ANNUAL REPORT 2005 - Yusen Logistics...YAS began business as a freight collection and loading agency...

Y A S G l o b a l C h a l l e n g e

ANNUAL REPORT 2005

Fifty years of Yusen Air & Sea Service

Yusen Air & Sea Service Co., Ltd. (YAS) has been in business for fifty years, and the Company´s develop-

ment over that half-century can be divided roughly into four periods.

YAS began business as a freight collection and loading agency on behalf of international airlines; the

Company also operated a travel agency. This period of our history lasted six years, from 1955 to 1961.

In the second period of the Company´s history -- a 23-year period from 1961 to 1984 -- we moved into the

business of air freight forwarding (otherwise known as cargo consolidation), and the volume of cargo handled

increased steadily as we operated as a principal member of the TAC (Tokyo Aircargo Consolidators) group.

In the third period of YAS’s development, the 11 years from 1984 to 1995, we operated as an independent

air freight forwarder. Separating ourselves from the TAC group, we switched to handling all our

freight forwarding ourselves, and during this period we also made great strides in building a network

of overseas bases.

In the fourth period, from 1995 to 2005, we decided to specialize totally in the airfreight business, and to

that end established a subsidiary to take over our passenger travel agency business, allowing the parent

company to focus on its core competency of freight forwarding.

Now, in 2005, as we celebrate our 50th birthday and look to the next 50 years, we have redefined the

business domain of YAS as a comprehensive logistics provider, and we have set ourselves the goal of

becoming one of the leading global logistics providers in the world.

Forward-Looking StatementsStatements contained in this report concerning plans, predictions, and strategies to improve future performance ("forward-looking statements") are based on information currently available to the Company's management, and inevitably involve acertain element of risk and uncertainty.

1

Our Group Philosophy

By meeting the cargo transportation needs of our customers, we aim to both raise the corporate

value of the YAS Group and make a significant contribution to the benefit of society.

As a responsible corporate citizen, we pledge to our four main categories of stakeholder - our

customers, shareholders, employees, and the general public - that we will do our utmost in tackling

the four challenging tasks listed below.

Working closely with our customers, we will provide world premiertransportation service and quality in the total logistics business

We aim to maximize our corporate value through sound and dynamicbusiness operations and management transparency

We will foster a fair, sincere and “humane” corporate culture inwhich all employees can feel pride, hope and a sense of worth

We will contribute to enriching society by meeting our environmentand social responsibilities as “good corporate citizen”

1

2

3

4

Financial Highlights ... 2Message from the Management ... 3Interview with the President ... 4Medium-Term Business Plan ... 8Corporate Governance and Corporate Social Responsibility ...14

Management’s Discussion and Analysis ...15Consolidated Balance Sheets …20

Consolidated Statements of Income …22Consolidated Statements of Shareholders’ Equity …23Consolidated Statements of Cash Flows …24Notes to Consolidated Financial Statements …25Report of Independent Auditors …35Global Service Network …36Corporate Information …37

Contents

Four Challenges facing YAS

2

Financial Highlights

Net SalesUnit: Millions of yen

148,263

01 02 03 04 05 01 02 03 04 05 01 02 03 04 05

Net IncomeUnit: Millions of yen

6,797

Shareholders’ EquityUnit: Millions of yen

35,894160,000

140,000

120,000

100,000

80,000

60,000

40,000

20,000

0

40,000

35,000

30,000

25,000

20,000

15,000

10,000

5,000

0

8,000

7,000

6,000

5,000

4,000

3,000

2,000

1,000

0

Financial Highlights

2004

¥118,465

7,222

3,738

29,488

66,332

¥ 208.38

–

15.00

1,673.78

2003

¥110,996

7,392

4,632

27,137

64,780

¥ 259.34

–

15.00

1,539.33

2002

¥ 91,517

2,271

1,346

23,607

57,967

¥ 76.52

–

10.00

1,342.08

2001

¥ 102,632

4,899

1,920

20,966

58,865

¥ 109.16

–

10.00

1,191.80

2005

¥ 148,263

10,408

6,797

35,894

75,485

¥ 317.17

–

30.00

1,698.40

2005

$ 1,380,603

96,918

63,293

334,239

702,905

$ 2.953

–

0.279

15.815

Net Sales

Operating Income

Net Income

Shareholders' Equity

Total Assets

Per Share Data (in single yen and U.S.dollars):

Net Income - Primary

Net Income - Fully diluted

Dividends

Shareholders' Equity

Millions of yenThousands ofU.S. dollars

Note: The United States dollar amounts represent translations of Japanese yen amounts at the rate of ¥107.39 = U.S.$1. See Note 3 to consolidated financial statements.

Yusen Air & Sea Service Co., Ltd. and its subsidiaries for the fiscal years ended March 31, 2005

3

Message from the Management

To mark the fiftieth anniversary of the Company’s estab-

lishment, in February 2005 the stock of YAS was listed for

trading on the First Section of the Tokyo Stock Exchange.

For the first forty years after its founding, YAS operated

the two business lines of travel agency and freight

consolidator/forwarder. In 1995, we established a

subsidiary to take over our travel agency business, and

since then we have dedicated ourselves to becoming an

international freight forwarder, principally by air, but also

including ocean freight forwarding operations.

For an air freight forwarder to be able to respond fully to

the requirements of customers and provide a door-to-door

service, the forwarder needs the ability to offer the

optimum service in the collection and packaging of the

goods to be transported, the selection of the best route,

and the ability to negotiate with the carriers (airlines and

ocean shipping lines) and obtain advantageous conditions

that the goods owners themselves would be unable to

match. The particular strengths of YAS lie in our speed and

adaptability, as well as our ability to offer door-to-door

delivery with the full range of ancillary logistics services.

In fiscal 2004 - the reporting period and also the milestone

50th year of the Company’s history - we recorded net

sales, on a consolidated basis, of ¥148,263 million

(US$1,381 million), an increase of 25% over the previous

term. Operating income was up even more sharply year-

on-year, by 44% at ¥10,408 million (US$97 million). These

figures were both historical highs. However, we have no

intention of resting on our laurels: we will continue our

efforts to ensure that our system is capable of effectively

meeting the changing needs of the market. To this end,

we have drawn up the “YAS Global Challenge,” which is

our Group’s new Medium-Term Business Plan covering

the period from April 2005 to March 2008, under which we

have delineated a new business operations system, which

we expect to produce even better business performance.

I hope that the shareholders of YAS and all our other

stakeholders will continue to favor us with their support

and loyalty as we take on these challenging tasks.

Chairman

Michio TanakaPresident

Shunichi Yano

4

Interview with the President

Could you explain the background to the“YAS Global Challenge”?

Our core business field is international air freight

forwarding. Looking back over the last decade,

despite temporary setbacks to the growth of economic

activity, such as the bursting of the bubble in the ICT

sector, the outbreak of SARS, and so on, the global

economy has followed an overall expansionary trend, and

the air freight market, on the whole, has been firm.

On a tonnage basis, the amount of air freight handled by

YAS in fiscal 2004 was 2.2 times that in fiscal 1995. The

main reasons why we were able to register record-high

revenues and profits for the reporting term was that

demand for air freight transport was noticeably higher than

in most years recently. This success should therefore be

assessed cautiously. Moreover, the air freight industry is

undergoing rapid change, and we must now secure a solid

business base for ourselves that will allow us to overcome

adversity that is very likely to occur in the near future.

For YAS, our important customers are widely across the

globe, they procure materials from all over the world, and

their products are similarly distributed on a worldwide

scale. YAS faces the need to swiftly adapt its organization

to respond to the rapid international expansion of business

activities by these companies. To this end, we are steadily

strengthening our office network for our customers in the

world. We have already established subsidiaries in China

and Eastern Europe, and are considering plans for

establishing a foothold in the Middle East in the future. We

will also be stepping up our marketing activities in countries

expected to play a more active part from here onward in

the international movement of goods, including Russia,

India, Mexico, the countries that l ie along the

Mediterranean coast of Africa, Brazil and others. To

succeed in this, we must motivate our staff to brush up

their knowledge and expertise about the customs, legal

systems, and political situations in these countries. To

swiftly develop skilled staff, we need to completely overhaul

our staff education system with an eye on the needs of the

future. We fully intend to invest as much in this effort as is

required.

Q

A

President Shunichi Yano

YAS´s Growth Trends

200,000

150,000

100,000

50,000

0

ConsolidatedNon-consolidated

Unit: Millions of yen

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

The graph shows net sales trends both consolidated and non-consolidated since YAS specialized in the airfreight business from 1996.

5

In what ways has the internationalfreight forwarding industry evolved inrecent years?

As economies around the world become more

interdependent - the so-called “globalization”

process - there has naturally arisen a growing need for

greater volumes of transportation from one country to

another of parts and materials for processing, and of the

finished products of manufacturing companies. More and

more manufacturers are seeking to outsource their entire

overseas transportation and logistics needs to a service

provider. From the standpoint of freight forwarders such

as ourselves, this forces us to expand the range of

services we offer, to cover such areas as inventory

management and other sophisticated logistics services.

