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| Share Name | Share Symbol | Market | Type | Share ISIN | Share Description |
|---|---|---|---|---|---|
| Nippon Tel.& T. | LSE:NPN | London | Ordinary Share | JP3735400008 | NPV |
| Price Change | % Change | Share Price | Bid Price | Offer Price | High Price | Low Price | Open Price | Shares Traded | Last Trade | |
|---|---|---|---|---|---|---|---|---|---|---|
| 0.00 | 0.00% | 3,910.3704 | 0.00 | 01:00:00 |
| Industry Sector | Turnover | Profit | EPS - Basic | PE Ratio | Market Cap |
|---|---|---|---|---|---|
| 0 | 0 | N/A | 0 |
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Nippon Telegraph and Telephone Corp
30 June 2005
Part 1
NIPPON TELEGRAPH AND TELEPHONE CORPORATION
AND ITS SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Report of independent registered public accounting firm F-2
Report of the other auditors F-3
Consolidated balance sheets at March 31, 2004 and 2005 F-4
Consolidated statements of income for each of the three years ended March 31, 2005 F-6
Consolidated statements of shareholders' equity for each of the three years ended March 31, 2005 F-7
Consolidated statements of cash flows for each of the three years ended March 31, 2005 F-8
Notes to consolidated financial statements F-10
Financial statement schedule for the three years ended March 31, 2005:
Schedule II-Valuation and qualifying accounts F-60
F-1
--------------------------------------------------------------------------------
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and Board of Directors of
Nippon Telegraph and Telephone Corporation
(Nippon Denshin Denwa Kabushiki Kaisha)
In our opinion, based upon our audit and the report of other auditors, 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, 2004 and
2005, and the results of their operations and their cash flows for each of the
three years in the period ended March 31, 2005, 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 and financial statement schedule are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements and financial statement schedule based on
our audits. We did not audit the financial statements of NTT DoCoMo, Inc., a
63.0%-owned subsidiary, which statements reflect total assets of Y6,262,266
million and Y6,136,521 million ($57,351 million) at March 31, 2004 and 2005,
respectively, and total revenues of Y4,809,088 million, Y5,048,065 million and Y
4,844,610 million ($45,277 million) for each of the three years in the period
ended March 31, 2005. Those statements were audited by other auditors whose
report thereon has been furnished to us, and our opinion expressed herein,
insofar as it relates to the amounts included for NTT DoCoMo, Inc., is based
solely on the report of the other auditors. We conducted our audits of these
statements in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards 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 and the report of other auditors provide a reasonable
basis for our opinion.
As discussed in Note 2 to the consolidated financial statements, effective April
1, 2003, the Company changed its policy for accounting for changes in interest
in investees. As discussed in Note 2 to the consolidated financial statements,
the Company changed its method of accounting for commissions paid to agents
effective April 1, 2002.
/s/ ChuoAoyama PricewaterhouseCoopers
Tokyo, Japan
June 29, 2005
F-2
--------------------------------------------------------------------------------
Report of Independent Registered Public Accounting Firm
The Board of Directors and the Shareholders
NTT DoCoMo, Inc.:
We have audited the consolidated balance sheets of NTT DoCoMo, Inc. (a Japanese
corporation) and subsidiaries as of March 31, 2004 and 2005, and the related
consolidated statements of income and comprehensive income, shareholders' equity
and cash flows for each of the years in the three-year period ended March 31,
2005, which are not separately included herein. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards 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. An audit also includes assessing the accounting principles used and
significant estimates made by the management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of NTT DoCoMo, Inc. and
subsidiaries as of March 31, 2004 and 2005, and the results of their operations
and their cash flows for each of the years in the three-year period ended March
31, 2005, in conformity with U.S. generally accepted accounting principles.
As discussed in Note 2 of the notes to consolidated financial statements, the
Company changed its method of accounting for certain commissions paid to agents
as required by Emerging Issues Task Force Issue No. 01-09, "Accounting for
Consideration Given by a Vendor to a Customer (Including a Reseller of the
Vendor's Products)," effective April 1, 2002.
The consolidated financial statements as of and for the year ended March 31,
2005 have been translated into United States dollars solely for the convenience
of the reader. We have audited the translation and, in our opinion, the
consolidated financial statements expressed in Japanese yen have been translated
into dollars on the basis set forth in Note 3 of the notes to the consolidated
financial statements.
/s/ KPMG AZSA & Co.
Tokyo, Japan
June 21, 2005
F-3
--------------------------------------------------------------------------------
NIPPON TELEGRAPH AND TELEPHONE CORPORATION
AND ITS SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31
2004 2005 2005
Millions of yen Millions
of
U.S.
dollars
(Note 3)
ASSETS
Current assets:
Cash and cash equivalents (Note 5) Y 1,431,421 Y 1,381,959 $ 12,915
Short-term investments - 264,455 2,472
Notes and accounts receivable, trade (Note 4) 1,813,095 1,846,176 17,254
Allowance for doubtful accounts (40,317 ) (35,912 ) (336 )
Inventories (Note 6) 238,052 284,826 2,662
Prepaid expenses and other current assets 392,169 453,173 4,235
Deferred income taxes (Note 14) 256,719 321,936 3,009
Total current assets 4,091,139 4,516,613 42,211
Property, plant and equipment (Notes 2, 7 and 18):
Telecommunications equipment 13,770,965 13,945,449 130,331
Telecommunications service lines 12,611,662 12,865,704 120,240
Buildings and structures 5,529,986 5,602,881 52,363
Machinery, vessels and tools 1,988,176 1,918,728 17,932
Land 837,073 837,103 7,824
Construction in progress 339,023 258,455 2,416
35,076,885 35,428,320 331,106
Accumulated depreciation (24,307,259 ) (24,947,768 ) (233,157 )
10,769,626 10,480,552 97,949
Investments and other assets:
Investments in affiliated companies (Notes 2, 8 and 23) 385,029 178,033 1,664
Marketable securities and other investments (Note 9) 255,768 438,159 4,095
Goodwill, net (Notes 10 and 20) 281,561 320,536 2,996
Other intangibles, net (Notes 10 and 12) 1,324,804 1,329,631 12,426
Other assets (Notes 11 and 12) 649,441 707,543 6,612
Deferred income taxes (Note 14) 1,677,505 1,127,517 10,538
4,574,108 4,101,419 38,331
Y 19,434,873 Y 19,098,584 $ 178,491
The accompanying notes are an integral part of these statements.
F-4
--------------------------------------------------------------------------------
NIPPON TELEGRAPH AND TELEPHONE CORPORATION
AND ITS SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31
2004 2005 2005
Millions of yen Millions
of
U.S.
dollars
(Note 3)
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term borrowings (Note 11) Y 288,089 Y 422,886 $ 3,952
Current portion of long-term debt (Notes 11 and 22) 877,448 779,198 7,282
Accounts payable, trade (Note 4) 1,404,461 1,465,229 13,694
Accrued payroll (Note 13) 546,599 493,935 4,616
Accrued interest 18,977 18,200 170
Accrued taxes on income 346,103 115,084 1,076
Accrued consumption tax 51,526 16,034 150
Advances received 59,111 67,389 630
Other (Notes 13, 14 and 18) 216,531 301,624 2,819
Total current liabilities 3,808,845 3,679,579 34,389
Long-term liabilities:
Long-term debt (Notes 11 and 22) 4,756,118 4,323,751 40,409
Obligations under capital leases (Note 18) 257,811 187,845 1,755
Liability for employees' severance payments (Notes 12 and 13) 2,023,348 1,861,073 17,393
Other (Note 14) 577,591 548,464 5,126
7,614,868 6,921,133 64,683
Minority interest in consolidated subsidiaries 1,613,188 1,729,269 16,161
Shareholders' equity (Note 16):
Common stock, no par value-
Authorized-61,929,209 shares in 2004 and 2005
Issued-15,741,209 shares in 2004 and 2005 937,950 937,950 8,766
Additional paid-in capital (Notes 2 and 20) 2,722,092 2,799,828 26,167
Retained earnings (Notes 8 and 16) 2,710,805 3,334,866 31,167
Accumulated other comprehensive income (loss) (Notes 9, 12, 16 and 27,129 63,066 589
22)
Treasury stock, at cost (Note 16)-8 shares in 2004 and 800,145 (4 ) (367,107 ) (3,431 )
shares in 2005
6,397,972 6,768,603 63,258
Commitments and contingent liabilities (Note 23)
Y 19,434,873 Y 19,098,584 $ 178,491
The accompanying notes are an integral part of these statements.
F-5
--------------------------------------------------------------------------------
NIPPON TELEGRAPH AND TELEPHONE CORPORATION
AND ITS SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEAR ENDED MARCH 31
2003 2004 2005 2005
Millions of yen Millions
of
U.S.
dollars
(Note 3)
Operating revenues (Note 4):
Fixed voice related services Y 4,177,734 Y 3,882,166 Y 3,578,092 $ 33,440
Mobile voice related services 3,439,219 3,393,947 3,216,107 30,057
IP / packet communications services 1,304,990 1,639,591 1,772,737 16,568
Sale of telecommunication equipment 616,436 713,352 688,083 6,431
System integration 844,677 863,008 910,273 8,507
Other 540,090 603,473 640,576 5,987
10,923,146 11,095,537 10,805,868 100,990
Operating expenses (Notes 4 and 19):
Cost of services (exclusive of items shown 2,421,654 2,378,275 2,349,151 21,955
separately below)
Cost of equipment sold (Note 2) (exclusive of items 1,105,046 1,245,018 1,260,252 11,778
shown separately below)
Cost of system integration (exclusive of items shown 503,729 522,766 592,035 5,533
separately below)
Depreciation and amortization (Note 10) 2,377,764 2,197,058 2,141,720 20,016
Impairment loss (Note 7) - - 44,310 414
Selling, general and administrative expenses (Note 3,114,455 3,192,099 3,207,199 29,974
19)
Write-down of goodwill and other intangible assets 36,941 - - -
(Note 10)
9,559,589 9,535,216 9,594,667 89,670
Operating income 1,363,557 1,560,321 1,211,201 11,320
Other income (expenses):
Interest and amortization of bond discounts and (129,811 ) (113,358 ) (93,966 ) (878
)
issue costs (Note 2)
Interest income 26,321 26,661 26,288 246
Gains on sales of subsidiary stock (Notes 2 and 20) 138,718 - 26,984 252
Gains on sales of investments in affiliated company - - 508,492 4,752
(Note 8)
Other, net (Notes 9 and 21) 6,240 53,724 44,313 414
41,468 (32,973 ) 512,111 4,786
Income (loss) before income taxes 1,405,025 1,527,348 1,723,312 16,106
Income tax expense (benefit) (Note 14):
Current 392,973 496,658 233,060 2,178
Deferred 311,298 106,553 480,858 4,494
704,271 603,211 713,918 6,672
Income (loss) before minority interest, equity in 700,754 924,137 1,009,394 9,434
earnings (losses) of affiliated companies and
cumulative effect of accounting changes
Minority interest in consolidated subsidiaries (114,980 ) (259,952 ) (290,225 ) (2,713)
Equity in earnings (losses) of affiliated companies (329,536 ) (20,323 ) (8,985 ) (84)
(including write-down of Y319,564 million, net of
income taxes, in affiliates in 2003) (Note 8)
Income (loss) before cumulative effect of accounting 256,238 643,862 710,184 6,637
changes
Cumulative effect of accounting changes (net of (22,880 ) - - -
income taxes of Y25,852 million and minority
interest of Y12,836 million in 2003) (Note 2)
Net income (loss) Y 233,358 Y 643,862 Y 710,184 $ 6,637
2003 2004 2005 2005
Shares or Yen U.S.
dollars
(Note 3)
Per share of common stock:
Weighted average number of shares 16,039,414.63 15,855,684.15 15,475,366.20
outstanding
Income (loss) before cumulative effect of Y 15,975.52 Y 40,607.65 Y 45,891.26 $ 428.89
accounting changes
Cumulative effect of accounting changes (1,426.49 ) - - -
Net income (loss) 14,549.03 40,607.65 45,891.26 428.89
Cash dividends paid 5,000.00 5,000.00 6,000.00 56.07
The accompanying notes are an integral part of these statements.
F-6
--------------------------------------------------------------------------------
NIPPON TELEGRAPH AND TELEPHONE CORPORATION
AND ITS SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEAR ENDED MARCH 31
2003 2004 2005 2005
Millions of yen Millions
of
U.S.
dollars
(Note 3)
Common stock:
At beginning of year Y 937,950 Y 937,950 Y 937,950 $ 8,766
At end of year 937,950 937,950 937,950 8,766
Additional paid-in capital (Notes 2 and 20):
At beginning of year 2,669,736 2,669,736 2,722,092 25,440
Increase in additional paid-in capital of an affiliate - 3,087 - -
Increase in interest of investee - 49,269 77,736 727
At end of year 2,669,736 2,722,092 2,799,828 26,167
Retained earnings (Note 8 and 16):
At beginning of year 2,181,491 2,246,996 2,710,805 25,335
Appropriations-
Cash dividends (40,336 ) (39,831 ) (39,353 ) (368 )
Interim distribution-
Cash dividends (40,335 ) (39,830 ) (47,222 ) (441 )
Net income (loss) 233,358 643,862 710,184 6,637
Purchase and retirement of common stock (87,182 ) (100,392 ) - -
Other - - 452 4
At end of year 2,246,996 2,710,805 3,334,866 31,167
Accumulated comprehensive income (loss) (Notes 9, 12,
16 and 22):
At beginning of year 75,974 (217,083 ) 27,129 253
Other comprehensive income (loss) (293,057 ) 244,212 35,937 336
At end of year (217,083 ) 27,129 63,066 589
Treasury stock, at cost (Note 16)
At beginning of year (99 ) (4 ) (4 ) (0 )
Net change in treasury stock 95 - (367,103 ) (3,431 )
At end of year (4 ) (4 ) (367,107 ) (3,431 )
Shareholders' equity at end of year Y 5,637,595 Y 6,397,972 Y 6,768,603 $ 63,258
Summary of total comprehensive income (loss):
Net income (loss) Y 233,358 Y 643,862 Y 710,184 $ 6,637
Other comprehensive income (loss) (Notes 9, 12, 16 and (293,057 ) 244,212 35,937 336
22)
Comprehensive income (loss) Y (59,699 ) Y 888,074 Y 746,121 $ 6,973
The accompanying notes are an integral part of these statements.
