kayaba industry co., ltd. · pdf filefit, and nissan’s march and cube, all of which use...

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A n n u a l R e p o r t 2 0 0 3

KAYABA INDUSTRY CO., LTD.

37

Contents

To Our Stakeholders...................................................1An Interview with the President ..................................2Review of Operations .................................................8

Hydraulic Products..............................................8Systems Products .............................................10Research & Development..................................12

Board of Directors and Corporate Auditors..............14Financial Section ......................................................15Major Subsidiaries and Affiliates ..............................36Corporate Data .........................................................37

CONSOLIDATED FINANCIAL HIGHLIGHTSKayaba Industry Co., Ltd. and Consolidated Subsidiaries Years Ended March 31

Thousands ofMillions of yen U.S. dollars Change

(Millions Change2003 2002 2003 of yen) %

For the year:Net sales ......................................................................................... ¥207,643 ¥184,919 $1,730,358 ¥22,724 12.3Operating expenses ........................................................................ 198,706 182,085 1,655,883 16,621 9.1Net income (loss)............................................................................. 2,663 (735) 22,192 3,398 362.3

At year-end:Total shareholders’ equity................................................................ 59,521 57,956 496,008 1,565 2.7Total assets..................................................................................... 194,455 185,868 1,620,458 8,587 4.6

Per share data (in yen and dollars):Net income (loss)............................................................................. ¥11.47 ¥(3.30) $0.10Cash dividends applicable to the year ............................................. 5.00 — 0.04

Notes: 1. Unless otherwise indicated, all dollar amounts herein refer to U.S. currency. Yen amounts have been translated into U.S. dollars, for convenience only, at ¥120=US$1,the approximate exchange rate prevailing on March 31, 2003.

2. Per share amounts are based on the average number of shares outstanding each year.

Forward-Looking StatementsThis annual report contains forward-looking statements,including Kayaba’s plans and strategies, as well as state-ments that report historical results. Forward-lookingstatements involve such known and unknown risks anduncertainties as economic conditions; currency exchangerates; laws, regulations, and government policies; andpolitical instability in principal markets.

1

1

TO OUR STAKEHOLDERS

During fiscal 2002, ended March 31, 2003, even as the Japanese economy displayed some indications of bottoming out

with the initial recovery in exports, challenging conditions persisted overall as deflationary trends continued and both

private-sector capital investment and consumer spending remained lackluster. On the global level, while there was

growth in many economies in the Asia-Pacific region, strained international relations and the worldwide decline in stock

prices have made the future of the global economy particularly difficult to forecast.

Against this backdrop, Kayaba Industry Co., Ltd.’s consolidated net sales increased ¥22,724 million, or 12.3%, to

¥207,643 million (US$1,730 million) on the strength of increases in sales of automobile shock absorbers, notably in the

assembly-use and export segments, and growth in hydraulic devices and exports to China mainly through construction

machinery manufacturers, which compensated for the slip in revenues from systems products.

Turning to profit performance, the entire Kayaba Group has strongly implemented a range of initiatives to improve

profitability, including the reconfiguration of the production framework, securing of orders from customers through aug-

mented sales promotion efforts, and the reduction of fixed costs and overall expenses. Thanks to these initiatives, the

Company succeeded in substantially improving its income for the term. Income before income taxes and minority inter-

ests amounted to ¥5,466 million (US$46 million), compared with a loss in the previous fiscal year of ¥79 million. Net

income for the term also improved from a loss of ¥735 million in the previous year, to income of ¥2,663 million (US$22

million).

Kayaba’s current initiatives: Profitability expansion

1. Assembly of a global supply framework

2. Building a business foundation capable of flexibly adapting to changes in business conditions

3. Greater strengthening of developmental abilities

While growth in both sales and profits was achieved in fiscal 2002, the first year of our current Three-Year Plan, further

enhancement of profitability and strengthening of our corporate foundation remain our top priorities, which we will carry

out under the slogan “Change and Speed.” Specifically, we will accelerate our efforts to further augment our global sup-

ply bases, boost training and education programs for overseas operations, improve quality and cost, and establish prod-

uct creation and production processes and develop new products and new technologies with which we will prevail over

the global competition.

We look forward to the continued understanding and support of our shareholders, investors, and all stakeholders.

September 2003

Tadahiko Ozawa, President

2

2

AN INTERVIEW WITH THE PRESIDENT

QKayaba achieved firm growth in revenue

and income in fiscal 2002, ended March 31,

2003. Although the majority of income

growth in today’s industry is achieved through

restructuring and cost reduction, Kayaba simultane-

ously attained increases in both revenue and income

growth. Please describe the factors contributing

to this accomplishment.

AIncreased production of compact cars during

fiscal 2002, including the Toyota ist, the Honda

Fit, and Nissan’s March and Cube, all of which

use Kayaba shock absorbers, provided strong momen-

tum, resulting in satisfactory increases in revenue and

income.

Although there was a slight reduction in the domestic

workforce as we reduced production lines and integrated

or closed plants in accordance with market demand,

there was no specific plan regarding workforce reduction.

Rather, the improved profitability seen in the period under

review is one of the results of our ongoing efforts to

reduce costs in each product line at each plant through

structural reform of all manufacturing-related efforts, in

addition to such measures as component standardization

and the reevaluation of our businesses and products. I

would say that Kayaba’s business efforts and strategies

to enhance its corporate framework are paying dividends.

Adopting the slogan Change and Speed, Kayaba

will reinforce its business foundation and improve

its framework to achieve both globalization and

secure profit even as business conditions continue

to undergo sweeping changes.

Tadahiko Ozawa,

President

Building a business framework capable of swiftresponse to change

3

3

QFiscal 2003, ending March 31, 2004, is the

second year of Kayaba’s current Three-Year

Plan. What kind of year do you see it being in

terms of the results of Kayaba’s reforms?

AWe are steadily attaining a level from which we

can accommodate the cost reduction demands

of our customers, and I am certain that our reform pro-

jects in hydraulic devices, hydraulic shock absorbers,

steering, and other segments will bear fruit.

However, challenging conditions, including the rise in

steel and other raw materials prices, are expected to

continue, and Kayaba will continue to engage in mea-

sures to generate profit while keeping product prices low.

Reconfiguration of domestic operations

1999

1998

1997

1996

1995

2003

2002

2001

2000

8.71

6.73

8.62

2.59

-3.0

0

-12.

00

1.15

-1.3

1

4.53

Return on Equity (ROE)%

1999

1998

1997

1996

1995

2003

2002

2001

2000

4,78

4

4,16

5 5,61

5

1,73

8

-1,9

61

636

-735

2,66

3

-7,1

68

Net Income (Loss)(Million ¥)

QChallenging conditions in both production

and sales are expected to persist in the

Japanese market. What measures are

Kayaba taking to reconfigure its domestic operations

and increase competitiveness?

ATo reinforce our business framework so as to

be able to secure profit in the Japanese market,

we will concentrate our efforts on improving

quality and costs. We will pursue automation and work-

force streamlining as a means to reforming cost struc-

tures and continue to revise manufacturing processes

and indirect departments. We will also continue to assess

market conditions and consider further reconfiguration

of our manufacturing plants when appropriate. Our first

priority in this regard is to reap the full benefits of the clo-

sure of the Urawa Plant and the integration of its opera-

tions into our other plants.

We consider the domestic business to be the nerve

center of the Kayaba Group’s operations, and we will

ultimately apply the streamlining measures that have

produced results in Japan to our overseas operations.

4

4


Production BaseSales OfficeRepresentative Office

QKayaba appears to be concentrating specifi-

cally on its overseas operations in fiscal 2003.

Please describe the background to this.

AKayaba’s primary customers, automobile and

motorcycle manufacturers, conduct their busi-

nesses on a global level, taking such steps as

establishing manufacturing plants in the regions that have

the largest demand.

Given this setting, relying on exports from Japan alone

incurs extra shipping, longer lead times, and other extra-

neous costs. Also, limiting overseas operations to joint

ventures or technological support alone introduces such

problems as quality issues and delivery timing and runs

the risk of restricted mobility and inability to fully satisfy

customer demands, thus limiting Kayaba-led services.

We therefore decided, based on the assessment of local

market scales, that Kayaba should expand overseas

on its own.

The latest Kayaba production methods and cutting-

edge technologies will be adopted by its overseas plants

so as to assure the same standard of quality as its pro-

duction operations in Japan.

Overseas business operations

Global Network

5

5

QWhat is your assessment of business

in North America?

AKayaba has been independently conducting

automobile shock absorber production in North

America since October 2001. Having learned

from past joint venture experience, we narrowed our

focus to supplying Japanese automakers and gave top

priority to corporate revitalization, including increasing

production efficiency, reducing product defects, and

educating the workforce. However, we have had sup-

ply requests from numerous companies, including the

Big Three, and in the months and years ahead we will

proactively develop sales and raise profitability.

Also, although the North American market for the

maintenance of shock absorbers stands at 30 million

units, Kayaba commands a mere 5% market share. By

unifying specifications and integrating overlapping items,

we will raise productivity with the aim of increasing our

market share.

QWhat is the progress of business

in Europe?

AUntil now, Kayaba’s automobile shock

absorbers have been supplied to the various

EU markets through its joint venture in Spain.

While we will continue to provide technological guidance

to production operations in Spain, after consideration of

responsiveness to Japanese automakers’ expansion into

Europe and economic viability, we have made the deci-

sion to construct a new plant in the Czech Republic.

We will also expand promotion and marketing to local

automakers in addition to Japanese manufacturers. For

example, although its power steering pump production

subsidiary in Spain supplies pumps for use in numerous

Volkswagen models, Kayaba’s status as one of the

world’s leading shock absorber manufacturers still goes

generally unnoticed. If the Company can focus on the

high quality of our products through concentrated pro-

motion and marketing, I believe there is a very good

chance that we will be able to supply our shock

absorbers to the major European automakers within

the next five years.

QWhat developments are being made in

Asia?

AJapanese automakers are expanding local pro-

duction operations in China, a market that

offers the merits of scale. Kayaba has decided

to formulate a local supply framework and established

KYB Industrial Machinery (Zhenjiang) Ltd. to produce and

market shock absorbers.

Using this new subsidiary as a base, Kayaba’s auto-

mobile shock absorber business in China will target

6

6


Maintenance and improvement of product quality

QThe topic of improved product quality is

often brought up. What level of quality is

Kayaba aiming to achieve?

