\ ~~~~~~~~~~~~~~~R E S T R I C T E DIRETRN TO

EPORTS DESK Repo rt N o. TO-159b

WITHIN "4COpyONE WEEK

This report was prepared for use within the Bank. In making itavailable to others, the Bank assumes no responsibility to them forthe accuracy or completeness of the information contained herein.

INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT

APPRAISAL OF THF

KAWASAKI STEEL CORPORATION

BLAST FURNACE PROJECT

JAPAN

January ZO, 1958

Department of Technical Operations

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CURRENCY EQUIVALENTS

1 US$ n Y3601 million Y = $ 2,780

All tons are metric tons of 2,200 poundsThe fiscal year is from May 1 to April 30

APPRAISAL CF THE KkWASAXI STEEL C0RPOAOTIONBLAST FURICE PROJECT

TABIE OF CONTENTS

Paragraphs

Summary and Conclusions 1 - 10

I. Introduction 11 - 20

II. The Company 21 - 43Organiz-ation and Ownership 21 - 24Position in the JapaneseSteel Market 25 - 26

Present Facilities and Re-cent Growth 27 - 32

Management 33Labor 34Technical Assistance andStaff Training 35

Financial Results and Fin-ancing of Recent Invest-meents 36 - 41

Recent Financial Reorgan-ization 42 - 43

nII. The Project 44 - 65Description, Construction

Schedule and Arrangements 44Physical Results Expected 45 - 47Raw Materials 48 - 49Cost of the Project 50 - 51Future Production 52 - 53Expected Savings in Costof Production 54 - 56Price and Market Outlook 57 - 65

IV. Financing Plan and Projections 66 - 87Financing Plan 66 - 76Financial Projections 77Financial Conclusions 78 - 87

1. Properties taken over by the Kawasaki Steel Corporationon its establishment in 1950.

2. Works constructed and to be constructed at Chiba.3. Summary balance sheets, April 30, 1952 - 1957.4. Earnings statements, years ending April 30, 1952 - 1957.5. Details of recent financial reorganization.6. Future production plan.7. Financial projections.8. Present and proposed protective financial arrangements.

APPRPAISAL OF THE XIKASAKI STEL CORPORATIONBLAST FUR7NA- PROJECT

SUMKRY All) CONCLUSIONS

1. The Japanese Government has asked the Bank to make a loan to meetpart of the cost of a project of the Kawasaki Steel Corporation, which in-volves the erection of a second blast furnace at the Companyrs plant at Chiba,near Tokyo.

2, In December 1956, the Bank made a loan of 420 million (157-JA) tothe Japan Development Bank to finance foreign exchange expenditures for theconstruction of a strip mill at the same site. This project was appraised inT.O. 125a. The loan was made on the condition that the Company undergo afinancial reorganization, and elaborate arrangements were made to avoid thepossibility that the Company might get into financial difficulties during thelife of the loan.

3. Since that time the Company's financial position and prospects haveimproved considerably, and excellent progress has been achieved in the con-struction of the strip mill, which is likely to be finished much in advanceof schedule, and at a cost within the estimates.

4. The Company asked the Bank during 1957 to approve the constructionof the proposed second blast furnace on the basis of financing to be arrangedin Japan, and since the project promised substantially to reduce costs of pro-duction and to make possible an increase in the output of crude and finishedsteel without further investment in steel furnaces or rolling facilities, theBank agreed.

5. Subsequently, the Bank indicated its willingness to consider loansfor local currency expenditures on projects in Japan, and the project was sub-mitted for consideration as the basis of a Bank loan.

6. The cost of the project is estimated at about Y7.2 billion ($20 mil-lion equivalent). The Company proposes to finance the project partly by anissue of ordinary shares (*3 billion), which has already been successfullysold, partly by 10 year loans fron Japanese insurance companies and banks(1900 million), and partly by a loan from the Bank (through the Japan Develop-ment Bank) of $8 million equivalent (=2,880 million, which is equivalent to40% of the estimated cost). The balance of the cost (L420 million) would becovered by retained earnings. The Company also proposes to borrow *2 billionat five and seven years in Japan to cover part of its increased working capitalrequirements.

7. The proposed project should reduce the Company's dependence on pur-chased pig iron and scrap, and so effect improvements in earnings which aresubstantial in proportion to the amount invested.

8. The Company is well managed and has a competent technical staff.Satisfactory arrangements have been made for technical assistance and staff

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training. The Company operates its present plants efficiently. The costestimantes for the project are reasonable. There should be an adequate marketfor the Oompany's products. Arrangements for procurement and for constructionmanagement are satisfactory,

9. The financing plan is sound, and the financial projections show thaton conservative assumptions the Company should be able to cover its debt ser-vice with an adequate margin, maintain a sound liquid position and earn areasonable return on its shares. Some of the protective financial arrange-ments made in connection with the existing Bank loan could now, in view of theCompany's improved position and prospects, be eliminated, and others modified,without any undue risk to the creditors financing the construction program(for details see Annex 8). All the Japanese parties concerned have agreed tothese modifications in the protective financial arrangements.

10. The project is suitable for a Bank loan of $8 million equivalent,with a term of 14 years (including 21 years, grace). The borrower would bethe Japan Development Bank, which would relend the proceeds of the loan tothe Company. The loan would be guaranteed by the Japanese Government. Satis-factory arrangements have been made to borrow Y900 million for project costsand *2 billion for working capital, and protective financial arrangementshave been agreed as indicated in Afnex 8.

APPRAISAL CF THE KAWASAKI STEEL CORPORATIONBLhST FURNACE PROJECT

I. INTRODUCTION

U.* The Kawasaki Steel Corporation is one of the leading Japaneseproducers of steel plates and sheets. It has a well-established positionon both the Japanese and the export markets, and its management is techni-cally competent. However, its existing plate and sheet mills are of obso-lete types, and their costs of production are higher than those of moderncontinuous or semi-continuous strip mills.

22. In order to modernize its plant and to reduce production costs,Kawasaki is constructing a modern, fully integrated steel mill at Chiba,on Tokyo Bay. The first stage, which includes steelmaking equipment and aslabbing mill, was begun in 1952 and finished late in 1954. The second stage,which includes one hot and one cold strip mill, together with soaking pits,pelletizing equipment and service facilities, is now being constructed, andis due to be completed by August 1958.

13. In order to obtain the funds needed for this second stage of itsconstruction program, the Company borrowed $2O million equivalent (Loan No.157 JA) from the Bank in December 1956, sold an issue of ordinary shares($5.5 million equivalent) and borrowed Y4 billion ($11.1 million equivalent)from the Japan Development Bank and two other Japanese banks. In order toavoid possible financial difficulties which might arise because large amountsof existing debt (incurred to finance the first stage of the Chiba construc-tion program) would otherwise fall due during the construction period ofStage 2 , the Company made arrangements (which the Bank stipulated as a con-dition for its lending) with its existing long-term creditors (except theholders of its publicly issued debentures) to postpone the repayment dates oftheir loans, and to make the postponed repayment instalments payable only ifearned after the payment of specified priority charges, including the serviceof the new borrowings from the Bank and the three Japanese banks. Any repay-ment instalments which could not be met after the prior charges had been paidwcnld be further postponed, if necessary until the new borrowings had beenpaid off.

