<PAGE>
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SECURITIES AND EXCHANGE COMMISSION
----------------
FORM 20-F
[_] REGISTRATION STATEMENT PURSUANT TO SECTION 12(B) OR (G)
OF THE SECURITIES EXCHANGE ACT OF 1934
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED MARCH 31, 1998
COMMISSION FILE NUMBER 1-8910
----------------
NIPPON DENSHIN DENWA KABUSHIKI KAISHA
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
NIPPON TELEGRAPH AND TELEPHONE CORPORATION
(TRANSLATION OF REGISTRANT'S NAME INTO ENGLISH)
JAPAN
(JURISDICTION OF INCORPORATION OR ORGANIZATION)
19-2, NISHI-SHINJUKU 3-CHOME, SHINJUKU-KU, TOKYO 163-8019, JAPAN
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
SECURITIES REGISTERED OR TO BE REGISTERED PURSUANT TO SECTION 12(B) OF THE
ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH
REGISTERED
Common stock, par value (Yen)50,000 per
share ("Shares") New York Stock Exchange*
American Depositary Shares ("ADSs") New York Stock Exchange
each of which represents 1/200 of a Share
- --------
* Not for trading but only in connection with the registration of ADSs
pursuant to the requirements of the Securities and Exchange Commission.
----------------
SECURITIES REGISTERED OR TO BE REGISTERED PURSUANT TO SECTION 12(G) OF THE
ACT:
None
SECURITIES FOR WHICH THERE IS A REPORTING OBLIGATION PURSUANT TO SECTION 15(D)
OF THE ACT:
6% Global Notes Due March 25, 2008
Indicate the number of outstanding shares of each of the issuer's classes of
capital or common stock as of the close of the period covered by the annual
report.
Common stock, par value (Yen)50,000 15,912,000 shares
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes [X] No [_]
Indicate by check mark which financial statement item the registrant has
elected to follow.
Item 17 [_] Item 18 [X]
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<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<C> <S> <C>
PART I
ITEM 1 --DESCRIPTION OF BUSINESS...................................... 2
ITEM 2 --DESCRIPTION OF PROPERTY...................................... 28
ITEM 3 --LEGAL PROCEEDINGS............................................ 28
ITEM 4 --CONTROL OF REGISTRANT........................................ 28
ITEM 5 --NATURE OF TRADING MARKET..................................... 29
ITEM 6 --EXCHANGE CONTROLS AND OTHER LIMITATIONS AFFECTING SECURITY... 31
ITEM 7 --TAXATION..................................................... 33
ITEM 8 --SELECTED FINANCIAL DATA...................................... 35
ITEM 9 --MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS................................... 35
ITEM 9A --QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.... 47
ITEM 10 --DIRECTORS AND OFFICERS OF REGISTRANT......................... 49
ITEM 11 --COMPENSATION OF DIRECTORS AND OFFICERS....................... 51
ITEM 12 --OPTIONS TO PURCHASE SECURITIES FROM REGISTRANT OR
SUBSIDIARIES................................................ 51
ITEM 13 --INTEREST OF MANAGEMENT IN CERTAIN TRANSACTIONS............... 51
PART II
ITEM 14 --DESCRIPTION OF SECURITIES TO BE REGISTERED................... 51
PART III
ITEM 15 --DEFAULTS UPON SENIOR SECURITIES.............................. 51
ITEM 16 --CHANGES IN SECURITIES AND CHANGES IN SECURITY FOR REGISTERED
SECURITIES.................................................. 52
PART IV
ITEM 17 --FINANCIAL STATEMENTS......................................... 52
ITEM 18 --FINANCIAL STATEMENTS......................................... 52
ITEM 19 --FINANCIAL STATEMENTS AND EXHIBITS............................ 53
SIGNATURES.............................................................. 54
</TABLE>
<PAGE>
In this annual report, except as otherwise specified, the "Company" refers
to Nippon Telegraph and Telephone Corporation (hereinafter also sometimes
referred to as the "registrant"), "NTT" refers to the Company and its
subsidiaries and any of their respective predecessors in business, and the
"predecessor corporation" refers to Nippon Telegraph & Telephone Public
Corporation, which operated the business of the Company prior to April 1985.
References to fiscal years are to 12-month periods commencing in each case
on April 1 of the prior year and ending on March 31 of the year indicated.
References to years not specified as being fiscal years are to calendar years.
EXCHANGE RATES
In this annual report, all amounts are expressed in Japanese yen ("(Yen)" or
"yen"), except as otherwise specified. Except as otherwise indicated, for
convenience of the reader the translations of yen into dollars have been made
at the rate of 132 yen to the dollar, the approximate rate of exchange on
March 31, 1998, the date of the most recent balance sheet included herein.
On September 14, 1998, the noon buying rate in New York City for cable
transfers payable in yen as announced for customs purposes by the Federal
Reserve Bank of New York on such date was $1 = (Yen)133.22.
The following table sets forth for the periods indicated certain information
concerning the exchange rate for Japanese yen and U.S. dollars, based on the
noon buying rates for cable transfers in yen in New York City as certified for
customs purposes by the Federal Reserve Bank of New York.
<TABLE>
<CAPTION>
YEARS YEN PER DOLLAR
ENDED ---------------------------------
MARCH 31 HIGH LOW AVERAGE(1) YEAR-END
- -------- ------ ------ ---------- --------
<S> <C> <C> <C> <C>
1994.......................................... 114.20 102.40 107.13 102.40
1995.......................................... 105.38 86.85 98.48 86.85
1996.......................................... 107.29 81.12 96.95 107.00
1997.......................................... 124.54 104.49 113.20 123.72
1998.......................................... 133.99 111.42 123.57 133.29
1999 (through September 14, 1998)............. 147.14 128.96 138.94
</TABLE>
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(1) The average of month-end rates during the period.
1
<PAGE>
PART I
ITEM 1--DESCRIPTION OF BUSINESS
THE COMPANY/NTT
NTT is the largest provider of telecommunications services in Japan and
operates one of the largest telephone networks in the world. Its predominant
business is providing nationwide telecommunications services. These services
fall into six major classes: telephone services, telegraph services, leased
circuit services, data communication facility services, sale of
telecommunication equipment and other services.
The Company was established under the Nippon Telegraph and Telephone
Corporation Law (the "NTT Law") and is responsible for providing nationwide
telephone services and for promoting research in telecommunications
technologies and disseminating the results of such research. The Company is
subject to regulation of certain aspects of its management under the NTT Law.
The Company, together with other Type I Carriers, is regulated by the Minister
of Posts and Telecommunications ("MPT") under the Telecommunications Business
Law (the "Telecom Business Law"). See "Description of Business--Regulation."
In 1985 there were significant changes in the legislative and regulatory
framework for telecommunications in Japan, including the introduction of
telecommunications reform laws aimed at promoting competition in the
telecommunications services market. Prior to April 1, 1985, NTT was the sole
domestic telecommunications carrier in Japan.
On April 1, 1985, the Company was incorporated as a limited liability,
joint-stock company under the NTT Law and succeeded to all the assets and
liabilities of the predecessor corporation. The predecessor corporation was
incorporated under the Nippon Telegraph & Telephone Public Corporation Law on
August 1, 1952 to take over from the Japanese Government (the "Government")
the provision of nationwide telephone, telegraph and related
telecommunications services in Japan. All Government-owned assets relating to
such services were transferred to the predecessor corporation. In April 1953,
the predecessor corporation's international division, which operated Japan's
international telephone, telegraph and related telecommunications services,
was transferred to a separate corporation, Kokusai Denshin Denwa Co., Ltd.
("KDD"). The Company owns approximately 10% of the share capital of KDD, the
balance being owned by the public.
At the same time that the Company was incorporated as a private company in
1985, the Telecom Business Law opening the Japanese telecommunications
services industry to competition came into effect. The Telecom Business Law
authorizes the MPT to regulate two types of companies: Type I Carriers, such
as the Company, which provide telecommunications services through their own
circuit facilities, and Type II Carriers, which are telecommunication carriers
other than Type I Carriers, for example carriers which provide enhanced or
value added network ("VAN") services through circuits leased from Type I
Carriers. VAN services may also be provided by Type I Carriers. As of March
31, 1998, there were 153 Type I Carriers and 5,871 Type II Carriers.
In June 1997, the Diet passed the Law Concerning Partial Revision to the
Nippon Telegraph and Telephone Corporation Law (the "Revision Law"). The
Revision Law implements a plan proposed by the Ministry of Posts and
Telecommunications, and accepted in principle by the Company, to reorganize
the Company. Under the Revision Law, the Company will continue to exist but
will operate primarily as a holding company (the "Holding Company") with its
businesses reorganized into three newly established companies, a regional
company serving eastern Japan ("East-Nippon Telegraph and Telephone
Corporation"), a regional company serving western Japan ("West-Nippon
Telegraph and Telephone Corporation") and a long distance company, the name of
which has yet to be decided (referred to herein as the "Long Distance
Company"). The Revision Law also allows the Company to enter, through one or
more subsidiaries, the international telecommunications business before the
reorganization of the Company upon approval of MPT. The part of the Revision
Law relating to the reorganization of NTT will become effective at a date to
be established by Cabinet order not later than December 20, 1999 and the part
of the Revision Law allowing the Company to enter the international
2
<PAGE>
telecommunications business through one or more subsidiaries became effective
immediately. The Company established wholly owned subsidiaries: NTT Worldwide
Telecommunications Corporation ("NTT-WT") as a special Type II international
telecommunications company and NTT Worldwide Network Corporation ("NTT-WN") as
a Type I international telecommunications company in July 1997 and in
September 1997, respectively. See "Description of Business--Global
Businesses". It is contemplated that following the reorganization the Long
Distance Company will engage in the international telecommunications business
in addition to the domestic long-distance business.
In December 1997, the Ministry of Posts and Telecommunications announced
"the Basic Principles Concerning the Transfer of the Business Activities and
Succession of the Rights and Obligations of Nippon Telegraph and Telephone
Corporation." The Company will prepare "the Implementation Plans Concerning
the Transfer of the Business Activities and Succession of the Rights and
Obligations of Nippon Telegraph and Telephone Corporation" in accordance with
the Basic Principles. Matters concerning the transfer of business, which is
the precondition of reorganization, will be presented to shareholders at the
ordinary general meeting of shareholders in June 1999. NTT plans to take
advantage of the opportunities presented by the Revision Law to effectively
compete in extremely challenging international markets, actively promote
expansion of global telecommunications and multimedia businesses, and further
enhance its operations. See "Description of Business--Reorganization".
The Company's Shares are listed on the Tokyo Stock Exchange and all other
stock exchanges in Japan. In 1994, the Company listed its shares on the New
York Stock Exchange in ADR form and listed its shares on the London Stock
Exchange.
On November 24, 1995, the Company capitalized a portion of its additional
paid-in capital and effected a 1.02-for-1 stock split thereby distributing to
the shareholders of the Company the benefits of the sale of NTT DATA
Corporation ("NTT DATA") stock. As a result of the stock split, the number of
outstanding Shares amounted to 15,912 thousand.
Pursuant to an amendment to the NTT Law which became effective as of August
1, 1992, foreign nationals and foreign corporations, which were previously
prohibited from owning the Shares of the Company, have been allowed to own
Shares. However, the aggregate amount of the Company's voting rights which may
be owned by foreign nationals and foreign corporations must be less than 20%
of the Company's total voting rights. The Company is prohibited from
registering ownership of Shares by such persons in excess of such limit. See
"Restrictions on Foreign Ownership" in Item 6--Exchange Controls and Other
limitations Affecting Security Holders. Under the Revision Law, this
restriction will continue with respect to shares of the Holding Company.
RELATIONSHIP WITH THE GOVERNMENT
The Government is required by the NTT Law to own one-third or more of the
total number of the outstanding Shares of the Company. However, any increase
in the number of Shares attributable to issuance of new Shares, including
Shares issued upon the conversion or exercise of any convertible debentures or
debentures with preemptive rights, are not included in calculating the
proportion of the Shares held by the Government for this purpose.
The total number of outstanding Shares of the Company at the time of its
establishment was 15,600 thousand. Until October 1986, the Government owned
100% of the outstanding Shares of the Company. Out of the 10,400 thousand
Shares held by the Government which were permitted to be sold under the NTT
Law, the Government has sold 5,400 thousand Shares to a variety of individual
and institutional investors since October 1986.
3
<PAGE>
In December 1990, the Ministry of Finance announced its intended framework
for selling the remaining 5,000 thousand Shares. In the framework, it was
intended that:
(i) as a basic rule, of the 5,000 thousand Shares, 2,500 thousand Shares
would be consistently sold, at a rate of approximately 500 thousand
Shares per fiscal year;
(ii) the amount of Shares sold per fiscal year would be adjusted based on
market conditions notwithstanding any pre-determined plan as described
in (i);
(iii) the other 2,500 thousand Shares permitted to be sold would be retained
for the time being.
As a result of the 1.02-for-1 stock split on November 24, 1995 following the
sale of the NTT DATA stock, the number of outstanding Shares amounted to
15,912 thousand and the number of Shares permitted to sell amounted to 5,100
thousand. As of March 31, 1998, the Government owned 65.5% of the outstanding
Shares.
The NTT Law requires that any disposition of the Company's Shares owned by
the Government must be within the limits determined by the Diet in the
relevant annual budget. The Government has calculated the limit as one million
Shares, comprised of 500,000 Shares permitted to be sold under the budget for
fiscal year 1999, and 500,000 Shares undisposed of in fiscal year 1998. At
September 14, 1998, no such sales had been made.
Under the Revision Law, the Government is required to hold one-third or more
of the total number of the issued Shares of the holding company. Disposal of
Shares held by the Government is required to be within the number of Shares
decided by the Diet in the relevant annual budget.
BUSINESS OVERVIEW AND STRATEGY
The distinction between domestic and international telecommunications has
virtually been eliminated as domestic and international operators enter each
others' markets through mergers and alliances. Direct competition has begun in
the local call market as the interconnection of local switches was established
with regional operators. Cable Television (CATV) operators have also begun
providing telephony services. Furthermore, basic telecommunications agreements
under the administration of the World Trade Organization came into effect in
February 1998 and foreign telecommunications operators are stepping up their
activities in the Japanese market by obtaining necessary licenses and other
preparations.
NTT believes that these developments are causing services to become more
diversified and lower-priced, and as the environment for telecommunications
business is increasingly competitive, telecommunications operators are
required to have more comprehensive service capabilities, including
international telecommunications services.
The Company has completed the full digitization of its domestic
communications networks in December 1997. The Company is now moving forward
with the creation of fiber-optic access networks, which will enable the
provision of advanced services, including the transmission of video images.
NTT thinks that the main focus of management is shifting from establishing
infrastructure to developing and expanding multimedia services as a means of
promoting information distribution on its digitized infrastructure.
In global businesses, NTT is devoting its efforts to providing global system
integration services for multinational corporations and expanding its overseas
carrier businesses. The Company will actively expand the areas of provision
and service options for its international telecommunications services through
its international telecommunications subsidiaries toward full-scale entry into
the international telecommunication market following the reorganization.
NTT is seeking to continue to enhance operational efficiency and further
improve operational performance by streamlining its operations. The Company
has made significant changes to its facility management and maintenance
operations as well as its directory assistance services. The NTT Group as a
whole will direct its efforts toward broadening the scope of its business
interests and bolstering its management structure.
PRINCIPAL BUSINESS ACTIVITIES
NTT is the largest provider of telecommunications services in Japan. Its
predominant business is providing nationwide telecommunications services.
NTT's services fall into six major classes: telephone services, telegraph
4
<PAGE>
services, leased circuit services, data communication facility services, sale
of telecommunication equipment and other services. NTT's principal service is
providing customers with nationwide domestic telephone service through
exchange lines and cellular telephones and the Personal Handy-phone System
(PHS). Revenues from each of these classes over the last three years are as
follows:
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31,
----------------------------------
1996 1997 1998
---------- ---------- ----------
(BILLIONS OF YEN)
<S> <C> <C> <C>
Telephone services.......................... (Yen)5,558 (Yen)6,038 (Yen)6,306
% of Total Operating Revenues............... 70.3% 68.4% 66.7%
Telegraph services.......................... (Yen) 97 (Yen) 99 (Yen) 92
% of Total Operating Revenues............... 1.2% 1.1% 1.0%
Leased circuit services..................... (Yen) 393 (Yen) 429 (Yen) 488
% of Total Operating Revenues............... 5.0% 4.9% 5.2%
Data communication facility services........ (Yen) 301 (Yen) 338 (Yen) 373
% of Total Operating Revenues............... 3.8% 3.8% 3.9%
Sale of telecommunication equipment......... (Yen) 606 (Yen) 890 (Yen) 970
% of Total Operating Revenues............... 7.7% 10.1% 10.3%
Other services.............................. (Yen) 953 (Yen)1,028 (Yen)1,221
% of Total Operating Revenues............... 12.1% 11.7% 12.9%
</TABLE>
The following table sets forth certain information concerning NTT's
principal facilities and operations as of the dates indicated.
<TABLE>
<CAPTION>
MARCH 31,
---------------------------------------
1994 1995 1996 1997 1998
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
TELEPHONE SERVICES:
Telephone subscriber lines
(thousands).......................... 58,459 59,583 60,774 61,223 60,186
Cellular telephone subscribers
(thousands).......................... 1,323 2,206 4,936 10,960 17,984
PHS subscribers (thousands)........... -- -- 393 1,850 1,906
Public telephones (thousands)......... 820 801 799 794 777
TELEGRAPH SERVICES:
Telegrams (thousands)................. 44,997 43,288 41,385 40,198 37,564
Telex subscribers (thousands)......... 20 18 15 12 10
LEASED CIRCUIT SERVICES:
Conventional circuits (thousands)..... 1,018 1,025 1,001 967 902
High-speed digital circuits
(thousands).......................... 20 31 57 107 169
OTHER SERVICES:
Integrated Services Digital Network
(ISDN) subscribers:
INS-Net 64 (thousands).............. 235 337 510 1,037 2,286
INS-Net 1500 (thousands)............ 5 6 10 22 34
Open Computer Network (OCN) services
(thousands).......................... -- -- -- 1 159
Digital data exchange (DDX) services:
Digital Data Exchange-Packet (DDX-
P)................................. 39,439 36,740 33,424 31,821 30,625
Digital Data Exchange-Telephone
Packet (DDX-TP).................... 370,833 410,739 432,457 444,788 446,522
Frame Relay (Super Relay FR)........ -- 28 565 3,942 15,701
Pocket pager subscribers (thousands).. 4,948 5,355 6,328 5,836 3,908
Facsimile network subscribers
(thousands).......................... 601 678 812 1,015 1,128
Employees (thousands)................. 248 235 231 230 226
</TABLE>
TELEPHONE SERVICES
Revenues from telephone services were 66.7% of operating revenues in fiscal
year 1998. NTT's telephone services consist of telephone subscriber, cellular
telephone, PHS, public telephone, and other services. NTT is
5
<PAGE>
the principal provider of fixed-line telephone subscriber services in Japan,
providing approximately 60 million subscriber lines nationwide. NTT is also
the largest provider of cellular telephone services in Japan with
approximately 18 million cellular telephone subscribers. NTT provides both
local and long-distance telephone services, but until recently did not provide
international services. Under the new law relating to the reorganization of
the Company, the Company is now permitted to offer international services
through one or more subsidiaries upon approval of MPT. See "Description of
Business--Reorganization", "-- Regulation" and "-- Global Businesses".
(i) Telephone Subscriber Services
Telephone subscriber service is NTT's principal business activity. Due to an
increase in sales of INS-Net services and cellular telephones, the number of
subscriber lines in service decreased 1.04 million from the previous fiscal
year to 60.19 million subscriber lines at the end of the fiscal year 1998.
Although this is the first time that the total number of subscriber lines at
the end of fiscal year has decreased from the previous year, management
attributes that about 80% of the increase in ISDN subscribers represents a
shift from telephone subscribers and when combined with ISDN services, the
number of subscribers recorded year-on-year growth. Residential use accounted
for approximately 70.2% and business use accounted for approximately 29.8% of
telephone subscriber lines. Penetration rate at the end of the fiscal year was
approximately 477 subscriber lines per 1,000 inhabitants.
In fiscal year 1998, the Company's end to end fixed-line telephone traffic
decreased from the previous year in terms of number of calls as well as hours
of use. Management attributes that declines in telephone subscribers and the
sluggish Japanese economy had a negative impact on the Company's traffic.
Number of calls and hours of use decreased slightly when combined with ISDN.
The following table sets forth the Company's end to end traffic of fixed
telephone and ISDN services :
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31,
-----------------------------------
1996 1997 1998
----------- ----------- -----------
NUMBER OF CALLS (MILLION CALLS) :
<S> <C> <C> <C>
Fixed line telephone....................... 78,201 79,891 73,668
ISDN (Voice mode).......................... 904 1,613 3,569
ISDN (Digital mode)........................ 758 1,276 2,151
----------- ----------- -----------
Fixed line telephone and ISDN total........ 79,863 82,780 79,389
=========== =========== ===========
<CAPTION>
YEARS ENDED MARCH 31,
-----------------------------------
1996 1997 1998
----------- ----------- -----------
HOURS OF USE (MILLION HOURS) :
<S> <C> <C> <C>
Fixed line telephone....................... 3,535 3,441 3,240
ISDN (Voice mode).......................... 29 56 122
ISDN (Digital mode)........................ 27 65 168
----------- ----------- -----------
Fixed line telephone and ISDN total........ 3,591 3,561 3,531
=========== =========== ===========
</TABLE>
Current monthly charges for telephone exchange lines vary according to
business or residential use and the number of subscribers' exchange lines in
the message area for local calls. Current call charges for telephone exchange
lines vary according to distance, duration, day and time of day.
Since April 1, 1985, the effective date of the Telecom Business Law, the
Company has made numerous rate changes, amounting to an aggregate (Yen)982
billion rate reductions through March 31, 1998. In certain areas competing
Type I Carriers (so called "NCCs" New Common Carriers) have acquired their
market positions mainly by offering long-distance telephone services at rates
less than the Company's. In fiscal year 1997, the Company's share of inter-
prefecture calls between all prefectures in Japan dropped to 64.3% based on
the number of calls.
6
<PAGE>
In February 1998, the Company reduced the rate for daytime calls over 100
kilometers from (Yen)110/3 minutes to (Yen)90/3 minutes. This rate reduction
has eliminated price advantages held by NCCs for the first time. Management
believes that operating profitability, which has been weakened by intense rate
competition, has started to improve.
Despite the Company's rate reductions, primarily in long-distance rates,
long-distance profits had continued to support local services until fiscal
year 1996. In order to rebalance its rate structures, the Company sought, in
addition to reductions of long-distance rates, the development of a new rate
structure for local services, such as telephone exchange lines, local calls
and directory assistance, which would reflect the costs of providing such
services to the fullest extent possible. As part of this effort, the Company
revised its monthly charges for telephone exchange lines and directory
assistance service charges in February 1995 and October 1995.
The Company applied to MPT in December 1997 for a further revision of its
directory assistance service charges. This revision was partially implemented
in May 1998 following the approval of MPT and is expected to be further
implemented in May 1999. This revision is expected to have the effect of
increasing the Company's revenues by (Yen)15 billion per 12-month period.
The following tables set forth charges currently applied to telephone
subscriber services:
Installation Fee: (Yen)72,800
<TABLE>
<CAPTION>
SUBSCRIBER LINE CHARGES (MONTHLY
CHARGERS PER LINE):
--------------------------------
NUMBER OF SUBSCRIBERS 400,000 50,000 TO LESS THAN
IN A LOCAL AREA OR MORE 400,000 50,000
- --------------------- ---------- ---------- ----------
<S> <C> <C> <C>
Residential.................................... (Yen)1,750 (Yen)1,600 (Yen)1,450
Business....................................... (Yen)2,600 (Yen)2,450 (Yen)2,300
</TABLE>
Dialing charges (Call duration for (Yen)10 from a subscriber telephone)*:
<TABLE>
<CAPTION>
8 A.M. - 7 P.M. - 11 P.M. -
7 P.M. 11 P.M.** 8 A.M.
------------------ ------------------ ----------------
<S> <C> <C> <C>
Local area........... 3 min. ((Yen)10) 3 min. ((Yen)10) 4 min. ((Yen)10)
Adjacent area........ 90 sec. ((Yen)20) 90 sec. ((Yen)20) 2 min. ((Yen)20)
Up to 20 km.......... 90 sec. ((Yen)20) 90 sec. ((Yen)20) 2 min. ((Yen)20)
20 km--30 km......... 45 sec. ((Yen)40) 45 sec. ((Yen)40) 1 min. ((Yen)30)
30 km--60 km......... 36 sec. ((Yen)50) 36 sec. ((Yen)50) 1 min. ((Yen)30)
60 km--100 km........ 22.5 sec. ((Yen)80) 30 sec. ((Yen)60) 45 sec. ((Yen)40)
Over 100 km.......... 20 sec. ((Yen)90) 22.5 sec. ((Yen)80) 30 sec. ((Yen)60)
</TABLE>
- --------
* Amounts in ( ) are charges for 3 minutes.
** Also includes weekends and holiday daytime calls.
NTT is promoting greater utilization of telephones through marketing and
promotion of telephone subscriber services and other network services. At the
same time, the Company has sought to develop and provide services to satisfy
customer needs. This included the introduction of such new services as "Number
Display" service (Caller ID). "Number Display," introduced in October 1997,
allows the calling party's telephone number to be displayed on the called
party's telephone handset before the telephone is answered.
NTT has introduced several optional calling plans to different customer
segments. These services include "Telechoice" (a discount plan for toll calls
to specified area codes), "Telejozu" (an optional discount calling plan),
"Telewise" (a monthly toll-call charge discount service) and "Telehodai" (a
monthly flat rate for local/adjacent area calls made during midnight/early
morning hours used most often for the Internet).
7
<PAGE>
The interconnection of local switches with telecommunications operators,
which began during fiscal year 1998 through the Company's Group Centers (GCs,
or local switching offices), brought direct competition for local telephone
services for the first time.
The Company introduced two new calling plans during fiscal year 1998 to
compete more effectively. "Area Plus" service allows customers to make three-
minute calls to adjacent areas, or up to 20 kilometers, at a cost of (Yen)10
in the daytime ((Yen)10 for four minutes during late night hours and early
morning) by paying a fixed monthly fee. "Time Plus" service enables local
calls to be made at a cost of (Yen)10 for five minutes within their own local
calling area ((Yen)10 for seven minutes during late night hours and early
morning) by similarly paying a fixed monthly fee.
(ii) Cellular Telephone Services
NTT's cellular telecommunications and paging businesses are conducted
throughout Japan by a subsidiary, NTT Mobile Communications Network, Inc. (NTT
Central DoCoMo), and its eight regional subsidiaries (together, "NTT DoCoMo",
a trademark which stands for "Do Communications over the Mobile Network"). NTT
DoCoMo is Japan's leading mobile telecommunications services provider and is
the largest cellular operator in the world as measured by total number of
cellular subscribers. NTT DoCoMo offers a range of high-quality, high-mobility
communications services such as cellular telephone services, paging services
and other specialized mobile phone services (including maritime telephone, in-
flight telephone and satellite mobile communications services) through its own
advanced, networks. NTT DoCoMo also sells cellular handsets and pagers and
related equipment. NTT DoCoMo is regulated as a Type I telecommunications
carrier.
NTT DoCoMo is the largest subsidiary of the Company in terms of consolidated
operating revenues and operating income in fiscal year 1998. Although the
Company owns 94.7% of the NTT Central DoCoMo, the Company is not actively
involved in the daily management or operations of NTT DoCoMo and NTT DoCoMo's
business operations are conducted independently of the operations of the
Company and its other subsidiaries. In addition, transactions between NTT
DoCoMo and the Company and each of the Company's other subsidiaries are
conducted on an arm's length basis.
On September 14, 1998, the Company announced that NTT Central DoCoMo will
list its stock on the first section of the Tokyo Stock Exchange. In connection
with this, the Company will sell 218,000 shares of NTT Central DoCoMo's non-
par-value common stock. NTT Central DoCoMo will also issue 327,000 new shares
as part of the offering. The offer price will be set by NTT Central DoCoMo and
the Company in October, 1998 in consultation with the underwriters of the
offering based upon the results of book-building by the underwriters. As a
result of the offering, the Company's stake in NTT Central DoCoMo is expected
to be reduced to 67.1%.
The cellular telecommunications industry in Japan has experienced rapid
growth in recent years. The total number of cellular telephone subscribers in
Japan has grown from approximately 1.3 million at March 31, 1994 to
approximately 31.5 million at March 31, 1998 which positions Japan as the
second largest cellular market in the world. Penetration rate of cellular
telephone service at the end of the fiscal year was approximately 250
subscribers per 1,000 inhabitants. NTT DoCoMo continues to be Japan's leading
provider of cellular telephone services with aggregate subscriber base of
approximately 18.0 million and an estimated market share of 57.0% as of March
31, 1998.
The following table sets forth information regarding NTT DoCoMo's
subscribers and its market share:
<TABLE>
<CAPTION>
MARCH 31,
-----------------------------------
1994 1995 1996 1997 1998
----- ----- ----- ------ ------
<S> <C> <C> <C> <C> <C>
Cellular telephone subscribers (thou-
sands).................................. 1,323 2,206 4,936 10,960 17,984
Digital service (thousand)............. 3 380 2,556 9,445 17,706
Market share........................... 62.1% 51.0% 48.4% 52.5% 57.0%
</TABLE>
8
<PAGE>
NTT DoCoMo was the first cellular operator in Japan to provide digital
cellular service which it began offering in March 1993. NTT DoCoMo has
constructed and operates its own state-of-the-art digital network and is the
only cellular operator in Japan to have done so on a nationwide basis. At
March 31, 1998, NTT DoCoMo's digital service areas covered 99.6% of the
population in metropolitan areas and 98.8% of the population nationwide.
In fiscal year 1998, NTT DoCoMo's cellular telephone traffic continued to
grow from the previous year in terms of number of calls as well as hours of
use in accordance with the expansion of its market.
