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SECURITIES AND EXCHANGE COMMISSION
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FORM 20-F
[_] REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g)
OF THE SECURITIES EXCHANGE ACT OF 1934
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended March 31, 2000
Commission file number 1-8910
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NIPPON DENSHIN DENWA KABUSHIKI KAISHA
(Exact name of Registrant as specified in its charter)
NIPPON TELEGRAPH AND TELEPHONE CORPORATION
(Translation of Registrant's name into English)
JAPAN
(Jurisdiction of incorporation or organization)
3-1, OTEMACHI 2-CHOME, CHIYODA-KU, TOKYO 100-8116, JAPAN
(Address of principal executive offices)
Securities registered or to be registered pursuant to Section 12(b) of the
Act:
Title of each class Name of each exchange on which
registered
Common stock, par value (Yen)50,000
per share ("Shares") New York Stock Exchange*
American Depositary Shares ("ADSs") New York Stock Exchange
each of which represents 1/200 of a
Share
--------
* Not for trading but only in connection with the registration of ADSs
pursuant to the requirements of the Securities and Exchange Commission.
----------------
Securities registered or to be registered pursuant to Section 12(g) of the
Act:
None
Securities for which there is a reporting obligation pursuant to Section 15(d)
of the Act:
6% Global Notes Due March 25, 2008
Indicate the number of outstanding shares of each of the issuer's classes of
capital or common stock as of the close of the period covered by the annual
report.
Common stock, par value (Yen)50,000 15,834,590 shares
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes [X] No [_]
Indicate by check mark which financial statement item the registrant has
elected to follow.
Item 17 [_] Item 18 [X]
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
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<S> <C>
PART I
ITEM 1--DESCRIPTION OF BUSINESS......................................... 4
ITEM 2--DESCRIPTION OF PROPERTY......................................... 34
ITEM 3--LEGAL PROCEEDINGS............................................... 34
ITEM 4--CONTROL OF REGISTRANT........................................... 35
ITEM 5--NATURE OF TRADING MARKET........................................ 35
ITEM 6--EXCHANGE CONTROLS AND OTHER LIMITATIONS AFFECTING SECURITY
HOLDERS ......................................................... 38
ITEM 7--TAXATION........................................................ 40
ITEM 8--SELECTED FINANCIAL DATA......................................... 43
ITEM 9--MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS............................................ 44
ITEM 9A--QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK....... 60
ITEM 10--DIRECTORS AND OFFICERS OF REGISTRANT............................ 62
ITEM 11--COMPENSATION OF DIRECTORS AND OFFICERS.......................... 63
ITEM 12--OPTIONS TO PURCHASE SECURITIES FROM REGISTRANT OR SUBSIDIARIES.. 63
ITEM 13--INTEREST OF MANAGEMENT IN CERTAIN TRANSACTIONS.................. 63
PART II
ITEM 14--DESCRIPTION OF SECURITIES TO BE REGISTERED...................... 63
PART III
ITEM 15--DEFAULTS UPON SENIOR SECURITIES................................. 63
ITEM 16--CHANGES IN SECURITIES AND CHANGES IN SECURITY FOR REGISTERED
SECURITIES....................................................... 64
PART IV
ITEM 17--FINANCIAL STATEMENTS............................................ 64
ITEM 18--FINANCIAL STATEMENTS............................................ 64
ITEM 19--FINANCIAL STATEMENTS AND EXHIBITS............................... 64
SIGNATURES.......................................................... 66
</TABLE>
2
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In this annual report, except as otherwise specified, "NTT" refers to Nippon
Telegraph and Telephone Corporation (hereinafter also sometimes referred to as
the "registrant"), "NTT Group" refers to NTT and its subsidiaries and any of
their respective predecessors in business, and the "predecessor corporation"
refers to Nippon Telegraph & Telephone Public Corporation, which operated the
business of NTT prior to April 1985.
References to fiscal years are to 12-month periods commencing in each case
on April 1 of the prior year and ending on March 31 of the year indicated.
References to years not specified as being fiscal years are to calendar years.
EXCHANGE RATES
In this annual report, all amounts are expressed in Japanese yen ("(Yen)" or
"yen"), except as otherwise specified. Except as otherwise indicated, for
convenience of the reader the translations of yen into dollars have been made
at the rate of 106 yen to the dollar, the approximate rate of exchange on
March 31, 2000, the date of the most recent balance sheet included herein.
On August 1, 2000, the noon buying rate in New York City for cable transfers
payable in yen as announced for customs purposes by the Federal Reserve Bank
of New York on such date was $1 = (Yen)109.47.
The following table sets forth for the periods indicated certain information
concerning the exchange rate for Japanese yen and U.S. dollars, based on the
noon buying rates for cable transfers in yen in New York City as certified for
customs purposes by the Federal Reserve Bank of New York.
<TABLE>
<CAPTION>
Yen per Dollar
---------------------------------
Years Ended March 31 High Low Average(1) Year-end
-------------------- ------ ------ ---------- --------
<S> <C> <C> <C> <C>
1995.......................................... 105.38 86.85 98.48 86.85
1996.......................................... 107.29 81.12 96.95 107.00
1997.......................................... 124.54 104.49 113.20 123.72
1998.......................................... 133.99 111.42 123.57 133.29
1999.......................................... 147.14 108.83 127.86 118.43
2000.......................................... 124.45 101.53 110.02 102.73
2001 (through August 1, 2000)................. 109.75 104.19 107.87
</TABLE>
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(1) The average of month-end rates during the period.
3
<PAGE>
PART I
ITEM 1--DESCRIPTION OF BUSINESS
NTT Group
NTT Group 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 (Integrated Services
Digital Network) services, sale of telecommunication equipment and other
services.
Telephone services are the largest part of the business of NTT Group,
representing approximately 61.6% or (Yen)6,394 billion, of total operating
revenues of approximately (Yen)10,383 billion in fiscal year 2000. Telegraph
services contributed 0.8%, leased circuit services 4.8%, data communication
facility services 3.8%, ISDN services 7.9%, sale of telecommunication
equipment 11.0% and other services, which include Open Computer Network (OCN)
services and system development services, contributed 10.1%, of operating
revenues, respectively.
NTT Group's telephone services consist primarily of local, long distance and
wireless services. International telecommunications services were recently
added after the adoption of amendments to the Nippon Telegraph and Telephone
Corporation Law (the "NTT Law"), allowing NTT Group for the first time to
provide consumers with a full range of telephony services. NTT Group is the
principal provider of fixed-line services in Japan with approximately 55
million subscribers.
NTT Group provides cellular telephone services and Personal Handy-phone
System (PHS) services through NTT DoCoMo, Inc. ("NTT DoCoMo"), which changed
its name from NTT Mobile Communications Network, Inc. on April 1, 2000, and
its eight regional subsidiaries (together, "NTT DoCoMo Group"). NTT DoCoMo
Group 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 29,356 thousand subscribers as of March 31,
2000. NTT DoCoMo is 67.1% owned by NTT. The balance of NTT DoCoMo's shares are
owned by public investors.
NTT Group provides data communication facility services through NTT DATA
Corporation ("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 was reorganized as a holding company effective on July 1, 1999 when the
relevant NTT business activities were transferred to NTT's respective wholly-
owned subsidiaries, Nippon Telegraph and Telephone East Corporation ("NTT
East"), Nippon Telegraph and Telephone West Corporation ("NTT West"), and NTT
Communications Corporation ("NTT Communications"). NTT East inherited the
intra-prefectural telecommunications services in the Hokkaido, Tohoku, Kanto,
Tokyo and Shinetsu regions and related services. NTT West inherited the intra-
prefectural telecommunications services in the Tokai, Hokuriku, Kansai,
Chugoku, Shikoku and Kyushu regions and related services. NTT Communications
inherited the domestic inter-prefectural telecommunications and multimedia
network services and related services, and was allowed to enter the
international telecommunications business. See "Description of Business--
Reorganization".
On April 1, 1998, NTT Group became subject to Statement of Financial
Accounting Standards No. 131 ("SFAS 131"), "Disclosures about Segments of an
Enterprise and Related Information." SFAS 131 requires public enterprises to
report certain information about their products and services, the geographic
areas in which they operate and their major customers. As a result of the
adoption of SFAS 131, NTT Group's results are now segmented according to its
four primary lines of business: wireline services, wireless services, data
communication
4
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services and other services. The wireline segment, which was provided by NTT
through June 30, 1999 and which now is 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; the wireless segment, provided by NTT DoCoMo Group,
includes cellular services, PHS services and other related services; the data
communication segment, provided by NTT DATA, includes data communication
services and other related services; and the other services segment, provided
by other NTT Group subsidiaries, includes the sale of various
telecommunications products and other related services. See Footnote 14 to the
Notes to Consolidated Financial Statements attached hereto.
History
In 1985 there were significant changes in the legislative and regulatory
framework for telecommunications in Japan, including the introduction of
telecommunications reform laws aimed at promoting competition in the
telecommunications services market. Prior to April 1, 1985, the predecessor
corporation was the sole domestic telecommunications carrier in Japan.
On April 1, 1985, NTT was incorporated as a limited liability, joint-stock
company under the NTT Law and succeeded to all the assets and liabilities of
the predecessor corporation. The predecessor corporation was incorporated
under the Nippon Telegraph & Telephone Public Corporation Law on August 1,
1952 to take over from the Japanese Government (the "Government") the
provision of nationwide telephone, telegraph and related telecommunications
services in Japan. All Government-owned assets relating to such services were
transferred to the predecessor corporation. In April 1953, the predecessor
corporation's international division, which operated Japan's international
telephone, telegraph and related telecommunications services, was transferred
to a separate corporation, Kokusai Denshin Denwa Co., Ltd. (which merged with
Teleway Japan Corporation and changed its corporate name to KDD Corporation
("KDD") in December 1998). NTT owns approximately 8% of the share capital of
KDD, the balance being owned by the public.
At the same time that NTT was incorporated as a private company in 1985, the
Telecommunications Business Law (the "Telecom Business Law") opening the
Japanese telecommunications services industry to competition came into effect.
The Telecom Business Law authorizes the Minister of Posts and
Telecommunications ("MPT") to regulate two types of companies: Type I
Carriers, which provide telecommunications services through their own circuit
facilities, and Type II Carriers, which are telecommunication carriers other
than Type I Carriers, for example carriers which provide enhanced or value
added network ("VAN") services through circuits leased from Type I Carriers.
VAN services may also be provided by Type I Carriers. As of March 31, 2000,
there were 249 Type I Carriers and 7,651 Type II Carriers.
NTT's Shares are listed on the Tokyo Stock Exchange and all other stock
exchanges in Japan. In 1994, NTT listed its shares on the New York Stock
Exchange in ADR form and listed its shares on the London Stock Exchange.
On November 24, 1995, NTT capitalized a portion of its additional paid-in
capital and effected a 1.02-for-1 stock split thereby distributing to the
shareholders of NTT the benefits of the sale of NTT DATA stock. As a result of
the stock split, the number of outstanding Shares amounted to 15,912 thousand.
At the general shareholders meeting on June 29, 1999, the shareholders
approved the purchase by NTT of up to 120,000 of its Shares of common stock at
an aggregate cost not to exceed (Yen)120 billion, before its next ordinary
general meeting of shareholders in June 2000. On July 13, 1999, NTT acquired
48,898 Shares. Of the Shares it repurchased, 48,000 were purchased from the
Government of Japan. More recently, NTT acquired an additional 28,512 Shares
during the period from February 4 to February 15, 2000. None of these Shares
were purchased from the Government of Japan. As a result of these repurchases,
the number of outstanding Shares was reduced to 15,834,590. No additional
repurchases of Shares by NTT were proposed to, or authorized by, the
shareholders at the general shareholders meeting on June 29, 2000. See "Item
5--Nature of Trading Market."
Pursuant to an amendment to the NTT Law which became effective as of August
1, 1992, foreign nationals and foreign corporations, which were previously
prohibited from owning the Shares of NTT, have been allowed to own Shares.
However, the aggregate amount of NTT's voting rights which may be owned by
foreign nationals
5
<PAGE>
and foreign corporations must be less than 20% of NTT's total voting rights.
NTT is prohibited from registering ownership of Shares by such persons in
excess of such limit. See "Restrictions on Foreign Ownership" in Item 6--
Exchange Controls and Other Limitations Affecting Security Holders. Under the
Law Concerning Partial Revision to the Nippon Telegraph and Telephone
Corporation Law in June 1997 (the "Revision Law"), this restriction will
continue to apply to shares of NTT.
Relationship with the Government
The Government is required by the NTT Law to own one-third or more of the
total number of the outstanding Shares of NTT. However, any increase in the
number of Shares attributable to the issuance of new Shares, including Shares
issued upon the conversion or exercise of any convertible debentures or
debentures with preemptive rights, are not included in calculating the
proportion of the Shares held by the Government for this purpose.
The total number of outstanding Shares of NTT at the time of its
establishment was 15,600 thousand. Until October 1986, the Government owned
100% of the outstanding Shares of NTT. Out of the 10,400 thousand Shares held
by the Government which were permitted to be sold under the NTT Law, the
Government sold 5,400 thousand Shares to a variety of individual and
institutional investors during the period from October 1986 through December
1990.
On December 17, 1990, the Ministry of Finance announced its plan (the "1990
plan") that out of the 5,000 thousand Shares then available for sale under the
NTT Law, the Ministry of Finance would sell 2,500 thousand of such Shares at
the rate of approximately 500 thousand Shares per fiscal year (with any Shares
remaining unsold to be sold in future years based on market conditions), and
retain the other 2,500 thousand Shares for the time being. Prior to the
offering of Shares in December 1998, no such sales had been made as the
Government concluded that market conditions would not permit smooth absorption
of the Shares.
As a result of the 1.02-for-1 stock split on November 24, 1995 following the
sale of the NTT DATA stock, the number of outstanding Shares amounted to
15,912 thousand and the number of Shares that the Government was permitted to
sell amounted to 5,100 thousand.
The Government's annual budget for fiscal year 1999 contemplated the sale by
the Government of up to 1,000 thousand Shares. On December 18, 1998, the
Government sold the 1,000 thousand Shares contemplated to be sold to a variety
of individual and institutional investors in a global offering registered with
the United States Securities and Exchange Commission (the "SEC") in the form
of Shares or American depositary shares ("ADSs").
The Government's annual budget for fiscal year 2000 contemplated the sale of
up to 1,000 thousand additional Shares. On July 13, 1999, NTT repurchased
48,000 Shares from the Government and on November 12, 1999, the Government
sold the balance of the 952,000 Shares contemplated to be sold to a variety of
individual and institutional investors in a global offering registered with
the SEC in the form of ADSs.
As of March 31, 2000, the Government owned 8,416,855.26 Shares representing
53.15% of NTT's 15,834,590 outstanding Shares.
On December 20, 1999, the 1990 plan was terminated.
The NTT Law requires that any disposition of NTT's Shares owned by the
Government must be within the limits determined by the Diet in the relevant
annual budget. Under the budget for fiscal year 2001, the Government is
permitted to sell 1,000 thousand Shares.
The Government, acting through MPT, also regulates the activities of NTT
Group. See "Description of Business--Regulation." In addition, the Government
is one of the largest customers of NTT Group. NTT Group transacts business
with various departments and agencies of the Government as separate customers
on an arm's-length basis. The Government, in its capacity as shareholder,
votes at shareholder meetings of NTT and, by virtue
6
<PAGE>
of its position as a majority shareholder, theoretically has the power to
control most decisions taken at such meetings, although the Government has not
used this power to direct the management of NTT. The Government also has the
power to take certain actions with respect to the networks of NTT Group in the
interests of national security and international relations.
Business Overview and Strategy
By the end of fiscal year 2000, the number of mobile communications
subscribers in Japan exceeded the number of fixed-line subscribers, and demand
for mobile communications services continues to grow. The number of Japanese
Internet users, including users accessing the Internet through wireless
connections, is also expected to increase.
Higher-speed network services, including access lines, are required to
support the increasing sophistication of content, and the fusion between
telecommunications and broadcasting is bringing about developments in
electronic commerce and of other Internet-based businesses.
Fixed-line subscribers, on the other hand, will continue to decrease, while
the further evolution of Group Centers (GCs, or local switching offices)
connection and new market participation by both domestic and foreign companies
will create even fiercer competition not only in inter-prefectural
telecommunications but also at the intra-prefectural level.
Further, on-going globalization of the information communications market and
the growing seamlessness of services is bringing about dynamic structural
change, including the realignment of forces among existing carriers. Expansion
of the global market, particularly in terms of mobile communications and IP
communications, is sharpening competition among global carriers which view the
world as a single market.
NTT Group's fixed-line telephone business will inevitably fall off in line
with the changing market environment, reducing the proportion of total
operating revenues derived from fixed-line service. On the other hand, the
proportion of total operating revenues derived from mobile communications
services and Internet and data communications related services should
increase.
NTT Group's intra-prefectural business faces challenging market conditions
brought about by increased competition and the application of a Long-run
Incremental Cost Methodology to carrier interconnection fees, the introduction
of a price-cap system and other changes in the regulatory framework. NTT East
and NTT West are enforcing management efficiency and establishing the
necessary business foundations to deal appropriately with changes in the
regulatory environment. As part of an overall effort to meet these challenges,
NTT East and NTT West are diversifying and reducing charges as a means of
responding to the introduction of presubscription and other factors
intensifying intra-prefectural competition.
In inter-prefectural and international telephone businesses, NTT
Communications is diversifying services and lowering charges by, for example,
expanding and improving bundled services both inside and beyond Japan and
otherwise customizing service charges, responding actively to the introduction
of a presubscription system and other factors sharpening competition.
In the mobile communications business, recognizing that the mobile
communications market will continue to grow, NTT DoCoMo Group is working
steadily to expand business, and is also actively exploring the development of
non-voice communications through i-mode and International Mobile
Telecommunication 2000 (IMT-2000) in anticipation of strong demand for these
services and the inevitable slow down in the growth of voice communications
alone.
In the Internet and data communications related businesses, to deal with the
surge in Internet demand, NTT East and NTT West are providing 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 optic fiber access network.
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The Internet access breakthrough provided by low-cost optical access
services will not only increase consumer demand for a higher-speed, higher-
volume IP backbone, but is also expected to expand demand for content
applications and platforms which form the upper layer of this backbone, as
well as strengthening market demand for more sophisticated and diverse
services. Anticipating these trends, NTT Group plans to undertake business
development through strategic investments and alliances.
In global businesses, NTT Group will focus on the high-growth areas of
mobile communications, IP networks and platforms, expanding its operations
into U.S. and European markets from its Asian base.
Principal Business Activities
NTT Group is the largest provider of wireline and wireless voice, data,
Internet and related telecommunications services in Japan. Its predominant
business is providing nationwide telecommunications services. NTT Group's
services fall into seven major classes: telephone services, telegraph
services, leased circuit services, data communication facility services, ISDN
services, sale of telecommunication equipment and other services. NTT Group's
results are also segmented according to its four primary lines of business:
wireline services, wireless services, data communication services and other
services. See Footnote 14 to the Notes to Consolidated Financial Statements
attached hereto and Item 1--"Description of Business--NTT Group." NTT Group's
principal service is providing customers with nationwide domestic telephone
service through exchange lines and cellular telephones and PHS. Revenues from
each of these classes over the last three years are as follows:
<TABLE>
<CAPTION>
Years ended March 31,
----------------------------------
1998 1999 2000
---------- ---------- ----------
(Billions of yen)
<S> <C> <C> <C>
Telephone services...................... (Yen)6,306 (Yen)6,300 (Yen)6,394
% of Total Operating Revenues........... 66.7% 64.8% 61.6%
Telegraph services...................... (Yen) 92 (Yen) 86 (Yen) 83
% of Total Operating Revenues........... 1.0% 0.9% 0.8%
Leased circuit services................. (Yen) 488 (Yen) 507 (Yen) 500
% of Total Operating Revenues........... 5.2% 5.2% 4.8%
Data communication facility services.... (Yen) 373 (Yen) 383 (Yen) 397
% of Total Operating Revenues........... 3.9% 3.9% 3.8%
ISDN.................................... (Yen) 368 (Yen) 556 (Yen) 819
% of Total Operating Revenues........... 3.9% 5.7% 7.9%
Sale of telecommunication equipment..... (Yen) 970 (Yen)1,009 (Yen)1,138
% of Total Operating Revenues........... 10.3% 10.4% 11.0%
Other services.......................... (Yen) 853 (Yen) 889 (Yen)1,052
% of Total Operating Revenues........... 9.0% 9.1% 10.1%
</TABLE>
8
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The following table sets forth certain information concerning NTT Group's
principal facilities and operations as of the dates indicated.
<TABLE>
<CAPTION>
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).............. 393 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)
NTT...................................... 1,001 967 902 822 --
NTT East................................. -- -- -- -- 448
NTT West................................. -- -- -- -- 394
High-speed digital circuits (thousands)
NTT...................................... 57 107 169 228 --
NTT East................................. -- -- -- -- 244
NTT West................................. -- -- -- -- 205
INTEGRATED SERVICES DIGITAL NETWORK (ISDN)
SERVICES:
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) services
(thousands)............................. -- 1 159 478 1,147
Packet exchange services (thousands)..... 466 477 477 463 460
Frame Relay (thousands).................. 6 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>
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* The calculation method for determining the number of leased circuit
services was changed on July 1, 1999 when NTT's business activities were
transferred to NTT East, NTT West and NTT Communications.
Telephone Services
Revenues from telephone services were 61.6% of operating revenues in fiscal
year 2000. NTT Group's telephone services include certain items in the
wireline segment, such as telephone subscriber services, public telephones and
other related services; certain items in the wireless segment, such as
cellular telephones, PHS and other related services; and certain other
services. NTT Group is the principal provider of fixed-line telephone
subscriber services in Japan, providing approximately 55 million telephone
subscriber lines nationwide. NTT Group is also the largest provider of
cellular telephone services in Japan with approximately 29 million cellular
telephone subscribers. NTT Group provides both local and long-distance
telephone services, but until recently did not provide international services.
Under the new law relating to the reorganization of NTT, NTT Communications is
now permitted to offer international services. See "Description of Business--
Reorganization" and "--Global Businesses".
9
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(i) Telephone Subscriber Services
Telephone subscriber service is NTT Group's principal business activity. Due
in part to a shift to ISDN services, the number of subscriber lines in service
decreased 2.96 million from the previous fiscal year to 55.32 million
subscriber lines at the end of the fiscal year 2000. Residential use accounted
for approximately 72.9% and business use accounted for approximately 27.1% of
telephone subscriber lines.
Current monthly charges for telephone exchange lines vary according to
business or residential use and the number of subscribers' exchange lines in
the local calling area, or "Message Area," for local calls. Current call
charges for telephone exchange lines vary according to distance, duration, day
and time of day.
Since April 1, 1985, the effective date of the Telecom Business Law, NTT has
made numerous rate changes, amounting to an aggregate (Yen)967 billion in rate
reductions through March 31, 2000. In certain areas competing Type I Carriers
(so called "NCCs" or New Common Carriers) have acquired their market positions
mainly by offering long-distance telephone services at rates less than NTT
Group's. In fiscal year 1999, NTT Group's share of inter-prefecture calls
between all prefectures in Japan had dropped to 51% based on the number of
calls. When combined with ISDN services, NTT Group's share of inter-prefecture
calls in fiscal year 1999 was 58%. Market share data for fiscal year 2000 is
not available.
In February 1998, NTT reduced the rate for daytime calls over 100 kilometers
from (Yen)110/3 minutes to (Yen)90/3 minutes. This rate reduction eliminated
price advantages held by NCCs for the first time.
On April 3, 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.
The following tables set forth charges currently applied to telephone
subscriber services:
Installation Fee: (Yen)72,800
<TABLE>
<S> <C> <C> <C>
Subscriber line charges (Monthly charges
per line):
Number of subscribers in a local area.... 400,000 50,000 to Less than
or more 400,000 50,000
---------- ---------- ----------
Residential.............................. (Yen)1,750 (Yen)1,600 (Yen)1,450
Business................................. (Yen)2,600 (Yen)2,450 (Yen)2,300
</TABLE>
Dialing charges of NTT East and NTT West (Call duration for (Yen)10 from a
subscriber telephone)*:
<TABLE>
<CAPTION>
8 a.m.-7 p.m. 7 p.m.-11 p.m.** 11 p.m.-8 a.m.
------------------ ------------------ ----------------
<S> <C> <C> <C>
Local area........ 3 min. ((Yen)10) 3 min. ((Yen)10) 4 min. ((Yen)10)
Adjacent area..... 90 sec. ((Yen)20) 90 sec. ((Yen)20) 2 min. ((Yen)20)
Up to 20 km....... 90 sec. ((Yen)20) 90 sec. ((Yen)20) 2 min. ((Yen)20)
20 km--30 km...... 45 sec. ((Yen)40) 45 sec. ((Yen)40) 1 min. ((Yen)30)
30 km--60 km...... 36 sec. ((Yen)50) 36 sec. ((Yen)50) 1 min. ((Yen)30)
60 km--100 km..... 22.5 sec. ((Yen)80) 30 sec. ((Yen)60) 45 sec. ((Yen)40)
Over 100 km....... 20 sec. ((Yen)90) 22.5 sec. ((Yen)80) 30 sec. ((Yen)60)
</TABLE>
--------
* Amounts in ( ) are charges for 3 minutes.
** Also includes weekends and holiday daytime calls.
10
<PAGE>
Dialing charges of NTT Communications (Call duration for (Yen)10 from a
subscriber telephone)*:
<TABLE>
<CAPTION>
8 a.m.-7 p.m. 7 p.m.-11 p.m.** 11 p.m.-8 a.m.
---------------- ---------------- ----------------
<S> <C> <C> <C>
Adjacent area--20 km.. 90 sec. ((Yen)20) 90 sec. ((Yen)20) 2 min. ((Yen)20)
20 km--60 km.......... 45 sec. ((Yen)40) 45 sec. ((Yen)40) 1 min. ((Yen)30)
60 km--100 km......... 26 sec. ((Yen)70) 45 sec. ((Yen)40) 45 sec. ((Yen)40)
Over 100 km........... 20 sec. ((Yen)90) 26 sec. ((Yen)70) 36 sec. ((Yen)50)
</TABLE>
--------
* Amounts in ( ) are charges for 3 minutes.
** Also includes weekends and holiday daytime calls.
NTT Group is promoting greater utilization of telephones through marketing
and promotion of telephone subscriber services and other network services. At
the same time, NTT Group has sought to develop and provide services to satisfy
customer needs. This includes "Magic Box," introduced by NTT East and NTT West
in July 1999, which records messages at a processing center when a line is
busy or when a call is unanswered. The service can also be used for
transferring an incoming call to a cellular phone.
NTT Group offers several optional calling plans to different customer
segments. These services include "Telechoice" (a discount plan for toll calls
to specified area codes), "Telejozu" (an optional discount calling plan),
"Telewise" (a monthly toll-call charge discount service), "Telehodai" (a
monthly flat rate for local/adjacent area calls made during midnight/early
morning hours used most often for the Internet), "Area Plus" (a service that
allows customers to make three-minute calls to adjacent areas, or within a 20
kilometer area, at a cost of (Yen)10 in the daytime ((Yen)10 for four minutes
during late night hours and early morning) by paying a fixed monthly fee), and
"Time Plus" (a service that enables local calls to be made at a cost of
(Yen)10 for five minutes within their own local calling area ((Yen)10 for
seven minutes during late night hours and early morning) by similarly paying a
fixed monthly fee). In March 2000, NTT East and NTT West started overlapping
contracts service for "Area Plus" and "Time Plus" which allows subscribers to
obtain both services simultaneously.
The interconnection of local switches with telecommunications operators,
which began during fiscal year 1998 through NTT's Group Centers (GCs, or local
switching offices), brought direct competition for local telephone services
for the first time. During fiscal year 2000, the rate of interconnection of
GC's continued to increase resulting in a GC interconnection rate of
approximately 80%.
(ii) Cellular Telephone Service
During fiscal year 2000, the market in Japan for cellular telephone services
continued to expand, if at a slightly slower pace than prior fiscal years, and
the total number of cellular telephone subscribers increased by 23.1% to reach
a new high of 51.1 million. While NTT DoCoMo Group subscriber growth rate was
not as high as it was in recent years, as a result of the introduction of i-
mode and other new products and reductions in monthly and call charges, the
number of NTT DoCoMo Group's subscribers rose to 29.4 million, a 22.8%
increase over the previous fiscal year. In fiscal year 2000, traffic
substantially increased in terms of total hours of use.
NTT Group's cellular telecommunications and paging businesses, a part of NTT
Group's wireless segment, are conducted throughout Japan by NTT DoCoMo Group.
NTT DoCoMo Group is Japan's leading mobile telecommunications services
provider and is one of the largest cellular operators in the world as measured
by total number of cellular subscribers. NTT DoCoMo Group offers a range of
high-quality, high-mobility communications services such as cellular telephone
services, PHS services, paging services and other specialized mobile phone
services (including satellite mobile communications and in-flight telephone
services) through its own advanced network. NTT DoCoMo Group also sells
cellular telephone terminals, PHS terminals, pagers and related equipment. NTT
DoCoMo Group is regulated as a Type I telecommunications carrier and a Special
Type II telecommunications carrier.
11
<PAGE>
Although NTT owns 67.1% of NTT DoCoMo, NTT is not actively involved in the
daily management or operations of NTT DoCoMo Group. NTT DoCoMo Group's
business operations are conducted independently of the operations of NTT and
its other subsidiaries. In addition, transactions between NTT DoCoMo Group and
NTT and each of NTT's other subsidiaries are conducted on an arm's-length
basis.
On October 22, 1998, NTT DoCoMo listed its stock on the First Section of the
Tokyo Stock Exchange. In connection with this, NTT sold 218,000 shares of NTT
DoCoMo's non-par-value common stock and NTT DoCoMo issued 327,000 new shares
as part of the offering, which was completed on October 22, 1998. As a result
of the offering, NTT's stake in NTT DoCoMo was reduced from 94.7% to 67.1%.
The cellular industry in Japan has experienced a rapid growth in recent
years. The total number of cellular telephone subscribers in Japan has grown
from approximately 2.1 million at March 31, 1994 to approximately 51.1 million
at March 31, 2000, which positions Japan as the second largest cellular market
in the world. The penetration rate of cellular telephone services at the end
of fiscal year 2000 was approximately 403 subscribers per 1,000 inhabitants.
NTT DoCoMo Group continues to be Japan's leading provider of cellular
telephone services with an aggregate subscriber base of approximately 29.4
million and an estimated market share of 57.4% as of March 31, 2000.
The following table sets forth information regarding NTT DoCoMo Group's
subscribers and its market share:
<TABLE>
<CAPTION>
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>
NTT DoCoMo Group was the first cellular operator in Japan to provide digital
cellular service which it began offering in March 1993. As of March 31, 2000,
NTT DoCoMo Group's digital service areas covered approximately 100% of the
population nationwide.
In fiscal year 2000, NTT DoCoMo Group's cellular telephone traffic continued
to grow from the previous year in terms of number of hours of use in
accordance with the expansion of the cellular market:
The following table sets forth information regarding NTT DoCoMo Group's
cellular telephone traffic:
<TABLE>
<CAPTION>
March 31,
---------------
1998 1999 2000
---- ---- -----
<S> <C> <C> <C>
Hours of use (Million hours)................................. 448 784 1,237
</TABLE>
Cellular telephone subscribers are billed for a fixed monthly charge and
call charges which vary according to distance, duration, day and time of day.
NTT DoCoMo Group has continuously reduced its call and other rates,
including its monthly charge and subscription fee. NTT DoCoMo Group has also
introduced new plans, such as the prepaid service package known as "Pre-call"
service, to generate new types of usage.
NTT DoCoMo Group offers a variety of plans for fixed monthly charges and
call charges. The following table sets forth major charges currently applied
by NTT DoCoMo Group to its Digital 800 MHz service under its basic monthly
plans:
12
<PAGE>
Fixed monthly charges as of July 1, 2000:
<TABLE>
<CAPTION>
Fixed monthly charge Call charges
-------------------- ------------
<S> <C> <C>
Plan A............... (Yen)4,500 Includes (Yen)200 free charge.
Charges set forth in the table
below.
Plan B............... (Yen)3,500 Includes (Yen)400 free charge. 1.4
times the charges that are applied
to Plan A service.
Chotoku Plan......... (Yen)4,500 Includes (Yen)200 free charge.
Charged per minute. Low rate after 3
minutes.
Ohanashi Plus-Big.... (Yen)9,100 Includes (Yen)6,300 free charge. 1.1
times the charges that are applied
to Plan A service.
Ohanashi Plus-L...... (Yen)5,900 Includes (Yen)3,100 free charge. 1.2
times the charges that are applied
to Plan A service.
Ohanashi Plus-M...... (Yen)4,100 Includes (Yen)1,300 free charge. 1.4
times the charges that are applied
to Plan A service.
</TABLE>
Call charges for 3 minutes as of July 1, 2000 (weekdays):
<TABLE>
<CAPTION>
Calls originating in the business area of NTT
DoCoMo to: 8a.m.-7p.m. 7p.m.-11p.m. 11p.m-8a.m.
--------------------------------------------- ----------- ------------ -----------
<S> <C> <C> <C>
Fixed line telephone
Within the business area of NTT DoCoMo
Within the originating prefecture........ (Yen)80 (Yen)60 (Yen)40
Outside the originating prefecture....... (Yen)80 (Yen)60 (Yen)40
Outside the business area of NTT DoCoMo
To adjacent prefectures.................. (Yen)80 (Yen)60 (Yen)40
To other prefectures..................... (Yen)100 (Yen)80 (Yen)50
Cellular telephone of NTT DoCoMo Group
Within the business area of NTT DoCoMo and
to adjacent prefectures................... (Yen)110 (Yen)70 (Yen)50
Other areas................................ (Yen)130 (Yen)80 (Yen)50
Cellular telephone of other company
All areas.................................. (Yen)130 (Yen)80 (Yen)50
</TABLE>
In fiscal year 2000, NTT DoCoMo Group introduced "i-mode" service, which
connects users to various types of on-line Internet services including mobile
banking. As of March 31, 2000, the number of i-mode subscribers rose to 5.6
million. A principal reason for the success of NTT DoCoMo Group's i-mode
service 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 March 31,
2000, a total of 356 companies were using NTT DoCoMo Group's i-mode portal
websites to provide mobile online services, such as banking, news, games and
more. In addition, more than 7,000 voluntary websites not connected to the
portal are also accessible via NTT DoCoMo Group's i-mode service.
NTT DoCoMo Group is a leading supporter of wide-band code division multiple
access (W-CDMA), one of the standards for the third-generation wireless
communications platforms for the next century. W-CDMA will offer high-speed
data rates enabling the integration of voice communications with far-reaching
multimedia applications, such as full-motion video, Internet access and
videoconferencing. W-CDMA technology has gained acceptance in a number of
international markets, with Europe adopting a scheme based on W-CDMA as its
radio transmission technology 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 Group intends to commence
offering W-CDMA services in May 2001.
13
<PAGE>
In the Kanto area, which includes Tokyo, NTT DoCoMo faces three competitors:
Nippon Idou Tsushin Corporation ("IDO"), J-Phone Tokyo Co., Ltd. and Tu-Ka
Cellular Tokyo Inc. NTT DoCoMo Group faces similar competition in other areas.
(iii) PHS Services
NTT DoCoMo Group provides PHS services as parts of its businesses. Because
PHS base stations are small and easy to install, PHS services can easily be
provided in buildings and underground passages, but PHS cannot be used in fast
moving automobiles or trains.
The following table sets forth information regarding NTT DoCoMo Group's PHS
subscribers and its market share:
<TABLE>
<CAPTION>
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>
During fiscal year 2000, NTT DoCoMo Group introduced new merchandise and
services such as 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. NTT DoCoMo Group
also introduced new PHS rate plans and has lowered rates.
NTT DoCoMo Group faces PHS competition from two groups. These competitors
are DDI Pocket Telephone and the ASTEL group. ASTEL Tokyo Corporation ("ASTEL
Tokyo") was merged with Tokyo Telecommunications Network Co., Inc. ("TTNet")
on April 1, 1999.
Telegraph Services
Revenues from telegram services were 0.8% of operating revenues in fiscal
year 2000. This service category includes both telegram and telex services,
which are included in NTT Group's wireline segment. Although the number of
communications made by "D-MAIL," a telegram service that makes use of the
Internet, and the number of telegrams for birthday 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.
The following table sets forth information regarding the number of telegrams
sent and telex subscribers:
<TABLE>
<CAPTION>
March 31,
----------------------------------
1996 1997 1998 1999 2000
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Telegrams (thousands)..................... 41,385 40,198 37,564 36,180 34,078
Telex subscribers (thousands)............. 15 12 10 8 6
</TABLE>
Leased Circuit Services
Operating revenues from leased circuit services were 4.8% of operating
revenues in fiscal year 2000. This service category includes conventional
leased circuits, high-speed digital circuits, ATM Mega Link, ATM Share Link
and other services, which are included in NTT Group's wireline segment.
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. As of the end of fiscal year 2000, the number of high-speed
digital circuits of NTT East and NTT West was 244 thousand and 205 thousand,
respectively, and the number of conventional leased circuits of NTT East and
NTT West was 448 thousand and 394 thousand, respectively.
14
<PAGE>
To meet growing demand for low-cost, high-speed transmission, NTT introduced
"Digital Access 64", in fiscal year 1997, and "Digital Access 128", in fiscal
year 1998, which reduced price by simplifying performance functions and
offering different levels of maintenance. In fiscal year 1999, through the
launch of the "Digital Access 1500" service in the short distance area, and
the introduction of the "Digital Reach" service in the medium and long
distance areas, NTT boosted its competitiveness. Further, to meet specific
demands of customers, NTT launched a new asynchronous transfer mode (ATM)-
based service called "ATM Share Link Service" which offers minimum
communication rates even under the heaviest traffic conditions. This service
also enables customers to select different transmission speeds. "ATM Mega Link
Service," which was introduced in fiscal year 1998 and uses ATM transmission
to offer low-cost, high-speed, wide-area communications, became popular with
corporations as the telecommunications backbone for their internal networks.
There was also a strong increase in demand for ATM leased circuit services for
large-capacity LANs and private networks in fiscal year 2000.
In view of increasing demand for low-cost leased-line services due to the
growth of the Internet and corporate networks, NTT Communications reduced
charges for its long-distance "High-Speed Digital Leased Circuit" and "ATM
Mega Link" services in October 1999 and for the medium- to high-bandwidth "ATM
Mega Link" service in March 2000.
In December 1999, NTT East and NTT West launched on a trial basis a high-
speed and low-cost Internet access service known as the "ADSL Internet Access
Service," a flat-rate access service based on ADSL technologies.
The following table sets forth information regarding NTT Group's leased
circuit services:
<TABLE>
<CAPTION>
Years Ended March 31,
----------------------------
1996 1997 1998 1999 2000
----- ---- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Conventional circuits (thousands)
NTT............................................... 1,001 967 902 822 --
NTT East.......................................... -- -- -- -- 448
NTT West.......................................... -- -- -- -- 394
High-speed digital circuits (thousands)
NTT............................................... 57 107 169 228 --
NTT East.......................................... -- -- -- -- 244
NTT West.......................................... -- -- -- -- 205
ATM Mega Link
NTT............................................... -- -- 1,254 1,509 --
NTT East.......................................... -- -- -- -- 3,605
NTT West.......................................... -- -- -- -- 2,210
</TABLE>
--------
* The calculation method for determining the number of leased circuit
services was changed on July 1, 1999 when NTT's business activities were
transferred to NTT East, NTT West and NTT Communications.
Data Communication Facility Services
Operating revenues from data communication facility services, which is
included in NTT Group's data communication services segment, were 3.8% of
operating revenues in fiscal year 2000. In this category, NTT Group develops
data communications systems for clients, but retains ownership of the computer
hardware and software and provides facility management and systems
maintenance. Revenues are generated by monthly user fees which are paid by
clients for the use of such systems, including the provision of management and
maintenance. During fiscal year 2000, revenues grew due to the provision of
stable services to existing users and the development of new systems and
additional functions for existing systems of financial institutions and public
sector organizations. NTT Group prioritized the marketing of such services as
"STAR-ACE", a multi-shared banking system for regional financial institutions,
as an important strategic product.
15
<PAGE>
The business of NTT Group's data communication facility services is
conducted by a subsidiary, NTT DATA. NTT DATA is the leading provider of
information systems and computer networking in Japan. NTT DATA's business
operations are conducted independently of NTT Group's other operations, and
transactions with NTT and each of NTT's other subsidiaries are at arm's-
length. Although NTT DATA does not manufacture equipment itself, it develops
flexible data communications systems tailored to its clients' needs by
integrating computer software technology. NTT DATA has a strong relationship
with financial institutions, corporations in the manufacturing and service
sectors, and government organizations. Investment in information technology by
these clients is expected to continue.
NTT DATA listed its shares on the Tokyo Stock Exchange in April 1995 and in
connection therewith, issued 20,000 of its shares in a public offering for
(Yen)20,800 million. At such time, NTT also sold part of the shares of NTT
DATA held by it. In February 1996, NTT DATA issued 33,000 new shares in a
global offering for (Yen)100,650 million. Also in May 1998, NTT DATA raised
(Yen)150,370 million in a new issue of shares in a global offering and
increased paid-in capital of the company by (Yen)75,185 million to
(Yen)142,520 million. As a result, NTT holds 54.19% of the shares of NTT DATA.
ISDN
Operating revenues from ISDN services, which is included in NTT Group's
wireline segment, were 7.9% of operating revenues in fiscal year 2000. NTT
Group offers INS-Net 64 and INS-Net 1500 for its ISDN services. INS-Net
services benefited and continues to benefit from increased demand for Internet
access and connection lines for LANs. In October 1999, to make Internet use
more convenient for customers, NTT East and NTT West introduced a local fixed-
charge discount service "i-Ai plan". Under the "i-Ai Plan 1200", customers can
make the equivalent of (Yen)3,000 calls for a price of (Yen)1,200 and under
the "i-Ai Plan 3000" customers can make the equivalent of (Yen)7,500 of calls
for a price of (Yen)3,000. Customers will be billed the normal fees for
additional calls. As a result, sales of INS-Net 64 services increased
significantly in fiscal year 2000 with the number of subscribers growing 66.8%
to 6.6 million over the previous fiscal year. INS-Net 1500 comprised 82.1
thousand subscribers, representing a 72.1% increase over the previous fiscal
year.
To further stimulate the demand of INS-Net services, in July 1997 NTT
introduced "INS-Net 64 Light". "INS-Net 64 Light" makes ISDN more accessible
to consumers by allowing installation expenses to be included in monthly
charges, eliminating up-front financial outlays. Demand for this service is
benefiting from the growing use of INS-Net for Internet access in the home,
which is part of a strong trend that is increasing traffic on NTT Group's
network. To provide improved convenience while expanding penetration, another
INS-Net 64 service, "i-number", was also introduced enabling users to employ a
second telephone number as well as their current number.
The following table sets forth information regarding NTT's ISDN subscribers:
<TABLE>
<CAPTION>
March 31,
----------------------------
1996 1997 1998 1999 2000
---- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
INS-Net 64 (thousands).......................... 510 1,037 2,286 3,955 6,598
INS-Net 64 Light (thousands).................... -- -- 86 242 485
INS-Net 1500 (thousands)........................ 10 22 34 48 82
</TABLE>
With monthly charges above those of ordinary lines, management expects INS-
Net services to become an increasingly important source of earnings.
For a discussion of ISDN traffic, see "Description of Business--Telephone
Services--Telephone Subscriber Services ".
16
<PAGE>
Sale of Telecommunication Equipment
Operating revenues from the sale of telecommunication equipment were 11.0%
of operating revenues in fiscal year 2000. The sale of telecommunication
equipment is included in each of NTT Group's wireline, wireless and other
services segments. Due to greater demand for cellular telephones, the Japanese
mobile communications market showed rapid expansion during the fiscal year.
Sales of cellular telephone terminals rose 21.7% while sales of PHS terminals
increased 45.8% from the previous fiscal year.
In line with the increased use of the Internet and the demand for ISDN and
other equipment, NTT Group has emphasized the introduction of new products
such as IP products featuring computer telephony integration ("CTI") functions
and has actively promoted products meeting the needs of corporate users.
Other Services
Revenues from other services were 10.1% of operating revenues in fiscal year
2000. The other services category consists of certain wireline segment
businesses including digital data exchange, facsimile network (F-Net), OCN
services and other related services; certain wireless segment businesses
including pocket pager and other related services; certain data communications
segment businesses which include system development services; and certain
other services.
In December 1996, NTT launched OCN services to respond to the expansion of
computer communications such as the Internet and LAN-to-LAN connections. OCN
is based on a IP network which is completely different from the traditional
telephone network and is constructed by using routers and a high-speed
transmission network. OCN services are based on flat rate systems and not
based on distance or duration of communications and facilitate inexpensive
connections to the Internet and other networks.
During fiscal year 2000, NTT Communications revised charges for its "OCN
Dial Access" service, introduced a new plan "OCN Dial Access Natural" and
waived initial fees for "OCN Dial Access". In addition, NTT Communications
reduced monthly rates for its "OCN Economy" and "Super OCN". NTT
Communications introduced a new plan "Super OCN (Light)", featuring a basic
fee that is only 25% of the fee for the existing "Super-OCN". NTT
Communications launched its "Housing Connection Service" to connect customers'
routers and servers managed at NTT Communications' housing facilities directly
to its OCN backbone network. NTT Communications also introduced "OCN PC Pack",
a bundled package which includes a personal computer, to help customers begin
to use the Internet easily and at an inexpensive rate, helping to increase the
number of Internet users. On March 31, 2000, subscribers for OCN services
reached 1,147 thousand.
NTT introduced "Super Relay FR", a high-speed, large capacity frame relay
service in November 1994. The frame relay, a data-exchange method, is simpler
than a conventional packet exchange. NTT bolstered its "Super Relay FR" frame
relay services for high-speed, high-volume data transmission to operate local
area networks (LANs) and other systems with the addition of a flat monthly
rate service for customers. During fiscal year 2000, 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. In fiscal year 2000, frame relay installations increased
approximately 70% compared with the end of the previous fiscal year.
Sales of facsimile communications services remained firm amid diversified
uses reflecting the growing diffusion of facsimile machines in the home.
In response to Internet user demand, 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 June 2000, NTT East and NTT West announced that they would
formally start to offer the service, "FLET'S-ISDN," and expand service areas
in line with demand trends commencing July 2000.
The number of pocket pager subscribers decreased 31.6% as users shifted to
cellular telephones and PHS.
17
<PAGE>
System development services provide the development, and delivery and sale
of data communications systems. Sales of ready-made or "packaged" data
communications systems are also included in this category. During the fiscal
year, NTT Group continued to market Enterprise Resource Planning (ERP)
products, including its important strategic product, SCAW Design Series, which
handles core fields of corporate operations such as finance and production,
and ADVANCE RISM, a total support software package system for supporting
diverse operations of local government. System development services of NTT
Group are provided mainly by NTT DATA.
Capital Investments
NTT Group's capital investments for the preceding three fiscal years are
shown in the table below.
<TABLE>
<CAPTION>
Billions of yen Millions of
Years Ended March 31, U.S. Dollars
-------------------------------- ------------
1998 1999 2000 2000
---------- ---------- ---------- ------------
<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 Group is shifting its capital investment strategy from investment in
infrastructure to investment in demand-oriented customer services. NTT
completed full digitization of its fixed-line network in December 1997. Such
digitization allows NTT Group to offer various digital-related services such
as ISDN, high-speed digital circuit and frame relay.
NTT Group has made demand-oriented investments in its regional
telecommunications business in anticipation of the increase in demand for
Internet services due in part to the introduction of a fixed price system. NTT
Group believes that a fixed price system for Internet services will increase
network utilization and enhance profitability. NTT Group is also making
investments to accelerate the development of its fiber optic network focusing
in key business areas with the expectation that customers' needs are shifting
to faster broadband services. In the long distance and international
telecommunications business, NTT Group has shifted its investments from
existing services such as fixed-line telephone to data network and IP related
services. NTT Group also has begun to invest in international
telecommunications services equipment and to build an information sharing
platform. In the mobile telecommunications business, NTT Group has focused its
investments in building new facilities to meet the continually increasing
demand for mobile services and to improve the overall reliability of its
existing mobile telecommunications network while at the same time expanding
mobile data communication services.
As a result of the above capital investments, the amount of digital
equipment used for telecommunications services was (Yen)8,796 billion,
(Yen)8,230 billion and (Yen)7,675 billion in fiscal year 2000, 1999 and 1998,
respectively, and the amount invested in optical fiber cables used for
telecommunications services lines was (Yen)1,179 billion, (Yen)1,086 billion
and (Yen)1,012 billion in fiscal year 2000, 1999 and 1998, respectively.
Reorganization
On December 4, 1997, pursuant to June 1997 amendments to the NTT Law, the
Ministry of Posts and Telecommunications announced "the Basic Principles
Concerning the Transfer of the Business Activities and
18
<PAGE>
Succession of the Rights and Obligations of Nippon Telegraph and Telephone
Corporation" (the "Basic Principles"). On May 10, 1999, NTT submitted "the
Implementation Plans Concerning the Transfer of the Business Activities and
Succession of the Rights and Obligations of Nippon Telegraph and Telephone
Corporation" (the "Implementation Plans") in accordance with the Basic
Principles, which was approved by MPT. Matters concerning the transfer of
business, which was the precondition to reorganization, were approved at the
ordinary general meeting of shareholders on June 29, 1999.
On July 1, 1999, NTT was reorganized into a holding company structure with
NTT's local and long distance businesses being transferred to three new
wholly-owned subsidiaries: NTT East, NTT West and NTT Communications. Under
the Revision Law, NTT is required to hold all the shares of NTT East and NTT
West. The supplementary provisions of the Revision Law provide that for the
time being after the reorganization NTT needs MPT approval (subject to
consultation with the Minister of Finance) for the disposal of shares in NTT
Communications. NTT East 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 such
as frame relay and OCN and commenced offering international telecommunications
services on October 1, 1999.
After the transfer of business, NTT continues to exist but operates
primarily as a holding company. The principal sources of NTT's cash revenues
consist of three categories. NTT will receive:
. 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.
NTT is directly responsible for formulating overall strategy of NTT Group,
for setting financial targets and for basic research and development for NTT
Group. The presidents of NTT Group companies and NTT meet to discuss strategy
for NTT Group. Each of the companies within NTT Group operates autonomously,
subject to discussing with NTT 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 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.
NTT's reorganization was effected pursuant to amendments to the NTT Law
passed by the Diet in June 1997 implementing a plan proposed by MPT, and
accepted in principle by NTT. In December 1997, the Ministry of Posts and
Telecommunications announced the Basic Principles. On May 10, 1999, NTT
applied for approval from MPT for the Implementation Plans which were prepared
in accordance with the Basic Principles. On May 21, 1999, NTT received
approval for the reorganization announced by the Ministry of Posts and
Telecommunications pursuant to the Implementation Plans which provide for
certain conditions to ensure fair competition, with which NTT has to comply
following the reorganization, including a requirement that (i) NTT East and
NTT West have separate directors from NTT Communications; (ii) NTT
Communications may not procure equipment jointly with NTT and NTT East and NTT
West; and (iii) NTT East and NTT West deal on
19
<PAGE>
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.
Under the reorganization scheme:
. NTT continues its existence as a holding company with no change in share
ownership;
. NTT's shares continue to be listed on stock exchanges and the conditions
of share ownership will remain unchanged; and
. NTT will be able to avoid part of the potential adverse tax consequences
that would result if NTT East has profits and NTT West has losses
through the introduction of an expense sharing arrangement for three
fiscal years after the reorganization.
Moreover, NTT believes that the amendments enable:
. NTT Group to maintain its service levels, because the three companies
under NTT would continue to cooperate;
. NTT Group to retain current research and development capabilities
through the unification of fundamental research activities in NTT; and
. NTT Communications to enter the international telecommunications
business and provide global end-to-end services, consequently promoting
synergies within the overall NTT Group and bolstering its global
competitiveness.
Other Subsidiaries and Affiliated Companies
NTT Group has taken necessary measures to improve its operational efficiency
as well as expand into new business areas. To meet these objectives, NTT has
invested in both subsidiaries and affiliated companies. At March 31, 2000, NTT
had 379 subsidiaries and affiliated companies.
NTT transferred to its subsidiaries such services as telecommunications
software and systems development, facility management and maintenance,
equipment sales, and directory assistance, thus streamlining its labor force.
Subsidiaries that assume these functions will provide services not only to NTT
Group but also to third parties, creating the potential for new revenue
sources. In addition, separate units are taking more responsibility, compared
with when they were divisions of NTT, for the profit and loss of their
operations. This provides a stronger incentive for the subsidiaries to boost
revenues and cut costs. Arm's-length transactions within the NTT Group will
clarify expenses and contribute to a corporate culture that is highly cost
conscious.
As part of this effort, NTT established a wholly owned subsidiary, NTT
Communicationware Corporation ("NTT Comware"), to provide a wide range of
services to NTT and other clients. NTT Comware was established in April 1997
and commenced services in September 1997. NTT Comware offers a wide range of
telecommunications-related services, such as the development, production,
operation and maintenance of systems, software and related equipment. The
subsidiary provides NTT Group with communications software and systems
services to support its telecommunications business, as well as providing such
services to other telecommunications operators. NTT Comware has about 9,100
employees and paid-in capital of (Yen)20 billion as of March 31, 2000.
Local-oriented operations such as line installation and repair work have
been transferred to NTT Telecom Engineering ("TE") companies. NTT TE companies
also market telecommunications equipment and provide facility management.
Among these NTT TE companies, NTT Telecom Engineering Tokyo, Inc. ("TE
Tokyo"), NTT Telecom Engineering Kanto, Inc. ("TE Kanto") and NTT Telecom
Engineering Shinetsu, Inc. ("TE Shinetsu"), all wholly owned subsidiaries of
NTT, merged into NTT ME Corporation on April 1, 1999. On March 1, 2000 other
TE companies changed the designation to "TE" in their trading names to "ME".
The number of employees of NTT ME companies including NTT ME Corporation ("NTT
ME Group") at March 31, 2000
20
<PAGE>
was about 48,300. NTT ME Group, in addition to upgrading overall
telecommunications engineering services and improving operational efficiency,
provides sophisticated multimedia services using optical-fiber and system
integration and outsourcing services, such as LANs/WANs design, installation,
operation, maintenance and management.
Competition
The Telecom Business Law introduced competition in the telecommunications
service industry at the beginning of fiscal year 1986. As a result, NTT Group
faces 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. Many of these new companies have
substantial capital, technological and other resources.
The Telecom Business Law authorizes MPT to regulate two types of companies:
Type I Carriers, such as NTT East, NTT West, NTT Communications and NTT
DoCoMo, which provide telecommunications services through their own circuit
facilities, and Type II Carriers, which are telecommunication carriers other
than Type I Carriers, for example carriers which provide enhanced or VAN
services through circuits leased from Type I Carriers. VAN services may also
be provided by Type I Carriers. As of March 31, 2000, there were 249 Type I
Carriers and 7,651 Type II Carriers. NTT East and NTT West are the only Type I
Carrier which are responsible for providing nationwide telephone service
subject to the NTT Law. Certain of NTT's other subsidiaries are General and
Special Type II Carriers.
Certain competing Type I Carriers (so called "NCCs" or New Common Carriers)
have established microwave digital communications networks for their long-
distance services. Other NCCs have access to nationwide rights-of-way along
railway and utility lines and highways, which they have used to establish
their own optical fiber digital networks. In the fall of 1987, several long-
distance NCCs began offering telephone service to business and residential
customers in the Tokyo-Nagoya-Osaka corridor, where most of the nation's large
corporations have their head offices. These carriers have expanded their
services to all prefectures and metropolitan areas in Japan. In fiscal year
1999, NTT Group's share of inter-prefecture calls between all prefectures in
Japan dropped to 51% based on the number of calls. NTT Communications'
competitors in the long-distance market are Japan Telecom ("JT"), DDI
Corporation and KDD. In addition to long-distance services, NCCs provide their
customers with basic telephone, cellular telephone, PHS, leased circuit,
digital data exchange and pocket pager services. The offerings of
telecommunications services by NCCs are in various stages of development, with
several large NCCs completing their networks and some only recently
introducing their network services.
Until recently, NTT Group faced little or no competition in the market for
local telecommunications services. NTT Group 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 Group 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. NTT Group believes that
the entry of TTNet and QTNet into the local telephone market have the effect
of increasing competition. To compete more effectively, NTT extended its "Time
Plus" discount service to the whole of Japan. In June 2000, JT and DDI
Corporation ("DDI") announced plans to enter the local telephone services
market around May 2001.
Currently, NTT Group's ISDN services seek to accommodate and stimulate
demand for Internet and data communication related services in the local
Japanese market. NTT Group expects to face significant competition for market
share in the growing Internet services market from cable television ("CATV")
operators. CATV operators such as Titus Communications, J-COM Tokyo and Tokyo
Cable Network intend to bundle cable television, telephony and high-quality
Internet services. NTT Group may also face Internet-related competition from
global alliances, such as the recently announced joint venture, SpeedNet Inc.,
between Softbank Corp., Microsoft Corp. and Tokyo Electric Power Co.
("TEPCO"). In addition, AT&T and British Telecom ("BT")
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<PAGE>
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. Also, a consortium of 15 different Japanese companies, including KDD,
Mitsui & Co., Ltd. and DDI have recently formed the "DSL Basic Access
Committee." This committee's goal is the creation of a joint investment
company that will interconnect with NTT's local lines and use ADSL technology
to compete with NTT in the fixed rate Internet market.
NTT DoCoMo Group's competitors in the cellular market are IDO, DDI Cellular
group and J-Phone group. Despite intense competition, NTT DoCoMo Group 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 Group offer
cellular services in a competing format, such as cdmaOne currently offered by
DDI and IDO.
NTT DoCoMo Group'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.
Competing Type II Carriers offer a wide range of services, including VAN,
data processing and other services. Parent companies of many of these Type II
Carriers include banks, trading companies, retailers, transportation companies
and domestic and foreign computer and telecommunications equipment
manufacturers.
In recent years, the distinction between domestic and international
telecommunications has virtually been eliminated as domestic and international
operators enter each other's markets through mergers and alliances. The
interconnection with other operators, previously connected only through NTT's
Zone Centers (ZCs, or toll switching offices), was realized in 1997 through
NTT Group's Group Centers (GCs, or local switching offices). TTNet commenced
its local telephone services in January 1998. This brought direct competition
for local telephone services for the first time. CATV operators also provide
telephony services. Furthermore, basic telecommunications agreements under the
administration of the World Trade Organization came into effect in February
1998 and foreign telecommunications operators stepped up their activities in
the Japanese market by obtaining necessary licenses and other preparations.
NTT Group believes that these developments are causing services to become
more diversified and lower-priced, and as the environment for
telecommunications business is increasingly competitive, telecommunications
operators are required to have more comprehensive service capabilities,
including international telecommunications.
For a discussion of market shares of NTT Group's major services, see
"Description of Business--Principal Business Activities."
Regulation
The Ministry of Posts and Telecommunications is the main regulatory body in
Japan with responsibility for the telecommunications service industry. NTT
East, NTT West, NTT Communications and NTT DoCoMo Group companies together
with other Type I Carriers are regulated by MPT under the Telecom Business Law
in respect of various of their respective business activities. NTT, NTT East
and NTT West are also subject to regulation under the NTT Law.
In 1985, there were significant changes in the legislative and regulatory
framework for telecommunications in Japan. At the same time that NTT was
incorporated as a private company, the Telecom Business Law opening the
Japanese telecommunications services industry to competition came into effect.
Since then, the Government has taken various deregulation measures to promote
competition in the Japanese telecommunications market. As
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<PAGE>
a result, NTT Group faces increasing competition in many of its business
sectors from a large number of companies which have entered or are about to
enter the market.
The NTT Law
The NTT Law, amended in June 1997, provides that the purpose of NTT is to
hold all the Shares of NTT East and NTT West and to ensure proper and stable
provision of telecommunications services by NTT East and NTT West as well as
to conduct research relating to the telecommunications technologies that will
form the foundation for telecommunications. The NTT Law also provides that the
purposes of NTT East and NTT West are to operate regional telecommunications
businesses. NTT, NTT East and NTT West are responsible for providing
nationwide telephone services and for promoting research in telecommunications
technologies and disseminating the results of such research. The NTT Law
continues to require the Government to own one-third or more, and restricts
foreign ownership to less than 20%, of the total number of issued Shares. See
"Restrictions on Foreign Ownership" in Item 6--Exchange Controls and Other
Limitations Affecting Security Holders. The supplementary provisions of the
NTT Law provide that for the time being following the reorganization, NTT will
need MPT approval (subject to consultation with the Minister of Finance) for
the disposal of shares in NTT Communications. The NTT Law also requires
approval of MPT with respect to appointment or dismissal of directors and
corporate auditors of NTT. NTT, NTT East and NTT West are required to submit
business operating plans for each fiscal year for approval by MPT prior to the
beginning of such fiscal year. Amendments to the business plans also require
approval. NTT, NTT East and NTT West need MPT approval to issue new Shares,
convertible debentures or debentures with preemptive rights to acquire new
Shares; to change the articles of incorporation and to amalgamate or dissolve
each company. Approval of MPT is required for the disposition of profits of
NTT. NTT East and NTT West need MPT approval to transfer or mortgage their
telecommunications trunk lines or other important telecommunications
facilities. NTT, NTT East and NTT West are required to submit balance sheets,
profit and loss accounts and business reports to MPT within three months after
the end of its fiscal year. To carry out his supervisory function, MPT may,
when he deems it especially necessary, issue orders to NTT, NTT East and NTT
West, and may require these companies to submit reports on business
activities.
The following table summarizes certain of the major regulatory requirements
applicable under the NTT Law:
<TABLE>
<CAPTION>
NTT East
NTT NTT West
(Holding Company) (Regional Companies)
----------------- --------------------
<S> <C> <C>
Obligatory Share-holding by the
Government......................... One-third or more Prohibited
Issuance of new Shares.............. MPT approval* MPT approval
Foreign ownership of Shares......... Less than 20% Prohibited
Appointment of directors and
corporate auditors................. MPT approval Unregulated
Change of the articles of
incorporation...................... MPT approval** MPT approval
Disposition of profits.............. MPT approval* Unregulated
Business operating plan............. MPT approval* MPT approval*
</TABLE>
--------
* Subject to consultation with the Minister of Finance.
** Subject to consultation with the Minister of Finance only when the total
number of Shares will be changed.
The Telecom Business Law
The Telecom Business Law authorizes MPT to regulate two types of
telecommunications companies: Type I Carriers, which provide
telecommunications services through their own circuit facilities, and Type II
Carriers, which are telecommunications carriers other than Type I Carriers.
Type II Carriers are subdivided into Special Type II Carriers that provide
telecommunications facilities designed for communications between Japan and
foreign points or provide voice communication services to the public through
interconnections of public switched networks and leased circuits at each end
and General Type II Carriers that provide other services. Type I Carriers
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<PAGE>
may also offer the same services provided by Type II Carriers. As of March 31,
2000, there were 249 Type I Carriers and 7,651 Type II Carriers.
NTT East and NTT West are the only Type I Carriers that are responsible for
providing nationwide telephone service subject to the NTT Law. NTT
Communications and NTT DoCoMo Group companies are Type I Carriers, and certain
of NTT Group's other subsidiaries are General and Special Type II Carriers.
In accordance with agreements reached in February 1997 of basic
telecommunications services negotiations under the auspices of the World Trade
Organization, the Telecom Business Law was revised in June 1997. The Telecom
Business Law was revised in part to remove the requirement that in connection
with granting permission to an applicant to operate a Type I
telecommunications business, MPT must determine that the telecommunications
business to be provided by such applicant is appropriate in view of the demand
for such business within the relevant area and that the commencement of such
business will not result in an oversupply of telecommunications lines in the
relevant area. Restrictions on the proportion of total voting shares held by
foreign nationals, which had been limited to be one-third for Type I Carriers,
were eliminated effective in February 1998 with the exception of NTT and KDD
(the restriction on foreign ownership in KDD was abolished on July 30, 1998).
See "Restrictions on Foreign Ownership" in Item 6--Exchange Controls and Other
Limitations Affecting Security Holders.
The following table summarizes certain of the major regulatory requirements
applicable to Type I and Type II Carriers:
<TABLE>
<CAPTION>
Type I Carriers Type II Carriers
--------------- ---------------------------------
Special Type II General Type II
--------------- ---------------
<S> <C> <C> <C>
Government Regulation:
a. Start-up of Services Permission from Registration Notification to
MPT required with MPT MPT required
required
b. Rates and Charges Notification to Notification to Unregulated
MPT required* MPT required
c. Foreign Capital Unregulated** Unregulated Unregulated
Participation
</TABLE>
--------
* Except in the case of Type I Carriers with "designated
telecommunications facilities" (such as NTT East and NTT West) where
prior approval is required pending finalization of a price-cap system.
See "Description of Business--Regulation--Rates."
** Except in the case of NTT where the restriction continues.
Rates
Historically, Type I Carriers establish their rates in conformity with
guidelines established by the advisory committee to MPT. Basically, these
guidelines provided for the establishment of rates that would be reasonable
for the society as a whole and that would produce estimated revenues in an
amount equal to the "total cost" of each of the telecommunications services
offered by each Type I Carrier. In May 1995, the Telecom Business Law was
revised to provide that Type I Carriers need not obtain approval from MPT but
need only notify MPT of changes in their rates if such rates fall within the
categories of rates designated in ordinances issued by the Ministry of Posts
and Telecommunications as those which would have relatively less impact on
users' interests if they were to be changed. The revised law became effective
in October 1995. In December 1996, further revisions to regulations under the
Telecom Business Law were implemented to provide that Type I Carriers need not
obtain approval from MPT but need only notify MPT of their mobile
telecommunications rates for such services as cellular telephones, PHS and
pocket pagers.
In order to promote further competition in the telecommunications market,
and as part of the Government's overall policy toward deregulation, the
Telecom Business Law was revised in May 1998 and became effective as
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<PAGE>
of November 1, 1998. Under the revised Law, Type I Carriers need not obtain
approval from MPT but only notify MPT of their rates except in the case of
certain services to be provided by such carriers with "designated
telecommunications facilities". Type I Carriers with "designated
telecommunications facilities" will be subject to a price-cap system for basic
telephone services, ISDN services and leased circuit services provided within
prefectures. Certain facilities of NTT East and NTT West have been designated
as "designated telecommunications facilities" due to their dominant position in
the local telecommunications market. The price-cap will be reflected in an
index which represents a percentage of current rates. Under the price-cap
system, an index will be fixed annually by MPT, and 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 will initially equal the
Consumer Price Index in Japan less a productivity factor and an exogenous
factor. On June 13, 2000, the Telecommunications Council determined such index
for the period commencing on October 1, 2000 and submitted it to the Ministry
of Posts and Telecommunications. 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. NTT East and NTT West will have to notify the
Ministry of Posts and Telecommunications of their new rate plans by September
1, 2000. Beginning on October 1, 2000, NTT East and NTT West will be subject to
the new price-cap system. Until October 1, 2000, rates for regional
telecommunications services provided by NTT East and NTT West are subject to
MPT approval. It is estimated that fiscal year 2001 revenues of NTT Group will
be reduced by approximately (Yen)14 billion (representing a decrease of (Yen)7
billion for each of NTT East and NTT West); fiscal year 2002 revenues will be
reduced 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 revenues will be reduced 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).
Certain subsidiaries of NTT are Type II Carriers and are treated differently
than NTT East and NTT West for rate making purposes. Special Type II Carriers
must notify MPT prior to putting new rates into effect. General Type II
Carriers are unregulated with respect to rates.
For a discussion of rates currently applied to NTT Group's telephone and ISDN
services, see "Description of Business--Principal Business Activities."
Interconnection
In February 1995, NTT announced its basic approach to the opening of its
networks to other carriers in order to promote competition and to further
develop information telecommunications. In principle, NTT allows all other
carriers wishing to establish interconnections to NTT's network to do so--
provided NTT is compensated in a fair manner. Further, in September 1995, in
order to promote competition in the local telecommunications field, NTT
announced implementation of the interconnections of local switches and
subscriber lines.
Since then, NTT has held active discussions with other operators seeking to
use its networks. The interconnection with other operators, previously
connected only through NTT's Zone Centers (ZCs, or toll switching offices), was
realized in 1997 through NTT's Group Centers (GCs, or local switching offices).
TTNet commenced its local telephone services in January 1998. This brought
direct competition for local telephone services for the first time.
In June 1997, the Diet revised the Telecom Business Law in an attempt to
promote transparent, fair, prompt, and reasonable interconnections. The
revision provides that every Type I Carrier is obligated, upon request, to
allow other telecommunications carriers access to its network through
interconnection. Limitations on access may be based only on the maintenance of
network integrity, unreasonable injury to the interests of the Type I Carrier
or such other reasons as MPT determines to be proper. In addition to this
general requirement, every Type I Carrier which is to install a "designated
telecommunications facility" (defined as a telecommunications facility to be
installed by a Type I Carrier in a region where the Type I Carrier provides in
excess of a percentage of telecommunications services as designated by MPT)
will be required to submit each interconnection tariff determining
interconnection rates to be received by the Type I Carrier and conditions for
such interconnection to
25
<PAGE>
MPT for approval. Currently, NTT East and NTT West are the only Type I
Carriers obliged to make such submission. MPT will issue approval if the
technical requirements at standard points of interconnection and
interconnection rate by individual function are specified correctly and
distinctly, the interconnection conditions are not disadvantageous as compared
to the conditions the Type I Carrier would impose to connect its own
telecommunications facilities and there is no unfair discrimination against
any particular telecommunications carrier. Each Type I Carrier installing a
"designated telecommunications facility" will be required to publish each
interconnection tariff in accordance with rules to be promulgated by MPT, to
compile and publish accounts concerning the income and disbursements relating
to interconnections to its "designated telecommunications facilities" and to
recalculate its interconnection rates annually so that they are "fair and
impartial" in light of the costs as calculated in such accounts. The revised
Telecom Business Law became effective in November 1997.
Following the revision to the Telecom Business Law, the Ministry of Posts
and Telecommunications designated certain telecommunications facilities as
"designated telecommunications facilities" in December 1997. Certain of NTT's
facilities for its regional telecommunications services were designated as the
"designated telecommunications facilities" due to NTT's dominant position in
the local telecommunications market. NTT East and NTT West are subject to the
special rules mentioned above applicable under the revised Telecom Business
Law.
In October 1998, NTT submitted its interconnection tariffs to MPT for
approval in connection with its designated telecommunications facilities. Such
tariffs were approved in January 1999.
The conditions upon which network access, especially to local networks, is
offered, are of great significance to the development of the Japanese
telecommunications market. The cost of interconnection to the local networks
of NTT East and NTT West is expected to be a significant part of the operating
costs of competing telecommunications carriers, and, as competition grows,
increasingly important to NTT Group.
In May 1998, the U.S. Government and the Japanese Government issued a status
report in which the Japanese Government expressed its intention to introduce
"Long-run Incremental Cost Methodology" for setting interconnection rates.
Long-run Incremental Cost Methodology would calculate interconnection rates
based on costs assumed to be incurred for construction of the current network
with presently available equipment and technology. In the report issued by the
U.S. Government and the Japanese Government it was specifically stated that:
(i) a bill to amend the Telecom Business Law will be submitted to the
regular Diet Session in the spring of 2000 in order to implement Long-
run Incremental Cost Methodology as early as possible;
(ii) due consideration will be paid to ensure that the implementation of
Long-run Incremental Cost Methodology would cause no disruption to the
provision of universal services and that it would not prove
destructive to end user rates and business operations of incumbent
local exchange carriers; and
(iii) prior to the introduction of Long-run Incremental Cost Methodology
based rates, the Japanese Government will, within the scope of its
existing authority, promote the reduction of interconnection rates 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
rates 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 ("feeder Remote Terminals"). Under one assumption (the "Model
Case A"), these costs
26
<PAGE>
would be charged through interconnection rates. Under the other assumption
(the "Model Case B"), these costs would be recovered through monthly charges.
In February 2000, the Telecommunications Council 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.
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 Diet. The bill passed the Lower House on April 27 and the
Upper House on May 12, and the law was enacted on May 19. Both houses 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:
(i) 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;
(ii) 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
(iii) 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 foregoing 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 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 would 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 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).
However, on an NTT Group consolidated basis, such decrease would be reduced by
the off-setting cost savings of such Long-run Incremental Cost Methodology to
NTT Communications and NTT DoCoMo Group which provide a portion of the
revenues of NTT East and NTT West.
27
<PAGE>
Other Regulatory Developments
The following events represent major recent regulatory developments in the
telecommunications field.
In June 1998, the Ministry of Posts and Telecommunications released a report
concerning universal services, the provision of which is an obligation of NTT,
NTT East and NTT West under the NTT Law. The report concluded that certain
telephone services are indispensable to the national welfare and should be
deemed "universal services" that require proper and stable provision with
equal conditions across the country. In the report released by the Ministry of
Posts and Telecommunications, "universal services" would include basic
telephone services to customers throughout Japan. ISDN and wireless telephone
services were excluded from the scope of "universal services." At the present
time, it is not clear what obligations will be imposed on NTT, NTT East and
NTT West and other Type I Carriers with respect to the provision of "universal
services"; however, the report places emphasis on the establishment of a
"Universal Services Fund." The report proposed that, through contributions by
telecommunications service providers to the fund, providers of universal
services such as NTT, NTT East and NTT West should be subsidized for the costs
incurred to provide such services. It was also proposed that international and
long distance telephone services should not be subsidized since competition
among telecommunications service providers has already led to nationwide
availability. Based on the estimated costs of the universal services, the
Ministry of Posts and Telecommunications is conducting an overall review of
the need for a Universal Services Fund and the timetable for its possible
introduction.
The Ministry of Posts and Telecommunications 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 around fiscal year 2001.
The Ministry of Posts and Telecommunications is currently considering the
introduction of "Presubscription" for domestic and international service.
Presubscription will enable telephone subscribers to use the
telecommunications service provider of their choice without dialing prefixes
by prior selection of and registration with such service provider.
Presubscription is expected to be introduced in May 2001.
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 Group 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 report and in connection with
NTT's ownership of NTT DoCoMo, it will watch carefully competition between NTT
DoCoMo Group and NTT's two regional telephone companies. On July 13, 1999, the
Ministerial Conference on Industrial Structural Reform and Employment Policies
issued a report concerning regulatory reform to create employment
opportunities and strengthen industrial competitiveness. This report stated
that NTT's ownership of NTT DoCoMo will be considered, taking into account the
competition among cellular phone companies and the competition between NTT
DoCoMo Group and NTT's two regional telephone companies. It has not been
decided at this time what action, if any, may be taken by the Government.
A private research panel of experts on Government Regulation and Competition
Policy under the Fair Trade Commission ("FTC") announced in the June 2000
report that NTT's ownership in NTT DoCoMo should be
28
<PAGE>
lowered in order to promote fair competition. Some newspapers also reported
that the FTC opinion also states that NTT is not in violation of any anti-
monopoly laws at this point.
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, the Ministry of Posts and Telecommunications made
inquiries to the Telecommunications Council concerning a number of issues
relating to the promotion of competition in the Japanese telecommunications
market in order to advance the Information Technology revolution. As a result
of these inquiries, a formal discussion of these issues has begun.
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 for Internet and data
communication related services 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. Network-mediated cyberbusinesses are just one
example of the many remarkable, nascent changes being witnessed in the
structure of information sharing across a variety of fields. 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.
With the aim of developing the high-quality, high-speed, broadband network
services--notably IP-VPN services and fixed-rate IP connection services that
use ISDN lines--that promise to become the foundation of the information-
sharing society in the future, NTT Group is conducting R&D into access network
technologies that make use of a variety of media. Such technologies include
backbone network technologies such as IP and ATM, as well as optical fiber and
wireless. Moreover, as a part of work towards the creation of information-
sharing structures, NTT Group is developing optical access technologies
capable of dedicated connection speeds of up to 10 megabits per second.
Alongside these efforts, NTT Group has also carried out field trials on a
global network of IPv6, a next-generation Internet technology designed for
large-scale networks.
NTT Group's R&D programs have also targeted technologies associated with a
number of information-sharing platforms. For example, NTT has developed
methods to make e-commerce safe and reliable, such as authentication,
settlement, IC cards, or copyright protection and other technologies designed
to facilitate content distribution.
NTT Group is also conducting R&D into ways of enriching the quality of
information sharing. Such programs include "DUG-1," an intelligent spoken
dialogue system that can adapt to human interaction, and a "MultiMedia World
Processor" that can support 3-D computer graphics animation.
As part of research into ways of lowering the cost of constructing future
ultra-high-speed, high-capacity networks, NTT Group has developed processing
technology that has taken great strides in creating the manufacturing
expertise required to produce high-performance devices on a nanometer (a
billionth of a meter) scale-which has not been possible before now. NTT Group
was also the first company in the world to develop a single-chip opto-LSI
circuit, which is capable of the simultaneous detection of 16 optical signals
of different wavelengths, transmitted along a single optical fiber.
In other work, NTT Group has successfully tested prototype electronic
circuits that have extremely low electric power consumption--about 100,000
times less than that of conventional devices.
29
<PAGE>
Introduction of the next generation mobile communication system capable of
dealing with various but integrated contents, such as voice, data and visual
images, is needed. Standardization of the next generation mobile communication
system (IMT-2000, formerly FPLMTS) is moving forward with the ITU
(International Telecommunication Union). NTT DoCoMo Group has been actively
involved with this standardization, and is the principal supporter of
wideband-code division multiple access ("W-CDMA") as the third-generation
wireless communications platform for the next century. W-CDMA will offer high-
speed data rates enabling the integration of voice communications with
multimedia applications, such as full-motion video, Internet access and
videoconferencing. NTT DoCoMo Group intends to commence W-CDMA services in May
2001.
Since the reorganization of NTT, NTT engages in fundamental research and
development and business-oriented applied research and development activities
are conducted by NTT East, NTT West and NTT Communications.
Global Businesses
In June 1997, the Diet passed the amendments to the NTT Law. These changes,
among other things, allow NTT Group to enter the international
telecommunications business and provide global end-to-end services. See
"Description of Business--Reorganization".
NTT Group 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 West, 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 Group companies will
combine their strengths with the goal of capturing a significant share of the
rapidly growing electronic commerce market, and expect to engage in the
necessary partnering and alliances to promote globally IP platform businesses
such as ASP and data centers.
NTT Group global businesses are as follow:
(i) NTT East and NTT West
NTT Group has been actively involved in establishing carrier businesses and
infrastructure operations in Asia.
In November 1992, NTT participated in its first large-scale overseas
telecommunications project to provide Thai Telephone & Telecommunication
Public Co., Ltd. ("TT&T") with the design, construction and operation of a
one-million-circuit enlargement of a regional telephone system. In October
1993 TT&T started to provide telephone services in some areas and in September
1995 announced the construction of another half-million telephone lines, which
was completed in September 1996. As of December 1999, the total number of
telephone lines in service reached 1.2 million. Prior to the reorganization,
NTT had made cumulative investments worth US$209 million in TT&T. These
investments were transferred from NTT to NTT West upon the reorganization. NTT
West designates three board members and holds an 18% ownership interest in
TT&T.
30
<PAGE>
In July 1995, NTT agreed with PT Telekomunikasi Indonesia, a state-owned
domestic carrier in Indonesia, on the basic conditions for a project that will
install 400,000 telephone lines in central Java. This installation was
completed in August 1999. NTT, as a member of a consortium formed with Telstra
Corporation Limited and PT Indonesian Satellite Corporation, acquired 15% of
the total equity of the joint venture company, Mitra Global Telekomunikasi
Indonesia ("MGTI"). The aggregate amount of investment is US$31.8 million. At
the reorganization, this investment was transferred from NTT to NTT East.
In November 1997, NTT Vietnam Corporation, a joint venture 55% owned by NTT,
and Vietnam Posts and Telecommunications Corporation ("VNPT") jointly received
a license from the Vietnamese government for the construction of a telephone
network project in the northern part of Hanoi. The project will construct 240
thousand telephone exchange lines for an investment of approximately US$200
million. At the reorganization, this investment was transferred from NTT to
NTT East.
(ii) NTT Communications
NTT Group first launched its global end-to-end telecommunications services
in September 1997 pursuant to amendments to the NTT Law adopted in June 1997.
These services were limited 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
which conducts its global telecommunications activities under the name
"Arcstar." As of March 31, 2000, NTT Communications' Arcstar-brand global
communications services were provided in 47 areas.
In March 1995, NTT signed an agreement with Smart Communications Inc.
