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2006 Finance Info

Restatement of Consolidated / Non-consolidated Financial Statements for the first half of the fiscal year ending December 31, 2005

Tokyo, Japan - June 29, 2006 - Trend Micro (TSE: 4704; Nasdaq: TMIC), a leader in network antivirus and Internet content security software and services, today is restating its Consolidated / Non-consolidated Financial Statements for the first half of the fiscal year ending December 31, 2005, which were previously announced on August 3, 2005.

1. Reasons for Restatement
After the discussion with SEC on U.S. GAAP , some costs, which were historically disclosed as part of the operating expenses are included in cost of sales.
This change does not affect net sales, operating income, net income before tax and net income.

2.Restatement
Refer to the following.

Restatement of Consolidated / Non-consolidated Financial Statements for the first half of the fiscal year ending December 31, 2005

Amendments (Revised figures are underlined.)

CONSOLIDATED STATEMENTS OF INCOME NOTES TO CONSOLIDATED FINANCIAL STATEMEMENTS

Original

(Thousands of yen)
Account For the six months ended June 30,2004 For the six months ended June 30,2005 For the year ended December 31,2004
  Amount % Amount % Amount %
Net sales 28,464,157 100.0 34,489,740 100.0 62,049,254 100.0
Cost of sales 1,926,769   1,191,244   3,236,499  
Gross profit 26,537,388 93.2 33,298,496 96.5 58,812,755 94.8
Operating expenses:
Selling 7,457,213

  10,338,819   16,009,409  
Research and development and maintenance 2,278,974   2,891,775   4,858,259  
Customer support 2,717,490   3,190,146   5,723,426  
General and administrative 2,705,635   4,106,616   6,143,985  
Total operating expenses 15,159,312 53.2 20,527,356 59.5 32,735,079 52.8
Operating income 11,378,076 40.0 12,771,140 37.0 26,077,676 42.0

Amended

(Thousands of yen)
Account For the six months ended June 30,2004 For the six months ended June 30,2005 For the year ended December 31,2004
  Amount % Amount % Amount %
Net sales 28,464,157 100.0 34,489,740 100.0 62,049,254 100.0
Cost of sales            
Amortization of capitalized software, and Materials 1,926,769   1,191,244   3,236,499  
Maintenance 1,051,260   694,846   2,260,934  
Customer support 2,717,490   3,190,146   5,723,426  
  5,695,519 20.0 5,076,236 14.7 11,220,859 18.1
Operating expenses:
Selling 7,457,213   10,338,819   16,009,409  
Research and development 1,227,714   2,196,929   2,597,325  
General and administrative 2,705,635   4,106,616   6,143,985  
Total operating expenses 11,390,562 40.0 16,642,364 48.3 24,750,719 39.9
Operating income 11,378,076 40.0 12,771,140 37.0 26,077,676 42.0

Summary of significant accounting policies

Restatements

Amended
Maintenance costs, which were historically disclosed as part of the "Research and development and maintenance” line item within operating expenses in the semi-annual consolidated statements of income, are included in cost of sales and figures for the six months ended June 30, 2004 and 2005 have been restated to reflect such amendment. In addition, customer support expenses, which were disclosed as a part of operating expenses, are also included in cost of sales and figures for the six months ended June 30, 2004 and 2005 have been restated to reflect such amendment.


Pro forma stock-based compensation expense has been revised to reflect the corrections in the amortization period, expected life assumptions and volatilities used to determine stock-based compensation expense. This correction impacts the pro forma net income and pro forma net income per share previously disclosed in the

footnotes to the consolidated financial statements for the six months ended June 30, 2004 and 200 5. As a result, the pro forma net income for the six months ended June 30, 2004 decreased by (Yen) 515,201 thousand and for the six months ended June 30, 200 5 in creased by (Yen) 104,189 thousand , compared to the amounts previously presented. T he pro forma basic net income per share for the six months ended June 30, 2004 decreased by (Yen) 3.88 and for the six months ended June 30, 2005 in creased by (Yen) 0.78, compared to the amounts previously presented. The pro forma diluted net income per share for the six months ended June 30, 2004 decreased by (Yen) 3.80 and for the six months ended June 30, 2005 in creased by (Yen) 0.76 , compared to the amounts previously presented.

Stock-based compensation
The Company accounts for its stock-based incentive awards in accordance with the intrinsic value method as per APB No. 25, "Accounting for Stock Issued to Employees ” and related interpretations. The Company complies with the disclosure provisions of FAS No. 123, "Accounting for Stock-Based Compensation”, as amended by FAS No. 148.

