Consolidated Financial Highlights Dainippon Ink and Chemicals, Incorporated and Consolidated Subsidiaries Years ended March 31

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2 Dainippon Ink and Chemicals, Incorporated (DIC), is one of the world s leading diversified chemicals companies and the core of the DIC Group, which comprises 213 subsidiaries and affiliates in 59 countries worldwide. From its beginnings as a manufacturer of printing inks, DIC has leveraged its experience and technological expertise to create an extensive and diverse lineup of products, which it supplies to customers in a broad range of industries. In the process, DIC has transformed itself into a prominent force in the global markets for printing inks and organic pigments, among others. Group operations are currently divided into four principal segments: Graphic Arts Materials, Industrial Materials, High Performance and Applied Products, and Electronics and Information Materials. By continuing to develop innovative, highperformance products that respond to market needs, and by cultivating new technologies, products and businesses, DIC is contributing to industry and the communities it serves, as well as increasing its corporate value. In February 2008, DIC will celebrate its 100th anniversary. As it prepares to embark on its second century in business, DIC is stepping up efforts not only to enhance its financial performance, but also to ensure that it does so in a responsible manner. Contents Consolidated Financial Highlights 1 To Our Stockholders 3 At a Glance 6 Review of Operations 7 Research and Development 16 Safety and Environmental Preservation 18 Corporate Governance 20 Financial Section 23 Major Subsidiaries and Affiliates 49 Investor Information and Corporate Data 54 Disclaimer Regarding Forward-Looking Statements Statements contained herein concerning plans and strategies, other expectations or projections about the future, and other statements except for historical statements are forwardlooking statements. These forward-looking statements are subject to uncertainties that could cause actual results to differ materially from such statements. These uncertainties include, but are not limited to, general economic conditions, demand for and price of DIC s products, DIC s ability to continue to develop and market advanced products, and currency exchange rates. DIC disclaims any obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise.

3 Consolidated Financial Highlights Dainippon Ink and Chemicals, Incorporated and Consolidated Subsidiaries Years ended March Net sales 1,015,664 1,004,840 1,002,883 Operating income 51,390 49,487 48,153 Income before income taxes and minority interests 40,193 12,702 30,671 Net income 22,467 5,288 10,595 Property, plant and equipment, net 321, , ,081 Total net assets 232,239 Total stockholders equity 188, ,278 Total assets 991, , ,807 Earnings per share (Note 2) Basic 00, , , Diluted Cash dividends per share applicable to the period (Note 3) Thousands of U.S. dollars (Note 1) Net sales $8,607,322 $8,588,376 $8,571,650 Operating income 435, , ,564 Income before income taxes and minority interests 340, , ,145 Net income 190,398 45,197 90,556 Property, plant and equipment, net 2,720,441 2,738,239 3,009,239 Total net assets 1,968,127 Total stockholders equity 1,608,308 1,233,145 Total assets 8,404,915 8,286,060 8,536,812 U.S. dollars (Note 1) Earnings per share (Note 2) Basic $0, $0, $0, Diluted Cash dividends per share applicable to the period (Note 3) Notes: 1. Yen amounts have been translated, for readers convenience only, at the rate of 118 to US$1, the approximate rate of exchange at March 31, The computation of earnings per share of common stock has been based on the weighted-average number of shares issued and outstanding during each fiscal year. 3. Cash dividends per share have been presented on an accrual basis to correspond to the related earnings. Yen (Billions of yen) Net Sales 1, , ,015.7 Net Income 1, , ,016.8 Total Assets

4 Koji Oe, President 2

5 To Our Stockholders The global economy continued to expand in the fiscal year ended March 31, In the United States, firm growth in capital investment and a satisfactory employment situation supported firm consumer spending. Despite flagging exports, domestic demand supported strong growth in the European economy as an improved employment situation in the region s main countries bolstered consumer spending. In Asia, economic growth in the People s Republic of China (PRC) remained strong, while other countries also continued to see favorable results. The underlying tendency of Japan s economy was toward recovery, bolstered by increases in capital investment and exports. In this environment, DIC (Dainippon Ink and Chemicals, Incorporated, and its group companies) continued to implement stringent cost-cutting measures, as well as establish a pricing structure for its products that appropriately reflects raw materials prices. At the same time, DIC sought to bolster its operating results by implementing measures in line with its current medium-term management plan, Re-DIC 2008, to: ensure the world s lowest cost structure for our inks business; capture markets in high-growth regions; identify customer needs and leverage our expertise as a color professional to respond with products that offer new value; and develop innovative, high-performance materials that contribute to the creation of comfortable spaces. As a consequence, we achieved a substantial improvement in consolidated results compared with the previous fiscal year. Consolidated net sales rose 2.8%, to 1,015.7 billion, as robust economic conditions supported solid sales overall for mainstay printing inks, while favorable conditions for the automotive and electrical and electronics industries contributed to increased sales of epoxy resins, polyphenylene sulfide (PPS) compounds, highperformance optical materials, environment-friendly synthetic resins and other products. Operating income edged up 1.4%, to 51.4 billion, reflecting higher sales, efforts to adjust product prices in response to rising raw materials prices and decisive rationalization measures, although fitness club operation results were unfavorable due to a decline in members of existing clubs. The operating margin rose to 5.1%, from 4.9%. Net income rose sharply, to 22.5 billion, up from 5.3 billion. (The impact of the divestiture of the Reichhold Group in the fiscal year ended March 31, 2006, on the results of that period has been excluded from this presentation.) On all counts, we exceeded the initial estimates published in last year s annual report. Year-end dividends for the period were declared at 3.00 per share, bringing the annual dividend to 5.00 per share, including an interim dividend of This represents an increase of 1.00 per share from the previous fiscal year. Refining Our Approach As its name implies, our current medium-term management plan aims to build on our accomplishments to date to position us on a new growth track for the future. Re-DIC 2008 reflects the priorities outlined in our new management vision, Color and Comfort by Chemistry, which emphasizes leveraging our core technologies and global presence to maximize our expertise in color engineering and high-performance products, thereby enabling us to coexist with the community, contribute to society and earn the trust of our stakeholders. These objectives are encapsulated in two strategic priorities: shape the market for color-related businesses and develop innovative, high-performance materials that create comfortable spaces. Our principal goal in the period under review, the first year of Re-DIC 2008, was to build a solid foundation for future growth by leveraging existing businesses. To this end, we took decisive steps to increase cash generated by stable, core businesses and invest it in promising new businesses, while at the same time further reducing interest-bearing debt, to billion at fiscal yearend, a 43.8 billion reduction from the same point a year earlier. 3

