JSR 21. Targeting Faster Growth. japan synthetic rubber co., ltd. annual report 1997 April 1, 1996 March 31, 1997

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1 japan synthetic rubber co., ltd. annual report 1997 April 1, 1996 March 31, 1997 JSR 21 Targeting Faster Growth JSR launched a mid-term business plan in April 1997 called JSR 21, marking the beginning of a new stage in the company s expansion. JSR 21 calls for the company to leverage globally preeminent technological strengths to build competitive positions in core petrochemicals markets worldwide, while channeling substantial resources into fine chemicals and other growth fields to realize higher earnings.

2 financial highlights Japan Synthetic Rubber Co., Ltd. Years ended March 31 Thousands of Millions of yen U.S. dollars Results for the year Net sales 216, , , , , ,535 $1,841,539 Operating income 9,038 8,162 1,962 5,030 11,127 15, ,035 Income (loss) before income taxes 8,379 8,355 (1,249) 4,269 9,054 13, ,019 Net income (loss) 4,777 4,432 (2,207) 1,908 4,170 9,843 79,315 Capital expenditures 18,144 23,182 14,277 6,125 9,878 15, ,176 Depreciation and amortization 12,778 14,601 15,382 14,539 12,378 11,799 95,077 Year-end financial position Total assets 274, , , , , ,351 2,210,725 Shareholders equity 99, ,219 98,454 99, , , ,485 Yen U.S. dollars Per share of common stock Net income (loss) (8.51) $0.31 Cash dividends Note: U.S. dollar amounts are converted from yen, for convenience only, at the rate of 124.1=$1, the exchange rate prevailing at March 31, profile Japan Synthetic Rubber Co., Ltd. has a leading presence in the synthetic rubber market, boasting the top production capacity in Japan and ranking fourth worldwide. The company has built on this core strength to achieve a solid foothold in other markets as well such as acrylonitrile-butadiene styrene (ABS) plastics and emulsions. In recent years, JSR has channeled resources into positioning fast-growing fine chemicals operations as a second earnings stream. Particular focus is on applying expertise in opto-electronics technology to photoresists for semiconductors, LCD materials and optical fiber coating markets in which the company is quickly gaining ground. To reflect the diversity of its activities and the emergence of new strengths, the company will change its name to JSR Corporation, on the occasion of its 40th anniversary at year s end. contents To Our Shareholders 1 JSR 21 4 At a Glance 6 Review of Operations 7 Six-Year Summary 13 Financial Review 14 Financial Statements 16 Production Profile 26 Company Network 27 Corporate Data JAPAN SYNTHETIC RUBBER CO., LTD.

3 to our shareholders In fiscal 1997, the year ended March 31, 1997, JSR recorded net sales of 228,535 million and net income of 9,843 million both record highs. Backed by two main factors, we were able to achieve a dramatic return to profitability from a net loss in fiscal For several years, we have taken steps to drive down costs and enhance competitiveness in our petrochemicals sector. We have also channeled resources into stronger R&D and upgraded facilities for optical and electronic materials businesses with high growth potential. In light of these results, we elected to raise dividends applicable to the fiscal year by 0.5 to 6.00 per share. It has been our policy for many years to maintain annual dividends at a level over 5.00 per share and, in consideration of business performance, to raise dividends as a way of providing an adequate return to shareholders. To improve results as well as to support returns to shareholders, we will continue to apply retained earnings toward strengthening R&D and investment into growing new business fields from a long-term perspective. Petrochemicals: Lower Costs and Globalization Synthetic Rubber Synthetic rubber accounts for about 40% of total net sales at JSR. Supported by recovery in the automobile industry in Japan, record-setting tire production and continued economic expansion in Southeast Asia, both domestic and export sales volume rose. Standing head and shoulders above the second-largest producer, JSR remains the clear leader in the synthetic rubber industry in Japan and ranks fourth worldwide. Two elements are vital to ensuring continued growth in this business field: lower costs and globalization. We halved the grades of general-purpose synthetic rubber during the year. This led to an improvement in productivity and yielded significant cost reductions. Our overseas expansion efforts are targeting growing demand in neighboring regions of Asia. We took a crucial step in this direction with the February 1996 establishment of a joint venture with Thailand s Bangkok Synthetics Co., Ltd. (BST). The new venture will produce and market emulsion polymerized styrene butadiene rubber (E-SBR) and polybutadiene rubber (BR). We have also expanded our Shanghai Representative Office to upgrade sales capabilities in the Chinese market. We are positioning solution polymerized SBR (S-SBR), used in high-performance and fuel-efficient tires, as a strategic product. Through unified sales and production efforts, we are targeting markets for S-SBR in Europe and North America. Emulsions JSR maintained its leading share of the Japanese market for paper coating latex, the core business of the emulsions segment. We are focusing on expanding the earnings contribution of acrylic emulsions for use in floor polish and construction paint, as well as other new products. ABS Plastics JSR s acrylonitrile-butadiene styrene (ABS) plastics claims the top share of the Japanese market; however, in order to cope with the international competition with other leading U.S., European and Asian firms with larger production JAPAN SYNTHETIC RUBBER CO., LTD. 1.

