ANNUAL REPORT 2003 For the year ended March 31, 2003 AKEBONO BRAKE INDUSTRY CO., LTD. Profile Akebono Brake Industry Co., Ltd. (hereafter "Akebono"), has been progressively developing brake friction materials and related products ever since it first began manufacturing woven linings for drum brakes and clutch facings in 1929. We currently supply products on an original equipment manufacturing (OEM) basis to almost all Japanese automakers. Akebono has a dominant market share in Japan, and its product range spans items for automobiles, motorbikes, rolling stock, forklifts and agricultural equipment. In recent years, our efforts have been directed at building a framework to become a global supplier of friction materials in Japan, North America and Europe, by applying our core technology "Friction and Vibration, their Control and Analysis," which we developed as an expert in brakes. As a global company, we are demonstrating our presence through the speedy supply of high-quality products that are satisfying automakers' needs worldwide, and the development of environmental conservation technologies aimed at preserving a better global environment for future generations. Corporate Policies ●Customer Needs First ●Technology Realignment ●Establishing a Tri-polar Network Corporate Mission Through Friction and Vibration, their Control and Analysis, We are determined to Protect, Grow and Support Every Individual Life. ※Tentative translation from original Japanese. Akebono's Declaration for the 21st Century Contents Akebono's Declaration for the 21st Century was made as a guide to clarify ■Financial Highlights 02 the Akebono Group's orientation and direction for the 21st century. ■To Our Shareholders and Investors 03 ■Interview with CEO 05 ■Operating Status by Region 09 We will continue to create value long into the 21st century, pursuing our ■Environmental Conservation Activities 13 "Corporate Mission." ■Financial Section We hereby affirm that we will endeavor to: Five-year Summary 14 1. Recognize the real value of what we create and provide Management Discussion and Analysis 15 2. Assure our own indispensability by continuously creating new value Consolidated Balance Sheets 19 3. Accomplish our tasks with speed and the courage of one's own convictions Consolidated Statements of Operations 21 without fear of failure Consolidated Statements of Cash Flows 22 4. Achieve our aspirations through the pride of each and every individual. Consolidated Statements of Shareholders' Equity 23 Notes to Consolidated Financial Statements 24 Independent Auditor's Report 29 ■Directors and Officers 30 ■Investor Information 31 Forward-looking Statements Current plans, projections, strategies and business performance and other statements reported herein which are not based on historic facts represent forecasts made under Akebono's assumptions and views, based on information available at the time of preparing this Annual Report. These statements are therefore exposed to risks and uncertainties, including but not limited to those associated with the economic climate surrounding Akebono's business domain, trends in market competition, exchange rate, tax system and various institutions. Please note that the actual business performance may differ significantly from Akebono's forecasts, due to various factors. Financial Highlights AKEBONO BRAKE INDUSTRY CO., LTD., AND CONSOLIDATED SUBSIDIARIES Years ended March 31, 2003 and 2002 Millions of yen Thousands of US dollars 20032002 2003 Fiscal year Net sales ￥126,595 ￥126,655 $1,054,958 Operating income 8,453 5,560 70,442 Net income (loss) (6,318) 99 (52,650) Operating cash flow 8,035 12,276 66,958 Year-end Total assets 143,226 141,230 1,193,550 Shareholders' equity 14,502 21,111 120,850 Interest-bearing liabilities 63,855 71,977 532,125 Yen US dollars Per share data Net income (loss) ￥(67.25) ￥1.05 ＄(0.56) Cash dividends 1.00 1.00 0.01 Note: Yen amounts have been translated into US dollars, for convenience only, at ¥120 = $1, the approximate exchange rate on March 31, 2003. Net sales / Ratio of operating income to sales 1999 1.0 120,679 2000 3.6 121,080 2001 4.6 126,450 2002 4.4 126,655 Net sales (Millions of yen) 2003 6.7 126,595 Ratio of operating income to sales (%) Net income (loss) / Net income per share (loss) 1999 (60.98) (5,713) 2000 (9.84) (924) 2001 (14.54) (1,367) 2002 1.05 99 Net income (Millions of yen) 2003 (67.25) (6,318) Net income per share (%) Total assets / Shareholders' equity 1999 137,542 16,999 133,728 2000 15,495 2001 129,536 14,490 141,230 2002 21,111 Total assets (Millions of yen) 2003 143,226 Shareholders' equity (%) 14,502 ANNUAL REPORT 2003 02 To Our Shareholders and Investors First Year of Three-year Management Plan "Forward 30" Unfolds Smoothly 03 ANNUAL REPORT 2003 Akebono Posts