6 Medium-Term Management Plan: Re-DIC 2OO8 Operating income and Net income (Billions of yen) 80.0 Operating margin (%) Actual Estimate Actual Target Estimate Target Billions of yen 2006 (A) 2007 (B) 2007 (B) 2008 (C) 2008 (C) 2009 (D) Net sales 1, , , ,040.0 Operating income Operating margin (%) 4.9% 5.4% 5.1% 5.7% 5.2% 6.3% Net income Interest-bearing debt Debt-to-capitalization ratio (%) 68.8% 68.1% 64.7% 64.5% 61.9% 60.4% 0.0 Change (D A) ppt ppt Average annual change + 1.2% +10.1% ppt A number of key efforts and achievements during the period are featured in the Review of Operations section of this report, which begins on page 7. In the current fiscal year, ending March 31, 2008, our focus has shifted slightly from foundation building toward translating accomplishments into quantifiable growth and enhancing corporate value. We have set forth four key strategies and continue to implement a variety of ambitious initiatives. Achieve significant cost reductions by revamping production processes For general-use products, we are endeavoring to secure a global advantage in terms of price by developing revolutionary production processes. We made the decision to adopt a global mother plant system for inks and are currently considering possible locations. Other efforts include cultivating new markets, placing our products in underdeveloped markets, promoting products from existing production sites and fostering new businesses that transcend traditional boundaries. We are also implementing global purchasing to maximize Group purchasing power and to secure key resources. Expand businesses and enhance income by increasing sales of newly developed products that respond to market needs We are striving to offer solutions that assist our customers in leveraging their unique capabilities, as well as develop distinctive products. To this end, we are fortifying key synthesization and formulation technologies and concentrating on distinctive new products including PPS compounds, polyurethane resins, ultraviolet (UV)-curable materials, liquid crystals (LCs) and epoxy resins that offer innovative solutions to customer needs, in a bid to become the top supplier of these products to growth industries. We are also striving to increase our global market share for high-value-added, high-performance color materials by capitalizing on our proprietary pigment control technologies and improving productivity by applying new technologies to existing products. Capture markets in high-growth regions We are focusing particularly on the PRC, India, Russia and Brazil. These are markets in which we recognize significant latent demand for core products, notably printing inks. Initially, we are stepping up efforts to offer distinctive products that respond to local needs. We are capitalizing on our existing global operations to respond to emerging demand with exports from nearby countries, and will take advantage of rising demand in high-growth regions by offering the distinctive products that customers in these regions seek. Implement decisive, forward-looking measures to promptly realize the competitive potential of next-generation products and businesses We are addressing independent research themes and maximizing key management resources with the aim of growing new businesses to achieve the scale and profitability necessary to support growth for the Group going forward. Specifically, we are working to become the world s most competitive and profitable Graphic 4

7 Arts Materials business, differentiating basic materials, pigments and resin products, and developing innovative manufacturing processes. In line with this strategy, we have reorganized our Corporate R&D Department into three laboratories Color Science, Materials Research and Process Engineering with clearly defined missions. Milestones and New Beginnings Operating conditions for DIC are expected to remain harsh in the fiscal year ending March 31, 2008, owing to unstable prices for crude oil and naphtha, and rising prices for other key raw materials, as well as to increasingly intense competition, particularly in Asian markets, and economic uncertainty, including fears of a slowdown in U.S. economic growth. In this environment, we will continue to focus on applying costcutting measures and establishing a pricing structure for our products that appropriately reflects raw materials prices. In addition, we will continue to implement measures in line with our current medium-term management plan, Re-DIC 2008, with the aim of further improving operating results. On February 15, 2008, we will celebrate our 100th anniversary. While we view this important milestone as a cause for celebration, we are not content to rest on our laurels. The forces of globalization have transformed the priorities of society and what it expects from corporations. As I said in last year s annual report, we recognize that performance for us today, as indeed for our competitors, is defined not only as our ability to generate solid financial results but also as our ability to do so in a responsible manner, by contributing to the lower consumption of nonrenewable resources, sustainable development and the reduction of environmental load, as well as by contributing to society. This recognition is reflected in our Color and Comfort by Chemistry long-term vision, as well as in our establishment of a dedicated CSR Division. Originally a small ink manufacturer, DIC today is a global organization with operations that include printing inks, organic pigments, synthetic resins, high-performance products, and electronics and information materials and a network encompassing 213 subsidiaries and affiliates in 59 countries in other words, a very different company than it was a century ago. For this reason, and because we are already better known both in Japan and overseas as DIC, we will change our name from Dainippon Ink and Chemicals, Incorporated, to DIC Corporation, effective April 1, Under Re-DIC 2008, we pledge to redouble our efforts to ensure a sustainable, profitable future for DIC and to respond to the expectations of stakeholders. In all our efforts, I look forward to your input and support. June 27, 2007 Koji Oe, President 5

8 At a Glance Share of Total Sales % Graphic Arts Materials Printing Inks Printing Supplies Organic Pigments Total Sales (Billions of yen) Operating Income and Operating Margin (Billions of yen) (%) Share of Operating Income % Industrial Materials Synthetic Resins Synthetic Resin-Related Products Additives and Chemicals High Performance and Applied Products Special Compounds and Colorants Building Materials Petrochemical-Related Products Chemical Coatings Pressure-Sensitive Adhesive Materials Plastic Molded Products Electronics and Information Materials Imaging and Reprographic Products Liquid Crystal Materials Engineering Plastics Others This segment encompasses the operations of DIC Group companies that do not meet the criteria of other segments, including the manufacture and sale of health foods and the operation of fitness clubs Note: Total sales are in billions of yen and include intersegment transactions and foreign exchange adjustments. 6

9 Review of Operations Graphic Arts Materials T o p i c s DIC Launches Web World New ADVAN PREMIER On August 1, 2006, DIC commenced sales of Web World New ADVAN PREMIER, the latest product in its mainstay Web World ADVAN series of environment-friendly heatset web offset process inks. The new product came a mere 18 months after the launch of Web World New ADVAN, the popular successor to DIC s popular Web World ADVAN, a market leader since Web offset printers today demand inks that provide not only superb workability but also high quality and a high-grade finish. Web World New ADVAN PREMIER delivers outstanding glossiness, owing to the use of organic pigments and a newly developed resin varnish, which betters wettability, and to adjustments to the production process to improve efficiency. Better dot reproduction and ink laydown, particularly for black, results in a rich jettiness, greatly enhancing the quality of print on paper. Web World New ADVAN PREMIER also offers superb stability on the press, thereby resolving one of the key difficulties of high-definition and frequency-modulated screen printing, and realizes a higher-density, high-impact finish. The Graphic Arts Materials segment encompasses DIC s core printing inks, printing supplies and organic pigments businesses. A global leader in all three product categories, DIC enjoys unsurpassed advantages in terms of scale and diversity. In the fiscal year ended March 31, 2007, the segment reported net sales of billion, an increase of 7.4%, and operating income of 35.8 billion, up 9.5%. Percentage change Results of Operations excluding the impact of foreign currency For the fiscal year ended March 31, 2007 Percentage change fluctuations Net sales billion +7.4% +1.2% Operating income 35.8 billion +9.5% +2.5% Japan For the fiscal year ended March 31, 2007 Percentage change Net sales billion 0.2% Operating income 3.9 billion 4.7% In Japan, sales of organic pigments, especially exports, remained brisk. Offset inks struggled as sales of intermediate colors declined. Gravure inks also struggled as unfavorable weather conditions hampered demand for inks for flexible packaging, although sales for use on tobacco product- and building materials-related applications remained solid. Sales of news inks increased, owing to the increasing popularity of color printing, but shrinking newspaper production runs hampered shipments. Sales of presensitized (PS) plates for computer-to-plate (CTP) applications also rose, although sales of printing-related equipment and printing supplies fell. Efforts to adjust product prices in response to rising raw materials prices bore fruit in the area of gravure inks, but delays in making such adjustments for offset inks hindered operating income. As a consequence, segment net sales edged down 0.2%, to billion, and operating income declined 4.7%, to 3.9 billion. Index of Sales of Principal Products Offset inks Gravure inks News inks Organic pigments for printing inks Organic pigments for coatings and plastics PS plates for CTP applications Percentage change The Americas and Europe excluding the impact of foreign currency For the fiscal year ended March 31, 2007 Percentage change fluctuations Net sales billion +9.4% +2.0% Operating income 27.6 billion +12.9% +4.4% 7

10 DIC continues to reinforce its leading position in the global inks market by developing distinctive, environment-friendly highperformance products and enhancing its global production capabilities, thereby enabling it to respond effectively to the changing and increasingly diverse needs of its customers. T o p i c s Sun Chemical Acquires Packaging Solutions Company During the period under review, Sun Chemical acquired ECG Holdings (UK) Limited from Envoy Communications Group Incorporated, a Canadian design and marketing firm, for approximately 2.8 billion. ECG Holdings (UK) is the holding company of Watt Gilchrist Limited and Parker Williams Design Limited leading providers of comprehensive package design and associated services in Europe, with operations encompassing packaging design, digital mock-ups and reprographics, as well as workflow management system sales, brand design and brand artwork. By integrating Watt Gilchrist s ODIN, a leading digital asset management system, with its own color management system, SMART Color, Sun Chemical aims to establish a distinctive advantage over its competitors in the packaging solutions market. 8 DIC Merges Group Graphic Arts Materials Companies in Asia Pacific Region On August 1, 2006, DIC merged four Graphic Arts Materials segment companies in Malaysia Gunong Printing Ink (M) Sdn Bhd., DIC (Malaysia) Sdn. Bhd., Coates Brothers (Malaysia) Sdn. Bhd. and DIC Holdings (M) Sdn. Bhd. and made the surviving entity, Gunong, a subsidiary of Singapore-based DIC Asia Pacific Pte Ltd. DIC s objective was to streamline capital ties and create an integrated management structure that eliminated duplication and increased management efficiency. On January 1, 2007, DIC realigned its segment operations in Oceania. In Australia, DIC merged DIC Graphics Australia Pty Ltd., DIC Colortron Pty Ltd. and DIC International (Australia) Pty Ltd. The surviving entity, DIC Graphics Australia, was renamed DIC Australia Pty Ltd. In New Zealand, DIC merged DIC International (NZ) Ltd. into DIC Graphics New Zealand Ltd., which was later renamed DIC New Zealand Ltd. These moves were designed to enhance efficiency and facilitate profitability despite slow economic growth.

11 Necessary price increases were achieved for publication, packaging and news inks in Europe and North America. These increases partially countered the significant increases in raw material prices experienced over the past year. Shipments of ink increased in Central and Eastern Europe and in Latin America, reflecting the increase in demand in these regions. Profitability was further enhanced by the continuing consolidation of production facilities and the reduction of overhead in the United States and the United Kingdom. New product introductions for publication and packaging created additional demand and added to profit improvement. As a consequence, net sales in the Americas and Europe rose 9.4%, to billion, and operating income increased 12.9%, to 27.6 billion. Index of Sales of Principal Products Printing inks Organic pigments for coatings and plastics Percentage change Asia and Oceania excluding the impact of foreign currency For the fiscal year ended March 31, 2007 Percentage change fluctuations Net sales 61.7 billion +12.0% +2.9% Operating income 4.3 billion +7.1% +1.4% Principal Products Printing Inks Offset inks Gravure inks News inks Flexo inks Packaging adhesives Printing Supplies Presensitized (PS) plates Printing supplies Printing-related equipment Organic Pigments Organic pigments for printing inks Organic pigments for coatings and plastics DIC produces a wide range of general-use and high-performance organic pigments for inks, coatings, plastics and other applications. By its global production capabilities for these products, DIC is ensuring competitiveness and fortifying its leading global market position. In the PRC, sales of offset inks for high-end packaging applications rose, although gravure inks for flexible packaging and news inks struggled as a result of increasingly intense competition. In Southeast Asia, sales of gravure inks for packaging applications in Thailand were favorable, while the rationalization of production and the integration of production facilities supported a reduction in costs. In India, sales soared, bolstered by robust sales of gravure inks and news inks. These and other factors boosted segment net sales in Asia and Oceania 12.0%, to 61.7 billion, and operating income 7.1%, to 4.3 billion. Index of Sales of Principal Products Offset inks Gravure inks News inks

12 Industrial Materials Products in the Industrial Materials segment include synthetic resins, synthetic resin-related products and additives and chemicals. DIC supplies these products to a wide range of customers, including manufacturers of coatings, building materials, automobiles, electrical and electronics equipment, and textiles. In the period under review, the segment generated net sales of billion, an increase of 7.1%. Nonetheless, operating income declined 10.4%, to 8.5 billion. Percentage change Results of Operations excluding the impact of foreign currency For the fiscal year ended March 31, 2007 Percentage change fluctuations Net sales billion +7.1% +5.3% Operating income 8.5 billion 10.4% 11.1% 10 Japan For the fiscal year ended March 31, 2007 Principal Products Percentage change Net sales billion +5.1% Operating income 8.2 billion 7.8% Sales of epoxy resins were brisk, particularly for use in printed circuit boards and encapsulating materials. In the area of synthetic resins for coatings, sales of environment-friendly products rose sharply, while sales of acrylic resins were strong. Sales of polyurethane resins for use in abrasives increased significantly, while sales of waterborne polyurethane resins and synthetic resins for adhesives were also favorable. In contrast, phenolic resins struggled as sales for housing construction and civil engineering applications flagged. Efforts to adjust prices for alkyl phenols and synthetic resins for coatings began to bear fruit in the second half of the period. Nonetheless, efforts to adjust prices of general-use polyurethane resins, finishing agents and phenolic resins failed to advance, hampering operating income. As a consequence, segment net sales in Japan rose 5.1%, to billion, while operating income declined 7.8%, to 8.2 billion. Synthetic Resins Synthetic resins for inks and coatings, molded products, adhesives and textiles (polyurethane, epoxy, unsaturated polyester, acrylic, phenolic and alkyd resins) Papermaking chemicals Synthetic Resin-Related Products Bathtubs and bath units Synthetic marble Sheet molding compounds Additives and Chemicals Plasticizers Alkyl phenols Metal carboxylates DIC produces a diverse range of superior-quality, high-performance synthetic resins. These products are the choice of customers around the world from major industrial concerns to niche manufacturers in a variety of industries. Index of Sales of Principal Products Synthetic resins for coatings Phenolic resins Polyurethane resins Epoxy resins Alkyl phenols Plasticizers Percentage change Overseas excluding the impact of foreign currency For the fiscal year ended March 31, 2007 Percentage change fluctuations Net sales 35.7 billion +23.3% +11.2% Operating income 0.2 billion 44.2% 52.5% In the PRC, sales of resins for unsaturated polyester were brisk, while the commencement of production at a new plant in Zhangjiagang contributed to an increase in sales of synthetic resins for coatings and of plasticizers. Sales of alkyl phenols were strong in Singapore, as were sales of epoxy resins in Malaysia. In contrast, demand for synthetic resins for coatings used on twowheeled vehicles fell sharply in Indonesia. Owing to such factors, net sales overseas rose 23.3%, to 35.7 billion, while operating income fell 44.2%, to 200 million. Index of Sales of Principal Products Synthetic resins for coatings Unsaturated polyester resins Epoxy resins Alkyl phenols

13 Favored by manufacturers of encapsulation materials, DIC s epoxy resins contribute to improved product performance. In spring 2007, DIC established a mass production system for new environment-friendly, flameretardant epoxy resins for this application. T o p i c s Seiko PMC Commences Production of Papermaking Chemicals in the PRC In May 2006, subsidiary Seiko PMC Corp. began production at a papermaking chemicals plant established at SEIKO PMC (ZHANGJIAGANG) CORPORATION s plant site in Zhangjiagang, Jiangsu Province, in the PRC. The plant produces a variety of chemicals, including strengthening and sizing agents, and has an annual capacity of approximately 30,000 tons. Rapid economic growth in the PRC has triggered a sharp increase in local production of paper and paperboard. With the aim of capturing markets in high-growth regions, a key strategic goal, Seiko PMC will maximize its advanced expertise to enable the production and supply of a diverse range of high-quality papermaking chemicals in the PRC. Deqing DIC Synthetic Resins Doubles Production Capacity for Rosin- Modified Phenolic Resins During the period under review, Deqing DIC Synthetic Resins, Ltd., in the PRC, expanded its production facilities and doubled its annual production capacity for rosin-modified phenolic resins to 20,000 tons. Widely used in printing inks and paints, rosin-modified phenolic resins are crucial to the DIC Group. Deqing DIC Synthetic Resins operates as part of an integrated unit with Zhaoqing DIC Gum Rosins, Ltd., a producer of gum rosin, the principal raw material used in these resins. By doubling its production capacity, Deqing DIC Synthetic Resins has positioned itself to respond to rising demand and enhanced the cost competitiveness of its products, as well as reinforced its position as the DIC Group s principal supply base for these materials. 11

14 High Performance and Applied Products The High Performance and Applied Products segment encompasses a wide range of products, including special compounds and colorants, building materials, petrochemicalrelated products, chemical coatings, pressure-sensitive adhesive materials and plastic molded products. Customers for such products are varied and include companies in such industries as housing construction, civil engineering, food and beverage packaging, and automobile manufacturing. In the fiscal year ended March 31, 2007, segment net sales rose 2.3%, to billion, and operating income advanced 3.3%, to 5.4 billion. Percentage change Results of Operations excluding the impact of foreign currency For the fiscal year ended March 31, 2007 Percentage change fluctuations Net sales billion +2.3% +1.4% Operating income 5.4 billion +3.3% +2.7% Sales of high-performance optical materials were favorable, while sales of high-performance compounds, industrial adhesive tapes and label stock for printing were robust. In the area of building materials, sales of decorative boards and interior housing products were solid, while sales of wood finishes were brisk. Among plastic molded products, sales of automotive and medical products slumped, although sales of plastic pallets were strong. Efforts to adjust prices for polystyrene in response to rising raw materials prices fell short. Principal Products Special Compounds and Colorants Plastic colorants High-performance optical materials High-performance compounds Building Materials Decorative boards Interior housing products Petrochemical-Related Products Polystyrene Coextruded multilayer films Chemical Coatings Can coatings Wood finishes Pressure-Sensitive Adhesive Materials Industrial adhesive tapes Labels Stickers Label stock for printing Plastic Molded Products Plastic pallets Containers Automotive products Index of Sales of Principal Products Plastic colorants High-performance optical materials High-performance compounds Industrial adhesive tapes Can coatings Plastic pallets and containers Decorative boards Polystyrene DIC s high-performance plastic pallets contain recycled materials and offer an attractive, lightweight and environment-friendly alternative to wooden pallets. Demand for these pallets is increasing from manufacturers in a variety of industries. 12

15 T o p i c s DIC Expands Production Capacity for High-Performance Optical Materials In response to rising demand, DIC expanded its production capacity for high-performance optical materials in Japan, installing new facilities and modifying existing facilities at the Tatebayashi and Suita plants. DIC aims to respond to emerging demand by ensuring the quality of new products. As a result, DIC s overall annual domestic production capacity for these materials has increased approximately 1.4 times. Applications for high-performance optical materials are diverse and include such areas as films for printed substrates, flat panel displays, steel lamination and fibers. Demand is expanding sharply for use in reflective films for LCD backlights, owing to rapid growth in the LCD market. DIC Launches ACROS Wall-to-Wall Fitted Furniture System DIC developed and launched ACROS, an attractive and flexible wall-to-wall fitted furniture system targeted at the home renovation market in Japan. ACROS units can be produced in a wide range of sizes, thereby accommodating almost any wall-to-wall space. Five different color and pattern variations facilitate a variety of imaginative combinations. Each unit contains a television stand and a hanger rail, as well as internal drawers and shelves, for a variety of storage options. The rear panel is made of decorative board that has been treated with an odor-eliminating agent. Such systems are commonly manufactured by housing construction firms on an original equipment manufacturer (OEM) basis. With ACROS, DIC offers direct, online consultation with consumers. In addition to offering superb dimensional stability, as well as impact and heat resistance, DIC s pressure-sensitive adhesive tapes are easily removed and recycled. DIC manufactures a broad range of these products that respond to the needs of its customers worldwide. 13

16 Electronics and Information Materials The Electronics and Information Materials segment includes next-generation imaging and reprographic products, LC materials and engineering plastics. These products are supplied to customers in such high-growth areas as electrical and electronics equipment and information technology (IT). In the period under review, the segment reported net sales of 44.5 billion, an increase of 3.2%, and operating income of 5.1 billion, up 23.1%. Percentage change Results of Operations excluding the impact of foreign currency For the fiscal year ended March 31, 2007 Percentage change fluctuations Net sales 44.5 billion +3.2% +0.0% Operating income 5.1 billion +23.1% +22.0% Net sales in this segment increased 3.2%, to 44.5 billion. Sales of PPS compounds for automotive applications remained brisk and sales for electrical, electronics and housing applications increased. Sales of existing LCs were also favorable, while sales of specialty magnetic foils were firm. In contrast, sales of UV-curable coatings and bonding adhesives for optical discs to overseas markets declined as a recovery in the second half was insufficient to counter a struggling performance in the first half of the fiscal year. A number of new LCs were adopted for use by customers and shipments of these products commenced in the second half. Nonetheless, operating income climbed 23.1%, to 5.1 billion. Index of Sales of Principal Products UV-curable coatings and bonding adhesives for optical discs Toners Specialty magnetic foils LC materials PPS compounds and polymers The superb heat and chemical resistance of DIC s PPS polymers continues to bolster demand for these products. DIC is responding by increasing its production capacity, as well as by developing new production processes and next-generation products. 14

17 T o p i c s DIC Expands Production Capacity for PPS Polymers DIC is expanding its production capacity for PPS polymers by building a plant within subsidiary DIC EP Inc. s PPS polymers plant in Kashima, Japan, thereby positioning it to capitalize on soaring market demand. The new plant will employ advanced production technology that accelerates production, thereby greatly enhancing productivity and making DIC the world s most competitive manufacturer of linear PPS polymers. The new technology will also ensure a significant improvement in product quality. Completion of the first phase of construction at the new plant, slated for spring 2008, will add 3,500 tons to DIC s annual production capacity for PPS polymers. The second phase, scheduled for completion in 2012, will add a further 3,500 tons, thereby increasing DIC s total annual capacity for these products to 17,000 tons. DIC eventually plans to increase this to 20,000 tons. Sales efforts continue to focus on PPS alloy compounds a DIC strength for automotive applications, including fuel-efficient, comfortable and environment-friendly hybrid vehicles, a high-growth market. Principal Products Imaging and Reprographic Products Ultraviolet (UV)-curable coatings and bonding adhesives for optical discs Specialty magnetic foils Toners Jet inks Liquid Crystal Materials Liquid crystals (LCs) Engineering Plastics Polphenylene sulfide (PPS) compounds DIC is the world s leading manufacturer of super-twisted nematic (STN) LC materials for cellular phones. In recent years, DIC has been taking steps to establish a significant presence in the global market for thin-film transistor (TFT) LC materials. 15

18 Research and Development Research and Development Costs (Billions of yen) DIC conducts both business-specific and corporate R&D. The R&D departments of DIC Group companies worldwide cooperate to conduct R&D and, in line with the principle of sustainable development, develop environment-friendly technologies and products. Business-specific R&D focuses on individual business areas, namely graphic arts materials, synthetic resins, and high performance and applied products, as well as such high-growth areas as electronics and information materials. Business-specific R&D is the responsibility of divisional technical departments, which endeavor to respond to market needs by developing highly profitable products. Technical administrative departments have been established within each of DIC s four business operations to unify R&D policies as well as maximize synergies among the divisional technical departments. Overseas, Sun Chemical operates research centers in the United States, Germany and the United Kingdom, which, together with DIC, form a cooperative, global R&D network. Corporate R&D is conducted by the Color Science Laboratory, the Materials Research Laboratory and the Process Engineering Laboratory, all of which are based at the Central Research Laboratories, and by the Analysis Centers, which are located in individual plants and the Central Research Laboratories and provide support for R&D efforts. DIC s corporate R&D structure also encompasses the IJ Ink Development Center, a new Companywide ink jet project that brings together ink jet-related resources, previously distributed among multiple divisions, and the DP Development Center, a similar Companywide project established in April 2007 that combines device printing resources. DIC s corporate R&D network also includes facilities overseas: the DIC Berlin GmbH R&D Laboratory, in Germany, and Qingdao DIC Finechemicals Co., Ltd., in the PRC. DIC continues to encourage collaboration between its business-specific and corporate R&D organizations to promote the development of innovative products that respond to increasingly sophisticated market needs, as well as composite products that integrate a myriad of proprietary technologies. At the same time, DIC is collaborating with government bodies and academic institutions in investigative and basic research aimed at discovering the seeds of new products. In the fiscal year ended March 31, 2007, consolidated R&D costs amounted to 15.5 billion, compared with 14.8 billion in the previous period. A further 18.3 billion was allocated to efforts to improve or customize existing products. 16

19 Recent Achievements Graphic Arts Materials In the area of offset inks, DIC focused on enhancing the performance of environment-friendly heatset web offset ink Web World New ADVAN PREMIER and environment-friendly sheetfed offset process ink Space Color Fusion G. In gravure inks, DIC developed Chorus, a shrinkable ink for use on biaxially oriented polystyrene (OPS) and polyethylene terephthalate (PET) labels. Other newly developed products included an ink that has been adapted for use in mass production systems for reverse-printed color filters. In the area of organic pigments, we launched a high-contrast, high-brightness green organic pigment for color filters. Overseas, Sun Chemical introduced the Duratort line of retort lamination inks, which offer premium-quality process printing with either gravure or flexo inks and require no cross linker. Sun Chemical also added to its lineup of water-based inks with the WetFlex series of electron beam (EB)-cured inks, which has already met with considerable success among commercial printers in Germany. On another front, Sun Chemical s UV-cured news inks achieved a top processing speed of 10 meters per second on a full-sized newspaper press a first for UV-cured inks. In the area of electronics materials, Sun Chemical marketed etch resists for solar cells, a product category that is expected to see considerable growth ahead. New products in the area of organic pigments included a range of synthetic micas for use in high-performance coatings that provide greater luster and cleaner shades than natural micas, and SunSHINE SpectraFlex, a line of effect pigments containing aluminum instead of mica, for use in cosmetics. Industrial Materials In the area of synthetic resins, DIC continued to expand its UVcurable resins business, as well as to develop next-generation products though the integration of technologies. In optical films, DIC developed a new polyurethane acrylate that delivers excellent hardness and low warp. Newly developed construction materials included Flat One808, a polyurethane waterproofing material that requires only one day of work time. Also during the period, DIC reviewed the usability of its AFNOS NF/SP-29ON chlorofluorocarbon-free foam insulation spraying system with grade-3 incombustibility on construction sites. In spring 2007, DIC expects to have established a mass production system for environment-friendly, flame-retardant epoxy resins used in encapsulation materials for integrated circuits (ICs), enabling it to commence full-scale operations in this market. High Performance and Applied Products In the area of plastic colorants, DIC developed a new production method for highly dispersible organic pigments, enabling it to create a lineup of highly dispersible pigment base colors for polypropylene and other polyolefin resins. In decorative boards, DIC launched ACRYSTAR G, a line of boards featuring attractive designs, as well as promoted the development of decorative boards that offer high-performance features, including boards containing a visible light-sensitive light photocatalyst, boards that offer a humidity-control function and luminous boards. In pressuresensitive adhesive materials, DIC developed a halogen-free version of its EDR series of light-reflecting double-sided tapes for LCD module adhesives, which offers outstanding release resistance, while sales of DICTAT HC-1100 adhesive film, which delivers unmatched surface hardness and prevents shattering, continued to see expanded use on glass panels for cell phones. Electronics and Information Materials In LC materials, DIC commenced mass production of TFT LC materials, used in television displays, as well as succeeded in producing a demo model of a driven polymer-stabilized LCD. In the area of LC-related sealing materials, DIC marketed an ultrathin light diffusion film that responds to the need to produce everthinner backlight units for next-generation high-speed television displays. In new materials, DIC developed an affordably priced electroconductive paste containing silver-coated copper powder. In engineering plastics, DIC s PPS polymers attracted new orders for use in automotive lamp reflectors. DIC expects to complete construction of a new plant for PPS polymers within its Kashima Plant in Japan that will employ a new production process. 17

20 Safety and Environmental Preservation As a leading multinational manufacturer of fine chemicals, DIC is acutely aware of issues relating to the environment, safety and health (ESH), and of its responsibilities as a corporate citizen. In 1992, we set forth a guiding principle and 10 specific policies regarding ESH issues. These were revised in 1996 to comply with ISO 14001, the International Organization for Standardization s endorsement of environmental management systems. Today, the principle and policies are observed by Group companies everywhere. As a founding member of the Japan Responsible Care Council, established in 1995, DIC endorses the concept of sustainable development and places a high priority on ensuring the environmental soundness of its products and technologies. As a steadfast supporter of Responsible Care, DIC works toward: reducing the environmental impact of its corporate activities lowering energy and resource consumption minimizing the generation of solid waste developing environment-friendly products guaranteeing the comprehensive and safe management of chemical substances realizing a zero occupational accident frequency rate promoting communication with local communities. In the fiscal year ended March 31, 2007, DIC s energy consumption, calculated in volume of crude oil per unit of production, edged up 4.7% from the previous period, to kiloliters. This represented a decline of 10.3% from the fiscal year ended March 31, 1991, well over the target set at that time by the Japan Chemical Industry Association (JCIA) of a 10% reduction over 10 years, that is, by the fiscal year ending March 31, Absolute energy consumption, calculated in volume of crude oil used, was 126,996 kiloliters, up slightly from 122,735 kiloliters in the preceding fiscal year. Emissions of greenhouse gases in DIC s case, primarily carbon dioxide in the period under review totaled 84,021 carbon tons, increased from 76,829 carbon tons in the Energy Consumption (Thousand kiloliters) Greenhouse Gas Emissions (Thousand tons) (Tons) Volume of Industrial Waste Disposed of as Landfill Emission of PRTR Chemicals (Tons) , ,582 3, ,190 3,426 1, ,

21 previous period. Owing to the installation of a wood chip (carbon neutral biomass) boiler at the Kashima plant, DIC expects its emissions of greenhouse gases, i.e., carbon dioxide, to decrease. We have also set a long-term target for reducing the volume of solid waste disposed of as landfill of 95% from the fiscal year ended March 31, 2000, to 370 tons by the fiscal year ending March 31, 2008, our 100th anniversary. Solid waste disposed of in the period under review amounted to 312 tons, a 41.9% decrease from the preceding fiscal year. As well, we continue to improve our techniques for coping with unavoidable solid waste, including reducing surplus contaminated sludge; increasing disposal of sludge by incineration and recycling incinerator dregs into paving materials; and reusing waste plastics to fuel electric power production. As a consequence, our material recycling rate the percentage of waste output from our facilities recycled into usable materials was 23.2%, nearly level with the previous period. To minimize the risk of environmental damage caused by chemical substances, JCIA requires member companies to register and monitor emissions of 481 specified chemicals, in line with the Pollutant Release and Transfer Register (PRTR) system. In the period under review, we used 122 PRTR chemicals, the same as in the previous period, while our emissions of these chemicals amounted to 517 tons, down from 537 tons. The Japanese authorities also require corporations to submit reports on use and release of 354 PRTR chemicals/chemical groups. Our report for the period under review states that we released a total of 194 tons of 88 chemicals. DIC s occupational accident severity rate the number of work hours lost per one thousand hours of labor was as of March 31, 2006, the same as it was a year earlier. Our occupational accident frequency rate the number of accidents and injuries due to occupational accidents per one million hours of labor edged down 0.1 percentage point, to DIC exchanges information with overseas Group companies on ESH issues and responses, and cooperates closely to ensure the consistency and effectiveness of related activities. Sun Chemical conducts ESH programs in full compliance with local laws and regulations and focuses on developing products that use renewable resources and protect the environment, as well as on ensuring its manufacturing facilities operate in a manner that is both environment-friendly and safe. DIC Group companies in Southeast Asia and the PRC strive to maintain high ESH standards. In the period under review, subsidiaries DIC (China) Co., Ltd., and Qingdao DIC Finechemicals prepared the ESH management handbook that will encompass all Group companies in the PRC. In Southeast Asia, Singapore-based DIC Asia Pacific Pte Ltd cooperated with DIC in Japan to prepare an ESH handbook, which it distributed to all companies under its administration. During the period under review, DIC implemented safety audits for 12 subsidiaries in the PRC and four in Thailand. For detailed information on DIC s ESH activities, please see the Responsible Care Report at 19