We must also extend our reach into ocean freight

forwarding services more and more so as to be able to

provide the full range of forwarding possibilities. This

change presents an exciting opportunity to expand the total

volume of our business.

At the same time, we are also being called upon to

effectively respond to more exacting customer needs in

respect of shorter lead times, measures to prevent

damage to goods in transit, stricter security, and so on.

Another important task that we need to tackle to lay the

foundations of sustained growth into the future is the

expansion of “third-country trading,” that is, operations

involving the transport of goods from one overseas

country to another. In particular, the volume of exports by

air from Europe across the Atlantic to the United States is

growing strongly, and as YAS has a l ready made

considerable investment in expanding its facilities in both

Europe and the U.S., we can be confident of taking a larger

part of this market.

The three most vital elements in the competitiveness of

any forwarder are marketing power, service capabilities,

and cost-competitiveness. In respect of the first element,

we are confident that the size and human resource

capability of our marketing staff is fully competitive with

other forwarders in the world. The key to future success is

to maintain our high level of service quality and expand our

service menu, and to take steps to become more cost-

competitive. The effective composition of computer

systems is becoming essential to success in the freight

forwarding business, and whether or not a company can

install and make full use of information systems can be the

determining factor in its success or failure. A notable

feature of information systems is the rapid obsolescence

of the hardware, such as computers and peripheral

equipment. When to upgrade a system presents a

company’s management with a very difficult decision. We

must be ever-ready to take such steps, so as to take

advantage of every opportunity.

Q

A

6

Could you tell the readers somethingabout your strategies for business indifferent parts of the globe?

Our first priority is to increase cargo handling volume

by expanding our business office network in the

international transportation business. These days, customers

require door-to-door service. Mere port-to-port and airport-to-

airport transportation is no longer enough; customers want the

freight forwarder to take care of all handling procedures from

the shipper’s door to the consignee’s door with various value-

added logistics services. Moreover, forwarders must be able

to provide support services in countries that their

customers have only just begun doing business with, both

in terms of procurement and export.

For these reasons, we are constantly working to expand

our network of in-house facilities so as to be ready to meet

all conceivable customer requirements. If we can succeed

in this aim, we will have made great strides in sharpening

our competitive edge. By expanding our own network in

parallel with the expansion of our customers’ businesses over-

seas, we will be able to widen the scope of our services

through close cooperation with the existing marketing

staff. The main aim of expanding the network is to provide

our world premier service to our customers as a whole.

Under this concept, locally incorporated companies in each

part of the world would form part of the network and

contribute to expanding total revenues.

For example, in cases where customers in Europe want

their cargo transported from Asia to Europe, our affiliates

in Europe are responsible not only for the customs clear-

ance procedure but also for overseeing cargo handling at

the airport and then delivery to the final destination. At the

same time, affiliates, which has a relationship of close

cooperation with other subsidiaries in the region, seeks

business opportunities in the field of related services,

including intra-regional transportation, to more fully

meet customer needs.

YAS operates in five regions around the world, and the

Group members most suitable for handling the particular

characteristics of each region have been organized.

However, further strengthening of the management of our

overseas subsidiaries is required in order to move forward

with more efficient network operation. Fortunately, in

America and Europe, we already have proper local

organizations in place.

Another task we need to address is the expansion of

previously mentioned third-country trading. The rapidly

growing cross-Atlantic trade represents a major new

business opportunity for YAS, and the volume of this trade

has been growing at a particularly steep pace recently.

This field will be the target of focused efforts in the future.

Interview with the President

Q

A

Regional Air Cargo Markets — Growth Forecasts from 2003 to 2023

Average6.2%

Source: Boeing, World Air Cargo Forecast

Asi

a - N

orth

Am

eric

a

Intr

a - A

sia

Asi

a - E

urop

e

Euro

pe -

Sout

hwes

t Asi

aEu

rope

- La

tin A

mer

ica

Latin

Am

eric

a - N

orth

Am

eric

aEu

rope

- N

orth

Am

eric

aIn

tra

- Eur

ope

Euro

pe -

Afr

ica

Euro

pe -

Mid

dle

East

Nor

th A

mer

ica

8.5%

7.2%

6.7%

6.4%

6.0%

5.9%

5.6%

5.3%

5.2%

4.7%

4.1%

percentage

7

Please tell us about the goals under yourlatest Medium-term Business Plan.

As I have indicated, the goals under our three-year

Medium-term Business Plan, covering the period

ending March 2008, are: 1) developing a strong operating

base, 2) reinforcing our management base, and 3) securing

and developing human resources to support Group operations.

Specific numerical targets, to be reached by the end of the

three-year plan (March 2008), include, on a consolidated

basis, net sales of ¥200 billion and operating income of

¥12.3 billion. Compared with the figures for the reporting

period (fiscal 2004), these targets represent increases of

34.9% and 18.2%, respectively. The reason for the lower

projected growth rate of operating income than net sales

is that, during the period of the three-year plan, we have to

set up a business infrastructure such as an office network

in China and warehouse expansion in Southeast Asia,

where higher air freight growth rates over the long term

compared with the global average are expected to be

achieved. We thus need to put in place a strong marketing

network and facilities for transportation to be ready to

cope with future demand. At the moment, however, profit

margins on business in this part of the world are lower than

in certain other regions.

Regarding our dividend policy to shareholders, we aim to

pay a stable level of dividends. We have endeavored to

accurately reflect the ups and downs of the Company’s

business performance through dividends and in the form

of stock splits. Recently, however, investors have been

persistently calling for ordinary dividend payments themselves

to be closely linked to the fluctuations of a company’s

business performance. In response, we intend to take a

more flexible stance on dividend payments in the future.

In January 2005, YAS established the CSR (Corporate

Social Responsibility) Committee, which is charged with

overseeing the creation of a proper legal compliance

system and a risk management system, as well as general

social contributions by the Company from here onward.

The Company places top priority on ensuring that all its

employees keep in mind - at all times in the conduct of

their duties - the importance of the Company making a

contribution to society. Moreover, environmental preservation

is a particularly important issue for companies involved in

the transportation of cargos. Although our work, of itself,

does not place a particularly heavy burden on the environment,

we have a responsibility, whenever possible, to choose

trucking companies that employ low-emission vehicles.

We also make every effort to become involved in the

design of environmentally friendly products.

Q

A

Target Indicators

For the years ended and ending March 31

Net Sales

Ordinary Income

2005

148.3

10.9

2006

154.5

9.5

2007

171.0

11.0

2008

200.0

12.5

Note: Ordinary Income is a basic benchmark for business performance in Japan. Due to reclassification, however, ordinary income is not registered in the statements of income in the English-language version of the Annual Report.

Unit: Billions of yen

8

Five Regional Structure

Five Regions in the World

As explained above, YAS operates in five regions around

the world. Market movements in each region are monitored

mainly by the staff of the Regional Offices. In addition to our

Head Office in Tokyo, we have Regional Offices for the

Americas, Europe, East Asia, and South Asia & Oceania.

Executive officers of YAS are dispatched to our local

subsidiaries in each Regional Office to oversee operations and

ensure that the managements of the subsidiaries adhere

closely to the policies determined by YAS for each region. The

Regional Offices also take over some of the functions of the

Tokyo Head Office, including drafting and implementing

marketing strategies, and drawing up investment plans. Each

region has its own unique circumstances, and thus the same

market approach cannot be used in each region. In the

Americas, for instance, the demand for value-added logistics

services is particularly strong, while in Europe, the YAS

subsidiaries must put special effort into addressing the need

for expansion of ocean forwarding services.

In this way, we have emphasized response to the unique

features of each segment in our operations, but on the

other hand, the division of responsibilities among the directors

at Head Office who are responsible for overall supervision,

and the staff at the Regional Offices and the local

subsidiaries, is not necessarily clearly delineated. In the

present business world, rapid decision-making is critical to

a company’s success, and from that point of view, there

would appear to be a need to transfer more authority for

decisions on the ground to the Regional Offices and

subsidiaries. For this purpose, we are reviewing the

organizational structure of each region with the aim of

creating new decision-making hierarchies that afford

the staff in each region greater autonomy. In addition to

strengthening operations in the regions, it is important to

develop our local subsidiaries. Fortunately, we seem to

be having success in developing skilled local staff, and

th is wi l l contr ibute to bui ld ing a more effect ive

management structure for each region.

It is also becoming increasingly important to ensure close

liaison between one region and another. In place of the

conventional system in which the regions were linked only

by flights between “gateway” airports, we are working to

develop a more fine-meshed network of business relations

across each region in the confident belief that this will

result in improved marketing capabilities.

Japan Region■ Japan

The Americas Region■ United States■ Canada■ Brazil

Europe Region■ United Kingdom■ The Benelux countries■ Germany■ France■ Italy■ Czech

East Asia Region■ China■ Hong Kong■ Taiwan■ South Korea

South Asia & Oceania Region■ Singapore■ Malaysia■ Indonesia■ Thailand■ Australia■ Philippines■ Vietnam

Page 9

Page 10

Page 12Page 11

Page 13

Under our new three-year business plan for global operations, we have set numerical targets by operating region.

