MERCIAN CORPORATION ANNUAL REPORT by fyx28874

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									MERCIAN   C O R P O R AT I O N

 A N N U A L   R E P O R T

          2 0 0 0
MERCIAN CORPORATION AND CONSOLIDATED SUBSIDIARIES
FIVE-YEAR SUMMARY

                                                                                                                                                              Thousands of
                                                                                                          Millions of Yen                                      U.S. Dollars
                                                                                 1996         1997           1998               1999          2000              2000
For the Years ended December 31
Net sales.........................................................         ¥ 98,291 ¥ 98,858 ¥110,164 ¥110,186 ¥ 99,062                                   $ 861,409
Operating income ............................................                 3,881    3,946    4,856    3,719    2,248                                      19,548
Income before income taxes ............................                       2,533    3,071    1,873    2,143      249                                       2,165
Net income .....................................................              1,250    1,038      694    1,004      132                                       1,148
Additions to property, plant and equipment .....                              5,438    4,215    3,232    3,607    4,467                                      38,843
Depreciation and amortization .........................                       2,780    2,909    3,127    3,272    3,136                                      27,270



Per share, basic (Yen and U.S. Dollars)
    Net income ...............................................             ¥     8.61 ¥ 7.15 ¥ 4.78 ¥ 6.91 ¥ 0.91                                        $        0.008
    Cash dividends .........................................                     5.00    5.00   5.00   5.00   5.00                                                0.043
    Shareholders’ equity..................................                     366.77  368.58 368.01 341.06 340.81                                                2.964
Per share, diluted (Yen and U.S. Dollars)
    Net income ...............................................                      –                –                –             –               –                   –

As of December 31
Total shareholders’ equity................................                 ¥ 53,230 ¥ 53,543 ¥ 53,460 ¥ 49,546 ¥ 49,510                                   $ 430,522
Total assets .....................................................          127,017 138,132 148,036 143,049 137,927                                        1,199,365

Notes: U.S. dollar amounts are translated from yen at the rate of ¥115=$1, the approximate rate on the Tokyo foreign exchange market
       on December 31, 2000.

Net Sales                                Return on Average Assets                   Return on Average Equity                      Net Sales per Employee
(Billions of Yen)                        (%)                                        (%)                                           (Millions of Yen)


  120                                     1.00                                            3                                            80



   90                                     0.75                                                                                         60
                                                                                          2

   60                                     0.50                                                                                         40

                                                                                          1
   30                                     0.25                                                                                         20



    0                                          0                                          0                                             0
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   Liquor
   Chemical
   Feedstuffs
   Other



Contents
Results by Division .................................................... 1
To Our Shareholders ................................................. 2
Management Discussion and Analysis........................ 4
Consolidated Financial Statements ............................ 6
Corporate Data .......................................................... 19
Board of Directors ..................................................... 20
Investor Information .................................................. 21
MERCIAN CORPORATION AND CONSOLIDATED SUBSIDIARIES
RESULTS BY DIVISION

Alcoholic Drinks                                                   Sales of Gu Yue Long Shan, China’s premium Shaoxing
In fiscal 2000, ended December 31, 2000, Mercian wine            wine, and Tsingtao beer to Chinese restaurants continued
sales were influenced by industrywide trade inventory            to expand.
adjustments after the market leveled off following rapid           Efforts to cultivate new customers and increased sales
expansion in 1998, leaving a marked gap in supply and            of mainstay fermented cooking condiments sakashio and
demand. In domestic wines, cooling enthusiasm for red            mirin led to expanded sales of processing liquor.
wine brought down sales of Bon Rouge, billed as a                  The market for brewing alcohol continued to show few
“healthy” wine, compared with the previous period. Bon           indications of recovery. As a consequence, sales declined
Blanc, however, was acclaimed as a refreshing white              despite attempts to raise competitiveness by cutting
wine, and the affordably priced 720 ml-sized bottles of          costs. Consequently, sales of Japanese liquors dipped
Bistro were favorably received. Natural Made 100% Fruit          1.6%, to ¥29,312 million.
Wine, a new series of fruit wine, was successfully                 Total sales of alcoholic drinks fell 8.6%, to ¥76,973 million.
launched, but sales of other products faltered.
  We focused on cultivating the brands of prestigious            Chemicals and Pharmaceuticals
wineries, such as the Robert Mondavi Winery of                   Sales of mainstay medical antibiotic Josamycin decreased,
California and Tuscany’s Marchesi de’ Frescobaldi. Sales         owing to intensifying competition in the Chinese market,
of Australian wines were bolstered by the 2000 Summer            as did sales of veterinary antibiotic Aivlosin, hampered
Olympic Games, held in Sydney. The launching of the              by the economic downturn in South America, its main
new Nouveau wine from Chile rounded out our import               market. Furthermore, price revisions in the pharmaceutical
wine lineup.                                                     industry lowered sales of tumor-fighting antibiotic
  Sales from subsidiaries Markham Vineyards and                  Pinorubin.
Chateau Reysson increased from fiscal 1999. Overall wine
   ˆ                                                               In contrast, sales of food preservative were favorable,
sales fell, however, owing to a slump in sales of main           while sales of solvent ether increased despite harsh
existing products.                                               market conditions. Divisional sales fell 15.8%, to ¥6,993
  Sales of domestic whisky rose, triggered by changes in         million.
the packaging and taste of our mainstay Karuizawa and
the successful nationwide launch of Oak Master. In               Feedstuffs
imported whiskies, sales of Grant’s scotch were stable,          The Japanese market for compound feeds remained stag-
but the end of our sales agreement for Glenfiddich single-       nant, owing to the incidence of foot-and-mouth disease in
malt whisky and the slump in the bourbon market had a            some regions. Although customers welcomed coarse feed
negative effect on whisky sales.                                 and feed containing alcohol, price cuts brought down
  In the very competitive market for low-alcohol bever-          overall sales.
ages, sales of Gubicchu, which underwent taste and                 New products in the Rinkaru series proved effective in
packaging improvements, expanded. The success of the             raising sales, and Mercian also strengthened proposals to
Gyugyutto shibotta series of fruit cocktails, developed          make the strategic Soft EP fish pellet an exclusive feed.
mainly for women, also contributed to increased sales of         Sales of both these products improved, contributing to a
low-alcohol beverages.                                           2.8% advance in divisional sales, to ¥9,834 million.
  Owing to these factors, sales of wines, whiskies and
other Western spirits and cocktail drinks fell 12.5%, to         Others
¥47,660 million.                                                 Rent income from Mercian Place, a large-scale retail com-
   Sales were brisk for the mainstay White Pack label,           plex, was steady, but income from marketable real estate
modified for improved taste and packaging, and Raku, a           sales declined as a portion was delayed until fiscal 2001.
shochu using high-quality charcoal in the distilling             As a consequence, sales shrunk 34.7%, to ¥5,268 million.
process. The Hakusui premium shochu series produced
from famous brands of Japanese rice received positive
market response and saw increased sales. Stiffening price
competition, however, pushed overall shochu sales below
the fiscal 1999 level.




