Breaking down the ¥27.6 billion negative impact from the deterioration in the sales mix into more detail, the decline in domestic sales volume and the resulting deterioration in the sales mix had a negative impact of around ¥20 billion, more stringent specifications, such as those related to safety, had a negative impact of about ¥19 billion, and the increase in over- seas sales volume had a positive impact of around ¥12 billion. Put another way, the operating environment in fiscal 2003, marked by a weak domestic economy and greater competi- tion in the compact car (mainly 1.0 liter to 1.3 liter) segment, adversely affected the FHI Group’s sales, which are character- ized by high-performance cars, and ongoing efforts within the FHI Group to reduce total costs, including materials, were insufficient to offset the aforementioned adverse effects. For this reason, operating income in fiscal 2003 declined. Of the ¥14.2 billion increase in SG&A and other expenses, ¥7.7 billion was attributable to Fuji Heavy Industries Ltd. (the parent), around ¥4.0 billion was attributable to U.S. subsidiary Subaru of America, Inc., (SOA), and the remainder was due to exchange conversion. FHI (the parent) accounted for most of the ¥5.2 billion increase in R&D expenses, which rose 0.4 point as a percentage of sales, from 4.0% to 4.4%. Other expenses, net, totaled ¥20.5 billion, an improvement of ¥11.7 billion from the previous fiscal year. The major items were a ¥5.0 billion decline in losses on the devaluation of investment securities and a ¥6.8 billion drop in loss on the liquidation of affiliated companies. The decline in loss on the devaluation of investment securities was due mainly to lower valuation losses on financial stocks, which generated valuation losses of ¥8.9 billion in the previous fiscal year. The decline in losses on the liquidation of affiliated companies was due to the disappearance of ¥6.8 billion in losses on the liquidation of a domestic helicopter operation company and other items incurred in the previous fiscal year. As a result, income before income taxes and minority interests fell 16.3%, to ¥46.9 billion, a smaller decline in per- centage terms than the decrease in operating income. Moreover, income taxes for the year declined ¥14.7 billion, to ¥13.5 billion, owing to lower pretax profits, tax deductions associated with higher R&D expenses by FHI, and the reversal of the prior year’s accrued income taxes. After application of deferred-tax accounting, the corporation tax rate dropped to 28.9%, from 50.4%. Minority interests amounted to ¥0.1 billion, ¥2.3 billion lower than in the previous fiscal year. Consequently, net income rose 10.6%, to ¥33.4 billion, mark- ing the second straight annual rise. Net income as a percent- age of sales improved 0.2 point, to 2.4%, while return on equity improved 0.3 point, to 8.3%. Total assets at year-end increased ¥74.5 billion, or 5.9%, to ¥1,344.0 billion. Of this amount, ¥61.1 billion was due to the addition of SIA (including the Consignment Division) to the consolidated accounts. Excluding this factor, total assets rose only 1.1%. Total current assets rose ¥33.2 billion. The item FINANCIAL POSITION registering the sharpest rise was short-term loans, with an increase of ¥26.5 billion. This increase was associated mainly with low-interest loans by a domestic finance subsidiary. Marketable securities declined ¥21.8 billion, due to the fact that FHI (the parent) sold significant amounts of Free Financial Funds (FFF) and Money Market Funds (MMF) but made few new purchases. Cash and time deposits rose ¥13.3 billion, with the bulk accounted for by FHI (the parent), which built up liquid assets in light of the war in Iraq toward the end of the fiscal year. Investment in plant, property, and equipment increased ¥14.8 billion, of which ¥7.1 billion was related to SIA becoming a wholly owned subsidiary. Investments and other assets increased ¥25.8 billion, with the majority due to a ¥33.1 billion rise in the item “Other.” Around ¥32.7 billion of this amount is restricted collateral cash of SIA, which has been pledged as an alternative credit for collateral to secure the lease payment of production equipment for Isuzu vehicles.  SIA Financial Settlement Summary of assets and liabilities at the time of consolidation (Billions of yen) (Amortized by each fiscal year according to the incurred  expenses) Current Iiabilities:  ¥5.2 Total Iiabilities and consolidation adjustments:  ¥61.1 Fixed Iiabilities:  ¥7.0 Consolidation adjustment account: ¥48.8 Current assets:  ¥20.6 Fixed assets:  ¥40.4 Total assets:  ¥61.1 ■■ Balance sheet: Consolidation  adjustment account ■■ Statement of income: Non-operating  income (Consolidation adjustment income) 0 10 20 30 40 50 0 100 200 300 400 500 2004 2005 2006 2007 and beyond 2003 2002 (Millions of U.S. dollars) 2004 2005 2006 2007 and beyond 2003 2002 (Billions of yen) 6.7 7.8 13.1 4.9 16.3 48.8 407.4 Plan to Amortize the Consolidation Adjustment ■■ Net assets ■■ Depreciation of net assets 24 FUJI HEAVY INDUSTRIES LTD.