The previous fiscal year (April 2007 - March 2008) we posted sales of 742,841,500 yen (down 1.8% from the previous fiscal year.)

Numerical Technologies Inc. Earnings　Results (unit: million yen)

As we announce every year when releasing our earnings results, we are not publicly listed and do not offer dividends (i.e., our profit does not leave our firm.) And because we have booked a profit every year since our founding, we have a strong capital standing. (In other words, there is no need to accumulate retained earnings.) If we were a publicly traded company, profit growth would equal dividend increases, which would be good. And if we didn't care about how we looked to outsiders, the ideal would be simply to break even.
The features of our financial condition are very simple and easy to understand. (There is no way of manipulating our numbers.) We have booked a profit every year since our founding and have no cumulative losses. We have no inventory that requires liquidation or re-evaluation every year, no fixed assets that incur valuation losses, no sales firms that require amortization of goodwill, no consolidated subsidiaries or unconsolidated affiliates whose sales or profits can be shifted, and no outsourcing firms, because we develop 100% of our products in-house.
Because the average funding recovery period for a systems project is roughly a year, that is how much we need for our operating funds. Because of this simple business structure, we can largely estimate the following year's earnings. This fiscal year, we made active capital investments to further upgrade the grid environment-responsive version of our Altitude ALM (asset liability management) system. This decision was taken a year ago when we made our budget forecast. Because of the capital spending, our profit this fiscal year (in other words, expected tax payments) decreased. As a result, we booked roughly the amount of earnings we had forecast when we settled the accounts for the previous period. We posted a slight increase in profit; but this is due to a 42 million yen profit from foreign exchange transactions, which will be explained below.
Next fiscal year, thanks to orders from last fiscal year, we expect to post roughly the same level of sales as this fiscal year. We continue to operate with an eye on reducing costs, and the external environment is a stable one, meaning we intend to actively invest in R&D and other investments for the sake of our future. We hope to continue setting our budgets conducting business at our own pace.
We stopped disclosing our financial records to private credit rating agencies after the fiscal year ending March 2006. And we will not disclose financial information to such companies even if we are contacted by them in the future. We came to this decision following the April 1 2006 implementation of a partial revision to the income tax law which abolished the disclosure system for taxes, including corporate tax payments. Therefore, any financial information provided by private credit rating agencies like Teikoku Databank and Tokyo Shoko Research are either estimates by the credit rating agencies or taken from numbers and charts we posted here. (Please refer to Column: Is the Winter of Ratings Approaching? The Reality Behind Corporate Credit Record Databases) Customers, business partners, and companies that are considering doing business with us, can contact us directly for financial information. We will be happy to release financial data to such clients individually.

We are a packaged software developer that receives orders directly from major financial institutions and custom-develops products. All of our products are developed in-house. We have no contracts via outside system integrators, and neither do we outsource our work. Therefore, we basically do no buying in nor have any inventory. This means that labor costs make up most of our sales and administrative costs.

As you can see in the chart below, most of our assets are cash deposits. Most of our remaining assets are computer hardware. In other words, most of our assets take the form of extremely short-term, and highly liquid, funds.

Numerical Technologies Inc. Balance Sheet (As of March 31, 2008)

