-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, QgMUwtXeSbjQc8aiWvHdxw+QftWEqDox+FtdwV3vzTppvtJO9WRZkeFpJnr7/EXi guTMDOs5SZ3muUkoMKWsZw== 0000950123-99-007122.txt : 19990805 0000950123-99-007122.hdr.sgml : 19990805 ACCESSION NUMBER: 0000950123-99-007122 CONFORMED SUBMISSION TYPE: 20-F PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990331 FILED AS OF DATE: 19990804 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MATSUSHITA ELECTRIC INDUSTRIAL CO LTD CENTRAL INDEX KEY: 0000063271 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRONIC & OTHER ELECTRICAL EQUIPMENT (NO COMPUTER EQUIP) [3600] FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 20-F SEC ACT: SEC FILE NUMBER: 001-06784 FILM NUMBER: 99677560 BUSINESS ADDRESS: STREET 1: 1006 KADOMA CITY: KADOMA OSAKA JAPAN STATE: M0 BUSINESS PHONE: 0000000000 MAIL ADDRESS: STREET 1: 1006 KADOMA CITY: OSAKA 571 STATE: M0 20-F 1 FORM 20-F RE: MATSUSHITA ELECTRIC 1 SECURITIES AND EXCHANGE COMMISSION Form 20-F ANNUAL REPORT PURSUANT TO SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended March 31, 1999 -------------- Commission file number 1 - 6784 -------- MATSUSHITA DENKI SANGYO KABUSHIKI KAISHA ---------------------------------------- (Exact name of registrant as specified in its charter) MATSUSHITA ELECTRIC INDUSTRIAL CO., LTD. ---------------------------------------- (Translation of registrant's name into English) Japan ----- (Jurisdiction of incorporation or organization) 1006, Oaza Kadoma, Kadoma City, Osaka, Japan -------------------------------------------- (Address of principal executive offices) Securities registered or to be registered pursuant to Section 12(b) of the Act. Title of each class Name of each exchange on which registered American Depositary Shares* New York Stock Exchange and Pacific Stock Exchange - --------------------------- -------------------------------------------------- Common Stock** New York Stock Exchange and Pacific Stock Exchange - --------------------------- -------------------------------------------------- * American Depositary Shares evidenced by American Depositary Receipts. Each American Depositary Share represents ten shares of Common Stock. ** Par value 50 Japanese yen per share. Securities registered or to be registered pursuant to Section 12(g) of the Act. None - -------------------------------------------------------------------------------- (Title of Class) Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act. None - -------------------------------------------------------------------------------- (Title of Class) This form contains 83 pages. 2 -2- 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.
Outstanding as of --------------------------------- Title of Class March 31, 1999 March 30, 1999 -------------- (Japan Time) (New York Time) ------------- --------------- Common Stock - 50 yen par value per share 2,062,344,774 American Depositary Shares, each representing 10 shares of common stock 4,622,187
Indicate by check mark whether the Company (1) has filed all reports required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Company 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 Company has elected to follow. Item 17. X Item 18. . --- --- All information contained in this Report is as of March 31, 1999 or for the year ended March 31, 1999 (fiscal 1999) unless the context otherwise indicates. The noon buying rate for yen in New York City as certified for customs purposes by the Federal Reserve Bank of New York on July 21, 1999 was 118.25 yen = U.S.$1. Cautionary Statement Regarding Forward-Looking Statements - --------------------------------------------------------- Any statements in this Annual Report, other than those of historical fact, are forward-looking statements about the future performance of Matsushita and its Group companies, which are based on management's assumptions and beliefs in light of information currently available, and involve risks and uncertainties. Actual results may differ materially from these forecasts. Potential risks and uncertainties include, but are not limited to, domestic and overseas economic conditions, such as consumer spending and private capital expenditures, particularly given the continuing sluggish economy of Japan and other Asian countries; currency exchange rate fluctuations, notably with the yen, U.S. dollar, Asian currencies, the euro and other currencies, in which Matsushita operates its international business; direct and indirect restrictions imposed by other countries; fluctuations in market prices of securities in which Matsushita has substantial holdings; and Matsushita's ability to maintain its strength in many product and geographical areas, through such means as new product introductions, in a market that is highly competitive in terms of both price and technology, pertinent to the industry to which the Company primarily belongs. 3 -3- PART I Item 1. Description of Business ----------------------- GENERAL ------- Matsushita Electric Industrial Co., Ltd. (hereinafter, unless the context otherwise requires, "Matsushita" or the "Company" refers to Matsushita Electric Industrial Co., Ltd. and its consolidated subsidiaries as a group) is one of the world's leading producers of electronic and electric products. The Company was incorporated in Japan on December 15, 1935 under the laws of Japan as Matsushita Denki Sangyo Kabushiki Kaisha as the successor to an unincorporated enterprise founded in 1918 by the late Konosuke Matsushita. Mr. Matsushita led the Company with his corporate philosophy of contributing to the peace, happiness and prosperity of mankind through the supply of quality consumer goods. The Company's business expanded rapidly with the recovery and growth of the Japanese economy after World War II, as it met rising demand for consumer electric and electronic products, starting with washing machines, black-and-white television (TV) sets and refrigerators. Matsushita continued to grow during the following decades by expanding its product range to include color TV sets, hi-fi components, air conditioners, video tape recorders, industrial equipment and information and communications equipment, as well as electronic components. Overseas sales and production expansion was also a significant factor for the growth in these decades. Matsushita currently offers a comprehensive range of products, systems and components for consumer, business and industrial use based on sophisticated electronics and precision technology. Most of the Company's products are marketed under several trademarks, including "Panasonic," "National," "Technics," "Quasar," "Victor" and "JVC." In the 1990s, Matsushita placed increasing emphasis on technological development and the use of advanced electronics technology in every phase of life, thus steering the Company to achieve further growth in the next century. In particular, the Company has been expanding its development activities in such areas as next-generation audiovisual (AV) equipment, multimedia products, and advanced electronic components and devices, many items of which are incorporating digital technology. Its priority product areas include optical discs (such as DVDs), mobile communications equipment, display devices and semiconductors. In early 1998, "next-generation digital TV systems" was added as the fifth mid-term priority area. In December 1990, the Company acquired MCA INC. (MCA), a leading U.S. entertainment company, for approximately U.S.$6.1 billion. In May 1993, the Company and N.V. Philips' Gloeilampenfabrieken, now Koninklijke Philips Electronics N.V. (Philips), terminated their joint venture company, Matsushita Electronics Corp. (MEC), and the Company acquired Philips' 35% equity share in MEC for 185 billion yen, thus making MEC a wholly-owned subsidiary. In June 1995, the Company sold an 80% equity interest in MCA, now named Universal Studios, Inc., to The Seagram Company Ltd. for approximately U.S.$5.7 billion, leaving the Company with a minority interest. 4 -4- In April 1997, the Matsushita parent company established a new organizational structure, setting up four internal divisional companies - responsible for AVC (audiovisual and computer products), home appliances and household equipment, air conditioners, and electric motors - by grouping a majority of its some 50 product divisions. This step was taken in order to facilitate strategic planning, speed decision making and more efficiently allocate resources across a broader range than that afforded by each single product division. In March 1998, the Company announced a package of new management initiatives aimed at better sharing interests with shareholders. As part of this package, management implemented with approval at the annual shareholders' meeting in late June 1998, repurchase of 50 million shares of the parent company's common stock from the stock market for retirement, spending approximately 99 billion yen of retained earnings during fiscal 1999. At the same time, as an incentive to Board members and employees toward the enhancement of corporate value, the parent company granted stock option rights (exercisable from July 1, 2000 to June 30, 2004) to 32 Board members and four select senior executives, at amounts ranging from 2,000 to 10,000 common shares each, and established a stock-price-linked remuneration plan, under which a modest amount of cash payment will be offered once a year in addition to ordinary salary and bonus payments to approximately 11,000 employees of manager-level or above (effective through fiscal 2001). In May 1999, management again announced another stock option plan (exercisable from July 1, 2001 to June 30, 2005) for the current 32 Board members and four select senior executives. The amounts and conditions are approximately equal to those granted last year. SALES CATEGORIES ---------------- Matsushita is engaged in the production and sales of electronic and electric products in a broad array of business areas. The following table sets forth the Company's sales breakdown by product categories for the last three fiscal years:
Yen (billions) ------------------------------------------------ Fiscal year ended March 31, ------------------------------------------------ 1999 1998 1997 ------------ ------------- ------------- Consumer products Video and audio equipment 1,895 25% 1,885 24% 1,804 24% Home appliances and household equipment 1,394 18 1,474 18 1,638 21 ----- --- ----- --- ----- --- Subtotal 3,289 43 3,359 42 3,442 45 Industrial products Information and communi- cations equipment 2,150 28 2,264 29 2,021 26 Industrial equipment 717 10 701 9 701 9 ----- --- ----- --- ----- --- Subtotal 2,867 38 2,965 38 2,722 35 Components 1,484 19 1,567 20 1,512 20 ----- --- ----- --- ----- --- Total 7,640 100% 7,891 100% 7,676 100% ===== === ===== === ===== ===
5 -5- Note: From fiscal 1998, Matsushita reclassified its product categories for sales breakdown reporting purposes, whereby overall Company sales are divided into three major sectors: Consumer Products, Industrial Products and Components. The new categories are classified by type of product and customer, rather than by product group as was previously the case. Prior year figures have been restated to reflect this change. Consumer Products - ----------------- Consumer products is Matsushita's traditional and primary business area, in which the Company maintains a high competitive edge in Japan and overseas markets. Sales in this category, consisting of video and audio equipment and home appliances and household equipment, totaled 3,289 billion yen, representing 43% of total Company sales in fiscal 1999. Major products in this category are as follows. Video and Audio Equipment The Company's largest revenue source in the video and audio equipment field is home-use videocassette recorders (VCRs), including VCR decks, camcorders and related products. The Company's home VCR decks range broadly from high-quality picture and sound units, such as S-VHS VCR models, including those with satellite broadcast tuners and those compatible with the 16:9 wide aspect ratio (wide-screen) TV format, to easy-to-operate units. In camcorders, Matsushita offers a variety of compact models, including VHS-C, S-VHS-C and digital camcorders. Since introducing the industry's first digital camcorder in 1995, the Company has been consistently launching new advanced digital models, including palm-sized and other more compact models, that can be linked to printers and/or personal computers (PCs) for multiple video image processing/storage or still image printing. Matsushita's broad range of television receivers is designed to meet demand in all segments of the Japanese and international markets. Increasing emphasis has recently been placed, mainly in Japan, on flat-screen models, notably a new series of TVs introduced during fiscal 1999 called "Tau." The latest "Tau" features Matsushita's originally developed Semi-Stretched Tension (SST) flat-surface CRTs with higher picture quality. Matsushita meets the burgeoning demand for multi-channel, multi-functional digital TV broadcasting by manufacturing and selling set-top boxes (STBs) to receive digital satellite TV broadcasts in Japan. This was followed by introduction of STBs and TVs to receive digital terrestrial TV broadcasts commenced in the United States in late 1998. Matsushita has taken an active role in promoting DVD products, introducing the industry's first DVD players in fiscal 1997, and the world's first portable DVD players in early 1998. In fiscal 1999, Matsushita further enhanced this product's range by adding an even lighter and more compact portable model with longer playback time. Matsushita also provides supports for disc production and software development. Matsushita's product range of video equipment also includes color TV/VCR combination units, large-screen projection TV systems, and such flat screen TVs as liquid crystal display (LCD) TVs and plasma TVs (TVs using plasma display panels (PDPs)). In the area of audio equipment, Matsushita produces a large variety of products, such as compact disc (CD) and Mini Disc (MD) players, radio receivers, CD radio cassette recorders, tape recorders and portable headphone players, as well as stereo hi-fi equipment and electronic musical instruments. 6 -6- In response to growing market demand for compact digital audio equipment in recent years, Matsushita has been strengthening such product lines as CD and MD players with several outstanding features: In fiscal 1999, the Company introduced in the domestic market, the world's smallest and lightest portable MD player, featuring the industry's longest continuous playing time with batteries. In overseas markets and Japan, the Company also achieved success with a new compact stereo component system, incorporating a 5-CD changer. The Company further plans to introduce new industry-leading DVD-Audio equipment during fiscal 2000. This category also includes prerecorded video and audio tapes and discs. To maintain its competitive edge in the future, Matsushita is currently emphasizing development of advanced AV products focusing on better linkage to digital networks (digital broadcasts, the Internet, etc.). Home Appliances and Household Equipment Matsushita's vast array of home appliance products includes refrigerators, air conditioners, home laundry equipment (such as washing machines and dryers), vacuum cleaners, electric irons, dishwashers, microwave ovens, rice cookers and other cooking appliances, electric fans, air purifiers, electric and kerosene heaters and electrically-heated rugs. The line of household equipment mainly comprises kitchen fixture systems, electric, gas and kerosene hot-water supply systems, and bath and sanitary equipment. This category also includes electric lamps, bicycles, cameras and flash units, and fire extinguishers. Matsushita maintains its position as a leader of the Japanese home appliance industry, consistently supplying innovative and energy-efficient products that satisfy the needs of highly discerning Japanese consumers, including their growing concern for environmental issues and energy conservation. Recent examples include the world's first centrifugal force washing machine for home use, which cleans the laundry by flowing water rapidly through fabric, the industry's quietest vacuum cleaner, and a triangular-shaped air conditioner featuring a space-saving design and improved cooling and heating efficiency. In the household equipment area, the Company also seeks to provide user-friendly products that meet market needs, with environmental, health and hygienic concerns in mind. Successful examples in recent years include new kitchen fixture systems featuring pull-down shelves and a bathroom shower-with-chair unit for use by the aged and the disabled. To strengthen its established position in the industry, Matsushita is increasing its product development efforts to address energy-saving and eco-friendly requirements being set by Japanese and foreign governments, while also exploring digital networking of various household electric and electronic products to create a more comfortable and convenient lifestyle. Industrial Products - ------------------- Industrial products, comprised of information and communications equipment and industrial equipment, has been the Company's fastest growth area during the last several years, although this growth began to slow from around the middle of fiscal 1998 due mainly to a setback in private capital investment in Japan and Asia and falling price levels of several information and communications products. Sales in this category in fiscal 1999 totaled 2,867 billion yen, representing 38% of total Company sales. Major products are as follows. 7 -7- Information and Communications Equipment This line mainly includes information equipment, such as personal computers (PCs), word processors, printers, copying machines, PC displays, hard disk drives, CD-ROM, DVD-ROM and DVD-RAM drives; communications equipment, such as facsimile equipment, telephones, cellular telephones, other mobile communications equipment and digital private branch exchanges; and other systems equipment, such as CATV systems, broadcast- and business-use AV systems and equipment, large-screen visual equipment, communications network equipment, and traffic-related systems and equipment. Of these, Matsushita maintains a high competitive edge worldwide in particular lines of products, such as hard disk and optical disc drives, facsimile equipment, broadcast-use digital VCR equipment and airline inflight AV systems, while also enjoying a leading position in the Japanese cellular phone industry. In anticipation of the digital networking age, Matsushita is currently strengthening its lines of multimedia-related equipment and systems: Among them, emphasis is placed on optical disc systems and mobile communications equipment. The advancement of the former is being propelled by the Company's fast expansion of DVD-ROM drive production, marketing of thin DVD-ROM drives (for notebook PCs) and DVD-RAM drives, all meeting the needs for large-capacity information storage devices. In mobile communications equipment, the Company during fiscal 1999 consolidated its position as one of the leading manufacturers in GSM-standard markets such as Europe and Asia. The Company is also accelerating its development of the third-generation mobile communication system, called W-CDMA. Matsushita is also expanding its multimedia- or digital network-related businesses, mainly in Japan. These include various on-demand information systems to municipal, business and other customers, and participation in a number of development projects guided by government agencies, including next generation traffic systems called ITS (Intelligent Transport Systems), Internet-related services, and new digital territorial and satellite broadcast systems. In addition, Matsushita received orders for a large-scale satellite network system to link post offices nationwide. To reinforce its ability in these multimedia system businesses, the Company established a Systems Solutions Division in Tokyo in April 1999. Industrial Equipment Matsushita's product range of industrial equipment encompasses factory automation (FA) equipment, welding machines, electric power distribution equipment, commercial air conditioning equipment, vending machines and medical equipment. This category also includes car AV equipment, such as car audio and car navigation equipment. In FA equipment, Matsushita is an industry leader in electronic-parts-mounting machines, and is also a major producer of industrial robots and electronic measuring instruments. Building on this strength, the Company has been launching innovative products to meet ever-more sophisticated customer requirements, including the world's fastest chip mounter, a unique Stud Bump Bonding semiconductor-mounting machine, a precision assembly robot equipped with Matsushita's own compact motors for precise work in small spaces, and DVD disc production systems built around the Company's expertise in the optical disc field. In car AV equipment, Matsushita is one of the world's leading manufacturers. While serving Japanese automotive manufacturers, the Company is also reinforcing deliveries to car dealers and automotive product dealers, as well as to overseas auto manufacturers and dealers. For the expanding domestic market for car navigation systems, in fiscal 1999 Matsushita launched the world's first DVD car-navigation model featuring voice control and DVD video playback functions. 8 -8- Components - ---------- Matsushita produces a wide range of electronic and electric components and devices. Major products included in this category are semiconductors, general electronic components, display devices, electric motors, compressors and batteries, for use by Matsushita and other manufacturers. Sales of components as a whole in fiscal 1999, excluding in-house consumption, totaled 1,484 billion yen, accounting for 19% of the Company total. Recognizing that components and devices hold the key to innovation and advancement, as well as competitiveness, of finished products and systems in the digital networking age, Matsushita currently places significant priority on the development of electronic components' technology and business, with special emphasis on semiconductors and display devices. The Company's range of semiconductors is primarily made up of integrated circuits (ICs), such as MOS LSIs and bipolar ICs, discrete devices and CCDs. The Company has been strengthening development of single-chip multifunctional LSIs, called System LSIs, which form the basis of digital-network related AV equipment. Successful results included Media Core Processors, MPEG-2 encoder chips, 32-bit microcontrollers with embedded DRAMs, single-chip decoder LSIs for digital TV receivers, and system LSI chip sets for DVD-ROM drives. Matsushita is at the forefront in optical pickup semiconductors for DVDs, CCDs for video camcorders, and gallium-arsenide power modules for cellular phones. The Company in fiscal 1999 closed its U.S. semiconductor plant reducing production of the general-purpose DRAMs, which accounted for a relatively small portion of Matsushita's semiconductor output, to minimize any negative effects due to declining prices. In display devices, Matsushita has been a global leader in cathode-ray tubes (CRTs) to which Matsushita further added high technology SST flat-surface CRTs during fiscal 1999. The Company also produces a variety of LCD panels, ranging from STN types to TFT types, including low temperature polysilicon models. Matsushita is also strengthening its plasma display panels, offering 42-inch and 32-inch wide-screen models with the industry's highest brightness levels. The Company's broad spectrum of general components encompasses electronic circuit components, printed circuit boards, transformers, power supply components, coils, capacitors, resistors, tuners, switches, speakers, ceramic components, sensors and magnetic recording heads, all supporting Matsushita's finished products as well as products of other manufacturers, including electronics manufacturers and automotive makers. Electric motors are also essential parts that underpin electronics and other industries. Besides motors for consumer electronic and electric products, the Company is intensifying business for industrial products. Particularly competitive Matsushita motors include compact spindle motors for use in PC peripherals and CD and DVD players, vibration motors for cellular phones, and compact motors for FA equipment. In the area of compressors, Matsushita is positioned as a world leader, offering those primarily for air conditioners and refrigerators. 9 -9- Matsushita is one of the world's largest battery manufacturers, producing a comprehensive range of batteries, ranging from manganese, alkaline, lithium, silver oxide and zinc air cells, to rechargeable batteries, such as nickel-cadmium, nickel metal-hydride, lithium-ion and sealed lead-acid batteries and storage batteries for automotive use, as well as various battery powered appliances. Among these, production of compact, high-performance batteries, such as the Company's long life alkaline batteries and lithium-ion batteries, has been expanding in recent years, as they are increasingly used in compact electronic equipment. In its latest technological breakthrough, Matsushita began volume production of thin lithium-polymer cells in early 1999. Matsushita is a major supplier of high-performance batteries for electric vehicles (EVs), including hybrid electric vehicles (HEVs). Following the introduction of nickel metal-hydride rechargeable batteries for EVs in fiscal 1997, Matsushita launched these batteries for HEVs in fiscal 1998, through an EV battery joint venture with Toyota Motor Corporation. SALES AND DISTRIBUTION ---------------------- Set forth below is a sales breakdown by geographical markets:
Yen (billions) -------------------------------------------------------- Fiscal year ended March 31, -------------------------------------------------------- 1999 1998 1997 ------------- ------------- -------------- Japan 3,752 49 % 3,891 49 % 4,046 53% North and South America 1,513 20 1,458 19 1,249 16 Europe 1,019 13 949 12 836 11 Asia and Others 1,356 18 1,593 20 1,545 20 ----- --- ----- --- ----- --- Total 7,640 100 % 7,891 100 % 7,676 100% ===== === ===== === ===== ===
Sales and Distribution in Japan - ------------------------------- Domestic sales are handled primarily by 12 sales divisions organized according to the type of customer, i.e., consumers, corporate, government, manufacturing industry, housing/construction industry and other respective industries, in order to meet the specific and ever-diversifying needs of consumers and various industries. With the exception of light bulbs and other inexpensive products, substantially all of Matsushita's consumer products carry warranties which vary in duration from one to five years, in line with the normal practice of the industry. Service is provided by Matsushita and by approved service companies which obtain replacement parts from Matsushita and other suppliers. Overseas Activities - ------------------- Matsushita operates 223 companies in 46 countries outside of Japan, including five regional headquarters, 47 manufacturing/sales companies, 97 manufacturing companies, 45 sales companies, 11 research organizations and five finance subsidiaries. International marketing of Matsushita's products is conducted through the Company's sales subsidiaries and affiliates and also through independent distributors. In addition, certain products are sold in foreign markets on an OEM basis and marketed under the brand names of third parties. 9 10 -10- Overseas sales, including products manufactured outside Japan and those exported from Japan represented approximately 51% of the Company's total consolidated sales in fiscal 1999. In order to promote global business development and counter currency fluctuations, Matsushita has expanded its overseas production covering not only major consumer products, but also industrial products and components. In recent years, the Company placed emphasis on building new manufacturing facilities in newly developing areas, such as China, India and Eastern Europe. Matsushita's current emphasis is placed on advancing localization of development of products and technologies to enhance competitiveness of individual overseas manufacturing sites, as well as that of the entire Group regionally. The Company is also reviewing the functions of its R&D, production and sales bases worldwide by respective product categories to achieve optimum efficiency of Matsushita's global operations. Customers - --------- The largest markets for Matsushita's products have traditionally been consumers and households. However, since the 1980s, the proportion of sales to non-consumer customers, such as governments, commercial and industrial corporations and other institutions, including large customers such as electric and electronic equipment manufacturers, automotive manufacturers and various other machinery makers, has been rising as Matsushita places increasing emphasis on industrial and commercial products and electronic components. In the year ended March 31, 1999, sales of industrial products and components accounted for approximately 57% of Matsushita's total sales, rising from 48% of the total (52% of total excluding MCA) in fiscal 1995. Matsushita's business is not materially dependent upon any single customer. RESEARCH AND DEVELOPMENT ------------------------ Matsushita considers research and development (R&D) to be a key factor in its success and essential to the achievement of its corporate theme: to provide utmost satisfaction to customers throughout the world. Under this theme, the Company has been committed to "R&D that creates next generation businesses, while at the same time supporting today's and tomorrow's products and businesses." As part of this task, focus is also directed at the five priority areas: next-generation digital TV systems, semiconductors, display devices, optical discs and mobile communications equipment. In pursuit of these goals, Matsushita operates future-oriented R&D at several corporate R&D centers. The Advanced Technology Research Laboratories, reorganized from the former Central Research Laboratories, engages primarily in basic research aimed at developing advanced technologies to create new businesses looking toward the year 2010. Other corporate R&D centers include the Multimedia Development Center, the Optical Disk Systems Development Center, the Display Device Development Center and the Human Environmental Systems Development Center. They focus on the development of multimedia- and network-related products and systems, optical disc-related equipment systems, display devices, energy conservation technologies, and related key components and devices. In addition, several specialized R&D facilities operate independently, although they cooperate closely with the aforementioned research laboratories and development centers. These facilities include the Corporate Semiconductor Development Division, which operates five R&D centers, such as the Advanced LSI Technology Development Center and the Microprocessor Development Center, and the Production Engineering Laboratory, which engages in development of new manufacturing technology and supports production activities at Matsushita's domestic and overseas operating facilities. 11 -11- The Overseas R&D Promotion Center supports and augments the Company's global R&D activities, such as development of a common global platform for digital TV systems, strengthening the collaboration between corporate laboratories in Japan and overseas R&D centers such as those based in North America and Europe. Internal divisional companies, manufacturing divisions and principal subsidiaries also maintain their own research facilities and/or departments, engaged in specific research and development projects or engineering and design improvements, and these work in close cooperation with the above-mentioned corporate research organizations. Their current emphasis is placed on development of "Product Firsts," which are outstanding products that incorporate world- or industry-first technologies or features that inspire customers. Total expenditures for research and development amounted to 435 billion yen, 481 billion yen and 500 billion yen for the three years ended March 31, 1997, 1998 and 1999, respectively, representing 5.7%, 6.1% and 6.5% of Matsushita's total net sales for each of those periods. The most significant technological developments in recent years include; DVD products, including portable DVD players and DVD ROM drives featuring the Company's twin focus pickup, DVD-RAM drives with single side recording capacity of 4.7 gigabytes, and DVD discs employing a dual-layer disc bonding technology; a high-density multilayered printed circuit board technology with an "any layer interstitial via hole" structure, which enables development of compact and light digital cellular phones and other multimedia products; an MPEG-2 video encoder LSI that has integrated moving picture compression functions on a single chip, facilitating development of compact, low power consumption DVD recorders and video camcorders; an MPEG-2 decoder LSI applicable to 18 formats of the digital terrestrial TV broadcasting which began in the United States in October 1998; digital terrestrial TV tuner boards for use in PCs, jointly developed with a major U.S. PC manufacturer; a single-chip digital TV System LSI, which processes all digital signals received in radio waves and complies with most of the world's digital TV services; a resource-efficient TV incorporating highly recyclable magnesium alloy in its cabinet as an industry first and the Company's low energy consumption transformer; and rapid bacteria concentration and detection technology, which detects harmful bacteria that may cause food poisoning, and which eliminates the culturing process. CAPITAL EXPENDITURES -------------------- Recognizing that building advanced technologies, equipment and processes is essential to the cost-efficient manufacturing of sophisticated electronic products and devices, the Company has been attentive in planning plant and equipment investment to achieve higher competitiveness and investment efficiency. Besides constant investment in production automation and energy-saving facilities, increasing emphasis has been placed on expansion of strategically-important business areas, including key components and devices and mobile communications equipment. Total capital expenditures were 415 billion yen and 474 billion yen for fiscal 1997 and fiscal 1998, respectively. The Company's capital investment during fiscal 1999 totaled 352 billion yen, a decrease from previous years, primarily due to more selective investment, especially in the area of components and devices, including semiconductors and LCD devices. 12 -12- COMPETITION ----------- The markets in which the Company sells its products are highly competitive in Japan, as well as abroad. Matsushita's principal competitors, across the full range of its products, consist of several large Japanese manufacturers. In particular categories of products it encounters additional competition from companies in the United States, Europe and Asia. Matsushita also competes with a large number of smaller and more specialized companies. The Company expects that competition will continue to be intense both in Japan and abroad. In addition, the emergence of several Asian countries as lower-cost production sites has applied pressure to Japanese manufacturers, including Matsushita, in terms of price competition in international markets. To minimize the effects of these negative factors, the Company is devising various cost-reduction measures, shortening production and logistics lead time, optimizing its overseas production by emphasizing efficiency and competitiveness from a global perspective, and also developing joint ventures and other cooperative agreements with overseas partners. TRADEMARKS ---------- Most of Matsushita's products are distributed throughout the world under the "Panasonic" and "National" trademarks. Matsushita also sells a number of hi-fi products under the "Technics" trademark. Some of the subsidiaries' products are sold under other trademarks, including "Quasar," "Victor" and "JVC." PATENT LICENSE AGREEMENTS ------------------------- Matsushita holds numerous Japanese and foreign patents and utility model registrations for its products and engages in mutual exchange of technologies with a number of Japanese and foreign manufacturers. Its technical assistance, or licensing, to other manufacturers is increasing year by year. Matsushita is a licensee under various license agreements which cover a wide range of products, including audiovisual products, computers, communications equipment, semiconductors and other components. Matsushita has non-exclusive patent license agreements, among others, with Thomson Multimedia Licensing Inc. and Thomson S.A. covering a broad range of its products, the most important of which are television receivers, VCRs , CD players and CD-ROM equipment. Matsushita has non-exclusive patent cross-license agreements, among others, with Texas Instruments Incorporated and International Business Machines Corporation, both covering semiconductors, information equipment and certain other related products. Matsushita Electronics Corporation (MEC), a consolidated subsidiary of the Company, has non-exclusive patent license agreements with Koninklijke Philips Electronics N.V. covering most of the items manufactured by MEC, including semiconductor devices, various lamps, cathode-ray and electron tubes and certain other products. Matsushita's license and technical assistance agreements are for three- to ten-year periods, unless the agreements cover specific patents to be licensed therein, in which case they are normally for the life of the patent. The Company considers all its technical exchange and license agreements beneficial to its operations. 13 -13- RAW MATERIALS AND SOURCES OF SUPPLY ----------------------------------- Matsushita purchases a wide variety of parts and materials from various suppliers in Japan and abroad. The Company applies a multi-sourcing policy -- being not dependent upon any one source of supply for any essential item. The Company has also been endeavoring to promote a policy of global optimum purchasing by selecting the best qualified suppliers from all over the world and buying the most competitive parts and materials. Since suppliers are selected on the basis of a fair and comprehensive evaluation, the Company enjoys good business relationships with them and the sourcing is properly assured. EMPLOYEE RELATIONS ------------------ As of March 31, 1999, Matsushita had approximately 282,000 employees. Most regular employees in Japan, except management personnel, are union members, principally of the Matsushita Electric Industrial Workers Union, which is affiliated with the Japanese Electrical Electronic & Information Union. As is customary in Japan, the Company negotiates annually with the unions and grants annual wage increases and semiannual bonuses. Matsushita also renews the terms and conditions of labor contracts, other than those relating to wages and bonuses, every other year. In fiscal 1999, Matsushita introduced a stock-price-linked remuneration plan (effective through fiscal 2001) for its employees of manager level or above whereby a modest amount linked to the Company's stock price is paid once a year to these employees. For more than 20 years, Matsushita has experienced no major labor strikes or disputes. The Company considers its labor relations to be excellent. Item 2. Description of Property ----------------------- The Company's principal executive offices and key research laboratories are located in Kadoma, Osaka, Japan. Matsushita's manufacturing plants are located principally in Japan, other countries of Asia, North and South America and Europe. The Company considers that all its factories are well maintained and suitable for their current production requirements. 14 -14- The following table sets forth information as of March 31, 1999 with respect to manufacturing facilities:
Floor Space (thousands of Location square feet) Principal Products Manufactured - -------- ------------ ------------------------------- Osaka 9,471 VCRs, television receivers, DVD products, audio equipment, washing machines, other home appliances, information equipment, industrial equipment, components, batteries, kitchen fixtures. Kanagawa 4,227 Communications, information and measuring equipment, VCRs, audio equipment, car AV equipment, compact discs, CRT displays, refrigerators, batteries. Shiga 3,567 Air conditioners, refrigerators, compressors, vacuum cleaners. Tochigi 2,058 Television receivers, TV picture tubes, information equipment. Nara 2,070 Home appliances, gas and kerosene equipment, compact discs and DVD discs. Okayama 1,864 VCRs, components, magnetic tapes and discs. Kyoto 1,609 Semiconductors, components. Ibaraki 1,068 Television receivers, magnetic tapes. Shikoku 3,630 VCRs, television receivers, information equipment, audio equipment, home appliances. Kyushu 2,347 Information and communications equipment, home appliances, components, industrial equipment. North 6,322 Television receivers, home appliances, VCRs, car audio America equipment, communications equipment, compressors, components, batteries. Europe 3,779 VCRs, television receivers, audio equipment, car audio equipment, home appliances, components, information and communications equipment. Asia 17,810 Television receivers, VCRs, audio equipment, air conditioners, refrigerators, other home appliances, components, semiconductors, information and communications equipment, industrial equipment, compressors, batteries. Other 19,454 Home appliances, industrial equipment, components, semiconductors, video and audio equipment, batteries, information and communications equipment. ------ Total 79,276 ======
In addition to its manufacturing facilities, Matsushita's properties all over the world include sales offices located in various cities with an aggregate floor space of approximately 6.6 million square feet, research and development facilities with an aggregate floor space of approximately 6.9 million square feet, employee housing and welfare facilities with an aggregate floor space of approximately 11.2 million square feet, and administrative offices with an aggregate floor space of approximately 15.9 million square feet. As of March 31, 1999, Matsushita leased approximately 12.9 million square feet of floor space, most of which was for sales office space. 15 -15- Item 3. Legal Proceedings ----------------- In November 1991, Loral Fairchild Corporation, a Delaware corporation, filed two lawsuits in the United States District Court for the District of Virginia against the Company, Matsushita Electric Corporation of America and 36 other defendants. The suits were consolidated. All defendants were charged with infringement of two U.S. patents by virtue of the production abroad and sale in the United States of certain charge coupled devices (CCDs), which are used in products such as video cameras and facsimile machines. In December 1991, this action was transferred to the United States District Court for the Eastern District of New York. The action seeks damages, attorneys' fees and a permanent injunction. The Company has asserted that the patents are invalid and not infringed upon by its products incorporating CCDs. This litigation has been bifurcated between liability and damages and has been stayed as to all defendants except one defendant. In a first liability trial involving this defendant, a jury held that it infringed the two U.S. patents at issue. In July 1996, the court granted, among other things, its subsequent motion for judgment as a matter of law, overturning the verdict. Loral Fairchild Corporation appealed this decision to the Court of Appeals for the Federal Circuit and oral argument was held in June 1997. In June 1999, the Federal Circuit affirmed the district court's claim construction and its non-infringement decision. In July 1992, Matsushita Electronics Corporation (MEC), which manufactures CCDs, commenced a suit in the United States District Court for the Southern District of New York seeking a declaration that MEC's CCDs and all end products incorporating MEC's CCDs (collectively "products") are licensed under the two U.S. patents at issue. In April 1993, the district court granted MEC's motion for summary judgment and ruled that the products were licensed. The Court of Appeals for the Federal Circuit affirmed the decision in September 1994, and denied Loral Fairchild's petition for rehearing in November 1994. MEC's tort claim against Loral Fairchild and its parent, Loral Corporation, concerning certain liability issues was denied by the District Court in August 1997. The decision has not been appealed. Matsushita is a co-defendant in a class-action lawsuit relating to the acquisition of MCA in 1990. Certain former stockholders of MCA who tendered their shares to Matsushita in such acquisition brought actions in the United States District Court for the Central District of California claiming, in part, that the Company violated Securities and Exchange Commission Rule 14d-10 by treating the then chairman and chief executive officer of MCA differently than other MCA stockholders in such acquisition. The district court denied plaintiffs' motion for summary judgment and subsequently granted Matsushita's motion for summary judgment in 1992. The United States Court of Appeals, Ninth Circuit (1995 WL 75487 (9th Cir. (Cal.))), reversed, in part, finding that the Company violated Rule 14d-10 and remanded for further proceedings to determine damages. The Company has since filed a petition for a writ of certiorari with the United States Supreme Court. In February 1996, the Court reversed, finding that the separate class-action settlement judgment rendered by the Delaware Supreme Court is entitled to full faith and credit even though it released claims within the exclusive jurisdiction of the federal courts, and remanded for proceedings consistent with the Court's opinion. In October 1997, the Ninth Circuit further reversed, holding that it should withhold full faith and credit from the Delaware judgment because, as a matter of law, plaintiffs were not adequately represented in Delaware. The Ninth Circuit reheard the case and, in June 1999, withdrew its previous opinion and affirmed the district court's decision of 1992. Management is of the opinion that any outcome of these actions against Matsushita will not have a material adverse effect on Matsushita's operations or financial position. 16 -16- There are a number of other legal actions and administrative investigations against the Company and subsidiaries. Management is of the opinion that damages, if any, resulting from these actions will not have a material effect on Matsushita's results of operations or financial position. Item 4. Control of Registrant --------------------- (a) Matsushita is not, directly or indirectly, owned or controlled by other corporations or by the Japanese government or any foreign government. (b) (1) To the knowledge of the Company, no person owns more than ten percent of any class of the Company's common stock. (2) The total number of the Company's voting securities beneficially owned by the Directors and Corporate Auditors as a group as of March 31, 1999 is as follows:
Number of Percent Title of class Identity of person or group shares owned of class -------------- --------------------------- ------------ -------- Common Stock Directors and Corporate 18,432,984 0.89% Auditors -- 36 persons shares
(c) As far as is known to the Company, there is no arrangement, the operation of which may at a subsequent date result in a change in control of Matsushita. Item 5. Nature of Trading Market ------------------------ Common Stock, American Depositary Receipts - ------------------------------------------ The primary market for the Company's Common Stock is the Tokyo Stock Exchange (the "TSE"). The Common Stock is traded on the First Section of the TSE and is also listed on seven other stock exchanges in Japan. In addition, the Company's Common Stock is listed on the Amsterdam Stock Exchange in the form of original Common Stock under the ASAS system, on the Frankfurt Stock Exchange and Duesseldorf Stock Exchange in the form of co-ownership shares in a Global Bearer Certificate and on the Paris Stock Exchange in the form of original Common Stock of the Company. In the United States, the Company's American Depositary Shares have been listed on and traded in the New York Stock Exchange (the "NYSE") and the Pacific Stock Exchange in the form of American Depositary Receipts ("ADRs"). There may from time to time be a differential between the Common Stock's price on exchanges outside the United States and the market price of the American Depositary Shares in the United States. ADRs are issuable pursuant to a Deposit Agreement dated as of April 28, 1970, as amended and restated as of November 20, 1975 and as further amended as of October 1, 1982 (the "Deposit Agreement"), among the Company, Morgan Guaranty Trust Company of New York as Depositary (the "Depositary"), and the holders of ADRs. ADRs evidence American Depositary Shares, each representing 10 shares of Common Stock deposited under the Deposit Agreement with The Sumitomo Bank, Limited, as agent of the Depositary, or any successor or successors to such agent or agents. 17 -17- The following table sets forth for the periods indicated the reported high and low sales prices of the Company's Common Stock on the TSE, and the reported high and low sales prices of the Company's American Depositary Shares on the NYSE:
Tokyo Stock Exchange New York Stock Exchange -------------------- ----------------------- Price per Share of Price per American Common Stock (yen) Depositary Share (dollars) (a) ------------------ ------------------------------ Calendar Period High Low High Low --------------- ---- --- ---- --- 1997 1st quarter 2,000 1,670 166.00 142.88 2nd quarter 2,320 1,890 206.00 153.25 3rd quarter 2,520 2,070 211.00 170.00 4th quarter 2,300 1,750 189.56 135.13 1998 1st quarter 2,140 1,820 163.94 143.06 2nd quarter 2,280 2,025 171.00 147.88 3rd quarter 2,375 1,800 170.00 130.50 4th quarter 2,155 1,640 182.25 128.00 1999 1st quarter 2,355 1,878 195.00 157.50
Note: (a) The prices of American Depositary Shares, each representing 10 shares of Common Stock, are based upon reports by the NYSE, with all fractional figures rounded up to the nearest two decimal points. As of March 31, 1999, approximately 9.10% of the Company's Common Stock was owned of record by a total of 205 United States shareholders including the Depositary's nominee, considered as one shareholder of record, owning approximately 2.24% of the total Common Stock. Item 6. Exchange Controls and Other Limitations Affecting Security Holders ------------------------------------------------------------------ (a) Japanese Foreign Exchange Controls Effective April 1, 1998 the Foreign Exchange and Foreign Trade Control Law was amended and the title of the statute was changed to the Foreign Exchange and Foreign Trade Law. Under the amended Law all aspects of regulations on foreign exchange and foreign trade transactions which were subject to licensing or other approval or prior notification requirements are, with minor exceptions relating to inward direct investments (which are not generally applicable to the Company's shares), now subject to post transaction reporting requirements. Acquisitions and dispositions of shares of Common Stock or American Depositary Shares by non-residents of Japan (including foreign corporations not resident in Japan) are generally not subject to this reporting requirement. However, the Minister of Finance has the power to impose a licensing requirement for certain transactions in limited circumstances. Under the Foreign Exchange Law as currently in effect, dividends paid on, and the proceeds of sales in Japan of, shares held by non-residents of Japan may in general be converted into any foreign currency and repatriated abroad. 18 -18- (b) Description of Common Stock Set forth below is certain information relating to the Common Stock of the Company, including brief summaries of certain provisions of the Company's Articles of Incorporation and Share Handling Regulations, as currently in effect, and of the Commercial Code of Japan relating to a joint stock company (Kabushiki Kaisha) and certain related legislation. General ------- The authorized capital stock of the Company as of June 29, 1999 is 4,950,000,000 shares, which may be issued with a par value or without a par value. The Commercial Code requires that shares be in registered form. Under the Commercial Code shares are transferable by delivery of share certificates, but in order to assert shareholders' rights against the Company, the transferee must have his name registered in the Company's register of shareholders. All of the presently outstanding shares of the Company are of a par value of 50 yen per share. The Company may, by a resolution of the Board of Directors, convert par value shares into non-par value shares or vice versa. Shareholders are required to file their names, addresses and seals with The Chuo Trust & Banking Co., Ltd., the transfer agent for the Company's Common Stock, and shareholders not resident in Japan are required to file a mailing address in Japan or appoint a resident proxy in Japan. These requirements do not apply to the holders of ADRs. The central clearing system of share certificates under the Law Concerning Central Clearing of Share Certificates and Other Securities of Japan applies to the shares of Common Stock of the Company. Pursuant to this system a holder of shares of Common Stock is able to choose, at his discretion, to participate in this system and deposit with the sole depositary under the system, the Japan Securities Depositary Center, all certificates of shares of Common Stock elected to be put into this system. If the holder is not a participating institution in the clearing system, the elected shares should be deposited through a participating institution such as a securities company or bank that has a clearing account with the clearing house. In the Company's register of shareholders, the deposited shares are registered in the name of the clearing house. Each participating shareholder is in turn registered in the register of beneficial shareholders and treated the same way as shareholders registered in the Company's register of shareholders. For the purpose of transferring the deposited shares, delivery of share certificates is not required. In general, beneficial owners of deposited shares registered in the register of beneficial owners are entitled to the same rights and benefits as the holders of shares registered in the register of shareholders. The registered beneficial owners may exercise the rights attached to the shares, such as voting rights, and will receive dividends (if any) and notices to shareholders directly from the Company. The shares held by a person as a registered shareholder and those held by the same person as a registered beneficial owner are aggregated for these purposes. New shares issued with respect to deposited shares, including those issued upon a stock split, automatically become deposited shares. The beneficial owners are required to file with the Company's transfer agent, principally through the relevant participating institution, the same information as is required from the registered shareholders. Beneficial owners may at any time withdraw their shares from deposit and receive share certificates. 