In October 1995, SFAS 123 established a fair value based method of accounting for employee stock based compensation. If compensation cost for the stock options with warrants, and the stock options with Stock acquisition rights been determined based on the fair value at the grant dates, as prescribed by SFAS 123, the Company’s pro forma net income and net income per share would have been as follows:

Original

Thousands of Yen, except per share data

For the six

months ended

June 30,2004

For the six

months ended

June 30,2005

For the year

ended

December 31,2004

Net income:

As reported

6,969,007

8,490,156

15,874,836

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

(1,058,726)

(1,758,066)

(2,640,021)

Pro forma net income

5,910,281

6,732,090

13,234,815

Net income per share:

As reported—

Basic

(Yen)52.41

(Yen)63.67

(Yen)120.64

Diluted

51.47

62.71

118.59

Pro forma net income—

Basic

(Yen)44.45

(Yen)50.49

(Yen)100.58

Diluted

43.65

49.73

98.87


The fair values of the stock options with Stock acquisition rights were estimated on the date of grant using the Black - Scholes option pricing model with the following assumptions used for grants during the first six months ended June 30, 2004 and they ear ended December 31, 2004; expected life of 3.04 years, volatility of 59.20% and dividend yield of 0.32% for first half of 2004; expected life of 3.04-3.08 years, volatility of 52.41-59.20% and dividend yield of 0.28-0.32% f or 2004; and risk-free interest rates of 0.32% for options granted during the first half of 2004, and risk-free interest rates of ranging from 0.27% to 0.32% for options granted during the year ended December 31, 2004. The fair value per share of options granted above during first half of 2004 and fiscal 2004 were (Yen)1,682 and (Yen)1,682 to 1,788, respectively. There was no additional issuance of Stock acquisition rights as stock options during the first six months ended June 30, 2005.


<Amended>

Thousands of Yen, except per share data

For the six

months ended

June 30,2004

For the six

months ended

June 30,2005

For the year

ended

December 31,2004

Net income:

As reported

6,969,007

8,490,156

15,874,836

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

(1 ,573,927 )

(1, 653,877 )

( 3,319,609 )

Pro forma net income

5, 395,080

6,836,279

12,555,227

Net income per share:

As reported—

Basic

(Yen)52.41

(Yen)63.67

(Yen)120.64

Diluted

51.47

62.71

118.59

Pro forma net income—

Basic

(Yen) 40.57

(Yen) 51.27

(Yen) 95.41

Diluted

39.85

50.49

93.79

The fair values of the stock options with Stock acquisition rights were estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions used for grants during the first six months ended June 30, 2004 and the year ended December 31, 2004; expected life of 3.04 years, volatility of 59.20% and dividend yield of 0.32% for first half of 2004; expected life of 3.04-3.08 years, volatility of 52.41-59.20% and dividend yield of 0.28-0.32% for 2004; and risk-free interest rates of 0.32% for options granted during the first h alf of 2004, an d risk-free interest rates of ranging from 0.27% to 0.32% for options granted during the year ended December 31, 2004. The fair value per share of options granted above during first half of 2004 and fiscal 2004 were (Yen)1,682 and (Yen)1,682 to 1,788, respectively. There was no additional issuance of Stock acquisition rights as stock options during the first six months ended June 30, 2005.

Research and development and maintenance costs, and software development costs

<Original>

Research and development and maintenance costs in operating expenses are comprised of research and development costs and maintenance costs.


Research and development costs incurred up to the point where all substantial testing for the original English version product is complete, are charged to income. Such research and development costs charged to income were (Yen)1,227,714 thousand and (Yen)2,196,929 thousand ($19,792 thousands) for the six months ended June 30, 2004 and 2005, respectively.

Maintenance costs are fees, which relate to product version updates to enable product to cope with newly prevailing computer viruses and bug fixing. The maintenance costs were (Yen)1,051,260 thousand and (Yen)694,846 thousand ($6,260 thousand) for the six months ended June 30, 2004 and 2005, respectively.

Amended
Research and development costs incurred up to the point where all substantial testing for the original English version product is complete, are charged to income as operating expense. Such research and development costs charged to income were (Yen)1,227,714 thousand and (Yen)2,196,929 thousand ($19,792 thousands) for the six months ended June 30, 2004 and 2005, respectively.
Maintenance costs are fees, which relate to product version updates to enable product to cope with newly prevailing computer viruses and bug fixing, are recorded as cost of sales. The maintenance costs were (Yen)1,051,260 thousand and (Yen)694,846 thousand ($6,260thousand) for the six months ended June 30, 2004 and 2005, respectively.

(Following footnote below is newly added after "Status of manufacturing and actual sales”)


Customer support costs

<Amended>

Customer support costs are primarily payroll, related expenses and outsourced customer service fees, which relate to activities such as maintenance of customer’s database, education promotions to customers, investigation for appropriate customer support methodologies, responses to customer’s questions and sales promotions to customers via telephone. Customer support costs in cost of sales were (Yen) 2,717,490 thousand and (Yen) 3,190,146 thousand ($28,740 thousand) for the six months ended June 30, 2004 and 2005, respectively.

