Annual Report Year Ended March 31, 2007

KANSAI PAINT CO., LTD. 3-6, Fushimi-machi 4-chome, Chuo-ku, Osaka 541-8523, Japan Tel: 81-6-6203-5531 Fax: 81-6-6203-5018 http://www.kansai.co.jp A...
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KANSAI PAINT CO., LTD.

3-6, Fushimi-machi 4-chome, Chuo-ku, Osaka 541-8523, Japan Tel: 81-6-6203-5531 Fax: 81-6-6203-5018

http://www.kansai.co.jp

Annual Report 2007

Printed on recycled paper

Printed in Japan

Annual Report 2007 Year Ended March 31, 2007

Profile

Message from the President

Established in 1918, Kansai Paint Co., Ltd. has grown into Japan’s largest paint manufacturer as well as one of the country’s most progressive businesses. Today, the company enjoys a well-established position as one of the world’s leading paint manufacturers. The various products provided by the Kansai Paint Group play important roles in protecting and beautifying all types of goods and products, and some coatings even instill the products they coat with special functionality. As such, our products are highly revered and trusted in a wide range of fields for applications that include automobiles, architectural structures, and all types of industrial products. Also, as global environmental problems continue to grow in severity, Kansai Paint is working to create many types of products that can contribute to environmental conservation. Our products are highly valued by customers not only in Japan, but around the world as well, including Europe, the United States, and Asian countries such as China and India. Kansai Paint is dedicated to continuing to uphold its corporate social responsibilities as a leading company in the paint and coating industry as we strive to meet the needs of the global market.

—Constant dropping wears away a stone—

A room for checking colors under different light sources. This room is located in our CD Laboratory of the R&D Center. The shade and appearance of a color can change under different light sources. This room provides six different types of lighting conditions.

Overview of the Fiscal Period Ending March 2007 Detailed figures for the consolidated fiscal year (the fiscal year ending March 31, 2007) are included in the latter half of this annual report. To summarize, we achieved a net sales of ¥231,213 million (approximately US $1,959 million, a year-over-year increase of 9.6%), a consolidated operating income of ¥22,089 million (approximately US $187 million, a year-overyear increase of approximately 16.9%), and a net income of ¥13,267 million (US $112 million, a yearover-year increase of approximately 10.1%). Thanks to your support, we have been able to realize both increased income and increased profits for the past five years, setting new records for the profitability of our company. These results are certainly due to the efforts of the entire Group to make maximum use of our business resources to strengthen Group operations, promote total cost reduction, and reinforce our global strategies, as well as to our customers who have recognized and appreciated our efforts in these areas. With our increased profits, we have also been able to increase dividends by ¥1, from ¥10 to ¥11 per share.

Contents Message from the President ................................................. 1 ALESCO At a Glance ............................................................ 4 Corporate Activities Overseas Business ............................................................ 6 Research & Development ................................................. 8 Environmental Conservation and Social Contributions ... 10 Board of Directors .............................................................. 12 Financial Section Five-year Summary of Selected Financial Data ................ 13 Financial Review ............................................................ 14 Consolidated Balance Sheets ......................................... 16 Consolidated Statements of Income .............................. 18 Consolidated Statements of Changes in Net Assets ............ 19 Consolidated Statements of Cash Flows ........................ 20 Notes to Consolidated Financial Statements .................. 21 Independent Auditors' Report ....................................... 31 Directory ............................................................................ 32 Topics ................................................................................. 33

Dear Shareholders, At Kansai Paint Co., Ltd. and its Group companies, we take the concept of “contributing to society by providing products and services that satisfy our customers” as our fundamental business philosophy. Indeed, at the very foundation of the existence of the Kansai Paint Co., Ltd. Group is the idea of continuously working to improve our level of customer satisfaction, and through this, we strive to increase the value of our stock, strengthen our operational foundation, and contribute widely to society.

Although the Japanese economy is becoming stronger, unprecedented oil prices have led to sharp increases in material costs, creating extremely severe problems for paint industries. Still, backed by a high level of The ALESCO logo was designed to symbolize the three basic key words that express Kansai Paint’s image: science, growth, and reliability. The square blue field embodies the rationality and certainty of scientific advancement, while the A’s without crossbars represent growth in the sense of spread wings soaring into the sky. Reliability is portrayed through the overall balance and stability of the design.

Shoju Kobayashi, President

Kansai Paint Co., Ltd.

Annual Report 2007

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Message from the President

corporate revenue, there were increases in capital investments and exports to regions where economic growth is continuing, resulting in a gradual expansion of business activity. In the area of automotive coatings for new cars in particular, the number of four-wheeled vehicles produced in Japan has increased over the previous year due to an increase in the number of automobiles being exported. By providing highly functional paint and coating materials of excellent color and appearance, and by expanding the use of our Waterborne 3-Wet Metallic Finish System that can simultaneously reduce the emissions of both VOC (volatile organic compounds) and CO2, we have been able to achieve increased business results. We have also realized increase sales in the area of industrial coatings, as a result of an increase in demand for paints and coatings for industrial machinery, and to our ongoing efforts to introduce new environmentfriendly products to the market, such as water-based paint materials with low levels of VOC emission, and *Green polymer coatings that contribute to a reduction in CO2 emissions. *Green polymer coatings: A single-component urethane coating made from bio-polymer derived from corn starch. These coatings are used as plastic coatings.

for automobiles in Thailand and China, further strengthening our production system. In the area of decorative coatings, sales by Kansai Nerolac Paints, our subsidiary in India, have also been excellent.

Corporate Governance In the Company’s view, strengthening corporate governance is a crucial management task that paves the way for the ongoing enhancement of corporate value. To implement this task, the Board of Directors meets at least once per month, makes decisions on important matters determined by laws and ordinances, Board rules, and the Articles of Association, and reports on the progress of management plans. After thorough discussions, the Board makes resolutions on significant business-related issues and the decisions are implemented. I myself am the chairman of our Corporate Governance Committee, which works to promote compliance and ensure that it sticks; handling of crisis management strategy formulation and response; and to develop internal control of business, and active disclosure and management of information related to corporate activity. In a related move, we are working to broaden our information disclosure system through stepping up the issuance of press releases and upgrading our website to enhance corporate transparency.

Overall, the world economy has been undergoing strong and steady changes, despite the effects of crude oil price Corporate Governance Organization fluctuations and the This internal control organization assures healthy business administration and audits. deceleration of the US economy on the econoGeneral Shareholders’ Meeting mies of other countries Appointments/ Appointments/Dismissals around the world. Dismissals Overseas production by Board of Japanese automobile Directors manufacturers is increasAppointments/Audits Audits ing, and sales of our Board of Management President products in the Asian Auditors Committee region, including India, Internal Thailand, and China, Audits have been excellent. We Company Corporate Financial Audits Affiliate have also constructed Departments and Auditor Governance Administration Affiliate Companies Committee* Office new factories with equipment for manufacturing water-based paint * Corporate Governance Committee: has the President as chairman and Directors in charge of company divisions, and oversees matters such as internal control functions, compliance, risk management, and information management.

Kansai Paint Co., Ltd.

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Outlook for the Current Fiscal Year As for the outlook for the Asian economy for the coming fiscal year, although there is concern about the effects on the economy as a whole resulting from further sharp rises in the price of crude oil, exchange rate fluctuations, interest rate trends, etc., steady economic improvement is expected to continue. In particular, we can expect to see strong contributions from our overseas operations in the Asian region, for which our company has been working at a rapid rate to enhance our production capacities. In accordance with the operational strategies described below, the Kansai Paint and its Group companies shall work to fully utilize its resources, promoting business development that emphasizes profits and working to strengthen our operational foundation. To fortify this foundation, we are aiming for even greater business results in fiscal 2007, and shall strive to achieve consolidated net sales of ¥260,000 million (approx. US $2,203 million), a consolidated operating income of ¥26,500 million (approx. US $225 million), and a consolidated net income of ¥15,500 million (approx. US $131 million).

Outlook for the Future—Business Operation Strategies and Issues to Be Dealt with 1. Boosting Competitive Strength In order to develop products that conform to market needs, are globally competitive, and appealing to our customers, we are working to enrich our technological development capabilities. We are also working to strengthen our earning capacity by reducing total cost in order to make our business operations more efficient.

3. Globalization To ensure our competitive advantage in the global market, we are strengthening our cooperation with overseas Group companies and business partners in India, Southeast Asia, China, Europe, and the United States, and in Japan as well, and are working to increase the level of contributions we make to the achievements of our affiliated overseas businesses. 4. Carrying out Our Corporate Social Responsibilities Our corporate existence itself is dependent on our ability to meet our corporate responsibilities. The essential role of paint is to protect resources, and to protect the environment. Kansai Paint and its Group companies shall continue to put full effort into the protection and preservation of the environment, safety, and health through the development of environmentfriendly products. We are dedicated to realizing our corporate responsibilities, including the achievement of thorough compliance and the promotion of suitable information disclosure. The indispensable factor that enables a corporation to fulfill its social responsibilities is the conducting of business in a sound manner. Kansai Paint and its Group companies, as a paint manufacturer, are making effort to contribute to society through the provision of excellent products and services with the spirit of “constant dropping water wears away a stone.” To that end, we are striving to reinforce our research and development activities, and expand our global operation system as we proceed on our path of growth. We hope that this annual report will provide you with useful information pertaining to these activities of Kansai Paint Co., Ltd.

2. Reinforcing Group Business We are continuing to make improvements to the business structure of Kansai Paint and its Group companies as a whole, to concentrate our business resources, and to make investments that emphasize our paints and coatings business and related fields. Through these efforts, we work to promote a shared sense of value and Group strategies, maximizing the synergistic effects of the Group.

Kansai Paint Co., Ltd.

Shoju Kobayashi, President

Annual Report 2007

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ALESCO At a Glance

Segment

Main Products and Services

Automotive Coatings

Industrial Coatings

Decorative Coatings

Marine and Protective Coatings

New Business

Kansai Paint Co., Ltd.

Product Sales Ratios

Topics

Automotive coatings include coatings for new automobiles and automotive refinish paints for auto body shops. Automotive coatings for new cars include paint for use in production line applications at automobile manufacturing plants, and consist primarily of finish paints baked at high temperatures. Automotive refinishes are intended for use as repair paints in body shops, and dry at room temperature or at temperatures of approximately 60ºC.

There has been favorable growth in the sales of automotive coatings for new cars in Japan due to increases in production brought about by favorable exporting conditions.

Industrial coatings are used in a wide range of applications, and we offer a diverse range of coating materials for these applications. Applications include pre-coated metals, beverage cans, construction vehicles, industrial machines, electric appliances, and building materials for window sashes, doors, etc., for residential housing and other structures. Because these coating materials are primarily used in factories, we provide outstanding service and a wide range of paints with the coating performance required of all types of factory lines.

In Japan, sluggishness in production for beverage cans resulted in a decline in net sales for can coating materials. However, there was also favorable growth in the production of large-scale construction vehicles, forklifts, industrial machines, etc., backed by favorable exports, and this has resulted in an increase in the net sales of industrial machinery coatings.

Decorative coatings include paints and coatings for the exteriors and interiors of residential housing and other types of buildings. There are two types of primary applications for these products, coatings for new structures and coatings for repairs. In both cases, these products are used in close proximity to the human living environment, so there has been a growing demand recently for eco-friendly products in this area.

In the Japanese market, there has been a slowdown in the growth of demand for decorative coatings accompanied by increased competitiveness. However, we continue to make efforts to expand sales with eco-friendly products, through, for example, the introduction of products with high added value, such as exterior coatings that provide dirt-and-stain resistance functions, interior coatings providing ecofriendly functions, and water-based heat barrier

coatings for roofs, balconies and outer walls that are an effective countermeasure to the urban heat island phenomenon.

Marine coatings include paints used for anticorrosion and anti-fouling coatings in the construction of marine vessels in shipyards, paints used for maintenance during voyages and repainting while vessels are docked, and paints for marine containers. Protective coatings include paints used for new buildings, and maintenance coatings to provide long-term rust protection for bridges, tanks, and other types of large steel structures.

