NKK CORPORATION: Annual Report 2002
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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 Unconsolidated Subsidiaries and Affiliates

The consolidated financial statements include the accounts of the Company and its 82 subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. The investments in 15 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.

      National Steel Corporation (“NSC”) filed the petition for reorganization under Chapter 11 of U.S. Bankruptcy Code on March 6, 2002. NSC’s consolidated financial results were reflected in the Company’s consolidated statement of operations and statement of cash flows through the year ended March 31, 2002. Its year-end assets and liabilities were excluded from the Company’s consolidated balance sheet.

      The amounts included in the Company’s consolidated statement of operations, and total assets and debt that were excluded from the Company’s consolidated balance sheet are summarized as follows:

Notes:  1. 
The above amounts are after the adjustments for consolidation.
  2. 
The losses related to NSC, included in liquidation loss related to investments in subsidiaries and affiliates, etc., are added to other expenses.

      Following the July 2001 sale of some of the Company’s equity stake in EXA CORPORATION, the subsidiary moved out from under the Company’s consolidated range and has been accounted for under the equity method in the second half of fiscal 2002.
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.

      An 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 ($823,977 thousand) were reclassified to investment securities as of April 1, 2000.
 
Major Subsidiaries and Affiliates
 
NSC filed for Chapter 11 bankruptcy protection and reorganization under the U.S. Bankruptcy Code on March 6, 2002.
      NKK MARINE & LOGISTICS CORPORATION and Nichiei Unyu Soko K.K. plan to merge and reorganize in October 2002 in order to build a more comprehensive logistics company and create more flexible business organizations.
      ADCHEMCO Corporation is studying the potential for consolidation with the chemicals division of Kawasaki Steel as part of the reorganization of chemicals operations within the JFE Group. The target date for reorganization is April 2003.
      KOKAN DRUM COMPANY, LTD., has reached a basic agreement to merge with Kawasaki Container Co., Ltd., as part of the reorganization of container operations within the JFE Group. The target date for the merger is April 2003.
 
      Nippon Kokan Light Steel Kabushiki Kaisha is studying the potential for merger with Kawasaki Kenzai Co., Ltd., as part of the reorganization of the building materials business within the JFE Group. The target date for the merger is April 2003.
      The board of directors of NK HOME CO., LTD., passed a resolution on the policy of dissolving the company in a meeting held on April 25, 2002.
      EXA CORPORATION is the new name of the NK-EXA CORPORATION. We have transferred a part of the shares held by the Company to IBM Japan, Ltd., reducing our equity in EXA from 51% to 49%.
      The resolution of the scheme to dissolve NKK U.S.A. Corporation
was made at a meeting of NKK’s Board of Directors held on February 14, 2001.
 
(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 for 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
Retirement benefits for the employees are provided as of the balance sheet date based on the projected benefit obligation and pension assets.

      Out of the difference of ¥78,481 million ($588,976 thousand) which arose at the time of transition, the amount of ¥10,603 million ($79,572 thousand) was amortized for the year ended March 31, 2001, 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.

      For the year ended March 31, 2001, in accordance with an accounting standard for retirement benefits, which became effective April 1, 2000, ¥6,722 million ($50,447 thousand) of gain on establishment of pension trust fund was recorded from the stock contribution. The effect of the adoption of the accounting standard was to decrease income before income taxes and minority interests by ¥4,751 million ($35,655 thousand). Due to this adoption, amounts of former employees’ termination allowances and past service liability costs are included in employees’ termination allowances.

      NSC 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.

      An accounting standard for foreign currency translation became effective April 1, 2000. The effect of the adoption of the 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 principle 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.
 