Non-consolidated semi-annual income statements

<Original>

(Thousands of yen)

Period

Account

For the first half of

the previous fiscal year

For the first half of

the current fiscal year

Condensed income statement for

the previous fiscal year

(

From January 1, 2004

To June 30, 2004

)

(

From January 1, 2005

To June 30, 2005

)

(

From January 1, 2004

To December 31, 2004

)

Amount

Percentage

Amount

Percentage

Amount

Percentage

  

%

 

%

 

%

 

Net Sales

 

18,409,928

100.0

22,421,912

100.0

39,771,157

100.0

 

Cost of sales

*6

1,009,709

5.5

632,448

2.8

1,937,717

4.9

 

Gross profit

 

17,400,219

94.5

21,789,464

97.2

37,833,439

95.1

 

Selling, general and administrative expenses

 

8,427,204

45.8

11,430,241

51.0

18,506,382

46.5

*1,6

 

Operating income

 

8,973,014

48.7

10,359,222

46.2

19,327,056

48.6

















<Amended>

(Thousands of yen)

Period

Account

For the first half of

the previous fiscal year

For the first half of

the current fiscal year

Condensed income statement for

the previous fiscal year

(

From January 1, 2004

To June 30, 2004

)

(

From January 1, 2005

To June 30, 2005

)

(

From January 1, 2004

To December 31, 2004

)

Amount

Percentage

Amount

Percentage

Amount

Percentage

  

%

 

%

 

%

 

Net Sales

 

18,409,928

100.0

22,421,912

100.0

39,771,157

100.0

 

Cost of sales

*6

3,415,490

18.6

2,777,909

12.4

7,143,023

18.0

 

Gross profit

 

14,994,438

81.4

19,644,003

87.6

32,628,133

82.0

 

Selling, general and administrative expenses

 

6,021,424

32.7

9,284,780

41.4

13,301,077

33.4

*1,6

 

Operating income

 

8,973,014

48.7

10,359,222

46.2

19,327,056

48.6
















Note to Non-consolidated semi-annual income statement

<Original>

(Thousands of yen)

For the first half of the previous fiscal year

For the first half of the current fiscal year

For the previous fiscal year

(

From January 1, 2004

To June 30, 2004

)

(

From January 1, 2005

To June 30, 2005

)

(

From January 1, 2004

To December 31, 2004

)

*1 Major components of selling,

general and administrative expenses

are as follows

*1 Major components of selling,

general and administrative expenses

are as follows

*1 Major components of selling,

general and administrative expenses

are as follows

Sales promotions

and Advertising

Salaries and bonuses

Retirement benefit costs

Depreciation expense

Outside service fee

Research and

development costs

Software maintenance fee

Intercompany charge

1,594,464

1,321,643

90,934

56,981

1,115,274

1,229,277

1,051,144

625,841

 

Sales promotions

and Advertising

Salaries and bonuses

Retirement benefit costs Depreciation expense

Outside service fee

Research and

development costs

Software maintenance fee

Intercompany charge

2,870,044

1,400,219

70,085

53,732

1,215,907

1,997,928

694,049

1,319,009

 

Sales promotions

and Advertising

Salaries and bonuses

Retirement benefit costs

Depreciation expense

Outside service fee

Research and

development costs

Software maintenance fee

Intercompany charge

3,625,288

2,791,862

182,812

121,073

2,440,765

2,600,209

2,260,626

1,554,453

 















<Amended>

(Thousands of yen)

For the first half of the previous fiscal year

For the first half of the current fiscal year

For the previous fiscal year

(

From January 1, 2004

To June 30, 2004

)

(

From January 1, 2005

To June 30, 2005

)

(

From January 1, 2004

To December 31, 2004

)

*1 Major components of selling,

general and administrative expenses

are as follows

*1 Major components of selling,

general and administrative expenses

are as follows

*1 Major components of selling,

general and administrative expenses

are as follows

Sales promotions

and Advertising

Salaries and bonuses

Retirement benefit costs

Depreciation expense

Outside service fee

Research and

development costs

Intercompany charge

1,5 86 , 871

1, 056 , 742

72,048

47,281

449,578

1,229,277

625,841

 

Sales promotions

and Advertising

Salaries and bonuses

Retirement benefit costs Depreciation expense

Outside service fee

Research and

development costs

Intercompany charge

2,869,619

1,172,729

54,909

44,497

467,452

1,997,928

1,319,009

 

Sales promotions

and Advertising

Salaries and bonuses

Retirement benefit costs

Depreciation expense

Outside service fee

Research and

development costs

Intercompany charge

3,616,126

2, 237,924

144,831

100,542

1,005,875

2,600,209

1,554,453

 















About Trend Micro:

Trend Micro Incorporated (TSE: 4704), a global cloud security leader, creates a world safe for exchanging digital information with its Internet content security and threat management solutions for businesses and consumers. A pioneer in server security with over 20 years' experience, we deliver top-ranked client, server and cloud-based security that fits our customers' and partners' needs, stops new threats faster, and protects data in physical, virtualized and cloud environments. Powered by the Trend Micro™ Smart Protection Network™ cloud security infrastructure, our industry-leading cloud-computing security technology, products and services stop threats where they emerge, on the Internet, and are supported by 1,000+ threat intelligence experts around the globe.

Additional information about Trend Micro Incorporated and the products and services are available at Trend Micro.com This Trend Micro news release and other announcements are available at http://trendmicro.mediaroom.com/ and as part of an RSS feed at www.trendmicro.com/rss Or follow our news on Twitter at @TrendMicro.


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