Annual Report 2006 - Hitachi Zosen Corporation · 4 Hitachi Zosen Corporation Annual Report 2006...

Annual Report 2006Year ended March 31, 2006

Contents

1 Financial Highlights2 A Message from the Management4 Medium-term Management Plan8 Hitachi Zosen Group: At a Glance

10 Review of Operations15 Technological Development16 Tackling Environmental Issues Relating to Hitachi Zosen17 Corporate Governance18 Board of Directors and Board of Corporate Auditors19 Financial Section40 Corporate Directory41 Investor Information

Cautionary StatementForward-looking statements are based on informationcurrently available to Hitachi Zosen Corporation.Therefore those forward-looking statements includeunknown risks and uncertainties. Accordingly, you shouldnote that the actual results could differ materially fromthose forward-looking statements. Risks anduncertainties that could influence the ultimate outcomeinclude, but are not limited to the economic conditionssurrounding Hitachi Zosen Corporation and/or exchangerate fluctuation.

Our Mission is to Provide Solutions: Contribute to Economic Developmentand Rising Living Standards around the World and Operate in Harmony withLocal Communities and the Environment

Profile

Hitachi Zosen Corporation is continuously striving to be a leading globalenterprise, by swiftly identifying social needs and using its comprehensivetechnologies. Together with over 100 affiliated companies around theworld, Hitachi Zosen has expanded beyond its traditional base of machin-ery for heavy industry, aiming to become a comprehensive corporationthat engages in production, management and administration systems as a“technology and business innovator” and to provide customers with totalsolutions. As the Company spun off from its shipbuilding and offshoreoperations—the Company’s core businesses since its foundation—inOctober 2002, it now pursues technological advances in such fields asenvironmental preservation, which is the core business, industrial plants,steel structures, construction machinery, industrial machinery and primemovers, as well as electronics and information systems. Hitachi Zosen provides technologies and solutions that contribute toraising living standards and developing economies around the world, aswell as protecting the global environment.

Machinery and ProcessEquipment Group

Steel Structures and ConstructionMachinery Group

Environmental Systems andIndustrial Plants Group

Precision Machinery Group

1 Hitachi Zosen Corporation Annual Report 2006 ■

Millions except forper share amounts and number of employees

Years ended 31st March

2002 2003 2004 2005 2006 2006

Net sales ............................................ ¥ 439,109 ¥ 395,239 ¥ 337,386 ¥ 337,680 ¥ 333,881 $ 2,842

Net income (loss) ............................... 3,460 (35,062) 12,244 1,049 (29,057) (247)

Net income (loss) per share ................ ¥ 3.45 ¥ (69.81) ¥ 24.32 ¥ 2.08 ¥ (56.54) $ (0.48)

As of 31st March

2002 2003 2004 2005 2006 2006

Total assets ........................................ ¥ 638,812 ¥ 470,504 ¥ 400,328 ¥ 416,455 ¥ 390,206 $ 3,322

Shareholders’ equity .......................... 61,852 27,499 42,530 44,448 24,157 206

Number of employees ....................... 10,723 8,014 8,089 8,079 6,941 6,941

Note: 1. U.S. dollar amounts in this annual report are translated from yen, for convenience only, at the rate of ¥117.47=U.S.$1.00. (See Note 2 of the Notes to the Consolidated Financial Statements.)

2. The computation of net income per share is based on the weighted average number of shares outstanding during each period.

Financial HighlightsHitachi Zosen Corporation and consolidated subsidiaries

32 ■ Hitachi Zosen Corporation Annual Report 2006 Hitachi Zosen Corporation Annual Report 2006 ■

Shigetoshi Andoh, Chairman (left), and Minoru Furukawa, President

A Message from the Management

June 2006

Shigetoshi Andoh, Chairman

Minoru Furukawa, President

It is our pleasure to report to our shareholdersand other stakeholders on Hitachi Zosen'sconsolidated performance in fiscal 2006, from1st April 2005 to 31st March 2006.

Overview-Market Environment andEarnings ReportsDuring the fiscal year under review, the Japa-nese economy saw a rise in capital investmentin private sector as well as stable consumerspending after improvements in corporateprofits, and it reached a gradual recovery stage. However, the business environment of theGroup continued to be adverse, hurt by anongoing trend for reduced public spending,prolonged fierce price competition, and risingcosts of materials. Under such circumstances, the Group stroveto secure orders and improve profitability bymaking concerted efforts to reinforce thecompetitiveness of its products and pursueaggressive marketing. However, orders receivedin all segments fell from the previous year, withoverall orders totaling ¥334,664 million on aconsolidated basis. Consolidated net salesremained nearly unchanged from the previousyear, at ¥333,881 million. Operating incomeposted ¥2,766 million on a consolidated basis,about the same as the previous year. Therecording of a reserve for losses on work inprogress for losses for the next fiscal year andonwards reduced the profitability at the envi-ronmental systems and industrial plants sectors,and lower sales harmed the business results atthe steel structure, construction machinery, andlogistics systems divisions. In contrast, profits atthe subsidiaries significantly improved in themachinery and prime movers divisions where

demand comes mainly from the private sector.Consolidated ordinary income surpassed theprevious year but remained at a modest ¥2,092million, still not large enough to be called adramatic upturn in earnings. For this reason, the Group has decided toundertake drastic structural reform to break thedeadlock and ensure completion of our me-dium-term management plan, "Hitz-Innova-tion." In particular, the Company will specializein the engineering business focusing on theenvironmental systems and industrial plantssectors while promoting Group restructuringand reorganization including split-ups, pull-outs, and sell-offs of other businesses, clarifyingthe status of the Company as the operatingholding company that plans and promotesGroup management strategies, and thusreinforcing the Group management. In addi-tion, we have downsized the Company'sorganization to achieve staff levels that areproportionate to the corporate size, disposed ofretirement allowance debt by drastically re-vamping our retirement system, and disposedof impairment loss in real estate to minimizefinancial risk. With the implementation of structuralreforms, including the measures mentionedabove, we recorded a total of ¥14,467 millionas extraordinary income including gains onsales of fixed assets and shares of affiliatedcompanies, and a total of ¥34,030 million asextraordinary loss including losses from termi-nating the retirement benefit system and fromimpairment of fixed assets. As a result, consoli-dated net loss was ¥29,057 million, a heavydeficit. To our extreme regret, the Group had toagain forgo year-end dividends in the fiscalperiod under review. This decision was madebecause of the sizeable deficit in our non-consolidated net income due to the structuralreforms mentioned above. From fiscal 2007onwards, we will continue to make furtherefforts to ensure profit and secure dividendsources by making structural reforms. Hence,we sincerely ask for your kind understanding inthis matter.

Financial ReviewAt the end of the fiscal year under review, totalassets amounted to ¥390,206 million on aconsolidated basis, down ¥26,250 million fromthe previous year, due mainly to a decrease intangible fixed assets from disposal of fixedassets to strengthen the financial position inspite of an increase in cash and cash equiva-lents of ¥30 billion that came from issuing No.5 unsecured convertible bonds with stocksubscription rights. Meanwhile, total liabilities

fell ¥3,678 million to ¥357,687 million due to adecrease in interest-bearing debts following therepayment of short-term loans and long-termdebts. Total shareholders' equity stood at¥24,157 million as of the end of the fiscal term,down ¥20,291 million from the previous period,due to the booking of net loss from implemen-tation of drastic structural reforms, althoughthere were increases in capital and capitalreserve that came from a full conversion of theCompany's yen-denominated convertible bondswith stock subscription rights maturing in 2008. Looking at consolidated cash flows, net cashprovided by operating activities were up¥16,669 million mainly due to an increase inadvance receipt. Net cash provided by investingactivities were up ¥12,227 million mostly due toproceeds from sales of tangible fixed assets andinvestments in securities. Net cash provided byfinancing activities increased ¥309 million. TheCompany raised money by issuing No. 5 unse-cured convertible bonds with stock subscriptionrights, while repaying short-term loans andlong-term debts. As a result, the outstanding balance of cashand cash equivalents stood at ¥68,323 million atthe end of the fiscal term under review, up¥29,791 million. We will effectively utilize thisfund to cover structural reform expenses and tomake proactive investments for business expan-sion. To strengthen its financial position, the Groupis also making great efforts to reduce interest-bearing debts. In consequence, the Group'soutstanding balances of bonds and borrowingstotaled ¥153,968 million at the end of March2006, down ¥18,455 million from a year earlier.We will continue to systematically slash interest-bearing debts by increasing free cash flows,eliminating idle assets, and enhancing thegroup-wide fund management.

Current State of Medium-termManagement Plan "Hitz-Innova-tion"The Group has been expanding operationsaiming to establish a stable business foundationby boosting its "engineering and manufacturingcapacity" focusing on environment-relatedoperations-its core business-and precision-related and IT-related operations-areas wheregreat expansion is anticipated-through ourthree-year medium-term management plan Hitz-Innovation, which started in fiscal 2006. Against this backdrop, as a drastic measure toenhance profitability from fiscal 2007 onwards,in February 2006 the Group decided to specifi-cally expand the four key measures of the plan:(1) conversion of business structures, (2)strengthening corporate governance functions,(3) improving profitability, and (4) reform of

corporate culture. Thus we will ensure the planis thoroughly implemented.

Outlook for PerformanceIn fiscal 2006, the Company suffered a substan-tial net loss resulting from the implementationof drastic structural reforms. However, fromfiscal 2007 onwards these structural reformswill start to pay off, and we will make everyeffort to establish a foundation for stablebusiness revenue by securely executing thespecific expansion measures of the medium-term management plan Hitz-Innovation. In practical terms, we expect the difficultmarket conditions to continue in fiscal 2007with sluggish public works and harsh pricecompetition. At the same time, because of theimpact of withdrawal from and sales of busi-nesses in selective operations that are focusedon certain areas, as well as thorough profit-oriented order receiving activities, we expect toachieve orders of ¥260,000 million on aconsolidated basis, with consolidated net salesof ¥260,000 million. We expect both thesefigures to be lower than those of fiscal 2006.However, with increased profitability achievedthrough implementation of the drastic struc-tural reforms and a thorough cost-cuttingstrategy, the impact from reduced orders andsales will be minimized and we expect toachieve operating income of ¥7,000 million,with ordinary income of ¥2,000 million, andnet income of ¥500 million on a consolidatedbasis. For fiscal 2008 (ending 31st March 2008), thefinal year of the Hitz-Innovation plan, theGroup aims to achieve consolidated orders of¥270,000 million, consolidated net sales of¥270,000 million, consolidated operatingincome of ¥8,000 million, consolidated ordinaryincome of ¥5,000 million, and consolidated netincome of ¥2,000 million, as well as attainingthe goal of reducing the outstanding balance ofconsolidated interest-bearing debts to¥105,000 million. We will do our utmost to further increase ourcorporate value by fulfilling the medium-termmanagement plan Hitz-Innovation, and to win


Current Situation of Medium-termManagement PlanThe Group has been focusing on and promot-ing four measures: (1) conversion of businessstructures, (2) strengthening corporate gover-nance functions, (3) improving profitability, and(4) reform of corporate culture. We have aimedto promote these measures under the basicpolicy of "expanding precision equipment andIT-related areas while placing environment-related operations at the Group's core," basedon our three-year medium-term business planHitz-Innovation, which begins in fiscal 2006. In fiscal 2006, the first year of the medium-term management plan Hitz-Innovation, wewere able to successfully finish laying thegroundwork for reliable completion of the keymeasures. However, the business environmentsurrounding the Group's core operationsremains difficult; order prices keep fallingbecause of the reduced public works expendi-tures and the costs of raw materials remainhigh. Some of our large-scale constructions sawreduced profit margins due to our unsuccessfulattempts to lower costs to profitable levels andour insufficient project management. Under these circumstances, we have decidedto implement more drastic measures for fiscal2007 in order to ensure completion of themedium-term management plan Hitz-Innova-tion, and have settled on specific expansionplans for these four key measures.

Medium-term Management Plan

Overview of Specific ExpansionPlansThe following is an overview of the specificexpansion plans for the key measures of themedium-term management plan.

1.Conversion of Business Structures(1) Strengthening of the Core Engineering

BusinessThe Company will specialize in the engineer-ing business focusing on environment-related plants and sea water desalinationand chemical plants, and establish businessstructures that are well balanced in terms ofpublic and private demand. We will alsoposition the Company as an operatingholding company that plans and promotesmanagerial strategies of the Group. Addi-tionally, the Group will expand its after-salesservices by strategic personnel deploymentM&As, and injecting our business resourcesinto after-sales businesses for the privatesector, mainly the Group companies.

(2) Improving Competitiveness of theManufacturing BusinessesThe Group companies in machinery andprocessing equipment areas such as pressmachinery, prime movers, and plant equip-ment are highly competitive because of theiradvanced manufacturing technology. Weposition the businesses that are developedby these Group companies as "manufactur-ing operations for demand from privatesector" and meet the active demand.

4 ■ Hitachi Zosen Corporation Annual Report 2006


Hitachi Zosen GroupThe Hitachi Zosen Group consists of 98 compa-nies as of the end of March 2006-five of whichare listed on the stock exchange-and deals witha wide range of businesses.

The Company is seeking to establish a systemin which it plans and promotes Hitz Group'smanagerial strategies and the Group compa-nies are integrated, expecting to produce asynergy effect in business. The Company hasbeen withdrawing from or divesting non-coreoperations after reviewing each individualoperation.

● Engineering BusinessesThis category includes Ataka Construction &Engineering and Daiki Engineering in the waterprocessing business, Nichizou Tech and HECEngineering in the solution business for privatedemand. The Group is concentrating its manage-rial resources mainly in environment-related AOM. In addition, Ataka Construction & Engineeringand Daiki Engineering will merge on October 1,2006 to utilize synergy effects in the environ-ment-related fields of water, air and soil.

● Manufacturing Operations forDemand from Private Sector

Amid the current trend of active capital invest-

FY2005 FY2006 FY2007 FY2008Targets Targets

Orders 3,785 3,346 2,600 2,700

Net sales 3,376 3,338 2,600 2,700

Operating income 27 27 70 80

Ordinary income 6 20 20 50

Net income 10 (290) 5 20

Balance of Interest- 1,724 1,539 1,150 1,050bearing Debts

ROIC 1.5% 1.6% 4.7% 5.6%

Consolidated Results (100 million yen)

ments, the Group expects to see higher sales atHitachi Zosen Diesel and Engineering in thelarge diesel prime movers business, HitachiZosen Mechanical in the processing equipmentand atomic energy business, and Hitachi ZosenFukui in the press machinery business.

● Precision Machinery BusinessesThis category includes Hitz Hi-Technology in theFPD- and semiconductor-related device busi-ness, the vacuum valve manufacturer V Techs,and Hitz Sanki Techno in the food-processing,pharmaceutical manufacturing and plasticsheet/film manufacturing equipment and otherbusiness, which separated from the IndustrialMachinery Business Department. The Groupwill proactively inject its managerial resourcesinto these companies to help them expand.

● Manufacturing Operations for Demand from Public SectorThis category includes Hitachi Zosen SteelStructure, a subsidiary that separated from theSteel Structure Business Department, andGeological Technology & Machinery, a companythat consolidated the Construction MachineryBusiness Department. We will enhance theircompetitiveness through intensive cost-cuttingmeasures.

Conversely, the Group positions the steelstructure and construction machinerybusinesses as "manufacturing operationsfor demand from public sector," andconsiders alliances with other companieswhile seeking ways to survive by thoroughlyreducing costs.

(3) Expansion of Precision MachineryOperationsThe Group positions precision machineryoperations such as food-processing machin-ery, pharmaceutical filling equipment,industrial machinery including optical filmmanufacturing equipment, and organicelectroluminescent display manufacturingequipment and IT-related industries as"precision machinery operations," andactively injects our managerial resources asthe Group's expanding business.

(4) Disposal of Non-core AssetsThe Group positions all operations otherthan the four areas of "engineering opera-tions," "manufacturing operations forprivate demand," "manufacturing opera-tions for demand from public sector," and"precision machinery operations" as non-core operations, and as a rule, it plans towithdraw from or sell them to recoup theinvested capital.

2.Strengthening Corporate Governance Functions(1) Rigid Enforcement of Compliance

FunctionsThe top management is strongly determinedto promote compliance management andthe whole Group is currently doing just this.The Group will continue to enforce andstrengthen compliance management,recognizing that observation of laws andcorporate ethics lie at the very foundationsof a company's existence.

(2) Strengthening Project ManagementFunctionsIn addition to thoroughly eliminating risks atthe point an order is received, the Groupwill establish a specialized department tostrengthen the monitoring system that isimplemented once an order has beenreceived, and seeks to minimize the gapbetween the Group's targets and its actualresults by methods such as cutting costs.

3. Improving Profitability(1) Implementation of Structural Reforms

By reorganizing and restructuring the Groupthrough converting business structures as

Net Sales Balance of Interest-bearing Debts

ROICOperating Margin

well as the Company's transformation to anoperating holding company, the Group willensure improved profitability in fiscal 2007and beyond. The Group will do this whilerealizing a level of staffing that is appropri-ate for the company's size by implementingdrastic structural reforms, includingdownsizing the organization in conjunctionwith eliminating financial issues by disposingof retirement benefit debts through majorreform in the retirement benefit system anddisposing of impairment loss in real estate.

(2) Equity FinancingThe Group will appropriate the fund pro-duced by issuance of No. 5 unsecuredconvertible bonds with stock subscriptionrights to structural reform expenses. More-over, we will improve profitability by inject-ing part of the fund into high growth areassuch as precision machinery operations,machinery and processing equipmentoperations, and environment-related after-sales services.

(3) Reducing Interest-bearing DebtsThe Group will cut down on interest pay-ments by accelerating the reduction ofinterest-bearing debts through sales of non-core operation assets (such as affiliates, realestate, etc.) and strengthen financial posi-tion.

4. Reform of Corporate Culture(1) Promoting Corporate Culture Reform

MovementsThe Group will aim to have a corporateculture in which each employee can adapt toa changing environment and promptly solveproblems by spreading the corporate culturereform movements that we have beentackling with the help of outside consult-ants.

(2) Developing an Environment that En-hances MotivationThe Group is establishing a personnel andcompensation system based on merit bysignificantly changing our retirement benefitsystem. The Group is also actively copingwith corporate culture reform throughdeveloping an environment in which em-ployees can enhance their motivationvoluntarily by helping to develop next-generation leaders and promoting personnelexchange among the Group companies.

Numerical TargetsFrom fiscal 2007 onwards, we expect sales todecrease due to the withdrawal from anddivestment of several operations as well as thepromotion of a profit-oriented order-intakepolicy. In contrast, our profitability will improveas a result of the structural reforms and reallo-cation of investment capital, raised by disposingof non-core assets and making investments, tohigh-growth operations. Our numerical targets are as follows:


(Millions of yen)

2006 2005

Net Sales 76,320 71,657

Operating income 2,551 471

Orders 84,825 70,066

43.3%

13.3%

22.9%

12.8%

Sales compositionSegment

Hitachi Zosen Group: At a Glance

EnvironmentalSystems andIndustrial Plants

Steel Structures,ConstructionMachinery andLogistics Systems

Shipbuilding andOffshoreStructures

Machinery andPrime Movers

Other Businesses

Main products and services

Construction, production and sales ofmunicipal refuse incineration facilities,industrial waste processing facilities,energy recovery systems (powergeneration equipment using refuseetc.), biomass systems, water andsludge treatment facilities, soilremediation systems, various plantssuch as seawater desalination plants,denitration catalysts, and nuclearpower-related facilities and equipment.

Manufacture and sale of steel structuressuch as bridges, water gates, steelstacks, and hydraulic steel pipes; marinecivil engineering structures such ascaissons and immersed tunnels; disasterprevention systems, shield tunnelingmachines, mechanical parking systems,logistics systems, and civil engineeringmachinery.

Production and sales of steel-making machinery, forgingmachines and presses, windpower equipment, food &pharmaceuticals-relatedmachinery, plastic-formattingmachinery, prime movers,precision devices (OELDmanufacturing equipment,FPD manufacturing-related

Shipbuilding and maintenance ofvarious ships and offshore structures.

Production and sales ofelectronics and controlsystems, packaged software,information and communica-tions systems, high-precisionpositioning information system(using GPS and GIS), as well as

The Company has reached an agreement with SEOHEE, aconstruction company in Seoul, South Korea, to offer itexpertise on fluidized-bed gasification melting furnacesfor five years starting June 30, 2005. This technologylicensing was made possible because the needs of theCompany, which needed a good business partner in theKorean market, coincided with the needs of SEOHEE,which wished to acquire the related technologies.

The Company received an order for "HEX Car Station."This is a flat, mechanical multi-story parking system inwhich cars make round-trips to enter and exit the parkingarea and which can hold up to 274 automobiles, for"Cross Tower Osaka Bay" (completed in August 2006),the highest condominium apartment building in Japanstanding at over 200 meters, in the Benten-cho areawhich is at the core of the Osaka Bay Area redevelopmentproject. "HEX Car Station" has a number of features andfunctions, including a space-saving design, good safety,and faster loading and unloading of cars achieved bycomputer control.

As of October 1, 2005, the Company merged HitachiZosen Metal Works Co., Ltd. with Fuji Daiichi SeisakushoCo., Ltd. in the precision machinery business group tomake the wholly owned new subsidiary, "Hitz Hi-Technology Corporation" (Maizuru City, Kyoto Prefec-ture). This merger is part of the strategic measures in theexpanding precision machinery business, and is intendedto accelerate the establishment of organizations in thefield of large-scale film manufacturing equipment, a fieldthat will be the core of the business group.

In the shipbuilding and offshore structures businesses,demand for shipbuilding of new ships was strong thanksto the buoyant shipping market. The Company receivedand fulfilled orders for construction of tankers, containerships and bulk carriers among others, and upgraded andrepaired various types of ships during the fiscal yearunder review.

The "GPS tsunami detection system," which the Com-pany has been jointly developing as a group of fourinstitutions among industry, government, and academiaincluding the University of Tokyo Earthquake ResearchInstitute, received the awarding committee special awardin the 34th Japan Industrial Technology Grand Prix in April2005. This award is to publicly honor innovative large-scale technological developments and is also recom-mended by the Minister of Land, Infrastructure andTransport.

(Millions of yen)

2006 2005

Net Sales 44,240 57,932

Operating income (1,407) 86

Orders 30,824 37,031

(Millions of yen)

2006 2005

Net Sales 42,762 45,482

Operating income 1,390 705

Orders 43,987 46,346

(Millions of yen)

2006 2005

Net Sales 144,779 133,480

Operating income (716) 1,038

Orders 128,238 142,286

Topics

(Millions of yen)

2006 2005

Net Sales 25,780 29,129

Operating income 935 480

Orders 46,788 39,237

7.8%

22.8%


Review of Operations

Municipal refuse incineration plant in Odate, AkitaPrefecture

Shinagawa incineration plant of Clean Association of Tokyo 23 Desulfurization Reactor

Environmental Systems andIndustrial Plants

Stoker-type municipal refuse incineration facilities for Chengdu City(rendering of completed building)

OverviewThe Company positions the environment-related business as its core business whilefocusing on the engineering business, includingsea water desalination and chemical plants,and has adopted a fundamental policy tostrengthen its manufacturing and engineeringcapacities. Despite a harsh business environment causedby constrained public spending, sales from thisbusiness increased from the previous year to¥144,779 million in the fiscal year under review.However, operating loss was ¥716 million,mainly due to intensifying competition. Duringthis fiscal period the Company received ordersfor items such as a gasification melting furnaceand a recycling center for the Kimotsuki area,Kagoshima Prefecture; a recycling center forSuo-Oshima town, Yamaguchi Prefecture; andstoker-type municipal refuse incinerationfacilities for Chengdu City, which is theCompany's first order from China. In addition to these orders, in the PFI busi-ness, the long-term operations business andthe AOM business, the Company receivedorders for operations of Mizushima municipalrefuse incineration plant for Kurashiki City,Okayama Prefecture, and operations andmaintenance of Tamura Seibu EnvironmentCenter for Fukushima Prefecture, which are theCompany's sixth and seventh projects-topquality orders in the industry. The Company haswon many orders for such things as operationsof refuse incineration facilities from localgovernments. Projects completed and delivered by theGroup include refuse treatment facilities for the

Shinagawa incineration plant in Clean Associa-tion of Tokyo 23, and the Group has completedrefuse incineration facilities for Odate City,Akita Prefecture, the first intermediate process-ing operation of municipal waste in Japanunder the PFI Promotion Law, and has put theminto operation. In the industrial plant segment, with robustorders, the Group received an order for anacetate tow production plant from a chemicalfirm; and also received orders from domesticand overseas customers for NOx removalequipment and others, which the Groupcompleted and delivered. In addition, with anincreasing trend for new plant constructionprojects mainly in overseas markets, the Grouphas received orders for, completed, and deliv-ered a number of items of plant machinery,such as reactor vessels. Due to higher oil prices, increasing domesticand overseas appetite for petrochemical plantconstruction attributable to expanding large-scale consumer markets such as China, andincreasing appetite for gas plant constructionstemming from revitalized demand for energysources other than oil such as LNG and GTL,the reactor market, in particular, has boomed. Sales from this business were ¥11.3 billion,far exceeding last year figure of ¥8.0 billion.

Looking AheadThe Group has been focusing on the PFI andlong-term operations businesses before its peersin the sector have. In these businesses, in addi-tion to the orders mentioned above, we alsoreceived orders for operations of a gasificationmelting furnace (which only uses refuse-derivedfuel) and a refuse-derived fuel facility fromIshikawa Prefecture; operations of a new munici-pal refuse incineration plant, etc. from TakamatsuCity; and operations of a second municipal refuseincineration plant from Kashiwa City.

Although new construction demand for refuseincineration facilities is weak due to decreasedand suppressed public investments at themoment, we expect reconstruction demand forfacilities equipped with measures againstdioxins will increase in several years. TheCompany is one of the top firms in the field ofrefuse incineration facilities in terms of thenumber of orders received. With a considerabletrack record, superior technologies and busi-ness operations methodologies, we are focus-ing on the environmental solution businessessuch as the PFI business, the long-term opera-tions business, and the AOM business. In Asia including China, South Korea, andSoutheast Asia where demand for refuseincineration facilities has recently been increas-ing every year, we received our first order forrefuse incineration facilities from China, inaddition to six orders from South Korea and fiveorders from Taiwan so far. We also providedSEOHEE, a South Korean construction company,with technology for a fluidized-bed gasificationmelting furnace. In the water treatment-related businesses, theCompany itself has retreated from the human-waste treatment facilities business and theagricultural community sewage treatmentbusiness; it will specialize in fields such asdesalination and water treatment for aquariumsand industrial drainage treatment, where theCompany can use its distinctive water treat-ment technologies that have been nurturedover a long period of time, as well as focusingon biomass-related fields. The Hitz Group willcontinue to expand the varied businessesinvolved in water treatment, including newbusinesses such as a system to make slurry ice.The Group companies Ataka Construction &Engineering and Daiki Engineering will mergeto expand businesses in the diverse environ-ment-related fields of air, water and soil. Based

on its industry-leading technologies and trackrecord in the refuse incineration-related busi-ness, the Group will strive to become the topmaker in the diversified environmental servicebusinesses by strengthening its businessesincluding new businesses and by deployingbusiness strategies to contribute to the curbingof global warming and to the establishment ofa recycling society. In the process equipment segment, which iscontinuing to see a favorable market environ-ment this period, the reactor business of HitachiZosen Mechanical is expected to win moreorders than last year. In addition, starting nextfiscal period, Hitachi Zosen Mechanical will takeover the nuclear power-related facilities businessfrom Hitachi Zosen Diesel and Engineering, andwill begin operations as a general pressure vesselmanufacturer, adding casks to its product lineup. With regard to the nuclear power-relatedfacilities market, while nuclear power generationhas been gaining ground again worldwide,orders particularly from the United States havebeen booming, and include orders for 80canisters and 3 transfercasks. Furthermore, theJapanese market is alsoexpected to becomerevitalized in the nextperiod, and the strongdemand is forecast tocontinue for some time. Looking at overseas, theGroup has consecutivelyreceived orders from adomestic engineeringcompany for super largereactors of over 1,000 tons for LNG plants forQatar Gas; and there have been strong ordersfor deep desulphurization reactors for NorthAmerica.

Storage Cask


Shield tunneling machine for Bosphorus Straits

Steel Structures, Construction Machineryand Logistics Systems

Review of Operations

Machinery and Prime Movers

OverviewIn sluggish business environment with lingeringslow public spending and related private-sectorcapital investment, sales from this businesswere ¥44,240 million and operation loss was¥1,407 million despite our striving effort toexpand business operation. As for Steel Structures business, the Groupreceived orders for bridges, smokestacks andimmersed tunnels etc. from our clients: Ministryof Land, Infrastructure and Transportation, localgovernments, power companies, and construc-tion companies etc. The major bridge construc-tion orders include Showa section for NagoyaExpressway Public Corporation and the secondportion of the Third Expressway for HiroshimaExpressway Public Corporation as well as theJiccho viaduct for the Ministry of Land, Infra-structure and Transportation, Shikoku RegionalDevelopment Bureau. As to hydraulic gatesector, we secured water discharging damfacilities for Obara Dam for Ministry of Land,Infrastructure and Transportation, ChugokuRegional Development Bureau. During the year under review, we handedover various bridges including the Daishi Bridgefor Kawasaki City and other steel structureproducts mentioned as above. The construction machinery segment alsoexperienced a harsh operating environment dueto decreasing domestic demand for shields withthe decrease in domestic public works as wellas the construction cost reduction policy, butorders from overseas remained relatively stable.

In this situation, the Group received ordersfor and delivered various types of shield tunnel-ing machines for local governments andconstruction companies, including orders forshield tunneling machines in Singapore, SouthKorea and Taiwan, as well as delivery of thesemachines for tunnel construction for therailway tunnel under the Bosphorus Straits inTurkey.

Looking AheadIn the steel structures industry, as part of theGroup's business structural reforms, as of April1, 2006 the Company transferred its operationsto Hitachi Zosen Steel Structures Corporation,its 100% owned subsidiary company, to allowthe Company's business to survive severesituation. Thus we have established furthercompetitive business structure with productionsystem suitable for current market scale and thelow-cost system. Also in the parking structure equipmentbusiness, we decided to implement businessintegration with non-Group companies. As ofApril 1, 2006, the Company transferred itsparking structure equipment business to NHParking Systems Co., Ltd., and at the sametime, transferred 86% of its stake in NHParking Systems to Nippon Conveyor Co., Ltd.,a company with which it has been advancingbusiness cooperation. In the construction machinery business, theGroup will continue to develop its technologiescorresponding to the planned domestic large-scale tunnel construction work while strength-ening and expanding the shield businessstructure overseas.

OverviewOrders for machinery and prime moverscontinued to see severe price competition,despite high demand for marine prime moversdue to increasing demand for new ships and arecovery in private-sector capital spending inrelation to industrial machinery. Consequently,sales were up from the previous period to¥76,320 million and operating income was¥2,551 million. As for machinery, the Group received ordersfor and delivered various kinds of plasticextruding and forming equipment for domesticand overseas companies such as chemicalcompanies, and various kinds of filling equip-ment for domestic food companies and form-fill-sealing equipment for transfusion forpharmaceutical companies. In the field of precision machinery, the Groupis promoting the supply of products andimmediately responding to market changes bytaking full advantage of synergistic effectsbetween Group companies. The Group re-ceived orders for and delivered experimentingequipment for organic electro-luminescenceproduction and vacuum machinery, laser high-precision processing machinery, Nano-Stone

grinding equipmentfor glass, andhydrogen genera-tors. In the primemovers field, wereceived orders forand delivered gas-engine powergenerating facilitiesand diesel powergenerating facilitiesfor companies in the

food and auto industries. In addition, HitachiZosen Diesel and Engineering received ordersfor and delivered a number of marine primemovers both at home and abroad, includingelectronically controlled marine diesel enginesfor domestic shipyards.

Looking AheadThis April, the Company spun off its industrialmachinery business for food/medical productionequipment and plastic sheet/film manufacturingequipment to form Hitz Sanki Techno Corpora-tion. In the plastic extruding and forming segment,the Company will further differentiate itselffrom other companies by becoming multifunc-tional and by increasing productivity,recyclability, and maintainability while goinginto the field of optical films using the newlydeveloped metal elastic roll. Concurrently, wewill expand businesses by expanding ourperipheral services and products and therebyattracting new customers. Sales in the precision machinery group havealready amounted to approximately ¥12,000million in this business that includes flat-paneldisplays, precision machine equipment such assemiconductors, and vacuum and film manufac-turing equipment. In the field of precisionmachinery, the Company is seeking to integratetechnologies and human resources with groupcompanies: Hitz Hi-Technology Corporationwhich deals with casting/forging products, flatpanel displays, semiconductors, vacuum ma-chinery and other equipment; V Tex Corpora-tion which produces vacuum valves and equip-ment; and Takei Electric Industries Co., Ltd.which manufactures mechatronics machineryand system controllers. In this way we willmaximize the Group's synergistic effects, andenhance development of organic EL filmmanufacturing equipment, laser-related pro-cessing systems, hydrogen generators and otherproducts.Electronically Controlled ME Engine

Optical sheet manufacturing equipment Automatic FPD Transfer systemThe Daishi Bridge


Shipbuilding andOffshore Structures

“CONSTANTIN S”

Technological DevelopmentReview of Operations

Technological development results of theGroup companies include: V TEX's slit-typevacuum valves for OEL, Geological Technology& Machinery's exchange technology of cutterbits for shield tunneling machines, M Tech'sdevice to detect foreign objects in food byimage processing, Hitz Hi-Technology's devel-opment of a new model of lapping surfacetable, and an FPD glass substrate reconstructiontechnique (a technique for recycling defectiveglass substrate). In particular, the device todetect foreign objects in food by image pro-cessing and the FPD glass substrate reconstruc-tion technique will be put to practical useduring fiscal 2007. Of all the development themes positioned asalliances or scientific links with outside compa-nies, the most successful results are the manu-facturing technology of vertically oriented CNTand the improved performance of FC electrodeassembly using CNT. Apart from these product developments, wehold 14 professional skill courses for designengineers and production skill courses (welding,painting, and machining courses in Kanagawa,Innoshima, Mukaishima, and Sakai) in order toadvance fundamental technologies and to passon industrial technologies directlylinked to manufacturing. We have improved existingproducts line through establishing:a waste feed stabilizing control forgasification melting furnaces; flyash treatment technology; andclarification of behavior in plasmaash melting furnaces. In addition,we implemented an optimizationtest for fire grates and fire-resistantmaterial for stoker furnaces on anactual plant and conducted a CD trial design ofa superheater. Similarly, for steel structure products, we haveestablished a grade separation constructionmethod (multiple-pile method) that washastened to completion, and verified its durabil-ity. Also, our proprietary composite floor slabsfor roads have been registered as a standard ofthe Japan Bridge Association. In seawater desalination technology, weidentified the behavior of falling liquid filmsand improved the seawater brine hydraulicnozzle as part of MED-method desalinationtechnology.

The Group has implemented well over ahundred development themes and obtainedresults as intended. Environment-relatedthemes, our core business, account for 29%and new businesses account for 23% of them.

Major development resultsThe development results which contributedtoward orders were laser precision processingequipment for solar cells (three projects),optical film forming technology for FPD (fiveorders for UF rolls and new reducers), waterelectrolysis equipment using solar and windpower generation, cluster film-forming (or-dered by AMPI), improved manufacturingtechnology using laser welding, GPS wave andtsunami gauges, MAS method of compositeconstruction designed for soft ground, and atunneling machine for connecting sections inroad tunnels (widening tail seals). The distinguished development results whichcontributed to cost reduction and improvedreliability included an in-core analysis techniquefor plasma ash melting furnaces, an earth-quake-resistant design for multistory parkinggarages, reduced material costs for wasteincineration plants, practical application ofplastic fluff burners (Eco Burners), gasificationmelting furnace CO reduction technique,higher G rate (1,400 t/h•m) of MSF sea waterdesalination equipment, and tube plate mate-rial. Development results in new fields, that is, theresults that can be developed further in fiscal2006 and beyond, are the dehydration technol-ogy of ethanol, manufacturing method ofbioethanol, development of CCNS applicationproducts, optical non-contact stress testingdevices, hydrogen power generating systems,depurating method for soil polluted byorganoarsenic, and technology to detectmisfiring in gas engines. In the development oforganic electroluminescence, we designed andmanufactured a deposition apparatus that canproduce evaporated films with a thickness thatdeviates by only 1% and has a material yield ofover 30%.

In the shipbuilding and offshorestructures businesses, demand forconstruction of new ships wasstrong thanks to the buoyantshipping market. Sales in thissegment were ¥25,780 million andoperating income was ¥935 millionin the year under review. Against this background, theCompany received orders for anddelivered construction of tankers,container ships, bulk carriers andother items, as well as upgradingand repairing various types of shipsduring the fiscal year under review. In October 2002, the Companyspun off its shipbuilding division toform Universal Shipbuilding Corpo-ration (the Company's equity-method affiliate). We have sincebeen running that business mainlythrough Naikai Zosen Corporation.However, as the Company divestedpart of its shares in Naikai Zosen atthe end of February 2006, it has alsobecome the Company's equity-method affiliate.

Other Businesses

Sales from the other divisions during theyear under review were ¥42,762 millionand operating income was ¥1,390million. In the other divisions, the Companycontinued to supply wholesale electricityfor power companies, and expandedbusinesses in the electronics and controlsystem business, the high-precisionpositioning information service businesssuch as GPS data distribution serviceand the information provider servicethrough the Internet among others. The Company also received orders fornondestructive inspection, measurementand diagnosis businesses of steelstructures, concrete structures andvarious types of plant piping system;electric and instrumentation engineeringof various machinery and facilities; aswell as parking space guidance andsurveillance systems, etc.

NetSurv3000

Hitachi Zosen Ibaraki Power Station Corporation

High-precision positioningsystem

Organic EL display manufacturing equipment

Analytical result ofrefuse incinerator


Medium- and long-term targets

Item Purpose Targets Fiscal year Result forachieving fiscal 2005targets

Reduction of Suppression of Reduce energy 2010 Reduced byenergy carbon dioxide consumption rate 2%consumption emission by 6% compared

with fiscal 1990levels

Suppression of Reduce total waste 2010 Increased byReduction of waste discharge discharge rate by 37%waste 10% from fiscalmaterials 2000 levels

Suppression of Reduce total landfill 2010 Reduced bylandfill disposal disposal quantity by 25%quantity 40% compared with

fiscal 1999 levels

The Company is pushing ahead to establish aframework that enables efficient corporategovernance, as it recognizes that enhancementof corporate governance is one of its toppriority management issues to ensure corporatesoundness, transparency and efficiency, in-crease corporate value, and coexist with thesociety as a good corporate citizen. The Company has established the board ofdirectors and the management strategiescommittee as the managerial decision-makingbodies. Moreover, the Company is striving tostrengthen corporate governance functions andsupervising functions under group manage-ment. For that purpose, the top managementpersonnel of the consolidated subsidiaries havealso served as the Company's directors sincethe Company became the operating holdingcompany in converting business structures. Wehave ten directors as of July 2006. The board of directors oversees operationsand makes decisions on not only statutorymatters but also basic management policiesand other important matters. The managementstrategies committee, which is comprised ofdirectors and top executives, deliberates onbasic strategies and other central issues relatingto management. We are making appropriatemanagement decisions under this framework. Directors and executive officers are engagedin execution of operations, in line with basicmanagement strategies that the board andmanagement strategies committee havedecided up. These directors and executiveofficers report to the board and other bodies,as needed, about how operations are beingexecuted, and are supervised by the board. As of July 2006, the board of corporateauditors is comprised of one full-time corporateauditor and three part-time corporate auditors(two of whom are external), making a total offour persons. Corporate auditors always attendmeetings of the board of directors and otherimportant in-house meetings to fully overseethe execution of operations by directors andothers. These corporate auditors carry outmanagement audits in a neutral and objectivemanner. In addition to the corporate auditors(board of corporate auditors), we also instituted

a department specializing in internal audit. Thisdepartment is tasked with continuously imple-menting an internal audit of the Group's overalloperations, focusing on such things as account-ing, administration and procedures of business,operational risks and compliance. Based on theresults of this internal audit, the departmentoffers advice on how to improve management.It also exchanges information with corporateauditors, as needed, and shares the auditingresults. Through these activities, the Group isimproving the functions of audit and internalcontrol. Furthermore, the Company is proactivelyworking on strengthening compliance manage-ment to carry out business activities that abideby relevant laws and corporate ethics, and fulfillits corporate social responsibility. The Companyhas established the Compliance Committeechaired by a representative director. Thiscommittee regularly makes inquiries into andverifies the overall business activities, in termsof corporate compliance and ethics. The Grouptrains its executives and employees to improvetheir awareness of compliance and observationof corporate ethics, while distributing the "HitzEthic Code of Conducts," a guideline for ethics.

Corporate Governance

1. Efforts to protect theenvironment

Hitachi Zosen’s fundamental policy is to alwaysharmonize with the earth in every businessarea. To embody its efforts on environmentalmatters, the Company formulated some basicpolicies to protect the environment in 1992.These policies state that “the Company recog-nizes its responsibilities as a good corporatecitizen and proactively solves environmentalissues on a global basis; and endeavors topromote environment protection based on theunderstanding that the protection of natureand living environments of local communitiesare corporate social responsibilities.” In 1993,the Company’s Environmental ProtectionPromotion Committee drew up an environmen-tal protection promotion plan based on thesebasic policies. With this plan, the Company isnow implementing global environment protec-tion activities, such as protecting the ozonelayer, preventing global warming, and reducingand recycling waste, in addition to conventionalactivities. Each office and works has set targetsbased on this promotion plan, and is striving toprotect and preserve the environment. Since1994, the Company has audited offices con-cerning environment protection once a year,according to internal audit standards whichinclude the provision of global environmentprotection.

2. Promoting environmental manage-ment systems

In March 1998, Maizuru Works became Japan’sfirst shipbuilder to obtain ISO14001 certifica-tion. Since then, 10 domestic works, excludingKanagawa Works, have acquired the certifica-tion. The Company will continuously improveenvironmental management systems so that itcan implement appropriate measures againstrisks associated with the environment.

3. Promoting global environmentprotection and saving of energy andnatural resources

As part of its efforts to reduce the use of ozone-depleting substances, the Company discontin-ued the use of specified chlorofluorocarbonsand trichloroethane for washing in 1995, andspecific halons in extinguishants in 2002. As forenergy saving, by 2010 we aim to reducecarbon dioxide emissions to 6% below 1990levels, and to this end we are striving to reducethe emissions by more than 2% every year. Toachieve this, we are improving operationalprocesses, introducing energy-saving transform-ers and compressors, using energy-savingequipment such as energy-saving inverterfluorescent lights, as well as setting and observ-ing standards for air conditioning temperatures. We set the target of cutting the discharge ofwaste from 1991 levels by 15% by 2000, whichwe achieved in 1999. A new goal was set in2000 to decrease to 10% below 2000 levels by2010. To achieve this, we are endeavoring toachieve reductions of 1% a year. Further, withthe aim of reducing landfill to 40% below 1999levels by 2010, we are making efforts to slashlandfill by over 6% per year. As for recycling, we are stepping up ourefforts to recycle all scrap metal, use wastepaper as materials for recycled paper, and turnwaste oil into fuel. We are also recycling scrapwood into litter for livestock, flux into roadbedmaterials, and shotblast waste sand into cementmaterials.

4. Managing chemicalsubstances

The Company fully comprehends the issuesregarding exhaust gases and the quantity ofchemical substances that are moved in accor-dance with the PRTR method; and managessuch substances appropriately, while reducingtheir amount under the newly formulated“Voluntary Management Plan for ChemicalSubstances.”

5. Promoting communication on envi-ronment protection

The Company has actively disclosed the con-tents of its efforts on global environmentprotection and local environment conservation,and published an environmental report everyyear since 2002. We also cooperate with localgovernments and communities on variousactivities for promoting environment protection(such as local recycling and tree-plantingcampaigns) and participate in such activities.Furthermore, we join hands with organizationsinvolved in environment protection and ex-change activities and information with them.

Tackling Environmental Issues Relating to Hitachi Zosen


Board of Directors and Board of Corporate Auditors(as of June 29, 2006)

*Representative Director

Independent Auditors’ Report

Chairman

Shigetoshi Andoh

President

Minoru Furukawa*

Managing Directors

Tadao MurakawaKoichiro Anzai

Directors

Motohiro FujiiAkifumi MitaniMasaharu FuruteraYasuo OgawaYuichi HayakataHisao Matsuwake

Full-time Corporate Auditors

Hiromitsu Miyasaka

Corporate Auditors

Sakae KannoJunnosuke BanTadao Shimauchi

Shigetoshi Andoh Minoru Furukawa

Tadao Murakawa Koichiro Anzai

Motohiro Fujii Akifumi Mitani Masaharu Furutera Yasuo Ogawa Yuichi Hayakata Hisao Matsuwake

Hiromitsu Miyasaka Sakae Kanno Junnosuke Ban Tadao Shimauchi


CONSOLIDATED BALANCE SHEETSHitachi Zosen Corporation and Consolidated SubsidiariesAt March 31, 2005 and 2006

Thousands ofU.S. dollars

Millions of yen (Note 2)

2005 2006 2006

ASSETS

Current assets:Cash and time deposits (Notes 6 and 15) ¥ 39,322 ¥ 69,010 $ 587,469Marketable securities (Note 4) 164 285 2,426

39,486 69,295 589,895

Receivables:Trade notes and accounts:

Non-consolidated subsidiaries and affiliates 5,057 3,211 27,335Other (Note 6) 99,377 102,668 873,993

Other 6,497 5,690 48,438Allowance for doubtful receivables (837) (1,311) (11,160)

110,094 110,258 938,606

Inventories (Note 5) 43,830 34,810 296,331Deferred tax assets (Note 19) 4,866 3,028 25,777Prepaid expenses and other current assets 11,163 5,910 50,310

Total current assets 209,439 223,301 1,900,919

Investments and other non-current assets:Investments in non-consolidated subsidiaries and affiliates 30,389 30,164 256,780Investments in securities (Notes 4 and 6) 15,703 8,947 76,164Long-term loans receivable (Note 6) 4,568 4,083 34,758Deferred tax assets (Note 19) 6,356 944 8,036Other investments and non-current assets (Note 6) 10,539 9,153 77,918

Allowance for doubtful receivables (6,374) (6,831) (58,151)Total investments and other non-current assets 61,181 46,460 395,505

Property, plant and equipment, at cost (Note 6):Land (Note 8) 78,110 64,060 545,331Buildings and structures 71,553 57,073 485,852Machinery and equipment 81,051 69,886 594,926Construction in progress 6,863 8,771 74,666

237,577 199,790 1,700,775Less accumulated depreciation (96,369) (81,966) (697,761)

Property, plant and equipment, net 141,208 117,824 1,003,014

Intangible assets 4,628 2,621 22,312Total assets ¥ 416,456 ¥ 390,206 $ 3,321,750

See the accompanying Notes to the Consolidated Financial Statements.



2005 2006 2006

LIABILITIES, MINORITY INTERESTS ANDSHAREHOLDERS' EQUITY

Current liabilities:Short-term loans (Note 6) ¥ 65,570 ¥ 49,988 $ 425,538Current portion of long-term debt (Note 6) 28,416 25,410 216,311Notes and accounts payable:

Non-consolidated subsidiaries and affiliates 2,117 3,461 29,463Other 78,544 70,317 598,595

Advances received on work in progress 23,139 31,948 271,967Accrued income taxes 1,017 1,677 14,276Reserve for product warranty 2,080 1,881 16,013Reserve for losses on construction contracts – 2,211 18,822Accrued expenses 45,289 45,482 387,180Other current liabilities 18,946 16,150 137,482

Total current liabilities 265,118 248,525 2,115,647

Long-term liabilities:Long-term debt, less current portion (Note 6) 78,437 78,570 668,852Employees' retirement benefits (Note 18) 11,902 25,561 217,596Deferred tax liabilities for land revaluation (Note 8) 1,033 – –Other non-current liabilities 4,875 5,031 42,827

Total long-term liabilities 96,247 109,162 929,275

Total liabilities 361,365 357,687 3,044,922

Contingent liabilities (Note 7)

Minority interests in consolidated subsidiaries 10,643 8,362 71,184

Shareholders' equity:Common stock

Authorised ––2,000,000,000 sharesIssued ––504,219,737 shares at March 31, 2005

––560,330,834 shares at March 31, 2006 25,306 30,356 258,415Capital surplus 300 5,376 45,765Retained earnings (deficit) 17,126 (11,992) (102,086)Land revaluation difference (Note 8) 395 (149) (1,268)Net unrealised holding gains on securities 1,490 825 7,023Foreign currency translation adjustments (75) (151) (1,286)Treasury stock, at cost ––957,341 shares in 2005

––881,898 shares in 2006 (94) (108) (919)Total shareholders' equity 44,448 24,157 205,644

Total liabilities, minority interests and shareholders' equity ¥ 416,456 ¥ 390,206 $ 3,321,750


Financial Section


CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITYHitachi Zosen Corporation and Consolidated SubsidiariesFor the Years Ended March 31, 2005 and 2006

CONSOLIDATED STATEMENTS OF OPERATIONSHitachi Zosen Corporation and Consolidated SubsidiariesFor the Years Ended March 31, 2005 and 2006



2005 2006 2006

Net sales ¥ 337,680 ¥ 333,881 $ 2,842,266Cost of sales 300,579 300,787 2,560,543

Gross profit 37,101 33,094 281,723

Selling, general and administrative expenses 34,366 30,328 258,177

Operating income 2,735 2,766 23,546

Other income (expenses):Interest and dividend income 414 1,274 10,845Interest expense (3,736) (3,275) (27,879)Foreign exchange loss (35) (532) (4,529)Equity in net income of non-consolidated subsidiaries and affiliates 6,331 134 1,141Gain on sale of investments in consolidated subsidiaries (Note 9) 432 5,472 46,582Gain on sale of investments in securities 995 2,751 23,419Gain on sale of property (Note 10) – 8,510 72,444Government subsidies received – 484 4,120Loss on settlement of retirement benefit plans (Note 11) – (15,459) (131,600)Impairment losses (Note 12) – (13,487) (114,812)Loss on disposal of fixed assets (Note 13) (1,226) (2,100) (17,877)Provision for allowance for doubtful receivables (Note 14) – (1,494) (12,718)Surcharge and penalty – (923) (7,857)Compensatory payment for asbestos-related disease – (436) (3,712)Loss on devaluation of investments in securities – (129) (1,098)Loss on liquidation of subsidiaries and others (648) – –Other, net (1,757) (1,027) (8,742)Total other income (expenses) 770 (20,237) (172,273)

Income (loss) before income taxes and minority interests 3,505 (17,471) (148,727)Income taxes-current (Note 19) 1,292 3,006 25,590Income taxes-deferred (Note 19) 1,134 6,765 57,589

Income (loss) before minority interests 1,079 (27,242) (231,906)

Minority interests in net income of consolidated subsidiaries 30 1,815 15,451

Net income (loss) ¥ 1,049 ¥ (29,057) $ (247,357)

U.S. dollarsYen (Note 2)

Per share amountsNet income (loss) - basic ¥ 2.08 ¥ (56.54) $ (0.48)Net income - diluted 1.95 – –Cash dividends – – –



Millions of yen (Note2)

2005 2006 2006

Common stock:Balance at beginning of year ¥ 25,306 ¥ 25,306 $ 215,425Common stock issued on exercise of stock purchase warrants – 5,050 42,990Balance at end of year ¥ 25,306 ¥ 30,356 $ 258,415

Capital surplus:Balance at beginning of year ¥ 299 ¥ 300 $ 2,554Common stock issued on exercise of stock purchase warrants – 5,050 42,990Surplus on disposition of treasury stock 1 26 221Balance at end of year ¥ 300 ¥ 5,376 $ 45,765

Retained earnings (deficit):Balance at beginning of year ¥ 15,848 ¥ 17,126 $ 145,790

Net income (loss) 1,049 (29,057) (247,357)Bonuses to directors and statutory auditors (100) (102) (868)Increase due to consolidation of additional subsidiaries – 57 485Increase due to merger of unconsolidated subsidiaries 479 – –Decrease due to merger of unconsolidated subsidiaries – (16) (136)Decrease due to consolidation of additional subsidiaries (148) – –Decrease due to reversal of land revaluation excess (2) – –Balance at end of year ¥ 17,126 ¥ (11,992) $ (102,086)

Land revaluation difference (Note 8):Balance at beginning of year ¥ 393 ¥ 395 $ 3,363Increase (decrease) in land revaluation 2 (544) (4,631)Balance at end of year ¥ 395 ¥ (149) $ (1,268)

Net unrealised holding gains on securities:Balance at beginning of year ¥ 1,056 ¥ 1,490 $ 12,684Revaluation of securities 434 (665) (5,661)Balance at end of year ¥ 1,490 ¥ 825 $ 7,023

Foreign currency translation adjustments:Balance at beginning of year ¥ (311) ¥ (75) $ (639)Translation adjustments 236 (76) (647)Balance at end of year ¥ (75) ¥ (151) $ (1,286)

Treasury stock:Balance at beginning of year ¥ (61) ¥ (94) $ (800)Increase in treasury stock, net (33) (14) (119)Balance at end of year ¥ (94) ¥ (108) $ (919)

SharesNumber of shares of common stock: 2005 2006

Balance at beginning of year 504,219,737 504,219,737

Common stock issued on exercise of stock purchase warrants – 56,111,097

Balance at end of year 504,219,737 560,330,834



1. Going Concern

For the current fiscal year, Hitachi Zosen Corporation (the“Company”) and its consolidated subsidiaries (together,the “Companies“) recorded a net loss of ¥29,057million ($247,357 thousand), and at the end of thecurrent fiscal year, the Companies recorded a deficit of¥11,992 million ($102,086 thousand) and thesesituations indicate the existence of material uncertaintywhich may cast significant doubt about the Company’sability to continue as a going concern.

This situation occurred by recording steep losses withsweeping structural reform including settlement of employ-ees’ retirement benefits plans and impairment losses onfixed assets for strengthening of financial standing.

