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Notes to Consolidated Financial Statements
Year Ended March 31, 2003
1. Basis of Presentation
JFE Holdings, Inc. (the "Company" hereinafter) and
its domestic subsidiaries maintain their accounts and records in accordance
with the provisions set forth in the Commercial Code of Japan (the "Code"
hereinafter) and the Securities and Exchange Law and in conformity with
accounting principles and practices generally accepted in Japan (the "Japanese
GAAP" hereinafter), which may differ in some material respects from accounting
principles and practices generally accepted in countries and jurisdictions
other than Japan.
The Company's overseas subsidiaries maintain their accounts
and records in conformity with generally accepted accounting principles
and practices prevailing in their respective countries of domicile. The
notes to the consolidated financial statements include information which
is not required under the Japanese GAAP but is presented herein as additional
information.
In September 2002, Kawasaki Steel and NKK established
the Company through a stock-for-stock exchange process. As a result of
this transaction, each of the two companies has become a wholly owned
subsidiary of the Company.
The formation of the Company and the stock-for-stock exchange
of the two companies (the "Combination" hereinafter) were accounted for
using the pooling-of-interests method and, as such, the assets and liabilities
of the two companies are combined at book value. In addition, the consolidated
statement of income gives effect to the transaction as if the transaction
occurred at the beginning of the fiscal year presented, regardless of
when the Combination was in effect.
The translation of the Japanese yen amounts into U.S.
dollars is included solely for the convenience of the reader, using the
approximate exchange rate at March 31, 2003, which was ¥120.20 to
US$1.00. These convenient translations should not be construed as representations
that the Japanese yen amounts have been, could have been, or could in
the future be converted into U.S. dollars at this or any other rate of
exchange.
2. Summary of Significant Accounting Policies
(a) Consolidation Principles
The consolidated financial statements include the accounts
of the Company's 217 domestic and foreign subsidiaries (the "Group"
as JFE Holdings, Inc. consolidated group, hereinafter). All significant
inter-company transactions and accounts are eliminated.
Investments in an unconsolidated
subsidiary and 42 affiliates are accounted for by the equity method whereby
the Group includes in net income its share of income or losses of these
companies, and records its investments at cost adjusted for its share
of income, losses or dividends received.
Significant Subsidiaries and Affiliates
The Company's significant subsidiaries and affiliates are as follows: |
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Notes:
1. Figures in parentheses ( ) in the ownership interest column represent
the percentage of voting rights indirectly held.
2. The Company holds less than 50%
of the voting rights in this company but exercises de facto control, so
it is listed as a subsidiary.
3. Reorganization of subsidiaries:
Kawasaki Steel and NKK reallocated their respective businesses on April
1, 2003, based on the February 12, 2003, extraordinary meeting of shareholders
separately hosted by the two companies, as follows: (1) Kawasaki Steel's
engineering business passed to NKK under corporate divestiture, (2) NKK's
steel business passed to Kawasaki Steel under corporate divestiture, (3)
the urban development business of both Kawasaki Steel and NKK passed to
JFE Urban Development Company, a joint company to be newly established,
under corporate divestiture, (4) the basic technology R&D operations
of both Kawasaki Steel and NKK passed to JFE R&D Corporation, a joint
company to be newly established, under corporate divestiture, and (5)
Kawasaki Steel's subsidiary LSI business passed to JFE Holdings under
corporate divestiture. Furthermore, in conjunction with the aforementioned
corporate divestiture steps, Kawasaki Steel and NKK changed their company
names to JFE Steel Corporation and JFE Engineering Corporation, respectively,
as of April 1, 2003.
ADCHEMCO Corporation merged with Kawasaki Steel's Chemical
Division on April 1, 2003, to form JFE Chemical Corporation.
Kawasaki Steel Container Co., Ltd. merged with KOKAN DRUM CO., LTD. on
April 1, 2003, to form JFE Container Co., Ltd. This merger was part of
a reorganization of the container operations within the Group.
Nippon Kokan Light Steel Kabushiki Kaisha and Kawasaki Steel Metal Products
& Engineering Inc. merged on April 1, 2003, to form JFE Metal Products
& Engineering Inc. This merger was part of a reorganization of the
building materials operations within the Group.
On May 22, 2003, the Company's Board of Directors resolved to undertake
stock-for-stock exchanges and to issue new shares in order to turn Tokyo
Shearing Co., Ltd. and KAWATETSU GALVANIZING CO., LTD. into wholly owned
subsidiaries. The agreements for the stock-for-stock exchanges were signed
on the same day. See "17. Subsequent Events" below for an outline
of the stock-for-stock exchanges.
4. Major subsidiaries changing names:
NKK WELDED PIPE MANUFACTURING CO., LTD. changed its name to JFE WELDED
PIPE MANUFACTURING CO., LTD. on April 1, 2003.
Kawasaki Steel Civil Engineering & Construction Corporation changed
its name to JFE Civil Engineering & Construction Corporation on April
1, 2003.
NKK PLANT ENGINEERING CORPORATION changed its name to JFE Plant &
Service Corporation on April 1, 2003.
Nippon Kokan Biru Kanri K.K. changed its name to JFE Urban Plus Co., Ltd.
on April 1, 2003.
5. Details of these subsidiaries are given in a list beginning
on page 46.
(b) Translation of Foreign Currencies
Revenues and expenses are translated at the rates of exchange prevailing
when transactions are made, and assets and liabilities are translated
into Japanese yen at the exchange rates in effect on the respective balance
sheet dates.
(c) Valuation of Securities
Available-for-sale Securities
Marketable: Kawasaki Steel and its consolidated subsidiaries value
at market based on market price, etc. on the settlement day. NKK and its
consolidated subsidiaries value at market based on an average of market
prices for a period of one month prior to the settlement date. (In both
cases, valuation differences are recorded fully to balance sheet by the
direct capitalization method, with costs sold calculated primarily by
the moving average method.)
Non-marketable: Valued primarily at cost by the moving average
method.
(d) Valuation of Inventories
Kawasaki Steel and its consolidated subsidiaries primarily value at cost
by the last in first out (LIFO) method (however, uncompleted construction
contracts are valued at cost by the specific identification method). NKK
and its consolidated subsidiaries primarily value finished goods, semi-finished
goods and raw materials at cost by the moving average method; work in
process and uncompleted construction contracts at cost by the specific
identification method; supplies at cost by the gross average method, except
molds and rolls, which are valued by the specific identification method.
(e) Depreciation Method for Property, Plant and Equipment
Kawasaki Steel and its consolidated subsidiaries primarily use the declining
balance method; NKK and its consolidated subsidiaries depreciate machinery
and equipment primarily by the straight-line method, and other tangible
fixed assets by the declining balance method.
(f) Allowance for Doubtful Accounts
The projected uncollectible amount is provided as the allowance using
historical default rates for ordinary credits and individual collectability
assessments for credits deemed to have high likelihood of default and
for other specific credits.
(g) Accrued Retirement Benefits
Accrued retirement benefits are provided based on the amount of projected
benefit obligation reduced by pension plan assets at fair value at the
end of the fiscal period.
Prior service cost is amortized in projected average years
of service of the employees. Actuarial losses are amortized in projected
average years from the following fiscal year after the year in which they
occurred.
The transitional obligation at the date of adoption of
the new Accounting Standard for Retirement Benefits standards, ¥129,160
million ($1,074,542 thousand), is amortized in primarily 5 years from
the year ended March 31, 2001.
(h) Reserve for Rebuilding Furnaces
The estimated cost of the next repair
is allocated to the reserves in equal amounts over the year to the next
repair.
(i) Leases
Finance leases other than those that are deemed to transfer the ownership
of the leased assets to lessees are accounted for by a method similar
to that applicable to ordinary operating leases.
(j) Per Share Information
Basic net income per share is computed by dividing net income available
to common stockholders by the weighted average number of shares of common
stock outstanding during the period. Net income used in the computation
was ¥15,923 million ($132,472 thousand), the average number of shares
used in the computation was 574,046 thousand for the year ended March
31, 2003. Cash dividends per share shown in the statement of
income are the amounts applicable to the respective year.
3. Cash and Cash Equivalents
Cash and cash equivalents at March 31, 2003, consisted of the following:
4. Securities
The following is a summary of held-to-maturity securities and available-for-sale
securities at March 31, 2003:
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Marketable:
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Non-marketable:
Available-for-sale securities:
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5. Inventories
Inventories at March 31, 2003, were as follows:
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6. Long-Term Debt
Long-term debt at March 31, 2003, consisted of the following: |
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Notes:
1. 6-month yen LIBOR + 0.80%
(However, subject to the following interest-rate ceilings)
From the day after April 24, 1998, until the first-year payment deadline:
1.80% per annum
From the day after the first-year payment deadline until the second-year
payment deadline: 2.10% per annum
From the day after the second-year payment deadline until the third-year
payment deadline: 2.40% per annum
From the day after the third-year payment deadline until the fourth-year
payment deadline: 2.70% per annum
From the day after the fourth-year payment deadline until the fifth-year
payment deadline: 3.00% per annum
2. Calculated as 0.35% over 6-month
yen TIBOR as at two bank operating days prior to the payment deadline
(issue date for the first time) directly prior to the beginning of the
interest calculation period.
3. 10-year yen bond swap rate - 0.82%
4. From May 16, 2001 to May 15, 2006:
1.30% per annum
From May 16, 2006 to May 15, 2009: 2.00% per annum
5. Nippon Kokan Pipe Fitting MFG changed
its name to JFE Pipe Fitting MFG on April 1, 2003.
7. Pledged Assets
At March 31, 2003, pledged assets were as follows:
In addition, the Company intends to set pledges
for consolidated subsidiary shares (book value on the financial
statements of individual consolidated subsidiaries of ¥2,335
million [$19,430 thousand]).
8. Revaluation of Land for Business
In the years ended March 31, 2001 and 2002, part of the subsidiaries
and affiliates revaluated the land for business purposes based on
the Law Concerning Revaluation of Land and its amendment issued
on March 31, 2001 and 2002, respectively. Revaluation differences,
net of the portion charged to "deferred tax assets," "deferred tax
liabilities" and "minority interests," were recorded as "revaluation
reserve for land, net of tax" in shareholders' equity. On March
31, 2003, the fair value of these lands is lower than the revaluated
book-value. The difference was ¥9,029 million ($75,117 thousand).
9. Accrued Retirement Benefits
The following tables set forth the changes in the benefit obligation,
plan assets and funded status of the Company and its subsidiaries
at March 31, 2003.
Retirement and pension costs of the Company and
its subsidiaries included the following components for the year
ended March 31, 2003.
Notes:
1. Accrued retirement benefit cost incurred by consolidated subsidiaries
applying a simplified method to calculate retirement benefit obligation
is included under "service cost."
2. Other than the accrued retirement
benefit cost noted above, the domestic consolidated subsidiaries
processed supplementary severance amounts of ¥11,390 million
($94,763 thousand) for the year ended March 31, 2003.
The rationale for calculations of retirement benefit
obligations for the year ended March 31, 2003, is as follows:
1. Retirement benefit projection amortization method:
Primarily, the straight-line method over the period
2. Discount rate:
For Kawasaki Steel and its consolidated
subsidiaries, primarily 2.0%
For NKK and its consolidated subsidiaries,
primarily 1.5%
3. Expected return on plan assets:
For Kawasaki Steel and its consolidated subsidiaries, primarily
2.0%
For NKK and its consolidated subsidiaries, primarily 4.0%
4. Amortization period for prior service cost:
For Kawasaki Steel and its consolidated subsidiaries, primarily
12 years
For NKK and its consolidated subsidiaries, primarily 10 years
(Treated as cost using the straight-line method for a set number
of years within the average remaining service period for employees
at the time of accrual.)
5. Amortization period for actuarial losses:
For Kawasaki Steel and its consolidated subsidiaries, primarily
12 years
For NKK and its consolidated subsidiaries, primarily 10 years
(Amortized using the straight-line method over a set number of years
within the average remaining service period for the employees during
the consolidated fiscal year in which discrepancies were accrued.
These amounts are treated as cost posted to the next consolidated
fiscal year after year in which they were accrued.)
6. Amortization period for transitional obligations
due to adoption of new accounting standards:
Primarily 5 years
10. Contingencies
At March 31, 2003, the Group was contingently liable as follows:
These guarantees include ¥2,204 million ($18,341 thousand) borne
by other companies under re-guarantee agreements.
11. Leases
The Group leases certain buildings and structures, machinery and
equipment, office space and other assets. Total lease payments under
these leases were ¥11,306 million ($94,063 thousand) for the
year ended March 31, 2003.
Pro forma information on leased property, such as
acquisition costs, accumulated depreciation and future minimum lease
payments for property held under finance leases which do not transfer
ownership of the leased property to the lessee on an "as if capitalized"
basis for the year ended March 31, 2003, was as follows:
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Future minimum lease payments under finance leases as of March
31, 2003, were as follows:
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The acquisition costs and future minimum lease payments
under finance leases include the imputed interest expense portion.
Depreciation expenses, which were not reflected in the accompanying
consolidated statement of income, computed by the straight-line
method, were ¥11,306 million ($94,063 thousand) for the year
ended March 31, 2003.
12. Derivatives and Hedging Activities
The Group has a basic policy providing that derivative financial
instruments are used to reduce the interest rate risk and foreign
exchange rate risk, not to gain profit. The Group has established
a control environment that includes policies and procedures for
risk assessments and for the approval, reporting and monitoring
of transactions involving derivative financial instruments. The
Group does not hold or issue derivative financial instruments for
trading purposes. The Group is exposed to certain market risks arising
from its forward exchange contracts and swap agreements. The Group
is also exposed to the risk of credit loss in the event of non-performance
by the counterparties to the currency and interest; however, the
Group does not anticipate non-performance by any of these counterparties,
all of whom are financial institutions with high credit ratings.
Interest rate swap agreements outstanding at March 31, 2003, were
as follows:
13. Research and Development
Research and development expenses charged to income were ¥33,116
million ($275,508 thousand) for the year ended March 31, 2003.
14. Income Taxes
The Company and its domestic subsidiaries are subject to several
taxes based on income, which in the aggregate resulted in statutory
tax rate of approximately 42.1% for the year ended March 31, 2003.
Foreign subsidiaries are subject to income taxes of the countries
in which they operate. The effective tax rate for the year ended
March 31, 2003, differed from the statutory tax rate for the following
reasons:
The tax effects of temporary differences that give
rise to significant portions of the deferred tax assets at March
31, 2003, are presented below:
15. Segment Information
Information about operations in industry segments, geographic segments
and sales to foreign customers of the Group for the year ended and
as of March 31, 2003, was as follows:
(1) Industry Segments
Note:
The segment breakdowns were created by totaling the steel operations
of Kawasaki Steel and NKK for the "Steel" segment, the
engineering operations of Kawasaki Steel and NKK for the "Engineering"
segment, and the chemicals, LSI, information technology and other
operations of Kawasaki Steel and the other operations of NKK for
the "Others" segment. These totals are given consolidated
adjustment for transactions between the Company, Kawasaki Steel
and NKK.
Below are segment breakdowns for the operations of
Kawasaki Steel and NKK.
Kawasaki Steel
NKK
(2) Geographic Segments
Geographic segment information has not been disclosed because the
sales and assets of consolidated foreign subsidiaries for the year
ended March 31, 2003, were less than 10% of consolidated net sales
and assets.
(3) Sales to Foreign Customers
Sales to foreign customers for the year ended March 31, 2003, amounted
to ¥585,504 million ($4,871,089 thousand).
The sales figures are simple aggregates of the sales to foreign
customers of Kawasaki Steel and NKK, respectively ¥316,772 million
($2,635,375 thousand) and ¥268,732 million ($2,235,715 thousand).
16. Extraordinary Profit (Loss)
For the year ended March 31, 2003, extraordinary profit (loss) consisted
of the following:
17. Subsequent Events
On May 22, 2003, the Company's Board of Directors resolved to undertake
stock-for-stock exchanges in accordance with Article 358:1 of the
Code in order to turn Tokyo Shearing Co., Ltd. ("Tokyo Shearing"
hereinafter), and KAWATETSU GALVANIZING CO., LTD. ("KAWATETSU GALVANIZING"
hereinafter), into wholly owned subsidiaries, and to issue new shares
in conjunction with these transactions. The contracts for the stock-for-stock
exchanges were signed on the same day.
Below is an outline of the stock-for-stock exchanges
with Tokyo Shearing and KAWATETSU GALVANIZING.
1. Description of stock-for-stock exchange with
Tokyo Shearing
1) Outline of counterparty company in stock-for-stock exchange
(As of March 31, 2003)
| Name |
Tokyo Shearing Co., Ltd. |
| Head office |
12-8, Shinkawa 2-chome, Chuo-ku, Tokyo |
| Representative |
Shinji Yamada,
President and Representative Director |
| Established |
July 20, 1936 |
| Capital |
¥1,019 million ($8,478 thousand) |
| Businesses |
Shearing, processing and sale of steel plates,
sale of steel products and processed steel products, real estate
leasing, etc. |
2) Purpose of stock-for-stock exchange
In its medium-term business plan, JFE Steel Corporation ("JFE Steel"
hereinafter), one of the Group's operating companies, set goals
to "build an optimized production and marketing system and integrate
facilities" and "reorganize and consolidate group members." It is
essential that JFE Steel, Tokyo Shearing and Kawatetsu Kozai Kogyo
Kaisha, Ltd. ("Kawatetsu Kozai" hereinafter), manage their operations
in an integrated fashion based on a shared strategy in order to
strengthen the group-wide competitiveness in the steel plate and
building materials markets. In addition, detailed studies are under
way on the integration of Tokyo Shearing and Kawatetsu Kozai in
order to maximize their earnings as steel plate shearing and processing
members of the Group.
It was decided that turning Tokyo Shearing into
a wholly owned subsidiary of JFE Steel would be the best way to
faithfully implement these programs and improve shareholder value
for both the Company and Tokyo Shearing. However, JFE Steel is not
a publicly traded company, so a stock-for-stock exchange will be
undertaken between the Company and Tokyo Shearing, and then the
shares in Tokyo Shearing later transferred from the Company to JFE
Steel.
3) Description of stock-for-stock exchange
A stock-for-stock exchange will be performed on October 1, 2003,
in accordance with Articles 352 through 363 of the Code, at which
time Tokyo Shearing will become a wholly owned subsidiary of the
Company.
Pursuant to the stock-for-stock exchange, the Company
will issue 1,304,480 shares of common stock to be exchanged at a
ratio of 0.064 shares of common stock in JFE to a share of common
stock in Tokyo Shearing. Dividends on the 1,304,480 shares of newly
issued common stock will begin to accrue from October 1, 2003. The
total issue price for the new shares issued pursuant to the stock-for-stock
exchange will be equivalent to the existing net asset value of Tokyo
Shearing as of October 1, 2003, the day of the stock-for-stock exchange, and therefore
will result in the inclusion of ¥0 per share in new capital.
2. Description of stock-for-stock exchange with
KAWATETSU GALVANIZING
1) Outline of counterparty company in stock-for-stock exchange
(As of March 31, 2003)
| Name |
KAWATETSU GALVANIZING CO., LTD. |
| Head office |
1-9, Nihonbashi Muromachi 3-chome, Chuo-ku,
Tokyo |
| Representative |
Teruyuki Nakanishi,
President and Representative Director |
| Established |
June 14, 1913 |
| Capital |
¥4,313 million ($35,882 thousand) |
| Businesses |
Manufacture, processing and sale of hot-dip
galvanized and other surface-treated steel sheets |
2)Purpose of stock-for-stock exchange
In its medium-term business plan, JFE Steel set goals to "build
an optimized production and marketing system and integrate facilities"
and "reorganize and consolidate group members." It is
essential that JFE Steel, KAWATETSU GALVANIZING and NKK STEEL SHEET
& STRIP CORPORATION ("NKK STEEL SHEET & STRIP"
hereinafter) manage their operations in an integrated fashion based
on a shared strategy in order to strengthen the groupwide competitiveness
in the coated and hot-dip galvanized sheets market. In addition,
detailed studies are under way on the integration of KAWATETSU GALVANIZING
and NKK STEEL SHEET & STRIP in order to maximize earnings as
the steel sheet building materials specialist of the Group.
It was decided that turning KAWATETSU GALVANIZING
into a wholly owned subsidiary of JFE Steel would be the best way
to faithfully implement these programs and improve shareholder value
for both the Company and KAWATETSU GALVANIZING. However, JFE Steel
is not a publicly traded company, so a stock-for-stock exchange
will be undertaken between the Company and KAWATETSU GALVANIZING,
and then the shares in KAWATETSU GALVANIZING later transferred from
the Company to
JFE Steel.
3) Description of stock-for-stock exchange
A stock-for-stock exchange will be performed on October 1, 2003,
in accordance with Articles 352 through 363 of the Code, at which
time KAWATETSU GALVANIZING will become a wholly owned subsidiary
of the Company.
Pursuant to the stock-for-stock exchange, the Company
will issue 3,481,396 shares of common stock to be exchanged at a
ratio of 0.068 shares of common stock in JFE to a share of common
stock in AWATETSU GALVANIZING. Profit dividends on the 3,481,396
shares of newly issued common stock will begin to accrue from October
1, 2003.
The total issue price for the new shares issued
pursuant to the stock-for-stock exchange will be equivalent to the
existing net asset value of KAWATETSU GALVANIZING as at October
1, 2003, the day of the stock-for-stock exchange, and therefore
will result in the inclusion of ¥0 per share in new capital.
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