The following table sets forth information regarding NTT DoCoMo's cellular
telephone traffic :
<TABLE>
<CAPTION>
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
Hours of use (Million hours)..................................... 121 252 448
</TABLE>
Cellular telephone subscribers are billed for a fixed monthly charge and
call charges which vary according to distance, duration, day and time of day.
NTT DoCoMo has continuously reduced its call and other rates, including its
monthly charge and subscription fee, and also provides optional calling plans
that allow discounts for additional calls, and discount rates for calls on
weekends, holidays and during night hours on weekdays. In December 1996, NTT
DoCoMo abolished its subscription fee.
In December 1996, revisions to regulations under the Telecom Business Law
were implemented to provide that Type I Carriers need not obtain approval from
MPT but need only notify MPT of their mobile telecommunications tariffs for
such services as cellular telephones, PHS and pocket pagers.
NTT DoCoMo offers a variety of plans for fixed monthly charges and call
charges. The following table sets forth major charges currently applied by NTT
Central DoCoMo to its Digital 800 MHz service under two basic monthly plans:
<TABLE>
<CAPTION>
FIXED MONTHLY CHARGE CALL CHARGES
-------------------- ------------
<S> <C> <C>
Plan A.................. (Yen)4,900 Charges set forth in the table below.
Plan B.................. (Yen)3,600 1.5 times the charges that are applied to Plan A service.
</TABLE>
Call charges for 3 minutes (weekdays):
<TABLE>
<CAPTION>
CALLS ORIGINATING IN THE BUSINESS AREA OF CENTRAL 8 A.M.- 7 P.M.- 11 P.M.-
DOCOMO TO: 7 P.M. 11 P.M. 8 A.M.
- ------------------------------------------------- -------- -------- --------
<S> <C> <C> <C>
Fixed line telephone
Within the business area of Central DoCoMo
Within the originating prefecture............... (Yen)110 (Yen) 70 (Yen)50
Outside the originating prefecture.............. (Yen)120 (Yen) 80 (Yen)50
Outside the business area of Central DoCoMo
To adjacent prefectures......................... (Yen)120 (Yen) 80 (Yen)50
To other prefectures............................ (Yen)170 (Yen)100 (Yen)70
Cellular telephone of NTT DoCoMo
Within the business area of Central DoCoMo and to
adjacent prefectures............................. (Yen)120 (Yen) 70 (Yen)50
Other areas....................................... (Yen)130 (Yen) 80 (Yen)60
Cellular telephone of other company
All area.......................................... (Yen)130 (Yen) 80 (Yen)60
</TABLE>
NTT DoCoMo is the principal supporter of wideband-code division multiple
access (W-CDMA) as the third-generation wireless communications platform for
the next century. W-CDMA, which has been named the uniform European standard,
will offer high-speed data rates enabling the integration of voice
communications with far-reaching multimedia applications, such as full-motion
video, Internet access and videoconferencing. NTT DoCoMo intends to commence
W-CDMA services in 2001.
9
<PAGE>
In the Kanto area which includes Tokyo, NTT DoCoMo faces three competitors:
Nippon Idou Tsushin Corporation, Tokyo Digital Phone Co., Ltd. and Tu-ka
Cellular Tokyo Inc. NTT DoCoMo faces similar competition in other areas.
(iii) PHS Services
NTT's PHS services are provided by NTT Personal Group, which consists of NTT
Central Personal Communications Network Inc. and eight other NTT subsidiaries.
PHS services were introduced in July 1995 in the Kanto area, which includes
Tokyo, and parts of Hokkaido. In October 1995, NTT Personal Group commenced
nationwide PHS services. Because PHS base stations are small and easy to
install, PHS services can easily be provided in buildings and underground
passages, but PHS cannot be used in fast moving automobiles or trains.
In fiscal year 1997, NTT Personal Group instituted interconnection between
PHS and cellular telephones for more convenient use of PHS. In addition, in
April 1997 it launched a 32 kilobit-per-second data communications service
which enables the transmission of images and other types of data via PHS.
The following table sets forth information regarding NTT Personal Group's
subscribers and its market share:
<TABLE>
<CAPTION>
MARCH 31,
------------------
1996 1997 1998
---- ----- -----
<S> <C> <C> <C>
PHS subscribers (thousands)................................. 393 1,850 1,906
Market share.............................................. 26.1% 30.7% 28.3%
</TABLE>
NTT Personal Group faces competition from two groups. These competitors are
DDI Pocket Telephone Group and ASTEL Group.
Initially, PHS services grew rapidly by providing inexpensive services with
small and lightweight terminals. In September 1997, the number of subscribers
reached seven million. Since October 1997, however, the number of customers
has steadily fallen and liabilities of NTT Personal have exceeded its assets.
Consequently, NTT Personal Group began a review of its operations and major
shareholders of NTT Personal Group also began to review the PHS businesses. As
a result of its deliberations, NTT concluded that it would be difficult to
continue PHS services through NTT Personal Group and decided to transfer its
PHS businesses to NTT DoCoMo. NTT expects to complete the transfer within
fiscal year 1999 and to liquidate NTT Personal Group following the transfer.
NTT believes the transfer to NTT DoCoMo will create synergetic effects and
improve its PHS business operations, and will allow NTT DoCoMo to develop new
services based on the features of PHS.
TELEGRAPH SERVICES
Revenues from telegraph services were 1.0% of operating revenues in fiscal
year 1998. This revenue category includes both telegram and telex services. In
telegram services, the Company has sought to introduce new services; such as
"D-MAIL," a telegram service that makes use of the Internet. Efforts to
introduce new services were unable to offset a decline in the use of telegrams
for weddings and condolences. In telex services, the number of subscribers
continued to decline during the fiscal year, reflecting the ongoing shift
toward the use of facsimile machines, e-mail and other alternative means of
communication.
The following table sets forth information regarding the number of telegrams
sent and telex subscribers:
<TABLE>
<CAPTION>
MARCH 31,
----------------------------------
1994 1995 1996 1997 1998
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Telegrams (thousands)........................ 44,997 43,288 41,385 40,198 37,564
Telex subscribers (thousands)................ 20 18 15 12 10
</TABLE>
10
<PAGE>
LEASED CIRCUIT SERVICES
Revenues from leased circuit services were 5.2% of operating revenues in
fiscal year 1998. Demand from corporations upgrading their communications
systems continues to drive strong growth in high-speed digital leased circuit
services. Sales of high-speed data transmission services, especially
economical 64-kilobit-per-second lines, were strong. The number of high-speed
digital circuits jumped 57.5% to 169 thousand. Sales of conventional leased
circuits decreased 6.7% to 902 thousand as customers switched to high-speed
communications services.
To meet growing demand for low-cost, high-speed transmission, NTT introduced
"Digital Access 64" in fiscal year 1997, which has reduced price by
simplifying performance functions and offering different levels of
maintenance. "Digital Access 128," which was launched during fiscal year 1998,
also recorded a favorable performance. During the year, the Company also
launched "ATM Megalink Services," which use asynchronous transfer mode (ATM)
transmission to offer low-cost, high-speed, wide-area communications, as well
as "Enterprise Services," which allows a telephone line to be used more
efficiently by adjusting capacity.
In an effort to rebalance its rate structure in its leased circuit services,
the Company is gradually implementing tariff revisions for the services.
Revisions took effect in September 1995, April 1996, April 1997 and April
1998. These revisions are estimated to have the effect of decreasing the
Company's revenues by (Yen)42 billion per 12-month period.
The following table sets forth information regarding the Company's leased
circuit services:
<TABLE>
<CAPTION>
MARCH 31,
---------------------------
1994 1995 1996 1997 1998
----- ----- ----- ---- ----
<S> <C> <C> <C> <C> <C>
Conventional circuits (thousands)................... 1,018 1,025 1,001 967 902
High-speed digital circuits (thousands)............. 20 31 57 107 169
Digital Access 64/128 (thousands)................. -- -- -- 7 59
</TABLE>
DATA COMMUNICATION FACILITY SERVICES
Revenues from data communication facility services were 3.9% of operating
revenues in fiscal year 1998. In this category, NTT develops data
communications systems for clients, but retains ownership of the computer
hardware and software and provides facility management and systems
maintenance. Revenues are generated by monthly user fees which are paid by
clients for the use of such systems, including the provision of management and
maintenance. During the fiscal year, revenues grew as the monthly fees from
systems already in use were bolstered. NTT prioritized marketing of such
services as STAR-ACE, a sharing system for regional banks, as an important
strategic product.
The business of NTT's data communication facility services business is
conducted by a subsidiary, NTT DATA. NTT DATA is the leading provider of
information systems and computer networking in Japan. NTT DATA's business
operations are conducted independently of NTT's other operations, and
transactions with NTT are at arm's length. Although NTT DATA does not
manufacture equipment itself, it develops flexible data communications systems
tailored to its clients' needs by integrating computer software technology.
NTT DATA has a strong relationship with financial institutions, corporations
in the manufacturing and service sectors, and government organizations.
Investment in information technology by these clients is expected to continue.
NTT DATA listed its shares on the Tokyo Stock Exchange in April 1995 and, in
connection therewith, issued 20,000 of its shares in a public offering for
(Yen)20,800 million. At such time, the Company also sold part of the shares of
NTT DATA held by it. In February 1996, NTT DATA issued 33,000 new shares in a
global offering for (Yen)100,650 million. Also in May 1998, NTT DATA raised
(Yen)150,370 million in a new issue of shares in a global offering and
increased paid-in capital of the company by (Yen)75,185 million to
(Yen)142,520 million. As a result, the Company holds 54.19% of the shares of
NTT DATA.
11
<PAGE>
SALE OF TELECOMMUNICATION EQUIPMENT
Revenues from sale of telecommunication equipment were 10.3% of operating
revenues in fiscal year 1998. Due to greater demand for cellular telephones,
the Japanese mobile communications market showed rapid expansion during the
fiscal year. Sales of cellular telephone terminals rose 12.4% while sales of
PHS terminals decreased 8.5% from the previous fiscal year.
NTT has sought to expand its range of products compatible with LANs and
ISDN, as well as products compatible with "Number Display." In addition, NTT
has aggressively sought to boost sales of corporate systems. Sales of stand-
alone telephone handsets for the home, however, were stagnant.
OTHER SERVICES
Revenues from other services were 12.9% of operating revenues in fiscal year
1998. Other services provided by NTT include Integrated Services Digital
Network (ISDN), digital data exchange, facsimile network (F-Net), pocket
pager, Open Computer Network (OCN) services and system development services.
The Company offers INS-Net 64 and INS-Net 1500 for its ISDN services. INS-
Net services benefited from increased demand for Internet access and
connection lines for LANs. The Company developed and launched new services,
such as "Super Telewise" and "Telewise Wide" for INS-Net, which are based on
combining and discounting long-distance call charges on several lines. The
Company has also sought to reduce installation time. As a result, sales of
INS-Net 64 services increased significantly with the number of subscribers
growing 120.3% to 2.29 million over the previous fiscal year. INS-Net 1500
comprised 33.6 thousand subscribers, representing a 55.9% increase over the
previous fiscal year.
Strong growth in the number of ISDN circuits during fiscal year 1998 offset
declines in conventional telephone subscribers. With monthly charges above
those of ordinary lines, management expects INS-Net services to become an
increasingly important earnings source.
To further stimulate the demand of INS-Net services, in July 1997 the
Company introduced "INS-Net 64 Light". "INS-Net 64 Light" makes ISDN more
accessible to consumers by allowing installation expenses to be included in
monthly charges, eliminating up-front financial outlays. Demand for this
service is benefiting from the growing use of INS-Net for Internet access in
the home, which is part of a strong trend that is increasing traffic on NTT's
network. "Phoenix mini," another new service, leverages the benefits of INS-
Net to offer low-cost video telephone services affordable to general
consumers.
The following table sets forth information regarding NTT's ISDN subscribers:
<TABLE>
<CAPTION>
MARCH 31,
--------------------------
1994 1995 1996 1997 1998
---- ---- ---- ----- -----
<S> <C> <C> <C> <C> <C>
INS-Net 64 (thousands)............................... 235 337 510 1,037 2,286
INS-Net 64 Light (thousands)......................... -- -- -- -- 86
INS-Net 1500 (thousands)............................. 5 6 10 22 34
</TABLE>
For a discussion of ISDN traffic, see "Description of Business--Telephone
Services".
In December 1996, the Company launched OCN services to respond to the
expansion of computer communications such as the Internet and LAN-to-LAN
connections. OCN is based on a network completely different from the
traditional telephone network and is constructed by using routers and a high-
speed transmission network. To achieve efficient communications, OCN does not
fix a communication circuit to a receiver before sending, but instead it
divides information into packets and attaches an address to each packet. This
makes OCN suitable for communication among computers where there is no
necessity for a real-time response. OCN services are based on flat rate
systems which are not based on distance or duration of communications and
facilitates inexpensive connections to the Internet and other networks.
12
<PAGE>
During fiscal year 1998, the Company added service menus to fulfill
customers' diversifying requirements, such as "OCN Standard" and "OCN
Enterprise," new dedicated access services, and "OCN Dial Access Light," a
dial-up access with a new rate plan. The Company has also expanded service
areas in accordance with demand and provided a greater range of value-added
services. At March 31, 1998, subscribers for OCN services reached 159
thousand.
The Company introduced "Super Relay FR", a high-speed, large capacity frame
relay service in November 1994. The frame relay, a data-exchange method, is
simpler than a conventional packet exchange. The Company bolstered its "Super
Relay FR" frame relay services for high-speed, high-volume data transmission
to operate local area networks (LANs) and other systems with the addition of a
flat monthly rate service for customers. The Company also launched a second
class of frame relay service, which is a lower-cost service. At the same time,
rates were reduced, long-term discounts introduced and the number of service
items increased. Frame relay installations increased approximately 400%
compared with the end of the previous fiscal year.
Sales of facsimile communications services remained firm amid diversified
uses reflecting the growing diffusion of facsimile machines in the home. The
Company also took steps to broaden its range of services, including launching
a new service that enables communications between personal computers (PCs)
with facsimile functions and facsimile terminals.
The number of pocket pager subscribers decreased 33.0% as users shifted to
cellular telephones and PHS.
System development services provide the development, and delivery and sale
of data communications systems. Sales of ready-made or "packaged" data
communications systems are also included in this category. During the fiscal
year, NTT aggressively marketed SCAW Design Series, which handles core fields
of corporate operations such as finance and production. System development
services of NTT are provided by NTT DATA.
CAPITAL INVESTMENTS
NTT's capital investments for the preceding three fiscal years are shown in
the table below.
<TABLE>
<CAPTION>
BILLIONS OF YEN MILLIONS OF
YEARS ENDED MARCH 31, U.S. DOLLARS
-------------------------------- ------------
1996 1997 1998 1998
---------- ---------- ---------- ------------
<S> <C> <C> <C> <C>
Expansion and improvement of
services:
Telephone...................... (Yen)1,796 (Yen)1,856 (Yen)1,774 $13,442
Data communication facility.... 127 155 132 1,005
Other.......................... 213 401 354 2,679
Research and development......... 155 147 158 1,195
Construction, improvement and
renovation
of office building, etc......... 423 519 544 4,121
---------- ---------- ---------- -------
Total.......................... (Yen)2,714 (Yen)3,078 (Yen)2,962 $22,442
========== ========== ========== =======
</TABLE>
NTT continues to make large capital investments to meet the demands for
telecommunications services and for modernization programs. In recent years, a
substantial portion of capital investments has been used to finance the
installation of digital transmission and switching equipment throughout the
Company's telecommunications network. The Company completed full digitization
of subscriber terminal capacity in December 1997.
In fiscal year 1999, NTT expects to make capital investments in an amount
not significantly different from the levels of the past three fiscal years.
The Company plans to provide coverage of optical fiber cables in the access
network for approximately 100% of business areas by 2000 followed by a goal of
100% nationwide by 2010. The Company developed "New Optical Access System,"
which enables low-cost opticalization up to telephone poles near customers, at
a cost almost equivalent to metallic cable. This speeds the deployment of
optical fiber cables in the access network, bringing the Company one step
closer to the full introduction of high-speed broadband networks.
13
<PAGE>
SPINNING-OFF OF OPERATIONS
NTT has taken necessary measures to improve its operational efficiency as
well as expand into new business areas. To meet these purposes, NTT has
invested in both subsidiaries and affiliated companies (20% to 50% owned by
NTT). At March 31, 1998, the number of subsidiaries and affiliates of the
Company was 272 and the Company had directly contributed approximately
(Yen)234 billion to them.
The Company has been transferring to its subsidiaries such services as
telecommunications software and systems development, facility management and
maintenance, equipment sales, and directory assistance, thus streamlining its
labor force. Subsidiaries that assume these functions will provide services
not only to the Company but also to third parties, creating the potential for
new revenue sources. In addition, separate units will take more
responsibility, compared with when they were divisions of the Company, for the
profit and loss of their operations. This will give a stronger incentive for
the subsidiaries to boost revenues and cut costs. Arm's-length transactions
within the NTT Group will clarify expenses and contribute to a corporate
culture that is highly cost conscious.
As part of this effort, the Company established a wholly owned subsidiary,
NTT Communicationware Corporation ("NTT Comware"), to provide a wide range of
services to the Company and other clients. NTT Comware was established in
April 1997 and commenced services in September 1997. NTT Comware offers a wide
range of telecommunications-related services, such as the development,
production, operation and maintenance of systems, software and related
equipment. The subsidiary provides the Company with communications software
and systems services to support the corporation's telecommunications business,
as well as providing such services to other telecommunications operators. NTT
Comware began operations with 9,200 employees and paid-in capital of (Yen)20
billion.
Such local-oriented operations as line installation and repair work have
been transferred to NTT Telecom Engineering (TE) companies. TE companies also
market telecommunications equipment and provide facility management. The
number of employees of TE companies at March 31, 1998 was 44,500.
To reduce the costs of providing directory assistance services, along with
the introduction of new operating systems for such services, the Company has
begun to contract out these services to its subsidiaries. The Company plans to
fully contract out these services by the end of fiscal year 1999.
COMPETITION
The Telecom Business Law introduced competition in the telecommunications
service industry at the beginning of fiscal year 1986. As a result, NTT faces
increasing competition in many of its business sectors from a large number of
companies which have entered or are about to enter the telecommunications
services market. Many of these new companies have substantial capital,
technological and other resources.
The Telecom Business Law authorizes the MPT to regulate two types of
companies: Type I Carriers, such as the Company, which provide
telecommunications services through their own circuit facilities, and Type II
Carriers, which are telecommunication carriers other than Type I Carriers, for
example carriers which provide enhanced or value added network ("VAN")
services through circuits leased from Type I Carriers. VAN services may also
be provided by Type I Carriers. As of March 31, 1998, there were 153 Type I
Carriers and 5,871 Type II Carriers. The Company is the only Type I Carrier
that is responsible for providing nationwide telephone service subject to the
NTT Law. NTT DoCoMo and NTT Personal Group are Type I Carriers, and certain of
the Company's other subsidiaries are General and Special Type II Carriers.
Certain competing Type I Carriers (so called "NCCs"--New Common Carriers)
have established microwave digital communications networks for their long-
distance services. Other NCCs have access to nationwide rights-of-way along
railway and utility lines and highways, which they have used to establish
their own optical fiber digital networks. In the fall of 1987, several long-
distance NCCs began offering telephone service to business and residential
customers in the Tokyo-Nagoya-Osaka corridor, where most of the nation's
14
<PAGE>
large corporations have their head offices. These carriers have expanded their
services to all prefectures and metropolitan areas in Japan. In fiscal year
1997, the Company's share of inter-prefecture calls between all prefectures in
Japan dropped to 64.3% based on the number of calls. In addition to these
long-distance NCCs, there are many other types of NCCs which provide their
customers with basic telephone, cellular telephone, PHS, leased circuit,
digital data exchange and pocket pager services. The offerings of
telecommunications services by NCCs are in various stages of development, with
several large NCCs completing their networks and some only recently
introducing their network services.
Competing Type II Carriers offer a wide range of services, including VAN,
data processing and other services. Parent companies of many of these Type II
Carriers include banks, trading companies, retailers, transportation companies
and domestic and foreign computer and telecommunications equipment
manufacturers.
In recent years, the distinction between domestic and international
telecommunications has virtually been eliminated as domestic and international
operators enter each others' markets through mergers and alliances. The
interconnection with other operators, previously connected only through the
Company's Zone Centers (ZC's, or toll switching offices), was realized in 1997
through the Company's Group Centers (GCs, or local switching offices). Tokyo
Telecommunication Network Co., Inc. commenced its local telephone services in
January 1998. This brought direct competition for local telephone services for
the first time. CATV operators have also begun providing telephony services.
Furthermore, basic telecommunications agreements under the administration of
the World Trade Organization came into effect in February 1998 and foreign
telecommunications operators are stepping up their activities in the Japanese
market by obtaining necessary licenses and other preparations.
NTT believes that these developments are causing services to become more
diversified and lower-priced, and as the environment for telecommunications
business is increasingly competitive, telecommunications operators are
required to have more comprehensive service capabilities, including
international telecommunications.
For a discussion of market shares of NTT's major services, see "Description
of Business--Principal Business Activities."
REORGANIZATION
In June 1997, the Diet passed the Revision Law. The Revision Law implements
a plan proposed by the Ministry of Posts and Telecommunications, and accepted
in principle by the Company, to reorganize the Company. Under the Revision
Law, the Company will continue to exist but will operate primarily as a
holding company with its businesses reorganized into three newly established
companies, East-Nippon Telegraph and Telephone Corporation, West-Nippon
Telegraph and Telephone Corporation and the Long Distance Company. Under the
Revision Law, the Holding Company is required to hold all the shares of East-
Nippon Telegraph and Telephone Corporation and West-Nippon Telegraph and
Telephone Corporation. The supplementary provisions of the Revision Law
provide that for the time being after the reorganization the Holding Company
will need MPT approval (subject to consultation with the Minister of Finance)
for the disposal of shares in the Long Distance Company. East-Nippon Telegraph
and Telephone Corporation will operate the regional telecommunications
business in the eastern Japan prefectures of Hokkaido, Aomori-ken, Iwate-ken,
Miyagi-ken. Akita-ken, Yamagata-ken, Fukushima-ken, Ibaraki-ken, Tochigi-ken,
Gunma-ken, Saitama-ken, Chiba-ken, Tokyo-to, Kanagawa-ken, Niigata-ken,
Yamanashi-ken and Nagano-ken; West-Nippon Telegraph and Telephone Corporation
will operate the regional telecommunications business in the remaining
prefectures of western Japan; and the Long Distance Company will operate the
long-distance telecommunications business. The Long Distance Company will be
subject to regulation under the Telecom Business Law as a Type I carrier, but
will not be subject to regulation under the "New Law" (the Law Concerning the
Nippon Telegraph and Telephone Corporation, etc. after revisions are made
pursuant to the Revision Law). Each of East-Nippon Telegraph and Telephone
Corporation and West-Nippon Telegraph and Telephone Corporation will be
subject to regulation under the Telecom Business Law as a Type I carrier and
will be subject to regulation under the New Law. However, the requirement of
MPT approval with respect to the appointment of directors and corporate
auditors
15
<PAGE>
and disposition of profits, which is currently required by the NTT Law, will
not apply to East-Nippon Telegraph and Telephone Corporation or West-Nippon
Telegraph and Telephone Corporation. The Revision Law also allows the Company
to enter the international telecommunications business through one or more
subsidiaries before the reorganization of the Company upon MPT approval.
Additionally, under the Revision Law, taxes incurred to effect the required
asset transfers will be reduced or eliminated. Also, in order to address
issues raised by the Japanese system of taxation where consolidated tax
reporting is not permitted, the Revision Law will allow East-Nippon Telegraph
and Telephone Corporation and West-Nippon Telegraph and Telephone Corporation
to enter into a burden-sharing systems for a term of up to three years. Under
the burden-sharing systems, NTT West, which will provide services in the less
profitable western Japan and might in the early years operate at a loss, will
be able to share its expenses with East-Nippon Telegraph and Telephone
Corporation, which will provide services in the more profitable eastern Japan.
The part of the new law relating to the reorganization of NTT will become
effective at a date to be established by Cabinet order not later than December
20, 1999 and the part of the new law allowing the Company to enter the
international telecommunications business through one or more subsidiaries
became effective immediately.
On December 19, 1997 the Ministry of Posts and Telecommunications announced
"the Basic Principles Concerning the Transfer of the Business Activities and
Succession of the Rights and Obligations of Nippon Telegraph and Telephone
Corporation." The Company will prepare "the Implementation Plans Concerning
the Transfer of the Business Activities and Succession of the Rights and
Obligations of Nippon Telegraph and Telephone Corporation" in accordance with
the Basic Principles. Matters concerning the transfer of business, which is
the precondition of reorganization, will be presented to shareholders at the
ordinary general meeting of shareholders in June 1999.
The Basic Principles stipulate items to be succeeded by East-Nippon
Telegraph and Telephone Corporation, West-Nippon Telegraph and Telephone
Corporation, and the Long Distance Company (the Successor Companies) such as:
(i) date of business activities to be transferred to the Successor
Companies,
(ii) types and scope of the telecommunications business activities to be
transferred to the Successor Companies,
(iii) research activities related to the telecommunications technologies
to be transferred to the Successor Companies,
(iv) assets and liabilities and other rights and obligations to be
succeeded by the Successor Companies,
(v) matters necessary to ensure fair competition in the field of
telecommunications upon the transfer of the business activities to
the Successor Companies, and
(vi) other matters relevant to the proper and smooth transfer of the
business activities to the Successor Companies.
As to matters to ensure fair competition, the Basic Principles require that:
(i) The Regional Companies shall have separate directors from those of
the Long Distance Company.
(ii) Employees shall not be temporarily transferred between the Regional
Companies and the Long Distance Company.
(iii) With respect to short-term loans of the Holding Company and the
Successor Companies, such loans shall be undertaken separately.
(iv) The Holding Company and the Regional Companies shall not procure
equipment in collaboration with the Long Distance Company.
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<PAGE>
(v) The form of interconnection between the Regional Companies and the
Long Distance Company shall be substantially equal to the one used
between the Regional Companies and other telecommunications
carriers.
(vi) Conditions of interconnection between the Regional Companies and
the Long Distance Company shall be the same as those between the
Regional Companies and other telecommunications carriers.
(vii) The terms of trade for the provision of telecommunications
services between the Regional Companies and the Long Distance
Company shall be the same as the terms of trade between the
Regional Companies and other telecommunications carriers.
(viii) The Long Distance Company shall establish its own sales
divisions. In the event that the Regional Companies undertake
sales activities for the Long Distance Company to maintain users'
convenience, conditions of these activities shall be the same as
the terms used between the Regional Companies and other
telecommunications carriers.
(ix) Customer information and other such information provided between
the Regional Companies and the Long Distance Company shall be the
same as information provided between the Regional Companies and
other telecommunications carriers.
(x) The terms for disclosure to the Long Distance Company of information
concerning the results of the research conducted by the Holding
Company and the Regional Companies (except that related to
Fundamental Research whose costs are borne by the Long Distance
Company) shall be the same as those terms used for such disclosure
to other telecommunications carriers.
The Company believes that the Revision Law has considerable advantages in
bolstering the collective strength of NTT's international telecommunications
businesses and achieving growth. Shareholders' interests are secured under the
Revision Law through equity ownership in the Holding Company, which will own
the shares in the three newly established companies. Under the reorganization
scheme, (1) the Company will continue its existence as a holding company with
no change in share ownership, (2) the Company's shares will continue to be
listed on stock exchanges and the conditions of share ownership will remain
unchanged and (3) the Company will be able to avoid the erosion of its assets
through reductions in or exemptions from taxes incurred to effect the required
asset transfers, the introduction of intercompany burden-sharing systems and
other special tax measures. Moreover, the Company believes that the Revision
Law will enable (1) the Company to maintain service quality, because the three
companies under the Holding Company would continue to cooperate, (2) the
Company to retain current research and development capabilities through the
unification of fundamental research activities in the Holding Company and (3)
the Long Distance Company to enter the international telecommunications
business and provide global end-to-end services, consequently promoting
synergies within NTT and bolstering the global competitiveness of NTT.
REGULATION
The Ministry of Posts and Telecommunications is the only regulatory body in
Japan with responsibility for the telecommunications service industry. The
Company together with other Type I Carriers is regulated by MPT under the
Telecom Business Law in respect of various of its business activities. The
Company is also subject to regulation under the NTT Law.
In 1985, there were significant changes in the legislative and regulatory
framework for telecommunications in Japan. At the same time that the Company
was incorporated as a private company, the Telecom Business Law opening the
Japanese telecommunications services industry to competition came into effect.
Since then, the Government has taken various deregulation measures to promote
competition in the Japanese telecommunications market. As a result, NTT faces
increasing competition in many of its business sectors from a large number of
companies which have entered or are about to enter the market.
17
<PAGE>
THE NTT LAW
The NTT Law provides that the purpose of the Company is to operate a
domestic telecommunications business. Under the NTT Law, the Company is
responsible for providing nationwide telephone services and for promoting
research in telecommunications technologies and disseminating the results of
such research. The NTT Law also provides that the Government must own one-
third or more of the total number of the issued Shares of the Company.
However, any increase in the number of Shares attributable to the issuance of
new Shares, including Shares issued upon the conversion or exercise of any
convertible debentures or debentures with preemptive rights, are not included
in calculating the proportion of the Shares held by the Government for this
purpose. Under the NTT Law, foreign ownership of Shares of the Company is
restricted to less than 20%. See "Restrictions on Foreign Ownership" in Item
6--Exchange Controls and Other Limitations Affecting Security Holders.
The appointment of the Company's directors and corporate auditors is subject
to approval by MPT. The Company also submits its business operating plan for
each fiscal year, which sets forth the Company's proposed capital investments,
for approval by MPT prior to the beginning of such year. Amendments to the
business plan also require approval by MPT. In addition, the Company must
obtain MPT approval to issue new Shares, convertible debentures or debentures
with preemptive rights to acquire new Shares; to change the Company's articles
of incorporation; to dispose of any profits; to amalgamate or dissolve the
Company; and to transfer or mortgage its telecommunications trunk lines or
other important telecommunications facilities. The Company is also required to
submit its balance sheet, profit and loss account and business report to MPT
within three months after the end of its fiscal year. To carry out his
supervisory function, MPT may, when he deems it especially necessary, issue
orders to the Company, and may require the Company to submit reports on its
business activities.
The NTT Law also provides for Governmental review of the situation of the
Company within specified periods. Pursuant to this review, on March 30, 1990,
the Government announced that, from the viewpoint of promoting fair and
effective competition in the telecommunications services market, the Company
should, among other things, (1) introduce and implement a system for
conducting its local and long-distance telephone service operations in
separate divisions and separately disclosing the revenues and expenditures
related thereto, (2) facilitate connections with and the use of the Company's
telecommunications network by other companies, (3) eliminate intracompany
subsidies, (4) disseminate the results of research and development activities,
and (5) within two years seek to transfer its mobile telecommunications
business to a separate company. Furthermore, the Government announced that,
from the viewpoint of improving the operations of the Company, among other
things, steps should be taken (1) to promote the rationalization of the
Company, (2) to ensure consideration of returns to the Company's shareholders,
and (3) to implement the deregulation of the telecommunications services
industry.
Pursuant to a further review of the situation with respect to the status of
the Company, in June 1997, the Diet passed the Revision Law. The Revision Law
implements a plan proposed by the Ministry of Posts and Telecommunications,
and accepted in principle by the Company, to reorganize the Company. Under the
Revision Law, the Company will continue to exist but will operate primarily as
a holding company with its businesses reorganized into three newly established
companies, East-Nippon Telegraph and Telephone Corporation, West-Nippon
Telegraph and Telephone Corporation and the Long Distance Company. The Long
Distance Company will be subject to regulation under the Telecom Business Law
as a Type I carrier, but will not be subject to regulation under the New Law.
Each of NTT East and NTT West will be subject to regulation under the Telecom
Business Law as a Type I carrier, and will be subject to regulation under the
New Law. The Revision Law also allows the Company to enter the international
telecommunications business through one or more subsidiaries before the
reorganization of the Company upon MPT approval. The Long Distance Company is
expected to operate international telecommunications business after the
reorganization. See "Description of Business--Reorganization".
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<PAGE>
The Revision Law provides that the purpose of the Holding Company is to hold
all the Shares of East-Nippon Telegraph and Telephone Corporation and West-
Nippon Telegraph and Telephone Corporation and to ensure proper and stable
provision of telecommunications services by the Regional Companies as well as
to conduct research relating to the telecommunications technologies that will
form the foundation for telecommunications. The Revision Law also provides
that the purpose of the Regional Companies is to operate regional
telecommunications businesses. The Holding Company and the Regional Companies
will be responsible for providing nationwide telephone services and for
promoting research in telecommunications technologies and disseminating the
results of such research. The Revision Law continues to require the Government
to own one-third or more, and restricts foreign ownership to less than 20%, of
the total number of issued Shares. The supplementary provisions of the
Revision Law provide that for the time being following the reorganization the
Holding Company will need MPT approval (subject to consultation with the
Minister of Finance) for the disposal of shares in the Long Distance Company.
The Revision Law also requires approval of MPT with respect to appointment or
dismissal of directors and corporate auditors of the Holding Company. The
Holding Company and the Regional Companies will be required to submit business
operating plans for each fiscal year for approval by MPT prior to the
beginning of such fiscal year. Amendments to the business plans will also
require approval. The Holding Company and the Regional Companies will need MPT
approval to issue new Shares, convertible debentures or debentures with
preemptive rights to acquire new Shares; to change the articles of
incorporation and to amalgamate or dissolve each company. Approval of MPT will
be required for the disposition of profits of the Holding Company. The
Regional Companies will need MPT approval to transfer or mortgage their
telecommunications trunk lines or other important telecommunications
facilities. The Holding Company and the Regional Companies will be required to
submit balance sheets, profit and loss accounts and business reports to MPT
within three months after the end of its fiscal year. To carry out his
supervisory function, MPT may, when he deems it especially necessary, issue
orders to the Holding Company or to the Regional Companies, and may require
these companies to submit reports on business activities.
The following table summarizes certain of the major regulatory requirements
applicable under the NTT Law and the New Law:
<TABLE>
<CAPTION>
THE COMPANY HOLDING COMPANY REGIONAL COMPANIES
----------------- ----------------- ------------------
(THE NTT LAW) (THE NEW LAW)
<S> <C> <C> <C>
- --Obligatory Share- One-third or more One-third or more Unregulated
holding
by the Government
- --Issuance of new Shares MPT approval* MPT approval* MPT approval
- --Foreign ownership of Less than 20% Less than 20% Unregulated
Shares
- --Appointment of MPT approval MPT approval Unregulated
directors and corporate
auditors
- --Change of the articles MPT approval** MPT approval** MPT approval
of incorporation
- --Disposition of profits MPT approval* MPT approval* Unregulated
- --Business operating
plan MPT approval* MPT approval* MPT approval*
</TABLE>
- --------
* Subject to consultation with the Minister of Finance.
** Subject to consultation with the Minister of Finance only when the total
number of Shares will be changed.
In December 1997, the Ministry of Posts and Telecommunications announced
"the Basic Principles Concerning the Transfer of the Business Activities and
Succession of the Rights and Obligations of Nippon Telegraph and Telephone
Corporation." The Company will prepare "the Implementation Plans Concerning
the Transfer of the Business Activities and Succession of the Rights and
Obligations of Nippon Telegraph and Telephone Corporation" in accordance with
the Basic Principles. Matters concerning the transfer of business, which is
the precondition of reorganization, will be presented to shareholders at the
ordinary general meeting of shareholders in June 1999. See "Description of
Business--Reorganization".
19
<PAGE>
THE TELECOM BUSINESS LAW
The Telecom Business Law authorizes MPT to regulate two types of
telecommunications companies: Type I Carriers, which provide
telecommunications services through their own circuit facilities, and Type II
Carriers, which are telecommunications carriers other than Type I Carriers.
Type II Carriers are subdivided into Special Type II Carriers, which provide
telecommunications facilities that exceed in scale the standards stipulated in
the applicable Cabinet order or provide telecommunications facilities designed
for communications between Japan and foreign points, and General Type II
Carriers, which provide other services. Type I Carriers may also offer the
same services provided by Type II Carriers. As of March 31, 1998, there were
153 Type I Carriers and 5,871 Type II Carriers.
The Company is the only Type I Carrier that is responsible for providing
nationwide telephone service subject to the NTT Law. NTT DoCoMo and NTT
Personal Group are Type I Carriers, and certain of the Company's other
subsidiaries are General and Special Type II Carriers.
In June 1997, the Telecom Business Law was revised in part to remove the
requirement that in connection with granting permission to an applicant to
operate a Type I telecommunications business, MPT must determine that the
telecommunications business to be provided by such applicant is appropriate in
view of the demand for such business within the relevant area and that the
commencement of such business will not result in an oversupply of
telecommunications lines in the relevant area.
In accordance with agreements reached in February 1997 of basic
telecommunications negotiations under the administration of the World Trade
Organization, the Telecom Business Law was revised in June 1997. Restrictions
on the proportion of total voting shares held by foreign nationals, which had
been limited to be one-third for Type I Carriers, is eliminated effective in
February 1998 with the exception of the Company and KDD (KDD Law was abolished
on July 30, 1998). See "Restrictions on Foreign Ownership" in Item 6--Exchange
Controls and Other Limitations Affecting Security Holders.
In May 1998, the Telecom Business Law was revised to provide that even the
Type II Carriers can possess telecommunications facilities as long as such
facilities are connected to one specific customer and that Special Type II
Carriers are limited to Type II Carriers which provide telecommunications
facilities designed for communications between Japan and foreign points or
provides voice communication services to the public through interconnections
of public switched networks and leased circuits at each end. The revised law
will become effective at a date to be established by Cabinet order not later
than November 7, 1998.
The following table summarizes certain of the major regulatory requirements
applicable to Type I and Type II Carriers:
<TABLE>
<CAPTION>
TYPE I CARRIERS TYPE II CARRIERS
--------------- ------------------------------------
SPECIAL TYPE II GENERAL TYPE II
<S> <C> <C> <C>
Government Regulation:
a. Start-up of Services Permission from Registration with Notification to
MPT required MPT required MPT required
b. Rates and Charges Approval from Notification to Unregulated
MPT required* MPT required
c. Foreign Capital Unregulated** Unregulated Unregulated
Participation
</TABLE>
- --------
* The revised Telecom Business Law stipulates that Type I Carriers will not
in principle have to obtain approval from MPT but only notify MPT of their
rates. See "Description of Business--Regulation--Rates."
** Except in the case of the Company where the restriction continues.
20
<PAGE>
RATES
Type I Carriers establish their rates in conformity with guidelines
established by the advisory committee to MPT. Basically, these guidelines
provide for the establishment of rates that are reasonable for the society as
a whole and that will produce estimated revenues in an amount equal to the
"total cost" of each of the telecommunications services offered by each Type I
Carrier. "Total cost" consists of basic costs (operating expenses,
depreciation and taxes) plus a return on the assets of the business. Certain
categories of rates designated in an ordinance issued by the Ministry of Posts
and Telecommunications may be changed by notifying MPT (but without its
approval). Other rates must be approved by MPT before they are made effective.
Approval is granted if MPT determines, after consultation with an advisory
committee to MPT, that the rate, among other things, is fair and reasonable in
consideration of proper costs under efficient management, is calculated
according to the properly and clearly stipulated method and does not include
any provisions that unfairly discriminate against any person. The Company is a
Type I Carrier and therefore must generally submit rates to MPT for approval.
In May 1995, the Telecom Business Law was revised to provide that Type I
Carriers need not obtain approval from MPT but need only notify MPT of changes
in their rates if such rates fall within the categories of rates designated in
ordinances issued by the Ministry of Posts and Telecommunications as those
which would have relatively less impact on users' interests if they were to be
changed. The revised law became effective in October 1995.
In December 1996, revisions to regulations under the Telecom Business Law
were implemented to provide that Type I Carriers need not obtain approval from
MPT but need only notify MPT of their mobile telecommunications rates for such
services as cellular telephones, PHS and pocket pagers.
In order to promote further competition in the telecommunications market,
and as part of the Government's overall policy toward deregulation, the
Telecom Business Law was revised in May 1998. Under the revised Law, Type I
Carriers need not obtain approval from MPT but only notify MPT of their rates.
For certain services to be provided by such carriers with "designated
telecommunications facilities" and to be specified in an ordinance of the
Ministry of Posts and Telecommunications, a price-cap system will be
introduced. Under the price-cap system, an index will be annually fixed by
MPT, and if the increase ratio of a new rate does not exceed such index, such
carriers need not obtain approval from MPT but only notify MPT of their rates.
The revised Law will become effective at a date to be established by Cabinet
order not later than November 7, 1998. It is expected that until the
reorganization, rates for regional telecommunications services provided by the
Company will continue to be subject to MPT approval, while rates for such
services provided by the regional companies after the reorganization will be
subject to the price-cap system.
Also in June 1998, the Ministry of Posts and Telecommunications released a
report concerning universal services. The report concluded that the basic
telephone services are indispensable to the national welfare and should be
determined as "universal services" that require proper and stable provision
with equal conditions across the country. While future potential was noted,
ISDN and mobile communications services were excluded from the scope of
universal services.
In order to ensure the proper and stable provision with equal conditions of
such universal services, emphasis has been placed in the report on the
establishment of a "Universal Services Fund." The report proposed that,
through contributions by operators to the fund, providers of universal
services should be subsidized for the costs incurred to provide such services.
It was also proposed that although international and long-distance telephone
services should be included in the scope of universal services, such services
should not be subsidized since competition among operators has already led to
nationwide availability. The Ministry of Posts and Telecommunications is
currently reviewing the possibility of establishing the fund.
Certain subsidiaries of the Company are Type II Carriers and are treated
differently than the Company for rate making purposes. Special Type II
Carriers must notify MPT prior to putting new rates into effect. General Type
II Carriers are unregulated with respect to rates.
21
<PAGE>
For a discussion of rates currently applied to NTT's telephone and ISDN
services, see "Description of Business--Principal Business Activities."
INTERCONNECTION
In February 1995, the Company announced its basic approach to the opening of
its networks to other carriers in order to promote competition and to further
develop information telecommunications. In principle, the Company allows all
other carriers wishing to establish interconnections to the Company's network
to do so--provided the Company is compensated in a fair manner. Further, in
September 1995, in order to promote competition in the local
telecommunications field, the Company announced implementation of the
interconnections of local switches and subscriber lines.
Since then, the Company has held active discussions with other operators
seeking to use its networks. The interconnection with other operators,
previously connected only through the Company's Zone Centers (ZC's, or toll
switching offices), was realized in 1997 through the Company's Group Centers
(GCs, or local switching offices). Tokyo Telecommunication Network Co., Inc.
commenced its local telephone services in January 1998. This brought direct
competition for local telephone services for the first time.
In June 1997, the Diet revised the Telecom Business Law in an attempt to
promote transparent, fair, prompt, and reasonable interconnections. The
revision provides that every Type I Carrier is obligated, upon request, to
allow other telecommunications carriers access to its network through
interconnection. Limitations on access may be based only on the maintenance of
network integrity, unreasonable injury to the interests of the Type I Carrier
or such other reasons as MPT determines to be proper. In addition to this
general requirement, every Type I Carrier which is to install a "designated
telecommunications facility" (defined as a telecommunications facility to be
installed by a Type I Carrier in a region where the Type I Carrier provides in
excess of a percentage of telecommunications services as designated by MPT)
will be required to submit each interconnection tariff determining
interconnection charges to be received by the Type I Carrier and conditions
for such interconnection to MPT for approval. MPT will issue approval if the
conditions are technically and economically feasible, the interconnection
charges for each function are in amounts determined by MPT, the charges are
fair and impartial in view of the cost of such services, the interconnection
conditions are not disadvantageous as compared to the conditions the Type I
Carrier would impose to connect its own telecommunications facilities and
there is no unfair discrimination against any particular telecommunications
carrier. Each Type I Carrier installing a "designated telecommunications
facility" will be required to publish each interconnection tariff in
accordance with rules to be promulgated by MPT, to compile and publish
accounts concerning the income and disbursements relating to interconnections
to its "designated telecommunications facilities" and to recalculate its
interconnection charges annually so that they are "fair and impartial" in
light of the costs as calculated in such accounts. The revised Telecom
Business Law became effective in November 1997.
Following the revision to the Telecom Business Law, the Ministry of Posts
and telecommunications designated certain telecommunications facilities as the
"designated telecommunications facilities" in December 1997. Certain of the
Company's facilities for its regional telecommunications services were
designated as the "designated telecommunications facilities" due to the
Company's dominant position in the local telecommunications market. The
Company is subject to the special rules mentioned above applicable under the
revised Telecom Business Law.
In January 1998, the Company submitted its interconnection tariffs to the
MPT for approval in connection with its designated telecommunications
facilities. Such tariffs were approved in March 1998.
The condition upon which access to networks, especially to local networks is
offered, is of great significance to the development of the Japanese
telecommunications market. The cost of interconnection to the Company's local
network may be expected to be a significant part of the operating costs of
competing telecommunications carriers, and, as competition grows, increasingly
important to the Company.
22
<PAGE>
The United States Government had appealed to the Japanese Government for a
reduction in the interconnection charges and the introduction of "Long-run
Incremental Cost Methodology" in calculating the interconnection charges. The
U.S. Government stated that interconnection charges in Japan are set
relatively higher compared with the international level, thus forming a
barrier for U.S. companies to enter into the Japanese telecommunications
market. Current interconnection charges in Japan are calculated based on
"fully distributed historic cost," which compensates actual costs for the
construction of the network. In contrast, Long-run Incremental Cost
Methodology will calculate interconnection charges based on costs assumed to
be incurred for construction of the current network with presently available
equipment and technology.
In May 1998, the U.S. Government and the Japanese Government reached an
agreement to introduce Long-run Incremental Cost Methodology for the setting
of interconnection charges. Specifically, it was agreed that:
(i) a bill to revise the Telecom Business Law will be proposed to the
regular Diet Session in the spring of 2000 in order to implement Long-
run Incremental Cost Methodology as early as possible;
(ii) due consideration will be paid to ensuring that the implementation of
Long-run Incremental Cost Methodology would cause no disruption in the
provision of universal service and that it would not prove destructive
to end user rates and business operations of incumbent local
operators;
(iii) prior to the introduction of Long-run Incremental Cost Methodology
based charges, the Japanese Government will, within the scope of its
existing authority, promote the reduction of interconnection charges
as much as possible.
At this time, the ultimate results of the introduction of Long-run
Incremental Cost Methodology on the financial position and results of
operations of the Company cannot be determined.
OTHER DEVELOPMENTS FOR DEREGULATION
The following events represent major recent developments for deregulation in
the telecommunications field.
In July 1997, the Telecommunications Council in its report entitled "Vision
21 for Info-communications" recommended that in order to promote further
competition in the telecommunications market, the Government should implement
deregulation. In such report the Telecommunications Council recommended that
the Government seek the introduction of "number portability" by fiscal year
2001 to assure that telephone numbers will not change with a change in
carriers. The Ministry of Posts and Telecommunications aims to reach a
conclusion by the end of fiscal year 1999.
In accordance with MPT's policy, the Company began permitting
interconnections of public switched networks and leased circuits at one end
for voice in April 1995 and interconnections of public switched networks and
leased circuits at each end in October 1996. As for the interconnection of
both ends of international leased circuits with public switched networks, the
Ministry of Posts and Telecommunications took measures for liberalization in
December 1997 following the partial liberalization for internet telephony
services.
The Ministry of Posts and Telecommunications is currently having discussions
on the introduction of "Presubscription." Presubscription will enable
telephone subscribers to omit prefix numbers of the interconnecting operator's
by prior selection and registration with the operator.
In May 1998, the Diet passed the law to abolish the KDD Law. The law became
effective on July 30, 1998.
RESEARCH AND DEVELOPMENT
For the fiscal years 1998, 1997 and 1996, research and development expenses
amounted to (Yen)288.9 billion, (Yen)328.5 billion and (Yen)318.1 billion,
respectively, or 3.1%, 3.7%, and 4.0% of operating revenues.
In the field of telecommunications, the increasingly widespread use of
cellular telephones and personal computers (PCs) and soaring demand for such
computer-based communications as the Internet demonstrate that
23
<PAGE>
the multimedia market is growing and that an environment where diverse
information is distributed globally is becoming firmly established. Against
this backdrop, NTT is engaged in creating diverse, high-quality multimedia
services for the purpose of promoting a prosperous and future-oriented society
based on information distribution. With this aim, the Company has devoted
vigorous efforts to the research and development of leading-edge and basic
technologies that will support telecommunications in the future.
In fiscal year 1997, the Company developed "New Optical Access System" to
install fiber-optic cables as close as possible to customers' homes as part of
the basic technology for high-speed wide area networks that will be needed as
the age of multimedia matures. The Company began introducing this system in
March 1998. The Company also successfully substituted low-cost crystallized
glass for expensive zirconium used in ferrules, a key component of fiber
connectors.
The Company also developed technologies that will form the core of
multimedia services and ensure that information is freely distributed. Such
developments include a system that will allow any user to easily transmit
audio and visual data over the Internet using a PC and a video content sales
system that protects copyrights. Furthermore, with a focus on the
globalization of information distribution, the Company completed developing
one of the world's largest Japanese semantic dictionaries, containing words
whose meanings are divided into approximately 3,000 categories. Plans call for
the application of this to Japanese-English machine translation systems.
To ensure that users have full access to the contents of their choice, and
that intellectual property rights are protected, the Company developed an
image distribution system with an imbedded identification scheme to prevent
unauthorized copying. The system will facilitate the electronic marketing of
such digital materials as photographs and artwork and is part of our ongoing
efforts to promote the full realization of electronic commerce.
The Company tested a pilot system known as "InterSpace" that provides
digital sound and visual communications in a three-dimensional computer
environment. The system was the first to let users combine a digital image of
their own face with simulated "cyber bodies." The trial ran from July 1997 to
March 1998, testing electronic messaging and multiplayer games, and involved
approximately 10,000 people.
In March 1998, the Company introduced its Multiple Access Protocol Over
SONET/SDH (MAPOS), which provides high-performance frame-based transfer and
multiple access capabilities over Synchronous Optical Network
(SONET)/Synchronous Digital Hierarchy (SDH) systems. MAPOS helps Internet
service providers and large corporations reduce system congestion and improve
response times. The protocol enables ultrahigh-speed transmission rates for
Internet and intranet backbone networks, wide area networks (WANs), local area
networks (LANs) and other large-volume applications.
In April 1998, the Company unveiled its new ATM-based Passive Double Star
Optical Access System (ATM-PDS), which is based on a high-speed access system
standard expected to be formally adopted by the International
Telecommunications Union in October 1998. The development of an international
standard, by allowing mass production, will greatly reduce the cost of such
systems. ATM-PDS transmits voice, text and visual data in ATM cells over
passive optical networks to achieve transmission speed of 155 Mbps. Since one
line card can be shared by up to 16 users, each user is assured transmission
of 10 Mbps. This results in transmission speeds sufficient for advanced
multimedia applications at a reasonable cost. The Company plans to
commercialize the system by 1999.
In light of the need to prevent global warming, the Company has promoted
research and development focused on energy-efficient communications equipment,
such as large-scale integration (LSI) circuits that can operate at low
voltage, and announced its vision to reduce electric power consumption by
2010. The Company has already made great progress toward the realization of
ultralow-power-consumption integrated circuits, including a successful
experiment involving a silicon device that can be operated by a single
electron.
Introduction of the next generation mobile communication system capable of
dealing with various and yet integrated contents such as voice, data and
visual images is needed. Standardization of the next generation mobile
24
<PAGE>
communication system (IMT-2000 / FPLMTS) is moving forward with ITU
(International Telecommunication Union). NTT DoCoMo has been actively involved
with this standardization, and is the principal supporter of wideband-code
division multiple access (W-CDMA) as the third-generation wireless
communications platform for the next century. W-CDMA, which has been named the
uniform European standard, will offer high-speed data rates enabling the
integration of voice communications with far-reaching multimedia applications,
such as full-motion video, Internet access and videoconferencing. NTT DoCoMo
intends to commence W-CDMA services in 2001.
After the reorganization of NTT becomes effective, the holding company will
engage in fundamental research and development; and business-oriented applied
research and development activities will be conducted by the three operating
subsidiaries.
GLOBAL BUSINESSES
In June 1997, the Diet passed the Revision Law. This new law, among other
things, allows the Company to enter the international telecommunications
business between Japan and other locations through one or more subsidiaries
before the reorganization of the Company upon approval of MPT. See
"Description of Business--Reorganization".
NTT believes that entry into the international telecommunications market is
necessary to provide the services that customers desire. NTT will take
advantage of well-established client trust, technological know-how built up
over many years and substantial financial resources to expand in the
international arena. Specifically, NTT offers seamless, end-to-end
international services through the integrated operations of the Group, meeting
demand from multinational corporations, with a focus on the global networks of
Japanese companies. Furthermore, NTT will explore the possibility of expanding
its market scope to include smaller companies and consumers by providing
comprehensive international services, from voice communications to data
transmission. Although NTT intends to pursue its international services
business independently, it will consider alliances on a service-by-service
basis to create the highest level of competitiveness.
(i) Global Services
NTT is preparing to make full-scale entry into the international
telecommunications services market following reorganization. NTT unifies its
global telecommunications activities under the "Arcstar" name while providing
global telecommunications services through its subsidiaries.
In July 1997, the Company established a wholly owned subsidiary, NTT
Worldwide Telecommunications Corporation ("NTT-WT"), as a special Type II
international telecommunications company. NTT-WT and the Company's overseas
subsidiaries cooperatively launched global end-to-end services in September
1997 mainly for multinational corporations, with a service area spanning major
locations in the United States, Europe and Asia. It will expand geographic
coverage and its range of value-added network services.
In October 1997, the Company established another wholly-owned subsidiary,
NTT Worldwide Network Corporation ("NTT-WN"), as a Type I international
telecommunications company to provide facility-based international leased
circuit services and international telephone services. With other consortium
members, NTT-WN signed agreements for the construction and maintenance of the
"China-U.S. Undersea Fiber Optic Cable Network" and the "Japan-U.S. Cable
Network" in December 1997 and July 1998, respectively. Both networks will be
world's largest-class submarine fiber-optic cables linking Japan and other
Pacific Rim countries.
In June 1998, NTT-WT and IBM Corporation agreed to provide international
data transmission network services by connecting NTT-WT's international data
transmission service, the Arcstar frame relay network, with the frame relay
based services of IBM Global Network.
Also in June 1998, NTT-WT and International Digital Communications Inc.
("IDC") agreed to a bi-lateral arrangement including sales and services. Under
the agreement, NTT-WT will resell IDC's volume discount
25
<PAGE>
international telephone services, worldwide leased circuit and frame-relay
services in addition to NTT-WT's Arcstar-brand global telecommunications
services. IDC will become an agent for the sale of NTT-WT's domestic and
international call discount resale services.
(ii) Infrastructure Investments in Asia
NTT has already been actively involved in establishing carrier businesses
and infrastructure operations in Asia.
In November 1992, the Company participated in its first large-scale overseas
telecommunications project to provide Thai Telephone & Telecommunication
Public Co., Ltd. ("TT&T") with the design, construction and operation of a
one-million-circuit enlargement of a regional telephone system. In October
1993 TT&T started to provide telephone services in some areas and in September
1995 announced the construction of another half-million telephone lines, which
was completed in September 1996. As of April 1997, the total number of
telephone lines in service reached 1 million. The Company designates three
board members and invested US$178 million in TT&T, acquiring a 18% ownership
interest in TT&T.
In March 1995, the Company signed an agreement with Smart Communications
Inc. ("Smart"), a Philippine telecommunications operator providing mobile and
international telecommunications, to provide technical assistance in its local
telephone operations, including the installation of 700,000 lines. The Company
designates two board members and has invested US$145 million, acquiring a 15%
interest in Smart. Smart is the largest mobile service provider in the
Philippines with a market share of over 40%.
In July 1995, the Company agreed with PT Telekomunikasi Indonesia, a state-
owned domestic carrier in Indonesia, on the basic conditions for a project
that will install 400,000 telephone lines in central Java. The Company, as a
member of a consortium formed with Telstra Corporation Limited and PT
Indonesian Satellite Corporation, acquired 15% of the total equity of the
joint venture company, Mitra Global Telekomunikasi Indonesia (MGTI). The
aggregate amount of investment will be about US$51 million. The Company
participates in the management of MGTI by dispatching directors and technical
personnel.
In August 1997, the Company signed a contract with the Government of Sri
Lanka and Sri Lanka Telecom Ltd. ("SLT") to become a strategic partner of SLT.
The Company invested US$225 million in SLT, acquiring a 35% interest in SLT.
An NTT executive is serving as Chief Executive Officer of SLT. SLT, privatized
in 1996, is a sole provider of basic domestic and international
telecommunications services in Sri Lanka.
In November 1997, NTT Vietnam Corporation, a joint venture 55% owned by the
Company, and Vietnam Posts and Telecommunications Corporation (VNPT) jointly
received a license from the Vietnamese government for the construction of a
telephone network project in the northern part of Hanoi. The project will
construct 240 thousand telephone exchange lines for an investment of
approximately US$200 million.
In May 1998, StarHub, a consortium comprising NTT, Singapore Technologies
Telemedia (STT), Singapore Power (SP) and British Telecom (BT), was awarded
both licenses by the Telecommunication Authority of Singapore (TAS) to provide
public basic telecommunication services (domestic and international) and
public cellular mobile telephone services. NTT is working together with STT,
SP and BT towards the launch of the services in April 2000.
(iii) Other Initiatives
Since April 1996, the Company has been given the opportunity to take part in
Malaysia's Multimedia Super Corridor ("MSC") project, a national project of
Malaysia calling for the creation and development of a global multimedia hub
for the 21st century. The Company participated in designing the master plan of
the project. In May 1997, the Company agreed to acquire 15% of the total
equity of Cyberview, a joint venture company which
26
<PAGE>
is responsible for the development of Cyberjaya, the central city of MSC.
NTT's aggregate investment has been 52.5 million Ringgit. The Company was
awarded "MSC Status" by the Malaysian Government, which provides the Company
with certain financial and non-financial incentives, such as an exemption from
Malaysian income taxes and the ability to employ certain foreign workers. In
September 1997, NTT established NTT MSC Sdn. Bhd., a wholly owned subsidiary
which carries out telecommunications businesses in Malaysia and serves as the
center of R&D activities for the Asian region. NTT also contributes to the
development of Malaysia's telecommunications industry through technology
transfer and human resources development, including the dispatch of
instructors to the newly established Multimedia University.
In June 1997, the Company established the Asian Multimedia Forum ("AMF")
with leading telecommunications services providers and Internet services
providers. The AMF aims to promote multimedia services that extend beyond
national boundaries in the Asia-Pacific region. Jun-ichiro Miyazu, President
of the Company, became the first president of the forum. In addition, the AMF
Secretarial Office was established in the Global Business Headquarters of the
Company in Tokyo. As of August 1998, more than 40 companies have participated
in the AMF, comprising information and communications companies, vendors,
traders and other interested parties mainly from the Asia-Pacific region.
In September 1997, the Company invested US$100 million to acquire a 12.5%
stake in Teligent, a fixed wireless access carrier in the United States. This
investment reflects management's belief in the growth prospects of the U.S.
market and the potential strength of Teligent when combined with NTT's
managerial and technical support. As of August 1998, the Company's stake is
approximately 10%.
In April 1998, the Company signed agreements with Verio Inc., a U.S.-based
Internet service provider. Under the terms of the agreements,
(i) the Company acquired approximately 12% of Verio's stocks for $100
million concurrently with Verio's initial public offering in May 1998,
(ii) the Company will appoint one member to Verio's board of directors, and
(iii) the Company is working with Verio to jointly deploy a comprehensive
range of IP services to offer NTT customers.
