Annual Report 2005
F o r t h e y e a r e n d e d M a r c h 31 , 2 0 0 5

FUJI HEAVY INDUSTRIES LTD.
Annual Report 2005

Subaru Building, 7-2, Nishi-Shinjuku 1-chome,
Shinjuku-ku, Tokyo 160-8316, Japan

http://www.fhi.co.jp/english/

Printed on recycled paper in Japan

A Revolution in Motion

Harmony in Motion

Fuji Heavy Industries Ltd. (FHI) is a global manufacturer of transportation- and aerospace-related products and the
maker of Subaru automobiles. FHI’s roots go back to 1917, when Japan’s first Aircraft Research Laboratory (later
Nakajima Aircraft Co., Ltd.) was established, 14 years after the Wright Brothers’ first successful flight of the Kitty
Disclaimer Regarding Forward-Looking
Statements

Hawk flyer in 1903. While some of the world’s automakers have their roots in the aircraft industry, FHI is the only
automaker who continues to build aircraft today.
On July 15, 2003, the 50th anniversary of the Company’s founding in 1953, FHI introduced the six-star(“mutsuraboshi”) Subaru automobile emblem design as its new corporate symbol. The Company has been using
this symbol to further fortify its brand image and awareness on a global basis.

CONTENTS

To the Stakeholders of Fuji Heavy Industries Ltd.
Internal Reforms Aimed at Profitability Resurgence by Fiscal 2007
Restructuring Sales Processes and Networks
Boosting the Efficiency of Asset Utilizationand Streamlining the Corporate Structure

4
10
12
16

Management
Corporate Social Responsibility (CSR)
Financial Section
Consolidated Subsidiaries and Affiliates
Investor Information

18
20
23
63
64

Statements herein concerning plans and strategies,
expectations or projections about the future, FHI’s efforts
with regard to various management issues, and otherstatements, except for historical facts, are forward-looking
statements. These forward-looking statements are subject
to uncertainties that could cause actual results to differ
materially from those anticipated. These uncertainties
include, but are not limited to, general economic
conditions, demand for and prices of FHI’s products, FHI’s
ability to continue to develop and market advanced
products, raw material prices, and currency exchange
rates. FHI disclaims any obligation to update any forwardlooking statements, whether as a result of new
information, future events, or otherwise.

Annual Report 2005

1

Harmony in Motion

Fuji Heavy Industries Ltd. (FHI) is a global manufacturer of transportation- and aerospace-related products and the
maker of Subaru automobiles. FHI’s roots go back to 1917, when Japan’s first Aircraft Research Laboratory (later
Nakajima Aircraft Co., Ltd.) was established, 14 years after the Wright Brothers’ first successful flight of the Kitty
Disclaimer Regarding Forward-Looking
Statements

Hawk flyer in 1903. While some of the world’s automakers have their roots in the aircraft industry, FHI is the only
automaker who continues to build aircraft today.
On July 15, 2003, the 50th anniversary of the Company’s founding in 1953, FHI introduced the six-star(“mutsuraboshi”) Subaru automobile emblem design as its new corporate symbol. The Company has been using
this symbol to further fortify its brand image and awareness on a global basis.

CONTENTS

To the Stakeholders of Fuji Heavy Industries Ltd.
Internal Reforms Aimed at Profitability Resurgence by Fiscal 2007
Restructuring Sales Processes and Networks
Boosting the Efficiency of Asset Utilizationand Streamlining the Corporate Structure

4
10
12
16

Management
Corporate Social Responsibility (CSR)
Financial Section
Consolidated Subsidiaries and Affiliates
Investor Information

18
20
23
63
64

Statements herein concerning plans and strategies,
expectations or projections about the future, FHI’s efforts
with regard to various management issues, and otherstatements, except for historical facts, are forward-looking
statements. These forward-looking statements are subject
to uncertainties that could cause actual results to differ
materially from those anticipated. These uncertainties
include, but are not limited to, general economic
conditions, demand for and prices of FHI’s products, FHI’s
ability to continue to develop and market advanced
products, raw material prices, and currency exchange
rates. FHI disclaims any obligation to update any forwardlooking statements, whether as a result of new
information, future events, or otherwise.

Annual Report 2005

1

Spirit in Motion

Performance Overview
Automotive Sales Volume (thousand units, non-consolidated)
Net Sales
Operating Income
Ordinary Income
Net Income
Capital Investment
Depreciation
R&D Expenses
Interest-Bearing Debt
Exchange Rate (¥/$, non-consolidated)

2 FUJI HEAVY INDUSTRIES LTD.

(Billions of yen)

FY2003555
1,372.3
67.5
58.5
33.4
64.6
48.8
60.1
389.1
124

Actual Results
FY2004
FY2005553
601
1,439.5
1,446.5
50.3
42.0
56.6
43.6
38.6
18.2
74.6
85.3
53.2
51.1
57.5
53.0
378.9
412.2
116
108

Forecast for
FY2006
FY2007597
654
1,470.0
1,580.0
31.0
50.0
27.0
48.0
15.0
27.0
67.0
61.0
58.0
65.0
55.5
60.0
410.0
400.0
105
105

2004

2005

April

Subaru sales network in China is established

January"Subaru Academy" opens

July

New SUV development alliance with Saab is agreed

January

Forester undergoes a major face-lift

September Peter Solberg wins the first WRC Rally Japan

March

September Cumulative passenger car sales in Japan surpass
three million units

Cumulative sales of Subaru vehicles inJapan surpass 10 million units

April

Subaru R2 is awarded 2005 RJC* Car of the Year
Special Award for Best Mini Passenger Car

New directors’/executive officers’ assignments
are announcedMay

Revised FDR-1 is announced

New Subaru R1 is launchedMay

New Subaru B9 Tribeca is releasedin North American market

June

Finely tuned new Impreza is released

November
December*RJC: The Automotive Researchers & Journalists Conference of Japan

Annual Report 2005

3

Spirit in Motion

Performance Overview
Automotive Sales Volume (thousand units, non-consolidated)
Net Sales
Operating Income
Ordinary Income
Net Income
Capital Investment
Depreciation
R&D Expenses
Interest-Bearing Debt
Exchange Rate (¥/$, non-consolidated)

2 FUJI HEAVY INDUSTRIES LTD.

(Billions of yen)

Actual Results
FY2004
FY2005
FY2003553
601
555
1,439.5
1,446.5
1,372.3
50.3
42.0
67.5
56.6
43.6
58.5
38.6
18.2
33.4
74.6
85.3
64.6
53.2
51.1
48.8
57.5
53.0
60.1
378.9
412.2
389.1
116
108
124

Forecast for
FY2006
FY2007597
654
1,470.0
1,580.0
31.0
50.0
27.0
48.0
15.0
27.0
67.0
61.0
58.0
65.0
55.5
60.0
410.0
400.0
105
105

2004

2005

April

Subaru sales network in China is established

January"Subaru Academy" opens

July

New SUV development alliance with Saab is agreed

January

Forester undergoes a major face-lift

September Peter Solberg wins the first WRC Rally Japan

March

September Cumulative passenger car sales in Japan surpass
three million units

Cumulative sales of Subaru vehicles inJapan surpass 10 million units

April

November

Subaru R2 is awarded 2005 RJC* Car of the Year
Special Award for Best Mini Passenger Car

New directors’/executive officers’ assignments
are announcedMay

Revised FDR-1 is announced

December

New Subaru R1 is launchedMay

New Subaru B9 Tribeca is releasedin North American market

June

Finely tuned new Impreza is released*RJC: The Automotive Researchers & Journalists Conference of Japan

Annual Report 2005

3

To the Stakeholders of Fuji Heavy Industries Ltd.

Moving Resolutely Ahead
Fundamental Reforms
Fiscal 2005, ended March 31, 2005, was the third year of the Fuji Dynamic
Revolution–1 (FDR-1) medium-term business plan, which covers the fivefiscal years through fiscal 2007. Having revised the plan's targets in lightof actual performance during the first three years, we are now placing toppriority on stopping the downtrend in profit and making a turnaroundthrough reforms that bolster the Company's profit base.
In fiscal 2005, consolidated net sales edged up 0.5% from the levelin the previous year, to ¥1,446.5 billion. However, operating income decreased 16.5%, or ¥8.3 billion, to ¥42.0 billion, and net income amounted
to ¥18.2 billion, down 52.8%.
Factors with a positive influence on profitability included a ¥16.4 billion
reduction in the cost of materials along with decreases in R&D expenses
and selling, general and administrative (SG&A) expenses, which had the
combined effect of boosting operating profit ¥24.0 billion. However, thisamount was more than offset by ¥32.3 billion in negative factors, including
a loss on currency exchange, which decreased operating income by ¥15.1
billion, and a deterioration in sales volume and model mix, which reduced
operating income by ¥17.2 billion. This resulted in an ¥8.3 billion drop in
operating income.
Although both sales volume and sales revenue in Subaru automobile
operations increased, domestic sales of relatively profitable Legacy andSubaru R2 models were sluggish. Overseas, such factors as an increase inmarketing costs due to competition in the United States, additional costs
to respond to safety and environmental regulations, and the rising pricesof steel and other raw materials negatively impacted profitability. Risingsales in other markets and cost reduction efforts were not sufficient tocover such negative effects.
Because these circumstances have caused FHI's performance todiverge considerably from the FDR-1 targets, the Company has decided
to increase its emphasis on business rebuilding measures during theremaining two years of the business plan. Accordingly, while FHI will retain
its vision of being an attractive company with a strong market presence, itwill be reexamining the nature of its strengths and weaknesses and isdetermined to implement fundamental reforms.
Looking at long-term performance indicators, we have revised ouroperating income ratio target from 10% to 8%, a level that we believe iscompatible with sustained corporate growth. In view of our strongemphasis on high asset turnover, we are firmly maintaining our ROA
target of 10%. At this point, I will explain the nature of the revised
FDR-1 plan that will be guiding our efforts during the upcoming two years
to attain these targets.

Reasons for the FDR-1 Target Attainment Shortfall andPrincipal Features of the Revised Plan
In brief, the revised FDR-1 plan is designed to accurately
assess FHI's current situation and effectively adjust it so
Overview of the First Three Years of FDR-1
that the Company can reverse its recent profitability(Billions of yen)downtrend.
Revised: 637,000 (units)
Unfortunately, the new targets for consolidated
67.5
615,000 (units)
575,000 (units)
operating income—¥31.0 billion in fiscal 2006 and ¥50.0
600,577 (units)
billion in fiscal 2007—are considerably lower than the
1,446.5
553, 013 (units)555,421 (units)
50.3
previous targets of ¥68.0 billion in fiscal 2006 and ¥91.0
1,372.3
billion in fiscal 2007. The main reasons for the revision are
42.0
1,439.5
a sales volume level that was considerably lower than theoriginal planned level and a rise in the cost of materials
that was considerably greater than anticipated.
In contrast to FHI's situation, Japan's major automakers have recorded strong performance and record
profits, but this reflects those companies' large-scale
sales in markets other than Japan and the United States,
2003
2004
2005
high shares of overseas manufacturing operations,Operating Income
Actual Unit Sales
FDR-1
Sales
and other structural factors that make the effect of
currency exchange rate fluctuations on their performance
relatively small. FHI's business structure is the opposite—its profitability is highly dependent on the Japanese market and,particularly, the U.S. market. This kind of structural difference is presenting us with extremely severe challenges
regarding our performance.
The original form of FDR-1 anticipated that the risk of such structural challenges would be offset by sales volume
growth in Japan and the United States, but the intensification of market competition in both those countries restrained our
fiscal 2005 automobile sales volume to 595,000 units, or more than 9% less than our consolidated target of 639,000 units.
This reflects a domestic sales volume for the Subaru R2 that was much lower than planned and a rise in the U.S. sales
volume following the launch of the Baja and the new Legacy that was smaller than expected.
Also, as previously mentioned, raw material prices were much higher than expected. Our profitability was heavily
impacted by severe market conditions that did not allow us to raise selling prices to reflect such increases in raw material
prices.
In view of all this, we must do our utmost to quickly restore balance among our sales volume, costs, and selling prices.

Management Vision• Small in size, but strong in market presence• Establish a sustainable business model of high profitability with automobiles as the core business

Operating income ratio of more than 8% and ROA of more than 10% by 2010

Kyoji Takenaka
President and CEO

4 FUJI HEAVY INDUSTRIES LTD.

Annual Report 2005

5

To the Stakeholders of Fuji Heavy Industries Ltd.

Moving Resolutely Ahead
Fundamental Reforms
Fiscal 2005, ended March 31, 2005, was the third year of the Fuji Dynamic
Revolution–1 (FDR-1) medium-term business plan, which covers the fivefiscal years through fiscal 2007. Having revised the plan's targets in lightof actual performance during the first three years, we are now placing toppriority on stopping the downtrend in profit and making a turnaroundthrough reforms that bolster the Company's profit base.
In fiscal 2005, consolidated net sales edged up 0.5% from the levelin the previous year, to ¥1,446.5 billion. However, operating income decreased 16.5%, or ¥8.3 billion, to ¥42.0 billion, and net income amounted
to ¥18.2 billion, down 52.8%.
Factors with a positive influence on profitability included a ¥16.4 billion
reduction in the cost of materials along with decreases in R&D expenses
and selling, general and administrative (SG&A) expenses, which had the
combined effect of boosting operating profit ¥24.0 billion. However, thisamount was more than offset by ¥32.3 billion in negative factors, including
a loss on currency exchange, which decreased operating income by ¥15.1
billion, and a deterioration in sales volume and model mix, which reduced
operating income by ¥17.2 billion. This resulted in an ¥8.3 billion drop in
operating income.
Although both sales volume and sales revenue in Subaru automobile
operations increased, domestic sales of relatively profitable Legacy andSubaru R2 models were sluggish. Overseas, such factors as an increase inmarketing costs due to competition in the United States, additional costs
to respond to safety and environmental regulations, and the rising pricesof steel and other raw materials negatively impacted profitability. Risingsales in other markets and cost reduction efforts were not sufficient tocover such negative effects.
Because these circumstances have caused FHI's performance todiverge considerably from the FDR-1 targets, the Company has decided
to increase its emphasis on business rebuilding measures during theremaining two years of the business plan. Accordingly, while FHI will retain
its vision of being an attractive company with a strong market presence, itwill be reexamining the nature of its strengths and weaknesses and isdetermined to implement fundamental reforms.
Looking at long-term performance indicators, we have revised ouroperating income ratio target from 10% to 8%, a level that we believe iscompatible with sustained corporate growth. In view of our strongemphasis on high asset turnover, we are firmly maintaining our ROA
target of 10%. At this point, I will explain the nature of the revised
FDR-1 plan that will be guiding our efforts during the upcoming two years
to attain these targets.

Reasons for the FDR-1 Target Attainment Shortfall andPrincipal Features of the Revised Plan
In brief, the revised FDR-1 plan is designed to accurately
assess FHI's current situation and effectively adjust it so
Overview of the First Three Years of FDR-1
that the Company can reverse its recent profitability(Billions of yen)downtrend.
Revised: 637,000 (units)
Unfortunately, the new targets for consolidated
67.5
615,000 (units)
575,000 (units)
operating income—¥31.0 billion in fiscal 2006 and ¥50.0
553, 013 (units)
600,577 (units)
billion in fiscal 2007—are considerably lower than the
1,446.5
555,421 (units)
1,439.5
previous targets of ¥68.0 billion in fiscal 2006 and ¥91.0
1,372.3
50.3
billion in fiscal 2007. The main reasons for the revision are
42.0
a sales volume level that was considerably lower than theoriginal planned level and a rise in the cost of materials
that was considerably greater than anticipated.
In contrast to FHI's situation, Japan's major automakers have recorded strong performance and record
profits, but this reflects those companies' large-scale
sales in markets other than Japan and the United States,
2003
2004
2005
high shares of overseas manufacturing operations,Operating Income
Actual Unit Sales
FDR-1
Sales
and other structural factors that make the effect of
currency exchange rate fluctuations on their performance
relatively small. FHI's business structure is the opposite—its profitability is highly dependent on the Japanese market and,particularly, the U.S. market. This kind of structural difference is presenting us with extremely severe challenges
regarding our performance.
The original form of FDR-1 anticipated that the risk of such structural challenges would be offset by sales volume
growth in Japan and the United States, but the intensification of market competition in both those countries restrained our
fiscal 2005 automobile sales volume to 595,000 units, or more than 9% less than our consolidated target of 639,000 units.
This reflects a domestic sales volume for the Subaru R2 that was much lower than planned and a rise in the U.S. sales
volume following the launch of the Baja and the new Legacy that was smaller than expected.
Also, as previously mentioned, raw material prices were much higher than expected. Our profitability was heavily
impacted by severe market conditions that did not allow us to raise selling prices to reflect such increases in raw material
prices.
In view of all this, we must do our utmost to quickly restore balance among our sales volume, costs, and selling prices.

Management Vision• Small in size, but strong in market presence• Establish a sustainable business model of high profitability with automobiles as the core business

Operating income ratio of more than 8% and ROA of more than 10% by 2010

Kyoji Takenaka
President and CEO

4 FUJI HEAVY INDUSTRIES LTD.

Annual Report 2005

5

To the Stakeholders of Fuji Heavy Industries Ltd.

To survive and develop in line with our vision of being an attractive company with a strong market presence, I believe
it is crucial that we maintain our traditional emphasis on marketing distinctive products that clearly differentiate us from the
major automakers. We must move still further ahead with the unique core technologies that are characteristic of Subaru
automobiles and provide products that accurately meet the needs of customers who have a taste and high expectationsfor Subaru. Subaru strengths include such technologies as horizontally opposed engines and symmetrical AWD systems toprovide superb driving performance, which are combined with excellent powertrains, suspensions, chassis, and bodywork
while drawing on sophisticated ergonomics expertise. These are Subaru's core strengths, which we must effectively
leverage and extend while also working to offer superior environment-friendliness and safety so that we can provide
customers with pleasure and a sense of security.
FHI will continue working to further increase theBusiness Portfolio Overview
concentration of its resources in business segments
and markets that enable the Company to proactively
Large
Growthleverage its special technologies to generate
Potential
competitive advantages.
With regard to sales opportunities, we are
SUBARUSUBARU
Aerospace(North America)
Eco(Europe)seeking to build a business portfolio concentrated in
Tech.
Industrial
areas that offer considerable room for business
Products
SUBARU
growth where we can develop a strong sales network.
(Japan)In this perspective, the U.S. market appears to be theHigh
Lowmarket in which we have the most potential for fullBarrier
to Growth
fledged growth, while Japan and Europe are moresuitable for tightly focused operations on special
Smallmarkets and segments in which we can make themost out of our unique technologies.
Based on these ideas, the revised form of FDR-1 emphasizes the following five strategic goals:

1. Implementing urgent total cost reductions
2. Restructuring product planning
3. Restructuring sales processes and networks
4. Increasing asset turnovermodels already in mass production, we intend to intensify our current cost-reduction strategies. In particular, cost-cutting
programs initiated in Japan are to be simultaneously implemented at our U.S.-based manufacturing subsidiary, Subaru ofIndiana Automotive, Inc. (SIA), and these programs are to be very ambitious. We expect that cost-cutting programs will
make considerable use of our alliance with General Motors Corporation (GM).

2. Restructuring Product PlanningWith respect to product planning operations, FHI is strengthening its capabilities for marketing operations that place evenmore emphasis than previously on customer satisfaction.
The most important project in the Company's current product portfolio is the B9 Tribeca, which was launched in the
U.S. market in May 2005 as the most premium model in the entire Subaru lineup. We are very pleased to note that the B9Tribeca's marketing has got off to a smooth start. Situated in the hottest segment of the U.S. automobile market, it has
attracted considerable attention as a new type of midsized SUV. By methodically implementing our marketing plan for the
B9 Tribeca, we intend to develop it into a new pillar of profitability in our U.S. operations. Regarding existing models, we
implemented major model changes for the Forester and the Impreza during 2005. As the remodeled versions of theseproducts offer considerably improved fuel consumption performance, the current surge in fuel prices should further
increase the appeal of our strengthened lineup in the United States.
Beginning from a target date sometime in fiscal 2007, we plan to export B9 Tribecas manufactured by SIA to markets
throughout the world, including the Japanese market. In this way, we will be able to respond to vigorous growth in themidsized SUV segment in the European and Australian markets and cater to a portion of the Japanese market for multipassenger vehicles. At the same time, we will be able to boost the capacity utilization rate of SIA and hedge the foreignexchange risks we face.
In Japan, we plan to accelerate our launch of a third new passenger minicar model to next year, and we are expectingthat this model will help motivate our dealers and sub-dealers to increase sales volumes and profitability more effectively
than the Subaru R2, which was intended to play that role. Through this strategy and the addition of highly competitive
special-version vehicles, we will do our best to improve domestic profitability.
Moreover, our joint development with GM of an SUV for Saab Automobile AB is scheduled to bear fruit in the upcoming
fiscal year.
Regarding future product development themes, FHI will move forward with the development of the Legacy platform,
further strengthen its special core technologies, and create new products that eloquently manifest the distinctive Subaru
style. At the same time, the Company will work to increase the efficiency and speed of product development programs
and steadily proceed with medium- to long-term projects to develop a wide range of environment-friendly technologies,
including joint development projects involving such leading-edge GM technologies as those for hybrid cars and newgeneration diesel engines.

5. Streamlining the corporate structure

1. Implementing Urgent Total Cost Reductions
Expediting a total cost structure revolution will involve internal structural reforms and other measures designed to reduce
FHI's overall costs.
The Company has been working to lower its costs. Nonetheless, when allocating resources, we have tended to givepriority to new vehicle development. At this point, however, we will allocate resources with a strong emphasis on lowering
the cost of materials based on due efforts to achieve an appropriate balance between levels of sales volume, manufacturing costs, and selling prices. We are taking thorough measures to reduce the cost of newly developed vehicles as well
as models currently being mass-produced.
Regarding new models, we have set the clear-cut goal of achieving ¥100,000 in unit cost reductions, and we arealso seeking a 30% cut in the cost of new model development, including the costs of engineering, molds, and dies. As for

6 FUJI HEAVY INDUSTRIES LTD.

Product Portfolio
FMC

New minicar

Forester

FMC
New model

B9 Tribeca(Japan, Europe, Australia)
B9 Tribeca (United States)
Impreza

Legacy (Japan, Europe, Australia)

2005
FMC/New Model

Legacy (United States)

2006

2007~

Major Face-Lift

Annual Report 2005

7

To the Stakeholders of Fuji Heavy Industries Ltd.

To survive and develop in line with our vision of being an attractive company with a strong market presence, I believe
it is crucial that we maintain our traditional emphasis on marketing distinctive products that clearly differentiate us from the
major automakers. We must move still further ahead with the unique core technologies that are characteristic of Subaru
automobiles and provide products that accurately meet the needs of customers who have a taste and high expectationsfor Subaru. Subaru strengths include such technologies as horizontally opposed engines and symmetrical AWD systems toprovide superb driving performance, which are combined with excellent powertrains, suspensions, chassis, and bodywork
while drawing on sophisticated ergonomics expertise. These are Subaru's core strengths, which we must effectively
leverage and extend while also working to offer superior environment-friendliness and safety so that we can provide
customers with pleasure and a sense of security.
FHI will continue working to further increase theBusiness Portfolio Overview
concentration of its resources in business segments
and markets that enable the Company to proactively
Large
Growthleverage its special technologies to generate
Potential
competitive advantages.
With regard to sales opportunities, we are
SUBARUSUBARU
Aerospace(North America)
Eco(Europe)seeking to build a business portfolio concentrated in
Tech.
Industrial
areas that offer considerable room for business
Products
SUBARU
growth where we can develop a strong sales network.
(Japan)In this perspective, the U.S. market appears to be theHigh
Lowmarket in which we have the most potential for fullBarrier
to Growth
fledged growth, while Japan and Europe are moresuitable for tightly focused operations on special
Smallmarkets and segments in which we can make themost out of our unique technologies.
Based on these ideas, the revised form of FDR-1 emphasizes the following five strategic goals:

1. Implementing urgent total cost reductions
2. Restructuring product planning
3. Restructuring sales processes and networks
4. Increasing asset turnovermodels already in mass production, we intend to intensify our current cost-reduction strategies. In particular, cost-cutting
programs initiated in Japan are to be simultaneously implemented at our U.S.-based manufacturing subsidiary, Subaru ofIndiana Automotive, Inc. (SIA), and these programs are to be very ambitious. We expect that cost-cutting programs will
make considerable use of our alliance with General Motors Corporation (GM).

2. Restructuring Product PlanningWith respect to product planning operations, FHI is strengthening its capabilities for marketing operations that place evenmore emphasis than previously on customer satisfaction.
The most important project in the Company's current product portfolio is the B9 Tribeca, which was launched in the
U.S. market in May 2005 as the most premium model in the entire Subaru lineup. We are very pleased to note that the B9Tribeca's marketing has got off to a smooth start. Situated in the hottest segment of the U.S. automobile market, it has
attracted considerable attention as a new type of midsized SUV. By methodically implementing our marketing plan for the
B9 Tribeca, we intend to develop it into a new pillar of profitability in our U.S. operations. Regarding existing models, we
implemented major model changes for the Forester and the Impreza during 2005. As the remodeled versions of theseproducts offer considerably improved fuel consumption performance, the current surge in fuel prices should further
increase the appeal of our strengthened lineup in the United States.
Beginning from a target date sometime in fiscal 2007, we plan to export B9 Tribecas manufactured by SIA to markets
throughout the world, including the Japanese market. In this way, we will be able to respond to vigorous growth in themidsized SUV segment in the European and Australian markets and cater to a portion of the Japanese market for multipassenger vehicles. At the same time, we will be able to boost the capacity utilization rate of SIA and hedge the foreignexchange risks we face.
In Japan, we plan to accelerate our launch of a third new passenger minicar model to next year, and we are expectingthat this model will help motivate our dealers and sub-dealers to increase sales volumes and profitability more effectively
than the Subaru R2, which was intended to play that role. Through this strategy and the addition of highly competitive
special-version vehicles, we will do our best to improve domestic profitability.
Moreover, our joint development with GM of an SUV for Saab Automobile AB is scheduled to bear fruit in the upcoming
fiscal year.
Regarding future product development themes, FHI will move forward with the development of the Legacy platform,
further strengthen its special core technologies, and create new products that eloquently manifest the distinctive Subaru
style. At the same time, the Company will work to increase the efficiency and speed of product development programs
and steadily proceed with medium- to long-term projects to develop a wide range of environment-friendly technologies,
including joint development projects involving such leading-edge GM technologies as those for hybrid cars and newgeneration diesel engines.

5. Streamlining the corporate structure

1. Implementing Urgent Total Cost Reductions
Expediting a total cost structure revolution will involve internal structural reforms and other measures designed to reduce
FHI's overall costs.
The Company has been working to lower its costs. Nonetheless, when allocating resources, we have tended to givepriority to new vehicle development. At this point, however, we will allocate resources with a strong emphasis on lowering
the cost of materials based on due efforts to achieve an appropriate balance between levels of sales volume, manufacturing costs, and selling prices. We are taking thorough measures to reduce the cost of newly developed vehicles as well
as models currently being mass-produced.
Regarding new models, we have set the clear-cut goal of achieving ¥100,000 in unit cost reductions, and we arealso seeking a 30% cut in the cost of new model development, including the costs of engineering, molds, and dies. As for

6 FUJI HEAVY INDUSTRIES LTD.

Product Portfolio
FMC

New minicar

Forester

FMC
New model

B9 Tribeca(Japan, Europe, Australia)
B9 Tribeca (United States)
Impreza

Legacy (Japan, Europe, Australia)

2005
FMC/New Model

Legacy (United States)

2006

2007~

Major Face-Lift

Annual Report 2005

7

To the Stakeholders of Fuji Heavy Industries Ltd.

3. Restructuring Sales Processes
and Networks
In the United States, FHI has leveraged the launch ofappealing new products to expand its relatively low market
share in the sunbelt market and augment marketing
capabilities nationwide. Our previous sales network strategy
was not to increase the number of dealers, but rather toimprove the quality of dealers by increasing the number of
exclusive dealers and dealers with separate showrooms. Yet,with our expanded product lineup, we are now determined toincrease the number of dealers. We currently have 581 dealers
in the United States and plan to proactively work to increasethat number to 630 by about 2010 through the establishment of
new dealerships in promising locations. Moreover, we are
expanding our network while retaining “Site Control” by having
our U.S. marketing subsidiary, Subaru of America, Inc. (SOA),
invest a portion of the funds initially needed to create adealership and team up with dealer candidates who haveexcellent dealership operating experience. To implement this strategy methodically and with attention to detail, SOA isadjusting its regional administration systems and augmenting the specialized capabilities of its Dealer Development
Department. We expect that improvement of the sales network will help us boost our annual U.S. sales volume to 250,000
units by 2009 or 2010.
We are also striving to enhance the profitability of our sales network in Japan. Our measures to augment domestic
sales power have been somewhat delayed—as reflected in the time required to establish the “Partner 21” dealer sales
support network system, which was begun at the start of FDR-1 and completed in spring 2005—and it is extremely
important to accelerate these measures. One means of augmenting domestic marketing power we are considering is theintegration of marketing-related operations in regional blocks, including the consolidation of administrative functions fordealers in each block and perhaps the establishment of regional holding companies.
About 40% of our sales come from our contract basis sub-dealers, including Subaru Shops. The launch of new minicar
models is expected to increase the marketing power of more than 10,000 of these sub-dealers and to expand the sales
volume of both minicars and passenger cars.
Regarding Europe, where our automobile business performance has greatly improved, we are strengthening thecapabilities of our wholly owned subsidiary Subaru Europe N.V./S.A., while also reevaluating our distribution system,
expanding our dealer network, and taking steps to pioneer new markets in Eastern Europe and the CIS region. We expect
these measures to further expand the scale of our operations in Europe. FHI is also doing well in the Australian market,
where the well established premium positioning of Subaru has contributed to its solid profitability.

4. & 5. Increasing Asset Turnover and Streamlining the Corporate Structure
In light of FHI's limited resources, it is increasingly evident that the Company must select strategic fields and concentrate
its resources in those fields. In line with our goal of reducing consolidated total assets 10% and interest-bearing debt 20%
by the end of fiscal 2008, we are considering a number of measures. In particular, we are strictly managing our asset levels
in function-specific subsidiaries and the three main nonautomobile internal companies and determining our future
strategies for those units based on repeated examination of their potential for future business growth. We are also taking
measures to increase the efficiency and effectiveness of personnel deployment in the FHI Group, particularly in the parent
company.

8 FUJI HEAVY INDUSTRIES LTD.

Looking a bit more closely at the three nonautomobile companies, the Aerospace company had suffered from the
protracted slump in aircraft-related business following the September 11, 2001, terrorist attacks in the United States, but its
operations are finally showing signs of improvement. The Aerospace company has been investing in several large-scale
projects for the Japan Defense Agency and private-sector customers. These projects have advanced smoothly and will bemaking contributions to our net sales from the current fiscal year.
The Industrial Products company had also faced severe conditions for an extended period but has regained its
profitability and begun making steadily growing contributions to consolidated profitability. This reflects the division's moves
to tighten its focus on high-value-added engine models and proactively develop the OEM market.

Outlook
In conclusion, I will explain our profitability forecast for
Unit Sales and Operating Income(Billions of yen)
the next two fiscal years. In fiscal 2006, the launch of
Revised:654,000
the B9 Tribeca in North America is projected to boost
revenue. However, the positive effects on operating
Actual: 600,577 (units) Revised: 597,000
income of the B9 Tribeca launch and material cost
reductions are expected to be offset by various
50.0
factors, including a forecast loss on currency exchange
42.0
as well as increases in domestic and overseas fixed
costs, market conditions that preclude price rises, the31.0
expense of environmental protection and safetymeasures, higher raw material prices, and deteriorationin the sales volume and mix. As a result, operating
income is expected to decrease ¥11.0 billion from theprevious fiscal year, to ¥31.0 billion.
2005
2006
2007
In fiscal 2007, we anticipate that our sales volume(Actual)(Forecast)will rise, as our new passenger minicar model is
Unit Sales
Operating Income
expected to contribute to domestic sales and the B9Tribeca to U.S. sales for a full year. This and efforts tolower the manufacturing costs are expected to halt the profitability downtrend, boosting operating income to ¥50.0 billion, alevel exceeding the fiscal 2005 level.
We will subsequently implement various reforms aimed at ensuring that FHI is securely on track for sustained
corporate growth.
At the time that the Company revised the FDR-1 plan, it undertook an additional analysis of FHI's strengths andweaknesses. Having done this, we concluded that we must maintain our Subaru-unique strategies—which emphasize
superior functionality with respect to driving performance, safety, and environment friendliness—and move still further
ahead with those strategies. I ask for the continued understanding and support of shareholders and investors as we strive
during the next two years to effectively implement the strategies I have described and ensure that those strategies
generate results.

Kyoji Takenaka
President and CEO

Annual Report 2005

9

To the Stakeholders of Fuji Heavy Industries Ltd.

3. Restructuring Sales Processes
and Networks
In the United States, FHI has leveraged the launch ofappealing new products to expand its relatively low market
share in the sunbelt market and augment marketing
capabilities nationwide. Our previous sales network strategy
was not to increase the number of dealers, but rather toimprove the quality of dealers by increasing the number of
exclusive dealers and dealers with separate showrooms. Yet,with our expanded product lineup, we are now determined toincrease the number of dealers. We currently have 581 dealers
in the United States and plan to proactively work to increasethat number to 630 by about 2010 through the establishment of
new dealerships in promising locations. Moreover, we are
expanding our network while retaining “Site Control” by having
our U.S. marketing subsidiary, Subaru of America, Inc. (SOA),
invest a portion of the funds initially needed to create adealership and team up with dealer candidates who haveexcellent dealership operating experience. To implement this strategy methodically and with attention to detail, SOA isadjusting its regional administration systems and augmenting the specialized capabilities of its Dealer Development
Department. We expect that improvement of the sales network will help us boost our annual U.S. sales volume to 250,000
units by 2009 or 2010.
We are also striving to enhance the profitability of our sales network in Japan. Our measures to augment domestic
sales power have been somewhat delayed—as reflected in the time required to establish the “Partner 21” dealer sales
support network system, which was begun at the start of FDR-1 and completed in spring 2005—and it is extremely
important to accelerate these measures. One means of augmenting domestic marketing power we are considering is theintegration of marketing-related operations in regional blocks, including the consolidation of administrative functions fordealers in each block and perhaps the establishment of regional holding companies.
About 40% of our sales come from our contract basis sub-dealers, including Subaru Shops. The launch of new minicar
models is expected to increase the marketing power of more than 10,000 of these sub-dealers and to expand the sales
volume of both minicars and passenger cars.
Regarding Europe, where our automobile business performance has greatly improved, we are strengthening thecapabilities of our wholly owned subsidiary Subaru Europe N.V./S.A., while also reevaluating our distribution system,
expanding our dealer network, and taking steps to pioneer new markets in Eastern Europe and the CIS region. We expect
these measures to further expand the scale of our operations in Europe. FHI is also doing well in the Australian market,
where the well established premium positioning of Subaru has contributed to its solid profitability.

4. & 5. Increasing Asset Turnover and Streamlining the Corporate Structure
In light of FHI's limited resources, it is increasingly evident that the Company must select strategic fields and concentrate
its resources in those fields. In line with our goal of reducing consolidated total assets 10% and interest-bearing debt 20%
by the end of fiscal 2008, we are considering a number of measures. In particular, we are strictly managing our asset levels
in function-specific subsidiaries and the three main nonautomobile internal companies and determining our future
strategies for those units based on repeated examination of their potential for future business growth. We are also taking
measures to increase the efficiency and effectiveness of personnel deployment in the FHI Group, particularly in the parent
company.

8 FUJI HEAVY INDUSTRIES LTD.

Looking a bit more closely at the three nonautomobile companies, the Aerospace company had suffered from the
protracted slump in aircraft-related business following the September 11, 2001, terrorist attacks in the United States, but its
operations are finally showing signs of improvement. The Aerospace company has been investing in several large-scale
projects for the Japan Defense Agency and private-sector customers. These projects have advanced smoothly and will bemaking contributions to our net sales from the current fiscal year.
The Industrial Products company had also faced severe conditions for an extended period but has regained its
profitability and begun making steadily growing contributions to consolidated profitability. This reflects the division's moves
to tighten its focus on high-value-added engine models and proactively develop the OEM market.

Outlook
In conclusion, I will explain our profitability forecast for
Unit Sales and Operating Income(Billions of yen)
the next two fiscal years. In fiscal 2006, the launch of
Revised:654,000
the B9 Tribeca in North America is projected to boost
revenue. However, the positive effects on operating
Actual: 600,577 (units) Revised: 597,000
income of the B9 Tribeca launch and material cost
reductions are expected to be offset by various
50.0
factors, including a forecast loss on currency exchange
42.0
as well as increases in domestic and overseas fixed
costs, market conditions that preclude price rises, the31.0
expense of environmental protection and safetymeasures, higher raw material prices, and deteriorationin the sales volume and mix. As a result, operating
income is expected to decrease ¥11.0 billion from theprevious fiscal year, to ¥31.0 billion.
2005
2006
2007
In fiscal 2007, we anticipate that our sales volume(Actual)(Forecast)will rise, as our new passenger minicar model is
Unit Sales
Operating Income
expected to contribute to domestic sales and the B9Tribeca to U.S. sales for a full year. This and efforts tolower the manufacturing costs are expected to halt the profitability downtrend, boosting operating income to ¥50.0 billion, alevel exceeding the fiscal 2005 level.
We will subsequently implement various reforms aimed at ensuring that FHI is securely on track for sustained
corporate growth.
At the time that the Company revised the FDR-1 plan, it undertook an additional analysis of FHI's strengths andweaknesses. Having done this, we concluded that we must maintain our Subaru-unique strategies—which emphasize
superior functionality with respect to driving performance, safety, and environment friendliness—and move still further
ahead with those strategies. I ask for the continued understanding and support of shareholders and investors as we strive
during the next two years to effectively implement the strategies I have described and ensure that those strategies
generate results.

Kyoji Takenaka
President and CEO

Annual Report 2005

9

Internal Reforms Aimed atProfitability Resurgence by Fiscal 2007
Expediting a Total Cost Structure Revolution (TSR) is a central goal of the revised FDR-1 medium-term business plan.
FHI is taking thorough measures to reduce its manufacturing costs, aiming to halt the trend of profitability decline andsupport a resurgence of profitability during the current fiscal year. To enforce the current companywide reform program,
Hiroshi Komatsu, who turned around the Industrial Products internal company by restructuring its business in his position as
the company president, has been designated Executive Vice President with responsibility for cost planning andmanagement, manufacturing, procurement, and quality assurance.

Thorough Cost Reductions to Enable a Profitability Upsurge during Fiscal 2006
FHI's strong commitment to providing excellent products has enabled the Company to carry through amid toughcompetition to the present day. It has been accepted that companies may produce excellent products if willing to spend
sufficient money. Nowadays, however, it is increasingly accepted that companies must seek to produce excellent products
as a matter of course, and they must also devise systems for producing excellent products economically or be forced outof business. The global economy currently does not allow companies to spend whatever sum of money is necessary tocreate excellent products, and FHI has missed out on adjusting to the new conditions.
The most important element of successful reforms is always a clear understanding of the current situation. When there
is a problem causing a negative trend in corporate performance, it is crucial to identify the cause. If the cause is understoodand proper countermeasures are taken, it may be possible to quickly reverse the negative trend. The attainment of FHI's
profit targets for the next two years will depend greatly on the progress made in internal reforms, but the reforms will not be
fruitful if the Company does not ensure that reform consciousness becomes an integral part of its employees' day-to-day
operations.
It is obvious that we must design future products based on strong cost-consciousness or we cannot survive. To gain
momentum, FHI believes it crucial to implement cost-cutting measures to contribute to Company profits during the next
two years.

Greatly Reducing Automobile Manufacturing
Materials Costs in Japan and Overseas
With regard to cost-cutting, we will start a new measure, called the “Total Cost Structural Revolution” (TSR) strategy, whichsets automobile manufacturing direct materials cost cuts of 16% in Japan and 13.5% in the United States (over a 20-month

TSR
Japan

Reduction Ratio (%)

0Target: -10.0%
Actual: -10.56%

-5

-5
-10

-10

Target: -3.0%
Actual: -3.17%

Target: -13.5%

-15

-15
Target: -16.0%

CSR-1 Target

-20

-20

CSR-1 Actual
TSR Target

-25
-30

(FY)

United States (SIA)

Reduction Ratio (%)

0

-25

2003

10 FUJI HEAVY INDUSTRIES LTD.

-30

TSR

CSR-1
2004

2005

Post TSR
2006

2007

(CY)

CSR-1 Target
CSR-1 Actual
TSR Target

TSR

CSR-1
2004

2005

2006

Post TSR
2007

period) during the next two years. This program calls forfurther accelerating the rate of cost cuts. In the past two
years, the Company had set a target of reducing directmaterials costs 10.0% in Japan and was able to reduce
those costs 10.56%. In the United States, although our cost
reduction target of 3.0% was not substantial, we were able
to reduce those costs 3.17% in the past two years. The
current target of 13.5% in cost cuts over two years is
considerably more ambitious. Attaining these targets willentail proactive efforts to augment procurement from new
suppliers in Asia and other regions.
FHI's commitment to excellence in Subaru automobile
manufacturing led to certain unnecessary costs, andeliminating such excess costs is a top priority. Moreover,while the Company previously adopted an approach ofeliminating various types of costs over specified periods oftime, its new approach is to implement prospective cost
cuts immediately whenever possible.
Current goals regarding newly developed automobile
Hiroshi Komatsu
models are to reduce unit costs ¥100,000 per vehicle andDirector of the Board, Executive Vice President
lower tooling and dies costs and development costs 30%.
The automobile industry has established benchmarks regarding new model development, and FHI should not be
sharply deviating from those benchmarks. However, the Company has faced problems due to allowances made for
exceptional deviations with respect to its flagship Legacy models. We are returning to our natural posture of setting
investment targets for each automobile model and insisting that investment be kept within the target range. Of course, as
the Legacy models take the role of the Company's flagship product, they are equipped with brand-new technologies
intended for incorporation in other automobile models at later dates. A separate budget is provided for such newtechnology to ensure that cost-cutting programs do not undermine efforts to develop new technologies and nip promising
new initiatives in the bud.

Speed of Reforms Dependent on Reform-Consciousnessof Each Individual Employee
After becoming responsible for automobile manufacturing, my first feelings were that our operations were not speedy
enough and that many employees were still a bit complacent and lacked sufficient crisis consciousness. People unable tosolve problems now are also likely to be unable to solve the problems next year or the year after that. Increasing individual
employees' consciousness of problems is a crucial prerequisite to speedy reforms. To maintain our current employment levels,
we must take the marketing measures needed to support our sales and manufacturing volumes. In brief, we absolutely
must take more decisive problem-solving steps than many FHI employees have been able to take so far.
If we have the resolve to take the natural and proper steps, then we will overcome the problems. We simply have to
make decisions decisively and have the courage to act on those decisions.
We are working to ensure that all managers are highly conscious of the need for decisive reforms and that theytransmit that consciousness to their subordinates. To effectively strengthen the FHI Group, we have to create a culture andan organization that encourages employees to take the initiative. We will attain our strategic reform objectives by ensuringthat each employee has the resolve to take the natural and proper steps.

Annual Report 2005

11

Internal Reforms Aimed atProfitability Resurgence by Fiscal 2007
Expediting a Total Cost Structure Revolution (TSR) is a central goal of the revised FDR-1 medium-term business plan.
FHI is taking thorough measures to reduce its manufacturing costs, aiming to halt the trend of profitability decline andsupport a resurgence of profitability during the current fiscal year. To enforce the current companywide reform program,
Hiroshi Komatsu, who turned around the Industrial Products internal company by restructuring its business in his position as
the company president, has been designated Executive Vice President with responsibility for cost planning andmanagement, manufacturing, procurement, and quality assurance.

Thorough Cost Reductions to Enable a Profitability Upsurge during Fiscal 2006
FHI's strong commitment to providing excellent products has enabled the Company to carry through amid toughcompetition to the present day. It has been accepted that companies may produce excellent products if willing to spend
sufficient money. Nowadays, however, it is increasingly accepted that companies must seek to produce excellent products
as a matter of course, and they must also devise systems for producing excellent products economically or be forced outof business. The global economy currently does not allow companies to spend whatever sum of money is necessary tocreate excellent products, and FHI has missed out on adjusting to the new conditions.
The most important element of successful reforms is always a clear understanding of the current situation. When there
is a problem causing a negative trend in corporate performance, it is crucial to identify the cause. If the cause is understoodand proper countermeasures are taken, it may be possible to quickly reverse the negative trend. The attainment of FHI's
profit targets for the next two years will depend greatly on the progress made in internal reforms, but the reforms will not be
fruitful if the Company does not ensure that reform consciousness becomes an integral part of its employees' day-to-day
operations.
It is obvious that we must design future products based on strong cost-consciousness or we cannot survive. To gain
momentum, FHI believes it crucial to implement cost-cutting measures to contribute to Company profits during the next
two years.

Greatly Reducing Automobile Manufacturing
Materials Costs in Japan and Overseas
With regard to cost-cutting, we will start a new measure, called the “Total Cost Structural Revolution” (TSR) strategy, whichsets automobile manufacturing direct materials cost cuts of 16% in Japan and 13.5% in the United States (over a 20-month

TSR
Japan

Reduction Ratio (%)

0Target: -10.0%
Actual: -10.56%

-5

-5
-10

-10

Target: -3.0%
Actual: -3.17%

Target: -13.5%

-15

-15
Target: -16.0%

CSR-1 Target

-20

-20

CSR-1 Actual
TSR Target

-25
-30

(FY)

United States (SIA)

Reduction Ratio (%)

0

-25

2003

10 FUJI HEAVY INDUSTRIES LTD.

-30

TSR

CSR-1
2004

2005

Post TSR
2006

2007

(CY)

CSR-1 Target
CSR-1 Actual
TSR Target

TSR

CSR-1
2004

2005

2006

Post TSR
2007

period) during the next two years. This program calls forfurther accelerating the rate of cost cuts. In the past two
years, the Company had set a target of reducing directmaterials costs 10.0% in Japan and was able to reduce
those costs 10.56%. In the United States, although our cost
reduction target of 3.0% was not substantial, we were able
to reduce those costs 3.17% in the past two years. The
current target of 13.5% in cost cuts over two years is
considerably more ambitious. Attaining these targets willentail proactive efforts to augment procurement from new
suppliers in Asia and other regions.
FHI's commitment to excellence in Subaru automobile
manufacturing led to certain unnecessary costs, andeliminating such excess costs is a top priority. Moreover,while the Company previously adopted an approach ofeliminating various types of costs over specified periods oftime, its new approach is to implement prospective cost
cuts immediately whenever possible.
Current goals regarding newly developed automobile
Hiroshi Komatsu
models are to reduce unit costs ¥100,000 per vehicle andDirector of the Board, Executive Vice President
lower tooling and dies costs and development costs 30%.
The automobile industry has established benchmarks regarding new model development, and FHI should not be
sharply deviating from those benchmarks. However, the Company has faced problems due to allowances made for
exceptional deviations with respect to its flagship Legacy models. We are returning to our natural posture of setting
investment targets for each automobile model and insisting that investment be kept within the target range. Of course, as
the Legacy models take the role of the Company's flagship product, they are equipped with brand-new technologies
intended for incorporation in other automobile models at later dates. A separate budget is provided for such newtechnology to ensure that cost-cutting programs do not undermine efforts to develop new technologies and nip promising
new initiatives in the bud.

