Annual Report 1999 (For year ended March 31,1999)

Strategic Focus

The New "K"Line Spirit for 21 (New K-21)
  
The principal thrust of the Plan rests on four pillars, namely, 1) globalization of management, 2) consolidated management of all group companies, 3) revitalization of the organization, and 4) safe navigation for goods and the environment.
  
1.Globalization of Management
Globalization of management refers to a management style in tune with generally accepted global standards, the best location worldwide for the specific activity in question close contact with customers in each region, and a cutting-edge telecommunications system.
       Although we will not jettison the Japanese management system wholesale, we will adopt a new system of corporate governance under which greater emphasis is placed on profitability, efficiency in the management of funds, and A-ratings for our bonds. At the same time, we will increase transparency and fairness in management, which will cement the trust we enjoy with customers, and contribute not only to shareholders, customers, and employees but also to the public good.
  
2. Consolidated Management of All Group Companies
Under our policy of management consolidation we are now building a group management structure that will speed up the decision-making process when determining the direction of our domestic subsidiaries. If a subsidiary's management goals, numerical targets, and fund management efficiency are found to be insufficient, we will take immediate measures for improvement or reduction of its business operations.
        On the other hand, we will make our major overseas subsidiaries in charge of containership operations more autonomous, giving them a wider scope of authority and responsibilities. For the time being they will remain cost centers with authority for accounting and route operation, while route rearrangement and investment will be handled by headquarters.
       We will centralize the management of companies operating tie-up ships (Shikumisen) and introduce the profit center concept to business divisions on a consolidated basis, imputing costs generated by cost centers, including those incurred by companies operating tie-up ships and by subsidiaries, to each profit center.
    
3. Revitalization of the Organization
To counteract Japan's high personnel expenses, we are shifting from the traditional seniority system to a more performance-based system of remuneration, where the portion of an employee's salary linked to achievement rises as a proportion of total compensation. Accordingly, we will review staffing levels based on whether or not a job contributes to an increase in productivity and profitability from a group-wide perspective.
       In an effort to speed up personnel exchanges, including with the parent company, to upgrade our human resources development program, we are accumulating data on 3,500 personnel at 60 domestic subsidiaries and on another 1,400 at 17 affiliates. In addition, we are boosting group cohesion through an enhanced "Ocean Breeze," our in-house magazine in English, shared bulletin boards, and a "K" Line Group homepage.
      
4. Safe Navigation for Goods and the Environment
Last but not least, we are tackling safe navigation, a sensitive issue for all shipping companies, by enhancing and upgrading our activities in this area and necessary replacement of our fleets to adapt to IMO and other regulations for this purpose.
       The Company has been seriously and positively pursuing preservation of the environment, including a variety of measures for newbuildings that will minimize air pollution caused by NOx exhaust from ships.We are also experimenting with equipment onboard for reducing NOx. Once its effectiveness has been determined, we will be ready to adopt it at any time in view of more strict and rigid rules concerned.
       When it comes to destruction of the ozone layer by Freon gas, a refrigerant used in reefer containers, efforts for replacement are already under way from Freon gas to a less harmful substitute. As to sea pollution by oil, we are coping with this issue by introduction of double-hull tankers and installation of equipment designed against overflow from fuel oil tanks and also incineration of wasted oil.
       All current measures are in line with an organization for promotion of safety in navigation which was instituted in the Company as far back as 1983 in our attempt to contribute to preservation of the earth and its global environment through perfection in accident and risk management.

 

"K" Line's Response to the Year 2000 (Y2K) Issue
  
Business Application and Office Automation Systems
As "K" Line executed the SR (System Re-Engineering) Project from 1996-1997, a new information system securing Year 2000 Compliance has been implemented starting April 1997. "K" Line executed the SR projects for the purpose of reducing system-related costs, however, at the same time we upgraded our infrastructure hardware aiming to avoid impact from Year 2000 Problems. Although we had a few sub-systems that were not covered by our SR project, we completed all modification of those systems by the end of December 1998.
     