("Smart"), a Philippine telecommunications operator providing mobile and
international telecommunications, to provide technical assistance in its local
telephone operations. NTT Group originally acquired a 15% interest in Smart.
In March 1999, NTT raised its interest in Smart to 37% by acquiring Smart
shares from First Pacific Company Limited ("FPC") for US$149 million and
acquiring Smart's new shares for US$65 million. After the transaction, NTT's
total investment in Smart was US$372 million. Smart is the largest mobile
service provider in the Philippines with a market share of over 40%.
In August 1997, NTT signed a contract with the Government of Sri Lanka and
Sri Lanka Telecom Ltd. ("SLT") to become a strategic partner of SLT. NTT
invested US$225 million in SLT, acquiring a 35% interest in SLT. At the
reorganization, this investment was transferred from NTT to NTT Communications
and an NTT Communications executive is serving as Chief Executive Officer of
SLT. SLT, privatized in 1996, is an incumbent distributor of basic domestic
and international telecommunications services in Sri Lanka.
In September 1997, NTT invested US$100 million to acquire a 12.5% stake in
Teligent, a fixed wireless access carrier in the United States. This
investment reflects management's belief in the growth prospects of the U.S.
market and the potential strength of Teligent when combined with NTT Group's
managerial and technical support. As of March 2000, NTT's stake was 11.2%. At
the reorganization, this investment was transferred from NTT to NTT
Communications.
In May 1998, StarHub, a consortium formed by NTT, Singapore Technologies
Telemedia ("STT"), Singapore Power ("SP") and British Telecom ("BT"), won
licenses from the Telecommunication Authority of Singapore ("TAS") to provide
public basic telecommunication services (both domestic and international) and
public cellular mobile telephone services. At the reorganization, this
investment was transferred from NTT to NTT Communications. StarHub launched
the services in April 2000.
In August 1998, NTT with the Beijing Telecommunications Administration
("BTA") established a joint venture, Beijing Telecom NTT Engineering Co., Ltd.
("BNTE"). BNTE started operations from September 1998 providing a system
integration service mainly in the area of Beijing. The capital of the new
company is US$3
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<PAGE>
million, of which US$1.47 million was provided by NTT. At the reorganization,
this investment was transferred from NTT to NTT Communications.
In July 1999, NTT Communications reached an agreement with CCT Telecom
Holdings Limited ("CCT Telecom"), to acquire a 49% stake in HKNet Company
Limited ("HKNet"), a major Internet service provider ("ISP") in Hong Kong. The
amount of the investment is US$16 million. NTT Communications has the right to
designate two directors to HKNet and participate in the company's management.
The two companies are forming a strategic partnership to jointly provide
various IP-related services, such as IP-VPN, in Hong Kong and use the joint
venture to enrich services for corporate users being provided by NTT
Communications group under the "Arcstar" brand.
In September 1999, NTT Communications, which was assigned Smart's shares by
NTT, reached an agreement with Philippine Long Distance Telephone Company
("PLDT"), the Philippine's largest telecommunications carrier, and FPC, PLDT's
major shareholder, to acquire a 15% stake in PLDT. Pursuant to the agreement,
NTT Communications exchanged all of its shares in Smart for new common shares
of PLDT. PLDT issued new PLDT common shares to Smart's shareholders
representing 22.5% of PLDT's common share capital after the exchange of
shares. NTT Communication's interest in Smart accounted for 7.8% of the
enlarged share of capital of PLDT. NTT also simultaneously subscribed for
newly issued PLDT common shares for approximately US$358 million representing
7.2% of the enlarged common share capital of PLDT. Also, under the agreement,
the FPC group's 56% share ownership of Smart was converted into new common
shares of PLDT. As a result of the investment, NTT Communications was given
the right to appoint two directors.
In November 1999, NTT Communications signed an agreement with Australia-
based Davnet Limited ("Davnet") 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.
("Davtel"), 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. Under the agreement, NTT
Communications has the right to designate two directors to Davtel to
participate in the company's management.
In February 2000, NTT Communications signed an agreement with AT&T to
acquire 15% interest in AT&T Global Network Services-Japan LLC ("AGNS-Japan"),
part of AT&T Solutions Group, a wholly owned subsidiary of AT&T. NTT
Communications invested US$50 million. NTT Communications allowed AGNS-Japan
to use the NTT Communications logo with the AGNS-Japan logo in Japan. NTT
Communications would hold two seats on the board of directors of AGNS-Japan.
In May, 2000, NTT Communications, through a U.S.-based subsidiary, entered
into a definitive merger agreement with Verio pursuant to which NTT
Communications will acquire a majority of the shares of Verio at a price of
$60 per share of common stock through a takeover bid and Verio will thereafter
be merged into such U.S. subsidiary of NTT Communications. The transaction is
valued at approximately $5.1 billion.
In June 2000, NTT Worldwide Telecommunications Corporation, a wholly owned
subsidiary of NTT Communications, and Korea Telecom ("KT") concluded an
Arcstar Service Agreement. Under the agreement, KT is to provide and market
Arcstar services such as Managed Bandwidth Service and Arcstar Managed Frame
Relay Service in South Korea, thereby enabling a wider distribution of these
services.
(iii) NTT DoCoMo
In November 1998, NTT DoCoMo acquired an interest in a Brazilian cellular
phone holding company Tele Sudeste Celular Participaces S.A. ("Tele Sudeste"),
through a consortium of investors including Telefonica de Espana S.A.,
Iberdorola S.A. and Itochu Corporation. The consortium owns approximately
51.8% of the voting
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<PAGE>
share of Tele Sudeste. NTT DoCoMo invested (Yen)10.4 billion and its
participation in the consortium is equal to 7%. Tele Sudeste owns companies
that provide cellular services in Rio de Janeiro and Espirito Santo.
In December 1999, NTT DoCoMo reached an agreement and signed a Share
Purchase Agreement with Hutchison Whampoa Company Limited ("Hutchison") to
acquire a 19% ($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 and the designation of a Board member.
In May 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 is
to acquire 15% of the Class A shares of KPN Mobile. In July 2000, NTT DoCoMo
signed a share purchase agreement with KPN Mobile to invest approximately
US$3.8 billion.
In July 2000, NTT DoCoMo signed an agreement with Hutchison and KPN Mobile
to purchase equity stakes in Hutchison 3G UK Holdings Ltd ("Hutchison 3G"), a
holding company in the United Kingdom which owns the third generation cellular
telephone license through a subsidiary. NTT DoCoMo undertook this transaction
in order to introduce IMT-2000 and mobile multimedia services swiftly. NTT
DoCoMo will invest approximately US$1.8 billion in Hutchison 3G, acquiring a
20% interest in Hutchison 3G. KPN Mobile will acquire a 15% stake in Hutchison
3G.
(iv) Other Initiatives
Since April 1996, NTT has been given the opportunity to take part in
Malaysia's Multimedia Super Corridor ("MSC") project, a national project of
Malaysia calling for the creation and development of a global multimedia hub
for the 21st century. NTT participated in designing the master plan of the
project. NTT was awarded "MSC Status" by the Malaysian Government, which
provides NTT Group with certain financial and non-financial incentives, such
as an exemption from Malaysian income taxes and the ability to employ certain
foreign workers. In September 1997, NTT established NTT MSC Sdn. Bhd., a
wholly owned subsidiary which carries out telecommunications businesses in
Malaysia and serves as the center of R&D activities for the Asian region. NTT
Group also contributes to the development of Malaysia's telecommunications
industry through technology transfer and human resources development,
including the dispatch of instructors to the newly established Multimedia
University. After the reorganization, this project is being managed by NTT
Communications.
In June 1997, NTT established the Asian Multimedia Forum ("AMF") with
leading telecommunication services providers and Internet services providers.
The AMF aims to promote acceptance and development of multimedia services,
applications and technologies in Asia. AMF is a non-profit organization, and
open to the entities and individuals who share the same goal of promoting the
acceptance and implementation of multimedia services/applications/technologies
in Asia. As of June 2000, 53 organization companies, vendors, traders and
other interested parties mainly from the Asia-Pacific region have joined AMF.
After the reorganization, NTT Communications became a member of the AMF.
Procurement
As part of its strategy to strengthen its corporate competitiveness and to
meet the demands of today's rapidly advancing information and communication
fields, NTT Group is making every effort to increase management efficiency to
provide superior services to its customers. To realize this goal, NTT Group
conducts its procurement in an open and transparent manner, taking into
account its business needs, provides non-discriminatory and competitive
opportunities to both domestic and foreign suppliers, and conducts global and
market-driven procurement of competitive products.
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<PAGE>
NTT Group provides procurement information via the Internet homepage named
"ON TIME" and always welcomes access from competitive suppliers worldwide.
Employees
NTT and its consolidated subsidiaries had approximately 224,000 employees at
March 31, 2000, making it the largest private sector employer in Japan. Almost
all employees, excluding supervisory staff, are members of the NTT Rodo Kumiai
(All NTT Workers Union of Japan; the "Union"), which is a member of the Nippon
Rodo Kumiai So Rengokai (Japanese Trade Union Confederation). NTT Group
maintains favorable labor relations with the Union and has experienced no
significant strikes by the Union over the past ten years.
In fiscal year 1994, NTT offered voluntary early retirement to certain
employees in fiscal years 1994 and 1995 as part of its streamlining effort to
control growth in personnel expenses by strategic restructuring of staffing
levels. Approximately 14,000 employees accepted NTT's retirement proposal in
fiscal years 1994 and 1995.
In fiscal years 1998 and 1999, NTT re-evaluated its existing system of
support for workers who voluntarily choose to transfer out of the company. In
particular, NTT expanded the target age range of workers who qualify for
benefits under the system, and adopted a plan which would pay 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 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 4,000 employees will be transferred to other NTT Group
companies.
ITEM 2--DESCRIPTION OF PROPERTY
The properties of NTT Group consist principally of plant and equipment used
to provide nationwide telecommunications services and are generally in good
operating condition.
At March 31, 2000, the gross book value of NTT Group's property, plant and
equipment was (Yen)32,607 billion (US $308 billion), consisting of
telecommunications equipment (mainly central office equipment, including
switching equipment) (37.8%); telecommunications service lines (36.7%);
buildings and structures (15.8%); machinery, vessels and tools (vehicles,
office equipment, furniture, etc.) (5.6%); land (2.3%); and construction in
progress (1.8%). Substantially all of the important communications facilities
are in buildings owned by NTT Group.
NTT Group's network is constantly in the state of being modernized and is
expected to be adequate for current operations. In recent years, NTT has
upgraded its telecommunications plant and equipment with digital transmission
and switching equipment. On December 17, 1997, NTT's domestic
telecommunications network was completely digitized. NTT Group will provide
more effective and advanced services and plans to expand optical fiber cables
in the access network. As indicated under "Capital Investments" in Item 1--
"Description of Business," NTT Group is shifting capital investment strategy
from investment in infrastructure to investment in demand-oriented customer
services.
ITEM 3--LEGAL PROCEEDINGS
In the normal course of business, NTT Group is subject to proceedings,
lawsuits and other claims. However, based upon the information currently
available to both NTT Group and its legal counsel, management believes that
damages from such lawsuits, if any, would not have a material effect on NTT's
consolidated financial statements.
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ITEM 4--CONTROL OF REGISTRANT
(a) As far as known to the registrant, state whether the registrant is
directly or indirectly owned or controlled by another corporation(s) or by
any foreign government and, if so, give the name(s) of such controlling
corporation(s) or government and briefly describe the nature of such
control.
As of March 31, 2000, the Government of Japan owns 53.15% of the issued
and outstanding Shares of NTT. See Note 13 of the Notes to Consolidated
Financial Statements.
(b) If the registrant's outstanding voting securities are in registered form,
furnish the following information, as of the most recent practicable
date, in substantially the tabular form indicated, with respect to: (1)
any person who is known to the registrant to be the owner of more than
ten percent of any class of the registrant's voting securities and (2)
the total amount of any class of the registrant's voting securities owned
by the officers and directors as a group, without naming them.
<TABLE>
<CAPTION>
As of March 31, 2000
--------------------------------------------
Percent
Identity of Person Amount of of
Title of Class or Group Shares Owned Class
-------------- ---------------------- ------------ -------
<S> <C> <C> <C>
Common stock, par value Government of Japan 8,416,855.26 53.15%
(Yen)50,000................. (Minister of Finance)
Common stock, par value Directors and officers 128.14 0.001%
(Yen)50,000................. as a group (12 persons)
</TABLE>
(c) Describe any arrangements, known to the registrant, the operation of which
may at a subsequent date result in a change in control of the registrant.
None.
ITEM 5--NATURE OF TRADING MARKET
Share Prices and Dividends
The primary market for the Shares of NTT is the Tokyo Stock Exchange (the
"TSE"). The Shares have been traded on the First Section of that exchange
since February 1987 and are also listed on all other stock exchanges in Japan.
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The following table sets forth for the periods indicated the reported high
and low sale prices of the Shares on the TSE. It also sets forth the closing
highs and lows of two TSE stock indices. The Tokyo Stock Price Index
("TOPIX"), which is published by the TSE, is a weighted index of the market
value of all stocks listed on the First Section of the TSE. As of March 31,
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 Closing Nikkei
Price per Share TOPIX Stock Average
------------------- Average daily ----------------- -------------------
Calendar Period High Low trading volume High Low High Low
--------------- --------- --------- -------------- -------- -------- --------- ---------
(number
(yen) (yen) of shares) (points) (points) (yen) (yen)
<S> <C> <C> <C> <C> <C> <C> <C>
1998
First quarter......... 1,230,000 1,050,000 7,918 1,300.30 1,120.61 17,264.34 14,664.44
Second quarter........ 1,170,000 996,000 5,633 1,254.74 1,156.47 16,536.66 14,715.38
Third quarter......... 1,280,000 995,000 8,162 1,280.73 1,043.57 16,731.92 13,406.39
Fourth quarter........ 1,080,000 819,000 9,553 1,164.59 980.11 15,207.77 12,879.97
1999
First quarter......... 1,200,000 854,000 14,569 1,269.76 1,048.33 16,378.78 13,232.74
Second quarter........ 1,440,000 1,130,000 18,829 1,425.64 1,292.07 17,782.79 15,972.68
Third quarter......... 1,570,000 1,200,000 13,894 1,535.23 1,420.64 18,532.58 16,821.06
Fourth quarter........ 1,900,000 1,300,000 28,116 1,722.20 1,460.23 18,934.34 17,254.17
2000
First quarter......... 1,790,000 1,310,000 18,039 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
</TABLE>
On June 30, 2000, the last reported sale price of the Shares on the TSE was
(Yen)1,410,000 per Share, and the closing TOPIX and Nikkei Stock Average on
that date were 1,591.60 and (Yen)17,411.05, respectively.
ADSs are listed on the New York Stock Exchange. 200 ADSs represent one Share
and are evidenced by ADRs issued by Morgan Guaranty Trust Company of New York,
as Depositary.
On December 18, 1998, the Government sold 1,000 thousand Shares to a variety
of individual and institutional investors in a global offering. Shares sold in
the United States were registered with the SEC. The global offering consisted
of 981,560 Shares and 3,688,000 ADSs (representing 18,440 Shares).
On November 12, 1999, the Government sold 952,000 Shares to a variety of
individual and institutional investors in a global offering. Shares sold in
the United States were registered with the SEC. The global offering consisted
of 862,000 Shares and 18,000,000 ADSs (representing 90,000 Shares).
36
<PAGE>
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 of ADRs
(including 324 record holders in the United States holding 20,845,469 ADSs).
The following table sets forth for the periods indicated the high and low
sales price of the ADSs as set forth on the New York Stock Exchange composite
tape.
<TABLE>
<CAPTION>
NYSE
Price per Average daily
Calendar Period ADS trading volume
--------------- ----------- ----------------
High Low (number of ADSs)
----- ----- ----------------
($) ($)
<S> <C> <C> <C>
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
</TABLE>
The Shares are also listed on the London Stock Exchange.
NTT has paid dividends on the Shares semiannually in respect of each fiscal
year since NTT's founding in 1985. The annual dividend is recommended by the
Board of Directors and approved by shareholders at the general meeting of
shareholders required to be held in June of each year. Immediately following
approval thereof at the meeting and authorization of MPT, dividends are
distributed to holders of record on the preceding March 31 in proportion to
their respective holdings of Shares at that date. Annual dividends may be
distributed either in cash or, if approved by the shareholders, in the form of
Shares. In addition to annual dividends, NTT may make cash distributions from
its retained earnings to its shareholders of record as of September 30 in each
year by resolution of its Board of Directors and authorization of MPT.
The following table sets forth the respective shareholder and Board of
Director (interim dividend) approval dates, payment dates and amount of
dividends paid by NTT applicable to each of the six-month periods indicated.
<TABLE>
<CAPTION>
Six months ended Approval Date Payment Date Dividend 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>
See Note 13 of Notes to Consolidated Financial Statements.
37
<PAGE>
NTT paid an annual dividend of (Yen)7,500 per share in respect of fiscal
year 1999. This dividend consisted of a special dividend of (Yen)5,000 per
share and an ordinary dividend of (Yen)2,500 per share paid to shareholders of
record on March 31, 1999 following shareholders and MPT approval as well. The
special dividend was announced in October 1998 in conjunction with NTT's sale
of a portion of its interest in NTT DoCoMo.
The payment, as well as the amount, of dividends in the future will be
subject to the level of NTT's earnings, NTT's financial condition and other
factors, including applicable government regulations.
Under Japanese foreign exchange controls currently in effect, dividends paid
on Shares held by non-residents of Japan may be converted into any foreign
currency and repatriated abroad. Under the terms of the Deposit Agreement
pursuant to which ADRs are issued, the Depositary is required, to the extent
that in its judgment it can convert Japanese yen on a reasonable basis into
U.S. dollars and transfer the resulting dollars to the United States, to
convert all cash dividends that it receives in respect of deposited Shares
into U.S. dollars and to distribute the amount thus received (after deduction
of applicable withholding taxes and expenses of the Depositary) to the holders
of ADRs. See Item 6--"Exchange Controls and Other Limitations Affecting
Security Holders."
On November 24, 1995, NTT capitalized a portion of its additional paid-in
capital and effected a 1.02-for-1 stock split to be distributed to
shareholders of record as of September 30, 1995, thereby distributing the
benefits of the sale of NTT DATA stock to the shareholders of NTT. In the
United States, the distribution was considered by the New York Stock Exchange
as a stock dividend effected in the form of a stock split. See Note 13 of
Notes to Consolidated Financial Statements.
At the general shareholders meeting on June 29, 1999, the shareholders
approved the repurchase by NTT of up to 120,000 of its Shares of common stock,
at an aggregate cost not to exceed (Yen)120 billion, before its next ordinary
general meeting of shareholders in June 2000. On July 13, 1999, NTT acquired
48,898 Shares. Of the Shares it repurchased, 48,000 were purchased from the
Government of Japan. More recently, NTT acquired an additional 28,512 Shares
during the period from February 4 to February 15, 2000. No additional
repurchases of Shares by NTT were proposed to, or authorized by, the
shareholders at the general shareholders meeting on June 29, 2000. As a result
of these repurchases, the number of outstanding Shares was reduced to
15,834,590.
For a discussion of the tax treatment of dividends paid to U.S. holders of
ADSs, see Item 7--"Taxation."
ITEM 6--EXCHANGE CONTROLS AND OTHER LIMITATIONS AFFECTING SECURITY HOLDERS
General
The Foreign Exchange and Foreign Trade Law of Japan, as amended, and the
cabinet orders and ministerial ordinances issued thereunder (collectively, the
"Foreign Exchange Regulations") govern certain matters relating to the
acquisition and holding of shares of equity securities of Japanese
corporations by "non-residents of Japan" and "foreign investors" (as defined
below). For purposes of determining ownership interests, the Depositary is the
deemed owner of shares underlying ADRs.
"Non-residents of Japan" are defined as individuals who are not resident in
Japan and corporations whose principal offices are located outside Japan.
Generally, branches and other offices of Japanese corporations located outside
Japan are regarded as non-residents of Japan, but branches and other offices
of non-resident corporations located within Japan are regarded as residents of
Japan. "Foreign investors" are defined to be (i) individuals not resident in
Japan, (ii) corporations which are organized under the laws of foreign
countries or whose principal offices are located outside Japan, and (iii)
corporations not less than 50% of the shares of which are held by (i) and/or
(ii) or a majority of the officers (or officers having the power of
representation) of which are non-resident individuals.
38
<PAGE>
Acquisition of Shares
Acquisition by a non-resident of Japan of shares of stock of a Japanese
corporation from a resident of Japan generally used to require prior
notification by the acquiring person to the Minister of Finance ("MOF"). An
amendment to the Foreign Exchange and Foreign Trade Control Law was enacted
and took effect as from April 1, 1998. This amendment abolished the prior
notification requirement and was substituted by a subsequent reporting
requirement. Such subsequent reporting by the resident of Japan is not
required where (i) the amount of the purchase transaction of shares is
(Yen)100 million or less; or (ii) the purchase transaction is effected by
certain financial institutions acting as the agent or intermediary, as
prescribed by the Foreign Exchange Regulations.
Notwithstanding the foregoing, if the proposed transaction falls within the
category of "inward direct investment", the transaction is subject to
different regulations. The term "inward direct investment" in relation to
transactions in shares means in relevant part: acquisition of shares of a
listed corporation by a foreign investor (whether from a resident, a non-
resident or any other foreign investor) the result of which would be such
investor's holding directly or indirectly 10% or more of the total outstanding
shares of such corporation or (if such foreign investor already holds 10% or
more of the total outstanding shares of such corporation) acquisition of
additional shares in such corporation.
Whenever shares of NTT are acquired in a transaction which at such time
falls within the category of an inward direct investment requiring prior
notification, the foreign investor who makes such investment must file a prior
notification with MOF and other governmental ministries having jurisdiction
over the business of NTT 30 days prior to such transaction. When a prior
notification is required, the said ministries may recommend the modification
or abandonment of the proposed acquisition and, if the recommendation is not
accepted, order its modification or prohibition.
The acquisition of shares by non-resident shareholders by way of stock split
is not subject to any notification requirements.
American Depositary Shares
Neither the deposit of Shares by a non-resident of Japan, the issuance of
ADRs evidencing the ADSs created by such deposit in exchange therefor nor the
withdrawal of the underlying Shares upon surrender of ADRs is subject to any
formalities or restrictions referred to under "Acquisition of Shares" above,
except where as a result of such deposit or withdrawal the aggregate number of
Shares held by the Depositary or the holder surrendering ADRs, as the case may
be, would be 10% or more of the total outstanding Shares, in which event prior
notification may be required as noted under "Acquisition of Shares" above.
Dividends and Proceeds of Sale
Under the Foreign Exchange Regulations, dividends paid on, and the proceeds
of sales in Japan of, Shares held by non-residents of Japan may in general be
converted into any foreign currency and repatriated abroad.
Reporting of Substantial Shareholdings
The Securities and Exchange Law requires any person who has become,
beneficially and solely or jointly, a holder of more than 5% of the total
issued shares of a company listed on any Japanese stock exchange to file with
the MOF within five business days a report concerning such shareholdings. A
similar report must also be made in respect of any subsequent change of 1% or
more in any such holding. For this purpose, shares issuable to such person
upon conversion of convertible securities or exercise of share subscription
warrants are taken into account in determining both the number of shares held
by such holder and the issuer's total issued share capital. Copies of each
such report must also be furnished to the issuer of such shares and all
Japanese stock exchanges on which the shares are listed.
39
<PAGE>
Restrictions on Foreign Ownership
Pursuant to an amendment to the NTT Law which became effective as of August
1, 1992, foreign nationals and foreign corporations, which were previously
prohibited from owning the Shares, have been allowed to own Shares. However,
the aggregate amount of NTT's voting rights which may be owned by:
(i) any person who does not have Japanese nationality;
(ii) any foreign government or any of its representatives;
(iii) any foreign juridical person or association; and
(iv) any juridical person or association;
(x) which owns 10% or more of NTT's voting rights and
(y) 10% or more of the voting rights of which are owned by the persons
or bodies listed in (i) through (iii) above
(the proportion of NTT's voting rights in this case is determined by
multiplying the proportion expressed in (x) by that expressed in (y)) must be
less than 20% of NTT's total voting rights. NTT is prohibited from registering
ownership of Shares by such persons in excess of such limit.
Under the Revision Law, this restriction will continue with respect to
shares of NTT.
ITEM 7--TAXATION
Japanese Taxation
The following is a summary, prepared by Tomotsune Kimura & Mitomi, of the
principal Japanese tax consequences to an owner of shares or ADSs who is an
individual not resident in Japan or a non-Japanese corporation. The statements
regarding Japanese tax laws set forth below are based on the laws in force and
as interpreted by the Japanese taxation authorities as of the date hereof and
are subject to changes in the applicable Japanese laws or double taxation
conventions occurring after that date. This summary is not exhaustive of all
possible tax considerations which may apply to a particular investor and
potential investors are advised to satisfy themselves as to the overall tax
consequences of the acquisition, ownership and disposition of shares or ADSs,
including specifically the tax consequences under Japanese law, the laws of
the jurisdiction of which they are resident, and any tax treaty between Japan
and their country of residence, by consulting their own tax advisors.
Generally, a non-resident of Japan (whether an individual or a corporation)
is subject to Japanese withholding tax on dividends paid by Japanese
corporations. Stock splits are not subject to Japanese income tax. However, a
transfer of retained earnings or legal reserve (but, in general, not
additional paid-in capital) to stated capital (whether made in connection with
a stock split or otherwise) is treated as a dividend payment to shareholders
for Japanese tax purposes and is, in general, subject to Japanese income tax.
No such transfer would 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
40
<PAGE>
(b) not more than 25% of the gross income of the paying corporation for
such prior taxable year (if any) consists of interest or dividends
(as defined therein).
For purposes of the Convention and Japanese tax law, U.S. holders of ADRs
will be treated as owners of the Shares underlying the ADSs evidenced by the
ADRs.
In the absence of any applicable tax treaty, convention or agreement
reducing the maximum rate of withholding tax, the rate of Japanese withholding
tax applicable to dividends paid by Japanese corporations to non-residents of
Japan or non-Japanese corporations is 20%. At the date of this annual report,
Japan has income tax treaties, conventions or agreements whereby the above
mentioned withholding tax rate is reduced, in most cases to 15% for portfolio
investors with, inter alia, Australia, Belgium, Canada, Denmark, Finland,
France, Germany, Ireland, Italy, Luxembourg, The Netherlands, New Zealand,
Norway, Singapore, Spain, Sweden, Switzerland, the United Kingdom and the
United States of America.
A non-resident holder who is entitled to a reduced rate of Japanese
withholding tax on payment of dividends by NTT is required to submit an
Application Form for Income Tax Convention regarding Relief from Japanese
Income Tax on Dividends in advance through NTT to the relevant tax authority
before payment of dividends. A standing proxy for a non-resident holder may
provide such application service. With respect to ADSs, such reduced rate is
applicable if the Depositary or its agent submits two Application Forms for
Income Tax Convention (one prior to payment of dividends, the other within
eight months after NTT's fiscal year-end). To claim such reduced rate a non-
resident holder of ADSs will be required to file proof of taxpayer status,
residence and beneficial ownership (as applicable) and to provide other
information or documents as may be required by the Depositary. A non-resident
holder who does not submit an application in advance will be entitled to claim
the refund of withholding taxes withheld in excess of the rate of an
applicable tax treaty from the relevant Japanese tax authority.
Gains derived from the sale outside Japan of Shares or ADSs by a non-
resident of Japan, or from the sale of Shares within Japan by a non-resident
of Japan not having a permanent establishment in Japan, are generally not
subject to Japanese income tax.
Japanese inheritance and gift taxes at progressive rates may be payable by
an individual who has acquired Shares or ADSs as legatee, heir or donee even
though neither the individual nor the deceased nor donor is a Japanese
resident.
United States Taxation
The following discussion is based on the advice of Milbank, Tweed, Hadley &
McCloy LLP, United States counsel to NTT, with respect to United States
federal income tax laws presently in force. The discussion summarizes the
principal United States federal income tax consequences of an investment in
ADSs or Shares, but it is not a full description of all tax considerations
that may be relevant to a decision to purchase ADSs or Shares. In particular,
the discussion is directed only to U.S. holders that will hold ADSs or Shares
as capital assets and that have the United States dollar as their functional
currency. It does not address the tax treatment of U.S. holders that are
subject to special tax rules, such as banks, dealers, traders who elect to
mark to market, insurance companies, 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. NTT
believes, and the discussion therefore assumes, that it is not and will not
become a passive foreign investment company for United States federal income
tax purposes. HOLDERS SHOULD CONSULT THEIR TAX ADVISORS ABOUT THE UNITED
STATES FEDERAL, STATE AND LOCAL TAX CONSEQUENCES TO THEM OF THE PURCHASE,
OWNERSHIP AND DISPOSITION OF ADSs OR SHARES.
As used herein, "U.S. holder" means a beneficial owner of ADSs or Shares
that is a United States citizen or resident, a domestic corporation or
partnership, a trust subject to the control of a U.S. person and the primary
supervision of a U.S. court, or an estate the income of which is subject to
United States federal income taxation
41
<PAGE>
regardless of its source. The term "non-U.S. holder" refers to any beneficial
owner of ADSs or Shares other than a U.S. holder. If the obligations
contemplated by the Deposit Agreement are performed in accordance with its
terms, holders of ADSs (or ADRs evidencing ADSs) will be treated for United
States federal income tax purposes as the owners of the Shares represented by
those ADSs.
Cash dividends (including the amount of any Japanese taxes withheld) paid
with respect to the Shares represented by ADSs generally must be included in
the gross income of a U.S. holder as ordinary income when the dividends are
received (i) by the Depositary in the case of a U.S. holder holding ADSs or
(ii) by the U.S. holder in the case of a U.S. holder holding Shares. Dividends
paid in yen must be included in gross income at a United States dollar amount
based on the exchange rate in effect on the day of receipt by the Depositary
or, in the case of Shares, the U.S. holder. Any gain or loss recognized upon a
subsequent sale or conversion of the yen for a different amount will be United
States source ordinary income or loss. Japanese withholding tax paid by or for
the account of any U.S. holder may be used, subject to generally applicable
limitations and conditions, as a credit against the U.S. holder's U.S. federal
income tax liability or as a deduction in computing the U.S. holder's gross
income. Dividends generally will be foreign source income but generally will
be treated separately, together with other items of "passive income" (or in
the case of certain holders, "financial services income") for foreign tax
credit limitation purposes. A U.S. holder that is a corporation will not be
eligible for the dividends-received deduction. Distributions to U.S. holders
of additional Shares or preemptive rights with respect to Shares that are made
as part of a pro rata distribution to all shareholders of NTT generally will
not be subject to United States federal income tax. However, such
distributions of additional Shares or preemptive rights generally will be
subject to federal income tax if, for example, a U.S. holder can elect to
receive cash in lieu of Shares or preemptive rights or if the distribution of
Shares or preemptive rights is not proportionate.
A non-U.S. holder generally will not be subject to United States federal
income or withholding tax on dividends paid with respect to Shares or Shares
represented by ADSs, unless that income is effectively connected with the
conduct by the non-U.S. holder of a trade or business within the United States
(and is attributable to a permanent establishment maintained in the United
States by such non-U.S. holder, if an applicable income tax treaty so
requires).
U.S. holders generally will recognize capital gain or loss on the sale or
other disposition of ADSs or Shares (or preemptive rights with respect to such
Shares) held by the U.S. holder or by the Depositary. U.S. holders will not
recognize gain or loss on deposits or withdrawals of Shares in exchange for
ADSs or on the exercise of preemptive rights. Gain recognized by a U.S. holder
generally will be treated as United States source income. Consequently, in the
case of a disposition of shares or ADSs, the U.S. holder may not be able to
use the foreign tax credit for any Japanese tax imposed on the gain unless it
can apply the credit against tax due on income from foreign sources. Loss
recognized by a U.S. holder generally will be treated as United States source
loss. A U.S. holder may, however, be required to treat all or any part of such
loss as foreign source loss in certain circumstances, including if (i) NTT has
paid dividends within the 24-month period preceding the loss and (ii) the U.S.
holder included the dividends in the "financial services income" basket for
foreign tax credit limitation purposes. If such a loss were treated as foreign
source for foreign tax credit purposes, the amount of the U.S. holder's
allowable foreign tax credit may be reduced.
A non-U.S. holder of ADSs or Shares will not be subject to United States
federal income or withholding tax on gain from the sale or other disposition
of ADSs or Shares unless (i) such gain is effectively connected with the
conduct of a trade or business within the United States (and is attributable
to a permanent establishment maintained in the United States by such non-U.S.
holder, if an applicable income tax treaty so requires) or (ii) the non-U.S.
holder is an individual who is present in the United States for at least 183
days during the taxable year of the disposition and certain other conditions
are met.
Dividends in respect of the ADSs or Shares and the proceeds from the sale,
exchange, or redemption of the ADSs or Shares may be reported to the United
States Internal Revenue Service if paid to noncorporate holders. A 31% backup
withholding tax also may apply to amounts paid to noncorporate holders unless
they provide an
42
<PAGE>
accurate taxpayer identification number, a properly executed U.S. Internal
Revenue Service Form W-8 or otherwise establish a basis for exemption. The
amount of any backup withholding from a payment to a holder will be allowed as
a credit against the holder's United States federal income tax liability. The
requirements for establishing an exemption from information reporting and
backup withholding will change for payments made after December 31, 2000.
ITEM 8--SELECTED FINANCIAL DATA
The following data for each of the fiscal years 1996-2000 has been derived
from, and should be read in conjunction with, the consolidated financial
statements of NTT and its subsidiaries. Consolidated balance sheets at March
31, 1999 and 2000, the related consolidated statements of income,
shareholders' equity and cash flows for the three years ended March 31, 2000
and the notes thereto appear elsewhere in this annual report.
STATEMENT OF EARNINGS DATA
Nippon Telegraph and Telephone Corporation
and Its Subsidiaries
Years Ended March 31
<TABLE>
<CAPTION>
Millions of
Millions of Yen U.S. Dollars
------------------------------------------------------------------------------- ------------
1996 1997 1998 1999 2000 2000
-------------- -------------- -------------- -------------- --------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Operating revenues...... (Yen)7,908,643 (Yen)8,821,782 (Yen)9,450,013 (Yen)9,729,673 (Yen)10,383,339 $97,956
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
Other, net (mainly
representing interest
and amortization of
bond discounts and
other charges for debt
expenses).............. 151,012 259,702 216,513 (1,402,526) 134,818 1,272
-------------- -------------- -------------- -------------- --------------- -------
Income before income
taxes and minority
interest............... 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
Minority interest....... (6,124) (11,718) (32,275) (24,148) (115,210) (1,087)
Extraordinary loss...... -- -- -- (462,508) -- --
Equity in earnings of
affiliated companies... 7,605 14,329 9,479 9,043 10,090 95
-------------- -------------- -------------- -------------- --------------- -------
Net Income............ (Yen) 273,646 (Yen) 251,457 (Yen) 214,460 (Yen) 554,431 (Yen) 299,010 $ 2,821
============== ============== ============== ============== =============== =======
<CAPTION>
Yen U.S. Dollars
------------------------------------------------------------------------------- ------------
1996 1997 1998 1999 2000 2000
-------------- -------------- -------------- -------------- --------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Per share of common
stock:
Extraordinary loss...... -- -- -- (Yen) (29,067) -- --
Net income.............. (Yen) 17,197 (Yen) 15,803 (Yen) 13,478 (Yen) 34,844 (Yen) 18,883 $ 178
Cash dividends,
applicable to earnings
of the year............ (Yen) 4,902 (Yen) 5,000 (Yen) 5,000 (Yen) 5,000 (Yen) 10,000 $ 94
</TABLE>
Note: This financial data for per share of common stock is appropriately
adjusted for any stock split of common stock.
43
<PAGE>
BALANCE SHEET DATA
Nippon Telegraph and Telephone Corporation
and Its Subsidiaries
Years Ended March 31
<TABLE>
<CAPTION>
Millions of
Millions of Yen U.S. Dollars
------------------------------------------------------------------------------- ------------
1996 1997 1998 1999 2000 2000
--------------- --------------- --------------- --------------- --------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Property, plant and
equipment (net)........ (Yen)11,136,221 (Yen)11,655,768 (Yen)12,005,362 (Yen)12,161,818 (Yen)11,863,596 $111,921
Total assets............ 15,399,448 16,475,094 17,352,531 18,573,248 19,101,289 180,201
Long-term liabilities... 7,397,805 7,956,248 8,306,737 8,125,479 8,318,577 78,477
Total shareholders'
equity................. 5,196,119 5,340,412 5,463,928 5,910,770 6,014,624 56,742
</TABLE>
ITEM 9--MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Introduction
Significant changes in the legislative and regulatory framework for
telecommunications in Japan have occurred since 1985, including the
introduction of telecommunications reform laws aimed at promoting competition
in the telecommunications services market. See "Description of Business--NTT
Group" and "Description of Business--Regulation" for information as to the
current and possible future impact on NTT Group and its results of operations.
In June 1997, the Diet passed amendments to the NTT Law which implement a
plan proposed by MPT and accepted in principle by NTT, to reorganize NTT. See
"Description of Business--Reorganization." and "Description of Business--NTT
Group." On July 1, 1999, the relevant NTT business activities were transferred
to NTT's respective wholly-owned subsidiaries, NTT East, NTT West and NTT
Communications.
After the transfer of business, NTT continues to exist but operates
primarily as a holding company. The principal sources of NTT's cash revenues
are dividends from its subsidiaries; payments for providing management
services through contracts with subsidiaries; and payment for its fundamental
R&D activities through contracts with each of NTT's subsidiaries which
continuously use the results of the R&D activities.
In order to promote further competition in the telecommunications market,
and as part of the Government's overall policy toward deregulation, the
Telecom Business Law was revised in May 1998 and became effective as of
November 1, 1998. Pursuant to these revisions, rates for certain services
provided by the Regional Companies will generally be subject to the price-cap
system. The price-cap will be reflected in an index which represents a
percentage of current rates. Under the price-cap system, an index will be
fixed annually by MPT, and 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 will initially equal the Consumer Price Index
in Japan less a productivity factor and an exogenous factor. On June 13, 2000,
the Telecommunications Council determined such index for the period commencing
on October 1, 2000 and submitted it to the Ministry of Posts and
Telecommunications. 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. NTT East and NTT West will have to notify the Ministry of Posts
and Telecommunications of their new rate plans by September 1, 2000. Beginning
on October 1, 2000, NTT East and NTT West will be subject to the new price-cap
system. Until October 1, 2000, rates for regional telecommunications services
provided by NTT East and NTT West are subject to MPT approval. It is estimated
that fiscal year 2001 revenues of NTT Group will be reduced by approximately
(Yen)14 billion (representing a
44
<PAGE>
decrease of (Yen)7 billion for each of NTT East and NTT West, respectively);
fiscal year 2002 revenues will be reduced 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 revenues will be reduced
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). See "Description
of Business--Regulation--Rates."
In June 1997, the Diet revised the Telecom Business Law in an attempt to
promote transparent, fair, prompt and reasonable interconnection. The
conditions upon which access to networks is offered, especially to the local
networks, are of great significance to the development of the Japanese
telecommunications market. The cost of interconnection to the local networks
of NTT East and NTT West is expected to be a significant part of the operating
costs of competing telecommunications carriers, and, as competition grows,
increasingly important to NTT Group. See "Description of Business--
Regulation--Interconnection."
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:
(i) 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;
(ii) 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
(iii) 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 the foregoing 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, 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 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
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). However, on an
NTT Group consolidated basis, such decrease would be reduced by the off-
setting cost-savings of such Long-run Incremental Cost Methodology to NTT
Communications and NTT DoCoMo Group which provide a portion of the revenues of
NTT East and NTT West. See "Description of Business--Regulation--
Interconnection."
These regulatory developments may have the effect of increased competition
in the Japanese telecommunications industry. A more competitive environment
may affect NTT Group's results of operations. In anticipation of a more
competitive environment, NTT Group has introduced a range of new services,
including Internet and data communications related services as well as
discount services designated to provide optional calling plans to different
customer segments. In addition, NTT Group has continued to take steps to
enhance operational efficiency and customer satisfaction.
45
<PAGE>
SFAS 71 Write-Off
In fiscal year 1999, NTT Group discontinued accounting for all of its
operations in accordance with the provisions of Statement of Financial
Accounting Standards No. 71, "Accounting for the Effects of Certain Types of
Regulation" ("SFAS 71"), in its financial statements. Pursuant to the
requirements of Statement of Financial Accounting Standards No. 101,
"Regulated Enterprises-Accounting for the Discontinuation of Application of
FASB Statement No.71" ("SFAS 101"), NTT recorded an extraordinary non-cash
charge of approximately (Yen)462 billion, net of income taxes in the amount of
(Yen)427 billion in fiscal year 1999 and eliminated approximately (Yen)889
billion of regulatory assets from its balance sheet as of March 31, 1999.
Under SFAS 71, NTT had accounted for the effects of the rate-making process
by establishing certain regulatory assets, including the deferral of certain
costs based on approvals received from regulators. After assessing the recent
revision of the Telecom Business Law and proposed price-cap system, NTT
recognized that it is required under SFAS 101 to change its accounting for
regulated operations. NTT's determination that it is no longer eligible for
the continued application of SFAS 71 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 the 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.
New Accounting 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 SEC 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 fiscal year 2001 and is evaluating the effect that such
adoption may have on its consolidated results of operations and financial
position.
NTT DoCoMo offering
On October 22, 1998, NTT DoCoMo completed its initial public offering and
listed its stock on the First Section of the Tokyo Stock Exchange. NTT sold
218,000 shares of NTT DoCoMo's common stock, without par value, 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 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. See "Item 5--Nature of
Trading
46
<PAGE>
Market." 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 Group 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 year 1994, NTT offered voluntary early retirement to certain
employees in fiscal years 1994 and 1995 as part of its streamlining effort to
control growth in personnel expenses by strategic restructuring of staffing
levels. Approximately 14,000 employees accepted NTT's retirement proposal in
fiscal years 1994 and 1995.
In fiscal years 1998 and 1999, NTT re-evaluated its existing system of
support for workers who voluntarily choose to transfer out of the company. In
particular, NTT expanded the target age range of workers who qualify for
benefits under the system, and adopted a plan which would pay 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 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 4,000 employees will be transferred to other NTT Group
companies.
Year 2000 Problem
As part of its preparation for the Year 2000 problem, NTT Group made all
necessary adjustments in the Group company's facilities, systems and
equipment. A contingency plan was also formulated to enable prompt action in
case of any trouble. As a result of these efforts, no events or disruptions
occurred affecting the NTT Group's telecommunications services, and NTT Group
was able to maintain stable and uninterrupted services throughout the period
covering the transition to the year 2000.
Results of Operations
In fiscal years 2000 and 1999, NTT Group's 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 NCCs 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 effort, Internet and other data communications related
revenues increased 28.5% to (Yen)2,098 billion in fiscal year 2000. Operating
income increased 15.8% in fiscal year 2000, due principally to increased
operating income from NTT DoCoMo Group mobile telecommunications services
following a decrease of 18.4% in fiscal year 1999. Net income decreased 46.1%
in fiscal year 2000 primarily as a result of 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.
Because NTT Group's services are integrated, it is not practical to
segregate and quantify the effects of factors related to sales volume and
factors related to price on operating revenues in a wholly meaningful fashion.
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.
47
<PAGE>
NTT implemented the following rate reductions for long-distance services
from fiscal year 1994 through fiscal year 1998:
<TABLE>
<CAPTION>
Estimated
annual impact
on NTT's revenue based
Effective on the volume of services
Fiscal Year* Date at the effective date
------------ ------------- -------------------------
(billions of yen)
<S> <C> <C>
1994................................. October 1993 (Yen)270
1996................................. March 1996 (Yen) 60
1997................................. February 1997 (Yen) 60
1998................................. February 1998 (Yen) 80
</TABLE>
--------
* There were no rate reductions during fiscal years 1995, 1999 and 2000.
On April 3, 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 for NTT
Communications' operating revenue.
As the effective dates have not coincided with the beginning of fiscal
years, the estimated impact does not fully correspond with the impact for the
fiscal years in which the changes went into effect. In addition, demand is
affected by such factors as the marketing strategies of competitors and
general economic conditions.
The following table sets forth a breakdown by category of NTT Group'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>
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 No.71. The non-application of SFAS No.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 Group subscriber growth. Operating expenses in
fiscal year 1999 increased because of a rise in depreciation, amortization and
maintenance costs due to a greater amount of telecommunications equipment for
cellular telephone and PHS services needed to accommodate high NTT
48
<PAGE>
DoCoMo Group subscriber growth and other factors. In addition, the disposal
process for metal cables following NTT Group'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 Group's operating revenues are divided into the following seven service
categories: telephone services, telegraph services, leased circuit services,
data communication facility services, ISDN services, sale of telecommunication
equipment and other services. NTT Group's results are also segmented according
to its four primary lines of business: wireline services, wireless services,
data communication services and other services. See Footnote 14 to the Notes
to Consolidated Financial Statements attached hereto and Item 1--"Description
of Business--NTT Group."
In fiscal year 2000, NTT Group's operating revenues increased 6.7% to
(Yen)10,383 billion. Wireline services' operating revenues increased 1.2% to
(Yen)6,209 billion, as growth in ISDN services and other data related services
caused by the increased demand for Internet data communications. Wireless
services' operating revenues increased 17.0% to (Yen)3,927 billion due to a
steady increase in the number of cellular telephone subscribers and hours of
use. Operating revenues from data communication services and other services
increased 1.6% to (Yen)716 billion and 47.8% to (Yen)2,180 billion,
respectively. The increase in operating revenues from other services was due
to dividends from NTT subsidiaries, and receipt of payment for providing
management services through contracts with NTT subsidiaries and payment for
NTT fundamental R&D activities through contracts with each of NTT subsidiaries
which use the results of the R&D activities.
Making use of its fully digitized network, NTT Group developed and provided
such services as computer-based communications services compatible with the
Internet and other networks. As a result of this effort, information sharing
related services revenues which contains ISDN, OCN, high speed digital
circuit, digital data exchange (DDX) services, which are included in NTT
Group's wireline segment, and system integration (SI), which is included in
both wireline and data communication segment, increased 28.5% to (Yen)2,098
billion in fiscal year 2000.
NTT Group believes that the competition in telecommunications markets has
moved from being primarily price-based to requiring companies to promote the
quality and variety of services provided. To compete more effectively, NTT
Group has introduced a range of new services, including discount services
designed to provide optional calling plans to different customer segments. In
addition, NTT Group has continued to take steps to enhance operational
efficiency and fulfill customer satisfaction.
Telephone Services
Operating revenues from telephone services increased 1.5% in fiscal year
2000 to 6,394 billion, or 61.6% of operating revenues. NTT Group's telephone
services include certain items in the wireline segment, such as telephone
subscriber, public telephones and other related services; certain items in the
wireless segment, such as cellular telephone, PHS and other related services;
and certain other services. Subscribers for cellular telephone services
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.
(i) Telephone Subscriber Services
Due 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
49
<PAGE>
the total number of telephone and ISDN subscribers decreased as it did in
fiscal year 1999, the rate of decline has fallen.
<TABLE>
<CAPTION>
Years ended March
31,
--------------------
1998 1999 2000
------ ------ ------
<S> <C> <C> <C>
Telephone subscriber lines (thousands).................. 60,186 58,277 55,318
</TABLE>
By the end of March 2000, the GC connection rate was roughly 80%, resulting
in increased competition in the intra-prefectural telecommunications market.
NTT East and NTT West responded by offering overlapping contracts service for
"Area Plus" and "Time Plus" which allows subscribers to obtain both services
simultaneously from March 2000.
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 East and NTT West during the fiscal
year 2000 was approximately (Yen)110 billion.
NTT Group is promoting greater utilization of telephones through marketing
and promotion of telephone subscriber services and other network services. At
the same time, NTT Group has sought to develop and provide services to satisfy
customer needs. This includes "Magic Box", introduced by NTT East and NTT West
in July 1999, which records messages at a processing center when a line is
busy or when a call is unanswered. The service can also be used for
transferring an incoming call to a cellular phone.
(ii) Cellular Telephone Services
Cellular telephone services are part of NTT Group's wireless segment. 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 Group subscriber
growth was not as high as it was in recent years, as a result of the
introduction of i-mode and other new products and reductions in monthly and
call charges, the number of NTT DoCoMo Group subscribers rose substantially to
29.4 million, a 22.8% increase over the previous fiscal year.
The following table sets forth information regarding NTT DoCoMo Group's
cellular telephone subscribers and market share:
<TABLE>
<CAPTION>
Years Ended 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
Market share....................... 48.4% 52.5% 57.0% 57.5% 57.4%
</TABLE>
In fiscal year 2000, traffic increased in terms of both the number of calls
and total hours of use.
The following table sets forth information regarding NTT DoCoMo Group's
cellular telephone traffic:
<TABLE>
<CAPTION>
Years Ended
March 31,
---------------
1998 1999 2000
---- ---- -----
<S> <C> <C> <C>
Hours of use (Million hours)............................... 448 784 1,237
</TABLE>
(iii) PHS Services
PHS services are part of NTT Group's wireless segment. Due to the
introduction by NTT DoCoMo Group of "Doccimo" allowing compatible with 64K
data transmissions, the sale of combined cellular and PHS telephones and other
factors, the number of PHS subscribers rose 6.9% over the previous fiscal year
to 1.44 million.
50
<PAGE>
The following table sets forth information regarding NTT DoCoMo Group's PHS
subscribers and its market share:
<TABLE>
<CAPTION>
Years Ended 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
Operating revenues from telegraph services fell 3.4% to (Yen)83 billion in
fiscal year 2000, accounting for 0.8% of operating revenues. This service
category includes both telegram and telex services included in NTT Group's
wireline segment.
The total number of telegrams sent dropped 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 could not fully offset the continued decline in the use of
telegrams for weddings and condolences.
The following table sets forth information regarding the number of telegrams
sent and telex subscribers:
<TABLE>
<CAPTION>
Years Ended March 31,
----------------------------------
1996 1997 1998 1999 2000
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Telegrams (thousands)..................... 41,385 40,198 37,564 36,180 34,078
Telex subscribers (thousands)............. 15 12 10 8 6
</TABLE>
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 services included in NTT
Group's wireline segment.
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
thousand and 205 thousand, respectively, at the end of fiscal year 2000,
respectively, and the number of conventional leased circuits of NTT East and
NTT West was 448 thousand and 394 thousand, respectively.
NTT Communications reduced charges for its long-distance "High-Speed Digital
Leased Circuit" and "ATM Mega Link" services in October 1999, and for medium-
to high-bandwidth "ATM Mega Link" service in March 2000.
51
<PAGE>
The following table sets forth information regarding NTT Group's leased
circuit services:
<TABLE>
<CAPTION>
Years Ended March 31,
----------------------------
1996 1997 1998 1999 2000
----- ---- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Conventional circuits (thousands)
NTT.............................................. 1,001 967 902 822 --
NTT East......................................... -- -- -- -- 448
NTT West......................................... -- -- -- -- 394
High-speed digital circuits (thousands)
NTT.............................................. 57 107 169 228 --
NTT East......................................... -- -- -- -- 244
NTT West......................................... -- -- -- -- 205
ATM Mega Link
NTT.............................................. -- -- 1,254 1,509 --
NTT East......................................... -- -- -- -- 3,605
NTT West......................................... -- -- -- -- 2,210
</TABLE>
--------
* The calculation method for determining the number of leased circuit
services was changed on July 1, 1999 when NTT's business activities were
transferred to NTT East, NTT West and NTT Communications.
Data Communication Facility Services
Operating revenues from data communication facility services, which is
included in NTT Group's data communication segment, 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.
ISDN
Operating revenues from ISDN services, which is included in NTT Group's
wireline segment, increased 47.3% in fiscal 2000 to (Yen)819 billion, or 7.9%
of operating revenues. NTT Group's ISDN services comprise INS-Net 64 and INS-
Net 1500. In line with rising demand for Internet access and connection lines,
NTT East and NTT West introduced two "i-Ai Plan" Internet charge services for
INS-Net 64 to further promote Internet use. To provide improved convenience
while expanding penetration, another INS-Net 64 service, "i-number", was also
introduced enabling users to employ a second telephone number as well as their
current number.
Both INS-Net 64 and INS-Net 1500 showed dramatic growth in the fiscal year.
The number of INS-Net 64 subscribers soared 66.8% to 6.6 million, and the
number of INS-Net 1500 subscribers climbed 72.1% to 82.1 thousand. There was
also a large increase in traffic.
The following table sets forth information regarding NTT Group's ISDN
subscribers:
<TABLE>
<CAPTION>
March 31,
----------------------------
1996 1997 1998 1999 2000
---- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
INS-Net 64 (thousands).......................... 510 1,037 2,286 3,955 6,598
INS-Net 64 Light (thousands).................... -- -- 86 242 486
INS-Net 1500 (thousands)........................ 10 22 34 48 82
</TABLE>
Sale of Telecommunication Equipment
Operating revenues from the sale of telecommunication equipment rose 12.8%
to (Yen)1,138 billion, accounting for 11.0% of operating revenues. The sale of
telecommunication equipment is included in each of NTT Group's wireline,
wireless and other services segments.
52
<PAGE>
In line with the increased use of the Internet and the demand for ISDN and
other equipment NTT Group has emphasized the introduction of new products such
as IP products featuring computer telephony integration ("CTI") functions, and
has actively promoted products meeting the needs of corporate users.
Sales of cellular and PHS terminals equipment increased 21.7% and 45.8%
respectively.
Other Services
Operating revenues from other services rose 18.3% to (Yen)1,052 billion,
accounting for 10.1% of operating revenues. The other services category
consists of certain wireline segment businesses including digital data
exchange, facsimile network (F-Net), OCN services and other related services;
certain wireless segment businesses including pocket pager and other related
services; certain data communications segment businesses which include system
development services; and certain other services.
The following table sets forth information regarding NTT Group's subscribers
to other services:
<TABLE>
<CAPTION>
Years ended March 31,
-----------------------------
1996 1997 1998 1999 2000
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
OCN services (thousands)...................... -- 1 159 478 1,147
Packet exchange services (thousands).......... 466 477 477 463 460
Frame relay (thousands)....................... 6 4 16 44 75
Cell Relay.................................... 0 0 4 6 301
Facsimile network subscribers (thousands)..... 812 1,015 1,127 1,212 1,307
Pocket pager subscribers (thousands).......... 6,328 5,838 3,908 2,111 1,444
</TABLE>
Reflecting an increase in Internet usage, the number of "OCN Dial Access"
service subscribers reached 1,111 thousand. As a result, the total number of
subscribers increased by 140.0% to 1,147 thousand 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.
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
thousand 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, it was a slight decline of only 0.2%. An increase in severance and
pension-related costs and the accrual of compensated absences as a result of
non-application of SFAS No. 71 led to an increase in personnel expenses of
(Yen)34 billion to (Yen)2,401 billion.
Depreciation, amortization and maintenance costs decreased by (Yen)41
billion to (Yen)3,394 billion. This reflected reduced capital investment
overall despite increased NTT DoCoMo Group capital investment.
Other operating expenses increased (Yen)549 billion to (Yen)3,764 billion
due to such factors as increased agency commissions and sales costs for
terminal equipment as a result of high NTT DoCoMo Group subscriber growth and
a steady shift to more functional terminal equipment.
53
<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 Group mobile telecommunications services, net income
decreased by 46.1% to (Yen)299 billion from the previous fiscal year when net
income 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. 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 $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 INS-Net services
among users, combined with the effects of the sluggish Japanese economy,
caused the number of telephone subscriber lines to decline.
(i) Telephone subscriber services
Due to an increase in sales of INS-Net services and cellular telephones and
the sluggish economy, the number of subscriber lines in use decreased 1.91
million from the previous fiscal year to 58.28 million subscriber lines at the
end of fiscal year 1999, marking the second consecutive year of a decrease in
subscriber lines. Management believes that about 85% of the increase in ISDN
subscribers during the fiscal year is attributable to a shift from telephone
subscribers.
In fiscal year 1999, NTT's end-to-end telephone traffic decreased from the
previous fiscal year in terms of the number of calls as well as hours of use.
The primary reasons for this decrease were the ongoing economic downturn, the
shift to cellular telephone services and INS-Net and an increase in
competition. Even when combined with ISDN traffic, the number of calls and
hours of use decreased.
A rate reduction for long-distance calls implemented in February 1998
resulted in a negative impact on operating revenues in fiscal year 1999 of
(Yen)70 billion.
Revisions to directory assistance service charges, implemented in May 1998
and May 1999, are expected to increase NTT Group's revenues by (Yen)15 billion
per 12-month period.
54
<PAGE>
During the fiscal year, NTT made further progress with the interconnection
of local switches with local and long-distance carriers through its GCs. NTT
responded with the extension of the "Time Plus" discount service to the whole
of Japan and the introduction of a new "Telechoice" pricing plan.
Interconnection 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 approximately
(Yen)68 billion.
(ii) 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% over fiscal year 1999 to reach a new high of 41.5 million. While NTT
DoCoMo Group subscriber growth was not quite as rapid as in recent years, the
number of NTT DoCoMo Group'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.
(iii) PHS Services
On December 1, 1998, NTT Group's PHS services business that had been
operated formerly by NTT Personal Group was transferred to NTT DoCoMo Group.
The PHS services business had suffered a loss of customers and the liabilities
of NTT Personal Group had exceeded its assets. The transfer to NTT DoCoMo
Group should create synergistic effects and allow NTT DoCoMo Group 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 thousand.
However, the number of conventional leased circuits decreased 8.8% to 822
thousand as customers continued to switch to high-speed communications
services.
NTT implemented regular tariff revisions designed to keep a competitive rate
structure for its leased circuit services. These took effect in September
1995, April 1996, April 1997, and April 1998. These revisions are collectively
estimated to have had the effect of decreasing NTT's revenues by (Yen)42
billion per 12-month period.
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
Group, through its subsidiary NTT DATA, launched a number of new services for
national and local government institutions. Usage of "STAR-ACE," a multi-
shared banking system for regional financial institutions, also expanded
during the year.
55
<PAGE>
ISDN
Operating revenues from ISDN services increased 51.2% in fiscal year 1999 to
(Yen)556 billion or 5.7% of operating revenues. NTT Group's ISDN services are
comprised of INS-Net 64 and INS-Net 1500. Growth in ISDN services continued to
be driven by rising demand for Internet access and connection lines for LANs.
NTT launched two new services during the fiscal year, "INS Area Plus" and "INS
Time Plus." New demand was also created by the "Telesse" multimedia telephone
that allows users to enjoy the Internet simply and conveniently.
Continuing the rapid growth seen in fiscal year 1999, the number of INS-Net
64 subscribers soared 73.1% to 3.96 million, and the number of INS-Net 1500
subscribers climbed 42.0% to 47.7 thousand. ISDN traffic also recorded strong
growth.
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 buoyant, 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.
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 thousand.
As a result, the total number of OCN subscribers increased 201.4% to 478
thousand. During the fiscal year, NTT moved to expand the market for OCN by
introducing "Super OCN", a service that is ideal for companies, universities
and other high-volume users to help them cope with a large volume of Internet
traffic.
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 rocketed
180.0% to 43,959.
Operating Expenses
Operating expenses increased 5.1% in fiscal year 1999 to (Yen)9,018 billion.
Although the total number of employees continued to decline to 224,000, an
increase in severance-related expenses and the accrual of compensated absences
as a result of non-application of SFAS No.71 led to an increase in personnel
expenses of (Yen)22 billion to (Yen)2,367 billion.
Depreciation, amortization and maintenance costs increased by (Yen)250
billion to (Yen)3,436 billion. This reflected the increase of
telecommunications equipment for cellular telephone and PHS services to
accommodate high NTT DoCoMo Group subscriber growth and other factors, and
also an increase in the disposition of metal cables following NTT's conversion
to an optical access network.
Other operating expenses increased by (Yen)168 billion to (Yen)3,215 billion
due to such factors as growth in agency commissions, sales expenses for
terminals as a result of high NTT DoCoMo Group 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.
56
<PAGE>
Net Income
Net income in fiscal year 1999 increased 158.5% to (Yen)554.4 billion as a
result of the sale of NTT DoCoMo shares despite a decrease in operating income
and the extraordinary one-time loss of (Yen)462 billion stemming from NTT
discontinuing its application of SFAS 71 for all of its operations.
Due to a change in Japanese income tax regulations, effective April 1, 1999,
the statutory rate was reduced to approximately 41% and such amount has been
used in calculating the future expected tax effects of temporary differences.
