Annual Report 2005 アニュアルレポート | SHOWA CORPORATION 株式会社ショーワ

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1

Thousands of

Millions of yen

U.S. dollars

2004

2005

Motor vehicle parts

¥213,897

¥228,197

$2,124,937

Other

5,637

5,359

49,902

Total

¥219,535

¥233,557

$2,174,848

Thousands of

Millions of yen

U.S. dollars

2004

2005

Japan

¥090,446

¥100,921

$

0,

939,761

North America

81,548

76,473

712,105

Europe

18,552

18,723

174,345

Others

28,988

37,439

348,626

Total ¥219,535

¥233,557

$2,174,848

Financial and Operating Highlights

SHOWA CORPORATION and Consolidated Subsidiaries

Years ended 31st March, 2004 and 2005

Thousands of

Millions of yen

U.S. dollars

(except where noted) (except where noted)

2004

2005

Net sales

¥219,535

¥233,557

$2,174,848

Operating income

14,839

16,675

155,275

Income before income taxes and minority interests

14,036

16,272

151,522

Net income

7,577

9,196

85,631

Cash dividends paid during the period

896

987 9,190

Total assets

120,533

133,165

1,240,013

Shareholders’ equity

65,390

73,530

684,700

Depreciation and amortisation

6,480

6,197

57,705

Capital expenditures

5,262

8,728

81,273

Per share amounts:

Yen

U.S. dollars

Net income (basic)

¥0101.09

¥

0

121.03 $

2,077

1.12 Net income (diluted)

99.72

— —

Cash dividends

12.00

15.00

0.13 Shareholders’ equity

860.66

967.84

9.01

• Throughout this report, U.S. dollar amounts have been translated from Japanese yen solely for the convenience of the reader at the rate of ¥107.39=U.S.$1.00, the exchange rate prevailing at 31st March, 2005.

• The breakdown by geographic area is based on the degree of proximity to the geographic region. • Major countries or regions that fall under a category other than “Japan” are following:

North America: United States, Canada Europe: Spain, U.K.

Others: South America, Southeast Asia, China

NET SALES BY BUSINESS SEGMENTS

NET SALES BY GEOGRAPHICAL AREAS

Operating Highlights

Financial Highlights

Financial and Operating Highlights ... 1

Message from the President ... 2

Showa’s Global Network and

Mutually Complementary Parts ... 4

Review of Operations ... 6

Showa’s Technology ... 8

Topics ... 10

Profile

Showa Corporation manufactures and markets high-precision components for motor vehicles including

shock absorbers, steering systems and drive train products for automobiles, and motorcycles, as well as

components for outboard marine engines. The Company is one of the leading manufacturers of shock

absorbers for automobiles and motorcycles in the world today.

Established in 1938, the Company began motor vehicle parts production in 1946. In 1970, the

Company became affiliated with Honda Motor Co., Ltd., a world leader in automobile and motorcycle

manufacturing. When merged with Seiki Giken Kogyo Co.,Ltd., a power steering products

manufacturer, the Company was renamed Showa Corporation in 1993. In 1964, Showa’s shares were

listed on the Second Section of the Tokyo Stock Exchange (TSE). In 1985, the Company’s shares were

upgraded to the First Section of the TSE.

Headquartered in Gyoda City, Saitama, Japan, Showa operates five manufacturing plants, three

research and development facilities and two affiliated manufacturers within Japan.

The Company’s global business operation, a network of 30 facilities that includes 12 consolidated

subsidiaries, spreads over 15 nations including Japan.

Showa Corporation’s business activities revolve around customer satisfaction, as emphasized by the

Company principle “To meet customer needs with the highest quality and the most competitive

products.” Furthermore, at Showa, we strive to maintain our forward-looking stance and continue to

encourage technological, operational and administrative innovation.

Environmental preservation for the benefit of future generations is a great concern and a continuing

theme at Showa Corporation. We actively support a range of environmental preservation initiatives

through our product offerings and corporate activities.

Showa Corporation and its global affiliates in 15 nations embrace the Company’s business

philosophy described above. The Company and its affiliates strive to expand their business, providing

additional benefits to our customers and shareholders as well as to the communities and societies

where we operate.

Forward-looking statements: Forward-looking statements made in this annual report concerning performance or business strategies have been determined according to assumptions and beliefs based on information available at the time and contain elements of risk and uncertainty.

Financial Section ... 11

Corporate Information ... 30

Board of Directors and Corporate Auditors ... 31

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Strengthening Competitiveness

Domestic Operations

Domestically, we will initiate in-house production of metal

press molds and components, initiate internal development

and production of electric motors, and undertake reform of

development systems for improving development capability.

Global Operations

In order to strengthen, our production system to meet the

increased demand in ASEAN and China markets we will

strengthen production capabilities of our subsidiaries. We

will expand the factory building and production lines to

meet the demand for 3.5 million vehicles per year in

Indonesia. Moreover, in Guangzhou, China we will initiate

corporate measures aiming to increase the both local content

and in-house manufacturing ratios of electrical power

steering components.

In the U.S. and U.K. subsidiaries, we will begin local

production of electric power steering components to meet

the local demand.

In this way, we will further improve and expand the

businesses of Showa Group.

Dividends for Shareholders

Showa Corporation considers the return of profits to

shareholders based on business performance and results to

be an important issue. Moreover, we believe retained

earnings to be important for further business development

and strengthening of corporate structures for the future

business considerations.

The year-end dividend for Fiscal 2005 was 8 yen per

share; combined with the interim dividend, the dividend

payment for the year totalled 15 yen per share. As a result,

the payout ratio for the year was 17.6%, return on equity was

10.6%, and dividend rate for shareholders’ equity of 1.8%.

Capital from retained earnings will be put toward

meeting capital requirements for future overseas

development, product development, and improvement in

our efforts to improve profitability and to strengthen the

company’s financial structure.

Status of Corporate Governance

Basic Approach to Corporate Governance

Showa Corporation aims to be a company that enjoys the

trust of its shareholders and society as a whole, and that

continues to live up to the expectations placed upon it. To

achieve this goal, we are flexibly and efficiently developing

our business on a global scale in order to increase our

corporate value, however we also consider it essential to

maintain a clear understanding of the risks involved in such

to ensure that the company is conforming strictly to all

relevant laws, regulations, and other conventions both

inside and outside of the company.

Executive Management Structures

Showa oversees and audits the execution of its businesses

through the Board of Directors and the Board of Corporate

Auditors.

The Board of Directors is comprised of 16 directors and

makes decisions regarding important business matters and

other statutory issues, and oversees the execution of the

business operations.

The Board of Corporate Auditors is comprised of 4

Auditors (including 3 outside Corporate Auditors), and each

Corporate Auditor attends meeting of the Board of Directors

and other important internal meetings in accordance with

the internal Audit Policies, division of responsibilities, and

other directives stipulated by the Board of Corporate

Auditors. It also oversees the execution of activities by the

Directors, in part through audits of the business and

financial status of Showa Corporation and its key

subsidiaries. They cooperate with the internal auditing

committee and the independent auditors.

Showa’s outside Auditors have no stake in Showa

Corporation.

We look forward to the continued invaluable support

and guidance of all shareholders in the years to come.

Review of Fiscal 2005

The management environment surrounding Showa Group

this year was characterized by the U.S. economy remaining

firm, the European economy experiencing a moderate

recovery, the economic expansion in China and the ASEAN

region continuing, and the Japanese economy undergoing a

moderate but fundamental recovery.

The automotive industry is the main customer of Showa

Group, and in the U.S., despite a decrease in passenger car

sales, sales of light trucks increased, and we bettered last

year’s performance. In Europe sales remained in line with

last year. In Japan sales increased mainly due to passenger

car sales. Car sales in China, as well as demand for vehicles

in the Asia region, including motorcycles in Indonesia,

expanded greatly.

Under these conditions, Showa Group expanded global

production and procurement activities taking advantage of

our production bases deployed throughout the world. At

the same time we pushed forward aggressively to expand

sales and developed various measures aimed at

strengthening our product quality assurance system.

As a result, our net sales for FY 2005 increased 6.4%

compared with the previous fiscal year to ¥233,557 million

(US$2,174 million). As a result of increased income due to

this increase, operating income increased 12.4% from the

previous term to ¥16,675 million (US$155 million), and

ordinary income increased 11.9% from the previous fiscal

year to ¥17,016 million (US$158 million). Net income rose

21.4% to ¥9,196 million (US$85 million).

Outlook for Fiscal 2006

Looking to the future, we believe the world economic

situation will be the same as last year. For the automotive

industry we predict growth in demand focussed around

China and the ASEAN region. However, the business

environment surrounding automotive parts manufacturers is

unpredictable, due to the continually rising costs of crude oil

and raw materials, erratic foreign exchange price

fluctuations, and the demand for global-scale cost

competitiveness and product quality.

Under these conditions, we will promote measures to

create a “global corporation that enjoys the trust of its

customers worldwide” and work to strengthen our business

foundation and improve our corporate culture by :

• Uniting all development and production divisions in

common task of establishment of a solid quality assurance

system;

• Developing measures to strengthen our technological

capability and cost competitiveness; and

• Building human resources and a corporate culture that

supports a global corporation.

Message from the President

<Medium-term Goal>

Committed to customer satisfaction through global enterprise

<Strategic Orientation> Quality is No.1

World-class cost competitiveness

The best technology to boost our product competitiveness

Personnel and a corporate culture that support a global corporation

<Behavioral Guideline>

A thorough system of reporting, communicating, and consulting

Speed, Challenge and Straightforward Action

Improving our skills, boosting motivation levels, and upholding ethical integrity

Elimination of waste of materials, funds, and human resources.

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Small parts for

automobiles from

the U.S.A. to Japan

Propeller shafts for

automobiles from Canada to the U.K.

Fork pipes for

motorcycles from

China to Vietnam

Damper components,

fork and sheet pipes for

motorcycles from

China to Spain

Power steering component

(Pinion gear comp)

from China to Thailand

Gas spring for automobiles from China to Japan

Small components parts

for power steering from

China to Japan

Gear housing

for automobiles

from Indonesia to China

Gear housing

for automobiles

from Indonesia to Thailand

springs and press parts

for motorcycles from

Thailand to Malaysia

Fork pipes, springs

and rods for

motorcycles from

Indonesia to Malaysia

Complete bottom tubes,

springs and press parts

for automobiles

from Thailand to Indonesia

Complete bottom tubes,

springs and press parts

for automobiles

from Thailand to Pakistan

Cylinders and Gear housings

for automobiles from

Indonesia to the U.K.

Rods and rear cushions

for motorcycles

from Indonesia to Spain

Shock absorbers

Shock absorbers Shock

absorbers

Gas spring Shock absorbers

Shock absorbers

Shock absorbers Shock

absorbers Steering gearsfor HPS Steering gearsfor EPS

Gas spring

Propeller shafts Front and rear suspension

modules

Shock absorbers

Gas spring

Shock absorbers

Steering gears for HPS

Steering gears for HPS Pumps for HPS

Steering gears for HPS Pumps for HPS Shock absorbers

Steering gears for EPS

Steering gears for HPS

Pumps for HPS

EPS HPS

Steering gears

NISSIN SHOWA UK LTD.

AMERICAN SHOWA INC. Los Angeles Office

SHOWA CANADA INC. SHANGHAI SHOWA

AUTO PARTS CO., LTD.

P.T.SHOWA INDONESIA MANUFACTURING HONDA ATLAS CARS

PAKISTAN LTD.

CHENGDU NINGJIANG SHOWA AUTOPARTS CO., LTD.

ATLAS HONDA LTD.

GUANGZHOU SHOWA AUTOPARTS CO,. LTD.

MACHINO AUTO-PARTS CO., LTD.

SUMMIT SHOWA MANUFACTURING CO., LTD.

ARMSTRONG AUTO PARTS SDN. BHD.

MUNJAL SHOWA LTD. DAELIM MOTOR_{CO., LTD.}

SHOWA EUROPE, S.A.

KAI FA INDUSTRY CO., LTD.

AMERICAN SHOWA INC. Sunbury plant & Head Office

SHOWA DO BRASIL LTDA.

AMERICAN SHOWA INC. Blanchester Plant

SHOWA INDUSTRIA E COMERCIO LTDA.

Mutually Complementary Parts Production Base Showa Corporation

Major Technical Collaboration Showa Group

Supply Network Mutually Complementary Parts

Global Products Supply Network

Showa’s Global Network and

Mutually Complementary Parts

Propeller shafts

Fork pipes

Sheet pipes

Rear cushions

Springs Rods Damper components

Shock absorbers Rods Press

parts

Springs Complete bottom tubes

Cylinders for steering systems

Gear housing for steering systems

Small parts Gas springs

Steering gears for EPS

Pumps for HPS

Differential gears

Propeller shafts

Front and rear suspension

modules Gas springs Steering gears

for HPS Shock absorbers

Mutually Complementary Parts Products

For Automobiles

For Motorcycles

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Review of Operations

Fiscal 2005 Results

Shown below is an explanation of the breakdown of net

sales.

Motorcycle components increased 9.7% from the

previous term to ¥68,770 million (US$640 million); and

automotive components increased 5.4% compared to the

previous term to ¥159,430 million (US$1,484 million).

Proceeds for other components, predominantly from

outboard marine engine components, fell 4.9% from the

previous term to ¥5,360 million (US$49 million).

In Japan, proceeds from motorcycle components and

automotive components grew, producing an increase in

net sales of 10.1% on the previous year, to ¥93,100

million (US$866 million).

In Asia, proceeds from motorcycle components grew

in Indonesia and Thailand, while proceeds from

automotive components grew mainly due to power

steering systems and shock absorbers in Thailand and

China, resulting in an increase of 29.2% to ¥33,100

million (US$308 million) despite the foreign exchange in

favor of strong yen.

In Europe, motorcycle components shrunk

significantly in the subsidiary in Spain and automotive

components increased in the U.K. subsidiary, leading to

an overall slight decrease for our operations in Europe of

0.9% to ¥19,470 million (US$181 million).

In North America, net sales fell 4.3% from the

previous term to ¥77,880 million (US$725 million).

This was due significantly by an overall foreign

exchange loss for North America of about ¥3,560 million

Thailand, as well as shock absorbers and power steering

systems increasing in China.

In Europe, despite a decrease in drive train

components sales, sales for shock absorbers, power

steering systems, and brake parts increased contributing

an overall increase of 8.8% to ¥13,300 million (US$123

million).

Now turning to sales in North America, where the

increased production that resulted from the recovery in

early 2003 for the port strikes at the end of 2002 has had

a negative impact on this year’s results in comparison to

the previous year’s sales. In terms of the local currency

based sales, power steering systems rose 4.4%, however,

shock absorbers fell 8.7%, modules fell 7.5% in Canada,

and drive train components fell 8.4%. Foreign exchange

favoring the strong yen against the dollar also had a hand

in sales decrease in North America; overall, sales in North

America fell 6.4% to ¥66,590 million (US$620 million).

Sales in South America grew 32.7% to ¥1,770 million

(US$16 million) due to strong performance among our

key customers.

Motorcycle components

Sales for motorcycle components, primarily of shock

absorbers, rose 10.0% to ¥66,640 million (US$620 million),

while drive train components rose 2.7% to ¥2,130 million

(US$19 million) to produce an overall increase in sales of

9.7% to ¥68,770 million (US$640 million).

Sales breakdown by destination for motorcycle

components, Japan saw sales increase by 10.0% to

By product By area of unit sales

’04 ’05 ’04 ’05

233.5 219.5 233.5 219.5 8.3 0 50 100 150 200 250 Automotive components 151.2 Motorcycle components 62.7 68.7 159.4 0 50 100 150 200 250 81.4 77.9 19.5 33.1 93.1 19.6 25.6 84.5 10.0 5.4 Other components 5.6 0 50 100 150 200

’04 ’05 ’04 ’05

159.4 159.4 151.2 151.2 Others 27.3 21.1 59.9 52.5 Drive train products

18.4 EPS 14.8 20.0 Power steering systems 53.7 Shock absorbers 51.8 0 50 100 150 200 1.3 1.8 66.6 64.5 13.3 13.2 71.1 58.2 12.2 8.4 25.9

’04 ’05 ’04 ’05

68.7 62.7 68.7 2.1 0 20 40 60 80 Shock absorbers 60.6 Drive train products 2.1 66.6 0 20 40 60 80 62.7 9.5 7.4 16.8 22.1 6.9 _10.6 6.1 19.6 24.3 8.2

’04 ’05 ’04 ’05

5.4 5.4 0 2 4 6 8 5.6 Others 0.9 _1.3 4.1 Boats 4.7 0 2 4 6 8 5.6 0.1 0.0 0.1 0.0 4.3 0.4 0.8 4.2 0.3 0.7

(US$33 million), without which net sales would have

approximately equaled sales of last year. Motorcycle

components increased, boosted by strong customer sales,

however, in automotive components the recovery of

production for the 2002 end-of-year port strike occurred at

the beginning of the previous fiscal year (2003), causing

worsened results on comparison with the current year.

Now looking at South America, sales increased for

automotives and motorcycles due to good sales by our

customers in Brazil, leading to an increase of 20.6% to

¥10,010 million (US$93 million).

Automotive components

Sales for automotive components by product line, total

sales increased 5.4% to ¥159,430 million (US$1,484

million). Breakdown by product line is as follows; Shock

absorbers rose 1.2% to ¥52,500 million (US$488 million);

power steering systems rose 11.7% to ¥59,950 million

(US$558 million); drive train products rose 14.6% to

¥21,060 million (US$196 million); and in other products,

sales of modules sold in Canada and brakes sold in the

U.K. fell 5.1% to ¥25,920 million (US$241 million). Among

power steering systems, EPS had sales of ¥14,800 million

(US$137 million) last year, and sales for ¥20,050 million

(US$186 million) was expected for the current year.

Sales breakdown by destination, sales in Japan rose

11.0%, buoyed by Honda’s sales, to ¥64,560 million

(US$601 million).

In Asia, sales grew 56.8% to ¥13,210 million (US$123

million) mainly due to power steering units increasing in

¥24,310 million (US$226 million) boosted primarily by

middle and large-displacement models.

In Asia, sales grew 16.3% to ¥19,550 million (US$182

million) on the backed by increased sales in the vigorous

ASEAN markets, predominantly in Indonesia.

In Europe, reduced production by key customers led

to shrinkage in motorcycle components sales of 17.7% to

¥6,070 million (US$56 million).

Motorcycle component sales in North America

increased, predominantly due to increased sales to key

customers, and despite the influence of the appreciated

yen against the U.S. dollar, there was an overall increase

of 12.1% to ¥10,600 million (US$98 million).

In South America, motorcycle components sales grew

by 18.9% to ¥8,240 million (US$76 million) due to the

strength of key customers.

Other components

Among other components, outboard marine engine

components represent the bulk; the sales fell 14.3% to

¥4,050 million (US$37 million), while the other products

in this category rose, producing an overall fall of 4.9% to

¥5,360 million (US$49 million).

Notes: Showa Corporation presents its Review of Operations based on information available to the Company at the time it prepares and publishes each review. Readers are cautioned to remember when referring to this report that data are approximate estimates.

Automotive components

(Billions of yen)

Fiscal 2005 Results

(Billions of yen)

Motorcycle components

(Billions of yen)

Other components

(Billions of yen)

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Showa’s Technology

Automotive Components

Automobiles

1. Shock Absorbers

3. Propeller Shafts

2. Steering Systems

5. Gas Springs

2. Drive Unit Products

Motorcycle Components

Motorcycles

Pump HPS

4. Differential Gears

Power Trim and Tilt Units

EPS

Among the components that comprise an automobile, great

impor-tance is placed on steering system performance and reliability. In

addition to accurately transmitting the driver’s steering operations

to the automobile, the steering system is the man/machine interface

delivering information on running conditions from the automobile

to the driver. “Steering systems” refers to the components added to

assist steering efforts and provide drivers with comfortable

maneu-verability. Steering systems are classified into hydraulic power

steering system (HPS), which uses the engine’s power as a drive

source, and electric power steering system (EPS), utilizing the

vehicle’s battery. Showa has a full line of power steering models.

Shock absorbers are critical products that

determine an automobile’s character, not only by

improving ride quality but also by functioning to

control the attitude and stability of the automobile

body. Because of their superior performance and

quality, Showa brand shock absorbers have

earned the satisfaction of customers around the

world. Showa has many years of experience with

strut modules, and is also working on suspension

modules combined with peripheral components.

The role of a differential mechanism

is to absorb the difference in rotation

between the right and left wheels

that occurs when an automobile is

cornering. These products demand

durability, transmission efficiency,

and quiet operation. Showa’s

differ-ential gears achieve weight reduction

while exhibiting highperformance,

from subcompact cars to SUVs.

Gas springs assists the opening

and closing of automobile engine

compartment hoods and rear

gates, using gas reaction force.

They are also equipped with

speed-adjustment devices that

enable operators to open and

close the hood and trunk at

opti-mal speed. To answer diverse

needs, Showa develops the

variations of products.

Power trim and tilt units can actively

change the outboard engine angle, and

provide the following three functions.

The trim function provides good screw

efficiency and steady cruising by

adjusting the angle of the outboard

engine while running. The tilt function

enables owners to prevent outboard

engine damage from shellfish

adhe-sions, by raising the outboard engine

above the water’s surface when

moored. When driftwood or other

objects strike the outboard engine

while under way, shocks are absorbed,

helping to prevent damage to the

outboard engine and boat.

Power Trim and Tilt Units

for Outboard Engines

Outboard Engine Components

Rear cushion >>

The rear cushion is attached to the

rear fork directly or through a link.

By controlling the attitude and energy

absorption of the motorcycle body,

the rear cushion improves the ability of

the rear wheel to follow road contours.

For motorcycle and ATV drive unit

products, Showa has achieved lighter

weights through analysis of functions,

shapes, and materials, while

main-taining excellent durability,

trans-mission efficiency, and quiet operation.

1. Shock Absorbers

Showa motorcycle shock absorbers

are used extensively in various

motorcycle races around the world.

From racing machines to scooters, we

put our technology and experience to

excellent use to meet a wide variety

of performance needs.

Front forks >>

The front fork is a key structural

com-ponent of a motorcycle, holding the

front wheel and providing the steering

function. This vital part demands

excellent ability to closely follow road

contours through smooth operation

and steady damping force, while

retaining high rigidity.

(7)

Topics

1. Entering the F1 racing scene after 7 years’ absence to

supply shock absorbers to B·A·R Honda

Due to the increasing demand for electric power steering

system, Showa’s policy is to increase in-house production of

the main components and with this objective, we have made

investments in production facilities including extending the

assembly line for pinion gears, vacuum carburizing furnaces,

and rotor machining equipment. Further, in order to

strengthen development system for electric power steering,

we constructed a specialized dark room for electromagnetic

wave analysis.

Showa Corporation has begun providing support to B·A·R

Honda in the form of developing and supplying shock

absorbers. Our purpose of re-entering the F1 racing scene is

to redirect the knowledge gained through the races into our

advanced technologies and trusted, mass-produced

products. We aim to overcome the severe technological

problems faced at the pinnacle of the automotive world, at

the F1 racing scene, to stimulate the spirit of challenge and

achievement, and to improve the Showa brand on the

world stage.

In the Indy Racing League (IRL), the Andretti Green

Racing Team, for whom we develop and supply shock

absorbers, were the overall champions in the 2004 season.

2. Reinforcement of our domestic and overseas

research and development structure

In an attempt to further expand the research and

development capabilities in North America, construction has

begun on a new R&D Center at American Showa, Inc.,

(ASI), our U.S. subsidiary. With the completion of this R&D

Center as the North American development base for shock

absorbers, power steering systems, and propeller shafts, we

will be able to respond quickly to the needs of our

customers and improve customer satisfaction.

Dark room for analysis of electromagnetic waves

3. Expansion of new business activities

A new relationship with Nissan Motor Co. Ltd.

We have received a new order from Nissan Motor Co. Ltd. for

gas springs, and have begun sales.

Model to be equipped: Small passenger car - Tiida

Component:

Gas springs for the rear door

Sales began:

September 2004

Production base:

Shanghai Showa Auto Parts Co. Ltd.

This is the result of strengthening cost competitiveness by

utilizing the most appropriate production and procurement

methods that take advantage of production bases spread

throughout the world.

Providing electric power steering system to Suzuki

[Worldwide Strategic Vehicles]

Showa Corporation received new orders from Suzuki Motor

Corporation for components for their Swift model, and we

have begun sales this year.

Model to be equipped: Swift (Japanese name)

Product type:

Pinion type

Sales began:

September 2004

Production base:

Gotemba factory

This is one part of Showa’s business expansion activities,

and we will continue to aggressively promote sales

expansion activities.

4. Establishment of in-house production facilities for

electric power steering components at our subsidiary

in China.

Guangzhou Showa Auto Parts Co. Ltd. began in-house

production of the main components of electric power

steering system in March this year, advancing the policy to

streamline production and procurement by exporting to

Thailand as well as producing for domestic demand in

China.

Groundbreaking ceremony ASI R&D Center

Guangzhou Showa Auto Parts Co. Ltd. (extended section)

Main processes

Financial Section

Consolidated Financial Review ... 12

(Unaudited and Not Reviewed) Consolidated Balance Sheets ... 16

Consolidated Statements of Income... 18

Consolidated Statements of Shareholders’ Equity ... 19

Consolidated Statements of Cash Flows ... 20

Notes to Consolidated Financial Statements ... 21

(8)

Consolidated Financial Review

Overview

Net Sales

As a result of aggressively pursuing growth in sales focused on new orders, and expanding overseas opera-tions in the midst of growing demand for automobiles in China and the Asia region and strengthening sales among our main customers, the net sales of Showa Group (Showa Corporation, its consolidated sub-sidiaries and affiliated companies under the equity method) for the current fiscal year increased 6.4% com-pared to the previous fiscal year, to ¥233,557 million (US$2,174 million).

Operating Income

Consolidated operating income for the current fiscal year increased 12.4% compared to the previous fiscal year to ¥16,675 million (US$155 million) due to improved performance including increased sales, reduced costs and improved production efficiency despite increased cost of sales such as the costs of raw materials and labor.

SG&A Expenses

Consolidated sales, general and administrative expenses for the current fiscal year increased 1.2% compared to the previous consolidated fiscal year to ¥21,379 million (US$199 million) due to increased R&D expenses, etc.

R&D Activities

As a manufacturer of precise functional components for transportation machinery, Showa Group is reinforcing the competitive edge of its products by developing advanced electronic and light-weight technologies that quickly and accurately grasp the needs of society.

Showa Group’s R&D focuses on automotive parts, predominantly in Showa’s R&D Division, and total con-solidated R&D expenses for the current fiscal year decreased 15.6% compared to the previous fiscal year to ¥6,601 million (US$61 million). The Company has reviewed the scope of its research and development expenses following the transfer of the trial manufactur-ing section to production operations as well as the changes in its organizational structure effective the year ended March 31, 2005. If expenses included in the sales, general and administrative expense account were added back, R&D expenses have increased 10.1% compared to the previous fiscal year.

We established a R&D center in the U.S. in the cur-rent fiscal year to strengthen R&D activities for automo-tive components in North American region.

Motor Vehicle Parts

Sales of motor vehicle parts decreased 15.8% com-pared to the previous fiscal year to ¥6,384 million (US$59 million).

In the current fiscal year, we pushed forward with various initiatives to improve development efficiency and strengthen development capability such as starting a project to introduce a new design support system, and

construction of a electromagnetic wave dark room cen-ter for electromagnetic wave analysis for electric power steering components.

Showa Corporation has entered the F1 for the first time in 7 years with the goal to redirect the knowledge we gain into our advanced technologies and trusted, mass-produced products. We aim to overcome the severe technological problems faced at the pinnacle of the automotive world, the F1 stimulate the spirit of chal-lenge and achievement, and to improve the Showa brand on the world stage. In the Indie Racing League (IRL), the Andretti Green Racing Team, for who we develop and supply shock absorbers, was the overall champions in the 2004.

Other

Other products decreased 11.2% compared to the pre-vious fiscal year to ¥216 million (US$2 million).

Income before Income Taxes and Minority Interests

Income before income taxes and minority interests for the current fiscal year increased 15.9% compared to the previous fiscal year to ¥16,272 million (US$151 mil-lion). Although the loss from adjusting prior period’s inventory of the foreign subsidiaries of ¥526 million (US$4 million) was recorded, due to warranty expenses in the previous fiscal year was removed in this year and other factors, an increase resulted.

Equity in Earnings of Affiliates

The Group’s equity in earnings of affiliates accounted for under the equity method decreased by 32.9% com-pared to the previous fiscal year, to ¥192 million (US$1 million).

Net Income

Net income for the current fiscal year increased 21.4% compared to the previous fiscal year to ¥9,196 million (US$85 million).

Cash Flows

Consolidated cash and cash equivalents (below referred to as cash) increased ¥5,778 million (US$53 million) to a cash balance at the fiscal year end of ¥28,546 million (US$265 million) due to the high level of income before income taxes and minority interests, despite expendi-tures for acquiring fixed assets and expendiexpendi-tures for debt repayments.

All cash flows for the fiscal year under review and their causes are as follows.

0 2 4 6 8 10 Capital Expenditures Depreciation and Amortisation ’01 ’02 ’03 ’04 ’05

Capital Expenditures/

Depreciation and Amortisation

(Billions of yen)

6.4 6.5 6.8 6.7 5.2 6.1 8.7 6.3 5.7 5.6 0 50 100 150 200 250

’01 ’02 ’03 ’04 ’05

Net Sales

(Billions of yen)

196.6 233.5 177.3 154.7 219.5 48.7 94.4 106.8 101.0 121.0 0 2 4 6 8 10 12 14

’01 ’02 ’03 ’04 ’05

Net Income/

Net Income per Share

(Billions of yen) (Yen)

0 20 40 60 80 100 120 140 Net Income Net Income per Share

8.0 6.7 3.3 9.1 7.5 42.7 59.2 73.5 97.1 105.2 112.4 133.1 Total Assets Shareholders’ Equity Shareholders’ Equity per Share 0 20 40 60 80 100 120 140

’01 ’02 ’03 ’04 ’05

Total Assets/ Shareholders’ Equity/

Shareholders’ Equity per Share

(Billions of yen) (Yen)

53.9 0 200 400 600 800 1,000 1,200 1,400 65.3 120.5 792.5 741.6 625.0 860.6 967.8 6.0

6.8 7.0 6.6

0 2 4 6 8 10

’01 ’02 ’03 ’04 ’05

R&D Expenses

(Billions of yen)

7.8 8.0 14.0 12.2 13.2 0 3 6 9 12 15

’01 ’02 ’03 ’04 ’05

Return on Equity

(％)

14.2 R&D Expenses By Business Segments

Millions of yen 2004 2005

Motor vehicle parts ¥7,581 ¥6,384

Other 244 216

(9)

Segment Information

Business Segments Motor Vehicle Parts

Regarding motor vehicle parts, domestic revenues of shock absorbers, power steering systems and drive unit parts increased, partly due to increasing demand from new modeled cars introduced by our key customers. Gross sales from motorcycle component also increased due to strength in the market for components for large motorcycles.

As for North America, the U.S. subsidiary increased revenues from motorcycle components due to the improved market for large motorcycles, but a decrease in proceeds from automobile components combined with the influence of translation of foreign exchange led to an overall decrease in revenues. Gross sales in the Canadian subsidiary dropped due to decreased pro-duction by its customers.

In Europe, the U.K. subsidiary increased revenues from automobile components due to increased produc-tion by its main customers. The Spanish subsidiary decreased revenues from motorcycle components due to decreased customer sales.

Looking at other area, the Indonesian subsidiary increased revenues significantly, boosted by continued strong growth in the motorcycle market. The Thai sub-sidiary achieved a major increase in revenues due to increased sales of power steering systems. The Brazilian subsidiaries also increased revenues due to steady growth in sales to its key customers. The Chinese subsidiaries increased revenues significantly due to expansion of the four-wheel vehicle market and increased sales of electric power steering systems.

As a result, net sales in the motor vehicle parts busi-ness increased 6.7% compared to the previous fiscal year to ¥228,197 million (US$2,124 million). Operating income increased 14.1% from the previous fiscal year to ¥15,506 million (US$144 million).

Other

In “other product” segment, net sales of outboard marine engine components decreased.

As a result, net sales related to “other product” seg-ment decreased 4.9% compared to the previous fiscal year to ¥5,359 million (US$49 million). Operating income decreased 6.6% from the previous fiscal year to ¥1,169 million (US$10 million).

Net sales and Operating Income by Business Segments

Millions of yen 2004 2005 Net Operating Net Operating Sales Income Sales Income

Motor Vehicle

parts ¥213,897 ¥13,587 ¥228,197 ¥15,506

Other 5,637 1,251 5,359 1,169

Total ¥219,535 ¥14,839 ¥233,557 ¥16,675

[Reference]

Non-Consolidated Net sales by Business Segments

Motor vehicle parts ¥113,717 ¥127,752

Automotive components 77,941 89,429

Motorcycle components 35,776 38,323

Other components 6,226 6,595

Total ¥119,943 ¥134,347

Geographical Areas Japan

Domestically, revenues from motor vehicle parts increased together with both automotive components and motorcycle components. Revenues from “other product” segment also increased.

As a result, net sales increased 12.1% compared to the previous fiscal year to ¥133,663 million (US$1,244 million), and operating income increased 30.8% com-pared to the previous fiscal year to ¥8,356 million (US$77 million) due to the effect of increased sales and other improvements.

North America

In North America, revenues from motor vehicle parts at the U.S. subsidiary decreased due to the impact of for-eign exchange translation. The Canadian subsidiary’s revenues decreased, as did revenues from “other prod-uct” segment.

As a result, net sales decreased 6.4% compared to the previous fiscal year to ¥77,614 million (US$722 mil-lion), and operating income fell 28.8% compared to the previous fiscal year to ¥3,793 million (US$35 million) due to increased expenses for strengthening the quality assurance system at the U.S. subsidiary.

Europe

In Europe, the U.K. subsidiary increased revenues and the Spanish subsidiary decreased revenues.

As a result, net sales increased 0.9% compared to the previous fiscal year to ¥18,855 million (US$175 mil-lion), and operating income increased 50.7% compared to the previous fiscal year to ¥435 million (US$4 million).

Others

In other areas, the Indonesian, Thai, Brazilian and Chinese subsidiaries all increased revenues greatly.

As a result, net sales increased 30.4% compared to the previous fiscal year to ¥39,114million (US$364 mil-lion), and operating income increased 38.3% compared to the previous fiscal year to ¥4,858 million (US$45 mil-lion) due to increased sales.

Net sales and Operating Income by Geographical Areas

Millions of yen 2004 2005 Net Operating Net Operating Sales Income Sales Income

Japan ¥119,191 ¥ 6,386 ¥133,663 ¥ 8,356

North America 82,923 5,329 77,614 3,793

Europe 18,694 288 18,855 435

Others 29,993 3,512 39,114 4,858

Total ¥250,802 ¥15,517 ¥269,247 ¥17,443

Elimination or

corporate (31,266) (677) (35,689) (768)

Consolidated ¥219,535 ¥14,839 ¥233,557 ¥16,675 Net Cash Provided by Operating Activities

Net cash provided by operating activities was ¥15,941 million (US$148 million), which is a ¥1,559 million (US$12 million) (10.8%) increase compared to the previ-ous fiscal year. This is mainly due to the increase in income before income taxes and minority interests.

Net Cash Used in Investing Activities

Net cash used in investing activities increased ¥1,698 million (US$14 million) (26.1%) compared to the previ-ous fiscal year to ¥8,204 million (US$76 million). This is mainly due to an increase in purchases of property, plant and equipment.

Net Cash Used in Financing Activities

Net cash used in financing activities decreased ¥2,541 million (US$24 million) (61.6%) compared to the previ-ous fiscal year to ¥1,581 million (US$14 million). This is mainly due to a decrease in long-term dept repayments.

Capital Expenditures

Showa Group has been making capital expenditures focused on production facilities with the aim to develop core technologies for automotive parts in-house and expand production capabilities. Total capital expendi-ture for the current fiscal year rose 65.9% compared to the previous fiscal year to ¥8,728 million (US$81 million).

In automotive parts, most capital expenditure is focused on processing facilities for drive train nents and in-house production facilities for key compo-nents for electric power steering systems. Overseas, the focus is on in-house production facilities for electric power steering components in China, and investment to expand production for the Indonesian, Canadian and Brazilian subsidiaries. We have directed a total of ¥8,650 million (US$80 million) of capital expenditure to automotive component production facilities.

Capital expenditure by business segment is as fol-lows:

Capital Expenditures by Business Segments

Motor Vehicle Parts ¥5,164 ¥8,650

Other 86 37

Total ¥5,250 ¥8,688

Eliminations or corporate 11 39

(10)

Thousands of Millions of yen U.S. dollars (Note 3)

ASSETS

2004 2005 2005

Current assets:

Cash on hand and in banks (Note 8) ¥ 20,675 ¥ 26,410 $ 245,926

Notes and accounts receivable:

Trade 23,677 24,468 227,842

Unconsolidated subsidiaries and affiliates 10,627 11,473 106,834

Allowance for doubtful receivables (62) (84) (782)

Held-to-maturity securities (Notes 5 and 8) 2,092 2,135 19,880

Inventories (Note 4) 16,044 18,004 167,650

Deferred tax assets (Note 7) 2,650 2,379 22,152

Other 855 1,436 13,371

Total current assets 76,560 86,224 802,905

Investments and long-term advances:

Investments in unconsolidated subsidiaries and affiliates 7,329 8,147 75,863

Other investments in securities (Note 5) 1,737 1,784 16,612

Deferred tax assets (Note 7) 19 21 195

Long-term prepaid expenses 133 119 1,108

Other 833 803 7,477

Total investments and long-term advances 10,053 10,876 101,275

Property, plant and equipment, at cost:

Land (Note 6) 4,365 4,337 40,385

Buildings and structures 23,006 23,451 218,372

Machinery, vehicles and equipment 90,399 94,522 880,175

Construction in progress 1,392 1,780 16,575

119,164 124,092 1,155,526

Accumulated depreciation (85,647) (88,393) (823,102)

Property, plant and equipment, net 33,517 35,698 332,414

Other assets 401 365 3,398

Total assets ¥120,533 ¥133,165 $1,240,013

See accompanying notes to consolidated financial statements. SHOWA CORPORATION and Consolidated Subsidiaries 31st March, 2004 and 2005

Consolidated Balance Sheets

LIABILITIES, MINORITY INTERESTS AND SHAREHOLDERS’ EQUITY

2004 2005 2005

Current liabilities:

Short-term borrowings (Note 6) ¥ 3,496 ¥ 3,949 $ 36,772

Current portion of long-term debt (Note 6) 444 162 1,508

Notes and accounts payable:

Trade 31,150 32,964 306,955

Construction 197 304 2,830

Unconsolidated subsidiaries and affiliates 498 641 5,968

Other — 1 9

Accrued income taxes (Note 7) 2,237 2,551 23,754

Accrual for warranty expenses 282 121 1,126

Other 4,784 5,325 49,585

Total current liabilities 43,093 46,022 428,550

Long-term liabilities:

Long-term debt (Note 6) 159 — —

Accrued retirement benefits (Note 11) 4,491 5,350 49,818

Deferred tax liabilities (Note 7) 778 569 5,298

Other 378 390 3,631

Total long-term liabilities 5,808 6,310 58,757

Minority interests 6,241 7,301 67,985

Shareholders’ equity:

Common stock, no par value: Authorised: 180,000,000 shares Issued:

31st March, 2004 – 76,020,019 shares 12,698 — —

31st March, 2005 – 76,020,019 shares — 12,698 118,241

Capital surplus 13,558 13,558 126,250

Retained earnings 41,519 49,727 463,050

Net unrealised holding gain on securities 3,304 3,709 34,537

Translation adjustments (5,645) (6,117) (56,960)

Less treasury stock, at cost (45) (47) (437)

Total shareholders’ equity 65,390 73,530 684,700

Contingent liabilities (Note 9)

Total liabilities, minority interests and shareholders’ equity ¥120,533 ¥133,165 $1,240,013

(11)

2004 2005 2005

Net sales (Note 13) ¥219,535 ¥233,557 $2,174,848

Cost of sales 183,567 195,502 1,820,486

Gross profit 35,968 38,054 354,353

Selling, general and administrative expenses 21,128 21,379 199,078

Operating income 14,839 16,675 155,275

Other income (expenses):

Interest and dividend income 191 321 2,989

Interest expense (214) (136) (1,266)

Exchange gain (loss) 138 (78) (726)

Loss on sale and disposal of property, plant and equipment (270) (218) (2,029)

Equity in earnings of affiliates 286 192 1,787

Warranty expenses (900) — —

Prior periods' adjustment (note 15) — (526) (4,898)

Other, net (35) 42 391

(804) (402) (3,743)

Income before income taxes and minority interests 14,036 16,272 151,522

Income taxes (Note 7):

Current 6,099 5,477 51,001

Deferred (1,023) (204) (1,899)

5,076 5,273 49,101

Minority interests (1,382) (1,802) (16,779)

Net income (Note 12) ¥ 7,577 ¥ 9,196 $ 85,631

See accompanying notes to consolidated financial statements. SHOWA CORPORATION and Consolidated Subsidiaries Year ended 31st March, 2004 and 2005

Consolidated Statements of Income

2004 2005 2005

Common stock

Beginning of year ¥12,317 ¥12,698 $118,241

Add:

Conversion of convertible bonds 381 — —

End of year ¥12,698 ¥12,698 $118,241

Capital surplus

Add:

Conversion of convertible bonds 378 — —

End of year ¥13,558 ¥13,558 $126,250

Retained earnings

Add:

Net income 7,577 9,196 85,631

Deduct:

Cash dividends paid 896 987 9,190

Bonuses to directors and statutory auditors 56 — —

Adjustments for inclusion in consolidation 77 — —

Adjustments for inclusion in the equity method 1 — —

End of year ¥41,519 ¥49,727 $463,050

Net unrealised holding gain on securities

Beginning of year ¥ 2,472 ¥ 3,304 $ 30,766

Net change during the year 831 405 3,771

End of year ¥ 3,304 ¥ 3,709 $ 34,537

Translation adjustments

Beginning of year ¥ (3,616) ¥ (5,645) $ (52,565)

Net change during the year (2,029) (471) (4,385)

End of year ¥ (5,645) ¥ (6,117) $ (56,960)

Treasury stock, at cost

Beginning of year ¥ (43) ¥ (45) $ (419)

Net change during the year (1) (1) (9)

End of year ¥ (45) ¥ (47) $ (437)

(12)

2004 2005 2005

Cash flows from operating activities:

Income before income taxes and minority interests ¥14,036 ¥16,272 $151,522

Depreciation and amortisation 6,480 6,197 57,705

Decrease (increase) in allowance for doubtful receivable (21) 18 167

Increase (decrease) in accrual for warranty costs 282 (161) (1,499)

Increase in accrued retirement benefits 1,690 866 8,064

Exchange gain, net (125) (8) (74)

Equity in earnings of affiliates (286) (192) (1,787)

Loss on sale and disposal of property, plant and equipment 270 218 2,029

Increase in trade receivables (5,753) (1,868) (17,394)

Decrease (increase) in inventories 192 (2,010) (18,716)

Increase in trade payables 3,377 2,245 20,905

Other, net (5,761) (5,634) (52,462)

Net cash provided by operating activities 14,382 15,941 148,440

Cash flows from investing activities:

Purchases of property, plant and equipment (6,525) (8,160) (75,984)

Proceeds from sale of property, plant and equipment 77 47 437

Purchases of other investments in securities (7) (7) (65)

Other, net (50) (85) (791)

Net cash used in investing activities (6,506) (8,204) (76,394)

Cash flows from financing activities:

Increase in short-term borrowings 53 406 3,780

Decrease in long-term debt (2,732) (446) (4,153)

Cash dividends (897) (987) (9,190)

Cash dividends to minority shareholders (523) (540) (5,028)

Other, net (23) (12) (111)

Net cash used in financing activities (4,122) (1,581) (14,722)

Effect of exchange rate changes on cash and cash equivalents (632) (377) (3,510)

Net increase in cash and cash equivalents 3,121 5,778 53,803

Cash and cash equivalents at beginning of year 19,497 22,768 212,012

Increase due to inclusion in consolidation 149 — —

Cash and cash equivalents at end of year (Note 8) ¥22,768 ¥28,546 $265,816

Supplemental disclosures of cash flow information: Cash paid for:

Interest ¥ 259 ¥ 135 $ 1,257

Income taxes 7,546 5,569 51,857

Consolidated Statements of Cash Flows

1. Basis of Preparation

SHOWA CORPORATION (the “Company”) and its domes-tic subsidiaries maintain their accounting records in accor-dance with accounting principles generally accepted in Japan, and foreign subsidiaries of the Company maintain their books of account in conformity with those of their countries of domicile. The accompanying consolidated financial statements have been compiled from the consoli-dated financial statements prepared by the Company as required under the Securities and Exchange Law of Japan and, therefore, have been prepared in conformity with accounting principles generally accepted in Japan, which are different in certain respects as to the application and disclosure requirements of International Financial Reporting Standards.

In addition, the notes to the consolidated financial statements include information which is not required under accounting principles generally accepted in Japan but is presented herein as additional information.

As permitted by the Securities and Exchange Law of Japan, amounts of less than one million yen have been omitted. Consequently, the totals shown in the accompa-nying consolidated financial statements (both in yen and U.S. dollars) do not necessarily agree with the sums of the individual amounts.

Certain amounts in the prior year’s consolidated finan-cial statements have been reclassified to conform to the current year’s presentation.

2. Summary of Significant Accounting Policies (a) Principles of Consolidation

The consolidated financial statements include the accounts of the Company’s 12 domestic and foreign subsidiaries. All significant inter-company balances and transactions have been eliminated in consolidation.

Investments in 3 affiliates are accounted for by the equity method with appropriate adjustments for inter-com-pany profits and dividends.

The excess of cost over underlying net assets at fair value at the date of acquisition is amortised over a period of five years on a straight-line basis except that when the excess is immaterial, it is fully charged to income in the year of acquisition.

(b) Foreign Currency Translation

The revenue and expense accounts of the foreign sub-sidiaries are translated into yen at the average rate of exchange in effect during the year. Except for sharehold-ers’ equity, the balance sheet accounts are translated at the rate of exchange in effect at the balance sheet date. The components of shareholders’ equity are translated at their historical exchange rates. Translation adjustments are presented as a component of shareholders’ equity and minority interests.

(c) Investments in Securities

Securities other than equity securities issued by sub-sidiaries and affiliates are classified into three categories; trading, held-to-maturity or other securities. Trading

securi-SHOWA CORPORATION and Consolidated Subsidiaries

Notes to Consolidated Financial Statements

ties are carried at fair value and held-to-maturity securities are carried at amortised cost. Marketable securities classi-fied as other securities are carried at fair value with changes in unrealised holding gains or losses, net of the applicable income taxes, directly included in shareholders’ equity. Non-marketable securities classified as other secu-rities are carried at cost. Cost of secusecu-rities sold is deter-mined by the moving average method.

(d) Inventories

Inventories of the Company and its domestic consolidated subsidiaries are principally stated at cost determined by the average method, while inventories held by foreign sub-sidiaries are principally stated at cost determined by the first in, first out method.

(e) Property, Plant and Equipment and Depreciation

Property, plant and equipment is stated at cost. Depreciation of property, plant and equipment of the Company and its domestic consolidated subsidiaries is computed principally by the declining-balance method, while the straight-line method is applied to property, plant and equipment of certain foreign subsidiaries.

(f) Accrual for Warranty Expenses

Accrual for warranty expenses are recorded at an esti-mated amount to cover expenses anticipated to be incurred to fulfill the obligation under the basic parts supply contracts with the customers.

(g) Research and Development Expenses

Research and development expenses are charged to income as incurred.