APut simply: a level of quality that leaves our

customers, finished product manufacturers,

and end users, problem free. In other words,

we want the products that we deliver, by definition, to

cause zero hindrance to our customers’ operating lines.

The goal of each and every worker is to concentrate

on actually producing only products that provide total

customer satisfaction, rather than emphasizing defect

rate statistics.

Quality control can be very challenging, especially

since Kayaba makes products that are evaluated by cri-

teria that are not always quantifiable: ride quality, safety,

feeling, and so on. Nevertheless, we have commenced

programs to back up product warranty, with data taken

by quality managers at every process stage, starting at

the outset with the design review stage.

growing demand, including Sino-Japanese joint ventures.

We will also study the possibilities for promoting our

motorcycle shock absorbers and industrial hydraulic

devices in the growing Chinese market.

In other Asian regions, in addition to our operations

in Thailand, Malaysia, Indonesia, and Taiwan, we also

established a hydraulic shock absorber manufacturing

and sales company to supply the motorcycle industry

in Vietnam. By expanding orders from customers in

Vietnam, we aim to augment our supply framework in

the ASEAN region.

12,6

22

7,40

4

8,17

2

11,6

74

20,1

70

Overseas Sales by Geographic Area(North America)(Million ¥)

2003

2002

2001

2000

1999

13,0

08

16,5

08

16,0

22 17,7

15

18,8

08

Overseas Sales by Geographic Area(Europe)(Million ¥)

2003

2002

2001

2000

1999

5,58

0 6,54

0

6,75

5

5,83

0

7,87

2

Overseas Sales by Geographic Area(Southeast Asia)(Million ¥)

2003

2002

2001

2000

1999

7

7

Efforts for sustainable growth

We also consider clean working environments at our

plants to be one of the factors contributing to improved

product quality.

QWhat progress has Kayaba made in

technological R&D?

ASupplying highly reliable products with superb

cost performance amid growing globalization

requires not only improved performance for

each product but also development and product system-

ization and modularization.

Kayaba has been proactively engaged in R&D activi-

ties aimed at quickly creating new products and new

technologies with high-added-value and competitive-

ness, and many of these efforts are now bearing fruit.

For example, we have developed brakes for the bullet

train using aircraft systems technologies and we are

commencing overseas marketing of semi-active supension

originally developed for use in the bullet train. We also

achieved the world’s first mass production of Diamond-

Like Carbon (DLC) skin for use in motorcycle front forks,

which features excellent durability and seize resistance.

We are also jointly developing electromagnetic

dampers together with the University of Tokyo and work-

ing to enable low-cost overseas production of products

with the same properties as those made in Japan.

In the months and years ahead, we will continue to

invest proactively in R&D, which we see as a major

contributor to future profit.

QPlease describe Kayaba’s environmental

protection efforts.

AConsideration for the global environment is one

of Kayaba’s top priority action items. We are

constantly undertaking the challenge of devel-

oping environment-friendly products and technologies

while at the same time proactively working to reduce

environmental impact.

In environmental products, Kayaba has developed a

scrap plastic compactor that reduces the volume of

scrap plastic from PET bottles and other sources. The

compactor is now being supplied to waste treatment

centers and other local municipal facilities. We also jointly

developed a secondary pulverization vehicle for pruned

tree branches together with Hino Motors, Ltd. The pulver-

ized chips can be reused in compost or soil remediation

materials.

We hope to fully launch our new business related to

waste disposal and the environment in fiscal 2004.

QPlease explain the state of Kayaba’s

corporate governance.

AKayaba, of course, constantly pursues opti-

mum corporate governance. For example, our

flash bulletin system provides quick response

to on-site information and has been effective in achieving

zero time loss decision making. We will continue to

expand the use of this system as we go forward.

The majority of products handled by Kayaba are

custom-made or otherwise unique or require specific

technical knowledge. For this reason, it is often difficult

to see the effectiveness of recruiting external human

resources, and the Company currently uses only two

external auditors. However, in the interest of achieving

more forward-thinking corporate governance, we will

proactively explore other possibilities, including the adop-

tion of an executive officer system.

Shock Absorbers• For automobiles, motorcycles, railway

vehicles, and industrial-use products• Seismic isolation systems and vibration

control dampers

Hydraulic Equipment• For industrial use: Pumps, valves, motors,

and cylinders• For automobiles: Pumps and electric power

steering and four-wheel steering machinery• For aircraft: Equipment for landing systems,

flight control systems, pneumatic/hydraulicsystems, and space flight-related equipment

• Others: Jacks, brake pads, and clutch disksfor automobiles

Major Products

170,

874

173,

110

177,

700

169,

637 19

4,94

820

03

2002

2001

2000

1999

In October 2002, Kayaba established KayabaVietnam Co., Ltd., to serve Vietnam’s growingmotorcycle market.

Review of Operations

8

8

PerformanceDuring fiscal 2002, sales in the Hydraulic Products segment amounted to ¥194.9 billion (US$1,624.6 million), up ¥25.3 billion, or 14.9%,

from the previous fiscal year. Operating income for the segment surged ¥5.6 billion, or 61.9%, to ¥14.8 billion (US$123.0 million).

The primary reasons for these results were as follows.

Automobile shock absorbers—Beyond a rise in automobile production volume in Japan stemming from an export-led recovery,

shipments to the repairs market from Kayaba’s sales subsidiaries in Europe and North America also increased. The addition of

Kayaba’s new U.S. subsidiary, which commenced production in October 2002, to the scope of consolidation also contributed to a

substantial increase in revenue.

Hydraulic devices—Despite persistent weakness in domestic demand, Kayaba increased sales in industrial-use hydraulic devices

by effectively leveraging increases in exports to China in the segment’s core market of construction machinery manufacturers as

well as growth in the Company’s own exports to Asian markets. Sales of automotive hydraulic devices rose on the strength of

expanded production by the major domestic manufacturers as well as the inclusion of Kayaba’s power steering pump production

subsidiary in Thailand within the scope of consolidation.

HydraulicProducts

Sales of Hydraulic Products(Million ¥)

9

9

Kayaba will improve both quality and costs, and work to raise efficiency andcompetitiveness.

10

Systems Products• Special-purpose vehicles: Concrete mixer

trucks, granule carriers, exhaust absorbingcars, and special-function vehicles

• Systems devices: Motion simulators, controlsystems, electrical hydraulic servos, electroniccontrollers, hydraulic systems, auditorium andstage control systems, and hydraulic tunnelborers

16,2

55

15,7

99

15,1

50 16,5

92

13,9

7520

03

2002

2001

2000

1999

Kayaba has developed a waste plastic compactorfor use in local government environmental protectionprograms. The compactor reduces bulky scrap byone-tenth to one-fifteen its initial volume.

(Komono-cho Recycling Center in Mie)


10

PerformanceAlthough sales in the Systems Products segment during fiscal 2002 slipped ¥2.6 billion, or 15.8%, to ¥14.0 billion (US$116.5 million),

operating income amounted to ¥0.5 billion (US$4.5 million), a ¥0.8 billion improvement over a ¥0.3 billion loss in the previous fiscal

year.

The factors contributing to these results are as follows.

Systems devices—Sales eased off as a result of declines in deliveries of motion control devices to amusement parks and stage

control systems to large-scale facilities stemming from the protracted downturn in the Japanese economy.

Special-purpose vehicles—The Company increased sales in this sector by effectively leveraging new vehicle demand in the core

market for concrete mixer trucks in the second half resulting from Tokyo area emissions restrictions.

SystemsProducts

Major Products

Sales of Systems Products(Million ¥)

11

11

Kayaba will accelerate efforts to reduce breakeven points through thestreamlining of its workforce and other initiatives.

12

4,10

8

3,76

0

3,56

5

3,51

7 3,84

520

03

2002

2001

2000

1999 Joint research was undertaken with the University

of Tokyo into the possibility of developing electro-magnetic dampers with electric motors as next-generation dampers.


12

Major Product Developments in Fiscal 2002

This section outlines the ways in which the Company implemented a number of R&D initiatives during the recently ended

fiscal year.

Automobile shock absorbers—Development of the Dynamic Ride Control System, a new suspension system that links the

shock absorbers through the center unit, thereby greatly enhancing both handling and driving enjoyment.

Motorcycle shock absorbers—Introduction and establishment of mass production of the world’s first inner tube for motorcycle

front forks to use a DLC (Diamond-Like Carbon) skin, which is highly effective in reducing friction.

Railway shock absorbers—Development of a semi-active suspension for the bullet train featuring a switching system with contin-

uously variable damping force, an upgrade from the traditional fixed tiered phase damping force systems.

Anti-seismic vibration control dampers for buildings—Development of electronically controlled dampers, enabling low-cost

reduction of overall building vibration.

Steering devices—Development of the world’s first high-pressure high-capacity vein pump for passenger cars, delivering

enhanced handling and energy conservation.

Vehicle break pad products—Development of the new Rad’s Series, featuring substantially enhanced high-speed stability made

possible through improved durability and usable temperature range.

Stage control systems—Development of the Whispering Winch system, featuring extremely low operating noise and a broad

range of speeds.

Research& Development

R&D Expenditures(Million ¥)

13

Kayaba will strengthen its R&D framework and concentrate on performance enhancementand cost reduction, and search out new approaches to its products and technologies.t

13

14

14

Kenji Hanado Tadahiko Ozawa

Nobuyuki Funatsu Yoshitake Yonekubo

Kenzo Noguchi

Katsuma Ohara

Yohichi Furugohri Satoru Yamamoto

Kiyoshi Hosomi Masato Kosaka

Tomohiro Takeda Masahito Kori

Ken Mizumukai

Tatsuji Hayashi

Koji Masuda

Kiyoshi Inoue Masao Usui

Board of Directors and Corporate Auditors

Board of Directors

CHAIRMAN AND REPRESENTATIVE DIRECTOR

Kenji Hanado

PRESIDENT AND REPRESENTATIVE DIRECTOR

Tadahiko Ozawa

EXECUTIVE MANAGING DIRECTORS

Nobuyuki FunatsuLegal, Audit, and PurchasingGeneral Manager, Gifu Plants Management Div.

Yoshitake YonekuboTechnology and Information SystemsGeneral Manager, New Business DevelopmentOperations

Katsuma OharaInternational Operations General Manager, Suspension ProductsInternational Operations

MANAGING DIRECTORS

Yohichi FurugohriProduction and Environment General Manager, Aircraft Components Div.

Tomohiro TakedaGeneral Manager, Automotive Parts Div.

Masahito KoriCorporate Planning, General Affairs, and PersonnelAdministrationGeneral Manager, Corporate Planning Dept.

Kenzo NoguchiFinance and AccountingGeneral Manager, Finance and Accounting Dept.General Manager, Motorcycle Parts Div.

Satoru YamamotoGeneral Manager, Hydraulic Equipment Div.

DIRECTOR AND CORPORATE EXECUTIVE ADVISOR

Kiyoshi Hosomi

DIRECTORS

Masato KosakaQuality ControlGeneral Manager, Quality Control Dept.

Ken MizumukaiGeneral Manager, Gifu North Plant

Koji MasudaGeneral Manager, Gifu South Plant

Tatsuji HayashiGeneral Manager, General Affairs and Personnel Administration Dept.

Kiyoshi InoueGeneral Manager, Basic Technology R&D Center

Masao UsuiGeneral Manager, Sagami Plant

Corporate Auditors

STANDING CORPORATE AUDITORS

Katsuji AmanoHidetsune IsekiKatsuhisa Egawa

CORPORATE AUDITOR

Kenji Asai

(As of June 25, 2003)

15

15

Consolidated Five-Year SummaryKayaba Industry Co., Ltd. and Consolidated Subsidiaries Years ended March 31

Financial Section

Thousands ofMillions of yen U.S. dollars

2003 2002 2001 2000 1999 2003

For the year:Net sales .................................................................. ¥207,643 ¥184,919 ¥192,052 ¥187,522 ¥185,405 $1,730,358Operating expenses ................................................. 198,706 182,085 184,952 182,090 183,922 1,655,883Net income (loss)...................................................... 2,663 (735) 636 (7,168) (1,961) 22,192Capital expenditures................................................. 8,398 8,389 6,979 6,210 11,096 69,983

At year-end:Working capital ........................................................ ¥ 24,550 ¥ 25,267 ¥ 17,770 ¥ 33,063 ¥ 28,945 $ 204,583Total shareholders’ equity......................................... 59,521 57,956 54,309 56,029 63,463 496,008Total assets.............................................................. 194,455 185,868 183,214 185,010 169,334 1,620,458

Yen U.S. dollars

Per share:Net income (loss)...................................................... ¥ 11.47 ¥ (3.30) ¥ 2.85 ¥ (32.09) ¥ (8.53) $ 0.10Cash dividends applicable to the year ...................... 5.00 — 6.00 3.00 3.00 0.04Net worth ................................................................. 266.62 259.92 243.56 251.27 280.94 2.22

Number of employees............................................... 6,105 6,159 6,031 6,161 5,810

Notes: 1. Unless otherwise indicated, all dollar amounts herein refer to U.S. currency. Yen amounts have been translated into U.S. dollars, for convenience only, at ¥120=US$1,the approximate exchange rate prevailing on March 31, 2003. Billion is used in the American sense of one thousand million.

Notes: 2. Per share amounts are based on the average number of shares outstanding each year.

Contents

Financial Review.............................................................................................16

Consolidated Balance Sheets ........................................................................18

Consolidated Statements of Operations and Retained Earnings...................20

Consolidated Statements of Cash Flows .......................................................21

Notes to Consolidated Financial Statements.................................................22

Report of Independent Public Accountants ...................................................35

6

16

Financial Review

RESULTS OF OPERATIONSNet salesKayaba’s consolidated net sales for fiscal 2002, ended March31, 2003, increased 12.3%, or ¥22,724 million, to ¥207,643 mil-lion (US$1,730 million). Sales were boosted by increases in rev-enue from the Hydraulic Products segment, particularly inautomobile shock absorbers and industrial-use and automobilehydraulic devices, and from the new subsidiary in the UnitedStates, which commenced shock absorber production inOctober 2001. These factors compensated for the decline in rev-enue from the Systems Products segment.

Cost of salesCost of sales increased 9.6%, or ¥14,895 million, to ¥170,003million (US$1,417 million). The cost of sales ratio was down 2.0percentage points, to 81.9%, and net sales increased 12.3%.Gross profit rose 26.3%, or ¥7,829 million, to ¥37,640 million(US$314 million), and the gross profit margin was 18.1%, upfrom 16.1% in the previous fiscal year.

Operating incomeOperating income totaled ¥8,937 million (US$74 million), up215.3%, or ¥6,103 million, from the previous fiscal year. Selling,general and administrative (SG&A) expenses increased 6.4%,or ¥1,726 million, to ¥28,703 million (US$239 million), com-mensurate with the increase in net sales, and the ratio of SG&Aexpenses to net sales was 13.8%, down 0.8 percentage point,compared with 14.6% in the previous fiscal year.

Income (loss) before income taxes and minority interestsThe Company’s expenses included a loss on devaluation ofinvestment securities of ¥1,591 million due to market pricedeclines on its stockholdings and ¥1,017 million in severanceand retirement benefit expenses. However, as stated above, as

a result of Kayaba’s Groupwide measures to improve profitability,including the securing of orders from customers through effectivesales promotion, decreasing assets, and reducing costs, incomebefore income taxes and minority interests jumped to ¥5,466 mil-lion (US$46 million), compared with a loss of ¥79 million in theprevious fiscal year.

Net Income (loss)After deducting income taxes and minority interests from incomebefore income taxes, net income amounted to ¥2,663 million(US$22 million), an increase of ¥3,398 million from the previous fis-cal year’s loss. Net income per share was ¥11.47 (US$0.10) andcash dividends applicable to the fiscal year were ¥5.00 (US$0.04).

FINANCIAL CONDITIONSAssetsTotal assets amounted to ¥194,455 million (US$1,620 million),up 4.6%, or ¥8,587 million, from the previous fiscal year-end.

Total current assets were ¥106,616 million (US$888 million),up ¥12,950 million, due mainly to a ¥3,681 million increase intrade notes and accounts receivable, and a ¥10,657 millionincrease in short-term loans receivable. The increase in tradenotes and accounts receivable was a result of the increase insales and the rise in short-term loans receivable was caused bya change in accounting practices for the parent company’sadministration of short-term excess cash to presentation asa loan receivable item.

Total investments and other non-current assets declined¥4,405 million, to ¥22,043 million (US$184 million), due mainlyto a decrease in deferred tax assets.

A total of ¥8,398 million (US$70 million) was invested in prop-erty, plant and equipment, a slight increase of ¥9 million fromthe previous fiscal year, and ¥8,031 million (US$67 million) wasdepreciated in property, plant and equipment, slightly down

185.

4

187.

5

192.

1

184.

9

207.

6

Net Sales(Billion ¥)

2003

2002

2001

2000

1999

0.6

2.7

-2.0

-7.2

-0.7

Net Income (Loss)(Billion ¥)

2003

2002

2001

2000

1999

1.5

5.4

7.1

2.8

8.9

Operating Income(Billion ¥)

2003

2002

2001

2000

1999

11.1

6.2

7.0

8.4

8.4

Capital Expenditures(Billion ¥)

2003

2002

2001

2000

1999

17

17

¥2 million from the previous fiscal year. The book value ofmachinery and equipment increased ¥1,844 million, to ¥144,808million (US$1,207 million). Net property, plant and equipmentamounted to ¥65,796 million (US$548 million).

LiabilitiesTotal liabilities and minority interests in consolidated subsidiariesrose ¥7,021 million, to ¥134,934 million (US$1,124 million). Thisprincipally reflected a ¥6,220 million increase in trade notes andaccounts payable. This rise was due to increased purchasingresulting from the expansion in production. Short- and long-terminterest-bearing debt decreased ¥570 million, to ¥51,053 million(US$425 million). The debt-to-equity ratio (interest-bearing debtdivided by the sum of interest-bearing debt and shareholders’equity) decreased from 47.1% to 46.2%, and the current ratiodecreased from 1.37 to 1.30.

Shareholders’ EquityTotal shareholders’ equity increased ¥1,565 million, to ¥59,521million (US$496 million), mainly due to a ¥2,048 million increasein retained earnings. However, due to the aforementioned ¥8,587million increase in total assets, the shareholders’ equity ratiodecreased 0.6 percentage point, to 30.6%.

Cash FlowsNet cash provided by operating activities amounted to ¥19,279million (US$161 million), an increase of ¥12,865 million from theprevious fiscal term. This was primarily attributable to incomebefore income taxes and minority interests of ¥5,466 million(US$46 million) and depreciation and amortization of ¥8,157 mil-lion (US$68 million). The net changes in accounts receivable,inventories, and trade notes and accounts payable resulting fromthe increase in sales generated a cash balance of ¥1,457 million.

Net cash used in investing activities increased ¥551 million, to¥10,107 million (US$84 million). Net cash outflow due to payments

for acquisition of property, plant and equipment totaled ¥7,785million (US$65 million) and payments for acquisition of investmentsecurities of ¥1,424 million (US$12 million) and payments for addi-tional acquisition of consolidated subsidiaries stock of ¥1,131million (US$9 million). Hence, free cash flow improved by a sub-stantial margin of ¥12,314 million, from a cash outflow of ¥3,142million in the previous fiscal year, to a cash inflow of ¥9,172 mil-lion (US$76 million).

Net cash used in financing activities amounted to ¥1,261 mil-lion (US$11 million), compared with ¥1,680 million in net cashprovided by financing activities in the previous fiscal year. Netcash outflow was mainly due to the repayments of long-termdebt that amounted to ¥3,087 million (US$26 million) and cashdividends paid out of ¥446 million (US$4 million), while net cashinflow was primarily due to ¥1,798 million (US$15 million) fromshort-term loans.

As a result, cash and cash equivalents at end of year amount-ed to ¥20,252 million (US$169 million), compared with ¥12,281million at the previous fiscal year-end.

Consequently, management is confident that it has maintaineda sufficiently high level of liquidity.

SEGMENT INFORMATIONRevenue from sales of automobile shock absorbers increasedsubstantially due to an export-led recovery in domestic automo-bile production volumes, increased shipments by Kayaba’sEuropean and North American subsidiaries to the repair market,and strong sales by Kayaba’s U.S. subsidiary. Sales of theHydraulic Products segment were boosted by increased produc-tion on the part of principal domestic manufacturers as well asthe addition of Kayaba’s Thailand power steering pump produc-tion subsidiary to the scope of consolidation. Despite stagnationin domestic demand, sales of industrial-use hydraulic productsalso increased as a result of exports to China by the segment’sprimary customer base of construction machinery manufacturersas well as growth in the Company’s own direct exports to Asia.However, sales of hydraulic products for aircraft edged down asa result of a decline in production at The Boeing Company.

