Note: The U.S. dollar amounts above and elsewhere in this annual report are translated from yen, for convenience only, at the rate of = US$1.

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2 Financial Highlights For the years ended March 31, 1999 and 1998 (Note 3) Net sales , ,497 $1,413,961 $1,497,279 Income before income taxes... 7,632 8,133 63,310 67,466 Net income... 4,234 5,325 35,122 44,173 At March 31, 1999 and 1998 (Note 3) Total assets , ,354 $1,890,411 $1,811,315 Total shareholders equity... 63,330 60, , ,766 Number of employees... 3,456 3,421 Note: The U.S. dollar amounts above and elsewhere in this annual report are translated from yen, for convenience only, at the rate of = US$1. Net Sales 1600 (Units: Millions of U.S. dollars) Sales Composition (for the year ended March 31, 1999) In light of our new business, starting this term the number of our business segment has increased from three to five (see below). In this report, the figures from the previous term are calculated within their respective new divisions. (Units: Millions of U.S. dollars) Information, Rubber Latex Chemicals Environment Others Total and Health 42 10% 13% 14% 21% 100% $600 $141 $176 $196 $302 $1,414 Former Structure (up to the prior term) New Structure (starting this term) Synthetic Rubber Division Synthetic Rubbers Synthetic Latices Rubber Business Latex Business Synthetic Rubbers Synthetic Latices Synthetic Resin Division Others Chemicals Specialty Chemicals PVC Business Medical Equipment RIM Products Information Materials High Functional Resin (Cyclo-olefin Polymer) Environmental Materials Others Chemicals Business Information, Environment, and Health Business Others Chemicals Specialty Chemicals Information-related Materials High Functional Resin Environmental Materials RIM Products Medical Equipment PVC Business Technology Licensing Others

3 Corporate Profile Nippon Zeon Co., Ltd., was initially established in April 1950 with equity participation from BF Goodrich Chemicals Co. of the United States providing technical assistance, and three Japanese companies from the Furukawa Group: Furukawa Electric Co., Ltd., Yokohama Rubber Co., Ltd. and Nippon Light Metal Co., Ltd. Originally founded to manufacture polyvinyl chloride resins, the Company became the first Japanese enterprise to produce synthetic rubbers in We developed an original process for extracting butadiene, the main raw material for synthetic rubbers, from C4 fraction in 1965, followed by the development of a method for extracting isoprene from C5 fraction. Based on these fundamental advances in our own technologies, we established a complete production system starting from material production, ultimately positioning Nippon Zeon as a world-class manufacturer of synthetic rubbers. We currently command the top market share of oil-resistant specialty rubbers for automobile components. Driven by our comprehensive approach to C5 fraction applications, we have conducted extensive research and development and opened markets for a diverse range of products, such as thermoplastic elastomer SIS, C5 hydrocarbon resins, synthetic aroma chemicals, super-plasticizers for concrete, epoxy resin hardening agents, cyclo-olefine polymers, and RIM molding products. We take pride in our world-leading ranking in the comprehensive use of C5 fraction, with virtually every product in this area maturing into a major business concern. In order to reinforce the international competitiveness of our initial business in polyvinyl chloride resins, we transferred this business line in 1995 to the Shin Dai-Ichi Vinyl Corporation, a joint venture company. As a result, our current business activities represent a powerful synergy of petrochemical products, including basic materials revolving around C4 and C5, and new business lines representing interests in the fields of health, the environment, and information-age materials. Our C4 business line includes synthetic rubbers and synthetic latices, while the C5 business features chemical products and specialty chemical products. Medical equipment is at the center of our health-related business; environmental materials and RIM moldings headline our environmental business; and electronic materials, imaging materials, and cyclo-olefine polymers (Zeonex) form the focus of activities in our information-related business concerns. We also license selected components of our leading technologies, including those related to manufacturing synthetic rubbers and latices, extracting butadiene and butene, and drainage facilities. Including non-consolidated companies, Nippon Zeon Co., Ltd. comprises 29 domestic and 12 foreign subsidiaries with 14 affiliates, including six overseas. The Company s production facilities consist of five plants in Japan, one in Great Britain, three in the U.S.A., and four in Southeast Asia. Table of Contents Corporate Message to Stockholders...2 Review of Respective Businesses The Future of Nippon Zeon Financial Statements Report of Independent Certified Public Accountants Corporate Directory and Data

