Hitachi Chemical Annual Report - 日立化成株式会社 · Hitachi Chemical Company, Ltd. Head Office: ... U.S. dollar amounts in this annual report are translated from yen,

Hitachi Chemicalwww.hitachi-chem.co.jp

Annual Report 2002

Technological

Innovation for High-Value SolutionsMaximizing ValueTechnological Innovation

for High-Value Solutions

Maximizing ValueTechnological Innovation


Telecommunications

Automobiles & Energy Life Sciences & Amenities

This annual report was printed on 100% recycled paper. Printed in Japan

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Profile

Hitachi Chemical strives to achieve sustainable growth and

contribute to a more prosperous society while maintaining

its strong commitment to protecting the environment.

MAXIMIZING THE VALUE OF THE HITACHI CHEMICAL GROUP

Hitachi Chemical aims to be a technologically innovative corporation that provides

optimal solutions to its customers.

Hitachi Chemical Co., Ltd. was established in 1962 and began operations in 1963 with thetransfer of the business assets of the Chemical Products Division of Hitachi, Ltd. Sincethen, based on its accumulated polymer technologies, the company has continuouslyworked to expand its field of operations, developing innovative technologies and newbusiness ventures as a chemical manufacturer engaged in a wide range of areas, includingElectronics-Related Products, Chemical-Related Products, and Housing Equipment andEnvironmental Facilities.

Hitachi Chemical will continue its efforts to develop valuable new products and improveits technologies in three key areas with high growth potential: telecommunications, energy,and life sciences. As a technologically innovative corporation that provides optimalsolutions to its customers, Hitachi Chemical is combining and harmonizing the superiortechnologies it has accumulated over the years in order to maximize the value of theHitachi Chemical Group and contribute to a more prosperous society while maintaining itsstrong commitment to protecting the environment.

CORPORATE PHILOSOPHY

MANAGEMENT POLICY

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

Hitachi Chemical at a Glance . . . . . . . . . . . . . . . . . . . . . . 2

To Our Shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

Maximizing Value:

Technological Innovation for High-Value Solutions

Broad Technology Platform . . . . . . . . . . . . . . . . . . . . . 10

Key R&D Themes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11

Unique Products in Leading-Edge, High-Potential Domains . . . . . . . . . . . . . . . . . . . . . . . 14

Environmental Protection and Social Contribution . . . . 18

Board of Directors and Corporate Auditors . . . . . . . . . . 20

Financial Section

Six-Year Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21

Management’s Discussion and Analysisof Operations and Finances . . . . . . . . . . . . . . . . . . . . 22

Consolidated Balance Sheets . . . . . . . . . . . . . . . . . . . . 28

Consolidated Statements of Income . . . . . . . . . . . . . . 30

Consolidated Statements of Stockholders’ Equity . . 31

Consolidated Statements of Cash Flows . . . . . . . . . . 32

Notes to Consolidated Financial Statements . . . . . . . 33

Independent Auditors’ Report . . . . . . . . . . . . . . . . . . . 47

Global Network . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48

Presence in Japan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50

Corporate Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51

51Hitachi Chemical Co., Ltd.

Corporate Data(As of March 31, 2002)

Hitachi Chemical Company, Ltd.

Head Office:

Shinjuku-Mitsui Building,

1-1, Nishi-Shinjuku 2-chome,

Shinjuku-ku, Tokyo 163-0449, Japan

Phone: 81-3-3346-3111

Fax: 81-3-3346-2977

Established:

October 10, 1962

Paid-in Capital:

¥15,284 million

Common Stock:

Authorized: 800,000,000 shares

Issued: 207,251,426 shares

Number of Shareholders:

12,968

Stock Exchange Listings:

Tokyo, Osaka

(Ticker Symbol Number: 4217)

Independent Auditors:

Shin Nihon & Co.

Internet Address:

www.hitachi-chem.co.jp

Number of Employees:

3,459

Transfer Agent and Registrar:

Tokyo Securities Transfer Agent Co., Ltd.

Shin-Marunouchi Building,

5-1, Marunouchi 1-chome, Chiyoda-ku,

Tokyo 100-0005, Japan

Phone: 81-3-3212-4611

Stock Price Range (Tokyo Stock Exchange):

0

500

1,000

1,500

2,000

2,500

3,000

3,500

1997.4~1998.3

1998.4~1999.3

1999.4~2000.3

2000.4~2001.3

2001.4 5 6 7 8 9 10 11 12 2002.1 2 3

(yen)

CONTENTS

This Annual Report may contain certain statements that Hitachi Chemical believes are, or may be considered to be, “forward-lookingstatements.” These forward-looking statements generally use statements that include phrases such as “believe,” “expect,” “anticipate,”“plan,” “foresee,”or other similar words or phrases. Similarly, statements that describe our objectives, plans, or goals are also forward-looking statements. All of these forward-looking statements are subject to certain risks and uncertainties that could cause our actualresults to differ materially from those contemplated by the relevant forward-looking statements. The principal important risk factors thatcould cause actual performance and future actions to differ materially from those contemplated by the relevant forward-lookingstatements are: uncertainty as to the ability of Hitachi Chemical to continue to develop and market products that achieve marketacceptance; fluctuations in product demand and industry capacity; exchange rates and fluctuations between the yen and othercurrencies in which Hitachi Chemical makes significant sales or in which the assets and liabilities of Hitachi Chemical are denominated,particularly between the yen and the U.S. dollar; uncertainty as to the access of Hitachi Chemical to liquidity or long-term financing,particularly in the context of restrictions or availability of credit prevailing in Japan; uncertainty as to the ability of Hitachi Chemical toimplement measures to reduce the potential negative impact of fluctuations in product demand and/or exchange rates; economicconditions, and the regulatory and trade environment of the major markets of Hitachi Chemical; and the market prices of equitysecurities in Japan, declines in which may result in the devaluation loss of equity securities held by Hitachi Chemical. However, riskfactors are not limited to the above.

Financial Highlights

Hitachi Chemical Co., Ltd. and Consolidated SubsidiariesFor the Years Ended March 31, 2002, 2001 and 2000

Thousands ofMillions of yen U.S. dollars

(except per share data) (except per share data)

2002 2001 2000 2002

For the year:

Net sales ............................................................................................... ¥480,777 ¥586,314 ¥544,837 $3,614,865

Operating income ................................................................................ 13,642 45,993 36,172 102,571

Net income ........................................................................................... 3,141 13,022 12,587 23,617

Cash dividends declared ..................................................................... 2,072 2,021 2,021 15,579

Research and development expenses ............................................... 22,894 22,408 21,302 172,135

At year-end:

Total assets........................................................................................... ¥418,408 ¥457,117 ¥444,178 $3,145,925

Total liabilities ...................................................................................... 254,892 299,526 298,520 1,916,481

Total stockholders’ equity ................................................................... 143,692 134,095 124,035 1,080,391

Per share data:

Net income (primary) .......................................................................... ¥ 15.28 ¥ 64.42 ¥ 62.27 $ 0.11

Net income (diluted) ........................................................................... — 63.53 61.42 —

Cash dividends declared ..................................................................... 10.00 10.00 10.00 0.08

Total stockholders’ equity ................................................................... 693.35 663.34 613.64 5.21

Value indicators:

Return on sales (%).............................................................................. 0.7 2.2 2.3

Return on equity (%)............................................................................ 2.3 10.1 10.6

Return on assets (%)............................................................................ 0.7 2.9 2.9

Number of employees ............................................................................ 17,287 18,390 18,415

Note: U.S. dollar amounts in this annual report are translated from yen, solely for the convenience of the reader, at the rate of ¥133=US$1, the approximate exchange rate on the Tokyo Foreign Exchange Market as of March 29, 2002.

FORWARD-LOOKING STATEMENTS


MAIN

PRODUCTS

RESULTS

&

HIGHLIGHTS

CONSOLIDATED

SUBSIDIARIES

Total: 68 Companies

SEMICONDUCTOR- AND DISPLAY-RELATED MATERIALS● Epoxy Molding Compounds● Heat-Resistant Fine Polymers● Die Bonding Materials● Slurry for Chemical Mechanical Planarization● Anisotropic Conductive Films for Liquid Crystal Displays

PRINTED WIRING BOARDS AND RELATED PRODUCTS● Copper Clad Laminates for Printed Wiring Boards● Multilayer Printed Wiring Boards● Multiwire Boards● Package Substrates● Photosensitive Dry Films for Printed Wiring Boards● Liquid Photoimageable Solder Resist● Plating Chemicals for Printed Wiring Boards

OTHERS● Capacitors

● Sales of semiconductor-related products, printed wiring

boards and related products decreased sharply as a result

of depressed conditions in the information technology

industry. Overall sales decreased 27.9 percent year-on-year

to ¥191.7 billion, and operating income decreased 86.5

percent year-on-year to ¥3.7 billion.

● A new slitting plant for anisotropic conductive films began

operation at Hitachi Chemical (Shanghai) Co., Ltd. in June 2001.

● Hitachi AIC Inc., which manufactures and sells electronic

components including printed wiring boards and capacitors,

became a wholly owned subsidiary in August 2001.

2 Hitachi Chemical Co., Ltd.

Shin-Kobe Electric Machinery Co., Ltd.

Hitachi AIC Inc.

Hitachi Chemical Asia-Pacific Pte. Ltd.

Hitachi Chemical (Johor) Sdn. Bhd.

Akebono Technos Co., Ltd.

Hitachi Kasei Shoji Co., Ltd. and 19 others

Total: 25 companies

Hitachi Chemicalat a Glance (As of March 31, 2002)

ELECTRONICS–RELATED PRODUCTS

Note: Shin-Kobe Electric Machinery Co., Ltd. is included in the total number of companies listed for two segments, Electronics-Related Products and Chemical-Related Products. Six companies, including Hitachi Kasei Shoji Co., Ltd., carry out activities in all segmentsand are included in the total number of companies listed for each segment.


ORGANIC CHEMICAL PRODUCTS● Electrical Insulating Varnishes● Unsaturated Polyester Resins● Synthetic Resins for Paints● Expandable Polystyrene Beads● ASA Resins● Pharmaceuticals and Diagnostics● Adhesives

INORGANIC CHEMICAL PRODUCTS● Carbon Brushes● Carbon Anode Materials for Lithium Ion Batteries● Carbon and Graphite Products● Ceramics● Single Crystal Scintillators● Disc Brake Pads

PLASTIC MOLDED PRODUCTS● Automotive Molded Parts● Light Guides for Displays● Adhesive Films● Electromagnetic Shielding Films for Plasma Display Panels

OTHERS● Batteries● Powdered Metal Products

● Automotive products and new products including GSOsingle crystal scintillators and carbon anode materials forlithium ion batteries performed well. Reduced private capitalinvestment and personal consumption were factors in thedecrease in sales of other organic and inorganic chemical products and plastic molded products. Overall sales decreased9.6 percent year-on-year to ¥204.9 billion, and operating income decreased 39.8 percent year-on-year to ¥8.6 billion.

● Kyushu Hitachi Chemical Co., Ltd. and Nikka Plastics Co., Ltd., which manufacture and sell plastic molded parts, were consolidated to form Hitachi Chemical Automotive Products Co., Ltd. in April 2001.

● Hitachi Chemical Filtec Inc., a fifty-fifty joint venture with AEP Industries Inc. that manufactures and sells film products, became a wholly owned subsidiary in April 2001.

Shin-Kobe Electric Machinery Co., Ltd.

Hitachi Powdered Metals Co., Ltd.

Hitachi Kasei Polymer Co., Ltd.

Japan Brake Industrial Co., Ltd.

Hitachi Chemical Automotive Products Co., Ltd.


Total: 40 companies

● Prefabricated Bathroom Units● Home Bathtubs● System Kitchens● Compact Sized Kitchen Units● Vanity Tables● Toilet Seats with Warm Water Cleansing and Bidet Functions● Home Boilers● Solar Water Heaters● Domestic Wastewater Treatment Systems● Fiber Reinforced Plastic Water Tanks

● A decline in new housing starts caused sales of productsincluding prefabricated bathroom units and system kitchens to decrease. Overall sales decreased 10.0 percent year-on-year to ¥84.2 billion, and operating income decreased 67.8 percent year-on-year to ¥1.3 billion.

● Ten subsidiaries involved in marketing housing equipment and environmental facilities were consolidated to form subsidiaries Hitachi Housetec East Co., Ltd. and Hitachi Housetec West Co., Ltd. in April 2001.

● A business alliance with Sekisui Chemical Co., Ltd. coveringthe production, development and distribution of domestic wastewater treatment systems started in April 2001.

● Hitachi Chemical’s Housing Equipment and Environmental Facilities Division was spun off as a wholly owned subsidiary, Hitachi Housetec Co., Ltd., in October 2001.

Hitachi Housetec Co., Ltd.

Hitachi Kasei Unit Co., Ltd.

Fukuyama Hitachi Kasei, Ltd.

Hitachi Housetec East Co., Ltd.

Hitachi Housetec West Co., Ltd.

Hitachi Kasei Maintenance Co., Ltd.


Total: 16 companies

CHEMICAL–RELATED PRODUCTS HOUSING EQUIPMENT AND ENVIRONMENTAL FACILITIES

To Our Shareholders

To Our ShareholdersTo Our Shareholders


To Our Shareholders

FISCAL 2001 PERFORMANCE

For fiscal 2001, ended March 31, 2002, Hitachi Chemical’s performance was

substantially below the record sales and income achieved in fiscal 2000. Net sales

decreased 18.0 percent year-on-year to ¥480.8 billion. Operating income declined

70.3 percent to ¥13.6 billion, and net income was down 75.9 percent to ¥3.1 billion.

Net income per share decreased to ¥15.28 from ¥64.42 for the previous fiscal year,

while return on equity decreased sharply year-on-year to 2.3 percent from 10.1

percent.

FACTORS IN RESULTS AND INITIATIVES IN FISCAL 2001

The primary factor contributing to the sharp decrease in sales and income for

fiscal 2001 was the rapid decline in demand for global information technologies,

followed by a subsequent drop in sales of electronics-related products, including

networking equipment, personal computers and mobile phones, which were key

growth drivers in the previous fiscal year. Additionally, the Japanese economy has

been deflationary for an extended period, which was another important factor that

contributed to depressed product prices.

Further, the Company was not able to respond swiftly enough to rapid changes

in the operating environment. More specifically, Hitachi Chemical’s product mix

was too heavily weighted with Electronics-Related Products, and results were

strongly influenced by negative changes in this market. In addition, the timing of

capital investment decisions did not produce expected results. Finally, our efforts

to date directed at reducing overall costs have been insufficient to cover the rapid

deterioration in earnings.

MAXIMIZING VALUE:

TECHNOLOGICAL INNOVATION FOR HIGH-VALUE SOLUTIONS


Responding to this sudden change in its operating environment, Hitachi

Chemical has accelerated efforts to build a more balanced and diversified business

portfolio by bolstering its Electronics-Related Business and reviving its Chemical-

Related Business. In addition, Hitachi Chemical is working to enhance its core

strengths and competitiveness with ongoing efforts to reduce manufacturing costs

and further improve production technologies. Moreover, the Company took steps

to reduce fixed costs by reducing capital investment by approximately ¥10.0

billion from fiscal 2000 levels, and reducing the number of Group employees by

approximately 1,100. Inventory reduction efforts and accelerated collection of

account receivables increased the amount of capital available to reduce interest-

bearing liabilities. As a result, interest-bearing liabilities decreased to ¥90.6 billion

from a previous amount of ¥126.9 billion as of March 31, 2000.

As a result of the Company’s ongoing restructuring program to strengthen the

Hitachi Chemical Group, the number of consolidated subsidiaries was reduced

from 100 three years ago, to 68 currently. Despite these efforts, 11 subsidiaries

recorded losses before income taxes in the past fiscal year due to declining market

conditions.

ECONOMIC OUTLOOK AND MANAGEMENT TASKS FOR FISCAL 2002

The rapid deterioration of the operating environment during fiscal 2001

contributed to a substantial decline in performance. However, I can say with

President andRepresentative DirectorIsao Uchigasaki at the GSO singlecrystal scintillatorproduction line of theYamazaki Works(Katsuta) in Japan.


confidence that the recent management

strategies implemented during the

past fiscal year will definitely

contribute to performance gains for

fiscal 2002.

During fiscal 2002, ongoing inven-

tory adjustments and a halt in the

decrease of exports have been

realized. These favorable signs of

change, however slight, in Japan’s

stagnant economy will provide a

positive influence. Nevertheless,

personal consumption and capital investment are not projected to improve

rapidly, suggesting that the operating environment will still remain extremely

challenging.

Reflecting on the past fiscal year, more than ever, Hitachi Chemical needs to

build a more balanced and diversified business portfolio and must increase the

synergistic effects of consolidated management in order to strengthen and

stabilize its earnings base to withstand changes in its operating environment.

BUILDING A BALANCED AND DIVERSIFIED BUSINESS PORTFOLIO

While the electronics industry experienced a global decline during 2001, it is

projected to continue to expand at a robust pace over the mid-term with the

continued growth of Internet-based wireless communications and digital

household information appliances. Hitachi Chemical will maintain its strategic

emphasis on developing innovative, leading-edge technologies and new products

for the electronics industry.

Hitachi Chemical intends to achieve consistent results in leading-edge sectors by

further refining its selective resource allocation processes for new investment.