F-7
--------------------------------------------------------------------------------
NIPPON TELEGRAPH AND TELEPHONE CORPORATION
AND ITS SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED MARCH 31
2003 2004 2005 2005
Millions of yen Millions
of
U.S.
dollars
(Note 3)
Cash flows from operating activities:
Net income (loss) Y 233,358 Y 643,862 Y 710,184 $ 6,637
Adjustments to reconcile net income (loss) to net
cash provided by operating activities-
Depreciation and amortization (Note 10) 2,377,764 2,197,058 2,141,720 20,016
Impairment loss (Note 7) - - 44,310 414
Deferred taxes (Note 14) 311,298 106,553 480,858 4,494
Minority interest in consolidated subsidiaries 114,980 259,952 290,225 2,712
Cumulative effect of accounting changes (Note 2) 22,880 - - -
Write-down of goodwill and other intangible assets 36,941 - - -
(Note 10)
Loss on disposal of property, plant and equipment 225,282 176,394 186,674 1,745
Gains on sales of subsidiary stocks (Notes 2 and 20) (138,718 ) - (26,984 ) (252 )
Gains on sales of investments in affiliated company - - (508,492 ) (4,752 )
(Note 8)
Equity in (earnings) losses of affiliated companies 329,536 20,323 8,985 84
(Note 8)
(Increase) decrease in notes and accounts receivable, 389,570 16,480 (37,130 ) (347 )
trade
(Increase) decrease in inventories (Note 6) 7,267 (57,905 ) (46,771 ) (437 )
(Increase) decrease in other current assets (111,458 ) 109,493 (66,897 ) (625 )
Increase (decrease) in accounts payable, trade and (39,205 ) (24,164 ) 29,595 277
accrued payroll (Note 13)
Increase (decrease) in accrued consumption tax 4,309 (26,935 ) (35,483 ) (332 )
Increase (decrease) in accrued interest (7,284 ) (4,869 ) (782 ) (7 )
Increase (decrease) in advances received 11,542 (6,589 ) 8,292 77
Increase (decrease) in accrued taxes on income (131,879 ) 134,937 (231,037 ) (2,159 )
Increase (decrease) in other current liabilities 52,904 38,860 65,114 608
(Note 13)
Increase (decrease) in liability for employees' (1,193,281 ) (94,036 ) (95,606 ) (894 )
severance payments, net of deferred pension costs
(Note 13)
Increase (decrease) in other long-term liabilities 22,288 (20,046 ) (49,903 ) (466 )
Other (Note 9) (79,578 ) 11,223 (37,059 ) (346 )
Net cash provided by operating activities Y 2,438,516 Y 3,480,591 Y 2,829,813 $ 26,447
The accompanying notes are an integral part of these statements.
F-8
--------------------------------------------------------------------------------
NIPPON TELEGRAPH AND TELEPHONE CORPORATION
AND ITS SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED MARCH 31
2003 2004 2005 2005
Millions of yen Millions
of
U.S.
dollars
(Note 3)
Cash flows from investing activities:
Payments for property, plant and equipment Y (1,725,536 ) Y (1,765,708 ) Y (1,610,991 ) $ (15,056 )
Proceeds from sale of property, plant and equipment 89,572 79,744 54,095 506
Payments for purchase of non-current investments (61,786 ) (40,755 ) (195,892 ) (1,831 )
Proceeds from sale of non-current investments 28,868 33,410 776,369 7,256
(Notes 8, 9 and 20)
Payments for purchase of short-term investments - - (361,850 ) (3,382 )
Proceeds from redemption of short-term investments - - 113,576 1,061
Acquisition of intangibles and other assets (318,135 ) (443,501 ) (543,668 ) (5,081 )
Net cash used in investing activities (1,987,017 ) (2,136,810 ) (1,768,361 ) (16,527 )
Cash flows from financing activities:
Proceeds from issuance of long-term debt (Note 11) 1,065,248 478,320 343,814 3,213
Payments for settlement of long-term debt (Note 11) (1,024,229 ) (1,145,167 ) (893,682 ) (8,352 )
Dividends paid (80,671 ) (79,661 ) (86,575 ) (809 )
Purchase and retirement of common stock (Note 16) (87,087 ) (100,392 ) (367,103 ) (3,431 )
Payments for acquisition of subsidiary stocks from (86,256 ) (205,047 ) (105,363 ) (985 )
minority shareholders (Note 20)
Net increase (decrease) in short-term borrowings (241,175 ) (170,584 ) (3,054 ) (28 )
and other
Net cash provided by (used in) financing activities (454,170 ) (1,222,531 ) (1,111,963 ) (10,392 )
Effect of exchange rate changes on cash and cash (3,448 ) (2,895 ) 1,049 10
equivalents
Net increase (decrease) in cash and cash (6,119 ) 118,355 (49,462 ) (462 )
equivalents
Cash and cash equivalents at beginning of year 1,319,185 1,313,066 1,431,421 13,378
Cash and cash equivalents at end of year (Note 5) Y 1,313,066 Y 1,431,421 Y 1,381,959 $ 12,916
Cash paid during the year for:
Interest Y 136,123 Y 117,844 Y 94,129 $ 880
Income taxes, net 602,537 253,995 581,940 5,439
Noncash investing and financing activities:
Purchase of minority interests of consolidated 275,341 439 - -
subsidiaries through share exchanges (Note 20)
Acquisition of shares from sale of an investment - - 16,711 156
Capital lease obligations incurred during the year 12,176 13,690 18,522 173
The accompanying notes are an integral part of these statements.
F-9
--------------------------------------------------------------------------------
NIPPON TELEGRAPH AND TELEPHONE CORPORATION
AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Nature of operations:
Nippon Telegraph and Telephone Corporation ("NTT") and its subsidiaries ("NTT
Group") conduct the following main business activities: regional communications
(domestic intra-prefectural communication services and incidental services),
principally operated by Nippon Telegraph and Telephone East Corporation ("NTT
East") and Nippon Telegraph and Telephone West Corporation ("NTT West");
long-distance and international communications (domestic inter-prefectural
communication services, international communication services and incidental
services), principally operated by NTT Communications Corporation ("NTT
Communications"); wireless communications (mobile phone services, PHS services,
Quickcast services, etc., and incidental services), principally operated by NTT
DoCoMo, Inc. ("NTT DoCoMo"); and data communications (system integration,
network system services, etc.), principally operated by NTT DATA CORPORATION ("
NTT DATA"). NTT's wireless communications ceased accepting new applications for
Quickcast services as of June 30, 2004 and announced to terminate Quickcast
services as of March 31, 2007. NTT's wireless communications also ceased
accepting new applications for PHS services as of April 30, 2005.
Pursuant to the Nippon Telegraph and Telephone Corporation Law ("NTT Law") as
approved by the Japanese Diet, NTT was incorporated on April 1, 1985, upon which
all the assets and liabilities of Nippon Telegraph and Telephone Public
Corporation ("Public Corporation") were transferred to NTT. As provided for in
the supplementary provisions of the NTT Law, all the new shares held by Public
Corporation were transferred to the Japanese Government upon the dissolution of
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 Japanese Government has sold approximately 7,416 thousand
shares of NTT's common stock to the public. The Japanese Government's ownership
ratio of NTT's issued stock is 40.9% as of March 31, 2005. As a normal part of
its business operations, NTT provides various telecommunications and other
services to the Japanese Government.
2. Summary of significant accounting policies:
NTT and its consolidated subsidiaries in Japan maintain their records and
prepare their financial statements in accordance with the Japanese Commercial
Code by applying accounting principles generally accepted in Japan, and its
foreign subsidiaries in conformity with those countries of their domicile. NTT,
as a regulated company, also follows the NTT Law and other related accounting
regulations for preparing such financial statements.
The accompanying consolidated financial statements incorporate certain
adjustments and reclassifications to conform with accounting principles
generally accepted in the United States of America.
Significant accounting policies, after reflecting adjustments for the above, are
as follows:
(1) Change in Accounting Policy
NTT changed its accounting policy in the second half of the year ended March 31,
2004 with regard to accounting for transactions where subsidiaries issue shares
to third parties at amounts in excess of or less than NTT's average carrying
value or similar transactions which result in changes in interest. The effect of
this accounting change was to adopt the policy as of the beginning of the year
ended March 31, 2004. Previously, NTT recognized gains and losses arising from
these transactions in income for the year in which the change in interest
occurred. NTT changed its policy to recognize these gains and losses in equity,
as permitted by Staff Accounting Bulletin No. 51, "Accounting for sales of stock
by a subsidiary." This change was made because, based on the activities for the
year ended March 31, 2004 and potential future transactions, NTT concluded it
F-10
--------------------------------------------------------------------------------
NIPPON TELEGRAPH AND TELEPHONE CORPORATION
AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
probable that similar future transactions in respect of decreases and increases
in interest in investee companies may occur twice or more in a short period. As
a result, NTT believes these gains are more appropriately recorded in equity.
Adoption of this change in policy does not require a cumulative effect change as
equity appropriately reflects prior gains as described in Note 2(3).
(2) Application of New Accounting Standards
Accounting for Certain Financial Instruments with Characteristics of both
Liabilities and Equity
Effective April 1, 2004, NTT Group adopted Statement of Financial Accounting
Standards No. 150 ("SFAS 150"), "Accounting for Certain Financial Instruments
with Characteristics of both Liabilities and Equity." This statement changes the
accounting for certain financial instruments with characteristics of both
liabilities and equity that, under previous guidance, could be classified as
equity, by now requiring those instruments to be classified as liabilities (or
assets in some circumstances) in the balance sheet. Further, SFAS 150 requires
disclosure regarding the terms of those instruments and settlement alternatives.
The adoption of SFAS 150 did not have an impact on the results of operations or
the financial position of NTT Group.
Accounting for Revenue Arrangements with Multiple Deliverables
Effective April 1, 2004, NTT Group adopted Emerging Issues Task Force Issue No.
00-21 ("EITF 00-21"), "Accounting for Revenue Arrangements with Multiple
Deliverables." This Issue provides guidance on when and how to separate elements
of an arrangement that may involve the delivery or performance of multiple
products, services and rights to use assets into separate units of accounting.
The transition provision allows either prospective application or a cumulative
effect adjustment upon adoption. The adoption of EITF 00-21 did not have a
material impact on the results of operations or the financial position of NTT
Group.
Determining Whether an Arrangement Contains a Lease
Effective April 1, 2004, NTT Group adopted Emerging Issues Task Force Issue No.
01-08 ("EITF 01-08"), "Determining Whether an Arrangement Contains a Lease."
This Issue provides guidance on how to determine whether an arrangement contains
a lease that is within the scope of Statement of Financial Accounting Standards
No. 13, "Accounting for Leases." The adoption of EITF 01-08 did not have a
material impact on the results of operations or the financial position of NTT
Group.
(3) Principal Accounting Policies
Basis of consolidation and accounting for investments in affiliated companies
The consolidated financial statements include the accounts of NTT, those of its
majority-owned subsidiaries, and variable interest entities ("VIEs") that have
become consolidated in accordance with the Financial Accounting Standards Board
("FASB") revised Interpretation No. 46 ("FIN 46-R"), "Consolidation of Variable
Interest Entities." All significant intercompany transactions and accounts are
eliminated in consolidation.
The fiscal years of certain foreign subsidiaries end on December 31 and any
significant subsequent transactions for the period from January 1 to March 31
are reflected in the results of operations of NTT Group.
F-11
--------------------------------------------------------------------------------
NIPPON TELEGRAPH AND TELEPHONE CORPORATION
AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Investments in affiliated companies where NTT Group owns an aggregate of 20 to
50 percent, and/or if NTT exercises significant influence over the affiliated
companies, are stated at cost plus equity in undistributed earnings. Investments
with less than 20% ownership interest in various private companies whereby NTT
Group does not have significant influence are recorded using the cost method of
accounting.
Under Accounting Principles Board ("APB") Opinion No. 18, "The Equity Method of
Accounting for Investments in Common Stock," NTT evaluates its investments in
affiliates for impairment due to declines in value considered to be other than
temporary. In performing its evaluations, NTT utilizes various information, as
available, including cash flow projections, independent valuations and, if
applicable, stock price analysis. In the event of a determination that a decline
in value is other than temporary, a charge to earnings is recorded for the loss
and a new cost basis in the investment is established.
When subsidiaries or affiliated companies issued shares to third parties at
amounts in excess of or less than NTT's average carrying value or similar
transactions which result in changes in interest occurred, previously NTT
recorded gains and losses arising from these transactions in income for the year
in which the change in interest occurred. Effective April 1, 2003, NTT changed
its policy to record these gains and losses in equity.