4 Corporate Message to Stockholders The Japanese economy continued to seriously deteriorate during the current consolidated fiscal year (hereinafter referred to as the current term ), with individual consumption, housing, and capital investments all remaining sluggish due to prolonged financial structural problems and an uncertain economic outlook, along with decreased exports partly due to the turmoil in Asian economies. By contrast, the U.S.A. enjoyed continued strong economic growth. The European economy has also remained relatively buoyant on the whole, though the U.K. s economy slowed due to a higher British pound. In such a business environment, the Company s sales for the current term have decreased billion (5.6%) over the previous consolidated fiscal year (hereinafter referred to as the previous term ) to billion. Ordinary profit has also registered a decline of 1.87 billion (19.9%) from the previous term, to 7.53 billion, resulting in a decreased net profit of 4.23 billion (down 20.5%, or 1.09 billion from the previous term). These sales results and the settlement of accounts in the current term resulted in distributable profits of 2.5 per share. Annual dividends, including intermediate allocations, are 5 per share, the same as in the previous term with dividend disposition in the current term at 212.5%. Sales activities of the main divisions are provided below. In existing C4 and C5 businesses during the current term, under our time-honored policy of developing into the world leader by further reinforcing our strengths, we have focused our efforts on the following three objectives: to build a top-level, world-class operational structure in the oil-resistant specialty rubbers field with the C4 line; to steadily promote the comprehensive utilization of C5 fractions; to review PVC business. In C4 business, Zeon Chemicals Inc. (U.S.) acquired NBR business in North America from DSM Copolymer Corporation, U.S.A. in January As a result, the Company has increased its share in the world market of NBR by 5% to 33%, reinforcing its status as the world s leader and widening its lead over the nearest competitor, Bayer (with a 21%share). In C5 business, following approximately 25% increase in production capacity for various monomers completed last spring, we have significantly expanded the production capacity for various induction products of monomer products during the current term. Such efforts include: (1) The start of operations of the C5 hydrocarbon resins plant of Zeon Chemicals (Thailand), with an annual production capacity of 20,000 tons, in May The plant is the first overseas C5 production site. In addition, the hydrocarbon resins plant in Mizushima enhanced its capacity by 5,000 tons in April 1999, resulting in the Company s overall annual capacity of around 60,000 tons (third in the world s C5 resins market); (2) With the completion of a 10,000-ton expansion in the Mizushima SIS lines, its annual production capacity now reaches 30,000 tons annually. The resulting increase in production will be allocated for export to the United States, where demand for adhesive tapes, hotmelt adhesive agents, etc. remains strong. Along with these expansions, the capacity of isoprene rubber has been enhanced by 17,000 tons, to 40,000 tons; (3) A new line of synthetic aroma chemicals, with annual production of 350 tons, has been introduced to the Mizushima plant in May 1999, as part of our efforts to achieve early annual sales of 10 billion in Specialty Chemicals Division. In addition to these developments, Zeonex, Zeonor, Zeorora and RIM, which all utilize C5 fraction as a raw material, have increased overall demand for C5 fraction, leading to an even stronger standing for the Company in the world market. As for new business lines, the Company has striven to establish solid positions in the Information, Environmental and Health fields based on our fundamental principal of never duplicating others and never allowing ourselves to be duplicated, coupled with our own unique technology, and our management policy of constantly aiming to become the leader in world markets, even small niche markets. During the current term, we have made efforts to offset the deficits of these new ventures, but in vain, due to further deterioration of the Japanese economy. We are, however, confident that they will most likely become profitable by next term. 2

5 In the Information field, the following developments in the information materials business took place: (1) The U.S. Environmental Protection Agency gave its 1998 Ozone Layer Protection Award to our newly-developed fluoro-compounds, Zeorora H and ZFL-58. The production facility for these products was completed in December 1998 in Takaoka (annual production: 250 tons), followed by a launch in the market. Zeorora ZFL-58 has been acclaimed for its outstanding performance as an etchant gas for semiconductor production and adopted by several leading manufacturers around the world; (2) In polymerized toner business, the encapsulated low-temperature fusing toner was introduced and registered impressive sales growth. Over the next term, we will continue to cut into the conventional pulverized toner market by taking advantage of our low-temperature fusing technology. As for our Specialty Plastics business, which also belongs in the information category, a new type of cyclo-olefin polymer, Zeonor, was launched in September Although there is no super-high quality for Zeonor as there is for Zeonex, this product has been priced at only half the price of existing lines, due to its general-purpose status. Zeonor has rapidly come to be appreciated in the market for its application to liquid crystal backlight and other diverse purposes, and has in fact been adopted for other applications. We will develop Zeonor into a market of general-purpose transparent resins with annual sales of several ten thousand tons in the near future. Meanwhile, new demand for Zeonex is expected to develop as the material for information recording discs. In our RIM business in the Environmental field, combined septic tanks for sewage have shown a significant increase in sales. This business is expected to continue its outstanding growth over the next term, benefitting from the voluntary regulation of the Septic Tanks Manufacturers Association to discontinue production of single-unit septic tanks. Moreover, our efforts thus far to develop new applications in the housing-facilities area have finally begun to bear fruit, showing very promising prospects for the business. Regarding our Medical Products business in the Health field, we successfully developed a PTCA catheter jointly with Japan Lifeline Co., Ltd. and began its distribution to Japan Lifeline in April The polyvinyl chloride (PVC) resins business, which constituted a part of our original business, was transferred to a joint-venture company, the Shin Dai-Ichi Vinyl Corporation (established in July 1995), with our 40% share, in order to make the business more competitive. Although Shin Dai-Ichi Vinyl has since taken up stringent cost-cutting measures, its cumulative loss reached nearly 7 billion by the end of March Therefore, we have decided to divest this business, as it is now out of our direct management and is no longer our core business. As a result of negotiations with partner companies, we should still incur some divestment-related costs in the next term, but will be completely discharged from any financial support obligation to Shin Dai-Ichi Vinyl in fiscal year 2000 and thereafter. Thus a solution to the PVC business problem, which has negatively affected our operation for years, has now been scheduled. Amid these operational objectives and challenges for the current term, planning of a global strategy for the C4 and C5 businesses is nearly completed, and the timetable for a solution to the PVC business problems has now been fixed. For fiscal year 1999, we intend the new businesses to turn a profit at an earlier stage, while enhancing our competitive edge through implementation of the company-wide austerity program, ZΣ Campaign, to achieve higher financial performance. We would appreciate your continued support and cooperation in the years ahead. President Katsuhiko Nakano 3