In the area of coatings for ships, shipbuilders in Japan are operating at a high level, but the market is highly competitive, and business conditions are exceptionally severe. As such, our company is putting major effort into expanding the sales of high-value-added coatings for this market.

our efforts on the area of new facility construction by private companies, allowing us to realize a recovery of business performance. Improvements in the business performance of private industries have led to an increase in demand for products for new factories. Additionally, our process-saving products have been selected for use by a major electric power company.

In the area of new business, Kansai Paint is now providing functional materials that have been developed using technologies fostered through our research related to paints and coatings. We have been working in the business of photo-resist materials for electronics and communications, and in the business of micro-organism biocatalysts in environmental and biotechnological related-areas. We are also creating a business for films used to protect cars from dirt and scratches during shipping and transportation.

In the area of telecommunications and electronics, although sales quantities increased for photoresist materials, net sales were lower compared with the previous year due to factors such as falling retail prices. There was also a decrease in the net sales of micro-organism carriers for waste-water treatment in septic tanks.

Annual Report 2007

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Overseas as well, Japanese automobile manufacturers are expanding their local production in India, China and various other Asian countries, resulting in increased sales of our paint products.

In the area of coatings for steel structures, there has been a decline in the demand for new bridge construction, so we have concentrated

In the area of automotive refinishes, although the market in Japan is sluggish, we have been able to develop new demand through the expanded sales of our environment-friendly products, and we have also entered into an exclusive contract for selling PPG Japan paint products in Japan. These and other efforts have resulted in increased sales for paints for repairs.

In 2006, we were also able to successfully create environment-friendly *Green polymer coatings for use as a coating base material. Overall, sales of coatings for plastics have increased. * Green polymer coatings: A single-component urethane coating made from “Green polymer” derived from corn starch.

Overseas, our subsidiaries in India enjoyed favorable sales thanks to a high rate of economic growth. We also bought our Malaysian paint manufacturer of decorative coatings and made it a consolidated subsidiary of the Group. Overall, sales increased for our overseas affiliates.

As a result, sales in this area have also increased.

However, there was an increase in the export of automobiles manufactured in Japan and a rise in demand overseas, resulting in an increase in the sales of protective films. Overall, net sales increased for new business.

(Sales for areas other than paints and coatings account for 7% of total sales.)

Kansai Paint Co., Ltd.

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Corporate Activities

While striving to maintain an appropriate balance in three areas showing remarkable economic growth— India, China, and the ASEAN nations, we are also working to develop our overseas business with a focus on Asia, a region for which major growth is being forecast. In North America and Europe, we have established a solid supply system for automotive coatings, our primary product type in this area, through PPG Kansai Automotive Finishes (PKAF), a joint venture company with PPG Industries, and business in this area is operating smoothly. The following is a breakdown of our business achievements in each region.

Overseas Business Europe ● KANSAI ● PPG

PAINT EUROPE LIMITED. KANSAI AUTOMOTIVE FINISHES UK, LLP

In India, an area undergoing remarkable economic development, demand continues to grow for products related to residential housing and automobiles. Favorable results in the areas of decorative coatings, automotive coatings, and industrial coatings have resulted in a large increase in revenue. We have also changed the name of our subsidiary in India from Goodlass Nerolac Paints

Ltd. to Kansai Nerolac Paints Ltd. in order to promote the appeal of the technical capabilities of the company in the areas of industrial coatings, including automotive coatings. We are also actively working to expand business in order to further increase sales through, for example, a merger with Polycoat Powder Ltd., a 100%owned subsidiary of Kansai Paint Co., Ltd. working in the area of powder coatings. In China, we have constructed a new automotive coatings plant in Guangzhou, and have created a system to respond to the expanding automobile market in China for the area ranging from Shenyang and Tianjin in the north to the Guangzhou region in the south. We have also seen a recovery in our production of marine containers, resulting in increased revenue and increased profit for China as a whole. Favorable business results have been seen in other Asian regions as well. In Thailand, favorable automobile manufacturing conditions have supported an active demand for

automotive coatings, allowing us to achieve increased revenue and increased profits. We have also completed our second plant in the country and have begun operations there, which are going well. In Indonesia, high interest policies implemented by the government have resulted in a decrease in automobile manufacturing, leading to a decrease in both revenue and profits. However, automobile manufacturing is making a recovery in the country, so the outlook is good for conditions to improve. In Malaysia, there has been a deceleration in automobile manufacturing, resulting in sluggish performance in the area of automotive coatings. However, Kansai Coatings Malaysia Sdn. Bhd., which was purchased last year, enjoyed increased sales for both decorative coatings and industrial coatings, resulting in continued increased revenue and increased profit for Malaysia as a whole. Through these business results, we have achieved increased revenue and increased profit for our overseas investing companies as a whole.

Asia

AMERICAS

● KDK

AUTOMOTIVE COATINGS CO., LTD. KANSAI PAINT CO., LTD. ● KANSAI PAINT H. K. LTD. ● COSCO KANSAI PAINT & CHEMICALS (SHANGHAI) CO., LTD. ● COSCO KANSAI PAINT & CHEMICALS (TIANJIN) CO., LTD. ● CHONGQING KANSAI PAINT CO., LTD. ● SHENYANG KANSAI PAINT CO., LTD. ● TIANJIN WINFIELD KANSAI PAINT & CHEMICALS CO., LTD. ● HUNAN XIANGJIANG KANSAI PAINT CO., LTD. ● GUANGZHOU KANSAI PAINT CO., LTD. ● SUZHOU KANSAI PAINT CO., LTD. ● KANSAI PAINT PHILIPPINES, INC. ● THAI KANSAI PAINT CO., LTD. ● KANSAI RESIN (THAILAND) CO., LTD. ● P.T. KANSAI PAINT INDONESIA ● P.T.GDJAH TUNGGAL PRAKARSA ● SIME KANSAI PAINTS SDN. BHD. ● KANSAI COATINGS MALAYSIA SDN. BHD. ● KANSAI PAINT (SINGAPORE) PTE. LTD. ● KANSAI PAINT (ASIA) PTE. LTD. ● KANSAI NEROLAC PAINTS LTD.

EUROPE

● TAIWAN

ASIA

Guangzhou Kansai Paint Co., Ltd.

Kansai Coatings Malaysia Sdn. Bhd.

Tianjin Winfield Kansai Paint & Chemicals Co., Ltd.

Kansai Nerolac Paints Ltd.

Thai Kansai Paint Co., Ltd.

Kansai Paint (Singapore) Pte. Ltd.

Americas ● KANSAI

PAINT (AMERICA), INC. KANSAI AUTOMOTIVE FINISHES U.S., LLC ● PPG KANSAI AUTOMOTIVE FINISHES CANADA, LP ● PPG ALESCO AUTOMOTIVE FINISHES MEXICO, S.de.R.L.de C.V. ● PPG

Kansai Paint Co., Ltd.

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Kansai Paint Co., Ltd.

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Corporate Activities

nomena occurring in the process of paint production, application, and film formation, thus proceeding with appropriate product development. In addition, in relation to laws pertaining to environmental substances, we are developing precise analytical technologies that can detect substance levels lower than those stipulated in regulations, and we are promoting compliance to ensure that all of our products exhibit minimum stress on the environment. Through these efforts, we are developing and enhancing our global support network.

Research & Development The most important objective for Kansai Paint and its Group companies is the timely development of technologies and products based on market needs, and as such, we are conducting a wide range of research and development activities related to new technologies from a global standpoint. For the consolidated term under review, we have been able to further increase the efficiency of our development efforts and to increase the speed of development by crossfunctional communication within our R&D center, and through cooperative collaboration between our Coating Business headquarters and Production Division. We have also been actively promoting cooperation with research organizations such as universities and external companies as we work to develop new technologies and methods. Through these activities, we are working to foster human resources capable of participating in work on a global scale. Kansai Paint Co., Ltd.

Annual Report 2007

During the consolidated term under review, the total R&D expenditures of Kansai Paint and its Group companies amounted to ¥5,271 million (approx. US$45 million), and a total of 564 people have been involved in R&D activities in the Kansai Paint Group as a whole. The following is an overview of the company’s R&D activities by business segment.

1. Coatings In our basic research, we are selecting subjects with the potential for becoming the fundamental technologies of coating development, and then working to aggressively develop these projects. We are also promoting efforts to find applications in the field of coatings for technologies, such as nanotechnology and biotechnology. Meanwhile, in the area of observational and analytical research, we are working to further improve the quality of our coatings amidst the current trend toward a dramatic increase in the use of water-based products. To achieve these, we are working on developing evaluative and analytical technologies related to the physical, organizational, and morphological aspects of the various phe8

In the area of color design research, we have been researching the latest color trends at motor shows and in the markets of various materials, and have proposed brand new colors in water-based coatings for automobiles. We plan to begin marketing these colors to automobile manufacturers within two years. We have also conducted research of the colors and appearance of traditional Japanese craftwork to develop composite colors that reflect a Japanese sense of taste. For the area of decorative coatings, we have been studying guidelines related to the landscape law, and our findings are being reflected in our color planning for houses, buildings, other structures, and even urban landscapes. In the area of color science, we have developed an application for digital color simulation that makes it possible to change the color and design of coatings by modifying the color elements in metallic colors and multicolor patterns.

In the area of automotive coatings as well, we have developed the next generation of coatings that target higher performance and even greater reductions in VOC than our existing water-based coating products and high solid coating products. In the area of industrial coatings, we have reached the stage of practical application for coatings that utilize “Green polymer coating” developed with the goal of reducing CO2 emissions. In the area of decorative coatings, we have developed a new water-based multicolor coating, and are applying this to commercial products. During the term under review, Kansai Paint’s expenditures on research and development in the paint business amounted to ¥4,881 million (approx. US$41 million).

2. Other Business In the area of electronics and communications and in environmental and biotechnological related-areas, we have been promoting the development of new technologies and new products. In the area of electronics and communications, we have been working in the development of photo-resist materials that are compatible with various types of direct laser plotting methods, and our research has advanced to the point at which we can form high definition patterns in photo-resist material that

is compatible with 405 nm wavelength lasers. We have found that this process is well suited to the formation of electrodes on flat display panels. We have also been promoting the development of resist ink materials for high definition screen-printing, and have been able to form patterns of 30 µm and smaller on reel-to-reel systems with polyimide flexible circuit boards. In environmental and biotechnological related-areas, we have been working in collaboration with Institute of Microchemical Technology Co. Ltd. to establish basic technologies for a visible immunity analysis microchip with high reaction efficiency, and are continuing in our studies that aim to further increase sensitivity and to expand the scope of applications for this technology. For the carriers applied to highconcentration BOD waste-water processing, which were developed during the year in review, we have discovered that the carriers are effective in greatly reducing waste sludge. During the term under review, Kansai Paint’s expenditures on research and development in other business amounted to ¥390 million (approx. US$3 million).

In coatings resources, we have continued from the previous term with the development of high-valueadded materials fusing futureoriented paints and painting systems, with the objectives of enhancing ecofriendliness, saving resources and energy, streamlining processes, and improving performance.

Kansai Paint Co., Ltd.

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Corporate Activities

for overhead expenses, totaling ¥5,068 million (an increase of 7.7% from the previous year). The economic effects brought about by our environment protection measures totaled ¥49 million.

©MOTOPIA in SUZUKA CIRCUIT

Environmental Conservation and Social Contributions In addition to taking an affirmative, proactive stance toward environmental conservation, Kansai Paint and its Group companies are fully aware of their social responsibilities, and eagerly make contributions to society and their host communities. The information below is covered more fully in our “Environmental & Social Report 2007”, which you are welcome to read. This report is also available from our corporate web site.

Environmental Conservation Efforts Basic Corporate Policy Working to preserve the global environment while ensuring productrelated safety and health, Kansai Paint and its Group companies have adopted the following basic policies Kansai Paint Co., Ltd.

