Annual Report 2005 - Rikenweb.riken.co.jp/ir/pdf/AR2005.pdfment for overseas markets and...

Annual Report 2005For the year ended March 31, 2005

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CORPORATE PROFILE

Established in 1927, Riken (Riken Corporation and its

worldwide operating group) is today one of the

world's leading manufacturers of piston rings. In addi-

tion to its core ring business, Riken provides a wide

variety of other engine and vehicle components and

construction products and services. Building upon its

advanced engineering capabilities, Riken is continu-

ously developing new materials and expanding its

presence in growing markets such as sensor develop-

ment and electromagnetic compatibility.

CONTENTS

AT A GLANCE ÷÷÷÷÷÷÷÷÷÷÷÷÷÷÷÷÷÷÷÷÷÷÷÷÷÷÷÷1TO OUR SHAREHOLDERS ÷÷÷÷÷÷÷÷÷÷÷÷÷÷÷÷2REVIEW OF OPERATIONS ÷÷÷÷÷÷÷÷÷÷÷÷÷÷÷÷÷5

AUTOMOTIVE PARTS ÷÷÷÷÷÷÷÷÷÷÷÷÷÷÷÷÷÷÷5CONSTRUCTION PRODUCTS &

SERVICES÷÷÷÷÷÷÷÷÷÷÷÷÷÷÷÷÷÷÷÷÷÷÷÷÷÷÷÷6OTHER PRODUCTS & SERVICES ÷÷÷÷÷÷÷÷6R&D ACTIVITIES ÷÷÷÷÷÷÷÷÷÷÷÷÷÷÷÷÷÷÷÷÷÷÷÷7

FINANCIAL SECTION ÷÷÷÷÷÷÷÷÷÷÷÷÷÷÷÷÷÷÷÷÷8FIVE-YEAR SUMMARY ÷÷÷÷÷÷÷÷÷÷÷÷÷÷÷÷÷÷8OPERATIONAL REVIEW AND ANALYSIS OF FINANCIAL POSITION÷÷÷÷·9

CONSOLIDATED BALANCE SHEETS ÷÷÷÷10CONSOLIDATED STATEMENTS OF

INCOME ÷÷÷÷÷÷÷÷÷÷÷÷÷÷÷÷÷÷÷÷÷÷÷÷÷÷÷÷12CONSOLIDATED STATEMENTS OF

SHAREHOLDERS’ EQUITY ÷÷÷÷÷÷÷÷÷÷÷13CONSOLIDATED STATEMENTS OF

CASH FLOWS ÷÷÷÷÷÷÷÷÷÷÷÷÷÷÷÷÷÷÷÷÷÷÷14NOTES TO CONSOLIDATED

FINANCIAL STATEMENTS ÷÷÷÷÷÷÷÷÷÷÷÷15REPORT OF INDEPENDENT AUDITORS ÷÷÷27OVERSEAS ACTIVITIES ÷÷÷÷÷÷÷÷÷÷÷÷÷÷÷÷÷÷28CORPORATE DIRECTORY ÷÷÷÷÷÷÷÷÷÷÷÷÷÷÷30INVESTOR INFORMATION÷÷÷÷÷÷÷÷÷÷÷÷÷÷÷÷32BOARD OF DIRECTORS ÷÷÷÷÷÷÷÷÷÷÷÷÷÷÷÷÷33

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AT A GLANCE

1RIKEN CORPORATION

71.1%6.8%

22.1%

AUTOMOTIVE PARTSSEGMENT¥55,745 million

CONSTRUCTIONPRODUCTS ANDSERVICES SEGMENT¥5,337 million

OTHER PRODUCTS ANDSERVICES SEGMENT¥17,345 million

BREAKDOWN OF NET SALESFor the year ended March 31, 2005

NET SALES(¥ million)

2003 2004 2005

71,509 71,738

0

6000

2000

8000

4000

0000 78,429

OPERATING INCOME(¥ million)

2003 2004 2005

5,9516,091

0

1400

2800

4200

5600

70006,842

NET INCOME PER SHARE(¥)

2003 2004 2005

42.08

37.07

0

10

20

30

40

5047.86

PRINCIPAL FINANCIAL FIGURESFor the years ended March 31, 2003, 2004 and 2005

RIKEN AR 2005 p1-8 05.10.20 11:17 ページ1

From right to left: President Toshinaga Koizumi, Executive Vice President Fumio Kiyota

RIKEN AR 2005 p1-8 05.10.20 11:17 ページ2

To Our Shareholders

3RIKEN CORPORATION

During the year under review, ended March 31, 2005, the economy of the United States generally

expanded reflecting strong personal consumption and brisk capital investment. This same growth

trend was also evident in China and the ASEAN countries.

With the global economy expanding, Japan's exports and capital investment increased, contribut-

ing to improved corporate earnings in the country. Thus, the Japanese economy followed a recovery

path during the year under review. This improvement came about despite various negative factors,

including soaring crude oil prices and raw materials prices and the slowing growth of personal con-

sumption due to a succession of natural disasters such as typhoons and earthquakes, as well as

inclement weather.

In the automobile industry, overseas production during calendar year 2004 generally flattened out

in Europe and the United States, while output increased in such countries as China, ASEAN nations

and Brazil. Meanwhile, domestic production in 2004 rose 2.5% from the previous year, reaching

10.62 million units, as expanding overseas markets lifted exports 4.2%, to 4.98 million units, and as

carmakers introduced new compact models to the market. Another factor behind the gain in 2004

was the absence of a reduction in sales which was forecasted after the significant pre-buy activities

in 2003 resulting from the tightening of diesel engine exhaust emissions.

With plant expansion and housing construction on the rise, the domestic construction and hous-

ing industries continued to be steady during the year under review.

In this business climate, the Riken Group made efforts to strengthen the competitiveness of its

quality, technology and pricing particularly in its core product areas, including piston rings and

camshafts, to better satisfy the needs of its customers.

During the year under review, automotive parts sales increased and sales of mechanical equip-

ment for overseas markets and environmental and safety-related equipment were also up. As a

result, consolidated net sales climbed 9.3% from the previous year, to ¥78,429 million. Although

profits were negatively influenced by falling selling prices and surging costs of materials for casting

products and other expenses, operating income rose 12.3%, to ¥6,842 million, due to our efforts to

cut procurement costs and streamline operations in the production and other sectors. Net income

amounted to ¥4,998 million, jumping 28.9% from the previous year. Consequently, operating

income and net income posted record highs.

On October 23, 2004, Riken Corporation's Kashiwazaki Plant and several Group companies

located in the Chuetsu region of Niigata Prefecture were hit by a series of severe earthquakes.

Fortunately, no significant damage was reported and all quickly resumed normal operations.

Based on these positive results, we have decided to increase our annual dividend by ¥1.5 per

share, to ¥10.

Business Climate and Operational Review

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4 RIKEN CORPORATION

In the period ahead, the U.S. and Asian economies are expected to remain steady, while the Europeaneconomy is expected to follow a mild recovery. However, considering various uncertainties, includingthe possibility that crude oil prices and raw materials prices may stay at the current high level orincrease, the world economic outlook is likely to remain unclear. On the domestic front, robust exportsand capital investment will continue to help companies maintain good profitability. However, there isconcern that the increasing burden of taxes and social security costs may negatively impact personalconsumption. Moreover, surging raw materials prices, possible yen appreciation and political uncertain-ty will all cause stock market concerns. Thus, it will continue to be difficult to be optimistic about theeconomic and business environment.

In this environment, the Riken Group will work to expand sales of automotive parts, the main cus-tomers for which are the Japanese automakers, and increase sales of environmental and safety-relatedequipment. In fiscal 2005, net sales are forecasted to be ¥83 billion, operating income ¥7.4 billion, andnet income ¥5.4 billion, all on a consolidated basis.

For the automobile industry, markets are expected to expand worldwide, including those in Chinaand other Asian nations, as well as the United States and the developed countries of Europe. Japaneseautomakers are forecasted to further increase the scale of their production globally. With our customersworking to enhance their competitiveness and grow, their requirements for our products are becomingmore and more demanding with regards to quality, technology and price. Considering that raw materialsupply and demand will continue to tighten resulting in the continuation of surging prices, business con-ditions for us will remain severe. Under this type of environment, we greatly need to further strengthenour business base.

The Riken Group will strive to hone its competitive edge through further improvements in productquality and technology. It will also carry out sales activities suitable for global markets, and strengthencooperation among Group companies inside and outside Japan. Thus it aims to expand total Groupsales. At the same time, to further heighten corporate value, the Group will redouble its streamliningefforts to increase production efficiency and improve its financial standing.

As for our medium to long-term strategies for fiscal 2006 and thereafter, a new medium-term man-agement plan will be drawn up within the current fiscal year. The new plan will build upon the base thatwas established under "PLAN 2005" and will focus on extending the scope of our core businesses inglobal markets and developing the next-generation of automotive parts.

Meanwhile, the first phase of construction work to renovate and increase production capacity at theKashiwazaki Plant and the Tsurugi Plant was nearly completed as of May 2005. This effort was made tostrengthen our piston ring operations. Furthermore, steel piston ring production lines will soon be refur-bished and rationalized to become innovative production lines that excel in quality, cost and delivery(QCD).

Riken Automobile Parts (Wuhan) Co., Ltd., established in January 2004, has already installed state-of-the-art equipment and is scheduled to begin producing high-quality piston rings using the latesttechnology in July of this year.

We are grateful for the support and encouragement of our shareholders.

Toshinaga KoizumiPresident

Outlook for the Future

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Review of Operations

5RIKEN CORPORATION

The automotive parts segment includes the core products of the

Group, piston rings, camshafts, high-grade cast iron products and

valve lifters. Brisk production of engines by Japanese carmakers,

combined with increasing transactions with overseas manufactur-

ers, lifted sales of piston rings for automobile engine applications.

Sales of camshafts also increased thanks to vigorous production

by customers and the increasing adoption of our products for

high-volume models. As a consequence, this segment's sales rose

to ¥55,745 million, a 7.8% increase from the previous year.

Positive production rationalization efforts were offset by soaring

material costs for products such as high-grade cast iron products

and camshafts resulting in segment operating income of ¥4,035

million, a reduction of 1.4%.

Automotive Parts

AUTOMOTIVE PARTS SEGMENT SALESFor the years ended March 31(¥ million)

50,83549,882

52,62251,694

55,745

2001 2002 2003 2004 2005

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6 RIKEN CORPORATION

Among the other products and services of the Group, sales of

sealing rings for transmissions continued strong, and sales of envi-

ronmental-safety-related equipment and equipment for overseas

markets increased. As a result, sales in this segment rose a signifi-

cant 16.2% from the previous year, amounting to ¥17,345 million.

Economies of volume production and the

progress of production rationalization pushed

operating income to ¥2,383 million, an increase

of 22.1%.

Other Products & Services

CONSTRUCTION PRODUCTS & SERVICESSEGMENT SALESFor the years ended March 31(¥ million)

6,651

5,578

4,9935,114

5,337

2001 2002 2003 2004 2005

The construction products and services segment continued to

face severe competition. However, as a result of its efforts to

increase sales of mechanical fittings and other products, sales

rose 4.4% from the prior year, to ¥5,337 million. Notwithstanding

surging prices of materials, operating income skyrocketed 816.1%

year over year, to ¥424 million, as the division strove to expand

sales and further streamline production.

Construction Products & Services

OTHER PRODUCTS & SERVICESSEGMENT SALESFor the years ended March 31(¥ million)

14,42213,788

14,929

17,345

0

3600

7200

10800

14400

18000

2001 2002 2003 2004 2005

13,892

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7RIKEN CORPORATION

The Riken Group is making efforts to develop automotive parts that will helpfacilitate lower fuel and oil consumption and cleaner exhaust gas emissions,and thereby contribute to the conservation of the global environment.

Research and development of products and technologies in the Group'sautomotive parts segment, the construction products and services segmentand the other products and services segment are carried out by theResearch and Development Department of the Company, as well as by theproduction development and production technology sections of each busi-ness division.

The Group's R&D expenses during the year under review totaled ¥1,359million (including research expenses for commercialization of certain develop-ments), of which the automotive parts segment accounted for ¥1,248 million.Spending by the construction products and services segment and the otherproducts and services segment totaled ¥32 million and ¥78 million, respec-tively.

Major R&D activities in each business segment are described below.

1. Automotive parts(1) Development of low-friction, long-life piston rings for gasoline engines

that reduce fuel consumption(2) Development of piston rings for diesel engines that conform to tighter

emissions regulations(3) Research and development of valve components and transmission seal

rings(4) Research and development of various surface treatment technologies

with superior sliding properties(5) Research and development of undercarriage components focusing on

lighter weight and higher strength casting components(6) Research and development of NOx sensors for cars

2. Construction products and services(1) Development of mechanical fittings for various

tube types that can be easily installed, repairedand renewed

(2) Development of long-life water and hot watersupply stainless steel piping systems with highconstruction reliability

3. Other products and services(1) Development of high-frequency absorbers for

anechoic chambers particularly those utilizing ahigh-frequency or microwave testing environment

(2) Development of ceramic exothermic materialswith superior high-temperature durability

R&D Activities

RIKEN AR 2005 p1-8 05.10.20 11:17 ページ7

FINANCIAL SECTION

8 RIKEN CORPORATION

FIVE-YEAR SUMMARYRiken Corporation and Consolidated SubsidiariesYears ended March 31

CONSOLIDATED 2001 2002 2003 2004

Millions of yen

Net sales ¥ 71,909 ¥ 69,249 ¥ 71,509 ¥ 71,738

Operating income 6,157 5,589 5,951 6,091

Net income (loss) (3,173) 3,344 4,409 3,877

Total assets 76,877 72,849 72,144 74,459

Net assets per share (yen) 213.02 245.89 269.53 297.07

Net income (loss) per share (yen) (29.80) 31.81 42.08 37.07

Diluted net income per share (yen) ─ ─ ─ 37.06

Capital ratio (%) 29.5 35.3 38.9 41.5

Net cash provided by operating activities 8,213 5,333 8,917 6,529

Net cash used in investing activities (1,863) (3,314) (6,120) (4,283)

Net cash used in financing activities (9,032) (4,623) (3,002) (2,071)

Cash and cash equivalents at end of year 9,331 7,258 6,724 6,520

Number of employees 3,979 3,850 3,736 3,699

NON-CONSOLIDATED 2001 2002 2003 2004

Millions of yen

Net sales ¥ 64,253 ¥ 61,740 ¥ 62,909 ¥ 63,263

Operating income 5,175 4,465 5,427 4,497

Net income (loss) (3,169) 2,639 3,711 2,891

Capital 8,573 8,573 8,573 8,573

Common shares issued (shares) 106,484,667 106,484,667 106,484,667 106,484,667

Total assets 63,428 58,574 58,496 60,639

Net assets per share (yen) 177.06 192.71 219.78 240.12

Amount of dividend per share (yen) 5.00 7.50 8.50 8.50

Net income (loss) per share (yen) (29.76) 25.12 35.38 27.59

Diluted net income per share (yen) ─ ─ ─ 27.58

Capital ratio (%) 29.7 34.4 39.1 41.2

Number of employees 1,634 1,564 1,501 1,466

2005

¥ 78,429

6,842

4,998

80,747

337.98

47.86

47.78

43.7

7,547

(5,427)

(2,959)

5,578

3,723

2005

¥ 68,483

4,665

3,245

8,573

106,484,667

65,460

264.13

10.00

31.00

30.95

42.1

1,470

RIKEN AR 2005 p1-8 05.10.20 11:17 ページ8

9RIKEN CORPORATION

Significant Accounting Policies and EstimatesThe accompanying consolidated financial statements of RikenCorporation (the Company) and its consolidated subsidiaries areprepared on the basis of accounting principals generally accepted inJapan. When compiling these financial statements, estimates thatmay have influence on the values of assets and liabilities as of theclosing date and the values of income and expenses for the yearunder review are mainly the allowance for uncollectible accounts,accrued bonuses and accrued retirement benefits, and these aresubject to continuous assessment.

Our estimates, judgments and assessments are made on thebasis of factors that are deemed reasonable in light of past perform-ance and conditions. However, since estimates inevitably involveuncertainties, actual values may differ from estimates.

In the fiscal year under review, the Company changed itsaccounting policy related to retirement benefits for directors.Accordingly, the accrued amount at the end of the year was estab-lished based on internal policy and is reported as a provision foraccrued retirement benefits to directors. Until the previous year, thisitem had been expensed at the time of payment. This change wasmade because the accounting practice of reporting a provision forretirement benefits to directors has taken hold and also because weaimed to ensure proper periodic accounting of profit and loss andthe Group's sound financial position by apportioning such provisionduring each director's term of office in a reasonable manner.

Operational ReviewThe main theme of our medium-term business plan is to establish atruly global operation and expand Group sales and earnings. In pur-suit of this goal, we made significant efforts to increase sales andenhance our corporate value during the year under review.

As a result of these efforts, the Group posted net sales of¥78,429 million (up 9.3% from the previous year), gross profit of¥17,652 million (up 4.0%), operating income of ¥6,842 million (up12.3%), ordinary income of ¥7,844 million (up 17.8%), incomebefore income taxes and minority interests of ¥7,515 million (up24.2%) and net income of ¥4,998 million (up 28.9%), all on a con-solidated basis.

Net sales were increased by ¥6,691 million from the prior year byour efforts to expand sales of automotive parts and environmentaland safety-related equipment.

Although surging raw material prices affected sales costs, pro-duction rationalization and other measures enabled reductions ofcosts to a greater extent than in the previous year. In addition,increased production and good performance at affiliated companiescontributed to the year-to-year growth of gross profit.

Other income climbed 24% from the previous year, to ¥1,919 mil-lion. A major part of this growth was related to the gain in equityearnings (¥1,106 million) reflecting the strong performance of affili-ates, including those in Asia, whose earnings are accounted for byusing the equity-method. Meanwhile, other expenses were down6% from the previous year, to ¥917 million, as loss on disposal offixed assets and exchange loss were reduced.

Extraordinary profit of ¥155 million was posted, as the gain onsales of fixed assets increased, among other factors, while extraor-dinary loss amounted to ¥484 million due to the recording of a pro-vision for retirement benefits to directors and other factors.

As a consequence of all of the factors above, the Group's operat-ing income, ordinary income, net income before income taxes andminority interests and net income marked record highs for the year

under review.

Financial PositionThe Group's net assets as of the end of the year under review(March 31, 2005) were up ¥6,288 million from a year earlier, to¥80,747 million. This increase was due mainly to increased equityearnings and an increase in investments in securities (investment inRiken Automobile Parts (Wuhan) Co., Ltd. & other investments) of¥2,277 million. Furthermore, tangible fixed assets rose by ¥1,435million.

Total liabilities as of the end of the year under review came to¥44,240 million, an increase of ¥1,854 million from a year earlier.The unsettled amount was up ¥4,142 million, due to notes andaccounts payable and the Company's capital investment. On theother hand, interest-bearing debt at the end of the year declined¥2,096 million from a year earlier, to ¥17,017 million, due to theappropriation of funds generated from operating and other activities.

Shareholders' equity at the end of the year under review amount-ed to ¥35,254 million, rising ¥4,366 million from a year earlier. Thisgrowth was brought about by an increase in retained earnings of¥4,090 million, among other factors.

As a result, the net worth ratio as of the end of the year underreview reached 43.7%, an increase of 2.2% from 41.5% at the endof the previous year. Meanwhile, return on equity (ROE) for the yearunder review rose to 15.1%, due to an increase in net income. Thiswas up 1.9% from 13.2% at the end of the previous year.

Shareholders' equity per share based on outstanding shares atthe end of the year under review was ¥337.98, an increase of¥40.91 from ¥297.7 at the end of the previous year.

Cash FlowsOverviewFree cash flow, calculated by subtracting "cash flow from investingactivities" from "cash flow from operating activities," amounted to¥2,120 million for the year under review. As a result of appropriationof funds for the repayment of debt (¥2,209 million) and payment ofdividends (¥882 million), cash and cash equivalents at the end of theyear under review dropped by ¥942 million from a year earlier, to¥5,578 million.

Comparison with the Previous YearCash flow from operating activities reached ¥7,547 million, up¥1,018 million from the preceding year. In addition to an increase of¥1,465 million in income before income taxes and minority interests,cash increased by ¥1,288 million due to an increase in notes andaccounts payable. Meanwhile cash decreased due to such factorsas a ¥1,377 million increase in notes and accounts receivable, a¥1,089 million rise in inventories, and a ¥477 million payment ofincome taxes.

Cash flow for investment activities amounted to ¥5,427 million, anincrease of ¥1,143 million from the previous year. This growth wasmainly due to the acquisition cost of tangible fixed assets totaling¥4,368 million, an increase of ¥291 million, and the ¥1,190 millionacquisition costs of investment securities, an increase of ¥834 mil-lion.

Cash flow for financing activities totaled ¥2,959 million, up ¥887million from the previous year. The main factor behind this growthwas the payment of short- and long-term debt rising ¥1,042 millionfrom the previous year, to ¥2,209 million.

OPERATIONAL REVIEW AND ANALYSIS OF FINANCIAL POSITION

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10 RIKEN CORPORATION

CONSOLIDATED BALANCE SHEETS

Riken Corporation and Consolidated SubsidiariesYears ended March 31, 2005 and 2004

ASSETS

Current assets:

Cash and cash equivalents

Time deposits

Notes and accounts receivable

Less allowance for doubtful receivables

Marketable securities (Notes 1(f) and 3)

Inventories (Note 4)

Deferred tax assets (Notes 1(k) and 7)

Other current assets

Total current assets

Non-current assets:

Property, plant and equipment, at cost (Notes 5 and 6):

Land

Buildings

Machinery and equipment

Construction in progress

Property, plant and equipment, net

Investments in unconsolidated subsidiaries and affiliates

Investments in other securities (Notes 1(f) and 3)

Deferred tax assets (Notes 1(k) and 7)

Other non-current assets

Total non-current assets

Total assets

The accompanying notes are an integral part of these statements.

2005

$ 52,131

570

197,963

(243)

─

87,121

9,346

6,654

353,561

33,346

67,383

112,841

14,692

246,972

31,523

55,869

47,187

19,514

401,084

$ 754,645

2004

¥ 6,520

188

19,133

(42)

2

7,620

1,095

377

34,895

3,543

7,664

13,002

780

24,991

3,169

3,904

5,408

2,088

39,563

¥ 74,459

2005

¥ 5,578

61

21,182

(26)

─

9,322

1,000

712

37,831

3,568

7,210

12,074

1,572

26,426

3,373

5,978

5,049

2,088

42,916

¥ 80,747

000,000

(Millions of yen) (Thousands ofU.S. dollars)

(Note 2)

RIKEN AR 2005 p9-32 05.10.26 10:38 ページ10

11RIKEN CORPORATION

CONSOLIDATED BALANCE SHEETS


LIABILITIES, MINORITY INTERESTS AND SHAREHOLDERS' EQUITY

Current liabilities:

Notes and accounts payable

Short-term debt (Note 6)

Current portion of long-term debt (Note 6)

Accrued income taxes (Note 7)

Accrued expenses and other current liabilities (Note 8)

Total current liabilities

Long-term liabilities:

Long-term debt (Note 6)

Deferred tax liabilities (Notes 1(k) and 7)

Accrued retirement benefits (Notes 1(j) and 9)

Accrued retirement benefits to directors and statutory auditors (Notes 1(j) and 9)

Excess of net assets acquired over cost

Other long-term liabilities

Total long-term liabilities

Minority interests in consolidated subsidiaries

Shareholders' equity (Note 10):

Common stock:

Authorized - 196,525,000 shares

Issued - 106,484,667 shares at March 31, 2005 and 2004

Capital surplus

Retained earnings

Unrealized holding gain on other securities (Notes 1(f) and 3)

Translation adjustments (Note 1(c))

Less treasury stock, at cost

Total shareholders' equity

Contingent liabilities (Note 12)

Total liabilities, minority interests and shareholders' equity


2005

$ 124,299

78,495

11,458

9,813

75,822

299,907

66,065

28

44,467

2,458

150

355

113,551

11,701

80,121

61,757

211,318

2,430

(18,178)

(7,972)

329,477

$ 754,645

00,000

0,000

2004

¥ 11,219

9,356

1,206

1,620

5,840

29,244

8,242

4

4,831

–

54

7

13,141

1,184

8,573

6,605

18,521

141

(1,969)

(983)

30,888

¥ 74,459

2005

¥ 13,300

8,399

1,226

1,050

8,113

32,090

7,069

3

4,758

263

16

38

12,150

1,252

8,573

6,608

22,611

260

(1,945)

(853)

35,254

¥ 80,747


(Note 2)

RIKEN AR 2005 p9-32 05.10.26 10:38 ページ11


CONSOLIDATED STATEMENTS OF INCOME


Net sales

Cost of sales

Gross profit

Selling, general and administrative expenses

Operating income

Other income (expenses):

Interest and dividend income

Interest expense

Equity in earnings of investees

Loss on disposal of inventories

Gain on sales of fixed assets

Gain on reversal of allowance for doubtful receivables

Loss on disposal of fixed assets

Retirement benefits to directors and statutory auditors

Other, net

Income before income taxes and minority interests

Income taxes (Notes 1(k) and 7):

Current

Deferred

Minority interests in earnings of consolidated subsidiaries

Net income (Note 15)


2005

$ 732,981

568,000

164,972

101,019

63,944

1,084

(2,383)

10,336

(935)

944

467

(1,495)

(1,953)

215

70,234

19,308

3,551

22,869

(654)

$ 46,710

,000

0,000

2004

¥ 71,738

54,759

16,979

10,888

6,091

138

(307)

834

(175)

30

─

(133)

─

(427)

6,050

2,813

(783)

2,030

(143)

¥ 3,877

2005

¥ 78,429

60,776

17,652

10,809

6,842

116

(255)

1,106

(100)

101

50

(160)

(209)

23

7,515

2,066

380

2,447

(70)

¥ 4,998


(Note 2)

RIKEN AR 2005 p9-32 05.10.26 10:38 ページ12

13RIKEN CORPORATION

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY


Common stock

Balance at beginning of year

Balance at end of year

Capital surplus


Add:

Gain on sales of treasury stock


Retained earnings


Add:

Net income

Adjustments for inclusion in or exclusion from consolidation or

equity method of accounting

Prior period adjustments at foreign subsidiaries

Other adjustment

Deduct:

Cash dividends applicable to the year

Bonuses to directors and statutory auditors

Prior period adjustments at foreign subsidiaries


Unrealized holding gain on other securities


Net change during the year

Balance at end of year (Notes 1(f) and 3)

Translation adjustments



Balance at end of year (Note 1(c))

Treasury stock





2005

$ 80,121

$ 80,121

$ 61,729

28

$ 61,757

$ 173,093

46,710

─

─

0

(8,252)

(234)

─

$ 211,318

$ 1,318

1,112

$ 2,430

$ (18,402)

215

$ (18,178)

$ (9,187)

1,206

$ (7,972)

2004

¥ 8,573

¥ 8,573

¥ 6,604

0

¥ 6,605

¥15,220

3,877

334

1

─

(883)

(28)

─

¥18,521

¥ (2)

143

¥ 141

¥(1,386)

(583)

¥(1,969)

¥ (970)

(13)

¥ (983)

2005

¥ 8,573

¥ 8,573

¥ 6,605

3

¥ 6,608

¥18,521

4,998

─

─

0

(883)

(25)

─

¥22,611

¥ 141

119

¥ 260

¥(1,969)

23

¥(1,945)

¥ (983)

129

¥ (853)


(Note 2)

RIKEN AR 2005 p9-32 05.10.26 10:38 ページ13


CONSOLIDATED STATEMENTS OF CASH FLOWS


Operating activities

Income before income taxes and minority interests

Depreciation and amortization


(Reversal of) provision for accrued retirement benefits

Reversal of allowance for doubtful receivables

Gain on sales of fixed assets

Loss on disposals of fixed assets

Increase in notes and accounts receivable

Increase in inventories

Increase in notes and accounts payable

Other, net

Subtotal

Interest received

Interest paid

Income taxes paid

Net cash provided by operating activities

Investing activities

Increase in property, plant and equipment

Proceeds from sales of property, plant and equipment

Increase in investments in securities

Proceeds from sales of investments in securities

Other, net

Net cash used in investing activities

Financing activities

Proceeds from short-term bank loans

Repayment of short-term bank loans

Proceeds from long-term bank loans

Repayment of long-term bank loans

Increase in treasury stock

Proceeds from sales of treasury stock

Cash dividends paid

Other, net

Net cash used in financing activities

Effect of exchange rate changes on cash and cash equivalents

Net decrease in cash and cash equivalents

Cash and cash equivalents at beginning of year

Cash and cash equivalents at end of year


2005

$ 70,234

39,196

(10,336)

(1,140)

(159)

(944)

1,495

(19,056)

(15,738)

19,196

14,121

96,869

1,084

(2,402)

(25,009)

70,533

(40,822)

1,318

(11,121)

19

(112)

(50,720)

54,766

(64,103)

─

(11,308)

(318)

1,551

8,243

─

(27,654)

(963)

(8,804)

60,935

$ 52,131

2004

¥ 6,050

4,143

(834)

321

(137)

(30)

133

(661)

(594)

766

718

9,873

138

(328)

(3,154)

6,529

(4,077)

49

(356)

160

(60)

(4,283)

4,372

(5,809)

9,634

(9,366)

(11)

–

(883)

(9)

(2,071)

(378)

(204)

6,724

¥ 6,520

2005

¥ 7,515

4,194

(1,106)

(122)

(17)

(101)

160

(2,039)

(1,684)

2,054

1,511

10,365

116

(257)

(2,676)

7,547

(4,368)

141

(1,190)

2

(12)

(5,427)

5,860

(6,859)

─

(1,210)

(34)

166

(882)

─

(2,959)

(103)

(942)

6,520

¥ 5,578


(Note 2)

RIKEN AR 2005 p9-32 05.10.26 10:38 ページ14

15RIKEN CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Riken Corporation and Consolidated SubsidiariesMarch 31, 2005

1. SUMMARY OF SIGNIFICANTACCOUNTING POLICIES

(a) BASIS OF PRESENTATIONRiken Corporation (the "Company") and itsdomestic subsidiaries maintain their books ofaccount in conformity with the financial accountingstandards of Japan, and its foreign subsidiariesmaintain their books of account in conformity withthose of their countries of domicile.

The accompanying consolidated financial state-ments of the Company and consolidated sub-sidiaries are prepared on the basis of accountingprinciples generally accepted in Japan, which aredifferent in certain respects as to the applicationand disclosure requirements of InternationalFinancial Reporting Standards, and are compiledfrom the consolidated financial statements pre-pared by the Company as required by theSecurities and Exchange Law of Japan.

As permitted by the regulations under theSecurities and Exchange Law, amounts of lessthan one million yen have been omitted. As aresult, the totals shown in the accompanying con-solidated financial statements (both in yen and inU.S. dollars) do not necessarily agree with thesums of the individual amounts.

(b) PRINCIPLES OF CONSOLIDATION ANDACCOUNTING FOR INVESTMENTS INUNCONSOLIDATED SUBSIDIARIES ANDAFFILIATED COMPANIES

The accompanying consolidated financial statementsinclude the accounts of the Company and any signif-icant subsidiaries and affiliates which it controlsdirectly or indirectly. Subsidiaries and affiliates overwhich the Company exercises significant influence interms of their operating and financial policies havebeen included in the consolidated financial state-ments on an equity basis. All significant intercompa-ny balances and transactions have been eliminated.

The excess of cost over the underlying equity innet assets at the dates of acquisition of the majorconsolidated subsidiaries is charged to income overa five-year period by the straight-line method.

Investments in unconsolidated subsidiaries andaffiliates, not accounted for by the equity method,are stated at cost or less.

(c) TRANSLATION OF FOREIGN CURREN-CIES

Accounts of foreign consolidated subsidiaries aretranslated into yen as follows: all assets, liabilities,retained earnings at the end of the year and items,including net income, in the statement of income, atthe rate of exchange in effect at the year end; capitalstock, at historical rates, and dividends paid, at therate of exchange in effect when paid.

The Company has presented translation adjust-ments as a component of shareholders' equity and

minority interests in consolidated subsidiaries(instead of as a component of assets or liabilities) inthe accompanying consolidated financial statements.

(d) APPROPRIATION OF RETAINED EARN-INGS

Cash dividends paid, transfers to the legal reserveand bonuses to directors and statutory auditors arerecorded in the financial year in which the proposedappropriations of retained earnings are approved bythe Board of Directors and/or shareholders.

(e) CASH EQUIVALENTSThe Company and its consolidated subsidiaries sub-stantially consider all highly liquid investments with amaturity of three months or less when purchased tobe cash equivalents.

(f) SECURITIESSecurities other than those of subsidiaries and affili-ates are classified into three categories: trading,held-to-maturity or other securities. Trading securi-ties are carried at fair value and held-to-maturitysecurities are carried at amortized cost. Marketablesecurities classified as other securities are carried atfair value with any changes in unrealized gain or loss,net of the applicable income taxes, included directlyin shareholders' equity. Non-marketable securitiesclassified as other securities are carried at cost.Cost of securities sold is determined by the movingaverage method.

(g) INVENTORIESInventories are stated at cost determined principallyby the moving average method.

(h) PROPERTY, PLANT AND EQUIPMENTAND DEPRECIATION

Depreciation of buildings and of machinery andequipment is determined primarily by the declining-balance method, except for buildings acquired inJapan subsequent to March 31, 1998 on whichdepreciation is computed by the straight-linemethod, at rates based on the estimated useful livesof the respective assets.

(i) LEASESNoncancelable leases are primarily accounted for asoperating leases (whether such leases are classifiedas operating or finance leases) except that leaseagreements which stipulate the transfer of ownershipof the leased assets to the lessee are accounted foras finance leases.

(j) RETIREMENT BENEFITSAccrued retirement benefits at March 31, 2005and 2004 have been provided principally at an

RIKEN AR 2005 p9-32 05.10.26 10:38 ページ15


2. U.S. DOLLAR AMOUNTS

3. SECURITIES

amount calculated based on the retirement benefitobligation and the fair value of the pension planassets as of the balance sheet date, as adjustedfor unrecognized actuarial gain or loss and unrec-ognized prior service cost. The retirement benefitobligation is attributed to each period by thestraight-line method over the estimated years ofservice of the eligible employees. Unrecognizedactuarial gain and loss are amortized in the yearfollowing the year in which the gain or loss is rec-ognized by the straight-line method over periods(principally 10 years) which are shorter than theaverage remaining years of service of the employ-ees.

In prior years, the Company expensed retirementbenefits to directors and statutory auditors whenpaid. Effective the semiannual period endedSeptember 30, 2004, the Company began accruingretirement benefits to directors and statutory auditorsat the full amount which would be required to bepaid if all directors and statutory auditors retired atthe balance sheet date based on the Company'sinternal regulations. This change in method ofaccounting was made in order to reflect a moreappropriate cost allocation to each period and toenhance the Company's financial position. The

effect of this change was to decrease net income by¥250 million and to increase selling, general andadministrative expenses by ¥41 million and otherexpenses by ¥209 million.

See Note 9 for the method of accounting for thecorporate portion of the retirement benefit obligationunder the Welfare Pension Fund Plan.

(k) INCOME TAXESDeferred tax assets and liabilities are determinedbased on the differences between financial reportingand the tax bases of the assets and liabilities and aremeasured using the enacted tax rates and lawswhich will be in effect when the differences areexpected to reverse.

(l) RESEARCH AND DEVELOPMENT COSTSResearch and development costs are charged toincome when incurred.

The translation of yen amounts into U.S. dollaramounts is included solely for convenience andhas been made, as a matter of arithmetic compu-tation only, at ¥107 = U.S.$1.00, the approximaterate of exchange prevailing on March 31, 2005.The translation should not be construed as a rep-

resentation that yen have been, could have been,or could in the future be, converted into U.S. dol-lars at that or any other rate.

(a) Information regarding marketable securities classified as other securities at March 31, 2005 is as follows:

Securities whose carrying

value exceeds their acquistion cost:

Stock

Subtotal

Securities whose acquisition cost

exceeds their carrying value:

Stock

Subtotal

Total

March 31, 2005

Acquisitioncost

Carryingvalue

Unrealizedgain (loss)

Acquisitioncost

Carryingvalue

Unrealizedgain (loss)

¥251 ¥727 ¥476 $2,346 $6,794 $4,449

251 727 476 2,346 6,794 4,449

33 22 (10) 308 206 (93)

33 22 (10) 308 206 (93)

¥284 ¥749 ¥465 $2,654 $7,000 $4,346

(Millions of yen) (Thousands of U.S. dollars)

RIKEN AR 2005 p9-32 05.10.26 10:38 ページ16

17RIKEN CORPORATION

(b) Sales of securities classified as held-to-maturity debt securities and the related aggregate cost, gain andloss at March 31, 2005 were as follows:

March 31, 2005

Sales cost Gain andloss Sales cost Gain and

loss

¥ 2 ¥ ─ ¥ ─ $ 19 $ ─ $ ─


(Millions of yen)

Securities whose fair value exceeds carrying value:

Coporate bonds

Subtotal

Securities whose carrying value exceeds fair value:

Coporate bonds

Subtotal

Total

(d) Information regarding marketable securities classified as held-to-maturity debt securities at March31, 2004 is as follows:

March 31, 2004

Carrying value Fair value Unrealizedgain (loss)

¥ 2 ¥ 2 ¥ 0

2 2 0

─ ─ ── ─ ─

¥ 2 ¥ 2 ¥ 0

Held-to-maturity debt securities:

Other

Other securities:

Unlisted securities (except for securities

traded on the over-the-counter market)

Others

(c) The carrying value and details of securities with no determinable fair value at March 31, 2005, aresummarized as follows:

Carrying value

(Thousands ofU.S. dollars)

(Millions of yen)

¥ ─ $ ─

2,620 24,486

3 28

(e) Information regarding marketable securities classified as other securities at March 31, 2004 is asfollows:

(Millions of yen)

Securities whose carrying value exceeds

their acquisition cost:

Stock

Subtotal

Securities whose acquisition cost excceds

their carryng value:

Stock

Subtotal

Total

March 31, 2004

Acquisition cost Carrying value Unrealizedgain (loss)

¥ 215 ¥ 491 ¥ 275

215 491 275

65 54 (11)

65 54 (11)

¥ 281 ¥ 546 ¥ 264

RIKEN AR 2005 p9-32 05.10.26 10:38 ページ17


(Millions of yen)

Held-to-maturity debt securities:

Others

Other securities:

Unlisted securities (except for securities traded on the over-the-counter market)

Others

Carrying value

¥ 0

2,620

3

4. INVENTORIES

Finished products

Goods for resale

Work in process

Other

Inventories at March 31, 2005 and 2004 were as follows:

2005 2004 2005

(Millions of yen)(Thousands ofU.S. dollars)

¥ 2,750

1,111

4,201

1,259¥ 9,322

¥ 2,631

961

2,961

1,066¥ 7,620

$ 25,701

10,383

39,262

11,766$ 87,121

(Millions of yen)

Corporate bondsOther debt securitiesOther securitiesTotal

March 31, 2004

Due in oneyear or less

Due after one yearthrough five years

Due after five years through ten years

Due afterten years

¥ 2 ¥ ─ ¥ ─ ¥ ─0 ─ ─ ── ─ ─ ─

¥ 2 ¥ ─ ¥ ─ ¥ ─

(f) Sales of securities classified as other securities and the related aggregate gain and loss at March 31, 2004were as follows:

March 31, 2004

Sales Aggregategain

Aggregateloss Sales Aggregate

gainAggregate

loss

¥ 172 ¥ ─ ¥ ─ $ 1,623 $ ─ $ ─


(h) The redemption schedule for securities with maturity dates classified as other securities and held-to-maturity debt securities is summarized as follows:

(g) The carrying value and details of securities not carried at fair value at March 31, 2004 are summa-rized as follows:

March 31,

RIKEN AR 2005 p9-32 05.10.26 10:38 ページ18

19RIKEN CORPORATION

5. DEPRECIATION

6. SHORT-TERM DEBT ANDLONG-TERM DEBT

Depreciation of property, plant and equipmentfor the years ended March 31, 2005 and 2004amounted to ¥4,021 million ($37,579 thou-sand) and ¥3,917 million, respectively.Accumulated depreciation of property, plant

and equipment at March 31, 2005 and 2004amounted to ¥62,883 million ($587,692 thou-sand) and ¥60,842 million, respectively.

At March 31, 2005 and 2004, short-term debt and the current portion of long-term debt consisted ofthe following:

Loans, principally from banks

Current portion of long-term debt

2005 2004 2005


¥ 8,425

1,200

¥ 9,625

¥ 9,3561,206

¥10,562

$ 78,738

11,215

$ 89,953

The annual interest rates applicable to short-term debt outstanding at March 31, 2005 and 2004ranged principally from 0.58 percent to 8.17 percent and from 0.59 percent to 7.40 percent, respec-tively.

At March 31, 2005 and 2004, long-term debt consisted of the following:

Secured loans from banks, insurance

companies, due through 2011 at interest

rates ranging from 4.09 percent to

4.90 percent

Unsecured loans from banks, insurance

companies and others due through 2018

at interest rates ranging from 1.49 percent

to 6.00 percent

Less current portion

2005 2004 2005


¥ 274

7,995

8,270

(1,200)

¥ 7,069

¥ 285

9,162

9,448

(1,206)

¥ 8,242

$ 2,561

74,720

77,280

(11,215)

$ 66,065

2006

2007

2008

2009 and thereafter

The maturities of long-term debt are summarized as follows:

The assets pledged as collateral for short-term debt of ¥535 million ($5,000 thousand) and long-termdebt of ¥274 million ($2,561 thousand) at March 31, 2005 and 2004 were as follows:

Year ending March 31,


¥ 1,200

1,525

1,135

4,410

¥ 8,270

$ 11,215

14,252

10,607

41,206

$ 77,280

Property, plant and equipment, at netbook value

Other

2005 2004 2005


¥ 1,964

25

¥ 1,991

¥ 1,61195

¥ 1,708

$ 18,355

234

$ 18,607

March 31,

March 31,

March 31,

RIKEN AR 2005 p9-32 05.10.26 10:38 ページ19


Statutory tax rate

Effect of:

Expenses not deductible for income tax purposes

Dividend income deductible for income tax purposes

Per capita portion of inhabitants taxes

Differences in tax rates applicable to overseas subsidiaries


Other, net

Effective tax rates

The effective tax rates reflected in the consolidated statement of income for the years ended March31, 2005 and 2004 differ from the statutory tax rates for the following reasons:

2004

41.8%

0.4(0.4)0.4(1.6)(5.8)(1.2)

33.6%

The significant components of deferred tax assets and liabilities at March 31, 2005 and 2004 were asfollows:

Deferred tax assets:Current assets:Accrued bonusesAccrued enterprise taxOther, netValuation allowance

Total deferred tax assets (current)Non-current assets:Accrued retirement benefitsDepreciationLoss carryforwardAccrued retirement benefits to directors and statutory auditors

Other, netValuation allowanceElimination of deferred tax liabilities (non-current)

Total deferred tax assets (non-current)Deferred tax liabilities:

Current liabilitiesNon-current liabilities:Gain on contribution of securitiesto retirement benefit trust

DepreciationOther, netElimination to deferred tax assets(non-current)

Total deferred tax liabilities (non-current)

2005 2004 2005


¥ 77879

219(76)

¥ 1,000

¥ 6,5956314

106331

(309)

(1,753)¥ 5,049

¥ ─

¥ (1,472)(66)

(217)

1,753¥ (3)

¥ 737205228(75)

¥ 1,095

¥ 7,0235822

─282(300)

(1,678)¥ 5,408

¥ ─

¥ (1,470)(74)

(137)

1,678¥ (4)

$ 7,271738

2,047(701)

$ 9,346

$ 61,636589131

9913,093(2,888)

(16,383)$ 47,187

$ ─

$ (13,757)(617)

(2,028)

16,383$ (28)

7. INCOME TAXES Income taxes applicable to the Company andits domestic subsidiaries comprise corporationtax, inhabitants taxes and enterprise taxwhich, in the aggregate, resulted in a statutorytax rate of 41.8 percent for 2004. However, inaccordance with an amendment to local taxlaws which became effective April 1, 2004, the

statutory tax rate of 40.5 percent was adoptedsubsequent to March 31, 2004.

