Kyokuto Kaihatsu Kogyo Co., Ltd.
Annual Report 2004
Year ended March 31, 2004

KYOKUTO KAIHATSU KOGYO CO., LTD. AND CONSOLIDATED SUBSIDIARIESFINANCIAL HIGHLIGHTS
Years ended March 31, 2004 and 2003

Millions of yen

Thousands of
U.S. dollars(Note 1)

2004

2003

2004

For the Year:Net Sales .........................................................
Operating income ...........................................
Net income .....................................................

57,4283,163
1,328

55,2691,759
201

548,556
30,21912,690At Year-end:
Total assets ......................................................
Total shareholders’ equity ...............................

85,56655,172

78,94352,737

817,329
527,006

U.S. dollars(Note 1)

Yen
2004
Amounts per Share of Common Stock (Note 2):
Net Income .....................................................
Cash dividend attributable to the year .............

45.73
10.00

2003

5.94
6.00

2004

0.44
0.10

Note 1. U.S. dollar amounts are translated for convenience only, at the rate of ¥104.69 to
US$1.
2. The computations of net income per share of common stock are based on the weighted average number of shares outstanding during each year.

CONTENTS
1. To Our Shareholders
3. Consolidated Statements of Income andRetained Earnings
4. Consolidated Balance Sheets
6. Consolidated Statements of Cash Flows
7. Notes to Consolidated Financial Statements
15. Report of Independent Certified Public
Accountants
16. Corporate Information
17. Board of Directors and Statutory Auditors

TO OUR SHAREHOLDERS

1. Summary of Operations
We are pleased to report the business results of Kyokuto Kaihatsu Kogyo Co., Ltd. For the year
ending March 31, 2004.
(1)