Annual Report 2007

for the purpose of retaining the confidence of society. 1. To supply products after full consideration of their potential impact on people and the environment. 2. To undertake proactive countermeasures to cope with the potential effects of products on people and the environment. 3. To cooperate with external organizations to raise awareness concerning the environment, safety, and health. 4. To disclose and provide information related to the environment, safety, and health. The status of each of these activities for the year in review is described below. 1. Environmental Accounting We introduced environmental accounting in 1999 in an effort to reconcile the expenses and benefits of safeguarding the environment with our business activities. During the term under review, our fundamental protection-related costs included ¥599 million for investments in plants and equipment, and ¥4,469 million 10

2. Acquisition and Maintenance of ISO14001 Certification During the term under review, eight of our major facilities earned renewed ISO14001:2004 certification. We are also further committed to earning the certification for our affiliates which are not yet certified, both in Japan and abroad. During this term, one overseas affiliate acquired certification. As a result, a total of 14 affiliates (six in Japan, and eight certifications at seven companies overseas) now have certification. Additionally, four overseas affiliates are currently working to acquire certification. Working steadily to acquire certification for those affiliates in Japan and overseas which have yet to be certified, Kansai Paint and its Group members are strengthening the Group’s environmental management system through ongoing activities to maintain the standards set by ISO14001. 3. Safe Management of Chemicals In addition to observing the laws related to chemical substances already in place, we have already imposed voluntary limits in the form of official internal rules on the use of chemicals that are not yet regulated by laws. We are striving to see to it that these rules are observed, starting with the research and development stage, to ensure the protection of the environment as well as health and safety. 4. The ALES ECO PLAN 2007 4-1. Reducing Harmful Substances in Our Products We have set reduction targets for certain hazardous substances such as Pb compounds, Cr compounds, toluene, xylene, and other volatile organic compounds.

For the year in review, although we have realized reductions in these substances, we have been unable to achieve our targets due to increases in production volume. Still, we shall continue to make effort in this area so that we can achieve our targets during fiscal 2007, the final year of this plan. 4-2. Reducing Stress on the Environment Incurred during Production We have set reduction targets for CO2 and other waste emissions, and are working towards those targets. We achieved “zero emission status” (i.e. a recycling rate of 99.0% or more) for all of our facilities in March 2005, and have maintained that standard continuously, keeping our zero emission status for the year under review as well. With the increase in production volume for the year under review, the volume of waste also rose slightly (totaling 30,770 tons, an increase of 2% from the previous year). CO2 emissions, however, were reduced to 33.8 kg t-CO2, a reduction of approximately 1% from the previous year. Kansai Paint shall continue in its endeavors to reduce production-induced stress on the environment. 4-3. Safety and Sanitation Based on our strong philosophy of not allowing even one safety failure, we continuously strive for zero accidents. For the year under review, we had fewer work-related injuries than in the previous year, but unfortunately we had one very unexpected death due to an employee falling in a conference room. Through training programs that instill workers with the capabilities of anticipating and preventing accidents in their daily work, Kansai Paint strives to promote the assurance of safety and sanitation, including efforts to increase the capacity of our workers to sense and be aware of potential risks.

Kansai Paint Co., Ltd.

Annual Report 2007

Social Contributions Kansai Paint and its Group companies are thoroughly aware of their corporate social responsibilities, and are eager to make contributions to benefit society. During the term under review, we conducted the following support, assistance, and communication activities as part of our effort to make social contributions. Since 1999, The Kansai Paint Scholarship program was established to assist Asian foreign-exchange students. This year marked the eighth year of the program, which has assisted a total of 38 students to date. In other areas, many of our employees took part in volunteer activities such as wall painting projects to beautify cityscapes throughout the region. As a member of the regional environmental protection group, our company cooperated in various environmental improvement activities as well. We also conducted tours of our plants and development centers. Encouraged by the successes thus far, we shall continue to move forward on this path of social responsibility.

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Five-year Summary of Selected Financial Data

Board of Directors

Years ended March 31, 2007, 2006, 2005, 2004, and 2003

Consolidated Basis Thousands of U.S. dollars (Note 1)

Millions of yen

2007

President

2006

2005

2004

2003

2007

For the year: Net sales ........................................ Operating income .......................... Income before income taxes .......... Net income ....................................

¥ 231,214 22,090 24,287 13,267

¥ 210,965 18,903 22,284 12,049

¥ 196,786 17,528 17,249 10,196

¥ 185,777 12,408 15,239 9,051

¥ 180,133 11,930 8,671 4,761

$ 1,958,611 187,124 205,735 112,385

At year-end: Total assets ..................................... Total net assets ..............................

¥ 299,299 164,131

¥ 266,887 152,176

¥ 219,739 125,967

¥ 208,733 116,599

¥ 189,879 101,459

$ 2,535,358 1,390,352

Per share amounts (in yen and U.S. dollars): Net income ....................................

¥

¥

¥

¥

¥

$

Shoju Kobayashi Executive Vice President

Toshinobu Otani Senior Managing Directors

Kazuhiro Fujita Shinichi Hamamatsu Koichi Imada Yuzo Kawamori

48.98

44.04

37.24

33.07

Osamu Isozaki Kouji Yamamoto Directors

Shoju Kobayashi

Toshinobu Otani Executive Vice President

Hiroshi Miura Shigeru Nakamura Mitsuhiro Fukuda Hiroshi Ishino Yasuo Yoshizawa Masanobu Ota Full-time Corporate Auditors

Teruhiko Sasai Akifumi Fujita Corporate Auditors

Mineo Imamura Yoko Miyazaki

(as of June 28, 2007)

Kansai Paint Co., Ltd.

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0.41

For convenience only U.S. dollar amounts in this report have been translated from Japanese yen at the rate of ¥118.05 to US$1, the exchange rate at March 31, 2007. Net income per share is computed based on the weighted average number of shares outstanding during the respective years. From the year ended March 31, 2003, the portion of net income unavailable to common shareholders, such as directors’ bonuses, which is included in the appropriation of retained earnings, is deducted from net income for the calculation of net income per share.

Managing Directors

President

17.13

Kansai Paint Co., Ltd.

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13

Financial Review

Overview For the year in review, although fluctuating crude oil price and a deceleration of the US economy have affected the economies of countries around the world, the global economy as a whole has become stronger. In the Japanese economy as well, we have seen material prices rising due to sharp increase in the cost of crude oil as well as sluggish growth in consumers’ spending, but there have also been increases in capital investments backed by high levels of corporate revenue, and an increase in export to regions where economic growth is continuing, and these have resulted in a moderate growth of business activity. In this transitional economic environment, our corporate Group continued to fulfill the corporate social responsibilities, while making maximum utilization of our business resources to “Strengthen Group Business,” “Promote Total Cost Reduction,” and “Reinforce Global Strategies” in order to realize greater business achievements. As a result of these efforts, consolidated net sales posted term-on-term growth of 9.6%, consolidated operating income surged 16.9%, and consolidated net income rose 10.1%.

Status of Sales ●

Paints and Coatings Business Net sales for our paints and coatings business as a whole totaled ¥224,675 million, an increase of ¥19,943 million (9.7%) over the previous term.

• Automotive Coatings In the area of automotive OEM coatings, the number of fourwheeled vehicles manufactured in Japan increased over the previous term thanks to an increase in export. In addition to developing the market for coating materials that offer excellently designed performance and high functionality, and which realize superb coating quality, we have also worked to expand the sales of our Waterborne 3-Wet Metallic Coating System that greatly reduces both the emission of volatile organic compounds (VOC), which contributes to atmospheric pollution, and the emission of carbon dioxide (CO2), a greenhouse gas. Overseas, the local production of automobiles by Japanese manufacturers continues to increase, and our company has been putting major efforts into developing our business in these areas. As a result, we have seen a favorable transition in sales by our subsidiaries in countries such as India, Thailand, and China. Also, in order to respond to increasing demand, we constructed new plants for manufacturing water-based coating materials in Thailand and China, finally have scaled-up our production system. Due to these efforts, our company has been able to increase its net sales of automotive OEM coatings compared with the previous term. In the area of automotive refinishes, while there has been a decline in demand throughout the market in Japan, our company has been able to acquire new customers by featuring our main eco-friendly coating products. While we have been putting considerable efforts into converting existing customers to the use of these products, we have also been working to develop products such as a polyurethane topcoat clear that can reduce VOC emission. We have also formed a partnership with PPG Japan, and have entered into an exclusive contract with that company for the sales of its products in Japan. These efforts have resulted in increased net sales in this area over the previous term. Consequestly, net sales for automotive coatings surpassed the level of the previous term.

Kansai Paint Co., Ltd.

• Industrial Coatings In Japan, the sluggishness of production for coated metal cans for beverages resulted in a decline in net sales for can coating material. However, there was growth in the production of construction machinery supported by favorable exports, which resulted in increased net sales of industrial machinery coatings. Our company was also able to consistently introduce products aiming at the concepts of “Environment Protection,” “Resource Savings,” and “Energy Savings.” These include baking type waterborne coatings and air-drying type waterborne polyurethane coatings, both of which also reduce VOC emission, onecomponent vegetable resin coatings that contribute to a reduction in emission of gasses such as CO2, and electrodeposition coatings that reduce running cost. Overseas, demands have grown in Asia, where brisk business continues, and our subsidiaries enjoyed favorable sales. Thus, net sales for industrial coatings surpassed the level of the previous term. • Decorative Coatings In Japan, market conditions have leveled off, and there has been a downward tendency in the unit prices for construction contract. Despite these conditions, we have been working to expand sales by introducing products with highly added value, such as exterior coatings that provide waterproof and stain resistance, interior coatings providing eco-friendly functions, and heat barrier coatings for concrete and asphalt that are an effective countermeasure to the heat island phenomenon. We have also negotiated with our clients and their contractors through the utilization of the collective strengths of the Group. Overseas, our subsidiaries in India enjoyed favorable sales. In Malaysia, Kansai Coatings Malaysia has joined consolidated subsidiaries of the Group. As a result, net sales for decorative coatings surpassed the level of the previous term. • Marine and Protective Coatings In the area of marine coatings, the shipbuilding industry in Japan is operating at a high level thanks to secure orders for shipbuilding over the next several years, and our company is putting major efforts into expanding the sales of highly-value-added coatings. In the area of protective coatings, while there has been a decline in the demand for new bridge construction, recovery of the customers’ business situation has helped us to enjoy orders for their new plants. Another factor that has contributed to our achievements in this area is the adoption of our process-saving products in a major construction project by an electric power company that we have been negotiating with through years. As a result, net sales for the marine and protective coatings surpassed those of the previous term. ●

Other Business Net sales for other business as a whole totaled ¥6,538 million, an increase of ¥306 million (4.9%) over the previous term. In the area of telecommunications and electronics, although sales quantities for photoresist materials increased, net sales did not reach the same level as in the previous term due to factors such as retail prices falling. In environmental and biotechnology areas, net sales decreased due to factors such as stagnation in the sales of carriers for the advanced sewage treatment of wastewater. In the area of films, however, increases in automobile production in Japan as well as those in overseas demand have pushed up the sales of protective films.

Annual Report 2007

14

Cost of Sales, SG & A, and Operating Income The cost of sales amounted to ¥160,757 million, an increase of ¥14,634 million (10%) over the previous term. Although sales increased, the increase in the cost of sales was greater than that in sales themselves. Consequently, the ratio of gross profit to sales was 30.5%, down from 30.7% in the previous term. Selling, general and administrative expenses amounted to ¥48,367 million, an increase of ¥2,428 million (5.3%) over the previous term. As a result, operating income rose to ¥22,090 million, an increase of ¥3,187 million (16.9%) from the previous term. The ratio of operating income to sales also rose to 9.6%, up from 9.0% in the previous term.

Non-operating Income and Expenses With respect to non-operating income and expenses, the Company reported a non-operating income (net total of profit and expenses) of ¥2,197 million, down from ¥3,381 million in the previous term. These results were due to a decrease in equity in earning of affiliated companies because of the consolidation of the companies that had been treated under the equity method in the previous term, while there was an improvement in net financial income thanks to an increase in dividends received.

Net Income Net income amounted to ¥13,267 million, up ¥1,218 million (10.1%) over the previous term. Return on sales (ROS) held steady at 5.7%. There was also a favorable increase in earnings per share (EPS), rising to ¥48.98 from ¥44.04 in the previous term.

Dividends The Company’s basic policy is to share profits according to business results, striving to make stable and continuous distributions of dividends to shareholders while enhancing the Company’s profitability by firming its business constitution. With respect to internal reserves, our policy is to use the reserves effectively for investment in R&D, as well as in our production and sales systems, both in Japan and overseas, with the objective of establishing stable, long-term business foundations while striving to achieve further growth. The Company is maintaining its policy that calls for dividends to be paid biannually, on the basis of each last day of the interim term and the full fiscal term for payment. For the term under review, the annual dividends were set at ¥11 per share, an increase of ¥1 from the previous term.