19 -19- Dividends --------- The Articles of Incorporation of the Company provide that the accounts shall be closed on March 31 of each year and that dividends, if any, shall be paid to the shareholders of record as of the end of such fiscal period. After the close of the fiscal period, the Board of Directors prepares, among other things, a proposed allocation of profits for dividends and other purposes; this proposal is submitted to the Corporate Auditors of the Company and to independent certified public accountants and then submitted for approval to the ordinary general meeting of shareholders, which is normally held in June each year. In addition to provisions for dividends, if any, and for the legal reserve and other reserves, the allocation of profits customarily includes a bonus to Directors and Corporate Auditors. In addition to annual dividends, the Board of Directors of the Company may by its resolution declare a cash distribution pursuant to Article 293-5 of the Commercial Code (an "interim dividend") to shareholders who are registered in the Company's register of shareholders at 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 dividends or interim dividends for any fiscal period unless it has set aside in its legal reserve an amount equal to at least one-tenth of the amount paid by way of appropriation of retained earnings for such fiscal period until the legal reserve is one-quarter of its stated capital. Under the Commercial Code the Company is permitted to distribute profits by way of year-end or interim dividends out of the excess of its net assets over the aggregate of: (i) its stated capital; (ii) its capital surplus; (iii) its accumulated legal reserve; (iv) the legal reserve to be set aside in respect of the fiscal period concerned; (v) the excess, if any, of unamortized expenses incurred in preparation for commencement of business and in connection with research and development expense over the aggregate of amounts referred to in (ii), (iii) and (iv) above; and (vi) if the Company has on its balance sheet a number of shares of its Common Stock which the Company has acquired for the purpose of transferring the same to its Directors and/or employees but such shares are yet to be so transferred, the book value of such shares. In the case of interim dividends, the net assets are calculated by reference to the balance sheet as at the last closing of the Company's accounts, but adjusted to reflect any subsequent payment by way of appropriation of retained earnings and transfer to legal reserve in respect thereof, provided that interim dividends may not be paid where there is a risk that at the end of the fiscal year there might not be any excess of net assets over the aggregate of the amounts referred to in (i) through (vi) above. In addition, if the Company's shareholders have adopted a resolution for the Company's purchase of shares of its Common Stock for the purpose of transferring the same to its Directors and/or employees or for the purpose of retiring the same with retained earnings, the total amount of purchase price authorized by such resolution shall, so long as such resolution has not expired, and whether or not such purchase has been effected, be deducted from the amount available for interim dividends. 20 -20- The Commercial Code, currently in effect, does not provide for "stock dividends". However, under the Code, the shareholders may by resolution transfer any amount which is distributable as dividends to stated capital and the Board of Directors may by resolution issue additional shares by way of a stock split up to the aggregate par value equal to the amount so transferred; thus, the same effect as a stock dividend can be achieved. 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 its Articles of Incorporation, the Company is not obligated to pay any dividends which are left unclaimed for a period of three years after the date on which they first became payable. Transfer of capital surplus and legal reserve to stated capital and ------------------------------------------------------------------- stock splits (free share distributions) --------------------------------------- When the Company issues new shares of Common Stock, the entire amount of the issue price of such new shares is required to be accounted for as stated capital, although the Company may account for an amount not exceeding one-half of such issue price as capital surplus (subject to the remainder being not less than the total par value of the new shares being issued). The Board of Directors may transfer the whole or any part of capital surplus and legal reserve to stated capital and grant to shareholders additional shares of Common Stock free of charge by way of a stock split, without affecting the par value thereof, with reference to the whole or any part of the amount of capital surplus and legal reserve so transferred to stated capital; such additional shares may also be granted by reference to the amount representing the portion of the issue price of shares of Common Stock in excess of the par value thereof which has been accounted for as stated capital. The Commercial Code permits the Company to make a partially free distribution to shareholders by way of a rights issue at a subscription price per share which is less than the par value thereof if: (i) the difference between the subscription price and the par value does not exceed the amount of the stated capital minus the aggregate par value of all outstanding shares, divided by the number of new shares to be issued pursuant to such rights issue; (ii) the sum of the net assets of the Company (as appearing on the latest balance sheet) and the total subscription price, divided by the number of the shares outstanding immediately after the issue of the new shares, is at least 50 yen; and (iii) the subscription rights are made transferable. In order to satisfy the requirement mentioned in (i) above, the Board of Directors may transfer the whole or any part of capital surplus or legal reserve to stated capital. General meeting of shareholders ------------------------------- The ordinary general meeting of shareholders to settle accounts of the Company for each fiscal period is normally held in June each year in Kadoma, Osaka, Japan. In addition, the Company may hold an extraordinary general meeting of shareholders whenever necessary by giving at least two weeks' advance notice to shareholders. 21 -21- Notice 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 resident proxy or mailing address in Japan) at least two weeks prior to the date set for the meeting. Any shareholder holding at least 300 units of shares or 1% of the total number of outstanding shares for 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 ------------- A shareholder is entitled to one vote per share subject to the limitations on voting rights set forth in the following paragraph and " "Unit" share system -- Voting rights of a holder of shares representing -------------------- less than one unit " below. Except as otherwise provided by law or by the Company's Articles of Incorporation, a resolution can be adopted at a general meeting of shareholders by a majority of the shares having voting rights represented at the meeting. The Commercial Code and the Company'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 outstanding shares having voting rights. The Company's shareholders are not entitled to cumulative voting in the election of Directors. A corporate shareholder, more than one-quarter of whose outstanding shares are directly or indirectly owned by the Company, may not exercise its voting rights in respect of the shares of the Company. The Company has no voting rights with respect to its own Common Stock. Shareholders may exercise their voting rights through proxies provided that the proxies are also shareholders holding voting rights. The Company's shareholders also may cast their votes in writing. The Commercial Code provides that in order to amend the Articles of Incorporation and in certain other instances, including an increase in the total number of shares authorized to be issued, a reduction of the stated capital, the removal of a Director or Corporate Auditor, dissolution, merger or consolidation of the Company requiring shareholders resolutions, 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, any offering of new shares at a "specially favorable" price (or any offering of convertible bonds or debentures with "specially favorable" conversion conditions or of bonds or debentures with warrants or rights to subscribe for new shares with "specially favorable" conditions) to persons other than shareholders or granting to Directors and/or employees rights to subscribe for new shares if the Articles of Incorporation so permit, the quorum shall be a majority of the total number of shares having voting rights outstanding and the approval of the holders of at least two-thirds of the shares having voting rights represented at the meeting is required (the "special shareholders resolution"). 22 -22- Subscription rights ------------------- Holders of the Company's 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 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' 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 the Company 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 the Company and third parties only if the Company's prior written consent to each such transfer is obtained. When such consent is necessary in the future for the transfer of subscription rights, the Company intends to consent, on request, to all such transfers by such a non-resident or foreign corporation. The Commercial Code permits a company to provide in its articles of incorporation that it may, by a special shareholders resolution, grant to its directors and/or employees rights to subscribe for new shares if there exists a justifiable reason. The Company's Articles of Incorporation do not so provide. Dilution -------- In the future it is possible that market conditions and other factors might make a rights offering to shareholders at par or substantially below the market price of shares of Common Stock desirable. If the number of shares offered in a rights offering is substantial in relation to the number of shares outstanding and the market price exceeds the subscription price at the time of the offering, a shareholder who does not exercise and is unable otherwise to realize the full value of his subscription rights would suffer economic dilution of his equity interest in the Company. Existing shareholders' equity interest in the Company will be diluted, if a substantial amount of stock option rights for new shares is granted to the Company's Directors and/or employees with the exercise price set below the market price. Liquidation rights ------------------ In the event of a liquidation of the Company, 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 the Company's presently outstanding shares of Common Stock including shares represented by the American Depositary Shares are fully paid and non-assessable. 23 -23- Transfer agent -------------- The Chuo Trust & Banking Co., Ltd. is the transfer agent for the Company's Common Stock; as such transfer agent, it keeps the Company's register of shareholders in its office at 6-26, Kitahama 2-chome, Chuo-ku, Osaka, 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 the Company's year-end dividends. The shareholders who are registered as the holders of 1,000 shares or more in the Company's register of 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 period ending on such March 31. September 30 is the record date for interim dividends. In addition, the Company may set a record date for determining the shareholders entitled to other rights and for other purposes by giving at least two weeks' public notice. The price of the shares generally goes ex-dividend or ex-rights on Japanese stock exchanges on the third business day prior to a record date (or if the record date is not a business day, the fourth business day prior thereto), for the purpose of dividends or rights offerings. Repurchase by the Company of its Common Stock --------------------------------------------- Except as otherwise permitted by the Commercial Code and the Law of Special Exception to the Commercial Code Concerning Retirement of Shares (the "Special Retirement Law") as set out below, the Company or any of its subsidiaries cannot acquire the Company's Common Stock except by means of a reduction of capital in the manner provided in the Commercial Code. The Company may acquire, its Common Stock in response to a shareholder's request for purchase of his shares representing less than one unit. See " "Unit" share system -- Right of a holder of shares ------------------ representing less than one unit to require the Company to purchase such shares " below. Shares so purchased must be sold or otherwise transferred to a third party within a reasonable period thereafter. Under the Commercial Code and the Special Retirement Law the Company may acquire its Common Stock for the following purposes, subject to the authorization of shareholders at an ordinary general meeting (if the Articles of Incorporation provide that the shares may be purchased for the purpose of retirement by resolution of the Board of Directors if the Board deems it especially necessary to do so in view of general economic conditions, the business and financial condition of the Company and other factors, by the resolution of the Board of Directors): (i) for the purpose of transferring the same to its Directors and/or employees if there exists a justifiable reason; and (ii) for the purpose of retirement thereof with retained earnings. Acquisition by the Company of shares of its Common Stock for the above purposes is subject to, among other things, the following restrictions: (i) the number of shares to be acquired does not exceed 10% of all issued and outstanding shares (except in the case of purchase of shares for retirement pursuant to shareholders' authorization); 24 -24- (ii) total amount of purchase price does not exceed the amount of the retained earnings available for dividend payment minus the amount to be paid by way of appropriation of retained earnings for the fiscal year and, if any amount of retained earnings is to be capitalized, such amount (if the purchase is made pursuant to the resolution of the Board of Directors as referred to in the parentheses above, one-half of such permitted amount); and (iii) acquisition shall be made through a stock exchange transaction or by way of tender offer. The Company's shareholders gave, at the ordinary general meeting of shareholders held in June 1998, an authorization for the acquisition of not exceeding 120,000 shares of Common Stock for the purpose of transferring the same to all its Directors then in office and certain senior executives. Pursuant to such authorization, 113,000 shares of Common Stock were purchased for such purpose. Further, the Company's shareholders have, at the ordinary general meeting of shareholders held in June 1999, given an authorization for the acquisition of not exceeding 120,000 shares of Common stock for the same purpose. The Company's shareholders gave, at the ordinary general meeting of shareholders held in June 1998, an authorization for the acquisition, during the period not later than the next ordinary general meeting of shareholders, of 50,000,000 shares of Common stock for the purpose of retirement thereof with retained earnings. Pursuant to such authorization, 50,000,000 shares of Common Stock were purchased and retired with retained earnings during such period. In June 1998 the Company provided in its Articles of Incorporation to purchase not exceeding 200,000,000 shares by resolution of the Board of Directors for the purpose of retirement thereof with retained earnings. No such purchase pursuant to a resolution of the Board of Directors may be made after the conclusion of the ordinary general meeting of shareholders for the fiscal year ending immediately after the Board resolution. No Board resolution has been made for this purpose. The Special Retirement Law was amended in March 1998 enabling the Company to acquire its own shares for the purpose of retiring the same with capital surplus by resolution of the Board of Directors if the Articles of Incorporation so provide and if the Board deems it especially necessary to do so in view of general economic conditions, the business and financial condition of the Company and other factors. The acquisition of shares under this authorization is subject to the restriction that: (x) the total amount of the purchase price does not exceed the total amount of capital surplus and accumulated legal reserve minus the amount equal to one-fourth of stated capital; and (y) if the aggregate of the amounts of (i) through (vi) referred to under "Dividends" above and the amount of interim dividends distributed exceeds the net assets appearing on the balance sheets as at the latest closing of the Company's accounts, no purchase of shares for this purpose can be made. The Company's Articles of Incorporation do not so provide. 25 -25- "Unit" share system ------------------- Pursuant to the Commercial Code the Company has adopted 1,000 shares as one unit of shares. Transferability of shares representing less than one unit Certificates for shares representing less than one unit may only be issued in certain limited circumstances. Since the transfer of shares normally requires delivery of the certificates therefor, fractions of a unit for which no share certificates are issued are not transferable. Shares representing less than one unit for which share certificates have been issued continue to be transferable, but the transfer may be registered in the Company's register of shareholders only if the transferee is already a registered shareholder (whether in respect of units or of shares representing less than one unit). A holder who owns ADRs evidencing less than 100 American Depositary Shares will indirectly own less than a whole unit. Because transfer of ADRs does not require changes in the ownership of the underlying shares of Common Stock, holders of ADRs evidencing American Depositary Shares that constitute less than one unit of Common Stock are not affected by such restrictions in their ability to transfer such ADRs. However, because transfers of less than one unit of the underlying shares of Common Stock are normally prohibited under the unit share system, under the Deposit Agreement relating to the ADRs, the right of ADR holders to surrender their ADRs and withdraw the underlying shares of Common Stock for sale in Japan may only be exercised as to whole units of Common Stock. Although, as discussed below, under the unit share system holders of less than a unit have the right to require the Company to purchase their shares, holders of ADRs evidencing American Depositary Shares that represent other than integral multiples of whole units are unable to withdraw the underlying shares of Common Stock representing less than one unit and, therefore, are unable, as a practical matter, to exercise the right to require the Company 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. Rights of a holder of shares representing less than one unit to require the Company to purchase such shares A holder of shares representing less than one unit may at any time require the Company to purchase such shares at their last reported sale price on the Osaka Securities Exchange on the day when such request is made or, if no sale takes place on the Osaka Securities Exchange on such day, the last reported sale price on the Tokyo Stock Exchange on such day, and if a sale takes place on neither of such exchanges on such day, the price at which the first sale of the shares is effected on the Osaka Securities Exchange thereafter, less applicable brokerage commission. Other rights of a holder of shares representing less than one unit A holder of shares representing less than one unit has the following rights in respect of such shares: (i) the right to receive dividends (including interim dividends); (ii) the right to receive shares and/or cash by way of a stock split or upon consolidation or subdivision of shares or upon a capital decrease or merger of the Company; 26 - 26 - (iii) the right to be allotted subscription rights with respect to new shares, convertible bonds and bonds with warrants to subscribe for shares when such rights are granted to shareholders; (iv) the right to participate in the distribution of surplus assets in the event of the liquidation of the Company; and (v) the right to require the Company to issue replacement share certificates for lost, stolen or destroyed share certificates. All other rights, including voting rights, cannot be exercised with respect to shares representing less than one unit. Voting rights of a holder of shares representing less than one unit A holder of shares representing less than one unit cannot exercise any voting rights with respect to such shares. In calculating the quorum for various voting purposes, the aggregate number of shares representing less than one unit will be excluded from the number of outstanding shares. A holder of shares representing one or more whole units will have one vote for each such share, except as stated in "Voting rights" above. --------------- Consolidation by operation of law of shares constituting one unit into one share The unit share system is intended to be an interim measure with a view ultimately to achieve shares of a much higher denomination than at present. On a date to be specified by separate legislation, the shares comprising one unit will be deemed to be consolidated into one share. Presently it is not known when the bill specifying such date will be submitted to the Japanese parliament. If the consolidation takes place, the holder of any fractional share constituting one-hundredth of one share or any integral multiple thereof, which may result from such consideration, will be registered as the holder thereof in the register of fractional shares and the holder of any fraction representing less than a whole hundredth of one share will be entitled to receive a cash payment. A registered holder of fractional shares may request that a company issue certificates therefor, unless its articles of incorporation provide otherwise, in which case such holder may request that the company purchase such fractional shares. Fractional shares will not carry voting rights and, unless such company's articles of incorporation provide otherwise, the entitlement thereof will be limited and will not include the right to receive dividends. (c) Reporting of Substantial Shareholdings The Securities and Exchange Law of Japan, as amended, requires any person who has become, beneficially and solely or jointly, a holder of more than 5% of the total issued shares of a company listed on any Japanese stock exchange or whose shares are traded on the over-the-counter market in Japan to file with the Minister of Finance within five business days a report concerning such shareholdings. A similar report must also be made in respect of any subsequent change of 1% or more in any such holding with certain exceptions. For this purpose, shares issuable to such person upon conversion of convertible securities or exercise of share subscription warrants are taken into account in determining both the number of shares held by such holder and the issuer's total issued share capital. Copies of each such report must also be furnished to the issuer of such shares and all Japanese stock exchanges on which the shares are listed or (in the case of shares traded over-the-counter) the Japan Securities Dealers Association. 27 - 27 - Item 7. Taxation -------- 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 (whether for the purpose of making a free distribution or dividend in shares), subject as set out below, are not subject to Japanese income tax. However, a transfer of retained earnings or legal reserve (but not capital surplus) to stated capital is treated as a dividend payment to shareholders for Japanese tax purposes and is, in general, subject to Japanese income tax. Under the Income Tax Convention between the U.S. and Japan (the "Convention"), the maximum rate of Japanese withholding tax that may be imposed on dividends paid to a U.S. resident or corporation not having a "permanent establishment" (as defined therein) in Japan is generally 15%. For purposes of the Convention and the U.S. Internal Revenue Code of 1986, as amended (the "Code"), U.S. holders of ADRs will be treated as the owners of the Common Stock underlying the American Depositary Shares evidenced by the ADRs. For purposes of this discussion, a "U.S. holder" is a holder that (i) is a resident of the United States for purposes of the Convention, (ii) does not maintain a permanent establishment or fixed base in Japan to which ADRs or Common Stock are attributable and through which the beneficial owner carries on or has carried on business (or in the case of an individual, performs or has performed independent personal services) and (iii) is not otherwise ineligible for benefits under the Convention with respect to income and gain derived in connection with the ADRs or Common Stock. Japanese taxation of Common Stock or ADRs - ----------------------------------------- In the absence of an applicable tax treaty, convention or agreement reducing the maximum rate of withholding tax, the rate of Japanese withholding tax on dividends paid by Japanese corporations to non-residents of Japan or non-Japanese corporations is 20%. Gains derived by a non-resident of Japan or a non-Japanese corporation from the sale of Common Stock or ADRs outside Japan, or from the sale of Common Stock within Japan by a non-resident of Japan or by a non-Japanese corporation not having a 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 an individual who has acquired Common Stock or ADRs as a legatee, heir or donee. If the Company purchases shares of its Common Stock by way of a tender offer for the purpose of retirement with retained earnings as described under "Item 6. Exchange Controls and Other Limitations Affecting Security Holders (b) Description of Common Stock -- Repurchase by the Company of its Common Stock" ---------------------------------------------- and so retires such shares, the selling shareholders are deemed to have received a dividend in an amount equal to the selling price less the aggregate of the stated capital and the capital surplus attributable to the shares so sold, except that if such retirement is made on or before March 31, 2001, no such dividend is deemed to have been received but the entire profits realized by the selling shareholders from such sales are treated as gains realized from the ordinary sales of the shares and is subject to income tax or corporation tax, as appropriate. In addition, when shares acquired by the Company (whether by way of a tender offer or otherwise) for the purpose of retirement with retained earnings are retired by the Company with retained earnings, the shareholders existing at the time of such retirement are deemed to have received a dividend in an amount equal to the amount of the stated capital attributable to the retired shares and calculated in proportion to each shareholder's shares at the time of such retirement, except that if such retirement is made on or before March 31, 2001, no income tax is payable with respect to such portion deemed as a dividend. If the Company purchases shares of its Common Stock for the purpose of retirement with capital surplus and so retires such shares, the entire profits realized by the selling shareholders from such sales are treated as gains realized from ordinary 28 - 28 - sales of the shares and is subject to income tax or corporation tax, as appropriate. In this case, no taxable event is deemed to accrue from such retirement to the shareholders existing at the time of retirement. United States taxation of Common Stock or ADRs - ---------------------------------------------- Dividends received by an U.S. holder of ADRs or Common Stock will be includable in income as ordinary income for U.S. federal income tax purposes to the extent paid out of current or accumulated earnings and profits of the Company as determined for U.S. federal income tax purposes. Subject to limitations set out in the Code, an U.S. holder of ADRs or Common Stock of the Company will be entitled to a credit for Japanese tax withheld in accordance with the Convention from dividends paid by the Company. For purposes of the foreign tax credit limitation, dividends will be foreign source income, but will constitute "passive" or "financial services" income. Dividends paid by the Company to U.S. corporate holders of ADRs or Common Stock will not be eligible for the dividends-received deduction. Item 8. Selected Financial Data -----------------------
Yen (billions), except per share amounts and yen exchange rates -------------------------------------------------------- Fiscal year ended March 31, -------------------------------------------------------- 1999 1998 1997 1996 1995 ---- ---- ---- ---- ---- Income Statement Data: - ---------------------- Net sales 7,640 7,891 7,676 6,795 6,948 Income before income taxes 202 356 332 77 232 Net income (loss) 14 94 138 (57) 90 Per common share: Net income (loss): Basic 6.48 44.32 65.39 (27.12) 43.15 Diluted 6.48 41.53 60.64 (27.12) 41.04 Dividends 12.50 13.00 12.50 12.50 13.50 ($0.097) ($0.107) ($0.112) ($0.136) ($0.136) Balance Sheet Data: - ------------------- Total assets 7,938 8,564 8,696 8,012 8,202 Long-term debt 709 690 923 1,019 1,291 Minority interests 609 618 611 560 556 Stockholders' equity 3,533 3,770 3,696 3,398 3,255 Yen exchange rates per - ---------------------- U.S. dollar: ------------ Year-end 118.43 133.29 123.72 107.00 86.85 Average 128.19 122.78 113.19 97.09 98.48 High 108.83 111.42 104.49 81.12 86.85 Low 147.14 133.99 124.54 107.29 105.38 Notes: 1. Dividends per share reflect those paid during each fiscal year. The dollar amounts of the dividends per share have been computed at the exchange rates prevailing on the respective payment dates.
