<PAGE>
As filed with the Securities and Exchange Commission on September 29, 2000
Registration No. 333-
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------
FORM F-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------
Nippon Denshin Denwa Kabushiki Kaisha
(Exact name of Registrant as specified in its charter)
Nippon Telegraph and Telephone Corporation
(Translation of Registrant's name in English)
Japan 4813 None
(State or other (Primary Standard (I.R.S. Employer
jurisdiction of Industrial Classification Identification No.)
incorporation or Code Number)
organization)
3-1, Otemachi 2-chome
Chiyoda-ku, Tokyo 100-8116
Japan
813-5205-5581
(Address and telephone number of Registrant's principal executive offices)
--------------
NTT America, Inc.
101 Park Avenue
New York, New York 10178
U.S.A.
212-867-1511
(Name, address, and telephone number of agent for service)
Copy to:
Theodore A. Paradise Robert W. Mullen, Jr. Robert G. DeLaMater
Davis Polk & Wardwell Milbank, Tweed, Hadley & Sullivan & Cromwell
Akasaka Twin Tower East McCloy LLP Otemachi First Square
11F 1 Chase Manhattan Plaza 5-1, Otemachi 1-chome
17-22, Akasaka 2-chome New York, New York 10005 Chiyoda-ku, Tokyo 100-
Minato-ku, Tokyo 107-0052 U.S.A. 0004 Japan
Japan
Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date of this Registration Statement.
--------------
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. [_]
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, please check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier registration statement for the
same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
--------------
CALCULATION OF REGISTRATION FEE
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Proposed
Proposed Maximum
Title of Each Class of Amount Maximum Aggregate Amount of
Securities to be To Be Offering Price Offering Registration
Registered Registered(1) Per Unit(2) Price(2) Fee
-----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common stock, par value
(Yen)50,000 per
share(3)............ 200,000 shares $11,302.58 $2,260,516,000 $596,776.25
</TABLE>
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
(1) The amount of shares registered also includes any shares initially offered
and sold outside the United States and thereafter sold or resold in the
United States. The shares are not being registered for the purpose of sales
outside the United States.
(2) Estimated solely for purposes of determining the registration fee pursuant
to Rule 457(c) under the Securities Act.
(3) A separate Registration Statement on Form F-6 has been filed for the
registration of American Depositary Shares evidenced by American
Depositary Receipts representing the shares being registered hereby
(Registration No. 33-81562).
--------------
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until this Registration Statement shall become
effective at such date as the Commission, acting pursuant to said Section 8(a),
may determine.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this prospectus is not complete and may be changed. These +
+securities may not be sold until the registration statement filed with the +
+Securities and Exchange Commission is effective. This preliminary prospectus +
+is not an offer to sell nor does it seek an offer to buy these securities in +
+any jurisdiction where the offer is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
Subject to Completion, Dated September 29, 2000
[LOGO] NTT
Nippon Telegraph and Telephone Corporation
1,200,000 Shares of Common Stock
(Par Value (Yen)50,000 Per Share)
in the form of Shares or American Depositary Shares
-----------
This is an offering of shares and American depositary shares of Nippon
Telegraph and Telephone Corporation. Each ADS is equal to 1/200th of a share of
NTT. This prospectus relates to an offering of shares, in the form of
shares or ADSs, in the United States and Canada in connection with a global
offering of up to 1,200,000 shares. In addition, shares, in the form of
shares or ADSs, are being offered outside the United States, Canada and Japan
in an international offering and shares are being offered in Japan.
The Minister of Finance of Japan, representing the Government of Japan, is
offering 1,000,000 of the shares being sold in the global offering and NTT is
offering 200,000 of the shares being sold in the global offering. NTT will not
receive any proceeds from the sale of shares by the Government of Japan.
The common stock of NTT is listed on the First Section of the Tokyo Stock
Exchange and on all other stock exchanges in Japan. The common stock is also
listed on the London Stock Exchange. The ADSs are listed on the New York Stock
Exchange under the symbol "NTT." Until delivery of the ADSs by the underwriters
against payment, ADSs relating to the shares sold in the global offering will
trade on the New York Stock Exchange on a "when issued" basis under the symbol
"NTT WI." On September 27, 2000, the closing sale price of the common stock on
the TSE was (Yen)1,070,000 per share. On September 27, 2000, the closing sale
price of the ADSs on the New York Stock Exchange was $51.13 per ADS.
-----------
Neither the Securities and Exchange Commission nor any other regulatory body
has approved or disapproved of these securities or passed upon the adequacy or
accuracy of this prospectus. Any representation to the contrary is a criminal
offense.
-----------
<TABLE>
<CAPTION>
Proceeds, before Proceeds, before
Initial Public Underwriting expenses, to the expenses,
Offering Price Commissions Minister of Finance to NTT
-------------- ------------ ------------------- ----------------
<S> <C> <C> <C> <C>
Per Share................... (Yen) (Yen) (Yen) (Yen)
Per ADS..................... $ $ $ $
Total....................... (Yen) (Yen) (Yen) (Yen)
Total (U.S. Dollar
Translation)(/1/).......... $ $ $ $
</TABLE>
-----
(1) The rate used for such translation was $1 = (Yen) , the Noon Buying Rate
on , 2000.
-----------
NTT has granted the U.S. and international underwriters options to purchase
up to an additional 100,000 shares of NTT, in the form of shares or ADSs,
solely to cover over-allotments.
The underwriters expect to deliver the shares against payment in Yen and the
ADSs against payment in U.S. Dollars on , 2000.
-----------
Joint Global Coordinators and Joint Bookrunners
Goldman Sachs International
Merrill NikkoSalomonSmithBarney
Lynch & Co. Nomura
Securities
-----------
Merrill Goldman, Nomura NikkoSalomonSmithBarney Americas
Lynch & Co__.Sachs & Co__. Securities
International,
Inc.________
Daiwa Securities America Inc. J.P. Morgan & Co.
Lehman Brothers Morgan Stanley Dean Witter
UBS Warburg LLC
-----------
Prospectus dated , 2000.
<PAGE>
PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in this prospectus.
This summary may not contain all of the information that should be considered
before investing in NTT. You should read the entire prospectus carefully in
evaluating an investment in NTT. References to fiscal years are to fiscal years
ended on March 31 of the years indicated.
NTT
NTT is the largest provider of wireline and wireless voice, data, Internet
and related 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 services, sale of telecommunication
equipment and other services.
Telephone services are the largest part of the business of NTT, representing
approximately 61.6%, or (Yen)6.4 trillion, of total operating revenues of
approximately (Yen)10.4 trillion in fiscal year 2000. Sale of telecommunication
equipment contributed 11.0% of operating revenues. Other services, which
include Open Computer Network, or OCN, services and system development
services, contributed 10.1%, ISDN services 7.9%, leased circuit services 4.8%,
data communication facility services 3.8% and telegraph services 0.8% of
operating revenues.
NTT's telephone services consist primarily of local, long distance,
international and wireless services. NTT is the principal provider of local and
long distance fixed-line services in Japan with approximately 55 million
subscribers as of March 31, 2000.
NTT provides cellular telephone services and Personal Handy-phone System, or
PHS, services through NTT DoCoMo. NTT DoCoMo, together with its subsidiaries,
is the largest provider of cellular telephone services in Japan and is one of
the largest cellular operators in the world as measured by the number of
subscribers, with approximately 31.6 million cellular subscribers as of July
31, 2000. NTT DoCoMo is 67.1% owned by NTT. The balance of NTT DoCoMo's shares
are owned by public investors.
NTT provides data communication facility services through NTT DATA. NTT DATA
is the leading provider of information communication systems and computer
networking in Japan. NTT DATA primarily engages in strategic planning, systems
planning and systems design, and installation of information communication
systems and computer networks. NTT DATA is 54.2% owned by NTT. The balance of
NTT DATA's shares are owned by public investors.
NTT has operated under a holding company structure since July 1999. In
addition to owning interests in NTT DoCoMo and NTT DATA, NTT, as a parent
company, owns three wholly-owned subsidiaries: Nippon Telegraph and Telephone
East Corporation, Nippon Telegraph and Telephone West Corporation, and NTT
Communications Corporation. NTT East and NTT West operate the regional
telecommunications services in eastern Japan and western Japan, respectively,
and NTT Communications operates the long distance telecommunications and other
network services throughout Japan and internationally.
3
<PAGE>
As the holding company, the NTT parent is directly responsible for the
overall strategy of the NTT group. The NTT parent is also responsible for basic
research and development. The NTT parent receives dividends when declared by
its subsidiaries and compensation from its subsidiaries for providing
management services and the results of its R&D activities. The reorganized NTT
has the following structure:
[CHART APPEARS HERE]
--------
NTT
Parent
--------
100% 100% 100% 100% 100% 100%
----- ----- ------ ----- ----- ----------
NTT NTT NTT NTT NTT Other
East West Communications DoCoMo DATA NTT
Subsidiaries
----- ----- ------ ----- ----- ----------
Competitive Strengths
. Leading market position in local, long distance and wireless markets in
Japan
. Extensive customer base in each market segment
. Most extensive and advanced telecommunications network in Japan,
including nationwide wireline, wireless and Internet Protocol (IP)
networks
. Leader in research and development of technology for fixed and wireless
data transmission, Internet and other related technologies
. Largest beneficiary of increasing demand for Internet and data
transmission
. Extensive wireless telecommunications businesses with dominant market
share in Japan
. Strong systems integration and information technology (IT) services
. Strong consolidated financial performance
Strategy
. Maximize shareholder value and enhance overall NTT group value by
implementing an overall NTT group strategy, pursuing a clear mission and
achievement of performance criteria, including financial targets, and
reviewing and supervising the operations and performance of each group
company
. Promote the development of Internet and data transmission related
businesses or what NTT refers to as "Information Sharing" by:
. maximizing the use of NTT's strengths, its advanced network and
extensive customer base to actively expand ISDN, ADSL and other
broadband, leased circuit line and i-mode businesses
. using fiber optic access cable to expand in the near future the range
of low-cost and diverse high speed access services
. increasing the number of subscribers of Internet service provider
(ISP) services such as OCN
4
<PAGE>
. further expanding platform and content-related businesses, including
data center, server housing, hosting, Application Service Provider
(ASP) services and e-commerce platforms such as verification, billing
and settlement
. offering further improved cellular technology, products and services,
including IMT-2000, to provide mobile Internet and data
communications services
. capturing increasing corporate demand for information technology
services
. continuing comprehensive research and development activities
. Strengthen the competitiveness of traditional voice transmission
business by reducing costs, diversifying pricing and service options in
line with customer demand and improving the quality of wireless
transmission
. Improve efficiency by implementing a restructuring plan for a three
fiscal year period formulated by NTT East and NTT West, focusing capital
investment in demand-driven customer services to reduce consolidated
capital investment and reducing personnel costs and other operational
expenses through various means
. Strengthen international operations by:
. leveraging the strength of the i-mode and IMT-2000 technologies to
invest in and form alliances with the world's major
telecommunications companies
. establishing de facto standards for the mobile Internet by forming
partnerships with the world's leading multimedia providers
. creating seamless international data transmission and global
solutions businesses by developing global IP networks and IP
connectivity primarily in Asia and North America
. capturing a significant share of international e-commerce markets
Challenges
. Further deregulation of telecommunication rates
. Decrease in revenues resulting from reduction in interconnection rates
and the introduction of the price-cap system
. Increasing competition in local, long distance, international, wireless
and Internet related services markets
. Decline in fixed line subscribers
. High personnel costs associated with the current size and age-structure
of NTT's workforce
5
<PAGE>
The Global Offering
Unless otherwise specifically stated, the information in this prospectus
assumes that the underwriters do not exercise the options granted by NTT to
purchase up to an additional 100,000 shares, in the form of shares or ADSs, in
the global offering solely to cover over-allotments. There will be 16,034,590
shares of NTT outstanding after the offering (16,134,590 if the underwriters'
over-allotment option is exercised in full), and the Minister of Finance,
representing the Government of Japan, will own approximately 46% of NTT's
outstanding shares (approximately 46% if the underwriters' over-allotment
option is exercised in full).
Global Offering:............ Up to 1,200,000 shares, consisting of the U.S.
offering, the international offering and the
Japanese offering. Of the shares being offered in
the global offering, 1,000,000 are being offered
by the Minister of Finance of Japan, representing
the Government of Japan, and 200,000 are being
newly issued and offered by NTT.
U.S. Offering:.......... shares in the form of shares or ADSs.
International shares in the form of shares or ADSs.
Offering:...............
Japanese Offering:...... shares.
Selling Shareholder:........ The Minister of Finance of Japan, referred to as
MOF, representing the Government of Japan. As of
March 31, 2000, the Government of Japan owned
8,416,855.26 shares or approximately 53% of NTT's
outstanding shares and after the global offering
the Government of Japan will own approximately
46% of NTT's outstanding shares.
Offering Price:............. (Yen) per share
$ per ADS (based on an exchange rate of
(Yen) = $1.00 and adjusted for the ratio of
1/200th share per ADS)
The ADSs:................... An American depositary receipt, or ADR, is a
negotiable certificate issued by a United States
bank or trust company acting as depositary. In
the same way that a share certificate of a U.S.
issuer would evidence shares, an ADR evidences
American depositary shares, which are also
referred to as ADSs. Each ADS represents an
ownership interest in 1/200th of one share of
NTT. Shares represented by ADSs are held in Japan
on deposit by the depositary or its agent for the
benefit of holders of ADRs.
Use of Proceeds: ........... NTT will not receive any proceeds from the sale
of the shares being sold by the MOF. NTT intends
to use the entirety of the net proceeds from the
issuance of the new shares, which are estimated
to be (Yen) billion ((Yen) billion if the
underwriters' over-allotment option is exercised
in full), to fund its investments in NTT
Communications. NTT Communications intends to use
such proceeds to repay the borrowings made for
its acquisition of shares of Verio, Inc.
Lock-up Agreement: ......... NTT and MOF have agreed with the underwriters not
to dispose of or hedge any of their shares of
stock or securities convertible into
6
<PAGE>
or exchangeable for shares during the period from
the date of this prospectus continuing through
the date 180 days after the date of this
prospectus without the consent of the global
coordinators, subject to the following two
exceptions. The Minister of Finance may engage in
these kinds of transactions (a) with NTT for
repurchase and cancellation of its shares, or (b)
with an entity controlled by the Government of
Japan that agrees to be bound by the above
restrictions. The second exception is that NTT is
not bound by this lock-up agreement in connection
with any existing employee or director benefit
plans.
Shares Outstanding Before
and After the Global
Offering: ..................
There are 15,834,590 shares issued by NTT which
are outstanding prior to the global offering, all
of which will be issued and outstanding after the
global offering. After the issuance of the new
shares, 16,034,590 shares will be issued by NTT
and outstanding (16,134,590 if the underwriters'
over-allotment option is exercised in full).
Listing:.................... Tokyo Stock Exchange (and all other stock
exchanges in Japan)
London Stock Exchange
New York Stock Exchange (ADSs)
Payment and Settlement:..... The underwriters expect to deliver certificates
representing the shares against payment therefor
in yen in Tokyo through the central clearing
system in Japan, known as JASDEC, on , 2000
(Tokyo time). The underwriters expect to deliver
ADSs against payment therefor in U.S. dollars in
New York, New York through the facilities of DTC
on , 2000.
Delivery of the shares and the ADSs is expected
to occur, subject to receipt and acceptance by
the underwriters, on , 2000, which is later
than three business days after pricing of the
offerings. Because of the longer settlement
period purchasers who wish to trade shares or
ADSs on or soon after pricing may need to specify
alternative settlement arrangements to prevent a
failed settlement. Until delivery by the
underwriters against payment, ADSs relating to
the shares sold in the global offering will trade
on the New York Stock Exchange on a "when issued"
basis under the symbol "NTT WI." The shares and
ADSs will not trade on a "when issued" basis on
the Tokyo Stock Exchange, the London Stock
Exchange or on any other market.
Because of this longer settlement period, the
margin requirements of the New York Stock
Exchange may require certain purchasers of the
shares or ADSs in the global offering to deposit
and maintain margin during such period.
Conditionality.............. The issuance and sale of the new shares by NTT
are conditional upon, among other things,
approval by the Minister of Post and
Telecommunications of Japan, referred to as MPT,
after
7
<PAGE>
consultation with MOF and the absence of an
injunction prohibiting the issuance of the new
shares by NTT under Article 280-10 of the
Commercial Code of Japan. Article 280-10 provides
an action for such injunction by a shareholder of
NTT only if the issuance violates the law or the
articles of incorporation or is made in a
remarkably unfair manner. The sale of shares by
MOF is not subject to either of these two
conditions. As a result, the sale of shares by
MOF could proceed, unless in either such event
MOF agrees otherwise after consultation with the
underwriters, even if the new shares are not
issued and sold by NTT. In that event, 1,000,000
shares of NTT would be offered in the global
offering, from which NTT would not receive any of
the proceeds, and after the global offering,
15,834,590 shares of NTT would be issued and
outstanding, and MOF would own approximately 47%
of NTT's outstanding shares.
Security Codes:
Shares.................. Tokyo Stock Exchange Securities Identification
Code: 9432
ISIN: JP3735400008
Common Code: 002364085
SEDOL: 6641373
ADSs (relating to CUSIP: 654624105
existing shares)........ ISIN: US6546241059
SEDOL: 2639996
ADSs (relating to
shares issued in the
global offering until
the time of
settlement).............
CUSIP: 654624105 100
ISIN:
SEDOL:
8
<PAGE>
Summary Financial Information
The summary financial information below and certain data under other
financial data have been derived from the consolidated financial statements and
related notes of NTT which have been prepared in conformity with accounting
principles generally accepted in the United States. The consolidated financial
statements of NTT as of and for the fiscal years ended March 31, 1996, 1997,
1998, 1999 and 2000 have been audited by PricewaterhouseCoopers. The
information below should be read in conjunction with, and is qualified in its
entirety by reference to, the consolidated financial statements of NTT and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included in this prospectus.
<TABLE>
<CAPTION>
As of and for the years ended March 31,
------------------------------------------------------------------------------------------
1996 1997 1998 1999 2000 2000
-------------- -------------- -------------- -------------- --------------- ---------
(Millions except per share amounts, percentages or ratios) (Millions
of U.S.
dollars)
<S> <C> <C> <C> <C> <C> <C>
Statement of Income
Data:
Operating revenues...... (Yen)7,908,643 (Yen)8,821,782 (Yen)9,450,013 (Yen)9,729,673 (Yen)10,383,339 $97,956
Telephone.............. 5,557,674 6,038,146 6,306,034 6,300,460 6,394,562 60,326
Telegraph.............. 96,746 98,683 92,211 85,521 82,631 780
Leased circuit......... 393,415 428,715 488,160 507,163 499,891 4,716
Data communication
facility.............. 301,365 337,934 372,765 383,455 397,107 3,746
ISDN................... 126,905 190,403 367,826 555,976 818,833 7,725
Sale of
telecommunication
equipment............. 606,102 889,834 969,586 1,008,589 1,138,369 10,739
Miscellaneous.......... 826,436 838,067 853,431 888,509 1,051,946 9,924
Operating expenses...... 7,212,492 8,052,307 8,577,968 9,018,238 9,559,549 90,184
Operating income........ 696,151 769,475 872,045 711,435 823,790 7,772
Gains (losses) on sales
of subsidiary stock.... (98,011) -- -- (1,634,314) -- --
Extraordinary loss, net
of taxes............... -- -- -- (462,508) -- --
Net income ............. 273,646 251,457 214,460 554,431 299,010 2,821
Net income per share of
common stock........... 17,197 15,803 13,478 34,844 18,883 178
Balance Sheet Data:
Cash and cash
equivalents............ (Yen) 638,642 (Yen) 821,140 (Yen) 913,236 (Yen)1,656,672 (Yen) 1,155,274 $10,899
Property, plant and
equipment, net......... 11,136,221 11,655,768 12,005,362 12,161,818 11,863,596 111,921
Total assets............ 15,399,448 16,475,094 17,352,531 18,573,248 19,101,289 180,201
Total liabilities....... 10,203,329 11,134,684 11,888,603 12,662,478 13,086,665 123,459
Total interest bearing
debt................... 4,986,208 5,597,520 6,058,526 5,642,084 5,518,041 52,057
Total shareholders'
equity................. 5,196,119 5,340,410 5,463,928 5,910,770 6,014,624 56,742
Other Financial Data:
Capital expenditures.... (Yen)2,244,576 (Yen)2,612,878 (Yen)2,685,961 (Yen)2,789,342 (Yen) 2,349,969 $22,169
Depreciation and
amortization........... 1,909,768 2,093,314 2,281,843 2,439,957 2,418,331 22,814
Net cash provided by
operating activities... 2,306,778 2,650,708 2,730,607 2,365,231 2,795,988 26,377
Net cash used in
investing activities... 2,286,593 2,861,484 2,908,947 631,967 2,934,306 27,682
Net cash provided (used)
by financing
activities............. 36,010 393,274 270,436 (989,828) (363,080) (3,425)
Adjusted EBITDA(1) ..... 2,816,093 3,075,829 3,318,579 3,326,078 3,451,268 32,559
Adjusted EBITDA
margin(1)(2)........... 35.6% 34.9% 35.1% 34.2% 33.2%
Net income margin(2).... 3.5 2.9 2.3 5.7 2.9
Return on equity(3)..... 5.37 4.77 3.97 9.75 5.01
Return on assets(4)..... 4.67 4.83 5.16 3.96 4.37
Return on capital
employed(5)............ 3.4 3.6 3.8 3.2 4.2
</TABLE>
-------
(1) Adjusted EBITDA refers to operating income before deducting depreciation
and amortization expenses and losses on sale and disposal of property,
plant and equipment. Adjusted EBITDA should not be construed as an
alternative to operating income or any other measure of performance
determined in accordance with U.S. generally accepted accounted principles
or as an indicator of operating performance, liquidity or cash flows from
operating, investing and financing activities, and may not be directly
comparable to similarly named measures reported by other companies.
Information concerning Adjusted EBITDA is included because NTT believes it
is a useful supplement to cash flow data as a measure of its performance.
(2) Calculated as a percentage of operating revenues.
(3) Calculated as net income as a percentage of average total shareholders'
equity.
(4) Calculated as operating income as a percentage of average total assets.
(5) Calculated as operating income multiplied by (1 minus 51% (the marginal
tax rate) for fiscal years 1996-1998, 1 minus 48% (the marginal tax rate)
for fiscal year 1999 and 1 minus 41% (the marginal tax rate) for fiscal
year 2000) as a percentage of the sum of average total interest bearing
debt and average total shareholders' equity.
9
<PAGE>
Summary Operating and Other Data
The following table provides operating and other data for the five years
ended March 31, 2000.
<TABLE>
<CAPTION>
As of and for the years ended March 31,
------------------------------------------------------
1996 1997 1998 1999 2000
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Japanese Demographic and
Economic Data:
Population
(millions)(1).......... 125.6 125.9 126.2 126.5 126.7
GDP (trillions)(1)...... (Yen)489.7 (Yen)503.8 (Yen)505.0 (Yen)494.4 (Yen)494.9
GDP per capita
(millions)(1).......... 3.9 4.0 4.0 3.9 3.9
Japanese
Telecommunications
Market Data:
Fixed line:
Total number of
telephone subscriber
lines of NTT
(millions)............ 60.8 61.2 60.2 58.3 55.3
Telephone subscriber
line penetration rate
(%)................... 48.4 48.6 47.7 46.1 43.6
Total ISDN subscribers
of NTT (millions)(2).. 0.6 1.3 2.6 4.4 7.4
Local market share
(%)(3)................ 98.6 97.7 97.1 93.7 N/A
Long distance market
share (%)(3).......... 68.1 64.3 59.4 51.2 N/A
Cellular:
Total cellular
subscribers in Japan
(millions)............ 10.2 20.9 31.5 41.5 51.1
Cellular penetration
rate (%).............. 8.2 16.6 25.0 32.8 40.4
Cellular subscribers of
NTT DoCoMo and its
subsidiaries
(millions)............ 4.9 11.0 18.0 23.9 29.4
Market share of NTT
DoCoMo and its
subsidiaries (%)(4)... 48.4 52.5 57.0 57.5 57.4
PHS:
Total PHS subscribers
in Japan (millions)... 1.5 6.0 6.7 5.8 5.7
PHS penetration rate
(%)................... 1.2 4.8 5.3 4.6 4.5
PHS subscribers of NTT
DoCoMo and its
subsidiaries
(millions)............ 0.4 1.9 1.9 1.3 1.4
Market share of NTT
DoCoMo and its
subsidiaries (%)(4)... 26.1 30.7 28.3 23.3 25.2
Employees (thousands)... 231 230 226 224 224
</TABLE>
-------
N/A: Not Available.
(1) Based on the 2000 Economic White Paper.
(2) Assuming an average of 10 lines per INS-Net 1500 subscriber.
(3) Market share data is based on number of calls.
(4) Market share data is based on number of subscribers.
10
<PAGE>
WHERE TO FIND MORE INFORMATION
NTT files reports and other information with the SEC. These reports and other
information can be read and copied at the SEC's public reference room in
Washington, D.C. Please call the SEC at 1-800-SEC-0330 for further information
on the public reference rooms. Starting with NTT's Form 20-F for the fiscal
year ended March 31, 1998, NTT's filings are also available to the public over
the Internet at the SEC's web-site at http://www.sec.gov.
NTT can "incorporate by reference" the information it files with the SEC,
which means that NTT can disclose important information to you by referring you
to those documents. The information incorporated by reference is considered to
be part of this prospectus. NTT incorporates by reference its Annual Report on
Form 20-F for the fiscal year ended March 31, 2000 (File No. 1-8910) filed with
the SEC pursuant to the Securities Exchange Act of 1934.
In addition, any reports on Form 20-F, including any amendments to those
reports, that will be filed with the SEC and certain reports that NTT
designates on Form 6-K that may be furnished to the SEC prior to the
termination of this offering will also be incorporated by reference and
considered part of this prospectus and will automatically update and supersede
the information contained herein.
You may request a copy of any document incorporated by reference, at no cost,
by writing or telephoning NTT at 3-1, Otemachi 2-chome, Chiyoda-ku, Tokyo 100-
8116 Japan, Attention: Department IV, telephone number: 813-5205-5581.
FORWARD LOOKING STATEMENTS
Some of the statements made in this prospectus and in documents incorporated
by reference are forward looking statements. These include statements with
respect to NTT's plans, strategies and beliefs and other statements that are
not historical facts. The statements are based on management's assumptions and
beliefs in light of the information currently available to it. These
assumptions and beliefs include information concerning:
. NTT; and
. the economy and telecommunications industry in Japan and overseas.
The assumptions also involve risks and uncertainties which may cause the actual
results, performance or achievements to be materially different from any future
results, performance or achievements expressed or implied by the forward
looking statements. Potential risks and uncertainties include:
. risks and uncertainties associated with the pricing of services;
. the effects of deregulation of the telecommunications market,
including the reduction of interconnection rates and the introduction
of the price-cap system;
. risks and uncertainties associated with estimating the reduction in
revenues that will result from changes in rates;
. the effects of increased competition;
. the financial and operating impact of equity investments in overseas
companies, including Verio Inc., KPN Mobile N.V., referred to as KPN
Mobile, Hutchison 3G UK Holdings Ltd., referred to as Hutchison 3G,
and any other companies in which NTT may make equity investments;
. risks and uncertainties associated with projections of future usage
of NTT's network and the development of high-speed transmission,
Internet and e-commerce related businesses; and
. the ability of NTT and its subsidiaries, including NTT DoCoMo, to
maintain growth and the success of new products and services and new
businesses.
11
<PAGE>
USE OF PROCEEDS
NTT will not receive any proceeds from the sale of the shares being sold by
the Minister of Finance of Japan on behalf of the Government of Japan. NTT
intends to use the entirety of the net proceeds from the issuance of the new
shares, which are estimated to be (Yen) billion ((Yen) billion if the
underwriters' over-allotment option is exercised in full), to fund its
investments in NTT Communications. NTT Communications intends to use such
proceeds to repay the borrowings made for its acquisition of shares of Verio,
Inc.
EXCHANGE RATES
In parts of this prospectus, yen amounts have been translated into U.S.
dollars for the convenience of investors. Unless otherwise noted, the rate used
for the translations was (Yen)106 equal to $1.00, which was the approximate
exchange rate on March 31, 2000. The following table shows the noon buying
rates in New York City for cable transfers in yen as announced for customs
purposes by the Federal Reserve Bank of New York--the "Noon Buying Rate"--for
Japanese yen expressed in Japanese yen per $1.00. The Noon Buying Rate on
September 27, 2000 was $1=(Yen)107.44. No representation is made that any
Japanese yen or U.S. dollar amounts could have been or could be converted into
U.S. dollars or Japanese yen, as the case may be, at any particular rate or at
all.
<TABLE>
<CAPTION>
Years Ended March 31,
-----------------------------------------------------------------------
1996 1997 1998 1999 2000 2001(/1/)
----------- ----------- ----------- ----------- ----------- -----------
Yen exchange rates per
U.S. dollar:
<S> <C> <C> <C> <C> <C> <C>
High.................... (Yen)107.29 (Yen)124.54 (Yen)133.99 (Yen)147.14 (Yen)124.45 (Yen)109.75
Low..................... 81.12 104.49 111.42 108.83 101.53 104.19
Average(2).............. 97.09 113.20 123.57 128.10 110.02 107.64
At period-end........... 107.00 123.72 133.29 118.43 102.73 107.44
</TABLE>
--------
(1) Through September 27, 2000.
(2) The average of month-end rates during the period.
Fluctuations in the exchange rate between the Japanese yen and the U.S.
dollar will affect the U.S. dollar equivalent of the Japanese yen price of the
shares on the Japanese stock exchanges and, as a result, are likely to affect
the market price of the ADSs on the New York Stock Exchange. NTT will declare
any cash dividends on shares in Japanese yen and exchange rate fluctuations
will affect the U.S. dollar amounts received by holders of ADSs on conversion
of cash dividends on the shares represented by the ADSs. See "Description of
ADRs and Deposit Agreement."
12
<PAGE>
CAPITALIZATION
The following table, which should be read in conjunction with NTT's
consolidated financial statements included in this prospectus, shows the
unaudited consolidated capitalization of NTT as of March 31, 2000 and as
adjusted to give effect to the issuance of 200,000 new shares by NTT in this
offering. Except as disclosed below and except for changes in shareholders'
equity attributable to the payment of the annual dividend, there has been no
material change in the consolidated capitalization of NTT since March 31, 2000.
<TABLE>
<CAPTION>
March 31, 2000
---------------------------------------------------
Actual As Adjusted Actual As Adjusted
--------------- -------------- -------- -----------
(millions of U.S.
(millions of yen) dollars)
<S> <C> <C> <C> <C>
Short-term Debt
Total short-term debt (in-
cluding short-term
borrowings and current
portion of long-term
debt).................... (Yen) 1,278,953 (Yen)1,278,953 $ 12,066 $12,066
=============== ============== ======== =======
Long-term Debt
Long-term debt............ (Yen) 4,239,088 (Yen)4,239,088 $ 39,991 $39,991
--------------- -------------- -------- -------
Shareholders' Equity
Common stock, (Yen)50,000
par value................ 795,600 7,506
Authorized: 62,400,000
shares
Issued and outstanding:
15,834,590 shares
(16,034,590 shares as
adjusted)
Additional paid-in capi-
tal...................... 2,530,476 23,872
Retained earnings......... 2,648,286 2,648,286 24,984 24,984
Accumulated other compre-
hensive income........... 40,262 40,262 380 380
--------------- -------------- -------- -------
Total shareholders' equi-
ty....................... 6,014,624 56,742
--------------- -------------- -------- -------
Total capitalization...... (Yen)11,532,665 (Yen) $108,799 $
=============== ============== ======== =======
</TABLE>
13
<PAGE>
SELECTED FINANCIAL DATA
The selected financial data below have been derived from the consolidated
financial statements and related notes of NTT which have been prepared in
conformity with accounting principles generally accepted in the United States.
The consolidated financial statements of NTT as of and for the fiscal years
ended March 31, 1996, 1997, 1998, 1999 and 2000 have been audited by
PricewaterhouseCoopers. The information below should be read in conjunction
with, and is qualified in its entirety by reference to, the consolidated
financial statements of NTT and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" included in this prospectus.