                                                             1
MERCIAN CORPORATION AND CONSOLIDATED SUBSIDIARIES
TO OUR SHAREHOLDERS

                                                           in tax rates for alcohol. This fiscal year we experi-
                                                           enced the aftermath of the explosive popularity of
                                                           wine—our strongest division—in 1997 and 1998.
                                                             In this environment, we have moved forward
                                                           with thorough cuts in unit costs, and are improving
                                                           the efficiency of the consolidation and streamlining
                                                           of organizations and operations, as well as reorga-
                                                           nizing our manufacturing and distribution systems
                                                           and revising our personnel system to raise competi-
                                                           tiveness in the market.
                                                             Despite rationalization measures, consolidated
                                                           net sales in fiscal 2000 fell 10.1%, to ¥99,062
                                                           million. Operating income fell 39.6%, to ¥2,248
                                                           million. Although the sale of unused land led to


W       ith the dawn of the 21st century, Mercian
       launched the reforms discussed below to
strengthen the foundation of its business. To
                                                           an extraordinary profit, the disposal of latent
                                                           losses on marketable securities in advance of the
                                                           introduction of new accounting procedures led to
enhance corporate governance, we have improved             an 86.9% drop in consolidated net income, to
the board of directors and appointed external direc-       ¥132 million. Accordingly, net income per share
tors, and introduced an operating officer and in-          slipped to ¥0.91, while cash dividends per share
house company system. We have also introduced              were reduced to ¥2.50.
economic value added (EVA) as a key management
indicator, adopted a new personnel system and a            Building a Management Base for the Future
performance-based salary system, realigned our             Price reductions are expected to continue hamper-
manufacturing and distribution systems, and raised         ing the alcoholic beverages market, intensifying
the efficiency of business and order centers. These        competition for survival among companies. The
measures will allow us to achieve our ultimate             Mercian Group is undertaking to revamp its man-
goal: to enhance corporate value. I will explain the       agement base, strengthen the competitiveness of its
basic philosophy behind these reforms and provide          divisions, and make the transition to a growth busi-
my thoughts on them later in this message.                 ness portfolio by implementing the reforms men-
                                                           tioned earlier. In the following paragraphs, I will
Fiscal 2000 Results                                        explain the basic philosophy behind these reforms.
Conditions in the alcoholic beverages market have            First, to enhance corporate governance, the board
harshened owing to the trend toward lower selling          of directors will concentrate on policy making and
prices, reflecting the stagnant economy, and the           operation monitoring. To this end, we have
shorter product cycles caused by the maturing              appointed external directors.
market, as well as the debate concerning revisions




                                                       2
  Second, we will introduce an operating officer            Consumer Focus
system, which will bear authority and responsi-             As a leading company in Japan’s wine industry,
bility for actual operations in line with policies          Mercian will continue to focus on responding to the
determined by the board of directors.                       diverse needs of consumers, and on continuing to
  Third, we will introduce an in-house company              develop and provide products that create and
system in April 2001. As a result, our seven existing       expand new markets. Our focus on consumers
divisions will be reorganized into four companies.          enables us to keep abreast of rapidly changing con-
This system will clarify responsibilities and enable        sumer needs and products that will satisfy cus-
prompt decision making in response to changes in            tomers. This attitude, as well as our identity as a
the business environment, as well as raise accuracy         pioneer creating high-quality products based on
of efforts to assess the efficiency of investments.         advanced technology and accumulated experience,
We also anticipate synergistic effects between the          is integral not only to our core wine business, but
operating officer system and the in-house company           also to our other operations.
system.                                                       The Mercian Group is confident that, at the start
  Fourth, we will adopt EVA. By using this in               of the 21st century, steady implementation of these
addition to profit accounting—the principal cur-            reforms will allow us to thoroughly accomplish
rent performance measure—we hope to improve                 company changes. Paving the way for the future
performance measures. Each in-house company                 and continuing to enhance corporate value will
will be evaluated according to the same standards,          enable us to respond to our shareholders’ expecta-
the results of which will be used as part of                tions and fulfill our responsibilities to society.
employee incentive programs.
  Fifth, we will introduce new performance-based            March 2001
salary and personnel systems. The management of
each in-house company will have clearly defined
roles and responsibilities for achieving goals.
Management will also be responsible for revising
                                                                                                     Tadao Suzuki
bonus systems and determining how employees are                                                      President
rewarded.
  Sixth, we will reorganize our manufacturing and
distribution systems. In January 2001, we imple-
mented supply chain management utilizing propri-
etary software, and we are currently considering a
reorganization of plants to augment the efficiency
of the new production system.