6 C 4 Business 100,000 Million yen 80,000 Synthetic Rubbers (Solid) Background Left: Rubber Busienss sales Center: Mississippi Plant, Zeon Chemicals, Inc. Right: R&D Center, Zeon Chemicals, Inc. 60,000 40,000 20, Nippon Zeon is the first commercial synthetic rubber producer in Japan. Rubber products developed and manufactured by the Company, including oil-resistant specialty rubbers and general-purpose rubbers used in tires, have made significant contributions to related industries, particularly the automobile industry. Efforts in the area of synthetic rubbers have resulted in the development and mass production of solution-polymerized, styrene butadiene rubbers with chemically modified chain ends, which provide excellent fuel-savings and high-braking performance on both wet and dry surfaces. In the area of oil-resistant rubbers, the Company has developed new nitrile rubbers and new epichlorohydrin rubbers which contribute to environmental preservation. Automobiles that incorporate these new rubbers produce significantly reduced levels of CO, HC, and NOx emissions. The full-scale production of hydrogenated NBR also provides automakers with a means of responding to the growing demand for products with extended operating lives, including the target of 80,000 maintenance-free miles of operation. Current Status Domestic sales of synthetic rubbers declined by around 10% from the previous term in both volume and sales amount. This decline is primarily due to the sluggish economy and higher unemployment, which led to a significant decrease in auto sales and production cuts by major auto manufacturers. Furthermore, sharp appreciation of the yen since last summer, coupled with soft natural rubber prices, caused some tire manufacturers to resume use of imported synthetic rubbers and hike the utilization ratio of natural rubbers in tire production. Export sales also declined by about 15% from the previous term in both volume and amount, against a backdrop of poor economic development and declining prices in Southeast Asia. U.K. subsidiaries enjoyed increased sales volumes over the results from the previous term. But the sales amounts decreased because of the strong appreciation in the value of the sterling pound. U.S. subsidiaries showed excellent profits, with sales volumes and sales amounts far exceeding the previous term s results. 4 Future Prospects Nippon Zeon is the leader in technology and development related to oil-resistant rubber (NBR, acrylic rubber, epichlorohydrin rubber, and hydrogenated NBR) as well as the world s leading producer of NBR. In January 1999, Zeon Chemicals Inc. (U.S.A.), or ZCI, acquired NBR business in North America (business interest worth nearly 10,000 tons and production rights of 16,000 tons, both per annum) from DSM Copolymer in the U.S.A. The income from this acquisition should be reflected in ZCI s results in fiscal year As a result of this acquisition, Nippon Zeon increased its share in the world market of NBR to 33%, reinforcing its status as the world s leader as well as its lead over the nearest competitor, Bayer (with a 21% share). In the general-purpose rubbers business, last spring Nippon Zeon licensed its originally developed production technogy of solution-polymerized SBR and BR to Dow Chemical Company in the U.S.A. With this license, Dow Chemical is now building a new rubber production facility in Germany, which is to be completed in mid We have concluded an agreement with Dow Chemical on distribution of the products manufactured at this new plant. With this agreement, our company has successfully established a product distribution base for the U.S.A. and European markets. Furthermore, at the domestic facility in Tokuyama, the production capacity of solution-polymerized SBR should be expanded by 25,000 tons by mid From these two distribution bases, we will develop our SBR business in the world market. Our SBR is expected to take a dominant position as the raw material for environmentally responsible, high-performance tires in near future.