To address this situation, the Companies will devotethemselves to change in the business structure based ona concrete evolution plan under “Hitz-Innovation” whichis a medium-term management plan formulated inFebruary 2006. And by investing a part of funds, whichwere raised from issuing No.5 unsecured convertiblebonds with stock subscription rights amounting to¥30,000 million ($255,385 thousand), in growth areasaggressively, the Companies will strive together forstrengthening of “Manufacturing and engineeringcapacity” concentrating on the environmental field as acore business and precision machinery and informationtechnology industries as growth businesses, and toestablishment of a stable revenue base. Furthermore, onexercise of the stock purchase warrants, the Companieswill be able to strengthen their capital.

As a result, these financial statements have beenprepared on a going concern basis, and do not reflectthe impact of the afore-mentioned material uncertaintywhich may cast significant doubt about the Company’sability to continue as a going concern.

2. Basis of Presenting ConsolidatedFinancial Statements

The accompanying consolidated financial statementshave been prepared in accordance with the provisions setforth in the Japanese Securities and Exchange Law andits related accounting regulations, and in conformity withaccounting principles generally accepted in Japan(“Japanese GAAP”), which are different in certainrespects as to application and disclosure requirements ofInternational Financial Reporting Standards.

The accounts of overseas subsidiaries are based ontheir accounting records maintained in conformity withgenerally accepted accounting principles prevailing in therespective countries of domicile. The accompanyingconsolidated financial statements have been restructuredand translated into English (with some expandeddescriptions and the inclusion of consolidated statementsof shareholders' equity) from the consolidated financialstatements of the Company prepared in accordance withJapanese GAAP and filed with the appropriate LocalFinance Bureau of the Ministry of Finance as required by

the Securities and Exchange Law. Some supplementaryinformation included in the statutory Japanese languageconsolidated financial statements, but not required forfair presentation, is not presented in the accompanyingconsolidated financial statements.

The translation of the Japanese yen amounts into U.S.dollars are included solely for the convenience of readersoutside Japan, using the prevailing exchange rate at March31, 2006, which was ¥117.47 to U.S.$1.00. The conve-nience translations should not be construed as representa-tions that the Japanese yen amounts have been, couldhave been, or could in the future be, converted into U.S.dollars at this or any other rate of exchange.

3. Significant Accounting Policies

a) ConsolidationThe accompanying consolidated financial statements

include the accounts of the Company and significantcompanies, over which the Company has power ofcontrol through majority voting rights or existence ofcertain conditions evidencing control by the Company.Investments in non-consolidated subsidiaries andaffiliates, over which the Company has ability to exercisesignificant influence over operating and financial policiesof the investees, are accounted for by the equity method.

The consolidated financial statements consist of theaccounts of the Company and its fifty-seven (sixty-four in2005) significant subsidiaries that meet the controlrequirements for consolidation. Intercompany transactionsand accounts have been eliminated in the consolidation.

Investments in two (two in 2005) non-consolidatedsubsidiaries and ten (nine in 2005) affiliates are ac-counted for by the equity method.

The difference between cost and net assets ofacquired subsidiaries and affiliates are primarily amortisedusing the straight-line method over 5 years.

The consolidated financial statements include theaccounts of five (four in 2005) consolidated subsidiaries,the fiscal year-end of which is December 31. Appropriateadjustments are made for significant transactions duringthe period from December 31 to the date of the consoli-dated financial statements.

In the elimination of investments in subsidiaries, theassets and liabilities of the subsidiaries, including theportion attributable to minority shareholders, areevaluated using the fair value at the time the Companyacquired control of the respective subsidiaries.

b) Cash Flow StatementsIn preparing the consolidated statements of cash

flows, cash on hand, readily-available deposits and highlyliquid debt investments with maturities not exceedingthree months at the time of purchase are considered tobe cash and cash equivalents.

c) Translation of Foreign CurrenciesForeign currency monetary assets and liabilities are

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSCONSOLIDATED STATEMENTS OF CASH FLOWSHitachi Zosen Corporation and Consolidated SubsidiariesFor the Years Ended March 31, 2005 and 2006



2005 2006 2006

Cash flows from operating activities:Income (loss) before income taxes and minority interests ¥ 3,505 ¥ (17,471) $ (148,727)Depreciation 7,859 8,322 70,844Impairment losses – 13,487 114,812Increase in allowance for doubtful receivables 179 1,193 10,156Increase in employees' retirement benefits 2,881 16,162 137,584Increase in reserve for losses on construction contracts – 2,211 18,822Interest and dividend income (414) (1,274) (10,845)Interest expense 3,736 3,275 27,879Equity in net income of non-consolidated subsidiaries and affiliates (6,331) (134) (1,141)Gain on sale of property, plant and equipment – (8,510) (72,444)Gain on sale of investments in consolidated subsidiaries (432) (5,472) (46,582)Gain on sale of investments in securities – (2,751) (23,419)Loss on devaluation of investments in securities 69 129 1,098Loss on disposal of fixed assets 1,226 2,100 17,877Government subsidies received – (484) (4,120)Loss on liquidation of subsidiaries and others 648 – –Increase in trade receivables (6,448) (8,097) (68,928)Decrease (increase) in inventories 1,072 (4,568) (38,887)Decrease (increase) in other current assets (4,089) 4,227 35,984Increase in trade payables 10,484 926 7,883Increase in accrued expenses 7,104 1,632 13,893Increase (decrease) in advances received (531) 16,670 141,908Increase (decrease) in other current liabilities 3,514 (1,246) (10,607)Other (331) (101) (860)

Sub-total 23,701 20,226 172,180Interest and dividends received 1,689 2,018 17,179Interest paid (3,783) (3,299) (28,084)Income taxes paid (1,880) (2,276) (19,375)

Net cash and cash equivalents provided by operating activities 19,727 16,669 141,900

Cash flows from investing activities:Purchase of securities (270) (2) (17)Proceeds from sales of securities 750 4 34Purchase of property, plant and equipment (47,999) (12,310) (104,793)Proceeds from sales of property, plant and equipment 3,305 13,230 112,624Purchase of intangible assets (1,497) (1,683) (14,327)Purchase of investments in securities (1,222) (441) (3,754)Proceeds from sales of investments in securities 3,539 7,671 65,302Net increase by sales of subsidiaries’ stocks resulting in changes

in scope of consolidation 982 4,910 41,798Government subsidies received – 484 4,120Other 1,330 364 3,099

Net cash and cash equivalents provided by (used in) investing activities (41,082) 12,227 104,086

Cash flows from financing activities:Decrease in short-term loans and debt, net (14,363) (11,015) (93,769)Proceeds from long-term debt 50,205 16,789 142,922Payment of long-term debt (30,238) (37,203) (316,702)Proceeds from issuance of bonds 10,250 32,300 274,964Redemption of bonds (20,016) (282) (2,401)Other (248) (280) (2,384)

Net cash and cash equivalents provided by (used in) financing activities (4,410) 309 2,630

Effect of exchange rate changes on cash and cash equivalents 17 35 298Net increase (decrease) in cash and cash equivalents (25,748) 29,240 248,914Cash and cash equivalents at beginning of year 63,657 38,532 328,016Cash and cash equivalents of newly consolidated subsidiaries,

at beginning of year 623 551 4,691Cash and cash equivalents at end of year (Note 15) ¥ 38,532 ¥ 68,323 $ 581,621See the accompanying Notes to the Consolidated Financial Statements.


h) InventoriesWork in progress is composed of the accumulated

production cost of contracts. The accumulated produc-tion cost includes direct production costs, factory andengineering overhead and other costs incurred.

Raw materials and supplies are stated at cost, which isgenerally determined by the specific identificationmethod and the moving average method, but not toexceed market value.

i) Depreciation and AmortisationDepreciation is computed, with minor exceptions, by

the declining-balance method. Buildings, acquired afterMarch 31, 1998, are depreciated using the straight-linemethod. Amortisation is computed on the straight-linemethod for intangible assets based useful lives.

j) Software CostsThe Companies include internal use software in

intangible assets and depreciate it using the straight-linemethod over an estimated useful life of five years.

k) Deferred AssetsShare and bond issue expenses are charged to

expenses in the year incurred.

l) Reserve for Product WarrantyThe reserve for product warranty, which is based on

experience of the past two years, is provided to coverpossible warranty costs incurred after delivery or comple-tion of construction.

m) Reserve for Losses on Construction ContractsTo provide for losses on construction contracts, the

Companies record a reasonably estimated amount of losson construction contracts at the end of fiscal year.

There were contracts for which losses could bereasonably estimated on March 31, 2006.

As a result, operating income decreased by ¥2,211million ($18,822 thousand) and loss before income taxesand minority interests increased by the same amount.

n) Employees’ Severance and Retirement BenefitsThe Companies provide two types of post-employment

benefit plans, unfunded lump-sum payment plans andfunded non-contributory pension plans, under which alleligible employees are entitled to benefits based on thelevel of wages and salaries at the time of retirement ortermination, length of service and certain other factors.

The Companies provide for employees’ severanceand retirement benefits based on the estimatedamounts of projected benefit obligation and the fairvalue of the plan assets.

The net transition obligation, resulting from theadoption of a new Japanese accounting standard, is beingrecognised in expenses in equal amounts primarily over 15years commencing with the year ended March 31, 2001.Prior service costs are recognised in expenses in equal

amounts within the average of the estimated remainingservice lives of the employees, and actuarial gains andlosses are recognised in expenses using the straight-linemethod within the average of the estimated remainingservice lives commencing with the following period.

The Company decided to settle these existing plans onMarch 31, 2007 at the Board of Directors meeting heldon February 28, 2006. And “An Agreement aboutRevision of Post-employment Benefit Plans” was con-cluded between the employees and employer on March13, 2006.

The Company applied “Practical Treatment of Account-ing for Transfers between Retirement Benefit Plans (Reportof Practical Issues No.2)”, issued by the AccountingStandards Board of Japan. As a result, in the year endedMarch 31, 2006, the Companies recorded a loss onsettlement of retirement benefit plans of ¥15,459 million($131,600 thousand) in other expenses and increasedemployees’ retirement benefits by the same amount.

o) Research and Development ExpensesResearch and development expenses are charged to

selling, general and administrative expenses and manu-facturing costs as incurred. Research and developmentexpenses amounted to ¥4,106 million and ¥3,066 million($26,100 thousand) for the years ended March 31, 2005and 2006, respectively.

p) Income TaxesThe provision for income taxes is based on income for

financial statement purposes. Deferred income taxes arerecognised for loss carry forwards and temporarydifferences between financial and tax reporting purposes.Income taxes comprise corporation tax, enterprise tax,and prefectural and municipal inhabitants taxes.

q) Accounting for LeasesFinance leases which do not transfer ownership and

do not have bargain purchase provisions are accountedfor in the same manner as operating leases underJapanese GAAP.

r) Appropriation of Retained EarningsThe appropriation of retained earnings, which must

be proposed and approved by an ordinary generalmeeting of shareholders after the end of the year, isrecorded in the year approved. The appropriation ofretained earnings of the Company, which is reflected inthe accompanying consolidated financial statements forthe year ended March 31, 2006, was proposed andapproved at the ordinary general meeting of sharehold-ers held on June 29, 2005.

s) Amounts per ShareBasic net income (loss) per share is computed based

on the weighted average number of shares of commonstock outstanding during each year.

Diluted net income per share is computed based on

translated into Japanese yen at the year-end rates, andthe resulting translation gains or losses are included inthe current statement of operations.

Assets and liabilities of consolidated overseassubsidiaries are translated into Japanese yen using theexchange rates prevailing at the end of each fiscal year.Revenue and expenses are translated at the averagerates of exchange for the respective years. The resultingforeign currency translation adjustments are accountedfor as a separate component of shareholders’ equity.

d) Revenue RecognitionThe Companies principally record revenues at the

time of delivery using the completed contract method.However, the Company records revenues using thepercentage of completion method for major contracts(¥500 million or more) lasting over one year and certainconsolidated subsidiaries record revenues using thepercentage of completion method for large scalecontracts lasting over one year.

e) Allowance for Doubtful ReceivablesFor receivables from insolvent customers, who are

undergoing bankruptcy, other collection proceedings orin a similar financial condition, the allowance fordoubtful accounts is provided based on the evaluationof each customer’s financial condition and the estima-tion of recoverable amounts due to the existence ofsecurity interests or guarantees.

For other receivables, the allowance for doubtfulreceivables is provided based on the Companies’ actualrate of bad debts in the past.

f) SecuritiesTrading securities are stated at fair market value.

Gains and losses realised on disposal and unrealised gainsand losses from market value fluctuations are recognisedas gains or losses in the period of the change. Held-to-maturity debt securities are stated at amortised cost.Equity securities issued by subsidiaries and affiliatedcompanies which are not consolidated or accounted forby equity method are stated at moving-average cost.Available-for-sale securities with available fair marketvalues are stated at fair market value. Unrealised holdinggains and unrealised holding losses on these securitiesare reported, net of applicable income taxes, as aseparate component of shareholders’ equity. Realisedgains and losses on sale of such securities are computedusing moving-average cost. Securities with no availablefair market value which are classified as available-for-sale-securities are stated at moving-average cost.

If the market value of held-to-maturity debt securities,equity securities issued by non-consolidated subsidiariesand affiliated companies, and available-for-sale securitiesdeclines significantly, such securities are stated at fairmarket value and the difference between fair marketvalue and the carrying amount is recognised as loss inthe period of the decline. If the fair market value of

equity securities issued by unconsolidated subsidiariesand affiliated companies, not on the equity method, isnot readily available, such securities should be writtendown to net asset value with a corresponding charge inthe statement of income in the event net asset valuedeclines significantly. In these cases, such fair marketvalue or the net asset value will be the carrying amountof the securities at the beginning of the next year.

g) Derivatives and Hedge AccountingDerivative financial instruments are stated at fair

value and changes in the fair value are recognised asgains or losses unless derivative financial instrumentsare used for hedging purposes.

(1) Hedge accountingThe Companies defer recognition of gains or lossesresulting from changes in fair value of derivativefinancial instruments until the related losses or gainson the hedged items are recognised.However, if interest rate swap contracts are used ashedges and meet certain hedging criteria, the netamount to be paid or received under the interest rateswap contracts is added to or deducted from theinterest on the asset or liability for which the swapcontract was executed.

(2) Hedging instruments and hedged itemsHedging instruments: Interest rate swap contractsHedged items: Interest on loans and bonds

payableHedging instruments: Forward foreign currency

exchange contracts andother derivatives

Hedged items: Trade receivables andexpected trade receivablesdenominated in foreigncurrencies from exports ofproducts, trade payablesdenominated in foreigncurrencies from imports ofmaterials

(3) Hedging policyThe Companies use derivative financial instruments tohedge future risks of interest rate fluctuations andfuture risks of foreign exchange fluctuations inaccordance with their internal policies and procedures.

(4) Evaluation of hedge effectivenessThe Companies evaluate hedge effectiveness bycomparing the cumulative changes in cash flowsand foreign currency exchange or the changes infair value of hedged items and the correspondingchanges in the hedging derivative instruments.

(5) Control over use of derivativesWhen the accounting sections of group companies usederivatives, they follow the group companies’ administra-tion rules, which the Board of Directors of the Companyhave approved to control the risk of using derivatives.


At March 31, 2006

Securities with book values (fair values) exceedingacquisition costs:

Millions of yenAcquisition cost Book value Difference

Equity securities ¥ 656 ¥ 1,535 ¥ 879Bonds 100 100 0Other 11 23 12

Total ¥ 767 ¥ 1,658 ¥ 891

Securities with book values (fair values) not exceedingacquisition costs:


Equity securities ¥ 36 ¥ 33 ¥ (3)Bonds 0 0 –

Total ¥ 36 ¥ 33 ¥ (3)

At March 31, 2006


Thousands of U.S. dollarsAcquisition cost Book value Difference

Equity securities $ 5,584 $ 13,067 $ 7,483Bond 851 851 0Others 94 196 102

Total $ 6,529 $ 14,114 $ 7,585


Thousands of U.S. dollarsAcquisition cost Book value Difference

Equity securities $ 306 $ 281 $ (25)Bond 0 0 –

Total $ 306 $ 281 $ (25)

b) The following table summarises book values ofsecurities with no available fair values as of March31, 2005 and 2006:

Available-for-sale securities:Millions of yen Thousands of

U.S. dollarsBook value Book value

Type 2005 2006 2006

Non-listed equitysecurities ¥ 6,372 ¥ 5,832 $ 49,647

Non-listed preferredshares 500 – –

Loan trusts 419 363 3,090

c) Available-for-sale securities with maturities and held-to-maturity debt securities mature as follows:

At March 31, 2005

Millions of yenOver one Over five

Within one year but years but Over tenyear within five within ten years

years years

Government bonds ¥ – ¥ – ¥ – ¥ 1,032Corporate bonds 5 110 – –Other bonds 823 357 – –

Total ¥ 828 ¥ 467 ¥ – ¥ 1,032

At March 31, 2006

Millions of yenOver one Over five


years years

Government bonds ¥ – ¥ – ¥ – ¥ 1,032Corporate bonds 100 11 – –Other bonds 218 145 – –

Total ¥ 318 ¥ 156 ¥ – ¥ 1,032

At March 31, 2006

Thousands of U.S. dollarsOver one Over five


years years

Government bonds $ – $ – $ – $ 8,785Corporate bonds 851 94 – –Other bonds 1,856 1,234 – –

Total $2,707 $1,328 $ – $ 8,785

d) Total sales of available-for-sale securities in the yearended March 31, 2005 amounted to ¥3,539 millionand the related gains and losses amounted to ¥999million and ¥5 million, respectively.

Total sales of available-for-sale securities in the yearended March 31, 2006 amounted to ¥7,671 million($65,302 thousand) and the related gains and lossesamounted to ¥2,706 million ($23,036 thousand) and¥3 million ($26 thousand), respectively.

4. Securities

a) The following tables summarise acquisition costs,book values and fair values of securities with avail-able fair values as of March 31, 2005 and 2006:

(1) Trading securities:

Millions of yen Thousands ofU.S. dollars

2005 2006 2006

Book value(fair value) ¥ 164 ¥ 185 $ 1,575Amount for the year

of net unrealised gains(losses) included in thestatements of operations (2) 6 51

(2) Held-to-maturity debt securities:

At March 31, 2005

Securities with available fair values exceeding bookvalues:

Millions of yenBook value Fair value Difference

Government bonds ¥ 859 ¥ 884 ¥ 25

the weighted average number of shares after consider-ation of the dilutive effect of the shares of common stocksissuable upon the exercise of stock purchase warrants.

t) Shareholders’ EquityUnder the Commercial Code of Japan, the entire

amount of the issue price of shares is required to beaccounted for as capital, although a company may, byresolution of its Board of Directors, account for anamount not exceeding one-half of the issue price of thenew shares as additional paid-in capital, which is in-cluded in capital surplus.

The Commercial Code provides that an amount equalto at least 10% of cash dividends and other cash appro-priations shall be appropriated and set aside as a legalearnings reserve until the total amount of legal earningsreserve and additional paid-in capital equals 25% ofcommon stock. The legal earnings reserve and additionalpaid-in capital may be used to eliminate or reduce adeficit by resolution of the shareholders' meeting or maybe capitalised by resolution of the Board of Directors. Oncondition that the total amount of legal earnings reserveand additional paid-in capital remains being equal to orexceeding 25% of common stock, they are available fordistribution by the resolution of shareholders' meeting.Legal earnings reserve is included in retained earnings inthe accompanying financial statements.

The maximum amount that the Company candistribute as dividends is calculated based on the non-consolidated financial statements of the Company inaccordance with the Commercial Code.

Other securities:Millions of yen

Book value Fair value Difference

Government bonds ¥ 173 ¥ 173 ¥ –Corporate bonds 15 15 –Others 774 774 –

Total ¥ 962 ¥ 962 ¥ –

At March 31, 2006

Securities with available fair values not exceeding bookvalues:

Millions of yenBook value Fair value Difference

Government bonds ¥ 1,032 ¥ 1,027 ¥ (5)Corporate bond 11 11 –

Total ¥ 1,043 ¥ 1,038 ¥ (5)

At March 31, 2006

Securities with available fair values not exceeding bookvalues:


Book value Fair value Difference

Government bonds $ 8,785 $ 8,742 $ (43)Corporate bond 94 94 –

Total $ 8,879 $ 8,836 $ (43)

(3) Available-for-sale securities:

At March 31, 2005



Equity securities ¥ 3,335 ¥ 5,682 ¥ 2,347Bonds 100 101 1Other 11 19 8

Total ¥ 3,446 ¥ 5,802 ¥ 2,356



Equity securities ¥ 647 ¥ 523 ¥ (124)Bonds 100 99 (1)

Total ¥ 747 ¥ 622 ¥ (125)


7. Contingent Liabilities

Contingent liabilities at March 31, 2005 and 2006consisted of the following:


2005 2006 2006

Notes receivablediscounted ¥ 59 ¥ 6 $ 51

Notes receivableendorsed 5 – –

Guarantees of bank loansand other indebtedness 192 87 741Total ¥ 256 ¥ 93 $ 792

8. Land Revaluation Difference

Land for operations was revalued by consolidatedsubsidiaries in accordance with the Land RevaluationLaw in the year ended March 31, 2000 and the revalua-tion amount, net of taxes, is shown as a separatecomponent of shareholders’ equity.

At October 1, 2002, the Company merged with HECCorporation which was a consolidated subsidiary, andsucceeded to the land revaluation excess.

The market value of the land was ¥350 million and¥191 million ($1,626 thousand) less than the revaluedbook amount at March 31, 2005 and 2006, respectively.

12. Impairment Losses

The groups of assets for which the Companies recognised impairment losses in the year ended March 31, 2006, are as follows:

Location Use Type of Assets

Sakai Works Mainly production facilities Land, buildings and(Nishi-ku, Sakai City) for steel structures structures

Kawachinagano Company Housing Company housing in Land, buildings and(Kawachinagano City, Osaka Prefecture) Osaka district structures

Land required in Ariake Machinery Works Industrial land Land(Tamana-gun, Kumamoto Prefecture)

Land adjacent to Universal Studios Japan Parking Land(Konohana-ku, Osaka City)

Land in front of Nanko Building Parking Land(Suminoe-ku, Osaka City)

Goodwill for Water Treatment Goodwill for Goodwill(Suminoe-ku, Osaka City) environmental business

The Companies grouped their assets based mainly on divisions and works. The Companies also grouped their assetsfor sale individually.

The Companies reduced the book value of each assets’ group to the recoverable amounts and recognised impair-ment losses of ¥13,487 million ($114,812 thousand) because operating income of the Sakai Works has decreased dueto decreasing public works, Kawachinagano Company Housing will be closed in March 2008, sale plans for Landrequired in Ariake Machinery Works, Land adjacent to Universal Studios Japan and Land in front of Nanko Building

9. Gain on Sale of Investments in Consoli-dated Subsidiaries

Gain on sale of investments in a consolidatedsubsidiary for the year ended March 31, 2005 resultedfrom the sale of stock of a consolidated subsidiary,Creative Inc., to a third party.

Gain on sale of investments in consolidated subsid-iaries for the year ended March 31, 2006 resultedmainly from the sale of stock of consolidated subsidiar-ies, Naikai Zosen Corporation and Hitachi ZosenInformation Systems Co., Ltd., to third parties.

10. Gain on Sale of Property

Gain on sale of property for the year ended March31, 2006 resulted from the sale of Toyonaka Dormitory,corporate housing in the Tokyo district and KawaguchiWorks of subsidiary Hitachi Zosen Tomioka MachineryCo., Ltd.

11. Loss on settlement of retirement benefit plans

Loss on settlement of retirement benefit plans forthe year ended March 31, 2006 resulted mainly fromdisposition of the net transition obligation and theactuarial differences for settlement of the plans.

The following assets were pledged as collateral mainlyfor secured long-term debt of ¥49,173 million at March31, 2005, and ¥35,818 million ($304,912 thousand) atMarch 31, 2006:


2005 2006 2006

Cash and time deposits ¥ – ¥ 648 $ 5,516Other receivables – 642 5,465Investments in securities 1,032 608 5,176Property, plant and

equipment(at net book value) 60,994 42,159 358,892

Long-term loans receivable – 54 460Other investments and

non-current assets – 4 34Total ¥62,026 ¥ 44,115 $375,543

5. Inventories

Inventories at March 31, 2005 and 2006 consisted of thefollowing:


2005 2006 2006

Work in progress ¥ 41,038 ¥ 31,911 $ 271,652Raw materials andsupplies 2,792 2,899 24,679

Total ¥ 43,830 ¥ 34,810 $ 296,331

Long-term debt at March 31, 2005 and 2006 consisted of the following:Millions of yen Thousands of

U.S. dollars

2005 2006 2006

0.6 per cent. to 3.5 per cent. loans from banks andother financial institutions, due through 2018:

Secured (or partly secured) ¥ 49,173 ¥ 35,818 $ 304,912Unsecured 47,146 35,762 304,435

0.00 per cent. convertible bonds due 2008 – 30,000 255,3850.57 per cent. straight bonds due 2010 – 1,800 15,3230.00 per cent. convertible bonds due 2008 10,000 – –1.37 per cent. straight bonds due 2006 300 300 2,5540.42 per cent. straight bonds due 2007 – 300 2,5540.56 per cent. straight bonds due 2007 84 – –Variable rate straight bonds due 2008 150 – –Less: current portion included in current liabilities (28,416) (25,410) (216,311)

Total ¥ 78,437 ¥ 78,570 $ 668,852

6. Short-term Loans and Long-term Debt

Short-term loans represented bank loans bearingaverage interest rates of 1.22 per cent. and 1.28 percent., as of March 31, 2005 and 2006, respectively, areas follows:


2005 2006 2006

Secured (or partly secured) ¥ 1,156 ¥ 200 $ 1,702Unsecured 64,414 49,788 423,836

Total ¥ 65,570 ¥ 49,988 $ 425,538

The aggregate annual maturities of long-term debtoutstanding at March 31, 2006 are as follows: Millions of yen Thousands ofYear ending March 31, U.S. dollars

2008 ¥ 39,621 $ 337,2862009 10,430 88,7892010 8,589 73,1172011 5,840 49,7152012 and thereafter 14,090 119,945

Total ¥ 78,570 $ 668,852


b) OtherAssets and liabilities of consolidated subsidiaries sold toa third party on December 31, 2004, were as follows:

Millions of yen

Current assets ¥ 2,600Fixed assets 1,183

Total ¥ 3,783

Current liabilities ¥ 1,030Fixed liabilities 300

Total ¥ 1,330

Assets and liabilities of a consolidated subsidiary(Hitachi Zosen Real Estate Co., Ltd.) sold to a third partyon September 30, 2005, were as follows:


Current assets ¥ 3,301 $ 28,101Fixed assets 552 4,699

Total ¥ 3,853 $ 32,800

Current liabilities ¥ 2,599 $ 22,125Fixed liabilities 484 4,120

Total ¥ 3,083 $ 26,245

Assets and liabilities of a consolidated subsidiary (NaikaiZosen Corporation) sold to a third party on March 31,2006, were as follows:


Current assets ¥ 16,246 $ 138,299Fixed assets 11,835 100,749

Total ¥ 28,081 $ 239,048

Current liabilities ¥ 17,494 $ 148,923Fixed liabilities 6,342 53,988

Total ¥ 23,836 $ 202,911

Assets and liabilities of a consolidated subsidiary(Hitachi Zosen Information Systems Co., Ltd.) sold to athird party on March 31, 2006, were as follows:


Current assets ¥ 4,778 $ 40,674Fixed assets 2,391 20,354

Total ¥ 7,169 $ 61,028

Current liabilities ¥ 3,628 $ 30,884Fixed liabilities 1,228 10,454

Total ¥ 4,856 $ 41,338

13. Loss on Disposal of Fixed Assets

Loss on disposal of fixed assets for the year endedMarch 31, 2005 is comprised of losses from the disposalof buildings and structures of ¥177 million, machineryand equipment of ¥66 million, land of ¥970 million,and other assets of ¥13 million.

Loss on disposal of fixed assets for the year endedMarch 31, 2006 is comprised of losses from the disposalof buildings and structures of ¥343 million ($2,920thousand) and machinery and equipment of ¥1,757million ($14,957 thousand).

14. Provision for Allowance for Doubtful Receivables

Provision for allowance for doubtful receivables isrecorded based on the estimation of unrecoverableamounts due to each customer’s declining asset values.

were decided, and Goodwill for Water Treatment turned out to be a non-productive asset due to partial withdrawalfrom water treatment business.

.Impairment losses are as follows:

Millions of yen

Buildingsand Land Goodwill Total

structures

Sakai Works ¥ 2,216 ¥ 5,039 ¥ – ¥ 7,255Kawachinagano Company Housing 1,674 928 – 2,602Land required in Ariake Machinery Works – 852 – 852Land adjacent to Universal Studios Japan – 1,922 – 1,922Land in front of Nanko Building – 736 – 736Goodwill for Water Treatment – – 120 120

Total ¥ 3,890 ¥ 9,477 ¥ 120 ¥ 13,487

Thousands of U.S. dollars

Buildingsand Land Goodwill Total

structures

Sakai Works $ 18,865 $ 42,896 $ – $ 61,761Kawachinagano Company Housing 14,250 7,900 – 22,150Land required in Ariake Machinery Works – 7,253 – 7,253Land adjacent to Universal Studios Japan – 16,362 – 16,362Land in front of Nanko Building – 6,265 – 6,265Goodwill for Water Treatment – – 1,021 1,021

Total $ 33,115 $ 80,676 $ 1,021 $ 114,812

The recoverable amounts of the Sakai Works and the Kawachinagano Company Housing are the present values ofexpected cash flows from on-going utilization and subsequent disposition of assets using the discount rate of 5%.

The recoverable amounts of the Land required in Ariake Machinery Works, the Land adjacent to Universal StudiosJapan and the Land in front of Nanko Building are net realisable values based on real estate valuations.

15. Cash Flows Information

a) Cash and cash equivalentsCash and cash equivalents in the consolidated state-ments of cash flows, and cash and time deposits in theconsolidated balance sheets at March 31, 2005 and2006 are reconciled as follows:


2005 2006 2006

Cash and time deposits in the

balance sheets ¥39,322 ¥ 69,010 $587,469Time deposits

with maturitiesover three months (790) (687) (5,848)

Cash and cashequivalents in cashflow statements ¥38,532 ¥ 68,323 $581,621

Exercise of stock purchase warrants


2005 2006 2006

Increase in common stock resultingfrom exercise of stock purchase warrants ¥ – ¥ 5,050 $ 42,990

Increase in capital surplus resultingfrom exercise of stock purchase warrants – 5,050 42,990

Decrease in bond premium resultingfrom exercise of stock purchase warrants – (100) (852)

Decrease in bonds resulting from exerciseof stock purchase warrants ¥ – ¥ 10,000 $ 85,128

16. Lease Information

a) Finance leases as lesseeThe original lease obligations, the payments to date,and the payments remaining for assets which wereleased from other parties as of March 31, 2005 and2006 are as follows:

At March 31, 2005:Millions of yen

Original lease Payments Paymentsobligations to date remaining

Machinery, equipmentand vehicles ¥ 1,679 ¥ 861 ¥ 818

Software 98 40 58Total ¥ 1,777 ¥ 901 ¥ 876




Software 70 36 34Total ¥ 1,454 ¥ 806 ¥ 648

At March 31, 2006:Thousands of U.S. dollars


Machinery, equipmentand vehicles $11,782 $ 6,555 $ 5,227

Software 596 307 289Total $12,378 $ 6,862 $ 5,516



Notional Over one Market Unrealisedamount year value gain (loss)

Foreign exchangecontracts:

Type of contracts:Sell

U.S. dollars ¥ 2,030 ¥ – ¥ 2,080 ¥ (50)Purchase

U.S. dollars 142 – 176 34

Total ¥ 2,172 ¥ – ¥ 2,256 ¥ (16)Interest related derivatives:Interest rate swap:To receive floating,

pay fixed ¥ 5,424 ¥ 3,000 ¥ (117) ¥ (117)To receive fixed,

pay floating 2,600 2,600 (5) (5)

Total ¥ 8,024 ¥ 5,600 ¥ (122) ¥ (122)



Foreign exchangecontracts:

Type of contracts:Sell

U.S. dollars $17,281 $ – $ 17,707 $ (426)Purchase

U.S. dollars 1,209 – 1,498 289

Total $18,490 $ – $ 19,205 $ (137)Interest related derivatives:Interest rate swap:To receive floating,

pay fixed $46,174 $25,539 $ (996) $ 996To receive fixed,

pay floating 22,133 22,133 (43) 43

Total $68,307 $47,672 $(1,039) $ 1,039

18. Retirement and Severance Benefits

The Companies provide two types of post-employ-ment benefit plans, unfunded lump-sum payment plansand funded non-contributory pension plans, underwhich all eligible employees are entitled to benefitsbased on the level of wages and salaries at the time ofretirement or termination, length of service and certainother factors. The Companies occasionally makeadditional payments to employees for special retirementbenefits.

The Company decided to settle these existing planson March 31, 2007 at the Board of Directors meetingheld on February 28, 2006. And “An Agreement aboutRevision of Post-employment Benefit Plans” wasconcluded between the employees and employer onMarch 13, 2006.

The following table sets forth the composition of theliabilities recorded in the balance sheets for the Compa-nies’ retirement plans at March 31, 2005 and 2006.


2005 2006 2006Projected benefit

obligation ¥41,502 ¥ 35,694 $ 303,856Less fair value of

pension assets (11,362) (10,427) (88,763)Funded status:

Benefit obligation in excess of plan assets 30,140 25,267 215,093 Unrecognised net

transition obligation (14,471) _ _Unrecognised

actuarial differences (3,849) 217 1,847

Total 11,820 25,484 216,940Deferred benefit

expenses (82) (77) (656)Retirement and severance

benefits in theconsolidatedbalance sheets ¥11,902 ¥ 25,561 $ 217,596

Note:Some consolidated subsidiaries have adopted theallowed alternative treatment of the accountingstandards for retirement benefits for smallbusiness entities.

Severance and pension costs of the Companies includedthe following components for the years ended March31, 2005 and 2006.


2005 2006 2006

Service cost - benefitsearned during the year ¥ 2,439 ¥ 2,629 $ 22,380

Interest cost on projected benefit obligation 965 813 6,921

Expected return on planassets (159) (153) (1,302)

Amortisation of nettransition obligation 1,908 1,448 12,326

Amortisation of actuarialdifferences 1,136 1,299 11,058

Severance and retirementbenefit expenses ¥ 6,289 ¥ 6,036 $ 51,383

Loss on settlement ofretirement benefit plans – 15,459 131,600

Total ¥ 6,289 ¥ 21,495 $ 182,983

Lease payments for the above finance leases for theyears ended March 31, 2005 and 2006 were ¥324million and ¥405 million ($3,448 thousand), respectively.

Future minimum payments, including finance charges,for finance leases at March 31, 2005 and 2006 are asfollows:


2005 2006 2006

Payments due withinone year ¥ 253 ¥ 209 $ 1,779

Payments due afterone year 623 439 3,737

Total ¥ 876 ¥ 648 $ 5,516

b) Operating leases as lesseeFuture minimum payments for operating leases at

March 31, 2005 and 2006 are as follows:Millions of yen Thousands of

U.S. dollars

2005 2006 2006

Payments due withinone year ¥ 4 ¥ 4 $ 34

Payments due afterone year – 4 34

Total ¥ 4 ¥ 8 $ 68

c) Finance leases as lessorThe cost, accumulated depreciation, and remainingbook value of assets which were leased to other partiesas of March 31, 2005 and 2006 are as follows:


Cost Accumulated Remainingdepreciation book value


Software 265 137 128Total ¥ 1,287 ¥ 938 ¥ 349



Machinery, equipmentand vehicles ¥ 901 ¥ 740 ¥ 161

Software 263 134 129Total ¥ 1,164 ¥ 874 ¥ 290



Machinery, equipmentand vehicles $ 7,670 $ 6,299 $ 1,371

Software 2,239 1,141 1,098Total $ 9,909 $ 7,440 $ 2,469

Lease payments for finance leases received for theyears ended March 31, 2005 and 2006 were ¥241million and ¥179 million ($1,524 thousand), respectively.

Depreciation for the years ended March 31, 2005 and2006 were ¥176 million and ¥105 million ($894 thou-sand), respectively.

Future minimum payments to be received, includingfinance charges, for finance leases at March 31, 2005and 2006 are as follows:


2005 2006 2006

Payments due withinone year ¥ 159 ¥ 110 $ 937

Payments due afterone year 213 184 1,566

Total ¥ 372 ¥ 294 $ 2,503

17. Derivative Transactions

The Company enters into forward foreign currencyexchange, and interest swap transactions.

Forward foreign currency exchange transactions areused to reduce the risk of fluctuations in future foreigncurrency exchange rates with respect to the differencebetween the foreign trade order balances and the futurepayments for foreign procurement.

Interest swap transactions are used to avoid the risk ofrising interest rates.

The following tables summarise market value informa-tion as of March 31, 2005 and 2006 of derivativetransactions for which hedge accounting has not beenapplied.



Interest relatedderivatives:

Interest rate swap:To receive floating,

pay fixed ¥ 9,179 ¥ 1,616 ¥ (165) ¥ (165)To receive fixed,

pay floating 600 600 49 49Total ¥9,779 ¥ 2,216 ¥ (116) ¥ (116)


Net deferred tax assets are included in the consolidatedbalance sheets as follows:


2005 2006 2006

Current assets ¥ 4,866 ¥ 3,028 $ 25,777Investments and other

non-current assets 6,356 944 8,036

Net deferred tax assets ¥11,222 ¥ 3,972 $ 33,813

20. Segment Information

The Companies’ operations are classified into fivebusiness segments as follows:

Operations in the environmental systems and plantssegment include the production of refuse incinerationplants and industrial plants.

Operations in the shipbuilding and offshore struc-tures segment include the production of ships, shiprepairs, and offshore structures.

Operations in the steel structures, constructionmachinery and logistics systems segment include bridgeconstruction, water gates, shield tunneling machines,and multi-storey car parking systems.

Operations in the machinery and prime moverssegment include the production of iron and steelmanufacturing machinery, pressing machinery, dieselengines, turbines and boilers.

Operations in the other businesses segment includethe production of electronic equipment and high-precision positioning information systems.

Information by business segment of the Companies isas follows:


2005 2006 2006Sales to outside customers

Environmentalsystems and plants ¥ 133,480 ¥144,779 $1,232,476

Shipbuilding andoffshore structures 29,129 25,780 219,460

Steel structures,construction machineryand logistics systems 57,932 44,240 376,607

Machinery andprime movers 71,657 76,320 649,698

Other businesses 45,482 42,762 364,025

Consolidated 337,680 333,881 2,842,266


2005 2006 2006Inter-segment sales

Environmental systemsand plants ¥ 770 ¥ 932 $ 7,934

Shipbuilding andoffshore structures 186 182 1,549

Steel structures,construction machineryand logistics systems 316 89 758

Machinery and primemovers 1,043 280 2,384


Total 3,550 2,993 25,479Eliminations (3,550) (2,993) (25,479)

Consolidated – – –


2005 2006 2006Total sales

Environmental systemsand plants ¥ 134,250 ¥ 145,711 $ 1,240,410



Machinery and primemovers 72,700 76,600 652,081


Total 341,231 336,874 2,867,745Eliminations (3,551) (2,993) (25,479)

Consolidated ¥ 337,680 ¥ 333,881 $ 2,842,266


2005 2006 2006Cost and expenses

Environmental systemsand plants ¥ 133,212 ¥ 146,427 $ 1,246,505





Total 338,451 334,121 2,844,309Eliminations and

corporate (3,506) (3,006) (25,589)

Consolidated ¥ 334,945 ¥ 331,115 $ 2,818,720

Note: Contributions of employees to the funded pensionplans are not included in service cost.For the year ended March 31, 2005 the Compa-nies made additional payments for retirementbenefits of ¥16 million, which was recognised inexpenses, but which is not included in the abovetable.The Company applied “Practical Treatment ofAccounting for Transfers between RetirementBenefit Plans (Report of Practical Issues No.2)”,issued by the Accounting Standards Board ofJapan. As a result, in the year ended March 31,2006, the Companies recorded a loss on settle-ment of retirement benefit plans of ¥15,459million ($131,600 thousand) in other expensesand increased employees’ retirement benefits bythe same amount.For the year ended March 31, 2006, the Compa-nies made additional payments for retirementbenefits of ¥170 million ($1,447 thousand),which was recognised in expenses, and which isincluded in the above table.

Assumptions used in accounting for the retirementbenefit plans for the years ended March 31, 2005 and2006, are as follows:

2005 2006

Method of attributing Straight-line Straight-linebenefits to periods of method methodservice

Discount rate 2.0% to 3.0% 1.5% to 2.5%Long-term rate of return

on fund assets 1.0% to 3.0% 1.0% to 2.5%Amortisation period for 5 to 12 years 5 to 12 years

actuarial differences(within the remainingaverage term ofemployees’ service)

Amortisation period fornet transition obligation 15 years –

19. Income Taxes

The Companies are subject to a number of incometaxes which, in the aggregate, indicate a statutory ratein Japan of approximately 40.6% for the year endedMarch 31, 2005.

The significant differences between the statutory taxrate and the Companies’ effective tax rate for financialstatement purposes for the year ended March 31, 2005are as follows:

2005

Statutory tax rate 40.6%Non-deductible expenses 14.4Non-taxable dividend income (47.6)Effect of an inability to recognise tax effects of temporary differences 74.3Equity in net income (loss) of non- consolidated subsidiaries and affiliates (73.7)Elimination of dividend income 53.1Prefectural and municipal inhabitants taxes 4.5Other 3.6

Effective tax rate 69.2%

Note: Information for 2006 is not shown because a netloss was recorded.

Significant components of the Companies’ deferred taxassets and liabilities as of March 31, 2005 and 2006 areas follows:


2005 2006 2006Deferred tax assets:

Employees’ retirementbenefits ¥ 4,410 ¥ 10,592 $ 90,168

Tax loss carry forwards 11,133 10,483 89,240Impairment losses 4,197 9,445 80,403Allowance for

doubtful receivables 992 1,303 11,092Loss on work in progress 909 606 5,159Loss on devaluation of

securities 377 411 3,499Research and

development expenses 378 274 2,332Loss on devaluation of

real estate held for sale 159 50 426Other reserves 2,291 2,731 23,248Other 2,060 1,187 10,105Total deferred tax assets 26,906 37,082 315,672Valuation allowance (14,867) (32,839) (279,552)Deferred tax assets,

net 12,039 4,243 36,120Deferred tax liabilities:

Reserve forcompressed entry – (188) (1,600)

Net unrealised holdinggains on securities (727) – –

Other (90) (83) (707)Total deferred tax

liabilities (817) (271) (2,307)Net deferred tax assets ¥11,222 ¥ 3,972 $ 33,813



2005 2006 2006

Operating income (loss)Environmental systems

and plants ¥ 1,038 ¥ (716) $ (6,095)Shipbuilding and

offshore structures 480 935 7,960Steel structures,

construction machineryand logistics systems 86 (1,407) (11,977)

Machinery, and primemovers 471 2,551 21,716

Other businesses 705 1,390 11,832

Total 2,780 2,753 23,436Eliminations and

corporate (45) 13 110Consolidated ¥ 2,735 ¥ 2,766 $ 23,546


2005 2006 2006Assets

Environmental systemsand plants ¥ 92,754 ¥ 94,944 $ 808,240





Total 349,308 304,470 2,591,896Eliminations and

corporate 67,148 85,736 729,854

Consolidated ¥ 416,456 ¥ 390,206 $3,321,750


2005 2006 2006Depreciation







corporate 310 271 2,307

Consolidated ¥ 7,859 ¥ 8,322 $ 70,844


2005 2006 2006

Impairment losses

Environmental systemsand plants ¥ – ¥ 1,609 $ 13,697

Shipbuilding andoffshore structures – – –

Steel structures,construction machineryand logistics systems – 7,743 65,915

Machinery and primemovers – 1,389 11,824

Other businesses – 88 749

Total – 10,829 92,185Eliminations and

corporate – 2,658 22,627Consolidated ¥ – ¥ 13,487 $ 114,812


2005 2006 2006Capital expenditure



Steel structures,construction machineryand logistics systems 20,446 525 4,469




corporate 10,325 35 298

Consolidated ¥ 49,497 ¥ 13,993 $ 119,120

Corporate amounts are mainly the common accountsof the head office, which cannot be allotted to each seg-ment. Corporate assets, including mainly cash, time de-posits and securities, at March 31, 2005 and 2006 are¥68,081 million and ¥86,970 million ($740,359 thou-sand), respectively.

Geographic segment information is not shownbecause domestic net sales, including export sales fromJapan, for the years ended March 31, 2005 and 2006and related assets at March 31, 2005 and 2006 aremore than 90% of the respective consolidated net salesand assets.

Overseas sales by region for the years ended March31, 2005 and 2006 are as follows:


2005 2006 2006

Asia ¥ 31,945 ¥ 35,308 $ 300,571Central and

South America 11,287 17,225 146,633Europe 9,066 5,271 44,871Other 9,945 10,854 92,398

Total ¥ 62,243 ¥ 68,658 $ 584,473

Overseas sales include overseas subsidiaries’ sales tooverseas third parties as well as the Company’s anddomestic subsidiaries’ export sales to third parties.

Note: The main countries and areas included in each segmentare as follows:

• AsiaKorea, China, Taiwan, Thailand, Singapore, UnitedArab Emirates, Saudi Arabia, and Hong Kong

• Central and South AmericaPanama and Brazil

• EuropeEngland, France, and Germany

• OtherAmerica and Liberia

21. Related Party Transactions

The Company purchased fixed assets from a relatedparty in the amount of ¥35,684 million in the year endedMarch 31, 2005.

22. Subsequent events

a) The Company issued No.5 unsecured convertiblebonds with 300 stock subscription rights in March 2006,and 60 stock purchase warrants were exercised on April13, 2006, 10 stock purchase warrants were exercised onJune 1, 2006 and 30 stock purchase warrants wereexercised on June 26, 2006. As a result, the Companyissued 64,800,236 shares. The amount of bonds out-standing, the remaining number of stock purchasewarrants and issued common stock of the Company areas follows:

Amount outstanding of the No.5 unsecured convert-ible bonds with stock subscription rights

¥20,000 million ($170,256 thousand)The remaining number of stock purchase warrants

200Issued common stock of the Company

625,131,070 shares

b) Related to a lawsuit filed by citizens concerning thesuspicion of the violation of the antitrust law in relationto a bid for a waste incineration plant ordered byFukuoka City, five companies including the Companywere ordered to pay ¥2,088 million ($17,775 thousand)jointly to Fukuoka City by The Fukuoka District Court onApril 25, 2006.

Furthermore, a similar lawsuit concerning constructionordered by Tama New Town Environmental Association,the Company was ordered to pay ¥1,286 million($10,947 thousand) to the association by The TokyoDistrict Court on April 28, 2006.

The Company has appealed these decisions.

c) Eleven companies, including the Company, and itsconsolidated subsidiary Ataka Construction & Engineer-ing Co., Ltd. are facing a criminal accusation brought bythe Fair Trade Commission of Japan on the suspicion ofviolation of the antitrust law concerning construction ofhuman-waste treatment plants in May 2006, and werecharged by the Osaka District Public Prosecutors Office inJune 2006. The trial is in process.

As a result, the Company and Ataka Construction &Engineering Co., Ltd. are suspended from bidding by theMinistry of Land, Infrastructure and Transport and otherlocal authorities.

d) Five companies, including the Company, had beenunder investigation for possible violation of the antitrustlaw concerning construction of waste incineration plants.In August 1999, they didn’t accept the recommendationmade by the Fair Trade Commission of Japan. On June27, 2006, the Fair Trade Commission of Japan decided tobar the Company from bidding on such projects.

40 ■ Hitachi Zosen Corporation Annual Report 2006

Business Promotion & ProductDevelopment Center2-11, Funamachi 2-chome,Taisho-ku, Osaka 551-0022, JapanPhone : +81-6-6551-9101Fax : +81-6-6551-9642

Sakai Works5-1, Chikko-shinmachi 1-cho, Nishi-ku,Sakai, Osaka 592-8331, JapanPhone : +81-72-243-6801Fax : +81-72-243-6839

Mukaishima Works14755 Mukaihigashi-cho Onomichi,Hiroshima 722-0062, JapanPhone : +81-848-44-1111Fax : +81-848-44-1518

Maizuru Works1180, Amarube-shimo, Maizuru,Kyoto 625-8501, JapanPhone : +81-773-62-8925Fax : +81-773-62-4450

Innoshima Works2477-16 Habu-cho Onomichi,Hiroshima 722-2323, JapanPhone : +81-845-22-1200Fax : +81-845-22-0383

Ariake Machinery Works1, Ariake, Nagasu-machi,Tamana-gun, Kumamoto 869-0113,JapanPhone : +81-968-78-2155Fax : +81-968-78-7031

Ibaraki Works4, Kogyo-danchi, Hitachiomiya,Ibaraki 319-2134, JapanPhone : +81-295-53-5730Fax : +81-295-52-4797

Kanagawa Works4-1, Mizue-cho, Kawasaki-ku,Kawasaki, Kanagawa 210-0866,JapanPhone : +81-44-288-1149Fax : +81-44-288-1115

Taipei OfficeRoom 902, Chia Hsing Building,96 Sec. 2, Chung Shan N. Rd.,Taipei 10449, TaiwanPhone : +886-2-2568-2022/2023Fax : +886-2-2568-2030

Shanghai OfficeRoom No.9004, Zhongrong PlazaNo.1088 Pudong South Road,Pudong New Area, Shanghai200120, The People’s Republic ofChinaPhone : +86-21-6887-2525Fax : +86-21-6887-2838

Beijing OfficeRoom No.1417, Beijing FortuneBuilding, 5, Dong San Huan Bei Lu,Chao Yang Qu, Beijing 100004,The People's Republic of ChinaPhone : +86-10-6590-8481/8482Fax : +86-10-6590-8483

Head Office7-89, Nanko-kita 1-chome, Suminoe-ku, Osaka 559-8559, JapanPhone : +81-6-6569-0001 Fax : +81-6-6569-0002

Tokyo Head Office15th Floor, Omori Bellport D-wing, 26-3, Minami-Ohi 6-chome,Shinagawa-ku, Tokyo 140-0013, JapanPhone : +81-3-6404-0800 Fax : +81-3-6404-0809

Corporate Directory

Bangkok OfficeBB Building 19th Floor Room No.1911,54 Sukhumvit 21(Asoke) Road,Kwaeng Klong Torey Nua, KhetWattana Bangkok 10110, ThailandPhone : +66-0-2259-4831Fax : +66-0-2259-4833

Ho Chi Minh City Office8th Floor, PDD Building, 162 PasteurStreet, District 1, Ho Chi Minh City,VietnamPhone : +84-8-822-8636/8637Fax : +84-8-822-8635

Busan OfficeRoom 1104B, KE Building, 83-5,4-Ga, Chungang-Dong, Chung-Ku,Busan 600-816, KoreaPhone : +82-51-464-6796/6798Fax : +82-51-464-6878

HITACHI ZOSEN EUROPE LTD.5th Floor, 107 Cannon Street,London EC4N 5AF, U.K.Phone : +44-(0)20-7929-2099Fax : +44-(0)20-7929-1803

Hitachi Zosen U.S.A. Ltd.New York2 Grand Central Tower, 140 East45th Street, 14th Floor, New York,NY 10017, U.S.A.Phone : +1-212-883-9060Fax : +1-212-883-9064

Hitachi Zosen U.S.A. Ltd.Houston10777 Westheimer Road, Suite 1075,Houston, TX 77042, U.S.A.Phone : +1-713-532-9611Fax : +1-713-532-9533

Hitz Holdings U.S.A. INC.2 Grand Central Tower, 140 East45th Street, 14th Floor, New York,NY 10017, U.S.A.Phone : +1-212-883-9060Fax : +1-212-883-9064

Zhenjiang Zhengmao HitachiZosen Machinery Co., Ltd.250 Guantang Qiao Road, ZhenjiangJiangsu, The people's Republic ofChinaPhone : +86-511-451-4032Fax : +86-511-451-4982

Taiwan Hitz Hi-TechnologyCorporation2F, No.586, Section 2 Wenxin Road,Xitun District, Taichung City 407,Taiwan (R.O.C)Phone : +886-4-2130-9777Fax : +886-4-2310-9779

Hitachi Zosen Corporation Annual Report 2006 ■

Investor Information(On a nonconsolidated basis, as of March 31, 2006)

Financial Institution 24.1%

Securities Firms 4.7%

Other Corporations 6.4%

Foreign Owners 8.4%

Individuals 56.4%

Hitachi Zosen Corporation

Date of Establishment:April 1, 1881

Paid-in Capital:¥30,355,788,573

Consolidated Subsidiaries:57

Number of Employees:2,034

Number of Shareholders:126,497

Common Stock:Authorized:2,000,000,000Issued and outstanding:560,330,834

Major Shareholders:The Bank of Tokyo-Mitsubishi UFJ, Ltd.Japan Securities Finance Co., Ltd.SOMPO JAPAN INSURANCE INC.Japan Trustee Service Bank, Ltd.The Master Trust Bank of Japan, Ltd.Nippon Life Insurance CompanyMorgan Stanley and Company, Inc.Bank of New York GCM Client Accounts E ISGHitachi, Ltd.Tokio Marine & Nichido Fire Insurance Co., Ltd.

Transfer Agent for Common Stock:Mitsubishi UFJ Trust and Banking Corpo-ration4-5, 1-chome, Marunouchi, Chiyoda-ku,Tokyo, 100-0005, Japan

Stock Exchange Listings:Tokyo, Osaka stock exchanges(#7004)

Independent Accountants:KPMG AZSA & Co.

General Meeting of Shareholders:The General Meeting of Shareholders isheld in June in Osaka

Stock Price Range in Fiscal 2006:High: ¥273 (January 5, 2006)Low: ¥138 (May 25, 2005)

Shareholders by Category:

Stock Price Range and Trading Volume (Tokyo Stock Exchange) :

• Stock price (yen)

• Monthly trading volume (million shares)

41 Hitachi Zosen Corporation Annual Report 2006 ■

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