                                                        3
MERCIAN CORPORATION AND CONSOLIDATED SUBSIDIARIES
MANAGEMENT DISCUSSION AND ANALYSIS

Results of Operations                                                                 Accelerated disposal of losses from revaluation of
The Japanese economy benefited from government                                      securities resulted in net income of ¥132 million, an
fiscal measures in fiscal 2000, and signs of higher                                 86.9% drop. Net income per share fell 86.8%, to
private-sector capital investment and higher                                        ¥0.91. At the general shareholders’ meeting held on
employment figures in certain industries suggested                                  March 29, 2001, voters approved cash dividends of
a gradual recovery. Nevertheless, a full-fledged                                    ¥2.50 per share.
recovery was hindered by faltering consumer
spending and a slump in the stock market.                                           Financial Position
  The business environment in the alcoholic bever-                                  Total assets at the end of fiscal 2000 amounted to
ages market became even more harsh, with price                                      ¥137,927 million, a dip of 3.6%. Total current
cuts and shorter product cycles as well as debates                                  assets dropped 29.9%, to ¥72,540 million, or 52.6%
concerning revisions in alcohol taxes. In this envi-                                of total assets, owing primarily to a reduction in
ronment, the Mercian Group focused on maximiz-                                      marketable securities. Reductions in short-term
ing management efficiency and offering products of                                  borrowings brought total current liabilities down
the best quality for the best price. Despite tireless                               9.6%, to ¥51,029 million.
efforts to secure profits, we were unable to over-                                    An increase in buildings, machinery and equip-
come falling selling prices. As a consequence, con-                                 ment and the transfer of ¥26,023 million in mar-
solidated net sales fell 10.1%, to ¥99,062 million.                                 ketable securities recorded under current assets to
  Reductions in fixed costs lowered cost of sales                                   fixed assets raised fixed assets 65.2%, to ¥65,387
9.6%, to ¥67,420 million. Although we continued                                     million. Total long-term liabilities remained on a
our efforts to produce high-quality, low-cost table                                 par with the end of fiscal 1999, at ¥37,330 million.
wines and other products, we were unable to                                         As a result, working capital for the period under
overcome the impact of a weak market, which                                         review was ¥21,511 million.
pulled operating income down 39.6%, to ¥2,248
million.




Working Capital                       Equity Ratio                                Current Ratio and Quick Ratio         Interest Coverage Ratio
(Billions of Yen)                     (%)                                         (Times)                               (Times)


   50                                   60                                           3                                     5


   40                                                                                                                      4
                                        45
                                                                                     2
   30                                                                                                                      3
                                        30
   20                                                                                                                      2
                                                                                     1
                                        15
   10                                                                                                                      1


    0                                       0                                        0                                     0
        ’96   ’97   ’98   ’99   ’00             ’96   ’97   ’98   ’99   ’00              ’96    ’97   ’98   ’99   ’00          ’96   ’97   ’98   ’99   ’00

                                                                                            Current Ratio
                                                                                            Quick Ratio

                                                                              4
Cash Flows                                                                            Key Ratios
Net cash provided by operating activities rose ¥82                                    As of December 31, 2000, Mercian’s current ratio
million, to ¥5,797 million. The main causes were a                                    was 1.42 times, down from 1.83 times. The quick
¥6,032 million decrease in notes and accounts                                         ratio fell from 1.35 times to 0.86 times. Profit ratio
receivable, compared with a ¥1,742 million                                            before income taxes fell to 0.25%, from 1.94%, and
increase in fiscal 1999, and a ¥17 million decrease                                   the net profit margin dropped from 0.91%, to
in notes and accounts payable, compared with a                                        0.13%. The return on average assets (ROA)
¥2,928 million decrease in fiscal 1999.                                               dropped to 0.09%, from 0.7%. The return on aver-
  Net cash used in investing activities amounted to                                   age equity (ROE) declined from 2.02%, to 0.27%.
¥2,405 million, compared with net cash provided                                       Asset turnover was 0.72 times, compared with 0.77
by investing activities of ¥542 million in fiscal 1999.                               times at the end of fiscal 1999. Mercian’s dividend
Principal factors were ¥2,251 million in proceeds                                     payout ratio increased to 274.7%, from 72.4%.
from sales or disposal of property, plant and equip-
ment, up ¥2,145 million, and ¥1,211 million in
expenditures for loan receivables and other invest-
ment activities.
  Net cash used in financing activities increased
¥2,034 million, to ¥5,408 million. This was caused
primarily by a ¥4,479 million decrease in short-term
borrowings, compared with a ¥2,698 million
decrease in fiscal 1999. Dividends paid in fiscal
2000 amounted to ¥726 million, at ¥5.0 per share.
  Cash and cash equivalents at end of year were
¥1,327 million, down ¥1,812 million.




Operating Margin                        Net Profit Margin                           Selling, General and                 R&D Expenditure as a
(%)                                     (%)                                         Administrative Expenses as           Percentage of Net Sales
                                                                                    a Percentage of Net Sales (%)        (%)

 5.0                                      1.5                                         40                                   1.5


 4.0
                                                                                      30
                                          1.0                                                                              1.0
 3.0
                                                                                      20
 2.0
                                          0.5                                                                              0.5
                                                                                      10
 1.0


      0                                       0                                        0                                       0
          ’96   ’97   ’98   ’99   ’00             ’96   ’97   ’98   ’99   ’00              ’96   ’97   ’98   ’99   ’00             ’96   ’97   ’98   ’99   ’00




                                                                                5
MERCIAN CORPORATION AND CONSOLIDATED SUBSIDIARIES
BUSINESS SEGMENT INFORMATION
Years ended December 31, 1999 and 2000

                                                                                                                                    Thousands of
                                                                                                             Millions of Yen     U.S. Dollars (Note 2)
                                                                                                          1999           2000              2000
Net Sales
  Liquor
    Customers...................................................................................       ¥ 84,234      ¥ 76,968           $669,291
    Intersegment ...............................................................................              –             4                 43
      Total........................................................................................      84,234        76,973            669,334

   Chemical
    Customers...................................................................................          8,309          6,993             60,811
    Intersegment ...............................................................................              –              –                  –
      Total........................................................................................       8,309          6,993             60,811

   Feedstuffs
     Customers...................................................................................         9,569          9,835             85,524
     Intersegment ...............................................................................             –              –                  –
       Total........................................................................................      9,569          9,835             85,524

   Other
     Customers...................................................................................         8,072          5,265             45,784
     Intersegment ...............................................................................             –              3                 26
       Total........................................................................................      8,072          5,268             45,810

   Eliminations ...................................................................................           –            (8)               (70)
     Total Net Sales ............................................................................      ¥110,186      ¥ 99,062           $861,409




                                                                                6
                                                                                                                                      Thousands of
                                                                                                               Millions of Yen     U.S. Dollars (Note 2)
                                                                                                            1999           2000              2000
Operating Income
  Liquor............................................................................................     ¥ 7,633       ¥ 4,720          $    41,038
  Chemical........................................................................................          1,081         1,156              10,056
  Feedstuffs ......................................................................................           449           751               6,534
  Other .............................................................................................         215           599               5,203
  Corporate and eliminations .............................................................                 (5,661)       (4,978)            (43,283)
    Total...........................................................................................        3,719         2,248              19,548

Identifiable Assets
   Liquor............................................................................................     78,529         74,582            648,545
   Chemical........................................................................................        9,435          8,396             73,012
   Feedstuffs ......................................................................................       7,230          6,902             60,020
   Other .............................................................................................     9,956         14,737            128,150
   Corporate and eliminations .............................................................               37,897         33,308            289,638
     Total...........................................................................................    143,049        137,927          1,199,365

Depreciation
  Liquor............................................................................................        1,998          1,891             16,437
  Chemical........................................................................................            639            593              5,159
  Feedstuffs ......................................................................................           202            195              1,697
  Other .............................................................................................         193            319              2,776
  Corporate and eliminations .............................................................                    237            138              1,201
    Total...........................................................................................        3,272          3,136             27,270

Capital Investment
  Liquor............................................................................................       2,946         2,998               26,078
  Chemical........................................................................................           517           259                2,254
  Feedstuffs ......................................................................................           99            84                  732
  Other .............................................................................................          5           280                2,428
  Corporate and eliminations .............................................................                    38           291                2,525
    Total...........................................................................................     ¥ 3,607       ¥ 3,912          $    34,017




                                                                                  7
MERCIAN CORPORATION AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
As of December 31, 1999 and 2000

                                                                                                                                             Thousands of
                                                                                                                  Millions of Yen         U.S. Dollars (Note 2)
                                                                                                               1999            2000                 2000
ASSETS
Current Assets
   Cash and cash equivalents ..............................................................              ¥     3,139     ¥     1,327          $     11,539
   Time deposits and short-term investments .......................................                            1,162                  –                     –
   Notes and accounts receivable—trade..............................................                          42,305          36,530               317,652
   Less: Allowance for doubtful accounts .............................................                          (245)          (158)                 (1,374)
                                                                                                              42,060          36,372               316,278
   Marketable securities ......................................................................               26,292                255               2,217
   Inventories.....................................................................................           27,242          28,878               251,113
   Deferred income taxes (Note 4) .......................................................                       499                 647               5,626
   Other current assets........................................................................                3,080           5,061                44,009
      Total Current Assets ....................................................................              103,474          72,540               630,782


Property, Plant and Equipment (Note 3)
   Land ..............................................................................................         2,829           2,846                24,748
   Buildings........................................................................................          26,075          27,697               240,844
   Less: Accumulated depreciation ......................................................                     (11,886)        (12,814)             (111,426)
   Machinery and equipment ..............................................................                     35,986          37,184               323,339
   Less: Accumulated depreciation ......................................................                     (27,602)        (28,824)             (250,643)
   Construction in progress .................................................................                   981                 982               8,539
   Other .............................................................................................         4,493           5,171                44,965
   Less: Accumulated depreciation ......................................................                      (3,479)         (3,980)              (34,609)
                                                                                                              27,397          28,262               245,757


Investments and Other Assets
   Investments in securities.................................................................                  8,828          33,789               293,817
   Foreign currency translation adjustment ..........................................                           632                 314               2,731
   Other assets ...................................................................................            2,718           3,022                26,278
                                                                                                              12,178          37,125               322,826
      Total Assets ................................................................................      ¥143,049        ¥137,927             $1,199,365

See accompanying notes to consolidated financial statements.




                                                                                  8
                                                                                                                                         Thousands of
                                                                                                              Millions of Yen         U.S. Dollars (Note 2)
                                                                                                           1999           2000                  2000
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities
   Notes and accounts payable:
     Trade .........................................................................................    ¥ 6,307       ¥ 6,425              $    55,870
     Other ..........................................................................................     10,414          9,720                 84,522
   Short-term borrowings ....................................................................             30,848         26,637                231,626
   Current portion of long-term debt ....................................................                     29                 26                  226
   Accrued income taxes .....................................................................               825                 128               1,113
   Other current liabilities ...................................................................           8,041          8,093                 70,374
     Total Current Liabilities ...............................................................            56,464         51,029                443,730


Long-Term Liabilities
   Long-term debt (Note 3) .................................................................              28,878         28,763                250,113
   Deferred income taxes (Note 4) .......................................................                  3,079          3,460                 30,087
   Reserves for termination benefits (Note 5) .......................................                       453                 620               5,391
   Other long-term liabilities................................................................             4,629          4,487                 39,018
     Total Long-Term Liabilities ..........................................................               37,039         37,330                324,609


Minority Interests in Consolidated Subsidiaries.................................                                  –              58                  504


Shareholders’ Equity
   Common stock: ¥50 par value
     Authorized: 500,000,000 shares
     Issued: 1999—145,270,303 shares ................................................                     20,973                  –                     –
               2000—145,270,303 shares .................................................                          –      20,973                182,374
   Additional paid-in capital ................................................................            20,043         20,043                174,287
   Retained earnings ...........................................................................           8,530          8,494                 73,861
     Total Shareholders’ Equity ...........................................................               49,546         49,510                430,522


     Total Liabilities and Shareholders’ Equity .....................................                   ¥143,049      ¥137,927            $1,199,365




                                                                                9
MERCIAN CORPORATION AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31, 1998, 1999 and 2000

                                                                                                                                         Thousands of
                                                                                                     Millions of Yen                  U.S. Dollars (Note 2)
                                                                                          1998           1999              2000                  2000
Net sales ............................................................................. ¥110,164     ¥110,186          ¥ 99,062              $861,409
Cost of sales (Note 6) ..........................................................         73,612         74,560            67,420                586,261
      Gross Profit ..................................................................     36,552         35,626            31,642                275,148
Selling, general and administrative expenses (Note 6) ...........                         31,696         31,907            29,394                255,600
      Operating Income .........................................................           4,856          3,719             2,248                 19,548


Other income (expenses):
   Interest and dividend income ...........................................                 641              376             363                   3,157
   Interest expense ..............................................................        (1,156)           (971)          (1,023)                (8,896)
   Disposition of obsolete inventories ...................................                 (536)            (470)           (736)                 (6,400)
   Revaluation of marketable securities.................................                  (1,549)            (91)          (1,841)               (16,009)
   Sale (Disposition) of property and equipment ...................                         108             (181)           1,611                 14,009
   Other—net ......................................................................        (491)            (239)           (373)                 (3,243)
                                                                                          (2,983)        (1,576)           (1,999)               (17,383)
      Income before Income Taxes.........................................                  1,873          2,143              249                   2,165


Income taxes (Note 4):
   Current ...........................................................................     1,132          1,639              324                   2,817
   Deferred..........................................................................            –        (294)               71                     617
   Income before minority interests in subsidiaries and
      equity earnings (losses) of associated companies ...........                          741              798            (146)                 (1,270)
   Minority interest in subsidiaries .......................................                     –              –                 2                     17
   Equity earnings (losses) of associated companies ..............                          (47)             206             280                   2,435
      Net Income .................................................................. ¥       694       ¥ 1,004          ¥     132             $     1,148


Per share (Yen and U.S. dollar):
   Net income
      Basic............................................................................    ¥4.78          ¥6.91             ¥0.91                 $0.008
      Diluted ........................................................................           –              –                 –                      –
   Cash dividends................................................................          ¥5.00          ¥5.00             ¥5.00                 $0.043


See accompanying notes to consolidated financial statements.




                                                                                 10
MERCIAN CORPORATION AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
Years ended December 31, 1998, 1999 and 2000

                                                                                                                                   Thousands of
                                                                                                  Millions of Yen               U.S. Dollars (Note 2)
                                                                                       1998           1999           2000                 2000
Common Stock
   Balance at beginning of year ............................................          ¥20,973       ¥20,973         ¥20,973            $182,374
      Balance at end of year ..................................................       ¥20,973       ¥20,973         ¥20,973            $182,374


Additional Paid-in Capital
   Balance at beginning of year ............................................          ¥20,043       ¥20,043         ¥20,043            $174,287
      Balance at end of year ..................................................       ¥20,043       ¥20,043         ¥20,043            $174,287


Retained Earnings
   Balance at beginning of year ............................................          ¥12,528       ¥12,445         ¥ 8,530            $ 74,174
   Add:
      Net income ..................................................................      694           1,004           132                  1,148
      Increase in earnings from the addition
         of consolidated subsidiaries .......................................                 –              –         634                  5,513
   Deduct:
      Cash dividends paid .....................................................          (726)           (726)        (726)               (6,313)
      Bonuses to directors and corporate auditors...................                      (51)            (52)         (51)                  (443)
      Decrease in earnings from the addition
         of consolidated subsidiaries .......................................                 –       (1,449)          (24)                  (209)
      Tax effect of adjustments on beginning assets
         and liabilities balance ................................................             –       (2,692)               –                     –
      Balance at end of year ..................................................       ¥12,445       ¥ 8,530         ¥ 8,494            $ 73,861


See accompanying notes to consolidated financial statements.




                                                                              11
MERCIAN CORPORATION AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 1998, 1999 and 2000

                                                                                                                                     Thousands of
                                                                                                   Millions of Yen                U.S. Dollars (Note 2)
                                                                                         1998          1999              2000               2000
Cash Flows from Operating Activities
  Net income (Note 9) ........................................................           ¥ 694        ¥ 1,004        ¥     132            $ 1,148
  Adjustments to reconcile net income to net cash
   provided by operating activities:
    Depreciation and amortization ......................................                  3,127         3,272            3,136              27,270
    Provision for retirement allowances and termination benefits....                         55            61              124               1,078
    Payments of retirement allowances and termination benefits ...                            –           (79)              (2)                (17)
    Deferred income taxes ..................................................                  –          (294)              70                 609
    Equity in undistributed net (income) losses
    of affiliated companies..................................................                 –          (205)         (279)                (2,426)
    Minority interests .........................................................              –             –             2                     17
    Revaluation of marketable securities .............................                    1,548            91         1,216                 10,574
    Loss (gain) on sales of property, plant and equipment....                              (104)          181        (1,611)               (14,009)
    (Increase) decrease in notes and accounts receivable .....                           (1,967)       (1,742)        6,032                 52,452
    (Increase) decrease in inventories .................................                 (9,888)        7,319        (1,343)               (11,678)
    (Increase) decrease in other current assets.....................                        (73)         (827)         (633)                (5,504)
    Increase (decrease) in notes and accounts payable .........                            (812)       (2,928)          (17)                  (148)
    Increase (decrease) in accrued income taxes ..................                       (1,006)          660          (710)                (6,174)
    Other ...........................................................................      (308)         (798)         (320)                (2,783)
    Net Cash Provided by (Used in) Operating Activities ......                           (8,734)        5,715         5,797                 50,409

Cash Flows from Investing Activities
  Additions to property, plant and equipment ......................                      (3,232)       (3,607)       (4,467)               (38,843)
  Proceeds from sales or disposal of property,
   plant and equipment ......................................................               404           106         2,251                 19,574
  (Increase) decrease in time deposits and short-term investments ...                       225         1,037         1,162                 10,104
  (Increase) decrease in marketable securities......................                         53         1,391            14                    122
  (Increase) decrease in investments in securities ................                         102          (416)         (154)                (1,339)
  Other ..............................................................................       (4)        2,031        (1,211)               (10,530)
     Net Cash Provided by (Used in) Investing Activities .......                         (2,452)          542        (2,405)               (20,913)

Cash Flows from Financing Activities
  Proceeds from long-term debt ..........................................                 1,097           475              –                     –
  Repayments of long-term debt..........................................                 (1,010)         (425)          (203)               (1,765)
  Increase (decrease) in short-term borrowings....................                       11,743        (2,698)        (4,479)              (38,948)
  Dividend paid .................................................................          (726)         (726)          (726)               (6,313)
     Net Cash Provided by (Used in) Financing Activities ......                          11,104        (3,374)        (5,408)              (47,026)
Net Increase (Decrease) in Cash and Cash Equivalents.......                                 (82)        2,883         (2,016)              (17,530)
Cash and Cash Equivalents at Beginning of Year................                              324           242          3,139                27,296
Cash and Cash Equivalents of Additional Consolidated Subsidiaries                             –            14            204                 1,774
Cash and Cash Equivalents at End of Year..........................                       ¥ 242        ¥ 3,139        ¥ 1,327               $11,539

See accompanying notes to consolidated financial statements.



                                                                                12
MERCIAN CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1 Summary of Significant Accounting Policies

Basis of Presenting Consolidated Financial Statements            Income Taxes
Mercian Corporation (the “Company”) and its domestic             Income taxes are accounted for under the asset and lia-
subsidiaries maintain their books of account in confor-          bility method. Deferred tax assets and liabilities are rec-
mity with financial accounting standards of Japan, and           ognized for the future tax consequences attributable to
its foreign subsidiaries maintain their books of account         differences between the financial statement carrying
in conformity with those of the countries of their domi-         amounts of existing assets and liabilities and their
cile.                                                            respective tax bases and operating loss and tax credit
                                                                 carryforwards.
Principles of Consolidation
The consolidated financial statements include the                Pension Plans and Reserves for Termination Benefits
accounts of the Company and its subsidiaries.                    Until October 31, 1988, the Company had an unfunded
Significant intercompany accounts and transactions               employee retirement allowances plan. Effective November
have been eliminated on consolidation.                           1, 1988, the Company instituted a non-contributory
   Investments in certain associated companies in                funded pension plan covering all employees, to replace the
which the Company’s ownership is 20% to 50% are                  prior employee retirement allowances plan. Under the
stated at their underlying net equity value after elimi-         pension plan, employees are entitled to an annuity or a
nation of intercompany profits.                                  lump-sum payment at the time of termination, the amount
                                                                 of which is determined on the basis of length of service,
Cash Equivalents                                                 rate of pay at the time of termination and other factors.
The Company considers all highly liquid investments                 Costs with respect to the employee pension plan are
with a maturity of three months or less to be “cash              funded and accrued at an amount determined actuari-
equivalents.”                                                    ally. Past service costs are being funded annually over
                                                                 10 years.
Inventories                                                         Reserves for termination benefits represent provi-
Inventories are stated at cost as determined by the              sions of retirement benefits for directors and corporate
moving-average method.                                           auditors who are entitled to lump-sum payments under
                                                                 the funded retirement plan, effective May 1, 1992. The
Property, Plant and Equipment                                    provisions of termination benefits have been made at
Property, plant and equipment are stated on the basis            50% of the incurred amount.
of cost.
   Depreciation of property (excluding a rental shopping         Excise Taxes
center building), plant and equipment is computed using          Excise taxes are levied on liquor when delivered from
the declining-balance method over the estimated useful           factories and are included in net sales and cost of sales.
lives, as prescribed by Japanese tax law. A rental build-
ing completed in 1996 for a compound shopping center,            Net Income per Share and Cash Dividends per Share
and buildings acquired in or after 1999, are depreciated         The computation of net income per share is based on
by the straight-line method. Significant renewals and            the weighted average number of shares of common
additions are capitalized at cost. Maintenance and               stock outstanding during the period. Cash dividends per
repairs are charged to income as incurred.                       share represent the cash dividends declared as applica-
                                                                 ble to the respective years.
Marketable Securities and Investments in Securities
Marketable securities and investments in securities are
stated at cost as determined by the moving-average
method. Marketable securities, however, are revalued
at market price when they are considered to have
fallen remarkably and irrecoverably.




                                                            13
MERCIAN CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Note 2 U.S. Dollar Amounts

The translation of yen amounts into U.S. dollar amounts                                  The translation should not be construed as a represen-
is included solely for convenience, as a matter of arith-                                tation that yen has been, could have been, or could be in
metical computation only, at the rate of ¥115=US$1, the                                  the future converted into U.S. dollars at the above rate.
approximate rate of exchange on December 31, 2000.


Note 3 Long-Term Debt

Long-term debt at December 31, 1999 and 2000, comprised the following:

                                                                                                                                                   Thousands of
                                                                                                                        Millions of Yen             U.S. Dollars
                                                                                                                    1999              2000              2000
Secured loans principally from banks and insurance companies,
   payable in yen, due through 2004, at rates from 2.0% to 7.05%.............                                  ¥ 6,448           ¥ 6,329            $ 55,036
2.0% mortgage convertible bonds, payable in yen, due 2002 .....................                                     4,883             4,883              42,461
2.0% convertible bonds, payable in yen, due 2004 ....................................                              17,577            17,577             152,843
                                                                                                                   28,908            28,789             250,340
Less: Current portion ...............................................................................                  29                 26                228
                                                                                                               ¥28,878           ¥28,763            $250,113



The assets pledged as collateral for the Company’s debt at December 31, 1999 and 2000, were as follows:
                                                                                                                                                   Thousands of
                                                                                                                        Millions of Yen             U.S. Dollars
                                                                                                                    1999              2000              2000
Property, plant and equipment (at net book value)....................................                          ¥     703          ¥       738       $     6,420
Investment securities ...............................................................................              10,972            11,005              95,694


Convertible bonds outstanding are convertible into shares of common stock under the following conditions:
                                                                                                                     2.0% Convertible           2.0% Convertible
                                                                                                                     Bonds, Due 2002            Bonds, Due 2004

Conversion prices per share at December 31, 2000 ..........................                                           ¥1,170.30                     ¥1,523.00
Convertible period
   from .........................................................................................          November 2, 1987                December 1, 1989
   to .............................................................................................        December 26, 2002               December 29, 2004


In the future, the Company is required to provide sinking funds for the 2.0% convertible bonds in the amounts shown
in the following schedule, reduced by the bonds converted or redeemed.

                                                                                                                     2.0% Convertible
                                                                                                                     Bonds, Due 2004               Thousands of
Years ended December 31                                                                                              (Millions of Yen)              U.S. Dollars

2001 .......................................................................................................                ¥2,000                      $17,391
2002 .......................................................................................................                 3,000                       26,087
2003 .......................................................................................................                 3,000                       26,087
                                                                                                                            ¥8,000                      $69,565

                                                                                   14
Under the terms of the mortgage convertible bonds, each                                 shares of common stock are reserved for conversion of
conversion price is subject to adjustment in certain cases,                             all the outstanding convertible bonds.
which include the payment of stock dividends and free
distribution of shares. A sufficient number of authorized

The aggregate annual maturities of long-term debt subsequent to December 31, 2000, are summarized below:
                                                                                                                                                   Thousands of
Years ended December 31                                                                                              Millions of Yen                U.S. Dollars

2001 .......................................................................................................              ¥       –                 $          –
2002 .......................................................................................................                   5,934                     51,597
2003 .......................................................................................................                     57                        497
2004 .......................................................................................................                  22,640                    196,872
2005 and after .........................................................................................                        132                       1,147
                                                                                                                          ¥28,763                   $250,113

As is customary in Japan, long-term and short-term                                      provide that the bank has the right to offset cash
bank loans are made under general agreements which                                      deposited against any long-term and short-term debt
provide that additional security and guarantees for pre-                                that becomes due and, in case of default and certain
sent and future indebtedness will be given under certain                                other specified events, against all other debts payable
circumstances at the request of the bank, and that any                                  to the bank. Such rights, as applicable to the Company,
collateral so furnished will be applicable to all indebt-                               have never been exercised by banks.
edness due to that bank. In addition, the agreements


Note 4 Income Taxes

The tax effects of temporary deferment that give rise to significant portions of the deferred tax assets and deferred tax
liabilities at December 31, 1999 and 2000, are presented below:
                                                                                                                                                   Thousands of
                                                                                                                      Millions of Yen               U.S. Dollars
                                                                                                                   1999                 2000            2000
Deferred tax assets:
   Accrued expenses ................................................................................           ¥    128            ¥     170         $ 1,482
   Retirement and severance benefits........................................................                              –              248              2,158
   Intercompany profits............................................................................                       5                    8               67
   Tax loss carryforwards.........................................................................                    27                 363              3,158
   Accrued enterprise tax .........................................................................                   75                       –                –
   Allowance for doubtful receivables .......................................................                             8                    –                –
   Other ..................................................................................................         252                  162              1,409
      Total deferred tax assets ...................................................................                 499                  952              8,282


Deferred tax liabilities:
   Tax purpose reserves regulated by Japanese tax law..............................                             (3,079)                (3,530)          (30,692)
   Accrued enterprise tax .........................................................................                       –              (53)             (464)
   Other ..................................................................................................               –             (156)            (1,358)
      Total deferred tax liabilities...............................................................             (3,079)                (3,739)          (32,513)
      Net deferred tax liabilities .................................................................           ¥(2,580)            ¥(2,787)          $(24,231)


                                                                                  15
MERCIAN CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


The Company and its subsidiaries are subject to a num-                                 42.05% for the year ended December 31, 1999 and
ber of taxes based on earnings which, in aggregate,                                    42.10% for the year ended December 31, 2000.
resulted in an average normal tax rate of approximately

The effective rates for the two years differ from the normal tax rates for the following reasons:


                                                                                                                           1999                2000
Normal tax rate .......................................................................................                   42.05%             42.10%
   Expenses not deductible for tax purposes..............................................                                  8.49%             27.15%
   Inhabitant tax......................................................................................                    2.34%             10.41%
   Effect of change in normal statutory tax rate .........................................                                 5.63%                   –%
   Other ..................................................................................................               (1.29)%            (4.98)%
Effective tax rate......................................................................................                  57.23%             74.68%


Note 5 Pension Plans and Termination Benefits

The charges to income for pension costs and termination benefits for each of the three years in the period ended
December 31, 2000, were as follows:
                                                                                                                                             Thousands of
                                                                                                              Millions of Yen                 U.S. Dollars
                                                                                              1998                 1999               2000       2000
Pension costs ......................................................................          ¥925                 ¥981               ¥874       $7,600
Termination benefits............................................................                55                   59                 56          491

The net assets of the contributory pension plans at December 31, 2000, were ¥12,360 million ($107,482 thousand).


Note 6 Research and Development

Research and development expenses included in cost of sales and selling, general and administrative expenses for
each of the three years in the period ended December 31, 2000, were as follows:
                                                                                                                                             Thousands of
                                                                                                              Millions of Yen                 U.S. Dollars
                                                                                              1998                 1999               2000       2000
                                                                                              ¥968              ¥1,093                ¥994       $8,644


Note 7 Contingent Liabilities

The Company had the following contingent liabilities at December 31, 2000:
                                                                                                                                             Thousands of
                                                                                                                       Millions of Yen        U.S. Dollars

As guarantor of bank loans ......................................................................                          ¥4,760            $41,390
As guarantor of employees’ housing loans ................................................                                       269             2,338




                                                                                 16
Note 8 Subsequent Event

The following appropriations of retained earnings, which                                 31, 2000, were approved at a shareholders’ meeting held
have not been reflected in the accompanying consoli-                                     on March 29, 2001.
dated financial statements for the year ended December
                                                                                                                                       Thousands of
                                                                                                                Millions of Yen         U.S. Dollars

Cash dividends of ¥2.50 ($0.02) per share.................................................                               ¥363             $3,158


Note 9 Supplemental Cash Flow Information

Supplemental cash flow information is as follows:

                                                                                                                                       Thousands of
                                                                                                       Millions of Yen                  U.S. Dollars
                                                                                             1998           1999                2000        2000
Cash paid during the year:
  Interest ...........................................................................     ¥1,032           ¥976           ¥1,017          $8,843
  Income taxes...................................................................           1,691            979            1,034           8,991