NTT believes that this strategic alliance will enable provision of the
enhanced IP services such as Internet VPN (Virtual Private Network).
PROCUREMENT
NTT does not have any manufacturing divisions and, accordingly, it procures
finished products from outside suppliers. Therefore, NTT is continually
seeking opportunities to develop relationships with high-quality, cost-
efficient suppliers to strengthen its business operations in Japan's highly
competitive telecommunications market. NTT strives to acquire competitive and
economical products and technologies from throughout the world.
The Company provides its procurement related information through "ON TIME,"
a procurement information provision homepage via the Internet. Applications,
inquiries and contacts with companies interested in becoming suppliers to the
Company are handled by the Company's overseas offices and subsidiaries as well
as by the Company's International Procurement Office in Tokyo.
EMPLOYEES
NTT had approximately 226,000 employees at March 31, 1998, making it the
largest private sector employer in Japan. Almost all employees, excluding
supervisory staff, are members of the Zenkoku Denki Tsushin Rodo Kumiai (All
Japan Telecommunications Workers Union; the "Union"), which is a member of the
Nippon Rodo Kumiai So Rengokai (Japanese Trade Union Confederation). NTT
maintains favorable labor relations with the Union and has experienced no
significant strikes by the Union over the past ten years.
27
<PAGE>
In fiscal year 1994, the Company offered voluntary early retirement to
certain employees in fiscal years 1994 and 1995 as part of its streamlining
effort to control growth in personnel expenses by strategic restructuring of
staffing levels. Approximately 14,000 employees accepted the Company's
retirement proposal in fiscal years 1994 and 1995.
ITEM 2--DESCRIPTION OF PROPERTY
The properties of NTT consist principally of plant and equipment used to
provide nationwide telecommunications services and are generally in good
operating condition.
At March 31, 1998, the gross book value of NTT's property, plant and
equipment was (Yen)31,365 billion (U.S. $238 billion), consisting of
telecommunications equipment (mainly central office equipment, including
switching equipment) (37.1%); telecommunications service lines (37.4%);
buildings and structures (15.2%); machinery, vessels and tools (vehicles,
office equipment, furniture, etc.) (6.4%); land (1.9%); and construction in
progress (2.0%). Substantially all of the important communications facilities
are in buildings owned by NTT.
NTT's network is constantly in the state of being modernized. As
improvements are made to the existing telecommunications plant, such plant as
so improved is expected to be adequate for current operations. As indicated
under "Capital Investments" in Item 1, "Description of Business," NTT has made
and expects to make large capital investments to meet the demand for
telecommunications services and modernization programs.
In recent years, NTT has been working to modernize its telecommunications
plant and equipment with digital transmission and switching equipment. On
December 17, 1997, NTT's domestic telecommunications network was completely
digitized. NTT will provide more effective and advanced services and plans to
expand optical fiber cables in the access network.
ITEM 3--LEGAL PROCEEDINGS
In the normal course of business, NTT is subject to proceedings, lawsuits
and other claims. However, based upon the information currently available to
both NTT and its legal counsel, management believes that damages from such
lawsuits, if any, would not have a material effect on NTT's consolidated
financial statements.
ITEM 4--CONTROL OF REGISTRANT
(a) As far as known to the registrant, state whether the registrant is
directly or indirectly owned or controlled by another corporation(s) or by
any foreign government and, if so, give the name(s) of such controlling
corporation(s) or government and briefly describe the nature of such
control.
The Government of Japan owns 65.49% of the issued and outstanding
Shares of the Company. See Note 13 of the Notes to Consolidated
Financial Statements.
(b) If the registrant's outstanding voting securities are in registered
form, furnish the following information, as of the most recent practicable
date, in substantially the tabular form indicated, with respect to: (1) any
person who is known to the registrant to be the owner of more than ten
percent of any class of the registrant's voting securities and (2) the
total amount of any class of the registrant's voting securities owned by
the officers and directors as a group, without naming them.
<TABLE>
<CAPTION>
AS OF MARCH 31, 1998
---------------------------------------------
IDENTITY OF PERSON AMOUNT OF SHARES PERCENT
TITLE OF CLASS OR GROUP OWNED OF CLASS
-------------- ------------------- ---------------- --------
<S> <C> <C> <C>
Government of Japan
Common stock, per value (Minister of
(Yen)50,000................ Finance) 10,420,270.24 65.49%
Directors and
Common stock, per value officers as a group
(Yen)50,000................ (36 persons) 409.44 0.003%
</TABLE>
28
<PAGE>
(c) Describe any arrangements, known to the registrant, the operation of
which may at a subsequent date result in a change in control of the
registrant.
None.
ITEM 5--NATURE OF TRADING MARKET
SHARE PRICES AND DIVIDENDS
The primary market for the Shares of the Company is the Tokyo Stock Exchange
(the "TSE"). The Shares have been traded on the First Section of that exchange
since February 1987 and are also listed on all other stock exchanges in Japan.
The following table sets forth for the periods indicated the reported high
and low sale prices of the Shares on the TSE. It also sets forth the closing
highs and lows of two TSE stock indices. The Tokyo Stock Price Index
("TOPIX"), which is published by the TSE, is a weighted index of the market
value of all stocks listed on the First Section of the TSE. As of March 31,
1998, stocks of 1,327 companies were traded on the First Section of the TSE.
The Nikkei Stock Average is a widely followed unweighted arithmetic average of
225 selected stocks traded on the First Section.
<TABLE>
<CAPTION>
TSE CLOSING NIKKEI
PRICE PER SHARE CLOSING TOPIX STOCK AVERAGE
------------------- ----------------- -------------------
CALENDAR PERIOD HIGH LOW HIGH LOW HIGH LOW
- --------------- --------- --------- -------- -------- --------- ---------
(YEN) (YEN) (POINTS) (POINTS) (YEN) (YEN)
<S> <C> <C> <C> <C> <C> <C>
1996
First quarter....... 866,000 742,000 1,638.10 1,520.46 21,406.85 19,627.57
Second quarter...... 835,000 772,000 1,725.64 1,640.11 22,750.70 21,170.72
Third quarter....... 841,000 753,000 1,708.21 1,539.67 22,455.49 20,107.11
Fourth quarter...... 922,000 770,000 1,622.91 1,448.45 21,612.30 19,161.71
1997
First quarter....... 914,000 808,000 1,480.86 1,326.60 19,446.00 17,303.65
Second quarter...... 1,110,000 836,000 1,560.28 1,320.82 20,681.07 17,485.75
Third quarter....... 1,240,000 999,000 1,555.16 1,373.97 20,575.26 17,683.27
Fourth quarter...... 1,150,000 920,000 1,391.06 1,130.00 17,842.16 14,775.22
1998
First quarter....... 1,230,000 1,050,000 1,300.30 1,120.61 17,264.34 14,664.44
Second quarter...... 1,170,000 996,000 1,254.74 1,156.47 16,536.66 14,715.38
</TABLE>
On June 30, 1998, the last reported sale price of the Shares on the TSE was
(Yen)1,150,000 per Share, and the closing TOPIX and Nikkei Stock Average on
that date were 1,230.38 and (Yen)15,830.27, respectively.
ADSs are listed on the New York Stock Exchange. 200 ADSs represent one Share
and are evidenced by ADRs issued by Morgan Guaranty Trust Company of New York,
as Depositary.
29
<PAGE>
On June 30, 1998, approximately 5,538,000 ADSs (equivalent to 27,690 Shares,
or approximately 0.17% of the total number of Shares outstanding on that date)
were outstanding and were held by 167 record holders of ADRs (including 163
record holders in the United States holding 5,537,332 ADSs). The following
table sets forth for the periods indicated the high and low sales price of the
ADSs as set forth on the New York Stock Exchange composite tape.
<TABLE>
<CAPTION>
NYSE
PRICE PER ADS
-------------
CALENDAR PERIOD HIGH LOW
- --------------- -------------
($) ($)
<S> <C> <C> <C> <C> <C> <C>
1996
First quarter.................................... 42.50 36.00
Second quarter................................... 39.63 36.13
Third quarter.................................... 38.63 34.88
Fourth quarter................................... 40.25 35.00
1997
First quarter.................................... 39.00 34.63
Second quarter................................... 49.25 34.50
Third quarter.................................... 52.00 46.25
Fourth quarter................................... 47.38 35.94
1998
First quarter.................................... 48.50 41.13
Second quarter................................... 44.38 34.69
</TABLE>
The Shares are also listed on the London Stock Exchange.
The Company has paid dividends on the Shares semiannually in respect of each
fiscal year since the Company's founding in 1985. The annual dividend is
recommended by the Board of Directors and approved by shareholders at the
general meeting of shareholders required to be held in June of each year.
Immediately following approval thereof at the meeting and authorization of
MPT, dividends are distributed to holders of record at the preceding March 31
in proportion to their respective holdings of Shares at that date. Annual
dividends may be distributed either in cash or, if approved by the
shareholders, in the form of Shares. In addition to annual dividends, the
Company may make cash distributions from its retained earnings to its
shareholders of record as of September 30 in each year by resolution of its
Board of Directors and authorization of MPT.
The following table sets forth the respective shareholder and Board of
Director (interim dividend) approval dates, payment dates and amount of
dividends paid by the Company applicable to each of the six-month periods
indicated.
<TABLE>
<CAPTION>
DIVIDEND
SIX MONTHS ENDED APPROVAL DATE PAYMENT DATE PER SHARE
- ---------------- ----------------- ----------------- --------------------
(YEN) (DOLLARS)
<S> <C> <C> <C> <C>
September 30, 1993.... November 19, 1993 December 13, 1993 (Yen)2,500 $22.94
March 31, 1994........ June 29, 1994 June 30, 1994 (Yen)2,500 $25.38
September 30, 1994.... November 22, 1994 December 13, 1994 (Yen)2,500 $24.92
March 31, 1995........ June 29, 1995 June 30, 1995 (Yen)2,500 $29.49
September 30, 1995.... November 22, 1995 December 13, 1995 (Yen)2,500 $24.57
March 31, 1996........ June 27, 1996 June 28, 1996 (Yen)2,500 $22.84
September 30, 1996.... November 22, 1996 December 13, 1996 (Yen)2,500 $21.98
March 31, 1997........ June 27, 1997 June 30, 1997 (Yen)2,500 $21.78
September 30, 1997.... November 21, 1997 December 12, 1997 (Yen)2,500 $20.50
March 31, 1998........ June 26, 1998 June 29, 1998 (Yen)2,500 $19.24
</TABLE>
30
<PAGE>
See Note 13 of Notes to Consolidated Financial Statements.
The payment, as well as the amount, of dividends in the future will be
subject to the level of the Company's earnings, the Company's financial
condition and other factors, including applicable government regulations.
Under Japanese foreign exchange controls currently in effect, dividends paid
on Shares held by non-residents of Japan may be converted into any foreign
currency and repatriated abroad. Under the terms of the Deposit Agreement
pursuant to which ADRs are issued, the Depositary is required, to the extent
that in its judgment it can convert Japanese yen on a reasonable basis into
U.S. dollars and transfer the resulting dollars to the United States, to
convert all cash dividends that it receives in respect of deposited Shares
into U.S. dollars and to distribute the amount thus received (after deduction
of applicable withholding taxes and expenses of the Depositary) to the holders
of ADRs. See Item 6, "Exchange Controls and Other Limitations Affecting
Security Holders."
On November 24, 1995, the Company capitalized a portion of its additional
paid-in capital and effected a 1.02-for-1 stock split to be distributed to
shareholders of record as of September 30, 1995, thereby distributing the
benefits of the sale of NTT DATA stock to the shareholders of the Company. In
the United States, the distribution was considered by the New York Stock
Exchange as a stock dividend effected in the form of a stock split. See Note
13 of Notes to Consolidated Financial Statements.
For a discussion of the tax treatment of dividends paid to US Holders of
ADSs, see Item 7, "Taxation."
ITEM 6--EXCHANGE CONTROLS AND OTHER LIMITATIONS AFFECTING SECURITY
GENERAL
The Foreign Exchange and Foreign Trade Control Law of Japan, as amended, and
the cabinet orders and ministerial ordinances issued thereunder (collectively,
the "Foreign Exchange Regulations") govern certain matters relating to the
acquisition and holding of shares of equity securities of Japanese
corporations by "non-residents of Japan" and "foreign investors" (as defined
below).
"Non-residents of Japan" are defined as individuals who are not resident in
Japan and corporations whose principal offices are located outside Japan.
Generally, branches and other offices of Japanese corporations located outside
Japan are regarded as non-residents of Japan, but branches and other offices
of non-resident corporations located within Japan are regarded as residents of
Japan. "Foreign investors" are defined to be (i) individuals not resident in
Japan, (ii) corporations which are organized under the laws of foreign
countries or whose principal offices are located outside Japan, and (iii)
corporations not less than 50% of the shares of which are held by (i) and/or
(ii) or a majority of the officers (or officers having the power of
representation) of which are non-resident individuals.
ACQUISITION OF SHARES
Acquisition by a non-resident of Japan of shares of stock of a Japanese
corporation from a resident of Japan generally used to require prior
notification by the acquiring person to the Minister of Finance ("MOF"). An
amendment to the Foreign Exchange and Foreign Trade Control Law was enacted
and took effect as from April 1, 1998. This amendment abolished the prior
notification requirement to be substituted by a subsequent reporting
requirement.
Notwithstanding the foregoing, if the proposed transaction falls within the
category of "inward direct investment", the transaction is subject to
different regulations. The term "inward direct investment" in relation to
transactions in shares means in relevant part: acquisition of shares of a
listed corporation by a foreign investor (whether from a resident, a non-
resident or any other foreign investor) the result of which would be such
investor's holding directly or indirectly 10% or more of the total outstanding
shares of such corporation or (if such foreign investor already holds 10% or
more of the total outstanding shares of such corporation) acquisition of
additional shares in such corporation.
31
<PAGE>
Except in certain cases which are prescribed by the law as requiring prior
notification (acquisition of the Shares of the Company being included in this
category), whenever an inward direct investment is made, the foreign investor
who makes such investment must make a report to the MOF and other Ministers
having jurisdiction over the business of the issuer of the shares within 15
days from the acquisition. When a prior notification is required, the said
Ministers may recommend the modification or abandonment of the proposed
acquisition and, if the recommendation is not accepted, order its modification
or prohibition.
AMERICAN DEPOSITARY SHARES
Neither the deposit of Shares by a non-resident of Japan, the issuance of
ADRs evidencing the ADSs created by such deposit in exchange therefor nor the
withdrawal of the underlying Shares upon surrender of ADRs is subject to any
formalities or restrictions referred to under "Acquisition of Shares" above,
except where as a result of such deposit or withdrawal the aggregate number of
Shares held by the Depositary or the holder surrendering ADRs, as the case may
be, would be 10% or more of the total outstanding Shares, in which event prior
notification may be required as noted under "Acquisition of Shares" above.
DIVIDENDS AND PROCEEDS OF SALE
Under the Foreign Exchange Regulations, dividends paid on, and the proceeds
of sales in Japan of, Shares held by non-residents of Japan may in general be
converted into any foreign currency and repatriated abroad. The acquisition of
Shares by non-resident shareholders by way of stock split is not subject to
any notification requirements.
REPORTING OF SUBSTANTIAL SHAREHOLDINGS
The Securities and Exchange Law requires any person who has become,
beneficially and solely or jointly, a holder of more than 5% of the total
issued shares of a company listed on any Japanese stock exchange to file with
the MOF within five business days a report concerning such shareholdings. A
similar report must also be made in respect of any subsequent change of 1% or
more in any such holding. For this purpose, shares issuable to such person
upon conversion of convertible securities or exercise of share subscription
warrants are taken into account in determining both the number of shares held
by such holder and the issuer's total issued share capital. Copies of each
such report must also be furnished to the issuer of such shares and all
Japanese stock exchanges on which the shares are listed.
RESTRICTIONS ON FOREIGN OWNERSHIP
Pursuant to an amendment to the NTT Law which became effective as of August
1, 1992, foreign nationals and foreign corporations, which were previously
prohibited from owning the Shares, have been allowed to own Shares. However,
the aggregate amount of the Company's voting rights which may be owned by:
(i) any person who does not have Japanese nationality;
(ii) any foreign government or any of its representatives;
(iii) any foreign juridical person or association; and
(iv) any juridical person or association;
(x) which owns 10% or more of the Company's voting rights and
(y) 10% or more of the voting rights of which are owned by the
persons or bodies listed in (i) through (iii) above
(the proportion of the Company's voting rights in this case is determined
by multiplying the proportion expressed in (x) by that expressed in (y))
must be less than 20% of the Company's total voting rights. The Company is
prohibited from registering ownership of Shares by such persons in excess of
such limit.
Under the Revision Law, this restriction will continue with respect to
shares of the holding company.
32
<PAGE>
ITEM 7--TAXATION
JAPANESE TAXATION
The Japanese income tax discussion set forth below, prepared by Tomotsune
Kimura & Mitomi, Japanese counsel to the Company, is intended only as a
summary and does not purport to be a complete analysis or listing of all the
potential Japanese tax consequences that may be relevant to the ownership of
Shares or ADSs by a person who is not a resident of Japan.
Generally, a non-resident of Japan (whether an individual or a corporation)
is subject to Japanese withholding tax on dividends paid by Japanese
corporations. Stock splits are not subject to Japanese income tax. However, a
transfer of retained earnings or legal reserve (but, in general, not
additional paid-in capital) to stated capital (whether made in connection with
a stock split or otherwise) is treated as a dividend payment to shareholders
for Japanese tax purposes and is, in general, subject to Japanese income tax.
No such transfer would be necessary in connection with a stock split if the
total par value of the shares in issue after the stock split does not exceed
the stated capital.
Under the Convention between the United States of America and Japan for the
Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect
to Tax on Income dated March 8, 1971 (the "Convention"), as currently in
force, the maximum rate of Japanese withholding tax which may be imposed on
dividends paid to a United States resident or corporation not having a
"permanent establishment" (as defined therein) in Japan is limited to:
(i) 15% of the gross amount actually distributed; or
(ii) if the recipient is a corporation, 10% of the gross amount actually
distributed, if
(a) during the part of the paying corporation's taxable year which
precedes the date of payment of the dividend and during the whole
of its prior taxable year (if any), at least 10% of the voting
shares of the paying corporation were owned by the recipient
corporation, and
(b) not more than 25% of the gross income of the paying corporation
for such prior taxable year (if any) consists of interest or
dividends (as defined therein).
For purposes of the Convention, U.S. holders of ADRs will be treated as
owners of the Shares underlying the ADSs evidenced by the ADRs.
In the absence of any applicable tax treaty, convention or agreement
reducing the maximum rate of withholding tax, the rate of Japanese withholding
tax applicable to dividends paid by Japanese corporations to non-residents of
Japan or non-Japanese corporations is 20%.
Gains derived from the sale outside Japan of Shares or ADSs by a non-
resident of Japan, or from the sale of Shares within Japan by a non-resident
of Japan not having a permanent establishment in Japan, are generally not
subject to Japanese income tax.
Japanese inheritance and gift taxes at progressive rates may be payable by
an individual who has acquired Shares or ADSs as legatee, heir or donee even
though neither the individual nor the deceased nor donor is a Japanese
resident.
Generally, a transfer by a non-resident of Japan of Shares on any Japanese
stock exchange is subject to a Japanese securities transaction tax which is
levied on the transferor at the rate of 0.1% (currently) of the aggregate
transfer prices. A transfer by a non-resident of Japan of ADSs on the NYSE is
not subject to the Japanese securities transaction tax provided the transferor
is outside Japan at the time of the transfer. Non-residents of Japan
interested in trading Shares or ADSs through facilities other than the NYSE
should seek the advice of their own tax advisors as to Japanese securities
transaction tax or other tax consequences.
33
<PAGE>
UNITED STATES TAXATION
The following discussion is based on the advice of Milbank, Tweed, Hadley &
McCloy, United States counsel to the Company, with respect to United States
federal income tax laws presently in force. The discussion summarizes the
principal United States federal income tax consequences of an investment in
the ADSs or Shares, but it is not a full description of all tax considerations
that may be relevant to a decision to purchase ADSs or Shares. In particular,
the discussion is directed only to U.S. holders that will hold ADSs or Shares
as capital assets and that have the United States dollar as their functional
currency. It does not address the tax treatment of U.S. holders that are
subject to special tax rules, such as banks, dealers, insurance companies,
tax-exempt entities and holders of 10% or more of the voting shares of the
Company.
As used herein, "U.S. holder" means a beneficial owner of ADSs or Shares
that is a United States citizen or resident, a domestic corporation or
partnership, a trust subject to the control of a U.S. person and the primary
supervision of a U.S. court, or an estate the income of which is subject to
United States federal income taxation regardless of its source. The term "non-
U.S. holder" refers to any beneficial owner of ADSs or Shares other than a
U.S. holder. If the obligations contemplated by the Deposit Agreement are
performed in accordance with its terms, holders of ADSs (or ADRs evidencing
ADSs) will be treated for United States federal income tax purposes as the
owners of the Shares represented by those ADSs.
Cash dividends (including the amount of any Japanese taxes withheld) paid
with respect to the Shares represented by ADSs generally will be includable in
the gross income of a U.S. holder as ordinary income when the dividends are
received by the Depositary. Dividends paid in yen will be includable in a
United States dollar amount based on the exchange rate in effect on the day of
receipt by the Depositary. Dividends generally will be foreign source income.
Any gain or loss recognized upon a subsequent sale or conversion of the yen
for a different amount will be United States source ordinary income or loss.
Japanese withholding tax paid by or for the account of any U.S. holder may be
used, subject to generally applicable limitations and conditions, as a credit
against the U.S. holder's U.S. federal income tax liability or as a deduction
in computing the U.S. holder's gross income. Dividends will not be eligible
for the dividends-received deduction allowed to corporations. Distributions to
U.S. holders of additional Shares or preemptive rights with respect to Shares
that are made as part of a pro rata distribution to all shareholders of the
Company generally will not be subject to United States federal income tax.
A non-U.S. holder generally will not be subject to United States federal
income or withholding tax on dividends paid with respect to Shares or Shares
represented by ADSs, unless such income is effectively connected with the
conduct by the non-U.S. holder of a trade or business within the United
States.
U.S. holders generally will recognize capital gain or loss on the sale or
other disposition of ADSs or Shares (or preemptive rights with respect to such
Shares) held by the U.S. holder or by the Depositary. U.S. holders will not
recognize gain or loss on deposits or withdrawals of Shares in exchange for
ADSs or on the exercise of preemptive rights. Gain recognized by a U.S. holder
generally will be treated as United States source income. Loss may be treated
as foreign source loss by reference to the source of dividends paid with
respect to the Shares.
A non-U.S. holder of ADSs or Shares will not be subject to United States
federal income or withholding tax on gain from the sale or other disposition
of ADSs or Shares unless such gain is effectively connected with the conduct
of a trade or business within the United States or the non-U.S. holder is an
individual who is present in the United States for at least 183 days during
the taxable year of the disposition and certain other conditions are met.
34
<PAGE>
ITEM 8--SELECTED FINANCIAL DATA
The following data for each of the fiscal years 1994-1998 has been derived
from, and should be read in conjunction with, the financial statements of the
Company. Consolidated balance sheets at March 31, 1997 and 1998, the related
consolidated statements of income, shareholders' equity and cash flows for the
three years ended March 31, 1998 and the notes thereto appear elsewhere in
this annual report.
STATEMENT OF EARNINGS DATA
NIPPON TELEGRAPH AND TELEPHONE CORPORATION
AND ITS SUBSIDIARIES
YEARS ENDED MARCH 31
<TABLE>
<CAPTION>
MILLIONS OF
MILLIONS OF YEN U.S. DOLLARS
----------------------------------------------------------------------------- ------------
1994 1995 1996 1997 1998 1998
-------------- -------------- -------------- -------------- -------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Operating revenues...... (Yen)6,686,976 (Yen)7,043,822 (Yen)7,908,643 (Yen)8,821,782 (Yen)9,450,013 $71,591
Operating expenses...... 6,296,893 6,653,588 7,212,492 8,052,307 8,577,968 64,985
-------------- -------------- -------------- -------------- -------------- -------
Operating income........ 390,083 390,234 696,151 769,475 872,045 6,606
Other, net (mainly rep-
resenting interest and
amortization of bond
discounts and other
charges for debt ex-
penses)................ 215,020 214,334 151,012 259,702 216,513 1,640
Income before income
taxes and minority in-
terest................. 174,621 170,305 545,139 509,773 655,532 4,966
Income taxes............ 91,979 82,429 272,974 260,927 418,276 3,169
Minority interest....... 754 (2,433) (6,124) (11,718) (32,275) (244)
Equity in earnings of
affiliated companies... 442 5,595 7,605 14,329 9,479 72
-------------- -------------- -------------- -------------- -------------- -------
Net Income.............. (Yen) 83,396 (Yen) 85,443 (Yen) 273,646 (Yen) 251,457 (Yen) 214,460 $ 1,625
============== ============== ============== ============== ============== =======
<CAPTION>
YEN U.S. DOLLARS
----------------------------------------------------------------------------- ------------
1994 1995 1996 1997 1998 1998
-------------- -------------- -------------- -------------- -------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Per share of common
stock:
Net income............. (Yen) 5,241 (Yen) 5,370 (Yen) 17,197 (Yen) 15,803 (Yen) 13,478 $ 102
Cash dividends, applica-
ble to earnings of the
year................... (Yen) 4,902 (Yen) 4,902 (Yen) 4,902 (Yen) 5,000 (Yen) 5,000 $ 38
</TABLE>
Note: This financial data for per share of common stock is appropriately
adjusted for any stock split of common stock.
BALANCE SHEET DATA
NIPPON TELEGRAPH AND TELEPHONE CORPORATION
AND ITS SUBSIDIARIES
YEARS ENDED MARCH 31
<TABLE>
<CAPTION>
MILLIONS OF
MILLIONS OF YEN U.S. DOLLARS
------------------------------------------------------------------------------- ------------
1994 1995 1996 1997 1998 1998
--------------- --------------- --------------- --------------- --------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Property, plant and
equipment (net)........ (Yen)10,737,495 (Yen)10,857,314 (Yen)11,136,221 (Yen)11,655,768 (Yen)12,005,362 $90,950
Total assets............ 14,076,677 14,397,961 15,399,448 16,475,094 17,352,531 131,459
Long-term liabilities... 6,699,402 7,175,053 7,397,805 7,956,248 8,306,737 62,930
Total shareholders' eq-
uity................... 4,970,071 5,000,437 5,196,119 5,340,412 5,463,928 41,394
</TABLE>
ITEM 9--MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
INTRODUCTION
Significant changes in the legislative and regulatory framework for
telecommunications in Japan have occurred since 1985, including the
introduction of telecommunications reform laws aimed at promoting
35
<PAGE>
competition in the telecommunications services market. See "Description of
Business--The Company/NTT" and "Description of Business--Regulation" for
information as to the current and possible future impact on NTT and its
results of operations.
In June 1997, the Diet passed the Revision Law which implements a plan
proposed by MPT, accepted in principle by the Company, to reorganize the
Company.
On December 19, 1997 the Ministry of Posts and Telecommunications announced
"the Basic Principles Concerning the Transfer of the Business Activities and
Succession of the Rights and Obligations of Nippon Telegraph and Telephone
Corporation." The Company will prepare "the Implementation Plans Concerning
the Transfer of the Business Activities and Succession of the Rights and
Obligations of Nippon Telegraph and Telephone Corporation" in accordance with
the Basic Principles. Matters concerning the transfer of business, which is
the precondition of reorganization, will be presented to shareholders at the
ordinary general meeting of shareholders in June 1999. See "Description of
Business--Reorganization."
Following the reorganization, the Company will continue to exist as a
holding company. The principal sources of the Company's cash revenues will be
dividends from its subsidiaries. At this time, the ultimate effect of the
implementation of the New Law on the financial position and results of
operations of the Company cannot be determined.
In order to promote further competition in the telecommunications market,
and as part of the Government's overall policy toward deregulation, the
Telecom Business Law was revised in May 1998. Under the revised Law, Type I
Carriers need not obtain approval from MPT but only notify MPT of their rates.
For certain services to be provided by such carriers with "designated
telecommunications facilities" and to be specified in an ordinance of the
Ministry of Posts and Telecommunications, a price-cap system will be
introduced. Under the price-cap system, an index will be annually fixed by
MPT, and if the increase ratio of a new rate does not exceeds such index, such
carriers need not obtain approval from MPT but only notify MPT of their rates.
The revised Law will become effective at a date to be established by Cabinet
order not later than November 7, 1998. It is expected that until the
reorganization, rates for regional telecommunications services provided by the
Company will continue to be subject to MPT approval, while rates for such
services provided by the regional companies after the reorganization will be
subject to the price-cap system. See "Description of Business--Regulation--
Rates."
In June 1997, the Diet revised the Telecom Business Law in an attempt to
promote transparent, fair, prompt and reasonable interconnections. The
conditions upon which network access is offered will be of great significance
to the development of the Japanese telecommunications market. The cost of
interconnection to the Company's network is expected to be a significant part
of the operating costs of competing network operators, and, as competition
grows, increasingly important to NTT.
Following the revision to the Telecom Business Law, the Ministry of Posts
and Telecommunications designated certain telecommunications facilities as the
"designated telecommunications facilities" in December 1997. Certain of the
Company's facilities for its regional telecommunications services were
designated as the "designated telecommunications facilities" due to the
Company's dominant position in the local telecommunications market. The
Company is subject to the special rules applicable under the revised Telecom
Business Law.
In January 1998, the Company submitted its interconnection tariffs to the
MPT for approval in connection with its designated telecommunications
facilities. Such tariffs were approved in March 1998. See "Description of
Business--Regulation--Interconnection."
In May 1998, the U.S. Government and the Japanese Government reached an
agreement to introduce Long-run Incremental Cost Methodology for the setting
of interconnection charges. Specifically, it was agreed that:
(i) a bill to revise the Telecom Business Law will be proposed to the
regular Diet Session in the spring of 2000 in order to implement Long-
run Incremental Cost Methodology as early as possible;
36
<PAGE>
(ii) due consideration will be paid to ensuring that the implementation of
Long-run Incremental Cost Methodology would cause no disruption in the
provision of universal service and that it would not prove destructive
to end user rates and business operations of incumbent local
operators;
(iii) prior to the introduction of Long-run Incremental Cost Methodology
based charges, the Japanese Government will, within the scope of its
existing authority, promote the reduction of interconnection charges
as much as possible.
At this time, the ultimate results of the introduction of Long-run
Incremental Cost Methodology on the financial position and results of
operations of the Company cannot be determined. See "Description of Business--
Regulation--Interconnection."
The Company is currently subject to regulations under the Telecom Business
Law as described above and accordingly, has adopted Statements of Financial
Accounting Standards No. 71 ("SFAS 71"), "Accounting for the Effects of
Certain Types of Regulation", which requires that the effects of the rate-
making process be recorded. Such effects concern mainly the time at which
various items enter into the determination of net income in order to follow
the principle of matching costs and revenues. These timing differences can
create "regulatory assets" and these regulatory assets of (Yen)847 billion at
March 31, 1998 are included in the consolidated financial statements (see
"Summary of significant accounting policies--Accounting under regulation" in
Note 2 of Notes to Consolidated Financial Statements). Management of the
Company believes that the Company currently meets the criteria for continued
application of SFAS 71 but will continue to evaluate significant changes in
the Japanese regulatory and competitive environment to assess the Company's
overall compliance with SFAS 71.
NTT recognizes the potential for the Year 2000 Problem to disrupt the smooth
operation of computer systems. To mitigate such risk, the Company began an in-
house investigation in March 1995, and in the following November established a
task force to promote Company-wide preparations based on the efficient sharing
of related information. Management has set a target of June 1999 to complete
necessary changes to network elements and intracompany support systems, and
work is proceeding smoothly. With a number of favorable conditions, such as
the ability of its network elements to handle a four digit century and the
conversion of intracompany support systems to a four digit century as
intercorporate standards in 1992, management estimates that costs related to
the Year 2000 Problem for the Company will be approximately (Yen)4 billion.
However, this estimate may be revised should problems occur from outside
sources or other unforeseen circumstances. Management estimates that costs
related to the Year 2000 Problem for NTT will come to approximately (Yen)5.1
billion.
RESULTS OF OPERATIONS
In fiscal years 1998 and 1997, operating revenues increased 7.1% and 11.5%,
respectively. In fiscal year 1998, growth in cellular telephone services and
digital-related demand, including ISDN services, high-speed digital leased
circuit services and OCN services caused by Internet access, overcame the
negative impact of rate reductions for long-distance and leased circuit
services and a reduction in interconnection charges paid by NCCs for network
access. In fiscal year 1997, the increase was caused mainly by growth in
revenues from cellular telephone services and digital-related demand.
Operating income increased 13.3% in fiscal year 1998, following an increase of
10.5% in fiscal year 1997. Net income declined 14.7% in fiscal year 1998 and
declined 8.1% in fiscal year 1997.
Because NTT's services are integrated, it is not practical to segregate and
quantify the effects of factors related to sales volume and factors related to
price on operating revenues in a wholly meaningful fashion. NTT has achieved
significant cost reductions since incorporation and has recorded increased
revenues despite substantial rate reductions.
Rate reductions are affecting revenues from NTT's long-distance and leased
circuit services. In addition, reforming the system for charging NCCs for
accessing NTT's network has had an adverse impact on interconnection revenues.
37
<PAGE>
The Company has implemented the following rate reductions for long-distance
services from fiscal year 1994 through fiscal year 1998:
<TABLE>
<CAPTION>
ESTIMATED ANNUAL IMPACT
ON NTT'S REVENUE BASED
ON THE VOLUME OF SERVICES
FISCAL YEAR* EFFECTIVE DATE AT THE EFFECTIVE DATE
------------ -------------- -------------------------
(BILLIONS OF YEN)
<S> <C> <C>
1994................................ October 1993 (Yen)270
1996................................ March 1996 (Yen) 60
1997................................ February 1997 (Yen) 60
1998................................ February 1998 (Yen) 80
</TABLE>
- --------
* There were no rate reductions during fiscal year 1995.
As the effective dates have not coincided with the beginning of fiscal
years, the estimated impact does not fully correspond with the impact for the
fiscal years in which the changes went into effect. In addition, demand is
affected by such factors as the marketing strategies of competitors and
general economic conditions.
The following table sets forth the Company's end-to-end traffic of fixed-
line telephone and ISDN services:
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31,
--------------------------------
1996 1997 1998
---------- ---------- ----------
NUMBER OF CALLS (MILLION CALLS)
<S> <C> <C> <C>
Fixed line telephone........................ 78,201 79,891 73,668
ISDN (Voice mode)........................... 904 1,613 3,569
ISDN (Digital mode)......................... 758 1,276 2,151
---------- ---------- ----------
Fixed line telephone and ISDN total......... 79,863 82,780 79,389
========== ========== ==========
<CAPTION>
YEARS ENDED MARCH 31,
--------------------------------
1996 1997 1998
---------- ---------- ----------
HOURS OF USE (MILLION HOURS)
<S> <C> <C> <C>
Fixed line telephone........................ 3,535 3,441 3,240
ISDN (Voice mode)........................... 29 56 122
ISDN (Digital mode)......................... 27 65 168
---------- ---------- ----------
Fixed line telephone and ISDN total......... 3,591 3,561 3,531
========== ========== ==========
</TABLE>
The Company increased the rate it charges for its directory assistance
services in October 1995. The Company also increased rates for public
telephone call charges in fiscal years 1994 and 1995. These factors had the
effect of increasing revenues approximately (Yen)100 billion per 12-month
period. In February 1995, the Company increased its monthly charge for basic
exchange lines. This factor had the effect of increasing revenues
approximately (Yen)190 billion per 12-month period. The Company applied for a
further revision of its directory assistance services charges to MPT in
December 1997. This revision was partially implemented in May 1998 following
the approval of MPT and will be further implemented in May 1999. This revision
is expected to have the effect of increasing the Company's revenues by (Yen)15
billion per 12-month period.
38
<PAGE>
The following table sets forth a breakdown by category of NTT's operating
revenues for fiscal years 1996, 1997 and 1998.
<TABLE>
<CAPTION>
PERCENT INCREASE
YEARS ENDED
YEARS ENDED MARCH 31, MARCH 31,
---------------------------------------------- ------------------
1996 1997 1998 1998 1997 1998
---------- ---------- ---------- ------------- -------- --------
(BILLIONS OF YEN) (BILLIONS OF
U.S. DOLLARS)
<S> <C> <C> <C> <C> <C> <C>
Operating Revenues
Telephone............... (Yen)5,558 (Yen)6,038 (Yen)6,306 $47.8 8.6% 4.4%
Telegraph............... 97 99 92 0.7 2.0 6.6
Leased Circuit.......... 393 429 488 3.7 9.0 13.9
Data Communication fa-
cility................. 301 338 373 2.8 12.1 10.3
Sale of Telecommunica-
tion equipment......... 606 890 970 7.3 46.8 9.0
Miscellaneous........... 953 1,028 1,221 9.3 7.9 18.7
---------- ---------- ---------- ----- -------- --------
(Yen)7,909 (Yen)8,822 (Yen)9,450 $71.6 11.5 7.1
========== ========== ========== ===== ======== ========
</TABLE>
FISCAL YEAR 1998 COMPARED WITH FISCAL YEAR 1997
OPERATING REVENUES
NTT's operating revenues are divided into the following six service
categories: telephone services, telegraph services, leased circuit services,
data communication facility services, sale of telecommunication equipment and
other services.
NTT believes that the competition in telecommunications markets has moved
from being primarily price-based to requiring companies to promote the quality
and variety of services provided. To compete more effectively, NTT has
introduced a range of new services, including discount services designed to
provide optional calling plans to different customer segments. In addition,
NTT has continued to take steps to enhance operational efficiency and fulfill
customer satisfaction.
TELEPHONE SERVICES
Operating revenues from telephone services increased 4.4% in fiscal year
1998 to (Yen)6,306 billion, or 66.7% of operating revenues. NTT's telephone
services consist of telephone subscriber, cellular telephone, PHS, public
telephone and other services. Growth during fiscal year 1998 was supported by
a sharp rise in cellular telephone subscribers, offsetting a decline in fixed-
line telephone subscribers amid a mature market and a shift to such services
as the Company's INS-Net services.
(i) Telephone Subscriber Services
Telephone subscriber service is NTT's principal business activity. Owing to
an increase in sales of INS-Net services and cellular telephones, the number
of subscriber lines in use decreased 1.04 million from the previous fiscal
year to 60.19 million subscriber lines at fiscal year-end.
Although the fiscal year marked the first time that the total number of
subscriber lines at the end of a fiscal year has decreased from the previous
year, management estimates that approximately 80% of the increase in ISDN
subscribers is attributable to a shift from telephone subscribers, and when
combined with ISDN services, the number of subscribers recorded year-on-year
growth. The penetration rate at the end of the fiscal year was approximately
47.7 subscriber lines per 100 inhabitants.
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31,
-----------------------
1996 1997 1998
------- ------- -------
<S> <C> <C> <C>
Telephone subscriber lines (thousands): 60,774 61,223 60,186
Fixed-line telephone Penetration rate*.................. 48.4 48.6 47.7
</TABLE>
- --------
* Subscriber lines per 100 inhabitants.
39
<PAGE>
In fiscal year 1998, the Company's end-to-end telephone traffic decreased
from the previous year in terms of number of calls as well as hours of use.
Management attributes the decrease in network traffic to declines in telephone
subscribers and the sluggish Japanese economy. The number of calls and hours
of use decreased slightly when combined with ISDN.
In February 1998, the Company reduced the rate for daytime calls over 100
kilometers from (Yen)110 to (Yen)90 for a three-minute call. This rate
reduction had a negative impact on operating revenues during fiscal year 1998
of approximately (Yen)80 billion.
The Company applied for a further revision of its directory assistance
service charges to the MPT in December 1997. This revision was partially
implemented in May 1998 following the approval of the MPT and will be further
implemented in May 1999. This revision is expected to have the effect of
increasing the Company's revenues by (Yen)15 billion per 12-month period.
The interconnection of local switches with local and long-distance carriers
began during the fiscal year under review through the Company's Group Centers
(GCs, or local switching offices), bringing direct competition to the local
call market. The Company responded with two competitive new discounted
services, "Area Plus" and "Time Plus."
Interconnection charges were reduced further in March 1998 applicable to
calls made from April 1997. The adverse impact on interconnection charge
revenues during fiscal year 1998 was approximately (Yen)62 billion.
(ii) Cellular Telephone Services
In fiscal year 1998, the market for cellular telephone services continued to
expand and total cellular telephone subscribers in Japan reached 31.5 million,
recording year-on-year growth of 51.1%. The number of NTT DoCoMo's subscribers
reached nearly 18.0 million at March 31, 1998, a 64.1% increase from the
previous fiscal year.
The following table sets forth information regarding NTT DoCoMo's
subscribers and its market share:
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31,
-----------------------------------
1994 1995 1996 1997 1998
----- ----- ----- ------ ------
<S> <C> <C> <C> <C> <C>
Cellular telephone subscribers (thou-
sands).................................. 1,323 2,206 4,936 10,960 17,984
Digital service (thousands)............ 6 380 2,556 9,445 17,706
Market share........................... 62.1% 51.0% 48.4% 52.5% 57.0%
</TABLE>
In fiscal year 1998, NTT DoCoMo's cellular telephone traffic continued to
grow from the previous year in terms of number of calls as well as hours of
use reflecting the expansion of its market.
The following table sets forth information regarding NTT DoCoMo's cellular
telephone traffic:
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31,
-------------------------
1996 1997 1998
------- ------- -------
<S> <C> <C> <C>
Hours of use (millions).............................. 121 252 448
</TABLE>
(iii) PHS Services
Initially, PHS services grew rapidly by providing inexpensive services with
small and lightweight terminals. In September 1997, the number of subscribers
reached seven million. Since October 1997, however, the number of customers
has steadily fallen and liabilities of NTT Personal have exceeded its assets.
Consequently, NTT Personal Group began a review of its operations and major
shareholders of NTT Personal Group also began to review the PHS businesses. As
a result of its deliberations, NTT concluded that it would be difficult to
continue PHS services through NTT Personal Group and decided to transfer its
PHS businesses to NTT DoCoMo. NTT
40
<PAGE>
expects to complete the transfer within fiscal year 1999 and to liquidate NTT
Personal Group following the transfer. NTT believes the transfer to NTT DoCoMo
will create synergetic effects and improve its PHS business operations, and
will allow NTT DoCoMo to develop new services based on the features of PHS.
The following table sets forth information regarding NTT Personal Group's
subscribers and its market share:
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31,
------------------------
1996 1997 1998
------- ------- -------
<S> <C> <C> <C>
PHS subscribers (thousands)........................... 393 1,850 1,906
Market share.......................................... 26.1% 30.7% 29.5%
</TABLE>
TELEGRAPH SERVICES
Operating revenues from telegraph services declined 6.6% in fiscal year 1998
to (Yen)92 billion, accounting for 1.0% of operating revenues. This revenue
category includes both telegram and telex services.
The number of telegrams sent declined 6.6% to 37,564 thousand telegrams, as
efforts to improve customer service, including the introduction of "D-MAIL," a
telegram service that makes use of the Internet, were unable to offset a
decline of 8.4% in telegrams for weddings and condolences to 27,360 thousand
telegrams. Kanji telegrams (Chinese character telegrams) accounted for
approximately 90% of all telegrams sent during the term.
In telex services, the number of subscribers continued to decline during the
fiscal year, reflecting the ongoing shift toward the use of facsimile
machines, e-mail and other alternative means of communication.
The following table sets forth information regarding the number of telegrams
sent and telex subscribers:
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31,
----------------------------------
1994 1995 1996 1997 1998
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Telegrams (thousands)........................ 44,997 43,288 41,385 40,198 37,564
Telex subscribers (thousands)................ 20 18 15 12 10
</TABLE>
LEASED CIRCUIT SERVICES
Operating revenues from leased circuit services grew 13.9% in fiscal year
1998 to (Yen)488 billion, accounting for 5.2% of operating revenues. Strong
demand for high-speed digital leased circuit services was driven by the trend
toward rapid, digital telecommunications networks and LAN/WAN construction in
the corporate sector. Sales growth was supported by "Digital Access 64," a
low-cost service with simplified functions, and "Digital Access 128," a new
service launched during the fiscal year.
The number of high-speed digital circuits climbed 57.5% to 169,000. However,
the number of conventional leased circuits decreased 6.7% to 902,000 as
customers switched to high-speed communications services.
In an effort to rebalance its rate structure in its leased circuit services,
the Company implemented tariff revisions for the services. Revisions took
effect in September 1995, April 1996, April 1997 and April 1998. These
revisions are estimated to have the effect of decreasing the Company's
revenues by (Yen)42 billion per 12-month period.
The following table sets forth information regarding the Company's leased
circuit services:
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31,
---------------------------
1994 1995 1996 1997 1998
----- ----- ----- ---- ----
<S> <C> <C> <C> <C> <C>
Conventional leased circuits (thousands)............ 1,018 1,025 1,001 967 902
High-speed digital circuits (thousands)............. 20 31 57 107 169
Digital Access 64/128 (thousands)................. -- -- -- 7 59
</TABLE>
41
<PAGE>
DATA COMMUNICATION FACILITY SERVICES
Operating revenues from data communication facility services rose 10.3% in
fiscal 1998 to (Yen)373 billion, or 3.9% of operating revenues. During the
fiscal year, corporations, national and local governments, and financial
institutions continued to steadily increase their use of data communications
services. In addition to growing revenues from previously established systems,
services launched during the second half of fiscal year 1997 and the beginning
of fiscal year 1998 contributed to revenue growth. NTT also prioritized the
marketing of such services as "STAR-ACE," a multi-shared banking system for
regional financial institutions and "SCAW Design Series," which handles core
fields of corporate operations such as finance and production, as important
strategic products.
SALE OF TELECOMMUNICATION EQUIPMENT
Operating revenues from the sale of telecommunication equipment increased
9.0% in fiscal year 1998 to (Yen)970 billion, which was 10.3% of operating
revenues. Sales of stand-alone telephones and other products to consumers were
sluggish, and sales of PHS terminals declined 8.5% as a result of competition
from cellular telephones. However, sales of equipment to support LAN and ISDN
services were strong, and sales of cellular telephone terminals rose 12.4%,
reflecting robust subscriber growth and the introduction of attractive new
models.
OTHER SERVICES
Operating revenues from other services increased 18.7% in fiscal year 1998
to (Yen)1,221 billion, or 12.9% of operating revenues. Other services provided
by NTT include Integrated Services Digital Network (ISDN), digital data
exchange, facsimile network (F-Net), pocket pager, Open Computer Network (OCN)
services and system development services.
The following table sets forth information regarding NTT's subscribers to
other services.
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31,
-----------------------
1996 1997 1998
------- ------- -------
<S> <C> <C> <C>
Integrated Services Dig-
ital Network (ISDN)
subscribers:
INS-Net 64 (thousands).. 510 1,037 2,286
INS-Net 1500 (thou-
sands)................. 10 22 34
Digital data exchange
(DDX) services:
Digital Data Exchange--
Packet (DDXP).......... 33,424 31,821 30,625
Digital Data Exchange--
Telephone Packet
(DDXTP)................ 432,457 444,788 446,522
Frame relay (Super Relay
FR).................... 565 3,942 15,701
Pocket pager subscribers
(thousands)............ 6,328 5,838 3,908
Facsimile network sub-
scribers (thousands)... 812 1,015 1,127
</TABLE>
(i) ISDN
Growth in ISDN services is being driven by strong demand in the corporate
sector and the growing penetration of Internet services in the home. The
Company's ISDN services comprise INS-Net 64 and INS-Net 1500.
In July 1997, the Company launched "INS-Net 64 Light" which makes ISDN more
accessible to consumers by allowing installation expenses to be included in
monthly charges, eliminating up-front financial outlays. "Phoenix mini,"
another new service, leverages the benefits of INS-Net to offer low-cost video
telephone services affordable to general consumers.
As a result of the above factors, the number of INS-Net 64 subscribers
climbed 120.4% to 2.29 million, and the number INS-Net 1500 subscribers rose
55.9% to 33.6 thousand. ISDN traffic also recorded strong growth.
42
<PAGE>
Robust growth in the number of ISDN circuits, combined with higher basic
service charges, offset declines in conventional telephone service revenues.
The following table sets forth information regarding NTT's ISDN subscribers:
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31,
--------------------------
1994 1995 1996 1997 1998
---- ---- ---- ----- -----
<S> <C> <C> <C> <C> <C>
INS-Net 64 (thousands)............................... 235 337 510 1,037 2,286
INS-Net 64 Light (thousands)......................... -- -- -- -- 86
INS-Net 1500 (thousands)............................. 5 6 10 22 34
</TABLE>
(ii) OCN
Amid dramatic growth in computer communications such as the Internet and
connections between corporate LANs, the number of the Company's OCN
subscribers jumped 109 times to 158.7 thousand at fiscal year-end. During
fiscal year 1998, the Company added service menus to fulfill customers'
diversifying requirements, such as "OCN Standard" and "OCN Enterprise," new
dedicated access services, and "OCN Dial Access Light," a dial-up access with
a new rate plan. The Company also expanded service areas in accordance with
demand and provided a greater range of value-added services.
OPERATING EXPENSES
Operating expenses increased 6.5% in fiscal year 1998 to (Yen)8,578 billion.
Personnel expenses were (Yen)2,346 billion, an increase of 3.5%. Although the
total number of employees at the end of fiscal year 1998 was 226,000, a
decline of 4,000 compared with the end of fiscal year 1997, an increase in
employees' salaries and severance-related expenses led to higher personnel
expenses.
Depreciation, amortization and maintenance costs increased (Yen)186 billion
to (Yen)3,185 billion. Depreciation recorded by the Company declined, despite
increases in depreciable assets related to digitizing the Company's network
and investment in facilities for providing ISDN services, as a result of lower
depreciation of metal cables following progress in converting to an optical
access network. However, increases in depreciation at NTT DoCoMo, reflecting
aggressive capital investment to meet strong demand, exceeded declines at the
Company.
Other operating expenses increased (Yen)260 billion to (Yen)3,047 billion,
due to such factors as growth in agency commissions and expenses for terminal
equipment as a result of high subscriber growth at NTT DoCoMo.
As a result of the above factors, operating income increased (Yen)103
billion, or 13.3%, to (Yen)872 billion.
NET INCOME
Income tax increased as a result of the establishment of a valuation
allowance related to deferred tax assets. Management took this step in
recognition that the operating loss carryforwards for tax purposes of NTT
Personal Group would not likely be realized given continued losses associated
with PHS businesses. This and other factors offset growth in operating income.
Consequently, net income fell 14.7% to (Yen)214.5 billion.
FISCAL YEAR 1997 COMPARED WITH FISCAL YEAR 1996
OPERATING REVENUES
TELEPHONE SERVICES
Operating revenues from telephone services increased 8.6% in fiscal year
1997 to (Yen)6,038 billion, accounting for 68.4% of operating revenues.
Operating revenues from cellular telephone services continued to record strong
growth. The number of cellular telephone subscribers as of fiscal year-end
grew 122.0% to 10,960 thousand. Growth in cellular telephone service revenues
on NTT's network offset the adverse impact of the following rate
43
<PAGE>
reductions. The rates on long-distance, daytime calls over 160 kilometers were
reduced from (Yen)180 to (Yen)140 per three-minute call in March 1996 and
daytime calls over 100 kilometers were reduced from (Yen)140 to (Yen)110 in
February 1997. These reductions had an adverse impact on operating revenues of
approximately (Yen)120 billion. Interconnection charges were reduced,
effective April 1996 for long-distance and PHS NCCs and effective December
1996 for cellular NCCs. In fiscal year 1997, the adverse impact on access
revenues, which the Company receives from long-distance, cellular, PHS,
international and local NCCs, was approximately (Yen)101 billion.
TELEGRAPH SERVICES
Operating revenues from telegraph services grew 2.0% in fiscal year 1997 to
(Yen)99 billion, or 1.1% of operating revenues. Although the number of
telegrams sent declined 2.9% to 40,198 thousand telegrams, growth in such
value added services as kanji telegrams (Chinese character telegrams) resulted
in an increase in the average price per telegram sent. Kanji telegrams
accounted for approximately 91% of all telegrams sent during the term.
LEASED CIRCUIT SERVICES
Operating revenues from leased circuit services in fiscal year 1997 were
(Yen)429 billion, accounting for 4.9% of operating revenues. These revenues
increased 9.0% as compared with fiscal 1996, despite a rate reduction in
September 1995, which had an adverse impact of approximately (Yen)15 billion
in fiscal year 1997. The number of high-speed digital circuits grew 87.5% to
107 thousand at the end of fiscal year 1997, and the number of conventional
leased circuits decreased 3.4% to 967 thousand.
DATA COMMUNICATION FACILITY SERVICES
Operating revenues from data communication facility services increased 12.1%
in fiscal year 1997 to (Yen)338 billion, accounting for 3.8% of operating
revenues. Strong demand was recorded from national and local governments and
financial institutions. Growth in operating revenues from data communication
facility services was also due in part to positive result from NTT DATA's
aggressive marketing of the strategically important product "STAR-ACE," a
shared system for regional banks.
SALE OF TELECOMMUNICATION EQUIPMENT
Operating revenues from sale of telecommunication equipment grew 46.8% in
fiscal year 1997 to (Yen)890 billion, or 10.1% of operating revenues. Growth
was supported primarily by the sale of cellular telephone equipment and
telephone systems for corporate use.
OTHER SERVICES
Operating revenues from other services (miscellaneous) rose 7.9% in fiscal
year 1997 to (Yen)1,028 billion, accounting for 11.7% of operating revenues.
The number of INS-Net 64 (64 kilobit per second) lines at the end of the
fiscal year was 1,037,000, an increase of 103.3% from a year earlier, and the
number of INS-Net 1500 lines grew 111.2% to 22,000 lines.
OPERATING EXPENSES
Operating expenses increased 11.6% during fiscal year 1997 to (Yen)8,052
billion. Personnel costs were (Yen)2,267 billion, a decrease of 0.8% from
fiscal year 1996. The total number of employees at the end of fiscal year 1997
was 230,000, compared with 231,000 a year earlier. This decrease offsets an
average 2.8% increase in employee salaries. The number of employees of the
Company at the end of fiscal year 1997 was 182,000, accounting for 79.1% of
the total workforce of 230,000. Since its privatization in 1985, the Company
has striven to increase its operational efficiency through such efforts as
rationalizing companywide business processes and eliminating
44
<PAGE>
sales offices. The Company has also been restructured by reallocating human
resources, scaling back hiring, and offering voluntary retirement plans. As a
result of these efforts, personnel reductions of 3,000 Company employees were
achieved in fiscal year 1997.
Depreciation, amortization and maintenance costs increased 6.7% in fiscal
year 1997 to (Yen)2,999 billion. Of this amount, depreciation and amortization
was (Yen)2,093 billion, an increase of 9.6%. This increase reflected higher
investments made in recent periods to convert to optical access networks, for
ISDN circuits and for cellular telephone services. Maintenance costs in fiscal
year 1997 were (Yen)578 billion, an increase of 1.8%. Other operating expenses
for fiscal year 1997 were (Yen)2,787 billion, an increase of 31.6%. Expenses
related to the disposal of fixed assets were (Yen)327 billion, a decrease of
1.4% and research and development expenses amounted (Yen)329 billion, an
increase of 3.3%.
As a result of the above factors, operating income increased 10.5% to
(Yen)769 billion.
NET INCOME
Other expenses grew 71.1% in fiscal year 1997 to (Yen)245 billion. Interest
and amortization of bond discounts and issue costs totaled (Yen)254 billion, a
decrease of 5.3%. Income before income taxes was (Yen)524 billion, a decrease
of 5.2%, and net income was (Yen)251 billion, a decrease of 8.1%.
LIQUIDITY AND CAPITAL RESOURCES
FISCAL YEAR 1998 COMPARED WITH FISCAL YEAR 1997
FINANCING
Net cash provided by operating activities was (Yen)2,731 billion in fiscal
year 1998, compared with (Yen)2,651 billion in fiscal year 1997. Net cash
provided by operating activities during fiscal year 1998 was not sufficient to
make payments for property, plant and equipment and dividends. The shortfall
was made up for by raising long-term debt. Net cash used in investing
activities was (Yen)2,909 billion, an increase of (Yen)47 billion from fiscal
year 1997.
The high level of capital investment in fiscal year 1998 was used to
strengthen multimedia services capacity and enhance the quality of telephone
and non-telephone services, mainly through the installation of digital
switching exchanges and equipment and facilities necessary to establish a
nationwide fiber-optic network. On December 17, 1998, the Company's domestic
telecommunications network was completely digitized.
NTT expects to continue the current level of capital investment in fiscal
year 1999 and in subsequent fiscal years, because it will get sufficient cash
from operating activities. This investment will be used for the modernization
of the Japanese telecommunications network and the capital investment
requirements of its subsidiaries.
Net cash provided by financing activities for fiscal year 1998 was (Yen)270
billion, compared with (Yen)393 billion in fiscal year 1997. The Company has
established a corporate goal of controlling outstanding debt and realizing
more efficient sources of funds from both domestic and overseas markets.
Long-term debt in fiscal year 1998 was (Yen)1,048 billion, compared with
(Yen)1,137 billion in fiscal year 1997. This debt included bond offerings in
Japanese yen and U.S. dollars. For a further description of the Company's
debt, see Note 9 of the Notes to Consolidated Financial Statements.
CAPITAL RESOURCES
As of March 31, 1998, NTT had cash and cash equivalents (investments with
principal maturities of less than three months) of (Yen)913 billion, compared
with (Yen)821 billion at March 31, 1997. Cash equivalents represent a
45
<PAGE>
temporary cash surplus to repay debts and for working capital and capital
investments. Accordingly, the balance of cash equivalents will fluctuate year-
by-year depending on particular funding and working capital requirements. The
ratio of interest-bearing debt (short-term borrowings and long-term debt) to
shareholders' equity increased to 110.9% at March 31, 1998, compared with
104.8% at March 31, 1997.
CAPITAL INVESTMENTS
Capital investments for property, plant and equipment and intangible assets,
computed on the basis of all cash investments and other considerations, during
fiscal year 1998 were (Yen)2,962 billion, compared with (Yen)3,078 billion in
fiscal year 1997.
To meet more sophisticated, diverse and global needs of customers, the
majority of such investments were made to increase digitization, including the
installation of digital exchanges and optical fiber cables. Other areas of
investment included the promotion of research and development and the renewal
and improvement of existing facilities, such as telephone subscriber lines,
public telephones that use magnetic cards and leased circuit lines.
As of March 31, 1998, NTT had outstanding commitments for the purchase of
property, plant, equipment and other assets of approximately (Yen)501 billion
(US$3,792 million). Such expenditures are to be made generally for the purpose
of capital investment during fiscal year 1999. NTT expects to obtain the funds
needed for such commitments through net cash provided by operating activities.
FISCAL YEAR 1997 COMPARED WITH FISCAL YEAR 1996
FINANCING
Net cash provided by operating activities was (Yen)2,651 billion in fiscal
year 1997, compared with (Yen)2,307 billion in fiscal year 1996, an increase
of 14.9%. Net cash provided by operating activities during fiscal year 1997
was adequate to make payments for property, plant and equipment and dividends.
Surplus cash from operating activities and additional cash provided by the
issuance of long-term debt was used to invest in affiliates, acquire
intangible fixed assets and repay interest-bearing debt. Net cash used in
investing activities was (Yen)2,861 billion, an increase of (Yen)575 billion
from fiscal year 1996.
The high level of capital investment was aimed at enhancing the quality of
telephone and non-telephone services, primarily through the installation of
digital switching exchanges, digital transmission lines, including fiber-optic
cables to private homes, and other equipment necessary to establish a
nationwide fiber-optic network.
NTT expects to continue the current level of capital investment in fiscal
year 1998 and in subsequent fiscal years, subject to sufficient cash
generation from operating activities, the national requirements for the
modernization of the Japanese telecommunications network and the capital
investment requirements of its subsidiaries.
Net cash provided by financing activities for fiscal year 1997 was (Yen)393
billion, compared with (Yen)36 billion in fiscal year 1996. The Company has
established a corporate goal of controlling outstanding debt and realizing
more efficient sources of funds from both domestic and overseas markets.
Since its privatization, NTT has made efforts, as an issuer, to improve the
efficiency of the bond market. As part of those efforts, NTT introduced the
fixed price re-offer method to the market in fiscal year 1992. NTT continues
to make efforts to improve the Japanese bond market and further reduce its
issuance costs.
In fiscal year 1997, long-term debt raised was (Yen)1,137 billion, compared
with (Yen)898 billion in fiscal year 1996. This debt included bond offerings
in Japanese yen, U.S. dollars and other currencies.
46
<PAGE>
CAPITAL RESOURCES
As of March 31, 1997, NTT had cash and cash equivalents (investments with
principal maturities of less than three months) of (Yen)821 billion, compared
with (Yen)639 billion at March 31, 1996. Cash equivalents represent a
temporary cash surplus to repay debts and for working capital and capital
investments. Accordingly, the balance of cash equivalents will fluctuate year-
by-year depending on particular funding and working capital requirements. The
ratio of interest-bearing debt (short-term borrowings and long-term debt) to
shareholders' equity increased to 104.8% at March 31, 1997, compared with
96.0% at March 31, 1996.
CAPITAL INVESTMENTS
Capital investments for property, plant and equipment and intangible assets,
computed on the basis of all cash investments and other considerations, during
fiscal year 1997 were (Yen)3,078 billion, compared with (Yen)2,714 billion in
fiscal 1996.
To meet more sophisticated, diverse and global needs of customers, the
majority of such investments were made to increase digitization, including the
installation of digital exchanges and fiber-optic cables, and to improve the
systematization for rationalizing NTT's business aimed at reducing labor costs
and to increase efficiency. Other areas of investment included the necessary
infrastructure for cellular and PHS services, the promotion of research and
development, and the renewal and improvement of existing facilities, such as
telephone subscriber lines, public telephones that use magnetic cards and
leased circuit lines.
As of March 31, 1997, NTT had outstanding commitments for the purchase of
property, plant, equipment and other assets of approximately (Yen)451 billion.
Such expenditures are to be made generally for the purpose of capital
investment during fiscal year 1998, and NTT expects to obtain the funds needed
for such commitments through net cash provided by operating activities.
ITEM 9A--QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The financial instruments that NTT holds are continuously exposed to
fluctuations in markets, such as currency exchange rates, interest rates and
stock prices of investments.
NTT from time to time enters into derivative financial instruments, such as
forward exchange contracts, interest rate swap agreements and currency swap
agreements, in order to limit its main exposure to loss in relation to
underlying debt instruments that may result from adverse fluctuations in
foreign currency exchange rates and interest rates. NTT does not use
derivative financial instruments for trading purposes. The use of derivative
financial instruments are based on specific internal rules and are subject to
controls at the relevant department of the head office. In most cases,
derivative instruments are integrated as part of debt transactions and are
entered into at the beginning date of those transactions and have the same
maturity as the underlying debt.
No specific hedging activities are taken against the price fluctuations of
stocks held by NTT as marketable securities.
EQUITY PRICE RISK
NTT holds available-for-sale securities and held-to-maturity securities
included in marketable securities and other investments. In general, highly-
liquid and low risk instruments are preferred in the portfolio. Available-for-
sale securities are held as long term investments. NTT does not hold
marketable securities for trading purposes.
47
<PAGE>
Maturities and fair values of available-for-sale securities and held-to-
maturity securities were as follows at March 31, 1998:
<TABLE>
<CAPTION>
MILLIONS OF YEN
--------------------------
1998
--------------------------
CARRYING AMOUNT FAIR VALUE
--------------- ----------
<S> <C> <C>
Due after 1 year through 5 years.................. 783 815
Due after 5 years through 10 years................ 2,724 2,710
Equity securities................................. 118,925 80,458
------- ------
Total........................................... 122,432 83,983
</TABLE>
FOREIGN EXCHANGE RISK
NTT from time to time enters into forward foreign exchange contracts and
currency swap agreements to hedge the risk of fluctuations in foreign currency
exchange rates associated with long-term debt issued by NTT denominated in
foreign currencies. Such contracts and agreements have the same maturity as
the underlying debt.
Amounts of NTT's financial instruments that are sensitive to foreign
currency exchange rates were not material at March 31, 1998.
Amounts related to forward foreign exchange contracts or currency swap
agreements entered into in connection with long-term debt denominated in
foreign currencies which eliminate all foreign currency exposures are shown at
the table of "Interest Rate Risk."
INTEREST RATE RISK
NTT's exposure to market risk for changes in interest rates relates
principally to its debt obligations. NTT has long-term debt primarily with
fixed rates. Interest rate swap agreements are entered into from time to time
to convert floating rate underlying debt into fixed rate debt.
The following tables provide information about NTT's financial instruments
that are sensitive to changes in interest rates including debt obligations and
interest rate swaps.
For the debt obligations, the table presents principal cash flows by
expected maturity dates, related weighted average interest rates and fair
values of financial instruments.
For interest rate swaps, the table presents notional amounts and weighted
average interest rates by expected maturity dates and fair value of the swap
at the reporting date. Notional amounts are used to calculate the contractual
payments to be exchanged under the contract. Weighted average floating rates
are based on the interest rates which were applicable on March 31, 1998.
48
<PAGE>
The information is presented in Japanese yen equivalents, which is NTT's
reporting currency. The instrument's actual cash flows are denominated in both
Japanese yen and foreign currencies, as indicated.
<TABLE>
<CAPTION>
MILLIONS OF YEN
----------------------------------------------------------------------------------
AVERAGE CARRYING AMOUNT AND MATURITY DATE (YEAR ENDING MARCH 31)
INTEREST -------------------------------------------------------------------------
RATE 1999 2000 2001 2002 2003 THEREAFTER TOTAL FAIR VALUE
-------- -------- -------- -------- -------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Long-term debt
including current
portion
Japanese yen bonds and
notes................ 4.0% (276,146) (216,168) (196,309) (292,646) (223,868) (607,546) (1,812,683) (1,869,752)
U.S. dollar notes..... 7.1% (99,709) (66,394) (73,058) (39,786) (66,496) (132,920) (478,363) (545,733)
Swiss franc bonds and
notes................ 5.0% (240) (44,928) (96) (96) (21,942) (7,891) (75,193) (78,446)
Canadian dollar
notes................ 9.3% (18,907) (18,895) (18,874) 0 0 0 (56,676) (64,413)
Deutsche mark bonds... 7.1% 0 (28,872) 0 0 0 0 (28,872) (31,386)
Sterling pound bonds.. 8.4% 36 36 36 (22,526) 36 (56,378) (78,760) (98,597)
Unsecured indebtedness
to banks--
Japanese yen loans.... 2.9% (430,456) (491,280) (609,428) (496,347) (340,007) (689,059) (3,056,577) (3,052,566)
U.S. dollar loans..... 5.7% 0 (6,039) 0 0 0 (5,990) (12,029) (12,814)
Thai Baht loans....... 10.7% 0 (2,378) 0 0 0 0 (2,378) (2,821)
------ -------- -------- -------- -------- -------- ---------- ---------- ----------
Subtotal............ (825,422) (874,918) (897,729) (851,401) (652,277) (1,499,784) (5,601,531) (5,756,528)
Forward exchange
contracts............. (11,707) (8,325) (16,581) (4,929) (878) (10,053) (52,473) 41,302
Currency swap
agreements............ (3,340) 0 0 0 (3,500) (3,850) (10,690) 11,516
------ -------- -------- -------- -------- -------- ---------- ---------- ----------
Total (840,469) (883,243) (914,310) (856,330) (656,655) (1,513,687) (5,664,694) (5,703,710)
<CAPTION>
MILLIONS OF YEN
----------------------------------------------------------------------
NOTIONAL AMOUNT AND AVERAGE INTEREST RATE
(YEAR ENDING MARCH 31)
----------------------------------------------------------- FAIR
1999 2000 2001 2002 2003 THEREAFTER VALUE
-------- -------- -------- -------- -------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Floating to Fixed
(Japanese yen)........ 44,500 44,500 34,500 6,000 0 0 (2,091)
Average pay rate...... 2.7% 2.7% 2.5% 2.9% -- --
Average receive rate.. 0.8% 0.8% 0.8% 0.8% -- --
</TABLE>
ITEM 10--DIRECTORS AND OFFICERS OF REGISTRANT
The overall direction of the affairs of the Company is the responsibility of
its Board of Directors. The Board of Directors currently consists of 36
members, of whom 35 are also executive officers of the Company. Directors are
elected for a two-year term. Elections are conducted at the Company's Annual
Meeting, the most recent of which was held on June 26, 1998.
49
<PAGE>
The following is a list of the Directors (including executive officers of the
Company) and corporate auditors of the Company at June 26, 1998:
<TABLE>
<CAPTION>
CURRENT POSITION
AS DIRECTOR OR
CORPORATE AUDITOR
NAME TITLE HELD SINCE
---- ----- -----------------
<S> <C> <C>
Representative Directors
Shigeo Sawada............. Chairman June 1990
Jun-ichiro Miyazu......... President June 1987
Toshiharu Aoki............ Senior Executive Vice President June 1992
Directors
Masanobu Suzuki........... Executive Vice President June 1993
Yuji Matsuo............... Executive Vice President June 1994
Hiroshi Ishihara.......... Executive Vice President June 1994
Toshiyuki Mineshima....... Executive Vice President June 1996
Norio Wada................ Executive Vice President June 1992
Tadayuki Arai............. Executive Vice President June 1995
Kiyoshi Mita.............. Executive Vice President June 1995
Satoshi Miura............. Executive Vice President June 1996
Michio Takeuchi........... Executive Vice President June 1996
Katsuya Okimi............. Executive Vice President June 1997
Hirofumi Shimada.......... Senior Vice President June 1994
Masahiro Shibao........... Senior Vice President June 1994
Ryuji Nunotani............ Senior Vice President June 1995
Yoshinori Uda............. Senior Vice President June 1996
Seiji Takashima........... Senior Vice President June 1996
Michitomo Ueno............ Senior Vice President June 1996
Toshiaki Fukui............ Senior Vice President June 1997
Kunihiro Kato............. Senior Vice President June 1997
Shin-ichi Aizawa.......... Senior Vice President June 1997
Masaaki Kasahara.......... Senior Vice President June 1997
Kanji Koide............... Senior Vice President June 1997
Yoshiyuki Sukemune........ Senior Vice President June 1997
Yoshio Bessyo............. Senior Vice President June 1998
Jun-ichi Yuki............. Senior Vice President June 1998
Kiyoshi Fujita............ Senior Vice President June 1998
Shunzo Morishita.......... Senior Vice President June 1998
Shigehiko Suzuki.......... Senior Vice President June 1998
Mamoru Ishida............. Senior Vice President June 1998
Nobuharu Ono.............. Senior Vice President June 1998
Susumu Fukuzawa........... Senior Vice President June 1998
Ryuzo Sejima.............. Counselor to the President June 1986
Corporate Auditors
Masayuki Kojima........... Corporate Auditor June 1995
Tadashi Yamamoto.......... Corporate Auditor June 1996
Keisuke Sada.............. Corporate Auditor June 1998
Toshio Hayata............. Corporate Auditor June 1998
</TABLE>
50
<PAGE>
ITEM 11--COMPENSATION OF DIRECTORS AND OFFICERS
During fiscal year 1998, the aggregate amount of compensation paid by the
Company to all Directors, executive officers and corporate auditors as a group
was (Yen)1,228 million.
ITEM 12--OPTIONS TO PURCHASE SECURITIES FROM REGISTRANT OR SUBSIDIARIES
None.
ITEM 13--INTEREST OF MANAGEMENT IN CERTAIN TRANSACTIONS
(a) Describe briefly any material transactions during the last three fiscal
years or any presently proposed transactions, to which the registrant or any
of its subsidiaries was or is to be a party, in which any of the following
persons had or is to have a direct or indirect material interest, naming such
person, such person's relationship to the registrant, the nature of the
interest in the transaction and, where practicable, the amount of such
interest:
(1) any director or officer of the registrant;
(2) any security holder named in answer to Item 4(a);
The Company provides various telecommunications services to the
Government of Japan. In fiscal year 1998, the Company provided
services to the Ministry of Posts and Telecommunications for which it
received (Yen)1,443 million. In fiscal year 1997, the Company
provided services to the Ministry of Posts and Telecommunications for
which it received (Yen)1,842 million. In fiscal year 1996 the Company
provided services to the Ministry of Posts and Telecommunications for
which it received (Yen)4,505 million. In addition, the Company made
payments to the Ministry of Posts and Telecommunications of
(Yen)10,113 million, (Yen)10,406 million and (Yen)10,744 million in
fiscal years 1998, 1997 and 1996, respectively, for services rendered
by the Ministry of Posts and Telecommunications in connection with
the collection of telephone revenues.
(3) any relative or spouse of any of the foregoing persons, or any
relative of such spouse, who has the same home as such person or who
is a director or officer of any parent or subsidiary of the
registrant.
(b) State as to each of the following persons who was indebted to the
registrant or its subsidiaries at any time during the last three years (i) the
largest aggregate amount of indebtedness outstanding at any time during such
period, (ii) the nature of the indebtedness and of the transaction in which it
was incurred, (iii) the amount thereof outstanding as of the latest
practicable date, and (iv) the rate of interest paid or charged thereon:
(1) each director or officer of the registrant; and
(2) each associate of any such director or officer.
None.
PART II
ITEM 14--DESCRIPTION OF SECURITIES TO BE REGISTERED
Not applicable.
PART III
ITEM 15--DEFAULTS UPON SENIOR SECURITIES
(a) If there has been any material default in the payment of principal,
interest, a sinking or purchase fund installment, or any other material
default not cured within 30 days, with respect to any indebtedness of the
51
<PAGE>
registrant or any of its significant subsidiaries exceeding 5 percent of the
total assets of the registrant and its consolidated subsidiaries, identify the
indebtedness and state the nature of the default. In the case of such a
default in the payment of principal, interest or a sinking or purchase fund
installment, state the amount of the default and the total arrearage on the
date of filing this report.
None.
(b) If any material arrearage in the payment of dividends has occurred or if
there has been any other material delinquency not cured within 30 days, with
respect to any class of preferred stock of the registrant which is registered
or which ranks prior to any class of registered securities, or with respect to
any class of preferred stock of any significant subsidiary of the registrant,
give the title of the class and state the nature of the arrearage or
delinquency. In the case of an arrearage in the payment of dividends, state
the amount and the total arrearage on the date of filing this report.
Not applicable.
ITEM 16--CHANGES IN SECURITIES AND CHANGES IN SECURITY FOR REGISTERED
SECURITIES
(a) If the constituent instruments defining the rights of the holders of any
class of registered securities have been materially modified, give the title
of the class of securities involved and state briefly the general effect of
such modification upon the rights of holders of such securities.
None
(b) If the rights evidenced by any class of registered securities have been
materially limited or qualified by the issuance or modification of any other
class of securities, state briefly the general effect of the issuance or
modification of such other class of securities upon the rights of the holders
of the registered securities.
None
(c) If there has been a material withdrawal or substitution of assets
securing any class of registered securities of the registrant, furnish the
following information:
(1) Give the title of the securities.
(2) Identify and describe briefly the assets involved in the withdrawal
or substitution.
(3) Indicate the provision in the underlying indenture, if any,
authorizing the withdrawal or substitution.
Not applicable.
(d) If the trustees or paying agents for any registered securities have
changed during the last fiscal year, furnish the names and addresses of the
new trustees or paying agents.
Not applicable.
PART IV
ITEM 17--FINANCIAL STATEMENTS
Not applicable.
ITEM 18--FINANCIAL STATEMENTS
The Report of Independent Accountants, Consolidated Balance Sheet of NTT at
March 31, 1998 and 1997, Consolidated Statement of Income, Consolidated
Statement of Shareholders' Equity and Consolidated Statement
52
<PAGE>
of Cash Flows of NTT for each of the three years ended March 31, 1996, 1997
and 1998 and Notes to Consolidated Financial Statements, and Schedule II--
Valuation and Qualifying Accounts, appear as pages F-1 through F-38.
ITEM 19--FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial Statements
See accompanying index to Consolidated Financial Statements.
(b) Exhibits
(1) Consent of Independent Public Accountants.
The Company agrees to furnish to the Securities and Exchange Commission upon
request a copy of any instrument which defines the rights of holders of long-
term debt of the Company and its consolidated subsidiaries.
53
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 12 OF THE SECURITIES EXCHANGE ACT OF
1934, THE REGISTRANT CERTIFIES THAT IT MEETS ALL OF THE REQUIREMENTS FOR
FILING ON FORM 20-F AND HAS DULY CAUSED THIS ANNUAL REPORT TO BE SIGNED ON ITS
BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
Nippon Telegraph and Telephone
Corporation
/s/ Mototane Miyazaki
By___________________________________
Name:Mototane Miyazaki
Title:Executive Manager
General Affairs Department
Date: September 24, 1998
54
<PAGE>
NIPPON TELEGRAPH AND TELEPHONE CORPORATION
AND ITS SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of independent accountants......................................... F-2
Consolidated balance sheets at March 31, 1997 and 1998.................... F-3
Consolidated statement of income for the three years ended March 31,
1998..................................................................... F-5
Consolidated statement of shareholders' equity for the three years ended
March 31, 1998........................................................... F-6
Consolidated statement of cash flows for the three years ended March 31,
1998..................................................................... F-7
Notes to consolidated financial statements................................ F-8
Financial statements schedule for the three years ended March 31, 1998:
Schedule II--Valuation and qualifying accounts.......................... F-27
</TABLE>
All other schedules are omitted because they are not applicable or the
required information is shown in the financial statements or the notes
thereto.
Financial statements of majority-owned subsidiaries of the registrant not
consolidated and of 50% or less owned persons accounted for by the equity
method have been omitted because the registrant's proportionate share of the
income from continuing operations before income taxes, and total assets of
each such company is less than 20% of the respective consolidated amounts, and
the investment in and advances to each company is less than 20% of
consolidated total assets.
The consolidated financial statements listed above are presented in Japanese
yen and the amounts pertaining to the most recent period are also expressed in
U.S. dollars, for convenience only, as described in Note 3.
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Directors of Nippon Telegraph and Telephone
Corporation
In our opinion, the consolidated financial statements, expressed in yen,
listed in the accompanying index present fairly, in all material respects, the
financial position of Nippon Telegraph and Telephone Corporation and its
subsidiaries at March 31, 1997 and 1998, and the results of their operations
and their cash flows for each of the three years in the period ended March 31,
1998, in conformity with accounting principles generally accepted in the
Untied States of America. These financial statements are the responsibility of
the Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards in Japan
and in the United States of America which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for the
opinion expressed above.
Price Waterhouse
Tokyo, Japan
June 26, 1998
F-2
<PAGE>
NIPPON TELEGRAPH AND TELEPHONE CORPORATION
AND ITS SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
MARCH 31
<TABLE>
<CAPTION>
1997 1998 1998
--------------- --------------- ------------
MILLIONS OF YEN MILLIONS OF
U.S. DOLLARS
(NOTE 3)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents
(Notes 5 and 19)............. (Yen) 821,140 (Yen) 913,236 $ 6,918
Notes and accounts receivable,
trade
(Notes 4 and 19)............. 930,792 1,085,381 8,223
Allowance for doubtful
accounts..................... (26,363) (35,816) (271)
Inventories (Note 6).......... 231,407 223,776 1,695
Prepaid expenses and other
current assets (Note 11)..... 353,332 417,900 3,164
--------------- --------------- --------
Total current assets........ 2,310,308 2,604,477 19,731
--------------- --------------- --------
Property, plant and equipment
(Notes 9 and 15):
Telecommunications equipment.. 10,925,837 11,633,361 88,132
Telecommunications service
lines........................ 11,496,236 11,722,358 88,806
Buildings and structures...... 4,557,920 4,763,092 36,084
Machinery, vessels and tools.. 1,902,698 1,997,359 15,131
Land.......................... 579,140 609,186 4,615
Construction in progress...... 688,448 639,262 4,843
--------------- --------------- --------
30,150,279 31,364,618 237,611
Accumulated depreciation...... (18,494,511) (19,359,256) (146,661)
--------------- --------------- --------
11,655,768 12,005,362 90,950
--------------- --------------- --------
Investments and other assets:
Investments in affiliated
companies.................... 113,762 201,945 1,531
Marketable securities and
other investments
(Note 7)..................... 154,947 124,910 946
Intangible and other assets
(Note 8)..................... 1,654,289 1,904,503 14,428
Deferred income taxes (Note
11).......................... 586,020 511,334 3,873
--------------- --------------- --------
2,509,018 2,742,692 20,778
--------------- --------------- --------
(Yen)16,475,094 (Yen)17,352,531 $131,459
=============== =============== ========
</TABLE>
The accompanying notes are an integral part of these statements.
F-3
<PAGE>
NIPPON TELEGRAPH AND TELEPHONE CORPORATION
AND ITS SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
MARCH 31
<TABLE>
<CAPTION>
1997 1998 1998
--------------- --------------- ------------
MILLIONS OF YEN MILLIONS OF
U.S. DOLLARS
(NOTE 3)
<S> <C> <C> <C>
LIABILITIES AND SHAREHOLDERS'
EQUITY
Current liabilities:
Short-term borrowings (Notes 9
and 19)...................... (Yen) 387,544 (Yen) 456,995 $ 3,462
Current portion of long-term
debt (Notes 9 and 19)........ 667,964 825,422 6,253
Accounts payable, trade (Notes
4 and 19).................... 1,115,840 1,131,444 8,572
Accrued payroll (Note 19)..... 427,276 494,387 3,745
Accrued interest.............. 54,054 55,976 424
Accrued taxes on income....... 224,870 188,616 1,429
Accrued consumption tax (Note
12).......................... 27,295 99,813 756
Advances received............. 49,521 72,117 546
Other......................... 118,954 121,056 917
--------------- --------------- --------
Total current liabilities... 3,073,318 3,445,826 26,104
--------------- --------------- --------
Long-term liabilities:
Long-term debt (Notes 9 and
19).......................... 4,542,012 4,776,109 36,183
Obligations under capital
leases (Note 15)............. 452,968 473,681 3,588
Liability for employees' sev-
erance payments (Note 10).... 2,795,089 2,890,761 21,900
Other (Note 11)............... 166,179 166,186 1,259
--------------- --------------- --------
7,956,248 8,306,737 62,930
--------------- --------------- --------
Minority interest in consoli-
dated subsidiaries............. 105,118 136,040 1,031
--------------- --------------- --------
Shareholders' equity (Note 13):
Common stock, (Yen)50,000 par
value--
Authorized--62,400,000 shares
Issued and outstanding--
15,912,000 shares........... 795,600 795,600 6,027
Additional paid-in capital.... 2,530,476 2,530,476 19,170
Legal reserve................. 94,140 102,678 778
Unrealized loss on securities
(Note 7)..................... (4,648) (20,061) (152)
Foreign currency translation
adjustments.................. -- 4,030 31
Retained earnings............. 1,924,842 2,051,205 15,540
--------------- --------------- --------
5,340,410 5,463,928 41,394
--------------- --------------- --------
Commitments and contingent lia-
bilities (Note 20).............
--------------- --------------- --------
(Yen)16,475,094 (Yen)17,352,531 $131,459
=============== =============== ========
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE>
NIPPON TELEGRAPH AND TELEPHONE CORPORATION AND ITS SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
YEAR ENDED MARCH 31
<TABLE>
<CAPTION>
1996 1997 1998 1998
-------------- -------------- -------------- ------------
MILLIONS OF YEN MILLIONS OF
U.S. DOLLARS
(NOTE 3)
<S> <C> <C> <C> <C>
Operating revenues (Note
4):
Telephone............. (Yen)5,557,674 (Yen)6,038,146 (Yen)6,306,034 $47,773
Telegraph............. 96,746 98,683 92,211 699
Leased circuit........ 393,415 428,715 488,160 3,698
Data communication
facility............. 301,365 337,934 372,765 2,824
Sale of
telecommunication
equipment............ 606,102 889,834 969,586 7,345
Miscellaneous......... 953,341 1,028,470 1,221,257 9,252
-------------- -------------- -------------- -------
7,908,643 8,821,782 9,450,013 71,591
-------------- -------------- -------------- -------
Operating expenses
(Notes 4 and 16):
Personnel............. 2,285,502 2,266,599 2,345,609 17,770
Depreciation,
amortization and
maintenance costs.... 2,809,602 2,998,550 3,185,044 24,129
Other................. 2,117,388 2,787,158 3,047,315 23,086
-------------- -------------- -------------- -------
7,212,492 8,052,307 8,577,968 64,985
-------------- -------------- -------------- -------
Operating income........ 696,151 769,475 872,045 6,606
-------------- -------------- -------------- -------
Other expenses (income):
Interest and
amortization of bond
discounts and issue
costs................ 268,032 253,950 235,363 1,783
Interest income....... (2,066) (1,839) (2,086) (16)
Gains on sale of
subsidiary stocks
(Note 17)............ (98,011) -- -- --
Other, net............ (16,943) 7,591 (16,764) (127)
-------------- -------------- -------------- -------
151,012 259,702 216,513 1,640
-------------- -------------- -------------- -------
Income before income
taxes.................. 545,139 509,773 655,532 4,966
-------------- -------------- -------------- -------
Income taxes (Note 11):
Current............... 274,409 359,005 362,910 2,750
Deferred.............. (1,435) (98,078) 55,366 419
-------------- -------------- -------------- -------
272,974 260,927 418,276 3,169
-------------- -------------- -------------- -------
Income before minority
interest............... 272,165 248,846 237,256 1,797
Minority interest in
consolidated
subsidiaries........... (6,124) (11,718) (32,275) (244)
Equity in earnings of
affiliated companies... 7,605 14,329 9,479 72
-------------- -------------- -------------- -------
Net Income.............. (Yen) 273,646 (Yen) 251,457 (Yen) 214,460 $ 1,625
============== ============== ============== =======
<CAPTION>
YEN U.S. DOLLARS
(NOTE 3)
<S> <C> <C> <C> <C>
Per share of common
stock:
Net income............ (Yen) 17,197 (Yen) 15,803 (Yen) 13,478 $ 102
-------------- -------------- -------------- -------
Cash dividends,
applicable to
earnings for the year
(Note 13)............ (Yen) 4,902 (Yen) 5,000 (Yen) 5,000 $ 38
-------------- -------------- -------------- -------
</TABLE>
The accompanying notes are an integral part of these statements.
F-5
<PAGE>
NIPPON TELEGRAPH AND TELEPHONE CORPORATION
AND ITS SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
YEAR ENDED MARCH 31
<TABLE>
<CAPTION>
1996 1997 1998 1998
-------------- -------------- -------------- ------------
MILLIONS OF YEN MILLIONS OF
U.S. DOLLARS
(NOTE 3)
<S> <C> <C> <C> <C>
Common stock (Note 13):
At beginning of year.. (Yen) 780,000 (Yen) 795,600 (Yen) 795,600 $ 6,027
Capitalization of
additional paid-in
capital.............. 15,600 -- -- --
-------------- -------------- -------------- -------
At end of year........ 795,600 795,600 795,600 6,027
-------------- -------------- -------------- -------
Additional paid-in
capital (Note 13):
At beginning of year.. 2,546,076 2,530,476 2,530,476 19,170
Transfer to common
stock................ (15,600) -- -- --
-------------- -------------- -------------- -------
At end of year........ 2,530,476 2,530,476 2,530,476 19,170
-------------- -------------- -------------- -------
Legal reserve (Note 13):
At beginning of year.. 77,689 85,602 94,140 713
Change during the
year................. 7,913 8,538 8,538 65
-------------- -------------- -------------- -------
At end of year........ 85,602 94,140 102,678 778
-------------- -------------- -------------- -------
Unrealized gain (loss)
on securities (Note 7):
At beginning of year.. 22,923 22,959 (4,648) (35)
Change during the
year................. 36 (27,607) (15,413) (117)
-------------- -------------- -------------- -------
At end of year........ 22,959 (4,648) (20,061) (152)
-------------- -------------- -------------- -------
Foreign currency
translation
adjustments:
At beginning of year.. -- -- -- --
Change during the
year................. -- -- 4,030 31
-------------- -------------- -------------- -------
At end of year........ -- -- 4,030 31
-------------- -------------- -------------- -------
Retained earnings (Note
13):
At beginning of year.. 1,573,749 1,761,482 1,924,842 14,582
Appropriations--
Cash dividends
((Yen)2,451 in
1996, (Yen)2,500 in
1997 and
(Yen)2,500--$19 in
1998 per share).... (39,000) (39,780) (39,780) (301)
Transfer to legal
reserve............ (4,013) (4,560) (4,560) (35)
Interim distribution--
Cash dividends
((Yen)2,451 in
1996, (Yen)2,500 in
1997 and
(Yen)2,500--$19 in
1998 per share).... (39,000) (39,779) (39,779) (301)
Transfer to legal
reserve............ (3,900) (3,978) (3,978) (30)
Net income............ 273,646 251,457 214,460 1,625
-------------- -------------- -------------- -------
At end of year........ 1,761,482 1,924,842 2,051,205 15,540
-------------- -------------- -------------- -------
Shareholders' equity at
end of year............ (Yen)5,196,119 (Yen)5,340,410 (Yen)5,463,928 $41,394
============== ============== ============== =======
</TABLE>
The accompanying notes are an integral part of these statements.
