NKK CORPORATION: Annual Report 1998
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NKK CORPORATION
Notes to Non-Consolidated Financial Statements


1. Summary of Significant Accounting Policies

(a) Basis of Preparation

The accompanying non-consolidated financial statements have been prepared from the accounts and records maintained by NKK CORPORATION (the "Company") in accordance with the Commercial Code of Japan and in conformity with accounting principles and practices generally accepted in Japan. Preparation of statements of cash flows is not required in Japan; however, they have been presented in the accompanying non-consolidated financial statements to provide additional information. Certain items presented in the original non-consolidated financial statements have been reclassified for the convenience of readers outside Japan.

As permitted by the Commercial Code of Japan, amounts of less than one million yen have been omitted. As a result, the totals shown in the accompanying non-consolidated financial statements do not necessarily agree with the sum of the individual amounts.

(b) Foreign Currency Translation

All assets and liabilities denominated in foreign currencies, other than those hedged by forward exchange contracts, are translated into Japanese yen at the historical rates. All revenues and expenses associated with foreign currencies are translated at the rates of exchange prevailing when such transactions were made. Translation gains and losses are credited or charged to income currently. Translation gains and losses arising from long-term forward exchange contracts are deferred and amortized over the remaining terms of the respective contracts.

(c) Basis of Recognition of Sales and Profit on Contracts

The Company adopts the percentage-of-completion method for long-term contracts if the period of construction is more than 1 year (in the case of shipbuilding, more than 2 years) and the contract price exceeds ¥1 billion for the recognition of sales and gross profit on contracts. See Note 3 regarding the change in the criteria for the period of construction and the contract price on the percentage-of-completion method. Except for the mentioned above, the Company adopts the completed-contract method.

(d) Securities

Marketable and investment securities are carried at cost, except for those securities which have been written down to reflect a decline in value deemed other than temporary.

(e) Inventories

Inventories are valued at cost determined principally by the following methods:
 
  Finished goods  
    and raw materials ...... Moving average method
  Work in process .......... Specific identification method
  Supplies ................. Total average method

(f) Property, Plant and Equipment

Depreciation of plant and equipment is as follows:
 
  Machinery and equipment at   
    the Keihin Works and   
    the Fukuyama Works ............ Straight-line method
  Plant and equipment at the   
    Ayase LSI Research Center ..... Straight-line method
  Other ........................... Declining-balance method

Depreciation is computed by the above methods based on the estimated useful lives of the respective assets as prescribed under the Corporation Tax Law of Japan.

Maintenance and repairs, including minor renewals and betterments, are charged to income as incurred.

(g) Accounting for Leases

Finance leases, except for lease agreements which stipulate the transfer of ownership of the leased property to the lessee, are accounted for as operating leases.

(h) Research and Development Expenses

Research and development expenses are charged to income as incurred.

(i) Income Taxes

Income taxes are calculated on taxable income and charged to income on an accrual basis. In conformity with accounting principles generally accepted in Japan, Enterprise tax, which is levied on the earnings of the corporation, is included in operating expenses in the original non-consolidated financial statements. For the convenience of readers outside Japan, it has been reclassified to Income taxes. Deferred income taxes pertaining to timing differences between financial and tax reporting are not provided. See Note 11.

(j) Employees' Termination Allowances and Pension Plan

Employees of the Company are generally entitled to receive termination benefits when they leave the Company. The termination payments are determined on the basis of length of services and basic salaries at the time of termination. The Company provides for these allowances at the present value of the amount which would be required to be paid if all eligible employees terminated their services involuntarily as of the balance sheet date.

The Company has a funded noncontributory qualified pension plan which funds a portion of the employees' termination allowances. This plan applies to vested employees over 50 years of age. Past service cost relating to the pension plan is being amortized by the straight-line method over a period of approximately 9 years.

(k) Amounts per Share of Common Stock

The computation of net income per share is based on the average number of shares of common stock outstanding during each year.

Cash dividends per share of common stock are stated on an accrual basis and include, in each year ended March 31, the dividends subsequently approved by the shareholders as applicable to the year then ended.

2. U.S. Dollar Amounts

The translation of Japanese yen amounts for 1998 into U.S. dollar amounts is stated solely for convenience, as a matter of arithmetic computation only, at the rate of ¥132=U.S.$1, the approximate rate of exchange on March 31, 1998. The translation should not be construed as a representation that Japanese yen have been, could have been, or could in the future be, converted into U.S. dollars at the above or any other rate.

3. Change in Accounting Method

Effective April 1, 1996, in view of the increasing number of contracts with relatively small amounts, the Company changed the criteria for the period of construction and the contract price on the percentage-of-completion method from more than 1 year and ¥3 billion or more (in the case of shipbuilding, more than 3 years and ¥20 billion or more), to more than 1 year (in the case of shipbuilding, more than 2 years) and ¥1 billion or more. The effect of this change was to increase Net sales for the fiscal period by ¥58,002 million ($467,758 thousand) and Income before income taxes for the fiscal period by ¥5,717 million ($46,105 thousand).

4. Marketable Securities

Marketable securities were as follows:

Table

5. Other Assets

Other assets were as follows:

Table

6. Short-Term Bank Borrowings, Commercial Paper and Long-Term Indebtedness

Short-term bank borrowings, due principally in 90 days, bore interest at average rates of 1.3% and 0.9% per annum at March 31, 1998 and 1997, respectively.

Commercial paper, due in 99 days on the average, bore interest at average rates of 1.3% and 0.6% per annum at March 31, 1998 and 1997, respectively.

Long-term indebtedness at March 31, 1998 and 1997 consisted of the following:

Table

The assets pledged to secure the Company's indebtedness at March 31, 1998 were as follows:

Table

The 1.5% convertible yen bonds, due 1998 were issued in July 1989. They are convertible into shares of common stock of the Company at the current conversion price of ¥808.1 ($6.12) per share. The conversion price is subject to adjustment in certain circumstances.

As is customary in Japan, substantially all bank borrowings including short-term borrowings are subject to general agreements with each bank which provide, among other things, that the bank may require the borrower to provide collateral (or additional collateral) or guarantors for these loans and may treat any collateral so furnished to the bank as collateral for all present and future indebtedness.

The aggregate annual maturities of long-term indebtedness subsequent to March 31, 1998 are summarized below:

Table

7. Reserve for Rebuilding Furnaces

Blast furnaces and hot blast stoves including related machinery and equipment periodically require repair and substantial replacement of their components. The estimated future costs of such work are provided for and charged to income on a straight-line basis over the period to the date of the anticipated repair or replacement work. The difference between the estimated and actual cost is charged or credited to income at the time the work is performed.

8. Legal Reserve

The Commercial Code of Japan provides that an amount equivalent to at least 10% of cash dividends and bonuses paid to directors and 10% of interim cash dividends be appropriated to the Legal reserve until such reserve equals 25% of common stock. The Code also provides that neither Capital surplus nor the Legal reserve is available for dividends, but both may be used to reduce a deficit by resolution of the shareholders or may be transferred to Common stock by resolution of the Board of Directors.

9. Other, Net

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

Table

10. Income Taxes

The Company is subject to a number of taxes based on earnings which, in the aggregate, resulted in a statutory tax rate of approximately 51% for both 1998 and 1997. The differences between the statutory tax rate and the effective tax rates in the accompanying non-consolidated statements of income resulted principally from the effect of timing differences in the recognition of certain income and expenses for tax and financial reporting purposes, the effect of permanently non-deductible expenses and certain tax credits.

11. Deferred Income Taxes

As mentioned in Note 1(b), translation gains arising from long-term forward exchange contracts are deferred and amortized over the remaining terms of the respective contracts. Under the Corporation Tax Law of Japan, such translation gains arising from contracts entered into before April 1, 1993 are not taxable until the maturity dates of the respective contracts.

Because of the settlement of a portion of a contract, the corresponding portion of the Reserve for income taxes was reversed. The reversal was included in Income taxes - deferred, and netted against the current provision of the Reserve for income taxes.

12. Leases

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

Table
Lease commitment equivalents as of March 31, 1998:
Table

Lease payments for the year ended March 31, 1998 (depreciation expense equivalents) amounted to ¥409 million ($3,098 thousand).

Depreciation expense equivalents are calculated by the straight-line method with the lease period as the useful life.

In preparing the above notes, the interest expense including method was used because, at the end of the fiscal year, the lease commitment balance was not material to the balance of Property, plant and equipment, net.

13. Contingent Liabilities

The Company was contingently liable for guarantees of loans which were given for:

Table

14. Subsequent Events

(a) The following appropriations of Retained earnings, which have not been reflected in the accompanying financial statements for the year ended March 31, 1998, was approved at the shareholders' meeting held on June 26, 1998:

Table

(b) The Company repurchased 116,416 thousand shares of the Company's common stock at the aggregate cost of ¥13,620 million ($103,182 thousand) during the period from April 7 to May 8, 1998 in order to retire the Company's treasury stock by capital surplus.

(c) On June 10, 1998, the Company issued yen bonds which were as follows:

Table

(d) On June 17,1998, the Company issued yen bonds which were as follows:

Table



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