4 capacities, we formed a joint venture company, Techno Polymer Co., Ltd., with Mitsubishi Chemical Corporation to consolidate our ABS plastics operations in October % interest is held by JSR. The aim of forming the new company is to reestablish a stronger base for global competition and future expansion in the ABS field with production capacity which ranks fourth in the world. We expect the consolidation to contribute to higher productivity and lower costs, thereby solidifying our position in Asia. Fine Chemicals and Other Products: Strong Earnings From Value-Added Products Building on a vast technological base in polymer chemistry, JSR has diversified into fine chemicals for opto-electronics applications. Our successful management efforts in this field have generated highly favorable results. Sales of fine chemicals and other products climbed 23.2% in fiscal This segment accounted for 18.8% of total net sales and 31.0% of total operating income. JSR s fine chemicals operations currently rest on three pillars: photoresists for semiconductor production, liquid crystal display (LCD) materials, and optical fiber coating materials. We are also working to position our ARTON heat-resistant transparent plastic business as a fourth earnings stream. Demand in these sectors is growing rapidly in line with the worldwide spread of information technology. These areas are also demanding greater speed in responding to market changes. JSR is seeking to stay out ahead of growth in the market through the timely launch of nextgeneration products with outstanding characteristics. We are also aiming to increase global market share while developing and commercializing new technologies and products to broaden our business line-up. We are aggressively channeling resources to this segment to build greater revenue-generating potential into the company. Major business activities and capital expenditures during the year were: Photoresists for Semiconductors Photoresist activities are focusing on addressing rapid progress in semiconductor microfabrication technology. We have also finished laying the groundwork for the production of next-generation photoresists for excimer laser applications. A new production base in Sunnyvale, California was completed during the year. This gives us a truly global manufacturing network, based in North America as well as in Japan and Europe. In anticipation of rising demand among Korean, Taiwanese and other Asian makers, we plan to complete a second domestic production base in Kyushu in fall This will expand production capacity in the current fiscal year by more than half, positioning JSR to capture an even greater share of the photoresist market. Liquid Crystal Display Materials Brisk worldwide shipments of notebook PCs and rising emphasis on larger LCD panel sizes sparked a remarkable increase in sales volume for LCD materials. The global LCD market is projected to expand at the rate of over 10% per year in the near term. To meet burgeoning demand, we are raising production capacity and working to seize a greater share of this market. ARTON Heat-Resistant Transparent Plastic JSR is positioning ARTON, a transparent plastic that is characterized by outstanding heat-resistance and optical properties, as a strategic next-generation product. In September 1997, we plan to finish construction of a 1,000- ton annual capacity plant to mass-produce this material, paving the way for the full-scale business promotion of this promising product. JSR 21: Business Plan for the Next Century We inaugurated a mid-term business plan in April 1997, called JSR 21. Centering on the development of technology- 2. JAPAN SYNTHETIC RUBBER CO., LTD.

5 oriented businesses, the plan calls for us to leverage existing technical strengths in concert with forwardlooking R&D to create new business opportunities. JSR 21 sets out a net sales target of more than 300 billion in fiscal 2002, yielding current income of more than 30 billion. We are confident that the plan, by fostering improvements in the technical and human resources that form the basis for our business activities, and supported by business process re-engineering, will help strengthen our corporate foundation. Promoting Responsible Care JSR recognizes that maintaining environmental protection and safety is a top management priority. We are taking a number of actions to improve performance in the areas of safety, health and the environment. We have devised specific management policies governing safety, environmental issues, quality and product safety. At the same time, we have formed a Responsible Care Promotion Department to support the comprehensive, effective implementation of Responsible Care initiatives in all aspects of operations, from research and development to production and sales. New Directions for the Future Four decades ago, this company started out with synthetic rubber as its core business. Responding to ensuing changes in the needs of the market, we succeeded in realigning our operations and expanding into the fine chemicals sector. The current mid-term business plan calls for the further progress of our business structure. To reflect the increasingly diverse nature of our activities, we will change our company name to JSR Corporation at our 40th anniversary on December 10, Amidst mounting competition in our business environment, we have developed a clear vision for JSR that fully anticipates changing realities. Backed by a new corporate identity, we will undertake business activities that will contribute to further growth in revenues to meet the expectations of our shareholders. We appreciate your continued support in our endeavors. July 1997 Eiichi Matsumoto President and Representative Director JAPAN SYNTHETIC RUBBER CO., LTD. 3.

6 JSR 21 Targeting Faster Growth JSR launched a mid-term business plan in April 1997 called JSR 21, marking the beginning of a new stage in the company s expansion. JSR 21 calls for the company to leverage globally preeminent technological strengths to build competitive positions in core petrochemicals markets worldwide, while channeling substantial resources into fine chemicals and other growth fields to realize higher earnings. 1 By fiscal 2002, JSR is aiming to increase net A Growing Company sales significantly to more than 300 billion, at the same time approximately doubling current income to more than 30 billion. The objective is to strengthen the profit structure: by expanding the contribution of value-added fine chemicals operations to net sales, the company is striving to boost the current income to net sales ratio from 6.5% at present to 10.0%. Net Sales ( billion) MAR Current Income ( billion) MAR Net Sales by Segment (%) 4. JAPAN SYNTHETIC RUBBER CO., LTD Synthetic rubber Emulsions 2 JSR is taking steps to re-engineer its business composition, seeking to maintain Fine chemicals & other products Plastics Revenue Diversity earnings in core petrochemicals-related businesses while bringing about solid earnings growth by concentrating investments on fine chemicals businesses. This will entail raising the share of net sales accounted for by fine chemicals and other products, from the current level of 19% to 30%. Fine chemicals and other products have already grown to the point where their operating income is on a par with that of synthetic rubber operations. JSR expects this growth to continue.