7 30,000 Million yen 24,000 Synthetic Latices 18,000 12,000 6,000 Background Left: Latex Business sales Right: Work gloves made of NBR latex Nippon Zeon manufactures and sells a variety of latices, such as SBR, BR, NBR and Acrylate, and has the advantage of being able to meet various customer needs with a wide assortment of materials. Synthetic latices have two major uses, in paper processing (mainly coated papers) and ABS resin manufacturing, and other diversified applications, such as textile manufacturing (including carpet backing, nonwoven fabrics, tire-cord treatment and others), road construction (asphalt modifier), adhesive agents, foam rubbers, and others. NBR latex, used for foam rubber in the manufacture of cosmetic puffs, is an especially noteworthy product which has achieved success in world markets. As for the use of NBR latex in rubber gloves, the allergy problem inherent to natural latex gloves resulted in a rapid shift from natural latex to synthetic latex, which certainly contributed to the significant growth of NBR latex sales. Nippon Zeon has been collaborating with Rohm and Haas Company in U.S.A. in the field of superior hollow particle latices, used mainly as organic pigments for paper coatings. This has contributed to the strong growth of this field, along with the reduced weight and enhanced performance of paper. Latices for moisture-proof paper recycled from polyethylene-laminated paper have been growing strongly, along with the Company s commitment to environmental protection. In this way, Nippon Zeon not only conducts research to improve existing products within large, established markets, but also enthusiastically works to develop new markets by often introducing unique and highly functional products, taking full advantage of advanced technologies which have been cultivated over time, in order to meet the needs of niche markets. Current Status Although domestic sales declined compared to the previous term due to industry-wide production cuts under economic recession, total sales registered an increase, since exports were significantly higher than those in the previous term. Decline in domestic sales from the previous term s level were felt only slightly as higher demand in new areas, such as specialty chemical and hollow particle latices, partly offset the reduced demand for latices for paper processing. However, sales of latices for ABS resins and special applications decreased from the previous term, leading to an overall decline in domestic sales as a whole. Export sales showed a significant increase over the previous term, since lackluster demand for the main applications of tire cords was more than offset by the exceptionally strong growth of glove applications (which were the focus of sales expansion) as well as an upturn in new users demand for ABS resins. Future Prospects In the domestic market, severe circumstances are expected to persist, with demand remaining flat at the current level in the first half of Under these circumstances, price pressure should increase significantly in the paper-processing area, the largest market for latices, due to deterioration of paper manufacturers earnings. We, however, expect favorable business growth with pivotal products, such as superior hollow particles, which have demonstrated significant quality-enhancing effects, amid intensified quality competition. In the specialty latices area, with further acceleration of the trend toward environmental protection and safety improvement, environmentally responsible new products, such as latices for recycling moistureproof paper*, will become widespread. Continued growth in export sales are expected this year due to the rapid expansion of NBR latex for application in work gloves. * Conventional moisture-proof paper is polyethylene-laminated paper, which is not recyclable. 5

8 C 5 Business 30,000 Million yen 24,000 Chemicals 18,000 12,000 6,000 Background Chemicals Business sales Nippon Zeon has focused for 25 years on the full utilization of C5 fraction, which involves more than 30 types of chemicals. Our own GPI Process (Zeon Process of Isoprene) enables each chemical to be efficiently extracted and separated from C5 fraction. This approach has earned us the top ranking in the world in this field. Isoprene Rubber (IR), commonly referred to as synthetic natural rubber, is manufactured with isoprene, one of the initial products of the GPI Process. This product is handled by the Synthetic Rubber Division. Thermoplastic elastomer SIS, a block copolymer of styrene and isoprene, is utilized as a base polymer of pressure-sensitive tapes and labels produced by a non-solvent process, as well as hot-melt adhesives. Products from piperylene, which is also a result of this process, are manufactured under the Quintone 100 series (aliphatic hydrocarbon resin) for use in traffic paints and adhesives for pressure-sensitive tapes and labels. Products from piperylene, isoprene and maleic anhydride (trademark: Quinhard) are used as epoxy resin hardeners. Dicyclopentadiene products are marketed as the Quintone 1000 series (alicyclic hydrocarbon resin) for use in paints, inks and automobile tire modifiers. Products from isoamylene with maleic anhydride (trademark: Quinflow) are aqueous dispersants mainly used as water reducers for concrete Current Status The growth rate of the global SIS market in 1998 was still high and we faced the possibility of a supply shortage to our customers. Fortunately, we succeeded in meeting sales demand through our efforts to improve productivity. The hydrocarbon resin company in Thailand, Zeon Chemicals Thailand Co., Ltd., began commercial production in May 1998 at below its maximum capacity (20,000 tons) under the circumstances which Asian market was shrank. Though the Japanese hydrocarbon resin market in 1998 was also flat, domestic sales increased slightly over Future Prospects Although we expanded SIS production capacity by 50% in spring 1999, we will need 100% plant operation throughout this year due to the remarkable growth of the global SIS market. The Asian hydrocarbon resin market will return to rapid growth in 1999 and we expect greater sales in Thailand, where production of resin was only 80% of production capacity. On the other hand, tough competition in the domestic hydrocarbon resin business will continue as no future market growth in Japan is anticipated. 6 Left: New SIS plant (Mizushima) Center: Traffic paint Right: Zeon Chemicals Thailand Co., Ltd.

