NOTES TO NON-CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1999 and 1998

KAWASAKI STEEL CORPORATION

1. Basis of preparation

(a) The accompanying non-consolidated financial statements were prepared from the accounts and records maintained by Kawasaki Steel Corporation (the "Company") in accordance with the relevant provisions of the Securities and Exchange Law of Japan and in conformity with generally accepted accounting principles and practices in Japan. Accordingly, the accompanying non-consolidated financial statements are not intended to present the non-consolidated financial position, results of operations, and cash flows in accordance with accounting principles and practices generally accepted in countries and jurisdictions other than Japan.

In preparing the non-consolidated financial statements for inclusion in this report, certain items presented in the originally published financial statements have been reclassified for readers outside Japan.

(b) Preparation of non-consolidated statements of cash flows is not required in Japan. They are, however, presented in this report to provide additional information.

(c) As permitted by the Securities and Exchange Law of Japan, all amounts in the financial statements and notes are stated in millions of yen by rounding off fractional amounts of less than one million. As a result, the totals in yen shown in the financial statements and notes do not necessarily agree with the sums of the individual amounts.

(d) The translation of yen amounts into U.S. dollar amounts is included solely for convenience and has been made as a matter of arithmetical computation only, at the rate of 120.55 yen=US$1, the prevailing rate on the Tokyo foreign exchange market on March 31, 1999.

The translation should not be construed as a representation that the yen amounts have been or could be readily converted, realized, or settled in U.S. dollars at that or any other rate.

2. Summary of significant accounting policies

(a) Foreign currency translation
Short-term monetary assets and liabilities in foreign currencies are translated into Japanese yen at the exchange rates prevailing on the date of the respective balance sheet (current exchange rates).

(b) Sales recognition
Sales of finished goods are generally recognized when the goods are shipped to customers.

Sales and the related costs of certain long-term construction contracts (for which the period of construction is more than one year and the acceptance amount of the contract exceeds 7 billion yen, but 500 million yen in the case of the Bridge and Steel Structure Division) are recognized by the percentage of completion method.

(c) Inventories
Inventories are carried at cost as determined by the last-in, first-out method, except for inventories of the engineering business, which are valued by the individual identification method; inventories of the LSI business are by the first-in, first-out method; supplementary supplies by the moving-average method; and ingot cases and rolls by the average method.

(d) Marketable securities and investments in securities
All securities are valued at cost as determined by the moving-average method. However, in cases where there has been a substantial decline in value and the Company does not expect a significant recovery in the foreseeable future, such securities have been written down to a level that the Company considers to be fair and reasonable in the circumstances.

(e) Depreciation
Depreciation is provided by the declining-balance method based on the useful lives of the assets as prescribed by the Corporation Tax Law of Japan. The range of useful lives is principally from 14 to 50 years for buildings and structures and from 5 to 15 years for machinery and equipment.
In the current year ended March 31, 1999, in accordance with a revision of the Ministerial Ordinance Concerning the Useful Life of Depreciable Assets, the Company reduced the useful lives for buildings.

As a result of this change, "Ordinary profit" for the year ended March 31, 1999 was decreased by 1,386 million yen , and "Loss before income taxes" for the year ended March 31, 1999 was increased by the same amount, when compared with calculations based on the previous useful lives.

Maintenance and repairs, including minor renewals and betterments, are charged to income as incurred.

(f) Research and development expenses
Research and development expenses are charged to income as incurred.

(g) Income taxes
Until the year ended March 31, 1998, income taxes were calculated on taxable income and charged to income on an accrual basis, and deferred income taxes resulting from timing differences between financial reporting and tax reporting were not provided.
In the current year ended March 31, 1999, the Company applied tax effect accounting. As a result of this change, "Net loss" for the year ended March 31, 1999 was decreased by 42,884 million yen, and "Adjustment for past tax effect" aggregated 12,520 million yen, therefore, "Stockholders' equity" was increased by 55,405 million yen, when compared with the previous method. In addition, " Deferred tax assets" aggregated 55,405 million yen; therefore, "Assets" were increased by the same amount, when compared with the previous method.

(h) Retirement allowances and pension plans
Employees of the Company are generally entitled to lump-sum retirement allowances when they leave the Company. The amount of the retirement allowance is determined on the basis of length of service and basic salary at the time of retirement.

In the case of involuntary retirement, the employee is entitled to a higher payment than in the case of voluntary retirement.

The Company provides for these retirement allowances by the present value method, based on the amounts which could be required to be paid if all employees retired voluntarily as of the balance sheet date.

Retirement allowance provisions are not funded by the Company.

Effective March 1, 1990, the Company introduced a qualified defined pension plan, replacing a part of the lump-sum retirement allowance, which provides a lump-sum payment, as defined, to employees who terminate employment with the Company at age 50 or older.

Normal costs of the plan are charged to income as incurred. Past service cost is being amortized by the declining-balance method (30% of the unamortized balance each year), as prescribed by Japanese tax law.
In the current year ended March 31, 1999, the Company adopted the reduction of anticipated rates of interest and benefit for making the benefits scheme financially sound. As a result of this change, past service cost was increased by 18,543 million yen; therefore, "Loss before income taxes" for the year ended March 31, 1999 was increased by 5,157 million yen, when compared with the previous rates.