Speed of Reforms Dependent on Reform-Consciousnessof Each Individual Employee
After becoming responsible for automobile manufacturing, my first feelings were that our operations were not speedy
enough and that many employees were still a bit complacent and lacked sufficient crisis consciousness. People unable tosolve problems now are also likely to be unable to solve the problems next year or the year after that. Increasing individual
employees' consciousness of problems is a crucial prerequisite to speedy reforms. To maintain our current employment levels,
we must take the marketing measures needed to support our sales and manufacturing volumes. In brief, we absolutely
must take more decisive problem-solving steps than many FHI employees have been able to take so far.
If we have the resolve to take the natural and proper steps, then we will overcome the problems. We simply have to
make decisions decisively and have the courage to act on those decisions.
We are working to ensure that all managers are highly conscious of the need for decisive reforms and that theytransmit that consciousness to their subordinates. To effectively strengthen the FHI Group, we have to create a culture andan organization that encourages employees to take the initiative. We will attain our strategic reform objectives by ensuringthat each employee has the resolve to take the natural and proper steps.

Annual Report 2005

11

Restructuring Sales Processes
and Networks
Measures during the Next Two Years
In the revised FDR-1 plan, we regard the North American market as a focal market with possibilities for further growth. In
addition to the North American market, we will strengthen our sales networks in Japan, Europe, and other areas.

North America

Measures during the First Three Years of FDR-1
In the U.S. market, FHI was able to smoothly increase the sales volume of vehicles while annually increasing the weighted
average of the manufacturer's suggested retail prices (MSRPs) of those vehicles. The approach of adding high-performancefeatures that started with the Impreza WRX STI was extended to the Legacy GT, and the strategy of developing a twopillared marketing strategy—with high-performance models forming one pillar and Outback and Forester crossover models
forming the other—proved to be effective.
The target of increasing sales volume to above the 200,000-unit level was not attained, however, and intensifying
competition led to challenges such as rising incentive payments. These factors and the difficulty of passing on the cost ofenvironmental and safety countermeasures in the form of higher selling prices prevented the attainment of the Company's
profit target.

MSRP(U.S. dollars)

RETAIL SALES

25,000250,000

20,000200,000

15,000150,000

10,000100,000

5,000

50,00001995 1996 1997 1998 1999 2000 2001 2002 2003 2004

(Model year wtd.)

12 FUJI HEAVY INDUSTRIES LTD.

0North America is the most important market for FHI's future growth, and efforts during the next two years will determine thedirection of the Company's future business development. Growth strategy measures aimed at boosting sales volume to250,000 units in 2009 or 2010 are to be implemented during the next two years, but top priority will be given to augmenting
profitability. Regarding products, the Company will work to secure sales volume and profit by promoting sales of pricecompetitive models. Meanwhile, the Company will also elevate brand value and increase per-unit profit by promoting salesof high-added-value models, such as the newly introduced B9 Tribeca. The Company also intends to restrict its incentive
payments to a low level compared with competitors.

Specific Measures
Along with vigorous efforts to strengthen its sales network in the sunbelt region, FHI is now striving to strengthen the dealer
network in metropolitan areas throughout the United States to expand its customer base and is making investments in sales
network upgrades. The "Site Control" operation planned in such a market as Dallas, Texas, is one example of augmenting
the network in urban areas, while steps to increase exclusive dealerships and separate showroom dealerships is another.
By the end of 2006, the Company aims to create a network of 608 dealerships, with 415 (68%) exclusive and separate
showroom dealerships and 385 (63%) "Signature Facility" dealerships. These activities are currently supervised by SOA'ssales division, but SOA is creating a new department to more dynamically upgrade the dealer network. During 2005, SOA
will reorganize its regional responsibilities to further strengthen the sunbelt region, increasing the number of sales districts
from 37 to 47 to tighten the focus of market development and sales promotion activities in each district.

(Units)1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

Subaru of Jacksonville

Annual Report 2005

13

Restructuring Sales Processes
and Networks
Measures during the Next Two Years
In the revised FDR-1 plan, we regard the North American market as a focal market with possibilities for further growth. In
addition to the North American market, we will strengthen our sales networks in Japan, Europe, and other areas.

North America

Measures during the First Three Years of FDR-1
In the U.S. market, FHI was able to smoothly increase the sales volume of vehicles while annually increasing the weighted
average of the manufacturer's suggested retail prices (MSRPs) of those vehicles. The approach of adding high-performancefeatures that started with the Impreza WRX STI was extended to the Legacy GT, and the strategy of developing a twopillared marketing strategy—with high-performance models forming one pillar and Outback and Forester crossover models
forming the other—proved to be effective.
The target of increasing sales volume to above the 200,000-unit level was not attained, however, and intensifying
competition led to challenges such as rising incentive payments. These factors and the difficulty of passing on the cost ofenvironmental and safety countermeasures in the form of higher selling prices prevented the attainment of the Company's
profit target.

MSRP(U.S. dollars)

RETAIL SALES

25,000250,000

20,000200,000

15,000150,000

10,000100,000

5,000

50,00001995 1996 1997 1998 1999 2000 2001 2002 2003 2004

(Model year wtd.)

12 FUJI HEAVY INDUSTRIES LTD.

0North America is the most important market for FHI's future growth, and efforts during the next two years will determine thedirection of the Company's future business development. Growth strategy measures aimed at boosting sales volume to250,000 units in 2009 or 2010 are to be implemented during the next two years, but top priority will be given to augmenting
profitability. Regarding products, the Company will work to secure sales volume and profit by promoting sales of pricecompetitive models. Meanwhile, the Company will also elevate brand value and increase per-unit profit by promoting salesof high-added-value models, such as the newly introduced B9 Tribeca. The Company also intends to restrict its incentive
payments to a low level compared with competitors.

Specific Measures
Along with vigorous efforts to strengthen its sales network in the sunbelt region, FHI is now striving to strengthen the dealer
network in metropolitan areas throughout the United States to expand its customer base and is making investments in sales
network upgrades. The "Site Control" operation planned in such a market as Dallas, Texas, is one example of augmenting
the network in urban areas, while steps to increase exclusive dealerships and separate showroom dealerships is another.
By the end of 2006, the Company aims to create a network of 608 dealerships, with 415 (68%) exclusive and separate
showroom dealerships and 385 (63%) "Signature Facility" dealerships. These activities are currently supervised by SOA'ssales division, but SOA is creating a new department to more dynamically upgrade the dealer network. During 2005, SOA
will reorganize its regional responsibilities to further strengthen the sunbelt region, increasing the number of sales districts
from 37 to 47 to tighten the focus of market development and sales promotion activities in each district.

(Units)1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

Subaru of Jacksonville

Annual Report 2005

13

JapanEurope and Other Regions

Principal strategic tasks regarding the sales network in Japan include the following:

Operations in European markets are considered the third major pillar of FHI's marketing operations, and the Company isseeking to boost its regional sales volume to 100,000 units by implementing the following strategies:

Reforming Sales Systems and Operations by Utilizing the"Partner 21" Dealer Support Network System

Strengthening the Capabilities of Subaru Europe

Creating Regional Block Management

Subaru Europe N.V./S.A., established in March 2002, is augmenting its public relations and marketing capabilities,
resulting in increased sales of the G3X Justy and other FHI models. It is proactively endeavoring to promote greater sales
by increasing its involvement in the management of principal distributors and striving to achieve distribution cost
reductions to enable competitive selling prices.

Management integration of FHI-owned dealers is to be achieved through the establishment of regional holding companies
to strengthen the relationship with FHI and to enhance operational speed.

Reinforcing the Sales Network

Dealer operations within individual regions will be consolidated and measures to improve efficiency through the integrationof administrative functions and other support operations will be implemented from fiscal 2006.

Enhancing the Quality of Customer Service
FHI is giving additional emphasis to the quality of customer service offered by dealer frontline staff, and measures are to betaken to dramatically improve the quality of customer interface in showrooms and service facilities. A specialized team has
been established to promote the improvements among frontline staff and additional programs are to be organized foraugmenting the importance of customer service quality among store managers with the goal of becoming the top
automobile manufacturer in service quality as evaluated by outside agencies.

FHI is aiming to increase the number of its dealerships to expand its geographic market coverage in urban and otherregions while concurrently working to increase dealership quality. The number of dealerships was 974 in 2004, and planscall for increasing this number to 1,140 in 2006 by establishing additional dealerships in such countries as Germany, theUnited Kingdom, Italy, France, Norway, and Russia.

Developing Additional New Markets
FHI is also taking steps to create and strengthen its presence in promisingmarkets in the Eastern Europe, Central Europe, and CIS regions.
Subaru Australia posted record sales for the ninth consecutive
year in 2004, selling over 33,000 units, and it has been making steadyprogress in elevating the position of the Subaru brand. Another promisingmarket is China, where Subaru established a dealer network in 2004. We
place the Chinese market as key to expanding Subaru sales in Asia.
Subaru Europe N.V./S.A.

Yokohama

14 FUJI HEAVY INDUSTRIES LTD.

Osaka

Kobe

Annual Report 2005

15

JapanEurope and Other Regions

Principal strategic tasks regarding the sales network in Japan include the following:

Operations in European markets are considered the third major pillar of FHI's marketing operations, and the Company isseeking to boost its regional sales volume to 100,000 units by implementing the following strategies:

Reforming Sales Systems and Operations by Utilizing the"Partner 21" Dealer Support Network System

Strengthening the Capabilities of Subaru Europe

Creating Regional Block Management

Subaru Europe N.V./S.A., established in March 2002, is augmenting its public relations and marketing capabilities,
resulting in increased sales of the G3X Justy and other FHI models. It is proactively endeavoring to promote greater sales
by increasing its involvement in the management of principal distributors and striving to achieve distribution cost
reductions to enable competitive selling prices.

Management integration of FHI-owned dealers is to be achieved through the establishment of regional holding companies
to strengthen the relationship with FHI and to enhance operational speed.

Reinforcing the Sales Network

Dealer operations within individual regions will be consolidated and measures to improve efficiency through the integrationof administrative functions and other support operations will be implemented from fiscal 2006.

Enhancing the Quality of Customer Service
FHI is giving additional emphasis to the quality of customer service offered by dealer frontline staff, and measures are to betaken to dramatically improve the quality of customer interface in showrooms and service facilities. A specialized team has
been established to promote the improvements among frontline staff and additional programs are to be organized foraugmenting the importance of customer service quality among store managers with the goal of becoming the top
automobile manufacturer in service quality as evaluated by outside agencies.

FHI is aiming to increase the number of its dealerships to expand its geographic market coverage in urban and otherregions while concurrently working to increase dealership quality. The number of dealerships was 974 in 2004, and planscall for increasing this number to 1,140 in 2006 by establishing additional dealerships in such countries as Germany, theUnited Kingdom, Italy, France, Norway, and Russia.

Developing Additional New Markets
FHI is also taking steps to create and strengthen its presence in promisingmarkets in the Eastern Europe, Central Europe, and CIS regions.
Subaru Australia posted record sales for the ninth consecutive
year in 2004, selling over 33,000 units, and it has been making steadyprogress in elevating the position of the Subaru brand. Another promisingmarket is China, where Subaru established a dealer network in 2004. We
place the Chinese market as key to expanding Subaru sales in Asia.
Subaru Europe N.V./S.A.

Yokohama

14 FUJI HEAVY INDUSTRIES LTD.

Osaka

Kobe

Annual Report 2005

15

Boosting the Efficiency ofAsset Utilization andStreamlining the Corporate Structure
The revised FDR-1 medium-term business plan calls for FHI to implement measures related to two additional strategic goals
not included in the original version of FDR-1: boosting the efficiency of asset utilization and streamlining the corporate
structure.

Asset TurnoverAerospace

Boosting the Efficiency of Asset Utilization
FHI is aiming to reduce consolidated total assets 10% (from ¥1,357.5 billion, as of March 31, 2005) and interest-bearing
debt 20% (from ¥412.2 billion, as of March 31, 2005) by March 31, 2008.
Measures to boost the efficiency of asset utilization are to be applied resolutely and empirically in all areas ofoperations, without exception. The diverse measures to be taken in this regard are to include those aimed at (1) strictly
managing asset levels in function-specific subsidiaries and the main three nonautomobile business divisions, (2) reducing
inventory assets through process management, and (3) liquefying assets and selling businesses. In particular, theCompany will naturally be striving to realize substantial recoveries in the profitability of the main three nonautomobile
business divisions, and it will strictly manage the asset efficiency of the divisions while annually reevaluating its businessportfolio and considering whether those divisions should be maintained.

Industrial Products(Millions of yen)

Operating Income(Loss)
5,000

100,000

4,500

90,00081,61082,7304,000

80,00070,000

3,500

3,370

3,000

60,00059,4342,500

50,0002,090

Streamlining the Corporate Structure

40,000

FHI will take measures to optimize the workforces of the parent company and manufacturing plants and rationalize affiliates
while making organizational and systemic reforms designed to facilitate the rapid attainment of targets. To promoteorganizational streamlining, personnel revitalization, and expedited decision making, reforms are to be made to retirement
and pension systems.
To promote the effective implementation of these measures, FHI has established the Operational Reform Committee,
which is working to (1) focus attention on strategic tasks by improving time management and (2) take steps aimed atboosting productivity in administrative support units.

30,00038,89939,20039,900
2,000
1,500
1,000

20,000

583

620

640

10,0006,491
54

0-10,000
At March 31,

0.1%

-431
2.6%

4.1%

1.5%

1.6%

1.6%

7,260

9,170

20

60

0.3%

0.7%

2006

2007

-6.6%
2005

2006

Sales (Left scale)

2007

2005

2006

Operating Income (Loss) (Right scale)

Recovering demand in commercial
business (Boeing, etc.)
Increasing sales of defense business

16 FUJI HEAVY INDUSTRIES LTD.

Eco Technology

Sales

2007

2005

500
0
-500

%

Expanding major OEM contracts
mainly in the United States

Securing the top market share of
Fuji Mighty

Annual Report 2005

17

Boosting the Efficiency ofAsset Utilization andStreamlining the Corporate Structure
The revised FDR-1 medium-term business plan calls for FHI to implement measures related to two additional strategic goals
not included in the original version of FDR-1: boosting the efficiency of asset utilization and streamlining the corporate
structure.

Asset TurnoverAerospace

Boosting the Efficiency of Asset Utilization
FHI is aiming to reduce consolidated total assets 10% (from ¥1,357.5 billion, as of March 31, 2005) and interest-bearing
debt 20% (from ¥412.2 billion, as of March 31, 2005) by March 31, 2008.
Measures to boost the efficiency of asset utilization are to be applied resolutely and empirically in all areas ofoperations, without exception. The diverse measures to be taken in this regard are to include those aimed at (1) strictly
managing asset levels in function-specific subsidiaries and the main three nonautomobile business divisions, (2) reducing
inventory assets through process management, and (3) liquefying assets and selling businesses. In particular, theCompany will naturally be striving to realize substantial recoveries in the profitability of the main three nonautomobile
business divisions, and it will strictly manage the asset efficiency of the divisions while annually reevaluating its businessportfolio and considering whether those divisions should be maintained.

Industrial Products(Millions of yen)

Operating Income(Loss)
5,000

100,000

4,500

90,00081,61082,7304,000

80,00070,000

3,500

3,370

3,000

60,00059,4342,500

50,0002,090

Streamlining the Corporate Structure

40,000

FHI will take measures to optimize the workforces of the parent company and manufacturing plants and rationalize affiliates
while making organizational and systemic reforms designed to facilitate the rapid attainment of targets. To promoteorganizational streamlining, personnel revitalization, and expedited decision making, reforms are to be made to retirement
and pension systems.
To promote the effective implementation of these measures, FHI has established the Operational Reform Committee,
which is working to (1) focus attention on strategic tasks by improving time management and (2) take steps aimed atboosting productivity in administrative support units.

30,00038,89939,20039,900
2,000
1,500
1,000

20,000

583

620

640

10,0006,491
54

0-10,000
At March 31,

0.1%

-431
2.6%

4.1%

1.5%

1.6%

1.6%

7,260

9,170

20

60

0.3%

0.7%

2006

2007

-6.6%
2005

2006

Sales (Left scale)

2007

2005

2006

Operating Income (Loss) (Right scale)

Recovering demand in commercial
business (Boeing, etc.)
Increasing sales of defense business

16 FUJI HEAVY INDUSTRIES LTD.

Eco Technology

Sales

2007

2005

500
0
-500

%

Expanding major OEM contracts
mainly in the United States

Securing the top market share of
Fuji Mighty

Annual Report 2005

17

Management

Representative Director of the Board
President and CEO
Kyoji Takenaka(As of July 1, 2005)

Director of the Board
Troy A. Clarke

Representative Director of the Board
Senior Executive Vice President
Hiroshi Suzuki
Representative Directors of the Board
Executive Vice Presidents
Takao Tsuchiya
Shunsuke Takagi

Senior Vice Presidents
Hiroyuki Oikawa
Yoji Ishimaru
Kazushige Okuhara
Norihisa Matsuo
Shoichi Washizu
Kunio Ishigami
Jun Kondo
Ikuo Mori
Takashi Ishihara

Directors of the Board
Executive Vice Presidents
Kiyoshi Inoh
Hiroshi Komatsu

Vice Presidents
Ichiro Kudo
Tsunenori Hoshi
Shizuhiro Okazaki
Masaharu Yuasa
Satoshi Sakurai
Hideki Ishido
Takashi Mochizuki
Derek C. Leck
Yoichi Serizawa
Kazuyoshi Shimizu
Yoshio Hasunuma
Naoto Muto
Yasuyuki Yoshinaga
Tamaki Kamogawa
Masakazu Kimura
Akira Mabuchi
Thomas C. Englin

Standing Corporate Auditors
Takeo Tsumuji
Masayoshi Nagano
Masatake Yashiro
Corporate Auditor
Morihiko Tashiro

Troy A. Clarke

Takao Tsuchiya

Kyoji Takenaka

Hiroshi Suzuki

Shunsuke Takagi

Kiyoshi Inoh

Hiroshi Komatsu

Director of the Board

Representative Directorof the Board
Executive Vice President

Representative Directorof the Board
President and CEO

Representative Directorof the Board
Senior Executive Vice President

Representative Directorof the Board
Executive Vice President

Director of the Board
Executive Vice President

Director of the Board
Executive Vice President• To create more value
in the partnership between
Fuji Heavy Industries Ltd. andGeneral Motors Corporation• Be persistent in demanding
perfection for the benefitof all customers• Derive energy from challenges• Start by accurately assessing
our own abilities, the natureof competition and the levelsof customer satisfaction• Be meticulous about systems
for generating sales revenue
and profit• Prefer to regret overdoing
things rather than leaving
things undone• Reform entails change,
and clinging to the past
will prevent progress• Play the role of the villain
for the sake of attaining
the target level of consolidated
operating income• Maintain a strong emphasis
on results• Rather than thinking about
whether something is possible,
just think of a way to do it• Give preference to action
over proposals and resultsover action• Those unable to succeed
will fade from sight

18 FUJI HEAVY INDUSTRIES LTD.

Annual Report 2005

19

Management

Representative Director of the Board
President and CEO
Kyoji Takenaka(As of July 1, 2005)

Director of the Board
Troy A. Clarke

Representative Director of the Board
Senior Executive Vice President
Hiroshi Suzuki
Representative Directors of the Board
Executive Vice Presidents
Takao Tsuchiya
Shunsuke Takagi

Senior Vice Presidents
Hiroyuki Oikawa
Yoji Ishimaru
Kazushige Okuhara
Norihisa Matsuo
Shoichi Washizu
Kunio Ishigami
Jun Kondo
Ikuo Mori
Takashi Ishihara

Directors of the Board
Executive Vice Presidents
Kiyoshi Inoh
Hiroshi Komatsu

Vice Presidents
Ichiro Kudo
Tsunenori Hoshi
Shizuhiro Okazaki
Masaharu Yuasa
Satoshi Sakurai
Hideki Ishido
Takashi Mochizuki
Derek C. Leck
Yoichi Serizawa
Kazuyoshi Shimizu
Yoshio Hasunuma
Naoto Muto
Yasuyuki Yoshinaga
Tamaki Kamogawa
Masakazu Kimura
Akira Mabuchi
Thomas C. Englin

Standing Corporate Auditors
Takeo Tsumuji
Masayoshi Nagano
Masatake Yashiro
Corporate Auditor
Morihiko Tashiro

Troy A. Clarke

Takao Tsuchiya

Kyoji Takenaka

Hiroshi Suzuki

Shunsuke Takagi

Kiyoshi Inoh

Hiroshi Komatsu

Director of the Board

Representative Directorof the Board
Executive Vice President

Representative Directorof the Board
President and CEO

Representative Directorof the Board
Senior Executive Vice President

Representative Directorof the Board
Executive Vice President

Director of the Board
Executive Vice President

Director of the Board
Executive Vice President• To create more value
in the partnership between
Fuji Heavy Industries Ltd. andGeneral Motors Corporation• Be persistent in demanding
perfection for the benefitof all customers• Derive energy from challenges• Start by accurately assessing
our own abilities, the natureof competition and the levelsof customer satisfaction• Be meticulous about systems
for generating sales revenue
and profit• Prefer to regret overdoing
things rather than leaving
things undone• Reform entails change,
and clinging to the past
will prevent progress• Play the role of the villain
for the sake of attaining
the target level of consolidated
operating income• Maintain a strong emphasis
on results• Rather than thinking about
whether something is possible,
just think of a way to do it• Give preference to action
over proposals and resultsover action• Those unable to succeed
will fade from sight

18 FUJI HEAVY INDUSTRIES LTD.

Annual Report 2005

19

Corporate Social Responsibility (CSR)

1. Environmental Management
Establishment of Our Environmental Logo

The FHI CSR Policy

In June 2005, FHI established the Subaru Group's environmental logo. Centered on a plant leaf design, the logo is

To be good corporate citizens, companies have the responsibility to society to undertake various types of CSR activities.
FHI's CSR activities and other activities all reflect the Corporate Philosophy, which is also the CSR policy.

awareness of FHI's proactive efforts in line with the policy of “creating products and an environment that are good fordesigned to represent a world with green land and blue skies. The display of the logo is meant to promote greater
the world and society.”
The Subaru Group recognizes that its operations are deeply connected with the natural environment. By striving
to create products and an environment that are good for the world and society, the Group is seeking to help create an

Corporate Philosophy and CSR Policy

abundant future for mankind.

1. We will strive to create advanced technology on an ongoing basis and provide consumers with distinctive products withthe highest level of quality and customer satisfaction.
2. We will aim to continuously promote harmony among people, society, and the environment while
contributing to the prosperity of society.
3. We will look to the future with a global perspective and aim to foster a vibrant, progressive company.

Shareholders
andInvestors

Financial
Institutions

Educational
and ResearchInstitutions

Customers

Local
Communities

Customers and Products

Corporate Governance

Making economic and social
contributions by providing
products and services ofsuperior quality while giving
top priority to customer
satisfaction

Working to inspire sustained
trust and satisfaction from society
by clarifying management decision
making and operational executionfunctions and making management
processes transparent, efficient,and appropriate

Natural Environment

Compliance

Creating products that arefriendly to the earth, society,and individuals based onrecognition of the deep
correlation between theenvironment and businessactivities

Acting as an excellent corporate
citizen by undertaking all corporate activities in an open andfair manner that accords withall relevant laws and regulations

Government
Entities

Corporate Philosophy

Promoting progress in science,transportation safety, motor
vehicle culture, and manufacturing while contributing
to regional societies and each
person within those societies

NGOs
and NPOs

Clients,
Suppliers,
Corporate Allies,
and Employees

20 FUJI HEAVY INDUSTRIES LTD.

investment or risk.
Having responded to European laws regarding the recycling of end-of-life vehicles (ELVs) since July 2003, FHI ismoving ahead in collaboration with other automobile manufacturers with efforts to respond to a Japanese ELV recycling
law and has established the Automobile Recycle System of Subaru in Japan.