Building a balanced and diversified business portfolio of products with differing

growth cycles is essential in strategically positioning the Company against

volatility in any particular market. Our key strategies involve developing new

products and exploring new applications for existing products and technologies,

President Uchigasaki

on an inspection tour

of Hitachi Chemical’s

Yamazaki Works

(Katsuta).


by deploying our broad technology platforms, which have been one of our core

strengths, in new and innovative ways. Creating new product clusters with

varying growth cycles is a primary objective, and Hitachi Chemical intends to

aggressively invest management resources in three high-potential fields:

telecommunications, energy and life sciences. These key business areas will be

the mainstay of our earnings base.

This strategy has been paying off and a variety of new business opportunities

have been created. By combining and fusing its existing chemical-related

technologies, Hitachi Chemical developed electromagnetic (EMI) shielding films

for plasma display panels, and light guides that brighten liquid crystal displays.

Other examples include carbon anode materials for lithium ion batteries, GSO

(gadolinium silicon oxide) single crystal scintillators for positron emission

tomography medical equipment, and a microchip for gene analysis. All of these

products, based on technologies the Company cultivated over many years, were

able to fulfill emerging market needs in new, value-added sectors.

Another aspect of the Company’s efforts to diversify its product portfolio will be

aggressive international expansion, augmented by the local market manufacturing

of products that have proven to be strongly competitive in offshore markets.

Hitachi Chemical also plans to devote extensive efforts in building a larger

presence in rapidly growing markets such as China and Southeast Asia, with the

target of increasing its net percentage of overseas sales from the current level of

approximately 20 percent to 30 percent. In addition, Hitachi Chemical intends to

strengthen its intellectual property with strategies that will ensure that the

Company’s unique products and technologies will be directed at improving its

global competitiveness.

INCREASING THE SYNERGISTIC EFFECTS OF CONSOLIDATED MANAGEMENT

Hitachi Chemical continues to implement a consolidated management system and

strengthen its management of the Group to maximize synergistic benefits. During

fiscal 2001, the Company spun off the Housing Equipment and Environmental

Facilities Division into a wholly owned subsidiary, Hitachi Housetec Co., Ltd. We

also converted some consolidated business companies, including Hitachi AIC Inc.

and Hitachi Chemical Filtec Inc., into wholly owned subsidiaries, and concentrated

MAXIMIZING VALUE:



on reorganizing and merging unprofitable business entities. Through these efforts,

we have essentially completed the reorganized framework for the Group. As a

result, we are now able to implement the most appropriate business model

reflecting the Company’s unique strengths in each area of our operations. This

shift to unified management of all Group companies, including our overseas

operations, will further heighten this synergism and our global competitiveness. In

addition, Hitachi Chemical continues to make progress in improving cash flow,

reducing interest-bearing liabilities and strengthening its overall financial

performance.

As part of the process of streamlining consolidated management, Hitachi

Chemical has already implemented intragroup financing procedures and a new

performance evaluation system. During fiscal 2002, the Company will accelerate

the installation of an administration and control system, which incorporates a

consolidated accounting system. Making full use of information technology, we

will also continue to move forward with initiatives directed at raising the

effectiveness of our Group management. These plans will include integrating

business processes, improving overall efficiency of our sales functions by

eliminating overlapping sales coverage, and sharing services for indirect

administrative tasks. Of particular note, Hitachi Chemical will implement quarterly

consolidated financial reports during fiscal 2002. Quarterly reports will be a useful

mechanism to evaluate the performance of each of the Company’s businesses on

a more frequent basis and will enable us to respond more quickly and flexibly to

new challenges in our operating environment.

CORPORATE ETHICS AND ENVIRONMENTAL MANAGEMENT

Hitachi Chemical is fully committed to further contributing to society through the

development of superior technologies and products, while consistently striving to

reduce its impact on the environment. The Company’s management is closely

aligned with environmental protection, and Hitachi Chemical aims to maintain

Environmental Management practices that incorporate environmental protection

with increased management efficiency. During fiscal 2001, Hitachi Chemical made

significant progress in its activities to achieve zero emissions by fiscal 2005. This


fiscal year, the Company will take additional steps to reduce emissions of global

warming gases. We will also emphasize lowering the volume of hazardous

chemical substances used and released into the environment, in keeping with the

Pollutant Release and Transfer Register (PRTR) System under relevant laws of

Japan for controlling particular chemicals. In this regard, starting from the

product design stage, we will implement new measures that will conserve

resources and energy use to the greatest extent possible. Moreover, in March

2002, the Environmental Management Council was established to carefully review

and determine the Hitachi Chemical Group’s environmental management policies

and key issues related to environmental protection, accident prevention and

safety.

To maintain its position as a responsible corporate citizen, Hitachi Chemical

operates in accordance with all relevant laws and its corporate code of ethics. I

believe that this raison d’etre is the basis of our communication with all our

stakeholders, including shareholders, customers, suppliers, and local

communities. We strive to succeed at the important task of earning their respect

and support. Hitachi Chemical offers numerous opportunities to respond to

questions or concerns raised by any of its stakeholders, and it will keep all lines of

communication open to further enhance the level of its stakeholders’ trust.

The chemical industry is undergoing an unprecedented structural

transformation. While working to create a management base that can maintain

stable earnings regardless of changes in its operating environment, Hitachi

Chemical, as a technologically innovative corporation, aims to maximize the value

of its Group companies.

July 2002

Isao Uchigasaki

President and Representative Director

MAXIMIZING VALUE:


Maximizing Value:

Technological Innovation


Design, Synthesis, Purification

Polymeric MaterialsOrganic Materials

Inorganic MaterialsComposite Materials

MoldingCoating and Printing

LaminationDispersion

Surface Treatment and Interface ControlPlating

Conduction and InsulationMicro Interconnection

EvaluationGenetic DiagnosisAmenity Design

MATERIAL TECHNOLOGY PROCESS TECHNOLOGY SYSTEM TECHNOLOGY

NANOTECHNOLOGYPRECISION AND

MICROSCOPIC PROCESSINGINTEGRATION AND RELIABILITY

CHEMI-TRONICS

INTEGRATING OUR CHEMICAL- AND

ELECTRONICS-RELATED BUSINESS

ECO-CHEMICALS

INTEGRATING OUR CHEMICAL- AND

ECOLOGY-RELATED BUSINESS

HEALTH AND AMENITIES

PROMOTING GOOD HEALTH AND

MORE PLEASANT LIVES

TELECOMMUNICATIONS ENERGY LIFE SCIENCES

SEMICONDUCTOR-

AND DISPLAY-

RELATED MATERIALS

PRINTED WIRING

BOARDS AND

RELATED PRODUCTS

AUTOMOTIVE

PRODUCTS AND

PLASTIC MOLDED

PRODUCTS

ORGANIC AND

INORGANIC

CHEMICAL PRODUCTS

DIAGNOSTICS

HOUSING EQUIPMENT

AND ENVIRONMENTAL

FACILITIES

INSULATING

VARNISHES

INDUSTRIAL

LAMINATES

PORCELAIN

INSULATORS

CARBON

PRODUCTS

SEMICONDUCTOR

MANUFACTURING

PROCESS

PRINTED WIRING BOARDS

MANUFACTURING AND

PACKAGING PROCESS

AUTOMOBILE

MANUFACTURING

PROCESS

INDUSTRIAL MARKET

COMFORTABLE

AND SAFE LIVING

HEALTHY

LIVES

CONSUMER MARKET

BUSINESSDOMAINS FOR

FUTURE GROWTH

MAIN PRODUCTGROUPS

COOPERATIVEDEVELOPMENT

WITH CUSTOMERS

TECHNOLOGYPLATFORM

PRODUCT ORIGIN

Hitachi Chemical’s technology platform can be divided into three main areas: material

technologies, process technologies and system technologies. We work toward technological

innovation by combining and fusing these technologies to offer customers optimal solutions.

Evolution in Technologies, Products and Business Domains

BROAD TECHNOLOGY PLATFORM

CURRENTOPPORTUNITIES



Topographic images of a polymer

film probed using atomic force

microscopy

MAXIMIZING VALUE:


MATERIAL TECHNOLOGIES: CENTRAL TO PRODUCT DEVELOPMENT

Material technologies are a core component of product development at Hitachi

Chemical. Our emphasis on strengthening our material technologies has

allowed us to broaden and deepen our technology platform. Hitachi Chemical

is studying technologies to precisely control polymer synthesis, and is also

applying quantum chemistry to material design in order to expand the limits of

material properties including optical, electrical and mechanical properties and

heat resistance. We are also aggressively moving forward with research

covering areas such as the creation of new functional materials by fusing

various types of organic, inorganic and other substances. In addition,

nanotechnology has emerged as an innovative basic technology that supports

significant progress in the potential of materials, and Hitachi Chemical is

working in cooperation with other Hitachi Group companies to apply it in new

technology development. Another important field is characterizing and

elucidating micro-phenomena at the surface of a material, the interfaces

between its constituents, and the interfaces between materials to improve

properties in practical applications such as adhesion. Using techniques such as

temperature-controllable atomic force microscopy* and surface enhanced

Raman spectroscopy**, we are aggressively developing techniques to analyze

nano-scale and molecular structures.

Hitachi Chemical has an in-house evaluation facility of the same level as

those of semiconductor manufacturers in order to investigate optimal

combinations of materials and processing conditions that meet customer

needs. We also research new evaluation technologies that keep abreast of

advances in semiconductor devices. The results thus obtained give Hitachi

Chemical a solid base for providing Material System Solutions that offer

customers optimal materials and processes.

* Temperature-controllable atomic force microscopy is becoming a powerful characterizationmethod for polymer surfaces in the temperature range from ambient temperature to 300˚C. Themicroscopy enables us to obtain three-dimensional topographic images and viscoelastic imagesfor polymer surfaces.

** Surface enhanced Raman spectroscopy has been proved to be one of the most sensitive surface probing tools. The spectroscopy is based on a phenomenon where Raman intensity of molecules adsorbed on metal surfaces, such as gold, silver and copper, is remarkably enhanced by many orders of magnitude.

KEY R&D THEMES

INCREASING PARTICIPATION IN THE FIELDS OF TELECOMMUNICATIONS,

ENERGY AND LIFE SCIENCES

Hitachi Chemical has targeted telecommunications, energy and life sciences as

leading-edge, high-potential business domains on which the Company will

focus over the medium- to long-term. We ensure that our research and

development efforts are directed toward parts and materials that can be

applied in these fields.

In telecommunications, Hitachi Chemical is applying its fundamental

technological strengths cultivated in the fields of semiconductor-related

materials and printed wiring boards. Primary emphases in research and

development in these sectors include materials for optical transmission,

household information appliances and high-frequency wireless

communications. In October 2001, Hitachi Chemical established the Laboratory

for Optical Materials within the Research & Development Center. Based on the

Company’s fundamental polymer-based optical material design and synthesis

technologies, the Laboratory’s optical-related material research subjects

include optical wave guide polymers, polymers for optical printed wiring

boards, optical control materials and optoelectrical printed wiring boards. In

addition, we are conducting research into base materials with superior

dielectric properties that minimize high-frequency transmission loss and

substrates that incorporate passive elements, to respond to the miniaturization

of and the use of high-frequency circuitry in printed wiring boards.

In the field of energy, Hitachi Chemical supplies carbon anode materials for

lithium ion batteries. Subsidiary Shin-Kobe Electric Machinery Co., Ltd. has

also succeeded in commercializing manganese type lithium ion batteries for

electric and hybrid electric vehicles, and is aiming to expand this business.

Hitachi Chemical is committed to further strengthening research and

development of materials for fuel cells, a highly efficient source of clean energy

that is expected to quickly come into practical use. In particular, strong future

demand is projected for polymer electrolyte fuel cells for household and

automotive use. Carbon separators and membrane electrode assemblies are

critical to these fuel cells. In research and development of these materials,

Hitachi Chemical makes effective use of its core polymer design, synthesis and

process technologies, and knowledge and expertise in film formation, adhesion

and carbon technologies.

1998 1999 2000 2001 2002

2,309

NUMBER OF PATENTS

2,202 2,177

(Years ended March 31)

1,960

1,747


In life sciences, Hitachi Chemical and U.S. research subsidiary Hitachi

Chemical Research Center, Inc. completed the joint development of gene

expression enabling tools for rapid and easy purification of mRNA from cell

samples, and started their marketing efforts, primarily in the U.S. and Europe.

In Japan, microchips for rapid electrophoresis analysis have been successfully

developed and introduced to the market with favorable results. Part of the

Research & Development Center, the Laboratory for Biotechnology is

strengthening its core technologies in areas such as polymer surface treatment

and modification and biomolecular immobilization, while designing next-

generation biotechnology product concepts. Hitachi Chemical has also applied

its many years of experience in single crystal technology in successfully

commercializing single crystal scintillators for use in radiation detectors for

positron emission tomography medical equipment. Looking forward, Hitachi

Chemical will utilize its wide range of fundamental technologies in aggressively

expanding its product lineups in the field of life sciences.

RESEARCH AND DEVELOPMENT ORGANIZATION FOR

NEW BUSINESS CREATION

Hitachi Chemical is accelerating the launch of new products by dividing the

process from fundamental research to market introduction into three stages —

incubation, pilot and commercialization — which it oversees. The incubation

stage concentrates on determining themes for future business development

and proactively developing the fundamental technologies they will require. Our

leading-edge research is complemented by contributions from external

research institutions including universities. During the pilot stage, Hitachi

Chemical channels management resources into these promising research

projects under our Special Promotion System for Commercialization with the

goal of shortening time to market. Key themes that advance to the

commercialization phase are incorporated into Hitachi Chemical’s business

development strategy and are designated as Strategic Development Projects.

They are given priority to receive full-scale investment to generate favorable

results. Efforts to shorten research and development lead time allow research

laboratory staff to take leadership in each of the incubation, pilot and

commercialization stages.

1998 1999 2000 2001 2002

21.8

R&D EXPENSES

21.2 21.3


(Billions of yen)

22.422.9


MAXIMIZING VALUE:


Wireless Base StationsCase 1 ➠

Case 2 ➠

High Layer Count Printed WiringBoards

These high-density, multilayer printedwiring boards meet demands for largersized-products. They are also well suitedfor backplanes of switching equipmentand servers.

Fiber-Optic Communications

High-Tg Copper Clad Laminates forMultilayer Printed Wiring Boards

Highly resistant to heat, moisture andelectrolytic corrosion, these products aredesigned for use in semiconductor packagesubstrates that require high reliability and in abroad range of other applications, includingmainframe computers, communicationsequipment, and electronic components forautomobiles.

Copper Clad Laminates for High-Frequency Applications

Featuring low dielectric constant and lowtransmission loss, these copper cladlaminates contribute to large capacityand high-speed transmission in thetelecommunication market.

Polymer Optical Waveguides for ONUs

Optical waveguides are incorporated in ONUs,which convert optical and electrical signals. The useof polymer instead of quartz in the waveguidesoffers superior workability and is excellent for massproduction.

Unique Products in Leading–Edge,High Potential Domains

Antennas formobile phones

Inside of base stations

The ubiquitous network society can now connect with the worldanytime and anywhere using personal computers and mobiledevices that fit in the palm of the hand. Hitachi Chemical supportssocial development and technological innovation by supplyingleading-edge materials that contribute to improved functionalityand productivity for the semiconductors and display devices thatdrive telecommunication device evolution.

Telecommunications

F T T H

F T T O

Fiber-optic network


PackageFiber

Waveguide core

Preamp

Photo diodeFilter

Monitor photo diode

Laser diode

For faster, more convenient

communication — Supplying

the leading-edge materials that

support the broadband era

Optical network unit (ONU) module

Polymer opticalwaveguide

Mobile PhonesCase 3 ➠

Low-k Interlayer Dielectric Materialsfor Semiconductors

Low-k interlayer dielectric materialscontribute to the accelerated operation of semiconductor devices.

Anisotropic ConductiveFilms

These films are materials forfine-pitch interconnectionsthat contribute to high imageresolution for LCDs, organicelectroluminescent displays,and plasma display panels.

CMP Slurry for Semiconductors

This slurry is used for CMP process insemiconductor interlayer dielectricmaterial where high-precisionplanarization is required to increaselayering and miniaturization of circuitry,and for planarizing copper wiring toachieve high-speed devices.

Highly Heat-Resistant Liquid Polyimidesfor ULSIs

These polyimides offer high reliability inapplications such as overcoating for electricalcircuits on semiconductor chips and rewiringon wafer-level CSPs. A broad product lineupfrom nonphotosensitive to photosensitivetypes enables use in a variety of devicestructures, manufacturing processes andpackage forms. (Hitachi Chemical DuPontMicroSystems)

Carbon Anode Materialsfor Lithium Ion Batteries

These anode materials arewidely recognized assatisfying the demand forhigh-performance, long-lifebatteries.

Lithium ion battery

Semiconductorpackage

Semiconductor chip

High-Density InterconnectionMultilayer Boards

These high-density printedwiring boards meet demandsfor high density and thinness,thus providing support inmaking electronics smallerand more functional.

Liquid PhotoimageableSolder Resist

This solder resist adds ahigher level of reliability tosubstrates of semiconductorpackages such as BGA, CSP,TAB and COF.