9 Specialty Chemicals Background New aroma chemicals plant (Mizushima) We began research and development in synthetic aroma chemicals about twenty years ago to improve the Company s comprehensive utilization of C5 fraction, and completed the construction of the synthetic aroma chemicals facility at the Mizushima Plant and the marketing of synthetic aroma chemicals in the early 1980s. Thereafter, we added the production of intermediates used in pharmaceutical and agricultural materials and various other industrial chemicals. With this successful business expansion, the Specialty Chemicals Division was spun off as an independent operation from the Specialty Chemicals Department of the Chemicals Division in July At present, synthetic aroma chemicals are the core business of the Specialty Chemicals Division, with more than 30 varieties produced and sold. Green Notes, with its sense of freshness, and Jasmine Notes are both notably successful. Leaf Alcohol, an especially popular green aroma, is produced from 2-Butyn in C5 fraction and used for fragrance and flavor. We are the world s largest producer of Leaf Alcohol, meeting more than half of the global demand. We also rank second in the world market for methyl-dihydrojasmonate, which enjoys strong demand as a fragrance in such products as perfumes, hair shampoos and hair conditioners, with the Jasmine Notes product line. We maintain business ties with the top ten flavor & fragrance houses in the world and have established worldwide renown as a synthetic aroma manufacturer. Current Status While growth remains healthy, it is not as robust as the previous term. Sales in the Specialty Chemicals Division have fallen into a temporary lull as consumers in Asia and Latin America economize. Sales of synthetic aroma chemicals, the main products, increased slightly from the previous term. While demand from multinational flavor and fragrance houses as well as aroma compounders was extremely sluggish in the second half of 1998, reflecting the global slow down stemming from the Asian crisis, signs of recovery began to appear in the first quarter of Sales of our main products, both Green Notes and Jasmine Notes aroma chemicals, have been recovering. Sales of specialty chemicals as raw materials and intermediates for agrochemicals, industrial chemicals, and aroma chemicals increased more than 10% from the previous term. Sales of C5-related products such as cyclopentane, cyclopentanone, and cyclopentene and their derivatives increased, while the ongoing development of new applications is beginning to bear fruit. Sales of specialty chemicals as raw materials and intermediates for pharmaceuticals fell significantly because two major products went off the market; however, other products, including those with new applications, are ongoing. Future Prospects Products handled by this division tend to target niche markets but focus on the creation of new demand and the attainment of world recognition as the top products in their categories. Therefore, although the start-up of demand takes time, demand for several key products has already showed signs of growth requiring increased investment in production capacity. In order to meet the increased demand for specialty chemicals, we have already expanded production capacities for synthetic aroma chemicals and will continue to do so, if necessary. 7

10 Information, The Environment, and Health 30,000 Million yen 24,000 Information 18,000 12,000 6,000 Highly Functional Resin Cyclo-olefin Polymer Information, Environment, and Health Business sales We developed optical resins (hydrogenated cyclo-olefin polymer under the trademark Zeonex) and started operating production facilities in Mizushima in November 1990 with an annual capacity of 1,000 tons. To meet the increasing demand, Nippon Zeon completed additional facilities to support an annual production of 2,000 tons in November In 1996, we received the Chemical Technology Prize from The Chemical Society of Japan for providing useful new optical transparent plastics in the optical parts market. The raw material for this resin is DCPD, yet another of the many materials extracted from C5 fraction. The resin is used in the production of optical parts in place of glass, and takes advantage of such features as high optical reliability, utilizing special features such as low water absorbency, heat resistance, a low optical distortion property and minute moldability, which are not found in conventional resins, such as methacrylate resins and polycarbonates. It has been very well-received for uses in various types of precision optical parts, including optical lenses, prisms, optical cells, and optical films. Since it contains fewer impurities and is readily incinerated for disposal, unlike glass, it is therefore useful for such products as medicine containers and medical syringes. Significant growth is expected in the medical market. In addition, we plan to diversify its application as a new plastic material for electronic high-frequency parts utilizing a high electric insulation property and highdensity information recording media such as DVDs. In the fall of 1998, we launched a new product called Zeonor, which enables us to explore yet another market of cyclo-olefin polymers (COPs). Zeonor has properties which meet a wider range of heatresistance/resilience requirements and has been increasingly evaluated positively in the market for such applications as materials for auto lamps, LCD light guide plates and backlight film, various types of optical sheets, and pharmaceutical PTP films. Some of these applications have already been adopted. While we expect that the supply of Zeonor can be covered by the excess capacity of existing facilities during fiscal year 1999, capacity expansion is planned for fiscal year 2000, when its demand is likely to grow well beyond the current level of capacity. Electronic Chemicals In the electronic chemicals business, the Company manufactures and distributes various resists and developers which are used in the production of semiconductors and LCDs. Electron-beam resists, which have been adopted for application in high-tech masks, are registering a steady growth in sales. In addition, they have been adopted by the largest manufacturer of EB-writers as their standard resist. Chemically amplified EB resists are highly promising in their application to System LSI and precision processing of ASIC (Application Specific Integrated Circuit). Zeorora ZFL-58 has been adopted in the advanced semiconductor field as an etchant which provides high selectivity for precision processing. At the same time, fluorinated cyclopentane, Zeorora H, has been launched, which is noted for its zero-depletion potential and short atmospheric life span. Zeorora H was granted the 1998 Stratospheric Ozone Protection Award by the U.S. Environmental Protection Agency last year. In the LCD field, which is growing markedly, LCD resists exhibited strong sales growth, especially in South Korea, Taiwan, and China. 8