14. The contractual arrangements provided that the (bmpany might notincrease the amount of its long-term debt without the agreement of the Bankand the Japan Development Bank, limited short-term borrowings to V5 billionand limited the payment of cash dividends so as to ensure the retention ofadequate earnings during the construction period. 3tandby credits were ar-ranged with the fbmpany's main bank, the Daiichi Bank, to protect the Companyagainst temporary liquidity difficulties.

i5. These arrangements for meeting the Company's financial needs andfor safeguarding it against possible financial difficulties put it into asound position to embark on the second stage of its construction program.Financial projections showed that its earnings prospects were good and itsprospective debt service cover satisfactory.

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16. Early in 1957, the Company, in accordance with the policy of theJapanese Government and the steel industry to reduce the country's depend-ence on supplies of imported pig iron and scrap, and in order to lower itscosts of production, adopted a plan to construct a second blast furnace(1,000 tons per day) and related facilities at its Chiba works, at a costof about $18 million equivalent. It proposed to finance this constructionpartly by an issue of share capital ($8.3 million equivalent) and partly byborrowings in Japan ($9.7 million equivalent).

17. In accordance with its obligations under the contractual arrange-ments for the existing Bank loan, the Company requested the Bank's permissionto incur the additional long term debt needed for this third stage of theirconstruction program. The Bank, being satisfied that this additional invest-ment would be in the Company's interest, and that the financing plan wassound, agreed in June 1957, to the construction of the blast furnace, pro-vided that the proposed financing could be arranged in a satisfactory manner.

18. Subsequently, the Bank notified the Japanese Government that it wasprepared to consider local expenditure loans for suitable projects in Japan,and the Company's project, which involves little foreign exchange expenditure,became eligible for consideration by the Bank.

19. In September the Japanese Government informed the Bank that amongthe projects which it wished the Bank to consider was this project, and trans-mitted to the Bank an application for a loan equivalent to about 40% of theestimated cost.

20. This report brings up to date information about the Company con-tained in the appraisal (T.O. 125a) prepared last year in connection withLoan No. 157 JA, and appraises the blast furnace project and the proposedfinancing plan.

II. THE CCOPANY

Organization and Ownership

21. Kawasaki began to produce steel in 1918, when the Kawasaki DockyardsCompany (predecessor to the present Kawasaki Heavy Industries Limited) builta plate mill in the city of Kobe at the site of the present Fukiai plant tomanufacture its own ship plates. In 1929, "pull-over" type sheet mills wereadded, and the company became Japan's first producer of steel sheets. Untilthe end of the last war, it maintained its position as a leading (and prob-ably the largest) Japanese producer of plates and sheets.

22. in 1950, as a result of the decartelization laws, the steelmakingfacilities were separated from the Kawasaki Dockyards Company, and were trans-ferred to an independent company known as the Kawasaki Steel Corporation.

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The Company has now an authorized share capital of *12 billion ($33.3 millionequivalent), of which *9 billion ($25 million equivalent) is fully paid up.This includes a recent issue of 03 billion.

23* The ownership of Kawasaki Steel Corporation is widely distributed.As of September 30, 1957, banks, insurance companies and securities companiesheld about 31% of the stock, industrial and commercial corporations about 24%and private investors 45%. There were more than 58,o00 individual and nearly800 corporate shareholders.

24, The Obmpany has small investments in some subsidiary companies, butthese investments are not important. The accounts of the subsidiaries havenot been consolidated with those of the Company for the purpose of this report.

Position in the Japanese Steel Market

2!. In recent years, Kawasaki has produced 7 - 9% of the total Japaneseoutput of rolled steel products. Out of its total production of 690,000 tonsin the 12 months ended April 30, 1957s 52% were plates, 29% were black, gal-vanized and special sheets, and the remaining 19% were bars, narrow strip andwelded tubes. In the previous year, plates were 49%, sheets 34%, others 17%,but in the preceding years plates and sheets each accounted for 40 - 45% oftotal output.

26. During the last three years, the OCmpany's output of steel sheets hasbeen maintained., but its share in the Japanese market has declined. When thenew strip mill at Chiba comes into production, the Companyts costs of produc-tion w'ill fall, and the quality of its products will improve, so that itshould be in a good position to compete with other leading producers, such asYawata, which also have modern facilities for this type of product.

Present Facilities and Recent Growth

27. At the time it was separated from the Kawasaki Dockyards Company,the (bmpany took over steel plants with a nominal yearly ingot capacity ofover 800,000 tons and rolling mill facilities which permitted some flexibilityin the choice of end products. These facilities are listed in Annex 1.

28. Many problems faced the Company. The main steel mills (Fukiai andHyogo) were quite old. There were no blast furnaces; ingot production wasbased alnost entirely on purchased scrap. The fairly modern electric steelfurnaces at NJishinomiya and Chita operated far below their rated capacities,and the cost of the ordinary steel ingots making up the bulk of the outputwas high. The Omparyj, like many other steel producers, found itself in aposition where conversion to larger scale and more continuous operations wasessential to reduce costs, but expansion at the existing site was impossible.This was particularly true for the major production items, plates and sheets.

29. The Company decided, therefore, to construct, in two stages, a newintegrated mill at Chiba on Tblyo Bay. The first stage consisted of inte-grated blast furnace, steel furnace and slabbing mill facilities which would

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supply higher quality raw materials at reduced costs for existing rollingfacilities. The second stage, financed in part with the existing Bank loan,will make Chiba a modern,, fully integrated steel producer, with a capacityof about 390,000 tons of hot strip, most of which will be used to produceabout 290,000 tons of cold strip. The Comparnts other plants are to be mod-ernized and reorganized, and the old hand mills gradually abandoned, exceptfor the rolling of special quality sheets. The main items of both stages ofconstruction at Chiba are listed in Annex 2.

3Q. To carry out this program, the following investments have been madein recent years:

Business Years Ending April 301952 1953 1954 1955 1956 1957 Total

_ __ __ __ _--(mi=o-n Ye-nT- =- - - - - -

Chiba plantStage 1 3,884 4,894 4,945 904 3314 14,961Stage 2 - - - - 5j,456 5,456

Nishinomiya plant 495 314 25 6 79)Fukiai plant 283 126 157 188 68) 486 3,009Other plants 120 4410 245 5 2)

Total 4,782 5,744 5,372 1,103 483 5,942 23,426

31. The first stage of construction at Ciba has been completed. Theblast furnace (blown in in June 1953) is producing at the rate of nearly350,000 tons per year, and the coke ratio of 0.7 shows efficient operation.The steel furnaces, which began operating early in 1954, have an annual capa-city of 600,000 tons, and the slabbing mill, which began working in September1954, has a rated annual capacity of some 1,200,000 tons (about the minimumeconomic capacity)* Since September 1954 the Chiba plant has been feedinglarge quantities of pig iron and steel slabs to Fukiai and the other Kawasakiplants.

32. Excellent progress has been achieved in the second stage of con-struction (the hot and cold strip mills, etc.). Work began in October 1956,and when the existing Bank loan was made in December 1956, it was expectedthat the project would be completed by April 30, 1959, Actually, there arenow good prospects of advancing the completion date by as much as nine months,to July 31, 1958 (for details see Annex 2). This speaks very well for theefficiency of the Company's engineers, who are supervising the construction.They are working in close cooperation with their eqiipment manufacturers, whoare supplying erection supervisors.

Management

33.. The Cbmpany's creditors, headed by the Daiichi Bank (traditionallyKawasakits chief bankers), have been closely associated with the direction ofits affairs since 1952, when the Daiichi Bank agreed to help finance the first

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stage of construction at Chiba. In 1953 at the suggestion of the Bank ofJapan, Mr. Ohmori, then the managing director of the Daiichi Bank, left thebank to become full-time chairman of the Kawaski board. Mr. Nishiyamas thepresident, is a very dynamic person. Mr, Okada, the director in charge offinances carries out a complex task with great ability.

Labor

34. As of September 30, 1957 the Company employed a total of about 19s000(some 15,000 workers and some 400O salaried staff). The performance of thestaff and workers is good, and there has been no serious labor trouble in re-cent years. When the current investment program has been completed, the laborforce at Chiba will need to be increased by about 1,000, while the number ofmen employed in the Fukiai and NJishinomiya plants will be reduced by some 1i,400.No difficulty is expected in shifting men from Fukiai and Nishinomiya to Chiba,and the net reduction in the labor force should not provide any difficult pro-blem, since normal wastage amounts to 50/60 a month. The competence of theCompanyts technical staff is shown by the excellent achievements at Chiba, bothin operating Stage 1 and in constructing Stage 2.

Technical Assistance and Staff Training

35. In May, 1957 the Company contracted with the Republic Steel corpora-tion, of Cleveland, Ohio, for technical assistance in all its operations, andfor the training of staff for the Chiba plant. This contract runs for fiveyears and may be renewed. For the services to be rendered under this contract,Kawasaki will pay Republic $1,300,000 in instalments during the five years.Republic's assistance will be of special value in the initial operating periodof Stage 2 project at Chiba.

Financial Results and Financing of Recent Investments

36. Comparative summary balance sheets for recent years are shown inAnnex 3* Recent earnings are shown in Annex 4, and summarized below (figuresin million yen):

Year ended Profits before Depreciation, Interest Net Profits afterApril 30 and Discount and Income Taxes these Deductions

1952 4,431 1,9891953 2,638 9031954 3,992 4011955 3,566 251956 4,988 3901957 9s093 2,374

37. The reduction of net profits almost to the vanishing point in theyear ended April 30, 1955, was the result of a large increase in depreciationcharges and interest and discount payments. Depreciation rose from h460 mil-lion in 1952 to *2,306 milUion in 1956 (including in the three years 1954-1956

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large amounts of special depreciation on new facilities). Interest and dis-count charges increased from M770 million in 1952 to 'El979 million in 1956.This reflected the heavy debt incurred to finance Stage 1 of the Chiba plant.

38. The severe decline in net profits was reversed in the latter partof the year ended April 301 1956. The upward trend continued during the fol-lowing year, which was in fact the most profitable in the Company's history.During this year the Japanese steel industry was enjoying boom conditions.(The net profit shown in the table for this year is after deduction of 1-,356million for special provisions) The favorable trend in earnings continuedduring the first half of the current year (May-October, 1957), net profitsrunning at an annual rate of about *3,600 million. However, the steel markethas softened considerably in recent months, and prices have been reduced, sothat it is unlikely that this rate of earnings will be maintained during thesecond six months of the year.

39. During the six year period ending April 30, 1957 the Company fin-anced capital investments amounting to Y23.4 billion from the followingsources (figures in billion yen):

Depreciation 8.3Retained earnings 2.0Issue of share capital 3.5Borrowings 9.6

231.

40. Ihe total amount paid out in dividends during this period was Yl.3billion. A substantial increase in current assets was financed largely by anincrease of *10.4 billion in current liabilities. The development of the Com-pany's financial position is shown in the summary balance sheets in Annex 3.

41. It should be noted that in accordance with Japanese practice, theCompany's financial statements are not certified by independent auditors.

Recent Financial Reorganization

42. When the Bank considered the Company's previous application for aloan, it became evident that unless there were a financial reorganization, theCompany might get into difficulties during the construction period, since alarge amount of existing debt, incurred to finance Stage 1 of the Chiba de-velopment, would fall due during this period.

43. Accordingly, as a condition of the effectiveness of the Bank loanmade in December 1956, the Company made arrangements with its principal credi-tors which involved their postponing the repayment dates of their loans, andtheir agreement to the aompany's observing certain priorities (of which thefirst was the service on the Bank loan and the loans obtained from Japanesebanks for the Chiba Stage 2 project) in the disposition of the funds generatedby its operations. It also made an arrangement for a standby credit with theDaiichi Bank. The details of these arrangements are explained in T.O. 125a,the relevant paragraphs of which are quoted for ease of reference in Annex 5.

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III. THE PROJECT

Description, Construction Schedule and Arrangements

44. The Company proposes to construct, at the Chiba site, a blastfurnace with a capacity of 1,000 tons a day of pig iron, together with abattery of 60 coke ovens and appropriate by-products facilities. The pel-letizing capacity is to be extended by additional facilities with a pro-duction capacity of 260,000 tons a year. The coal storage and blendingfacilities will be expanded, oxygen making capacity will be increased, andthe necessary additions made to the various service facilities. It is plan-ned to complete most of these new facilities by the end of 1958 and the restearly in 1959 (see Annex 2). The project has been designed by the Company'stechnical staff, and is being constructed under their supervision. Thesearrangements are satisfactory. All contracts have been and will be, to theextent practicable, let on the basis of competitive bidding.

physical Results Expected

45. The new project will increase pig iron production capacity from324,000 to 684,000 tons per annum. The proportion of iron ore and scrap ironin the blast furnace charge will be reduced, and that of pellets increased.Efficiency of production will improve. The value of by-products per ton ofpig iron will rise about 18% as the result of an improvement in gas recovery.

46. The effective capacity of the open hearth furnaces will improve,as molten pig is substituted for purchased pig and scrap. The Company alsoexpects to increase the output of the steel furnaces by improved productiontechniques, which have been tried out successfully during an experimentalperiod. It is for this purpose that the oxygen capacity has to be expanded.

47. The effect of these changes on the Company's metallurgical balancemay be seen from the following figures (thousand tons):

Actual Estimated1956/57 1959/60

Chiba pig iron 336 630Purchased pig iron 88 0Company scrap 190 210Purchased scrap 416 520Corresponding ingot output 939 1,240Corresponding output of fin-

ished products 690 897

Raw Materials

48. The table in the preceding paragraph shows how purchased pig ironwill be eliminated, and the proportion of purchased scrap reduced per ton ofingots by substitution of molten pig and the increase in the Company's ownmill scrape The Companyts estimate of mill scrap is conservative and may

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well be improved in actual practice. In normal practice about 20% of theingot weight is expected to be returned as scrap.

49. The ODmpany will have to buy more iron ore and coking coal. Mostof the coal will probably come from the USf, and most of the iron ore fromthe Philippines, Malaya, Goa, India and other Asian sources. The Company isactively engaged, in conjunction with other leading Japanese steel producersjin seeking new sources of ore in these areas. If these efforts are not suc-cessful, some ore may have to be imported from as far away as North Americaor Brazil. No relianace is being placed on imports from China, the major pre-war supplier for the Japanese steel industry.