Income taxes of the overseas subsidiariesare based generally on the tax rates applicablein their countries of incorporation.

2005

40.5%

0.3

(0.6)

0.3

(1.1)

(6.0)

(0.8)

32.6%

March 31,

RIKEN AR 2005 p9-32 05.10.26 10:38 ページ20

21RIKEN CORPORATION

8. ACCRUED EXPENSESAND OTHER CURRENTLIABILITIES

At March 31, 2005 and 2004, accrued expenses and other current liabilities consisted of the follow-ing:

Accrued bonusesOther

2005 2004 2005


¥ 1,921

6,191

¥ 8,113

¥ 1,820

4,020

¥ 5,840

$ 17,953

57,860

$ 75,822

9. RETIREMENT BENEFITPLANS

The Company has defined benefit plans, i.e.,welfare pension fund plans (WPFP), tax-quali-fied pension plans and lump-sum paymentplans, covering substantially all employeeswho are entitled to lump-sum or annuity pay-ments, the amounts of which are determinedby reference to their basic rates of pay, lengthof service, and the conditions under which ter-mination occurs. In addition, domestic sub-sidiaries have primarily defined benefit plans,

funded non-contributory tax-qualified, andlump-sum payments. Certain overseas sub-sidiaries have defined benefit plans.

The following table sets forth the funded andaccrued status of the plans, and the amountsrecognized in the consolidated balance sheetat March 31, 2005 and 2004 for theCompany's and the subsidiaries' defined ben-efit plans:

Retirement benefit obligation

Plan assets at fair value

Unfunded retirement benefit obligation

Unrecognized actuarial gain or loss

Unrecognized prior service cost

Accrued retirement benefits

2005 2004 2005


¥(23,177)

20,020

(3,157)

(735)

(865)

¥ (4,758)

¥(23,461)

18,390

(5,071)

239

─¥ (4,831)

$(216,607)

187,103

(29,505)

(6,869)

(8,084)

$ (44,467)

On February 1, 2005, the Company receivedapproval from the Minister of Health, Laborand Welfare with respect to its application forexemption from the obligation for benefitsrelated to past employee services under the

substitutional portion of the WPFP. Theremaining corporate portion of the WPFP istransferred to a corporate defined benefit pen-sion plan.

The components of retirement benefit expenses for the years ended March 31, 2005 and 2004 areoutlined as follows:

Service costInterest cost Expected return on plan assetsAmortization of actuarial gain or lossPast service costOtherSubtotalTotal

2005 2004 2005


¥ 1,044386─

1576640

1,694¥ 1,694

¥ 845472─

854─37

2,209¥ 2,209

$ 9,7573,607─

1,467617374

15,832$ 15,832

Discount rates

Expected rates of return on plan assets

2005 2004

March 31,

1.7%

0.0%

2.0%

0.0%

The assumptions used in accounting for the above plans were as follows:

March 31,

March 31,

March 31,

RIKEN AR 2005 p9-32 05.10.26 10:38 ページ21


10. SHAREHOLDERS'EQUITY

11. RESEARCH ANDDEVELOPMENT COSTS

The Commercial Code of Japan (the "Code")provides that an amount equal to at least 10%of the amounts to be disbursed as distribu-tions of earnings be appropriated to the legalreserve until the sum of the legal reserve andadditional paid-in capital equals 25% of thecommon stock account. The Code also stipu-lates that, to the extent that the sum of theadditional paid-in capital account and the legalreserve exceeds 25% of the common stockaccount, the amount of any such excess is

available for appropriation by resolution of theshareholders.

Retained earnings also include retainedearnings appropriated for special reserves inaccordance with the Special TaxationMeasures Law and the Commercial Code ofJapan. The reserves are deducted from tax-able income when provided and are to bereversed to taxable income in subsequentyears through direct appropriations of retainedearnings.

Research and development costs included inselling, general and administrative expensesand manufacturing costs for the years ended

March 31, 2005 and 2004 amounted to¥1,359 million ($12,701 thousand) and ¥1,397million, respectively.

At March 31, 2005 and 2004, the Company and its consolidated subsidiaries had the following con-tingent liabilities:12. CONTINGENT

LIABILITIES

As endorser of trade notes discounted

and endorsed

As guarantor of transferred accounts

receivable

As guarantor of indebtedness of

employees

2005 2004 2005


¥ 307

197

136

¥ 640

¥ 253

156

138

¥ 547

$ 2,869

1,841

1,271

$ 5,981

Acquisition costs:


Other assets

Accumulated depreciation:


Other assets

Net book value:


Other assets

2005 2004 2005


¥ 1,687

95

¥ 1,783

¥ 1,091

56

¥ 1,148

¥ 595

38

¥ 634¥

7,620

¥ 1,911

134

¥ 2,046

¥ 1,120

82

¥ 1,203

¥ 790

51

¥ 842

$ 15,766

888

$ 16,664

$ 10,196

523

$ 10,729

$ 5,561

355

$ 5,925,

13. LEASES The following pro forma amounts representthe acquisition costs, accumulated depreci-ation and net book value of the leased prop-erties at March 31, 2005 and 2004, which

would have been reflected in the consolidat-ed balance sheets if finance lease account-ing had been applied to the finance leasescurrently accounted for as operating leases:

March 31,

March 31,

RIKEN AR 2005 p9-32 05.10.26 10:38 ページ22

23RIKEN CORPORATION

Lease payments relating to finance leasesaccounted for as operating leases amountedto ¥253 million ($2,364 thousand) and ¥306million for the years ended March 31, 2005and 2004, respectively which were almostequal to the depreciation expense of theleased assets computed by the straight-line

method over the lease terms.Future minimum lease payments (including

the interest portion thereon) subsequent toMarch 31, 2005 for finance leases accountedfor as operating leases are summarized as fol-lows:

Year ending March 31,

2006

2007 and thereafter

Total


¥ 211

423

¥ 634

$ 1,972

3,953

$ 5,925

14. DERIVATIVES The Company enters into foreign forwardexchange contracts to reduce its exposure toadverse fluctuation in foreign exchange ratesrelating to receivables and payables denomi-nated in foreign currencies. In addition, theCompany enters into interest-rate swap agree-ments to reduce its exposure to adverse fluc-

tuation in interest rates relating to long-termdebt.

Disclosure of fair value information for inter-est-related derivatives positions has beenomitted since all derivatives were accountedfor as hedges at March 31, 2005 and 2004.

15. AMOUNTS PER SHARE The computation of basic net income pershare is based on the weighted-average num-ber of shares of common stock outstandingduring each year. If applicable, diluted netincome per share is computed based on theweighted-average number of shares of com-mon stock outstanding each year after givingeffect to the dilutive potential of the shares of

common stock to be issued pursuant to thestock option plan.

Cash dividends per share represent divi-dends declared as applicable to the year.

Net assets per share are based on the num-ber of shares outstanding at the year end.

Net income:

Basic

Diluted

Net assets

Cash dividends applicable to the year

No diluted net income per share was presented for the year ended March 31, 2003.

2005 2004 2005

(yen) (U.S. dollars)

¥ 47.86

47.78

337.98

10.00

¥ 37.07

37.06

297.07

8.50

$ 0.447

0.447

3.159

0.093

RIKEN AR 2005 p9-32 05.10.26 10:38 ページ23


1. Sales:

Sales to third parties

Intersegment sales

and transfers

Total

Operating expenses

Operating income

2. Assets, depreciation expenses, capital expenditures:

Assets

Depreciation expenses

Capital expenditures

Automobile Construction Other TotalEliminationsor corporate

Consolidated

Year ended March 31, 2005

(Millions of yen)

¥55,745 ¥5,337 ¥17,345 ¥78,429 ¥ ─ ¥78,429

─ ─ ─ ─ (─) ─55,745 5,337 17,345 78,429 (─) 78,429

51,710 4,913 14,962 71,586 (─) 71,586

¥ 4,035 ¥ 424 ¥ 2,383 ¥ 6,842 ¥ (─) ¥ 6,842

¥51,107 ¥5,861 ¥12,349 ¥69,318 ¥11,428 ¥80,747

¥ 3,380 ¥ 217 ¥ 516 ¥ 4,115 ¥ 58 ¥ 4,173

¥ 5,127 ¥ 158 ¥ 411 ¥ 5,697 ¥ ─ ¥ 5,697

(a) Business segmentsThe business segment information of the Company and its consolidated subsidiaries for the yearsended March 31, 2005 and 2004 is summarized as follows:

16. SEGMENT INFORMATION

1. Sales:


Intersegment sales

and transfers

Total

Operating expenses

Operating income


Assets



Automobile Construction Other TotalEliminationsor corporate

Consolidated


(Thousands of U.S. dollars)

