NIPPON PAINT CO., LTD. - Morningstar

Year Ended March 31, 2002

A N N U A L R E P O R T 2 0 0 2

NIPPON PAINT CO., LTD.

Brought to you by Global Reports

Nippon Paint was founded in Tokyo in March 1881. In the subsequent 121 years, we have grown to become the

leading company in Japanese paints and coatings industry, and our growth continues today. We have developed

paints and coatings for a broad range of industrial sectors, including automobiles, buildings, industrial products,

and ships.

We employ two basic precepts in the conduct of our business to further our growth in the future as a global

company, i.e., “Grow and progress globally as a specialty chemical company that supplies high-value paint

coatings,” and “Build a worldwide cachet as an environment-conscious company that contributes to protecting the

environment and reducing the consumption of resources and energy.”

In addition, we are making every effort to contribute to the welfare of the community and the public based on

working for the shared prosperity of all our stakeholders, including our stockholders, customers, employees, and

the residents of our community.

The Nippon Paint consists of 19 manufacturing and sales companies in Japan, four companies in the United

States, three companies in Europe, and 10 manufacturing and sales companies in Asia. Every one of these

companies is engaged in the manufacture or sale of the finest products in regions where there is demand for them.

C o n t e n t s

Financial Highlights ................................ 1

Message from the Management .............. 2

New Business Plan ................................. 4

A New R&D Structure ...................... 5

Developing Eco-Products ................ 6

Environmental Protection Activities ... 6

Review of Operations .............................. 7

Financial Statements ............................ 13

Company Data ...................................... 24

Subsidiaries and Affiliates .......................... 25


01

NIPPON PAINT Co., Ltd.

ConsolidatedThousands of

Millions of yen U.S. dollars (Note)

For the years ended 31st March 2002 2001 2002

Net sales ....................................................................................................... ¥192,467 ¥199,673 $1,444,405Operating income .......................................................................................... 7,626 10,957 57,238Income before income taxes ......................................................................... 2,841 10,814 21,320Net income ................................................................................................... 813 5,679 6,101Capital expenditure ....................................................................................... 5,886 4,584 44,173Depreciation & amortization .......................................................................... 5,610 5,451 42,101Per share of common stock (Yen or U.S. dollars)

Net income ................................................................................................ ¥ 3.07 ¥ 21.40 $ 0.023Cash dividends .......................................................................................... 6.00 6.00 0.045

As of 31st March

Shareholders’ equity .................................................................................. ¥ 92,958 ¥ 92,223 $ 697,620Total assets ............................................................................................... 224,260 227,342 1,683,002

Non-ConsolidatedThousands of

Millions of yen U.S. dollars (Note)

For the years ended 31st March 2002 2001 2002

Net sales ....................................................................................................... ¥123,044 ¥127,882 $ 923,407Income before income taxes ......................................................................... 983 8,104 7,377Net income ................................................................................................... 564 5,111 4,233Per share of common stock (Yen or U.S. dollars)

Net income ................................................................................................ ¥ 2.13 ¥ 19.26 $ 0.016Cash dividends .......................................................................................... 6.00 6.00 0.045

As of 31st March

Shareholders’ equity ...................................................................... ¥ 85,963 ¥ 87,285 $ 645,126Total assets.................................................................................... 167,532 172,684 1,257,276

Note: U.S. dollar amounts represent translations from yen, for convenience only, at the rate of ¥133.25 = U.S.$1 in effect on 31st March, 2002.

FINANCIAL HIGHLIGHTS

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215.

0

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197.

9

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198.

2

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199.

7

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192.

5

Net Sales(¥ billions)

'98

89.1

'99

84.5

'00

88.8

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92.2

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93.0

Shareholders' Equity(¥ billions)

'98

233.

3

'99

222.

4

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222.

7

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227.

3

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224.

3

Total Assets(¥ billions)


Business Climate

The three-year management plan for Nippon Paint and its group

companies concluded as of the end of Fiscal 2001, ended March

31, 2002. We spared no effort to increase our profitability, but in-

stead met with the harsh reality of year-on-year declines in net sales,

operating income, and net income. Consolidated sales slid 3.6%

from the year before to ¥192,467 million (US$1,444.4 million). Op-

erating income tumbled 30.4% during the same period to ¥7,627

million (US$57.2 million), and net income after taxes plunged 85.7%

to ¥813 million (US$ 6.1 million).

The primary factor behind the decline in consolidated sales was

the general economic stagnation, including plummeting corporate

capital investment stemming from the prolonged slump in the

economy of Japan and other countries, and the downturn in indi-

vidual consumption. In turn, this resulted in a sharp dip in both the

volume and value of our shipments from the previous year.

Conditions were particularly harsh during the second half of the

year. Specifically, there was a significant drop in the number of ve-

hicles produced by domestic carmakers, one of our most important

customers. Additional factors were the slump in public works projects

and the slide in housing construction starts.

A breakdown of group companies in Japan and overseas shows

that the performance of our joint venture companies in Asia contin-

ued to grow from the year before. The performance of automotive

subsidiaries in Europe and the U.S. was down during the same pe-

riod, however, and sales in Japan fell year on year due to tottering

demand.

To survive under these circumstances in such a severe business

climate, we launched a three-year management plan in April 1999

based on reforming our financial foundation to achieve greater prof-

its. The plan ended during the year under review. During those three

years, we worked to develop new products with high added value,

focusing on environment-friendly products in a multitude of busi-

ness sectors, conduct aggressive sales activities, and cut costs.

The business climate changed at a rate far faster than we had

anticipated in our forecasts, however, and we were regrettably un-

able to achieve our profit targets. Further, the decline in earnings for

the year was the result of recording the valuation losses on our

investment securities portfolio resulting from a sagging domestic stock

market.

Based on our performance described in the foregoing, our earn-

ings per share (EPS) for the term fell to ¥3.07 from ¥21.40 during

the year before, and our return on equity (ROE) fell to 0.88% from

6.28% during the term before.

Appropriation

During the year under review, our income was down sharply from

that of the previous year. Despite this, however, we paid the same

dividend of ¥6.00 per share (US$ 0.045) as we did during the previ-

ous year.

We are allocating funds to internal reserves to beef up our finan-

cial foundation in the future and for investment in R&D activities and

production facilities as part of our efforts to improve corporate and

stockholder value from a long-term perspective.

New Business Plan

Nippon Paint group is proceeding with the implementation of a man-

agement plan based on a financial foundation contributing to greater

profits in the future so that we may deliver exceptional products to

the world’s markets and achieve global growth and expansion. The

year under review was the final year of the group’s three-year man-

agement plan launched in April 1999 to enhance our profitability

and streamline our corporate structure. In particular, we focused

our efforts on achieving higher operating profit and ROE, reducing

group personnel, and slashing interest-bearing debt.

As a result, we whittled our workforce by 4,237 people, an 11.5%

cutback, since the initiation of the plan. We also slashed interest-

bearing debt by ¥47.6 billion, or 26.5%, during the three years of

the plan. In both of these areas, we generally achieved the objec-

tives of our plan.

In the future, our group will conduct business based on two fun-

damental precepts, that is, “Grow and progress globally as a spe-

cialty chemical company that supplies high-value paint films,” and

“Build a worldwide cachet as an environment-conscious company

that contributes to protecting the environment and reducing the con-

sumption of resources and energy.”

02


MESSAGE FROM THE MANAGEMENT


To achieve these objectives, we have formulated a new manage-

ment plan slated to conclude in March 2006. This management

plan includes 1) creating new added value for the customer, 2) re-

forming our cost structure, 3) strengthening our financial structure,

and 4) implementing overseas strategy.

Environmental Activities

Global concerns in protecting the environment and conserving re-

source energy have grown stronger in recent years, and entities on

the demand side are increasing their opportunities for green pro-

curement.

Our corporate group is implementing Eco Action 21, which is

based on developing environment-friendly products and conduct-

ing activities to lessen the environmental burden with the objective

of becoming a trusted eco-company that puts an emphasis on the

importance of the environment, safety, and health in all stages of the

production process.

In addition, Nippon Paint has renewed the registration for the

ISO 14001 international certification standards for environmental

protection activities. The group’s manufacturing companies have

currently completed the evaluation registration, and the sales com-

panies are preparing for acquiring the certification.

Policies for the Future

We fully expect that business conditions will remain harsh in the

future, particularly in the Japanese and Western markets, and that

the direction of economic trends will be uncertain. Therefore, we

forecast that a difficult business climate will continue for our corpo-

rate group, characterized by declining sales prices caused by inten-

sified competition, with raw materials prices governed by exchange

rate and crude oil price trends.

It is our intention to further strengthen our technical and product

capabilities and reform our business systems to achieve the targets

of our new management plan slated to run until the fiscal year end-

ing March 2006. To achieve our targets, we will significantly raise

the bar for our consolidated sales targets in the fiscal year ending

March 2003 to ¥196,500 million, a 2% rise from the year under

Hiroshi Fujii

Chairman

Teruyoshi Fujishima

President

03


review, as well as a significant boost for the target for net income

after tax.

We at Nippon Paint will continue to make every effort in the

future to make our objective contributing to the benefit of society

through such efforts as improving profits with more efficient opera-

tions and implementing environmental measures. We sincerely hope

that all our stockholders and customers understand our efforts and

will lend their cooperation to them.


The year under review marked the final year of our three-year busi-

ness plan. As we were not able to achieve our profit goals, we have

inaugurated a new business plan “2005 – the Mid-Term business

Plan for Reform” to run from April 2002 to the fiscal year ending

March 2006. We will strive to conduct even more painstaking efforts

to reform our business structure, cut costs, and rationalize our struc-

ture in the face of harsh business conditions.

Our target for ROE is 10%. We view this as an essential condi-

tion for continuing our growth in the future as a blue-chip global

company. We believe that it will be impossible to achieve this target

through efforts similar to those we have made in the past, so we aim

to create new added value.

The primary aspects of “2005 – the Mid-Term business Plan for

Reform,” starting in Fiscal Year 2002 (ending March 31, 2003), are

as follows.

Creating new added value for the customer. As significant new

demand cannot be expected in a mature industry, we will propose

effective strategic plans to resolve the issues faced by our custom-

ers and create an approach in which this plan can be efficiently

implemented.

Reforming the cost structure. Our profit ratio continues to fall

every year due to plunging market prices. Further, we expect per-

sonnel costs and fixed costs to rise due to the creation of a fund for

employee retirement benefits. Therefore, we must reduce strategic

costs to strengthen our profit foundation.

Strengthening our financial foundation. The introduction of

mark-to-market accounting methods means that valuation losses

on stock, real estate, and other investments can significantly impact

net income. Therefore, we will create a flexible and resilient struc-

ture capable of responding to any situation. Our entire group will

redouble its efforts to reduce interest-bearing debt, protect our claims,

and dispose of non-performing debt.

NEW BUSINESS PLAN

04


Business Targets for Fiscal 2002

A new R&D structure linked to the new mid-term management plan

Environment-friendly products development

High value-added products development

Product strategy

Developing environment-friendly products and new technologies

Creating new technologies and products for the customer's profit

Discovering new technologies and products to create new markets

Cost structure reformation

Developing new product technologies to reduce costs

Procuring raw materials at the most appropriate location in Japan and overseas

Introducing Total Supply Chain Management (TSCM)

Share expansion

Concentrating sales activities on high value-added products

Developing a solutions-oriented business

Stronger financial structure

Slashing interest-bearing debt

Cutting inventories

Reducing investment securities


A New R&D Structure

We unveiled a new R&D structure one year ago to prevail over the

slumping paints and coatings market and profit conditions. This new

structure is linked to our next mid-term management plan to achieve

follow-up from a different approach.

We established the Innovative Technology Laboratory in Tokyo

and Osaka to seek out the next-generation business sectors and to

search for new businesses. In addition, we reorganized four devel-

opment centers that provide technical support to three business

divisions (automotive coatings, trade-use paints, and industrial-use

coatings) to respond directly to their individual needs with a new

structure of featuring individual technical divisions under each of

the business divisions.

Facilities of the Innovative Technology Laboratory have opened

in Tokyo and Neyagawa, Osaka. It began operation in April 2002. Its

R&D policies are to accelerate our technological development that

aims to improve the added value of products and to conduct R&D

that focuses on high-function technology, environment-friendly chem-

istry, and process design technology. While the primary focus of the

Innovative Technology Laboratory is on the paints and coatings busi-

ness, it also is conducting research into electronic materials, life

sciences, and other related sectors, and pursuing other basic re-

search topics.

In addition, we opened four development centers in April 2001.

These four centers specialize in different fields and conduct techni-

cal research enabling us to provide value appealing to the customer

and to develop new products for the future. The first is Resin and

Materials Center, which is responsible for the overall management

of information related to the enormous quantity of paint resins. There

is also e-Laboratory, which shares technical information within the

company and creates systems as required. The Engineering Center

is responsible for such activities as the production process and the

development of painting technology. The fourth is the Color Design

Center.

The Engineering Center in particular has been given a new as-

signment, in which they are to concentrate on painting technology

research to meet the rising demands for reducing total costs, in-

cluding the cost of paint. Also, under the auspices of the Color De-

sign Center, which includes Automotive Group and Space Design

Group, we are conducting research into colors and the creation of

colors using digital equipment.

We also have a weathering test facility on Miyakojima Island in

Okinawa Prefecture. The facility conducts performance trials to ex-

pand the durability of paint films by exposing test boards, painted

and coated samples, and other items to harsh natural conditions,

especially intense sunlight and rain. There, we are striving to im-

prove quality and weather-resistant properties by conducting vari-

ous experiments to test the weather-resistant capabilities of paints

and coatings, including paints for metal sheets such as those used

in automobiles and buildings.

05


A New R&D Structure Linked to the New Mid-Term Business Plan

Traditional R&D process

The Innovative Technology Laboratory

Tokyo Group

Osaka Group

High-function technology

Environment-friendly chemistry

Process design technology

Resin and Materials Center e-Laboratory

Engineering Center Color Design Center

Development Centers

Weathering test facility on Miyakojima, Okinawa

Tokyo Laboratory Osaka Laboratory in Neyagawa

Central Research Center

Miyakojima weathering test facility


Developing ECO-Products

Nippon Paint’s product development concept emphasizes superior

performance, high added value, and environmental awareness. A

look at the percentage of environment-friendly products offered by

the Japanese paint industry shows that the average number of these

products in volume terms is 27.8%. In contrast, 35.6% of Nippon

Paint’s products incorporate environmental considerations. These

are primarily water-based paints and powdered coatings.

These products do not use organic solvents and limit the

use of volatile organic chemicals (VOCs). We intend to

devote more resources to this trend in various product

sectors in the future.

In recent years, consumers in this market have be-

come more interested in green procurement, in which they

select suppliers who offer environment-friendly parts and materials.

Nippon Paint will continue to actively develop and offer environ-

ment-friendly products and painting systems to protect the environ-

ment and respond to the needs of the customers in the market-

place.

Environmental Protection Activities

For the first time, we have formed a cooperative relationship with

Kansai Paint Co., Ltd. to develop environmental measures. We es-

tablished a joint venture Eco Systems Co., Ltd. in March 2001, a

company that recycles organic solvents and other paint factory

wastes, including waste paint. They extract the volatile organic sol-

vents from the plant’s waste paint, enabling them to be reused for

such applications as cleaning fluids for plant equipment.

The solid wastes from the plant are burned and used as

fuel for power generation, and the incinerated ash is used

as paint material.

There are two facilities for extracting organic solvents.

One is in western Japan, located at Kansai Paint’s

Amagasaki Plant. The other is in eastern Japan, located at

our Tochigi Plant. Every manufacturing plant in both companies

throughout Japan ships their waste materials to the nearest dis-

posal plant, where the waste paint and solvents are processed.

These plants have the capacity to process about 3,000 tons an-

nually, and the entire volume of disposed organic solvents can be

recycled. Thus, Japan’s two largest paint manufacturers are coop-

erating to achieve more efficient disposition of waste materials.

06


Environmental Protection Activities

Target Performance for Fiscal 2001 Targets for Fiscal 2002

ISO14001We received a new ISO 14001 evaluation and renewed our certification.

Promoting ISO 14001 certification acquisition for our affiliated companies. (Our goal is to acquire this certification at all of our affiliated companies in Japan by the end of Fiscal 2005.)

CO2We cut CO2 emission volume by 12% from Fiscal Year 1990 levels. (Our goal was a 7.5% reduction.)

Reducing CO2 emission volume by more than 12% from Fiscal Year 1990 totals.

Waste materialsWe reduced the final processed volume of waste materials by 79% from Fiscal Year 1990 totals.

Reducing the final processed volume of waste materials by at least 79% from Fiscal Year 1990 totals.

IncineratorsWe closed incinerators at three plants in Tochigi, Chiba, and Aichi Prefectures.

Closing the incinerator at the Okayama Plant by December.

Recycling of waste materials

Our recycling rate of waste materials increased by 87% from Fiscal 1990 levels. (Our initial target was an 86% increase.)

Increasing our recycling rate of waste materials by 92% from Fiscal Year 1990 levels.


REVIEW OF OPERATIONS

The business of our group can be broadly divided into the paints and coatingsbusiness and the fine chemicals business. Sales in the paints and coatings busi-

ness totaled ¥181,161 million, accounting for 94.1% of all sales. The remaining 5.9%

of sales are in the fine chemicals business, which totaled ¥11,306 million. Sales were

held in check by the poor performance of the economy as a whole. Sales in the paints

and coatings sector slid 3.4% from the year-before period, while sales in the fine chemi-

cals sector fell 6.4%.

The paints and coatings business includes automotive coatings, as well as trade-use

paints, industrial-use coatings, and other paints and coatings. We aim to produce and

sell each of these products in the most appropriate location both in Japan and over-

seas.

We also develop products that incorporate the concept of environmental protection

and added higher value. We develop and apply the technical expertise we have fostered

in the fine chemical business to create the next generation of mainstay products, which,

we expect, will make other revenue channel than the incumbent products in the paints

and coatings business.

07


Sales breakdown

Paints and CoatingsPaints and Coatings:¥181,161 million

94.1%

Trade-Use Paints:¥42,767 million

22.2%

Industrial Use Paints: ¥30,857 million16.0%

Others: ¥55,263 million28.7%

Fine ChemicalsFine Chemicals: ¥11,306 million5.9%

Automotive coatings:¥52,272 million

27.2%


In addition to water-based paints, our powdered coatings, which

have an extremely low VOC content, is garnering increased attention

as an environment-friendly product. The powdered intermediate coat

material is being used more frequently for trucks and sports utility

vehicles in the United States. During the year under review, General

Motors began using powdered coatings for the intermediate coat on

its truck production lines.

In Japan, our company and Nippon Bee Chemical manufacture

automotive coatings, and these products are sold through Daiwa

Paint Trading and specified agents. Among our group companies,

Nippon Bee Chemical handles the paints for plastics used in auto-

mobiles and buildings, as well as coatings. They have captured the

leading share in the market for these products. Overseas, NPA Coat-

ings and Morton Nippon Coatings in the United States, NP Automo-

tive Coatings (Europe) in Great Britain, and Daihan Automotive Coat-

ings in South Korea manufacture and sell products to local automo-

bile manufacturers.

In the future, we will continue to offer products to automobile

manufacturers that add value to their cars, and provide a total pack-

age of products and services. We also intend to step up our sales

activities throughout the world, focusing on carmakers in Europe

and North America.

Paints and Coatings

Automotive Coatings

Nippon Paint is one of the world’s foremost paint manufacturers in

the automotive coatings sector. We offer an integrated painting sys-

tem that handles every aspect of automobile coating, from surface

treatment, undercoat and intermediate coat to finish coat. Automo-

bile manufacturers both in Japan and overseas have increasingly

recognized the quality of our system and are using the system in

their plants.

During the year under review, our sales activities with Japanese

and overseas auto makers that focused on environment-friendly cat-

ionic electrodeposition paints in particular enabled us to achieve

successful sales in Asia and in the Chinese market. Sales were slack

in Western countries, however, limited in the U.S. by the decline in

vehicle production and competition with other companies in the in-

dustry. Thus, combined sales in Japan and abroad fell 3.3% from

the year before to ¥52,272 million due to the drop in vehicle produc-

tion and the shift to smaller cars.

The environmental protection activities of automobile manufac-

turers are increasing their demand for water-based paints and coat-

ings. We responded to this demand by building the first plant in the

domestic industry exclusively for producing water-based paints for

automobiles. This plant is located in our Aichi factory, and began

operation in October 2001. It contains the most up-to-date produc-

tion facilities and is equipped with a system for producing water-

based paints of the highest quality to improve customer satisfaction

with our products.

Water-based paints do not contain organic solvents, which alle-

viate the burden on the environment. Auto manufacturers in Japan

are more frequently using these paints. It is estimated that Japanese

automobile manufacturers will have converted 50% of their produc-

tion lines to water-based paints by 2005.

Our objective is to convert all automobile coatings to water-based

paints by 2005, including the intermediate coat and the finish coat.

The content of our water-based paints has more than 50% fewer

VOCs than conventional water-based paints. The weather resistance

and sheen is at a level equivalent to that of conventional products.

We also have been obtaining good results by being the first to offer

the automobile manufacturers color choices that anticipate user

trends.

08




Trade-Use Paints

The trade-use paints business covers a wide range of products, and

includes paints for buildings, condominiums, individual homes, and

bridges. We have developed and offer products that satisfy user needs

for low VOC content, superior durability, and long-term attractive-

ness.

During the year under review, we worked hard to uncover new

demand in this business sector by introducing environment-friendly

paint products for housing. In the repainting and repair market, we

worked to increase sales of water-based paint products both for in-

dividual homes that feature superior durability and for condomini-

ums to appeal these products’ long-term attractiveness. We also con-

tinued to expand the Colormony paint shops in Japan to encourage

owners to repaint their homes. Overall demand was sluggish, how-

ever, and sales in this sector totaled ¥42,767 million, down 2.8%

from the year before.

Our objective in the retail strategy for the Colormony shops is to

allow the general consumer to feel more familiar with paint products

and painting. Our retail strategy in the future will be to boost paint

sales by expanding these shops nationwide, increase the number of

training facilities for our painting crews, and develop repainting de-

mand.

Overseas, meanwhile, we continue to build a stronger base in

Southeast Asia. China has become an important market for us in

recent years, and sales there have been mushrooming recently, not

only for building paints, but also for automobile coatings and metal

plate precoatings.

Our group completed the construction of a resin manufacturing

plant in Shanghai in March 2002 capable of producing 10,000 tons

of resin a year. This plant will respond to the enormous demand for

paint products in that country. We fully expect our business in China

to expand in the future, and the construction of a comprehensive

technical center has been completed in September 2002. This cen-

ter is equipped with the latest IT.

In addition to Nippon Paint, the primary companies in this busi-

ness in Japan include the manufacturers AS Paint and NP Color

Plaza. Regional sales companies include Nippon Paint Hanbai

(Hokkaido), Nippon Paint Hanbai (Higashinihon), Nippon Paint

Hanbai (Chubu), Nippon Paint Hanbai (Nishinihon), and Nippon

Paint Hanbai (Shikoku). Sunrise Engineering conducts actual paint-

ing work as well as work inspection and management.

09


Technical Center (Shanghai)


Industrial-Use Paints and Coatings

The primary product categories for industrial use paints and coat-

ings are those for consumer electronics products and various indus-

trial products, and paints and coatings for metal surfaces, including

the Shinkansen Bullet Train and other rolling stock. In addition, we

have developed and launched on the market new materials that are

extremely popular, including home siding materials, exterior trim

materials, roofing materials, and construction materials for build-

ings. In addition to improving the exterior appearance, these prod-

ucts have superior durability and anti-corrosive characteristics en-

abling them to withstand severe weather conditions. We are forging

ahead with sales activities for our broad product lineup in this sec-

tor, including water-based paints and powdered coatings, other prod-

ucts, and water-borne recycling and painting systems.

Despite these positive developments, however, a contraction in

demand, primarily for consumer electronics products and home

building materials in Japan, resulted in declining shipments in both

volume and value terms. Sales stood at ¥30,857 million, 8.4% down

from the previous year.

10



We formed Nippon Fine Coatings Co., Ltd. in March 2002 as a

joint venture with Dainippon Ink and Chemicals Incorporated, a com-

pany for metal plate precoating materials used for such products as

office furniture and consumer electronics products. This new com-

pany began sales activities in April 2002. We own a 60% stake in the

company.

The unit sales price plummeted for colored sheet metal coat-

ings. Faced with these difficult conditions, we integrated the research

and development activities, production systems, and sales systems

of both companies to utilize our combined capabilities. We hope the

resulting synergistic effect will create a structure that yields high

profits. In the future, we intend to step up our sales activities for

plastics, including cellular telephones and laptop PCs.

At present, we manufacture these products in Japan, and the

products are being sold through Nippon Paint Industrial Coating and

specified agents. Overseas, Akzo Nobel Nippon Paint Holding B.V.

in Nederland, as well as its group companies, are manufacturing

and selling these products in Great Britain, Sweden, Germany, France,

Italy and Spain.


Other Paints

We were able to increase sales in the other paints sector, which

include paints for automobile repair, ships, and household use. The

sales of paints for other equipment and facility-related industrial use

declined, however. Accordingly, overall sales in this sector stood at

¥55,263 million, down 1.1% from the year-before period.

The needs for paints used in motor vehicle repair have diversi-

fied in recent years, as users are tending to keep their vehicles for

longer periods of time before replacing them. Thus, conditions in

this sector have become more difficult for us. We have introduced a

computer-based color matching system. We also developed an ex-

terior painting and repair system in which a car’s body color is gauged

and the paint and color tone are analyzed to achieve an accurate

color tone match. All these efforts contribute to improved customer

satisfaction with the work efficiency and quality of our products.

Nippon Paint Marine Coatings develops, manufactures, and sells

products in the marine coatings sector. It was the first company in

the world to develop and market a paint for the underside of ships

that contained no organic tin. They also marketed a paint for ship

hulls that contained no stain-proofing agents. Thus, the company is

always working to develop environment-friendly coatings that con-

tribute to global environmental protection.

In the household paint sector, Nippe Home Products manufac-

tures and sells easy-to-use paints for repainting the home and do-it-

yourself projects. An increasing number of this company’s products

are receiving the Ecomark seal denoting that they incorporate envi-

ronmental considerations.

Another group company is Nippon Liner, which manufactures

and applies such specialty products as paints for center lines on

highways and anti-corrosive paints for concrete. Other companies

include Nippon Paint Plant Engineering, which performs the con-

struction work for paint facilities, and Nippe Trading, a trading com-

pany that imports and exports products and materials. These com-

panies were unable to shore up sales due to cutbacks in corporate

capital investment and public works projects.

11



Fine Chemicals

There is a wide variety of business segments in the fine chemicals

sector. These include metal surface processing, electronic materi-

als, life sciences, and adhesives. We employ and expand the core

technologies fostered in our paints and coatings business to create

products for new business sectors.

During the term under review, sales fell in the fine chemicals

sector due to plunging demand for surface processing materials,

which account for a large part of sales in this category, resulting

from the sharp declines in the automotive industry and the elec-

tronic equipment and machinery industry. Demand also fell for photo

resists resulting from the slowdown in the electronics and IT indus-

tries. In addition, there was a downturn in demand for color filter

materials used in liquid crystal displays.

In the future, we intend to develop new products for the elec-

tronic materials sector based on our own high polymer technology,

photochemical technology, and composite design technology. We

also will continue to develop niche products based on our superior

technologies for the IT industry and clinical testing materials mar-

kets.

Surface processing agents are essential for improving rust resis-

tance and paint film adhesion before painting the surface of metals

and plastics. These agents are used in an extremely wide range of

sectors. The recent sluggishness in production, however, has re-

sulted in an inescapable decline in demand.

Nevertheless, our products hold the top share in products for

processing the surfaces of aluminum cans and other containers used

for beer and cold beverages. We are working to develop environ-

ment-friendly technology for use with the many types of metallic

materials for which demand is projected to rise in the future.

In the electronic materials sector, Nippon Paint has the technol-

ogy for the photo ED system, or photo resists that form detailed cir-

cuits on printed circuit boards. The resist adhesion process has be-

come a critical technology for producing electronic materials, and

we have carved out our own territory for electronic materials by com-

bining resin technology with paint technology. The resist for printed

circuit boards is used for the extremely dense boards used in cellu-

lar telephones and other products, and the results of our develop-

ment have won wide acclaim both in Japan and overseas. In addi-

tion, our materials for semiconductor package boards are being used

throughout the world.

In the life sciences sector, our blood serum PS Gel developed as

a spin-off of advanced resin synthesis and dispersion technologies

improves the accuracy and speed of medical tests. It is being used

by medical laboratories and institutions throughout the world. We

also are working to expand the sales of our new products, including

blood serum separation polymers.

The application of our base technology, including Tecron, an

adhesive material for metals, and printing plates such as Nippe

Graphics, is furthering product development in many areas, and is

fostering the creation of mainstay products that will take the place of

paints and coatings in the future.

Nippon Paint manufactures surface processing agents, adhe-

sive agents, photoresist, and blood serum separation polymers. These

products are sold through Daiwa Paint Trading, Nippon Paint Indus-

trial Coating, and specified agents. Overseas, group company Nipsea

Chemical manufactures and sells surface processing agents in South

Korea. They are producing and selling products for local automobile

and consumer electronics manufacturers.


12



Thousands ofMillions of yen U.S. dollars

2002 2001 2000 1999 1998 2002(Consolidated)Net sales .................................................. ¥192,467 ¥199,673 ¥198,179 ¥197,873 ¥215,046 $1,444,405Income before income taxes ..................... 2,841 10,814 7,477 188 3,570 21,320Net income .............................................. 813 5,679 3,572 (2,847) 517 6,101

Yen U.S. dollars

Per share of common stock:Net income ............................................ ¥ 3.07 ¥ 21.40 ¥ 13.46 ¥ (10.73) ¥ 1.95 $ 0.023Cash dividends ...................................... 6.00 6.00 6.00 6.00 6.00 0.045


Balance sheet data:Shareholders’ equity ............................. ¥ 92,958 ¥ 92,223 ¥ 88,757 ¥ 84,493 ¥ 89,097 $ 697,620Total assets........................................... 224,260 227,342 222,654 222,355 233,283 1,683,002

IndicatorsReturn on assets (%) ............................ 0.36 2.52 1.61 (1.25) 0.22Return on equity (%) ............................ 0.88 6.28 4.12 (3.28) 0.58Stockholder equity (%) ......................... 41.50 40.60 39.90 38.00 38.20


2002 2001 2000 1999 1998 2002(Non-consolidated)Net sales .................................................. ¥123,044 ¥127,882 ¥128,351 ¥132,025 ¥146,882 $ 923,407Income before income taxes ..................... 983 8,104 5,159 3,938 4,441 7,377Net income .............................................. 564 5,111 3,064 1,624 2,640 4,233

Yen U.S. dollars

Per share of common stock:Net income ........................................... ¥ 2.13 ¥ 19.26 ¥ 11.55 ¥ 6.12 ¥ 9.95 $ 0.016Cash dividends ..................................... 6.00 6.00 6.00 6.00 6.00 0.045


Balance sheet data:Shareholders’ equity ............................. ¥ 85,963 ¥ 87,285 ¥ 83,799 ¥ 81,289 ¥ 81,291 $ 645,126Total assets........................................... 167,532 172,684 166,440 171,469 170,337 1,257,276

Note: U.S. dollar amounts represent translations from yen, for convenience only, at the rate of ¥133.25=U.S.$1 in effect on 31st March, 2002.

Five-Year Summary

FINANCIAL STATEMENTS

13



Nippon Paint Co., Ltd. and Consolidated Subsidiaries

Consolidated Balance SheetsAs of 31st March, 2002 and 2001

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

2002 2001 2002

ASSETSCurrent assets:

Cash and cash equivalents ............................................................ ¥ 26,611 ¥ 24,802 $ 199,707Notes and accounts receivable:

Trade ......................................................................................... 69,442 75,599 521,141Non-consolidated subsidiaries and affiliates ............................... 5,472 4,723 41,066Less allowance for doubtful receivables ...................................... (527) (558) (3,955)

Inventories (Note 3) ....................................................................... 15,889 16,058 119,242Other current assets ...................................................................... 4,044 3,640 30,349

Total current assets ..................................................... 120,931 124,264 907,550

Property, plant and equipment (Note 4):Land .............................................................................................. 16,149 16,075 121,193Buildings and structures ................................................................ 62,246 60,246 467,137Machinery and equipment ............................................................. 66,445 63,319 498,649Construction in progress ................................................................ 1,347 1,510 10,109

146,187 141,150 1,097,088

Less accumulated depreciation ...................................................... (88,792) (84,645) (666,356)Total property, plant and equipment ............................ 57,395 56,505 430,732

Investments and other assets:Investments in and advances to non-consolidated subsidiaries and

affiliates ..................................................................................... 14,729 12,131 110,537Investments in other securities (Note 4) ......................................... 21,647 26,935 162,453Other assets ................................................................................... 9,558 7,507 71,730

Total investments and other assets .............................. 45,934 46,573 344,720Total assets ................................................................. ¥224,260 ¥227,342 $1,683,002

See accompanying notes to consolidated financial statements.

14




2002 2001 2002

LIABILITIES, MINORITY INTEREST AND SHAREHOLDERS’ EQUITYCurrent liabilities:

Notes and accounts payable:Trade ......................................................................................... ¥ 50,941 ¥ 56,026 $ 382,297Non-consolidated subsidiaries and affiliates ............................... 834 697 6,259Other ......................................................................................... 3,165 1,817 23,753

Short-term bank loans and current portion oflong-term debt (Note 4) .............................................................. 32,432 21,592 243,393

Accrued income taxes ................................................................... 1,598 3,178 11,992Accrued expenses and other current liabilities ............................... 8,844 10,303 66,371

Total current liabilities .................................................. 97,814 93,613 734,065

Long-term liabilities:Long-term debt (Note 4) ................................................................ 15,220 24,963 114,222Retirement allowances (Note 5) ..................................................... 9,276 8,220 69,613Retirement allowances for directors and corporate auditors............ 1,384 1,555 10,387Other long-term liabilities ............................................................... 3,706 3,135 27,812

Total long-term liabilities .............................................. 29,586 37,873 222,034

Minority interest ............................................................................... 3,902 3,633 29,283

Commitments and contingent liabilities (Note 7)

Shareholders’ equity:Common stock:

Authorized—1,000,000,000 shares:Issued—2002, 2001—265,402,443 shares .............................. 27,712 27,712 207,970

Additional paid-in capital ............................................................... 27,185 27,185 204,015Retained earnings .......................................................................... 37,077 37,906 278,251Net unrealized loss on securities .................................................... (158) — (1,186)Treasury stock, at cost ................................................................... (5) — (38)Foreign statement translation adjustments ..................................... 1,147 (580) 8,608

Total shareholders’ equity ............................................ 92,958 92,223 697,620Total liabilities, minority interest and

shareholders’ equity ................................................ ¥224,260 ¥227,342 $1,683,002

15





Consolidated Statements of IncomeAs of 31st March, 2002 and 2001


2002 2001 2002

Net sales (Note 6) ............................................................................. ¥192,467 ¥199,673 $1,444,405Cost of sales (Note 6) ....................................................................... 126,773 130,975 951,392

Gross profit ................................................................................ 65,694 68,698 493,013Selling, general and administrative expenses ................................... 58,067 57,741 435,775

Operating income ....................................................................... 7,627 10,957 57,238Other income (expenses):Interest and dividend income ............................................................ 271 351 2,033Interest expenses .............................................................................. (1,061) (1,173) (7,962)Equity in earnings of affiliates ............................................................ 2,163 1,869 16,232Gain (loss) on sale of investment securities ........................................ (75) 849 (563)Write-down of investment securities ................................................... (4,855) (1,080) (36,435)Gain (loss) on sale or disposal of property, plants and equipments .... (127) 135 (953)Write-down of property, plants and equipment .................................. (370) (2,777)Other, net .......................................................................................... (732) (1,094) (5,493)

Income before income taxes ...................................................... 2,841 10,814 21,320Income taxes:

Current .......................................................................................... 4,207 5,785 31,572Deferred ........................................................................................ (2,506) (1,102) (18,807)

Minority interest ............................................................................... 327 452 2,454Net income ................................................................................ ¥ 813 ¥ 5,679 $ 6,101

Yen U.S. dollars (Note 1)

Amount per share:Net income .................................................................................... ¥ 3.07 ¥21.40 $0.023Cash dividends .............................................................................. 6.00 6.00 0.045

16





Consolidated Statements of Shareholders’ EquityYears ended 31st March, 2002 and 2001

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

2002 2001 2002 2001 2002

Common stock:Beginning balance .............................................................. 265,402 265,402 ¥27,712 ¥27,712 $207,970Ending balance ................................................................... 265,402 265,402 ¥27,712 ¥27,712 $207,970

Additional paid-in capital:Beginning balance ............................................................................................... ¥27,185 ¥27,185 $204,015Ending balance .................................................................................................... ¥27,185 ¥27,185 $204,015

Retained earnings:Beginning balance ............................................................................................... ¥37,906 ¥33,860 $284,473Add-

Previous year deferred income tax adjustment ................................................. 0 0 0Increase resulting from subsidiaries newly consolidated ................................... 0 0 0Net income ...................................................................................................... 813 5,679 6,101

Deduct-Cash dividends ................................................................................................ (1,592) (1,592) (11,947)Bonuses to directors and corporate auditors ..................................................... (50) (41) (376)

Ending balance .................................................................................................... ¥37,077 ¥37,906 $278,251

(Net) unrealized gain or loss on securities:Beginning balance ............................................................................................... ¥ — ¥— $ —Other comprehensive income (loss) for the year, net of tax .................................. (158) — (1,186)Ending balance .................................................................................................... ¥(158) ¥— $(1,186)

Treasury stock at cost:Beginning balance ............................................................................................... ¥— ¥— $ —Purchase ............................................................................................................. (5) — (38)Ending balance .................................................................................................... ¥(5) ¥— $(38)

17




Consolidated Statements of Cash FlowsYears ended 31st March, 2002 and 2001


2002 2001 2002

Cash flows from operating activities:Net income .................................................................................... ¥ 2,841 ¥10,814 $ 21,320Adjustments to reconcile net income to net cash provided

by operating activities:Depreciation and amortization ................................................ 5,610 5,451 42,101Interest income and dividends ................................................ (271) (351) (2,034)Interest expenses ................................................................... 1,060 1,173 7,955Equity in earnings of affiliated companies ............................... (2,163) (1,869) (16,233)Gain (loss) on disposal or sales of property,

plant and equipment ........................................................... 497 (135) 3,730Gain (loss) on sale or write-down of investment securities ....... 4,929 231 36,991Decrease (increase) in accounts receivable ............................ 5,046 (7,795) 37,869Decrease (increase) in inventories .......................................... 169 (206) 1,268Increase (decrease) in accounts payable ................................ (4,947) 8,641 (37,126)Other ...................................................................................... 199 2,041 1,494

Sub total ............................................................................. 12,970 17,995 97,335

Interest and dividend income received ................................... 1,268 871 9,516Interest expenses paid ............................................................ (1,090) (1,352) (8,180)Income taxes paid .................................................................. (5,787) (5,348) (43,430)

Net cash provided by operating activities ................................ 7,361 12,166 55,241

Cash flows from investing activities:Acquisition of property, plant and equipment ................................. (4,543) (3,720) (34,094)Proceeds from sales of property, plant and equipment ................... 21 680 158Acquisition of short-term and other investments............................. (215) (12,588) (1,614)Proceeds from sale of short-term and other investments ............... 101 12,648 758Other ............................................................................................. 320 760 2,402