Epoxy Molding Compoundsfor SemiconductorEncapsulation

A broad lineup of compoundsfor new forms ofsemiconductor packagingincludes environmentallyfriendly products for flame-resistant applications that donot contain halogen andproducts with a lead-freesolder that provide high heatresistance during mounting.

Printed wiring board

Die Bonding Materials forSemiconductors

A wide array of productsthat helps to makesemiconductor packagessmaller and thinner,including LOC, BGA andCSP.

Conformal CoatingMaterials

The superior moisture-proofing capabilities ofthese products help toprotect the electrodes inLCDs, contributing toincreased reliability ofelectrical equipment bysignificantly improvingelectrode corrosionresistance.

Light Guides for LCDBacklights

The use of holographic diffusertechnology for light guidesenables a higher level ofbrightness for LCDs.


Package Substrates

These substrates for BGA and CSP are designed for high-density mounting through thecombination of high-densityinterconnection technology andvarious base materials.

Liquid crystal display

Automobiles

Molded Plastic Rear Hatch Door

Strength is essential for therear hatch door of anautomobile. This rear hatchdoor was the first in Japanto be made of plastic, whichcontributes to automobileweight reduction and stylingflexibility.

Diffusion Bonding RotorAssembly for HybridVehicles

This rotor is designed for theengine motors of next-generation hybrid vehicles.Sintering diffusion bondingtechnology improves motorperformance and fuelefficiency, thus reducingenvironmental impact.(Hitachi Powdered MetalsCo., Ltd.)

Mn Type Lithium Ion Batteries forElectric and Hybrid Electric Vehicles

Lithium ion batteries are contributing tothe progress of environmentally friendlyautomobiles. The use of supply-richmanganese enables production of high-power, long-life and lightweight batteries.(Shin-Kobe Electric Machinery Co., Ltd.)

Planar Antennas for Automobiles

Developed for automobile radarsystems, these small-sized planarantennas offer superior sensitivityand durability.

Automobiles & EnergyWe’re moving from the age of fossil fuels to the age of cleanenergy. The development of electric vehicles and automobile fuelcells that eliminate CO2 emissions is progressing. HitachiChemical’s mission is to provide society with environmentallyfriendly products and technologies. We have taken up thechallenge of supporting a clean and pleasant future.

Impregnating Varnishesfor High-VoltageAutomotive Applications

These products offeroutstanding heat resistanceand insulation, and are usedfor automobile motors. Theyimprove motor reliability,and the ability to use highervoltage allows automobilesto offer more amenities.


Environmentally friendlyenergy — Discovering the keysto clean energy and moreintelligent automobiles


High-Strength Plastic Gears

These are used as secondarybalance shaft gears to makeautomobile motors more durableand reliable. Compared toconventional metal gears, the useof plastic results in reduced noiseand vibration while running.(Shin-Kobe Electric MachineryCo., Ltd.)

Disc Brake Pads

Varieties of performance areavailable to allow consumersto select the optimal discbrake pads depending onthe type of vehicle and otherparameters.

Case 2 ➠

Life SciencesCase 1 ➠

System Kitchens

Customers can select layouts thatcombine stylish interior design withease of use, ranging from simpleand reasonably priced plans tothose with high-grade functions.(Hitachi Housetec Co., Ltd.)

Prefabricated Bathroom Units

These barrier-free, non-grating typeprefabricated bathroom unitsprovide a space that is bothfunctional and comfortable. (Hitachi Housetec Co., Ltd.)

Single Crystal Scintillatorsfor Diagnostic ImagingSystem

With their superior responsiveness to radiation,GSO single crystal scintillatorsenable high-precisiondiagnosis in a short time.

Gene Expression EnablingProducts

Needs are rapidly rising,primarily in the U.S. market,for gene expression analysisused in drug discovery andgene diagnosis. These easy to use, reasonably pricedhigh-throughput systemsspecializing in mRNA geneexpression analysis contributeto business development inthe pharmaceutical, biotechnology, and health careindustries. (RNAture, Inc.)

Gene analysis

PET (Positron Emission Tomography)

Microchip ElectrophoresisAnalysis System

This high-throughput systemis easy to use and offers therapid analysis of gene strandlength necessary forpractical applications ofgenetic information in gene-based drug developmentand identification ofindividuals.

Household

Life Sciences & AmenitiesHitachi Chemical is working to make people’s everyday lives better,from providing high-throughput genetic analysis equipment thatsupports the development of treatments designed for specificindividual physiologies and pharmaceuticals with no side effects, tocreating functional, pleasant living spaces suited to various familystructures. We are always seeking new ways to deploy thetechnologies we have developed over many years in a broad rangeof fields.

Water-Based Acrylic Resin Emulsion forExternal Coatings

Used to coat building exteriors, this resinexcels in protecting buildings from theweather and maintaining their appearance.It contains virtually no volatile compounds,making it safe for people to use.

Courtesy of Philips Medical Systems,a division of Koninkli jke Phil ipsElectronics N.V.


Making people’s dreamscome true — Designinggene diagnosis and pleasantliving environments


Example of use: Exterior equipment for buildings

Hitachi Chemical recognizes that environmental

problems affect all humankind and harmony with

the environment is the top management priority.

Under the Company’s Environmental Protection

Action Guidelines enacted in 1993, the Company

has been active in a variety of areas including

strengthening its environmental management

system, reducing waste emissions and CO2

emissions, promoting recycling, and broadening

its lineup of environmentally friendly products.

ENVIRONMENTAL MANAGEMENT SYSTEM

In 1973, Hitachi Chemical began full-fledged efforts

to improve its environmental management system

with the creation of a dedicated organization

within the head office and at each of the

Company’s manufacturing facilities. Since then,

internal environmental safety audits have been

conducted annually, and Hitachi Chemical has

continuously implemented improvements to the

system. By 1996, all the manufacturing facilities of

Hitachi Chemical Co., Ltd. had obtained ISO 14001

certification of their environmental management

systems, followed thereafter by the head office,

laboratories and sales centers. As of the end of

March 2002, forty sites of the entire Hitachi

Chemical Group had obtained ISO 14001

certification.

Furthermore, in 1999 Hitachi Chemical began

publishing its annual Responsible Care Report

covering the environment, safety and health,

and began disclosure of environmental

accounting in 2000. In addition to the existing

Environmental Safety Management Committee

chaired by the director responsible for

environmental activities, in March 2002, Hitachi

Chemical established the Environmental

Management Council, chaired by the president.

The Council determines primary issues and

solutions regarding environmental protection

and accident prevention and safety to develop

the Hitachi Chemical Group’s environmental

management policy.

ZERO EMISSIONS

Since fiscal 2000, Hitachi Chemical has been

placing strong emphasis on achieving zero

emissions in its operations. The Company’s

efforts are not centered solely on reducing the

final disposal volume of wastes to zero, but also

on reducing resource losses and emissions of

hazardous substances to zero. All processes

related to manufacturing have therefore been

revised to support this program. Hitachi

Chemical’s targets for zero emissions are a

reduction in volume of industrial waste disposed

to under 5 tons annually and a final landfill

disposal rate of 1.0 percent or less by fiscal

2005. As of the end of fiscal 2001, two

manufacturing facilities were successful in

reducing their rate to 1.0 percent or less. As a

result, the overall final landfill disposal rate for

the Company was 2.4 percent.

REDUCTION IN VOLUME OF INDUSTRIAL WASTE

DISPOSED AND FINAL LANDFILL DISPOSAL RATE

(Thousands of tons; %)


*For all graphs on pages 18-19, ”Main Group Companies” representscombined data for 16 main group companies with a significant impacton the environment, including Shin-Kobe Electric Machinery Co., Ltd.and Hitachi Powdered Metals Co., Ltd.


Final Landfill Disposal Rate(Non-Consolidated)

Reduction in Volume of Industrial Waste Disposed(Main Group Companies) *

Reduction in Volume of Industrial Waste Disposed(Non-Consolidated)

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002

13.5

10.1

7.3 7.2 6.45.5

3.52.5 2.1

7.36.3

2.4

2.6

5.07.19.2

14.620.1

23.823.3

31.237.3%

1.2 0.9

Environmental Protection

and Social Contribution


REDUCTION OF CO2 EMISSIONS

(Thousands of tons)


INCREASE IN VOLUME OF RECYCLING

AND RECYCLING RATE

(Thousands of tons; %)


CORPORATE ETHICS AND CONTRIBUTION TO

SOCIETY

Hitachi Chemical’s Standard of Corporate

Conduct, enacted in 1983 and revised in 1992,

formalizes the Company’s profound under-

standing that it must function as a responsible

member of society. It requires Hitachi Chemical

to operate in a fair and transparent manner,

harmonize operations with the environment,

and contribute meaningfully to society as a

sound corporate citizen that truly supports the

interests of society. Under this fundamental

philosophy, Hitachi Chemical complies fully and

scrupulously with laws and corporate ethical

standards.

Furthermore, Hitachi Chemical has contributed

to the communities it serves by striving for a

workplace free of accidents and disasters under

the Occupational Health and Safety Management

System implemented at all manufacturing

facilities in fiscal 2000. Other contributions to local

communities have included regional cleanup

activities and support for junior soccer events.

CO2 Emissions Index (1991=100)(Non-Consolidated)

CO2 Emissions(Main Group Companies) *

CO2 Emissions(Non-Consolidated)

1991

244226

211194 199

1992 1993 1994 1995 1996

201

1997

204

1998

204

1999

195

2000 2001 2002

205 213

316

177

254

96898992

8789889493

9795100

Recycling Rate(Non-Consolidated)

Increase in Volume of Recycling(Main Group Companies) *

Increase in Volume of Recycling(Non-Consolidated)

1992

16 17 1720

1993 1994 1995 1996 1997

26

1998

29

1999

27

2000

35

2001 2002

40

32

88878580

77

6762

5753

4944%

33 32

16

Hitachi Chemical supports the KatsutaMarathon held every year in the city ofHitachinaka, Ibaraki Prefecture.

Annual sponsorship of a Junior SoccerTournament for grade-school children isanother area where Hitachi Chemical isactive in local communities.

MAXIMIZING VALUE:



Board of Directors and Corporate Auditors(As of June 26, 2002)

Isao Uchigasaki

Daisuke Makino

Yasuji Nagase

Go Sato

Seiki Harada Yutaka Murakawa Nobuyuki Hayashi Tetsuo Odashiro

Tsutomu Kanai Keiichi Takeda

Masayuki Amano Yasuyuki Ueda Yoshiki Yagi Tsugio Makimoto

PRESIDENT AND

REPRESENTATIVE

DIRECTOR

Isao Uchigasaki

EXECUTIVE VICE

PRESIDENTS AND

REPRESENTATIVE

DIRECTORS

Daisuke MakinoCompliance, Group Management and Overseas Business Development

Go SatoSales and Purchasing

EXECUTIVE MANAGING

DIRECTORS

Seiki HaradaEnvironment and TechnologyInnovation

Yutaka MurakawaAdministration

Nobuyuki HayashiResearch and Development

Tetsuo OdashiroManufacturingand Pharmaceuticals

BOARD DIRECTORS

Tsutomu Kanai(Chairman andRepresentative Director, Hitachi, Ltd.)

Yasuji Nagase(President and RepresentativeDirector, Hitachi Housetec Co., Ltd.)

Keiichi TakedaFinance & Accounting and Information Technology

CORPORATE AUDITORS

Masayuki Amano

Yasuyuki Ueda

Yoshiki Yagi(Executive Vice President and Representative Director, Hitachi, Ltd.)

Tsugio Makimoto(Corporate Advisor, Sony Corporation)

CORPORATE OFFICERS

Takashi Morinaga

Takashi Urano

Noriyuki Kinjo

Naoki Suzuki

Tatsuji Nomura

Kiyoshi Togawa

Chikashi Takase

Tadahiko Dewa

Yoshikazu Shimazaki

Shoichi Hanaeda

Shigeru Hayashida

Akao Yamanaka

Junichi Okuda


Millions of yen Thousands of U.S. dollars (except per share data) (except per share data)

2002 2001 2000 1999 1998 1997 2002

For the year:

Net sales................................................ ¥480,777 ¥586,314 ¥544,837 ¥524,219 ¥565,110 ¥535,236 $3,614,865

Operating income .................................. 13,642 45,993 36,172 25,301 28,168 28,316 102,571

Net income ............................................ 3,141 13,022 12,587 8,096 2,686 7,763 23,617

Cash dividends declared........................ 2,072 2,021 2,021 1,819 1,819 1,415 15,579

Research and development expenses ...... 22,894 22,408 21,302 21,163 21,834 19,719 172,135

At year-end:

Total assets ........................................... ¥418,408 ¥457,117 ¥444,178 ¥418,304 ¥445,669 ¥438,802 $3,145,925

Total liabilities ........................................ 254,892 299,526 298,520 298,918 332,507 325,073 1,916,481

Total stockholders’ equity...................... 143,692 134,095 124,035 100,795 94,768 94,147 1,080,391

Per share data:

Net income (primary) ............................. ¥ 15.28 ¥ 64.42 ¥ 62.27 ¥ 40.05 ¥ 13.29 ¥ 38.40 $ 0.11

Net income (diluted) .............................. — 63.53 61.42 39.34 — 36.64 —

Cash dividends declared........................ 10.00 10.00 10.00 9.00 9.00 7.00 0.08

Total stockholders’ equity...................... 693.35 663.34 613.64 498.63 468.82 465.75 5.21

Value indicators:

Return on sales (%) ............................... 0.7 2.2 2.3 1.5 0.5 1.5Return on equity (%) ............................. 2.3 10.1 10.6 8.3 2.8 8.5Return on assets (%)............................. 0.7 2.9 2.9 1.9 0.6 1.8

Number of employees.......................... 17,287 18,390 18,415 19,285 19,497 17,941

Note: U.S. dollar amounts in this annual report are translated from yen, solely for the convenience of the reader, at the rate of ¥133=US$1, the approximate exchange rate on the Tokyo Foreign Exchange Market as of March 29, 2002.

Six-Year SummaryHitachi Chemical Co., Ltd. and Consolidated SubsidiariesFor the Years Ended March 31, 2002, 2001, 2000, 1999, 1998 and 1997


FINANCIAL STRATEGY

Hitachi Chemical Co., Ltd. and its consolidated subsidiaries

(collectively, “Hitachi Chemical”) strive for efficient asset

utilization and appropriate liquidity. Hitachi Chemical’s

financial policies are designed to maintain a sound balance

sheet and the availability of capital for operating needs. Of

particular note, Hitachi Chemical implemented a program

in fiscal 1999 to counter the tendency of interest-bearing

liabilities to increase in tandem with business expansion.

For the three-year period ended March 2002, Hitachi

Chemical had the objective of reducing total interest-

bearing liabilities by 30 percent, and exceeded this goal by

900 basis points in reducing total interest-bearing liabilities

by 39 percent. In procuring funds, Hitachi Chemical

considers the soundness of its balance sheet in obtaining

borrowings and issuing debentures to smoothly fund

general capital requirements, capital expenditures and

operating capital needs.

RESULTS OF OPERATIONS

During the year ended March 31, 2002, Japan remained

mired in the serious recession that has continued since the

collapse of the bubble economy. The economy reflected

the rapid slump in the information technology (IT) industry

in tandem with increased deflation, and numerous

companies reported significant deterioration in

performance. Amid these conditions, private capital

investment and personal consumption continued to

weaken, and the unemployment rate reached the highest

level since World War II.

The global economy was impacted by restrained capital

investment, particularly in IT-related industries. The U.S.

economy was notably less robust, and economies in Asia

that are dependent on exports to Europe and the United

States continued to contract. The terrorist attacks in the

United States on September 11, 2001 set the stage for

unfavorable conditions to take hold simultaneously

throughout the world.

Given this challenging operating environment, Hitachi

Chemical aimed to maximize the value of its entire group of

companies. In August 2001, Hitachi AIC Inc. became a

wholly owned subsidiary through a share exchange, and in

October 2001, the Housing Equipment and Environmental

Facilities Division was spun off into a separate company,

Hitachi Housetec Co., Ltd. These moves were representative

of Hitachi Chemical's drive to improve the vitality and

profitability of Group businesses through restructuring. In

addition, Hitachi Chemical also concentrated management

resources on high-value-added products to solidify its

earnings base, and worked to improve product

performance and cost competitiveness. Hitachi Chemical

also made progress in areas including new product

development and building an organization to promote

commercialization in the high-potential fields of

telecommunications, energy and life sciences. Responding

to the decrease in net sales, Hitachi Chemical took steps

including reducing fixed costs, further increasing

productivity and cutting all kinds of costs. At the same

time, Hitachi Chemical maintained its top management

priority on environmental protection in working to develop

and market products that reduce environmental impact.

NET SALES

The implementation of the measures discussed above was

insufficient to compensate for the rapid deterioration of the

operating environment during the fiscal year. Net sales

decreased 18.0 percent year-on-year, or ¥105.5 billion, to

¥480.8 billion. The decrease in net sales was largely the

result of a decrease in sales of Electronics-Related Products

due to the rapid slump in IT-related demand. Overseas

sales decreased 15.3 percent year-on-year, or ¥17.9 billion,

to ¥99.5 billion. The ratio of overseas sales to total net

sales, however, increased 70 basis points to 20.7 percent

because sales to overseas customers did not decline as

much as sales to domestic customers.

Results in each business segment follow below. Sales

data for each segment exclude intersegment sales.