                                                                                17
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

The Board of Directors
Mercian Corporation



We have audited the accompanying consolidated balance sheets of Mercian Corporation and its subsidiaries as of
December 31, 1999 and 2000, and the related consolidated statements of income, shareholders’ equity and cash
flows for each of the three years in the period ended December 31, 2000, all expressed in yen. These consolidated
financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion
on these consolidated financial statements based on our audits.
   We conducted our audits in accordance with auditing standards generally accepted in Japan. Those standards
require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements. An audit also includes assessing the accounting principles used and sig-
nificant estimates made by management, as well as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
   In our opinion, the consolidated financial statements referred to above, expressed in yen, present fairly, in all mate-
rial respects, the financial position of Mercian Corporation and its subsidiaries as of December 31, 1999 and 2000,
and the results of its operations and its cash flows for each of the three years in the period ended December 31,
2000, in conformity with accounting principles generally accepted in Japan.
   The U.S. dollar amounts in the accompanying consolidated financial statements with respect to the year ended
December 31, 2000, are presented solely for convenience. Our audit also included the translation of yen amounts
into U.S. dollar amounts and, in our opinion, such translation has been made on the basis described in Note 2 to the
consolidated financial statements.

March 29, 2001
Tokyo, Japan




                                                                                           Nihombashi Corporation
                                                                                           Certified Public Accountants




                                                            18
MERCIAN CORPORATION AND CONSOLIDATED SUBSIDIARIES
CORPORATE DATA

Head Office                                                Consolidated Subsidiaries
Mercian Corporation                                        Mercian Feed Corporation
5-8, Kyobashi 1-chome,                                     38-5, Masago-cho, Tomakomai,
Chuo-ku, Tokyo 104-8305, Japan                             Hokkaido 059-1373, Japan
Tel: +81 3 3231 3910                                       Tel: +81 144 56 2113
Fax: +81 3 3231 8539
                                                           Mercian Cleantec Corporation
                                                           5-8, Kyobashi 1-chome,
Date of Establishment
                                                           Chuo-ku, Tokyo 104-8305, Japan
December 4, 1934
                                                           Tel: +81 3 3231 8910
DOMESTIC NETWORK                                           Markham Vineyards
Branch Offices                                             2812, St. Helena, CA, U.S.A.
Hokkaido, Tohoku, Kanto, Tokyo Metropolitan,                     1
                                                           Tel: + 707 963 5292
Chubu, Kansai, Chugoku, Kyushu, Okinawa
                                                             a
                                                           Chˆ teau Reysson
Subbranches                                                33180 Vertheuil, Haut-Medoc, France
Aomori, Akita, Fukushima, Matsumoto, Niigata, Mito,        Tel: +33 5 5641 9805
Saitama, Chiba, Minami-Tokyo, Nishi-Tokyo,                 Mercian Karuizawa Museum of Art
Kanagawa, Shizuoka, Kanazawa, Shikoku, Okayama,            1799-1, Maseguchi, Oaza, Miyota-cho, Kitasaku-gun,
Oita, Minami-Kyushu                                        Nagano 389-0207, Japan
                                                           Tel: +81 267 32 0288
Plants
Tomakomai, Karuizawa (Distillery), Katsunuma                   o
                                                           San¯ Corporation
(Winery), Nagareyama, Kawasaki, Fujisawa, Iwata,           17-11, Kyobashi 2-chome,
Yatsushiro                                                 Chuo-ku, Tokyo 104-0031, Japan
                                                           Tel: +81 3 3563 6358
Research Facility
                                                           Marusan Express Co., Ltd.
Fujisawa
                                                           4-31, Tateuma-machi, Yatsushiro,
                                                           Kumamoto 866-0017, Japan
OVERSEAS NETWORK
                                                           Tel: +81 965 33 8338
Branch Office
Europe Office (France)                                     M.P.K. Corporation
                                                           17-11, Kyobashi 2-chome,
Production Subsidiaries                                    Chuo-ku, Tokyo 104-0031, Japan
Markham Vineyards (United States)                          Tel: +81 3 3535 7775
Château Reysson (France)
                                                           Sanraku Finechem Incorporated
Affiliates                                                 4980, Kaisei-cho, Shinnanyo,
Shenzhen Main Luck                                         Yamaguchi 746-0006, Japan
  Pharmaceuticals Inc. (PRC)                               Tel: +81 834 63 4845

Shaoxing Gu Yue Long Shan                                  Enshu Green Farm Co., Ltd.
  Wine Industry Co., Ltd. (PRC)                            1808, Nakaizumi, Iwata,
                                                           Shizuoka 438-0078, Japan
                                                           Tel: +81 538 32 4131




                                                      19
MERCIAN CORPORATION AND CONSOLIDATED SUBSIDIARIES
BOARD OF DIRECTORS

President
Tadao Suzuki

Executive Managing Directors
Arata Hori
Tetsuji Saeki
Kunihiko Shimizu
Yuji Okabe

Managing Directors
Takeo Yoshioka
Junkichi Mashino

Directors
Yoshihiko Miyauchi
  (Chairman and CEO of Orix Corporation)
Shunsuke Inamori
  (Chairman of Ajinomoto Corporation)

Standing Corporate Auditors
Takeshi Ito
Teruhiko Kanno
Akio Sato

Corporate Auditor
Tetsuro Hirano




(As of March 31, 2001)




                                              20
MERCIAN CORPORATION AND CONSOLIDATED SUBSIDIARIES
INVESTOR INFORMATION

Paid-in Capital                                     Further Information
¥20,972,930,087 (As of March 31, 2001)              Mercian Corporation
                                                    Public Relations Department,
Stock Exchange Listings                             5-8, Kyobashi 1-chome,
Tokyo, Osaka, Nagoya, Fukuoka, Sapporo              Chuo-ku, Tokyo 104-8305, Japan
                                                    Tel: (03) 3231-3910
Common Shares                                       Fax: (03) 3231-8539
Authorized: 500,000,000
Issued: 145,270,303 (As of March 31, 2001)

Number of Shareholders
18,811 (As of December 31, 2000)

Number of Employees
1,057 (As of December 31, 2000)

Independent Public Auditors
Nihombashi Corporation

Transfer Agent
The Mitsubishi Trust and Banking Corporation
4-5, Marunouchi 1-chome,
Chiyoda-ku, Tokyo 100-0005, Japan




                                               21

								
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