Omron 2003 Annual Report Download - page 52

17. Related Party
Transaction
18.
Commitments
and Contingent
Liabilities
terparty fails to meet the terms of an interest rate swap agreement, the Companies’ exposure is limited to the
interest rate differential. Management considers the exposure to credit risk to be minimal since the counterpar-
ties are major financial institutions.
At March 31, 2002, the notional amounts on which the Companies had interest rate swap agreements out-
standing aggregated ¥2,500 million. The estimated fair values of interest rate swap contracts are based on pre-
sent value of discounted future cash flow analysis.
(2) Foreign exchange forward contracts and foreign currency options:
The Companies enter into foreign exchange forward contracts and combined purchased and written foreign
currency option contracts to hedge foreign currency transactions (primarily the U.S. dollar and the EURO) on a
continuing basis for periods consistent with their committed exposure. The terms of the currency derivatives are
rarely more than 10 months. The credit exposure of foreign exchange contracts are represented by the fair value
of the contracts at the reporting date. Management considers the exposure to credit risk to be minimal since the
counterparties are major financial institutions.
The notional amounts of contracts to exchange foreign currency (forward contracts) outstanding at March 31,
2003 and 2002 were as follows:
Thousands of
Millions of yen U.S. dollars
2003 2002 2003
Forward exchange contracts................................................................... ¥24,326 ¥16,328 $202,717
Foreign currency options......................................................................... —8,049 —
The notional amounts do not represent the amounts exchanged by the parties to derivatives and are not a
measure of the Companies’ exposure through its use of derivatives. The amounts exchanged are determined by
reference to the notional amounts and the other terms of the derivatives.
The Companies hedge certain exposures to fluctuations in foreign currency exchange rates that occur prior to
conversion of foreign currency denominated monetary assets and liabilities into the functional currency. Prior to
conversion to the functional currency, these assets and liabilities are translated at currency exchange rates in
effect on the balance sheet date. The effects of changes in currency exchange rates are reported in earnings
and included in Foreign exchange loss, net in the consolidated statements of operations. Currency forward con-
tracts and options designated as hedges of the monetary assets and liabilities are also marked to spot rates with
the resulting gains and losses reported in the consolidated statements of operations.
Concentration of Credit Risk
Financial instruments that potentially subject the Companies to concentrations of credit risk consist principally of
short-term cash investments and trade receivables. The Companies place their short-term cash investments with
high-credit-quality financial institutions. Concentrations of credit risk with respect to trade receivables, as approxi-
mately 75% of total sales are concentrated in Japan, are limited due to the large number of well-established cus-
tomers and their dispersion across many industries. The Company normally requires customers to deposit funds to
serve as security for ongoing credit sales.
In August 2000, the Company entered into an operating lease agreement for a new head office, including land
and a building, with a company owned by the family of the Company’s founder, which includes the Company’s
chairman and representative director, representative director and chief executive officer, and certain managing offi-
cers at that time. This lease agreement has an initial non-cancelable lease term of 20 years and requires a monthly
rental payment of ¥106 million ($883 thousand) and a security deposit of ¥2,600 million ($21,667 thousand) which is
refundable when the agreement expires. During the years ended March 31, 2003, 2002 and 2001, the Company
paid ¥1,272 million ($10,600 thousand), ¥1,272 million and ¥954 million, respectively, for rentals and the balance of
the security deposit at March 31, 2003 and 2002 was ¥2,600 million ($21,667 thousand).
The Company has commitments at March 31, 2003 of approximately ¥3,170 million ($26,417 thousand) related to
contracts for the construction of a new research and development laboratory building in Kyoto.
The Company has commitments at March 31, 2003 of approximately ¥23,395 million ($194,958 thousand) related
to contracts for outsourcing computer services. The contract requires an annual service fee of ¥4,846 million
($40,383 thousand) for the year ending March 31, 2004. The annual service fee will gradually decrease each year
during the contract term to ¥4,518 million ($37,650 thousand) for 2008. The contract is cancelable subject to a
penalty of 15% of aggregate service fees payable for the remaining term of the contract.
The Company and certain of its subsidiaries are defendants in several pending lawsuits. However, based upon
the information currently available to both the Company and its legal counsel, the Company management believes
that damages from such lawsuits, if any, would not have a material effect on the consolidated financial statements.
50 • Omron Corporation