ELECTRONICS-RELATED PRODUCTS

Segment sales decreased 27.9 percent year-on-year, or

¥74.3 billion, to ¥191.7 billion, and decreased 540 basis

points as a percentage of total net sales to 39.9 percent.

Management’s Discussion and

Analysis of Operations and Finances


Semiconductor- and display-related materials

Sales of anisotropic conductive films for liquid crystal

displays were essentially the same as for the previous fiscal

year due to comparatively favorable exports to customers

in Asia. The sharp drop in demand for semiconductors,

however, resulted in decreased sales of semiconductor-

related materials, including epoxy molding compounds,

slurry for chemical mechanical planarization, and die

bonding materials.

Sales of epoxy molding compounds produced by Hitachi

Chemical (Malaysia) Sdn. Bhd. decreased year-on-year

because of lower semiconductor production.

Printed wiring boards and related products

Overall sales of copper clad laminates for printed wiring

boards decreased year-on-year due to weaker IT-related

demand, although sales of environmentally friendly

products increased, as did sales of new products for high-

frequency applications that contribute to higher-speed

communication equipment. Sales of each type of printed

wiring boards such as multilayer printed wiring boards

and photosensitive dry films for printed wiring boards were

also down sharply year-on-year.

Sales of paper phenolic copper clad laminates for printed

wiring boards produced by Hitachi Chemical (Johor) Sdn.

Bhd. decreased year-on-year as demand for household

electrical appliances contracted. Sales of multilayer printed

wiring boards produced by Hitachi Chemical Asia-Pacific

Pte. Ltd. also decreased, due largely to reduced exports to

the United States. Sales when translated into yen, however,

were essentially unchanged due to the influence of foreign

exchange rates.

Others

Decreased demand for information and communication

equipment such as mobile phones and personal computers

resulted in decreased sales of capacitors by Hitachi AIC Inc.

CHEMICAL-RELATED PRODUCTS

Sales in this segment decreased 9.6 percent year-on-year,

or ¥21.9 billion, to ¥204.9 billion, and increased 390 basis

points as a percentage of total net sales to 42.6 percent.

Organic chemical products

Reduced production of televisions, air conditioners and

other equipment resulted in lower sales of electrical

insulating varnishes compared with the previous fiscal

year. Sales of expandable polystyrene beads for

applications including the packaging materials for electrical

appliances also decreased year-on-year. In addition, sales

of acrylic resins used in building exterior paints and other

products and sales of ASA resins used for automotive

components also decreased from the previous fiscal year.

Sales of adhesives produced by Hitachi Kasei Polymer

Co., Ltd. decreased. Environmentally friendly non-solvent

adhesives for housing components and packaging

performed favorably, although demand decreased for other

types of adhesives.

Inorganic chemical products

Sales of carbon anode materials for lithium ion batteries

increased strongly year-on-year, supported by expanded use

among major customers. Sales of GSO single crystal

scintillators for positron emission tomography medical

equipment also increased. Sales of carbon brushes decreased

year-on-year due to reduced demand for motors for

automotive electrical equipment. Sales of alumina ceramics

dropped due to lower demand from the semiconductor-

manufacturing equipment industry.

Net sales

1998 1999 2000 2001 2002

565.1524.2

544.8586.3

480.8

1997

535.2

(Billions of yen)



Sales of graphite coating for cathode ray tubes (CRTs)

manufactured by Hitachi Powdered Metals Co., Ltd.

decreased due to a decline in CRT production. Sales of the

disc brake pads manufactured by Japan Brake Industrial

Co., Ltd. also decreased year-on-year.

Plastic molded products

Sales of EMI shielding films for plasma display panels rose

strongly. Sales of light guides for displays made using

holographic diffuser technology for use in applications

including mobile phones also increased significantly,

supported by customer recognition of their high level of

luminescence and precision. Sales of automotive molded

parts rose year-on-year because major automobile

manufacturers increased the use of plastic rear hatch door

panels, which contribute to reduced vibration and vehicle

weight. Sales of crosslinked polyethylene foam used in

building insulation and other applications were essentially

unchanged year-on-year, while sales of adhesive films

decreased due to reduced demand for use in electronics-

related applications.

Others

Sales of Shin-Kobe Electric Machinery Co., Ltd.’s

rechargeable batteries were firm for use as backup power

supplies in information and communication applications,

but decreased for automotive applications. Sales of

powdered metal products manufactured by Hitachi

Powdered Metals Co., Ltd. decreased year-on-year because

of lower demand, particularly in the automobile industry.

HOUSING EQUIPMENT AND ENVIRONMENTAL FACILITIES

Sales in this segment decreased 10.0 percent year-on-year,

or ¥9.4 billion, to ¥84.2 billion, and increased 150 basis

points as a percentage of net sales to 17.5 percent.

Sales of household domestic wastewater treatment

systems that handle both human waste and household

wastewater increased as the market expanded. Sales of

prefabricated bathroom units for apartment blocks

increased, although overall sales in this sector decreased

because of lower sales of these units for detached houses.

Sales of system kitchens also decreased year-on-year.

Hitachi Kasei Maintenance Co., Ltd. and Chubu Nikka

Services Co., Ltd. provide maintenance and technical

services for housing equipment and environmental

facilities. Sales of maintenance and technical services

increased, while sales of equipment repair services

declined.

COST OF SALES AND SELLING, GENERAL AND

ADMINISTRATIVE EXPENSES

Hitachi Chemical's successful efforts to raise cost

competitiveness through means such as increasing

productivity resulted in a decrease of 15.6 percent year-on-

year, or ¥67.9 billion, in cost of sales to ¥366.2 billion. Cost

of sales increased 220 basis points as a percentage of net

sales to 76.2 percent, however, because net sales

decreased by a larger margin. Selling, general and

administrative (SG&A) expenses decreased 5.0 percent

year-on-year, or ¥5.3 billion, to ¥100.9 billion. As a

percentage of net sales, SG&A expenses increased 290

basis points to 21.0 percent, again reflecting the

comparatively larger decrease in net sales. Research and

development expenses increased 2.2 percent, or ¥0.5

billion, to ¥22.9 billion, and represented 4.8 percent of net

sales, about the same level as in the previous fiscal year.

Hitachi Chemical implemented an early retirement

program as an organizational reform in response to the

rapid deterioration of the operating environment. The cost

for the early retirement program of approximately ¥3.0

billion was allocated to both cost of sales and SG&A

expenses.

OPERATING INCOME

Operating income totaled ¥13.6 billion, a year-on-year

decrease of 70.3 percent, or ¥32.4 billion. As a percentage

of net sales, operating income decreased 500 basis points

to 2.8 percent.

By segment, operating income for Electronics-Related

Products decreased 86.5 percent year-on-year, or ¥24.0

billion, to ¥3.7 billion. The ratio of segment operating

income to segment net sales was 1.9 percent, compared to

10.4 percent for the previous fiscal year. Operating income

for Chemical-Related Products decreased 39.8 percent year-

on-year, or ¥5.7 billion, to ¥8.6 billion. The ratio of segment

operating income to segment net sales was 4.2 percent,

compared to 6.3 percent for the previous fiscal year.

Operating income for Housing Equipment and

Environmental Facilities decreased 67.8 percent year-on-

year, or ¥2.7 billion, to ¥1.3 billion. The ratio of segment

operating income to segment net sales was 1.5 percent,


OTHER INCOME (EXPENSES)

Other expenses, net totaled ¥4.3 billion, compared to other

expenses, net of ¥19.2 billion for the previous fiscal year.

Equity in loss of affiliated companies was ¥0.4 billion,

compared with equity in earnings of affiliated companies of

¥0.9 billion in the previous fiscal year. However, Hitachi

Chemical did not record either gain on sale of subsidiaries'

common stock and other, or transition difference arising

from the adoption of the new accounting standard for

retirement benefits, which resulted in a net expense of

¥18.5 billion in the previous fiscal year. Net interest

expense, defined as interest expense less interest and

dividend income, decreased ¥0.5 billion to ¥1.2 billion. As a

result, income before income taxes and minority interests

decreased 65.2 percent year-on-year, or ¥17.4 billion, to

¥9.3 billion.

NET INCOME

Income taxes decreased 56.9 percent year-on-year, or ¥6.8

billion, to ¥5.1 billion, and were equivalent to 55.0 percent

of income before income taxes and minority interests,


Minority interests decreased 42.2 percent year-on-year, or

¥0.8 billion, to ¥1.1 billion.

As a result, net income decreased 75.9 percent year-on-

year, or ¥9.9 billion, to ¥3.1 billion. The ratio of net income

to net sales was 0.7 percent, compared to 2.2 percent for

the previous fiscal year. Return on average total

stockholders' equity was 2.3 percent, compared to 10.1

percent for the previous fiscal year. Return on average total

assets was 0.7 percent, compared to 2.9 percent for the

previous fiscal year. Net income per share totaled ¥15.28,

compared to ¥64.42 for the previous fiscal year.

FINANCIAL CONDITION

ASSETS, LIABILITIES, MINORITY INTERESTS AND

STOCKHOLDERS' EQUITY

Total assets decreased 8.5 percent from March 31, 2001, or

¥38.7 billion, to ¥418.4 billion due largely to efforts to

reduce inventories and promote collection of accounts

receivable and more focused capital investment, which

raised asset efficiency.


Operating income

1998 1999 2000 2001 2002

28.225.3

36.2

46.0

13.6

1997

28.3

(Billions of yen)

Net income Net income per share (primary)

1998 1999 2000 2001 2002

2.7

8.1

12.6 13.0

3.1

1997

7.8

1998 1999 2000 2001 2002

13.29

40.05

62.2764.42

15.28

1997

38.40

(Billions of yen) (Yen)

(Years ended March 31) (Years ended March 31) (Years ended March 31)


Current assets decreased 16.1 percent year-on-year, or

¥40.7 billion, to ¥212.2 billion. Trade receivables decreased

¥27.6 billion from a year earlier to ¥105.6 billion. Efforts to

improve productivity throughout the Hitachi Chemical

Group supported a decrease in inventories of ¥10.3 billion

from a year earlier to ¥35.8 billion. The allowance for

doubtful receivables increased ¥0.7 billion from a year

earlier to ¥2.7 billion.

Property, plant and equipment decreased 3.3 percent

year-on-year, or ¥5.1 billion, to ¥149.6 billion, due largely to

more focused capital investment. Investments and other

assets increased 2.0 percent year-on-year, or ¥0.9 billion, to

¥48.8 billion. Fair value accounting resulted in a decrease in

investment securities, but deferred tax assets increased

¥2.3 billion from a year earlier.

As of March 31, 2002, total liabilities decreased 14.9

percent year-on-year, or ¥44.6 billion, to ¥254.9 billion.

Current liabilities decreased 14.7 percent year-on-year, or

¥30.5 billion, to ¥176.1 billion. A primary factor in this

decrease was a reduction of ¥12.8 billion in trade payable.

Short-term debt increased ¥4.2 billion to ¥42.2 billion. The

current ratio, defined as the ratio of current assets to

current liabilities, decreased to 120.5 percent from 122.4

percent a year earlier, and working capital, defined as

current assets minus current liabilities, decreased 22.1

percent to ¥36.0 billion. Long-term debt decreased ¥13.2

billion to ¥35.1 billion, primarily due to Hitachi Chemical's

efforts to reduce loan obligations. As a result, total interest-

bearing liabilities, defined as the sum of short-term debt,

the current portion of long-term debt and long-term debt,

decreased ¥15.2 billion from a year earlier to ¥90.6 billion.

At year-end, stockholders' equity increased 7.2 percent

year-on-year, or ¥9.6 billion, to ¥143.7 billion. The

stockholders' equity ratio, defined as the ratio of

stockholders' equity to total assets, increased to 34.3

percent from 29.3 percent a year earlier. The debt-to-equity

ratio, defined as the sum of short-term debt and long-term

debt, including the current portion, divided by

stockholders' equity, improved to 0.630 times from 0.789

times a year earlier. Stockholders’ equity per share of

common stock outstanding as of March 31, 2002 increased

to ¥693.35 from ¥663.34 a year earlier.

CASH FLOWS

Cash and cash equivalents at year-end decreased 5.4

percent year-on-year, or ¥3.2 billion, to ¥56.3 billion.

Net cash provided by operating activities decreased 12.6

percent year-on-year, or ¥6.4 billion, to ¥44.6 billion,

primarily because of the substantial drop in net income.

Net cash used in investing activities was ¥29.9 billion,

compared with ¥27.9 billion in the previous fiscal year.

Hitachi Chemical reduced purchases of tangible fixed

Total assets Return on assets (ROA)

1998 1999 2000 2001 2002

445.7418.3

444.2457.1

418.4

1997

438.8

1998 19991997 2000 2001 2002

1.8

0.6

1.9

2.9

0.7

2.9

(Billions of yen) (%)

Total stockholders’ equity

1998 1999 2000 2001 2002

94.8100.8

124.0134.1

143.7

1997

94.1

(Billions of yen)

(As of March 31) (Years ended March 31) (As of March 31)


assets, but did not generate the proceeds from sale of

subsidiaries' and affiliated companies' common stock and

investments in securities, which were recorded in the

previous fiscal year.

Net cash used in financing activities was ¥18.7 billion,

compared with ¥23.4 billion in the previous fiscal year. This

decrease was largely a result of Hitachi Chemical's ongoing

program of strengthening its financial structure by

reducing interest-bearing liabilities.

DIVIDEND POLICY

Hitachi Chemical considers its operating environment,

performance and future business prospects in allocating

earnings between dividends and internal capital reserves.

The Company uses internal capital reserves to research and

develop promising new high-value-added products, add

vitality to existing businesses, and build on its strong

financial structure.

In accordance with these policies, Hitachi Chemical paid

cash dividends per share of common stock totaling ¥10.00

for the fiscal year ended March 31, 2002. The dividend

payout ratio increased to 76.7 percent from 25.6 percent for

the previous fiscal year.

RISK MANAGEMENT

Hitachi Chemical uses derivatives to reduce the remaining

risk exposure after appropriate measures have been taken

to balance credits and obligations. The derivative

instruments used by Hitachi Chemical are interest-rate

swaps, foreign currency contracts and instruments of a

similar nature, which are used to reduce interest rate and

currency risks. The major risks to which such derivative

transactions are subject are market risk and credit risk. The

derivative transactions Hitachi Chemical uses are intended

to hedge against market risk related to balance sheet assets

and liabilities.

Details of the status of market and credit risk, including

transaction positions and valuation of unrealized profit and

loss, are regularly reported to the Board of Directors.

Interest-bearing liabilitiesReturn on stockholders’ equity (ROE)

1998 19991997 2000 2001 2002

8.5

2.8

8.3

10.6

2.3

10.1167.7

149.0

126.9

105.7

90.6

156.6

1998 1999 2000 2001 20021997

(%) (Billions of yen)

Debt/equity ratio

1998 19991997 2000 2001 2002

1.6641.769

1.478

1.023

0.630

0.789

(Times)

(Years ended March 31) (As of March 31) (As of March 31)

Consolidated Balance SheetsHitachi Chemical Co., Ltd. and Consolidated SubsidiariesMarch 31, 2002 and 2001

Thousands ofU.S. dollars

Millions of yen (Note 2)

ASSETS 2002 2001 2002

Current assets:

Cash and cash equivalents (Note 1 (c))................................................................... ¥ 56,332 ¥ 59,551 $ 423,549

Short-term investments (Note 4) ............................................................................ 22 693 165

Trade receivables (Note 3):Notes .................................................................................................................. 18,249 30,447 137,211

Accounts............................................................................................................. 87,339 102,781 656,684

.................................................................................................................................... 105,588 133,228 793,895

Less allowance for doubtful receivables............................................................. 2,725 1,985 20,489

Net receivables ........................................................................................... 102,863 131,243 773,406

Inventories (Note 5) ................................................................................................ 35,760 46,067 268,872

Prepaid expenses and other current assets (Notes 3 and 6) .................................. 17,191 15,314 129,256

Total current assets .................................................................................... 212,168 252,868 1,595,248

Property, plant and equipment, at cost (Notes 7 and 8) ........................................ 529,241 513,463 3,979,256

Less accumulated depreciation .............................................................................. 379,670 358,797 2,854,662

Net property, plant and equipment............................................................. 149,571 154,666 1,124,594

Intangible assets:

Cost in excess of net assets acquired .................................................................... 3,674 — 27,624

Other intangible assets........................................................................................... 4,173 1,695 31,376

Total intangible assets ................................................................................ 7,847 1,695 59,000

Investments and other assets:

Affiliated companies’ stock under the equity method ............................................ 4,451 5,353 33,466

Investments in securities (Note 4) .......................................................................... 11,373 11,945 85,511

Long-term loans receivable..................................................................................... 723 1,695 5,436

Other assets (Notes 3 and 6) .................................................................................. 34,144 30,744 256,722

Less allowance for doubtful receivables................................................................. 1,869 1,849 14,052

Total investments and other assets............................................................ 48,822 47,888 367,083

.................................................................................................................................... ¥418,408 ¥457,117 $3,145,925

See accompanying notes to consolidated financial statements.