We manage our financial assets with utmost attention to safety and liquidity. In particular, (1) During the fiscal year, we keep our funds in yen-denominated, short-term Japanese government securities (three-month instruments) (2) At the end of the term, we hold our assets in ordinary deposits, diversifying our funds in numerous domestic financial institutions. We do not keep any funds in CDs, long-term assets for the purpose of fund management, mutual funds, REITs, or insurance policies for the purpose of tax cuts. Neither do we have any transactions with overseas brokerages, commercial banks, investment banks, or investment funds.
Of special note this fiscal year was our selling off of all of our three million dollars worth of dollar-denominated MMFs. As we noted in the assets column of our financial results for the fiscal year ending March 2002, these dollar-denominated assets were purchased in 2001 as a safety net against Japan's credit risks, which investors feared back then. After exchanging these dollars into yen, all of our assets have been yen-denominated. And because we happened to sell the dollars on the day when the yen was at its 2007 low against the greenback, we booked 42 million yen in non-operating profit. Next fiscal year, we plan to continue holding our assets in yen because the current sovereign risk is higher overseas compared with Japan. The sovereign risk problem in Europe, the U.S., and emerging nations has come to light partially in U.S. financial market crisis of July to August 2007. Anyone involved in business related to credit risk is no doubt already aware of what we mean.
You may question the safe management of funds using bank deposits and short-term government bonds in terms of the "financial literacy" that has become a buzz phrase recently. Lately, there have been a lot of books and lectures about how Japanese people lack financial literacy. These books insist that "keeping your money in banks is not letting your money work for you," a claim that our company must be seen as repudiating.
Our tax burden is no less than 47.6%. Our liquidity ratio (liquid assets divided by liquid liabilities) is 1215.2%, our ratio of interest-bearing debts is 0% (i.e., we are debt-free), our capital ratio (shareholders' equity to total assets) is 92.2%, and our ratio of fixed assets (tangible fixed assets divided by net worth) is 1.1%. Our debt accounts consist 100% of unpaid corporate tax payments and other liquid liabilities, making us effectively debt-free. This shows that we are truly financially sound. Even if we fail to get additional work, we can probably hold out for about 10 years. Does it make sense to have a more sound financial record than Citibank or Morgan Stanley? Of course it does.
If you were a shareholder who invests in publicly listed firms, you would enjoy high share prices and high dividends when company earnings are stellar, and would lose only the value of your shares if a company went bankrupt. If you live on a salary and can easily change jobs, you would enjoy a hefty bonus when earnings are stellar and would simply need to change jobs if your employer went bankrupt. This is a case of "my win is mine and my loss is yours." The pay off curve showing profit and loss is asymmetric, which is the same when buying a call option. Like the CEOs of U.S. firms, you can take as many risks as you want.
But if you are a shareholder of an unlisted, almost-self-run business, you enjoy high share prices and high dividends when company earnings are stellar, and would lose your livelihood if the company went bankrupt. If you live on a salary and cannot easily change jobs, you enjoy a hefty bonus when earnings are stellar and would be unable to pay your mortgage if your employer went bankrupt. And good fortune doesn't last forever. Even if you live on a salary and can easily change jobs, you have to consider external events such as traffic accidents, serious illness, divorce, nursing care, education, and natural disasters. If such events occur, all of a sudden, you no longer have a call option. Your safety net disappears. This is the basic theory of risk management (external events, investment horizons, and asymmetrical payoff).
The proper business judgment for a tech firm like us is to search for the most appropriate efficiency frontier while maintaining a thick cushion of safe assets if it has been proven that there is a high volatility considering past stellar earnings because business risk itself is high-risk, high-return. It's either that or increase investment in the business, or offer dividends and raise the effective tax rate to 75% (1 - 50% effective corporate tax rate × 50% personal income tax rate), which can be scary. If, with all this in mind, we had invested in hedge funds or made real estate investments exceeding the scope of our benefit package, our customers (who are professionals in risk management) would lose confidence in us. They would think, "Can we trust a company that can't even manage its own risks?" (Please refer to Column: Regarding Various Ratios Indicating Financial Health)
If we were to add a note to the aforementioned comment about financial literacy, it would be that books that urge readers to take their money out of bank deposits and invest in mutual funds are merely claims by writers who set themselves up as authorities on the aforementioned call option model. If you are the kind of person who would be inconvenienced by being fired from your company, the content of these books is 100% lies.

Our capital account of 68,179,376 yen is our legally required reserves for programming and other purposes. We have registered our software at the Information-Technology Promotion Agency as a universal program (meaning other than control programs) that falls under regulation number 2 (indicated as "ro" in Japanese) in the middle of the first chart on term 1 of Article 57 as well as term 1 of Article 20-2 of the Special Taxation Measures Law. Our registration number is 25295. Our registration date was February 28, 1999.
The reserves for programming and other purposes are set to be abolished due to a law revision, and we have been gradually dipping into these reserves since the fiscal year ended March 2004.
In regards to our shareholding status, the three members of the Board of Directors currently own a combined 100% of the company's shares, and we have no capital tie-up with outside firms. We are therefore a neutral company in terms of capital.

Today's risk management is also a device industry. Companies have to strengthen their proprietary systems in order to maintain high developmental productivity and meet the needs of client financial institutions. As a result of the growing business size of financial institutions recently, it has become quite a large-scale project to simply establish a testing environment large enough to handle our clients' data volume. A massive amount of hardware investment is necessary, especially to realize a liability ALM system or daily simulations. For these reasons, we continue to make high levels of capital investments.
In the previous fiscal year, we used the super computer at Tokyo Institute of Technology and, with the cooperation of clients using our products, were able to show that it is possible to conduct detailed Monte Carlo simulations for asset liability management even for the largest-class mega banks. For details on this research, please refer to the official document titled "Financial ALM/Risk management model operations and computer grid technology application." This fiscal year, this research is being employed as the "Strategic Fields Promotion: the Development of HPC Application Technology for risk management simulation for social infrastructure - the application of HPC technology for large-scale ALM simulation."

The main risks to our business can be divided into three categories - human resource-related risks, intellectual-property-related risks and development projects.

We are an independent systems vendor with in-house R&D resources. We develop and sell financial middle-office systems (i.e., financial risk management systems) including ALM systems, profit management systems, credit risk management systems, market risk management systems, and operational risk management systems.
Japanese and non-Japanese companies that specialize in providing these extremely difficult financial systems are mainly companies founded by former employees of financial institutions. From our point of view, credit rating agencies like Moody's, S&P, Fitch, and R&I as well as strategic consulting firms like McKinsey and Boston Consulting Group, as well as accounting consulting firms like Price Waterhouse Coopers and Ernst & Young, are all outsiders. We don't consider them professionals. The only people who are on a par with our know-how may be the insider teams of certain investment banks. The same situation can be said for overseas vendors specializing in financial risk management systems.
Because this field requires high expertise, it is important for us to work hard at boosting morale amongst our employees, or, to put it more directly, to retain senior staff. The policy we have followed since our founding in order to deal with this human-resource-related risk is to treat senior employees like directors and shareholders, and not take on work that cannot be completed within this framework, not counting additional administrative tasks. In other words, we chose to operate our business like law firms, accounting firms and hospitals. The effectiveness of this policy can be conversely proven by the often seen tendency of employees to suddenly quit their jobs after their employers go public as a result of those employees who were allocated shares profiting from the company going public.
On this note, we are proud of our company having reached its 10th year. But even if we can maintain business the same way over the next ten years, what happens after that? We have to think of the next step. This means hiring new (in many cases, inexperienced) employees, offering incentives that motivate employees, and, paradoxically, making our products easier to use, and commodifying them.

We protect our intellectual property rights through trademark registrations, copyright registrations, and patent applications.

Regarding development projects, we have years of experience in both placing and taking on orders for the development of systems for financial institutions. We have also built a strong financial base for the taking on of large-scale projects. Even if a development project risk becomes a reality despite these conditions, we can prevent our business from weakening by prolonging our recovery period for accounts receivable and stabilizing our fixed assets. And because our biggest fear is gaining a bad reputation, we would never discontinue a project midway. We evaluate the development risks for each case before taking on an order, and we will continue our policy of turning down projects if we decide that a project has little chance of success or is regarded as dangerous for the company.
In addition, we sign software escrow contracts between us, our clients and a third party (Software Information Center) to ensure that if anything happens to our company, the copyright of all entrusted assets, including source codes, are released to the clients.
Regarding internal control and the personal information protection law which came into full effect on April 1, 2005, this fiscal year we plan to continue full management of our internal information, continue to refrain from outsourcing, and conduct all development efforts in-house in order to prevent information leaks.