The following table illustrates the effect on net income (loss) before
cumulative effect of accounting changes and net income (loss) per share assuming
that NTT had recognized gains and losses from changes in interest in equity in
each period:
2003 2004 2005 2005
Millions of yen Millions
of
U.S.
dollars
Reported income (loss) before cumulative effect of accounting Y 256,238 Y 643,862 Y 710,184 $ 6,637
changes
Deduct:
Gains on sales of subsidiary stock included in reported income (138,718 ) - - -
Pro forma income (loss) before cumulative effect of accounting 117,520 643,862 710,184 6,637
changes
Reported net income (loss) 233,358 643,862 710,184 6,637
Deduct:
Gains on sales of subsidiary stock included in reported income (138,718 ) - - -
Pro forma net income (loss) Y 94,640 Y 643,862 Y 710,184 $ 6,637
F-12
--------------------------------------------------------------------------------
NIPPON TELEGRAPH AND TELEPHONE CORPORATION
AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
2003 2004 2005 2005
Yen U.S.
dollar
Basic and diluted net income per share:
Reported income (loss) before cumulative effect of Y 15,975.52 Y 40,607.65 Y 45,891.26 $ 428.89
accounting changes
Deduct:
Gains on sales of subsidiary stock included in reported (8,648.57 ) - - -
income
Pro forma income (loss) before cumulative effect of 7,326.95 40,607.65 45,891.26 428.89
accounting changes
Basic and diluted net income per share:
Reported net income (loss) 14,549.03 40,607.65 45,891.26 428.89
Deduct:
Gains on sales of subsidiary stock included in reported (8,648.57 ) - - -
income
Pro forma net income (loss) Y 5,900.46 Y 40,607.65 Y 45,891.26 $ 428.89
Use of estimates-
The preparation of NTT's consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities at the date of the consolidated financial
statements and the disclosure of contingent 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-
Revenues arising from fixed voice related services, mobile voice related
services, IP/packet communications services and other services are recognized at
the time these services are provided to customers. With regard to revenues from
mobile voice related services, monthly rate plans for cellular (FOMA and mova)
services generally include a certain amount of allowances (free minutes and/or
packets), and the used amount of the allowances is subtracted from total usage
in calculating the airtime revenue from a subscriber for the month. Prior to
November 2003, the total amounts of the base monthly charges was recognized as
revenues in the month they were charged as the subscribers could not carry over
the unused allowances to the following months. In November 2003, NTT Group
introduced a billing arrangement, called "Nikagetsu Kurikoshi" (two-month carry
over), in which the unused allowances are automatically carried over up to the
following two months. NTT Group also introduced a new arrangement which enables
the unused allowances offered in and after December 2004 that have been carried
over for two months to be automatically used to cover the airtime and/or packet
fees exceeding the allowances of the other lines in the "Family Discount" group,
a discounted billing arrangement for families with two to ten subscriptions.
With the introduction of these new billing arrangements, NTT Group has deferred
revenues based on the portion of unused allowances that are estimated to be
utilized prior to expiration. As NTT Group does not have sufficient empirical
evidence to reasonably estimate such amounts, NTT Group currently deducts and
defers all amounts allocated to unused allowances for revenues. The deferred
revenues are recognized as revenues as the subscribers make calls or data
communications, similar to the way airtime revenues are recognized, or as
allowance expire.
F-13
--------------------------------------------------------------------------------
NIPPON TELEGRAPH AND TELEPHONE CORPORATION
AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Within revenues from mobile voice related services, non-recurring upfront fees,
such as activation fees, are deferred and recognized as revenues over the
estimated average period of the customers for each service. The related direct
costs are deferred only to the extent of the upfront fee amount and are
amortized over the same period.
Sales of telecommunication equipment less certain amounts of agency commissions
are recognized as income upon delivery of the equipment to agent resellers in
accordance with Emerging Issue Task Force Issue No. 01-09, "Accounting for
Consideration Given by a Vendor to a Customer (Including a Reseller of the
Vendor's Products)," which NTT Group adopted effective April 1, 2002. The
transactions are considered to have occurred when the agent resellers have taken
the title to the product, and the risk and rewards of ownership have been
substantially transferred. The adoption resulted in an adjustment as of April 1,
2002 for the cumulative effect of accounting change in the consolidated
statements of income of Y22,880 million (net of taxes of Y25,852 million and
minority interest of Y12,836 million), related to the recognition of certain
amounts of commissions paid to agent resellers, previously recognized as
selling, general and administrative expenses on the date of resale to the end
user customers, as a reduction of equipment sales upon delivery of the equipment
to the agent resellers.
Revenues from system integration are recognized upon completion of each project.
In connection with revenues from system integration projects, provision for
estimated losses, if any, is made in the period in which the loss first becomes
probable and reasonably quantifiable.
Cash and cash equivalents, short-term investments-
Cash in excess of daily requirements is invested in time deposits, marketable
bonds of the Japanese Government, commercial paper and certificates of deposit
purchased under agreements to resell. Those with original maturities of three
months or less are classified as "Cash and cash equivalents" in the consolidated
balance sheets. Those with original maturities of longer than three months and
remaining maturities of 12 months or less at the end of the fiscal year are
classified as "Short-term investments" in the consolidated balance sheets.
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 other comprehensive income (loss).
Foreign currency receivables and payables are translated at appropriate year-end
current rates and the resulting translation gains or losses are taken into
income currently.
NTT Group transacts limited business in foreign currencies. The effect of
exchange rate fluctuations from the initial transaction date to the settlement
date is recorded as "Other, net" in the consolidated statements of 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 other comprehensive income (loss), net of taxes.
Equity securities, whose fair values are not readily determinable, are carried
at cost. NTT Group
F-14
--------------------------------------------------------------------------------
NIPPON TELEGRAPH AND TELEPHONE CORPORATION
AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
periodically reviews the carrying amounts of its marketable securities for
impairments that are other than temporary. If this evaluation indicates there is
an impairment that is other than temporary, the security is written down to its
estimated fair value. Debt securities designated as held-to-maturity are carried
at amortized cost and are reduced to net realizable value for declines in market
value unless such declines are deemed to be temporary. Realized gains and
losses, which are determined on the average cost method, are reflected in
income.
Inventories-
Inventories consist of telecommunications equipment to be sold, projects in
progress, materials and supplies. Telecommunications equipment to be sold and
materials are stated at cost, not in excess of market value with cost being
determined on a first-in first-out 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. Supplies are valued at cost,
not in excess of market value with cost being determined by the average cost
method or by the specific identification method. Due to the rapid technological
changes associated with the wireless communications business, NTT DoCoMo
disposed of obsolete handsets during the years ended March 31, 2003, 2004 and
2005 totaling Y22,383 million, Y5,295 million and Y12,047 million ($113
million), respectively, which are included in "Cost of equipment sold" in the
consolidated statements of income.
Property, plant and equipment and depreciation-
Property, plant and equipment are stated at cost. 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:
Digital switch equipment 6 years
Cables 10 to 13 years
Tubes and tunnels 27 years
Reinforced concrete buildings 38 to 50
years
Machinery, vessels and tools 2 to 20 years
Maintenance and repairs, including minor renewals and betterments, are charged
to income as incurred.
Capitalized interest-
Interest is capitalized where it relates to the construction of property, plant
and equipment over the period of construction. NTT Group also capitalizes
interest associated with the development of internal-use software. NTT Group
amortizes such capitalized interest over the estimated useful lives of the
related assets. Total interest costs incurred, including in interest and
amortization of bond discounts and issue costs, were Y134,295 million and Y
116,715 million and Y94,807 million ($886 million), of which Y4,484 million and
Y3,357 million and Y841 million ($8 million) were capitalized for the years
ended March 31, 2003, 2004 and 2005, respectively.
Accounting for the impairment of long-lived assets-
Long-lived assets, including property, plant and equipment, software and certain
other intangible assets with finite useful lives are reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount
may not be recoverable, in accordance with Statement of Financial Accounting
Standards
F-15
--------------------------------------------------------------------------------
NIPPON TELEGRAPH AND TELEPHONE CORPORATION
AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
No. 144 ("SFAS 144"), "Accounting for the Impairment or Disposal of Long-Lived
Assets." 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.
Goodwill and other intangible assets-
Goodwill is the excess of the acquisition cost of businesses over the fair value
of the identifiable net assets acquired. NTT Group adopted the provisions of
Statement of Financial Accounting Standards No. 142, "Goodwill and Other
Intangible Assets," under which goodwill is not amortized, but tested for
impairment on an annual basis and when indicators of impairment are present.
Other intangible assets primarily consist of computer software and the right to
use utility facilities. NTT Group capitalizes the cost of internal-use software,
which has a useful life in excess of one year in accordance with AICPA Statement
of Position ("SOP") 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use." Subsequent additions, modifications or
upgrades to internal-use software are capitalized only to the extent that they
allow the software to perform a task it previously did not perform. Software
maintenance and training costs are expensed in the period in which they are
incurred. Capitalized computer software costs are amortized on a straight-line
basis over a period of generally five years.
Income taxes-
Income taxes are computed based on "Income (loss) before income taxes" included
in the consolidated statements of income. The asset and liability approach is
used to recognize deferred tax assets and liabilities for the expected future
tax consequences of temporary differences between the carrying amounts and the
tax bases of assets and liabilities and of operating loss carryforwards.
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 Group uses several types of derivative financial instruments to manage
foreign currency exchange rate and interest rate risks. NTT Group does not use
derivative instruments for trading or speculative purposes.
In accordance with Statement of Financial Accounting Standards No. 133 ("SFAS
133"), "Accounting for Derivative Instruments and Hedging Activities," No. 138,
"Accounting for Certain Derivative Instruments and Certain Hedging Activities,"
and No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging
Activities," all derivatives are recognized as either assets or liabilities in
the balance sheet at fair value and are reported in "Prepaid expenses and other
current assets," "Other assets," "Current liabilities-Other" and "Long-term
liabilities-Other" in the consolidated balance sheets. Classification of each
derivative as current or non-current is based upon whether the maturity of each
instrument is less than or greater than 12 months. Changes in fair value of
derivative financial instruments are either recognized in income or
shareholders' equity (as a component of accumulated other comprehensive income
(loss)), depending on whether the derivative financial instrument qualifies as a
hedge and the derivative is being used to hedge changes in fair value or cash
flows.
The fair values of forward exchange contracts, interest rate swap agreements,
and currency swap agreements are estimated based on the amounts NTT Group would
receive or pay to terminate the contracts at each year end with discounted
amounts of net future cash flows.
F-16
--------------------------------------------------------------------------------
NIPPON TELEGRAPH AND TELEPHONE CORPORATION
AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
For derivatives classified as fair value hedges, changes in the fair value of
derivatives designated and effective as fair value hedges for recognized assets
or liabilities or unrecognized firm commitments are recognized in earnings as
offsets to changes in the fair value of the related hedged assets or
liabilities.
For derivatives classified as cash flow hedges, changes in the fair value of
derivatives designated and effective as cash flow hedges for forecasted
transactions or exposures associated with recognized assets or liabilities are
initially recorded in other comprehensive income (loss) and reclassified into
earnings when the hedged transaction affects earnings.
From time to time, however, NTT Group may enter into derivatives that
economically hedge certain of its risks, even though hedge accounting does not
apply under SFAS 133. In these cases, changes in the fair values of these
derivatives are recognized in current period earnings.
NTT Group formally documents all relationships between hedging instruments and
hedged items, as well as its risk management objective and strategy for
undertaking various hedge transactions. This process includes linking all
derivatives that are designated as fair value or cash flow hedges to (1)
specific assets or liabilities on the balance sheet or (2) specific firm
commitments or forecasted transactions. NTT Group also assesses (both at the
hedge's inception and on an ongoing basis at least quarterly) whether the
derivatives that are used in hedging transactions have been highly effective in
offsetting changes in the fair value or cash flows of hedged items and whether
those derivatives may be expected to remain highly effective in future periods.
When it is determined that a derivative is not highly effective as a hedge, NTT
Group discontinues hedge accounting. The amounts representing hedges'
ineffectiveness and the component of derivative instruments' gain or loss
excluded from the assessment of hedge effectiveness are reported as "Other, net"
in the consolidated statements of income.
Cash flows from financial instruments accounted for as hedges are classified in
the consolidated statements of cash flows under the same category as the items
being hedged.
Net income per share-
Basic net income per share is computed based on the average number of shares
outstanding during the year and is appropriately adjusted for any free
distribution of common stock. Diluted net income per share 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. Since NTT did not issue dilutive securities, there is no difference
between basic net income per share and diluted net income per share.
Distribution of common stock-
On occasion, NTT may make a free distribution of common stock, which is
accounted for by a transfer from additional paid-in capital to the common stock
account.
Comprehensive income-
Comprehensive income is defined in Statement of Financial Accounting Standards
No. 130 ("SFAS 130"), "Reporting Comprehensive Income," as a total change in
shareholders' equity, excluding capital transactions. NTT Group's comprehensive
income comprises net income plus other comprehensive income (loss) representing
changes in foreign currency translation adjustments, unrealized gains/losses on
securities, minimum pension liability adjustments and unrealized gains/losses on
derivative instruments. NTT Group has elected to disclose comprehensive income
in the consolidated statements of shareholders' equity and its components in
Note 16.
F-17
--------------------------------------------------------------------------------
NIPPON TELEGRAPH AND TELEPHONE CORPORATION
AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Variable Interest Entities (VIEs)-
In accordance with FIN 46-R, VIEs with assets totaling approximately Y25 billion
and Y23 billion ($215 million) as of March 31, 2004 and 2005, respectively,
which were established to develop real estate for rental, and VIEs with assets
totaling approximately Y51 billion and Y55 billion ($514 million) as of March
31, 2004 and 2005, respectively, which were established to lease software, for
the purpose of securitization of mainly real estate and software, have been
recognized and consolidated as VIEs in which NTT Group is the primary
beneficiary.
In addition to the above, a VIE with assets totaling approximately Y49 billion
and Y74 billion ($692 million) as of March 31, 2004 and 2005, respectively,
which was established for the purpose of carrying out a project to develop real
estate for rental, has been recognized as a VIE in which NTT Group holds
significant variable interest, and NTT Group annually evaluates its preferential
interest of Y9 billion and Y14.7 billion ($137 million) as of March 31, 2004 and
2005, respectively, which is accounted for using the equity method. NTT Group is
jointly responsible with the other investor for the VIE's financing activities
and estimates that its maximum exposure to loss over the amount of the
preferential interest is approximately Y16 billion and Y30 billion ($280
million) as of March 31, 2004 and 2005, respectively.
Accounting for Asset Retirement Obligations-
NTT Group adopted Statement of Financial Accounting Standards No. 143 ("SFAS 143
"), "Accounting for Asset Retirement Obligations." SFAS 143 requires that legal
obligations associated with the retirement of tangible long-lived assets be
recorded as liabilities, measured at fair value, when those obligations are
incurred if a reasonable estimate of fair value can be made. Upon initially
recognizing liabilities for asset retirement obligations, an entity must
capitalize the cost by recognizing an increase in the carrying amount of the
related long-lived assets.
NTT Group's asset retirement obligations subject to SFAS 143 primarily relate to
obligations to restore leased land and buildings for NTT Group's
telecommunications equipment to their original condition. NTT estimates the fair
value of these liabilities and concludes its amount is immaterial.
Accounting for the Transfer to the Japanese Government of the Substitutional
Portion of Employee Pension Fund Liabilities-
NTT Group adopted Emerging Issues Task Force Issue No. 03-02 ("EITF 03-02"), "
Accounting for the Transfer to the Japanese Government of the Substitutional
Portion of Employee Pension Fund Liabilities." This provides a consensus that
Japanese employers should account for the entire separation process as a single
settlement event upon completion of the transfer to the Japanese Government of
the substitutional portion of the benefit obligations and related plan assets.
Prior to the actual transfer of the substitutional portion of the benefit
obligations and related plan assets, no accounting should be affected.
Additionally, EITF 03-02 requires that the resultant gain from the government
subsidy which is the difference between the substitutional portion of the
obligations settled, assuming a market discount rate, and the
government-calculated amount which determines the plan assets required to be
transferred, would be recognized as a gain at settlement.
In June 2003, pursuant to the Law Concerning Defined-Benefit Corporate Pension
Plans, NTT Kosei-Nenkin-Kikin (NTT Employees Pension Fund) applied to the
Japanese Government for permission to be relieved of the future obligation to
disburse the benefits covering the substitutional portion, and in September
2003, the approval was granted. However, in accordance with EITF 03-02, no
accounting should occur until the completion of the entire transfer.
F-18
--------------------------------------------------------------------------------
NIPPON TELEGRAPH AND TELEPHONE CORPORATION
AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
It is undetermined when the transfer of the benefit obligations and related plan
assets will take place and what the sum accompanying the settlement will be.
Recent pronouncements-
In November 2004, the FASB issued Statement of Financial Accounting Standards
No. 151 ("SFAS 151"), "Inventory Costs - an amendment of Accounting Research
Bulletin No. 43 ("ARB 43"), Chapter 4." SFAS 151 amends the guidance in ARB 43,
Chapter 4, "Inventory Pricing," to clarify the accounting for abnormal amounts
of idle facility expense, freight, handling costs, and wasted material
(spoilage). ARB 43, Chapter 4 previously stated that such costs might be so
abnormal as to require treatment as current period charges. SFAS 151 requires
that those items be recognized as current-period charges regardless of whether
they meet the criterion of "so abnormal." In addition, SFAS 151 requires that
allocation of fixed production overheads to the costs of conversion be based on
the normal capacity of the production facilities. SFAS 151 is effective for
inventory costs incurred during fiscal years beginning after June 15, 2005,
which, for NTT Group, is the year beginning April 1, 2006. NTT estimates the
adoption of SFAS 151 will not have a material impact on its results of
operations or financial position.
In December 2004, the FASB revised Statement of Financial Accounting Standards
No. 123 ("SFAS 123R"), "Share-Based Payment," which eliminates the ability to
account for share-based compensation transactions using APB Opinion No. 25, "
Accounting for Stock Issued to Employees," and generally requires instead that
such transactions be accounted for using a fair-value-based method. SFAS 123R is
effective during fiscal years beginning after June 15, 2005, which, for NTT
Group, is the year beginning April 1, 2006. NTT is currently evaluating the
impact of adopting SFAS 123R.
In December 2004, the FASB issued Statement of Financial Accounting Standards
No. 152 ("SFAS 152"), "Accounting for Real Estate Time-Sharing Transactions - an
amendment of FASB Statements No. 66 and 67." The statement amends Statement of
Financial Accounting Standards No. 66, "Accounting for Sales of Real Estate," to
reference the financial accounting and reporting guidance for real estate
time-sharing transactions provided in SOP 04-2, "Accounting for Real Estate
Time-Sharing Transactions." This Statement also amends Statement of Financial
Accounting Standards No. 67, "Accounting for Costs and Initial Rental Operations
of Real Estate Projects," to state that the guidance for (a) incidental
operations and (b) costs incurred to sell real estate projects does not apply to
real estate time-sharing transactions. SFAS 152 is effective during fiscal years
beginning after June 15, 2005, which, for NTT Group, is the year beginning April
1, 2006. NTT estimates the adoption of SFAS 152 will not have a material impact
on its results of operations or financial position.
In December 2004, the FASB issued Statement of Financial Accounting Standards
No. 153 ("SFAS 153"), "Exchanges of Non-Monetary Assets - an Amendment of APB
Opinion No. 29." The amendments eliminate the exception for non-monetary
exchanges of similar productive assets and replace it with a general exception
for exchanges of non-monetary assets that do not have commercial substance. The
provisions in SFAS 153 are effective for non-monetary asset exchanges occurring
during fiscal periods beginning after June 15, 2005, which, for NTT Group, is
the year beginning April 1, 2006. NTT estimates the adoption of SFAS 153 will
not have a material impact on its results of operations or financial position.
In March 2005, the FASB issued FASB Interpretation No. 47 ("FIN 47") "Accounting
for Conditional Asset Retirement Obligations - an interpretation of FASB
Statement No. 143." FIN 47 provides guidance relating to the identification of
and financial reporting for legal obligations to perform an asset retirement
activity. The Interpretation requires recognition of a liability for the fair
value of a conditional asset retirement obligation when incurred if the
liability's fair value can be reasonably estimated. FIN 47 is effective for
fiscal years ending after December 15, 2005, which, for NTT Group, is the year
beginning April 1, 2005. NTT is currently evaluating the impact of adopting FIN
47.
F-19
--------------------------------------------------------------------------------
NIPPON TELEGRAPH AND TELEPHONE CORPORATION
AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
In May 2005, the FASB issued Statement of Financial Accounting Standards No. 154
("SFAS 154") "Accounting Changes and Error Corrections - a replacement of APB
Opinion No. 20 and FASB statement No. 3." SFAS 154 replaces APB Opinion No. 20
("APB 20"), "Accounting Changes," and FASB Statement No. 3, "Reporting
Accounting Changes in Interim Financial Statements," and changes the
requirements for the accounting for and reporting of a change in accounting
principle. APB 20 previously required that most voluntary changes in accounting
principle be recognized by including in net income of the period of the change
the cumulative effect of changing to the new accounting principle. SFAS 154
requires retrospective application to prior periods' financial statements of
changes in accounting principle. SFAS 154 is effective for accounting changes
and corrections of errors made in fiscal years beginning after December 15,
2005, which, for NTT Group, is effective for the year beginning April 1, 2006.
The impact of SFAS 154 will depend on the change, if any, in a future period.
Reclassifications-
Certain items for prior years' financial statements have been reclassified to
conform to the presentation for the year ended March 31, 2005. "Fixed voice
transmission services," "Mobile voice transmission services," "Data transmission
services" and "Leased circuit," previously represented on the consolidated
income statements are reclassified and represented as "Fixed voice related
services," "Mobile voice related services" and "IP/packet communications
services" for the year ended March 31, 2005.
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 Y107 = US$1, the
approximate current rate at March 31, 2005, 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 Group has entered into a number of different types of transactions with
affiliated companies, the most significant of which are the sales of
telecommunications 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, 2005 and the related balances at March 31, 2004 and 2005 were as
follows:
2003 2004 2005 2005
Millions of yen Millions
of
U.S.
dollars
Operating revenues Y 31,018 Y 26,353 Y 33,449 $ 313
Operating expenses Y 217,887 Y 184,040 Y 226,496 $ 2,117
Receivables Y 9,061 Y 23,592 $ 220
Payables Y 45,205 Y 41,625 $ 389
F-20
--------------------------------------------------------------------------------
NIPPON TELEGRAPH AND TELEPHONE CORPORATION
AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Dividends from affiliated companies accounted for by the equity method for the
years ended March 31, 2003, 2004 and 2005 were Y872 million, Y384 million and Y
988 million ($9 million), respectively.
5. Cash and cash equivalents:
Cash and cash equivalents at March 31, 2004 and 2005 comprised the following:
2004 2005 2005
Millions of yen Millions
of
U.S.
dollars
Cash Y 956,869 Y 814,060 $ 7,608
Certificates of deposit, commercial paper and marketable 38,990 - -
securities purchased under agreements to resell
Time deposits, certificates of deposit and other 435,562 567,899 5,307
Total Y 1,431,421 Y 1,381,959 $ 12,915
Certificates of deposit, commercial paper and securities, including marketable
bonds of the Japanese Government, are purchased under agreements to resell and
are to be sold back to financial institutions at predetermined selling prices
and dates. Such certificates of deposit, commercial paper and securities and
other deposits are stated at amounts, which approximate fair value.
6. Inventories:
Inventories at March 31, 2004 and 2005 comprised the following:
2004 2005 2005
Millions of yen Millions
of
U.S.
dollars
Telecommunications equipment to be sold and materials Y 147,723 Y 178,790 $ 1,671
Projects in progress 60,381 75,601 707
Supplies 29,948 30,435 284
Total Y 238,052 Y 284,826 $ 2,662
7. Impairment of long-lived assets:
Impairment of PHS business assets-
As a result of its revised business outlook, NTT Group evaluated the
recoverability of its long-lived assets related to the PHS services in
accordance with SFAS 144 for the year ended March 31, 2005. To estimate the fair
value of the long-lived assets related to PHS services, NTT Group used future
undiscounted cash flows expected to be generated by the long-lived assets
because of the absence of an observable market price. Because NTT Group
estimated that future cash flows from the PHS services would be negative, NTT
Group wrote down the entire carrying value of the long-lived assets related to
the PHS business and recognized a non-cash impairment loss of long-lived assets
included in the wireless services segment of Y44,310 million ($414 million) for
the year ended March 31, 2005, which is recorded as "Impairment loss" in the
consolidated statements of income.
F-21
--------------------------------------------------------------------------------
NIPPON TELEGRAPH AND TELEPHONE CORPORATION
AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
8. Investments in affiliated companies:
NTT Group's main investments in the following entities are accounted for on the
equity method as of March 31, 2004 and 2005 except for AT&T Wireless Services,
Inc. and Hutchison 3G UK Holdings Limited as explained below for 2005:
NTT Group's
ownership percentage
Company name 2004 2005
----------
Hutchison Telephone Company Limited ("HTCL") 24.10 % 24.10 %
Hutchison 3G HK Holdings Limited 24.10 % 24.10 %
Hutchison 3G UK Holdings Limited ("H3G UK") 20.00 % -
AT&T Wireless Services, Inc. ("AT&T Wireless") 15.89 % -
All of the above investments are privately held companies. As discussed below,
NTT Group began accounting for its investment in H3G UK using the cost method
for the year ended March 31, 2005.
AT&T Wireless-
On July 9, 2001, AT&T Corp. ("AT&T") completed the planned split-off of its
wireless group ("AT&T Wireless Group"). In connection with the split-off, all
the assets and liabilities of AT&T Wireless Group were transferred to AT&T
Wireless, a wholly owned subsidiary of AT&T. The split-off was then effected by
redeeming all the outstanding shares of AT&T Wireless Group tracking stock in
exchange for shares of AT&T Wireless common stock and distributing additional
shares of AT&T Wireless common stock to holders of AT&T common stock, resulting
in AT&T Wireless becoming an independent, publicly-traded company. NTT DoCoMo's
investment in AT&T Wireless preferred tracking stock was converted into AT&T
Wireless common stock resulting in approximately 16% voting interest in AT&T
Wireless. NTT DoCoMo accounted for its common stock investment in AT&T Wireless
using the equity method due to its ability to exercise significant influence
over operating and financial policies primarily through board representation,
appointment of key management positions, approval rights and rights to require
repurchase of the investment under certain circumstances.
In February 2004, AT&T Wireless entered into a merger agreement with Cingular
Wireless LLC ("Cingular"), a mobile operator in the United States of America,
and certain of its affiliates. Under the terms of the merger agreement, it was
agreed that all the outstanding shares of common stock of AT&T Wireless shall be
converted into $15 per share in cash. On October 26, 2004, pursuant to the
merger agreement, the merger between AT&T Wireless and Cingular became
effective. As a result, NTT DoCoMo transferred all of its AT&T Wireless shares
to Cingular, and NTT DoCoMo received approximately $6,495 million (equivalent to
approximately Y699,514 million) in cash. NTT DoCoMo ceased to account for it
under the equity method. NTT DoCoMo recognized a gain of Y501,781 million
($4,690 million) on the transaction and recorded as gain on sale of affiliate
shares for the year ended March 31, 2005. The gain on sale of affiliate shares
included reclassification of unrealized gain (loss) on securities, unrealized
gain (loss) of derivative instruments and foreign currency translation
adjustments amounting to Y(144) million ($(1) million), Y461 million ($4
million) and Y64,564 million ($603 million), respectively.
H3G UK-
On May 27, 2004, NTT DoCoMo agreed to sell its entire 20% shareholding in H3G UK
to Hutchison Whampoa Limited ("HWL") for a total consideration of #120 million
in a Sale and Purchase Agreement signed
F-22
--------------------------------------------------------------------------------
NIPPON TELEGRAPH AND TELEPHONE CORPORATION
AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
between NTT DoCoMo and HWL. Under the terms of the agreement, NTT DoCoMo were to
receive the payment in three installments, the final installment of which was
expected to be made in December 2006, either in cash or in shares of Hutchison
Telecommunications International Limited ("HTIL"), a subsidiary company of HWL
that is being listed on the Stock Exchange of Hong Kong since October 15, 2004.
NTT DoCoMo's right to receive #120 million as of the time of completion of the
transaction in February 2007 is also secured by the Sale and Purchase Agreement.
As a result of the agreement, NTT DoCoMo waived certain of its minority
shareholder's rights, including voting right and supervisory board
representation. As NTT DoCoMo no longer had the ability to exercise significant
influence over H3G UK, NTT DoCoMo ceased to account for its investment in H3G UK
using the equity method.
During the year ended March 31, 2005, NTT DoCoMo received 187,966,653 shares of
HTIL (equivalent to #80 million) as the first installment payment by HWL, which
was reported as "Marketable securities and other investments", with an
offsetting amount recorded as "Other long-term liabilities" until such time that
the transfer of H3G UK shares is completed.
On May 9, 2005, NTT DoCoMo received a notice from HWL that HWL intends to
exercise its right to accelerate completion of the payment. In accordance with
the agreement, NTT DoCoMo completed the sale of H3G UK shares to HWL on June 23,
2005. NTT DoCoMo will recognize a gain of Y62 billion ($579 million) on the
transaction and record the gain as "Gains on sales of investments in affiliated
company" in the consolidated statement of income for the year ending March 31,
2006.
As part of the agreement, the #200 million shareholder loan provided by NTT
DoCoMo to H3G UK in May 2003 was transferred for value to Hutchison Europe
Telecommunications S.a r.l., a HWL subsidiary company, on May 27, and the
payment was completed.
KGT-
On October 7, 2003, KG Telecommunications Co., Ltd. ("KGT"), a former equity
method investee of NTT DoCoMo, entered into a stock purchase agreement with Far
EasTone Telecommunications Co., Ltd. ("FET"), a mobile operator in Taiwan, by
which KGT agreed to become a wholly owned subsidiary of FET. Simultaneously, NTT
DoCoMo signed a memorandum of understanding with FET to collaborate on the
promotion of third generation ("3G") mobile phone business and "i-mode" business
in Taiwan.
Pursuant to the stock purchase agreement, KGT merged into a subsidiary of FET
and ceased to exist on January 1, 2004. NTT Group ceased the equity method of
accounting for its investment in KGT at that time. On April 29, 2004, the entire
transaction was completed and the former shareholders of KGT received 0.46332
FET shares plus NT$6.72 for each KGT share they owned. As a result, NTT DoCoMo
became an approximately 5% shareholder of FET, and received approximately NT$2.5
billion (Y8 billion). The transaction did not have a material impact on NTT
Group's results of operations or financial position.
DoCoMo AOL-
On December 17, 2003, NTT DoCoMo entered into a stock sales agreement with
American Online, Inc. ("AOL"). Pursuant to the stock sales agreement, NTT DoCoMo
sold all the shares of DoCoMo AOL, Inc. ("DoCoMo AOL"), a former equity method
investee of NTT DoCoMo, NTT DoCoMo owned. And NTT Group ceased the equity method
of accounting for its investment in DoCoMo AOL at that time. The transaction did
not have a material impact on NTT Group's results of operations and financial
position.
F-23
--------------------------------------------------------------------------------
NIPPON TELEGRAPH AND TELEPHONE CORPORATION
AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
KPNM-
In November 2002, NTT DoCoMo was requested by KPN Mobile N.V. ("KPNM"), a former
equity method investee of NTT DoCoMo, to subscribe for additional shares of KPNM
as NTT DoCoMo had a right to subscribe for additional shares of KPNM for
maintaining its portion of voting right. In December 2002, NTT DoCoMo decided
not to exercise its right to subscribe for additional shares of KPNM. As a
result, NTT DoCoMo's ownership interest in KPNM decreased from 15% to
approximately 2.2% and NTT DoCoMo lost certain of its minority shareholder's
rights under the shareholders' agreement, including supervisory board
representation. As a result, NTT DoCoMo no longer has the ability to exercise
significant influence over KPNM, and NTT Group ceased to account for its
investment in KPNM using the equity method from December 2004.
Impairment-
NTT and NTT DoCoMo reviewed the business outlook of their affiliates in order to
determine if any decline in investment values was other than temporary. As a
result of such evaluations, NTT and NTT DoCoMo determined that the decline in
values of certain investments were other than temporary and recorded impairment
charges aggregating Y319,564 million, net of deferred income taxes of Y225,535
million for the year ended March 31, 2003. The gross impairment charges in 2003
consist mainly of Y284,078 million for AT&T Wireless, Y123,245 million for H3G
UK, Y117,898 million for KPNM, Y9,619 million for KGT and Y10,259 million for
DoCoMo AOL. NTT and NTT DoCoMo did not record impairment charges for the year
ended March 31, 2004. NTT and NTT DoCoMo recorded impairment charges for HTCL, a
mobile operator in Hong Kong, of Y8,612 million ($80 million) for the year ended
March 31, 2005. The impairment charges are included with equity in earnings
(losses) of affiliated companies in the accompanying consolidated statements of
income.
NTT and NTT DoCoMo believe the estimated fair values of investments in
affiliates at March 31, 2005 equal or exceed the related carrying values.
Summarized financial information-
The following represents summarized financial information for NTT Group's main
equity investments in the years ended March 31, 2003, 2004 and 2005. All
affiliates are included in each of the fiscal years disclosed except for KPNM
for the year ended March 31, 2003, 2004 and 2005, DoCoMo AOL and KGT for the
year ended March 31, 2004 and 2005, and AT&T Wireless and H3G UK for the year
ended March 31, 2005 as they are no longer equity method investee. The investee
information for 2004 and 2005 is presented in aggregate below, as there was no
individual significant investee.
2003
AT&T H3G UK KGT Others
Wireless
Millions of yen
Income statement data:
Revenues Y 1,956,689 Y - Y 78,982 Y 533,634
Operating income (loss) (32,296 ) (31,498 ) (3,584 ) (6,549 )
Income (loss) from continuing operations (276,022 ) (37,474 ) (6,422 ) (3,894 )
Net income (loss) (290,918 ) (37,474 ) (4,332 ) (10,024 )
F-24
--------------------------------------------------------------------------------
NIPPON TELEGRAPH AND TELEPHONE CORPORATION
AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
2004 2005
Total Total
Millions of Millions Millions
yen of yen of
U.S.
dollars
Balance sheet data:
Current assets Y 1,187,596 Y 266,096 $ 2,487
Noncurrent assets 5,675,015 434,532 4,061
Current liabilities 648,632 242,742 2,269
Noncurrent liabilities 2,393,670 204,093 1,907
Minority interest 3,856 1,202 11
Mandatorily redeemable preferred stock 18,962 - -
Mandatorily redeemable common stock 821,044 - -
Income statement data:
Revenues Y 2,454,567 Y 570,736 $ 5,334
Operating income (loss) (5,834 ) 6,923 65
Income (loss) from continuing operations (112,351 ) 390 4
Net income (loss) (118,102 ) (8,086 ) (76 )
NTT's shares of undistributed earnings of its affiliated companies included in
its consolidated retained earnings were Y15,837 million, Y9,855 million and Y
15,247 million ($142 million) as of March 31, 2003, 2004 and 2005, respectively.
NTT's recorded investment in affiliated publicly-held companies was Y69,629
million ($651 million) as of March 31, 2005 and based on quoted market prices at
that date, the related market value was Y44,629 million ($417 million).
The total carrying value of NTT's investments in affiliates in the consolidated
balance sheets at March 31, 2004 and 2005 was lower by Y288,291 million and
greater by Y72,451 million ($678 million) than its aggregate underlying equity
in net assets of such affiliates as of the date of the most recent available
financial statements of the investees, respectively. Such change from 2004 to
2005 is primarily due to the disposal of AT&T Wireless shares.
F-25
--------------------------------------------------------------------------------
NIPPON TELEGRAPH AND TELEPHONE CORPORATION
AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
9. Marketable securities and other investments:
Marketable securities and other investments include available-for-sale
securities and held-to-maturity securities. The aggregate carrying amounts,
gross unrealized holding gains, gross unrealized holding losses and fair value
by major security type at March 31, 2004 and 2005 are as follows:
March 31, 2004
Carrying Gross Gross Fair
amounts unrealized unrealized value
gains losses
Millions of yen
Available-for-sale:
Equity securities Y 72,104 Y 68,968 Y 10,579 Y 130,493
Debt securities 89 1 - 90
Held-to-maturity:
Debt securities 21,659 194 2 21,851
Total Y 93,852 Y 69,163 Y 10,581 Y 152,434
March 31, 2005
Carrying Gross Gross Fair
amounts unrealized unrealized value
gains losses
Millions of yen
Available-for-sale:
Equity securities Y 70,352 Y 126,641 Y 534 Y 196,459
Debt securities 151,271 58 16 151,313
Held-to-maturity:
Debt securities 16,271 61 0 16,332
Total Y 237,894 Y 126,760 Y 550 Y 364,104
March 31, 2005
Carrying Gross Gross Fair
amounts unrealized unrealized value
gains losses
Millions of U.S. dollars
Available-for-sale:
Equity securities $ 657 $ 1,184 $ 5 $ 1,836
Debt securities 1,414 0 0 1,414
Held-to-maturity:
Debt securities 152 1 0 153
Total $ 2,223 $ 1,185 $ 5 $ 3,403
F-26
--------------------------------------------------------------------------------
NIPPON TELEGRAPH AND TELEPHONE CORPORATION
AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Gross unrealized holding losses on available-for-sale securities and the fair
value of the related securities, aggregated by investment category and length of
time that individual securities have been in a continuous unrealized loss
position, at March 31, 2004 and 2005 are as follows:
March 31, 2004
Less than 12 months 12 months or longer
Fair Gross Fair Gross
value unrealized value unrealized
holding holding
losses losses
Millions of yen
Available-for-sale:
Equity securities Y 2,022 Y 138 Y 27,317 Y 10,441
Debt securities - - - -
Held-to-maturity:
Debt securities 9 1 2,999 1
March 31, 2005
Less than 12 months 12 months or longer
Fair Gross Fair Gross
value unrealized value unrealized
holding holding
losses losses
Millions of yen
Available-for-sale:
Equity securities Y 1,152 Y 411 Y 256 Y 123
Debt securities 152 5 195 11
Held-to-maturity:
Debt securities 7 0 - -
Cost method investments: 307 1,756 3,867 4,633
March 31, 2005
Less than 12 months 12 months or longer
Fair Gross Fair Gross
value unrealized value unrealized
holding holding
losses losses
Millions of U.S. dollars
Available-for-sale:
Equity securities $ 11 $ 4 $ 2 $ 1
Debt securities 1 0 2 0
Held-to-maturity:
Debt securities 0 0 - -
Cost method investments: 3 16 36 43
In the ordinary course of business, NTT maintains long-term investment
securities, which are included in "Marketable securities and other investments."
The total carrying amounts of the investment securities accounted for under the
cost method were Y103,526 million and Y74,116 million ($693 million) at March
31, 2004 and 2005, respectively. NTT did not evaluate fair values of investment
securities with an aggregate carrying amount of Y67,470 million ($631 million)
of these securities for impairment at March 31, 2005 because there are no events
or changes in circumstances that have material effects on the fair value or it
is not practicable to measure these effects.
F-27
--------------------------------------------------------------------------------
NIPPON TELEGRAPH AND TELEPHONE CORPORATION
AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Proceeds, gross realized gains and losses from sales of available-for-sale
securities for each of the three years in the period ended March 31, 2005 are as
follows:
March March March March
31, 31, 31, 31,
2003 2004 2005 2005
Millions Millions Millions Millions
of yen of yen of yen of U.S.
dollars
Proceeds Y 8,740 Y 17,004 Y 12,546 $ 117
Gross realized gain 1,052 11,042 7,420 69
Gross realized loss 1,223 809 60 1
The amounts of net losses reclassified out of accumulated other comprehensive
income (loss) into retained earnings for the year ended March 31, 2004 was Y429
million. The amounts of net income reclassified out of accumulated other
comprehensive income (loss) into retained earnings for the year ended March 31,
2005 was Y1,775 million ($17 million).
Maturities of debt securities classified as held-to-maturity at March 31, 2004
and 2005 are as follows:
2004
Carrying Fair
amounts Value
Millions of yen
Due within 1 year Y 5,384 Y 5,412
Due after 1 year through 5 years 10,769 10,921
Due after 5 years through 10 years 5,506 5,518
Due after 10 years - -
Total Y 21,659 Y 21,851
2005 2005
Carrying Fair Carrying Fair
amounts Value amounts Value
Millions of yen Millions of
U.S. dollars
Due within 1 year Y 11,207 Y 11,253 $ 105 $ 105
Due after 1 year through 5 years 1,064 1,075 10 10
Due after 5 years through 10 years 4,000 4,004 37 38
Due after 10 years - - - -
Total Y 16,271 Y 16,332 $ 152 $ 153
On January 22, 2001, NTT DoCoMo invested $9.8 billion (Y1,142.5 billion) in AT&T
Wireless Group. The $9.8 billion cost was allocated based on estimated fair
values at date of investment to AT&T preferred tracking stock $9.5 billion (Y
1,111.8 billion) and warrants $0.3 billion (Y30.7 billion), and was accounted
for on the cost basis. As discussed in Note 8, on July 9, 2001 upon the
split-off of AT&T Wireless and automatic conversion of its investment into AT&T
Wireless common stock and warrants, NTT DoCoMo began to account for its
investment in AT&T Wireless common stock on the equity method, while the
warrants began to be carried on a mark to market basis. Market value of the
warrants was computed using the Black-Scholes option pricing methodology until
the year ended March 31, 2003. In February 2004, AT&T Wireless entered into a
merger agreement with Cingular and its subsidiaries. Under the terms of the
merger agreement, per share purchase price of the outstanding common stock of AT
&T Wireless was $15 and was below the exercise price of the warrant of
F-28
--------------------------------------------------------------------------------
NIPPON TELEGRAPH AND TELEPHONE CORPORATION
AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
$35 per share. In addition, the price movement of AT&T Wireless shares showed
that the capital market expected that the merger would be completed, although
the transaction was subject to approval by regulatory authorities, and other
closing conditions. Consequently, NTT DoCoMo reduced the book value of the
warrant as of March 31, 2004 to zero. In this regard, a market value write-down
of Y599 million, Y1,706 million has been included in "Other, net" in the
accompanying consolidated statements of income for the years ended March 31,
2003 and 2004, respectively. On October 26, 2004, pursuant to the merger
agreement, the merger between AT&T Wireless and Cingular became effective. As a
result thereof, NTT DoCoMo determined that the book value of the warrant as of
March 31, 2005 was also nil. The expiration date of these warrants is on January
26, 2006.
10. Goodwill and other intangible assets:
Goodwill-
On September 8, 2000, NTT Communications completed its acquisition of Verio Inc.
("Verio"). The acquisition was recorded under the purchase method of accounting
in accordance with Statement of Financial Accounting Standards No. 141 ("SFAS
141"), "Business Combinations."
Under this statement, NTT recognized the excess of the acquisition cost of Verio
over the fair value of its net assets estimated at date of acquisition as
goodwill fully included in the long distance communications and international
services segment in the consolidated balance sheets.
In September 2002, Verio made a downward revision in its business plans due to
such factors as the stagnant U.S. economy and decline in market demand, which
have led to the deterioration of the business environment. It was in response to
changes in Verio's business plans that NTT performed the goodwill impairment
test and recorded an impairment loss of Y30,083 million included in "Write-down
of goodwill and other intangible assets" in the consolidated statement of income
for the year ended March 31, 2003.
As of March 31, 2005, Verio had goodwill of Y62,028 million ($580 million).
For the year ended March 31, 2004 and 2005, NTT recorded goodwill of Y85,541
million and Y32,657 million ($305 million), respectively, in connection with NTT
DoCoMo's share repurchase program. Further explanation is given in Note 20.
F-29
--------------------------------------------------------------------------------
NIPPON TELEGRAPH AND TELEPHONE CORPORATION
AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
The changes in the carrying amount of goodwill by reportable segment for the
years ended March 31, 2004 and 2005 are as follows:
2004
Long distance Wireless Total
communications services
and
international
services
Millions of yen
Balance at March 31, 2003 Y 70,866 Y 133,196 Y 204,062
Goodwill acquired during year - 85,699 85,699
Foreign currency translation adjustments (8,200 ) - (8,200 )
Balance at March 31, 2004 Y 62,666 Y 218,895 Y 281,561
2005
Long distance Wireless Total
communications services
and
international
services
Millions of yen
Balance at March 31, 2004 Y 62,666 Y 218,895 Y 281,561
Goodwill acquired during year - 39,400 39,400
Goodwill adjustment related to sale of subsidiary (1,400 ) - (1,400 )
stock
Foreign currency translation adjustments 975 - 975
Balance at March 31, 2005 Y 62,241 Y 258,295 Y 320,536
2005
Long distance Wireless Total
communications services
and
international
services
Millions of U.S. dollars
Balance at March 31, 2004 $ 586 $ 2,046 $ 2,632
Goodwill acquired during year - 368 368
Goodwill adjustment related to sale of subsidiary (13 ) - (13 )
stock
Foreign currency translation adjustments 9 - 9
Balance at March 31, 2005 $ 582 $ 2,414 $ 2,996
Other intangible assets-
NTT Group determines that no intangible assets have indefinite lives. Intangible
assets subject to amortization are comprised of the following:
2004 2005 2005
Millions of yen Millions
of
U.S.
dollars
Computer software Y 3,414,129 Y 3,589,054 $ 33,543
Rights to use utility facilities 323,858 326,153 3,048
Other 102,987 121,125 1,131
Accumulated amortization (2,516,170 ) (2,706,701 ) (25,296 )
Total Y 1,324,804 Y 1,329,631 $ 12,426
F-30
--------------------------------------------------------------------------------
NIPPON TELEGRAPH AND TELEPHONE CORPORATION
AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
In above table, the net carrying amounts of computer software as of March 31,
2004 and 2005 are Y1,167,540 million and Y1,159,477 million ($10,836 million),
respectively.
The aggregate amortization expense for intangible assets for the years ended
March 31, 2003, 2004 and 2005 were Y501,984 million, Y 465,645 million and Y
437,399 million ($4,088 million), respectively.
In addition, as Verio revised its business plan, NTT recorded, in accordance
with SFAS 121/144, a pre-tax impairment loss of intangible assets amounting to Y
6,858 million for the year ended March 31, 2003, which is included in "
Write-down of goodwill and other intangible assets" in the consolidated
statements of income.
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.
The estimated aggregate amortization expense for intangible assets during each
of the five years in the period ending March 31, 2010 are as follows:
Year ending March 31 Millions Millions
-------------- of yen of
U.S.
dollars
2006 Y 364,948 $ 3,411
2007 291,316 2,723
2008 210,102 1,964
2009 142,987 1,336
2010 81,322 760
11. Short-term borrowings and long-term debt:
Short-term borrowings at March 31, 2004 and 2005 comprised the following:
2004 2005 2005
Millions of yen Millions
of
U.S.
dollars
Borrowing denominated in Japanese yen:
Unsecured short-term bank loans bearing interest at weighted average rates of Y 155,707 Y 145,242 $ 1,357
0.30% and 0.30% per annum at March 31, 2004 and 2005, respectively
Commercial paper bearing interest at weighted average rates of 0.01% and 0.01% 129,000 277,000 2,589
per annum at March 31, 2004 and 2005, respectively
Borrowing denominated in U.S. dollar:
Unsecured short-term bank loans bearing interest at weighted average rates of 3,382 644 6
1.28% and 3.23% per annum at March 31, 2004 and 2005, respectively
Y 288,089 Y 422,886 $ 3,952
F-31
--------------------------------------------------------------------------------
NIPPON TELEGRAPH AND TELEPHONE CORPORATION
AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Long-term debt at March 31, 2004 and 2005 comprised the following:
2004 2005 2005
Millions of yen Millions
of
U.S.
dollars
Debt denominated in Japanese yen:
0.15% - 3.35% coupon bonds due 2005 - 2014 Y 2,653,180 Y 2,509,042 $ 23,449
0.15% - 2.50% Euro yen notes due 2005 - 2007 183,234 155,234 1,451
0.16% floating rate domestic bonds due 2007 3,000 2,000 19
0.19% floating rate Euro yen notes due 2005 10,000 10,000 94
Secured indebtedness to banks-
2.10% (weighted average) loans due 2006 - 2019 9,780 6,997 65
0.61% (weighted average) floating rate loans due 2006 - 2011 - 28,800 269
Unsecured indebtedness to banks-
1.44% (weighted average) loans due 2005 - 2022 2,223,765 1,791,391 16,742
0.25% (weighted average) floating rate loans due 2005 - 2008 247,344 214,440 2,004
5,330,303 4,717,904 44,093
Debt denominated in foreign currencies:
3.50% - 6.00% U.S. dollar notes due 2008 117,259 119,129 1,113
2.75% floating rate U.S. dollar notes due 2007 8,535 8,671 81
5.13% Swiss franc bonds due 2006 7,515 8,146 76
3.75% - 4.13% Euro notes due 2006 - 2011 97,785 175,463 1,640
Unsecured indebtedness to banks-
3.02% (weighted average) U.S. dollar floating rate loans due 73,220 74,483 696
2005 - 2009
304,314 385,892 3,606
Total long-term debt principal 5,634,617 5,103,796 47,699
Less-Deferred bond discounts (1,051 ) (847 ) (8 )
5,633,566 5,102,949 47,691
Less-Current maturities (877,448 ) (779,198 ) (7,282 )
Total long-term debt Y 4,756,118 Y 4,323,751 $ 40,409
Interest rates and due dates are in the above table stated at March 31, 2005.
All holders of the bonds and notes issued by NTT, referred to in the above
table, generally have preferential rights 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, 2005
stipulate that certain of the bonds and notes are redeemable at the option of
NTT, generally at the principal amount. Additionally, such agreements generally
provide that the bonds and notes may be purchased by NTT at the current value.
Assets totaling Y80,000 million ($748 million) included in "Other assets" are
restricted to the repayment of the debt obligation totaling Y80,000 million
($748 million) as of March 31, 2005.
F-32
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NIPPON TELEGRAPH AND TELEPHONE CORPORATION
AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
The balance of long-term debt as of March 31, 2005, and the aggregate amounts of
annual maturities from year ending March 31, 2005 to year ending March 31, 2010
and thereafter are as follows:
Year ending March 31 Millions of Millions
-------------- yen of
U.S.
dollars
2006 Y 779,198 $ 7,282
2007 815,512 7,622
2008 825,744 7,717
2009 629,319 5,881
2010 549,532 5,136
Thereafter 1,503,644 14,053
Total Y 5,102,949 $ 47,691
As of March 31, 2005, NTT Group has unused committed lines of credit amounting
to Y71.5 billion ($668 million) and can borrow from the banks with whom NTT's
subsidiaries have committed line contracts.
12. Employees' severance payments:
(1) Severance Payments and Contract-type Corporate Pension Plan
Employees whose services with NTT Group are terminated are normally entitled to
lump-sum severance payments and pension payments based on NTT's severance
payment plan, determined by reference to the employee's basic rate of pay,
length of service and other conditions.
In the year ended March 31, 1993, NTT and certain subsidiaries introduced a
non-contributory funded qualified pension plan. The benefits under the plan
cover 28% of the severance amount payable under the prior severance scheme to
employees who are more than 50 years old and retire after twenty or more years
of service. The benefits are also payable in a lump sum at the option of the
employee. In the year ended March 31, 2001, NTT made amendments to the severance
payment plan, which resulted 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.
On November 9, 2001, NTT and its seven main consolidated subsidiaries, including
NTT East and NTT West, agreed with the labor union to implement a structural
reform plan, which reduced the expected years of future services of current
employees of NTT East and NTT West. The effect of this change in the actuarial
assumption of employees' expected years of future services increased the
projected benefit obligation and was reflected as an actuarial loss. This
structural reform plan included reducing personnel costs through adopting a
fundamental outsourcing strategy and diversifying employment types, and further
reductions in various other costs. Under this plan, NTT East and NTT West moved
their order-taking, SOHO sales, equipment maintenance and operations, repair
work, etc., to newly-established outsourcing companies in each region
(prefecture or block of prefectures) and introduced a system whereby transferred
employees age 51 or over would be retired from NTT East and NTT West and rehired
by the outsourcing companies. On May 1, 2002, upon the implementation of this
structural reform, a total of approximately 60,000 employees of NTT East and NTT
West were retired from these companies and rehired by the outsourcing companies,
which resulted in a curtailment of the severance scheme that significantly
reduced the expected years of future services of current employees of NTT East
and NTT West, in accordance with Statement of Financial Accounting Standards No.
88, "Employers' Accounting for Settlements and Curtailments of Defined Benefit
Pension Plans and for Termination Benefits." In this connection, a curtailment
loss of Y322,736 million was recognized in the year ended March 31, 2002.
F-33
--------------------------------------------------------------------------------
NIPPON TELEGRAPH AND TELEPHONE CORPORATION
AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
In March 2003, NTT and eighteen of its consolidated subsidiaries, including NTT
East and NTT West, introduced a point system under which a set sum is added
every year reflecting the individual employee's performance over that year.
Although this amendment was not intended to lower the level of severance
payments, it changed the expected severance amounts for employees and reduced
the projected benefit obligation as of March 31, 2003, by a total of Y70,188
million. From the year ended March 31, 2004, the effect of this reduction in the
projected benefit obligation has been reflected as an offset to the amortization
of unrecognized prior service cost over the remaining service periods.
In April 2004, NTT Group's qualified pension plan was converted to a
contract-type corporate pension plan under the Law Concerning Defined-Benefit
Corporate Pension Plans, and a rule was introduced under which the level of
future pension benefits for plan participants whose benefits have not been
vested would fluctuate with market interest rates and other factors. As a
result, the projected benefit obligation decreased by Y119,937 million in
December 2003, when the qualified pension plan was amended. From the plan
amendment date, the effect of such a reduction in the projected benefit
obligation is reflected as an offset to the amortization of unrecognized prior
service cost over the remaining service periods.
The following table presents the reconciliation of the changes in the plan's
benefit obligations and fair value of plan assets based on NTT severance payment
plan during the years ended March 31, 2004 and 2005. NTT uses a March 31
measurement date.
2004 2005 2005
Millions of yen Millions
of
U.S.
dollars
Change in benefit obligations:
Benefit obligation, beginning of year Y 2,802,684 Y 2,580,180 $ 24,114
Service cost 99,461 89,428 836
Interest cost 54,191 49,783 465
Plan amendment (122,333 ) (15 ) (0 )
Actuarial loss (gain) (25,822 ) 3,542 33
Other 8,481 781 7
Benefit payments (236,482 ) (197,646 ) (1,847 )
(Severance payments and Pension)
Benefit obligation, end of year 2,580,180 2,526,053 23,608
Change in fair value of plan assets:
Fair value of plan assets, beginning of year 798,583 998,703 9,334
Actual return on plan assets 132,221 33,089 309
Employer contributions 126,146 124,697 1,165
Other 3,684 204 2
Benefits payments (Pension) (61,931 ) (55,790 ) (521 )
Fair value of plan assets, end of year 998,703 1,100,903 10,289
At March 31:
Funded status (1,581,477 ) (1,425,150 ) (13,319 )
Unrecognized net actuarial loss 283,075 274,928 2,570
Unrecognized transition obligation 5,430 4,212 39
Unrecognized prior service cost (*1) (241,157 ) (209,796 ) (1,961 )
Net amount recognized Y (1,534,129 ) Y (1,355,806 ) $ (12,671 )
--------
(*1) Unrecognized prior 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.
F-34
--------------------------------------------------------------------------------
NIPPON TELEGRAPH AND TELEPHONE CORPORATION
AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
The following table provides the amounts recognized in the consolidated balance
sheets:
2004 2005 2005
Millions of yen Millions
of
U.S.
dollars
At March 31:
Liability for employees' severance payments Y (1,573,970 ) Y (1,401,579 ) $ (13,099 )
Other intangibles and other assets 4,649 3,739 35
Accumulated other comprehensive loss 35,192 42,034 393
Net amount recognized Y (1,534,129 ) Y (1,355,806 ) $ (12,671 )
The accumulated benefit obligation was Y2,537,474 million and Y2,489,602 million
($23,267 million) at March 31, 2004 and 2005, respectively.
The projected benefit obligation, the accumulated benefit obligation and the
fair value of plan assets in the pension scheme with accumulated benefit
obligations in excess of fair value of plan assets at March 31, 2004 and 2005
are as follows:
2004 2005 2005
Millions of yen Millions
of
U.S.
dollars
At March 31:
Projected benefit obligation Y 2,580,030 Y 2,525,849 $ 23,606
Accumulated benefit obligation 2,537,350 2,489,428 23,266
Fair value of plan assets 998,549 1,100,720 10,287
The charges to income for employees' severance payments for each of the three
years in the period ended March 31, 2005 included the following components:
2003 2004 2005 2005
Millions of yen Millions
of
U.S.
dollars
Service cost Y 101,199 Y 99,461 Y 89,428 $ 836
Interest cost on projected benefit obligation 66,487 54,191 49,783 465
Expected return on plan assets (23,853 ) (21,093 ) (26,057 ) (244 )
Amortization of unrecognized net actuarial loss 2,759 13,984 5,209 49
Amortization of unrecognized transition obligation 4,701 4,702 1,218 11
Amortization of unrecognized prior service cost (38,695 ) (32,417 ) (31,361 ) (293 )
Total cost for employees' severance as recorded in Y 112,598 Y 118,828 Y 88,220 $ 824
the consolidated statements of income
F-35
--------------------------------------------------------------------------------
NIPPON TELEGRAPH AND TELEPHONE CORPORATION
AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
The following table reflects the weighted-average assumptions used to determine
the benefit obligations and net periodic pension cost:
2003 2004 2005
Weighted-average assumption used to determine benefit obligations at
March 31
Discount rate 2.0% 2.0% 2.0%
Rate of compensation increase 1.5-3.4% 1.5-3.4% 1.5-3.4%
Weighted-average assumption used to determine net periodic pension cost for years
ended March 31
Discount rate 2.5% 2.0% 2.0%
Rate of compensation increase 1.5-3.4% 1.5-3.4% 1.5-3.4%
Expected long-term return on plan assets 2.5% 2.5% 2.5%
In determining the expected long-term rate of return on plan assets, NTT
considers the current and projected asset allocations, as well as expected
long-term investment returns and risks for each category of plan assets based on
analysis of historical results.
The pension plan weighted-average asset allocations at March 31, 2004 and 2005,
by asset category, are as follows:
2004 2005
At March 31
Domestic bonds 28.3% 28.2%
Domestic stocks 26.6% 24.9%
International bonds 19.0% 19.6%
International stocks 14.7% 15.2%
Other financial instruments 11.4% 12.1%
Total 100.0% 100.0%
NTT Group's policy toward plan asset management is formulated with the ultimate
objective of ensuring the steady disbursement of pension benefits in future
periods. The long-term objective of asset management, therefore, is to secure
the total profits deemed necessary to ensure sound pension financing. To achieve
this, NTT Group selects various investments and takes into consideration their
expected returns and risks and the correlation among the investments. NTT Group
then sets the target allocation ratio for the plan assets and endeavors to
maintain that ratio. The target allocations are formulated from a mid- to
long-term perspective and are reviewed annually. In the event that the
investment environment changes dramatically, NTT Group will review the asset
allocations, as necessary. The target allocations in March 2005 are: domestic
bonds, 30.0%; domestic stocks, 25.0%; international bonds, 20.0%; international
stocks, 15.0%; and other financial instruments 10.0%.
Domestic stocks include NTT, NTT DoCoMo and NTT DATA common stock carried at
their fair value of Y10,909 million (1.1% of total plan assets) and Y6,783
million ( 0.6% of total plan assets and $63 million) at March 31, 2004 and 2005,
respectively.
NTT Group expects to contribute Y123,046 million ($1,150 million) to the
severance payments and the contract-type corporate pension plan in the year
ending March 31, 2006.
F-36
--------------------------------------------------------------------------------
NIPPON TELEGRAPH AND TELEPHONE CORPORATION
AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
The estimated future benefit payments of the severance payments and the
contract-type corporate pension plan are as follows:
Year ending March 31 Millions of Millions
-------------- yen of
U.S.
dollars
2006 Y 202,938 $ 1,897
2007 195,049 1,823
2008 185,599 1,734
2009 174,046 1,627
2010 200,145 1,870
2011-2015 925,472 8,649
Total Y 1,883,249 $ 17,600
(2) Social Welfare Pension Scheme and the NTT Kosei-Nenkin-Kikin
Since incorporation in April 1985, both NTT Group and its employees had made
contributions every year to the Nippon Telegraph and Telephone Mutual Aid Plan
("NTT Mutual Aid Plan"), which was one of the Japanese government-regulated
social welfare pension schemes, based on the Public Corporation Employee Mutual
Aid Association Law, and was operated to pay pension benefits to the retired/
existing employees of NTT, Public Corporation and/or their predecessor
government organizations (Ministry of Communications in the area of
telecommunications and the Ministry of Telecommunications). The NTT Mutual Aid
Plan was considered as a multi-employer plan as defined by Statement of
Financial Accounting Standards No. 87 ("SFAS 87"), "Employers' Accounting
Pensions" and, accordingly, contributions were recognized as expense when they
were made to such plan.
As part of the Japanese social welfare pension scheme restructuring in 1997, the
Japanese Welfare Pension Insurance Law was amended effective April 1, 1997 to
integrate the NTT Mutual Aid Plan under the Public Corporation Employee Mutual
Aid Association Law with the Welfare Pension Insurance Scheme under the Japanese
Welfare Pension Insurance Law. This converted the NTT Mutual Aid Plan into a)
the national Kosei-Nenkin ("National Plan"), b) NTT Kosei-Nenkin-Kikin ("NTT
Plan") and c) the Special Accounting Fund for the NTT Plan (former NTT Mutual
Aid Plan).
a) The National Plan
The National Plan is a government-regulated social welfare pension plan under
the Japanese Welfare Pension Insurance Law and since April 1997, both NTT Group
and its employees have made contributions to such plan every year. It is
considered as a multi-employer plan as defined by SFAS 87 and contributions are
recognized as expenses when contributions are made to such plan. The total
amounts of contributions were Y85,888 million, Y95,444 million and Y111,432
million ($1,041 million) for the years ended March 31, 2003, 2004 and 2005,
respectively.
b) The NTT Plan
NTT established the NTT Plan in April 1997. Both NTT Group and its employees
make contributions to such plan to supplement the pension benefits to which the
employees are entitled under the National Plan. The NTT Plan is regulated under
the Japanese Welfare Pension Insurance Law and covers a substitutional portion
of the National Plan. The NTT Plan is considered a defined benefit pension plan
as defined by SFAS 87 and accounts for benefit obligations, etc. separately from
the severance payment and qualified pension plan as described in the preceding
paragraph in (1) above.
F-37
--------------------------------------------------------------------------------
NIPPON TELEGRAPH AND TELEPHONE CORPORATION
AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
In the year ended March 31, 2002, based on revisions of the Japanese Welfare
Pension Insurance Law in March 2000, NTT amended the NTT Plan's provision that
the beginning date of paying benefits to its employees was deferred from 60
years old to 65 years old. The amendment reduced its projected benefit
obligation.
In June 2003, under the Law Concerning Defined-Benefit Corporate Pension Plans,
the NTT Plan applied to the Japanese Government for permission to be relieved of
the future obligations to disburse the NTT Plan benefits covering the
substitutional portion and in September 2003, the approval was granted.
However, in accordance with EITF 03-02, no accounting should occur until the
completion of the entire transfer. It is undetermined when the transfer of the
benefit obligations and related plan assets will take place and what the sum
accompanying the settlement will be. Based on the relief of these future
obligations, net pension cost for the NTT Plan for the year ended March 31, 2004
decreased by Y45,483 million and contributions to the National Plan increased by
Y12,489 million.
The following table presents a reconciliation of the changes in the NTT Plan's
benefit obligations and fair value of assets of the NTT Plan at March 31, 2004
and 2005. NTT uses a March 31 measurement date.
2004 2005 2005
Millions of yen Millions
of
U.S.
dollars
Change in benefit obligations:
Benefit obligation, beginning of year Y 1,858,506 Y 1,954,004 $ 18,262
Service cost 84,307 44,098 412
Interest cost 36,536 39,008 364
Actuarial loss (gain) (21,398 ) (24,122 ) (225 )
Other 3,289 (105 ) (1 )
Benefit payments (7,236 ) (10,569 ) (99 )
- - -
Benefit obligation, end of year 1,954,004 2,002,314 18,713
Change in fair value of plan assets:
Fair value of plan assets, beginning of year 969,314 1,165,712 10,895
Actual return on plan assets 164,039 39,078 365
Employer contributions 22,310 11,997 112
Employee contributions 15,337 5,605 53
Other 1,943 (63 ) (1 )
Benefits payments (7,231 ) (10,569 ) (99 )
Fair value of plan assets, end of year 1,165,712 1,211,760 11,325
At March 31:
Funded status (788,292 ) (790,554 ) (7,388 )
Unrecognized net actuarial loss 473,025 410,650 3,838
Unrecognized prior service cost (*1) (40,582 ) (36,049 ) (337 )
Net amount recognized Y (355,849 ) Y (415,953 ) $ (3,887 )
--------
(*1) Unrecognized prior 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.
F-38
--------------------------------------------------------------------------------
NIPPON TELEGRAPH AND TELEPHONE CORPORATION
AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
The following table provides the amounts recognized in the consolidated balance
sheets:
2004 2005 2005
Millions of yen Millions
of
U.S.
dollars
At March 31:
Liability for employees' severance payments Y (449,378 ) Y (459,494 ) $ (4,294 )
Accumulated other comprehensive loss 93,529 43,541 407
Net amount recognized Y (355,849 ) Y (415,953 ) $ (3,887 )
The accumulated benefit obligation was Y1,615,090 million and Y1,671,254 million
($15,619 million) at March 31, 2004 and 2005, respectively.
The charges to income for employees' severance payments for each of the three
years in the period ended March 31, 2005 included the following components:
2003 2004 2005 2005
Millions of yen Millions
of
U.S.
dollars
Service cost Y 123,421 Y 84,307 Y 44,098 $ 412
Interest cost on projected benefit 38,473 36,536 39,008 364
obligation
Expected return on plan assets (26,322 ) (25,002 ) (29,260 ) (273 )
Amortization of unrecognized net actuarial 21,033 44,051 28,975 271
loss
Amortization of unrecognized prior service (4,385 ) (4,552 ) (4,533 ) (42 )
cost
Employee contributions (28,532 ) (15,337 ) (5,605 ) (53 )
- - - -
Total cost for employees' severance as Y 123,688 Y 120,003 Y 72,683 $ 679
recorded in the consolidated statements of
income
The following table reflects the weighted-average assumptions used to determine
the benefit obligations and net periodic pension cost:
2003 2004 2005
Weighted-average assumption used to determine benefit obligations at
March 31
Discount rate 2.0 % 2.0 % 2.0 %
Rate of compensation increase 2.0-4.7 % 2.0-4.7 % 2.0-4.7 %
Weighted-average assumption used to determine net periodic pension cost
for years ended March 31
Discount rate 2.5 % 2.0 % 2.0 %
Rate of compensation increase 2.0-4.7 % 2.0-4.7 % 2.0-4.7 %
Expected long-term return on plan assets 2.5 % 2.5 % 2.5 %
In determining the expected long-term rate of return on plan assets, the NTT
Plan considers the current and projected asset allocations, as well as expected
long-term investment returns and risks for each category of the plan assets
based on analysis of historical results.
F-39
--------------------------------------------------------------------------------
NIPPON TELEGRAPH AND TELEPHONE CORPORATION
AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
The pension plan weighted-average asset allocations at March 31, 2004 and 2005,
by asset category, are as follows:
2004 2005
At March 31
Domestic bonds 29.1 % 34.3 %
Domestic stocks 28.1 % 17.8 %
International bonds 19.5 % 13.9 %
International stocks 15.2 % 11.0 %
Other financial instruments 8.1 % 23.0 %
- -
Total 100.0 % 100.0 %
The NTT Plan's policy toward plan asset management is formulated with the
ultimate objective of ensuring the steady disbursement of pension benefits in
future periods. The long-term objective of asset management, therefore, is to
secure the total profits deemed necessary to ensure sound pension financing. To
achieve this, the NTT Plan selects various investments and takes into
consideration their expected returns and risks and the correlation among the
investments. The NTT Plan then sets the target allocation ratio for the plan
assets and endeavors to maintain that ratio. The target allocations are
formulated from a mid- to long-term perspective and are reviewed annually. In
the event that the investment environment changes dramatically, the NTT Plan
will review the asset allocations, as necessary. The target allocations in March
2005 are: domestic bonds, 30.0%; domestic stocks, 25.0%; international bonds,
20.0%; international stocks, 15.0%; and other financial instruments 10.0%.
Domestic stocks include NTT, NTT DoCoMo and NTT DATA common stock carried at
their fair value of Y15,096 million (1.3% of total plan assets) and Y5,329
million (0.4% of total plan assets and $50 million) at March 31, 2004 and 2005,
respectively.
NTT Group expects to contribute Y11,695 million ($109 million) to the NTT Plan
in the year ending March 31, 2006.