28 29 - 29 - 2. In June 1995, the Company sold an 80% equity interest in MCA INC. (MCA). Accordingly, beginning in fiscal 1996, MCA, now named Universal Studios, Inc., is no longer treated as a consolidated subsidiary. The Company registered a one-time, non-operating loss on the sale of its investment in MCA of approximately 164 billion yen in fiscal 1996, primarily stemming from the realization of foreign currency translation adjustments, which led to a substantial decrease in income before income taxes and a net loss. 3. Fiscal 1999 and 1998 net income represent amounts after subtracting the impact of approximately 53 billion yen and 33 billion yen, respectively, attributable to adjustments of net deferred tax assets to reflect reductions in Japan's corporate income tax rate. Item 9. Management's Discussion and Analysis of Financial Condition and --------------------------------------------------------------- Results of Operations --------------------- (a) Results of Operations During the three-year period ended March 31, 1999 ("fiscal 1997," "fiscal 1998," and "fiscal 1999"), the Japanese economy turned from a recovery phase to a recession. Whereas fiscal 1997 was marked by a continued recovery from the previous recession in the early 1990s, the Japanese economy experienced a setback in fiscal 1998. This was triggered by a raise in the consumption tax rate and the failure of several financial institutions, which collectively led to a decline in private business sector demand and diminished consumer confidence. In fiscal 1999, the sluggishness of the domestic economy deepened further, as seen in lower corporate capital investment and consumer spending. Outside Japan, economic conditions in North America and Western Europe were generally favorable throughout this three-year period. Asian economies, however, experienced a downturn in fiscal 1998 following an outbreak of currency-related turmoil in Southeast Asia in the summer of 1997. In fiscal 1999, that turmoil spread to the Commonwealth of Independent States (CIS) and Latin America. This, together with the lingering recession in Asia, increased uncertainty in the global economy. Reflecting the aforementioned factors, Japan's Gross Domestic Product in real terms increased 4.4% in fiscal 1997 and decreased 0.4% and 2.0% in fiscal 1998 and fiscal 1999, respectively. Inflation rates in Japan for the three-year period were low in terms of the consumer price index with the wholesale price index showing a deflationary trend in fiscal 1999. This trend, combined with intensified worldwide price competition, caused price declines in electronic products. This had a negative impact on the Company's earnings especially in industrial products and components sectors, as mentioned later. A large portion of the Company's overseas business is conducted in low inflation areas, and operations in highly inflationary environments were not material. Because of the size of Matsushita's international business operations, the Company is exposed to both translation and transaction risk stemming from currency exchange rate fluctuations. Translation risk is a risk with regard to consolidation of foreign currency denominated financial statements of overseas subsidiaries. Depending on the fluctuation of the exchange rate, the value of overseas subsidiaries can differ from period to period when translated into yen. This is a reporting consideration and does not affect business operations. Transaction risk is a risk that occurs in export, import and other transactions when two or more different currencies are 30 - 30 - involved. This is a risk that the currency structure of the Company's sales and assets deviates from the currency structure of expenses and liabilities during the transaction period. The Company's business was favorably affected by the yen's depreciation during the three-year period. In order to alleviate the effects of currency-related transaction risk, Matsushita has traditionally used several currency risk hedging methods, such as forward foreign-exchange contracts and currency options contracts with leading banks. Matsushita has also recently implemented matching of exports and imports exchange contracts. As a basic countermeasure against currency exchange risk, the Company has also been strengthening production operations outside Japan to meet overseas demand, while reducing dependence on exports. The Company does not have any material unhedged monetary assets, liabilities, or commitments denominated in currencies other than the operation's functional currency. During this period, Matsushita focused its management efforts on mid-term growth. In fiscal 1998 following the previous three-year business plan, the Company implemented the four-year Progress 2000 Plan. The basic objective of the Plan is to build a stronger management structure leading to the creation of an enterprise that provides the utmost in customer satisfaction in the 21st century. The Progress 2000 Plan emphasizes enhancement of the Company's earnings ratios through balanced growth in three primary business sectors -- consumer products, industrial products and components -- along with balanced growth of domestic and overseas operations. To this end, the Plan calls for various structural reforms and strengthened product competitiveness. The Plan specifies five priority businesses to propel the growth of the entire Company, namely digital TV systems, semiconductors, display devices, optical discs, and mobile communications equipment. Matsushita's consolidated sales and earnings results during the last three fiscal years, reflecting all the aforementioned external and internal conditions, can be summarized as follows: In fiscal 1997, net sales increased 13.0% to 7,676 billion yen. This was attributable to a favorable economic environment and successful management steps under the previous three-year business plan. Net income climbed to 138 billion yen, compared to a net loss of 57 billion yen in fiscal 1996, when the Company incurred a one-time non-operating loss of approximately 164 billion yen primarily relating to the sale of a controlling interest in MCA (currently Universal Studios Inc.). In fiscal 1998, net sales increased 2.8% to 7,891 billion yen, helped mainly by growth in overseas sales, notably in North America and Europe. Net income decreased 32.1% to 94 billion yen, due mainly to slowed demand in Japan and Asia and intensified price competition which impacted operating profit. The Company also incurred a 33 billion yen negative impact from adjustments of net deferred tax assets to reflect a reduction in Japan's corporate income tax rate. Without the effects of these adjustments, net income for fiscal 1998 would have decreased 8.0%. In fiscal 1999, net sales decreased 3.2% to 7,640 billion yen, mainly reflecting the sluggish Japanese economy and worsened overseas economic conditions, especially in Southeast Asia and the CIS. Net income dropped 85.5% to 14 billion yen, primarily because of decreased sales and price declines due to intensified worldwide competition negatively impacting operating profit. The net income reduction was further exacerbated by the negative effect of 53 billion yen adjustments of net deferred tax assets reflecting a further reduction in Japan's corporate income tax rate. Without the effects of these adjustments, net income for fiscal 1999 would have decreased 47.7%. 31 - 31 - Year ended March 31, 1999 compared with 1998 -------------------------------------------- (1) Sales ----- Consolidated net sales in fiscal 1999 decreased 3.2% to 7,640 billion yen, from 7,891 billion yen in the previous year. This decrease was attributed primarily to lower demand in Japan and worsened overseas market conditions, especially in Southeast Asia and the CIS. Domestic sales declined 3.6% to 3,752 billion yen, reflecting sluggish demand in product areas such as industrial products and components due to slow corporate capital investments and price declines. Domestic sales declined despite successful sales increases in the video and audio equipment field and contributions from certain new home appliance products. Despite solid sales growth in North America and Europe, led by video and audio equipment, overseas sales fell 2.8% to 3,888 billion yen, due mainly to depressed demand in Southeast Asia, the CIS, and Latin America. Sales by major product categories were as follows: Sales of consumer products decreased 2.1% to 3,289 billion yen. In this category, sales of video and audio equipment edged up 0.5% to 1,895 billion yen. Domestic sales of consumer products showed favorable growth, led by digital AV products such as digital camcorders and DVD players. Overseas, sales in North America and Western Europe marked strong gains, with TVs and VCRs leading the way. However, this growth was offset by drops in sales in Southeast Asia and the CIS. Meanwhile, sales of home appliances and household equipment fell 5.4% to 1,394 billion yen. This decline was mainly due to sluggish demand in the primary market, Japan, and decreased sales in overseas markets such as Southeast Asia. This decline occurred despite favorable market acceptance of industry-first products such as the centrifugal force washing machine. Sales of industrial products totaled 2,867 billion, down 3.3% from the previous year. Of this, sales of information and communications equipment decreased 5.1% to 2,150 billion yen, principally because of worldwide price declines in computer peripherals, notably PC displays and hard disk drives. Helped by overseas growth, sales of mobile communications equipment, broadcast- and business-use video systems, and printers expanded. Industrial equipment sales rose 2.3% to 717 billion yen, as robust sales of car AV equipment in and outside Japan more than offset a fall in sales of FA equipment. Sales of components decreased 5.2% to 1,484 billion yen, reflecting sluggish sales of semiconductors and general electronic components due to slow demand in Japan and other Asian markets, as well as global price declines. However sales of compact batteries and electric motors, chiefly for the information and communications industry, were favorable especially in overseas markets. (2) Operating Profit ---------------- Operating profit decreased 42.6% to 194 billion yen, from 338 billion yen a year ago. Major factors for this decline were negative effects of reduced sales in Japan, Asia, and emerging markets; worldwide price declines, particularly in industrial products and components; and increases in fixed costs, including R&D expenditures and depreciation. 32 - 32 - (3) Other Income (Deductions) ------------------------- Other income (net) totaled 9 billion yen, down from 18 billion yen in fiscal 1998. Major causes for this decrease included lower interest and dividend income and other non-operating expenses such as loss on liquidation of a U.S. joint venture for production of computer peripherals components. (4) Provision for Income Taxes -------------------------- Provision for income taxes amounted to 175 billion yen. Its ratio to income before income taxes climbed to 86.7% from 66.0% a year ago, primarily owing to adjustments of net deferred tax assets at the end of fiscal 1999. This reflects a reduction for the second consecutive year in Japan's corporate income tax rate. (See Note 9 of the Notes to Consolidated Financial Statements.) (5) Minority Interests ------------------ Minority interests decreased to 8 billion yen, from 26 billion yen in fiscal 1998, reflecting the earnings decrease of subsidiaries in challenging economic conditions. (6) Equity in Earnings (Losses) of Associated Companies --------------------------------------------------- Equity in earnings (losses) of associated companies was a loss of 6 billion yen, compared with a loss of 1 billion yen in the prior year. This aggravation was caused by increased losses of certain associated companies, including the aforementioned U.S. joint venture for computer peripherals components. (7) Net Income ---------- As a result of all the factors stated in the preceding paragraphs, net income for fiscal 1999 decreased to 14 billion yen, compared with 94 billion yen in fiscal 1998. Its ratio to sales declined to 0.2%, compared with 1.2% in the prior year. Year ended March 31, 1998 compared with 1997 -------------------------------------------- (1) Sales ----- Consolidated net sales in fiscal 1998 reached 7,891 billion yen, up 2.8% from the previous year's 7,676 billion yen. This increase was mainly attributable to growth in overseas sales, notably in North America and Europe, which more than offset a decline in domestic sales. Domestic sales decreased 3.8% to 3,891 billion yen, largely owing to sluggish sales of home appliances and household equipment, reflecting such factors as slow consumer spending and housing starts and unseasonable weather, which suppressed sales of seasonal products such as air conditioners, and slowdown of growth in the second half in other principal product lines such as information and communications equipment and components, due partly to price declines. Overseas sales increased 10.2% to 4,000 billion yen, owing to substantial expansion of sales in North America and Europe, led by video and audio equipment and information and communications equipment. 33 - 33 - Sales by major categories were as follows: Sales of consumer products, consisting of video and audio equipment, and home appliances and household equipment, decreased 2.4% to 3,359 billion yen. Sales of video and audio equipment advanced 4.5% to 1,885 billion yen, thanks mainly to strong gains by the Company's digital video camcorders in Japan and steady growth of VCR decks, TVs and audio products overseas. Sales of home appliances and household equipment, meanwhile, decreased 10.0% to 1,474 billion yen, due largely to the aforementioned decline in domestic sales of major appliances such as air conditioners, refrigerators and washing machines. Sales of industrial products, consisting of information and communications equipment, and industrial equipment, increased 8.9% to 2,965 billion yen. Sales of information and communications equipment grew 12.1% to 2,264 billion yen, reflecting solid advances in overseas sales of PCs and PC peripherals, video systems for commercial and industrial use, and facsimile machines. Industrial equipment sales remained almost flat at 701 billion yen, as a moderate increase in sales of FA equipment and car AV equipment offset a decline in demand for other industrial equipment such as power distribution equipment and vending machines. Sales of components rose 3.6% to 1,567 billion yen. This result was principally attributable to firm sales of general components and semiconductors for use in information and communications equipment and digital AV equipment. Sales of electric motors and batteries, notably compact high-performance types, also advanced steadily. (2) Operating Profit ---------------- Operating profit decreased 9.7% to 338 billion yen, compared with the previous year's 374 billion yen, reflecting the adverse effects of decreased or negative sales gains in Japan and other Asian markets due to declining demand and intensified worldwide price competition. (3) Other Income (Deductions) ------------------------- Other income (net) registered a gain of 18 billion yen in fiscal 1998, compared with a loss of 42 billion yen in fiscal 1997, when the Company recorded impairment losses of 153 billion yen related to NL Finance Co., Ltd. (NLF), a financial subsidiary, along with gross realized gains of 104 billion yen from the sale of available-for-sale securities. During fiscal 1998, the Company recognized an impairment loss of 57 billion yen associated with the machinery and equipment of subsidiaries to manufacture semiconductors, of which the prices have significantly decreased, along with an impairment loss of 31 billion yen related to the decline in value of land held, and foreign exchange losses of 25 billion yen mainly related to currency devaluations in Southeast Asian countries. On the other hand, the Company recorded gross realized gains of 118 billion yen from the sale of available-for-sale securities. (See Notes 4, 5 and 6 of the Notes to Consolidated Financial Statements.) (4) Provision for Income Taxes -------------------------- Provision for income taxes amounted to 235 billion yen. Its ratio to income before income taxes increased to 66.0%, compared with 46.8% in fiscal 1997, mainly due to adjustments of net deferred tax assets during fiscal 1998 to reflect a reduction in Japan's corporate income tax rate. (See Note 9 of the Notes to Consolidated Financial Statements.) 34 - 34 - (5) Minority Interests ------------------ Minority interests totaled 26 billion yen, compared with 44 billion yen in fiscal 1997, reflecting the earnings decrease of several subsidiaries. (6) Equity in Earnings (Losses) of Associated Companies --------------------------------------------------- Equity in earnings (losses) of associated companies was a loss of 1 billion yen, compared with a gain of 6 billion yen in the prior year, due to increased losses of certain associated companies, including the one for production of components for PC peripherals which became an associated company during fiscal 1998. (7) Net Income ---------- Due to the factors stated in the preceding paragraphs, net income for fiscal 1998 decreased to 94 billion yen, compared with 138 billion yen in fiscal 1997. Its ratio to sales was 1.2%, compared with 1.8% in the previous year. Year ended March 31, 1997 compared with 1996 -------------------------------------------- (1) Sales ----- Consolidated net sales in fiscal 1997 reached 7,676 billion yen, up 13.0% from the previous year's 6,795 billion yen. This increase was achieved in a generally favorable worldwide economic environment. Domestic sales rose 8.5% to 4,046 billion yen, largely because of continued strong demand for information and communications equipment, as well as a steady growth in sales of video and audio equipment and home appliances. Overseas sales grew 18.3% to 3,630 billion yen, due mainly to sales growth in all major categories and the depreciation of the yen. On a local currency basis, overseas sales increased 8.3%. Sales by major product categories, as restated in accordance with the category reclassifications effective in fiscal 1998, were as follows: Sales of consumer products increased 10.0% to 3,442 billion yen. Within this category, sales of video and audio equipment advanced 7.7% to 1,804 billion yen, due largely to the solid growth of high-definition TVs and digital video camcorders in Japan, increased sales of color TVs in overseas markets, and solid growth of headphone stereos and CD players worldwide. Sales of home appliances and household equipment grew 12.7% to 1,638 billion yen, with a steady increase in demand for fully-automatic washing machines, vacuum cleaners and microwave ovens, as well as lower-power consumption models of large-sized refrigerators and air-conditioners mainly in Japan. Sales of industrial products increased 21.7% to 2,722 billion yen. Of this, sales of information and communications equipment increased 30.2% to 2,021 billion yen, led by mobile communications equipment such as cellular phones, and computer peripherals such as hard-disk drives and PC displays. Industrial equipment sales rose 2.3% to 701 billion yen, thanks mainly to increased demand for welding machines, air conditioning equipment and vending machines in Japan. 35 - 35 - Sales of components rose 5.7% to 1,512 billion yen, as the adverse effect of price declines in semiconductors was more than offset by growth in sales of general components, LCD panels, and compact lithium-ion rechargeable batteries. (2) Operating Profit ---------------- Despite the negative effect of worldwide price declines, operating profit increased 41.4% to 374 billion yen, compared with the previous year's 264 billion yen, due principally to the Company's efforts to lower manufacturing costs and other expenses, the growth in sales, and the favorable effects of the yen's depreciation. (3) Other Income (Deductions) ------------------------- Other income (net) registered a loss of 42 billion yen in fiscal 1997, compared with a loss of 188 billion yen in fiscal 1996, when the Company incurred a one-time, non-operating loss of approximately 164 billion yen, primarily stemming from the realization of foreign currency translation adjustments relating to the sale of the MCA equity interest. During fiscal 1997, the Company recognized a loss of 107 billion yen associated with impaired receivables related to NLF, a financial subsidiary, along with an impairment loss of 46 billion yen related to the decline in value of real estate held for sale which had been received by NLF in satisfaction of impaired receivables. The Company recorded gross realized gains of 104 billion yen from the sale of available-for-sale securities in fiscal 1997. (4) Provision for Income Taxes -------------------------- Provision for income taxes amounted to 155 billion yen. Its ratio to income before income taxes decreased to 46.8%, compared with 150.7% in fiscal 1996, when the Company incurred the aforementioned, non-tax-deductible loss relating to the MCA equity sale. (5) Minority Interests ------------------ Minority interests totaled 44 billion yen, compared with 22 billion yen in fiscal 1996, reflecting the earnings improvement of several subsidiaries. (6) Equity in Earnings of Associated Companies ------------------------------------------ Equity in earnings of associated companies increased to 6 billion yen from 4 billion yen in the prior year, due to the improvement in earnings of certain associated companies. (7) Net Income ---------- Due to the factors stated in the preceding paragraphs, net income for fiscal 1997 grew to 138 billion yen, compared with the prior year's net loss of 57 billion yen. Its ratio to sales was 1.8%, compared with (0.8%) in the previous year. 36 - 36 - (b) Financial Position and Liquidity The Company's consolidated total assets at the end of fiscal 1999 decreased to 7,938 billion yen, compared with 8,564 billion yen a year ago. This drop was largely attributable to reductions in the aggregate amount of cash and cash equivalents and in inventories. Stockholders' equity at the end of fiscal 1999 also slid, to 3,533 billion yen, from 3,770 billion yen in the previous year, caused mainly by a decrease in retained earnings reflecting retirement of treasury stock and the negative effect of the yen's year-end exchange rate on accumulated other comprehensive loss (translation adjustments). The Company's capital investment during fiscal 1999 totaled 352 billion yen, a fall from the previous year's figure of 474 billion yen. This decline was primarily owing to more selective investment in the area of components and devices, including semiconductors and LCD devices. In contrast, depreciation during the year edged up to 366 billion yen, compared with 360 billion yen in fiscal 1998. Net cash provided by operating activities in fiscal 1999 amounted to 499 billion yen, down from 529 billion yen in the previous fiscal year, chiefly owing to a fall in net income. Net cash used in investing activities came to 378 billion yen, compared with 431 billion yen in fiscal 1998. This decline was primarily attributable to a smaller degree of increase in investments and advances than in the previous year and to a cutback in capital expenditures. Net cash used in financing activities rose to 434 billion yen, from 224 billion yen a year ago, reflecting increased cash outflows, mainly for greater repayments of long-term debt and repurchase of the Company's common stock. All these activities, compounded by the effect of exchange rate changes, resulted in a net decrease of 372 billion yen in cash and cash equivalents during fiscal 1999. Cash and cash equivalents at the end of fiscal 1999 totaled 1,534 billion yen, compared with 1,906 billion yen a year ago. (c) Market Risk Management (Item 9A) The Company is exposed to market risk, including changes of foreign exchange rates, interest rates and prices of marketable securities. In order to hedge the risks of changes in foreign exchange rates and interest rates, the Company uses derivative financial instruments. The Company does not hold or issue financial instruments for trading purposes. Although the use of derivative financial instruments exposes the Company to the risk of credit-related losses in the event of nonperformance by counterparties, the Company believes that such risk is minor because of the high credit rating of the counterparties. Equity Price Risk: The Company holds available-for-sale securities included in short-term investments and investments and advances. In general, highly-liquid and low risk instruments are preferred in the portfolio. Available-for-sale securities included in investments and advances are held as longer term investments. The Company does not hold marketable securities for trading purposes. 37 - 37 - Maturities and fair values of available-for-sale securities were as follows at March 31, 1999 and 1998:
Yen (millions) --------------------------------------- 1999 1998 ----------------- ------------------ Carrying Fair Carrying Fair amount value amount value -------- ------ -------- ------ Due within one year 122,666 122,676 123,396 123,901 Due after one year through five years 94,793 94,554 92,813 92,616 Due after five years 2 3 253 178 Equity securities 386,024 580,487 400,383 571,012 ------- ------- ------- ------- 603,485 797,720 616,845 787,707 ======= ======= ======= =======
Foreign Exchange Risk: The primary purpose of the Company's foreign currency hedging activities is to protect against the volatility associated with foreign currency transactions. The Company primarily utilizes forward exchange contracts and options with duration of less than a few months. The Company also enters into foreign exchange contracts from time to time to hedge the risk of fluctuation in foreign currency exchange rates associated with long-term debt that is denominated in foreign currencies. Foreign exchange contracts related to such long-term debt have the same maturity as the underlying debt. The following table provides the contract amounts and fair values of foreign exchange contracts, primarily hedging U.S. dollar revenues, at March 31, 1999 and 1998. Amounts related to foreign exchange contracts entered into in connection with long-term debt denominated in foreign currencies which eliminate all foreign currency exposures, are shown in the table of "Interest Rate Risk."