7 3 JSR maintains an overwhelming share of many Global Cost- Competitiveness in Petrochemicals petrochemicals-related markets in Japan. To translate these strengths into a position of international competitiveness, the company is taking measures to bring 5A Sound Financial Position The stability of JSR s petrochemicals-related businesses and the solid growth performance of fine chemicals activities have enabled a significant improvement in the company s financial position. JSR 21 builds upon this Operating Margin Synthetic Rubber Emulsions Plastics MAR costs down and expand its share of global markets. Over the past three years, JSR has made major headway in improving profit margins in its petrochemicals operations. Current actions are targeting further reductions in fixed costs through the continued consolidation of synthetic rubber and emulsions product grades. In ABS plastics activities as well, the company is combining product grades and cutting personnel costs to generate cost savings of about 4.0 billion. Fine Chemicals & ( billion) Other Products Sales MAR Amid rapid expansion in fine chemicals markets, JSR draws on its vast expertise Technology Drives Growth in Fine Chemicals in opto-electronics technology to supply customers with outstanding products faster than competitors. This has enabled the company to maintain high shares of markets for photoresists for semiconductors, LCD materials and optical fiber coating materials. Sales in these fields are rising steadily, having grown by about 2.3 times over the past four years. Particularly in the core field of photoresists for semiconductors, JSR is also strengthening its production and marketing presence overseas through local bases; plans call for overseas production capacity to be expanded in the current fiscal year. This will accelerate globalization efforts and better position the company to capture an even greater share of international markets. Return on Equity 4.3 (2.2) MAR momentum, ultimately leading to a consistently high return on equity. Moreover, JSR is tightening its focus on strategic high-growth fields as it steps up investments, thereby raising the efficiency of the balance sheet. (%) (%) JAPAN SYNTHETIC RUBBER CO., LTD. 5.

8 at a glance Synthetic Rubber Synthetic rubber is JSR s core business. In terms of production capacity, the company ranks number-one in Japan and fourth worldwide. Automobile tires are the primary application for this segment s major product groups styrene-butadiene rubber (SBR), polybutadiene rubber (BR) and other generalpurpose synthetic rubbers. Drawing on strengths in polymer technology, JSR s acrylonitrile rubber, ethylene-propylene rubber and other specialty synthetic rubber products find application chiefly in auto parts. 12.1% Emulsions JSR s emulsions segment can be roughly divided into paper materials and specialty chemicals. Paper materials mainly refer to paper coating latex; JSR claims the top share of this market in Japan. Specialty chemicals encompass acrylic emulsion for use in paints, floor polish and adhesives, and other products. 35.9% Plastics This segment s former acrylonitrilebutadiene styrene (ABS) plastics operations are now the domain of subsidiary Techno Polymer Co., Ltd. This subsidiary claims the largest ABS production capacity in Japan and ranks fourth in the world. Building on its technical grounding in ABS, Techno Polymer is pursuing the development of AES weatherresistant plastic, polymer alloys and other distinctive, high-quality plastics. JSR is concentrating on the field of thermoplastic elastomers, which share characteristics of both rubber and plastic. Developed internally, JSR s RB polybutadiene plastic is eliciting particularly strong demand. 33.2% 18.8% Fine Chemicals and Other Products JSR predicts strong growth in this segment, and has already established a dominant presence in many related market sectors. The company is channeling resources into positioning the segment as a core business, on a par with petrochemicals operations. In both domestic and world markets, the company holds a leading position in photoresists for semiconductors, liquid crystal display materials and optical fiber coating materials. Another promising business is ARTON, a heat-resistant transparent plastic, which has continued to post favorable sales growth since its full-fledged market debut in JSR is seeking to boost sales further by developing new applications for this material. 6. JAPAN SYNTHETIC RUBBER CO., LTD.

9 review of operations Synthetic Rubber Market Overview Demand in the overall Japanese synthetic rubber market grew by roughly 5% in fiscal 1997, reflecting several factors. Production of automobile tires, which account for 60% of demand, reached an all-time high during the year. The domestic auto industry also recorded its first year-on-year increase in production volume in six years. Demand in neighboring regions of Asia is expanding. Results At JSR, net sales of synthetic rubber climbed 7.8% to 82,185 million. Several products, including SBR and BR, posted substantial gains in sales volume both in Japan and overseas. Growth in demand is particularly strong for BR for snow tire applications and solution polymerized SBR (S-SBR) for tires that contribute to higher performance and greater fuel-efficiency. Various specialty synthetic rubbers also turned in improved sales volume, including ethylene-propylene rubber and acrylonitrile-butadiene rubber. JSR s synthetic rubber is found even in the tires of F-1 racing vehicles. Racing rubber must be specially configured to enable the tires to stick firmly to road surfaces at speeds of up to 300 kph, and respond precisely to driver control even under harsh conditions. synthetic rubber sales (Billions of yen) mar A sharp rise in the price of raw materials in the second half of the year had a temporary impact on profitability. Despite JSR s actions to streamline the number of product grades and lower distribution costs, this served to limit to 2.1% the increase in operating income, to 5,445 million. To improve profitability, the company implemented a price increase in Japan in March Outlook & Strategies Dramatic growth is not foreseen in the domestic synthetic rubber market. In neighboring Asian countries, however, synthetic rubber accounts for only around 40% of all newly produced rubber pointing to tremendous room for expansion. Movement in this direction will be supported by burgeoning car ownership, which is expected to spark a rapid rise in tire production. Nevertheless, competition with overseas manufacturers will remain fierce. JSR must thus make further progress in cutting costs. At the same time, the company must boost production capacity in anticipation of rising demand in this region and take steps to fortify its line of strategic products. Further reducing costs The world s fourth largest production capacity gives JSR a formidable competitive edge in terms of price. The company is working to take further advantage of its economies of scale to drive down costs. JAPAN SYNTHETIC RUBBER CO., LTD. 7.

10 emulsions sales (Billions of yen) mar Production facilities for BST Elastomers Co., Ltd. in Thailand are scheduled for completion in mid This company plans to manufacture SBR and BR products to meet fast-growing demand in Thailand and in neighboring countries. Expanding market share in Asia outside Japan JSR maintains the largest output capacity in Asia, and is taking measures to capture a greater share of markets in this region by further increasing capacity. To this end, the company in February 1996 forged an alliance with several local partners in Thailand to set up a joint venture to produce SBR and BR. With a 100,000-ton annual capacity, the new plant aims to go on-stream in the first half of Fortifying the strategic product line Used for tires that contribute to higher performance and greater fuelefficiency, S-SBR continues to elicit higher demand: volume shipped in fiscal 1997 was up about 20% over the previous year. To sustain this momentum, JSR is negotiating an agreement with Mexico s Industrias Negromex S.A. de C.V. concerning the production and marketing of S-SBR in North America, and is also targeting the start up of S-SBR production in Europe by the end of Emulsions Market Overview Paper coating latex is the core product of the emulsions segment. Although production volume of coated paper rose 6% in Japan in fiscal 1997, the use of a smaller amount of latex in paper coating processes undermined total demand for this product. Nevertheless, markets for specialty acrylic emulsion products for use in floor polish, construction paint and other applications continued to expand throughout the year. Results Segment sales fell 7.7% to 27,611 million. This was primarily a reflection of the use of less paper coating latex in coating processes, as well as a fall in production levels, due to water shortages, among a certain segment of the customer base. Nonetheless, rigorous costcontainment initiatives enabled a 4.3% increase in operating income to 2,647 million. More paper manufacturers are turning to JSR s paper coating latex for its outstanding adhesiveness and ease of printing. The company boasts the top share of this market in Japan. 8. JAPAN SYNTHETIC RUBBER CO., LTD.

11 Outlook & Strategies Lowering production costs Domestic demand for coated paper is projected to remain solid over the next few years. Starting in fiscal 1997, the nation s leading paper manufacturers are expected to initiate the construction of large-scale coated paper production facilities. JSR is laying the groundwork for capitalizing on this immense sales opportunity. Moreover, through the consolidation and elimination of latex grades and the development of new grades, the company is making headway in bringing down production costs. Increasing the contribution of new businesses Existing products have become a stable source of earnings in specialty chemicals operations. JSR is now shifting its attention to the development of new products with outstanding performance. The company is also actively pursuing new fields outside the housing and construction markets, including information, printing and environment-related applications. By 2002, JSR is working to increase the new business contribution to segment sales to about 20%. Plastics Market Overview Sales volume of ABS and other styrene plastics was generally favorable throughout the year, supported by rising shipments to makers of office equipment and communications devices. Growth in export plastics sales (Billions of yen) mar Demand for ABS plastics is growing among manufacturers of office equipment and telecommunications devices as well as Japanese production subsidiaries in Asia. JSR is building its presence in this field throughout Asia, cutting costs while addressing specific customer demands for property, color, luster and other characteristics. sales was even stronger, as Japanese manufacturers expanded production activities in Asia and other overseas regions. Results In response to mounting demand for ABS in Asia outside Japan, JSR formed a marketing company in Shanghai in August This venture conjoined its marketing efforts with those of similar bases in Singapore, Hong Kong and Thailand. In the field of thermoplastic elastomers, JSR achieved higher sales volume for its unique RB polybutadiene plastic for use in the soles of dress shoes. To meet higher demand, the company raised output capacity for this material by about 20%. Total plastics sales increased 10.5% to 75,810 million. Operating income in the segment jumped 49.9% to 3,236 million. Outlook & Strategies Domestic demand for ABS plastics is expected to remain stable in the current fiscal year, supported by growth in office equipment, communications devices and other industry sectors. Continued expansion in Asia by Japanese manufacturers is projected to fuel higher demand for ABS. Accordingly, JSR is working to capture a greater share of flourishing Asian markets by introducing a series of highly competitive products while continuing to target ways to cut costs. JAPAN SYNTHETIC RUBBER CO., LTD. 9.

12 fine chemicals and other products sales (Billions of yen) mar Produced only by JSR, RB polybutadiene plastic is finding broad application in auto parts, films, tubes and other areas. Recent demand has been strongest for use in the soles of dress shoes. Reducing costs In the process of responding to changes in market demand over the past several years, JSR has come to produce a wide range of ABS product grades. The company is taking steps to consolidate many of these grades. These actions, together with personnel reductions, are projected to yield cost savings of about 4.0 billion. Capturing a greater share of Asian markets Claiming approximately 35% of total domestic production capacity, JSR ranks first in the ABS market in Japan, fourth worldwide, and second in Asia outside Japan, where major demand growth is foreseen. The company is tightly focusing on the enormous latent demand in this region, aiming to capture a larger share of this market. Fine Chemicals and Other Products Market Overview All of this segment s key markets expanded during the year, supported by the widespread dissemination of information and communication technologies. In the semiconductor field, falling prices for 16M DRAMs notwithstanding, demand for photoresists used in semiconductor manufacturing processes rose steadily. Climbing demand for notebook PCs stimulated sales of overcoat, alignment layer, pigment dispersed resists and other LCD materials. The drive to create a nationwide fiber-optic network in Japan fueled demand for optical fiber coating materials. Results Vibrant market activity enabled sales to increase 23.2% over the previous year to 42,929 million. This represents 18.8% of total net sales. Recognized for their outstanding performance and quality, JSR s photoresists for semiconductors maintained their number-two position in the world. A marked increase in the number of notebook PCs shipped together with the push toward larger panel sizes led to a substantial rise in sales of LCD materials. Performance in pigment dispersed resists was especially remarkable. JSR maintains a leading position in the domestic market for such resists, as well as in the markets for overcoat and alignment layer. With a 90% share of the domestic market for optical fiber coating materials, the company enjoyed a sharp rise in sales of this material during the year. In the new field of ARTON heatresistant transparent plastic, expanding applications in optical pickup lenses, CCDs, optical ICs, optical discs, films and other areas are supporting rapid sales gains. This product was developed in fiscal 1997 as a semiconductor encapsulation material. Due to the above factors, operating income roughly trebled to 5,097 million. 10. JAPAN SYNTHETIC RUBBER CO., LTD.

13 Outlook & Strategies JSR is positioning the fine chemicals and other products segment as a second pillar of business. Plans call for its share of net sales to rise to 30% by Photoresists for Semiconductors Projections point to about 10% annual growth in the global semiconductor market over the next several years. In the field of photoresists for semiconductors, rapid progress in microfabrication has accelerated the era of state-of-the-art excimer lasers. JSR is taking initiative over other companies in the development of next-generation resists for this field, drawing on its superior R&D capabilities to expand this business area. Building capacity via a three-pronged production base The company s new California plant was completed in March In Japan, construction of the new plant in Kyushu is scheduled to finish in October Each plant will boost capacity by 125,000 gallons per year. Combined with existing plants in Yokkaichi and in Belgium, these plants should enable about a 50% increase in total capacity in fiscal 1998 compared with fiscal In the field of photoresists for semiconductors, JSR is pursuing 0.20 micron excimer laser microfabrication to capture a substantial share of next-generation 64M and 256M DRAM markets. Strengthening capabilities in excimer resists To better position its semiconductor photoresist operations, JSR is sharpening development technologies in excimer resists to meet needs arising from ongoing progress in microfabrication technologies. LCD Materials The global LCD market is predicted to expand by more than 10% per year over the near term, backed by growth in notebook PCs and increasing incorporation of LCD monitors in desktop PCs. Responding aggressively to growth in global markets In response, JSR will continue to develop new products and applications in emerging fields. JSR s Sunnyvale, California plant was finished in March This plant along with a new plant in Kyushu, slated for completion this fall, will raise the company s total production capacity by about 50%. Used extensively in many types of LCD components, JSR materials consistently rank at the top of their respective markets. JAPAN SYNTHETIC RUBBER CO., LTD. 11.

14 Optical Fiber Coating Materials The Fiber to the Home plan by Japan s Ministry of Posts and Telecommunications to connect all homes and businesses to a nationwide fiber-optic network is projected to more than double optical fiber demand by 2000 compared with present levels. JSR claims a high share of the current market for optical fiber coating materials. The company will seek to secure this position by increasing production volume in line with demand. Expand optical fiber fields JSR will continue to secure a major share of optical fiber markets by drawing on strengths in polymer technologies in terms of the productivity gains of its fast-hardening optical fiber coating materials and the ability of optical fiber materials to transmit data accurately over long distances. New applications The company will also open up new markets by using existing expertise in ultraviolet and electron-beam hardening technologies in high-value-added fields other than optical fibers. Normally found in liquid form, JSR s optical fiber coating materials harden quickly under ultraviolet light. The plan to create a nationwide fiber-optic network in Japan is expected to fuel much higher optical fiber demand. Distinguished by its transparency, heatresistance, and minimal deformation in water, ARTON plastic continues to find new markets in high-fidelity music CDs, optical semiconductor encapsulation materials, lenses, films, fiber-optic cables and other products. ARTON Heat-Resistant Transparent Plastic The superior thermal and optical properties of JSR s distinctive heat-resistant transparent plastic, ARTON, continue to elicit higher demand. The company is developing new applications for this material to sustain growth in sales volume. Developing further applications JSR is striving to develop applications in optical fiber-based activities and take advantage of the shift toward fiber-optic cables to realize lighter weight in automobiles, and to promote ARTON as an alternative to conventional polycarbonate resin in high-capacity DVD-RAMs. Expand production volume JSR has been making ARTON at its pilot plant in Yokkaichi. In September 1997, the company plans to finish building commercial production facilities at its Chiba plant. When completed, the facilities will have an annual output capacity of 1,000 tons. By 2002, the company plans to expand sales volume to 2,000 tons and raise total sales, including finished products, to 5.0 billion. 12. JAPAN SYNTHETIC RUBBER CO., LTD.