Sales of concrete mixer trucks and other special-purpose vehi-cles rose on the strength of demand for replacement vehiclesfollowing the implementation of new emissions restrictions in theTokyo area in the second half of the term. However, in-systemdevices revenues declined as a result of decreases in demandof stage control systems to large-scale facilities and motionsimulators to amusement parks.

Overseas sales increased 32.2%, or ¥12,831 million, to¥52,721 million (US$439 million), and accounted for 25.4% of netsales. Due to a rise in revenues from Kayaba’s U.S. subsidiary,which commenced shock absorber production in October 2001,sales in North America jumped 72.8%, or ¥8,496 million, to¥20,170 million (US$168 million). As a result of the addition ofKayaba’s subsidiaries in Southeast Asia to the scope of consoli-dation, sales in Southeast Asia rose 35.0%, or ¥2,042 million, to¥7,872 million (US$66 million).

Total Shareholders’ Equity Ratio(%)

30.6

37.5

30.3

29.6 31

.2

2003

2002

2001

2000

1999

Return on Equity (ROE)(%)

4.5

-3.0

-12.

0

1.2

-1.3

2003

2002

2001

2000

1999

8

18

Consolidated Balance Sheets

Kayaba Industry Co., Ltd. and Consolidated Subsidiaries March 31, 2003 and 2002

Thousands ofMillions of yen U.S. dollars (Note 1)

ASSETS 2003 2002 2003

Current assets:Cash and time deposits (Note 9)..................................................................................... ¥ 10,121 ¥ 12,641 $ 84,342Marketable securities (Note 11)....................................................................................... — 63 —Trade receivables:

Notes and accounts ................................................................................................... 58,607 54,926 488,392Unconsolidated subsidiaries and affiliated companies ................................................. 747 1,432 6,225Allowance for doubtful receivables.............................................................................. (338) (156) (2,817)

Inventories (Note 3)......................................................................................................... 23,134 22,953 192,784Deferred tax assets (Note 6) ........................................................................................... 3,241 1,297 27,008Short-term loans receivable ............................................................................................ 10,704 47 89,200Prepaid expenses and other current assets .................................................................... 400 463 3,333

Total current assets ................................................................................................ 106,616 93,666 888,467

Investments and other non-current assets:Investments in and loans to unconsolidated subsidiariesand affiliated companies ............................................................................................... 3,753 3,685 31,275

Allowance for doubtful receivables.................................................................................. (164) (164) (1,367)Investment securities (Note 11) ....................................................................................... 8,994 9,712 74,950Lease deposits, loans and other long-term receivables................................................... 1,988 2,470 16,567Deferred tax assets (Note 6) ........................................................................................... 7,130 10,454 59,417Other assets ................................................................................................................... 342 291 2,850

Total investments and other non-current assets...................................................... 22,043 26,448 183,692

Property, plant and equipment (Note 4):Land............................................................................................................................... 21,378 21,282 178,150Buildings......................................................................................................................... 38,576 38,103 321,467Machinery and equipment .............................................................................................. 144,808 142,964 1,206,732Construction in progress................................................................................................. 1,458 1,142 12,150

Total ....................................................................................................................... 206,220 203,491 1,718,499Less accumulated depreciation ...................................................................................... 140,424 137,737 1,170,200

Net property, plant and equipment ......................................................................... 65,796 65,754 548,299

Total assets ............................................................................................................ ¥194,455 ¥185,868 $1,620,458

See accompanying notes.

19

19


LIABILITIES AND SHAREHOLDERS’ EQUITY 2003 2002 2003

Current liabilities:Bank loans (Note 4) ........................................................................................................ ¥ 17,556 ¥ 15,648 $ 146,300Current maturities of long-term debt (Note 4) .................................................................. 7,531 2,984 62,758Trade payables:

Notes and accounts ................................................................................................... 42,341 36,121 352,842Unconsolidated subsidiaries and affiliated companies ................................................. 393 414 3,275

Payables—other ............................................................................................................. 6,030 6,465 50,250Accrued expenses.......................................................................................................... 6,080 5,045 50,667Income taxes payable..................................................................................................... 1,444 358 12,033Other current liabilities .................................................................................................... 691 1,364 5,758

Total current liabilities.............................................................................................. 82,066 68,399 683,883

Long-term debt less current maturities (Note 4) ........................................................... 25,967 32,992 216,392Retirement benefits (Note 5)............................................................................................ 19,543 18,127 162,858Deferred tax liabilities on land revaluation.................................................................... 4,823 4,983 40,192Other long-term liabilities ............................................................................................... 557 519 4,642

Minority interests in consolidated subsidiaries ............................................................ 1,978 2,892 16,483

Contingent liabilities (Note 8)

Shareholders’ equity (Note 7):Common stock;

Authorized—491,955,000 sharesIssued—222,984,315 shares...................................................................................... 19,114 19,114 159,283

Capital surplus................................................................................................................ 20,248 20,248 168,733Land revaluation excess ................................................................................................. 5,231 5,070 43,592Retained earnings........................................................................................................... 16,506 14,458 137,550Net unrealized holding gains on securities....................................................................... 982 1,129 8,183Foreign currency translation adjustments........................................................................ (2,531) (2,061) (21,091)Less: Treasury stock....................................................................................................... (29) (2) (242)

Total shareholders’ equity ....................................................................................... 59,521 57,956 496,008

Total liabilities and shareholders’ equity .................................................................. ¥194,455 ¥185,868 $1,620,458

20

20

Kayaba Industry Co., Ltd. and Consolidated Subsidiaries Years ended March 31, 2003 and 2002


2003 2002 2003

Net sales (Note 15)............................................................................................................ ¥207,643 ¥184,919 $1,730,358Cost of sales (Notes 13 and 15) ....................................................................................... 170,003 155,108 1,416,691

Gross profit............................................................................................................. 37,640 29,811 313,667Selling, general and administrative expenses (Notes 13 and 15) ................................. 28,703 26,977 239,192

Operating income (Note 15) .................................................................................... 8,937 2,834 74,475Other income (expenses):

Interest and dividend income .......................................................................................... 154 181 1,283Interest expense ............................................................................................................. (932) (1,078) (7,767)Gain on sale of investments in stock of affiliated companies ........................................... 69 — 575Severance and retirement benefit expenses (Note 5) ...................................................... (1,017) (1,017) (8,475)Reorganization and restructuring costs of U.S. operations.............................................. — (148) —Reorganization and restructuring costs of Hydraulic Equipment Division ......................... (647) — (5,392)Royalty income ............................................................................................................... 666 657 5,550Loss on disposal of property, plant and equipment......................................................... (612) (584) (5,100)Equity in earnings of unconsolidated subsidiaries and affiliated companies ..................... 650 483 5,417Loss on devaluation of investment securities................................................................... (1,591) (2,420) (13,258)Other, net (Note 14) ........................................................................................................ (211) 1,013 (1,758)

Net other expenses ................................................................................................ (3,471) (2,913) (28,925)

Income (loss) before income taxes and minority interests........................................ 5,466 (79) 45,550Income taxes (Note 6):

Current ....................................................................................................................... 1,049 415 8,741Deferred ..................................................................................................................... 1,520 9 12,667

Income (loss) before minority interests in consolidated subsidiaries................................. 2,987 (503) 24,142Minority interests ............................................................................................................ (234) (232) (1,950)

Net income (loss) .................................................................................................... 2,663 (735) 22,192Retained earnings:

Balance at beginning of year........................................................................................... 14,458 15,892 120,483Deductions:

Cash dividends paid ................................................................................................... (446) (669) (3,717)Bonuses to directors and corporate auditors .............................................................. (37) (29) (308)Bonuses to employees ............................................................................................... — (1) —Decrease in retained earnings from decrease in number of consolidated subsidiaries... (126) — (1,050)Decrease in retained earnings from increase in number of consolidated subsidiaries .... (6) — (50)

Balance at end of year .................................................................................................... ¥ 16,506 ¥ 14,458 $ 137,550

Yen U.S. dollars (Note 1)

Amounts per share of common stock:Net income (loss) ............................................................................................................ ¥11.47 ¥(3.30) $0.10Cash dividends applicable to the year............................................................................. 5.00 — 0.04


Consolidated Statements of Operations and Retained Earnings


2

21


2003 2002 2003

Cash flows from operating activities:Income (loss) before income taxes and minority interests ................................................... ¥ 5,466 ¥ (79) $ 45,550

Depreciation and amortization ........................................................................................ 8,157 8,188 67,975Loss on disposal of property, plant and equipment ........................................................ 612 584 5,100Loss on devaluation of investment securities .................................................................. 1,591 2,420 13,258Amortization of consolidation goodwill ............................................................................ 74 61 617Changes in allowance for doubtful receivables ............................................................... 193 147 1,608Changes in retirement benefits ....................................................................................... 1,517 (2,366) 12,642Interest and dividend income.......................................................................................... (154) (181) (1,283)Interest........................................................................................................................... 932 1,078 7,767Equity in expense of unconsolidated subsidiaries and affiliated companies ..................... (650) (483) (5,417)Gain on sale of property, plant and equipment ............................................................... (4) (21) (33)Reorganization and restructuring costs of U.S. operations ............................................. — 148 —Reorganization and restructuring costs of Hydraulic Equipment Division......................... 648 — 5,400Changes in trade notes and accounts receivable............................................................ (4,447) 5,756 (37,059)Changes in inventories ................................................................................................... (569) 1,629 (4,742)Changes in trade notes and accounts payable ............................................................... 6,473 (6,249) 53,942Other, net....................................................................................................................... 711 (1,704) 5,925

Subtotal ................................................................................................................. 20,550 8,928 171,250Interest and dividends received ...................................................................................... 306 251 2,550Interest paid ................................................................................................................... (925) (1,112) (7,708)Income taxes paid.......................................................................................................... (447) (1,795) (3,725)Income taxes refunded................................................................................................... 187 142 1,558Payments for reorganization and restructuring costs of Hydraulic Equipment Division .... (392) — (3,267)

Net cash provided by operating activities ............................................................... 19,279 6,414 160,658Cash flows from investing activities:

Transfer to time deposits.................................................................................................... (1,266) (592) (10,550)Transfer from time deposits................................................................................................ 1,131 775 9,425Payments for acquisition of property, plant and equipment................................................. (7,785) (8,383) (64,875)Proceeds from sale of property, plant and equipment ........................................................ 20 55 167Payments for acquisition of investment securities ............................................................... (1,424) (1,128) (11,867)Proceeds from sale of investment securities ....................................................................... — 96 —Payments for additional acquisition of consolidated subsidiaries stock ............................... (1,131) — (9,425)Payments for loans............................................................................................................. (47) (3,058) (392)Proceeds from collection of loans....................................................................................... 247 3,080 2,058Other, net .......................................................................................................................... 148 (401) 1,234

Net cash used in investing activities........................................................................ (10,107) (9,556) (84,225)Cash flows from financing activities:

Proceeds from bank loans.................................................................................................. 30,867 28,812 257,225Repayments of bank loans ................................................................................................. (29,068) (28,441) (242,233)Proceeds from long-term debt .......................................................................................... 603 13,200 5,025Repayments of long-term debt........................................................................................... (3,087) (3,161) (25,725)Repayments of bonds ....................................................................................................... — (8,000) —Payments for acquisition of treasury stock.......................................................................... (26) (2) (217)Cash dividends paid........................................................................................................... (446) (669) (3,717)Cash dividends paid for minority interests........................................................................... (104) (59) (866)

Net cash used in (provided by) financing activities .................................................. (1,261) 1,680 (10,508)Effect of exchange rate changes on cash and cash equivalents ................................... 36 152 300

Net increase (decrease) in cash and cash equivalents ................................................... 7,947 (1,310) 66,225Cash and cash equivalents at beginning of year ............................................................. 12,281 13,591 102,342Increase in cash and cash equivalents due to change of consolidated scope ............ 24 — 200

Cash and cash equivalents at end of year (Note 9)........................................................... ¥20,252 ¥12,281 $168,767


Consolidated Statements of Cash Flows

22

22


The Company and its consolidated domestic subsidiaries main-

tain their official accounting records in Japanese yen, and in

accordance with the provisions set forth in the Japanese

Commercial Code and accounting principles and practices gen-

erally accepted in Japan (“Japanese GAAP”). The accounts of

overseas subsidiaries are based on their accounting records

maintained in conformity with generally accepted accounting

principles and practices prevailing in the respective countries of

domicile. Certain accounting principles and practices generally

accepted in Japan are different from International Accounting

Standards and standards in other countries in certain respects as

to application and disclosure requirements. Accordingly, the

accompanying consolidated financial statements are intended for

use by those who are informed about Japanese accounting prin-

ciples and practices.

The accompanying financial statements have been restructured

and translated into English (with some expanded descriptions

and the inclusion of the statements of shareholders’ equity) from

the consolidated financial statements of the Company prepared

in accordance with Japanese GAAP and filed with the appropri-

ate Local Finance Bureau of the Ministry of Finance as required

by the Securities and Exchange Law. Some supplementary informa-

tion included in the statutory Japanese-language consolidated

financial statements, but not required for fair presentation, is not

presented in the accompanying financial statements.

The translation of the Japanese yen amounts into U.S. dollars

are included solely for the convenience of readers, using the pre-

vailing exchange rate at March 31, 2003, which was ¥120 to

US$1. The convenience translations should not be construed as

representations that the Japanese yen amounts have been,

could have been, or could in the future be converted into U.S.

dollars at this or any other rate of exchange.

1. BASIS OF PRESENTING CONSOLIDATED FINANCIAL STATEMENTS

Consolidation

The consolidated financial statements of the Company include

the accounts of the Company and its significant subsidiaries

(16 in 2003 and 17 in 2002) which are controlled through sub-

stantial ownership of majority voting rights or the existence of

certain conditions.

Financial statements of certain consolidated subsidiaries which

have the fiscal year ending December 31 were consolidated with

adjustments made for material transactions which took place in

the three-month period between the balance sheet date of such

subsidiaries and that of the Company.

Equity method

Investments in seven affiliated companies in 2003 and eight in 2002

(20% to 50% owned and certain others less than 20% owned) are

accounted for by the equity method and, accordingly, are stated

at cost adjusted for equity in undistributed earnings and losses

from the date of acquisition.

Investments in the other affiliated companies and unconsolidated

subsidiaries are stated at cost or less.

Foreign currency translation

Receivables and payables denominated in foreign currencies are

translated into Japanese yen at the year-end rates.

Balance sheets of consolidated overseas subsidiaries are trans-

lated into Japanese yen at the year-end rates except for share-

holders’ equity accounts, which are translated at the historical

rates. Income statements of consolidated overseas subsidiaries

are translated at average rates.

Foreign currency translation adjustments are presented in

shareholders’ equity and minority interests.

Cash and cash equivalents

In preparing the consolidated statements of cash flows, cash on

hand, readily-available deposits and short-term highly liquid invest-

ments with maturities of not exceeding three months at the time

of purchase are considered to be cash and cash equivalents.

Inventories

Inventories are stated at cost by the weighted-average method.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Notes to Consolidated Financial Statements

23

23

Securities

Under the accounting standard for financial instruments, the

Company and its consolidated subsidiaries (the “Companies”)

examine the intent of holding each security and classify those

securities as (a) securities held for trading purposes, (b) debt

securities intended to be held to maturity, (c) equity securities

issued by subsidiaries and affiliated companies and (d) for all

other securities that are not classified in any of the above cate-

gories (hereafter, “available-for-sale securities”).

Equity securities issued by subsidiaries and affiliated compa-

nies which are not consolidated or accounted for using the equity

method are stated at moving-average cost. Available-for-sale

securities with available fair market values are stated at fair market

value. Unrealized gains and unrealized losses on these securities

are reported, net of applicable income taxes, as a separate com-

ponent of shareholders’ equity. Realized gains and losses on sales

of such securities are computed using the moving-average cost.

Securities with no available fair market value are stated at

moving-average cost.

For the year ended March 31, 2002, as permitted as a tempo-

rary measure under the new accounting standards for financial

instruments effective April 1, 2000, securities acquired under

resale agreements continued to be accounted for in the same

manner as in the periods before April 1, 2000. At March 31,

2002, marketable securities and cash and time deposits included

such securities amounting to ¥63 million ($525 thousand) and

¥4,000 million ($33,333 thousand), respectively. However, with

effect from the year ended March 31, 2003, the Companies clas-

sify those securities into short-term loans receivable on the bal-

ance sheet. The balance of such securities was ¥10,704 million

($89,200 thousand) as of March 31, 2003.

Derivative transactions and hedge accounting

The accounting standard for financial instruments requires com-

panies to state derivative financial instruments at fair value and to

recognize changes in the fair value as gains or losses unless

derivative financial instruments are used for hedging purposes.

If derivative financial instruments are used as hedges and meet

certain hedging criteria, the Companies defer recognition of gains

or losses resulting from changes in the fair value of derivative

financial instruments until the related gains or losses on the

hedged items are recognized.

However, if a forward foreign exchange contract is executed to

hedge a future transaction denominated in a foreign currency, the

future transaction will be recorded using the contracted forward

rate and no gains or losses on the forward foreign exchange con-

tract are recognized.

Also, if interest rate swap contracts are used as hedges and

meet certain hedging criteria, the net amount to be paid or received

under the interest rate swap contract is added to or deducted

from the interest on the assets or liabilities for which the swap

contract was executed.

Property, plant and equipment

Property, plant and equipment are carried at cost except for cer-

tain land used for business operations. Depreciation is computed

by the declining-balance method at rates based on the estimated

useful lives, except for buildings acquired after March 31, 1998,

which are depreciated using the straight-line method. Overseas

consolidated subsidiaries use the straight-line method over the

estimated useful lives.

Land revaluation

Pursuant to the Law Concerning Revaluation of Land enacted on

March 31, 1998, land owned by the Company for business oper-

ations was revalued at fair value as of March 31, 2002. Due to

the revaluation, the book value of the land increased by ¥10,054

million, to ¥20,377 million as of March 31, 2002, and the related

unrealized gain is reported as a separate component of share-

holders’ equity net of applicable income taxes as of March 31,

2002.

According to the revised law, the Company is not permitted to

revalue the land at any time even in the case that the fair value of

the land declines. Such unrecorded revaluation loss amounted to

¥2,769 million ($23,075 thousand) at March 31, 2003.

Research and development

Expenses relating to research and development activities are

charged to income as incurred.

Certain lease transactions

Financial leases, except for those leases for which the ownership

of the leased assets is considered to be transferred to lessees,

are accounted for as operating leases.

24

24

Retirement benefits

(1) Employees’ severance and retirement benefits

The Company and its certain domestic consolidated subsidiaries

provide two types of post-employment benefit plans, unfunded

lump-sum payment plans and funded noncontributory pension

plans, under which all eligible employees are entitled to benefits

based on the level of wage and salary at the time of retirement or

termination, length of service and certain other factors. Some

subsidiaries have adopted a pension plan of their own.

At March 31, 2000, the Company and certain domestic con-

solidated subsidiaries accrued liabilities for lump-sum severance

and retirement payments at 100% of the amount required had

all eligible employees voluntarily terminated their employment at

the balance sheet date. The Companies recognized pension ex-

pense based on the accrual method.

The Companies provided an allowance for employees’ sever-

ance and retirement benefits at March 31, 2003 and 2002 based

on the amounts of projected benefit obligation and the fair value

of the plan assets at those dates.

The excess of the projected benefit obligation over the total of

the fair value of pension assets as of April 1, 2000 and the bal-

ances of retirement benefits and accrued prior service costs

recorded as of April 1, 2000 (the “net transition obligation”)

amounted to ¥16,442 million, of which ¥11,358 million was rec-

ognized as an expense as a result of the contribution of invest-

ment securities worth ¥11,358 million to the employee retirement

benefit trust in June 2000. The remaining net transition obligation,

amounting to ¥5,084 million, will be recognized in expenses in

equal amounts over five years commencing with the year ended

March 31, 2001. Actuarial gains and losses are recognized in

expenses in equal amounts over the average of the estimated

remaining service lives (14 to 15 years) commencing with the

succeeding period.

(2) Severance and retirement allowance for directors

Directors and corporate auditors of the Company and certain sub-

sidiaries receive lump-sum payments upon termination of their ser-

vices under unfunded termination plans. The full amount of such

retirement benefits for directors and corporate auditors is accrued

in accordance with the internal rules. The payments to directors

and corporate auditors are subject to shareholders’ approval.