Cost of tha project

50e The estimated cost of the project is as follows (million yen):

Blast furnace, pelletizing equipmentand accessories 2,591

Coal handling equipment and coke ovens 1,646By-products equipment 398Oxygen plant 555Services: electrical 1,276

other 407Minor related works 70Contingencies 250

-77.

51. Contracts have been placed at firm prices for nearly *4.5 billion,mostly in Japan, at a small saving compared with the estimates. The remainingestimates have been calculated on the basis of current equipment and construc-tion costs, and in many cases on bids from suppliers. kdequate allawances forspare parts are included. The contingencies are sufficient. The estimates arereasonable. Interest during construction will be paid out of current earnings.

Future Production

52. Annex 6 shows the distribution of the Obmpanyrs output in the yearended April 30, 1957 and the expected distribution in the following three years.The table shows that the Company expects the production of plates to be main-tained at the present level of about 360,000 tons per annum while that ofsheets will increase, as the result of the operation of the new strip mill,from the present level of about 240,000 tons to about 430,000 tons per annum.Other products would increase only slightly, from 9?0000 tons to 104,000 tonsper annum.

53. On this basis, the Company would have, at the end of the period,considerable flexibility in shifting from plates to sheets if market conditionswere appropriate.

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Expected Savings in Cost of Production

54. Ihe main eoonony to be achieved is in the substitution of theCompanyts own pig iron for purchased pig a-id scrap. This is calculated ona conservative basis to amount to a little more than *2 billion per annumbefore depreciation and interest. This saving is calculated against costlevels comparable with those on the basis of which the Company's profit-ability was assessed in T.O. 125a, and no judgment is involved concerningthe long-range price levels of imported scrap and pig iron.

55. In addition, the lompany expects, by working with two blast furs-aces, to reduce the production cost of pig iron by about 4%, or about *250million annually.

56. The total expected cost savings of Y2.3 billion per annum are equiva-lent to *l.5 billion after depreciation, which represents a very satisfactoryreturn on an investment of *7.2 billion.

Price and Market Outlook

57. A recent Japanese Government study of the prospects of demand forthe products of the steel industry concludes, on the basis of assumptions con-cerning the rates of growth of the gross national product and of industrialproduction, that the domestic demand for steel products is likely to grow atthe rate of about 8.5% per annum during the next five years. The same studyestimates that export demand may increase by slightly less than 10% per annumin this period. If these forecasts were fulfilled, total demand would increasefrom 11.5/12.5 million tons ingot equivalent to a little over 20 million tonsin the five year period.

58. The Japanese study includes a program for the enlargement of the in-dustry's capacity designed to attain this level of production.

59. The demand estimates are perhaps on the optimistic side, and rathermore conservative assumptions would correspond to a 1962 demand of the orderof about 18 million tons, or some 10% less than the Japanese estimate.

60. If the proposed expansion program were carried out according to theschedule suggested in the Japanese study, and demand did not in fact rise above18 million tons in 1962, the result would be that the industry's productivefacilities would not be utilized at full capacity (95%), but only at 82% to 85%.What would in fact be more likely to happen, since the industry's constructionplans for the period will not all be finalized for some time to come. is thatpart of the expansion program would be postponed, and the capacity envisagedin the Japanese study reached a year or two after 1962.

61. The conclusion is that the present firm plans for expansion of theindustryts capacity are not likely to result in any serious excess over theprobable demand.

62. Kawasaki itself is primarily concerned with the market in plate,strip and sheet. Since other companies are installing modern plate and strip

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millso it is likely that the prices of these items in the Japanese marketmay eventually be reduced.

63. Since the existing Bank loan was made, in December 1956, prices haveactually risen considerably, though there has been some weakening in recentmonths.

64. In preparing the financial statements, the following assumptions havebeen made concerning the ComparyIs future earnings:

a) profits (before depreciation, interest and taxes) for 1957/58 willfall below those of the previous year by about 20%. In fact, thefigures for the first half of the year show profits at the same rateas those of the previous year. Though profits in the second halfwill no doubt be lower, to assume a 40% reduction is very conserva-tive.

b) for the following year, although major savings will accrue from theinitial operation of the new blast furnace, profits will run about6% below the 1956/57 level.

c) for the following years, when the full benefit will be obtained fromthe new blast furnace and from the strip mill, and the productivecapacity of the Company's plants will have increased by some 30%from the 1956/57 level, profits will run at little more than the1956/57 level, rising slightly in the first three years as discountcharges are reduced.

65. These are very conservative assumptions. As in last year's reports,no attempt has been made to forecast year by year cost and price levels. Theprospects of the Cbmpany's being able to sell the amount of steel which it ex-pects to produce are good, but the assumptions made about earnings discountthe possibility of production considerably below capacity.

IV. FINANCING PLAN AMD PROJECTIONS

Financing Plan

66. The Company's financial requirements for the three years endingApril 30, 1959 are as follows (million yen):

Construction:Chiba Stage 2 16,000Chiba Stage 3 1,193Other construction 1,195

Total construction 24,388Working capital (net increase) 9s,543Debt repayment:Debentures 1,837Other long term debt 1,771Total repayments 3,608

Total Requirements 37,539

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67. The increase in working capital is accounted for partly by the needto increase inventories (both for the operation of the new blast furnace andfor the increased scale of operations), anid partly by the need to carry in-creased receivables (partly corresponding to the expected increase in salesand partly because of slower payments due to credit stringency).

68. The Company proposes to meet these requirements from the followingsources (million yen):

Retained earnings 11,849Capital increases 5,278Existing IBMD loan 7,200Existing loans from Japanese banks 4,000Proposed IBRD loan 2,880Local borrowings at 10 years 900Local borrowings at 5/7 years 2,000Public issues of debentures 1,850Proposed housing loans 217Increase in short term debt 1,1490

Total 37,664

69. An issue of A2 billion shares was successfully sold during 1956/57,and a further issue of F3 billion was also successfully sold in August 1957.The Company plans to sell a small amount of shares in 1958/59 in order tobring the issued capital up to a round f10 bilion.

70. The Company has made arrangements with leading insurance companiesand banks to borrow the proposed Y900 million loans on a term of 10 years (in-cluding three years, grace). The rate of interest would be decided when formalloan agreements are signed.

71. The proposed Y2 billion borrowings at five and seven years are tocover part of the working capital needs. Nio finm arrangements have yet beenmade for these loans, which the Compare intends to raise from trust and in-surance companies and from the Daiichi Bank. The Company proposes to raisethese loans as it needs them. In order to protect itself against the pos-sibility of not being able to do so, the Company has asked the Daiichi Bankwhether it would be prepared to raise the limit on its stand-by credit byY2 billion to V7 billion during the two years ending April 30, 1960. TheDaiichi Bank has indicated its willingness to do so.

72. If this were done, and the present limit on short-term borrowings(which are covered by the stand-by credit) increased by the same amount forthese two years, the Compary would have some flexibility in making its ar-rangements to finance its working capital requirements.

73. The proposed refunding issues of debentures are underwritten by theDaiichi Bank in accordance with the arrangements made last year (see Annex 5).

74. The proposed Housing Loans would be borrowed from Government agenciesto finance part of the cost of construction of workers' housing. This type &f

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loan carries a low rate of interest (6 B%) and is for a long term (20 years).In the arrangements made last year, a ceiling of 7240 million was fixed forsuch loans. The Company has asked that this limit should be raised to I500million.