The estimated future benefit payments of the NTT Plan are as follows:
Year ending March 31 Millions Millions
-------------- of yen of
U.S.
dollars
2006 Y 12,227 $ 114
2007 21,634 202
2008 28,089 263
2009 37,550 351
2010 46,173 432
2011-2015 337,607 3,155
Total Y 483,280 $ 4,517
c) Special Accounting Fund for the NTT Plan (former NTT Mutual Aid Plan)
The Special Accounting Fund for the NTT Plan (former NTT Mutual Aid Plan) is a
transitional pension plan created to settle the former NTT Mutual Aid Plan in
accordance with the Law to Partially Amend the Japanese
F-40
--------------------------------------------------------------------------------
NIPPON TELEGRAPH AND TELEPHONE CORPORATION
AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Welfare Pension Insurance Law and other legislation. The NTT Mutual Aid Plan was
integrated with the National Plan in April 1997, and the Special Accounting Fund
for the NTT Plan aims to provide pension benefits for employees who retired
before the 1997 shift in the scheme based on the Former Public Corporation
Employee Mutual Aid Association Law.
Based on the provisions of the Law to Partially Amend the Japanese Welfare
Pension Insurance Law and other legislation, NTT pays contributions set by the
Japanese Government every year to the Special Accounting Fund for the NTT Plan
to cover the costs of pension benefits based on the Former Public Corporation
Employee Mutual Aid Association Law to cover benefits for the period of service
in and prior to June 1956 of employees who retired in July 1956 or later from
NTT, Public Corporation, and/or their predecessor government organizations
(Ministry of Communications in the area of telecommunications and the Ministry
of Telecommunications).
The Special Accounting Fund for the NTT Plan is a social welfare pension scheme,
as are the former NTT Mutual Aid Plan and the current National Plan. It is
considered as a multi-employee plan as defined by SFAS 87 and contributions are
recognized as expenses when contributions are made to such plan. The amounts of
contributions were Y77,376 million, Y71,236 million and Y71,086 million ($664
million) for the years ended March 31, 2003, 2004 and 2005, respectively, and
NTT expects such contributions will decrease year by year.
13. Restructuring charges:
In the year ended March 31, 2002, NTT recorded restructuring costs in relation
to the implementation of the business restructuring of NTT East and NTT West,
both of which form part of the "Regional communications services" segment. In
the financial statements at March 31, 2002, the accrued amount of these costs
was included in "Liability for employees' severance payments" in the amount of Y
322,736 million, and in "Accrued payroll" in the amount of Y196,090 million. In
accordance with progress being made with the restructuring, Y21,218 million and
Y17,626 million ($165 million) of "Accrued payroll" was disbursed in the year
ended March 31, 2004 and 2005, respectively.
In the year ended March 31, 2002, NTT also recorded restructuring costs in
relation to the reform of business activities relating to Verio and to the
implementation of restructuring by domestic subsidiaries other than NTT East and
NTT West. At March 31, 2002, the accrued amount of these costs was included in "
Accrued payroll" in the amount of Y19,907 million, and in "Other" in the "
Current liabilities" section of the balance sheet in the amount of Y61,281
million. In accordance with progress being made with the reforms at Verio and
with the restructuring, Y397 million of "Accrued payroll" and Y7,735 million of
"Other" were disbursed in the year ended March 31, 2004 and Y512 million ($5
million) of "Accrued payroll" and Y2,131 million ($20 million) of "Other" were
disbursed in the year ended March 31, 2005.
F-41
--------------------------------------------------------------------------------
NIPPON TELEGRAPH AND TELEPHONE CORPORATION
AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Reconciliation in "Accrued payroll" and "Other" in the years ended March 31,
2004 and 2005 is as follows:
2004 2005 2005
Millions of yen Millions
of
U.S.
dollars
Accrued payroll:
At beginning of year Y 46,886 Y 25,271 $ 236
Payments or settlements (21,615 ) (18,138 ) (169)
At end of year Y 25,271 Y 7,133 $ 67
Other:
At beginning of year Y 18,615 Y 11,772 $ 110
Adjustments 2,627 (827 ) (8)
Payments or settlements (7,735 ) (2,131 ) (20)
Foreign currency translation adjustments (1,735 ) 192 2
At end of year Y 11,772 Y 9,006 $ 84
14. Income taxes:
NTT applies the accounting procedures and presentation used in the consolidated
tax return system. Under the consolidated tax return system, the amount of
corporate income tax and adjusted amounts related to corporate income and other
similar tax is calculated by totaling the taxable income of NTT and its wholly
owned subsidiaries. In addition, the realizable amount of deferred tax assets
relating to corporate income tax will be assessed on the basis of the future
taxable income estimates of NTT and its wholly owned subsidiaries. As of March
31, 2005, NTT had 169 wholly owned subsidiaries in Japan, including NTT East,
NTT West and NTT Communications.
On March 31, 2003, the Law to Partially Revise the Local Tax Law was
promulgated, which introduced the pro forma standard taxation system on April 1,
2004, for one-fourth of the corporate enterprise tax assessed on income where
the tax is determined by a value-added assessment rate applied to wages paid and
by a capital assessment rate applied to capital. As a result of the decrease in
the effective tax rate used in deferred tax expenses, when compared with the
effective tax rate applied before this revision, net deferred tax assets
decreased approximately Y56 billion and net income decreased approximately Y47
billion (net of minority interest) for the year ended March 31, 2003.
F-42
--------------------------------------------------------------------------------
NIPPON TELEGRAPH AND TELEPHONE CORPORATION
AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
NTT is subject to a number of different taxes, based on income with an aggregate
statutory tax rate in Japan of approximately 41%. Reconciliation of the
difference of the effective tax rates of NTT and the statutory tax rates are as
follows:
Percent of income
before income taxes
2003 2004 2005
Statutory tax rate 42.00 % 42.00 % 40.64 %
Adjustment by introduction of pro forma standard taxation of 3.91 - -
corporate enterprise tax
Net change in valuation allowance 2.68 (0.88 ) 1.55
Other 1.54 (1.63 ) (0.76 )
Effective tax rate 50.13 % 39.49 % 41.43 %
Significant components of the deferred tax assets and liabilities at March 31,
2004 and 2005 are as follows:
2004 2005 2005
Millions of yen Millions
of
U.S.
dollars
Deferred tax assets:
Liability for employees' severance payments Y 716,743 Y 704,743 $ 6,586
Accrued enterprise tax 30,560 15,061 141
Property, plant and equipment and intangible assets 219,095 252,314 2,358
principally due to differences in depreciation
Payable for additional lump-sum severance payments 2,889 - -
Impairment of investments in foreign companies 797,838 401,331 3,751
Compensated absences 96,617 99,707 932
Accrued bonus 46,265 45,191 422
Unamortized purchases of leased assets 46,018 26,336 246
Operating loss carryforward 346,311 261,101 2,440
Other 195,246 220,497 2,061
Total gross deferred tax assets 2,497,582 2,026,281 18,937
Less -Valuation allowance (60,953 ) (87,618 ) (819 )
Total deferred tax assets 2,436,629 1,938,663 18,118
Deferred tax liabilities:
Unrealized gains on securities (23,292 ) (47,831 ) (447 )
Special depreciation reserve (11,584 ) (10,788 ) (101 )
Gains on sales of subsidiary stocks (556,622 ) (528,062 ) (4,935 )
Foreign currency translation adjustments (37,554 ) (19,498 ) (182 )
Other (47,187 ) (56,716 ) (530 )
Total gross deferred tax liabilities (676,239 ) (662,895 ) (6,195 )
Net deferred tax assets Y 1,760,390 Y 1,275,768 $ 11,923
The valuation allowance at March 31, 2004 and 2005 mainly relates to deferred
tax assets of consolidated subsidiaries with operating loss carryforwards for
tax purposes that are not expected to be realized. The net change in the total
valuation allowance for the year ended March 31, 2004 was a decrease of Y2,563
million, and for the year ended March 31, 2005 was an increase of Y26,665
million ($249 million), respectively.
F-43
--------------------------------------------------------------------------------
NIPPON TELEGRAPH AND TELEPHONE CORPORATION
AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
During the years ended March 31, 2003, 2004 and 2005, through utilization of
operating loss carryforwards, Y1,465 million, Y139,609 million and Y177,352
million ($1,657 million) of tax benefits have been realized, respectively.
Net deferred tax assets at March 31, 2004 and 2005 are included in the
consolidated balance sheets as follows:
2004 2005 2005
Millions of yen Millions
of
U.S.
dollars
Deferred income taxes (current assets) Y 256,719 Y 321,936 $ 3,009
Deferred income taxes (investments and other assets) 1,677,505 1,127,517 10,538
Other current liabilities (613 ) - -
Other long-term liabilities (173,221 ) (173,685 ) (1,624 )
Total Y 1,760,390 Y 1,275,768 $ 11,923
Operating loss carryforwards for tax purposes of consolidated subsidiaries at
March 31, 2005 amounted to Y567,966 million ($5,308 million) and are available
as an offset against future taxable income of such subsidiaries. These
carryforwards expire mainly in five years. Realization is dependent on such
subsidiaries generating sufficient taxable income prior to the 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.
15. Consumption tax:
The consumption tax rate, with minor exceptions, for all taxable goods and
services is 5%. Consumption tax payable or receivable is determined based on
consumption taxes levied on operating revenues offset by consumption taxes
directly incurred by the company when purchasing goods and services.
16. Shareholders' equity:
According to the NTT Law, NTT must obtain authorization from the Minister of
Public Management, Home Affairs, 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.
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 Y15,600
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% 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 under generally
accepted accounting principles in the United States, Y234,624 million would have
been transferred from retained earnings to the applicable capital account.
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
F-44
--------------------------------------------------------------------------------
NIPPON TELEGRAPH AND TELEPHONE CORPORATION
AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
distributed upon the approval of the board of directors, if the Articles of
Incorporation provide for such interim cash dividends, subject to some
restrictions on the amount, and (iii) an amount equal to at least 10% of cash
dividends and other appropriations paid in cash be appropriated from retained
earnings to a legal reserve until the aggregated amount of capital surplus and
legal reserve equals 25% of stated capital computed in accordance with generally
accepted accounting principles in Japan.
The capital surplus and legal reserve, up to 25% of stated capital, are not
available for dividends but may be used to reduce a deficit or may be
transferred to stated capital. Any amount of the capital surplus and legal
reserve exceeding 25% of stated capital is available for distribution upon
approval of the shareholders' meeting.
Purchase by NTT of its own shares is subject to the prior approval of
shareholders at the ordinary general meeting of shareholders, which includes the
maximum number of shares purchased and the maximum total purchase amount. Once
such approval of shareholders is obtained, NTT may purchase its own shares at
any time during the period up to the conclusion of the next ordinary general
meeting of shareholders.
On May 14, 2002, the board of directors resolved the following proposals. The
proposals, which were discussed and resolved by the ordinary general meeting of
shareholders held on June 27, 2002, resolved that NTT could acquire up to a
total not exceeding 200,000 outstanding shares of its common stock at an amount
in total not exceeding Y100 billion until the conclusion of the ordinary general
meeting of shareholders to be held for the year ended March 31, 2003. On October
8, 2002, based on this resolution, NTT acquired 200,000 shares of its common
stock for a total purchase price of Y86,200 million.
Based on the resolution of the board of directors' meeting held on March 25,
2003, NTT retired 202,145 of its own shares (purchase price: Y87,182 million).
On May 13, 2003, the board of directors resolved the proposals that NTT may
acquire up to a total not exceeding 200,000 outstanding shares of its common
stock at an amount in total not exceeding Y100 billion until the conclusion of
the ordinary general meeting of shareholders to be held for the year ended March
31, 2004. The proposals were discussed and resolved by the ordinary general
meeting of shareholders held on June 27, 2003. Based on this resolution, NTT
acquired 190,460 shares of its common stock for a total purchase price of Y
99,999 million from October 15, 2003 through December 12, 2003.
Based on the resolution of the board of directors' meeting held on March 30,
2004, NTT retired 191,236 of its own shares (purchase price: Y100,391 million).
On May 14, 2004, the board of directors resolved the proposals that NTT may
acquire up to a total not exceeding 1,000,000 outstanding shares of its common
stock at an amount in total not exceeding Y600 billion ($5,607 million) until
the conclusion of the ordinary general meeting of shareholders to be held for
the year ending March 31, 2005. The proposals were discussed and resolved by the
ordinary general meeting of shareholders held on June 29, 2004. Based on this
resolution, NTT acquired 800,145 shares of its common stock for a total purchase
price of Y366,466 million ($3,425 million) on November 26, 2004.
The amount of statutory retained earnings of NTT available for the payments of
dividends to shareholders as of March 31, 2005 was Y1,417,774 million ($13,250
million). In accordance with customary practice in Japan, appropriations of
retained earnings 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 in the accompanying
consolidated financial statements at March 31, 2005 includes amounts
representing final cash dividends of Y44,819 million ($419 million), Y3,000
($28) per share, which were approved at the shareholders' meeting held on June
28, 2005.
F-45
--------------------------------------------------------------------------------
NIPPON TELEGRAPH AND TELEPHONE CORPORATION
AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
On May 12, 2005, the board of directors resolved the proposals that NTT may
acquire up to a total not exceeding 1,250,000 outstanding shares of its common
stock at an amount in total not exceeding Y600 billion ($5,607 million) until
the conclusion of the ordinary general meeting of shareholders to be held for
the year ending March 31, 2006. The proposals were discussed and resolved by the
ordinary general meeting of shareholders held on June 28, 2005.
Change in shares
Issued Treasury
shares stock
Balance at March 31, 2002 16,134,590 215
Acquisition of treasury stock through purchase of odd-lot shares 1,939
Purchase of treasury stock under resolution of the ordinary general meeting of 200,000
shareholders
Retirement of treasury stock (202,145 )
Balance at March 31, 2003 15,932,445 9
Acquisition of treasury stock through purchase of odd-lot shares 775
Purchase of treasury stock under resolution of the ordinary general meeting of 190,460
shareholders
Retirement of treasury stock (191,236 )
Balance at March 31, 2004 15,741,209 8
Acquisition of treasury stock through purchase of odd-lot shares 1,298
Purchase of treasury stock under resolution of the ordinary general meeting of 800,145
shareholder
Balance at March 31, 2005 15,741,209 801,451
F-46
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