Years ended March 31, 1999 and 1998 1. Basis of Presenting of Financial Statements Kobe Steel, Ltd. (the "Company") maintains its accounts and records in accordance with the provisions set forth in the Japanese Commercial Code and the Securities and Exchange Law and in conformity with accounting principles and practices generally accepted in Japan, which are different from the accounting and disclosure requirements of International Accounting Standards. The accompanying non-consolidated financial statements are a translation of the audited non-consolidated financial statements of the Company which were prepared in accordance with accounting principles and practices generally accepted in Japan from the accounts and records maintained by the Company and were filed with the Minister of Finance ("MOF") as required by the Securities and Exchange Law. In preparing the accompanying non-consolidated financial statements, certain reclassifications have been made in the non-consolidated financial statements issued domestically in order to present them in a form which is more familiar to readers outside Japan. The non-consolidated statements of cash flows have been prepared for the purpose of inclusion in the non-consolidated financial statements, although such statements are not customarily prepared in Japan and are not required to be filed with MOF. Certain prior year amounts have been reclassified to conform to 1999 presentation. These changes had no impact on previously reported results of operations or shareholders' equity. The translation of the Japanese yen amounts into U.S. dollars are included solely for the convenience of the reader, using the prevailing exchange rate at March 31, 1999, which was 120.55 yen to U.S.$1.00. The convenience translations should not be construed as representations that the Japanese yen amounts have been, could have been, or could in the future be, converted into U.S. dollars at this or any other rate of exchange. 2. Summary of Accounting Policies (1) Reporting Entity The non-consolidated financial statements report only the accounts of the Company. (2) Cash Equivalents The Company considers time deposits (due within one year) to be cash equivalents. (3) Allowance for Doubtful Accounts The allowance for doubtful accounts is provided in amounts considered to be sufficient to cover possible losses on collection. It is determined by adding the uncollectable amounts individually estimated for doubtful accounts to a maximum amount permitted for tax purposes, which is calculated collectively. (4) Marketable Securities and Investments in Securities Listed equity securities included in both marketable securities and investments in securities, except for certain equity securities of subsidiaries and affiliates in which the Company's ownership equals or exceeds 25 percent, are stated at the lower of moving average cost or market value. Other securities, including investments in subsidiaries and affiliates, are stated at moving average cost. If significant impairment of value is deemed permanent, cost is appropriately reduced. Commencing with the year ended March 31,1999, the Company records recoveries of write-downs of securities in accordance with a revision in the Corporation Tax Law. There was no effect on net loss resulting from adopting this accounting policy. (5) Inventories Inventories are valued at cost, as determined by the following methods: Two main works in the Iron and Steel Sector and the three main plants in the Aluminum and Copper Sector.......... ..................................................Last-in, first-out method Finished goods and work in process in one plant in the Iron and Steel Sector and the Machinery and Information Sector.......... ..................................................Specific identification method Others.......... ..................................................Average method (6) Depreciation of Plant and Equipment Buildings and structures in all locations and machinery and equipment located in the Kakogawa Works, the Kobe Works, the Takasago Works, the Moka Plant, the Chofu Plant and the Daian Plant are depreciated using the straight-line method and all other machinery and equipment are depreciated using the declining balance method over estimated useful lives. Effective April 1, 1998, in accordance with a revision in the Corporation Tax Law, the Company shortened the estimated useful lives of buildings, excluding building fixtures. The effect of this change was to increase loss before income taxes by 883 million yen ($7,325 thousand). (7) Long-term Construction Contracts Sales and the related costs of certain long-term (over one year) construction contracts are recognized by the percentage of completion method. (8) Research and Development Expenses Effective April 1, 1998, the Company changed its method of accounting for expenses in respect of the development of new products and research into and the application of new technologies (being in each case expenses which are expected to contribute to future sales) from deferring and amortizing over five years to charging directly to income. This change was made to improve the financial reporting of the Company in accordance with the "Opinion Concerning Establishment of Accounting Standards for Research and Development Costs, etc." by the Business Accounting Deliberation Council, etc. The effect of this change was to increase loss before income taxes by 7,241 million yen ($60,066 thousand). (9) Income Taxes The Company provided income taxes at the amounts currently payable for the year ended March 31, 1998. Effective April 1, 1998, the Company adopted the new accounting standard, which recognizes tax effects of temporary differences between the carrying amounts of assets and liabilities for tax and financial reporting. The asset and liability approach is used to recognize deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The amount of deferred income taxes attributable to the net tax effects of the temporary differences at April 1, 1998 of 7,506 million yen ($62,265 thousand) is reflected as an adjustment to the retained earnings brought forward from the previous year. Prior years' financial statements have not been restated. The effect for the year ended March 31, 1999 was to decrease net loss by 17,361 million yen ($144,015 thousand) Also, the new disclosure requirements effective from the year ended March 31, 1999, require that enterprise tax, which is levied on taxable income at a normal tax rate of approximately 11%, be included in income taxes. There was no effect on the non-consolidated statements of operations for the years ended March 31, 1999 and 1998 from this change. (10) Employees' Retirement Benefits Substantially all employees of the Company are entitled to a lump-sum payment at the time of retirement. The amount is, in general, determined on the basis of length of service, base salary at the date of retirement and cause of retirement. In the case of involuntary retirement, the employee is entitled to a greater payment than in the case of voluntary retirement. Employees whose employment is terminated after the age of 50 may elect to take part of their retirement benefits in the form of pension payments. The funds required to make pension payments are entrusted to an outside trustee. The liability in respect of lump-sum retirement benefits is stated at the present value of the unfunded portion of the expected future retirement benefits attributable to eligible employees' years of service as at the balance sheet date. Prior service costs in respect of the pension plan, less that portion of the provision in respect of lump-sum retirement benefits no longer required by reason of the introduction of the pension scheme, are amortized on the declining balance method at the rate of 15 percent per annum and included in "Other income (expenses): Amortization of prior service costs of the pension plan" in the non-consolidated statements of operations. The net assets at book value of the non-contributory funded pension plan amounted to 82,968 million yen ($688,246 thousand) at October 31, 1998, the date of the most recent available information. During the year ended March 31, 1999, to improve the financial soundness of the pension plan, the Company reduced the assumed rate of return on fund assets and reduced the rate of benefits to employees. The Company also changed its funding method from a full year contribution in March of each year to monthly funding. As a result, for the year ended March 31, 1999, only one month funding was contributed and charged to expenses. The effect of these changes was to decrease loss before income taxes by 6,997 million yen ($58,042 thousand). (11) Allowance for Special Repairs Blast furnaces and hot blast stoves, including related machinery and equipment, periodically require substantial component replacement and repair. The estimated future costs of such work are provided for and charged to income on a straight-line basis over the period to the date of the anticipated replacement and repair. The difference between such estimated costs and actual costs is charged or credited to income at the time the repairs take place. For the year ended March 31, 1999, the Company reversed the allowance for special repairs, which exceeded the future revised cost of repairs to hot blast stoves located in the Kakogawa Works and the Kobe Works, and which was related to two blast furnaces located in the Kobe Works which were shut down and disposed. Reversal of the allowance for special repairs is shown in the accompanying non-consolidated statements of operations. (12) Translation of Foreign Currencies Current receivables and payables denominated in foreign currencies are translated at historical rates in accordance with Statement No. 55 of the Audit Committee of the Japanese Institute of Certified Public Accountants. All other assets and liabilities denominated in foreign currencies are translated at historical rates except those, including bonds denominated in foreign currencies, hedged by forward exchange contracts. If current and long-term receivables and payables denominated in foreign currencies had been translated at the current rate on March 31, 1999, a gain of 1,918 million yen ($15,910 thousand) would have been recognized. (13) Leases Finance leases which do not transfer ownership and do not have bargain purchase provisions may be accounted for in the same manner as operating leases under generally accepted accounting principles in Japan. (14) Net Income (Loss) per 1,000 Shares Computations of net income (loss) per 1,000 shares are based on the weighted average number of shares outstanding during the year.