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. Accordingly, the accompanying non-consolidated financial statements are not intended to present the non-consolidated financial position, results of operations and cash flows in accordance with accounting principles and practices generally accepted in countries and jurisdictions other than Japan. Preparation of statements of cash flows is not currently 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.
(c) Basis of Recognition of Sales and Profit on Contracts
The Company adopts the percentage-of-completion method for the recognition of sales and gross profit on contracts if the period of construction is over 1 year (in the case of shipbuilding, over 2 years) and the contract price exceeds ¥1 billion. The Company adopts the completed-contract method for the recognition of revenue on all other contracts.
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.
Inventories are valued at cost determined principally by the following methods.
and raw materials ..... Moving average method
(f) Property, Plant and Equipment
Depreciation of plant and equipment is as follows; In fiscal 1997 (the year ended March 31, 1998).
Machinery and equipment at.
Keihin and Fukuyama Works... straight-line method
Plant and equipment at the.
Ayase LSI Research Center ...straight-line method
In fiscal 1998 (the year ended March 31, 1999).
Machinery and equipment at.
Keihin and Fukuyama Works....straight-line method
Plant and equipment at the.
Ayase LSI Research Center ...straight-line method
New buildings completed.
after April 1, 1998 .........straight-line 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.
(a) In fiscal 1997 (the year ended March 31, 1998), enterprise tax, which was levied on the earnings of the corporation, was included in operating expenses in the original non-consolidated financial statements. For the convenience of readers outside of Japan, it had been reclassified to income taxes.
(b) In fiscal 1998 (the year ended March 31, 1999), as a result of the change in the accounting principles generally accepted in Japan, enterprise tax was reclassified from operating expense to income tax. Thus, there is no need to reclassify enterprise tax as income tax for convenience of readers outside Japan.
(j) Employees' Termination Allowances and Pension Plan
Employees of the Company are generally entitled to receive severance benefits when they terminate their services with the Company. The termination payments are determined on the basis of length of service and basic salary at the date 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' retirement 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, for each year ended March 31, the dividends subsequently approved by the shareholders as applicable to the year then ended.
The translation of yen amounts for the year ended March 31,1999 into U.S. dollar amounts is stated solely for convenience, as a matter of arithmetic computation only, at the rate of ¥121=U.S.$1.00, the approximate rate of exchange on March 31, 1999. 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.
Marketable securities were as follows.
Other assets were as follows.
Short-term bank borrowings, due principally in 90 days, bore interest at average rates of 1.2% and 1.3% per annum at March 31, 1999 and 1998, respectively.
Commercial paper, due in 130 days on the average, bore interest at average rates of 0.9% and 1.3% per annum at March 31, 1999 and 1998, respectively.
Long-term indebtedness at March 31, 1999 and 1998 consisted of the following.
Assets pledged to secure the Company's and its subsidiaries' indebtedness at March 31, 1999 were as follows.
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, 1999 are summarized as follows.
The Company repurchased 116,416 thousand shares of its common stock for ¥13,620 million ($112,562 thousand) in the aggregate during the period from April 7 to May 8, 1998. A resolution to retire the Company's treasury stock from additional paid-in capital was approved at a meeting of the Company's shareholders held on June 26, 1998.
Blast furnaces and hot blast stoves including the related machinery and equipment periodically require repairs and substantial replacement of their components. The estimated future costs of such work are provided for and charged to income on a straightline basis over the period to the date of the anticipated repairs or replacement work. The difference between the estimated and actual cost is charged or credited to income at the time the work is performed.
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 additional paid-in capital 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.
"Other, net" in "Other expenses (income)" was composed of the following.
"Gain on sales or disposal of property, plant and equipment" includes the gain of investment in kind of (¥54.4 billion).
"Loss on liquidation of investments" includes the cost of liquidation of a subsidiary, TOA STEEL CO., LTD., of (¥60.1 billion).
"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 products (SRAM), such as loss on disposal of inventories and loss on disposal of fixed assets.
The Company is subject to a number of taxes based on earnings which, in the aggregate, resulted in statutory tax rates of approximately 48% for the year ended March 31, 1999 and 51% for the year ended March 31, 1998. The differences between the statutory and effective tax rates in the accompanying non-consolidated statements of operations resulted principally from (1) the effect of permanently non-deductible expenses, and (2) the effect of timing differences in the recognition of certain income and expenses for tax and financial reporting purposes..
Tax effect accounting was introduced in Japan in 1999 and recognition of certain income and expenses, as mentioned in (2) above has been deferred to future years. (See Note 11).
Effective the fiscal year ended March 31, 1999, the Company initially adopted tax effect accounting. 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..
Significant components of deferred tax assets and liabilities at March 31, 1999 were as follows:.
The effect of this application of tax effect accounting was to increase total assets by ¥35,993 million and to decrease net loss by ¥37,169 million for the year ended March 31, 1999. The loss on adjustment to retained earnings as a result of the initial application of tax effect accounting was ¥1,176 million..
Finance leases, except for lease agreements which stipulate the transfer of ownership of the leased assets to the Company, are summarized as follows:.
Lease commitments equivalents as of March 31, 1999 were.
Lease payments for the year ended March 31, 1999 (depreciation expense equivalents) amounted to ¥394 million ($3,256 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 balance of lease commitments was not material to the balance of property, plant and equipment, net..
In 1999, the standard of accounting was changed and, accordingly, contingent liabilities involved not only guarantees of loans but also reservation guarantees of loans and keep-well contracts of subsidiaries bonds. The effect of this application was to increase contingent liabilities by ¥41.9 billion..
At March 31, 1999, the Company was contingently liable for guarantees of loans or bonds given on behalf of:.
The above guarantees include ¥62,836 million ($519,306 thousand) of the guarantees for which collateral received, for example, of housing loans for employees of the Company.