2. Corporate Governance
Scope of Corporate Activities

Social Contribution

Based on its voluntary environmental plan, the “FHI Environmental Conservation Program,” FHI is undertaking activities
aimed at reducing the burden on the environment at every stage of business—from product development to procurement,
production, use, and disposal.
In fiscal 2005, FHI attained its green procurement objective of increasing the share of its automobile operations related
suppliers that have environmental management systems (EMSs) to more than 95%.
Environmental auditing systems have already been introduced at all the parent company's principal facilities, andmeasures were taken during fiscal 2005 to progressively expand the scope of EMSs to other Group units. For example,
two of our overseas sales subsidiaries, U.S.-based Subaru of America, Inc. (SOA), and Canada-based Subaru Canada, Inc.
(SCI), obtained ISO 14001 certification during the year.
Regarding environmental accounting, FHI has calculated that its environmental costs were ¥21,045 million in fiscal
2005, compared with ¥25,043 million in fiscal 2004 and ¥26,017 million in fiscal 2003. Economic effects were ¥2,298 million
in fiscal 2005, compared with ¥1,980 million in fiscal 2004 and ¥1,226 million in fiscal 2003. These figures reflect the steadyannual improvement being achieved in the Company's environmental performance. One particularly noteworthy
environmental protection initiative was the February 2005 use of the Energy Performance Contract (ESCO) method to
introduce a 6,030kW gas-engine-type, natural-gas-powered cogeneration system at the Utsunomiya plant. The use of the
ESCO method enables such benefits as reduction of energy consumption and CO2 emissions without entailing any initial

Basic Corporate Governance Policy
Information Disclosure
Striving to disclose information
to all stakeholders quickly,
appropriately, fairly, andaccurately

Procurement

Employees

Offering equal opportunities
to a wide range of potential
suppliers in Japan and overseas,building relationships of mutual
trust with suppliers, and executing transactions properly
and fairly

Proceeding with measures toensure respect for each employee's rights and personality,
maintain healthy and safe work
environments, and make work
meaningful and worthwhile

Media

Employees

Stakeholders

FHI is working to strengthen its corporate governance policies to ensure that it can measure up to the trust and confidence
placed in the Company by all its shareholders, customers, and other stakeholders.
• Since June 1999, the Company has employed an executive officer system that helps clarify responsibilities for
operational execution in each division.
• Since June 2003, the Company has reduced the terms of directors and executive officers from two years to one.
• Since June 2004, the Company has given responsibility for the nomination of corporate officers to its Executive
Nomination Meeting and given responsibility for evaluating performance and determining the remuneration of corporate
officers to its Executive Compensation Meeting.
• Since June 2005, the Company has reduced the number of directors of the board from eight to seven.
All these measures are designed to clarify management decision making and operational execution functions,increase management transparency, and accelerate management functions.
The Board of Corporate Auditors Meeting consists of four corporate auditors, including two outside corporate auditors,
and is responsible for receiving reports on important auditing issues and deliberates accordingly.
The Executive Management Board performs preliminary reviews of issues before their presentation to the Board of
Directors Meeting and deliberates on companywide management strategies and the execution of important business
operations.

Annual Report 200521

Corporate Social Responsibility (CSR)

1. Environmental Management
Establishment of Our Environmental Logo

The FHI CSR Policy

In June 2005, FHI established the Subaru Group's environmental logo. Centered on a plant leaf design, the logo is

To be good corporate citizens, companies have the responsibility to society to undertake various types of CSR activities.
FHI's CSR activities and other activities all reflect the Corporate Philosophy, which is also the CSR policy.

awareness of FHI's proactive efforts in line with the policy of “creating products and an environment that are good fordesigned to represent a world with green land and blue skies. The display of the logo is meant to promote greater
the world and society.”
The Subaru Group recognizes that its operations are deeply connected with the natural environment. By striving
to create products and an environment that are good for the world and society, the Group is seeking to help create an

Corporate Philosophy and CSR Policy

abundant future for mankind.

1. We will strive to create advanced technology on an ongoing basis and provide consumers with distinctive products withthe highest level of quality and customer satisfaction.
2. We will aim to continuously promote harmony among people, society, and the environment while
contributing to the prosperity of society.
3. We will look to the future with a global perspective and aim to foster a vibrant, progressive company.

Shareholders
andInvestors

Financial
Institutions

Educational
and ResearchInstitutions

Customers

Local
Communities

Customers and Products

Corporate Governance

Making economic and social
contributions by providing
products and services ofsuperior quality while giving
top priority to customer
satisfaction

Working to inspire sustained
trust and satisfaction from society
by clarifying management decision
making and operational executionfunctions and making management
processes transparent, efficient,and appropriate

Natural Environment

Compliance

Creating products that arefriendly to the earth, society,and individuals based onrecognition of the deep
correlation between theenvironment and businessactivities

Acting as an excellent corporate
citizen by undertaking all corporate activities in an open andfair manner that accords withall relevant laws and regulations

Government
Entities

Corporate Philosophy

Promoting progress in science,transportation safety, motor
vehicle culture, and manufacturing while contributing
to regional societies and each
person within those societies

NGOs
and NPOs

Clients,
Suppliers,
Corporate Allies,
and Employees

20 FUJI HEAVY INDUSTRIES LTD.

investment or risk.
Having responded to European laws regarding the recycling of end-of-life vehicles (ELVs) since July 2003, FHI ismoving ahead in collaboration with other automobile manufacturers with efforts to respond to a Japanese ELV recycling
law and has established the Automobile Recycle System of Subaru in Japan.

2. Corporate Governance
Scope of Corporate Activities

Social Contribution

Based on its voluntary environmental plan, the “FHI Environmental Conservation Program,” FHI is undertaking activities
aimed at reducing the burden on the environment at every stage of business—from product development to procurement,
production, use, and disposal.
In fiscal 2005, FHI attained its green procurement objective of increasing the share of its automobile operations related
suppliers that have environmental management systems (EMSs) to more than 95%.
Environmental auditing systems have already been introduced at all the parent company's principal facilities, andmeasures were taken during fiscal 2005 to progressively expand the scope of EMSs to other Group units. For example,
two of our overseas sales subsidiaries, U.S.-based Subaru of America, Inc. (SOA), and Canada-based Subaru Canada, Inc.
(SCI), obtained ISO 14001 certification during the year.
Regarding environmental accounting, FHI has calculated that its environmental costs were ¥21,045 million in fiscal
2005, compared with ¥25,043 million in fiscal 2004 and ¥26,017 million in fiscal 2003. Economic effects were ¥2,298 million
in fiscal 2005, compared with ¥1,980 million in fiscal 2004 and ¥1,226 million in fiscal 2003. These figures reflect the steadyannual improvement being achieved in the Company's environmental performance. One particularly noteworthy
environmental protection initiative was the February 2005 use of the Energy Performance Contract (ESCO) method to
introduce a 6,030kW gas-engine-type, natural-gas-powered cogeneration system at the Utsunomiya plant. The use of the
ESCO method enables such benefits as reduction of energy consumption and CO2 emissions without entailing any initial

Basic Corporate Governance Policy
Information Disclosure
Striving to disclose information
to all stakeholders quickly,
appropriately, fairly, andaccurately

Procurement

Employees

Offering equal opportunities
to a wide range of potential
suppliers in Japan and overseas,building relationships of mutual
trust with suppliers, and executing transactions properly
and fairly

Proceeding with measures toensure respect for each employee's rights and personality,
maintain healthy and safe work
environments, and make work
meaningful and worthwhile

Media

Employees

Stakeholders

FHI is working to strengthen its corporate governance policies to ensure that it can measure up to the trust and confidence
placed in the Company by all its shareholders, customers, and other stakeholders.
• Since June 1999, the Company has employed an executive officer system that helps clarify responsibilities for
operational execution in each division.
• Since June 2003, the Company has reduced the terms of directors and executive officers from two years to one.
• Since June 2004, the Company has given responsibility for the nomination of corporate officers to its Executive
Nomination Meeting and given responsibility for evaluating performance and determining the remuneration of corporate
officers to its Executive Compensation Meeting.
• Since June 2005, the Company has reduced the number of directors of the board from eight to seven.
All these measures are designed to clarify management decision making and operational execution functions,increase management transparency, and accelerate management functions.
The Board of Corporate Auditors Meeting consists of four corporate auditors, including two outside corporate auditors,
and is responsible for receiving reports on important auditing issues and deliberates accordingly.
The Executive Management Board performs preliminary reviews of issues before their presentation to the Board of
Directors Meeting and deliberates on companywide management strategies and the execution of important business
operations.

Annual Report 2005

21

As FHI proceeds with the implementation of the revised FDR-1 plan, it will be taking various measures to further
strengthen its internal control systems and auditing systems while also considering whether to recruit outside directors.

3. Compliance
Aiming to maintain the trust and support of society, FHI is engaged in systematic compliance activities throughout all
Group companies. In 2001, the Company announced its compliance policy, which is summarized as “FHI views
compliance as a top-priority management issue, recognizes that rigorous companywide compliance systems are an
important part of the foundation of its operations, and seeks to ensure strict compliance with all relevant public laws andinternal regulations as a means of promoting maximum levels of fairness and openness in line with the highest societal
standards.” The Company has also set up a companywide compliance promotion committee to deliberate, discuss, anddecide on important compliance issues and promote exchanges of related information. From February 2003, we launched
a “compliance hotline system” enabling employees to report directly to the Compliance Hotline Desk of the Legal
Department when compliance problems arise. In addition to continually maintaining compliance-related educational andtraining programs, the Company began implementing groupwide measures to fully comply with Japan's new personal
information protection law from April 2005.

4. Customer Satisfaction
In line with its distinctive Subaru strategies that emphasize superior functionality with respect to driving performance,
safety, and environment friendliness, FHI is proactively developing new products while seeking to provide customers withproducts that both excite and satisfy. The Company has announced that its quality policy is to “consistently give top priority
to customer satisfaction, work to increase the quality of operations, and provide products and services characterized by
top-class quality.” In line with this policy, the Company has established a Subaru Customer Center to improve capabilities
for handling customer consultations, promoting customer satisfaction, and providing diverse services. In January 2005, theCompany established the Subaru Academy, which is working to help further increase groupwide capabilities fordeveloping and applying technologies and for responding to customer needs and inquiries.
To maintain strong quality assurance performance, FHI compiles quality-related information from around the world,quickly assesses the importance of the information, and promptly takes resolute measures to rectify quality problems. The
Company makes relentless quality assurance efforts at all operational stages—from product development throughmanufacturing.

5. Employee Satisfaction
Aiming to make its workforce an “autonomously motivated and proactively creative group,” FHI is taking various measures
to reform and invigorate its corporate culture. To increase the distinctive dynamism of its organization, the Company istaking measures related to salary systems as well as career planning, education, and employee welfare systems that aredesigned to help build an organization able to boldly address new challenges. A Japanese law effective from April 2005,
the Next Generation Development Support Countermeasure Promotion Law, calls for companies to take various measures,
including those to offer improved work environments. In response, FHI has been progressively augmenting its relatedcompanywide “positive action” programs since April 2005.

6. Social Contribution
Aiming to be an excellent corporate citizen, FHI recognizes the importance of its responsibility to make special
contributions to society in line with its distinctive Subaru strategies and capabilities. Accordingly, the Company is striving to
make contributions in product-related fields, foster the development of personnel able to create next-generation products,
promote the development of communities surrounding its facilities, and support the individual social contribution initiativesof its employees. In these ways, FHI is endeavoring to help contribute to sound and sustainable social development.

22 FUJI HEAVY INDUSTRIES LTD.

Financial Section
CONTENTS
Consolidated Five-Year Financial Summary ..............................24
Management’s Discussion and Analysis ofResults of Operations and Financial Position ..........................25
Consolidated Balance Sheets ......................................................32
Consolidated Statements of Income...........................................34
Consolidated Statements of Shareholders’ Equity ....................35
Consolidated Statements of Cash Flows....................................36
Notes to Consolidated Financial Statements .............................37
Independent Auditors’ Report......................................................62

Annual Report 2005

23

Consolidated Five-Year Financial Summary
FUJI HEAVY INDUSTRIES LTD. AND CONSOLIDATED SUBSIDIARIES
Years ended March 31

For the Year:Net sales
Cost of sales
Gross profit
Selling, general andadministrative expenses
Operating income
Income before income taxes
and minority interest
Net income
At Year-End:
Shareholders’ equity
Total assets
Ratio of shareholders’ equity
to total assets (%)
Per Share (in yen and U.S. dollars):
Net income:
Basic
DilutedShareholders’ equity
Other Information:
Depreciation/amortization expenses
Capital expenditures(addition to fixed assets)
R&D expenses
Number of shares issued(thousands of shares)*
Number of shareholders*Number of employees*:
Parent only
Consolidated

Millionsof yenMillionsof yenMillionsof yenMillionsof yenMillionsof yenThousands of
U.S. dollars

2005

2004

2003

2002

2001

2005

¥1,446,491
1,107,718
338,773¥1,439,451
1,085,716
353,735¥1,372,337
1,011,582
360,755¥1,362,493
992,950
369,543¥1,311,887
978,841
333,046$13,469,513
10,314,908
3,154,605

296,756
42,017

303,41150,324

293,234
67,521

281,063
88,480251,373
81,673

2,763,349
391,256

21,066
18,23856,266
38,64946,97033,48456,13630,283

21,291
22,628196,164
169,830¥ 471,149
1,357,459¥ 453,708
1,349,727¥ 411,252
1,344,072¥ 396,112
1,269,558¥ 357,455
1,168,501$ 4,387,271
12,640,460

34.7%

33.6%

30.6%

31.2%

30.6%

¥

23.27
23.27
604.51

¥

50.62
49.66
582.60

¥

44.84
42.91
553.90

¥

40.74
38.83
532.88

¥

30.44
29.06
480.86

$

0.22
0.22
5.63

¥

71,010¥71,112¥

67,896¥

63,964¥64,070$661,235

147,759
52,962

128,026
57,541

119,423
60,110118,376
54,903102,301
46,622782,866
34,558782,866
34,704

746,52135,584

746,506
33,094

746,502
32,996

12,703
26,98912,92827,296

13,06427,47813,374
26,483

13,60326,502

1,375,910
493,174

Note: U.S. dollar figures have been translated from yen, for convenience only, at the rate of ¥107.39 to US$1.00, the approximate rate of exchange at March 31, 2005.
* As of March 31

Operating Income

Net Sales(Billions of yen)(Billions of yen)

1,500

100

1,200

80

900

60

600

40

300

20

0

0

2001

2002

2003

2004

2005

2001

2002

2003

2004

2005

1,312

1,362

1,372

1,439

1,446

81.7

88.5

67.5

50.3

42.0

Aerospace

OthersAutomobile

Industrial Products

24 FUJI HEAVY INDUSTRIES LTD.

Management’s Discussion and Analysis of Resultsof Operations and Financial Position
OVERVIEW¥42.0 billion, compared with the previous fiscal year, due toIn the fiscal year 2005, ended March 31, 2005, conditions inthe strong yen against the U.S. dollar and deterioration of thethe Japanese economy were firm, owing to such factors as

automotive sales volume and model mix. Income before

recovering corporate earnings and rising private-sector capi-

income taxes and minority interest decreased ¥35.2 billion, or

tal investment, although the persistent appreciation of the yen

62.6%, to ¥21.1 billion. Due to a loss on devaluation of inven-against the U.S. dollar and rapid rises in the prices of crude

tories related to one of the Aerospace division’s projects andoil and certain other raw materials continued to make antici-

other factors as well as an increase in the tax expenses of apating future economic trends very difficult. In the United

U.S. subsidiary, net income decreased ¥20.4 billion, orStates, which is a key overseas market, the Federal Reserve

52.8%, compared with the previous fiscal year, to ¥18.2 bil-

Bank raised interest rates several times, causing concern

lion. Earnings per share fell from ¥50.62 to ¥23.27, while

over the possibility of additional interest rate hikes. This and a

return on equity dropped from 8.9% to 3.9%.

cooling of consumer sentiment due to such factors as surg-

The Company generated 91.2% of its consolidated sales
from the Automobile division, 4.1% from the Aerospace divi-ing gasoline prices sustained fears of a recession.
Amid these conditions, FHI’s mainstay Subaru Automotive

sion, 3.2% from the Industrial Products division, and the rest

Business Unit recorded a lower domestic sales volume forfrom the Other division. The Automobile division accounted

passenger cars, as the new model effect of the Legacy hadfor 97.4% of operating income. While the other three busi-

run its course, although the Subaru R2 and Subaru R1

ness divisions all posted losses during the previous fiscal

minicar models supported a 3.5% rise in the overall sales vol-year, the Aerospace division and Industrial Products division

ume in Japan, compared with the previous fiscal year, towere able to regain their profitability during the fiscal year

254.0 thousand units. Overseas sales volume grew 3.0%,

2005. The Aerospace division contributed 0.5% of operatingcompared with the previous fiscal year, to 340.7 thousand

income, and the Industrial Products division contributed

units, reflecting double-digit growth in Europe and Australia

2.0%. Moreover, the operating loss of the Other division wasalong with increased growth in the important U.S. market due

cut by more than half, improving from a loss of ¥1.5 billion toto sales of the new Legacy. The growth in both domestic anda loss of ¥0.6 billion.

overseas sales volumes more than offset the strong yen’s

By region, the Japan division, including exports fromnegative impact on overseas sales, and consolidated sales

Japan, accounted for 61.3% of consolidated sales, up 2.9

for the year rose ¥7.0 billion, or 0.5%, compared to the previ-

percentage points from the previous fiscal year, and operat-

ous fiscal year, to ¥1,446.5 billion.

ing income grew 7.6%, to ¥40.5 billion. The North America

Regarding profitability, despite efforts to reduce various

division considerably countervailed this improvement, as

costs, operating income declined ¥8.3 billion, or 16.5%, tosales decreased 7.7% and operating income fell from ¥1.1
billion to an operating loss of ¥6.7 billion. Although sales of
the new Legacy were strong in North America, profitability

Net Income

was affected by a temporary rise in costs associated with the(Billions of yen)40

launch of the new Legacy models. Other region sales grew
68.9% and operating income increased 41.7%, to ¥0.4 billion.
30

REVIEW OF OPERATIONS BY DIVISION
20

Consolidated net sales in the fiscal year 2005 rose 0.5% fromthe previous fiscal year, to ¥1,446.5 billion. Information for10each division follows.

0

2001

2002

2003

2004

2005

22.6

30.3

33.5

38.6

18.2

Annual Report 200525

Automobile Inventory

Automobile Division(1,000 units)

Sales of the Automobile division were up ¥2.9 billion, or

60

0.2%, from the previous fiscal year, to ¥1,323.7 billion. The
50

size of the increase was restrained by yen appreciation. In
terms of global sales volume, FHI reported a year-on-year

40

increase of 18.3 thousand units, or 3.2%, to 594.8 thousand
30

units. In Japan, the total automobile sales volume grew 8.5
thousand units, or 3.5%, to 254.0 thousand units; of this, the

20

2001

2002

2003

2004

2005

number of passenger cars sold decreased 7.1 thousand

Japan

29.7

33.5

22.9

28.4

24.5

units, or 6.4%, to 104.0 thousand units, and the number ofUnited States

40.0

41.2

44.7

48.1

50.9

minicars sold rose by 15.6 thousand units, or 11.6%, toConsolidated Automobile Sales by Region (Number of units)
Japan
United States
CanadaEuropeAustralia
OthersSubtotal
CKD* Overseas
Total
SIA Consignment Production

2005

2004

2003

2002

2001

254,039
193,917
16,50660,51735,414
21,241
581,634
0581,634
13,150245,541
189,633
16,15453,57830,685
15,652551,2432,800
554,043
25,239245,525
192,389
17,69941,32529,455
14,051
540,4441,500
541,944—264,257
191,381
15,63232,37326,923
12,675543,241
3,288
546,529—

290,301
172,686
15,00539,951
27,976
14,378560,297
3,941
564,238—* CKD: Complete Knocked Down

Non-Consolidated Automobile Sales by Model (Number of units)
Domestic Units:
LegacyImpreza
ForesterOthersSubtotal
Minicars
Total
Export Units:
LegacyImpreza
ForesterOthersSubtotal
Minicars
Total
CKD Overseas(SIA Portion)
U.S. Retail Sales*:LegacyImpreza
Forester
Baja
Total
U.S. Production Units*:
Legacy

2005

2004

2003

2002

2001

59,84327,437
19,457
1,397
108,134
164,624
272,758

73,67622,26320,097
2,479
118,515
143,502
262,01749,17925,471
25,3894,174
104,213
147,712251,925

59,20924,89922,922
4,244
111,274
167,265
278,539

67,42432,362
28,994297
129,077
173,754
302,83144,102
69,945
90,131
8,324
212,502—212,50233,86567,34999,463161
200,838—
200,838

21,42175,354
99,145—
195,920—
195,920

24,72775,70072,629—173,05622
173,078

26,25454,72185,453—
166,428
108
166,536

115,317
115,317

90,15887,358

107,576
106,076

104,234
100,946

111,783
107,842

89,45332,20958,424
7,316
187,40279,83936,52559,761
10,694
186,819

85,35938,22653,9222,513
180,020

95,29135,61255,041—
185,944

96,391
19,22056,605—
172,216

105,550

96,993102,813103,010

107,955* U.S. Retail Sales and U.S. Production Units are the aggregate figures for the calendar year from January through December.

26 FUJI HEAVY INDUSTRIES LTD.

150.0 thousand units, resulting in a decline in the averageregion, although the Impreza and Forester showed declines,

unit price of automobiles sold. Although sales of the Imprezasales of the all-new Legacy, which began in June 2004, along

were bolstered by a victory at the 2004 FIA World Rally

with OEM production to Saab Automobile AB, contributed toChampionship (WRC) Rally Japan held in September 2004,

an increase of 4.6 thousand units, or 2.3%, compared withthere was a decrease in the sales of the flagship Legacy as

the previous fiscal year, to 210.4 thousand units.

the new model effect faded out. However, minicar sales were

In Europe, sales of the all-new Legacy were solid, andboosted by the high evaluations of the Subaru R2, which,sales of the new G3X Justy (an OEM vehicle from Suzuki

since its launch in December 2003, has received such

Motor Corporation) also made a significant contribution to anawards as the “2005 RJC Car of the Year Special Award forincrease in overall sales of 6.9 thousand units, or 13.0%, tothe Best Minicar” and the “2004-2005 Car of the Year Japan

60.5 thousand units. Furthermore, growth in the sales of theBest 10 Cars,” along with an additional contribution from the

all-new Legacy and the sound performance of the Impreza

Subaru R1, which was launched in January 2005.

and the Forester led to sales of 35.4 thousand units in

In overseas markets, total sales volume was increased
21.9 thousand units, or 7.2%, to 327.6 thousand units. When

Australia, an increase of 4.7 thousand units, or 15.4%, fromthe previous fiscal year.

consignment production by Subaru of Indiana Automotive,

Operating income decreased ¥11.2 billion, or 21.4%, toInc. (SIA), is included, the number increases 9.8 thousand¥40.9 billion, due to the deterioration of sales volume andunits, or 3.0%, to 340.7 thousand units. In the North America

model mix as well as a loss on currency exchange.