Financial Position Current assets increased to ¥150,146 million, up ¥19,104 million (14 .6%) from the level at the end of the previous term. This growth was largely attributed to increases in trade notes and accounts receivable in keeping with rising net sales, increases in cash and cash equivalents resulting from the fact that the last day of the term under review was a business holiday for financial institutions, and increases in inventories. Tangible fixed assets, intangible fixed assets, investments and other assets amounted to ¥149,153 million, an increase of ¥13,308 million (9.8%) over the level at the end of the previous term. The main factor involved herein was increases in tangible

Kansai Paint Co., Ltd.

fixed assets resulting from the construction of new factories, etc., in the Asian region. Current liabilities amounted to ¥90,011 million, a large increase of ¥21,035 million (30.5%) over the level at the end of the previous term. The main factors involved herein were increases in trade notes and accounts payable resulting from increases in purchases and the effects of a business holiday for financial institutions, and increases in long-term debts payable within one year. Fixed liabilities amounted to ¥30,685 million, a decrease of ¥3,649 million (10.6%) from the level at the end of the previous term. The main factor herein was a decrease in long-term debts due to maturity within one year. Total shareholders’ equity (net of minority interests) amounted to ¥164,131 million, an increase of ¥11,955 million (7.9%) over the level at the end of the previous term. The shareholders’ equity ratio fell from 57.0% in the previous term to 54.8%. The return on equity (ROE) also decreased from 8.7% in the previous term to 8.4%, and the return on assets (ROA) decreased from 5.0% to 4.7%.

Cash Flows Cash generated by operating activities was ¥17,586 million, while net cash consumed by investment activities and by financing activities was ¥11,426 million and ¥3,820 million, respectively. As a result, cash and cash equivalents at term-end stood at ¥40,096 million, an increase of ¥3,827 million (10.6%) from the level at the end of the previous term.

Outlook While concern remains about the outlook for the economy due to the current trends in the prices of crude oil and raw materials, fluctuating exchange rates, the effects of interest rate variation, etc. on economies as a whole in Japan and abroad, and the effects of economic deceleration in the United States, we should still be able to expect to see a moderate expansion of the economy. Aware of this situation, Kansai Paint and its Group companies have entered into the final year of our three-year mid-term management plan launched in fiscal year 2005, which prioritizes our key policies of “Reinforce Competitive Strength,” “Strengthen Group Business,” “Promote Globalization,” and “Carry out the Company’s Social Responsibilities.” Making maximum use of the business resources of our Group companies, we shall continue working to expand and strengthen our business foundations by promoting the development of business projects that emphasize profitability while also encouraging business reforms. Although the effects of fluctuations in the price of crude oil are expected to continue, we can also expect to see continuous growth in demand in the Asian region, resulting in increased revenue and profit, and in Japan, efforts will be continued to reduce costs. Therefore, for the next term, we forecast consolidated net sales of ¥260,000 million, an increase of 12.5% from the term under review, and a consolidated net income of ¥15,500 million, an increase of 16.8%.

Annual Report 2007

15

Consolidated Balance Sheets Kansai Paint Co., Ltd. and Consolidated Subsidiaries March 31, 2007 and 2006

Millions of yen

Assets

2007

Current assets: Cash and cash equivalents ...................................................................................... Marketable securities (Note 4) ................................................................................ Receivables: Trade notes and accounts (Note 12): Unconsolidated subsidiaries and affiliates ....................................................... Other (Note 6) ................................................................................................ Loans .................................................................................................................. Other .................................................................................................................. Allowance for doubtful receivables ....................................................................

Inventories (Note 6): Finished goods .................................................................................................... Work in process .................................................................................................. Raw materials and supplies .................................................................................

Deferred income tax assets (Note 11) .................................................................... Other current assets (Note 6) ................................................................................. Total current assets ................................................................................

¥

40,096 800

Thousands of U.S. dollars (Note 1)

2006 ¥

36,269 807

2007 $

339,653 6,777

14,886 65,626 999 997 (709)

16,550 50,503 1,410 1,198 (1,106)

126,099 555,917 8,462 8,446 (6,006)

81,799

68,555

692,918

12,166 3,910 6,119

10,187 3,271 6,294

103,058 33,122 51,834

22,195

19,752

188,014

3,265 1,991 150,146

3,260 2,399 131,042

27,657 16,866 1,271,885

Property, plant and equipment (Note 6): Land ........................................................................................................................ Buildings, machinery and equipment ...................................................................... Construction in progress .........................................................................................

12,169 154,435 1,401

9,969 140,916 1,156

103,083 1,308,217 11,868

Accumulated depreciation ......................................................................................

168,005 (113,173)

152,041 (106,058)

1,423,168 (958,687)

54,832

45,983

464,481

Investments and other assets: Investments in and loans to unconsolidated subsidiaries and affiliates .................... Investment securities (Notes 4 and 6) ...................................................................... Loans receivable ...................................................................................................... Prepaid pension costs (Note 10) ............................................................................. Deferred income tax assets (Note 11) .................................................................... Other ...................................................................................................................... Allowance for doubtful receivables ......................................................................... Intangible assets .................................................................................................

14,100 73,732 114 1,192 1,151 2,752 (351) 92,690 1,631 ¥ 299,299

13,914 71,661 113 394 1,085 2,246 (504) 88,909 953 ¥ 266,887

119,441 624,583 966 10,097 9,750 23,312 (2,973) 785,176 13,816 $ 2,535,358

Liabilities and Net Assets

2007

Current liabilities: Short-term borrowings (Note 5) ............................................................................. Long-term debt due within one year (Note 5) ......................................................... Payables: Trade notes and accounts (Note 12): Unconsolidated subsidiaries and affiliates ....................................................... Other .............................................................................................................. Other ..................................................................................................................

¥

2,043 7,691

Kansai Paint Co., Ltd.

Annual Report 2007

16

2006 ¥

2,140 38

2007 $

17,306 65,150

2,054 58,201 4,918

1,965 46,604 3,226

17,400 493,020 41,660

65,173

51,795

552,080

Income and enterprise taxes payable ...................................................................... Accrued expenses ................................................................................................... Deferred income tax liabilities (Note 11) ................................................................ Other current liabilities (Note 12) ............................................................................ Total current liabilities ............................................................................

3,959 7,637 18 3,490 90,011

5,542 7,232 18 2,211 68,976

33,537 64,693 152 29,564 762,482

Long-term debt due after one year (Note 5) ...................................................... Employees’ severance and retirement benefits (Note 10) ................................. Retirement benefits for directors and corporate auditors ............................. Deferred income tax liabilities (Note 11) ............................................................ Negative goodwill .............................................................................................. Other long-term liabilities ................................................................................. Contingent liabilities (Note 7)

1,579 7,338 599 18,387 168 2,614

7,028 7,706 389 16,398 61 2,752

13,376 62,160 5,074 155,756 1,423 22,143

Net Assets (Note 9): Shareholders’ equity: Common stock: Authorized — 793,496,000 shares in 2007 and 2006 Issued — 272,623,270 shares in 2007 and 2006 ............................................... Capital surplus ....................................................................................................... Retained earnings ................................................................................................... Treasury stock, at cost: 1,821,617 shares in 2007 1,745,147 shares in 2006 ................................................................................... Total shareholders’ equity ....................................................................

25,659 27,164 80,795

25,659 27,157 70,664

217,357 230,106 684,413

(799) 132,819

(656) 122,824

(6,768) 1,125,108

Valuation and translation adjustments: Net unrealized holding gains on securities .............................................................. Foreign currency translation adjustments ................................................................ Total valuation and translation adjustments ........................................

31,187 125 31,312

30,643 (1,291) 29,352

264,185 1,059 265,244

14,472 178,603 ¥ 299,299

11,401 163,577 ¥ 266,887

122,592 1,512,944 $ 2,535,358

Minority interests ................................................................................................ Total net assets ......................................................................................

See accompanying notes.

See accompanying notes.

Thousands of U.S. dollars (Note 1)

Millions of yen

Kansai Paint Co., Ltd.

Annual Report 2007

17

Consolidated Statements of Income

Consolidated Statements of Changes in Net Assets

Kansai Paint Co., Ltd. and Consolidated Subsidiaries Years ended March 31, 2007 and 2006

Kansai Paint Co., Ltd. and Consolidated Subsidiaries Years ended March 31, 2007 and 2006

Millions of yen

2007 Net sales ............................................................................................................... Cost of sales ......................................................................................................... Selling, general and administrative expenses .................................................. Operating income ..............................................................................................

2006

¥ 231,214 160,757 48,367 22,090

Other income (expenses): Interest and dividend income ................................................................................. Interest expense ...................................................................................................... Gain on sale of marketable and investment securities, net ..................................... Write-down of marketable and investment securities ............................................. Write-down of inventories ...................................................................................... Loss on disposal of inventories ................................................................................ Loss on sale or disposal of property, plant and equipment, net .............................. Equity in earnings of affiliates ................................................................................. Impairment loss ...................................................................................................... Other, net ...............................................................................................................

¥ 210,965 146,123 45,939 18,903

1,115 (226) 158 – (210) (380) (252) 1,452 – 540 2,197 24,287

Income before income taxes .............................................................................

Thousands of U.S. dollars (Note 1)

$ 1,958,611 1,361,771 409,716 187,124

961 (177) 274 (13) (274) (417) (143) 1,467 (51) 1,754 3,381 22,284

9,445 (1,914) 1,339 – (1,779) (3,219) (2,135) 12,300 – 4,574 18,611 205,735

7,617 1,111 15,559

8,438 (257) 14,103

64,524 9,411 131,800

Minority interests in net income of consolidated subsidiaries ........................ Net income ...........................................................................................................

(2,292) 13,267

(2,054) 12,049

(19,415) 112,385

¥

$

U.S. dollars (Note 1)

Yen

Net income per share .......................................................................................... Cash dividends per share ....................................................................................

¥ ¥

2007 48.98 11.00

¥ ¥

2006 44.04 10.00

Valuation and translation adjustments

2007

Income taxes (Note 11): Current ................................................................................................................... Deferred .................................................................................................................. Income before minority interests .......................................................................

¥

Millions of yen Shareholders’ equity

$ $

2007 0.41 0.09

Common stock

Balance at March 31, 2005 .................. Cash dividends paid — ¥8.50 per share ................................... Bonuses to directors ................................ Contribution under government rules to welfare fund for employees of overseas subsidiaries ....................... Net income .............................................. Treasury stock .......................................... Effect of merger on and changes in equity method companies ................... Net changes of items other than shareholders’ equity ............................

¥25,659

Balance at March 31, 2006 .................. Cash dividends paid — ¥11.00 per share ................................. Bonuses to directors ................................ Contribution under government rules to welfare fund for employees of overseas subsidiaries ....................... Net income .............................................. Purchase of treasury stock ....................... Disposal of treasury stock ........................ Decrease in retained earnings due to exclusion of equity method companies ........................................... Decrease in treasury stock due to exclusion of equity method companies ........................................... Net changes of items other than shareholders’ equity ............................

¥25,659

Balance at March 31, 2007 ..................

¥25,659

Capital surplus

Retained earnings

¥27,157

¥61,018

Treasury stock

¥(537)

¥113,297

¥342

Net unrealized holding gains on securities

Foreign currency translation adjustments

Total valuation and translation adjustments

¥15,563

¥(3,235)

¥12,670

(5) 12,049

(5) 12,049 (119)

(5) 12,049 (119)

16

16

(119)

¥70,664

¥(656)

¥122,824

(342)

15,080

1,944

16,682

2,192

18,874



¥30,643

¥(1,291)

¥29,352

¥11,401

¥163,577

(2,991) (114)

(2,991) (114)

(2,991) (114)

(3) 13,267

(3) 13,267 (175) 17

(3) 13,267 (175) 17

(28)

(28)

22

22

22

¥(799)

¥132,819

(175) 10

7

(28)

544 ¥80,795



¥31,187

Common stock

1,416

1,960

3,071

5,031

125

¥31,312

¥14,472

¥178,603

Balance at March 31, 2006 ................. Cash dividends paid — ¥11.00 per share ................................ Bonuses to directors ............................... Contribution under government rules to welfare fund for employees of overseas subsidiaries ...................... Net income ............................................. Purchase of treasury stock ...................... Disposal of treasury stock ....................... Decrease in retained earnings due to exclusion of equity method companies .......................................... Decrease in treasury stock due to exclusion of equity method companies .......................................... Net changes of items other than shareholders’ equity ...........................

$217,357

Balance at March 31, 2007 .................

$217,357

Capital surplus

$230,047

Retained earnings

$598,593

Valuation and translation adjustments

Treasury stock

$(5,557)

$1,040,440



Net unrealized holding gains on securities

Foreign currency translation adjustments

Total valuation and translation adjustments

$259,577

$(10,936) $248,641

Minority interests

$96,578

Total net assets

$1,385,659

(25,337) (966)

(25,337) (966)

(25,337) (966)

(25) 112,385

(25) 112,385 (1,482) 144

(25) 112,385 (1,482) 144

(237)

(237)

186

186

186

$(6,768)

$1,125,108

(1,482) 85

59

(237)

$230,106

Total shareholders’ Revaluation surplus equity

$684,413



4,608

11,995

16,603

26,014

42,617

$264,185

$1,059

$265,244

$122,592

$1,512,944

See accompanying notes.

18

¥

Thousands of U.S. dollars (Note 1)

See accompanying notes.

Annual Report 2007

¥135,176 (2,312) (102)

Shareholders’ equity

Kansai Paint Co., Ltd.

¥ 9,209

Total net assets

(2,312) (102)

16

¥27,164

Minority interests

(2,312) (102)

0

¥27,157

Total shareholders’ Revaluation surplus equity

Kansai Paint Co., Ltd.

Annual Report 2007

19

Consolidated Statements of Cash Flows

Notes to Consolidated Financial Statements

Kansai Paint Co., Ltd. and Consolidated Subsidiaries Years ended March 31, 2007 and 2006

Kansai Paint Co., Ltd. and Consolidated Subsidiaries

Thousands of U.S. dollars (Note 1)

Millions of yen

2007 Cash flows from operating activities: Income before income taxes ................................................................................... Depreciation and amortization ................................................................................ Impairment loss ...................................................................................................... Amortization of negative goodwill ......................................................................... Provision for severance and retirement benefits ...................................................... Decrease in allowance for doubtful receivables ....................................................... Interest and dividend income ................................................................................. Interest expense ...................................................................................................... Equity in earnings of affiliates ................................................................................. Write-down of marketable and investment securities ............................................. Loss on sale or disposal of property, plant and equipment, net .............................. Incerase in trade receivables ................................................................................... Increase in inventories ............................................................................................. Increase in trade payables ...................................................................................... Other ......................................................................................................................

¥

24,287 5,645 – (38) (1,626) (706) (1,115) 226 (1,452) – 252 (10,032) (1,128) 8,705 2,513

2006 ¥

22,284 5,495 51 (27) (741) (61) (961) 177 (1,467) 13 143 (4,316) (2,290) 2,136 2,247

2007 $

205,735 47,819 – (322) (13,774) (5,980) (9,445) 1,914 (12,300) – 2,135 (84,981) (9,555) 73,740 21,287

Interest and dividends received ............................................................................... Interest paid ........................................................................................................... Income taxes paid ................................................................................................... Net cash provided by operating activities ................................................................

25,531 1,928 (226) (9,647) 17,586

22,683 1,924 (177) (4,255) 20,175

216,273 16,332 (1,914) (81,720) 148,971

Cash flows from investing activities: Purchase of marketable securities ........................................................................... Proceeds from sales of marketable securities .......................................................... Purchase of property, plant and equipment ............................................................ Proceeds from sales of property, plant and equipment ........................................... Purchase of intangible assets ................................................................................. Purchase of investment securities ............................................................................ Proceeds from sales of investment securities ........................................................... Loans receivable advanced ...................................................................................... Collection on loans receivable ................................................................................. Other ...................................................................................................................... Net cash used in investing activities ........................................................................

(8,351) 6,345 (9,403) 226 (702) (5,424) 4,924 (3,627) 4,127 459 (11,426)

(2,888) 2,895 (7,168) 238 (319) (9,936) 6,874 (2,752) 2,885 (498) (10,669)

(70,741) 53,749 (79,653) 1,915 (5,947) (45,947) 41,711 (30,724) 34,960 3,888 (96,789)

Cash flows from financing activities: Proceeds from short-term debt ............................................................................... Payment of short-term debt .................................................................................... Proceeds from long-term debt ................................................................................ Payment of long-term debt ..................................................................................... Purchase of treasury stock ...................................................................................... Disposal of treasury stock ...................................................................................... Cash dividends paid ................................................................................................ Cash dividends paid to minority shareholders ......................................................... Net cash used in financing activities ........................................................................

4,997 (5,488) 1,119 (454) (175) 16 (2,991) (844) (3,820)

6,261 (5,854) – (405) (136) 1 (2,312) (730) (3,175)

42,330 (46,489) 9,479 (3,846) (1,482) 136 (25,337) (7,150) (32,359)

621 2,961 36,269

381 6,712 29,317

5,260 25,083 307,234

836

213

7,082

Effect of exchange rate changes on cash and cash equivalents ..................... Increase in cash and cash equivalents ............................................................... Cash and cash equivalents at beginning of year .............................................. Increase in cash and cash equivalents due to change in scope of consolidation .................................................................................... Increase in cash and cash equivalents due to merger of consolidated subsidiaries ................................................................................ Cash and cash equivalents at end of year .........................................................

¥

30 40,096

See accompanying notes.

Kansai Paint Co., Ltd.

Annual Report 2007

20

¥

27 36,269

$

254 339,653

1. Basis of Presenting Consolidated Financial Statements The accompanying consolidated financial statements of Kansai Paint Co., Ltd. (the “Company”) and its consolidated subsidiaries (together the “Companies”) have been prepared in accordance with the provisions set forth in the Japanese Securities and Exchange Law and its related accounting regulations and in conformity with accounting principles generally accepted in Japan (“Japanese GAAP”), which are different in certain respects as to application and disclosure requirements of International Financial Reporting Standards. The accounts of the Company’s overseas subsidiaries are based on their accounting records maintained in conformity with generally accepted accounting principles prevailing in the respective countries of domicile. The accompanying consolidated financial statements have been restructured and translated into English, with some expanded descriptions and the inclusion of the consolidated statement of changes in net assets for 2006, from the consolidated financial statements

of the Company prepared in accordance with Japanese GAAP and filed with the appropriate Local Finance Bureau of the Ministry of Finance as required by the Securities and Exchange Law. Some supplementary information included in the statutory Japanese language consolidated financial statements, but not required for fair presentation, is not presented in the accompanying consolidated financial statements. The translations of the Japanese yen amounts into U.S. dollars were included solely for the convenience of readers outside Japan, using the prevailing exchange rate at March 31, 2007, which was ¥118.05 to US$1.00. The translations should not be construed as representations that the Japanese yen amounts have been, could have been, or could in the future be converted into U.S. dollars at this or any other rate of exchange.

2. Summary of Significant Accounting Policies Principles of consolidation The consolidated financial statements include the accounts of the Company and its 33 (32 in the fiscal year ended March 31, 2006) significant subsidiaries. Intercompany transactions and accounts have been eliminated. Investments in 15 (14 in the fiscal year ended March 31, 2006) unconsolidated subsidiaries and 38 (40 in the fiscal year ended March 31, 2006) affiliates are stated at cost, adjusted for equity in undistributed earnings and losses since acquisition. The accounts of 13 (12 in the fiscal year ended March 31, 2006) consolidated subsidiaries are included on the basis of their respective fiscal years, one of which ends on February 28 and the others end on December 31. These subsidiaries do not prepare for consolidation purposes statements which correspond with the fiscal year of the Company, which ends March 31. For these consolidated subsidiaries, when there are significant transactions between their respective fiscal year ends and the Company’s, adjustments are made to reflect such transactions in the accompanying consolidated financial statements. In the elimination of investments in subsidiaries, the assets and liabilities of the subsidiaries, including the portion attributable to minority shareholders, are evaluated using fair values at the time the Company acquired control of the respective subsidiary. The difference between the cost of investments in subsidiaries and the equity in their net assets at the date of acquisition is amortized over five years in principle.

Cash and cash equivalents In preparing the consolidated statements, cash on hand, readily available deposits and short-term highly liquid investments with maturities not exceeding three months at the time of purchase are considered to be cash and cash equivalents.

Allowance for doubtful receivables With respect to the domestic consolidated subsidiaries (the “Domestic Companies”), the allowance for doubtful receivables is determined by adding individually estimated uncollectible amounts to an amount calculated using the provision Kansai Paint Co., Ltd.

rate based on past experience. The allowance for doubtful receivables of overseas consolidated subsidiaries is determined by estimates of management in amounts sufficient to cover possible losses on future collection.

Securities The Companies do not hold trading securities. Held-tomaturity debt securities are stated at amortized cost. Equity securities issued by subsidiaries and affiliated companies which are not consolidated or accounted for using the equity method are stated at moving average cost. Available-for-sale securities with available fair market values are stated at fair market value. Unrealized gains and losses on these securities are reported, net of applicable income taxes, as a separate component of net assets. Realized gains and losses on the sale of such securities are computed using moving average cost. Securities with no available fair market value are mainly stated at moving average cost. If the market value of equity securities issued by unconsolidated subsidiaries or affiliated companies not on the equity method or the market value of available-for-sale securities declines significantly, such securities are stated at fair market value, and the difference between fair market value and the carrying amount is recognized as loss in the period of the decline. If the fair market value of equity securities issued by unconsolidated subsidiaries or affiliated companies not on the equity method is not readily available, such securities should be written down to net asset value with a corresponding charge in the consolidated statements of income in the event the net asset value declines significantly. In these cases, the fair market value or the net asset value will be the carrying amount of the securities at the beginning of the next year.

Inventories Inventories of the Domestic Companies are primarily stated at moving average cost. Inventories of overseas subsidiaries are stated principally at the lower of cost or market.

Property, plant and equipment and depreciation Property, plant and equipment are carried at cost. Depreciation is computed primarily using the declining balance Annual Report 2007

21

method for Domestic Companies and the straight-line method for overseas subsidiaries. For Domestic Companies, buildings acquired after March 31, 1998 are depreciated using the straight-line method. Depreciation of assets whose acquisition costs are between ¥100 thousand and ¥200 thousand is provided by the straight-line method over three years.

Software costs Internal use software in intangible assets is amortized using the straight-line method over the estimated useful life of five years.

Research and development expenses Research and development expenses are charged to income as incurred. Research and development expenses for the years ended March 31, 2007 and 2006 were ¥5,271 million ($44,651 thousand) and ¥5,275 million, respectively.

Income taxes Income taxes comprise corporation tax, prefectural and municipal inhabitants’ taxes and enterprise tax. Enterprise tax is deductible from taxable income when paid. The asset and liability approach is used to recognize deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes.

Finance leases Finance leases which do not transfer ownership are accounted for in the same manner as operating leases under Japanese GAAP.

Retirement benefits (1) Employees’ severance and retirement benefits Under the terms of the Domestic Companies’ retirement plans, substantially all employees are entitled to a lumpsum payment at the time of retirement. The amount of the retirement benefit is, in general, based on the length of service, basic salary at the time of retirement and cause of retirement. Liabilities and expenses for severance and retirement benefits are determined based on the amounts actuarially calculated using certain assumptions. The Domestic Companies provide for employees’ severance and retirement benefits based on the estimated amounts of projected benefit obligation and the fair value of the plan assets. Actuarial gains and losses and prior service costs are recognized in expenses using the straight-line method mainly over 13 years which is within the average of the estimated remaining service years of the employees. (2) Retirement benefits for directors and corporate auditors Retirement benefits for directors and corporate auditors of the Company and certain consolidated domestic subsidiaries are provided on the accrual basis in accordance with the companies’ established rules.

Derivatives and hedge accounting The Companies state derivative financial instruments at fair value and recognize changes in the fair value as gains or losses, unless the derivative financial instruments are used for hedging purposes. Kansai Paint Co., Ltd.

