UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 20-F
(Mark One)
( ) REGISTRATION STATEMENT PURSUANT TO SECTION 12(b)
OR 12(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, 2003
--------------
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to ___________
Commission file number 1-8320
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KABUSHIKI KAISHA HITACHI SEISAKUSHO
-----------------------------------
(Exact name of Registrant as specified in its charter)
Hitachi, Ltd.
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(Translation of Registrant's name into English)
Japan
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(Jurisdiction of incorporation or organization)
6, Kanda-Surugadai 4-chome, Chiyoda-ku, Tokyo 101-8010, Japan
-------------------------------------------------------------
(Address of principal executive offices)
Securities registered or to be registered pursuant to Section 12(b) of the Act.
Title of each class Name of each exchange on which registered
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American Depositary Shares New York Stock Exchange
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Common Stock New York Stock Exchange
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Securities registered or to be registered pursuant to Section 12(g) of the Act.
None
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(Title of Class)
Securities for which there is a reporting obligation pursuant to Section 15(d)
of the Act.
None
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(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.
Common Stock 3,368,124,286 shares
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No ___
---
Indicate by check mark which financial statement item the registrant has elected
to follow.
Item 17 X Item 18 ___
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Fiscal years 2002, 2001 and 2000 of this report indicate Hitachi, Ltd.'s fiscal
years ended March 31, 2003, 2002 and 2001.
Unless the context indicates otherwise, the term "Company" refers to Hitachi,
Ltd. and the term "Hitachi" refers to Hitachi, Ltd. and its consolidated
subsidiaries.
Cautionary Statement
Certain statements contained in this annual report may constitute
forward-looking statements which reflect management's current views with respect
to certain future events and financial performance based on certain assumptions
and include any statement that does not directly relate to any historical or
current fact. Words such as "anticipate," "believe," "expect," "estimate,"
"intend," "plan," "project" and similar expressions which indicate future events
and trends may identify forward-looking statements. Actual results may differ
materially from those projected or implied in the forward-looking statements and
from historical trends. Further, certain forward-looking statements are based
upon assumptions of future events which may not prove to be accurate.
Factors that could cause actual results to differ materially from those
projected or implied in any forward-looking statements and from historical
trends include, but are not limited to:
- rapid technological change, particularly in the Information &
Telecommunication Systems segment and Electronic Devices segment;
- uncertainty as to Hitachi's ability to continue to develop and market
products that incorporate new technology on a timely and cost-effective
basis and to achieve market acceptance for such products;
- fluctuations in product demand and industry capacity, particularly in the
Information & Telecommunication Systems segment, Electronic Devices segment
and Digital Media & Consumer Products segment;
- increasing commoditization of information technology products, and
intensifying price competition in the market for such products;
2
- fluctuations in rates of exchange for the yen and other currencies in
which Hitachi makes significant sales or in which Hitachi's assets and
liabilities are denominated, particularly between the yen and the U.S.
dollar;
- uncertainty as to Hitachi's ability to access, or access on favorable
terms, liquidity or long-term financing, particularly in the context of
limited credit availability currently prevailing in Japan;
- uncertainty as to Hitachi's ability to implement measures to reduce the
potential negative impact of fluctuations in product demand and/or
exchange rates;
- general economic conditions and the regulatory and trade environment of
Hitachi's major markets, particularly, the United States, Japan and
elsewhere in Asia, including, without limitation, continued stagnation or
deterioration of the Japanese economy, or direct or indirect restriction
by other nations of imports;
- uncertainty as to Hitachi's access to, or protection for, certain
intellectual property rights, particularly those related to electronics
and data processing technologies;
- uncertainty as to the success of alliances upon which Hitachi depends,
some of which Hitachi may not control, with other corporations in the
design and development of certain key products; and
- uncertainty as to general market price levels for equity securities in
Japan, declines in which may require Hitachi to write-down equity
securities it holds.
These factors listed above are not exclusive and are in addition to other
factors that are stated or indicated elsewhere in this report, or in other
materials published by the Company.
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
Year ended March 31
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1999 2000 2001 2002 2003
-------------------------------------------------------------------------------
(Millions of yen, except per share amounts and number of shares issued)
Total revenues 7,977,374 8,001,203 8,416,982 7,993,784 8,191,752
Income (loss) before income taxes and
minority interests (221,174) 79,235 323,655 (586,072) 96,828
Net income (loss) (327,611) 16,922 104,380 (483,837) 27,867
Per common share:
Net income (loss)
Basic (98.15) 5.07 31.27 (144.95) 8.31
Diluted (98.15) 4.99 30.32 (144.95) 8.19
Cash dividends declared 5.50 6.00 11.00 3.00 6.00
($0.045) ($0.058) ($0.094) ($0.024) ($0.049)
Cash and cash equivalents 1,237,527 1,357,432 1,381,603 1,029,374 828,171
Short-term investments 605,679 632,434 433,650 178,933 186,972
Total assets 9,847,742 9,983,361 11,246,608 9,915,654 10,179,389
Short-term debt and current
installments of long-term debt 1,159,811 1,305,670 1,611,855 1,199,921 1,328,446
Long-term debt 1,478,168 1,482,810 1,881,270 1,798,303 1,512,152
Minority interests 776,462 791,925 825,158 798,744 751,578
Stockholders' equity 3,006,015 2,987,687 2,861,502 2,304,224 1,853,212
Common stock 281,735 281,738 281,754 282,032 282,032
Number of shares issued
(thousand shares) 3,337,895 3,337,900 3,337,932 3,338,481 3,368,124
Note: On April 1, 2000, Hitachi adopted the provisions of Statement of
Financial Accounting Standards No. 115, "Accounting for Certain
Investments in Debt and Equity Securities." Accordingly, figures for all
prior periods have been restated.
4
The following table provides the noon buying rates for Japanese yen in New York
City for cable transfers as certified for customs purposes by the Federal
Reserve Bank of New York. Translation of dividend amounts into U.S. dollars is
based on such rates at each respective payment date. The average rate means the
average of the exchange rates on the last day of each month during a fiscal
year.
Yen exchange rates per U.S. dollar:
Year ended March 31 Average High Low
------------------- ------- ---- ---
1999 128.10
2000 110.02
2001 111.65
2002 125.64
2003 121.10
March 2003 121.42 116.47
April 2003 120.55 118.25
May 2003 119.50 115.94
June 2003 119.87 117.46
July 2003 120.55 117.24
August 2003 120.47 116.71
On September 10, 2003, the yen exchange rate per U.S. dollar was 117.13 yen
per $1.
B. Capitalization and Indebtedness
Not applicable.
C. Reasons for the Offer and Use of Proceeds.
Not applicable.
D. Risk Factors
Hitachi operates in a broad range of business fields, conducts business on a
global scale, and utilizes sophisticated specialized technologies to carry on
its operations. It is therefore exposed to risks attributable to the economic
environment, risks inherent in individual industrial sectors and business lines,
and risks related to management.
Although certain risks that may affect Hitachi's businesses are listed in this
section, the list is not exhaustive. Hitachi's businesses may in the future also
be affected by other risks that are currently unknown or that are not currently
considered significant. The items set forth in this section contain information
relating to the forward-looking statements subject to "Cautionary Statement"
beginning on page 2 of this report.
Certain of the risk factors that may affect Hitachi are set out below.
Risks related to economic environment
.. Economic trends
The continuing adverse economic environment in Hitachi's main markets may
have a negative effect on Hitachi's business results. Decreases in
consumption owing to economic downturns in Japan, North America, Asia and
other major markets where Hitachi does business may negatively impact
Hitachi's business results by reduced demand and increased price competition
for the products and services Hitachi offers. In addition, the
5
adverse economic environment may result in increased risks of excess
inventories and overcapacities, and further restructuring measures by
Hitachi, which could pose associated expenses.
.. Currency exchange rate fluctuations
Since Hitachi conducts business in many foreign countries, a certain portion
of its assets, liabilities, revenues and expenses are denominated in various
currencies, principally the U.S. dollar. Fluctuations in currency exchange
rates may affect Hitachi's financial results, which are reported in Japanese
yen. A strong yen, for example, reduces the price competitiveness of products
exported to foreign markets and diminishes profit by decreasing revenues.
Risks related to industrial sectors and business lines
.. Rapid technological innovation
New technologies are rapidly emerging in the segments in which Hitachi does
business, with the pace of technological innovation being especially notable
in the field of information systems and electronics. The development of such
advanced technologies and their continuous, timely and cost-effective
incorporation in products and services is indispensable to stay competitive.
While introducing such products and services requires a significant
commitment to research and development, there can be no assurance that
Hitachi's research and development will result in success. Should Hitachi
fail in its endeavors to so develop and incorporate such advanced
technologies, the results of operations of related Hitachi businesses may be
negatively impacted.
.. Intense competition
The industrial sectors and business lines in which Hitachi is engaged are
experiencing increasingly intense competition. Hitachi competes with diverse
competitors ranging from huge global corporations to specialized companies.
Competitors are increasingly manufacturing products, including sophisticated
electronic products, in low-cost jurisdictions. Globalization of markets and
commoditization of such products are making price competition in the business
sectors in which Hitachi is engaged increasingly intense. To succeed in this
competitive environment, Hitachi believes its products and services must be
competitive in terms of price, engineering expertise, quality and brand
value. Hitachi cannot be certain that each or any of the products or services
that it offers will be competitive, and should each or any such products or
services fail to be competitive, Hitachi's business results may be negatively
affected.
.. Supply and demand balance
Supply in excess of demand leads to a decline in selling prices and thus,
such oversupply in the markets in which Hitachi is involved may adversely
affect Hitachi's performance. In addition, Hitachi may be forced to dispose
overcapacity and obsolete equipment to adjust supply and demand, which can
cause Hitachi losses. Semiconductor industry and liquid crystal display
industry, in particular, are highly cyclical and cyclical downturns are
characterized by a sharp fall in prices and overcapacity. Hitachi's
semiconductor business and liquid crystal display business have recently been
and may be in the future negatively impacted by a periodic oversupply in the
global markets.
.. Dependence on the ability of third parties to deliver materials and
components
Hitachi's manufacturing operations rely on third parties for supplies of
parts, components and services of adequate quality and quantity and in a
timely manner. External suppliers may have other customers and may not have
sufficient capacity to meet all of the needs of such customers during periods
of excess demand. Although in general, Hitachi maintains multiple sources of
supply and works closely with its suppliers to avoid supply-related problems,
such problems including shortages and delays may occur, which could
materially harm Hitachi's business. In addition, reliance on outside sources
increases the risk that Hitachi will not be able to control or avoid the
introduction under the Hitachi name of products incorporating defective or
inferior components, which could impose expenses for product recalls and
lawsuits on Hitachi and adversely affect Hitachi's business results or its
reputation for quality products.
6
Risks related to management
.. Dependence on specially skilled personnel
Hitachi believes it can continue to remain competitive only if it can
maintain and secure additional people who are highly skilled in the fields of
management and technology. However, the number of skilled personnel is
limited and the competition for attracting and maintaining such personnel is
intense, particularly in the information technology industry. Hitachi cannot
assure that it will be able to successfully maintain and secure additional
skilled personnel.
.. Acquisitions, joint ventures and strategic alliances
In every operating sector, Hitachi conducts business through acquisitions of
other companies, joint ventures and strategic alliances with outside partners
to develop new technologies and products, and to strengthen competitiveness.
Such transactions are inherently risky, including because of the difficulties
in integrating operations, technologies, products and personnel. Integration
issues are complex, time-consuming and expensive and, without proper planning
and implementation, could adversely affect Hitachi's business. The success of
alliances may also be adversely affected by decisions or performance of
alliance partners other than Hitachi or by adverse business trends. Hitachi
may incur significant acquisition, administrative and other costs in
connection with these transactions, including costs related to integration or
restructuring of acquired businesses. There can be no assurance that Hitachi
will be able to successfully integrate acquired businesses or achieve all or
any of the initial aims through such transactions.
.. Restructuring of business
Hitachi is continuing to restructure its business to improve management
efficiency and strengthen competitiveness by closing unprofitable operations,
divesting its subsidiaries and affiliated companies, reorganizing production
bases and sales network and reducing its workforce. In connection with these
actions, there may occur costs that adversely affect Hitachi's financial
results and condition. Restructuring measures may be constrained or intended
plans cannot be implemented in a timely manner due to governmental
regulations, employment issues and underdevelopment of Japanese M&A market.
Moreover, Hitachi may not achieve all of the goals that it aims for through
these actions.
.. Measures taken under the medium-term management plan
In January 2003, Hitachi announced a new medium-term management plan through
the fiscal year ending March 31, 2006. Hitachi plans to realign its business
portfolio by exiting certain businesses and increasing focus on targeted
businesses under the management plan. A variety of exit strategies may be
employed to exit the selected businesses, including divestiture and closure.
Significant costs may arise in connection with these actions, including costs
related to the restructuring of businesses and losses related to the sale of
securities. While increasing focus on targeted businesses may require a
significant commitment to investment and research and development, there can
be no assurance that Hitachi's investment and research and development
efforts will be successful. In addition, there can be no assurance that the
strategic realignment of businesses under the plan will be beneficial to
Hitachi's business or financial condition. Even assuming the strategic
realignment would be beneficial, Hitachi may fail to properly implement the
measures under the plan, which might adversely affect Hitachi's financial
condition and results of operations.
.. Intellectual property
Hitachi depends in part on intellectual property rights covering its
products, product design and manufacturing processes. Hitachi owns or
licenses a large number of intellectual property rights and, when Hitachi
believes it is necessary or desirable, obtains additional licenses for the
use of other parties' intellectual property rights. If Hitachi fails to
protect, maintain or obtain such rights, its performance and ability to
compete may be adversely affected. In addition, since intellectual property
litigation is costly and unpredictable, Hitachi's efforts to protect its
intellectual property rights or to defend itself against claims relating to
intellectual property rights made by others could impose considerable
expenses on Hitachi.
7
.. Product quality and liability
Hitachi increasingly provides products and services utilizing sophisticated
and complicated technologies. Reliance on external suppliers reduces
Hitachi's control over quality assurance. There is a risk that defects may
occur in Hitachi's products and services. The occurrence of such defects
could make Hitachi liable for damages caused by the defects and could
negatively impact Hitachi's reputation for quality products and thereby
adversely affect Hitachi's business results.
.. Risks of natural disasters and similar events
Portions of Hitachi's facilities, including its research and development
facilities, manufacturing facilities and the Company's headquarters, are
located in Japan, where seismic activity is frequent. Large earthquakes or
other significant natural disasters could have a negative impact on Hitachi's
operating activities, results of operations and financial condition. In
addition, with the increased importance of information systems in Hitachi's
operating activities, disruptions in such information systems due to computer
viruses and other factors could have a negative impact on Hitachi's operating
activities, results of operations and financial condition.
.. Governmental regulations
Hitachi's business activities are subject to various governmental regulations
in countries where it operates, which include investment approvals, export
regulations, tariffs, antitrust, intellectual property, consumer and business
taxation, exchange controls, and environmental and recycling requirements.
Significant changes in such regulations may limit Hitachi's business
activities or increase operating costs.
.. Financial risks
Hitachi owns marketable securities that are exposed to stock market risks.
Declines in stock market prices may have an adverse effect on Hitachi's
financial condition and results of operations. Hitachi is dependent on the
capital market for long-term financing secured through the issue of
debentures and long-term borrowing from financial institutions, which exposes
Hitachi to interest rate and credit risks.
.. Retirement benefits
Hitachi has significant employee retirement benefit costs which are derived
from actuarial valuations based on a number of assumptions. Assumptions may
differ from actual results and may adversely and materially affect Hitachi's
financial condition and results of operations. For example, difference
between expected return assumptions and actual return on plan assets could
result in a material understatement of Hitachi's funding obligations which
may adversely affect Hitachi's financial condition and results of operations.
In addition, changes in valuation assumptions, such as the discount rate or
the expected return on plan assets, may have a material effect on Hitachi's
financial condition and results of operations.
8
Item 4. Information on the Company
A. History and Development of the Company
The Company was founded in 1910 as a small electric repair shop and was
incorporated as Hitachi, Ltd. (KABUSHIKI KAISHA HITACHI SEISAKUSHO) in 1920
under the laws of Japan. Its registered office is located at 6, Kanda-Surugadai
4-chome, Chiyoda-ku, Tokyo 101-8010, Japan. The telephone number of the
Company's principal executive office is +81-3-3258-1111.
Over the years, Hitachi has broadened the horizon of its research as well as its
business activities to develop a highly diversified product mix ranging from
electricity generation systems to consumer products and electronic devices.
Hitachi has grown into Japan's largest diversified manufacturer of electronic
and electrical products. With its diverse product lines, Hitachi maintains a
significant presence in each of the major markets it serves, which together make
Hitachi one of the world's largest manufacturers of electronic products. With
its emphasis on research and development and its ability to combine a wide range
of technologies, Hitachi continues to strive to provide the world with products
that meet the changing needs of its customers.
In January 2003, Hitachi launched a new medium-term management plan defining the
direction and goals of its businesses through the fiscal year ending March 31,
2006. The plan includes, among other things, a realignment of Hitachi's business
portfolio which may be implemented by exiting certain businesses, increasing
focus on targeted businesses and creating new businesses in an effort to achieve
increased profitability and alteration of its corporate governance structure in
an effort to improve the efficiency and transparency of management. In addition,
under the plan, Hitachi expects to pursue further growth in the global markets
by identifying competitive businesses and channeling management resources into
those businesses. The businesses on which Hitachi plans to increase focus
include its storage solutions business, hard disk drive business and automotive
equipment business. Hitachi also expects under the plan to continue to improve
cash-flow management by increasing the efficiency of working capital use while
making selective investments, and further to reduce procurement costs. See "Item
5. Operating and Financial Review and Prospects - A. Operating Results" and
"Item 6. Directors, Senior Management and Employees."
In recent years, Hitachi has accelerated business reorganization, including to
facilitate Hitachi's goal of maximizing growth by combining and utilizing the
diverse management resources within Hitachi in the most effective and efficient
ways.
On October 1, 2000, Hitachi Credit Corporation, a 53.4% owned subsidiary, merged
with Hitachi Leasing, Ltd., a 50.0% owned affiliate of the Company, for the
purpose of strengthening management and promoting business development in the
area of financial services. The merged company changed its name to Hitachi
Capital Corporation.
On October 1, 2000, Kokusai Electric Co., Ltd., a 26.7% owned affiliate of the
Company, merged with Hitachi Denshi, Ltd., a 63.7% owned subsidiary, and Yagi
Antenna Co., Ltd., a 40.9% owned affiliate of the Company, for the purpose of
integrating and strengthening their wireless communication businesses. The
merged company became an affiliate of the Company and changed its name to
Hitachi Kokusai Electric Inc.
On October 1, 2001, Nissei Sangyo Co., Ltd., a subsidiary of the Company, was
integrated with the Company's instrument and semiconductor manufacturing
equipment operations and sales operations relating to clinical testing systems
of Hitachi Medical Corporation, a subsidiary of the Company, to form Hitachi
High-Technologies Corporation. The aim of the reorganization is to speedily
respond to market changes in nanotechnology areas such as semiconductor
manufacturing equipment and biotechnology-related products.
On April 1, 2002, the consumer products operation of the Company was separated
and integrated with related subsidiaries of the Company to form Hitachi Home &
Life Solutions, Inc. for the purpose of enabling the consumer products business
to be managed with more speed and flexibility.
9
On October 1, 2002, the Company made UNISIA JECS CORPORATION a wholly-owned
subsidiary through a share exchange. The purpose of the transaction was to
strengthen Hitachi's competitiveness in the automotive products business. UNISIA
JECS CORPORATION changed its name to Hitachi Unisia Automotive, Ltd. on the same
date.
In June 2002, the Company and International Business Machines Corporation
("IBM") entered into an agreement under which their respective hard disk drive
operations would be transferred to a new standalone company and the Company
would then purchase a majority ownership in the new company. The purpose of the
transaction was to strengthen hard disk drive operations in a highly competitive
market. The deal closed on December 31, 2002 and the new company, Hitachi Global
Storage Technologies, Inc., commenced operations on January 1, 2003.
On April 1, 2003, the Company transferred its semiconductor operations centered
in system LSIs to a new company incorporated jointly by the Company and
Mitsubishi Electric Corporation ("Mitsubishi"). Hitachi expects the new company,
Renesas Technology Corp. ("Renesas"), to improve semiconductor competitiveness
by permitting more flexible management and realizing synergies between the
advanced technologies of the Company and Mitsubishi. Renesas is expected to be
accounted for under the equity method by Hitachi.
Hitachi's capital expenditures for fixed assets on a completion basis were JPY
787,496 million, JPY 856,279 million and JPY 971,095 million in fiscal 2002,
2001 and 2000. While Hitachi has maintained a selective attitude toward
investment decisions, it has placed an emphasis on capital expenditures for
strategically important products. Excluding the purchase of assets to be leased,
a significant portion of capital expenditures have been directed toward
information-related products and electronic devices, including large capital
investments in manufacturing facilities to maintain or enhance competitiveness
in those product sectors. The decrease in capital expenditures during fiscal
2001 reflected curbs on expenditures in the semiconductor sector. The decrease
in capital expenditures during fiscal 2002 reflected Hitachi's increasingly
selective attitude toward investment decisions. In April 2003, Hitachi projected
that, for the fiscal year ending March 31, 2004, its capital expenditures would
amount to approximately JPY 810,000 million, primarily invested in Japan.