Business Results

Japanese economy during the first half of this fiscal year showed a slow recovery because of
struggling employment situation and consumer spending as well as uncertain internationalsituations. However during the second half of the year, it had an increasing economic
resurgence with a sign of recovery in stock market and corporate investment backed up by
well-conditioned export markets and improved corporate performance.
The environments surrounding our special purpose vehicle business created in our domestic
market a drastic replacement demands with a central focus on Tokyo metropolitan area mainly
because of gaseous mission control enforcement on diesel trucks. For export markets, ademand for construction vehicles made a good progress in China where active investment
demands are still continuing.
Katsushi Tanaka
Our environmental business has experienced fierce competition due to buying restraint after
the enforcement of anti-dioxin and cash-strapped public finances of local governments, which resulted in rugged environmentsfor order entry.
Such being the circumstances, we have tried to expand our corporate value by efficient capital operation and improved
profitability in the framework of the last year of our Medium-Term Management Planning “Plan 2001,” which was started in
April 2001. In this direction, we have made every effort to improve the business performance by strengthening the sales forces
for increasing demands of Tokyo metropolitan area backed-up by gaseous emission control, expanding export business, reducing
costs, developing new products, strengthening sales and service forces, promoting more effective use of resources, etc.
Our business results in the consolidated basis thus achieved in this fiscal year are shown below in comparison with the last year:
The sales revenue is 57,428 million yen achieving year-on-year increase of 2,158 million yen (+4%) mainly because of theincreases of special purpose vehicles sales while the plant construction of environmental business being decreased. The ordinary
income is 2,918 million yen achieving year-on-year drastic increase of 1,293 million yen (+80%) along with the sales increase of
special purpose vehicle segment. The net income is 1,328 million yen achieving year-on-year increase of 1,126 million yen.
The summary of each business segment in the consolidated basis is reported below in comparison with the last fiscal year.
1. Specialty Truck Division
Demands for special purpose vehicles drastically increased in Japan with a central focus on Tokyo metropolitan area due to thegaseous emission control for the diesel trucks that was enforced in October last year.
We reinforced our sales forces in Tokyo metropolitan area and promoted sales tie-up and OEM with the competitors. We also
made the effort to expand the sales and to improve the profitability through the various effective measures: reducing the cost bymaterial procurement from China, strengthening the product-line up by developing new products, enhancing the service
structure, etc.
Consequently, most of our main product segments experienced a large-scale increase of sales: construction segment (dumptruck, concrete pump truck, mixer truck, etc.), distribution and energy saving segment (Bulk Carrier, tank lorry, tail-gate lifter, carcarrier, etc.), environment and civil work segment (garbage collector, detachable body truck, other special purpose truck,
multistory car park, etc.), and spare parts/repair services, etc.
Our export business enjoyed steady sales by focusing on construction related business such as mixer trucks and concrete pumptrucks mainly for China.
Consequently, the sales revenue is 39,058 million yen achieving year-on-year increase of 6,725 million yen (+21%). The
operating income is 1,896 million yen achieving year-on-year increase of 1,723 million yen (+996%) as the results of sales
increase and cost reduction effect.
2. Environmental Equipment and Systems Division
In a difficult market situation, our environmental equipment and systems business made every effort to maintain the appropriate
level of the sales and orders received through various sales activities in recycle plaza and recycle center that are our mainline
business, plant-related equipment such as RDF (Refuse Derived Fuel) equipment and leachate treatment facilities in final disposalsites, contracted business for maintenance and operation. Besides, we worked on actively R&D and sales of Refuse Gasificationand Melting System, next generation incinerator whose prospective demands can be well expected.
As a result, we received 3 plant construction orders including recycle plaza amounting 10,835 million yen achieving year-onyear increase of 554 million yen (+5%). The sales revenue is 10,246 million yen resulting in year-on-year decrease of 4,586
million yen (-31%) due to the plant construction order decrease while the contracted business for maintenance and operation
being kept at the same level of sales as the last year. The operating income is 534 million yen resulting in year-on-year decreaseof 715 million yen (-57%) due to the sales decrease.
3. Automobile Sales Division
For automobile sales division, we have enhanced sales and service capabilities including renewal of the shops as well as madeevery effort of cost reduction to improve the profitability. However, new vehicle sales decreased due to diminishing consumer
spending. Consequently the sales revenue is 6,086 million yen resulting in year-on-year decrease of 444 million yen (-7%). The
operating income is 17 million yen achieving year-on-year increase of 89 million yen from the last year’s operating loss of 71
million yen.
4. Real Estate Leasing Division
Besides the real estate leasing, this business is also developing coin parking business in order to secure stable income throughmore effective use of idle properties. In this year, leasing income of Kanagawa Ryutsu Center in Atsugi city that started in
September 2003 and increased sales of coin parking business contributed in the operation of this business. The sales revenue is2,456 million yen achieving year-on-year increase of 505 million yen (+26%). The operating income is 692 million yen
achieving year-on-year increase of 301 million yen (+77%).
(2) Financial standing
1. Asset, debt, and capital standings
We report below the financial standing as of the end of this consolidated accounting year. The total asset is 85,566 million yen
making year-on-year increase of 6,622 million yen (+8%).
The current asset is 46,057 million yen making year-on-year increase of 4,216 million yen (+10%). The main factors causing thischange are; accounts receivable decrease of 2,849 million yen due to payment received of the construction related toenvironmental business, bills receivable increase of 1,850 million yen and inventory assets increase of 1,741 million yen due to1the increased sales and orders received in special purpose vehicle business, and securities increase obtained by surplus funds of
2,215 million yen.
The fixed asset is 39,508 million yen making year-on-year increase of 2,406 million yen (+6%). The main factors are; tangible
fixed assets increase of 776 million yen caused by the construction of Kanagawa Ryutsu Center and Yokohama Service Center,
investment and other assets increase of 1,630 million yen due to investment securities increase by stock market improvement.
The total debt is 30,393 million yen making year-on-year increase of 4,398 million yen (+17%). The current liability increased
by 2,338 million yen (+12%) because of unpaid corporate tax increase, etc. The fixed liability increased by 2,060 million yen(+29%) because of increased long-term debt and deferred tax liability. The capital stock is 55,172 million yen making year-onyear increase of 2,434 million yen (+5%) due to the declaration of this year’s net income and the increased variance of theestimated securities.
The return on equity (ROE) as of the end of this consolidated fiscal year is 64% (67% at the end of last year).
2. State of Cash Flow
The cash and cash equivalent as of the end of this consolidated fiscal year is 12,724 million yen making increase of 2,265
million yen (+22%) from the balance at the beginning of the year. The breakdown of the total is as follows.
<Cash Flow from Operating Activities>
Operating activities have resulted in cash inflow of 3,287 million yen (year-on-year increase of 3,618 million yen). This is due toincreased current net income before tax created by the substantial increase of our mainline products; special purpose vehicle,
and the improved profitability of our whole group operations, besides well-off collection of accounts receivable and increased
payable accounts of purchase.
<Cash Flow from Investing Activities>
Investing activities have resulted in cash outflow of 2,109 million yen (year-on-year increase of cash inflow of 1,565 million yen).
This is due to the expenditures to obtain the fixed assets; construction of Yokohama Service Center for special purpose vehicle
business and of Kanagawa Ryutsu Center for real estate leasing business while income by the sale of securities being obtained.
<Cash Flow from Financing Activities>
Financing activities have resulted in cash inflow of 1,095 million yen (year-on-year increase of cash inflow of 1,558 million yen).
This is due to financial income caused by long-term borrowing while expenditures being occurred to obtain common stock fortreasury (treasury stock) and to pay the dividend to stockholders.
(3) Concept and Practice related to Corporate Governance
1. Basic policies on corporate governanceOur company group is now implementing reorganization of management system aiming at expanding our value of the enterpriseby conducting speedy decisions on management policies and strategies to react appropriately to the changing businessenvironment, by strengthening the executive system to implement speedily and timely the said policies and strategies. We arealso reinforcing our audit and supervisory functions for thorough compliance with the legal imperatives and regulations in theprocess from decision-making to its execution. We well recognize that it is our important managerial task to keep good
relationship with various stake-holders; stockholders, customers, local society, and employees by enhancing our corporate ethics
and realizing rightly our role as a corporation and a member of our society through our healthy corporate activities.
On such viewpoint, we are sure to develop our company by enhancing, improving, and maintaining not only the juridical
functions and regulations such as general meeting of shareholders, board meeting, board of auditors, and accounting auditor but
also our voluntary regulations such as company regulations.
2. Practice related to corporate governance
We are conducting renewed business operation based on new management framework having operating officer system that was
introduced in June 2002. According to this change, we have reduced the limit number of directors set in the corporation charter
from 20 to 12 directors in order to optimize the number of board members and to execute speedy decision makings. As of March
31st, 2004, there are 10 directors and 16 operating officers (including 9 concurrent directors). We are planning to propose anagenda to change the number of directors from 10 to 7 reducing 3 members at the fixed general meeting to be held on June 29,
2004. This is to speed up further our business judgment. We have also shortened the term of directors of our company and all
our affiliated companies to one year from two years that is stipulated by the Commercial Law. This is to activate further the board
meeting.
Our group does not appoint any outside board members. However, as far as the auditing system concerns, we have
implemented 4 auditors system including 2 outside auditors to enhance the audit and supervisory functions.
For administrative decision making, the board meeting is held once a month and the management committee twice a month.
There, with attendance of the auditors, the board members deliberate and decide the management policies and strategies. We
also hold contingent board meeting as occasion arises.
For execution control, the business operation meeting consisting of operation officers is held once a month to execute thebusiness plan and management policy as well as to assure the planned performances.
For accounting auditors, we have appointed Yuko Audit Corporation and concluded a contract with them. We disclose
accordingly our business conditions and are subject to accounting audit for fair accounting practices.
For the judgment relating to legal problems and issues such as contract and lawsuit, we have established a system to obtainappropriate advices if necessary through legal aid service organized by our corporate lawyers.

