As filed with the Securities and Exchange Commission on August 6, 2002
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 20-F
[ ] REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g)
OF THE SECURITIES EXCHANGE ACT OF 1934; or
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended March 31, 2002
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period ________ to ________
Commission File No. 0-12713
NIPPON DENKI KABUSHIKI KAISHA
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
NEC CORPORATION
(TRANSLATION OF REGISTRANT'S NAME INTO ENGLISH)
JAPAN
(JURISDICTION OF INCORPORATION OR ORGANIZATION)
7-1, Shiba 5-chome
Minato-ku, Tokyo 108-8001, Japan
81-3-3454-1111
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
Securities registered or to be registered pursuant to Section 12(b) of the Act.
Title of Each Class Name of each exchange on which registered
NONE N/A
Securities registered or to be registered pursuant to Section 12(g) of the Act.
American Depositary Shares
each representing one share of common stock of the Registrant
(Title of Class)
Securities for which there is a reporting obligation pursuant to Section 15(d)
of the Act.
None
(Title of Class)
Indicate the number of outstanding shares of each of the issuer's classes of
capital or common stock as of the close of the period covered by the annual
report.
1,656,268,189 shares of common stock
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark which financial statement item the registrant has
elected to follow:
Item 17 [ ] Item 18 [X]
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TABLE OF CONTENTS
Page
----
ITEM 1. Identity of Directors, Senior Management and Advisers 4
ITEM 2. Offer Statistics and Expected Timetable 4
ITEM 3. Key Information 4
ITEM 4. Information on the Company 14
ITEM 5. Operating and Financial Review and Prospects 26
ITEM 6. Directors, Senior Management and Employees 43
ITEM 7. Major Shareholders and Related Party Transactions 48
ITEM 8. Financial Information 49
ITEM 9. The Offer and Listing 50
ITEM 10. Additional Information 51
ITEM 11. Quantitative and Qualitative Disclosures about Market Risk 62
ITEM 12. Description of Securities Other than Equity Securities 63
ITEM 13. Defaults, Dividend Arrearages and Delinquencies 63
ITEM 14. Material Modifications to the Rights of Security Holders and Use of Proceeds 63
ITEM 15. [Reserved] 64
ITEM 16. [Reserved] 64
ITEM 17. Financial Statements 64
ITEM 18. Financial Statements 64
ITEM 19. Exhibits 64
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS F-1
2
REFERENCES
In this Form 20-F, the "Company," "we," "us," and "our" refer to NEC
Corporation and, unless the context requires otherwise, its consolidated
subsidiaries. The term "NEC" refers to NEC Corporation excluding its
subsidiaries and affiliates unless the context otherwise requires.
FORWARD-LOOKING STATEMENTS
This annual report contains forward-looking statements pertaining to
our technology, products and services, and business performance. Written
forward-looking statements may appear in other documents that we file with the
U.S. Securities and Exchange Commission, or SEC, and in reports to shareholders
and other communications. The U.S. Private Securities Litigation Reform Act of
1995 contains a safe-harbor for forward-looking statements, on which we rely in
making these disclosures.
Some of the forward-looking statements can be identified by the use of
forward-looking words such as "believes," "expects," "may," "will," "should,"
"seeks," "intends," "plans," "estimates," or "anticipates," or the negative of
those words, or other comparable words or phrases. You can also identify
forward-looking statements by discussions of strategy, plans, or intentions.
Forward-looking statements necessarily depend on assumptions, data, or
methods that may be incorrect or imprecise and we may not be able to realize
the results expected by them. You should not place undue reliance on
forward-looking statements, which reflect our analysis and expectations only.
Forward-looking statements are not guarantees of future performance and involve
inherent risks and uncertainties.
A number of important factors could cause our actual results to differ
materially from those in the forward-looking statements. Among the factors that
could cause actual results to differ materially from such statements include:
- global economic conditions and general economic conditions in
our markets;
- demand for, and competitive pricing pressure on, our products
and services;
- our ability to continue to win acceptance of our products and
services in highly competitive markets;
- our ability to restructure, or otherwise adjust, our
operations to reflect changing market conditions; and
- movement of currency exchange rates.
For a discussion of factors that could cause actual results to differ,
please see the discussion under "Item 3.D. Risk Factors" contained in this
annual report and in other information contained in our filings with the SEC.
Any forward-looking statements speak only as of the date on which they are
made, and we do not undertake any obligation to update or revise any of them,
whether as a result of new information, future events or otherwise.
3
PART I
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS.
Not applicable.
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE.
Not applicable.
ITEM 3. KEY INFORMATION.
A. SELECTED FINANCIAL DATA
You should read the selected consolidated financial data set forth
below in conjunction with "Item 5. Operating and Financial Review and
Prospects" and our consolidated financial statements and the related notes
included elsewhere in this annual report. These data are qualified in their
entirety by reference to all of that information.
The selected consolidated financial data as of and for the fiscal
years ended March 31, 1998, 1999, 2000, 2001, and 2002 have been derived from
our audited consolidated financial statements for those fiscal years.
Our consolidated financial statements are prepared in accordance with
accounting principles generally accepted in the United States, or U.S. GAAP.
YEAR ENDED MARCH 31,
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1998 1999 2000 2001 2002
------------ ------------ ------------ ------------- -------------
(MILLIONS OF YEN, EXCEPT PER SHARE AMOUNTS)
STATEMENT OF OPERATIONS DATA:
Sales and other income JPY 4,970,686 JPY 4,815,791 JPY 5,209,891 JPY 5,591,122 JPY 5,211,412
Net sales 4,901,122 4,759,412 4,991,447 5,409,736 5,101,022
Income (loss) before income
taxes 90,993 (224,726) 30,183 92,323 (461,183)
Provision (benefit) for income
taxes 41,514 (72,988) 32,484 56,308 (178,173)
Income (loss) before
cumulative effect of
accounting change 41,417 (151,261) 10,416 56,603 (309,425)
Net income (loss) 47,417 (151,261) 10,416 56,603 (312,020)
PER SHARE DATA:
Basic(1)
Income (loss) before
cumulative effect of
accounting change 29.78 (94.49) 6.40 34.55 (187.06)
Net income (loss) 29.78 (94.49) 6.40 34.55 (188.63)
Diluted(1)
Income (loss) before
cumulative effect of
accounting change 27.36 (94.49) 6.40 32.17 (187.06)
Net income (loss) 27.36 (94.49) 6.40 32.17 (188.63)
Cash dividends 11.00 8.50 6.00 11.00 6.00
OTHER FINANCIAL DATA:
Capital expenditures 385,346 253,623 281,639 346,491 200,067
Depreciation 285,862 306,442 260,942 250,138 234,738
R&D expenses 381,239 346,215 315,163 344,957 333,632
4
AS OF MARCH 31,
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1998 1999 2000 2001 2002
------------- ------------ ------------ ------------ ------------
(MILLIONS OF YEN)
BALANCE SHEET DATA:
Total assets JPY 5,074,478 JPY 5,045,934 JPY 4,608,964 JPY 4,823,624 JPY 5,010,883
Long-term liabilities 1,458,856 1,931,286 1,611,504 1,642,538 2,005,610
Shareholders' equity 1,162,287 927,345 976,853 915,036 564,915
(1) For the fiscal year ended March 31, 2002, the weighted average number
of our shares of common stock outstanding was 1,654,131,607, and
1,654,131,607 on a diluted basis.
EXCHANGE RATE INFORMATION
We maintain our accounts in Japanese yen. The following table sets
forth, for each period indicated, the noon buying rate in New York City for
cable transfers in yen as certified for customs purposes by the Federal Reserve
Bank of New York for Japanese yen, expressed in Japanese yen per $1.00. On July
26, 2002, the noon buying rate was $1.00 equals JPY 118.78 and the inverse noon
buying rate was JPY 100 equals $0.84.
YEAR 2002
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FEBRUARY MARCH APRIL MAY JUNE JULY(1)
---------- --------- --------- --------- ---------- - ---------
Yen exchange rate per U.S.$
High JPY 134.77 JPY 133.46 JPY 133.40 JPY 128.66 JPY 125.64 JPY 120.19
Low 132.26 127.07 128.13 123.08 119.38 115.71
(1) Period from July 1 to July 26.
YEAR ENDED MARCH 31,
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1998 1999 2000 2001 2002
---------- ----------- ---------- ---------- ----------
Yen exchange rate per U.S.$
Average (of month-end rates) JPY 123.57 JPY 128.10 JPY 110.02 JPY 111.64 JPY 125.05
B. CAPITALIZATION AND INDEBTEDNESS
Not applicable.
C. REASONS FOR THE OFFER AND USE OF PROCEEDS
Not applicable.
D. RISK FACTORS
Investing in our securities involves a high degree of risk. You should
carefully consider the risks described below as well as all the other
information in this annual report, including our consolidated financial
statements and related notes, and "Item 11. Quantitative and Qualitative
Disclosure about Market Risk," before investing in our securities. Our
business, operating results, and financial condition could be materially
adversely affected by any of these risks. The trading price of our securities
could decline due to any of these risks, and you may lose all or part of your
investment.
5
RISKS RELATED TO OUR INDUSTRY
WE ARE SUBJECT TO INTENSE COMPETITION IN MANY OF THE MARKETS IN WHICH WE
OPERATE, AND THIS MAY ADVERSELY AFFECT OUR ABILITY TO MAINTAIN OUR GROSS
MARGINS
Competition creates an aggressive pricing environment in many of the
markets in which we operate, particularly acute during market slowdowns, which
places significant pressure on our ability to maintain gross margins. Our
competitors may be more profitable or may be able to compete for customers more
effectively based on price. In recent years, the period of time between our
introduction of a new product and the introduction by others of the same or a
comparable product has declined. This has increased the risk that the products
we offer will become subject to intense price competition as others enter the
market.
We have many competitors, ranging from large multinational
corporations to an increasing number of relatively small, rapidly growing and
highly specialized companies. Unlike many of our competitors, however, we
operate in many businesses while competing with companies that specialize in
one or more of our product or service lines. As a result, we may not fund or
invest in some of our businesses as much as our competitors, and we may not be
able to change or take advantage of market opportunities as quickly or as well
as they do. In addition, some of our customers may be hesitant to share
information with us, or to allow us to collaborate in their design process,
because we may also compete with them in other areas.
THE CYCLICAL NATURE OF THE MARKET FOR SEMICONDUCTORS, AND THE PERIODIC
OVERCAPACITY THAT RESULTS FROM THIS, MAY SERIOUSLY HARM OUR RESULTS OF
OPERATIONS
The market for semiconductors is highly cyclical and has suffered
significant downturns from time to time, including at present. Past downturns
have been characterized by diminished product demand, accelerated erosion of
selling prices and production overcapacity. The current downturn may be
prolonged, and the volatility of the semiconductor market may lead to future
downturns, with similar adverse effects on our operating results.
The cyclical nature of the semiconductor market is due partly to
periods of production overcapacity. Both international semiconductor companies
and specialist semiconductor foundries have added significant capacity in
recent years. As a consequence, semiconductor production capacity may
periodically exceed the demand for semiconductor products, thus putting
downward pressure on selling prices and reducing our revenues.
OUR OPERATING RESULTS MAY SUFFER IF OUR PRODUCTION PROCESSES ENCOUNTER PROBLEMS
OR IF WE ARE NOT ABLE TO MATCH OUR PRODUCTION CAPACITY TO FLUCTUATING LEVELS OF
DEMAND
The computer, communications, semiconductor, and other markets in
which we operate are characterized by the introduction of products with short
life cycles in a rapidly changing technological environment. Production
processes are highly complex, require advanced and costly equipment and must
continuously be modified to improve yields and performance. Production
difficulties or inefficiencies can reduce yields or interrupt production, and
we may not be able to deliver products on time in a cost effective, competitive
manner. If production is interrupted, we may not be able to shift production to
other facilities on a timely basis, or customers may purchase products from
other suppliers. A resulting shortage of manufacturing capacity for some
products could adversely affect our ability to compete. Resulting reductions in
revenues and damage to customer relationships could be significant.
Japanese legal and practical restrictions on the termination of
employees, union agreements and other factors limit our ability to reduce our
production capacity and costs, during industry downturns, to adjust to reduced
levels of demand. In addition, during these periods customers generally do not
order products as far in advance of the scheduled shipment date as they do when
the industry is operating closer to capacity, making it difficult to forecast
production levels and revenues. Conversely, during periods of increased demand,
we may not have sufficient capacity to meet customer orders, making
relationships with
6
affected customers difficult. As a result, we may lose sales as customers turn
to our competitors that can satisfy their increased demand either immediately
or in the future.
IF WE FAIL TO ATTRACT, HIRE, AND RETAIN SKILLED PERSONNEL, WE MAY NOT BE ABLE
TO ACHIEVE OUR BUSINESS OBJECTIVES.
Like all technology companies, we must compete for talented employees
to develop our products, services, and solutions in a market where the demand
for such individuals exceeds the number of qualified candidates. As a result,
our human resources organization focuses significant efforts on attracting and
retaining individuals in key technology positions. If we experience a
substantial loss of, or an inability to attract, talented personnel, the
resulting talent gaps could affect our ability to meet our business objectives.
WEAK ECONOMIC CONDITIONS IN JAPAN AND WORLDWIDE MAY HARM OUR BUSINESS
We are very dependent on the Japanese market. In the fiscal year ended
March 31, 2002, our sales in Japan accounted for 77% of our total net sales.
The outlook for the Japanese economy in terms of public and private sector
capital investment, consumer spending, and foreign currency exchange rates is
highly uncertain. The length and severity of a continuing weakness in the
Japanese economy could have a significant impact on our financial results.
Uncertainty in the Japanese economy means that it is difficult to estimate the
level of growth for the economy. Because all components of our budgeting and
forecasting depend upon estimates of growth in the markets we serve, the
prevailing economic uncertainty makes estimates of future income and required
expenditures even more difficult to make than usual. If we are mistaken in our
budgeting and forecasting, it will be more difficult for us to respond
appropriately to a changing economic environment.
We depend also on markets outside Japan. In the fiscal year ended
March 31, 2002, 23% of our total net sales were generated outside Japan. Our
business is therefore subject to risks involved in international markets,
including negative economic developments in foreign economies. Our results of
operations also could be hurt if demand for the products or services made or
offered by our customers decreases due to adverse economic conditions in any of
the regions where they sell or offer their own products or services. In recent
months, the telecommunications and technology markets have weakened
significantly in the U.S. and Europe. Further deterioration in these markets
would adversely affect our results of operations.
During the fiscal year ended March 31, 2002, we implemented various
restructuring initiatives to respond to adverse market conditions. We incurred
restructuring expenses of JPY 285.9 billion. We are also implementing additional
restructuring initiatives in the fiscal year ending March 31, 2003. See "Item
5.A. Operating Results -- Significant Measures to Counter Structural Changes in
the Industry and a Slowdown in Markets" and "-- Restructurings of our NEC
Electron Devices Businesses."
WE FACE REGULATORY CHANGE AND UNCERTAINTY, AS WELL AS POTENTIAL LEGAL
LIABILITY, IN MANY COUNTRIES IN WHICH WE OPERATE
Our business is subject to various risks associated with unexpected
regulatory changes, uncertainty in the application of laws and governmental
policies, and uncertainty relating to legal liabilities in many of the
countries in which we operate. Substantial changes in the regulatory or legal
environments in which we operate could hurt our business, operating results,
and financial condition.
Changes in Japanese and international telecommunications regulations
and tariffs, including those related to the Internet-related businesses and
technologies, could affect the sales of our products or services and this could
adversely affect our business, operating results, and financial condition.
Our operations are subject to many environmental laws and regulations
governing, among other things, air emissions, wastewater discharges, the use
and handling of hazardous substances, waste disposal, product recycling, and
soil and ground-water contamination. We face risks of environmental liability
in our current and historical manufacturing activities. Costs associated with
future additional environmental
7
compliance or remediation obligations could adversely affect our business,
operating results, and financial condition.
WE MAY BE SUBJECT TO PRODUCT LIABILITY CLAIMS THAT COULD RESULT IN SIGNIFICANT
DIRECT OR INDIRECT COSTS TO US
There is a risk that defects may occur in our products and services.
Many of our products and services are used in situations where the adverse
consequences of failure would be severe, so called "mission-critical" uses,
exposing us in some cases to even greater risk. The occurrence of these defects
could make us liable for damages caused by the defects, including consequential
damages. Negative publicity concerning these problems could also make it harder
for us to get customers to buy our products and services. Both could hurt our
business, operating results, and financial condition.
OUR OPERATING AND FINANCING ACTIVITIES EXPOSE US TO FOREIGN CURRENCY EXCHANGE
AND INTEREST RATE RISKS, WHICH MAY ADVERSELY AFFECT OUR REVENUES AND
PROFITABILITY
We are exposed to risks of foreign currency exchange rate
fluctuations. Our consolidated financial statements, which are presented in
Japanese yen, are affected by foreign exchange rate changes. These changes can
affect the yen value of our equity investments and monetary assets and
liabilities arising from business transactions in foreign currencies. They can
also affect the costs and sales proceeds of products or services that are
denominated in different currencies. Despite our measures to reduce, or hedge
against, foreign currency exchange risks, foreign exchange rate fluctuations
may hurt our business, operating results, and financial condition.
We are also exposed to risks of interest rate fluctuations, which may
affect our overall operational costs and the value of our financial assets and
liabilities, in particular long-term debts. Despite our measures to hedge a
portion of our exposure to fluctuations in interest rates, changes in interest
rates may increase our operational costs, reduce the value of our financial
assets or increase the value of our liabilities.
RISKS RELATED TO OUR BUSINESS
WE MAY NOT SUCCEED IN IMPLEMENTING OUR REORGANIZATION AND STRATEGY
We are continuing to implement our business strategy and make
significant changes in our corporate organization, including
- focusing on and promoting products and services related to
the Internet, mobile communications, and broadband
technologies as our core business,
- restructuring unprofitable operations,
- forming strategic alliances and joint ventures, and
- transferring or taking public some businesses that we believe
may perform better on a stand-alone basis.
We may not be successful in achieving all of these goals or realizing
the benefits that we expect from them. For example, although we believe that
the Internet-related business has great potential for growth, it may not grow
as much as we expect. Similarly, a lack of interested buyers, or continued
weakness in the equity capital markets, may undermine our efforts to sell or
take public those of our operations that we have identified for possible
disposition. In addition, severe competition from existing and new competitors
or costs related to implementing our strategy may limit the benefits we are
able to realize from our strategy.
8
IF WE FAIL TO KEEP PACE WITH TECHNOLOGICAL ADVANCES IN OUR INDUSTRY, OR IF WE
PURSUE TECHNOLOGIES THAT DO NOT BECOME COMMERCIALLY ACCEPTED, CUSTOMERS MAY NOT
BUY OUR PRODUCTS AND SERVICES AND OUR REVENUE AND PROFITABILITY MAY DECLINE
The markets for the products and services that we offer are
characterized by rapidly changing technology, evolving technical standards,
changes in customers' preferences, and the frequent introduction of new
products and services. The development and commercialization of new
technologies and the introduction of new products and services will often make
existing products and services obsolete or unmarketable. Our competitiveness in
the future will depend at least in part on our ability to:
- keep pace with rapid technological developments and maintain
technological leadership;
- enhance existing products and services;
- develop and manufacture innovative products in a timely and
cost-effective manner;
- utilize or adjust to new products, services, and
technologies;
- attract and retain highly capable technical and engineering
personnel;
- accurately assess the demand for, and perceived market
acceptance of, new products and services that we develop;
- avoid delays in developing new products or delays in shipping
new products;
- address increasingly sophisticated customer requirements; and
- have our products selected for design in our customers'
future products.
We may not be successful in identifying and marketing product and
service enhancements, or offering and supporting new products and services, in
response to rapid technological changes and changes in customers' preferences.
If we fail to keep up with these technological changes and changes in
customers' preferences, our business, operating results, and financial
condition will be significantly harmed.
The process of developing new products entails many risks. The
development process can be lengthy and costly, and requires us to commit a
significant amount of resources well in advance of sales. Technology and
standards may change while we are in development, rendering our products
outdated or uncompetitive before their introduction. Our products, some of
which contain both hardware and software, may contain undetected errors that
may be found after the products' introduction and shipment.
OUR REVENUES AND PROFITABILITY CAN FLUCTUATE FROM PERIOD TO PERIOD AND ARE
OFTEN DIFFICULT TO PREDICT FOR PARTICULAR PERIODS DUE TO FACTORS BEYOND OUR
CONTROL
Our results of operations for any quarter or year are not necessarily
indicative of results to be expected in future periods. Our operating results
have historically been and are expected to continue to be subject to quarterly
and yearly fluctuations as a result of a number of factors, including:
- the introduction and market acceptance of new technologies,
products and services;
- variations in product costs and the mix of products sold;
- the size and timing of customer orders, which in turn will
often depend upon the success of our customers' business or
specific products or services;
9
- the impact of acquired businesses and technologies;
- manufacturing capacity and lead times; and
- fixed costs.
There are other trends and factors beyond our control which may affect
our operations and make it difficult to predict operating results for a
particular period. These include:
- the speed and direction of the development of the Internet;
- the timing and pace of the introduction of broadband
communications technologies into the Internet and of the
introduction of appealing applications that can only be
supported effectively through broadband connections;
- the timing of the introduction and market acceptance of
next-generation mobile communications standards and
technologies in Japan and in other major markets;
- adverse changes in the conditions in the markets for
semiconductors, PCs, mobile handsets, and other products and
services that we offer;
- governmental decisions regarding the development and
deployment of communications infrastructure, including the
size and timing of governmental expenditures in these areas;
- the size and timing of capital expenditures by our customers;
- inventory practices of our customers;
- conditions in the broader markets for information technology
and communications, and the Japanese or global economy
generally;
- changes in governmental regulation or intervention affecting
communications, data networking or the Internet;
- adverse changes in the public and private equity and debt
markets and the ability of our customers and suppliers to
obtain financing or to fund capital expenditures; and
- adverse changes in the credit quality of our customers and
suppliers.
These trends and factors could have a material adverse effect on our
business, operating results and financial condition.
WE MAY NOT SUCCEED IN EXECUTING OUR GROWTH STRATEGIES OUTSIDE OF JAPAN
Our strategy includes expanding our business in markets outside of
Japan. In many of these markets, we face barriers in the form of long-standing
relationships between our potential customers and their local suppliers and
protective regulations. In addition, pursuing international growth
opportunities may require us to make significant investments long before we
realize returns on the investments, if any. Increased investments may result in
expenses growing at a faster rate than revenues. Our overseas projects and
investments could be adversely affected by:
- reversals or delays in the opening of foreign markets to new
participants;
- exchange controls;
10
- restrictions on foreign investment or the repatriation of
profits or invested capital;
- nationalization of local industry;
- changes in export or import restrictions;
- changes in the tax system or rate of taxation in the
countries where we do business; and
- economic, social, and political risks.
In addition, difficulties in foreign financial markets and economies
and of foreign financial institutions, particularly in emerging markets, could
adversely affect demand from customers in the affected countries. Because of
these factors, we may not succeed in expanding our business in international
markets. This could hurt our business growth prospects and results of
operations.
IF WE ARE UNABLE TO PROTECT OUR INTELLECTUAL PROPERTY RIGHTS, OUR BUSINESS AND
PROSPECTS MAY BE HARMED
We depend on our proprietary technology and our ability to obtain
patents, licenses, and other intellectual property rights covering our
products, services, business models, and design and manufacturing processes.
The process of seeking patent protection can be long and expensive. Although we
have approximately 72,000 patents, any of our patents could be challenged,
invalidated, or circumvented. The fact that we hold many patents or other
intellectual property rights does not ensure that the rights granted under them
will provide competitive advantages to us. For example, the protection afforded
by our intellectual property rights such as patents, patent applications, and
copyrights may be undercut by rapid changes in technologies in the industries
in which we operate. Similarly, there can be no assurance that claims allowed
on any future patents will be sufficiently broad to protect our technology.
Effective patent, copyright, and trade secret protection may be unavailable or
limited in some countries, and our trade secrets may be vulnerable to
disclosure or misappropriation by employees, contractors, and other persons.
Litigation, which could consume financial and management resources, may be
necessary to enforce our patents or other intellectual property rights or to
defend against claims of infringement brought against us by others.
WE MAY BE SUBJECT TO INTELLECTUAL PROPERTY LITIGATION AND INFRINGEMENT CLAIMS,
WHICH COULD CAUSE US TO INCUR SIGNIFICANT EXPENSES OR PREVENT US FROM SELLING
OUR PRODUCTS
Many of our products are designed to include software or other
intellectual property licenses from third parties. Competitors' protected
technology may be unavailable to us or be made available to us only on
unfavorable terms and conditions. While it may be necessary in the future to
seek or renew licenses relating to various aspects of our products, we believe
that, based upon past experience and standard industry practice, these licenses
generally can be obtained on commercially reasonable terms. There can be no
assurances, however, that we will be able to obtain, on commercially reasonable
terms or at all, from third parties the licenses we need in the future. Due to
the existence of a large number of patents in our field and the rapid rate of
issuance of new patents, it is not economically practical to determine in
advance whether a product or any of its components infringe the patent rights
of others.
From time to time, we are sued by others or receive notices from
others regarding patent and other intellectual property claims. Whether or not
these claims have merit, they may require significant resources to defend. If
an infringement claim is successful and we are unable to obtain the license for
the infringed technology or substitute similar non-infringing technology, our
business could be adversely affected.
11
IF OUR FACILITIES WERE TO EXPERIENCE CATASTROPHIC LOSS DUE TO EARTHQUAKE, OUR
OPERATIONS WOULD BE SERIOUSLY HARMED
Several of our facilities in Japan could be subject to catastrophic
loss caused by earthquake damage to their location. We have significant
facilities in areas with above average seismic activity. If any of these
facilities were to experience a catastrophic loss, it could disrupt our
operations, delay production, shipments and revenue, and result in large
expenses to repair or replace the facility.
THE FAILURE OF OUR SUPPLIERS TO DELIVER RAW MATERIALS, COMPONENTS, EQUIPMENT,
AND OTHER SUPPLIES AS EXPECTED COULD HURT OUR BUSINESS
Our manufacturing operations depend on obtaining deliveries of raw
materials, components, equipment, and other supplies in a timely manner. In
some cases, we purchase on a just-in-time basis. Because the products that we
purchase are often complex, it may be difficult for us to substitute one
supplier for another or one product for another. Some products are only
available from a limited number of suppliers or a single supplier. Although we
believe that supplies of the raw materials, components, equipment, and other
supplies we use are currently adequate, shortages could occur in critical
materials due to interruption of supply or increased industry demand. Our
results of operations would be hurt if we could not obtain adequate delivery of
these supplies in a timely manner or if we had to pay significantly more for
them.
Reliance on suppliers and industry supply conditions generally involve
several risks, including:
- the possibility of defective raw materials, components,
equipment, or other supplies, which can adversely affect the
reliability and reputation of our products;
- a shortage of raw materials, components, equipment, or other
supplies, and reduced control over delivery schedules, which
can adversely affect our manufacturing capacity and
efficiencies; and
- an increase in the cost of raw materials, components,
equipment, and other supplies, which can adversely affect our
profitability.
WE RELY ON OUR STRATEGIC PARTNERS, AND OUR BUSINESS COULD SUFFER IF OUR
STRATEGIC PARTNERS HAVE PROBLEMS OR OUR RELATIONSHIPS WITH THEM CHANGE
As part of our strategy, we have entered into a number of long-term
strategic alliances with leading industry participants, both to develop new
technologies and products and to manufacture existing and new products. If our
strategic partners encounter financial or other business difficulties, if their
strategic objectives change or if they perceive us no longer to be an
attractive alliance partner, they may no longer desire or be able to
participate in our alliances. Our business could be hurt if we were unable to
continue one or more of our alliances.
POTENTIAL ACQUISITIONS AND INVESTMENTS MAY REQUIRE US TO INTEGRATE NEW
TECHNOLOGIES, OPERATIONS, AND SERVICES
From time to time we consider opportunities to expand our business
through acquisitions and investments. Any acquisition we pursue exposes us to
the risk that we might be unable to integrate new businesses with our culture
and strategies. We also cannot be certain that we will be able to achieve the
benefits we expect from a particular acquisition. For example, we may fail to
retain the customers of the businesses we acquire, and we may fail to retain
key employees. Acquisitions may also strain our managerial and operational
resources, as our managers and employees may be diverted by the challenge of
managing new operations from monitoring and improving our operations in our
existing businesses. Our business, operating results, and financial condition
may suffer if we fail to coordinate our resources effectively to manage both
our existing businesses and any businesses we may acquire.
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WE CONDUCT A SUBSTANTIAL AMOUNT OF BUSINESS WITH THE NTT GROUP OF COMPANIES,
INCLUDING NTT DOCOMO, INC., AND OUR BUSINESS COULD SUFFER IF THEY ENCOUNTER
BUSINESS PROBLEMS OR DECIDE TO REDUCE THEIR BUSINESS WITH US
Approximately 16% of our net sales in the fiscal year ended March 31,
2002 were derived from sales to the Nippon Telegraph and Telephone Corporation,
or NTT, group of companies, including NTT DoCoMo, Inc. NTT group is the largest
provider of wireline and wireless voice, data, Internet, and related
telecommunications services in Japan. NTT DoCoMo is the leading mobile
communications service provider in Japan. If either of these companies were to
suffer significant business or financial problems, they might reduce their
level of capital expenditures or current procurement, which could adversely
affect our business, operating results, and financial condition. In addition,
although at present none of the NTT group companies engages in any material
manufacturing, if in the future any NTT group company were to begin
manufacturing products that we supply, or to acquire one of our competitors,
this could adversely affect our business.
WE ARE EXPOSED TO THE RISK THAT OUR CUSTOMERS, INCLUDING THOSE TO WHOM WE HAVE
PROVIDED VENDOR FINANCING, MAY ENCOUNTER FINANCIAL DIFFICULTIES
We sometimes provide vendor financing to our customers, or provide
guarantees to banks or trading companies that have provided such financing. In
addition, many of our customers purchase products and services from us on
payment terms that do not provide for immediate payment. If our customers to
whom we have extended or guaranteed vendor financing, or from whom we have
substantial accounts receivable, encounter financial difficulties and are
unable to make payments on time, our business, operating results, and financial
condition could be adversely affected.
OUR PENSION AND SEVERANCE PLANS ARE CURRENTLY UNDERFUNDED DUE TO THE DECLINE IN
THE VALUE OF SECURITIES CONSTITUTING PLAN ASSETS, AND SATISFYING OUR
OBLIGATIONS UNDER THESE PLANS MAY COST MORE THAN WE EXPECT
At March 31, 2002, we had total outstanding benefit obligations,
calculated in accordance with U.S. GAAP, of JPY 1,396.1 billion. Although we
fund our pension plans in conformity with the regulatory requirements where
applicable, at March 31, 2002 the fair value of plan assets was JPY 799.4
billion. Consequently, as of that date we had JPY 596.7 billion of unfunded
pension plan obligations.
Primarily because of the decline in Japanese stock prices during the
fiscal year ended March 31, 2002, the value of plan assets at the beginning of
fiscal year ended March 31, 2002, declined by JPY 50.8 billion, more than
offsetting our aggregate contributions to plan assets during the course of the
year. Further declines in the Japanese stock market would reduce the value of
the plan assets, and increase the level of our plan underfunding.
Under our pension and severance plans, we use a discount rate of 3.5%
to measure benefit obligations. In accordance with U.S. GAAP, unrecognized
prior service cost and actuarial loss have been amortized using the
straight-line method over the average remaining service period of employees
expected to receive benefits under such plans. The amount of actuarial loss may
change depending on any future change in the discount rate and other factors
such as the return on plan assets. If we were to determine that a lower
discount rate should be used to measure benefit obligations, the current amount
of our outstanding pension benefit obligations would increase. Further, an
increase in the amount of unrecognized prior service cost and actuarial loss
increases the recorded expenses of the following years.
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ITEM 4. INFORMATION ON THE COMPANY.
A. HISTORY AND DEVELOPMENT OF THE COMPANY
NEC's legal and commercial name is "Nippon Denki Kabushiki Kaisha" in
Japanese or NEC Corporation in English. NEC was incorporated on July 17, 1899
as a joint stock corporation ("kabushiki kaisha") in Japan under the Japanese
Commercial Code.
NEC's principal executive offices are located at 7-1, Shiba 5-chome,
Minato-ku, Tokyo 108-8001, Japan. NEC's telephone number is +81-3-3454-1111.
HISTORY
NEC was formed as a joint venture between Western Electric Company of
the United States and two Japanese individuals. Initially, NEC acted as a sales
agent for telephone equipment manufactured by Western Electric, but it soon
commenced production of similar equipment in Japan.
In 1925, Western Electric's interests in its foreign affiliates,
including NEC, were sold to International Telephone & Telegraph Corporation, or
ITT. In 1932, the Sumitomo family holding company acquired a substantial stock
interest in NEC, which was sold to the public in 1948, following the passage of
Japanese anti-monopoly laws. ITT's shareholding was successively reduced from
1958 and was completely disposed of during 1978.
We expanded our business lines to include the production of
transmission equipment in 1929, radio broadcast equipment in 1930 and radio
communications equipment in 1932. In 1958, we started mass production of
transistors and, in the same year, we produced the NEAC 2201, the first fully-
transistorized commercial computer in the world.
We commenced R&D activities relating to integrated circuits in 1960.
During the 1960s we entered the field of satellite communications and
established our first post-war overseas manufacturing subsidiary.
In the 1970s, we significantly increased our production of computers,
semiconductors, and other electron devices. We began integrating our computer
and communications products as significant further advances were achieved in
technology and as we increased our allocation of resources to R&D activities.
Other important developments during this period include the establishment of
our position as a world leader in specific high technology markets, such as
satellite communication earth stations and certain semiconductor devices, the
diversification of our customer base, particularly in the Japanese private
sector and overseas, and the expansion of our manufacturing facilities, both in
Japan and abroad.
In the 1980s, we pursued a policy of globalization to conduct our
diversified manufacturing and sales operations closer to our customers. We
added a total of 50 subsidiaries and affiliates, 12 for manufacturing and 38
for marketing and other services during the 1980s in overseas markets.
During the 1990s, we expanded our global operations and increased
efficiency, in order to enhance global competitiveness and to respond to rapid
changes in market demand. We expanded and upgraded some of our manufacturing
facilities, promoted strategic alliances with major companies and augmented our
R&D activities in the United States and Europe.
In 2000, our operations were reorganized into three in-house
companies, NEC Solutions, NEC Networks, and NEC Electron Devices, each of which
focuses on serving the needs of a particular market and customer base.
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CAPITAL EXPENDITURES
The following table sets forth a breakdown of our annual capital
expenditures (on an accrual basis) during the three years ended March 31, 2002:
YEAR ENDED MARCH 31,
-----------------------------------------
2000 2001 2002
----------- ----------- -----------
(Millions of yen)
NEC Solutions JPY 31,662 JPY 26,947 JPY 34,576
NEC Networks 32,955 44,882 46,689
NEC Electron Devices 171,857 239,536 96,558
Others 17,713 20,058 6,726
----------- ----------- -----------
Total 254,187 331,423 184,549
Corporate 27,452 15,068 13,953
----------- ----------- -----------
Electronics business Total 281,639 346,491 198,502
Leasing business -- -- 1,565
----------- ----------- -----------
Consolidated total JPY 281,639 JPY 346,491 JPY 200,067
=========== =========== ===========
During the three years ended March 31, 2002, our capital expenditures
were principally devoted to the expansion and upgrading of our manufacturing
facilities for semiconductors.
Capital expenditures during the fiscal year ended March 31, 2002
declined by 42%, compared with the fiscal year ended March 31, 2001, to JPY
200.1 billion. Major capital expenditures in the fiscal year ended March 31,
2002 included investment in manufacturing facilities for system LSIs in Japan,
which contributed to a 60% decrease in capital expenditures for NEC Electron
Devices to JPY 96.6 billion. For the fiscal year ended March 31, 2002, NEC
Solutions invested in equipment for the expansion of its BIGLOBE services as
well as for R&D and manufacturing of computers as servers and storage systems.
NEC Networks invested in equipment for the manufacturing of communications
equipment and for R&D of optical network systems and W-CDMA mobile
communications systems.
At the start of our current fiscal year, we established a capital
expenditure budget devoted to investing in equipment for continuing R&D of
computers, optical network systems and W-CDMA systems, and system LSIs, as well
as for the manufacturing of our various products. We continuously monitor our
capital expenditures and evaluate whether adjustments to our budget are
necessary in light of market conditions and other economic factors. We expect to
spend approximately JPY 16.6 billion in capital expenditures during the fiscal
year ending March 31, 2003.
B. BUSINESS OVERVIEW
We are a leading provider of systems, components, services, and
integrated solutions for computing and communications applications. Our
understanding of our customers' needs together with our industry expertise,
technical capabilities, and broad product portfolio enable us to offer
computing, communications, and device solutions that address their core
operational requirements. By focusing on high-growth market opportunities and
building on our expertise in broadband and mobile technologies, we seek to
further develop our leadership position as an innovative provider of computing
and communications solutions.
In April 2000, we reorganized our businesses into three in-house
companies, which correspond to our three principal business segments:
- NEC SOLUTIONS delivers highly reliable Internet-related
services and other computing solutions to enterprise,
government, and individual customers by providing software,
hardware, and services necessary to design, integrate, and
operate these elements. The products and services of this
in-house company include: systems integration services,
software, Internet-related services, and maintenance and
customer support services, as well as PCs, mainframe
computers, servers, workstations, supercomputers, and storage
systems. In
15
the fiscal year ended March 31, 2002, we derived JPY 2,209.1
billion of our sales, and realized a segment profit of JPY
75.4 billion, from NEC Solutions.
- NEC NETWORKS designs and provides wireline network
infrastructure, mobile and wireless network infrastructure,
and mobile terminals, which enable our customers, primarily
network service providers, to build and operate their
networks with a high degree of service quality and
reliability and in a cost-effective manner. Working closely
with our customers, we design and deploy network systems and
products including: optical network systems, switching
systems, Internet Protocol, or IP, network systems, mobile
and wireless network systems, and mobile terminals. In the
fiscal year ended March 31, 2002, we derived JPY 1,957.2
billion of our sales, and realized a segment profit of JPY
53.4 billion, from NEC Networks.
- NEC ELECTRON DEVICES is a leading provider of semiconductors,
displays, and other electronic components used in computers,
communications products, digital consumer electronic
products, and automobiles. Our semiconductor products include
system LSIs, general-purpose semiconductors such as display
driver LSI, transistors and compound semiconductors, and
memory devices. In the fiscal year ended March 31, 2002, we
derived JPY 842.9 billion of our sales, and incurred a
segment loss of JPY 148.2 billion, from NEC Electron Devices.
In the fiscal year ended March 31, 2002, we had net sales of JPY
5,101.0 billion, of which we generated approximately 77% in Japan and the
balance overseas. As of March 31, 2002, we employed approximately 142,000
people worldwide and had manufacturing, sales, or R&D consolidated subsidiaries
in Japan and overseas.
NEC SOLUTIONS
NEC Solutions delivers highly reliable computing solutions to
enterprise, government, and individual customers by providing software,
hardware, and services necessary to design, integrate, and operate these
elements. Our focus has been and will continue to be to formulate customized
solutions packages, taking advantage of the comprehensive understanding of the
evolving needs of customers and the industry and technological expertise we
have acquired through our long history of technology deployments.
Systems Integration Services. Through our systems integration
services group, which has approximately 13,000 highly qualified systems
engineers, we provide our customers with end-to-end systems design,
development, deployment, and systems operation solutions. We deliver systems
integration services directly and through NEC Soft, Ltd. and other
subsidiaries. Our services consist of:
- Systems design, development, and deployment services: We
design, develop, and deploy complex software applications and
the hardware configurations that meet the specific
requirements of our customers.
- Operational support services: We provide operational
support services, including system problem diagnosis and
correction, so that customers can effectively operate their
computer systems.
- Consulting services: We provide consulting services on
systems architecture design and technology planning,
including the evaluation and selection of technologies and
platforms, to our customers so that they can meet their
business and financial objectives.
Software. We develop and provide software products primarily for use
in our computers. Software products include operating systems, middleware for
managing large-scale distributed data processing systems, and application
software. We continue to further develop the capabilities of our middleware,
which enables the more rapid, cost-effective integration of different systems,
protocols, and
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technologies. We use a combination of custom designed and third party software
to take advantage of the various products and technologies on the market.
Internet-related Services. We offer a broad range of
Internet-related services through the infrastructure of our BIGLOBE service,
which is a leading Internet service provider, or ISP, in Japan. BIGLOBE has
over 200 access points or points of presence throughout Japan. Through BIGLOBE,
we also offer value-added services such as application services, housing, and
hosting.
Maintenance and Customer Support Services. We offer maintenance and
support services to our customers mainly through our subsidiary, NEC Fielding,
Ltd., one of Japan's largest technical support companies, with over 430 service
centers.
Personal Computers and Peripheral Products. NEC Solutions develops,
manufactures, and markets PCs, PC peripheral products and personal digital
assistance, or PDAs. We produce a wide range of PC products including desk-top
PCs and notebook PCs, targeted at corporate customers as well as for the
consumer markets. We offer PCs with wireless connectivity, multimedia functions,
and advanced security functions. We are a leading supplier of PCs in Japan.
Mainframes, Servers and Workstations, Supercomputers, and Storage
Systems. NEC Solutions develops and manufactures mainframe computers, UNIX
servers and workstations, PC servers and workstations, supercomputers, storage
systems, and other products for private companies and government agencies
mainly in Japan. We are a leading supplier of PC servers, PC workstations, and
mainframe computers in Japan.
- Mainframe computers: Our Parallel ACOS series of mainframe
computers employ parallel processing technology for use in
mission-critical systems. We focus on high performance
products that can also integrate easily with open servers.
- Servers and workstations: Our high-performance,
high-scalability UNIX servers are used as core servers in a
wide variety of applications, from network management to
operating critical business systems. We are working with
Hewlett-Packard Company to develop servers which employ Intel
Corporation's 64-bit processors, allowing for faster
processing speeds. We also worked with Intel to create the
Express 5800 series of PC servers and workstations which run
a Windows operating system and give customers access to a
broad range of applications. We offer fault-tolerant PC
servers developed together with Stratus Technologies
International, S.a r.l. and Intel, that provide high levels
of resiliency against failure. The combination of de facto
open platform components and a Windows operating system
results in a low cost fault-tolerant solution.
- Supercomputers: Our SX-series of vector-processing
supercomputers meet intensive, high-speed processing
requirements for specialized applications that require
significant calculating power, such as weather forecasting,
structural analysis, and fluid dynamics. The SX-series is
used by research institutes, universities, and companies,
mainly in Japan and Europe. We formed an alliance with Cray
Inc., for the marketing of our SX-series of supercomputers,
particularly in the North American market.
- Storage systems: We manufacture various storage systems,
including disk array, tape storage, and others. Our iStorage
series of storage systems is designed to meet the expanding
demand for increased capacity, reliability, performance, and
endurance. We are working with VERITAS Software Corporation
and Oracle Corporation Japan to offer storage solutions using
all three companies' products and technologies.
In addition, our other products include terminals such as key
telephone systems and point-of-sale terminals.
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NEC NETWORKS
NEC Networks is a leading supplier of wireline network infrastructure,
mobile and wireless network infrastructure, and mobile terminals, which enable
our customers, primarily network service providers, to build and operate their
networks with a high degree of service quality and reliability in a
cost-effective manner.
Optical and Other Network Systems. NEC Networks manufactures a wide
range of optical network systems. We are one of the top providers of these
systems in Japan. Optical network systems use light to transmit and process
large volumes of information, including voice, video, and data through
fiber-optic cables. These networks vary in size, purpose, and geographic scope.
Our optical and other network systems products include:
- wavelength division multiplexing, or WDM, systems
(terrestrial and submarine),
- optical access systems,
- synchronous digital hierarchy, or SDH, and synchronous
optical network, or SONET, systems, and
- other network systems.
Wavelength division multiplexing systems. We have a leading
position in WDM-based optical network systems for both terrestrial and
submarine applications. WDM involves combining beams of light of
slightly different wavelengths through a single fiber with each
wavelength carrying its own stream of information. This increases the
amount of traffic that can travel over existing optical fiber cable
infrastructure, allowing existing infrastructure to be used more
efficiently.
In terrestrial WDM systems, we supply telecommunications
operators within and outside Japan. Our products include state of the
art technology such as a 160-channel WDM system with a maximum
transmission capacity of 1.6 terabit per second, or Tbps. We also
succeeded in transmitting 10.9 Tbps data using a WDM system in March
2001, and we aim to shorten development time for subsequent
generations of systems through partnerships. Our current partnerships
include those with WaveSplitter Technologies, Inc., a U.S. venture
business for optical fiber technology, with Hitachi, Ltd. for ultra
high-speed optical network systems, and with Tellium, Inc. for
integrated optical network systems combining WDM and optical
switching.
In WDM submarine cable systems, we offer highly-competitive
full turn-key solutions. In addition to supplying WDM systems, we
offer system construction from deep sea cable installation to marine
operation and maintenance. We currently supply submarine cable systems
that will provide links between several countries, mainly in the
Asia-Pacific area. We seek to provide integrated submarine cable
networks through our strategic alliances with Global Marine Systems,
Ltd., a leader in marine installation and operation and OCC
Corporation, a submarine cable supplier.
Optical access systems. We are providing optical line
terminals and optical network terminals for NTT's Fiber-to-the-Home,
or FTTH, service, which was launched in July 2001. FTTH technology
will allow significant increases in data transmission capabilities
compared to traditional copper lines. We are working with our
subsidiary, NEC Eluminant Technologies, Inc. of the United States, to
provide asynchronous transfer mode-passive optical network, or
ATM-PON, systems.
Synchronous digital hierarchy and synchronous optical
network Systems. SDH and SONET refer to standards for transmission of
digital signals over optical fiber. These standards
18
helped revolutionize the performance and cost of telecommunications
networks based on optical fiber. We develop and manufacture SDH and
SONET products both for terrestrial and submarine use. We developed
and have recently begun to distribute "SpectralWave U-Node (Universal
Node)," a next-generation SDH/SONET high-speed optical transmission
system. SpectralWave U-Node enables efficient, high-speed, and highly
reliable data transmission. It also provides interfaces with many
different systems, including gigabit ethernet interface utilizing
virtual concatenation and generic framing procedure, and boasts
smaller size and reduced power consumption.
Other network systems. We develop and manufacture:
- x digital subscriber line, or xDSL, systems and
other wired access systems; and
- cable television, or CATV, systems and modems, and
teleconferencing systems.
xDSL is a technology that allows more data to be sent over
existing copper telephone lines. The system uses a modem technology
that converts existing twisted-pair telephone lines into access paths
for various high-speed communications.
The hybrid fiber and coaxial CATV system, which transmits
video and other signals through a combination of optic fibers and
coaxial cables, is one of the technologies that can support a variety
of multimedia products. The system allows long-distance, multi-channel
transmission and reception of video signals.
Switching systems and Internet Protocol network systems. We develop
and manufacture switching systems, Internet Protocol, or IP, network systems,
and various related telecommunications equipment. These systems include:
- public switching systems;
- IP switching routers and network infrastructure servers;
- enterprise networking systems; and
- asynchronous transfer mode, or ATM, switching systems.
We provide reliable, high-speed public switching systems for Japanese
and overseas telecommunications operators. Our switching systems feature
wire-speed packet transfer, which eliminate bottlenecks even during periods of
high traffic, as well as multi-service converged environments that are fully
scalable and configurable.
We also design and manufacture IP switching routers and network
infrastructure servers. IP is the main protocol used on the Internet. It is a
form of packet technology that routes information over networks based on a
system of unique addresses.
IP networks are playing an increasingly central role in basic systems.
We provide products that enable the deployment of IP networks with high
reliability. NTT DoCoMo, a leading mobile communications service provider in
Japan, chose to adopt our IP switching routers for its IP wide code division
multiple access, or W-CDMA, network trials. We played a leading role in
development and standardization activities of the next-generation protocol,
Internet Protocol Version 6, or IPv6. IPv6 cures a number of problems in the
current protocol and adds many improvements in areas such as routing and
network auto-configuration. Our IPv6 routers have already been adopted by
advanced network service providers and enterprise users. We aim to build
increasingly reliable networks by combining IP switching routers with network
infrastructure servers offering a wide variety of services tailored to the
objectives of our customers.
19
Enterprise networking systems are private voice and data integrated
network systems, including Voice over Internet Protocol, or VoIP, a technology
used to transmit voice conversations over a data network using the IP. We
provide industry specific PBX and IP-PBX systems for customers such as hotels
and hospitals.
ATM technology is an information transfer standard that can be used by
many different communications systems to deliver traffic at varying rates,
permitting a mix of voice data and video. We provide a range of ATM products
including a highly advanced ATM network management system. Our system provides
connection control management, traffic and performance control management,
security control management, and fault/configuration control management.
Mobile and Wireless Communications Network Systems. We develop and
manufacture network systems and equipment for mobile communications, including
base stations, mobile switching systems, and network management systems.
We are the leading producer of personal digital cellular, or PDC,
systems in Japan. PDC was adopted in Japan as the second-generation mobile
communications standard, but is not used outside of Japan. The system supports
both voice and data communications, packet-switched wireless data, and a full
range of supplemental services including, call waiting, voice mail, three-party
calling and call forwarding.
We have also been selected by NTT DoCoMo as one of the suppliers of
W-CDMA systems for its 3G mobile communications service, which started
commercial services in Japan in October 2001. We are the leading supplier of
these systems in Japan.
Overseas, we worked to raise our profile and position in the mobile
communications systems market through a number of initiatives. We entered into
an alliance with Siemens AG to develop, manufacture, and market W-CDMA systems.
We also carried out W-CDMA field trials in collaboration with major European
communications operators such as British Telecommunications plc and Telecom
Italia Mobile S.p.A. In April 2001, NEC Networks became a provider of W-CDMA
networks for Hutchison 3G UK Limited.
We also manufacture wireless communications systems, including
terrestrial and satellite microwave communications systems, and wireless access
systems such as fixed wireless access, and have sold these systems in more than
120 countries.
Mobile Terminals. We develop and manufacture mobile terminals, such
as mobile phones, and personal handy phone systems, or PHS, handsets. We are
one of the leading mobile phone suppliers in Japan. Newer models of our mobile
phones feature large screen color displays and Java applications enabling users
to access and more fully utilize NTT DoCoMo's i-mode mobile Internet service.
We are forming an alliance with Matsushita Electric Industrial Co., Ltd. to
jointly develop a common architecture and application software for 3G mobile
phones.
Broadcast and Other Systems. We produce broadcast equipment,
including analog and digital, terrestrial and satellite broadcast equipment,
air traffic control equipment and space electronic equipment, including
satellites and satellite transponders. Our industrial electronic systems
include laser systems and postal automation systems.
NEC ELECTRON DEVICES
NEC Electron Devices is a leading provider of semiconductors,
displays, and other electronic components used in computers, communications
products, digital consumer electronic products, and automobiles.
Semiconductors. A significant portion of our semiconductor sales are
composed of:
20
- system large-scale integrated circuit, or LSI, products;
- general-purpose semiconductors such as display driver ICs,
transistors and compound semiconductors; and
- DRAMs and other memories.
System LSI Products. NEC Electron Devices designs, develops, and
manufactures system LSIs, the core component of its device solutions. System
LSIs include application specific integrated circuits, or ASICs, application
specific standard products, or ASSPs, microprocessors, and microcontrollers. We
supply system LSIs for use in a variety of products including computers,
communications products, digital consumer electronic products, and automotive
electronics equipment. In fiscal year ended March 31, 2002, NEC Electron
Devices bolstered their ability to deliver a full lineup of customer specific
solutions and focused on providing services ranging from system consultation to
software solutions. For example, we have realized high performance graphics
processing LSIs produced in consultation with and specifically for our customer
manufacturing state-of-the-art game consoles, controller LSIs for the digital
camera market and the CPU with copper wiring technology for our flagship SX-6
supercomputers.
General Purpose Semiconductors, Transistors and Compound
Semiconductors. We design, develop, and manufacture general purpose discrete
semiconductor devices, power management ICs in a wide variety of applications,
and display control devices used in mobile phones, PCs, monitors, and other
systems. We also design, develop, and manufacture optical and microwave
semiconductor devices including compound semiconductors.
DRAMs. We manufacture mainly high-speed, high-capacity DRAMs. Major
products include DRAMs for computers, communications equipment, digital
consumer electronic products, and others. To facilitate accelerated development
of new products as well as to take steps to reduce our exposure to increased
market volatility, we established a joint venture company, Elpida Memory, Inc.,
with Hitachi, Ltd. to combine the competitive strengths of both companies.
Although we and Hitachi produce DRAM for Elpida Memory, we have taken steps to
readjust DRAM production bases. In the fiscal year ended March 31, 2002, we
stopped DRAM production at production lines in the United States and the United
Kingdom. Elpida Memory plans to establish a new 300mm wafer fabrication plant in
fall 2002 and we will accelerate the transfer of our DRAM business to Elpida
Memory.
Other Memories. We design, develop, and produce memory products such
as SRAM, flash memory, and mask ROM. Our SRAMs and flash memories have the
advantage of low power consumption and multi-packaging abilities. The major
applications for these products are portable equipment such as mobile phones,
broadband-related products, and digital consumer electronic products.
Displays. Our display panels feature TFT color LCDs and color plasma
display panels, or PDPs.
Color LCDs. We develop and produce a range of TFT color LCDs used
mainly in PC monitors, industrial and medical equipment displays, and displays
for mobile phones.
Plasma Displays. We are engaged in the development and manufacturing
of plasma display modules and plasma display monitors and televisions. We
expect demand for plasma displays to grow rapidly, mainly for use in
televisions and public displays.
Electronic Components. We design, manufacture, and produce
electronic components such as batteries, capacitors, printed wiring boards, and
relays. Our rechargeable lithium-ion batteries are mainly used in mobile
phones. Our tantalum capacitors, which are notable in terms of their small size
and high capacity, are used in a wide variety of applications, including mobile
phones, PCs, and game consoles. In April 2002, we integrated three electronic
components businesses, our capacitor, relay and rechargeable battery
operations, with Tokin Corporation, which was concurrently renamed NEC TOKIN
Corporation.
21
NEC Electron Devices also produces automotive electronics products
such as control units for antilock brake systems, supplemental restraint
systems, occupant posture detection systems, and seat back sensors. These
technologies serve to improve the automobile occupants' safety.
SEASONALITY
Our sales are generally seasonal in nature, higher in the second and
fourth quarters of our fiscal year ended March 31, than in the first and third
quarters, partly as a result of the seasonal purchases of governmental agencies
in Japan.
SUPPLIES
For its systems integration services NEC Solutions utilizes and offers
various software and hardware products developed or manufactured internally as
well as procured from third party vendors. Our subsidiaries in Japan provide
software development and systems engineering services to us, on a
subcontracting basis. We outsource part of our software development to software
companies in Japan, and are increasingly outsourcing to overseas subsidiaries
and software companies to supplement our resources in Japan. Hardware products
of NEC Solutions are mainly manufactured by our subsidiaries in Japan. Some
models of computers and some sub-assemblies are manufactured by our
subsidiaries outside Japan and by contract manufacturers both in and outside
Japan. We procure some computers from vendors on an OEM basis to supplement our
product line.
NEC Networks manufactures the majority of our communications systems
and equipment, mainly at our subsidiaries in Japan. Certain models for the
overseas markets are manufactured by our overseas subsidiaries. We also use
contract manufacturers in and outside of Japan, to supplement our production
capacity and enhance our profitability.
Most of NEC Electron Devices' products are manufactured by our
subsidiaries or joint venture manufacturing companies established with our
partners in and outside of Japan. Some of our electron devices are procured
from silicon foundries and third party vendors.
The principal raw materials and components used by us are ICs
including memories and logic ICs, LCD panels, printed wiring boards, silicon,
connectors, and capacitors. Certain raw materials and components such as
silicon and memories used in the manufacture of our products are purchased with
a view to maximizing the benefits of bulk purchasing and efficient stock
control. Electronic data interchange, or EDI, is widely used to negotiate and
purchase raw materials and components to make the procurement process
efficient. We use an Internet-based purchasing system to lower costs and
improve efficiency in our procurement operations. This system permits internal
sharing of information concerning, among other things, suppliers, prices, and
quality of raw materials or components. It also permits more frequent and
speedy communications with suppliers. In addition, we purchase certain raw
materials and components from overseas suppliers through our international
purchasing offices in the United States, the United Kingdom, and several
countries in Asia as well as in Japan, to reduce product costs.
We purchase raw materials and components from many Japanese and
overseas suppliers and we believe that we are not dependent on any single third
party supply source for any raw materials or components essential to any
significant part of our business. We have not experienced any difficulty in
obtaining, on acceptable terms, any raw materials or components which
materially affect the operation of our business, and do not presently foresee
any such difficulty.
CUSTOMERS, SALES, AND MARKETING
We provide our products and services to customers located in Japan and
overseas, including the United States, the Asia Pacific region and Europe.
22
The following table shows our net sales by market and net sales by
market as a percentage of total net sales for each of the three fiscal years
ended March 31, 2002:
YEAR ENDED MARCH 31,
-------------------------------------------------------------------------------
2000 2001 2002
--------------- -------------- -------------
(Millions of yen, except percentage data)
NET SALES BY MARKET
Japan JPY 3,489,047 (70%) JPY 3,954,681 (73%) JPY 3,911,173 (77%)
Overseas 1,502,400 (30%) 1,455,055 (27%) 1,189,849 (23%)
------------- ------------- -------------
Total JPY 4,991,447 JPY 5,409,736 JPY 5,101,022
============= ============= =============
NEC Solutions. We provide systems integration services directly to
our key customers in Japan through each of NEC's industry-focused systems
integration divisions, each of which has experience and know-how in their
respective sectors, especially in the telecommunications, banking, and
government sectors. Our subsidiaries also provide systems integration services
to a more diversified group of customers. We provide Internet-related services
directly to individual customers as well as to corporate customers. Maintenance
services are rendered by our subsidiaries to customers directly or on a
subcontracting basis. With respect to hardware, we sell the majority of our PCs
through dealers and wholesalers. Mainframe computers, servers, and workstations
are sold directly to large enterprises and government agencies by our sales
force supported by our engineering staff, as well as to a broader customer base
through dealers. The systems and products we sell are in the case of specific
installations, supplied to meet individual orders of our customers, or, in the
case of standard products, supplied from stock. Our customers include leading
companies in manufacturing, distribution, banking, insurance, and other
industries, governmental and other public agencies, telecommunications
operators, and educational establishments.
NEC Networks. In Japan, we sell the majority of our communications
systems and equipment directly to our customers, with the remainder through
dealers and wholesalers. Overseas sales of such products are handled by our
subsidiaries directly or through trading companies, depending on whether we are
the principal contractor for the project. Sales of larger sized communications
systems are generally made in satisfaction of specific orders of our customers.
Our customers include Japanese and overseas telecommunications operators,
national agencies, and broadcasting companies.
NEC Electron Devices. Most of the sales in Japan of our electron
devices are made to customers through dealers. Overseas sales of these products
are effected through our overseas sales subsidiaries. We also make sales to
other in-house companies. Users of these products consist of computer
manufacturers, communications equipment makers, consumer electronics
manufacturers, the automobile industry, and other electronic product
manufacturers.
INTELLECTUAL PROPERTY
We hold approximately 72,000 patents issued under Japanese and other
laws and have a large number of Japanese and foreign patent applications
pending. We maintain many licenses to Japanese and foreign patents. In some
cases, such licenses are included in technical assistance agreements with
licensors which cover a wide range of products and components, including
computers, communications products, and semiconductors. In addition, we own and
have licenses to use certain copyrights.
We have granted licenses to, and entered into technical assistance
agreements with, various Japanese and foreign companies. In some instances,
cross-licenses of their respective patents are entered into between the
parties.
Although we consider our various patents, copyrights, licenses, and
technical assistance agreements important to us, we do not believe our
business, as a whole, is materially dependent on any particular patent, group
of related patents, any copyright or any license or technical assistance
agreement.
23
COMPETITION
We compete primarily in the markets for computing and communications
applications as well as electron devices. These markets are highly competitive.
We expect competition in the markets we serve to increase in the future as
existing competitors enhance and expand their product and service offerings and
as new participants enter these markets. Increased competition may result in
price reductions, reduced profitability and loss of market share. We cannot
assure you that we will be able to compete successfully against existing or
future competitors. Some of our customers and companies with which we have
strategic relationships also are, or may be in the future, competitors of ours.
The size and number of our competitors vary across our product and
service segments, as do the resources allocated by our competitors to the
markets we target. Our competitors may have greater financial, personnel, and
other resources than we have in a particular market or overall. Competitors
with greater financial resources may be able to offer lower prices, additional
products or services or other incentives that we cannot match or offer. These
competitors may be in a stronger position to respond quickly to new
technologies and may be able to undertake more extensive marketing campaigns.
They may also adopt more aggressive pricing policies and make more attractive
offers to potential customers, employees, and strategic partners. These
competitors may make strategic acquisitions or establish cooperative
relationships among themselves or with third parties to increase their ability
to gain market share.
Further, some of our competitors are currently selling commercial
quantities of products that we have not begun to market. By being able to offer
these products in commercial quantities before we do, our competitors may
establish significant market share and positioning that we may be unable to
overcome once we begin marketing that product.
Our management believes that we will be able to maintain and enhance
our position in a world market characterized by increasing demands and
applications for Internet-related products and services due to the following
strengths:
- Our experience, expertise, and technical capabilities as a
leading provider of systems, components, services, and
integrated solutions for computing and communications
applications, dedicated to meeting our customers' needs, and
- Our technological achievements and market position, as
reinforced by our continuing R&D programs and other marketing
efforts.
REGULATION
Our business activities are subject to various governmental
regulations in countries in which we operate, including regulations relating to
business/investment approvals, export regulations including those related to
national security considerations, tariffs, antitrust, intellectual property,
consumer and business taxation, exchange controls, and environmental and
recycling requirements. In addition, we are subject to the Telecommunications
Business Law of Japan mainly related to our BIGLOBE services, and maintain a
license for construction work in Japan, such as for cable construction.
C. ORGANIZATIONAL STRUCTURE
NEC and its subsidiaries and affiliates form a group of which NEC is
the parent company. As of March 31, 2002, we had 169 consolidated subsidiaries
and 13 affiliated companies accounted for by the equity method.
The following table gives details of our significant subsidiaries (all
of which are consolidated), as of March 31, 2002:
24
PERCENTAGE OF VOTING
SECURITIES DIRECTLY OR
NAME OF SUBSIDIARY COUNTRY OF INCORPORATION INDIRECTLY OWNED BY NEC
- ---------------------------------------------------- ------------------------ -----------------------
NEC CustomMax, Ltd. Japan 100.00%
NEC Saitama, Ltd. Japan 100.00
NEC Leasing, Ltd. Japan 57.00
NEC Fielding, Ltd. Japan 93.36
NEC System Integration & Construction, Ltd. (1) Japan 41.40
NEC Custom Technica, Ltd. Japan 100.00
NEC Kyusyu, Ltd. Japan 100.00
NEC Access Technica, Ltd. Japan 100.00
NEC Nexsolution, Ltd. Japan 100.00
NEC Mobiling, Ltd. (1) Japan 67.11
NEC Deviceport, Ltd. Japan 100.00
NEC Kofu, Ltd. Japan 100.00
NEC Kansai, Ltd. Japan 100.00
NEC Soft, Ltd. (1) Japan 68.16
NEC Infrontia Corporation (1) Japan 53.91
NEC Logistics, Ltd. Japan 100.00
NEC Computers International B.V. The Netherlands 95.56
NEC Taiwan Ltd. Taiwan 100.00
NEC America, Inc. U.S.A. 100.00
NEC Technologies Hong Kong Limited China 100.00
NEC Electronics Inc. U.S.A. 100.00
NEC do Brasil S.A. Brazil 99.98
(1) Listed on the Tokyo Stock Exchange.
D. PROPERTY, PLANTS, AND EQUIPMENT
We have 59 manufacturing plants in Japan and 29 in 14 other countries
(Argentina, Australia, Brazil, China, France, Ireland, Malaysia, Mexico, the
Philippines, Singapore, Thailand, the United Kingdom, the United States and
Vietnam). Our principal plants are located in Japan. The approximate land space
and floor space of these plants as of March 31, 2002 were as follows:
Location Description Principal Products Land Space Floor Space
- ---------------------------- ----------------- ---------------------- ------------- -------------
(Thousands of (Thousands of
square meters) square meters)
- ---------------------------- ----------------- ---------------------- ------------- -------------
Kawasaki, Kanagawa Tamagawa Plant Communications 214 241
equipment;
semiconductors
Fuchu, Tokyo Fuchu Plant Computers and 220 222
industrial electronic
systems; communications
equipment
Sagamihara, Kanagawa Sagamihara Plant Semiconductors; 195 180
electronic components
Otsu, Shiga NEC Kansai, Ltd. Semiconductors 187 161
Abiko, Chiba Abiko Plant Communications equipment 295 126
Kumamoto, Kumamoto NEC Kyushu, Ltd. Semiconductors 128 121
Yokohama, Kanagawa Yokohama Plant Communications equipment 136 118
Tsuruoka, Yamagata NEC Yamagata, Ltd. Semiconductors 139 96
Ichinoseki, Iwate NEC Tohoku, Ltd. Communications equipment 68 56
Yonezawa, Yamagata NEC Custom PCs 59 47
Technica, Ltd.
Fukushima, Fukushima NEC Wireless Communication Network 81 47
Network, Ltd.
Ota, Gunma NEC Custom PCs 93 34
Technica, Ltd.
We generally consider the production capacity of the plants adequate
and sufficient for our requirements. We are experiencing underutilization in
some of our semiconductor manufacturing plants due to the recent downturn in
demand, especially for commodity products.
25
We own most of the land and floor space for our manufacturing
activities. Certain properties are subject to mortgages or encumbrances in
order to secure outstanding indebtedness. We lease our corporate headquarters
in Tokyo and the floor space for a substantial portion of the other sales and
administrative offices throughout the world.
In addition to the above, our corporate R&D facilities, most of which
we own, occupy 126 thousand square meters of floor space.
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS.
The following discussion and analysis should be read in conjunction
with "Item 3.A. Selected Financial Data" and our consolidated financial
statements and notes to those financial statements included elsewhere in this
annual report.
A. OPERATING RESULTS
OVERVIEW
We are a leading provider of systems, components, services, and
integrated solutions for computing and communications applications. We focus
particularly on providing reliable solutions to meet complex customer
requirements. Our results of operations are thus affected by trends in the
information technology ("IT") industry, technological changes such as the
proliferation of the Internet, mobile, and broadband technologies, and product
cycles resulting from the evolution from one generation of computing,
communications, or electron device technologies to the next.
Our business consists of our electronics operations and our leasing
operations. The leasing business segment was established, following the
consolidation of NEC Leasing, Ltd.'s financial results into our overall results
effective as of the beginning of the fiscal year ended March 31, 2002. NEC
Leasing provides financing services such as leasing of computer products to
government and corporate clients in Japan.
The electronics business is divided into three principal segments,
which we call NEC Solutions, NEC Networks, and NEC Electron Devices.
NEC Solutions provides solutions, including the provision of systems
integration ("SI") services, software, and Internet-related services as well as
the development, design, manufacturing and sale of a wide range of computers
and computer-related systems primarily for corporate and individual customers.
NEC Networks provides network integration services as well as the
development, design, manufacturing, and sale of communication equipment,
primarily to network service providers.
NEC Electron Devices develops, designs, manufactures and sells
semiconductors and other electron devices mainly for end-products
manufacturers.
We have undertaken company-wide efforts to become a solutions-oriented
company, which provides solutions that proactively address our customers'
problems and focuses on businesses that capitalize on two broad trends that are
shaping the emerging next-generation Internet society: mobile and broadband
technologies.
NEC Solutions is developing its SI services business with the goal of
becoming a leading player in its markets by building on its strengths in open
mission critical systems (backbone systems using open systems such as UNIX
servers).
NEC Networks is developing a global leadership position in the
networking equipment market, by leveraging its solution capabilities using its
knowledge and experience as a total system supplier. It will
26
seek to accomplish this goal by building on its broad range of superior
hardware technologies, such as Internet protocol ("IP") and optical networks,
and its strong track record in selling and developing 3G wireless
communications infrastructure and mobile handsets.
In NEC Electron Devices, the system LSI business forms the core of its
operations, focusing on delivering device solutions based on a thorough
understanding of customer needs. Maintaining strong customer relationships, NEC
Electron Devices is concentrating efforts on system LSIs for high-end
applications that require a greater speed, higher integration and performance,
such as LSIs for servers, core routers and storage products. At the same time,
NEC Electron Devices is refining leading-edge technologies and promoting their
wide spread use in its effort to become a solutions leader in system LSIs in a
broad range of applications.
The following table sets forth a summary of our results of operations
for the fiscal years ended March 31, 2000, 2001, and 2002:
YEAR ENDED MARCH 31,
-------------------------------------------
2000 2001 2002
----------- ----------- ------------
(BILLIONS OF YEN)
SALES:
NEC Solutions JPY 2,270.6 JPY 2,228.5 JPY 2,209.1
NEC Networks 1,527.7 1,834.4 1,957.2
NEC Electron Devices 1,122.8 1,228.9 842.9
Others 723.9 742.4 634.8
Eliminations (653.6) (624.5) (589.2)
----------- ----------- -----------
Electronics business total 4,991.4 5,409.7 5,054.8
Leasing business -- -- 71.8
Eliminations -- -- (25.6)
Net sales 4,991.4 5,409.7 5,101.0
Cost of sales 3,664.5 3,981.1 3,919.3
Selling, general and
administrative expenses 1,216.5 1,243.4 1,237.2
SEGMENT PROFIT (LOSS)(1):
NEC Solutions 84.4 84.1 75.4
NEC Networks 57.1 83.1 53.4
NEC Electron Devices 49.4 68.3 (148.2)
Others (2.7) 20.2 3.0
Eliminations (17.6) (16.9) (3.3)
----------- ----------- -----------
Unallocated corporate
expenses (60.2) (53.6) (39.7)
----------- ----------- -----------
Electronics business total 110.4 185.2 (59.4)
Leasing business total -- -- 6.3
Eliminations -- -- (2.4)
Aggregate segment profit (loss) 110.4 185.2 (55.5)
Income (loss) before income taxes 30.2 92.3 (461.2)
Income (loss) before cumulative 10.4 56.6 (309.4)
effect of accounting change
Net income (loss) 10.4 56.6 (312.0)
(1) Segment profit means sales less cost of sales and selling, general and
administrative expenses allocable to each segment.