Hitachi expects this investment to be funded primarily through internal sources
of financing.
B. Business Overview
Main Categories of Products and Services
Hitachi's business is highly diversified. Starting from the fiscal year ended
March 31, 2002, Hitachi has reclassified its operations into seven industry
segments: (1) Information & Telecommunication Systems, (2) Electronic Devices,
(3) Power & Industrial Systems, (4) Digital Media & Consumer Products, (5) High
Functional Materials & Components, (6) Logistics, Services & Others and (7)
Financial Services. Hitachi's major categories of products and services offered
in each segment as of March 31, 2003 are shown below. This classification of
segments is required pursuant to a ministerial ordinance under the Securities
and Exchange Law of Japan.
(1) Information & Telecommunication Systems
Systems Integration, Software, Disk Array Subsystems, Hard Disk Drives,
Servers, Mainframes, Personal Computers, Computer Peripherals,
Telecommunications Equipment
10
(2) Electronic Devices
System LSIs, Memories, Multi-Purpose Semiconductors, Liquid Crystal
Displays, Semiconductor Manufacturing Equipment, Test and Measurement
Equipment, Medical Electronics Equipment
(3) Power & Industrial Systems
Nuclear Power Plants, Thermal Power Plants, Hydroelectric Power Plants,
Plant Engineering and Construction, Industrial Machinery and Plants,
Air-Conditioning Equipment, Construction Machinery, Railway Vehicles,
Elevators, Escalators, Automotive Equipment, Environmental Control Systems
(4) Digital Media & Consumer Products
Optical Disk Drives, Television Sets, Mobile Phones, LCD Projectors, Room
Air Conditioners, Refrigerators, Washing Machines, Batteries, Information
Storage Media
(5) High Functional Materials & Components
Wires and Cables, Copper Products, Malleable Cast-Iron Products, Forged and
Cast-Steel Products, Specialty Steels, Magnetic Materials, Chemical
Products, Electrical Insulating Materials, Synthetic Resin Materials and
Products, Carbon Products, Printed Circuit Boards, Ceramic Materials
(6) Logistics, Services & Others
General Trading, Transportation, Property Management
(7) Financial Services
Loan Guarantees, Leasing, Insurance Services
Sales and Distribution
Hitachi distributes its products in Japan primarily through its own sales
network. Hitachi also distributes some of its products through independent
dealers. In most field sales offices, Hitachi's sales personnel specialize in
the marketing of particular types of products.
International marketing is conducted through overseas sales subsidiaries,
joint-venture companies and unaffiliated distributors. Also, certain types of
equipment are sold to industrial companies in foreign markets on an original
equipment manufacturing (OEM) basis and marketed under the brand names of such
industrial companies.
Overseas sales amounted to JPY 2,645,209 million in fiscal 2002, accounting for
32% of total revenues. Foreign currency exchange rate fluctuations influence
Hitachi's operating environment. A strong yen reduces the price competitiveness
of products exported to foreign markets and diminishes profit by decreasing
revenue when foreign currency income from overseas product sales is converted to
yen. See "Item 5. Operating and Financial Review and Prospects - A. Operating
Results."
Hitachi's widespread customer base in domestic and overseas markets encompasses
leading industrial companies, financial institutions, utilities, governments and
individual customers. No material part of its business is dependent upon one or
a few customers.
11
Segment Information
Hitachi has not presented segment information in accordance with the
requirements of Statement of Financial Accounting Standards (SFAS) No.131,
"Disclosures about Segments of an Enterprise and Related Information," since
foreign issuers are presently exempted from these disclosure requirements for
the purpose of Securities Exchange Act filings with the SEC. However, Hitachi is
required to disclose the segment information presented below in accordance with
a ministerial ordinance under the Securities and Exchange Law of Japan. Hitachi
believes that this presentation may be useful in understanding Hitachi's results
of operations.