$ 520,981 $ 49,879 $162,103 $732,981 $ ─ $732,981

─ ─ ─ ─ (─) ─520,981 49,879 162,103 732,981 (─) 732,981

483,271 45,916 139,832 669,028 (─) 669,028

$ 37,710 $ 3,963 $ 22,271 $ 63,944 $ (─) $ 63,944

$ 477,636 $ 54,776 $115,411 $647,832 $106,804 $754,645

$ 31,589 $ 2,028 $ 4,822 $ 38,458 $ 542 $ 39,000

$ 47,916 $ 1,477 $ 3,841 $ 53,243 $ ─ $ 53,243

RIKEN AR 2005 p9-32 05.10.26 10:38 ページ24

25RIKEN CORPORATION

1. Sales:


Intersegment sales

and transfers

Total

Operating expenses

Operating income


Assets



ConstructionAutomobile Other TotalEliminations

and corporateConsolidated


(Millions of yen)

¥51,694 ¥5,114 ¥14,929 ¥71,738 ¥ ─ ¥71,738

─ ─ ─ ─ (─ ) ─51,694 5,114 14,929 71,738 (─ ) 71,738

47,602 5,068 12,976 65,647 (─ ) 65,647

¥ 4,092 ¥ 46 ¥ 1,952 ¥ 6,091 ¥ (─ ) ¥ 6,091

¥47,953 ¥6,278 ¥10,430 ¥64,662 ¥ 9,796 ¥74,459

¥ 3,276 ¥ 246 ¥ 539 ¥ 4,061 ¥ 61 ¥ 4,123

¥ 3,421 ¥ 136 ¥ 702 ¥ 4,260 ¥ ─ ¥ 4,260


Interarea sales and transfers

Total

Operating expenses

Operating income

Total assets

JapanOther

geographicareas

Total ConsolidatedEliminations

and corporate


(Millions of yen)

¥ 65,615 ¥ 12,813 ¥ 78,429 ¥ ─ ¥ 78,4296,512 470 6,982 (6,982) ─

72,128 13,284 85,412 (6,982) 78,42965,962 12,688 78,650 (7,063) 71,586

¥ 6,165 ¥ 595 ¥ 6,761 ¥ 80 ¥ 6,842¥ 59,644 ¥ 9,674 ¥ 69,318 ¥ 11,428 ¥ 80,747

(b) Geographical segmentsThe geographical segment information for the Company and its subsidiaries for the years endedMarch 31, 2005 and 2004 is summarized as follows:



Total

Operating expenses

Operating income

Total assets

JapanOther

geographicareas

TotalEliminations




$ 613,224 $ 119,747 $ 732,981 $ ─ $ 732,981

60,860 4,393 65,252 (65,252) ─674,093 124,150 798,243 (65,252) 732,981

616,467 118,579 735,047 (66,009) 669,028

$ 57,617 $ 5,561 $ 63,187 $ 748 $ 63,944

$ 557,421 $ 90,411 $ 647,832 $ 106,804 $ 754,645

RIKEN AR 2005 p9-32 05.10.26 10:38 ページ25




Total

Operating expenses

Operating income

Total assets

JapanOther

geographicareas

TotalEliminations



(Millions of yen)

¥61,158 ¥10,580 ¥71,738 ¥ ─ ¥71,738

5,455 523 5,979 (5,979) ─66,613 11,104 77,717 (5,979) 71,738

61,206 10,434 71,641 (5,994) 65,647

¥ 5,406 ¥ 669 ¥ 6,076 ¥ 15 ¥ 6,091

¥55,690 ¥ 8,972 ¥64,662 ¥ 9,796 ¥74,459

Overseas sales

Consolidated net sales

Overseas sales as a percentage

of consolidated net sales

Overseas sales




Overseas sales




Asia Other Total


(Millions of yen)

¥ 9,292 ¥ 13,060 ¥ 22,352

¥ 78,429

11.8% 16.7% 28.5%

$86,841 $122,056 $208,897

$732,981

11.8% 16.7% 28.5%

¥ 7,614 ¥ 10,854 ¥ 18,468

¥ 71,738

10.6% 15.1% 25.7%

Asia Other Total



Asia Other Total


(Millions of yen)

(c) Overseas salesOverseas sales, which include export sales of the Company and its domestic subsidiaries andsales (other than exports to Japan) of the foreign subsidiaries, for the years ended March 31,2005 and 2004 are summarized as follows:

RIKEN AR 2005 p9-32 05.10.26 10:38 ページ26

REPORT OF INDEPENDENT AUDITORS

27RIKEN CORPORATION

The Board of Directors

Riken Corporation

We have audited the accompanying consolidated balance sheets of Riken Corporation and consolidat-

ed subsidiaries as of March 31, 2005 and 2004, and the related consolidated statements of income,

shareholders' equity, and cash flows for the years then ended, all expressed in yen. These financial

statements are the responsibility of the Company's management. Our responsibility is to express an

opinion on these financial statements based on our audits.

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

standards require that we plan and perform the audit to obtain reasonable assurance about whether

the financial statements are free of material 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 financial statements referred to above present fairly, in all material respects, the con-

solidated financial position of Riken Corporation and consolidated subsidiaries at March 31, 2005 and

2004, and the consolidated results of their operations and their cash flows for the years then ended in

conformity with accounting principles generally accepted in Japan.

Supplemental Information

As described in Note 1(j), Riken Corporation changed its method of accounting for retirement benefits

to directors and statutory auditors for the year ended March 31, 2005.

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 transla-

tion of yen amounts into U.S. dollar amounts and, in our opinion, such translation has been made on

the basis described in Note 2.

June 29, 2005

RIKEN AR 2005 p9-32 05.10.26 10:38 ページ27

!2

!1

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i

y

t

r

q

e

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OVERSEAS ACTIVITIES


The beginning of Riken's full-scale expansion overseascan be traced back to the establishment of Taiwan RikenInd. Co., Ltd. in 1968.

Starting with the production and manufacture of pistonrings by joint ventures established with local business con-glomerates, we have built a solid Asian operating basewith locations in Taiwan, Korea, Thailand and China(Xiamen). Riken also has partnership with Shriram Pistons& Rings Limited, an affiliate of the Group, that is expectedto enhance production and marketing in the Indian mar-ket. Moreover, we established Riken Automobile Parts(Wuhan) Co., Ltd. in China as a wholly owned subsidiaryand the sixth ring manufacturing location in Asia. RikenWuhan began production of piston rings in July 2005. Wealso have a sales subsidiary in Singapore to support ourefforts in Asia.

During our expansion in Asia during the 1970s, weestablished engineering and sales subsidiaries in theUnited States and Germany to respond to heightenedinterest in our products. We also founded Allied RingCorporation, a joint venture manufacturing company, in1989 in order to provide locally produced rings to theJapanese automakers in the United States and to be able

to supply semi-finished steel piston rings to the joint ven-ture partner who was and continues to be a main supplierto the “Big Three” automakers.

Riken is also involved in fields other than piston rings. InIndonesia, we manufacture high-grade cast-iron autoparts and pipe fittings through the joint venture companyP.T. Pakarti Riken Indonesia. This company supplies partsand components to the Japanese transplants located inthe ASEAN market. Taiwan Riken and Xiamen Riken alsomanufacture cast-iron camshafts to supply to localJapanese automakers. In addition, Riken engages in tech-nological transfer of technologies and products such asknuckles to local companies in North America.

Riken currently has twelve subsidiaries and affiliates,excluding holding companies, and has established techni-cal tie-ups with three companies. The Group will make itsbest efforts to become a global market leader in the autoparts industry by utilizing and strengthening its globaloperation while expanding the Group's sales and earn-ings.

From Left:Akira Nakatani, Director Riken of Asia PTE. Ltd.Masahiko Wada, President P.T. Pakarti Riken IndonesiaJunichi Sagawa, Vice President Siam Riken Ind. Co., Ltd.

From Left:Tsuneki Tsukurimichi, President Xiamen Riken Ind. Co., Ltd.Junji Shirogane, Vice President Riken of Korea Inc.Kazuyoshi Takaki, President Riken Automobile Parts (Wuhan) Co., Ltd.Yoshiaki Wada, President Taiwan Riken Ind. Co., Ltd.

From Left:Isami Takahama, Director Overseas OperationsNoritada Okano, Managing DirectorMasahiko Sekimoto, GM Overseas Sales & Marketing

RIKEN AR 2005 p9-32 05.10.26 10:38 ページ28

!0

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AB

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29RIKEN CORPORATION

OVERSEAS SUBSIDIARIES

qTAIWAN RIKEN IND. CO., LTD.41, Chen-Tai Road Sec. 3, Wu-Ku Hsiang,Taipei Hsien, TaiwanTEL: (886) 2-2291-4551FAX: (886) 2-2291-5136

wP.T. PAKARTI RIKEN INDONESIAJI. Sukodono, Gedangan, Sidoarjo 61254IndonesiaTEL: (62) 31-891-2555FAX: (62) 31-891-0088

eSIAM RIKEN INDUSTRIAL CO., LTD.700/361 Moo 6, Don Hua Roh,Amatanakorn Industrial Estate,Amphur muangchonburi, Chonburi 20000ThailandTEL: (66) 2-740-0410FAX: (66) 38-458-756

rRIKEN OF KOREA INC.#261 Shintanjin-dong, Daeduk-ku,Daejeon, KoreaTEL: (82) 42-934-1500FAX: (82) 42-931-2366

tXIAMEN RIKEN IND. CO., LTD.No.12 Xibin Road Xinglin District,Xiamen, 361022, ChinaTEL: (86) 592-621-3087FAX: (86) 592-621-3134

yRIKEN AUTOMOBILE PARTS (WUHAN)CO., LTD.