Net cash used in investing activities ....................................... (4,316) (2,220) (32,390)

Cash flows from financing activities:Increase (decrease) in short-term loans ......................................... 649 (10,478) 4,871Proceeds from long-term debt ....................................................... 2,881 4,059 21,621Repayment of long-term debt ........................................................ (3,344) (2,508) (25,096)Cash dividends .............................................................................. (1,802) (2,972) (13,523)Other ............................................................................................. 161 — 1,208

Net cash provided by (used in) financing activities ................. (1,455) (11,899) (10,919)

Efect of exchange rate changes on cash and cash equivalents ........ 219 159 1,644

Increase(decrease) in cash and cash equivalents .......................... 1,809 (1,794) 13,576

Cash and cash equivalents at beginning of year ............................ 24,802 26,596 186,131

Cash and cash equivalents at end of year ........................................ ¥26,611 ¥24,802 $199,707


18




Notes to Consolidated Financial Statements

1. Basis of Presenting Consolidated Financial StatementsThe accompanying consolidated financial statements have beenprepared from the accounts maintained by Nippon Paint Co.,Ltd. (the “Company”) and its domestic subsidiaries in accor-dance with the provisions set forth in the Japanese CommercialCode and the Securities and Exchange Law and in conformitywith accounting principles and practices generally accepted inJapan, which may differ in some material respects from account-ing principles and practices generally accepted in countries andjurisdictions other than in Japan.

In addition, the notes to the consolidated financial statementsinclude information which is not required under accountingprinciples generally accepted in Japan but is presented herein asadditional information.

The accompanying consolidated financial statements havebeen prepared from the consolidated financial statements of theCompany and its subsidiaries (the “Group”) which were filedwith the Director of the Kanto Local Finance Bureau and StockExchanges in Japan as required by the Securities and ExchangeLaw. Certain modifications and reclassifications, includingpresentation of the consolidated statements of shareholders’equity and cash flows, have been made in the accompanyingconsolidated financial statements to facilitate understanding byreaders outside Japan.

Japanese yen amounts are translated into U.S. dollars, forconvenience only, at the prevailing exchange rate as of 31stMarch, 2002 at ¥133.25 to U.S. $ 1. These translations shouldnot be construed as representations that the Japanese yenamounts actually represent, or have been or could be convertedinto U.S. dollars at this or any other rate.

2. Summary of Significant Accounting Policies

(a) Principles of ConsolidationThe accompanying consolidated financial statements include theaccounts of the Company and significant subsidiaries (over 50percent. Owned or conducted rule). Material inter-companybalances, transactions and profits have been eliminated inconsolidation. Investments in significant affiliates (20 per cent. to50 per cent. owned) are stated at cost plus equity in undistrib-uted earnings. Investments in non-consolidated subsidiaries, andin the affiliates which are not accounted for on an equity method,are carried at cost.

The difference between the cost of investments in subsidiariesand affiliates and the equity in their net assets at dates ofacquisition is being amortized over five years using the straight-line method, with the exception of minor amounts.(b) Translation of Foreign CurrenciesCurrent monetary assets and liabilities denominated in foreigncurrencies are translated at the current rates of exchange ineffect at each balance sheet data, except for such amountshedged by forward exchange contracts which are translated atforward rates.

Other assets and liabilities in foreign currencies are translatedat the historical rates of exchange in effect on the dates of thetransactions or forward contract rates of exchange.

Exchange gains and losses are recognized in the periods inwhich they occur.

(c) Translation of Foreign Financial StatementsThe balance sheet accounts of the consolidated foreign subsidiariesand affiliates are translated at the rates of exchange in effect at thebalance sheet date. Income and expense accounts are translated atan average of exchange rates in effect during the year. Differencesarising from translation are presented as “Foreign statementstranslation adjustments” in the accompanying consolidated balancesheets.(d) SecuritiesSecurities with market quotations are stated at the market priceon 31st March, 2002 (with any unrealized valuation differencerecorded under shareholders’ equity, and cost computed usingthe moving-average method), while non-marketable securitiesare stated at cost, cost being determined by the moving-averagemethod. Fiscal year 2001, ending 31st March, 2001 securities ofthe Group were stated at moving-average cost.

Effective 1st April, 2001, the Group adopted the valuationmethod which the market price in other securities is based onthe Japanese accounting standard for financial instruments.(e) InventoriesInventories are stated at cost, cost being determined by themoving average method.(f) Property, Plant and Equipment and DepreciationProperty, plant and equipment are stated at cost. Depreciation iscomputed by the declining balance method at rates based onestimated useful lives of the assets. In accordance with therevision of Corporate Tax Law, buildings (excluding buildingimprovements) newly acquired after April 1st,1998 in Japan, arestated by using the straight-line depreciation method as desig-nated in the tax law. Maintenance, repairs and renewals whichdo not result in substantial betterments are charged to incomewhen incurred.(g) Computer SoftwareExpenditure relating to computer software developed for internaluse is charged to income when incurred, except if it contributesto the generation of income or to future cost savings. Suchexpenditure is capitalized as an asset is amortized using thestraight-line method over its estimated useful life which is 5years.(h) Retirement Allowances and Pension PlansIn accordance with the new standards, retirement allowance isprovided based on the amount of projected benefit obligationreduced by pension plan assets at fair value at the end of theannual period.(i) Retirement Allowances and Pension Plans for Directors andCorporate AuditorsThe Company and its domestic consolidated subsidiaries haveprovided for the retirement allowances for directors and corpo-rate auditors in an amount determined by the Company’s and itsdomestic consolidated subsidiaries’ internal regulations.(j) Cash EquivalentsCash equivalents are highly liquid investments acquired with anoriginal maturity of three months or less.(k) Research and Development CostsResearch and development costs are charged to income whenincurred.

19



(l) LeasesThe finance leases without covenants transferring ownership ofthe properties to lessees are not capitalized, and dealt in thesame way as operating leases.(m) Consumption TaxConsumption tax is excluded from the figures of the accompany-ing financial statements.(n) Net Income per SharePrimary net income per share is computed based on theweighted average number of shares outstanding during eachperiod.(o) Additional Paid-in CapitalThe Commercial Code of Japan provides that additional paid-incapital is not available for dividends, but may be used to reducea capital deficit by resolution of the shareholders or may becapitalized by resolution of the board of directors.(p) Appropriation of Retained EarningsCash dividends and bonuses to directors and corporate auditorsare recorded in the fiscal year in which a proposed appropriationis approved by a general meeting of shareholders.

3. InventoriesInventories as of 31st March, 2002 and 2001 consisted of:


2002 2001 2002Finished goods ................................... ¥10,392 ¥10,540 $ 77,989Work in process ................................. 2,863 3,076 21,486Raw materials and supplies ............... 2,634 2,442 19,767

¥15,889 ¥16,058 $119,242

4. Long-term DebtLong-term debt as of 31st March, 2002 and 2001 consisted of:


2002 2001 2002Secured:

Bank loans and other .................... ¥ 453 ¥ 624 $ 3,400Unsecured:

2.175 percent bondsdue 20th August, 2002 .............. 10,000 10,000 75,047

2.0 percent bondsdue 22nd May, 2003 .................. 5,000 5,000 37,523

Bank loans and other .................... 12,342 12,399 92,62327,795 28,023 208,593

Less-current portion includedcurrent liabilities ........................ 12,575 3,060 94,372

¥15,220 ¥24,963 $114,221

Property, plant and equipment and investments in securities withthe net book value of ¥800 million ($6,004 thousand) arecharged as collateral for long-term debt as of 31st March, 2002.

The aggregate annual maturities of long-term debt subsequentto 31st March, 2002 are summarized below:


Year ending 31st March,2003 ............................................. ¥12,575 $ 94,3712004 ............................................. 8,534 64,0462005 ............................................. 6,477 48,6082006 ............................................. 163 1,2232007 and after .............................. 46 345

¥27,795 $208,593

5. Retirement Allowances and Pension PlansThe Company and its domestic subsidiaries have contributory,noncontributory defined benefit plans and a lump-sum paymentat the time of retirement. The amount of the retirement allow-ance is, in general, determined on the basis of length of serviceand current basic salary at the time of retirement

Certain of the domestic consolidated subsidiaries also haveemployees’ retirement benefit plans and funded pension planssimilar to those of the Company.

The following tables set forth the changes in benefit obligation,plan assets and funded status of the Company and its domesticsubsidiaries on 31st March, 2001.


Benefit obligation ............................... ¥93,606 $702,484Fair value of plan assets ..................... 47,659 357,666Accrued pension liability recognized in

The Consolidated balance sheets ... 9,275 69,606Prepayment pension cost ................... (62) (465)Unrecognized prior service cost ......... (2,352) (17,651)Unrecognized actuarial difference ...... 20,956 157,268Unrecognized net transition obligation at date of adoption ........................... 18,130 136,060

Retirement and pension costs of the Company and its domesticsubsidiaries included the following components for the yearended 31st March, 2002.


Service cost ....................................... ¥2,940 $22,064Interest cost ....................................... 2,772 20,803Expected return on plan assets .......... (1,872) (14,049)Amortization:

Prior service cost ............................ (266) (1,996)Actuarial difference cost ................. 910 6,829Transition obligation at date of

adoption ..................................... 1,396 10,477Net periodic benefit cost .................... 5,880 44,128

20



Assumption used in the accounting for the defined benefit plansfor the year ended 31st March, 2002 is as follows:Discount rate ............................................................ 2.8%Expected rate of return on fund assets ...................... 4.0%Method of attributing benefit to

periods of service .................................................. Straight-line basisAmortization period for prior service cost .................. 10 yearsAmortization period for actuarial difference ............... 10 yearsAmortization period for transition obligation

at date of adoption ................................................ 15 years

6. Transactions with Related PartiesTransactions with non-consolidated subsidiaries and affiliates forthe years ended 31st March, 2002 and 2001 were as follows:


2002 2001 2002Sales to .............................................. ¥14,144 ¥12,109 $106,146Purchases from .................................. 3,005 3,111 22,552

7. Contingent LiabilitiesAs of 31st March, 2002 the Company and its consolidatedsubsidiaries have contingent liabilities as follows:


Guarantee for bank borrowing ............ ¥1,309 $9,824

8. LeasesLease payments for the year ended 31st March, 2002 under thefinance leases without covenants transferring ownership of theproperties to lessees are ¥1,107 million ($8,308 thousand).


Original lease obligation(Including finance charges) ............ ¥5,768 $43,287

Payments remaining:Payments due within one year ....... 1,056 7,925Payments due after one year .......... 1,674 12,563

9. DerivativesThe Group has entered into foreign exchange forward contractsin the normal course of business, to reduce the exposure tofluctuations in foreign exchange rates. The Group does not holdor issue derivatives for speculative purposes.

Foreign exchange forward contracts are subject to market riskwhich is the exposure created by potential fluctuations in marketconditions. The counterparties to the Group’s derivatives arelimited to major international financial institutions. The Groupdoes not anticipate any loses arising from credit risk. Derivativetransactions entered into by the Group has been made inaccordance with internal polices which regulate the authorizationof such transaction.

All the forward exchange contracts entered into to hedgereceivables and payables denominated in foreign currencies,since they have been translated and reflected at the correspond-ing contracted rates in the accompanying balance sheets at theend of fiscal year.

10. Income TaxesThe tax effects of temporary differences that give rise to signifi-cant portions of the deferred tax assets on 31st March, 2002 and2001 are presented below:


2002 2001 2002Deferred tax assets:

Accrued enterprise tax ................... ¥ 128 ¥ 300 $ 961Excess bonuses accrued ................ 930 980 6,979Excess retirement allowances ......... 1,842 1,190 13,824Elimination of unrealized profit ....... 885 891 6,642Write-down of

investment securities .................. 2,126 — 15,955Net unrealized loss on securities .... 183 — 1,373Tax loss carry forwards ................... 5,273 5,291 39,572Other .............................................. 1,489 1,348 11,174

Total gross deferred tax assets ........... 12,856 10,000 96,480Less valuation allowances .................. (5,610) (5,435) (42,101)

Deferred tax assets ............................ 7,246 4,565 54,379

Deferred tax liabilities:Adjustments to fixed assets based

on corporate tax law .................... (22) (24) (165)Other .............................................. (6) (13) (45)

Net unrealized on securities ............... (67) — (503)Total gross deferred tax liabilities ....... (95) (37) (713)

Net deferred tax assets ...................... ¥ 7,151 ¥4,528 $53,666

The reconciliation of the statutory tax rate and the effectiveincome tax rate percentage of income before income taxes areas follows:

2002 2001

Statutory tax rate ....................................... 42.0% —Permanently non-

deductible expenses ............................. 13.0 —Permanently non-

taxable dividend income ....................... (7.5) —Equity in earnings of affiliates .................... (26.3) —Elimination of dividend income ................. 14.5 —Allowances ................................................ 20.3 —Other ......................................................... 3.8 —Effective income tax rate ........................... 59.8 —

The difference between the statutory tax rate and the Group’seffective income tax rate for financial statement purposes for theyear ending 31st March, 2001 was not significant. The differ-ence was under and 5% of the statutory tax rate.

21



11. Segment InformationInformation about operations in different industry segments of theGroup for the years ended 31st March, 2002 and 2001.

Millions of yen

2002Paint Fine-chemical Eliminations

Segment Segment Total or Corporate Consolidated

Sales and Operating IncomeSales to third parties .................................................................... ¥181,161 ¥11,306 ¥192,467 ¥ — ¥192,467Inter segment sales ...................................................................... — — — — —Operating expenses ..................................................................... 175,224 9,617 184,841 — 184,841Operating income ......................................................................... 5,937 1,689 7,626 — 7,626

Assets, Depreciation and Capital ExpenditureAssets .......................................................................................... 168,611 10,510 179,121 45,139 224,260Depreciation ................................................................................ 5,297 313 5,610 — 5,610Capital expenditure ...................................................................... 5,735 151 5,886 — 5,886

Millions of yen



Sales and Operating IncomeSales to third parties .................................................................... ¥187,597 ¥12,076 ¥199,673 ¥ — ¥199,673Inter segment sales ...................................................................... — — — — —Operating expenses ..................................................................... 178,979 9,737 188,716 — 188,716Operating income ......................................................................... 8,618 2,339 10,957 — 10,957

Assets, Depreciation and Capital ExpenditureAssets .......................................................................................... 168,772 10,767 179,539 47,803 227,342Depreciation ................................................................................ 5,061 390 5,451 — 5,451Capital expenditure ...................................................................... 4,513 71 4,584 — 4,584

Thousands of U.S. dollars



Sales and Operating IncomeSales to third parties .................................................................... $1,359,557 $84,848 $1,444,405 $ — $1,444,405Inter segment sales ...................................................................... — — — — —Operating expenses ..................................................................... 1,315,001 72,173 1,387,174 — 1,387,174Operating income ......................................................................... 44,556 12,675 57,231 — 57,231

Assets, Depreciation and Capital ExpenditureAssets .......................................................................................... 1,265,374 78,874 1,344,248 338,754 1,683,002Depreciation ................................................................................ 39,752 2,249 42,101 — 42,101Capital expenditure ...................................................................... 43,039 1,133 44,173 — 44,173

Paint segment consists of Automotive coatings, Industrial-usecoatings, Trade-use paints and Other paints and coatings.

Fine-chemical segments consists of color filter materials,electric materials, pretreatment chemicals, photo ED and bloodserum separation polymers.

12. Subsequent EventsThe following appropriations of retained earnings, which have not been reflected in the accompanying consolidated financial statementsfor the year ended 31st March, 2002, were approved at a shareholders’ meeting held on 27th June, 2002.


Cash dividends (¥3.00 - $0.023 per share) ............................................................................................. ¥796 $5,974

22



To the Board of DirectorsNippon Paint Co., Ltd.

We have audited the consolidated balance sheets of Nippon Paint Co., Ltd. and its

consolidated subsidiaries as of 31st March, 2002 and 2001, and the related consolidatedstatements of income, shareholders’ equity, and cash flows for the years then ended, all

expressed in Japanese yen. Our audits were made in accordance with auditing stan-

dards, procedures and practices generally accepted and applied in Japan and, accord-

ingly, included such tests of the accounting records and such other auditing procedures

as we considered necessary in the circumstances.

In our opinion, the accompanying consolidated financial statements expressed inJapanese yen, present fairly the consolidated financial position of Nippon Paint Co., Ltd.

and its consolidated subsidiaries as of 31st March, 2002 and 2001, and the consolidated

results of their operations and their cash flows for the years then ended, in conformity

with accounting principles and practices generally accepted in Japan applied on a

consistent basis.As described in Note 2, effective 1st April 2001, the consolidated financial state-

ments, Nippon Paint Co., Ltd. and its consolidated subsidiaries have adopted new

accounting standards for Securities.

The U.S. dollar amounts in the accompanying consolidated financial statements with

respect to the year ended 31st March, 2002 are presented solely for convenience. Our

audit also included the translation of yen amounts into U.S. dollar amounts and, in ouropinion, such translation has been made on the basis described in Note 1 to the consoli-

dated financial statements.

Osaka, Japan

27th June, 2002

ShinNihon & Co.

Report of Independent Certified Public Accountantson the Consolidated Financial Statements

See note 1 to the consolidated financial statements which explains the basis of preparing theconsolidated financial statements of Nippon Paint Co., Ltd. and its consolidated Japanese subsidiar-ies under Japanese accounting principles and practices.

23



General Information(as of 31st March, 2002)

Established:14th March, 1881

Head Office:2-1-2, Oyodo-Kita, Kita-Ku, Osaka 531-8511, JapanTel: +81-6-6458-1111Fax: +81-6-6455-9261

Stock Listings:Nippon Paint common stock-Code 4612- is listing on theTokyo, Osaka and Nagoya Stock Exchanges

Transfer Agent:The UFJ Trust and Banking Co., Ltd.Security Agency Business Department3-6-3, Fushimicho, Chuo-Ku, Osaka 541-8502, JapanTel: +81-6-6229-3011

Capital:¥27,712 million

Number of Shares Outstanding:265,402,443

Common Stock Trading Statistics :FY1997 FY1998 FY1999 FY2000 FY2001

High ¥400 ¥254 ¥328 ¥429 ¥487Low 181 180 195 232 245

Board of Directors andCorporate Auditors

ChairmanHiroshi Fujii *

PresidentTeruyoshi Fujishima *

Executive Vice PresidentHiromoto Ueno *

Senior Vice PresidentsKozo TaninoShizuo KatsunagaSekiya SuzukiKoichi Tokita

Vice PresidentsKiyohiko ChijiiwaSusumu IwatoMakoto Matsuura

Executive DirectorsTakashi YoshiiShouji NishioKatsufumi HasebeKiyomi Sakurai

Corporate AuditorsYukio NomuraRyuzo MizuguchiAtsushi ShimizuYoshio Iimura

* Representative Director(As of 27th June, 2002)

COMPANY DATA

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SUBSIDIARIES AND AFFILIATES

Nippon Paint Hanbai (Hokkaido) Co., Ltd.Nippon Paint Hanbai (Higashinihon) Co., Ltd.Nippon Paint Hanbai (Chubu) Co., Ltd.Nippon Paint Hanbai (Nishinihon) Co., Ltd.Nippon Paint Hanbai (Shikoku) Co., Ltd.Nippon Paint Industrial Coating Co., Ltd.Daiwa Paint Trading Co., Ltd.Nippon Fine Coatings Co., Ltd.Nippon Bee Chemical Co., Ltd.AS Paint Co., Ltd.

Asahi Solvent Manufacturing. Co., Ltd.Nippoin Paint Marine Coatings Co., Ltd.Nippe Home Products Co., Ltd.NP Color Plaza Co., Ltd.Nippe Graphics Co., Ltd.Nippon Liner Co., Ltd.Sunrise Engineering Co., Ltd.Nippon Paint Plant Engineering Co., Ltd.Nippe Trading Co., Ltd.Eco Systems Co., Ltd.

Nippon Paint (USA) Inc.801 West Street, Wilmington, DE 19801-1545, U.S.A.

Nippon Paint Research Institute (America), Inc.44382 Macomb Industrial Drive, Clinton Township, MI 48036, U.S.A.

NPA Coatings Inc.11110 Berea Road, Cleveland, OH 44102, U.S.A.

Morton Nippon Coatings2701 East 170th Street, Lansing, IL 60438, U.S.A.

Nippon Paint (Europe) Ltd.Level 8, City Tower, 40 Basinghall Street, London EC2V 5DE, U.K.

NP Automotive Coatings (Europe) Ltd.Britannia Trade Park, Radway Road, Swindon, Wiltshire SN3 4ND, U.K.

Akzo Nobel Nippon Paint LimitedNorth Woolwich Road, London E16 2AP, U.K.

Akzo Nobel Nippon Paint ABOdensvivagen 32mS-594 32 Gamleby, Sweden

Akzo Nobel Nippon Paint GmbHLochnerstrasse 12 90441 Nürnberg, Germany

Akzo Nobel Nippon Paint SAB.P.n1266 76068 Le Harve Cadex, France

Akzo Nobel Nippon Paint España SA14-20 Feixa Llarga 08040 Zona Franca Barcelona, Spain

Akzo Nobel Nippon Paint2 Via Emilia, 20070 Fombio, Italy

Nipsea Chemical Co., Ltd.407-7, Mokne-Dong, Ansan-Si, Kyunggi-Do,425-100, Korea

Daihan Automotive Coatings Co., Ltd.615, Pakdal-dong, Manan-gu, Anyang-city, Kyonggi-Do, Korea

Asia Industries, Ltd.24, Tung-Yuan Road, Chung-Li Shih Tao-Yuan Hsien, Taiwan

Nippon Paint (Philippines) Inc.Hologram Street, Light Industry and Science Park of the PhilippinesCabuyao, Laguna, Philippines

Nippon Paint (China) Co., Ltd.287,Chuangye Road, Wangqiao Development Zone,Newpudong District, Shanghai, 201201, People’s Republic of ChinaLangfang Nippon Paint Co., Ltd..Fuzhong Road, Langfang Economic & Technical Development Zone,Hebei Province, 065001, People’s Republic of China

Suzhou Nippon Paint Co., Ltd.Miduqiao, Fengmenwai, Suzhou-city, Jiangsu Province, People’s Repub-lic of China

Nippon Paint (Chongqing) Chemicals Co., Ltd.75 Pan Long the Forth Village, Jiulong Town, Jiulongpo District, Chongqing400051, Sichuan Province, People’s Republic of China

Nippon Paint (Guangdong) Co., Ltd.Shui Kou Luo Tang Zone, Hui Yang City, Guangdong, People’s Republic ofChina

Nippon Paint (H.K.) Co., Ltd.Room 1101, Tower 1, Cheung Sha Wan Plaza, 833 Cheung Sha Wan Road,Kowloon, Hong Kong

Nippon Paint (Vietnam) Co., Ltd.Road No2 Bienhoa Industrial Zone1, Bienhoa City,Dongnai Province,Vietnam

Nippon Paint (Thailand) Co., Ltd.101 Soi Klabcharoen 1, Suksawad Road, Phrapradaeng,,Samutprakarn,10130, Thailand

Nippon Paint (Malaysia) Sdn. Bhd.Lot I-17, Taman Perindustrian, Subang Utama, 40000 Shah Alam, SelangorDarul Ehsan, Malaysia

Paint Marketing Company (M) Sdn. Bhd.Lot 63, Jalan Sesiku, 40700 Shah Alam, Selangor Darul Ehsan, Malaysia

Nippon Paint (Singapore) Co., Pte. Ltd.No.1, First Lok Yang Road, Jurong, Singapore 629728, Singapore

I.R.E.Corporation Ltd.18 Verdum Road #01-01, Singapore 207280

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2-1-2, Oyodo-Kita, Kita-ku, Osaka 531-8511, Japan

Tel: 06-6458-1111

Printed in JapanThis annual report is printed

on recycled paper.


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