9

YAS Group companies operating within Japan consist of

the parent company - Yusen Air & Sea Service Co., Ltd. -

ten freight handling subsidiaries, two subsidiaries engaged

in the travel agency business, and one subsidiary handling

miscellaneous businesses. The majority of the freight

handling business consists of international freight

forwarding, and in terms of combined exports and imports,

the YAS Group ranks around No. 10 among global logistics

providers. Our travel agency business, which is operated

through subsidiaries headquartered in Japan. The majority

of this business consists of corporate travel demand, such

as ordinary business trips as well as group trips for study

purposes, attendance at conferences, and so on.

For the reporting period, the amount of air freight handled

by the YAS Group exceeded 12,000 tons every month

except May, which was a very vigorous level of demand.

The period from September to November was particularly

busy, owing to extreme congestion at ports on the West

Coast of the United States, as a result of which the

volume of air freight exports to the Americas rose sharply.

Exports of components and semi-finished goods to East

Asia also increased, largely due to increased production of

digital electronic appliances and vehicles by customers at

plants in that part of the world. In a breakdown of air

freight exports by customer industry, electric and elec-

tronic machinery and appliances accounted for 50%, and

vehicle components and other related products for

between 20% and 30%.

In imports, meanwhile, YAS enjoyed a higher growth rate

in handling charges than the industry average throughout

the entire reporting period. In logistics services, to cope

with increasing customer needs, we expanded our facili-

ties at Narita Airport and constructed large-scale facilities

at the newly-opened Central Japan International Airport

(near Nagoya).

Our strategic goals under the 2005-2008 Medium-term

Business Plan include expanding the volume of freight

transported into and out of China, Hong Kong, and Taiwan,

as well as increasing the amount of business done in the

ocean transport and logistics businesses. The two principal

numerical targets for the term ending March 2008, the

final year of the medium-term plan, are sales of ¥99 billion

and operating income of ¥6.9 billion.

YUSEN AIR & SEA SERVICE (TOHOKU) CO., LTD.

YUSEN AIR & SEA SERVICE CO., LTD.YUSEN AIR & SEA SERVICE (HOKURIKU) CO., LTD.

YUSEN AIR & SEA SERVICE (SHINSHU) CO., LTD.

YUSEN AIR & SEA SERVICE KEIHIN TRANS CO., LTD.

YUSEN AIR LOGISTICS (HAMAMATSU) CO., LTD.

YUSEN AIR LOGISTICS (NAGOYA) CO., LTD.

YUSEN AIR & SEA SERVICE (CHUGOKU) CO., LTD.

YUSEN AIR & SEA SERVICE (KYUSHU) CO., LTD.

YUSEN AIR & SEA SERVICE (KITAKANTO) CO., LTD.

YUSEN AIR & SEA SERVICE (TSUKUBA) CO., LTD.

99,0006,900

Regional Strategic Objectives

1

2

SalesOperating Income

Millions of yen

2005 2006 2007 2008

140,000

120,000

100,000

80,000

60,000

40,000

20,000

0

Targets / Sales & Operating Income

Develop freight import handling and logistics services

Develop air freight export services

Japan Region

10

The Americas Region

The YAS Group has two consolidated subsidiaries in both

the United States and Canada, and one unconsolidated

subsidiary in Brazil. They are overseen by an Executive

officer stationed in New York.

The plants of our main customers – motor vehicle manu-

facturers and their suppliers – are mostly located in the

mid-west area through the southern part of the U.S., and

following the free trade agreement between Japan and

Mexico, which came into effect this April, many makers of

vehicle components have commenced production in

Mexico. For these reasons, in addition to the Mexico-U.S.

cross-border traffic that we have long handled, we are now

starting to handle the supply of parts and materials from

China, Japan and other East and Southeast Asian countries

to Mexico, as well as to the southern part of the United

States. We are therefore strengthening our facilities for

the reception of imports from East and Southeast Asian

countries at the principal North American gateways of Los

Angeles and San Francisco, to bolster our ability to

supply customers in the southern U.S. states and

Mexico. As part of this initiative, our U.S. subsidiary

has set up two representative offices in Mexico.

The expansion of the volume of cargo imported into the

U.S. and Canada has also forced us to beef up our logistics

capabilities on the North American continent, and we are

now providing logistics services centered on warehouses

in Toronto, Chicago, and Los Angeles.


Business Plan include expanding the volume of transac-

tions with East and Southeast Asian countries, notably

China, as well as the volume of U.S.-Mexico cross-border

trade.

The two principal numerical targets for the term ending

March 2008 are sales of ¥15.8 billion and operating income

of ¥0.85 billion.

YUSEN AIR & SEA SERVICE DO BRASIL LTDA.

YUSEN AIR & SEA SERVICE (CANADA) INC

YUSEN AIR & SEA SERVICE (U.S.A.) INC.

15,800850


1

2


Millions of yen

2005 2006 2007 2008

21,000

18,000

15,000

12,000

9,000

6,000

3,000

0


Consolidate our gateway function on West Coast of the U.S.

Strengthen logistics for NAFTA

11

For overall control of our European operations, we have

established a regional holding company in the Netherlands,

under which there are six freight - handling operating companies.

The Executive officer in charge of overall supervision of

European operations is stationed in Amsterdam.

Considerable attention is now focusing on the potential of

countries of Eastern Europe that have recently joined the EU

as sites for production plants for consumer goods for sale in

the markets of the older members of the EU. In particular,

automakers and auto parts makers — led by Japanese

companies — are rushing to set up plants in these new EU

members, or to expand the scale of the plants they already

have. This has, naturally, led to a rapid expansion in the

international movement of freight. YAS has subsidiaries or

representative offices in Poland, the Czech Republic,

Austria, and Turkey, among others, and we plan to use

these operational bases as the core of a new network of

high - quality goods transportation services.

Against this background, because the Eastern Europe

countries still lack sufficient infrastructure in the form of

airports or seaports capable of handling a smooth flow of

international freight forwarding, YAS is utilizing its gateways

in Western Europe — at Frankfurt, Amsterdam, and

Hamburg, as well as others — through which to direct the

flow of freight to and from East and Southeast Asia and

Eastern Europe. Thus far, our service has met with

considerab le customer approva l . We have a lso

commenced transportation services to and from Spain

utilizing our gateway ports, and business performance

is growing steadily, in line with our expectations.

Recently, Japanese automakers have also been drawing

up plans to commence business in Russia, and we are

watching developments carefully, as this could constitute

a potentially huge market.


Business Plan include expanding the volume of transactions

with East and Southeast Asian countries, notably China,

and investing in reinforcing our freight transportation

system in Europe.



of ¥1.5 billion.

YUSEN AIR & SEA SERVICE (BENELUX) B.V.YUSEN AIR & SEA SERVICE (EUROPE) B.V.

YUSEN AIR & SEA SERVICE (DEUTSCHLAND) GmbH

YUSEN AIR & SEA SERVICE (CZECH) s.r.o.

YUSEN AIR & SEA SERVICE (U.K.) LTD.

YUSEN AIR & SEA SERVICE (FRANCE) S.A.R.L.

3

YUSEN AIR & SEA SERVICE (ITALIA) S.R.L.

21,5001,500


1

2


Millions of yen

2005 2006 2007 2008

28,000

24,000

20,000

16,000

12,000

8,000

4,000

0


Strengthen our gateway function and develop logistics service in Germany, the Netherlands, etc.

Consolidate our business base in Central and Eastern Europe

Expand our operations into Russia

Europe Region

12

East Asia Region

In East Asia, the YAS Group has six consolidated subsidiaries

and two unconsolidated subsidiaries. The regional head office

is in Hong Kong, but the Executive officer in charge of the East

Asia region is stationed in Shanghai.

The Company is investing considerable management

resources in the task of strengthening its business base in

China, whose economy continues to grow year after year.

We are focusing our construction of business facilities on

the coastal region of China, particularly areas close to

major airports. As of June 2005, in addition to our local

subsidiaries in Shanghai and Beijing, we operated branch

offices (also run by locally incorporated companies) at 24

locations including some representative offices.

Our network of facilities now covers virtually all of the

Chinese coastal strip, where the majority of manufacturing

facilities are located, and we are now focusing our efforts

on strengthening the business base of each facility,

including the system for customs clearance and a network

of warehouses and collection points for gathering together

goods to be transported out of the country, or, alternatively,

for distribution to various local customers.

China’s potential as a market for consumer goods has

been in the spotlight over the past few years, but as large

parts of the country still lack sufficient infrastructure for

efficient goods distribution, we will face a difficult task in

building an internal transportation network. However, by

exploiting to the full the synergy realizable through collabo-

ration between the parent company and the Nippon Yusen

affiliate NYK Logistics (China), which provides long-

distance land transportation and distribution services, we

hope to build a finely meshed network that will serve the

needs of the entire YAS Group.


Business Plan include bolstering our marketing system,

expanding our ability to distribute goods within China, rein-

forcing our ocean freight forwarding business, and

securing the necessary cargo space required to actively

engage in the transportation of freight to Europe and

America, as well as other Asian countries.


March 2008 are sales of ¥37 billion and operating income

of ¥1.7 billion.

37,0001,700

YUSEN AIR & SEA SERVICE (KOREA) CO., LTD.

YUSEN SHENDA AIR & SEA SERVICE (SHANGHAI) LTD.YUSEN AIR & SEA SERVICE LOGISTICS (SHANGHAI) CO., LTD.

YUSEN AIR LOGISTICS (XIAMEN) CO., LTD

YUSEN AIR & SEA SERVICE (TAIWAN) LTD.

YUSEN AIR & SEA SERVICE (H.K.) LTD.YUSEN AIR & SEA SERVICE (CHINA) LTD.

YUSEN SHENDA AIR & SEA SERVICE (BEIJING) CO., LTD.


1

2


Millions of yen

2005 2006 2007 2008

49,000

42,000

35,000

28,000

21,000

14,000

7,000

0


Develop activities in China Strengthen our gateway function in coastal areasExpand to inland provinces Strengthen collaboration with our NYK Group companies

Strengthen our international transport capacity

a

b

c

13

The YAS Group has five consolidated subsidiaries and one

affiliate accounted for by the equity method operating in

the South Asia & Oceania region. The Executive officer in

charge of the region is stationed in Singapore.

Since the SARS outbreak of 2003, many companies have

come to recognize the danger of putting all their eggs in

one basket by locating their manufacturing plants solely in

China. There has thus been a move to distribute production

facilities more widely throughout the region, principally in

the member countries of ASEAN. Vietnam has stood out

particularly strongly as a viable alternative production host

country. This is all the more so as it is ideally located to

supply the Chinese market. In view of these facts,

Japanese companies have been moving into Vietnam in

some numbers.

Thailand, too, is being reassessed, from simply a production

base to a consumption market as well. There has recently

been a dramatic increase in the production volume of

motor vehicles and electric appliances in Thailand, and,

once again, Japanese companies lead the pack. In line

with these developments, there is a growing need for air

freight importation of components into Thailand, as well as

for the exportation of finished products to Europe and the

United States.

India and the Philippines are also showing considerable

potential as markets for international goods movement,

and YAS is putting effort into developing these markets.

We are also drawing up plans for moving into the markets

of certain Middle Eastern countries, as these fall under the

jurisdiction of our South Asia & Oceania region.


Business Plan include expanding our total business volume

in intra-Asia transactions, and increasing exports and

imports to and from Europe and the United States. To this

end, we will be taking measures to secure additional cargo

space.



of ¥1.35 billion.


1

2

3


Millions of yen

2005 2006 2007 2008

42,000

36,000

30,000

24,000

18,000

12,000

6,000

0


29,5001,350

TRANS ASIA SHIPPING CORPORATION BHD. (TASCO)

P.T. YUSEN AIR & SEA SERVICE INDONESIA

YUSEN AIR & SEA SERVICE (SINGAPORE) PTE. LTD.

YUSEN AIR & SEA SERVICE (AUSTRALIA) PTY. LTD.

YUSEN AIR & SEA SERVICE (THAILAND) CO., LTD.

YUSEN AIR & SEA SERVICE (VIETNAM) CO., LTD.

YUSEN AIR & SEA SERVICE (PHILIPPINES) INC.

Enhance our business base in countries where we are established (Thailand, Vietnam, Philippines, Malaysia, etc)

Expand into high growth areas (India, Middle East)

Strengthen our international transport capacity

South Asia & Oceania Region

14

Corporate GovernanceBasic policies, and steps taken

To ensure the efficient management of the entire YAS Group

and the optimal allocation of management resources, thereby

raising the corporate value of the parent company and its group,

Yusen Air & Sea Service Co., Ltd. (YAS) has established a

Groupwide management system that nonetheless recognizes

the importance of giving sufficient decision-making autonomy to

the managements of each operating company in the Group. In

the management of the Group as a whole, we place particular

importance on the following points:

1. To protect the rights and material interests of the Company’s

shareholders, and treat all shareholders fairly

2. To respect the rights and material interests of all stakeholders,

including shareholders, and maintain harmonious relationships

with them, in recognition that this is essential to the

enhancement of the corporate value.

3. To protect these rights and material interests of all our stake-

holders, we will ensure the transparency of our management

through frequent disclosure of corporate information that the

Company’s stakeholders, in our view, have the right to know

4. To ensure that the Company’s corporate governance structure

is conducive to the performance by the Company’s directors

and corporate auditors of their fundamental duties

With effect from the current period, YAS has adopted the execu-

tive officer system. The primary aim of this change is to transfer

the task of supervising the Company’s geographical segments,

which has hitherto been performed by the Company’s directors,

to the newly appointed cadre of executive officers. This change

also transfers, from the Board of Directors to the executive offi-

cers in charge of the regions, decision-making authority and

responsibilities with respect to the day-to-day conduct of busi-

ness operations. The Board of Directors will thereby be free to

focus its attentions on matters of major importance to the

management of the entire YAS Group. Accordingly, the separa-

tion of spheres of authority and responsibilities is expected to

facilitate faster decision-making. Needless to say, however, it is

impossible to efficiently conduct day-to-day operations without

considering the overall management of the Company.

Conversely, effective overall management was not feasible

without a good “hands-on” understanding of actual operations.

Corporate Social Responsibility (CSR)The CSR Committee

The CSR Committee, established in January of this year, is

charged principally with the task of clarifying the social responsi-

bilities that the Company must fulfill. The committee members

serve for one year, and the committee makes regular reports and

proposals to the Board of Directors. The Committee was initially

chaired by Vice President Shunichi Yano, who is now the

Company President: his position as chairman of the CSR

Committee has been taken by Isao Takano, who serves concur-

rently as a Board member and a Managing Executive Officer.

Three subcommittees come under the control of the CSR

Committee. The main activities undertaken by these subcommit-

tees thus far are summarized below.

1. The Compliance Subcommittee

Drafting of the employees’ code of conduct.

This code was approved by the Board of Directors on April 27 and

distributed to all staff in June.

The subcommittee is currently examining the material to be

included in a forthcoming compliance manual, as well as

measures to promote the observance of compliance rules.

The subcommittee is also devising a system of staff training in

the principles of compliance.

2. Environmental Preservation and Social Contribution

Subcommittee

The subcommittee is currently working on a draft policy state-

ment of the Company’s plans for acquiring certification the ISO

14001 environmental management systems standards.

It is also working on a draft policy statement of the Company’s

plans for initiating green purchasing.

3. Risk Management Subcommittee

On May 12 of this year the subcommittee presented the

outlines of its Manual of Basic Measures for Disaster Scenarios

to the Board of Directors: it was received with general

approval.

The subcommittee is preparing a statement on the Company’s

policy with respect to security measures.

Corporate Governance and Corporate Social Responsibility

15

Management´s Discussion and Analysis

OverviewOverall, the global economy maintained its expansionarytrend during the reporting period. Consumer spending in theUnited States showed a firm undertone, while capitalinvestment continued to recover, thanks largely toreplacement demand for information equipment. Meanwhile,China’s economy continued to grow, playing the role ofdriving force for the world’s economy together with theUnited States.In the air cargo business, against the background of solidconsumer spending in Europe and the U.S. on the one hand,and rising production volumes in China and Southeast Asiaon the other, YAS saw a sharp increase in the volume ofcomponents transported within the East-and-SoutheastAsian region, and an equally steep rise in the transport offinished products from the region to the markets of Europeand the United States. The Japanese airfreight forwardingindustry benefited from the severe congestion at ports onthe U.S. West Coast, which forced some goods owners toswitch from sea to air freight. As a result, the tonnage of aircargo handled by the whole industry during the reportingperiod topped 1.3 million tons to set an all-time record.

Business ResultsDuring the reporting period, an increase was seen inoverall activity in the cargo transport field — our corebusiness. In particular, we were able to take advantageof a steady growth in demand for air freight forwarding

services, and as a result, net sales on a consolidatedbasis posted a sharp 25.2% rise over the previousbusiness term, to ¥148,263 million (US$1,381 million).On the other hand, the cost of sales also rose in line withthe expansion of operating income, by 28.3% year-on-year, to ¥109,255 million (US$1,017 million). Gross profitwas up by a sharp 17.0%, at ¥39,008 million (US$363million), with the result that the gross profit marginslipped 1.8 percentage points from the previous term to26.3%. Selling, general and administrative expenses rose9.5% year-on-year, to ¥28,600 million (US$266 million).As a result, operating income jumped 44.1% year-on-year, to ¥10,408 million (US$97 million) from ¥7,222million for the previous term.Unlike the previous term, no impairment losses on fixedassets were reg istered for the report ing term.Accordingly, income before income taxes rose 71.2% to¥10,828 million (US$101 million), the first time it hasever surpassed ¥10 billion. Net income was up sharplyfrom the previous term, by 81.8% at ¥6,797 million(US$63 million). Earnings per share swelled from ¥173.65(assuming that the stock split carried out during the termwas made at the beginning of the previous term) to¥317.17 (US$2.95). The return on equity rose from13.2% to 20.8%.

Sales by Geographic Segment

Net SalesOperating Income

01 02 03 04 05

160,000

140,000

120,000

100,000

80,000

60,000

40,000

20,000

0

Japan

The Americas

Europe

East Asia

South-Asia & Oceania

84,249

12,470

15,261

24,262

14,131

148,26310,408

148,263Total

Net Sales / Operating Income

Unit: Millions of yen Unit: Millions of yen

56.0%

8.3%

10.1%

16.1%

9.4%

Figures in sales by geographic segment include inter-segment transactions. The total amount in the space above is not equal to operating income in the statements of income.

16

Segment Information by Business Type(Figures in Segment Information include inter-segmenttransactions.)

1. Air and sea cargoDuring the reporting period, the Company successfullyacquired a growing amount of orders for the internationalmovement of goods, especially in form of air cargo, againstthe background of a vigorous overall market. As a result,sales for this segment rose 25.5% year-on-year, to ¥144,382mill ion, while operating income was up even moredramatically, by 39.6% at ¥9,635 million.

2. TravelThe number of passengers traveling abroad on business tripsincreased compared with the previous reporting term. Inaddition, we were able to reduce operating expenses. As aresult, sales climbed 13.0% year-on-year, to ¥3,790 million,while operating income more than tripled over the previousyear, to ¥621 million.

3. OtherSales were up 21.0% at ¥731 million, and operating incomerose 18.2% to ¥156 million.

Segment Information by Business Regionals(Figures in Segment Information by Geographic Area includeinter-segment transactions.)

1. JapanSales were up 22.7% over the previous term, at ¥84,249million, while operating income posted year-on-year growth of41.3%, to ¥6,617 million.In the early part of the term under review, the volume of cargohandled was dominated by exports of digital electronicappliances to Europe and the U.S., such as flat-screentelevisions. Exports to Europe of digital cameras and parts forair conditioners were also up over the previous year. In thelatter half of the term, the volume of air cargo to the UnitedStates rose dramatically due to a rise in demand forautomotive parts to meet demand for increased vehicleproduction in the U.S. In addition, demand for cargo transport by sea from East andSoutheast Asian countries recorded a steep increase, but thecongestion at ports on the West Coast of the United Statesforced a number of manufacturers to switch to air transport,particularly for automotive parts. Moreover, a rapid increase indemand for air cargo services to China and Southeast Asiancountries was seen in order to cope with increased localproduction by Japanese makers of digital electronic appliancesand motor vehicles. By the end of the term, a falloff had takenplace in the pace of shipments of electric and electronicequipment — particularly semiconductor manufacturing



01 02 03 04 05

100,000

80,000

60,000

40,000

20,000

0

Japan Sales / Operating Income


84,2496,617

14,000

12,000

10,000

8,000

6,000

4,000

2,000

0


01 02 03 04 05

The Americas Sales / Operating Income


12,470704

18,000

15,000

12,000

9,000

6,000

3,000

0

SalesOperating Income / Loss

01 02 03 04 05

Europe Sales / Operating Income


15,2611,238

17

equipment — but exports of automotive parts retained theirvigor. As a result, air cargo exports from Japan on a tonnagebasis registered an increase of 23.9% over the previousbusiness term.Imports of fresh food and flowering plants by air were at a lowlevel in the term, but in terms of the number of importcontracts handled, a 10.7% increase was registered inautomotive parts, medical equipment, middle-of-the-rangedigital electronic appliances, and semiconductors. The volumeof sea-borne cargo imports also increased. To enable us to cope with this increased volume of goodshandled, we expanded our logistics center located next-doorto Narita Airport, and began construction of the new ChubuLogistics Center, on the same artificial island on which thenew Chubu International Airport (opened February 2005 nearNagoya) is located. Both construction projects werecompleted within the reporting period, and the facilities madea contribution to the Company’s business performance for theterm. The passenger travel business registered a firm performance.

2. The AmericasSales were up 18.6% year-on-year, at ¥12,470 million, whileoperating income jumped sharply, by 75.3%, to ¥704 million.A major increase was posted in the volume of automotive partimports transported by air, with the number of importcontracts handled by our North American operations rising6.5%. In exports, growth was registered in air transport of

automotive parts, aircraft parts, and high-tech equipmentmade in America. The amount of air freight exports, intonnage terms, grew 13.8% over the previous year. Steadygrowth was also posted by the Company’s ocean transportand logistics operations.For the purpose of preparation of the consolidated financialstatements, YAS applied an exchange rate of ¥104.21 to thedollar, the rate prevailing as of the closing of the Company’sbooks on March 31, 2005 (this compares with a rate of¥107.13 at the previous business term-end).

3. EuropeSales increased 26.3% year-on-year, to ¥15,261 million, andoperating income grew strongly, by 119.0% to ¥1,238 million.Against the background of increased exports by air from theEuropean plants of Japanese automakers and auto partsmakers to the Americas and Japan, the total amount of aircargo exports from Europe on a tonnage basis posted a23.9% year-on-year growth. In a particularly significantdevelopment, starting in the reporting period, YAS for the firsttime secured orders from a German vehicle manufacturer fordeliveries to the Americas. YAS is now emerging as a majorplayer in the trans-Atlantic automobile parts transportationbusiness, utilizing the expertise it has accumulated in East andSoutheast Asia.

On the import side, a major increase was enjoyed in thevolume of transport of consumer goods, particularly digital


01 02 03 04 05

30,000

25,000

20,000

15,000

10,000

5,000

0

18,000

15,000

12,000

9,000

6,000

3,000

0

East Asia Sales / Operating Income


24,2621,059


01 02 03 04 05

South Asia & Oceania* Sales / Operating Income


14,131790

* Strictly speaking, “South Asia & Oceania” is used for accounting purposes (geographic segmentation) and includes the Indian subcontinent, Southeast Asia and Oceania.

1818

electronic appliances, partly as a result of the stimulatoryeffect of the Athens Olympics on demand for flat-screen TVs.The amount of transport of air conditioner components alsogrew. Firm growth was also recorded in imports of vehiclecomponents from East Asia. As a result, the number ofcontracts for the import of goods into Europe by air posted ayear-on-year rise of 17.9%.For the purpose of preparation of the consolidated financialstatements, YAS applied an exchange rate of ¥141.61 to theeuro, the rate prevailing as of the closing of the Company’sbooks on March 31, 2005 (this compares with a rate of¥133.74 at the previous business term-end).

4. East AsiaAlthough sales posted a sharp year-on-year rise of 45.3%, to¥24,262 million, operating income rose only 5.2%, to ¥1,059million, owing to increased transportation costs as a result of ashortage of aircraft cargo space, and the Company’s inabilityto pass on these cost increases sufficiently to our customers. In air cargo exports, large increases were seen in exports fromHong Kong of personal computers and peripheral devices, aswell as automotive components. The Company also enjoyedan increased volume of export business from the rest ofChina, as well as from Taiwan. Judged by tonnage, theamount of goods exported by air from the entire East Asianregion was up 38.6% over the previous term. Imports by airalso registered a strong performance, with the number ofcontracts up 20.6%, largely thanks to a solid performance by

imports of semiconductors and related components intoSouth Korea. The subsidiary in Beijing, which had been jointly establishedwith a local company venture and had begun operations fromthe reporting period, was included in the scope ofconsolidation effective from the reporting period.

5. South Asia & Oceania Sales posted a 15.7% year-on-year growth, to ¥14,131 million,while operating income surged 39.2% to ¥790 million.In exports, the volume of automotive parts and digitalelectronic appliances handled — both by air and by sea —increased over the previous term. The majority of themovement of automotive parts was within the region,whereas most of the electronic appliance exports were toJapan or the United States. Additionally, the first half of theterm saw an increase in shipments of air conditioningcomponents from Thailand to Europe, and the amount ofexports by air posted a year-on-year increase of 12% in termsof tonnage. Imports by air also increased, driven mainly by agrowth in electronic components and automotive parts, withthe number of contracts up 11.5% over the previous term.


01 02 03 04 05

120,000

100,000

80,000

60,000

40,000

20,000

0

Cost of Sales


109,25535,000

30,000

25,000

20,000

15,000

10,000

5,000

0

31.0

28.0

25.0

22.0

19.0

16.0

13.0

10.001 02 03 04 05

SG&A Expenses and SG&A Expenses to Sales

Unit: Millions of yen %

28,60019.3

400

300

200

100

001 02 03 04 05

Earnings per Share

Unit: Yen

317.17

1919

Financial Position

Current assets at the end of the period stood at ¥46,171million (US$430 million), up 13.3% over the previous term-end. This is primarily attributable to an increase in tradenotes and accounts receivables and cash and time depositsresulting from the year-on-year growth in net sales.Noncurrent assets, meanwhile, stood at ¥29,314 million(US$273 million) at term-end, up ¥3,716 million year-on-year.The main factor behind this is the expansion of theCompany’s Narita Logistics Center and the construction ofthe Chubu Logistics Center at the Chubu InternationalAirport, as a consequence of which the value of buildingsand structures at term-end was up by ¥4,571 million over theprevious term-end. As a result of the above, total assets at term-end came to¥75,485 million (US$703 million), an increase of 13.8% overthe previous term-end. Current liabilities posted an increase of 6.9% over theprevious term-end, to ¥26,978 million (US$251 million), as acombined result of an increase in trade notes and accountspayables and a decrease in short-term bank loans. Owing toan increase in long-term debt, long-term liabilities increasedby 7.3% during the reporting period, to ¥11,941 million(US$111 million). Consequently, total liabilities were up 7.0%over the previous term-end, at ¥38,919 million (US$362million).In shareholders’ equity, retained earnings were up by ¥6,433

million, and shareholders’ equity increased 21.7% over theprevious term-end, to ¥35,894 million (US$334 million). Theequity ratio (shareholders’ equity as a percentage of totalassets) rose by 3.2 percentage points, to 47.6%. ROE,which was 13.2% for the previous term, rose to 20.8% forthe reporting term, and shareholders’ equity per share rosefrom ¥1,394.81 (retroactively adjusted for the stock split) atthe previous term-end to ¥1,698.40 (US$15.815).

Cash flowsNet cash provided by operating activities amounted to¥8,371 million (US$78 million), an increase of ¥4,374 million(109.4%) from the previous term. This was due to anincrease of ¥4,505 million in income before income taxes. Net cash used in investing activities increased by ¥2,963million (136.4%) over the previous term, to ¥5,136 million(US$48 million). This was mainly the result of increasedexpenditure (up ¥1,895 million) for the purchase of property,plant and equipment, and a ¥426 million decrease in theamount of cash inflow from the sale of property, plant andequipment. Net cash used in financing activities declined by ¥1,128million (46.5%) to ¥1,297 million (US$12 million), which isattributable to a decrease of ¥1,801 million in outlays for therepayment of long-term debt. As a result, cash and cashequivalents increased by ¥2,062 million during the reportingperiod, to stand at ¥11,446 million (US$107 million) at term-end, an increase of 22.0% over the previous term-end.

01 02 03 04 05

25

20

15

10

5

0

Return on Equity

%

20.8

10.0

8.0

6.0

4.0

2.0

001 02 03 04 05

Return on Total Assets

%

9.66,000

5,000

4,000

3,000

2,000

1,000

001 02 03 04 05

Capital Expenditure


5,399

20

Thousands ofU.S. dollars

Millions of yen (Note 3)

2005 2004 2005ASSETSCurrent assets:

Cash and time deposits (Note11) ¥11,450 ¥ 9,390 $106,621Trade notes and accounts receivable 32,028 29,447 298,240Deferred tax assets – current (Note 8) 824 712 7,673Other current assets 2,137 1,471 19,899Less: Allowance for doubtful accounts (268) (286) (2,496)

Total current assets 46,171 40,734 429,937

Investments and advances:Investments in securities (Note 4) 813 1,052 7,571Investments in unconsolidated subsidiaries and affiliates 849 754 7,905Deferred tax assets - non-current (Note 8) 2,097 1,878 19,527Other investments and advances 2,609 2,924 24,295

Total investments and advances 6,368 6,608 59,298

Property, plant and equipment:Buildings and structures (Note 6) 17,368 12,797 161,728Furniture and fixtures 2,883 2,584 26,846Machinery, equipment and vehicles 911 864 8,483

21,162 16,245 197,057Less: Accumulated depreciation (7,125) (6,427) (66,347)

14,037 9,818 130,710Land (Note 6) 7,621 7,632 70,966Construction in progress 13 378 121

Total property, plant and equipment 21,671 17,828 201,797

Intangible assets 1,275 1,162 11,873

Total assets ¥75,485 ¥66,332 $702,905

The accompanying notes are an integral part of the statements.

Consolidated Balance SheetsYusen Air & Sea Service Co., Ltd. and Its Consolidated Subsidiaries March 31, 2005 and 2004

21



2005 2004 2005LIABILITIES AND SHAREHOLDERS’ EQUITYCurrent liabilities:

Short-term bank loans ¥ 956 ¥ 3,627 $ 8,902Current portion of long-term debt (Note 6) 1,329 566 12,375Trade notes and accounts payable 16,379 14,769 152,519Accrued income taxes 2,421 1,718 22,544Accrued bonus to employees 1,453 1,196 13,530Deferred tax liabilities – current (Note 8) 3 3 28Other current liabilities 4,437 3,368 41,317

Total current liabilities 26,978 25,247 251,215

Long-term liabilities:Long-term debt (Note 6) 6,614 5,649 61,589Accrued retirement benefits to:

Employees (Note 7) 4,341 4,420 40,423Directors and statutory auditors 299 308 2,784

4,640 4,728 43,207Deferred tax liabilities - non-current (Note 8) 366 398 3,408Excess of underlying equity in net assets of

consolidated subsidiaries over investment cost 140 185 1,304Other long-term liabilities 181 168 1,685

Total long-term liabilities 11,941 11,128 111,193

Minority interests in consolidated subsidiaries 672 469 6,258

Commitments and contingent liabilities (Note 9)

Shareholders’ equity:Common stock, no par value;

Authorized; 80,000,000 and 40,000,000 shares at March 31, 2005 and 2004

Issued; 21,110,400 and 17,592,000 shares at March 31, 2005 and 2004 4,301 4,301 40,050

Additional paid-in capital 4,744 4,744 44,175Retained earnings (Note 13) 28,202 21,769 262,613Unrealized gain on securities 97 129 903Adjustments on foreign currency statement translation (1,342) (1,419) (12,496)Less: Treasury stock, at cost

March 31,2005 — 42,988 shares (108) — (1,006)March 31,2004 — 18,700 shares — (36) —

Total shareholders' equity 35,894 29,488 334,239

Total liabilities and shareholders' equity ¥75,485 ¥66,332 $702,905

U.S. dollarsYen (Note 3)

Shareholders' equity per share (Note15) ¥ 1,698.40 ¥1,673.78 $ 15.815


22



2005 2004 2005

Net sales ¥148,263 ¥118,465 $1,380,603

Cost of sales 109,255 85,132 1,017,366Gross profit 39,008 33,333 363,237

Selling, general and administrative expenses (Note 10) 28,600 26,111 266,319Operating income 10,408 7,222 96,918

Other income (expenses):Interest and dividend income 109 91 1,015Interest expense (188) (234) (1,751)Loss on write-down of investments in securities (1) (178) (9)Foreign currency exchange gain, net 255 368 2,375Equity in earnings of unconsolidated subsidiaries and affiliates 97 67 903Compensation for expropriation — 182 —Provision of allowance for doubtful accounts — (293) —Loss from impairment of fixed assets — (902) —Loss on early repayment of long-term debt (80) — (745)Others, net 228 0 2,123

420 (899) 3,911Income before income taxes 10,828 6,323 100,829

Income taxes (Note 8):Current 4,194 3,087 39,054Deferred (342) (724) (3,185)

3,852 2,363 35,8696,976 3,960 64,960

Minority interests in net income of consolidated subsidiaries (179) (222) (1,667)

Net income ¥ 6,797 ¥ 3,738 $ 63,293

U.S. dollarsYen (Note 3)

Per share:Net income — primary (Note15) ¥317.17 ¥208.38 $2.953Net income — fully diluted (Note15) — — —Dividends 30.00 15.00 0.279


Consolidated Statements of IncomeYusen Air & Sea Service Co., Ltd. and Its Consolidated Subsidiaries for the years ended March 31, 2005 and 2004

23

Millions of yen

AdjustmentsNumber of on foreignshares of Additional Unrealized currency

common stock Common paid-in Retained gain (loss) statement Treasury(thousands) stock capital earnings on securities translation stock

Balance as at March 31, 2003 17,592 ¥4,301 ¥4,744 ¥18,460 ¥55 ¥ (412) ¥ (11)Net income for the year ended March 31, 2004 — — — 3,738 — — —Cash dividends — — — (325) — — —Directors' and statutory auditors' bonus — — — (71) — — —Decrease in retained earnings due to inclusion

in consolidation of additional subsidiaries — — — (29) — — —Decrease in retained earnings due to exclusion

from application of the equity method of investment in an affiliate — — — (4) — — —

Unrealized gain on securities — — — — 74 — —Change in foreign currency translation adjustments — — — — — (1,007) —Purchase of treasury stock — — — — — — (25)

Balance as at March 31, 2004 17,592 4,301 4,744 21,769 129 (1,419) (36)Increase in the number of shares by stock split 3,518 — — — — — —Net income for the year ended March 31, 2005 — — — 6,797 — — —Cash dividends — — — (290) — — —Directors' and statutory auditors' bonus — — — (74) — — —Unrealized loss on securities — — — — (32) — —Change in foreign currency translation adjustments — — — — — 77 —Purchase of treasury stock — — — — — — (72)

Balance as at March 31, 2005 21,110 ¥4,301 ¥4,744 ¥28,202 ¥97 ¥(1,342) ¥(108)

Thousands of U.S. dollars (Note 3)

AdjustmentsNumber of on foreignshares of Additional Net unrealized currency

common stock Common paid-in Retained gain (loss) statement Treasury(thousands) stock capital earnings on securities translation stock