In addition, the valuation allowance at March 31, 1998, which mainly related
to deferred tax assets on the losses related to financial assistance to
subsidiary companies which are not expected to be tax deductible, was reversed
because the tax losses of NTT Personal Group have been realized in fiscal year
1999. As a result, the effective tax rate in fiscal year 1999 decreased to
51.2%, compared with 63.8% in fiscal year 1998, which had a positive impact on
net income.
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 Group 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 was (Yen)2,934 billion compared with (Yen)632
billion in fiscal year 1999 (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 investments and other considerations during
fiscal year 2000 were (Yen)2,729 billion, compared with (Yen)3,088 billion in
fiscal year 1999, and 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 Group 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 Group
expects total capital investment to decline in the coming year.
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. 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.
The ratio of interest-bearing debt (short-term borrowings and long-term
debt) to shareholder's equity stood at 91.7% on March 31, 2000 compared with
95.5% at the previous fiscal year-end.
Liquidity
As of March 31, 2000, NTT Group 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
57
<PAGE>
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 year depending on particular funding and working
capital requirements.
Capital Investments
Capital investment in fiscal year 2000 totaled (Yen)2,729 billion. The
majority of this sum was invested in research and development activities and
the renewal and upgrading of existing equipment to meet the increasingly
diverse and international needs of customers.
As of March 31, 2000, NTT Group had outstanding commitments for the purchase
of property, plant and equipment of approximately (Yen)458 billion (US$4,322
million), principally reflecting capital investment expenditures for fiscal
year 2001. NTT Group expects the funds needed for such commitments to be met
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 Group invested in property, plant and equipment, paid back
interest-bearing debt, made investments in subsidiaries and affiliates and
paid dividends.
Owing to the proceeds from sales of subsidiary stock, which amounted to
(Yen)2,213 billion, net cash used in investing activities in fiscal year 1999
was (Yen)632 billion compared with (Yen)2,909 billion in fiscal year 1998.
Capital investments for property, plant and equipment and intangible assets
computed on the basis of all cash investments and other considerations, during
fiscal year 1999 were (Yen)3,088 billion, compared with (Yen)2,962 billion in
the fiscal year 1998, and consisted principally of the expansion and upgrading
of infrastructure for mobile communications, ISDN, OCN, frame relay and other
services, together with various investments to enhance the quality of other
services.
Since the completion of the digitization of its main high-speed network
infrastructure in December 1997, NTT has shifted its capital investment focus
from planned infrastructure development to a strategy of investing in services
according to demand. Since investment in fixed-line telephone services is
projected to decrease in fiscal year 2000, NTT Group expects total capital
investment to decline in the coming year.
Net cash used in financing activities in fiscal year 1999 amounted to
(Yen)990 billion, compared with net cash of (Yen)270 billion provided by
financing activities in fiscal year 1998. NTT's policy is to control
outstanding debt while realizing more efficient sources of funds in domestic
and overseas capital markets.
The total amount of capital raised in fiscal year 1999 from issues of long-
term debt was (Yen)653 billion. This sum included corporate bond offerings
denominated in both Japanese yen and U.S. dollars. For a further description
of NTT's debt, see Note 9 of the Notes to Consolidated Financial Statements.
Capital Resources
As of March 31, 1999, NTT Group had cash and cash equivalents (short-term
investments with principal maturities of less than three months) of (Yen)1,657
billion, compared with (Yen)913 billion a year earlier. Cash equivalents
represent a temporary cash surplus used to repay debts, make tax payments and
capital investments, and as working capital. Accordingly, the balance of cash
equivalents will fluctuate each year depending on
58
<PAGE>
particular funding and working capital requirements. The ratio of interest-
bearing debt (short-term borrowings and long-term debt) to shareholders'
equity stood at 95.5% on March 31, 1999, compared with 110.9% at the previous
fiscal year-end.
Capital Investments
Capital investment in fiscal year 1999 totaled (Yen)3,088 billion. The
majority of this sum was used to make investments in high-speed, digitized
networks to meet the increasingly diverse and international needs of
customers. NTT Group also invested in research and development activities and
the renewal and upgrading of the existing network infrastructure.
As of March 31, 1999, NTT Group had outstanding commitments for the purchase
of property, plant and equipment and other assets of approximately (Yen)578
billion (US$4,777 million), principally reflecting capital investment
expenditures for fiscal year 2000. NTT Group expects the funds needed for such
commitments to be met from net cash provided by operating activities.
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 certain
information about operating segments in their financial statements and also
requires that they report certain information about their products and
services, the geographic areas in which they operate and report 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. 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 No. 71. The non-application
of SFAS No. 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.
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 subsidiaries, and receipt of
payment for providing management services through contracts with NTT
subsidiaries and payment for NTT fundamental R&D activities through contracts
with each of NTT subsidiaries which use 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.
Forward Looking Statements
Some of the statements made in this report 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.
59
<PAGE>
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
Long-run Incremental Cost Methodology, and increased competition;
. the impact of NTT's reorganization; and
. the ability of its subsidiaries, including without limitation NTT
DoCoMo, to maintain growth and the success of new products and services
and new businesses. NTT desires to qualify for the "safe harbor"
provisions of the Private Securities Litigation Reform Act of 1995.
ITEM 9A--QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Quantitative and qualitative disclosure about market risk
The financial instruments that NTT Group holds are continuously exposed to
fluctuations in markets, such as currency exchange rates, interest rates and
stock prices of investments.
NTT Group from time to time enters into derivative financial instruments,
such as forward exchange contracts, interest rate swap agreements, currency
swap agreements and interest rate option contracts, in order to limit its main
exposure to loss in relation to underlying debt instruments or assets that may
result from adverse fluctuations in foreign currency exchange rates and
interest rates. NTT Group does not use derivative financial instruments for
trading purposes. The use of derivative financial instruments are based on
specific internal rules and are subject to controls at the relevant department
of the head offices of NTT and its subsidiaries. In most cases, derivative
instruments are integrated as part of debt transactions or financial assets
and are entered into at the beginning date of those transactions and have the
same maturity as the underlying debt or assets.
No specific hedging activities are taken against the price fluctuations of
stocks held by NTT Group as marketable securities.
Equity Price Risk
NTT Group holds available-for-sale securities and held-to-maturity
securities included in marketable securities and other investments. In
general, highly-liquid and low risk instruments are preferred in the
portfolio. Available-for-sale securities are held as long term investments.
NTT Group does not hold marketable securities for trading purposes.
Maturities and fair values of available-for-sale securities and held-to-
maturity securities were as follows at March 31, 2000:
<TABLE>
<CAPTION>
2000
-------------------------
Carrying
amount Fair value
------------ ------------
Millions of Yen
<S> <C> <C>
Due after 1 year through 5 years.................. (Yen) 25,966 (Yen) 27,530
Due after 5 years through 10 years................ 17,286 17,110
Equity securities................................. 138,542 256,425
------------ ------------
Total........................................... (Yen)181,794 (Yen)301,065
============ ============
</TABLE>
Foreign Exchange Risk
NTT Group from time to time enters into forward foreign exchange contracts
and currency swap agreements to hedge the risk of fluctuations in foreign
currency exchange rates associated with long-term debt issued by
60
<PAGE>
NTT Group denominated in foreign currencies. Such contracts and agreements
have the same maturity as the underlying debt.
Amounts of NTT Group's financial instruments that are sensitive to foreign
currency exchange rates were not material at March 31, 2000.
Amounts related to forward foreign exchange contracts or currency swap
agreements entered into in connection with long-term debt denominated in
foreign currencies which eliminate all foreign currency exposures are shown at
the table of "Interest Rate Risk."
Interest Rate Risk
NTT Group's exposure to market risk for changes in interest rates relates
principally to its debt obligations. NTT Group has long-term debt primarily
with fixed rates. Interest rate swap agreements are entered into from time to
time to convert floating rate underlying debt or assets into fixed rate debt
or assets, or vice versa. Interest rate option contracts are entered into from
time to time to hedge the risk of a rise in the interest rate of underlying
debt.
The following tables provide information about NTT Group's financial
instruments that are sensitive to changes in interest rates including debt
obligations and interest rate swaps.
For the debt obligations, the table presents principal cash flows by
expected maturity dates, related weighted average interest rates and fair
values of financial instruments.
For interest rate swaps, the table presents notional amounts and weighted
average interest rates by expected maturity dates and fair value of the swap
at the reporting date. Notional amounts are used to calculate the contractual
payments to be exchanged under the contract. Weighted average floating rates
are based on the interest rates which were applicable on March 31, 2000.
Amounts attributable to NTT Group's option contracts that are sensitive to
interest rates were not material at March 31, 2000.
The information is presented in Japanese yen equivalents, which is NTT
Group's reporting currency. The instruments' actual cash flows are denominated
in both Japanese yen and foreign currencies, as indicated.
<TABLE>
<CAPTION>
Average Carrying amount and maturity date (year ending March 31)
interest ------------------------------------------------------------------------
rate 2001 2002 2003 2004 2005 Thereafter Total Fair value
-------- -------- -------- -------- -------- -------- ---------- ---------- ----------
Millions of Yen
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Long-term debt
including current
portion
Japanese yen bonds and
notes: 3.3% (196,273) (297,610) (253,832) (66,838) (238,856) (838,645) (1,892,054) (1,879,130)
U.S. dollar notes: 6.1% (58,750) (31,965) (53,485) (53,503) 36 (107,042) (304,709) (348,822)
Swiss franc bonds and
notes: 4.3% (96) (96) (16,272) 0 0 (5,849) (22,313) (23,675)
Canadian dollar notes: 10.3% (14,892) 0 0 0 0 0 (14,892) (16,078)
Sterling pound bonds: 9.1% 36 (17,276) 36 (43,253) 0 0 (60,457) (71,986)
Euro notes: 3.8% 96 96 96 96 96 (77,618) (77,138) (82,188)
Unsecured indebtedness
to banks--
Japanese yen loans: 2.4% (595,415) (489,274) (380,852) (451,189) (209,937) (585,990) (2,712,657) (2,717,019)
U.S. dollar loans: 5.4% (3,354) (10,036) (54) (1,500) (5,411) (3,161) (23,516) (25,392)
---- -------- -------- -------- -------- -------- ---------- ---------- ----------
Subtotal............. (868,648) (846,161) (704,363) (616,187) (454,072) (1,618,305) (5,107,736) (5,164,290)
Forward exchange
contracts............. (1,040) 8,106 4,792 2,605 (234) 2,282 16,511 (50,548)
Currency swap
agreements............ (4,165) 1,428 9,475 6,475 0 40,018 53,231 (72,900)
---- -------- -------- -------- -------- -------- ---------- ---------- ----------
Total.................. (873,853) (836,627) (690,096) (607,107) (454,306) (1,576,005) (5,037,994) (5,287,738)
</TABLE>
61
<PAGE>
<TABLE>
<CAPTION>
Notional amount and average interest rate
(year ending March 31)
---------------------------------------------------- Fair
2001 2002 2003 2004 2005 Thereafter value
------- ------- ------ ------ ------ ---------- ------
Millions of Yen
<S> <C> <C> <C> <C> <C> <C> <C>
Interest rate swap
agreements
Floating to Fixed
(Japanese yen)........ 161,355 118,812 86,412 63,512 44,012 2,500 (3,371)
Average pay rate....... 1.3% 1.0% 0.5% 0.3% 0.3% 1.6%
Average receive rate... 1.9% 2.3% 2.9% 3.5% 3.1% 2.3%
Fixed to Floating
(Japanese yen)........ 128,687 105,640 66,665 38,530 6,440 760 8,026
Average pay rate....... 1.2% 1.1% 1.2% 1.2% 1.7% 1.4%
Average receive rate... 0.4% 0.3% 0.3% 0.3% 0.3% 0.1%
Floating to Floating
(Japanese yen)........ 7,515 7,000 7,000 2,000 1,000 1,000 40
Average pay rate....... 0.4% 0.3% 0.3% 0.1% 0.0% 0.0%
Average receive rate... 1.0% 1.0% 1.0% 1.9% 0.3% 0.3%
</TABLE>
ITEM 10--DIRECTORS AND OFFICERS OF REGISTRANT
The overall direction of the affairs of NTT is the responsibility of its
Board of Directors. The Board of Directors currently consists of 11 members,
of whom 9 are also executive officers of NTT. Directors are elected for a two-
year term. Elections are conducted at NTT's Annual Meeting, the most recent of
which was held on June 29, 2000.
The following is a list of the Directors (including executive officers of
NTT), corporate auditors of NTT and chief executive officers of NTT's
principal subsidiaries at July 1, 2000:
<TABLE>
<CAPTION>
Current Position
as Director or
Corporate Auditor
Name Title Held Since
---- ----- -----------------
<S> <C> <C>
Representative Directors
Jun-ichiro Miyazu......... President June 1987
Norio Wada................ Senior Executive Vice President June 1992
Yusuke Tachibana.......... Senior Executive Vice President July 1999
Haruki Matsuno............ Senior Executive Vice President June 2000
Directors
Kanji Koide............... Senior Vice President June 1997
Shigehiko Suzuki.......... Senior Vice President June 1998
Hiromi Wasai.............. Senior Vice President July 1999
Toyohiko Takabe........... Senior Vice President July 1999
Satoru Miyamura........... Senior Vice President June 2000
Takashi Imai.............. Senior Vice President July 1999
Yotaro Kobayashi.......... Senior Vice President July 1999
Corporate Auditors
Keisuke Sada.............. Corporate Auditor June 1998
Takao Nakajima............ Corporate Auditor June 2000
Makoto Yoshida............ Corporate Auditor July 1999
Hideaki Toda.............. Corporate Auditor July 1999
Chief Executive Officers of
Principal Subsidiaries
Hidekazu Inoue............ President, NTT East July 1999
Kazuo Asada............... President, NTT West July 1999
Masanobu Suzuki........... President, NTT Communications May 1999
Keiji Tachikawa........... President, NTT DoCoMo June 1998
Toshiharu Aoki............ President, NTT DATA June 1999
</TABLE>
62
<PAGE>
ITEM 11--COMPENSATION OF DIRECTORS AND OFFICERS
During fiscal year 2000, the aggregate amount of compensation paid by NTT,
NTT East, NTT West, NTT Communications, NTT DoCoMo and NTT DATA to all
Directors, executive officers and corporate auditors as a group was (Yen)2,722
million.
ITEM 12--OPTIONS TO PURCHASE SECURITIES FROM REGISTRANT OR SUBSIDIARIES
None.
ITEM 13--INTEREST OF MANAGEMENT IN CERTAIN TRANSACTIONS
(a) Describe briefly any material transactions during the last three fiscal
years or any presently proposed transactions, to which the registrant or
any of its subsidiaries was or is to be a party, in which any of the
following persons had or is to have a direct or indirect material
interest, naming such person, such person's relationship to the
registrant, the nature of the interest in the transaction and, where
practicable, the amount of such interest:
(1) any director or officer of the registrant;
(2) any security holder named in answer to Item 4(a);
(3) any relative or spouse of any of the foregoing persons, or any relative
of such spouse, who has the same home as such person or who is a
director or officer of any parent or subsidiary of the registrant.
None.
(b) State as to each of the following persons who was indebted to the
registrant or its subsidiaries at any time during the last three years (i)
the largest aggregate amount of indebtedness outstanding at any time
during such period, (ii) the nature of the indebtedness and of the
transaction in which it was incurred, (iii) the amount thereof outstanding
as of the latest practicable date, and (iv) the rate of interest paid or
charged thereon:
(1) each director or officer of the registrant; and
(2) each associate of any such director or officer.
None.
PART II
ITEM 14--DESCRIPTION OF SECURITIES TO BE REGISTERED
Not applicable.
PART III
ITEM 15--DEFAULTS UPON SENIOR SECURITIES
(a) If there has been any material default in the payment of principal,
interest, a sinking or purchase fund installment, or any other material
default not cured within 30 days, with respect to any indebtedness of the
registrant or any of its significant subsidiaries exceeding 5 percent of
the total assets of the registrant and its consolidated subsidiaries,
identify the indebtedness and state the nature of the default. In the case
of such a default in the payment of principal, interest or a sinking or
purchase fund installment, state the amount of the default and the total
arrearage on the date of filing this report.
None.
63
<PAGE>
(b) If any material arrearage in the payment of dividends has occurred or if
there has been any other material delinquency not cured within 30 days,
with respect to any class of preferred stock of the registrant which is
registered or which ranks prior to any class of registered securities, or
with respect to any class of preferred stock of any significant subsidiary
of the registrant, give the title of the class and state the nature of the
arrearage or delinquency. In the case of an arrearage in the payment of
dividends, state the amount and the total arrearage on the date of filing
this report.
Not applicable.
ITEM 16--CHANGES IN SECURITIES AND CHANGES IN SECURITY FOR REGISTERED
SECURITIES
(a) If the constituent instruments defining the rights of the holders of any
class of registered securities have been materially modified, give the
title of the class of securities involved and state briefly the general
effect of such modification upon the rights of holders of such securities.
None
(b) If the rights evidenced by any class of registered securities have been
materially limited or qualified by the issuance or modification of any
other class of securities, state briefly the general effect of the
issuance or modification of such other class of securities upon the rights
of the holders of the registered securities.
None
(c) If there has been a material withdrawal or substitution of assets securing
any class of registered securities of the registrant, furnish the
following information:
(1) Give the title of the securities.
(2) Identify and describe briefly the assets involved in the withdrawal or
substitution.
(3) Indicate the provision in the underlying indenture, if any, authorizing
the withdrawal or substitution.
Not applicable.
(d) If the trustees or paying agents for any registered securities have
changed during the last fiscal year, furnish the names and addresses of
the new trustees or paying agents.
Not applicable.
PART IV
ITEM 17--FINANCIAL STATEMENTS
Not applicable.
ITEM 18--FINANCIAL STATEMENTS
The Report of Independent Accountants, Consolidated Balance Sheet of NTT at
March 31, 2000 and 1999, Consolidated Statement of Income, Consolidated
Statement of Shareholders' Equity and Consolidated Statement of Cash Flows of
NTT for each of the three years ended March 31, 1998, 1999 and 2000 and Notes
to Consolidated Financial Statements, and Schedule II--Valuation and
Qualifying Accounts, appear as pages F-1 through F-35.
ITEM 19--FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial Statements
See accompanying index to Consolidated Financial Statements.
64
<PAGE>
(b) Exhibits
(1) Consent of Independent Accountants.
NTT agrees to furnish to the Securities and Exchange Commission upon request
a copy of any instrument which defines the rights of holders of long-term debt
of NTT and its consolidated subsidiaries.
65
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange Act of
1934, the registrant certifies that it meets all of the requirements for filing
on Form 20-F and has duly caused this annual report to be signed on its behalf
by the undersigned, thereunto duly authorized.
Nippon Telegraph and Telephone
Corporation
/s/ Kazuto Tsubouchi
By: _________________________________
Kazuto Tsubouchi
Senior Manager
Investor Relations Group
Department IV
Date: August 10, 2000
66
<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 paragraphs 2 and 3 of Note 21
as to which the date is August 10, 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 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 that
F-9
<PAGE>
NIPPON TELEGRAPH AND TELEPHONE CORPORATION
AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 predetermined
F-13
<PAGE>
NIPPON TELEGRAPH AND TELEPHONE CORPORATION
AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 amount.
F-17
<PAGE>
NIPPON TELEGRAPH AND TELEPHONE CORPORATION
AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 2000 2000
-------------------- -------------- ------------
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 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 for each of the
two 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--
Customer............ 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 will acquire a majority of the shares of
Verio at a price of $60 per share of common stock through a takeover bid and
Verio will thereafter be merged into the U.S. subsidiary of NTT
Communications. The transaction is valued at approximately $5.1 billion.
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 is
to acquire 15% of the shares of KPN Mobile. On July 12, 2000, NTT DoCoMo
signed a share purchase agreement with KPN Mobile to invest approximately Euro
4 billion (US$3.8 billion).
On July 12, 2000, NTT DoCoMo signed an agreement with Hutchison and KPN
Mobile to purchase equity stakes in Hutchison 3G UK Holdings Ltd ("Hutchison
3G"), a holding company in the United Kingdom which owns the third generation
cellular telephone license through a subsidiary. NTT DoCoMo will invest
approximately (Pounds)1.2 billion (US$1.8 billion) in Hutchison 3G, acquiring
a 20% interest in Hutchison 3G. KPN Mobile will acquire a 15% stake in
Hutchison 3G.
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