Income taxes

Income taxes comprise corporation, enterprise and inhabitant taxes.

The Companies recognize tax effects of temporary differences

between the financial statement basis and the tax basis of assets

and liabilities.

Amounts per share

In computing net income (loss) per share of common stock, the

average number of shares issued during each fiscal year has

been used. For diluted net income per share, both net income

(loss) and shares outstanding were adjusted to assume the con-

version of convertible bonds. Cash dividends per share represent

actual amounts applicable to the respective years.

Effective April 1, 2002, the Company adopted the new account-

ing standard for earnings per share and related guidance (Ac-

counting Standards Board Statement No. 2, “Accounting Standard

for Earnings Per Share” and Financial Standards Implementation

Guidance No. 4, “Implementation Guidance for Accounting Stan-

dard for Earnings Per Share,” issued by the Accounting Standards

Board of Japan on September 25, 2002).

The effect on earnings per share of the adoption of the new

accounting standard was not material.

Reclassifications

Certain prior year amounts have been reclassified to conform to

the 2003 presentation. These changes had no impact on previ-

ously reported results of operations or shareholders’ equity.

Treasury stock and reversal of statutory reserves

Effective April 1, 2002, the Company adopted the new account-

ing standard for treasury stock and reversal of statutory reserves

(Accounting Standards Board Statement No. 1, “Accounting

Standard for Treasury Stock and Reversal of Statutory Reserves,”

issued by the Accounting Standards Board of Japan on February

21, 2002). The effect on net income of adopting the new stan-

dard was not significant.

25

25

Inventories at March 31, 2003 and 2002 consisted of the following:


2003 2002 2003

Finished products .......................................................................................................................... ¥ 9,489 ¥10,210 $ 79,075Work in process............................................................................................................................. 10,778 10,567 89,817Raw materials and supplies ........................................................................................................... 2,867 2,176 23,892

...................................................................................................................................................... ¥23,134 ¥22,953 $192,784

3. INVENTORIES

Bank loans at March 31, 2003 and 2002 were represented by

short-term notes, generally 90 days, bearing annual interest rates

ranging from 0.49% to 4.60% and from 0.49% to 4.73%,

respectively.

4. BANK LOANS AND LONG-TERM DEBT

Long-term debt at March 31, 2003 and 2002 consisted of the following:


2003 2002 2003

2.5% unsecured bonds, due in 2005 ............................................................................................. ¥ 7,000 ¥ 7,000 $ 58,333Loans from banks and others, due through 2009 withinterest rates ranging from 0.95% to 2.9%:Secured..................................................................................................................................... 2,833 3,054 23,608Unsecured................................................................................................................................. 23,665 25,922 197,209

Total .................................................................................................................................. 33,498 35,976 279,150Less current maturities................................................................................................................... 7,531 2,984 62,758

...................................................................................................................................................... ¥25,967 ¥32,992 $216,392

As is customary in Japan, security may have to be given if

requested by a lending bank, and such bank has the right to off-

set cash deposited with it against any debt or all obligations that

become due and, in the case of default or certain other specified

events, against all debts payable to the bank. The Company has

never received such a request.

At March 31, 2003, the following assets were pledged as col-

lateral for notes and long-term bank loans:


Property, plant and equipment less accumulated depreciation ..................................................................... ¥18,496 $154,133

The aggregate annual maturities of long-term debt are as follows:

Thousands ofYear ending March 31, Millions of yen U.S. dollars

2004 ............................................................................................................................................................ ¥ 7,531 $ 62,7582005 ............................................................................................................................................................ 10,268 85,5672006 ............................................................................................................................................................ 3,826 31,8832007 ............................................................................................................................................................ 8,295 69,1252008 ............................................................................................................................................................ 1,595 13,292Thereafter..................................................................................................................................................... 1,983 16,525

.................................................................................................................................................................... ¥33,498 $279,150

26

26


2003 2002 2003

Projected benefit obligation .......................................................................................................... ¥100,196 ¥88,136 $834,967Unrecognized actuarial differences............................................................................................... (35,832) (16,861) (298,600)Less fair value of plan assets........................................................................................................ (43,927) (51,352) (366,058)Less unrecognized net transition obligation .................................................................................. (2,028) (3,050) (16,900)Prepaid pension expense............................................................................................................. 479 721 3,991

Liability for employees’ severance and retirement benefits........................................................ 18,888 17,594 157,400Severance and retirement allowance for directors .................................................................... 655 533 5,458

Total retirement benefits........................................................................................................... ¥ 19,543 ¥18,127 $162,858

Included in the consolidated statements of operations and retained earnings for the years ended March 31, 2003 and 2002 are

employees’ severance and retirement benefit expenses comprising the following:


2003 2002 2003

Service costs–benefits earned during the year ................................................................................. ¥2,612 ¥2,564 $21,767Interest cost on projected benefit obligation..................................................................................... 2,623 2,907 21,858Expected return on plan assets........................................................................................................ (1,321) (2,108) (11,008)Amortization of net transition obligation............................................................................................ 1,017 1,017 8,475Amortization of actuarial differences................................................................................................. 1,162 570 9,683Special payment of extra retirement benefits.................................................................................... 42 65 350

Severance and retirement benefit expenses................................................................................. ¥6,135 ¥5,015 $51,125

The estimated amount of all employees’ retirement benefits to

be paid at the future retirement date is allocated equally to each

service year using the estimated number of total service years.

The discount rate and the rate of expected return on plan assets

used by the Companies were 2.5% and 3.0% for 2003, and

3.0% and 3.5% to 5.0% for 2002, respectively. Actuarial differ-

ences are recognized as an expense in equal amounts over 14 to

15 years.

As explained in Note 2, Summary of Significant Accounting Poli-

cies, the liabilities and expenses for employees’ severance and

retirement benefits are determined based on the amounts obtained

by actuarial calculations.

The liabilities for employees’ severance and retirement benefits

included in the liabilities section of the consolidated balance

sheets as of March 31, 2003 and 2002 consist of the following:

5. RETIREMENT BENEFITS

6. INCOME TAXES

The aggregate statutory income tax rate will be reduced for the

years commencing on April 1, 2004 or later due to the revised

local tax law. At March 31, 2003, the Company and consolidat-

ed domestic subsidiaries applied the reduced aggregate statu-

tory income tax rate of 39.8% for calculating deferred tax assets

and liabilities that are expected to be recovered or settled in the

years commencing on April 1, 2004 or later. As a result, de-

ferred tax assets decreased by ¥279 million ($2,325 thousand),

deferred income taxes increased by ¥258 million ($2,150 thou-

sand) and net unrealized holding gains on securities increased

by ¥22 million ($183 thousand) compared with what would be

reported using the currently applicable tax rate of 41.1%.Deferred tax liabilities on land revaluation decreased by ¥160

million ($1,333 thousand) and land revaluation excess increasedby the same amount compared with the previous fiscal year.

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The following table summarizes the significant differences bet-

ween the statutory tax rate and the Company’s effective tax rate

for financial statement purposes for the year ended March 31,

2003. Reconciliation of the statutory tax rate and the Company’s

effective tax rate for the year ended March 31, 2002 was not

required due to a small difference.

2003

Statutory tax rate........................................................................................................................................................................... 41.1%Decrease of deferred tax assets due to the change of the aggregate statutoryincome tax rates...................................................................................................................................................................... 4.7

Non-deductible expenses (entertainment expenses, etc.) .......................................................................................................... 4.6Valuation allowance................................................................................................................................................................... 2.4Equity in earnings of the affiliated company ............................................................................................................................... (4.9)Other......................................................................................................................................................................................... (0.9)

Effective tax rate............................................................................................................................................................................ 47.0%

Significant components of the Company’s deferred tax assets and liabilities as of March 31, 2003 and 2002 were as follows:


2003 2002 2003

Deferred tax assets:Provision for employees’ severance and retirement benefits....................................................... ¥10,515 ¥10,524 $ 87,626Reorganization and restructuring costs of U.S. operations ......................................................... — 4,341 —Loss carried forward .................................................................................................................. 5,233 3,962 43,608Fixed assets write-down ............................................................................................................ 1,851 2,047 15,425Accrued bonuses....................................................................................................................... 1,213 808 10,108Provision for retirement benefits for directors ............................................................................. 262 220 2,183Unrealized holding losses on securities ...................................................................................... 65 85 542Other ......................................................................................................................................... 1,174 798 9,783

Total deferred tax assets............................................................................................................ 20,313 22,785 169,275Less: Valuation allowance .......................................................................................................... (5,376) (5,358) (44,800)

...................................................................................................................................................... 14,937 17,427 124,475

Deferred tax liabilities:Securities contributed to employees’ retirement benefit trust ..................................................... (3,487) (4,272) (29,058)Unrealized holding gains on securities........................................................................................ (722) (884) (6,017)Prepaid pension expenses ......................................................................................................... (190) (296) (1,583)Other ......................................................................................................................................... (167) (225) (1,392)

Total deferred tax liabilities ......................................................................................................... (4,566) (5,677) (38,050)

Net deferred tax assets...................................................................................................... ¥10,371 ¥11,750 $ 86,425

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Reconciliations of cash and time deposits shown in the consolidated balance sheets and cash and cash equivalents shown in the con-

solidated statements of cash flows as of March 31, 2003 and 2002 are as follows:

Thousands of Millions of yen U.S. dollars

2003 2002 2003

Cash and time deposits ................................................................................................................. ¥10,121 ¥12,641 $ 84,342Less: Time deposits with maturities exceeding three months ......................................................... (556) (423) (4,633)Add: Commercial paper with maturity less than three months........................................................ 10,687 63 89,058

Cash and cash equivalents ............................................................................................................ ¥20,252 ¥12,281 $168,767

9. CASH AND CASH EQUIVALENTS

At March 31, 2003, the Company and its consolidated sub-

sidiaries were contingently liable for trade notes receivable dis-

counted amounting to ¥281 million (US$2,342 thousand) and

trade notes receivable endorsed amounting to ¥698 million

(US$5,817 thousand).

At the same date, the Company was also contingently liable

under guarantees of indebtedness of unconsolidated subsidiaries and

affiliated companies amounting to ¥790 million (US$6,583 thou-

sand) and of employees’ loans for their own houses amounting to

¥12 million (US$100 thousand).

8. CONTINGENT LIABILITIES

Under the Commercial Code of Japan (the “Code”), at least 50%

of the issue price of new shares is required to be credited to

common stock. The portion which is to be credited to common

stock is determined by resolution of the Board of Directors.