(k) Reclassifications
Certain amounts in the consolidated financial statements of prior years have been reclassified to conform with the current year presentation.
4.  U.S. Dollar Amounts

The translation of yen amounts as of and for the year ended March 31, 2002, into U.S. dollar amounts is stated solely for convenience, as a matter of arithmetic computation only, at the rate of ¥133.25=US$1.00, the approximate rate of exchange on March 31, 2002. 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.  Depreciation and Amortization

Depreciation and amortization for the years ended March 31, 2002 and 2001, amounted to ¥107,613 million ($807,602 thousand) and ¥112,102 million, respectively.
6.  Investments in Unconsolidated Subsidiaries and Affiliates

Investments in unconsolidated subsidiaries and affiliates were as follows:


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.
7.  Securities

Market values of available-for-sale securities were as follows:


      Other available-for-sale securities sold within the fiscal year were as follows:


      Available-for-sale securities which were non-marketable were as follows;


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

8.  Other Assets

Other assets were composed of the following:

9.  Long-Term Indebtedness

Long-term indebtedness was summarized as follows:


Notes:  1. 
An interest rate for each interest calculation period is determined by six-month TIBOR two banking days prior to the latest interest due date (the issue date for the first period) plus 0.35%.
  2. 
These bonds at the end of the previous fiscal year were issued by overseas subsidiary NSC.

      The Company and its domestic consolidated subsidiaries have commitment line contracts to enhance efficiency and stability in fund procurement.

      Components of commitment line contracts were as follows:

10.  Other Long-Term Liabilities

Other long-term liabilities were composed of the following:

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 were as follows:

Notes:  1. 
Some subsidiaries apply a simplified method to calculate retirement benefit obligation.
  2. 
The Company posted a reduction in past service obligations, owing to amendments, effective April 10 , 2002, regarding provisions for lower yields on pension benefits and lower assumed rates of interest on pension funds under tax-qualified pension plans.

      Components of accrued retirement benefit cost were as follows:

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. 
Amortization of net retirement benefit obligation at the transition associated with adoption of an accounting standard for retirement benefits includes the one-time amortization of ¥10,603 million ($79,572 thousand) through the contribution of available-for-sale securities to retirement benefit trust for the year ended March 31, 2001.
  3. 
Other than the accrued retirement benefit cost noted above, the Company and its domestic consolidated subsidiaries processed supplementary severance amounts of ¥9,066 million ($68,038 thousand) and ¥11,396 million for the years ended March 31, 2002 and 2001, respectively.

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

Note: 
The Company and its subsidiaries expense amounts, determined proportionally by the straight-line method based on a fixed number of years within the average remaining years of service of employees, in the consolidated fiscal year following the term in which the expenses incurred.

      NSC and its consolidated subsidiaries maintain defined-benefit plans for nearly all full-time 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:


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


      Recognized cost for the year ended December 31, 2000, was ¥3,763 million ($28,240 thousand).
      The assumptions used in the calculation of projected pension benefits obligation was as follows:

12.  Other, Net

“Other, net” in “other (income) expenses” was composed of the following:


      Loss on the transfer of assets incurred from joint venturing of seamless pipes with Siderca S.A., represents losses incurred in the transfer of machinery and equipment to the joint venture.

      “Loss on reorganization of welfare and real 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

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:


The above guarantees included ¥3,871 million ($29,051 thousand) and ¥5,403 million reguaranteed by other parties at March 31, 2002 and 2001, respectively.
16. Leases

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


Lease commitment equivalents were as follows:

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.


      Major items causing a difference between the statutory tax rate and effective tax rate were as follows:

18.  Segment Information

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

(a) 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:

19.  Subsequent Events

1.  In an operating environment characterized by the expansion of global procurement activities and continued realignment of the steel industry, including changes in worldwide demand, the Company and Kawasaki Steel Corporation formed an agreement for consolidation in the previous year that would facilitate the provision of products and services geared to the high-level needs of clients and thereby promote business activities.

      On June 26, 2002, the Company and Kawasaki Steel received shareholder approval of the agreement at the companies’ respective annual shareholders’ meetings, paving the way for the establishment of JFE Holdings, Inc., a parent company under which the Company and Kawasaki Steel will become wholly owned subsidiaries through the transfer of shares, as stipulated in Article 364 of the Commercial Code of Japan.

      A summary of the transfer of shares is as follows:
(1)  Exchange Ratios
All shareholders of record, including real shareholders, listed in the shareholder registers of the Company and Kawasaki Steel, as of the day preceding the day on which shares will be transferred, will be given shares in JFE Holdings in the ratios shown below.
  Shareholders of the Company
   
75 shares of JFE Holdings common stock for every 1,000 shares of the Company’s common stock
  Shareholders of Kawasaki Steel
   
100 shares of JFE Holdings common stock for every 1,000 shares of Kawasaki Steel common stock
(2)  Capital and Additional Paid-In Capital for JFE Holdings
Capital  :  ¥100 billion
Additional Paid-In Capital  : 
The amount remaining after the aforementioned capital is subtracted from the combined net assets of the Company and Kawasaki Steel on the day that the transfer of shares is executed.
(3)  Date of Transfer of Shares
September 26, 2002
(Scheduled date for establishing JFE Holdings is September 27, 2002.)
(4)  Conditions for Joint Establishment
The Company and Kawasaki Steel will jointly establish JFE Holdings, which will become the parent company.

About Kawasaki Steel (As of March 31, 2002)
Corporate Name  :  Kawasaki Steel Corporation
Location of Headquarters  :  1-28, Kitahonmachi-dori 1-chome,
Chuo-ku, Kobe 651-0075, Japan
Date of Establishment  :  August 7, 1950
Capital  :  ¥239,644 million
Major Businesses  :  1. Manufacture and sale of steel products
2. Manufacture and sale of chemicals
3. Engineering
President and Representative Director  :  Fumio Sudo
Number of Employees  :  9,269
 
2.  The domestic shipbuilding industry faces several daunting challenges, particularly low prices for ships, caused by excessive supply, and fierce competition, paralleling the rise of the shipbuilding industry in other nations, most notably South Korea. This situation is likely to persist in the medium-to-long term.

      The Company and Hitachi Zosen Corporation came to the mutual conclusion that stronger competitive positions for both companies in this business would require such means as enhanced technology and product-development capabilities through the sharing of management resources, heightened cost competitiveness, greater economy of scale and the implementation of a more efficient operating structure.

      To this end, the two companies agreed to transfer respective shipbuilding operations to a 50:50 joint venture, Universal Shipbuilding Corporation. The decision was approved at the annual shareholders’ meeting held by the Company on June 26, 2002.

      A summary of the business transfer is as follows:
(1)  Operations
Business related to shipbuilding operations
(2)  Date of Transfer
September 26, 2002
(3) 
Assets and Liabilities to be Transferred
Assets and liabilities that are related to shipbuilding operations and proposed for transfer, as of March 31, 2002, are as follows:
  Current assets   ¥  7.4 billion
  Fixed assets   ¥14.0 billion
  Current liabilities   ¥  5.2 billion
(4) 
Value, Method of Payment
The value of the assets and liabilities to be transferred will be determined by the market value on the date of transfer. The method and timing of payment will be determined in separate discussions.
(5) 
Summary of operations to be transferred for the most recent fiscal year (April 1, 2001 to March 31, 2002), is as follows:
  Net sales   ¥58.2 billion
  Operating income   ¥  6.0 billion
(6)  About the New Joint Venture

Corporate Name  :  Universal Shipbuilding Corporation
Location of Headquarters  :  28-1, Oi 1-chome, Shinagawa-ku,
Tokyo 140-0014, Japan
Capital  :  ¥10 million
Major Businesses  : 
Design, manufacture, sale and repair of ships, floating-type petroleum storage facilities, megafloats and other marine structures
Chairman and Representative Director  :  Kenzo Tazawa
President and Representative Director  :  Takehiko Kamijo
Percentage of Ownership  : 
NKK   50%
Hitachi Zosen   50%

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