SIGNIFICANT MEASURES TO COUNTER STRUCTURAL CHANGES IN THE INDUSTRY AND SLOWDOWN
IN MARKETS
In the fiscal year ended March 31, 2002, the effects of the IT
downturn in the United States spread to Japan, which has been mired in a
prolonged recession, Europe and other regions. Demand weakened for
information-related products, such as communications equipment and PCs, and
electron devices such as semiconductors and displays. The fiscal year ended
March 31, 2002 also saw changes in the structure of the IT industry, as seen in
the shift of production and certain other activities to China. In response,
during the fiscal year ended March 31, 2002 we implemented the following
measures to restore our ability to generate earnings and strengthen our
financial position:
27
ACCELERATING STRUCTURAL REFORMS. We restructured businesses such as
those for PCs, DRAMs and displays, that have been negatively impacted by
changes in PC-related markets. Since the second half of the fiscal year ended
March 31, 2002, we also implemented a restructuring program to counter the
rapid deterioration in the communications equipment market, which is expected
to remain challenging for some time. Restructuring expenses totalled JPY 285.9
billion, which reflected:
- - NEC SOLUTIONS: RESTRUCTURING THE PERSONAL COMPUTERS BUSINESS. NEC
Solutions incurred restructuring expenses of JPY 33.6 billion, due
mainly to restructuring the PCs and PC peripherals business by
integrating and realigning domestic subsidiaries.
- - NEC NETWORKS: RESTRUCTURING COST STRUCTURE OF OPTICAL NETWORKING
BUSINESS AND OVERSEAS BUSINESSES. NEC Networks' restructuring program
focused on reviewing development projects, reducing material costs and
streamlining its workforce in the optical networking business. It also
worked to scale down operations in Brazil and the United States. NEC
Networks recorded JPY 51.2 billion in restructuring expenses, mainly
for substantial personnel cuts and inventory corrections arising from
its restructuring program.
- - NEC ELECTRON DEVICES: IMPLEMENTING STRUCTURAL REFORMS. In response to
a changing growth model for electronic products, NEC Electron Devices
incurred JPY 200.9 billion in restructuring expenses to reduce fixed
costs in order to achieve improved profitability beginning in the
fiscal year ending March 31, 2003. The initiatives included stopping
DRAM production in the United States and United Kingdom, ceasing
operations on old production lines, disposing of aging facilities, and
reducing the number of employees.
IMPROVING OUR BALANCE SHEET. Shareholders' equity at the end of the
fiscal year ended March 31, 2002 was JPY 564.9 billion, down JPY 350.1 billion
year on year, the shareholders' equity ratio was 11.3% and the debt-equity
ratio was 4.0 times. This is due mainly to the net loss of the fiscal year
ended March 31, 2002 of JPY 312.0 billion, largely the result of restructuring
expenses, and an increase in the minimum pension liability adjustment owing to
an actual loss on pension plan assets brought about by a weak stock market. Had
our leasing business been accounted for by the equity method at March 31, 2002,
our shareholders' equity ratio would have been 12.7% and our debt-equity ratio
3.0 times.
The weakening state of our balance sheet in the fiscal year ended
March 31, 2002 prompted us to implement additional restructuring measures.
These included reducing inventories by implementing company-wide supply chain
management ("SCM") and adjusting semiconductor production. As a result, we
reduced total assets by JPY 359.8 billion, compared with the end of the fiscal
year ended March 31, 2001, and held interest-bearing debt to JPY 1,696.7
billion, which represented an increase of only JPY 12.5 billion. In both cases,
figures are calculated as if our leasing business had been accounted for by the
equity method. We intend to reduce interest-bearing debt further, using funds
raised internally through ongoing efforts to reduce assets and raise the return
on assets.
RESTRUCTURINGS OF OUR NEC ELECTRON DEVICES BUSINESSES
We have been continuing our efforts to refocus the businesses of NEC
Electron Devices. In May 2002, we announced further restructuring plans for NEC
Electron Devices, which include, among other things, our plan to transfer most
of our semiconductor operations to a new subsidiary in November 2002. The new
company's operations will include system LSIs, integrated circuits and discrete
devices and compound semiconductor devices. The new company's operations will
not include our DRAM operations. We plan eventually to take this company
public.
28
RESULTS OF OPERATIONS
FISCAL YEAR ENDED MARCH 31, 2002 COMPARED WITH FISCAL YEAR ENDED MARCH 31, 2001
Sales. In the fiscal year ended March 31, 2002, our net sales fell
by JPY 308.7 billion to JPY 5,101.0 billion, down 6% from the previous fiscal
year. The fall was attributable to a 31% decline in net sales at NEC Electron
Devices, in spite of a 7% increase in net sales at NEC Networks and almost flat
sales at NEC Solutions.
By geographical location of customers, net sales in Japan declined by
1% to JPY 3,911.2 billion. This was mainly attributable to a decline in PCs
sales due to a sluggish domestic PCs market and the effect of a fall in both
shipments and price of semiconductors and displays due to significantly weak
demand. These factors more than offset higher sales of communications
equipment, such as mobile handsets, and SI services for various industries,
such as manufacturing and communications. Overseas sales were down 18% at JPY
1,189.8 billion. Higher sales of fiber-optic submarine cable systems were
negated by falling prices for semiconductors, displays and other electron
devices in overseas markets.
Sales denominated in foreign currencies, principally the U.S. dollar,
fell by 17% to JPY 1,146.0 billion, due to falling prices and shipment volume
of semiconductors and other products. Consequently, foreign currency
denominated sales represented 23% of net sales for the fiscal year ended March
31, 2002. Fluctuations in foreign currency exchange rates had a negligible
effect on earnings, due to a variety of risk hedging measures such as forward
exchange contracts and balancing of foreign-currency denominated sales and
procurement.
See also "-- Results of Operations by Operating Segment Comparing
Fiscal Years Ended March 31, 2002 and 2001."
Interest, Gain on Securities Sold, Dividends, and Other (Other
Income). Other income was JPY 103.6 billion, down JPY 36.5 billion from JPY
140.1 billion in the previous fiscal year. Since April 2000, we have realigned
businesses with the goal of selectively focusing on strategic core businesses.
Actions have included divestitures of non-core businesses, and implementation
of measures designed to raise asset productivity, such as selling marketable
securities. Consequently, in the fiscal year ended March 31, 2001, we recorded
gains on the sale of investments in securities of JPY 57.9 billion and gains on
the sale of property, plant and equipment of JPY 34.3 billion. Similarly, in
the fiscal year ended March 31, 2002, we recorded gains on the sale of
investments in securities of JPY 32.9 billion and gains on the sale of
property, plant and equipment of JPY 12.1 billion.
Gains Due to Stock Issuances by Subsidiaries. In the fiscal year
ended March 31, 2002, we recorded a JPY 3.1 billion gain on the IPO of NEC
Mobiling, Ltd. Of this amount, the sale of our shares in NEC Mobiling as part
of its IPO made up JPY 1.8 billion and gains arising from the difference
between the offering price and the carrying amount of these shares accounted
for JPY 1.2 billion. We also recorded gains of JPY 3.7 billion due to stock
issuances by other subsidiaries. See Note 18 to our consolidated financial
statements on page F-39.
Cost of Sales. Cost of sales fell by JPY 61.8 billion to JPY 3,919.3
billion. As a percentage of net sales, cost of sales were 76.8%, up 3.2
percentage points over the previous fiscal year. This increase was mainly
attributable to a fall in semiconductor and display prices, which more than
offset the effect of measures to improve SCM and cut fixed costs.
Selling, General, and Administrative Expenses. Selling, general and
administrative ("SG&A") expenses declined by JPY 6.2 billion to JPY 1,237.3
billion, mainly reflecting vigorous efforts to trim R&D and other expenses. As
a percentage of net sales, however, SG&A expenses increased 1.3 percentage
points due to the sharp drop in sales reflecting falling prices for electron
devices.
R&D expenses fell by 3% to JPY 333.6 billion, representing 6.5% of net
sales. We pursued greater efficiencies with emphasis on the development of
next-generation wireless communication systems,
29
leading-edge system LSIs and Internet-related products. For additional R&D
information, see "Item 5.C. Research and Development."
Other Expenses. Other expenses increased JPY 259.0 billion to JPY 469.4
billion. In the fiscal year ended March 31, 2002, we incurred restructuring and
other unusual charges of JPY 370.5 billion, primarily for additional
restructuring measures to mitigate the adverse business environment. We recorded
such charges for restructuring subsidiaries and the disposal of assets, and
impairment losses on investment in securities. See Note 19 to our consolidated
financial statements on page F-41.
Income (Loss) Before Income Taxes. We recorded a loss before income
taxes of JPY 461.2 billion, down JPY 553.5 billion from income before income
taxes of JPY 92.3 billion in the previous fiscal year. This was mainly
attributable to a sharp fall in total segment profit, which fell JPY 240.7
billion, reflecting a sharp decline in segment profit at NEC Electron Devices,
together with moderate declines at NEC Solutions and NEC Networks. Another
factor contributing to the loss was a JPY 234.3 billion increase in
restructuring and other unusual charges.
Equity in Earnings (Losses) of Affiliated Companies. We recorded equity
in losses of affiliated companies of JPY 23.8 billion, down JPY 45.7 billion
from earnings of JPY 21.9 billion in the previous fiscal year. This mainly
reflected losses posted by affiliates involved in the semiconductor business due
to the downturn in the market.
Provision (Benefit) for Income Taxes. At March 31, 2002, we had
deferred tax assets of JPY 560.7 billion after valuation allowance of JPY 27.2
billion and deferred tax liabilities of JPY 117.9 billion. Major differences
between income (loss) before income taxes for financial reporting purposes and
for income tax purposes include tax credits, utilization of operating loss
carryforwards and the non-deductibility of certain expenses. The total valuation
allowance decreased by JPY 9.5 billion in the fiscal year ended March 31, 2002.
See Note 9 to our consolidated financial statements for a more detailed
explanation.
Consolidated tax returns were not permitted under Japanese tax rules
until the year ended March 31, 2002. Accordingly, in Japan a subsidiary's
losses cannot be offset against NEC's income or that of NEC's other
subsidiaries. Japanese income tax regulations permit the carryforward of tax
losses in a Japanese entity as an offset against its taxable income during the
subsequent five years. Operating loss carryforwards expire at the end of the
five-year period. The valuation allowance of JPY 27.2 billion at March 31, 2002
was comprised of (1) JPY 19.1 billion for deferred tax assets recognized for
operating loss carryforwards of certain consolidated subsidiaries and (2) JPY
8.1 billion mainly for deferred tax assets related to the tax-deductible
temporary differences recorded by subsidiaries in a loss position. At March 31,
2002, our operating loss carryforwards amounting to JPY 583.9 billion consisted
of (1) JPY 219.0 billion related to foreign subsidiaries for which deferred tax
assets and valuation allowance were recorded, amounting to JPY 41.9 billion and
JPY 3.6 billion, respectively, and (2) JPY 364.9 billion related to domestic
companies for which deferred tax assets and valuation allowance were recorded,
amounting to JPY 146.6 billion and JPY 15.5 billion, respectively. In
determining the amount of valuation allowance, we consider all available
evidence, including those companies' respective financial condition and results
of operations, future losses or income (to the extent that they can be
reasonably projected), projected future reversals of taxable temporary
differences and our ability to realize tax benefits at the parent company level
from subsidiary losses through tax planning strategies. In particular, we
believe that those companies that have incurred losses and operating loss
carryforwards will, in general, gradually improve their financial results in
subsequent fiscal years, although such improvement will occur at a different
pace at each company and in general cannot be predicted with enough certainty
to avoid recording a valuation allowance.
Net Income (Loss). Net loss for the fiscal year ended March 31, 2002
was JPY 312.0 billion, compared to net income of JPY 56.6 billion for the fiscal
year ended March 31, 2001, a decrease of JPY 368.6 billion. Net loss per share
was JPY 188.63. This mainly reflected the previously mentioned loss before
income taxes and equity in losses due to weak results of affiliates accounted
for by the equity method.
Comprehensive Income (Loss). We recorded a comprehensive loss of JPY
338.9 billion for the fiscal year ended March 31, 2002. The main reason was the
net loss of JPY 312.0 billion. Other comprehensive loss for the fiscal year
ended March 31, 2002 was JPY 26.8 billion, an improvement of JPY 99.8
30
billion from the fiscal year ended March 31, 2001. Gains on foreign currency
translation adjustments of JPY 13.5 billion were more than offset by a loss of
JPY 37.8 billion from the minimum pension liability adjustment, caused by
falling investment returns on pension plan assets due to slumping stock prices.
RESULTS OF OPERATIONS BY OPERATING SEGMENT COMPARING FISCAL YEARS ENDED
MARCH 31, 2002 AND 2001
We began consolidating NEC Leasing, formerly an equity method
affiliate, effective April 1, 2001. NEC Leasing mainly provides leasing
services. The leasing business differs significantly in nature from our
electronics business and has a significant impact on our consolidated financial
condition. Accordingly, we have decided to treat the leasing business as a
separate segment from the electronics business for accounting purposes. In the
fiscal year ended March 31, 2002, the electronics business posted sales of JPY
5,054.8 billion, down JPY 355.0 billion, or 7%, from the previous fiscal year.
Total segment losses of the electronics business were JPY 59.4 billion, down
JPY 244.6 billion. In the fiscal year ended March 31, 2002, the leasing
business recorded sales of JPY 71.8 billion and segment profit of JPY 6.3
billion.
Sales and segment profit figures by operating segment for the
electronics business are presented below. Sales and segment profit figures for
each segment include intersegment transactions. See Note 22 to our consolidated
financial statements on page F-46.
NEC SOLUTIONS
Sales. NEC Solutions' sales for the fiscal year ended March 31, 2002
were JPY 2,209.1 billion, down 1% from the previous fiscal year, almost flat
compared with the previous fiscal year. SI services for various industries such
as manufacturing and communications fared well. In addition, by taking advantage
of opportunities for valued-added services offered by BIGLOBE, sales of software
and IT services grew. In hardware, higher sales of such computers as servers,
contributed by large-scale projects, were more than offset by slower sales of
personal products due to the persistently weak domestic consumer PC market and a
slowdown in demand for PCs for corporate clients.
Segment Profit. Segment profit for the fiscal year ended March 31, 2002
fell by JPY 8.7 billion to JPY 75.4 billion. Software and services saw higher
profit margins due to higher productivity in SI services and a stronger focus on
software development. This profit was offset, however, by declining hardware
profitability, particularly in servers and a weak PC market. As a result,
segment profit as a percentage of sales fell by 0.4 percentage points to 3.4%.
NEC NETWORKS
Sales. NEC Networks' sales for the fiscal year ended March 31, 2002
increased by 7% to JPY 1,957.2 billion. The main reasons for the increase were
strong investment in 3G wireless communications systems by communications
operators and strong mobile handset sales in Japan, and increased overseas sales
of fiber-optic submarine cable systems mainly in the first half, despite a sharp
deterioration in market conditions in the second half.
Segment Profit. Segment profit for the fiscal year ended March 31, 2002
declined by JPY 29.7 billion to JPY 53.4 billion. As a percentage of sales,
segment profit worsened by 1.8 percentage points to 2.7%. Profit margins of
mobile handsets improved on account of higher sales than the previous fiscal
year in the domestic market, but were more than offset primarily by the falling
profitability of network infrastructure, mainly optical networking equipment for
overseas communications carriers.
NEC ELECTRON DEVICES
Sales. NEC Electron Devices' sales for the fiscal year ended March 31,
2002 fell by 31% to JPY 842.9 billion. The deterioration of IT-related markets,
including PCs and communications equipment, and the digital home electronics
market continued. Accordingly, semiconductor and display businesses
31
were hit hard by a sharp drop in demand for finished electronic products,
resulting in decreases in sales in terms of both volume and price.
Segment Loss. Segment loss for the fiscal year ended March 31, 2002 was
JPY 148.2 billion, down JPY 216.4 billion from the segment profit for the
previous fiscal year. This was mainly attributable to oversupply of DRAMs due to
the effect of a stagnant PC market and competition among semiconductor
manufacturers. In the display fields, demand for LCDs for use in PCs dropped and
profit margins for small to medium-sized displays for mobile phones worsened due
to intensified competition.
OTHERS
Sales. The others segment includes the manufacture and sale of
semiconductor manufacturing equipment, and LCD projectors as well as information
and network system construction services. Sales in this segment were JPY 634.8
billion, down 15% from the previous fiscal year, due to the completion of the
sale of our electronic testing and measuring equipment and resistor equipment
business to a third party.
Segment Profit. Segment profit was JPY 3.0 billion, down JPY 17.3
billion, due to lower sales of semiconductor manufacturing equipment and slimmer
profit margins.
FISCAL YEAR ENDED MARCH 31, 2001 COMPARED WITH FISCAL YEAR ENDED MARCH 31, 2000
Sales. In the fiscal year ended March 31, 2001, our net sales increased
by JPY 418.3 billion, or 8%, to JPY 5,409.7 billion, from the previous fiscal
year. This increase was attributable to increases of 20% in sales at NEC
Networks and 9% in sales at NEC Electron Devices, which were partly offset by a
2% decline in sales at NEC Solutions.
Net sales in the fiscal year ended March 31, 2001 denominated in
foreign currencies, mainly U.S. dollars, were JPY 1,374.5 billion, a decline of
2% from the previous fiscal year. This decline was primarily due to the
discontinuance of our consumer PC business in North America. As a consequence
of these factors, sales denominated in foreign currencies accounted for 25% of
net sales. The effect of fluctuations in foreign currency exchange rates on our
net sales was insignificant, as a result of our efforts to reduce risks from
such fluctuations, such as using forward exchange contracts and balancing our
procurement and outsourced assembly operations to foreign countries.
See also "-- Results of Operations by Operating Segment Comparing
Fiscal Years Ended March 31, 2001 and 2000."
Interest, Gain on Securities Sold, Dividends, and Other (Other Income).
Other income in the fiscal year ended March 31, 2001 was JPY 140.1 billion, a
decrease of JPY 78.3 billion from JPY 218.4 billion in the previous fiscal year.
In the fiscal year ended March 31, 2000, we recognized a JPY 112.4 billion gain
on the sale of securities and a JPY 45.3 billion gain on the sale of property,
plant, and equipment, including the sale and leaseback of our head office
building. In the fiscal year ended March 31, 2001, we recorded a JPY 57.9
billion gain on the sale of investments in securities, as well as a JPY 34.3
billion gain on the sale of property, plant, and equipment, including some of
our overseas production facilities.
Gains Due to Stock Issuances by Subsidiaries. During the fiscal year
ended March 31, 2001, NEC Soft, Ltd. and NEC Machinery Corporation completed
their initial public offerings. We recorded JPY 41.3 billion in gains related to
the stock offerings by these subsidiaries. Of the total gain, JPY 26.0 billion
was realized as a result of the sale of shares we held in these subsidiaries as
part of their initial public offering and JPY 15.3 billion was recorded as
increased equity in the net assets of these subsidiaries because the price per
share received in the public offering was in excess of the previous book value
per share. No similar gains were recorded in the previous fiscal year.
Cost of Sales. Cost of sales in the fiscal year ended March 31, 2001
was JPY 3,981.1 billion, an increase of JPY 316.6 billion, or 9%, over the
previous fiscal year, corresponding to our increase in net sales. As a
percentage of net sales, cost of sales in the fiscal year ended March 31, 2001
was 73.6%, remaining
32
largely unchanged from the previous fiscal year despite the drop in market
prices for memory devices and PCs in the second half of the fiscal year ended
March 31, 2001. This was mainly attributable to our efforts to promote supply
chain management and efforts to reduce fixed costs.
Selling, General, and Administrative Expenses. Selling, general, and
administrative expenses in the fiscal year ended March 31, 2001 increased JPY
26.9 billion over the previous fiscal year to JPY 1,243.4 billion, partly
reflecting variable costs associated with the higher level of net sales in the
later fiscal year and an increase in R&D expenses. As a percentage of net sales,
selling, general, and administrative expenses decreased from 24.4% in the fiscal
year ended March 31, 2000 to 23.0% in the fiscal year ended March 31, 2001 owing
primarily to greater selectivity in R&D investment and the results of our
efforts to reduce costs.
R&D expenses in the fiscal year ended March 31, 2001 were JPY 345.0
billion, an increase of 9% compared with the previous fiscal year, and
represented 6.4% of net sales. We focused our R&D efforts during the fiscal
year ended March 31, 2001 on the development of next-generation technologies
such as 3G mobile communications systems, as well as the development of optical
network and Internet-related products.
Other Expenses. Other expenses in the fiscal year ended March 31, 2001
fell by JPY 18.1 billion to JPY 210.4 billion compared with the previous fiscal
year. This decrease reflected a JPY 24.9 billion reduction in net foreign
exchange loss and an JPY 11.8 billion decrease in restructuring and other
unusual charges, from the fiscal year ended March 31, 2000 partially offset by
an JPY 18.4 billion increase in miscellaneous other expenses. In the fiscal year
ended March 31, 2001, we incurred restructuring and other unusual charges of JPY
136.2 billion, including restructuring charges for the disposition of assets and
the liquidation of NEC Home Electronics and restructuring of other subsidiaries
and impairment losses due to other than temporary decline in marketable
securities. These restructuring and other unusual charges, while substantial,
represented an 8% decline from the previous fiscal year in which we recorded
restructuring and other unusual charges of JPY 148.0 billion, including
restructuring charges related to NEC Home Electronics and Packard Bell NEC, and
refunds to the Defense Agency and the Defense Facilities Administration Agency
of Japan.
Income Before Income Taxes. Income before income taxes in the fiscal
year ended March 31, 2001 was JPY 92.3 billion, a JPY 62.1 billion, or 206%,
increase over the previous fiscal year. This reflected a 42% improvement in
aggregate segment profit in Japan resulting from strong sales growth in Japan,
gains on the sale of overseas production facilities and gains due to stock
issuances by subsidiaries. Our strong operating results in Japan at the segment
profit level in the fiscal year ended March 31, 2001 were offset to a
significant extent, however, by restructuring charges associated with NEC Home
Electronics and impairment losses on marketable securities. The increase also
reflected an improvement in the results of our foreign subsidiaries. In the
fiscal year ended March 31, 2000, our foreign subsidiaries suffered aggregate
losses before income taxes of JPY 90.0 billion, including restructuring charges
associated with Packard Bell NEC, while they recorded income before income taxes
in the fiscal year ended March 31, 2001, in part due to our termination of
Packard Bell NEC's North American operations in the previous fiscal year.
Equity in Earnings of Affiliated Companies. Equity in earnings of
affiliated companies increased by 93.7%, to JPY 21.9 billion in the fiscal year
ended March 31, 2001, reflecting increases in sales and operating revenue, gross
profit, and net income of affiliated companies accounted for by the equity
method, as compared with the previous fiscal year.
Provision for Income Taxes. At March 31, 2001, we had deferred tax
assets of JPY 302.6 billion after valuation allowance of JPY 36.7 billion and
deferred tax liabilities of JPY 113.9 billion. Major differences between income
before income taxes for financial reporting purposes and for income tax purposes
include tax credits, utilization of operating loss carryforwards and the
non-deductibility of certain expenses. The total valuation allowance decreased
by JPY 7.2 billion in the fiscal year ended March 31, 2001. See Note 9 to the
consolidated financial statements for a more detailed explanation.
33
Consolidated tax returns were not permitted under Japanese tax rules.
Accordingly, in Japan a subsidiary's losses cannot be offset against NEC's
income or that of NEC's other subsidiaries. Japanese income tax regulations
permit the carryforward of tax losses in a Japanese entity as an offset against
its taxable income during the subsequent five years. Operating loss
carryforwards expire at the end of the five-year period. The valuation
allowance of JPY 36.7 billion at March 31, 2001 was comprised of (1) JPY 19.4
billion for deferred tax assets recognized for operating loss carryforwards of
certain consolidated subsidiaries and (2) JPY 17.3 billion mainly for deferred
tax assets related to the tax-deductible temporary differences recorded by
subsidiaries in a loss position. At March 31, 2001, our operating loss
carryforwards amounting to JPY 270.3 billion consisted of (1) JPY 101.9 billion
related to foreign subsidiaries for which deferred tax assets and valuation
allowance were recorded, amounting to JPY 33.1 billion and JPY 6.8 billion,
respectively, and (2) JPY 168.4 billion related to domestic companies for which
deferred tax assets and valuation allowance were recorded, amounting to JPY
70.5 billion and JPY 12.6 billion, respectively. In determining the amount of
valuation allowance, we consider all available evidence, including those
companies' respective financial condition and results of operations, future
losses or income (to the extent that they can be reasonably projected),
projected future reversals of taxable temporary differences and our ability to
realize tax benefits at the parent company level from subsidiary losses through
tax planning strategies. In particular, we believe that those companies that
have incurred losses and operating loss carryforwards will, in general,
gradually improve their financial results in subsequent fiscal years, although
such improvement will occur at a different pace at each company and in general
cannot be predicted with enough certainty to avoid recording a valuation
allowance.
Net Income. Net income for the fiscal year ended March 31, 2001 was JPY
56.6 billion, a JPY 46.2 billion increase over the previous fiscal year. This
increase resulted from the increase in income before income taxes described
above and the increase in equity in earnings of affiliated companies. The net
income to net sales ratio was 1.0% and return on equity was 6.0%.
Comprehensive Income (Loss). In the fiscal year ended March 31, 2001,
we recorded a comprehensive loss of JPY 70.0 billion, as the result of recording
a negative minimum pension liability adjustment of approximately JPY 84.9
billion and unrealized losses on marketable securities of approximately JPY 60.9
billion, offset to some extent by positive foreign currency translation
adjustments. The negative minimum pension liability adjustment resulted from a
reduction, from 4.0% to 3.5%, in the discount rate that we use in estimating
benefit obligations and a decline in the value of the securities comprising plan
assets, primarily as a consequence of the overall decline in the Japanese stock
market during the fiscal year ended March 31, 2001. Our unrealized losses on
marketable securities in the fiscal year ended March 31, 2001 similarly resulted
from the Japanese stock market decline. The Nikkei-225 Stock Average, which is
generally considered the leading indicator of Japanese stock market performance,
began the fiscal year at JPY 20,337, and closed the fiscal year at JPY 12,999, a
36% decline.
Our other comprehensive losses in the fiscal year ended March 31, 2001
represented a substantial decline from the previous fiscal year, in which we
recorded JPY 41.5 billion in unrealized gains on marketable securities and a
positive minimum pension liability adjustment of JPY 28.2 billion, which were
partially offset by negative foreign currency adjustments of JPY 24.3 billion.
RESULTS OF OPERATIONS BY OPERATING SEGMENT COMPARING FISCAL YEARS ENDED
MARCH 31, 2001 AND 2000
NEC SOLUTIONS
Sales. NEC Solutions' sales for the fiscal year ended March 31,
2001 were JPY 2,228.5 billion, decrease of 2% from the previous fiscal year.
Sales of systems integration services increased due to strong demand from large
corporate and government customers and an increase in e-business projects. Sales
also increased in our BIGLOBE business, due to growing use of the Internet. In
hardware, sales of servers and workstations declined due to weak investment in
information technology by small and medium-sized companies as well as a decrease
in sales of mainframe computers. Although our sales to corporate customers grew
in Japan, our overall PC sales decreased due to slowdown in demand for PCs in
the worldwide market and our withdrawal from the consumer PC business in North
America.
34
Segment Profit. Segment profit for the fiscal year ended March 31, 2001
was JPY 84.1 billion, largely unchanged from the previous fiscal year. The
profitability of our hardware business suffered from the rapid drop in PC prices
in the second half of the fiscal year ended March 31, 2001, and declining sales
of and profit margins on mainframe computers. The profitability of our systems
integration services business, however, improved substantially as the overall
efficiency of our systems integration services business improved. As a result,
the segment profit to sales ratio of NEC Solutions remained 3.8%, approximately
the same level as the previous fiscal year.
NEC NETWORKS
Sales. NEC Networks' sales for the fiscal year ended March 31, 2001
increased by 20% to JPY 1,834.4 billion from the previous fiscal year. In the
Japanese market, sales increased due to strong growth in sales of i-mode mobile
handsets for NTT DoCoMo and investment in network buildouts by network service
providers. Overseas sales also increased. Although sales of high-capacity
optical fiber transmission systems fell in the North American market as a result
of scaled-down investment in network infrastructure by network service
providers, sales grew in Asia and Oceania, particularly for submarine cable
systems. In Latin America, NEC Networks also posted strong sales growth owing to
vigorous capital investments in communications infrastructure such as central
office switching systems.
Segment Profit. Segment profit for the fiscal year ended March 31, 2001
was JPY 83.1 billion, a 46% increase over the previous fiscal year, improving
from 3.7% of net sales in the fiscal year ended March 31, 2000 to 4.5% of NEC
Networks' net sales in the fiscal year ended March 31, 2001. This was
attributable to a substantial increase in sales of mobile handsets for NTT
DoCoMo's i-mode service and of network infrastructure systems in the Japanese
market, which more than offset the increase in expenses for the development of
equipment for next-generation communications infrastructure.
NEC ELECTRON DEVICES
Sales. NEC Electron Devices' sales for the fiscal year ended March 31,
2001 rose by 9% to JPY 1,228.9 billion, supported by strong demand for PCs,
mobile handsets, and digital consumer electronic products continued from the
previous fiscal year. Sales of color LCDs declined due to weak market
conditions, but increased sales of almost all product categories of
semiconductors, including memory devices, LCD driver ICs and opto-devices, and
system LSIs, as well as electronic components in the first half of the fiscal
year ended March 31, 2001 contributed to the growth.
Segment Profit. Segment profit for the fiscal year ended March 31, 2001
rose by 38% to JPY 68.3 billion, improving from 4.4% of net sales in the fiscal
year ended March 31, 2000 to 5.6% of net sales in the fiscal year ended March
31, 2001. This reflected improved sales of LCD driver ICs, opto-devices, and
system LSIs, and the increase in memory prices in the first half of the fiscal
year ended March 31, 2001. These increases more than offset a decline in the
profitability of our display business, which incurred a loss of JPY 13 billion
in the fiscal year ended March 31, 2001.
OTHERS
Sales. Sales in this segment are generated by products such as LCD
projectors, avionics systems, and semiconductor manufacturing equipment as well
as information and network system construction services. Sales in our Others
segment in the fiscal year ended March 31, 2001 were JPY 742.4 billion, largely
unchanged from the previous fiscal year.
Segment Profit. Segment profit improved to JPY 20.2 billion from the
previous fiscal year's segment loss of JPY 2.7 billion due to the achievement of
profitability in semiconductor manufacturing equipment business and enhanced
profitability in the businesses of avionics systems as well as information and
network system construction services.
35
B. LIQUIDITY AND CAPITAL RESOURCES
FINANCIAL AND LIQUIDITY MANAGEMENT
Our policy is to maintain a level of cash and cash equivalents,
including committed credit facilities with financial institutions, equivalent
to approximately one month of net sales. Cash and cash equivalents including
committed credit facilities established with financial institutions in Japan
and overseas were JPY 727.8 billion as of March 31, 2002, JPY 91.0 billion more
than at the end of the previous fiscal year. This is equivalent to 1.7 times
average monthly sales in the fiscal year ended March 31, 2002. The increase
mainly reflected our policy of preparing for possible instability in the
domestic financial markets brought about by the bankruptcy of financial
institutions and other factors. Under this policy, we increased our committed
credit facilities by JPY 100.0 billion, bringing the total to JPY 350.0 billion
at March 31, 2002. Committed credit facility contracts do not contain clauses
that permit the lenders to terminate the credit facility in the event of an
adverse change in ratings of our securities or commercial paper ("CP").
In order to secure funds at low interest rates, we are also increasing
emphasis on procuring long-term funds and on the use of capital market
instruments. In the fiscal year ended March 31, 2002, we raised JPY 100.0
billion through the issuance of trust originated preferred securities having no
predetermined maturity and another JPY 100.0 billion through the issuance of
euro yen convertible bonds (maturity of 8 years). As of March 31, 2002,
long-term funding accounted for 68% of total funds procured, down 5 percentage
points from the previous fiscal year due to the issuance of CP maturing after
the fiscal year-end. Long-term funding remained at a high level.
The use of capital market instruments accounted for 66% of total
funding, up 2 percentage points from the previous fiscal year. All figures
exclude the effect of the consolidation of our leasing business.
The trust originated preferred securities were issued to build a
stronger financial structure by increasing equity, while minimizing, insofar as
possible, the dilution of shareholder value. Trust originated preferred
securities have certain equity-like features, such as having no predetermined
maturity, ranking junior to ordinary debt in the event of liquidation, and
allowing deferrals of dividends for a certain period of time should NEC suspend
dividends on common stocks. Major rating agencies have acknowledged that trust
originated preferred securities may be recognized as equity to a certain
extent. At the same time, however, trust originated preferred securities do not
dilute earnings per share for existing shareholders, unlike a share issuance at
fair value. See Note 10 to our consolidated financial statements on page F-26.
For our short-term funding needs, we rely primarily on CP in Japan to
preserve flexibility for short-term capital or operating purposes. We have a
JPY 500.0 billion CP program that we believe is sufficient for our present
working-capital requirements. In the fiscal year ended March 31, 2002, our
long-term credit ratings were lowered to A+ (Rating and Investment Information,
Inc.) and Baa2 (Moody's Investor Service), and our short-term credit rating was
lowered to A-1 (Rating and Investment Information, Inc.). The lowering of these
ratings did not have a material impact on our ability to issue and sell CP.
To maintain our flexibility to meet short and long-term cash
requirements, our U.S. financial subsidiary has a $500 million medium-term note
("MTN") program and NEC and our U.K. financial subsidiary also jointly have a $2
billion MTN program.
OFF-BALANCE SHEET ARRANGEMENTS
We securitize receivables by selling certain trade receivables and
investment in leases to a special purpose company, without recourse. The
purpose of such securitization transactions is to enhance asset efficiency and
eliminate the risk associated with default on trade receivables and investments
in leases. On sales of trade receivables and investment in leases, in some
cases we retain subordinated interests. The subordinated interests have no
significant impact on our financial position.
36
We also sell a portion of our land, buildings, facilities and
equipment to special purpose companies, leasing them back over periods of one
to five years, for the purpose of eliminating risks associated with a fall in
asset value or obsolete production facilities. These transactions are treated
as operating leases for accounting purposes.
Neither we, nor our directors or employees, have any investments in
these special purpose companies. The special purpose companies used in
connection with the securitization of trade receivables and investment in
leases are not consolidated since we have surrendered control over the
receivables. Similarly, the special purpose companies used in connection with
the leasing of property are not consolidated, since third parties have made a
substantial investment that is at risk for the life of the special purpose
company.
The amount of off-balance sheet arrangements as of March 31, 2001 and
2002 were as follows:
As of March, 31
- --------------------------------------------------------------------------------------------------------
2001 2002
-------------------------------------------------
(Billions of yen)
Securitized trade receivables and investment in leases JPY 236.4 JPY 286.8
Operating leases 204.4 206.6
- ----------------------------------------------------------------------------------- ---------------------
Total JPY 440.8 JPY 493.4
- ----------------------------------------------------------------------------------- ---------------------
(CONTRACTUAL OBLIGATIONS)
The status of contractual obligations as of March 31, 2002 was as
follows:
- --------------------------------------------------------------------------------------------------------
Payments due by period
-------------------------------------------------------------------------------------
Total Less than 1-3 years 3-5 years 5+
1 year years
- --------------------------------------------------------------------------------------------------------
(Billions of yen)
Long-term debt
excluding
capital leases JPY 1,797.4 JPY 302.5 JPY 638.9 JPY 423.5 JPY 432.5
- --------------------------------------------------------------------------------------------------------
Capital leases 11.8 7.8 3.0 1.0 --
- --------------------------------------------------------------------------------------------------------
Operating leases 140.8 48.9 56.9 24.2 10.8
- --------------------------------------------------------------------------------------------------------
Total JPY 1,950.0 JPY 359.2 JPY 698.8 JPY 448.7 JPY 443.3
- --------------------------------------------------------------------------------------------------------
Commitments for contractual obligations for the purchase of property,
plant and equipment were JPY 15.1 billion, and will be paid within one year.
The balance of guarantees, excluding guarantees for employees (maximum
guarantee period: 22 years), was JPY 70.7 billion. Guarantees with periods less
than 1 year, 1 to 3 years, 3 to 5 years, and 5 years or more were JPY 10.2
billion, JPY 32.8 billion, JPY 10.6 billion and JPY 17.1 billion.
ASSETS, LIABILITIES, AND SHAREHOLDERS' EQUITY
Effective April 1, 2001, we began consolidating NEC Leasing, formerly
an equity method affiliate. The table below compares our financial position
treating the leasing business as a consolidated subsidiary and as an equity
method affiliate, as in previous years. We believe this comparative
presentation is critical to an accurate portrayal of our financial position, as
the level of interest-bearing debt in our leasing business increases in line
with growth in our volume of business.
37
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
Condensed
consolidated
balance sheets,
Condensed consolidated balance sheets, including leasing
accounting for leasing business business in
by the equity method consolidation
---------------------------------------------------------------------------
As of March 31 2001 2002 2002
(Millions of yen)
Assets:
Cash and cash equivalents JPY 386,835 JPY 348,021 JPY 377,772
Notes and accounts receivable 1,053,133 938,179 905,069
Inventories 828,081 650,043 650,043
Investment in leases -- -- 506,761
Investments and long-term
receivables excluding
investment in leases 733,637 640,957 621,078
Property, plant and equipment 1,128,813 939,470 959,577
Other 693,125 947,201 990,583
Total assets JPY 4,823,624 JPY 4,463,871 JPY 5,010,883
Liabilities and shareholders'
equity:
Interest-bearing debt JPY 1,684,259 JPY 1,696,739 JPY 2,259,705
Other liabilities 2,155,942 1,987,805 1,956,246
Minority interests 68,387 117,212 132,817
Preferred securities issued by
a subsidiary -- 97,200 97,200
Shareholders' equity 915,036 564,915 564,915
Total liabilities and
Shareholders' equity JPY 4,823,624 JPY 4,463,871 JPY 5,010,883
- ---------------------------------------------------------------------------------------------------------
Total assets at March 31, 2002 were JPY 5,010.9 billion, up JPY 187.3
billion over the previous fiscal year. This mainly reflected a JPY 547.0
billion increase in investment in leases and other assets due to the
consolidation of NEC Leasing. Accounting for the leasing business by the equity
method, total assets would have declined by JPY 359.8 billion to JPY 4,463.9
billion. Our effort to improve asset efficiency resulted in sharp cuts in
accounts receivable and inventories.
Current assets at March 31, 2002 were JPY 2,405.0 billion, down JPY
60.7 billion from the previous fiscal year. The decline was JPY 340.4 billion,
excluding the impact of additional investment in leases and other of JPY 279.7
billion from the consolidation of the leasing business. Accounting for the
leasing business by the equity method, cash and cash equivalents would have
been JPY 348.0 billion, down JPY 38.8 billion. Notes and accounts receivable
declined by JPY 115.0 billion to JPY 938.2 billion due to efforts to promote
the collection of accounts receivable reflecting the fourth quarter sales
decline. Inventories fell by JPY 178.0 billion to JPY 650.0 billion due to the
promotion of SCM and extensive production adjustments at NEC Electron Devices.
Investments and long-term receivables increased by JPY 142.2 billion
to JPY 875.9 billion at March 31, 2002, including JPY 254.8 billion of
investment in leases. A decline in marketable securities, reflecting a weak
stock market and the sale of marketable securities aimed at raising asset
efficiency, was more than offset by the JPY 234.9 billion in additional
investment in leases and other assets arising from the consolidation of the
leasing business.
Property, plant and equipment decreased by JPY 169.2 billion to JPY
959.6 billion at March 31, 2002. The main reason was the recording of
impairment losses on existing facilities due to restructuring measures, the
sale of certain production bases to Electronics Manufacturing Service ("EMS")
companies and the leasing of production facilities.
Other assets totaled JPY 770.4 billion, up JPY 275.0 billion. We
recorded long-term deferred tax assets relating to future tax effects on
operating loss carry forwards resulting from our substantial net loss in the
fiscal year ended March 31, 2002.
38
Current and long-term liabilities increased by JPY 375.8 billion from
March 31, 2001 to JPY 4,216.0 billion at March 31, 2002. Interest-bearing debt,
the sum of short-term borrowings, the current portion of long-term debt and
long-term debt, increased by JPY 575.4 billion to JPY 2,259.7 billion at March
31, 2002. The increase in interest-bearing debt was mainly attributable to the
effect of the consolidation of NEC Leasing of JPY 563.0 billion. Excluding that
effect, interest-bearing debt increased by only JPY 12.5 billion to JPY 1,696.7
billion at March 31, 2002. While we worked to reduce interest-bearing debt by
procuring funds through preferred securities issued by a subsidiary, declining
cash flows from operating activities and the issuance of euro yen convertible
bonds slightly increased interest-bearing debt.
Accrued pension and severance costs increased by JPY 67.2 billion to
JPY 467.6 billion at March 31, 2002. This mainly reflected lower investment
returns on pension plan assets due to the weak stock market.
Shareholders' equity was JPY 564.9 billion at March 31, 2002, down JPY
350.1 billion compared with the previous fiscal year end. This was mainly due
to the current year net loss and a JPY 26.8 billion decrease in accumulated
other comprehensive income (loss). Accumulated other comprehensive income
(loss) is the sum of accumulated foreign currency translation adjustments, the
minimum pension liability adjustment, unrealized gains (losses) on marketable
securities and unrealized gains (losses) on derivative financial instruments.
The decrease in accumulated other comprehensive income (loss) was mainly due to
a JPY 37.8 billion increase in the minimum pension liability adjustment due to
lower investment returns. As a result, the shareholders' equity ratio declined
from 19.0% to 11.3% (12.7% using the equity method of accounting for the
leasing business).
CASH FLOWS
YEAR ENDED MARCH 31,
----------------------------------------------
2000 2001 2002
---------- ----------- ----------
(Billions of yen)
NET CASH PROVIDED BY (USED IN):
Operating activities JPY 458.5 JPY 360.5 JPY 136.6
Investing activities 90.4 (111.5) (203.5)
Financing activities (487.5) (240.0) 55.7
Effect of exchange rate changes on cash and
cash equivalents (7.1) 3.9 2.1
--------- --------- ---------
Net increase (decrease) in cash and cash
equivalents JPY 54.3 JPY 12.9 JPY (9.1)
========= ========= =========
Cash and cash equivalents at March 31, 2002 amounted to JPY 377.8
billion, down JPY 9.1 billion from March 31, 2001.
Net cash provided by operating activities was JPY 136.6 billion for
the fiscal year ended March 31, 2002, JPY 223.9 billion less than the previous
fiscal year. A company-wide effort to raise asset efficiency through such means
as production innovations reduced inventories, notes and accounts receivable.
However these reductions were more than offset by our fiscal year ended March
31, 2002 net loss of JPY 312.0 billion. Depreciation fell by JPY 15.4 billion
to JPY 234.7 billion for the fiscal year ended March 31, 2002 due to cutbacks
in capital expenditures.
Net cash used in investing activities was JPY 203.5 billion for the
fiscal year ended March 31, 2002, JPY 92.0 billion more than in the fiscal year
ended March 31, 2001. The effect of decreased expenditures on property, plant
and equipment in line with reductions in capital expenditures was offset by
reduced proceeds from the sale of marketable securities and property, plant and
equipment compared with the previous fiscal year.
Net cash provided by financing activities was JPY 55.7 billion for the
fiscal year ended March 31, 2002. We raised a total of JPY 200.0 billion (par
value) in December 2001 through the issuance of JPY 100.0 billion in euro yen
convertible bonds and JPY 100.0 billion in preferred securities by a
subsidiary. Net cash
39
provided by financing activities was also impacted by the redemption of
convertible bonds and repayment of long-term debt, partially offset by
increases in short-term debt.
Cash dividends per share applicable to the fiscal year ended March 31,
2002 were JPY 6.0, JPY 5.0 less than in the previous fiscal year, reflecting
the deterioration in business conditions across IT fields and the substantial
restructuring expenses incurred during the fiscal year ended March 31, 2002. We
paid an interim dividend of JPY 3.0 per share in December 2001.
For a discussion of our capital expenditures, see the "Capital
Expenditures" section under "Item 4.A. History and Development of the Company."
CRITICAL ACCOUNTING POLICIES
Our analysis of the financial condition and results of operations
discusses the consolidated financial statements, which have been prepared in
conformity with accounting principles generally accepted in the United States.
The preparation of financial statements requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimated. Management
believes that estimates and assumptions used in applying the following critical
accounting policies affect our consolidated financial statements significantly.
Marketable Securities. We classify our marketable equity securities
and debt securities as available-for-sale which are reported at fair value,
with unrealized gains and losses included in accumulated other comprehensive
income (loss), net of taxes. When a decline in value of the investments in
marketable securities is deemed to be other-than-temporary, we recognize an
impairment loss to the extent of the decline. In determining if and when such a
decline in value is other-than-temporary, we evaluate the market conditions,
trends of earnings, and other key measures. Realized gains or losses on the
sale of the marketable securities are based on the average cost of a particular
security held at the time of sale.
Future adverse changes in market conditions or poor operating results
of the companies whose marketable securities are owned by us could result in
losses or an inability to recover the carrying value of the marketable
securities that may not be reflected in marketable securities' current carrying
value, thereby possibly requiring an impairment charge in the future.
Pension and Severance Plans. We have pension and severance costs and
liabilities that are developed from actuarial valuations. Inherent in these
valuations are key assumptions including a discount rate and the expected
long-term rate of return on pension plan assets. We are required to consider
current market conditions, including changes in interest rates, in selecting
these assumptions. Changes in the related pension and severance costs and
liabilities may occur in the future due to changes in the assumptions, in
addition to changes resulting from fluctuations in the number of our employees.
Deferred Income Taxes. We record a valuation allowance to reduce our
deferred tax assets to the amount that is more likely than not to be realized.
In this regard, we have considered future taxable income and ongoing prudent
and feasible tax planning strategies in assessing the need for recording a
valuation allowance. In the event that we were to determine that we would be
able to realize our deferred tax assets in the future in excess of our net
recorded amount, an adjustment to the deferred tax asset would increase income
in the period such determination was made. Likewise, should we determine that
we would not be able to realize all or part of our net deferred tax asset in
the future, an adjustment to the deferred tax asset would decrease income in
the period in which such determination was made.
Impairment of Long-Lived Assets. Long-lived assets are evaluated for
impairment using an estimate of undiscounted cash flows whenever events or
changes in circumstances indicate that the carrying amount of such assets may
not be recoverable. If the estimate of undiscounted cash flows is less than the
carrying amount of the assets, an impairment loss is recorded based on the fair
value of the assets.
40
In determining the fair value of the respective assets, we must make
estimates and assumptions regarding future cash flows and other factors. If
these estimates or their related assumptions change in the future, we may be
required to record impairment charges for each of the assets not previously
recorded.
Intangible Assets. Intangible assets consist primarily of the costs
of purchased patents and trade names and goodwill. Goodwill represents the
excess of cost of the acquired enterprise over the sum of the amounts assigned
to identifiable assets less liabilities assumed. Costs allocated to patents and
trade names are amortized principally on a straight-line basis over their
estimated useful lives. Goodwill, which arose from business combinations
completed before July 1, 2001, has been amortized on a straight-line basis over
the period of expected benefit which does not exceed 10 years. Goodwill, which
arose from business combinations completed after June 30, 2001, is stated at
cost, and no amortization is recorded.
We review the carrying amount of intangible assets for impairment
whenever events or circumstances indicate that the carrying amounts may not be
recoverable. In assessing the recoverability of our intangible assets, we must
make estimates and assumptions regarding estimated future cash flows and other
factors to determine the fair value of the respective assets. If these
estimates or their related assumptions change in the future, we may be required
to record impairment charges for these assets not previously recorded.
EFFECT OF NEW ACCOUNTING STANDARDS
In June 2001, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 141, "Business Combinations," and No. 142, "Goodwill and Other
Intangible Assets." SFAS No. 141 requires that the purchase method of accounting
be used for all business combinations initiated after June 30, 2001. SFAS No.
141 also includes guidance on the initial recognition and measurement of
goodwill and other intangible assets arising from business combinations
completed after June 30, 2001. SFAS No. 142 prohibits the amortization of
goodwill and intangible assets with indefinite useful lives. SFAS No. 142
requires that these assets be reviewed for impairment at least annually.
Intangible assets with finite lives will continue to be amortized over their
estimated useful lives. Additionally, SFAS No. 142 requires that goodwill
included in the carrying value of equity method investments no longer be
amortized.
We adopted SFAS No. 142 effective April 1, 2002. We recorded
amortization of JPY 5,517 million, JPY 6,330 million and JPY 8,360 million for
the years ended March 31, 2000, 2001 and 2002, respectively, under previous
accounting standards. In accordance with SFAS No. 142, we are required to
perform the impairment tests of goodwill and indefinite lived intangible assets
by the end of September 2002. Any impairment charge resulting from these tests
will be reflected as the cumulative effect of accounting change. We completed
these tests and determined that these assets are not impaired.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS No. 144 addresses financial
accounting and reporting for the impairment or disposal of long-lived assets
and supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of," and the accounting and
reporting provisions of APB Opinion No. 30, "Reporting the Results of
Operations," for a disposal of a segment of a business. We adopted SFAS No. 144
effective April 1, 2002, and do not expect a material effect on our results of
operations and financial position, except that any future discontinued
operations may be presented in our financial statements differently under SFAS
No. 144 as compared to the previous accounting standards.
C. RESEARCH AND DEVELOPMENT
Since the establishment in 1939 of our first research laboratory, we
have consistently recognized the importance of our R&D activities. R&D is
critical to our success, and we are committed to continue devoting our
personnel as well as significant financial and other resources to it.
The table below sets forth information with respect to our R&D
expenditures for the periods shown:
41
- ------------------------------------------------------------------------------------
YEAR ENDED MARCH 31,
--------------------------------------
2000 2001 2002
- ------------------------------------------------------------------------------------
(BILLIONS OF YEN)
- ------------------------------------------------------------------------------------
R&D expenses JPY 315.2 JPY 345.0 JPY 333.6
As a percentage of net sales 6.3% 6.4% 6.5%
- ------------------------------------------------------------------------------------
During the fiscal year ended March 31, 2002, R&D expenses at NEC
Solutions, NEC Networks and NEC Electron Devices, and others, were JPY 51.8
billion, JPY 153.9 billion, and JPY 95.7 billion, and JPY 32.2 billion,
respectively.
We conduct our R&D activities at NEC Laboratories, our corporate R&D
department, as well as in each of the R&D departments of NEC Solutions, NEC
Networks and NEC Electron Devices, respectively.
NEC Laboratories conducts medium and long-term R&D activities to
develop fundamental technologies that will form the basis for our future
operations, and new technologies that will enhance existing businesses. These
activities take place in various specialized laboratories located in Japan, the
United States and Europe.
Our in-house companies conduct product and technology development at
their own respective development divisions and development laboratories. The
activities of each of these R&D departments are closely related to their own
operating activities of their affiliated in-house companies. R&D departments
are responsible for addressing the needs of their own targeted markets. NEC
Laboratories collaborates closely with each of those divisions and laboratories
in product and technology development activities.
We conduct R&D activities, including in the areas of:
- Internet application platforms, with a focus on electronic
commerce, or e-commerce, application platforms, and
mission-critical systems;
- Communications systems focused on optical network systems,
third and fourth-generation mobile communications systems and
mobile handsets, and IP networking systems such as routers;
- Semiconductor devices, focusing on system LSIs; and
- Fundamental research such as nanotechnology and convergence
of biology and IT.
D. TREND INFORMATION
The fiscal year ended March 31, 2002 was one of the most severe years
encountered by us, due to the continuing long-term stagnant conditions for the
Japanese economy, and the prevailing market conditions in the information
technology sector throughout the world.
In Japan, serious deflation continued due to commodity price decline
and economic recession. Manufacturing companies were forced to make drastic
downward adjustments in production volume, resulting in sharp reduction in
investments in plant and equipment. Moreover weak performance of Japanese
companies resulted in decreases in personal income and worsening employment
condition, which restrained consumer spending. Overseas, as the economy in the
United States slowed-down for the first time in 10 years and was slowed further
by the terrorist attacks on September 11, 2001, the stagnant economic condition
continued. However, by the end of the period, the world economy started to show
signs of recovery, due to a rise in expectation for the recovery of the United
States economy.
In the electronics industry, despite the firm demand for system
integration services, sales of personal computers remained weak because of the
recession, the telecommunications market was adversely
42
affected by reductions of investment in plant and equipment by
telecommunications carriers, and the demand for electronic devices such as
semiconductors and displays fell sharply.
For additional trend information, see "Item 5.A. Operating Results."
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES.
A. DIRECTORS AND SENIOR MANAGEMENT
Set forth below are the members of the board of directors and
corporate auditors of NEC as of July 31, 2002, together with their respective
dates of birth, positions, and remaining length of term of office as director
or corporate auditor. All members of the board mentioned below, except for Mr.
Toshio Morikawa, Advisor to Sumitomo Mitsui Banking Corporation, Mr. Koichi
Kimura, Special Advisor to Daiwa Institute of Research Ltd., and Mr. Akira
Uehara, President of the Taisho Pharmaceutical Co. Ltd., are also corporate
officers of NEC.
TERM
NAME DATE OF BIRTH EXPIRES POSITION
- -------------------- ----------------- --------- -----------------------------------------------------
Hajime Sasaki April 6, 1936 June 2004 Chairman of the Board
(Representative Director)
Koji Nishigaki June 22, 1938 June 2004 President and Member of the Board
(Representative Director)
Mineo Sugiyama July 22, 1939 June 2003 Senior Executive Vice President and Member of the
Board (Representative Director)
Shigeo Matsumoto December 29, 1940 June 2003 Executive Vice President and Member of the Board
Akinobu Kanasugi April 17, 1941 June 2003 Executive Vice President and Member of the Board, and
Company President of NEC Solutions
Yoshio Omori December 22, 1939 June 2003 Senior Vice President and Member of the Board
Kaoru Tosaka March 15, 1942 June 2004 Senior Vice President and Member of the Board, and
Company President of NEC Electron Devices
Kaoru Yano February 23, 1944 June 2003 Senior Vice President and Member of the Board, and
Company President of NEC Networks
Toshiro Kawamura July 7, 1942 June 2003 Senior Vice President and Member of the Board, and
Company Deputy President of NEC Solutions
Makoto Maruyama March 22, 1941 June 2003 Senior Vice President and Member of the Board
Shunichi Suzuki February 20, 1945 June 2004 Senior Vice President and Member of the Board
Tsutomu Nakamura June 12, 1948 June 2004 Senior Vice President and Member of the Board, and
Company Deputy President of NEC Networks
Toshio Morikawa March 3, 1933 June 2004 Member of the Board
Koichi Kimura January 6, 1936 June 2003 Member of the Board
Akira Uehara April 5, 1941 June 2004 Member of the Board
Tatsuo Sakairi October 15, 1937 June 2003 Corporate Auditor
Kenji Usui October 19, 1942 June 2004 Corporate Auditor
Koichi Yoshida October 30, 1940 June 2003 Corporate Auditor
Tsuneo Kabe March 9, 1927 June 2004 Corporate Auditor
Board members and corporate auditors may be contacted through NEC's
headquarters: c/o NEC Corporation, 7-1, Shiba 5-chome, Minato-ku, Tokyo
108-8001, Japan.
The following is a brief biography of each of NEC's board members most
of whom are also corporate officers, and corporate auditors.
Hajime Sasaki has been the Chairman of the Board since March 1999.
He served as Senior Executive Vice President from June 1996 until March 1999
and has been a member of the board since June 1988.
Koji Nishigaki became President in March 1999 and has been a member
of the board since June 1990. He served as Executive Vice President from June
1994 to March 1999.
43
Mineo Sugiyama has been a Senior Executive Vice President since June
2000. Mr. Sugiyama was elected to the board of directors in June 1991 and
served as Executive Vice President from June 1998 until June 2000.
Shigeo Matsumoto has been an Executive Vice President since June
1999. Mr. Matsumoto was elected to the board of directors in June 1991 and
served as Senior Vice President from June 1996 until June 1999.
Akinobu Kanasugi has been an Executive Vice President since June
2000. Mr. Kanasugi is also the current Company President of NEC Solutions. Mr.
Kanasugi was elected to the board of directors in June 1995 and served as
Senior Vice President from June 1999 until June 2000.
Yoshio Omori has been a Senior Vice President since June 1997. Mr.
Omori served as an Advisor to NEC from April 1997 until June 1997, when he was
elected to the board of directors. Prior to joining NEC, Mr. Omori served as
the Director General of the Cabinet Information Research Office of Japan from
March 1993 until April 1997.
Kaoru Tosaka has been a Senior Vice President since June 1998. He is
also the current Company President of NEC Electron Devices. Mr. Tosaka was
elected to the board of directors in June 1994, and he served as Company Deputy
President of NEC Solutions from April 2000 to April 2002.
Kaoru Yano has been a Senior Vice President since June 1999. He is
also the current Company President of NEC Networks. Mr. Yano was elected to the
board of directors in June 1995. He served as Executive General Manager of the
Transmission Operations Unit from June 1994 to June 1998.
Toshiro Kawamura has been a Senior Vice President and member of the
board since June 2001. He has also been a Company Deputy President of NEC
Solutions since June 2001. Mr. Kawamura was a member of the board from June
1996 until April 2000, and served as Senior Vice President from April 2000
until June 2001, when he was elected to his current position.
Makoto Maruyama has been a Senior Vice President and member of the
board since June 2001. Mr. Maruyama served as Associate Senior Vice President
from April 2000 until June 2001, when he was elected to his current position.
Shunichi Suzuki has been a Senior Vice President and member of the
board since June 2002. Mr. Suzuki served as Associate Senior Vice President
from April 2000 until June 2002, when he was elected to his current position.
Tsutomu Nakamura has been a Senior Vice President and member of the
board since June 2002. He has also been a Company Deputy President of NEC
Networks since April 2002. Mr. Nakamura served as Associate Senior Vice
President from June 2000 until April 2002.
Toshio Morikawa has been a member of the board since June 2000. Mr.
Morikawa was the Chairman of the Board of The Sumitomo Bank, Ltd. from June
1997 to March 2001, and currently is an Advisor to Sumitomo Mitsui Banking
Corporation.
Koichi Kimura has been a member of the board since June 2001. Mr.
Kimura served as Vice Chairman of Daiwa Institute of Research Ltd. from October
1998 until June 2000. In June 2000, Mr. Kimura became Special Advisor to Daiwa
Institute of Research Ltd.
Akira Uehara has been a member of the board since June 2002. Mr.
Uehara has been the President of the Taisho Pharmaceutical Co. Ltd. since June
1982 to the present.
Tatsuo Sakairi has been a corporate auditor since June 2000. Mr.
Sakairi was a member of the board from June 1989 until April 2000. Mr. Sakairi
served as Senior Executive Vice President from June 1998 until April 2000, and
as an Executive Advisor to NEC from April 2000 until June 2000.
44
Kenji Usui has been a corporate auditor since June 2001. Mr. Usui
was Senior Vice President of NEC-Mitsubishi Electric Visual Systems Corporation
until June 2001. He served as Senior Vice President of NEC Home Electronics,
Ltd. from June 1998 to January 2000.
Koichi Yoshida has been a corporate auditor since June 2000. Mr.
Yoshida was the President of Sumitomo Life Insurance Company from July 1997 to
July 2001, and currently is the Senior Advisor to Sumitomo Life Insurance
Company.
Tsuneo Kabe has been a corporate auditor since June 2001. Mr. Kabe
was appointed as a justice of the Supreme Court of Japan from May 1990 until he
retired in March 1997. Mr. Kabe is currently an attorney at law of Ishizawa, Ko
& Sato.
No family relationship exists among any of NEC's board members most of
whom are corporate officers or corporate auditors. No arrangement or
understanding exists between any of NEC's board members most of whom are
corporate officers or corporate auditors and any other person pursuant to which
any director, corporate officer, or corporate auditor was elected to their
position at NEC.
B. COMPENSATION
For the fiscal year ended March 31, 2002, NEC's board of directors
most of whom are also NEC's corporate officers, received aggregate
compensation, including bonuses and retirement allowances, paid by NEC and its
subsidiaries of JPY 847 million and the corporate auditors received aggregate
compensation of JPY 182 million. The aggregate amount accrued by NEC for the
fiscal year ended March 31, 2002 to provide pension, retirement, or similar
benefits for board members most of whom are also corporate officers and
corporate auditors was JPY 121 million and JPY 27 million, respectively.
C. BOARD PRACTICES
TERM
All board members and corporate auditors are elected by the general
meeting of shareholders. The regular term of office of a board member is two
years and a corporate auditor is three years (in the case of corporate auditors
to be elected at an ordinary general meeting of shareholders to be held with
respect to the first fiscal year ending on and after May 1, 2002, the regular
term of office is four years) from the date of their election to office.
However, board members and corporate auditors may serve any number of
consecutive terms. There is no regular term of office for corporate officers.
BOARD OF DIRECTORS AND CORPORATE AUDITORS
NEC's articles of incorporation provide for a board of directors of
not more than 40 members and for not more than five corporate auditors. There
is no maximum age limit for members of the board. Board members and corporate
auditors may be removed from office at any time by a resolution of a general
meeting of shareholders.
In April 2000, NEC introduced a new corporate officer system in order
to facilitate efficient and more responsive decision-making and draw clearer
lines of responsibility, and NEC reduced the number of board members by
approximately half.
Currently the number of board members is 15. Corporate officers have
responsibility for executing NEC's business operations, and the board members
oversee these officers and set fundamental strategies for NEC.
The board of directors has ultimate responsibility for the
administration of NEC's affairs. The board of directors may elect by its
resolutions from among its members a chairman of the board, a vice chairman of
the board, a president and one or more senior executive vice presidents,
executive vice presidents and senior vice presidents, although any such
position may be left vacant. By resolution, the
45
board of directors designates, from among its members, representative
directors, who have authority individually to represent NEC generally in the
conduct of its affairs.
Under the Commercial Code of Japan, board members must refrain from
engaging in any business competing with NEC unless approved by a board
resolution, and no board member may vote on a proposal, arrangement or contract
in which that board member is deemed to be materially interested.
The amount of remuneration payable to NEC's board members as a group
and that of NEC's corporate auditors as a group in respect of a fiscal year is
subject to approval by a general meeting of shareholders. Within those
authorized amounts, the compensation for each board member and corporate
auditor is determined by the board of directors and a consultation of the
corporate auditors, respectively.
Neither the Commercial Code nor NEC's articles of incorporation
contain special provisions as to the retirement age of NEC's board members and
corporate auditors, or to a requirement of NEC's board members and corporate
auditors to hold any shares of NEC's capital stock. In accordance with Japanese
practice, when a board member or corporate auditor retires, a proposal to pay a
retirement allowance is submitted to a general meeting of shareholders for
approval. The amount of the retirement allowance for a board member or
corporate auditor generally reflects the person's position at the time of
retirement, length of services as a board member or corporate auditor and
contribution to NEC's operations. NEC has a retirement plan for NEC's board
members, corporate auditors, and employees. Generally, there are no directors'
service contracts providing for benefits upon termination of employment.
The Commercial Code requires a resolution of the board of directors
for a company to acquire or dispose of material assets, to borrow substantial
amounts of money, to employ or discharge important employees such as corporate
officers, and to establish, change or abolish material corporate organizations
such as a branch office.
Pursuant to the amendments to the Commercial Code, which became
effective on May 1, 2002 and NEC's articles of incorporation, as amended, NEC
may enter into a liability limitation agreement with outside directors which
limits the maximum amount of their liability owed to NEC for the damages arising
from their actions stipulated in Item 5 of Paragraph 1, Article 266 of the
Commercial Code to the higher of either (i) the amount to be fixed which is not
less than JPY 15,000,000 or (ii) the amount stipulated by the Commercial
Code, provided that such directors shall act in good faith and without gross
negligence.
The corporate auditors are not required to be and are not certified
public accountants. At least one of the corporate auditors must be a person who
has not been a board member or employee of NEC or any of its subsidiaries
during the five-year period prior to election as a corporate auditor. After the
conclusion of the ordinary general meeting of shareholders to be held with
respect to the first fiscal year ending on or after May 1, 2005, at least half
of corporate auditors must be persons who have not been either board members or
employees of NEC or any of its subsidiaries. A corporate auditor may not at the
same time be a board member or an employee of NEC or any of its subsidiaries.
The corporate auditors have the statutory duty of examining NEC's financial
statements and NEC's business reports to be submitted annually by the board of
directors at the general meetings of shareholders and of reporting their
opinions to the shareholders. They also have the statutory duty of supervising
the administration by the board members of NEC's affairs. They shall
participate in the meetings of the board of directors but are not entitled to
vote.
The corporate auditors constitute the board of corporate auditors.
Under the Commercial Code and the Law concerning Special Measures to the
Commercial Code with respect to Audit of Corporations, the board of corporate
auditors has a statutory duty to prepare and submit its audit report to the
board of directors each year. A corporate auditor may note an opinion in the
auditor report if a corporate auditor's opinion is different from the opinion
expressed in the audit report. The board of corporate auditors is empowered to
establish audit principles, the method of examination by corporate auditors of
NEC's affairs and financial position and other matters concerning the
performance of the corporate auditors' duties.
46
D. EMPLOYEES
As of March 31, 2002, we had approximately 142,000 employees on a
consolidated basis, approximately 80% of which were located in Japan and 20%
outside Japan. Approximate numbers of employees by each in-house company are as
follows:
Number of Employees
Electronics business
NEC Solutions 48,900
NEC Networks 34,500
NEC Electron Devices 35,700
Others 22,400
Leasing business 500
As of March 31, 2001, we had approximately 150,000 employees and as of
March 31, 2000, we had approximately 155,000 employees.
Since 1952, NEC has had a comprehensive labor contract with NEC
Workers' Union covering, in general, conditions of employment other than
salary, wages, bonuses and retirement benefits. This contract, which provides
that all of NEC's permanent employees except management and other specified
personnel must become union members, has been renegotiated from time to time,
and the present agreement extends until March 31, 2004. The permanent employees
of NEC's consolidated subsidiaries are covered by separate labor contracts. We
believe that our labor-management relations are good.
E. SHARE OWNERSHIP
As of March 31, 2002, NEC's board members, most of whom are also
corporate officers, and corporate auditors together owned 182,534 shares of
common stock, representing 0.01% of the total outstanding shares.
STOCK OPTION PLAN
At the ordinary general meeting of NEC's shareholders held on June 29,
2000, NEC's shareholders approved a stock option plan (the "2000 stock option
plan") for board members, corporate officers, and specified upper-level
employees, under which no more than 320,000 shares may be purchased for an
aggregate price not exceeding JPY 1,200 million. NEC will hold shares purchased
under the 2000 stock option plan and reserve them for transfer to NEC's board
members, corporate officers, and specified upper-level employees upon the
exercise of their options. The aggregate number of shares to be transferred to
board members and corporate officers of NEC upon the exercise of their
outstanding options under the 2000 stock option plan is 190,000 shares. The
exercise price of the options is currently JPY 3,400 per share, subject to
adjustment if there is a stock split or consolidation of shares, or new shares
are issued at a price less than the market price. The options can be exercised
from July 1, 2002 to June 30, 2006. The options lapse automatically upon the
optionholder's death and generally expire one year after the termination of the
optionholder's service with NEC.
At the ordinary general meeting of NEC's shareholders held on June 21,
2001, NEC's shareholders approved a second stock option plan (the "2001 stock
option plan"), with terms and conditions substantially the same as those of the
2000 stock option plan. The aggregate number of shares to be transferred to
board members and corporate officers of NEC upon the exercise of their
outstanding options under the 2001 stock option plan is 204,000 shares. The
exercise price per share of the options is JPY 1,876 per share. The options can
be exercised from July 1, 2003 to June 30, 2007.
47
At the ordinary general meeting of NEC's shareholders held on June 20,
2002, NEC's shareholders approved a third stock option plan (the "2002 stock
option plan") under which NEC may issue stock acquisition rights (the "Rights")
to board members, corporate officers, and certain upper-level employees of NEC
and certain executives of NEC's subsidiaries in Japan pursuant to Articles
280-20 and 280-21 of the Commercial Code. Holders of the Rights are entitled to
acquire 1,000 shares of common stock of NEC per Right upon the exercise of the
Rights. Under the 2002 stock option plan, no more than 450 Rights may be issued.
The aggregate number of shares to be issued or transferred to board members and
corporate officers of NEC upon the exercise of their outstanding Rights is
192,000 shares. The exercise price of the Rights is currently JPY 916 per share,
subject to adjustment if there is a stock split or consolidation of shares, or
new shares are issued at a price less than the market price. The Rights can be
exercised from July 1, 2004 to June 30, 2008. If a holder of the Rights ceases
to be a board member, corporate officer or employee of NEC or its subsidiaries,
the Rights cannot be exercised by the holder after the expiry of one year after
such event.
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS.
A. MAJOR SHAREHOLDERS
As of March 31, 2002, NEC had 149,084 registered shareholders. NEC's
shareholders do not have different voting rights. The ten largest shareholders
appearing on the register of shareholders of NEC's common stock at that date
were as follows:
NUMBER OF SHARES OF PERCENTAGE OF SHARES OF
SHAREHOLDER COMMON STOCK HELD COMMON STOCK HELD
- ----------------------------------------------------------------- ------------------- -----------------------
The Chase Manhattan Bank, N.A., London 85,107,357 5.14%
Japan Trustee Services Bank, Ltd. (Trust Account) 80,784,000 4.88
Sumitomo Life Insurance Company 66,500,000 4.02
The Mitsubishi Trust and Banking Corporation (Trust Account) 55,835,000 3.37
Nippon Life Insurance Company 49,668,675 3.00
The Chase Manhattan Bank, N.A., London, S.L. Omnibus Account 49,515,247 2.99
The Sumitomo Mitsui Banking Corporation 42,530,909 2.57
UFJ Trust Bank Limited (Trust Account A) 35,782,000 2.16
Mitsui Sumitomo Insurance Company, Limited 31,182,670 1.88
The Dai-ichi Mutual Life Insurance Company 30,711,000 1.85
----------- -----
Total 527,616,858 31.86%
=========== =====
We received from Capital Guardian Trust Company, Capital
International, Inc., Capital International Limited, Capital International S.A.
and Capital Research and Management Company, copies of reports concerning the
bulk holding of shares of common stock (see the "Reporting of Substantial
Shareholders" section under Item 10.B. "Memorandum and Articles of
Association") that these companies jointly held 133,674,390 shares, or 8.07% of
the total outstanding shares as of April 30, 2002. We are unable to confirm
their shareholdings because they did not appear on our register of
shareholders.
The record of ownership and distribution of our shares of common
stock, appearing on the register of shareholders as of March 31, 2002, was as
follows:
NUMBER OF NUMBER OF SHARES PERCENTAGE OF
SHAREHOLDERS HELD SHARES HELD
------------ ---------------- -------------
Japanese government and local government 1 20,208 0.00%
Japanese financial institutions 395 760,814,841 45.94
Japanese securities companies 103 12,565,711 0.76
Other Japanese corporations 2,114 103,073,734 6.22
Foreign institutions and individuals(1) 878 470,079,404 28.38
Japanese individuals and others 145,593 309,714,291 18.70
------- ------------- ------
Total 149,084 1,656,268,189 100.00%
======= ============= ======
48
(1) 95,921,408 shares, or 5.8%, of our outstanding common stock was owned
by 139 U.S. shareholders of record, one of whom is the ADR
depositary's nominee holding 8,514,340 shares, or 0.5%, of our
outstanding common stock.
B. RELATED PARTY TRANSACTIONS
Since April 1, 1999, none of our board members most of whom are also
corporate officers or corporate auditors, and none of the close members of
their respective families, has had the following:
- any personal interest in transactions effected by NEC which
were unusual in their nature or conditions or significant to
our business and which were either effected during an earlier
fiscal year or presently proposed, and remain in any respect
outstanding and unperformed; or
- any outstanding loans (including guarantees of any kind) made
by us to or for the benefit of these persons.
In the ordinary course of business on an arm's length basis, NEC
purchases and sells materials, supplies and services from and to its affiliates
accounted for by the equity method, including NEC Personal Systems
Minami-Kyusyu, Ltd., Elpida Memory, Inc., NEC-Mitsubishi Electric Visual
Systems Corporation, SINCERE Corporation, Nippon Electric Glass Co., Ltd.,
ANRITSU CORPORATION, Tokin Corporation, Toyo Communication Equipment Co., Ltd.,
Kaijo Corporation, SUMITOMO 3M Limited, Shanghai Hua Hong NEC Electronics
Company, Limited, and Samsung NEC Mobile Display Co., Ltd. Starting April 1,
2002, Tokin Corporation is now accounted as our consolidated subsidiary and
concurrently changed its name to NEC TOKIN Corporation.
NEC sells and purchases materials, supplies, and services to and from
these affiliates accounted for by the equity method in the ordinary course of
business. For the fiscal year ended March 31, 2002, NEC recorded total sales of
approximately JPY 72.4 billion to, and total purchases of approximately JPY
57.6 billion, from these affiliated companies. As of March 31, 2002, NEC had
trade receivables of approximately JPY 18.2 billion owed by, and trade payables
of approximately JPY 19.2 billion owed to, these affiliated companies.
In addition, NEC has guaranteed the repayment of some loans granted to
Shanghai Hua Hong NEC Electronics Company, Limited and other affiliates. As of
March 31, 2002, the total outstanding principal amount guaranteed by us for
affiliated companies is JPY 25.1 billion.
NEC does not consider the amounts involved in the above transactions
to be material to its business. Please refer to Note 3 to the consolidated
financial statements for a more detailed explanation regarding NEC's
investments in and transactions with these affiliated companies.
C. INTERESTS OF EXPERTS AND COUNSEL
Not applicable.
ITEM 8. FINANCIAL INFORMATION.
A. CONSOLIDATED STATEMENTS AND OTHER FINANCIAL INFORMATION
See our consolidated financial statements beginning on page F-1 of
this annual report.
49
LEGAL PROCEEDINGS
We and certain of our subsidiaries are currently engaged in a lawsuit
with GE Warranty Management, Inc. in the Superior Court of California, Los
Angeles County. The lawsuit concerns a claim for declaratory relief that two of
our subsidiaries initiated against GE Warranty in December, 2001 and a
cross-claim by GE Warranty against us and some of our subsidiaries. In its
cross-complaint, GE Warranty seeks reimbursement of costs it allegedly incurred
in connection with warranty contracts that it issued to purchasers of personal
computers previously manufactured by two of our subsidiaries, punitive damages
and attorney's fees. We and the subsidiaries involved in the lawsuit are
vigorously defending GE Warranty's claim, and believe that the claim has no
basis either in law or in fact.
Other than as disclosed above, neither NEC nor any of our subsidiaries
is a party to, nor is any of our property the subject of, any legal proceeding
which, in the opinion of our management, is or may be of material importance to
us and our subsidiaries, taken as a whole. No legal proceeding of material
importance known to our management is currently threatened by governmental
authorities.
We had been engaged in an arbitration proceeding against InterDigital
Technology Corporation before the American Arbitration Association for
resolution of disputes on royalties under a license agreement for certain
patents relating to time division multiple access, or TDMA, technology. The
arbitration proceeding was terminated by settlement in January 2002.
DIVIDEND POLICY
NEC has paid cash dividends on shares of our common stock on a
semi-annual basis in each year since 1951. It is the present intention of our
board of directors to continue to propose year-end cash dividends at general
meetings. NEC's board of directors may declare an interim cash dividend after
the close of our semi-annual fiscal period if they deem it appropriate. This
will be subject to our earnings and financial condition and other factors,
including legal restrictions with respect to the payment of dividends.
B. SIGNIFICANT CHANGES
No significant changes have occurred since the date of the annual
financial statements included in this annual report.
ITEM 9. THE OFFER AND LISTING.
A. OFFER AND LISTING DETAIL
The following table shows, for the periods indicated, the reported
high and low sale prices for shares of NEC's common stock on the Tokyo Stock
Exchange and the reported high and low sales prices for NEC's American
Depositary Shares, or ADSs, on the Nasdaq National Market System:
TOKYO STOCK EXCHANGE PRICES NASDAQ NATIONAL MARKET PRICES
FOR COMMON STOCK FOR ADSS (1)
--------------------------- -----------------------------
HIGH LOW HIGH LOW
--------------------------- -----------------------------
(PRICE PER SHARE IN YEN) (PRICE PER ADS IN DOLLARS)
Year ended December 31, 1998 JPY 1,560 JPY 762 $ 12.38 $ 6.20
Year ended December 31, 1999 2,665 1,012 25.00 8.73
Year ended December 31, 2000 3,450 1,899 32.40 17.40
Year ended December 31, 2001
First quarter 2,580 1,520 21.93 12.50
Second quarter 2,390 1,665 19.73 13.55
Third quarter 1,826 970 14.66 7.85
Fourth quarter 1,400 900 11.20 7.50
Year ending December 31, 2002
First quarter 1,447 846 11.05 6.30
50
Second quarter 1,158 794 8.70 6.55
Third quarter (through July 26) 862 719 7.20 6.25
January 1,447 1,022 11.05 7.65
February 1,018 846 7.28 6.30
March 1,207 947 9.29 7.25
April 1,158 977 8.70 7.50
May 1,028 900 8.11 7.04
June 942 794 7.68 6.55
July (through July 26) 862 719 7.20 6.25
(1) NEC's ADS to common stock ratio was changed from 1:5 to 1:1 effective
May 25, 2001. The prices of ADSs presented in the table above prior to
the ratio change on May 25, 2001 have been restated on the current
basis that each ADS represents one share of common stock.
B. PLAN OF DISTRIBUTION
Not applicable.
C. MARKETS
The primary market for NEC's common stock is the Tokyo Stock Exchange.
NEC's common stock is also listed on four other stock exchanges in Japan.
NEC's common stock is also listed on the London Stock Exchange, on the
Amsterdam Exchange, on the Frankfurt Stock Exchange in the form of co-ownership
shares in a Global Bearer Certificate and on the Swiss Exchanges in the form of
Swiss Bearer Depositary Receipts. NEC's ADSs evidenced by American Depositary
Receipts, or ADRs, have been traded since 1963 on the over-the-counter market
in the United States and are currently quoted on the Nasdaq National Market
System.
D. SELLING SHAREHOLDERS
Not applicable.
E. DILUTION
Not applicable.
F. EXPENSES OF THE ISSUE
Not applicable.
ITEM 10. ADDITIONAL INFORMATION.
A. SHARE CAPITAL
Not applicable.
B. MEMORANDUM AND ARTICLES OF ASSOCIATION
ORGANIZATION
NEC is a joint stock corporation ("kabushiki kaisha") incorporated in
Japan under the Commercial Code ("shoho") of Japan. It is registered in the
Commercial Register ("shogyo tokibo") maintained by the Minato Branch Office of
the Tokyo Legal Affairs Bureau.
51
CORPORATE PURPOSE OF NEC
Article 2 of NEC's articles of incorporation provides that the
corporate purposes of NEC is to carry on the following businesses:
1. To manufacture, sell or otherwise dispose of,
telecommunications equipment, machinery and instruments, electronic
computers and other electronics application equipment, machinery and
instruments, electrical equipment, machinery and instruments, and all
kinds of equipment, machinery, instruments and systems related to
electricity;
2. To manufacture, sell or otherwise dispose of, nuclear energy
machinery and instruments, aircraft machinery and instruments, medical
machinery and instruments, measuring instruments and all equipment,
machinery, instruments and systems other than those mentioned in the
preceding item above;
3. To manufacture, sell or otherwise dispose of, electron tubes,
semiconductor devices, integrated circuits and all parts and materials
for use in or in connection with any equipment, machinery and
instruments mentioned in any of the preceding items;
4. To provide telecommunications, data base, and other
information services;
5. To contract for construction work;
6. To engage in any and all activities requisite to the
promotion, handling, and carrying out of the businesses mentioned in
any of the preceding items; and
7. To invest in businesses mentioned in any of the preceding
items which businesses are under the administration of others.
BOARD OF DIRECTORS
Under the Commercial Code, each board member has executive powers and
duties to manage the affairs of NEC and each representative director, who is
elected from among the board members by the board of directors, has the
statutory authority to represent NEC in all respects. Under the Commercial Code,
board members of NEC must refrain from engaging in any business competing with
NEC unless approved by a board resolution, and no board member may vote on a
proposal, arrangement or contract in which that board member is deemed to be
materially interested. In this connection, while any board member has the power
to vote on remuneration (including pension or other benefits) for any board
member, if specifically named as payee of such remuneration, such board member
must abstain from voting in respect of the relevant portion of the proposal.
Neither the Commercial Code nor NEC's articles of incorporation
contain special provisions as to the borrowing power exercisable by a board
member. See also the discussion under "Item 6.C. Board Practices" contained in
this document.
COMMON STOCK
General. Set forth below is information relating to NEC's common
stock, including brief summaries of the relevant provisions of NEC's articles
of incorporation and share handling regulations, as currently in effect, and of
the Commercial Code of Japan and related legislation. The discussion of the
Commercial Code below reflects certain amendments to the Commercial Code, which
became effective on October 1, 2001 (the "2001 Amendments") and April 1, 2002
(the "2002 Amendments").
In order to assert shareholders' rights against NEC, a shareholder
must have its name and address registered on NEC's register of shareholders, in
accordance with NEC's share handling regulations. The
52
registered beneficial holder of deposited shares underlying the ADSs is the
Depositary for the ADSs. Accordingly, holders of ADSs will not be able directly
to assert shareholders' rights to NEC.
A holder of shares may choose, at its discretion, to participate in
the central clearing system for share certificates under the Law Concerning
Central Clearing of Share Certificates and Other Securities of Japan.
Participating shareholders must deposit certificates representing all of the
shares to be included in this clearing system with the Japan Securities
Depository Center, Inc., or JASDEC. If a holder is not a participating
institution in JASDEC, it must participate through a participating institution,
such as a securities company or bank having a clearing account with JASDEC. All
shares deposited with JASDEC will be registered in the name of JASDEC on NEC's
register of shareholders. Each participating shareholder will in turn be
registered on NEC's register of beneficial shareholders and be treated in the
same way as shareholders registered on NEC's register of shareholders. For the
purpose of transferring deposited shares, delivery of share certificates is not
required. Entry of the share transfer in the books maintained by JASDEC for
participating institutions, or in the book maintained by a participating
institution for its customers, has the same effect as delivery of share
certificates. The registered beneficial shareholders may exercise the rights
attached to the shares, such as voting rights, and will receive dividends (if
any) and notices to shareholders directly from NEC. The shares held by a person
as a registered shareholder and those held by the same person as a registered
beneficial shareholder are aggregated for these purposes. Beneficial owners may
at any time withdraw their shares from deposit and receive share certificates.
Authorized Capital. Article 5 of the articles of incorporation of
NEC provides that the total number of shares authorized to be issued by NEC is
3,200,000,000 shares.
As of March 31, 2002, 1,656,268,189 shares of common stock without a
par value were issued and outstanding.
The 2001 Amendments eliminated the concept of "par value" of shares of
capital stock. Thus, all shares of capital stock of NEC have no par value.
Dividends. NEC's articles of incorporation provide that the accounts
shall be closed on March 31 of each year. Year-end dividends, if any, shall be
paid to shareholders, beneficial shareholders, and pledgees of record as of the
end of day. After the close of the fiscal period, the board of directors
prepares, among others, a proposed allocation of profits for dividends and
other purposes. This proposal is submitted to the board of corporate auditors
of NEC and to independent certified public accountants and then submitted for
approval to the ordinary general meeting of shareholders. This meeting is to be
held in June each year. In addition to provisions for any dividends and for the
legal reserve and other reserves, the allocation of profits customarily
includes a bonus to directors and corporate auditors. In addition to year-end
dividends, the board of directors may by its resolution declare an interim cash
dividend pursuant to Article 293-5 of the Commercial Code to shareholders,
beneficial shareholders, and pledgees. This interim dividend is paid to those
who are registered in NEC's register of shareholders or beneficial shareholders
as of the end of each September 30, without prior shareholder approval, but
subject to the limitations described below.
The Commercial Code provides that a company may not make any
distribution of profits by way of year-end dividends or interim dividends for
any fiscal period unless it has set aside in its legal reserve an amount equal
to at least 10% of the amount paid by way of appropriation of retained earnings
for such fiscal period or of the amount of such interim dividends until the
aggregate amount of additional paid-in capital and legal reserve is 25% of its
stated capital. Under the Commercial Code, NEC is permitted to distribute
profits by way of year-end or interim dividends out of the excess of NEC's net
assets over the aggregate of:
(1) NEC's stated capital;
(2) NEC's additional paid-in capital;
53
(3) NEC's accumulated legal reserve;
(4) the legal reserve to be set aside in respect of the fiscal
period concerned;
(5) any excess of unamortized expenses incurred in preparation
for commencement of business and in connection with R&D over
the aggregate of amounts referred to in (2), (3), and (4)
above; and
(6) if certain of NEC's assets are stated at market value
pursuant to the provisions of the Commercial Code, the
excess, if any, of the aggregate market value of those assets
over the aggregate acquisition cost of those assets.
In the case of interim dividends, the net assets are calculated by
reference to the non-consolidated balance sheet at the last closing of NEC's
accounts. However, the assets are adjusted to reflect (x) any subsequent
payment made by appropriation of retained earnings and transfer to legal
reserve in respect thereof; (y) any subsequent transfer of retained earnings to
stated capital; and (z)if NEC has been authorized, pursuant to a resolution of
an ordinary general shareholders meeting, to acquire NEC's shares, the total
amount of the purchase price of those shares authorized by the resolution that
may be paid by NEC. Interim dividends may not be paid where there is a risk
that at the end of the fiscal year there might not be any excess of net assets
over the aggregate of the amounts referred to in (1) through (6) above.
In Japan, the "ex-dividend" date and the record date for dividends
precede the date of determination of the amount of the dividend to be paid.
Under NEC's articles of incorporation, NEC does not have to pay any
dividends which are left unclaimed for a period of three years.
Stock Splits. NEC may at any time split shares in issue into a
greater number of shares by resolution of the board of directors, and may amend
its articles of incorporation to increase the number of the authorized shares
to be issued in proportion to the relevant stock split in principle pursuant to
a resolution of the board of directors rather than a special resolution of a
general meeting of shareholders which is otherwise required for amending the
articles of incorporation.
In the event of a stock split, generally, shareholders will not be
required to exchange share certificates for new share certificates, but
certificates representing the additional shares resulting from the stock split
will be issued to shareholders. When a stock split is to be made, NEC must give
public notice of the stock split, specifying the record date therefor, at least
two weeks prior to such record date. In addition, promptly after the stock
split takes effect, NEC must give notice to each shareholder specifying the
number of shares to which such shareholder is entitled by virtue of the stock
split.
General Meetings of Shareholders. NEC's ordinary general meeting of
shareholders is held every June in Tokyo, Japan. The record date for an
ordinary general meeting of shareholder is March 31 of each year. In addition,
NEC may hold an extraordinary general meeting of shareholders whenever
necessary by giving at least two weeks' advance notice to shareholders.
Notice of convocation of a shareholders' meeting setting forth the
place, time and purpose thereof, must be mailed to each shareholder having
voting rights (or, in the case of a non-resident shareholder, to his or her
standing proxy or mailing address in Japan) at least two weeks prior to the
date set for the meeting. Under the Commercial Code, such notice may be given
to shareholders by electronic means, subject to the consent by the relevant
shareholders.
Any shareholder or group of shareholders holding at least three
percent of the total number of voting rights for a period of six months or more
may require the convocation of a general meeting of shareholders for a
particular purpose. Unless such shareholders' meeting is convened promptly or a
convocation notice of a meeting which is to be held not later than six weeks
from the day of such demand is
54
================================================================================
dispatched, the requiring shareholder may, upon obtaining a court approval,
convene such shareholders' meeting.
Any shareholder or group of shareholders holding at least 300 voting
rights or 1% of the total number of voting rights for a period of six months or
more may propose a matter to be considered at a general meeting of shareholders
by submitting a written request to a representative director at least six weeks
prior to the date set for such meeting.
Voting Rights. So long as NEC maintains the unit share system (see
"(New `Unit' share system)" below), a holder of shares constituting one or more
units is entitled to one vote for each such unit of shares, subject to the
limitations on votes set forth in the following two sentences. A corporate
shareholder more than one-quarter of whose total voting rights are directly or
indirectly owned by NEC may not exercise its voting rights with respect to
shares of common stock of NEC that it owns. In addition, NEC may not exercise
voting rights with respect to its own shares that it owns. If NEC eliminates
from its article of incorporation the provisions relating to the unit of
shares, holders of common stock will have one vote for each share they hold.
Except as otherwise provided by law or by the articles of incorporation of NEC,
a resolution can be adopted at a general meeting of shareholders by a majority
of the number of voting rights of all the shareholders represented at the
meeting. The Commercial Code and NEC's articles of incorporation provide,
however, that the quorum for the election of directors and corporate auditors
shall not be less than one-third of the total number of voting rights of all
the shareholders. NEC's shareholders are not entitled to cumulative voting in
the election of directors. Shareholders may cast their vote in writing and may
also exercise their voting rights through proxies, provided that the proxies
are also shareholders holding voting rights. Shareholders may also exercise
their voting rights by electronics means when the board of directors decides to
permit such method of exercising voting rights.
The Commercial Code provides that in order to amend the articles of
incorporation and in certain other instances, including a reduction of stated
capital, the removal of a director or corporate auditor, dissolution, merger or
consolidation with a certain exception under which shareholders' resolution is
not required, the transfer of the whole or an important part of the business,
the taking over of the whole of the business of any other corporation with a
certain exception under which shareholders resolution is not required, share
exchange or share transfer for the purpose of establishing 100%
parent-subsidiary relationships with a certain exception under which
shareholders resolution is not required, splitting of the corporation into two
or more corporations with a certain exception under which shareholders
resolution is not required, or any offering of new shares at a "specially
favorable" price (or any offering of stock acquisition rights to subscribe for
or acquire shares of capital stock ("stock acquisition rights") or bonds with
stock acquisition rights at a "specially favorable" exercise conditions) to any
persons other than shareholders, the quorum shall be a majority of the total
voting rights of all the shareholders and the approval by at least two-thirds of
the voting rights of all the shareholders represented at the meeting is required
(the "special shareholders resolutions").
Issue of Additional Shares and Pre-emptive Rights. Holders of NEC's
shares of Common Stock have no pre-emptive rights under its articles of
incorporation. Authorized but unissued shares may be issued at such times and
upon such terms as the board of directors determines, subject to the
limitations as to the offering of new shares at a "specially favorable" price
mentioned under "Voting Rights" above. The board of directors may, however,
determine that shareholders shall be given subscription rights regarding a
particular issue of new shares, in which case such rights must be given on
uniform terms to all shareholders as at a record date of which not less than
two weeks' prior public notice must be given. Each of the shareholders to whom
such rights are given must also be given notice of the expiry thereof at least
two weeks prior to the date on which such rights expire.
Rights to subscribe for new shares may be made generally
transferable by the board of directors. Whether NEC will make subscription
rights generally transferable in future rights offerings will depend upon the
circumstances at the time of such offerings. If subscription rights are not
made generally transferable, transfers by a non-resident of Japan or a
corporation organized under the laws of a foreign country or whose principal
office is located in a foreign country will be enforceable against NEC and
third parties only if NEC's prior written consent to each such transfer is
obtained.
55
Under the 2002 Amendments, subject to certain requirements, NEC may
issue stock acquisition rights by a resolution of the board of directors.
Holders of stock acquisition rights may exercise their rights to acquire a
certain number of shares within the exercise period as prescribed in the terms
of their stock acquisition rights. Upon exercise of stock acquisition rights,
NEC will be obliged to issue the relevant number of new shares or alternatively
to transfer the necessary number of existing shares held by it.
Liquidation Rights. In the event of NEC's liquidation, the assets
remaining after payment of all debts and liquidation expenses and taxes will be
distributed among the shareholders in proportion to the respective numbers of
shares held.
Liability to Further Calls or Assessments. All of NEC's presently
outstanding shares are fully paid and non-assessable.
Transfer Agent. The Sumitomo Trust and Banking Company, Limited is
the transfer agent for NEC's common stock. As such transfer agent, it keeps
NEC's registers of shareholders and beneficial shareholders in its office at
4-4, Marunouchi 1-chome, Chiyoda-ku, Tokyo 100-8233, Japan, and makes transfer
of record ownership upon presentation of the certificates representing the
transferred shares.
Record Date. March 31 is the record date for NEC's year-end
dividends if declared. So long as NEC maintains the unit share system, the
shareholders and beneficial shareholders who are registered as the holders of
one or more whole units of shares in NEC's register of shareholders and/or
beneficial shareholders at the end of each March 31 are also entitled to
exercise shareholders' rights at the ordinary general meeting of shareholders
with respect to the fiscal year ending on that March 31. September 30 is the
record date for interim dividends if declared. In addition, NEC may set a
record date for determining the shareholders and beneficial shareholders
entitled to other rights and for other purposes by giving at least two weeks'
prior notice.
The price of shares generally goes ex-dividend or ex-rights on
Japanese stock exchanges on the third business day prior to a record date for
the purpose of dividends or rights offerings. If the record date is not a
business day, this occurs on the fourth business day prior to a record date.
Acquisition by NEC of Its Common Stock. NEC may acquire its own
shares through Japanese stock exchanges on which NEC's shares are listed or by
way of tender offer (pursuant to an ordinary resolution at an ordinary general
meeting of shareholders); from a specific party other than a subsidiary of NEC
(pursuant to a special resolution at an ordinary general meeting of
shareholders); or from a subsidiary of NEC (pursuant to a resolution of the
board of directors). When the acquisition is made by NEC from a specific party
other than a subsidiary of NEC, any shareholder may make a request directly to
NEC in writing not later than five days prior to the date set for the relevant
shareholders' meeting to include him/her as the seller of his/her shares in the
proposed purchase. Any such acquisition of shares (other than the acquisition
by NEC of its own shares from a subsidiary of NEC, in which case, subject to
the requirement that the total amount of the purchase price does not exceed the
amount of retained earnings available for interim dividends) must satisfy
specified requirements, including the requirements that the total amount of the
purchase price does not exceed the sum of the amount of retained earnings
available for year-end dividend payment after taking into account any reduction
of the stated capital, additional paid-in capital or legal reserve (if the
reduction of the stated capital, additional paid-in capital or legal reserve is
authorized at the same ordinary general meeting of shareholders), less the sum
of the amount to be paid by way of appropriation of retained earnings for the
relevant fiscal year and any transfer of retained earnings to stated capital.
NEC may hold the shares acquired in compliance with the provisions of
the Commercial Code as amended. Shares acquired by NEC may be held by it for
any period or may be cancelled by resolution of the board of directors. NEC may
also transfer to any person the shares held by it, subject to a resolution of
the board of directors, and subject also to other requirements similar to those
applicable to the issuance of new shares, as described in "Issue of Additional
shares and Pre-emptive Rights" above. NEC may also utilize its treasury stock
for the purpose of transfer to any person upon exercise of stock acquisition
rights or for the purpose of acquiring another company by way of merger, share
exchange or corporate split through exchange of treasury stock for shares or
assets of the acquired company.
56
New "Unit" share system. The 2001 Amendments introduced a new unit
share system called "tangen-kabushiki."
Pursuant to these amendments and the articles of incorporation of NEC,
1,000 shares constitute one unit. Although the number of shares constituting a
new unit is included in the articles of incorporation, any amendment to the
articles of incorporation reducing (but not increasing) the number of shares
constituting a unit or eliminating the provisions for the unit of shares may be
made by the resolution of the board of directors rather than by the special
shareholders resolution, which is otherwise required for amending the articles
of incorporation. The number of shares constituting one new unit, however,
cannot exceed 1,000 or one two-hundredth (1/200) of all issued shares.
Voting rights under the new unit share system. Under the new
unit share system, shareholders shall have one voting right for each unit of
shares that they hold. Any number of shares less than a full unit will carry no
voting rights.
Share certificates for less than a unit. Unless NEC's board of
directors adopts a resolution to eliminate the provision for the unit shares
from the articles of incorporation or the shareholders amend the articles of
incorporation by a special shareholders resolution to eliminate the provision
not to issue share certificates for less than a unit of shares, a share
certificate for any number of shares less than a unit will in general not be
issued. As the transfer of shares normally requires the delivery of the share
certificates therefor, any fraction of a unit for which no share certificates
are issued is not transferable.
Repurchase by NEC of shares constituting less than a unit. A
holder of shares constituting less than a full unit will be able to require NEC
to purchase those shares at their market value in accordance with the provisions
of the share handling regulations of NEC.
Effect of the unit share system on holders of ADRs. A holder who
owns ADRs evidencing less than 1,000 ADSs will indirectly own less than a whole
unit. Because a transfer of ADRs does not require a change in the ownership of
the underlying shares, holders of ADRs evidencing ADSs that constitute less than
one unit of common stock are not affected by such restrictions in their ability
to transfer such ADRs. However, a transfer of less than one unit of the
underlying shares is normally impractical under the unit share system. Thus
under the Deposit Agreement relating to the ADRs, the right of ADR holders to
surrender their ADRs and withdraw the underlying shares for sale in Japan may
only be exercised with whole units of common stock. Under the unit share system,
holders of less than a unit have the right to require NEC to purchase their
shares. However, holders of ADRs evidencing ADSs that represent amounts other
than integral multiples of whole units are unable to withdraw the underlying
shares representing less than one unit. Therefore, they are unable, as a
practical matter, to exercise the right to require NEC to purchase such
underlying shares. As a result, access to the Japanese markets by holders of
ADRs through the withdrawal mechanism will not be available for dispositions of
shares in lots of less than one unit.
REPORTING OF SUBSTANTIAL SHAREHOLDERS
The Securities and Exchange Law of Japan and regulations thereunder
requires any person who has become, beneficially and solely or jointly, a
holder of more than 5% of the total issued shares of capital stock of a
company listed on any Japanese stock exchange or whose shares are traded on the
over-the-counter market in Japan to file with the Director of a competent local
finance bureau of the Ministry of Finance within five business days a report
concerning such shareholdings. A similar report must be made in respect of any
subsequent change of 1% or more in any holding or any change in material
matters set out in reports previously filed, with certain exceptions. For this
purpose, shares issuable to such person upon conversion of convertible
securities or exercise of share subscription warrants or stock acquisition
rights are taken into account in determining both the number of shares held by
such holder and the issuer's total issued share capital. Copies of each such
report must also be furnished to the issuer of such shares and all Japanese
stock exchanges on which the shares are listed or, in the case of shares traded
over-the-counter, the Japan Securities Dealers Association.
57
Except for the general limitation under Japanese anti-trust and
anti-monopoly regulations against holding of shares of capital stock of a
Japanese corporation which leads or may lead to a restraint of trade or
monopoly, and except for general limitations under the Commercial Code or NEC's
articles of incorporation on the rights of shareholders applicable regardless
of residence or nationality, there is no limitation under Japanese laws and
regulations applicable to NEC or under its articles of incorporation on the
rights of non-resident or foreign shareholders to hold the shares of common
stock of NEC or to exercise voting rights.
There is no provision in NEC's articles of incorporation that would
have an effect of delaying, deferring or preventing a change in control of NEC
and that would operate only with respect to merger, consolidation, acquisition
or corporate restructuring involving NEC.
C. MATERIAL CONTRACTS
All contracts entered into by us during the two years preceding the
date of this annual report were entered into in the ordinary course of
business.
D. EXCHANGE CONTROLS
The Japanese Foreign Exchange and Foreign Trade Law, currently in
effect, does not affect or restrict the rights of a non-resident or foreign
corporation to acquire or hold shares of capital stock of NEC except that in
the event of acquisition of shares of common stock, unless such acquisition is
made through a securities company or other financial institution, the acquiring
non-resident or foreign corporation is subject to a post-transaction reporting
requirement under the Foreign Exchange and Foreign Trade Law. However, the
Minister of Finance has the power to impose a licensing requirement in certain
acquisitions in extremely limited circumstances. Under the current Foreign
Exchange and Foreign Trade Law, dividends paid on, and the proceeds of sales in
Japan of, shares held by non-residents of Japan may generally be converted into
any foreign currency and repatriated abroad.
E. TAXATION
The discussion below is not intended to constitute a complete analysis
of all tax consequences relating to the acquisition, ownership and disposition
of shares of common stock and ADSs. Prospective purchasers and holders of the
shares of common stock or ADSs should consult their own tax advisors concerning
the tax consequences of their particular situations.
The following is a general summary of the material United States
federal income and Japanese tax consequences of the acquisition, ownership and
disposition of shares of common stock or ADSs by an investor that holds those
shares or ADSs, as capital assets (generally, property held for investment).
This summary does not purport to address all tax consequences that may be
relevant to holders of shares of common stock or ADSs, and does not take into
account the specific circumstances of all categories of potential investors,
some of which (such as tax-exempt entities, banks, insurance companies,
broker-dealers, investors liable for alternative minimum tax, investors that own
or are treated as owning 10% or more of our voting stock, investors that hold
shares of common stock or ADSs as part of a straddle, hedge, conversion
transaction or other integrated transaction, investors that hold shares of
common stock or ADSs through a partnership or other pass-through entity and
investors whose functional currency is not the U.S. dollar) may be subject to
special tax rules. This summary is based on the tax laws of Japan and the
federal income tax laws of the United States as in effect on the date hereof, as
well as on the Income Tax Convention between the United States and Japan, as
currently in force, (the "Tax Convention"), all of which are subject to change
(possibly with retroactive effect), and to differing interpretations. In this
regard, U.S. Holders should note that the United States and Japan began formal
renegotiation of the Tax Convention in October 2001, and the negotiations
continue. In addition, this summary is based in part upon the representations of
the Depositary and the assumption that each obligation in the Deposit Agreement
for ADSs and in any related agreement, will be performed in accordance with its
terms.
58
For purposes of this discussion, a "U.S. Holder" is any beneficial
owner of shares of common stock or ADSs that is:
- an individual citizen or resident of the United States,
- corporation or other entity taxable as a corporation
organized under the laws of the United States or of any
political subdivision thereof,
- an estate or trust the income of which is subject to United
States federal income taxation without regard to its source.
An "Eligible U.S. Holder" is a U.S. Holder that:
- is a resident of the United States for purposes of the Tax
Convention,
- does not maintain a permanent establishment or fixed base in
Japan to which shares of common stock or ADSs are attributable
and through which the U.S. Holder carries on or has carried on
business (or, in the case of an individual, performs or has
performed independent personal services), and
- is not otherwise ineligible for benefits under the Tax
Convention with respect to income and gain derived in
connection with the shares of common stock or ADSs.
A "Non-U.S. Holder" is any beneficial owner of shares of common stock
or ADSs that is:
- an individual who is classified as a nonresident for United
States federal income tax purposes,
- a foreign corporation or other foreign entity taxable as a
corporation, or
- an estate or trust that is not a U.S. Holder.
This summary does not address any aspect of United States federal tax
law other than income taxation, and does not discuss any aspect of Japanese tax
law other than income taxation, inheritance and gift taxation and securities
transfer taxation. Investors are urged to consult their own tax advisors
regarding the United States federal, state and local and Japanese and other tax
consequences to them of acquiring, owning and disposing of shares of common
stock or ADSs. In particular, where relevant, investors are urged to confirm
their status as Eligible U.S. Holders with their tax advisors and to discuss
with their tax advisors any possible consequences of their failure to qualify
as Eligible U.S. Holders. In general, taking into account the earlier
assumptions, for purposes of the Tax Convention and for United States federal
income and Japanese tax purposes, owners of ADRs evidencing ADSs will be
treated as the owners of the shares of common stock represented by those ADSs,
and exchanges of shares of common stock for ADSs, and exchanges of ADSs for
shares of common stock, will not be subject to United States federal income or
Japanese tax.
Japanese taxation. The following is a summary of certain Japanese
income tax consequences of the ownership and disposition of shares of common
stock or ADSs by a portfolio investor who is a non-resident of Japan or a
non-Japanese corporation having no permanent establishment in Japan.
Generally, a non-resident of Japan or a non-Japanese corporation is
subject to Japanese withholding tax on dividends paid by a Japanese
corporation. Stock splits in themselves are not subject to Japanese income tax.
In the absence of an applicable tax treaty, convention or agreement
reducing the maximum rate of withholding tax, the rate of Japanese withholding
tax applicable to dividends paid by Japanese corporations to non-residents of
Japan or non-Japanese corporations is 20%. At the date of this document, Japan
has income tax treaties, conventions or agreements whereby the withholding tax
rate is reduced, in most
59
cases, to 15% for portfolio investors with, among other countries, Australia,
Belgium, Canada, Denmark, Finland, France, Germany, Ireland, Italy, Luxembourg,
The Netherlands, New Zealand, Norway, Singapore, Spain, Sweden, Switzerland, the
United Kingdom and the United States.
Under the Tax Convention, as currently in force, the maximum rate of
Japanese withholding tax which may be imposed on dividends paid by a Japanese
corporation to Eligible U.S. Holders generally is limited to 15% of the
gross amount actually distributed. An Eligible U.S. Holder is required to
submit an Application Form for Income Tax Convention Regarding Relief from
Japanese Income Tax on Dividends in advance through NEC to the relevant tax
authority before such payment of dividends. A standing proxy in Japan for a
non-resident holder of Common Stock may provide this application service. With
respect to ADSs, the Depositary or its agent will apply for this reduced rate
on behalf of Eligible U.S. Holders by submitting two Application Forms (one
before payment of dividends, the other within eight months after NEC's fiscal
year-end) to the Japanese tax authorities. To claim this reduced rate, an
Eligible U.S. Holder of ADSs will be required to file a proof of taxpayer
status, residence and beneficial ownership (as applicable) and to provide other
information or documents as may be required by the Depositary. An Eligible U.S.
Holder who does not submit an application in advance will be entitled to claim
the refund of withholding taxes withheld in excess of the rate under the Tax
Convention from the relevant Japanese tax authority.
Gains derived by a non-resident of Japan or a non-Japanese corporation
from the sale of shares of common stock or ADSs outside Japan or from the sale
of shares of common stock within Japan by a non-resident of Japan or a
non-Japanese corporation having no permanent establishment in Japan, are in
general not subject to Japanese income or corporation tax.
Japanese inheritance or gift tax at progressive rates may be payable
by a non-resident individual who has acquired shares of common stock or ADSs as
a legatee, heir or donee even though neither the individual nor the deceased
nor donor is a Japanese resident.
Holders of shares of NEC's common stock or ADSs should consult their
tax advisers regarding the effect of these taxes.
U.S. federal income taxation. The following is a summary of
material United States federal income tax consequences of the ownership of
shares of common stock or ADSs by a U.S. Holder. This summary is based on
United States federal income tax laws, including the United States Internal
Revenue Code of 1986, as amended (the "Code"), its legislative history,
existing and proposed regulations thereunder, published ruling and court
decisions, and on the Tax Convention all of which are subject to change
possibly with retroactive effect.
This summary is not a complete analysis or description of all
potential United States federal income tax consequences to a particular U.S.
Holder. It does not address all United States federal income tax considerations
that may be relevant to all categories of potential investors, certain of which
are subject to special tax rules. It also does not address any state or local
tax consequences of an investment in shares of common stock or ADSs.
As noted above, if the obligations of the depositary are performed in
accordance with the terms of the Deposit Agreement relating to the ADRs, owners
of ADRs evidencing ADSs will be treated as the owners of the shares of common
stock represented by those ADSs. The U.S. Treasury has expressed concerns that
parties to whom ADSs are pre-released may be taking actions that are
inconsistent with the claiming of foreign tax credits by U.S. Holders of ADSs.
Accordingly, the discussion on the creditability of Japanese taxes described
below could be affected by future actions that may be taken by the U.S.
Treasury.
We believe, and the discussion therefore assumes, that we are not and
will not become a "passive foreign investment company" or a "foreign personal
holding company" for United States federal income tax purposes.
60
Taxation of dividends. U.S. Holders will include in gross income
the gross amount of any dividends received (before reduction for Japanese
withholding taxes) to the extent paid out of NEC's current or accumulated
earnings and profits (as determined for United States federal income tax
purposes) as ordinary income. The dividend will not be eligible for the
"dividends-received deduction" allowed to United States corporations in respect
of dividends received from other United States corporations. The amount of the
dividend will be the U.S. dollar value of the Japanese yen payments made,
determined at the spot Japanese yen/U.S. dollar rate on the date the dividend
is received by the depositary in the case of U.S. Holders of ADSs, or by the
shareholder in the case of U.S. Holders of common stock, regardless of whether
the dividend payment is in fact converted into U.S. dollars at that time. If a
U.S. Holder realizes gain or loss on a sale or other disposition of Japanese
yen, it will generally be U.S. source ordinary income or loss.
Subject to certain limitations, the Japanese tax withheld in
accordance with the Tax Convention will be creditable against the U.S. Holder's
United States federal income tax liability. For foreign tax credit limitation
purposes, the dividend will be income from sources without the United States,
but generally will be treated separately, together with other items of "passive
income" or, in the case of certain U.S. Holders "financial services income."
Taxation of capital gains. Upon a sale or other disposition of
shares of common stock or ADSs, a U.S. Holder will recognize gain or loss in an
amount equal to the difference between the U.S. dollar value of the amount
realized and the U.S. Holder's tax basis (determined in U.S. dollars) in such
shares of common stock or ADSs. Generally, such gain or loss will be capital
gain or loss and will be long-term capital gain or loss if the U.S. Holder's
holding period for such shares of common stock or ADSs exceeds one year. Any
such gain or loss will be income or loss from sources within the United States
for foreign tax credit limitation purposes.
Transfers of retained earnings and sales of shares of Common Stock to
NEC. A transfer of retained earnings or legal reserve to stated capital is
generally treated as a dividend payment for Japanese tax purposes subject to
withholding tax. A sale of shares of common stock or ADSs to NEC results in a
deemed dividend to the selling shareholders to the extent that the sales price
exceeds the aggregate of the stated capital and the capital surplus
attributable to the shares sold. Transfers of retained earnings or legal
reserves to stated capital and deemed dividends that may result from sales of
shares of common stock to NEC are not generally taxable events for United
States federal income tax purposes and therefore would not give rise to foreign
source income and U.S. Holders may not be able to use the foreign tax credit
arising from any Japanese withholding tax imposed on such transactions unless
they can apply the credit (subject to limitations) against U.S. tax due or
other foreign source income in the appropriate category for foreign tax credit
purposes.
Information Reporting and Backup Withholding. Dividends paid on
common stock or ADSs to a U.S. Holder, or proceeds from a U.S. Holder's sale,
exchange or other disposition of common stock or ADSs, may be subject to
information reporting requirements. Those dividends or proceeds from sale or
disposition may also be subject to backup withholding unless the U.S. Holder:
- is a corporation or comes within certain other categories of
exempt recipients, and, when required, demonstrates this fact,
or
- provides a correct taxpayer identification number on a
properly completed U.S. Internal Revenue Service (the "IRS"),
Form W-9 or substitute form, certifies that the U.S. Holder is
not subject to backup withholding and otherwise complies with
applicable requirements of the backup withholding rules.
Any amount withheld under these rules will be creditable against the
U.S. Holder's United States federal income tax liability or refundable to the
extent that it exceeds such liability if the U.S. Holder provides the required
information to the IRS. If a U.S. holder is required to and does not provide a
correct taxpayer identification number, the U.S. Holder may be subject to
penalties imposed by the IRS.
61
F. DIVIDENDS AND PAYING AGENTS
Not applicable.
G. STATEMENTS BY EXPERTS
Not applicable.
H. DOCUMENTS ON DISPLAY
We are subject to the informational requirements of the U.S.
Securities Exchange Act of 1934, as amended. In accordance with these
requirements, we file reports and other information with the SEC. These
materials, including Annual Report on Form 20-F and the exhibits thereto, may
be inspected and copied at the SEC's Public Reference Room at 450 Fifth Street,
N.W., Washington D.C. 20549 and at the SEC's regional offices at 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of the materials
may be obtained from the Public Reference Room of the SEC at 450 Fifth Street,
N.W., Washington D.C. 20549 at proscribed rates. The public may obtain
information on the operation of the SEC's Public Reference Room by calling the
SEC in the United States at 1-800-SEC-0330. The SEC also maintains a web site
at http://www.sec.gov that contains reports, proxy statements, and other
information regarding registrants that file electronically with the SEC.
I. SUBSIDIARY INFORMATION
Please refer to discussion under "Item 4.C. Organizational Structure."
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
In the normal course of our business, we are exposed to cash flow
risks and risks of fair value of assets and liabilities resulting from
fluctuations in foreign currency exchange rates and interest rates. In order to
reduce such risks, we enter into various kinds of financial instruments. We do
not, however, own any such financial instruments for trading purposes. The
counterparties to our derivative transactions are major financial institutions.
We have established credit lines for each of such financial institutions,
considering, among other factors, their credit quality, and manage the monthly
balance for each such institution.
We adopt sensitivity analyses for the evaluation of our risks
resulting from fluctuations of foreign currency exchange rates and interest
rates. In such sensitivity analysis, we assume certain movements of foreign
currency exchange rates or interest rates, and value our risks that such
movements may affect the fair value of our financial instruments, such as cash
and cash equivalents, marketable and investment securities, loans, short-term
borrowings, long-term debt, and derivative financial instruments. The market
value of risks resulting from foreign currency exchange rate movements and
interest rate movements is the present value of future cash flows affected by
those rate movements in accordance with the valued market risk. The discount
rate used in the assessment of the present value is determined based on the
foreign currency exchange and interest rates at March 31, 2002. The difference
between the fair value so calculated based on such movements of foreign
currency exchange and/or interest rates, and the actual fair value (market
value) at March 31, 2002, is the profit or loss assumed by such risks. We have
not included the effect of accounts receivable and payable denominated in
foreign currencies that are the object of our derivative hedging. Therefore,
the following sensitivity analysis amounts do not reflect the full effect of
the hedging activities related to all of the underlying exposures.
RISKS FROM FOREIGN CURRENCY EXCHANGE RATE FLUCTUATIONS
We enter into certain derivative contracts in order to hedge the
adverse impact of fluctuations in foreign currency
62
exchange rates on our monetary assets and liabilities denominated in foreign
currency arising from our operating activities. The primary classes of
derivative financial instruments used for this purpose are forward exchange
contracts, and currency swap agreements. These derivative financial instruments
are used to hedge the effects from foreign currency exchange rate fluctuations
of, among others, U.S. dollars and Euros against Japanese yen. If exchange
rates of such currencies against Japanese yen decrease by 10% while conditions
other than such exchange rates remain the same, then the fair value of our
financial instruments would decrease by JPY 0.7 billion. On the other hand, if
such exchange rates rise by 10%, the fair value of such financial instruments
would increase by JPY 0.7 billion.
RISKS FROM INTEREST RATE FLUCTUATIONS
We are also exposed to risks of interest rate fluctuations that may
affect the fair value of our financial assets and liabilities (mainly long-term
debt). We enter into certain derivative contracts in order to hedge losses
resulting from fluctuations in interest rates. The primary classes of
derivative financial instruments used for this purpose are interest rate swap
agreements. If interest rates rise by 10% from those of March 31, 2002 while
conditions other than such interest rates remain the same, then the fair value
of those financial instruments would increase by JPY 1.5 billion. On the other
hand, if such interest rates decrease by 10%, the fair value of such financial
instruments would decrease by JPY 1.5 billion.
RISK FROM PRICE MOVEMENTS OF MARKETABLE SECURITIES
All of our marketable securities are classified as available-for-sale
securities. We do not own any marketable securities for trading purposes. The
following table sets forth the maturity dates and cost and fair values of debt
securities in our investment portfolio, and the cost and fair values of equity
securities therein, at March 31, 2002.
(MILLIONS OF YEN)
AT MARCH 31, 2002
COST FAIR VALUE
----------- -----------
Debt securities (by maturity dates):
Less than 1 year JPY 4,451 JPY 4,418
1 to 2 years 129 143
2 to 3 years 3,056 2,946
3 to 4 years 626 402
4 to 5 years 22 15
over 5 years 64 59
Equity securities: 177,855 255,096
----------- -----------
Total JPY 186,203 JPY 263,079
=========== ===========
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES.
Not applicable.
PART II
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES.
None.
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF
PROCEEDS.
Not applicable.
63
ITEM 15. [RESERVED].
ITEM 16. [RESERVED].
PART II
ITEM 17. FINANCIAL STATEMENTS.
Not applicable.
ITEM 18. FINANCIAL STATEMENTS.
Please see our consolidated financial statements beginning on page
F-1.
ITEM 19. EXHIBITS.
The following documents are exhibits to this annual report:
1. Articles of incorporation, as amended to date (English
translation)
2. Share handling regulations, as amended to date (English
translation)
3. Certificate of English Translations for Articles of
incorporation and for Share handling regulations
8. Subsidiaries of the Company (see "Item 4.C. Organizational
Structure")
10(a)(1). Certification of Chief Executive Officer or Equivalent
Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
10(a)(2). Certification of Chief Financial Officer or Equivalent
Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
64
SIGNATURES
The registrant certifies that it meets all of the requirements for
filing on Form 20-F and that it has duly caused and authorized the undersigned
to sign this annual report on its behalf.
NEC CORPORATION
By: /s/ Koji Nishigaki
------------------------------------
Koji Nishigaki
President
Date: August 6, 2002
NEC Corporation
Index to Consolidated Financial Statements
PAGE
-----------
Report of Ernst & Young, Independent Auditors F-2
Report of PricewaterhouseCoopers, Independent Accountants F-3
Consolidated Balance Sheets at March 31, 2001 and 2002 F-4, F-5
Consolidated Statements of Operations, Comprehensive Income (Loss) and Retained
Earnings for the years ended March 31, 2000, 2001 and 2002 F-6
Consolidated Statements of Cash Flows for the years ended March 31, 2000, 2001 and 2002 F-7
Notes to Consolidated Financial Statements F-8 - F-50
Financial Statement Schedule for the years ended March 31, 2000, 2001 and 2002:
II- Valuation and Qualifying Accounts F-51
All other schedules are omitted because they are not applicable or the
required information is shown in the financial statements or the notes thereto.
Financial statements of majority-owned subsidiaries not consolidated and of
50 percent or less owned persons accounted for by the equity method have been
omitted because the registrant's and its other subsidiaries' proportionate share
of the income from continuing operations before income taxes, and total assets
of each such company is less than 20 percent of the respective consolidated
amounts, and the investment in and advances to each company is less than 20
percent of consolidated total assets.
F-1
Report of Independent Auditors
The Board of Directors and Shareholders
NEC Corporation (Nippon Denki Kabushiki Kaisha)
We have audited the accompanying consolidated balance sheets of NEC Corporation
(the "Company") as of March 31, 2001 and 2002, and the related consolidated
statements of operations, comprehensive income (loss) and retained earnings and
cash flows for each of the two years in the period ended March 31, 2002, all
expressed in Japanese yen. Our audits also included the information for each of
the two years in the period ended March 31, 2002 included in the financial
statement schedule listed in the Index at Item 18 (a). These financial
statements and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audit.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. 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 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 fiscal 2001 and 2002 consolidated financial statements
referred to above present fairly, in all material respects, the consolidated
financial position of NEC Corporation at March 31, 2001 and 2002, and the
consolidated results of its operations and its cash flows for each of the two
years in the period ended March 31, 2002 in conformity with accounting
principles generally accepted in the United States of America. Also, in our
opinion, the information for each of the two years in the period ended March
31, 2002 included in the related financial statement schedule, when considered
in relation to the basic consolidated financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
As discussed in Note 2 to the consolidated financial statements, in fiscal 2001
the Company changed its method of accounting for the issuance of stock by a
subsidiary and, in fiscal 2002, the Company changed its method of accounting
for derivative financial instruments and hedging activities.
/s/ Ernst & Young
Tokyo, Japan
April 23, 2002
F-2
Report of Independent Accountants
To the Board of Directors and
Shareholders of NEC Corporation
(Nippon Denki Kabushiki Kaisha)
We have audited the accompanying consolidated statements of operations,
comprehensive income (loss) and retained earnings, of cash flows, and financial
statement schedule of NEC Corporation and its consolidated subsidiaries for the
year ended March 31, 2000, stated in yen. 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 conducted our audits in accordance with auditing standards generally
accepted in the United States of America. 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 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 results of the operations and the cash
flows of NEC Corporation and its consolidated subsidiaries for the year ended
March 31, 2000, in conformity with accounting principles generally accepted in
the United States of America. In addition, in our opinion, the financial
statement schedule referred to above presents fairly, in all material respects,
the information set forth therein when read in conjunction with the related
consolidated financial statements.
We have not audited the consolidated financial statements and financial
statement schedule of NEC Corporation and its consolidated subsidiaries for any
period subsequent to March 31, 2000.
/s/ PricewaterhouseCoopers
PricewaterhouseCoopers
Tokyo, Japan
May 11, 2000
F-3
NEC Corporation
Consolidated Balance Sheets
MARCH 31
---------------------------------
2001 2002
-------------- --------------
(Millions of yen)
ASSETS
Current assets:
Cash and cash equivalents JPY 386,835 JPY 377,772
Notes receivable, trade (Notes 7 and 15) 60,127 33,224
Accounts receivable, trade (Notes 7 and 15) 1,020,205 904,020
Allowance for doubtful notes and accounts (27,199) (32,175)
Current portion of investment in leases (Notes 7, 15 and 20) - 251,947
Inventories (Note 5) 828,081 650,043
Deferred tax assets (Note 9) 123,786 118,293
Prepaid expenses and other current assets 73,940 101,912
-------------- --------------
Total current assets 2,465,775 2,405,036
Investments and long-term receivables:
Marketable securities (Notes 4 and 7) 335,680 263,079
Investments and advances (Note 3):
Affiliated companies 194,138 154,747
Other 153,964 158,179
Long-term receivables, trade 49,855 45,073
Investment in leases (Notes 7, 15 and 20) - 254,814
-------------- --------------
733,637 875,892
Property, plant and equipment (Notes 7 and 20):
Land 98,261 103,783
Buildings 935,953 887,698
Machinery and equipment 2,321,503 2,063,309
Construction in progress 59,171 71,349
-------------- --------------
3,414,888 3,126,139
Accumulated depreciation (2,286,075) (2,166,562)
-------------- --------------
1,128,813 959,577
Other assets:
Deferred tax assets (Note 9) 178,838 442,411
Intangible assets (Note 6) 243,630 254,711
Other 72,931 73,256
-------------- --------------
495,399 770,378
-------------- --------------
JPY 4,823,624 JPY 5,010,883
============== ==============
F-4
MARCH 31
--------------------------------
2001 2002
------------- -------------
(Millions of yen)
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term borrowings (Note 7) JPY 231,251 JPY 450,544
Current portion of long-term debt (Note 7) 231,713 310,283
Notes payable, trade 83,899 61,685
Accounts payable, trade 1,107,449 877,270
Accounts payable, other and accrued expenses 296,585 295,505
Accrued income taxes 42,862 35,317
Other current liabilities 203,904 179,737
------------- -------------
Total current liabilities 2,197,663 2,210,341
Long-term liabilities:
Long-term debt (Note 7) 1,221,295 1,498,878
Accrued pension and severance costs (Note 8) 400,333 467,561
Other 20,910 39,171
------------- -------------
1,642,538 2,005,610
Minority shareholders' equity in consolidated subsidiaries 68,387 132,817
Preferred securities issued by a subsidiary (Note 10) - 97,200
Commitments and contingent liabilities (Note 21)
Shareholders' equity (Note 11):
Common stock:
Authorized - 3,200,000,000 shares
Issued 2001 - 1,656,259,435 shares 244,717
2002 - 1,656,268,189 shares 244,726
Additional paid-in capital 361,813 361,820
Legal reserve 39,046 39,046
Retained earnings 349,033 27,079
Accumulated other comprehensive income (loss) (78,603) (105,437)
------------- -------------
916,006 567,234
Treasury stock, at cost:
2001 - 307,716 shares, 2002 - 2,285,092 shares (970) (2,319)
------------- -------------
915,036 564,915
------------- -------------
JPY 4,823,624 JPY 5,010,883
============= =============
(See notes to consolidated financial statements.)
F-5
NEC Corporation
Consolidated Statements of Operations, Comprehensive Income (Loss)
and Retained Earnings
YEAR ENDED MARCH 31
----------------------------------------------
2000 2001 2002
------------- ------------- -------------
(Millions of yen)
Sales and other income:
Net sales JPY 4,991,447 JPY 5,409,736 JPY 5,101,022
Interest, gain on securities sold, dividends and other (Notes 4, 19 and 20) 218,444 140,062 103,637
Gain due to stock issuances by subsidiaries (Note 18) - 41,324 6,753
------------- ------------- -------------
5,209,891 5,591,122 5,211,412
Costs and expenses:
Cost of sales 3,664,513 3,981,113 3,919,268
Selling, general and administrative (Notes 2, 16 and 17) 1,216,520 1,243,440 1,237,276
Interest 70,211 63,873 46,673
Other (Note 19) 228,464 210,373 469,378
------------- ------------- -------------
5,179,708 5,498,799 5,672,595
------------- ------------- -------------
Income (loss) before income taxes 30,183 92,323 (461,183)
Provision (benefit) for income taxes (Note 9) 32,484 56,308 (178,173)
------------- ------------- -------------
Income (loss) before minority interest, equity in earnings (losses) of affiliated
companies and cumulative effect of accounting change (2,301) 36,015 (283,010)
Minority interest in income (losses) of consolidated subsidiaries (1,419) 1,296 2,574
------------- ------------- -------------
Income (loss) before equity in earnings (losses) of affiliated companies and
cumulative effect of accounting change (882) 34,719 (285,584)
Equity in earnings (losses) of affiliated companies (Note 3) 11,298 21,884 (23,841)
------------- ------------- -------------
Income (loss) before cumulative effect of accounting change 10,416 56,603 (309,425)
Cumulative effect of accounting change, net of tax (Note 2) - - (2,595)
------------- ------------- -------------
Net income (loss) 10,416 56,603 (312,020)
Comprehensive income (loss):
Other comprehensive income (loss), net of tax (Note 11):
Foreign currency translation adjustments (24,333) 19,127 13,451
Minimum pension liability adjustment (Note 8) 28,243 (84,871) (37,834)
Unrealized gains (losses) on marketable securities (Note 4) 41,500 (60,864) 463
Unrealized gains (losses) on derivative financial instruments (Note 14) - - 692
Cumulative effect of accounting change (Note 2) - - (3,606)
------------- ------------- -------------
Other comprehensive income (loss) 45,410 (126,608) (26,834)
------------- ------------- -------------
Comprehensive income (loss) JPY 55,826 JPY (70,005) JPY (338,854)
============= ============= =============
Retained earnings:
Balance at beginning of year JPY 313,262 JPY 312,638 JPY 349,033
Net income (loss) 10,416 56,603 (312,020)
Dividends (9,770) (18,084) (9,934)
Transfer to legal reserve (1,270) (2,124) -
------------- ------------- -------------
Balance at end of year JPY 312,638 JPY 349,033 JPY 27,079
============= ============= =============
2000 2001 2002
------------- ------------- -------------
(Yen)
Per share (Note 13):
Basic:
Income (loss) before cumulative effect of accounting change JPY 6.40 JPY 34.55 JPY (187.06)
Net income (loss) 6.40 34.55 (188.63)
Diluted:
Income (loss) before cumulative effect of accounting change 6.40 32.17 (187.06)
Net income (loss) 6.40 32.17 (188.63)
Cash dividends per share 6.00 11.00 6.00
(See notes to consolidated financial statements.)
F-6
NEC Corporation
Consolidated Statements of Cash Flows
YEAR ENDED MARCH 31
--------------------------------------------
2000 2001 2002
------------ ------------ ------------
(Millions of yen)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) JPY 10,416 JPY 56,603 JPY (312,020)
Adjustments to reconcile net income (loss) to net cash provided by operating
activities:
Depreciation 260,942 250,138 234,738
Deferred income taxes (2,102) (2,463) (222,423)
(Gain) loss on property, plant and equipment (24,249) (13,823) 146,430
Realized (gain) loss on marketable securities (98,194) 2,175 62,139
Gain due to stock issuances by subsidiaries - (41,324) (6,753)
Provision for pension and severance costs, less payments 10,310 5,060 56
Equity in (earnings) losses of affiliated companies, net of dividends (7,552) (17,149) 28,030
Minority interest in income (losses) of consolidated subsidiaries (1,419) 1,296 2,574
(Increase) decrease in notes and accounts receivable 201,934 (139,644) 169,628
(Increase) decrease in inventories 85,104 (83,769) 216,062
Increase (decrease) in notes and accounts payable 80,817 226,886 (178,878)
Increase (decrease) in other current liabilities (56,383) 110,723 (60,747)
Other, net (1,087) 5,783 57,801
------------ ------------ ------------
Net cash provided by operating activities 458,537 360,492 136,637
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sales of property, plant and equipment 246,386 112,887 56,094
Additions to property, plant and equipment (263,767) (310,711) (295,585)
Proceeds from sales and redemption of marketable securities 180,576 48,053 33,659
Purchase of marketable securities (97,606) (3,373) (2,482)
Proceeds from sales of affiliates' stock 33,672 55,656 38,438
Investments in affiliates (5,675) - (31,046)
Disbursements for long-term loans (646) (23,151) (11,842)
Decrease in long-term loans 1,599 10,458 18,714
Increase in other investment securities (566) (2,028) (6,408)
Other, net (3,577) 683 (3,078)
------------ ------------ ------------
Net cash provided by (used in) investing activities 90,396 (111,526) (203,536)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from long-term debt 24,916 115,401 257,240
Repayments of long-term debt (282,917) (218,144) (398,479)
Increase (decrease) in short-term borrowings (222,434) (149,988) 104,232
Dividends paid (9,801) (14,577) (15,948)
Proceeds from stock issuances by subsidiaries - 24,635 12,448
Proceeds from preferred securities issued by a subsidiary - - 97,000
Other, net 2,765 2,627 (839)
------------ ------------ ------------
Net cash provided by (used in) financing activities (487,471) (240,046) 55,654
Effect of exchange rate changes on cash and cash equivalents (7,164) 3,948 2,182
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents 54,298 12,868 (9,063)
Cash and cash equivalents at beginning of year 319,669 373,967 386,835
------------ ------------ ------------
Cash and cash equivalents at end of year JPY 373,967 JPY 386,835 JPY 377,772
============ ============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for:
Interest JPY 70,120 JPY 63,021 JPY 47,852
Income taxes 39,277 33,347 51,795
SUPPLEMENTAL INFORMATION OF NONCASH FINANCING ACTIVITIES
Conversion of convertible debt into shares of common stock JPY 1,292 JPY 27,159 JPY 18
(See notes to consolidated financial statements.)
F-7
NEC Corporation
Notes to Consolidated Financial Statements
March 31, 2002
1. NATURE OF OPERATIONS
NEC Corporation and its consolidated subsidiaries (the "Company") is a provider
of systems, components, services, and integrated solutions for computing and
communication applications. The Company operates its principal business through
three in-house companies based on customers and markets served.
NEC Solutions is primarily engaged in the provision of systems integration
services, Internet-related services, and software, as well as the development,
design, manufacture and sale of computer systems, mainly for corporate and
individual customers.
NEC Networks is primarily engaged in the development, design, manufacture, sale
and network integration services for communication systems and equipment mainly
for network service providers.
NEC Electron Devices is primarily engaged in the development, design,
manufacture and sale of semiconductors and other electron devices for equipment
manufacturers.
The Company's principal manufacturing facilities are located in Japan, the
United States of America, Europe, and Asia, and its products are marketed by the
Company throughout the world.
2. SIGNIFICANT ACCOUNTING POLICIES
NEC Corporation and its Japanese subsidiaries maintain their records and prepare
their financial statements in accordance with accounting principles generally
accepted in Japan, and its foreign subsidiaries in conformity with those of the
countries in which such subsidiaries are domiciled. Certain adjustments and
reclassifications have been incorporated in the accompanying consolidated
financial statements to conform with accounting principles generally accepted in
the United States of America. These adjustments were not recorded in the
statutory books of account.
The preparation of 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 and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimated.
F-8
NEC Corporation
Notes to Consolidated Financial Statements (continued)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Significant accounting policies, after reflecting adjustments for the above, are
as follows:
(BASIS OF CONSOLIDATION AND INVESTMENTS IN AFFILIATED COMPANIES)
The consolidated financial statements include the accounts of NEC Corporation
and its subsidiaries in which it has a controlling financial interest. All
significant intercompany transactions and accounts are eliminated. The fiscal
years of certain foreign subsidiaries are December 31 and there have been no
significant transactions for such subsidiaries for the period from January 1,
2002 to March 31, 2002.
Investments in 20 - 50% owned companies over which the Company does not have
control, but has the ability to exercise significant influence, are accounted
for by the equity method.
Special purpose entities ("SPEs") used in connection with the securitization of
receivables are not consolidated when the Company has surrendered control over
the receivables. SPEs used in connection with the leasing of property are not
consolidated when the owner of the SPE has made a substantial investment that is
at risk for the life of the SPE.
(CASH EQUIVALENTS)
All highly liquid investments with original maturities of three months or less
are considered to be cash equivalents.
(FOREIGN CURRENCY TRANSLATION)
Assets and liabilities of foreign consolidated subsidiaries and affiliated
companies accounted for by the equity method are translated into yen at
appropriate year-end rates of exchange and all revenue and expense accounts are
translated at average rates of exchange prevailing during the year. The
resulting translation adjustments are accumulated and included in accumulated
other comprehensive income (loss) classified as part of shareholders' equity.
(MARKETABLE SECURITIES AND OTHER INVESTMENTS)
The Company classifies its marketable equity securities and debt securities as
available-for-sale which are reported at fair value, with unrealized gains and
losses included in accumulated other comprehensive income (loss), net of taxes.
When a decline in value of the investments in marketable securities is deemed to
be other-than-temporary, the Company recognizes an impairment loss to the extent
of the decline. In determining if and when such a decline in value is
other-than-temporary, the Company evaluates the market conditions, trends of
earnings, and other key measures. Realized gains or losses on the sale of
marketable securities are based on the average cost of a particular security
held at the time of sale.
Other investment securities are stated at cost.
F-9
NEC Corporation
Notes to Consolidated Financial Statements (continued)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(INVENTORIES)
Inventories are stated at the lower of cost or market.
Finished products made to customer specifications are stated at accumulated
production costs. Mass-produced standard products are principally costed on a
first-in, first-out basis.
Work in process made to customer specifications is stated at accumulated
production costs of job orders. Work in process of mass-produced standard
products is stated on an average cost basis. The cost of semifinished components
is principally determined on a first-in, first-out basis.
Raw materials and purchased components are principally stated on a first-in,
first-out basis and, for certain subsidiaries, on an average cost basis.
The Company identifies slow moving and obsolete inventory, and writes down such
inventory to its estimated market value based on assumptions about future demand
and market conditions.
(PROPERTY, PLANT AND EQUIPMENT AND DEPRECIATION)
Property, plant and equipment are stated at cost. Depreciation is computed
principally using the declining-balance method at rates based on the following
estimated useful lives of the assets: buildings, 7 to 50 years, machinery and
equipment, 2 to 22 years. Maintenance and repairs, including minor renewals and
betterments, are charged to income as incurred.
Leased assets meeting certain criteria are capitalized and amortized principally
using the declining-balance method over the lease term.
Assets leased to others under operating leases are stated at cost and
depreciated using the straight-line method over the estimated useful lives.
(INTANGIBLE ASSETS)
Intangible assets consist primarily of the costs of purchased patents and trade
names and goodwill. Goodwill represents the excess of cost of the acquired
enterprise over the sum of the amounts assigned to identifiable assets less
liabilities assumed. Costs allocated to patents and trade names are amortized
principally on a straight-line basis over their estimated useful lives.
Goodwill, which arose from business combinations completed before July 1, 2001,
has been amortized on a straight-line basis over the period of expected benefit
which does not exceed 10 years. Goodwill, which arose from business combinations
completed after June 30, 2001, is stated at cost, and no amortization is
recorded.
The Company reviews the carrying amount of intangible assets for impairment
whenever events or circumstances indicate that the carrying amounts may not be
recoverable.
F-10
NEC Corporation
Notes to Consolidated Financial Statements (continued)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(IMPAIRMENT OF LONG-LIVED ASSETS)
Long-lived assets are evaluated for impairment using an estimate of undiscounted
cash flows whenever events or changes in circumstances indicate that the
carrying amount of such assets may not be recoverable. If the estimate of
undiscounted cash flows is less than the carrying amount of the assets, an
impairment loss is recorded based on the fair value of the assets.
(INCOME TAXES)
Deferred tax assets and liabilities are determined based on the financial
statement and tax bases of assets and liabilities, using the enacted tax rates
in effect for the year in which the temporary differences are expected to
reverse. Deferred tax assets are also recognized for the estimated future tax
effects attributable to operating loss carryforwards. Valuation allowances are
established to reduce deferred tax assets if it is more likely than not that
some portion or all of the deferred tax assets will not be realized.
(ISSUANCE OF STOCK BY A SUBSIDIARY)
When a subsidiary issues stock to unrelated third parties, the Company's
ownership interest in the subsidiary decreases; however, if the price per share
is more or less than the Company's average carrying amount per share, the
Company is required to adjust the carrying amount of its investment in the
subsidiary.
Prior to fiscal 2001, the Company accounted for such adjustments as capital
transactions, with a charge or credit to additional paid-in capital. In fiscal
2001, the Company changed its accounting method to recognize such gains or
losses in income for the year in which the change in ownership interest occurs.
The Company believed this change was to a preferable method because it better
reflects the Company's stated strategy of taking competitive subsidiaries public
and raising their overall corporate value. As a result of the change, net income
and diluted net income per share for the year ended March 31, 2001 increased by
JPY 8,868 million and by JPY 4.79 per share, respectively.
(NET INCOME PER SHARE)
Basic net income per share ("EPS") is computed by dividing net income by the
weighted-average number of shares of common stock outstanding for the period.
Diluted EPS assumes the dilution that could occur if securities or other
contracts to issue common stock were exercised or converted into common stock,
or resulted in the issuance of common stock unless their inclusion would have
antidilutive effect.
F-11
NEC Corporation
Notes to Consolidated Financial Statements (continued)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(REVENUE RECOGNITION)
Revenue from sales of mass-produced standard products such as electron devices,
mobile terminals, computers and workstations is recognized when the products are
shipped.
Revenue from services is recognized as the services are provided.
Revenue from development of custom software products is recognized when the
software products have been delivered and accepted by the customer.
The Company enters into multiple element projects with customers which include
both products and services. Such projects generally include several separate
agreements covering portions of the project. If the Company has vendor specific
objective evidence for revenues allocated to each separate agreement and
undelivered elements are not essential to functionality of delivered elements,
revenue is allocated among the elements as each is completed and accepted by the
customer. If undelivered elements are essential to functionality, revenue for
the project is recognized when all elements have been completed and the project
is accepted by the customer.
Revenues from the sale of equipment under sales-type leases are recognized at
the inception of the lease. Income on sales-type leases and direct-financing
leases is recognized to produce a constant periodic rate of return on the net
investment in the lease. Leases not qualifying as sales-type lease or
direct-financing lease are accounted for as operating leases and related revenue
are recognized over the lease term.
Cash consideration given by the Company to a customer or a reseller of the
Company's products is accounted for as a reduction of revenue unless the Company
receives, or will receive, an identifiable benefit in exchange for the
consideration and can reasonably estimate the fair value of the benefit
identified.
(SHIPPING AND HANDLING COSTS)
The Company includes shipping and handling costs which totaled JPY 6,938
million, JPY 6,719 million and JPY 6,372 million for the years ended March 31,
2000, 2001 and 2002 in selling, general and administrative expenses.
(DERIVATIVE FINANCIAL INSTRUMENTS)
Effective on April 1, 2001, the Company adopted the Statement of Financial
Accounting Standards ("SFAS") No. 133, (Accounting for Derivative Instruments
and Hedging Activities). Adoption of SFAS No. 133 on April 1, 2001 resulted in a
loss from the cumulative effect of an accounting change of JPY 2,595 million and
a reduction from accumulated other comprehensive income (loss) of JPY 3,606
million.
F-12
NEC Corporation
Notes to Consolidated Financial Statements (continued)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(DERIVATIVE FINANCIAL INSTRUMENTS (CONTINUED))
As a result of adoption of SFAS No. 133, the Company recognizes all derivative
financial instruments, such as forward exchange contracts and interest rate swap
agreements, in the consolidated financial statements at fair value regardless of
the purpose or intent for holding the derivative financial instruments. Changes
in the fair value of derivative financial instruments are either recognized
periodically in income or in shareholders' equity as a component of other
comprehensive income (loss) depending on whether the derivative financial
instruments qualify for hedge accounting, and if so, whether they qualify as a
fair value hedge or a cash flow hedge. Changes in fair values of derivative
financial instruments accounted for as a fair value hedge are recorded in income
along with the portion of the change in the fair value of the hedged item that
relates to the hedged risk. Changes in fair value of derivative financial
instruments accounted for as a cash flow hedge, to the extent it is effective as
a hedge, are recorded in other comprehensive income (loss), net of tax. Changes
in fair value of derivative financial instruments not qualifying as a hedge are
reported in income.