Change in Units Sold by Model (Comparison of units sold in fiscal 2005 and fiscal 2004)
Japan (Non-consolidated)

Export Units (Non-consolidated)(1,000 units)(1,000 units)

30

30

15

15

0

0

-15

Change-10Total

LegacyImpreza

ForesterTraviq

Minicars

+10.7

-13.8

+5.2

-0.6

-1.1

+21.1

ChangeTotal

LegacyImpreza

ForesterOthers

+11.7

+10.2

+2.6

-9.3

+8.2

U.S. Retail Sales(1,000 units)
30

15

0

-15

ChangeTotal

LegacyImpreza

Forester

Baja

-0.6

+9.6

-4.3

-1.3

-3.4

Annual Report 200527

Industrial Products Division

operating income, from an operating loss of ¥0.3 billion in the

Total sales of the Industrial Products division, which handles

previous fiscal year to ¥0.2 billion in operating income.

such products as general-use engines and generators,
increased ¥4.5 billion, or 10.6%, to ¥47.1 billion. In Japan,

Other Businesses

sales of pump engines decreased, but overall sales were up

Sales in this segment declined ¥3.3 billion, or 12.1%, toowing to strong sales of newly redesigned generators.

¥23.6 billion. This primarily reflected a drop in the sales of Fuji

Overseas sales were up considerably, as exports to theMighty sanitation trucks following a temporary surge inUnited States of engines for leisure vehicles were strong, anddemand in the previous fiscal year stemming from the tight-

the development strategy for the U.S. market in regard toening of diesel vehicle emission restrictions in the Tokyo met-

engines used in conjunction with industrial machinery

ropolitan area. Sales were also reduced by the transfer ofproceeded smoothly. While an operating loss of ¥0.3 billion

House Division operations to an affiliated company in April

was recorded in the previous year, the rise in sales during the2004. Despite the drop in sales, operating loss for the seg-

year under review supported a surge in operating income, toment shrank ¥0.9 billion, from ¥1.5 billion to ¥0.6 billion.

¥0.8 billion.

COST OF SALES, EXPENSES, AND OPERATING
Aerospace Division

INCOMEThe Aerospace division increased its total sales ¥2.6 billion,

The cost of sales rose ¥22.0 billion, or 2.0%, to ¥1,107.7 bil-or 4.6%, to ¥59.5 billion. Sales to the Japan Defense Agency

lion. This boosted the cost of sales ratio 1.2 percentage

rose due to the start of full-scale deliveries for the next-gener-

points, from 75.4% to 76.6%. Though net sales increased

ation Maritime Patrol Aircraft and Cargo Transport Aircraft¥7.0 billion, gross profit decreased ¥15.0 billion, or 4.2%, to(PX/CX), which more than offset declines in sales of UH-1J¥338.8 billion. This decrease reflected a rise in raw material

utility helicopters and unmanned target drones. Commercial

prices as well as the effect of yen appreciation and a deterio-

sector operations faced challenges due to a decrease inration of the automobile model mix. Progressive measuresdeliveries of components to Boeing and the appreciation of

taken to reduce research and development costs and otherthe yen, but sales in the sector grew owing to the start ofexpenses lowered SG&A expenses ¥6.7 billion, or 2.2%, todeliveries of vertical fins for the Airbus A380 and the delivery¥296.8 billion. However, operating income decreased ¥8.3

of an experimental Stratospheric Platform Airship System tobillion, or 16.5%, to ¥42.0 billion, and the operating income

the Japan Aerospace Exploration Agency. The rise in sales

ratio declined 0.6 percentage point, from 3.5% to 2.9%.

was instrumental in enabling a ¥0.5 billion improvement in

Net Sales by Division (Excluding intersegment sales)(Billions of yen)

2005

2004

2003

2002

2001

Automobile
Industrial Products
Aerospace
Other¥1,319.6
46.8
59.4
20.6

¥1,316.9
42.2
56.6
23.6

¥1,229.8
41.5
63.0
37.9

¥1,219.7
39.4
66.2
37.0

¥1,167.2
44.2
65.5
34.9

Total

¥1,446.5¥1,439.4¥1,372.3¥1,362.4¥1,311.8

2005

2004

2003

2002

2001

Automobile
Industrial Products
Aerospace
Other
Corporate and Elimination

¥40.9
0.8
0.2
(0.6)
0.6

¥52.1
(0.2)
(0.3)
(1.4)
0.3

¥67.3
(0.8)
3.3
(3.1)
0.8

¥85.6
(0.2)
7.4
(4.2)
(0.0)

¥82.2
0.7
2.4
(4.1)
0.3

Total

¥42.0

¥50.3

¥67.5

¥88.4

¥81.6

Operating Income (Loss) by Division

28 FUJI HEAVY INDUSTRIES LTD.

(Billions of yen)Factors positively affecting operating income included a

income taxes and minority interests decreased ¥35.2 billion,¥16.4 billion reduction in the cost of materials, comprising theor 62.6%, to ¥21.1 billion.

net value including the price rise of raw materials, a ¥4.5 bil-Income taxes for the year fell to ¥5.9 billion, from ¥12.0 bil-lion decrease in research and development expenses, and alion in the previous fiscal year, and deferred tax credits¥3.1 billion drop in SG&A and other expenses. The aggregate

totaled ¥3.3 billion, reducing the effective tax rate to 12.6%.

value of these cost reductions was ¥24.0 billion. Factors neg-

Minority interest in consolidated subsidiaries amounted to a

atively affecting operating income included a loss on currency

loss of ¥179 million. Consequently, net income decreased

exchange, mainly from yen/U.S. dollar fluctuations, which¥20.4 billion, or 52.8%, to ¥18.2 billion.

decreased operating income by ¥15.1 billion, and a deterioration of the sales volume and model mix, taking into account

FINANCIAL POSITION

the additional costs for overseas environmental and safety

Total assets increased ¥7.7 billion, or 0.6%, to ¥1,357.5 billion.

regulations, which reduced operating income by ¥17.2 billion.

Total current assets decreased ¥5.8 billion, to ¥649.1 billion,

The aggregate value of these operating income reductions

as a ¥26.3 billion rise in short-term loans, to ¥128.2 billion,

was ¥32.3 billion.

was more than offset by decreases in cash and time

Net other income (expenses) decreased ¥26.9 billion, from

deposits, notes and accounts receivable, trade, marketablea ¥5.9 billion gain in the previous fiscal year to a ¥21.0 billion

securities, and inventories. Property, plant and equipment,

loss. Regarding other income, amortization of consolidation

net, rose by ¥34.0 billion to ¥543.7 billion, resulting from anadjustments grew ¥2.0 billion, due to offsetting accounts

increase in capital investment for new Legacy production andrelated to SIA operations, from ¥4.9 billion to ¥6.9 billion.

transactions related to SIA’s leased facilities. Regarding

Other expenses consisted of such items as an ¥8.1 billion

investments and other assets, investment securities

loss on devaluation of inventories related to a significant delay

increased ¥14.1 billion, to ¥71.1 billion. However, reflecting

in an aircraft development project, a ¥4.2 billion loss on com-the withdrawal of ¥29.1 billion of restricted collateral cash

pensation to suppliers associated with the partial reschedul-

deposits made by SIA, the “other assets” item in investments

ing of automobile business development plans, a ¥3.5 billion

and other assets fell ¥35.3 billion, to ¥21.5 billion, causing theloss on discontinued operations due to the termination of

total value of investments and other assets to decrease ¥20.4

trailer train parts operations and other operations of wholly

billion, to ¥164.7 billion.

owned subsidiary Yusoki Kogyo K.K., and a ¥3.1 billion loss

Total liabilities fell ¥9.9 billion, to ¥882.8 billion, largely dueon revaluation of derivatives. These losses are considered toto drops in such items as notes and accounts payable, trade,be temporary. As a result of these factors, income before

consolidation adjustments, accrued expenses, and accrued

Analysis of Increases and Decreases in Operating Income (Consolidated)(Billions of yen)

16.4

4.5

3.1

Amortization of
consolidation
adjustments

-15.1

50.3

6.9
-17.2

OperatingincomeFY 2004

Reductionin material
costs, etc.

Reduction in
R&D expenses

Decreasein otherexpenses

Loss oncurrency
exchange

Deteriorationof sales mix

42.0

OperatingincomeFY 2005

Annual Report 2005

29

pension and severance liability. Consolidation adjustments in

reductions are aimed at enhancing efficiency and making

particular decreased, largely resulting from the July 2004 ter-other improvements rather than postponing automobile

mination of Isuzu OEM production at SIA as well as fromdevelopment projects. Reductions also targeted R&D

transactions related to SIA’s leased facilities. Total interest-

expenses, which were reduced to ¥53.0 billion from ¥57.5

bearing debt rose ¥33.2 billion, to ¥412.2 billion, owing mainly

billion in the previous fiscal year, and this investment reduc-to a ¥12.0 billion rise in commercial paper, to ¥22.0 billion,

tion policy is to be continued during the current fiscal year.

and an ¥18.8 billion increase in long-term debts, to ¥59.1 billion.

However, while depreciation decreased to ¥51.1 billion, fromTotal shareholders’ equity grew ¥17.4 billion, to ¥471.1 bil-

¥53.2 billion in the previous fiscal year, depreciation inlion, reflecting a rise in retained earnings. Accordingly, thethe current fiscal year is expected to rise to ¥58.0 billion. In

shareholders’ equity ratio increased 1.1 points, from 33.6%

addition, recognizing that R&D programs play a crucial role in

to 34.7%, and shareholders’ equity per share increased fromsupporting its corporate development, FHI plans R&D¥582.60 to ¥604.51. Despite the growth in interest-bearing

expenses of ¥55.5 billion during the current fiscal year.

debt, the rise in shareholders’ equity greatly restrained deterioration in the debt/equity ratio, which rose only to 0.87, from

CASH FLOWS

0.84. The Company thus continued to maintain a solid finan-

Cash and cash equivalents at the end of the year undercial position while keeping its debt/equity ratio well within thereview totaled ¥131.7 billion, down ¥7.7 billion from the pre-upper limits of 1.0.

vious fiscal year-end. Net cash provided by operating activities fell ¥42.4 billion, to ¥57.3 billion. Net cash used in

CAPITAL EXPENDITURES

investing activities decreased ¥37.4 billion, to ¥89.8 billion.

The FHI Group proactively implemented investments during

Net cash provided by financing activities grew ¥23.9 billion,

the year, and its capital expenditures amounted to ¥85.3 bil-to ¥26.2 billion.

lion. This figure, up ¥10.8 billion from the ¥74.5 billion level ofFree cash flow, defined as net cash provided by operating

the previous fiscal year, includes ¥14.9 billion in temporary

activities plus net cash used in investing activities, decreased

costs associated with transactions related to SIA’s leased facil-¥5.1 billion from negative ¥27.4 billion in the previous fiscal

ities. These investments were based on the FDR-1 medium-year to negative ¥32.4 billion. This resulted from a significant

term business plan and were mostly for the automobile

decrease in net cash from operating activities.

operations, but a revision of that plan is projected to result in

The principal reasons for the large drop in net cash provid-an ¥18.3 billion drop in investments for the current fiscal year,

ed by operating activities included a ¥35.2 billion decrease

ending March 31, 2006, to ¥67.0 billion. Those investment

in income before income taxes and minority interest, aInterest-Bearing Debt Balance and D/E Ratio

Investment in Plant and Equipment/Depreciation Expenses(Billions of yen)(Times)(Billions of yen)

500

1.5

100

400

1.2

80

300

0.9

60

200

0.6

40

100

0.3

20

0

0

0

2001

2002

2003

2004

2005

2001

2002

2003

2004

2005

Interest-bearing debt 365.1

396.7

389.1

379.0

412.2

Investment in plantand equipment

43.6

70.6

64.6

74.6

85.3

D/E ratio

1.0

0.9

0.8

0.9

Depreciation expenses

45.3

45.0

48.8

53.2

51.1

30 FUJI HEAVY INDUSTRIES LTD.

1.0

¥17.2 billion increase in inventories, and a ¥26.8 billion

R1 is expected to depress minicar sales volume 4.5%, toreduction of amortization of consolidation adjustments, due

143.3 thousand units. Thus, it is anticipated that total auto-

to offsetting accounts related to SIA operations, including

mobile sales volume in Japan will decline 1.3%, to 250.7transactions associated with leased facilities.

thousand units.

The decrease in net cash used in investing activities

While the new Legacy models helped boost overseas

reflected a ¥17.1 billion drop in the purchase of marketablesales volume 7.2% during the fiscal year under review, over-securities along with the recording of ¥29.4 billion in pro-seas sales volume in the current fiscal year is projected to

ceeds from the withdrawal of restricted collateral cash, whichrise to 331.0 thousand units, a sharp deceleration to a

was used as seed money for consolidation adjustments.

growth rate of only 1.0%, excluding SIA consignment pro-

The rise in net cash provided by financing activities reflect-

duction terminated in July 2004. In the North American mar-ed a shift from short-term to long-term fund procurement

ket, the beneficial effects of the new Legacy helped boost

that entailed increases of ¥44.6 billion in long-term debts andsales volume 2.3% during the fiscal year under review, and¥11.0 billion in commercial paper, which was partially offset

robust growth of 4.3% is expected during the current fiscal

by an ¥8.5 billion increase in repayment on long-term debts

year, to 219.4 thousand units, as the new B9 Tribeca will be

and a ¥22.8 billion drop in short-term borrowings. In the pre-launched in early summer 2005. However, it is anticipatedvious fiscal year, repayment on long-term debts amounted tothat gains in other markets will be rolled back slightly¥28.6 billion and commercial paper ¥1.0 billion, while pro-because of inventory adjustments.

ceeds from long-term debts and net increase in short-term

Operating income is projected to decline ¥11.0 billion,

borrowings amounted to ¥5.3 billion and ¥21.7 billion,

from ¥42.0 billion to ¥31.0 billion. The projected decline

respectively. In the fiscal year under review, repayments onreflects a ¥22.0 billion reduction comprising a ¥2.5 billion riselong-term debts and net decrease in short-term borrowings

in R&D expenses, a ¥1.7 billion increase in SG&A expenses

amounted to ¥37.2 billion and ¥1.1 billion, respectively, whileand other expenses, an ¥8.6 billion loss on currency

net increase in commercial paper and proceeds from long-exchange fluctuations, and a ¥9.2 billion decrease resulting

term debts amounted to ¥12.0 billion and ¥49.9 billion,

from deterioration of sales volume and model mix. On therespectively.

positive side, an ¥11.0 billion reduction in the cost of materials, which is the net value including the forecasted rise of

OUTLOOK

price of raw materials, is expected to contribute to operating

FHI disclosed its revised FDR-1 in May 2005, and theincome.

first target of the remaining two years of the medium-term

FHI expects the current fiscal year to be one characterizedbusiness plan is to establish a profitable base for the future.

by the bottoming out of performance and return to recovery.

Our goals of an operating income ratio of more than 8%
and ROA of more than 10% by 2010 still stand. However,considering the past three years, our urgent task is to overcome such difficulties as high costs and a weak sales network.
FHI forecasts consolidated net sales of ¥1,470.0 billion (up1.6%), operating income of ¥31.0 billion (down 26.2%), andnet income of ¥15.0 billion (down 17.8%).
Regarding mainstay automobile operations, in Japan, thebeneficial effects of minor face-lift changes to the Forester
and Impreza are expected to boost passenger car sales volume 3.3%, to 107.5 thousand units, and the fading of newmodel benefits from the launch of the Subaru R2 and Subaru

Annual Report 200531

Consolidated Balance Sheets
FUJI HEAVY INDUSTRIES LTD. AND CONSOLIDATED SUBSIDIARIESAs of March 31, 2005 and 2004ASSETS
Current assets:
Cash and time deposits (Note 4)
Marketable securities (Notes 4 and 5)
Notes and accounts receivable, trade (Note 9)
Allowance for doubtful accounts
Inventories (Note 6)
Short-term loans (Note 4)
Deferred tax assets (Note 12)
Other current assets (Note 9)
Total current assets

Property, plant and equipment (Notes 7, 8 and 9)
Less—accumulated depreciation
Net property, plant and equipment

Investments and other assets:
Investment securities (Note 5)
Investments in non-consolidated subsidiaries and affiliated companies
Long-term loans
Goodwill
Intangibles, net
Deferred tax assets (Note 12)
Other assets (Note 9)
Allowance for devaluation of investments
Allowance for doubtful accounts
Total investments and other assets
Total assets

32 FUJI HEAVY INDUSTRIES LTD.

¥

Millionsof yenMillionsof yenThousands of
U.S. dollars(Note 1)

2005

2004

2005

40,74287,003
116,278(1,259)175,087
128,20234,85968,158¥46,684
113,490122,724(661)
179,338
101,871
34,14957,284$379,384
810,159
1,082,764(11,724)
1,630,385
1,193,798
324,602634,677

649,070

654,879

6,044,045

1,174,358(630,632)

1,125,117(615,374)

10,935,450(5,872,353)

543,726

509,743

5,063,097

65,323
6,970
5,976
16,961
26,25024,481
21,453(41)(2,710)52,926
5,298
4,918
17,75322,70029,70756,759(280)(4,676)608,278
64,90455,648
157,938
244,436
227,964
199,767(382)(25,235)

164,663

185,105

1,533,318¥1,357,459¥1,349,727$12,640,460

LIABILITIES AND SHAREHOLDERS’ EQUITYCurrent liabilities:
Short-term borrowings (Note 9)
Current portion of long-term debts (Note 9)
Notes and accounts payable, trade
Accrued expenses (Note 2)
Accrued income taxes (Note 12)
Other current liabilities (Note 12)
Total current liabilities
Long-term liabilities:
Long-term debts (Note 9)
Accrued pension and severance liability (Note 11)
Consolidation adjustments (Note 3)
Other long-term liabilities (Notes 8 and 12)
Total long-term liabilities
Minority interest in consolidated subsidiaries
Contingent liabilities (Note 19)
Shareholders’ equity (Note 13):
Common stock
Authorized—1,500,000,000 shares
Issued—782,865,873 shares
Capital surplus
Revaluation reserve for land (Notes 8 and 12)
Retained earnings
Net unrealized holding gains on securities
Translation adjustments
Less—treasury stock, at cost, 2005—3,761,911 shares
2004—4,480,160 shares
Total shareholders’ equity
Total liabilities and shareholders’ equity

Millionsof yenMillionsof yenThousands of
U.S. dollars(Note 1)

2005

2004

2005

¥ 217,928
34,667
190,790
110,093
8,872
47,961¥ 207,029
40,888
193,186
113,908
5,092
43,128$ 2,029,314
322,814
1,776,608
1,025,170
82,615446,606

610,311603,2315,683,127

159,595
59,002
12,352
41,583131,079
61,65444,02752,7091,486,125
549,418
115,020
387,215

272,532

289,469

2,537,778

3,467

3,319

32,284

153,795
160,071421
178,022
16,945(35,874)(2,231)—

153,795
160,107421
165,192
10,291(33,300)—(2,798)1,432,117
1,490,558
3,920
1,657,715
157,789(334,053)(20,775)—

471,149

453,708

4,387,271¥1,357,459¥1,349,727$12,640,460

The accompanying notes are an integral part of these balance sheets.

Annual Report 200533

Consolidated Statements of Income
FUJI HEAVY INDUSTRIES LTD. AND CONSOLIDATED SUBSIDIARIES
Years ended March 31, 2005, 2004 and 2003

Net sales
Cost of sales

Millionsof yenMillionsof yenMillionsof yenThousands of
U.S. dollars(Note 1)

2005

2004

2003

2005

¥1,446,491
1,107,718¥1,439,451
1,085,716¥1,372,337
1,011,582$13,469,513
10,314,908

338,773296,756

353,735
303,411

360,755
293,234

3,154,605
2,763,349

42,01750,32467,521

391,256

2,393(2,437)
541
915
(23)
(4,752)(3,132)(8,122)(3,467)
6,868(4,174)——(5,561)

2,081(2,416)
4,153
7,348
(221)
(3,089)
—
—
—
4,912
—
1,049
(1,268)(6,607)

1,855(2,941)(994)(1,538)(3,884)(4,822)——(1,882)————(6,345)22,283(22,693)
5,038
8,520
(213)
(44,250)(29,165)(75,631)(32,284)
63,954(38,868)——(51,783)

Gross profit
Selling, general and administrative expenses (Note 14)
Operating income
Other income (expenses):
Interest and dividend income
Interest expenses
Gain (loss) on sale of securities
Foreign exchange gains (losses)
Loss on devaluation of securities
Loss on sale and disposal of property, plant and equipment, net
Loss on revaluation of derivatives
Loss on devaluation of inventories at Aerospace division (Note 16)
Loss on discontinued operations (Note 15)
Amortization of consolidation adjustments (Note 3)
Loss on compensation to suppliers (Note 17)
Gain on prior period adjustment
Pension and severance cost (Note 11)
Other, net(20,951)

5,942(20,551)(195,092)

Income before income taxes and minority interest

21,06656,266

46,970196,164

Income taxes (Note 12):Current
Reversal of prior year’s accrued income taxes
Deferred

5,913—(3,264)

12,030—
5,603

20,359(2,973)(3,810)55,061—(30,394)

2,649

17,633

13,576

24,667

18,417(179)

38,63316

33,39490

171,497(1,667)

Income before minority interest
Minority interest in consolidated subsidiaries
Net income

Per share data (Note 2):
Net income—Basic—Diluted
Cash dividends (Note 13)
The accompanying notes are an integral part of these statements.

34 FUJI HEAVY INDUSTRIES LTD.

¥

18,238¥38,649¥33,484$

169,830

Yen

Yen

Yen

U.S. dollars(Note 1)

¥23.2723.27
9.00¥50.6249.66
9.00¥44.84
42.91
9.00

$0.22
0.22
0.08

Consolidated Statements of Shareholders’ Equity
FUJI HEAVY INDUSTRIES LTD. AND CONSOLIDATED SUBSIDIARIES
Years ended March 31, 2005, 2004 and 2003

Thousands

Balance, March 31, 2002
Foreign currency translation adjustment
Cash dividends
Payment of bonuses to directors
and statutory auditors
Shares issued upon conversion of convertible bonds
Increase in treasury stock
Revaluation reserve for land
Increase in unrealized holding gains on securities
Comprehensive loss
Net income
Balance, March 31, 2003
Foreign currency translation adjustment
Cash dividends
Payment of bonuses to directors
and statutory auditors
Shares issued upon conversion of convertible bonds
Increase in treasury stock
Gain on disposal of treasury stockReversal of revaluation reserve for land
Revaluation reserve for land
Increase in unrealized holding gains on securities
Comprehensive income
Net income
Balance, March 31, 2004
Foreign currency translation adjustment
Cash dividends
Payment of bonuses to directors
and statutory auditors
Increase in the number of companies accounted
for by the equity method
Decrease in treasury stock
Loss on disposal of treasury stock
Increase in unrealized holding gains on securities
Comprehensive income
Net income
Balance, March 31, 2005

Millions of yen

Number ofsharesissuedCommonstock

Capitalsurplus

Revaluation
reservefor land746,506¥144,450¥150,762¥381

Retainedearnings

Net
unrealized
holding
gains onsecurities¥107,328 ¥ 4,997

Translation
adjustment¥ (9,579)(8,658)Less—
treasurystock,
at cost¥(2,227)(6,689)
(161)
15

5

4
(526)
8
(1,551)

746,521

144,455

150,766

389(776)
33,484133,186

3,446(18,237)(15,063)(2,753)(6,846)(171)
36,345

9,340

(157)

(157)

(31)
32
6,845

160,107

421

405
38,649165,192

10,291(33,300)(2,574)(2,798)

1,496
567
(36)

782,866¥153,795¥160,071

(77)

¥421

(161)
9
(526)
8
(1,551)(776)
33,484
411,252(15,063)(6,846)(7,013)(45)

153,795¥396,112(8,658)(6,689)(171)
18,645
(45)
36
(31)
32
6,845
405
38,649453,708(2,574)(7,013)9,305
36782,866

Total
shareholders’equity6,654
343
18,238¥178,022 ¥16,945¥(35,874)¥(2,231)

1,496
567
(113)
6,654
343
18,238¥471,149

Thousands of U.S. dollars (Note 1)

Balance, March 31, 2004
Foreign currency translation adjustment
Cash dividends
Payment of bonuses to directors
and statutory auditors
Increase in the number of companies accounted
for by the equity method
Decrease in treasury stock
Loss on disposal of treasury stock
Increase in unrealized holding gains on securities
Comprehensive income
Net income
Balance, March 31, 2005

$1,432,117 $1,490,893$3,920 $1,538,244 $ 95,828(65,304)$(310,084) $ (26,055) $4,224,863(23,969)(23,969)(65,304)(1,462)(1,462)

13,93013,9305,280(1,052)
61,961
3,194
169,830$(334,053) $(20,775) $4,387,271
5,280

(335)

$1,432,117 $1,490,558(717)
61,961
3,194
169,830$3,920 $1,657,715 $157,789

The accompanying notes are an integral part of these statements.