June, 2004

Katsushi Tanaka
President

2

KYOKUTO KAIHATSU KOGYO CO., LTD. AND CONSOLIDATED SUBSIDIARIESCONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS
Years ended March 31, 2004 and 2003

Thousands of
U.S. dollars(Note 1)Millions of yen
2004

2003

2004

Net sales ..................................................................
Cost of sales .............................................................

57,42844,68755,26944,481

548,556
426,854

Gross profit ....................................................

12,741

10,788

121,702

Selling, general andadministrative expenses .....................................
Operating income (loss) ................................

9,577
3,163

9,028
1,759

91,48330,219Other income (expenses)
Interest and dividend income ..............................
Interest expenses .................................................
Gain (loss) on sales ofproperty and equipment .....................................
Gain (loss) on sales of securities ..........................
Write-down of investment securities ...................
Special research and development expenditures ....
Other-net ............................................................

62
(96)

45
(94)

599
(925)

(114)
290
(1)
(539)
(257)

776
(142)
(2,003)—
187(1,090)2,771(11)(5,153)(2,456)

Income (loss) before income taxes .......................

2,507

528

23,953

Income taxes (Note 12)
current ................................................................
deferred (prepaid), net .........................................

1,560
(375)

290
52

14,903(3,584)

Total income taxes ..............................................

1,185

343

11,319Minority interest ......................................................

(5)

(17)

(55)

Net income (loss) ............................................

1,328

201

12,69029,642(194)(34)

29,645(169)(26)

283,145(1,854)
(330)

—

(8)

0

30,742

29,642

293,650

Retained earnings:
Balance at beginning of period ...........................
Cash dividends paid ............................................
Bonuses to directors and statutory auditors .........
Adjustment of retained earnings
for eliminations of treasury stock ........................
Balance at end of period .....................................

Yen

U.S. dollars

Per share of common stock:
Net income (loss) ................................................

46.05

5.94

0.44

Diluted net income (loss) ....................................

45.73

5.94

0.44

Cash dividend, applicable toearnings of the year ............................................

10.00

6.00

0.10

The accompanying notes are an integral part of this statements.

3

KYOKUTO KAIHATSU KOGYO CO., LTD. AND CONSOLIDATED SUBSIDIARIESCONSOLIDATED BALANCE SHEETS
Years ended March 31, 2004 and 2003

Millions of yen

Thousands of
U.S. dollars(Note 1)

2004

2003

2004

Current assets:
Cash and time deposits .......................................
Short-term investments (Note 3) ..........................
Trade note and accounts receivable .........................
Less: Allowance for doubtful accounts ...............
Inventories ..........................................................
Deferred income taxes (Note 12) ........................
Prepaid expenses ................................................
Other current assets ............................................

5,961
6,832
23,945
(181)
7,169
993
91
1,246

5,911
4,616
24,836
(64)
5,428
555
69
487

56,94665,262
228,723(1,737)
68,486
9,485
870
11,905

Total current assets .......................................

46,057

41,841

439,944

Investments and other assets:
Investments in securities (Note 3) ........................
Deferred income taxes (Note 12) ........................
Other ..................................................................

5,417
284
3,579

3,575
282
3,793

51,743
2,722
34,192

Total investments and other assets ........................

9,281

7,650

88,658Property and equipment:
Land ...................................................................
Buildings and structures ......................................
Machinery and equipment ..................................
Construction in progress .....................................
Other ..................................................................

12,38626,029
7,111
215
2,257

12,38624,228
6,953
576
2,254

118,311248,637
67,931
2,056
21,562Less — Accumulated depreciation .........................

48,000(18,044)

46,398(17,219)

458,499(172,359)

Total property and equipment .......................

29,95529,179286,139

Intangible assets ......................................................
Cost in excess of net assets of subsidiaries ...........
Other ..................................................................

24
246

40
232

229
2,357

Total intangible assets ...................................

270

272

2,586

Total assets ....................................................

85,56678,943

817,329ASSETS

4Millions of yen

Thousands of
U.S. dollars(Note 1)

2004

2003

2004

Current liabilities:
Short-term bank loans (Note 4) ...........................
Current portion of long-term debt (Note 4) ..........
Trade note and account payable .........................
Accrued income and other taxes .........................
Accrued expenses ...............................................
Other current liabilities .......................................

2,955
32
13,101
1,597
1,946
1,653

2,608
98
12,354
706
1,758
1,424

28,227
312
125,146
15,25918,595
15,797

Total current liabilities ..................................

21,287

18,949203,338

1,137
1,802

112
1,726

10,865
17,213

301
—
1,145
4,719

341
1
286
4,578

2,878
—
10,94245,083

Total long-term liabilities ..............................

9,106

7,045

86,984

Minority interests ....................................................

—

210

—

Shareholders’ equity:
Common stock, no par value (Note 10)
Authorized — 117,708,100 shares
Issued — 28,326,779 shares in 2004 and28,165,779 shares in 2003 ..............
Additional paid-in capital (Note 10) .......................
Retained earnings ................................................
Net unrealized holding gains on securities ..........
Foreign currency translation adjustments ............
Treasury stock, at cost .........................................

11,842
11,66130,742
1,231
(28)
(276)

11,786
11,50829,642
70—(270)

113,119
111,390
293,650
11,762(271)(2,644)

Total shareholders’ equity .............................

55,172

52,737

527,006

Total liabilities andshareholders’ equity .....................................

85,56678,943

817,329

LIABILITIES AND SHAREHOLDERS’ EQUITY

Long-term liabilities:
Long-term debt (Note 4) ......................................
Accrued retirement benefits (Note 5) ...................
Directors’ and statutory auditors’
retirement benefits .............................................
Net assets of subsidiaries in excess of cost ..........
Deferred income taxes (Note 12) ........................
Other long-term liabilities ...................................