15 six-year summary Japan Synthetic Rubber Co., Ltd. Years ended March 31 Thousands of Millions of yen U.S. dollars Results for the year Net sales 216, , , , , ,535 $1,841,539 Costs and expenses 207, , , , , ,770 1,714,504 Operating income 9,038 8,162 1,962 5,030 11,127 15, ,035 Interest and dividend income 3,683 2,561 1,881 1, ,529 12,321 Interest and discount charges 4,727 3,774 3,028 3,045 2,021 1,514 12,200 Income (loss) before income taxes 8,379 8,355 (1,249) 4,269 9,054 13, ,019 Net income (loss) 4,777 4,432 (2,207) 1,908 4,170 9,843 79,315 Capital expenditures 18,144 23,182 14,277 6,125 9,878 15, ,176 Depreciation and amortization 12,778 14,601 15,382 14,539 12,378 11,799 95,077 Year-end financial position Total assets 274, , , , , ,351 2,210,725 Long-term debt due after one year 46,085 38,787 19,970 27,121 22,505 17, ,307 Total liabilities 175, , , , , ,331 1,332,240 Shareholders equity 99, ,219 98,454 99, , , ,485 Current ratio (times) Return on assets (%) (0.9) Return on equity (%) (2.2) Shareholders equity/total assets (%) Per share of common stock (yen and U.S. dollars) Net income (loss) (8.51) Cash dividends Shareholders equity Note: U.S. dollar amounts are converted from yen, for convenience only, at the rate of 124.1=$1, the exchange rate prevailing at March 31, JAPAN SYNTHETIC RUBBER CO., LTD. 13.

16 financial review Japan Synthetic Rubber Co., Ltd. Sales and Income Consolidated net sales rose 9.0% to 228,535 million in fiscal 1997, the year ended March 31, Several factors were behind the increase. In addition to record levels of tire production in Japan during the year, healthy demand in the domestic auto industry and solid exports to Asia outside Japan led to a 7.8% increase in sales of synthetic rubber. JSR s actions to strengthen its business base through the establishment of Techno Polymer Co., Ltd. to handle ABS plastics operations, together with brisk growth in sales of the company s distinctive RB polybutadiene plastic, lifted sales of plastics by 10.5%. Sales of fine chemicals and other products flourished, climbing 23.2%. Pacing results were photoresists for semiconductors and LCD materials, which rose significantly on the back of a vibrant PC market. Driven by the rapid expansion of Japan s national fiber-optic network, optical fiber coating materials posted similarly large sales gains. By region, sales in Japan were up 8.3% to 187,398 million. Overseas sales advanced 12.3% to 41,137 million, due to favorable sales of synthetic rubber and ABS plastics in Asia and higher sales of photoresists in Europe and North America, coupled with the yen s depreciation. Consolidated sales include the results of 11 companies in Japan and five overseas subsidiaries. The cost of sales rose 6.5% to 167,905 million. As a result of strenuous efforts to reduce expenses, however, the ratio of costs of sales to net sales declined 1.7 percentage points. While selling, general and administrative expenses climbed 9.6% to 44,865 million, JSR was able to limit the increase in the ratio of SGA expenses to net sales to 0.1 percentage points. Operating income was up 41.7% to 15,765 million. This was chiefly a reflection of higher sales and rigorous cost-cutting efforts in petrochemicals-related activities together with a nearly three-fold increase in operating income in fine chemicals and other products. The ratio of operating income to net sales in this segment jumped from 4.9% in fiscal 1996 to 11.9%. JSR recorded a gain on the sale of land and an increase in dividend income. Nevertheless, these factors were more than offset by a loss on the liquidation of subsidiary Japan Optical Disk Corporation, a loss on the devaluation of investment securities, and a loss on the write down of inventories. This brought about a 535 million increase in net other expense to 2,608 million. Significantly higher interest and dividend income conjoined with lower interest and discount charges, enabling a return to net interest income from the previous year s net interest expense. Higher operating income fed through into a 45.3% increase in income before income taxes to 13,157 million. The tax effect of the liquidation of Japan Optical Disk caused a reduction in income taxes. Meanwhile, solid performance by affiliate Japan Fine Coatings Co., Ltd. contributed to higher equity in earnings of affiliated companies. As a result of these factors, net income for the year climbed 136.0% to 9,843 million. Return on equity was 9.0%, compared with 4.1% in fiscal Net income per share was 37.94, up from a year earlier. In light of this performance, the company elected to raise cash dividends applicable to the year by 0.50 to Segment Information Millions of yen Fine chemicals Elimination Synthetic and other and/or rubber Emulsions Plastics products Total corporate Consolidated For 1995 Net sales 72,194 29,058 62,591 27, , ,739 Costs and expenses 69,708 27,403 60,829 26, ,665 2, ,709 Operating income 2,486 1,655 1,762 1,171 7,074 (2,044) 5,030 For 1996 Net sales 76,272 29,908 68,637 34, , ,670 Costs and expenses 70,938 27,369 66,478 33, , ,543 Operating income 5,334 2,539 2,159 1,702 11,734 (607) 11,127 For 1997 Net sales 82,185 27,611 75,810 42, , ,535 Costs and expenses 76,740 24,964 72,574 37, , ,770 Operating income 5,445 2,647 3,236 5,097 16,425 (660) 15, JAPAN SYNTHETIC RUBBER CO., LTD.

17 Financial Position Current assets at March 31, 1997 were 152,197 million, a 11,583 million increase from a year earlier. The change was primarily a factor of an increase in inventories associated with the revenue gain, together with higher marketable securities and other accounts receivable. Property, plant and equipment was up 4,852 million to 91,848 million, largely the result of investments to expand capacity for photoresists and other fine chemicals. Current liabilities stood at 124,324 million. The 10,975 increase was mainly due to increases in trade notes and accounts payable and other current liabilities. At year s end, the ratio of total liabilities to total assets was essentially unchanged at 60.3%, compared with 60.9% in the previous fiscal year. Total assets at March 31, 1997 were 274,351 million, a 15,360 million increase from the previous year-end. The asset turnover ratio was up from 0.81 times to 0.83 times in fiscal Cash Flows Net cash provided by operating activities totaled 23,766 million, a 7,528 million increase from the year before. This was largely a factor of the substantial increase in net income, together with a decrease in notes and accounts receivable, while the tax effect of the liquidation of Japan Optical Disk caused a significant decrease in income taxes payable. Investing activities used 19,158 million in cash, a 3,786 million increase from a year earlier. This was primarily due to higher payments for the purchase of property, plant and equipment as the company stepped up capital investments, mostly for photoresist and other fine chemical operations. Net cash used in financing activities fell 9,256 million to 4,463 million. The decrease was principally a factor of smaller repayments of bank loans and long-term debt compared with the previous fiscal year. Net cash provided by operating activities more than covered net cash used in investing and financing activities. Consequently, cash at March 31, 1997 was up 440 million from a year earlier to 5,745 million. net sales by segment (Billions of yen) net income and return on equity (Billions of yen) (%) total assets and shareholders equity (Billions of yen) mar Synthetic rubber Emulsions Plastics Fine chemicals and other products -4-4 mar Net Income Return on Equity 0 mar Total Assets Shareholders Equity JAPAN SYNTHETIC RUBBER CO., LTD. 15.

18 consolidated balance sheets Japan Synthetic Rubber Co., Ltd. March 31, 1996 and 1997 Thousands of U.S. dollars Millions of yen (Note 1) ASSETS Current assets: Cash 5,305 5,745 $ 46,293 Notes and accounts receivable trade 65,342 65, ,871 Notes and accounts receivable trade from unconsolidated subsidiaries and affiliated companies 3,168 2,148 17,309 Marketable securities (Note 3) 22,028 24, ,981 Inventories (Note 4) 31,598 34, ,574 Short-term loans receivable 1,952 3,162 25,479 Accounts receivable other 10,435 15, ,304 Other current assets 1,290 1,963 15,817 Allowance for doubtful accounts (504) (524) (4,222) Total current assets 140, ,197 1,226,406 Property, plant and equipment (Note 5): Buildings and structures 68,547 68, ,668 Machinery and equipment 156, ,793 1,287,615 Tools, furniture and fixtures 24,983 23, ,960 Land 19,057 19, ,019 Construction in progress 5,077 12, , , ,674 2,285,850 Less accumulated depreciation 186, ,826 1,545,737 Net property, plant and equipment 86,996 91, ,113 Intangible assets 1,101 2,004 16,148 Investments and other non-current assets: Investment securities (Notes 3 and 5) 14,264 14, ,465 Investments in unconsolidated subsidiaries and affiliated companies 9,281 7,231 58,268 Long-term loans receivable ,457 Long-term loans receivable from unconsolidated subsidiaries and affiliated companies 3,775 4,481 36,108 Other assets 4,163 3,828 30,846 Allowance for doubtful accounts (1,882) (2,028) (16,342) 30,106 28, ,802 Foreign currency translation adjustments ,256 See accompanying notes. 258, ,351 $2,210, JAPAN SYNTHETIC RUBBER CO., LTD.

19 Thousands of U.S. dollars Millions of yen (Note 1) LIABILITIES AND SHAREHOLDERS EQUITY Current liabilities: Notes and accounts payable trade 34,912 38,057 $ 306,664 Notes and accounts payable trade to unconsolidated subsidiaries and affiliated companies 13,154 13, ,375 Bank loans (Note 5) 34,133 34, ,700 Long-term debt due within one year (Note 5) 4,151 6,915 55,721 Accounts payable other 6,682 9,474 76,342 Income taxes payable (Note 7) 4,887 1,768 14,247 Other current liabilities 15,430 20, ,756 Total current liabilities 113, ,324 1,001,805 Long-term debt due after one year (Note 5) 22,505 17, ,307 Severance and retirement benefits 20,393 20, ,134 Other long-term liabilities 599 1,090 8,783 Minority interest 889 2,260 18,211 Contingent liabilities (Note 9) Shareholders equity (Note 6): Common stock, par value 50 per share; Authorized 700,000,000 shares Issued 259,473,316 shares in ,512,161 shares in ,180 23, ,914 Additional paid-in capital 25,039 25, ,894 Legal reserve 3,018 3,203 25,810 Retained earnings 50,029 57, , , , ,493 Less treasury stock, at cost Total shareholders equity 101, , , , ,351 $2,210,725 JAPAN SYNTHETIC RUBBER CO., LTD. 17.

20 consolidated statements of income Japan Synthetic Rubber Co., Ltd. Years ended March 31, 1995, 1996 and 1997 Thousands of U.S. dollars Millions of yen (Note 1) Net sales (Note 8) 191, , ,535 $1,841,539 Costs and expenses (Note 8): Cost of sales 147, , ,905 1,352,981 Selling, general and administrative expenses (Note 11) 39,603 40,945 44, , , , ,770 1,714,504 Operating income (Note 8) 5,030 11,127 15, ,035 Other income (expense): Interest and dividend income 1, ,529 12,321 Interest and discount charges (3,045) (2,021) (1,514) (12,200) Gain on sale of land 31 1,033 8,324 Reversal of allowance for doubtful accounts 233 Loss on devaluation of securities (581) (15) (942) (7,591) Loss on write down of inventories (625) (5,036) Gain on sale of a consolidated subsidiary Loss on disposal and devaluation of property, plant and equipment (1,152) (976) (7,865) Loss on liquidation of a consolidated subsidiary (1,649) (13,288) Exchange gains (losses) (62) (864) 462 3,723 Other net 1, (761) (2,073) (2,608) (21,016) Income before income taxes 4,269 9,054 13, ,019 Income taxes (Note 7): Current 3,050 5,491 3,918 31,571 Deferred (46) (15) ,004 5,476 3,938 31,732 1,265 3,578 9,219 74,287 Minority interest in net income of consolidated subsidiaries (20) (34) (187) (1,507) Equity in earnings of affiliated companies ,535 Net income 1,908 4,170 9,843 $ 79,315 U.S. dollars Yen (Note 1) Amounts per share of common stock: Net income (Note 6) $0.31 Cash dividends applicable to the year See accompanying notes. 18. JAPAN SYNTHETIC RUBBER CO., LTD.

21 consolidated statements of shareholders equity Japan Synthetic Rubber Co., Ltd. Years ended March 31, 1995, 1996 and 1997 Number of shares of common stock (thousands) Millions of yen Common Additional Legal Retained stock paid-in capital reserve earnings Balance at March 31, ,473 23,180 25,039 2,705 47,538 Cumulative effect of additions of consolidated subsidiaries net 6 (539) Net income 1,908 Cash dividends paid ( 2.50 per share) (648) Bonuses to directors (62) Transfer to legal reserve 100 (100) Foreign currency translation adjustments (28) Balance at March 31, ,473 23,180 25,039 2,811 48,069 Net income 4,170 Cash dividends paid ( 7.50 per share) (1,946) Bonuses to directors (79) Transfer to legal reserve 207 (207) Foreign currency translation adjustments 22 Balance at March 31, ,473 23,180 25,039 3,018 50,029 Cumulative effect of additions of consolidated subsidiaries net 11 (459) Net income 9,843 Cash dividends paid ( 6.00 per share) (1,557) Bonuses to directors (115) Transfer to legal reserve 174 (174) Common stock issued upon conversion of convertible bonds Balance at March 31, ,512 23,196 25,055 3,203 57,567 Thousands of U.S. dollars (Note 1) Common Additional Legal Retained stock paid-in capital reserve earnings Balance at March 31, 1996 $186,785 $201,765 $24,319 $403,134 Cumulative effect of additions of consolidated subsidiaries net 89 (3,699) Net income 79,315 Cash dividends paid ($0.05 per share) (12,546) Bonuses to directors (927) Transfer to legal reserve 1,402 (1,402) Common stock issued upon conversion of convertible bonds Balance at March 31, 1997 $186,914 $201,894 $25,810 $463,875 See accompanying notes. JAPAN SYNTHETIC RUBBER CO., LTD. 19.

22 consolidated statements of cash flows Japan Synthetic Rubber Co., Ltd. Years ended March 31, 1995, 1996 and 1997 Thousands of U.S. dollars Millions of yen (Note 1) Cash flows from operating activities: Net income 1,908 4,170 9,843 $ 79,315 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization (Note 8) 14,539 12,378 11,799 95,077 Reversal of allowance for doubtful accounts (233) Loss on devaluation of securities ,591 Loss on write down of inventories 625 5,036 Gain on sale of a consolidated subsidiary (33) (208) Loss on disposal and devaluation of property, plant and equipment 1, ,865 Gain on sale of land (31) (1,033) (8,324) Loss on liquidation of a consolidated subsidiary 1,649 13,288 Other 438 1,208 1,157 9,323 Changes in assets and liabilities net: Decrease (increase) in notes and accounts receivable (5,405) (11,142) Decrease (increase) in inventories 820 (3,982) (3,137) (25,278) Increase in notes and accounts payable 6,523 9,910 3,196 25,753 Increase (decrease) in income taxes payable 1,477 2,247 (3,124) (25,173) Other (1,134) ,188 Total adjustments 17,573 12,068 13, ,192 Net cash provided by operating activities 19,481 16,238 23, ,507 Cash flows from investing activities: Proceeds from sale of property, plant and equipment ,064 8,574 Payments for purchase of property, plant and equipment (6,125) (9,878) (15,038) (121,176) Proceeds from sale of a consolidated subsidiary Payments for purchase of unconsolidated subsidiaries and affiliated companies (1,498) (557) (4,488) Proceeds from sale (payments for purchase) of securities net (3,248) (10,548) (2,800) (22,563) Decrease (increase) in loans receivable (870) 6,402 (1,015) (8,179) Other (877) (657) (812) (6,544) Net cash used in investing activities (10,975) (15,372) (19,158) (154,376) Cash flows from financing activities: Proceeds from long-term debt 11, ,898 Repayments of bank loans and long-term debt (18,627) (11,926) (4,184) (33,714) Dividends paid to shareholders and bonuses to directors (710) (2,025) (1,672) (13,473) Other ,326 Net cash used in financing activities (7,828) (13,719) (4,463) (35,963) Net increase (decrease) in cash 678 (12,853) 145 1,168 Increase in cash resulting from change in consolidation of subsidiaries ,377 Cash at beginning of year 16,697 18,158 5,305 42,748 Cash at end of year 18,158 5,305 5,745 $ 46,293 Supplemental disclosures of cash flow information: Cash paid during the year for: Interest 3,020 1,994 1,531 $12,337 Income taxes 1,830 3,703 6,292 50,701 See accompanying notes 20. JAPAN SYNTHETIC RUBBER CO., LTD.