Proceeds in excess of the amounts credited to common stock

are credited to capital surplus.

The Code provides that an amount at least equal to 10% of

the aggregate amount of cash dividends and certain other cash

payments which are made as an appropriation of retained earn-

ings applicable to each fiscal period shall be appropriated and

set aside as a legal reserve until the total of the legal reserve and

additional paid-in capital equals 25% of stated capital. Prior to

the revision of the Code effective October 1, 2001, such appro-

priations as a legal reserve were required until the amount of legal

reserve equaled 25% of common stock. If the total of the legal

reserve and additional paid-in capital exceeds 25% of stated

capital, the excess can be transferred to retained earnings by

resolution of the shareholders.

The Code permits the Company to transfer a portion of addi-

tional paid-in capital and legal reserve to stated capital by resolution

of the Board of Directors. The Code also permits the Company to

transfer portions of unappropriated retained earnings, available

for dividends, to stated capital by resolution of the shareholders.

Under the Code, the Company may issue new common shares to

existing shareholders without consideration as a stock split pursuant

to resolution of the Board of Directors. Legal reserve is included

in retained earnings in the accompanying financial statements.

Dividends are approved by the shareholders at a meeting held

subsequent to the fiscal year to which the dividends are applica-

ble. Semiannual interim dividends may also be paid upon resolu-

tion of the Board of Directors, subject to certain limitations

imposed by the Code.

The maximum amount that the Company can distribute as

dividends is calculated based on the unconsolidated financial

statements of the Company and in accordance with the Code.

7. SHAREHOLDERS’ EQUITY

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Finance leases which do not transfer ownership to lessees are not capitalized and are accounted for in the same manner as operating

leases.

A summary of assumed amounts of acquisition cost, accumulated depreciation and net book value of machinery and equipment at

March 31, 2003 and 2002 is as follows:


2003 2002 2003

Acquisition cost of machinery and equipment .................................................................................... ¥4,490 ¥3,873 $37,417Accumulated depreciation of machinery and equipment .................................................................... 1,737 2,016 14,475

Net book value of machinery and equipment ..................................................................................... ¥2,753 ¥1,857 $22,942

Future minimum lease payments at March 31, 2003 and 2002 were as follows:


2003 2002 2003

Due within one year ........................................................................................................................... ¥ 760 ¥ 666 $ 6,333Due after one year ............................................................................................................................. 1,993 1,191 16,609

.......................................................................................................................................................... ¥2,753 ¥1,857 $22,942

Lease payments and assumed depreciation charge for the years ended March 31, 2003 and 2002 were as follows:


2003 2002 2003

Lease payments.................................................................................................................................... ¥829 ¥954 $6,908Assumed depreciation charge............................................................................................................... 829 954 6,908

10. LEASE INFORMATION

Assumed depreciation charges are computed using the

straight-line method over lease terms assuming no residual value.

Since the portion of the future minimum lease payments is

minor compared to the balance of property, plant and equipment

at March 31, 2003 and 2002, interest expense has been in-

cluded in acquisition costs and depreciation expense.

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The Company and certain consolidated subsidiaries have entered

into forward exchange contracts with banks as hedges against

receivables denominated in foreign currencies and interest rate

swap agreements for certain assets with fixed interest rates and

certain liabilities with variable interest rates to hedge its exposure

to fluctuations of interest rates.

These derivative financial transactions are utilized solely for

hedging purposes under the internal control rules and the

supervision of the Board of Directors. The Companies do not

anticipate any credit loss from non-performance by the counter-

parties to forward exchange contracts and interest rate swap

agreements.

The following summarizes hedging derivative financial instru-

ments used by the Companies and items hedged:

Hedging instruments:

Forward foreign exchange contracts, interest rate swap

contracts

Hedged items:

Foreign currency transactions, bank loans

Evaluation of hedge effectiveness during the years ended

March 31, 2003 and 2002 is omitted as hedge accounting has

been applied to derivative transactions.

12. DERIVATIVE FINANCIAL INSTRUMENTS

A. The following tables summarize acquisition costs, book values and fair value of securities with available fair values as of March 31,

2003 and 2002.

Available-for-sale securities: Securities with book values exceeding acquisition costs

Millions of yen Thousands of U.S. dollars

2003 2002 2003

Acquisition Acquisition Acquisitioncost Book value Difference cost Book value Difference cost Book value Difference

Equity securities...................... ¥2,404 ¥4,218 ¥1,814 ¥3,002 ¥5,139 ¥2,137 $20,033 $35,150 $15,117

Available-for-sale securities: Other securities

Millions of yen Thousands of U.S. dollars

2003 2002 2003

Acquisition Acquisition Acquisitioncost Book value Difference cost Book value Difference cost Book value Difference

Equity securities...................... ¥2,656 ¥2,493 ¥(163) ¥3,495 ¥3,289 ¥(206) $22,133 $20,775 $(1,358)

B. The following tables summarize book values of securities with no available fair values as of March 31, 2003 and 2002.

Available-for-sale securities:


2003 2002 2003

Commercial paper ............................................................................................................................. ¥ — ¥ 63 $ —Non-listed equity securities ................................................................................................................ 2,283 1,282 19,025Others ............................................................................................................................................... — 2 —

Total .............................................................................................................................................. ¥2,283 ¥1,347 $19,025

11. SECURITIES

C. Total sales of available-for-sale securities sold in the year ended

March 31, 2003 was not material.

Total sales of available-for-sale securities sold in the year ended

March 31, 2002 amounted to ¥95 million and the related losses

amounted to ¥53 million, respectively.

3

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13. RESEARCH AND DEVELOPMENT COSTS

Research and development costs charged to the cost of sales

and selling, general and administrative expenses for the years

ended March 31, 2003 and 2002 were ¥3,845 million (US$32,042

thousand) and ¥3,517 million, respectively.

Business segment

The Company and its consolidated subsidiaries operate primarily in the production and sale of hydraulic products and systems products.

Business segment information for the years ended March 31, 2003 and 2002 is as follows:

Year ended March 31, 2003: Millions of yen

EliminationHydraulic products Systems products Total or unallocation Consolidated

Sales:Outside customers .......................................................... ¥194,525 ¥13,118 ¥207,643 ¥ — ¥207,643Intersegment ................................................................... 423 857 1,280 (1,280) —

Total sales............................................................... 194,948 13,975 208,923 (1,280) 207,673Operating expenses ............................................................ 180,194 13,431 193,625 5,081 198,706

Operating income................................................................ ¥ 14,754 ¥ 544 ¥ 15,298 ¥ (6,361) ¥ 8,937

Identifiable assets................................................................ ¥144,437 ¥12,521 ¥156,958 ¥37,497 ¥194,455

Depreciation and amortization ............................................. 7,359 499 7,858 173 8,031

Capital expenditures............................................................ 7,625 499 8,124 274 8,398



Sales:Outside customers .......................................................... ¥169,192 ¥15,727 ¥184,919 ¥ — ¥184,919Intersegment ................................................................... 445 865 1,310 (1,310) —

Total sales............................................................... 169,637 16,592 186,229 (1,310) 184,919Operating expenses ............................................................ 160,524 16,886 177,410 4,675 182,085

Operating income (loss)....................................................... ¥ 9,113 ¥ (294) ¥ 8,819 ¥ (5,985) ¥ 2,834

Identifiable assets................................................................ ¥136,323 ¥14,400 ¥150,723 ¥35,145 ¥185,868

Depreciation and amortization ............................................. 7,251 604 7,855 179 8,034

Capital expenditures............................................................ 8,007 315 8,322 67 8,389

15. SEGMENT INFORMATION

Other, net, included in other income (expenses) for the years ended March 31, 2003 and 2002 comprises the following:


2003 2002 2003

Compensation received ........................................................................................................................ ¥ 177 ¥ 79 $ 1,475Loss on disposal of inventories ............................................................................................................. (318) (219) (2,650)Foreign exchange gain, net ................................................................................................................... (411) 879 (3,425)Grants received..................................................................................................................................... 56 52 467Others................................................................................................................................................... 285 222 2,375

............................................................................................................................................................. ¥(211) ¥1,013 $(1,758)

14. OTHER INCOME (EXPENSES)—OTHER, NET

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Year ended March 31, 2003: Thousands of U.S. dollars


Sales:Outside customers .......................................................... $1,621,042 $109,316 $1,730,358 $ — $1,730,358Intersegment ................................................................... 3,525 7,142 10,667 (10,667) —

Total sales ............................................................... 1,624,567 116,458 1,741,025 (10,667) 1,730,358Operating expenses ............................................................ 1,501,617 111,925 1,613,542 42,341 1,655,883

Operating income................................................................ $ 122,950 $ 4,533 $ 127,483 $ (53,008) $ 74,475

Identifiable assets ................................................................ $1,203,642 $104,341 $1,307,983 $312,475 $1,620,458

Depreciation and amortization ............................................. 61,325 4,158 65,483 1,442 66,925

Capital expenditures............................................................ 63,542 4,158 67,700 2,283 66,925

Geographic segment

Geographic segment information for the years ended March 31, 2003 and 2002 is as follows:


EliminationJapan Other areas Total or unallocation Consolidated

Sales:Outside customers ............................................................. ¥170,807 ¥36,836 ¥207,643 ¥ — ¥207,643Intersegment ...................................................................... 12,261 116 12,377 (12,377) —

Total sales .................................................................. 183,068 36,952 220,020 (12,377) 207,643Operating expenses................................................................ 168,136 36,653 204,789 (6,083) 198,706

Operating income ................................................................... ¥ 14,932 ¥ 299 ¥ 15,231 ¥ (6,294) ¥ 8,937

Identifiable assets ................................................................... ¥146,230 ¥25,941 ¥172,171 ¥22,284 ¥194,455


EliminationJapan Other areas Total or unallocation Consolidated

Sales:Outside customers ............................................................. ¥161,207 ¥23,712 ¥184,919 ¥ — ¥184,919Intersegment ...................................................................... 8,599 113 8,712 (8,712) —

Total sales .................................................................. 169,806 23,825 193,631 (8,712) 184,919Operating expenses................................................................ 161,765 23,481 185,246 (3,161) 182,085

Operating income ................................................................... ¥ 8,041 ¥ 344 ¥ 8,385 ¥ (5,551) ¥ 2,834

Identifiable assets ................................................................... ¥140,597 ¥21,461 ¥162,058 ¥23,810 ¥185,868

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Elimination Japan Other areas Total or unallocation Consolidated

Sales:Outside customers........................................................... $1,423,391 $306,967 $1,730,358 $ — $1,730,358Intersegment.................................................................... 102,175 967 103,142 (103,142) —

Total sales ............................................................... 1,525,566 307,934 1,833,500 (103,142) 1,730,358Operating expenses............................................................. 1,401,133 305,442 1,706,575 50,692 1,655,883

Operating income ................................................................ $ 124,433 $ 2,492 $ 126,925 $ (52,450) $ 74,475

Identifiable assets ................................................................ $1,218,583 $216,175 $1,434,758 $185,700 $1,620,458

Overseas sales

Overseas sales by geographic area for the years ended March 31, 2003 and 2002 were as follows:


North Southeast OtherAmerica Europe Asia areas Total

III. Overseas sales ................................................................................... ¥20,170 ¥18,808 ¥7,872 ¥5,871 ¥ 52,721III. Consolidated sales ............................................................................. — — — — 207,643III. Ratio of overseas sales (%) ................................................................. 9.7% 9.1% 3.8% 2.8% 25.4%



III. Overseas sales ................................................................................... ¥11,674 ¥17,715 ¥5,830 ¥4,671 ¥ 39,890III. Consolidated sales ............................................................................. — — — — 184,919III. Ratio of overseas sales (%) ................................................................. 6.3% 9.6% 3.2% 2.5% 21.6%



III. Overseas sales................................................................................. $168,083 $156,733 $65,600 $48,925 $ 439,341III. Consolidated sales ........................................................................... — — — — 1,730,358III. Ratio of overseas sales (%)............................................................... 9.7% 9.1% 3.8% 2.8% 25.4%

Overseas sales included those of the Company and its consolidated subsidiaries.

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16. SUBSEQUENT EVENTS

A. On June 25, 2003, the shareholders of the Company authorized the following appropriations of retained earnings at March 31, 2003:


Cash dividends, ¥3 ($0.03) per share ........................................................................................................... ¥669 $5,575

Bonuses to directors and corporate auditors................................................................................................ 68 567

B. In connection with the enforcement of the Defined Benefit

Enterprise Pension Law, the Company and some of its consolidat-

ed subsidiaries received approval from the Minister of Health,

Labor and Welfare for winding-up the non-contributory defined

benefit pension plan and exemption from payment of future

benefits on April 24, 2003. In accordance with the winding-up, the

future obligations will disappear, and the Companies will record ¥7

billion as a part of special gains in the next fiscal year’s financial

statements.

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To the Shareholders and the Board of Directors of KAYABA INDUSTRY CO., LTD.:

We have audited the accompanying consolidated balance sheets of KAYABA INDUSTRY CO., LTD. and subsidiaries as of March

31, 2003 and 2002, and the related consolidated statements of operations and retained earnings, and cash flows for the years then

ended, expressed in Japanese yen. These consolidated financial statements are the responsibility of the Company’s management.

Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in Japan. Those standards require that we

plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstate-

ment. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements.

An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evalu-

ating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated

financial position of KAYABA INDUSTRY CO., LTD. and subsidiaries as of March 31, 2003 and 2002, and the consolidated results

of their operations and their cash flows for the years then ended, in conformity with accounting principles generally accepted in

Japan as described in Note 1 to the consolidated financial statements.

Without qualifying our opinion, we draw attention to Note 16 to the consolidated financial statements as a subsequent event,

KAYABA INDUSTRY CO., LTD. and some of its consolidated subsidiaries received approval from the Minister of Health, Labor and

Welfare for winding-up the non-contributory defined benefit pension plan and exemption from payment of future benefits on April

24, 2003. In accordance with the winding-up, the future obligations will disappear, and the Companies will record ¥7 billion as a

part of special gains in the next fiscal year’s financial statements.

The consolidated financial statements as of and for the year ended March 31, 2003 have been translated into United States dollars

solely for the convenience of the reader. We have recomputed the translation and, in our opinion, the consolidated financial state-

ments expressed in Japanese yen have been translated into United States dollars on the basis set forth in Note 1 to the consoli-

dated financial statements.

Tokyo, Japan

June 25, 2003

Report of Independent Public Accountants

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36

Japan

Nippon Power Steering Co., Ltd.2548 Dota, Kani City, Gifu 509-0298, JapanTel: 81-574-28-2811Fax: 81-574-28-2840

Kayaba Engineering and Service Co., Ltd.Tanaka Building, 1-25, Shiba 2-chome, Minato-ku, Tokyo 105-0014, JapanTel: 81-3-5476-1777Fax: 81-3-3451-7803

Nihon Koki Co., Ltd.Fuji Bldg., 11-1, Shiba Daimon 2-chome, Minato-ku, Tokyo 105-0012, JapanTel: 81-3-3431-9331Fax: 81-3-3431-1634

Kayaba-Rae Stage Co., Ltd.Fuji Bldg., 11-1, Shiba Daimon 2-chome, Minato-ku, Tokyo 105-0012, JapanTel: 81-3-3578-1791Fax: 81-3-3578-1789

Japan Analysts Co., Ltd.Matsunaga Bldg., 1-17, Hamamatsu-cho 2-chome, Minato-ku, Tokyo 105-0013, JapanTel: 81-3-3436-5660Fax: 81-3-3436-1077

Yanagisawa Seiki MFG Co., Ltd.7001 Oaza-Sakaki, Sakaki-machi, Hanishina-gun,Nagano 389-0601, JapanTel: 81-268-82-2850Fax: 81-268-82-2857

MacGREGOR-Kayaba Co., Ltd.Suzue Baydium, 15-1, Kaigan 1-chome, Minato-ku, Tokyo 105-0022, JapanTel: 81-3-5403-1951Fax: 81-3-5403-1953

Americas

KYB Manufacturing North America, Inc.2625 North Morton, Franklin, IN 46131, U.S.A.Tel: 1-317-736-7774Fax: 1-317-736-4618

KYB America LLC140 North Mitchell Court, Addison, IL 60101, U.S.A.Tel: 1-630-620-5555Fax: 1-630-620-8133

Europe

Kayaba Europe GmbHKimpler Str. 336, 47807 Krefeld, GermanyTel: 49-2151-931430Fax: 49-2151-9314320

Kayaba Spain S.A.Poligono Industrial de Ipertegui No. 2, Orcoyen Navarra, SpainTel: 34-948-321004Fax: 34-948-321005

AP Amortiguadores, S.A.Ctra. Irurzun S/No, 31171 Ororbia Navarra, SpainTel: 34-948-421700Fax: 34-948-322338

Paioli Meccanica S.p.A.30/D, Via Ronchi Inferiore, 40061 Minerbio (BO), ItalyTel: 39-51-6606010Fax: 39-51-6606105

Asia

Yung Hwa Machinery Industrial Co., Ltd.No. 493, Kuang Hsing Rd., Pa-Teh City, Tao Yuan Hsien, TaiwanTel: 886-3-3683123Fax: 886-3-3683369

Thai Kayaba Industries Co., Ltd.700/460 Moo 7, T. Don Hua, Roh A. Muang, Chonburi 20000, ThailandTel: 66-3-821-5025Fax: 66-3-821-5029

Siam Kayaba Co., Ltd.380 Moo 2, Sukhumvit Rd., T. Bangpoo Mai, Ampur Muang, Samut Prakan 10280, ThailandTel: 66-2-323-9035Fax: 66-2-323-9037

Kayaba (Malaysia) Sdn. Bhd.Kayaba Hydraulics (Malaysia) Sdn. Bhd.Lot 8, Jalan Waja 16, Telok Panglima Garang, 42500 Kuala Langat, Selangor DE, MalaysiaTel: 60-3-31226222Fax: 60-3-31226677

P.T. Kayaba IndonesiaJL. Rawaterate 1/4, Pulogadung Industrial Estate, Jakarta Timur 13930, IndonesiaTel: 62-21-4615020Fax: 62-21-4606140

Husco-Kayaba Hydraulics (Shanghai), Ltd.No. 235, Jiangtian Rd., East Songjiang Industry Zone, Shanghai 201600, People’s Republic of ChinaTel: 86-21-5774-6468Fax: 86-21-3774-0186

Kayaba Vietnam Co., Ltd.Plot D46 Thang Long Industrial Park,Dong Anh District, Hanoi, VietnamTel: 84-4-8812773Fax: 84-4-8812774

Major Subsidiaries and Affiliates

37

37

37

Corporate Data

Head OfficeWorld Trade Center Bldg., 4-1, Hamamatsu-cho 2-chome, Minato-ku, Tokyo 105-6111, JapanTel: 81-3-3435-3511Fax: 81-3-3436-6759URL: http://www.kyb.co.jp/

Date of EstablishmentNovember 25, 1948

Paid-in Capital¥19,114 million

Common Stock Issued222,984,315 shares

Number of Shareholders19,176

Number of Employees6,105 (Consolidated basis)

Securities TradedTokyo Stock Exchange (First Section)

Transfer Agent and RegistrarMizuho Trust & Banking Co., Ltd.2-1, Yaesu, 1-chome,Chuo-ku, Tokyo 100-0005, Japan

(As of March 31, 2003)

PlantsSagami, Kumagaya, Gifu North, Gifu South, Mie

R&D CentersBasic Technology R&D Center, Production Technology R&D Center

Sales BranchesSapporo, Sendai, Hamamatsu, Nagoya, Osaka,Hiroshima, Fukuoka

Overseas Offices

Europe BranchKimpler Str. 336, 47807 Krefeld, GermanyTel: 49-2151-9314350

Fax : 49-2151-9314330

California Representative Office5790 Katella Ave., Cypress, CA 90630, U.S.A.Tel: 1-562-799-3862Fax: 1-562-799-3863

Seattle Representative Office700 5th Ave., Suite 5900, Seattle, WA 98104, U.S.A.Tel: 1-206-386-5625Fax: 1-206-621-9448

Kayaba Middle East EstablishmentRoom 309 A, 3rd Fl., Sheikha Mariam Bint Almaktoum Bldg., Nasser Square, Deira, Dubai, U.A.E.Tel: 971-4-2230244Fax: 971-4-2234363

0

100

200

300

400(Yen)

1998 1999 2000 2001 2002

¥354 ¥287 ¥248 ¥235 ¥293

123 151 165 151

(As of March 31, 2003)

159

FY

High

Low

Common Stock Price Range (Tokyo Stock Exchange)

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