-----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, I5uPN4ZjQGwHLA7/bEWIoibplVt0b8MdxXaXPO++3YHh92JRQZt2qJQoAEkkiPYF LpBs+tIslFPEPp+H1SJguw== 0001145549-02-000196.txt : 20020806 0001145549-02-000196.hdr.sgml : 20020806 20020806082434 ACCESSION NUMBER: 0001145549-02-000196 CONFORMED SUBMISSION TYPE: 20-F PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20020331 FILED AS OF DATE: 20020806 FILER: COMPANY DATA: COMPANY CONFORMED NAME: NEC CORP CENTRAL INDEX KEY: 0000072127 STANDARD INDUSTRIAL CLASSIFICATION: COMPUTER & OFFICE EQUIPMENT [3570] IRS NUMBER: 000000000 STATE OF INCORPORATION: M0 FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 20-F SEC ACT: 1934 Act SEC FILE NUMBER: 000-12713 FILM NUMBER: 02720152 BUSINESS ADDRESS: STREET 1: 7 1 SHIBA 5 CHOME MINATO KU STREET 2: MINATO-KU, TOKYO 108-8001 CITY: JAPAN STATE: M0 ZIP: 00000 BUSINESS PHONE: 01181337986535 MAIL ADDRESS: STREET 1: 7 1 SHIBA 5 CHOME MINATO KU STREET 2: MINATO-KU, TOKYO 108-8001 CITY: JAPAN STATE: M0 ZIP: 00000 FORMER COMPANY: FORMER CONFORMED NAME: NIPPON ELECTRIC CO LTD DATE OF NAME CHANGE: 19830721 20-F 1 k00250e20vf.txt NEC CORPORATION As filed with the Securities and Exchange Commission on August 6, 2002 ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 20-F [ ] REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934; or [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended March 31, 2002 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period ________ to ________ Commission File No. 0-12713 NIPPON DENKI KABUSHIKI KAISHA (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) NEC CORPORATION (TRANSLATION OF REGISTRANT'S NAME INTO ENGLISH) JAPAN (JURISDICTION OF INCORPORATION OR ORGANIZATION) 7-1, Shiba 5-chome Minato-ku, Tokyo 108-8001, Japan 81-3-3454-1111 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) Securities registered or to be registered pursuant to Section 12(b) of the Act.
Title of Each Class Name of each exchange on which registered NONE N/A
Securities registered or to be registered pursuant to Section 12(g) of the Act. American Depositary Shares each representing one share of common stock of the Registrant (Title of Class) Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act. None (Title of Class) Indicate the number of outstanding shares of each of the issuer's classes of capital or common stock as of the close of the period covered by the annual report. 1,656,268,189 shares of common stock Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark which financial statement item the registrant has elected to follow: Item 17 [ ] Item 18 [X] ================================================================================ TABLE OF CONTENTS
Page ---- ITEM 1. Identity of Directors, Senior Management and Advisers 4 ITEM 2. Offer Statistics and Expected Timetable 4 ITEM 3. Key Information 4 ITEM 4. Information on the Company 14 ITEM 5. Operating and Financial Review and Prospects 26 ITEM 6. Directors, Senior Management and Employees 43 ITEM 7. Major Shareholders and Related Party Transactions 48 ITEM 8. Financial Information 49 ITEM 9. The Offer and Listing 50 ITEM 10. Additional Information 51 ITEM 11. Quantitative and Qualitative Disclosures about Market Risk 62 ITEM 12. Description of Securities Other than Equity Securities 63 ITEM 13. Defaults, Dividend Arrearages and Delinquencies 63 ITEM 14. Material Modifications to the Rights of Security Holders and Use of Proceeds 63 ITEM 15. [Reserved] 64 ITEM 16. [Reserved] 64 ITEM 17. Financial Statements 64 ITEM 18. Financial Statements 64 ITEM 19. Exhibits 64 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS F-1
2 REFERENCES In this Form 20-F, the "Company," "we," "us," and "our" refer to NEC Corporation and, unless the context requires otherwise, its consolidated subsidiaries. The term "NEC" refers to NEC Corporation excluding its subsidiaries and affiliates unless the context otherwise requires. FORWARD-LOOKING STATEMENTS This annual report contains forward-looking statements pertaining to our technology, products and services, and business performance. Written forward-looking statements may appear in other documents that we file with the U.S. Securities and Exchange Commission, or SEC, and in reports to shareholders and other communications. The U.S. Private Securities Litigation Reform Act of 1995 contains a safe-harbor for forward-looking statements, on which we rely in making these disclosures. Some of the forward-looking statements can be identified by the use of forward-looking words such as "believes," "expects," "may," "will," "should," "seeks," "intends," "plans," "estimates," or "anticipates," or the negative of those words, or other comparable words or phrases. You can also identify forward-looking statements by discussions of strategy, plans, or intentions. Forward-looking statements necessarily depend on assumptions, data, or methods that may be incorrect or imprecise and we may not be able to realize the results expected by them. You should not place undue reliance on forward-looking statements, which reflect our analysis and expectations only. Forward-looking statements are not guarantees of future performance and involve inherent risks and uncertainties. A number of important factors could cause our actual results to differ materially from those in the forward-looking statements. Among the factors that could cause actual results to differ materially from such statements include: - global economic conditions and general economic conditions in our markets; - demand for, and competitive pricing pressure on, our products and services; - our ability to continue to win acceptance of our products and services in highly competitive markets; - our ability to restructure, or otherwise adjust, our operations to reflect changing market conditions; and - movement of currency exchange rates. For a discussion of factors that could cause actual results to differ, please see the discussion under "Item 3.D. Risk Factors" contained in this annual report and in other information contained in our filings with the SEC. Any forward-looking statements speak only as of the date on which they are made, and we do not undertake any obligation to update or revise any of them, whether as a result of new information, future events or otherwise. 3 PART I ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS. Not applicable. ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE. Not applicable. ITEM 3. KEY INFORMATION. A. SELECTED FINANCIAL DATA You should read the selected consolidated financial data set forth below in conjunction with "Item 5. Operating and Financial Review and Prospects" and our consolidated financial statements and the related notes included elsewhere in this annual report. These data are qualified in their entirety by reference to all of that information. The selected consolidated financial data as of and for the fiscal years ended March 31, 1998, 1999, 2000, 2001, and 2002 have been derived from our audited consolidated financial statements for those fiscal years. Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States, or U.S. GAAP.
YEAR ENDED MARCH 31, ---------------------------------------------------------------------------------- 1998 1999 2000 2001 2002 ------------ ------------ ------------ ------------- ------------- (MILLIONS OF YEN, EXCEPT PER SHARE AMOUNTS) STATEMENT OF OPERATIONS DATA: Sales and other income JPY 4,970,686 JPY 4,815,791 JPY 5,209,891 JPY 5,591,122 JPY 5,211,412 Net sales 4,901,122 4,759,412 4,991,447 5,409,736 5,101,022 Income (loss) before income taxes 90,993 (224,726) 30,183 92,323 (461,183) Provision (benefit) for income taxes 41,514 (72,988) 32,484 56,308 (178,173) Income (loss) before cumulative effect of accounting change 41,417 (151,261) 10,416 56,603 (309,425) Net income (loss) 47,417 (151,261) 10,416 56,603 (312,020) PER SHARE DATA: Basic(1) Income (loss) before cumulative effect of accounting change 29.78 (94.49) 6.40 34.55 (187.06) Net income (loss) 29.78 (94.49) 6.40 34.55 (188.63) Diluted(1) Income (loss) before cumulative effect of accounting change 27.36 (94.49) 6.40 32.17 (187.06) Net income (loss) 27.36 (94.49) 6.40 32.17 (188.63) Cash dividends 11.00 8.50 6.00 11.00 6.00 OTHER FINANCIAL DATA: Capital expenditures 385,346 253,623 281,639 346,491 200,067 Depreciation 285,862 306,442 260,942 250,138 234,738 R&D expenses 381,239 346,215 315,163 344,957 333,632
4
AS OF MARCH 31, ----------------------------------------------------------------------------- 1998 1999 2000 2001 2002 ------------- ------------ ------------ ------------ ------------ (MILLIONS OF YEN) BALANCE SHEET DATA: Total assets JPY 5,074,478 JPY 5,045,934 JPY 4,608,964 JPY 4,823,624 JPY 5,010,883 Long-term liabilities 1,458,856 1,931,286 1,611,504 1,642,538 2,005,610 Shareholders' equity 1,162,287 927,345 976,853 915,036 564,915
(1) For the fiscal year ended March 31, 2002, the weighted average number of our shares of common stock outstanding was 1,654,131,607, and 1,654,131,607 on a diluted basis. EXCHANGE RATE INFORMATION We maintain our accounts in Japanese yen. The following table sets forth, for each period indicated, the noon buying rate in New York City for cable transfers in yen as certified for customs purposes by the Federal Reserve Bank of New York for Japanese yen, expressed in Japanese yen per $1.00. On July 26, 2002, the noon buying rate was $1.00 equals JPY 118.78 and the inverse noon buying rate was JPY 100 equals $0.84.
YEAR 2002 -------------------------------------------------------------------------------- FEBRUARY MARCH APRIL MAY JUNE JULY(1) ---------- --------- --------- --------- ---------- - --------- Yen exchange rate per U.S.$ High JPY 134.77 JPY 133.46 JPY 133.40 JPY 128.66 JPY 125.64 JPY 120.19 Low 132.26 127.07 128.13 123.08 119.38 115.71
(1) Period from July 1 to July 26.
YEAR ENDED MARCH 31, ----------------------------------------------------------------- 1998 1999 2000 2001 2002 ---------- ----------- ---------- ---------- ---------- Yen exchange rate per U.S.$ Average (of month-end rates) JPY 123.57 JPY 128.10 JPY 110.02 JPY 111.64 JPY 125.05
B. CAPITALIZATION AND INDEBTEDNESS Not applicable. C. REASONS FOR THE OFFER AND USE OF PROCEEDS Not applicable. D. RISK FACTORS Investing in our securities involves a high degree of risk. You should carefully consider the risks described below as well as all the other information in this annual report, including our consolidated financial statements and related notes, and "Item 11. Quantitative and Qualitative Disclosure about Market Risk," before investing in our securities. Our business, operating results, and financial condition could be materially adversely affected by any of these risks. The trading price of our securities could decline due to any of these risks, and you may lose all or part of your investment. 5 RISKS RELATED TO OUR INDUSTRY WE ARE SUBJECT TO INTENSE COMPETITION IN MANY OF THE MARKETS IN WHICH WE OPERATE, AND THIS MAY ADVERSELY AFFECT OUR ABILITY TO MAINTAIN OUR GROSS MARGINS Competition creates an aggressive pricing environment in many of the markets in which we operate, particularly acute during market slowdowns, which places significant pressure on our ability to maintain gross margins. Our competitors may be more profitable or may be able to compete for customers more effectively based on price. In recent years, the period of time between our introduction of a new product and the introduction by others of the same or a comparable product has declined. This has increased the risk that the products we offer will become subject to intense price competition as others enter the market. We have many competitors, ranging from large multinational corporations to an increasing number of relatively small, rapidly growing and highly specialized companies. Unlike many of our competitors, however, we operate in many businesses while competing with companies that specialize in one or more of our product or service lines. As a result, we may not fund or invest in some of our businesses as much as our competitors, and we may not be able to change or take advantage of market opportunities as quickly or as well as they do. In addition, some of our customers may be hesitant to share information with us, or to allow us to collaborate in their design process, because we may also compete with them in other areas. THE CYCLICAL NATURE OF THE MARKET FOR SEMICONDUCTORS, AND THE PERIODIC OVERCAPACITY THAT RESULTS FROM THIS, MAY SERIOUSLY HARM OUR RESULTS OF OPERATIONS The market for semiconductors is highly cyclical and has suffered significant downturns from time to time, including at present. Past downturns have been characterized by diminished product demand, accelerated erosion of selling prices and production overcapacity. The current downturn may be prolonged, and the volatility of the semiconductor market may lead to future downturns, with similar adverse effects on our operating results. The cyclical nature of the semiconductor market is due partly to periods of production overcapacity. Both international semiconductor companies and specialist semiconductor foundries have added significant capacity in recent years. As a consequence, semiconductor production capacity may periodically exceed the demand for semiconductor products, thus putting downward pressure on selling prices and reducing our revenues. OUR OPERATING RESULTS MAY SUFFER IF OUR PRODUCTION PROCESSES ENCOUNTER PROBLEMS OR IF WE ARE NOT ABLE TO MATCH OUR PRODUCTION CAPACITY TO FLUCTUATING LEVELS OF DEMAND The computer, communications, semiconductor, and other markets in which we operate are characterized by the introduction of products with short life cycles in a rapidly changing technological environment. Production processes are highly complex, require advanced and costly equipment and must continuously be modified to improve yields and performance. Production difficulties or inefficiencies can reduce yields or interrupt production, and we may not be able to deliver products on time in a cost effective, competitive manner. If production is interrupted, we may not be able to shift production to other facilities on a timely basis, or customers may purchase products from other suppliers. A resulting shortage of manufacturing capacity for some products could adversely affect our ability to compete. Resulting reductions in revenues and damage to customer relationships could be significant. Japanese legal and practical restrictions on the termination of employees, union agreements and other factors limit our ability to reduce our production capacity and costs, during industry downturns, to adjust to reduced levels of demand. In addition, during these periods customers generally do not order products as far in advance of the scheduled shipment date as they do when the industry is operating closer to capacity, making it difficult to forecast production levels and revenues. Conversely, during periods of increased demand, we may not have sufficient capacity to meet customer orders, making relationships with 6 affected customers difficult. As a result, we may lose sales as customers turn to our competitors that can satisfy their increased demand either immediately or in the future. IF WE FAIL TO ATTRACT, HIRE, AND RETAIN SKILLED PERSONNEL, WE MAY NOT BE ABLE TO ACHIEVE OUR BUSINESS OBJECTIVES. Like all technology companies, we must compete for talented employees to develop our products, services, and solutions in a market where the demand for such individuals exceeds the number of qualified candidates. As a result, our human resources organization focuses significant efforts on attracting and retaining individuals in key technology positions. If we experience a substantial loss of, or an inability to attract, talented personnel, the resulting talent gaps could affect our ability to meet our business objectives. WEAK ECONOMIC CONDITIONS IN JAPAN AND WORLDWIDE MAY HARM OUR BUSINESS We are very dependent on the Japanese market. In the fiscal year ended March 31, 2002, our sales in Japan accounted for 77% of our total net sales. The outlook for the Japanese economy in terms of public and private sector capital investment, consumer spending, and foreign currency exchange rates is highly uncertain. The length and severity of a continuing weakness in the Japanese economy could have a significant impact on our financial results. Uncertainty in the Japanese economy means that it is difficult to estimate the level of growth for the economy. Because all components of our budgeting and forecasting depend upon estimates of growth in the markets we serve, the prevailing economic uncertainty makes estimates of future income and required expenditures even more difficult to make than usual. If we are mistaken in our budgeting and forecasting, it will be more difficult for us to respond appropriately to a changing economic environment. We depend also on markets outside Japan. In the fiscal year ended March 31, 2002, 23% of our total net sales were generated outside Japan. Our business is therefore subject to risks involved in international markets, including negative economic developments in foreign economies. Our results of operations also could be hurt if demand for the products or services made or offered by our customers decreases due to adverse economic conditions in any of the regions where they sell or offer their own products or services. In recent months, the telecommunications and technology markets have weakened significantly in the U.S. and Europe. Further deterioration in these markets would adversely affect our results of operations. During the fiscal year ended March 31, 2002, we implemented various restructuring initiatives to respond to adverse market conditions. We incurred restructuring expenses of JPY 285.9 billion. We are also implementing additional restructuring initiatives in the fiscal year ending March 31, 2003. See "Item 5.A. Operating Results -- Significant Measures to Counter Structural Changes in the Industry and a Slowdown in Markets" and "-- Restructurings of our NEC Electron Devices Businesses." WE FACE REGULATORY CHANGE AND UNCERTAINTY, AS WELL AS POTENTIAL LEGAL LIABILITY, IN MANY COUNTRIES IN WHICH WE OPERATE Our business is subject to various risks associated with unexpected regulatory changes, uncertainty in the application of laws and governmental policies, and uncertainty relating to legal liabilities in many of the countries in which we operate. Substantial changes in the regulatory or legal environments in which we operate could hurt our business, operating results, and financial condition. Changes in Japanese and international telecommunications regulations and tariffs, including those related to the Internet-related businesses and technologies, could affect the sales of our products or services and this could adversely affect our business, operating results, and financial condition. Our operations are subject to many environmental laws and regulations governing, among other things, air emissions, wastewater discharges, the use and handling of hazardous substances, waste disposal, product recycling, and soil and ground-water contamination. We face risks of environmental liability in our current and historical manufacturing activities. Costs associated with future additional environmental 7 compliance or remediation obligations could adversely affect our business, operating results, and financial condition. WE MAY BE SUBJECT TO PRODUCT LIABILITY CLAIMS THAT COULD RESULT IN SIGNIFICANT DIRECT OR INDIRECT COSTS TO US There is a risk that defects may occur in our products and services. Many of our products and services are used in situations where the adverse consequences of failure would be severe, so called "mission-critical" uses, exposing us in some cases to even greater risk. The occurrence of these defects could make us liable for damages caused by the defects, including consequential damages. Negative publicity concerning these problems could also make it harder for us to get customers to buy our products and services. Both could hurt our business, operating results, and financial condition. OUR OPERATING AND FINANCING ACTIVITIES EXPOSE US TO FOREIGN CURRENCY EXCHANGE AND INTEREST RATE RISKS, WHICH MAY ADVERSELY AFFECT OUR REVENUES AND PROFITABILITY We are exposed to risks of foreign currency exchange rate fluctuations. Our consolidated financial statements, which are presented in Japanese yen, are affected by foreign exchange rate changes. These changes can affect the yen value of our equity investments and monetary assets and liabilities arising from business transactions in foreign currencies. They can also affect the costs and sales proceeds of products or services that are denominated in different currencies. Despite our measures to reduce, or hedge against, foreign currency exchange risks, foreign exchange rate fluctuations may hurt our business, operating results, and financial condition. We are also exposed to risks of interest rate fluctuations, which may affect our overall operational costs and the value of our financial assets and liabilities, in particular long-term debts. Despite our measures to hedge a portion of our exposure to fluctuations in interest rates, changes in interest rates may increase our operational costs, reduce the value of our financial assets or increase the value of our liabilities. RISKS RELATED TO OUR BUSINESS WE MAY NOT SUCCEED IN IMPLEMENTING OUR REORGANIZATION AND STRATEGY We are continuing to implement our business strategy and make significant changes in our corporate organization, including - focusing on and promoting products and services related to the Internet, mobile communications, and broadband technologies as our core business, - restructuring unprofitable operations, - forming strategic alliances and joint ventures, and - transferring or taking public some businesses that we believe may perform better on a stand-alone basis. We may not be successful in achieving all of these goals or realizing the benefits that we expect from them. For example, although we believe that the Internet-related business has great potential for growth, it may not grow as much as we expect. Similarly, a lack of interested buyers, or continued weakness in the equity capital markets, may undermine our efforts to sell or take public those of our operations that we have identified for possible disposition. In addition, severe competition from existing and new competitors or costs related to implementing our strategy may limit the benefits we are able to realize from our strategy. 8 IF WE FAIL TO KEEP PACE WITH TECHNOLOGICAL ADVANCES IN OUR INDUSTRY, OR IF WE PURSUE TECHNOLOGIES THAT DO NOT BECOME COMMERCIALLY ACCEPTED, CUSTOMERS MAY NOT BUY OUR PRODUCTS AND SERVICES AND OUR REVENUE AND PROFITABILITY MAY DECLINE The markets for the products and services that we offer are characterized by rapidly changing technology, evolving technical standards, changes in customers' preferences, and the frequent introduction of new products and services. The development and commercialization of new technologies and the introduction of new products and services will often make existing products and services obsolete or unmarketable. Our competitiveness in the future will depend at least in part on our ability to: - keep pace with rapid technological developments and maintain technological leadership; - enhance existing products and services; - develop and manufacture innovative products in a timely and cost-effective manner; - utilize or adjust to new products, services, and technologies; - attract and retain highly capable technical and engineering personnel; - accurately assess the demand for, and perceived market acceptance of, new products and services that we develop; - avoid delays in developing new products or delays in shipping new products; - address increasingly sophisticated customer requirements; and - have our products selected for design in our customers' future products. We may not be successful in identifying and marketing product and service enhancements, or offering and supporting new products and services, in response to rapid technological changes and changes in customers' preferences. If we fail to keep up with these technological changes and changes in customers' preferences, our business, operating results, and financial condition will be significantly harmed. The process of developing new products entails many risks. The development process can be lengthy and costly, and requires us to commit a significant amount of resources well in advance of sales. Technology and standards may change while we are in development, rendering our products outdated or uncompetitive before their introduction. Our products, some of which contain both hardware and software, may contain undetected errors that may be found after the products' introduction and shipment. OUR REVENUES AND PROFITABILITY CAN FLUCTUATE FROM PERIOD TO PERIOD AND ARE OFTEN DIFFICULT TO PREDICT FOR PARTICULAR PERIODS DUE TO FACTORS BEYOND OUR CONTROL Our results of operations for any quarter or year are not necessarily indicative of results to be expected in future periods. Our operating results have historically been and are expected to continue to be subject to quarterly and yearly fluctuations as a result of a number of factors, including: - the introduction and market acceptance of new technologies, products and services; - variations in product costs and the mix of products sold; - the size and timing of customer orders, which in turn will often depend upon the success of our customers' business or specific products or services; 9 - the impact of acquired businesses and technologies; - manufacturing capacity and lead times; and - fixed costs. There are other trends and factors beyond our control which may affect our operations and make it difficult to predict operating results for a particular period. These include: - the speed and direction of the development of the Internet; - the timing and pace of the introduction of broadband communications technologies into the Internet and of the introduction of appealing applications that can only be supported effectively through broadband connections; - the timing of the introduction and market acceptance of next-generation mobile communications standards and technologies in Japan and in other major markets; - adverse changes in the conditions in the markets for semiconductors, PCs, mobile handsets, and other products and services that we offer; - governmental decisions regarding the development and deployment of communications infrastructure, including the size and timing of governmental expenditures in these areas; - the size and timing of capital expenditures by our customers; - inventory practices of our customers; - conditions in the broader markets for information technology and communications, and the Japanese or global economy generally; - changes in governmental regulation or intervention affecting communications, data networking or the Internet; - adverse changes in the public and private equity and debt markets and the ability of our customers and suppliers to obtain financing or to fund capital expenditures; and - adverse changes in the credit quality of our customers and suppliers. These trends and factors could have a material adverse effect on our business, operating results and financial condition. WE MAY NOT SUCCEED IN EXECUTING OUR GROWTH STRATEGIES OUTSIDE OF JAPAN Our strategy includes expanding our business in markets outside of Japan. In many of these markets, we face barriers in the form of long-standing relationships between our potential customers and their local suppliers and protective regulations. In addition, pursuing international growth opportunities may require us to make significant investments long before we realize returns on the investments, if any. Increased investments may result in expenses growing at a faster rate than revenues. Our overseas projects and investments could be adversely affected by: - reversals or delays in the opening of foreign markets to new participants; - exchange controls; 10 - restrictions on foreign investment or the repatriation of profits or invested capital; - nationalization of local industry; - changes in export or import restrictions; - changes in the tax system or rate of taxation in the countries where we do business; and - economic, social, and political risks. In addition, difficulties in foreign financial markets and economies and of foreign financial institutions, particularly in emerging markets, could adversely affect demand from customers in the affected countries. Because of these factors, we may not succeed in expanding our business in international markets. This could hurt our business growth prospects and results of operations. IF WE ARE UNABLE TO PROTECT OUR INTELLECTUAL PROPERTY RIGHTS, OUR BUSINESS AND PROSPECTS MAY BE HARMED We depend on our proprietary technology and our ability to obtain patents, licenses, and other intellectual property rights covering our products, services, business models, and design and manufacturing processes. The process of seeking patent protection can be long and expensive. Although we have approximately 72,000 patents, any of our patents could be challenged, invalidated, or circumvented. The fact that we hold many patents or other intellectual property rights does not ensure that the rights granted under them will provide competitive advantages to us. For example, the protection afforded by our intellectual property rights such as patents, patent applications, and copyrights may be undercut by rapid changes in technologies in the industries in which we operate. Similarly, there can be no assurance that claims allowed on any future patents will be sufficiently broad to protect our technology. Effective patent, copyright, and trade secret protection may be unavailable or limited in some countries, and our trade secrets may be vulnerable to disclosure or misappropriation by employees, contractors, and other persons. Litigation, which could consume financial and management resources, may be necessary to enforce our patents or other intellectual property rights or to defend against claims of infringement brought against us by others. WE MAY BE SUBJECT TO INTELLECTUAL PROPERTY LITIGATION AND INFRINGEMENT CLAIMS, WHICH COULD CAUSE US TO INCUR SIGNIFICANT EXPENSES OR PREVENT US FROM SELLING OUR PRODUCTS Many of our products are designed to include software or other intellectual property licenses from third parties. Competitors' protected technology may be unavailable to us or be made available to us only on unfavorable terms and conditions. While it may be necessary in the future to seek or renew licenses relating to various aspects of our products, we believe that, based upon past experience and standard industry practice, these licenses generally can be obtained on commercially reasonable terms. There can be no assurances, however, that we will be able to obtain, on commercially reasonable terms or at all, from third parties the licenses we need in the future. Due to the existence of a large number of patents in our field and the rapid rate of issuance of new patents, it is not economically practical to determine in advance whether a product or any of its components infringe the patent rights of others. From time to time, we are sued by others or receive notices from others regarding patent and other intellectual property claims. Whether or not these claims have merit, they may require significant resources to defend. If an infringement claim is successful and we are unable to obtain the license for the infringed technology or substitute similar non-infringing technology, our business could be adversely affected. 11 IF OUR FACILITIES WERE TO EXPERIENCE CATASTROPHIC LOSS DUE TO EARTHQUAKE, OUR OPERATIONS WOULD BE SERIOUSLY HARMED Several of our facilities in Japan could be subject to catastrophic loss caused by earthquake damage to their location. We have significant facilities in areas with above average seismic activity. If any of these facilities were to experience a catastrophic loss, it could disrupt our operations, delay production, shipments and revenue, and result in large expenses to repair or replace the facility. THE FAILURE OF OUR SUPPLIERS TO DELIVER RAW MATERIALS, COMPONENTS, EQUIPMENT, AND OTHER SUPPLIES AS EXPECTED COULD HURT OUR BUSINESS Our manufacturing operations depend on obtaining deliveries of raw materials, components, equipment, and other supplies in a timely manner. In some cases, we purchase on a just-in-time basis. Because the products that we purchase are often complex, it may be difficult for us to substitute one supplier for another or one product for another. Some products are only available from a limited number of suppliers or a single supplier. Although we believe that supplies of the raw materials, components, equipment, and other supplies we use are currently adequate, shortages could occur in critical materials due to interruption of supply or increased industry demand. Our results of operations would be hurt if we could not obtain adequate delivery of these supplies in a timely manner or if we had to pay significantly more for them. Reliance on suppliers and industry supply conditions generally involve several risks, including: - the possibility of defective raw materials, components, equipment, or other supplies, which can adversely affect the reliability and reputation of our products; - a shortage of raw materials, components, equipment, or other supplies, and reduced control over delivery schedules, which can adversely affect our manufacturing capacity and efficiencies; and - an increase in the cost of raw materials, components, equipment, and other supplies, which can adversely affect our profitability. WE RELY ON OUR STRATEGIC PARTNERS, AND OUR BUSINESS COULD SUFFER IF OUR STRATEGIC PARTNERS HAVE PROBLEMS OR OUR RELATIONSHIPS WITH THEM CHANGE As part of our strategy, we have entered into a number of long-term strategic alliances with leading industry participants, both to develop new technologies and products and to manufacture existing and new products. If our strategic partners encounter financial or other business difficulties, if their strategic objectives change or if they perceive us no longer to be an attractive alliance partner, they may no longer desire or be able to participate in our alliances. Our business could be hurt if we were unable to continue one or more of our alliances. POTENTIAL ACQUISITIONS AND INVESTMENTS MAY REQUIRE US TO INTEGRATE NEW TECHNOLOGIES, OPERATIONS, AND SERVICES From time to time we consider opportunities to expand our business through acquisitions and investments. Any acquisition we pursue exposes us to the risk that we might be unable to integrate new businesses with our culture and strategies. We also cannot be certain that we will be able to achieve the benefits we expect from a particular acquisition. For example, we may fail to retain the customers of the businesses we acquire, and we may fail to retain key employees. Acquisitions may also strain our managerial and operational resources, as our managers and employees may be diverted by the challenge of managing new operations from monitoring and improving our operations in our existing businesses. Our business, operating results, and financial condition may suffer if we fail to coordinate our resources effectively to manage both our existing businesses and any businesses we may acquire. 12 WE CONDUCT A SUBSTANTIAL AMOUNT OF BUSINESS WITH THE NTT GROUP OF COMPANIES, INCLUDING NTT DOCOMO, INC., AND OUR BUSINESS COULD SUFFER IF THEY ENCOUNTER BUSINESS PROBLEMS OR DECIDE TO REDUCE THEIR BUSINESS WITH US Approximately 16% of our net sales in the fiscal year ended March 31, 2002 were derived from sales to the Nippon Telegraph and Telephone Corporation, or NTT, group of companies, including NTT DoCoMo, Inc. NTT group is the largest provider of wireline and wireless voice, data, Internet, and related telecommunications services in Japan. NTT DoCoMo is the leading mobile communications service provider in Japan. If either of these companies were to suffer significant business or financial problems, they might reduce their level of capital expenditures or current procurement, which could adversely affect our business, operating results, and financial condition. In addition, although at present none of the NTT group companies engages in any material manufacturing, if in the future any NTT group company were to begin manufacturing products that we supply, or to acquire one of our competitors, this could adversely affect our business. WE ARE EXPOSED TO THE RISK THAT OUR CUSTOMERS, INCLUDING THOSE TO WHOM WE HAVE PROVIDED VENDOR FINANCING, MAY ENCOUNTER FINANCIAL DIFFICULTIES We sometimes provide vendor financing to our customers, or provide guarantees to banks or trading companies that have provided such financing. In addition, many of our customers purchase products and services from us on payment terms that do not provide for immediate payment. If our customers to whom we have extended or guaranteed vendor financing, or from whom we have substantial accounts receivable, encounter financial difficulties and are unable to make payments on time, our business, operating results, and financial condition could be adversely affected. OUR PENSION AND SEVERANCE PLANS ARE CURRENTLY UNDERFUNDED DUE TO THE DECLINE IN THE VALUE OF SECURITIES CONSTITUTING PLAN ASSETS, AND SATISFYING OUR OBLIGATIONS UNDER THESE PLANS MAY COST MORE THAN WE EXPECT At March 31, 2002, we had total outstanding benefit obligations, calculated in accordance with U.S. GAAP, of JPY 1,396.1 billion. Although we fund our pension plans in conformity with the regulatory requirements where applicable, at March 31, 2002 the fair value of plan assets was JPY 799.4 billion. Consequently, as of that date we had JPY 596.7 billion of unfunded pension plan obligations. Primarily because of the decline in Japanese stock prices during the fiscal year ended March 31, 2002, the value of plan assets at the beginning of fiscal year ended March 31, 2002, declined by JPY 50.8 billion, more than offsetting our aggregate contributions to plan assets during the course of the year. Further declines in the Japanese stock market would reduce the value of the plan assets, and increase the level of our plan underfunding. Under our pension and severance plans, we use a discount rate of 3.5% to measure benefit obligations. In accordance with U.S. GAAP, unrecognized prior service cost and actuarial loss have been amortized using the straight-line method over the average remaining service period of employees expected to receive benefits under such plans. The amount of actuarial loss may change depending on any future change in the discount rate and other factors such as the return on plan assets. If we were to determine that a lower discount rate should be used to measure benefit obligations, the current amount of our outstanding pension benefit obligations would increase. Further, an increase in the amount of unrecognized prior service cost and actuarial loss increases the recorded expenses of the following years. 13 ITEM 4. INFORMATION ON THE COMPANY. A. HISTORY AND DEVELOPMENT OF THE COMPANY NEC's legal and commercial name is "Nippon Denki Kabushiki Kaisha" in Japanese or NEC Corporation in English. NEC was incorporated on July 17, 1899 as a joint stock corporation ("kabushiki kaisha") in Japan under the Japanese Commercial Code. NEC's principal executive offices are located at 7-1, Shiba 5-chome, Minato-ku, Tokyo 108-8001, Japan. NEC's telephone number is +81-3-3454-1111. HISTORY NEC was formed as a joint venture between Western Electric Company of the United States and two Japanese individuals. Initially, NEC acted as a sales agent for telephone equipment manufactured by Western Electric, but it soon commenced production of similar equipment in Japan. In 1925, Western Electric's interests in its foreign affiliates, including NEC, were sold to International Telephone & Telegraph Corporation, or ITT. In 1932, the Sumitomo family holding company acquired a substantial stock interest in NEC, which was sold to the public in 1948, following the passage of Japanese anti-monopoly laws. ITT's shareholding was successively reduced from 1958 and was completely disposed of during 1978. We expanded our business lines to include the production of transmission equipment in 1929, radio broadcast equipment in 1930 and radio communications equipment in 1932. In 1958, we started mass production of transistors and, in the same year, we produced the NEAC 2201, the first fully- transistorized commercial computer in the world. We commenced R&D activities relating to integrated circuits in 1960. During the 1960s we entered the field of satellite communications and established our first post-war overseas manufacturing subsidiary. In the 1970s, we significantly increased our production of computers, semiconductors, and other electron devices. We began integrating our computer and communications products as significant further advances were achieved in technology and as we increased our allocation of resources to R&D activities. Other important developments during this period include the establishment of our position as a world leader in specific high technology markets, such as satellite communication earth stations and certain semiconductor devices, the diversification of our customer base, particularly in the Japanese private sector and overseas, and the expansion of our manufacturing facilities, both in Japan and abroad. In the 1980s, we pursued a policy of globalization to conduct our diversified manufacturing and sales operations closer to our customers. We added a total of 50 subsidiaries and affiliates, 12 for manufacturing and 38 for marketing and other services during the 1980s in overseas markets. During the 1990s, we expanded our global operations and increased efficiency, in order to enhance global competitiveness and to respond to rapid changes in market demand. We expanded and upgraded some of our manufacturing facilities, promoted strategic alliances with major companies and augmented our R&D activities in the United States and Europe. In 2000, our operations were reorganized into three in-house companies, NEC Solutions, NEC Networks, and NEC Electron Devices, each of which focuses on serving the needs of a particular market and customer base. 14 CAPITAL EXPENDITURES The following table sets forth a breakdown of our annual capital expenditures (on an accrual basis) during the three years ended March 31, 2002:
YEAR ENDED MARCH 31, ----------------------------------------- 2000 2001 2002 ----------- ----------- ----------- (Millions of yen) NEC Solutions JPY 31,662 JPY 26,947 JPY 34,576 NEC Networks 32,955 44,882 46,689 NEC Electron Devices 171,857 239,536 96,558 Others 17,713 20,058 6,726 ----------- ----------- ----------- Total 254,187 331,423 184,549 Corporate 27,452 15,068 13,953 ----------- ----------- ----------- Electronics business Total 281,639 346,491 198,502 Leasing business -- -- 1,565 ----------- ----------- ----------- Consolidated total JPY 281,639 JPY 346,491 JPY 200,067 =========== =========== ===========
During the three years ended March 31, 2002, our capital expenditures were principally devoted to the expansion and upgrading of our manufacturing facilities for semiconductors. Capital expenditures during the fiscal year ended March 31, 2002 declined by 42%, compared with the fiscal year ended March 31, 2001, to JPY 200.1 billion. Major capital expenditures in the fiscal year ended March 31, 2002 included investment in manufacturing facilities for system LSIs in Japan, which contributed to a 60% decrease in capital expenditures for NEC Electron Devices to JPY 96.6 billion. For the fiscal year ended March 31, 2002, NEC Solutions invested in equipment for the expansion of its BIGLOBE services as well as for R&D and manufacturing of computers as servers and storage systems. NEC Networks invested in equipment for the manufacturing of communications equipment and for R&D of optical network systems and W-CDMA mobile communications systems. At the start of our current fiscal year, we established a capital expenditure budget devoted to investing in equipment for continuing R&D of computers, optical network systems and W-CDMA systems, and system LSIs, as well as for the manufacturing of our various products. We continuously monitor our capital expenditures and evaluate whether adjustments to our budget are necessary in light of market conditions and other economic factors. We expect to spend approximately JPY 16.6 billion in capital expenditures during the fiscal year ending March 31, 2003. B. BUSINESS OVERVIEW We are a leading provider of systems, components, services, and integrated solutions for computing and communications applications. Our understanding of our customers' needs together with our industry expertise, technical capabilities, and broad product portfolio enable us to offer computing, communications, and device solutions that address their core operational requirements. By focusing on high-growth market opportunities and building on our expertise in broadband and mobile technologies, we seek to further develop our leadership position as an innovative provider of computing and communications solutions. In April 2000, we reorganized our businesses into three in-house companies, which correspond to our three principal business segments: - NEC SOLUTIONS delivers highly reliable Internet-related services and other computing solutions to enterprise, government, and individual customers by providing software, hardware, and services necessary to design, integrate, and operate these elements. The products and services of this in-house company include: systems integration services, software, Internet-related services, and maintenance and customer support services, as well as PCs, mainframe computers, servers, workstations, supercomputers, and storage systems. In 15 the fiscal year ended March 31, 2002, we derived JPY 2,209.1 billion of our sales, and realized a segment profit of JPY 75.4 billion, from NEC Solutions. - NEC NETWORKS designs and provides wireline network infrastructure, mobile and wireless network infrastructure, and mobile terminals, which enable our customers, primarily network service providers, to build and operate their networks with a high degree of service quality and reliability and in a cost-effective manner. Working closely with our customers, we design and deploy network systems and products including: optical network systems, switching systems, Internet Protocol, or IP, network systems, mobile and wireless network systems, and mobile terminals. In the fiscal year ended March 31, 2002, we derived JPY 1,957.2 billion of our sales, and realized a segment profit of JPY 53.4 billion, from NEC Networks. - NEC ELECTRON DEVICES is a leading provider of semiconductors, displays, and other electronic components used in computers, communications products, digital consumer electronic products, and automobiles. Our semiconductor products include system LSIs, general-purpose semiconductors such as display driver LSI, transistors and compound semiconductors, and memory devices. In the fiscal year ended March 31, 2002, we derived JPY 842.9 billion of our sales, and incurred a segment loss of JPY 148.2 billion, from NEC Electron Devices. In the fiscal year ended March 31, 2002, we had net sales of JPY 5,101.0 billion, of which we generated approximately 77% in Japan and the balance overseas. As of March 31, 2002, we employed approximately 142,000 people worldwide and had manufacturing, sales, or R&D consolidated subsidiaries in Japan and overseas. NEC SOLUTIONS NEC Solutions delivers highly reliable computing solutions to enterprise, government, and individual customers by providing software, hardware, and services necessary to design, integrate, and operate these elements. Our focus has been and will continue to be to formulate customized solutions packages, taking advantage of the comprehensive understanding of the evolving needs of customers and the industry and technological expertise we have acquired through our long history of technology deployments. Systems Integration Services. Through our systems integration services group, which has approximately 13,000 highly qualified systems engineers, we provide our customers with end-to-end systems design, development, deployment, and systems operation solutions. We deliver systems integration services directly and through NEC Soft, Ltd. and other subsidiaries. Our services consist of: - Systems design, development, and deployment services: We design, develop, and deploy complex software applications and the hardware configurations that meet the specific requirements of our customers. - Operational support services: We provide operational support services, including system problem diagnosis and correction, so that customers can effectively operate their computer systems. - Consulting services: We provide consulting services on systems architecture design and technology planning, including the evaluation and selection of technologies and platforms, to our customers so that they can meet their business and financial objectives. Software. We develop and provide software products primarily for use in our computers. Software products include operating systems, middleware for managing large-scale distributed data processing systems, and application software. We continue to further develop the capabilities of our middleware, which enables the more rapid, cost-effective integration of different systems, protocols, and 16 technologies. We use a combination of custom designed and third party software to take advantage of the various products and technologies on the market. Internet-related Services. We offer a broad range of Internet-related services through the infrastructure of our BIGLOBE service, which is a leading Internet service provider, or ISP, in Japan. BIGLOBE has over 200 access points or points of presence throughout Japan. Through BIGLOBE, we also offer value-added services such as application services, housing, and hosting. Maintenance and Customer Support Services. We offer maintenance and support services to our customers mainly through our subsidiary, NEC Fielding, Ltd., one of Japan's largest technical support companies, with over 430 service centers. Personal Computers and Peripheral Products. NEC Solutions develops, manufactures, and markets PCs, PC peripheral products and personal digital assistance, or PDAs. We produce a wide range of PC products including desk-top PCs and notebook PCs, targeted at corporate customers as well as for the consumer markets. We offer PCs with wireless connectivity, multimedia functions, and advanced security functions. We are a leading supplier of PCs in Japan. Mainframes, Servers and Workstations, Supercomputers, and Storage Systems. NEC Solutions develops and manufactures mainframe computers, UNIX servers and workstations, PC servers and workstations, supercomputers, storage systems, and other products for private companies and government agencies mainly in Japan. We are a leading supplier of PC servers, PC workstations, and mainframe computers in Japan. - Mainframe computers: Our Parallel ACOS series of mainframe computers employ parallel processing technology for use in mission-critical systems. We focus on high performance products that can also integrate easily with open servers. - Servers and workstations: Our high-performance, high-scalability UNIX servers are used as core servers in a wide variety of applications, from network management to operating critical business systems. We are working with Hewlett-Packard Company to develop servers which employ Intel Corporation's 64-bit processors, allowing for faster processing speeds. We also worked with Intel to create the Express 5800 series of PC servers and workstations which run a Windows operating system and give customers access to a broad range of applications. We offer fault-tolerant PC servers developed together with Stratus Technologies International, S.a r.l. and Intel, that provide high levels of resiliency against failure. The combination of de facto open platform components and a Windows operating system results in a low cost fault-tolerant solution. - Supercomputers: Our SX-series of vector-processing supercomputers meet intensive, high-speed processing requirements for specialized applications that require significant calculating power, such as weather forecasting, structural analysis, and fluid dynamics. The SX-series is used by research institutes, universities, and companies, mainly in Japan and Europe. We formed an alliance with Cray Inc., for the marketing of our SX-series of supercomputers, particularly in the North American market. - Storage systems: We manufacture various storage systems, including disk array, tape storage, and others. Our iStorage series of storage systems is designed to meet the expanding demand for increased capacity, reliability, performance, and endurance. We are working with VERITAS Software Corporation and Oracle Corporation Japan to offer storage solutions using all three companies' products and technologies. In addition, our other products include terminals such as key telephone systems and point-of-sale terminals. 17 NEC NETWORKS NEC Networks is a leading supplier of wireline network infrastructure, mobile and wireless network infrastructure, and mobile terminals, which enable our customers, primarily network service providers, to build and operate their networks with a high degree of service quality and reliability in a cost-effective manner. Optical and Other Network Systems. NEC Networks manufactures a wide range of optical network systems. We are one of the top providers of these systems in Japan. Optical network systems use light to transmit and process large volumes of information, including voice, video, and data through fiber-optic cables. These networks vary in size, purpose, and geographic scope. Our optical and other network systems products include: - wavelength division multiplexing, or WDM, systems (terrestrial and submarine), - optical access systems, - synchronous digital hierarchy, or SDH, and synchronous optical network, or SONET, systems, and - other network systems. Wavelength division multiplexing systems. We have a leading position in WDM-based optical network systems for both terrestrial and submarine applications. WDM involves combining beams of light of slightly different wavelengths through a single fiber with each wavelength carrying its own stream of information. This increases the amount of traffic that can travel over existing optical fiber cable infrastructure, allowing existing infrastructure to be used more efficiently. In terrestrial WDM systems, we supply telecommunications operators within and outside Japan. Our products include state of the art technology such as a 160-channel WDM system with a maximum transmission capacity of 1.6 terabit per second, or Tbps. We also succeeded in transmitting 10.9 Tbps data using a WDM system in March 2001, and we aim to shorten development time for subsequent generations of systems through partnerships. Our current partnerships include those with WaveSplitter Technologies, Inc., a U.S. venture business for optical fiber technology, with Hitachi, Ltd. for ultra high-speed optical network systems, and with Tellium, Inc. for integrated optical network systems combining WDM and optical switching. In WDM submarine cable systems, we offer highly-competitive full turn-key solutions. In addition to supplying WDM systems, we offer system construction from deep sea cable installation to marine operation and maintenance. We currently supply submarine cable systems that will provide links between several countries, mainly in the Asia-Pacific area. We seek to provide integrated submarine cable networks through our strategic alliances with Global Marine Systems, Ltd., a leader in marine installation and operation and OCC Corporation, a submarine cable supplier. Optical access systems. We are providing optical line terminals and optical network terminals for NTT's Fiber-to-the-Home, or FTTH, service, which was launched in July 2001. FTTH technology will allow significant increases in data transmission capabilities compared to traditional copper lines. We are working with our subsidiary, NEC Eluminant Technologies, Inc. of the United States, to provide asynchronous transfer mode-passive optical network, or ATM-PON, systems. Synchronous digital hierarchy and synchronous optical network Systems. SDH and SONET refer to standards for transmission of digital signals over optical fiber. These standards 18 helped revolutionize the performance and cost of telecommunications networks based on optical fiber. We develop and manufacture SDH and SONET products both for terrestrial and submarine use. We developed and have recently begun to distribute "SpectralWave U-Node (Universal Node)," a next-generation SDH/SONET high-speed optical transmission system. SpectralWave U-Node enables efficient, high-speed, and highly reliable data transmission. It also provides interfaces with many different systems, including gigabit ethernet interface utilizing virtual concatenation and generic framing procedure, and boasts smaller size and reduced power consumption. Other network systems. We develop and manufacture: - x digital subscriber line, or xDSL, systems and other wired access systems; and - cable television, or CATV, systems and modems, and teleconferencing systems. xDSL is a technology that allows more data to be sent over existing copper telephone lines. The system uses a modem technology that converts existing twisted-pair telephone lines into access paths for various high-speed communications. The hybrid fiber and coaxial CATV system, which transmits video and other signals through a combination of optic fibers and coaxial cables, is one of the technologies that can support a variety of multimedia products. The system allows long-distance, multi-channel transmission and reception of video signals. Switching systems and Internet Protocol network systems. We develop and manufacture switching systems, Internet Protocol, or IP, network systems, and various related telecommunications equipment. These systems include: - public switching systems; - IP switching routers and network infrastructure servers; - enterprise networking systems; and - asynchronous transfer mode, or ATM, switching systems. We provide reliable, high-speed public switching systems for Japanese and overseas telecommunications operators. Our switching systems feature wire-speed packet transfer, which eliminate bottlenecks even during periods of high traffic, as well as multi-service converged environments that are fully scalable and configurable. We also design and manufacture IP switching routers and network infrastructure servers. IP is the main protocol used on the Internet. It is a form of packet technology that routes information over networks based on a system of unique addresses. IP networks are playing an increasingly central role in basic systems. We provide products that enable the deployment of IP networks with high reliability. NTT DoCoMo, a leading mobile communications service provider in Japan, chose to adopt our IP switching routers for its IP wide code division multiple access, or W-CDMA, network trials. We played a leading role in development and standardization activities of the next-generation protocol, Internet Protocol Version 6, or IPv6. IPv6 cures a number of problems in the current protocol and adds many improvements in areas such as routing and network auto-configuration. Our IPv6 routers have already been adopted by advanced network service providers and enterprise users. We aim to build increasingly reliable networks by combining IP switching routers with network infrastructure servers offering a wide variety of services tailored to the objectives of our customers. 19 Enterprise networking systems are private voice and data integrated network systems, including Voice over Internet Protocol, or VoIP, a technology used to transmit voice conversations over a data network using the IP. We provide industry specific PBX and IP-PBX systems for customers such as hotels and hospitals. ATM technology is an information transfer standard that can be used by many different communications systems to deliver traffic at varying rates, permitting a mix of voice data and video. We provide a range of ATM products including a highly advanced ATM network management system. Our system provides connection control management, traffic and performance control management, security control management, and fault/configuration control management. Mobile and Wireless Communications Network Systems. We develop and manufacture network systems and equipment for mobile communications, including base stations, mobile switching systems, and network management systems. We are the leading producer of personal digital cellular, or PDC, systems in Japan. PDC was adopted in Japan as the second-generation mobile communications standard, but is not used outside of Japan. The system supports both voice and data communications, packet-switched wireless data, and a full range of supplemental services including, call waiting, voice mail, three-party calling and call forwarding. We have also been selected by NTT DoCoMo as one of the suppliers of W-CDMA systems for its 3G mobile communications service, which started commercial services in Japan in October 2001. We are the leading supplier of these systems in Japan. Overseas, we worked to raise our profile and position in the mobile communications systems market through a number of initiatives. We entered into an alliance with Siemens AG to develop, manufacture, and market W-CDMA systems. We also carried out W-CDMA field trials in collaboration with major European communications operators such as British Telecommunications plc and Telecom Italia Mobile S.p.A. In April 2001, NEC Networks became a provider of W-CDMA networks for Hutchison 3G UK Limited. We also manufacture wireless communications systems, including terrestrial and satellite microwave communications systems, and wireless access systems such as fixed wireless access, and have sold these systems in more than 120 countries. Mobile Terminals. We develop and manufacture mobile terminals, such as mobile phones, and personal handy phone systems, or PHS, handsets. We are one of the leading mobile phone suppliers in Japan. Newer models of our mobile phones feature large screen color displays and Java applications enabling users to access and more fully utilize NTT DoCoMo's i-mode mobile Internet service. We are forming an alliance with Matsushita Electric Industrial Co., Ltd. to jointly develop a common architecture and application software for 3G mobile phones. Broadcast and Other Systems. We produce broadcast equipment, including analog and digital, terrestrial and satellite broadcast equipment, air traffic control equipment and space electronic equipment, including satellites and satellite transponders. Our industrial electronic systems include laser systems and postal automation systems. NEC ELECTRON DEVICES NEC Electron Devices is a leading provider of semiconductors, displays, and other electronic components used in computers, communications products, digital consumer electronic products, and automobiles. Semiconductors. A significant portion of our semiconductor sales are composed of: 20 - system large-scale integrated circuit, or LSI, products; - general-purpose semiconductors such as display driver ICs, transistors and compound semiconductors; and - DRAMs and other memories. System LSI Products. NEC Electron Devices designs, develops, and manufactures system LSIs, the core component of its device solutions. System LSIs include application specific integrated circuits, or ASICs, application specific standard products, or ASSPs, microprocessors, and microcontrollers. We supply system LSIs for use in a variety of products including computers, communications products, digital consumer electronic products, and automotive electronics equipment. In fiscal year ended March 31, 2002, NEC Electron Devices bolstered their ability to deliver a full lineup of customer specific solutions and focused on providing services ranging from system consultation to software solutions. For example, we have realized high performance graphics processing LSIs produced in consultation with and specifically for our customer manufacturing state-of-the-art game consoles, controller LSIs for the digital camera market and the CPU with copper wiring technology for our flagship SX-6 supercomputers. General Purpose Semiconductors, Transistors and Compound Semiconductors. We design, develop, and manufacture general purpose discrete semiconductor devices, power management ICs in a wide variety of applications, and display control devices used in mobile phones, PCs, monitors, and other systems. We also design, develop, and manufacture optical and microwave semiconductor devices including compound semiconductors. DRAMs. We manufacture mainly high-speed, high-capacity DRAMs. Major products include DRAMs for computers, communications equipment, digital consumer electronic products, and others. To facilitate accelerated development of new products as well as to take steps to reduce our exposure to increased market volatility, we established a joint venture company, Elpida Memory, Inc., with Hitachi, Ltd. to combine the competitive strengths of both companies. Although we and Hitachi produce DRAM for Elpida Memory, we have taken steps to readjust DRAM production bases. In the fiscal year ended March 31, 2002, we stopped DRAM production at production lines in the United States and the United Kingdom. Elpida Memory plans to establish a new 300mm wafer fabrication plant in fall 2002 and we will accelerate the transfer of our DRAM business to Elpida Memory. Other Memories. We design, develop, and produce memory products such as SRAM, flash memory, and mask ROM. Our SRAMs and flash memories have the advantage of low power consumption and multi-packaging abilities. The major applications for these products are portable equipment such as mobile phones, broadband-related products, and digital consumer electronic products. Displays. Our display panels feature TFT color LCDs and color plasma display panels, or PDPs. Color LCDs. We develop and produce a range of TFT color LCDs used mainly in PC monitors, industrial and medical equipment displays, and displays for mobile phones. Plasma Displays. We are engaged in the development and manufacturing of plasma display modules and plasma display monitors and televisions. We expect demand for plasma displays to grow rapidly, mainly for use in televisions and public displays. Electronic Components. We design, manufacture, and produce electronic components such as batteries, capacitors, printed wiring boards, and relays. Our rechargeable lithium-ion batteries are mainly used in mobile phones. Our tantalum capacitors, which are notable in terms of their small size and high capacity, are used in a wide variety of applications, including mobile phones, PCs, and game consoles. In April 2002, we integrated three electronic components businesses, our capacitor, relay and rechargeable battery operations, with Tokin Corporation, which was concurrently renamed NEC TOKIN Corporation. 21 NEC Electron Devices also produces automotive electronics products such as control units for antilock brake systems, supplemental restraint systems, occupant posture detection systems, and seat back sensors. These technologies serve to improve the automobile occupants' safety. SEASONALITY Our sales are generally seasonal in nature, higher in the second and fourth quarters of our fiscal year ended March 31, than in the first and third quarters, partly as a result of the seasonal purchases of governmental agencies in Japan. SUPPLIES For its systems integration services NEC Solutions utilizes and offers various software and hardware products developed or manufactured internally as well as procured from third party vendors. Our subsidiaries in Japan provide software development and systems engineering services to us, on a subcontracting basis. We outsource part of our software development to software companies in Japan, and are increasingly outsourcing to overseas subsidiaries and software companies to supplement our resources in Japan. Hardware products of NEC Solutions are mainly manufactured by our subsidiaries in Japan. Some models of computers and some sub-assemblies are manufactured by our subsidiaries outside Japan and by contract manufacturers both in and outside Japan. We procure some computers from vendors on an OEM basis to supplement our product line. NEC Networks manufactures the majority of our communications systems and equipment, mainly at our subsidiaries in Japan. Certain models for the overseas markets are manufactured by our overseas subsidiaries. We also use contract manufacturers in and outside of Japan, to supplement our production capacity and enhance our profitability. Most of NEC Electron Devices' products are manufactured by our subsidiaries or joint venture manufacturing companies established with our partners in and outside of Japan. Some of our electron devices are procured from silicon foundries and third party vendors. The principal raw materials and components used by us are ICs including memories and logic ICs, LCD panels, printed wiring boards, silicon, connectors, and capacitors. Certain raw materials and components such as silicon and memories used in the manufacture of our products are purchased with a view to maximizing the benefits of bulk purchasing and efficient stock control. Electronic data interchange, or EDI, is widely used to negotiate and purchase raw materials and components to make the procurement process efficient. We use an Internet-based purchasing system to lower costs and improve efficiency in our procurement operations. This system permits internal sharing of information concerning, among other things, suppliers, prices, and quality of raw materials or components. It also permits more frequent and speedy communications with suppliers. In addition, we purchase certain raw materials and components from overseas suppliers through our international purchasing offices in the United States, the United Kingdom, and several countries in Asia as well as in Japan, to reduce product costs. We purchase raw materials and components from many Japanese and overseas suppliers and we believe that we are not dependent on any single third party supply source for any raw materials or components essential to any significant part of our business. We have not experienced any difficulty in obtaining, on acceptable terms, any raw materials or components which materially affect the operation of our business, and do not presently foresee any such difficulty. CUSTOMERS, SALES, AND MARKETING We provide our products and services to customers located in Japan and overseas, including the United States, the Asia Pacific region and Europe. 22 The following table shows our net sales by market and net sales by market as a percentage of total net sales for each of the three fiscal years ended March 31, 2002:
YEAR ENDED MARCH 31, ------------------------------------------------------------------------------- 2000 2001 2002 --------------- -------------- ------------- (Millions of yen, except percentage data) NET SALES BY MARKET Japan JPY 3,489,047 (70%) JPY 3,954,681 (73%) JPY 3,911,173 (77%) Overseas 1,502,400 (30%) 1,455,055 (27%) 1,189,849 (23%) ------------- ------------- ------------- Total JPY 4,991,447 JPY 5,409,736 JPY 5,101,022 ============= ============= =============
NEC Solutions. We provide systems integration services directly to our key customers in Japan through each of NEC's industry-focused systems integration divisions, each of which has experience and know-how in their respective sectors, especially in the telecommunications, banking, and government sectors. Our subsidiaries also provide systems integration services to a more diversified group of customers. We provide Internet-related services directly to individual customers as well as to corporate customers. Maintenance services are rendered by our subsidiaries to customers directly or on a subcontracting basis. With respect to hardware, we sell the majority of our PCs through dealers and wholesalers. Mainframe computers, servers, and workstations are sold directly to large enterprises and government agencies by our sales force supported by our engineering staff, as well as to a broader customer base through dealers. The systems and products we sell are in the case of specific installations, supplied to meet individual orders of our customers, or, in the case of standard products, supplied from stock. Our customers include leading companies in manufacturing, distribution, banking, insurance, and other industries, governmental and other public agencies, telecommunications operators, and educational establishments. NEC Networks. In Japan, we sell the majority of our communications systems and equipment directly to our customers, with the remainder through dealers and wholesalers. Overseas sales of such products are handled by our subsidiaries directly or through trading companies, depending on whether we are the principal contractor for the project. Sales of larger sized communications systems are generally made in satisfaction of specific orders of our customers. Our customers include Japanese and overseas telecommunications operators, national agencies, and broadcasting companies. NEC Electron Devices. Most of the sales in Japan of our electron devices are made to customers through dealers. Overseas sales of these products are effected through our overseas sales subsidiaries. We also make sales to other in-house companies. Users of these products consist of computer manufacturers, communications equipment makers, consumer electronics manufacturers, the automobile industry, and other electronic product manufacturers. INTELLECTUAL PROPERTY We hold approximately 72,000 patents issued under Japanese and other laws and have a large number of Japanese and foreign patent applications pending. We maintain many licenses to Japanese and foreign patents. In some cases, such licenses are included in technical assistance agreements with licensors which cover a wide range of products and components, including computers, communications products, and semiconductors. In addition, we own and have licenses to use certain copyrights. We have granted licenses to, and entered into technical assistance agreements with, various Japanese and foreign companies. In some instances, cross-licenses of their respective patents are entered into between the parties. Although we consider our various patents, copyrights, licenses, and technical assistance agreements important to us, we do not believe our business, as a whole, is materially dependent on any particular patent, group of related patents, any copyright or any license or technical assistance agreement. 23 COMPETITION We compete primarily in the markets for computing and communications applications as well as electron devices. These markets are highly competitive. We expect competition in the markets we serve to increase in the future as existing competitors enhance and expand their product and service offerings and as new participants enter these markets. Increased competition may result in price reductions, reduced profitability and loss of market share. We cannot assure you that we will be able to compete successfully against existing or future competitors. Some of our customers and companies with which we have strategic relationships also are, or may be in the future, competitors of ours. The size and number of our competitors vary across our product and service segments, as do the resources allocated by our competitors to the markets we target. Our competitors may have greater financial, personnel, and other resources than we have in a particular market or overall. Competitors with greater financial resources may be able to offer lower prices, additional products or services or other incentives that we cannot match or offer. These competitors may be in a stronger position to respond quickly to new technologies and may be able to undertake more extensive marketing campaigns. They may also adopt more aggressive pricing policies and make more attractive offers to potential customers, employees, and strategic partners. These competitors may make strategic acquisitions or establish cooperative relationships among themselves or with third parties to increase their ability to gain market share. Further, some of our competitors are currently selling commercial quantities of products that we have not begun to market. By being able to offer these products in commercial quantities before we do, our competitors may establish significant market share and positioning that we may be unable to overcome once we begin marketing that product. Our management believes that we will be able to maintain and enhance our position in a world market characterized by increasing demands and applications for Internet-related products and services due to the following strengths: - Our experience, expertise, and technical capabilities as a leading provider of systems, components, services, and integrated solutions for computing and communications applications, dedicated to meeting our customers' needs, and - Our technological achievements and market position, as reinforced by our continuing R&D programs and other marketing efforts. REGULATION Our business activities are subject to various governmental regulations in countries in which we operate, including regulations relating to business/investment approvals, export regulations including those related to national security considerations, tariffs, antitrust, intellectual property, consumer and business taxation, exchange controls, and environmental and recycling requirements. In addition, we are subject to the Telecommunications Business Law of Japan mainly related to our BIGLOBE services, and maintain a license for construction work in Japan, such as for cable construction. C. ORGANIZATIONAL STRUCTURE NEC and its subsidiaries and affiliates form a group of which NEC is the parent company. As of March 31, 2002, we had 169 consolidated subsidiaries and 13 affiliated companies accounted for by the equity method. The following table gives details of our significant subsidiaries (all of which are consolidated), as of March 31, 2002: 24
PERCENTAGE OF VOTING SECURITIES DIRECTLY OR NAME OF SUBSIDIARY COUNTRY OF INCORPORATION INDIRECTLY OWNED BY NEC - ---------------------------------------------------- ------------------------ ----------------------- NEC CustomMax, Ltd. Japan 100.00% NEC Saitama, Ltd. Japan 100.00 NEC Leasing, Ltd. Japan 57.00 NEC Fielding, Ltd. Japan 93.36 NEC System Integration & Construction, Ltd. (1) Japan 41.40 NEC Custom Technica, Ltd. Japan 100.00 NEC Kyusyu, Ltd. Japan 100.00 NEC Access Technica, Ltd. Japan 100.00 NEC Nexsolution, Ltd. Japan 100.00 NEC Mobiling, Ltd. (1) Japan 67.11 NEC Deviceport, Ltd. Japan 100.00 NEC Kofu, Ltd. Japan 100.00 NEC Kansai, Ltd. Japan 100.00 NEC Soft, Ltd. (1) Japan 68.16 NEC Infrontia Corporation (1) Japan 53.91 NEC Logistics, Ltd. Japan 100.00 NEC Computers International B.V. The Netherlands 95.56 NEC Taiwan Ltd. Taiwan 100.00 NEC America, Inc. U.S.A. 100.00 NEC Technologies Hong Kong Limited China 100.00 NEC Electronics Inc. U.S.A. 100.00 NEC do Brasil S.A. Brazil 99.98
(1) Listed on the Tokyo Stock Exchange. D. PROPERTY, PLANTS, AND EQUIPMENT We have 59 manufacturing plants in Japan and 29 in 14 other countries (Argentina, Australia, Brazil, China, France, Ireland, Malaysia, Mexico, the Philippines, Singapore, Thailand, the United Kingdom, the United States and Vietnam). Our principal plants are located in Japan. The approximate land space and floor space of these plants as of March 31, 2002 were as follows:
Location Description Principal Products Land Space Floor Space - ---------------------------- ----------------- ---------------------- ------------- ------------- (Thousands of (Thousands of square meters) square meters) - ---------------------------- ----------------- ---------------------- ------------- ------------- Kawasaki, Kanagawa Tamagawa Plant Communications 214 241 equipment; semiconductors Fuchu, Tokyo Fuchu Plant Computers and 220 222 industrial electronic systems; communications equipment Sagamihara, Kanagawa Sagamihara Plant Semiconductors; 195 180 electronic components Otsu, Shiga NEC Kansai, Ltd. Semiconductors 187 161 Abiko, Chiba Abiko Plant Communications equipment 295 126 Kumamoto, Kumamoto NEC Kyushu, Ltd. Semiconductors 128 121 Yokohama, Kanagawa Yokohama Plant Communications equipment 136 118 Tsuruoka, Yamagata NEC Yamagata, Ltd. Semiconductors 139 96 Ichinoseki, Iwate NEC Tohoku, Ltd. Communications equipment 68 56 Yonezawa, Yamagata NEC Custom PCs 59 47 Technica, Ltd. Fukushima, Fukushima NEC Wireless Communication Network 81 47 Network, Ltd. Ota, Gunma NEC Custom PCs 93 34 Technica, Ltd.