(i) Net income per share and cash dividends per share
The computation of net income per share is based on the weighted average number of shares of common stock issued during each year. The outstanding convertible bonds did not have the potentially deductive effect of primary net income per share in fiscal 1998.

Cash dividends declared subsequent to the end of an accounting year and designated as applicable to the earnings of the year are accrued and charged to retained earnings as of the end of the accounting year in question.

3. Marketable securities

Marketable securities and the aggregate values of listed equity securities were as follows:

4. Inventories

Inventories as of March 31, 1999 and 1998 were as follows:

5. Deferred income taxes

  Significant components of the Company's deferred income tax assets and liabilities consisted of the following :

 

 

 

6. Investments in and advances to subsidiaries and affiliates

Investments in and advances to subsidiaries and affiliates consisted of the following:

7. Short-term loans

Short-term loans consisted of the following:

8. Allowance for loss on guarantees and similar acts

The Company provides for estimated losses on guarantees and similar acts in consideration of the financial conditions of companies whose loans the Company guarantees.

 

9. Other current liabilities

Other current liabilities as of March 31, 1999 and 1998 consisted of the following:

10. Long-term debt

Long-term debt as of March 31, 1999 and 1998 consisted of the following:
(1) Until September 27, 2001. 3.45% thereafter.
(2) Until January 27, 2000. 2.55% thereafter.
(3) If the 6 month JPY-Libor plus 0.8% exceeds the following rates, the following rates will be applied.
1st and 2nd calculation period: 1.8%
3rd and 4th calculation period: 2.1%
5th and 6th calculation period: 2.4%
7th and 8th calculation period: 2.7%
9th and 10th calculation period: 3.0%
(4) These bonds were convertible into shares of common stock at the rate of 1,082.20 yen per share as of the date of this report.

Assets pledged as of March 31, 1999 and 1998 to secure the Company's long-term debt were as follows:

As is customary in Japan, substantially all bank borrowings, including short-term borrowings, are subject to general agreements with each bank which provide, among other things, that the bank may require the borrower to provide collateral (or additional collateral) or guarantees for these loans and may treat any collateral so furnished as collateral for all present and future indebtedness. In addition, the bank shall have the right to offset cash deposits against obligations that have become due or, in the event of default, against all obligations payable to the bank.

Under certain loan agreements relating to long-term debt, the lenders may require the Company to submit proposals for appropriations of earnings, including payment of dividends, for the creditors' review and approval prior to presentation to the stockholders. The Company has never received a request of the kind described.

The aggregate annual maturities of long-term debt subsequent to March 31, 1999 are summarized as follows:
 
 
 

11. Allowance for special repairs

Blast furnaces and hot stoves, including related machinery and equipment, periodically require substantial repairs and replacement of components. Such work normally occurs approximately every 7 to 10 years for blast furnaces and every 14 to 20 years for hot stoves. The estimated future costs of such maintenance are provided and charged to income on a straight-line basis over the periods to the respective dates of such anticipated replacements and repairs. Differences between the estimated costs and the actual costs are charged or credited to income as incurred.

12. Legal reserve

The Commercial Code of Japan provides that a portion of retained earnings equal to at least 10% of cash dividends and bonuses to directors and statutory auditors paid with respect to each financial period be appropriated as a legal reserve until such reserve equals 25% of the common stock. This reserve is not available for dividends, but may be capitalized by resolution of the Board of Directors or used to eliminate a deficit by resolution of the stockholders.

13. Retained earnings

Retained earnings include the reserves under the Special Taxation Measures Law. The schedule of these reserves is summarized as follows:

The Special Taxation Measures Law permits the Company to deduct, for income tax purposes, transfers to certain reserves that are not required for financial accounting purposes, if recorded on the books as profit appropriations or charges to income, and to restore them to taxable income in future years.

14. Sales to and purchases from subsidiaries and affiliates

Sales to and purchases from subsidiaries and affiliates for the years ended March 31, 1999 and 1998 were as follows:

15. Income taxes

Income taxes applicable to the Company consist of corporate, enterprise, and inhabitants' taxes. Until the year ended March 31,1998, "Income taxes" shown in the statements of operations included corporate and inhabitants' taxes, and enterprise tax was included in operating expenses. In the current year ended March 31,1999, in accordance with the revision of the Ministerial Ordinance Concerning the Securities and Exchange Law of Japan, "Income taxes" shown in the statements of operations include the above-mentioned three taxes. This change has had no effect on "Ordinary profit" and "Loss before income taxes". "Accrued taxes" reflected on the balance sheets consist of the above-mentioned three taxes.

16. Contingencies

The Company had the following contingent liabilities as of March 31, 1999 and 1998:

17. Finance lease agreements

As of March 31, 1999, the Company had finance lease agreements, principally for computers, vehicles, and other industrial machinery and equipment. Future minimum payments for finance lease as of March 31, 1999 are 6,637 million yen ($55,057 thousand) in fiscal 1999 and 17,429 million yen ($144,587 thousand) in fiscal 2000 and thereafter.
Annual lease payments for the years ended March 31, 1999 and 1998 were as follows: