company intends to reinvest undistributed earnings of the Company’s foreign subsidiaries. The unrecognized deferred tax liabilities as of December 31, 2006 for such undistributed earnings amounted to (Yen)1,859,009 thousand.

 

42


Table of Contents

12. Financial instruments

(1) Derivative instruments

The Company has a policy not to utilize any derivative financial instruments with off-balance sheet risk. In accordance with the policy, the parent company and its subsidiaries did not have any derivative financial instruments.

(2) Fair value of financial instruments

Other than debt and equity securities, the fair value of which are disclosed in the “Marketable securities and investment securities” section, the Company’s involvement in financial assets and liabilities with market risk is limited to cash and cash equivalents, time deposits, notes and accounts receivable, trade, notes and accounts payable, trade, and long-term debt. The estimated fair values of cash and cash equivalents, time deposits, notes and accounts receivable, trade, and notes and accounts payable, trade approximate their carrying amounts. At December 36, 2005 and 2006, there was substantially no long-term debt including current portion.

13. Commitments and contingent liabilities

The Company provides a service based on ‘Service level agreement’ (“the Agreement”) where the Company guarantees a certain level of services rendered to customers. The Company is required to pay penalties up to the limited amounts defined in the Agreement if the Company cannot perform the services as specified in the Agreement. The Company has booked (Yen) 626 thousand of reserves for specific liabilities as of December 31, 2006 in connection with the Agreement that we currently deem to be probable and estimable as other current liabilities.

14. Segment Information

The Company has been engaged in the ‘security software business’.

The Company discloses segment information as required by SFAS No. 131 “Disclosures about Segments of an Enterprise and Related Information” based on the management information provided, on a regular basis, to its chief operating decision maker.

The information provided to the chief operating decision maker for assessing the Company’s performance includes 5 regional segments and the corporate segment. The five operating segments by region are Japan, North America, Europe, Asia Pacific and Latin America. The other operating segment is Corporate, which is comprised of research and development, marketing, customer support and administrative departments that operate and bring benefits to the Company worldwide.

Below is summarized information of our regional segments’ sales and operating income. These figures comply with the accounting policies disclosed in the notes to consolidated financial statements.

 

     (Thousands of yen)  
     Net sales to external customers    Operating income (loss)  
    

For the year

ended

December 31, 2005

  

For the year

ended

December 31, 2006

  

For the year

ended

December 31, 2005

   

For the year

ended

December 31, 2006

 

Japan

   29,416,077    33,248,210    18,636,462     24,747,490  

North America

   15,416,991    19,295,083    10,483,801     9,971,739  

Europe

   18,379,304    21,150,417    10,330,980     10,026,165  

Asia Pacific

   7,909,753    9,148,675    2,836,044     948,651  

Latin America

   1,907,776    2,771,277    1,092,793     1,769,649  

Corporate

   —      —      (15,808,305 )   (20,387,898 )
                      

Consolidated Total

   73,029,901    85,613,662    27,571,775     27,075,796  
                      

Beginning in the year ending December 31, 2006, the Company reports sales information by customer type in addition to the sales information by the five regional segments to the chief operating decision maker to assess the Company’s performance. The three categories of customer type are enterprise, small and mid size business, and consumer.

Below is summarized supplemental information of sales by customer type. These figures comply with the accounting policies disclosed in the notes to consolidated financial statements.

 

     (Thousands of yen)

Net sales to external customers:

  

For the year

ended

December 31, 2005

  

For the year

ended

December 31, 2006

Enterprise

   —      24,739,617

Small and mid size business

   —      40,299,896

Consumer

   —      20,574,149
         

Consolidated Total

   —      85,613,662
         

Net sales to external customers for the year ended December 31, 2005 can not be separated by the customer type.

Significant customer

 

     (Thousands of yen)  

Customer

  

For the year

ended

December 31, 2005

   

For the year

ended

December 31, 2006

 
     Net Sales    Ratio     Net Sales    Ratio  

SOFTBANK BB

   10,604,947    14.5 %   11,046,421    12.9 %

 

43


Table of Contents

15. Deferred Revenue by Region

 

     ( Thousands of yen )
     As of December 31, 2005    As of December 31, 2006
     Current    Non-current    Current    Non-current

Japan

   12,429,867    1,542,109    17,558,125    2,624,830

North America

   7,529,743    856,903    12,067,689    2,641,114

Europe

   7,779,059    1,289,305    10,530,189    2,087,470

Asia Pacific

   2,579,002    186,619    3,407,539    328,316

Latin America

   1,188,644    —      1,530,161    —  
                   

Total

   31,506,315    3,874,936    45,093,703    7,681,730
                   

16. Subsequent events

None

17. Status of manufacturing and actual sales

(1) Manufacturing result

 

     

(Thousands of Yen)

  

Period

Product

  

For the year ended

December 31, 2005

  

For the year ended

December 31, 2006

PC client

   226,606    256,915

LAN server

   104,232    15,800

Internet server

   359,633    466,751

All Suite products

   —      —  

Other products

   392,499    750,518
         

Total

   1,082,970    1,489,984
         

(Note)

 

1. Amount is based on manufacturing cost.
2. Consumption tax is not included in the amount above.
3. All Suite products were manufactured as each separate products and sold as All Suite products. Therefore there is no capitalization of all Suite product for the year ended December 31, 2005 and 2006.

(2) Sales result

 

     

(Thousands of Yen)

  

Period

Product

  

For the year ended

December 31, 2005

  

For the year ended

December 31, 2006

PC client

   19,714,453    22,417,901

LAN server

   3,278,568    2,760,329

Internet server

   18,373,789    19,295,750

All Suite products

   24,484,969    31,721,533

Other products

   3,494,862    4,603,998
         

Sub-total

   69,346,641    80,799,511

Other service

   3,683,260    4,814,151
         

Total

   73,029,901    85,613,662

 

44


Table of Contents

February 21, 2007

Report of Earning Results (Non-consolidated)

for Fiscal Year Ended December 31, 2006

[ Prepared in accordance with Japan GAAP ]

 

Company:    Trend Micro Incorporated    Tokyo Stock Exchange 1st Section
Code:    4704    Location : Tokyo

(URL http://www.trendmicro.co.jp/)

 

Representative:    Title    Representative Director and Chief Executive Officer
   Name    Eva Cheng   
Contact:    Title    Controller, Finance & Accounting Department and General Manager, Business Support Department
   Name    Yuzuru Nanami    (Phone: 81-3-5334-3600)

Date of the board of directors meeting

 

Date of shareholder’s meeting

  

February 21, 2007

 

March 27, 2007

Scheduled date of dividend payments: March 28, 2007

The company adopts Unit Stock method. (One unit: 500 shares)

1. Financial Highlights for FY 2006 (January 1, 2006 through December 31, 2006)

 

(1) Results of operations   (All figures are rounded down to millions of yen.)  
    Sales  

(Compared to

the previous year)

    Operating
income
 

(Compared to

the previous year)

   

Ordinary

income

 

(Compared to

the previous year)

 
    Millions of yen   %     Millions of yen   %     Millions of yen   %  

FY2006

  53,431   (10.8 )   22,661   (3.8 )   24,119   (7.6 )

FY2005

  48,228   (21.3 )   21,823   (12.9 )   22,423   (14.8 )

 

    Net income   (Compared to
the previous year)
   

Net income

per share

(Basic)

 

Net income per
share

(Diluted)

  Return on
shareholders’
equity
  Ordinary
income/total
assets ratio
  Ordinary income
ratio
    Millions of yen   %     Yen   Yen   %   %   %

FY 2006

  14,265   (8.7 )   106.48   105.75   23.9   26.3   45.1

FY 2005

  13,122   (9.7 )   98.30   96.88   24.8   28.9   46.5

(Note)

1. Number of weighted average shares outstanding:   

133,977,907 shares (FY2006)

133,498,438 shares (FY2005)

2. Change in accounting principle: Yes

3. The percentage of sales, operating income, ordinary income and net income are compared with the prior fiscal year.

(2) Financial Position

 

     Total assets    Shareholders’ equity   

Shareholders’

equity ratio

  

Shareholders’ equity

per share

     Millions of yen    Millions of yen    %    Yen

FY 2006

   99,796    61,240    61.0    457.82

FY 2005

   83,692    58,515    69.9    436.39

(3) Cash dividends

 

     Annual cash dividends per share   

Total
dividends

(Annual)

   Dividend-payout
ratio
   Dividend/
stockholders’ equity
ratio
          As of June end    As of Dec end         
     Yen    Yen    Yen    Millions of Yen    %    %

FY 2006

   84.00    0.00    84.00    11,158    78.9    18.8

FY 2005

   56.00    0.00    56.00    7,509    57.0    12.8

FY 2007

   TBA    TBA    TBA         

(Note)

1. Number of shares issued at the end of fiscal year:    132,834,892 shares ( FY 2006)
   134,090,494 shares ( FY 2005)
2. Number of treasury stocks at the end of fiscal year:        4,509,612 shares ( FY 2006)
       2,513,231 shares ( FY 2005)

 

1


Table of Contents

Non-consolidated Financial Statements

    (1) Condensed non-consolidated balance sheets

 

     (Thousands of yen)
     Period   

FY2005

(As of December 31, 2005)

  

FY2006

(As of December 31, 2006)

Account

   Note    Amount    Percentage    Amount    Percentage

(Assets)

                    

I        Current assets

                    

1       Cash and bank deposits

         36,425,321          42,292,620   

2       Accounts receivable, trade

   *2       11,158,987          13,750,099   

3       Marketable securities

         5,919,607          17,968,014   

4       Product

         83,715          94,454   

5       Raw material

         10,171          7,386   

6       Stores

         31,008          34,027   

7       Intercompany short-term loan receivables

         34,552          34,859   

8       Prepaid expense

         116,588          60,065   

9       Other receivables

   *2       182,357          446,172   

10     Deferred tax assets

         5,886,541          7,933,826   

11     Others

   *2       842,434          902,237   

12     Allowance for bad debt

         D56,094          D48,803   
                        

Total current assets

         60,635,190    72.4       83,474,960    83.6

II      Non-current assets

                    

1       Tangible fixed assets

                    

(1)    Buildings

      419,840          448,650      

Accrued depreciation

      187,198    232,642       223,100    225,550   
                        

(2)    Fixtures and fittings

      650,041          714,086      

Accrued depreciation

      414,064    235,976       479,783    234,302   
                            

Total Tangible fixed assets

         468,619    0.6       459,852    0.5

2       Intangible fixed assets

                    

(1)    Software

         1,032,322          1,837,648   

(2)    Software in progress

         432,456          416,493   

(3)    Others

         627,551          446,600   
                        

Total intangible fixed assets

         2,092,330    2.5       2,700,743    2.7

3       Investments and other non-current assets

                    

(1)    Investments in securities

         16,779,345          8,413,367   

(2)    Investments in subsidiaries and affiliates

         2,152,563          2,152,563   

(3)    Investments in capital of affiliates

         5,277          5,277   

(4)    Intercompany long-term loan receivables

         59,231          59,758   

(5)    Security deposits

         324,894          326,094   

(6)    Member ship

         4,000          4,000   

(7)    Deferred tax assets

         1,292,730          2,261,004   

(8)    Allowance for bad debt

         D59,231          D119   

(9)    Allowance for loss on investments in subsidiaries and affiliates

         D62,365          D60,788   
                        

Total investments and other non-current assets

         20,496,446    24.5       13,161,157    13.2
                        

Total non-current assets

         23,057,396    27.6       16,321,753    16.4
                        

Total assets

         83,692,587    100.0       99,796,714    100.0
                        

 

2


Table of Contents
     Period   

FY2005

(As of December 31, 2005)

  

FY2006

(As of December 31, 2006)

Account

   Note   

Amount

   Percentage   

Amount

   Percentage

(Liabilities)

                    

I        Current liabilities

                    

1       Accounts payable, trade

   *2       150,183          167,506   

2       Account payables, other

   *2       5,757,523          9,367,849   

3       Accrued corporate tax and others

         3,574,476          7,320,978   

4       Accrued consumption taxes

         151,867          438,987   

5       Accrued expenses

         377,944          182,970   

6       Advances received

         48,674          2,962   

7       Deposits received

         76,356          45,544   

8       Allowance for bonuses

         —            73,972   

8       Allowance for sales return

         144,289          23,740   

9       Warrants

         298,050          —     

10     Deferred revenue

         12,429,867          17,558,125   

11     Others

         32,987          46,903   
                        

Total current liabilities

         23,042,220    27.5       35,229,538    35.3

II      Non-current liabilities

                    

1       Deferred revenue

         1,542,109          2,624,830   

2       Allowance for retirement benefits

         586,482          694,912   

3       Allowance for retirement benefits for directors and corporate auditors

         5,836          7,340   
                        

Total non-current liabilities

         2,134,428    2.6       3,327,082    3.3
                        

Total liabilities

         25,176,648    30.1       38,556,621    38.6
                        

(Shareholders’ equity)

                    

I        Common stock

   *1,6       12,484,849    14.9       —      —  

II      Capital surplus

                    

1       Capital reserve

         15,087,304    18.0       —      —  

III     Accumulated earnings

                    

1       Legal reserve

         20,833    0.0       —      —  

2       Inappropriate retained earnings at the end of the period

         37,517,773    44.9       —      —  

IV    Valuated difference on other securities

   *4       688,420    0.8       —      —  

V      Treasury stock

   *5       D7,283,242    D8.7       —      —  
                        

Total shareholders’ equity

         58,515,938    69.9       —      —  
                        

Total liabilities and shareholders’ equity

         83,692,587    100.0       —