11 Imaging Materials In the imaging materials business, the Company manufactures and distributes toners for printers/copiers and the binder resins which are used in production of magnetic tapes such as video and audio cassette tapes. As for the toner business, in 1993 we launched a polymerized toner for the first time in the world, followed in March 1998 by the introduction of an encapsulated, low-temperature fusing toner which utilized polymerizing technology. This low-temperature fusing toner brings significant energy- and resource-saving effects by reducing fusing-to-paper temperature by nearly 30 C compared to conventional pulverized toners, while enabling speedier printing. The superb properties of the new product have boosted its sales to buoyant levels. At present, development of super-low-temperature fusing toner, which will lower the fusing temperature even further, is under way as part of the Company s R&D efforts. Our ultimate goal in this business is to develop more environmentally friendly toners which enable even higher-speed printing, while tapping new markets. In binder resins for magnetic tapes, the Company has the top share of the worldwide market. Since magnetic tapes are mature products, with no significant change in demand, sales volume and amount have remained at relatively stable levels. Left: LCD light guide plates and films Center: Zeonex prism Right: Microscope photos of polymerized toner developed by Zeon (left) and pulverized toner (right) 9

12 Information, The Environment and Health Environment Environmental & Civil Engineering Materials Our business in this area involves the following four environmental materials: 1. Landscaping materials: Artificial plastic logs utilizing recycled plastics have become popular landscaping materials in parks and other outdoor recreational facilities. Sales expansion has also resulted from a series of advanced products, such as bridges, decks and pavillions, in addition to traditional products such as fences and stairs. Furthermore, a new product which utilizes recycled plastics is in the pipeline, with a launch scheduled for fiscal year Civil engineering materials: This represents perhaps the most important of the four areas in this business division. Geotextile materials for waste disposal, road construction and harbor facilities are not only marketed as separate materials but also as components of complete systems. Soil reinforcement materials and drainage materials, also benefiting from consistent demand, contributed to sales expansion. In addition to geotextile materials, we also sell such civil engineering materials as lightweight slope protection frames using recycled plastics like artificial plastic logs and sheets. 3. Park materials: Sales of various types of public toilets, which were released in 1996, increased rapidly, and they can be expected to reach the sales amount of four hundred million yen this fiscal year. Moreover, as a part of our ongoing efforts to shore up our park materials lineup, we will begin distribution of playing facilities/goods manufactured by Kompan Playscape Inc. of Denmark, in order to help sales growth in this business. 4. Road materials: We sell asphalt modifiers (synthetic rubber latices, SIS, SBS) as road materials. Growth in the demand remains at the same level as in the previous term. In the fiscal year 1998, although harsh conditions continued for this business due to the delay of the implementation of the Emergency Economic Package into the following year, sales increased slightly over the previous term with some improvement in profit. In the fiscal year 1999, the Government will implement its economic policies on a continuous basis, giving top priority to economic recovery, which should improve the prospect for this business. Accordingly, sales are expected to substantially exceed the results of fiscal year Left: Artifical plastic logs Right: Public toilets in park

13 RIM Products The Company developed its RIM method a technology for making large molding products in The Company entered the market with an integrated system extending from raw materials to finished molding products. The raw materials and the catalyst are injected into a metal mold where they undergo a chemical reaction at an ambient temperature and pressure. This makes it easy to create even a large, thick molding product as a single unit, or an item with a complex shape; indeed, such products are used as parts for construction and agricultural equipment, such as power-shovel bumpers, and lawn-tractor hoods. Our RIM products are being used by all Japanese manufacturers of construction and agricultural equipment, and the products range of uses continues to expand. RIM products substitute for fiberreinforced plastic or replace sheet metal and metal castings in such applications as truck bumpers and commercial game-machine shells. Combined septic tank for sewage: advances in RIM technologies have enabled the production of largescale plastic products which were previously not possible. At the same time, demand for combined septic tanks for sewage has dramatically increased in response to national policies calling for expanding the coverage of sewage facilities from 45% to 70% by the year Combined septic tanks for sewage constructed of RIM materials are light, strong and secure from leakage. Moreover, the tanks are suitable for thermal recycling; that is, if necessary, they can be collected, cut and incinerated. The RIM compounding plant was completed in Yonezawa City in April 1998, representing a new production base in eastern Japan to supplement the Mizushima Plant, the current production base in western Japan. With the completion of the new plant, sales of RIM products can be expected to increase in eastern Japan as well. A molding factory is planned for construction next to this plant in the near future. Against a backdrop of growing awareness of environmental issues, the Septic Tanks Manufacturers Association developed a voluntary scheme to discontinue production of single-unit septic tanks by the end of March Nearly 90% of the Association s members are participating in this scheme. Accordingly, with a sharp decrease in production of single-unit septic tanks, the sales of combined septic tanks are likely to increase significantly after April More than 40% of combined septic tanks are made of RIM, while the shift from FRP to RIM has become more prevalent among manufacturers. We believe the sales volume of RIM should expand significantly during fiscal year Besides its use in septic tanks, RIM has come to be utilized more widely recently; other applications include housing equipments and upholsters of medical equipment. Housing equipments, in particular, have a significant market, and are likely to grow into one of the major applications for RIMs. The RIM business is forecast to achieve 50% growth in earnings in fiscal year 1999 over the previous year and to make a significant contribution to the Company s earnings as a whole. Left: Combined septic tank for sewage Right: Sink basin 11