Yen (millions) -------------------------------------- 1999 1998 ------------------ ----------------- Contract Fair Contract Fair amount value amount value ------- ------ ------- ------ Forward: To sell foreign currencies 312,453 (2,065) 419,806 (9,182) To buy foreign currencies 62,371 596 132,567 200 Options purchased to sell foreign currencies 3,670 (15) 7,620 (73) Options purchased to buy foreign currencies - - 2,378 55 Options written to buy foreign currencies 3,873 36 - -
Interest Rate Risk: The Company's exposure to market risk for changes in interest rates relates principally to its debt obligations. The Company has long-term debt primarily with fixed rates. Interest rate swaps may be entered into from time to time by the Company to hedge cash flows of interests and fair values of debt. However, interest rate swaps utilized by the Company at March 31, 1999 and 1998 were not material. 38 - 38 - The following tables provide information about the Company's financial instruments that are sensitive to changes in interest rates at March 31, 1999 and 1998. The table presents principal cash flows by expected maturity dates, related weighted average interest rates and fair values of financial instruments.
Yen (millions) ------------------------------------------------------------------------------------ Carrying amount and maturity date (as of March 31, 1999) ------------------------------------------------------------------------------------ Average interest There- Fair rate Total 2000 2001 2002 2003 2004 after value -------- ----- ---- ---- ---- ---- ---- ------- ----- Long-term debt, including current portion: Japanese yen convertible bonds 1.5% 264,403 21,000 99,010 16,999 98,911 28,483 361,963 Straight bonds issued by a subsidiary 1.9% 20,000 5,000 5,000 10,000 19,795 U.S. dollar unsecured bonds 5.8% 120,265 120,265 124,926 Unsecured yen loans from banks and insurance companies and others 1.9% 434,211 134,512 127,548 97,413 53,316 17,359 4,063 430,952 - ------------------------------------------------------------------------------------------------------------------------ Subtotal 838,879 134,512 148,548 201,423 190,580 121,270 42,546 937,636 Foreign exchange contracts 4,717 4,717 4,888 - ------------------------------------------------------------------------------------------------------------------------ Total 843,596 134,512 148,548 201,423 195,297 121,270 42,546 942,524 - ------------------------------------------------------------------------------------------------------------------------
Yen (millions) ------------------------------------------------------------------------------------ Carrying amount and maturity date (as of March 31, 1998) ------------------------------------------------------------------------------------ Average interest There- Fair rate Total 1999 2000 2001 2002 2003 after value ------- ----- ---- ---- ---- ---- ---- ------- ----- Long-term debt, including current portion: Japanese yen convertible bonds 1.4% 498,020 233,600 21,000 99,021 16,999 127,400 576,152 U.S. dollar unsecured bonds 5.8% 131,730 131,730 142,317 Euro medium-term notes 5.6% 5,284 5,284 5,255 Unsecured yen loans from banks and insurance companies and others 2.2% 421,332 121,068 75,451 120,570 74,592 23,986 5,665 416,319 - ----------------------------------------------------------------------------------------------------------------------- Subtotal 1,056,366 359,952 75,451 141,570 173,613 172,715 133,065 1,140,043 Foreign exchange contracts (6,833) (6,833) (12,077) - ----------------------------------------------------------------------------------------------------------------------- Total 1,049,533 359,952 75,451 141,570 173,613 165,882 133,065 1,127,966 - -----------------------------------------------------------------------------------------------------------------------
39 - 39 - (d) Regarding Environment In June 1998, certain Japanese prefectural and municipal authorities announced, based on the Company's and its subsidiaries' reports, that a higher level of harmful substances than allowed by Japan's current environmental standards was detected in underground water taken from the Company's and a certain number of subsidiaries' factory sites. These substances, known as volatile organic compounds, include trichloroethylene, tetrachloroethylene and trichloroethane, and were used in the past for washing metal parts and semiconductors. It is believed that the underground water was contaminated by small quantities of these substances sinking into the soil. Matsushita ceased the use of such substances for the above purposes before the end of 1995 in all of its domestic factories. The Company has been taking measures necessary to remove the excess substances at the factory sites mentioned above. Moreover, to check the possibility that other sites may also be contaminated, the Company conducted thorough inspections of all 112 domestic manufacturing sites, including subsidiaries and affiliates. For sites with any signs of contamination, the Company made reports to the related prefectural and municipal authorities. The Company is currently conducting appropriate removal and purification processes in accordance with the Japanese Environment Agency's guidelines and municipal recommendations. With regard to overseas manufacturing sites, the Company will completely cease the use of volatile organic compounds by the end of 1999, and will complete its inspection and analysis of manufacturing sites worldwide by the end of fiscal 2000. The Company has to date spent approximately 2 billion yen for all current remedial actions. Over the next several years, the Company expects that it will incur additional costs. However, such future costs cannot be estimated precisely at this stage. The Company does not believe this will have a material adverse effect on its liquidity, financial position, or results of operations. The Company is not aware of any other incidents of this kind that may have a material adverse effect on its liquidity, financial position, or results of operations. It is difficult to estimate future environmental expenditures because of the many uncertainties involved, including the future status of the law, regulations and technology. However, the Company believes that capital expenditures and expenses to be incurred in complying with current laws and regulations for environmental protection will not have a material adverse effect upon its liquidity, financial position, or result of operations. (e) Year 2000 Issue (1) Policy ------ The Company recognizes the importance of the Year 2000 issue from the standpoint of its business continuity and customer service, and has been pursuing corporate-wide initiatives to cope with this issue. 40 - 40 - (2) Project ------- In July 1997, management issued a corporate release, Towards Readiness for the Year 2000 Issue, and in June 1998, commenced the Matsushita groupwide project, Groupwide Council Towards Readiness for the Year 2000 Issue headed by the Executive Vice President in charge of planning, information systems, logistics, intellectual property and corporate multimedia. In accordance with the project, the Council investigates the state of the Company's products, internal information systems, manufacturing facilities, suppliers of raw materials and parts, infrastructure such as buildings and other facilities to identify potential problems; collects information on the state of readiness; implements and advances remedial measures; and regularly reports to management on the status of progress. The Council confers with management as to the appropriate measures to be taken and engages in various educational activities both within the Matsushita group and with related parties. (3) State of readiness ------------------ In December 1998, the Company completed an identification and assessment in respect of the potential impact of the Year 2000 issue on the Company's products. By the end of March 1999, necessary notice to relevant customers on required remedial measures was completed. Remedial measures are being implemented in consultation with customers and it is anticipated all necessary work will be completed by the end of September 1999. Remedial activities have been going on in stages in respect of internal information systems; identification of potential problems and impact analysis was completed by the end of 1996, and system adjustment and installation of core systems such as accounting, production, sales and distribution and other logistics will be completed by September 1999, after verification tests. The Company is also addressing the information systems and other facilities of external vendors and other suppliers by obtaining confirmation from them with tests being conducted wherever necessary. (4) Costs ----- Costs required for Year 2000 readiness measures with respect to internal information systems and production facilities are extremely difficult to calculate as they are mainly handled by the Company's information systems department as part of their routine operations. The Company's payment to outside sources in relation to modifications of systems to deal with the Year 2000 issue and for the upgrade or replacement of existing systems are estimated to amount to approximately 19 billion yen, of which approximately 80% was accounted for in the Company's financial statements for the year ended March 1999, or earlier. The Company does not anticipate the total costs for these measures to have a material effect on its consolidated operations and financial position. (5) Contingency Plan ---------------- In order to prepare for a worst-case scenario, the Company has established a contingency plan and a number of internal systems to ensure a smoother transition for customers of the Company's products, information systems, production systems, suppliers of raw materials and parts, buildings and related equipment and others. 41 - 41 - (6) Risks ----- As this issue involves a number of outside parties in diverse areas and as the effect of possible failure by one party or segment is likely to be widespread, many aspects of the Company's Year 2000 project are outside its control. Furthermore, because the Company's operations encompass many different countries, there is no guarantee that the Year 2000 issue will be addressed with the same degree of attention in different parts of the world. Thus, unforeseen problems may arise in different countries. These factors make it impossible for the Company to ensure that it will avoid material effect on its operations or business, or that it can insulate itself completely from third-party liability arising from the Year 2000 issue. (f) New Accounting Pronouncements In June 1998, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities," applicable for the fiscal year beginning April 1, 2000. This Statement establishes accounting and reporting standards for derivative instruments and for hedging activities. SFAS No. 133 requires that an entity recognize all derivatives as either assets or liabilities in the balance sheet and measure those instruments at fair value. Changes in the fair value of derivatives are recorded each period in current earnings or other comprehensive income (loss), depending on whether a derivative is designated as part of a hedge transaction and the type of hedge transaction. The ineffective portion of all hedges will be recognized in earnings. The Company has not yet determined the impact that the adoption of SFAS No. 133 will have on the results of operations or financial position. In March 1998, the American Institute of Certified Public Accountants (AICPA) issued Statement of Position (SOP) 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use," applicable for the fiscal year beginning April 1, 1999. SOP 98-1 provides guidance on when costs for internal use computer software should be capitalized or expensed as incurred. The Company does not expect that the adoption will materially affect the results of operations or financial position. (g) Information by Segment In accordance with the ministerial disclosure requirements under the Securities and Exchange Law of Japan, the Company has reported sales, operating profit, identifiable assets, depreciation and capital investment by business segment and also has reported sales, operating profit and identifiable assets by geographical location of companies. Business segments correspond to categories of activity classified primarily by markets and products. "Consumer products" includes video and audio equipment, as well as home appliances and household equipment. "Industrial products" includes information and communications equipment and industrial equipment. "Components" includes electronic components, semiconductors, motors and batteries. 42 - 42 - Information by segment for fiscal 1999 and 1998 is shown in the tables below: By Business Segment:
Yen (billions) --------------------- 1999 1998 ------ ------ Sales: Consumer products: Customers 3,289 3,359 Intersegment 7 7 ------ ------ Total 3,296 3,366 Industrial products: Customers 2,867 2,965 Intersegment 8 5 ------ ------ Total 2,875 2,970 Components: Customers 1,484 1,567 Intersegment 761 768 ------ ------ Total 2,245 2,335 Eliminations (776) (780) ------ ------ Consolidated total 7,640 7,891 ====== ====== Operating profit: Consumer products 91 100 Industrial products 154 222 Components 18 86 Corporate and eliminations (69) (70) ------ ------ Consolidated total 194 338 ====== ====== Identifiable assets: Consumer products 2,346 2,455 Industrial products 2,034 2,087 Components 1,681 1,754 Corporate and eliminations 1,877 2,268 ------ ------ Consolidated total 7,938 8,564 ====== ====== Depreciation: Consumer products 82 78 Industrial products 90 84 Components 185 190 Corporate and eliminations 9 8 ------ ------ Consolidated total 366 360 ====== ====== Capital investment (including intangibles other than goodwill)*: Consumer products 84 81 Industrial products 97 111 Components 168 280 Corporate and eliminations 8 8 ------ ------ Consolidated total 357 480 ====== ======
* Intangibles mainly represent rights to public facilities and patents. 43 - 43 - By Geographical Location of Companies:
Yen (billions) --------------------- 1999 1998 ------ ------ Sales: Japan: Customers 4,920 5,265 Intersegment 1,046 991 ------ ------ Total 5,966 6,256 North and South America: Customers 1,125 1,058 Intersegment 35 42 ------ ------ Total 1,160 1,100 Europe: Customers 736 614 Intersegment 31 28 ------ ------ Total 767 642 Asia and Others: Customers 859 954 Intersegment 474 428 ------ ------ Total 1,333 1,382 Eliminations (1,586) (1,489) ------ ------ Consolidated total 7,640 7,891 ====== ====== Operating profit: Japan 194 326 North and South America 7 11 Europe 11 15 Asia and Others 51 52 Corporate and eliminations (69) (66) ------ ------ Consolidated total 194 338 ====== ====== Identifiable assets: Japan 4,703 4,781 North and South America 488 533 Europe 356 317 Asia and Others 681 762 Corporate and eliminations 1,710 2,171 ------ ------ Consolidated total 7,938 8,564 ====== ======
Notes: 1. Corporate expenses include certain corporate R&D expenditures and general corporate expenses. 2. Corporate assets consist of cash and cash equivalents, marketable securities in short-term investments, investments and advances and other assets related to unallocated expenses. 44 - 44 - Item 10. Directors and Officers of Registrant ------------------------------------ (a) The Articles of Incorporation of the Company provide that the number of Directors of the Company shall be three or more and that of Corporate Auditors shall be three or more. Directors and Corporate Auditors shall be elected by the general meeting of shareholders. The Board of Directors has ultimate responsibility for administration of the Company's affairs. Directors may, by resolution of the Board of Directors, appoint a Chairman of the Board of Directors, a Vice Chairman of the Board of Directors, a President and Director, and one or more Executive Vice Presidents and Directors, Senior Managing Directors, and Managing Directors. The Chairman of the Board of Directors, Vice Chairman of the Board of Directors, President and Director, Executive Vice Presidents and Directors, Senior Managing Directors, and Managing Directors are Representative Directors and severally represent the Company. The term of office of Directors shall expire at the conclusion of the ordinary general meeting of shareholders with respect to the last closing of accounts within two years from their assumption of office, and in the case of Corporate Auditors, within three years from their assumption of office. However, they may serve any number of consecutive terms. The Corporate Auditors of the Company are not required to be and are not certified public accountants. However, at least one of the Corporate Auditors should be a person who has not been a director, general manager or employee of the Company or any of its subsidiaries during the five-year period prior to his election as a Corporate Auditor. Each Corporate Auditor has the statutory duty to examine the financial statements and business reports to be submitted by the Board of Directors at the general meeting of shareholders and also to supervise the administration by the Directors of the Company's affairs. They are entitled to participate in meetings of the Board of Directors but are not entitled to vote. The Corporate Auditors constitute the Board of Corporate Auditors. 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 his opinion in the audit report if his opinion is different from the opinion expressed in the audit report. The Board of Corporate Auditors is empowered to establish audit principles, method of examination by Corporate Auditors of the Company's affairs and financial position and other matters concerning the performance of the Corporate Auditors' duties. The Corporate Auditors may not at the same time be Directors, managers or employees of the Company. Set forth below are the names of Directors and Corporate Auditors after the ordinary general meeting of shareholders held on June 29, 1999, their positions and offices with Matsushita Electric Industrial Co., Ltd., and the periods during which they have served as Director or Corporate Auditor.
Director/ Corporate Name Positions with registrant Auditor since ---- ------------------------- ------------- Masaharu Matsushita Chairman of the Board of Directors 1944 Yoichi Morishita President and Director 1987 Kazuhiko Sugiyama Executive Vice President and Director 1996 Masayuki Matsushita Executive Vice President and Director 1986
45 - 45 -
Director/ Corporate Name Positions with registrant Auditor since ---- ------------------------- ------------- Tsutomu Fukuhara Senior Managing Director 1988 Kunio Nakamura Senior Managing Director 1993 Motoi Matsuda Senior Managing Director 1993 Atsushi Murayama Senior Managing Director 1995 Kazuo Toda Senior Managing Director 1994 Osamu Tanaka Senior Managing Director 1995 Katsuro Sakakibara Managing Director 1992 Seinosuke Kuraku Managing Director 1994 Susumu Ishihara Managing Director 1994 Kazuhiro Mori Managing Director 1999 Yukio Shohtoku Managing Director 1994 Sukeichi Miki Managing Director 1997 Kyonosuke Ibe Director 1979 Josei Ito Director 1994 Tokio Miyao Director 1996 Yoshinori Kobe Director 1996 Yoshitomi Nagaoka Director 1996 Hiroaki Enomoto Director 1996 Seiichi Wakino Director 1997 Yoshio Hino Director 1997 Toshio Sugiura Director 1997 Haruo Ueno Director 1998 Takami Sano Director 1998 Susumu Koike Director 1998 Fumio Otsubo Director 1998 Toru Ishida Director 1999 Yoshiaki Kushiki Director 1999 Tameshige Hirata Director 1999 Kazuo Ichikawa Senior Corporate Auditor 1998 Mamoru Furuichi Senior Corporate Auditor 1997 Masaaki Arai Corporate Auditor 1974 Toshio Miyoshi Corporate Auditor 1994
(b) There are no family relationships between any Director or Corporate Auditor and any other Director or Corporate Auditor of the Company except as described below: Masayuki Matsushita, Executive Vice President and Director is a son of Masaharu Matsushita, Chairman of the Board of Directors. 46 - 46 - Item 11. Remuneration of Directors and Officers -------------------------------------- (a) The aggregate amount of remuneration, including bonuses, paid by the Company during fiscal 1999 to all Directors and Corporate Auditors as a group (42 persons) for services in all capacities was 1,403 million yen. (b) In accordance with customary Japanese business practices, a retiring Director or Corporate Auditor receives a lump-sum retirement payment, which is subject to approval of the general meeting of shareholders. Retirement allowances provided for Directors and Corporate Auditors for fiscal 1999 amounted to 269 million yen. Item 12. Options to Purchase Securities from Registrant or Subsidiaries -------------------------------------------------------------- In May 1998, the Board of Directors decided to implement the Company's first stock option plan for Board members and select senior executives and to purchase the Company's own shares for transfer to them under the plan, pursuant to Article 210-2 of the Japanese Commercial Code. Upon the approval of shareholders at the ordinary general meeting of shareholders held in June 1998 and subsequent Board of Directors' resolutions, the stock options (rights to purchase common shares) were provided to the then 32 Directors on the Board and four select senior executives, at amounts ranging from 2,000 to 10,000 common shares each. The stock options are exercisable from July 1, 2000 to June 30, 2004, at 2,291 yen per common share, the exercise price calculated by a formula approved by shareholders at the said annual shareholders meeting. In order to cover these options the Company in early July 1998 purchased on the Tokyo Stock Exchange a total of 113,000 common shares with an aggregate purchase price of approximately 252 million yen. At the ordinary general meeting of shareholders held in June 1999, the shareholders approved another stock option plan for Board members and select senior executives. As in the previous year, the 32 Directors currently on the Board and four select senior executives were granted stock options at amounts ranging from 2,000 to 10,000 shares each. Under this stock option plan, the stock options are exercisable from July 1, 2001 to June 30, 2005, at 2,476 yen per common share, as determined in the same manner as last year. Shareholders authorized the purchase of Common Stock up to 120,000 shares or a total value not to exceed 350 million yen to cover these options. Item 13. Interest of Management in Certain Transactions ---------------------------------------------- None 47 - 47 - PART II Item 14. Description of Securities to be Registered ------------------------------------------ Not applicable PART III Item 15. Defaults upon Senior Securities ------------------------------- None Item 16. Changes in Securities and Changes in Security for Registered ------------------------------------------------------------ Securities ---------- None 48 - 48 - PART IV Item 17. Financial Statements -------------------- Index of Consolidated Financial Statements of Matsushita Electric Industrial Co., Ltd. and Subsidiaries:
Page number ------ Independent Auditors' Report 49 Consolidated Balance Sheets as of March 31, 1999 and 1998 50 Consolidated Statements of Income for the years ended March 31, 1999, 1998 and 1997 52 Consolidated Statements of Stockholders' Equity for the years ended March 31, 1999, 1998 and 1997 53 Consolidated Statements of Cash Flows for the years ended March 31, 1999, 1998 and 1997 55 Notes to Consolidated Financial Statements 57 Schedule for the years ended March 31, 1999, 1998 and 1997: Schedule VIII Valuation and Qualifying Accounts and Reserves for the years ended March 31, 1999, 1998 and 1997 81
All other schedules are omitted as permitted by the rules and regulations of the Securities and Exchange Commission as the required information is presented in the consolidated financial statements or notes thereto, or the schedules are not applicable. Financial statements of nonconsolidated subsidiaries and affiliates 20% to 50% owned are omitted because none of such subsidiaries and affiliates constitute a significant subsidiary. 49 - 49 - Independent Auditors' Report ---------------------------- The Board of Directors and Stockholders Matsushita Electric Industrial Co., Ltd.: We have audited the consolidated financial statements of Matsushita Electric Industrial Co., Ltd. and subsidiaries as listed in the accompanying index. In connection with our audits of the consolidated financial statements, we also have audited the financial statement schedule as listed in the accompanying index. These consolidated financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. Matsushita Electric Industrial Co., Ltd. and subsidiaries have not applied Statement of Financial Accounting Standards (SFAS) No. 115 in accounting for certain investments in debt and equity securities but have provided the disclosures required by SFAS No. 115 as of March 31, 1999 and 1998, and for each of the years in the three-year period ended March 31, 1999. The effects on the consolidated financial statements of not adopting SFAS No. 115 are summarized in Note 4 of the notes to consolidated financial statements. The segment information required to be disclosed in financial statements under United States generally accepted accounting principles is not presented in the accompanying consolidated financial statements. Foreign issuers are presently exempted from such disclosure requirement in Securities Exchange Act filings with the United States Securities and Exchange Commission. In our opinion, except for the effects of the departure from SFAS No. 115 in accounting for certain investments in debt and equity securities discussed in the third paragraph of this report, and except for the omission of the segment information discussed in the preceding paragraph, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Matsushita Electric Industrial Co., Ltd. and subsidiaries as of March 31, 1999 and 1998, and the results of their operations and their cash flows for each of the years in the three-year period ended March 31, 1999, in conformity with United States generally accepted accounting principles. Also in our opinion, 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. KPMG Osaka, Japan May 18, 1999, except as to Note 16, which is as of June 29, 1999 50 - 50 - MATSUSHITA ELECTRIC INDUSTRIAL CO., LTD. AND SUBSIDIARIES Consolidated Balance Sheets March 31, 1999 and 1998
Yen (millions) ---------------------- Assets 1999 1998 ------ ---- ---- Current assets: Cash and cash equivalents (Note 7) 1,533,585 1,906,226 Short-term investments (Notes 4 and 14) 124,327 130,204 Trade receivables (Note 7): Related companies (Note 3) 22,364 25,245 Notes 98,513 115,213 Accounts 1,264,075 1,271,804 Allowance for doubtful receivables (63,649) (62,742) ---------- ---------- Net trade receivables 1,321,303 1,349,520 ---------- ---------- Inventories (Notes 2 and 7) 1,018,663 1,101,613 Other current assets (Notes 4 and 9) 411,428 437,006 ---------- ---------- Total current assets 4,409,306 4,924,569 ---------- ---------- Noncurrent receivables (Note 5) 276,311 282,838 Investments and advances (Notes 4 and 14): Associated companies (Note 3) 325,658 333,967 Other investments and advances 954,170 995,213 ---------- ---------- Total investments and advances 1,279,828 1,329,180 ---------- ---------- Property, plant and equipment (Note 6): Land 223,040 223,806 Buildings 1,215,986 1,171,255 Machinery and equipment 3,053,600 3,026,070 Construction in progress 70,222 76,411 ---------- ---------- 4,562,848 4,497,542 Less accumulated depreciation 3,069,297 2,975,675 ---------- ---------- Net property, plant and equipment 1,493,551 1,521,867 ---------- ---------- Other assets (Notes 4 and 9) 479,252 505,058 ---------- ---------- 7,938,248 8,563,512 ========== ==========
See accompanying Notes to Consolidated Financial Statements. 51 - 51 - MATSUSHITA ELECTRIC INDUSTRIAL CO., LTD. AND SUBSIDIARIES Consolidated Balance Sheets March 31, 1999 and 1998
Yen (millions) ------------------ Liabilities and Stockholders' Equity 1999 1998 ------------------------------------ ---- ---- Current liabilities: Short-term borrowings, including current portion of long-term debt (Notes 7 and 14) 577,321 887,841 Commercial paper 72,826 138,460 Trade payables: Related companies (Note 3) 16,330 17,784 Notes 48,668 68,028 Accounts 570,353 593,687 --------- --------- Total trade payables 635,351 679,499 --------- --------- Accrued income taxes (Note 9) 84,688 94,585 Accrued payroll 160,568 171,428 Other accrued expenses 563,370 582,255 Deposits and advances from customers 102,242 102,407 Employees' deposits 151,679 150,343 Other current liabilities (Note 4) 242,894 223,400 --------- --------- Total current liabilities 2,590,939 3,030,218 --------- --------- Noncurrent liabilities: Long-term debt (Notes 7 and 14) 709,084 689,581 Retirement and severance benefits (Note 8) 495,175 454,406 Other liabilities (Notes 4 and 9) 915 1,559 --------- --------- Total noncurrent liabilities 1,205,174 1,145,546 --------- --------- Minority interests (Note 4) 609,080 617,634 Stockholders' equity (Note 4): Common stock of 50 yen par value (Notes 7 and 10): Authorized - 5,000,000,000 shares Issued - 2,062,344,774 shares (2,112,318,310 shares in 1998) 209,444 209,416 Capital surplus (Notes 7 and 10) 567,696 570,628 Legal reserve (Note 10) 86,112 84,039 Retained earnings (Note 10) 2,824,820 2,938,539 Accumulated other comprehensive income (loss) (Note 4) (154,765) (32,508) Treasury stock (Notes 10 and 16); 113,000 shares at cost (252) - --------- --------- Total stockholders' equity 3,533,055 3,770,114 Commitments and contingent liabilities (Note 15) --------- --------- 7,938,248 8,563,512 ========= =========
See accompanying Notes to Consolidated Financial Statements. 52 - 52 - MATSUSHITA ELECTRIC INDUSTRIAL CO., LTD. AND SUBSIDIARIES Consolidated Statements of Income Years ended March 31, 1999, 1998 and 1997
Yen (millions) ------------------------------ 1999 1998 1997 ---- ---- ---- Net sales: Related companies (Note 3) 204,339 257,366 291,271 Other 7,435,780 7,633,296 7,384,641 ---------- ---------- ---------- Total net sales 7,640,119 7,890,662 7,675,912 Cost of sales (Note 3) 5,346,914 5,494,746 5,316,390 ---------- ---------- ---------- Gross profit 2,293,205 2,395,916 2,359,522 Selling, general and administrative expenses (Note 12) 2,099,521 2,058,358 1,985,621 ---------- ---------- ---------- Operating profit 193,684 337,558 373,901 Other income (deductions): Interest and dividend income 64,295 68,164 63,111 Interest expense (62,083) (61,573) (66,532) Other, net (Notes 4, 5, 6 and 12) 6,397 11,475 (38,355) ---------- ---------- ---------- 8,609 18,066 (41,776) ---------- ---------- ---------- Income before income taxes 202,293 355,624 332,125 Provision for income taxes (Note 9): Current 152,303 195,948 223,187 Deferred 23,147 38,901 (67,800) ---------- ---------- ---------- 175,450 234,849 155,387 ---------- ---------- ---------- Income before minority interests and equity in earnings (losses) of associated companies 26,843 120,775 176,738 Minority interests 7,632 25,777 44,391 Equity in earnings (losses) of associated companies (Note 3) (5,670) (1,394) 5,506 ---------- ---------- ---------- Net income 13,541 93,604 137,853 ========== ========== ========== Yen ------------------------------------ Net income per depositary share, each representing 10 shares of common stock (Note 11): Basic 65 443 654 Diluted 65 415 606
See accompanying Notes to Consolidated Financial Statements. 53 - 53 - MATSUSHITA ELECTRIC INDUSTRIAL CO., LTD. AND SUBSIDIARIES Consolidated Statements of Stockholders' Equity Years ended March 31, 1999, 1998 and 1997
Yen (millions) ------------------------------ 1999 1998 1997 ---- ---- ---- Common stock: Balance at beginning of year 209,416 208,473 198,706 Conversion of bonds (Notes 10 and 12) 28 943 9,767 ---------- ---------- ---------- Balance at end of year 209,444 209,416 208,473 ========== ========== ========== Capital surplus: Balance at beginning of year 570,628 573,780 562,876 Conversion of bonds (Notes 10 and 12) 28 944 9,765 Transfer of ownership arising on capital transactions by consolidated and associated companies (Note 12) (2,960) (4,096) 1,139 ---------- ---------- ---------- Balance at end of year 567,696 570,628 573,780 ========== ========== ========== Legal reserve: Balance at beginning of year 84,039 81,663 78,817 Transfer from retained earnings (Note 10) 2,073 2,376 2,846 ---------- ---------- ---------- Balance at end of year 86,112 84,039 81,663 ========== ========== ========== Retained earnings: Balance at beginning of year 2,938,539 2,874,763 2,766,060 Net income 13,541 93,604 137,853 Cash dividends (Note 10) (26,304) (27,452) (26,304) Transfer to legal reserve (Note 10) (2,073) (2,376) (2,846) Retirement of treasury stock (Note 10) (98,883) - - ---------- ---------- ---------- Balance at end of year 2,824,820 2,938,539 2,874,763 ========== ========== ========== Accumulated other comprehensive income (loss) (Note 4): Balance at beginning of year (32,508) (42,970) (208,862) Other comprehensive income (loss), net of tax: Translation adjustments (122,257) 10,462 165,892 ---------- ---------- ---------- Balance at end of year (154,765) (32,508) (42,970) ========== ========== ==========
(Continued) 54 - 54 - MATSUSHITA ELECTRIC INDUSTRIAL CO., LTD. AND SUBSIDIARIES Consolidated Statements of Stockholders' Equity Years ended March 31, 1999, 1998 and 1997
Yen (millions) ------------------------------ 1999 1998 1997 ---- ---- ---- Treasury stock: Balance at beginning of year - - - Repurchase of common stock (Note 10) (99,135) - - Retirement of treasury stock (Note 10) 98,883 - - -------- -------- -------- Balance at end of year (Note 16) (252) - - ======== ======== ======== Disclosure of comprehensive income (loss): Net income 13,541 93,604 137,853 Other comprehensive income (loss), net of tax: Translation adjustments (122,257) 10,462 165,892 -------- -------- -------- Total comprehensive income (loss) (Note 4) (108,716) 104,066 303,745 ======== ======== ========
See accompanying Notes to Consolidated Financial Statements. 55 - 55 - MATSUSHITA ELECTRIC INDUSTRIAL CO., LTD. AND SUBSIDIARIES Consolidated Statements of Cash Flows Years ended March 31, 1999, 1998 and 1997
Yen (millions) -------------------------- 1999 1998 1997 ---- ---- ---- Cash flows from operating activities (Note 12): Net income 13,541 93,604 137,853 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 373,155 365,129 349,646 Net gain on sale of investments (14,198) (113,234) (98,554) Provision for doubtful receivables 13,505 20,565 120,604 Deferred income taxes 23,147 38,901 (67,800) Impairment loss on long-lived assets (Note 6) - 88,662 45,800 Minority interests 7,632 25,777 44,391 (Increase) decrease in trade receivables (37,724) 43,046 (125,230) (Increase) decrease in inventories 36,587 (49,299) (9,426) (Increase) decrease in other current assets (21,951) (24,041) (22,096) (Increase) decrease in noncurrent receivables 6,527 (26,413) (28,394) Increase (decrease) in trade payables 2,213 1,175 74,557 Increase (decrease) in accrued income taxes (7,743) (77,003) 75,653 Increase (decrease) in accrued expenses and other current liabilities 29,994 84,834 96,600 Increase (decrease) in retirement and severance benefits 42,231 29,178 34,605 Other 32,235 28,398 6,300 -------- -------- -------- Net cash provided by operating activities 499,151 529,279 634,509 -------- -------- -------- Cash flows from investing activities (Note 12): Proceeds from sale of short-term investments 376,174 488,887 434,186 Purchase of short-term investments (362,062) (348,350) (328,780) Proceeds from disposition of investments and advances 84,014 203,644 247,379 Increase in investments and advances (137,456) (322,790) (408,259) Capital expenditures (359,037) (475,906) (405,595) Other 20,612 23,166 12,836 -------- -------- -------- Net cash used in investing activities (377,755) (431,349) (448,233) -------- -------- --------
(Continued) 56 - 56 - MATSUSHITA ELECTRIC INDUSTRIAL CO., LTD. AND SUBSIDIARIES Consolidated Statements of Cash Flows Years ended March 31, 1999, 1998 and 1997
Yen (millions) ---------------------------------- 1999 1998 1997 ---- ---- ---- Cash flows from financing activities (Note 12): Increase (decrease) in short-term borrowings (100,202) (85,660) 28,353 Increase in deposits and advances from customers and employees 3,441 7,545 4,231 Proceeds from long-term debt 186,717 129,109 228,360 Repayments of long-term debt (388,233) (238,029) (312,385) Dividends paid (26,304) (27,452) (26,304) Dividends paid to minority interests (9,998) (9,232) (8,613) Repurchase of common stock (Note 10) (99,135) - - ---------- ---------- ---------- Net cash used in financing activities (433,714) (223,719) (86,358) ---------- ---------- ---------- Effect of exchange rate changes on cash and cash equivalents (60,323) 7,185 76,133 ---------- ---------- ---------- Net increase (decrease) in cash and cash equivalents (372,641) (118,604) 176,051 Cash and cash equivalents at beginning of year 1,906,226 2,024,830 1,848,779 ---------- ---------- ---------- Cash and cash equivalents at end of year 1,533,585 1,906,226 2,024,830 ========== ========== ==========
See accompanying Notes to Consolidated Financial Statements. 57 - 57 - MATSUSHITA ELECTRIC INDUSTRIAL CO., LTD. AND SUBSIDIARIES Notes to Consolidated Financial Statements March 31, 1999, 1998 and 1997 (1) Summary of Significant Accounting Policies ------------------------------------------ (a) Description of Business Matsushita Electric Industrial Co., Ltd. (hereinafter, the "Company," including consolidated subsidiaries, unless the context otherwise requires) is one of the world's leading producers of electronic and electric products. The Company currently offers a comprehensive range of products, systems and components for consumer, business and industrial use based on sophisticated electronics and precision technology. Most of the Company's products are marketed under several trade names, including "Panasonic," "National," "Technics," "Quasar," "Victor" and "JVC." Sales in fiscal 1999 were categorized as follows: video and audio equipment--25%, home appliances and household equipment--18%, information and communications equipment--28%, industrial equipment--10%, and components--19%. A sales breakdown in fiscal 1999 by geographical market was as follows: Japan--49%, North and South America--20%, Europe--13%, and Asia and Others--18%. The Company is not dependent on a single supplier, and has no significant difficulty in obtaining raw materials from suppliers. (b) Basis of Presentation of Consolidated Financial Statements The Company and its domestic subsidiaries maintain their books of account in conformity with financial accounting standards of Japan, and its foreign subsidiaries in conformity with those of the countries of their domicile. The consolidated financial statements presented herein have been prepared in a manner and reflect the adjustments which are necessary to conform with United States generally accepted accounting principles. (c) Principles of Consolidation (See Note 3) The consolidated financial statements include the accounts of the Company and its subsidiaries. Significant intercompany accounts and transactions have been eliminated on consolidation. Investments in certain associated companies in which the Company's ownership is 20% to 50% are stated at their underlying net equity value after elimination of intercompany profits. 58 - 58 - MATSUSHITA ELECTRIC INDUSTRIAL CO., LTD. AND SUBSIDIARIES Notes to Consolidated Financial Statements The difference between the cost and underlying net equity at acquisition of investments in subsidiaries and associated companies accounted for on an equity basis is allocated to identifiable assets based on fair market value at the date of acquisition. The unallocated portion of the difference, which is recognized as goodwill, is being amortized over a ten- to forty-year period. (d) Revenue Recognition Revenues from sales are recognized when products are shipped to customers. (e) Leases Certain subsidiaries of the Company lease machinery and equipment. Leases of such assets are principally accounted for as direct financing leases and included in "Trade receivables--Accounts" and "Noncurrent receivables" in the accompanying balance sheets. (f) Inventories (See Note 2) Finished goods and work in process are stated at the lower of cost (average) or market. Raw materials are stated at cost, principally on a first-in, first-out basis, not in excess of current replacement cost. (g) Foreign Currency Translation Foreign currency financial statements are translated in accordance with Statement of Financial Accounting Standards (SFAS) No. 52, "Foreign Currency Translation," under which all assets and liabilities are translated into yen at year-end rates and income and expense accounts are translated at weighted average rates. Adjustments resulting from the translation of financial statements are reflected under the caption, "Accumulated other comprehensive income (loss)," a separate component of stockholders' equity. (h) Property, Plant and Equipment Property, plant and equipment is stated at cost. Depreciation is computed primarily using the declining balance method based on the estimated useful lives. 59 - 59 - MATSUSHITA ELECTRIC INDUSTRIAL CO., LTD. AND SUBSIDIARIES Notes to Consolidated Financial Statements (i) Short-term Investments and Investments and Advances (See Note 4) Marketable equity securities included in short-term investments and in investments and advances are carried at the lower of cost or market, cost being determined by the average method. Other items included in short-term investments, primarily marketable securities classified as current assets and those included in investments and advances, are carried at cost or less. In May 1993, the Financial Accounting Standards Board (FASB) issued SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities," applicable for the fiscal year beginning April 1, 1994. This addresses the accounting and reporting for investments in equity securities that have readily determinable fair values and for all investments in debt securities. The Company decided not to apply SFAS No. 115 in the body of its consolidated financial statements in order to maintain comparability to consolidated financial statements prepared in accordance with accounting principles generally accepted in Japan where such debt and equity securities are reported at historical cost. The effects on the consolidated financial statements of not adopting SFAS No. 115 are summarized in Note 4. This treatment was approved by the United States Securities and Exchange Commission. (j) Noncurrent Receivables (See Note 5) Noncurrent receivables are recorded at cost, less the related allowance for impaired receivables. A loan is considered to be impaired when, based on current information and events, it is probable that a creditor will be unable to collect all amounts due according to the contractual terms of the loan agreement. When a loan is considered to be impaired, the amount of impairment is measured based on the present value of expected future cash flows or the fair value of the collateral. Cash receipts on impaired receivables are applied to reduce the principal amount of such receivables until the principal has been recovered and are recognized as interest income, thereafter. (k) Income Taxes (See Note 9) Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Income taxes have not been accrued for undistributed earnings of foreign subsidiaries and associated companies, as these amounts are considered to be reinvested indefinitely. Calculation of the unrecognized deferred tax liability related to these earnings is not practicable. 60 - 60 - MATSUSHITA ELECTRIC INDUSTRIAL CO., LTD. AND SUBSIDIARIES Notes to Consolidated Financial Statements (l) Advertising (See Note 12) Advertising costs are expensed as incurred. (m) Net Income per Depositary Share (See Notes 7, 10 and 11) The Company adopted SFAS No. 128, "Earnings per Share," in the fiscal year beginning April 1, 1997. This Statement establishes standards for computing net income per share and simplifies the standards for computing net income per share previously found in APB Opinion No. 15, "Earnings per Share." It requires dual presentation of basic and diluted net income per share on the face of the income statement for all entities with complex capital structures. All prior year net income per share data presented were restated to conform with the provisions of SFAS No. 128. Under SFAS No. 128, basic net income per share is computed based on the weighted average number of common shares outstanding during each period, and diluted net income per share assumes the dilution that could occur if convertible bonds or similar securities were converted into common stock or exercised to result in the issuance of common stock. (n) Cash Equivalents Cash equivalents include all highly liquid debt instruments purchased with a maturity of three months or less. (o) Derivative Financial Instruments (See Notes 13 and 14) Derivative financial instruments utilized by the Company and its subsidiaries are comprised principally of foreign exchange contracts used to hedge currency risk. Gains and losses on derivatives used to hedge existing assets or liabilities denominated in foreign currencies are recognized in income currently, as are the offsetting foreign exchange gains and losses on the items hedged. Gains and losses related to qualifying hedges of firm commitments denominated in foreign currencies are deferred and recognized in income when the transaction occurs. Derivative financial instruments that do not meet the criteria for hedge accounting are marked to market. 61 - 61 - MATSUSHITA ELECTRIC INDUSTRIAL CO., LTD. AND SUBSIDIARIES Notes to Consolidated Financial Statements (p) Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of (See Note 6) The Company accounts for long-lived assets in accordance with the provisions of SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." This Statement requires that long-lived assets and certain identifiable intangibles be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows (undiscounted and without interest charges) expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceed the fair value of the assets. Assets to be disposed of are reported at the lower of carrying amount or fair value less cost to sell. (q) Comprehensive Income (Loss) The Company adopted SFAS No. 130, "Reporting Comprehensive Income," in the fiscal year beginning April 1, 1998, except for the effects on comprehensive income (loss) of the Company's departure from the provisions of SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities" (See Note 4). Comprehensive income (loss) consists of net income and change in foreign currency translation adjustments, and is presented in the consolidated statements of stockholders' equity. SFAS No. 130 requires only additional disclosures in the consolidated financial statements and does not affect the Company's consolidated financial position or results of operations. Prior years consolidated financial statements have been reclassified to conform with the provisions of SFAS No. 130. (r) Use of Estimates Management of the Company has made a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities to prepare these financial statements in conformity with generally accepted accounting principles. Actual results could differ from those estimates. 62 - 62 - MATSUSHITA ELECTRIC INDUSTRIAL CO., LTD. AND SUBSIDIARIES Notes to Consolidated Financial Statements (s) New Accounting Pronouncements In June 1998, FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," applicable for the fiscal year beginning April 1, 2000. This Statement establishes accounting and reporting standards for derivative instruments and for hedging activities. SFAS No. 133 requires that an entity recognize all derivatives as either assets or liabilities in the balance sheet and measure those instruments at fair value. Changes in the fair value of derivatives are recorded each period in current earnings or other comprehensive income (loss), depending on whether a derivative is designated as part of a hedge transaction and the type of hedge transaction. The ineffective portion of all hedges will be recognized in earnings. The Company has not yet determined the impact that the adoption of SFAS No. 133 will have on the results of operations or financial position. In March 1998, the American Institute of Certified Public Accountants (AICPA) issued Statement of Position (SOP) 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use," applicable for the fiscal year beginning April 1, 1999. SOP 98-1 provides guidance on when costs for internal use computer software should be capitalized or expensed as incurred. The Company does not expect that the adoption will materially affect the results of operations or financial position. (2) Inventories ----------- Inventories at March 31, 1999 and 1998 are summarized as follows:
Yen (millions) ---------------------- 1999 1998 ---- ---- Finished goods 540,173 588,660 Work in process 176,793 193,727 Raw materials 301,697 319,226 --------- --------- 1,018,663 1,101,613 ========= =========
(3) Investments in and Transactions with Associated Companies --------------------------------------------------------- Certain financial information in respect of associated companies at March 31, 1999 and 1998 and for the three years ended March 31, 1999 is shown below. The most significant of these associated companies is Matsushita Electric Works, Ltd. (MEW). At March 31, 1999, the Company has a 32.2% equity ownership in MEW. On December 8, 1997, Universal Studios, Inc. (Universal) issued new shares to the Seagram Company Ltd. As a result, the Company's ownership interest in Universal fell below 20%. The financial information of Universal for fiscal 1998 and thereafter is not included in the following. 63 - 63 - MATSUSHITA ELECTRIC INDUSTRIAL CO., LTD. AND SUBSIDIARIES Notes to Consolidated Financial Statements
Yen (millions) ---------------- 1999 1998 ---- ---- Current assets 945,218 1,092,931 Other assets 1,458,959 1,449,442 --------- --------- 2,404,177 2,542,373 Current liabilities 610,683 697,723 Other liabilities 858,707 846,485 --------- --------- Net assets 934,787 998,165 ========= ========= Company's equity in net assets 262,488 274,823 ========= =========
Yen (millions) ---------------------------------- 1999 1998 1997 ---- ---- ---- Net sales 2,175,672 2,306,649 3,062,556 Gross profit 502,972 553,459 816,730 Net income (loss) (12,807) 23,690 46,217
Purchases and dividends received from associated companies for the three years ended March 31, 1999 are as follows:
Yen (millions) ---------------------------------- 1999 1998 1997 ---- ---- ---- Purchases from 258,881 259,451 257,150 Dividends received 10,995 9,875 6,032
Retained earnings include undistributed earnings of associated companies in the amount of 85,206 million yen and 85,889 million yen, respectively, as of March 31, 1999 and 1998. Investments in associated companies include equity securities which have quoted market values at March 31, 1999 and 1998 compared with related carrying amounts as follows:
Yen (millions) ----------------------------- 1999 1998 ---- ---- Carrying amount 257,924 270,312 Market value 343,236 366,585
64 - 64 - MATSUSHITA ELECTRIC INDUSTRIAL CO., LTD. AND SUBSIDIARIES Notes to Consolidated Financial Statements (4) Short-term Investments and Investments and Advances --------------------------------------------------- As discussed in Note 1(i), the Company does not apply SFAS No. 115 in the body of its consolidated financial statements. The effects on the consolidated financial statements of not adopting SFAS No. 115 are disclosed in this note. SFAS No. 115 requires that certain investments in debt and equity securities be classified as held-to-maturity, trading, or available-for-sale securities. The short-term investments and investments and advances of the Company consist of available-for-sale securities. The consolidated statements of income for the three years ended March 31, 1999 were not materially affected by SFAS No. 115. The effects on balance sheet items of the Company's departure from SFAS No. 115 as of March 31, 1999 and 1998 are summarized as follows:
Yen (millions) --------------- 1999 1998 ---- ---- Stockholders' equity as reported 3,533,055 3,770,114 Net increase in the carrying amount of: Short-term investments 6,596 18,314 Investments and advances 187,639 152,548 Net decrease in deferred tax assets and increase in deferred tax liabilities: Current deferred tax assets (decrease) (2,791) (4,135) Noncurrent deferred tax assets (decrease) (78,545) (72,613) Current deferred tax liabilities (increase) - (4,582) Noncurrent deferred tax liabilities (increase) (69) - Net unrealized gain on securities held by associated companies 3,382 2,892 Net increase in minority interests (7,116) (8,856) --------- --------- Total adjustments to stockholders' equity 109,096 83,568 --------- --------- Stockholders' equity in accordance with U.S. generally accepted accounting principles 3,642,151 3,853,682 ========= =========
65 - 65 - MATSUSHITA ELECTRIC INDUSTRIAL CO., LTD. AND SUBSIDIARIES Notes to Consolidated Financial Statements As a result of the above adjustments, total assets at March 31, 1999 and 1998 would increase by 116,281 million yen and 97,006 million yen, respectively. If the provisions of SFAS No. 115 had been applied, comprehensive loss for the year ended March 31, 1999 would amount to 83,188 million yen, compared with comprehensive income of 41,581 million yen and 181,261 million yen for the years ended March 31, 1998 and 1997, respectively. The carrying amount, fair value, gross unrealized holding gains, and gross unrealized holding losses of available-for-sale securities included in short-term investments and investments and advances at March 31, 1999 and 1998 are as follows:
Yen (millions) ------------------------------------------- 1999 ------------------------------------------- Gross Gross unrealized unrealized Carrying Fair holding holding amount value gains losses --------- ------- ----------- ---------- Current: Equity securities 1,607 8,185 6,578 - Japanese and foreign 80,767 81,002 235 - government bonds Convertible and straight 20,870 20,751 43 162 bonds Investment trust 76 76 - - Other debt securities 21,007 20,909 15 113 ------- ------- ------- --- 124,327 130,923 6,871 275 ======= ======= ======= === Noncurrent: Equity securities 384,417 572,302 187,885 - Japanese and foreign 5,144 5,159 15 - government bonds Convertible and straight 1,351 1,367 16 - bonds Investment trust 85,116 84,830 29 315 Other debt securities 3,130 3,139 9 - ------- ------- ------- --- 479,158 666,797 187,954 315 ======= ======= ======= ===
66 - 66 - MATSUSHITA ELECTRIC INDUSTRIAL CO., LTD. AND SUBSIDIARIES Notes to Consolidated Financial Statements
Yen (millions) -------------------------------------------- 1998 -------------------------------------------- Gross Gross unrealized unrealized Carrying Fair holding holding amount value gains losses -------- ------- ---------- ---------- Current: Equity securities 3,754 21,550 17,796 - Japanese and foreign government bonds 85,783 86,205 470 48 Convertible and straight bonds 16,269 16,258 10 21 Investment trust 102 114 12 - Other debt securities 24,296 24,391 145 50 ------- ------- ------- ---- 130,204 148,518 18,433 119 ======= ======= ======= ==== Noncurrent: Equity securities 396,629 549,462 152,833 - Japanese and foreign government bonds 2,946 2,998 52 - Convertible and straight bonds 1,355 1,375 20 - Investment trust 81,107 80,757 30 380 Other debt securities 4,604 4,597 2 9 ------- ------- ------- ---- 486,641 639,189 152,937 389 ======= ======= ======= ===
Maturities of short-term investments and investments and advances classified as available-for-sale at March 31, 1999 and 1998 are as follows:
Yen (millions) ------------------------------------------- 1999 1998 -------------------- ------------------- Carrying Fair Carrying Fair amount value amount value -------- -------- -------- ------- Due within one year 122,666 122,676 123,396 123,901 Due after one year through five years 94,793 94,554 92,813 92,616 Due after five years 2 3 253 178 Equity securities 386,024 580,487 400,383 571,012 ------- ------- ------- ------- 603,485 797,720 616,845 787,707 ======= ======= ======= =======
67 - 67 - MATSUSHITA ELECTRIC INDUSTRIAL CO., LTD. AND SUBSIDIARIES Notes to Consolidated Financial Statements The change in net unrealized holding gain on available-for-sale securities, net of related taxes and minority interests, for the years ended March 31, 1999, 1998 and 1997 was an increase of 25,528 million yen, a decrease of 62,485 million yen and a decrease of 122,484 million yen, respectively. Proceeds from sale of available-for-sale securities for the years ended March 31, 1999, 1998 and 1997 were 434,082 million yen, 657,449 million yen and 652,504 million yen, respectively. The gross realized gains for the years ended March 31, 1999, 1998 and 1997 were 14,594 million yen, 118,370 million yen and 104,393 million yen, respectively. The gross realized losses for the years ended March 31, 1999, 1998 and 1997 were 396 million yen, 5,136 million yen and 5,839 million yen, respectively. The cost of securities sold in computing gross realized gains and losses is determined by the average cost method. (5) Noncurrent Receivables ---------------------- The recorded investment in noncurrent receivables relating to NL Finance Co., Ltd. (NLF), a financial subsidiary, for which impairment has been recognized at March 31, 1999 and 1998 was 6,829 million yen and 15,343 million yen, respectively. Related allowance for doubtful receivables was not significant at March 31, 1999 and 1998. The average recorded investment in impaired receivables during the years ended March 31, 1999, 1998 and 1997 was 13,126 million yen, 73,954 million yen and 133,225 million yen, respectively. Additions charged to bad debt expenses were not significant for the year ended March 31, 1999, and were 12,249 million yen and 107,302 million yen for the years ended March 31, 1998 and 1997, respectively. Write-downs charged against the allowance were not significant for the year ended March 31, 1999, and were 74,897 million yen and 113,041 million yen for the years ended March 31, 1998 and 1997, respectively. (6) Long-Lived Assets ----------------- As the prices of semiconductors, mainly DRAMs, significantly decreased during fiscal 1998, due to highly competitive market conditions, the Company projected that future business of subsidiaries manufacturing those products would result in a net operating loss. As a result of the comparison of future net cash flows expected to be generated by the machinery and equipment to manufacture those products and their carrying amounts, the Company recognized an impairment loss of 57,290 million yen, included in other (net) of other income (deductions), during fiscal 1998. The Company recognized an impairment loss of 31,372 million yen, included in other (net) of other income (deductions), during fiscal 1998 related to the decline in value of land held. The Company recognized an impairment loss of 45,800 million yen, included in other (net) of other income (deductions), during fiscal 1997 related to the decline in value of real estate held for sale that had been received by NLF in satisfaction of impaired receivables. 68 - 68 - MATSUSHITA ELECTRIC INDUSTRIAL CO., LTD. AND SUBSIDIARIES Notes to Consolidated Financial Statements (7) Long-term Debt and Short-term Borrowings ---------------------------------------- Long-term debt at March 31, 1999 and 1998 is set forth below:
Yen (millions) ---------------- 1999 1998 ---- ---- Convertible bonds, due 1999, interest 1.3% - 198,357 Convertible bonds, due 2002, interest 1.3% 99,010 99,021 Convertible bonds, due 2004, interest 1.4% 98,911 98,917 Convertible bonds issued by subsidiaries, due 1999, 2000, 2002 and 2005, interest 0.35% - 4.3% 66,482 101,725 U.S. dollar unsecured bonds, due 2002, effective interest 5.8% 124,982 124,897 Euro medium-term notes issued by a subsidiary, due 1998, effective interest 5.6% - 5,284 Straight bonds issued by a subsidiary, due 2001-2005, interest 1.38% - 2.15% 20,000 - Unsecured yen loans from banks and insurance companies, principally by financial subsidiaries, due 1998 - 2005, effective interest 1.9% in 1999 and 2.2% in 1998 434,158 421,249 Other long-term debt 53 83 ------- --------- 843,596 1,049,533 Less current portion 134,512 359,952 ------- --------- 709,084 689,581 ======= =========
The aggregate annual maturities and sinking fund requirements of long-term debt after March 31, 1999 are as follows:
Yen (millions) -------------- Year ending March 31: 2000 134,512 2001 148,548 2002 201,423 2003 195,297 2004 121,270
As is customary in Japan, short-term and long-term bank loans are made under general agreements which provide that security and guarantees for future and present indebtedness will be given upon request of the bank, and that the bank shall have the right, as the obligations become due, or in the event of their default, to offset cash deposits against such obligations due to the bank. 69 - 69 - MATSUSHITA ELECTRIC INDUSTRIAL CO., LTD. AND SUBSIDIARIES Notes to Consolidated Financial Statements Each of the loan agreements grants the lender the right to request additional security or mortgages on property, plant and equipment. At March 31, 1999 and 1998, short-term loans subject to such general agreements amounted to 298,942 million yen and 325,109 million yen, respectively. The balance of short-term loans represents borrowings under commercial paper, acceptances and short-term loans of foreign subsidiaries. The weighted average interest rates on short-term borrowings outstanding at March 31, 1999 and 1998 were 4.3% and 5.1%, respectively. Acceptances payable by foreign subsidiaries, in the amount of 794 million yen and 6,580 million yen at March 31, 1999 and 1998, respectively, are secured by a portion of the cash, accounts receivable and inventories of such subsidiaries. The amount of assets pledged is not calculable. The 1.3% convertible bonds maturing in 2002 are redeemable from 1999 at the option of the Company at prices ranging from 102% of principal to 100% of principal, and are currently convertible into approximately 61,117,000 shares of common stock at 1,620 yen per share. The 1.4% convertible bonds maturing in 2004 are redeemable from 2000 at the option of the Company at prices ranging from 103% of principal to 100% of principal, and are currently convertible into approximately 61,056,000 shares of common stock at 1,620 yen per share. The convertible bonds maturing through 2005 issued by subsidiaries are redeemable at the option of the subsidiaries at prices ranging from 106% of principal to 100% of principal near maturity. (8) Retirement and Severance Benefits --------------------------------- Upon retirement or termination of employment for reasons other than dismissal, employees are entitled to lump-sum payments based on the current rate of pay and length of service. If the termination is involuntary or caused by death, the severance payment is greater than in the case of voluntary termination. The plans are not funded. Retirement and severance benefit liabilities in the consolidated balance sheets are stated at the amount of the vested benefit obligation which would exist if all employees voluntarily terminated their employment at that date. Such liability exceeds the projected benefit obligation under the plans. Pension costs charged to income represent benefit payments plus or minus the change in the vested benefit obligation. Pension costs of unfunded benefit pension plans for the years ended March 31, 1999, 1998 and 1997 amounted to 49,306 million yen, 50,522 million yen and 51,714 million yen, respectively. 70 - 70 - MATSUSHITA ELECTRIC INDUSTRIAL CO., LTD. AND SUBSIDIARIES Notes to Consolidated Financial Statements In addition to the plans described above, substantially all employees of the Company and certain subsidiaries are covered by contributory, funded benefit pension plans which include a portion of social security tax calculated in accordance with the Welfare Pension Insurance Law. The Company and certain subsidiaries contribute to the pension funds as well as to the social security tax portion. The employees contribute only to the social security tax portion. The pension funds do not account for participants on an individual basis. Therefore, assets cannot be attributed to each participant. The plans require that the actuarial liability reserve and annual contributions be calculated by the open aggregate cost method for social security tax under the Welfare Pension Insurance Law and by the open aggregate cost method or the entry-age method for the companies. Pension costs excluding the social security tax portion for the years ended March 31, 1999, 1998 and 1997 amounted to 79,570 million yen, 60,071 million yen and 37,935 million yen, respectively. The Company decided not to apply accounting for Single-Employer Defined Benefit Pension Plans under SFAS No. 87 for those funded benefit pension plans as the effects on the consolidated financial statements of the implementation of SFAS No. 87 are immaterial. However, the following table summarizes the funded status based on the actuarial funding method for the contributory benefit pension plans of the Company at March 31, 1998 and 1997 with the latest information available:
Yen (millions) ------------------- 1998 1997 ---- ---- Liability reserve 1,051,132 846,705 Fair value of plan assets, primarily marketable securities and loans 1,058,554 850,072 --------- ------- Fair value of plan assets greater than the liability reserve 7,422 3,367 ========= =======
The assumed rates of salary increase, expected long-term rate of return and discount rate for the above contributory pension plans were 2.7%~3.9%, 5.5% and 5.5%, respectively. The contributions to these plans for the years ended March 31, 1998 and 1997 for the portion of social security tax were 26,623 million yen and 22,756 million yen, respectively. Approximately half of the portion of social security tax was contributed by the employees and half was contributed by the companies. The balance of past service costs in the amount of 20,587 million yen as of March 31, 1998 is being amortized over a seven- to ten-year period. Contributions to amortize the past service costs for the years ended March 31, 1998 and 1997 totaled 6,808 million yen and 2,576 million yen, respectively. The companies are not required by regulation to report the actuarially computed value of vested benefits, and such information, therefore, is not presented. 71 - 71 - MATSUSHITA ELECTRIC INDUSTRIAL CO., LTD. AND SUBSIDIARIES Notes to Consolidated Financial Statements (9) Income Taxes ------------ Income before income taxes and income taxes for the three years ended March 31, 1999 are summarized as follows:
Yen (millions) ------------------------------ Domestic Foreign Total -------- ------- ----- 1999: Income before income taxes 153,047 49,246 202,293 Income taxes: Current 117,925 34,378 152,303 Deferred 26,881 (3,734) 23,147 ------- ------ ------- Total income taxes 144,806 30,644 175,450 ======= ====== ======= 1998: Income before income taxes 258,582 97,042 355,624 Income taxes: Current 160,275 35,673 195,948 Deferred 43,252 (4,351) 38,901 ------- ------ ------- Total income taxes 203,527 31,322 234,849 ======= ====== ======= 1997: Income before income taxes 234,255 97,870 332,125 Income taxes: Current 193,369 29,818 223,187 Deferred (61,838) (5,962) (67,800) ------- ------ ------- Total income taxes 131,531 23,856 155,387 ======= ====== =======
For the years ended March 31, 1999 and 1998, domestic income taxes, deferred include the impact of 61,123 million yen and 37,423 million yen, respectively, attributable to adjustments of net deferred tax assets to reflect reductions in Japan's corporate income tax rate. 72 - 72 - MATSUSHITA ELECTRIC INDUSTRIAL CO., LTD. AND SUBSIDIARIES Notes to Consolidated Financial Statements The Company and its subsidiaries are subject to a number of taxes based on earnings which, in aggregate, resulted in an average normal tax rate of approximately 47.6% for the year ended March 31, 1999, and 51.2% for the two years ended March 31, 1998. The effective rates for the years differ from the normal tax rates for the following reasons:
1999 1998 1997 ---- ---- ---- Normal tax rate 47.6% 51.2% 51.2% Tax credit for increased research expenses (0.9) (1.0) (1.7) Lower tax rates of overseas subsidiaries (9.6) (1.3) (4.9) Expenses not deductible for tax purposes 7.6 4.3 5.1 Change in valuation allowance allocated to income tax expenses 6.8 (1.7) (4.3) Adjustments of deferred tax assets and liabilities for enacted changes in tax laws and rates 30.2 10.5 - Other 5.0 4.0 1.4 ---- ---- ---- Effective tax rate 86.7% 66.0% 46.8% ==== ==== ====
The significant components of deferred income tax expenses for the three years ended March 31, 1999 are as follows:
Yen (millions) ---------------------- 1999 1998 1997 ---- ---- ---- Deferred tax expense (exclusive of the effects of other components listed below) (51,821) 7,342 (53,476) Adjustments of deferred tax assets and liabilities for enacted changes in tax laws and rates 61,123 37,423 - Increase (decrease) in the balance of valuation allowance for deferred tax assets 13,845 (5,864) (14,324) ------ ------ ------- 23,147 38,901 (67,800) ====== ====== =======
73 - 73 - MATSUSHITA ELECTRIC INDUSTRIAL CO., LTD. AND SUBSIDIARIES Notes to Consolidated Financial Statements The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at March 31, 1999 and 1998 are presented below:
Yen (millions) ----------------- 1999 1998 ------- ------- Deferred tax assets: Inventory valuation 83,516 92,636 Expenses accrued for financial statement purposes but not currently included in taxable income 132,477 146,890 Depreciation 121,689 143,741 Retirement and severance benefits 108,194 93,882 Tax loss carryforwards 62,864 52,006 Other 85,502 93,046 ------- ------- Total gross deferred tax assets 594,242 622,201 Less valuation allowance 38,275 39,612 ------- ------- Net deferred tax assets 555,967 582,589 Deferred tax liabilities: Purchase accounting step-up of identifiable assets (2,761) (3,082) Other (29,316) (30,348) ------- ------- Total gross deferred tax liabilities (32,077) (33,430) ------- ------- Net deferred tax assets 523,890 549,159 ======= =======
The net change in total valuation allowance for the years ended March 31, 1999 and 1998 was a decrease of 1,337 million yen and 15,407 million yen, respectively. At March 31, 1999, certain subsidiaries had, for tax reporting purposes, net operating loss carryforwards of approximately 159,031 million yen, which will generally expire between 2000 and 2014. 74 - 74 - MATSUSHITA ELECTRIC INDUSTRIAL CO., LTD. AND SUBSIDIARIES Notes to Consolidated Financial Statements Net deferred tax assets and liabilities at March 31, 1999 and 1998 are reflected in the accompanying consolidated balance sheets under the following captions:
Yen (millions) ----------------- 1999 1998 ---- ---- Other current assets 251,189 263,560 Other assets 273,616 287,158 Other liabilities (915) (1,559) -------- -------- Net deferred tax assets 523,890 549,159 ======== ========
(10) Stockholders' Equity -------------------- In accordance with the Japanese Commercial Code, at least 50% of the amount of converted debt must be credited to the common stock account. The Company issued 26,464 shares, 1,161,459 shares and 13,441,895 shares in connection with the conversion of bonds for the three years ended March 31, 1999, respectively. For the year ended March 31, 1999, 50,000,000 shares of the Company's common stock were repurchased from the market and retired for an aggregate cost of 98,883 million yen. The entire repurchase cost of retired shares was charged to retained earnings in accordance with the Japanese Commercial Code. The Japanese Commercial Code provides that an amount equal to at least 10% of appropriations paid in cash be appropriated as a legal reserve until such reserve equals 25% of stated capital. This reserve is not available for dividends but may be used to reduce a deficit or may be transferred to stated capital. Cash dividends and transfers to the legal reserve charged to retained earnings during the three years ended March 31, 1999 represent dividends paid out during the periods and related appropriation to the legal reserve. The accompanying consolidated financial statements do not include any provision for the semi-annual dividend of 7.75 yen per share, totaling 15,982 million yen, planned to be proposed in June 1999 in respect of the year ended March 31, 1999 or for the related appropriation. 75 - 75 - MATSUSHITA ELECTRIC INDUSTRIAL CO., LTD. AND SUBSIDIARIES Notes to Consolidated Financial Statements (11) Net Income per Depositary Share ------------------------------- A reconciliation of the numerators and denominators of the basic and diluted net income per depositary share computation for the three years ended March 31, 1999 is as follows:
Yen (millions) ------------------------- 1999 1998 1997 ---- ---- ---- Net income available to common stockholders 13,541 93,604 137,853 Effect of assumed conversions: Convertible bonds, due 1999, interest 1.3% - 1,259 1,259 Convertible bonds, due 2002, interest 1.3% - 629 634 Convertible bonds, due 2004, interest 1.4% - 676 683 Others - - 1 ------ ------ ------- Diluted net income 13,541 96,168 140,430 ====== ====== =======
Number of shares ---------------------------------- 1999 1998 1997 ---- ---- ---- Average common shares outstanding 2,089,988,449 2,112,052,091 2,108,067,837 Dilutive effect of assumed conversions: Convertible bonds, due 1999, interest 1.3% - 81,285,840 81,289,186 Convertible bonds, due 2002, interest 1.3% - 61,267,028 61,666,616 Convertible bonds, due 2004, interest 1.4% - 61,181,174 61,712,449 Others - - 3,122,125 ------------- ------------- ------------- Diluted common shares outstanding 2,089,988,449 2,315,786,133 2,315,858,213 ============= ============= =============
Yen -------------------------------- 1999 1998 1997 ---- ---- ---- Net income per depositary share: Basic 65 443 654 Diluted 65 415 606
Approximately 197 million of the potential common shares were excluded from the computation of diluted net income per share for the year ended March 31, 1999, because their inclusion would have had an antidilutive effect on net income per share. 76 - 76 - MATSUSHITA ELECTRIC INDUSTRIAL CO., LTD. AND SUBSIDIARIES Notes to Consolidated Financial Statements (12) Supplementary Information to the Statements of Income and Cash Flows -------------------------------------------------------------------- Research and development costs and advertising costs charged to income for the three years ended March 31, 1999 are as follows:
Yen (millions) ----------------------------- 1999 1998 1997 ---- ---- ---- Research and development costs 499,986 480,539 434,874 Advertising costs 128,285 125,774 117,222
Included in other (net) of other income (deductions) for the year ended March 31, 1999 is a loss of 11,277 million yen related to liquidation of a U.S. joint venture for production of computer peripherals components. Included in other (net) of other income (deductions) for the year ended March 31, 1998 are foreign exchange losses of 25,086 million yen. Foreign exchange gains and losses included in the consolidated statements of income for the years ended March 31, 1999 and 1997 were not significant. Included in other (net) of other income (deductions) for the year ended March 31, 1997 is a loss of 107,302 million yen associated with impaired receivables of NLF, a financial subsidiary. Income taxes and interest expenses paid and noncash investing and financing activities for the three years ended March 31, 1999 are as follows:
Yen (millions) ------------------------- 1999 1998 1997 ------- ------- ------- a) Cash paid: Interest 70,672 77,254 86,244 Income taxes 160,046 272,951 147,534 b) Noncash investing and financing activities: Conversion of bonds 56 1,887 19,532 Transfer of ownership arising on capital transactions by consolidated and associated companies 2,960 4,096 1,139
77 - 77 - MATSUSHITA ELECTRIC INDUSTRIAL CO., LTD. AND SUBSIDIARIES Notes to Consolidated Financial Statements (13) Foreign Exchange Contracts -------------------------- The Company and its subsidiaries operate internationally, giving rise to significant exposure to market risks arising from changes in foreign exchange rates. Derivative financial instruments are comprised principally of foreign exchange contracts utilized by the Company and some of its subsidiaries to hedge these risks. The Company and its subsidiaries do not hold or issue financial instruments for trading purposes. The Company and its subsidiaries are exposed to credit risk in the event of nonperformance by counterparties to foreign exchange contracts, but such risk is considered minor because of the high credit rating of the counterparties. The contract amounts of foreign exchange contracts at March 31, 1999 and 1998 are as follows:
Yen (millions) ------------------- 1999 1998 ---- ---- Forward: To sell foreign currencies 312,453 419,806 To buy foreign currencies 62,371 132,567 Options purchased to sell foreign currencies 3,670 7,620 Options purchased to buy foreign currencies - 2,378 Options written to buy foreign currencies 3,873 -
The Company and its subsidiaries enter into forward exchange contracts and options to hedge firm commitments expected to be denominated in foreign currencies, principally U.S. dollars. The terms of these foreign exchange contracts rarely extend beyond a few months. (14) Fair Value of Financial Instruments ----------------------------------- The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value: Cash and cash equivalents, Trade receivables, Short-term borrowings, Trade payables and Accrued expenses The carrying amount approximates fair value because of the short maturity of these instruments. Short-term investments The fair value of short-term investments is estimated based on quoted market prices. 78 - 78 - MATSUSHITA ELECTRIC INDUSTRIAL CO., LTD. AND SUBSIDIARIES Notes to Consolidated Financial Statements Noncurrent receivables The carrying amount which is generally stated at the net realizable value approximates fair value. Investments and advances The fair value of investments and advances is estimated based on the quoted market prices or the present value of future cash flows using appropriate current discount rates. Long-term debt The fair value of long-term debt is estimated based on the quoted market prices or the present value of future cash flows using appropriate current discount rates. Derivative financial instruments The fair value of derivative financial instruments, consisting principally of foreign exchange contracts, all of which are used for hedging purposes, are estimated by obtaining quotes from brokers. The estimated fair values of financial instruments, all of which are held or issued for purposes other than trading, at March 31, 1999 and 1998 are as follows:
Yen (millions) --------------------------------------------- 1999 1998 ------------------- ----------------------- Carrying Fair Carrying Fair amount value amount value -------- -------- ---------- ---------- Non-derivatives: Assets: Short-term investments 124,327 130,923 130,204 148,518 Investments and advances 799,937 988,304 806,756 959,564 Liabilities: Long-term debt, including current portion (838,879) (937,636) (1,056,366) (1,140,043) Derivatives relating to long-term debt, including current portion (4,717) (4,888) 6,833 12,077
Limitations Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instruments. These estimates are subjective in nature and involve uncertainties and matters of significant judgments and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates. 79 - 79 - MATSUSHITA ELECTRIC INDUSTRIAL CO., LTD. AND SUBSIDIARIES Notes to Consolidated Financial Statements (15) Commitments and Contingent Liabilities -------------------------------------- At March 31, 1999, commitments outstanding for the purchase of property, plant and equipment approximated 17,838 million yen. Contingent liabilities at March 31, 1999 for discounted export bills of exchange and guarantees of loans amounted to approximately 85,691 million yen, including 62,898 million yen for loans guaranteed principally on behalf of associated companies and customers. There are a number of legal actions against the Company and certain subsidiaries. Management is of the opinion that damages, if any, resulting from these actions will not have a material effect on the Company's consolidated financial statements. (16) Stock Option Plans ------------------ The Company's option rights were allotted to 32 directors and four senior executives on July 1, 1998, at amounts ranging from 2,000 to 10,000 common shares each. The stock option rights are exercisable from July 1, 2000, to June 30, 2004. Shares repurchased for this purpose were in aggregate to 113,000 common shares or approximately 252 million yen in value for the year ended March 31, 1999. The Company applies Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations in accounting for its Stock Option Plans described above. Accordingly, as the option price at the date of the grant exceeded the fair market value of common shares, no compensation cost has been recognized in connection with the Plan. If the accounting provisions of SFAS No. 123, "Accounting for Stock-Based Compensation" had been adopted, the impact on the Company's net income for the year ended March 31, 1999 would not be material. The effects of applying this statement for either recognizing compensation cost or pro forma disclosures may not be representative of the effects on reported net income for future years. In accordance with the Japanese Commercial Code, there are certain restrictions on payment of dividends in connection with treasury stock repurchased for stock options. As a result of restrictions on the treasury stock repurchased for stock options, retained earnings of approximately 252 million yen as of March 31, 1999 are restricted as to the payment of cash dividends. On June 29, 1999, the annual shareholders' meeting approved that the Company's stock option rights would be allotted to 32 directors and four senior executives at amounts ranging from 2,000 to 10,000 common shares each. This stock option rights are exercisable from July 1, 2001, to June 30, 2005. Share purchases for this purpose will be limited in aggregate to 120,000 common shares or 350 million yen in value. 80 - 80 - MATSUSHITA ELECTRIC INDUSTRIAL CO., LTD. AND SUBSIDIARIES Notes to Consolidated Financial Statements (17) Quarterly Financial Data (Unaudited) ------------------------------------ Quarterly net sales, net income (loss) and net income (loss) per depositary share for the two years ended March 31, 1999 are set forth in the following table:
Yen (millions), except per share information -------------------------------------------------------- 1999 -------------------------------------------------------- Net income Net income Net (loss) per (loss) per Net income depositary share: depositary share: sales (loss) basic (yen) diluted (yen) --------- ------ ----------------- ----------------- Quarter ended ------------- June 30 1,875,846 11,116 53 51 September 30 2,015,996 (1,608) (8) (8) December 31 1,938,354 20,295 98 92 March 31 1,809,923 (16,262) (79) (79)
Yen (millions), except per share information ------------------------------------------------------- 1998 ------------------------------------------------------- Net income Net income Net (loss) per (loss) per Net income depositary share: depositary share: sales (loss) basic (yen) diluted (yen) --------- ------ ----------------- ----------------- Quarter ended ------------- June 30 1,892,648 26,291 125 116 September 30 2,005,925 30,912 146 136 December 31 2,082,879 38,996 184 171 March 31 1,909,210 (2,595) (12) (8)
For the quarters ended March 31, 1999 and 1998, net loss includes the impact of 52,768 million yen and 33,259 million yen, respectively, attributable to adjustments of net deferred tax assets to reflect reductions in Japan's corporate income tax rate. 81 - 81 - Schedule VIII ------------- MATSUSHITA ELECTRIC INDUSTRIAL CO., LTD. AND SUBSIDIARIES Valuation and Qualifying Accounts and Reserves (In millions of yen) Years ended March 31, 1999, 1998 and 1997
Deduct ----------------- Balance Add at Add- Bad (deduct) Balance beginning charged debts -cumulative at end of to written translation of period income off Reversal adjustments period --------- ------- ------- -------- ----------- ------- Allowance for doubtful trade receivables: 1999 62,742 13,505 8,781 2,454 (1,363) 63,649 1998 60,810 8,316 4,824 1,240 (320) 62,742 1997 53,826 13,302 6,887 956 1,525 60,810 Allowance for doubtful noncurrent receivables: 1999 523 - 219 - - 304 1998 63,171 12,249 74,897 - - 523 1997 68,910 107,302 113,041 - - 63,171
82 - 82 - Item 19. Financial Statements and Exhibits --------------------------------- (a) Financial Statements The following financial statements and schedules are filed in Part IV, Item 17 of this report: Consolidated Financial Statements of Matsushita Electric Industrial Co., Ltd. and Consolidated Subsidiaries:
Page number ------ Independent Auditors' Report 49 Consolidated Balance Sheets as of March 31, 1999 and 1998 50 Consolidated Statements of Income for the years ended March 31, 1999, 1998 and 1997 52 Consolidated Statements of Stockholders' Equity for the years ended March 31, 1999, 1998 and 1997 53 Consolidated Statements of Cash Flows for the years ended March 31, 1999, 1998 and 1997 55 Notes to Consolidated Financial Statements 57 Schedule for the years ended March 31, 1999, 1998 and 1997: Schedule VIII Valuation and Qualifying Accounts and Reserves for the years ended March 31, 1999, 1998 and 1997 81
(b) Exhibits ARTICLES OF INCORPORATION as amended on June 29, 1999 (English translation) 83 - 83 - SIGNATURES ---------- Pursuant to the requirements of Section 12 of the Securities Exchange Act of 1934, the Company certifies that it meets all of the requirements for filing on Form 20-F and has duly caused this annual report to be signed on its behalf by the undersigned, thereunto duly authorized. MATSUSHITA ELECTRIC INDUSTRIAL CO., LTD. ---------------------------------------- (Registrant) Date: July 30, 1999 By /s/ Shigeru Nakatani ------------------------------------- Shigeru Nakatani President of Panasonic Finance (America), Inc. 375 Park Avenue New York, N.Y. 10152 EX-3 2 ARTICLES OF INCORPORATION 1 Exhibit - ------- (TRANSLATION) ARTICLES OF INCORPORATION (Amended on June 29, 1999) MATSUSHITA ELECTRIC INDUSTRIAL CO., LTD. 2 - 1 - (TRANSLATION) ARTICLES OF INCORPORATION OF MATSUSHITA ELECTRIC INDUSTRIAL CO., LTD. (Matsushita Denki Sangyo Kabushiki Kaisha) CHAPTER I GENERAL PROVISIONS ARTICLE 1. (Trade Name) The Company shall be called Matsushita Denki Sangyo Kabushiki Kaisha, and written in English as Matsushita Electric Industrial Co., Ltd. ARTICLE 2. (Principal Office) The principal office of the Company shall be located in Kadoma City, Osaka-fu. ARTICLE 3. (Purpose) The purpose of the Company shall be to engage in the following businesses: 1. manufacture and sale of electric machinery and equipment, communication and electronic equipment, as well as lighting equipment; 2. manufacture and sale of gas, kerosene and kitchen equipment, as well as machinery and equipment for building and housing; 3. manufacture and sale of machinery and equipment for office and transportation, as well as for sales activities; 4. manufacture and sale of medical, health and hygienic equipment, apparatus and material; 5. manufacture and sale of optical and precision machinery and equipment; 6. manufacture and sale of batteries, battery-operated products, carbon and manganese and other chemical and metal products; 7. manufacture and sale of air conditioning and anti-pollution equipment, as well as industrial machinery and equipment; 8. manufacture and sale of other machinery and equipment; 3 - 2 - 9. engineering and installation of machinery and equipment related to any of the preceding items as well as engineering and performance of and contracting for other construction work; 10. production and sale of software; 11. sale of iron and steel, nonferrous metals, minerals, oil, gas, ceramics, paper, pulp, rubber, leather, fibre and their products; 12. sale of foods, beverages, liquor and other alcoholics, agricultural, livestock, dairy and marine produces, animal feed and their raw materials; 13. manufacture and sale of drugs, quasi-drugs, cosmetics, fertilizer, poisonous and deleterious substance and other chemical products; 14. sale of woods and other construction materials and general merchandise; 15. motion picture and musical entertainment business and promotion of sporting events; 16. export and import of products, materials and software mentioned in each of the preceding items (other than item 9); 17. providing repair and maintenance services for the products, goods and software mentioned in each of the preceding items for itself and on behalf of others; 18. provision of information and communication services, and broadcasting business; 19. business related to publishing, printing, freight forwarding, security, maintenance of buildings, dispatch of workers, general leasing, financing, non-life insurance agency and buying, selling, maintaining and leasing of real estate; 20. investment in various businesses; 21. accepting commission for investigations, research, development and consulting related to any of the preceding items; and 22. all other business or businesses incidental or related to any of the preceding items. ARTICLE 4. (Method of Public Notice) Public notices of the Company shall be given in the "Asahi Shimbun" published in Osaka City. 4 - 3 - CHAPTER II SHARES ARTICLE 5. (Total Number of Shares and Par Value of Each Share) The total number of shares authorized to be issued by the Company shall be four billion nine hundred and fifty million (4,950,000,000). The amount of each share having par value shall be fifty yen (yen50). ARTICLE 6. (Retirement of Shares) After June 26, 1998, the Company may, by a resolution of the Board of Directors, purchase up to two hundred million (200,000,000) of the Company's shares with profits and retire them. ARTICLE 7. (Number of Shares Constituting One Unit of Shares) The number of shares constituting one unit of shares shall be one thousand (1,000). ARTICLE 8. (Record Date) The Company shall deem those shareholders (including beneficial shareholders; hereinafter the same interpretation being applicable) having voting rights whose names are registered as such on the register of shareholders (including register of beneficial shareholders; hereinafter the same interpretation being applicable) as of the end of each fiscal period as the shareholders entitled to exercise their rights as shareholders at the ordinary general meeting of shareholders for such fiscal period. In addition to the preceding paragraph, the Company shall, by a resolution of the Board of Directors and upon giving prior public notice, determine those shareholders and registered pledgees whose names appear as such on the register of shareholders as of a designated date as the shareholders or pledgees entitled to exercise their rights. ARTICLE 9. (Transfer Agent) The Company shall appoint a transfer agent with respect to shares. The transfer agent and its handling office shall be designated by a resolution of the Board of Directors, and public notice shall be given with regard thereto. The register of shareholders of the Company shall be kept at the handling office of the transfer agent, and the handling business related to shares, such as registration of transfer of shares, purchase by the Company of shares not constituting a full unit, etc., shall be handled by the transfer agent and the Company shall not handle such business. 5 - 4 - ARTICLE 10. (Share Handling Regulations) Registration of transfers of shares, purchase by the Company of shares constituting less than one unit of shares and other handling business related to shares of the Company shall be governed by, in addition to these Articles of Incorporation, the Share Handling Regulations established by the Board of Directors. CHAPTER III GENERAL MEETINGS OF SHAREHOLDERS ARTICLE 11. (Convocation) An ordinary general meeting of shareholders of the Company shall be convened within three (3) months from the day immediately following the day on which the accounts are closed, and an extraordinary general meeting of shareholders may be convened whenever necessary. ARTICLE 12. (Chairman of General Meetings of Shareholders) Chairmanship of general meetings of shareholders shall be assumed by the President. Should the President be unable to act, one of the other Representative Directors shall take his/her place as previously determined by the Board of Directors. ARTICLE 13. (Method of Adopting Resolutions) Unless otherwise provided by laws or orders or by these Articles of Incorporation, resolutions of general meetings of shareholders shall be adopted by a majority of the votes of shareholders present or represented at the meeting. ARTICLE 14. (Exercise of Voting Rights through Proxy) A shareholder may exercise his/her voting rights through a proxy who is also a shareholder of the Company entitled to exercise voting rights; provided, however, that the proxy must submit to the Company a power of attorney authorizing such proxy. CHAPTER IV DIRECTORS AND BOARD OF DIRECTORS ARTICLE 15. (Number of Directors) The number of Directors of the Company shall be three (3) or more. 6 - 5 - ARTICLE 16. (Election of Directors) Directors shall be elected at a general meeting of shareholders. Resolutions for such election shall be adopted by a majority of the votes of the shareholders present who hold shares representing in the aggregate not less than one-third of the total outstanding shares which carry voting rights. No cumulative voting shall be used with respect to the resolutions for the election of Directors. ARTICLE 17. (Representative Directors and Directors with Special Titles) The Company may, by a resolution of the Board of Directors, appoint from among the Directors one Chairman of the Board of Directors, one Vice Chairman of the Board of Directors, one President, and one or more Executive Vice Presidents, Senior Managing Directors and Managing Directors. The Chairman of the Board of Directors, the Vice Chairman of the Board of Directors, the President, Executive Vice Presidents, Senior Managing Directors and Managing Directors shall severally represent the Company. ARTICLE 18. (Terms of Office of Directors) The terms of office of Directors shall expire at the conclusion of the ordinary general meeting of shareholders with respect to the last closing of accounts within two (2) years from their assumption of office. The term of office of a Director elected to fill a vacancy shall expire at the time his/her predecessor's full term of office would have expired. ARTICLE 19. (Remuneration and Retirement Allowances for Directors) Remuneration and retirement allowances for Directors shall be determined at a general meeting of shareholders. ARTICLE 20. (Notice of Convocation of a Meeting of Board of Directors) Notice of convocation of a meeting of the Board of Directors shall be dispatched to each Director and Corporate Auditor three (3) days in advance of the date set for the meeting; provided, however, that in case of urgency this period may be shortened. ARTICLE 21. (Regulations of Board of Directors) Matters to be resolved by the Board of Directors and any other details concerning the Board of Directors shall be governed by the Regulations of the Board of Directors established by the Board of Directors. 7 - 6 - CHAPTER V CORPORATE AUDITORS AND BOARD OF CORPORATE AUDITORS ARTICLE 22. (Number of Corporate Auditors) The number of Corporate Auditors of the Company shall be three (3) or more. ARTICLE 23. (Election of Corporate Auditors) Corporate Auditors shall be elected at a general meeting of shareholders. Resolutions for such election shall be adopted by a majority of the votes of the shareholders present who hold shares representing in the aggregate not less than one-third of the total outstanding shares which carry voting rights. ARTICLE 24. (Full-time Corporate Auditors and Senior Corporate Auditors) The Company shall appoint one or more Full-time Corporate Auditor(s) who shall be selected by the Corporate Auditors from among their number. The Company may appoint one or more Senior Corporate Auditor(s) who shall be selected by the Corporate Auditors from among their number. ARTICLE 25. (Terms of office of Corporate Auditors) The terms of office of Corporate Auditors shall expire at the conclusion of the ordinary general meeting of shareholders with respect to the last closing of accounts within three (3) years from their assumption of office. The term of office of a Corporate Auditor elected to fill a vacancy shall expire at the time his/her predecessor's full term of office would have expired. ARTICLE 26. (Remuneration and Retirement Allowances for Corporate Auditors) Remuneration and retirement allowances for Corporate Auditors shall be determined at a general meeting of shareholders. ARTICLE 27. (Notice of Convocation of a Meeting of Board of Corporate Auditors) Notice of convocation of a meeting of the Board of Corporate Auditors shall be dispatched to each Corporate Auditor three (3) days in advance of the date set for the meeting; provided, however, that in case of urgency this period may be shortened. 8 - 7 - ARTICLE 28. (Regulations of Board of Corporate Auditors) Matters to be resolved by the Board of Corporate Auditors and any other details concerning the Board of Corporate Auditors shall be governed by the Regulations of the Board of Corporate Auditors established by the Board of Corporate Auditors. CHAPTER VI ACCOUNTS ARTICLE 29. (Fiscal Year and Closing of Accounts) The fiscal year of the Company shall commence on April 1 each year and end on March 31 the next following year and the accounts shall be closed on the last day of each fiscal year. ARTICLE 30. (Dividends) Dividends of the Company shall be paid to those shareholders or registered pledgees whose names appear as such on the register of shareholders at the end of each fiscal period. ARTICLE 31. (Interim Dividends) The Company may, by a resolution of the Board of Directors, pay interim dividends (cash distributions as provided in Article 293-5 of the Commercial Code; hereinafter the same being applicable) to those shareholders or registered pledgees whose names appear as such on the register of shareholders as of the close of September 30 of each year. ARTICLE 32. (Expiration Period for Dividends and Interim Dividends) In case dividends or interim dividends shall not be received within three (3) years from the commencement of payment thereof, the Company shall be relieved from the obligation for the payment thereof. Dividends and interim dividends shall bear no interest. ARTICLE 33. (Timing of Conversion of Convertible Debentures and Dividends) With respect to the first payment of dividends on shares issued upon conversion of convertible debentures, such conversion shall be deemed to have been made at the beginning of the business year in which the application for conversion was made and the dividends shall be paid accordingly. For the purpose of the application of the above provisions, the interim dividends pursuant to the provisions of Article 31 shall be deemed as the dividends and each of the periods from April 1 to September 30 and from October 1 to March 31 of the next following year shall be deemed a business year respectively. 9 - 8 - CHAPTER VII MISCELLANEOUS RULES ARTICLE 34. (Transfer Agent of Bonds or Debentures) The Company shall appoint a transfer agent or agents in respect to bonds or debentures issued by the Company. -----END PRIVACY-ENHANCED MESSAGE-----