5

KYOKUTO KAIHATSU KOGYO CO., LTD. AND CONSOLIDATED SUBSIDIARIESCONSOLIDATED STATEMENT OF CASH FLOWS
Years ended March 31, 2004 and 2003

Millions of yen
2004
Operating activities:
Net income before income taxes .................................................
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization ...............................................
Write-down of investment securities ......................................
Net gains (loss) on sales of marketable securities
and investments ....................................................................
Net gains (loss) on sales of property .......................................
Provision (reversal) for accrued retirement benefits ................
Interest and dividend income .................................................
Interest expenses ....................................................................

2004

2,507

528

23,953

1,373
45

1,301
2,049

13,123
431

(290)
57
38
(62)
96

124
(788)
98
(45)
94

(2,771)
551
368
(599)
925

Decrease (increase) in accounts receivable .................................
Decrease (increase) in inventories ...............................................
Decrease (increase) in prepaid expenses .....................................
Decrease (increase) in accounts payable .....................................
Decrease (increase) in accrued expenses .....................................
Decrease (increase) in income taxes payable ..............................
Other,net ....................................................................................
Sub total ...........................................................................
Interest and dividend income received ........................................
Interest expenses paid .................................................................
Income taxes paid .......................................................................
Other,net ....................................................................................
Net cash provided by operating activities ........................

576(1,741)
230
991
248
(406)
780
4,446
61
(31)
(262)
(926)
3,287

(3,998)
(3)
(247)
2,216
(388)
374
(1,181)
133
42
(29)
(434)
(42)
(330)

5,510
(16,638)
2,200
9,471
2,374
(3,883)
7,459
42,475588(303)(2,505)(8,850)31,404

Investing activities:
Decrease (increase) in time deposits ............................................
Payment for purchase of marketable securities and investments ..
Proceeds from sales of marketable securities and investments .....
Payment for purchase of facilities ................................................
Proceeds from sale of facilities ....................................................
Disbursement of loan receivables.................................................
Collection of loan receivables .....................................................
Net cash provided by (used in) investing activities ...........

—
(367)
770
(2,551)66(22)
8(2,096)—(1,791)492(3,141)
1,159
(401)
7
(3,675)—(3,505)
7,357(24,371)
631
(213)
76
(20,024)

Financing activities:
Increase (decrease) in short-term debt .........................................
Proceeds from long-term debt ......................................................
Payment on long-term debt .........................................................
Proceeds from issuance of common stock ...................................
Purchases of treasury stock ..........................................................
Dividends paid ............................................................................
Net cash provided by (used in) financing activities ..........

330
1,068
(107)
111
(112)
(194)
1,095

180
—
(98)
0
(375)
(170)
(463)

3,152
10,201(1,028)1,068(1,078)(1,855)
10,460(21)
2,266
10,458—(4,469)14,927(197)
21,64299,898—12,724—
10,458—
121,540

Effect of exchange rate change on cash and cash equivalents ..........
Net increase in cash and cash equivalents .......................................
Cash and cash equivalents at beginning of year ...............................
Increase in cash and cash equivalents by increase of
number of consolidated subsidiaries ...............................................
Cash and cash equivalents at end of year ........................................

6

2003

Thousands of
U.S. dollars(Note 1)KYOKUTO KAIHATSU KOGYO CO., LTD. AND CONSOLIDATED SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.

Basis of Presenting Consolidated
Financial Statements

Kyokuto Kaihatsu Co.,Ltd (the “Company”) and its
domestic subsidiaries maintain their accounts andrecords in accordance with the provisions set forthin the Commercial Code of Japan (the “Code”) andthe Securities and Exchange Law and in conformity
with accounting principles and practices generally
accepted in Japan.

sidiaries in accordance with the Securities andExchange Law and related regulations of Japan.
The minor differences arising from the cost of thecompanies' investments in subsidiaries and affiliates over the equity in their net assets at fair value
are charged or credited to income in the year ofacquisition. Significant differences are, as a rule,amortized over periods of 5 years. All significant
inter-company accounts and transactions havebeen eliminated.

The accompanying consolidated financial statements are prepared based on the consolidated
financial statements of the Company and its subsidiaries (the “Group”) which were filed with the
Director of Kanto Local Finance Bureau as
required by the Securities and Exchange Law.

Investments in associates are accounted for by theequity method whereby the Group includes in net
income its share of income or losses of these companies, and records its investments at cost adjusted
for its share of income, losses or dividends
received.

In preparing the accompanying consolidated financial statements, certain reclassifications andrearrangements have been made to the consolidated financial statements issued domestically inorder to present them in a form which is morefamiliar to readers outside Japan.

(b) Consolidated Statement of Cash Flows:

The translation of the Japanese yen amounts into
U.S. dollars is included solely for the convenienceof the reader, using the approximate exchange rate
at March 31, 2004, which was ¥104.69 to
US$1.00. These convenience translations should
not be construed as representations that theJapanese yen amounts have been, could havebeen, or could in the future be, converted into U.S.
dollars at this or any other rate of exchange.
As permitted by the regulations under the
Securities and Exchange Law of Japan, amounts ofless than one million yen have been omitted. As aresult, the totals shown in the accompanying consolidated financial statements (both in yen and in
U.S.dollars) do not necessarily agree with the sumsof the individual amounts.
2.

In preparing the consolidated statements of cash
flows, cash on hand, readily-available deposits andshort-term highly liquid investments with maturityof not exceeding three months at the time of purchase are considered to be cash and cash
equivalents.
(c) Short-term investments and Investments in
Securities:
For the Accounting Standards for Financial
Instruments which was issued by the BusinessAccounting Deliberation Council, securities areclassified into three categories: trading securities,
held-to-maturity debt securities, equity investments
in associates and other securities.
Those classified as other would be reported at fairvalue with unrealized gains, net of related taxes
reported in equity. Under the Code, unrealized
holding gains on securities, net of related taxes is
not available for distribution as dividends andbonuses to directors and corporate auditors.