14 Information, The Environment and Health Health Medical Equipment A strong medical devices product line, under the Xemex brand name, has been released onto the market. Our ventricular assist device, the first officially approved unit in the world, is a groundbreaking product representing an integration of diverse technologies, involving material processing technology, fluid technology and electric technology, as well as original antithrombotic technology. We currently plan to expand our sales by concentrating on cardiovascular, digestive endoscopic, and nutrition devices. This year, we have launched new devices into the market, the new driving console 908 for IABP (Intra-Aortic Balloon Pumping) and the next generation bipolar polypectomy snare B- Wave. Strengthening our R&D activities and production facilities, we will continue to expand our business lines. We have withdrawn some products which are not in line with our current product group, though we have kept sales revenues from the previous term. 12 Left: Intra-Aortic Balloon Pumping Center: Bipolar polypectomy snare Right: Takaoka Plant for medical equipment

15 Others 50,000 Million yen 40,000 PVC 30,000 20,000 10,000 Other Business sales Background Nippon Zeon s polyvinyl chloride (PVC) business served as the basic line of business since the establishment of our Company. In July 1995, we transferred this entire business to the Shin Dai-ichi Vinyl Corporation, newly established by Sumitomo Chemical Co., Ltd., Sun Arrow Chemical Co., Ltd., Tokuyama Co., Ltd., and Nippon Zeon Co., Ltd Current Status The Shin Dai-Ichi Vinyl Corporation (hereinafter ZEST ) has carried out nearly 3 billion in cost savings while substantial financial support has been provided by three controlling companies for the four years since its inauguration. Nevertheless, the company s cumulative loss reached nearly 7 billion, which is almost equivalent to its paid-in capital, as of the end of March Meanwhile, Japanese PVC manufacturers as a whole (eleven companies) also incurred a total loss of around 15 billion in 1998, thus recording net losses for seven years in a row. Through the creation of ZEST, we started to reinvigorate our PVC business while trying to enhance its international competitiveness, in order to eventually bring about this business s recovery. We have decided, however, to transfer our controlling stake of ZEST to one of its parent companies, Tokuyama Co., Ltd., for the following reasons. First, since neither ethylene nor chloride, two main constituents of PVC, are part of our business, it was difficult for us to take the lead in improving cost competitiveness. Secondly, PVC is no longer our core business, and the loss of it would be more than sufficiently compensated by new businesses. Therefore, we have divested the entire PVC business, which was one of our original business lines. Future Prospects The paid-in capital of 7 billion of ZEST will be reduced entirely at the end of June 1999 to offset its cumulative losses. New capital of 4 billion will then be paid in as of the same date, followed by an additional capital increase of 4 billion at the end of March In addition, the ratio of equity participation will be reshuffled. Tokuyama will increase its interest from the current 30% to 71%, while Nippon Zeon and Sumitomo Chemical, now holding 40% and 30% respectively, will reduce their stakes to 14.5% each at the end of March Meanwhile, ZEST will discontinue production at one of its major facilities in Mizushima, located within Nippon Zeon s Mizushima plant, with an annual capacity of 120,000 tons. Consequently, Nippon Zeon is now under negotiation with relevant business concerns on the closure of a plant operated by Sanyo Monomer, a Nippon Zeon subsidiary (55% interest). The plant, with an annual vinyl chloride monomer production capacity of 230,000 tons, has been the major supplier of vinyl chloride monomers to ZEST s Mizushima Plant. Nippon Zeon s financial support of ZEST, which amounted to 1.2 to 1.4 billion annually and negatively affected the Company s operation so far, will end in fiscal year We will, however, continue consigned production of specialty PVC products at ZEST s Takaoka Plant (located within our Takaoka Plant and with an annual production capacity of 65,000 tons). Not only is the specialty PVC business profitable, as suppliers we take our responsibility to users seriously. Technology Licensing, Support-related Business and Others Sales amount from technology licensing, support-related business and others was 1.94 billion yen, including 505 million yen in revenues from licensing. This represented a decline of about 30% from previous term. We project sales amount of 1.6 billion yen from technology licensing, support-related business and others in the next term, with licensing revenues of approximately 600 million yen. 13