Balance as at March 31, 2004 17,592 $40,050 $44,175 $202,710 $ 1,201 $(13,213) $(335)Increase in the number of shares by stock split 3,518 — — — — — —Net income for the year ended March 31, 2005 — — — 63,293 — — —Cash dividends — — — (2,701) — — —Directors' and statutory auditors' bonus — — — (689) — — —Unrealized loss on securities — — — — (298) — —Change in foreign currency translation adjustments — — — — — 717 —Purchase of treasury stock — — — — — — (671)

Balance as at March 31, 2005 21,110 $40,050 $44,175 $262,613 $ 903 $(12,496) $(1,006)


Consolidated Statements of Shareholders’ EquityYusen Air & Sea Service Co., Ltd. and Its Consolidated Subsidiaries for the years ended March 31, 2005 and 2004

24



2005 2004 2005

Cash flows from operating activities:Income before income taxes ¥10,828 ¥6,323 $100,829Depreciation and amortization 1,360 1,245 12,664Loss from impairment of fixed assets — 902 —Amortization of difference between investment costs and equityin net assets acquired of consolidated subsidiaries (45) (22) (419)

Provision (reversal) for accrued retirement benefits to employees (78) 318 (726)Interest and dividend income (109) (91) (1,015)Interest expense 188 234 1,751Equity in earnings of affiliates (97) (67) (903)Increase in trade notes and accounts receivable (2,474) (2,879) (23,038)Increase in trade notes and accounts payable 1,510 1,908 14,061Gain on sale of investments in securities (15) (30) (140)Loss on write-down of investments in securities 1 178 9Loss on write-down of golf club membership 18 16 168Provision (reversal) of allowance for doubtful accounts (12) 264 (112)Other, net 825 (109) 7,682

11,900 8,190 110,811Interest and dividend received 166 173 1,546Interest paid (191) (237) (1,778)Income taxes paid (3,504) (4,129) (32,629)

Net cash provided by operating activities 8,371 3,997 77,950

Cash flows from investing activities:Purchase of property, plant and equipment (5,399) (3,504) (50,275)Proceeds from sale of property, plant and equipment 21 447 196Purchase of investments in securities (62) (84) (577)Proceeds from sale of investments in securities 109 145 1,015Purchase of consolidated subsidiaries (37) (79) (345)Lending of loans (48) (82) (447)Collection of loans 93 138 866Others 187 846 1,741

Net cash used in investing activities (5,136) (2,173) (47,826)

Cash flows from financing activities:Short-term bank loans, net (2,675) (1,373) (24,909)Borrowing of long-term debt 2,800 2,100 26,073Repayment of long-term debt (1,057) (2,858) (9,843)Cash dividends paid (290) (325) (2,700)Cash dividends paid to minority shareholders (10) (4) (93)Other, net (65) 35 (605)

Net cash used in financing activities (1,297) (2,425) (12,077)

Effect of exchange rate changes on cash and cash equivalents 98 (188) 912Increase (Decrease) in cash and cash equivalents 2,036 (789) 18,959Cash and cash equivalents at beginning of year 9,384 9,196 87,382Adjustments of new consolidated subsidiaries on cash and cash equivalents 26 977 242

Cash and cash equivalents at end of year (Note 11) ¥11,446 ¥9,384 $106,583


Consolidated Statements of Cash FlowsYusen Air & Sea Service Co., Ltd. and Its Consolidated Subsidiaries for the years ended March 31, 2005 and 2004

25

1. Basis of Presenting Consolidated FinancialStatements

(1) Accounting Principles and PresentationThe accompanying consolidated financial statements have beenprepared based on the accounts maintained by Yusen Air & SeaService Co., Ltd. (the “Company”) and its consolidatedsubsidiaries in accordance with the provisions set forth in theJapanese Commercial Code (the “Code”) and the Securities and

Exchange Law, and in conformity with accounting principles andpractices generally accepted in Japan, which are different incertain respects from the application and disclosure requirementsof International Financial Reporting Standards.

Certain items presented in the consolidated financial state-ments submitted to the Director of Kanto Finance Bureau in Japanhave been reclassified in these accounts for the convenience ofreaders outside Japan.

(2) Scope of ConsolidationThe Company had 43 subsidiaries as at March 31, 2005 (44 at March 31, 2004). The consolidated financial statements include the accountsof the Company and 33 of its subsidiaries as at March 31, 2005 (33 at March 31, 2004). The 33 major subsidiaries which have been consoli-dated with the Company are listed below:

Equity ownershipConsolidated subsidiaries percentage (*1) Capital stock (*1)

Yusen Air & Sea Service (U.S.A.) Inc. 100.00% US$ 14,000 thousandYusen Air & Sea Service (H. K.) Ltd. 100.00 HK$ 55,000 thousandYusen Air & Sea Service (Singapore) Pte. Ltd. 100.00 S$ 16,700 thousandYusen Air & Sea Service (Europe) B.V. 100.00 EURO 18,518 thousandYusen Air & Sea Service (Benelux) B.V. 100.00(*2) EURO 700 thousandYusen Air & Sea Service (Deutschland) GmbH. 100.00(*2) EURO 4,000 thousandYusen Air & Sea Service (U.K.) Ltd. 100.00(*2) STG 1,050 thousandYusen Air & Sea Service (Australia) Pty. Ltd. 100.00(*3) A$ 1,500 thousandYusen Air & Sea Service (Canada) Inc. 100.00 C$ 5,000 thousandYusen Air & Sea Service (France) S.a.r.l. 100.00(*2) EURO 4,700 thousandYusen Air & Sea Service (Taiwan) Ltd. 100.00(*4) NT$ 22,505 thousandYusen Air & Sea Service (Italia) S.r.l. 100.00(*2) EURO 774 thousandYusen Air & Sea Service Holdings, Inc. 100.00(*5) US$ 3,200 thousandYusen Air & Sea Service (China) Ltd. 100.00(*6) HK$ 11,000 thousandP.T. Yusen & Sea Service Indonesia 60.00(*7) US$ 177 thousandYusen Air & Sea Service Management (Thailand) Co., Ltd. 49.00(*8) THB 10 millionYusen Air & Sea Service (Thailand) Co., Ltd. 100.00(*9) THB 100 millionYusen Shenda Air & Sea Service (Shanghai) Ltd. 50.00(*10) RMB 8,277 thousandYusen Air & Sea Service (Beijing) Co., Ltd. 75.00(*11) RMB 8,277 thousandYusen Air & Sea Service (Korea) Co., Ltd. 100.00 KRW 2,000 millionYusen Air Logistics (Hamamatsu) Co., Ltd. 100.00 ¥20 millionYusen Air & Sea Service Keihin Trans Co., Ltd. 90.00 ¥36 millionYusen Air & Sea Service (Kitakanto) Co., Ltd. 75.00 ¥50 millionYusen Air & Sea Service (Tsukuba) Co., Ltd. 65.00 ¥50 millionYusen Travel Co., Ltd. 100.00 ¥270 millionYusen Air & Sea Service (Shinshu) Co., Ltd. 80.00 ¥50 millionYusen Air & Sea Service (Tohoku) Co., Ltd. 80.00 ¥30 millionYusen Air Logistics (Nagoya) Co., Ltd. 100.00 ¥20 millionRyowa Diamond Air Service Co., Ltd. 99.17(*12) ¥50 millionYusen Air & Sea Service (Kyushu) Co., Ltd. 100.00 ¥30 millionYusen Air & Sea Service (Hokuriku) Co., Ltd. 100.00 ¥20 millionYusen Air & Sea Service (Chugoku) Co., Ltd. 80.00 ¥30 millionYusen Air Staff Service Co., Ltd. 100.00 ¥20 million

( *1) as of March 31, 2005( *2) owned 100.00% by Yusen Air & Sea Service (Europe) B.V. ( *3) owned 80.00% by the Company, 20.00% by Yusen Air & Sea Service (Singapore) Pte. Ltd. ( *4) owned 60.01% by the Company, 39.99% by Yusen Air & Sea Service (H.K.) Ltd.( *5) owned 100.00% by Yusen Air & Sea Service (U.S.A.) Inc.( *6) owned 100.00% by Yusen Air & Sea Service (H.K.) Ltd.( *7) owned 10.50% by the Company, 49.50% by Yusen Air & Sea Service (Singapore) Pte. Ltd.( *8) owned 49.00% by Yusen Air & Sea Service (Singapore) Pte. Ltd.( *9) owned 51.00% by Yusen Air & Sea Service Management (Thailand) Co., Ltd., 49.00% by Yusen Air & Sea Service (Singapore) Pte. Ltd. (*10) owned 50.00% by Yusen Air & Sea Service (H.K.) Ltd.(*11) owned 75.00% by Yusen Air & Sea Service (Singapore) Pte. Ltd.(*12) owned 99.17% by Yusen Travel Co., Ltd.

The Company and these consolidated subsidiaries are together referred to as "the Companies" hereinafter.

Combined total assets, net sales, net income and retained earnings of the remaining 10 (11 for 2004) subsidiaries, are not significant inrelation to those of the consolidated financial statements of the Companies.