Prior to April 1, 2001, the Company used forward exchange contracts and interest
rate swap agreements for hedging purposes. For forward exchange contracts, gains
and losses on contracts designated as hedges were recognized in income and were
offset against the foreign exchange differences in the underlying assets and
liabilities. The gains and losses were included in other income or expenses. The
discounts and premiums on forward exchange contracts were amortized over the
lives of the respective contracts and included in interest expense. The related
receivable or payable was included in other current assets or other current
liabilities. Agreements that are, in substance, essentially the same as forward
exchange contracts, such as currency swaps, are accounted for in a manner
similar to the accounting for forward exchange contracts. For interest rate swap
agreements, differentials to be paid or received related to interest rate swap
agreements were recognized in interest expense over the lives of the agreement.
The receivable or payable for the differential is included in other current
assets or other current liabilities.
(SALES OF RECEIVABLES)
In some cases, the Company retains certain interests in trade receivables and
investment in leases sold in securitizations. Gain or loss on the sale of the
trade receivables and investment in leases is based on the previous carrying
amount of the trade receivables and investment in leases involved in the
transfer, allocated between the trade receivables and investment in leases sold,
and the retained interests based on their relative fair values at the transfer
date. The Company generally estimates fair value based on the present value of
future expected cash flows estimated using certain assumptions; credit losses
and discount rates commensurate with the risks involved.
F-13
NEC Corporation
Notes to Consolidated Financial Statements (continued)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(NEW ACCOUNTING STANDARDS)
In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No.
141, (Business Combinations), and No. 142, (Goodwill and Other Intangible
Assets). SFAS No. 141 requires that the purchase method of accounting be used
for all business combinations initiated after June 30, 2001. SFAS No. 141 also
includes guidance on the initial recognition and measurement of goodwill and
other intangible assets arising from business combinations completed after June
30, 2001. SFAS No. 142 prohibits the amortization of goodwill and intangible
assets with indefinite useful lives. SFAS No. 142 requires that these assets be
reviewed for impairment at least annually. Intangible assets with finite lives
will continue to be amortized over their estimated useful lives. Additionally,
SFAS No. 142 requires that goodwill included in the carrying value of equity
method investments no longer be amortized.
The Company will adopt SFAS No. 142 effective April 1, 2002. The Company
recorded amortization of JPY 5,517 million, JPY 6,330 million and JPY 8,360
million for the years ended March 31, 2000, 2001 and 2002, respectively, under
previous accounting standards. In accordance with SFAS No. 142, the Company is
required to perform the impairment tests of goodwill and indefinite lived
intangible assets by the end of September 2002. Any impairment charge resulting
from these tests will be reflected as the cumulative effect of accounting
change. The Company has not yet determined whether the adoption of this
statement will result in an impairment of goodwill and indefinite lived
intangible assets.
In August 2001, the FASB issued SFAS No. 144, (Accounting for the Impairment or
Disposal of Long-Lived Assets). SFAS No. 144 addresses financial accounting and
reporting for the impairment or disposal of long-lived assets and supersedes
SFAS No. 121, (Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of), and the accounting and reporting
provisions of APB Opinion No. 30, (Reporting the Results of Operations), for a
disposal of a segment of a business. SFAS No. 144 is effective for years
beginning after December 15, 2001, with earlier application encouraged. The
Company will adopt SFAS No. 144 effective April 1, 2002 and has not determined
what effect, if any, it will have on the Company's results of operations and
financial position.
(RECLASSIFICATIONS)
Certain accounts in the consolidated financial statements for the years ended
March 31, 2000 and 2001 have been reclassified to conform to the 2002
presentation.
F-14
NEC Corporation
Notes to Consolidated Financial Statements (continued)
3. INVESTMENTS IN AFFILIATED COMPANIES
Investments in affiliated companies accounted for by the equity method together
with a percentage of the Company's ownership of voting shares at March 31, 2002
are: Nippon Electric Glass Co., Ltd. (35.7%); ANRITSU CORPORATION (22.0%); Toyo
Communication Equipment Co., Ltd. (21.4%); Tokin Corporation (43.2%); SUMITOMO
3M Limited (25.0%); Elpida Memory, Inc. (50.0%); NEC-Mitsubishi Electric Visual
Systems Corporation (50.0%) and 6 other companies.
Summarized financial information relating to affiliated companies accounted for
by the equity method is as follows:
MARCH 31
-------------------------------
2001 2002
------------- -------------
(Millions of yen)
Current assets JPY 1,189,132 JPY 655,028
Other assets, including property, plant and equipment 1,043,043 694,943
------------- -------------
Total assets JPY 2,232,175 JPY 1,349,971
============= =============
Current liabilities JPY 854,569 JPY 487,567
Long-term liabilities 751,623 338,103
Shareholders' equity 625,983 524,301
------------- -------------
Total liabilities and shareholders' equity JPY 2,232,175 JPY 1,349,971
============= =============
YEAR ENDED MARCH 31
--------------------------------------------------
2000 2001 2002
------------- ------------- -------------
(Millions of yen)
Sales and operating revenue JPY 1,104,816 JPY 1,388,641 JPY 1,002,208
Gross profit 212,714 276,966 179,108
Net income (loss) 30,204 75,888 (57,505)
F-15
NEC Corporation
Notes to Consolidated Financial Statements (continued)
3. INVESTMENTS IN AFFILIATED COMPANIES (CONTINUED)
Of the 13 affiliated companies at March 31, 2002 (16 companies at March 31,
2001) accounted for by the equity method, the stocks of 4 companies (5 companies
at March 31, 2001) carried at JPY 118,382 million and JPY 110,072 million at
March 31, 2001 and 2002, respectively, had quoted market values of an aggregate
of JPY 217,234 million and JPY 130,174 million at March 31, 2001 and 2002,
respectively.
As a result of reorganization of various affiliated companies, the Company
acquired a controlling financial interest in a leasing affiliated company, and
consolidated such entity in the year ended March 31, 2002.
The balances and transactions with affiliated companies accounted for by the
equity method are shown below:
MARCH 31
-----------------------------
2001 2002
---------- ----------
(Millions of yen)
Receivables, trade JPY 62,929 JPY 18,191
Payables, trade 83,636 19,201
YEAR ENDED MARCH 31
--------------------------------------------
2000 2001 2002
----------- ----------- ----------
(Millions of yen)
Sales JPY 211,388 JPY 206,961 JPY 72,384
Purchases 111,119 172,571 57,597
Dividends received from affiliated companies accounted for by the equity method
for the years ended March 31, 2000, 2001 and 2002 totaled JPY 3,746 million,
JPY 5,052 million and JPY 2,049 million, respectively.
F-16
NEC Corporation
Notes to Consolidated Financial Statements (continued)
4. MARKETABLE SECURITIES
The following is a summary of marketable securities by major security type:
MARCH 31, 2001
-------------------------------------------------------------
GROSS GROSS
UNREALIZED UNREALIZED
COST HOLDING GAINS HOLDING LOSSES FAIR VALUE
----------- ------------- -------------- -----------
(Millions of yen)
Available-for-sale:
Equity securities JPY 233,842 JPY 100,420 JPY 32,984 JPY 301,278
Debt securities 26,425 8,209 232 34,402
----------- ----------- ---------- -----------
JPY 260,267 JPY 108,629 JPY 33,216 JPY 335,680
=========== =========== ========== ===========
MARCH 31, 2002
-------------------------------------------------------------
GROSS GROSS
UNREALIZED UNREALIZED
COST HOLDING GAINS HOLDING LOSSES FAIR VALUE
----------- ------------- -------------- -----------
(Millions of yen)
Available-for-sale:
Equity securities JPY 177,855 JPY 95,112 JPY 17,871 JPY 255,096
Debt securities 8,348 14 379 7,983
JPY 186,203 JPY 95,126 JPY 18,250 JPY 263,079
Contractual maturities of available-for-sale debt securities at March 31, 2002
are in the period from May 20, 2002 to July 27, 2009.
Proceeds from sales of available-for-sale securities were JPY 180,576 million,
JPY 48,053 million and JPY 21,017 million for the years ended March 31, 2000,
2001 and 2002, respectively. Gross realized gains were JPY 98,200 million, JPY
40,099 million and JPY 8,435 million for the years ended March 31, 2000, 2001
and 2002, respectively, and gross realized losses, including writedowns, were
JPY 6 million, JPY 42,274 million and JPY 70,574 million for the years ended
March 31, 2000, 2001 and 2002, respectively.
F-17
NEC Corporation
Notes to Consolidated Financial Statements (continued)
5. INVENTORIES
Inventories at March 31, 2001 and 2002 consisted of the following:
MARCH 31
---------------------------
2001 2002
----------- -----------
(Millions of yen)
Finished products JPY 294,876 JPY 235,783
Work in process and semifinished components 403,501 318,115
Less - advance payments received (54,414) (47,448)
Raw materials and purchased components 184,118 143,593
----------- -----------
JPY 828,081 JPY 650,043
=========== ===========
6. INTANGIBLE ASSETS
Accumulated amortization of intangible assets was JPY 237,170 million and JPY
239,829 million at March 31, 2001 and 2002, respectively.
7. SHORT-TERM BORROWINGS AND LONG-TERM DEBT
Short-term borrowings at March 31, 2001 and 2002 were as follows:
MARCH 31
---------------------------
2001 2002
----------- -----------
(Millions of yen)
Loans, principally from banks, including bank overdrafts
(average interest rate of 1.96% in 2001 and 1.25% in 2002):
Secured JPY 7,720 JPY 20,228
Unsecured 211,797 249,316
Commercial paper (average interest rate of 12.24% in 2001
and 0.11% in 2002) 11,734 181,000
----------- -----------
JPY 231,251 JPY 450,544
=========== ===========
At March 31, 2002, the Company had unused lines of credit for short-term
financing aggregating JPY 268,406 million with no commitment fees and credit
facility agreements aggregating JPY 350,000 million with certain facility fees.
F-18
NEC Corporation
Notes to Consolidated Financial Statements (continued)
7. SHORT-TERM BORROWINGS AND LONG-TERM DEBT (CONTINUED)
Long-term debt at March 31, 2001 and 2002 was as follows:
MARCH 31
-----------------------------
2001 2002
------------- -------------
(Millions of yen)
Loans, principally from banks and insurance companies, due 2001 to 2010 with
interest rates of 0.233% to 12.75% at March 31, 2001 and due 2002 to 2011 with
interest rates of 0.105% to 14.50% at March 31, 2002:
Secured JPY 30,960 JPY 23,495
Unsecured 298,159 690,330
5.7% to 6.05% unsecured yen bonds due 2002 to 2007 30,000 30,000
1.1% to 3.3% at March 31, 2001 and 0.45% to 3.3% at March 31, 2002 unsecured
yen debentures due 2001 to 2010 at March 31, 2001 and due 2002 to 2010 at
March 31, 2002 595,000 618,000
1.9% unsecured yen convertible debentures due 2004, convertible currently at
JPY 1,962.90 for one common share, redeemable before due date 118,508 118,506
1.0% unsecured yen convertible debentures due 2011, convertible currently at
JPY 1,375.00 for one common share, redeemable before due date 97,906 97,906
1.8% unsecured yen convertible debentures 95,011 -
Zero coupon unsecured yen convertible debentures due 2007, convertible currently
at JPY 3,207.00 for one common share, redeemable before due date 100,000 100,000
Zero coupon unsecured yen convertible debentures due 2010, convertible currently
at JPY 1,730.00 for one common share, redeemable before due date - 100,000
0.375% unsecured yen convertible notes issued by a consolidated subsidiary 5,312 -
0.2% to 5.1% at March 31, 2001 and 0.09% to 0.3% at March 31, 2002 medium-term
notes issued by consolidated subsidiaries due 2001 to 2004 at March 31, 2001
and due 2002 to 2004 at March 31, 2002 30,560 9,024
Long-term capital lease obligations, due 2001 to 2029 with interest rates of
1.6% to 7.9% at March 31, 2001 and due 2002 to 2007 with interest rates of
2.398% to 8.9% at March 31, 2002 45,081 11,856
Other 6,451 8,098
------------- -------------
1,452,948 1,807,215
Unamortized premium 60 1,946
------------- -------------
1,453,008 1,809,161
Less - portion due within one year (231,713) (310,283)
------------- -------------
JPY 1,221,295 JPY 1,498,878
============= =============
F-19
NEC Corporation
Notes to Consolidated Financial Statements (continued)
7. SHORT-TERM BORROWINGS AND LONG-TERM DEBT (CONTINUED)
The following were pledged as security for short-term borrowings and long-term
debt at March 31, 2002:
(Millions of yen)
-----------------
Notes and accounts receivable and investment in leases JPY 6,745
Marketable securities 12,550
Property, plant and equipment (net book value) 115,249
The agreement for the 1.9% unsecured yen convertible debentures due 2004
stipulates, among other things, that NEC Corporation is required to deposit with
a designated bank, as a sinking fund payment, amounts adjusted for redemptions
and conversions made to the dates specified in the agreement. Under the
agreement, NEC Corporation deposited, instead of cash, marketable securities
amounting to JPY 66,113 million and JPY 88,407 million at March 31, 2001 and
2002, respectively.
The sinking fund payment, adjusted for the conversions made to March 31, 2002,
is as follows:
SINKING FUND PAYMENT
CONVERTIBLE -------------------------------------------
DEBENTURES DATE AMOUNT OF PAYMENT
- ----------- -------------- --------------------
(Millions of yen)
1.9% March 31, 2003 JPY 14,000
At March 31, 2002, an aggregate of 220,563 thousand shares of common stock would
have been issuable upon conversion of all convertible debt of NEC Corporation.
The Company has basic agreements with lending banks to the effect that, with
respect to all present or future loans with such banks, the Company shall
provide collateral (including sums on deposit with such banks) or guarantors
immediately upon the bank's request and that any collateral furnished, pursuant
to such agreements or otherwise, will be applicable to all indebtedness to such
banks.
Certain of the loan agreements provide, among other things, that the Company
submits to the lenders (upon their request) for approval its proposed
appropriation of income (including dividends) before such appropriation can be
submitted to the shareholders for approval.
F-20
NEC Corporation
Notes to Consolidated Financial Statements (continued)
7. SHORT-TERM BORROWINGS AND LONG-TERM DEBT (CONTINUED)
Annual maturities and sinking fund requirements on long-term debt during the
five years ending March 31, 2007 are as follows:
YEAR ENDING MARCH 31: (Millions of yen)
- --------------------- -----------------
2003 JPY 324,283
2004 380,593
2005 261,338
2006 189,604
2007 234,863
8. PENSION AND SEVERANCE PLANS
NEC Corporation and its subsidiaries in Japan have severance indemnity plans and
non-contributory defined benefit funded pension plans, or only severance
indemnity plans, covering substantially all of their employees who meet
eligibility requirements of the retirement regulations. Under the plans,
employees whose service with the Company is terminated are, under most
circumstances, entitled to lump-sum severance indemnities and/or pension
payments, determined by reference to the current base rate of pay, length of
service and conditions under which the termination occurs. The funding policy is
to make contributions that can be deducted for Japanese income tax purposes.
NEC Corporation and certain subsidiaries in Japan also have contributory defined
benefit pension plans covering substantially all of their employees, including
the governmental welfare pension benefit plan which would otherwise be provided
by the Japanese government. The pension benefits are determined based on years
of service and the compensation amount as stipulated in the regulations. The
governmental welfare pension contributions are funded in conformity with the
requirements regulated by the Japanese Welfare Pension Insurance Law.
The contributions to the contributory and the non-contributory pension plans are
placed into trusteed pension funds.
According to revisions of the Japanese Welfare Pension Insurance Law in March
2000, NEC Corporation and certain subsidiaries in Japan amended the governmental
welfare pension benefit plan effective in March 2000 and 2001 which reduced the
benefit obligation.
Most subsidiaries outside Japan have various retirement plans which are
primarily defined contribution plans covering substantially all of their
employees. The funding policy for the defined contribution plans is to annually
contribute an amount equal to a certain percentage of the participants' annual
salaries.
F-21
NEC Corporation
Notes to Consolidated Financial Statements (continued)
8. PENSION AND SEVERANCE PLANS (CONTINUED)
Reconciliations of beginning and ending balances of the benefit obligations and
the fair value of the plan assets are as follows:
MARCH 31
-------------------------------
2001 2002
------------- -------------
(Millions of yen)
Change in benefit obligations:
Benefit obligations at beginning of year JPY 1,156,107 JPY 1,280,618
Service cost 61,175 65,131
Interest cost 46,245 47,107
Actuarial loss 123,256 3,042
Benefits paid (54,096) (65,066)
Plan amendments (52,069) -
Newly consolidated subsidiaries - 65,303
------------- -------------
Benefit obligations at end of year 1,280,618 1,396,135
Change in plan assets:(*1)
Fair value of plan assets at beginning of year 787,915 759,571
Actual loss on plan assets (69,061) (50,831)
Employer contributions 67,262 61,301
Benefits paid (26,545) (25,167)
Newly consolidated subsidiaries - 54,558
------------- -------------
Fair value of plan assets at end of year 759,571 799,432
------------- -------------
Funded status (521,047) (596,703)
Unrecognized prior service cost and actuarial loss (*2) 298,946 375,652
Unrecognized net obligation at April 1, 1989 being recognized over 17 years 15,599 12,552
------------- -------------
Net amounts recognized JPY (206,502) JPY (208,499)
============= =============
Amounts recognized in the consolidated balance sheets consist of:
Accrued pension and severance costs JPY (400,333) JPY (467,561)
Accumulated other comprehensive income, pretax 193,831 259,062
------------- -------------
Net amounts recognized JPY (206,502) JPY (208,499)
============= =============
- ----------
(*1) The plan assets consist principally of corporate equity securities,
government securities and corporate debt securities.
(*2) Unrecognized prior service cost and actuarial loss are amortized on the
straight-line method over the average remaining service period of employees
expected to receive benefits under the plan.
F-22
NEC Corporation
Notes to Consolidated Financial Statements (continued)
8. PENSION AND SEVERANCE PLANS (CONTINUED)
The weighted-average assumptions used in the accounting for the plans at March
31, 2001 and 2002 were as follows:
MARCH 31
----------------------
2001 2002
-------- --------
Discount rate 3.5% 3.5%
Rate of increase in future compensation level 1.7%-3.8% 1.7%-3.8%
Expected long-term rate of return on plan assets 4.0% 4.0%
Components of net pension and severance cost for all defined benefit plans
including both the Company's and the employees' contributory portion of such
plans for the years ended March 31, 2000, 2001 and 2002 were as follows:
YEAR ENDED MARCH 31
----------------------------------------
2000 2001 2002
---------- ---------- ----------
(Millions of yen)
Service cost JPY 51,940 JPY 61,175 JPY 65,131
Interest cost 44,312 46,245 47,107
Expected return on plan assets (26,783) (31,617) (32,558)
Amortization of unrecognized prior service cost and actuarial loss 15,867 8,666 18,842
Amortization of unrecognized net obligation at April 1, 1989 being
recognized over 17 years 3,047 3,047 3,047
---------- ---------- -----------
Net pension and severance cost for all defined benefit plans JPY 88,383 JPY 87,516 JPY 101,569
========== ========== ===========
The total cost for all defined benefit and defined contribution plans was as
follows:
YEAR ENDED MARCH 31
-----------------------------------------
2000 2001 2002
----------- ----------- -----------
(Millions of yen)
Net pension and severance cost for all defined benefit plans JPY 88,383 JPY 87,516 JPY 101,569
Net pension cost for employees' portion of the contributory defined
benefit pension plans (19,053) (13,959) (16,245)
Pension and severance cost for defined contribution plans 2,307 3,355 3,620
----------- ----------- -----------
Total cost for all defined benefit and defined contribution plans JPY 71,637 JPY 76,912 JPY 88,944
=========== =========== ===========
F-23
NEC Corporation
Notes to Consolidated Financial Statements (continued)
9. INCOME TAXES
Income (loss) before income taxes and provision (benefit) for income taxes
comprise the following components:
YEAR ENDED MARCH 31
---------------------------------------------
2000 2001 2002
----------- ---------- ------------
(Millions of yen)
Income (loss) before income taxes:
NEC Corporation and domestic subsidiaries JPY 120,198 JPY 89,191 JPY (258,858)
Foreign subsidiaries (90,015) 3,132 (202,325)
----------- ---------- ------------
JPY 30,183 JPY 92,323 JPY (461,183)
=========== ========== ============
Provision (benefit) for income taxes:
Current:
NEC Corporation and domestic subsidiaries JPY 29,551 JPY 48,480 JPY 42,831
Foreign subsidiaries 5,035 10,291 1,419
----------- ---------- ------------
34,586 58,771 44,250
Deferred:
NEC Corporation and domestic subsidiaries 7,273 6,755 (192,870)
Foreign subsidiaries (9,375) (9,218) (29,553)
----------- ---------- ------------
(2,102) (2,463) (222,423)
----------- ---------- ------------
JPY 32,484 JPY 56,308 JPY (178,173)
=========== ========== ============
The Company is subject to a number of different income taxes which, in the
aggregate, result in statutory tax rate in Japan of approximately 42%. A
reconciliation between the reported total income tax expense (benefit) and the
amount computed by multiplying the income (loss) before income taxes by the
statutory tax rate is as follows:
YEAR ENDED MARCH 31
------------------------------------------
2000 2001 2002
----------- ---------- ------------
(Millions of yen)
"Expected" tax expense (benefit) JPY 12,677 JPY 38,776 JPY (193,697)
Increase (decrease) in taxes resulting from:
a) Tax benefit on prior losses of subsidiaries (1,050) (5,417) (15,864)
b) Changes in valuation allowance (11,844) 2,562 (5,156)
c) Non-deductible expense for tax purposes 2,337 2,613 1,889
d) International tax rate differences 9,206 (452) 1,402
e) Tax rate difference relating to unrecognized gain (loss) of
marketable securities 6,694 - -
f) Non-deductible goodwill amortization 8,648 4,349 6,875
g) Tax on undistributed earnings 8,141 8,587 12,391
h) Other (2,325) 5,290 13,987
----------- ---------- ------------
Actual total income tax expense (benefit) JPY 32,484 JPY 56,308 JPY (178,173)
=========== ========== ============
F-24
NEC Corporation
Notes to Consolidated Financial Statements (continued)
9. INCOME TAXES (CONTINUED)
The significant components of deferred tax assets and liabilities at March 31,
2001 and 2002 were as follows:
MARCH 31
-----------------------------
2001 2002
----------- -----------
(Millions of yen)
Deferred tax assets:
Intercompany profit between consolidated companies JPY 29,892 JPY 21,970
Investments and advances 67,853 133,496
Accrued bonus 30,642 24,088
Accrued pension and severance costs 121,124 152,552
Operating lease 29,236 24,939
Operating loss carryforwards 103,631 225,973
Other 70,850 122,827
----------- -----------
453,228 705,845
Less - valuation allowance (36,683) (27,229)
----------- -----------
Total JPY 416,545 JPY 678,616
=========== ===========
Deferred tax liabilities:
Marketable securities JPY 38,084 JPY 33,415
Tax deductible reserve 45,337 31,826
Tax on undistributed earnings 19,932 38,235
Other 10,568 14,436
----------- -----------
Total JPY 113,921 JPY 117,912
=========== ===========
In Japan, consolidated tax returns were not permitted until the year ended March
31, 2002; accordingly, NEC Corporation and its domestic subsidiaries file
separate tax returns. The valuation allowance is primarily related to deferred
tax assets of certain consolidated subsidiaries with operating loss
carryforwards which are not expected to be realized. The net changes in the
total valuation allowance for the years ended March 31, 2000, 2001 and 2002 were
decreases of JPY 31,297 million, JPY 7,197 million and JPY 9,454 million,
respectively.
At March 31, 2002, for tax return purposes the Company had operating loss
carryforwards amounting to approximately JPY 583,938 million of which JPY
364,892 million relates to domestic companies and will expire during the period
from 2003 through 2007. The remainder of approximately JPY 219,046 million
relates to foreign subsidiaries and, except for approximately JPY 127,523
million with no expiration date, will expire through 2022.
Realization is dependent on the Company generating sufficient taxable income
prior to expiration of the operating loss carryforwards or the Company executing
certain available tax strategies. Although realization is not assured,
management believes it is more likely than not that the net deferred tax asset
will be realized.
F-25
NEC Corporation
Notes to Consolidated Financial Statements (continued)
10. PREFERRED SECURITIES ISSUED BY A SUBSIDIARY
In December 2001, NEC Business Trust ("NBT"), a wholly owned subsidiary of NEC
Corporation, issued 200,000 shares of NEC Trust Originated Preferred Securities
("TOPrS") to the public at an issuance price of JPY 485,000 per share, 97% of
face value. NBT is a business trust established in the United States of America.
NBT invested the proceeds of such issuance into interest bearing (at a rate
equivalent to the TOPrS dividend rate) Unsecured Subordinated Debentures due
2021 of NEC Corporation ("Subordinated Debentures"). The Subordinated Debentures
represent the sole assets of NBT. NEC Corporation has the right to redeem the
Subordinated Debentures beginning on December 18, 2006, or in the case of
certain regulatory events at the principal amount plus accrued interest.
Holders of TOPrS are entitled to a cash dividend at JPY 6,250 per unit on the
initial payment date, June 18, 2002, at a fixed rate of 2.50% per annum on the
second payment date, December 18, 2002 through the tenth payment date, December
18, 2006, and at a floating rate of six month Yen LIBOR plus 2.00% per annum on
the eleventh payment date, June 18, 2007, and thereafter. Distributions not paid
on the scheduled payment date will accumulate and interest thereon will compound
and accrue semi-annually.
The discount of JPY 3,000 million is being amortized over five years. The
amortization for the year ended March 31, 2002 was JPY 200 million.
F-26
NEC Corporation
Notes to Consolidated Financial Statements (continued)
11. SHAREHOLDERS' EQUITY
Changes in common stock, additional paid-in capital, legal reserve, accumulated
other comprehensive income (loss) and treasury stock are shown below:
YEAR ENDED MARCH 31
-----------------------------------------------
2000 2001 2002
----------- ------------ ------------
(Millions of yen)
Common stock:
Balance at beginning of year JPY 230,212 JPY 231,137 JPY 244,717
Conversion of convertible debt 925 13,580 9
----------- ------------ ------------
Balance at end of year JPY 231,137 JPY 244,717 JPY 244,726
=========== ============ ============
Additional paid-in capital:
Balance at beginning of year JPY 345,642 JPY 348,234 JPY 361,813
Conversion of convertible debt 803 13,579 9
Change in interest in consolidated subsidiaries 1,780 - -
Gain (loss) on sale of treasury stock 9 - (2)
----------- ------------ ------------
Balance at end of year JPY 348,234 JPY 361,813 JPY 361,820
=========== ============ ============
Legal reserve:
Balance at beginning of year JPY 35,652 JPY 36,922 JPY 39,046
Transfer from retained earnings 1,270 2,124 -
----------- ------------ ------------
Balance at end of year JPY 36,922 JPY 39,046 JPY 39,046
=========== ============ ============
Accumulated other comprehensive income (loss):
Balance at beginning of year JPY 2,595 JPY 48,005 JPY (78,603)
Other comprehensive income (loss), net of tax 45,410 (126,608) (26,834)
----------- ------------ ------------
Balance at end of year JPY 48,005 JPY (78,603) JPY (105,437)
=========== ============ ============
Treasury stock, at cost:
Balance at beginning of year JPY (18) JPY (83) JPY (970)
Net change resulting from purchase and sales of
fractional shares of less than "One Unit" as defined by
the Japanese Commercial Code
(65) 70 (816)
Purchase of shares for stock option plan - (957) (533)
----------- ------------ ------------
Balance at end of year JPY (83) JPY (970) JPY (2,319)
=========== ============ ============
F-27
NEC Corporation
Notes to Consolidated Financial Statements (continued)
11. SHAREHOLDERS' EQUITY (CONTINUED)
(1) Common stock and additional paid-in capital
Issuances of common stock in connection with conversions of convertible
debt for the years ended March 31, 2000, 2001 and 2002 were 1,798,430
shares, 27,439,595 shares and 8,754 shares, respectively.
On October 1, 2001, an amendment ("Amendment") to the Japanese Commercial
Code became effective. The Amendment eliminates the stated par value of the
Company's outstanding shares which results in all outstanding shares having
no par value as of October 1, 2001. The Amendment also provides that shares
issued after September 30, 2001 will have no par value. Before the
Amendment, the Company's shares had a par value of JPY 50 per share.
Under the Japanese Commercial Code, the entire amount of the issue price of
shares is required to be accounted for in the common stock account although
a company in Japan may, by a resolution of its board of directors, account
for an amount not exceeding one-half of the issue price of the shares as
additional paid-in capital.
Prior to 1985, NEC Corporation made, based on the resolution of the board
of directors, a free distribution of 233,182,146 shares to shareholders,
which was clearly distinguished from a "stock dividend" paid out of profits
that, under the Japanese Commercial Code before April 1, 1991, must be
approved by the shareholders. The cumulative amount of the fair value of
these shares at the time of issuance was JPY 258,755 million. In accounting
for the free distribution of shares, the Japanese Commercial Code before
April 1, 1991 permitted the board of directors to authorize either (1) a
transfer from additional paid-in capital to the common stock account or (2)
no entry if free shares were distributed from the portion of previously
issued shares accounted for as excess of par value in the common stock
account. Had NEC Corporation accounted for these free share distributions
in the manner used by United States companies, that amount would have been
transferred from retained earnings to appropriate capital accounts. Such
transfer, however, would have had no effect on total shareholders' equity.
(2) Legal reserve and retained earnings
The Japanese Commercial Code provides that an amount equal to at least 10%
of cash dividends and other distributions from retained earnings paid by
NEC Corporation and its Japanese subsidiaries be appropriated as a legal
reserve. No further appropriation is required when the total amount of
additional paid-in capital and the legal reserve equals 25% of the stated
capital. The Japanese Commercial Code also provides that to the extent that
the sum of the additional paid-in capital and the legal reserve exceed 25%
of the stated capital, the amount of the excess (if any) is available for
appropriations by the resolution of the shareholders.
F-28
NEC Corporation
Notes to Consolidated Financial Statements (continued)
11. SHAREHOLDERS' EQUITY (CONTINUED)
(2) Legal reserve and retained earnings (continued)
The amount of retained earnings available for dividends is based on NEC
Corporation's retained earnings determined in accordance with generally
accepted accounting principles and the Commercial Code in Japan. The
appropriations of retained earnings for the year ended March 31, 2002, as
incorporated in the accompanying consolidated financial statements, include
year-end dividends of JPY 4,967 million which, in accordance with the
Japanese Commercial Code, will be proposed for approval at the Ordinary
General Meeting of Shareholders to be held on June 20, 2002 and will be
recorded in the statutory books of account on that date.
Retained earnings at March 31, 2002 included the Company's equity in
undistributed earnings of affiliated companies accounted for by the equity
method in the amount of JPY 64,864 million.
(3) Other comprehensive income (loss)
Change in accumulated other comprehensive income (loss) is as follows:
YEAR ENDED MARCH 31
------------------------------------------------
2000 2001 2002
----------- ------------ ------------
(Millions of yen)
Foreign currency translation adjustments:
Balance at beginning of year JPY (1,648) JPY (25,981) JPY (6,854)
Change in the current period (24,333) 19,127 13,451
----------- ------------ ------------
Balance at end of year JPY (25,981) JPY (6,854) JPY 6,597
=========== ============ ============
Minimum pension liability adjustment:
Balance at beginning of year JPY (55,794) JPY (27,551) JPY (112,422)
Change in the current period 28,243 (84,871) (37,834)
----------- ------------ ------------
Balance at end of year JPY (27,551) JPY (112,422) JPY (150,256)
=========== ============ ============
Unrealized gains (losses) on marketable securities:
Balance at beginning of year JPY 60,037 JPY 101,537 JPY 40,673
Change in the current period 41,500 (60,864) 463
----------- ------------ ------------
Balance at end of year JPY 101,537 JPY 40,673 JPY 41,136
=========== ============ ============
Unrealized gains (losses) on derivative financial
instruments:
Balance at beginning of year JPY - JPY - JPY -
Cumulative effect of accounting change - - (3,606)
Change in the current period - - 692
----------- ------------ ------------
Balance at end of year JPY - JPY - JPY (2,914)
=========== ============ ============
Total accumulated other comprehensive income (loss):
Balance at beginning of year JPY 2,595 JPY 48,005 JPY (78,603)
Cumulative effect of accounting change - - (3,606)
Change in the current period 45,410 (126,608) (23,228)
----------- ------------ ------------
Balance at end of year JPY 48,005 JPY (78,603) JPY (105,437)
=========== ============ ============
F-29
NEC Corporation
Notes to Consolidated Financial Statements (continued)
11. SHAREHOLDERS' EQUITY (CONTINUED)
(3) Other comprehensive income (loss) (continued)
Tax effect allocated to each component of other comprehensive income (loss)
is as follows:
YEAR ENDED MARCH 31
-----------------------------------------------------
BEFORE-TAX TAX (EXPENSE) NET-OF-TAX
AMOUNT OR BENEFIT AMOUNT
------------ ------------- ------------
(Millions of yen)
2000:
Foreign currency translation adjustments JPY (24,333) JPY - JPY (24,333)
Minimum pension liability adjustment 48,695 (20,452) 28,243
Unrealized gains (losses) on marketable
securities:
Unrealized holding gains arising during period 156,825 (65,019) 91,806
Less: reclassification adjustments for gains
realized in net income (loss) (98,194) 47,888 (50,306)
------------ ----------- ------------
Other comprehensive income (loss) JPY 82,993 JPY (37,583) JPY 45,410
============ =========== ============
2001:
Foreign currency translation adjustments JPY 19,127 JPY - JPY 19,127
Minimum pension liability adjustment (146,329) 61,458 (84,871)
Unrealized gains (losses) on marketable
securities:
Unrealized holding losses arising during period (100,977) 38,851 (62,126)
Less: reclassification adjustments for losses
realized in net income (loss) 2,175 (913) 1,262
------------ ----------- ------------
Other comprehensive income (loss) JPY (226,004) JPY 99,396 JPY (126,608)
============ =========== ============
2002:
Foreign currency translation adjustments:
Foreign currency translation adjustments
arising during period JPY 15,414 JPY - JPY 15,414
Less: reclassification adjustments for gains
realized in net income (loss) (1,963) - (1,963)
Minimum pension liability adjustment (65,231) 27,397 (37,834)
Unrealized gains (losses) on marketable securities:
Unrealized holding losses arising during period 61,490 (24,986) 36,504
Less: reclassification adjustments for losses
realized in net income (loss) (62,139) 26,098 (36,041)
Unrealized gains (losses) on derivative financial
instruments:
Cumulative effect of accounting change (6,217) 2,611 (3,606)
Net changes in fair value of derivative
financial instruments (420) 176 (244)
Less: reclassification adjustments for gains
realized in net income (loss) 1,613 (677) 936
------------ ----------- ------------
Other comprehensive income (loss) JPY (57,453) JPY 30,619 JPY (26,834)
============ =========== ============
F-30
NEC Corporation
Notes to Consolidated Financial Statements (continued)
12. STOCK-BASED COMPENSATION PLAN
At the shareholders' meeting held in June 2000, the Company's shareholders
approved a stock option plan (the "2000 Plan") for directors, corporate officers
and certain upper-level employees of NEC Corporation. Under the 2000 Plan, NEC
Corporation was to purchase no more than 320,000 shares in the market with an
aggregate price not exceeding JPY 1,200 million, and will hold and reserve such
shares for transfer to option holders upon exercise of the options.