<TABLE>
<CAPTION>
As of and for the years ended March 31,
------------------------------------------------------------------------------------------
1996 1997 1998 1999 2000 2000
-------------- -------------- -------------- -------------- --------------- ---------
(Millions except per share amounts) (Millions
of U.S.
dollars)
<S> <C> <C> <C> <C> <C> <C>
Statement of Income Da-
ta:
Operating revenues...... (Yen)7,908,643 (Yen)8,821,782 (Yen)9,450,013 (Yen)9,729,673 (Yen)10,383,339 $97,956
Telephone.............. 5,557,674 6,038,146 6,306,034 6,300,460 6,394,562 60,326
Telegraph.............. 96,746 98,683 92,211 85,521 82,631 780
Leased circuit......... 393,415 428,715 488,160 507,163 499,891 4,716
Data communication
facility.............. 301,365 337,934 372,765 383,455 397,107 3,746
ISDN................... 126,905 190,403 367,826 555,976 818,833 7,725
Sale of
telecommunication
equipment............. 606,102 889,834 969,586 1,008,589 1,138,369 10,739
Miscellaneous.......... 826,436 838,067 853,431 888,509 1,051,946 9,924
Operating expenses...... 7,212,492 8,052,307 8,577,968 9,018,238 9,559,549 90,184
Personnel.............. 2,285,502 2,266,599 2,345,609 2,367,449 2,401,056 22,651
Depreciation,
amortization and
maintenance costs..... 2,809,602 2,998,550 3,185,044 3,435,522 3,394,343 32,022
Other.................. 2,117,388 2,787,158 3,047,315 3,215,267 3,764,150 35,511
Operating income........ 696,151 769,475 872,045 711,435 823,790 7,772
Other expenses
(income)............... 151,012 259,702 216,513 (1,402,526) 134,818 1,272
Interest and
amortization of bond
discounts and issue
costs................. 268,032 253,950 235,363 216,038 175,081 1,652
Interest income........ (2,066) (1,839) (2,086) (6,881) (32,382) (306)
Gains on sales of
subsidiary stock...... (98,011) -- -- (1,634,314) -- --
Other, net............. (16,943) 7,591 (16,764) 22,631 (7,881) (74)
Income before income
taxes ................. 545,139 509,773 655,532 2,113,961 688,972 6,500
Income taxes............ 272,974 260,927 418,276 1,081,917 284,842 2,687
Extraordinary loss, net
of taxes............... -- -- -- (462,508) -- --
Income before minority
interest and equity in
earnings of affiliated
companies.............. 272,165 248,846 237,256 569,536 404,130 3,813
Minority interest in
consolidated
subsidiaries........... (6,124) (11,718) (32,275) (24,148) (115,210) (1,087)
Equity in earnings of
affiliated companies... 7,605 14,329 9,479 9,043 10,090 95
Net income.............. 273,646 251,457 214,460 554,431 299,010 2,821
Net income per share of
common stock........... 17,197 15,803 13,478 34,844 18,883 178
</TABLE>
14
<PAGE>
<TABLE>
<CAPTION>
As of and for the years ended March 31,
-----------------------------------------------------------------------------------------
1996 1997 1998 1999 2000 2000
-------------- -------------- -------------- -------------- -------------- ---------
(Millions except per share amounts, percentages or ratios) (Millions
of U.S.
dollars)
<S> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash and cash
equivalents............ (Yen) 638,642 (Yen) 821,140 (Yen) 913,236 (Yen)1,656,672 (Yen)1,155,274 $10,899
Notes and accounts
receivable, trade...... 1,058,308 930,792 1,085,381 1,463,777 1,678,095 15,831
Inventories............. 164,490 231,407 223,776 195,843 189,850 1,791
Property, plant and
equipment, net......... 11,136,221 11,655,768 12,005,362 12,161,818 11,863,596 111,921
Investments in
affiliated companies... 86,900 113,762 201,945 300,420 338,379 3,192
Marketable securities
and other investments.. 195,345 154,947 124,910 163,754 369,654 3,487
Intangible and other
assets................. 1,324,893 1,654,289 1,904,503 1,527,113 1,881,597 17,751
Total assets............ 15,399,448 16,475,094 17,352,531 18,573,248 19,101,289 180,201
Accounts payable,
trade.................. 903,579 1,115,840 1,131,444 1,416,615 1,440,629 13,591
Total interest bearing
debt................... 4,986,208 5,597,520 6,058,526 5,642,084 5,518,041 52,057
Short term borrowings... 208,438 387,544 456,995 235,180 410,305 3,871
Current portion of long-
term debt.............. 671,948 667,964 825,422 848,546 868,648 8,195
Long-term debt.......... 4,105,822 4,542,012 4,776,109 4,558,358 4,239,088 39,991
Total liabilities....... 10,203,329 11,134,684 11,888,603 12,662,478 13,086,665 123,459
Total shareholders'
equity................. 5,196,119 5,340,410 5,463,928 5,910,770 6,014,624 56,742
Other Financial Data:
Capital expenditures.... (Yen)2,244,576 (Yen)2,612,878 (Yen)2,685,961 (Yen)2,789,342 (Yen)2,349,969 $22,169
Depreciation and
amortization........... 1,909,768 2,093,314 2,281,843 2,439,957 2,418,331 22,814
Net cash provided by
operating activities... 2,306,778 2,650,708 2,730,607 2,365,231 2,795,988 26,377
Net cash used in
investing activities .. 2,286,593 2,861,484 2,908,947 631,967 2,934,306 27,682
Net cash provided (used)
by financing activities
....................... 36,010 393,274 270,436 (989,828) (363,080) (3,425)
Research and development
expenses............... 318,105 328,529 288,931 381,776 357,626 3,374
Adjusted EBITDA(1)...... 2,816,093 3,075,829 3,318,579 3,326,078 3,451,268 32,559
Adjusted EBITDA
margin(1)(2)........... 35.6% 34.9% 35.1% 34.2% 33.2%
Net income margin(2).... 3.5 2.9 2.3 5.7 2.9
Return on equity(3)..... 5.37 4.77 3.97 9.75 5.01
Return on assets(4)..... 4.67 4.83 5.16 3.96 4.37
Return on capital
employed(5)............ 3.4 3.6 3.8 3.2 4.2
</TABLE>
--------
(1) Adjusted EBITDA refers to operating income before deducting depreciation
and amortization expenses and losses on sale and disposal of property,
plant and equipment. Adjusted EBITDA should not be construed as an
alternative to operating income or any other measure of performance
determined in accordance with U.S. generally accepted accounted principles
or as an indicator of operating performance, liquidity or cash flows from
operating, investing and financing activities, and may not be directly
comparable to similarly named measures reported by other companies.
Information concerning Adjusted EBITDA is included because NTT believes it
is a useful supplement to cash flow data as a measure of its performance.
(2) Calculated as a percentage of operating revenues.
(3) Calculated as net income as a percentage of average total shareholders'
equity.
(4) Calculated as operating income as a percentage of average total assets.
(5) Calculated as operating income multiplied by (1 minus 51% (the marginal tax
rate) for fiscal years 1996-1998, 1 minus 48% (the marginal tax rate) for
fiscal year 1999 and 1 minus 41% (the marginal tax rate) for fiscal year
2000) as a percentage of the sum of average total interest bearing debt and
average total shareholders' equity.
15
<PAGE>
SELECTED OPERATING AND OTHER DATA
The following table provides operating and other data for the five years
ended March 31, 2000.
<TABLE>
<CAPTION>
As of and for the years
ended March 31,
--------------------------------------------------------
1996 1997 1998 1999 2000
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Japanese Demographic and
Economic Data:
Population
(millions)(1).......... 125.6 125.9 126.2 126.5 126.7
GDP (trillions)(1)...... (Yen)489.7 (Yen)503.8 (Yen)505.0 (Yen)494.4 (Yen)494.9
GDP per capita
(millions)(1).......... 3.9 4.0 4.0 3.9 3.9
Japanese
Telecommunications
Market Data:
Fixed line:
Total number of
telephone subscriber
lines of NTT
(millions)............ 60.8 61.2 60.2 58.3 55.3
Telephone subscriber
line penetration
rate(%)............... 48.4 48.6 47.7 46.1 43.6
Total ISDN subscribers
of NTT (millions)(2).. 0.6 1.3 2.6 4.4 7.4
Local market share
(%)(3)................ 98.6 97.7 97.1 93.7 N/A
Long distance market
share (%)(3).......... 68.1 64.3 59.4 51.2 N/A
Duration of
communications
(million hours)(4).... 7,619 7,581 7,441 7,432 8,029
Yearly growth rate of
number of calls
(%)(4)................ 4.2 3.7 (4.4) (9.3) (1.5)
Cellular:
Total cellular
subscribers in Japan
(millions)............ 10.2 20.9 31.5 41.5 51.1
Cellular penetration
rate (%).............. 8.2 16.6 25.0 32.8 40.4
Cellular subscribers of
NTT DoCoMo and its
subsidiaries
(millions)............ 4.9 11.0 18.0 23.9 29.4
Market share of NTT
DoCoMo and its
subsidiaries (%)(4)... 48.4 52.5 57.0 57.5 57.4
PHS:
Total PHS subscribers
in Japan (millions)... 1.5 6.0 6.7 5.8 5.7
PHS penetration rate
(%)................... 1.2 4.8 5.3 4.6 4.5
PHS subscribers of NTT
DoCoMo and its
subsidiaries
(millions)............ 0.4 1.9 1.9 1.3 1.4
Market share of NTT
DoCoMo and its
subsidiaries (%)(4)... 26.1 30.7 28.3 23.3 25.2
Employees (thousands):.. 231 230 226 224 224
</TABLE>
--------
N/A: Not Available.
(1) Based on the 2000 Economic White Paper.
(2) Assuming an average of 10 lines per INS-Net 1500 subscriber.
(3) Market share data is based on number of calls.
(4) Fixed to fixed communications through GC switches.
(5) Market share data is based on number of subscribers.
16
<PAGE>
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 in recent years and are still on-
going, including the implementation of telecommunications reform laws aimed at
promoting competition in the telecommunications services market.
In June 1997, the Japanese Diet passed amendments to the NTT Law which
implement a plan proposed by the Ministry of Posts and Telecommunications, and
accepted in principle by NTT, to reorganize NTT. 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, the NTT parent company continues to exist but operates primarily as a
holding company. The principal sources of the NTT parent company's cash
revenues are:
. dividends from its subsidiaries;
. payment for providing management services through contracts with its
subsidiaries; and
. payment for its fundamental R&D activities through contracts with each
of its subsidiaries which use the results of the R&D activities.
The costs of implementing the reorganization have not been material to NTT's
financial position or results of operations.
In order to promote further competition in the telecommunications market, and
as part of the Japanese Government's overall policy toward deregulation, the
Telecommunications Business Law--the "Telecom Business Law"--was revised in May
1998 and became effective on November 1, 1998. Pursuant to these revisions,
rates for certain services provided by NTT East and NTT West will generally be
subject to a price-cap system.
Under the price-cap system, the price-cap will be based on an index which
represents a percentage of current rates. The index will be fixed annually by
MPT. As long as the proposed rates of a Type I Carrier with "designated
telecommunications facilities," such as NTT East and NTT West, do not exceed
the amount that would be allowed under the price-cap, such carriers will not
need to obtain approval from MPT but only need to notify MPT of their rates.
Rates in excess of the amounts that would be allowed under the price-cap will
require the prior approval of MPT. The index currently equals the Consumer
Price Index in Japan less a productivity factor and an exogenous factor. On
June 21, 2000, MPT notified NTT East and NTT West of such index for the one-
year period commencing on October 1, 2000. The index for basic telephone
services, ISDN services and other services was set at 97.8, and the index for
leased circuit services was set at 97.6.
Beginning on October 1, 2000, NTT East and NTT West will be subject to the
price-cap system. It is estimated that the effect of the price-cap would be to
reduce fiscal year 2001 consolidated revenues of NTT by approximately (Yen)14
billion (representing a decrease of (Yen)7 billion for each of NTT East and NTT
West, respectively); fiscal year 2002 consolidated revenues by approximately
(Yen)33 billion (representing a decrease of (Yen)17 billion for NTT East and a
decrease of (Yen)16 billion for NTT West); and fiscal year 2003 consolidated
revenues by approximately (Yen)39 billion (representing a decrease of (Yen)20
billion for NTT East and a decrease of (Yen)19 billion for NTT West).
Pursuant to the price-cap system, on August 31, 2000, NTT East and NTT West
notified MPT of their new rate plans effective October 1, 2000. NTT East and
NTT West will reduce basic telephone service and ISDN usage rates for intra-
prefectural, inter-city calls in excess of 20 kilometers. The new rate plans
reduce usage
17
<PAGE>
rates for such calls by approximately 40% of the average and up to a maximum
reduction of approximately 66%, which is applicable only for intra-prefectural,
inter-city calls in excess of 100 kilometers made between 11 p.m. and 8 a.m. In
addition, NTT East and NTT West also notified MPT of discount plans and will
reduce usage charges for certain high speed digital transmission and ATM leased
circuit services beginning October 1, 2000. It is estimated that fiscal year
2001 consolidated revenues of NTT will be reduced approximately (Yen)17 billion
(representing a decrease of (Yen)10 billion for NTT East and (Yen)7 billion for
NTT West) in comparison to the estimated reduction of approximately (Yen)14
billion resulting from the application of the price-cap.
In June 1997, the Japanese Diet revised the Telecom Business Law in an
attempt to promote transparent, fair, prompt and reasonable interconnection.
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 and
potential new network operators, and, as competition grows, increasingly
important to NTT.
The Government of Japan and the U.S. Government had not been able to reach an
agreement on the introduction of Long-run Incremental Cost Methodology-based
rates at the Japan-U.S. Talks on Deregulation and Competitive Policy which had
been held through March 2000. However, in July 2000, as part of continued
discussions, the Government of Japan and the U.S. Government agreed, among
other things, on such introduction. In particular, the Government of Japan and
the U.S. Government agreed that:
. interconnection rates would be reduced 22.5% for GC (group centers, or
local switching offices) interconnection and 60.1% for ZC (zone centers,
or toll switching offices) interconnection in comparison to the fiscal
year 1999 rates to be phased in over three years, between fiscal years
2001 and 2003;
. in regard to the above reductions, by the end of fiscal year 2002, NTT
will frontload and implement rate reductions, including decreasing rates
by 80% for both ZC exchange and GC-ZC transmission and by 70% for GC
exchange in comparison to the model interconnection rates based on the
estimates of traffic data from fiscal year 2000. Based on these plans,
by the end of fiscal year 2002, GC rates are expected to decline by 20%
and ZC rates are expected to decline by 50% in comparison to the fiscal
year 1999 rates; and
. by the end of 2002, the Ministry of Posts and Telecommunications will
complete a study on the revision of the model and the treatment of an
alternative model under which the recovery of a portion of switch
equipment, referred to as feeder Remote Terminals, would be recovered
through monthly rates rather than through interconnection rates, and the
Government of Japan and the U.S. Government will further discuss
interconnection rates for fiscal year 2003.
It is uncertain how the implementation of the Long-run Incremental Cost
Methodology will impact the revenues and expenditures of NTT East and NTT West
as the estimated figures for fiscal years 2001 and 2002 are subject to change
once the final fiscal year 2000 traffic figures become available. If the rates
used in the model, which are based on the estimated fiscal year 2000 traffic
data, are reduced by 27.5% it is estimated that fiscal year 2001 revenues of
NTT East and NTT West will be reduced by approximately (Yen)49 billion
(representing a decrease in revenues of (Yen)24 billion for NTT East and a
decrease in revenues of (Yen)25 billion for NTT West); fiscal year 2002
revenues of NTT East and NTT West would be reduced by approximately (Yen)86
billion (representing a decrease in revenues of (Yen)43 billion for each of NTT
East and NTT West, respectively); and fiscal year 2003 revenues of NTT East and
NTT West will be reduced by approximately (Yen)107 billion (representing a
decrease in revenues of (Yen)55 billion for NTT East and a decrease in revenues
of (Yen)52 billion for NTT West). For these three fiscal years, the resulting
decrease in revenues of NTT East and NTT West is expected to be (Yen)242
billion (representing a decrease in revenues of (Yen)122 billion for NTT East
and a decrease in revenues of (Yen)120 billion for NTT West).
These and other regulatory developments may have the effect of increasing
competition in the Japanese telecommunications industry. A more competitive
environment may affect NTT's results of operations. NTT believes that
competition in telecommunications markets is based on price and the quality and
variety of
18
<PAGE>
services provided. To compete more effectively, NTT has introduced a range of
new services, including Internet and data communications related services as
well as discount services designed to provide optional calling plans to
different customer segments. In addition, NTT has continued to take steps to
enhance operational efficiency and customer satisfaction. NTT has also taken
steps to enhance quality through network upgrades and R&D activities.
NTT DoCoMo Offering
On October 22, 1998, NTT DoCoMo completed its initial public offering and
listed its common stock on the First Section of the Tokyo Stock Exchange. NTT
sold 218,000 shares of NTT DoCoMo's common stock for total proceeds of
(Yen)826.1 billion, and NTT 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 DoCoMo was reduced from 94.7% to 67.1%. During fiscal year 1999, NTT
recognized pre-tax gains on the sale and issuance of NTT DoCoMo's shares of
approximately (Yen)781 billion and (Yen)784 billion, respectively, as well as
applicable deferred taxes thereon. During fiscal year 2000, NTT used a portion
of the proceeds from its sale of NTT DoCoMo shares to repurchase 77,410 shares
of NTT's common stock for cancellation at an aggregate purchase price of
approximately (Yen)120 billion. As a result of the repurchase, the number of
outstanding shares was reduced to 15,834,590. In fiscal year 2000, NTT also
paid a special dividend of (Yen)5,000 per share to NTT's shareholders of record
on March 31, 1999, or an aggregate of (Yen)79,560 million. The remaining
proceeds to NTT from the NTT DoCoMo offering were used for general corporate
purposes. NTT DoCoMo used the proceeds from its issuance of new shares to repay
debt, to fund current and future capital expenditures and for general corporate
purposes.
Employee Reduction
NTT and its consolidated subsidiaries had approximately 224,000 employees at
March 31, 2000, making it the largest private sector employer in Japan.
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 an additional
amount of one-time severance. Approximately 6,300 employees accepted NTT's
voluntary transfer proposal in fiscal years 1998 and 1999.
On November 17, 1999, NTT East and NTT West announced in their Mid-term
Restructuring Plan that the companies would reduce the number of employees by
an aggregate of approximately 21,000 by the end of fiscal year 2003. Of this
amount, it is expected that approximately 4,300 employees will be transferred
to other NTT group companies, including NTT DoCoMo.
Year 2000 Problem
As part of its preparation for the Year 2000 problem, NTT made all necessary
adjustments in NTT's facilities, systems and equipment. A contingency plan was
also formulated to enable prompt action in case of any trouble. No material
events or disruptions occurred affecting the NTT's telecommunications services,
and NTT was able to maintain stable and uninterrupted services throughout the
period covering the transition to the year 2000.
Voluntary Early Retirement
The NTT parent, NTT East and NTT West have decided to implement a voluntary
early retirement program covering a total of approximately 6,500 employees in
fiscal years 2001 and 2002 as part of a rationalization of their management.
This rationalization is a response to adverse business conditions resulting
from intense competition and other factors in the telecommunications industry.
Verio Acquisition
On September 8, 2000, NTT completed its purchase of Verio. The acquisition is
being accounted for as a purchase. Verio has had operating losses in the past
and there is no assurance that it will not continue to have such losses in the
future. Additionally, NTT has not yet determined the impact of the amortization
of goodwill associated with the Verio acquisition on its future results of
operations.
19
<PAGE>
SFAS 71 Write-Off
In fiscal year 1999, NTT discontinued accounting for all of its consolidated
operations in accordance with the provisions of Statement of Financial
Accounting Standards No. 71, "Accounting for the Effects of Certain Types of
Regulation," 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,"
NTT recorded an extraordinary non-cash charge of approximately (Yen)462
billion, net of income taxes in the amount of approximately (Yen)427 billion,
during the six-month period ended September 30, 1998, and has eliminated
approximately (Yen)889 billion of regulatory assets from its balance sheet as
of September 30, 1998.
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 7l 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. In this environment, NTT does not believe that it can be assured that
prices could 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. The
discontinuation of the application of SFAS 71 has the effect of increasing
certain costs, including depreciation and pension and severance related costs.
New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities," which has been amended by Statement of Financial
Accounting Standards No. 137, "Accounting for Derivative Instruments and
Hedging Activities--Deferral for the Effective Date of FASB Statement No. 133,"
and Statement of Financial Accounting Standards No. 138, "Accounting for
Certain Derivative Instrument and Certain Hedging Activities--An amendment of
FASB Statement No. 133." SFAS 133, as amended, is effective for NTT beginning
April 1, 2001. SFAS 133 requires that all derivative instruments be recorded on
the balance sheet at fair value. Changes in the fair value of derivatives are
recorded each period in current earnings or other comprehensive income,
depending on whether a derivative is designated as part of a hedge transaction
and the type of hedge transaction. The ineffective portion of all hedges will
be recognized in earnings. NTT is in the process of determining the impact that
the adoption of SFAS 133 will have on its results of operations and financial
position.
In December 1999, the SEC issued Staff Accounting Bulletin No. 101, "Revenue
Recognition in Financial Statements." SAB 101 provides guidance on applying
generally accepted accounting principles to revenue recognition issues in
financial statements. NTT will adopt SAB 101 as required in the second half of
fiscal year 2001 and is evaluating the effect that such adoption may have on
its consolidated results of operations and financial position.
Results of Operations
In fiscal years 2000 and 1999, operating revenues increased 6.7% and 3.0%,
respectively. In both fiscal year 2000 and 1999, growth in cellular telephone
services and data-related demand, including ISDN services, high-speed digital
leased circuit services and OCN services caused by increased demand for
Internet access, overcame the negative impact of a decline in the number of
telephone subscriber lines and a reduction in interconnection charges paid by
certain competing Type I Carriers (so-called "NCCs"--New Common Carriers) for
network access. Making use of its digitized network, NTT improved computer-
based communications services compatible with the Internet and other networks.
These services include ISDN, OCN, high speed digital circuit, digital data
exchange (DDX) services and system integration. As a result of this
20
<PAGE>
effort, Internet and other data communications related revenues increased 28.5%
to (Yen)2,098 billion in fiscal year 2000 from (Yen)1,633 billion in fiscal
year 1999. Operating income increased 15.8% in fiscal year 2000, due
principally to increased operating income from NTT DoCoMo mobile
telecommunications services. This was followed in fiscal year 1999 with a
decrease of 18.4% in operating income despite an offsetting increase in
operating revenues, which was due principally to an increase in expenses for
telecommunications equipment for cellular telephone and PHS services to
accommodate high NTT DoCoMo subscriber growth, and to an increase in the
disposition of metal cables following NTT's conversion to an optical access
network. Net income decreased 46.1% in fiscal year 2000 primarily due to the
sale and issuance of NTT DoCoMo shares in fiscal year 1999 which more than
offset the one time extraordinary loss of (Yen)462 billion taken in fiscal year
1999 as a result of the discontinuance of the application of SFAS 71. Net
income increased 158.5% in fiscal year 1999.
Rate reductions are affecting revenues from NTT's long-distance and leased
circuit services. In addition, reduction in interconnection rates has had, and
will continue to have, an adverse impact on interconnection revenue.
NTT implemented the following rate reductions for long-distance services from
fiscal year 1996 through fiscal year 1998:
<TABLE>
<CAPTION>
Estimated
annual impact
on NTT's revenue based
Effective on the volume of services
Fiscal Year* Date at the effective date
------------ ------------- -------------------------
(billions of yen)
<S> <C> <C>
1996.................................... March 1996 (Yen) 60
1997.................................... February 1997 (Yen) 60
1998.................................... February 1998 (Yen) 80
</TABLE>
--------
* There were no rate reductions during fiscal years 1999 and 2000.
In April 2000, NTT Communications reduced charges for inter-prefectural long-
distance calls and international phone calls. This reduction is expected to
have an annual impact of (Yen)50 billion on NTT Communications' operating
revenues.
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
factors such as the marketing strategies of competitors and general economic
conditions.
NTT East and NTT West are also reducing their intra-prefectural rates
effective October 1, 2000 pursuant to the new price cap system and will be
reducing interconnection rates pursuant to the recently agreed Long-run
Incremental Cost Methodology. See "--Introduction" for a discussion of the
impact of these rate changes on NTT's operating revenues.
The following table sets forth a breakdown by category of NTT's operating
revenues for fiscal years 1998, 1999 and 2000.
<TABLE>
<CAPTION>
Percent
Increase
Years
ended
Years ended March 31, March 31,
---------------------------------------------- -----------
1998 1999 2000 2000 1999 2000
---------- ---------- ----------- ------------ ---- ----
(billions of yen) (billions of
U.S. dollars)
<S> <C> <C> <C> <C> <C> <C>
Operating Revenues
Telephone............... (Yen)6,306 (Yen)6,300 (Yen)6,394 $60.3 (0.1%) 1.5%
Telegraph............... 92 86 83 0.8 (7.3) (3.4)
Leased circuit.......... 488 507 500 4.7 3.9 (1.4)
Data communication
facility............... 373 383 397 3.8 2.9 3.6
ISDN.................... 368 556 819 7.7 51.2 47.3
Sale of
telecommunication
equipment.............. 970 1,009 1,138 10.8 4.0 12.8
Other................... 853 889 1,052 9.9 4.1 18.3
---------- ---------- ----------- ----- ---- ----
(Yen)9,450 (Yen)9,730 (Yen)10,383 $98.0 3.0% 6.7%
========== ========== =========== ===== ==== ====
</TABLE>
21
<PAGE>
In fiscal years 2000 and 1999, operating expenses increased 6.0% and 5.1%,
respectively. Operating expenses increased in fiscal year 2000 principally due
to an increase in severance and pension-related costs as a result of the non-
application of SFAS 71. The non-application of SFAS 71, which was effective
only for the second half of fiscal year 1999, led to an increase in personnel
expense in fiscal year 2000 compared to fiscal year 1999. In addition, other
sales costs in fiscal year 2000 increased due to such factors as increased
agency commissions and sales costs for terminal equipment as a result of high
NTT DoCoMo subscriber growth. Operating expenses in fiscal year 1999 increased
because of a rise in depreciation, amortization and maintenance costs due to
increased investment in telecommunications equipment needed to accommodate high
NTT DoCoMo subscriber growth and the effects of the non-application of SFAS 71
for the second half of fiscal year 1999. In addition, the disposal of metal
cables following NTT's conversion to an optical access network increased
operating expenses. Other operating expenses also increased due in part to
growth in agency commissions and sales expenses for terminals as a result of
high NTT DoCoMo subscriber growth.
Fiscal Year 2000 compared with Fiscal Year 1999
Operating Revenues
NTT'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.
Telephone Services
Operating revenues from telephone services increased 1.5% in fiscal year 2000
to (Yen)6,394 billion, or 61.6% of operating revenues as compared with 64.3% in
fiscal year 1999. Telephone services include telephone subscriber services,
cellular telephone services, PHS, public telephones and other services.
Subscribers for cellular telephone services increased, leading to an increase
in overall network traffic. However, the continuing trend towards an increase
in ISDN subscribers caused the number of fixed-line telephone subscribers to
decline.
Telephone Subscriber Services
Telephone subscriber services are NTT's principal business activities. Due
mainly to a shift towards ISDN subscribers, the number of telephone subscriber
lines in use decreased 2.96 million from the previous fiscal year to 55.32
million subscriber lines at the end of fiscal year 2000. Although the aggregate
number of telephone and ISDN subscribers decreased as it did in fiscal years
1999 and 1998, the rate of decline has fallen.
Interconnection rates were further reduced in February 2000, with reductions
applicable to calls made from April 1999. The adverse effect of such reduction
on interconnection charge revenues of NTT for fiscal year 2000 was
approximately (Yen)110 billion. The adverse effect of the reduction in
interconnection charges on NTT's operating revenues is partially offset by the
cost-savings of these reduced charges to NTT DoCoMo and NTT Communications.
NTT is promoting greater utilization of telephones through marketing and
promotion of telephone subscriber services and other network services.
Cellular Telephone Services
During fiscal year 2000, the market in Japan for cellular telephones
continued to expand and the total number of cellular telephone subscribers
increased by 23.1% to reach a new high of 51.1 million. While NTT DoCoMo
subscriber growth was not as high as it was in previous years, as a result of
the introduction of the i-mode service, which connects users to various types
of on-line Internet services, and other new services and reductions in monthly
and call charges, the number of NTT DoCoMo subscribers rose substantially to
29.4 million, a 22.8% increase over the previous fiscal year.
22
<PAGE>
PHS Services
Due to the introduction by NTT DoCoMo of 64K data communication technology,
and of "Doccimo", which offers features of both cellular and PHS, and other
factors, the number of PHS subscribers rose 6.9% over the previous fiscal year
to 1.44 million.
Telegraph Services
Operating revenues from telegraph services fell 3.4% to (Yen)83 billion in
fiscal year 2000, accounting for 0.8% of operating revenues.
The total number of telegrams sent dropped 5.8% in fiscal year 2000, from
36.2 million to 34.1 million. Although the number of communications made by "D-
MAIL," a telegram service that makes use of the Internet, and the number of
telegrams for birthday and Christmas increased steadily during the fiscal year,
this did not fully offset the continued decline in the use of telegrams for
weddings and condolences.
Leased Circuit Services
Operating revenues from leased circuit services decreased 1.4% in fiscal year
2000 to (Yen)500 billion, accounting for 4.8% of operating revenues. This
service category includes conventional leased circuits, high-speed digital
circuits, ATM Mega Link, ATM Share Link and other related services.
Expanded use of the Internet has led to increased demand for Internet service
providers and prompted increased telecommunications between computers. There
has also been widespread construction of LANs, WANs and Intranets in the
corporate sector. This has resulted in a notable shift in demand with the focus
on high-speed digital telecommunication services. With respect to ATM leased
circuit services, there was a particularly noticeable increase in the demand
for core circuits for large-capacity LANs and private networks.
The number of high-speed digital circuits of NTT East and NTT West was
244,000 and 205,000 at the end of fiscal year 2000, respectively, and the
number of conventional leased circuits of NTT East and NTT West was 448,000 and
394,000, respectively.
NTT Communications reduced charges for its long-distance "High-Speed Digital
Leased Circuit" and "ATM Mega Link" services in October 1999, and for its
medium- to high-bandwidth "ATM Mega Link" service in March 2000.
Data Communication Facility Services
Operating revenues from data communication facility services increased 3.6%
in fiscal year 2000 to (Yen)397 billion, or 3.8% of operating revenues. During
the fiscal year, revenues grew because of the provision of stable services to
existing users, and the development of new systems and the additional functions
for existing systems of financial institutions and public sector organizations.
Integrated Services Digital Network (ISDN)
Operating revenues from ISDN services increased 47.3% in fiscal year 2000 to
(Yen)819 billion, or 7.9% of operating revenues. Most of the increase in
revenues resulted from an increase in the number of subscribers. NTT's ISDN
services comprise INS-Net 64 and INS-Net 1500. In line with rising demand for
Internet access and connection lines, in September 1999 NTT introduced two "i-
Ai Plan" fixed-charge discount services for INS-Net 64 to further promote
Internet use. To provide improved convenience while expanding penetration, an
additional INS-Net 64 service, "i-number", was introduced enabling users to
employ a second telephone number as well as their current number.
23
<PAGE>
Both INS-Net 64 and INS-Net 1500 showed dramatic growth in fiscal year 2000.
The number of INS-Net 64 subscribers increased 66.8% to 6.6 million, and the
number of INS-Net 1500 subscribers increased 72.1% to 82,100. There was also a
large increase in traffic.
Sale of Telecommunication Equipment
Operating revenues from the sale of telecommunication equipment rose 12.8% in
fiscal year 2000 to (Yen)1,138 billion, accounting for 11.0% of operating
revenues.
In line with the increased use of the Internet and the demand for ISDN and
other equipment NTT has emphasized the introduction of new products such as IP
products featuring computer telephony integration ("CTI") functions, and
actively promoted products meeting the needs of corporate users.
Sales of cellular telephone terminals and PHS terminals increased 21.7% and
45.8% respectively.
Other Services
Operating revenues from other services rose 18.3% in fiscal year 2000 to
(Yen)1,052 billion, accounting for 10.1% of operating revenues. The other
services category consists of digital data exchange, facsimile network (F-Net),
OCN services, frame relay, pocket pager, systems development services and other
services.
OCN
Reflecting an increase in Internet usage, the number of OCN Dial Access
service subscribers reached 1,111,000. As a result, the total number of
subscribers increased by 140.0% to 1,147,000 at the end of fiscal year 2000.
During fiscal year 2000, NTT Communications reduced charges for its OCN Dial
Access service and introduced a new charge plan, OCN Natural. In addition, NTT
Communications reduced monthly rates for its OCN Economy, Super OCN and
Business OCN services, and startup charges for its OCN Dial Access service and
other services. NTT Communications also introduced OCN PC Pack to help
customers begin using the Internet easily and inexpensively, which helped to
increase Internet users.
Frame Relay
Within its frame relay services, NTT Communications lowered the fixed charges
of "Super Relay FR" and enhanced the service with the addition of Arcstar 21,
an Internet protocol virtual private network ("IP-VPN") service that enables
closed group telecommunications with pre-designated partners. As a result of
the above factors, the number of subscribers increased 70% to 75,000 at the end
of fiscal year 2000.
Operating Expenses
Operating expenses increased 6.0% in fiscal year 2000 to (Yen)9,560 billion.
Although the total number of employees continued to decrease in fiscal year
2000, overall there was a slight decline of only 0.2% as a result of additional
employees being added through the consolidation of new companies. An increase
in severance and pension-related costs and the accrual of compensated absences
as a result of non-application of SFAS 71 led to an increase in personnel
expenses of (Yen)34 billion to (Yen)2,401 billion.
Depreciation, amortization and maintenance costs decreased by 1.2% or (Yen)41
billion to (Yen)3,394 billion. This reflected reduced capital investment
overall despite increased NTT DoCoMo capital investment.
Other operating expenses increased (Yen)549 billion to (Yen)3,764 billion due
mainly to increased agency commissions and sales costs for terminal equipment
as a result of high NTT DoCoMo subscriber growth and a steady shift to enhanced
terminal equipment.
24
<PAGE>
As a result of the above factors, operating income increased (Yen)112
billion, or 15.8%, to (Yen)824 billion.
Net Income
Although operating income increased, due principally to increased operating
income from NTT DoCoMo mobile telecommunications services, net income decreased
by 46.1% in fiscal year 2000 to (Yen)299 billion from the previous fiscal year.
Net income in fiscal year 1999 increased sharply by 158.5% to (Yen)554 billion
from fiscal year 1998 as a result of the sale of NTT DoCoMo shares in fiscal
year 1999 partially offset by the extraordinary one-time loss of (Yen)462
billion stemming from NTT's discontinuance of its application of SFAS 71 in
fiscal year 1999.
Interest expenses in fiscal year 2000 decreased by 19% from fiscal year 1999
to (Yen)175 billion due in part to the decrease in both short-term and long-
term market interest rates and due in part to the decrease in the outstanding
principal amount of NTT's long-term borrowings.
The effective tax rate in fiscal year 2000 decreased to 41.3%, compared with
51.2% in fiscal year 1999, principally due to the decrease in the statutory tax
rate to 41.0% in fiscal year 2000 from 48.0% in fiscal year 1999. The decrease
in the effective tax rate had a positive impact on NTT's net income.
An increase in minority interest in consolidated subsidiaries from (Yen)24
billion in fiscal year 1999 to (Yen)115 billion in fiscal year 2000 is
accounted for by an increase in the relative percentage ownership of minority
interests resulting from the sale of NTT DoCoMo's shares by NTT and NTT
DoCoMo's sale of its own new shares in October 1998.
Fiscal Year 1999 compared with Fiscal Year 1998
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. Subscribers for cellular
telephone services grew substantially, leading to an increase in total network
traffic. However, the shift to cellular and ISDN services among users, combined
with the effects of the sluggish Japanese economy, caused the number of
telephone subscriber lines to decline.
Telephone Subscriber Services
Due to an increase in sales of ISDN 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 was attributable to a shift from telephone
subscribers.
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 ISDN 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, were expected to increase NTT's revenues by (Yen)15 billion per
12-month period.
Interconnection rates 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
25
<PAGE>
approximately (Yen)68 billion. The adverse effect of the reduction in
interconnection rates on NTT's operating revenue is partially offset by the
cost-savings of these reduced charges to NTT group companies, including NTT
DoCoMo.
Cellular Telephone Services
The market in Japan for cellular telephone services continued to expand
vigorously, and the total number of cellular telephone subscribers climbed
31.7% during fiscal year 1999 to reach a new high of 41.5 million. While NTT
DoCoMo subscriber growth was not as rapid as in previous years, the number of
NTT DoCoMo's subscribers rose to 23.9 million, a 32.9% increase over the
previous fiscal year. In fiscal year 1999, traffic increased in terms of both
the number of calls and total hours of use.
PHS Services
On December 1, 1998, NTT'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. NTT believes that the transfer to NTT DoCoMo has
created synergistic effects and allows NTT DoCoMo to provide a comprehensive
set of mobile communications services.
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.
The total number of telegrams sent dropped 3.7% in fiscal year 1999, from
37.6 million to 36.2 million. 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 32.1 million.
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.
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 Mega Link 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 228,000. However,
the number of conventional leased circuits decreased 8.8% to 822,000 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.
Data Communication Facility Services
Operating revenues from data communication facility services increased 2.9%
in fiscal year 1999 to (Yen)383 billion, or 3.9% of operating revenues. NTT,
through its subsidiary NTT DATA, launched a number of new services for national
and local government institutions.
26
<PAGE>
Integrated Services Digital Network (ISDN)
Operating revenues from ISDN services increased 51.2% in fiscal year 1999 to
(Yen)556 billion or 5.7% of operating revenues. Most of the increase in
revenues resulted from an increase in the number of subscribers. Growth in ISDN
services continued to be driven by rising demand for Internet access and
connection lines for LANs.
Continuing the rapid growth seen in fiscal year 1998, 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 47,700. ISDN traffic also recorded strong growth.
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.
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 strong, increasing 9.4% in
fiscal year 1999.
Other Services
Operating revenue from other services rose 4.1% to (Yen)889 billion,
accounting for 9.1% of total revenues.
OCN
Reflecting a substantial increase in Internet usage, the number of
subscribers for NTT's "OCN Dial Access" services rose substantially during
fiscal year 1999, with the number of installations rising over 400,000. As a
result, the total number of OCN subscribers increased 201.4% to 478,000. 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.
Frame Relay
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 process of this service and other
marketing initiatives, the number of frame relay subscribers increased by
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 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.
27
<PAGE>
Other operating expenses increased by (Yen)168 billion to (Yen)3,215 billion
due mainly to growth in agency commissions, sales expenses for terminals as a
result of high NTT DoCoMo subscriber growth and increased 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 was 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 had been realized in fiscal year 1999.
As a result, the effective tax rate in fiscal year 1999 decreased to 51.2%,
compared with 63.8% in fiscal year 1998.
Liquidity and Capital Resources
Fiscal Year 2000 compared with Fiscal Year 1999
Financing and Capital Resources
Net cash provided by operating activities in fiscal year 2000 amounted to
(Yen)2,796 billion, compared with (Yen)2,365 billion in fiscal year 1999,
reflecting, in part, an increase in accrued consumption tax in fiscal year 2000
and a decrease in such tax in fiscal year 1999. NTT used this cash to acquire
property, repay interest-bearing debt, make investments in affiliates and pay
dividends.
Net cash used in investing activities in fiscal year 2000 increased to
(Yen)2,934 billion compared with (Yen)632 billion in fiscal year 1999 primarily
as a result of the proceeds from sales of subsidiary stock in fiscal year 1999,
which amounted to (Yen)2,213 billion. Net cash used in investing activities in
fiscal year 2001 will be affected by the purchase by NTT Communications of
Verio, Inc in a transaction valued at approximately (Yen)550 billion, the
investment by NTT DoCoMo in KPN Mobile in a transaction valued at approximately
(Yen)407 billion and the investment by NTT DoCoMo in Hutchison 3G in a
transaction valued at (Yen)185 billion.
Net cash used in financing activities in fiscal 2000 amounted to (Yen)363
billion compared with net cash of (Yen)990 billion used in financing activities
in fiscal year 1999. In fiscal year 2000, NTT paid a special dividend of
(Yen)5,000 per share in conjunction with NTT's sale of a portion of its
interest in NTT DoCoMo and repurchased 77,410 shares of its common stock at an
aggregate cost of approximately (Yen)120 billion. Net cash used in financing
activities also reflected an increase of (Yen)154 billion in short-term
borrowings in fiscal year 2000 versus a decrease of (Yen)393 billion in short-
term borrowings in fiscal year 1999. 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 2000 from issues of long-
term debt was (Yen)678 billion. This sum included corporate bond offerings
denominated in both Japanese yen and Euros. For a further description of NTT's
debt, see Note 9 of the Notes to Consolidated Financial Statements.
NTT DoCoMo expects to meet its capital requirements from internal funds and
short-term bank loans in the near term. Based on market conditions, NTT DoCoMo
will consider a number of financing options to meet its capital requirements
for the long term including bank loans and equity and debt issuances.
28
<PAGE>
Liquidity
As of March 31, 2000, NTT had cash and cash equivalents short-term
investments with principal maturities of less than three months of (Yen)1,155
billion, compared with (Yen)1,657 billion a year earlier. Cash equivalents
represent a temporary cash surplus used to repay debts and make capital
investments, and as working capital. Accordingly, the balance of cash
equivalents fluctuates each fiscal year depending on particular funding and
working capital requirements.
Capital Investments
Capital investments for property, plant and equipment and intangible assets
computed on the basis of cash and other consideration paid during fiscal year
2000 were (Yen)2,729 billion, compared with (Yen)3,088 billion in fiscal year
1999. Investments consisted principally of the expansion and upgrading of ISDN,
OCN, frame relay and mobile communications including i-mode and other
multimedia services, and the opticalization of access networks.
NTT has shifted its capital investment from planned telecommunications
infrastructure development to a strategy of investing in services according to
demand. Capital investments in fiscal year 2001 will focus on the expansion of
ISDN, OCN and mobile multimedia services and international networks in line
with increased demand for the Internet. Since investment in fixed-line
telephone services is projected to decrease in fiscal year 2001, NTT expects
total capital investment to decline in the coming fiscal year.
As of March 31, 2000, NTT had outstanding commitments for the purchase of
property, plant and equipment of approximately (Yen)458 billion, principally
reflecting capital investment expenditures for fiscal year 2001. NTT expects
the funds needed for such commitments to be met primarily from net cash
provided by operating activities.
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 DoCoMo and NTT
DATA), NTT invested in property, plant and equipment, paid back interest-
bearing debt, made investments in subsidiaries and affiliates and paid
dividends.
Net cash used in investing activities in fiscal year 1999 declined to
(Yen)632 billion compared with (Yen)2,909 billion in fiscal year 1998 primarily
as a result of the proceeds from sales of subsidiary stock in fiscal year 1999,
which amounted to (Yen)2,213 billion.
Capital investments for property, plant and equipment and intangible assets
computed on the basis of all cash and other consideration paid 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.
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.
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.
29
<PAGE>
Capital Resources
As of March 31, 1999, NTT 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. 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 also invested in research and development activities and the renewal and
upgrading of the existing network infrastructure.
As of March 31, 1999, NTT 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 expects the funds needed for these
commitments to be met from net cash provided by operating activities.
SFAS 131 Segment Information
On April 1, 1998, NTT adopted Statement of Financial Accounting Standards No.
131: "Disclosures about Segments of an Enterprise and Related Information."
SFAS 131 requires public business enterprises to report information about
operating segments in their financial statements and also requires that they
report information about their products and services, the geographic areas in
which they operate and their major customers. As a result of the application of
SFAS 131, NTT's results are now segmented according to four primary lines of
business: wireline services, wireless services, data communication services and
other services.
The wireline segment 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 DoCoMo and its subsidiaries, includes:
. cellular services;
. PHS services;
. pocket pager services; and
. other related services.
The data communication segment, provided by NTT DATA, includes:
. data communication facility services;
. systems integration services; and
. other related services.
30
<PAGE>
The other services segment, provided by other NTT consolidated subsidiaries,
includes:
. the management of telecommunications facilities;
. the sale and maintenance of telecommunications equipment;
. the loan of real estate;
. the sale of telephone cards; and
. certain other services.
See Note 14 to the Notes to Consolidated Financial Statements.
In fiscal year 2000, NTT's operating revenues increased 6.7% to (Yen)10,383
billion and its operating income increased 15.8% to (Yen)824 billion. Operating
revenues from wireline services increased 1.2% to (Yen)6,209 billion as the
increase of ISDN subscribers and usage offset a decline in telephone subscriber
lines. Operating income from wireline services decreased 16.3% to (Yen)70
billion due to an increase in severance and pension-related costs as a result
of the non-application of SFAS 71. The non-application of SFAS 71, which was
effective only for the second half of fiscal year 1999, led to an increase in
personnel expense in fiscal year 2000 compared to fiscal year 1999. Operating
revenues from wireless services increased 17.0% to (Yen)3,927 billion due to a
substantial increase in the number of cellular telephone subscribers. Operating
income from wireless services increased 11.8% to (Yen)523 billion as a result
of the increase in operating revenues offset partially by an increase in
expenses associated with adding new subscribers and enhanced terminal
equipment. Operating revenues from the data communications segment increased
1.6% to (Yen)716 billion. Operating revenues from the other segment increased
47.8% to (Yen)2,180 billion due to dividends from NTT's subsidiaries, receipt
of payment for providing management services through contracts with NTT's
subsidiaries and payment for NTT fundamental R&D activities through contracts
with each of NTT's subsidiaries which uses the results of the R&D activities.
Operating income from data communication services increased 31.3% to (Yen)39
billion and operating income from other services increased 119.5% to (Yen)115
billion.
31
<PAGE>
BUSINESS
NTT is the largest provider of wireline and wireless voice, data, Internet
and related telecommunications services in Japan and operates one of the
largest telephone networks in the world. Its predominant business is providing
nationwide telephone service. The telecommunications services it provides 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. Revenues from each of these
classes over the last three fiscal years are as follows:
<TABLE>
<CAPTION>
For the years ended March 31,
-----------------------------------------------------
1998 1999 2000
---------------- ---------------- -----------------
(billions of yen)
<S> <C> <C> <C> <C> <C> <C>
Operating Revenues
Telephone............... (Yen)6,306 66.7% (Yen)6,300 64.8% (Yen) 6,394 61.6%
Telegraph............... 92 1.0 86 0.9 83 0.8
Leased circuit.......... 488 5.2 507 5.2 500 4.8
Data communication fa-
cility................. 373 3.9 383 3.9 397 3.8
ISDN.................... 368 3.9 556 5.7 819 7.9
Sale of telecommunica-
tion equipment......... 970 10.3 1,009 10.4 1,138 11.0
Other................... 853 9.0 889 9.1 1,052 10.1
---------- ----- ---------- ----- ----------- -----
Total............... (Yen)9,450 100.0% (Yen)9,730 100.0% (Yen)10,383 100.0%
========== ===== ========== ===== =========== =====
</TABLE>
NTT has experienced compound annual growth in operating revenues of 4.8%
during the last three fiscal years. For the fiscal year ended March 31, 2000,
NTT reported operating revenues of (Yen)10,383 billion, operating income of
(Yen)824 billion and net income of (Yen)299 billion.
NTT was established under the Nippon Telegraph and Telephone Corporation Law,
or NTT Law, and is responsible for providing nationwide telephone services and
for promoting research in telecommunications technologies and disseminating the
results of its research. Each of the NTT parent company, NTT East and NTT West
are subject to regulation of certain aspects of its management under the NTT
Law. NTT East, NTT West, NTT Communications and NTT DoCoMo, together with other
Type I Carriers (defined as companies which provide telecommunications services
through their own network facilities), are regulated by MPT under the Telecom
Business Law.
Competitive Strengths
NTT believes that the following are its principal competitive strengths:
Leading Market Position
NTT is the leading telecommunications services provider in each of its
principal domestic telecommunications services markets: local, long distance
and wireless services. NTT's position in each of these markets provides it with
strong cash flow and a stable earnings base.
Extensive Customer Base in Each Market Segment
NTT has an extensive customer base in each of its principal domestic
telecommunications services markets. As of March 31, 2000, NTT had
approximately 55.3 million fixed line subscribers and approximately 7.4 million
ISDN subscribers (assuming 10 average lines per INS-Net 1500 subscriber). As of
July 31, 2000, NTT had approximately 31.6 million cellular subscribers and the
number of i-mode service subscribers reached 10 million in August 2000. NTT is
able to leverage these extensive customer bases to gain new subscribers to, and
increase sales of, Internet and data transmission related services such as
NTT's ISDN, OCN and i-mode services.
32
<PAGE>
Most Extensive and Advanced Network
NTT has the most extensive and advanced telecommunications infrastructure and
network in Japan. NTT has nationwide wireline, wireless and IP networks. NTT
continually expands and upgrades these networks. For instance, NTT made
extensive investment in upgrading and modernizing its fixed line networks and
completed full digitization of its fixed line networks in December 1997. This
upgrade provided the capability for the nationwide ISDN services currently
provided and for the fiber-to-the-home, or FTTH, services scheduled to be
provided in the near future. Additionally, NTT has almost completed the
conversion of its trunklines for long-distance and IP services into fiber optic
cables.
Leader in Research and Development of Technology for Fixed and Wireless Data
Transmission, Internet and Related Technologies
By further developing NTT's digital network, NTT is able to provide advanced
services necessary for developing Internet related businesses such as high-
speed data transmission, Internet services, information communications services
and e-commerce transactions. In addition, NTT believes that, by introducing the
latest fiber optic technology, NTT is in a position to provide customers with
competitively priced Internet and data transmission related services.
Furthermore, by concentrating its basic research and development functions at
the NTT parent company, NTT believes it is able to efficiently develop next
generation core technologies in advance of competitors.
Largest Beneficiary of Increasing Demand for Internet and Data Transmission
NTT has experienced strong growth in Internet and data transmission related
businesses. With the recent rapid expansion in demand for Internet and high-
speed data transmission related services in Japan, NTT believes that its
advanced technologies and modern networks, including the last mile to
customers, have positioned it to be the largest beneficiary of the growth in
this market.
Extensive Wireless Businesses with Dominant Market Share in Japan
NTT DoCoMo is one of the largest wireless services providers in the world
with approximately 29.4 million subscribers and a market share in Japan of
approximately 57.4% as of March 31, 2000. Japan is the third largest wireless
market in the world in terms of the number of subscribers. During fiscal year
2000, total cellular subscribers in Japan increased approximately 23.1% to 51.1
million as of March 31, 2000. The subscriber base and revenues of NTT DoCoMo
are expected to continue to grow in the near-to-medium term, although it is not
likely that they will continue to grow at historical rates. In response to
increasing demand for wireless Internet and data transmission services, NTT
DoCoMo introduced its i-mode service in February 1999. The number of
subscribers to NTT DoCoMo's i-mode service, which provides users with various
types of wireless Internet services including mobile banking, reached 10
million in August 2000. NTT DoCoMo is also one of the world's leading companies
in the development of a third generation wireless technology known as IMT-2000,
which should allow the provision to NTT DoCoMo's subscribers with the ability
to deal with a wide range of content such as voice, data and animation in a
wireless environment.
Strong Systems Integration and IT services
NTT DATA is the largest provider of information communication systems and
computer networking in Japan. NTT DATA provides strategic planning, systems
planning, systems design and installation and systems maintenance and
facilities management to a wide range of governmental, financial and industrial
clients, with an emphasis on outsourcing services in recent periods. NTT
expects that NTT DATA will continue to grow as the government agencies,
financial institutions and leading corporations with which NTT DATA has strong
relationships continue to invest in information technology.
33
<PAGE>
Strong Consolidated Financial Performance
NTT has shown strong and stable growth in consolidated operating revenues for
the past five years with operating revenues of (Yen)10.38 trillion for fiscal
year 2000. For the same fiscal year, NTT's consolidated operating income was
(Yen)824 billion and adjusted EBITDA was (Yen)3.45 trillion.
Strategy
NTT developed a three-year business plan for the period of fiscal years 2001
through 2003, the first such plan, as an expression of the business direction
of NTT as a whole and steps to be taken by each NTT group company in pursuit of
a common objective. The plan will be reviewed every year to ensure a timely and
sensitive response to the rapidly changing market, a process which will
establish the operational policy of NTT as a business based on a holding
company system.
Transformation to Global Information Sharing Corporate Group
NTT seeks to grow its business by developing from a domestic provider of
conventional telecommunications services to a global provider of comprehensive
information and telecommunications services. As communications technology
develops, communications service providers are increasingly able to transmit
digitized information in a more efficient and cost-effective manner through
high speed networks based on fiber optic and other sophisticated technologies.
Demand for seamless, worldwide networks that provide value-added services and
information, such as Internet services and mobile computing, is increasing.
There is also increasing demand for platforms used on these networks for
applications, including data centers, Web and application hosting services and
e-commerce, and for information content carried through these networks,
including music, books and other media. NTT calls this expansion of
communications services, both in terms of functions and media as well as the
explosive increase in the quality and quantity of information, "Information
Sharing." NTT intends to maximize the business opportunities presented by
trends related to Information Sharing by expanding its business to include the
construction of value-added networks and the development of related equipment
platforms and content as well as by actively developing its mobile, IP network
and platform businesses with efforts focused on international expansion.
Following its reorganization on July 1, 1999, NTT categorized its group
companies into four broad categories:
. regulated companies--NTT East and NTT West
. competitive companies--NTT Communications, NTT DoCoMo and NTT DATA
. management resource utilization companies--support the main NTT group
companies listed above
. new business development companies--develop new businesses for untapped
markets
The NTT parent company has established missions and performance criteria for
each category of company. Regulated companies, which provide local
telecommunication services and are subject to regulation under the NTT Law, are
to reduce costs, provide stable and high-quality telecommunication services,
and promote Information Sharing businesses as local access providers.
Competitive companies, Type I carriers that are not subject to the NTT Law, are
to strengthen competitiveness and to lead the development of Information
Sharing services. Management resource utilization companies are to pursue
efficiency and to develop related business opportunities based on existing
know-how. New business development companies are to develop new business
opportunities, establish core competencies, enhance competitiveness through
investments and partnering and publicly list at the appropriate stage of
development.
The NTT parent company has also set clear consolidated financial targets
based on EBITDA margin, free cash flow and return on capital employed (ROCE).
In order to achieve these financial targets, the NTT parent company sets
management goals for each company that are in line with the missions for each
category of NTT group company. The NTT parent company also regularly reviews
and supervises the operations and performance of, and provides feedback to,
each group company.
34
<PAGE>
To achieve its goal of developing from a domestic provider of conventional
telecommunications services to a global provider of comprehensive information
and communications services and to maximize the benefits of the reorganization
and strengthen the competitive position of each of the NTT group companies, NTT
formulated the following strategies:
Promote Development of Information Sharing Businesses
NTT seeks to promote Information Sharing businesses by:
. Maximizing the use of NTT's strengths, its advanced network and
extensive customer base to actively expand ISDN, ADSL and other
broadband services, leased circuit line and i-mode businesses;
. Using existing fiber optic access cable to expand in the near future the
range of low-cost and diverse fiber optic access services, such as high-
speed IP connection services and LAN-style optical communications
services;
. Increasing the number of subscribers to ISP services such as OCN through
the provision of attractive service menus and pricing options;
. Further expanding platform and content-related businesses, including
data center, server housing, hosting, and ASP services, and
verification, billing and settlement and related e-commerce platform
services;
. offering customers further improved cellular technology, products and
services to provide full-scale, high-quality mobile Internet and data
communications related services using i-mode and IMT-2000 technology;
. capturing increasing corporate demand for information technology
services using its capacity to offer total solutions and full-line
network services; and
. continuing comprehensive research and development activities.
Strengthen the Competitiveness of Traditional Voice Businesses
NTT seeks to strengthen the local, long distance and wireless voice
communications businesses by:
. adopting flexible and effective pricing strategies that are responsive
to the competitive conditions in the local, long distance, international
and wireless communications markets, in particular, maintaining cost
competitiveness through the operation of the unregulated group companies
that are in sound financial condition and have relatively few employees;
. diversifying pricing and service options in line with customer demand;
and
. improving the quality of wireless transmission.
Improve Efficiency
NTT seeks to improve the efficiency of its operations. In particular, NTT
East and NTT West formulated a mid-term restructuring plan in November 1999 and
is currently improving efficiency by:
. shifting the focus of capital investment from conventional network
services to demand-driven customer services such as IP network and IMT-
2000 related network services to reduce consolidated capital investment;
. reducing high personnel costs associated with the current size and age
structure of its workforce by efficiently reallocating personnel among
the NTT group companies, reducing the number of new hires, further
shifting from a seniority-based compensation system to a merit-based
system in order to raise operating revenue per employee and reduce
personnel cost as a percentage of operating revenue; and
35
<PAGE>
. cutting overall expenses and reducing transaction fees among the NTT
group companies by improving efficiency of such companies and finding
new markets outside the NTT group.
Strengthen International Operations
NTT seeks to strengthen international operations by:
. Wireless. Leveraging the strength of the i-mode and IMT-2000
technologies to invest in and form alliances with the world's major
telecommunications companies, and establishing the de facto standards
for the mobile Internet by forming partnerships with the world's leading
multimedia providers;
. IP Network. Developing a global IP network and IP connectivity,
primarily in Asia and North America, in order to respond to the
borderless needs of Japanese global companies and other global companies
seeking to enter the Japanese and Asian markets; and
. IP Platform. Using the strength of NTT to capture a significant share of
the rapidly growing Internet-related (e.g., e-commerce) market, while
promoting IP platform businesses such as ASP services and data centers
globally through forging partnerships and alliances.
Reorganization
On July 1, 1999, NTT was reorganized into a holding company structure with
NTT's local and long distance business being transferred to three new wholly-
owned subsidiaries: NTT East, NTT West and NTT Communications. NTT East
provides regional telecommunications services in the Hokkaido, Tohoku, Kanto,
Tokyo and Shinetsu regions of Japan and related services. NTT West provides
regional telecommunications services in the Tokai, Hokuriku, Kansai, Chugoku,
Shikoku and Kyushu regions of Japan and related services. NTT Communications
provides domestic inter-prefectural telecommunications, other network services
and data transmission services and commenced offering international
telecommunications services on a full-scale basis on October 1, 1999.
The NTT parent company continues to exist but operates primarily as a holding
company. The principal sources of the NTT parent company's cash revenues
consist of three categories. The NTT parent company receives:
.dividends from its subsidiaries;
.payment for providing management services through contracts with its
subsidiaries; and
. payment for its fundamental R&D activities through contracts with each
of its subsidiaries which use the results of the R&D activities.
The NTT parent company is directly responsible for formulating and promoting
to group companies the overall strategy of NTT, for setting financial targets
and for basic research and development for the group. The presidents of NTT
East, NTT West, NTT Communications, NTT DoCoMo, NTT DATA and the NTT parent
company meet regularly to discuss strategy for the group. Each of the companies
within NTT operates autonomously, subject to discussing with the NTT parent
company certain fundamental business decisions such as entry into new material
lines of business and the fundamental conditions of financings from financial
institutions.
In connection with the reorganization, the amendments also provide, among
other things, 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 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
36
<PAGE>
Ministry of Posts and Telecommunications. Under this arrangement, because 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. There can be no assurances that NTT West
will not continue to report losses following the expiration of the three-year
period during which NTT East is permitted to bear a portion of NTT West's
costs.
NTT's reorganization was effected pursuant to amendments to the NTT Law
passed by the Japanese Diet in June 1997 implementing a plan proposed by MPT,
and accepted in principle by NTT. The Basic Principles for the reorganization
announced in December 1997 by the Ministry of Posts and Telecommunications
pursuant to these amendments provide for certain conditions to ensure fair
competition with which NTT has to comply following the reorganization,
including a requirement that NTT East and NTT West have separate directors from
NTT Communications, NTT Communications may not procure equipment jointly with
the NTT parent company and NTT East and NTT West, and NTT East and NTT West
deal on the same terms with NTT Communications as they would with other
telecommunications companies. Pursuant to the amendments to the NTT Law, NTT is
required to hold all of the shares of NTT East and NTT West and, for the time
being, will need MPT approval (subject to consultation with the Minister of
Finance) for the disposal of shares originally issued by NTT Communications in
connection with the reorganization.
Principal Business Activities
The following table sets forth certain information concerning NTT's principal
facilities and operations as of the dates and for the periods indicated.
<TABLE>
<CAPTION>
As of or for the year ended
March 31,
----------------------------------
1996 1997 1998 1999 2000
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Telephone services:
-------------------
Telephone subscriber lines (thousands)..... 60,774 61,223 60,186 58,277 55,318
Cellular telephone subscribers
(thousands)............................... 4,936 10,960 17,984 23,897 29,356
PHS subscribers (thousands)................ 384 1,851 1,906 1,349 1,441
Public telephones (thousands).............. 799 794 777 754 736
Telegraph services:
-------------------
Telegrams (thousands)...................... 41,385 40,198 37,564 36,180 34,078
Telex subscribers (thousands).............. 15 12 10 8 6
Leased circuit services:
------------------------
Conventional circuits (thousands).......... 1,001 967 902 822 842
High-speed digital circuits (thousands).... 57 107 169 228 448
Integrated Services Digital Network (ISDN)
services:
------------------------------------------
ISDN subscribers:
INS-Net 64 (thousands)................... 510 1,037 2,286 3,955 6,598
INS-Net 1500 (thousands)................. 10 22 34 48 82
Other services:
---------------
Open Computer Network (OCN) service
subscribers (thousands)................... -- 1 159 478 1,147
Packet exchange services (thousands)....... 466 477 477 463 460
Frame Relay (Super Relay FR) (thousands)... 1 4 16 44 75
Cell Relay................................. -- 0 4 6 301
Pocket pager subscribers (thousands)....... 6,328 5,836 3,908 2,111 1,444
Facsimile network subscribers (thousands).. 812 1,015 1,127 1,212 1,307
Employees (thousands)...................... 231 230 226 224 224
</TABLE>
37
<PAGE>
Telephone Services
NTT is currently the largest provider of telecommunications services in
Japan. Revenues from telephone services were 61.6% of operating revenues in
fiscal year 2000. Telephone services consist of telephone subscriber, cellular
telephone, PHS, public telephone and other services.
Telephone Subscriber Services
Telephone subscriber service is NTT's principal business activity. NTT is the
principal provider of fixed-line telephone subscriber service in Japan. NTT
currently faces significant competition in the long distance market from each
of Japan Telecom Co., Ltd. (JT), DDI Corporation (DDI) and KDD Corporation
(KDD). In addition, it was recently reported that JT and DDI plan to enter the
local telephone service market. Owing to an increase in sales of ISDN services
and cellular telephones and the sluggish economy in Japan, the number of NTT's
telephone subscriber lines in use decreased 2.96 million from the end of fiscal
year 1999 to 55.3 million subscriber lines at the end of fiscal year 2000.
NTT believes that Japanese fixed-line penetration and utilization are low
when compared with the United States and other developed countries. NTT is
constantly trying to promote greater utilization of telephones through
marketing and through the promotion of telephone subscriber services such as
toll free dialing, caller I.D. and voice mail and other network services. NTT
also researches and develops new services that it believes will satisfy
customer needs.
Cellular Telephone Services
NTT's cellular telecommunications and paging businesses are conducted
throughout Japan by NTT's 67.1%-owned subsidiary, NTT DoCoMo, and its eight
regional subsidiaries. NTT DoCoMo and its subsidiaries are Japan's leading
mobile telecommunications services providers and are one of the largest
cellular operators in the world as measured by total number of cellular
subscribers. The market for cellular telephone services continued to expand,
and total cellular telephone subscribers in Japan reached 51.1 million at the
end of fiscal year 2000. The number of NTT DoCoMo subscribers was approximately
31.6 million at July 31, 2000.
The following table sets forth information regarding NTT DoCoMo's subscribers
and its market share:
<TABLE>
<CAPTION>
As of March 31,
-------------------------------------
1996 1997 1998 1999 2000
----- ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Cellular telephone subscribers
(thousands)........................... 4,936 10,960 17,984 23,897 29,356
i-mode (thousands)................... -- -- -- 48 5,603
Market share........................... 48.4% 52.5% 57.0% 57.5% 57.4%
</TABLE>
The following table sets forth information regarding NTT DoCoMo's cellular
telephone traffic:
<TABLE>
<CAPTION>
Years ended March 31,
------------------------
1998 1999 2000
------- ------- ----
<S> <C> <C> <C>
Hours of use (millions)................................ 448 784 1,237
</TABLE>
In February 1999, NTT DoCoMo introduced "i-mode" service, which connects
users to various types of on-line Internet services including mobile banking.
The number of i-mode subscribers was 5.6 million at March 31, 2000. On August
6, 2000, the number of i-mode subscribers reached 10 million. A principal
benefit of i-mode is that it uses the web-based HTML programming language and,
as a result, websites can be adapted to i-mode easily and quickly. As of July
31, 2000, a total of 578 companies were using i-mode portal websites, which
were listed by NTT DoCoMo, to provide mobile online services, such as banking,
news, games and more. In addition, there were more than 18,000 non-listed i-
mode websites.
On September 27, 2000, NTT DoCoMo and American Online Inc., the world's
largest ISP company with extensive experience in the Internet business, entered
into an agreement to jointly develop a new Internet service called fixed mobile
convergence, which will integrate mobile telecommunications networks and fixed-
line telecommunications networks, and provide such services worldwide. On the
same date, NTT DoCoMo agreed with AOL Japan's existing shareholders, AOL,
Mitsui & Co., Ltd. and Nihon Keizai Shimbun Inc., to purchase a 42.3% interest
in AOL Japan.
38
<PAGE>
Through NTT DoCoMo, NTT is a leading supporter of wide-band code division
multiple access, which is known as W-CDMA, one of the standards for the third-
generation wireless communications platforms for the next century. NTT DoCoMo
will offer this service as IMT-2000. IMT-2000 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 video-
conferencing. IMT-2000 technology has gained acceptance in a number of
international markets, with Europe adopting a scheme based on IMT-2000 as its
radio transmission technology 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 intends to commence offering IMT-2000
services in May 2001.
PHS Services
PHS is a wireless telecommunication technology similar to cellular which uses
base stations which are smaller and easier to install than those used for
cellular services. In addition, when first introduced PHS service offered lower
tariffs, smaller and lighter handsets with longer battery life and higher data
transmission speeds than conventional cellular phones. However, as cellular
operators have regularly reduced rates and cellular handsets have continued to
decrease in size and weight, the price and size advantages of PHS have grown
less significant.
Compared to traditional cellular services, PHS services are difficult to use
while mobile, have smaller coverage areas due to lower transmission power, have
limited network coverage and have higher dropped call rates.
NTT DoCoMo has recently introduced a new type of telephone equipment known as
"Doccimo", which offers features of both cellular and PHS, as well as "64K Data
Communication", which caters to the need for high-speed data transmission. The
need for high speed data transmission has been increasing recently due to the
growing demand for mobile computing. NTT DoCoMo also introduced new PHS rate
plans and has lowered rates.
The following table sets forth information regarding NTT DoCoMo's PHS
subscribers and its market share:
<TABLE>
<CAPTION>
As of March 31,
-------------------
1998 1999 2000
----- ----- -----
<S> <C> <C> <C>
PHS telephone subscribers (thousands).................... 1,906 1,349 1,441
Market share............................................. 28.3% 23.3% 25.2%
</TABLE>
Telegraph Services
Under the Telecom Business Law, NTT East and NTT West have sole
responsibility for domestic telegram services. Although the number of
communications made by "D-MAIL," a telegram service that makes use of the
Internet, and the number of telegrams for birthdays and Christmas increased
steadily during the fiscal year, this could not fully offset the continued
decline in the use of telegrams for weddings and condolences. In telex
services, the number of subscribers continued to decline during fiscal year
2000, reflecting the ongoing shift toward the use of facsimile machines, e-mail
and other alternative means of communication.
Leased Circuit Services
NTT provides customized telephone and data transmission services to major
corporate customers that include high speed circuits that are modified to meet
the specific needs of the customer. As a result of the increase in corporate
use of information networks, sales of high-speed data transmission services,
especially
39
<PAGE>
economical 64-kilobit-per-second lines, have been strong. In December 1999, NTT
launched on a trial basis a high-speed and low-cost Internet access service
known as "ADSL Internet Access Service", a flat-rate service based on ADSL
technologies.
ISDN Services
NTT provides Integrated Services Digital Network services, or ISDN services,
which facilitate high-speed access to the Internet. Due to strong demand in the
corporate sector and the growing penetration of Internet services in the home,
ISDN services, which are comprised of INS-Net 64 and INS-Net 1500, have
recorded strong growth. In September 1999, to make Internet use more convenient
for customers, NTT introduced a local fixed-charge discount service known as
"i-Ai plan."
Data Communication Facility Services
NTT, through its subsidiary NTT DATA, develops data communications systems
through the integration of computer hardware and software with
telecommunications networks. Data communications systems include: data
communications systems for individual clients, network data communications
systems to which multiple clients subscribe and ready-made or "packaged" data
communications systems used by many clients including "STAR-ACE", a multi-
shared banking system for regional financial institutions. NTT DATA has
developed a broad-based clientele in three sectors: the public administration
sector, the financial sector and the industrial sector.
Other Services
Other services provided by NTT include:
. digital data exchange services, providing reliable, high quality data
transmission networks;
. facsimile network services (F-Net);
. pocket pager services;
. system development and solution services, which provide for the
development, delivery and sale of packaged data communications systems;
and
. Open Computer Network (OCN) services
. OCN services help computers communicate where there is no need for a
real-time response; and
. Charges for OCN services are calculated based on flat rates and do
not depend on distance or duration of communications and therefore
OCN services provide customers with inexpensive connections to the
Internet and other networks.
. As of March 31, 2000, NTT had 1,147 thousand OCN subscribers.
In response to Internet user demand and by allowing users to connect with
ISPs through NTT's regional IP network, NTT East and NTT West began offering an
IP connection service on a trial basis in certain areas of Tokyo and Osaka in
November 1999, and lowered the monthly rate from (Yen)8,000 to (Yen)4,500 in
May 2000. NTT East and NTT West also added a new service for connection at its
central office (at a monthly rate of (Yen)2,900). NTT East and NTT West have
been expanding the offering of these services to major cities in line with
demand trends. In July 2000, NTT East and NTT West started to offer the
service, "FLET'S-ISDN," and expanded service areas in line with demand trends.
Internet and Data Communications Related Businesses
NTT has experienced strong growth in Internet and data communications related
revenues. NTT's Internet and data communications related business includes high
speed data transmission services and multimedia telecommunications services,
such as video conferencing, full motion video and mobile computing.
40
<PAGE>
The following table sets forth NTT's Internet and data communications related
service revenue:
<TABLE>
<CAPTION>
Years ended March 31,
---------------------------------------------
1998 1999 2000 2000
---------- ---------- ---------- ------------
(billions of yen) (billions of
U.S.
dollars)
<S> <C> <C> <C> <C>
OCN........................... (Yen) 6 (Yen) 24 (Yen) 42 $ 0
Digital data exchange......... 55 67 208 2
High-speed digital circuit.... 192 223 235 2
ISDN.......................... 368 556 819 8
Systems Integration (SI)...... 710 763 794 8
---------- ---------- ---------- ---
Total....................... (Yen)1,331 (Yen)1,633 (Yen)2,098 $20
========== ========== ========== ===
</TABLE>
As part of its Internet and data communications related growth strategy, NTT
completed the upgrade of its network to digital technology in December 1997.
NTT's digital network allows it to offer Internet and data communications
related services such as ISDN, high-speed data transmission services and frame-
relay and cell-relay services.
To deal with the surge in Internet demand, NTT provides a full range of
access services, including not only ISDN but also ADSL and optical access
services. One particular focus is the early development of low-cost and diverse
optical access services in response to the expected growth in demand for high-
speed Internet access, with efforts underway to expand and improve the fiber
optic access network.
NTT believes that deployment of fiber optic cables is important for the
future provision of Internet and data communications related services due to
the superior data transmission capabilities of fiber optic cables. NTT provides
coverage of fiber optic cables in the access network to feeder points for
approximately 100% of major business areas and plans to implement fiber optic
cable 100% nationwide by 2010. A feeder point is the point where a bundle of
cable is separated and normally where the underground cable is exposed at
ground level. Currently, NTT has approximately 250,000 kilometers of fiber
optic cables extending throughout Japan and covering over 90% of major business
areas and over 70% of all business areas with a population of over 100,000. NTT
has recently developed technology to reduce significantly the cost of
installing fiber optic cables to telephone poles near end users.
NTT believes that the deployment of fiber optic cables will allow it to offer
increasingly sophisticated services to its customers, though there are no
assurances as to the extent of demand for these services.
NTT believes that its modern networks and its investment in research and
development have positioned it to exploit opportunities for growth in the
Internet and data communications related market.
Global Businesses
General
In June 1997, the Japanese Diet passed amendments to the NTT Law, which for
the first time allowed NTT to enter the international telecommunications
business and provide global end-to-end services. In September 1997, NTT
commenced offering these services, which were limited initially to data
communications services provided to multinational corporations. NTT began
offering global end-to-end telecommunications services, including voice, on a
full-scale basis on October 1, 1999. These services are provided by NTT's
subsidiary, NTT Communications. NTT is conducting its global telecommunications
activities under the name "Arcstar." As of March 31, 2000, NTT's Arcstar-brand
global communications services were provided in 47 areas.
41
<PAGE>
Prior to the launch of international end-to-end telecommunications services,
NTT was actively involved in establishing carrier businesses and infrastructure
operations in Asia. Since 1992, NTT has invested in and provided technological
know-how to projects in Thailand, the Philippines, Indonesia, Sri Lanka,
Vietnam, Singapore and Malaysia.
Recently, NTT is focusing on the high-growth areas of mobile communications,
IP networks and platforms, and expanding into U.S. and European markets from
its Asian base.
NTT DoCoMo plans to use its global competitiveness and strength in areas such
as i-mode and IMT-2000 technology to build investment and financing ties with
major mobile infrastructure operators in other countries and actively engage in
business development with the objective of the full-scale development of mobile
multimedia services in the U.S. and Europe, as well as in Asia. Joint ventures
and strategic alliances are expected to be formed with the world's leading
multimedia companies with the goal of establishing mobile communications and
other standards.
NTT Communications will spearhead efforts to develop a global IP network and
IP connectivity in Asia and the U.S. in particular, responding to the
borderless needs of Japanese global companies and other global companies
seeking to enter the Japanese and Asian markets.
NTT Communications, NTT DoCoMo, NTT DATA and other NTT companies will combine
their strengths with the goal of capturing a significant share of the rapidly
growing e-commerce market, and expect to engage in the necessary partnering and
alliances to promote globally IP platform businesses such as ASP and data
centers.
Recent Developments
On May 8, 2000, NTT Communications through a U.S.-based subsidiary, entered
into a definitive merger agreement with Verio Inc., a U.S. Internet solution
provider, pursuant to which NTT Communications would acquire a majority of the
shares of Verio at a price of US$60 per share of common stock through a tender
offer and the U.S. subsidiary of NTT Communications would thereafter be merged
into Verio. The transaction is valued at approximately US$5.1 billion. On
September 8, 2000, such transaction was completed. Verio offers a broad range
of Internet solutions, including high-speed access, web hosting, e-commerce,
virtual private networks and other enhanced services. The merger will enable
the combined company to offer seamless, international web-based business
solutions by combining the IP networks and services of the two companies.
On May 9, 2000, NTT DoCoMo signed a Memorandum of Understanding with Dutch-
based Koninklijke KPN N.V. and its subsidiary, a holding company of cellular
operators, KPN Mobile, under which NTT DoCoMo would acquire 15% of the shares
of KPN Mobile for the maximum amount of Euro 5.1 billion. In August 2000, NTT
DoCoMo acquired 15% of the Class A shares of KPN Mobile for approximately Euro
4 billion (US$3.7 billion).
On July 12, 2000, NTT DoCoMo entered into agreements with KPN Mobile and
Hutchison Whampoa Ltd. to invest in Hutchison 3G, which owns a third generation
cellular telephone license in the United Kingdom. NTT DoCoMo invested
approximately (Pounds)1.2 billion (US$1.7 billion) and acquired a 20% interest
in Hutchison 3G and KPN Mobile acquired a 15% stake in Hutchison 3G. NTT DoCoMo
undertook this transaction in order to establish platforms for the swift
introduction of IMT-2000 and mobile multimedia services in European countries
including the United Kingdom. NTT DoCoMo participates in Hutchison 3G
management by designating Hutchison 3G board members and providing technical
assistance.
StarHub, a consortium formed by NTT, British Telecom (BT) and two local
corporations, won licenses from the Singaporean government to provide public
basic telecommunication services, both domestic and international, and public
cellular mobile telephone services. StarHub launched its services in April
2000. In China, NTT established Beijing Telecom NTT Engineering Co., Ltd. with
the Beijing Posts and Telecommunications Administration and now provides
system-integration services for customers mainly in the Beijing area.
42
<PAGE>
NTT also provides facility-based international leased circuit services and
international telephone services. NTT also participates in international
consortia for the construction and maintenance of the "China-U.S. Undersea
Fiber Optic Cable Network" and the "Japan-U.S. Cable Network." Both networks
will be the world's largest-class submarine fiber optic cables linking Japan
and other Pacific Rim countries.
In November 1999, NTT Communications signed an agreement with Australia-based
Davnet Limited concerning a strategic partnership to jointly provide high-
quality network services to corporate customers (in particular multinationals)
in Australia. Under the terms of the agreement, NTT Communications obtained a
49% stake in Davnet Telecommunications Pty Ltd., a subsidiary of Davnet, after
the reorganization of the Davnet Group. The total size of the transaction is
approximately US$78 million. The two companies will jointly provide various IP-
based services and other communication services in the Australian market.
In December 1999, NTT DoCoMo entered into a Share Purchase Agreement with
Hutchison Whampoa Company Limited to acquire a 19% (US$410 million) equity
participation in HTCL, a Hong Kong company that operates a cellular telephone
business in Hong Kong under the Hutchison Whampoa Group, also a Hong Kong
company. NTT DoCoMo is involved in the management of HTCL through technical
support relating to the development of IMT-2000 and mobile multimedia services.
In February 2000, NTT Communications signed an agreement with AT&T to acquire
a 15% interest in AT&T Global Network Services-Japan LLC, known as AGNS-Japan,
part of AT&T Solutions Group, a wholly owned subsidiary of AT&T. NTT
Communications invested US$50 million and allows AGNS-Japan to use the NTT
Communications logo with the AGNS-Japan logo in Japan. NTT Communications and
AT&T will jointly develop and enhance network outsourcing services through
AGNS-Japan.
In June 2000, NTT Worldwide Telecommunications Corporation, a wholly owned
subsidiary of NTT Communications, and Korea Telecom, known as KT, concluded an
Arcstar Service Agreement. Under this agreement, KT is to provide and market
Arcstar services such as Managed Bandwidth Services and Arcstar Managed Frame
Relay Services in South Korea, thereby enabling a wider distribution of these
services.
Competition
NTT faces competition in virtually all aspects of its business, including in
the local, long distance and wireless markets. In addition to current
competitors, new entrants, including foreign telecommunications companies, are
expected to enter each of these markets in the future.
NTT currently faces significant competition in the long distance market from
each of JT, DDI and KDD. This competition resulted in a drop in inter-
prefecture calls between all prefectures in Japan for NTT's fixed line
telephone services in fiscal year 1999 and fiscal year 2000. In February 1998,
NTT reduced the rate for daytime calls over 100 kilometers to eliminate price
advantages held by competitors in the long distance market. This rate reduction
is estimated to reduce annual revenues by approximately (Yen)80 billion. In
April, 2000, NTT Communications simultaneously reduced charges for inter-
prefectural long-distance calls and international phone calls. This reduction
is expected to have an annual impact of (Yen)50 billion on NTT Communications'
operating revenues.
Until recently, NTT faced little or no competition in the market for local
telecommunications services. NTT currently has one principal competitor for
local services in the Tokyo metropolitan area: Tokyo Telecommunications
Network, or TTNet. At March 31, 2000, TTNet had 2.6 million subscribers. NTT
has one principal competitor for local services in the Kyushu area of Japan,
Kyushu Telecommunications Network, or QTNet, which entered the local telephone
market on April 1, 1999. At March 31, 2000, QTNet had 0.5 million subscribers.
To compete more effectively, NTT extended its "Time Plus" discount service to
the whole of Japan. It was recently reported that JT and DDI plan to enter the
local telephone services market in May 2001. Upon the expected introduction of
presubscription in May 2001, telephone subscribers will be able to select their
telecommunications service provider without dialing prefixes by prior selection
of and registry with that
43
<PAGE>
service provider. This will make it easier for telephone subscribers to use a
competing service provider, which is expected to significantly increase
competition from other service providers. In addition, in July 2000, the United
States and Japan reached an agreement to reduce interconnection rates. NTT
expects that this agreement will also significantly increase competition in the
telecommunications industry.
In December 1999, DDI, KDD, and IDO Corporation announced an agreement to
merge as of October 1, 2000. By offering integrated mobile, domestic and
international telecommunications services on a large scale, the new company may
be in a position to compete more effectively against NTT.
Currently, NTT's ISDN services seek to accommodate and stimulate demand for
Internet and data communication related services in the local Japanese market.
NTT has faced increased competition recently and expects to face more
significant competition for market share in the growing Internet services
market from cable television (CATV) operators. CATV operators such as Jupiter
Telecommunications Co., Ltd. and Tokyo Cable Network Inc. intend to bundle
cable television, telephony and high-quality Internet services. In addition,
AT&T and British Telecom (BT) entered the Japanese market through a 30% equity
interest in JT, which is the sole distributor of combined AT&T/BT global
services in Japan. AT&T, BT and JT are jointly developing a high-speed global
Internet network for corporate users. NTT also faces competition from other
companies including MCI WorldCom Japan and new ADSL operators such as Tokyo
Metallic Communications.
NTT DoCoMo's competitors in the cellular market are IDO, DDI Cellular group
and J-Phone group. Despite intense competition, NTT DoCoMo had approximately
57.4% market share of cellular subscribers as of March 31, 2000. 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 and ASTEL
group. DDI Pocket group is the leader among the three PHS group operators with
approximately 57.7% market share, NTT DoCoMo has approximately 25.2% market
share and ASTEL group has approximately 17.1% market share of PHS subscribers
as of March 31, 2000.
Research and Development
NTT believes that its investment in research and development is important to
allow it to develop new products and services and to remain competitive. For
the fiscal years 2000, 1999 and 1998, research and development expenses
amounted to (Yen)357.6 billion, (Yen)381.8 billion and (Yen)288.9 billion, or
3.4%, 3.9%, and 3.1% of operating revenues, respectively.
In the field of telecommunications, demand in the Internet and data
communication related services 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 the Internet and data
communication related services networks is also changing across a wide variety
of areas. Network-mediated cyberbusinesses are just one example of the many
changes in the structure of Information Sharing. In response to these
developments, NTT 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.
To this end, NTT is currently engaged in research and development projects to
develop technology to lower the cost of installing fiber optic wires, to
develop standard protocols for high-speed access telecommunications systems,
and to improve the energy-efficiency of communications equipment. NTT is also
developing technology to facilitate Internet and multimedia development,
including systems to allow digital sound and visual communications, to improve
the protection of intellectual property rights for digital materials, and to
provide ultra-high speed transmission rates for Internet, intranet and other
high-volume applications. NTT DoCoMo and its subsidiaries are developing W-CDMA
in connection with International Mobile Telecommunications-2000, a third-
generation wireless communication platform for the twenty-first century.
44
<PAGE>
Capital Investments
NTT's capital investments for the preceding three fiscal years are shown in
the table below.
<TABLE>
<CAPTION>
For the
year ended
For the years ended March 31, March 31,
-------------------------------- -------------
1998 1999 2000 2000
---------- ---------- ---------- -------------
(billions of yen) (millions of
U.S. dollars)
<S> <C> <C> <C> <C>
Expansion and improvement of
services:
Fixed-line telephone ......... (Yen)1,322 (Yen)1,129 (Yen)931 $ 8,778
Mobile ....................... 544 571 561 5,296
ISDN ......................... 165 153 198 1,863
Leased circuit ............... 97 79 103 972
Data communication facility .. 132 163 177 1,674
Research and development ....... 158 200 103 973
Construction, improvement and
renovation of
office building, etc........... 544 793 656 6,187
---------- ---------- ---------- -------
Total ........................ (Yen)2,962 (Yen)3,088 (Yen)2,729 $25,743
========== ========== ========== =======
</TABLE>
NTT 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's
telecommunications network. NTT completed full digitization of its fixed-line
network in December 1997. This digitization allows NTT to offer various
digital-related services such as ISDN, high-speed digital circuits and frame
relay.
In fiscal year 2000, NTT has made capital investments in an amount below the
levels of the past three fiscal years. NTT has installed fiber optic cables in
the access network for over 90% of business areas and plans to implement fiber
optic cables 100% nationwide by 2010.
Privatization
The total number of outstanding shares of NTT at the time of its
establishment was 15.6 million. Until October 1986, MOF owned 100% of the
outstanding shares of NTT. Between October 1986 and October 1988, MOF sold 5.4
million shares to a variety of individual and institutional investors. As of
November 24, 1995, as a result of a 1.02-to-1 stock split on that date, the
number of outstanding shares amounted to 15,912,000 and MOF owned 10,419,289.24
shares, representing approximately 66% of the outstanding shares.
In December 1990, MOF announced its plan, referred to as the 1990 plan, that
out of the 5.0 million shares then available for sale under the NTT Law, MOF
would sell 2.5 million of these shares at the rate of approximately 0.5 million
shares per fiscal year (with any shares remaining unsold to be sold in future
years based on market conditions), and retain the other 2.5 million shares for
the time being. Until December 1998, no sales had been made as the Government
concluded that market conditions would not permit smooth absorption of the
shares. The NTT Law requires that the disposition of shares by MOF must be
within the limits determined by the Diet in the relevant annual budget.
On December 18, 1998, MOF sold 1.0 million 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 offering reduced MOF's ownership to 9,419,339.24 shares, or
approximately 59%, of NTT as of March 31, 1999.
At the general shareholders meeting on June 29, 1999, it was approved that
NTT would repurchase up to (Yen)120 billion of its shares of common stock from
time to time until the next ordinary general meeting of shareholders in June
2000. On July 12, 1999, NTT announced in Tokyo it would repurchase up to 80,000
shares of its common stock at a set time on the following day through
transactions executed on the Tokyo
45
<PAGE>
Stock Exchange in accordance with applicable Japanese law at a price per share
equal to the closing price on that exchange on July 12. On July 13, 1999, NTT
acquired 48,898 shares of its common stock through such transactions. Of the
shares it repurchased, 48,000 were bought from MOF. On November 12, 1999, MOF
sold the remaining 952,000 shares permitted to be sold under the annual budget
approved by the Diet for the fiscal year ending March 31, 2000. The shares were
sold 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 offering reduced MOF's ownership
to 8,416,855.26 shares, or approximately 53%, of NTT as of March 31, 2000.
On December 20, 1999, the 1990 plan was terminated.
More recently, NTT acquired an additional 28,512 of its shares during the
period from February 4 to February 15, 2000, pursuant to the authority granted
by shareholders at the general shareholders meeting on June 29, 1999. None of
these shares were purchased from MOF. No additional repurchases of shares by
NTT were proposed to, or authorized by, shareholders at the general
shareholders meeting on June 29, 2000.
As of March 31, 2000, MOF owned 8,416,855.26 shares, representing 53.15% of
NTT's 15,834,590 outstanding shares. One million shares are permitted to be
sold under the budget for the fiscal year ending March 31, 2001. These shares
are being sold by MOF as part of this global offering. Upon consummation of the
sale of the 200,000 new shares to be issued and sold by NTT and 1,000,000
existing shares to be sold by MOF in this global offering, MOF will own
approximately 46% of the 16,034,590 shares of NTT that will be outstanding.
It is NTT's understanding that at present the Government has not determined
the number of shares the sale of which will be permitted under the annual
budget to be submitted to the Diet for the fiscal year ending March 31, 2002.
The Government generally proposes its annual budget to the Diet in January of
each year. The fiscal year of the Government begins April 1.
Relationship with the Government
Prior to the global offering, the Government, through the Minister of
Finance, owned approximately 53%, and after the global offering will own
approximately 46%, of the outstanding shares of NTT. For a description of the
Government's ownership of shares of NTT, see "Privatization" and "Principal
Shareholders and Selling Shareholder." The Government, acting through MPT, also
regulates the activities of NTT and certain of its subsidiaries and approval by
MPT is required for the issuance of new shares subject to consultation with
MOF. In addition, the Government is one of NTT's largest customers. NTT
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 the largest shareholder, theoretically has the power to control
most decisions taken at these 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 Japanese
telecommunication carriers including NTT in the interests of national security
and international relations.
Enforceability of Certain Civil Liabilities
NTT is a limited liability, joint-stock company incorporated under the laws
of Japan. All of its directors and executive officers (and certain experts
named in this prospectus) reside in Japan. Substantially all of the assets of
these persons and of NTT are located outside the United States. It may not be
possible, therefore, for investors to effect service of process within the
United States upon NTT or these persons or to enforce against them judgments
obtained in United States courts predicated upon the civil liability provisions
of the federal securities laws of the United States. NTT has been advised by
its Japanese counsel, Tomotsune Kimura & Mitomi, that there is doubt as to the
enforceability in Japan, in original actions or in actions for enforcement of
judgments of United States courts, of liabilities predicated solely upon the
federal securities laws of the United States.
46
<PAGE>
REGULATORY DEVELOPMENTS
Pricing of Telecommunications Services
In connection with measures introduced to promote further competition in the
telecommunications market, changes have been made to the regulations governing
the manner in which telecommunications service providers set prices for their
telecommunications services. In general and subject to certain exceptions,
notification to MPT is all that is required for a Type I Carrier to change the
prices it charges for its telecommunications services, such as long distance
services. However, changes in the prices charged for basic telephone services,
ISDN services and leased circuit services within prefectures will be subject to
a price-cap system described below. Also, changes to prices charged for
interconnection with a Type I Carrier's network are subject to prior approval
by MPT as described below.
Price-Cap System
In order to promote further competition in the telecommunications market, and
as part of the Japanese 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 need to 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, the price-cap will be based on an index which
represents a percentage of current rates. The index will be fixed annually by
MPT. As long as the proposed rates of a Type I Carrier with "designated
telecommunications facilities" do not exceed the amount that would be allowed
under the price-cap, such carriers will not need to obtain approval from MPT
but only need to notify MPT of their rates. Rates in excess of the amounts that
would be allowed under the price-cap will require the prior approval of MPT.
The index currently equals the Consumer Price Index in Japan less a
productivity factor and an exogenous factor. On June 21, 2000, MPT notified NTT
East and NTT West of such index for the one-year period commencing on October
1, 2000. The index for basic telephone services, ISDN services and other
services was set at 97.8, and the index for leased circuit services was set at
97.6.
Beginning on October 1, 2000, NTT East and NTT West will be subject to the
new price-cap system. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Introduction" for a discussion of the
impact of the price-cap on the revenues of NTT East and NTT West.
Pursuant to the price-cap system, on August 31, 2000, NTT East and NTT West
notified MPT of their new rate plans effective October 1, 2000. NTT East and
NTT West will reduce basic telephone services and ISDN usage charges for intra-
prefectural, inter-city calls in excess of 20 kilometers. In addition, NTT East
and NTT West notified MPT of discount plans and will reduce usage charges for
certain high speed digital transmission and ATM leased circuit services. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Introduction" for a discussion of the impact of these rate
reductions on the revenues of NTT East and NTT West.
Certain subsidiaries of NTT are Type II Carriers and are treated differently
from 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.
Interconnection
The Telecom Business Law requires that every Type I Carrier, such as NTT East
and NTT West, must agree to the request of other telecommunications carriers to
access its network through interconnection, subject
47
<PAGE>
to certain limited exceptions. A Type I Carrier maintaining a "designated
telecommunications facility" is required to submit each interconnection tariff
and conditions of interconnection with MPT for approval. Currently, NTT East
and NTT West are the only Type I Carriers obligated to make this 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" is required to
publish each interconnection tariff in accordance with rules 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 rates annually so that they are "fair
and impartial", as defined under the Telecom Business Law, in light of the
costs as calculated in the accounts. In November 1998, NTT submitted its
interconnection tariffs in connection with its "designated telecommunications
facilities" now operated by NTT East and NTT West, including, principally,
local exchanges, and these tariffs were approved in January 1999.
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:
. a bill to amend the Telecom Business law would 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;
. due consideration would 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
. 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 Government of Japan and the U.S. Government 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 rates as much as possible,
within the scope of its existing authority, and ensure that the relationship
between retail rates and interconnection rates would not impair local
competition.
A study group for Long-run Incremental Cost Methodology of the Ministry of
Posts and Telecommunications on September 20, 1999 announced a technology model
for Long-run Incremental Cost Methodology. The model contains two alternative
assumptions with respect to the recovery of costs for a portion of switch
equipment, referred to as feeder Remote Terminals. Under one assumption,
referred to as Model Case A, these costs would be charged through
interconnection rates. Under the other assumption, referred to as Model Case B,
these costs would be recovered through monthly charges.
In February 2000, the Telecommunications Council, an entity created by MPT
for the purpose of making recommendations on telecommunications policy and
regulation, submitted to MPT its report, in which it stated that it would be
appropriate to adopt Model Case A for the time being, and to leave Model Case B
for consideration in the future as there was no consensus in Japan on raising
users' monthly charges. The report also stated that it would be appropriate to
implement the recommended Long-run Incremental Cost Methodology based on the
Model Case A in as short a period as possible, although it would be necessary
to allow for an introductory period, since there would be a serious adverse
effect on the operations of NTT East and NTT West were Model Case A to be
adopted immediately.
48
<PAGE>
At the end of March 2000, an amended Telecom Business Law bill that provided
for the introduction of the Long-run Incremental Cost Methodology was submitted
to the Japanese Diet, and the law was enacted on May 19. Both houses of the
Japanese Diet also adopted a supplementary resolution, which provided that care
be taken so that there would be no adverse effect on providing universal
service, on the operations of NTT East and NTT West, and on user charges, and
that the selection, application, and implementation of a model be handled with
great care so that costs of investment can be recovered effectively and
accurately. The supplementary resolution also provided that a thorough
examination be made of the effectiveness of this method of regulation itself,
which in many foreign countries is only partially implemented, and that any
necessary changes be made. MPT is to issue an order relating to the specific
method of calculation to be used under the amended Telecom Business Law.
The Government of Japan and the U.S. Government had not been able to reach an
agreement on the introduction of Long-run Incremental Cost Methodology-based
rates at the Japan-U.S. Talks on Deregulation and Competitive Policy which had
been held through March 2000. However, in July 2000, as part of continued
discussions, the Government of Japan and the U.S. Government agreed, among
other things, on such introduction. In particular, the Government of Japan and
the U.S. Government agreed that:
. interconnection rates would be reduced 22.5% for GC interconnection and
60.1% for ZC interconnection in comparison to the fiscal year 1999 rates
to be phased in over three years, between fiscal years 2001 and 2003;
. in regard to the above reductions, by the end of fiscal year 2002, NTT
will frontload and implement rate reductions, including decreasing rates
by 80% for both ZC exchange and GC-ZC transmission and by 70% for GC
exchange in comparison to the model interconnection rates based on
estimates of the traffic data from fiscal year 2000. Based on these
plans, by the end of fiscal year 2002, GC rates are expected to decline
by 20% and ZC rates are expected to decline by 50% in comparison to the
fiscal year 1999 rates; and
. by the end of 2002, the Ministry of Posts and Telecommunications will
complete a study on the revision of the model and the treatment of Model
Case B, and the Government of Japan and the U.S. Government will further
discuss interconnection rates for fiscal year 2003.
It is uncertain how the implementation of the Long-run Incremental Cost
Methodology will impact the revenues and expenditures of NTT East and NTT West
as the estimated figures for fiscal years 2001 and 2002 are subject to change
once the final fiscal year 2000 traffic figures become available. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Introduction" for a discussion of the impact of the implementation
of the Long-run Incremental Cost Methodology on the revenues of NTT East and
NTT West.
Universal Services
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 "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. It is possible that it will
become necessary to include ISDN and wireless telephone services, which have
been rapidly spreading in the recent years, in the scope of "universal
services." The report places emphasis on the establishment of a "Universal
Services Fund" and proposed that, through contributions by telecommunications
service providers to the fund, providers of universal services should be
subsidized for the costs incurred to provide these 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. On July 26, 2000, the
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<PAGE>
Ministry of Posts and Telecommunications made inquiries to the
Telecommunications Council concerning the promotion of fair competition in the
Japanese telecommunications market in order to advance the Information
Technology revolution. As part of such inquiry, the issue of securing
"universal services" has been discussed.
Number Portability
The Ministry of Posts and Telecommunications discussed 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 study group's reports (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. Local number portability
will be introduced as early as possible by the end of fiscal year 2001.
Presubscription
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 that service provider. Presubscription is expected to be
introduced in May 2001.
Further Deregulation and Reform
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, together with the elimination of monopolies in the
regional telecommunications markets, and recommended that effective action
should be taken to promote substantive competition between NTT East and NTT
West. This report also included a recommendation that in the future the
reorganized NTT be required to reduce its ownership of NTT DoCoMo to the level
where competition between NTT DoCoMo and NTT's two regional telephone 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 first report and in connection with NTT's
ownership of NTT DoCoMo, it will watch carefully competition between NTT DoCoMo
and NTT's two regional telephone companies. On March 31, 2000, the Government
of Japan further revised its Three-year Program for Promoting Deregulation
stating, among other things, that the reduction of NTT's ownership of NTT
DoCoMo will continue to be considered, taking into account the competition
among cellular phone companies and the competition between NTT DoCoMo and NTT's
two regional telephone companies.
In June 2000, a private research panel of experts on Government Regulation
and Competition Policy under the Fair Trade Commission, or FTC, announced in
its interim report that it is necessary that NTT reduce its ownership in NTT
DoCoMo. NTT continues to maintain that its ownership of NTT DoCoMo does not
have any adverse effect on fair competition in the Japanese telecommunications
market.
On July 26, 2000, MPT made inquiries to the Telecommunications Council
concerning a number of issues relating to the promotion of fair competition in
the Japanese telecommunications market in order to advance the Information
Technology revolution. On the same day, a special department in the
Telecommunications Council was established to discuss this matter. The
department had its first meeting on September 5, 2000. The issues include the
following topics:
.the future status of network structures and the telecommunications
industry;
.the basic framework for competition;
.the status of the NTT Group and assurance of fair competition;
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<PAGE>
. the assurance of universal service;
. the assurance of national security interests in the telecommunications
field;
. R&D systems for the telecommunications industry; and
. policies for ensuring user benefit.
The resolution of these issues is uncertain. NTT believes that it may have a
significant impact on NTT. However, it is too early to predict what reform, if
any, will occur at this time. It has not been decided at this time what action,
if any, may be taken by the Government.
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<PAGE>
DIVIDENDS AND PRICE RANGE OF SHARES AND ADSs
The primary market for the common stock of NTT is the Tokyo Stock Exchange,
also referred to as the TSE. The common stock of NTT has been traded on the
First Section of the TSE since February 1987 and is also listed on all other
stock exchanges in Japan. Application will be made to list the shares offered
in the global offering on the First Section of the TSE, to list ADSs
representing the new shares to be issued and sold by NTT on the New York Stock
Exchange and to list the new shares to be issued and sold by NTT on the London
Stock Exchange.
Tokyo Stock Exchange
The TSE market is a continuous auction market where buy and sell orders
directly interact with one another. In general, orders, either limit or market,
are placed by member broker/dealer firms with the "Saitori" member who
functions solely as a middleman between these firms. The Saitori member
maintains a central order book for each of its "franchise" stocks allocated by
the TSE and matches orders in accordance with price priority and time
precedence.
The TSE has been adopting the following measures to prevent certain short-
term price fluctuations.
Special Bid or Asked Quotes
When there is a major order imbalance, the TSE requires the Saitori member to
indicate a "special bid quote" or a "special asked quote," showing that there
exists a major imbalance between buy and sell orders. A special quote is
publicly disseminated through the market information system of the TSE,
enabling market participants to respond to the imbalance. If contraside orders
come into the market and equilibrium is established at the special quote, the
quote is withdrawn by the Saitori member. Conversely, when the imbalance
continues, the Saitori member renews the special quote, with the approval from
the TSE, upward or downward at an interval of every five minutes or more within
certain specified variations until equilibrium is established.
Daily price limits
In addition to special quotes, the TSE maintains daily price limits for
individual stocks to prevent day-to-day swings in stock prices and also to
provide a "time-out" for publicizing a major price rise or decline in a stock
and resultant evaluation of the situation by the investing public. TSE's daily
price limits are set in terms of absolute yen depending upon the price range of
each stock for the purpose of simplicity. As the price limits simply prohibit
bids and offers at prices beyond the limits, the market for a stock is open for
trading within the limits, even after the stock hits a limit.
The daily price limit also applies to the special quote. Thus, the special
quote cannot be indicated beyond the limit.
The total trading volume in 1999 on the TSE was 151.2 billion shares, with a
daily average of 617.1 million shares.
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<PAGE>
The following table shows the reported high and low sales prices and the
average daily trading volumes of NTT's common stock on the TSE for the periods
indicated. It also provides the closing highs and lows of two TSE stock
indices. The Tokyo Stock Price Index, or 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, 2000, stocks of 1,401 companies were traded
on the First Section of the TSE. The Nikkei Stock Average is a widely followed
unweighted arithmetic average of 225 selected stocks traded on the First
Section.
<TABLE>
<CAPTION>
TSE Closing Nikkei
Price per Share Closing TOPIX Stock Average
------------------- Average daily ----------------- -------------------
High Low trading volume High Low High Low
--------- --------- ------------------ -------- -------- --------- ---------
Calendar Period (yen) (yen) (number of shares) (points) (points) (yen) (yen)
<S> <C> <C> <C> <C> <C> <C> <C>
1998
First quarter.......... 1,220,000 1,050,000 7,918 1,300.30 1,120.61 17,264.34 14,664.44
Second quarter......... 1,160,000 1,010,000 5,633 1,254.74 1,156.47 16,536.66 14,715.38
Third quarter.......... 1,270,000 995,000 8,162 1,280.73 1,043.57 16,731.92 13,406.39
Fourth quarter......... 1,060,000 836,000 9,553 1,164.59 980.11 15,207.77 12,879.97
1999
First quarter.......... 1,200,000 855,000 14,569 1,269.76 1,048.33 16,378.78 13,232.74
Second quarter......... 1,410,000 1,150,000 18,943 1,425.64 1,292.07 17,782.79 15,972.68
Third quarter.......... 1,570,000 1,200,000 13,929 1,535.23 1,420.64 18,532.58 16,821.06
Fourth quarter ........ 1,900,000 1,300,000 28,119 1,722.20 1,460.23 18,934.34 17,254.17
2000
First quarter.......... 1,790,000 1,310,000 18,045 1,754.78 1,558.15 20,706.65 18,168.27
Second quarter......... 1,600,000 1,200,000 16,154 1,732.45 1,504.93 20,833.21 16,008.14
Third quarter (through
September 27, 2000).. 1,590,000 1,070,000 15,638 1,613.89 1,448.11 17,614.66 15,639.95
</TABLE>
On September 27, 2000, the last reported sale price of the Shares on the TSE
was (Yen)1,070,000 per share, and the closing TOPIX and Nikkei Stock average on
that date were 1,448.11 and (Yen)15,639.95 respectively.
Settlement
Settlement of transactions concerning shares listed on any of the stock
exchanges in Japan, including the TSE, will normally be effected on the fourth
business day from and including the transaction date. Settlement in Japan is
made by physical delivery of share certificates or through the Japanese
Securities Depository Center, also known as JASDEC. See "Description of the
Shares--General."
American Depositary Shares
The ADSs are listed on the New York Stock Exchange. 200 ADSs represent one
share. The ADSs are evidenced by ADRs issued by Morgan Guaranty Trust Company
of New York, as depositary.
On December 18, 1998, the Government sold one million shares to a variety of
individual and institutional investors in a global offering in the form of
981,560 shares and 3,688,000 ADSs (representing 18,440 shares). A portion of
the global offering was registered with the United States Securities and
Exchange Commission.
On November 12, 1999, the Government sold 952,000 shares to a variety of
individual and institutional investors in a global offering in the form of
862,000 shares and 18,000,000 ADSs (representing 90,000 shares). A portion of
the global offering was registered with the United States Securities and
Exchange Commission.
On June 30, 2000, approximately 20,846,100 ADSs (equivalent to 104,230
shares, or approximately 0.66% of the total number of shares outstanding on
that date) were outstanding and were held by 335 record holders
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<PAGE>
of ADRs (including 324 record holders in the United States holding 20,846,100
ADSs). The following table sets forth for the periods shows the high and low
sales prices of the ADSs as provided on the New York Stock Exchange composite
tape.
<TABLE>
<CAPTION>
NYSE Average daily
Price per ADS trading volume
------------- ----------------
High Low
------------- (number of ADSs)
Calendar Period ($) ($)
<S> <C> <C> <C>
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
Third quarter................................... 62.81 56.50 98,603
Fourth quarter.................................. 89.25 77.38 179,039
2000
First quarter................................... 78.81 68.00 143,303
Second quarter.................................. 68.38 60.06 86,842
Third quarter (through September 27, 2000)...... 61.25 51.13 104,192
</TABLE>
The common stock is also listed on the London Stock Exchange.
Dividends
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 is subject to approval by shareholders at the general
meeting of shareholders required to be held in June of each year and by MPT.
Immediately following approval thereof at the meeting and approval 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 in cash. 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 subject to approval by MPT.
The following table lists the respective shareholder and Board of Directors
(interim dividend) approval dates, payment dates and amount of dividends
(expressed in yen and expressed as a U.S. dollar equivalent based on the Noon
Buying Rate on the date of payment) paid by NTT applicable to each of the six-
month periods indicated.
<TABLE>
<CAPTION>
Record Date/Six months Dividend
ended Approval Date Payment Date per Share
---------------------- ----------------- ----------------- --------------------
(yen) (dollars)
<S> <C> <C> <C> <C>
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
September 30, 1999...... November 24, 1999 December 13, 1999 (Yen)2,500 $23.96
March 31, 2000.......... June 29, 2000 June 30, 2000 (Yen)2,500 $23.14
</TABLE>
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
54
<PAGE>
record on March 31, 1999 following the approval of shareholders and MPT. The
special dividend was announced in October 1998 in conjunction with NTT's sale
of a portion of its interest in NTT DoCoMo.
Shares of NTT to be newly issued in this global offering will entitle
shareholders to the same rights to receive year-end dividends payable to
shareholders of record on March 31, 2001 as existing shareholders.
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 regulatory action and approval by
shareholders and MPT.
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.
For a discussion of the tax treatment of dividends paid to U.S. Holders of
ADSs, see "Tax Considerations."
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<PAGE>
PRINCIPAL SHAREHOLDERS AND SELLING SHAREHOLDER
Upon consummation of the sale of the 200,000 new shares to be issued and sold
by NTT and the 1,000,000 existing shares to be sold by MOF on behalf of the
Government of Japan in this global offering, MOF, representing the Government
of Japan, will own approximately 46% of the outstanding shares of NTT. MOF is
required by the NTT Law and the amendments to the NTT Law to own one-third or
more of the total number of the issued shares. However, any increase in the
number of issued shares attributable to the issuance of new shares, including
shares issued upon the conversion or exercise of any convertible debentures or
debentures with preemptive rights, is not included for the time being in
calculating the proportion of the shares held by MOF for this purpose. Under
the NTT Law, as of March 31, 2000, the maximum number of shares permitted to be
sold by the Government was approximately 3.1 million shares.
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<PAGE>
DESCRIPTION OF THE SHARES
Information relating to the shares, including brief summaries of provisions
of NTT's Articles of Incorporation and NTT's Share Handling Regulations, as
currently in effect, and of the Commercial Code of Japan and the NTT Law are
provided below. These summaries are not complete and are qualified in their
entirety by reference to the full Articles of Incorporation and the full Share
Handling Regulations which have been filed or incorporated by reference as
exhibits to the Registration Statement of which this prospectus forms a part.
General
Under the Articles of Incorporation, the presently authorized capital stock
of NTT consists of 62,322,590 shares of common stock with a par value of
(Yen)50,000 per share. As of July 31, 2000, 15,834,590 shares were issued and
outstanding. The Commercial Code requires that shares be in registered form.
Under the Commercial Code, shares are transferable by delivery of share
certificates, but in order to assert shareholders' rights against NTT, the
transferee must have its name and address registered on NTT's register of
shareholders. The Share Handling Regulations require shareholders to file their
names, addresses and seal impressions with The Chuo Mitsui Trust and Banking
Company, Limited, the transfer agent for NTT. Foreign shareholders customarily
using a signature may file a specimen signature in lieu of a seal impression.
Shareholders not resident in Japan are required to file a mailing address in
Japan or appoint a resident proxy in Japan. These requirements do not apply to
the holders of ADSs or ADRs.
The Japan Securities Depository Center (JASDEC) is currently the only
securities depository in Japan. Under the system operated by the depository,
securities are centrally held at the depository and transactions are settled by
transfer between accounts held at the depository instead of physical delivery
and receipt of securities certificates. In addition, holders of securities can
exercise their rights without withdrawing securities from the depository. This
kind of system is adopted in other countries and most countries that have
securities exchanges use the depository system.
A holder of shares may choose, at its discretion, to participate in this
system. Only participants (such as a securities company or a bank having an
account with the depository) can deposit certificates for shares with the
depository and holders of certificates for shares deposit their certificates
through participants. Each participant maintains balances of securities with
the depository in separate accounts designated as a participant account and a
client account, and at specified times identifies to the depository (which
informs the issuer) the persons holding shares in the client's account. A
participant holding shares in a participant's account or a person identified as
holding shares in a client's account is considered to be a holder of shares,
proportionate to the number of shares in the account.
Each issuer whose shares are held through the securities depository system
maintains two registers: a register of shareholders and a register of
beneficial shareholders. Each participant holding shares in a participant's
account or person identified as holding shares in a client's account is
registered as a beneficial owner of deposited shares in the issuer's register
of beneficial shareholders. Beneficial owners of deposited shares may exercise
the same shareholders' rights, such as voting rights, as the holders of shares
registered in the register of shareholders, and is entitled to receive
dividends in the same way as holders of shares registered in the register of
shareholders.
New shares issued in respect of deposited shares, including those issued upon
a merger or a stock split, automatically become deposited shares. Beneficial
owners may withdraw their shares from the depository and receive share
certificates, except on days specified by the depository.
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Dividends
The Articles of Incorporation provide that NTT's financial accounts shall be
closed on March 31 of each year and that dividends, if any, will be paid to the
shareholders of record at the close of business as of such date. Pursuant to
the Commercial Code, after the close of the fiscal year, the Board of Directors
prepares, among other things, a proposal for appropriation of profits and
retained earnings for year-end dividends, legal reserve and other reserves, and
this appropriation customarily includes a bonus to Directors and Corporate
Auditors. This proposal is then submitted to the Board of Corporate Auditors of
NTT and the independent certified public accountants for their review and
comments. Then the proposal accompanied by the Board of Corporate Auditors' and
independent accountant's reports are submitted for shareholder approval at the
Ordinary General Meeting of Shareholders, which, pursuant to the Articles of
Incorporation, must be convened in June of each year.
In addition to year-end dividends, the Board of Directors may, by resolution,
declare an interim cash dividend to shareholders of record as of the close of
business on September 30 of each year, without prior shareholder approval, but
subject to the restrictions described below. The requisite appropriation of
profits and retained earnings and related transfer of the applicable amount to
legal reserve occurs at the time of the payment of the interim dividend from
funds available for appropriation for the immediately preceding fiscal year,
less the year-end dividends and bonuses to Directors and Corporate Auditors
paid in respect of the prior fiscal year and any transfer of profits and
retained earnings to the stated capital subsequent to the prior fiscal year-
end. Payment of interim dividends reduces the funds legally available for the
payment of year-end dividends for the fiscal year in which the interim
dividends are resolved and paid.
Under the NTT Law, the appropriation of profits and retained earnings,
including the payment of interim dividends, of NTT requires the approval of
MPT.
Under the Commercial Code, the shareholders may, by resolution at an Ordinary
General Meeting of Shareholders, transfer to NTT's stated capital account any
amount which could otherwise be distributed as year-end dividends and the Board
of Directors may, by its resolution but subject to the approval of MPT, pay a
dividend in the form of additional shares, by way of a stock split without
affecting its par value, up to the amount transferred to NTT's stated capital
account.
The Commercial Code provides that a company may not make any distribution of
profits by way of year-end dividends or interim dividends for any fiscal year
unless it has set aside in its legal reserve an amount equal to at least one-
tenth of the amount paid by way of appropriation of profits and retained
earnings for the fiscal year until the legal reserve is one-quarter of its
stated capital. The Commercial Code permits a company to distribute profits by
way of year-end or interim dividends out of the excess of its net assets over
the aggregate of:
. its stated capital;
. its additional paid-in capital;
. its accumulated legal reserve;
. the legal reserve to be set aside for the fiscal year concerned;
. the excess, if any, of unamortized expenses incurred in preparation for
commencement of business and in connection with research and development
expense over the aggregate of amounts listed above, other than its
stated capital; and
. the aggregate amount of the difference between the market value and
acquisition cost of certain assets which are stated at market value
pursuant to the provisions of the Commercial Code.
In the case of interim dividends, the net assets are calculated by reference
to the balance sheet as at the last closing of the company's accounts, but
adjusted to reflect any subsequent payment by way of appropriation
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of profits and retained earnings and the related transfer to the legal reserve,
any subsequent transfer of profits and retained earnings to stated capital and
the aggregate purchase price of shares determined by a resolution at the
ordinary general meeting of shareholders authorizing a company to acquire its
shares pursuant to the below mentioned amendments to the Commercial Code,
provided that interim dividends may not be paid where there is a risk that at
the end of the fiscal year there might not be any excess of net assets over the
aggregate of the amounts listed above. If NTT has on its balance sheet a number
of shares that NTT has acquired for the purpose of transferring them to its
Directors or employees but these shares are yet to be transferred, the book
value of such shares shall be deducted from the amount available for payment of
annual and interim dividends. As of March 31, 2000, the net assets of NTT
determined in accordance with the Commercial Code were (Yen)4,815.7 billion
(U.S. $45,431 million), its stated capital was (Yen)795.6 billion (U.S. $7,506
million), its additional paid-in capital was (Yen)2,530.5 billion (U.S. $23,873
million) and its legal reserve was (Yen)123.4 billion (U.S. $1,164 million).
In Japan the "ex-dividend" date and the record date for dividends precede the
date of determination of the amount of the dividend to be paid. See "Record
Date." For information as to taxation of dividends, see "Tax Considerations--
Japanese Taxation."
Transfer of Additional Paid-in Capital and Legal Reserve to Stated Capital and
Stock Splits
The Commercial Code permits NTT, by resolution of the Board of Directors, to
transfer the whole or any part of additional paid-in capital and legal reserve
to stated capital and, after being authorized by MPT pursuant to the NTT Law,
to grant to shareholders additional shares free of charge by way of a stock
split without affecting its par value, with reference to the whole or any part
of the amount of additional paid-in capital and legal reserve transferred to
stated capital. When NTT issues new shares other than in a stock split, the
entire amount of the issue price of the new shares is required to be accounted
for as stated capital, although NTT may account for an amount not exceeding
one-half of the issue price as additional paid-in capital (subject to the
remainder being not less than the total par value, if any, of the new shares
being issued). Additional shares granted to shareholders by way of a stock
split may also be granted by reference to the amount representing the portion
of the issue price of shares in excess of its par value which has been
accounted for as stated capital. The stock split may be made only if:
. the total par value of the shares in issue after the stock split does
not exceed the stated capital; and
. the net assets of NTT (as appearing in the latest balance sheet) divided
by the number of the shares in issue after the stock split is at least
(Yen)50,000.
The Commercial Code permits NTT to make a distribution to shareholders by way
of a rights issue at a subscription price per share which is less than its par
value if:
. the difference between the subscription price and the par value does not
exceed the amount of the stated capital minus the aggregate par value of
all outstanding shares, divided by the number of new shares to be issued
pursuant to such rights issue;
. the sum of the net assets of NTT (as appearing on its latest balance
sheet) and the total subscription price, divided by the number of the
shares outstanding immediately after the issuance of the new shares, is
at least (Yen)50,000; and
. the subscription rights are made transferable.
In order to satisfy the above requirements related to stated capital, the Board
of Directors may transfer the whole or any part of additional paid-in capital
or legal reserve to stated capital.
Fractional Shares
If NTT makes stock splits or issues convertible bonds or debentures or bonds
or debentures with warrants or rights to subscribe for new shares, fractional
shares constituting one-hundredth of one share or any integral
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multiple of one share will be issued depending on the conditions of the splits
or issues. Fractional shares will not carry voting rights but, under the
Articles of Incorporation, they will have the right to receive dividends. Under
the Articles of Incorporation, any certificate representing such fractional
shares will not be issued and therefore fractional shares are not normally
transferable. Holders of fractional shares will be registered in the register
of fractional shares. The registered holders of fractional shares may at any
time require NTT to purchase the shares at the current market price.
Ordinary General Meeting of Shareholders
The Ordinary General Meeting of Shareholders to settle accounts of NTT for
each fiscal year is held in June each year in Tokyo, Japan. In addition, NTT
may hold an extraordinary general meeting of shareholders whenever necessary by
giving at least two weeks' advance notice to shareholders.
Under the Commercial Code, notice of any shareholders' meeting, including the
place, time and purpose, must be mailed to each shareholder (or, in the case of
a non-resident shareholder, to their resident proxy or mailing address in Japan
appointed or determined pursuant to the Share Handling Regulations) at least
two weeks prior to the date set for the meeting.
Voting Rights
A shareholder is entitled to one vote per share subject to the limitation on
voting rights discussed below. Under the Commercial Code, except as otherwise
provided by law or by the Articles of Incorporation, a resolution can be
adopted at a General Meeting of Shareholders by a majority of the shares having
voting rights represented at the meeting. The Commercial Code and the Articles
of Incorporation provide, however, that the quorum for the election of
Directors and Corporate Auditors may not be less than one-third of the total
number of outstanding shares having voting rights. NTT's shareholders are not
entitled to cumulative voting in the election of Directors. A corporate
shareholder, more than one-quarter of whose outstanding shares are directly or
indirectly owned by NTT, may not exercise its voting rights in respect of the
shares of NTT. Shareholders may exercise their voting rights through proxies
provided that the proxies are also shareholders. Under the NTT Law, the
election and removal of Directors and Corporate Auditors are subject to the
approval of MPT.
The Commercial Code provides that in order to amend the articles of
incorporation of a corporation and in certain other instances, including a
reduction of the stated capital, the removal of a Director or Corporate
Auditor, dissolution, merger or consolidation, the establishment of a 100%
parent-subsidiary relationship by way of a share exchange or share transfer,
the transfer of the whole or an important part of the business, the taking over
of the whole of the business of any other corporation or any offering of new
shares at a "specially favorable" price (or any offering of convertible bonds
or debentures with "specially favorable" conversion conditions or of bonds or
debentures with warrants or rights to subscribe for new shares with "specially
favorable" conditions) to persons other than shareholders, the quorum shall be
a majority of the total number of shares outstanding and the approval of the
holders of at least two-thirds of the shares represented at the meeting is
required.
Subscription Rights
Holders of the shares have no preemptive rights under the Articles of
Incorporation. Authorized but unissued shares may be issued at times and upon
terms determined by the Board of Directors, subject to the approval of MPT and
the limitation as to the offering of new shares at a "specially favorable"
price discussed in "Voting Rights" above. Under the Commercial Code, the Board
of Directors may, however, determine that shareholders shall be given
subscription rights regarding a particular issue of new shares, in which case
such rights must be given on uniform terms to all shareholders as of a record
date of which not less than two weeks' public notice must be given. Each of the
shareholders to whom these rights are given must also be given notice of the
expiry thereof at least two weeks prior to the date on which the rights are to
expire.
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Rights to subscribe for new shares may be made transferable or
nontransferable by the Board of Directors and may be made at par or at or
substantially below the market price of shares. Accordingly, rights offerings
can result in substantial dilution or can result in rights holders not being
able to realize the economic value of their rights.
Liquidation Rights
In the event of a liquidation of NTT, the assets remaining after payment of
all debts, liquidation expenses and taxes will be distributed among the
shareholders in proportion to the respective numbers of shares which they hold.
Liability to Further Calls or Assessments
All NTT's presently outstanding shares are fully paid and nonassessable.
Transfer Agent
The Chuo Mitsui Trust and Banking Company, Limited is the transfer agent for
the shares. The Chuo Mitsui Trust and Banking Company, Limited keeps NTT's
register of shareholders at its office at 7-1, Kyobashi 1-chome, Chuo-ku, Tokyo
104-8345, Japan and transfers record ownership upon presentation of the
certificates representing the transferred shares.
Record Date
The close of business on March 31 is the record date for NTT's year-end
dividends, if paid. The shareholders who are registered as the holders on NTT's
register of shareholders at the close of business as of March 31 are also
entitled to exercise shareholders' voting rights at the Ordinary General
Meeting of Shareholders for the fiscal year ending on March 31 of each year.
The close of business on September 30 of each year is the record date for
interim dividends, if paid. In addition, NTT may set a record date for
determining the shareholders entitled to other rights and for other purposes by
giving at least two weeks' public notice.
The shares generally trade ex-dividend or ex-rights in the Japanese stock
exchanges on the third business day prior to a record date (or, if the record
date is not a business day, the fourth business day prior thereto), for the
purpose of dividends or rights offerings.
Repurchase by the Company of Shares
Except as otherwise permitted by the Commercial Code, neither NTT nor any of
its subsidiaries may acquire shares except by means of a reduction of capital
in the manner provided in the Commercial Code. NTT may acquire shares for the
following purposes, subject to the authorization of shareholders at an ordinary
general meeting:
(1) for the purpose of transferring them to its Directors and/or employees;
and
(2) for the purpose of cancellation.
Acquisition by NTT of its shares for the purpose of transferring the shares
to its Directors and/or employees is subject to, among other things, the
following restrictions:
. the number of shares to be acquired must not exceed 10% of the total
number of issued shares; and
. the aggregate amount of the purchase price must not exceed the amount of
the retained earnings available for annual dividend payment less the sum
of any amount paid or to be paid by way of appropriation of retained
earnings and any transfer of retained earnings to stated capital.
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Acquisition by NTT of its shares for the purpose of cancellation is subject to,
among other things, the following restrictions:
. the aggregate amount of the purchase price must not exceed the amount of
the retained earnings available for any annual dividend payment less the
sum of any amount paid or to be paid by way of appropriation of retained
earnings and any transfer of retained earnings to stated capital; and
. there is not a concern that there would be no retained earnings
available for annual dividend payment at the close of the current fiscal
year.
In the case of shares being listed on an exchange or the over-the-counter
market, acquisition shall be made through the market or by way of tender offer
by the close of the following ordinary general meeting. The amendments
introduced for the purpose of (1) above enable NTT to introduce a stock option
plan using the shares already issued, subject to the satisfaction of additional
requirements.
Exchange Controls and Other Limitations Affecting Security Holders
The Foreign Exchange and Foreign Trade Law of Japan and the cabinet orders
and ministerial ordinances issued thereunder (collectively, the "Foreign
Exchange Regulations") govern matters relating to the acquisition and holding
of shares of equity securities of Japanese corporations by "non-residents of
Japan" and "foreign investors." For purposes of determining ownership
interests, the Depositary is the deemed owner of shares underlying ADRs.
"Non-residents of Japan" are 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:
. individuals not resident in Japan;
. corporations which are organized under the laws of foreign countries or
whose principal offices are located outside Japan; and
. corporations not less than 50% of the shares of which are held by either
of the above persons 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 requires a subsequent reporting by the
resident of Japan. The subsequent reporting by the resident of Japan is not
required where:
. the amount of the purchase transaction of shares is (Yen)100 million or
less; or
. the purchase transaction is effected by certain financial institutions
acting as agent or intermediary, as prescribed by the Foreign Exchange
Regulations.
However, if the proposed transaction falls within the category of "inward
direct investment," the transaction is subject to regulation. 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 the investor's holding directly or indirectly 10% or
more of the total issued shares of the corporation or (if the foreign investor
already holds 10% or more of the total issued shares of the corporation)
acquisition of additional shares in the corporation.
Whenever shares of NTT are acquired in a transaction which at the time falls
within the category of an inward direct investment requiring prior
notification, the foreign investor who makes the investment must file a
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prior notification with MOF and MPT 30 days prior to the transaction. When a
prior notification is required, MOF and MPT 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 the deposit nor the withdrawal of the
underlying shares upon surrender of ADRs is subject to any formalities or
restrictions referred to under "Acquisition of Shares", except where as a
result of the 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 issued shares, in which event prior notification may be
required as noted above.
Dividends and Proceeds of Sales
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.
Reporting of Substantial Shareholdings
The Securities and Exchange Law of Japan 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 a
local finance bureau of the Ministry of Finance a report concerning the
shareholdings within five business days. The local finance bureau of the
Ministry of Finance is authorized to review such filing by the Financial
Reconstruction Commission. 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 upon conversion of convertible securities or exercise of share
subscription warrants are taken into account in determining both the number of
shares held by the holder and the issuer's total share capital. Copies of each
report must also be furnished to the issuer of the shares and all Japanese
stock exchanges on which the shares are listed.
Restrictions on Foreign Ownership
Foreign nationals and foreign corporations are allowed to own shares of NTT.
However, if the aggregate amount of NTT's voting rights which may be owned by:
(1) any person who does not have Japanese nationality;
(2) any foreign government or any of its representatives;
(3) any foreign juridical person or association; and
(4) 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 (1) through (3) 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))
is more than 20% of NTT's total voting rights, then NTT is prohibited from
registering ownership of shares by these persons in excess of this limit. As of
March 31, 2000, foreign ownership of NTT's Shares was 14.9%.
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DESCRIPTION OF ADRs AND DEPOSIT AGREEMENT
An ADR is a negotiable certificate issued by a United States bank or trust
company acting as depositary. In the same way that a share certificate of a
U.S. issuer would evidence shares, an ADR evidences American depositary shares,
which are also referred to as ADSs. Each ADS represents an ownership interest
in 1/200th of one share of NTT, which shares are held in Japan on deposit by
the depositary or its agent for the benefit of holders of ADRs.
The terms of the ADRs are contained in the deposit agreement dated as of July
8, 1994 among NTT, Morgan Guaranty Trust Company of New York, as depositary,
and the holders of ADRs issued thereunder. The following is a summary of the
material provisions of the deposit agreement and, as such, it does not contain
all information that may be relevant to holders of ADRs. Investors should read
the entire deposit agreement (including the form of ADR) for complete
information. Copies of the deposit agreement are available at the principal
office of the depositary in New York, presently located at 60 Wall Street, New
York, New York 10260.
The depositary will issue ADRs based on the deposit of shares with The Bank
of Tokyo-Mitsubishi, Ltd. as custodian under the deposit agreement. Deposited
shares will be represented by ADSs. If a holder's ownership interest is held
through a broker, dealer or other third party, the broker, dealer or third
party will provide documentation showing the holder's beneficial interest in
the ADSs. Only persons in whose names ADRs are registered on the books of the
depositary will be treated as holders of ADRs by the depositary and NTT. The
term "holders" refers only to persons in whose name ADRs are registered on the
books of the depositary. The depositary owes no duties to anyone other than NTT
and holders.
Deposit of Shares and Issuance of ADRs
Shares deposited with the custodian must be accompanied by certain documents,
including instruments showing that such shares have been properly transferred
or endorsed to the person on whose behalf the deposit is being made. The
custodian will hold all deposited shares for the account of the depositary. As
a result, Holders have no direct ownership interest in the shares and only have
such rights as are contained in the deposit agreement. The custodian will also
hold any additional securities, property and cash received on or in
substitution for the deposited shares. The deposited shares and any such
additional items are referred to as "deposited securities."
Upon each deposit of shares, receipt of related delivery documentation and
compliance with the other provisions of the deposit agreement, including the
payment of the fees and charges of the depositary, the depositary will issue an
ADR or ADRs in the name of the person entitled thereto evidencing the number of
ADSs to which such person is entitled. Certificated ADRs will be delivered at
the depositary's principal New York office or any other location that it may
designate as its transfer office.
Surrender of ADRs and Delivery of Deposited Securities
Holders are entitled to receive the deposited securities underlying the ADSs
upon surrender of certificated ADRs to the depositary with delivery
instructions for the deposited securities. In addition, holders must pay all
fees, taxes and governmental charges that may apply. Deposited securities are
normally delivered at the custodian's office unless the holder requests, at his
own risk and expense, that they be delivered to another place. The depositary
may only restrict the withdrawal of deposited securities in connection with:
. temporary delays caused by closing transfer books of the depositary or
NTT or the deposit of shares in connection with voting at a
shareholders' meeting, or the payment of dividends;
. the payment of fees, taxes and similar charges; or
. compliance with any U.S. or foreign laws or governmental regulations
relating to the ADRs.
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Distributions on Deposited Securities
NTT may make various types of distributions with respect to its securities.
Except as stated below, to the extent the depositary is legally permitted it
will deliver distributions to holders in proportion to their interests in the
following manner:
. Cash: The depositary shall convert cash distributions from foreign
currency to U.S. dollars if this is permissible and can be done on a
reasonable basis. The depositary will endeavor to distribute such cash
in a practicable manner, and may deduct any taxes required to be
withheld, any expenses of converting foreign currency and transferring
funds to the United States, and other expenses and adjustments.
. Shares: In the case of a distribution in shares, the depositary may
issue and will issue if NTT so requests additional ADRs to evidence the
number of ADSs representing the shares. Only whole ADSs will be issued.
Any shares which would result in fractional ADSs will be sold and the
net proceeds will be distributed to the holders entitled to the
proceeds. In addition, if the distribution results in the issuance of
fractional shares, the depositary will sell the fractional shares to
NTT.
. Rights: In the case of a distribution of rights to subscribe for
additional shares or other rights, if NTT provides satisfactory evidence
that the depositary may lawfully distribute these rights, the depositary
may arrange for holders to instruct the depositary as to the exercise of
the rights. However, if NTT does not furnish such evidence, the
depositary may:
. sell the rights if practicable and distribute the net proceeds as
cash; or
. allow the rights to lapse, whereupon holders of ADRs will receive
nothing.
NTT has no obligation to file a registration statement under the
Securities Act in order to make any rights available to holders. Any
sale or lapse of rights may reduce the holders' equity interest in NTT.
. Other Distributions: In the case of a distribution of securities or
property other than those described above, the depositary may either:
. distribute the securities or property in any manner it deems fair
and equitable; or
. sell the securities or property and distribute any net proceeds as
cash.
The depositary may choose any practicable method of distribution for any
specific holder, including the distribution of foreign currency, securities or
property, or it may retain such items on behalf of the holder as deposited
securities.
There can be no assurances that the depositary will be able to convert any
currency at a specified exchange rate or sell any property, rights, shares or
other securities at a specified price, nor that any of these transactions can
be completed within a specified time period.
Restrictions on Foreign Ownership
The NTT Law restricts NTT's ability to register shares owned by foreign
persons and entities, in the aggregate, in excess of 20% of the voting
securities of NTT. See "Description of Shares--Exchange Controls and Other
Limitations Affecting Security Holders--Restrictions on Foreign Ownership." All
shares held as deposited securities under the deposit agreement are deemed to
be owned by foreign persons for purposes of this ownership limitation. The
ownership interests of ADR holders are subject to procedures for the
enforcement of this limitation, including the cancellation of ADSs and the
forfeiture of transfer rights, rights to give voting instructions and rights to
receive dividends. Holders are bound by NTT's interpretation of these
procedures and the foreign ownership limitation.
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NTT may decline to register shares presented by the custodian for
registration on the grounds that the foreign ownership limitation would be
exceeded. In this case, the depositary will use its best reasonable efforts to:
. determine the holder of the ADRs to which the shares relate;
. stop the transfer of such ADRs and disregard any voting instructions
given by the holder of the ADRs;
. notify the holder that such ADRs may not be transferred or voted and
that the depositary will, at its option, either deliver the underlying
shares to the holder or sell the shares on behalf of the holder;
. deliver either the underlying shares or the proceeds of any sale to the
holder of the ADRs; and
. cancel the ADRs.
If the depositary decides that it is not practicable to determine the holder
of such ADRs, then the depositary will use its best reasonable efforts to
purchase an equal number of additional ADRs, sell the shares whose registration
was refused, and cancel the ADRs to which the shares relate. The holders are
liable for any deficiency and the depositary is entitled to reimbursement for
all costs of purchasing the additional ADRs and may deduct such costs from the
net proceeds of the sale of the shares. If there is any shortfall, the
depositary may deduct the same from distributions payable to ADR holders or may
sell deposited securities held under the deposit agreement and apply the
proceeds against the shortfall.
Under Japanese law, an ADR holder cannot assert any rights as a shareholder
against NTT, including voting and dividend rights, unless the shares which
underlie such holder's ADRs are registered in NTT's share register in the name
of the depositary. Since NTT registers the transfer of shares according to its
customary practice, the timing of the registration of deposited shares may be
affected by how frequently NTT effects registration at any given time.
Record Dates
The depositary may fix a record date for determining the holders who shall be
entitled to receive distributions, exercise voting rights, receive notices, or
act on other matters. This record date will be as near as possible to the
corresponding record date set by NTT.
Voting of Deposited Securities
After receiving voting materials from NTT, the depositary will notify the
holders of any shareholder meeting or solicitation of consents or proxies. This
notice will describe how the holder may instruct the depositary to exercise the
voting rights for the shares which underlie the holder's ADRs. If the
depositary receives instructions on or before the date specified in the notice
to holders, the depositary will endeavor to vote the shares in accordance with
the holder's instructions. If the depositary does not receive instructions from
a holder on or before the date established by the depositary for this purpose,
the depositary will deem the holder to have instructed the depositary to vote
or cause to be voted the shares so represented in favor of any proposals or
recommendations by NTT. To accomplish this, the depositary will issue a
discretionary proxy to NTT to vote the underlying shares in favor of any
proposals or recommendations of NTT. No votes will be cast as to fractional
shares, which will be rounded down to the nearest whole share. Because there is
no guarantee that holders will receive voting materials in time to instruct the
depositary to vote, it is possible that holders or persons who hold their ADRs
through brokers, dealers or other third parties will not have the opportunity
to exercise their rights to vote. The depositary will not itself exercise any
voting discretion. Furthermore, neither the depositary nor its agents are
responsible for any failure to carry out any voting instructions, for the
manner in which any vote is cast or for the effect of any vote.
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Inspection of Transfer Books
The depositary will maintain books for the registration, transfer,
combination and split-up of ADRs. Such books will be available for inspection
by the holders for the purpose of communicating with holders in the interest of
the business of NTT or a matter related to the deposit agreement.
Changes Affecting Deposited Securities
If NTT takes certain actions that affect the deposited securities, including
(1) any change in par value, split-up, consolidation, cancellation or other
reclassification of deposited securities and (2) any recapitalization,
reorganization, merger, consolidation, liquidation, receivership, bankruptcy or
sale of all or substantially all the assets of NTT, then the depositary may
choose to:
(1) amend the form of ADR;
(2) distribute additional or amended ADRs;
(3) distribute cash, securities or other property it has received in
connection with these actions;
(4) sell any securities or property received and distribute the proceeds
as cash; or
(5) none of the above.
If the depositary does not choose any of (1)-(4), any of the cash, securities
or other property it receives will constitute part of the deposited securities
and each ADR will then represent a proportionate interest in the property.
Amendment and Termination of Deposit Agreement
NTT and the depositary may jointly amend the deposit agreement. The holders
must be given at least 30 days notice of any amendment that imposes or
increases any fees or charges (except for taxes and other charges specifically
payable by holders under the deposit agreement), or affects any substantial
existing right of holders. If a holder continues to hold ADRs after being so
notified, the holder is deemed to agree to such amendment. No amendment may
take away any holder's right cancel ADRs and to receive the deposited
securities underlying the ADRs, except in order to comply with requirements of
law.
If directed by NTT, the depositary shall terminate the deposit agreement by
giving the holders at least 30 days prior notice. The depositary may also
terminate the deposit agreement by providing notice if it has resigned and no
successor has been appointed within 90 days after its resignation. After
termination, the depositary's only responsibility will be to deliver deposited
securities to holders who surrender their ADRs, and to hold or sell
distributions received on deposited securities. As soon as practicable after
the expiration of six months from the termination date, the depositary will
sell the deposited securities which remain and hold the net proceeds of such
sales, without liability for interest, in trust for the holders who have not
yet surrendered their ADRs. After making such sale, the depositary shall have
no obligations except to account for such proceeds and other cash.
Charges of the Depositary
Holders will be charged a fee for each issuance of ADRs, including issuances
resulting from distributions of shares, rights and other property, and for each
surrender of ADRs in exchange for deposited securities. The fee in each case is
$5.00 for each 100 ADSs (or any portion thereof) evidenced by the ADRs issued
or surrendered. Holders or persons depositing shares may also be charged the
following expenses:
. stock transfer or other taxes and other governmental charges;
. cable, telex and facsimile transmission and delivery charges;
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. transfer or registration fees for the registration of transfer of
deposited securities on any applicable register in connection with the
deposit or withdrawal of deposited securities; and
. expenses of the depositary in connection with the conversion of foreign
currency into U.S. dollars.
NTT will pay all other charges and expenses of the depositary and any agent
of the depositary (except the custodian) pursuant to agreements from time to
time between NTT and the depositary. Fees payable by holders and persons
depositing shares may be amended from time to time.
Liability of Holders for Taxes
Holders must also pay any tax or other governmental charge payable by the
custodian or the depositary on any ADR, deposited security or distribution. If
a holder owes any tax or other governmental charge, the depositary may (1)
deduct the amount of the tax or other governmental charge from any cash
distributions, or (2) sell deposited securities and deduct the amount owing
from the net proceeds of the sale. In either case the holder remains liable for
any shortfall. If any tax or governmental charge is required to be withheld on
any non-cash distribution, the depositary may sell the distributed property or
securities to pay the taxes and distribute any remaining net proceeds to the
holders entitled to the proceeds.
Conditions to the Issuance of ADRs and other Transactions
The depositary, the custodian or NTT may refuse to:
. issue, register or transfer an ADR or ADRs;
. effect a split-up or combination of ADRs;
. deliver distributions on any such ADRs; or
. permit the withdrawal of deposited securities (unless the deposit
agreement provides otherwise)
until the following conditions have been met:
. the holder has paid all taxes, governmental charges, and fees and
expenses as required in the deposit agreement;
. the holder has provided the depositary with any information it may deem
necessary or proper, including, without limitation, proof of identity
and the genuineness of any signature; and
. the holder has complied with such regulations as the depositary may
establish under the deposit agreement.
The depositary may also suspend the issuance of ADRs, the deposit of shares,
the registration, transfer, split-up or combination of ADRs, or the withdrawal
of deposited securities (unless the deposit agreement provides otherwise), if
the register for ADRs or any deposited securities is closed or if the
depositary or NTT decides any such action is advisable.
Limitations on Liability
The deposit agreement expressly limits the obligations and liability of the
depositary, NTT and their respective agents. The depositary and NTT will not be
liable:
. if they are prevented or hindered in performing any obligation by
circumstances beyond their control, including, without limitation,
requirements of law, the terms of the deposited securities, and acts of
God;
. for exercising or failing to exercise discretion under the deposit
agreement;
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. if they perform their obligations without gross negligence or bad faith;
or
. for any action based on advice or information from legal counsel,
accountants, any person presenting shares for deposit, any holder, or
other qualified person.
Pre-released ADRs
The depositary may issue ADRs not only against the deposit with the custodian
of shares (or rights to receive shares from NTT or any registrar, transfer
agent, clearing agent or similar entity), but also against the agreement by a
qualified third party to deliver to the depositary the shares within a
specified period of time. ADRs issued against such an agreement are called
"Pre-released ADRs." Pre-released ADRs may be issued only if:
. the depositary has received collateral for the full market value of the
Pre-released ADRs; and
. each recipient of Pre-released ADRs agrees in writing that he or she
(1) owns the underlying shares;
(2) assigns all rights in the shares to the depositary;
(3) holds such shares for the account of the depositary; and
(4) will deliver the shares to the custodian as soon as practicable,
and promptly if the depositary so demands.
In general, the number of Pre-released ADRs will not evidence more than 20%
of all ADSs outstanding at any given time (excluding those evidenced by Pre-
released ADRs). However, the depositary may change or disregard this limit from
time to time under certain circumstances.
The Depositary
The depositary is Morgan Guaranty Trust Company of New York, a New York
banking corporation. Morgan Guaranty Trust Company of New York is a commercial
bank offering a wide range of banking and trust services to its customers in
the New York metropolitan area, throughout the United States and around the
world.
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TAX CONSIDERATIONS
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 below are based on the laws in force and as
interpreted by the Japanese taxation authorities as of the date of this
prospectus 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 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 the 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 prospectus, 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, among others, 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
apply for the non-resident holder. With respect to
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ADSs, this 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
this 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 or ADSs 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 the donor is a Japanese
resident.
United States Federal Income Taxation
The following discussion includes the opinion of Milbank, Tweed, Hadley &
McCloy LLP as to the principal United States federal income tax consequences
under present law of an investment in the ADSs or the shares. This summary and
opinion applies only to investors that hold the ADSs or shares as capital
assets and that have the U.S. dollar as their functional currency. It is not
intended as tax advice to any particular investor, certain of which (such as
banks, insurance companies, dealers, traders who elect to mark to market, tax-
exempt entities, persons holding an ADS or share as part of a straddle,
hedging, conversion or constructive sale transaction and holders of 10% or more
of the voting shares of NTT) are subject to special tax treatment. 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. PROSPECTIVE PURCHASERS 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 here, the term "U.S. holder" means a beneficial owner of ADSs or
shares that is:
. a United States citizen or resident for United States federal income tax
purposes;
. a corporation, partnership or other entity organized in or under the
laws of the United States or any political subdivision of the United
States;
. a trust subject to the control of one or more U.S. persons 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 other beneficial owner of ADSs or
shares. If the obligations of the depositary are performed in accordance with
the terms of the deposit agreement, holders of ADSs (or ADRs evidencing ADSs)
generally will be treated as the owners of the shares represented by those ADSs
(or ADRs evidencing ADSs).
Dividends and Other Distributions
Dividends (including the amount of any Japanese taxes withheld) paid with
respect to the ADSs or shares generally must be included in the gross income of
a U.S. holder as ordinary income when the dividends are received by the
depositary, in the case of ADSs, or by the U.S. holder (or the U.S. holder's
agent), in the case of shares. The dividends will not be eligible for the
dividends-received deduction allowed to corporations. Dividends paid in yen
will be includible in a U.S. dollar amount based on the exchange rate in effect
on the date of receipt (which, in the case of ADSs, will be the date of receipt
by the depositary). Any gain or loss
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recognized on a subsequent sale or conversion of the yen for a different amount
generally will be United States source ordinary income or loss. Distributions
to U.S. holders of additional shares or rights to subscribe to shares that are
made as part of a pro rata distribution to all shareholders of NTT (including
holders of ADSs) generally will not be subject to United States federal income
tax. However, such distributions of additional shares or rights will generally
be subject to United States federal income tax if, for example, a U.S. holder
can elect to receive cash in lieu of shares or rights or the distribution of
shares or rights is not proportionate.
Subject to significant limitations and restrictions, a U.S. holder will be
eligible to claim a credit against its United States federal income tax
liabilities for Japanese taxes withheld from dividend distributions at the
rates specified under the Convention. The limitations on foreign taxes eligible
for credit are generally calculated separately for specific classes of income.
For this purpose, dividends paid with respect to the ADSs or shares will
generally constitute "passive income" or, for some providers of financial
services, "financial services income."
A non-U.S. holder generally will not be subject to United States federal
income tax on dividends paid by NTT with respect to the ADSs or shares unless
such 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 as a condition for such
non-U.S. holder to be subject to United States taxation on a net income basis
in respect of income from shares or ADSs).
Capital Gains
U.S. holders will recognize capital gain or loss upon the sale or other
disposition of ADSs or shares (or rights to subscribe for shares) held by the
U.S. holder or 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
subscription rights. Gain recognized by a U.S. holder on a sale or other
disposition of shares or ADSs generally will be treated as U.S. 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 Japanese tax, if any, 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 (a) NTT has paid dividends within the 24-month period preceding
the loss and (b) the 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 tax on gain from the sale or other disposition of ADSs or shares
unless (a) 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 as a condition for such non-U.S.
holder to be subject to United States taxation on a net income basis in respect
of gain from the sale or other disposition of shares or ADSs) or (b) 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.
Estate and Gift Tax
As discussed in "--Japanese Taxation," certain Japanese inheritance and gift
taxes may be imposed on holders of ADSs or shares. An individual U.S. holder of
ADSs or shares who is a citizen or resident of the United States for United
States federal estate tax purposes will have the value of ADSs or shares owned
by such U.S. holder included in their gross estate for United States federal
estate tax purposes. U.S. holders should consult their tax advisors with
respect to the creditability of any Japanese inheritance and gift taxes and the
potential application of the Estate and Gift Tax Treaty between the United
States and Japan.
Information Reporting and Backup Withholding
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.
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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 BEN 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.
EXPERTS
The financial statements of Nippon Telegraph and Telephone Corporation as of
March 31, 2000 and 1999 and for each of the three years in the period ended
March 31, 2000, included herein and incorporated in this prospectus by
reference to the Annual Report on Form 20-F of Nippon Telegraph and Telephone
Corporation for the year ended March 31, 2000, have been included and
incorporated in reliance on the report of PricewaterhouseCoopers, independent
accountants, given on their authority as experts in auditing and accounting.
VALIDITY OF SECURITIES
The validity of the ADSs will be passed upon on behalf of NTT by Milbank,
Tweed, Hadley & McCloy LLP and the underwriters by Sullivan & Cromwell. The
validity of the shares underlying the ADSs will be passed upon by Tomotsune
Kimura & Mitomi, Japanese counsel to NTT, and Nagashima Ohno & Tsunematsu,
Japanese counsel to the underwriters. Certain legal matters will be passed upon
on behalf of MOF by Davis Polk & Wardwell. In giving their opinions, Milbank,
Tweed, Hadley & McCloy LLP and Sullivan & Cromwell may rely as to matters of
Japanese law upon the opinions of Tomotsune Kimura & Mitomi and Nagashima Ohno
& Tsunematsu, and Tomotsune Kimura & Mitomi and Nagashima Ohno & Tsunematsu may
rely as to matters of New York law upon the opinions of Milbank, Tweed, Hadley
& McCloy LLP and Sullivan & Cromwell. All statements in this prospectus with
respect to or involving matters of Japanese law have been passed upon by
Tomotsune Kimura & Mitomi and Nagashima Ohno & Tsunematsu, and are stated
herein on their authority. Statements as to United States taxation in this
prospectus under the caption "Tax Considerations--United States Federal Income
Taxation" include the opinion of Milbank, Tweed, Hadley & McCloy LLP and are
stated herein on their authority.
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UNDERWRITING
The global offering consists of (i) the U.S. offering of an aggregate of
shares, in the form of shares or ADSs, in the United States and Canada, (ii)
the international offering of an aggregate of shares, in the form of shares
or ADSs, outside the United States, Canada and Japan, and (iii) the Japanese
offering of an aggregate of shares inside Japan. Goldman Sachs
International, Merrill Lynch, Pierce, Fenner & Smith Incorporated, Nikko
Salomon Smith Barney Limited and The Nomura Securities Co., Ltd. are the joint
global coordinators and joint bookrunners of the global offering.
MOF, NTT and the underwriters for the U.S. offering named below have entered
into an underwriting agreement with respect to the shares being offered in the
U.S. offering. Subject to certain conditions, each U.S. underwriter has
severally agreed to purchase from MOF the number of shares indicated in the
table below. Merrill Lynch, Pierce, Fenner & Smith Incorporated, Goldman, Sachs
& Co., Nomura Securities International, Inc. and Salomon Smith Barney Inc. are
the representatives of the U.S. offering.
<TABLE>
<CAPTION>
U.S. Underwriters Number of Shares
----------------- ----------------
<S> <C>
Merrill Lynch, Pierce, Fenner & Smith
Incorporated...........................................
Goldman, Sachs & Co.........................................
Nomura Securities International, Inc........................
Salomon Smith Barney Inc....................................
Daiwa Securities America Inc. ..............................
J.P. Morgan Securities Inc. ................................
Lehman Brothers Inc. .......................................
Morgan Stanley & Co. Incorporated...........................
UBS Warburg LLC.............................................
---
Total.......................................................
===
</TABLE>
Shares and ADSs sold by the underwriters to the public will initially be
offered at the initial public offering prices set forth on the cover of this
prospectus. Any shares or ADSs sold by the underwriters to securities dealers
may be sold at a discount of up to (Yen) per share or $ per ADS from the
respective initial public offering price. Any such securities dealers may
resell any shares or ADSs purchased from the U.S. underwriters to certain other
brokers or dealers at a discount of up to (Yen) per share or $ per ADS
from the respective initial public offering price. If all the shares and ADSs
are not sold at the initial offering price, the joint global coordinators may
change the offering prices and the other selling terms.
Subject to certain conditions, NTT has granted the U.S. and international
underwriters options to purchase up to an additional 100,000 shares, in the
form of shares or ADSs, at the initial public offering price set forth on the
cover of this prospectus, less underwriting discounts and commissions, solely
to cover over-allotments. If any shares or ADSs are purchased by the U.S.
underwriters pursuant to these options, the U.S. underwriters will severally
purchase shares or ADSs in approximately the same proportions set forth in the
table above. If these options are exercised in full by the U.S. and
international underwriters, the total initial public offering price would be
(Yen) , or $ , and the total underwriting commission would be (Yen) , or
$ .
NTT and MOF have also entered into an underwriting agreement with the
underwriters for the international offering for the sale of shares outside
the United States, Canada and Japan. Nomura International plc, Salomon Brothers
International Limited, Goldman Sachs International and Merrill Lynch
International are the joint lead managers of the international offering. MOF
and NTT have also entered into (i) an underwriting agreement with the
underwriters for the Japanese offering for the sale by MOF of shares in
Japan and (ii) an underwriting agreement with the underwriters for the Japanese
offering for the issue and sale by NTT of shares in Japan. Nikko Salomon
Smith Barney Limited, The Nomura Securities Co., Ltd., Merrill Lynch Japan
Incorporated, Tokyo Branch and Goldman Sachs (Japan) Ltd. are the lead managers
of the Japanese offering. Except as described below, the U.S. and international
offerings are conditioned upon the Japanese offering. The issuance and sale of
the new shares by NTT, including the new
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shares to be sold in Japan and the additional 100,000 shares subject to the
over-allotment options described above, are conditioned upon, among other
things, approval by MPT, after consultation with MOF, and the absence of an
injunction prohibiting the issuance of the new shares by NTT under Article 280-
10 of the Commercial Code of Japan. Article 280-10 provides an action for such
injunction by a shareholder of NTT only if the issuance violates the law or the
articles of incorporation or is made in a remarkably unfair manner. The sale of
shares by MOF is not subject to either of these two conditions. In the case of
either such event, the underwriters will still be committed to purchase the
shares to be sold by MOF in the U.S., international and Japanese offerings
unless MOF agrees otherwise after consultation with the underwriters. The
initial offering price and underwriting commission per share for each of the
U.S. offering, the international offering and the Japanese offering are
identical.
The U.S. and international underwriting agreements provide that the
obligations of the U.S. and international underwriters are subject to certain
conditions precedent. In addition, under the terms and conditions of the U.S.
underwriting agreement, the U.S. underwriters are committed to take and pay for
all of the shares or ADSs if any are purchased. However, in the event of a
default by one or more of the U.S. underwriters, the purchase commitments of
the non-defaulting U.S. underwriters will be increased and the amount of shares
or ADSs offered in the United States may be decreased.
The underwriters for each of the offerings have entered into an agreement in
which they agree to restrictions on where and to whom they and any dealer
purchasing from them may offer shares or ADSs in connection with the global
offering. The U.S. and international underwriters also have agreed that they
may sell shares or ADSs between their respective underwriting groups.
NTT and MOF have agreed with the underwriters not to dispose of or hedge any
of their shares of stock or securities convertible into or exchangeable for
shares during the period from the date of this prospectus continuing through
the date 180 days after the date of this prospectus, other than, with respect
to MOF's agreement, to NTT for repurchase and cancellation or to an entity
controlled by the Government of Japan that agrees to be bound by the foregoing
restrictions, except with the prior written consent of the joint global
coordinators. With respect to NTT's agreement with the underwriters, such
agreement does not apply to any existing employee or director benefit plans.
In connection with the U.S. and international offerings, the underwriters may
purchase and sell shares or ADSs in the open market. These transactions may
include short sales, stabilizing transactions and purchases to cover positions
created by short sales. Short sales involve the sale by the underwriters of a
greater number of shares or ADSs than they are required to purchase in the
offerings. "Covered" short sales are sales made in an amount not greater than
the underwriters' option to purchase additional shares or ADSs from NTT in the
offering. The underwriters may close out any covered short position by either
exercising their option to purchase additional shares or ADSs or purchasing
shares or ADSs in the open market. In determining the source of shares or ADSs
to close out the covered short position, the underwriters will consider, among
other things, the price of shares or ADSs available for purchase in the open
market as compared to the price at which they may purchase shares or ADSs
through the over-allotment option. "Naked" short sales are any sales in excess
of such option. The underwriters must close out any naked short position by
purchasing shares or ADSs in the open market. A naked short position is more
likely to be created if the underwriters are concerned that there may be
downward pressure on the price of the shares or ADSs in the open market after
pricing that could adversely affect investors who purchase in the offering.
Stabilizing transactions consist of certain bids or purchases made for the
purpose of preventing or retarding a decline in the market price of the shares
or ADSs while the global offering is in progress.
The underwriters may also impose a penalty bid. This occurs when a particular
underwriter repays to the underwriters a portion of the underwriting discount
received by it because the representatives have repurchased shares or ADSs sold
by or for the account of such underwriter in stabilizing or short covering
transactions.
Purchases to cover a short position and stabilizing transactions may have the
effect of preventing or retarding a decline in the market price of NTT's stock
and, together with the imposition of the penalty bid, may
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stabilize, maintain or otherwise affect the market price of the shares or ADSs.
As a result, the price of the shares or ADSs may be higher than the price that
otherwise might exist in the open market. If these activities are commenced,
they may be discontinued at any time. These transactions may be effected on the
London Stock Exchange, the New York Stock Exchange, in the over-the-counter
market or otherwise.
In addition, in connection with the Japanese offering, the Japanese
underwriters may engage in stabilizing transactions on the Tokyo Stock
Exchange, in accordance with applicable Japanese regulations and customary
practice in Japan. Under those regulations, a representative of the Japanese
underwriters may maintain a stabilizing bid on the Tokyo Stock Exchange at a
price above the initial public offering price for the global offering,
including a price as high as, but no higher than, the closing price of the
shares or ADSs on that exchange on the date of this prospectus, which was
(Yen) per share. However, any such stabilization will be permitted only
during the three trading days in Tokyo immediately following the date of this
prospectus.
NTT estimates that its total expenses for the global offering will be
approximately (Yen) .
NTT has agreed to indemnify the several underwriters against certain
liabilities, including liabilities under the Securities Act of 1933.
This prospectus may be used by the underwriters and other dealers in
connection with offers and sales of the shares, including sales of shares
initially sold by the underwriters in the offerings being made outside of the
United States, to persons located in the United States.
The underwriters expect to deliver certificates representing the shares
against payment therefor in yen in Tokyo through the central clearing system
(JASDEC) in Japan on , 2000 (Tokyo time). The underwriters expect to deliver
ADSs against payment therefor in U.S. dollars in New York, New York through the
facilities of DTC on , 2000.
Delivery of the shares and the ADSs is expected to occur, subject to receipt
and acceptance by the underwriters, on , 2000, which is later than three
business days after pricing of the offerings. Under Rule 15c6-1 of the
Securities Exchange Act of 1934, trades in the secondary market generally are
required to settle in three business days unless the parties to such trade
expressly agree otherwise. Because of the longer settlement period, purchasers
who wish to trade shares or ADSs on or soon after pricing may need to specify
alternative settlement arrangements to prevent a failed settlement. Until
delivery of the ADSs by the underwriters against payment, the ADS relating to
the shares sold in the global offering will trade on the New York Stock
Exchange on a "when issued" basis under the symbol "NTT WI." The shares and
ADSs will not trade on a "when issued" basis on the Tokyo Stock Exchange, the
London Stock Exchange or any other market.
Because of this longer settlement period, the margin requirements of the New
York Stock Exchange, including its Rule 431, may require certain purchasers of
the shares or ADSs in the global offering to deposit and maintain margin during
such period. A potential purchaser of these securities should consult with its
broker or other financial institution at which its account is maintained in
order to determine if such requirements apply to such purchaser and, if so, how
they may be satisfied.
76
<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, 1999 and 2000.................... F-3
Consolidated statement of income for the three years ended March 31,
2000..................................................................... F-5
Consolidated statement of shareholders' equity for the three years ended
March 31, 2000........................................................... F-6
Consolidated statement of cash flows for the three years ended March 31,
2000..................................................................... F-7
Notes to consolidated financial statements................................ F-8
Financial statements schedule for the three years ended March 31, 2000:
Schedule II--Valuation and qualifying accounts.......................... F-35
</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, 1999 and 2000, and the results of their operations
and their cash flows for each of the three years in the period ended March 31,
2000, in conformity with accounting principles generally accepted in the United
States of America. In addition, in our opinion, the financial statement
schedule listed in the accompanying index presents fairly, in all material
respects, the information set forth therein when read in conjunction with the
related consolidated financial statements. 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/ PricewaterhouseCoopers
Tokyo, Japan
June 29, 2000, except for Note 21
as to which the date is September 25, 2000
F-2
<PAGE>
NIPPON TELEGRAPH AND TELEPHONE CORPORATION
AND ITS SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
March 31
<TABLE>
<CAPTION>
1999 2000 2000
---------------- ---------------- ------------
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) 1,656,672 (Yen) 1,155,274 $ 10,899
Notes and accounts
receivable, trade (Notes 4
and 19).................... 1,463,777 1,678,095 15,831
Allowance for doubtful
accounts................... (40,287) (35,682) (337)
Inventories (Note 6)........ 195,843 189,850 1,791
Prepaid expenses and other
current assets (Note 11)... 641,745 709,230 6,691
---------------- ---------------- ---------
Total current assets...... 3,917,750 3,696,767 34,875
---------------- ---------------- ---------
Property, plant and equipment
(Notes 9 and 15):
Telecommunications
equipment.................. 11,843,092 12,334,617 116,365
Telecommunications service
lines...................... 11,823,529 11,958,392 112,815
Buildings and structures.... 5,000,443 5,151,633 48,600
Machinery, vessels and
tools...................... 2,140,526 1,836,879 17,329
Land........................ 697,938 745,261 7,031
Construction in progress.... 859,526 579,822 5,470
---------------- ---------------- ---------
32,365,054 32,606,604 307,610
Accumulated depreciation.... (20,203,236) (20,743,008) (195,689)
---------------- ---------------- ---------
12,161,818 11,863,596 111,921
---------------- ---------------- ---------
Investments and other assets:
Investments in affiliated
companies.................. 300,420 338,379 3,192
Marketable securities and
other investments (Note
7)......................... 163,754 369,654 3,487
Intangible and other assets
(Note 8)................... 1,527,113 1,881,597 17,751
Deferred income taxes (Note
11)........................ 502,393 951,296 8,975
---------------- ---------------- ---------
2,493,680 3,540,926 33,405
---------------- ---------------- ---------
(Yen) 18,573,248 (Yen) 19,101,289 $ 180,201
================ ================ =========
</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>
1999 2000 2000
--------------- --------------- ------------
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) 235,180 (Yen) 410,305 $ 3,871
Current portion of long-term
debt (Notes 9 and 19)......... 848,546 868,648 8,195
Accounts payable, trade (Notes
4 and 19)..................... 1,416,615 1,440,629 13,591
Accrued payroll (Note 19)...... 516,188 486,415 4,589
Accrued interest............... 44,586 40,390 381
Accrued taxes on income........ 491,803 346,895 3,272
Accrued consumption tax (Note
12)........................... 22,370 92,014 868
Advances received.............. 72,008 83,604 789
Other (Note 11)................ 96,684 88,877 838
--------------- --------------- --------
Total current liabilities.... 3,743,980 3,857,777 36,394
--------------- --------------- --------
Long-term liabilities:
Long-term debt (Notes 9 and
19)........................... 4,558,358 4,239,088 39,991
Obligations under capital
leases (Note 15).............. 378,083 359,786 3,394
Liability for employees'
severance payments (Note 10).. 2,977,403 3,088,996 29,142
Other (Note 11)................ 211,635 630,707 5,950
--------------- --------------- --------
8,125,479 8,318,577 78,477
--------------- --------------- --------
Minority interest in consolidated
subsidiaries.................... 793,019 910,311 8,588
--------------- --------------- --------
Shareholders' equity (Note 13):
Common stock, (Yen)50,000 par
value--
Authorized--62,400,000
shares.......................
Issued and outstanding--
15,912,000 shares in 1999 and
15,834,590 shares in 2000.... 795,600 795,600 7,506
Additional paid-in capital..... 2,530,476 2,530,476 23,872
Retained earnings.............. 2,628,272 2,648,286 24,984
Accumulated other comprehensive
income (loss)................. (43,578) 40,262 380
--------------- --------------- --------
5,910,770 6,014,624 56,742
--------------- --------------- --------
Commitments and contingent
liabilities (Note 20)...........
(Yen)18,573,248 (Yen)19,101,289 $180,201
=============== =============== ========
</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>
1998 1999 2000 2000
-------------- -------------- -------------- ------------
Millions of yen Millions of
U.S. dollars
(Note 3)
<S> <C> <C> <C> <C>
Operating revenues (Note
4):
Telephone.............. (Yen)6,306,034 (Yen)6,300,460 (Yen)6,394,562 $60,326
Telegraph.............. 92,211 85,521 82,631 780
Leased circuit......... 488,160 507,163 499,891 4,716
Data communication
facility.............. 372,765 383,455 397,107 3,746
ISDN services.......... 367,826 555,976 818,833 7,725
Sale of
telecommunication
equipment............. 969,586 1,008,589 1,138,369 10,739
Miscellaneous.......... 853,431 888,509 1,051,946 9,924
-------------- -------------- -------------- -------
9,450,013 9,729,673 10,383,339 97,956
-------------- -------------- -------------- -------
Operating expenses
(Notes 4 and 16):
Personnel.............. 2,345,609 2,367,449 2,401,056 22,651
Depreciation,
amortization and
maintenance costs..... 3,185,044 3,435,522 3,394,343 32,022
Other.................. 3,047,315 3,215,267 3,764,150 35,511
-------------- -------------- -------------- -------
8,577,968 9,018,238 9,559,549 90,184
-------------- -------------- -------------- -------
Operating income........ 872,045 711,435 823,790 7,772
-------------- -------------- -------------- -------
Other expenses (income):
Interest and
amortization of bond
discounts and issue
costs................. 235,363 216,038 175,081 1,652
Interest income........ (2,086) (6,881) (32,382) (306)
Gains on sales of
subsidiary stock (Note
17)................... -- (1,634,314) -- --
Other, net............. (16,764) 22,631 (7,881) (74)
-------------- -------------- -------------- -------
216,513 (1,402,526) 134,818 1,272
-------------- -------------- -------------- -------
Income before income
taxes.................. 655,532 2,113,961 688,972 6,500
-------------- -------------- -------------- -------
Income taxes (Note 11):
Current................ 362,910 659,082 444,363 4,192
Deferred............... 55,366 422,835 (159,521) (1,505)
-------------- -------------- -------------- -------
418,276 1,081,917 284,842 2,687
-------------- -------------- -------------- -------
Income before
extraordinary loss,
minority interest and
equity in earnings of
affiliated companies... 237,256 1,032,044 404,130 3,813
Extraordinary loss for
discontinuance of
regulatory accounting
principles (Note 2).... -- (462,508) -- --
Income before minority
interest and equity in
earnings of affiliated
companies.............. 237,256 569,536 404,130 3,813
Minority interest in
consolidated
subsidiaries........... (32,275) (24,148) (115,210) (1,087)
Equity in earnings of
affiliated companies... 9,479 9,043 10,090 95
-------------- -------------- -------------- -------
Net Income.............. (Yen) 214,460 (Yen) 554,431 (Yen) 299,010 $ 2,821
============== ============== ============== =======
<CAPTION>
U.S. dollars
Yen (Note 3)
---------------------------------------------- ------------
<S> <C> <C> <C> <C>
Per share of common
stock:
Extraordinary loss..... -- (Yen)(29,067) -- --
-------------- -------------- -------------- -------
Net income............. (Yen)13,478 (Yen)34,844 (Yen)18,883 $178
-------------- -------------- -------------- -------
Cash dividends,
applicable to earnings
for the year (Note
13)................... (Yen)5,000 (Yen)5,000 (Yen)10,000 $94
-------------- -------------- -------------- -------
</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>
1998 1999 2000 2000
-------------- -------------- -------------- ----------------
Millions of yen Millions of U.S.
dollars (Note 3)
<S> <C> <C> <C> <C>
Common stock (Note 13):
At beginning of year... (Yen) 795,600 (Yen) 795,600 (Yen) 795,600 $ 7,506
Capitalization of
additional paid-in
capital............... -- -- -- --
-------------- -------------- -------------- -------
At end of year......... 795,600 795,600 795,600 7,506
-------------- -------------- -------------- -------
Additional paid-in
capital (Note 13):
At beginning of year... 2,530,476 2,530,476 2,530,476 23,872
Transfer to common
stock................. -- -- -- --
-------------- -------------- -------------- -------
At end of year......... 2,530,476 2,530,476 2,530,476 23,872
-------------- -------------- -------------- -------
Retained earnings (Note
13):
At beginning of year... 2,018,982 2,153,883 2,628,272 24,795
Appropriations--
Cash dividends
((Yen)7,500--$71 per
share)................ (39,780) (39,780) (119,339) (1,126)
Interim distribution--
Cash dividends
((Yen)2,500--$24 per
share)................ (39,779) (39,779) (39,658) (374)
Net income............. 214,460 554,431 299,010 2,821
Purchase and retirement
of common stock....... -- -- (119,999) (1,132)
Other change........... -- (483) -- --
-------------- -------------- -------------- -------
At end of year......... 2,153,883 2,628,272 2,648,286 24,984
-------------- -------------- -------------- -------
Accumulated
comprehensive income
(loss) (Note 13):
At beginning of year... (4,648) (16,031) (43,578) (411)
Other comprehensive
income................ (11,383) (27,547) 83,840 791
-------------- -------------- -------------- -------
At end of year......... (16,031) (43,578) 40,262 380
-------------- -------------- -------------- -------
Shareholders' equity at
end of year............ (Yen)5,463,928 (Yen)5,910,770 (Yen)6,014,624 $56,742
============== ============== ============== =======
Summary of total
comprehensive income:
Net income............. (Yen) 214,460 (Yen) 554,431 (Yen) 299,010 $ 2,821
Other comprehensive
income................ (11,383) (27,547) 83,840 791
-------------- -------------- -------------- -------
Comprehensive income.... (Yen) 203,077 (Yen) 526,884 (Yen) 382,850 $ 3,612
============== ============== ============== =======
</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>
1998 1999 2000 2000
-------------- -------------- -------------- ------------
Millions of yen Millions of
U.S. dollars
(Note 3)
<S> <C> <C> <C> <C>
Cash flows from
operating activities:
Net income............ (Yen)214,460 (Yen)554,431 (Yen)299,010 $ 2,821
Adjustments to
reconcile net income
to net cash provided
by operating
activities--
Extraordinary item,
net of taxes (Note
2)................... -- 462,508 -- --
Depreciation and
amortization......... 2,281,843 2,439,957 2,418,331 22,814
Deferred taxes........ 55,366 422,835 (159,521) (1,505)
Minority interest..... 32,275 24,148 115,210 1,087
Loss on sale or
disposal of property,
plant and equipment.. 164,691 174,686 209,147 1,973
Gains on sales of
subsidiary stock
(Note 17)............ -- (1,634,314) -- --
Increase in notes and
accounts receivable,
trade................ (145,136) (182,732) (218,923) (2,065)
Decrease in
inventories.......... 7,631 27,955 5,993 56
(Increase) decrease in
other current
assets............... (11,712) (211,880) 216,529 2,043
Increase in accounts
payable, trade and
accrued payroll...... 125,000 25,419 121,558 1,147
Increase (decrease) in
accrued consumption
tax.................. 72,518 (77,665) 69,644 657
Increase (decrease) in
accrued interest..... 1,922 (11,594) (4,196) (40)
Increase (decrease) in
advances received.... 22,596 (1,631) 11,596 109
Increase (decrease) in
accrued taxes on
income............... (36,290) 300,609 (384,336) (3,626)
Increase (decrease) in
liability for
employees' severance
payments, net of
deferred pension
costs................ (16,293) 84,267 107,653 1,016
Increase (decrease) in
other long-term
liabilities.......... 1,054 (1,330) (1,696) (16)
Other................. (39,318) (30,438) (10,011) (94)
-------------- -------------- -------------- --------
Net cash provided by
operating
activities.......... 2,730,607 2,365,231 2,795,988 26,377
-------------- -------------- -------------- --------
Cash flows from
investing activities:
Payments for property,
plant and equipment.. (2,685,961) (2,789,342) (2,349,969) (22,169)
Proceeds from sale of
property, plant and
equipment............ 10,827 20,707 35,196 332
Acquisition of
investments in
affiliates and
intangible and other
assets............... (233,813) (76,342) (619,533) (5,845)
Proceeds from sales of
subsidiary stock
(Note 17)............ -- 2,213,010 -- --
-------------- -------------- -------------- --------
Net cash used in
investing
activities.......... (2,908,947) (631,967) (2,934,306) (27,682)
-------------- -------------- -------------- --------
Cash flows from
financing activities:
Proceeds from issuance
of long-term debt.... (Yen)1,047,974 (Yen)653,435 (Yen)677,822 $ 6,395
Payments for
settlement of long-
term debt............ (706,388) (1,170,912) (916,246) (8,644)
Dividends paid........ (79,559) (79,559) (158,997) (1,500)
Net increase
(decrease) in short-
term borrowings and
other................ 8,409 (392,792) 154,340 1,456
Purchase and
retirement of common
stock................ -- -- (119,999) (1,132)
-------------- -------------- -------------- --------
Net cash provided
(used) by financing
activities.......... 270,436 (989,828) (363,080) (3,425)
-------------- -------------- -------------- --------
Net increase (decrease)
in cash and cash
equivalents........... 92,096 743,436 (501,398) (4,730)
Cash and cash
equivalents at
beginning of year..... 821,140 913,236 1,656,672 15,629
-------------- -------------- -------------- --------
Cash and cash
equivalents at end of
year.................. (Yen)913,236 (Yen)1,656,672 (Yen)1,155,274 $ 10,899
============== ============== ============== ========
Cash paid during the
year for:
Interest.............. (Yen)233,344 (Yen)232,099 (Yen)156,196 $ 1,474
-------------- -------------- -------------- --------
Income taxes.......... (Yen)400,860 (Yen)364,176 (Yen)831,109 $ 7,841
-------------- -------------- -------------- --------
Capital lease
obligations incurred
during the year....... (Yen)99,975 (Yen)32,881 (Yen)10,011 $ 94
-------------- -------------- -------------- --------
</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 occur,
reorganization was implemented in which NTT became 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 were accomplished by transferring 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 inherited the intra-
prefectural telecommunications services in the Hokkaido, Tohoku, Kanto, Tokyo
and Shinetsu regions and related services. Nippon Telegraph and Telephone West
Corporation inherited the intra-prefectural telecommunications services in the
Tokai, Hokuriku, Kansai, Chugoku, Shikoku and Kyushu regions and related
services.
NTT Communications Corporation inherited all the business activities
comprising the domestic inter-prefecture telecommunications and multimedia
network services and related services and is allowed to enter the international
market.
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),
and its foreign subsidiaries in conformity with those countries of their
domicile. 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) valuation of debt and equity
securities, (2) the accrual of certain expenses, (3) lease transactions,
F-8
<PAGE>
NIPPON TELEGRAPH AND TELEPHONE CORPORATION
AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(4) severance lump-sum and pension payments and certain other items to conform
with accounting principles generally accepted in the United States of America.
These adjustments were not recorded in the statutory books of account.
Significant accounting policies, after reflecting 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. The fiscal years of certain
foreign subsidiaries are December 31 and there have been no significant
transactions for the period from January 1, 2000 to March 31, 2000.
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 the periods benefited ranging from one to twenty
years.
Discontinuance of regulation accounting principles--
During the fiscal year ended March 31, 1999, NTT has discontinued the
application of the provisions of Statement of Financial Accounting Standards
No. 71, "Accounting for the Effects of Certain Types of Regulation" ("SFAS
71") for all of its operations. 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. 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 ($4,363 million), net of income taxes of (Yen)426,931 million ($4,028
million) during the six-month period ended September 30, 1998 and has
eliminated (Yen)889,439 million ($8,391 million) of regulatory assets from its
balance sheet as of September 30, 1998.
The major components of the eliminated regulatory assets as of September 30,
1998 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 $ 997 (Yen) 54,960 $ 518
Deferred pension costs.. 679,722 6,413 353,456 3,335
Unamortized purchases of
the leased assets...... 104,024 981 54,092 510
------------ ------ ------------ ------
Total................. (Yen)889,439 $8,391 (Yen)462,508 $4,363
============ ====== ============ ======
</TABLE>
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
F-9
<PAGE>
NIPPON TELEGRAPH AND TELEPHONE CORPORATION
AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 services, 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.
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
F-10
<PAGE>
NIPPON TELEGRAPH AND TELEPHONE CORPORATION
AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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.
Derivative financial instruments--
NTT and certain subsidiaries enter into several derivative financial
instruments as hedges, 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.
Had an underlying hedged transaction been settled or ceased to exist, all
changes in fair value of related derivatives which have not been settled would
be recognized in foreign exchange gains/losses.
F-11
<PAGE>
NIPPON TELEGRAPH AND TELEPHONE CORPORATION
AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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--
Basic net income per share ("EPS") is computed based on the average number of
shares outstanding during the year and is appropriately adjusted for any free
distribution of common stock. 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. 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.
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 June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 ("SFAS 133"), "Accounting for Derivative
Instruments and Hedging Activities", which has been amended by Statement of
Financial Accounting Standards No. 137 ("SFAS 137"), "Accounting for Derivative
Instruments and Hedging Activities--Deferral for the Effective Date of FASB
Statement No. 133", and Statement of Financial Accounting Standards No. 138
("SFAS 138"), "Accounting for Certain Derivative Instrument and Certain Hedging
Activities--An amendment of FASB Statement No. 133." SFAS 133, as amended, is
effective for NTT beginning April 1, 2001. SFAS 133 requires that all
derivative instruments be recorded on the balance sheet at fair value. Changes
in the fair value of derivatives are recorded each period in current earnings
or other comprehensive income, depending on whether a derivative is designated
as part of a hedge transaction and the type of hedge transaction. The
ineffective portion of all hedges will be recognized in earnings. NTT is in the
process of determining the impact that the adoption of SFAS 133 will have on
its results of operations and financial position.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial
Statements". SAB 101 provides guidance on applying generally accepted
accounting principles to revenue recognition issues in financial statements.
NTT will adopt SAB 101 as required in the second half of the fiscal year ending
March 31, 2001 and is evaluating the effect that such adoption may have on its
consolidated results of operations and financial position.
F-12
<PAGE>
NIPPON TELEGRAPH AND TELEPHONE CORPORATION
AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Reclassifications--
Certain items for prior years' financial statements have been reclassified to
conform to the 2000 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)106 =
US$1, the approximate current rate at March 31, 2000, 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, 2000 and the related balances at March 31, 1999 and 2000
were as follows:
<TABLE>
<CAPTION>
1998 1999 2000 2000
------------ ------------ ------------ ------------
Millions of yen Millions of
U.S. dollars
<S> <C> <C> <C> <C>
Sales..................... (Yen)169,347 (Yen)120,243 (Yen)97,552 $ 920
============ ============ ============ ======
Purchases................. (Yen)423,998 (Yen)461,009 (Yen)485,563 $4,581
============ ============ ============ ======
Receivables............... (Yen)54,085 (Yen)47,768 $ 451
============ ============ ======
Payables.................. (Yen)177,274 (Yen)188,635 $1,780
============ ============ ======
</TABLE>
Dividends from affiliated companies accounted for by the equity method for
the years ended March 31, 1998, 1999 and 2000 were (Yen)592 million, (Yen)752
million and (Yen)808 million ($8 million), respectively.
5. Cash and cash equivalents:
Cash and cash equivalents at March 31, 1999 and 2000 comprised the following:
<TABLE>
<CAPTION>
1999 2000 2000
-------------- -------------- ------------
Millions of yen Millions of
U.S. dollars
<S> <C> <C> <C>
Cash.............................. (Yen)517,379 (Yen)719,167 $ 6,785
Certificates of deposit,
commercial paper and marketable
securities purchased under
agreements to resell............. 559,068 38,063 359
Time deposits, certificates of
deposit and other................ 580,225 398,044 3,755
-------------- -------------- -------
(Yen)1,656,672 (Yen)1,155,274 $10,899
============== ============== =======
</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
F-13
<PAGE>
NIPPON TELEGRAPH AND TELEPHONE CORPORATION
AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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, 1999 and 2000 comprised the following:
<TABLE>
<CAPTION>
1999 2000 2000
------------ ------------ ------------
Millions of yen Millions of
U.S. dollars
<S> <C> <C> <C>
Telecommunications terminals to be
sold.............................. (Yen)106,368 (Yen) 85,100 $ 803
Projects in progress............... 76,686 81,110 765
Materials and supplies............. 12,789 23,640 223
------------ ------------ ------
(Yen)195,843 (Yen)189,850 $1,791
============ ============ ======
</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, 1999 and 2000 are as follows:
<TABLE>
<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, 2000
--------------------------------------------------
Gross Gross
Carrying unrealized unrealized
amounts gains losses Fair value
------------ ------------ ----------- ------------
Millions of yen
<S> <C> <C> <C> <C>
Available-for-sale:
Equity securities...... (Yen)138,542 (Yen)181,019 (Yen)63,136 (Yen)256,425
Held-to-maturity:
Debt securities........ 43,252 1,591 203 44,640
------------ ------------ ----------- ------------
Total................ (Yen)181,794 (Yen)182,610 (Yen)63,339 (Yen)301,065
============ ============ =========== ============
</TABLE>
F-14
<PAGE>
NIPPON TELEGRAPH AND TELEPHONE CORPORATION
AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
<TABLE>
<CAPTION>
March 31, 2000
-------------------------------------
Gross Gross
Carrying unrealized unrealized Fair
amounts gains losses value
-------- ---------- ---------- ------
Millions of U.S. dollars
<S> <C> <C> <C> <C>
Available-for-sale:
Equity securities.................... $1,307 $1,708 $596 $2,419
Held-to-maturity:
Debt securities...................... 408 15 2 421
------ ------ ---- ------
Total.............................. $1,715 $1,723 $598 $2,840
====== ====== ==== ======
</TABLE>
During the years ended March 31, 1998, 1999 and 2000, 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)15,413
million, (Yen)2,120 million and increased by (Yen)97,501 million ($920
million), respectively.
Maturities of debt securities classified as held-to-maturity at March 31, 2000
are as follows:
<TABLE>
<CAPTION>
2000 2000
----------------------- --------------
Carrying Carrying Fair
amounts Fair Value amounts value
----------- ----------- -------- -----
Millions of yen Millions of
U.S. dollars
<S> <C> <C> <C> <C>
Due after 1 year through 5 years..... (Yen)25,966 (Yen)27,530 $245 $260
Due after 5 years through 10 years... 17,286 17,110 163 161
----------- ----------- ---- ----
Total.............................. (Yen)43,252 (Yen)44,640 $408 $421
=========== =========== ==== ====
</TABLE>
Proceeds from sales of available-for-sale securities for the years ended
March 31, 1998, 1999 and 2000 were immaterial.
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)36,220 million and
(Yen)69,977 million ($660 million) at March 31, 1999 and 2000, respectively.
The corresponding fair values at those dates were not computed as such
estimation was not readily determinable. Other investments excluding the
previously described securities are stated at cost or less.
F-15
<PAGE>
NIPPON TELEGRAPH AND TELEPHONE CORPORATION
AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
8. Intangible and other assets:
Intangible and other assets and the related accumulated amortization at March
31, 1999 and 2000 were as follows:
<TABLE>
<CAPTION>
1999 2000 2000
-------------- -------------- ------------
Millions of yen Millions of
U.S. dollars
<S> <C> <C> <C>
Computer software............. (Yen)1,811,746 (Yen)2,030,863 $19,159
Rights to use utility
facilities and other......... 753,216 1,091,300 10,295
-------------- -------------- -------
2,564,962 3,122,163 29,454
Accumulated amortization...... (1,074,524) (1,240,566) (11,703)
-------------- -------------- -------
1,490,438 1,881,597 17,751
Minimum pension liability (See
Note 10)..................... 8,154 -- --
Prepaid pension costs (See
Note 10)..................... 28,521 -- --
-------------- -------------- -------
(Yen)1,527,113 (Yen)1,881,597 $17,751
============== ============== =======
</TABLE>
Computer software is recorded at cost and is amortized on a straight-line
basis over an estimated useful life which is generally 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 on a straight-line basis over their estimated useful
lives of eighteen years. Other intangibles are also recorded at cost and
amortized on a straight-line basis over their estimated useful lives averaging
twelve years.
9. Short-term borrowings and long-term debt:
Short-term borrowings at March 31, 1999 and 2000 comprised the following:
<TABLE>
<CAPTION>
1999 2000 2000
------------ ------------ ------------
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 1.07% and 0.46%
per annum at March 31, 1999 and
2000, respectively................. (Yen)232,180 (Yen)347,305 $3,277
Commercial paper of 0.59% and 0.24%
per annum at March 31, 1999 and
2000, respectively................. 3,000 63,000 594
------------ ------------ ------
(Yen)235,180 (Yen)410,305 $3,871
============ ============ ======
</TABLE>
F-16
<PAGE>
NIPPON TELEGRAPH AND TELEPHONE CORPORATION
AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Long-term debt at March 31, 1999 and 2000 comprised the following:
<TABLE>
<CAPTION>
1999 2000 2000
-------------- -------------- ------------
Millions of yen Millions of
U.S. dollars
<S> <C> <C> <C>
Debt denominated in Japanese
yen:
0.75%--6.8% coupon bonds due
2000--2010................. (Yen)1,647,700 (Yen)1,739,300 $16,408
1.6%--2.5% Euro yen notes
due 2001--2007............. 164,000 154,000 1,453
Unsecured indebtedness to
banks--
2.5% (weighted average)
loans due 2000--2022..... 2,790,101 2,595,828 24,489
0.6% (weighted average)
floating rate loans due
2000--2007............... 159,800 116,820 1,102
-------------- -------------- -------
4,761,601 4,605,948 43,452
-------------- -------------- -------
Debt denominated in foreign
currencies:
6.0%--6.75% U.S. dollar
notes due 2000--2008....... 407,193 305,378 2,881
4.0%--5.125% Swiss franc
bonds and notes due 2002--
2006....................... 69,283 22,097 208
10.25% Canadian dollar notes
due 2001................... 32,564 14,904 141
7.125% Deutsche mark bonds
due 2000................... 26,752 -- --
7.375%--10.875% Sterling
pound bonds due 2001--
2003....................... 69,419 60,592 572
3.75% Euro notes due 2006... -- 77,730 733
Unsecured indebtedness to
banks--
10.67% Thai baht loan due
2000..................... 2,209 -- --
5.6% (weighted average)
U.S. dollar floating rate
loans due 2006........... 39,599 23,516 222
-------------- -------------- -------
647,019 504,217 4,757
-------------- -------------- -------
Total long-term debt
principal.................. 5,408,620 5,110,165 48,209
Less--Deferred bond
discounts.................. (1,716) (2,429) (23)
-------------- -------------- -------
5,406,904 5,107,736 48,186
Less--Current maturities.... (848,546) (868,648) (8,195)
-------------- -------------- -------
Total long-term debt........ (Yen)4,558,358 (Yen)4,239,088 $39,991
============== ============== =======
</TABLE>
Interest rates and due dates are stated at March 31, 2000.
At March 31, 2000, buildings and land of certain consolidated subsidiaries,
with a book value of (Yen)14,626 million ($138 million), were mortgaged as
collateral for certain loans.
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.
The bond and note agreements relating to NTT's long-term debt at March 31,
2000 stipulate, among other things, that certain of the bonds and notes are
redeemable at the option of NTT generally at the principal
F-17
<PAGE>
NIPPON TELEGRAPH AND TELEPHONE CORPORATION
AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 deleted 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, 2000 was (Yen)100,000 million ($943 million).
Under Statement of Financial Accounting Standards No. 125 ("SFAS 125"),
"Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities," NTT recognized debts of (Yen)50,000 million ($472 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, 2005 and thereafter are as follows:
<TABLE>
<CAPTION>
Year ending March 31
--------------------
Millions of Millions of
yen U.S. dollars
<S> <C> <C>
2001............................................. (Yen) 868,648 $ 8,195
2002............................................. 846,161 7,982
2003............................................. 704,363 6,645
2004............................................. 616,187 5,813
2005............................................. 454,072 4,284
Thereafter....................................... 1,618,305 15,267
-------------- -------
(Yen)5,107,736 $48,186
============== =======
</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.
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. In 2000, NTT would revise the severance indemnity plan, which
will result in the reduction of the projected benefit obligation. The effect of
such a reduction in the projected benefit obligation has been reflected as an
offset of unrecognized prior service cost.
F-18
<PAGE>
NIPPON TELEGRAPH AND TELEPHONE CORPORATION
AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following table 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, 1999 and 2000:
<TABLE>
<CAPTION>
1999 2000 2000
--------------- --------------- ------------
Millions of yen Millions of
U.S. dollars
<S> <C> <C> <C>
Change in benefit obligations:
Benefit obligation, beginning
of year...................... (Yen) 4,011,150 (Yen) 4,055,997 $ 38,264
Service cost.................. 156,047 138,450 1,306
Interest cost................. 140,217 124,910 1,178
Benefit payments.............. (217,259) (163,447) (1,542)
Settlements................... (34,158) (75,115) (708)
Plan amendment................ -- (320,303) (3,022)
--------------- --------------- --------
Benefit obligation, end of
year......................... 4,055,997 3,760,492 35,476
--------------- --------------- --------
Change in fair value of plan as-
sets:
Fair value of plan assets, be-
ginning of year.............. 488,901 546,738 5,158
Actual return on plan assets.. (14,929) 49,679 469
Employer contributions........ 88,987 88,475 835
Benefits payments............. (16,221) (19,685) (186)
--------------- --------------- --------
Fair value of plan assets, end
of year...................... 546,738 665,207 6,276
--------------- --------------- --------
At March 31:
Funded status................. (3,509,259) (3,095,285) (29,200)
Unrecognized net loss......... 141,822 35,102 331
Unrecognized transition obli-
gation....................... 350,344 280,991 2,651
Unrecognized prior service
cost (*1).................... 83,668 (246,293) (2,324)
--------------- --------------- --------
Net amount recognized......... (Yen)(2,933,425) (Yen)(3,025,485) $(28,542)
=============== =============== ========
</TABLE>
--------
(*1) Unrecognized prior year service cost has been amortized on the straight-
line method over the average remaining service period of employees
expected to receive benefits under the plan.
The following table provides the amounts recognized in NTT's consolidated
balance sheets:
<TABLE>
<CAPTION>
1999 2000 2000
--------------- --------------- ------------
Millions of yen Millions of
U.S. dollars
<S> <C> <C> <C>
At March 31:
Liability for employees' sev-
erance payments.............. (Yen)(2,977,403) (Yen)(3,065,250) $(28,918)
Intangible and other assets... 8,154 -- --
Accumulated other comprehen-
sive loss.................... 35,824 39,765 376
--------------- --------------- --------
Net amount recognized......... (Yen)(2,933,425) (Yen)(3,025,485) $(28,542)
=============== =============== ========
</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 relating to the
NTT Severance Payment Plan for each of the three years in the period ended
March 31, 2000 included the following components:
<TABLE>
<CAPTION>
1998 1999 2000 2000
------------ ------------ ------------ ------------
Millions of yen Millions of
U.S. dollars
<S> <C> <C> <C> <C>
Service cost............ (Yen)157,153 (Yen)156,047 (Yen)138,450 $1,306
Interest cost on
projected benefit
obligation............. 164,229 140,217 124,910 1,178
Expected return on plan
assets................. (15,233) (20,030) (22,159) (209)
Net amortization and
deferral............... 81,236 81,466 83,096 784
------------ ------------ ------------ ------
Net periodic severance
payments under
SFAS 87................ 387,385 357,700 324,297 3,059
Deduct: Amounts
attributable to
regulatory accounting
practices under SFAS
71..................... (107,501) (52,197) -- --
------------ ------------ ------------ ------
Total cost for
employees' severance
indemnities as recorded
in the consolidated
statement of income.... (Yen)279,884 (Yen)305,503 (Yen)324,297 $3,059
============ ============ ============ ======
Assumptions in
determination of net
pension cost:
Discount rate......... 3.5% 3.5% 3.0%
Long-term rate of
salary increases..... 3.5% 3.5% 3.0%
Long-term rate of
return on funded
assets............... 4.0% 4.0% 3.0%
</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.
In March 2000, there were revisions of the Japanese Welfare Pension Insurance
Law, which reduced the projected benefit obligation of the contributory defined
benefit pension plans for NTT and certain subsidiaries in Japan.
F-20
<PAGE>
NIPPON TELEGRAPH AND TELEPHONE CORPORATION
AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following table 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, 1999 and 2000:
<TABLE>
<CAPTION>
1999 2000 2000
------------ ------------ ------------
Millions of yen Millions of
U.S. dollars
<S> <C> <C> <C>
Change in benefit obligations:
Benefit obligation, beginning of
year........................... (Yen)733,124 (Yen)874,465 $ 8,250
Service cost.................... 132,573 132,471 1,250
Interest cost................... 25,651 30,591 289
Benefit payments................ (468) (978) (9)
Settlements..................... (16,415) 84,322 794
Plan amendment.................. -- (16,194) (153)
------------ ------------ -------
Benefit obligation, end of
year........................... 874,465 1,104,677 10,421
------------ ------------ -------
Change in fair value of plan as-
sets:
Fair value of plan assets,
beginning of year.............. 764,153 839,436 7,919
Actual return on plan assets.... 1,733 77,072 727
Employer contributions.......... 74,018 42,866 404
Employee contributions.......... -- 32,865 310
Benefits payments............... (468) (978) (9)
------------ ------------ -------
Fair value of plan assets, end
of year........................ 839,436 991,261 9,351
------------ ------------ -------
At March 31:
Funded status................... (35,029) (113,416) (1,070)
Unrecognized net gain........... 63,550 105,864 999
Unrecognized prior service cost
(*1)........................... -- (16,194) (153)
------------ ------------ -------
Net amount recognized........... (Yen) 28,521 (Yen)(23,746) $ (224)
============ ============ =======
</TABLE>
--------
(*1) Unrecognized prior year service cost has been amortized on the straight-
line method over the average remaining service period of employees
expected to receive benefits under the plan.
The following table provides the amounts recognized in NTT's consolidated
balance sheets:
<TABLE>
<CAPTION>
At March 31,
------------------------
1999 2000 2000
----------- ------------ ------------
Millions of yen Millions of
U.S. dollars
<S> <C> <C> <C>
Liability for employee's severance
payments........................... -- (Yen)(23,746) $(224)
Intangible and other assets......... (Yen)28,521 -- --
----------- ------------ -----
Net amount recognized............... (Yen)28,521 (Yen)(23,746) $(224)
=========== ============ =====
</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 relating to NTT's
welfare pension plans for each of the three years in the period ended March 31,
2000 included the following components:
<TABLE>
<CAPTION>
1998 1999 2000 2000
------------ ------------ ------------ ------------
Millions of yen Millions of
U.S. dollars
<S> <C> <C> <C> <C>
Service cost............ (Yen)132,444 (Yen)132,573 (Yen)132,471 $1,250
Interest cost on
projected benefit
obligation............. 19,788 25,651 30,591 289
Expected return on plan
assets................. (26,594) (32,037) (35,064) (331)
Employee contributions.. (31,362) (32,071) (32,865) (310)
------------ ------------ ------------ ------
Net periodic severance
payments under SFAS
87..................... 94,276 94,116 95,133 898
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) -- --
------------ ------------ ------------ ------
Total cost for
employees' severance
indemnities as recorded
in the consolidated
statement of income.... (Yen)38,185 (Yen)69,929 (Yen)95,133 $ 898
============ ============ ============ ======
Assumptions in
determination of net
pension cost:
Discount rate......... 3.5% 3.5% 3.0%
Long-term rate of
salary increases..... 3.5% 3.5% 3.0%
Long-term rate of
return on funded
assets............... 4.0% 4.0% 3.0%
</TABLE>
11. Income taxes:
NTT is subject to a number of different taxes, based on income with an
aggregate normal statutory tax rate in Japan of approximately 51 percent in
1998, approximately 48 percent in 1999 and approximately 41 percent in 2000.
Due to a change in Japanese income tax regulations, effective April 1, 1998 and
April 1, 1999, the statutory rates were reduced to approximately 48 percent and
41 percent, respectively, and such rates were used to calculate the future
expected tax effects of temporary differences. Reconciliation of the difference
of the effective tax rates of NTT and the normal statutory tax rates are as
follows:
<TABLE>
<CAPTION>
Percent of income
before income
taxes
-------------------
1998 1999 2000
----- ----- -----
<S> <C> <C> <C>
Normal statutory tax rate............................... 51.00% 48.00% 41.00%
Changes in income tax rate.............................. 6.49 4.59 --
Provision (reversal) of valuation allowance............. 4.66 (1.45) --
Other................................................... 1.66 0.04 0.34
----- ----- -----
Effective tax rate...................................... 63.81% 51.18% 41.34%
===== ===== =====
</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, 1999 and 2000 are as follows:
<TABLE>
<CAPTION>
1999 2000 2000
------------ ------------ ------------
Millions of yen Millions of
U.S. dollars
<S> <C> <C> <C>
Deferred tax assets:
Liability for employees'
severance payments.............. (Yen)786,851 (Yen)897,165 $8,464
Advance received................. 8,069 6,141 58
Accrued enterprise tax........... 42,957 30,148 284
Depreciation..................... 80,832 131,842 1,244
Compensated absences............. 95,557 100,061 944
Unamortized purchases of the
leased assets................... 37,976 39,426 372
Other............................ 65,522 140,390 1,324
------------ ------------ ------
Total gross deferred tax assets.. 1,117,764 1,345,173 12,690
Less valuation allowance......... -- (2,287) (21)
------------ ------------ ------
Total deferred tax assets........ 1,117,764 1,342,886 12,669
------------ ------------ ------
Deferred tax liabilities:
Valuation for securities......... 13,098 76,581 723
Special reserve for tax
purposes........................ 30,903 31,069 293
Gains on sales of subsidiary
stocks.......................... 358,099 358,099 3,378
Other............................ 61,217 123,783 1,168
------------ ------------ ------
Total gross deferred tax
liabilities..................... 463,317 589,532 5,562
------------ ------------ ------
Net deferred tax assets.......... (Yen)654,447 (Yen)753,354 $7,107
============ ============ ======
</TABLE>
NTT DoCoMo Inc., and its eight regional subsidiaries (together, "NTT DoCoMo
Group", 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 Group by the end of fiscal year 1999 and to liquidate NTT Personal
Group following the transfer. Through the liquidation, NTT and NTT DoCoMo Group
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
valuation allowance at March 31, 2000 mainly relates to deferred tax assets of
consolidated subsidiaries with operating loss carryforwords for tax purposes
that are not expected to be realized. The net changes in the total valuation
allowance for the fiscal years ended March 31, 1999 and 2000 were a decrease of
(Yen)30,573 million and an increase of (Yen)2,287 million ($21 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, 1999 and 2000 are included in the
consolidated balance sheet as follows:
<TABLE>
<CAPTION>
1999 2000 2000
------------ ------------ ------------
Millions of yen Millions of
U.S. dollars
<S> <C> <C> <C>
Prepaid expenses and other current
assets.............................. (Yen)166,355 (Yen)172,624 $1,629
Deferred income taxes (investments
and other assets)................... 502,393 951,296 8,974
Other current liabilities............ (7,684) (15,795) (149)
Other long-term liabilities.......... (6,617) (354,771) (3,347)
------------ ------------ ------
(Yen)654,447 (Yen)753,354 $7,107
============ ============ ======
</TABLE>
Operating loss carryforwards for tax purposes of consolidated subsidiaries at
March 31, 2000 amounted to approximately (Yen)5,486 million ($52 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, less valuation allowance, 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:
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 7,400 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
F-24
<PAGE>
NIPPON TELEGRAPH AND TELEPHONE CORPORATION
AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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.
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 ($147 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 ($2,213 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)2,824,550 million
($26,647 million) at March 31, 2000.
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, 2000 includes amounts
representing final cash dividends of (Yen)39,586 million ($373 million),
(Yen)2,500 ($24) per share, and the related transfer to the legal reserve of
(Yen)3,964 million ($37 million), which were approved at the shareholders'
meeting held on June 29, 2000.
On June 29, 1999, the shareholders of NTT approved a stock repurchase plan.
Under the plan, NTT was authorized to repurchase up to (Yen)120,000 million
($1,132 million) for a one year period. In accordance with the plan, NTT
repurchased and retired 77,410 shares of its common stock for a total purchase
price (Yen)119,999 million ($1,132 million) during the year ended March 31,
2000. Repurchases of common stock are accounted for in accordance with Japanese
Commercial Code and customary practices in Japan as a reduction to retained
earnings for the cost of the repurchase.
F-25
<PAGE>
NIPPON TELEGRAPH AND TELEPHONE CORPORATION
AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Accumulated other comprehensive income (loss)--
An analysis of the changes for the years ended March 31, 1998, 1999 and 2000
in accumulated other comprehensive income (loss) is shown below:
<TABLE>
<CAPTION>
1998 1999 2000 2000
------------ ------------ ------------ ------------
Millions of yen Millions of
U.S. dollars
<S> <C> <C> <C> <C>
Unrealized gain on secu-
rities:
At beginning of year.. (Yen) (4,648) (Yen)(20,061) (Yen)(22,181) $(210)
Change during the
year................. (15,413) (2,120) 97,502 920
------------ ------------ ------------ -----
At end of year...... (Yen)(20,061) (Yen)(22,181) (Yen) 75,321 $ 710
============ ============ ============ =====
Foreign currency trans-
lation adjustments:
At beginning of year.. (Yen) -- (Yen) 4,030 (Yen) (261) $ (2)
Change during the
year................. 4,030 (4,291) (11,663) (110)
------------ ------------ ------------ -----
At end of year...... (Yen) 4,030 (Yen) (261) (Yen)(11,924) $(112)
============ ============ ============ =====
Minimum pension liabil-
ity adjustments:
At beginning of year.. (Yen) -- (Yen) -- (Yen)(21,136) $(199)
Change during the
year................. -- (21,136) (1,999) (19)
------------ ------------ ------------ -----
At end of year...... (Yen) -- (Yen)(21,136) (Yen)(23,135) $(218)
============ ============ ============ =====
Total accumulated other
comprehensive income
(loss):
At beginning of year.. (Yen) (4,648) (Yen)(16,031) (Yen)(43,578) $(411)
Change during the
year................. (11,383) (27,547) 83,840 791
------------ ------------ ------------ -----
At end of year...... (Yen)(16,031) (Yen)(43,578) (Yen) 40,262 $380
============ ============ ============ =====
</TABLE>
Tax effects allocated to each component of other comprehensive income (loss)
for the years ended March 31, 1998, 1999 and 2000 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,
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 (Yen)(27,547)
============ ============ ============
For the year ended March 31,
2000:
Unrealized gain on securities.. (Yen)155,476 (Yen)(57,974) (Yen) 97,502
Foreign currency translation
adjustments................... (12,511) 848 (11,663)
Minimum pension liability
adjustment.................... (3,941) 1,942 (1,999)
------------ ------------ ------------
Other comprehensive income
(loss)...................... (Yen)139,024 (Yen)(55,184) (Yen) 83,840
============ ============ ============
</TABLE>
F-26
<PAGE>
NIPPON TELEGRAPH AND TELEPHONE CORPORATION
AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
<TABLE>
<CAPTION>
Pre- Net-
tax of-tax
amount Tax expense amount
------ ----------- ------
Millions of U.S. dollars
<S> <C> <C> <C>
For the year ended March 31, 2000:
Unrealized gain on securities................... $1,467 $(547) $920
Foreign currency translation adjustments........ (118) 8 (110)
Minimum pension liability adjustment............ (37) 18 (19)
------ ----- ----
Other comprehensive income (loss)............. $1,312 $(521) $791
====== ===== ====
</TABLE>
14. Business segment and geographic area:
The operation segments reported below are the segments of NTT for which
separate financial information is available and for which 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, which was provided by
NTT through June 30, 1999 and which is now provided by NTT East, NTT West and
NTT Communications, 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
fundamental research activities, the management of telecommunications
facilities, the sale and maintenance of telecommunications equipment, the loan
of real estate, the sale of telephone cards and certain other services,
primarily within the NTT Group itself.
F-27
<PAGE>
NIPPON TELEGRAPH AND TELEPHONE CORPORATION
AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Business segments--
Sales and operating revenue:
<TABLE>
<CAPTION>
1998 1999 2000 2000
-------------- -------------- --------------- ------------
Millions of yen Millions of
U.S. dollars
<S> <C> <C> <C> <C>
Sales and operating
revenue:
Wireline services--
Customers........... (Yen)6,046,334 (Yen)5,752,301 (Yen) 5,715,235 $ 53,917
Intersegment........ 276,010 384,703 494,120 4,662
-------------- -------------- --------------- --------
Total............... 6,322,344 6,137,004 6,209,355 58,579
Wireless services--
Customers........... 2,682,658 3,206,829 3,722,470 35,118
Intersegment........ 257,384 149,317 204,943 1,933
-------------- -------------- --------------- --------
Total............... 2,940,042 3,356,146 3,927,413 37,051
Data communication
services--
Customers........... 609,118 633,909 641,761 6,054
Intersegment........ 60,111 71,556 74,669 705
-------------- -------------- --------------- --------
Total............... 669,229 705,465 716,430 6,759
Other--
Customers........... 111,903 136,634 303,873 2,867
Intersegment........ 960,654 1,338,100 1,876,050 17,698
-------------- -------------- --------------- --------
Total............... 1,072,557 1,474,734 2,179,923 20,565
Elimination........... (1,554,159) (1,943,676) (2,649,782) (24,998)
-------------- -------------- --------------- --------
Consolidated total.... (Yen)9,450,013 (Yen)9,729,673 (Yen)10,383,339 $ 97,956
============== ============== =============== ========
</TABLE>
F-28
<PAGE>
NIPPON TELEGRAPH AND TELEPHONE CORPORATION
AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Segment profit or loss:
<TABLE>
<CAPTION>
1998 1999 2000 2000
------------ -------------- ------------ ------------
Millions of yen Millions of
U.S. dollars
<S> <C> <C> <C> <C>
Operating income:
Wireline services..... (Yen)467,228 (Yen) 83,283 (Yen) 69,698 $ 658
Wireless services..... 327,154 467,521 522,692 4,931
Data communication
services............. 43,217 29,626 38,913 367
Other................. 2,584 52,535 115,305 1,088
------------ -------------- ------------ ------
Total................. 840,183 632,965 746,608 7,044
Elimination........... 31,862 78,470 77,182 728
------------ -------------- ------------ ------
Consolidated operating
income................. 872,045 711,435 823,790 7,772
Other income............ 66,511 1,716,115 135,441 1,278
Other expenses.......... 283,024 313,589 270,259 2,550
------------ -------------- ------------ ------
Consolidated income
before income taxes.... (Yen)655,532 (Yen)2,113,961 (Yen)688,972 $6,500
============ ============== ============ ======
Equity in earnings
(losses) in other
income:
Wireline services..... (Yen) 6,076 (Yen) 3,427 (Yen) (2,700) $ (26)
Wireless services..... 2,057 7,834 8,988 85
Data communication
services............. 1,353 1,156 1,970 19
Other................. (7) (3,374) 1,832 17
------------ -------------- ------------ ------
Consolidated total...... (Yen) 9,479 (Yen) 9,043 (Yen) 10,090 $ 95
============ ============== ============ ======
</TABLE>
Assets:
<TABLE>
<CAPTION>
1998 1999 2000 2000
--------------- --------------- --------------- ------------
Millions of yen Millions of
U.S. dollars
<S> <C> <C> <C> <C>
Total Assets:
Wireline services..... (Yen)12,774,420 (Yen)12,489,103 (Yen)12,260,998 $115,670
Wireless services..... 2,845,854 4,124,605 4,386,572 41,383
Data communication
services............. 964,329 1,038,138 1,082,623 10,213
Other................. 1,512,152 2,290,675 3,792,372 35,777
--------------- --------------- --------------- --------
Total................. 18,096,755 19,942,521 21,522,565 203,043
Elimination........... (744,224) (1,369,273) (2,421,276) (22,842)
--------------- --------------- --------------- --------
Consolidated total...... (Yen)17,352,531 (Yen)18,573,248 (Yen)19,101,289 $180,201
=============== =============== =============== ========
</TABLE>
F-29
<PAGE>
NIPPON TELEGRAPH AND TELEPHONE CORPORATION
AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Other significant items:
<TABLE>
<CAPTION>
1998 1999 2000 2000
-------------- -------------- -------------- ------------
Millions of yen Millions of
U.S. dollars
<S> <C> <C> <C> <C>
Depreciation and
amortization:
Wireline services..... (Yen)1,593,176 (Yen)1,620,457 (Yen)1,393,550 $13,147
Wireless services..... 422,419 492,402 591,431 5,580
Data communication
services............. 148,398 147,553 143,543 1,354
Other................. 117,850 179,545 289,807 2,733
-------------- -------------- -------------- -------
Consolidated total...... (Yen)2,281,843 (Yen)2,439,957 (Yen)2,418,331 $22,814
============== ============== ============== =======
Capital expenditures for
segment assets:
Wireline services..... (Yen)1,886,969 (Yen)1,727,901 (Yen)1,427,203 $13,464
Wireless services..... 791,845 870,417 876,057 8,265
Data communication
services............. 161,705 236,098 211,189 1,992
Other................. 121,807 253,443 214,346 2,022
-------------- -------------- -------------- -------
Consolidated total...... (Yen)2,962,326 (Yen)3,087,859 (Yen)2,728,795 $25,743
============== ============== ============== =======
</TABLE>
The capital expenditures in the above table represent the additions to fixed
assets of each segment.
Transfers between reportable businesses 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, 1998, 1999 and 2000.
15. Leases:
NTT and its subsidiaries lease certain office space, employees' residential
facilities and other assets. Leases qualifying as capital leases at March 31,
1999 and 2000 were as follows:
<TABLE>
<CAPTION>
Class of property 1999 2000 2000
----------------- ------------ ------------ ------------
Millions of yen Millions of
U.S. dollars
<S> <C> <C> <C>
Buildings........................... (Yen)381,663 (Yen)363,644 $ 3,430
Machinery, vessels and tools........ 287,824 273,128 2,577
Accumulated depreciation............ (308,581) (301,876) (2,848)
------------ ------------ -------
(Yen)360,906 (Yen)334,896 $ 3,159
============ ============ =======
</TABLE>
F-30
<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, 2000 are as
follows:
<TABLE>
<CAPTION>
Millions
Millions of of U.S.
Year ending March 31 yen dollars
-------------------- ------------ --------
<S> <C> <C>
2001.................................................. (Yen)38,674 $ 365
2002.................................................. 37,716 356
2003.................................................. 31,688 299
2004.................................................. 29,219 275
2005.................................................. 28,509 269
Later years........................................... 1,046,498 9,873
------------ ------
Total minimum lease payments.......................... 1,212,304 11,437
Less--Amount representing interest.................... (841,902) (7,943)
------------ ------
Present value of net minimum lease payments........... 370,402 3,494
Less--Current obligation.............................. (10,616) (100)
------------ ------
Long-term capital lease obligations................... (Yen)359,786 $3,394
============ ======
</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, 1998, 1999 and 2000 were (Yen)153,055 million,
(Yen)146,443 million and (Yen)153,376 million ($1,447 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 and 2000 were as follows:
<TABLE>
<CAPTION>
1999 2000 2000
------------ ------------ ------------
Millions of yen Millions of
U.S. dollars
<S> <C> <C> <C>
Investment in financing leases:
Total minimum lease payments re-
ceivable....................... (Yen)394,687 (Yen)419,637 $3,959
Unearned income................. (44,301) (49,845) (470)
Estimated residual values....... 507 585 5
------------ ------------ ------
350,893 370,377 3,494
Less--Allowance for doubtful ac-
counts........................... (3,416) (3,980) (38)
------------ ------------ ------
347,477 366,397 3,456
Less--Current portion............. (136,270) (109,762) (1,035)
------------ ------------ ------
(Yen)211,207 (Yen)256,635 $2,421
============ ============ ======
</TABLE>
F-31
<PAGE>
NIPPON TELEGRAPH AND TELEPHONE CORPORATION
AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
At March 31, 2000, the contractual maturities of minimum lease payments of
the investment in financing leases are as follows:
<TABLE>
<CAPTION>
Millions
Millions of of U.S.
Year ending March 31 yen dollars
-------------------- ------------ --------
<S> <C> <C>
2001................................................... (Yen)136,815 $1,291
2002................................................... 107,021 1,010
2003................................................... 78,862 744
2004................................................... 52,470 495
2005................................................... 27,925 263
Thereafter............................................. 16,544 156
------------ ------
(Yen)419,637 $3,959
============ ======
</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, 1998, 1999 and 2000
were (Yen)288,931 million, (Yen)381,776 million and (Yen)357,626 million
($3,374 million), respectively.
Advertising costs--
Advertising costs are expensed as incurred. Advertising costs included in
other operating expenses were (Yen)83,452 million, (Yen)89,956 million and
(Yen)113,077 million ($1,067 million) for the years ended March 31, 1998, 1999
and 2000, 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 ($51,585) 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 ($1,419 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 DoCoMo, Inc. ("NTT DoCoMo") formerly named NTT
Mobile Communications Network Inc., a consolidated subsidiary, 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 ($36,792) per share. NTT sold
218,000 shares of NTT DoCoMo's common stock, without par value, for total
proceeds of (Yen)826,140 million ($7,794 million), net of related expenses. In
addition, NTT DoCoMo issued 327,000 new shares of stock for total proceeds of
(Yen)1,236,500 million ($11,665 million), net of related expenses. As a result
of the offering, NTT's stake in NTT 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 ($15,418 million) are
recognized in the consolidated statement of income for the year ended
F-32
<PAGE>
NIPPON TELEGRAPH AND TELEPHONE CORPORATION
AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
March 31, 1999 together with applicable deferred taxes thereon. In the
consolidated statement of cash flows for 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
($20,877 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, 1998, 1999 and 2000 were loss of (Yen)799
million, gain of (Yen)1,368 million and (Yen)918 million ($9 million),
respectively.
19. Financial instruments:
The carrying amounts and the estimated fair values of financial instruments
excluding debt and equity securities at March 31, 1999 and 2000 are as follows:
<TABLE>
<CAPTION>
1999 2000 2000
-------------------------------- -------------------------------- ------------------
Carrying Carrying Carrying Fair
amounts Fair value amounts Fair value amounts value
--------------- --------------- --------------- --------------- -------- --------
Millions of U.S.
Millions of yen dollars
<S> <C> <C> <C> <C> <C> <C>
Long-term debt including
current portion........ (Yen)(5,406,904) (Yen)(5,523,304) (Yen)(5,107,736) (Yen)(5,164,290) $(48,186) $(48,720)
Forward exchange
contracts.............. (10,492) 1,255 16,511 (50,548) (156) (477)
Interest rate and
currency swap
agreements............. 6,654 (6,344) 53,231 (68,205) 502 (643)
Option contracts
purchased.............. 155 0 9 0 0 0
Option contracts
written................ (267) (267) (145) (145) (1) (1)
</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, 1999 and 2000 with discounted amounts of net future
cash flows.
F-33
<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, 1999 and 2000:
<TABLE>
<CAPTION>
1999 2000 2000
------------ ------------ ------------
Millions of yen Millions of
U.S. dollars
<S> <C> <C> <C>
Forward exchange contracts.......... (Yen)396,679 (Yen)227,688 $2,148
Interest rate and currency swap
agreements......................... 850,074 886,701 8,365
Option contracts purchased.......... 30,000 2,000 19
Option contracts written............ 21,600 10,800 102
</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,
2000.
20. Commitments and contingent liabilities:
Commitments outstanding at March 31, 2000 for the purchase of property, plant
and equipment and other assets approximated (Yen)458,131 million ($4,322
million).
Contingent liabilities at March 31, 2000 for loans guaranteed amounted to
(Yen)33,061 million ($312 million).
At March 31, 2000, 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:
On May 8, 2000, NTT Communications Corporation ("NTT Communications"), a
subsidiary of NTT, through a U.S.-based subsidiary, entered into a definitive
merger agreement with Verio Inc., a U.S. Internet solution provider ("Verio"),
pursuant to which NTT Communications would acquire a majority of the shares of
Verio at a price of $60 per share of common stock through a takeover bid and
the U.S. subsidiary of NTT Communications would thereafter be merged into
Verio. The transaction is valued at approximately $5.1 billion. On September 8,
2000, such acquisition was completed. The acquisition will be accounted for as
a purchase in fiscal year 2001.
On May 9, 2000, NTT DoCoMo signed a Memorandum of Understanding with Dutch-
based Koninklijke KPN N.V. ("KPN") and its subsidiary, a holding company of
cellular operators, KPN Mobile N.V. ("KPN Mobile"), under which NTT DoCoMo
would acquire 15% of the shares of KPN Mobile for the maximum amount of Euro
5.1 billion. In August, 2000, NTT DoCoMo acquired 15% of the shares of KPN
Mobile for approximately Euro 4 billion ($US3.7 billion).
On July 12, 2000, NTT DoCoMo entered into agreements with KPN Mobile and
Hutchison Whampoa Ltd. to invest in Hutchison 3G UK Holdings Ltd ("Hutchison
3G"), which owns a third generation cellular telephone license in the United
Kingdom. NTT DoCoMo invested approximately (Pounds)1.2 billion (US$1.7
billion), and acquired a 20% interest in Hutchison 3G and KPN Mobile acquired a
15% stake in Hutchison 3G.
The NTT parent, NTT East and NTT West have decided to implement a voluntary
early retirement program covering a total of approximately 6,500 employees in
fiscal years 2001 and 2002 as part of a rationalization of their management.
This rationalization is a response to adverse business conditions resulting
from intense competition and other factors in the telecommunications industry.
The related termination benefits will be recognized as costs in the periods
during which the relevant employees retire.
F-34
<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, 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
=========== =========== ============ ===========
Year ended March 31, 2000:
Allowance for doubtful
accounts............... (Yen)40,287 (Yen)29,737 ((Yen)34,342) (Yen)35,682
=========== =========== ============ ===========
--------
Note: 1. Amounts written off.
<CAPTION>
Balance at
beginning of Balance at
period Additions Deductions end of period
------------ ----------- ------------ -------------
Millions of yen
<S> <C> <C> <C> <C>
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) --
=========== =========== ============ ===========
Year ended March 31, 2000:
Valuation allowance--
Deferred tax assets.... (Yen) -- (Yen) 2,287 (Yen) -- (Yen) 2,287
=========== =========== ============ ===========
</TABLE>
F-35
<PAGE>
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
No dealer, salesperson or other person is authorized to give any information
or to represent anything not contained in this prospectus. You must not rely
on any unauthorized information or representations. This prospectus is an
offer to sell only the shares offered hereby, but only under circumstances and
in jurisdictions where it is lawful to do so. The information contained in
this prospectus is current only as of its date.
----------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary....................................................... 3
Where To Find More Information........................................... 11
Forward Looking Statements............................................... 11
Use of Proceeds.......................................................... 12
Exchange Rates........................................................... 12
Capitalization........................................................... 13
Selected Financial Data.................................................. 14
Selected Operating and Other Data........................................ 16
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 17
Business................................................................. 32
Regulatory Developments.................................................. 47
Dividends and Price Range of Shares and ADSs............................. 52
Principal Shareholders and Selling Shareholder........................... 56
Description of the Shares................................................ 57
Description of ADRs and Deposit Agreement................................ 64
Tax Considerations....................................................... 70
Experts.................................................................. 73
Validity of Securities................................................... 73
Underwriting............................................................. 74
Index to Financial Statements............................................ F-1
</TABLE>
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
Nippon Telegraph and Telephone Corporation
1,200,000 Shares of Common Stock
(Par Value (Yen)50,000 Per Share)
in the form of Shares or American Depositary Shares
----------------
[LOGO]
NTT
----------------
Merrill Lynch & Co.
Goldman, Sachs & Co.
Nomura Securities International, Inc.
NikkoSalomonSmithBarney Americas
Representatives of the U.S. Underwriters
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
<PAGE>
Part II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 14. Other Expenses of Issuances and Distribution.
The estimated expenses in connection with the issuance and sale of the ADSs
being registered hereunder (other than underwriting discounts) are set forth in
the following table:
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee.............. $ 596,776
Accounting fees and expenses..................................... 60,000
Legal fees and expenses.......................................... 901,000
Printing expenses................................................ 1,797,000
Miscellaneous.................................................... 3,480,000
----------
Total........................................................ $6,834,776
==========
</TABLE>
Item 15. Indemnification of Directors and Officers.
Articles 254 and 280 of the Commercial Code of Japan make the provisions of
Section 10, Chapter 2, Book III of the Civil Code applicable to the
relationship between NTT and its directors and corporate auditors,
respectively. Section 10, among other things, provides in effect that:
(1) If a director or a corporate auditor of a company has defrayed any
expenses which are considered necessary for the management of the affairs
of such company entrusted to him, he may demand reimbursement therefor from
the company;
(2) If a director or a corporate auditor has assumed an obligation
necessary for the management of the affairs entrusted to him, he may
require the company to perform it in his place or, if it is not due, to
furnish adequate security; and
(3) If a director or a corporate auditor, without any fault on his part,
sustains damage through the management of the affairs entrusted to him, he
may demand compensation therefor from the company.
Item 16. Exhibits.
See Exhibit Index on Page II-4.
Item 17. Undertakings.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933, as amended, may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the provisions described under Item 15
above, or otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act of 1933, as amended, and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act of 1933, as amended,
and will be governed by the final adjudication of such issue.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of
this registration statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liabilities under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-1
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form F-3 and has duly caused this registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Tokyo, Japan on September 29, 2000.
Nippon Telegraph and Telephone
Corporation
*
By: _________________________________
(Jun-ichiro Miyazu, President)
Pursuant to the requirements of the Securities Act of 1933, this registration
statement has been signed by the following persons in the capacities and on the
dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
* President and Director September 29, 2000
______________________________________ (Principal Executive
Jun-ichiro Miyazu Officer)
* Senior Executive Vice September 29, 2000
______________________________________ President and Director
Norio Wada
* Senior Executive Vice September 29, 2000
______________________________________ President and Director
Yusuke Tachibana
* Senior Executive Vice September 29, 2000
______________________________________ President and Director
Haruki Matsuno
* Senior Vice President and September 29, 2000
______________________________________ Director
Kanji Koide
* Senior Vice President and September 29, 2000
______________________________________ Director
Shigehiko Suzuki
* Senior Vice President and September 29 2000
______________________________________ Director
Hiromi Wasai
* Senior Vice President and September 29, 2000
______________________________________ Director
Toyohiko Takabe
* Senior Vice President and September 29, 2000
______________________________________ Director (Principal
Satoru Miyamura Financial and Accounting
Officer)
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
Senior Vice President and September 29, 2000
______________________________________ Director
Takashi Imai
Senior Vice President and September 29, 2000
______________________________________ Director
Yotaro Kobayashi
NTT AMERICA, INC.
* Executive Vice President September 29, 2000
By:___________________________________
Akihiko Okada
/s/ Satoru Miyamura
*By: _________________________________
Satoru Miyamura, attorney-in-fact
</TABLE>
* Satoru Miyamura, by signing his name hereto, does sign this document on
behalf of the person indicated above pursuant to a power of attorney duly
executed by such person and filed with the Securities and Exchange
Commission.
II-3
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Page
Exhibit No.
------- ----
<C> <S> <C>
1. Form of Underwriting Agreement.
2.1 The Law Concerning Nippon Telegraph and Telephone Corporation,
etc. (English translation thereof) (incorporated by reference
to Exhibit 2.1 to NTT's Registration Statement on Form F-3
(file no. 333-89083)).
2.2 Law Concerning Partial Revision to the Nippon Telegraph and
Telephone Corporation Law (English translation thereof)
(incorporated by reference to NTT's Form 6-K dated June 30,
1997).
2.3 Supplemental Provisions for the Law Concerning Partial Revision
to the Nippon Telegraph and Telephone Corporation Law (English
translation thereof) (incorporated by reference to NTT's Form
6-K dated July 8, 1997).
2.4 Plan concerning the reorganization of NTT approved by the
shareholders of NTT on June 29, 1999 (English translation
thereof) (incorporated by reference to NTT's Form 6-K dated
June 14, 1999).
3.1 Articles of Incorporation of NTT (English translation thereof)
(incorporated by reference to NTT's Form 6-K dated September
28, 2000)
3.2 Regulations of Board of Directors of NTT (English translation
thereof) (incorporated by reference to NTT's Form 6-K dated
September 28, 2000)
3.3 Share Handling Regulations of NTT (English translation thereof)
(incorporated by reference to NTT's Form 6-K dated September
28, 2000)
4.1 Deposit Agreement, dated as of July 8, 1994, among NTT, Morgan
Guaranty Trust Company of New York, as Depositary, and all
holders from time to time of American Depositary Receipts
issued thereunder (incorporated by reference to Exhibit (a) to
Registration Statement on Form F-6 (file no. 33-81562)).
4.2 Form of ADR (included in Exhibit 4.1).
4.3 Specimen Certificate for shares of NTT's common stock, par
value (Yen)50,000 per share (English translation thereof)
(incorporated by reference to Exhibit 2.2 to NTT's Registration
Statement on Form 20-F (file no. 1-8910)).
5.1 Opinion and consent of Tomotsune Kimura & Mitomi, as to the
validity of the shares underlying the ADSs.
8.1 Tax opinion and consent of Milbank, Tweed, Hadley & McCloy LLP.
23.1 Consent of PricewaterhouseCoopers.
23.2 Consent of Tomotsune Kimura & Mitomi (included in Exhibit 5.1).
23.3 Consent of Milbank, Tweed, Hadley & McCloy LLP (included in
Exhibit 8.1).
24. Powers of Attorney.
</TABLE>
--------
II-4