Notes to Consolidated Financial StatementsYusen Air & Sea Service Co., Ltd. and Its Consolidated Subsidiaries

26

(3) Consolidation and EliminationFor the purposes of preparing the consolidated financial statements,all significant intercompany transactions, account balances andunrealized profits among the Companies have been eliminated, andthe portion thereof attributable to minority interests is charged tominority interests.

Elimination of cost of investments in consolidated subsidiarieswith the underlying equity in net assets of such subsidiaries at thetime of acquisition has been made to include equity in the netincome (loss) of the subsidiaries earned subsequent to the acquisi-tion of each block of shares. Any difference between the cost of aninvestment in a subsidiary and the amount of underlying equity innet assets of the subsidiary at the time of acquisition is in principledeferred and amortized over 5-year period on a straight-line basis. Ifsuch amount is not material, it is directly charged/credited againstincome for the year.

(4) Investments in Unconsolidated Subsidiaries and AffiliatesAt March 31, 2005, the Company had 10 (11 for 2004) unconsolidated subsidiaries and 3 (4 for 2004) affiliates, andinvestments in 3 (4 for 2004) unconsolidated subsidiaries and 1 (1for 2004) affiliate are accounted for by the equity method wherebythe costs of investments are adjusted for subsequent movementof equity in undistributed earnings of the subsidiaries and affiliate.

Investments in the remaining unconsolidated subsidiaries andaffiliates are stated at cost.

(5) Revaluation of Assets and Liabilities of SubsidiariesThe Company has fully applied the fair value accounting method toassets and liabilities held by the subsidiaries as of the date of theirinclusion in the scope of consolidation.

2. Summary of Significant Accounting Policies(1) Financial Instruments

(a) Investments in securities and Investments in unconsolidated subsidiaries and affiliatesInvestments of the Company in equity securities issued byunconsolidated subsidiaries and affiliates are accounted for bythe equity method. Exceptionally, investments in certain unconsolidated subsidiaries and affiliates are stated at cost,which is determined by the moving-average method, becausethe effect of application of the equity method would beimmaterial.

Other securities for which market quotations are availableare stated at fair value. Net unrealized gain or loss on thesesecurities is reported as a separate item in the shareholders’equity by a net-of-tax amount.

Other securities for which market quotations are unavailable are stated at cost, which is determined by moving-average method, except as stated in the paragraph below.

In case where the fair value of equity securities issued byunconsolidated subsidiaries and affiliates or other securities hasdeclined significantly and such impairment of the value is notdeemed temporary, those securities are written down to thefair value and the resulting losses are included in net profit or

loss for the period.(b) DerivativesAll derivatives are stated at fair value, with changes in fair valueincluded in net profit or loss for the period in which they arise,except for derivatives that are designated as “hedging instruments.” (see (c) Hedge Accounting below)(c) Hedge AccountingThe derivatives designated as hedging instruments by theCompanies are interest rate swaps and currency swaps. Therelated hedged items are long-term bank loans and long-termadvances.

The hedging interest rate swaps and currency swaps thatmeet the conditions for applying the hedge accounting are notmeasured at fair value. They are assumed together with thehedged asset or liability as a synthetic instrument withconverted terms. Net cash flow from interest rate swapcontracts is reflected to adjust the interests on the hedgedasset or liability, and currency swaps are assigned to the claimand debt in foreign currency which is being hedged, rather thandeferring changes in fair value of those contracts.

The Companies do not anticipate incurring significant lossesfrom the derivative arrangements due to the event of nonperformance by the counterparties.

(2) Property, Plant and EquipmentProperty, plant and equipment are stated at cost. Depreciation forproperty, plant and equipment held by the Company and domesticconsolidated subsidiaries is computed on the declining-balancemethod. Useful lives of assets are generally within the followingrange:Buildings and structures 3~60 yearsFurniture and fixtures 2~20 yearsMachinery, equipment and vehicles 4~6 yearsExceptionally, buildings and structures at Toyooka distributioncenter, Iwata distribution center and Yusen Air Fukumoto Buildingare depreciated by the straight-line method.

Depreciation of the tangible fixed assets held by overseasconsolidated subsidiaries is generally based on the straight-linemethod.

Normal repairs and maintenance, including minor renewalsand improvements, are charged to income as incurred.

(3) Intangible assetsAmortization of intangible assets is computed using the straight-line method, over a period prescribed by the Japanese tax laws.

Software costs for internal use are amortized over theirexpected useful lives (5 years) on a straight-line basis.

(4) Accounting standard for impairment of fixed assetsOn August 9, 2002, the Business Accounting Council in Japanissued “Accounting Standard for Impairment of Fixed Assets”.The standard requires that fixed assets be reviewed for impairment whenever events or changes in circumstances indi-cate that the carrying amount of an asset may not be recoverable.An impairment loss is recognized in the income statement by

Notes to Consolidated Financial Statements

27

reducing the carrying amount of impaired assets or a group ofassets to the recoverable amount to be measured as the higher ofnet selling price and value in use.

Effective from the year ended March 31, 2004, the Companiesadopted the standard. For the year ended March 31, 2004, as aresult of adoption of the standard, income before income taxeshas decreased by ¥902 million ($8,535 thousand) as comparedwith the amounts which would have been reported if the previousstandard had been applied consistently. For the year ended March31, 2005, no impairment loss was recognized.

(5) Allowance for Doubtful AccountsThe Company and its domestic consolidated subsidiaries providethe allowance for doubtful accounts by the method which uses thepercentage of their own actual bad debt loss against the balance oftotal receivables in addition to the amount of uncollectible receivables estimated on individually identified accounts. Overseasconsolidated subsidiaries provide mainly for the amount of uncollectible receivables estimated on an individual basis.

(6) Accrued Bonuses to EmployeesAccrued bonuses to employees are provided for the portionrelevant to the current year of the estimated amount of bonuspayment in summer.

(7) Accrued retirement benefitsThe Company, its domestic consolidated subsidiaries and certainoverseas consolidated subsidiaries have funded pension plans tocover the employees’ retirement benefits. The amount of suchretirement benefits is determined by reference to the latest rate ofpay, length of service and conditions under which the retirementsoccur. Past service obligations are charged to income as incurred.Unrecognized actuarial differences are amortized on a straight-linebasis over the period of 10 years from the following year in whichthey arise.

The Company and its 3 consolidated subsidiaries provide forlump-sum retirement payments for directors and statutory auditors by amounts that would be required pursuant to theinternal regulation if they retired at the balance sheet dates.

(8) Foreign Currency TranslationAll monetary assets and liabilities denominated in foreign currencies, whether long-term or short-term, are translated intoJapanese yen at the exchange rates prevailing at the balancesheet date. Resulting gains and losses are included in net profit orloss for the period.

(9) Translation of Foreign Currency Financial Statements(Accounts of Overseas Subsidiaries and Affiliates)

Foreign currency financial statements of overseas consolidatedsubsidiaries, and overseas subsidiaries and affiliates accounted for bythe equity method are translated into Japanese yen at currentexchange rates prevailing at the relevant balance sheet dates ofthese subsidiaries and affiliates, except that shareholders’ equity aretranslated at historical rates.

The net balance is recorded as “Adjustments on foreign currencystatement translation” in the shareholders’ equity of the consolidatedbalance sheet.

(10) Income TaxesIncome taxes of the Company and its domestic subsidiariesconsist of corporate income tax, local inhabitants tax and enterprise tax.

The Company and its subsidiaries adopted deferred taxaccounting to recognize deferred tax assets and liabilities for theexpected future tax consequences of temporary differencesbetween the carrying amounts and the tax bases of assets andliabilities.

(11) Accounting for the Consumption TaxIn Japan, the consumption tax is imposed at a flat rate of 5% on alldomestic consumption of goods and services (with certain exemptions). The consumption tax imposed on the Companies’domestic sales to customers is withheld by the Companies at thetime of sales and is paid to the national government subsequently.The consumption tax withheld upon sale and the consumption taxpaid by the Companies on the purchases of goods and servicesare not included in the related amounts in the accompanyingconsolidated statements of income.

(12) Accounting for LeasesFinance leases other than those that are deemed to transfer theownership of the leased assets to lessees are accounted for bythe method that is applicable to ordinary operating leases.

(13) Net Income and Dividends per Share“Shareholders’ equity per share” is computed based on theoutstanding shares of common stock at relevant balance sheetdates.

“Net income per share primary” is computed based on theweighted average number of shares of common stockoutstanding during each year.

“Net income per share fully diluted” for the years endedMarch 31, 2005 and 2004 is not shown in the consolidated statements of income since there were no outstanding convertiblebonds or other common stock equivalents.

“Cash dividends per share” shown for each year in the consolidated statement of income represent dividends declared asapplicable to the respective year rather than those paid in eachyear.

(14) Appropriation of Retained EarningsUnder the Japanese Commercial Code and the Articles ofIncorporation of the Company, the plan for appropriation of retainedearnings (primarily for cash dividend payments) proposed by theboard of directors should be approved at the shareholders’ meetingwhich must be held within three months after the end of eachfinancial year. The appropriation of retained earnings reflected inthe accompanying cons

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