| 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.
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 Companys 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. NSCs consolidated financial results were reflected in the Companys 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 Companys consolidated balance sheet.
The amounts included in the Companys consolidated statement of operations, and total assets and debt that were excluded from the Companys consolidated balance sheet are summarized as follows:
Following the July 2001 sale of some of the Companys equity stake in EXA CORPORATION, the subsidiary moved out from under the Companys consolidated range and has been accounted for under the equity method in the second half of fiscal 2002.
(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.
|(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.
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
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.
Certain amounts in the consolidated financial statements of prior years have been reclassified to conform with the current year presentation.
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.
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:
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:
Components of accrued retirement benefit cost were as follows:
The basis for calculation of retirement benefit obligation was as follows:
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
NSC restated its financial statements retroactively in fiscal 2000. This restatement increased NSCs retained earnings as of December 31, 1999, by $19.8 million, and resulted in an increase in the Companys 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.
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:
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:
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: