<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, 1999
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)
3-1, OTEMACHI 2-CHOME, CHIYODA-KU, TOKYO 100-8116, 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
----
<S> <C>
PART I
ITEM 1--DESCRIPTION OF BUSINESS......................................... 4
ITEM 2--DESCRIPTION OF PROPERTY......................................... 31
ITEM 3--LEGAL PROCEEDINGS............................................... 31
ITEM 4--CONTROL OF REGISTRANT........................................... 31
ITEM 5--NATURE OF TRADING MARKET........................................ 32
ITEM 6--EXCHANGE CONTROLS AND OTHER LIMITATIONS AFFECTING SECURITY
HOLDERS ......................................................... 34
ITEM 7--TAXATION........................................................ 36
ITEM 8--SELECTED FINANCIAL DATA......................................... 39
ITEM 9--MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS............................................ 41
ITEM 9A--QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK....... 55
ITEM 10--DIRECTORS AND OFFICERS OF REGISTRANT............................ 58
ITEM 11--COMPENSATION OF DIRECTORS AND OFFICERS.......................... 58
ITEM 12--OPTIONS TO PURCHASE SECURITIES FROM REGISTRANT OR SUBSIDIARIES.. 58
ITEM 13--INTEREST OF MANAGEMENT IN CERTAIN TRANSACTIONS.................. 58
PART II
ITEM 14--DESCRIPTION OF SECURITIES TO BE REGISTERED...................... 59
PART III
ITEM 15--DEFAULTS UPON SENIOR SECURITIES................................. 59
ITEM 16--CHANGES IN SECURITIES AND CHANGES IN SECURITY FOR REGISTERED
SECURITIES....................................................... 60
PART IV
ITEM 17--FINANCIAL STATEMENTS............................................ 60
ITEM 18--FINANCIAL STATEMENTS............................................ 60
ITEM 19--FINANCIAL STATEMENTS AND EXHIBITS............................... 60
SIGNATURES.......................................................... 61
</TABLE>
2
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In this annual report, except as otherwise specified, "NTT" refers to Nippon
Telegraph and Telephone Corporation (hereinafter also sometimes referred to as
the "registrant"), "NTT Group" refers to NTT 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 NTT 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 121 yen to the dollar, the approximate rate of exchange on
March 31, 1999, the date of the most recent balance sheet included herein.
On August 16, 1999, 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)114.83.
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>
Yen per Dollar
---------------------------------
Years Ended March 31 High Low Average(1) Year-end
- -------------------- ------ ------ ---------- --------
<S> <C> <C> <C> <C>
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.......................................... 147.14 108.83 127.86 118.43
2000 (through August 16, 1999)................ 124.45 113.98 120.49
</TABLE>
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(1) The average of month-end rates during the period.
3
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PART I
ITEM 1--DESCRIPTION OF BUSINESS
NTT Group
NTT Group 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 seven major classes: telephone services, telegraph
services, leased circuit services, data communication facility services, ISDN
(Integrated Services Digital Network) services, sale of telecommunication
equipment and other services.
On June 29, 1999, NTT's reorganization was approved at the ordinary general
meeting of shareholders. At 0:00 a.m., on July 1, 1999 the relevant NTT
business activities were transferred to NTT's respective wholly-owned
subsidiaries, Nippon Telegraph and Telephone East Corporation ("NTT East"),
Nippon Telegraph and Telephone West Corporation ("NTT West"), and NTT
Communications Corporation ("NTT Communications"). NTT East inherited the
intra-prefectural telecommunications services in the Hokkaido, Tohoku, Kanto,
Tokyo and Shinetsu regions and related services. NTT West inherited the intra-
prefectural telecommunications services in the Tokai, Hokuriku, Kansai,
Chugoku, Shikoku and Kyushu regions and related services. NTT Communications
inherited the domestic inter-prefectural telecommunications and multimedia
network services and related services, and was allowed to enter the
international telecommunications business. See "Description of Business--
Reorganization".
On April 1, 1998, NTT Group became subject to Statement of Financial
Accounting Standards No. 131 ("SFAS 131"), "Disclosures about Segments of an
Enterprise and Related Information." SFAS 131 requires public enterprises to
report certain information about their products and services, the geographic
areas in which they operate and their major customers. As a result of SFAS
131, NTT Group's results are now segmented according to its four primary lines
of business; wireline services, wireless services, data communication services
and other services. The wireline segment, provided by NTT, includes telephone
services (excluding cellular services and PHS services), telegraph services,
leased circuit services, ISDN services and other related services; the
wireless segment, provided by NTT Mobile Communications Network, Inc. ("NTT
Central DoCoMo," 67% owned by NTT) and its eight regional subsidiaries
(together, "NTT DoCoMo"), includes cellular services, PHS services and other
related services; the data communication segment, provided by NTT DATA
Corporation ("NTT DATA," 54% owned by NTT), includes data communication
services and other related services; and the other services segment, provided
by other NTT Group subsidiaries, includes the sale of various
telecommunications products and other related services. See Footnote 14 to the
Notes to Consolidated Financial Statements attached hereto.
History
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, the predecessor
corporation was the sole domestic telecommunications carrier in Japan.
On April 1, 1985, NTT was incorporated as a limited liability, joint-stock
company under the Nippon Telegraph and Telephone Corporation Law (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
4
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Denwa Co., Ltd. (which merged with Teleway Japan Corporation and changed its
corporate name to KDD Corporation ("KDD") in December 1998). NTT owns
approximately 8% of the share capital of KDD, the balance being owned by the
public.
At the same time that NTT was incorporated as a private company in 1985, the
Telecommunications Business Law (the "Telecom Business Law") opening the
Japanese telecommunications services industry to competition came into effect.
The Telecom Business Law authorizes the Minister of Posts and
Telecommunications ("MPT") to regulate two types of companies: Type I
Carriers, 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, 1999,
there were 179 Type I Carriers and 6,602 Type II Carriers.
NTT's Shares are listed on the Tokyo Stock Exchange and all other stock
exchanges in Japan. In 1994, NTT 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, NTT capitalized a portion of its additional paid-in
capital and effected a 1.02-for-1 stock split thereby distributing to the
shareholders of NTT the benefits of the sale of 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 NTT, have been allowed to own Shares.
However, the aggregate amount NTT's voting rights which may be owned by
foreign nationals and foreign corporations must be less than 20% of NTT's
total voting rights. NTT 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 Law Concerning Partial Revision to the Nippon Telegraph and
Telephone Corporation Law in June 1997 (the "Revision Law"), this restriction
will continue with respect to shares of NTT.
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 NTT. 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 NTT at the time of its
establishment was 15,600 thousand. Until October 1986, the Government owned
100% of the outstanding Shares of NTT. Out of the 10,400 thousand Shares held
by the Government which were permitted to be sold under the NTT Law, the
Government sold 5,400 thousand Shares through December 1990 to a variety of
individual and institutional investors since October 1986.
In December 1990, the Ministry of Finance announced its plan that out of the
5,000 thousand Shares then available for sale under the NTT Law, the Ministry
of Finance would sell 2,500 thousand of such Shares at the rate of
approximately 500 thousand Shares per fiscal year (with any Shares remaining
unsold to be sold in future years based on market conditions), and retain the
other 2,500 thousand Shares for the time being. Prior to the offering of the
Shares in December 1998, no such sales had been made as the Government
concluded that market conditions would not permit smooth absorption of the
Shares.
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 that the Government was permitted to
sell amounted to 5,100 thousand.
5
<PAGE>
On December 18, 1998, the Government sold 1,000 thousand Shares to a variety
of individual and institutional investors in a global offering registered with
the United States Securities and Exchange Commission in the form of Shares or
American depositary shares ("ADS"). As of March 31, 1999, the Government owned
59.20% of the outstanding Shares.
The NTT Law requires that any disposition of NTT's Shares owned by the
Government must be within the limits determined by the Diet in the relevant
annual budget. Under the budget for fiscal year 2000, the Government is
permitted to sell 1,000 thousand Shares.
At the general shareholders meeting on June 29, 1999, it was approved NTT
would repurchase Shares of its common stock from time to time until the next
ordinary general meeting of shareholders. Most recently, NTT acquired 48,898
Shares on July 13, 1999. Of the Shares it repurchased, 48,000 were bought from
the Government of Japan. As a result of the repurchase, the number of
outstanding Shares was reduced to 15,863,102. See "Item 5--Nature of Trading
Market."
The Government, acting through MPT, also regulates the activities of NTT
Group. See "Description of Business--Regulation." In addition, the Government
is one of the largest customers of NTT Group. NTT Group transacts business
with various departments and agencies of the Government as separate customers
on an arm's-length basis. The Government, in its capacity as shareholder,
votes at shareholder meetings of NTT and, by virtue of its position as a
majority shareholder, theoretically has the power to control most decisions
taken at such meetings, although the Government has not used this power to
direct the management of NTT. The Government also has the power to take
certain actions with respect to the networks of NTT Group in the interests of
national security and international relations.
Business Overview and Strategy
The distinction between domestic and international telecommunications has
virtually been eliminated as domestic and international operators enter each
other's markets through mergers and alliances. This reorganization of the
industry is stimulating competition. Competition has intensified not only in
the long-distance markets but also in the local telecommunications markets, as
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 stepped up their activities in the Japanese
market by obtaining necessary licenses and other preparations, resulting in
intensified competition in the entire spectrum of domestic and international
telecommunications markets.
The explosive worldwide increase in the number of Internet users and the
spread of local area networks (LANs) is expected to create a huge computer-
based communications market with enormous potential for growth. As a result,
many companies are seeking to establish themselves in this new market, and the
competition, which extends beyond traditional sector boundaries and crosses
national frontiers, has intensified.
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.
NTT completed the full digitization of its domestic communications networks
in December 1997. Making use of a foundation of advanced digitized networks,
NTT Group will concentrate its efforts on maximizing its R&D capabilities and
resources in the creation and provision of new services, and is introducing a
wide variety of discount pricing schemes, that together NTT believes will help
to revitalize and enliven the information sharing market in Japan. Alongside
this, NTT Group is strengthening its ability to deliver solution businesses
such as security, hosting, and outsourcing, based on a variety of high-quality
network services. Furthermore, NTT
6
<PAGE>
Group is gradually installing the necessary infrastructure for the fiber-optic
conversion of the access networks that can enable the provision of wide-band
services such as video transmission, taking into consideration the demand for
such services, 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 business, in line with deregulations worldwide, NTT Group plans to
expand the number of destination countries and extend the menu of global
services provided under the "Arcstar" brand name. As well as independent
development by the NTT Group, NTT Group will launch a variety of businesses,
including business ventures, with companies from Japan and overseas. In Asia,
NTT Group will investigate possibilities of creating relationships with
international carriers. In Europe and America, NTT Group is aiming to develop
its business presence both through strengthening its own service provision
capabilities and through joint ventures and alliances with other firms.
NTT Group is seeking to continue to enhance operational efficiency and
further improve operational performance by streamlining its operations. To
this end, NTT transferred to its subsidiaries such services as
telecommunications software and systems development, facility management and
maintenance, equipment sales and directory assistance services. 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 Group is the largest provider of telecommunications services in Japan.
Its predominant business is providing nationwide telecommunications services.
NTT Group's services fall into seven major classes: telephone services,
telegraph services, leased circuit services, data communication facility
services, ISDN services, sale of telecommunication equipment and other
services. NTT Group's results are also segmented according to its four primary
lines of business: wireline services, wireless services, data communication
services and other services. See Footnote 14 to the Notes to Consolidated
Financial Statements attached hereto and Item 1--"Description of Business--NTT
Group." NTT Group'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,
----------------------------------
1997 1998 1999
---------- ---------- ----------
(Billions of yen)
<S> <C> <C> <C>
Telephone services...................... (Yen)6,038 (Yen)6,306 (Yen)6,300
% of Total Operating Revenues........... 68.4% 66.7% 64.8%
Telegraph services...................... (Yen) 99 (Yen) 92 (Yen) 86
% of Total Operating Revenues........... 1.1% 1.0% 0.9%
Leased circuit services................. (Yen) 429 (Yen) 488 (Yen) 507
% of Total Operating Revenues........... 4.9% 5.2% 5.2%
Data communication facility services.... (Yen) 338 (Yen) 373 (Yen) 383
% of Total Operating Revenues........... 3.8% 3.9% 3.9%
ISDN.................................... (Yen) 190 (Yen) 368 (Yen) 556
% of Total Operating Revenues........... 2.2% 3.9% 5.7%
Sale of telecommunication equipment..... (Yen) 890 (Yen) 970 (Yen)1,009
% of Total Operating Revenues........... 10.1% 10.3% 10.4%
Other services.......................... (Yen) 838 (Yen) 853 (Yen) 889
% of Total Operating Revenues........... 9.5% 9.0% 9.1%
</TABLE>
7
<PAGE>
The following table sets forth certain information concerning NTT Group's
principal facilities and operations as of the dates indicated.
<TABLE>
<CAPTION>
March 31,
---------------------------------------
1995 1996 1997 1998 1999
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
TELEPHONE SERVICES:
Telephone subscriber lines
(thousands)........................ 59,583 60,774 61,223 60,186 58,277
Cellular telephone subscribers
(thousands)........................ 2,206 4,936 10,960 17,984 23,897
PHS subscribers (thousands)......... -- 393 1,851 1,906 1,349
Public telephones (thousands)....... 801 799 794 777 754
TELEGRAPH SERVICES:
Telegrams (thousands)............... 43,288 41,385 40,198 37,564 36,180
Telex subscribers (thousands)....... 18 15 12 10 8
LEASED CIRCUIT SERVICES:
Conventional circuits (thousands)... 1,025 1,001 967 902 822
High-speed digital circuits
(thousands)........................ 31 57 107 169 228
INTEGRATED SERVICES DIGITAL NETWORK
(ISDN) SERVICES:
INS-Net 64 (thousands).............. 337 510 1,037 2,286 3,955
INS-Net 1500 (thousands)............ 6 10 22 34 48
OTHER SERVICES:
Open Computer Network (OCN) services
(thousands)........................ -- -- 1 159 478
Digital data exchange (DDX)
services:
Digital Data Exchange-Packet (DDX-
P)................................. 36,740 33,424 31,821 30,625 26,643
Digital Data Exchange--Telephone
Packet (DDX-TP).................... 410,739 432,457 444,788 446,522 436,427
Frame Relay......................... 28 565 3,942 15,701 43,959
Cell Relay.......................... -- -- 0 4 6
Pocket pager subscribers (thousands).. 5,355 6,328 5,836 3,908 2,111
Facsimile network subscribers
(thousands).......................... 678 812 1,015 1,127 1,212
Employees (thousands)................. 235 231 230 226 224
</TABLE>
Telephone Services
Revenues from telephone services were 64.8% of operating revenues in fiscal
year 1999. NTT Group's telephone services include certain items in the
wireline segment, such as telephone subscriber services, public telephones and
other related services; certain items in the wireless segment, such as
cellular telephones, PHS and other related services; and certain other
services. NTT Group is the principal provider of fixed-line telephone
subscriber services in Japan, providing approximately 58 million subscriber
lines nationwide. NTT Group is also the largest provider of cellular telephone
services in Japan with approximately 24 million cellular telephone
subscribers. NTT Group 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 NTT, NTT Communications is now
permitted to offer international services. See "Description of Business--
Reorganization" and "--Global Businesses".
(i) Telephone Subscriber Services
Telephone subscriber service is NTT Group's principal business activity. Due
to an increase in sales of ISDN services and cellular telephones and the
sluggish economy in Japan, the number of subscriber lines in service decreased
1.91 million from the previous fiscal year to 58.28 million subscriber lines
at the end of the fiscal year 1999, marking the second consecutive year of a
decrease in subscriber lines. Management believes that about 85% of the
increase in ISDN subscribers represents a shift from telephone subscribers.
Residential use
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accounted for approximately 71.5% and business use accounted for approximately
28.5% of telephone subscriber lines. Penetration rate at the end of the fiscal
year 1999 was approximately 461 subscriber lines per 1,000 inhabitants.
In fiscal year 1999, NTT's end-to-end telephone traffic decreased from the
previous year in terms of number of calls as well as hours of use. The primary
reasons for this decrease were the ongoing economic downturn, an increase in
competition and the shift to cellular telephone services and INS-Net. Even
when combined with ISDN traffic, the number of calls and hours of use
decreased.
The following table sets forth NTT's end to end traffic of fixed telephone
and ISDN services:
<TABLE>
<CAPTION>
Years ended March
31,
--------------------
Number of calls (Million calls): 1997 1998 1999
-------------------------------- ------ ------ ------
<S> <C> <C> <C>
Fixed line telephone.................................... 79,891 73,668 61,074
ISDN (Voice mode)....................................... 1,613 3,569 7,150
ISDN (Digital mode)..................................... 1,277 2,152 3,199
------ ------ ------
Fixed line telephone and ISDN total..................... 82,781 79,389 71,423
====== ====== ======
<CAPTION>
Years ended March
31,
--------------------
Hours of use (Million hours): 1997 1998 1999
----------------------------- ------ ------ ------
<S> <C> <C> <C>
Fixed line telephone.................................... 3,441 3,240 2,952
ISDN (Voice mode)....................................... 56 122 241
ISDN (Digital mode)..................................... 65 168 334
------ ------ ------
Fixed line telephone and ISDN total..................... 3,562 3,531 3,526
====== ====== ======
</TABLE>
Current monthly charges for telephone exchange lines vary according to
business or residential use and the number of subscribers' exchange lines in
the local calling area, or "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, NTT has
made numerous rate changes, amounting to an aggregate (Yen)967 billion rate
reductions through March 31, 1999. 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 NTT's.
In fiscal year 1999, NTT's share of inter-prefecture calls between all
prefectures in Japan dropped to 59.4% based on the number of calls. When
combined with ISDN services, NTT's share of inter-prefecture calls is 63%.
In February 1998, NTT reduced the rate for daytime calls over 100 kilometers
from (Yen)110/3 minutes to (Yen)90/3 minutes. This rate reduction eliminated
price advantages held by NCCs for the first time.
Despite NTT'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, NTT 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, NTT revised its monthly
charges for telephone exchange lines and directory assistance service charges
in February 1995 and October 1995.
NTT applied to MPT in December 1997 for a further revision of its directory
assistance service charges. This revision was partially implemented in May
1998 and in May 1999 following the approval of MPT. This revision is expected
to have the effect of increasing NTT Group's revenues by (Yen)15 billion per
12-month period.
9
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The following tables set forth charges currently applied to telephone
subscriber services:
Installation Fee: (Yen)72,800
<TABLE>
<S> <C> <C> <C>
Subscriber line charges (Monthly
chargers per line):
Number of subscribers in a local 400,000 50,000 to Less than
area................................. or more 400,000 50,000
----------- ----------- -----------
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. 7 p.m.-11 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 Group is promoting greater utilization of telephones through marketing
and promotion of telephone subscriber services and other network services. At
the same time, NTT Group 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), "Telehodai" (a
monthly flat rate for local/adjacent area calls made during midnight/early
morning hours used most often for the Internet), "Area Plus" (a service that
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" (a service that 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). During fiscal year 1999, NTT expanded the service of "Time
Plus" to the whole of Japan.
The interconnection of local switches with telecommunications operators,
which began during fiscal year 1998 through NTT's Group Centers (GCs, or local
switching offices), brought direct competition for local telephone services
for the first time. During fiscal year 1999, GC interconnection continued to
expand.
(ii) Cellular Telephone Service
NTT Group's cellular telecommunications and paging businesses, part of NTT
Group's wireless segment, are conducted throughout Japan by NTT DoCoMo. NTT
DoCoMo is Japan's leading mobile telecommunications services provider and is
one of the largest cellular operators 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 network.
10
<PAGE>
NTT DoCoMo also sells cellular handsets and pagers and related equipment. NTT
DoCoMo is regulated as a Type I telecommunications carrier and a Special Type
II telecommunications carrier.
Although NTT owns 67.1% of NTT Central DoCoMo, NTT is not actively involved
in the daily management or operations of NTT DoCoMo. NTT DoCoMo's business
operations are conducted independently of the operations of NTT and its other
subsidiaries. In addition, transactions between NTT DoCoMo and NTT and each of
NTT's other subsidiaries are conducted on an arm's length basis.
On October 22, 1998, NTT Central DoCoMo listed its stock on the first
section of the Tokyo Stock Exchange. In connection with this, NTT sold 218,000
shares of NTT Central DoCoMo's non-par-value common stock and NTT Central
DoCoMo issued 327,000 new shares as part of the offering, which was completed
on October 22, 1998. As a result of the offering, NTT's stake in NTT Central
DoCoMo was reduced from 94.7% to 67.1%.
The cellular industry in Japan has experienced a rapid growth in recent
years. The total number of cellular telephone subscribers in Japan has grown
from approximately 2.1 million at March 31, 1994 to approximately 41.5 million
at March 31, 1999, which positions Japan as the second largest cellular market
in the world. The penetration rate of cellular telephone services at the end
of the fiscal year was approximately 328 subscribers per 1,000 inhabitants.
NTT DoCoMo continues to be Japan's leading provider of cellular telephone
services with aggregate subscriber base of approximately 23.9 million and an
estimated market share of 57.5% as of March 31, 1999.
The following table sets forth information regarding NTT DoCoMo's
subscribers and its market share:
<TABLE>
<CAPTION>
March 31,
------------------------------------
1995 1996 1997 1998 1999
----- ----- ------ ------ ------
<S> <C> <C> <C> <C> <C>
Cellular telephone subscribers
(thousands)........................ 2,206 4,936 10,960 17,984 23,897
Digital service (thousands)....... 380 2,556 9,445 17,706 23,895
Analog service (thousands)*....... 1,826 2,380 1,515 278 2
Market share...................... 50.9% 48.4% 52.5% 57.0% 57.5%
</TABLE>
- --------
* NTT DoCoMo terminated its analog service on April 1, 1999.
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 operated its own state-of-the-art digital network and is the
only cellular operator in Japan to have done so on a nationwide basis. As of
March 31, 1999, NTT DoCoMo's digital service areas covered approximately 99.9%
of the population nationwide. NTT DoCoMo terminated its analog service on
April 1, 1999, allowing it to use the limited spectrum resources more
efficiently.
In fiscal year 1999, 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 the cellular market:
The following table sets forth information regarding NTT DoCoMo's cellular
telephone traffic:
<TABLE>
<CAPTION>
March 31,
--------------
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Hours of use (Million hours).................................. 252 448 784
</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. During fiscal year
1999, NTT
11
<PAGE>
DoCoMo launched new optional plans that included dialing charges in fixed
monthly charges. On July 1, 1999, NTT DoCoMo introduced a new fee-based volume
discount called "Ichinen-Waribiki."
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 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 its basic monthly plans:
Fixed monthly charges as of July 1, 1999
<TABLE>
<CAPTION>
Fixed monthly charge Call charges
-------------------- ------------
<S> <C> <C>
Plan A............. (Yen)4,500 Charges set forth in the table below.
Plan B............. (Yen)3,500 1.4 times the charges that are applied
to Plan A service. Includes (Yen)200
free charge.
Charged per minute. Low rate after 3
Chotoku Plan....... (Yen)4,500 minute.
Ohanashi Plus-L.... (Yen)5,900 Includes (Yen)3,000 free charge. 1.3
times the charges that are applied to
Plan A service.
Ohanashi Plus-M.... (Yen)4,100 Includes (Yen)1,300 free charge. 1.5
times the charges that are applied to
Plan A service.
Ohanashi Plus-Big.. (Yen)9,100 Includes (Yen)6,100 free charge. 1.1
times the charges that are applied to
Plan A service.
</TABLE>
Call charges for 3 minutes as of July 1, 1999 (weekdays):
<TABLE>
<CAPTION>
Calls originating in the business area of
Central DoCoMo to: 8a.m.-7p.m. 7p.m.-11p.m. 11p.m-8a.m.
- ----------------------------------------- ----------- ------------ -----------
<S> <C> <C> <C>
Fixed line telephone
Within the business area of Central
DoCoMo
Within the originating prefecture....... (Yen)100 (Yen)60 (Yen)40
Outside the originating prefecture.... (Yen)110 (Yen)70 (Yen)50
Outside the business area of Central
DoCoMo
To adjacent prefectures............... (Yen)110 (Yen)70 (Yen)50
To other prefectures.................. (Yen)150 (Yen)90 (Yen)60
Cellular telephone of NTT DoCoMo
Within the business area of Central
DoCoMo and to adjacent prefectures..... (Yen)110 (Yen)70 (Yen)50
Other areas............................. (Yen)130 (Yen)80 (Yen)50
Cellular telephone of other company
All area................................ (Yen)130 (Yen)80 (Yen)50
</TABLE>
In fiscal year 1999, NTT DoCoMo introduced "i-mode" service, which connects
users to various types of on-line services including mobile banking, and
"mopera" service, which provides users with access to the Internet and mobile
information.
NTT DoCoMo is a leading supporter of wide-band code division multiple access
(W-CDMA) as the third-generation wireless communications platform for the next
century. W-CDMA 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. W-CDMA technology has
gained acceptance in a number of international markets, with Europe adopting a
scheme based on W-CDMA as its radio transmission technology
12
<PAGE>
for the third-generation mobile communications system in January 1998, and
many operators in Asia and Oceania announcing their support for this
technology. NTT DoCoMo is committed to further contributions toward
establishing a global standard, while promoting joint system trials with
interested parties world-wide. NTT DoCoMo intends to commence W-CDMA services
in spring of 2001.
In the Kanto area, which includes Tokyo, NTT Central 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
On December 1, 1998, NTT Group's PHS business, now part of NTT Group's
wireless segment, that had formerly been operated by NTT Central Personal
Communications Network, Inc. and eight other regional PHS operating companies
(together, "NTT Personal Group") was transferred to NTT DoCoMo. The
integration of the PHS business enabled NTT DoCoMo to provide a comprehensive
set of mobile communications services. PHS services were introduced in July
1995 in the Kanto area, which includes Tokyo, and also in 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.
The following table sets forth information regarding NTT DoCoMo's PHS
subscribers and its market share:
<TABLE>
<CAPTION>
March 31,
-------------------
1997 1998 1999
----- ----- -----
<S> <C> <C> <C>
PHS telephone subscribers (thousands)................... 1,851 1,906 1,349
Market share............................................ 30.7% 28.3% 23.3%
</TABLE>
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 Group have exceeded its
assets. Consequently, NTT Personal Group began a review of the PHS businesses.
As a result of its deliberations, NTT Group concluded that it would be
difficult to continue PHS business through NTT Personal Group and decided to
transfer its PHS businesses to NTT DoCoMo. NTT Group completed the transfer on
December 1, 1998. NTT Group expects the transfer to NTT DoCoMo to create
synergetic effects and improve its PHS businesses operations, and allow NTT
DoCoMo to develop new services based on the features of PHS.
NTT DoCoMo endeavored to boost PHS service by introducing "Family discount",
a service that discounts charges for families that use several mobile phones
and PHS and by launching a 64 kilobit-per-second data communications service
that makes use of high-speed performance of PHS. In addition, NTT DoCoMo also
introduced a new type of handset called "Doccimo," which are terminals that
are compatible with both Personal Data Communications system (PDC) using a
cellular phone and PHS.
NTT DoCoMo faces PHS competition from two groups. These competitors are DDI
Pocket Telephone Group and ASTEL group. ASTEL Tokyo Corporation ("ASTEL
Tokyo") was merged with Tokyo Telecommunications Network Co., Inc. ("TTNet")
on April 1, 1999.
Telegraph Services
Revenues from telegram services were 0.9% of operating revenues in fiscal
year 1999. This service category includes both telegram and telex services,
which are included in NTT Group's wireline segment. Although the number of
communications made by "D-MAIL," a telegram service that makes use of the
Internet, increased steadily during the fiscal year, this could not fully
offset the continued decline in the use of telegrams for weddings and
condolences.
13
<PAGE>
The following table sets forth information regarding the number of telegrams
sent and telex subscribers:
<TABLE>
<CAPTION>
March 31,
----------------------------------
1995 1996 1997 1998 1999
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Telegrams (thousands) .................... 43,288 41,385 40,198 37,564 36,180
Telex subscribers (thousands)............. 18 15 12 10 8
</TABLE>
Leased Circuit Services
Revenues from leased circuit services were 5.2% of operating revenues in
fiscal year 1999. This service category includes conventional leased circuits,
high-speed digital circuits, ATM Megalink, ATM Share Link and other services,
which are included in NTT Group's wireline segment.
Demand from corporations upgrading their communications systems continues to
drive strong growth in high-speed digital circuits. Sales of high-speed data
transmission services, especially economical 64-kilobit-per-second lines, were
strong. The number of high-speed digital circuits jumped 34.9% to 228
thousand. Sales of conventional leased circuits decreased 8.8% to 822 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, and "Digital Access 128", in fiscal
year 1998, which reduced price by simplifying performance functions and
offering different levels of maintenance. In fiscal year 1999, through the
launch of the "Digital Access 1500" service in the short distance area, and
the introduction of the "Digital Reach" service in the medium and long
distance areas, NTT boosted its competitiveness. Further, to meet specific
demands of customers, NTT launched a new asynchronous transfer mode (ATM)-
based service called "ATM Share Link Service", offers minimum communication
rates even under the heaviest traffic conditions. This service also enables
customers to select different transmission speeds. "ATM Megalink Service,"
which was introduced in fiscal year 1998 and uses ATM transmission to offer
low-cost, high-speed, wide-area communications, became much more popular with
corporations as the telecommunications backbone for their internal networks.
In an effort to rebalance its rate structure in its leased circuit services,
NTT gradually 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 NTT's revenues by
(Yen)42 billion per 12-month period.
The following table sets forth information regarding NTT's leased circuit
services:
<TABLE>
<CAPTION>
March 31,
----------------------------
1995 1996 1997 1998 1999
----- ----- ---- ----- -----
<S> <C> <C> <C> <C> <C>
Conventional circuits (thousands).............. 1,025 1,001 967 902 822
High-speed digital circuits (thousands)........ 31 57 107 169 228
Digital Access 64/128/1500 (thousands)......... -- -- 7 59 128
Digital Reach 64/128/1500...................... -- -- -- -- 3,316
ATM Megalink................................... -- -- -- 1,254 1,509
</TABLE>
Data Communication Facility Services
Revenues from data communication facility services, which is included in NTT
Group's data communication services segment, were 3.9% of operating revenues
in fiscal year 1999. In this category, NTT Group 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 because of development of new systems and
additional
14
<PAGE>
functions for existing systems. NTT Group prioritized the marketing of such
services as STAR-ACE, a sharing system for regional banks, as an important
strategic product.
The business of NTT Group's data communication facility services 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 Group's other operations, and
transactions with NTT and each of NTT's other subsidiaries 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, NTT 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, NTT holds 54.19% of the shares of NTT DATA.
ISDN
Revenues from ISDN services, which is included in NTT Group's wireline
segment, were 5.7% of operating revenues in fiscal year 1999. NTT Group 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. NTT
Group developed and launched new services, such as "INS Area Plus" that 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 and
"INS Time Plus" that 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. As a result, sales of INS-Net 64 services increased significantly with
the number of subscribers growing 73.1% to 3.96 million over the previous
fiscal year. INS-Net 1500 comprised 47.7 thousand subscribers, representing a
42.0% increase over the previous fiscal year.
To further stimulate the demand of INS-Net services, in July 1997 NTT
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 Group's
network. "Phoenix mini," another new service, leverages the benefits of INS-
Net to offer low-cost video telephone services affordable to general
consumers. New demand was also created by the "Telesse" multimedia telephone
that allows users to enjoy the Internet simply and conveniently.
The following table sets forth information regarding NTT's ISDN subscribers:
<TABLE>
<CAPTION>
March 31,
---------------------------
1995 1996 1997 1998 1999
---- ---- ----- ----- -----
<S> <C> <C> <C> <C> <C>
INS-Net 64 (thousands)........................... 337 510 1,037 2,286 3,955
INS-Net 64 Light (thousands)..................... -- -- -- 86 242
INS-Net 1500 (thousands)......................... 6 10 22 34 48
</TABLE>
With monthly charges above those of ordinary lines, management expects INS-
Net services to become an increasingly important earnings source.
15
<PAGE>
For a discussion of ISDN traffic, see "Description of Business--Telephone
Services--Telephone Subscriber Services".
Sale of Telecommunication Equipment
Revenues from sale of telecommunication equipment were 10.4% of operating
revenues in fiscal year 1999. The sale of telecommunication equipment is
included in each of NTT Group's wireline, wireless and other services
segments. 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 9.4% while sales of PHS terminals decreased
73.9% from the previous fiscal year.
Due to the effects of the long-standing domestic recession and other
factors, the total sales of business telephones and other terminal equipment
to companies were down. However, NTT was successful in boosting sales of
products compatible with LANs, ISDN networks and the Number Display (Caller
ID).
Other Services
Revenues from other services were 9.1% of operating revenues in fiscal year
1999. The other services category consists of certain wireline segment
businesses including digital data exchange, facsimile network (F-Net), OCN
services and other related services; certain wireless segment businesses
including pocket pager and other related services; certain data communications
segment businesses which include system development services; and certain
other services.
In December 1996, NTT 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 IP network which is completely different from the traditional
telephone network and is constructed by using routers and a high-speed
transmission network. 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.
During fiscal year 1999, NTT added new service menus in order to meet the
increasingly sophisticated and diverse needs of customers in terms of
computer-based communications services. NTT introduced "Super OCN", a service
providing high quality and reliability that is ideal for corporations,
universities and other users to help them cope with a large volume of Internet
traffic, and "OCN Dial Access Long", a service offering dial-up access that is
ideal for users who tend to remain on-line for relatively long periods of
time. At March 31, 1999, subscribers for OCN services reached 478 thousand.
NTT 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. NTT 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. During fiscal year 1999, NTT launched a new "Dial-
up FR" service that makes data exchange possible between a frame relay network
and an ordinary analog or ISDN fixed line. Frame relay installations increased
approximately 180.0% 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. NTT
also took steps to increase the functions of "Tegarusu", a service enabling
reciprocal communication between facsimile machines and electronic mail, to
provide customers with extra convenience.
The number of pocket pager subscribers decreased 46.0% 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.
16
<PAGE>
During the fiscal year, NTT Group developed new systems and added functions
for existing systems that satisfy diversified needs of clients. In addition,
NTT Group continued to market Enterprise Resource Planning (ERP) products,
including its important strategic product, SCAW Design Series, which handles
core fields of corporate operations such as finance and production and ADVANCE
RISM, a total support software package system for supporting diverse
operations of local government. System development services of NTT Group are
provided mainly by NTT DATA.
Capital Investments
NTT Group'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
-------------------------------- ------------
1997 1998 1999 1999
---------- ---------- ---------- ------------
<S> <C> <C> <C> <C>
Expansion and improvement of
services:
Fixed-line telephone ......... (Yen)1,334 (Yen)1,322 (Yen)1,129 $ 9,329
Mobile ....................... 609 544 571 4,713
ISDN ......................... 166 165 153 1,263
Leased circuit ............... 148 97 79 655
Data communication facility .. 155 132 163 1,349
Research and development ....... 147 158 200 1,654
Construction, improvement and
renovation of office building,
etc............................ 519 544 793 6,556
---------- ---------- ---------- -------
Total ........................ (Yen)3,078 (Yen)2,962 (Yen)3,088 $25,519
========== ========== ========== =======
</TABLE>
NTT Group is shifting capital investment strategy from investment in
infrastructure to investment in demand-oriented customer services. In recent
years, a substantial portion of capital investments has been used to finance
the installation of digital transmission and switching equipment throughout
NTT Group's telecommunications network. NTT completed full digitization of its
fixed-line network in December 1997. Such digitization allows NTT Group to
offer various digital-related services such as ISDN, high-speed digital
circuit and frame relay.
In fiscal year 2000, NTT Group expects to make capital investments in an
amount below the levels of the past three fiscal years, since the revenue from
conventional fixed-line network is not expected to increase. NTT Group 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. NTT 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 NTT Group one step closer to the full
introduction of high-speed broadband networks.
As a result of the above capital investment, the amount of digital equipment
used for telecommunications services was (Yen)8,230 billion, (Yen)7,675
billion and (Yen)6,680 billion in fiscal year 1999, 1998 and 1997,
respectively and the amount of optical fiber cables used for
telecommunications services lines was (Yen)1,086 billion, (Yen)1,012 billion
and (Yen)905 billion in fiscal year 1999, 1998 and 1997, respectively.
Reorganization
On December 4, 1997, pursuant to June 1997 amendments to the NTT Law, 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
"Basic Principles"). On May 10, 1999, NTT submitted "the Implementation Plans
Concerning the Transfer of the Business Activities and Succession of the
Rights and Obligations of Nippon Telegraph and Telephone Corporation" (the
"Implementation Plans") in accordance with the Basic Principles, which was
approved by
17
<PAGE>
MPT. Matters concerning the transfer of business, which was the precondition
to reorganization, were approved at the ordinary general meeting of
shareholders on June 29, 1999.
After the transfer of business, NTT continues to exist but operates
primarily as a holding company with its businesses reorganized into three
newly established companies, NTT East, NTT West and NTT Communications. Under
the Revision Law, NTT is required to hold all the shares of NTT East and NTT
West. The supplementary provisions of the Revision Law provide that for the
time being after the reorganization NTT needs MPT approval (subject to
consultation with the Minister of Finance) for the disposal of shares in NTT
Communications. NTT East operates 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; NTT West operates the regional telecommunications business in the
remaining prefectures of western Japan; and NTT Communications operates the
international and long-distance telecommunications business and data
transmission services such as frame relay and OCN. NTT Communications is
subject to regulation under the Telecom Business Law as a Type I carrier, but
is not subject to regulation under the NTT Law. Both NTT East and NTT West are
subject to regulation under the Telecom Business Law as a Type I carrier and
are subject to regulation under the NTT Law. However, the requirement of MPT
approval with respect to the appointment of directors and corporate auditors
and disposition of profits, which was required by the NTT Law, does not apply
to NTT East or NTT West. The amendments to the NTT Law also provide for NTT
East and NTT West to enter into an arrangement by which NTT East may bear a
portion of NTT West's expenses by payment of cash for the fiscal years ending
within three years after the incorporation of NTT East. This arrangement will
only be permitted if both NTT East and NTT West have the same fiscal year end.
This arrangement in any one fiscal year is also subject to the requirements
that NTT East must have earned a profit in such fiscal year equal to or
greater than the expenses it is proposing to share and the amount of expenses
to be shared must fall within a range provided by the Ministry of Posts and
Telecommunications. Under this arrangement, since NTT East will pay a portion
of NTT West's expenses if NTT East has profits and NTT West has losses,
taxable income of NTT East will be decreased by the amount of expenses of NTT
West paid by NTT East.
As to matters to ensure fair competition, the Basic Principles require that:
(i) NTT East and NTT West (the "Regional Companies") shall have separate
directors from those of NTT Communications.
(ii) Employees shall not be temporarily transferred between the Regional
Companies and NTT Communications.
(iii) With respect to short-term loans of NTT, NTT East, NTT West and NTT
Communications, such loans shall be undertaken separately.
(iv) NTT and the Regional Companies shall not procure equipment in
collaboration with NTT Communications.
(v) The form of interconnection between the Regional Companies and NTT
Communications 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 NTT
Communications 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 NTT Communications shall be the
same as the terms of trade between the Regional Companies and other
telecommunications carriers.
(viii) NTT Communications shall establish its own sales divisions. In the
event that the Regional Companies undertake sales activities for NTT
Communications to maintain users' convenience, conditions of these
activities shall be the same as the terms used between the Regional
Companies and other telecommunications carriers.
18
<PAGE>
(ix) Customer information and other such information provided between the
Regional Companies and NTT Communications shall be the same as
information provided between the Regional Companies and other
telecommunications carriers.
(x) The terms for disclosure to NTT Communications of information
concerning the results of the research conducted by NTT and the
Regional Companies (except that related to fundamental research whose
costs are borne by NTT Communications) shall be the same as those terms
used for such disclosure to other telecommunications carriers.
The Ministry of Posts and Telecommunications received comments on the Basic
Principles (original plan, announced on October 2, 1997) from the
telecommunications industry. Based upon these comments, the Ministry of Posts
and Telecommunications stated, among other things, that to promote fair
competition, the pre-reorganization prohibition on the joint acquisition of
equipment by NTT, NTT DATA and NTT DoCoMo should continue to be applied to the
Regional Companies, NTT DATA and NTT DoCoMo after the reorganization.
NTT will be paid for its services through concluding contracts with its
subsidiaries as follows: NTT will be paid for its fundamental R&D activities
through contracts with each of NTT's subsidiaries which continuously uses
results of those R&D activities, and NTT will be paid for providing management
services through contracts with its certain subsidiaries.
NTT believes that the reorganization has considerable advantages in
bolstering the collective strength of NTT Group's international
telecommunications businesses and achieving growth. Shareholders' interests
are secured under the amendments to the NTT Law through equity ownership in
NTT, which owns the shares in the three newly established companies. Under the
reorganization scheme, (1) NTT will continue its existence as a holding
company with no change in share ownership, (2) NTT's shares will continue to
be listed on stock exchanges and the conditions of share ownership will remain
unchanged and (3) NTT Group will be able to avoid the erosion of its profits
through the introduction of intercompany burden-sharing systems. Moreover, NTT
believes that the amendments will enable (1) NTT Group to maintain service
quality, because the three companies under NTT would continue to cooperate,
(2) NTT Group to retain current research and development capabilities through
the unification of fundamental research activities in NTT and (3) NTT
Communications to enter the international telecommunications business and
provide global end-to-end services, consequently promoting synergies within
NTT Group and bolstering its global competitiveness.
Other Subsidiaries and Affiliated Companies
NTT Group 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, 1999, the number of subsidiaries and affiliates of NTT was
331 and NTT had directly contributed approximately (Yen)347 billion to them.
NTT transferred 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 NTT
Group but also to third parties, creating the potential for new revenue
sources. In addition, separate units are taking more responsibility, compared
with when they were divisions of NTT, for the profit and loss of their
operations. This provides 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, NTT established a wholly owned subsidiary, NTT
Communicationware Corporation ("NTT Comware"), to provide a wide range of
services to NTT 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 NTT Group with communications software
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<PAGE>
and systems services to support its telecommunications business, as well as
providing such services to other telecommunications operators. NTT Comware has
9,000 employees and paid-in capital of (Yen)20 billion as of March 31, 1999.
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, 1999 was 48,800. NTT Telecom
Engineering Tokyo, Inc. (TE Tokyo), NTT Telecom Engineering Kanto, Inc. (TE
Kanto) and NTT Telecom Engineering Shinetsu, Inc. (TE Shinetsu), all wholly
owned subsidiaries of NTT, merged into NTT-ME Corporation on April 1, 1999.
The merger, in addition to upgrading overall telecommunications engineering
services and improving operational efficiency, is expected to strengthen
sophisticated multimedia services using optical-fiber and system integration
and outsourcing services, such as LANs/WANs design, installation, operation,
maintenance and management.
Competition
The Telecom Business Law introduced competition in the telecommunications
service industry at the beginning of fiscal year 1986. As a result, NTT Group
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 NTT East, NTT West, NTT Communications and
NTT DoCoMo, 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, 1999, there were 179 Type I Carriers and 6,602 Type II Carriers. NTT East
and NTT West are the only Type I Carrier which are responsible for providing
nationwide telephone service subject to the NTT Law. Certain of NTT'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 large
corporations have their head offices. These carriers have expanded their
services to all prefectures and metropolitan areas in Japan. In fiscal year
1998, NTT's share of inter-prefecture calls between all prefectures in Japan
dropped to 59.4% based on the number of calls. NTT Communications' competitors
in the long-distance market are Japan Telecom, DDI Corporation, TTNet and KDD.
In addition to long-distance services, NCCs 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.
NTT DoCoMo's competitors in the cellular market are IDO, DDI Cellular group,
Tu-Ka group, Digital Tu-Ka group and Digital Phone group. Despite intense
competition, NTT DoCoMo had approximately 57.5% market share of cellular
subscribers as of March 31, 1999. Intense competition in the cellular market
has led to rapid, substantial and sustained decreases in the prices for
handsets, monthly access fees and usage charges for calls. Certain of the
competitors of NTT DoCoMo offer cellular services in a competing format, such
as cdmaOne currently offered by DDI and IDO.
NTT DoCoMo's competitors in the PHS market are DDI Pocket group, ASTEL group
and TTNet (merged with ASTEL Tokyo on April 1, 1999). DDI Pocket group is the
leader among the three PHS group operators
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with approximately 59.8% market share, NTT DoCoMo has approximately 23.3%
market share and ASTEL group has approximately 16.8% market share of PHS
subscribers as of March 31, 1999.
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 other's markets through mergers and alliances. The
interconnection with other operators, previously connected only through NTT's
Zone Centers (ZCs, or toll switching offices), was realized in 1997 through
NTT's Group Centers (GCs, or local switching offices). TTNet 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 stepped up their
activities in the Japanese market by obtaining necessary licenses and other
preparations.
NTT Group 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 Group's major services, see
"Description of Business--Principal Business Activities."
Regulation
The Ministry of Posts and Telecommunications is the main regulatory body in
Japan with responsibility for the telecommunications service industry. NTT
East, NTT West, NTT Communications and NTT DoCoMo together with other Type I
Carriers are regulated by MPT under the Telecom Business Law in respect of
various of their respective business activities. NTT, NTT East and NTT West
are 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 NTT 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 Group
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.
The NTT Law
The NTT Law, amended in June 1997, provides that the purpose of NTT is to
hold all the Shares of NTT East and NTT West and to ensure proper and stable
provision of telecommunications services by NTT East and NTT West as well as
to conduct research relating to the telecommunications technologies that will
form the foundation for telecommunications. The NTT Law also provides that the
purposes of NTT East and NTT West are to operate regional telecommunications
businesses. NTT, NTT East and NTT West are responsible for providing
nationwide telephone services and for promoting research in telecommunications
technologies and disseminating the results of such research. The NTT 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. See
"Restrictions on Foreign Ownership" in Item 6--Exchange Controls and Other
Limitations Affecting Security Holders. The supplementary provisions of the
NTT Law provide that for the time being following the reorganization, NTT will
need MPT approval (subject to consultation with the Minister of Finance) for
the disposal of shares in NTT
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Communications. The NTT Law also requires approval of MPT with respect to
appointment or dismissal of directors and corporate auditors of NTT. NTT, NTT
East and NTT West are 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 also require approval. NTT, NTT East and NTT
West 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 is required for the disposition of profits of NTT. NTT East and NTT
West need MPT approval to transfer or mortgage their telecommunications trunk
lines or other important telecommunications facilities. NTT, NTT East and NTT
West are 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 NTT, NTT East and NTT West, 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:
<TABLE>
<CAPTION>
NTT East
NTT NTT West
(Holding Company) (Regional Companies)
----------------- --------------------
<S> <C> <C>
Obligatory Share-holding by the
Government......................... One-third or more Prohibited
Issuance of new Shares.............. MPT approval* MPT approval
Foreign ownership of Shares......... Less than 20% Prohibited
Appointment of directors and
corporate auditors................. MPT approval Unregulated
Change of the articles of
incorporation...................... MPT approval** MPT approval
Disposition of profits.............. MPT approval* Unregulated
Business operating plan............. 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.
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, 1999, there were
179 Type I Carriers and 6,602 Type II Carriers.
NTT East and NTT West are the only Type I Carriers that are responsible for
providing nationwide telephone service subject to the NTT Law. NTT
Communications and NTT DoCoMo are Type I Carriers, and certain of NTT Group's
other subsidiaries are General and Special Type II Carriers.
In accordance with agreements reached in February 1997 of basic
telecommunications services negotiations under the auspices of the World Trade
Organization, the Telecom Business Law was revised 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. Restrictions on the proportion of total voting shares held by
foreign nationals, which had been limited to be one-third for Type I Carriers,
were eliminated effective in February 1998 with the exception of NTT and KDD
(the restriction on foreign ownership in KDD was abolished
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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 further 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
provide voice communication services to the public through interconnections of
public switched networks and leased circuits at each end. The revised law
became effective on November 1, 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 Notification to Notification to Unregulated
MPT required* MPT required
c. Foreign Capital Unregulated** Unregulated Unregulated
Participation
</TABLE>
--------
* Except in the case of Type I carriers with "designated
telecommunications facilities" (such as NTT East and NTT West) where
prior approval is required pending finalization of a price-cap system.
See "Description of Business--Regulation--Rates."
** Except in the case of NTT where the restriction continues.
Rates
Historically, Type I Carriers establish their rates in conformity with
guidelines established by the advisory committee to MPT. Basically, these
guidelines provided for the establishment of rates that would be reasonable
for the society as a whole and that would produce estimated revenues in an
amount equal to the "total cost" of each of the telecommunications services
offered by each Type I Carrier. 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, further 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 and became effective as of
November 1, 1998. Under the revised Law, Type I Carriers need not obtain
approval from MPT but only notify MPT of their rates except in the case of
certain services to be provided by such carriers with "designated
telecommunications facilities". Type I Carriers with "designated
telecommunications facilities" will be subject to a price-cap system for basic
telephone services, ISDN services and leased circuit services provided within
prefectures. Certain facilities of NTT East and NTT West have been designated
as "designated telecommunications facilities" due to their dominant position
in the local telecommunications market. 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, while changes in excess of the index will
require the prior approval of MPT. It is currently expected that the index
will initially
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<PAGE>
equal the Consumer Price Index in Japan less a productivity factor and an
exogenous factor. Until the initial index is determined, rates for regional
telecommunications services provided by NTT East and NTT West are subject to
MPT approval. The initial index will be specified by MPT around December 1999
and will be applied in March 2000.
Certain subsidiaries of NTT are Type II Carriers and are treated differently
than NTT East and NTT West 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.
For a discussion of rates currently applied to NTT Group's telephone and
ISDN services, see "Description of Business--Principal Business Activities."
Interconnection
In February 1995, NTT 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, NTT allows all other
carriers wishing to establish interconnections to NTT's network to do so--
provided NTT is compensated in a fair manner. Further, in September 1995, in
order to promote competition in the local telecommunications field, NTT
announced implementation of the interconnections of local switches and
subscriber lines.
Since then, NTT has held active discussions with other operators seeking to
use its networks. The interconnection with other operators, previously
connected only through NTT's Zone Centers (ZCs, or toll switching offices),
was realized in 1997 through NTT's Group Centers (GCs, or local switching
offices). TTNet 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. Currently, NTT East and NTT West
are the only Type I Carriers obliged to make such submission. MPT will issue
approval if the technical requirements at standard points of interconnection
and interconnection charge by individual function are specified correctly and
distinctly, 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 NTT's
facilities for its regional telecommunications services were designated as the
"designated telecommunications facilities" due to NTT's dominant position in
the local telecommunications market. NTT East and NTT West are subject to the
special rules mentioned above applicable under the revised Telecom Business
Law.
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<PAGE>
In October 1998, NTT submitted its interconnection tariffs to the MPT for
approval in connection with its designated telecommunications facilities. Such
tariffs were approved in January 1999.
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 local networks
of NTT East and NTT West is expected to be a significant part of the operating
costs of competing telecommunications carriers, and, as competition grows,
increasingly important to NTT Group.
In May 1998, the U.S. Government and the Japanese Government issued a status
report in which the Japanese Government expressed its intention to introduce
"Long-run Incremental Cost Methodology" for setting interconnection charges.
Long-run Incremental Cost Methodology would calculate interconnection charges
based on costs assumed to be incurred for construction of the current network
with presently available equipment and technology. In the report issued by the
U.S. Government and the Japanese Government it was specifically stated that:
(i) a bill to amend the Telecom Business law will be submitted 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 ensure that the implementation of
Long-run Incremental Cost Methodology would cause no disruption to the
provision of universal services and that it would not prove
destructive to end user rates and business operations of incumbent
local exchange carriers; and
(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.
In a joint statement by the governments of the United States and Japan in
May, 1999, it was stated that, in the process of calculating interconnection
charges for fiscal year 2000, the Government of Japan will continue its policy
of promoting reductions of the interconnection charges as much as possible,
within the scope of its existing authority, and ensure that the relationship
between retail rates and interconnection charges would not impair local
competition.
A study group for Long-run Incremental Cost Methodology of the Ministry of
Posts and Telecommunications on July 30, 1999 announced a model plan for Long-
run Incremental Cost Methodology. Pursuant to this model, a cost of
interconnection charges for the Regional Companies' ZCs would be reduced by
51.3% and a cost of interconnection charges for the Regional Companies' GCs
would be reduced by 6.2%. The study group stated that the model plan will not
be applied instantly to interconnection charges themselves but was made to
calculate the cost thereof. It was also stated that as for introduction of the
implementation of Long-run Incremental Cost Methodology, the Ministry of Posts
and Telecommunications is planning to submit the plan to the
Telecommunications Council after Autumn, 1999 and examine the implementation
of Long-run Incremental Cost Methodology, paying due consideration to ensure
that the implementation of Long-run Incremental Cost Methodology causes no
disruption of provision of universal service and that it would not prove
destructive to end user rates and the business operation of existing local
exchange carriers.
At this time, the ultimate results of the introduction of Long-run
Incremental Cost Methodology on the financial position and results of
operations of NTT Group cannot be determined.
Other Regulatory Developments
The following events represent major recent regulatory developments in the
telecommunications field.
In June 1998, the Ministry of Posts and Telecommunications released a report
concerning universal services, the provision of which is an obligation of NTT,
NTT East and NTT West under the NTT Law. The report concluded that certain
telephone services are indispensable to the national welfare and should be
deemed
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<PAGE>
"universal services" that require proper and stable provision with equal
conditions across the country. In the report released by the Ministry of Posts
and Telecommunications, "universal services" would include basic telephone
services to customers throughout Japan. ISDN and wireless telephone services
were excluded from the scope of "universal services." At the present time, it
is not clear what obligations will be imposed on NTT, NTT East and NTT West
and other Type I Carriers with respect to the provision of "universal
services;" however, the report places emphasis on the establishment of a
"Universal Services Fund." The report proposed that, through contributions by
telecommunications service providers to the fund, providers of universal
services such as NTT, NTT East and NTT West should be subsidized for the costs
incurred to provide such services. It was also proposed that international and
long distance telephone services should not be subsidized since competition
among telecommunications service providers has already led to nationwide
availability. Based on the estimated costs of the universal services, the
Ministry of Posts and Telecommunications is conducting an overall review of
the need for a Universal Services Fund and the timetable for its possible
introduction.
The Ministry of Posts and Telecommunications is now having discussions on
the introduction of local number portability, which will enable subscribers to
change their telephone companies without changing their phone numbers. The
Ministry of Posts and Telecommunications publicized its comments (a) in May
1998 regarding the realization of number portability and (b) in March 1999
regarding the division of costs in implementing this new system. Also in March
1999, the Ministry of Posts and Telecommunications announced that number
portability shall be introduced in fiscal year 2001.
The Ministry of Posts and Telecommunications is currently considering the
introduction of "Presubscription" for domestic and international service.
Presubscription will enable telephone subscribers to use the
telecommunications service provider of their choice without dialing prefixes
by prior selection of and registration with such service provider. In November
1998, the Ministry of Posts and Telecommunications announced that
presubscription shall be introduced in the spring of 2001. As of December
1998, under the auspices of the Committee on Standards for the Introduction of
Presubscription, research had been conducted among service providers with an
eye towards the introduction of such a system.
The Deregulation Committee, an advisory committee set up by the Japanese
Cabinet Decision of December 20, 1997, issued a report on December 15, 1998,
with respect to government deregulation in a number of sectors of the Japanese
economy. The report reflected a desire for NTT's complete privatization at
some point in the future when monopoly in the regional telecommunications
markets is eliminated and recommended that effective action should be taken to
promote substantive competition between NTT East and NTT West. See
"Description of Business--Reorganization." Such report also included a
recommendation that in the future the reorganized NTT be required to reduce
its ownership of NTT Central DoCoMo to the level where competition between NTT
Central DoCoMo and the Regional Companies is facilitated. On March 30, 1999,
the Government of Japan revised its Three-year Program for Promoting
Deregulation stating, among other things, that, based on the Deregulation
Committee's report and in connection with NTT's ownership of NTT Central
DoCoMo, it will watch carefully competition between NTT Central DoCoMo and the
Regional Companies. It has not been decided at this time what action, if any,
may be taken by the Government and it is not clear at this time to what level
NTT's shareholding of NTT Central DoCoMo might be required to be reduced.
NTT stated that its ownership of NTT Central DoCoMo does not have any
adverse effects on fair competition, and continues to maintain that view. In
addition, in 1991 NTT stated that it would aim to list NTT Central DoCoMo
shares after approximately five years from its establishment, and that it
would reduce its shareholding in NTT Central DoCoMo in conjunction with
opportunities such as the listing. Following such statement, on October 22,
1998, NTT listed NTT Central DoCoMo shares and reduced its shareholding from
94.7% to 67.1%.
Research and Development
For the fiscal years 1999, 1998 and 1997, research and development expenses
amounted to (Yen)328.5 billion, (Yen)288.9 billion and (Yen)328.5 billion,
respectively, or 3.4%, 3.1%, and 3.7% of operating revenues.
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In the field of telecommunications, demand for the information sharing
market appears to be set to maintain high growth rates well into the future,
fueled by the spread of cellular telephones and personal computers (PCs) and
the sharp rise in use of the Internet and other computer-based communications
networks. The structure of information sharing networks is also changing
across a wide variety of areas--for example, news can now be received by e-
mail, and tickets can be booked over the Internet. Based on this kind of
market situation, NTT Group has vigorously engaged in research and development
programs that aim, first, to create convenience and secure multimedia
services, and, second, to develop the basic technologies that will support the
future of telecommunications.
In fiscal year 1997, NTT 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. NTT began introducing this system in March 1998. To
support the economical construction of optical fiber networks, NTT has made
substantial progress in developing all-plastic components for the central
parts of fiber-cable connectors--a success that promises to make the goal of
optical fiber to the home (FTTH) a reality.
NTT has pushed forward with the research and development of technologies
that will underlie the high-speed, wide-band networks which will become the
foundation of the telecommunications industry in the future. As well as ATM
backbone network technologies, NTT is developing high-speed access network
technologies that make use of optical fiber or wireless connections, and, at
the same time, is also developing next-generation network technologies.
Moreover, NTT has successfully developed a new kind of light source that
permits the world's highest volume of data transmission along an optical
fiber, achieving fiber-optic data transmission speeds of 3 terabits/second.
NTT has also devoted its energies to the development of a range of
technologies designed to be the foundation of information sharing. In addition
to a crypt system that enhances security for Internet users, NTT has developed
technologies that prevent the unlawful use of contents within a network to
assure the security of network transmissions.
NTT has also developed a Japanese-English machine translation system called
"ALTFLASH", which is designed for use with newspaper articles on the economy
and financial markets that typically use Japanese with a highly standardized
structure. In another project, NTT has developed an "Active Search" that
enables high-speed searches for specific data from a time-series of
audiovisual data taken from a commercial or a jingle for an advertisement.
Further, to aid global environmental preservation, NTT Group is striving to
reduce the energy consumption of telecommunications infrastructure. In
addition to developing large-scale integration (LSI) circuits that can operate
at low voltage and other clean-energy technologies, NTT Group is also working
on the development of an MPEG-2 encoder compatible with high-definition
television (HDTV) applications that consumes about 5% of the electrical power
of conventional products. In another development, after beginning to recycle
telephone directories, NTT has developed a method of using the secondary
wastes produced by the recycling as water purification materials.
Introduction of the next generation mobile communication system capable of
dealing with various but integrated contents, such as voice, data and visual
images, is needed. Standardization of the next generation mobile communication
system (IMT-2000, formerly FPLMTS) is moving forward with the 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 will offer high-speed
data rates enabling the integration of voice communications with multimedia
applications, such as full-motion video, Internet access and
videoconferencing. NTT DoCoMo intends to commence W-CDMA services in the
spring of 2001.
27
<PAGE>
Since the reorganization of NTT, NTT will engage in fundamental research and
development and business-oriented applied research and development activities
will be conducted by NTT East, NTT West and NTT Communications.
Global Businesses
In June 1997, the Diet passed the amendments to the NTT Law. These changes,
among other things, allow NTT Communications to enter the international
telecommunications business and provide global end-to-end services. See
"Description of Business--Reorganization".
NTT Group believes that entry into the international telecommunications
market is necessary to provide the services that customers desire. NTT Group
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 Group 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 Group 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 Group 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 Group is making full-scale entry into the international
telecommunications services market. NTT Group is conducting its global
telecommunications activities under the name "Arcstar".
In June 1998, NTT Worldwide Telecommunications Corporation ("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 (IGN).
In August 1998, NTT with the Beijing Telecommunications Administration
("BTA") established a joint venture, Beijing Telecom NTT Engineering Co., Ltd.
("BNTE"). BNTE started operations from September 1998 providing a system
integration service mainly in the area of Beijing. The capital of the new
company is US$3 million, of which US$1.47 million was provided by NTT. At the
reorganization, this investment was transferred from NTT to NTT
Communications.
In April 1999, NTT and AT&T agreed to collaborate in the fast-growing global
market of corporate network solutions. Under the terms of a Memorandum of
Understanding ("MOU"), NTT and AT&T immediately began working together to
develop definitive agreements and business ventures that provide value-added
networking solutions for large and mid-sized multinational businesses and
industries. AT&T Solutions, as the managed professional services unit of AT&T,
will represent AT&T in working with NTT. At the reorganization, this business
was transferred from NTT to NTT Communications.
(ii) Infrastructure Investments in Asia
NTT Group has been actively involved in establishing carrier businesses and
infrastructure operations in Asia.
In November 1992, NTT 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
28
<PAGE>
telephone lines, which was completed in September 1996. As of April 1999, the
total number of telephone lines in service reached 1.1 million. Prior to the
reorganization, NTT had made cumulative investments worth US$178 million in
TT&T. These investments were transferred from NTT to NTT West upon the
reorganization. NTT West designates three board members and holds an 18%
ownership interest in TT&T.
In March 1995, NTT 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. NTT Group
originally acquired a 15% interest in Smart. In March 1999, NTT raised its
interest in Smart to 37% by acquiring Smart shares from First Pacific Company
Limited ("FPC") for US$145 million and acquiring Smart's new shares for US$65
million. After the transaction, NTT's total investment in Smart was US$372
million. Smart is the largest mobile service provider in the Philippines with
a market share of over 40%.
In June 1999, NTT reached an agreement in principle with Philippine Long
Distance Telephone Company ("PLDT"), the Philippines' largest
telecommunications carrier, and FPC, PLDT's major shareholder, to acquire a
15% stake in PLDT. Pursuant to the agreement in principle, NTT exchanged all
of its shares in Smart for new common shares of PLDT. PLDT issued new PLDT
common shares to Smart's shareholders representing 22.5% of PLDT's common
share capital after the exchange of shares. NTT's interest in Smart accounted
for 7.8% of the enlarged share capital of PLDT. NTT also simultaneously
subscribed for newly issued PLDT common shares for approximately US$386
million representing 7.2% of the enlarged common share capital of PLDT. Also,
under the agreement, the FPC group's entire shareholding in Smart, equal to
56% of outstanding stock was converted into new common shares of PLDT. As a
result of the investment, NTT was given the right to appoint two directors to
an enlarged board of 13 directors. At the reorganization, this investment was
transferred from NTT to NTT Communications.
In July 1995, NTT 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. NTT, 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. At the reorganization, this investment
was transferred from NTT to NTT East.
In August 1997, NTT signed a contract with the Government of Sri Lanka and
Sri Lanka Telecom Ltd. ("SLT") to become a strategic partner of SLT. NTT
invested US$225 million in SLT, acquiring a 35% interest in SLT. At the
reorganization, this investment was transferred from NTT to NTT Communications
and an NTT Communications executive is serving as Chief Executive Officer of
SLT. SLT, privatized in 1996, is an incumbent distributor of basic domestic
and international telecommunications services in Sri Lanka.
In November 1997, NTT Vietnam Corporation, a joint venture 55% owned by NTT,
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. At the reorganization, this investment was transferred to NTT East.
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. At the
reorganization, this investment was transferred to NTT Communications. NTT
Communications is working together with STT, SP and BT towards the launch of
the services in April 2000.
29
<PAGE>
(iii) Other Initiatives
Since April 1996, NTT 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. NTT participated in designing the master plan of the
project. NTT was awarded "MSC Status" by the Malaysian Government, which
provides NTT Group 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
Group 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. After the reorganization, this project is being managed by NTT
Communications.
In June 1997, NTT 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 NTT,
became the first president of the forum. In addition, the AMF Secretarial
Office was established in the Global Business Headquarters of NTT in Tokyo. As
of August 1999, 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. After the
reorganization, NTT Communications became a member of the AMF.
In September 1997, NTT 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 Group's
managerial and technical support. As of April 1999, NTT's stake was 11.0%. At
the reorganization, this investment was transferred from NTT to NTT
Communications.
In April 1998, NTT signed agreements with Verio Inc., a U.S.-based Internet
service provider. Under the terms of the agreements,
(i) NTT acquired approximately 12% of Verio's shares of stock for US$100
million concurrently with Verio's initial public offering in May 1998
(as of March 1999, 9.6% of Verio's shares of stock were held by NTT),
(ii) NTT will appoint one member to Verio's board of directors, and
(iii) NTT is working with Verio to jointly deploy a comprehensive range of
IP services to offer NTT customers.
NTT Group believes that this strategic alliance will enable provision of the
enhanced IP services such as Internet VPN (Virtual Private Network). At the
reorganization, this investment was transferred from NTT to NTT
Communications.
Procurement
As part of its strategy to strengthen its corporate competitiveness and to
meet the demands of today's rapidly advancing information and communication
fields, NTT Group is making every effort to increase management efficiency to
provide superior services to its customers. To realize this goal, NTT Group
conducts its procurement in an open and transparent manner, taking into
account its business needs, provides non-discriminatory and competitive
opportunities to both domestic and foreign suppliers, and conducts global and
market-driven procurement of competitive products.
NTT Group provides procurement information via the Internet homepage named
"ON TIME" and always welcomes access from competitive suppliers worldwide.
30
<PAGE>
Employees
NTT and its consolidated subsidiaries had approximately 224,000 employees at
March 31, 1999, making it the largest private sector employer in Japan. Almost
all employees, excluding supervisory staff, are members of the NTT Rodo Kumiai
(All NTT Workers Union of Japan; the "Union"), which is a member of the Nippon
Rodo Kumiai So Rengokai (Japanese Trade Union Confederation). NTT Group
maintains favorable labor relations with the Union and has experienced no
significant strikes by the Union over the past ten years.
In fiscal year 1994, NTT 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 NTT's retirement proposal in
fiscal years 1994 and 1995.
In fiscal years 1998 and 1999, NTT re-evaluated its existing system of
support for workers who voluntarily choose to transfer out of the company. In
particular, NTT expanded the target age range of workers who qualify for
benefits under the system, and adopted a plan which would pay additional
amount of one-time severance in connection therewith. Approximately 6,300
employees accepted NTT's voluntary transfer proposal in fiscal years 1998 and
1999.
ITEM 2--DESCRIPTION OF PROPERTY
The properties of NTT Group consist principally of plant and equipment used
to provide nationwide telecommunications services and are generally in good
operating condition.
At March 31, 1999, the gross book value of NTT Group's property, plant and
equipment was (Yen)32,365 billion (US $267 billion), consisting of
telecommunications equipment (mainly central office equipment, including
switching equipment) (36.6%); telecommunications service lines (36.5%);
buildings and structures (15.4%); machinery, vessels and tools (vehicles,
office equipment, furniture, etc.) (6.6%); land (2.2%); and construction in
progress (2.7%). Substantially all of the important communications facilities
are in buildings owned by NTT Group.
NTT Group's network is constantly in the state of being modernized and is
expected to be adequate for current operations. In recent years, NTT has
upgraded its telecommunications plant and equipment with digital transmission
and switching equipment. On December 17, 1997, NTT's domestic
telecommunications network was completely digitized. NTT Group will provide
more effective and advanced services and plans to expand optical fiber cables
in the access network. As indicated under "Capital Investments" in Item 1,
"Description of Business," NTT Group is shifting capital investment strategy
from investment in infrastructure to investment in demand-oriented customer
services.
ITEM 3--LEGAL PROCEEDINGS
In the normal course of business, NTT Group is subject to proceedings,
lawsuits and other claims. However, based upon the information currently
available to both NTT Group 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.
As of March 31, 1999, the Government of Japan owns 59.20% of the issued and
outstanding Shares of NTT. See Note 13 of the Notes to Consolidated
Financial Statements.
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<PAGE>
(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, 1999
----------------------------------------------
Amount of
Identity of Person Shares Percent
Title of Class or Group Owned of Class
-------------- ---------------------- ------------ --------
<S> <C> <C> <C>
Common stock, par value Government of Japan 9,419,339.24* 59.20%*
(Yen)50,000............... (Minister of Finance)
Common stock, par value Directors and officers 274.60 0.002%
(Yen)50,000............... as a group (26 persons)
</TABLE>
--------
* On July 13, 1999, NTT repurchased 48,898 of its Shares. See Item 5--
"Nature of Trading Market". Of the Shares it repurchased, 48,000 were
bought from the Government of Japan, thereby reducing the holding of the
Government of Japan.
(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 NTT 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,
1999, stocks of 1,338 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 Closing Nikkei
Price per Share TOPIX Stock Average
------------------- Average daily ----------------- -------------------
Calendar Period High Low trading volume High Low High Low
- --------------- --------- --------- -------------- -------- -------- --------- ---------
(number
(yen) (yen) of shares) (points) (points) (yen) (yen)
<S> <C> <C> <C> <C> <C> <C> <C>
1997
First quarter ........ 914,000 808,000 7,390 1,480.86 1,326.60 19,446.00 17,303.65
Second quarter ....... 1,110,000 836,000 15,757 1,560.28 1,320.82 20,681.07 17,485.75
Third quarter ........ 1,240,000 999,000 8,828 1,555.16 1,373.97 20,575.26 17,683.27
Fourth quarter ....... 1,150,000 920,000 7,585 1,391.06 1,130.00 17,842.16 14,775.22
1998
First quarter ........ 1,230,000 1,050,000 7,918 1,300.30 1,120.61 17,264.34 14,664.44
Second quarter ....... 1,170,000 996,000 5,633 1,254.74 1,156.47 16,536.66 14,715.38
Third quarter ........ 1,280,000 995,000 8,162 1,280.73 1,043.57 16,731.92 13,406.39
Fourth quarter ....... 1,080,000 819,000 9,553 1,164.59 980.11 15,207.77 12,879.97
1999
First quarter ........ 1,200,000 854,000 14,569 1,269.76 1,048.33 16,378.78 13,232.74
Second quarter ....... 1,440,000 1,130,000 18,829 1,425.64 1,292.07 17,782.79 15,972.68
</TABLE>
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<PAGE>
On June 30, 1999, the last reported sale price of the Shares on the TSE was
(Yen)1,410,000 per Share, and the closing TOPIX and Nikkei Stock Average on
that date were 1,416.20 and (Yen)17,529.74, 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.
On December 18, 1998, the Government sold 1,000 thousand Shares to a variety
of individual and institutional investors in a global offering. Shares sold in
the United States were registered with the United States Securities and
Exchange Commission. The global offering consisted of 981,560 Shares and
3,688,000 ADSs (representing 18,440 Shares).
On June 30, 1999, approximately 10,964,600 ADSs (equivalent to 55,823
Shares, or approximately 0.34% of the total number of Shares outstanding on
that date) were outstanding and were held by 218 record holders of ADRs
(including 212 record holders in the United States holding 10,963,766 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 Average daily
Calendar Period ADS trading volume
- --------------- ----------- ----------------
High Low (number of ADSs)
----- ----- ----------------
($) ($)
<S> <C> <C> <C>
1997
First quarter.................................... 39.00 34.63 3,489
Second quarter................................... 49.25 34.50 46,080
Third quarter.................................... 52.00 46.25 22,166
Fourth quarter................................... 47.38 35.94 20,667
1998
First quarter.................................... 48.50 41.13 19,307
Second quarter................................... 44.38 34.69 13,732
Third quarter.................................... 45.44 35.63 14,689
Fourth quarter................................... 45.25 31.00 31,264
1999
First quarter.................................... 49.88 36.00 41,234
Second quarter................................... 64.94 47.00 49,233
</TABLE>
The Shares are also listed on the London Stock Exchange.
NTT has paid dividends on the Shares semiannually in respect of each fiscal
year since NTT'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, NTT 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.
33
<PAGE>
The following table sets forth the respective shareholder and Board of
Director (interim dividend) approval dates, payment dates and amount of
dividends paid by NTT 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, 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
September 30, 1998.... November 20, 1998 December 11, 1998 (Yen)2,500 $21.41
March 31, 1999........ June 29, 1999 June 30, 1999 (Yen)7,500 $52.26
</TABLE>
See Note 13 of Notes to Consolidated Financial Statements.
NTT paid an annual dividend of (Yen)7,500 per share in respect of fiscal
year 1999. This dividend consisted of a special dividend of (Yen)5,000 per
share and an ordinary dividend of (Yen)2,500 per share paid to shareholders of
record on March 31, 1999 following shareholders and MPT approval as well. The
special dividend was announced in October 1998 in conjunction with NTT's sale
of a portion of its interest in NTT Central DoCoMo.
The payment, as well as the amount, of dividends in the future will be
subject to the level of NTT's earnings, NTT'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, NTT 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 NTT. 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.
At the general shareholders meeting on June 29, 1999, it was approved that
NTT will repurchase up to (Yen)120 billion of its shares of common stock
before its next ordinary general meeting of shareholders in June 2000. The
number of Shares to be repurchased shall not exceed 120,000. On July 13, 1999,
NTT repurchased 48,898 Shares through transactions executed on the Tokyo Stock
Exchange at the price of (Yen)1,500,000 per share. As a result of the
repurchase, the number of outstanding Shares was reduced to 15,863,102.
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 HOLDERS
General
The Foreign Exchange and Foreign Trade Law of Japan, as amended, and the
cabinet orders and ministerial ordinances issued thereunder (collectively, the
"Foreign Exchange Regulations") govern certain matters relating
34
<PAGE>
to the acquisition and holding of shares of equity securities of Japanese
corporations by "non-residents of Japan" and "foreign investors" (as defined
below). For purposes of determining ownership interests, the Depositary is the
deemed owner of shares underlying ADRs.
"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 and was substituted by a subsequent reporting
requirement. Such subsequent reporting by the resident of Japan is not
required where (i) the amount of the purchase transaction of shares is
(Yen)100 million or less; or (ii) the purchase transaction is effected by
certain financial institutions acting as the agent or intermediary, as
prescribed by the Foreign Exchange Regulations.
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.
Whenever shares of NTT are acquired in a transaction which at such time
falls within the category of an inward direct investment requiring prior
notification, the foreign investor who makes such investment must file a prior
notification with MOF and other governmental ministries having jurisdiction
over the business of NTT 30 days prior to such transaction. When a prior
notification is required, the said ministries may recommend the modification
or abandonment of the proposed acquisition and, if the recommendation is not
accepted, order its modification or prohibition.
The acquisition of shares by non-resident shareholders by way of stock split
is not subject to any notification requirements.
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.
35
<PAGE>
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 NTT'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 NTT'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 NTT'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 NTT's total voting rights. NTT 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 NTT.
ITEM 7--TAXATION
Japanese Taxation
The following is a summary, prepared by Tomotsune Kimura & Mitomi, of the
principal Japanese tax consequences to an owner of shares or ADSs who is an
individual not resident in Japan or a non-Japanese corporation. The statements
regarding Japanese tax laws set forth below are based on the laws in force and
as interpreted by the Japanese taxation authorities as of the date hereof and
are subject to changes in the applicable Japanese laws or double taxation
conventions occurring after that date. This summary is not exhaustive of all
possible tax considerations which may apply to a particular investor and
potential investors are advised to satisfy themselves as to the overall tax
consequences of the acquisition, ownership and disposition of shares or ADSs,
including specifically the tax consequences under Japanese law, the laws of
the jurisdiction of which they are resident, and any tax treaty between Japan
and their country of residence, by consulting their own tax advisors.
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
36
<PAGE>
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. NTT
currently does not intend to transfer its retained earnings to 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 and Japanese tax law, 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%. At the date of this annual report,
Japan has income tax treaties, conventions or agreements whereby the above
mentioned withholding tax rate is reduced, in most cases to 15% for portfolio
investors with, inter alia, Australia, Belgium, Canada, Denmark, Finland,
France, Germany, Ireland, Italy, Luxembourg, The Netherlands, New Zealand,
Norway, Singapore, Spain, Sweden, Switzerland, the United Kingdom and the
United States of America.
A non-resident holder who is entitled to a reduced rate of Japanese
withholding tax on payment of dividends by NTT is required to submit an
Application Form for Income Tax Convention regarding Relief from Japanese
Income Tax on Dividends in advance through NTT to the relevant tax authority
before payment of dividends. A standing proxy for a non-resident holder may
provide such application service. With respect to ADSs, such reduced rate is
applicable if the Depositary or its agent submits two Application Forms for
Income Tax Convention (one prior to payment of dividends, the other within
eight months after NTT's fiscal year-end). To claim such reduced rate a non-
resident holder of ADSs will be required to file proof of taxpayer status,
residence and beneficial ownership (as applicable) and to provide other
information or documents as may be required by the Depositary. A non-resident
holder who does not submit an application in advance will be entitled to claim
the refund of withholding taxes withheld in excess of the rate of an
applicable tax treaty from the relevant Japanese tax authority.
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.
United States Taxation
The following discussion is based on the advice of Milbank, Tweed, Hadley &
McCloy LLP, United States counsel to NTT, 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
ADSs or Shares,
37
<PAGE>
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, persons holding an ADS or share as part of a straddle,
hedging, conversion or integrated transaction and holders of 10% or more of
the voting shares of NTT. NTT believes, and the discussion therefore assumes,
that it is not and will not become a passive foreign investment company for
United States federal income tax purposes. HOLDERS SHOULD CONSULT THEIR TAX
ADVISORS ABOUT THE UNITED STATES FEDERAL, STATE AND LOCAL TAX CONSEQUENCES TO
THEM OF THE PURCHASE, OWNERSHIP AND DISPOSITION OF ADSs OR SHARES.
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 must be included in
the gross income of a U.S. holder as ordinary income when the dividends are
received (i) by the Depositary in the case of a U.S. holder holding ADSs or
(ii) by the U.S. holder in the case of a U.S. holder holding Shares. Dividends
paid in yen must be included in gross income at a United States dollar amount
based on the exchange rate in effect on the day of receipt by the Depositary
or, in the case of Shares, the U.S. holder. 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 generally will be foreign source income but generally will
be treated separately, together with other items of "passive income" (or in
the case of certain holders, "financial services income") for foreign tax
credit limitation purposes. A U.S. holder that is a corporation will not be
eligible for the dividends-received deduction. 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 NTT generally will
not be subject to United States federal income tax. However, such
distributions of additional Shares or preemptive rights generally will be
subject to federal income tax if, for example, a U.S. holder can elect to
receive cash in lieu of Shares or preemptive rights or if the distribution of
Shares or preemptive rights is not proportionate.
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 that income is effectively connected with the
conduct by the non-U.S. holder of a trade or business within the United States
(and is attributable to a permanent establishment maintained in the United
States by such non-U.S. holder, if an applicable income tax treaty so
requires).
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. Consequently, in the
case of a disposition of shares or ADSs, the U.S. holder may not be able to
use the foreign tax credit for any Japanese tax imposed on the gain unless it
can apply the credit against tax due on income from foreign sources. Loss
recognized by a U.S. holder generally will be treated as United States source
loss. A U.S. holder may, however, be required to treat all or any part of such
loss as foreign source loss in certain circumstances, including if (i) NTT has
paid dividends within the 24-month period preceding the loss and (ii) the
38
<PAGE>
U.S. holder included the dividends in the "financial services income" basket
for foreign tax credit limitation purposes. If such a loss were treated as
foreign source for foreign tax credit purposes, the amount of the U.S.
holder's allowable foreign tax credit may be reduced.
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 (i) such gain is effectively connected with the
conduct of a trade or business within the United States (and is attributable
to a permanent establishment maintained in the United States by such non-U.S.
holder, if an applicable income tax treaty so requires) or (ii) 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.
Dividends in respect of the ADSs or Shares and the proceeds from the sale,
exchange, or redemption of the ADSs or Shares may be reported to the United
States Internal Revenue Service if paid to noncorporate holders. A 31% backup
withholding tax also may apply to amounts paid to noncorporate holders unless
they provide an accurate taxpayer identification number, a properly executed
U.S. Internal Revenue Service Form W-8 or otherwise establish a basis for
exemption. The amount of any backup withholding from a payment to a holder
will be allowed as a credit against the holder's United States federal income
tax liability. The requirements for establishing an exemption from information
reporting and backup withholding will change for payments made after December
31, 2000.
ITEM 8--SELECTED FINANCIAL DATA
The following data for each of the fiscal years 1995-1999 has been derived
from, and should be read in conjunction with, the consolidated financial
statements of NTT and its subsidiaries. Consolidated balance sheets at March
31, 1998 and 1999, the related consolidated statements of income,
shareholders' equity and cash flows for the three years ended March 31, 1999
and the notes thereto appear elsewhere in this annual report.
39
<PAGE>
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
----------------------------------------------------------------------------- ------------
1995 1996 1997 1998 1999 1999
-------------- -------------- -------------- -------------- -------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Operating revenues...... (Yen)7,043,822 (Yen)7,908,643 (Yen)8,821,782 (Yen)9,450,013 (Yen)9,729,673 $ 80,411
Operating expenses...... 6,653,588 7,212,492 8,052,307 8,577,968 9,018,238 74,531
-------------- -------------- -------------- -------------- -------------- --------
Operating income........ 390,234 696,151 769,475 872,045 711,435 5,880
Other, net (mainly
representing interest
and amortization of
bond discounts and
other charges for debt
expenses).............. 225,524 151,012 259,702 216,513 (1,402,526) (11,591)
-------------- -------------- -------------- -------------- -------------- --------
Income before income
taxes and minority
interest............... 164,710 545,139 509,773 655,532 2,113,961 17,471
Income taxes............ 82,429 272,974 260,927 418,276 1,081,917 8,942
Minority interest....... (2,433) (6,124) (11,718) (32,275) (24,148) (200)
Extraordinary loss...... -- -- -- -- (462,508) (3,822)
Equity in earnings of
affiliated companies... 5,595 7,605 14,329 9,479 9,043 75
-------------- -------------- -------------- -------------- -------------- --------
Net Income............ (Yen) 85,443 (Yen) 273,646 (Yen) 251,457 (Yen) 214,460 (Yen) 554,431 $ 4,582
============== ============== ============== ============== ============== ========
<CAPTION>
Yen U.S. Dollars
----------------------------------------------------------------------------- ------------
1995 1996 1997 1998 1999 1999
-------------- -------------- -------------- -------------- -------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Per share of common
stock:
Extraordinary loss...... -- -- -- -- (Yen) (29,067) $ (240)
Net income.............. (Yen) 5,370 (Yen) 17,197 (Yen) 15,803 (Yen) 13,478 (Yen) 34,844 $ 288
Cash dividends,
applicable to earnings
of the year............ (Yen) 4,902 (Yen) 4,902 (Yen) 5,000 (Yen) 5,000 (Yen) 5,000 $ 41
</TABLE>
Note: This financial data for per share of common stock is appropriately
adjusted for any stock split of common stock.
40
<PAGE>
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
------------------------------------------------------------------------------- ------------
1995 1996 1997 1998 1999 1999
--------------- --------------- --------------- --------------- --------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Property, plant and
equipment (net)........ (Yen)10,857,314 (Yen)11,136,221 (Yen)11,655,768 (Yen)12,005,362 (Yen)12,161,818 $100,511
Total assets............ 14,397,961 15,399,448 16,475,094 17,352,531 18,573,248 153,498
Long-term liabilities... 7,175,053 7,397,805 7,956,248 8,306,737 8,125,479 67,153
Total shareholders'
equity................. 5,000,437 5,196,119 5,340,412 5,463,928 5,910,770 48,849
</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 competition
in the telecommunications services market. See "Description of Business--NTT
Group" and "Description of Business--Regulation" for information as to the
current and possible future impact on NTT Group and its results of operations.
In June 1997, the Diet passed amendments to the NTT Law which implement a
plan proposed by MPT, accepted in principle by NTT, to reorganize NTT. See
"Description of Business--Reorganization." and "Description of Business--NTT
Group." On December 4, 1997, pursuant to the amendments to the NTT Law, the
Ministry of Posts and Telecommunications announced the Basic Principles. On
May 10, 1999, NTT submitted the Implementation Plans in accordance with the
Basic Principles which was approved by MPT. Matters concerning the transfer of
business, which was the precondition of reorganization, were approved at the
ordinary general meeting of shareholders on June 29, 1999. See "Description of
Business--Reorganization." On July 1, 1999, the relevant NTT business
activities were transferred to NTT's respective wholly-owned subsidiaries, NTT
East, NTT West and NTT Communications.
After the transfer of business, NTT continues to exist but operates
primarily as a holding company. The principal sources of NTT's cash revenues
are dividends from its subsidiaries. NTT will be paid for its services through
concluding contracts with its subsidiaries as follows: NTT will be paid for
its fundamental R&D activities through contracts with each of NTT's
subsidiaries which continuously use results of those R&D activities, and NTT
will be paid for providing management services through contracts with its
certain subsidiaries.
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 and became effective as of
November 1, 1998. Rates for certain services provided by the Regional
Companies will generally 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 interconnection. The
conditions upon which access to networks, especially to the local networks is
offered, is of great significance to the development of the Japanese
telecommunications market. The cost of interconnection to the local networks
of NTT East and NTT West is expected to be a significant part of the
41
<PAGE>
operating costs of competing telecommunications carriers, and, as competition
grows, increasingly important to NTT Group. See "Description of Business--
Regulation--Interconnection."
In May 1998, the U.S. Government and the Japanese Government issued a status
report in which the Japanese Government expressed its intention to introduce
"Long-run Incremental Cost Methodology" for setting interconnection charges.
Long-run Incremental Cost Methodology would calculate interconnection charges
based on costs assumed to be incurred for construction of the current network
with presently available equipment and technology. A study group for Long-run
Incremental Cost Methodology of the Ministry of Posts and Telecommunications
on July 30, 1999 announced a model plan for Long-run Incremental Cost
Methodology. Pursuant to this model, a cost of interconnection charges for the
Regional Companies' Zone Centers (ZCs, or toll switching offices) would be
reduced by 51.3% and a cost of interconnection charges for the Regional
Companies' Group Centers (GCs, or local switching offices) would be reduced by
6.2%. The study group stated that the model plan will not be applied instantly
to interconnection charges themselves but was made to calculate the cost
thereof. It was also stated that as for introduction of the implementation of
Long-run Incremental Cost Methodology, the Ministry of Posts and
Telecommunications is planning to submit the plan to the Telecommunications
Council after Autumn, 1999 and examine the implementation of Long-run
Incremental Cost Methodology, paying due consideration to ensure that the
implementation of Long-run Incremental Cost Methodology causes no disruption
of provision of universal service and that it would not prove destructive to
end user rates and the business operation of incumbent local exchange
carriers. At this time, the ultimate results of the introduction of Long-run
Incremental Cost Methodology on the financial position and results of
operations of NTT Group cannot be determined. See "Description of Business--
Regulation--Interconnection."
In fiscal year 1999, NTT Group discontinued accounting for all of its
operations in accordance with the provisions of Statement of Financial
Accounting Standards No. 71, "Accounting for the Effects of Certain Types of
Regulation" ("SFAS 71"), in its financial statements. Pursuant to the
requirements of Statement of Financial Accounting Standards No. 101,
"Regulated Enterprises--Accounting for the Discontinuation of Application of
FASB Statement No. 71" ("SFAS 101"), NTT recorded an extraordinary non-cash
charge of approximately (Yen)462 billion, net of income taxes in the amount of
(Yen)427 billion in fiscal year 1999 and has eliminated approximately (Yen)889
billion of regulatory assets from its balance sheet as of March 31, 1999.
Under SFAS 71, NTT had accounted for the effects of the rate-making process
by establishing certain regulatory assets, including the deferral of certain
costs based on approvals received from regulators. After assessing the recent
revision of the Telecom Business Law and proposed price-cap system, NTT
recognized that it is required under SFAS 101 to change its accounting for
regulated operations. NTT's determination that it is no longer eligible for
the continued application of SFAS 71 is based on the belief that the
convergence of competition, technological change, actual and potential
regulatory and legislative actions, and other factors are creating open and
competitive markets. In this environment, NTT does not believe that it can be
assured that the prices can be maintained at a level that will recover the
regulatory assets recorded. In addition, changes from cost-based regulation to
various forms of incentive regulation, such as the price-cap system specified
in the Ministry of Posts and Telecommunications' ordinance, contributed to the
determination that the continued application of SFAS 71 is no longer
appropriate.
On April 1, 1998, NTT Group adopted Statement of Financial Accounting
Standards No. 131 ("SFAS 131"), "Disclosures about Segments of an Enterprise
and Related Information." SFAS 131 requires public business enterprises to
report certain information about operating segments in their financial
statements and also requires that they report certain information about their
products and services, the geographic areas in which they operate, and their
major customers. As a result of SFAS 131, NTT Group's results are now
segmented according to its four primary lines of business: wireline services,
wireless services, data communication services and other services. See
Footnote 14 to the Notes to Consolidated Financial Statements attached hereto
and Item 1--"Description of Business--NTT Group."
On October 22, 1998, NTT Central DoCoMo completed its initial public
offering and listed its stock on the First Section of the Tokyo Stock
Exchange. NTT sold 218,000 shares of NTT Central DoCoMo's common stock,
42
<PAGE>
without par value, for total proceeds of (Yen)826.1 billion and NTT Central
DoCoMo issued 327,000 new shares of stock for total proceeds of (Yen)1,236.5
billion. As a result of the offering, NTT's stake in NTT Central DoCoMo was
reduced from 94.7% to 67.1%. NTT intends to use a portion of the proceeds from
its sale of NTT Central DoCoMo shares to repurchase up to (Yen)120 billion of
NTT's outstanding common stock before its next ordinary general meeting of
shareholders in June 2000. On July 13, 1999, NTT repurchased 48,898 Shares of
its common stock through transaction executed thorough Tokyo Stock Exchange at
the price of (Yen)1,500,000 per share. As a result of the repurchase, the
number of outstanding Shares was reduced to 15,863,102. See "Item 5--Nature of
Trading Market." NTT also paid a special dividend of (Yen)5,000 per share to
NTT's shareholders of record on March 31, 1999 using the proceeds of the sale
of NTT Central DoCoMo stock and intends to use the remaining proceeds for
general corporate purposes. NTT DoCoMo expects to use the proceeds from its
issuance of new Shares to repay debt, to fund current and future capital
expenditures and for general corporate purposes. During fiscal year 1999, NTT
recognized pre-tax gains on the sale and issuance of NTT Central DoCoMo's
shares of approximately (Yen)781 billion and (Yen)784 billion, respectively,
as well as applicable deferred taxes thereon.
NTT Group recognizes the potential for the Year 2000 Problem to disrupt the
smooth operation of computer systems. To mitigate such risk, NTT Group began
an in-house investigation in March 1995, and in the following November
established a task force to promote NTT Group-wide preparations based on the
efficient sharing of related information. NTT Group is addressing both
information technology ("IT") and non-IT systems.
With a number of favorable conditions, such as the ability of its network
infrastructure to handle a four digit year and the conversion of intra-company
support systems to a four digit year as an inter-corporate standard in 1992,
management estimates that costs related to the Year 2000 Problem for NTT Group
will be approximately (Yen)6.8 billion. However, this estimate may be revised
should problems occur from outside sources or due to unforeseen circumstances.
NTT Group presently believes that the Year 2000 Problem will not pose
significant operational problems for its systems. However, if the anticipated
modifications and conversions are not completed on a timely basis, or if the
systems of other companies on which the systems and operations of NTT Group
rely are not converted on a timely basis, the Year 2000 Problem could have an
adverse effect on the operations of NTT Group.
To the extent NTT Group has not already implemented a four digit year on its
computer systems, NTT Group has completed renovation, final testing and
validation on the majority of its computer systems. NTT Group has already
completed changes determined to be necessary on a smaller number of its
computer systems, and such systems are currently in use. At the same time, NTT
Group completed renovating the remaining portion of its network infrastructure
and intra-company support systems by June 1999.
NTT Group is taking steps to assess the level of risk associated with the
Year 2000 Problem by acquiring information from external vendors to confirm
the status of compliance measures by such vendors for the Year 2000 Problem
and performing tests where necessary. However, given the reliance on third
party information and the difficulty of determining potential errors, no
assurance can be given that the computer systems or operations of NTT Group
will not be affected by mistakes, if any, of third parties or third party
failures to complete the Year 2000 project on a timely basis.
NTT Group recognizes the importance of readiness for potential worst case
scenarios. As a result, NTT Group is preparing its own Y2K contingency plans
based on existing contingency plans and procedures, but with special
consideration of the unique factors characteristic to this problem. These
contingency plans were completed by the end of June 1999.
Results of Operations
In fiscal years 1999 and 1998, NTT Group's operating revenues increased 3.0%
and 7.1%, respectively. In both fiscal year 1999 and 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 in
February 1998 and reduction in interconnection charges
43
<PAGE>
paid by NCCs for network access. Operating income decreased 18.4% in fiscal
year 1999, following an increase of 13.3% in fiscal year 1998. Net income
increased 158.5% in fiscal year 1999 and declined 14.7% in fiscal year 1998.
Because NTT Group'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 Group 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.
NTT 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 years 1995 and 1999.
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 NTT's end-to-end traffic of fixed-line
telephone and ISDN services:
<TABLE>
<CAPTION>
Years ended March
31,
--------------------
Number of calls (Million calls): 1997 1998 1999
-------------------------------- ------ ------ ------
<S> <C> <C> <C>
Fixed line telephone.................................... 79,891 73,668 61,074
ISDN (Voice mode)....................................... 1,613 3,569 7,150
ISDN (Digital mode)..................................... 1,277 2,152 3,199
------ ------ ------
Fixed line telephone and ISDN total..................... 82,781 79,389 71,423
====== ====== ======
<CAPTION>
Years ended March
31,
--------------------
Hours of use (Million hours): 1997 1998 1999
----------------------------- ------ ------ ------
<S> <C> <C> <C>
Fixed line telephone.................................... 3,441 3,240 2,952
ISDN (Voice mode)....................................... 56 122 241
ISDN (Digital mode)..................................... 65 168 334
------ ------ ------
Fixed line telephone and ISDN total..................... 3,562 3,531 3,526
====== ====== ======
</TABLE>
NTT increased the rate it charges for its directory assistance services in
October 1995. NTT 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,
NTT increased its monthly charge for basic exchange lines. This factor had the
effect of increasing revenues approximately (Yen)190 billion per 12-
44
<PAGE>
month period. NTT applied for a further revision of its directory assistance
services charges to MPT in December 1997. This revision was implemented in May
1998 and in May 1999 following the approval of MPT. This revision is expected
to have the effect of increasing NTT's revenues by (Yen)15 billion per 12-
month period.
The following table sets forth a breakdown by category of NTT Group's
operating revenues for fiscal years 1997, 1998 and 1999.
<TABLE>
<CAPTION>
Percent
increase
Years
ended
Years ended March 31, March 31,
---------------------------------------------- -----------
1997 1998 1999 1999 1998 1999
---------- ---------- ---------- ------------- ---- ----
(billions of yen) (billions of
U.S. Dollars)
<S> <C> <C> <C> <C> <C> <C>
Operating Revenues
Telephone............... (Yen)6,038 (Yen)6,306 (Yen)6,300 $52.1 4.4% (0.1%)
Telegraph............... 99 92 86 0.7 (6.6%) (7.3%)
Leased Circuit.......... 429 488 507 4.2 13.9 3.9
Data communication
facility............... 338 373 383 3.2 10.3 2.9
ISDN.................... 190 368 556 4.6 93.2 51.2
Sale of
Telecommunication
equipment.............. 890 970 1,009 8.3 9.0 4.0
Other................... 838 853 889 7.3 1.8 4.1
---------- ---------- ---------- ----- ---- ----
(Yen)8,822 (Yen)9,450 (Yen)9,730 $80.4 7.1% 3.0%
========== ========== ========== ===== ==== ====
</TABLE>
In fiscal years 1999 and 1998, operating expenses increased 5.1% and 6.5%,
respectively. Operating expenses in fiscal year 1999 increased because of a
rise in depreciation, amortization and maintenance costs due to a greater
amount of telecommunications equipment for cellular telephone and PHS services
needed to accommodate high NTT DoCoMo subscriber growth and other factors. In
addition, the disposal process for metal cables following NTT's conversion to
an optical access network increased. Moreover, other operating expenses also
increased due to such factors as growth in agency commissions and sales
expenses for terminals as a result of high NTT DoCoMo subscriber growth.
Operating expenses in fiscal year 1998 increased because of a rise in
depreciation, amortization and maintenance costs due to greater depreciation
at NTT DoCoMo, reflecting aggressive capital investment to meet strong demand.
In addition, other operating expenses also increased due to such factors as
growth in agency commissions and expenses for terminal equipment as a result
of high subscriber growth at NTT DoCoMo.
Fiscal year 1999 compared with Fiscal year 1998
Operating Revenues
NTT Group's operating revenues are divided into the following seven service
categories: telephone services, telegraph services, leased circuit services,
data communication facility services, ISDN services, sale of telecommunication
equipment and other services. NTT Group's results are also segmented according
to its four primary lines of business: wireline services, wireless services,
data communication services and other services. See Footnote 14 to the Notes
to Consolidated Financial Statements attached hereto and Item 1--"Description
of Business--NTT Group."
In fiscal year 1999, NTT Group's operating revenues increased 3.0% to
(Yen)9,730 billion. However, wireline services' operating revenue decreased
2.9% to (Yen)6,137 billion, as the increase of ISDN subscribers could not
offset a decline in telephone subscriber lines. Wireless services' operating
revenue increased 14.2% to (Yen)3,356 billion due to a substantial increase in
the number of cellular telephone subscribers. The operating revenue of data
communication services and other services increased 5.4% to (Yen)705 billion
and 37.5% to (Yen)1,475 billion, respectively.
Making use of its fully digitized network, NTT Group developed and provided
such services as computer-based communications services compatible with the
Internet and other networks. As a result of this effort,
45
<PAGE>
information sharing related services revenues which contains ISDN, OCN, high
speed digital circuit, digital data exchange (DDX) services, which are
included in NTT Group's wireline segment, and system integration (SI), which
is included in both wireline and data communication segment, increased 22.7%
to (Yen)1,633 billion in fiscal year 1999.
NTT Group 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
Group has introduced a range of new services, including discount services
designed to provide optional calling plans to different customer segments. In
addition, NTT Group has continued to take steps to enhance operational
efficiency and fulfill customer satisfaction.
Telephone Services
Operating revenues from telephone services decreased 0.1% in fiscal year
1999 to (Yen)6,300 billion, or 64.8% of operating revenues. NTT Group's
telephone services include certain items in the wireline segment, such as
telephone subscriber, public telephones and other related services; certain
items in the wireless segment, such as cellular telephone, PHS and other
related services; and certain other services. Subscribers for cellular
telephone services grew substantially, leading to an increase in total network
traffic. However, the shift to cellular and INS-Net services among users,
combined with the effects of the sluggish Japanese economy, caused the number
of telephone subscriber lines to decline.
(i) Telephone subscriber services
Telephone subscriber service is NTT Group's principal business activity. Due
to an increase in sales of INS-Net services and cellular telephones and the
sluggish economy, the number of subscriber lines in use decreased 1.91 million
from the previous fiscal year to 58.28 million subscriber lines at the end of
fiscal year 1999, marking the second consecutive year of a decrease in
subscriber lines. Management believes that about 85% of the increase in ISDN
subscribers during the fiscal year is attributable to a shift from telephone
subscribers. The penetration rate at the end of the fiscal year was
approximately 461 subscriber lines per 1,000 inhabitants.
<TABLE>
<CAPTION>
Years ended March
31,
--------------------
1997 1998 1999
------ ------ ------
<S> <C> <C> <C>
Telephone subscriber lines (thousands).................. 61,223 60,186 58,277
Fixed-line telephone Penetration rate*.................. 48.6 47.7 46.1
</TABLE>
--------
* Subscriber lines per 100 inhabitants
In fiscal year 1999, NTT's end-to-end telephone traffic decreased from the
previous fiscal year in terms of the number of calls as well as hours of use.
The primary reasons for this decrease were the ongoing economic downturn, the
shift to cellular telephone services and INS-Net and an increase in
competition. Even when combined with ISDN traffic, the number of calls and
hours of use decreased.
A rate reduction for long-distance calls implemented in February 1998
resulted in a negative impact on operating revenues in fiscal year 1999 of
(Yen)70 billion.
Revisions to directory assistance service charges, implemented in May 1998
and May 1999, are expected to increase NTT Group's revenues by (Yen)15 billion
per 12-month period.
During the fiscal year, NTT made further progress with the interconnection
of local switches with local and long-distance carriers through its GCs. NTT
responded with the extension of the "Time Plus" discount service to the whole
of Japan and the introduction of a new "Telechoice" pricing plan.
Interconnection charges were reduced further in January 1999, with the
reduction applicable to calls made from April 1998. The adverse effect on
interconnection charge revenues during fiscal year 1999 was approximately
(Yen)68 billion.
46
<PAGE>
(ii) Cellular Telephone Services
Cellular telephone services are part of NTT Group's wireless segment. The
market in Japan for cellular telephone services continued to expand
vigorously, and the total number of cellular telephone subscribers climbed
31.7% over fiscal year 1999 to reach a new high of 41.5 million. While growth
was not quite as explosive as in recent years, the number of NTT DoCoMo's
subscribers rose substantially to 23.9 million, a 32.9% increase over 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,
------------------------------------
1995 1996 1997 1998 1999
----- ----- ------ ------ ------
<S> <C> <C> <C> <C> <C>
Cellular telephone subscribers
(thousands)........................ 2,206 4,936 10,960 17,984 23,897
Digital service (thousands)....... 380 2,556 9,445 17,706 23,895
Analog service (thousands)*....... 1,826 2,380 1,515 278 2
Market share...................... 50.9% 48.4% 52.5% 57.0% 57.5%
</TABLE>
--------
* NTT DoCoMo terminated its analog service on April 1, 1999.
In fiscal year 1999, traffic increased in terms of both the number of calls
and total hours of use.
The following table sets forth information regarding NTT DoCoMo's cellular
telephone traffic:
<TABLE>
<CAPTION>
Years Ended
March 31,
--------------
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Hours of use (Million hours).................................. 252 448 784
</TABLE>
(iii) PHS Services
PHS services are part of NTT Group's wireless segment. On December 1, 1998,
NTT Group's PHS services business that had been operated formerly by NTT
Personal Group was transferred to NTT DoCoMo. The PHS services business had
suffered a loss of customers and the liabilities of NTT Personal Group had
exceeded its assets. The transfer to NTT DoCoMo should create synergistic
effects and allow NTT DoCoMo to provide a comprehensive set of mobile
communications services.
The following table sets forth information regarding NTT DoCoMo's PHS
subscribers and its market share:
<TABLE>
<CAPTION>
Years Ended March
31,
-------------------
1997 1998 1999
----- ----- -----
<S> <C> <C> <C>
PHS telephone subscribers (thousands)................... 1,851 1,906 1,349
Market share............................................ 30.7% 28.3% 23.3%
</TABLE>
Telegraph Services
Operating revenues from telegraph services fell 7.3% to (Yen)86 billion in
fiscal year 1999 accounting for 0.9% of operating revenues. This service
category includes both telegram and telex services included in NTT Group's
wireline segment.
The total number of telegrams sent dropped 3.7% in fiscal year 1999, from
37,564 thousand to 36,180 thousand. Although the number of communications made
by "D-MAIL," a telegram service that makes use of the Internet, increased
steadily during fiscal 1999, this could not fully offset a decline of 32.1% in
the use of telegrams for weddings and condolences, to 32,145 thousand. Such
telegrams made up 88.8% of the total.
47
<PAGE>
The following table sets forth information regarding the number of telegrams
sent and telex subscribers:
<TABLE>
<CAPTION>
Years Ended March 31,
----------------------------------
1995 1996 1997 1998 1999
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Telegrams (thousands)..................... 43,288 41,385 40,198 37,564 36,180
Telex subscribers (thousands)............. 18 15 12 10 8
</TABLE>
Leased Circuit Services
Operating revenues from leased circuit services increased 3.9% in fiscal
year 1999 to (Yen)507 billion accounting for 5.2% of operating revenues. This
service category includes conventional leased circuits, high-speed digital
circuits, ATM Megalink, ATM Share Link and other services included in NTT
Group's wireline segment.
Driven by the increasing complexity and sophistication of corporate
telecommunications systems and widespread construction of LANs and WANs in the
corporate sector, the user base for other services, particularly "Digital
Access 64/128", continued to grow favorably. "ATM Megalink services" became
much more popular with corporations as the telecommunications backbone for
their internal networks.
The number of high-speed digital circuits climbed 34.9% to 228 thousand.
However, the number of conventional leased circuits decreased 8.8% to 822
thousand as customers continued to switch to high-speed communications
services.
NTT implemented regular tariff revisions designed to keep a competitive rate
structure for its leased circuit services. These took effect in September
1995, April 1996, April 1997, and April 1998. These revisions are collectively
estimated to have had the effect of decreasing NTT's revenues by (Yen)42
billion per 12-month period.
The following table sets forth information regarding NTT's leased circuit
services:
<TABLE>
<CAPTION>
Years Ended March 31,
----------------------------
1995 1996 1997 1998 1999
----- ----- ---- ----- -----
<S> <C> <C> <C> <C> <C>
Conventional circuits (thousands).............. 1,025 1,001 967 902 822
High-speed digital circuits (thousands)........ 31 57 107 169 228
Digital Access 64/128/1500 (thousands)......... -- -- 7 59 128
Digital Reach 64/128/1500...................... -- -- -- -- 3,316
ATM Megalink................................... -- -- -- 1,254 1,509
</TABLE>
Data Communication Facility Services
Operating revenues from data communication facility services, which is
included in NTT Group's data communication segment, increased 2.9% in fiscal
year 1999 to (Yen)383 billion, or 3.9% of operating revenues. NTT Group
launched a number of new services for national and local government
institutions. Usage of "STAR-ACE," a multi-shared banking system for regional
financial institutions, also expanded during the year.
ISDN
Operating revenues from ISDN services, which is included in NTT Group's
wireline segment, increased 51.2% in fiscal year 1999 to (Yen)556 billion or
5.7% of operating revenues. NTT Group's ISDN services comprise INS-Net 64 and
INS-Net 1500. Growth in ISDN services continued to be driven by rising demand
for Internet access and connection lines for LANs. NTT launched two new
services during the fiscal year, "INS Area Plus" and "INS Time Plus." New
demand was also created by the "Telesse" multimedia telephone that allows
users to enjoy the Internet simply and conveniently.
48
<PAGE>
Continuing the rapid growth seen in fiscal year 1999, the number of INS-Net
64 subscribers soared 73.1% to 3.96 million, and the number of INS-Net 1500
subscribers climbed 42.0% to 47.7 thousand. ISDN traffic also recorded strong
growth.
The following table sets forth information regarding NTT's ISDN subscribers:
<TABLE>
<CAPTION>
Years Ended March 31,
---------------------------
1995 1996 1997 1998 1999
---- ---- ----- ----- -----
<S> <C> <C> <C> <C> <C>
INS-Net 64 (thousands)........................... 337 510 1,037 2,286 3,955
INS-Net 64 Light (thousands)..................... -- -- -- 86 242
INS-Net 1500 (thousands)......................... 6 10 22 34 48
</TABLE>
Sale of Telecommunication Equipment
Operating revenues from the sale of telecommunication equipment rose 4.0% to
(Yen)1,009 billion, accounting for 10.4% of operating revenues. The sale of
telecommunication equipment is included in each of NTT Group's wireline,
wireless and other services segments.
Due to the effects of the long-standing domestic recession and other
factors, total sales of business telephones and other terminal equipment to
companies were down. However, sales volumes for cellular telephone terminals
and products compatible with LANs, ISDN networks and Number Display (caller
ID) rose over fiscal year 1999.
As a result of the shift to cellular telephones, sales of PHS terminals fell
73.9%. Sales of cellular telephone terminals were buoyant, increasing 9.4% in
fiscal year 1999.
Other Services
Operating revenues from other services rose 4.1% to (Yen)889 billion,
accounting for 9.1% of total revenues. The other services category consists of
certain wireline segment businesses including digital data exchange, facsimile
network (F-Net), OCN services and other related services; certain wireless
segment businesses including pocket pager and other related services; certain
data communications segment businesses which include system development
services; and certain other services.
The following table sets forth information regarding NTT Group's subscribers
to other services:
<TABLE>
<CAPTION>
Years ended March 31,
---------------------------------------
1995 1996 1997 1998 1999
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
OCN Services(thousands)............ -- -- 1 159 478
Digital data exchange (DDX)
services:
Digital Data Exchange--Packet
(DDX-P) 36,740 33,424 31,821 30,625 26,643
Digital Data Exchange--Telephone
Packet (DDX-TP)................. 410,739 432,457 444,788 446,522 436,427
Frame relay...................... 28 565 3,942 15,701 43,959
Cell Relay....................... -- 0 0 4 6
Facsimile network subscribers
(thousands)....................... 678 812 1,015 1,127 1,212
Pocket pager subscribers
(thousands)....................... 5,355 6,328 5,838 3,908 2,111
</TABLE>
Reflecting a substantial increase in Internet usage, the number of
subscribers for NTT's "OCN Dial Access" services rose dramatically during
fiscal year 1999, with the number of installations rising over the 400
thousand. As a result, the total number of OCN subscribers increased by 201.4%
to 478 thousand. During the fiscal year, NTT moved to expand the market for
OCN by introducing "Super OCN," a service that is ideal for companies,
universities and other high-volume users to help them cope with a large volume
of Internet traffic.
49
<PAGE>
Within its frame relay services, NTT launched a new "Dial-Up FR" service
that makes data exchange possible between a frame relay network and an
ordinary analog or ISDN fixed line. Thanks to the success of this service and
other marketing initiatives, the number of frame relay subscribers rocketed
180.0% to 43,959.
Operating Expenses
Operating expenses increased 5.1% in fiscal year 1999 to (Yen)9,018 billion.
Although the total number of employees continued to decline to 224,000, an
increase in severance-related expenses and the accrual of compensated absences
as a result of non-application of SFAS No. 71 led to an increase in personnel
expenses of (Yen)22 billion to (Yen)2,367 billion.
Depreciation, amortization and maintenance costs increased by (Yen)250
billion to (Yen)3,436 billion. This reflected the increase of
telecommunications equipment for cellular telephone and PHS services to
accommodate high NTT DoCoMo subscriber growth and other factors, and also an
increase in the disposition of metal cables following NTT's conversion to an
optical access network.
Other operating expenses increased by (Yen)168 billion to (Yen)3,215 billion
due to such factors as growth in agency commissions and sales expenses for
terminals as a result of high NTT DoCoMo subscriber growth. Other operating
expenses also increased because usage fees for telecommunications equipment
increased as a result of higher interconnection charges for cellular
telephones.
As a result of the above factors, operating income decreased (Yen)161
billion, or 18.4% to (Yen)711 billion.
Net Income
Net income in fiscal year 1999 increased 158.5% to (Yen)554.4 billion as a
result of the sale of NTT DoCoMo shares despite a decrease in operating income
and the extraordinary one-time loss of (Yen)462 billion stemming from NTT
discontinuing its application of SFAS 71 for all of its operations.
Due to a change in Japanese income tax regulations, effective April 1, 1999,
the statutory rate was reduced to approximately 41% and such amount has been
used in calculating the future expected tax effects of temporary differences.
In addition, the valuation allowance at March 31, 1998, which mainly related
to deferred tax assets on the losses related to financial assistance to
subsidiary companies which are not expected to be tax deductible, was reversed
because the tax losses of NTT Personal Group have been realized in fiscal year
1999. As a result, the effective tax rate in fiscal year 1999 decreased to
51.18%, compared with 63.81% in fiscal year 1998, which had a positive impact
on net income.
Fiscal year 1998 compared with Fiscal year 1997
Operating Revenues
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. 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 NTT's INS-Net services.
(i) Telephone Subscriber Services
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.
50
<PAGE>
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.
In fiscal year 1998, NTT'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, NTT 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.
Revision to directory assistance service implemented in May 1998 and in May
1999 are expected to increase NTT Group's revenues by (Yen)15 billion per 12-
month period.
The interconnection of local switches with local and long-distance carriers
began during fiscal year 1998 through NTT's GCs, bringing direct competition
to the local call market. NTT 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.
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.
(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.
NTT Group and major shareholders of NTT Personal Group transferred their PHS
businesses in fiscal year 1999. Management believes the transfer to NTT DoCoMo
will create synergetic effects and will allow NTT DoCoMo to develop new
services based on the features of PHS.
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 33,613 thousand
telegrams. Kanji telegrams (Chinese character telegrams) accounted for
approximately 90% of all telegrams sent during the term.
51
<PAGE>
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.
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 thousand.
However, the number of conventional leased circuits decreased 6.7% to 902
thousand as customers switched to high-speed communications services.
In an effort to rebalance its rate structure in its leased circuit services,
NTT 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 NTT's revenues by (Yen)42 billion
per 12-month period.
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 Group 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.
ISDN
Operating revenues from ISDN services increased 93.2% in fiscal year 1998 to
(Yen)368 billion, or 3.9% of operating revenues. Growth in ISDN services is
being driven by strong demand in the corporate sector and the growing
penetration of Internet services in the home. NTT's ISDN services comprise
INS-Net 64 and INS-Net 1500.
In July 1997, NTT 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. Robust
growth in the number of ISDN circuits, combined with higher basic service
charges, offset declines in conventional telephone service revenues.
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.
52
<PAGE>
Other Services
Operating revenues from other services increased 1.8% in fiscal year 1998 to
(Yen)853 billion, or 9.0% of operating revenues. Other services provided by
NTT Group include digital data exchange, facsimile network (F-Net), pocket
pager, OCN services and system development services.
Amid dramatic growth in computer communications such as the Internet and
connections between corporate LANs, the number of NTT's OCN subscribers jumped
109 times to 158.7 thousand at the end of fiscal year 1998. During fiscal year
1998, NTT 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. NTT 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 NTT declined, despite
increases in depreciable assets related to digitizing NTT'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 NTT.
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 carry-forwards 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.
Liquidity and Capital Resources
Fiscal year 1999 compared with Fiscal year 1998
Financing
Net cash provided by operating activities in fiscal year 1999 amounted to
(Yen)2,365 billion, compared with (Yen)2,731 billion in fiscal year 1998.
With this cash and proceeds from sales of subsidiary stock (NTT Central
DoCoMo and NTT DATA), NTT Group invested in property, plant and equipment,
paid back interest-bearing debt, made investments in subsidiaries and
affiliates and paid dividends.
Owing to the proceeds from sales of subsidiary stock, which amounted to
(Yen)2,213 billion, net cash used in investing activities in fiscal year 1999
totaled (Yen)632 billion, compared with (Yen)2,909 billion in fiscal year
1998.
53
<PAGE>
Capital investments for property, plant and equipment and intangible assets
computed on the basis of all cash investments and other considerations, during
fiscal year 1999 were (Yen)3,088 billion, compared with (Yen)2,962 billion in
the fiscal year 1998, and consisted principally of the expansion and upgrading
of infrastructure for mobile communications, ISDN, OCN, frame relay and other
services, together with various investments to enhance the quality of other
services.
Since the completion of the digitization of its main high-speed network
infrastructure in December 1997, NTT has shifted its capital investment focus
from planned infrastructure development to a strategy of investing in services
according to demand. Since investment in fixed-line telephone services is
projected to decrease in fiscal year 2000, NTT Group expects total capital
investment to decline in the coming year.
Net cash used in financing activities in fiscal year 1999 amounted to
(Yen)990 billion, compared with net cash of (Yen)270 billion provided by
financing activities in fiscal year 1998. NTT's policy is to control
outstanding debt while realizing more efficient sources of funds in domestic
and overseas capital markets.
The total amount of capital raised in fiscal year 1999 from issues of long-
term debt was (Yen)653 billion. This sum included corporate bond offerings
denominated in both Japanese yen and U.S. dollars. For a further description
of NTT's debt, see Note 9 of the Notes to Consolidated Financial Statements.
Capital Resources
As of March 31, 1999, NTT Group had cash and cash equivalents (short-term
investments with principal maturities of less than three months) of (Yen)1,657
billion, compared with (Yen)913 billion a year earlier. Cash equivalents
represent a temporary cash surplus used to repay debts, make tax payments and
capital investments, and as working capital. Accordingly, the balance of cash
equivalents will fluctuate each 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 stood at 95.5% on March
31, 1999, compared with 110.9% at the previous fiscal year-end.
Capital Investments
Capital investment in fiscal year 1999 totaled (Yen)3,088 billion. The
majority of this sum was used to make investments in high-speed, digitized
networks to meet the increasingly diverse and international needs of
customers. NTT Group also invested in research and development activities and
the renewal and upgrading of the existing network infrastructure.
As of March 31, 1999, NTT Group had outstanding commitments for the purchase
of property, plant and equipment and other assets of approximately (Yen)578
billion (US$4,777 million), principally reflecting capital investment
expenditures for fiscal year 2000. NTT Group expects the funds needed for such
commitments to be met from net cash provided by operating activities.
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
54
<PAGE>
switching exchanges and equipment and facilities necessary to establish a
nationwide fiber-optic network. On December 17, 1998, NTT's domestic
telecommunications network was completely digitized.
Net cash provided by financing activities for fiscal year 1998 was (Yen)270
billion, compared with (Yen)393 billion in fiscal year 1997.
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.
Capital Resources
As of March 31, 1998, NTT Group 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
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 Group 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 Group expects to
obtain the funds needed for such commitments through net cash provided by
operating activities.
Forward Looking Statements
Certain statements contained herein are forward-looking statements. These
include statements concerning NTT's expectations and other statements that are
not historical fact. In particular, items relating to government regulation
are not within the control of NTT and are therefore subject to change at any
time. In addition, risks and uncertainties associated with the pricing of
services and the success of NTT's reorganization may cause the actual results,
performance or achievements of NTT to be materially different from any future
results, performance or achievements expressed or implied by such forward-
looking statements. NTT desires to qualify for the "safe harbor" provisions of
the Private Securities Litigation Reform Act of 1995.
ITEM 9A--QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Quantitative and qualitative disclosures about market risk
The financial instruments that NTT Group holds are continuously exposed to
fluctuations in markets, such as currency exchange rates, interest rates and
stock prices of investments.
NTT Group from time to time enters into derivative financial instruments,
such as forward exchange contracts, interest rate swap agreements, currency
swap agreements and interest rate option contracts, in order to limit its main
exposure to loss in relation to underlying debt instruments or assets that may
result from adverse
55
<PAGE>
fluctuations in foreign currency exchange rates and interest rates. NTT Group
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 offices of NTT and
its subsidiaries. In most cases, derivative instruments are integrated as part
of debt transactions or financial assets and are entered into at the beginning
date of those transactions and have the same maturity as the underlying debt
or assets.
No specific hedging activities are taken against the price fluctuations of
stocks held by NTT Group as marketable securities.
Equity Price Risk
NTT Group 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 Group does not hold marketable securities for trading purposes.
Maturities and fair values of available-for-sale securities and held-to-
maturity securities were as follows at March 31, 1999:
<TABLE>
<CAPTION>
1999
-------------------
Carrying
amount Fair value
-------- ----------
Millions of Yen
<S> <C> <C>
Due after 1 year through 5 years......................... 31,777 32,414
Due after 5 years through 10 years....................... 17,984 17,954
Equity securities........................................ 115,366 77,773
------- -------
Total.................................................. 165,127 128,141
</TABLE>
Foreign Exchange Risk
NTT Group 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 Group
denominated in foreign currencies. Such contracts and agreements have the same
maturity as the underlying debt.
Amounts of NTT Group's financial instruments that are sensitive to foreign
currency exchange rates were not material at March 31, 1999.
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 Group's exposure to market risk for changes in interest rates relates
principally to its debt obligations. NTT Group 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 or assets into fixed rate debt
or assets, or vice versa. Interest rate option contracts are entered into from
time to time to hedge the risk of a rise in the interest rate of underlying
debt.
The following tables provide information about NTT Group'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.
56
<PAGE>
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, 1999.
Amounts attributable to NTT Group's option contracts that are sensitive to
interest rates were not material at March 31, 1999.
The information is presented in Japanese yen equivalents, which is NTT
Group's reporting currency. The instruments' 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 2000 2001 2002 2003 2004 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: 3.7% (216,168) (196,309) (297,646) (248,868) (61,874) (789,672) (1,810,537) (1,808,581)
U.S. dollar notes: 6.5% (60,583) (66,670) (36,285) (60,685) (60,703) (121,406) (406,332) (461,402)
Swiss franc bonds and
notes: 5.0% (41,598) (96) (96) (20,507) 0 (7,373) (69,670) (71,784)
Canadian dollar notes: 10.3% (16,291) (16,270) 0 0 0 0 (32,561) (36,175)
Deutsche Mark bonds: 7.1% (26,752) 0 0 0 0 0 (26,752) (27,932)
Sterling pound bonds: 8.4% 36 36 (19,798) 36 (49,558) 0 (69,248) (85,066)
Unsecured indebtedness
to banks--
Japanese yen loans: 2.7% (471,451) (590,311) (497,221) (360,311) (432,414) (598,288) (2,949,996) (2,987,795)
U.S. dollar loans: 5.4% (13,530) (3,883) (11,307) (61) (1,685) (9,133) (39,599) (42,186)
Thai Baht loans: 10.7% (2,209) 0 0 0 0 0 (2,209) (2,383)
---- -------- -------- -------- -------- -------- ---------- ---------- ----------
Subtotal............. (848,546) (873,503) (862,353) (690,396) (606,234) (1,525,872) (5,406,904) (5,523,304)
Forward exchange
contracts............. (1,034) (7,624) 1,264 557 (3,700) 45 (10,492) 1,255
Currency swap
agreements............ (2,988) 0 276 2,275 (725) 7,816 6,654 (8,760)
---- -------- -------- -------- -------- -------- ---------- ---------- ----------
Total.................. (852,568) (881,127) (860,813) (687,564) (610,659) (1,518,011) (5,410,742) (5,530,809)
</TABLE>
<TABLE>
<CAPTION>
Millions of Yen
---------------------------------------------------------------
Notional amount and average interest rate
(year ending March 31)
----------------------------------------------------
2000 2001 2002 2003 2004 Thereafter Fair value
------- ------- ------ ------ ------ ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Interest rate swap
agreements
Floating to Fixed (Jap-
anese yen)............ 202,287 141,536 89,492 33,387 4,872 3,427 (8,052)
Average pay rate....... 2.2% 2.2% 2.0% 1.7% 2.6% 2.9%
Average receive rate... 0.3% 0.2% 0.2% 0.2% 0.5% 0.8%
Fixed to Floating (Jap-
anese yen)............ 102,300 86,300 80,300 74,300 60,000 41,000 10,363
Average pay rate....... 0.5% 0.4% 0.4% 0.4% 0.3% 0.2%
Average receive rate... 3.1% 3.2% 3.3% 3.4% 3.6% 3.3%
Floating to Floating
(Japanese yen)........ 2,175 1,515 1,000 1,000 1,000 1,000 105
Average pay rate....... 1.6% 1.1% 0.1% 0.1% 0.1% 0.1%
Average receive rate... 2.5% 2.7% 3.1% 3.1% 3.1% 3.1%
</TABLE>
57
<PAGE>
ITEM 10--DIRECTORS AND OFFICERS OF REGISTRANT
The overall direction of the affairs of NTT is the responsibility of its
Board of Directors. The Board of Directors currently consists of 12 members,
of whom 10 are also executive officers of NTT. Directors are elected for a
two-year term. Elections are conducted at NTT's Annual Meeting, the most
recent of which was held on June 29, 1999.
The following is a list of the Directors (including executive officers of
NTT), corporate auditors of NTT and chief executive officers of NTT's
principal subsidiaries at July 1, 1999:
<TABLE>
<CAPTION>
Current Position
as Director or
Corporate Auditor
Name Title Held Since
---- ----- -----------------
<C> <S> <C>
Representative Directors
Shigeo Sawada.................................. Chairman June 1990
Jun-ichiro Miyazu.............................. President June 1987
Senior Executive Vice
Norio Wada..................................... President June 1992
Senior Executive Vice
Yusuke Tachibana............................... President July 1999
Directors
Toshiyuki Mineshima............................ Executive Vice President June 1996
Kunihiro Kato.................................. Senior Vice President June 1997
Kanji Koide.................................... Senior Vice President June 1997
Shigehiko Suzuki............................... Senior Vice President June 1998
Hiromi Wasai................................... Senior Vice President July 1999
Toyohiko Takabe................................ Senior Vice President July 1999
Takashi Imai................................... Senior Vice President July 1999
Yotaro Kobayashi............................... Senior Vice President July 1999
Corporate Auditors
Tadashi Yamamoto............................... Corporate Auditor June 1996
Keisuke Sada................................... Corporate Auditor June 1998
Makoto Yoshida................................. Corporate Auditor July 1999
Hideaki Toda................................... Corporate Auditor July 1999
Chief Executive Officers of Principal Subsidiaries
Hidekazu Inoue................................. President, NTT East July 1999
Kazuo Asada.................................... President, NTT West July 1999
President, NTT
Masanobu Suzuki................................ Communications May 1999
President, NTT Central
Keiji Tachikawa................................ DoCoMo June 1998
Toshiharu Aoki................................. President, NTT DATA June 1999
</TABLE>
ITEM 11--COMPENSATION OF DIRECTORS AND OFFICERS
During fiscal year 1999, the aggregate amount of compensation paid by NTT,
NTT DoCoMo and NTT DATA to all Directors, executive officers and corporate
auditors as a group was (Yen)2,587 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
58
<PAGE>
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);
NTT provides various telecommunications services to the Government of
Japan. In fiscal year 1999, NTT provided services to the Ministry of
Posts and Telecommunications for which it received (Yen)256 million. In
fiscal year 1998, NTT provided services to the Ministry of Posts and
Telecommunications for which it received (Yen)1,443 million. In fiscal
year 1997 NTT provided services to the Ministry of Posts and
Telecommunications for which it received (Yen)1,842 million. In
addition, NTT made payments to the Ministry of Posts and
Telecommunications of (Yen)9,556 million, (Yen)10,113 million and
(Yen)10,406 million in fiscal years 1999, 1998 and 1997, 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.
None.
(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
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.
59
<PAGE>
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, 1999 and 1998, Consolidated Statement of Income, Consolidated
Statement of Shareholders' Equity and Consolidated Statement of Cash Flows of
NTT for each of the three years ended March 31, 1997, 1998 and 1999 and Notes
to Consolidated Financial Statements, and Schedule II--Valuation and
Qualifying Accounts, appear as pages F-1 through F-34.
ITEM 19--FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial Statements
See accompanying index to Consolidated Financial Statements.
(b) Exhibits
(1)Consent of Independent Accountants.
NTT 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 NTT and its consolidated subsidiaries.
60
<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/ Kazuto Tsubouchi
By __________________________________
Kazuto Tsubouchi
Senior Manager
Investor Relations Group
Department IV
Date: September 1, 1999
61
<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, 1998 and 1999................... F-3
Consolidated statement of income for the three years ended March 31,
1999.................................................................... F-5
Consolidated statement of shareholders' equity for the three years ended
March 31, 1999.......................................................... F-6
Consolidated statement of cash flows for the three years ended March 31,
1999.................................................................... F-7
Notes to consolidated financial statements............................... F-8
Financial statements schedule for the three years ended March 31, 1999:
II--Valuation and qualifying accounts.................................. F-34
</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, 1998 and 1999, and the results of their operations
and their cash flows for each of the three years in the period ended March 31,
1999, in conformity with accounting principles generally accepted in the
United 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.
/s/ Price Waterhouse
Tokyo, Japan
June 29, 1999, except for paragraph 2 of Note 21 as to which the date is
August 30, 1999
F-2
<PAGE>
NIPPON TELEGRAPH AND TELEPHONE CORPORATION
AND ITS SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
March 31
<TABLE>
<CAPTION>
1998 1999 1999
--------------- --------------- ------------
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) 913,236 (Yen) 1,656,672 $ 13,692
Notes and accounts receivable,
trade (Notes 4 and 19)....... 1,085,381 1,463,777 12,097
Allowance for doubtful
accounts..................... (35,816) (40,287) (333)
Inventories (Note 6).......... 223,776 195,843 1,618
Prepaid expenses and other
current assets (Note 11)..... 417,900 641,745 5,304
--------------- --------------- --------
Total current assets........ 2,604,477 3,917,750 32,378
--------------- --------------- --------
Property, plant and equipment
(Notes 9 and 15):
Telecommunications equipment.. 11,633,361 11,843,092 97,877
Telecommunications service
lines........................ 11,722,358 11,823,529 97,715
Buildings and structures...... 4,763,092 5,000,443 41,326
Machinery, vessels and tools.. 1,997,359 2,140,526 17,691
Land.......................... 609,186 697,938 5,768
Construction in progress...... 639,262 859,526 7,103
--------------- --------------- --------
31,364,618 32,365,054 267,480
Accumulated depreciation...... (19,359,256) (20,203,236) (166,969)
--------------- --------------- --------
12,005,362 12,161,818 100,511
--------------- --------------- --------
Investments and other assets:
Investments in affiliated
companies.................... 201,945 300,420 2,483
Marketable securities and
other investments (Note 7)... 124,910 163,754 1,353
Intangible and other assets
(Note 8)..................... 1,904,503 1,527,113 12,621
Deferred income taxes (Note
11).......................... 511,334 502,393 4,152
--------------- --------------- --------
2,742,692 2,493,680 20,609
--------------- --------------- --------
(Yen)17,352,531 (Yen)18,573,248 $153,498
=============== =============== ========
</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--(Continued)
March 31
<TABLE>
<CAPTION>
1998 1999 1999
--------------- --------------- ------------
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) 456,995 (Yen) 235,180 $ 1,944
Current portion of long-term
debt (Notes 9 and 19)........ 825,422 848,546 7,013
Accounts payable, trade (Notes
4 and 19).................... 1,131,444 1,416,615 11,708
Accrued payroll (Note 19)..... 494,387 516,188 4,266
Accrued interest.............. 55,976 44,586 368
Accrued taxes on income....... 188,616 491,803 4,064
Accrued consumption tax (Note
12).......................... 99,813 22,370 185
Advances received............. 72,117 72,008 595
Other (Note 11)............... 121,056 96,684 799
--------------- --------------- --------
Total current liabilities... 3,445,826 3,743,980 30,942
--------------- --------------- --------
Long-term liabilities:
Long-term debt (Notes 9 and
19).......................... 4,776,109 4,558,358 37,672
Obligations under capital
leases (Note 15)............. 473,681 378,083 3,125
Liability for employees'
severance payments (Note
10).......................... 2,890,761 2,977,403 24,607
Other (Note 11)............... 166,186 211,635 1,749
--------------- --------------- --------
8,306,737 8,125,479 67,153
--------------- --------------- --------
Minority interest in
consolidated subsidiaries...... 136,040 793,019 6,554
--------------- --------------- --------
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 6,575
Additional paid-in capital.... 2,530,476 2,530,476 20,913
Retained earnings............. 2,153,883 2,628,272 21,721
Accumulated other
comprehensive loss........... (16,031) (43,578) (360)
--------------- --------------- --------
5,463,928 5,910,770 48,849
--------------- --------------- --------
Commitments and contingent
liabilities (Note 20)..........
(Yen)17,352,531 (Yen)18,573,248 $153,498
=============== =============== ========
</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>
1997 1998 1999 1999
-------------- -------------- -------------- ------------
Millions of yen Millions of
U.S. dollars
(Note 3)
<S> <C> <C> <C> <C>
Operating revenues (Note
4):
Telephone.............. (Yen)6,038,146 (Yen)6,306,034 (Yen)6,300,460 $52,070
Telegraph.............. 98,683 92,211 85,521 707
Leased circuit......... 428,715 488,160 507,163 4,191
Data communication
facility.............. 337,934 372,765 383,455 3,169
ISDN services.......... 190,403 367,826 555,976 4,595
Sale of
telecommunication
equipment............. 889,834 969,586 1,008,589 8,336
Miscellaneous.......... 838,067 853,431 888,509 7,343
-------------- -------------- -------------- -------
8,821,782 9,450,013 9,729,673 80,411
-------------- -------------- -------------- -------
Operating expenses
(Notes 4 and 16):
Personnel.............. 2,266,599 2,345,609 2,367,449 19,566
Depreciation,
amortization and
maintenance costs..... 2,998,550 3,185,044 3,435,522 28,393
Other.................. 2,787,158 3,047,315 3,215,267 26,572
-------------- -------------- -------------- -------
8,052,307 8,577,968 9,018,238 74,531
-------------- -------------- -------------- -------
Operating income........ 769,475 872,045 711,435 5,880
-------------- -------------- -------------- -------
Other expenses (income):
Interest and
amortization of bond
discounts and issue
costs................. 253,950 235,363 216,038 1,786
Interest income........ (1,839) (2,086) (6,881) (57)
Gains on sales of
subsidiary stock (Note
17)................... -- (1,634,314) (13,507)
Other, net............. 7,591 (16,764) 22,631 187
-------------- -------------- -------------- -------
259,702 216,513 (1,402,526) (11,591)
-------------- -------------- -------------- -------
Income before income
taxes.................. 509,773 655,532 2,113,961 17,471
-------------- -------------- -------------- -------
Income taxes (Note 11):
Current................ 359,005 362,910 659,082 5,447
Deferred............... (98,078) 55,366 422,835 3,495
-------------- -------------- -------------- -------
260,927 418,276 1,081,917 8,942
-------------- -------------- -------------- -------
Income before
extraordinary loss,
minority interest and
equity in earnings of
affiliated companies... 248,846 237,256 1,032,044 8,529
Extraordinary loss for
discontinuance of
regulatory accounting
principles (Note 2).... -- -- (462,508) (3,822)
Income before minority
interest and equity in
earnings of affiliated
companies.............. 248,846 237,256 569,536 4,707
Minority interest in
consolidated
subsidiaries........... (11,718) (32,275) (24,148) (200)
Equity in earnings of
affiliated companies... 14,329 9,479 9,043 75
-------------- -------------- -------------- -------
Net Income.............. (Yen) 251,457 (Yen) 214,460 (Yen) 554,431 $ 4,582
============== ============== ============== =======
<CAPTION>
U.S. dollars
Yen (Note 3)
---------------------------------------------- ------------
<S> <C> <C> <C> <C>
Per share of common
stock:
Extraordinary loss..... -- -- (Yen)(29,067) $(240)
-------------- -------------- -------------- -------
Net income............. (Yen)15,803 (Yen)13,478 (Yen)34,844 $288
-------------- -------------- -------------- -------
Cash dividends,
applicable to earnings
for the year (Note
13)................... (Yen)5,000 (Yen)5,000 (Yen)5,000 $41
-------------- -------------- -------------- -------
</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>
1997 1998 1999 1999
----------------------- ----------------------- ----------------------- --------------
Millions of yen Millions of
U.S. dollars
(Note 3)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Common stock (Note 13):
At beginning of year... (Yen)795,600 (Yen) 795,600 (Yen) 795,600 $ 6,575
Capitalization of
additional paid-in
capital............... -- -- -- --
-------------- -------------- -------------- -------
At end of year......... 795,600 795,600 795,600 6,575
-------------- -------------- -------------- -------
Additional paid-in
capital (Note 13):
At beginning of year... 2,530,476 2,530,476 2,530,476 20,913
Transfer to common
stock................. -- -- -- --
-------------- -------------- -------------- -------
At end of year......... 2,530,476 2,530,476 2,530,476 20,913
-------------- -------------- -------------- -------
Retained earnings (Note
13):
At beginning of year... 1,847,084 2,018,982 2,153,883 17,801
Appropriations--
Cash dividends
((Yen)2,500 in 1997,
(Yen)2,500 in 1998
and (Yen)2,500--$21
in 1999 per share).... (39,780) (39,780) (39,780) (329)
Interim distribution--
Cash dividends
((Yen)2,500 in 1997,
(Yen)2,500 in 1998
and (Yen)2,500--$21
in 1999 per share).... (39,779) (39,779) (39,779) (329)
Net income............. 251,457 251,457 214,460 214,460 554,431 554,431 4,582 4,582
Other change........... -- -- (483) (4)
-------------- -------------- -------------- -------
At end of year......... 2,018,982 2,153,883 2,628,272 21,721
-------------- -------------- -------------- -------
Accumulated
comprehensive income
(loss) (Note 13):
At beginning of year... 22,959 (4,648) (16,031) (133)
Other comprehensive
income................ (27,607) (27,607) (11,383) (11,383) (27,547) (27,547) (227) (227)
Total comprehensive
income................ 223,850 203,077 526,884 4,355
-------------- ------- -------------- ------- -------------- ------- ------- -----
At end of year......... (4,648) (16,031) (43,578) (360)
-------------- -------------- -------------- -------
Shareholders' equity at
end of year............ (Yen)5,340,410 (Yen)5,463,928 (Yen)5,910,770 $48,849
============== ============== ============== =======
</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>
1997 1998 1999 1999
-------------- -------------- -------------- ------------
Millions of yen Millions of
U.S. dollars
(Note 3)
<S> <C> <C> <C> <C>
Cash flows from
operating activities:
Net income............ (Yen)251,457 (Yen)214,460 (Yen)554,431 $ 4,582
Adjustments to
reconcile net income
to net cash provided
by operating
activities--
Extraordinary item,
net of taxes......... -- -- 462,508 3,822
Depreciation and
amortization......... 2,093,314 2,281,843 2,439,957 20,165
Deferred taxes........ (98,078) 55,366 422,835 3,495
Loss on sale or
disposal of property,
plant and equipment.. 213,040 164,691 174,686 1,444
Gains on sales of
subsidiary stock
(Note 17)............ -- -- (1,634,314) (13,507)
(Increase) decrease in
notes and accounts
receivable, trade.... 131,339 (145,136) (182,732) (1,510)
(Increase) decrease in
inventories.......... (66,917) 7,631 27,955 231
(Increase) decrease in
other current
assets............... 3,724 (11,712) (211,880) (1,751)
Increase (decrease) in
accounts payable,
trade and accrued
payroll.............. 140,919 125,000 25,419 210
Increase (decrease) in
accrued consumption
tax.................. 515 72,518 (77,665) (642)
Increase (decrease) in
accrued interest..... (4,528) 1,922 (11,594) (96)
Increase (decrease) in
advances received.... 12,762 22,596 (1,631) (13)
Increase (decrease) in
accrued taxes on
income............... (7,995) (36,290) 300,609 2,484
Increase (decrease) in
liability for
employees' severance
payments, net of
deferred pension
costs................ 22,394 (16,293) 84,267 696
Increase (decrease) in
other long-term
liabilities.......... (56,968) 1,054 (1,330) (11)
Other................. 15,730 (7,043) (6,290) (52)
-------------- -------------- -------------- -------
Net cash provided by
operating
activities.......... 2,650,708 2,730,607 2,365,231 19,547
-------------- -------------- -------------- -------
Cash flows from
investing activities:
Payments for property,
plant and equipment.. (2,612,878) (2,685,961) (2,789,342) (23,052)
Proceeds from sale of
property, plant and
equipment............ 9,517 10,827 20,707 171
Acquisition of
investments in
affiliates and
intangible and other
assets............... (258,123) (233,813) (76,342) (631)
Proceeds from sales of
subsidiary stock
(Note 17)............ -- -- 2,213,010 18,289
-------------- -------------- -------------- -------
Net cash used in
investing
activities.......... (2,861,484) (2,908,947) (631,967) (5,223)
-------------- -------------- -------------- -------
Cash flows from
financing activities:
Proceeds from issuance
of long-term debt.... (Yen)1,136,896 (Yen)1,047,974 (Yen)653,435 $ 5,400
Payments for
settlement of long-
term debt............ (804,385) (706,388) (1,170,912) (9,677)
Dividends paid........ (79,559) (79,559) (79,559) (657)
Net increase
(decrease) in short-
term borrowings and
other................ 140,322 8,409 (392,792) (3,246)
-------------- -------------- -------------- -------
Net cash provided
(used) by financing
activities.......... 393,274 270,436 (989,828) (8,180)
-------------- -------------- -------------- -------
Net increase in cash
and cash equivalents.. 182,498 92,096 743,436 6,144
Cash and cash
equivalents at
beginning of year..... 638,642 821,140 913,236 7,548
-------------- -------------- -------------- -------
Cash and cash
equivalents at end of
year.................. (Yen)821,140 (Yen)913,236 (Yen)1,656,672 $13,692
============== ============== ============== =======
Cash paid during the
year for:
Interest.............. (Yen)258,748 (Yen)233,344 (Yen)232,099 $ 1,918
-------------- -------------- -------------- -------
Income taxes.......... (Yen)361,641 (Yen)400,860 (Yen)364,176 $ 3,010
-------------- -------------- -------------- -------
Capital lease
obligations incurred
during the year....... (Yen)56,631 (Yen)99,975 (Yen)32,881 $ 272
-------------- -------------- -------------- -------
</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 (hereinafter referred to as
"NTT") is primarily engaged in the provision of nationwide telecommunications
services in Japan. NTT and its subsidiaries' services fall into seven major
classes: telephone services, telegraph services, leased circuit services, data
communication facility services, ISDN (Integrated Services Digital Network)
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"),
which was promulgated and partially implemented on June 20, 1997.
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."
On May 10, 1999, NTT applied for approval from the Minister of Posts and
Telecommunications for "the Implementation Plans Concerning the Transfer of
the Business Activities and Succession of the Rights and Obligations of Nippon
Telegraph and Telephone Corporation", which were prepared in accordance with
"the Basic Principles Concerning the Transfer of the Business Activities and
Succession of the Rights and Obligations of Nippon Telegraph and Telephone
Corporation" as drawn up in accordance with the provisions of the
aforementioned legislation. On May 21, 1999, NTT received the Minister of
Posts and Telecommunications' approval for the plans. In conjunction with
these approved implementation plans that set out how the business transfer
will occur, reorganization will be implemented in which NTT will become a
holding company holding all the shares in two regional companies (Nippon
Telegraph and Telephone East Corporation and Nippon Telegraph and Telephone
West Corporation) and one long-distance company (NTT Communications
Corporation).
The transfers of businesses will be accomplished by transferring at 0:00
a.m., on July 1, 1999, NTT's relevant business activities to the respective
wholly-owned subsidiaries, Nippon Telegraph and Telephone East Corporation,
Nippon Telegraph and Telephone West Corporation, and NTT Communications
Corporation.
Nippon Telegraph and Telephone East Corporation will inherit the intra-
prefectural telecommunications services in the Hokkaido, Tohoku, Kanto, Tokyo
and Shinetsu regions and related services. Nippon Telegraph and Telephone West
Corporation will inherit the intra-prefectural telecommunications services in
the Tokai, Hokuriku, Kansai, Chugoku, Shikoku and Kyushu regions and related
services.
NTT Communications Corporation will inherit all the business activities
comprising the domestic inter-prefecture telecommunications and multimedia
network services and related services and is allowed to enter the
international.
2. Summary of significant accounting policies:
NTT 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).
NTT, as a regulated company, also follows the NTT 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) capital leases, (4) unrealized gains and losses on debt and
equity securities and certain
F-8
<PAGE>
NIPPON TELEGRAPH AND TELEPHONE CORPORATION
AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 adjustments for the above,
are as follows:
Basis of consolidation and accounting for investments in affiliated companies
- --
The consolidated financial statements include the accounts of NTT and those
of its majority-owned subsidiaries. All significant intercompany transactions
and accounts are eliminated in consolidation.
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 NTT'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.
Discontinuance of regulation accounting principles--
During the fiscal year ended March 31, 1999, NTT discontinued the
application of the provisions of Statement of Financial Accounting Standards
No. 71 ("SFAS 71"), "Accounting for the Effects of Certain Types of
Regulation" for all of its operations. Under SFAS 71, NTT had accounted for
the effects of rate-making process by establishing certain regulatory assets,
including the deferral of certain costs. Pursuant to the requirements of
Statement of Financial Accounting Standards No. 101, "Regulated Enterprises--
Accounting for the Discontinuation of Application of FASB Statement No. 71"
("SFAS 101"), NTT recorded an extraordinary non-cash charge of (Yen)462,508
million ($3,822 million), net of income taxes of (Yen)426,931 million ($3,528
million) during the six-month period ended September 30, 1998 and eliminated
(Yen)889,439 million ($7,351 million) of regulatory assets from its balance
sheet as of September 30, 1998.
After assessing the recent revision of the Telecom Business Law, which
became effective as of November 1, 1998, and the proposed price-cap system,
NTT recognized that it was required under SFAS 101 to change its accounting
for regulated operations. NTT's determination that it was no longer eligible
for the continued application of SFAS 71 was based on the belief that the
convergence of competition, technological change, actual and potential
regulatory and legislative actions and other factors are creating open and
competitive markets.
The major components of the eliminated regulatory assets are as follows:
<TABLE>
<CAPTION>
Pretax After-tax
------------------------- -------------------------
Millions of Millions of Millions of Millions of
yen U.S. dollars yen U.S. dollars
<S> <C> <C> <C> <C>
Deferred compensated
absences............... (Yen)105,693 $ 873 (Yen)54,960 $ 454
Deferred pension costs.. 679,722 5,618 353,456 2,921
Unamortized purchases of
the leased assets...... 104,024 860 54,092 447
------------ ------ ------------ ------
Total................. (Yen)889,439 $7,351 (Yen)462,508 $3,822
============ ====== ============ ======
</TABLE>
F-9
<PAGE>
NIPPON TELEGRAPH AND TELEPHONE CORPORATION
AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The regulatory assets included in the accompanying consolidated balance
sheet as at March 31, 1998 were as follows:
<TABLE>
<CAPTION>
Millions of
yen
------------
<S> <C>
Regulatory assets due to:
Deferred compensated absences (*)........................... (Yen)132,538
Deferred severance lump-sum and pension payments (**)....... 603,337
Unamortized purchases of the leased assets under SFAS 13
(***)...................................................... 110,995
------------
Total..................................................... (Yen)846,870
============
</TABLE>
- --------
(*) Included in "Prepaid expenses and other current assets" in the
accompanying balance sheet as at March 31, 1998.
(**) Included in "Intangible and other assets" in the accompanying balance
sheet as at March 31, 1998.
(***) Included in "Accumulated depreciation" in the accompanying balance sheet
as at March 31, 1998.
Estimates--
The preparation of NTT'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, including telegraph service, leased circuit service and data
communication facility service, 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 accumulated comprehensive
income.
F-10
<PAGE>
NIPPON TELEGRAPH AND TELEPHONE CORPORATION
AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Marketable securities--
Unrealized gains and losses on equity securities designated as available-
for-sale, whose fair values are readily determinable, are reported as a
component of accumulated comprehensive income, 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.
Inventories--
Inventories consist of telecommunications terminals to be sold, projects in
progress and materials and supplies. Telecommunications terminals to be sold
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. Materials and supplies are valued at cost,
not in excess of market, cost being determined on a first-in first-out basis.
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 NTT 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.
Accounting for the impairment of long-lived assets--
NTT Group's long-lived assets, including property, plant and equipment,
software and other intangibles are reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount may not be
recoverable. If the total of the expected future undiscounted cash flows is
less than the carrying amount of the asset, a loss is recognized for the
difference between the fair value and carrying value of the asset.
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.
F-11
<PAGE>
NIPPON TELEGRAPH AND TELEPHONE CORPORATION
AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Derivative financial instruments--
NTT and certain subsidiaries enter into several derivative financial
instruments, such as forward exchange contracts, currency swap agreements,
interest rate swap agreements and interest rate option contracts, in order to
limit their main exposure to loss in relation to underlying debt instruments
or underlying assets resulting from adverse fluctuations in foreign currency
exchange rates and interest rates. NTT and its subsidiaries do not use
derivative financial instruments for trading 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 creditworthy 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.
NTT and certain subsidiaries entered into interest rate swap agreements
which are fully integrated with underlying debt obligations or financial
assets and designed to convert floating rate debt into fixed rate debt, or
vice versa, and interest rate option agreements are also arranged so that
exposures to losses resulting from fluctuations in interest rates are managed.
As the purpose of entering into the swap transaction is mainly to change the
nature of debt, NTT and certain 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, NTT 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.
F-12
<PAGE>
NIPPON TELEGRAPH AND TELEPHONE CORPORATION
AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Comprehensive income--
NTT adopted Statement of Financial Accounting Standards No. 130 ("SFAS
130"), "Reporting Comprehensive Income" in the six-month period ended
September 30, 1998. Comprehensive income is defined in this standard as total
change in stockholders' equity excluding capital transactions. NTT's
comprehensive income comprises net income plus other comprehensive income
representing changes in foreign currency translation adjustments, unrealized
gains/losses on securities and minimum pension liability adjustment. NTT has
elected to disclose comprehensive income and its components in the statement
of shareholders' equity.
Recent pronouncements--
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 NTT's internal needs. NTT is now in the process of
assessing the impact that this SOP will have on NTT's results of operations
and consolidated financial position.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 ("SFAS 133"), "Accounting for
Derivative Instruments and Hedging Activities." This standard, which is
effective for fiscal years beginning after June 15, 2000, requires all
derivatives to be recognized in the statement of financial position as either
assets or liabilities and measured at fair value. To implement this standard,
all hedging relationships must be reassessed. At this stage, it is not
possible to estimate the impact of the adoption of SFAS 133 on NTT's financial
position or results of operations.
Reclassifications--
Certain items for prior years' financial statements have been reclassified
to conform to the 1999 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 the
amounts shown in U.S. dollars are for convenience only, the rate of (Yen)121 =
US$1, the approximate current rate at March 31, 1999, has been used for the
purpose of presentation of the U.S. dollar amounts in the accompanying
consolidated financial statements.
4. Related party transactions:
NTT and its subsidiaries have entered into a number of different types of
transactions with affiliated companies, the most significant of which 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, 1999 and the related balances at March 31, 1998 and
1999 were as follows:
F-13
<PAGE>
NIPPON TELEGRAPH AND TELEPHONE CORPORATION
AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
<TABLE>
<CAPTION>
1997 1998 1999 1999
------------ ------------ ------------ ------------
Millions of yen Millions of
U.S. dollars
<S> <C> <C> <C> <C>
Sales..................... (Yen)193,856 (Yen)169,347 (Yen)120,243 $ 994
============ ============ ============ ======
Purchases................. (Yen)365,910 (Yen)423,998 (Yen)461,009 $3,810
============ ============ ============ ======
Receivables............... (Yen)45,339 (Yen)54,085 $ 447
============ ============ ======
Payables.................. (Yen)147,718 (Yen)177,274 $1,465
============ ============ ======
</TABLE>
Dividends from affiliated companies accounted for by the equity method for
the years ended March 31, 1997, 1998 and 1999 were (Yen)522 million, (Yen)592
million and (Yen)752 million ($6 million), respectively.
5. Cash and cash equivalents:
Cash and cash equivalents at March 31, 1998 and 1999 comprised the
following:
<TABLE>
<CAPTION>
1998 1999 1999
------------ -------------- ------------
Millions of yen Millions of
U.S. dollars
<S> <C> <C> <C>
Cash................................ (Yen)573,995 (Yen)517,379 $ 4,276
Certificates of deposit, commercial
paper and marketable securities
purchased under agreements to
resell............................. 74,539 559,068 4,620
Time deposits, certificates of
deposit and other.................. 264,702 580,225 4,796
------------ -------------- -------
(Yen)913,236 (Yen)1,656,672 $13,692
============ ============== =======
</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.
6. Inventories:
Inventories at March 31, 1998 and 1999 comprised the following:
<TABLE>
<CAPTION>
1998 1999 1999
------------ ------------ ------------
Millions of yen Millions of
U.S. dollars
<S> <C> <C> <C>
Telecommunications terminals to be
sold.............................. (Yen)109,689 (Yen)106,368 $ 879
Projects in progress............... 100,456 76,686 634
Materials and supplies............. 13,631 12,789 105
------------ ------------ ------
(Yen)223,776 (Yen)195,843 $1,618
============ ============ ======
</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, 1998 and 1999 are as follows:
F-14
<PAGE>
NIPPON TELEGRAPH AND TELEPHONE CORPORATION
AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
<TABLE>
<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, 1999
-------------------------------------------------
Gross Gross
Carrying unrealized unrealized
amounts gains losses Fair value
------------ ----------- ----------- ------------
Millions of yen
<S> <C> <C> <C> <C>
Available-for-sale:
Equity securities....... (Yen)115,366 (Yen)35,088 (Yen)72,681 (Yen) 77,773
Held-to-maturity:
Debt securities......... 49,761 872 265 50,368
------------ ----------- ----------- ------------
Total................. (Yen)165,127 (Yen)35,960 (Yen)72,946 (Yen)128,141
============ =========== =========== ============
<CAPTION>
March 31, 1999
-------------------------------------------------
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....... $ 953 $ 290 $ 600 $ 643
Held-to-maturity:
Debt securities......... 411 7 2 416
------------ ----------- ----------- ------------
Total................. $ 1,364 $ 297 $ 602 $ 1,059
============ =========== =========== ============
</TABLE>
During the years ended March 31, 1997, 1998 and 1999, the net unrealized
gain or loss on available-for-sale securities included in the separate
component of shareholders' equity, net of applicable taxes, decreased by
(Yen)27,607 million, (Yen)15,413 million and (Yen)2,120 million ($17 million),
respectively.
Maturities of debt securities classified as held-to-maturity at March 31,
1999 are as follows:
<TABLE>
<CAPTION>
1999 1999
----------------------- ---------------------------
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)31,777 (Yen)32,414 $ 262 $ 268
Due after 5 years
through 10 years....... 17,984 17,954 149 148
----------- ----------- ------------ ------------
Total................. (Yen)49,761 (Yen)50,368 $ 411 $ 416
=========== =========== ============ ============
</TABLE>
Proceeds from sales of available-for-sale securities for the years ended
March 31, 1997, 1998 and 1999 were immaterial.
F-15
<PAGE>
NIPPON TELEGRAPH AND TELEPHONE CORPORATION
AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In the ordinary course of business, NTT 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)40,945 million and
(Yen)36,220 million ($299 million) at March 31, 1998 and 1999, 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, 1998 and 1999 were as follows:
<TABLE>
<CAPTION>
1998 1999 1999
-------------- -------------- ------------
Millions Of Yen Millions Of
U.S. Dollars
<S> <C> <C> <C>
Computer software........... (Yen)1,881,423 (Yen)1,811,746 $14,973
Rights to use utility
facilities and other....... 590,309 753,216 6,225
-------------- -------------- -------
2,471,732 2,564,962 21,198
Accumulated amortization.... (1,272,983) (1,074,524) (8,880)
-------------- -------------- -------
1,198,749 1,490,438 12,318
Deferred periodic pension
costs (See Note 2)......... 603,337 -- --
Minimum pension liability
(See Note 10).............. 21,728 8,154 67
Prepaid pension costs (See
Note 10)................... 80,689 28,521 236
-------------- -------------- -------
(Yen)1,904,503 (Yen)1,527,113 $12,621
============== ============== =======
</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.
9. Short-term borrowings and long-term debt:
Short-term borrowings at March 31, 1998 and 1999 comprised the following:
<TABLE>
<CAPTION>
1998 1999 1999
------------ ------------ ------------
Millions of yen Millions of
U.S. dollars
<S> <C> <C> <C>
Unsecured short-term bank loans
bearing interest at a weighted
average rates of 1.28% and 1.07%
per annum at March 31, 1998 and
1999, respectively................. (Yen)341,995 (Yen)232,180 $1,919
Commercial paper of 1.01% and 0.59%
per annum at March 31, 1998 and
1999, respectively................. 115,000 3,000 25
------------ ------------ ------
(Yen)456,995 (Yen)235,180 $1,944
============ ============ ======
</TABLE>
F-16
<PAGE>
NIPPON TELEGRAPH AND TELEPHONE CORPORATION
AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Long-term debt at March 31, 1998 and 1999 comprised the following:
<TABLE>
<CAPTION>
1998 1999 1999
-------------- -------------- ------------
Millions of yen Millions of
U.S. dollars
<S> <C> <C> <C>
Debt denominated in Japanese
yen:
1.72%--6.8% coupon bonds due
1999--2010................... (Yen)1,647,100 (Yen)1,647,700 $13,617
Unsecured indebtedness to
banks--
2.8% (weighted average)
loans due 1999--2022....... 2,998,440 2,790,101 23,059
1.2% (weighted average)
floating rate loans due
1999--2007................. 58,042 159,800 1,321
-------------- -------------- -------
4,703,582 4,597,601 37,997
-------------- -------------- -------
Debt denominated in foreign
currencies:
6.0%--9.0% U.S. dollar notes
due 1999--2008............... 479,160 407,193 3,365
4.0%--6.0% Swiss franc bonds
and notes due 1999--2006..... 74,566 69,283 573
10 1/4% Canadian dollar notes
due 1999--2001............... 56,658 32,564 269
7 1/8% Deutsche mark bonds due
2000......................... 28,872 26,752 221
7 3/8%--10 7/8% Sterling pound
bonds due 2001--2003......... 78,967 69,419 574
1.6%--5.4% yen notes due
1999--2007................... 167,000 164,000 1,355
Unsecured indebtedness to
banks--
10.67% Thai baht loan due
2000....................... 2,378 2,209 18
5.4% (weighted average) U.S.
dollar floating rate loans
due 1999--2006............. 12,029 39,599 327
-------------- -------------- -------
899,630 811,019 6,702
-------------- -------------- -------
Total long-term debt principal.. 5,603,212 5,408,620 44,699
Less--Deferred bond discounts... 1,681 1,716 14
-------------- -------------- -------
5,601,531 5,406,904 44,685
Less--Current maturities........ 825,422 848,546 7,013
-------------- -------------- -------
Total long-term debt............ (Yen)4,776,109 (Yen)4,558,358 $37,672
============== ============== =======
</TABLE>
Interest rates and due dates are stated at March 31, 1999.
At March 31, 1999, buildings and land of certain consolidated subsidiaries,
with a book value of (Yen)12,295 million ($102 million), were mortgaged as
security for certain loans.
In addition, loan agreements relating to an aggregate of (Yen)249,630
million ($2,063 million) of short-term and long-term debt from commercial
banks of a consolidated subsidiary provide that certain minimum lease payments
and installment receivables are subject to pledges as collateral against these
debts at any time if requested by the lenders. To date, the subsidiary has not
received any such requests from the lenders.
All the holders of the bonds and notes issued by NTT 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 relating to NTT's long-term debt at March 31,
1999 stipulate, among other things, that certain of the bonds and notes are
redeemable at the option of NTT generally at the principal amount.
Additionally, such agreements generally provide that the bonds and notes may
be purchased by NTT at the current value.
In February and November 1996, debts totaling (Yen)50,000 million and
(Yen)50,000 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, 1999 was (Yen)100,000 million ($826 million).
Under Statement of Financial Accounting Standards No. 125 ("SFAS 125"),
"Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities," NTT and one of its subsidiaries recognized
debts of (Yen)55,000 million ($455 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, 2004 and thereafter are as follows:
<TABLE>
<CAPTION>
Year ending March 31, 1999 1999
--------------------- -------------- ------------
Millions of Millions of
yen U.S. dollars
<S> <C> <C>
2000............................................. (Yen) 848,546 (Yen) 7,013
2001............................................. 873,503 7,219
2002............................................. 862,353 7,127
2003............................................. 690,396 5,706
2004............................................. 606,234 5,010
Thereafter....................................... 1,525,872 12,610
-------------- -----------
(Yen)5,406,904 (Yen)44,685
============== ===========
</TABLE>
10.Employees' severance payments:
Employees whose services with NTT 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 NTT.
In the fiscal year ended March 31, 1993, NTT 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.
F-18
<PAGE>
NIPPON TELEGRAPH AND TELEPHONE CORPORATION
AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following tables presents reconciliation of the changes in the plan's
benefit obligations and fair value of assets of the NTT Severance Payment Plan
at March 31, 1998 and 1999:
<TABLE>
<CAPTION>
1998 1999 1999
--------------- --------------- ------------
Millions of yen Millions of
U.S. dollars
<S> <C> <C> <C>
Change in benefit
obligations:
Benefit obligation,
beginning of year........ (Yen) 4,052,192 (Yen) 4,011,150 $ 33,150
Service cost.............. 157,153 156,047 1,290
Interest cost............. 164,229 140,217 1,159
Benefit payments.......... (222,772) (217,259) (1,796)
Settlements............... (139,652) (34,158) (282)
--------------- --------------- --------
Benefit obligation, end of
year..................... 4,011,150 4,055,997 33,521
--------------- --------------- --------
Change in fair value of plan
assets:
Fair value of plan assets,
beginning of year........ 386,013 488,901 4,041
Actual return on plan
assets................... 32,321 (14,929) (123)
Employer contributions.... 83,863 88,987 735
Benefits payments......... (13,296) (16,221) (134)
--------------- --------------- --------
Fair value of plan assets,
end of year.............. 488,901 546,738 4,519
--------------- --------------- --------
At March 31:
Funded status............. (3,522,249) (3,509,259) (29,002)
Unrecognized net loss..... 140,192 141,822 1,172
Unrecognized transition
obligation............... 419,697 350,344 2,895
Unrecognized prior service
cost..................... 93,327 83,668 691
--------------- --------------- --------
Net amount recognized..... (Yen)(2,869,033) (Yen)(2,933,425) $(24,244)
=============== =============== ========
</TABLE>
The following table provides the amounts recognized in NTT's consolidated
balance sheets:
<TABLE>
<CAPTION>
1998 1999 1999
--------------- --------------- ------------
Millions of yen Millions of
U.S. dollars
<S> <C> <C> <C>
At March 31:
Liability for employees'
severance payments....... (Yen)(2,890,761) (Yen)(2,977,403) $(24,607)
Intangible and other
assets................... 21,728 8,154 67
Accumulated other
comprehensive loss....... -- 35,824 296
--------------- --------------- --------
Net amount recognized..... (Yen)(2,869,033) (Yen)(2,933,425) $(24,244)
=============== =============== ========
</TABLE>
F-19
<PAGE>
NIPPON TELEGRAPH AND TELEPHONE CORPORATION
AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The charges to income for employees' severance indemnities for each of the
three years in the period ended March 31, 1999 included the following
components:
<TABLE>
<CAPTION>
1997 1998 1999 1999
------------ ------------ ------------ ------------
Millions of yen Millions of
U.S. dollars
<S> <C> <C> <C> <C>
Service cost............ (Yen)156,730 (Yen)157,153 (Yen)156,047 $1,290
Interest cost on
projected benefit
obligation............. 171,278 164,229 140,217 1,159
Expected return on plan
assets................. (14,061) (15,233) (20,030) (166)
Net amortization and
deferral............... 80,902 81,236 81,466 673
------------ ------------ ------------ ------
Net periodic severance
payments under
SFAS 87................ 394,849 387,385 357,700 2,956
Deduct: Amounts
attributable to
regulatory accounting
practices under SFAS
71..................... (148,812) (107,501) (52,197) (431)
------------ ------------ ------------ ------
Total cost for
employees' severance
indemnities as recorded
in the consolidated
statement of income.... (Yen)246,037 (Yen)279,884 (Yen)305,503 $2,525
============ ============ ============ ======
Assumptions in
determination of net
pension cost:
Discount rate......... 4.0% 3.5% 3.5%
Long-term rate of
salary increases..... 4.0% 3.5% 3.5%
Long-term rate of
return on funded
assets............... 4.0% 4.0% 4.0%
</TABLE>
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, NTT established welfare pension plans or NTT Kosei Nenkin Kikin, a
defined benefit pension plan to which both NTT 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 Japanese government's obligation
under the NTT Mutual Aid Plan and related assets of the NTT Mutual Aid Plan
were assigned to NTT's welfare pension plans 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, NTT 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 assigned to NTT's welfare pension plans 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.
F-20
<PAGE>
NIPPON TELEGRAPH AND TELEPHONE CORPORATION
AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following tables presents a reconciliation of the changes in NTT's
welfare pension plans' benefit obligations and fair value of assets of NTT's
welfare pension plans at March 31, 1998 and 1999:
<TABLE>
<CAPTION>
1998 1999 1999
------------ ------------ ------------
Millions of yen Millions of
U.S. dollars
<S> <C> <C> <C>
Change in benefit obligations:
Benefit obligation, beginning of
year........................... (Yen)494,747 (Yen)733,124 $6,059
Service cost.................... 132,444 132,573 1,096
Interest cost................... 19,788 25,651 212
Benefit payments................ (71) (468) (4)
Settlements..................... 86,216 (16,415) (136)
------------ ------------ ------
Benefit obligation, end of
year........................... 733,124 874,465 7,227
------------ ------------ ------
Change in fair value of plan as-
sets:
Fair value of plan assets,
beginning of year.............. 628,698 764,153 6,315
Actual return on plan assets.... 63,151 1,733 15
Employer contributions.......... 72,375 74,018 612
Benefits payments............... (71) (468) (4)
------------ ------------ ------
Fair value of plan assets, end
of year........................ 764,153 839,436 6,938
------------ ------------ ------
At March 31:
Funded status................... 31,029 (35,029) (289)
Unrecognized net gain........... 49,660 63,550 525
------------ ------------ ------
Net amount recognized........... (Yen) 80,689 (Yen) 28,521 $ 236
============ ============ ======
</TABLE>
The following table provides the amounts recognized in NTT's consolidated
balance sheets:
<TABLE>
<CAPTION>
At March 31,
-----------------------
1998 1999 1999
----------- ----------- ------------
Millions of yen Millions of
U.S. dollars
<S> <C> <C> <C>
Intangible and other assets............. (Yen)80,689 (Yen)28,521 $236
----------- ----------- ----
Net amount recognized................... (Yen)80,689 (Yen)28,521 $236
=========== =========== ====
</TABLE>
F-21
<PAGE>
NIPPON TELEGRAPH AND TELEPHONE CORPORATION
AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The charges to income for employees' severance indemnities for each of the
two years in the period ended March 31, 1999 included the following
components:
<TABLE>
<CAPTION>
1998 1999 1999
------------ ------------ ------------
Millions of yen Millions of
U.S. dollars
<S> <C> <C> <C>
Service cost....................... (Yen)132,444 (Yen)132,573 $1,096
Interest cost on projected benefit
obligation........................ 19,788 25,651 212
Expected return on plan assets..... (26,594) (32,037) (265)
Employee contributions............. (31,362) (32,071) (265)
------------ ------------ ------
Net periodic severance payments
under SFAS 87..................... 94,276 94,116 778
Gain on transferred plan assets in
excess of projected benefit
obligation as of April 1, 1997.... (133,951) -- --
Deduct: Amounts attributable to
regulatory accounting practices
under SFAS 71..................... 77,860 (24,187) (200)
------------ ------------ ------
Total cost for employees' severance
indemnities as recorded in the
consolidated statement of income.. (Yen) 38,185 (Yen) 69,929 $ 578
============ ============ ======
Assumptions in determination of net
pension cost:
Discount rate.................... 3.5% 3.5%
Long-term rate of salary
increases....................... 3.5% 3.5%
Long-term rate of return on
funded assets................... 4.0% 4.0%
</TABLE>
11. Income taxes:
NTT and its subsidiaries are subject to a number of different taxes, based
on income with an aggregate normal statutory tax rate of approximately 51
percent (1997 and 1998) and 48 percent (1999). Due to a change in Japanese
income tax regulations, effective April 1, 1999, the statutory rate was
reduced to approximately 41% 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 NTT for the years ended March 31,
1997, 1998 and 1999 differ from the normal statutory tax rates for the
following reasons:
<TABLE>
<CAPTION>
Percent of income
before income taxes
----------------------
1997 1998 1999
------ ------ ------
<S> <C> <C> <C>
Normal statutory tax rate............................ 51.00% 51.00% 48.00%
Changes in income tax rate........................... -- 6.49 4.59
Provision (reversal) of valuation allowance.......... -- 4.66 (1.45)
Other................................................ 0.18 1.66 0.04
------ ------ ------
Effective tax rate................................... 51.18% 63.81% 51.18%
====== ====== ======
</TABLE>
F-22
<PAGE>
NIPPON TELEGRAPH AND TELEPHONE CORPORATION
AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Significant components of the deferred tax assets and liabilities at March
31, 1998 and 1999 are as follows:
<TABLE>
<CAPTION>
1998 1999 1999
------------ ------------ ------------
Millions of yen Millions of
U.S. dollars
<S> <C> <C> <C>
Deferred tax assets:
Liability for employees'
severance payments.............. (Yen)569,678 (Yen)786,851 $6,503
Advance received................. 11,012 8,069 67
Accrued enterprise tax........... 18,951 42,957 355
Depreciation..................... 23,268 80,832 668
Financial assistance to
subsidiary companies............ 95,375 -- --
Compensated absences............. 38,239 95,557 790
Unamortized purchases of the
leased assets................... 12,623 37,976 314
Other............................ 53,010 65,522 541
------------ ------------ ------
Total gross deferred tax assets.. 822,156 1,117,764 9,238
Less valuation allowance......... (30,573) -- --
------------ ------------ ------
Total deferred tax assets........ 791,583 1,117,764 9,238
------------ ------------ ------
Deferred tax liabilities:
Valuation for securities......... 17,011 13,098 108
Special reserve for tax
purposes........................ 41,897 30,903 255
Gains on sales of subsidiary
stocks.......................... 31,972 358,099 2,960
Other............................ 50,684 61,217 506
------------ ------------ ------
Total gross deferred tax
liabilities..................... 141,564 463,317 3,829
------------ ------------ ------
Net deferred tax assets.......... (Yen)650,019 (Yen)654,447 $5,409
============ ============ ======
</TABLE>
NTT Mobile Communications Network Inc., and its eight regional subsidiaries
(together, "NTT DoCoMo", a trademark which stands for "Do Communications over
the Mobile Network") and NTT were major shareholders of NTT Personal Group,
which operated NTT's PHS business. In May 1998 NTT 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, NTT and NTT
DoCoMo provided financial assistance to NTT Personal Group in the form of
intercompany loans. Although losses relating to the financial assistance had
already been recognized on a consolidated basis, they were not tax deductible
until the liquidation was completed. Therefore, NTT recognized deferred tax
assets related to these losses in the fiscal year ended March 31, 1998. The
liquidation of NTT Personal Group was completed in March 1999. Because the tax
losses of NTT Personal Group have been realized in the fiscal year ended March
31, 1999, the valuation allowance at March 31, 1998, which mainly related to
deferred tax assets on the losses related to financial assistance to
subsidiary companies which are not expected to be tax deductible, was
reversed. The net changes in the total valuation allowance for the fiscal
years ended March 31, 1998 and 1999 were an increase of (Yen)29,094 million
and a decrease of (Yen)30,573 million ($253 million), respectively.
F-23
<PAGE>
NIPPON TELEGRAPH AND TELEPHONE CORPORATION
AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Net deferred tax assets at March 31, 1998 and 1999 are included in the
consolidated balance sheet as follows:
<TABLE>
<CAPTION>
Millions of
Millions of yen U.S. dollars
-------------------------- ------------
1998 1999 1999
------------ ------------ ------------
<S> <C> <C> <C>
Prepaid expenses and other current
assets........................... (Yen)138,686 (Yen)166,355 $1,375
Deferred income taxes (investments
and other assets)................ 511,334 502,393 4,152
Other current liabilities......... -- (7,684) (63)
Other long-term liabilities....... (1) (6,617) (55)
------------ ------------ ------
(Yen)650,019 (Yen)654,447 $5,409
============ ============ ======
</TABLE>
Operating loss carryforwards for tax purposes of consolidated subsidiaries
at March 31, 1999 amounted to approximately (Yen)3,561 million ($29 million)
and are available as an offset against future taxable income of such
subsidiaries. These carryforwards expire at various dates up to five years.
Realization is dependent on such subsidiaries generating sufficient taxable
income prior to expiration of the loss carryforwards. Although realization is
not assured, management believes it is more likely than not that all of the
deferred tax assets 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 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, NTT was incorporated on April 1, 1985, upon which all the assets and
liabilities of the Public Corporation were transferred to NTT. 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 6,400 thousand
shares of NTT's common stock to the public. As a normal part of its business
operations, NTT provides various telecommunications and other services to the
Government of Japan.
According to the NTT Law, NTT must obtain authorization from the Minister of
Posts and Telecommunications for certain financial matters including (1) any
new issue of shares, convertible debentures or debentures with preemptive
rights to acquire new shares; (2) any resolution for (i) a change in the
Articles of Incorporation, (ii) an appropriation of profits or (iii) any
merger or dissolution; and (3) any 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 computed in accordance with generally accepted accounting
principles in Japan.
F-24
<PAGE>
NIPPON TELEGRAPH AND TELEPHONE CORPORATION
AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
On November 24, 1995, based upon the resolution of the Board of Directors'
Meeting held on April 28, 1995, NTT capitalized the aggregate amount of
(Yen)15,600 million ($129 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. Under generally accepted accounting principles 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 ($1,939 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)2,888,757 million
($23,874 million) at March 31, 1999.
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, 1999 includes amounts
representing final cash dividends of (Yen)119,339 million ($986 million),
(Yen)7,500 ($62) per share, and the related transfer to the legal reserve of
(Yen)11,934 million ($99 million), which were approved at the shareholders'
meeting held on June 29, 1999.
Accumulated other comprehensive income (loss)--
An analysis of the changes for the years ended March 31, 1997, 1998 and 1999
in accumulated other comprehensive income (loss) is shown below:
<TABLE>
<CAPTION>
1997 1998 1999 1999
----------- ------------ ------------ ------------------------
Millions of yen Millions of U.S. dollars
<S> <C> <C> <C> <C>
Unrealized gain on
securities:
At beginning of year.. (Yen)22,959 (Yen) (4,648) (Yen)(20,061) $(166)
Change during the
year................. (27,607) (15,413) (2,120) (17)
----------- ------------ ------------ -----
At end of year...... (Yen)(4,648) (20,061) (22,181) $(183)
=========== ============ ============ =====
Foreign currency
translation
adjustments:
At beginning of year.. (Yen) -- (Yen) -- (Yen) 4,030 $ 33
Change during the
year................. -- 4,030 (4,291) (35)
----------- ------------ ------------ -----
At end of year...... (Yen) -- (Yen) 4,030 (Yen) (261) ($2)
=========== ============ ============ =====
Minimum pension
liability adjustments:
At beginning of year.. (Yen) -- (Yen) -- (Yen)---- $ --
Change during the
year................. -- -- (21,136) (175)
----------- ------------ ------------ -----
At end of year...... (Yen) -- (Yen) -- (Yen)(21,136) $(175)
=========== ============ ============ =====
Total accumulated other
comprehensive income
(loss):
At beginning of year.. (Yen)22,959 (Yen) (4,648) (Yen)(16,031) $(133)
Change during the
year................. (27,607) (11,383) (27,547) (227)
----------- ------------ ------------ -----
At end of year...... (Yen)(4,648) (Yen)(16,031) (Yen)(43,578) $(360)
=========== ============ ============ =====
</TABLE>
F-25
<PAGE>
NIPPON TELEGRAPH AND TELEPHONE CORPORATION
AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Tax effects allocated to each component of other comprehensive income (loss)
for the years ended March 31, 1997, 1998 and 1999 is shown below:
<TABLE>
<CAPTION>
Pre-tax Net-of-tax
amount Tax expense amount
------------ ----------- ------------
Millions of yen
<S> <C> <C> <C>
For the year ended March 31, 1997:
Unrealized gain on securities... (Yen)(56,442) (Yen)28,835 (Yen)(27,607)
------------ ----------- ------------
Other comprehensive income
(loss)....................... (Yen)(56,442) (Yen)28,835 (Yen)(27,607)
============ =========== ============
For the year ended March 31, 1998:
Unrealized gain on securities... (Yen)(29,090) (Yen)13,677 (Yen)(15,413)
Foreign currency translation
adjustments.................... 7,750 (3,720) 4,030
------------ ----------- ------------
Other comprehensive income
(loss)....................... (Yen)(21,340) (Yen) 9,957 (Yen)(11,383)
============ =========== ============
For the year ended March 31, 1999:
Unrealized gain on securities... (Yen) (5,210) (Yen) 3,090 (Yen) (2,120)
Foreign currency translation
adjustments.................... (8,192) 3,901 (4,291)
Minimum pension liability
adjustment..................... (35,824) 14,688 (21,136)
------------ ----------- ------------
Other comprehensive income
(loss)....................... (Yen)(49,226) (Yen)21,679 $ (27,547)
============ =========== ============
<CAPTION>
Pre-tax Net-of-tax
amount Tax expense amount
------------ ----------- ------------
Millions of U.S. dollars
<S> <C> <C> <C>
For the year ended March 31, 1999:
Unrealized gain on securities... $ (43) $ 26 $ (17)
Foreign currency translation
adjustments.................... (68) 33 (35)
Minimum pension liability
adjustment..................... (296) 121 (175)
------------ ----------- ------------
Other comprehensive income
(loss)....................... $ (407) $ 180 $ (227)
============ =========== ============
</TABLE>
14. Business segment and geographic area:
Effective for the fiscal year ended March 31, 1999, NTT adopted Statement of
Financial Accounting Standards No. 131 ("SFAS 131"), "Disclosures about
Segments of an Enterprise and Related Information" which requires disclosure
of financial and descriptive information about NTT Group's reportable
operating segments. The operation segments reported below are the segments of
NTT for which separate financial information is available and for operating
profit/loss amounts are evaluated regularly by executive management in
deciding how to allocate resources and in assessing performance.
NTT Group's results are segmented according to its four primary lines of
business: wireline services, wireless services, data communication services
and other services. NTT Group's wireline services segment, provided by NTT,
includes telephone services (excluding cellular services and PHS services),
telegraph services, leased circuit services, ISDN services and other related
services. NTT Group's wireless services segment, provided by NTT DoCoMo,
includes cellular services, PHS services and other related services. NTT
Group's data communication services segment, provided by NTT DATA, includes
data communication facility services, System Integration services and other
related services. The other services segment includes the management of
telecommunications facilities, sale and maintenance of telecommunications
equipment, the loan of real estate, sale of telephone cards and certain other
services, primarily within the NTT Group itself.
F-26
<PAGE>
NIPPON TELEGRAPH AND TELEPHONE CORPORATION
AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Business segments--
Sales and operating revenue:
<TABLE>
<CAPTION>
1997 1998 1999 1999
-------------- -------------- -------------- ------------
Millions of yen Millions of
U.S. dollars
<S> <C> <C> <C> <C>
Sales and operating
revenue:
Wireline services
revenue--
Customers........... (Yen)6,141,658 (Yen)6,046,334 (Yen)5,752,301 $ 47,540
Intersegment........ 229,755 276,010 384,703 3,179
-------------- -------------- -------------- --------
Total............... 6,371,413 6,322,344 6,137,004 50,719
Wireless services
revenue--
Customer............ 2,038,311 2,682,658 3,206,829 26,503
Intersegment........ 119,217 257,384 149,317 1,234
-------------- -------------- -------------- --------
Total............... 2,157,528 2,940,042 3,356,146 27,737
Data communication
services revenue--
Customers........... 547,962 609,118 633,909 5,239
Intersegment........ 54,875 60,111 71,556 591
-------------- -------------- -------------- --------
Total............... 602,837 669,229 705,465 5,830
Other--
Customers........... 93,851 111,903 136,634 1,129
Intersegment........ 555,502 960,654 1,338,100 11,059
-------------- -------------- -------------- --------
Total............... 649,353 1,072,557 1,474,734 12,188
Elimination........... (959,349) (1,554,159) (1,943,676) (16,063)
-------------- -------------- -------------- --------
Consolidated total.... (Yen)8,821,782 (Yen)9,450,013 (Yen)9,729,673 $ 80,411
============== ============== ============== ========
</TABLE>
F-27
<PAGE>
NIPPON TELEGRAPH AND TELEPHONE CORPORATION
AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Segment profit or loss:
<TABLE>
<CAPTION>
1997 1998 1999 1999
------------ ------------ -------------- ------------
Millions of yen Millions of
U.S. dollars
<S> <C> <C> <C> <C>
Operating income:
Wireline services
revenue.............. (Yen)562,742 (Yen)467,228 (Yen) 83,283 $ 688
Wireless services
revenue.............. 106,873 327,154 467,521 3,864
Data communication
services revenue..... 41,436 43,217 29,626 245
Other................. 34,131 2,584 52,535 434
------------ ------------ -------------- -------
Total................. 745,182 840,183 632,965 5,231
Elimination........... 24,293 31,862 78,470 649
------------ ------------ -------------- -------
Consolidated operating
income................. 769,475 872,045 711,435 5,880
Other income............ 82,871 66,511 1,716,115 14,183
Other expenses.......... 342,573 283,024 313,589 2,592
------------ ------------ -------------- -------
Consolidated income
before income taxes.... (Yen)509,773 (Yen)655,532 (Yen)2,113,961 $17,471
============ ============ ============== =======
Equity in earnings
(losses) in other
income:
Wireline services
revenue.............. (Yen) 9,731 (Yen) 6,076 (Yen) 3,427 $ 28
Wireless services
revenue.............. 4,486 2,057 7,834 65
Data communication
services revenue..... 171 1,353 1,156 10
Other................. (59) (7) (3,374) (28)
------------ ------------ -------------- -------
Consolidated total...... (Yen) 14,329 (Yen) 9,479 (Yen) 9,043 $ 75
============ ============ ============== =======
</TABLE>
Assets:
<TABLE>
<CAPTION>
1997 1998 1999 1999
--------------- --------------- --------------- ------------
Millions of yen Millions of
U.S. dollars
<S> <C> <C> <C> <C>
Total Assets:
Wireline services
revenue.............. (Yen)13,026,768 (Yen)12,774,420 (Yen)12,489,103 $103,216
Wireless services
revenue.............. 2,281,953 2,845,854 4,124,605 34,087
Data communication
services revenue..... 903,609 964,329 1,038,138 8,580
Other................. 786,577 1,512,152 2,290,675 18,931
--------------- --------------- --------------- --------
Total................. 16,998,907 18,096,755 19,942,521 164,814
Elimination........... (523,813) (744,224) (1,369,273) (11,316)
--------------- --------------- --------------- --------
Consolidated total...... (Yen)16,475,094 (Yen)17,352,531 (Yen)18,573,248 $153,498
=============== =============== =============== ========
</TABLE>
F-28
<PAGE>
NIPPON TELEGRAPH AND TELEPHONE CORPORATION
AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Other significant items:
<TABLE>
<CAPTION>
1997 1998 1999 1999
-------------- -------------- -------------- ------------
Millions of yen Millions of
U.S. dollars
<S> <C> <C> <C> <C>
Depreciation and
amortization:
Wireline services
revenue.............. (Yen)1,625,641 (Yen)1,593,176 (Yen)1,620,457 $13,392
Wireless services
revenue.............. 292,926 422,419 492,402 4,069
Data communication
services revenue..... 140,173 148,398 147,553 1,220
Other................. 34,574 117,850 179,545 1,484
-------------- -------------- -------------- -------
Consolidated total...... (Yen)2,093,314 (Yen)2,281,843 (Yen)2,439,957 $20,165
============== ============== ============== =======
Capital expenditures for
segment assets:
Wireline services
revenue.............. (Yen)1,991,196 (Yen)1,886,969 (Yen)1,727,901 $14,280
Wireless services
revenue.............. 808,810 791,845 870,417 7,194
Data communication
services revenue..... 190,164 161,705 236,098 1,951
Other................. 87,478 121,807 253,443 2,095
-------------- -------------- -------------- -------
Consolidated total...... (Yen)3,077,648 (Yen)2,962,326 (Yen)3,087,859 $25,520
============== ============== ============== =======
</TABLE>
The capital expenditures in the above table represent the additions to fixed
assets of each segment.
Transfers between reportable business are made at arms-length prices.
Operating income is sales and operating revenue less costs and operating
expenses.
There has been no sales and operating revenue from transactions with a single
external customer amounting to 10 percent or more of NTT's revenues for the
years ended March 31, 1997, 1998 and 1999.
15. Leases:
NTT and its subsidiaries lease certain office space, employees' residential
facilities and other assets. Leases qualifying as capital leases at March 31,
1998 and 1999 were as follows:
<TABLE>
<CAPTION>
Class of property 1998 1999 1999
----------------- ------------ ------------ ------------
Millions of yen Millions of
U.S. dollars
<S> <C> <C> <C>
Buildings........................... (Yen)393,233 (Yen)381,663 $ 3,154
Machinery, vessels and tools........ 305,545 287,824 2,379
Accumulated depreciation............ (197,526) (308,581) (2,550)
------------ ------------ -------
(Yen)501,252 (Yen)360,906 $ 2,983
============ ============ =======
</TABLE>
F-29
<PAGE>
NIPPON TELEGRAPH AND TELEPHONE CORPORATION
AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Future minimum lease payments by year under capital leases together with the
present value of the net minimum lease payments at March 31, 1999 are as
follows:
<TABLE>
<CAPTION>
Millions of Millions of
Year ending March 31 yen U.S. dollars
-------------------- ------------ ------------
<S> <C> <C>
2000............................................... (Yen)41,241 $ 341
2001............................................... 40,175 332
2002............................................... 32,927 272
2003............................................... 29,937 248
2004............................................... 29,564 244
Later years........................................ 1,121,401 9,268
------------ ------
Total minimum lease payments....................... 1,295,245 10,705
Less--Amount representing interest................. 904,091 7,472
------------ ------
Present value of net minimum lease payments........ 391,154 3,233
Less--Current obligation........................... 13,071 108
------------ ------
Long-term capital lease obligations................ (Yen)378,083 $3,125
============ ======
</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, 1997, 1998 and 1999 were (Yen)178,519 million,
(Yen)153,055 million and (Yen)146,443 million ($1,210 million), respectively.
Certain consolidated subsidiaries undertake direct financing lease
operations. Direct financing leases consist of full-payout leases relating to
various equipment, including office equipment, medical equipment, transport
equipment and other equipment. The excess of aggregate leases rentals plus the
estimated residual value over the cost of the leased equipment constitutes the
unearned lease income to be taken into income over the lease term. The
estimated residual values represent estimated proceeds from the disposition of
equipment at the time the lease is terminated. Amortization of unearned lease
income is computed using the interest method.
Finance lease receivables at March 31, 1999 comprise the following:
<TABLE>
<CAPTION>
Millions of Millions of
yen U.S. dollars
------------ ------------
<S> <C> <C>
Investment in financing leases:
Total minimum lease payments receivable......... (Yen)394,687 $3,262
Unearned income................................. (44,301) (366)
Estimated residual values....................... 507 4
------------ ------
350,893 2,900
Less--Allowance for doubtful accounts............. 3,416 28
------------ ------
347,477 2,872
Less--Current portion............................. 136,270 1,126
------------ ------
(Yen)211,207 $1,746
============ ======
</TABLE>
F-30
<PAGE>
NIPPON TELEGRAPH AND TELEPHONE CORPORATION
AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
At March 31, 1999, the contractual maturities of minimum lease payments of
the investment in financing leases are as follows:
<TABLE>
<CAPTION>
Millions of Millions of
Year ending March 31 yen U.S. dollars
-------------------- ------------ ------------
<S> <C> <C>
2000............................................... (Yen)167,850 $1,387
2001............................................... 111,141 918
2002............................................... 64,175 530
2003............................................... 30,924 256
2004............................................... 12,057 100
Thereafter......................................... 8,540 71
------------ ------
(Yen)394,687 $3,262
============ ======
</TABLE>
Allowance for doubtful accounts is based upon past loss experience and an
estimation of mortgaged asset values.
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 ended March 31, 1997, 1998 and 1999
were (Yen)328,529 million, (Yen)288,931 million and (Yen)381,776 million
($3,155 million), respectively.
Advertising costs--
Advertising costs are expensed as incurred. Advertising costs included in
other operating expenses were (Yen)75,244 million, (Yen)83,452 million and
(Yen)89,956 million ($743 million) for the years ended March 31, 1997, 1998
and 1999, respectively.
17. Gains on sales of subsidiary stock:
On May 12, 1998, NTT Data Corporation ("NTT DATA"), a consolidated
subsidiary, issued 27,500 shares of common stock in a public offering to third
parties at a price of (Yen)5,468 thousand ($45,190) per share, which was in
excess of NTT's average per share carrying value. The issuance of these shares
at an aggregate issuance price of (Yen)150,370 million ($1,243 million) is
regarded as a sale of a part of NTT's interest in NTT DATA. As a result of the
issuance, NTT's shareholding in NTT DATA declined from 60 percent to 54
percent.
On October 22, 1998, NTT Mobile Communications Network Inc. ("NTT Central
DoCoMo") completed its initial public offering and its stock on the First
Section of the Tokyo Stock Exchange at a price of (Yen)3,900 thousand
($32,231) per share. NTT sold 218,000 shares of NTT Central DoCoMo's common
stock, without par value, for total proceeds of (Yen)826,140 million ($6,828
million), net of related expenses. In addition, NTT Central DoCoMo issued
327,000 new shares of stock for total proceeds of (Yen)1,236,500 million
($10,219 million), net of related expenses. As a result of the offering, NTT's
stake in NTT Central DoCoMo has been reduced from 94.68 percent to 67.13
percent.
The resulting pretax gains on these issuances and sales of subsidiary stock
amounting to approximately (Yen)1,634,314 million ($13,507 million) are
recognized in the consolidated statement of income for the year ended March
31, 1999 together with applicable deferred taxes thereon. In the consolidated
statement of cash flows for
F-31
<PAGE>
NIPPON TELEGRAPH AND TELEPHONE CORPORATION
AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
the year ended March 31, 1999, the gains on sales of subsidiary stock are
excluded from the cash flows from operating activities and the related cash
proceeds of (Yen)2,213,010 million ($18,289 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, 1997, 1998 and 1999 were losses of (Yen)2,120
million, (Yen)799 million and gain of (Yen)1,368 million ($11 million),
respectively.
19. Financial instruments:
The carrying amounts and the estimated fair values of financial instruments
excluding debt and equity securities at March 31, 1998 and 1999 are as
follows:
<TABLE>
<CAPTION>
1998 1999 1999
---------------------- ---------------------- -----------------
Carrying Carrying Carrying Fair
amounts Fair value amounts Fair value amounts value
---------- ---------- ---------- ---------- -------- -------
Millions of yen Millions of
U.S. dollars
<S> <C> <C> <C> <C> <C> <C>
Long-term debt including
current portion........ (5,601,531) (5,756,528) (5,406,904) (5,523,304) (44,685) (45,647)
Forward exchange
contracts.............. (52,473) 41,302 (10,492) 1,255 (87) 10
Interest rate and
currency swap
agreements............. (10,690) 9,425 6,654 (6,344) 55 (52)
Option contracts
purchased.............. -- -- 155 0 1 0
Option contracts
written................ -- -- (267) (267) (2) (2)
</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.
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 NTT's current incremental rates of
borrowings for similar liabilities.
Derivative financial instruments--
The fair values of forward exchange contracts, interest rate swap
agreements, currency swap agreements and interest rate option contracts are
estimated based on the amounts NTT and certain subsidiaries would receive or
pay to terminate the contracts at March 31, 1998 and 1999 with discounted
amounts of net future cash flows.
F-32
<PAGE>
NIPPON TELEGRAPH AND TELEPHONE CORPORATION
AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The table below shows the notional principal amounts of those derivative
financial instruments at March 31, 1998 and 1999:
<TABLE>
<CAPTION>
1998 1999 1999
------------ ------------ ------------
Millions of yen Millions of
U.S. dollars
<S> <C> <C> <C>
Forward exchange contracts.......... (Yen)499,056 (Yen)396,679 $3,278
Interest rate and currency swap
agreements......................... 553,270 850,074 7,025
Option contracts purchased.......... -- 30,000 248
Option contracts written............ -- 21,600 179
</TABLE>
Concentrations of credit risk--
NTT 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, 1999.
20. Commitments and contingent liabilities:
Commitments outstanding at March 31, 1999 for the purchase of property,
plant and equipment and other assets approximated (Yen)578,054 million ($4,777
million).
Contingent liabilities at March 31, 1999 for loans guaranteed amounted to
(Yen)46,814 million ($387 million).
At March 31, 1999, NTT and its subsidiaries had no material litigation or
claims outstanding, pending or threatened against it, which would have a
material adverse effect on NTT's consolidated financial position or results of
operations.
21. Subsequent events:
Subsequent to March 31, 1999, NTT issued (Yen)120,000 million ($992 million)
coupon yen-denominated bonds and (Yen)95,363 million ($788 million) Euro-
denominated Eurobonds.
In accordance with the Commercial Law of Japan, the Board of Directors has
obtained the approval of shareholders to acquire and retire stock of NTT
during the period beginning from June 29, 1999 and continuing to the
conclusion of the next Ordinary General Meeting of Shareholders at a cost not
to exceed (Yen)120,000 million ($992 million) with funds derived from retained
profits of NTT. On July 13, 1999, NTT repurchased 48,898 shares through
transaction executed on the Tokyo Stock Exchange at the price of
(Yen)1,500,000 per share. As a result of the repurchase, the number of
outstanding shares was reduced to 15,863,102 and retained earnings was reduced
by (Yen)73,347 million ($606 million).
NTT DoCoMo announced the revision of its fixed monthly charges for cellular
telephone services and the introduction of a new charge plan (O-Hanashi Plus
Big) which was effective on June 1, 1999 and will be effective on July 1,
1999, respectively.
Also, NTT DoCoMo announced the introduction of a new fee-based volume
discount (Ichinen Waribiki) which will be effective on July 1, 1999.
F-33
<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
------------ ----------- ------------ -------------
Millions of yen
<S> <C> <C> <C> <C>
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
=========== =========== ============ ===========
Year ended March 31, 1999:
Allowance for doubtful
accounts............... (Yen)35,816 (Yen)24,838 ((Yen)20,367) (Yen)40,287
=========== =========== ============ ===========
- --------
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, 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
=========== =========== ============ ===========
Year ended March 31, 1999:
Valuation allowance--
Deferred tax assets.... (Yen)30,573 (Yen) -- ((Yen)30,573) (Yen) --
=========== =========== ============ ===========
</TABLE>
F-34
<PAGE>
EXHIBIT 1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statement on Form F-3 (No.333-8264) of Nippon Telegraph and Telephone
Corporation of our report dated June 29, 1999, except for paragraph 2 of Note
21 as to which the date is August 30, 1999, relating to the financial
statements of Nippon Telegraph and Telephone Corporation as of and for the
year ended March 31, 1999, which appears on page F-2 of this Form 20-F.
/s/ Price Waterhouse
Tokyo, Japan
August 30, 1999