75. The increase in short term debt is within the limit of 5 billionestablished last year. As stated above, it is proposed that this limit mightbe exceeded temporarily by additional short-term borrowings to provide interimfinancing for working capital pending the raising of five and seven year money.

76. As far as concerns security, it is proposed that the second IBRDloan (which would, like the first one, be made by the Bank to the Japan De-velopment Bank and relent by them to Kawasaki), together with the additionallocal borrowfings at long term, should rank after the existing IBgD loan andthe *h billion borrowed in Japan last year, but ahead of the rest of the Com-pany's long term debt. The publicly held mortgage debentures would continueto be a first charge on the assets pledged to secure them. These arrangementsare regarded by the Japan Development Bank as meeting its normal security re-quirements.

Financial Projections

77. Financial forecasts (Annex 7) show the expected earnings, cash flowand financial situation of the Company, both during the construction periodand during the first five operating years. The assumptions made for the pur-pose of calculation are listed in the Annex.

Financial Conclusions

78, The projections show that during the construction period (three yearsending April 30, 1959): -

a) earnings after depreciation, taxes and cash dividends (at the rateof 5% per annum) would amount to *4L,058 million. Adding *5.555 mil-lion in depreciation accruals and 12,236 million in free reserve al-locations, total retained earnings muld amount to 111849 million.

b) the Company would have enough cash to meet all its financial re-quirements with a net accrual of 1125 million.

c) interest on all debt, and service on the housing loans, would becovered by margins ranging from 2.3 to 4.5 times.

d) the current ratio would be maintained ata level above the minimumof 1.8:1 established in the arrangements made last year.

e) the ratio of total debt to equity would rise from 50:50 to 56:44.

79. During the five years following April 30, 1959 the projections indi-cate that:

a) service on all debt (excluding repayment of debentures which would berefunded) would be covered by margins ranging from 1.8 to 2.2 times.Further projections show that the cover would exceed 1.8 in the fol-lowing years.

- 13 -

b) earnings would be adequate to pay cash dividends at the rate of 10%per annum.

a) the amount of notes receivable discounted could be reduced fromY7,439 million to *5,939 million (a normal level) by April 30, 1961.

d) current liabilities could be reduced by *2.3 billion by April 30,1961.

e) the cash position would improve by April 30, 1963 to a point whereall short-term debt could be paid off without reducing the cash bal-ance below the normal requirement of about 93 billion.

f) the debt-equity ratio would improve from 56:,44 to 41:59 by the endof the five years.

80. It will be seen from the foregoing that the financing plan is sound.The Company should be able, with adequate margins, to meet all its financialobligations, and should earn a reasonable return on its equity.

81. The arrangements made with the Daiichi Bank (see Annex 5) in con-nection with the first IBRD loan would protect the Company from getting intodifficulties if it were not able to refund its mortgage debentures by publicissue or if it were unable to obtain short-term credit.

82. The Company's financial situation and prospects have considerablyimproved since last year. The financial forecasts in T.0. 125a showed thatthe lowest prospective service cover on all debt (including the "old" debt)was about 1.4. The present forecasts (annex 7) show a minimum prospectivecover of 1.8. Taking into account the very conservative character of the as-sumptions made, and the excellent liquidity prospects, this can be consideredan adequate margin without some of the safeguards which were included in thearrangements made last year.

83. It no longer seems necessary to put the repayment instalments ofthe "oldt' debt on an income basis. Nor would there seem to be any need toprovide that the Daiichi Bank should guarantee the payment of interest on theCompanyrs debt.

84. Further, there would be no undue risk involved in removing alto-gether the limitation on the Company's freedom to raise housing loans (in-stead of raising the permitted ceiling from !240 million to 1500 million, asthe Company has requested). Finally, the limitation of cash dividends to arate of 5% per annum in the period ending April 30, 1960, which was includedin last year's arrangements in order to ensure the retention of earnings dur-ing the construction period, could now safely be modified. Construction willhave been practically completed by October 30, 1958, and there is no reasonto continue the limitation beyond that date. The proposed contractual ar-rangements for a second IBRD loan include a normal type of dividend limitationfor the operating period, namely that the Company should not pay cash divi-dends if such payment would result in running the current ratio below a reason-able level.

- 14 -

85. In order to show the extent of these proposed modifications of theprotective financial arrangements made last year, the existing and proposedarrangements are compared in tabular form in Annex 8.

86. To modify the protective financial arrangements made last year asproposed would be a mark of recognition of the improvement in the Company'sprospects, would materially simplify the now complex contractual arrangementsand would improve the Company's credit standing, without depriving the lenderswho are helping to finance the present construction program of any substantialprotection.

87. !L is, of course, the Japan Development Bm k and the other existingand proposed Japanese lenders who would be primarily affected by the changessuggested above. They have aU agreed to these changes.

ANNEX I

PROPERTIES TAKEN OVER BY THE KAWASAKI STEELCORPORATION ON ITS ESTABLISH1EN1T IN 1950

Annual ProductionFukiai Plant Canacitv (tons)

10 open hearth furnaces7 electric furnaces2 plate mills

18 hand hot sheet mills8 cold sheet mills4 galvanizing lines

canacity: Steel Ingot 597,000Plate 300,000Hot rolled sheet 220,000Cold rolled sheet 76,000Galvanized sheet 120,000

Hyogo Plant

2 open hearth furnaces2 electric furnaces .Ironi and steel -casting equipment

5 hydraulic presses2 forging hammers6 bar mills

oapacity: Steel Ingot lll,000Cast iron 11,000Cast steel 7,000Forged steel 20,000Bars and shapes (hot rolled) 60,000

Nishinomiva Plant

10 electric furnacesPlate millSemi-continuous hoop mill2 cold hoop mills2 4-high reversing mills

Electrically welded pipe mill

canacitv: Steel Ingot 109,000Plate 139,000Hot rolled hoop 90,000Cold rolled hoop 24,000Electrically welded pipe 24.,000

Chita Plant

5 electric furnacesBar millCasting equipment

capacitv: Steel Ingot 63,000Bars and shapes (hot rolled) 12,000Cast iron and steel 37,000

AOMEX1Iage 2

Annual Production

Ruii Plant Caacity (ton)

4 Krupp-Renn rotary kilnscaDacity: Luppen (synthetic scrap) 47,000

ANNEX 2

KAWASAKI STEEL CORPORATION

WORKS CONSTRUCTED AND TO BE CONSTRUCTED AT CUIBA

Annual Production Date FinishedCapacity (tons) or to be Finished

Blast furnace 335,000 pig iron June 19533 Open hearth furnaces 600,000 steel ingots January/May 1954Slabbing mill 1,200,000 slabs September 1954

3 Sheet mills 48,000 sheets January, 1953Wire rope mill etc. 14,000 wire rope etc. April 1951-Febl'r

54 Coke ovens 220,000 coke June 1953 1By-product equipment 44,000 June 1953

Stage 2

2-high scale breaker (fromFukiai plant) July 31, 1958

4-high reversing roughing millwith vertical edger July 31, 1958

5-stand 56" hot finishing mill(for sheets down to 1.6 mn..thick)'39010CO hot strip July 31, 1958

4-stand 56" cold finishing mill (forsheets down to 0.25 mm.,.thehighest gauge normally used forgalvanizing and tinplate) 290,000 cold strip July 31, 1958