Summary of Significant Accounting Policies(a) Consolidation Principles:

Other investments are carried at cost. The cost isdetermined by the moving average method.

The consolidated financial statements include theaccounts of the Company and its significant sub-7

(Trading securities)(e) Depreciation:

Trading securities are held for resale in anticipation of short-term market movements. Tradesecurities, consisting of debt and marketable equity
securities, are stated at fair value. Gains and losses,
both realized and unrealized, are charged toincome.

Depreciation is principally computed on the
declining-balance method, based on the estimateduseful lives of assets which are prescribed by
Japanese income tax laws. Buildings are depreciated on a straight-line basis.

(Held-to-maturity debt securities and other securities)
Management determines the appropriate classification of debt securities at the time of purchase andreevaluates the classification as of each balance
sheet date. Debt securities are classified as held-tomaturity when the Company has the positive intent
and ability to hold the securities to maturity. Heldto-maturity debt securities are stated at amortizedcost adjusted for the amortization of premiums andthe accretion of discounts to maturity.
Marketable equity securities and debt securities
not classified as held-to-maturity are classified asother securities. Other securities are carried at fairvalue with the unrealized gains and losses, net oftax, reported in a separate component of shareholders’ equity. The amortized cost of debt
securities in this category is adjusted for the amortization of premiums and the accretion of
discounts to maturity. Realized gains and losses
and declines in value judged to be other than temporary on other securities are charged to income.
(Golf club membership)
An impairment loss on deposits for golf club membership is required to be recognized in accordancewith the new standard.

Amortization of intangible assets is computed by
the straight-line method over periods prescribedprimarily by the Japanese Commercial Code orJapanese income tax laws.
(f) Stock and bond issue expenses:
Stock and bond issue expenses are charged toincome as incurred.
(g) Accrued Retirement Benefits:
To provide for the payment of retirement benefits
and pension plans to employees, the Company
and certain consolidated subsidiaries have enteredan amount into a reserve equivalent to the amountrecognized as necessary at the end of the period
under review based on the expected retirement
and severance obligations and the assets of pension plans at fiscal year-end.
The Company and its domestic subsidiaries provide for lump-sum severance benefits with respect
to directors and corporate auditors. While theCompany has no legal obligation, it is a customary
practice in Japan to make lump-sum payments to a
director or a corporate auditor upon retirement.
Annual provisions are made in the accounts for theestimated costs of this termination plan, which is
not funded. Any amounts payable to officers uponretirement are subject to approval at the shareholders’ meeting.

(d) Inventories:(h) Construction Contract:
Merchandise inventories are stated at cost, determined by the specific identification method.
Materials and work in process are stated at cost,
determined by the periodic average method.
Supplies are stated at cost, determined by the lastpurchase cost method.

8

The construction contract takes longer than one
year and the contract amount exceeded ¥0.5 billion, the percentage of completion method isapplied.

(i) Leases:
In Japan finance leases other than those that are
deemed to transfer the ownership of the leased
assets to lessees are accounted for by a method
similar to that applicable to ordinary operatingleases.
(j) Research and Development and Computer
Software:Research and development expenditure is charged
to income when incurred.
Expenditure relating to computer software developed for internal use is charged to income whenincurred, except if it contributes to the generationof income or to future cost savings. Such expenditure is capitalized as an asset is amortized using
the straight-line method over its estimated usefullife which is in the range of 3 to 5 years.
(k) Income Taxes:
Income taxes consist of corporation, inhabitantsand enterprise taxes for domestic companies andforeign income taxes.
Deferred income taxes are provided for the income
tax expenses under the asset and liability method.
Deferred income tax assets and liabilities are determined based on temporary differences between
the financial statements and tax bases of assets andliabilities, using enacted tax rates in effect during
the years in which the differences are expected toreverse, and on available tax credits carryforward.
(l) Per Share Information
The computation of basic net income per share isbased on the weighted average number of sharesof common stock outstanding during each period.
The average number of shares used in the computation was 27,784 thousand shares for 2004 and
28,098 thousand shares for 2003.

For the year ended 31, 2004 and 2003, fully diluted net income per share of common stock assumes
full exercise of right of the outstanding stock
option plan at the beginning of the year.
Cash dividends per share shown in the statements
of income are the amounts applicable to therespective years.
3.

Short-Term Investments, Investments in
Securities and Investments in and Advances
to associates:

Short-term securities at March 31, 2004 and 2003
consisted of the following:

Millions of yen

Market value available:
Trading securities .......
Market value not available:
M.M.F. and F.F.F........
Other investment trust ....
Total ..........................

Thousands of
U.S. dollars

2004

2003

2004

¥ 101

¥ 101

$

¥6,70130¥6,832¥4,515—¥4,616$64,010287$65,262966

The following is a summary of other securities at
March 31, 2004 and 2003:
Millions of yen
March 31, 2004
Other securities
Gross
Gross Book Value
unrealized unrealized (Estimatedgains
losses fair value)

Cost
Market value available:
Equity securities ........ ¥ 2,292 ¥ 2,118 ¥Bonds and debentures ...
——Other securities .........
——¥ 2,292 ¥ 2,118 ¥Market value not available
Total ..........................

43 ¥ 4,367————
43 ¥ 4,367
1,050¥ 5,417

Millions of yen
March 31, 2003
Other securities
Gross
Gross Book Value
unrealized unrealized (Estimatedgains
losses fair value)

Cost
Market value available:
Equity securities ........ ¥ 2,383 ¥Bonds and debentures ...
—Other securities .........
—¥ 2,383 ¥Market value not available
Total ..........................

256 ¥
—
—
256 ¥

135 ¥ 2,504————
135 ¥ 2,504
1,070¥ 3,5759

Thousands of U.S. dollars
March 31, 2004
Other securities
Gross
Gross Book Value
unrealized unrealized (Estimated
Cost
gains
losses fair value)
Market value available:
Equity securities ........ $21,898 $20,237 $Bonds and debentures ...
——Other securities .........
——$21,898 $20,237 $Market value not available
Total ..........................

4.

417 $41,719————
417 $41,719
10,036$51,755

Short-term bank loans and long-term debt:

The annual average interest rates applicable toshort-term bank loans at March 31, 2004 and 2003
are 0.81% and 0.86%, respectively.
Long-term debt at March 31, 2004 and 2003 consistedof the following:

Millions of yen
2004
2003
0.75% bank loansdue 2005 ......................
0.61% bank loansdue 2009 ......................
1.50% guarantee moneydue 2023 ......................

¥

32

¥

98

Thousands of
U.S. dollars
2004
$

312

¥1,137¥ 112$10,865¥3,111¥4,282¥3,056¥3,266$29,723$40,902

Aggregate annual maturities of long-term debt
subsequent to March 31, 2004 are as follows:Year ending March 31
2005 ...........................................
2006 ...........................................
2007 ...........................................
2008 ...........................................
2009 and thereafter .....................

10

Millionsof yen
¥

32
17
1,017
250
2,962
¥ 4,282

Thousands of
U.S. dollars
$

312
169
9,721
2,395
28,302$ 40,902

5.

Accrued Retirement Benefits

The following tables sets forth the changes inbenefit obligation, plan assets and funded status of
the Company and its subsidiaries at March 31,
2004 and 2003.

Millions of yen
2004
2003
Benefit obligation at endof year ..........................
Fair value of plan assets
at end of year ...............
Funded status:
Benefit obligation inexcess of plan assets .....
Unrecognized net
transition obligation at
date of adoption ..........
Unrecognized priorservice cost ...................
Unrecognized actuarial
loss ...............................
Prepaid expenses for plan
assets at end of year ......
Accrued pension liability
recognized in the
consolidation
balance sheets ..............

Thousands of
U.S. dollars
2004¥ 5,350¥ 5,273$51,105

2,846

2,711

27,186

2,504

2,562

23,919

—

—

—

—

—

—

712

849

6,810

(10)

(12)

(104)

1,802

1,726

17,213

Note: Some domestic subsidiaries have adopted
allowed alternative treatment of the accounting
standards for retirement benefit for small business
entity.
Severance and pension costs of the Company andits subsidiaries included the following components
for the year ended March 31, 2004 and 2003.

Millions of yen
2004
2003
Service cost ...................
Interest cost ...................
Expected return on plan
assets ........................
Amortization:
Transition obligation at
date of adoption .......
Prior service cost .......
Actuarial losses .........
Net periodic benefit cost

¥

¥

257
131

¥

Thousands of
U.S. dollars
2004

260
153

$ 2,462
1,260

(99)

(65)

(949)

—
—
162
452

—
—
75
424

—
—
1,548
$ 4,321¥

Assumption used in the accounting for the defined
benefit plans for the year ended March 31, 2004
and 2003 is as follows:
2004
Method of attributing benefit toperiods of service
Discount rate ................................
Long-term rate of return onfund assets ....................................
Amortization period for transition
obligation at date of adoption ........
Amortization period for priorservice cost ..................................
Amortization period for actuarial
losses ...........................................

6.

2003

straight-line straight-line
basis
basis
2.0%
2.5%
2.5%

3.0%

—

—

—

—

10 years

10 yearsContingencies

8.

LeasesThe Group leases certain machinery andequipment, and other assets. Total lease payments
under these leases were ¥402 million ($3,843
thousand) , and ¥359 million for the years ended
March 31, 2004 and 2003, respectively.
Pro forma information relating to acquisition costs,
accumulated depreciation and future minimum
lease payments for property held under financeleases which do not transfer ownership of theleased property to the lessee on an “as if
capitalized” basis for the years ended March 31,
2004 and 2003, are as follows:
Millions of yen
2003

At March 31, 2004 and 2003, the Group was
contingently liable as follows:
Millions of yen
2004
2003
As an endorser of notes
discounted or endorsed¥2,084

Thousands of
U.S. dollars
2004¥1,719$19,915

¥ 450
2
¥ 452

$16,382356$16,737

Acquisition costs ...........

MachineryandEquipment

Other

Total

¥ 1,214¥¥ 1,844

Accumulated
Depreciation ................
Net leased property .......

429
¥

784

¥

629
305

735

324

¥ 1,109

As a guarantor of indebtedness of:
Associates .................
Others .......................

7.

¥1,71537¥1,752

Cash and Cash Equivalents

Acquisition costs ...........

Cash and cash equivalents at March 31, 2004 and2003 is as follows:

Cash and time deposits ...
Short-term investment ....
Less-time deposits withoriginal maturities morethan three months .........
Less-stock ......................

Millions of yen
2004
2003
¥ 5,961 ¥ 5,911
6,832
4,616

Millions of yen
2004

Net leased property .......

Thousands of
U.S. dollars
2004$ 56,947
65,263(669)—$121,540

Other

Total

¥ 1,010¥ 1,060¥ 2,071

Accumulated
Depreciation ................

522
¥

488

556
¥

504

1,079
¥

992

Thousands of U.S. dollars
2004

Acquisition costs ...........
(70)
(70)
—
—
¥12,724 ¥10,458

MachineryandEquipment

MachineryandEquipment

Other

Total

$ 9,655$10,130$19,785

Accumulated
Depreciation ................

4,993

5,314

10,307Net leased property .......

$ 4,662$ 4,816$ 9,47811

Future minimum lease payments under financeleases as of March 31, 2004 and 2003 were as
follows:

Due within one year ......
Due after one year .........
Total ..............................

Millions of yen
2004
2003
¥ 391
¥ 368
601
740
¥ 992
¥1,109Changes in common stock and additional paid-in
capital have resulted from the following.