Record-high Operating Income, Ridding Ourselves of the "Negative Legacy" due to Effects of Business Streamlining, etc. Resolutely and Working on Improvements in Our Financial Constitution for the Future Akebono is currently pushing ahead with its three-year medium-term management plan "Forward 30" effective April 2002, in pursuit of Akebono posted record-high operating income but faced a fulfilling its long-term goal of securing a 30% share of the global OEM consolidated net loss amounting to 6,318 million yen for the year market for disc brake pads, dubbed "Global 30." ended March 2003, having written off a massive unrealized loss on its In the first year of "Forward 30" (the year ended March 2003), the real estate business as an extraordinary loss. economic climate in Japan was harsh: despite some improvements in The real estate business had extended welfare facilities to employees corporate earnings, personal consumption slumped due to the impact since the establishment of a subsidiary in 1969. In the subsequent of widespread deflation, falling stock prices, uncertainty in years, however, it suffered a massive unrealized loss due to its failure employment and decreasing income. to take prompt action against non-performing assets, which swelled In the automotive industry, domestic production exceeded the 10 following the burst of Japan's economic bubble. Our original plan million mark for the first time in two years, totaling 10.32 million units, was to deal with this problem after fulfilling the aforementioned a year-on-year increase of 5.3%. This was attributable to the medium-term management plan "Forward 30." However, we relatively solid performance of exports of finished vehicles targeting acknowledged that the drive to globalize our business could not be North America and Asia and sales of small cars in Japan, both of financed from a long-term perspective, without considering the impact which increased. Meanwhile, the business environment is of the real estate business on Akebono's rating and stock price, and undergoing dramatic changes, as exemplified by the acceleration of the means to finance dividend payments. Based on the judgment corporate restructuring across group boundaries, and the pursuit of that Akebono's business performance (operating income) in the year environmentally friendly technological innovations. ended March 2003 was not a one-off condition, we decided to write The parts industry is no different from the automotive sector in terms off the loss within the current fiscal year (ending March 2004) by of globalization, diminishing borders and falling prices. Competition ourselves, rather than waiting idly until accounting for the impairment to survive the major shakeup remains fierce. of assets becomes mandatory in two years time. We firmly believe In such a climate, Akebono's non-consolidated net sales amounted to that improvements in our financial constitution made by ridding 98,277 million yen, up 3,451 million yen from the previous year. ourselves of such "negative legacy" will help Akebono globalize its Consolidated net sales totaled 126,595 million yen, which was more business significantly in the future. or less the same as in the previous year. This was attributable to We will continue executing the three-year medium-term management adjustments made to the accounting period of its North American plan "Forward 30" steadily, in an effort to boost our competitiveness consolidated subsidiary Akebono Corporation (North America), based on a global scale. on which only nine months' data was included in the consolidated We look forward to your kind understanding and further support. closing of accounts. On the income side, Akebono's consolidated operating income was a record-high 8,453 million yen, up 2,893 million yen from the previous year, owing to the strong performance of North American operations, the large volume of contracts targeting North America, the spin-off of plants in Japan, the execution of integrated production, the revision of personnel and remuneration schemes, the reduction of costs and other radical endeavors. Hisataka Nobumoto President, CEO & Chairman of the Board ANNUAL REPORT 2003 04 Interview with CEO Please explain Akebono's efforts in concrete terms. Promotion of the Cost Revolution, Involving Radical Innovation of Operational Procedures Among the numerous measures featured in "Forward 30," the cost revolution may be regarded as the lifeline in global competition. The plan involves the radical innovation of operational procedures, including the conventional domestically-oriented comprehensive revision of designs and patterns of thinking and behavior may drawings from a new perspective, generate profits in the short run but which goes far beyond cost reduction