50" continuous pickling line May 31, 1958Three 50" shear lines July 31, 1958Soaking pits Sept.30, 1957Pelletizing equipment Miarch 31, 1957Service facilities June 30, 1958

Stage 3

Blast furnace 360,000 pig iron March 31, 1958Pelletizing equipment 260,000 October 31, 1958

60 Coke ovens 250,000 coke March 31, 1958By-products equipment April 30, 1959Coal storage and blending equip-ment July 31, 1958Electric power plant 15,000 SW. February 28, 1959Service facilities July 31, 1958Oxygen plant 3,000 m3/hr July 31, 195

ANN 3

KAVASAKI STEEL CORPORATION

SUMMBRY BAIANCE SIHEETS

April 321952 193 -1954 1975 1956 1957- - - - - - - - - million yen…----

ASSETS

Current AssetsCash and Receivables 2,89h 5,745 9,583 8,7g9 9,146 8,591Inventories 6,489 7,o48 8,281 7,889 8,377 13,831Suspense Accounts 502 602 701 647 330 450Total Current Assets 9oU5 13p395 5 17,0335 17p53 22,572

Fixed AssetsTangible Fixed Assets 7s,931 143,154 19,720 20,606 20,986 26,859Intangible Assets 4 17 160 157 153 154Total 7,935 14ol7l 19bdO 20o,76 21,13 27,013

Less Reserve for Deprec-iation 563 1 149 3,025 4 812 7,l1 4 8 912Net Fixed Assets 7,372 16,1355,022 -55.T9I5 149 81025

Total Assets 17,257 26,417 35jt20 33,286 31,878 40,973

LIABILITIES

Current LiabilitiesShort-term Debt 150 1,293 49200 5,229 3,210 3,535other Current Liabilities 9,209 12,785 13,071 9,227 9,713 12,100Suspense Accounts 540 305 309 307 296 284Total Current Liabilities 9,599 14,353 17,50 )776 l3;M7 159-19

Reserve for Eriplcyees Retire-ment 54 329 408 475 479 819

Long-term Debt 496 3,h57 7,266 7,870 7,612 9,032

CapitalShare Capital 1,000 2,000 4,ooO 4,000 4,000 6,100Revaluation Reserve 2,712 2,656 2,618 2,605 2,605 2p5O4Other Capital Reserves andSurplus 3,096 3,592 3,548 3,573 3 963 6,599

Total Ecuity 6,506 1246B 10,166 10,175 10a566 15,203

Total Liabilities andEquity 17,257 26,417 35_420 33,286 31,878 o.,973

Ratio of Current Assets toCurrent Liabilities (includ-ing short-term debts) 1.00:1 0.93:1 1.06:1 1.17:1 1.35:1 1.43:1Ratio of Current Assets toCurrent Liabilities (exclud-ing short-term debts) 1.01:1 1.02:1 1.39:1 1.82:1 1.78:1 1.85:1

ANNEX 3Page 2

NOTES

1. The balance sheets as shown agree with the Company's published state-ments except that they reflect the position after certain appropri-ations for tax reserve and additional appropriations for depreciationreserve agreed at the shareholders' meetings. There are also certainminor regroupings of assets and liabilities for the purpose of clearpresentation.

2. Cash and Receivables are shown net of the following reductions forReserve for Bad Debts:

1956 4 38 million1957 107 million

3. Reserve for Depreciation includes the following amounts for Reservefor Special Repairs:

1954 1 29 million1955 60 million1956 91 million1957 134 million

ANNE 4

KA1WASAXI STREL (ORPORATION

EPJ21INGS STAIEMEM.S

12 months Ended April 30195 1953 1954 1755 1956 1957 7

Sales (thousand tons) 325o2 441.9 462.1 512.1 636.8 700.5Average sales price (thousand

yen per ton) 73.1 56.6 59.5 48.9 53.2 72.0

… - - - - - - -million yen - - - - - - - - - -

Gross Sales, including non-operatingE profit or loss 23,777 25,027 27s439 25,O084 33,950 49,492

Operating Costs, excludingdepreciation and interest 19,346 22,389 23,447 212518 28,962 40,399

Operating Profits 4t9431 2,638 3,992 3;566 49988 9,093

Less - Ordinary depreciation 1X62 586 968 1,359 1s371 1,218Special depreciation - 890 405 935 70Income tax appropria-

tions 1,210 657 254 4 313 2,020Interest on debt (770) 199 653 1,113 1,056 874Bank charges (discounts

etc.) ( ) 293 826 660 923 1,181Special provisions - - - - - 1,356

2f442 I73 3,591 3,75L1T 3 6,715

Net Profits 1,989 903 401 25 390 2,374

Appropriation for CapitalReserves 1,710 496 - 48 22 387 2,123

Dividends 262 395 4 34 - - 238Bonus to management 12 11 11 - - 13

w 22 m 271i

Balance unappropriated 5 2 4 3 3 -Balance at beginning of period 91 96 98 102 105 108Balance at end of period 1023 To l07

ANEX 5

KAWASAKI STEEL CORPORATION

DETAILS OF RECENT FINANCIAL REORGANIZATION

Quotation from T.O. 125a:

n47. As of April 30, 1956 Kawasaki's indebtedness totalled 1 10,822million (about $30.1 million equivalent). Of this total 1 3,210 million con-sisted of short-term bank loans, which represented money raised for capitalpurposes, and had been usually renewed at maturity. (The Daiichi Bank held1 1,470 million of this short-term debt.) The balance of 1 7,612 millionwas long-term debt (almost all falling due within five years) consisting ofthe following (Y million):-

Japan Development Bank loan 1,420Other bank and trust company loans 2,176Insurance company loans 1,000Mortgage debentures 2,879Housing loans 137

Total 7,612

"48. The company proposes to use most of the proceeds of the currentshare issue to repay the Japan Development Bank loan and part of the loansfrom trust and banking companies. It plans also to adjust and consolidatecertain other loans. The net result is sho-wn in the following table (fig-ures in I million):-

Bank loans 1,456Insurance company loans 1,250Mortgage debentures 2,879Housing loans 137

Total 5,722

(To be paid off out of proceeds ofshare issue 1,890)

(7,612)

The balance of the proceeds of the share issue would be used to increaseworking capital.

"49. Kawasaki's plan of debt reorganization, described below, has re-ceived the conditional approval of the creditors involved.

a) Proposed Treatment of Capital

"50. Short-term debt would if possible be renewed on maturity. TheDaiichi Bank would extend to Kawasaki a 15 year line of credit of up toI 5 billion (including the 1 1,470 million already held by it), which wouldbe available to refund such short-term debt as could not be renewed, and toprovide additional working capital if required.

"51. Long-tem bank loans would be frozen until April 30, 1960, andwould be scheduled for payment in equal semi-annual instalments during thefollowing six years.

ANNEX 5Page 2

"52. Insurance comDany loans would also be frozen until April 30,1960, and would be scheduled for payment in approximately equal semi-annual instalments during the following 11 years.

"53. Both the banks and the insurance companies would agree to deferany instalments_which Kawasaki could not pay (after meeting the service ofthe new debts LI.B.R.D., J.D.B., etc incurred for the project, and pro-viding Y 500 million a year for necessary renewals, etc.), without reducingits current ratio below 1.8:1, if necessary up to the date of the lastmaturity of the new debts.