NEC Corporation granted options to purchase 301,000 shares of its common stock
at JPY 3,400 per share, the approximate market value at the date of grant. The
terms of the options are subject to adjustment if there is a share split or
consolidation of shares, or in certain circumstances, if new shares are issued
at a price less than the current quoted market price.
F-31
NEC Corporation
Notes to Consolidated Financial Statements (continued)
12. STOCK-BASED COMPENSATION PLAN (CONTINUED)
The options vested at the grant date, and are exercisable during the period from
July 1, 2002 to June 30, 2006. The 2000 Plan provides that options lapse
automatically upon the option holder's death and generally expire one year after
termination of service.
At the shareholders' meeting held in June 2001, the Company's shareholders
approved the second stock option plan (the "2001 Plan") with terms and
conditions substantially the same as those of the 2000 Plan.
The aggregate number of shares to be transferred upon the exercise of all
outstanding options under the 2001 Plan is 310,000 shares. The exercise price
per share of the option is equal to JPY 1,876 per share. The options vested at
the grant date, and are exercisable during the period from July 1, 2003 to
June 30, 2007.
The stock option activity is as follows:
YEAR ENDED MARCH 31,
--------------------------------------------------
2001 2002
----------------------- --------- ---------
WEIGHTED- WEIGHTED-
AVERAGE AVERAGE
NUMBER OF EXERCISE NUMBER OF EXERCISE
OPTIONS PRICE OPTIONS PRICE
--------- --------- --------- ---------
(Yen) (Yen)
Outstanding at beginning of year - JPY - 301,000 JPY 3,400
Granted 301,000 3,400 310,000 1,876
------- -------
Outstanding at end of year 301,000 3,400 611,000 2,627
======= =======
Exercisable at end of year - - - -
The weighted-average remaining contractual life for options outstanding at March
31, 2002 is 4.76 years.
SFAS No. 123, (Accounting for Stock-Based Compensation), encourages entities to
use a fair value method in accounting for stock based compensation plans, but
permits entities to continue to use the intrinsic value method prescribed in
Accounting Principles Board Opinion No. 25 ("APB No. 25"), (Accounting for Stock
Issued to Employees), for employee stock options. Companies electing to use APB
No. 25 are required to present pro forma disclosures of net income and net
income per share as if the SFAS No. 123 fair value method had been used.
F-32
NEC Corporation
Notes to Consolidated Financial Statements (continued)
12. STOCK-BASED COMPENSATION PLAN (CONTINUED)
The Company has elected to apply APB No. 25 under which the Company recognizes
no compensation expense as long as the option price per share is at least equal
to the market price at the measurement date. Had the Company recognized
stock-based compensation expense based on the SFAS No. 123 fair value method,
income (loss) before cumulative effect of accounting change, net income (loss),
income (loss) before cumulative effect of accounting change per share and net
income (loss) per share for the years ended March 31, 2001 and 2002 would have
been as follows:
YEAR ENDED MARCH 31
-----------------------------
2001 2002
---------- ------------
(Millions of yen)
Income (loss) before cumulative effect of accounting change:
As reported JPY 56,603 JPY (309,425)
Pro forma 56,305 (309,565)
Net income (loss):
As reported 56,603 (312,020)
Pro forma 56,305 (312,160)
(Yen)
Basic EPS:
Income (loss) before cumulative effect of accounting change:
As reported JPY 34.55 JPY (187.06)
Pro forma 34.37 (187.15)
Net income (loss):
As reported 34.55 (188.63)
Pro forma 34.37 (188.72)
Diluted EPS:
Income (loss) before cumulative effect of accounting change:
As reported JPY 32.17 JPY (187.06)
Pro forma 32.01 (187.15)
Net income (loss):
As reported 32.17 (188.63)
Pro forma 32.01 (188.72)
F-33
NEC Corporation
Notes to Consolidated Financial Statements (continued)
12. STOCK-BASED COMPENSATION PLAN (CONTINUED)
The weighted-average fair value per option at the grant date for options granted
during the years ended March 31, 2001 and 2002 was JPY 991 and JPY 451,
respectively. The fair value of options granted, which is charged to income at
the grant date in determining the pro forma impact, is estimated using the
Black-Scholes option pricing model with the following weighted-average
assumptions:
YEAR ENDED MARCH 31
-----------------------------
2001 2002
------- -------
Risk-free interest rate 1.00% 0.43%
Expected life 4 years 4 years
Expected volatility 36.40% 42.60%
Expected dividend 0.27% 0.56%
13. NET INCOME (LOSS) PER SHARE
A reconciliation of the numerator and the denominators of the basic and diluted
per share computations for income (loss) before cumulative effect of accounting
change, cumulative effect of accounting change, net of tax and net income (loss)
is as follows:
YEAR ENDED MARCH 31
---------------------------------------------
2000 2001 2002
---------- ---------- ------------
(Millions of yen)
Income (loss) before cumulative effect of accounting change
available to common shareholders JPY 10,416 JPY 56,603 JPY (309,425)
Effect of dilutive securities:
Convertible debt - 2,995 -
---------- ---------- ------------
Diluted income (loss) before cumulative effect of
accounting change JPY 10,416 JPY 59,598 JPY (309,425)
========== ========== ============
Cumulative effect of accounting change, net of tax JPY - JPY - JPY (2,595)
========== ========== ============
Net income (loss) available to common shareholders JPY 10,416 JPY 56,603 JPY (312,020)
Effect of dilutive securities:
Convertible debt - 2,995 -
---------- ---------- ------------
Diluted net income (loss) JPY 10,416 JPY 59,598 JPY (312,020)
========== ========== ============
F-34
NEC Corporation
Notes to Consolidated Financial Statements (continued)
13. NET INCOME (LOSS) PER SHARE (CONTINUED)
YEAR ENDED MARCH 31
----------------------------------------------------
2000 2001 2002
------------- ------------- -------------
(Number of shares)
Weighted-average number of shares of common stock
outstanding for the year 1,627,817,355 1,638,173,139 1,654,131,607
Effect of dilutive securities:
Convertible debt - 214,656,268 -
------------- ------------- -------------
Weighted-average number of shares of diluted common
stock outstanding for the year 1,627,817,355 1,852,829,407 1,654,131,607
============= ============= =============
YEAR ENDED MARCH 31
-----------------------------------------
2000 2001 2002
-------- --------- ------------
(Yen)
Per share:
Basic:
Income (loss) before cumulative effect of accounting change JPY 6.40 JPY 34.55 JPY (187.06)
Cumulative effect of accounting change, net of tax - - (1.57)
Net income (loss) 6.40 34.55 (188.63)
Diluted:
Income (loss) before cumulative effect of accounting change 6.40 32.17 (187.06)
Cumulative effect of accounting change, net of tax - - (1.57)
Net income (loss) 6.40 32.17 (188.63)
Securities that could potentially dilute basic EPS in the future that were not
included in the fully diluted computation because they would have been
antidilutive were as follows:
YEAR ENDED MARCH 31
--------------------------------------------------
2000 2001 2002
----------- ------- -----------
(Number of shares)
Convertible debt 205,924,498 - 220,562,540
Stock options - 301,000 611,000
F-35
NEC Corporation
Notes to Consolidated Financial Statements (continued)
14. FINANCIAL INSTRUMENTS
(1) Fair value of financial instruments
The carrying amounts of cash and cash equivalents, notes and accounts
receivable, trade, notes and accounts payable, trade, short-term
borrowings, accounts payable, other and accrued expenses, accrued income
taxes and other current assets and liabilities approximated fair value
because of their short-term maturities. The carrying amounts and estimated
fair values of the other financial instruments are summarized as follows:
MARCH 31
-------------------------------------------------------------------
2001 2002
------------------------------- --------------------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
-------------- -------------- -------------- --------------
(Millions of yen)
Long-term receivables, trade JPY 49,855 JPY 50,639 JPY 45,073 JPY 45,428
Long-term loans 34,591 34,838 42,782 43,899
Long-term debt, including current
portion and excluding capital
lease obligations (1,407,927) (1,551,636) (1,797,305) (1,842,467)
Derivatives:
Forward exchange contracts (15,937) (15,903) (1,352) (1,352)
Interest rate and currency swap
agreements (14,228) (21,688) (24,957) (24,957)
F-36
NEC Corporation
Notes to Consolidated Financial Statements (continued)
14. FINANCIAL INSTRUMENTS (CONTINUED)
(1) Fair value of financial instruments (continued)
The fair values of financial instruments at March 31, 2001 and 2002 are
determined by using a variety of methods and assumptions such as reference
to various markets and other data as appropriate. For long-term
receivables, trade and long-term loans included in investments and
advances-other, fair value is estimated using estimated discounted future
cash flows. For long-term debt, fair value is estimated using market
quotes, or where market quotes are not available, using estimated
discounted future cash flows. Investments in equity securities, included in
investments and advances-other, with an aggregate carrying amount of JPY
119,373 million and JPY 115,397 million at March 31, 2001 and 2002,
respectively, consist of numerous investments in securities of non-public
companies. It is not practicable to reasonably estimate the fair values of
these investments. The fair value of forward exchange contracts is
estimated by obtaining quotes for futures contracts with similar
maturities, the fair value of interest rate and currency swap agreements is
estimated based on estimated discounted net future cash flows.
(2) Derivative financial instruments
The Company utilizes derivative financial instruments to manage
fluctuations in foreign currency exchange rates and interest rates. The
Company has policies and procedures for risk management and the approval,
reporting and monitoring of derivative financial instruments. The Company's
policies prohibit holding or issuing derivative financial instruments for
trading purposes.
Forward exchange contracts have been entered into to offset the adverse
impact of fluctuations in foreign currency exchange rates on monetary
assets and liabilities denominated in foreign currencies arising from the
Company's operating activities.
At March 31, 2001, the Company had outstanding forward exchange contracts
which mature through March 2002 to purchase the equivalent of JPY 85,337
million, principally U.S. dollars, and to sell the equivalent of JPY
146,082 million, principally U.S. dollars and Euros.
At March 31, 2002, the Company had outstanding forward exchange contracts
which mainly mature through January 2003. The forward exchange contracts
are not designated as hedging instruments under SFAS No. 133, and changes
in fair value of forward exchange contracts are recognized in income as
offsets to the remeasurement of the monetary assets and liabilities
denominated in foreign currencies. The related receivable or payable is
included in other current assets or other current liabilities.
F-37
NEC Corporation
Notes to Consolidated Financial Statements (continued)
14. FINANCIAL INSTRUMENTS (CONTINUED)
(2) Derivative financial instruments (continued)
The Company has entered into interest rate swap agreements to manage
interest rate risk exposure associated with underlying debt. The Company
has also entered into currency swap agreements together with interest rate
swap agreements to manage both foreign currency and interest rate risk
exposures associated with certain underlying debt. Certain interest rate
swap agreements are designated as either a fair value hedge or a cash flow
hedge depending on the interest rate characteristics of the underlying debt
as discussed below.
(Fair Value Hedging Strategy)
The interest rate swap agreements utilized by the Company effectively
modify the Company's fixed-rate debt to a floating rate for the next 7
years. These agreements involve the receipt of fixed rate amounts in
exchange for floating rate interest payments over the life of the
agreements without an exchange of the underlying principal amount.
(Cash Flow Hedging Strategy)
The interest rate swap agreements utilized by the Company effectively
convert a portion of its floating-rate debt to a fixed-rate basis for the
next 7 years. Approximately 9% of the Company's outstanding short-term debt
was designated as the hedged items to interest rate swap agreements at
March 31, 2002.
At March 31, 2001, the aggregate notional principal amounts for interest
rate swap agreements and currency swap agreements were JPY 516,543 million.
These agreements mature through 2009.
At March 31, 2002, the Company expects to reclassify JPY 865 million of net
losses on derivative financial instruments from accumulated other
comprehensive income (loss) to earnings during the next twelve months due
to the payment of variable interest associated with the floating rate debt.
At March 31, 2002, there were no significant gains or losses on derivative
financial instruments or portions thereof that were either ineffective as
hedges, excluded from assessment of hedge effectiveness, or where the
underlying risk did not occur.
The counterparties to the Company's derivative transactions are major
financial institutions. As a normal business risk, the Company is exposed
to credit loss in the event of nonperformance by the counterparties,
however, the Company does not anticipate nonperformance by the
counterparties to these agreements, and no material losses are expected.
F-38
NEC Corporation
Notes to Consolidated Financial Statements (continued)
15. SECURITIZATION OF RECEIVABLES
The Company has several securitization programs under which certain trade
receivables and investment in leases are transferred, without recourse, to a
special purpose entity ("SPE"). Simultaneously, the SPE sells an interest in
those receivables and investment in leases to a large financial institution. In
certain securitizations, the Company has retained subordinated interests which
are not material to the Company's financial position. Credit losses related to
the securitized trade receivables and investment in leases have been immaterial.
The Company services, administers and collects the securitized trade receivables
and investment in leases on behalf of the SPE. For the years ended March 31,
2000, 2001 and 2002, JPY 1,065,845 million, JPY 1,255,087 million and JPY
1,467,985 million in proceeds have been received under the securitization
programs. For the years ended March 31, 2000, 2001 and 2002, the Company has
recorded losses of JPY 399 million, JPY 692 million and JPY 871 million related
to the securitization programs.
16. RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses included in selling, general and
administrative expenses were JPY 315,163 million, JPY 344,957 million and JPY
333,632 million for the years ended March 31, 2000, 2001 and 2002, respectively.
17. ADVERTISING COSTS
The Company expenses advertising costs as incurred. Advertising expenses
amounted to JPY 31,774 million, JPY 20,703 million and JPY 27,709 million for
the years ended March 31, 2000, 2001 and 2002, respectively.
18. STOCK ISSUANCES BY SUBSIDIARIES
NEC Soft, Ltd. ("NES"), a consolidated subsidiary which develops software, sold
2,800,000 shares of stock at JPY 7,107 per share to third parties in a public
offering on July 28, 2000, receiving total consideration of JPY 19,900 million.
At the same time, the Company sold 2,800,000 shares of NES's stock to third
parties at the same price through the market, and recognized a gain of JPY
17,399 million on this transaction. As a result of NES's public offering, the
Company's ownership interest in NES decreased from 95.34% to 67.41%. However,
because the issuance price per share of stock sold by NES was more than the
Company's average carrying amount per share, the Company was required to adjust
the carrying amount of its investment in NES by JPY 12,990 million and
recognized a gain for that amount. The Company provided a deferred tax liability
of JPY 5,456 million on such gain.
F-39
NEC Corporation
Notes to Consolidated Financial Statements (continued)
18. STOCK ISSUANCES BY SUBSIDIARIES (CONTINUED)
NEC Machinery Corporation ("NEM"), a consolidated subsidiary which manufactures
and markets semiconductor manufacturing machinery and factory automation
systems, sold 1,000,000 shares of stock at JPY 4,735 per share to third parties
in a public offering on October 6, 2000, receiving total consideration of JPY
4,735 million. At the same time, the Company sold 2,000,000 shares of NEM's
stock to third parties at the same price through the market, and recognized a
gain of JPY 8,635 million on this transaction. As a result of NEM's public
offering, the Company's ownership interest in NEM decreased from 90.90% to
53.91%. However, because the issuance price per share of stock sold by NEM was
more than the Company's average carrying amount per share, the Company was
required to adjust the carrying amount of its investment in NEM by JPY 2,300
million and recognized a gain for that amount. The Company provided a deferred
tax liability of JPY 966 million on such gain.
NEC Mobiling, Ltd. ("Mobiling"), a consolidated subsidiary which distributes
mobile phones and develops software for mobile and wireless communications
network systems, sold 2,250,000 shares of stock at JPY 1,692 per share to third
parties in a public offering on February 22, 2002, receiving total consideration
of JPY 3,807 million. At the same time, the Company sold 2,250,000 shares of
Mobiling's stock to third parties at the same price through the market, and
recognized a gain of JPY 1,828 million on this transaction. As a result of
Mobiling's public offering, the Company's ownership interest in Mobiling
decreased from 97.72% to 67.11%. However, because the issuance price per share
of stock sold by Mobiling was more than the Company's average carrying amount
per share, the Company was required to adjust the carrying amount of its
investment in Mobiling by JPY 1,226 million and recognized a gain for that
amount. The Company provided a deferred tax liability of JPY 515 million on such
gain.
Certain other consolidated subsidiaries issued new shares of stock to third
parties during the year ended March 31, 2002, receiving aggregate consideration
of JPY 5,864 million. As a result of the issuance of new shares, the Company's
ownership interest in the consolidated subsidiaries decreased; however, because
the issuance price per share of stock issued by the consolidated subsidiaries
was more than the Company's average carrying amount per share, the Company was
required to adjust the carrying amounts of its investments in the consolidated
subsidiaries by JPY 3,699 million and recognized gains for that amount. The
Company provided deferred tax liabilities of JPY 1,516 million on such gains.
F-40
NEC Corporation
Notes to Consolidated Financial Statements (continued)
19. OTHER INCOME AND EXPENSES
The principal components of other income and expenses for the years ended March
31, 2000, 2001 and 2002 were as follows:
YEAR ENDED MARCH 31
----------------------------------------------
2000 2001 2002
----------- ----------- -----------
(Millions of yen)
Interest, gain on securities sold, dividends and other:
Interest and dividend income JPY 14,255 JPY 20,786 JPY 15,754
Gain on sale of investments in securities 112,446 57,928 32,900
Gain on sale of property, plant and equipment 45,329 34,289 12,063
Other 46,414 27,059 42,920
----------- ----------- -----------
JPY 218,444 JPY 140,062 JPY 103,637
=========== =========== ===========
Other expenses:
Net foreign exchange loss JPY 34,398 JPY 9,537 JPY 11,132
Restructuring and other unusual charges 148,022 136,187 370,471
Amortization of goodwill 5,517 6,330 8,360
Loss on sale or disposal of property, plant and equipment 21,080 20,466 17,423
Other 19,447 37,853 61,992
----------- ----------- -----------
JPY 228,464 JPY 210,373 JPY 469,378
=========== =========== ===========
Restructuring and other unusual charges principally consisted of restructuring
charges, refund of the amount overcharged in connection with the Defense Agency
and the Defense Facilities Administration Agency of Japan, and write-offs and
loss on sales of investments in securities.
The Company closed its consumer PC business in North America in fiscal 2000, and
completed restructuring of its consumer electronics appliances business in
fiscal 2001. As a result, the Company recorded restructuring charges which
principally consisted of write-off or disposal of inventories, machinery and
equipment and other assets and personnel related costs. All disbursements
relating to the restructuring charges have been completed in the respective
fiscal years.
F-41
NEC Corporation
Notes to Consolidated Financial Statements (continued)
19. OTHER INCOME AND EXPENSES (CONTINUED)
During the year ended March 31, 2002, the Company implemented plans to
reorganize and restructure the manufacturing operations of NEC Solutions, NEC
Networks and NEC Electron Devices. This included the closure or consolidation of
plants, a downsizing of the workforce and an exiting or termination of certain
product lines. In addition, an impairment loss was recognized for certain
machinery, equipment and intangible assets related to the aforementioned
businesses and product lines. As a result of above restructuring, the Company
incurred restructuring charge of JPY 285,914 million for fiscal 2002. The
restructuring charge consisted of losses of JPY 202,940 million on disposal and
impairment related to buildings, machinery and equipment, and on disposal and
write-down related to inventories, personnel costs of JPY 46,686 million for
reduction of approximately 13,000 employees, which excludes employees who left
through normal attrition, and others of JPY 36,288 million. The impairment loss
for buildings and machinery and equipment was JPY 108,778 million, and
impairment loss for intangible assets was JPY 10,488 million. Prior to March
31, 2002 the Company had paid personnel costs of JPY 43,752 million. At March
31, 2002, unpaid termination benefits approximated JPY 2,934 million.
20. LEASING ARRANGEMENTS
(1) Equipment leasing
The Company is a lessor of equipment under financing and operating leasing
arrangement with terms principally from 3 to 6 years.
The Company sells computer equipment to an affiliated financing company
which in turn leases the equipment to certain government and governmental
agencies under operating leases. The Company also agrees to repurchase that
equipment from the affiliated financing company at prescribed amounts at
the expiration of the lease. The Company accounts for these transactions as
assets owned and leased to others under operating leases.
The cost of equipment under operating leases at March 31, 2001 and 2002 was
JPY 53,308 million and JPY 59,113 million, respectively, and was included
in machinery and equipment. Accumulated depreciation on equipment under
operating leases at March 31, 2001 and 2002 was JPY 40,311 million and JPY
46,080 million, respectively.
F-42
NEC Corporation
Notes to Consolidated Financial Statements (continued)
20. LEASING ARRANGEMENTS (CONTINUED)
(1) Equipment leasing (continued)
Investment in leases represents financing leases which consist of
sales-type leases and direct-financing leases. Components of the investment
in sales-type and direct-financing leases are as follows:
MARCH 31, 2002
-----------------
(Millions of yen)
Total minimum lease payments JPY 544,738
Executory costs (9,657)
Unearned income (24,469)
------------
510,612
Less - allowance for uncollectible amounts (3,851)
------------
506,761
Less - current portion (251,947)
------------
JPY 254,814
============
The following is a schedule by year of the future minimum lease payments to be
received under financing leases and non-cancelable operating leases at March 31,
2002.
FINANCING OPERATING
LEASES LEASES
----------- ---------
(Millions of yen)
YEAR ENDING MARCH 31:
2003 JPY 203,705 JPY 7,648
2004 142,124 431
2005 103,663 -
2006 62,274 -
2007 25,294 -
2008 and thereafter 7,678 -
----------- ---------
Total minimum lease payments JPY 544,738 JPY 8,079
=========== =========
F-43
NEC Corporation
Notes to Consolidated Financial Statements (continued)
20. LEASING ARRANGEMENTS (CONTINUED)
(2) Lease of facilities and equipment
The Company leases certain facilities and equipment for its own use. The
gross amount of leased assets under capital leases included in machinery
and equipment was JPY 100,897 million and JPY 33,011 million at March 31,
2001 and 2002, respectively. Accumulated depreciation of the leased assets
at March 31, 2001 and 2002 was JPY 61,599 million and JPY 22,657 million,
respectively.
The following is a schedule by year of the future minimum lease payments
under capital leases together with the present value of the net minimum
lease payments at March 31, 2002:
(Millions of yen)
-----------------
YEAR ENDING MARCH 31:
2003 JPY 8,752
2004 2,493
2005 1,289
2006 756
2007 379
----------
Total minimum lease payments 13,669
Less - amount representing interest (1,813)
----------
Present value of net minimum lease payments 11,856
Less - current obligation (7,832)
----------
Long-term lease obligation JPY 4,024
==========
During the year ended March 31, 2000, the Company sold certain land,
buildings, facilities and equipment for JPY 176,057 million. The assets
were leased back from the purchaser over periods of one to four years. The
resulting leases were classified as operating leases and the resulting gain
of JPY 43,787 million, relating to the profit on the sale in excess of the
present value of the minimum lease payments over the lease terms, was
recorded as other income. A deferred gain of JPY 21,124 million is being
amortized over the lease term.
Rental expense under operating leases, including the assets subject to
sale-leaseback transactions discussed above, were JPY 121,510 million,
138,655 million and 111,975 million for the years ended March 31, 2000,
2001 and 2002, respectively.
F-44
NEC Corporation
Notes to Consolidated Financial Statements (continued)
20. LEASING ARRANGEMENTS (CONTINUED)
(2) Lease of facilities and equipment (continued)
Future minimum rental payments are as follows:
(Millions of yen)
-----------------
YEAR ENDING MARCH 31:
2003 JPY 48,888
2004 33,876
2005 23,060
2006 16,263
2007 7,940
2008 and thereafter 10,846
21. COMMITMENTS AND CONTINGENT LIABILITIES
Commitments outstanding at March 31, 2002 for the purchase of property, plant
and equipment approximated JPY 15,138 million.
Contingent liabilities at March 31, 2002 for loans guaranteed and other
guarantees amounted to approximately JPY 106,450 million and JPY 2,737 million,
respectively. Loans guaranteed at March 31, 2002 included loans guaranteed for
affiliated companies of JPY 25,102 million and for employees of JPY 38,504
million. The guarantees are outstanding for periods ranging from 1 to 22 years.
In the opinion of management, the risk of loss related to these contingencies at
March 31, 2002 is not material to the Company's financial position.
F-45
NEC Corporation
Notes to Consolidated Financial Statements (continued)
22. SEGMENT INFORMATION
(1) Operating segments
The following information represents the operating segments of the Company,
for which separate financial information is available and is reviewed by
the chief operating decision maker in deciding how to allocate resources
and in assessing performance periodically. NEC Solutions provides mainly
Internet solutions to corporations, individuals and government/public
sectors, and develops, designs, manufactures and markets computer systems
which include systems integration services, software, Internet services
"BIGLOBE," and support services as well as hardware such as UNIX servers,
workstations, mainframe computers, PC servers, storage systems and PCs. NEC
Networks provides Internet solutions mainly to network service providers,
and develops, designs, manufactures and markets communications network
systems which include transmission systems such as terrestrial and
submarine cable WDM systems and optical access system, routing and
switching systems such as high end routers and digital central office
switching systems, wireless systems such as 3rd generation ("3G") wireless
communication systems, microwave and satellite communications equipment,
and cellular phones. NEC Networks also develops, designs, manufactures and
markets satellite equipment, broadcast equipment and network management
systems. NEC Electron Devices provides electron device solutions for the
Internet industry, and develops, designs, manufactures, and markets
semiconductors such as system LSIs, general purpose semiconductors, system
memories and DRAMs, displays such as color LCDs and plasma display panels,
and electronic components such as capacitors, printed wiring boards and
relays. The others segment develops, designs, manufactures and markets
manufacturing equipment for semiconductors and LCD projectors, and provides
construction services of information and network systems.
The Company's leasing subsidiary is recognized as an additional operating
segment.
F-46
NEC Corporation
Notes to Consolidated Financial Statements (continued)
22. SEGMENT INFORMATION (CONTINUED)
(1) Operating segments (continued)
a. Sales
YEAR ENDED MARCH 31
----------------------------------------------------
2000 2001 2002
------------- ------------- -------------
(Millions of yen)
Sales:
NEC Solutions:
External customers JPY 2,138,161 JPY 2,103,031 JPY 2,053,510
------------- ------------- -------------
Intersegment 132,464 125,441 155,583
Total 2,270,625 2,228,472 2,209,093
NEC Networks:
External customers 1,422,302 1,743,054 1,866,654
Intersegment 105,456 91,308 90,515
------------- ------------- -------------
Total 1,527,758 1,834,362 1,957,169
NEC Electron Devices:
External customers 881,895 1,021,746 694,587
Intersegment 240,895 207,147 148,291
------------- ------------- -------------
Total 1,122,790 1,228,893 842,878
Others:
External customers 549,089 541,905 423,932
Intersegment 174,822 200,527 210,846
------------- ------------- -------------
Total 723,911 742,432 634,778
Eliminations (653,637) (624,423) (589,132)
------------- ------------- -------------
Electronics business total 4,991,447 5,409,736 5,054,786
Leasing business:
External customers - - 62,339
Intersegment - - 9,420
------------- ------------- -------------
Total - - 71,759
Eliminations - - (25,523)
------------- ------------- -------------
Consolidated total JPY 4,991,447 JPY 5,409,736 JPY 5,101,022
============= ============= =============
F-47
NEC Corporation
Notes to Consolidated Financial Statements (continued)
22. SEGMENT INFORMATION (CONTINUED)
(1) Operating segments (continued)
b. Segment profit or loss
YEAR ENDED MARCH 31
-----------------------------------------------
2000 2001 2002
------------ ------------ ------------
(Millions of yen)
Segment profit (loss):
NEC Solutions JPY 84,430 JPY 84,055 JPY 75,390
NEC Networks 57,110 83,144 53,447
NEC Electron Devices 49,444 68,290 (148,159)
Others (2,747) 20,249 2,988
------------ ------------ ------------
Total 188,237 255,738 (16,334)
Eliminations (17,640) (16,852) (3,357)
Unallocated corporate expenses (60,183) (53,703) (39,750)
------------ ------------ ------------
Electronics business total 110,414 185,183 (59,441)
------------ ------------ ------------
Leasing business - - 6,306
Eliminations - - (2,387)
------------ ------------ ------------
110,414 185,183 (55,522)
Other income 218,444 181,386 110,390
Other expenses (298,675) (274,246) (516,051)
------------ ------------ ------------
Consolidated income (loss) before income taxes JPY 30,183 JPY 92,323 JPY (461,183)
============ ============ ============
c. Assets
MARCH 31
---------------------------------------------------
2000 2001 2002
------------- ------------- -------------
(Millions of yen)
Total assets:
NEC Solutions JPY 1,023,039 JPY 1,070,999 JPY 1,031,523
NEC Networks 1,071,050 1,326,517 1,181,781
NEC Electron Devices 1,171,940 1,222,183 1,046,265
Others 758,059 759,007 779,106
------------- ------------- -------------
Total 4,024,088 4,378,706 4,038,675
Eliminations (222,528) (290,862) (233,477)
Corporate assets 807,404 735,780 658,673
------------- ------------- -------------
Electronics business total 4,608,964 4,823,624 4,463,871
Leasing business - - 662,143
Eliminations - - (115,131)
------------- ------------- -------------
Consolidated total JPY 4,608,964 JPY 4,823,624 JPY 5,010,883
============= ============= =============
Others includes the investment in the leasing subsidiary accounted for by
the equity method.
F-48
NEC Corporation
Notes to Consolidated Financial Statements (continued)
22. SEGMENT INFORMATION (CONTINUED)
(1) Operating segments (continued)
d. Other significant items
YEAR ENDED MARCH 31
-------------------------------------------------
2000 2001 2002
----------- ----------- -----------
(Millions of yen)
Depreciation:
NEC Solutions JPY 31,119 JPY 29,363 JPY 32,719
NEC Networks 32,770 31,859 35,760
NEC Electron Devices 153,559 151,867 135,737
Others 23,561 17,859 11,390
----------- ----------- -----------
Total 241,009 230,948 215,606
Corporate 19,933 19,190 17,526
----------- ----------- -----------
Electronics business total 260,942 250,138 233,132
Leasing business - - 1,606
----------- ----------- -----------
Consolidated total JPY 260,942 JPY 250,138 JPY 234,738
=========== =========== ===========
Capital expenditures for segment assets:
NEC Solutions JPY 31,662 JPY 26,947 JPY 34,576
NEC Networks 32,955 44,882 46,689
NEC Electron Devices 171,857 239,536 96,558
Others 17,713 20,058 6,726
----------- ----------- -----------
Total 254,187 331,423 184,549
Corporate 27,452 15,068 13,953
----------- ----------- -----------
Electronics business total 281,639 346,491 198,502
Leasing business - - 1,565
----------- ----------- -----------
Consolidated total JPY 281,639 JPY 346,491 JPY 200,067
=========== =========== ===========
Transfers between reportable operating segments are made at arm's-length
prices. Corporate expenses include general corporate expenses and research
and development expenses at NEC Corporation which are not allocated to any
operating segment. Corporate assets consist primarily of cash and cash
equivalents and buildings maintained for general corporate purposes. The
capital expenditures represent the additions to fixed assets of each
segment.
F-49
NEC Corporation
Notes to Consolidated Financial Statements (continued)
22. SEGMENT INFORMATION (CONTINUED)
(2) Geographic information
Sales, which are attributed to geographic areas based on the country
location of NEC Corporation or subsidiary that transacted the sale with the
external customer, geographic profit (loss) for the years ended March 31,
2000, 2001 and 2002 and long-lived assets at March 31, 2000, 2001 and 2002
were as follows. Although the disclosure of geographic profit (loss) is not
required under accounting principles generally accepted in the United
States of America, the Company discloses this information as supplemental
information due to the disclosure requirements of the Japanese Securities
and Exchange Law.
YEAR ENDED MARCH 31
-------------------------------------------------------
2000 2001 2002
------------- ------------- -------------
(Millions of yen)
Net sales:
Japan JPY 3,745,910 JPY 4,308,152 JPY 4,230,278
North America 521,684 379,569 255,218
Others 723,853 722,015 615,526
------------- ------------- -------------
Total JPY 4,991,447 JPY 5,409,736 JPY 5,101,022
============= ============= =============
Geographic profit (loss):
Japan JPY 120,141 JPY 170,094 JPY (16,854)
North America (13,705) (2,904) (31,588)
Others 4,774 17,993 (7,080)
Eliminations (796) - -
------------- ------------- -------------
Total JPY 110,414 JPY 185,183 JPY (55,522)
============= ============= =============
MARCH 31
-------------------------------------------------------
2000 2001 2002
------------- ------------- -------------
(Millions of yen)
Long-lived assets:
Japan JPY 1,213,264 JPY 1,203,522 JPY 1,132,400
North America 65,023 77,167 35,346
Others 126,628 128,541 82,121
------------- ------------- -------------
Total JPY 1,404,915 JPY 1,409,230 JPY 1,249,867
============= ============= =============
There are no countries with respect to sales and long-lived assets included
in other areas which are individually material. Transfers between
geographic areas are made at arm's-length prices.
(3) Major customers
Sales to one customer accounted for approximately 11.6%, 13.2% and 16.0% of
consolidated sales for the years ended March 31, 2000, 2001 and 2002,
respectively.
F-50
SCHEDULE II
NEC CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
BALANCE AT ADDITIONS
BEGINNING OF CHARGED TO COSTS BALANCE AT END
PERIOD AND EXPENSES DEDUCTIONS OF PERIOD
------------ ---------------- ---------- --------------
(Millions of yen)
Year ended March 31, 2000:
Allowance for doubtful notes
and accounts JPY 17,273 JPY 15,568 JPY 6,426(1) JPY 26,415
========== ========== ========= ==========
Year ended March 31, 2001:
Allowance for doubtful notes
and accounts JPY 26,415 JPY 5,857 JPY 5,073(1) JPY 27,199
========== ========== ========= ==========
Year ended March 31, 2002:
Allowance for doubtful notes
and accounts JPY 27,199 JPY 7,968 JPY 2,992(1) JPY 32,175
========== ========== ========= ==========
Note
- ----
(1) Principally accounts written off, translation adjustments and reversal of
allowance for doubtful notes and accounts.
F-51
EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION
-------------- -----------------------------------------------------------------
1 Articles of Incorporation, as amended to date (English
translation)
2 Share Handling Regulations, as amended to date (English
translation)
3 Certificate of English Translations for Articles of Incorporation
and Share Handling Regulations
8 Subsidiaries of the Company (see "Item 4.C. Organizational
Structure")
10(a)(1) Certification of Chief Executive Officer or Equivalent Pursuant
to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906
of the Sarbanes-Oxley Act of 2002
10(a)(2) Certification of Chief Financial Officer or Equivalent Pursuant
to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906
of the Sarbanes-Oxley Act of 2002