LIABILITIES, MINORITY INTERESTS AND STOCKHOLDERS’ EQUITY 2002 2001 2002

Current liabilities:

Short-term debt (Note 8)......................................................................................... ¥ 42,179 ¥ 38,025 $ 317,135

Current portion of long-term debt (Note 8) ............................................................. 13,301 19,384 100,008

Trade payables (Note 3):Notes .................................................................................................................. 1,708 1,990 12,842

Accounts............................................................................................................. 46,342 58,856 348,436

Accrued expenses .................................................................................................. 24,443 25,320 183,782

Income taxes (Note 6) ............................................................................................ 6,746 16,052 50,722

Other current liabilities (Note 3) .............................................................................. 41,402 46,945 311,293

Total current liabilities ................................................................................. 176,121 206,572 1,324,218

Long-term debt (Note 8) ........................................................................................... 35,093 48,328 263,857

Retirement and severance benefits (Note 9) .......................................................... 39,959 39,993 300,444

Other liabilities (Note 6) ............................................................................................ 3,719 4,633 27,962

Total liabilities ............................................................................................. 254,892 299,526 1,916,481

Minority interests ..................................................................................................... 19,824 23,496 149,053

Stockholders’ equity:

Common stock:Authorized—800,000,000 shares; Issued—207,251,426 shares in 2002 and

202,152,991 shares in 2001 (Note 10) ................................................. 15,284 15,029 114,917

Capital surplus (Note 10)......................................................................................... 34,174 27,342 256,948

Legal reserve (Note 11) .......................................................................................... 3,564 3,448 26,797

Retained earnings (Notes 8 and 11)........................................................................ 89,254 88,669 671,083

Net unrealized holding gain on securities ............................................................... 1,849 2,083 13,902

Foreign currency translation adjustments............................................................... (424) (2,471) (3,188)

.................................................................................................................................... 143,701 134,100 1,080,459

Treasury stock, at cost, 7,286 shares in 2002and 2,422 shares in 2001 (Note 12)...................................................................... (9) (5) (68)

Total stockholders’ equity........................................................................... 143,692 134,095 1,080,391

Commitments and contingencies (Note 13)

.................................................................................................................................... ¥418,408 ¥457,117 $3,145,925


Consolidated Statements of IncomeHitachi Chemical Co., Ltd. and Consolidated SubsidiariesFor the Years Ended March 31, 2002, 2001 and 2000



2002 2001 2000 2002

Net sales (Note 3) ................................................................................... ¥480,777 ¥586,314 ¥544,837 $3,614,865

Cost of sales (Notes 3 and 14) ............................................................... 366,225 434,120 405,749 2,753,572

Gross profit ...................................................................................... 114,552 152,194 139,088 861,293

Selling, general and administrative expenses (Note 14) ..................... 100,910 106,201 102,916 758,722

Operating income ............................................................................ 13,642 45,993 36,172 102,571

Other income (expenses):

Interest income .................................................................................. 698 749 654 5,248

Dividend income ................................................................................. 202 319 282 1,519

Equity in earnings (loss) of affiliated companies ................................. (359) 854 656 (2,699)

Exchange gain (loss) ............................................................................ 457 1,147 (1,612) 3,436

Interest expenses................................................................................ (2,079) (2,767) (3,268) (15,632)

Loss on disposal of property, plant and equipment ............................ (1,347) (1,258) (2,477) (10,128)

Devaluation loss of securities ............................................................. (614) (757) (475) (4,617)

Amortization of cost in excess of net assets acquired ........................ (594) (179) (1,114) (4,466)

Gain on sale of subsidiaries’ common stock and other ....................... 32 1,537 — 241

Gain on contribution to pension fund trusts (Note 4) .......................... — 10,097 — —

Transition difference arising from the adoption of the new accounting standard for retirement benefits (Note 9) ........ — (28,611) — —

Other, net ........................................................................................... (718) (379) (653) (5,398)

................................................................................................................. (4,322) (19,248) (8,007) (32,496)

Income before income taxes and minority interests ...................... 9,320 26,745 28,165 70,075

Income taxes (Note 6) ............................................................................ 5,127 11,903 13,375 38,549

Income before minority interests ................................................... 4,193 14,842 14,790 31,526

Minority interests .................................................................................. 1,052 1,820 2,203 7,909

Net income ..................................................................................... ¥ 3,141 ¥ 13,022 ¥ 12,587 $ 23,617

U.S. dollarsYen (Note 2)

Primary net income per share .............................................................. ¥ 15.28 ¥ 64.42 ¥ 62.27 $ 0.11

Diluted net income per share ............................................................... — 63.53 61.42 —



Consolidated Statements of Stockholders’ EquityHitachi Chemical Co., Ltd. and Consolidated SubsidiariesFor the Years Ended March 31, 2002, 2001 and 2000



2002 2001 2000 2002

Common stock:

Balance at beginning of year ............................................................... ¥ 15,029 ¥ 15,025 ¥ 15,023 $ 113,000

Issuance of common stock (Note 10).................................................. 255 — — 1,917

Conversion of convertible debentures (Note 10) ................................. — 4 2 —

Balance at end of year ......................................................................... 15,284 15,029 15,025 114,917

Capital surplus:

Balance at beginning of year ............................................................... 27,342 27,338 27,336 205,579

Issuance of common stock (Note 10).................................................. 6,832 — — 51,369

Conversion of convertible debentures (Note 10) ................................. — 4 2 —


Legal reserve:


Transfer from retained earnings (Note 11) .......................................... 116 217 204 872


Retained earnings:


Effect of newly consolidated subsidiaries ........................................... — (154) (75) —

Net income .......................................................................................... 3,141 13,022 12,587 23,617

Cash dividends (Note 11)..................................................................... (2,047) (2,021) (1,920) (15,391)

Transfer to legal reserve (Note 11) ...................................................... (116) (217) (204) (872)

Bonuses to directors (Note 11)............................................................ (393) (369) (250) (2,955)

Adjustment of prior year’s deferred taxes........................................... — — 12,935 —

Transfer to minority interests arising from issuance of common stock by subsidiaries ....................................... — (76) — —


Net unrealized holding gain on securities:

Balance at beginning of year ............................................................... 2,083 — — 15,662

Net change during the year ................................................................. (234) 2,083 — (1,760)

Balance at end of year ......................................................................... 1,849 2,083 — 13,902

Foreign currency translation adjustments:

Balance at beginning of year ............................................................... (2,471) — — (18,579)

Net change during the year ................................................................. 2,047 (2,471) — 15,391

Balance at end of year ......................................................................... (424) (2,471) — (3,188)

Treasury stock:

Balance at beginning of year ............................................................... (5) (43) (2) (38)

Decrease (increase) in treasury stock (Note 12) .................................. (4) 38 (41) (30)

Balance at end of year ......................................................................... (9) (5) (43) (68)

Total stockholders’ equity........................................................ ¥143,692 ¥134,095 ¥124,035 $1,080,391



Consolidated Statements of Cash FlowsHitachi Chemical Co., Ltd. and Consolidated SubsidiariesFor the Years Ended March 31, 2002, 2001 and 2000



2002 2001 2000 2002

Cash flows from operating activities (Note 15):Net income.................................................................................................. ¥ 3,141 ¥13,022 ¥12,587 $ 23,617

Adjustments to reconcile net income to net cash provided by operating activities:Depreciation and amortization................................................................. 29,628 29,188 31,155 222,767

Devaluation loss of marketable securities............................................... 614 757 475 4,617

Deferred income taxes............................................................................ (2,600) (10,790) (2,546) (19,549)

Loss on disposal of property, plant and equipment, net ......................... 1,174 1,186 1,992 8,827

Income applicable to minority interests .................................................. 1,052 1,820 2,203 7,909

Equity in (earnings) loss of affiliated companies ..................................... 359 (854) (656) 2,699

Gain on contribution to pension fund trusts............................................ — (10,097) — —

Transition difference arising from the adoption of the new accounting standard for retirement benefits........................... — 28,611 — —

(Increase) decrease in trade receivables ................................................. 29,826 217 (6,569) 224,256

(Increase) decrease in inventories........................................................... 11,049 (1,962) (2,544) 83,075

Increase in other current assets.............................................................. (1,525) (1,175) (2,027) (11,466)

Increase (decrease) in trade payables ..................................................... (14,306) (5,162) 8,106 (107,564)

Increase (decrease) in accrued expenses and retirement and severance benefits ................................................ (1,348) (825) 4,406 (10,135)

Increase (decrease) in accrued income taxes ......................................... (9,173) 3,062 5,388 (68,970)

Increase (decrease) in other liabilities ..................................................... (3,112) 4,337 4,728 (23,398)

Other ....................................................................................................... (142) (250) (309) (1,068)

Net cash provided by operating activities ....................................... 44,637 51,085 56,389 335,617

Cash flows from investing activities:

Decrease in short-term investments........................................................... 693 49 4,529 5,211

Capital expenditures.................................................................................... (27,825) (34,624) (28,982) (209,210)

Proceeds from sale of property, plant and equipment................................ 2,207 4,212 1,467 16,594

Purchase of subsidiaries’ and affiliated companies’ stockand investments in securities .................................................................. (2,521) (1,732) (461) (18,955)

Proceeds from sale of subsidiaries’ and affiliated companies’ common stock and investments in securities......... 180 2,277 1,026 1,353

(Increase) decrease in other investments ................................................... (930) 2,211 1,319 (6,992)

(Increase) decrease in short-term loans receivable..................................... (160) 180 925 (1,203)

(Increase) decrease in long-term loans receivable ...................................... 1,080 (7) 225 8,120

Other ........................................................................................................... (2,661) (511) (1,033) (20,008)

Net cash used in investing activities ............................................... (29,937) (27,945) (20,985) (225,090)

Cash flows from financing activities:

Increase (decrease) in short-term debt ....................................................... 3,608 (15,886) (6,006) 27,128

Proceeds from long-term debt .................................................................... 200 5,410 15,683 1,504

Payments on long-term debt....................................................................... (19,938) (10,360) (30,122) (149,910)

Dividends paid to stockholders ................................................................... (2,047) (2,021) (1,920) (15,391)

Dividends paid to minority stockholders of subsidiaries ............................. (532) (540) (225) (4,000)

Proceeds from sale of treasury stock ......................................................... 16 311 225 120

Purchase of treasury stock.......................................................................... (22) (266) (258) (165)

Net cash used in financing activities ............................................... (18,715) (23,352) (22,623) (140,714)

Effect of exchange rate changes on cash and cash equivalents ................... 757 965 (876) 5,691

Cash and cash equivalents of newly consolidated subsidiaries ................... 39 2,228 — 293

Net increase (decrease) in cash and cash equivalents........................ (3,219) 2,981 11,905 (24,203)

Cash and cash equivalents at beginning of year .......................................... 59,551 56,570 44,665 447,752

Cash and cash equivalents at end of year..................................................... ¥56,332 ¥59,551 ¥56,570 $423,549



Notes to Consolidated Financial StatementsHitachi Chemical Co., Ltd. and Consolidated SubsidiariesFor the Years Ended March 31, 2002, 2001 and 2000

1. BASIS OF

PRESENTATION

AND SUMMARY

OF SIGNIFICANT

ACCOUNTING

POLICIES

(a) Basis of Presentation

The accompanying consolidated financial statements have been prepared from the accounts maintainedby Hitachi Chemical Co., Ltd. (the Company) and its domestic subsidiaries in accordance with the provi-sions set forth in the Japanese Commercial Code and in conformity with accounting principles and prac-tices generally accepted in Japan, which may differ in some material respects from accounting principlesand practices generally accepted in countries and jurisdictions other than Japan, and those maintained byits foreign subsidiaries in conformity with those of the countries of their domicile.

In addition, the consolidated financial statements, including the notes to the consolidated financial state-ments, presented herein have been compiled from the consolidated financial statements filed with theMinistry of Finance (the MOF report) as required by the Securities and Exchange Law of Japan and, forthe convenience of readers outside Japan, include certain reclassifications and additional informationwhich is not required under accounting principles generally accepted in Japan.

(b) Principles of Consolidation

The consolidated financial statements include the accounts of the Company and those of its majority-owned subsidiaries, whether directly or indirectly controlled. All the significant intercompany accounts andtransactions have been eliminated in consolidation.

Most of the investments in affiliated companies are stated at their underlying equity value, and theappropriate portion of the earnings of such companies is included in consolidated income. The investments in affiliated companies which do not materially affect consolidated income and equity arestated at cost.

The cost in excess of net assets acquired by the Company is being amortized using the straight-linemethod over its estimated useful period by each individual investment in subsidiaries, not exceedingtwenty years or, if the amount is not material, charged immediately to consolidated income.

Until the year ended March 31, 2001, the cost in excess of net assets acquired by the Company hadbeen amortized using the straight-line method over five years or, if the amount was not material, chargedimmediately to consolidated income.

(c) Cash and Cash Equivalents

For the purpose of the statements of cash flows, the Company considers all the highly liquid investmentswith insignificant risk of changes in value which have maturities of generally three months or less when pur-chased to be cash equivalents. Due to this reason, certain investments which were reported as short-terminvestments in the MOF report were reclassified as cash and cash equivalents in the consolidated finan-cial statements in the amount of ¥5,900 million in 2001 and ¥11,163 million in 2000.

(d) Short-Term Investments and Investments in Securities

Effective April 1, 2000, the Company adopted “Accounting Standard for Financial Instruments” issued bythe Business Accounting Deliberation Council. Under this standard, securities are to be classified into oneof the following three categories and accounted for as follows:• Securities that are generally used with the objective of generating profits on short-term differences in

price are classified as trading securities and measured at fair value, with unrealized holding gains andlosses included in earnings.

• Securities that the Company has the positive intent and ability to hold to maturity are classified as held-to-maturity securities and measured at amortized cost.

• Securities classified as neither trading securities nor held-to-maturity securities are classified as othersecurities and measured at fair value, with either unrealized holding gains and losses excluded fromearnings and reported as a net amount in a separate component of stockholders’ equity until realized orunrealized holding losses included in earnings and unrealized gains excluded from earnings and reportedas a net amount in a separate component of stockholders’ equity until realized.The Company reports unrealized holding gains and losses of other securities with fair values as a net

amount in a separate component of stockholders' equity until realized. Other securities without fair valuesare carried at cost. In computing realized gain or loss, cost of other securities was principally determinedby the moving-average method.

Previously, marketable securities were stated principally at the lower of cost or market. Investments inother than marketable securities were stated at cost.

The adoption of this standard did not have a material effect on net income for the year ended March 31, 2001.


(e) Inventories

Inventories are stated principally at the lower of cost or market (certain consolidated subsidiaries use the cost method). Cost is determined by the moving-average method.

(f ) Property, Plant and Equipment

Property, plant and equipment are stated at cost and depreciated over the estimated useful lives of the respective assets by the declining-balance method, except for certain buildings which are depreciatedby the straight-line method.

(g) Retirement and Severance Benefits

Effective April 1, 2000, the Company adopted “Accounting Standard for Retirement Benefits” issued bythe Business Accounting Deliberation Council. Under this standard, allowance for retirement and severance benefits for employees is provided based on the estimated retirement benefit obligation andthe pension assets.

Previously, under unfunded defined benefit pension plans, retirement allowance for employees hadbeen made for the estimated accrued liability to which they were entitled if they were to voluntarily retireor sever immediately at the balance sheet date, less applicable plan assets of the tax-qualified pensionplan. In addition, under contributory defined benefit pension plans (Employees’ Pension Fund as is stipulat-ed by the Japanese Welfare Pension Insurance Law), annual contributions had been charged to incomewhen paid.

As a result of the application of this standard, operating income and income before income taxes andminority interests decreased for the year ended March 31, 2001 by ¥1,116 million and ¥19,630 million,respectively.

A retirement allowance for directors and corporate auditors has been made for the vested benefits towhich they are entitled if they were to retire or sever immediately at the balance sheet date.

(h) Derivative Financial Instruments

Effective April 1, 2000, the Company adopted “Accounting Standard for Financial Instruments” issued bythe Business Accounting Deliberation Council. Under this standard, in principle, net assets or liabilitiesarising from derivative financial instruments are measured at fair value, with unrealized gain or loss included inearnings. Hedging transactions, that meet the criteria of hedge accounting as regulated in “AccountingStandard for Financial Instruments,” are accounted for using deferral hedge accounting, which requires theunrealized gain or loss to be deferred as a liability or asset until gain or loss relating to the hedge object is recognized.

Previously, forward exchange contracts were accounted for as foreign currency transactions covered bysuch contracts were translated at contract rates and, interest rate swap transactions were accounted for as if interest rates under the interest rate swap transactions were originally applied to underlying borrowings and debentures.


(i) Foreign Currency Translation

Effective April 1, 2000, the Company adopted the revised “Accounting Standard for Foreign CurrencyTransaction” issued by the Business Accounting Deliberation Council. Under this standard, foreign curren-cy transactions are translated into yen on the basis of the rates in effect at the transaction date. At year-end, monetary assets and liabilities denominated in foreign currencies are translated into yen at the ratesof exchange in effect at the balance sheet date. Gains or losses resulting from the translation of foreigncurrencies, including gains and losses on settlement, are credited or charged to income as incurred.

The financial statements of the consolidated foreign subsidiaries are translated into the reporting currency of yen as follows: all assets and liabilities are translated at the rates of exchange in effect at thebalance sheet date; stockholders’ equity accounts are translated at historical rates; income and expensesare translated at an average of exchange rates in effect during the year; and a comprehensive adjustmentresulting from the translation of assets, liabilities and stockholders’ equity is included in minority interestsand, as “Foreign currency translation adjustments,” a separate component of stockholders’ equity.