If derivative financial instruments are used as hedges and meet certain hedging criteria, the Domestic Companies defer recognition of gains or losses resulting from changes in fair value of the derivative financial instruments until the related losses or gains on the hedged items are recognized. However, in cases where forward foreign exchange contracts are used as hedges and meet certain hedging criteria, forward foreign exchange contracts and hedged items are accounted for in the following manner: (1) If a forward foreign exchange contract is executed to hedge an existing foreign currency receivable or payable, (a) the difference, if any, between the Japanese yen amount of the hedged foreign currency receivable or payable translated using the spot rate at the inception date of the contract and the book value of the receivable or payable is recognized in the income statement in the period which includes the inception date, and (b) the discount or premium on the contract (the difference between the Japanese yen amount of the contract translated using the contracted forward rate and that translated using the spot rate at the inception date of the contract) is recognized over the term of the contract. (2) If a forward foreign exchange contract is executed to hedge a future transaction denominated in a foreign currency, the future transaction will be recorded using the contracted forward rate, and no gains or losses on the forward foreign exchange contract will be recognized. Also, if interest rate swap contracts are used as hedges and meet certain hedging criteria, the net amount to be paid or received under the interest rate swap contract is added to or deducted from the interest on the assets or liabilities for which the swap contract was executed.

Net income and dividends per share The computation of net income per share is based on the weighted average number of shares outstanding during the period. Diluted net income per share of common stock for the years ended March 31, 2007 and 2006 is not shown since there were no outstanding convertible bonds or other common stock equivalents. In accordance with the Japanese Corporate Law, the declaration of dividends and appropriations of retained earnings are approved at the general meeting of shareholders held after the end of the fiscal year. Therefore, cash dividends per share shown in the consolidated statements of income reflect interim dividends and the final dividends approved after the end of the relevant fiscal year.

Accounting standard for presentation of net assets in the balance sheet Effective from the year ended March 31, 2007, the Company and its consolidated subsidiaries adopted the new accounting standard, “Accounting Standard for Presentation of Net Assets in the Balance Sheet” (Statement No. 5 issued by the Accounting Standards Board of Japan on December 9, 2005) and the implementation guidance for the accounting standard for presentation of net assets in the balance sheet (the Financial Accounting Standard Implementation Guidance No. 8 issued by the Accounting Standards Board of Japan on December 9, 2005), (collectively, the “New Accounts Standards”). Annual Report 2007

22

Under the New Accounting Standards, the balance sheet comprises three sections, which are the assets, liabilities and net assets sections. Previously, the balance sheet comprised the assets, liabilities, minority interests, as applicable, and shareholders’ equity sections. The net assets section comprises four subsections, which are shareholders’ equity, valuation and translation adjustments, share subscription rights and minority interests. The previously presented shareholders’ equity and certain other balance sheet items for March 31, 2006 have been restated to conform to the March 31, 2007 presentation. As a result, minority interests in consolidated subsidiaries amounting to ¥11,401 million are included in the net assets section as of March 31, 2006. If the New Accounting Standards had not been adopted and the previous presentation method for shareholders’ equity had been applied, shareholders’ equity at March 31, 2007 would have been ¥164,131 million ($1,390,352 thousand).

Accounting standard for statement of changes in net assets Effective from the year ended March 31, 2007, the Company and its consolidated subsidiaries adopted the new accounting standard, “Accounting Standard for Statement of Changes in Net Assets” (Statement No. 6 issued by the Accounting Standards Board of Japan on December 27, 2005) and the implementation guidance for the accounting standard for statement of changes in net assets (the Finan-

cial Accounting Standard Implementation Guidance No. 9 issued by the Accounting Standards Board of Japan on December 27, 2005), (collectively, the “Additional New Accounting Standards”). Accordingly, the Company prepared the statement of changes in net assets for the year ended March 31, 2007 in accordance with the Additional New Accounting Standards. Also, the Company voluntarily prepared the consolidated statement of changes in net assets for the year ended March 31, 2006 in accordance with the Additional New Accounting Standards. Previously, consolidated statements of shareholders’ equity were prepared for the purpose of inclusion in the consolidated financial statements although not required under Japanese GAAP.

Reclassification and restatement Certain prior year amounts have been reclassified to conform to the current year presentation. As described above, the consolidated balance sheet for March 31, 2006 has been adapted to conform to new presentation rules for March 31, 2007. In lieu of the consolidated statement of shareholders’ equity for the year ended March 31, 2006, which was prepared on a voluntary basis for inclusion in the consolidated financial statements for the year ended March 31, 2006, the Company prepared the consolidated statement of changes in net assets for the year ended March 31, 2006 as well as for the year ended March 31, 2007. These reclassifications had no impact on previously reported results of operations or retained earnings.

3. Finance Leases Information regarding non-capitalized finance leases at March 31, 2007 and 2006 was as follows: Millions of yen

2007

Machinery, equipment and vehicles

Original lease obligations (including finance charges) ......................................... Payments remaining: Payments due within one year ........................................................................ Payments due after one year ..........................................................................

Tools and fixtures

Total

¥

873

¥

842

¥ 1,715

¥

135 216 351

¥

139 219 358

¥

¥

¥

¥

274 435 709

Thousands of U.S. dollars (Note 1)

2007

Machinery, equipment and vehicles

Original lease obligations (including finance charges) ......................................... Payments remaining: Payments due within one year ........................................................................ Payments due after one year ..........................................................................

Tools and fixtures

Total

$ 7,395

$ 7,133

$14,528

$ 1,143 1,830 $ 2,973

$ 1,178 1,855 $ 3,033

$ 2,321 3,685 $ 6,006

Millions of yen

2006

Machinery, equipment and vehicles

Original lease obligations (including finance charges) ......................................... Payments remaining: Payments due within one year ........................................................................ Payments due after one year ..........................................................................

Tools and fixtures

Total

¥

852

¥ 1,041

¥ 1,893

¥

143 219 362

¥

¥

¥

¥

176 315 491

¥

319 534 853

Lease payments under non-capitalized finance leases for the years ended March 31, 2007 and 2006 were ¥353 million ($2,990 thousand) and ¥364 million, respectively. Kansai Paint Co., Ltd.

Annual Report 2007

23

(d) The following table summarizes carrying values of bonds and other securities by contractual maturities classified as available-for-sale and held-to-maturity as of March 31, 2007:

4. Securities (1) Information on securities of the Companies at March 31, 2007 was as follows: (a) The following table summarizes acquisition costs, book values and fair values of held-to-maturity and available-for-sale securities with available fair values as of March 31, 2007: Held-to-maturity

Millions of yen Within 1 year

Millions of yen

Securities with fair values exceeding book values: Other .............................................................................................................. Total ................................................................................................................ Securities with fair values not exceeding book values: Bonds ............................................................................................................. Other .............................................................................................................. Total ................................................................................................................ Available-for-sale Securities with book values exceeding acquisition costs: Equity securities .............................................................................................. Total ................................................................................................................ Securities with book values not exceeding acquisition costs: Equity securities .............................................................................................. Bonds ............................................................................................................. Investment funds ............................................................................................ Total ................................................................................................................

Book value

Securities with book values exceeding acquisition costs: Equity securities .............................................................................................. Total ................................................................................................................ Securities with book values not exceeding acquisition costs: Equity securities .............................................................................................. Bonds ............................................................................................................. Investment funds ............................................................................................ Total ................................................................................................................

Difference

¥ ¥

400 400

¥ ¥

400 400

¥ ¥

0 0

¥

300 100 400

¥

300 100 400

¥

(0) (0) (0)

¥

Acquisition cost

¥

¥

Millions of yen Book value

Difference

¥ ¥

15,050 15,050

¥ ¥

65,461 65,461

¥ ¥

¥

474 3,000 193

¥

381 2,993 188

¥

(93) (7) (5)

¥

3,667

¥

3,562

¥

(105)

Held-to-maturity Securities with fair values exceeding book values: Other .............................................................................................................. Total ................................................................................................................ Securities with fair values not exceeding book values: Bonds ............................................................................................................. Other .............................................................................................................. Total ................................................................................................................ Available-for-sale

Fair value

50,411 50,411

Thousands of U.S. dollars (Note 1) Book value Difference Fair value

$ $

3,388 3,388

$ $

3,388 3,388

$ $

0 0

$

2,541 847 3,388

$

2,541 847 3,388

$

(0) (0) (0)

$

$

$

Thousands of U.S. dollars (Note 1) Acquisition cost Book value Difference

Bonds ........................................................................................... ¥ Other ........................................................................................... Total ............................................................................................. ¥

300 500 800

¥ ¥

3,000 – 3,000

Within 1 year

$

Within 1-5 years

2,541 4,236 6,777

$

$

25,413 – 25,413

$

(2) Information on securities of the Companies at March 31, 2006 was as follows: (a) The following table summarizes acquisition costs, book values and fair values of held-to-maturity and available-for-sale securities with available fair values as of March 31, 2006: Held-to-maturity

Millions of yen

Securities with fair values exceeding book values: Bonds ............................................................................................................. Other .............................................................................................................. Total ................................................................................................................ Available-for-sale Securities with book values exceeding acquisition costs: Equity securities .............................................................................................. Bonds ............................................................................................................. Total ................................................................................................................ Securities with book values not exceeding acquisition costs: Equity securities .............................................................................................. Investment funds ............................................................................................ Total ................................................................................................................

Book value

¥ ¥

808 201 1,009

Fair value

¥ ¥

¥ ¥ ¥

¥

14,022 190 14,212

¥

134 2,999 3,133

¥

¥

¥

(2) (0) (2)

¥

Millions of yen Book value

Acquisition cost

¥

Difference

806 201 1,007

Difference

63,148 192 63,340

¥

108 2,985 3,093

¥

49,126 2 49,128

¥

(26) (14) (40)

¥

(b) The following table summarizes book values of available-for-sale securities with no available fair values as of March 31, 2006: Available-for-sale securities

Millions of yen

Non-listed equity securities .................................................................................................................................... Investment funds ................................................................................................................................................... Other ..................................................................................................................................................................... Total .......................................................................................................................................................................

¥

1,046 3,791 187 5,024

¥

$ 127,488 $ 127,488

$ 554,519 $ 554,519

$ 427,031 $ 427,031

(c) Total sales of available-for-sale securities in the year ended March 31, 2006 amounted to ¥9,769 million and the related gains amounted to ¥274 million.

$

$

$

(d) The following table summarizes carrying values of bonds and other securities by contractual maturities classified as available-for-sale and held-to-maturity as of March 31, 2006:

$

4,015 25,413 1,635 31,063

$

3,227 25,354 1,593 30,174

$

(788) (59) (42) (889)

Available-for-sale securities Millions of yen

Non-listed equity securities ....................................................................................................... Investment funds ...................................................................................................................... Other ........................................................................................................................................ Total ..........................................................................................................................................

¥

¥

1,248 3,324 136 4,708

Millions of yen Within 1 year

Bonds ................................................................................................................................... Other .................................................................................................................................... Total ......................................................................................................................................

(b) The following table summarizes book values of available-for-sale securities with no available fair values as of March 31, 2007: Thousands of U.S. dollars (Note 1)

$

$

(c) Total sales of available-for-sale securities in the year ended March 31, 2007 amounted to ¥11,269 million ($95,460 thousand) and the related gains amounted to ¥158 million ($1,338 thousand).

10,572 28,157 1,152 39,881

24

¥

700 100 800

¥

3,100 100 3,200

¥

Short-term borrowings are principally represented by bank loans with interest rates ranging from 0.58% to 12.00% at March 31, 2007 and from 0.05% to 11.00% at March 31, 2006. Long-term debt at March 31, 2007 and 2006 consisted of the following: Thousands of U.S. dollars (Note 1)

Millions of yen

2007 Banks and insurance companies, 0.10% - 6.10% in 2007 (1.00% - 6.10% in 2006), maturing through 2028 ..................................................................................... ¥ Other long-term debt ..............................................................................................

¥ Annual Report 2007

¥

Within 1-5 years

5. Short-Term Borrowings and Long-Term Debt

Less amounts due within one year ...........................................................................

Kansai Paint Co., Ltd.

Thousands of U.S. dollars (Note 1)

Within 1-5 years

Kansai Paint Co., Ltd.

Annual Report 2007

9,251 19 9,270 7,691 1,579 25

2006 ¥

¥

7,047 19 7,066 38 7,028

2007 $

$

78,365 161 78,526 65,150 13,376

6. Pledged Assets

9. Net Assets

Pledged assets at March 31, 2007 and 2006 were as follows:

The Japanese Corporate Law (“the Law”) became effective on May 1, 2006, replacing the Japanese Commercial Code (“the Code”). The Law is generally applicable to events and transactions occurring after April 30, 2006 and for fiscal years ending after that date. Under Japanese laws and regulations, the entire amount paid for new shares is required to be designated as common stock. However, a company may, by a resolution of the Board of Directors, designate an amount not exceeding one-half of the price of the new shares as additional paid-in capital, which is included in capital surplus. Under the Law, in cases where a dividend distribution of surplus is made, a smaller of an amount equal to 10% of the dividend or the excess, if any, of 25% of common stock over the total of additional paid-in capital and legal earnings reserve must be set aside as additional paid-in capital or legal earnings reserve. Legal earnings reserve is included in retained earnings in the accompanying consolidated balance sheets. Under the Code, companies were required to set aside an amount equal to at least 10% of the aggregate amount of cash dividends and other cash appropriations as legal earnings reserve until the total of legal earnings reserve and additional paid-in capital equaled 25% of common stock. Under the Code, legal earnings reserve and additional

Millions of yen

Thousands of U.S. dollars (Note 1)

2007 Trade notes and accounts pledged for 4.18% short-term borrowings of ¥7 million ($59 thousand) ...... Inventories pledged for 11.5% - 12.0% short-term borrowings of ¥188 million ($1,593 thousand) ..... Other current assets pledged for certain trade notes and accounts ........................................................ Property, plant and equipment pledged for 0.985% - 1.015% short-term borrowings of ¥100 million ($847 thousand), 0.0997% - 3.62% long-term debt due within one year of ¥668 million ($5,659 thousand), 0.80% - 3.62% long-term debt due after one year of ¥1,006 million ($8,522 thousand) and other long-term liabilities of ¥439million ($3,719 thousand) ......................... Investment securities pledged for certain trade notes and accounts .......................................................

¥

¥

7 1,632 20

2,952 12 4,623

2007 $

$

59 13,825 169

25,006 102 39,161

Millions of yen

2006 Inventories pledged for 10.00% - 11.00% short-term borrowings of ¥267 million ....................................................... Other current assets pledged for certain trade notes and accounts ............................................................................... Property, plant and equipment pledged for payables other of ¥173 million and other long-term liabilities of ¥589 million .................................................................................................................. Investment securities pledged for certain trade notes and accounts ..............................................................................

¥

¥

1,602 15 1,068 12 2,697

paid-in capital could be used to eliminate or reduce a deficit by a resolution of the shareholders’ meeting or could be capitalized by a resolution of the Board of Directors. Under the Law, both of these appropriations generally require a resolution of the shareholders’ meeting. Additional paid-in capital and legal earnings reserve may not be distributed as dividends. Under the Code, however, on condition that the total amount of legal earnings reserve and additional paid-in capital remained equal to or exceeded 25% of common stock, they were available for distribution by resolution of the shareholders’ meeting. Under the Law, all additional paid-in capital and all legal earnings reserve may be transferred to other capital surplus and retained earnings, respectively, which are potentially available for dividends. The maximum amount that the Company can distribute as dividends is calculated based on the unconsolidated financial statements of the Company in accordance with Japanese laws and regulations. At the annual shareholders’ meeting held on June 28, 2007, the shareholders approved cash dividends amounting to ¥1,630 million ($13,808 thousand). This appropriation was not accrued in the consolidated financial statements as of March 31, 2007. Such appropriations are recognized in the period in which they are approved by the shareholders.

7. Contingent Liabilities

10. Employees’ Severance and Retirement Benefits

Information on contingent liabilities of the Company at March 31, 2007 and 2006 is as follows:

The liabilities for severance and retirement benefits included in the liability section of the consolidated balance sheets as of March 31, 2007 and 2006 consisted of the following: Millions of yen

Thousands of U.S. dollars (Note 1)

2007 As endorser of notes endorsed ................................................................................................................ As guarantor of indebtedness of unconsolidated subsidiaries and affiliates .............................................

¥ ¥

204 5 209

2007 $ $

1,728 42 1,770

Millions of yen

As endorser of notes endorsed ........................................................................................................................................ As guarantor of indebtedness of unconsolidated subsidiaries and affiliates .....................................................................

2006 142 7 ¥ 149 ¥

Thousands of U.S. dollars (Note 1)

Millions of yen

2007 Projected benefit obligation ................................................................................ Unrecognized prior service costs ......................................................................... Unrecognized actuarial differences ..................................................................... Prepaid pension costs ......................................................................................... Less fair value of pension assets .......................................................................... Liability for severance and retirement benefits ................................................

¥

48,682 2,347 (4,928) 1,192 (39,955) ¥ 7,338

2006 ¥

48,834 2,647 (6,420) 394 (37,749) ¥ 7,706

8. Derivative Transactions

Kansai Paint Co., Ltd.

speculation purposes. The Companies deal with highly rated international financial institutions as counterparts to these transactions to minimize credit risk exposure. The Finance Divisions enter into the derivative transactions and control the transactions, including the processing of the transactions, such as with settlements, in accordance with established policies approved by the Board of Directors. Hedge accounting applies to all derivative transactions of Kansai Paint and its consolidated subsidiaries, consequently, these transactions are not disclosed in these notes.

Annual Report 2007

26

$ 412,385 19,881 (41,745) 10,097 (338,458) $ 62,160

Included in the consolidated statements of income for the years ended March 31, 2007 and 2006 were severance and retirement benefit expenses that comprised the following: Thousands of U.S. dollars (Note 1)

Millions of yen

The Companies enter into forward foreign exchange contracts, and interest rate swap transactions to control risks related to foreign currencies and interest rates. Forward foreign exchange contracts are used to hedge the risk of fluctuations in foreign currency exchange rates with respect to monetary receivables and payables, including future transactions, denominated in foreign currencies resulting from import and export transactions, and the interest rate swaps are used to hedge the risk of fluctuations in interest rates. The Companies principally use derivative transactions in connection with managing their market risk and not for

2007

2007 Service costs - benefits earned during the year ................................................... Interest cost on projected benefit obligation ....................................................... Expected return on plan assets ........................................................................... Amortization of prior service costs ...................................................................... Amortization of actuarial differences .................................................................. Severance and retirement benefit expenses ....................................................

¥

¥

1,462 866 (796) (300) 935 2,167

2006 ¥

¥

1,482 861 (637) (300) 1,487 2,893

2007 $

$

12,385 7,336 (6,743) (2,541) 7,920 18,357

The discount rate and the rate of expected return on plan assets used by the Company are mainly 1.8% and 2.5%, respectively, for the year ended March 31, 2007 and mainly 1.8% and 2.5%, respectively, for the year ended March 31, 2006. The estimated amount of all retirement benefits to be paid at future retirement dates is allocated equally to each service year using the estimated number of total service years.

Kansai Paint Co., Ltd.

Annual Report 2007

27

11. Deferred Income Taxes

13. Segment Information

The following table summarizes the significant differences between the statutory tax rate and the Companies’ effective income tax rate for financial statement purposes for the years ended March 31, 2007 and 2006.

As most of the Companies’ activities are in the manufacture and sale of paints and coatings, industrial segment information is not disclosed. Regional segment information for the years ended March 31, 2007 and 2006 was as follows:

2007 40.0% 0.4 (0.8) (2.4) (1.3) 35.9%

Statutory tax rate .............................................................................................................................. Nondeductible expenses ................................................................................................................... Nontaxable dividend income ............................................................................................................. Equity in earnings of affiliates ........................................................................................................... Deductible taxes and other ............................................................................................................... Effective tax rate ...............................................................................................................................

2006 40.0% 0.5 (0.6) (2.6) (0.6) 36.7%

Significant components of the Companies’ deferred tax assets and liabilities as of March 31, 2007 and 2006 were as follows: Millions of yen

2007 Deferred tax assets: Valuation loss on inventories .......................................................................... Elimination of unrealized profit on inventories ................................................ Excess allowance for doubtful receivables ....................................................... Excess accrued expenses ................................................................................. Accrued enterprise tax .................................................................................... Excess bonuses accrued .................................................................................. Retirement benefits ........................................................................................ Other .............................................................................................................. Subtotal .......................................................................................................... Valuation allowance ........................................................................................ Total deferred tax assets ................................................................................. Deferred tax liabilities: Adjustments in allowance for doubtful accounts in the consolidation elimination of receivables and payables ...................................................... Adjustments to fixed assets based on corporate tax laws ............................... Unrealized holding gains on securities ............................................................ Tax effect of foreign subsidiaries’ undistributed earnings ................................ Total deferred tax liabilities ................................................................................. Net deferred tax assets (liabilities) .......................................................................

Thousands of U.S. dollars (Note 1)

2006

Millions of yen

2007 Japan ................................................. Asia .................................................... Americas ............................................ Europe ............................................... Total ................................................... Elimination and corporate .................. Consolidated basis .............................

162 635 136 224 306 1,501 3,282 2,146 8,392 (262) 8,130

18 379 20,122 1,599 22,118 ¥ (13,988)

¥

145 561 92 224 416 1,480 3,642 2,748 9,308 (196) 9,112

13 298 19,635 1,237 21,183 ¥ (12,071)

¥

¥

162,014 67,128 1,114 958 231,214 – 231,214

Intersegment sales or transfer amounts

¥

¥

7,867 68 6 68 8,009 (8,009) –

¥ 169,881 67,196 1,120 1,026 239,223 (8,009) ¥ 231,214

2007 $

1,372 5,379 1,152 1,898 2,592 12,715 27,802 18,179 71,089 (2,220) 68,869

152 3,211 170,453 13,545 187,361 $(118,492)

Operating expenses

Net sales

¥

¥

155,493 59,432 1,005 952 216,882 (7,758) 209,124

Operating income

¥ 14,388 7,764 115 74 22,341 (251) ¥ 22,090

Assets

¥

¥

258,345 51,429 801 477 311,052 (11,753) 299,299

Millions of yen

2006 ¥

Total sales to external customers

Japan ................................................. Asia .................................................... Americas ............................................ Europe ............................................... Total ................................................... Elimination and corporate .................. Consolidated basis .............................

Total sales to external customers

¥

¥

152,859 56,206 1,185 715 210,965 – 210,965

Intersegment sales or transfer amounts

¥

¥

5,283 141 0 97 5,521 (5,521) –

Operating expenses

Net sales

¥ 158,142 56,347 1,185 812 216,486 (5,521) ¥ 210,965

¥

¥

145,723 49,985 1,082 758 197,548 (5,486) 192,062

Operating income

¥ 12,419 6,362 103 54 18,938 (35) ¥ 18,903

Assets

¥

¥

232,829 43,081 765 449 277,124 (10,237) 266,887

Thousands of U.S. dollars (Note 1)

2007 Japan ................................................. Asia .................................................... Americas ............................................ Europe ............................................... Total ................................................... Elimination and corporate .................. Consolidated basis .............................

Total sales to external customers

Intersegment sales or transfer amounts

$ 1,372,419 568,640 9,437 8,115 1,958,611 – $ 1,958,611

$ 66,641 576 51 576 67,844 (67,844) $ –

Operating expenses

Operating income

Assets

$ 1,317,179 503,447 8,514 8,065 1,837,205 (65,718) $ 1,771,487

$ 121,881 65,769 974 626 189,250 (2,126) $ 187,124

$ 2,188,437 435,654 6,785 4,041 2,634,917 (99,559) $ 2,535,358

Net sales

$1,439,060 569,216 9,488 8,691 2,026,455 (67,844) $1,958,611

Overseas sales for the years ended March 31, 2007 and 2006 were as follows: Millions of yen

12. Effect of Bank Holidays on March 31, 2007 As financial institutions in Japan were closed on March 31, 2007, amounts that would normally be settled on March 31, 2007 were collected or paid on the following business day, April 2, 2007. As a result, notes and accounts receivable increased by approximately ¥6,648 million ($56,315

thousand), notes and accounts payable increased by approximately ¥4,850 million ($41,084 thousand), and other current liabilities increased by approximately ¥23 million ($195 thousand).

2007 Asia ...................................................................................................................... Americas .............................................................................................................. Europe ................................................................................................................. Overseas sales ......................................................................................................