38MD, 2nd Industrial Zone, WuhanEconomic - Technological DevelopmentZone, Wuhan 430056 ChinaTEL: (86) 27-8422-9286FAX: (86) 27-8422-9392

uSHRIRAM PISTONS & RINGS LIMITED23 Kasturba Gandhi Marg, New Delhi,110001 IndiaTEL: (91) 11-23315941FAX: (91) 11-23311203

iRIKEN OF ASIA PTE. LTD.10 Collyer Quay, #19-08 Ocean Building,04315 Singapore

oRIKEN OF AMERICA, INC.4709 Golf Road, Suite 807, Skokie, Illinois60076, U.S.A.TEL: (1) 847-673-1400FAX: (1) 847-673-1457

!0ALLIED RING CORPORATION916 West State Street, St. Johns, Michigan48879, U.S.A.TEL: (1) 989-224-2384FAX: (1) 989-224-5494

!1EURO-RIKEN GMBHSchiess Strasse, 58, 40549 Dusseldorf,GermanyTEL: (49) 211-5135450FAX: (49) 211-51354529

!2RIKEN ESPA~NA, S.A.

Poligono Industrial de Constanti,(Tarragona), SpainTEL: (34) 977-52-0506FAX: (34) 977-52-2306

TECHNOLOGICAL TIE-UPS

AGREDE FOUNDRIES, INC.9898 West Bluemound Rd. Milwaukee,Wisconsin53226-0499 U.S.A.

BINTERMET CORPORATION5445 Corporate Drive, Suite 200 Troy,Michigan48098-2683 U.S.A.

CDANA ALBARUS S.A. INDÚSTRIA ECOMÉRCIO

Rua Ricardo Bruno Albarus, 201Distrito Industrial PO Box 104Gravatai-Rs 94000-970 Brazil

From Left:Hideo Masukawa, President Euro-Riken GMBHDon McNulty, President Riken of America, Inc.Akira Kunimoto, President Allied Ring Corporation

Riken Automobile Parts (Wuhan) Co., Ltd.

RIKEN AR 2005 p9-32 05.10.26 10:38 ページ29

RIKEN CORPORATION

DomesticClients

Automotive PartsSegment

Other Productsand

Services Segment

ConstructionProducts

andServices Segment

Service Departments

Nihon Mekki Industry Co., Ltd.

Riken Kumagaya Kikai Co., Ltd.

Riken Castec Co., Ltd.

Riken Kikai Co., Ltd.

Riken Seimitsu Co., Ltd.

Temko Co., Ltd.

Nikken Kikou, Inc.

Metal Care Co., Ltd.

Nikken Stainless Fitting Co., Ltd.

Riken Eletech Co., Ltd.

Riken Environmental SystemCo., Ltd.

Kashiwazaki Piston RingCo., Ltd.

Products

Products • Service

Outsourcing • Order Handling

Service

Construction • Service

Products

Parts

Outsourcing • Order Handling

Service

Parts and Materials

Consolidated Subsidiaries

Non-Consolidated Subsidiaries

Domestic Sales Companies

Riken Trading Co., Ltd.

Yaesu Trading Co., Ltd.

Overseas Sales Companies

Riken of America, Inc.

Euro Riken GmbH.

Riken of Asia Pte. Ltd.

Overseas Production Bases

<Piston Ring Production and Sales>

Riken of Korea, Inc.

Taiwan Riken Industry Co., Ltd.

Siam Riken Industrial Co., Ltd.

Allied Ring Corporation

Shriram Pistons & Rings Limited

Riken Automobile Parts (Wuhan)Co., Ltd.

<Seal Parts Production and Sales>

Riken España, S.A

<Automotive Parts andPipe Joint Production and Sales>

P.T. Pakarti Riken IndonesiaKohyoh Service Co., Ltd.

RKE Co., Ltd.

OverseasClients

Integrated Supply

Yaesu Giken Co., Ltd.

CORPORATE DIRECTORY As of June 29, 2005


RIKEN AR 2005 p9-32 05.10.26 10:38 ページ30

31RIKEN CORPORATION

HEAD OFFICE13-5, Kudankita 1-chome, Chiyoda-ku, Tokyo 102-8202,JapanTEL: (03) 3230-3911FAX: (03) 3230-3919http://www.riken.co.jp/

DOMESTIC SALES OFFICES

SAPPORO SALES OFFICE4-10, Chuo-2joh 6-chome, Shiroishi-ku, Sapporo 003-0012,JapanTEL: (011) 865-1919FAX: (011) 865-1918

SENDAI SALES OFFICE1-5, Izumichuo 4-chome, Izumi-ku, Sendai, Miyagi 981-3133,JapanTEL: (022) 773-8825FAX: (022) 773-8826

KANAGAWA SALES OFFICE3-9, Naka-machi 3-chome, Atsugi, Kanagawa 243-0018,JapanTEL: (0462) 25-7111FAX: (0462) 25-7118

HAMAMATSU SALES OFFICE319-28, Kaji-cho, Hamamatsu, Shizuoka 430-0933, JapanTEL: (053) 457-1155FAX: (053) 454-1453

NAGOYA SALES OFFICE17-13, Nishiki 1-chome, Naka-ku, Nagoya, Aichi 460-0003,JapanTEL: (052) 201-8681FAX: (052) 201-5057

OSAKA SALES OFFICE2-7, Koraibashi 4-chome, Chuo-ku, Osaka, Osaka 541-0043,JapanTEL: (06) 4706-6720FAX: (06) 4706-6702

HIROSHIMA SALES OFFICE9-28, Hikarimachi 1-chome, Higashi-ku, Hiroshima 732-0052,JapanTEL: (082) 506-2455FAX: (082) 506-2457

FUKUOKA SALES OFFICE4-4, Hakata-ekimae 1-chome, Hakata-ku, Fukuoka 812-0011,JapanTEL: (092) 474-2175FAX: (092) 474-2435

OVERSEAS OFFICE

JAKARTA REPRESENTATIVE OFFICEJI Kebon sirih No.96. Jakarta, 10110 IndonesiaTEL: (62) 21-386-0750FAX: (62) 21-386-0751

PLANTS

KASHIWAZAKI PLANT1-37, Hokuto-cho, Kashiwazaki, Niigata 945-8555, JapanTEL: (0257) 23-3113FAX: (0257) 24-3309

TSURUGI PLANT949-1, Shimosakai, Tsurugi, Kashiwazaki, Niigata 945-0105,JapanTEL: (0257) 22-5959FAX: (0257) 22-0210

KUMAGAYA PLANT14-1, Suehiro 4-chome, Kumagaya, Saitama 360-8522, JapanTEL: (048) 521-3511FAX: (048) 524-8110

RIKEN AR 2005 p9-32 05.10.26 10:38 ページ31

REESTABLISHEDDecember 1, 1949

COMMON SHARES ISSUED106,484,667

CAPITAL¥8,573,597,000

NUMBER OF SHAREHOLDERS13,473

EMPLOYEES (Non-Consolidated)1,470

DISTRIBUTION OF SHAREHOLDERS

DIVIDEND POLICYOur fundamental policy toward dividends, over time, is to pay a steadydividend while building a solid foundation for our operations.

ANNUAL STOCK PRICE SUMMARY

TRANSFER AGENT AND REGISTRARThe Chuo Mitsui Trust and Banking Company, Limited is the company’sprincipal transfer and registry agent.3-33-1 Shiba, Minato-ku, Tokyo 105-8574, Japan

Financial institutionsIndividualsBrokerage firms,foreign investors and othersCorporations

9.40%

56.15%26.96%

7.49%

high

low

Year ended March 312004 2005200320022001

100

200

300

400

500Stock price (¥)

INVESTOR INFORMATION As of March 31, 2005


RIKEN AR 2005 p9-32 05.10.26 10:38 ページ32

BOARD OF DIRECTORS As of June 29, 2005

PRESIDENT

Toshinaga Koizumi

EXECUTIVE VICE PRESIDENT

Fumio Kiyota

MANAGING DIRECTORS

Noritada OkanoTatsuo FujitaKenichiro Takagi

DIRECTORS

Haruhito WatanabeKensei MatsukiNobuhisa IidaNobuyuki OkuboToshio MizobuchiTatsuro TakakiHitoshi MurayamaTsutomu KakutaIsami Takahama

CORPORATE AUDITORS

Nobuhiro ToridukaShu TamaruTetsuo KodamaShinichiro TojoKeisuke Kamata

33RIKEN CORPORATION

RIKEN AR 2005 C1_C4 05.10.20 11:23 ページ33

13-5, Kudan-kita 1-chome,Chiyoda-ku, Tokyo 102-8202, JapanTEL:(03)3230-3911FAX:(03)3230-3919

RIKEN AR 2005 C1_C4 05.10.20 11:23 ページC4

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