Previously, foreign currency transactions were translated into yen on the basis of the rates in effect atthe transaction date, except for those covered by firm forward exchange contracts which were translatedat such contract rates. At year-end, monetary current assets and current liabilities denominated in foreigncurrencies were translated into yen at the rates of exchange in effect at the balance sheet date, and other


monetary assets and liabilities denominated in foreign currencies were translated into yen at historicalrates. However, material unrealized translation losses on other monetary assets and liabilities had to becalculated using the rates of exchange in effect at the balance sheet date. On the translation of the finan-cial statements of the consolidated foreign subsidiaries, a comprehensive adjustment resulting from thetranslation of assets, liabilities and stockholders’ equity was presented as “Foreign currency translationadjustments” in the consolidated balance sheets as an asset or liability.


(j) Income Taxes

Effective April 1, 1999, the Company adopted “Accounting Standard for Deferred Income Taxes” issued bythe Business Accounting Deliberation Council. The standard requires that deferred income taxes be account-ed for under the asset and liability method. Under the asset and liability method of the standard, deferred tax assets and liabilities are recognized for the expected future tax consequences attributable to differ-ences between the financial statement carrying amount of existing assets and liabilities and their respectivetax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to tax-able income in the years in which those temporary differences are expected to be recovered or settled.

Previously, deferred tax assets and liabilities arising from temporary differences were not recognized.The cumulative effect of the changes in the accounting principles for deferred income taxes was to

increase retained earnings at April 1, 1999 by ¥12,935 million and to increase net income for the year endedMarch 31, 2000 by ¥2,511 million.

(k) Net Income per Share

Primary net income per share is based on the weighted average number of shares of common stock out-standing during the respective years. On a diluted basis, both net income and shares outstanding areadjusted to assume the conversion of convertible debentures.


3. TRANSACTIONS

WITH RELATED

COMPANIES

The outstanding common stock of the Company is owned 52.2% by Hitachi, Ltd. (the parent company).The Company’s balances with the parent company and subsidiaries of the parent company as of March

31, 2002 and 2001, and related transactions for each of the years in the three-year period ended March31, 2002 are summarized as follows:


2002 2001 2002

Balances:Parent company:

Trade accounts receivable ............................................................................. ¥976 ¥1,097 $7,338

Other current assets...................................................................................... 127 184 955

Other current liabilities .................................................................................. 647 755 4,865

Subsidiaries of parent company:Trade accounts payable ................................................................................. 373 1,055 2,805


2002 2001 2000 2002

Principal transactions:Parent company:

Sales ..................................................................................... ¥6,377 ¥10,192 ¥12,136 $47,947

Purchases of materials ......................................................... 547 721 960 4,113

Purchases of facilities and other........................................... 1,239 1,271 25 9,316

Subsidiaries of parent company:Purchases of materials ......................................................... 2,225 4,089 4,143 16,729

The Company’s balances with its affiliated companies as of March 31, 2002 and 2001 are summarized as follows:


2002 2001 2002

Trade accounts receivable ..................................................................................... ¥1,498 ¥1,640 $11,263

Other current assets.............................................................................................. 239 292 1,797

Other assets .......................................................................................................... 1,275 416 9,586

Trade accounts payable ......................................................................................... 595 1,181 4,474

2. BASIS OF

FINANCIAL

STATEMENT

TRANSLATION

The accompanying consolidated financial statements are expressed in yen and, solely for the convenienceof the reader, have been translated into U.S. dollars at the rate of ¥133=US$1, the approximate exchangerate prevailing on the Tokyo Foreign Exchange Market as of March 29, 2002. This translation should not beconstrued as a representation that any amounts shown could be converted into U.S. dollars.


4. SHORT-TERM

INVESTMENTS

AND INVESTMENTS

IN SECURITIES

The following is a summary of the amortized cost basis, gross unrealized holding gains or losses andaggregate fair value of other securities by major security type as of March 31, 2002 and 2001.

Millions of yen

Amortized Gross gains Aggregate Amortized Gross gains Aggregatecost basis or losses fair value cost basis or losses fair value

2002 2001

Other securities with gross unrealized holding gains:

Equity securities..................................... ¥3,719 ¥3,542 ¥7,261 ¥4,544 ¥4,111 ¥ 8,655Debt securities ....................................... 6 1 7 6 1 7

................................................................... 3,725 3,543 7,268 4,550 4,112 8,662Other securities with gross unrealized holding losses:

Equity securities..................................... 1,526 (111) 1,415 1,281 (183) 1,098Debt securities ....................................... 336 (10) 326 337 (5) 332

................................................................... 1,862 (121) 1,741 1,618 (188) 1,430

................................................................... ¥5,587 ¥3,422 ¥9,009 ¥6,168 ¥3,924 ¥10,092

Thousands of U.S. dollars

Amortized Gross gains Aggregatecost basis or losses fair value

2002

Other securities with gross unrealized holding gains:

Equity securities ................................... $27,963 $26,631 $54,594

Debt securities ..................................... 45 8 53

................................................................. 28,008 26,639 54,647

Other securities with gross unrealized holding losses:

Equity securities ................................... 11,474 (835) 10,639

Debt securities ..................................... 2,526 (75) 2,451

................................................................. 14,000 (910) 13,090

................................................................. $42,008 $25,729 $67,737

It is not practicable to estimate the fair value of investments in non-marketable securities because ofthe lack of a market price and difficulty in estimating fair value without incurring excessive cost. The carry-ing amount of these investments at March 31, 2002 and 2001 totaled ¥2,169 million ($16,308 thousand)and ¥1,601 million, respectively.

As of March 31, 2002 and 2001, certain subsidiaries held held-to-maturity securities, which consist ofcorporate bonds, amounting to ¥217 million ($1,632 thousand) and ¥945 million, respectively. Gross unre-alized holding gains and losses of these securities were not material.

Information about the contractual maturities of held-to-maturity securities and other securities with contractual maturities as of March 31, 2002 are as follows:

Millions of yen Thousands of U.S. dollars

After one After oneWithin year through After Within year through After

one year five years five years one year five years five years

Debt securities:Corporate bonds..................................... ¥— ¥217 ¥ — $ — $1,632 $ —

Other ...................................................... 17 10 — 128 75 —

................................................................... ¥17 ¥227 ¥ — $128 $1,707 $ —

During the year ended March 31, 2001, the Company and a certain subsidiary contributed their othersecurities, in the amount of ¥12,501 million at fair value, to pension fund trusts. Gross realized gains onthose contributions for the year ended March 31, 2001 were ¥10,097 million.


5. INVENTORIES Inventories as of March 31, 2002 and 2001 are summarized as follows:


2002 2001 2002

Finished goods................................................................................................... ¥11,749 ¥14,314 $ 88,338

Semi-finished goods .......................................................................................... 1,638 2,044 12,316

Work in process................................................................................................. 13,517 16,540 101,632

Raw materials .................................................................................................... 8,856 13,169 66,586

........................................................................................................................... ¥35,760 ¥46,067 $268,872

6. INCOME TAXES The income tax expenses (benefits) reflected in the consolidated statements of income for the years ended March 31, 2002, 2001 and 2000 consist of the following:


2002 2001 2000 2002

Current tax expense .................................................................... ¥7,727 ¥22,693 ¥15,921 $58,098

Deferred tax benefit..................................................................... (2,600) (10,790) (2,546) (19,549)

..................................................................................................... ¥5,127 ¥11,903 ¥13,375 $38,549

The Company and its domestic subsidiaries are subject to a number of taxes based on income, which inthe aggregate resulted in a normal income tax rate of 41.7% for the years ended March 31, 2002, 2001and 2000.

Reconciliations between the normal income tax rate and the effective income tax rate as a percentageof income before income taxes and minority interests are as follows:

2002 2001 2000

Normal income tax rate .................................................................................................. 41.7% 41.7% 41.7%Expenses not deductible for tax purposes................................................................. 9.1 3.5 3.3Equity in (earnings) loss of affiliated companies ........................................................ 1.6 (1.3) (1.0)Amortization of cost in excess of net assets acquired............................................... 2.7 0.3 1.6Other .......................................................................................................................... (0.1) 0.3 1.9

Effective income tax rate ............................................................................................... 55.0% 44.5% 47.5%

The tax effects of temporary differences that give rise to significant portions of the deferred tax assetsand liabilities as of March 31, 2002 and 2001 are presented below:


2002 2001 2002

Total gross deferred tax assets:Retirement and severance benefits............................................................... ¥16,520 ¥15,675 $124,211

Accrued bonus............................................................................................... 2,831 2,271 21,286

Accrued business tax..................................................................................... 627 1,407 4,714

Allowance for doubtful receivables................................................................ 1,010 821 7,594

Other.............................................................................................................. 10,507 8,199 79,000

........................................................................................................................... 31,495 28,373 236,805

Total gross deferred tax liability:Tax purpose reserves regulated by Japanese Tax Law ................................. (574) (679) (4,316)

Net unrealized holding gain on securities ...................................................... (1,471) (1,649) (11,060)

Other.............................................................................................................. (1,731) (1,360) (13,015)

........................................................................................................................... (3,776) (3,688) (28,391)

Net deferred tax assets ..................................................................................... ¥27,719 ¥24,685 $208,414


7. PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment, at cost as of March 31, 2002 and 2001 consisted of the following:


2002 2001 2002

Land ............................................................................................................... ¥ 25,643 ¥ 25,477 $ 192,804

Buildings and structures ................................................................................ 123,597 119,815 929,301

Machinery and equipment ............................................................................. 377,951 363,922 2,841,737

Construction in progress................................................................................ 2,050 4,249 15,414

....................................................................................................................... ¥529,241 ¥513,463 $3,979,256

8. SHORT-TERM AND LONG-TERM DEBT

Long-term debt as of March 31, 2002 and 2001 is summarized as follows:


2002 2001 2002

Unsecured debentures:2nd series, due 2006, interest 3.5%.......................................................... ¥10,000 ¥10,000 $ 75,188

3rd series, due 2002, interest 1.95% ........................................................ — 15,000 —

4th series, due 2009, interest 2.3% .......................................................... 5,000 5,000 37,594

5th series, due 2004, interest 1.44% ........................................................ 3,000 3,000 22,556



Due 2003, interest 2.75%, issued by a consolidated subsidiary ............... 2,000 2,000 15,038

Unsecured convertible debentures:4th series, due 2003, interest 2.0% .......................................................... 7,106 7,106 53,429

Due 2003, interest 0.6%, issued by a consolidated subsidiary.................... 1,105 1,105 8,308

Loans, principally from banks and insurance companies:Secured by various assets and mortgages on property, plant and equipment, maturing 2002–2007, interest 2.2–3.3% ....................... 1,447 1,960 10,880

Unsecured, maturing 2002–2006, interest 0.99–4.8%.............................. 11,736 15,541 88,241

....................................................................................................................... 48,394 67,712 363,865

Less current installments............................................................................... 13,301 19,384 100,008

....................................................................................................................... ¥35,093 ¥48,328 $263,857

The aggregate annual maturities of long-term debt after March 31, 2003 are as follows:

Thousands ofYears ending March 31, Millions of yen U.S. dollars

2004................................................................................................................................. ¥ 5,901 $ 44,3682005................................................................................................................................. 4,584 34,4662006................................................................................................................................. 2,388 17,9552007................................................................................................................................. 10,190 76,617Thereafter ........................................................................................................................ 12,030 90,451

......................................................................................................................................... ¥35,093 $263,857

Net deferred tax assets as of March 31, 2002 and 2001 are reflected in the consolidated balance sheetsunder the following items:


2002 2001 2002

Prepaid expenses and other current assets ...................................................... ¥ 7,984 ¥ 7,844 $ 60,030

Other assets ...................................................................................................... 20,340 17,998 152,932

Other liabilities ................................................................................................... (605) (1,157) (4,548)

Net deferred tax assets ..................................................................................... ¥27,719 ¥24,685 $208,414


The assets pledged as collateral for short-term and long-term debt at March 31, 2002 are as follows:


Property, plant and equipment ........................................................................................ ¥ 9,566 $71,925Other................................................................................................................................ 983 7,391

......................................................................................................................................... ¥10,549 $79,316

Loans of ¥2,194 million ($16,496 thousand) from a bank as of March 31, 2002 are secured by an invest-ment in Hitachi Powdered Metals Co., Ltd., a 53.3% (17,072 thousand shares) owned subsidiary. The6,600 thousand shares in Hitachi Powdered Metals Co., Ltd. are collateralized, and the fair value of theshares as of March 31, 2002 was ¥3,564 million ($26,797 thousand).

As is customary in Japan, both short-term and long-term bank loans are made under general agree-ments which provide that security and guarantees for present and future indebtedness will be given uponrequest of the bank, and that the bank shall have the right, as the obligations become due or in the eventof default, to offset cash deposits against such obligations due the bank.

Generally, certain secured and unsecured loan agreements provide, among other things, that thelenders or trustees shall have the right to have any distribution of earnings, including the payment of dividends and the issuance of additional capital stock, submitted to them for prior approval and also grantthem the right to request additional security or mortgages on property, plant and equipment.

The unsecured convertible debentures due in 2003 are redeemable in whole or in part, at the option of theCompany, from April 1, 1996 to March 31, 2002 at premiums ranging from 6% to 1%, and at par thereafter.The debentures are currently convertible into 4,029,315 shares of common stock at ¥1,763.60 ($13.26) pershare. Commencing March 31, 1997, the Company was required to make with the bank a deposit of ¥1,500million ($11,278 thousand) less the aggregate amounts of the debentures converted, repurchased orredeemed which have not been deducted before. In March 2002, 4,000 thousand shares of investment inHitachi Powdered Metals Co., Ltd. are held in trust in accordance with Trustee agreement for the unsecured debentures. The fair value of the shares held in trust is ¥2,160 million ($16,241 thousand) as ofMarch 31, 2002.

Pursuant to the terms of the indentures under which the unsecured convertible debentures due in 2003were issued, accumulated cash dividends (including interim dividends) paid by the Company for the fiscalyears beginning after March 31, 1988 may not exceed accumulated ordinary income before income taxesless income taxes in the statements of income of the Company for the fiscal years beginning after March 31,1988 plus ¥2,500 million ($18,797 thousand) as long as these convertible debentures are outstanding.

9. LIABILITY FOR

RETIREMENT

AND SEVERANCE

BENEFITS

The Company and its domestic subsidiaries have a number of contributory and noncontributory pensionplans to provide retirement and severance benefits to substantially all the employees.

Principal pension plans are unfunded defined benefit pension plans. Under the plans, employees areentitled to lump-sum payments based on the current rate of pay and the length of service upon retirementor termination of employment for reasons other than dismissal for cause. The liability under these plans ispartially funded by contributions to pension fund trusts.

In addition to the above plans, the Company and certain subsidiaries have contributory defined benefitpension plans (Employees’ Pension Fund as is stipulated by the Japanese Welfare Pension InsuranceLaw) covering substantially all employees.

Funding status of the Company’s plans as of March 31, 2002 and 2001 is summarized as follows:


2002 2001 2002

Projected benefit obligations...................................................................... ¥(141,535) ¥(143,698) $(1,064,173)

Plan assets at fair value.............................................................................. 87,793 93,557 660,098

Funding status............................................................................................ (53,742) (50,141) (404,075)

Unrecognized actuarial loss........................................................................ 16,622 10,722 124,977

Unrecognized prior service benefit ............................................................ (2,812) (421) (21,143)

Net amount recognized in the consolidated balance sheet ....................... ¥ (39,932) ¥ (39,840) $ (300,241)

Amounts recognized in the statement of financial position consist of:Prepaid expenses and other current assets........................................... ¥ 27 ¥ 153 $ 203

Retirement and severance benefits ....................................................... (39,959) (39,993) (300,444)

................................................................................................................... ¥ (39,932) ¥ (39,840) $ (300,241)


Net periodic benefit costs for the contributory, funded benefit pension plans and the unfunded lump-sum payment plans of the Company for the years ended March 31, 2002 and 2001 consisted of the follow-ing components:


2002 2001 2002

Service cost, net of employees’ contributions.................................................. ¥4,475 ¥ 3,795 $33,646

Interest cost...................................................................................................... 4,961 4,991 37,301

Expected return on plan assets for the period.................................................. (1,510) (1,879) (11,353)

Amortization of transition difference (Note a) ................................................... — 28,611 —

Amortization of unrecognized actuarial loss (Note b)........................................ 1,098 — 8,256

Amortization of prior service benefit (Note c) ................................................... (240) (204) (1,805)

Net periodic benefit cost................................................................................... ¥8,784 ¥35,314 $66,045

Notes: a. The transition difference of ¥28,611 million arising from the adoption of the new accounting standard was charged imme-diately to consolidated income for the year ended March 31, 2001.

b. Actuarial gains and losses are amortized using the straight-line method over certain years, principally over 10 years,which are within the estimated average remaining service years of employees.

c. Prior service benefits and costs are amortized using the straight-line method over certain years, principally over 10years for the year ended March 31, 2002 and 3 years for the year ended March 31, 2001, which are within the estimatedaverage remaining service years of employees.

d. Besides retirement and severance benefits under the defined benefit pension plans above, special termination benefits of¥2,727 million ($20,504 thousand) and ¥1,747 million were paid and charged to earnings during the years ended March 31,2002 and 2001, respectively.

Actuarial assumptions used in the accounting for the Company’s and subsidiaries’ plans are principallyas follows:

2002 2001

Discount rate ........................................................................................................................................... 3.5% 3.5%Expected return rate on plan assets ....................................................................................................... 2.0% 2.0%

10. COMMON STOCK The Japanese Commercial Code (JCC) had required designation of par value to all common stock at least50% of new share issuance price, or the common stock par value prescribed by the JCC. EffectiveOctober 1, 2001, the JCC was amended to eliminate the provision of common stock par value resulting inall common stock being recorded with no par value.

Conversions of convertible debentures issued subsequent to October 1, 1982 into common stock wereaccounted for in accordance with the provisions of the JCC by crediting one-half of the conversion price toeach of the common stock account and the capital surplus account.

On August 1, 2001, the Company issued 5,098,435 shares of its common stock in exchange for all out-standing shares of Hitachi AIC Inc., formerly a majority owned subsidiary.

11. LEGAL RESERVE AND CASH DIVIDENDS

The Japanese Commercial Code (JCC) had provided that earnings in an amount equal to at least 10% ofappropriations of retained earnings to be paid in cash be appropriated as a legal reserve until such reserveequals 25% of stated common stock. This legal reserve was not available for dividends but might be usedto reduce a deficit by resolution of the shareholders or might be transferred to stated common stock byresolution of the Board of Directors.

Effective October 1, 2001, the JCC was amended to require earnings in an amount equal to at least10% of appropriations of retained earnings to be paid in cash be appropriated as a legal reserve until totaladditional paid in capital and legal reserve equals 25% of stated common stock. In addition to reduction ofa deficit and transfer to stated common stock, either additional paid in capital or legal reserve may be avail-able for dividends by resolution of the shareholders to the extent that the amount of total additional paid incapital and legal reserve exceeds 25% of stated common stock.

Cash dividends, directors’ bonuses and appropriations to the legal reserve charged to retained earningsduring the years ended March 31, 2002, 2001 and 2000 represent dividends and bonuses paid out duringthose years and the related appropriations to the legal reserve. The accompanying consolidated financialstatements do not include any provision for the semiannual dividend of ¥5.0 ($0.04) per share totaling¥1,036 million ($7,789 thousand) or directors’ bonuses of ¥227 million ($1,707 thousand), subsequently pro-posed by the Board of Directors in respect of the year ended March 31, 2002.


13. COMMITMENTS AND CONTINGENCIES

At March 31, 2002, outstanding commitments for the purchase of property, plant and equipment were¥771 million ($5,797 thousand), and contingent liabilities for guarantees for loans amounted to ¥1,220 million($9,173 thousand).

It is common practice in Japan for companies, in the ordinary course of business, to receive promissorynotes in the settlement of trade accounts receivable and to subsequently discount such notes to banks orto transfer them by endorsement to suppliers in the settlement of accounts payable. As of March 31,2002 and 2001, the Company and its subsidiaries are contingently liable for trade notes discounted andendorsed in the following amounts:


2002 2001 2002

Notes discounted............................................................................................... ¥ — ¥ 723 $ —

Notes endorsed ................................................................................................. 4,124 12,180 31,008

........................................................................................................................... ¥4,124 ¥12,903 $31,008

14. RESEARCH AND DEVELOPMENT EXPENSES

Research and development expenses included in general and administrative expenses and gross produc-tion cost for the years ended March 31, 2002, 2001 and 2000 amounted to ¥22,894 million ($172,135 thou-sand), ¥22,408 million and ¥21,302 million, respectively.

15. SUPPLEMENTARY CASH FLOW INFORMATION


2002 2001 2000 2002

Cash paid during the year for:Interest ..................................................................................... ¥ 2,104 ¥ 2,791 ¥ 3,557 $ 15,820

Income taxes ............................................................................ 16,900 19,631 10,533 127,068

12. TREASURY STOCK The Japanese Commercial Code (JCC) had imposed certain restrictions on acquisition and disposal of trea-sury stock. Effective October 1, 2001, the JCC eliminated the provision of these restrictions and allowedacquisitions of treasury stock to the extent of distributable funds appropriated by resolution of the share-holders.

In May 2002, the Board of Directors of the Company resolved to present a proposal to the shareholdersfor the acquisition of up to 20,000 thousand shares of the Company’s common stock for aggregate acqui-sition price not exceeding ¥40,000 million ($300,752 thousand) as treasury stock for the period from theclose of the ordinary general shareholders’ meeting to the close of the next ordinary general shareholders’meeting, pursuant to the provisions of the JCC. This proposal was approved in the ordinary general share-holders’ meeting in June 2002.


16. FINANCIAL INSTRUMENTS AND DERIVATIVE FINANCIAL INSTRUMENTS

The Company and certain subsidiaries operate globally and are exposed to market risks arising from fluctu-ations in foreign currency exchange rates and interest rates. In order to manage those risks, the Companyand certain subsidiaries enter into various agreements on derivative financial instruments, including for-ward exchange contracts, foreign currency swap agreements, currency option contracts and interest rateswap agreements. Forward exchange contracts are utilized to manage risks arising from foreign currencyreceivables from export of finished goods; foreign currency payables from the import of raw materials; andforecasted foreign currency sales and purchase transactions. Foreign currency swap agreements, curren-cy option contracts and interest rate swap agreements are utilized to manage foreign currency risk andinterest rate risk for debts. The Company and its subsidiaries have no derivative financial instruments fortrading purposes. In addition, the Company and its subsidiaries are exposed to potential credit-related loss-es in the event of non-performance by counterparties to financial instruments and derivative financialinstruments, but it is not expected that any counterparties will fail to meet their obligations, because most ofthe counterparties are authentic financial institutions.

The Company and its subsidiaries have also developed hedging policies to control various aspects ofderivative financial transactions including authorization levels and transaction volumes. Based on this policy,the Company and its subsidiaries hedge, within certain scopes, risks arising from changes in foreign currencyexchange rates and interest rates. The Company and its subsidiaries review periodically the effectivenessof all the hedge policies to take account of the cumulative cash flows and any changes in the market.

The estimated fair values of the derivative financial instruments, excluding certain interest rate swapagreements, which are accounted for using deferral hedge accounting, by major instrument type as ofMarch 31, 2002 and 2001 are as follows:

Millions of yen

Unrealized UnrealizedNotional Estimated gains Notional Estimated gains amounts fair values (losses) amounts fair values (losses)

2002 2001

Interest rate swap agreements:Floating rate to floating rate ................... ¥10,000 ¥ 3 ¥ 3 ¥10,000 ¥ — ¥ —Floating rate to fixed rate ....................... 100 (2) (2) 3,000 (63) (63)

................................................................... 10,100 1 1 13,000 (63) (63)Currency option transactions:

To sell foreign currencies ....................... 272 (1) 1 2,940 (178) (123)To buy foreign currencies....................... 130 1 (2) 1,470 12 (43)

................................................................... 402 0 (1) 4,410 (166) (166)Forward exchange contracts:

To sell foreign currencies ....................... 576 585 (8) 407 431 (24)

Foreign currency swap agreements........... — — — 209 7 7

................................................................... ¥(8) ¥(246)


UnrealizedNotional Estimated gains amounts fair values (losses)

2002

Interest rate swap agreements:Floating rate to floating rate ................... $75,188 $ 23 $ 23

Floating rate to fixed rate ....................... 752 (15) (15)

................................................................... 75,940 8 8

Currency option transactions:To sell foreign currencies ....................... 2,045 (8) 8

To buy foreign currencies....................... 978 8 (16)

................................................................... 3,023 0 (8)

Forward exchange contracts:To sell foreign currencies ....................... 4,331 4,398 (60)

Foreign currency swap agreements........... — — —

................................................................... $(60)


The fair values of derivative financial instruments were estimated on the basis of information obtainedfrom third party financial institutions. The fair values of currency-related transactions are estimated usingforward exchange rates. The fair values of interest rate swap agreements represent the estimatedreceipts or payments that would be made to terminate the agreements.

17. SEGMENTINFORMATION

The Company and its subsidiaries’ business segments are classified as “Electronics-Related Products,”“Chemical-Related Products” and “Housing Equipment and Environmental Facilities.”

The main products of each business segment are provided on pages 2-3 of this annual report.

Business segment information:

Millions of yen

2002

Housing Electronics- Chemical- Equipment and

Related Related EnvironmentalProducts Products Facilities Total Eliminations Consolidated

Sales to outside customers................ ¥191,693 ¥204,878 ¥84,206 ¥480,777 ¥ — ¥480,777

Intersegment sales ............................ 1,250 872 31 2,153 (2,153) —

........................................................... 192,943 205,750 84,237 482,930 (2,153) 480,777

Operating expenses ........................... 189,212 197,156 82,952 469,320 (2,185) 467,135

Operating income............................... ¥ 3,731 ¥ 8,594 ¥ 1,285 ¥ 13,610 ¥ 32 ¥ 13,642

Assets ................................................ ¥189,644 ¥184,936 ¥45,143 ¥419,723 ¥(1,315) ¥418,408

Depreciation and amortization of tangible and intangible fixed assets ...................................... 15,454 10,816 2,764 29,034 — 29,034

Additions to tangible andintangible fixed assets...................... 10,370 13,633 3,346 27,349 — 27,349

Millions of yen

2001



Sales to outside customers................ ¥265,967 ¥226,748 ¥93,599 ¥586,314 ¥ — ¥586,314Intersegment sales ............................ 753 1,371 634 2,758 (2,758) —

........................................................... 266,720 228,119 94,233 589,072 (2,758) 586,314Operating expenses ........................... 239,001 213,838 90,241 543,080 (2,759) 540,321


Assets ................................................ ¥213,816 ¥196,618 ¥47,408 ¥457,842 ¥ (725) ¥457,117Depreciation and amortization of tangible and intangible fixed assets ...................................... 15,005 11,577 2,427 29,009 — 29,009




Millions of yen

2000



Sales to outside customers................ ¥239,690 ¥206,665 ¥98,482 ¥544,837 ¥ — ¥544,837Intersegment sales ............................ 780 1,645 805 3,230 (3,230) —

........................................................... 240,470 208,310 99,287 548,067 (3,230) 544,837Operating expenses ........................... 216,022 199,769 96,107 511,898 (3,233) 508,665


Assets ................................................ ¥192,403 ¥196,359 ¥57,178 ¥445,940 ¥(1,762) ¥444,178Depreciation and amortization of tangible and intangible fixed assets ...................................... 13,735 12,098 3,151 28,984 — 28,984



2002



Sales to outside customers ............. $1,441,301 $1,540,436 $633,128 $3,614,865 $ — $3,614,865

Intersegment sales .......................... 9,399 6,556 233 16,188 (16,188) —

......................................................... 1,450,700 1,546,992 633,361 3,631,053 (16,188) 3,614,865

Operating expenses......................... 1,422,647 1,482,376 623,699 3,528,722 (16,428) 3,512,294

Operating income ............................ $ 28,053 $ 64,616 $ 9,662 $ 102,331 $ 240 $ 102,571

Assets.............................................. $1,425,895 $1,390,496 $339,421 $3,155,812 $ (9,887) $3,145,925

Depreciation and amortizationof tangible and intangible fixed assets.................................... 116,196 81,323 20,782 218,301 — 218,301

Additions to tangible andintangible fixed assets ................... 77,970 102,504 25,158 205,632 — 205,632

Geographic segment information:

Millions of yen

2002

Japan Asia Other areas Total Eliminations Consolidated

Sales to outside customers ............... ¥408,942 ¥57,139 ¥14,696 ¥480,777 ¥ — ¥480,777

Intersegment sales ............................ 22,601 6,374 1,160 30,135 (30,135) —

........................................................... 431,543 63,513 15,856 510,912 (30,135) 480,777

Operating expenses........................... 421,375 60,045 16,150 497,570 (30,435) 467,135

Operating income .............................. ¥ 10,168 ¥ 3,468 ¥ (294) ¥ 13,342 ¥ 300 ¥ 13,642

Assets ................................................ ¥367,496 ¥46,333 ¥14,250 ¥428,079 ¥ (9,671) ¥418,408

Millions of yen

2001


Sales to outside customers ............... ¥504,816 ¥66,645 ¥14,853 ¥586,314 ¥ — ¥586,314Intersegment sales ............................ 26,915 8,088 2,030 37,033 (37,033) —

........................................................... 531,731 74,733 16,883 623,347 (37,033) 586,314Operating expenses........................... 491,273 69,244 16,499 577,016 (36,695) 540,321

Operating income .............................. ¥ 40,458 ¥ 5,489 ¥ 384 ¥ 46,331 ¥ (338) ¥ 45,993

Assets ................................................ ¥409,091 ¥46,006 ¥14,574 ¥469,671 ¥(12,554) ¥457,117

Millions of yen

2000


Sales to outside customers ............... ¥473,279 ¥56,980 ¥14,578 ¥544,837 ¥ — ¥544,837Intersegment sales ............................ 24,373 5,519 1,786 31,678 (31,678) —

........................................................... 497,652 62,499 16,364 576,515 (31,678) 544,837Operating expenses........................... 468,196 57,201 14,893 540,290 (31,625) 508,665

Operating income .............................. ¥ 29,456 ¥ 5,298 ¥ 1,471 ¥ 36,225 ¥ (53) ¥ 36,172

Assets ................................................ ¥399,334 ¥44,654 ¥13,433 ¥457,421 ¥(13,243) ¥444,178


2002


Sales to outside customers ............... $3,074,752 $429,616 $110,497 $3,614,865 $ — $3,614,865

Intersegment sales ............................ 169,932 47,925 8,722 226,579 (226,579) —

........................................................... 3,244,684 477,541 119,219 3,841,444 (226,579) 3,614,865

Operating expenses........................... 3,168,233 451,466 121,429 3,741,128 (228,834) 3,512,294

Operating income .............................. $ 76,451 $ 26,075 $ (2,210) $ 100,316 $ 2,255 $ 102,571

Assets ................................................ $2,763,128 $348,368 $107,143 $3,218,639 $ (72,714) $3,145,925

Overseas sales:Overseas sales, which include export sales of the Company and its domestic subsidiaries and sales (otherthan exports to Japan) of the foreign consolidated subsidiaries, are summarized as follows:


2002 2001 2000 2002

Percentage of Percentage of Percentage of consolidated consolidated consolidated

Amount net sales Amount net sales Amount net sales Amount

Overseas sales:Asia ............................ ¥ 67,252 14.0% ¥ 84,445 14.4% ¥ 75,864 13.9% $ 505,654

Other areas ................ 32,225 6.7 32,957 5.6 28,796 5.3 242,293

................................... ¥ 99,477 20.7% ¥117,402 20.0% ¥104,660 19.2% $ 747,947

Consolidated net sales... ¥480,777 100.0% ¥586,314 100.0% ¥544,837 100.0% $3,614,865



Independent Auditors’ ReportHitachi Chemical Co., Ltd. and Consolidated Subsidiaries

To the Shareholders and Board of Directors of

Hitachi Chemical Co., Ltd.

We have audited the consolidated balance sheets of Hitachi Chemical Co., Ltd. and consolidated subsidiaries as of March 31, 2002 and

2001 and the related consolidated statements of income, stockholders’ equity and cash flows for each of the three years in the period

ended March 31, 2002, all expressed in yen.

Our audits were made in accordance with auditing standards, procedures and practices generally accepted and applied in Japan and,

accordingly, included such tests of the accounting records and such other auditing procedures as we considered necessary in the

circumstances.

In our opinion, the consolidated financial statements referred to above, expressed in yen, present fairly the consolidated financial posi-

tion of Hitachi Chemical Co., Ltd. and consolidated subsidiaries as of March 31, 2002 and 2001, and the consolidated results of their

operations and their cash flows for each of the three years in the period ended March 31, 2002 in conformity with accounting principles

and practices generally accepted in Japan applied on a consistent basis.

As described in Note 1 to the consolidated financial statements, Hitachi Chemical Co., Ltd. and consolidated subsidiaries had adopted

new accounting standard for retirement benefits, financial instruments and foreign currency transactions in the preparation of their

consolidated financial statements for the year ended March 31, 2001.

The U.S. dollar amounts in the accompanying consolidated financial statements with respect to the year ended March 31, 2002 are

presented solely for the convenience of the reader. Our audit also included the translation of yen amounts into U.S. dollar amounts and,

in our opinion, such translation has been made on the basis described in Note 2 to the consolidated financial statements.

Shin Nihon & Co.

Tokyo, Japan

June 26, 2002

See Note 1 to the consolidated financial statements which explains the basis of preparing the consolidated financial statements of

Hitachi Chemical Co., Ltd. under Japanese accounting principles and practices.

OVERSEAS OFFICES OF

HITACHI CHEMICAL CO., LTD.

Taipei Office

Room No. 606,Chia Hsin Building, 96, Sec. 2,Chung Shan N. Road, Taipei, TaiwanPhone: 886-2-2581-3632Fax: 886-2-2521-7509

Beijing Office

Room No. 1207, Beijing Fortune Building,5 Dong San Huan Bei-Lu, Chao Yang District,Beijing, ChinaPhone: 86-10-6590-8761∼ 2Fax: 86-10-6590-8763

MAJOR OVERSEAS SUBSIDIARIES

AND AFFILIATES

ASIA & OCEANIAMANUFACTURING

Hitachi Chemical (Johor) Sdn. Bhd.Managing Director: Mikio Sonogashira

PLO 458, Jalan Keluli 10,81700 Pasir Gudang, Johor, MalaysiaPhone: 60-7-251-4601Fax: 60-7-251-4626Manufacturing and marketing of copper clad laminates for printed wiring boards,photosensitive dry films, and electricalinsulating varnishes

Hitachi Chemical Asia-Pacific Pte. Ltd.Managing Director: Yoshikazu Shimazaki

No. 3 Killiney Road,#06-02 Winsland House I,Singapore 239519Phone: 65-6836-6988Fax: 65-6836-6788Manufacturing and marketing of printed wiring boards

Import and marketing of electronics- and chemical-related products

Loyang Plant

32 Loyang Way,Singapore 508730Phone: 65-6542-8511Fax: 65-6545-5407

Bedok Plant

20 Bedok South Road,Singapore 469277Phone: 65-6241-9811Fax: 65-6444-6002

Taipei Branch

Room No. 606,Chia Hsin Building, 96, Sec. 2,Chung Shan N. Road, Taipei, TaiwanPhone: 886-2-2581-3632Fax: 886-2-2521-7509

Hsinchu Office

11-7 Floor, No. 295, Sec. 2,Kuang-Fu Road, Hsinchu, TaiwanPhone: 886-3-571-9270Fax: 886-3-571-8986

Hitachi Chemical Co. (Taiwan) Ltd.President: Eiichi Sakimoto

No. 4, 2nd South Road,Kaohsiung Export Processing Zone,Kaohsiung, TaiwanPhone: 886-7-821-7111Fax: 886-7-841-4690Manufacturing and marketing of printed wiring boards

Slitting operation of photosensitive dry films for printed wiring boards

Taoyuan Branch

No.15-6, Hsi-chou chang-hsing chun,Lu-chu shaing Taoyuan, TaiwanPhone: 886-3-322-9421∼ 3Fax: 886-3-321-2328

Hitachi Chemical (Malaysia) Sdn. Bhd.Managing Director: Akihiro Moriya

Plot 501, Prai Industrial Estate,13600 Prai, Penang, MalaysiaPhone: 60-4-390-3977Fax: 60-4-390-3990, -398-0408Manufacturing and marketing of epoxy molding compounds and die bonding paste for semiconductor devices

Bioclone Australia Pty Ltd.Managing Director: Tetsuo Odashiro

71-73 Railway Parade, Marrickville, Sydney, NSW 2204, AustraliaPhone: 61-2-9517-1966Fax: 61-2-9517-2990Manufacturing and marketing of

diagnostic reagents

Hitachi Chemical Electronic Materials(Korea) Co., Ltd.President: Hiroshi Ebihara

211-1, Wau-Ri,Bongdam-Eup, Hwasung-City,Kyonggi-Do, 445-897, KoreaPhone: 82-31-222-8781∼ 3Fax: 82-31-222-8784Slitting operation and marketing of photosensitive dry films for printed wiring boards

Busan Service Center

1116-7, Yongwon-Dong, Jinhae-shi,Kyungnam, 645-510, KoreaPhone: 82-55-552-8781Fax: 82-55-552-8782

PT. Hitachi Chemical ElectronicProducts IndonesiaPresident Director: Yasuhiko Yokoya

JL. Palem 2 Blok DS No. 12,Lippo Cikarang-Bekasi 17550, IndonesiaPhone: 62-21-897-2152Fax: 62-21-897-2155Manufacturing and marketing of printed wiring boards

Hitachi Chemical (Shanghai) Co., Ltd.Managing Director: Akira Yamaji

10F, Yong Hua Building No. 138,Pu Dong Da Dao, Shanghai, ChinaPhone: 86-21-5887-1570Fax: 86-21-5887-1571Slitting operation and marketing of photosensitive dry films for printed wiringboards and anisotropic conductive filmsfor LCDs

Import and export of Hitachi Chemical products

Factory

1/F., 188 He Dan Road,Wai Gao Qiao Free Trade Zone,Shanghai, ChinaPhone: 86-21-5866-0202Fax: 86-21-5866-6657

Hitachi Powdered Metals (Singapore) Pte. Ltd.Managing Director: Yutaka Ikenoue

No. 7 Tuas Avenue 5, Singapore 639333Phone: 65-6861-5633Fax: 65-6861-5635Manufacturing and marketing of sintered bearings and small mechanical parts

Global Network



Xinyi Rihong Plastic Chemical Co., Ltd.Chairman: Pan Xin Ming

No. 220, Industry Road, Xinyi, Guangdong, ChinaPhone: 86-668-888-7766Fax: 86-668-888-2099Manufacturing and marketing of rosin derivatives

Hitachi Chemical AutomotiveProducts (Thailand) Co., Ltd.Managing Director: Fumitaka Nakamura

Siam Eastern Industrial Park,No. 60/11 Moo 3, Tambol Mabyangporn,Amphur Pluakdaeng,Rayong 21140, ThailandPhone: 66-38-891-397Fax: 66-38-891-400, -180Manufacturing and marketing of plastic automotive parts

CSB Battery Co., Ltd.Chairman: Chau-Hai ChenChief Executive Officer: Richard Chen

14 Floor, No. 13, Sec. 2, Pei Tou Road,Pei-Tou, Taipei, TaiwanPhone: 886-2-2893-5100Fax: 886-2-2895-1055Manufacturing and marketing of sealed lead-acid batteries and electric equipment

Thai Sintered Products Co., Ltd.Managing Director: Yasushi Tamura

1/1 Moo 22, Suvintawong Hwy., Saladang Bangnumprieo, Chachoengsao 24000, ThailandPhone: 66-38-593-023Fax: 66-38-593-022Manufacturing and marketing of sintered structural parts

SALES AND SERVICE

Hitachi Chemical Co. (Hong Kong) Ltd.Managing Director: Katsuhide Kii

Room 801, Tsimshatsui Centre, West Wing,66 Mody Road, Tsimshatsui East,Kowloon, Hong KongPhone: 852-2366-9304Fax: 852-2723-3549Import, export, and marketing of electronics- and chemical-related products

Slitting operation and marketing of photosensitive dry films for printed wiringboards

Dong Guan (China) Factory

Phone: 86-769-641-3898Fax: 86-769-641-3878

Tuen Mun (HK) Factory

Phone: 852-2464-7820Fax: 852-2464-7830

U.S.A.MANUFACTURING

Hitachi Chemical Diagnostics, Inc.Chairman: Tetsuo OdashiroPresident and Chief Executive Officer:Brenton Hanlon

630 Clyde Court, Mountain View,CA 94043, U.S.A.Phone: 1-650-961-5501Fax: 1-650-969-2745Manufacturing and marketing of diagnostic reagents

RNAture, Inc.President and Chief Executive Officer:Takayuki Saito

1003 Health Sciences Road West,Irvine, CA 92612, U.S.A.Phone: 1-949-725-2743Fax: 1-949-725-2788Manufacturing and marketing of gene expression enabling products

Tri-Continent Scientific, Inc.President and Chief Operating Officer:Brenton Hanlon

12555 Loma Rica Drive,Grass Valley, CA 95945, U.S.A.Phone: 1-530-273-8888Fax: 1-530-273-2586Manufacturing and marketing of OEM liquid-handling products and instrumentcomponents

Sintering Technologies, Inc.President and Chief Executive Officer: Jun Sakai

1024 Barachel Lane, Greensburg, IN 47240, U.S.A.Phone: 1-812-663-5058Fax: 1-812-663-8118Manufacturing and marketing of sintered structural parts and valve train components

Hitachi Chemical DuPont MicroSystems L.L.C.Chief Executive Officer: Toichi Hamajima

Building 424, Cheesequake Road,Parlin, NJ 08859, U.S.A.Phone: 1-732-613-2175Fax: 1-732-613-2502Manufacturing and marketing of polyimide materials for semiconductordevices and LCDs

RESEARCH

Hitachi Chemical Research Center, Inc.President and Chief Executive Officer:Takayuki Saito

1003 Health Sciences Road West,Irvine, CA 92612, U.S.A.Phone: 1-949-725-2721Fax: 1-949-725-2727R&D in biotechnology

SALES AND SERVICE

Hitachi Chemical Co. America, Ltd.President and Chief Executive Officer:Tadao Kurosawa

10080 North Wolfe Road, Suite SW3-200,Cupertino, CA 95014, U.S.A.Phone: 1-408-873-2200Fax: 1-408-873-2284Import and marketing of electronics-

and chemical-related products

Dallas Sales Office

555 Republic Drive, Suite 200,Plano, TX 75074, U.S.A.Phone: 1-972-516-4209Fax: 1-972-516-4293

EUROPESALES AND SERVICE

Hitachi Chemical Europe GmbHManaging Director: Takeshi Takagi

Immermannstr. 65C,40210 Düsseldorf, F.R. GermanyPhone: 49-211-166730Fax: 49-211-161634Import and marketing of electronics-

and chemical-related productsExport of raw materials for Hitachi

Chemical products

Paris Liaison Office

72 Rue du Cherche-Midi,75006 Paris, FrancePhone: 33-1-454-94418Fax: 33-1-454-83887

Hitachi Chemical DuPont MicroSystems GmbHManaging Director: Marion Weigand

Du Pont Strasse 1,D-61343 Bad Homburg v.d.H., F.R. GermanyPhone: 49-6172-87-1823Fax: 49-6172-87-1824Import and marketing of polyimide materials

for semiconductor devices and LCDs

Presence in Japan

MAJOR DOMESTIC SUBSIDIARIES

AND AFFILIATES

MANUFACTURING

Shin-Kobe Electric Machinery Co., Ltd.President: Hiromu Miyajima

Phone: 81-3-5695-6111Fax: 81-3-5695-6142Manufacturing and marketing of automotive batteries, industrial batteries, electricequipment, golf cart, and plastic products

Hitachi Powdered Metals Co., Ltd.President: Yoshio Hirano

Phone: 81-47-362-1171Fax: 81-47-362-1182Manufacturing and marketing of powdered metal products

Hitachi AIC Inc.President: Koichi Shimoyama

Phone: 81-3-3490-6481Fax: 81-3-3490-6332Manufacturing and marketing of capacitors and printed wiring boards

Hitachi Housetec Co., Ltd.President: Yasuji Nagase

Phone: 81-3-5248-5500Fax: 81-3-5248-5510Manufacturing and marketing of housingequipment and environmental facilities

Japan Brake Industrial Co., Ltd.President: Toru Nakagawa

Phone: 81-426-27-8311Fax: 81-426-27-8310Manufacturing and marketing of friction materials for automobiles, motorcycles,railcars, and construction machines

Hitachi Chemical Automotive Products Co., Ltd.President: Hiroshi Nagare

Phone: 81-947-45-5990Fax: 81-947-42-1414Manufacturing and marketing of plastic automotive parts and molded synthetic resin products

Hitachi Kasei Polymer Co., Ltd.President: Shigeyoshi Tanaka

Phone: 81-3-3294-6421Fax: 81-3-3294-5365Manufacturing and marketing of adhesives and synthetic resin products

Nikka Kaseihin Co., Ltd.President: Toshio Aoyama

Phone: 81-296-44-4980Fax: 81-296-44-4983Manufacturing and marketing of

foamed styrene products

Namie Hitachi Chemical Co., Ltd.President: Yoshinori Oyama


carbon products

Hitachi Chemical Filtec Inc.President: Hideo Sekine


food-wrapping films

Hitachi Chemical Industrial Materials Co., Ltd.President: Takeshi Sumi

Phone: 81-294-22-1313Fax: 81-294-22-1782Manufacturing and marketing of traffic marking materials and molded syntheticresin products

Nippon Denkai, Ltd.President: Hitoshi Yasukawa


electrodeposited copper foil

Hitachi Chemical DuPont MicroSystems, Ltd.President: Toichi Hamajima

Phone: 81-3-3407-9003Fax: 81-3-3407-9037Manufacturing and marketing of polyimide materials for semiconductordevices and LCDs

INSTALLATION, TRADING, DESIGN,

AND SERVICE

Hitachi Kasei Shoji Co., Ltd.President: Takeo Fujisawa

Phone: 81-3-5259-8909Fax: 81-3-3295-8449Marketing of electronics- and chemical-related products

Nikka Equipment & Engineering Co., Ltd.President: Yasuyuki Iguchi

Phone: 81-294-24-2060Fax: 81-294-22-8541Design and manufacturing of facilities and machinery

Hitachi Kasei Business Service Co., Ltd.President: Yutaka Murakawa

Phone: 81-3-3259-6311Fax: 81-3-3259-6320Outsourcing of accounting, training/education and other business services

Leasing of personal computers and other office equipment

Hitachi Chemical Electronics Co., Ltd.President: Kazuyoshi Tsunoda

Phone: 81-296-28-1111Fax: 81-296-28-5927Design and manufacturing of printed wiring boards

Akebono Technos Co., Ltd.President: Junichi Kitagaki

Phone: 81-44-865-8711Fax: 81-44-865-8721Marketing of materials and instruments for printed wiring boards


Profile

Hitachi Chemical strives to achieve sustainable growth and

contribute to a more prosperous society while maintaining

its strong commitment to protecting the environment.

MAXIMIZING THE VALUE OF THE HITACHI CHEMICAL GROUP

Hitachi Chemical aims to be a technologically innovative corporation that provides

optimal solutions to its customers.

Hitachi Chemical Co., Ltd. was established in 1962 and began operations in 1963 with thetransfer of the business assets of the Chemical Products Division of Hitachi, Ltd. Sincethen, based on its accumulated polymer technologies, the company has continuouslyworked to expand its field of operations, developing innovative technologies and newbusiness ventures as a chemical manufacturer engaged in a wide range of areas, includingElectronics-Related Products, Chemical-Related Products, and Housing Equipment andEnvironmental Facilities.

Hitachi Chemical will continue its efforts to develop valuable new products and improveits technologies in three key areas with high growth potential: telecommunications, energy,and life sciences. As a technologically innovative corporation that provides optimalsolutions to its customers, Hitachi Chemical is combining and harmonizing the superiortechnologies it has accumulated over the years in order to maximize the value of theHitachi Chemical Group and contribute to a more prosperous society while maintaining itsstrong commitment to protecting the environment.

CORPORATE PHILOSOPHY

MANAGEMENT POLICY

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

Hitachi Chemical at a Glance . . . . . . . . . . . . . . . . . . . . . . 2

To Our Shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

Maximizing Value:

Technological Innovation for High-Value Solutions

Broad Technology Platform . . . . . . . . . . . . . . . . . . . . . 10

Key R&D Themes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11

Unique Products in Leading-Edge, High-Potential Domains . . . . . . . . . . . . . . . . . . . . . . . 14

Environmental Protection and Social Contribution . . . . 18

Board of Directors and Corporate Auditors . . . . . . . . . . 20

Financial Section

Six-Year Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21

Management’s Discussion and Analysisof Operations and Finances . . . . . . . . . . . . . . . . . . . . 22

Consolidated Balance Sheets . . . . . . . . . . . . . . . . . . . . 28

Consolidated Statements of Income . . . . . . . . . . . . . . 30

Consolidated Statements of Stockholders’ Equity . . 31

Consolidated Statements of Cash Flows . . . . . . . . . . 32

Notes to Consolidated Financial Statements . . . . . . . 33

Independent Auditors’ Report . . . . . . . . . . . . . . . . . . . 47

Global Network . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48

Presence in Japan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50

Corporate Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51


Corporate Data(As of March 31, 2002)

Hitachi Chemical Company, Ltd.

Head Office:

Shinjuku-Mitsui Building,

1-1, Nishi-Shinjuku 2-chome,

Shinjuku-ku, Tokyo 163-0449, Japan

Phone: 81-3-3346-3111

Fax: 81-3-3346-2977

Established:

October 10, 1962

Paid-in Capital:

¥15,284 million

Common Stock:

Authorized: 800,000,000 shares

Issued: 207,251,426 shares

Number of Shareholders:

12,968

Stock Exchange Listings:

Tokyo, Osaka

(Ticker Symbol Number: 4217)

Independent Auditors:

Shin Nihon & Co.

Internet Address:

www.hitachi-chem.co.jp

Number of Employees:

3,459

Transfer Agent and Registrar:

Tokyo Securities Transfer Agent Co., Ltd.

Shin-Marunouchi Building,

5-1, Marunouchi 1-chome, Chiyoda-ku,

Tokyo 100-0005, Japan

Phone: 81-3-3212-4611

Stock Price Range (Tokyo Stock Exchange):

0

500

1,000

1,500

2,000

2,500

3,000

3,500

1997.4~1998.3

1998.4~1999.3

1999.4~2000.3

2000.4~2001.3

2001.4 5 6 7 8 9 10 11 12 2002.1 2 3

(yen)

CONTENTS

Hitachi Chemicalwww.hitachi-chem.co.jp

Annual Report 2002

Technological

Innovation for High-Value SolutionsMaximizing ValueTechnological Innovation


Maximizing ValueTechnological Innovation


Telecommunications

Automobiles & Energy Life Sciences & Amenities

This annual report was printed on 100% recycled paper. Printed in Japan

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Documents

Hitachi Chemical Annual Report - 日立化成株式会社 · Hitachi Chemical Company, Ltd. Head Office: ... U.S. dollar amounts in this annual report are translated from yen,