16 Research and Development Organization and Function The Technology Development Division was newly formed by combining the R&D and the Manufacturing Divisions in March 1999 in order to build up technology with low cost and high speed from the early stages of R&D. The R&D Group consists of the R&D Center, Corporate Business Development and Intellectual Property Department. The R&D Center houses over 350 technical staff members who work in nine Product Research Laboratories and four Corporate Research Laboratories, the latter being the center of new product and new technology development. The role of Corporate Business Development is to conduct in-depth market studies and initial market development to correctly lead the direction of R&D. Research and Progress in 1998 As a part of C5 fraction utilization strategy, a new cyclo-olefin polymer (COP), ZEONOR series, has been developed, in addition to its existing ZEONEX family. ZEONOR was designed to meet a need for a low cost, large market. Its applications include automotive parts and lamps, LCD light guide plates, various types of film, and so on. Furthermore, a type of COP was found to be useful in micro-electronic applications as a low-k inter-layer insulator. Another exciting development was the successful development of low-temperature fixing toner which has made it possible to increase printing speed without increasing fixing temperature. The first commercial printer using this type of toner has been put on the market last year. Another new product from R&D, fluorinated cyclopentane (Zeorora H) and cyclopentene (Zeorora ZFL- 58), are now in the commercialization stage. Zeorora H is used as a solvent for lubricants for hard disk coatings and precision cleaning solvent, and Zeorora ZFL-58 is used as etching gas for next generation semiconductors. Zeorora H received the Stratospheric Ozone Protection Award from the U.S. Environmental Protection Agency (EPA) in October 1998 for its low earth-warming property. Future Prospects The R&D Group continues to provide strong support to existing businesses and lead the way into new product and technology development activities. One example is a new wave of metallocene catalysts which are extensively influencing polymer industries. We are focusing on this subject in collaboration with academia and governmental institutions. Another example is genetically engineered chicken vaccines. An approval of at least three new recombinant vaccines by the U.S. Department of Agriculture (USDA) is expected in the year Left: Stratospheric Ozone Protection Award presented by U.S. Environmental Protection Agency Right: Auto lamp parts made of Zeonor

17 The Future of Nippon Zeon Nippon Zeon 2000 The Company will celebrate its 50th anniversary in April We hope that by then the Company will have steadily advanced as Zeon, a dependable chemical company with abundant creativity and individuality consistent with its management concept of Zeon, contributing to the preservation of the Earth and the prosperity of the human race and its management vision to establish the Nippon Zeon Group as worthy of the pride of every employee. Moreover, we believe that the successful achievement of our performance goals will unite our customers, shareholders, and local community residents in a very joyful 50th anniversary celebration. The foundation of the Company s management strategy for existing businesses will be to further capitalize on our strengths and cultivate a top-level, world-class enterprise. For instance, in our C4 business line in the field of oil-resistant specialty rubbers, though the Company boasts the largest worldwide market share, with production bases in the three key locations of Japan, the U.S.A., and Europe, we acquired the NBR business of DSM Copolymer Corporation of the U.S.A. in January 1999, through our subsidiary, Zeon Chemicals Inc., to further reinforce our standing as the world leader. We intend to continue building on our lead over our nearest competitor through our efforts to enhance customer satisfaction and confidence in our company. As for the C5 business line, in order to expand utilization of C5 fraction, which we can boast is the most advanced in the world, the Company has carried out large-scale investment in capacity expansion since fiscal year As for other future plans, construction of a large plant for the exclusive production of Zeonor, cyclo-olefin polymers (COPs), is in the pipeline. Other capacity-expansion plans have been completed on schedule or are near completion. At these newly completed plants, we are going to make every possible effort, on a company-wide scale, to ensure vertical start-up, immediate full operation and full distribution. As for new business lines, the Company will establish solid positions in the information, environment and health categories based on its own unique and exclusive technology. For example, in its information businesses, the Company will cultivate highly functional resin cyclo-olefin polymer, polymerized toners, environmentally friendly solvents and etching gases. In its environmental businesses, the Company will focus on combined septic tanks for sewage, housing equipment, park materials, and civil engineering materials for the construction of final disposal sites. An exciting array of promising products in response to market needs, including PTCA catheters, is planned for its medical products business line. The Company is determined to cultivate these new businesses as major pillars supporting the 21st-century Zeon by achieving profitable results at the earliest possible stage of fiscal year As for PVC business, its divestment required serious deliberation on our part, since it was one of our original businesses. We, however, believe that it was a reasonable decision made in terms of selection and concentration. The resources which used to be allocated to the PVC business will be redistributed to the Company s core businesses more intensively, to achieve higher earnings. Countermeasures to the Y2K Problem We recognize the seriousness of the Y2K problem and are dealing with it as one of our most important management matters. We have established a permanent Information System Committee to deal with Y2K. So far, we have finished safeguarding the Company s basic business information system, and are scheduled to complete preparations for the equipment and facilities in our plants by fall of this year, during the plants holidays. Our main products are chemical materials, which are unaffected by the millenium bug. The devices we sell as a part of our business have been taken care of, and our customers have been informed. At the same time we are currently analysing research data on the Y2K preparedness of our main business partners, mainly our raw-materials providers. In addition, we are working hard to create a troubleshooting manual for unexpected mishaps, to minimize any harm to our business activities. 15