F-6
<PAGE>
NIPPON TELEGRAPH AND TELEPHONE CORPORATION
AND ITS SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
YEAR ENDED MARCH 31
<TABLE>
<CAPTION>
1996 1997 1998 1998
------------ ------------ ------------ ------------
MILLIONS OF YEN MILLIONS OF
U.S. DOLLARS
(NOTE 3)
<S> <C> <C> <C> <C>
Cash flows from
operating activities:
Net income............ (Yen)273,646 (Yen)251,457 (Yen)214,460 $ 1,625
Adjustments to
reconcile net income
to net cash provided
by operating
activities--
Depreciation and
amortization......... 1,909,768 2,093,314 2,281,843 17,287
Deferred taxes........ (1,435) (98,078) 55,366 419
Loss on sale or
disposal of property,
plant and equipment.. 210,174 213,040 164,691 1,248
Gains on sales of
subsidiary stocks
(Note 17)............ (98,011) -- -- --
(Increase) decrease in
notes and accounts
receivable, trade.... (351,331) 131,339 (145,136) (1,100)
(Increase) decrease in
inventories.......... (35,963) (66,917) 7,631 58
(Increase) decrease in
other current
assets............... (42,475) 3,724 (11,712) (89)
Increase in accounts
payable, trade and
accrued payroll...... 266,608 140,919 125,000 947
Increase in accrued
consumption tax...... 1,099 515 72,518 549
Increase (decrease) in
advances received.... (59,167) 12,762 22,596 171
Increase (decrease) in
accrued taxes on
income............... 186,866 (7,995) (36,290) (275)
Increase (decrease) in
liability for
employees' severance
payments, net of
deferred pension
costs................ 53,989 22,394 (16,293) (123)
Increase (decrease) in
other long-term
liabilities.......... (7,876) (56,968) 1,054 8
Other................. 886 11,202 (5,121) (39)
------------ ------------ ------------ --------
Net cash provided by
operating
activities.......... 2,306,778 2,650,708 2,730,607 20,686
------------ ------------ ------------ --------
Cash flows from
investing activities:
Payments for property,
plant and equipment.. (2,244,576) (2,612,878) (2,685,961) (20,348)
Proceeds from sale of
property, plant and
equipment............ 18,327 9,517 10,827 82
Acquisition of
investments in
affiliates and
intangible and other
assets............... (239,114) (258,123) (233,813) (1,771)
Proceeds from sales of
subsidiary stocks
(Note 17)............ 178,770 -- -- --
------------ ------------ ------------ --------
Net cash used in
investing
activities.......... (2,286,593) (2,861,484) (2,908,947) (22,037)
------------ ------------ ------------ --------
Cash flows from
financing activities:
Proceeds from issuance
of long-term debt.... 897,665 1,136,896 1,047,974 7,939
Payments for
settlement of long-
term debt............ (817,980) (804,385) (706,388) (5,351)
Dividends paid........ (78,000) (79,559) (79,559) (603)
Net increase
(decrease) in short-
term borrowings and
other................ 34,325 140,322 8,409 64
------------ ------------ ------------ --------
Net cash provided by
financing
activities.......... 36,010 393,274 270,436 2,049
------------ ------------ ------------ --------
Net increase in cash
and cash equivalents.. 56,195 182,498 92,096 698
Cash and cash
equivalents at
beginning of year..... 582,447 638,642 821,140 6,221
------------ ------------ ------------ --------
Cash and cash
equivalents at end of
year.................. (Yen)638,642 (Yen)821,140 (Yen)913,236 $ 6,919
============ ============ ============ ========
Cash paid during the
year for:
Interest.............. (Yen)269,416 (Yen)258,748 (Yen)233,344 $ 1,768
------------ ------------ ------------ --------
Income taxes.......... (Yen) 87,803 (Yen)361,641 (Yen)400,860 $ 3,037
------------ ------------ ------------ --------
Capital lease
obligations incurred
during the year....... (Yen) 52,126 (Yen) 56,631 (Yen) 99,975 $ 757
------------ ------------ ------------ --------
</TABLE>
The accompanying notes are an integral part of these statements.
F-7
<PAGE>
NIPPON TELEGRAPH AND TELEPHONE CORPORATION
AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS:
Nippon Telegraph and Telephone Corporation ("the Company") is primarily
engaged in the provision of nationwide telecommunications services in Japan.
The Company and its subsidiaries' services fall into six major classes:
telephone services, telegraph services, leased circuit services, data
communication facility services, sale of telecommunication equipment and other
services.
In June 1997, the Japanese Diet passed the Law Concerning Partial Revision
to the Nippon Telegraph and Telephone Corporation Law ("the Revision Law").
This Revision Law implements a plan proposed by the Ministry of Posts and
Telecommunications, and accepted in principle by the Company, to reorganize
the Company. Under the Revision Law, the Company will continue to exist but
will operate primarily as a holding company with its businesses reorganized
into three newly established companies, two regional telecommunications
companies and a long distance telecommunications company. The Revision Law
also allows the Company to enter, through one or more subsidiaries, the
international telecommunications business before the reorganization of the
Company upon approval of the Minister of Posts and Telecommunications ("the
MPT").
In December 1997, the Ministry of Posts and Telecommunications announced
"the Basic Principles Concerning the Transfer of the Business Activities and
Succession of the Rights and Obligations of Nippon Telegraph and Telephone
Corporation." The Company will prepare "the Implementation Plans Concerning
the Transfer of the Business Activities and Succession of the Rights and
Obligations of Nippon Telegraph and Telephone Corporation" in accordance with
the Basic Principles. Matters concerning the transfer of business, which is
the precondition of reorganization, will be presented to shareholders at the
ordinary general meeting of shareholders in June 1999.
The Company plans to take advantage of the opportunities presented by the
Revision Law to effectively compete in extremely challenging international
markets, actively promote expansion of global telecommunications and
multimedia businesses, and further enhance its operations. At this time,
however, the ultimate effect of the implementation of the New Law on the
financial position and results of operations of the Company cannot be
determined.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
The Company and its subsidiaries in Japan maintain their records and prepare
their statutory financial statements in accordance with the Japanese
Commercial Code by applying accounting principles generally accepted in Japan
(Japanese GAAP). The Company, as a regulated company, also follows the NIT
Law, the Telecommunications Business Law ("the Telecom Business Law") and
other related accounting regulations for preparing such financial statements.
The accompanying consolidated financial statements incorporate certain
adjustments and reclassifications relating to (1) the tax effects of temporary
differences, (2) compensated absences and severance lump-sum and pension
payments, (3) foreign currency translation, (4) capital leases, (5) unrealized
gains and losses on debt and equity securities and certain other items to
conform with accounting principles generally accepted in the United States of
America. These adjustments were not recorded in the statutory books of
account.
Significant accounting policies, after reflecting adjustment for the above,
are as follows:
BASIS OF CONSOLIDATION AND ACCOUNTING FOR INVESTMENTS IN AFFILIATED
COMPANIES--
The consolidated financial statements include the accounts of the Company
and those of its majority-owned subsidiaries. All significant intercompany
transactions and accounts are eliminated in consolidation.
F-8
<PAGE>
NIPPON TELEGRAPH AND TELEPHONE CORPORATION
AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Investments in 20 to 50 percent-owned companies, in which the ability to
exercise significant influence exists, are stated at cost plus equity in
undistributed earnings.
On occasion, a subsidiary may issue its shares to third parties at amounts
per share in excess of or less than the Company's average per share carrying
value. With respect to such transactions, the resulting gains or losses
arising from a change in interest are recorded in income for the year in which
the change in interest transaction occurs.
The excess of cost over underlying equity at acquisition dates of
investments in subsidiaries and affiliated companies, if significant in
amount, is amortized over five years.
ACCOUNTING UNDER REGULATION--
The Company is currently subject to regulations under the Telecom Business
Law and accordingly, has adopted Statement of Financial Accounting Standards
No. 71 ("SFAS 71"), "Accounting for the Effects of Certain Types of
Regulation", which requires that the effects of the rate-making process be
recorded. Such effects concern mainly the time at which various items enter
into the determination of net income in order to follow the principle of
matching costs and revenues. These timing differences can create "regulatory
assets." These regulatory assets included in the accompanying consolidated
financial statements are listed and discussed below:
<TABLE>
<CAPTION>
1997 1998 1998
------------ ------------ ------------
MILLIONS OF YEN MILLIONS
OF
U.S. DOLLARS
<S> <C> <C> <C>
Regulatory assets due to:
Deferred compensated absences*........ (Yen)160,389 (Yen)132,538 $1,004
Deferred severance lump-sum and
pension payments**................... 573,696 603,337 4,571
Unamortized purchases of the leased
assets under SFAS 13................. 108,309 110,995 841
------------ ------------ ------
(Yen)842,394 (Yen)846,870 $6,416
============ ============ ======
</TABLE>
- --------
* Included in "Prepaid expenses and other current assets" in the accompanying
consolidated financial statements
** Included in "Intangible and other assets" in the accompanying consolidated
financial statements
Accrual for employees' compensated absences is reflected in the accompanying
consolidated financial statements and, as the Company expects to recover such
costs through the regulatory process when such amounts are paid, the related
deferred charges are reflected in the accompanying consolidated financial
statements.
Deferred severance lump-sum and pension payments above represent differences
between the Company's severance lump-sum and pension payments calculated under
Japanese GAAP and costs determined under the provisions of Statement of
Financial Accounting Standards No. 87 ("SFAS 87"), "Employers' Accounting for
Pensions". The Company expects to recover such differences through the
regulatory process when such amounts are accrued in accordance with Japanese
GAAP.
Certain leases qualifying as capital leases are capitalized and related
lease obligations are reflected in the accompanying financial statements. As
required by the SFAS 71, the leased assets of the Company are amortized to the
extent of the amount equal to rental expenses less interest on the lease
obligations.
F-9
<PAGE>
NIPPON TELEGRAPH AND TELEPHONE CORPORATION
AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
In order to promote further competition in the telecommunications market,
and as part of the Government's overall policy toward deregulation, the
Telecom Business Law was revised in May 1998. Under the revised Law, Type I
Carriers need not obtain approval from MPT but only notify MPT of their rates.
For certain services to be provided by such carriers with "designated
telecommunications facilities" and to be specified in an ordinance of the
Ministry of Posts and Telecommunications, a price-cap system will be
introduced. Under the price-cap system, an index will be annually fixed by
MPT, and if the increase ratio of a new rate does not exceed such index, such
carriers need not obtain approval from MPT but only notify MPT of their rates.
The Revised Law will become effective at a date to be established by Cabinet
order not later than November 7, 1998. It is expected that until the
reorganization, rates for regional telecommunications services provided by the
Company will continue to be subject to MPT approval, while rates for such
services provided by the regional companies after the reorganization will be
subject to the price-cap system. Management, however, believes that the
Company currently meets the criteria for continued application of SFAS 71 but
will continue to evaluate significant changes on the Japanese regulatory and
competitive environment to assess the Company's overall compliance with
SFAS 71.
ESTIMATES--
The preparation of the Company's consolidated financial statements in
conformity with accounting principles generally accepted in the United States
of America requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
REVENUE RECOGNITION--
Revenue from telecommunications services mainly represent telephone service
revenues. Telephone service revenues are recorded at the time billings are
made to customers based on seconds of traffic processed plus basic fees, on a
monthly billing cycle basis. Sales of telecommunications equipment are
recognized when products are delivered. Other telecommunications services
revenues are recorded when the services are rendered to customers.
CASH AND CASH EQUIVALENTS--
Cash in excess of daily requirements is invested in temporary cash
equivalents mainly consisting of time deposits and marketable bonds of the
Government of Japan, commercial paper and certificates of deposit purchased
under agreements to resell, all of which are low-risk, short-term financial
instruments readily convertible to known amounts of cash and having an
original maturity of three months or less. Such instruments are deemed to be
cash equivalents for the purpose of the statement of cash flows.
FOREIGN CURRENCY TRANSLATION--
All asset and liability accounts of foreign subsidiaries and affiliates are
translated into Japanese yen at appropriate year-end current rates and all
income and expense accounts are translated at rates that approximate those
rates prevailing at the time of transactions. The resulting translation
adjustments are accumulated as a component of shareholders' equity.
MARKETABLE SECURITIES-
Unrealized gains and losses on equity securities designated as available-
for-sale, whose fair values are readily determinable, are reported in a
separate component of shareholders' equity, net of applicable taxes. Debt
securities designated as held-to-maturity are carried at amortized cost and
are reduced to net realizable value for other than temporary declines in
market value. Realized gains and losses which are determined on the average
cost method are reflected in income.
F-10
<PAGE>
NIPPON TELEGRAPH AND TELEPHONE CORPORATION
AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
INVENTORIES--
Inventories are stated at cost, not in excess of market, cost being
determined by the "average cost" basis. Projects in progress, which mainly
relate to software production based on contracts with customers, are stated at
the lower of cost or estimated realizable value, cost being determined as the
accumulated production cost for contract items and on a first-in first-out
basis for other items.
PROPERTY, PLANT AND EQUIPMENT AND DEPRECIATION--
Property, plant and equipment is stated at cost (including contract price,
direct labor charges and other related overhead), which is determined in
accordance with applicable accounting regulations. The regulations provide
that the cost of funds used during construction for telecommunications
equipment does not constitute allowable cost for capitalization and that
customers' contributions received by the Company in connection with
installation of telecommunications service lines are deducted from the cost of
service lines. Depreciation is computed principally using a declining-balance
method at rates based on estimated useful lives of the assets with the
exception of buildings for which the straight-line method is generally used.
With minor exceptions, the estimated useful lives of depreciable properties
are as follows:
<TABLE>
<S> <C>
Telecommunications equipment.................................. 5 to 42 years
Telecommunications service lines.............................. 10 to 27 years
Buildings and structures...................................... 3 to 75 years
Machinery, vessels and tools.................................. 2 to 17 years
</TABLE>
Maintenance and repairs, including minor renewals and betterments, are
charged to income as incurred.
LIABILITY FOR EMPLOYEES' SEVERANCE PAYMENTS--
Employees whose services with the Company and its subsidiaries are
terminated are normally entitled to lump-sum severance payments or pension
payments as described below, determined by reference to the current basic rate
of pay, length of service and conditions under which the termination occurs.
Under normal circumstances, the minimum payment is an amount based on
voluntary retirement. Employees receive additional benefits on involuntary
retirement. As a result of the plan amendment made in the fiscal year ended
March 31, 1993, which resulted in unrecognized prior service costs at March
31, 1993, employees receive further benefits if they retire between the ages
of 45 and 55 with 10 years or more of service with the Company.
In the fiscal year ended March 31, 1993, the Company and certain
subsidiaries established a non-contributory funded pension plan with insurance
companies and trust companies. The benefits under the plan cover 28 percent of
the indemnities under existing regulations to employees who are more than 50
years old and will be retiring after twenty or more years of service.
Retirement benefits are payable, at the option of the employee, in monthly
installments or in a lump-sum.
Through March 31, 1997 substantially all employees of the Company and its
subsidiaries in Japan were eligible to receive severance payments under the
NTT Severance Payment Plan and pension payments under the NTT Mutual Aid Plan.
The funded status of the Company's Employees' Severance Payments at March 31,
1997 related solely to the NTT Severance Payment Plan.
As part of the Japanese social insurance scheme restructuring, the Japanese
Welfare Pension Insurance Law was amended effective April 1, 1997 to convert
the NTT Mutual Aid Plan, which was administered by the Public Corporation
Employee Mutual Aid Association Law, into a government-sponsored welfare
pension plan under the Japanese Welfare Pension Insurance Law. At the same
time, the Company established the NTT Kosei Nenkin
F-11
<PAGE>
NIPPON TELEGRAPH AND TELEPHONE CORPORATION
AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
jKikin ("the NTT group companies' welfare pension plan"), a defined benefit
pension plan to which both the Company and the employees make contributions
and which is regulated by the Japanese Welfare Pension Insurance Law. The NTT
Severance Payment Plan was not affected.
Effective April 1, 1997, a portion of the obligation under the NTT Mutual
Aid Plan and related assets was transferred to the NTT group companies'
welfare pension plan by the Japanese government. The NTT Mutual Aid Plan was
considered a multi-employer plan as defined by Statement of Financial
Accounting Standards No. 87 ("SFAS 87") "Employers' Accounting Pensions" and
accordingly, expense was recognized as contributions were owed to such plan.
Because the Japanese government accounted for the assets and liabilities under
such plan under a method other than that required by SFAS 87, the Company had
an actuary value the plan's assets and liabilities pursuant to the provisions
of SFAS 87. Pursuant to the provisions of SFAS 87, the fair value of the
assets transferred to the plan was (Yen)629 billion and the actuarial present
value of benefit obligations (vested benefit, accumulated benefit and
projected benefit obligations) as of April 1, 1997 were (Yen)279 billion,
(Yen)281 billion and (Yen)495 billion, respectively. Substantially all of the
difference between the assets and the actuarial present value of the projected
benefit obligations was reflected as a reduction of regulatory assets.
ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS--
Effective April 1, 1996, the Company adopted Statement of Financial
Accounting Standards No. 121 ("SFAS 121"), "Accounting for Impairment of Long-
Lived Assets and for Long-Lived Assets to Be Disposed Of." This standard
requires that long-lived assets and certain identifiable intangibles held and
used be reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of the assets or intangibles may not be
recoverable. The adoption of this standard did not materially affect the
financial position or results of operations as the Company was generally in
conformance with this standard prior to adoption.
INCOME TAXES--
The provision for income taxes is computed based on the pretax income
included in the consolidated statement of income. The asset and liability
approach is used to recognize deferred tax liabilities and assets for the
expected future tax consequences of temporary differences between the carrying
amounts and the tax bases of assets and liabilities. Valuation allowances are
recorded to reduce deferred tax assets when it is more likely than not that a
tax benefit will not be realized.
DERIVATIVE FINANCIAL INSTRUMENTS--
The Company and certain subsidiaries enter into several derivative financial
instruments, such as forward exchange contracts, interest rate swap agreements
and currency swap agreements, in order to limit their main exposure to loss in
relation to underlying debt instruments resulting from adverse fluctuations in
foreign currency exchange rates and interest rates. The Company and its
subsidiaries do not use derivative financial instruments for speculative
purposes. Most of these instruments are integrated as part of debt
transactions and are entered into at the beginning date of those transactions,
and have the same maturity as the underlying debt. These instruments are
executed with large financial institutions.
As forward exchange contracts and currency swap agreements are utilized for
hedging purposes, such resulting gains or losses are effectively offset
against foreign exchange gains or losses on the underlying hedged debts
through recognition in the same period.
The Company and certain subsidiaries entered into interest rate swap
agreements which are fully integrated with underlying debt obligations and
designed to convert floating rate debt into fixed rate debt, or vice versa. As
the purpose of entering into the swap transaction is mainly to change the
nature of debt, the Company and certain
F-12
<PAGE>
NIPPON TELEGRAPH AND TELEPHONE CORPORATION
AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
subsidiaries account for the swap agreement like a hedge of the obligation and
record interest expense using the revised interest rate.
Cash flows from financial instruments are classified in the consolidated
statement of cash flows under the same categories as the cash flows from the
related assets, liabilities or anticipated transactions.
NET INCOME PER SHARE--
Net income per common share is computed based on the average number of
shares outstanding during the year and is appropriately adjusted for any free
distribution of common stock.
In February 1997, the FASB issued Statement of Financial Accounting
Standards No. 128 ("SFAS 128"), "Earnings per Share", which replaces the
presentation of primary Earnings per Share (EPS) with a presentation of basic
EPS and also requires dual presentation of basic and diluted EPS with an
appropriate reconciliation of both computations. Basic EPS is computed based
on the average number of shares of common stock outstanding during each
period. Diluted EPS assumes the dilution that could occur if securities or
other contracts to issue common stock were exercised or converted into common
stock or resulted in the issuance of common stock. Although the provisions of
SFAS 128 are applied to the current and prior periods, the basic and diluted
EPS amounts are the same as those amounts previously reported as Net Income
Per Share of Common Stock.
DISTRIBUTION OF COMMON STOCK--
On occasion, the Company may make a free distribution of common stock which
is accounted for by a transfer of the applicable par value from additional
paid-in capital to the common stock account. Under the Japanese Commercial
Code, a stock dividend can be effected by an appropriation of retained
earnings to the common stock account by a resolution of the general
shareholders' meeting and the free share distribution with respect to the
amount as appropriated by a resolution of the Board of Directors' Meeting.
RECENT PRONOUNCEMENTS--
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 130 ("SFAS 130"), "Reporting Comprehensive Income." This standard requires
additional disclosures in the financial statements for periods beginning after
December 15, 1997, and will have no effect on the Company's financial position
or results of operations.
In March 1998, the American Institute of Certified Public Accountants issued
Statement of Position (SOP) 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use". This SOP, which is effective
for financial statements for fiscal years beginning after December 15, 1998,
provides guidance on accounting for the costs of computer software developed
or obtained solely to meet the Company's internal needs. At this stage, it is
not possible to estimate the impact of adoption on the Company's financial
position or results of operations.
RECLASSIFICATIONS--
Certain items for prior years' financial statements have been reclassified
to conform to the 1998 presentation.
3. U.S. DOLLAR AMOUNTS:
U.S. dollar amounts are included solely for convenience. These translations
should not be construed as representations that the yen amounts actually
represent, or have been or could be converted into, U.S. dollars. As
F-13
<PAGE>
NIPPON TELEGRAPH AND TELEPHONE CORPORATION
AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
the amounts shown in U.S. dollars are for convenience only, the rate of
(Yen)132 = US$1, the approximate current rate at March 31, 1998, has been used
for the purpose of presentation of the U.S. dollar amounts in the accompanying
consolidated financial statements.
4. RELATED PARTY TRANSACTIONS:
The Company and its subsidiaries have entered into a number of different
types of transactions with affiliated companies, of which major transactions
are the sales of telecommunications terminal equipment, the purchases of
terminal equipment and materials and the receipt of certain services.
Transactions with affiliated companies for each of the three years in the
period ended March 31, 1998 and the related balances at March 31, 1997 and
1998 were as follows:
<TABLE>
<CAPTION>
1996 1997 1998 1998
------------ ------------ ------------ ------------
MILLIONS OF YEN MILLIONS OF
U.S. DOLLARS
<S> <C> <C> <C> <C>
Sales.................... (Yen)158,470 (Yen)193,856 (Yen)169,347 $1,283
============ ============ ============ ======
Purchases................ (Yen)328,074 (Yen)365,910 (Yen)423,998 $3,212
============ ============ ============ ======
Receivables.............. (Yen) 40,942 (Yen) 45,339 $ 343
============ ============ ======
Payables................. (Yen)119,357 (Yen)147,718 $1,119
============ ============ ======
</TABLE>
Dividends from affiliated companies accounted for by the equity method for
the years ended March 31, 1996, 1997, and 1998 were (Yen)411 million, (Yen)522
million and (Yen)592 million ($4 million), respectively.
5. CASH AND CASH EQUIVALENTS:
Cash and cash equivalents at March 31, 1997 and 1998 comprised the
following:
<TABLE>
<CAPTION>
1997 1998 1998
------------ ------------ ------------
MILLIONS OF YEN MILLIONS OF
U.S. DOLLARS
<S> <C> <C> <C>
Cash ................................ (Yen)490,420 (Yen)573,995 $4,348
Certificates of deposit, commercial
paper and marketable securities
purchased under agreements to
resell.............................. 161,946 74,539 565
Time deposits, certificates of de-
posit and other..................... 168,774 264,702 2,005
------------ ------------ ------
(Yen)821,140 (Yen)913,236 $6,918
============ ============ ======
</TABLE>
Certificates of deposit, commercial paper and securities, including
marketable bonds of the Government of Japan, are purchased under agreements to
resell and are to be sold back to financial institutions at predetermined
selling prices and dates. Such certificates of deposit, commercial paper and
securities and other deposits are stated at amounts which approximate fair
value.
F-14
<PAGE>
NIPPON TELEGRAPH AND TELEPHONE CORPORATION
AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
6. INVENTORIES:
Inventories at March 31, 1997 and 1998 comprised the following:
<TABLE>
<CAPTION>
1997 1998 1998
------------ ------------ ------------
MILLIONS OF YEN MILLIONS OF
U.S. DOLLARS
<S> <C> <C> <C>
Telecommunications terminals to be
sold.............................. (Yen)126,694 (Yen)109,689 $ 831
Projects in progress............... 92,776 100,456 761
Materials and supplies............. 11,937 13,631 103
------------ ------------ ------
(Yen)231,407 (Yen)223,776 $1,695
============ ============ ======
</TABLE>
7. MARKETABLE SECURITIES AND OTHER INVESTMENTS:
Marketable securities and other investments include available-for-sale
securities and held-to-maturity securities. The aggregate fair value, gross
unrealized holding gains, gross unrealized holding losses and carrying amounts
by major security type at March 31, 1997 and 1998 are as follows:
<TABLE>
<CAPTION>
MARCH 31, 1997
-------------------------------------------------
GROSS GROSS
CARRYING UNREALIZED UNREALIZED
AMOUNTS GAINS LOSSES FAIR VALUE
------------ ----------- ----------- ------------
MILLIONS OF YEN
<S> <C> <C> <C> <C>
Available-for-sale:
Equity securities....... (Yen)119,770 (Yen)42,340 (Yen)51,720 (Yen)110,390
Held-to-maturity:
Debt securities......... 4,850 88 0 4,938
------------ ----------- ----------- ------------
Total................. (Yen)124,620 (Yen)42,428 (Yen)51,720 (Yen)115,328
============ =========== =========== ============
<CAPTION>
MARCH 31, 1998
-------------------------------------------------
GROSS GROSS
CARRYING UNREALIZED UNREALIZED
AMOUNTS GAINS LOSSES FAIR VALUE
------------ ----------- ----------- ------------
MILLIONS OF YEN
<S> <C> <C> <C> <C>
Available-for-sale:
Equity securities....... (Yen)118,925 (Yen)30,513 (Yen)68,980 (Yen) 80,458
Held-to-maturity:
Debt securities......... 3,507 18 0 3,525
------------ ----------- ----------- ------------
Total................. (Yen)122,432 (Yen)30,531 (Yen)68,980 (Yen) 83,983
============ =========== =========== ============
<CAPTION>
MARCH 31, 1998
-------------------------------------------------
GROSS GROSS
CARRYING UNREALIZED UNREALIZED
AMOUNTS GAINS LOSSES FAIR VALUE
------------ ----------- ----------- ------------
MILLIONS OF U.S. DOLLARS
<S> <C> <C> <C> <C>
Available-for-sale:
Equity securities....... $ 901 $ 231 $ 523 $ 609
Held-to-maturity:
Debt securities......... 27 0 0 27
------------ ----------- ----------- ------------
Total................. $ 928 $ 231 $ 523 $ 636
============ =========== =========== ============
</TABLE>
F-15
<PAGE>
NIPPON TELEGRAPH AND TELEPHONE CORPORATION
AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
During the years ended March 31, 1996, 1997 and 1998, the net unrealized
gain or loss on available-for-sale securities included in the separate
component of shareholders' equity, net of applicable taxes, increased by
(Yen)36 million, decreased by (Yen)27,607 million and decreased by (Yen)15,413
million ($117 million), respectively.
Maturities of debt securities classified as held-to-maturity at March 31,
1998 are as follows:
<TABLE>
<CAPTION>
1998 1998
--------------------- --------------
CARRYING FAIR CARRYING FAIR
AMOUNTS VALUE AMOUNTS VALUE
---------- ---------- -------- -----
MILLIONS OF YEN MILLIONS OF
U.S. DOLLARS
<S> <C> <C> <C> <C>
Due after 1 year through 5 years....... (Yen) 783 (Yen) 815 $ 6 $ 6
Due after 5 years through 10 years..... 2,724 2,710 21 21
---------- ---------- --- ---
Total................................ (Yen)3,507 (Yen)3,525 $27 $27
========== ========== === ===
</TABLE>
Proceeds from sales of available-for-sale securities for the years ended
March 31, 1996, 1997 and 1998 were immaterial.
In the ordinary course of business, the Company maintains long-term
investment securities, included in marketable securities and other
investments, issued by a large number of privately held companies. The
aggregate carrying amounts of the investments in privately held companies were
(Yen)39,707 million and (Yen)40,945 million ($310 million) at March 31, 1997
and 1998, respectively. The corresponding fair values at those dates were not
computed as such estimation was not readily determinable.
8. INTANGIBLE AND OTHER ASSETS:
Intangible and other assets and the related accumulated amortization at
March 31, 1997 and 1998 were as follows:
<TABLE>
<CAPTION>
1997 1998 1998
-------------- -------------- ------------
MILLIONS OF YEN MILLIONS
OF
U.S. DOLLARS
<S> <C> <C> <C>
Computer software............. (Yen)1,683,924 (Yen)1,881,423 $14,253
Rights to use utility
facilities and other......... 539,762 590,309 4,472
-------------- -------------- -------
2,223,686 2,471,732 18,725
Accumulated amortization...... (1,163,186) (1,272,983) (9,643)
-------------- -------------- -------
1,060,500 1,198,749 9,082
Deferred periodic pension
costs (See Note 10).......... 593,789 625,065 4,735
Prepaid pension costs (See
Note 10)..................... -- 80,689 611
-------------- -------------- -------
(Yen)1,654,289 (Yen)1,904,503 $14,428
============== ============== =======
</TABLE>
Computer software is recorded at cost and is amortized over an estimated
useful life of five years. Rights to use utility facilities are acquired for
lump-sum cash payments and mainly consist of cable tunnel and public use joint
tunnels. Such rights are recorded at cost and are amortized over their
estimated useful lives of eighteen years. Other intangibles are also recorded
at cost and amortized over their estimated useful lives averaging twelve
years.
F-16
<PAGE>
NIPPON TELEGRAPH AND TELEPHONE CORPORATION
AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
9. SHORT-TERM BORROWINGS AND LONG-TERM DEBT:
Short-term borrowings at March 31, 1998 represented one year unsecured
short-term bank loans bearing interest and commercial paper at a weighted
average rate of 1.21 percent per annum.