Research and development expenses were ¥7,825 mil-lion and ¥6,601 milmil-lion ($61,467 thousand) for the years ended 31st March, 2004 and 2005, respectively.

Up to the prior fiscal year, the Company’s research and development operations included trial manufacturing and, accordingly, research and development expenses included all costs incurred in the trial manufacturing section. The Company has reviewed the scope of its research and development expenses following the transfer of the trial manufacturing section to production operations as well as the changes in its organizational structure effective the year ended March 31, 2005. Based on this review, the Company has decided to exclude all costs incurred in the trial manufacturing section from research and development expenses. As a result, research and development expenses for the year ended March 31, 2005 decreased from those recorded in the previous fiscal year.

(h) Leases

Non-cancelable leases of the Company and its certain con-solidated subsidiaries are accounted for as operating leases (whether such leases are classified as operating or finance leases) except for lease agreements stipulating the transfer of ownership of the leased assets to the lessee which are accounted for as finance leases.

(i) Retirement Benefits

(13)

at cost less depreciation, and be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Companies would be required to recognise an impairment loss in their income statement if certain indicators of asset impairment exist and the book value of an asset exceeds the undiscounted sum of future cash flows of the asset.

3. U.S. Dollar Amounts

The translation of yen amounts into U.S. dollar amounts is included solely for the convenience of readers outside Japan and has been made, as a matter of arithmetic computation only, at the rate of ¥107.39=U.S.$1.00, the exchange rate prevailing at 31st March, 2005. The transla-tion should not be construed as a representatransla-tion that yen amounts have been, could have been, or could in the future be, converted into U.S. dollars at the above or any other rate.

4. Inventories

Inventories consist of the following:

Thousands of Millions of yen U.S. dollars

31st March, 2004 2005 2005

Finished goods ¥ 3,023 ¥ 3,417 $ 31,818

Work in process 2,251 2,436 22,683

Raw materials and

supplies 10,769 12,150 113,139

Total ¥16,044 ¥18,004 $167,650

5. Securities Marketable securities

Information regarding marketable securities classified as other securities at 31st March, 2004 and 2005 is as fol-lows:

Other securities

Millions of yen

Acquisition Carrying Unrealised 31st March, 2004 cost value gain (loss)

Securities whose carrying value exceeds their acquisition cost:

Stocks ¥1,174 ¥6,909 ¥5,735

Debt securities — — —

Other — — —

Subtotal 1,174 6,909 5,735

Securities whose acquisition cost exceeds their carrying value:

Stocks — — —

Other — — —

Subtotal — — —

Total ¥1,174 ¥6,909 ¥5,735

Millions of yen

Acquisition Carrying Unrealised

31st March, 2005 cost value gain (loss) Securities whose

carrying value exceeds their acquisition cost:

Stocks ¥1,182 ¥7,590 ¥6,408

Other — — —

Subtotal 1,182 7,590 6,408

Stocks — — —

Other — — —

Total ¥1,182 ¥7,590 ¥6,408

Thousands of U.S. dollars Acquisition Carrying Unrealised

31st March, 2005 cost value gain (loss) Securities whose

carrying value exceeds their acquisition cost:

Stocks $11,006 $70,676 $59,670

Other — — —

Subtotal 11,006 70,676 59,670

Stocks — — —

Other — — —

Total $11,006 $70,676 $59,670

Non-marketable securities

Information regarding non-marketable securities classified as held-to-maturity securities and other securities at 31st March, 2004 and 2005 is as follows:

Millions of yen

31st March, 2004 Book value Held-to-maturity securities:

Commercial paper ¥2,092

Other securities:

Unlisted securities ¥ 179

benefit obligation and the fair value of the pension plan assets as of the balance sheet date, as adjusted for the unrecognised net retirement benefit obligation at transition, unrecognised actuarial gain or loss and unrecognised prior service cost. The retirement benefit obligation has been attributed to each period by the straight-line method over the estimated years of service of the eligible employees.

Net retirement benefit obligation at transition is tised principally over 15 years. Prior service cost is amor-tised as incurred by the straight-line method principally over 15 years which are shorter than the average remaining years of service of the employees. Principal actuarial gain or loss is amortised in the year following the year in which the gain or loss is recognised by the declining-balance method over 15 years which are shorter than the average remaining years of service of the employees.

See Note 11 for the method of accounting for the sep-aration of substitutional portion of the benefit obligation from the corporate portion of the benefit obligation under Welfare Pension Fund Plan.

In addition, directors and statutory auditors of the Company and of certain consolidated subsidiaries are cus-tomarily entitled to lump-sum payments under their respec-tive unfunded retirement allowances plans. The provisions for retirement allowances for these officers have been made at an estimated amount.

( j) Derivative Financial Instruments

The Company and certain consolidated subsidiaries utilise forward foreign exchange contracts and interest rate and currency swap agreements in order solely to hedge against risks of adverse fluctuations in foreign currency exchange rates and interest rates. The Company and consolidated subsidiaries do not enter into such financial instruments for trading or speculative purposes.

Derivatives are carried at fair value, with any changes in unrealised gains or losses charged or credited to opera-tions, except for those which meet the criteria for deferral hedge accounting under which unrealised gains or losses are deferred as an asset or a liability.

(k) Income Taxes

Deferred tax assets and liabilities are determined based on the differences between financial reporting and the tax bases of the assets and liabilities, and are measured using the enacted tax rates and laws which will be in effect when the differences are expected to reverse.

( l ) Appropriation of Retained Earnings

Under the Commercial Code of Japan, the appropriation of retained earnings with respect to a given financial year is made by resolution of the shareholders at a general meet-ing to be held subsequent to the close of such financial year. The amounts for that year do not, therefore, reflect such appropriations.

(m) New Accounting Standards

The accounting standard “Impairment of Fixed Assets” was issued in August 2002 that is effective for fiscal years beginning on or after 1st April, 2005. The standard requires that tangible and intangible fixed assets should be carried

31st March, 2005 Book value Book value Held-to-maturity securities:

Commercial paper ¥2,135 $19,880

Other securities:

Unlisted securities ¥ 180 $ 1,676

6. Short-Term Borrowings and Long-Term Debt

Short-term borrowings are unsecured with average interest rates of 3.07% and 3.33% for the years ended 31st March, 2004 and 2005, respectively.

Long-term debt consists of the following:

31st March, 2004 2005 2005

Secured loans from local

government ¥ 83 ¥ 3 $ 27

Unsecured loans from

banks 521 159 1,480

604 162 1,508

Current portion (444) (162) (1,508)

Total ¥ 159 ¥ — $ —

The Company’s assets pledged as collateral for long-term debt as of 31st March, 2004 and 2005 are as follows:

31st March, 2004 2005 2005

Land ¥487 ¥487 $4,534

7. Income Taxes

Income taxes applicable to the Company comprised cor-poration tax, inhabitants’ taxes and enterprise tax which, in the aggregate, resulted in a statutory tax rate of 41.6% and 40.0% for the years ended 31st March, 2004 and 2005, respectively. Income taxes of the consolidated subsidiaries are based on the tax rates applicable in their countries of incorporation.