We generally consider the production capacity of the plants adequate and sufficient for our requirements. We are experiencing underutilization in some of our semiconductor manufacturing plants due to the recent downturn in demand, especially for commodity products. 25 We own most of the land and floor space for our manufacturing activities. Certain properties are subject to mortgages or encumbrances in order to secure outstanding indebtedness. We lease our corporate headquarters in Tokyo and the floor space for a substantial portion of the other sales and administrative offices throughout the world. In addition to the above, our corporate R&D facilities, most of which we own, occupy 126 thousand square meters of floor space. ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS. The following discussion and analysis should be read in conjunction with "Item 3.A. Selected Financial Data" and our consolidated financial statements and notes to those financial statements included elsewhere in this annual report. A. OPERATING RESULTS OVERVIEW We are a leading provider of systems, components, services, and integrated solutions for computing and communications applications. We focus particularly on providing reliable solutions to meet complex customer requirements. Our results of operations are thus affected by trends in the information technology ("IT") industry, technological changes such as the proliferation of the Internet, mobile, and broadband technologies, and product cycles resulting from the evolution from one generation of computing, communications, or electron device technologies to the next. Our business consists of our electronics operations and our leasing operations. The leasing business segment was established, following the consolidation of NEC Leasing, Ltd.'s financial results into our overall results effective as of the beginning of the fiscal year ended March 31, 2002. NEC Leasing provides financing services such as leasing of computer products to government and corporate clients in Japan. The electronics business is divided into three principal segments, which we call NEC Solutions, NEC Networks, and NEC Electron Devices. NEC Solutions provides solutions, including the provision of systems integration ("SI") services, software, and Internet-related services as well as the development, design, manufacturing and sale of a wide range of computers and computer-related systems primarily for corporate and individual customers. NEC Networks provides network integration services as well as the development, design, manufacturing, and sale of communication equipment, primarily to network service providers. NEC Electron Devices develops, designs, manufactures and sells semiconductors and other electron devices mainly for end-products manufacturers. We have undertaken company-wide efforts to become a solutions-oriented company, which provides solutions that proactively address our customers' problems and focuses on businesses that capitalize on two broad trends that are shaping the emerging next-generation Internet society: mobile and broadband technologies. NEC Solutions is developing its SI services business with the goal of becoming a leading player in its markets by building on its strengths in open mission critical systems (backbone systems using open systems such as UNIX servers). NEC Networks is developing a global leadership position in the networking equipment market, by leveraging its solution capabilities using its knowledge and experience as a total system supplier. It will 26 seek to accomplish this goal by building on its broad range of superior hardware technologies, such as Internet protocol ("IP") and optical networks, and its strong track record in selling and developing 3G wireless communications infrastructure and mobile handsets. In NEC Electron Devices, the system LSI business forms the core of its operations, focusing on delivering device solutions based on a thorough understanding of customer needs. Maintaining strong customer relationships, NEC Electron Devices is concentrating efforts on system LSIs for high-end applications that require a greater speed, higher integration and performance, such as LSIs for servers, core routers and storage products. At the same time, NEC Electron Devices is refining leading-edge technologies and promoting their wide spread use in its effort to become a solutions leader in system LSIs in a broad range of applications. The following table sets forth a summary of our results of operations for the fiscal years ended March 31, 2000, 2001, and 2002:
YEAR ENDED MARCH 31, ------------------------------------------- 2000 2001 2002 ----------- ----------- ------------ (BILLIONS OF YEN) SALES: NEC Solutions JPY 2,270.6 JPY 2,228.5 JPY 2,209.1 NEC Networks 1,527.7 1,834.4 1,957.2 NEC Electron Devices 1,122.8 1,228.9 842.9 Others 723.9 742.4 634.8 Eliminations (653.6) (624.5) (589.2) ----------- ----------- ----------- Electronics business total 4,991.4 5,409.7 5,054.8 Leasing business -- -- 71.8 Eliminations -- -- (25.6) Net sales 4,991.4 5,409.7 5,101.0 Cost of sales 3,664.5 3,981.1 3,919.3 Selling, general and administrative expenses 1,216.5 1,243.4 1,237.2 SEGMENT PROFIT (LOSS)(1): NEC Solutions 84.4 84.1 75.4 NEC Networks 57.1 83.1 53.4 NEC Electron Devices 49.4 68.3 (148.2) Others (2.7) 20.2 3.0 Eliminations (17.6) (16.9) (3.3) ----------- ----------- ----------- Unallocated corporate expenses (60.2) (53.6) (39.7) ----------- ----------- ----------- Electronics business total 110.4 185.2 (59.4) Leasing business total -- -- 6.3 Eliminations -- -- (2.4) Aggregate segment profit (loss) 110.4 185.2 (55.5) Income (loss) before income taxes 30.2 92.3 (461.2) Income (loss) before cumulative 10.4 56.6 (309.4) effect of accounting change Net income (loss) 10.4 56.6 (312.0)
(1) Segment profit means sales less cost of sales and selling, general and administrative expenses allocable to each segment. SIGNIFICANT MEASURES TO COUNTER STRUCTURAL CHANGES IN THE INDUSTRY AND SLOWDOWN IN MARKETS In the fiscal year ended March 31, 2002, the effects of the IT downturn in the United States spread to Japan, which has been mired in a prolonged recession, Europe and other regions. Demand weakened for information-related products, such as communications equipment and PCs, and electron devices such as semiconductors and displays. The fiscal year ended March 31, 2002 also saw changes in the structure of the IT industry, as seen in the shift of production and certain other activities to China. In response, during the fiscal year ended March 31, 2002 we implemented the following measures to restore our ability to generate earnings and strengthen our financial position: 27 ACCELERATING STRUCTURAL REFORMS. We restructured businesses such as those for PCs, DRAMs and displays, that have been negatively impacted by changes in PC-related markets. Since the second half of the fiscal year ended March 31, 2002, we also implemented a restructuring program to counter the rapid deterioration in the communications equipment market, which is expected to remain challenging for some time. Restructuring expenses totalled JPY 285.9 billion, which reflected: - - NEC SOLUTIONS: RESTRUCTURING THE PERSONAL COMPUTERS BUSINESS. NEC Solutions incurred restructuring expenses of JPY 33.6 billion, due mainly to restructuring the PCs and PC peripherals business by integrating and realigning domestic subsidiaries. - - NEC NETWORKS: RESTRUCTURING COST STRUCTURE OF OPTICAL NETWORKING BUSINESS AND OVERSEAS BUSINESSES. NEC Networks' restructuring program focused on reviewing development projects, reducing material costs and streamlining its workforce in the optical networking business. It also worked to scale down operations in Brazil and the United States. NEC Networks recorded JPY 51.2 billion in restructuring expenses, mainly for substantial personnel cuts and inventory corrections arising from its restructuring program. - - NEC ELECTRON DEVICES: IMPLEMENTING STRUCTURAL REFORMS. In response to a changing growth model for electronic products, NEC Electron Devices incurred JPY 200.9 billion in restructuring expenses to reduce fixed costs in order to achieve improved profitability beginning in the fiscal year ending March 31, 2003. The initiatives included stopping DRAM production in the United States and United Kingdom, ceasing operations on old production lines, disposing of aging facilities, and reducing the number of employees. IMPROVING OUR BALANCE SHEET. Shareholders' equity at the end of the fiscal year ended March 31, 2002 was JPY 564.9 billion, down JPY 350.1 billion year on year, the shareholders' equity ratio was 11.3% and the debt-equity ratio was 4.0 times. This is due mainly to the net loss of the fiscal year ended March 31, 2002 of JPY 312.0 billion, largely the result of restructuring expenses, and an increase in the minimum pension liability adjustment owing to an actual loss on pension plan assets brought about by a weak stock market. Had our leasing business been accounted for by the equity method at March 31, 2002, our shareholders' equity ratio would have been 12.7% and our debt-equity ratio 3.0 times. The weakening state of our balance sheet in the fiscal year ended March 31, 2002 prompted us to implement additional restructuring measures. These included reducing inventories by implementing company-wide supply chain management ("SCM") and adjusting semiconductor production. As a result, we reduced total assets by JPY 359.8 billion, compared with the end of the fiscal year ended March 31, 2001, and held interest-bearing debt to JPY 1,696.7 billion, which represented an increase of only JPY 12.5 billion. In both cases, figures are calculated as if our leasing business had been accounted for by the equity method. We intend to reduce interest-bearing debt further, using funds raised internally through ongoing efforts to reduce assets and raise the return on assets. RESTRUCTURINGS OF OUR NEC ELECTRON DEVICES BUSINESSES We have been continuing our efforts to refocus the businesses of NEC Electron Devices. In May 2002, we announced further restructuring plans for NEC Electron Devices, which include, among other things, our plan to transfer most of our semiconductor operations to a new subsidiary in November 2002. The new company's operations will include system LSIs, integrated circuits and discrete devices and compound semiconductor devices. The new company's operations will not include our DRAM operations. We plan eventually to take this company public. 28 RESULTS OF OPERATIONS FISCAL YEAR ENDED MARCH 31, 2002 COMPARED WITH FISCAL YEAR ENDED MARCH 31, 2001 Sales. In the fiscal year ended March 31, 2002, our net sales fell by JPY 308.7 billion to JPY 5,101.0 billion, down 6% from the previous fiscal year. The fall was attributable to a 31% decline in net sales at NEC Electron Devices, in spite of a 7% increase in net sales at NEC Networks and almost flat sales at NEC Solutions. By geographical location of customers, net sales in Japan declined by 1% to JPY 3,911.2 billion. This was mainly attributable to a decline in PCs sales due to a sluggish domestic PCs market and the effect of a fall in both shipments and price of semiconductors and displays due to significantly weak demand. These factors more than offset higher sales of communications equipment, such as mobile handsets, and SI services for various industries, such as manufacturing and communications. Overseas sales were down 18% at JPY 1,189.8 billion. Higher sales of fiber-optic submarine cable systems were negated by falling prices for semiconductors, displays and other electron devices in overseas markets. Sales denominated in foreign currencies, principally the U.S. dollar, fell by 17% to JPY 1,146.0 billion, due to falling prices and shipment volume of semiconductors and other products. Consequently, foreign currency denominated sales represented 23% of net sales for the fiscal year ended March 31, 2002. Fluctuations in foreign currency exchange rates had a negligible effect on earnings, due to a variety of risk hedging measures such as forward exchange contracts and balancing of foreign-currency denominated sales and procurement. See also "-- Results of Operations by Operating Segment Comparing Fiscal Years Ended March 31, 2002 and 2001." Interest, Gain on Securities Sold, Dividends, and Other (Other Income). Other income was JPY 103.6 billion, down JPY 36.5 billion from JPY 140.1 billion in the previous fiscal year. Since April 2000, we have realigned businesses with the goal of selectively focusing on strategic core businesses. Actions have included divestitures of non-core businesses, and implementation of measures designed to raise asset productivity, such as selling marketable securities. Consequently, in the fiscal year ended March 31, 2001, we recorded gains on the sale of investments in securities of JPY 57.9 billion and gains on the sale of property, plant and equipment of JPY 34.3 billion. Similarly, in the fiscal year ended March 31, 2002, we recorded gains on the sale of investments in securities of JPY 32.9 billion and gains on the sale of property, plant and equipment of JPY 12.1 billion. Gains Due to Stock Issuances by Subsidiaries. In the fiscal year ended March 31, 2002, we recorded a JPY 3.1 billion gain on the IPO of NEC Mobiling, Ltd. Of this amount, the sale of our shares in NEC Mobiling as part of its IPO made up JPY 1.8 billion and gains arising from the difference between the offering price and the carrying amount of these shares accounted for JPY 1.2 billion. We also recorded gains of JPY 3.7 billion due to stock issuances by other subsidiaries. See Note 18 to our consolidated financial statements on page F-39. Cost of Sales. Cost of sales fell by JPY 61.8 billion to JPY 3,919.3 billion. As a percentage of net sales, cost of sales were 76.8%, up 3.2 percentage points over the previous fiscal year. This increase was mainly attributable to a fall in semiconductor and display prices, which more than offset the effect of measures to improve SCM and cut fixed costs. Selling, General, and Administrative Expenses. Selling, general and administrative ("SG&A") expenses declined by JPY 6.2 billion to JPY 1,237.3 billion, mainly reflecting vigorous efforts to trim R&D and other expenses. As a percentage of net sales, however, SG&A expenses increased 1.3 percentage points due to the sharp drop in sales reflecting falling prices for electron devices. R&D expenses fell by 3% to JPY 333.6 billion, representing 6.5% of net sales. We pursued greater efficiencies with emphasis on the development of next-generation wireless communication systems, 29 leading-edge system LSIs and Internet-related products. For additional R&D information, see "Item 5.C. Research and Development." Other Expenses. Other expenses increased JPY 259.0 billion to JPY 469.4 billion. In the fiscal year ended March 31, 2002, we incurred restructuring and other unusual charges of JPY 370.5 billion, primarily for additional restructuring measures to mitigate the adverse business environment. We recorded such charges for restructuring subsidiaries and the disposal of assets, and impairment losses on investment in securities. See Note 19 to our consolidated financial statements on page F-41. Income (Loss) Before Income Taxes. We recorded a loss before income taxes of JPY 461.2 billion, down JPY 553.5 billion from income before income taxes of JPY 92.3 billion in the previous fiscal year. This was mainly attributable to a sharp fall in total segment profit, which fell JPY 240.7 billion, reflecting a sharp decline in segment profit at NEC Electron Devices, together with moderate declines at NEC Solutions and NEC Networks. Another factor contributing to the loss was a JPY 234.3 billion increase in restructuring and other unusual charges. Equity in Earnings (Losses) of Affiliated Companies. We recorded equity in losses of affiliated companies of JPY 23.8 billion, down JPY 45.7 billion from earnings of JPY 21.9 billion in the previous fiscal year. This mainly reflected losses posted by affiliates involved in the semiconductor business due to the downturn in the market. Provision (Benefit) for Income Taxes. At March 31, 2002, we had deferred tax assets of JPY 560.7 billion after valuation allowance of JPY 27.2 billion and deferred tax liabilities of JPY 117.9 billion. Major differences between income (loss) before income taxes for financial reporting purposes and for income tax purposes include tax credits, utilization of operating loss carryforwards and the non-deductibility of certain expenses. The total valuation allowance decreased by JPY 9.5 billion in the fiscal year ended March 31, 2002. See Note 9 to our consolidated financial statements for a more detailed explanation. Consolidated tax returns were not permitted under Japanese tax rules until the year ended March 31, 2002. Accordingly, in Japan a subsidiary's losses cannot be offset against NEC's income or that of NEC's other subsidiaries. Japanese income tax regulations permit the carryforward of tax losses in a Japanese entity as an offset against its taxable income during the subsequent five years. Operating loss carryforwards expire at the end of the five-year period. The valuation allowance of JPY 27.2 billion at March 31, 2002 was comprised of (1) JPY 19.1 billion for deferred tax assets recognized for operating loss carryforwards of certain consolidated subsidiaries and (2) JPY 8.1 billion mainly for deferred tax assets related to the tax-deductible temporary differences recorded by subsidiaries in a loss position. At March 31, 2002, our operating loss carryforwards amounting to JPY 583.9 billion consisted of (1) JPY 219.0 billion related to foreign subsidiaries for which deferred tax assets and valuation allowance were recorded, amounting to JPY 41.9 billion and JPY 3.6 billion, respectively, and (2) JPY 364.9 billion related to domestic companies for which deferred tax assets and valuation allowance were recorded, amounting to JPY 146.6 billion and JPY 15.5 billion, respectively. In determining the amount of valuation allowance, we consider all available evidence, including those companies' respective financial condition and results of operations, future losses or income (to the extent that they can be reasonably projected), projected future reversals of taxable temporary differences and our ability to realize tax benefits at the parent company level from subsidiary losses through tax planning strategies. In particular, we believe that those companies that have incurred losses and operating loss carryforwards will, in general, gradually improve their financial results in subsequent fiscal years, although such improvement will occur at a different pace at each company and in general cannot be predicted with enough certainty to avoid recording a valuation allowance. Net Income (Loss). Net loss for the fiscal year ended March 31, 2002 was JPY 312.0 billion, compared to net income of JPY 56.6 billion for the fiscal year ended March 31, 2001, a decrease of JPY 368.6 billion. Net loss per share was JPY 188.63. This mainly reflected the previously mentioned loss before income taxes and equity in losses due to weak results of affiliates accounted for by the equity method. Comprehensive Income (Loss). We recorded a comprehensive loss of JPY 338.9 billion for the fiscal year ended March 31, 2002. The main reason was the net loss of JPY 312.0 billion. Other comprehensive loss for the fiscal year ended March 31, 2002 was JPY 26.8 billion, an improvement of JPY 99.8 30 billion from the fiscal year ended March 31, 2001. Gains on foreign currency translation adjustments of JPY 13.5 billion were more than offset by a loss of JPY 37.8 billion from the minimum pension liability adjustment, caused by falling investment returns on pension plan assets due to slumping stock prices. RESULTS OF OPERATIONS BY OPERATING SEGMENT COMPARING FISCAL YEARS ENDED MARCH 31, 2002 AND 2001 We began consolidating NEC Leasing, formerly an equity method affiliate, effective April 1, 2001. NEC Leasing mainly provides leasing services. The leasing business differs significantly in nature from our electronics business and has a significant impact on our consolidated financial condition. Accordingly, we have decided to treat the leasing business as a separate segment from the electronics business for accounting purposes. In the fiscal year ended March 31, 2002, the electronics business posted sales of JPY 5,054.8 billion, down JPY 355.0 billion, or 7%, from the previous fiscal year. Total segment losses of the electronics business were JPY 59.4 billion, down JPY 244.6 billion. In the fiscal year ended March 31, 2002, the leasing business recorded sales of JPY 71.8 billion and segment profit of JPY 6.3 billion. Sales and segment profit figures by operating segment for the electronics business are presented below. Sales and segment profit figures for each segment include intersegment transactions. See Note 22 to our consolidated financial statements on page F-46. NEC SOLUTIONS Sales. NEC Solutions' sales for the fiscal year ended March 31, 2002 were JPY 2,209.1 billion, down 1% from the previous fiscal year, almost flat compared with the previous fiscal year. SI services for various industries such as manufacturing and communications fared well. In addition, by taking advantage of opportunities for valued-added services offered by BIGLOBE, sales of software and IT services grew. In hardware, higher sales of such computers as servers, contributed by large-scale projects, were more than offset by slower sales of personal products due to the persistently weak domestic consumer PC market and a slowdown in demand for PCs for corporate clients. Segment Profit. Segment profit for the fiscal year ended March 31, 2002 fell by JPY 8.7 billion to JPY 75.4 billion. Software and services saw higher profit margins due to higher productivity in SI services and a stronger focus on software development. This profit was offset, however, by declining hardware profitability, particularly in servers and a weak PC market. As a result, segment profit as a percentage of sales fell by 0.4 percentage points to 3.4%. NEC NETWORKS Sales. NEC Networks' sales for the fiscal year ended March 31, 2002 increased by 7% to JPY 1,957.2 billion. The main reasons for the increase were strong investment in 3G wireless communications systems by communications operators and strong mobile handset sales in Japan, and increased overseas sales of fiber-optic submarine cable systems mainly in the first half, despite a sharp deterioration in market conditions in the second half. Segment Profit. Segment profit for the fiscal year ended March 31, 2002 declined by JPY 29.7 billion to JPY 53.4 billion. As a percentage of sales, segment profit worsened by 1.8 percentage points to 2.7%. Profit margins of mobile handsets improved on account of higher sales than the previous fiscal year in the domestic market, but were more than offset primarily by the falling profitability of network infrastructure, mainly optical networking equipment for overseas communications carriers. NEC ELECTRON DEVICES Sales. NEC Electron Devices' sales for the fiscal year ended March 31, 2002 fell by 31% to JPY 842.9 billion. The deterioration of IT-related markets, including PCs and communications equipment, and the digital home electronics market continued. Accordingly, semiconductor and display businesses 31 were hit hard by a sharp drop in demand for finished electronic products, resulting in decreases in sales in terms of both volume and price. Segment Loss. Segment loss for the fiscal year ended March 31, 2002 was JPY 148.2 billion, down JPY 216.4 billion from the segment profit for the previous fiscal year. This was mainly attributable to oversupply of DRAMs due to the effect of a stagnant PC market and competition among semiconductor manufacturers. In the display fields, demand for LCDs for use in PCs dropped and profit margins for small to medium-sized displays for mobile phones worsened due to intensified competition. OTHERS Sales. The others segment includes the manufacture and sale of semiconductor manufacturing equipment, and LCD projectors as well as information and network system construction services. Sales in this segment were JPY 634.8 billion, down 15% from the previous fiscal year, due to the completion of the sale of our electronic testing and measuring equipment and resistor equipment business to a third party. Segment Profit. Segment profit was JPY 3.0 billion, down JPY 17.3 billion, due to lower sales of semiconductor manufacturing equipment and slimmer profit margins. FISCAL YEAR ENDED MARCH 31, 2001 COMPARED WITH FISCAL YEAR ENDED MARCH 31, 2000 Sales. In the fiscal year ended March 31, 2001, our net sales increased by JPY 418.3 billion, or 8%, to JPY 5,409.7 billion, from the previous fiscal year. This increase was attributable to increases of 20% in sales at NEC Networks and 9% in sales at NEC Electron Devices, which were partly offset by a 2% decline in sales at NEC Solutions. Net sales in the fiscal year ended March 31, 2001 denominated in foreign currencies, mainly U.S. dollars, were JPY 1,374.5 billion, a decline of 2% from the previous fiscal year. This decline was primarily due to the discontinuance of our consumer PC business in North America. As a consequence of these factors, sales denominated in foreign currencies accounted for 25% of net sales. The effect of fluctuations in foreign currency exchange rates on our net sales was insignificant, as a result of our efforts to reduce risks from such fluctuations, such as using forward exchange contracts and balancing our procurement and outsourced assembly operations to foreign countries. See also "-- Results of Operations by Operating Segment Comparing Fiscal Years Ended March 31, 2001 and 2000." Interest, Gain on Securities Sold, Dividends, and Other (Other Income). Other income in the fiscal year ended March 31, 2001 was JPY 140.1 billion, a decrease of JPY 78.3 billion from JPY 218.4 billion in the previous fiscal year. In the fiscal year ended March 31, 2000, we recognized a JPY 112.4 billion gain on the sale of securities and a JPY 45.3 billion gain on the sale of property, plant, and equipment, including the sale and leaseback of our head office building. In the fiscal year ended March 31, 2001, we recorded a JPY 57.9 billion gain on the sale of investments in securities, as well as a JPY 34.3 billion gain on the sale of property, plant, and equipment, including some of our overseas production facilities. Gains Due to Stock Issuances by Subsidiaries. During the fiscal year ended March 31, 2001, NEC Soft, Ltd. and NEC Machinery Corporation completed their initial public offerings. We recorded JPY 41.3 billion in gains related to the stock offerings by these subsidiaries. Of the total gain, JPY 26.0 billion was realized as a result of the sale of shares we held in these subsidiaries as part of their initial public offering and JPY 15.3 billion was recorded as increased equity in the net assets of these subsidiaries because the price per share received in the public offering was in excess of the previous book value per share. No similar gains were recorded in the previous fiscal year. Cost of Sales. Cost of sales in the fiscal year ended March 31, 2001 was JPY 3,981.1 billion, an increase of JPY 316.6 billion, or 9%, over the previous fiscal year, corresponding to our increase in net sales. As a percentage of net sales, cost of sales in the fiscal year ended March 31, 2001 was 73.6%, remaining 32 largely unchanged from the previous fiscal year despite the drop in market prices for memory devices and PCs in the second half of the fiscal year ended March 31, 2001. This was mainly attributable to our efforts to promote supply chain management and efforts to reduce fixed costs. Selling, General, and Administrative Expenses. Selling, general, and administrative expenses in the fiscal year ended March 31, 2001 increased JPY 26.9 billion over the previous fiscal year to JPY 1,243.4 billion, partly reflecting variable costs associated with the higher level of net sales in the later fiscal year and an increase in R&D expenses. As a percentage of net sales, selling, general, and administrative expenses decreased from 24.4% in the fiscal year ended March 31, 2000 to 23.0% in the fiscal year ended March 31, 2001 owing primarily to greater selectivity in R&D investment and the results of our efforts to reduce costs. R&D expenses in the fiscal year ended March 31, 2001 were JPY 345.0 billion, an increase of 9% compared with the previous fiscal year, and represented 6.4% of net sales. We focused our R&D efforts during the fiscal year ended March 31, 2001 on the development of next-generation technologies such as 3G mobile communications systems, as well as the development of optical network and Internet-related products. Other Expenses. Other expenses in the fiscal year ended March 31, 2001 fell by JPY 18.1 billion to JPY 210.4 billion compared with the previous fiscal year. This decrease reflected a JPY 24.9 billion reduction in net foreign exchange loss and an JPY 11.8 billion decrease in restructuring and other unusual charges, from the fiscal year ended March 31, 2000 partially offset by an JPY 18.4 billion increase in miscellaneous other expenses. In the fiscal year ended March 31, 2001, we incurred restructuring and other unusual charges of JPY 136.2 billion, including restructuring charges for the disposition of assets and the liquidation of NEC Home Electronics and restructuring of other subsidiaries and impairment losses due to other than temporary decline in marketable securities. These restructuring and other unusual charges, while substantial, represented an 8% decline from the previous fiscal year in which we recorded restructuring and other unusual charges of JPY 148.0 billion, including restructuring charges related to NEC Home Electronics and Packard Bell NEC, and refunds to the Defense Agency and the Defense Facilities Administration Agency of Japan. Income Before Income Taxes. Income before income taxes in the fiscal year ended March 31, 2001 was JPY 92.3 billion, a JPY 62.1 billion, or 206%, increase over the previous fiscal year. This reflected a 42% improvement in aggregate segment profit in Japan resulting from strong sales growth in Japan, gains on the sale of overseas production facilities and gains due to stock issuances by subsidiaries. Our strong operating results in Japan at the segment profit level in the fiscal year ended March 31, 2001 were offset to a significant extent, however, by restructuring charges associated with NEC Home Electronics and impairment losses on marketable securities. The increase also reflected an improvement in the results of our foreign subsidiaries. In the fiscal year ended March 31, 2000, our foreign subsidiaries suffered aggregate losses before income taxes of JPY 90.0 billion, including restructuring charges associated with Packard Bell NEC, while they recorded income before income taxes in the fiscal year ended March 31, 2001, in part due to our termination of Packard Bell NEC's North American operations in the previous fiscal year. Equity in Earnings of Affiliated Companies. Equity in earnings of affiliated companies increased by 93.7%, to JPY 21.9 billion in the fiscal year ended March 31, 2001, reflecting increases in sales and operating revenue, gross profit, and net income of affiliated companies accounted for by the equity method, as compared with the previous fiscal year. Provision for Income Taxes. At March 31, 2001, we had deferred tax assets of JPY 302.6 billion after valuation allowance of JPY 36.7 billion and deferred tax liabilities of JPY 113.9 billion. Major differences between income before income taxes for financial reporting purposes and for income tax purposes include tax credits, utilization of operating loss carryforwards and the non-deductibility of certain expenses. The total valuation allowance decreased by JPY 7.2 billion in the fiscal year ended March 31, 2001. See Note 9 to the consolidated financial statements for a more detailed explanation. 33 Consolidated tax returns were not permitted under Japanese tax rules. Accordingly, in Japan a subsidiary's losses cannot be offset against NEC's income or that of NEC's other subsidiaries. Japanese income tax regulations permit the carryforward of tax losses in a Japanese entity as an offset against its taxable income during the subsequent five years. Operating loss carryforwards expire at the end of the five-year period. The valuation allowance of JPY 36.7 billion at March 31, 2001 was comprised of (1) JPY 19.4 billion for deferred tax assets recognized for operating loss carryforwards of certain consolidated subsidiaries and (2) JPY 17.3 billion mainly for deferred tax assets related to the tax-deductible temporary differences recorded by subsidiaries in a loss position. At March 31, 2001, our operating loss carryforwards amounting to JPY 270.3 billion consisted of (1) JPY 101.9 billion related to foreign subsidiaries for which deferred tax assets and valuation allowance were recorded, amounting to JPY 33.1 billion and JPY 6.8 billion, respectively, and (2) JPY 168.4 billion related to domestic companies for which deferred tax assets and valuation allowance were recorded, amounting to JPY 70.5 billion and JPY 12.6 billion, respectively. In determining the amount of valuation allowance, we consider all available evidence, including those companies' respective financial condition and results of operations, future losses or income (to the extent that they can be reasonably projected), projected future reversals of taxable temporary differences and our ability to realize tax benefits at the parent company level from subsidiary losses through tax planning strategies. In particular, we believe that those companies that have incurred losses and operating loss carryforwards will, in general, gradually improve their financial results in subsequent fiscal years, although such improvement will occur at a different pace at each company and in general cannot be predicted with enough certainty to avoid recording a valuation allowance. Net Income. Net income for the fiscal year ended March 31, 2001 was JPY 56.6 billion, a JPY 46.2 billion increase over the previous fiscal year. This increase resulted from the increase in income before income taxes described above and the increase in equity in earnings of affiliated companies. The net income to net sales ratio was 1.0% and return on equity was 6.0%. Comprehensive Income (Loss). In the fiscal year ended March 31, 2001, we recorded a comprehensive loss of JPY 70.0 billion, as the result of recording a negative minimum pension liability adjustment of approximately JPY 84.9 billion and unrealized losses on marketable securities of approximately JPY 60.9 billion, offset to some extent by positive foreign currency translation adjustments. The negative minimum pension liability adjustment resulted from a reduction, from 4.0% to 3.5%, in the discount rate that we use in estimating benefit obligations and a decline in the value of the securities comprising plan assets, primarily as a consequence of the overall decline in the Japanese stock market during the fiscal year ended March 31, 2001. Our unrealized losses on marketable securities in the fiscal year ended March 31, 2001 similarly resulted from the Japanese stock market decline. The Nikkei-225 Stock Average, which is generally considered the leading indicator of Japanese stock market performance, began the fiscal year at JPY 20,337, and closed the fiscal year at JPY 12,999, a 36% decline. Our other comprehensive losses in the fiscal year ended March 31, 2001 represented a substantial decline from the previous fiscal year, in which we recorded JPY 41.5 billion in unrealized gains on marketable securities and a positive minimum pension liability adjustment of JPY 28.2 billion, which were partially offset by negative foreign currency adjustments of JPY 24.3 billion. RESULTS OF OPERATIONS BY OPERATING SEGMENT COMPARING FISCAL YEARS ENDED MARCH 31, 2001 AND 2000 NEC SOLUTIONS Sales. NEC Solutions' sales for the fiscal year ended March 31, 2001 were JPY 2,228.5 billion, decrease of 2% from the previous fiscal year. Sales of systems integration services increased due to strong demand from large corporate and government customers and an increase in e-business projects. Sales also increased in our BIGLOBE business, due to growing use of the Internet. In hardware, sales of servers and workstations declined due to weak investment in information technology by small and medium-sized companies as well as a decrease in sales of mainframe computers. Although our sales to corporate customers grew in Japan, our overall PC sales decreased due to slowdown in demand for PCs in the worldwide market and our withdrawal from the consumer PC business in North America. 34 Segment Profit. Segment profit for the fiscal year ended March 31, 2001 was JPY 84.1 billion, largely unchanged from the previous fiscal year. The profitability of our hardware business suffered from the rapid drop in PC prices in the second half of the fiscal year ended March 31, 2001, and declining sales of and profit margins on mainframe computers. The profitability of our systems integration services business, however, improved substantially as the overall efficiency of our systems integration services business improved. As a result, the segment profit to sales ratio of NEC Solutions remained 3.8%, approximately the same level as the previous fiscal year. NEC NETWORKS Sales. NEC Networks' sales for the fiscal year ended March 31, 2001 increased by 20% to JPY 1,834.4 billion from the previous fiscal year. In the Japanese market, sales increased due to strong growth in sales of i-mode mobile handsets for NTT DoCoMo and investment in network buildouts by network service providers. Overseas sales also increased. Although sales of high-capacity optical fiber transmission systems fell in the North American market as a result of scaled-down investment in network infrastructure by network service providers, sales grew in Asia and Oceania, particularly for submarine cable systems. In Latin America, NEC Networks also posted strong sales growth owing to vigorous capital investments in communications infrastructure such as central office switching systems. Segment Profit. Segment profit for the fiscal year ended March 31, 2001 was JPY 83.1 billion, a 46% increase over the previous fiscal year, improving from 3.7% of net sales in the fiscal year ended March 31, 2000 to 4.5% of NEC Networks' net sales in the fiscal year ended March 31, 2001. This was attributable to a substantial increase in sales of mobile handsets for NTT DoCoMo's i-mode service and of network infrastructure systems in the Japanese market, which more than offset the increase in expenses for the development of equipment for next-generation communications infrastructure. NEC ELECTRON DEVICES Sales. NEC Electron Devices' sales for the fiscal year ended March 31, 2001 rose by 9% to JPY 1,228.9 billion, supported by strong demand for PCs, mobile handsets, and digital consumer electronic products continued from the previous fiscal year. Sales of color LCDs declined due to weak market conditions, but increased sales of almost all product categories of semiconductors, including memory devices, LCD driver ICs and opto-devices, and system LSIs, as well as electronic components in the first half of the fiscal year ended March 31, 2001 contributed to the growth. Segment Profit. Segment profit for the fiscal year ended March 31, 2001 rose by 38% to JPY 68.3 billion, improving from 4.4% of net sales in the fiscal year ended March 31, 2000 to 5.6% of net sales in the fiscal year ended March 31, 2001. This reflected improved sales of LCD driver ICs, opto-devices, and system LSIs, and the increase in memory prices in the first half of the fiscal year ended March 31, 2001. These increases more than offset a decline in the profitability of our display business, which incurred a loss of JPY 13 billion in the fiscal year ended March 31, 2001. OTHERS Sales. Sales in this segment are generated by products such as LCD projectors, avionics systems, and semiconductor manufacturing equipment as well as information and network system construction services. Sales in our Others segment in the fiscal year ended March 31, 2001 were JPY 742.4 billion, largely unchanged from the previous fiscal year. Segment Profit. Segment profit improved to JPY 20.2 billion from the previous fiscal year's segment loss of JPY 2.7 billion due to the achievement of profitability in semiconductor manufacturing equipment business and enhanced profitability in the businesses of avionics systems as well as information and network system construction services. 35 B. LIQUIDITY AND CAPITAL RESOURCES FINANCIAL AND LIQUIDITY MANAGEMENT Our policy is to maintain a level of cash and cash equivalents, including committed credit facilities with financial institutions, equivalent to approximately one month of net sales. Cash and cash equivalents including committed credit facilities established with financial institutions in Japan and overseas were JPY 727.8 billion as of March 31, 2002, JPY 91.0 billion more than at the end of the previous fiscal year. This is equivalent to 1.7 times average monthly sales in the fiscal year ended March 31, 2002. The increase mainly reflected our policy of preparing for possible instability in the domestic financial markets brought about by the bankruptcy of financial institutions and other factors. Under this policy, we increased our committed credit facilities by JPY 100.0 billion, bringing the total to JPY 350.0 billion at March 31, 2002. Committed credit facility contracts do not contain clauses that permit the lenders to terminate the credit facility in the event of an adverse change in ratings of our securities or commercial paper ("CP"). In order to secure funds at low interest rates, we are also increasing emphasis on procuring long-term funds and on the use of capital market instruments. In the fiscal year ended March 31, 2002, we raised JPY 100.0 billion through the issuance of trust originated preferred securities having no predetermined maturity and another JPY 100.0 billion through the issuance of euro yen convertible bonds (maturity of 8 years). As of March 31, 2002, long-term funding accounted for 68% of total funds procured, down 5 percentage points from the previous fiscal year due to the issuance of CP maturing after the fiscal year-end. Long-term funding remained at a high level. The use of capital market instruments accounted for 66% of total funding, up 2 percentage points from the previous fiscal year. All figures exclude the effect of the consolidation of our leasing business. The trust originated preferred securities were issued to build a stronger financial structure by increasing equity, while minimizing, insofar as possible, the dilution of shareholder value. Trust originated preferred securities have certain equity-like features, such as having no predetermined maturity, ranking junior to ordinary debt in the event of liquidation, and allowing deferrals of dividends for a certain period of time should NEC suspend dividends on common stocks. Major rating agencies have acknowledged that trust originated preferred securities may be recognized as equity to a certain extent. At the same time, however, trust originated preferred securities do not dilute earnings per share for existing shareholders, unlike a share issuance at fair value. See Note 10 to our consolidated financial statements on page F-26. For our short-term funding needs, we rely primarily on CP in Japan to preserve flexibility for short-term capital or operating purposes. We have a JPY 500.0 billion CP program that we believe is sufficient for our present working-capital requirements. In the fiscal year ended March 31, 2002, our long-term credit ratings were lowered to A+ (Rating and Investment Information, Inc.) and Baa2 (Moody's Investor Service), and our short-term credit rating was lowered to A-1 (Rating and Investment Information, Inc.). The lowering of these ratings did not have a material impact on our ability to issue and sell CP. To maintain our flexibility to meet short and long-term cash requirements, our U.S. financial subsidiary has a $500 million medium-term note ("MTN") program and NEC and our U.K. financial subsidiary also jointly have a $2 billion MTN program. OFF-BALANCE SHEET ARRANGEMENTS We securitize receivables by selling certain trade receivables and investment in leases to a special purpose company, without recourse. The purpose of such securitization transactions is to enhance asset efficiency and eliminate the risk associated with default on trade receivables and investments in leases. On sales of trade receivables and investment in leases, in some cases we retain subordinated interests. The subordinated interests have no significant impact on our financial position. 36 We also sell a portion of our land, buildings, facilities and equipment to special purpose companies, leasing them back over periods of one to five years, for the purpose of eliminating risks associated with a fall in asset value or obsolete production facilities. These transactions are treated as operating leases for accounting purposes. Neither we, nor our directors or employees, have any investments in these special purpose companies. The special purpose companies used in connection with the securitization of trade receivables and investment in leases are not consolidated since we have surrendered control over the receivables. Similarly, the special purpose companies used in connection with the leasing of property are not consolidated, since third parties have made a substantial investment that is at risk for the life of the special purpose company. The amount of off-balance sheet arrangements as of March 31, 2001 and 2002 were as follows:
As of March, 31 - -------------------------------------------------------------------------------------------------------- 2001 2002 ------------------------------------------------- (Billions of yen) Securitized trade receivables and investment in leases JPY 236.4 JPY 286.8 Operating leases 204.4 206.6 - ----------------------------------------------------------------------------------- --------------------- Total JPY 440.8 JPY 493.4 - ----------------------------------------------------------------------------------- ---------------------
(CONTRACTUAL OBLIGATIONS) The status of contractual obligations as of March 31, 2002 was as follows:
- -------------------------------------------------------------------------------------------------------- Payments due by period ------------------------------------------------------------------------------------- Total Less than 1-3 years 3-5 years 5+ 1 year years - -------------------------------------------------------------------------------------------------------- (Billions of yen) Long-term debt excluding capital leases JPY 1,797.4 JPY 302.5 JPY 638.9 JPY 423.5 JPY 432.5 - -------------------------------------------------------------------------------------------------------- Capital leases 11.8 7.8 3.0 1.0 -- - -------------------------------------------------------------------------------------------------------- Operating leases 140.8 48.9 56.9 24.2 10.8 - -------------------------------------------------------------------------------------------------------- Total JPY 1,950.0 JPY 359.2 JPY 698.8 JPY 448.7 JPY 443.3 - --------------------------------------------------------------------------------------------------------
Commitments for contractual obligations for the purchase of property, plant and equipment were JPY 15.1 billion, and will be paid within one year. The balance of guarantees, excluding guarantees for employees (maximum guarantee period: 22 years), was JPY 70.7 billion. Guarantees with periods less than 1 year, 1 to 3 years, 3 to 5 years, and 5 years or more were JPY 10.2 billion, JPY 32.8 billion, JPY 10.6 billion and JPY 17.1 billion. ASSETS, LIABILITIES, AND SHAREHOLDERS' EQUITY Effective April 1, 2001, we began consolidating NEC Leasing, formerly an equity method affiliate. The table below compares our financial position treating the leasing business as a consolidated subsidiary and as an equity method affiliate, as in previous years. We believe this comparative presentation is critical to an accurate portrayal of our financial position, as the level of interest-bearing debt in our leasing business increases in line with growth in our volume of business. 37 CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
Condensed consolidated balance sheets, Condensed consolidated balance sheets, including leasing accounting for leasing business business in by the equity method consolidation --------------------------------------------------------------------------- As of March 31 2001 2002 2002 (Millions of yen) Assets: Cash and cash equivalents JPY 386,835 JPY 348,021 JPY 377,772 Notes and accounts receivable 1,053,133 938,179 905,069 Inventories 828,081 650,043 650,043 Investment in leases -- -- 506,761 Investments and long-term receivables excluding investment in leases 733,637 640,957 621,078 Property, plant and equipment 1,128,813 939,470 959,577 Other 693,125 947,201 990,583 Total assets JPY 4,823,624 JPY 4,463,871 JPY 5,010,883 Liabilities and shareholders' equity: Interest-bearing debt JPY 1,684,259 JPY 1,696,739 JPY 2,259,705 Other liabilities 2,155,942 1,987,805 1,956,246 Minority interests 68,387 117,212 132,817 Preferred securities issued by a subsidiary -- 97,200 97,200 Shareholders' equity 915,036 564,915 564,915 Total liabilities and Shareholders' equity JPY 4,823,624 JPY 4,463,871 JPY 5,010,883 - ---------------------------------------------------------------------------------------------------------
Total assets at March 31, 2002 were JPY 5,010.9 billion, up JPY 187.3 billion over the previous fiscal year. This mainly reflected a JPY 547.0 billion increase in investment in leases and other assets due to the consolidation of NEC Leasing. Accounting for the leasing business by the equity method, total assets would have declined by JPY 359.8 billion to JPY 4,463.9 billion. Our effort to improve asset efficiency resulted in sharp cuts in accounts receivable and inventories. Current assets at March 31, 2002 were JPY 2,405.0 billion, down JPY 60.7 billion from the previous fiscal year. The decline was JPY 340.4 billion, excluding the impact of additional investment in leases and other of JPY 279.7 billion from the consolidation of the leasing business. Accounting for the leasing business by the equity method, cash and cash equivalents would have been JPY 348.0 billion, down JPY 38.8 billion. Notes and accounts receivable declined by JPY 115.0 billion to JPY 938.2 billion due to efforts to promote the collection of accounts receivable reflecting the fourth quarter sales decline. Inventories fell by JPY 178.0 billion to JPY 650.0 billion due to the promotion of SCM and extensive production adjustments at NEC Electron Devices. Investments and long-term receivables increased by JPY 142.2 billion to JPY 875.9 billion at March 31, 2002, including JPY 254.8 billion of investment in leases. A decline in marketable securities, reflecting a weak stock market and the sale of marketable securities aimed at raising asset efficiency, was more than offset by the JPY 234.9 billion in additional investment in leases and other assets arising from the consolidation of the leasing business. Property, plant and equipment decreased by JPY 169.2 billion to JPY 959.6 billion at March 31, 2002. The main reason was the recording of impairment losses on existing facilities due to restructuring measures, the sale of certain production bases to Electronics Manufacturing Service ("EMS") companies and the leasing of production facilities. Other assets totaled JPY 770.4 billion, up JPY 275.0 billion. We recorded long-term deferred tax assets relating to future tax effects on operating loss carry forwards resulting from our substantial net loss in the fiscal year ended March 31, 2002. 38 Current and long-term liabilities increased by JPY 375.8 billion from March 31, 2001 to JPY 4,216.0 billion at March 31, 2002. Interest-bearing debt, the sum of short-term borrowings, the current portion of long-term debt and long-term debt, increased by JPY 575.4 billion to JPY 2,259.7 billion at March 31, 2002. The increase in interest-bearing debt was mainly attributable to the effect of the consolidation of NEC Leasing of JPY 563.0 billion. Excluding that effect, interest-bearing debt increased by only JPY 12.5 billion to JPY 1,696.7 billion at March 31, 2002. While we worked to reduce interest-bearing debt by procuring funds through preferred securities issued by a subsidiary, declining cash flows from operating activities and the issuance of euro yen convertible bonds slightly increased interest-bearing debt. Accrued pension and severance costs increased by JPY 67.2 billion to JPY 467.6 billion at March 31, 2002. This mainly reflected lower investment returns on pension plan assets due to the weak stock market. Shareholders' equity was JPY 564.9 billion at March 31, 2002, down JPY 350.1 billion compared with the previous fiscal year end. This was mainly due to the current year net loss and a JPY 26.8 billion decrease in accumulated other comprehensive income (loss). Accumulated other comprehensive income (loss) is the sum of accumulated foreign currency translation adjustments, the minimum pension liability adjustment, unrealized gains (losses) on marketable securities and unrealized gains (losses) on derivative financial instruments. The decrease in accumulated other comprehensive income (loss) was mainly due to a JPY 37.8 billion increase in the minimum pension liability adjustment due to lower investment returns. As a result, the shareholders' equity ratio declined from 19.0% to 11.3% (12.7% using the equity method of accounting for the leasing business). CASH FLOWS
YEAR ENDED MARCH 31, ---------------------------------------------- 2000 2001 2002 ---------- ----------- ---------- (Billions of yen) NET CASH PROVIDED BY (USED IN): Operating activities JPY 458.5 JPY 360.5 JPY 136.6 Investing activities 90.4 (111.5) (203.5) Financing activities (487.5) (240.0) 55.7 Effect of exchange rate changes on cash and cash equivalents (7.1) 3.9 2.1 --------- --------- --------- Net increase (decrease) in cash and cash equivalents JPY 54.3 JPY 12.9 JPY (9.1) ========= ========= =========
Cash and cash equivalents at March 31, 2002 amounted to JPY 377.8 billion, down JPY 9.1 billion from March 31, 2001. Net cash provided by operating activities was JPY 136.6 billion for the fiscal year ended March 31, 2002, JPY 223.9 billion less than the previous fiscal year. A company-wide effort to raise asset efficiency through such means as production innovations reduced inventories, notes and accounts receivable. However these reductions were more than offset by our fiscal year ended March 31, 2002 net loss of JPY 312.0 billion. Depreciation fell by JPY 15.4 billion to JPY 234.7 billion for the fiscal year ended March 31, 2002 due to cutbacks in capital expenditures. Net cash used in investing activities was JPY 203.5 billion for the fiscal year ended March 31, 2002, JPY 92.0 billion more than in the fiscal year ended March 31, 2001. The effect of decreased expenditures on property, plant and equipment in line with reductions in capital expenditures was offset by reduced proceeds from the sale of marketable securities and property, plant and equipment compared with the previous fiscal year. Net cash provided by financing activities was JPY 55.7 billion for the fiscal year ended March 31, 2002. We raised a total of JPY 200.0 billion (par value) in December 2001 through the issuance of JPY 100.0 billion in euro yen convertible bonds and JPY 100.0 billion in preferred securities by a subsidiary. Net cash 39 provided by financing activities was also impacted by the redemption of convertible bonds and repayment of long-term debt, partially offset by increases in short-term debt. Cash dividends per share applicable to the fiscal year ended March 31, 2002 were JPY 6.0, JPY 5.0 less than in the previous fiscal year, reflecting the deterioration in business conditions across IT fields and the substantial restructuring expenses incurred during the fiscal year ended March 31, 2002. We paid an interim dividend of JPY 3.0 per share in December 2001. For a discussion of our capital expenditures, see the "Capital Expenditures" section under "Item 4.A. History and Development of the Company." CRITICAL ACCOUNTING POLICIES Our analysis of the financial condition and results of operations discusses the consolidated financial statements, which have been prepared in conformity with accounting principles generally accepted in the United States. The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimated. Management believes that estimates and assumptions used in applying the following critical accounting policies affect our consolidated financial statements significantly. Marketable Securities. We classify our marketable equity securities and debt securities as available-for-sale which are reported at fair value, with unrealized gains and losses included in accumulated other comprehensive income (loss), net of taxes. When a decline in value of the investments in marketable securities is deemed to be other-than-temporary, we recognize an impairment loss to the extent of the decline. In determining if and when such a decline in value is other-than-temporary, we evaluate the market conditions, trends of earnings, and other key measures. Realized gains or losses on the sale of the marketable securities are based on the average cost of a particular security held at the time of sale. Future adverse changes in market conditions or poor operating results of the companies whose marketable securities are owned by us could result in losses or an inability to recover the carrying value of the marketable securities that may not be reflected in marketable securities' current carrying value, thereby possibly requiring an impairment charge in the future. Pension and Severance Plans. We have pension and severance costs and liabilities that are developed from actuarial valuations. Inherent in these valuations are key assumptions including a discount rate and the expected long-term rate of return on pension plan assets. We are required to consider current market conditions, including changes in interest rates, in selecting these assumptions. Changes in the related pension and severance costs and liabilities may occur in the future due to changes in the assumptions, in addition to changes resulting from fluctuations in the number of our employees. Deferred Income Taxes. We record a valuation allowance to reduce our deferred tax assets to the amount that is more likely than not to be realized. In this regard, we have considered future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for recording a valuation allowance. In the event that we were to determine that we would be able to realize our deferred tax assets in the future in excess of our net recorded amount, an adjustment to the deferred tax asset would increase income in the period such determination was made. Likewise, should we determine that we would not be able to realize all or part of our net deferred tax asset in the future, an adjustment to the deferred tax asset would decrease income in the period in which such determination was made. Impairment of Long-Lived Assets. Long-lived assets are evaluated for impairment using an estimate of undiscounted cash flows whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. If the estimate of undiscounted cash flows is less than the carrying amount of the assets, an impairment loss is recorded based on the fair value of the assets. 40 In determining the fair value of the respective assets, we must make estimates and assumptions regarding future cash flows and other factors. If these estimates or their related assumptions change in the future, we may be required to record impairment charges for each of the assets not previously recorded. Intangible Assets. Intangible assets consist primarily of the costs of purchased patents and trade names and goodwill. Goodwill represents the excess of cost of the acquired enterprise over the sum of the amounts assigned to identifiable assets less liabilities assumed. Costs allocated to patents and trade names are amortized principally on a straight-line basis over their estimated useful lives. Goodwill, which arose from business combinations completed before July 1, 2001, has been amortized on a straight-line basis over the period of expected benefit which does not exceed 10 years. Goodwill, which arose from business combinations completed after June 30, 2001, is stated at cost, and no amortization is recorded. We review the carrying amount of intangible assets for impairment whenever events or circumstances indicate that the carrying amounts may not be recoverable. In assessing the recoverability of our intangible assets, we must make estimates and assumptions regarding estimated future cash flows and other factors to determine the fair value of the respective assets. If these estimates or their related assumptions change in the future, we may be required to record impairment charges for these assets not previously recorded. EFFECT OF NEW ACCOUNTING STANDARDS In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No. 141, "Business Combinations," and No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. SFAS No. 141 also includes guidance on the initial recognition and measurement of goodwill and other intangible assets arising from business combinations completed after June 30, 2001. SFAS No. 142 prohibits the amortization of goodwill and intangible assets with indefinite useful lives. SFAS No. 142 requires that these assets be reviewed for impairment at least annually. Intangible assets with finite lives will continue to be amortized over their estimated useful lives. Additionally, SFAS No. 142 requires that goodwill included in the carrying value of equity method investments no longer be amortized. We adopted SFAS No. 142 effective April 1, 2002. We recorded amortization of JPY 5,517 million, JPY 6,330 million and JPY 8,360 million for the years ended March 31, 2000, 2001 and 2002, respectively, under previous accounting standards. In accordance with SFAS No. 142, we are required to perform the impairment tests of goodwill and indefinite lived intangible assets by the end of September 2002. Any impairment charge resulting from these tests will be reflected as the cumulative effect of accounting change. We completed these tests and determined that these assets are not impaired. In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS No. 144 addresses financial accounting and reporting for the impairment or disposal of long-lived assets and supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," and the accounting and reporting provisions of APB Opinion No. 30, "Reporting the Results of Operations," for a disposal of a segment of a business. We adopted SFAS No. 144 effective April 1, 2002, and do not expect a material effect on our results of operations and financial position, except that any future discontinued operations may be presented in our financial statements differently under SFAS No. 144 as compared to the previous accounting standards. C. RESEARCH AND DEVELOPMENT Since the establishment in 1939 of our first research laboratory, we have consistently recognized the importance of our R&D activities. R&D is critical to our success, and we are committed to continue devoting our personnel as well as significant financial and other resources to it. The table below sets forth information with respect to our R&D expenditures for the periods shown: 41
- ------------------------------------------------------------------------------------ YEAR ENDED MARCH 31, -------------------------------------- 2000 2001 2002 - ------------------------------------------------------------------------------------ (BILLIONS OF YEN) - ------------------------------------------------------------------------------------ R&D expenses JPY 315.2 JPY 345.0 JPY 333.6 As a percentage of net sales 6.3% 6.4% 6.5% - ------------------------------------------------------------------------------------
During the fiscal year ended March 31, 2002, R&D expenses at NEC Solutions, NEC Networks and NEC Electron Devices, and others, were JPY 51.8 billion, JPY 153.9 billion, and JPY 95.7 billion, and JPY 32.2 billion, respectively. We conduct our R&D activities at NEC Laboratories, our corporate R&D department, as well as in each of the R&D departments of NEC Solutions, NEC Networks and NEC Electron Devices, respectively. NEC Laboratories conducts medium and long-term R&D activities to develop fundamental technologies that will form the basis for our future operations, and new technologies that will enhance existing businesses. These activities take place in various specialized laboratories located in Japan, the United States and Europe. Our in-house companies conduct product and technology development at their own respective development divisions and development laboratories. The activities of each of these R&D departments are closely related to their own operating activities of their affiliated in-house companies. R&D departments are responsible for addressing the needs of their own targeted markets. NEC Laboratories collaborates closely with each of those divisions and laboratories in product and technology development activities. We conduct R&D activities, including in the areas of: - Internet application platforms, with a focus on electronic commerce, or e-commerce, application platforms, and mission-critical systems; - Communications systems focused on optical network systems, third and fourth-generation mobile communications systems and mobile handsets, and IP networking systems such as routers; - Semiconductor devices, focusing on system LSIs; and - Fundamental research such as nanotechnology and convergence of biology and IT. D. TREND INFORMATION The fiscal year ended March 31, 2002 was one of the most severe years encountered by us, due to the continuing long-term stagnant conditions for the Japanese economy, and the prevailing market conditions in the information technology sector throughout the world. In Japan, serious deflation continued due to commodity price decline and economic recession. Manufacturing companies were forced to make drastic downward adjustments in production volume, resulting in sharp reduction in investments in plant and equipment. Moreover weak performance of Japanese companies resulted in decreases in personal income and worsening employment condition, which restrained consumer spending. Overseas, as the economy in the United States slowed-down for the first time in 10 years and was slowed further by the terrorist attacks on September 11, 2001, the stagnant economic condition continued. However, by the end of the period, the world economy started to show signs of recovery, due to a rise in expectation for the recovery of the United States economy. In the electronics industry, despite the firm demand for system integration services, sales of personal computers remained weak because of the recession, the telecommunications market was adversely 42 affected by reductions of investment in plant and equipment by telecommunications carriers, and the demand for electronic devices such as semiconductors and displays fell sharply. For additional trend information, see "Item 5.A. Operating Results." ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES. A. DIRECTORS AND SENIOR MANAGEMENT Set forth below are the members of the board of directors and corporate auditors of NEC as of July 31, 2002, together with their respective dates of birth, positions, and remaining length of term of office as director or corporate auditor. All members of the board mentioned below, except for Mr. Toshio Morikawa, Advisor to Sumitomo Mitsui Banking Corporation, Mr. Koichi Kimura, Special Advisor to Daiwa Institute of Research Ltd., and Mr. Akira Uehara, President of the Taisho Pharmaceutical Co. Ltd., are also corporate officers of NEC.
TERM NAME DATE OF BIRTH EXPIRES POSITION - -------------------- ----------------- --------- ----------------------------------------------------- Hajime Sasaki April 6, 1936 June 2004 Chairman of the Board (Representative Director) Koji Nishigaki June 22, 1938 June 2004 President and Member of the Board (Representative Director) Mineo Sugiyama July 22, 1939 June 2003 Senior Executive Vice President and Member of the Board (Representative Director) Shigeo Matsumoto December 29, 1940 June 2003 Executive Vice President and Member of the Board Akinobu Kanasugi April 17, 1941 June 2003 Executive Vice President and Member of the Board, and Company President of NEC Solutions Yoshio Omori December 22, 1939 June 2003 Senior Vice President and Member of the Board Kaoru Tosaka March 15, 1942 June 2004 Senior Vice President and Member of the Board, and Company President of NEC Electron Devices Kaoru Yano February 23, 1944 June 2003 Senior Vice President and Member of the Board, and Company President of NEC Networks Toshiro Kawamura July 7, 1942 June 2003 Senior Vice President and Member of the Board, and Company Deputy President of NEC Solutions Makoto Maruyama March 22, 1941 June 2003 Senior Vice President and Member of the Board Shunichi Suzuki February 20, 1945 June 2004 Senior Vice President and Member of the Board Tsutomu Nakamura June 12, 1948 June 2004 Senior Vice President and Member of the Board, and Company Deputy President of NEC Networks Toshio Morikawa March 3, 1933 June 2004 Member of the Board Koichi Kimura January 6, 1936 June 2003 Member of the Board Akira Uehara April 5, 1941 June 2004 Member of the Board Tatsuo Sakairi October 15, 1937 June 2003 Corporate Auditor Kenji Usui October 19, 1942 June 2004 Corporate Auditor Koichi Yoshida October 30, 1940 June 2003 Corporate Auditor Tsuneo Kabe March 9, 1927 June 2004 Corporate Auditor
Board members and corporate auditors may be contacted through NEC's headquarters: c/o NEC Corporation, 7-1, Shiba 5-chome, Minato-ku, Tokyo 108-8001, Japan. The following is a brief biography of each of NEC's board members most of whom are also corporate officers, and corporate auditors. Hajime Sasaki has been the Chairman of the Board since March 1999. He served as Senior Executive Vice President from June 1996 until March 1999 and has been a member of the board since June 1988. Koji Nishigaki became President in March 1999 and has been a member of the board since June 1990. He served as Executive Vice President from June 1994 to March 1999. 43 Mineo Sugiyama has been a Senior Executive Vice President since June 2000. Mr. Sugiyama was elected to the board of directors in June 1991 and served as Executive Vice President from June 1998 until June 2000. Shigeo Matsumoto has been an Executive Vice President since June 1999. Mr. Matsumoto was elected to the board of directors in June 1991 and served as Senior Vice President from June 1996 until June 1999. Akinobu Kanasugi has been an Executive Vice President since June 2000. Mr. Kanasugi is also the current Company President of NEC Solutions. Mr. Kanasugi was elected to the board of directors in June 1995 and served as Senior Vice President from June 1999 until June 2000. Yoshio Omori has been a Senior Vice President since June 1997. Mr. Omori served as an Advisor to NEC from April 1997 until June 1997, when he was elected to the board of directors. Prior to joining NEC, Mr. Omori served as the Director General of the Cabinet Information Research Office of Japan from March 1993 until April 1997. Kaoru Tosaka has been a Senior Vice President since June 1998. He is also the current Company President of NEC Electron Devices. Mr. Tosaka was elected to the board of directors in June 1994, and he served as Company Deputy President of NEC Solutions from April 2000 to April 2002. Kaoru Yano has been a Senior Vice President since June 1999. He is also the current Company President of NEC Networks. Mr. Yano was elected to the board of directors in June 1995. He served as Executive General Manager of the Transmission Operations Unit from June 1994 to June 1998. Toshiro Kawamura has been a Senior Vice President and member of the board since June 2001. He has also been a Company Deputy President of NEC Solutions since June 2001. Mr. Kawamura was a member of the board from June 1996 until April 2000, and served as Senior Vice President from April 2000 until June 2001, when he was elected to his current position. Makoto Maruyama has been a Senior Vice President and member of the board since June 2001. Mr. Maruyama served as Associate Senior Vice President from April 2000 until June 2001, when he was elected to his current position. Shunichi Suzuki has been a Senior Vice President and member of the board since June 2002. Mr. Suzuki served as Associate Senior Vice President from April 2000 until June 2002, when he was elected to his current position. Tsutomu Nakamura has been a Senior Vice President and member of the board since June 2002. He has also been a Company Deputy President of NEC Networks since April 2002. Mr. Nakamura served as Associate Senior Vice President from June 2000 until April 2002. Toshio Morikawa has been a member of the board since June 2000. Mr. Morikawa was the Chairman of the Board of The Sumitomo Bank, Ltd. from June 1997 to March 2001, and currently is an Advisor to Sumitomo Mitsui Banking Corporation. Koichi Kimura has been a member of the board since June 2001. Mr. Kimura served as Vice Chairman of Daiwa Institute of Research Ltd. from October 1998 until June 2000. In June 2000, Mr. Kimura became Special Advisor to Daiwa Institute of Research Ltd. Akira Uehara has been a member of the board since June 2002. Mr. Uehara has been the President of the Taisho Pharmaceutical Co. Ltd. since June 1982 to the present. Tatsuo Sakairi has been a corporate auditor since June 2000. Mr. Sakairi was a member of the board from June 1989 until April 2000. Mr. Sakairi served as Senior Executive Vice President from June 1998 until April 2000, and as an Executive Advisor to NEC from April 2000 until June 2000. 44 Kenji Usui has been a corporate auditor since June 2001. Mr. Usui was Senior Vice President of NEC-Mitsubishi Electric Visual Systems Corporation until June 2001. He served as Senior Vice President of NEC Home Electronics, Ltd. from June 1998 to January 2000. Koichi Yoshida has been a corporate auditor since June 2000. Mr. Yoshida was the President of Sumitomo Life Insurance Company from July 1997 to July 2001, and currently is the Senior Advisor to Sumitomo Life Insurance Company. Tsuneo Kabe has been a corporate auditor since June 2001. Mr. Kabe was appointed as a justice of the Supreme Court of Japan from May 1990 until he retired in March 1997. Mr. Kabe is currently an attorney at law of Ishizawa, Ko & Sato. No family relationship exists among any of NEC's board members most of whom are corporate officers or corporate auditors. No arrangement or understanding exists between any of NEC's board members most of whom are corporate officers or corporate auditors and any other person pursuant to which any director, corporate officer, or corporate auditor was elected to their position at NEC. B. COMPENSATION For the fiscal year ended March 31, 2002, NEC's board of directors most of whom are also NEC's corporate officers, received aggregate compensation, including bonuses and retirement allowances, paid by NEC and its subsidiaries of JPY 847 million and the corporate auditors received aggregate compensation of JPY 182 million. The aggregate amount accrued by NEC for the fiscal year ended March 31, 2002 to provide pension, retirement, or similar benefits for board members most of whom are also corporate officers and corporate auditors was JPY 121 million and JPY 27 million, respectively. C. BOARD PRACTICES TERM All board members and corporate auditors are elected by the general meeting of shareholders. The regular term of office of a board member is two years and a corporate auditor is three years (in the case of corporate auditors to be elected at an ordinary general meeting of shareholders to be held with respect to the first fiscal year ending on and after May 1, 2002, the regular term of office is four years) from the date of their election to office. However, board members and corporate auditors may serve any number of consecutive terms. There is no regular term of office for corporate officers. BOARD OF DIRECTORS AND CORPORATE AUDITORS NEC's articles of incorporation provide for a board of directors of not more than 40 members and for not more than five corporate auditors. There is no maximum age limit for members of the board. Board members and corporate auditors may be removed from office at any time by a resolution of a general meeting of shareholders. In April 2000, NEC introduced a new corporate officer system in order to facilitate efficient and more responsive decision-making and draw clearer lines of responsibility, and NEC reduced the number of board members by approximately half. Currently the number of board members is 15. Corporate officers have responsibility for executing NEC's business operations, and the board members oversee these officers and set fundamental strategies for NEC. The board of directors has ultimate responsibility for the administration of NEC's affairs. The board of directors may elect by its resolutions from among its members a chairman of the board, a vice chairman of the board, a president and one or more senior executive vice presidents, executive vice presidents and senior vice presidents, although any such position may be left vacant. By resolution, the 45 board of directors designates, from among its members, representative directors, who have authority individually to represent NEC generally in the conduct of its affairs. Under the Commercial Code of Japan, board members must refrain from engaging in any business competing with NEC unless approved by a board resolution, and no board member may vote on a proposal, arrangement or contract in which that board member is deemed to be materially interested. The amount of remuneration payable to NEC's board members as a group and that of NEC's corporate auditors as a group in respect of a fiscal year is subject to approval by a general meeting of shareholders. Within those authorized amounts, the compensation for each board member and corporate auditor is determined by the board of directors and a consultation of the corporate auditors, respectively. Neither the Commercial Code nor NEC's articles of incorporation contain special provisions as to the retirement age of NEC's board members and corporate auditors, or to a requirement of NEC's board members and corporate auditors to hold any shares of NEC's capital stock. In accordance with Japanese practice, when a board member or corporate auditor retires, a proposal to pay a retirement allowance is submitted to a general meeting of shareholders for approval. The amount of the retirement allowance for a board member or corporate auditor generally reflects the person's position at the time of retirement, length of services as a board member or corporate auditor and contribution to NEC's operations. NEC has a retirement plan for NEC's board members, corporate auditors, and employees. Generally, there are no directors' service contracts providing for benefits upon termination of employment. The Commercial Code requires a resolution of the board of directors for a company to acquire or dispose of material assets, to borrow substantial amounts of money, to employ or discharge important employees such as corporate officers, and to establish, change or abolish material corporate organizations such as a branch office. Pursuant to the amendments to the Commercial Code, which became effective on May 1, 2002 and NEC's articles of incorporation, as amended, NEC may enter into a liability limitation agreement with outside directors which limits the maximum amount of their liability owed to NEC for the damages arising from their actions stipulated in Item 5 of Paragraph 1, Article 266 of the Commercial Code to the higher of either (i) the amount to be fixed which is not less than JPY 15,000,000 or (ii) the amount stipulated by the Commercial Code, provided that such directors shall act in good faith and without gross negligence. The corporate auditors are not required to be and are not certified public accountants. At least one of the corporate auditors must be a person who has not been a board member or employee of NEC or any of its subsidiaries during the five-year period prior to election as a corporate auditor. After the conclusion of the ordinary general meeting of shareholders to be held with respect to the first fiscal year ending on or after May 1, 2005, at least half of corporate auditors must be persons who have not been either board members or employees of NEC or any of its subsidiaries. A corporate auditor may not at the same time be a board member or an employee of NEC or any of its subsidiaries. The corporate auditors have the statutory duty of examining NEC's financial statements and NEC's business reports to be submitted annually by the board of directors at the general meetings of shareholders and of reporting their opinions to the shareholders. They also have the statutory duty of supervising the administration by the board members of NEC's affairs. They shall participate in the meetings of the board of directors but are not entitled to vote. The corporate auditors constitute the board of corporate auditors. Under the Commercial Code and the Law concerning Special Measures to the Commercial Code with respect to Audit of Corporations, the board of corporate auditors has a statutory duty to prepare and submit its audit report to the board of directors each year. A corporate auditor may note an opinion in the auditor report if a corporate auditor's opinion is different from the opinion expressed in the audit report. The board of corporate auditors is empowered to establish audit principles, the method of examination by corporate auditors of NEC's affairs and financial position and other matters concerning the performance of the corporate auditors' duties. 46 D. EMPLOYEES As of March 31, 2002, we had approximately 142,000 employees on a consolidated basis, approximately 80% of which were located in Japan and 20% outside Japan. Approximate numbers of employees by each in-house company are as follows:
Number of Employees Electronics business NEC Solutions 48,900 NEC Networks 34,500 NEC Electron Devices 35,700 Others 22,400 Leasing business 500
As of March 31, 2001, we had approximately 150,000 employees and as of March 31, 2000, we had approximately 155,000 employees. Since 1952, NEC has had a comprehensive labor contract with NEC Workers' Union covering, in general, conditions of employment other than salary, wages, bonuses and retirement benefits. This contract, which provides that all of NEC's permanent employees except management and other specified personnel must become union members, has been renegotiated from time to time, and the present agreement extends until March 31, 2004. The permanent employees of NEC's consolidated subsidiaries are covered by separate labor contracts. We believe that our labor-management relations are good. E. SHARE OWNERSHIP As of March 31, 2002, NEC's board members, most of whom are also corporate officers, and corporate auditors together owned 182,534 shares of common stock, representing 0.01% of the total outstanding shares. STOCK OPTION PLAN At the ordinary general meeting of NEC's shareholders held on June 29, 2000, NEC's shareholders approved a stock option plan (the "2000 stock option plan") for board members, corporate officers, and specified upper-level employees, under which no more than 320,000 shares may be purchased for an aggregate price not exceeding JPY 1,200 million. NEC will hold shares purchased under the 2000 stock option plan and reserve them for transfer to NEC's board members, corporate officers, and specified upper-level employees upon the exercise of their options. The aggregate number of shares to be transferred to board members and corporate officers of NEC upon the exercise of their outstanding options under the 2000 stock option plan is 190,000 shares. The exercise price of the options is currently JPY 3,400 per share, subject to adjustment if there is a stock split or consolidation of shares, or new shares are issued at a price less than the market price. The options can be exercised from July 1, 2002 to June 30, 2006. The options lapse automatically upon the optionholder's death and generally expire one year after the termination of the optionholder's service with NEC. At the ordinary general meeting of NEC's shareholders held on June 21, 2001, NEC's shareholders approved a second stock option plan (the "2001 stock option plan"), with terms and conditions substantially the same as those of the 2000 stock option plan. The aggregate number of shares to be transferred to board members and corporate officers of NEC upon the exercise of their outstanding options under the 2001 stock option plan is 204,000 shares. The exercise price per share of the options is JPY 1,876 per share. The options can be exercised from July 1, 2003 to June 30, 2007. 47 At the ordinary general meeting of NEC's shareholders held on June 20, 2002, NEC's shareholders approved a third stock option plan (the "2002 stock option plan") under which NEC may issue stock acquisition rights (the "Rights") to board members, corporate officers, and certain upper-level employees of NEC and certain executives of NEC's subsidiaries in Japan pursuant to Articles 280-20 and 280-21 of the Commercial Code. Holders of the Rights are entitled to acquire 1,000 shares of common stock of NEC per Right upon the exercise of the Rights. Under the 2002 stock option plan, no more than 450 Rights may be issued. The aggregate number of shares to be issued or transferred to board members and corporate officers of NEC upon the exercise of their outstanding Rights is 192,000 shares. The exercise price of the Rights is currently JPY 916 per share, subject to adjustment if there is a stock split or consolidation of shares, or new shares are issued at a price less than the market price. The Rights can be exercised from July 1, 2004 to June 30, 2008. If a holder of the Rights ceases to be a board member, corporate officer or employee of NEC or its subsidiaries, the Rights cannot be exercised by the holder after the expiry of one year after such event. ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS. A. MAJOR SHAREHOLDERS As of March 31, 2002, NEC had 149,084 registered shareholders. NEC's shareholders do not have different voting rights. The ten largest shareholders appearing on the register of shareholders of NEC's common stock at that date were as follows:
NUMBER OF SHARES OF PERCENTAGE OF SHARES OF SHAREHOLDER COMMON STOCK HELD COMMON STOCK HELD - ----------------------------------------------------------------- ------------------- ----------------------- The Chase Manhattan Bank, N.A., London 85,107,357 5.14% Japan Trustee Services Bank, Ltd. (Trust Account) 80,784,000 4.88 Sumitomo Life Insurance Company 66,500,000 4.02 The Mitsubishi Trust and Banking Corporation (Trust Account) 55,835,000 3.37 Nippon Life Insurance Company 49,668,675 3.00 The Chase Manhattan Bank, N.A., London, S.L. Omnibus Account 49,515,247 2.99 The Sumitomo Mitsui Banking Corporation 42,530,909 2.57 UFJ Trust Bank Limited (Trust Account A) 35,782,000 2.16 Mitsui Sumitomo Insurance Company, Limited 31,182,670 1.88 The Dai-ichi Mutual Life Insurance Company 30,711,000 1.85 ----------- ----- Total 527,616,858 31.86% =========== =====
We received from Capital Guardian Trust Company, Capital International, Inc., Capital International Limited, Capital International S.A. and Capital Research and Management Company, copies of reports concerning the bulk holding of shares of common stock (see the "Reporting of Substantial Shareholders" section under Item 10.B. "Memorandum and Articles of Association") that these companies jointly held 133,674,390 shares, or 8.07% of the total outstanding shares as of April 30, 2002. We are unable to confirm their shareholdings because they did not appear on our register of shareholders. The record of ownership and distribution of our shares of common stock, appearing on the register of shareholders as of March 31, 2002, was as follows:
NUMBER OF NUMBER OF SHARES PERCENTAGE OF SHAREHOLDERS HELD SHARES HELD ------------ ---------------- ------------- Japanese government and local government 1 20,208 0.00% Japanese financial institutions 395 760,814,841 45.94 Japanese securities companies 103 12,565,711 0.76 Other Japanese corporations 2,114 103,073,734 6.22 Foreign institutions and individuals(1) 878 470,079,404 28.38 Japanese individuals and others 145,593 309,714,291 18.70 ------- ------------- ------ Total 149,084 1,656,268,189 100.00% ======= ============= ======
48 (1) 95,921,408 shares, or 5.8%, of our outstanding common stock was owned by 139 U.S. shareholders of record, one of whom is the ADR depositary's nominee holding 8,514,340 shares, or 0.5%, of our outstanding common stock. B. RELATED PARTY TRANSACTIONS Since April 1, 1999, none of our board members most of whom are also corporate officers or corporate auditors, and none of the close members of their respective families, has had the following: - any personal interest in transactions effected by NEC which were unusual in their nature or conditions or significant to our business and which were either effected during an earlier fiscal year or presently proposed, and remain in any respect outstanding and unperformed; or - any outstanding loans (including guarantees of any kind) made by us to or for the benefit of these persons. In the ordinary course of business on an arm's length basis, NEC purchases and sells materials, supplies and services from and to its affiliates accounted for by the equity method, including NEC Personal Systems Minami-Kyusyu, Ltd., Elpida Memory, Inc., NEC-Mitsubishi Electric Visual Systems Corporation, SINCERE Corporation, Nippon Electric Glass Co., Ltd., ANRITSU CORPORATION, Tokin Corporation, Toyo Communication Equipment Co., Ltd., Kaijo Corporation, SUMITOMO 3M Limited, Shanghai Hua Hong NEC Electronics Company, Limited, and Samsung NEC Mobile Display Co., Ltd. Starting April 1, 2002, Tokin Corporation is now accounted as our consolidated subsidiary and concurrently changed its name to NEC TOKIN Corporation. NEC sells and purchases materials, supplies, and services to and from these affiliates accounted for by the equity method in the ordinary course of business. For the fiscal year ended March 31, 2002, NEC recorded total sales of approximately JPY 72.4 billion to, and total purchases of approximately JPY 57.6 billion, from these affiliated companies. As of March 31, 2002, NEC had trade receivables of approximately JPY 18.2 billion owed by, and trade payables of approximately JPY 19.2 billion owed to, these affiliated companies. In addition, NEC has guaranteed the repayment of some loans granted to Shanghai Hua Hong NEC Electronics Company, Limited and other affiliates. As of March 31, 2002, the total outstanding principal amount guaranteed by us for affiliated companies is JPY 25.1 billion. NEC does not consider the amounts involved in the above transactions to be material to its business. Please refer to Note 3 to the consolidated financial statements for a more detailed explanation regarding NEC's investments in and transactions with these affiliated companies. C. INTERESTS OF EXPERTS AND COUNSEL Not applicable. ITEM 8. FINANCIAL INFORMATION. A. CONSOLIDATED STATEMENTS AND OTHER FINANCIAL INFORMATION See our consolidated financial statements beginning on page F-1 of this annual report. 49 LEGAL PROCEEDINGS We and certain of our subsidiaries are currently engaged in a lawsuit with GE Warranty Management, Inc. in the Superior Court of California, Los Angeles County. The lawsuit concerns a claim for declaratory relief that two of our subsidiaries initiated against GE Warranty in December, 2001 and a cross-claim by GE Warranty against us and some of our subsidiaries. In its cross-complaint, GE Warranty seeks reimbursement of costs it allegedly incurred in connection with warranty contracts that it issued to purchasers of personal computers previously manufactured by two of our subsidiaries, punitive damages and attorney's fees. We and the subsidiaries involved in the lawsuit are vigorously defending GE Warranty's claim, and believe that the claim has no basis either in law or in fact. Other than as disclosed above, neither NEC nor any of our subsidiaries is a party to, nor is any of our property the subject of, any legal proceeding which, in the opinion of our management, is or may be of material importance to us and our subsidiaries, taken as a whole. No legal proceeding of material importance known to our management is currently threatened by governmental authorities. We had been engaged in an arbitration proceeding against InterDigital Technology Corporation before the American Arbitration Association for resolution of disputes on royalties under a license agreement for certain patents relating to time division multiple access, or TDMA, technology. The arbitration proceeding was terminated by settlement in January 2002. DIVIDEND POLICY NEC has paid cash dividends on shares of our common stock on a semi-annual basis in each year since 1951. It is the present intention of our board of directors to continue to propose year-end cash dividends at general meetings. NEC's board of directors may declare an interim cash dividend after the close of our semi-annual fiscal period if they deem it appropriate. This will be subject to our earnings and financial condition and other factors, including legal restrictions with respect to the payment of dividends. B. SIGNIFICANT CHANGES No significant changes have occurred since the date of the annual financial statements included in this annual report. ITEM 9. THE OFFER AND LISTING. A. OFFER AND LISTING DETAIL The following table shows, for the periods indicated, the reported high and low sale prices for shares of NEC's common stock on the Tokyo Stock Exchange and the reported high and low sales prices for NEC's American Depositary Shares, or ADSs, on the Nasdaq National Market System:
TOKYO STOCK EXCHANGE PRICES NASDAQ NATIONAL MARKET PRICES FOR COMMON STOCK FOR ADSS (1) --------------------------- ----------------------------- HIGH LOW HIGH LOW --------------------------- ----------------------------- (PRICE PER SHARE IN YEN) (PRICE PER ADS IN DOLLARS) Year ended December 31, 1998 JPY 1,560 JPY 762 $ 12.38 $ 6.20 Year ended December 31, 1999 2,665 1,012 25.00 8.73 Year ended December 31, 2000 3,450 1,899 32.40 17.40 Year ended December 31, 2001 First quarter 2,580 1,520 21.93 12.50 Second quarter 2,390 1,665 19.73 13.55 Third quarter 1,826 970 14.66 7.85 Fourth quarter 1,400 900 11.20 7.50 Year ending December 31, 2002 First quarter 1,447 846 11.05 6.30
50 Second quarter 1,158 794 8.70 6.55 Third quarter (through July 26) 862 719 7.20 6.25 January 1,447 1,022 11.05 7.65 February 1,018 846 7.28 6.30 March 1,207 947 9.29 7.25 April 1,158 977 8.70 7.50 May 1,028 900 8.11 7.04 June 942 794 7.68 6.55 July (through July 26) 862 719 7.20 6.25
(1) NEC's ADS to common stock ratio was changed from 1:5 to 1:1 effective May 25, 2001. The prices of ADSs presented in the table above prior to the ratio change on May 25, 2001 have been restated on the current basis that each ADS represents one share of common stock. B. PLAN OF DISTRIBUTION Not applicable. C. MARKETS The primary market for NEC's common stock is the Tokyo Stock Exchange. NEC's common stock is also listed on four other stock exchanges in Japan. NEC's common stock is also listed on the London Stock Exchange, on the Amsterdam Exchange, on the Frankfurt Stock Exchange in the form of co-ownership shares in a Global Bearer Certificate and on the Swiss Exchanges in the form of Swiss Bearer Depositary Receipts. NEC's ADSs evidenced by American Depositary Receipts, or ADRs, have been traded since 1963 on the over-the-counter market in the United States and are currently quoted on the Nasdaq National Market System. D. SELLING SHAREHOLDERS Not applicable. E. DILUTION Not applicable. F. EXPENSES OF THE ISSUE Not applicable. ITEM 10. ADDITIONAL INFORMATION. A. SHARE CAPITAL Not applicable. B. MEMORANDUM AND ARTICLES OF ASSOCIATION ORGANIZATION NEC is a joint stock corporation ("kabushiki kaisha") incorporated in Japan under the Commercial Code ("shoho") of Japan. It is registered in the Commercial Register ("shogyo tokibo") maintained by the Minato Branch Office of the Tokyo Legal Affairs Bureau. 51 CORPORATE PURPOSE OF NEC Article 2 of NEC's articles of incorporation provides that the corporate purposes of NEC is to carry on the following businesses: 1. To manufacture, sell or otherwise dispose of, telecommunications equipment, machinery and instruments, electronic computers and other electronics application equipment, machinery and instruments, electrical equipment, machinery and instruments, and all kinds of equipment, machinery, instruments and systems related to electricity; 2. To manufacture, sell or otherwise dispose of, nuclear energy machinery and instruments, aircraft machinery and instruments, medical machinery and instruments, measuring instruments and all equipment, machinery, instruments and systems other than those mentioned in the preceding item above; 3. To manufacture, sell or otherwise dispose of, electron tubes, semiconductor devices, integrated circuits and all parts and materials for use in or in connection with any equipment, machinery and instruments mentioned in any of the preceding items; 4. To provide telecommunications, data base, and other information services; 5. To contract for construction work; 6. To engage in any and all activities requisite to the promotion, handling, and carrying out of the businesses mentioned in any of the preceding items; and 7. To invest in businesses mentioned in any of the preceding items which businesses are under the administration of others. BOARD OF DIRECTORS Under the Commercial Code, each board member has executive powers and duties to manage the affairs of NEC and each representative director, who is elected from among the board members by the board of directors, has the statutory authority to represent NEC in all respects. Under the Commercial Code, board members of NEC must refrain from engaging in any business competing with NEC unless approved by a board resolution, and no board member may vote on a proposal, arrangement or contract in which that board member is deemed to be materially interested. In this connection, while any board member has the power to vote on remuneration (including pension or other benefits) for any board member, if specifically named as payee of such remuneration, such board member must abstain from voting in respect of the relevant portion of the proposal. Neither the Commercial Code nor NEC's articles of incorporation contain special provisions as to the borrowing power exercisable by a board member. See also the discussion under "Item 6.C. Board Practices" contained in this document. COMMON STOCK General. Set forth below is information relating to NEC's common stock, including brief summaries of the relevant provisions of NEC's articles of incorporation and share handling regulations, as currently in effect, and of the Commercial Code of Japan and related legislation. The discussion of the Commercial Code below reflects certain amendments to the Commercial Code, which became effective on October 1, 2001 (the "2001 Amendments") and April 1, 2002 (the "2002 Amendments"). In order to assert shareholders' rights against NEC, a shareholder must have its name and address registered on NEC's register of shareholders, in accordance with NEC's share handling regulations. The 52 registered beneficial holder of deposited shares underlying the ADSs is the Depositary for the ADSs. Accordingly, holders of ADSs will not be able directly to assert shareholders' rights to NEC. A holder of shares may choose, at its discretion, to participate in the central clearing system for share certificates under the Law Concerning Central Clearing of Share Certificates and Other Securities of Japan. Participating shareholders must deposit certificates representing all of the shares to be included in this clearing system with the Japan Securities Depository Center, Inc., or JASDEC. If a holder is not a participating institution in JASDEC, it must participate through a participating institution, such as a securities company or bank having a clearing account with JASDEC. All shares deposited with JASDEC will be registered in the name of JASDEC on NEC's register of shareholders. Each participating shareholder will in turn be registered on NEC's register of beneficial shareholders and be treated in the same way as shareholders registered on NEC's register of shareholders. For the purpose of transferring deposited shares, delivery of share certificates is not required. Entry of the share transfer in the books maintained by JASDEC for participating institutions, or in the book maintained by a participating institution for its customers, has the same effect as delivery of share certificates. The registered beneficial shareholders may exercise the rights attached to the shares, such as voting rights, and will receive dividends (if any) and notices to shareholders directly from NEC. The shares held by a person as a registered shareholder and those held by the same person as a registered beneficial shareholder are aggregated for these purposes. Beneficial owners may at any time withdraw their shares from deposit and receive share certificates. Authorized Capital. Article 5 of the articles of incorporation of NEC provides that the total number of shares authorized to be issued by NEC is 3,200,000,000 shares. As of March 31, 2002, 1,656,268,189 shares of common stock without a par value were issued and outstanding. The 2001 Amendments eliminated the concept of "par value" of shares of capital stock. Thus, all shares of capital stock of NEC have no par value. Dividends. NEC's articles of incorporation provide that the accounts shall be closed on March 31 of each year. Year-end dividends, if any, shall be paid to shareholders, beneficial shareholders, and pledgees of record as of the end of day. After the close of the fiscal period, the board of directors prepares, among others, a proposed allocation of profits for dividends and other purposes. This proposal is submitted to the board of corporate auditors of NEC and to independent certified public accountants and then submitted for approval to the ordinary general meeting of shareholders. This meeting is to be held in June each year. In addition to provisions for any dividends and for the legal reserve and other reserves, the allocation of profits customarily includes a bonus to directors and corporate auditors. In addition to year-end dividends, the board of directors may by its resolution declare an interim cash dividend pursuant to Article 293-5 of the Commercial Code to shareholders, beneficial shareholders, and pledgees. This interim dividend is paid to those who are registered in NEC's register of shareholders or beneficial shareholders as of the end of each September 30, without prior shareholder approval, but subject to the limitations described below. The Commercial Code provides that a company may not make any distribution of profits by way of year-end dividends or interim dividends for any fiscal period unless it has set aside in its legal reserve an amount equal to at least 10% of the amount paid by way of appropriation of retained earnings for such fiscal period or of the amount of such interim dividends until the aggregate amount of additional paid-in capital and legal reserve is 25% of its stated capital. Under the Commercial Code, NEC is permitted to distribute profits by way of year-end or interim dividends out of the excess of NEC's net assets over the aggregate of: (1) NEC's stated capital; (2) NEC's additional paid-in capital; 53 (3) NEC's accumulated legal reserve; (4) the legal reserve to be set aside in respect of the fiscal period concerned; (5) any excess of unamortized expenses incurred in preparation for commencement of business and in connection with R&D over the aggregate of amounts referred to in (2), (3), and (4) above; and (6) if certain of NEC's assets are stated at market value pursuant to the provisions of the Commercial Code, the excess, if any, of the aggregate market value of those assets over the aggregate acquisition cost of those assets. In the case of interim dividends, the net assets are calculated by reference to the non-consolidated balance sheet at the last closing of NEC's accounts. However, the assets are adjusted to reflect (x) any subsequent payment made by appropriation of retained earnings and transfer to legal reserve in respect thereof; (y) any subsequent transfer of retained earnings to stated capital; and (z)if NEC has been authorized, pursuant to a resolution of an ordinary general shareholders meeting, to acquire NEC's shares, the total amount of the purchase price of those shares authorized by the resolution that may be paid by NEC. Interim dividends may not be paid where there is a risk that at the end of the fiscal year there might not be any excess of net assets over the aggregate of the amounts referred to in (1) through (6) above. In Japan, the "ex-dividend" date and the record date for dividends precede the date of determination of the amount of the dividend to be paid. Under NEC's articles of incorporation, NEC does not have to pay any dividends which are left unclaimed for a period of three years. Stock Splits. NEC may at any time split shares in issue into a greater number of shares by resolution of the board of directors, and may amend its articles of incorporation to increase the number of the authorized shares to be issued in proportion to the relevant stock split in principle pursuant to a resolution of the board of directors rather than a special resolution of a general meeting of shareholders which is otherwise required for amending the articles of incorporation. In the event of a stock split, generally, shareholders will not be required to exchange share certificates for new share certificates, but certificates representing the additional shares resulting from the stock split will be issued to shareholders. When a stock split is to be made, NEC must give public notice of the stock split, specifying the record date therefor, at least two weeks prior to such record date. In addition, promptly after the stock split takes effect, NEC must give notice to each shareholder specifying the number of shares to which such shareholder is entitled by virtue of the stock split. General Meetings of Shareholders. NEC's ordinary general meeting of shareholders is held every June in Tokyo, Japan. The record date for an ordinary general meeting of shareholder is March 31 of each year. In addition, NEC may hold an extraordinary general meeting of shareholders whenever necessary by giving at least two weeks' advance notice to shareholders. Notice of convocation of a shareholders' meeting setting forth the place, time and purpose thereof, must be mailed to each shareholder having voting rights (or, in the case of a non-resident shareholder, to his or her standing proxy or mailing address in Japan) at least two weeks prior to the date set for the meeting. Under the Commercial Code, such notice may be given to shareholders by electronic means, subject to the consent by the relevant shareholders. Any shareholder or group of shareholders holding at least three percent of the total number of voting rights for a period of six months or more may require the convocation of a general meeting of shareholders for a particular purpose. Unless such shareholders' meeting is convened promptly or a convocation notice of a meeting which is to be held not later than six weeks from the day of such demand is 54 ================================================================================ dispatched, the requiring shareholder may, upon obtaining a court approval, convene such shareholders' meeting. Any shareholder or group of shareholders holding at least 300 voting rights or 1% of the total number of voting rights for a period of six months or more may propose a matter to be considered at a general meeting of shareholders by submitting a written request to a representative director at least six weeks prior to the date set for such meeting. Voting Rights. So long as NEC maintains the unit share system (see "(New `Unit' share system)" below), a holder of shares constituting one or more units is entitled to one vote for each such unit of shares, subject to the limitations on votes set forth in the following two sentences. A corporate shareholder more than one-quarter of whose total voting rights are directly or indirectly owned by NEC may not exercise its voting rights with respect to shares of common stock of NEC that it owns. In addition, NEC may not exercise voting rights with respect to its own shares that it owns. If NEC eliminates from its article of incorporation the provisions relating to the unit of shares, holders of common stock will have one vote for each share they hold. Except as otherwise provided by law or by the articles of incorporation of NEC, a resolution can be adopted at a general meeting of shareholders by a majority of the number of voting rights of all the shareholders represented at the meeting. The Commercial Code and NEC's articles of incorporation provide, however, that the quorum for the election of directors and corporate auditors shall not be less than one-third of the total number of voting rights of all the shareholders. NEC's shareholders are not entitled to cumulative voting in the election of directors. Shareholders may cast their vote in writing and may also exercise their voting rights through proxies, provided that the proxies are also shareholders holding voting rights. Shareholders may also exercise their voting rights by electronics means when the board of directors decides to permit such method of exercising voting rights. The Commercial Code provides that in order to amend the articles of incorporation and in certain other instances, including a reduction of stated capital, the removal of a director or corporate auditor, dissolution, merger or consolidation with a certain exception under which shareholders' resolution is not required, the transfer of the whole or an important part of the business, the taking over of the whole of the business of any other corporation with a certain exception under which shareholders resolution is not required, share exchange or share transfer for the purpose of establishing 100% parent-subsidiary relationships with a certain exception under which shareholders resolution is not required, splitting of the corporation into two or more corporations with a certain exception under which shareholders resolution is not required, or any offering of new shares at a "specially favorable" price (or any offering of stock acquisition rights to subscribe for or acquire shares of capital stock ("stock acquisition rights") or bonds with stock acquisition rights at a "specially favorable" exercise conditions) to any persons other than shareholders, the quorum shall be a majority of the total voting rights of all the shareholders and the approval by at least two-thirds of the voting rights of all the shareholders represented at the meeting is required (the "special shareholders resolutions"). Issue of Additional Shares and Pre-emptive Rights. Holders of NEC's shares of Common Stock have no pre-emptive rights under its articles of incorporation. Authorized but unissued shares may be issued at such times and upon such terms as the board of directors determines, subject to the limitations as to the offering of new shares at a "specially favorable" price mentioned under "Voting Rights" above. The board of directors may, however, determine that shareholders shall be given subscription rights regarding a particular issue of new shares, in which case such rights must be given on uniform terms to all shareholders as at a record date of which not less than two weeks' prior public notice must be given. Each of the shareholders to whom such rights are given must also be given notice of the expiry thereof at least two weeks prior to the date on which such rights expire. Rights to subscribe for new shares may be made generally transferable by the board of directors. Whether NEC will make subscription rights generally transferable in future rights offerings will depend upon the circumstances at the time of such offerings. If subscription rights are not made generally transferable, transfers by a non-resident of Japan or a corporation organized under the laws of a foreign country or whose principal office is located in a foreign country will be enforceable against NEC and third parties only if NEC's prior written consent to each such transfer is obtained. 55 Under the 2002 Amendments, subject to certain requirements, NEC may issue stock acquisition rights by a resolution of the board of directors. Holders of stock acquisition rights may exercise their rights to acquire a certain number of shares within the exercise period as prescribed in the terms of their stock acquisition rights. Upon exercise of stock acquisition rights, NEC will be obliged to issue the relevant number of new shares or alternatively to transfer the necessary number of existing shares held by it. Liquidation Rights. In the event of NEC's liquidation, the assets remaining after payment of all debts and liquidation expenses and taxes will be distributed among the shareholders in proportion to the respective numbers of shares held. Liability to Further Calls or Assessments. All of NEC's presently outstanding shares are fully paid and non-assessable. Transfer Agent. The Sumitomo Trust and Banking Company, Limited is the transfer agent for NEC's common stock. As such transfer agent, it keeps NEC's registers of shareholders and beneficial shareholders in its office at 4-4, Marunouchi 1-chome, Chiyoda-ku, Tokyo 100-8233, Japan, and makes transfer of record ownership upon presentation of the certificates representing the transferred shares. Record Date. March 31 is the record date for NEC's year-end dividends if declared. So long as NEC maintains the unit share system, the shareholders and beneficial shareholders who are registered as the holders of one or more whole units of shares in NEC's register of shareholders and/or beneficial shareholders at the end of each March 31 are also entitled to exercise shareholders' rights at the ordinary general meeting of shareholders with respect to the fiscal year ending on that March 31. September 30 is the record date for interim dividends if declared. In addition, NEC may set a record date for determining the shareholders and beneficial shareholders entitled to other rights and for other purposes by giving at least two weeks' prior notice. The price of shares generally goes ex-dividend or ex-rights on Japanese stock exchanges on the third business day prior to a record date for the purpose of dividends or rights offerings. If the record date is not a business day, this occurs on the fourth business day prior to a record date. Acquisition by NEC of Its Common Stock. NEC may acquire its own shares through Japanese stock exchanges on which NEC's shares are listed or by way of tender offer (pursuant to an ordinary resolution at an ordinary general meeting of shareholders); from a specific party other than a subsidiary of NEC (pursuant to a special resolution at an ordinary general meeting of shareholders); or from a subsidiary of NEC (pursuant to a resolution of the board of directors). When the acquisition is made by NEC from a specific party other than a subsidiary of NEC, any shareholder may make a request directly to NEC in writing not later than five days prior to the date set for the relevant shareholders' meeting to include him/her as the seller of his/her shares in the proposed purchase. Any such acquisition of shares (other than the acquisition by NEC of its own shares from a subsidiary of NEC, in which case, subject to the requirement that the total amount of the purchase price does not exceed the amount of retained earnings available for interim dividends) must satisfy specified requirements, including the requirements that the total amount of the purchase price does not exceed the sum of the amount of retained earnings available for year-end dividend payment after taking into account any reduction of the stated capital, additional paid-in capital or legal reserve (if the reduction of the stated capital, additional paid-in capital or legal reserve is authorized at the same ordinary general meeting of shareholders), less the sum of the amount to be paid by way of appropriation of retained earnings for the relevant fiscal year and any transfer of retained earnings to stated capital. NEC may hold the shares acquired in compliance with the provisions of the Commercial Code as amended. Shares acquired by NEC may be held by it for any period or may be cancelled by resolution of the board of directors. NEC may also transfer to any person the shares held by it, subject to a resolution of the board of directors, and subject also to other requirements similar to those applicable to the issuance of new shares, as described in "Issue of Additional shares and Pre-emptive Rights" above. NEC may also utilize its treasury stock for the purpose of transfer to any person upon exercise of stock acquisition rights or for the purpose of acquiring another company by way of merger, share exchange or corporate split through exchange of treasury stock for shares or assets of the acquired company. 56 New "Unit" share system. The 2001 Amendments introduced a new unit share system called "tangen-kabushiki." Pursuant to these amendments and the articles of incorporation of NEC, 1,000 shares constitute one unit. Although the number of shares constituting a new unit is included in the articles of incorporation, any amendment to the articles of incorporation reducing (but not increasing) the number of shares constituting a unit or eliminating the provisions for the unit of shares may be made by the resolution of the board of directors rather than by the special shareholders resolution, which is otherwise required for amending the articles of incorporation. The number of shares constituting one new unit, however, cannot exceed 1,000 or one two-hundredth (1/200) of all issued shares. Voting rights under the new unit share system. Under the new unit share system, shareholders shall have one voting right for each unit of shares that they hold. Any number of shares less than a full unit will carry no voting rights. Share certificates for less than a unit. Unless NEC's board of directors adopts a resolution to eliminate the provision for the unit shares from the articles of incorporation or the shareholders amend the articles of incorporation by a special shareholders resolution to eliminate the provision not to issue share certificates for less than a unit of shares, a share certificate for any number of shares less than a unit will in general not be issued. As the transfer of shares normally requires the delivery of the share certificates therefor, any fraction of a unit for which no share certificates are issued is not transferable. Repurchase by NEC of shares constituting less than a unit. A holder of shares constituting less than a full unit will be able to require NEC to purchase those shares at their market value in accordance with the provisions of the share handling regulations of NEC. Effect of the unit share system on holders of ADRs. A holder who owns ADRs evidencing less than 1,000 ADSs will indirectly own less than a whole unit. Because a transfer of ADRs does not require a change in the ownership of the underlying shares, holders of ADRs evidencing ADSs that constitute less than one unit of common stock are not affected by such restrictions in their ability to transfer such ADRs. However, a transfer of less than one unit of the underlying shares is normally impractical under the unit share system. Thus under the Deposit Agreement relating to the ADRs, the right of ADR holders to surrender their ADRs and withdraw the underlying shares for sale in Japan may only be exercised with whole units of common stock. Under the unit share system, holders of less than a unit have the right to require NEC to purchase their shares. However, holders of ADRs evidencing ADSs that represent amounts other than integral multiples of whole units are unable to withdraw the underlying shares representing less than one unit. Therefore, they are unable, as a practical matter, to exercise the right to require NEC to purchase such underlying shares. As a result, access to the Japanese markets by holders of ADRs through the withdrawal mechanism will not be available for dispositions of shares in lots of less than one unit. REPORTING OF SUBSTANTIAL SHAREHOLDERS The Securities and Exchange Law of Japan and regulations thereunder requires any person who has become, beneficially and solely or jointly, a holder of more than 5% of the total issued shares of capital stock of a company listed on any Japanese stock exchange or whose shares are traded on the over-the-counter market in Japan to file with the Director of a competent local finance bureau of the Ministry of Finance within five business days a report concerning such shareholdings. A similar report must be made in respect of any subsequent change of 1% or more in any holding or any change in material matters set out in reports previously filed, with certain exceptions. For this purpose, shares issuable to such person upon conversion of convertible securities or exercise of share subscription warrants or stock acquisition rights are taken into account in determining both the number of shares held by such holder and the issuer's total issued share capital. Copies of each such report must also be furnished to the issuer of such shares and all Japanese stock exchanges on which the shares are listed or, in the case of shares traded over-the-counter, the Japan Securities Dealers Association. 57 Except for the general limitation under Japanese anti-trust and anti-monopoly regulations against holding of shares of capital stock of a Japanese corporation which leads or may lead to a restraint of trade or monopoly, and except for general limitations under the Commercial Code or NEC's articles of incorporation on the rights of shareholders applicable regardless of residence or nationality, there is no limitation under Japanese laws and regulations applicable to NEC or under its articles of incorporation on the rights of non-resident or foreign shareholders to hold the shares of common stock of NEC or to exercise voting rights. There is no provision in NEC's articles of incorporation that would have an effect of delaying, deferring or preventing a change in control of NEC and that would operate only with respect to merger, consolidation, acquisition or corporate restructuring involving NEC. C. MATERIAL CONTRACTS All contracts entered into by us during the two years preceding the date of this annual report were entered into in the ordinary course of business. D. EXCHANGE CONTROLS The Japanese Foreign Exchange and Foreign Trade Law, currently in effect, does not affect or restrict the rights of a non-resident or foreign corporation to acquire or hold shares of capital stock of NEC except that in the event of acquisition of shares of common stock, unless such acquisition is made through a securities company or other financial institution, the acquiring non-resident or foreign corporation is subject to a post-transaction reporting requirement under the Foreign Exchange and Foreign Trade Law. However, the Minister of Finance has the power to impose a licensing requirement in certain acquisitions in extremely limited circumstances. Under the current Foreign Exchange and Foreign Trade Law, dividends paid on, and the proceeds of sales in Japan of, shares held by non-residents of Japan may generally be converted into any foreign currency and repatriated abroad. E. TAXATION The discussion below is not intended to constitute a complete analysis of all tax consequences relating to the acquisition, ownership and disposition of shares of common stock and ADSs. Prospective purchasers and holders of the shares of common stock or ADSs should consult their own tax advisors concerning the tax consequences of their particular situations. The following is a general summary of the material United States federal income and Japanese tax consequences of the acquisition, ownership and disposition of shares of common stock or ADSs by an investor that holds those shares or ADSs, as capital assets (generally, property held for investment). This summary does not purport to address all tax consequences that may be relevant to holders of shares of common stock or ADSs, and does not take into account the specific circumstances of all categories of potential investors, some of which (such as tax-exempt entities, banks, insurance companies, broker-dealers, investors liable for alternative minimum tax, investors that own or are treated as owning 10% or more of our voting stock, investors that hold shares of common stock or ADSs as part of a straddle, hedge, conversion transaction or other integrated transaction, investors that hold shares of common stock or ADSs through a partnership or other pass-through entity and investors whose functional currency is not the U.S. dollar) may be subject to special tax rules. This summary is based on the tax laws of Japan and the federal income tax laws of the United States as in effect on the date hereof, as well as on the Income Tax Convention between the United States and Japan, as currently in force, (the "Tax Convention"), all of which are subject to change (possibly with retroactive effect), and to differing interpretations. In this regard, U.S. Holders should note that the United States and Japan began formal renegotiation of the Tax Convention in October 2001, and the negotiations continue. In addition, this summary is based in part upon the representations of the Depositary and the assumption that each obligation in the Deposit Agreement for ADSs and in any related agreement, will be performed in accordance with its terms. 58 For purposes of this discussion, a "U.S. Holder" is any beneficial owner of shares of common stock or ADSs that is: - an individual citizen or resident of the United States, - corporation or other entity taxable as a corporation organized under the laws of the United States or of any political subdivision thereof, - an estate or trust the income of which is subject to United States federal income taxation without regard to its source. An "Eligible U.S. Holder" is a U.S. Holder that: - is a resident of the United States for purposes of the Tax Convention, - does not maintain a permanent establishment or fixed base in Japan to which shares of common stock or ADSs are attributable and through which the U.S. Holder carries on or has carried on business (or, in the case of an individual, performs or has performed independent personal services), and - is not otherwise ineligible for benefits under the Tax Convention with respect to income and gain derived in connection with the shares of common stock or ADSs. A "Non-U.S. Holder" is any beneficial owner of shares of common stock or ADSs that is: - an individual who is classified as a nonresident for United States federal income tax purposes, - a foreign corporation or other foreign entity taxable as a corporation, or - an estate or trust that is not a U.S. Holder. This summary does not address any aspect of United States federal tax law other than income taxation, and does not discuss any aspect of Japanese tax law other than income taxation, inheritance and gift taxation and securities transfer taxation. Investors are urged to consult their own tax advisors regarding the United States federal, state and local and Japanese and other tax consequences to them of acquiring, owning and disposing of shares of common stock or ADSs. In particular, where relevant, investors are urged to confirm their status as Eligible U.S. Holders with their tax advisors and to discuss with their tax advisors any possible consequences of their failure to qualify as Eligible U.S. Holders. In general, taking into account the earlier assumptions, for purposes of the Tax Convention and for United States federal income and Japanese tax purposes, owners of ADRs evidencing ADSs will be treated as the owners of the shares of common stock represented by those ADSs, and exchanges of shares of common stock for ADSs, and exchanges of ADSs for shares of common stock, will not be subject to United States federal income or Japanese tax. Japanese taxation. The following is a summary of certain Japanese income tax consequences of the ownership and disposition of shares of common stock or ADSs by a portfolio investor who is a non-resident of Japan or a non-Japanese corporation having no permanent establishment in Japan. Generally, a non-resident of Japan or a non-Japanese corporation is subject to Japanese withholding tax on dividends paid by a Japanese corporation. Stock splits in themselves are not subject to Japanese income tax. In the absence of an applicable tax treaty, convention or agreement reducing the maximum rate of withholding tax, the rate of Japanese withholding tax applicable to dividends paid by Japanese corporations to non-residents of Japan or non-Japanese corporations is 20%. At the date of this document, Japan has income tax treaties, conventions or agreements whereby the withholding tax rate is reduced, in most 59 cases, to 15% for portfolio investors with, among other countries, Australia, Belgium, Canada, Denmark, Finland, France, Germany, Ireland, Italy, Luxembourg, The Netherlands, New Zealand, Norway, Singapore, Spain, Sweden, Switzerland, the United Kingdom and the United States. Under the Tax Convention, as currently in force, the maximum rate of Japanese withholding tax which may be imposed on dividends paid by a Japanese corporation to Eligible U.S. Holders generally is limited to 15% of the gross amount actually distributed. An Eligible U.S. Holder is required to submit an Application Form for Income Tax Convention Regarding Relief from Japanese Income Tax on Dividends in advance through NEC to the relevant tax authority before such payment of dividends. A standing proxy in Japan for a non-resident holder of Common Stock may provide this application service. With respect to ADSs, the Depositary or its agent will apply for this reduced rate on behalf of Eligible U.S. Holders by submitting two Application Forms (one before payment of dividends, the other within eight months after NEC's fiscal year-end) to the Japanese tax authorities. To claim this reduced rate, an Eligible U.S. Holder of ADSs will be required to file a proof of taxpayer status, residence and beneficial ownership (as applicable) and to provide other information or documents as may be required by the Depositary. An Eligible U.S. Holder who does not submit an application in advance will be entitled to claim the refund of withholding taxes withheld in excess of the rate under the Tax Convention from the relevant Japanese tax authority. Gains derived by a non-resident of Japan or a non-Japanese corporation from the sale of shares of common stock or ADSs outside Japan or from the sale of shares of common stock within Japan by a non-resident of Japan or a non-Japanese corporation having no permanent establishment in Japan, are in general not subject to Japanese income or corporation tax. Japanese inheritance or gift tax at progressive rates may be payable by a non-resident individual who has acquired shares of common stock or ADSs as a legatee, heir or donee even though neither the individual nor the deceased nor donor is a Japanese resident. Holders of shares of NEC's common stock or ADSs should consult their tax advisers regarding the effect of these taxes. U.S. federal income taxation. The following is a summary of material United States federal income tax consequences of the ownership of shares of common stock or ADSs by a U.S. Holder. This summary is based on United States federal income tax laws, including the United States Internal Revenue Code of 1986, as amended (the "Code"), its legislative history, existing and proposed regulations thereunder, published ruling and court decisions, and on the Tax Convention all of which are subject to change possibly with retroactive effect. This summary is not a complete analysis or description of all potential United States federal income tax consequences to a particular U.S. Holder. It does not address all United States federal income tax considerations that may be relevant to all categories of potential investors, certain of which are subject to special tax rules. It also does not address any state or local tax consequences of an investment in shares of common stock or ADSs. As noted above, if the obligations of the depositary are performed in accordance with the terms of the Deposit Agreement relating to the ADRs, owners of ADRs evidencing ADSs will be treated as the owners of the shares of common stock represented by those ADSs. The U.S. Treasury has expressed concerns that parties to whom ADSs are pre-released may be taking actions that are inconsistent with the claiming of foreign tax credits by U.S. Holders of ADSs. Accordingly, the discussion on the creditability of Japanese taxes described below could be affected by future actions that may be taken by the U.S. Treasury. We believe, and the discussion therefore assumes, that we are not and will not become a "passive foreign investment company" or a "foreign personal holding company" for United States federal income tax purposes. 60 Taxation of dividends. U.S. Holders will include in gross income the gross amount of any dividends received (before reduction for Japanese withholding taxes) to the extent paid out of NEC's current or accumulated earnings and profits (as determined for United States federal income tax purposes) as ordinary income. The dividend will not be eligible for the "dividends-received deduction" allowed to United States corporations in respect of dividends received from other United States corporations. The amount of the dividend will be the U.S. dollar value of the Japanese yen payments made, determined at the spot Japanese yen/U.S. dollar rate on the date the dividend is received by the depositary in the case of U.S. Holders of ADSs, or by the shareholder in the case of U.S. Holders of common stock, regardless of whether the dividend payment is in fact converted into U.S. dollars at that time. If a U.S. Holder realizes gain or loss on a sale or other disposition of Japanese yen, it will generally be U.S. source ordinary income or loss. Subject to certain limitations, the Japanese tax withheld in accordance with the Tax Convention will be creditable against the U.S. Holder's United States federal income tax liability. For foreign tax credit limitation purposes, the dividend will be income from sources without the United States, but generally will be treated separately, together with other items of "passive income" or, in the case of certain U.S. Holders "financial services income." Taxation of capital gains. Upon a sale or other disposition of shares of common stock or ADSs, a U.S. Holder will recognize gain or loss in an amount equal to the difference between the U.S. dollar value of the amount realized and the U.S. Holder's tax basis (determined in U.S. dollars) in such shares of common stock or ADSs. Generally, such gain or loss will be capital gain or loss and will be long-term capital gain or loss if the U.S. Holder's holding period for such shares of common stock or ADSs exceeds one year. Any such gain or loss will be income or loss from sources within the United States for foreign tax credit limitation purposes. Transfers of retained earnings and sales of shares of Common Stock to NEC. A transfer of retained earnings or legal reserve to stated capital is generally treated as a dividend payment for Japanese tax purposes subject to withholding tax. A sale of shares of common stock or ADSs to NEC results in a deemed dividend to the selling shareholders to the extent that the sales price exceeds the aggregate of the stated capital and the capital surplus attributable to the shares sold. Transfers of retained earnings or legal reserves to stated capital and deemed dividends that may result from sales of shares of common stock to NEC are not generally taxable events for United States federal income tax purposes and therefore would not give rise to foreign source income and U.S. Holders may not be able to use the foreign tax credit arising from any Japanese withholding tax imposed on such transactions unless they can apply the credit (subject to limitations) against U.S. tax due or other foreign source income in the appropriate category for foreign tax credit purposes. Information Reporting and Backup Withholding. Dividends paid on common stock or ADSs to a U.S. Holder, or proceeds from a U.S. Holder's sale, exchange or other disposition of common stock or ADSs, may be subject to information reporting requirements. Those dividends or proceeds from sale or disposition may also be subject to backup withholding unless the U.S. Holder: - is a corporation or comes within certain other categories of exempt recipients, and, when required, demonstrates this fact, or - provides a correct taxpayer identification number on a properly completed U.S. Internal Revenue Service (the "IRS"), Form W-9 or substitute form, certifies that the U.S. Holder is not subject to backup withholding and otherwise complies with applicable requirements of the backup withholding rules. Any amount withheld under these rules will be creditable against the U.S. Holder's United States federal income tax liability or refundable to the extent that it exceeds such liability if the U.S. Holder provides the required information to the IRS. If a U.S. holder is required to and does not provide a correct taxpayer identification number, the U.S. Holder may be subject to penalties imposed by the IRS. 61 F. DIVIDENDS AND PAYING AGENTS Not applicable. G. STATEMENTS BY EXPERTS Not applicable. H. DOCUMENTS ON DISPLAY We are subject to the informational requirements of the U.S. Securities Exchange Act of 1934, as amended. In accordance with these requirements, we file reports and other information with the SEC. These materials, including Annual Report on Form 20-F and the exhibits thereto, may be inspected and copied at the SEC's Public Reference Room at 450 Fifth Street, N.W., Washington D.C. 20549 and at the SEC's regional offices at 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of the materials may be obtained from the Public Reference Room of the SEC at 450 Fifth Street, N.W., Washington D.C. 20549 at proscribed rates. The public may obtain information on the operation of the SEC's Public Reference Room by calling the SEC in the United States at 1-800-SEC-0330. The SEC also maintains a web site at http://www.sec.gov that contains reports, proxy statements, and other information regarding registrants that file electronically with the SEC. I. SUBSIDIARY INFORMATION Please refer to discussion under "Item 4.C. Organizational Structure." ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. In the normal course of our business, we are exposed to cash flow risks and risks of fair value of assets and liabilities resulting from fluctuations in foreign currency exchange rates and interest rates. In order to reduce such risks, we enter into various kinds of financial instruments. We do not, however, own any such financial instruments for trading purposes. The counterparties to our derivative transactions are major financial institutions. We have established credit lines for each of such financial institutions, considering, among other factors, their credit quality, and manage the monthly balance for each such institution. We adopt sensitivity analyses for the evaluation of our risks resulting from fluctuations of foreign currency exchange rates and interest rates. In such sensitivity analysis, we assume certain movements of foreign currency exchange rates or interest rates, and value our risks that such movements may affect the fair value of our financial instruments, such as cash and cash equivalents, marketable and investment securities, loans, short-term borrowings, long-term debt, and derivative financial instruments. The market value of risks resulting from foreign currency exchange rate movements and interest rate movements is the present value of future cash flows affected by those rate movements in accordance with the valued market risk. The discount rate used in the assessment of the present value is determined based on the foreign currency exchange and interest rates at March 31, 2002. The difference between the fair value so calculated based on such movements of foreign currency exchange and/or interest rates, and the actual fair value (market value) at March 31, 2002, is the profit or loss assumed by such risks. We have not included the effect of accounts receivable and payable denominated in foreign currencies that are the object of our derivative hedging. Therefore, the following sensitivity analysis amounts do not reflect the full effect of the hedging activities related to all of the underlying exposures. RISKS FROM FOREIGN CURRENCY EXCHANGE RATE FLUCTUATIONS We enter into certain derivative contracts in order to hedge the adverse impact of fluctuations in foreign currency 62 exchange rates on our monetary assets and liabilities denominated in foreign currency arising from our operating activities. The primary classes of derivative financial instruments used for this purpose are forward exchange contracts, and currency swap agreements. These derivative financial instruments are used to hedge the effects from foreign currency exchange rate fluctuations of, among others, U.S. dollars and Euros against Japanese yen. If exchange rates of such currencies against Japanese yen decrease by 10% while conditions other than such exchange rates remain the same, then the fair value of our financial instruments would decrease by JPY 0.7 billion. On the other hand, if such exchange rates rise by 10%, the fair value of such financial instruments would increase by JPY 0.7 billion. RISKS FROM INTEREST RATE FLUCTUATIONS We are also exposed to risks of interest rate fluctuations that may affect the fair value of our financial assets and liabilities (mainly long-term debt). We enter into certain derivative contracts in order to hedge losses resulting from fluctuations in interest rates. The primary classes of derivative financial instruments used for this purpose are interest rate swap agreements. If interest rates rise by 10% from those of March 31, 2002 while conditions other than such interest rates remain the same, then the fair value of those financial instruments would increase by JPY 1.5 billion. On the other hand, if such interest rates decrease by 10%, the fair value of such financial instruments would decrease by JPY 1.5 billion. RISK FROM PRICE MOVEMENTS OF MARKETABLE SECURITIES All of our marketable securities are classified as available-for-sale securities. We do not own any marketable securities for trading purposes. The following table sets forth the maturity dates and cost and fair values of debt securities in our investment portfolio, and the cost and fair values of equity securities therein, at March 31, 2002.
(MILLIONS OF YEN) AT MARCH 31, 2002 COST FAIR VALUE ----------- ----------- Debt securities (by maturity dates): Less than 1 year JPY 4,451 JPY 4,418 1 to 2 years 129 143 2 to 3 years 3,056 2,946 3 to 4 years 626 402 4 to 5 years 22 15 over 5 years 64 59 Equity securities: 177,855 255,096 ----------- ----------- Total JPY 186,203 JPY 263,079 =========== ===========
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES. Not applicable. PART II ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES. None. ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS. Not applicable. 63 ITEM 15. [RESERVED]. ITEM 16. [RESERVED]. PART II ITEM 17. FINANCIAL STATEMENTS. Not applicable. ITEM 18. FINANCIAL STATEMENTS. Please see our consolidated financial statements beginning on page F-1. ITEM 19. EXHIBITS. The following documents are exhibits to this annual report: 1. Articles of incorporation, as amended to date (English translation) 2. Share handling regulations, as amended to date (English translation) 3. Certificate of English Translations for Articles of incorporation and for Share handling regulations 8. Subsidiaries of the Company (see "Item 4.C. Organizational Structure") 10(a)(1). Certification of Chief Executive Officer or Equivalent Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 10(a)(2). Certification of Chief Financial Officer or Equivalent Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 64 SIGNATURES The registrant certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this annual report on its behalf. NEC CORPORATION By: /s/ Koji Nishigaki ------------------------------------ Koji Nishigaki President Date: August 6, 2002 NEC Corporation Index to Consolidated Financial Statements
PAGE ----------- Report of Ernst & Young, Independent Auditors F-2 Report of PricewaterhouseCoopers, Independent Accountants F-3 Consolidated Balance Sheets at March 31, 2001 and 2002 F-4, F-5 Consolidated Statements of Operations, Comprehensive Income (Loss) and Retained Earnings for the years ended March 31, 2000, 2001 and 2002 F-6 Consolidated Statements of Cash Flows for the years ended March 31, 2000, 2001 and 2002 F-7 Notes to Consolidated Financial Statements F-8 - F-50 Financial Statement Schedule for the years ended March 31, 2000, 2001 and 2002: II- Valuation and Qualifying Accounts F-51
All other schedules are omitted because they are not applicable or the required information is shown in the financial statements or the notes thereto. Financial statements of majority-owned subsidiaries not consolidated and of 50 percent or less owned persons accounted for by the equity method have been omitted because the registrant's and its other subsidiaries' proportionate share of the income from continuing operations before income taxes, and total assets of each such company is less than 20 percent of the respective consolidated amounts, and the investment in and advances to each company is less than 20 percent of consolidated total assets. F-1 Report of Independent Auditors The Board of Directors and Shareholders NEC Corporation (Nippon Denki Kabushiki Kaisha) We have audited the accompanying consolidated balance sheets of NEC Corporation (the "Company") as of March 31, 2001 and 2002, and the related consolidated statements of operations, comprehensive income (loss) and retained earnings and cash flows for each of the two years in the period ended March 31, 2002, all expressed in Japanese yen. Our audits also included the information for each of the two years in the period ended March 31, 2002 included in the financial statement schedule listed in the Index at Item 18 (a). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audit. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the fiscal 2001 and 2002 consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of NEC Corporation at March 31, 2001 and 2002, and the consolidated results of its operations and its cash flows for each of the two years in the period ended March 31, 2002 in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the information for each of the two years in the period ended March 31, 2002 included in the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein. As discussed in Note 2 to the consolidated financial statements, in fiscal 2001 the Company changed its method of accounting for the issuance of stock by a subsidiary and, in fiscal 2002, the Company changed its method of accounting for derivative financial instruments and hedging activities. /s/ Ernst & Young Tokyo, Japan April 23, 2002 F-2 Report of Independent Accountants To the Board of Directors and Shareholders of NEC Corporation (Nippon Denki Kabushiki Kaisha) We have audited the accompanying consolidated statements of operations, comprehensive income (loss) and retained earnings, of cash flows, and financial statement schedule of NEC Corporation and its consolidated subsidiaries for the year ended March 31, 2000, stated in yen. These financial statements and financial statement schedule are the responsibility of the company's management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the results of the operations and the cash flows of NEC Corporation and its consolidated subsidiaries for the year ended March 31, 2000, in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule referred to above presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. We have not audited the consolidated financial statements and financial statement schedule of NEC Corporation and its consolidated subsidiaries for any period subsequent to March 31, 2000. /s/ PricewaterhouseCoopers PricewaterhouseCoopers Tokyo, Japan May 11, 2000 F-3 NEC Corporation Consolidated Balance Sheets
MARCH 31 --------------------------------- 2001 2002 -------------- -------------- (Millions of yen) ASSETS Current assets: Cash and cash equivalents JPY 386,835 JPY 377,772 Notes receivable, trade (Notes 7 and 15) 60,127 33,224 Accounts receivable, trade (Notes 7 and 15) 1,020,205 904,020 Allowance for doubtful notes and accounts (27,199) (32,175) Current portion of investment in leases (Notes 7, 15 and 20) - 251,947 Inventories (Note 5) 828,081 650,043 Deferred tax assets (Note 9) 123,786 118,293 Prepaid expenses and other current assets 73,940 101,912 -------------- -------------- Total current assets 2,465,775 2,405,036 Investments and long-term receivables: Marketable securities (Notes 4 and 7) 335,680 263,079 Investments and advances (Note 3): Affiliated companies 194,138 154,747 Other 153,964 158,179 Long-term receivables, trade 49,855 45,073 Investment in leases (Notes 7, 15 and 20) - 254,814 -------------- -------------- 733,637 875,892 Property, plant and equipment (Notes 7 and 20): Land 98,261 103,783 Buildings 935,953 887,698 Machinery and equipment 2,321,503 2,063,309 Construction in progress 59,171 71,349 -------------- -------------- 3,414,888 3,126,139 Accumulated depreciation (2,286,075) (2,166,562) -------------- -------------- 1,128,813 959,577 Other assets: Deferred tax assets (Note 9) 178,838 442,411 Intangible assets (Note 6) 243,630 254,711 Other 72,931 73,256 -------------- -------------- 495,399 770,378 -------------- -------------- JPY 4,823,624 JPY 5,010,883 ============== ==============
F-4
MARCH 31 -------------------------------- 2001 2002 ------------- ------------- (Millions of yen) LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Short-term borrowings (Note 7) JPY 231,251 JPY 450,544 Current portion of long-term debt (Note 7) 231,713 310,283 Notes payable, trade 83,899 61,685 Accounts payable, trade 1,107,449 877,270 Accounts payable, other and accrued expenses 296,585 295,505 Accrued income taxes 42,862 35,317 Other current liabilities 203,904 179,737 ------------- ------------- Total current liabilities 2,197,663 2,210,341 Long-term liabilities: Long-term debt (Note 7) 1,221,295 1,498,878 Accrued pension and severance costs (Note 8) 400,333 467,561 Other 20,910 39,171 ------------- ------------- 1,642,538 2,005,610 Minority shareholders' equity in consolidated subsidiaries 68,387 132,817 Preferred securities issued by a subsidiary (Note 10) - 97,200 Commitments and contingent liabilities (Note 21) Shareholders' equity (Note 11): Common stock: Authorized - 3,200,000,000 shares Issued 2001 - 1,656,259,435 shares 244,717 2002 - 1,656,268,189 shares 244,726 Additional paid-in capital 361,813 361,820 Legal reserve 39,046 39,046 Retained earnings 349,033 27,079 Accumulated other comprehensive income (loss) (78,603) (105,437) ------------- ------------- 916,006 567,234 Treasury stock, at cost: 2001 - 307,716 shares, 2002 - 2,285,092 shares (970) (2,319) ------------- ------------- 915,036 564,915 ------------- ------------- JPY 4,823,624 JPY 5,010,883 ============= =============
(See notes to consolidated financial statements.) F-5 NEC Corporation Consolidated Statements of Operations, Comprehensive Income (Loss) and Retained Earnings
YEAR ENDED MARCH 31 ---------------------------------------------- 2000 2001 2002 ------------- ------------- ------------- (Millions of yen) Sales and other income: Net sales JPY 4,991,447 JPY 5,409,736 JPY 5,101,022 Interest, gain on securities sold, dividends and other (Notes 4, 19 and 20) 218,444 140,062 103,637 Gain due to stock issuances by subsidiaries (Note 18) - 41,324 6,753 ------------- ------------- ------------- 5,209,891 5,591,122 5,211,412 Costs and expenses: Cost of sales 3,664,513 3,981,113 3,919,268 Selling, general and administrative (Notes 2, 16 and 17) 1,216,520 1,243,440 1,237,276 Interest 70,211 63,873 46,673 Other (Note 19) 228,464 210,373 469,378 ------------- ------------- ------------- 5,179,708 5,498,799 5,672,595 ------------- ------------- ------------- Income (loss) before income taxes 30,183 92,323 (461,183) Provision (benefit) for income taxes (Note 9) 32,484 56,308 (178,173) ------------- ------------- ------------- Income (loss) before minority interest, equity in earnings (losses) of affiliated companies and cumulative effect of accounting change (2,301) 36,015 (283,010) Minority interest in income (losses) of consolidated subsidiaries (1,419) 1,296 2,574 ------------- ------------- ------------- Income (loss) before equity in earnings (losses) of affiliated companies and cumulative effect of accounting change (882) 34,719 (285,584) Equity in earnings (losses) of affiliated companies (Note 3) 11,298 21,884 (23,841) ------------- ------------- ------------- Income (loss) before cumulative effect of accounting change 10,416 56,603 (309,425) Cumulative effect of accounting change, net of tax (Note 2) - - (2,595) ------------- ------------- ------------- Net income (loss) 10,416 56,603 (312,020) Comprehensive income (loss): Other comprehensive income (loss), net of tax (Note 11): Foreign currency translation adjustments (24,333) 19,127 13,451 Minimum pension liability adjustment (Note 8) 28,243 (84,871) (37,834) Unrealized gains (losses) on marketable securities (Note 4) 41,500 (60,864) 463 Unrealized gains (losses) on derivative financial instruments (Note 14) - - 692 Cumulative effect of accounting change (Note 2) - - (3,606) ------------- ------------- ------------- Other comprehensive income (loss) 45,410 (126,608) (26,834) ------------- ------------- ------------- Comprehensive income (loss) JPY 55,826 JPY (70,005) JPY (338,854) ============= ============= ============= Retained earnings: Balance at beginning of year JPY 313,262 JPY 312,638 JPY 349,033 Net income (loss) 10,416 56,603 (312,020) Dividends (9,770) (18,084) (9,934) Transfer to legal reserve (1,270) (2,124) - ------------- ------------- ------------- Balance at end of year JPY 312,638 JPY 349,033 JPY 27,079 ============= ============= ============= 2000 2001 2002 ------------- ------------- ------------- (Yen) Per share (Note 13): Basic: Income (loss) before cumulative effect of accounting change JPY 6.40 JPY 34.55 JPY (187.06) Net income (loss) 6.40 34.55 (188.63) Diluted: Income (loss) before cumulative effect of accounting change 6.40 32.17 (187.06) Net income (loss) 6.40 32.17 (188.63) Cash dividends per share 6.00 11.00 6.00
(See notes to consolidated financial statements.) F-6 NEC Corporation Consolidated Statements of Cash Flows
YEAR ENDED MARCH 31 -------------------------------------------- 2000 2001 2002 ------------ ------------ ------------ (Millions of yen) CASH FLOWS FROM OPERATING ACTIVITIES Net income (loss) JPY 10,416 JPY 56,603 JPY (312,020) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation 260,942 250,138 234,738 Deferred income taxes (2,102) (2,463) (222,423) (Gain) loss on property, plant and equipment (24,249) (13,823) 146,430 Realized (gain) loss on marketable securities (98,194) 2,175 62,139 Gain due to stock issuances by subsidiaries - (41,324) (6,753) Provision for pension and severance costs, less payments 10,310 5,060 56 Equity in (earnings) losses of affiliated companies, net of dividends (7,552) (17,149) 28,030 Minority interest in income (losses) of consolidated subsidiaries (1,419) 1,296 2,574 (Increase) decrease in notes and accounts receivable 201,934 (139,644) 169,628 (Increase) decrease in inventories 85,104 (83,769) 216,062 Increase (decrease) in notes and accounts payable 80,817 226,886 (178,878) Increase (decrease) in other current liabilities (56,383) 110,723 (60,747) Other, net (1,087) 5,783 57,801 ------------ ------------ ------------ Net cash provided by operating activities 458,537 360,492 136,637 CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from sales of property, plant and equipment 246,386 112,887 56,094 Additions to property, plant and equipment (263,767) (310,711) (295,585) Proceeds from sales and redemption of marketable securities 180,576 48,053 33,659 Purchase of marketable securities (97,606) (3,373) (2,482) Proceeds from sales of affiliates' stock 33,672 55,656 38,438 Investments in affiliates (5,675) - (31,046) Disbursements for long-term loans (646) (23,151) (11,842) Decrease in long-term loans 1,599 10,458 18,714 Increase in other investment securities (566) (2,028) (6,408) Other, net (3,577) 683 (3,078) ------------ ------------ ------------ Net cash provided by (used in) investing activities 90,396 (111,526) (203,536) CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from long-term debt 24,916 115,401 257,240 Repayments of long-term debt (282,917) (218,144) (398,479) Increase (decrease) in short-term borrowings (222,434) (149,988) 104,232 Dividends paid (9,801) (14,577) (15,948) Proceeds from stock issuances by subsidiaries - 24,635 12,448 Proceeds from preferred securities issued by a subsidiary - - 97,000 Other, net 2,765 2,627 (839) ------------ ------------ ------------ Net cash provided by (used in) financing activities (487,471) (240,046) 55,654 Effect of exchange rate changes on cash and cash equivalents (7,164) 3,948 2,182 ------------ ------------ ------------ Net increase (decrease) in cash and cash equivalents 54,298 12,868 (9,063) Cash and cash equivalents at beginning of year 319,669 373,967 386,835 ------------ ------------ ------------ Cash and cash equivalents at end of year JPY 373,967 JPY 386,835 JPY 377,772 ============ ============ ============ SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash paid during the year for: Interest JPY 70,120 JPY 63,021 JPY 47,852 Income taxes 39,277 33,347 51,795 SUPPLEMENTAL INFORMATION OF NONCASH FINANCING ACTIVITIES Conversion of convertible debt into shares of common stock JPY 1,292 JPY 27,159 JPY 18
(See notes to consolidated financial statements.) F-7 NEC Corporation Notes to Consolidated Financial Statements March 31, 2002 1. NATURE OF OPERATIONS NEC Corporation and its consolidated subsidiaries (the "Company") is a provider of systems, components, services, and integrated solutions for computing and communication applications. The Company operates its principal business through three in-house companies based on customers and markets served. NEC Solutions is primarily engaged in the provision of systems integration services, Internet-related services, and software, as well as the development, design, manufacture and sale of computer systems, mainly for corporate and individual customers. NEC Networks is primarily engaged in the development, design, manufacture, sale and network integration services for communication systems and equipment mainly for network service providers. NEC Electron Devices is primarily engaged in the development, design, manufacture and sale of semiconductors and other electron devices for equipment manufacturers. The Company's principal manufacturing facilities are located in Japan, the United States of America, Europe, and Asia, and its products are marketed by the Company throughout the world. 2. SIGNIFICANT ACCOUNTING POLICIES NEC Corporation and its Japanese subsidiaries maintain their records and prepare their financial statements in accordance with accounting principles generally accepted in Japan, and its foreign subsidiaries in conformity with those of the countries in which such subsidiaries are domiciled. Certain adjustments and reclassifications have been incorporated in the accompanying consolidated financial statements to conform with accounting principles generally accepted in the United States of America. These adjustments were not recorded in the statutory books of account. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimated. F-8 NEC Corporation Notes to Consolidated Financial Statements (continued) 2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Significant accounting policies, after reflecting adjustments for the above, are as follows: (BASIS OF CONSOLIDATION AND INVESTMENTS IN AFFILIATED COMPANIES) The consolidated financial statements include the accounts of NEC Corporation and its subsidiaries in which it has a controlling financial interest. All significant intercompany transactions and accounts are eliminated. The fiscal years of certain foreign subsidiaries are December 31 and there have been no significant transactions for such subsidiaries for the period from January 1, 2002 to March 31, 2002. Investments in 20 - 50% owned companies over which the Company does not have control, but has the ability to exercise significant influence, are accounted for by the equity method. Special purpose entities ("SPEs") used in connection with the securitization of receivables are not consolidated when the Company has surrendered control over the receivables. SPEs used in connection with the leasing of property are not consolidated when the owner of the SPE has made a substantial investment that is at risk for the life of the SPE. (CASH EQUIVALENTS) All highly liquid investments with original maturities of three months or less are considered to be cash equivalents. (FOREIGN CURRENCY TRANSLATION) Assets and liabilities of foreign consolidated subsidiaries and affiliated companies accounted for by the equity method are translated into yen at appropriate year-end rates of exchange and all revenue and expense accounts are translated at average rates of exchange prevailing during the year. The resulting translation adjustments are accumulated and included in accumulated other comprehensive income (loss) classified as part of shareholders' equity. (MARKETABLE SECURITIES AND OTHER INVESTMENTS) The Company classifies its marketable equity securities and debt securities as available-for-sale which are reported at fair value, with unrealized gains and losses included in accumulated other comprehensive income (loss), net of taxes. When a decline in value of the investments in marketable securities is deemed to be other-than-temporary, the Company recognizes an impairment loss to the extent of the decline. In determining if and when such a decline in value is other-than-temporary, the Company evaluates the market conditions, trends of earnings, and other key measures. Realized gains or losses on the sale of marketable securities are based on the average cost of a particular security held at the time of sale. Other investment securities are stated at cost. F-9 NEC Corporation Notes to Consolidated Financial Statements (continued) 2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) (INVENTORIES) Inventories are stated at the lower of cost or market. Finished products made to customer specifications are stated at accumulated production costs. Mass-produced standard products are principally costed on a first-in, first-out basis. Work in process made to customer specifications is stated at accumulated production costs of job orders. Work in process of mass-produced standard products is stated on an average cost basis. The cost of semifinished components is principally determined on a first-in, first-out basis. Raw materials and purchased components are principally stated on a first-in, first-out basis and, for certain subsidiaries, on an average cost basis. The Company identifies slow moving and obsolete inventory, and writes down such inventory to its estimated market value based on assumptions about future demand and market conditions. (PROPERTY, PLANT AND EQUIPMENT AND DEPRECIATION) Property, plant and equipment are stated at cost. Depreciation is computed principally using the declining-balance method at rates based on the following estimated useful lives of the assets: buildings, 7 to 50 years, machinery and equipment, 2 to 22 years. Maintenance and repairs, including minor renewals and betterments, are charged to income as incurred. Leased assets meeting certain criteria are capitalized and amortized principally using the declining-balance method over the lease term. Assets leased to others under operating leases are stated at cost and depreciated using the straight-line method over the estimated useful lives. (INTANGIBLE ASSETS) Intangible assets consist primarily of the costs of purchased patents and trade names and goodwill. Goodwill represents the excess of cost of the acquired enterprise over the sum of the amounts assigned to identifiable assets less liabilities assumed. Costs allocated to patents and trade names are amortized principally on a straight-line basis over their estimated useful lives. Goodwill, which arose from business combinations completed before July 1, 2001, has been amortized on a straight-line basis over the period of expected benefit which does not exceed 10 years. Goodwill, which arose from business combinations completed after June 30, 2001, is stated at cost, and no amortization is recorded. The Company reviews the carrying amount of intangible assets for impairment whenever events or circumstances indicate that the carrying amounts may not be recoverable. F-10 NEC Corporation Notes to Consolidated Financial Statements (continued) 2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) (IMPAIRMENT OF LONG-LIVED ASSETS) Long-lived assets are evaluated for impairment using an estimate of undiscounted cash flows whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. If the estimate of undiscounted cash flows is less than the carrying amount of the assets, an impairment loss is recorded based on the fair value of the assets. (INCOME TAXES) Deferred tax assets and liabilities are determined based on the financial statement and tax bases of assets and liabilities, using the enacted tax rates in effect for the year in which the temporary differences are expected to reverse. Deferred tax assets are also recognized for the estimated future tax effects attributable to operating loss carryforwards. Valuation allowances are established to reduce deferred tax assets if it is more likely than not that some portion or all of the deferred tax assets will not be realized. (ISSUANCE OF STOCK BY A SUBSIDIARY) When a subsidiary issues stock to unrelated third parties, the Company's ownership interest in the subsidiary decreases; however, if the price per share is more or less than the Company's average carrying amount per share, the Company is required to adjust the carrying amount of its investment in the subsidiary. Prior to fiscal 2001, the Company accounted for such adjustments as capital transactions, with a charge or credit to additional paid-in capital. In fiscal 2001, the Company changed its accounting method to recognize such gains or losses in income for the year in which the change in ownership interest occurs. The Company believed this change was to a preferable method because it better reflects the Company's stated strategy of taking competitive subsidiaries public and raising their overall corporate value. As a result of the change, net income and diluted net income per share for the year ended March 31, 2001 increased by JPY 8,868 million and by JPY 4.79 per share, respectively. (NET INCOME PER SHARE) Basic net income per share ("EPS") is computed by dividing net income by the weighted-average number of shares of common stock outstanding for the period. Diluted EPS assumes the dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock, or resulted in the issuance of common stock unless their inclusion would have antidilutive effect. F-11 NEC Corporation Notes to Consolidated Financial Statements (continued) 2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) (REVENUE RECOGNITION) Revenue from sales of mass-produced standard products such as electron devices, mobile terminals, computers and workstations is recognized when the products are shipped. Revenue from services is recognized as the services are provided. Revenue from development of custom software products is recognized when the software products have been delivered and accepted by the customer. The Company enters into multiple element projects with customers which include both products and services. Such projects generally include several separate agreements covering portions of the project. If the Company has vendor specific objective evidence for revenues allocated to each separate agreement and undelivered elements are not essential to functionality of delivered elements, revenue is allocated among the elements as each is completed and accepted by the customer. If undelivered elements are essential to functionality, revenue for the project is recognized when all elements have been completed and the project is accepted by the customer. Revenues from the sale of equipment under sales-type leases are recognized at the inception of the lease. Income on sales-type leases and direct-financing leases is recognized to produce a constant periodic rate of return on the net investment in the lease. Leases not qualifying as sales-type lease or direct-financing lease are accounted for as operating leases and related revenue are recognized over the lease term. Cash consideration given by the Company to a customer or a reseller of the Company's products is accounted for as a reduction of revenue unless the Company receives, or will receive, an identifiable benefit in exchange for the consideration and can reasonably estimate the fair value of the benefit identified. (SHIPPING AND HANDLING COSTS) The Company includes shipping and handling costs which totaled JPY 6,938 million, JPY 6,719 million and JPY 6,372 million for the years ended March 31, 2000, 2001 and 2002 in selling, general and administrative expenses. (DERIVATIVE FINANCIAL INSTRUMENTS) Effective on April 1, 2001, the Company adopted the Statement of Financial Accounting Standards ("SFAS") No. 133, (Accounting for Derivative Instruments and Hedging Activities). Adoption of SFAS No. 133 on April 1, 2001 resulted in a loss from the cumulative effect of an accounting change of JPY 2,595 million and a reduction from accumulated other comprehensive income (loss) of JPY 3,606 million. F-12 NEC Corporation Notes to Consolidated Financial Statements (continued) 2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) (DERIVATIVE FINANCIAL INSTRUMENTS (CONTINUED)) As a result of adoption of SFAS No. 133, the Company recognizes all derivative financial instruments, such as forward exchange contracts and interest rate swap agreements, in the consolidated financial statements at fair value regardless of the purpose or intent for holding the derivative financial instruments. Changes in the fair value of derivative financial instruments are either recognized periodically in income or in shareholders' equity as a component of other comprehensive income (loss) depending on whether the derivative financial instruments qualify for hedge accounting, and if so, whether they qualify as a fair value hedge or a cash flow hedge. Changes in fair values of derivative financial instruments accounted for as a fair value hedge are recorded in income along with the portion of the change in the fair value of the hedged item that relates to the hedged risk. Changes in fair value of derivative financial instruments accounted for as a cash flow hedge, to the extent it is effective as a hedge, are recorded in other comprehensive income (loss), net of tax. Changes in fair value of derivative financial instruments not qualifying as a hedge are reported in income. Prior to April 1, 2001, the Company used forward exchange contracts and interest rate swap agreements for hedging purposes. For forward exchange contracts, gains and losses on contracts designated as hedges were recognized in income and were offset against the foreign exchange differences in the underlying assets and liabilities. The gains and losses were included in other income or expenses. The discounts and premiums on forward exchange contracts were amortized over the lives of the respective contracts and included in interest expense. The related receivable or payable was included in other current assets or other current liabilities. Agreements that are, in substance, essentially the same as forward exchange contracts, such as currency swaps, are accounted for in a manner similar to the accounting for forward exchange contracts. For interest rate swap agreements, differentials to be paid or received related to interest rate swap agreements were recognized in interest expense over the lives of the agreement. The receivable or payable for the differential is included in other current assets or other current liabilities. (SALES OF RECEIVABLES) In some cases, the Company retains certain interests in trade receivables and investment in leases sold in securitizations. Gain or loss on the sale of the trade receivables and investment in leases is based on the previous carrying amount of the trade receivables and investment in leases involved in the transfer, allocated between the trade receivables and investment in leases sold, and the retained interests based on their relative fair values at the transfer date. The Company generally estimates fair value based on the present value of future expected cash flows estimated using certain assumptions; credit losses and discount rates commensurate with the risks involved. F-13 NEC Corporation Notes to Consolidated Financial Statements (continued) 2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) (NEW ACCOUNTING STANDARDS) In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No. 141, (Business Combinations), and No. 142, (Goodwill and Other Intangible Assets). SFAS No. 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. SFAS No. 141 also includes guidance on the initial recognition and measurement of goodwill and other intangible assets arising from business combinations completed after June 30, 2001. SFAS No. 142 prohibits the amortization of goodwill and intangible assets with indefinite useful lives. SFAS No. 142 requires that these assets be reviewed for impairment at least annually. Intangible assets with finite lives will continue to be amortized over their estimated useful lives. Additionally, SFAS No. 142 requires that goodwill included in the carrying value of equity method investments no longer be amortized. The Company will adopt SFAS No. 142 effective April 1, 2002. The Company recorded amortization of JPY 5,517 million, JPY 6,330 million and JPY 8,360 million for the years ended March 31, 2000, 2001 and 2002, respectively, under previous accounting standards. In accordance with SFAS No. 142, the Company is required to perform the impairment tests of goodwill and indefinite lived intangible assets by the end of September 2002. Any impairment charge resulting from these tests will be reflected as the cumulative effect of accounting change. The Company has not yet determined whether the adoption of this statement will result in an impairment of goodwill and indefinite lived intangible assets. In August 2001, the FASB issued SFAS No. 144, (Accounting for the Impairment or Disposal of Long-Lived Assets). SFAS No. 144 addresses financial accounting and reporting for the impairment or disposal of long-lived assets and supersedes SFAS No. 121, (Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of), and the accounting and reporting provisions of APB Opinion No. 30, (Reporting the Results of Operations), for a disposal of a segment of a business. SFAS No. 144 is effective for years beginning after December 15, 2001, with earlier application encouraged. The Company will adopt SFAS No. 144 effective April 1, 2002 and has not determined what effect, if any, it will have on the Company's results of operations and financial position. (RECLASSIFICATIONS) Certain accounts in the consolidated financial statements for the years ended March 31, 2000 and 2001 have been reclassified to conform to the 2002 presentation. F-14 NEC Corporation Notes to Consolidated Financial Statements (continued) 3. INVESTMENTS IN AFFILIATED COMPANIES Investments in affiliated companies accounted for by the equity method together with a percentage of the Company's ownership of voting shares at March 31, 2002 are: Nippon Electric Glass Co., Ltd. (35.7%); ANRITSU CORPORATION (22.0%); Toyo Communication Equipment Co., Ltd. (21.4%); Tokin Corporation (43.2%); SUMITOMO 3M Limited (25.0%); Elpida Memory, Inc. (50.0%); NEC-Mitsubishi Electric Visual Systems Corporation (50.0%) and 6 other companies. Summarized financial information relating to affiliated companies accounted for by the equity method is as follows:
MARCH 31 ------------------------------- 2001 2002 ------------- ------------- (Millions of yen) Current assets JPY 1,189,132 JPY 655,028 Other assets, including property, plant and equipment 1,043,043 694,943 ------------- ------------- Total assets JPY 2,232,175 JPY 1,349,971 ============= ============= Current liabilities JPY 854,569 JPY 487,567 Long-term liabilities 751,623 338,103 Shareholders' equity 625,983 524,301 ------------- ------------- Total liabilities and shareholders' equity JPY 2,232,175 JPY 1,349,971 ============= =============
YEAR ENDED MARCH 31 -------------------------------------------------- 2000 2001 2002 ------------- ------------- ------------- (Millions of yen) Sales and operating revenue JPY 1,104,816 JPY 1,388,641 JPY 1,002,208 Gross profit 212,714 276,966 179,108 Net income (loss) 30,204 75,888 (57,505)
F-15 NEC Corporation Notes to Consolidated Financial Statements (continued) 3. INVESTMENTS IN AFFILIATED COMPANIES (CONTINUED) Of the 13 affiliated companies at March 31, 2002 (16 companies at March 31, 2001) accounted for by the equity method, the stocks of 4 companies (5 companies at March 31, 2001) carried at JPY 118,382 million and JPY 110,072 million at March 31, 2001 and 2002, respectively, had quoted market values of an aggregate of JPY 217,234 million and JPY 130,174 million at March 31, 2001 and 2002, respectively. As a result of reorganization of various affiliated companies, the Company acquired a controlling financial interest in a leasing affiliated company, and consolidated such entity in the year ended March 31, 2002. The balances and transactions with affiliated companies accounted for by the equity method are shown below:
MARCH 31 ----------------------------- 2001 2002 ---------- ---------- (Millions of yen) Receivables, trade JPY 62,929 JPY 18,191 Payables, trade 83,636 19,201
YEAR ENDED MARCH 31 -------------------------------------------- 2000 2001 2002 ----------- ----------- ---------- (Millions of yen) Sales JPY 211,388 JPY 206,961 JPY 72,384 Purchases 111,119 172,571 57,597
Dividends received from affiliated companies accounted for by the equity method for the years ended March 31, 2000, 2001 and 2002 totaled JPY 3,746 million, JPY 5,052 million and JPY 2,049 million, respectively. F-16 NEC Corporation Notes to Consolidated Financial Statements (continued) 4. MARKETABLE SECURITIES The following is a summary of marketable securities by major security type:
MARCH 31, 2001 ------------------------------------------------------------- GROSS GROSS UNREALIZED UNREALIZED COST HOLDING GAINS HOLDING LOSSES FAIR VALUE ----------- ------------- -------------- ----------- (Millions of yen) Available-for-sale: Equity securities JPY 233,842 JPY 100,420 JPY 32,984 JPY 301,278 Debt securities 26,425 8,209 232 34,402 ----------- ----------- ---------- ----------- JPY 260,267 JPY 108,629 JPY 33,216 JPY 335,680 =========== =========== ========== ===========
MARCH 31, 2002 ------------------------------------------------------------- GROSS GROSS UNREALIZED UNREALIZED COST HOLDING GAINS HOLDING LOSSES FAIR VALUE ----------- ------------- -------------- ----------- (Millions of yen) Available-for-sale: Equity securities JPY 177,855 JPY 95,112 JPY 17,871 JPY 255,096 Debt securities 8,348 14 379 7,983 JPY 186,203 JPY 95,126 JPY 18,250 JPY 263,079
Contractual maturities of available-for-sale debt securities at March 31, 2002 are in the period from May 20, 2002 to July 27, 2009. Proceeds from sales of available-for-sale securities were JPY 180,576 million, JPY 48,053 million and JPY 21,017 million for the years ended March 31, 2000, 2001 and 2002, respectively. Gross realized gains were JPY 98,200 million, JPY 40,099 million and JPY 8,435 million for the years ended March 31, 2000, 2001 and 2002, respectively, and gross realized losses, including writedowns, were JPY 6 million, JPY 42,274 million and JPY 70,574 million for the years ended March 31, 2000, 2001 and 2002, respectively. F-17 NEC Corporation Notes to Consolidated Financial Statements (continued) 5. INVENTORIES Inventories at March 31, 2001 and 2002 consisted of the following:
MARCH 31 --------------------------- 2001 2002 ----------- ----------- (Millions of yen) Finished products JPY 294,876 JPY 235,783 Work in process and semifinished components 403,501 318,115 Less - advance payments received (54,414) (47,448) Raw materials and purchased components 184,118 143,593 ----------- ----------- JPY 828,081 JPY 650,043 =========== ===========
6. INTANGIBLE ASSETS Accumulated amortization of intangible assets was JPY 237,170 million and JPY 239,829 million at March 31, 2001 and 2002, respectively. 7. SHORT-TERM BORROWINGS AND LONG-TERM DEBT Short-term borrowings at March 31, 2001 and 2002 were as follows:
MARCH 31 --------------------------- 2001 2002 ----------- ----------- (Millions of yen) Loans, principally from banks, including bank overdrafts (average interest rate of 1.96% in 2001 and 1.25% in 2002): Secured JPY 7,720 JPY 20,228 Unsecured 211,797 249,316 Commercial paper (average interest rate of 12.24% in 2001 and 0.11% in 2002) 11,734 181,000 ----------- ----------- JPY 231,251 JPY 450,544 =========== ===========
At March 31, 2002, the Company had unused lines of credit for short-term financing aggregating JPY 268,406 million with no commitment fees and credit facility agreements aggregating JPY 350,000 million with certain facility fees. F-18 NEC Corporation Notes to Consolidated Financial Statements (continued) 7. SHORT-TERM BORROWINGS AND LONG-TERM DEBT (CONTINUED) Long-term debt at March 31, 2001 and 2002 was as follows:
MARCH 31 ----------------------------- 2001 2002 ------------- ------------- (Millions of yen) Loans, principally from banks and insurance companies, due 2001 to 2010 with interest rates of 0.233% to 12.75% at March 31, 2001 and due 2002 to 2011 with interest rates of 0.105% to 14.50% at March 31, 2002: Secured JPY 30,960 JPY 23,495 Unsecured 298,159 690,330 5.7% to 6.05% unsecured yen bonds due 2002 to 2007 30,000 30,000 1.1% to 3.3% at March 31, 2001 and 0.45% to 3.3% at March 31, 2002 unsecured yen debentures due 2001 to 2010 at March 31, 2001 and due 2002 to 2010 at March 31, 2002 595,000 618,000 1.9% unsecured yen convertible debentures due 2004, convertible currently at JPY 1,962.90 for one common share, redeemable before due date 118,508 118,506 1.0% unsecured yen convertible debentures due 2011, convertible currently at JPY 1,375.00 for one common share, redeemable before due date 97,906 97,906 1.8% unsecured yen convertible debentures 95,011 - Zero coupon unsecured yen convertible debentures due 2007, convertible currently at JPY 3,207.00 for one common share, redeemable before due date 100,000 100,000 Zero coupon unsecured yen convertible debentures due 2010, convertible currently at JPY 1,730.00 for one common share, redeemable before due date - 100,000 0.375% unsecured yen convertible notes issued by a consolidated subsidiary 5,312 - 0.2% to 5.1% at March 31, 2001 and 0.09% to 0.3% at March 31, 2002 medium-term notes issued by consolidated subsidiaries due 2001 to 2004 at March 31, 2001 and due 2002 to 2004 at March 31, 2002 30,560 9,024 Long-term capital lease obligations, due 2001 to 2029 with interest rates of 1.6% to 7.9% at March 31, 2001 and due 2002 to 2007 with interest rates of 2.398% to 8.9% at March 31, 2002 45,081 11,856 Other 6,451 8,098 ------------- ------------- 1,452,948 1,807,215 Unamortized premium 60 1,946 ------------- ------------- 1,453,008 1,809,161 Less - portion due within one year (231,713) (310,283) ------------- ------------- JPY 1,221,295 JPY 1,498,878 ============= =============
F-19 NEC Corporation Notes to Consolidated Financial Statements (continued) 7. SHORT-TERM BORROWINGS AND LONG-TERM DEBT (CONTINUED) The following were pledged as security for short-term borrowings and long-term debt at March 31, 2002:
(Millions of yen) ----------------- Notes and accounts receivable and investment in leases JPY 6,745 Marketable securities 12,550 Property, plant and equipment (net book value) 115,249
The agreement for the 1.9% unsecured yen convertible debentures due 2004 stipulates, among other things, that NEC Corporation is required to deposit with a designated bank, as a sinking fund payment, amounts adjusted for redemptions and conversions made to the dates specified in the agreement. Under the agreement, NEC Corporation deposited, instead of cash, marketable securities amounting to JPY 66,113 million and JPY 88,407 million at March 31, 2001 and 2002, respectively. The sinking fund payment, adjusted for the conversions made to March 31, 2002, is as follows:
SINKING FUND PAYMENT CONVERTIBLE ------------------------------------------- DEBENTURES DATE AMOUNT OF PAYMENT - ----------- -------------- -------------------- (Millions of yen) 1.9% March 31, 2003 JPY 14,000
At March 31, 2002, an aggregate of 220,563 thousand shares of common stock would have been issuable upon conversion of all convertible debt of NEC Corporation. The Company has basic agreements with lending banks to the effect that, with respect to all present or future loans with such banks, the Company shall provide collateral (including sums on deposit with such banks) or guarantors immediately upon the bank's request and that any collateral furnished, pursuant to such agreements or otherwise, will be applicable to all indebtedness to such banks. Certain of the loan agreements provide, among other things, that the Company submits to the lenders (upon their request) for approval its proposed appropriation of income (including dividends) before such appropriation can be submitted to the shareholders for approval. F-20 NEC Corporation Notes to Consolidated Financial Statements (continued) 7. SHORT-TERM BORROWINGS AND LONG-TERM DEBT (CONTINUED) Annual maturities and sinking fund requirements on long-term debt during the five years ending March 31, 2007 are as follows:
YEAR ENDING MARCH 31: (Millions of yen) - --------------------- ----------------- 2003 JPY 324,283 2004 380,593 2005 261,338 2006 189,604 2007 234,863
8. PENSION AND SEVERANCE PLANS NEC Corporation and its subsidiaries in Japan have severance indemnity plans and non-contributory defined benefit funded pension plans, or only severance indemnity plans, covering substantially all of their employees who meet eligibility requirements of the retirement regulations. Under the plans, employees whose service with the Company is terminated are, under most circumstances, entitled to lump-sum severance indemnities and/or pension payments, determined by reference to the current base rate of pay, length of service and conditions under which the termination occurs. The funding policy is to make contributions that can be deducted for Japanese income tax purposes. NEC Corporation and certain subsidiaries in Japan also have contributory defined benefit pension plans covering substantially all of their employees, including the governmental welfare pension benefit plan which would otherwise be provided by the Japanese government. The pension benefits are determined based on years of service and the compensation amount as stipulated in the regulations. The governmental welfare pension contributions are funded in conformity with the requirements regulated by the Japanese Welfare Pension Insurance Law. The contributions to the contributory and the non-contributory pension plans are placed into trusteed pension funds. According to revisions of the Japanese Welfare Pension Insurance Law in March 2000, NEC Corporation and certain subsidiaries in Japan amended the governmental welfare pension benefit plan effective in March 2000 and 2001 which reduced the benefit obligation. Most subsidiaries outside Japan have various retirement plans which are primarily defined contribution plans covering substantially all of their employees. The funding policy for the defined contribution plans is to annually contribute an amount equal to a certain percentage of the participants' annual salaries. F-21 NEC Corporation Notes to Consolidated Financial Statements (continued) 8. PENSION AND SEVERANCE PLANS (CONTINUED) Reconciliations of beginning and ending balances of the benefit obligations and the fair value of the plan assets are as follows:
MARCH 31 ------------------------------- 2001 2002 ------------- ------------- (Millions of yen) Change in benefit obligations: Benefit obligations at beginning of year JPY 1,156,107 JPY 1,280,618 Service cost 61,175 65,131 Interest cost 46,245 47,107 Actuarial loss 123,256 3,042 Benefits paid (54,096) (65,066) Plan amendments (52,069) - Newly consolidated subsidiaries - 65,303 ------------- ------------- Benefit obligations at end of year 1,280,618 1,396,135 Change in plan assets:(*1) Fair value of plan assets at beginning of year 787,915 759,571 Actual loss on plan assets (69,061) (50,831) Employer contributions 67,262 61,301 Benefits paid (26,545) (25,167) Newly consolidated subsidiaries - 54,558 ------------- ------------- Fair value of plan assets at end of year 759,571 799,432 ------------- ------------- Funded status (521,047) (596,703) Unrecognized prior service cost and actuarial loss (*2) 298,946 375,652 Unrecognized net obligation at April 1, 1989 being recognized over 17 years 15,599 12,552 ------------- ------------- Net amounts recognized JPY (206,502) JPY (208,499) ============= ============= Amounts recognized in the consolidated balance sheets consist of: Accrued pension and severance costs JPY (400,333) JPY (467,561) Accumulated other comprehensive income, pretax 193,831 259,062 ------------- ------------- Net amounts recognized JPY (206,502) JPY (208,499) ============= =============
- ---------- (*1) The plan assets consist principally of corporate equity securities, government securities and corporate debt securities. (*2) Unrecognized prior service cost and actuarial loss are amortized on the straight-line method over the average remaining service period of employees expected to receive benefits under the plan. F-22 NEC Corporation Notes to Consolidated Financial Statements (continued) 8. PENSION AND SEVERANCE PLANS (CONTINUED) The weighted-average assumptions used in the accounting for the plans at March 31, 2001 and 2002 were as follows:
MARCH 31 ---------------------- 2001 2002 -------- -------- Discount rate 3.5% 3.5% Rate of increase in future compensation level 1.7%-3.8% 1.7%-3.8% Expected long-term rate of return on plan assets 4.0% 4.0%
Components of net pension and severance cost for all defined benefit plans including both the Company's and the employees' contributory portion of such plans for the years ended March 31, 2000, 2001 and 2002 were as follows:
YEAR ENDED MARCH 31 ---------------------------------------- 2000 2001 2002 ---------- ---------- ---------- (Millions of yen) Service cost JPY 51,940 JPY 61,175 JPY 65,131 Interest cost 44,312 46,245 47,107 Expected return on plan assets (26,783) (31,617) (32,558) Amortization of unrecognized prior service cost and actuarial loss 15,867 8,666 18,842 Amortization of unrecognized net obligation at April 1, 1989 being recognized over 17 years 3,047 3,047 3,047 ---------- ---------- ----------- Net pension and severance cost for all defined benefit plans JPY 88,383 JPY 87,516 JPY 101,569 ========== ========== ===========
The total cost for all defined benefit and defined contribution plans was as follows:
YEAR ENDED MARCH 31 ----------------------------------------- 2000 2001 2002 ----------- ----------- ----------- (Millions of yen) Net pension and severance cost for all defined benefit plans JPY 88,383 JPY 87,516 JPY 101,569 Net pension cost for employees' portion of the contributory defined benefit pension plans (19,053) (13,959) (16,245) Pension and severance cost for defined contribution plans 2,307 3,355 3,620 ----------- ----------- ----------- Total cost for all defined benefit and defined contribution plans JPY 71,637 JPY 76,912 JPY 88,944 =========== =========== ===========
F-23 NEC Corporation Notes to Consolidated Financial Statements (continued) 9. INCOME TAXES Income (loss) before income taxes and provision (benefit) for income taxes comprise the following components:
YEAR ENDED MARCH 31 --------------------------------------------- 2000 2001 2002 ----------- ---------- ------------ (Millions of yen) Income (loss) before income taxes: NEC Corporation and domestic subsidiaries JPY 120,198 JPY 89,191 JPY (258,858) Foreign subsidiaries (90,015) 3,132 (202,325) ----------- ---------- ------------ JPY 30,183 JPY 92,323 JPY (461,183) =========== ========== ============ Provision (benefit) for income taxes: Current: NEC Corporation and domestic subsidiaries JPY 29,551 JPY 48,480 JPY 42,831 Foreign subsidiaries 5,035 10,291 1,419 ----------- ---------- ------------ 34,586 58,771 44,250 Deferred: NEC Corporation and domestic subsidiaries 7,273 6,755 (192,870) Foreign subsidiaries (9,375) (9,218) (29,553) ----------- ---------- ------------ (2,102) (2,463) (222,423) ----------- ---------- ------------ JPY 32,484 JPY 56,308 JPY (178,173) =========== ========== ============
The Company is subject to a number of different income taxes which, in the aggregate, result in statutory tax rate in Japan of approximately 42%. A reconciliation between the reported total income tax expense (benefit) and the amount computed by multiplying the income (loss) before income taxes by the statutory tax rate is as follows:
YEAR ENDED MARCH 31 ------------------------------------------ 2000 2001 2002 ----------- ---------- ------------ (Millions of yen) "Expected" tax expense (benefit) JPY 12,677 JPY 38,776 JPY (193,697) Increase (decrease) in taxes resulting from: a) Tax benefit on prior losses of subsidiaries (1,050) (5,417) (15,864) b) Changes in valuation allowance (11,844) 2,562 (5,156) c) Non-deductible expense for tax purposes 2,337 2,613 1,889 d) International tax rate differences 9,206 (452) 1,402 e) Tax rate difference relating to unrecognized gain (loss) of marketable securities 6,694 - - f) Non-deductible goodwill amortization 8,648 4,349 6,875 g) Tax on undistributed earnings 8,141 8,587 12,391 h) Other (2,325) 5,290 13,987 ----------- ---------- ------------ Actual total income tax expense (benefit) JPY 32,484 JPY 56,308 JPY (178,173) =========== ========== ============
F-24 NEC Corporation Notes to Consolidated Financial Statements (continued) 9. INCOME TAXES (CONTINUED) The significant components of deferred tax assets and liabilities at March 31, 2001 and 2002 were as follows:
MARCH 31 ----------------------------- 2001 2002 ----------- ----------- (Millions of yen) Deferred tax assets: Intercompany profit between consolidated companies JPY 29,892 JPY 21,970 Investments and advances 67,853 133,496 Accrued bonus 30,642 24,088 Accrued pension and severance costs 121,124 152,552 Operating lease 29,236 24,939 Operating loss carryforwards 103,631 225,973 Other 70,850 122,827 ----------- ----------- 453,228 705,845 Less - valuation allowance (36,683) (27,229) ----------- ----------- Total JPY 416,545 JPY 678,616 =========== =========== Deferred tax liabilities: Marketable securities JPY 38,084 JPY 33,415 Tax deductible reserve 45,337 31,826 Tax on undistributed earnings 19,932 38,235 Other 10,568 14,436 ----------- ----------- Total JPY 113,921 JPY 117,912 =========== ===========
In Japan, consolidated tax returns were not permitted until the year ended March 31, 2002; accordingly, NEC Corporation and its domestic subsidiaries file separate tax returns. The valuation allowance is primarily related to deferred tax assets of certain consolidated subsidiaries with operating loss carryforwards which are not expected to be realized. The net changes in the total valuation allowance for the years ended March 31, 2000, 2001 and 2002 were decreases of JPY 31,297 million, JPY 7,197 million and JPY 9,454 million, respectively. At March 31, 2002, for tax return purposes the Company had operating loss carryforwards amounting to approximately JPY 583,938 million of which JPY 364,892 million relates to domestic companies and will expire during the period from 2003 through 2007. The remainder of approximately JPY 219,046 million relates to foreign subsidiaries and, except for approximately JPY 127,523 million with no expiration date, will expire through 2022. Realization is dependent on the Company generating sufficient taxable income prior to expiration of the operating loss carryforwards or the Company executing certain available tax strategies. Although realization is not assured, management believes it is more likely than not that the net deferred tax asset will be realized. F-25 NEC Corporation Notes to Consolidated Financial Statements (continued) 10. PREFERRED SECURITIES ISSUED BY A SUBSIDIARY In December 2001, NEC Business Trust ("NBT"), a wholly owned subsidiary of NEC Corporation, issued 200,000 shares of NEC Trust Originated Preferred Securities ("TOPrS") to the public at an issuance price of JPY 485,000 per share, 97% of face value. NBT is a business trust established in the United States of America. NBT invested the proceeds of such issuance into interest bearing (at a rate equivalent to the TOPrS dividend rate) Unsecured Subordinated Debentures due 2021 of NEC Corporation ("Subordinated Debentures"). The Subordinated Debentures represent the sole assets of NBT. NEC Corporation has the right to redeem the Subordinated Debentures beginning on December 18, 2006, or in the case of certain regulatory events at the principal amount plus accrued interest. Holders of TOPrS are entitled to a cash dividend at JPY 6,250 per unit on the initial payment date, June 18, 2002, at a fixed rate of 2.50% per annum on the second payment date, December 18, 2002 through the tenth payment date, December 18, 2006, and at a floating rate of six month Yen LIBOR plus 2.00% per annum on the eleventh payment date, June 18, 2007, and thereafter. Distributions not paid on the scheduled payment date will accumulate and interest thereon will compound and accrue semi-annually. The discount of JPY 3,000 million is being amortized over five years. The amortization for the year ended March 31, 2002 was JPY 200 million. F-26 NEC Corporation Notes to Consolidated Financial Statements (continued) 11. SHAREHOLDERS' EQUITY Changes in common stock, additional paid-in capital, legal reserve, accumulated other comprehensive income (loss) and treasury stock are shown below:
YEAR ENDED MARCH 31 ----------------------------------------------- 2000 2001 2002 ----------- ------------ ------------ (Millions of yen) Common stock: Balance at beginning of year JPY 230,212 JPY 231,137 JPY 244,717 Conversion of convertible debt 925 13,580 9 ----------- ------------ ------------ Balance at end of year JPY 231,137 JPY 244,717 JPY 244,726 =========== ============ ============ Additional paid-in capital: Balance at beginning of year JPY 345,642 JPY 348,234 JPY 361,813 Conversion of convertible debt 803 13,579 9 Change in interest in consolidated subsidiaries 1,780 - - Gain (loss) on sale of treasury stock 9 - (2) ----------- ------------ ------------ Balance at end of year JPY 348,234 JPY 361,813 JPY 361,820 =========== ============ ============ Legal reserve: Balance at beginning of year JPY 35,652 JPY 36,922 JPY 39,046 Transfer from retained earnings 1,270 2,124 - ----------- ------------ ------------ Balance at end of year JPY 36,922 JPY 39,046 JPY 39,046 =========== ============ ============ Accumulated other comprehensive income (loss): Balance at beginning of year JPY 2,595 JPY 48,005 JPY (78,603) Other comprehensive income (loss), net of tax 45,410 (126,608) (26,834) ----------- ------------ ------------ Balance at end of year JPY 48,005 JPY (78,603) JPY (105,437) =========== ============ ============ Treasury stock, at cost: Balance at beginning of year JPY (18) JPY (83) JPY (970) Net change resulting from purchase and sales of fractional shares of less than "One Unit" as defined by the Japanese Commercial Code (65) 70 (816) Purchase of shares for stock option plan - (957) (533) ----------- ------------ ------------ Balance at end of year JPY (83) JPY (970) JPY (2,319) =========== ============ ============
F-27 NEC Corporation Notes to Consolidated Financial Statements (continued) 11. SHAREHOLDERS' EQUITY (CONTINUED) (1) Common stock and additional paid-in capital Issuances of common stock in connection with conversions of convertible debt for the years ended March 31, 2000, 2001 and 2002 were 1,798,430 shares, 27,439,595 shares and 8,754 shares, respectively. On October 1, 2001, an amendment ("Amendment") to the Japanese Commercial Code became effective. The Amendment eliminates the stated par value of the Company's outstanding shares which results in all outstanding shares having no par value as of October 1, 2001. The Amendment also provides that shares issued after September 30, 2001 will have no par value. Before the Amendment, the Company's shares had a par value of JPY 50 per share. Under the Japanese Commercial Code, the entire amount of the issue price of shares is required to be accounted for in the common stock account although a company in Japan may, by a resolution of its board of directors, account for an amount not exceeding one-half of the issue price of the shares as additional paid-in capital. Prior to 1985, NEC Corporation made, based on the resolution of the board of directors, a free distribution of 233,182,146 shares to shareholders, which was clearly distinguished from a "stock dividend" paid out of profits that, under the Japanese Commercial Code before April 1, 1991, must be approved by the shareholders. The cumulative amount of the fair value of these shares at the time of issuance was JPY 258,755 million. In accounting for the free distribution of shares, the Japanese Commercial Code before April 1, 1991 permitted the board of directors to authorize either (1) a transfer from additional paid-in capital to the common stock account or (2) no entry if free shares were distributed from the portion of previously issued shares accounted for as excess of par value in the common stock account. Had NEC Corporation accounted for these free share distributions in the manner used by United States companies, that amount would have been transferred from retained earnings to appropriate capital accounts. Such transfer, however, would have had no effect on total shareholders' equity. (2) Legal reserve and retained earnings The Japanese Commercial Code provides that an amount equal to at least 10% of cash dividends and other distributions from retained earnings paid by NEC Corporation and its Japanese subsidiaries be appropriated as a legal reserve. No further appropriation is required when the total amount of additional paid-in capital and the legal reserve equals 25% of the stated capital. The Japanese Commercial Code also provides that to the extent that the sum of the additional paid-in capital and the legal reserve exceed 25% of the stated capital, the amount of the excess (if any) is available for appropriations by the resolution of the shareholders. F-28 NEC Corporation Notes to Consolidated Financial Statements (continued) 11. SHAREHOLDERS' EQUITY (CONTINUED) (2) Legal reserve and retained earnings (continued) The amount of retained earnings available for dividends is based on NEC Corporation's retained earnings determined in accordance with generally accepted accounting principles and the Commercial Code in Japan. The appropriations of retained earnings for the year ended March 31, 2002, as incorporated in the accompanying consolidated financial statements, include year-end dividends of JPY 4,967 million which, in accordance with the Japanese Commercial Code, will be proposed for approval at the Ordinary General Meeting of Shareholders to be held on June 20, 2002 and will be recorded in the statutory books of account on that date. Retained earnings at March 31, 2002 included the Company's equity in undistributed earnings of affiliated companies accounted for by the equity method in the amount of JPY 64,864 million. (3) Other comprehensive income (loss) Change in accumulated other comprehensive income (loss) is as follows:
YEAR ENDED MARCH 31 ------------------------------------------------ 2000 2001 2002 ----------- ------------ ------------ (Millions of yen) Foreign currency translation adjustments: Balance at beginning of year JPY (1,648) JPY (25,981) JPY (6,854) Change in the current period (24,333) 19,127 13,451 ----------- ------------ ------------ Balance at end of year JPY (25,981) JPY (6,854) JPY 6,597 =========== ============ ============ Minimum pension liability adjustment: Balance at beginning of year JPY (55,794) JPY (27,551) JPY (112,422) Change in the current period 28,243 (84,871) (37,834) ----------- ------------ ------------ Balance at end of year JPY (27,551) JPY (112,422) JPY (150,256) =========== ============ ============ Unrealized gains (losses) on marketable securities: Balance at beginning of year JPY 60,037 JPY 101,537 JPY 40,673 Change in the current period 41,500 (60,864) 463 ----------- ------------ ------------ Balance at end of year JPY 101,537 JPY 40,673 JPY 41,136 =========== ============ ============ Unrealized gains (losses) on derivative financial instruments: Balance at beginning of year JPY - JPY - JPY - Cumulative effect of accounting change - - (3,606) Change in the current period - - 692 ----------- ------------ ------------ Balance at end of year JPY - JPY - JPY (2,914) =========== ============ ============ Total accumulated other comprehensive income (loss): Balance at beginning of year JPY 2,595 JPY 48,005 JPY (78,603) Cumulative effect of accounting change - - (3,606) Change in the current period 45,410 (126,608) (23,228) ----------- ------------ ------------ Balance at end of year JPY 48,005 JPY (78,603) JPY (105,437) =========== ============ ============
F-29 NEC Corporation Notes to Consolidated Financial Statements (continued) 11. SHAREHOLDERS' EQUITY (CONTINUED) (3) Other comprehensive income (loss) (continued) Tax effect allocated to each component of other comprehensive income (loss) is as follows:
YEAR ENDED MARCH 31 ----------------------------------------------------- BEFORE-TAX TAX (EXPENSE) NET-OF-TAX AMOUNT OR BENEFIT AMOUNT ------------ ------------- ------------ (Millions of yen) 2000: Foreign currency translation adjustments JPY (24,333) JPY - JPY (24,333) Minimum pension liability adjustment 48,695 (20,452) 28,243 Unrealized gains (losses) on marketable securities: Unrealized holding gains arising during period 156,825 (65,019) 91,806 Less: reclassification adjustments for gains realized in net income (loss) (98,194) 47,888 (50,306) ------------ ----------- ------------ Other comprehensive income (loss) JPY 82,993 JPY (37,583) JPY 45,410 ============ =========== ============ 2001: Foreign currency translation adjustments JPY 19,127 JPY - JPY 19,127 Minimum pension liability adjustment (146,329) 61,458 (84,871) Unrealized gains (losses) on marketable securities: Unrealized holding losses arising during period (100,977) 38,851 (62,126) Less: reclassification adjustments for losses realized in net income (loss) 2,175 (913) 1,262 ------------ ----------- ------------ Other comprehensive income (loss) JPY (226,004) JPY 99,396 JPY (126,608) ============ =========== ============ 2002: Foreign currency translation adjustments: Foreign currency translation adjustments arising during period JPY 15,414 JPY - JPY 15,414 Less: reclassification adjustments for gains realized in net income (loss) (1,963) - (1,963) Minimum pension liability adjustment (65,231) 27,397 (37,834) Unrealized gains (losses) on marketable securities: Unrealized holding losses arising during period 61,490 (24,986) 36,504 Less: reclassification adjustments for losses realized in net income (loss) (62,139) 26,098 (36,041) Unrealized gains (losses) on derivative financial instruments: Cumulative effect of accounting change (6,217) 2,611 (3,606) Net changes in fair value of derivative financial instruments (420) 176 (244) Less: reclassification adjustments for gains realized in net income (loss) 1,613 (677) 936 ------------ ----------- ------------ Other comprehensive income (loss) JPY (57,453) JPY 30,619 JPY (26,834) ============ =========== ============
F-30 NEC Corporation Notes to Consolidated Financial Statements (continued) 12. STOCK-BASED COMPENSATION PLAN At the shareholders' meeting held in June 2000, the Company's shareholders approved a stock option plan (the "2000 Plan") for directors, corporate officers and certain upper-level employees of NEC Corporation. Under the 2000 Plan, NEC Corporation was to purchase no more than 320,000 shares in the market with an aggregate price not exceeding JPY 1,200 million, and will hold and reserve such shares for transfer to option holders upon exercise of the options. NEC Corporation granted options to purchase 301,000 shares of its common stock at JPY 3,400 per share, the approximate market value at the date of grant. The terms of the options are subject to adjustment if there is a share split or consolidation of shares, or in certain circumstances, if new shares are issued at a price less than the current quoted market price. F-31 NEC Corporation Notes to Consolidated Financial Statements (continued) 12. STOCK-BASED COMPENSATION PLAN (CONTINUED) The options vested at the grant date, and are exercisable during the period from July 1, 2002 to June 30, 2006. The 2000 Plan provides that options lapse automatically upon the option holder's death and generally expire one year after termination of service. At the shareholders' meeting held in June 2001, the Company's shareholders approved the second stock option plan (the "2001 Plan") with terms and conditions substantially the same as those of the 2000 Plan. The aggregate number of shares to be transferred upon the exercise of all outstanding options under the 2001 Plan is 310,000 shares. The exercise price per share of the option is equal to JPY 1,876 per share. The options vested at the grant date, and are exercisable during the period from July 1, 2003 to June 30, 2007. The stock option activity is as follows:
YEAR ENDED MARCH 31, -------------------------------------------------- 2001 2002 ----------------------- --------- --------- WEIGHTED- WEIGHTED- AVERAGE AVERAGE NUMBER OF EXERCISE NUMBER OF EXERCISE OPTIONS PRICE OPTIONS PRICE --------- --------- --------- --------- (Yen) (Yen) Outstanding at beginning of year - JPY - 301,000 JPY 3,400 Granted 301,000 3,400 310,000 1,876 ------- ------- Outstanding at end of year 301,000 3,400 611,000 2,627 ======= ======= Exercisable at end of year - - - -
The weighted-average remaining contractual life for options outstanding at March 31, 2002 is 4.76 years. SFAS No. 123, (Accounting for Stock-Based Compensation), encourages entities to use a fair value method in accounting for stock based compensation plans, but permits entities to continue to use the intrinsic value method prescribed in Accounting Principles Board Opinion No. 25 ("APB No. 25"), (Accounting for Stock Issued to Employees), for employee stock options. Companies electing to use APB No. 25 are required to present pro forma disclosures of net income and net income per share as if the SFAS No. 123 fair value method had been used. F-32 NEC Corporation Notes to Consolidated Financial Statements (continued) 12. STOCK-BASED COMPENSATION PLAN (CONTINUED) The Company has elected to apply APB No. 25 under which the Company recognizes no compensation expense as long as the option price per share is at least equal to the market price at the measurement date. Had the Company recognized stock-based compensation expense based on the SFAS No. 123 fair value method, income (loss) before cumulative effect of accounting change, net income (loss), income (loss) before cumulative effect of accounting change per share and net income (loss) per share for the years ended March 31, 2001 and 2002 would have been as follows:
YEAR ENDED MARCH 31 ----------------------------- 2001 2002 ---------- ------------ (Millions of yen) Income (loss) before cumulative effect of accounting change: As reported JPY 56,603 JPY (309,425) Pro forma 56,305 (309,565) Net income (loss): As reported 56,603 (312,020) Pro forma 56,305 (312,160) (Yen) Basic EPS: Income (loss) before cumulative effect of accounting change: As reported JPY 34.55 JPY (187.06) Pro forma 34.37 (187.15) Net income (loss): As reported 34.55 (188.63) Pro forma 34.37 (188.72) Diluted EPS: Income (loss) before cumulative effect of accounting change: As reported JPY 32.17 JPY (187.06) Pro forma 32.01 (187.15) Net income (loss): As reported 32.17 (188.63) Pro forma 32.01 (188.72)
F-33 NEC Corporation Notes to Consolidated Financial Statements (continued) 12. STOCK-BASED COMPENSATION PLAN (CONTINUED) The weighted-average fair value per option at the grant date for options granted during the years ended March 31, 2001 and 2002 was JPY 991 and JPY 451, respectively. The fair value of options granted, which is charged to income at the grant date in determining the pro forma impact, is estimated using the Black-Scholes option pricing model with the following weighted-average assumptions:
YEAR ENDED MARCH 31 ----------------------------- 2001 2002 ------- ------- Risk-free interest rate 1.00% 0.43% Expected life 4 years 4 years Expected volatility 36.40% 42.60% Expected dividend 0.27% 0.56%
13. NET INCOME (LOSS) PER SHARE A reconciliation of the numerator and the denominators of the basic and diluted per share computations for income (loss) before cumulative effect of accounting change, cumulative effect of accounting change, net of tax and net income (loss) is as follows:
YEAR ENDED MARCH 31 --------------------------------------------- 2000 2001 2002 ---------- ---------- ------------ (Millions of yen) Income (loss) before cumulative effect of accounting change available to common shareholders JPY 10,416 JPY 56,603 JPY (309,425) Effect of dilutive securities: Convertible debt - 2,995 - ---------- ---------- ------------ Diluted income (loss) before cumulative effect of accounting change JPY 10,416 JPY 59,598 JPY (309,425) ========== ========== ============ Cumulative effect of accounting change, net of tax JPY - JPY - JPY (2,595) ========== ========== ============ Net income (loss) available to common shareholders JPY 10,416 JPY 56,603 JPY (312,020) Effect of dilutive securities: Convertible debt - 2,995 - ---------- ---------- ------------ Diluted net income (loss) JPY 10,416 JPY 59,598 JPY (312,020) ========== ========== ============
F-34 NEC Corporation Notes to Consolidated Financial Statements (continued) 13. NET INCOME (LOSS) PER SHARE (CONTINUED)
YEAR ENDED MARCH 31 ---------------------------------------------------- 2000 2001 2002 ------------- ------------- ------------- (Number of shares) Weighted-average number of shares of common stock outstanding for the year 1,627,817,355 1,638,173,139 1,654,131,607 Effect of dilutive securities: Convertible debt - 214,656,268 - ------------- ------------- ------------- Weighted-average number of shares of diluted common stock outstanding for the year 1,627,817,355 1,852,829,407 1,654,131,607 ============= ============= =============
YEAR ENDED MARCH 31 ----------------------------------------- 2000 2001 2002 -------- --------- ------------ (Yen) Per share: Basic: Income (loss) before cumulative effect of accounting change JPY 6.40 JPY 34.55 JPY (187.06) Cumulative effect of accounting change, net of tax - - (1.57) Net income (loss) 6.40 34.55 (188.63) Diluted: Income (loss) before cumulative effect of accounting change 6.40 32.17 (187.06) Cumulative effect of accounting change, net of tax - - (1.57) Net income (loss) 6.40 32.17 (188.63)
Securities that could potentially dilute basic EPS in the future that were not included in the fully diluted computation because they would have been antidilutive were as follows:
YEAR ENDED MARCH 31 -------------------------------------------------- 2000 2001 2002 ----------- ------- ----------- (Number of shares) Convertible debt 205,924,498 - 220,562,540 Stock options - 301,000 611,000
F-35 NEC Corporation Notes to Consolidated Financial Statements (continued) 14. FINANCIAL INSTRUMENTS (1) Fair value of financial instruments The carrying amounts of cash and cash equivalents, notes and accounts receivable, trade, notes and accounts payable, trade, short-term borrowings, accounts payable, other and accrued expenses, accrued income taxes and other current assets and liabilities approximated fair value because of their short-term maturities. The carrying amounts and estimated fair values of the other financial instruments are summarized as follows:
MARCH 31 ------------------------------------------------------------------- 2001 2002 ------------------------------- -------------------------------- CARRYING ESTIMATED CARRYING ESTIMATED AMOUNT FAIR VALUE AMOUNT FAIR VALUE -------------- -------------- -------------- -------------- (Millions of yen) Long-term receivables, trade JPY 49,855 JPY 50,639 JPY 45,073 JPY 45,428 Long-term loans 34,591 34,838 42,782 43,899 Long-term debt, including current portion and excluding capital lease obligations (1,407,927) (1,551,636) (1,797,305) (1,842,467) Derivatives: Forward exchange contracts (15,937) (15,903) (1,352) (1,352) Interest rate and currency swap agreements (14,228) (21,688) (24,957) (24,957)
F-36 NEC Corporation Notes to Consolidated Financial Statements (continued) 14. FINANCIAL INSTRUMENTS (CONTINUED) (1) Fair value of financial instruments (continued) The fair values of financial instruments at March 31, 2001 and 2002 are determined by using a variety of methods and assumptions such as reference to various markets and other data as appropriate. For long-term receivables, trade and long-term loans included in investments and advances-other, fair value is estimated using estimated discounted future cash flows. For long-term debt, fair value is estimated using market quotes, or where market quotes are not available, using estimated discounted future cash flows. Investments in equity securities, included in investments and advances-other, with an aggregate carrying amount of JPY 119,373 million and JPY 115,397 million at March 31, 2001 and 2002, respectively, consist of numerous investments in securities of non-public companies. It is not practicable to reasonably estimate the fair values of these investments. The fair value of forward exchange contracts is estimated by obtaining quotes for futures contracts with similar maturities, the fair value of interest rate and currency swap agreements is estimated based on estimated discounted net future cash flows. (2) Derivative financial instruments The Company utilizes derivative financial instruments to manage fluctuations in foreign currency exchange rates and interest rates. The Company has policies and procedures for risk management and the approval, reporting and monitoring of derivative financial instruments. The Company's policies prohibit holding or issuing derivative financial instruments for trading purposes. Forward exchange contracts have been entered into to offset the adverse impact of fluctuations in foreign currency exchange rates on monetary assets and liabilities denominated in foreign currencies arising from the Company's operating activities. At March 31, 2001, the Company had outstanding forward exchange contracts which mature through March 2002 to purchase the equivalent of JPY 85,337 million, principally U.S. dollars, and to sell the equivalent of JPY 146,082 million, principally U.S. dollars and Euros. At March 31, 2002, the Company had outstanding forward exchange contracts which mainly mature through January 2003. The forward exchange contracts are not designated as hedging instruments under SFAS No. 133, and changes in fair value of forward exchange contracts are recognized in income as offsets to the remeasurement of the monetary assets and liabilities denominated in foreign currencies. The related receivable or payable is included in other current assets or other current liabilities. F-37 NEC Corporation Notes to Consolidated Financial Statements (continued) 14. FINANCIAL INSTRUMENTS (CONTINUED) (2) Derivative financial instruments (continued) The Company has entered into interest rate swap agreements to manage interest rate risk exposure associated with underlying debt. The Company has also entered into currency swap agreements together with interest rate swap agreements to manage both foreign currency and interest rate risk exposures associated with certain underlying debt. Certain interest rate swap agreements are designated as either a fair value hedge or a cash flow hedge depending on the interest rate characteristics of the underlying debt as discussed below. (Fair Value Hedging Strategy) The interest rate swap agreements utilized by the Company effectively modify the Company's fixed-rate debt to a floating rate for the next 7 years. These agreements involve the receipt of fixed rate amounts in exchange for floating rate interest payments over the life of the agreements without an exchange of the underlying principal amount. (Cash Flow Hedging Strategy) The interest rate swap agreements utilized by the Company effectively convert a portion of its floating-rate debt to a fixed-rate basis for the next 7 years. Approximately 9% of the Company's outstanding short-term debt was designated as the hedged items to interest rate swap agreements at March 31, 2002. At March 31, 2001, the aggregate notional principal amounts for interest rate swap agreements and currency swap agreements were JPY 516,543 million. These agreements mature through 2009. At March 31, 2002, the Company expects to reclassify JPY 865 million of net losses on derivative financial instruments from accumulated other comprehensive income (loss) to earnings during the next twelve months due to the payment of variable interest associated with the floating rate debt. At March 31, 2002, there were no significant gains or losses on derivative financial instruments or portions thereof that were either ineffective as hedges, excluded from assessment of hedge effectiveness, or where the underlying risk did not occur. The counterparties to the Company's derivative transactions are major financial institutions. As a normal business risk, the Company is exposed to credit loss in the event of nonperformance by the counterparties, however, the Company does not anticipate nonperformance by the counterparties to these agreements, and no material losses are expected. F-38 NEC Corporation Notes to Consolidated Financial Statements (continued) 15. SECURITIZATION OF RECEIVABLES The Company has several securitization programs under which certain trade receivables and investment in leases are transferred, without recourse, to a special purpose entity ("SPE"). Simultaneously, the SPE sells an interest in those receivables and investment in leases to a large financial institution. In certain securitizations, the Company has retained subordinated interests which are not material to the Company's financial position. Credit losses related to the securitized trade receivables and investment in leases have been immaterial. The Company services, administers and collects the securitized trade receivables and investment in leases on behalf of the SPE. For the years ended March 31, 2000, 2001 and 2002, JPY 1,065,845 million, JPY 1,255,087 million and JPY 1,467,985 million in proceeds have been received under the securitization programs. For the years ended March 31, 2000, 2001 and 2002, the Company has recorded losses of JPY 399 million, JPY 692 million and JPY 871 million related to the securitization programs. 16. RESEARCH AND DEVELOPMENT EXPENSES Research and development expenses included in selling, general and administrative expenses were JPY 315,163 million, JPY 344,957 million and JPY 333,632 million for the years ended March 31, 2000, 2001 and 2002, respectively. 17. ADVERTISING COSTS The Company expenses advertising costs as incurred. Advertising expenses amounted to JPY 31,774 million, JPY 20,703 million and JPY 27,709 million for the years ended March 31, 2000, 2001 and 2002, respectively. 18. STOCK ISSUANCES BY SUBSIDIARIES NEC Soft, Ltd. ("NES"), a consolidated subsidiary which develops software, sold 2,800,000 shares of stock at JPY 7,107 per share to third parties in a public offering on July 28, 2000, receiving total consideration of JPY 19,900 million. At the same time, the Company sold 2,800,000 shares of NES's stock to third parties at the same price through the market, and recognized a gain of JPY 17,399 million on this transaction. As a result of NES's public offering, the Company's ownership interest in NES decreased from 95.34% to 67.41%. However, because the issuance price per share of stock sold by NES was more than the Company's average carrying amount per share, the Company was required to adjust the carrying amount of its investment in NES by JPY 12,990 million and recognized a gain for that amount. The Company provided a deferred tax liability of JPY 5,456 million on such gain. F-39 NEC Corporation Notes to Consolidated Financial Statements (continued) 18. STOCK ISSUANCES BY SUBSIDIARIES (CONTINUED) NEC Machinery Corporation ("NEM"), a consolidated subsidiary which manufactures and markets semiconductor manufacturing machinery and factory automation systems, sold 1,000,000 shares of stock at JPY 4,735 per share to third parties in a public offering on October 6, 2000, receiving total consideration of JPY 4,735 million. At the same time, the Company sold 2,000,000 shares of NEM's stock to third parties at the same price through the market, and recognized a gain of JPY 8,635 million on this transaction. As a result of NEM's public offering, the Company's ownership interest in NEM decreased from 90.90% to 53.91%. However, because the issuance price per share of stock sold by NEM was more than the Company's average carrying amount per share, the Company was required to adjust the carrying amount of its investment in NEM by JPY 2,300 million and recognized a gain for that amount. The Company provided a deferred tax liability of JPY 966 million on such gain. NEC Mobiling, Ltd. ("Mobiling"), a consolidated subsidiary which distributes mobile phones and develops software for mobile and wireless communications network systems, sold 2,250,000 shares of stock at JPY 1,692 per share to third parties in a public offering on February 22, 2002, receiving total consideration of JPY 3,807 million. At the same time, the Company sold 2,250,000 shares of Mobiling's stock to third parties at the same price through the market, and recognized a gain of JPY 1,828 million on this transaction. As a result of Mobiling's public offering, the Company's ownership interest in Mobiling decreased from 97.72% to 67.11%. However, because the issuance price per share of stock sold by Mobiling was more than the Company's average carrying amount per share, the Company was required to adjust the carrying amount of its investment in Mobiling by JPY 1,226 million and recognized a gain for that amount. The Company provided a deferred tax liability of JPY 515 million on such gain. Certain other consolidated subsidiaries issued new shares of stock to third parties during the year ended March 31, 2002, receiving aggregate consideration of JPY 5,864 million. As a result of the issuance of new shares, the Company's ownership interest in the consolidated subsidiaries decreased; however, because the issuance price per share of stock issued by the consolidated subsidiaries was more than the Company's average carrying amount per share, the Company was required to adjust the carrying amounts of its investments in the consolidated subsidiaries by JPY 3,699 million and recognized gains for that amount. The Company provided deferred tax liabilities of JPY 1,516 million on such gains. F-40 NEC Corporation Notes to Consolidated Financial Statements (continued) 19. OTHER INCOME AND EXPENSES The principal components of other income and expenses for the years ended March 31, 2000, 2001 and 2002 were as follows:
YEAR ENDED MARCH 31 ---------------------------------------------- 2000 2001 2002 ----------- ----------- ----------- (Millions of yen) Interest, gain on securities sold, dividends and other: Interest and dividend income JPY 14,255 JPY 20,786 JPY 15,754 Gain on sale of investments in securities 112,446 57,928 32,900 Gain on sale of property, plant and equipment 45,329 34,289 12,063 Other 46,414 27,059 42,920 ----------- ----------- ----------- JPY 218,444 JPY 140,062 JPY 103,637 =========== =========== =========== Other expenses: Net foreign exchange loss JPY 34,398 JPY 9,537 JPY 11,132 Restructuring and other unusual charges 148,022 136,187 370,471 Amortization of goodwill 5,517 6,330 8,360 Loss on sale or disposal of property, plant and equipment 21,080 20,466 17,423 Other 19,447 37,853 61,992 ----------- ----------- ----------- JPY 228,464 JPY 210,373 JPY 469,378 =========== =========== ===========
Restructuring and other unusual charges principally consisted of restructuring charges, refund of the amount overcharged in connection with the Defense Agency and the Defense Facilities Administration Agency of Japan, and write-offs and loss on sales of investments in securities. The Company closed its consumer PC business in North America in fiscal 2000, and completed restructuring of its consumer electronics appliances business in fiscal 2001. As a result, the Company recorded restructuring charges which principally consisted of write-off or disposal of inventories, machinery and equipment and other assets and personnel related costs. All disbursements relating to the restructuring charges have been completed in the respective fiscal years. F-41 NEC Corporation Notes to Consolidated Financial Statements (continued) 19. OTHER INCOME AND EXPENSES (CONTINUED) During the year ended March 31, 2002, the Company implemented plans to reorganize and restructure the manufacturing operations of NEC Solutions, NEC Networks and NEC Electron Devices. This included the closure or consolidation of plants, a downsizing of the workforce and an exiting or termination of certain product lines. In addition, an impairment loss was recognized for certain machinery, equipment and intangible assets related to the aforementioned businesses and product lines. As a result of above restructuring, the Company incurred restructuring charge of JPY 285,914 million for fiscal 2002. The restructuring charge consisted of losses of JPY 202,940 million on disposal and impairment related to buildings, machinery and equipment, and on disposal and write-down related to inventories, personnel costs of JPY 46,686 million for reduction of approximately 13,000 employees, which excludes employees who left through normal attrition, and others of JPY 36,288 million. The impairment loss for buildings and machinery and equipment was JPY 108,778 million, and impairment loss for intangible assets was JPY 10,488 million. Prior to March 31, 2002 the Company had paid personnel costs of JPY 43,752 million. At March 31, 2002, unpaid termination benefits approximated JPY 2,934 million. 20. LEASING ARRANGEMENTS (1) Equipment leasing The Company is a lessor of equipment under financing and operating leasing arrangement with terms principally from 3 to 6 years. The Company sells computer equipment to an affiliated financing company which in turn leases the equipment to certain government and governmental agencies under operating leases. The Company also agrees to repurchase that equipment from the affiliated financing company at prescribed amounts at the expiration of the lease. The Company accounts for these transactions as assets owned and leased to others under operating leases. The cost of equipment under operating leases at March 31, 2001 and 2002 was JPY 53,308 million and JPY 59,113 million, respectively, and was included in machinery and equipment. Accumulated depreciation on equipment under operating leases at March 31, 2001 and 2002 was JPY 40,311 million and JPY 46,080 million, respectively. F-42 NEC Corporation Notes to Consolidated Financial Statements (continued) 20. LEASING ARRANGEMENTS (CONTINUED) (1) Equipment leasing (continued) Investment in leases represents financing leases which consist of sales-type leases and direct-financing leases. Components of the investment in sales-type and direct-financing leases are as follows:
MARCH 31, 2002 ----------------- (Millions of yen) Total minimum lease payments JPY 544,738 Executory costs (9,657) Unearned income (24,469) ------------ 510,612 Less - allowance for uncollectible amounts (3,851) ------------ 506,761 Less - current portion (251,947) ------------ JPY 254,814 ============
The following is a schedule by year of the future minimum lease payments to be received under financing leases and non-cancelable operating leases at March 31, 2002.
FINANCING OPERATING LEASES LEASES ----------- --------- (Millions of yen) YEAR ENDING MARCH 31: 2003 JPY 203,705 JPY 7,648 2004 142,124 431 2005 103,663 - 2006 62,274 - 2007 25,294 - 2008 and thereafter 7,678 - ----------- --------- Total minimum lease payments JPY 544,738 JPY 8,079 =========== =========
F-43 NEC Corporation Notes to Consolidated Financial Statements (continued) 20. LEASING ARRANGEMENTS (CONTINUED) (2) Lease of facilities and equipment The Company leases certain facilities and equipment for its own use. The gross amount of leased assets under capital leases included in machinery and equipment was JPY 100,897 million and JPY 33,011 million at March 31, 2001 and 2002, respectively. Accumulated depreciation of the leased assets at March 31, 2001 and 2002 was JPY 61,599 million and JPY 22,657 million, respectively. The following is a schedule by year of the future minimum lease payments under capital leases together with the present value of the net minimum lease payments at March 31, 2002:
(Millions of yen) ----------------- YEAR ENDING MARCH 31: 2003 JPY 8,752 2004 2,493 2005 1,289 2006 756 2007 379 ---------- Total minimum lease payments 13,669 Less - amount representing interest (1,813) ---------- Present value of net minimum lease payments 11,856 Less - current obligation (7,832) ---------- Long-term lease obligation JPY 4,024 ==========
During the year ended March 31, 2000, the Company sold certain land, buildings, facilities and equipment for JPY 176,057 million. The assets were leased back from the purchaser over periods of one to four years. The resulting leases were classified as operating leases and the resulting gain of JPY 43,787 million, relating to the profit on the sale in excess of the present value of the minimum lease payments over the lease terms, was recorded as other income. A deferred gain of JPY 21,124 million is being amortized over the lease term. Rental expense under operating leases, including the assets subject to sale-leaseback transactions discussed above, were JPY 121,510 million, 138,655 million and 111,975 million for the years ended March 31, 2000, 2001 and 2002, respectively. F-44 NEC Corporation Notes to Consolidated Financial Statements (continued) 20. LEASING ARRANGEMENTS (CONTINUED) (2) Lease of facilities and equipment (continued) Future minimum rental payments are as follows:
(Millions of yen) ----------------- YEAR ENDING MARCH 31: 2003 JPY 48,888 2004 33,876 2005 23,060 2006 16,263 2007 7,940 2008 and thereafter 10,846
21. COMMITMENTS AND CONTINGENT LIABILITIES Commitments outstanding at March 31, 2002 for the purchase of property, plant and equipment approximated JPY 15,138 million. Contingent liabilities at March 31, 2002 for loans guaranteed and other guarantees amounted to approximately JPY 106,450 million and JPY 2,737 million, respectively. Loans guaranteed at March 31, 2002 included loans guaranteed for affiliated companies of JPY 25,102 million and for employees of JPY 38,504 million. The guarantees are outstanding for periods ranging from 1 to 22 years. In the opinion of management, the risk of loss related to these contingencies at March 31, 2002 is not material to the Company's financial position. F-45 NEC Corporation Notes to Consolidated Financial Statements (continued) 22. SEGMENT INFORMATION (1) Operating segments The following information represents the operating segments of the Company, for which separate financial information is available and is reviewed by the chief operating decision maker in deciding how to allocate resources and in assessing performance periodically. NEC Solutions provides mainly Internet solutions to corporations, individuals and government/public sectors, and develops, designs, manufactures and markets computer systems which include systems integration services, software, Internet services "BIGLOBE," and support services as well as hardware such as UNIX servers, workstations, mainframe computers, PC servers, storage systems and PCs. NEC Networks provides Internet solutions mainly to network service providers, and develops, designs, manufactures and markets communications network systems which include transmission systems such as terrestrial and submarine cable WDM systems and optical access system, routing and switching systems such as high end routers and digital central office switching systems, wireless systems such as 3rd generation ("3G") wireless communication systems, microwave and satellite communications equipment, and cellular phones. NEC Networks also develops, designs, manufactures and markets satellite equipment, broadcast equipment and network management systems. NEC Electron Devices provides electron device solutions for the Internet industry, and develops, designs, manufactures, and markets semiconductors such as system LSIs, general purpose semiconductors, system memories and DRAMs, displays such as color LCDs and plasma display panels, and electronic components such as capacitors, printed wiring boards and relays. The others segment develops, designs, manufactures and markets manufacturing equipment for semiconductors and LCD projectors, and provides construction services of information and network systems. The Company's leasing subsidiary is recognized as an additional operating segment. F-46 NEC Corporation Notes to Consolidated Financial Statements (continued) 22. SEGMENT INFORMATION (CONTINUED) (1) Operating segments (continued) a. Sales
YEAR ENDED MARCH 31 ---------------------------------------------------- 2000 2001 2002 ------------- ------------- ------------- (Millions of yen) Sales: NEC Solutions: External customers JPY 2,138,161 JPY 2,103,031 JPY 2,053,510 ------------- ------------- ------------- Intersegment 132,464 125,441 155,583 Total 2,270,625 2,228,472 2,209,093 NEC Networks: External customers 1,422,302 1,743,054 1,866,654 Intersegment 105,456 91,308 90,515 ------------- ------------- ------------- Total 1,527,758 1,834,362 1,957,169 NEC Electron Devices: External customers 881,895 1,021,746 694,587 Intersegment 240,895 207,147 148,291 ------------- ------------- ------------- Total 1,122,790 1,228,893 842,878 Others: External customers 549,089 541,905 423,932 Intersegment 174,822 200,527 210,846 ------------- ------------- ------------- Total 723,911 742,432 634,778 Eliminations (653,637) (624,423) (589,132) ------------- ------------- ------------- Electronics business total 4,991,447 5,409,736 5,054,786 Leasing business: External customers - - 62,339 Intersegment - - 9,420 ------------- ------------- ------------- Total - - 71,759 Eliminations - - (25,523) ------------- ------------- ------------- Consolidated total JPY 4,991,447 JPY 5,409,736 JPY 5,101,022 ============= ============= =============
F-47 NEC Corporation Notes to Consolidated Financial Statements (continued) 22. SEGMENT INFORMATION (CONTINUED) (1) Operating segments (continued) b. Segment profit or loss
YEAR ENDED MARCH 31 ----------------------------------------------- 2000 2001 2002 ------------ ------------ ------------ (Millions of yen) Segment profit (loss): NEC Solutions JPY 84,430 JPY 84,055 JPY 75,390 NEC Networks 57,110 83,144 53,447 NEC Electron Devices 49,444 68,290 (148,159) Others (2,747) 20,249 2,988 ------------ ------------ ------------ Total 188,237 255,738 (16,334) Eliminations (17,640) (16,852) (3,357) Unallocated corporate expenses (60,183) (53,703) (39,750) ------------ ------------ ------------ Electronics business total 110,414 185,183 (59,441) ------------ ------------ ------------ Leasing business - - 6,306 Eliminations - - (2,387) ------------ ------------ ------------ 110,414 185,183 (55,522) Other income 218,444 181,386 110,390 Other expenses (298,675) (274,246) (516,051) ------------ ------------ ------------ Consolidated income (loss) before income taxes JPY 30,183 JPY 92,323 JPY (461,183) ============ ============ ============
c. Assets
MARCH 31 --------------------------------------------------- 2000 2001 2002 ------------- ------------- ------------- (Millions of yen) Total assets: NEC Solutions JPY 1,023,039 JPY 1,070,999 JPY 1,031,523 NEC Networks 1,071,050 1,326,517 1,181,781 NEC Electron Devices 1,171,940 1,222,183 1,046,265 Others 758,059 759,007 779,106 ------------- ------------- ------------- Total 4,024,088 4,378,706 4,038,675 Eliminations (222,528) (290,862) (233,477) Corporate assets 807,404 735,780 658,673 ------------- ------------- ------------- Electronics business total 4,608,964 4,823,624 4,463,871 Leasing business - - 662,143 Eliminations - - (115,131) ------------- ------------- ------------- Consolidated total JPY 4,608,964 JPY 4,823,624 JPY 5,010,883 ============= ============= =============
Others includes the investment in the leasing subsidiary accounted for by the equity method. F-48 NEC Corporation Notes to Consolidated Financial Statements (continued) 22. SEGMENT INFORMATION (CONTINUED) (1) Operating segments (continued) d. Other significant items
YEAR ENDED MARCH 31 ------------------------------------------------- 2000 2001 2002 ----------- ----------- ----------- (Millions of yen) Depreciation: NEC Solutions JPY 31,119 JPY 29,363 JPY 32,719 NEC Networks 32,770 31,859 35,760 NEC Electron Devices 153,559 151,867 135,737 Others 23,561 17,859 11,390 ----------- ----------- ----------- Total 241,009 230,948 215,606 Corporate 19,933 19,190 17,526 ----------- ----------- ----------- Electronics business total 260,942 250,138 233,132 Leasing business - - 1,606 ----------- ----------- ----------- Consolidated total JPY 260,942 JPY 250,138 JPY 234,738 =========== =========== =========== Capital expenditures for segment assets: NEC Solutions JPY 31,662 JPY 26,947 JPY 34,576 NEC Networks 32,955 44,882 46,689 NEC Electron Devices 171,857 239,536 96,558 Others 17,713 20,058 6,726 ----------- ----------- ----------- Total 254,187 331,423 184,549 Corporate 27,452 15,068 13,953 ----------- ----------- ----------- Electronics business total 281,639 346,491 198,502 Leasing business - - 1,565 ----------- ----------- ----------- Consolidated total JPY 281,639 JPY 346,491 JPY 200,067 =========== =========== ===========
Transfers between reportable operating segments are made at arm's-length prices. Corporate expenses include general corporate expenses and research and development expenses at NEC Corporation which are not allocated to any operating segment. Corporate assets consist primarily of cash and cash equivalents and buildings maintained for general corporate purposes. The capital expenditures represent the additions to fixed assets of each segment. F-49 NEC Corporation Notes to Consolidated Financial Statements (continued) 22. SEGMENT INFORMATION (CONTINUED) (2) Geographic information Sales, which are attributed to geographic areas based on the country location of NEC Corporation or subsidiary that transacted the sale with the external customer, geographic profit (loss) for the years ended March 31, 2000, 2001 and 2002 and long-lived assets at March 31, 2000, 2001 and 2002 were as follows. Although the disclosure of geographic profit (loss) is not required under accounting principles generally accepted in the United States of America, the Company discloses this information as supplemental information due to the disclosure requirements of the Japanese Securities and Exchange Law.
YEAR ENDED MARCH 31 ------------------------------------------------------- 2000 2001 2002 ------------- ------------- ------------- (Millions of yen) Net sales: Japan JPY 3,745,910 JPY 4,308,152 JPY 4,230,278 North America 521,684 379,569 255,218 Others 723,853 722,015 615,526 ------------- ------------- ------------- Total JPY 4,991,447 JPY 5,409,736 JPY 5,101,022 ============= ============= ============= Geographic profit (loss): Japan JPY 120,141 JPY 170,094 JPY (16,854) North America (13,705) (2,904) (31,588) Others 4,774 17,993 (7,080) Eliminations (796) - - ------------- ------------- ------------- Total JPY 110,414 JPY 185,183 JPY (55,522) ============= ============= =============
MARCH 31 ------------------------------------------------------- 2000 2001 2002 ------------- ------------- ------------- (Millions of yen) Long-lived assets: Japan JPY 1,213,264 JPY 1,203,522 JPY 1,132,400 North America 65,023 77,167 35,346 Others 126,628 128,541 82,121 ------------- ------------- ------------- Total JPY 1,404,915 JPY 1,409,230 JPY 1,249,867 ============= ============= =============
There are no countries with respect to sales and long-lived assets included in other areas which are individually material. Transfers between geographic areas are made at arm's-length prices. (3) Major customers Sales to one customer accounted for approximately 11.6%, 13.2% and 16.0% of consolidated sales for the years ended March 31, 2000, 2001 and 2002, respectively. F-50 SCHEDULE II NEC CORPORATION VALUATION AND QUALIFYING ACCOUNTS
BALANCE AT ADDITIONS BEGINNING OF CHARGED TO COSTS BALANCE AT END PERIOD AND EXPENSES DEDUCTIONS OF PERIOD ------------ ---------------- ---------- -------------- (Millions of yen) Year ended March 31, 2000: Allowance for doubtful notes and accounts JPY 17,273 JPY 15,568 JPY 6,426(1) JPY 26,415 ========== ========== ========= ========== Year ended March 31, 2001: Allowance for doubtful notes and accounts JPY 26,415 JPY 5,857 JPY 5,073(1) JPY 27,199 ========== ========== ========= ========== Year ended March 31, 2002: Allowance for doubtful notes and accounts JPY 27,199 JPY 7,968 JPY 2,992(1) JPY 32,175 ========== ========== ========= ==========
Note - ---- (1) Principally accounts written off, translation adjustments and reversal of allowance for doubtful notes and accounts. F-51 EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION -------------- ----------------------------------------------------------------- 1 Articles of Incorporation, as amended to date (English translation) 2 Share Handling Regulations, as amended to date (English translation) 3 Certificate of English Translations for Articles of Incorporation and Share Handling Regulations 8 Subsidiaries of the Company (see "Item 4.C. Organizational Structure") 10(a)(1) Certification of Chief Executive Officer or Equivalent Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 10(a)(2) Certification of Chief Financial Officer or Equivalent Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
EX-1 3 k00250exv1.txt ARTICLES OF INCORPORATION EXHIBIT 1 (TRANSLATION) ARTICLES OF INCORPORATION OF NIPPON DENKI KABUSHIKI KAISHA (NEC CORPORATION) HISTORICAL NOTE --------------- Promulgated on July 17, 1899 Entirely revised on November 29, 1951 Partially amended on November 29, 1955 Partially amended on May 31, 1956 Partially amended on November 26, 1956 Partially amended on November 28, 1957 Partially amended on November 28, 1958 Partially amended on November 30, 1960 Partially amended on November 30, 1961 Partially amended on November 30, 1962 Partially amended on January 28, 1963 Partially amended on November 30, 1963 Partially amended on November 30, 1966 Partially amended on November 30, 1968 Partially amended on November 30, 1970 Partially amended on November 30, 1972 Partially amended on November 30, 1973 Partially amended on May 29, 1975 Partially amended on June 30, 1977 Partially amended on June 30, 1982 Partially amended on June 29, 1984 Partially amended on June 28, 1985 Partially amended on June 29, 1988 Partially amended on June 27, 1991 Partially amended on June 29, 1994 Partially amended on June 27, 1997 Partially amended on October 1, 2001 Partially amended on June 20, 2002 ARTICLES OF INCORPORATION OF NIPPON DENKI KABUSHIKI KAISHA (NEC CORPORATION) CHAPTER I GENERAL PROVISIONS Article 1. (Trade Name) The Company is called Nippon Denki Kabushiki Kaisha, whose English expression shall be NEC Corporation. Article 2. (Object) The object of the Company is to carry on the following businesses: 1. To manufacture, sell or otherwise dispose of, telecommunications equipment, machinery and instruments, electronic computers and other electronics application equipment, machinery and instruments, electrical equipment, machinery and instruments, and all kinds of equipment, machinery, instruments and systems related to electricity; 2. To manufacture, sell or otherwise dispose of, nuclear energy machinery and instruments, aircraft machinery and instruments, medical machinery and instruments, measuring instruments and all equipment, machinery, instruments and systems other than those mentioned in item 1 above; 3. To manufacture, sell or otherwise dispose of, electron tubes, semiconductor devices, integrated circuits and all parts and materials for use in or in connection with any equipment, machinery and instruments mentioned in any of the preceding items; 4. To provide telecommunications, data base, and other information services; 5. To contract for construction work; 6. To engage in any and all activities requisite to the promotion, handling, and carrying out of the businesses mentioned in any of the preceding items; and 7. To invest in businesses mentioned in any of the preceding items which businesses are under the administration of others. Article 3. (Location of Principal Office) The Principal Office of the Company shall be located in Minato-ku, Tokyo. Article 4. (Method of Giving Public Notices) Public notices of the Company shall be inserted in the Nihon Keizai Shimbun published in Tokyo Metropolis. CHAPTER II SHARES Article 5. (Total Number of Shares Authorized to Be Issued) The total number of shares authorized to be issued by the Company shall be three billion two hundred million (3,200,000,000). Article 6. (Number of Shares Constituting One Unit of Shares) 1. The number of shares constituting one unit of shares of the Company shall be one thousand (1,000). - 2 - 2. The Company shall not issue share certificates with respect to any number of shares constituting less than one unit. Article 7. (Handling Regulations of Shares, etc.) 1. The denominations of share certificates, entry of a change in the name of a shareholder, registration of the creation of a pledge, manifestation of a trust, purchase of shares less than one unit, reissuance of a share certificate, and any other procedures relating to shares as well as fees therefor, shall be governed by the Share Handling Regulations established by the Board of Directors. 2. The procedures for inspection and transcription of the Company's documents and delivery of a certified copy or an extract copy thereof as well as fees therefor shall be governed by handling regulations established by the Board of Directors. Article 8. (Transfer Agent) 1. The Company shall appoint a Transfer Agent for shares. 2. The Transfer Agent and its office shall be designated by a resolution of the Board of Directors, and a public notice shall be given with regard thereto. 3. The Register of Shareholders (including the Register of Beneficial Shareholders; hereinafter the same interpretation being applicable) of the Company shall be kept at the office of the Transfer Agent, and the Transfer Agent shall handle the entry of a change in the name of a shareholder, purchase of shares less than one unit and any other business relating to shares, no such businesses being handled by the Company. Article 9. (Record Date) - 3 - 1. The shareholders (including beneficial shareholders; hereinafter the same interpretation being applicable) recorded in the last Register of Shareholders as of the last day of each business period shall be deemed the shareholders entitled to exercise the rights of shareholders at the ordinary general meeting of shareholders for that business period. 2. By a resolution of the Board of Directors a record date may be set whenever necessary in addition to the record date in the preceding paragraph, provided an advance public notice shall be given thereof. CHAPTER III GENERAL MEETINGS OF SHAREHOLDERS Article 10. (Convocation) 1. An ordinary general meeting of shareholders shall be convened in June of each year, and an extraordinary general meeting of shareholders shall be convened whenever necessary. 2. A general meeting of shareholders shall be convened by the Chairman of the Board pursuant to a resolution of the Board of Directors unless otherwise provided by law or ordinance, and, in cases where the office of the Chairman of the Board is vacant or he is unable to act, the Vice Chairman of the Board shall convene the meeting. In cases where the office of the Vice Chairman of the Board is vacant or he is unable to act, the President shall convene the meeting, and, in cases where the President is also unable to act, another Representative Director shall convene the meeting. Article 11. (Chairman) The chairmanship of the general meeting of shareholders shall be assumed by the Chairman of the Board, and, in cases where the office of the Chairman of the Board is vacant or he is unable to act, it shall be assumed by the Vice - 4 - Chairman of the Board. In cases where the office of the Vice Chairman of the Board is vacant or he is unable to act, the chairmanship shall be assumed by the President, and, in cases where the President is also unable to act, it shall be assumed by another Representative Director in accordance with an order previously determined by the Board of Directors. Article 12. (Requirements for Ordinary Resolution) The ordinary resolutions of general meetings of shareholders shall be passed by a majority of votes of shareholders present. Article 13. (Exercise of Voting Rights by Proxy) A shareholder may exercise his/her voting rights by a proxy, who shall be a shareholder of the Company with the right to vote, provided that such proxy must file with the Company a document establishing his/her power of representation. Article 14. (Minutes) 1. The summary of proceedings and results of each general meeting of shareholders shall be recorded in the minutes, which shall be signed by the chairman and the Directors present. 2. The original of the minutes mentioned in the preceding paragraph shall be kept at the Principal Office of the Company for ten years, and a certified copy thereof shall be kept at each branch office of the Company for five years. CHAPTER IV DIRECTORS AND BOARD OF DIRECTORS Article 15. (Number) - 5 - The Company shall have Directors not exceeding forty in number. Article 16. (Election) 1. A resolution electing Directors shall be adopted by a majority of votes of shareholders present at a general meeting of shareholders at which shareholders having not less than one-third of the total number of voting rights of all shareholders are present. 2. No cumulative voting shall be used for the resolution mentioned in the preceding paragraph. Article 17. (Term of Office) The term of office of a Director shall expire at the conclusion of the ordinary general meeting of shareholders to settle the accounts for the last business period taking place within two years following his/her assumption of office. Article 18. (Representative Director, etc.) 1. The Director(s) who represent the Company shall be nominated by a resolution of the Board of Directors. 2. The Board of Directors may by its resolution nominate a Chairman of the Board, a Vice Chairman of the Board, a President, one or more Senior Executive Vice Presidents, Executive Vice Presidents and Senior Vice Presidents. Article 19. (Board of Directors) 1. The Board of Directors shall make decision on the management of the affairs of the Company in accordance with the provisions of applicable law or - 6 - ordinance and of these Articles of Incorporation. 2. In addition to the provisions of law or ordinance and of these Article of Incorporation, the Rules of the Board of Directors established by the Board of Directors shall apply to matters relating to the Board of Directors. 3. In convening a meeting of the Board of Directors, notice shall be issued to each Director and each Corporate Auditor at least three days before the meeting date. Provided, however, in case of an urgency, this period may be shortened. Article 20. (Remuneration and Retirement Allowances) Remunerating and retirement allowances for Directors shall be fixed by a resolution of a general meeting of shareholders. Article 21. (Liability Limitation Contract with Outside Directors) The Company may enter into a contract with its outside Directors to limit their liability to the Company for the damages arising from actions stipulated in Item 5 of Paragraph 1, Article 266 of the Commercial Code of Japan to the higher of either (i) the amount to be fixed which is not less than 15 million yen or (ii) the amount stipulated by the Commercial Code of Japan, provided that they shall act in good faith and without gross negligence. Article 22. (Counselor) The Company may appoint one or more Counselors by a resolution of the Board of Directors. - 7 - CHAPTER V CORPORATE AUDITORS AND THE BOARD OF CORPORATE AUDITORS Article 23. (Number) The Company shall have Corporate Auditors not exceeding five in number. Article 24. (Election) A resolution electing Corporate Auditors shall be adopted by a majority of votes of shareholders present at a general meeting of shareholders at which shareholders having not less than one-third of the total number of voting rights of all shareholders are present. Article 25. (Term of Office) The term of office of a Corporate Auditor shall expire at the conclusion of the ordinary general meeting of shareholders to settle the accounts for the last business period taking place within three years following his/her assumption of office. Article 26. (Full-time Corporate Auditor) Corporate Auditors shall appoint from among themselves one or more full-time Corporate Auditors. Article 27. (Board of Corporate Auditors) 1. The Board of Corporate Auditors shall make decisions on the matters relating to the performance of duties of a Corporate Auditor in accordance with - 8 - the provisions of applicable law or ordinance and of these Articles of Incorporation. Provided, however, the Board of Corporate Auditors shall not prevent by a resolution a Corporate Auditor from exercising his/her powers. 2. In addition to the provisions of applicable law or ordinance and of these Articles of Incorporation, the Rules of the Board of Corporate Auditors established by the Board of Corporate Auditors shall apply to matters relating to the Board of Corporate Auditors. 3. In convening a meeting of the Board of Corporate Auditors, notice shall be issued to each Corporate Auditor at least three days before the meeting date. Provided, however, in case of an urgency, this period may be shortened. Article 28. (Remuneration and Retirement Allowances) Remuneration and retirement allowances for Corporate Auditors shall be fixed by a resolution of a general meeting of shareholders. CHAPTER VI ACCOUNTS Article 29. (Settlement of Accounts) The Company's business period shall be from April 1st of each year to March 31st of the ensuing year, and its accounts shall be settled at the end of each business period. Article 30. (Dividends) Dividends shall be paid to the shareholders or registered pledgees recorded in the last Register of Shareholders as of the last day of each business period. - 9 - Article 31. (Interim Dividends) The Company may by a resolution of the Board of Directors make cash distribution provided for in Article 293-5 of the Commercial Code (herein called "interim dividends") to the shareholders and registered pledgees recorded in the last Register of Shareholders as of September 30th of each year. Article 32. (Conversion of Convertible Debentures and Dividends Thereon) The first dividends or interim dividends to be paid on the shares of stock issued upon conversion of a convertible debenture shall be paid as if the conversion were made on April 1st where the conversion is requested during the period from April 1st to September 30th, or on October 1st where the conversion is requested during the period from October 1st to March 31st of the ensuing year, as the case may be. Article 33. (Limitation of Payment Period) In cases where dividends or interim dividends shall remain unclaimed after the lapse of three years from the day on which payment thereof was commenced, the Company shall be exonerated from the responsibility of payment thereof. Supplementary Provision Article 1. In the case where all convertible debentures issued by the Company prior to March 31st, 2002 are either converted or redeemed, Article 32 along with this provision shall be deleted, and Article 33 shall be renumbered as Article 32. - 10 - EX-2 4 k00250exv2.txt SHARE HANDLING REGULATIONS EXHIBIT 2 (TRANSLATION) SHARE HANDLING REGULATIONS OF NIPPON DENKI KABUSHIKI KAISHA (NEC CORPORATION) Historical Note --------------- Promulgated on October 31, 1951 Partially amended on July 28, 1953 Partially amended on November 30, 1966 Partially amended on April 30, 1968 Partially amended on May 29, 1975 Partially amended on April 28, 1982 Partially amended on September 29, 1982 Partially amended on April 30, 1985 Partially amended on January 27, 1989 Partially amended on September 27, 1991 Partially amended on June 27, 1997 Partially amended on October 1, 1999 Partially amended on October 1, 2001 Partially amended on April 1, 2002 SHARE HANDLING REGULATIONS OF NIPPON DENKI KABUSHIKI KAISHA (NEC CORPORATION) CHAPTER I GENERAL PROVISIONS (Purpose) Article 1. These Regulations shall, pursuant to the Articles of - ---------- Incorporation, govern the denominations of share certificates and procedures relating to shares as well as fees therefor. In addition to those provided for in these Regulations, the rules made by Japan Securities Depositary Center ("JASDEC") shall be applicable to the treatment of beneficial shareholders. (Share Certificate Denominations) Article 2. The share certificate denominations issued by the Company shall - ---------- be: 100-share certificates, 500-share certificates, 1,000-share certificates, 10,000-share certificates, 100,000-share certificates and share certificates representing any number of shares less than 100. 2. No requests shall be made by shareholders for the issuance of share certificates ("Certificates for Less Than One Unit Shares") representing shares in the number less than 1,000 ("Less Than One Unit Shares") except in the cases provided for in Articles 22, 23 and 24.
- 1 - (The Transfer Agent) Article 3. The Transfer Agent and its handling office and liaison offices - ---------- shall be as follows: The Transfer Agent: The Sumitomo Trust and Banking Company, Limited 5-33, Kitahama 4-chome, Chuo-ku, Osaka Handling Office: Tokyo Transfer Agent Department, The Sumitomo Trust and Banking Company, Limited 4-4, Marunouchi 1-chome, Chiyoda-ku, Tokyo Liaison Offices: Head Office, and each Branch Office in Japan of The Sumitomo Trust and Banking Company, Limited (Method of Filing Request, Notice or Application) Article 4. Any request, notification or application hereunder shall be filed - ---------- in the prescribed form, and the seal which has been reported to the Company pursuant to Article 15 shall be affixed thereto. 2. In case a request, notification or application provided for in the preceding paragraph is filed by an agent, a document certifying his authority of representation shall be submitted. (Certificates) Article 5. In case the Company deems it necessary in connection with a - ---------- request, notification or application under these Regulations, the Company may request the presentation of a certificate and/or any other evidential documents.
- 2 - CHAPTER II REGISTRATION OF TRANSFER OF TITLE TO SHARES (Registration of Transfer of Title to Shares) Article 6. In case a request for the registration of a transfer of title to - ---------- shares is made, a written request shall be presented together with a share certificate. 2. If a request for the registration of a transfer of title to shares is made by reasons other than assignment, a document evidencing the acquisition thereof shall be presented in addition to following the procedure prescribed in the preceding paragraph. Provided, however, that no share certificates are needed if the share certificates concerned have not been issued. (Registration of Transfer of Title Where Special Procedure is Required by Laws or Ordinances) Article 7. In case a special procedure is required by laws or ordinances to - ---------- be followed with respect to the transfer of title to shares, a document certifying the completion of such procedure and the share certificate shall be attached to the written request.
- 3 - CHAPTER III THE REGISTER OF BENEFICIAL SHAREHOLDERS (Entry in The Register of Beneficial Shareholders) Article 8. Entry in the Register of Beneficial Shareholders shall be made - ---------- according to notifications from JASDEC in relation to beneficial shareholders and reports by beneficial shareholders of their addresses, names and seals. (Reports of Beneficial Shareholders' Addresses, Names and Seals) Article 9. Beneficial shareholders shall present a report of their - ---------- addresses, names and seals to the Company through participants of JASDEC ("Participants"). (Summing up the Number of Holding Shares) Article 10. In case a shareholder listed on the Register of Shareholders and - ----------- a beneficial shareholder listed on the Register of Beneficial Shareholders are considered to be the same person, the numbers of shares listed on the both Registers in the name of such person shall be aggregated for the purpose of his exercise of shareholders' rights.
- 4 - CHAPTER IV REGISTRATION OF PLEDGE AND MANIFESTATION OF TRUST (Registration of Pledge and Cancellation Thereof) Article 11. In case a request for registration of pledge or change or - ----------- cancellation thereof is made, a written request jointly signed by the pledgor and the pledgee shall be presented together with the share certificate. (Manifestation of Trust and Cancellation Thereof) Article 12. In case a request for manifestation of trust is made, a written - ----------- request shall be submitted by the person establishing the trust or trustee together with the share certificate. 2. In case a request for the cancellation of the manifestation set forth in the preceding paragraph is made by the trustee or the beneficiary, the same shall apply. Provided, however, that in case such request is made by the beneficiary, a document certifying the cancellation of the trust shall be attached to the request.
- 5 - CHAPTER V NON-POSSESSION OF SHARE CERTIFICATES (Application for Non-possession of Share Certificates) Article 13. In case an application for non-possession of share certificate is - ----------- made, a written application shall be submitted together with the share certificates. Provided, however, that no share certificates need be presented if the share certificates concerned have not been issued. 2. No share certificates in regard to which an application provided for in the preceding paragraph has been made shall be issued. (Delivery of Share Certificates) Article 14. In case a shareholder who has made the application for - ----------- non-possession of share certificate requests the delivery of share certificates, he shall file a written request to that effect. Provided, however, that no requests shall be made for the delivery of Certificates for Less Than One Unit Shares.
- 6 - CHAPTER VI NOTIFICATIONS (Address, Name and Seal of Shareholders, etc.) Article 15. Shareholders, beneficial shareholders, registered pledgees or - ----------- their agents shall report their addresses, names and seals. Provided, however, that foreigners may substitute their signatures for such seals. In case any changes are made with regard to the foregoing matters, the same shall apply. (Provisional Address or Agent of Foreign Shareholders) Article 16. A shareholder, a beneficial shareholder or a registered pledgee - ----------- who resides in a foreign country shall, in addition to the requirement provided for in the preceding Article, designate and report a provisional address or an agent in Japan. The same shall apply in case of any change thereof. (Representative of Juridical Person) Article 17. In case a shareholder or a beneficial shareholder is a juridical - ----------- person, he shall report his representative. In case of any change in the representative, a notification thereof shall be filed together with a certified abstract copy of the company registration record. (Representative concerning Jointly-owned Shares) Article 18. Shareholders or beneficial shareholders who jointly own shares - ----------- shall designate a representative and submit a notification thereof signed by all of such joint-owners. The same shall apply in case of any change thereof.
- 7 - (Change of Entry in the Register of Shareholders, the Register of Beneficial Shareholders and Share Certificates) Article 19. In case any change of entry in the Register of Shareholders, the - ----------- Register of Beneficial Shareholders or in a share certificate is requested for any of the following reasons, a notification shall be filed together with the share certificate and a certified abstract copy of the family registration record or a certified copy of the company registration record. Provided, however, that no share certificates need be presented if such share certificates have not been issued or in case of a request by beneficial shareholders of any change of entry in the Register of Beneficial Shareholders: 1. Change of family name or given name, 2. Establishment, change or removal of a person in parental authority, guardian, or other legal representative, 3. Change in trade name or name of a juridical person, 4. Change in corporate organization. (Special Treatment for Notification of Beneficial Shareholders) Article 20. A notification to the Company by beneficial shareholders under - ----------- this Chapter shall be presented through Participants. Provided, however, in case of the change of his seal which has been reported to the Company, the notification need not be presented through Participants.
- 8 - CHAPTER VII REISSUANCE OF SHARE CERTIFICATES (Reissuance due to Division or Combination) Article 21. In case a request for issuance of a new share certificate is to - ----------- be made by reason of the division or combination of share certificates, a written request shall be presented together with the share certificates. Provided, however, that no requests shall be made for issuance of Certificates for Less Than One Unit Shares. 2. In case the total number of shares represented by Certificates for Less Than One Unit Shares which have been presented for the registration of a transfer of title to shares becomes 1,000, unless otherwise indicated by a person requesting the registration of such transfer of title, the share certificates shall be combined to 1,000-share certificate. (Reissuance due to Loss) Article 22. In case a request for issuance of new share certificates is to - ----------- made by reason of loss of share certificates, a written application shall be submitted together with the original or an exemplification copy of the judgement of nullification appertaining thereto. (Reissuance due to Damage or Mutilation) Article 23. In case an application for issuance of substitute share - ----------- certificates is to be made by reason of damage or mutilation of share certificates, a written application therefor shall be presented together with the share certificate concerned. Provided, however, that if it is difficult to ascertain the genuineness of the share certificates, the procedures provided for in the preceding Article shall be followed.
- 9 - (Reissuance due to filling-up of Column) Article 24. In case all of the space provided for entry of shareholders on a - ----------- share certificate has been filled up, the Company shall collect such share certificate and deliver a new share certificate in place thereof.
CHAPTER VIII PURCHASE OF LESS THAN ONE UNIT SHARES (Request for Purchase) Article 25. In case a request for purchase of Less Than One Unit Shares is to - ----------- be made, a written application therefor shall be presented together with the share certificates. Provided, however, that no share certificates need be presented if the share certificates concerned have not been issued. 2. Beneficial shareholders shall make a request provided for in the preceding paragraph through Participants and JASDEC. 3. The request provided for in the preceding two paragraphs shall become effective upon presentation of the written application at the handling office or liaison offices of the Transfer Agent. (Purchase Price) Article 26. Purchase price per share shall be the last price as reported by - ----------- the Tokyo Stock Exchange on the day when the request for purchase under the preceding Article becomes effective (the "Day of Request for Purchase"). 2. In case there has been no sale on the Tokyo Stock Exchange on the Day of Request for Purchase, the price at which a share is first traded subsequent to the Day of Request for Purchase shall be the purchase price per share.
- 10 - (Payment of Purchase Amount) Article 27. Purchase amount of Less Than One Unit Shares shall be the amount - ----------- obtainable by multiplying the purchase price per share by the number of shares to be purchased. 2. The purchase amount shall be paid after deduction of handling charges as provided for in Article 30. 3. The purchase amount shall be paid at the handling office of the Transfer Agent on the sixth business day counting from the day next following the day when the purchase price is determined under the preceding Article. Provided, however, that if the purchase price is the price with dividends, stock splits, rights to new shares or other rights, the payment of the purchase amount shall be made by the record date or date of allotment. 4. A person requesting the purchase may designate the method of payment by either transfer to a bank account or postal-book transfer. (Transfer of Title to Share Purchased) Article 28. Title to Less Than One Unit Shares in regard to which the request - ----------- for the purchase is made shall be transferred to the Company on the date when the purchase amount has been paid or the payment procedure for the purchase amount has been completed as provided for in the preceding Article.
- 11 - CHAPTER IX HANDLING CHARGES (Charges for Delivery of Share Certificates) Article 29. Handling Charges for delivery of share certificates pursuant to - ----------- Articles 14, 22 and 23 shall be the amount equivalent to those of the applicable stamp duty. (Handling Charges for Purchase of Less Than One Unit Shares) Article 30. Handling charges for purchase of Less Than One Unit Shares shall - ----------- be the amount to be specified by the Company as the equivalent handling charge for the purchase of shares.
- 12 - EX-3 5 k00250exv3.txt CERTIFICATE OF ENGLISH TRANSLATIONS EXHIBIT 3 CERTIFICATE OF ENGLISH TRANSLATIONS Pursuant to Rule 306 of Regulation S-T, the registrant certifies that the exhibits in Item 19. 1. Articles of incorporation and 2. Share handling regulations are fair and accurate English translation. NEC CORPORATION By: /s/ Koji Nishigaki ------------------------------------------- Koji Nishigaki President Date: August 6, 2002 EX-10.1 6 k00250exv10w1.txt CERTIFICATION OF CEO OR EQUIVALENT EXHIBIT 10(a)(1) NEC CORPORATION CERTIFICATION OF CHIEF EXECUTIVE OFFICER OR EQUIVALENT PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of NEC Corporation (the "Company") on Form 20-F for the fiscal year ended March 31, 2002 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Koji Nishigaki, President of the Company, certify, pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002, that: 1. The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. /s/ Koji Nishigaki ----------------------------- Name: Koji Nishigaki Title: President Dated: August 6, 2002 EX-10.2 7 k00250exv10w2.txt CERTIFICATION OF CFO OR EQUIVALENT EXHIBIT 10(a)(2) NEC CORPORATION CERTIFICATION OF CHIEF FINANCIAL OFFICER OR EQUIVALENT PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of NEC Corporation (the "Company") on Form 20-F for the fiscal year ended March 31, 2002 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Shigeo Matsumoto, Executive Vice President of the Company, certify, pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002, that: 1. The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. /s/ Shigeo Matsumoto ----------------------------------------- Name: Shigeo Matsumoto Title: Executive Vice President Dated: August 6, 2002 -----END PRIVACY-ENHANCED MESSAGE-----