A-ONE SEIMITSU INC.

The Company's mainstay product, spring collet chucks, is a consumable tool, and orders fluctuate in line with customers' machine utilization rates. During recent economic cycles, the impact on orders has been significant, with total net sales for the 35th fiscal period continuing to decline to ¥1,590,845 thousand from ¥1,868,061 thousand in the 32nd fiscal period. If economic conditions fluctuate significantly in the future, the Company may be similarly affected.

The Cutting Tool Division has continued to make capital investments to meet growing demand for specialty cutting tools, but orders have not grown sufficiently to absorb the increased costs, leading to declining profitability. In the current fiscal year, as a result of a review of future cash flows, the Company recorded an impairment loss in this division. If further capital investment is made in the future and the requirements for recognizing an impairment loss are met, business performance may be affected.

New production of cam-type automatic lathes themselves has ceased, and the division depends solely on orders from customers using existing machines. Orders for cams have declined year by year, with a particularly sharp decline in the most recent year. Unless sales increase, the division's profit and loss are expected to remain in a loss-making trend.

The regrinding of commercial cutting tools business, launched in August 1999, secured a certain customer base by capitalizing on the spread of carbide tools and the trend toward outsourcing. However, since the business began, competitors have increased and price competition has intensified. If price competition intensifies further in the future, it may affect the Company's orders and profitability.

If technological innovation in the future renders the turning process unnecessary, demand for the Company's mainstay product, spring collet chucks, would be lost, potentially having a material impact on the Company's business performance. Changes in cutting processes could also change the tools used, potentially reducing demand for regrinding itself. To address these risks, the Company is pursuing differentiation by strengthening its response to specialty and custom-order products.

The Company's export sales ratio was 9.6% (¥153,257 thousand) in the 35th fiscal period, with exports centered on Asia. If geopolitical risk, increases in trade tariffs, or restrictions or bans on exports and imports disrupt the global distribution of machined parts, the Company's orders may be affected. Note that all of the Company's sales are denominated in Japanese yen, so direct foreign exchange rate risk is limited.

The majority of new unit sales by the three major domestic manufacturers of CNC automatic lathes are for overseas markets, and as parts processing becomes more sophisticated both domestically and internationally, orders for collet chucks are increasingly shifting from standard products to custom-order products tailored to customer specifications. If the Company is unable to successfully meet customer specifications with high quality and short lead times, it may be unable to secure orders. The Company is focusing its sales activities on promoting its high level of responsiveness both domestically and internationally.

Specialty cutting tools are made to individual specifications and require short lead times, with the quality of design, manufacturing methods, and processes greatly affecting performance. If the Company fails to accurately respond to customer needs, or if its industry recognition does not improve, orders may be affected. Demand is growing against the backdrop of increasing complexity and difficulty of machining parts in the manufacturing industry, but maintaining competitiveness requires continuous investment in technology and human resources.

Capital investment in machinery and equipment to meet growing demand for specialty cutting tools may affect the profit and loss of business divisions and future cash flows. In the current fiscal year, amid continued new capital investment, orders did not grow sufficiently, profitability declined, and an impairment loss was recorded as a result. Similar risks exist for future capital investment decisions.

The Company's total net sales peaked at ¥1,868,061 thousand in the 32nd fiscal period and have continued to decline to ¥1,590,845 thousand in the 35th fiscal period, with both domestic and export sales trending downward. Although the mainstay Collet Chuck Division has a broad customer base, it has been significantly affected by economic cycles. Depending on future economic and industry trends, the Company may continue to be similarly affected.