Long-term debt at March 31, 1997 and 1998 comprised the following:
<TABLE>
<CAPTION>
1997 1998 1998
-------------- -------------- ------------
MILLIONS OF YEN MILLIONS OF
U.S. DOLLARS
<S> <C> <C> <C>
Debt denominated in Japanese
yen:
1.85%-7.2% coupon bonds due
1998-2010.................... (Yen)1,503,482 (Yen)1,647,100 $12,478
Unsecured indebtedness to
banks--
2.9% (weighted average)
loans due 1998-2022........ 2,779,645 2,998,440 22,715
1.3% (weighted average)
floating rate loans due
1998-2005.................. 152,172 58,042 440
-------------- -------------- -------
4,435,299 4,703,582 35,633
-------------- -------------- -------
Debt denominated in foreign
currencies:
6.0%-9 1/2% U.S. dollar notes
due 1998-2008................ 350,280 479,160 3,630
4.0%-6.0% Swiss franc bonds
and notes due 1999-2006...... 97,763 74,566 565
8 3/4% ECU notes due 1997..... 29,222 -- --
7 1/4%-10 1/4% Canadian dollar
notes due 1998-2001.......... 73,240 56,658 429
7 1/8% Deutsche mark bonds due
2000......................... 52,185 28,872 219
7 3/8%-10 7/8% Sterling pound
bonds due 2001-2003.......... 72,461 78,967 599
1.6%-5.4% yen notes due 1998-
2007......................... 85,000 167,000 1,265
Unsecured indebtedness to
banks--
10.67% Thai baht loan due
2000....................... 3,276 2,378 18
5.7% (weighted average) U.S.
dollar floating rate loans
due 2000-2004.............. 11,307 12,029 91
-------------- -------------- -------
774,734 899,630 6,816
-------------- -------------- -------
Total long-term debt principal.. 5,210,033 5,603,212 42,449
Less--Deferred bond discounts... 57 1,681 13
-------------- -------------- -------
5,209,976 5,601,531 42,436
Less--Current maturities........ 667,964 825,422 6,253
-------------- -------------- -------
Total long-term debt...... (Yen)4,542,012 (Yen)4,776,109 $36,183
============== ============== =======
</TABLE>
Interest rates and due dates are stated at March 31, 1998.
At March 31, 1998, buildings and land of certain consolidated subsidiaries,
with a book value of (Yen)13,630 million ($103 million), were mortgaged as
security for certain loans.
All the holders of the bonds and notes issued by the Company referred to in
the above table generally have a preferential right under the NTT Law to be
paid prior to other unsecured indebtedness subject to certain general
preferential rights provided for in the Japanese Civil Code, such as
preferential rights of employees to wages.
F-17
<PAGE>
NIPPON TELEGRAPH AND TELEPHONE CORPORATION
AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The bond and note agreements as to the long-term debt at March 31, 1998
stipulate, among other things, the following:
(1) Swiss franc bonds of (Yen)175 million ($1 million) are subject to
annual redemption. The Company shall repurchase, at market value, a
prescribed amount of bonds if the price within 60 days prior to each
redemption installment date does not exceed the par value of the bonds.
(2) At the option of the Company on terms as defined, all the bonds and
notes are redeemable generally at the principal amount or repurchasable at
the current value.
In February and November 1996, debts totaling (Yen)50,000 million and
(Yen)50,00 million, respectively, were removed from the balance sheet through
placing cash in a bank. The principal and interest of the funds deposited in a
trust fund with the bank will be sufficient to fund the scheduled principal
and interest payments of these debt issues. The balance of these outstanding
debts at March 31, 1998 was (Yen)100,000 million ($758 million).
Under Statement of Financial Accounting Standards No. 125 ("SFAS 125"),
"Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities," the Company and a certain subsidiary
recognized debts of (Yen)65,000 million ($492 million), which are not
considered extinguished, in the balance sheet with the related funds. These
funds, which are included in "Intangible and other assets" in the accompanying
consolidated financial statements, were subject to withdrawal restrictions.
The aggregate amounts of annual maturities of long-term debt during each of
the five years ending March 31, 2003 and thereafter are as follows:
<TABLE>
<CAPTION>
1998 1998
-------------- ------------
MILLIONS MILLIONS OF
OF YEN U.S. DOLLARS
<S> <C> <C>
Year ending March 31
1999........................................... (Yen) 825,422 $ 6,253
2000........................................... 874,918 6,628
2001........................................... 897,729 6,801
2002........................................... 851,401 6,450
2003........................................... 652,277 4,942
Thereafter..................................... 1,499,784 11,362
-------------- -------
(Yen)5,601,531 $42,436
============== =======
</TABLE>
F-18
<PAGE>
NIPPON TELEGRAPH AND TELEPHONE CORPORATION
AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
10. EMPLOYEES' SEVERANCE PAYMENTS:
The following tables presents reconciliation of the status of the NTT
Severance Payment Plan at March 31, 1997 and 1998:
<TABLE>
<CAPTION>
1997 1998 1998
-------------- -------------- --------
MILLIONS OF YEN MILLIONS
OF U.S.
DOLLARS
<S> <C> <C> <C>
Actuarial present value of benefit
obligations:
Vested benefit obligation........ (Yen)2,739,830 (Yen)2,992,165 $22,668
============== ============== =======
Accumulated benefit obligation... (Yen)3,174,125 (Yen)3,176,526 $24,065
============== ============== =======
Projected benefit obligation..... (Yen)4,052,192 (Yen)4,011,150 $30,388
Plan assets at fair value.......... 386,013 488,901 3,704
-------------- -------------- -------
Projected benefit obligation in
excess of plan assets............. 3,666,179 3,522,249 26,684
Unrecognized transition
obligation........................ (489,049) (419,697) (3,180)
Unrecognized prior service costs... (102,987) (93,327) (707)
Unrecognized net loss.............. (299,146) (140,192) (1,062)
Adjustment needed to recognize
minimum liability................. 20,092 21,728 165
-------------- -------------- -------
Liability for employees' severance
payments recognized in the
consolidated balance sheet........ (Yen)2,795,089 (Yen)2,890,761 $21,900
============== ============== =======
</TABLE>
The charges to income for employees' severance indemnities for each of the
three years in the period ended March 31, 1998 included the following
components:
<TABLE>
<CAPTION>
1996 1997 1998 1998
------------ ------------ ------------ ------------
MILLIONS OF YEN MILLIONS OF
U.S. DOLLARS
<S> <C> <C> <C> <C>
Service cost............ (Yen)152,761 (Yen)156,730 (Yen)157,153 $ 1,91
Interest cost on
projected benefit
obligation............. 177,662 171,278 164,229 1,244
Actual return on plan
assets................. (20,666) (5,756) (32,321) (245)
Net amortization and
deferral............... 88,332 72,597 98,324 745
------------ ------------ ------------ ------
Net periodic severance
payments under SFAS
87..................... 398,089 394,849 387,385 2,935
Deduct: Amounts
attributable to
regulatory accounting
practices under SFAS
71..................... (119,607) (148,812) (107,501) (814)
------------ ------------ ------------ ------
Total cost for
employees' severance
indemnities as recorded
in the consolidated
statement of income.... (Yen)278,482 (Yen)246,037 (Yen)279,884 $2,121
============ ============ ============ ======
Assumptions in
determination of net
pension cost:
Discount rate......... 4.5% 4.0% 3.5%
Long-term rate of
salary increases..... 4.5% 4.0% 3.5%
Long-term rate of
return on funded
assets............... 4.5% 4.0% 3.5%
</TABLE>
In 1995, the Company offered a voluntary early retirement program to certain
employees. Under the program, employees were entitled to receive special
termination benefits if they accepted the program which was offered during a
short period of time. The number of individuals to whom this program was
offered was limited to those employees between the ages of 40 to 57 years old
with 10 or more years of service with the Company.
F-19
<PAGE>
NIPPON TELEGRAPH AND TELEPHONE CORPORATION
AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
As the result, approximately 9,900 employees accepted the offer in 1995, at
which time the special termination program benefits, amounting to (Yen)33,707
million, were recognized as an expense.
As more fully described in Note 2, the Company established the NTT Kosei
Nenkin Kikin ("the NTT group companies' welfare pension plan"), a defined
benefit pension plan to which both the Company and the employees make
contributions and which is regulated by the Japanese Welfare Pension Insurance
Law.
<TABLE>
<CAPTION>
1998 1998
--------------- ------------
MILLIONS OF YEN MILLIONS OF
U.S. DOLLARS
<S> <C> <C>
Actuarial present value of benefit
obligations:
Vested benefit obligation................... (Yen)442,778 $3,354
------------ ------
Accumulated benefit obligation.............. (Yen)462,582 $3,504
------------ ------
Projected benefit obligation................ (Yen)733,124 $5,554
Plan assets at fair value..................... 764,153 5,789
------------ ------
Plan assets in excess of projected benefit
obligation................................... 31,029 235
Unrecognized net gain......................... 49,660 376
------------ ------
Prepaid pension costs......................... (Yen) 80,689 $ 611
============ ======
</TABLE>
<TABLE>
<CAPTION>
1998 1998
--------------- ------------
MILLIONS OF YEN MILLIONS OF
U.S. DOLLARS
<S> <C> <C>
Service cost................................... (Yen)132,444 $ 1,003
Interest cost on projected benefit obligation.. 19,788 150
Actual return on plan assets................... (63,150) (478)
Net amortization and deferral.................. 36,556 277
Employee contributions......................... (31,362) (238)
------------ -------
Net periodic severance payments under SFAS 87.. 94,276 714
Gain on transferred plan assets in excess of
projected
benefit obligation as of April 1, 1997........ (133,951) (1,015)
Deduct: Amounts attributable to regulatory
accounting practices under SFAS 71............ 77,860 590
------------ -------
Total cost for employees' severance indemnities
as
recorded in the consolidated statement of
income........................................ (Yen) 38,185 $289
============ =======
Assumptions in determination of net pension
cost:
Discount rate................................ 3.5%
Long-term rate of salary increases........... 3.5%
Long-term rate of return on funded assets.... 4.0%
------------
</TABLE>
11. INCOME TAXES:
The Company and its subsidiaries are subject to a number of different taxes,
based on income, which in the aggregate indicate a normal statutory tax rate
of approximately 51 percent. Due to a change in Japanese income tax
regulations, effective April 1, 1998, the statutory rate was reduced to
approximately 48% and such amount has been used in calculating the future
expected tax effects of temporary differences. However, there are certain
deductions and credits available and a limit on deductions of a certain
nature. The effective tax rates of the
F-20
<PAGE>
NIPPON TELEGRAPH AND TELEPHONE CORPORATION
AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Company for the years ended March 31, 1996, 1997 and 1998 differ from the
normal statutory rates for the following reasons:
<TABLE>
<CAPTION>
PERCENT OF INCOME
BEFORE INCOME
TAXES
--------------------
1996 1997 1998
----- ----- ------
<S> <C> <C> <C>
Normal statutory tax rate............................ 51.00% 51.00% 51.000%
Tax credit primarily for expenditures for research
and development, and certain equipment.............. (3.75) (0.40) (0.38)
Changes in income tax rate........................... -- -- 6.49
Provision for valuation allowance.................... -- -- 4.66
Other................................................ 2.82 0.58 2.04
----- ----- ------
Effective tax rate................................... 50.07% 51.18% 63.81%
===== ===== ======
</TABLE>
Significant components of the deferred tax assets and liabilities at March
31, 1997 and 1998 are as follows:
<TABLE>
<CAPTION>
1997 1998 1998
------------ ------------ --------
MILLIONS OF YEN MILLIONS
OF U.S.
DOLLARS
<S> <C> <C> <C>
Deferred tax assets:
Liability for employees' severance
payments........................... (Yen)599,909 (Yen)569,678 $4,316
Advance received.................... 8,835 11,012 83
Accrued enterprise tax.............. 22,905 18,951 144
Depreciation........................ 20,287 23,263 176
Operating loss carryforwards for tax
purposes........................... 72,766 2,810 21
Financial assistance to subsidiary
companies.......................... -- 95,375 723
Other............................... 108,887 101,062 766
------------ ------------ ------
Total gross deferred tax assets..... 833,589 822,156 6,229
Less valuation allowance............ (1,479) (30,573) (232)
------------ ------------ ------
Total deferred tax assets........... 832,110 791,583 5,997
------------ ------------ ------
Deferred tax liabilities:
Valuation for securities............ 22,059 17,011 129
Special reserve for tax purposes.... 42,136 41,897 318
Gains on sales of subsidiary
stocks............................. 31,972 31,972 242
Other............................... 49,962 50,684 384
------------ ------------ ------
Total gross deferred tax
liabilities........................ 146,129 141,564 1,073
------------ ------------ ------
Net deferred tax assets............. (Yen)685,981 (Yen)650,019 $4,924
============ ============ ======
</TABLE>
The Company and NTT Mobile Communications Network, Inc., and its eight
regional subsidiaries (together, "NTT DoCoMo", a trademark which stands for
"Do Communications over the Mobile Network") are major shareholders of NTT
Personal Group, which consists of NTT Central Personal Communications Network
Inc. and eight other NTT subsidiaries. In May 1998 the Company decided to
transfer its PHS business to NTT DoCoMo by the end of fiscal year 1999 and to
liquidate NTT Personal Group following the transfer. Through the liquidation,
the Company and NTT DoCoMo will provide financial assistance to NTT Personal
Group in the form of intercompany loans. The proceeds of such loans, which may
total up to approximately (Yen)200 billion, will
F-21
<PAGE>
NIPPON TELEGRAPH AND TELEPHONE CORPORATION
AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
be used by NTT Personal Group to settle outstanding bank debt and other
liabilities. Although losses relating to the financial assistance have already
been recognized on a consolidated basis, they are not tax deductible until the
liquidation is completed. Therefore, the Company has recognized deferred tax
assets related to these losses.
The valuation allowance at March 31, 1997 mainly related to deferred tax
assets of consolidated subsidiaries with operating loss carryforwards for tax
purposes that are not expected to be realized. The valuation allowance at
March 31, 1998 mainly related to deferred tax assets on the losses related to
financial assistance to subsidiary companies which are not expected to be tax
deductible. The net changes in the total valuation allowance for the years
ended March 31, 1997 and 1998 were a decrease of (Yen)1,862 million and an
increase of (Yen)29,094 million ($220 million), respectively.
Net deferred tax assets at March 31, 1997 and 1998 are included in the
consolidated balance sheet as follows:
<TABLE>
<CAPTION>
1997 1998 1998
------------ ------------ --------
MILLIONS OF YEN MILLIONS
OF U.S.
DOLLARS
<S> <C> <C> <C>
Prepaid expenses and other current
assets............................... (Yen)101,009 (Yen)138,686 $1,051
Deferred income taxes (investments and
other assets)........................ 586,020 511,334 3,873
Other long-term liabilities........... (1,048) (1) 0
------------ ------------ ------
(Yen)685,981 (Yen)650,019 $4,924
============ ============ ======
</TABLE>
Operating loss carryforwards for tax purposes of consolidated subsidiaries
at March 31, 1998 amounted to approximately (Yen)227,391 million ($1,723
million) and are available as an offset against future taxable income of such
subsidiaries. Theses carryforwards expire at various dates up to five years.
Realization is dependent on such subsidiaries generating sufficient taxable
income prior to expiration of loss carryforwards. Although realization is not
assured, management believes it is more likely than not that all of the
deferred tax assets, less valuation allowances, will be realized. The amount
of such net deferred tax assets considered realizable, however, could be
reduced in the near term if estimates of future taxable income during the
carryforward period are reduced.
12. CONSUMPTION TAX:
The consumption tax rate, with minor exceptions, for all taxable goods and
services is 3 percent. Effective April 1, 1997, the rate has been raised to 5
percent. A tax credit for consumption taxes incurred (which are included in
the cost of purchased goods and services) is available against consumption
taxes attributable to revenue in the same taxable period.
13. SHAREHOLDERS' EQUITY:
As noted previously, pursuant to the NTT Law as approved by the Japanese
Diet, the Company was incorporated on April 1, 1985, upon which all the assets
and liabilities of the Public Corporation were transferred to the Company. As
provided for in the supplementary provisions of the NTT Law, all the new
shares held by the Public Corporation were transferred to the Japanese
government upon the dissolution of the Public Corporation on April 1, 1985.
The NTT Law specifies, however, that such government ownership may eventually
be reduced to one-third. since incorporation, the Government of Japan has sold
5,400 thousand shares of the Company's common stock to the public. As a normal
part of its business operations, the Company provides various
telecommunications and other services to the Government of Japan.
According to the NTT Law, the Company shall obtain authorization from the
Minister of Posts and Telecommunications for certain financial matters
including (1) new issue of shares, convertible debentures or
F-22
<PAGE>
NIPPON TELEGRAPH AND TELEPHONE CORPORATION
AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
debentures with preemptive rights to acquire new shares; (2) any resolution
for (i) change in the Articles of Incorporation, (ii) appropriation of profits
or (iii) merger or dissolution; and (3) disposition of major
telecommunications trunk lines and equipment or providing mortgages on such
properties.
The Japanese Commercial Code provides that (i) all appropriations of
retained earnings, including dividends, require approval at an ordinary
general meeting of shareholders, (ii) interim cash dividends can be
distributed upon the approval of the board of directors, if the Articles of
Incorporation provide for such interim cash dividends, subject to some
restrictions in the amount, and (iii) an amount equal to at least 10 percent
of cash dividends and other appropriations paid in cash be appropriated from
retained earnings to a legal reserve until the reserve equals 25 percent of
stated capital.
On November 24, 1995, based upon the resolution of the Board of Directors'
Meeting held on April 28, 1995, the Company capitalized the aggregate amount
of (Yen)15,600 million ($118 million) of its additional paid-in capital to the
common stock account and made a free share distribution of 312,000 shares to
shareholders of record at September 30, 1995 representing 2 percent of
outstanding shares. In Japan, no accounting entry is required for such a free
share distribution. Had the distribution been accounted for in the manner
adopted by companies in the United States of America, (Yen)234,624 million
($1,777 million) would have been transferred from retained earnings to the
applicable capital accounts.
The amount of unrestricted consolidated retained earnings pursuant to
accounting principles generally accepted in Japan was (Yen)1,373,748 million
($10,407 million) at March 31, 1998.
In accordance with customary practice in Japan, the appropriations are not
accrued in the financial statements for the period to which they relate but
are recorded in the subsequent accounting period after shareholders' approval
has been obtained. Retained earnings at March 31, 1998 includes amounts
representing final cash dividends of (Yen)39,780 million ($301 million),
(Yen)2,500 ($19) per share, and the related transfer to the legal reserve of
(Yen)3,978 million ($30 million), which were approved at the shareholders'
meeting held on June 26, 1998.
14. BUSINESS SEGMENT AND GEOGRAPHIC AREA:
The Company and its subsidiaries are engaged predominantly in a single
industry, telecommunications services in Japan which include telephone,
telegraph, leased circuit, sale of telecommunication equipment and data
communications services.
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 131 ("SFAS 131"), "Disclosures about Segments of an Enterprise and Related
Information", which requires that public business enterprises report certain
information about operating segments in financial statements of the enterprise
and also requires that they report certain information about their products
and services, the geographic areas in which they operate, and their major
customers. In the case of the Company, SFAS 131 is effective for the fiscal
year beginning April 1, 1998. Management does not believe that the new
standard will have a material effect on the consolidated financial position or
operating results of the Company.
F-23
<PAGE>
NIPPON TELEGRAPH AND TELEPHONE CORPORATION
AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
15. LEASES:
The Company and its subsidiaries lease certain office space, employees'
residential facilities and other assets. Leases qualifying as capital leases
at March 31, 1997 and 1998 were as follows:
<TABLE>
<CAPTION>
CLASS OF PROPERTY 1997 1998 1998
----------------- ------------ ------------ ------------
MILLIONS OF YEN MILLIONS OF
U.S. DOLLARS
<S> <C> <C> <C>
Buildings........................... (Yen)394,288 (Yen)393,233 $ 2,979
Machinery, vessels and tools........ 169,369 305,545 2,315
Accumulated depreciation............ (95,943) (197,526) (1,497)
------------ ------------ -------
(Yen)467,714 (Yen)501,252 $ 3,797
============ ============ =======
</TABLE>
Future minimum lease payments by year under capital leases together with the
present value of the net minimum lease payments at March 31, 1998 are as
follows:
<TABLE>
<CAPTION>
MILLIONS OF MILLIONS OF
YEAR ENDING MARCH 31 YEN U.S. DOLLARS
-------------------- ------------ ------------
<S> <C> <C>
1999............................................... (Yen) 92,581 $ 701
2000............................................... 81,974 621
2001............................................... 68,209 517
2002............................................... 42,930 325
2003............................................... 35,151 266
Later years........................................ 1,182,740 8,960
------------ -------
Total minimum lease payments....................... 1,503,585 11,390
Less--Amount representing interest................. 976,036 7,394
------------ -------
Present value of net minimum lease payments........ 527,549 3,996
Less--Current obligation........................... 53,868 408
------------ -------
Long-term capital lease obligations................ (Yen)473,681 $ 3,588
============ =======
</TABLE>
Rental expenses under operating leases for land, buildings and equipment
under cancellable leases, which are generally renewed upon expiration, for the
years ended March 31, 1996, 1997 and 1998 were (Yen)173,223 million,
(Yen)178,519 million and (Yen)153,055 million ($1,160 million), respectively.
16. RESEARCH AND DEVELOPMENT EXPENSES AND ADVERTISING COSTS:
RESEARCH AND DEVELOPMENT EXPENSES--
Research and development expenses are charged to income as incurred and such
amounts charged to income for the years March 31, 1996, 1997 and 1998 were
(Yen)318,105 million, (Yen)328,529 million and (Yen)288,931 million ($2,189
million), respectively.
ADVERTISING COSTS--
Advertising costs are expensed as incurred. Advertising costs included in
other operating expenses were (Yen)59,973 million, (Yen)75,244 million and
(Yen)83,452 million ($632 million) for the years ended March 31, 1996, 1997
and 1998, respectively.
F-24
<PAGE>
NIPPON TELEGRAPH AND TELEPHONE CORPORATION
AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
17. GAINS ON SALES OF SUBSIDIARY STOCKS:
In April 1995, the Company sold 48,000 shares of NTT Data Corporation ("NTT
Data"), a consolidated subsidiary, to third parties for (Yen)49,866 million,
net of related expenses. In addition, on April 26, 1995 and February 14, 1996,
NTT Data issued 20,000 shares and 33,000 shares of common stock in a public
offering to third parties at a price of (Yen)1,040 thousand and (Yen)3,050
thousand per share, respectively, which were in excess of the Company's
average per share carrying value. The issuances of these shares for
(Yen)20,800 million and (Yen)100,650 million are regarded as sales of a part
of the Company's interest in NTT Data. As a result of these issuances and
sales, the Company's shareholding in NTT Data declined from 100 percent to 60
percent. The resulting gains on these issuances and sales of subsidiary stock,
together with those on other similar transactions, amounting to approximately
(Yen)98,011 million were included in the consolidated statement of income for
the year ended March 31, 1996. In the consolidated statement of cash flows for
the year ended March 31, 1996, the gains on sales of subsidiary stocks are
excluded from the cash flows from operating activities and the related cash
proceeds of (Yen)178,770 million are included in the cash flows from investing
activities.
18. FOREIGN EXCHANGE GAIN AND LOSS:
Foreign exchange results (mainly arising from foreign currency borrowings)
for the years ended March 31, 1996, 1997 and 1998 were losses of (Yen)708
million, (Yen)2,120 million and (Yen)799 million ($6 million), respectively.
19. FINANCIAL INSTRUMENTS:
The carrying amounts and the estimated fair values of financial instruments
excluding debt and equity securities at March 31, 1997 and 1998 are as
follows:
<TABLE>
<CAPTION>
1997 1998 1998
-------------------------- -------------------------- --------------------
CARRYING CARRYING CARRYING
AMOUNTS FAIR VALUE AMOUNTS FAIR VALUE AMOUNTS FAIR VALUE
------------ ------------ ------------ ------------ -------- ----------
MILLIONS OF
MILLIONS OF YEN U.S. DOLLARS
<S> <C> <C> <C> <C> <C> <C>
Cash and cash
equivalents............ (Yen)821,140 (Yen)821,140 (Yen)913,236 (Yen)913,236 $ 6,918 $ 6,918
Notes and accounts
receivable, trade...... 930,792 930,792 1,085,381 1,085,381 8,223 8,223
Short-term borrowings... (387,544) (387,544) (456,995) (456,995) (3,462) (3,462)
Accounts payable, trade (1,115,840) (1,115,840) (1,131,444) (1,131,444) (8,572) (8,572)
Accrued payroll......... (427,276) (427,276) (494,387) (494,387) (3,745) (3,745)
Long-term debt including
current portion........ (5,209,976) (5,433,703) (5,601,531) (5,756,528) (42,436) (43,610)
Forward exchange
contracts.............. (11,813) (16,664) (52,473) 41,302 (398) 313
Interest rate and
currency swap
agreements............. -- -- (10,690) 9,425 (81) 71
</TABLE>
CASH AND CASH EQUIVALENTS, NOTES AND ACCOUNTS RECEIVABLE, TRADE, SHORT-TERM
BORROWINGS, ACCOUNTS PAYABLE, TRADE AND ACCRUED PAYROLL--
The carrying amounts approximate fair value because of the short maturities
of such instruments.
F-25
<PAGE>
NIPPON TELEGRAPH AND TELEPHONE CORPORATION
AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
LONG-TERM DEBT INCLUDING CURRENT PORTION--
The fair value of long-term debt is estimated based on the discounted
amounts of future cash flows using the Company's current incremental rates of
borrowings for similar liabilities.
DERIVATIVE FINANCIAL INSTRUMENTS--
The fair values of forward exchange contracts, interest rate swap agreements
and currency swap agreements are estimated based on the amounts the Company
and certain subsidiaries would receive or pay to terminate the contracts at
March 31, 1997 and 1998 with discounted amounts of net future cash flows.
The table below shows the notional principal amounts of those derivative
financial instruments at March 31, 1997 and 1998:
<TABLE>
<CAPTION>
1997 1998 1998
------------ ------------ ------------
MILLIONS OF YEN MILLIONS
OF
U.S. DOLLARS
<S> <C> <C> <C>
Forward exchange contracts.......... (Yen)727,007 (Yen)499,056 $3,781
Interest rate and currency swap
agreements......................... 81,324 553,270 4,191
</TABLE>
CONCENTRATIONS OF CREDIT RISK--
The Company and certain subsidiaries do not have any significant
concentration of business transacted with an individual counterparty or groups
of counterparties that could, if suddenly eliminated, severely impact our
operations at March 31, 1998.
20. COMMITMENTS AND CONTINGENT LIABILITIES:
Commitments outstanding at March 31, 1998 for the purchase of property,
plant and equipment and other assets approximated (Yen)500,519 million ($3,792
million).
Contingent liabilities at March 31, 1998 for loans guaranteed amounted to
(Yen)19,356 million ($147 million).
At March 31, 1998, the Company and its subsidiaries had no material
litigation or claims outstanding, pending or threatened against it, which
would have a material adverse effect on the Company's consolidated financial
position or results of operations.
21. SUBSEQUENT EVENTS:
Subsequent to March 31, 1998, the Company issued (Yen)100,000 million ($758
million) coupon bonds.
On May 12, 1998, NTT Data issued 27,500 shares of common stock in a public
offering to third parties at a price of (Yen)5,468 thousand ($41,424) per
share, which was in excess of the Company's average per share carrying value.
The issuance of these shares of (Yen)150,370 million ($1,139 million) is
regarded as a sale of a part of the Company's interest in NTT Data. As a
result of the issuance, the Company's shareholding in NTT Data declined from
60% to 54% and gains on sales of subsidiary stocks in the aggregate amount of
approximately (Yen)69,106 million ($523 million) are expected to be recognized
in the consolidated financial statements for the year ending March 31, 1999.
F-26
<PAGE>
NIPPON TELEGRAPH AND TELEPHONE CORPORATION
AND ITS SUBSIDIARIES
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
YEAR ENDED MARCH 31
<TABLE>
<CAPTION>
ADDITIONS
BALANCE AT CHARGED TO
BEGINNING OF COSTS AND DEDUCTIONS BALANCE AT
PERIOD EXPENSES (NOTE 1) END OF PERIOD
------------ ----------- ------------ -------------
MILLION OF YEN
<S> <C> <C> <C> <C>
Year ended March 31, 1996:
Allowance for doubtful
accounts............... (Yen)16,495 (Yen)19,124 (Yen)(13,079) (Yen)22,540
=========== =========== ============ ===========
Year ended March 31, 1997:
Allowance for doubtful
accounts............... (Yen)22,540 (Yen)25,091 (Yen)(21,268) (Yen)26,363
=========== =========== ============ ===========
Year ended March 31, 1998:
Allowance for doubtful
accounts............... (Yen)26,363 (Yen)27,888 (Yen)(18,435) (Yen)35,816
=========== =========== ============ ===========
- --------
Note: 1. Amounts written off.
<CAPTION>
BALANCE AT
BEGINNING OF BALANCE AT
PERIOD ADDITIONS DEDUCTIONS END OF PERIOD
------------ ----------- ------------ -------------
<S> <C> <C> <C> <C>
Year ended March 31, 1996:
Valuation allowance
--Deferred tax
assets............... (Yen) 1,845 (Yen) 1,496 (Yen) -- (Yen) 3,341
=========== =========== ============ ===========
Year ended March 31, 1997:
Valuation allowance
--Deferred tax
assets............... (Yen) 3,341 (Yen) -- (Yen)( 1,862) (Yen) 1,479
=========== =========== ============ ===========
Year ended March 31, 1998:
Valuation allowance
--Deferred tax
assets............... (Yen) 1,479 (Yen)30,573 (Yen)( 1,479) (Yen)30,573
=========== =========== ============ ===========
</TABLE>
F-27
<PAGE>
EXHIBIT 1
We hereby consent to the incorporation by reference in the Prospectus
constituting part of the Registration Statement on Form F-3 (No. 333-8264) of
Nippon Telegraph and Telephone Corporation of our report dated June 26, 1998
appearing on page F-2 of this Form 20-F.
Price Waterhouse
Tokyo, Japan
September 18, 1998