22 Corporate Governance Basic Policy DIC identifies the purpose of corporate governance as being to ensure effective decision making pertaining to its management policy of achieving sustainable corporate growth and expansion through sound and efficient management, while at the same time guaranteeing the appropriate monitoring and assessment of and motivation for management s execution of business activities. Corporate Governance Organization To promote sound and efficient management, in July 2003 DIC introduced a risk management structure a system of internal controls designed to enhance its compliance program and facilitate the integration of risk management and compliance functions. With the aim of achieving a higher level of trust on the part of stockholders, customers and other stakeholders and enhancing corporate value, on April 1, 2007, DIC established the Corporate Social Responsibility Committee, which is under the direct supervision of the president, as well as a CSR Division, thereby creating a structure to guide related activities. DIC has also included two attorneys as external auditors on its Board of Auditors, thereby ensuring the effectiveness of auditing functions and is confident in its ability as a company with a Board of Auditors to respond to the expectations of stockholders. Other Important Corporate Governance-Related Matters DIC has three publicly listed subsidiaries: Seiko PMC Corp. and Renaissance, Inc., in Japan, and DIC India Ltd. Management decisions for these companies are approved by their respective boards of directors and annual meetings of stockholders. As a stockholder, DIC exercises its voting rights at the annual meetings of stockholders of each of the companies. DIC also receives information on the internal controls of each of the companies, Corporate Governance Organization Annual Meeting of Stockholders Elect Elect Board of Directors (13 members) Representative directors (President, Executive Vice President) Corporate Social Responsibility Committee Executive Committee Audit Independent audit Board of Auditors (Four members, of which two are external) Independent auditors (Deloitte Touche Tohmatsu) Internal Auditing Department CSR Division Internal audit Divisions, headquarters administrative departments, branches, plants Group companies 20

23 Board of Directors and Corporate Auditors (As of June 27, 2007) President Koji Oe Executive Vice President Kazuo Sugie Managing Directors Shunji Ehara Yasumasa Karaki Yoshikazu Aoyagi Directors Tatsuo Kobayashi Masahiko Sagara Masashi Nakajima Haruhiko Ito Toshihiro Sugai Yasufumi Miyazaki Yoshihisa Kawamura Toshio Nakamura Corporate Auditors Yuuichi Koyama Shizuhiko Abe Ken Kurosu* Kenichi Nakano* Koji Oe President Kazuo Sugie Executive Vice President Shunji Ehara Managing Director Yasumasa Karaki Managing Director Yoshikazu Aoyagi Managing Director *External enabling it to make proper evaluations. Hiring procedures for the three companies are independent of DIC s and with the exception of certain directors there are no exchanges of personnel between the companies and DIC. Corporate Governance Organization Board of Directors DIC s Board of Directors consists of 13 members, all of whom are directors of DIC. The Board of Directors is responsible for making decisions on matters stipulated in Japan s Corporate Law, and in DIC s own regulations, as requiring Board-level approval, as well as for monitoring the execution of business activities as reported by the executive officers. In principle, the Board of Directors meets twice monthly to ensure flexibility. Executive Committee The Executive Committee was established to deliberate and resolve issues related to the execution of business activities. In principle, the Executive Committee meets twice monthly. These meetings are also attended by corporate auditors as part of their auditing process. Details of deliberations and resolutions are reported to the Board of Directors. Board of Auditors The Board of Auditors comprises four members, including two external auditors. In principle, the Board of Auditors meets twice monthly. Audit activities consist of attending important meetings, including those of the Board of Directors and the Executive Committee, exchanging opinions with representative directors and collecting business reports from directors, executive officers and other pertinent individuals. Corporate Social Responsibility Committee The newly established Corporate Social Responsibility Committee, which is under the direct supervision of the president, replaces the Risk Management Committee. Committee members include directors designated by the Board of Directors and external legal advisors. An internal organization has also been established to promote CSR that includes the director in charge of CSR and individuals assigned to oversee CSR within individual divisions, departments, plants and DIC Group companies. Independent Auditors DIC has engaged Deloitte Touche Tohmatsu as its independent auditors. DIC strives to ensure an environment that facilitates the accurate disclosure of information and fair auditing. In the fiscal year ended March 31, 2007, DIC was audited by Futomichi Amano, partner, and Mitsuru Hirano, partner. Messrs Amano and Hirano were assisted by 10 qualified public accountants, eight junior certified public accountants and seven other individuals. Internal Control Systems In line with the Japanese Corporate Law, which calls for the establishment of effective internal control systems, in July 2003 DIC established a risk management structure designed to ensure the appropriate management of risks including those related to compliance encountered in the course of its operations. This structure was further refined in April 2007 with the establishment of the Corporate Social Responsibility Committee, which replaced 21