Annual Report 200535

Consolidated Statements of Cash Flows
FUJI HEAVY INDUSTRIES LTD. AND CONSOLIDATED SUBSIDIARIES
Years ended March 31, 2005, 2004 and 2003

Cash flows from operating activities:
Income before income taxes and minority interest
Adjustments to reconcile income before income taxes andminority interest to net cash provided by operating activities:
Depreciation/amortization expenses
Loss on sale and disposal of property, plant and equipment, net
Increase (decrease) in accrued pension and severance liability(Gain) loss on sale of securities
Loss on devaluation of securities
Decrease in notes and accounts receivable, trade(Increase) decrease in inventories
Increase (decrease) in notes and accounts payable, trade
Income taxes paid
Loss on compensation to suppliers
Loss on discontinued operations
Amortization of consolidation adjustments
Gain on prior period adjustments
Other, net

Millionsof yenMillionsof yenMillionsof yenThousands of
U.S. dollars(Note 1)

2005

2004

2003

2005

¥ 21,066¥ 56,266¥ 46,970$ 196,164

71,0104,752(2,730)
(541)
23
5,353
(11,272)
33(6,197)
4,174
3,467(31,675)—(136)

71,112
3,089
73(4,153)
221
1,191
5,889
(13,979)(18,374)——(4,912)(1,049)4,400

67,896
4,822
(106)
994
3,884
2,613
(12,017)
16,534(31,099)
—
1,882
—
—
5,690

661,235
44,250(25,421)(5,038)214
49,846(104,963)
307(57,706)
38,86832,284(294,953)—(1,266)57,327

99,774

108,063

533,821

Net cash provided by operating activities
Cash flows from investing activities:
Purchase of property, plant and equipment
Proceeds from sale of property, plant and equipment
Purchase of investment securities
Purchase of marketable securities
Proceeds from sale of investment securities
Proceeds from sale of marketable securities
Increase due to acquisition of Isuzu’s shareof Subaru of Indiana Automotive, Inc. (Note 3)
Purchase of intangible assets
Disbursement of loans receivableCollection of loans receivable
Other, net(137,998)
36,411(7,690)(37,119)
5,395
50,474(125,351)
38,634(11,718)(54,192)
11,17843,239(115,553)
32,213(10,167)(38,596)
9,114
72,588(1,285,017)
339,054(71,608)(345,647)
50,237470,007—(8,009)(122,633)
101,195
30,213—(8,070)(90,041)
70,101(920)

12,989(6,240)(75,898)
62,889573—(74,579)(1,141,940)
942,313281,339

Net cash used in investing activities(89,761)(127,140)(56,088)(835,841)

49,867(37,166)
20,000(10,000)
10,898(399)
24(7,013)(12)

5,269(28,635)
20,000(10,129)
22,662(49)
70(6,846)(7)

55,150(58,324)
10,000(22,027)
10,732(531)—(6,689)—464,354(346,084)
186,237(93,119)
101,481(3,715)
223(65,304)(112)

Net cash provided by (used in) financing activities

26,1992,335(11,689)

243,961

Effect of exchange rate changes on cash and cash equivalents(1,481)(5,512)(4,050)(13,791)

Net increase (decrease) in cash and cash equivalents(7,716)(30,543)

36,236(71,850)

Cash flows from financing activities:
Proceeds from long-term debts
Repayment on long-term debts
Issuance of bonds
Redemption of bonds
Net increase in short-term borrowings
Purchase of treasury stock
Proceeds from disposal of treasury stock
Dividends paid
Other, net

Cash and cash equivalents:
Balance at beginning of year

139,401

169,944

133,708

1,298,081

Balance at end of year (Note 4)¥131,685¥139,401¥169,944$1,226,231

Supplementary information on cash flows:
Cash paid during the period for interest
Conversion of convertible bonds

¥

¥

¥

$

The accompanying notes are an integral part of these statements.

36 FUJI HEAVY INDUSTRIES LTD.

2,432
—

2,361
18,6453,327
922,646—

Notes to Consolidated Financial Statements
FUJI HEAVY INDUSTRIES LTD. AND CONSOLIDATED SUBSIDIARIES

1. Basis of Presentation of the Financial Statements
The accompanying consolidated financial statements have been prepared in accordance with the provisions set forth in the Japanese Securities and Exchange Law and its related accounting regulations andin conformity with accounting principles generally accepted in Japan, which are different in certain
respects as to the application and disclosure requirements of International Financial ReportingStandards.
The accounts of overseas subsidiaries are based on their accounting records maintained in conformity
with generally accepted accounting principles prevailing in the respective countries of domicile. The
accompanying consolidated financial statements have been restructured and translated into English (withsome expanded descriptions and the inclusion of consolidated statements of shareholders’ equity) fromthe consolidated financial statements of the Company prepared in accordance with Japanese GAAP and
filed with the appropriate Local Finance Bureau of the Ministry of Finance as required by the Securities
and Exchange Law. Some supplementary information included in the statutory Japanese language consolidated financial statements, but not required for fair presentation, is not presented in the accompanying consolidated financial statements.
The translation of the Japanese yen amounts into U.S. dollars are included solely for the convenienceof readers outside Japan, using the prevailing exchange rate at March 31, 2005, which was ¥107.39 to
U.S.$1. The convenience translations should not be construed as representations that the Japanese yenamounts have been, could have been, or could in the future be, converted into U.S. dollars at this or any
other rate of exchange.

2. Summary of Significant Accounting Policies
Consolidation
The accompanying consolidated financial statements include the accounts of the Company and its
significant subsidiaries. All significant intercompany transactions and balances have been eliminated inconsolidation. The fiscal year-end of the consolidated domestic subsidiaries is the same as that of theparent company, while the fiscal year-end of the consolidated foreign subsidiaries is December 31.
Although these consolidated foreign subsidiaries are included based on their fiscal year ended December
31, significant transactions that occurred in the period between December 31 and March 31 are reflectedin the consolidated financial statements.
The consolidated financial statements include the accounts of the Company and 68 subsidiaries in thefiscal year 2005 and 66 subsidiaries in the fiscal years 2004 and 2003.
In addition, 4 non-consolidated subsidiaries and an affiliated company are accounted for by the equity
method in the fiscal year 2005, while there was no affiliated company accounted for by the equity
method in the fiscal year 2004 and an affiliated company was accounted for by the equity method in thefiscal year 2003.
Investments in insignificant non-consolidated subsidiaries and affiliated companies not accounted forby the equity method are carried at cost. The difference between the cost and underlying net equity ofinvestments in subsidiaries and affiliated companies is allocated to identifiable assets based on fair value
at the date of acquisition. The unallocated residual value of the excess of the cost over the underlying net
equity is recognized as consolidation adjustments and goodwill and is amortized over a period of 5 years
on the straight-line basis. However, consolidation adjustments that arose from making Subaru of Indiana
Automotive, Inc. (SIA), a wholly owned subsidiary of the Company, are amortized differently. The portion
that clearly corresponds to the forecasted future losses is amortized according to the generation of thoselosses, and the remaining portion of the consolidation adjustments is amortized by the straight-line
method over 5 years.
All assets and liabilities of subsidiaries, which include not only the Company’s interest in the subsidiary
but also the minority interest portion, are valued based on fair value at the time the Company consolidated
the subsidiary.

Annual Report 200537

Translation of foreign currency accounts
Under the Japanese accounting standard for foreign currency translation, monetary assets and liabilities
denominated in foreign currencies are translated into Japanese yen at the exchange rates prevailing at
each balance sheet date with the resulting gain or loss included in the current statements of income.
Assets and liabilities of foreign subsidiaries and affiliated companies are translated into Japanese yenat the exchange rates in effect at the balance sheet date of the foreign subsidiaries and affiliated companies, except for common stock and capital surplus, which are translated at historical rates. Revenue andexpense accounts are translated at the average exchange rates during the current year. The resulting foreign currency translation adjustments are included in “Translation adjustments” in shareholders’ equity
and minority interest in the accompanying consolidated balance sheets.
Cash equivalents
Cash and cash equivalents include all highly liquid investments, generally with original maturities of threemonths or less that are readily convertible to known amounts of cash and have negligible risk of changes
in value due to their short maturities.
Revenue recognition
Revenue from sales of finished products is generally recognized when such products are shipped to dealers
or customers. Revenue from operating leases is recognized on a straight-line basis over the lease term.
Change of accounting policy:
The Company changed the revenue recognition policy for the Aerospace division’s production contracts
with the production term exceeding one year and the amount of each contract exceeding ¥5,000 million,
from the delivery basis to the percentage-of-completion method from the fiscal year ended March 31,
2004. The Company changed the accounting policy for the purpose of more accurately matching revenues against costs in the period in which they were incurred in light of the recent trend that terms of
production contracts of the Aerospace division tend to extend over periods and the amounts of suchcontracts tend to become larger, and such a trend is expected to continue.
As a result of the change, net sales increased by ¥4,013 million and gross profit, operating income andincome before income taxes and minority interest increased by ¥231 million in the fiscal year ended
March 31, 2004 as compared with amounts resulting from the application of the previous policy.
Allowance for doubtful accounts
Allowance for doubtful accounts is provided based on the amount calculated as the actual ratio of bad
debt for ordinary receivables and the amount required for uncollectible accounts for specific doubtfulreceivables.
Allowance for devaluation of investments
Allowance for devaluation of investments is provided for losses from decrease in the value of investment
securities for which fair value is not available and investments in non-consolidated subsidiaries and affiliated companies based on the evaluation of the investees’ financial conditions, such as net assets andthe probability of recovering the value.
Marketable securities and investment securities
Under the Japanese accounting standard for financial instruments, securities for which fair value is available are stated at the fair value as of the balance sheet date with unrealized holding gains and losses
included as a component of shareholders’ equity until realized, while securities for which fair value is notavailable are stated at cost as determined by the moving-average method, after devaluation for any permanent impairment. Held-to-maturity debt securities are stated using the amortized interest cost method.
Derivative financial instruments and hedge accounting
The Japanese accounting standard for financial instruments requires the Company and consolidated
domestic subsidiaries 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.

38 FUJI HEAVY INDUSTRIES LTD.

For interest rate swap contracts used as hedges and which meet certain hedging criteria, the net
amount to be paid or received under the interest rate swap contract is added to or deducted from theinterest on the assets or liabilities for which the swap contract is executed.
Derivative financial instruments qualifying as a hedge, along with the related transactions, assets andliabilities are as follows:
Financial Instrument

Transaction, Assets and Liabilities

Interest swaps

Borrowings

The risk exposures to movements in interest rates are hedged according to the Company’s and consolidated subsidiaries’ risk management policy. Evaluation of hedge effectiveness is not considered necessary as the terms and notional amounts of these hedge instruments are the same as those of therelated transactions, assets and liabilities, and therefore they are assumed to be highly effective in offsetting movements in interest rates at their inception as well as during their term.
Change of accounting policy:
Previously, for foreign exchange contracts used as hedges and which met certain hedging criteria, theCompany translated hedged foreign currency receivables using the contracted forward rates, for forward
exchange contracts hedging future transactions, the Company deferred recognition of gains or losses
resulting from changes in fair value of the foreign exchange contracts until related gains or losses on thehedged items were recognized. However, the Company stopped applying the hedge accounting from thefiscal year 2005.
The reason for the change is that the Company reconsidered the appropriateness of application ofhedge accounting in connection with reviewing the hedge policy and the management activities for foreign exchange contracts.
As a result of this change, operating income increased by ¥141 million and income before income
taxes and minority interest decreased by ¥1,623 million as compared with amounts resulting from theapplication of the previous hedge accounting policy.
The impact of such change on segment information is stated in Segment Information (Note 21).
Inventories
Finished products are stated principally at cost determined by the moving-average method. Raw materials,
work in process and supplies are stated principally at cost determined by the first-in, first-out method.
Property, plant and equipment
Property, plant and equipment are stated at cost. Significant renewals and additions are capitalized;
ordinary maintenance, ordinary repairs, minor renewals and minor improvements are charged to consolidated statement of income as incurred.
Depreciation of property, plant and equipment of the Company and consolidated domestic subsidiaries is principally computed by the declining-balance method, except for the buildings (excluding
building improvements) acquired on or after April 1, 1998, for which the straight-line method is applied.
Depreciation of property, plant and equipment of consolidated foreign subsidiaries is computed by thestraight-line method at rates based on the estimated useful lives of the assets according to general class,type of construction and use.
Estimated useful lives for depreciable assets are as follows:
Building and structures: 7–50 years
Machinery, equipment and vehicles: 2–11 years
In the fiscal year ended March 31, 2005, the Company and the consolidated subsidiaries did not adopt
early the new accounting standard for impairment of fixed assets (“Opinion Concerning Establishment of
Accounting Standard for Impairment of Fixed Assets” issued by the Business Accounting Deliberation
Council on August 9, 2002) and the implementation guidance for the accounting standard for impairmentof fixed assets (the Financial Accounting Standard Implementation Guidance No. 6 issued by the
Accounting Standards Board of Japan on October 31, 2003). The new accounting standard is required tobe adopted effective April 1, 2005. The Company estimates that the effect of adopting the new accounting standard will have a material effect on the Company’s consolidated financial statements.

Annual Report 200539

Accounting for leases
In principle, finance leases are accounted for on a similar basis to sales by lessors or purchases bylessees. However, finance leases which do not transfer ownership of the leased assets to lessees as
stipulated in lease contracts can be accounted for as operating leases. Therefore, as a lessee, theCompany and consolidated subsidiaries have accounted for those leases as operating leases and havecharged periodic lease payments to expenses as incurred. Certain “as if capitalized” information is disclosed in Note 18 to the financial statements.
Intangible assets
Goodwill is principally amortized by the straight-line method based on the accounting principles generally
accepted in the respective countries of domicile. However, goodwill of the consolidated subsidiary in the
United States is not amortized in accordance with SFAS 142, while other identifiable assets are amortized by the straight-line method.
Computer software used internally by the Company and consolidated subsidiaries is amortized by thestraight-line method over the relevant economic useful lives (3 or 5 years).
Accrued pension and severance liability
On terminating employment, employees of the Company and consolidated subsidiaries in Japan are entitled, under most circumstances, to lump-sum indemnities or pensions as described below, based on current rates of pay, length of service, and conditions under which the termination occurs. The minimum
payment is an amount based on voluntary retirement. In addition to the minimum payment based on voluntary retirement, employees receive additional benefits for retirement due to age limit, death or otherdefined reasons.
Certain consolidated subsidiaries in Japan have contributory funded defined benefit pension plans, which
are pursuant to the Japanese Welfare Pension Insurance Law. The contributory pension plans cover a
portion of the governmental welfare pension program, under which the contributions are made by thecompanies and their employees, and an additional portion representing the substituted noncontributory
pension plan.
Under the Japanese accounting standard for pension and severance benefits, accrued pension andseverance liability for employees has been provided based on the estimated amounts of projected pension and severance obligation and fair value of plan assets at the end of the fiscal year. Prior service costis being amortized as incurred by the straight-line method over the period (14–18 years), which is shorter
than the average remaining service periods of the eligible employees. Actuarial gains and losses havebeen amortized from the following fiscal year by the straight-line method over the periods (primarily 18
years), which are shorter than the average remaining service periods of the eligible employees.
Accrued pension contribution for defined benefit pension plans is included in accrued pension andseverance liability.
Directors and statutory auditors of the Company and consolidated domestic subsidiaries are entitled
to receive lump-sum payments at the time of severance or retirement, subject to the approval of theshareholders. The liabilities for such benefits are determined based on the Company’s and consolidated
subsidiaries’ internal rules and are included in “Other long-tem liabilities” in the accompanying consolidated balance sheets.
Accrued warranty claims
The Company and consolidated subsidiaries provide for accrued warranty claims on products soldbased on their past experience of warranty services and estimated future warranty costs, which areincluded in “Accrued expenses” in the accompanying consolidated balance sheets.
Research and development costs
Research and development costs are expensed as incurred and amounting to ¥52,962 million(US$493,174 thousand), ¥57,541 million and ¥60,110 million for the fiscal years ended March 31, 2005,
2004 and 2003, respectively.

40 FUJI HEAVY INDUSTRIES LTD.

Income taxes
The provision for income taxes is computed based on the pretax income for the financial reporting
purposes. Deferred tax assets and liabilities are recognized for expected future tax consequences of
temporary differences between the financial statement carrying amounts and the tax bases of assets andliabilities. Valuation allowances are recorded to reduce deferred tax assets when it is more likely than notthat a tax benefit will not be realized.
Effective April 1, 2004, the “Corporation Size-Based Enterprise Tax System” for enterprises has been
introduced. Due to the introduction, the Accounting Standards Board of Japan issued Practical Solutions
Report No. 12, “Practical Solutions on Presentation for Size-Based Components of Corporate EnterpriseTax on Income Statements” on February 13, 2004, which prescribes the new accounting standard forenterprise taxes. In compliance with the report, the value-added and the capital components of theenterprise taxes, which are not related to income, are included in selling, general and administrative
expenses from the fiscal year 2005.
As a result, selling, general and administrative expenses increased by ¥1,009 million (US$9,396 thousand), and operating income, ordinary income and income before income taxes and minority interest
decreased by the same amount as compared with the previous fiscal year.
The impact of such change on segment information is stated in Segment Information (Note 21).
Net income per share
Basic net income per share (EPS) is computed based on the average number of shares of common stock
outstanding during each year. Diluted EPS assumes the potential dilution that could occur if all convertible securities were converted or other contracts to issue common stock were exercised to the extent
that it is not antidilutive.
Reclassifications
Certain reclassifications within the financial statements for the fiscal years ended March 31, 2004 and2003 have been made to conform to the presentation for the fiscal year ended March 31, 2005.

3. Acquisition of Isuzu’s Share of Subaru of Indiana Automotive, Inc.
Subaru of Indiana Automotive, Inc. (SIA, formerly Subaru-Isuzu Automotive, Inc.), a consolidated subsidiary in the United States, was a joint venture company of Isuzu Motors Ltd. and the Company (theCompany held a 51% share of SIA). On January 1, 2003, as a result of the dissolution of the joint venture
relationship with Isuzu Motors Ltd. and execution of an agreement for the consignment of production, theCompany acquired Isuzu’s share of SIA to make SIA a wholly owned subsidiary of the Company, and SIA
was assigned to produce certain Isuzu vehicles as well as Subaru vehicles.
Due to the use of a class stock system at SIA, the Company had previously consolidated only the
Subaru Division of SIA which had been governed by the Company through ownership of class F common
stock, while the Isuzu Division of SIA, which had been governed by Isuzu Motors Ltd. through ownershipof class I common stock, was excluded from the consolidated financial statements of the Company.
However, as a result of the acquisition of Isuzu’s share of SIA, the Company consolidated SIA as a whole,including the Consignment division (formerly the Isuzu division).
Prior to the Company’s acquisition of Isuzu’s share of SIA, Isuzu Motors Ltd. had made a capital injection into SIA in connection with the forecasted future losses related to the former Isuzu division. In relation to the consignment of the production agreement with Isuzu, the Company has operated the former
Isuzu division as the Consignment division. As the consigned production activities have been completed,
SIA has been expected to incur certain losses on the disposal of fixed assets, losses on cancellationof operating leases, and losses related to personnel reduction. Consequently, the consolidation
adjustments (credit side) arose.
The portion of the consolidation adjustments that clearly corresponds to the forecasted future losses
has been amortized according to the generation of those losses, and the remaining portion has beenamortized by the straight-line method over 5 years.

Annual Report 2005

41

The amortization of the consolidation adjustments for the year ended March 31, 2005 was ¥31,654 million (US$294,757 thousand), out of which, ¥6,847 million (US$63,954 thousand) was reflected as amortization of the consolidation, and ¥24,807 million (US$230,999 thousand), which corresponded to the loss
on the cancellation of the operating lease at SIA as a result of the termination of the consignment production of Isuzu vehicles, was offset against ¥27,603 million (US$257,035 thousand) expenses on thecancellation of the operating lease at SIA and was included in “other, net” under other income (expenses)
in the accompanying consolidated statement of income.
The amortization of the consolidation adjustments for the year ended March 31, 2004 was ¥4,892 million and reflected as “amortization of consolidation adjustments” in the accompanying statement ofincome. The annual amortization based on currently forecasted losses was as follows:

March 31, 2006
March 31, 2007
March 31, 2008
March 31, 2009 and thereafter

Millionsof yenThousands of
U.S. dollars¥ 6,600
3,800
(300)
2,212

$ 61,458
35,385(2,793)
20,598¥12,312$114,648

4. Additional Cash Flow Information(a) Cash and cash equivalents as of March 31, 2005 and 2004 consisted of the following:
Millionsof yenMillionsof yenThousands of
U.S. dollars

2005

2004

2005

Cash and time deposits
Marketable securities
Short-term loans¥ 40,742
87,003
128,202¥ 46,684
113,490
101,871$ 379,384
810,159
1,193,798

Less maturity over three months

255,947(124,262)

262,045(122,644)

2,383,341(1,157,110)

Cash and cash equivalents¥131,685¥139,401$1,226,231(b) Assets and liabilities of newly consolidated subsidiary through acquisition of shares:
Assets and liabilities of NIIGATA SUBARU Inc. and relationship with the acquisition cost and net cash
outflow of such acquisition, which are included in “Other, net” under “Cash flows from investing activities” for the year ended March 31, 2004, were as follows:
Millionsof yen42 FUJI HEAVY INDUSTRIES LTD.

Current assets
Long-term assets
Goodwill
Current liabilities
Long-term liabilities¥2,2684,065
212(3,145)(1,217)

Acquisition cost of NIIGATA SUBARU Inc.
Cash and cash equivalents of NIIGATA SUBARU Inc.

2,183
(324)

Net cash used for acquisition of NIIGATA SUBARU Inc.

¥1,859(c) Significant non-cash transaction:
On August 2004, the Company executed a share exchange agreement and made Yusoki Kogyo K.K. awholly owned subsidiary of the Company. As a result of the share exchange, consolidation adjustments
rose by ¥833 million and treasury stock decreased by ¥942 million.

5. Marketable Securities and Investment Securities
Information as to the value of marketable securities and investment securities as of March 31, 2005 and2004 was as follows:(1) Held-to-maturity debt securities for which fair market value was available:
As of March 31, 2004:
Millions of yen

Fair market value not exceeding book value:
Government bonds
TotalBook value

Fair market value

Difference

¥5

¥5

¥—

¥5

¥5

¥—

(2) Other investment securities (available-for-sale securities) for which fair market value was available:(a) As of March 31, 2005:
Millions of yen

Book value exceeding acquisition cost:
Equity securities
Debt securities
Government and municipal bonds
Corporate bonds
Other
Other
Subtotal
Book value not exceeding acquisition cost:
Equity securities
Debt securities
Government and municipal bonds
Corporate bonds
Other
Other

Acquisition cost

Book value

Difference¥20,761¥49,214¥28,453

100
2,500
36
4,281

100
2,501
181
4,282

0
1
145
1

27,67856,27828,600

256

205

(51)

6,656
4,740
501
2,344

6,627
4,724
500
2,338

(29)
(16)
(1)
(6)

Subtotal

14,497

14,394

(103)

Total

¥42,175¥70,672¥28,497

Annual Report 2005

43

Thousands of U.S. dollars
Acquisition cost

Book value

Difference$193,323$458,274$264,951

931
23,280335
39,864931
23,2891,685
39,874

0
9
1,350
10

257,733

524,053

266,320

2,384

1,909

(475)

61,98044,138
4,665
21,82761,71043,9894,656
21,770

(270)
(149)
(9)
(57)

Subtotal

134,994

134,034

(960)

Total

$392,727$658,087$265,360

Acquisition cost

Book value

Difference¥18,869¥36,167¥17,298

6,818
5,299
36
5,570

6,821
5,331
161
5,573

3
32
125
3

36,59254,053

17,461

2,011

1,889

(122)

4,801
1,546
848

4,799
1,546
845

(2)
0
(3)

9,206

9,079

(127)

¥45,798¥63,132¥17,334

Book value exceeding acquisition cost:
Equity securities
Debt securities
Government and municipal bonds
Corporate bonds
Other
Other
Subtotal
Book value not exceeding acquisition cost:
Equity securities
Debt securities
Government and municipal bonds
Corporate bonds
Other
Other

(b) As of March 31, 2004:
Millions of yen

Book value exceeding acquisition cost:
Equity securities
Debt securities
Government and municipal bonds
Corporate bonds
Other
Other
Subtotal
Book value not exceeding acquisition cost:
Equity securities
Debt securities
Corporate bonds
Other
Other
Subtotal
Total

44 FUJI HEAVY INDUSTRIES LTD.

(3) Other investment securities (available-for-sale securities) sold during the years ended March 31, 2005
and 2004:(a) For the year ended March 31, 2005:
Sales amount

Total gain

Total loss

¥640,095 million
US$5,960,471 thousand¥633 million
US$5,894 thousand¥56 million
US$521 thousand

The above sales amount included sales of short-term investments in commercial paper and otheramounting to ¥584,226 million (US$5,440,227 thousand).
(b) For the year ended March 31, 2004:
Sales amount

Total gain

Total loss

¥426,839 million¥4,760 million¥420 million

The above sales amount included sales of short-term investments in commercial paper and otheramounting to ¥372,422 million.
(4) Book values of major securities without available fair market value (except for held-to-maturity debt
securities stated in (1) above) as of March 31, 2005 and 2004:

Money management fundCommercial paper
Unlisted stocks (excluding over-the-counter stocks)
Negotiable certificated deposit
Beneficiary rights to the trust
Held-to-maturity debt securities
Medium-term government bond fundFree financial fundMillionsof yenMillionsof yenThousands of
U.S. dollars

2005

2004

2005

¥47,688
19,838
6,544
5,000
2,579
6
—
—

¥52,202
31,062
6,640
—
8,367
6
4,500
501

$444,064
184,72960,93746,55924,01556——

Note: The Company and consolidated subsidiaries recognized ¥23 million (US$214 thousand) and ¥198 million in loss on devaluation of securities for theyears ended March 31, 2005 and 2004, respectively, out of which, the devaluation of investment securities with fair market value was ¥10 million forthe year ended March 31, 2004.
For purpose of recording the loss on devaluation of securities, the Company and consolidated subsidiaries consider all securities whose fair market value has fallen below 50% of the book value to be permanently impaired, and records the relevant loss on devaluation. For securities whose fairmarket value has declined between 30% to 50% in relation to book value, the Company and consolidated subsidiaries specifically consider the probability of recovery of the fair value, and records a loss on devaluation in an amount deemed sufficient.

Annual Report 200545

(5) Schedule of redemption for other securities with maturity and held-to-maturity debt securities as ofMarch 31, 2005 and 2004:(a) As of March 31, 2005:
Millions of yen

Debt securities
Government andmunicipal bonds
Corporate bonds
Other
Other
Total

Thousands of U.S. dollars

Within 1
year

1 to 5years

5 to 10years

Over 10years

Within 1
year

1 to 5years

5 to 10years

Over 10years¥ 1,412
4,195
21,805
5,763¥3,393
2,747—
425¥1,420
262
—
54

¥501
22
—
359

$ 13,149
39,063203,045
53,664$31,593
25,580—3,957$13,223
2,439
—
503

$4,665
205—
3,343¥33,175¥6,565¥1,736¥882$308,921$61,132$16,165$8,213

Within 1
year

1 to 5years

5 to 10years

Over 10
years

¥

960
8,440
32,604
10,124¥4,760
1,125
161
174

¥ 875
403
—
103

¥232
—
—
228

¥52,128¥6,220¥1,381¥460(b) As of March 31, 2004:
Millions of yen

Debt securities
Government andmunicipal bonds
Corporate bonds
Other
Other
Total

6. Inventories
Inventories as of March 31, 2005 and 2004 consisted of the following:

Finished products
Work in process
Raw materials
Supplies

46 FUJI HEAVY INDUSTRIES LTD.

Millionsof yenMillionsof yenThousands of
U.S. dollars

2005

2004

2005

¥103,285
54,11015,882
1,810¥107,679
55,491
13,5882,580$ 961,775
503,864
147,891
16,855¥175,087¥179,338$1,630,385

7. Property, Plant and Equipment
Property, plant and equipment as of March 31, 2005 and 2004 were as follows:
Millionsof yenMillionsof yenThousands of
U.S. dollars

2005

2004

2005

Buildings and structures
Machinery and vehicles
Other¥280,438
494,199
216,021¥263,128
468,636
205,900$2,611,398
4,601,909
2,011,556

Less accumulated depreciation
Land
Construction in progress

990,658(630,632)
170,809
12,891

937,664(615,374)
166,518
20,9359,224,863(5,872,353)
1,590,548
120,039¥543,726¥509,743$5,063,097

Total

8. Revaluation Reserve for Land
In accordance with the Land Revaluation Law (Law No. 34, enacted on March 31, 1998), land owned by aconsolidated subsidiary for business use was revalued on March 31, 2002. The unrealized gains from therevaluation were included in shareholders’ equity as “Revaluation reserve for land,” net of deferred taxes.
The deferred taxes of the unrealized gains were included in other long-term liabilities. Unrecorded loss onrevaluation as of March 31, 2005 was ¥393 million (US$3,660 thousand). According to the Law, theCompany and consolidated subsidiaries are not permitted to revalue the land after April 1, 2002.

9. Short-Term Borrowings and Long-Term Debts
Short-term borrowings as of March 31, 2005 and 2004 consisted of the following:

Bank loans with average interest rate of 0.52% and 0.69%
per annum as of March 31, 2005 and 2004, respectively
Commercial paper with average interest rateof 0.04% per annum as of March 31, 2005 and 2004

Millionsof yenMillionsof yenThousands of
U.S. dollars

2005

2004

2005

¥195,928¥197,029$1,824,453

22,00010,000204,861¥217,928¥207,029$2,029,314

Annual Report 2005

47

Long-term debts as of March 31, 2005 and 2004 consisted of the following:
Millionsof yenMillionsof yenThousands of
U.S. dollars

2005

2004

2005

¥ 71,167
10,00010,00020,00030,00010,00020,000—300$ 777,186
93,118—186,237
279,356
93,118186,237
186,237
2,794

500

4,656

194,262(34,667)

171,967(40,888)

1,808,939(322,814)¥159,595¥131,079$1,486,125

Millionsof yenThousands of
U.S. dollars¥ 34,667
27,377
17,39044,578
10,23960,011$ 322,814
254,930
161,933
415,104
95,344
558,814¥194,262$1,808,939

Loans principally from banks and insurance companies due
through 2025 with average interest rate of 1.96%
and 2.50% per annum as of March 31, 2005
and 2004, respectively¥ 83,462
Unsecured 2.30% bonds due September 30, 2005
10,000Unsecured 1.76% bonds due April 30, 2004—
Unsecured 0.97% bonds due May 15, 2006
20,000Unsecured 1.22% bonds due September 30, 2008
30,000Unsecured 0.89% bonds due September 28, 2007
10,000Unsecured 0.68% bonds due June 18, 2010
20,000Unsecured 1.31% bonds due April 28, 2011
20,000
Secured 1.80% bonds of a consolidated subsidiary due July 7, 2005
300
Unsecured 0.93% bonds of a consolidated subsidiary
due February 15, 2007
500
Less—Portion due within one year

Annual maturities of long-term debts as of March 31, 2005 were as follows:

2006
2007
2008
2009
2010
2011 and thereafter

The following assets as of March 31, 2005 and 2004 were pledged as collateral for certain loans:

Notes and accounts receivable, trade
Other current assets
Property, plant and equipment
Other assets

48 FUJI HEAVY INDUSTRIES LTD.

Millionsof yenMillionsof yenThousands of
U.S. dollars

2005

2004

2005

¥ 11,665—
108,664271¥ 30,924
415
95,904248$ 108,623—
1,011,863
2,524¥120,600¥127,491$1,123,010

The unexecuted balance of commitments for borrowings by the Company and consolidated
subsidiaries (Subaru of America, Inc. and Subaru Europe N.V./S.A.) as of March 31, 2005 and 2004 was
as follows:
Millionsof yenMillionsof yenThousands of
U.S. dollars

2005

2004

2005

Total commitments
Less amounts currently executed¥86,434
10,000¥103,500
19,318$804,861
93,119Unexecuted balance¥76,434¥ 84,182$711,742

10. Unexecuted Balance of Overdraft Facilities and Lending Commitments
The unexecuted balance of overdraft facilities and lending commitments at a consolidated subsidiary(Subaru Finance Co., Ltd.) as of March 31, 2005 and 2004 was as follows:
Millionsof yenMillionsof yenThousands of
U.S. dollars

2005

2004

2005

Total overdraft facilities and lending commitments
Less amounts currently executed¥12,350
7,510¥8,1704,244$115,001
69,932Unexecuted balance¥ 4,840¥3,926$ 45,069

A portion of the overdraft facilities and lending commitments above is subject to credit considerations
as documented in the customer contracts. Therefore, the total balance above is not always executable.

11. Pension and Severance Plans
The Company and consolidated domestic subsidiaries have non-contributory funded defined benefit pension plans. The plan of the Company covers 80% of retirement and severance benefits for employees who
terminate employment at age 50 or over. Consolidated foreign subsidiaries primarily have defined contribution plans.
“Pension and severance cost” under “Other income (expenses)” in the accompanying consolidated
statement of income for the year ended March 31, 2004 represents costs resulting from changes madeby certain consolidated subsidiaries in the method of calculating projected pension and severance obligation from the simplified method to the principal method. Under the simplified method, accrued pension
and severance liability is provided at the amount that would be payable if all employees voluntarily retired
at the end of the fiscal year, less the amount covered by the plan assets, while accrued pension and severance liability is provided based on the estimated amount of pension and severance obligation (projected benefit obligations), less the fair value of plan assets at the end of the fiscal year under the principal
method.
One of the consolidated subsidiaries changed the calculation method to the principal method because
the number of employees exceeded 300 due to a merger, and other subsidiaries changed the calculation
method as a result of an increase in reliability in actuarial calculation based on certain assumptions.
As a result, other income decreased by ¥1,268 million and income before income taxes and minority
interest decreased by the same amount.

Annual Report 200549

Reconciliation between the projected pension and severance obligation and accrued pension and severance liability as of March 31, 2005 and 2004 was as follows:
Millionsof yenMillionsof yenThousands of
U.S. dollars

2005

2004

2005

a. Projected pension and severance obligationb. Plan assets¥138,357(59,548)¥139,686(54,946)$1,288,360(554,502)

c. Unfunded pension and severance obligations
d. Unamortized actuarial gain/loss
e. Unamortized prior service cost

78,809(17,472)(2,423)84,740(19,613)(3,546)

733,858(162,697)(22,562)

f. Net amount recorded in balance sheet
g. Prepaid pension cost

58,914(88)

61,581(73)

548,599(819)

h. Accrued pension and severance liability¥ 59,002¥ 61,654$ 549,418

Notes: 1. The above amounts included the government pension plan funded by social security taxes paid by employees and employer.
2. Certain insignificant consolidated subsidiaries calculated the liability using the simplified method.
3. In addition to the above plan assets, there were plan assets for the multi-employer pension plan amounting to ¥15,081 million (US$140,432 thousand) and ¥16,824 million for the years ended March 31, 2005 and 2004, respectively. The plan assets for the multi-employer pension plan could
not be allocated to each specific participating employer and were allocated based on the number of participants.

Periodic pension and severance costs for the years ended March 31, 2005, 2004 and 2003 consistedof the following:
Millionsof yenMillionsof yenMillionsof yenThousands of
U.S. dollars

2005

2004

2003

2005

a. Service costb. Interest costc. Expected return on plan assets
d. Amortization of actuarial gain/loss
e. Amortization of prior service cost

¥ 9,647
2,636(1,175)
1,853
257¥10,695
3,075(1,155)
1,269
295¥10,004
3,047(1,262)770
296$ 89,831
24,546(10,941)
17,2552,393

f. Pension and severance cost

¥13,218¥14,719¥12,855$123,084

Notes: 1. The above amounts did not include the social security taxes paid by employees.
2. Service costs of consolidated subsidiaries using the simplified method were included in service cost above.
3. Service costs above included service cost for the multi-employer pension plan amounting to ¥877 million (US$ 8,166 thousand), ¥1,096 millionand ¥907 million for the years ended March 31, 2005, 2004 and 2003, respectively, for which plan assets could not be allocated to each specificparticipating employer.
4. Service costs above included contributions for the defined contribution plans of consolidated foreign subsidiaries amounting to ¥1,476 million(US$13,744 thousand), ¥1,549 million and ¥1,579 million for the years ended March 31, 2005, 2004 and 2003, respectively.
5. In addition to the pension and severance cost above, additional retirement payments amounting to ¥371 million (US$ 3,455 thousand), ¥120 million and ¥137 million were made for the years ended March 31, 2005, 2004 and 2003, respectively. For the year ended March 31, 2005, ¥92
million (US$857 thousand) out of the entire additional retirement payment was included in “selling, general and administrative expenses,” and theremaining ¥279 million (US$2,598 thousand) was reflected as “loss on discontinued operations” in the accompanying consolidated statement ofincome, whereas the entire additional retirement payment was included in “selling, general and administrative expenses” in the accompanying
consolidated statements of income for the years ended March 31, 2004 and 2003.

Actuarial assumptions used in computation of pension and severance liability were as follows:a. Attribution of expected benefit obligation
The straight-line method
b. Discount rate
2.0%–2.5%
c. Expected rate of return on plan assets
1.4%–4.0%
d. Amortization of actuarial gain/loss
Primarily 18 years (Amortized by the straight-line
method starting from the following fiscal year basedon the periods shorter than the average remaining
service periods of the eligible employees)e. Amortization of prior service cost
14 to 18 years (The fiscal year 2004: 14 years)

50 FUJI HEAVY INDUSTRIES LTD.

12. Income Taxes
The Company and consolidated subsidiaries were subject to a number of taxes based on income, whichin aggregate, resulted in normal statutory income tax rates of approximately 40.5% for the year ended
March 31, 2005 and 41.8% for the fiscal years ended March 31, 2004 and 2003.
A reconciliation of the statutory income tax rate in Japan to the Company’s effective income tax rate
for the fiscal years ended March 31, 2005, 2004 and 2003 was as follows:

Statutory income tax rate in Japan
Increase (reduction) in taxes resulting from:
Changes in valuation allowance and tax benefit realized fromthe losses carried forward
Adjustment of past corporate income taxes
and corporate income taxes refundable
Adjustment of past corporate income taxes
of a consolidated subsidiary in the United StatesSpecial deduction on corporate income taxes
Entertainment and other non-deductible expenses
Effect of change in the statutory income tax rate in Japan
Amortization of consolidation adjustments
Other
Effective income tax rate

2005

2004

2003

40.5%

41.8%

41.8%

19.8

1.6

(8.1)

(1.6)

(5.3)

(6.3)

15.8
(5.4)
1.6
—
(59.0)
0.9

—
(4.9)
0.9
1.3
(3.4)
(0.7)

—
(3.1)
2.5
1.5
—
0.6

12.6%

31.3%

28.9%

Significant components of the deferred tax assets and liabilities as of March 31, 2005 and 2004 wereas follows:
Millionsof yenMillionsof yenThousands of
U.S. dollars

2005

2004

2005

¥ 7,628
4,444
22,473
11,075
6,177
7,637
6,552
6,016
7,760
15,204¥ 4,696
7,660
22,294
10,631
6,924
8,049
6,477
—
—
18,979$ 71,031
41,382
209,265
103,12957,51971,11561,011
56,02072,260141,578

94,966(11,890)

85,710(9,202)

884,310(110,718)

Total deferred tax assets, net of valuation allowance

83,07676,508773,592

Deferred tax liabilities:
Depreciation/amortization expenses
Net unrealized holding gains on investment securities
Revaluation reserve for land
Advanced depreciation reserve
Other(15,261)(11,496)
(478)
(468)
(2,455)(11,946)(6,999)(478)(468)(1,745)(142,108)(107,049)(4,451)(4,358)(22,861)

Total deferred tax liabilities(30,158)(21,636)(280,827)

Net deferred tax assets¥52,918¥54,872$492,765

Deferred tax assets:
Deficit carryforwards
Unrealized gain on sales of inventories
Accrued pension and severance liabilities
Accrued expenses
Accrued bonus
Accrued warranty claims
Unrealized gain on sales of property, plant and equipment
Loss on devaluation of inventories
Impairment loss on fixed assets of consolidated foreign subsidiary
Other
Total deferred tax assets
Valuation allowance

Annual Report 2005

51

Net deferred tax assets were included in the following accounts in the accompanying consolidatedbalance sheets.
Millionsof yenCurrent assets—Deferred tax assets
Investments and other assets—Deferred tax assets
Current liabilities—Other current liabilities
Long-term liabilities—Other long-term liabilities
Total net deferred tax assets

Millionsof yenThousands of
U.S. dollars

2005

2004

2005

¥34,859
24,481—(6,422)¥34,149
29,7070(8,984)$324,602
227,964—(59,801)¥52,918¥54,872$492,765

Effective for years commencing on April 1, 2004 or later, according to the revised local tax law, income
tax rates for enterprise taxes have been reduced as a result of introducing the “Corporation Size-basedEnterprise Tax System” for enterprises. Based on the change of income tax rates, for calculation ofdeferred tax assets and liabilities, the Company and consolidated domestic subsidiaries used the aggregate statutory income tax rates of 41.8% for current items and 40.5% for non-current items as of March
31, 2003 and 40.5% for both current and non-current item as of March 31, 2004 and 2005.
As a result of the change in the aggregate statutory income tax rates, net deferred tax assets
decreased by ¥640 million and income taxes—deferred on the consolidated statement of income, net
unrealized holding gains on securities, revaluation reserve for land and minority interest increased by¥728 million, ¥73 million, ¥8 million and ¥7 million, respectively, in the fiscal year 2003.

13. Shareholders’ Equity
Under the Commercial Code of Japan, the entire amount of the issue price of shares is required to beaccounted for as capital, although a company may, by resolution of its Board of Directors, account for an
amount not exceeding one-half of the issue price of the new shares as additional paid-in capital, which isincluded in capital surplus.
The Commercial Code provides that an amount equal to at least 10% of cash dividends and othercash appropriations shall be appropriated and set aside as a legal earnings reserve until the total amountof legal earnings reserve and additional paid-in capital equals 25% of common stock. (The total amountof legal earnings reserve and additional paid-in capital of the Company has reached 25% of common
stock, and therefore the Company is no longer required to provide legal earnings reserve.) The legal earnings reserve and additional paid-in capital may be used to eliminate or reduce a deficit by resolution of
the shareholders’ meeting or may be capitalized by resolution of the Board of Directors. On condition
that the total amount of legal earnings reserve and additional paid-in capital remains equal to or exceeds
25% of common stock, they are available for distribution by the resolution of the shareholders’ meeting.
Legal earnings reserve is included in retained earnings in the accompanying financial statements.
The maximum amount that the Company can distribute as dividends is calculated based on the nonconsolidated financial statements of the Company in accordance with the Commercial Code.
In accordance with customary practice in Japan, the appropriations are not accrued in the financial
statements for the period to which they relate, but are recorded in the subsequent accounting period
after shareholders’ approval has been obtained. Retained earnings at March 31, 2005 include amounts
representing final cash dividends of ¥3,507 million (US$32,657 thousand), ¥9 (US$0.08) per share,and directors’ bonuses of ¥55 million (US$512 thousand), which were approved at the shareholders’meeting held on June 24, 2005.

52 FUJI HEAVY INDUSTRIES LTD.

14. Selling, General and Administrative Expenses
Selling, general and administrative expenses for the fiscal years ended March 31, 2005, 2004 and 2003
consisted of the following:
Millionsof yenTransportation and packing expenses
Advertisement cost
Sales incentives
Salary and bonus
Research and development expenses
OthersMillionsof yenMillionsof yenThousands of
U.S. dollars

2005

2004

2003

2005

¥ 15,316
47,88433,67050,04752,042
97,797¥ 14,004
53,25733,15052,211
56,405
94,384¥ 14,089
51,27925,64055,44658,78887,992$ 142,620
445,889
313,530
466,030
484,608
910,672¥296,756¥303,411¥293,234$2,763,349

15. Loss on Discontinued Operations
The Company terminated the operation of Bus and Train Production in the fiscal year ended March 31,
2003. Loss on discontinued operations due to the termination of bus production was ¥893 million andtrain production was ¥989 million.
The Company terminated the operation of Trailer, Train parts and other operations of Yusoki Kogyo
K.K. in the fiscal year ended March 31, 2005. Loss on discontinued operations due to the termination ofsuch operations was ¥3,467 million (US$32,284 thousand).

16. Loss on Devaluation of Inventories at the Aerospace Division
In the fiscal year ended March 31, 2005, the Company recorded ¥8,122 million (US$75,631 thousand)loss on the devaluation of inventories because the prospective realization of the “Work in process”
of Aerospace division’s certain project had become uncertain due to a substantial delay in the scheduleof the project.

17. Loss on Compensation to Suppliers
In the fiscal year ended March 31, 2005, the Company recorded a ¥4,174 million (US$38,868 thousand)loss on compensation to suppliers based on the anticipated compensation loss for suppliers’ development costs which arose from the Company’s partial rescheduling of a certain development plan in the
Automotive division.

Annual Report 2005

53

18. Leases(1) Information as lessee
As allowed under Japanese accounting standards, the Company and consolidated subsidiaries in Japanaccount for finance lease which do not transfer ownership of leased assets to lessees as stipulated inlease contracts as operating leases. The “as if capitalized” information of such leases was as follows:
Details of the leased assets:
Millionsof yenMillionsof yenThousands of
U.S. dollars

2005

2004

2005

Machinery, equipment and vehicles
Other tangible assets
Intangibles assets¥1,3252,137
33¥1,465
2,634
435$12,338
19,900307

Accumulated depreciation/amortization

3,495(1,506)4,534(2,268)32,545(14,024)

Net¥1,989¥2,266$18,521

Information related to finance leases for the years ended March 31, 2005, 2004 and 2003 was as follows:

Rent paid
Depreciation/amortization expenses
Interest expense portion

Millionsof yenMillionsof yenMillionsof yenThousands of
U.S. dollars

2005

2004

2003

2005

¥665
599
57

¥757
739
51

¥990
895
54

$6,192
5,578
531

The future minimum lease/rent payments, excluding the portion of interest thereon, as of March 31,
2005 and 2004 were as follows:

Finance leases:
Due within one year
Due after one year
Operating leases:
Due within one year
Due after one year

54 FUJI HEAVY INDUSTRIES LTD.

Millionsof yenMillionsof yenThousands of
U.S. dollars

2005

2004

2005

¥ 526
1,574

¥

581
1,773

$ 4,898
14,657¥2,100¥ 2,354$19,555

¥ 694
3,287

¥ 8,538
50,700$ 6,462
30,608¥3,981¥59,238$37,070

(2) Information as lessor
Capitalized lease assets for finance leases as of March 31, 2005 and 2004 were as follows:
Millionsof yenMillionsof yenThousands of
U.S. dollars

2005

2004

2005

Machinery, equipment and vehicles
Other tangible assets
Intangible assets¥22,595
9,666
1,535

¥22,505
9,353
1,261

$210,401
90,00814,294

Accumulated depreciation/amortization

33,796(16,458)

33,119(14,814)314,703(153,254)¥17,338¥18,305$161,449

Information related to finance leases for the years ended March 31, 2005, 2004 and 2003 was as follows:

Rent received
Depreciation/amortization expenses
Interest income portion

Millionsof yenMillionsof yenMillionsof yenThousands of
U.S. dollars

2005

2004

2003

2005

¥9,417
7,187
1,313¥8,882
6,438
1,579¥9,273
6,236
1,688$87,690
66,924
12,226

The future minimum lease/rent payments receivable, excluding the portion of interest thereon, as ofMarch 31, 2005 and 2004 was as follows:

Finance leases:
Due within one year
Due after one year
Operating leases:
Due within one year
Due after one year

Millionsof yenMillionsof yenThousands of
U.S. dollars

2005

2004

2005

¥ 6,989
13,189¥ 7,663
13,947$ 65,081
122,814¥20,178¥21,610$187,895¥ 4,097
5,163¥ 4,161
4,502$ 38,151
48,077¥ 9,260¥ 8,663$ 86,228

Millionsof yenThousands of
U.S. dollars

19. Contingent Liabilities
Contingent liabilities as of March 31, 2005 and 2004 were as follows:
Millionsof yenTrade notes receivable discounted with banks
As guarantor of the indebtedness from financial institutes

2005

2004

2005

¥
—
40,408¥23
38,031$—
376,273

Annual Report 2005

55

20. Derivative Financial Instruments
In the normal course of business, the Company and consolidated subsidiaries employ derivative financial
instruments, including foreign exchange forward contracts, foreign currency options and interest rate
swaps, to manage their exposure to fluctuations in foreign currency exchange rates and interest rates.
The Company and consolidated subsidiaries do not use derivatives for speculative or trading purposes.
Fair value information of the derivative financial instruments as of March 31, 2005 and 2004 was as follows:(1) Foreign currency contracts:(a) As of March 31, 2005:
Millions of yen
Contract
amountFair value

Foreign exchange forward contracts:
Sell—
U.S. dollar¥100,153 ¥102,393
Euro
8,906
8,979
CAN dollar
6,183
6,438
Buy—
U.S. dollar
20,021
20,274Foreign currency options contracts:
Sell—
Call U.S. dollar
26,843[419]
Call Euro
690[13]
Call CAN dollar
855
[7]
Buy—
Put U.S. dollar
21,626[336]
Put Euro
675[13]
Put CAN dollar
855[6]56 FUJI HEAVY INDUSTRIES LTD.

Valuation
gains (losses)¥(2,240)
(73)
(255)
253

841

(422)

7

6

28

(21)

133

(203)

1

(12)

2

(4)

Thousands of U.S. dollars
Contract
amountFair value

Valuation
gains (losses)$932,610 $953,469
82,931
83,611
57,57559,950$(20,859)(680)(2,375)

186,433

249,958[3,902]
6,425
[121]
7,962
[65]
201,378[3,129]
6,286
[121]
7,962
[56]

188,789

2,356

7,831

(3,929)

65

56

261

(196)

1,238

(1,891)

9

(112)

19

(37)

(b) As of March 31, 2004:
Millions of yen
Contract
amountForeign currency options contracts:
Sell—
Call U.S. dollar¥29,726[398]
Buy—
Put U.S. dollar
29,571[398]

Fair value

Valuation
gains (losses)

¥ 93

¥305

255

(143)

Note: The amounts in [brackets] are the carrying amounts of the premium on the option recorded as other current assets or liabilities.

(2) Interest rate contracts:(a) As of March 31, 2005:
None.
(b) As of March 31, 2004:
Millions of yen

Interest swap contracts:
Receive floating rate
pay fixed rate

Contract
amountFair value

Valuation
gains (losses)¥5,300

¥(74)

¥(74)

The method to determine fair value is based on quotations obtained from financial institutions.
Derivative financial instruments that qualify as a hedge and are accounted for using the deferred hedge
accounting method are excluded from the above table according to the disclosure requirements.

Annual Report 2005

57

21. Segment Information
Information by industry segment
The Company and consolidated subsidiaries operate principally in four industry segments: automobiles,
industrial products, aerospace and other business fields (including eco-related equipment).
A summary of net sales, operating income, assets, depreciation/amortization expenses and capital
expenditures by industry segments for the years ended March 31, 2005, 2004 and 2003 was shown below:
Net sales:
Millionsof yenMillionsof yenMillionsof yenThousands of
U.S. dollars

2005

2004

2003

2005

¥1,319,603
4,069¥1,316,951
3,847¥1,229,807
3,231$12,287,950
37,890Subtotal
Industrial products—
Outside customers
Intersegment

1,323,672

1,320,798

1,233,038

12,325,840

46,814307

42,257333

41,58675

435,925
2,859

Subtotal
Aerospace—
Outside customers
Intersegment

47,121

42,59041,661

438,784

59,43440

56,632
218

63,00976553,441372

Subtotal
Other—
Outside customers
Intersegment

59,47456,85063,085553,813

20,6402,994

23,611
3,284

37,935
3,526

192,196
27,880Subtotal

23,63426,89541,461

220,076

Total
Corporate and elimination

1,453,901(7,410)1,447,133(7,682)

1,379,245(6,908)13,538,513(69,000)

Consolidated total¥1,446,491¥1,439,451¥1,372,337$13,469,513

Millionsof yenMillionsof yenMillionsof yenThousands of
U.S. dollars

2005

2004

2003

2005

Operating income (loss):
Automobiles
Industrial products
Aerospace
Other¥40,942
849
195
(590)

¥52,114(299)(327)(1,482)¥67,307(866)
3,359(3,114)$381,246
7,906
1,816
(5,494)

Total
Corporate and elimination

41,396621

50,006318

66,686835

385,474
5,782

Consolidated total¥42,017¥50,324¥67,521$391,256

Net sales:
Automobiles—
Outside customers
Intersegment

Segment profit or loss:

58 FUJI HEAVY INDUSTRIES LTD.

Assets:
Millionsof yenMillionsof yenMillionsof yenThousands of
U.S. dollars

2005

2004

2003

2005

Total assets:
Automobiles
Industrial products
Aerospace
Other¥1,136,372
57,611
127,548
74,449¥1,139,138
57,432
109,684
76,695¥1,140,525
55,793
101,130
75,360$10,581,730
536,465
1,187,709
693,258

Total
Corporate and elimination

1,395,980(38,521)

1,382,949(33,222)

1,372,808(28,736)

12,999,162(358,702)

Consolidated total¥1,357,459¥1,349,727¥1,344,072$12,640,460

Millionsof yenMillionsof yenMillionsof yenThousands of
U.S. dollars

2005

2004

2003

2005

¥ 64,630
1,999
1,912
2,469

¥ 65,486
2,115
1,712
1,799

¥ 61,743
2,133
1,772
2,248

$ 601,825
18,61517,80422,991

71,010—71,112—

67,896—661,235—

Consolidated total¥ 71,010¥ 71,112¥ 67,896$ 661,235

Capital expenditures for segment assets:
Automobiles
Industrial products
Aerospace
Other¥135,972
1,013
2,614
8,160

¥118,591
852
2,893
5,690

¥111,584
3,551
1,284
3,004

$1,266,151
9,433
24,341
75,985

Total
Corporate and elimination

147,759—

128,026—

119,423—

1,375,910—

Consolidated total¥147,759¥128,026¥119,423$1,375,910

Other significant items:

Depreciation/amortization expenses:
Automobiles
Industrial products
Aerospace
Other
Total
Corporate and elimination

Notes: 1. Definition of business segments:
Business segments are defined based on product line and market.
2. Main products by each business segment:
Business Segment
Main Products
Automobiles
Legacy, Impressa, Forester, R1, R2, Pleo, Samber
Industrial products
Robin engine, power generators, pumps
Aerospace
Aircraft, parts of space-related devices
Other
Garbage collection vehicles, specialized vehicles, real estate leasing
3. All operating costs and expenses are allocated to each business segment.
4. All figures in corporate and elimination represent elimination.
5. “Rail cars” and “buses” are excluded from the main products of the Other segment as a result of the termination of the operation of Bus and Train
Production by March 31, 2003.
6. “Houses” are excluded from the main products of the Other segment as a result of the transfer of the business to a non-consolidated subsidiary,
which is accounted for by the equity method, on April 1, 2004.
7. Changes of accounting policies:(Fiscal 2005)
Method of hedge accounting
As stated in the “Summary of Significant Accounting Policies,” the Company stopped applying hedge accounting from the fiscal year 2005. As
a result of this change, net sales and operating income increased by ¥133 million (US$1,238 thousand) in the Automobile segment and ¥8 million(US$74 thousand) in the Industrial Products segment as compared with the amounts resulting from the application of the previous hedge accounting policy.
(Fiscal 2004)
Revenue recognition
The Company changed the revenue recognition policy for the Aerospace division’s production contracts with the production term exceeding one
year and the amount of each contract exceeding ¥5,000 million, from the delivery basis to the percentage-of-completion method from the fiscal
year ended March 31, 2004. As a result of the change, in the Aerospace segment, net sales increased by ¥4,013 million and operating income
increased by ¥231 million as compared with amounts resulting from the application of the previous policy.
(Fiscal 2003)
None.
8. The introduction of the “Corporation Size-Based Enterprise Tax System”:
As stated in the “Summary of Significant Accounting Policies,” the “Corporation Size-Based Enterprise Tax System” for enterprise taxes was introduced from the fiscal year ended March 31, 2005. As a result, operating expenses increased by ¥881 million (US$8,204 thousand) in the Automobile
segment, ¥46 million (US$428 thousand) in the Industrial Products segment , ¥61 million (US$568 thousand) in the Aerospace segment and ¥21 million (US$196 thousand) in the Other segment, and operating income decreased by the same amount as compared with the previous fiscal year.
Annual Report 2005

59

Information by geographic area
A summary of net sales, operating income and assets by geographic area for the years ended March 31,
2005, 2004 and 2003 was shown below:
Net sales:
Millionsof yenMillionsof yenMillionsof yenThousands of
U.S. dollars

2005

2004

2003

2005

¥ 886,793
241,860¥ 840,330
263,260¥ 786,257
295,900$ 8,257,687
2,252,165

Subtotal
North America—
Outside customers
Intersegment

1,128,653

1,103,590

1,082,157

10,509,852

544,7532,027

590,271
1,692

582,326
1,971

5,072,661
18,875

Subtotal
Other—
Outside customers
Intersegment546,780

591,963584,297

5,091,536

14,945
391

8,850
344

3,754
231

139,166
3,641

Net sales:
Japan—
Outside customers
Intersegment

Subtotal

15,336

9,194

3,985

142,807

Total
Corporate and elimination

1,690,769(244,278)

1,704,747(265,296)

1,670,439(298,102)

15,744,195(2,274,682)

Consolidated total¥1,446,491¥1,439,451¥1,372,337$13,469,513

Millionsof yenMillionsof yenMillionsof yenThousands of
U.S. dollars

2005

2004

2003

2005

Operating income:Japan
North America
Other¥40,517(6,678)367¥37,670
1,071
259¥57,136
15,824
127$377,288(62,185)
3,418

Total
Corporate and elimination

34,206
7,811

39,00011,32473,087(5,566)

318,52172,735

Consolidated total¥42,017¥50,324¥67,521$391,256

Segment profit or loss:

60 FUJI HEAVY INDUSTRIES LTD.

Assets:
Millionsof yenMillionsof yenMillionsof yenThousands of
U.S. dollars

2005

2004

2003

2005

Assets:Japan
North America
Other¥1,080,303
307,858
2,439¥1,077,341
309,8422,102¥1,020,224
373,125
1,141$10,059,624
2,866,729
22,711

Total
Corporate and elimination

1,390,600(33,141)

1,389,285(39,558)

1,394,490(50,418)

12,949,064(308,604)

Consolidated total¥1,357,459¥1,349,727¥1,344,072$12,640,460

Notes: 1. Geographic areas are based on geographical proximity.
2. Principal countries or districts in each geographic area:
North America: United States and Canada
Other:
Europe3. All operating costs and expenses are allocated to each segment.
4. All figures in corporate and elimination represent elimination.
5. Changes of accounting policies:(Fiscal 2005)
Method of hedge accounting
As stated in the “Summary of Significant Accounting Policies,” the Company stopped applying hedge accounting from the fiscal year 2005. As
a result of this change, net sales and operating income increased by ¥141 million (US$1,313 thousand) in the Japan segment as compared withamounts resulting from the application of the previous hedge accounting policy.
(Fiscal 2004)
Revenue recognition
The Company changed the revenue recognition policy for the Aerospace division’s production contracts with the production term exceeding one
year and the amount of each contract exceeding ¥5,000 million, from the delivery basis to the percentage-of-completion method from the fiscal
year ended March 31, 2004. As a result of the change, in the Japan segment, net sales increased by ¥4,013 million and operating income
increased by ¥231 million as compared with amounts resulting from the application of the previous policy.
(Fiscal 2003)
None.
6. The introduction of the “Corporation Size-Based Enterprise Tax System”:
As stated in the “Summary of Significant Accounting Policies,” the “Corporation Size-Based Enterprise Tax System” for enterprise taxes was introduced from the fiscal year ended March 31, 2005. As a result, operating expense increased by ¥1,009 million (US$9,396 thousand) in the Japan
segment and operating income decreased by the same amount as compared with the previous fiscal year.

Overseas sales
Overseas sales for the years ended March 31, 2005, 2004 and 2003 were summarized as follows:
Millionsof yenMillionsof yenMillionsof yenThousands of
U.S. dollars

2005

2004

2003

2005

Overseas sales:
North America
EuropeOther¥ 593,249
117,826
108,357

41.0% ¥ 624,372
8.2
101,049
7.5
86,113

43.4% ¥ 622,783
7.0
72,841
6.0
77,453

45.4% $ 5,524,248
5.3
1,097,178
5.6
1,009,005

Total¥ 819,432

56.7% ¥ 811,534

56.4% ¥ 773,077

56.3% $ 7,630,431

Consolidated net sales¥1,446,491 100.0% ¥1,439,451 100.0% ¥1,372,337 100.0% $13,469,513

Notes: 1. Geographic areas are based on geographical proximity.
2. Principal countries or districts in each geographic area:
North America: United States and Canada
Europe:Germany, Switzerland and England
Other:
Australia
3. Overseas sales are sales outside of Japan by the Company and consolidated subsidiaries.
4. Changes of accounting policies:(Fiscal 2005)
Method of hedge accounting
As stated in the “Summary of Significant Accounting Policies,” the Company stopped applying hedge accounting from the fiscal year 2005. As aresult of this change, net sales increased by ¥56 million (US$521 thousand) in the North America segment and ¥85 million (US$792 thousand) inthe Europe segment as compared with amounts resulting from the application of the previous hedge accounting policy.
(Fiscal 2004)
None.
(Fiscal 2003)
None.

Annual Report 2005

61

Independent Auditors’ Report

To the Board of Directors of
FUJI HEAVY INDUSTRIES LTD.
We have audited the accompanying consolidated balance sheets of FUJI HEAVY INDUSTRIES LTD. (“the Company”) andconsolidated subsidiaries as of March 31, 2005 and 2004, and the related consolidated statements of income, shareholders’equity and cash flows for each of the three years in the period ended March 31, 2005, expressed in Japanese yen. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to independently
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 weplan and perform the audit to obtain reasonable assurance about whether the financial 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 consolidated
financial position of the Company and subsidiaries as of March 31, 2005 and 2004, and the consolidated results of their operations and their cash flows for each of the three years in the period ended March 31, 2005, in conformity with accounting principles generally accepted in Japan.
Without qualifying our opinion, we draw attention to the following.
(1) As discussed in Note 2 to the consolidated financial statements, the Company stopped applying the hedge accounting forforeign exchange contracts in fiscal year 2005.
(2) As discussed in Note 2 to the consolidated financial statements, the Company changed the method of the revenue recognition policy for Aerospace Division’s production contracts in fiscal year 2004.
The U.S. dollar amounts in the accompanying consolidated financial statements with respect to the year ended March 31,
2005 are presented solely for convenience. Our audit also included the translation of yen amounts into U.S. dollar amounts
and, in our opinion, such translation has been made on the basis described in Note 1 to the consolidated financial statements.

Tokyo, Japan
June 24, 2005

62 FUJI HEAVY INDUSTRIES LTD.

Consolidated Subsidiaries and Affiliates (As of March 31, 2005)

JAPAN
Fuji Robin Industries Ltd. (58.1%)
Manufacture, service, and sales of agricultural/forestry equipment,
engines, fire pumps, and related parts
http://www5.mediagalaxy.co.jp/fujirobin/

Fuji Machinery Co., Ltd. (69.5%)
Manufacture and sales of automobile parts and industrial product parts
http://www.fuji-machinery.co.jp/

Ichitan Co., Ltd. (51.0%)
Manufacture and sales of forged automobile/industrial product parts
http://www.ichitan.co.jp/

Kiryu Industrial Co., Ltd. (97.5%)
Manufacture of Subaru specially equipped automobiles and distribution of Subaru automobile parts
http://www.kiryu-kougyo.co.jp/

OVERSEAS
Subaru of America, Inc. (100.0%)
and 10 subsidiaries
Subaru Plaza, 2235 Route 70 West, Cherry Hill, NJ 08002, U.S.A.
Phone: +1-856-488-8500
Fax: +1-856-488-3137
Distribution and sales of Subaru automobiles and parts
http://www.subaru.com/

Fuji Heavy Industries U.S.A. Inc. (100.0%)
and one subsidiaryc/o Subaru of America, Inc.
Subaru Plaza, 2235 Route 70 West, Cherry Hill, NJ 08002, U.S.A.
Phone: +1-856-488-8532
Fax: +1-856-488-9279
Distribution and sales of Subaru automobiles and parts toforeign countries
Subaru Research & Development, Inc.

Subaru Kosan Co., Ltd. (100.0%)
Sales and leasing of real estate and travel agency operations

Subaru UI Co., Ltd. (100.0%)
Refurbishment, distribution, and sales of used Subaru automobiles
http://www.subaru-ui.jp/

FICS Corporation (100.0%)
Distribution and service of Volvo automobiles

Subaru Finance Co., Ltd. (100.0%)
Leasing and rental of Subaru automobiles and equipment andcredit, financing, accounting service, and sales of insurance
http://www.subaru-finance.co.jp/

Yusoki Kogyo K.K. (100.0%)
Manufacture and sales of parts for crane trucks and aerospace
http://www.yusoki.co.jp/

TOKYO SUBARU INC. (100.0%)
and 39 other dealerships
Distribution, sales, and service of Subaru automobiles
http://www.tokyo-subaru.co.jp/3995 Research Park Drive, Ann Arbor, MI 48108, U.S.A.
Phone: +1-734-623-0075
Fax: +1-734-623-0076
Research and development of automobiles

Subaru of Indiana Automotive, Inc. (100.0%)
and one subsidiary
5500 State Road 38 East, Lafayette, IN 47905, U.S.A.
Phone: +1-765-449-1111
Fax: +1-765-449-6952
Manufacture of Subaru automobiles
http://www.subaru-sia.com/

Subaru of Taiwan Co., Ltd. (80.0%)
8F-1, No. 100, Sec. 2, Chung Hsiao E. Rd.,
Taipei, Taiwan
Phone: +886-2-8866-6630
Fax: +886-2-2832-4021
http://www.subaru-sot.com.tw/

Subaru Canada, Inc. (100.0%)
and one subsidiary
560 Suffolk Court, Mississauga, Ontario, Canada L5R 4J7
Phone: +1-905-568-4959
Fax: +1-905-568-8087
Distribution and sales of Subaru automobiles and parts
http://www.subaru.ca/

Subaru Europe N.V./S.A. (100.0%)
Hermesstraat 6C, 1930 Nossegem-Zaventem, Belgium
Phone: +32-2-714-0400
Fax: +32-2-725-7792
Distribution, sales and marketing of automobiles, parts andaccessories

Robin Manufacturing U.S.A., Inc. (60.0%)1201 Industrial Road, Hudson, WI 54016, U.S.A.
Phone: +1-715-381-5902
Fax: +1-715-381-5901
Manufacture and sales of general-purpose, four-wheel buggy
and golf cart engines

Annual Report 2005

63

Investor Information (As of March 31, 2005)

Head Office

Major Shareholders

Subaru Building, 7-2, Nishi-Shinjuku 1-chome, Shinjuku-ku,
Tokyo 160-8316, Japan
Phone: +81-3-3347-2111
Fax +81-3-3347-2338

Subaru Building, 7-2, Nishi-Shinjuku 1-chome, Shinjuku-ku,
Tokyo 160-8316, Japan
Phone: +81-3-3347-2655
Fax: +81-3-3347-2295

General Motors of Canada Limited
Japan Trustee Services Bank, Ltd.
The Chase Manhattan Bank, N.A. London
The Master Trust Bank of Japan, Ltd.
Mizuho Corporate Bank, Ltd.
Depositary Nominees Inc.
Nippon Life Insurance Company
Suzuki Motor Corporation
Sompo Japan Insurance Inc.
Northern Trust Company (AVFC) Sub-account American Client

Established

Stock Listings

July 15, 1953

Tokyo Stock Exchange

Paid-in Capital

Transfer Agent¥153,795 million

Mizuho Trust & Banking Co., Ltd.
2-1, Yaesu 1-chome, Chuo-ku, Tokyo 103-8670, Japan

Investor Relations Office

Number of Shareholders
Web Site Address

46,007

http://www.fhi.co.jp/english/

Number of Common Stock Issued and Outstanding
782,865,873

Domestic Manufacturing Divisions
Gunma Manufacturing Division (Automobile Division)
Utsunomiya Manufacturing Division (Aerospace Division and
Eco technologies Division)
Saitama Manufacturing Division (Industrial Products Division)

Quarterly Common Stock Price Range (Tokyo Stock Exchange)
(Yen)
1200
1000
800
600
400
200
0

FY

2001

2002

2003

2004

2005

High

¥925

¥944

¥712

¥668

¥627

Low

608

471

362

414

462

64 FUJI HEAVY INDUSTRIES LTD.

Annual Report 2005
F o r t h e y e a r e n d e d M a r c h 31 , 2 0 0 5

FUJI HEAVY INDUSTRIES LTD.
Annual Report 2005

Subaru Building, 7-2, Nishi-Shinjuku 1-chome,
Shinjuku-ku, Tokyo 160-8316, Japan

http://www.fhi.co.jp/english/

Printed on recycled paper in Japan

A Revolution in Motion