NKK CORPORATION: Annual Report 2001
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NKK CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Basis of Preparation

The accompanying consolidated financial statements were principally prepared from accounts and records maintained by NKK CORPORATION (the "Company") and its consolidated subsidiaries in accordance with the provisions set forth in the Securities and Exchange Law of Japan and in conformity with accounting principles and practices generally accepted in Japan, which may differ in some material respects from accounting principles and practices generally accepted in countries and jurisdictions other than Japan.

      As permitted by the Securities and Exchange Law, amounts of less than ¥1 million have been omitted. Consequently, the totals shown in the accompanying consolidated financial statements (both in yen and U.S. dollars) do not necessarily agree with the sum of the individual amounts.



2. Consolidation Policy and Accounts for Investments in Nonconsolidated Subsidiaries and Affiliates

The consolidated financial statements include the accounts of the Company and its 123 subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. The investments in 16 affiliates are stated at their underlying equity value.

      In eliminating the cost of investments in consolidated subsidiaries with the underlying equity in net assets of such subsidiaries or affiliates accounted for by the equity method, a difference may arise between the two amounts. Such difference is principally deferred as an asset or liability, as the case may be, and is amortized to/against income on a straight-line method over a period of five years. Such difference, if not significant in amount, is charged or credited to income in the year of the acquisition.

      Investments in unconsolidated subsidiaries and the remaining affiliates are carried at cost or less. If an impairment in value is recognized, then the investment to be disposed of is reported at the lower of the carrying amount or fair value less costs to sell.

      Certain consolidated subsidiaries were included in these consolidated financial statements as the account settlement dates of these subsidiaries falls within a three month period from the Company's own fiscal year-end. Any significant events or changes in circumstances occurring during the three month period are recorded on the consolidated financial statements.



3. Significant Accounting Policies

(a) Valuation of Securities
Prior to the year ended March 31, 2000, marketable and investment securities had been valued principally at cost being determined by the moving-average method.

      A new accounting standard for financial instruments became effective April 1, 2000. Under the new accounting standard, available-for-sale securities with market price are marked to market based on the average market prices for one month before the balance sheet date. The revaluation differences are charged directly to the consolidated balance sheet by the direct-capitalization method, and the related costs of sale are calculated principally by moving-average method. Other available-for-sale securities without market price are stated at cost by the moving-average method.

      Due to this adoption, the Company and its consolidated subsidiaries assessed their intention to hold their investments in securities at the beginning of the year, and classified certain investments as available-for-sale securities. As a result, marketable securities presented as current assets of ¥109,795 million ($886,158 thousand) were reclassified to investment securities as of April 1, 2000.

(b) Valuation of Inventories
 Inventories for finished goods, semi-finished goods and raw materials are carried at cost, determined by the moving-average method. Work in process and uncompleted construction contracts are valued at cost on an individual basis. Molds and rolls are carried at cost on an individual basis. All other inventories are carried at cost based on the periodic-average method.

(c) Depreciation Method of Tangible Fixed Assets
Machinery and equipment are depreciated mainly using the straight-line method. All other tangible fixed assets are depreciated using the declining balance method.

(d) Allowance for Doubtful Accounts
Allowance for doubtful accounts represents an amount deemed necessary to cover possible losses on specific receivables and also projected collection losses estimated based on past provisions.

(e) Retirement and Severance Benefits and Pension Costs
Until the year ended March 31, 2000, accrued employees' retirement benefits were stated at the amount in the discounted cash flow base, which would be required to be paid if all employees covered by the retirement benefit plans terminated their employment at the balance sheet date.

      Retirement benefits are provided for the employees as of the balance sheet date based on the projected benefit obligation and pension assets.

      Out of the difference of ¥80,052 million ($646,102 thousand) which arose at the time of transition, the amount of ¥10,603 million ($85,577 thousand) was amortized at the time through stock contribution to the pension trust fund, and the remaining amount is amortized over five years. Actuarial difference is amortized from the following year.

      In accordance with a new accounting standard for retirement benefits, which became effective April 1, 2000, ¥6,722 million ($54,253 thousand) of gain on establishment of pension trust fund was recorded from the stock contribution. The effect of the adoption of the new accounting standard was to decrease income before income taxes and minority interests by ¥4,751 million ($38,345 thousand). Due to this adoption, amounts of former employees' termination allowances and past service liability costs are included in employees' termination allowances.

      National Steel Corporation and its significant subsidiaries have defined benefit pension plans. Pension costs are reported in compliance with FAS 87, the "Employers' Accounting for Pensions."

(f) Allowance for Special Maintenance and Repairs
Blast furnaces and hot blast stoves, including related machinery and equipment, periodically require substantial component replacements and repairs. The estimated future costs of such work are provided for based on the actual cost of prior replacements and repairs and the frequency at which they are implemented.

(g) Basis of Translation of Foreign Currency Accounts
All asset and liability accounts of foreign subsidiaries and affiliates are translated into Japanese yen at the appropriate current year-end rates and all income and expense accounts are translated at the average rate of exchange in effect during the year, except for shareholders' equity accounts, which are translated at their historical exchange rates.

      Current and non-current monetary accounts denominated in foreign currencies are translated into yen at the current rates. Translation differences are charged to operations.

      A new accounting standard for foreign currency translation became effective April 1, 2000. The effect of the adoption of the new standard on the consolidated financial statements was immaterial for the year ended March 31, 2001. Due to this adoption, the Company has presented translation adjustments as a component of shareholders' equity and minority interests (instead of as a component of assets or liabilities) in its consolidated financial statements for the year ended March 31, 2001.

(h) Leases
Finance leases other than those which are deemed to transfer the ownership of the leased assets to lessees are accounted for by the method similar to that applicable to ordinary operating leases.

(i) Accounting Policies of Overseas Subsidiaries
The financial statements of the consolidated subsidiaries in the United States have been prepared on the basis of accounting principles generally accepted in the United States. The financial statements of THAI COATED STEEL SHEET CO., LTD., have been prepared on the basis of accounting principles generally accepted in Thailand. Such financial statements have been consolidated in the accompanying consolidated financial statements without any adjustments to conform them to accounting principles generally accepted in Japan.

(j) Derivative Financial Instruments
Hedge Accounting

Deferral hedge accounting is adopted for all derivative transactions. Unrealized gains or losses arising from forward exchange transactions and currency swaps are allocated through the period of transaction. Net amounts of interest received/paid arising from interest rate swap transactions are charged to original interests periodically.

      The company and certain consolidated subsidiaries have entered into certain derivative transactions in order to hedge risks arising from adverse fluctuations in foreign currency exchange rates and interest rates according to their internal control regulations. These transactions are limited solely for hedging purposes and not for speculation.

MAJOR SUBSIDIARIES AND AFFILIATES
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Company Line of Business NKK's Shareholdings
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Steelmaking Operations
(%)
NKK BARS & SHAPES CO., LTD. Manufacture and sale of shapes, sections, bars, wire rods
100.0
NKK WELDED PIPE MANUFACTURING CO., LTD. Manufacture and sale of electric-resistant welded pipes and butt-welded pipes
99.9
ADCHEMCO Corporation Manufacture and sale of chemical products
100.0
Fukuyama Kyodo Power Co., LTD. Thermal power generation
50.0
NKK MATERIAL CO., LTD. Manufacture and sale of alloy steel and ceramics, etc.
98.9
NKK MARINE & LOGISTICS CORPORATION Warehousing, domestic shipping business, port transport
73.0
NKK TRADING INC. Sales and purchase of steel products
71.0
Japan Casting Co., Ltd. Manufacture and sale of iron and steel casting products
42.3
NKK PRECISION CO., LTD. Manufacture and sale of forms and blanks
100.0
NIPPON CHUTETSUKAN K.K. Manufacture and sale of cast iron pipes
30.0
NKK STEEL SHEET & STRIP CORPORATION Manufacture and sale of coated steel sheets
100.0
KOKAN DRUM COMPANY, LTD. Manufacture and sale of steel drums
67.1
NKKTUBES Manufacture and sale of seamless steel pipes
49.0
Nippon Kokan Light Steel Kabushiki Kaisha Manufacture and sale of light gauge steel products
81.0
FUJI KAKO CO., LTD. Manufacture and sale of synthetic resin pipes
60.0
Tokyo Shearing Co., Ltd. Plate shearing and pressing, manufacture and sale of steel products
49.6
OKUTAMA KOGYO CO., LTD. Mining and sale of lime
29.2
NIPPON KOKAN PIPE FITTING MFG. CO., LTD. Manufacture and sale of pipe fittings
68.7
GALVATEX CORPORATION Manufacture and sale of galvanized steel products
100.0
MENTEC KIKO CORPORATION Design, installation and maintenance of mechanical, electrical and control equipment; civil engineering works
83.5
KOKAN MINING COMPANY, LTD. Mining and processing of raw materials for steel production
83.7
Nichiei Unyu Soko K.K. Warehousing and transportation services
50.1
LS FENCE CO., LTD. Sale of exterior goods, contract work
73.6
JAPAN STEEL LEASING CO., LTD. Leasing and sale of construction machinery and materials
20.0
National Steel Corporation Manufacture and sale of steel sheets
69.7
THAI COLD ROLLED STEEL SHEET PUBLIC CO., LTD. Manufacture and sale of cold-rolled steel sheets
31.9
THAI COATED STEEL SHEET CO., LTD. Manufacture and sale of zinc-coated steel products
46.6
   
Engineering Operations
Nippon Kokan Koji K.K. Civil construction services
68.5
NKK SHIMIZU CO., LTD. Design, manufacture and construction of steel structures
99.9
NKK PLANT ENGINEERING CORPORATION Design, manufacture, construction, maintenance and sale of various types of plant and equipment
89.9
   
Other Operations
NKK Facilities & Favor Co., Ltd. Provision of welfare, wages, and other services under outsourcing contracts; renting and management of dormitories and company housing; real estate, travel and insurance services
99.9
NK HOME CO., LTD. Design, construction and sale of houses
100.0
NK-EXA CORPORATION Development and sale of computer systems
51.0
NK KANKYO CORPORATION Recycling of waste for various use
72.0
NKK Credit Corporation Group finance
100.0
NKK U.S.A. Corporation Holding company
100.0
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      The resolution of the scheme to dissolve NKK U.S.A. Corp. was made at the Board of Directors' meeting of NKK on February 14, 2001.
      NKK Marine & Logistics Corp. and Nissan Senpaku Ltd. were merged, with NKK Marine & Logistics the surviving entity, to reinforce the foundation of the Group's transportation division and to concentrate related know-how and operating resources in one company.
      As noted last term as a subsequent event, NKF Corp. transferred the custodian and social welfare portions of its operations to NKK Facilities & Favor Co., Ltd., to centralize the Group's administration of property and employee welfare programs under one roof. NKF Corp. was then absorbed by NKK. NKK Facilities & Favor changed its name from NKK Business Support Co., Ltd., in the term under review.

 

      NKKTUBES, a joint venture with Argentina's Siderca S.A. to produce seamless steel pipes, is a major affiliate of NKK from the term under review.
      Seeking to integrate equipment and maintenance capabilities, NKK merged Mentec Kiko Corp. with a subsidiary conducting similar operations, and has from the term under review included the company as a major subsidiary.
      In line with a comprehensive agreement with IBM Japan, Ltd., NKK relinquished 49% of its equity holding in NK-EXA Corp. to IBM Japan, and another 2% is scheduled to be relinquished to IBM Japan in July 2001.


4. U.S. Dollar Amounts

The translation of yen amounts for the year ended March 31, 2001, into U.S. dollar amounts is stated solely for convenience, as a matter of arithmetic computation only, at the rate of ¥123.90=U.S.$1.00, the approximate rate of exchange on March 31, 2001. The translation should not be construed as a representation that yen have been, could have been, or could in the future be, converted into U.S. dollars at the above or any other rate.



5. Securities

Market value of available-for-sale securities at March 31, 2001 was as follows: Market value of available-for-sale securities


   Other available-for-sale securities sold within the fiscal year ended March 31, 2001 were as follows: Other available-for-sale securities sold


   Available-for-sale securities which were non-marketable at March 31, 2001 were as follows: Available-for-sale securities

  The carrying values of available-for-sale securities at contractual maturity at March 31, 2001 were as follows: The carrying values


6. Depreciation and Amortization

Depreciation and amortization for the years ended March 31, 2001 and 2000, amounted to ¥112,102 million ($904,778 thousand) and ¥118,384 million, respectively.



7. Investments in Unconsolidated Subsidiaries and Affiliates

 Investments in unconsolidated subsidiaries and affiliates were as follows:

Investments in unconsolidated subsidiaries and affiliates

      Had the equity method of accounting been applied to the above investments valued at cost or less, the effect on the consolidated financial statements would not have been material.


8. Other Assets

 Other assets were composed of the following:

Other assets



9. Long-Term Indebtedness

 Long-term indebtedness at March 31, 2001 and 2000 was summarized as follows:

 Long-term indebtedness

 

      The Company and its domestic consolidated subsidiaries have concluded commitment line contracts to enhance efficiency and stability in fund procurement.
      Components of commitment line contracts at March 31, 2001 were as follows:

Components of commitment line



10. Other Long-Term Liabilities

Other long-term liabilities were composed of the following:

Other long-term liabilities



11. Retirement and Severance Benefits and Pension Costs

Pension Plan System

The Company and its domestic consolidated subsidiaries maintain as defined-benefit plans lump-sum payment programs and tax-qualified pension schemes. In addition, fulltime employees taking early retirement may be provided with supplementary severance amounts when these employees end their service to said companies.

      Components of retirement benefit obligation at March 31, 2001 were as follows:

Components of retirement benefit obligation

      Components of accrued retirement benefit cost for the year ended March 31, 2001 were as follows:

Components of accrued retirement benefit

      The basis for calculation of retirement benefit obligation was as follows:

The basis for calculation of retirement benefit obligation

      National Steel Corp. and its consolidated subsidiaries maintain defined-benefit plans for nearly all fulltime employees, and because pension costs are reported in compliance with FAS 87 of the U.S. Financial Accounting Standards Board, the assets and liabilities associated with said pension plans are disclosed as "other assets" in investments and other assets, as "other long-term liabilities" in long-term liabilities and reserves, and in retained earnings. The major components of these assets and liabilities are presented below.

      Projected pension benefit obligation at December 31, 2000 was composed of the following:

Projected pension benefit obligation

      Net amount posted in the balance sheets at December 31, 2000 was as follows:

Net amount posted in the balance sheets

      Recognized cost for the year ended December 31, 2000 was ¥3,763 million ($30,371 thousand).
      The basis for calculation of projected pension benefits obligation was as follows:

The basis for calculation of projected pension benefits obligation

12. Other, Net

 "Other, net" in "Other (income) expenses" was composed of the following:

      "Special charge on the reorganization of electronic devices business operation" comprises losses on the withdrawal from test manufacturing and sales of static random-access memory (SRAM) products, such as loss on disposal of inventories and loss on disposal of fixed assets.
      Loss on the transfer of assets incurred from the establishment of a seamless pipe joint venture with Siderca S.A., represents losses incurred in the transfer of machinery and equipment to the joint venture.
      Loss on the reorganization of welfare and estate functions represents losses incurred by the transfer of land, paralleling an operational reorganization through which the property and employee welfare functions of NKF Corp. were reassigned to NKK Facilities & Favor Co., Ltd.


13. Adjustment to Beginning Balance

National Steel Corporation ("NSC") restated its financial statements retroactively in fiscal 2000. This restatement increased NSC's retained earnings as of December 31, 1999 by $19.8 million, and resulted in an increase in the Company's retained earnings of ¥1,183 million for the year ended March 31, 2001.
      The Institute of Certified Accountants and Auditors of Thailand set forth a revision to accounting standards on January 20, 2000, prohibiting the recording of pre-operating expenses as an asset. The adjustments to retained earnings for the years beginning January 1, 1998 and 1999 is presented in the retained earnings statement of THAI COLD ROLLED STEEL SHEET PUBLIC CO., LTD.


14. Minimum Pension Liability

NSC recorded an adjustment to recognize its minimum pension liability at the excess of the accumulated benefit obligation over the fair value of the plan assets, including the unfunded accrued pension cost in underfunded plans.


15. Contingent Liabilities

The Company and its consolidated subsidiaries had the following contingent liabilities at March 31, 2001:

Contingent Liabilities

      The above guarantees include ¥5,403 million ($43,608 thousand) reguaranteed by other parties.


16. Leases

Finance leases, except for lease agreements which stipulate the transfer of ownership of the leased assets to the Company, are summarized as follows:

Leases


 

Lease commitment equivalents as of March 31, 2001:



17. Income Taxes

Deferred income taxes reflect the net effects of the temporary differences between the carrying amount of assets and liabilities for financial reporting and income tax purposes.

Income Taxes



18. Segment Information

The segment information of the Company and its consolidated subsidiaries was summarized as follows:

(a) Information by Business Segment

Information by Business Segment


(b) Overseas Sales

Overseas sales, which include export sales of the Company and its domestic subsidiaries and sales (other than exports to Japan) of the foreign subsidiaries, were as follows:

Overseas Sales



19. Subsequent Events

In April 2001, NKK and Kawasaki Steel Corporation reached a basic agreement on the consolidation of their entire operations. Following approval by their shareholders and Japan's regulatory authorities, the two companies will implement a full-scale business consolidation on equal terms, as follows:

  • In the first stage, the two companies will establish a joint holding company by a stock-for-stock deal, and will become wholly owned subsidiaries of this company by October 2002. In the second stage, working under the holding company, the companies will form all-new business entities in respective business segments.
  • The name, location, board members and other details of the holding company will be decided based on discussion between the two companies.
  • The stock swap ratio will be decided based on discussion between the two companies and consideration of the opinions of professional institutions.

On March 23, 2001, the Company decided the issuance of bonds with the following conditions:

Company decided




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