"54. The morteaae debentures, consisting of 22 separate issues and sub-issues, are held by the public, and it is not practical to attempt to modifytheir terms. Kawasaki proposes to issue new mortgage debentures to refundoutstanding issues as they fall due. The total amount of refunding neededbefore April 30, 1960 is g 2,300 million. The Daiichi Bank would underwriteall necessary refunding issues during the life of the new debts.

"55. The housing loans are small, the largest annual maturity beingonly Y 15 million. It is proposed to leave these loans as they are, butif Kawasaki could not pay any maturities after meeting the prior chargesmentioned above, without decreasing its current ratio below the agreed levelpthe Daiichi Bank would advance the amount of the shortfall.

b) Proposed Treatment of Interest

"56 Kawasaki would pay interest on all its debt (including debts owedto the Daiichi Bank) as it fell due. If, however, the company's earnings,after meeting prior charges as explained below, fell short of the amountneeded to pay interest, or if the company's current ratio would be reducedbelow the agreed ratio by such payment, the Daiichi Bank would lend Kawasakithe amount needed to meet interest payments or to restore the current ratio.Such loans from the Daiichi Bank would be retired either from surplus earn-ings or out of the proceeds of sale of ordinary shares. Any part of suchloans which could not be retired in these ways would not become payable untila date after the final date of the new debts.

"57. The prior charges referred to above are a) during the four yearsending April 30, 1960, interest on the new debt, amounts needed for invest-ment in the project (totalling 3 5 billion), Y 200 million a year for re-newals, etc., and service on the Housing loans; and b) thereafter: debt"service on the new debt and the Housing loans, and Y 500 million a year forrenewals, etc.

c) The Daiichi Bank

"58. It is clear that the effectiveness of this plan to protect thecompany's financial position depends largely upon the Daiichi Bank's willing-ness and ability to make good its undertakings. The standing, financialstrength and business reputation of the Daiichi Bank, and its relations withthe company, are such that there is no reason to doubt either its willingnessor its ability to carry out its proposed obligations if called upon to do so.It will, however, be seen from the analysis of the financial projections giverbelow that in normal circumstances it is not likely that the company wouldneed to have recourse to the Daiichi Bank."

ANNEX 6

KAWASAKI STEEL CORPORATION

Future Production P-an

Year to April 30

1.27 12L8 I59 1960-- - -(Thousand Tons)----

Sheet and strip 180 178 96 -

Sheet and strip (strip mill) - - 1114 305

Silicon and special sheets 62 92 108 126

Total sheets 242 270 318 431

Plates 356 352 358 362

Other Products 92 95 101 104

690 717 777 897

KA'WASARI STEMt CRPORATTON ANNE 7

INCCIME FORECAsTS

Three Year(12 months ending April 30) 1257 1958 1959 Total J 160 1961 1962 1963 1964

Income before Depreciation, Major Repairs,Interest and Taxes 7,912 6,363 7,462 21,737 8,o60 8,212 8,304 8,304 8,304

Ordinary Depreciation 1,288 1,307 2,960 5,555 3,000 2,770 2,560 2,370 2,190

Interest 874 1,159 1,872 3,905 2,099 1,890 1,784 1,664 1,560

Reserve Provisions 1,356 880 - 2,236 - - - - -

Net Profit before Taxes 4,394 3,017 2,630 10,041 2,961 3,552 3,960 4,270 4,554

Incom Tax Appropriation 2,020 1,207 1,052 4,279 1,184 1,421 1,584 1,708 1,821

Net Profit after Taxes 2,374 1,810 1,578 5,762 1,777 2,131 2,376 2,562 2,733

Cash Dividend 238 421 1,000 1,659 1,000 1,000 1,000 1,000 1,000Directors' Bonus 13 16 16 45 16 16 16 16 16

Balance to surplus 2,123 1,373 562 4,058 761 1,115 1,360 1,546 1,717

Net Profit after Income Taxes, before De-preciation and Interest 5,892 5,156 6,410 - 6,876 6,791 6,720 6,596 6,483

Times Long-term Debt Service Covered 2.3 4.5 3.4 _ 2.2 2.2 2.1 2.1 1.8

KAWASAKI STEEL CORPORATION ANNEXPage 2

sOURCES AND ALLOCATION OF FUIM

Three Year(12 months ending April 30) 1957 1938 1959 Total UK 1961 1962 1963 1964

(actual)Sources of Funds - - - - - - - - - - - - - - - - - - - - million yen - - - - - - - - - - - - - - - - - - - - - - -

Profit before Depreciation, Major Repairs,Interest and T&%es 7,912 6,363 7,462 21,737 8,060 8,212 8,304 8,304 8,304

Issue of Share Capital 2,005 3,126 147 5,278 - - - - -

Proceeds Strip Mill Loans: IBRD 1,599 4,900 701 7,200Others 1,500 2,500 - 4,000

Proceeds Blast Furnace Loans: IBRD - 500 2,380 2,880Others 500 400 900

Increase in Other Long-term Debt 300 786 2,981 4,067 581 500 100 250 350Increase in Short-term Debt 325 1,165 - 1,490Increase in Current Liabilities 2 3.625 2,69 81 62

_6, 0 1 6 23 . 46 5 16,766 86,4 8.7122 .

Alloration of Funds

Strip Mill Project 5,456 9,100 1,444 16,000 _ - _ _ _Blast Furnace Project - 4,000 3,193 7,193 - -_ _Other Capital Expenditures 4A86 378 1.195 i2 50 5°O 500 500

Total Construction 5,942 13,478 4,968 24,388 331 500 500) 500 500Interest on Strip Mill Loans: IBRD - 161 365 526 381 376 352 326 299

Others - 139 362 501 362 357 338 319 297Interest on Blast Furnace Loans: IBRD - - 103 103 181 179 168 157 145

Others - - 70 70 90 88 78 67 56Interest on Other Long-term Debt 874 859 972 2,705 1,085 890 848 795 763Repayient of strip Mill Loans: IBRD -- - - - 450 474 498 523

Others -- - - - 198 215 236 258Repayment of Blast Furnace Loans: 1BRD _ - - - 169 180 191 203

Others - - - - - 94 104 115 126Decrease of Other Long-term Debt 1,979 774 855 3,608 1,499 799 576 742 1,227Decrease of Short-term Debt - - - _ 1,000Increase of Current Assets 5,223 5,820 7,195 18,238 740 919 81 62 57Decrease of Current Liabilities -- - - 760 1,381 - - -

Taxes 2,020 1,207 1,052 4,279 1,184 1,421 1,584 1,708 1,821Dividend and Bonus 237 1 016 1.704 1 016 1.016 1 016 1,016 1

_= 22.875 m 5 _ 85837 7 ,7291

Cash surplus (shortage) for Year (273) 590 (192) 125 12 (125) 1,971 1,884 1,420Available Beglnning of Year 2,997 2,724 3,314 2,997 3,122 3,134 3,009 4,980 6,864Available End of Tear 2,724 3,314 3,122 3,122 3,134 3,009 4,980 6,864 8,284

KAWASAKI S TEEL ORPCRATEON ANNEX 7Page 3

BAIANCE SHEET FaRECAS1S

(As at April 30) 1957 1958 1959 1960 1961 1962 1963 1964(actual)

… - - - - - - - - - - - - - -- - - million yen - - - - - - - - - - - - - - - - - - - - - -

ASSETS

Current Assets 22,872 29,282 36,285 37,037 37,831 39,883 41,829 43,306

Fixed Assets 27,013 40,491 45,459 45,790 46,290 46,790 47,290 47,790Less Depreciation 10.219 13,179 16,179 18.949 21.509 23,879 26,o69

Net Fixed Assets 18,101 30,272 32,280 29,611 27,341 25,281 23,411 21,721

Total Assets T7 77M 5 1

LIABILITII1!