¥

¥

74,193 2,800 2,618 79,611

Thousands of U.S. dollars (Note 1)

2006 ¥ 63,406 2,639 2,430 ¥ 68,475

2007 $

$

628,488 23,719 22,177 674,384

Overseas sales include overseas subsidiaries’ sales to overseas third parties as well as the Domestic Companies’ export sales to third parties. The regions include the following countries: (1) Asia: India, Thailand and Taiwan etc. (2) Americas: United States etc. (3) Europe: United Kingdom etc.

Kansai Paint Co., Ltd.

Annual Report 2007

28

Kansai Paint Co., Ltd.

Annual Report 2007

29

14. Related Party Transactions Sales to unconsolidated subsidiaries and affiliates for the years ended March 31, 2007 and 2006 were as follows: Millions of yen

Sales to unconsolidated subsidiaries and affiliates ..............................................

¥

2007 20,226

¥

2006 24,678

Thousands of U.S. dollars (Note 1)

2007 $ 171,334

Receivables from unconsolidated subsidiaries and affiliates at March 31, 2007 and 2006 were as follows: Millions of yen

Receivables from unconsolidated subsidiaries and affiliates ................................

¥

2007 12,836

¥

2006 11,436

Thousands of U.S. dollars (Note 1)

2007 $ 108,734

15. Subsequent Event (1) On May 18, 2007, the Company’s Board of Directors approved a resolution for the acquisition of the Company’s own shares of common stock under Article 156 and Article 165, Section 3 of the Japanese Corporate Law. (a) The reason for acquiring its own shares of common stock is to implement a flexible capital policy in order to adapt to the change in the Company’s business environment. (b) Details of acquisition: 1. Type of shares to be acquired .......................... Common stock 2. Number of shares to be acquired ..................... 5,000,000 shares (maximum) 3. Schedule for acquisition of the shares ............. May 22, 2007 to October 31, 2007 4. Total amount of shares to be acquired ............. ¥5,500 million ($46,590 thousand) (maximum) (2) The following appropriations of retained earnings, which were not reflected in the accompanying consolidated financial statements for the year ended March 31, 2007, were approved at the annual general meeting of the shareholders of the Company held on June 28, 2007. Millions of yen

Appropriations: Cash dividends, ¥6 ($0.05) per share ..........................................................................................

Kansai Paint Co., Ltd.

Annual Report 2007

30

¥

1,630

Thousands of U.S. dollars (Note 1)

$

13,808

Kansai Paint Co., Ltd.

Annual Report 2007

31

Topics

Directory

HEAD OFFICE 3-6, Fushimi-machi 4-chome, Chuo-ku Osaka 541-8523, Japan Tel: 81-6-6203-5531 Fax: 81-6-6203-5018

TOKYO OFFICE 24-15, Higashi-Ohi 5-chome, Shinagawa-ku, Tokyo 140-8520, Japan Tel: 81-3-3472-3131 Fax: 81-3-3472-0525

R&D CENTER 17-1, Higashi-Yawata 4-chome, Hiratsukashi, Kanagawa 254-8562, Japan Tel: 81-463-23-2100 Fax: 81-463-24-0637

COSCO KANSAI PAINT & CHEMICALS (SHANGHAI) CO., LTD. No.5589-5689 Hutai Road, Shanghai 201907, China Tel: 86-21-5602-5077 Fax: 86-21-5602-0852

THAI KANSAI PAINT CO., LTD. 180 Moo 3 Taparuk Road, Amphur Muang, Samutprakarn 10270, Thailand Tel: 66-2-753-2377 Fax: 66-2-753-2774

Overseas KANSAI PAINT (AMERICA), INC. 5455 Corporate Drive, Suite 205 Troy, MI 48098, U.S.A. Tel: 1-248-952-0533 Fax: 1-248-952-0538 PPG KANSAI AUTOMOTIVE FINISHES U.S., LLC Troy-Automotive Technical Center, 5875 New King Court Troy, MI 48098, U.S.A. Tel: 1-248-641-2010 Fax: 1-248-641-2266 PPG KANSAI AUTOMOTIVE FINISHES CANADA, LP 834 Caledonia Road Toronto, Ontario M6B 3X9, Canada Tel: 1-905-855-5667 Fax: 1-905-823-4190 PPG ALESCO AUTOMOTIVE FINISHES MEXICO, S.de.R.L.de C.V. Libramiento a Tequisquiapan #66 Zona Industrial, San Juan del Rio, 76800 Queretaro, Mexico Tel: 52-427-2710124 Fax: 52-427-2719195 KANSAI PAINT EUROPE LIMITED. 20th Floor, Wembley Point, 1 Harrow Road Wembley Middlesex HA9 6DE UK Tel: 44-20-8900-5933 Fax: 44-20-8900-5966 PPG KANSAI AUTOMOTIVE FINISHES UK, LLP 4th Floor, Trigate 210-222 Hagley Road West Birmingham, B68 ONP UK Tel: 44-12-1423-7300 Fax: 44-12-1434-5386 KDK AUTOMOTIVE COATINGS CO., LTD. 264-1 Dangjeong-Dong, Gunpo-Shi Gyunggi-Do 435-030, Korea Tel: 82-31-456-8314 Fax: 82-31-456-8319 TAIWAN KANSAI PAINT CO., LTD. No.6, Yungkong 2nd Road, Yung-an Industrial District, Yung-an Hsiang Kaohsiung Hsien, Taiwan R.O.C. Tel: 886-7-622-3171 Fax: 886-7-623-0155 KANSAI PAINT H. K. LTD. Suite 1018, 10th Floor, Ocean Centre Harbour City, No.5 Canton Road, Kowloon, Hong Kong Tel: 852-2891-1280 Fax: 852-2891-0890

COSCO KANSAI PAINT & CHEMICALS (TIANJIN) CO., LTD. 42, 5th Avenue, TEDA, Tianjin, 300457, China Tel: 86-22-2529-2009 Fax: 86-22-2532-0902 CHONGQING KANSAI PAINT CO., LTD. 9 Danlong Road, Nanping, Nan‘an District, Chongqing, 400060, China Tel: 86-23-6283-4824 Fax: 86-23-6283-7094 SHENYANG KANSAI PAINT CO., LTD. 69 Kunshan West Road, Huanggu District, Shenyang 110035 China Tel: 86-24-8602-8669 Fax: 86-24-8602-5068 TIANJIN WINFIELD KANSAI PAINT & CHEMICALS CO., LTD. No.95 Taihua Road, TEDA, Tianjin, 300457, China Tel: 86-22-6623-0159 Fax: 86-22-6623-0152 HUNAN XIANGJIANG KANSAI PAINT CO., LTD. 790, Deya Road, Changsha 410003, China Tel: 86-731-422-3747 Fax: 86-731-422-0181 GUANGZHOU KANSAI PAINT CO., LTD. 26 Huangge East 2nd Road, Huangge, Nansha, Guangzhou, Guangdong, China Tel: 86-20-3468-4900 Fax: 86-20-3468-4930 SUZHOU KANSAI PAINT CO., LTD. Chengtai International Business Square #410, Renming Road #93, Kunshan, Jiangsu, China Tel: 86-512-5756-3372 Fax: 86-512-5756-3374 KANSAI PAINT PHILIPPINES, INC. 1st Street, Meridian Industrial Complex BO. Balibago, Sta. Rosa, Laguna, Phillippines Tel: 63-2-699-2028 Fax: 63-2-699-2029

Kansai Paint Co., Ltd.

Annual Report 2007

KANSAI RESIN (THAILAND) CO., LTD. 34 Moo 4, Eastern Seaboard Industrial Estate (Rayong), Yudhasart Road, Tumbol Pluakdaeng, Amphur Pluakdaeng, Rayong 21140, Thailand Tel: 66-38-954-747 Fax: 66-38-954-751 P.T. KANSAI PAINT INDONESIA MM 2100 Industrial Town, Blok DD-7, Jalan Irian No.9D, Cibitung-Bekasi 17520, Indonesia Tel: 62-21-8998-2370 Fax: 62-21-8998-2369 P.T.GDJAH TUNGGAL PRAKARSA Jl. Hayam Wuruk, 28 Jakarta 10120, Indonesia Tel: 62-21-385-4121 Fax: 62-21-381-0929 SIME KANSAI PAINTS SDN. BHD. 2 Solok Waja 2, Kawasan Perindustrian, Bukit Raja 41710 Klang, Selangor D.E., Malaysia Tel: 60-3-3348-7805 Fax: 60-3-3348-7806 KANSAI COATINGS MALAYSIA SDN. BHD. 4 Solok Waja 2, Kawansan Perindustrian Bukit Raja, P.O. Box 159, 41710 Klang, Selangor D.E., Malaysia Tel: 60-3-3341-5333 Fax: 60-3-3342-7223 KANSAI PAINT (SINGAPORE) PTE. LTD. 57 Penjuru Road, Jurong, Singapore 609141, Singapore Tel: 65-6261-8621 Fax: 65-6265-0301 KANSAI PAINT (ASIA) PTE. LTD. 16 Raffles Quay #42-02 Hong Leong Building, Singapore 048581, Singapore Tel: 65-6222-1192 Fax: 65-6222-1156

Paint for Towers

Kansai Paint products are being used on many of the famous tower structures of Japan. Tokyo Tower, a symbol of Tokyo, is repainted once every five years to maintain the beauty of the structure. Because the tower is painted every five years, the workability of the paint is more important than its corrosion resistance properties. Last year, in accordance with a request from the Metropolis of Tokyo, we began testing water-based coating material for use on the tower. Expected Durability: 5 years Undercoating: AQUAMAX II Top coating: ALES AQUA GLOSS

On the other hand, Kyoto Tower, which rises above the ancient capital city of Kyoto, is primarily white, to blend in with the traditional surroundings of the city. Because white shows dirt easily, a pollution-resistant paint is used. The tower was repainted from January to April of 2007.

(Saie) Multi-color Mother-of-Pearl Technique

Electrical towers, however, can be located in isolated mountainous regions as well as in densely populated areas, which can make maintenance work extremely difficult. Accordingly, there is a strong need to minimize tower maintenance. To meet this need, Kansai Paint has developed the TOWER BARRIER system that provides an extremely thick, long life coating. This system uses a 50 µm undercoating with excellent adhesion to the structural material, and a 350 µm thick top coating that creates a strong barrier against

Saie was developed to re-create the deep, rich colors seen in traditional craft work. Saie is a multi-color pattern coating technology in which multiple colors are interwoven into a beautiful finish. By combining a multi-nozzle spray gun with specialized paints, Kansai Paint has successfully developed this new and unique design system.

HIRM A Heat Barrier Coating for Concrete HIRM A is a revolutionary waterbased heat barrier coating for concrete developed to reduce the heat island phenomenon. Special pigments in the HIRM A coating reflect infrared rays, and “hollow balloons” in the particles of the coating material reduce heat transmission. Compared with unpainted surfaces, surfaces coated with HIRM A store approximately 30% less thermal energy under the hot summer sun, keeping the surface temperature roughly 10ºC to 15ºC cooler. HIRM A can also be applied easily using rollers, providing outstanding workability. As such, HIRM A can be used in a wide range of applications, including parking lots, pedestrian malls, verandas, and around swimming pools.

moisture and salt. This coating is expected to provide 50 years of corrosion resistance. Expected Durability: 50 years Undercoating: TOWER BARRIER Undercoat Top Coating: TOWER BARRIER Top coat

Expected Durability: 15 years Undercoating: SUPER ZAURUS Top coating: CERA M RETAN

Awards Auto color Award 2007: FASHION COLOR PRIZE LEXUS LS White Pearl Crystal Shine

Good Painting Color: Special Prize NAGAMINE Mori no 5 bangai

KANSAI NEROLAC PAINTS LTD. Ganpatrao Kadam Marg, Lower Parel, Mumbai 400013, India Tel: 91-22-2493-4001 Fax: 91-22-2493-6296

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Kansai Paint Co., Ltd.

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KANSAI PAINT CO., LTD.

3-6, Fushimi-machi 4-chome, Chuo-ku, Osaka 541-8523, Japan Tel: 81-6-6203-5531 Fax: 81-6-6203-5018

http://www.kansai.co.jp

Annual Report 2007

Printed on recycled paper

Printed in Japan

Annual Report 2007 Year Ended March 31, 2007