Thousands of
U.S. dollars
2004$3,736
5,742$9,478The acquisition costs and future minimum lease
payments under finance leases include theimputed interest expense portion.
Depreciation expense, which is not reflected in theaccompanying consolidated statements of income,computed by the straight-line method, would havebeen ¥402 million ($3,843 thousand) for the year
ended March 31, 2004.
9.

10. Shareholders’ Equity

Millions of yen
Number ofsharesCommonstock

Additional
paid-in
capitalBalance of March 31,
2002 .............................

28,310,779

11,786

11,613Retirement of stock during
2003 .............................

(145,000)

0

(105)

Balance of March 31,
2003 .............................

28,165,779

11,786

11,508Retirement of stock during
2004 .............................

161,000

56

153

Balance of March 31,
2004 .............................

28,326,779

11,842

11,661Thousands of
U.S. dollars

Derivatives and Hedging Activities

Derivative financial instruments are utilized by theCompany principally to reduce interest rate andforeign exchange rate risks. The Company has
established a control environment which includes
policies and procedures for risk assessment and forthe approval, reporting and monitoring oftransactions involving derivative financial
instruments. The Company does not hold or issue
derivative financial instruments for trading
purposes.
At March 31, 2004 and 2003, all forward
exchange contracts outstanding were entered into
in order to hedge receivables and payables
denominated in foreign currencies which havebeen translated and reflected at the corresponding
contracted rates in the accompanying consolidatedbalance sheets at March 31, 2004 and 2003.

Commonstock

Additional
paid-in
capital112,584

109,926

2004 .............................

535

1,465

Balance of March 31,
2004 .............................

113,119

111,390

Balance of March 31,
2003 .............................
Retirement of stock during

The Company adopted 100 shares of common
stock as “low unit”. A holder of shares representing
less than one unit cannot exercise any voting rights
with respect to such shares. However, the holder isentitled to receive dividends and other
distributions. A holder of a fraction of a unit may at
any time require the Company to purchase suchshares at the prevailing market price. Shares sopurchased must be sold or otherwise transferred toa third party within a reasonable time.
11. Research and Development and Computer
SoftwareResearch and development expenditure charged toincome was ¥1,284 million ($12,266 thousand)and ¥702 million for the years ended March 31,
2004 and 2003, respectively.

1212. Income Taxes
The Company and its domestic subsidiaries are
subject to several taxes based on income, which in
the aggregate resulted in statutory tax rates ofapproximately 42.0% and 42.0% for the years
ended March 31, 2004 and 2003, respectively.
Foreign subsidiaries are subject to income taxes of
the countries in which they operate.
The effective rate for the two years ended March
31, 2004 differs from the Company’s statutory tax
rate for the following reasons:Statutory tax rate ...................................
Dividend income ................................
Expenses not deductible forincome tax purposes ..........................
Per capital inhabitant tax ....................
Other ..................................................
Effective tax rate ....................................

2004
42.0
(0.3)

2003
42.0%
(8.0)

2.5
2.5
0.6
47.3

9.7
11.8
9.5
65.0%

In assessing the realizability of deferred tax assets,management of the Company considers whether it
is more likely than not that some portion or all of
the deferred tax assets will not be realized. The
ultimate realization of deferred tax assets is entirely
dependent upon the generation of future taxable
income in specific tax jurisdictions during theperiods in which those temporary differences
become deductible. Although realization is notassured, management considered the projected
future taxable income in making this assessment.
Based on these factors, management believes it ismore likely than not that the Company will realize
the benefits of these deductible differences, net ofthe existing valuation allowance as of March 31,
2004.
Tax loss carryforwards will expire between 2005
and 2008.
13. Segment Information:

The tax effects of temporary differences that giverise to significant portions of the deferred tax
assets at March 31, 2004 and 2003 are presented
below:

Millions of yen

Deferred tax assets:
Accrued expenses .........
Accrued retirement
benefits ........................
Depreciation .................
Unrealized profits .........
Tax loss carryforwards ..
Other ............................
Total gross deferred
tax assets ..................
Less valuation
allowance ................
Net deferred tax
assets .......................

Deferred tax liabilities:
Special tax-purpose
reserve for condensed
booking of fixed assets ...
Unrealized gains ofother securities ............
Total gross deferred
tax liabilities .............
Net deferred tax
assets ........................

Thousands of
U.S. dollars

2004

2003

2004

¥ 426

¥ 336

$ 4,073

773
210
302
42
725

760
221
302
170
365

7,386
2,006
2,891
404
6,929

2,479

2,157

23,688

(159)

(211)

(1,527)

2,320

1,946

22,161(1,344)(1,345)(12,838)

(843)

(49)

(8,058)(2,187)(1,394)(20,896)

¥ 132

¥ 551

$ 1,265

Information about operations in different industry
segments of the Group for the years ended March
31, 2004 and 2003, is as follows:
Industry Segments
a. Sales and Operating Income
Millions of yen
2004
Eliminations
Industry A Industry B Industry C Industry D /Corporate Consolidated
Sales to customers ....... ¥39,058 ¥10,246 ¥ 6,086 ¥ 2,036 ¥ — ¥57,428
Intersegment ...............
0
—
—
419
(419)
—
Total sales ................... 39,058 10,246
6,086
2,456
(419) 57,428
Operating expenses .... 37,162
9,712
6,068
1,763
(442) 54,264
Operating income ....... ¥ 1,896 ¥ 534 ¥ 17 ¥ 692 ¥ 22 ¥ 3,163
Millions of yen
2003
Eliminations
Industry A Industry B Industry C Industry D /Corporate Consolidated
Sales to customers ....... ¥32,317 ¥14,829 ¥ 6,531 ¥ 1,590 ¥ — ¥55,269
Intersegment ...............
14
3
—
360
(378)
—
Total sales ................... 32,332 14,833
6,531
1,951
(378) 55,269
Operating expenses .... 32,159 13,583
6,603
1,559
(395) 53,510
Operating income ....... ¥ 172 ¥ 1,249 ¥ (71) ¥ 391 ¥ 16 ¥ 1,759

13

Industry A
Sales to customers ....... $373,088
Intersegment ...............
0
Total sales ................... 373,088
Operating expenses .... 354,974
Operating income ....... $ 18,114

Thousands of U.S. dollars
2004
Eliminations
Industry B Industry C Industry D /Corporate Consolidated$ 97,877 $ 58,139 $ 19,454 $— $548,557
—
—
4,010
(4,011)—
97,877 58,139 23,464(4,011) 548,557
92,774 57,970 16,845(4,226) 518,337$ 5,103 $ 169 $ 6,619 $ 215 $ 30,219

Industry D consists of real estate business.
Corporate assets consist primarily of cash
and cash equivalents, investment in andadvances to affiliates, investments insecurities and the corporate headquarters
assets.
14. Subsequent Eventb. Assets, Depreciation and Capital Expenditures
Millions of yen
2004
Eliminations
Industry A Industry B Industry C Industry D /Corporate Consolidated
Assets .......................... ¥44,850 ¥ 7,386 ¥ 6,051 ¥ 9,693 ¥17,584 ¥85,566
Depreciation ...............
749
43
110
334
—
1,238
Capital expenditure .....
945
26
230
1,072
—
2,275
Millions of yen
2003
Industry A Industry B Industry C
Assets .......................... ¥40,597 ¥10,930 ¥ 6,112
Depreciation ...............
740
46
111
Capital expenditure ..... 2,510
67
99

Industry A
Assets .......................... $428,408
Depreciation ............... 7,162
Capital expenditure ..... 9,031

Eliminations
Industry D /Corporate Consolidated¥ 5,544 ¥15,760 ¥78,943
272
—
1,169
685
—
3,361

Thousands of U.S. dollars
2004
Eliminations
Industry B Industry C Industry D /Corporate Consolidated$ 70,558 $ 57,802 $ 92,596 $ 167,963 $817,329
419
1,059
3,192
— 11,833
254
2,206 10,241— 21,733

Notes: Industry A consists of special equipment
car.
Industry B consists of environmental
equipment and systems.
Industry C consists of car sales business.

14

The following appropriations of the Company’s
retained earnings in respect of the year ended
March 31, 2004 were as proposed by the Board of
Directors and approved by the shareholders at theannual general meeting held on 29 June, 2004:

Appropriations
Cash dividends(¥6.0 per share) ....................
Bonuses to directors ..............
Total appropriations .............

Millionsof yen
¥ 167
26
¥ 193

Thousands of
U.S. dollars$ 1,603248$ 1,851

REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

To the Shareholders andBoard of Directorsof Kyokuto Kaihatsu Kogyo Co., Ltd.

We have audited the accompanying consolidated balance sheets of Kyokuto Kaihatsu Co., Ltd. and subsidiaries as of March 31, 2003 and 2004, and the related consolidated statements of income,stockholders’ equity and cash flows for each of the years in the two-year period ended March 31, 2004.
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 thefinancial statements are free of material misstatement. 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 evaluating 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 financial position of Kyokuto Kaihatsu Kogyo Co.,Ltd. and subsidiaries as of March 31, 2003
and 2004, and the results of their operations and their cash flows for each of the years in the two-year
period ended March 31, 2004 in conformity with accounting principles generally accepted in Japan.
The accompanying consolidated financial statements as of and for the year ended March 31, 2004 havebeen translated into United States dollars solely for the convenience of the reader. We have recomputed
the translation and, in our opinion, the consolidated financial statements expressed in yen have beentranslated into dollars on the basis set forth in note 1 to the consolidated financial statements.

Osaka, Japan
June 29, 2004

15

CORPORATE INFORMATION

Kyokuto Kaihatsu Kogyo Co., Ltd.
Established:
June, 1955
Paid-in Capital:¥11,842 million (at March 31, 2004)
Number of Shares Issued:
27,962,658 shares (at March 31, 2004)
Number of Employees:
1,331
Head Office:1-45, Koshienguchi 6-chome, Nishinomiya City, Hyogo Prefecture,663-8545, Japan
Tel: 0798-66-1000
Fax: 0798-66-8146
Tokyo Office:1-1, Asahicho, Haneda, Ota-ku, Tokyo, 144-0042, Japan
Tel: 03-5737-2271
Fax: 03-5737-7791
Plants:Yokohama Plant
Occupies 51,890m2
Since March, 1962
Located in Yamato, Kanagawa
Nagoya Plant
Occupies 132,537m2
Since June, 1970
Located in Komaki, Aichi
Miki Plant
Occupies 98,274m2
Since October, 1979
Located in Miki, Hyogo
Fukuoka Plant
Occupies 66,832m2
Since September, 1970
Located in Iizuka, Fukuoka
Hachinohe Plant
Occupies 57,600m2
Since April, 1999
Located in Hachinohe, Aomori

16

BOARD OF DIRECTORS AND STATUTORY AUDITORS(at June 29, 2004)

President and Representative of the Board of Directors, CEO
Katsushi Tanaka
Senior Managing Director, Senior Managing Executive Officer
Tadao Yasuda
Managing Director, Managing Executive Officer
Hiroki Uoi
Director, Managing Executive Officer
Yukinori Matsuhashi
Director, Executive Officer
Takeshi Kunisada
Takaaki Hudetani
Syunji Nakamura
Executive Officer
Kiyoshi Urasaka
Yukitoshi Masumura
Toshihide Sakai
Tomoki Ueyama
Genpachi Hashimoto
Rikio Sagawa
Kozo Ueda
Daisuke Nagumo
Akira Yamasita
Standing Auditor
Yasuhiko Tamaki
AuditorKazuyoshi Kira
Rikuyuki Tentaku
Yasuo Mizuno

17

KYOKUTO KAIHATSU KOGYO CO., LTD.

Printed in Japan