Current Liabilities other thanShort-teru Debt 12,384 16,009 18,704 17,944 16,563 16,644 16,706 16,763

short-ternm Debt 3,535 4,700 4,700 3,700 3,700 3,700 3,700 3,700Strip Mill Loans: IBRD 1,599 6,499 7,200 7,200 6,750 6,276 5,778 5,255

Others 1,500 4,000 4,000 4,000 3,802 3,587 3,351 3,093Blast Furnace Loans: IBRD - 500 2,880 2,880 2,711 2,531 2,340 2,137

Others - 500 900 900 806 702 587 461Other Long-term Debt 5.933 2,945 8.07 7.15 6.854 6.378 5,886 5,00

Total Debt 12,567 22,144 27,751 25,833 24,623 234174 21,642 19,655

Share Capital 6,100 9,613 10,000 10,000 10,000 10,000 10,000 10,000surplus and Reserves 2,922 11,788 12.I10 12.871 13.986 15.346 16,892 18,609

Total Equity 16,022 21,401 22,110 22,871 23,986 25,346 26,892 28,609

Total Liabilities and Equity mm mm M= mm

(Notes Receivable Discounted) (2,989) (6,939) (7,439) (6,739) (5,939) (5,939) (5,939) (5,939)

RatiosCurrent Assets/Current Liabilities

excluding Short-term Debt 1.85:1 1.82sl 1.95:1 2.06:1 2.28:1 2.40:1 2.50:1 2.58:1Current Assets/Current Liabilities 1.43:1 1.41:1 1.56:1 1.71:1 1.87:1 1.96:1 2.05:1 2.12:1

Total Debt/Equity 44:56 51:49 56:44 53:47 51:49 48:52 45:55 41:59

ANNEX 7Page 4

Assumptions Used in Calculating Financial Projections

1. The Company's earnings will be as assumed in Paragraph 64.

2. Taxes will continue to be due at the rate of 40% on the net profitafter depreciation and interest.

3. Dividends will be paid in 1957/58 at the rate of 5% per annum onthe outstanding capital, and stock dividends will be distributed to make thetotal distribution rate 10% per annum. In subsequent years, cash dividendsat the rate of 10% per annum will be paid.

4. The Bank will lend the Japan Development Bank $8 million equivalentat 6,o with a term of 14 years (including 2' yearst grace), and the Japan De-velopment Bank will relend this to the Company at the same term at 6.3%.

5. The Company will borrow *900 million at 10 year term (includingthree years' grace) from Japanese insurance companies at 10%.

6. New public issues of mortgage debentures will be made in approxi-mately the amounts required to refund maturing issues, carrying interest at7.3%.

7. The Company will borrow *262 million housing loans, half in 1958/59and half in 1959/60, thus bringing the total housing loans borrowed up to*500 million. These loans will all be at 6 % repayable over 20 years.

8. In 1958/59 the Company will borrow *2 billion for working capitalpurposes. of this, b400 million will be borrowed from insurance companiesat 10%, repayable in one instalment at the end of five years; *600 millionwill be borrowed from trust companies at 10%, repayable in six equal annualinstalments of *100 million after two years' grace; and the remaining *1 bil-lion will be borrowed from the Daiichi Bank at 10% and repaid in the followingyear.

9. The Company will increase its short-term debt to *4.7 billion in1957/58, and will reduce it by t.1 billion in 1959/60. Interest will be chargedon short-term debt at 8%.

10. Accounts and Notes Receivable and (lNotes Receivable Discounted) willincrease from 98,206 million (F2,989 million) at April 30, 1957 to '*14,496million (Y6,939 million) at April 30, 1958 and Y19,996 million (i7,439 mil-lion) at April 30, 1959. Thereafter the total of Accounts and Notes Receivablewill remain at *19,996 million but the amount of Notes Receivable Discountedwill decline during the followuing two years by *700 million, and 1_800 millionrespectively.

11. Inventories will increase from E13,830 million at April 30, 1957 to17,000 million at April 30, 1958 and to F18,700 million at April 30, 1959, at

ANNIM 7Page 5

which level they will remain thereafter. The Company will continue to valueits inventories according to the present srstem, which is the most conserva-tive permitted by the tax laws.

12. Accounts and Notes Payable will increase from *9,O0l million atApril 30, 1957 to *13,331 million at April 30, 1958 and *15,731 million atApril 30, 1959. During the next two years they will be reduced by *800 millionand Fl1,500 million, remaining at a level of i13,J431 million in subsequent years,

13. In 1959/60 the Company will invest 131 million in workerst housingand *200 million in normal renewals and repairs. In subseauent years, it willinvest 4500 million a year in renewals and repairs.

14. No advantage will be taken of the special depreciation permissibleduring the five initial operating years of the new plant. In fact, the Com-pany will decide each year to what extent funds should be allocated to specialdepreciation, taking into account all relevant factors.

15. After the share capital has reached *10 billion, there will be nofurther issues of ordinary shares, Any issues which could be sold for cashwould improve the debt-equity ratio, especially if the proceeds were used torepay debt.

16. The Company will not take advantage of possible tax savings by al-locating from earnings any amounts to reserves for future price fluctuations,workmen's retirement fund or bad debts. Any amounts so allocated would reducetax liability and improve the cash position.

ANNEX 8

KAAM KI STEEL CORPO ATION

Present and Proposed Protective Financial Arrangements

Present Proposed

Daiichi Bank will underwrite refunding No change.issues of publicly held debentures.

Daiichi Bank makes available *5 billion Limit raised to *7 billion for15 year line of credit in case Company two years ending April 30, 1960.cannot renew short-term debts or raise Otherwise no change.more short term debt for working capital.

Daiichi Bank to provide long-term funds Eliminated.to meet shortfall if interest is notearned after meeting prior charges, orfor working capital if current ratio fallsbelow 1.8 as result of interest payments.

No repayment of t"old", debts before April No change.30, 1960; repayments thereafter scheduledover six years (bank loans) and 11 years(insurance company loans).

Repayment instalments of "old" debt to Eliminated.be deferred if they cannot be met out ofearnings after paying specified priorcharges.

Cash dividends limited to 5% per annum Present limitation to cease Oc-until April 30, 1960. Stock dividends may tober 30, 1958. Thereafterbe issued to increase total distribution cash dividends to be limited toto 10% per annum. No limitation after prevent current ratio being re-April 30, 1960. duced below reasonable level.

Companyts freedom to incur debt withoutcreditorst agreement limited for all cate-gories of debt, as follows; Limitations as follows:Long-term debt Y6,900 million *20 billionDebentures F 3 billion * 4 billionHousing loans Y 240 million No limitShort-term debt and debtunder Daiichi standbycredit Y 5 billion *7 bVSXion until April 30,

1960, and Y5 billion there-after.

Total debt *28 billion.