Computer System on the Vessels and Port Terminals
We have confirmed through the manufacturers that the most important equipment such as Main Engine, Generator and Steering Gear system are Year 2000 compliant. That equipment does not have date data and can be switched to manual operation in case the vessel encounters some unpredictable situation. There are some monitors and recording that display the date, for which we had checked by inputting and changing date and confirmed that they are Year 2000 compliant.
       We have already established a Contingency Plan and distributed it to each ship with instructions and Safety Policy, which includes the procedure of regular onboard drills, additional personnel watchkeeping, equipment/system change-over manual operations, safe voyage planning such as avoiding high density traffic areas and narrow channels and so on during any critical period.
       We may also consider having our ships stay clear of dangerous sea areas and adjust their time of entering and leaving port.
       For ships in port, although safe procedures to deal with interruptions and / or emergency stops in the loading and unloading operations are established between ships and terminal operators as usual manner, strict attention and close cooperation with terminal operators will be taken during any critical period.
       Regarding port Terminal operations, in order to ensure that our Ocean transportation can be performed without any interruption caused by Y2K, we have sent questionnaires regarding Y2K compliance to all companies concerned.
      
World-Wide Communication Network System
As we have to transmit cargo manifest data from load port to discharge port, it is very essential to keep our communication network secured in worldwide range.
       As it is described at the beginning, when we performed SR project we renewed our communication network and changed our EDI data format at the same time. In order to ensure that format Y2K compliant, we set 4-digit year figures instead of 2-digit, that is, YYYYMMDD.
       Concerning our domestic and foreign agent companies covering each vessel calling port, we have been encouraging them to review and re-organize their own systems to be Y2K compliant since 1995. We have been holding an eAnnual World Information System Conference' with those companies to review the existing problems and also Y2K compliance status. By the end of 1998, we could confirm that the systems in all of our agent companies are Y2K compliant.
       We are carring out comprehensive Y2K compliance tests for domestic and overseas in-house systems, as well as our partners' systems.
  
To Our Shareholders
At the end of March 1999, we have completed Y2K compliance tests, begun in January, for each system on a server machine which we have rent, for this testing. As we could finish major part of Y2K tasks were already finished in the SR project, and additional \73 million was allocated for pure Y2K compliance expenses. This amount included expenses for amending and upgrading software and manpower for testing.
       With our insurers we have reconfirmed the contents of our liability insurance policies for ships owned by us, and goods shipped, a prerequisite for our Y2K response, and no problems have been found. In addition, we have prepared for possible accidents and defects by taking out Marine Hull Insurance and P&I Insurance, which cover resulting damage.
       By the end of June 1999, we will finalize our contingency plans, which will contain alternative measures for top-priority items, as well as the details of countermeasures regarding the procurement of resources and equipment, personnel allocation, and emergency communications networks. As we have taken all necessary measures to solve the Y2K issue, we are confident that any impact suffered due to Y2K non-compliance will not be serious. We can therefore reassure our shareholders and other stakeholders that the Y2K issue will have no major implications for our maritime and other operations.

 

Effects of the U.S. Ocean Shipping Reform Act of 1998
  
Coming into force on May 1, 1999, the Ocean Shipping Reform Act of 1998 (OSRA) replaced the Shipping Act of 1984. The new law is expected to promote freer competition in the shipping industry with respect to U.S. trades, whose conferences the U.S. Government has been regulating by the Shipping Acts since 1916.
       Under the previous act, conferences had to file their contract rates with the U.S. Federal Maritime Commission (FMC) and the rates were made public. A conference could conclude a service contract (S/C) with a certain customer and give the customer a special rate below the regular freight rates. All S/Cs, however, had to be filed with the FMC and the rates were published.
       In the past, a conference member carrier could not offer any rate other than those of the conference freight rates. The previous shipping act introduced a system known as independent action (I/A), which allowed a conference member carrier to offer a preferential rate on ten days' advance notice.
       Under the new law, even conference members now have the right to conclude S/Cs, which enables all shipping lines to offer shippers preferential treatment on the condition that a minimum cargo volume be guaranteed, with the disclosure of contract rates no longer mandatory. Discrimination clauses, or "me-too" clauses, which require that all shippers with the same terms of shipment be offered S/Cs with identical terms, are also no longer mandatory. However, S/Cs must still be made public stating the following details: 1) ports covered by the contract, 2) commodities, 3) minimum cargo volume, and 4) duration of the contract, all of which must be filed with the FMC along with other crucial items.
       Therefore, market conditions are likely to change, since the rate-setting function, traditionally performed by the conferences, has disappeared and each shipping company will contract with shippers on the basis of its own business and management strategies. We believe that freight rates will be the result of fair competition between oceangoing shipping lines, untrammeled by criteria such as the distinction between conference and non-conference lines. We do not expect a repeat of the 1984 debacle, that is, a major decline in rates.