(1) Industry Segment
Year ended March 31
-------------------
2001 2002 2003
------------------ ------------------ ------------------
(Millions of yen)
Revenues
Information & Telecommunication Systems 1,796,084 17% 1,829,661 18% 1,899,651 19%
Electronic Devices 2,011,717 19 1,487,200 15 1,570,069 15
Power & Industrial Systems 2,321,104 21 2,266,895 23 2,297,068 22
Digital Media & Consumer Products 1,053,199 10 1,170,744 12 1,205,551 12
High Functional Materials & Components 1,467,345 13 1,250,248 12 1,248,550 12
Logistics, Services & Others 1,599,369 15 1,430,825 14 1,449,594 14
Financial Services 592,774 5 567,138 6 579,267 6
Subtotal 10,841,592 100% 10,002,711 100% 10,249,750 100%
==== ==== ====
Eliminations and Corporate Items (2,424,610) (2,008,927) (2,057,998)
----------- ----------- -----------
Total 8,416,982 7,993,784 8,191,752
=========== =========== ===========
Operating Income (Loss)
Information & Telecommunication Systems 48,921 13% 35,757 -% 110,523 -%
Electronic Devices 118,128 31 (163,633) - (23,242) -
Power & Industrial Systems 77,269 20 55,004 - 53,253 -
Digital Media & Consumer Products 1,541 0 (14,675) - 6,204 -
High Functional Materials & Components 83,415 22 (22,024) - 18,301 -
Logistics, Services & Others 8,437 2 3,257 - 10,352 -
Financial Services 44,146 12 37,403 - 12,067 -
Subtotal 381,857 100% (68,911) -% 187,458 -%
==== ==== ====
Eliminations and Corporate Items (39,545) (48,504) (34,491)
----------- ----------- -----------
Total 342,312 (117,415) 152,967
=========== =========== ===========
12
Year ended March 31
-------------------
2001 2002 2003
------------------ ------------------ ------------------
(Millions of yen)
Segment Assets
Information & Telecommunication Systems 1,342,252 12% 1,307,248 13% 1,702,104 16%
Electronic Devices 1,582,447 15 1,246,285 13 1,345,835 13
Power & Industrial Systems 2,230,193 20 2,060,169 21 2,194,445 21
Digital Media & Consumer Products 820,212 8 743,515 7 782,420 8
High Functional Materials & Components 1,520,718 14 1,349,133 14 1,298,973 13
Logistics, Services & Others 1,191,298 11 1,051,712 11 1,016,599 10
Financial Services 2,193,057 20 2,114,367 21 1,932,459 19
Subtotal 10,880,177 100% 9,872,429 100% 10,272,835 100%
=== === ===
Eliminations and Corporate Items 366,431 43,225 (93,446)
----------- ----------- -----------
Total 11,246,608 9,915,654 10,179,389
=========== =========== ===========
Depreciation & Amortization
Information & Telecommunication Systems 106,256 19% 105,716 18% 106,958 19%
Electronic Devices 153,789 27 168,706 28 120,911 22
Power & Industrial Systems 68,733 12 70,236 12 77,697 14
Digital Media & Consumer Products 46,155 8 46,419 8 43,083 8
High Functional Materials & Components 84,317 15 83,573 14 75,833 13
Logistics, Services & Others 38,383 7 40,058 7 32,700 6
Financial Services 64,728 12 79,124 13 102,468 18
Subtotal 562,361 100% 593,832 100% 559,650 100%
=== === ===
Eliminations and Corporate Items 4,315 4,796 6,719
----------- ----------- -----------
Total 566,676 598,628 566,369
=========== =========== ===========
Tangible & Intangible Asset Increase
Information & Telecommunication Systems 135,636 12% 137,802 13% 203,380 18%
Electronic Devices 230,684 20 125,373 12 107,373 9
Power & Industrial Systems 83,012 7 85,936 8 94,920 8
Digital Media & Consumer Products 48,135 4 40,871 4 37,074 3
High Functional Materials & Components 111,292 9 85,112 8 64,511 6
Logistics, Services & Others 36,519 3 44,823 4 35,498 3
Financial Services 527,429 45 551,017 51 608,434 53
Subtotal 1,172,707 100% 1,070,934 100% 1,151,190 100%
=== === ===
Eliminations and Corporate Items (69,824) (57,436) (65,483)
----------- ----------- -----------
Total 1,102,883 1,013,498 1,085,707
=========== =========== ===========
13
(2) Geographic Segment
Year ended March 31
-------------------
2001 2002 2003
------------------ ------------------ ------------------
(Millions of yen)
Revenues
Japan
Outside customer sales 6,557,736 65% 6,134,554 66% 6,290,654 65%
Intersegment transactions 1,148,587 12 892,562 10 1,026,916 11
----------- ---- ----------- ---- ----------- ----
Total 7,706,323 77 7,027,116 76 7,317,570 76
Asia
Outside customer sales 550,303 6 607,041 6 651,228 7
Intersegment transactions 415,946 4 349,337 4 351,006 3
----------- ---- ----------- ---- ----------- ----
Total 966,249 10 956,378 10 1,002,234 10
North America
Outside customer sales 863,349 9 830,959 9 802,582 8
Intersegment transactions 48,141 0 45,382 0 38,753 1
----------- ---- ----------- ---- ----------- ----
Total 911,490 9 876,341 9 841,335 9
Europe
Outside customer sales 395,809 4 364,840 4 379,615 4
Intersegment transactions 27,513 0 32,268 0 28,382 0
----------- ---- ----------- ---- ----------- ----
Total 423,322 4 397,108 4 407,997 4
Other Areas
Outside customer sales 49,785 0 56,390 1 67,673 1
Intersegment transactions 4,254 0 2,359 0 2,645 0
----------- ---- ----------- ---- ----------- ----
Total 54,039 0 58,749 1 70,318 1
Subtotal 10,061,423 100% 9,315,692 100% 9,639,454 100%
==== ==== ====
Eliminations and Corporate Items (1,644,441) (1,321,908) (1,447,702)
----------- ----------- -----------
Total 8,416,982 7,993,784 8,191,752
=========== =========== ===========
Operating Income (Loss)
Japan 303,359 82% (70,420) -% 155,684 82%
Asia 45,032 12 (5,090) - 18,357 10
North America 7,037 2 (21,053) - 6,336 3
Europe 13,109 4 4,007 - 6,720 4
Other Areas 1,246 0 1,842 - 2,097 1
Subtotal 369,783 100% (90,714) -% 189,194 100%
==== ==== ====
Eliminations and Corporate Items (27,471) (26,701) (36,227)
----------- ----------- -----------
Total 342,312 (117,415) 152,967
=========== =========== ===========
Segment Assets
Japan 8,492,338 82% 7,685,632 82% 7,935,395 81%
Asia 659,153 6 624,864 7 731,108 7
North America 662,439 7 603,980 6 592,530 6
Europe 471,040 5 434,239 5 502,446 5
Other Areas 37,428 0 39,492 0 55,824 1
Subtotal 10,322,398 100% 9,388,207 100% 9,817,303 100%
==== ==== ====
Eliminations and Corporate Items 924,210 527,447 362,086
----------- ----------- -----------
Total 11,246,608 9,915,654 10,179,389
=========== =========== ===========
14
(3) Revenues by Market
Year ended March 31
-------------------
2001 2002 2003
----------------- ---------------- ---------------
(Millions of yen)
Domestic sales 5,791,300 69% 5,444,662 68% 5,546,543 68%
Overseas sales
Asia 966,870 11 896,050 11 1,017,439 12
North America 903,800 11 930,629 12 890,684 11
Europe 550,968 7 513,310 6 537,029 7
Other Areas 204,044 2 209,133 3 200,057 2
Subtotal 2,625,682 31 2,549,122 32 2,645,209 32
---------- ---- ---------- ---- ---------- ----
Total 8,416,982 100% 7,993,784 100% 8,191,752 100%
========== ==== ========== ==== ========== ====
Notes: 1. Revenues by segment include intersegment transactions.
2. Geographic Segment is based on the locations of Hitachi's
facilities where products or services are produced.
3. Figures for Revenues by Market are based on the locations of
the customer to whom Hitachi's products or services are sold.
4. In order to be consistent with financial reporting principles
and practices generally accepted in Japan, operating income
(loss) is presented as total revenues less cost of sales and
selling, general and administrative expenses. Under accounting
principles generally accepted in the United States of America,
restructuring charges, net gain or loss on sale and disposal of
rental assets and other property, impairment losses, special
termination benefits and the losses resulting from the adoption
of EITF issue No. 03-2 "Accounting for the Transfer to the
Japanese Government of the Substitutional Portion of Employee
Pension Fund Liabilities" are included as part of operating
income (loss). See notes (16), (17) and (18) to the consolidated
financial statements.
5. Hitachi has changed industry segment classifications starting
from the fiscal year ended March 31, 2002. Accordingly, figures
for the fiscal year ended March 31, 2001 have been restated.
Hitachi conducts a broad and diverse range of businesses. Hitachi divides its
operations into seven segments that are determined mainly on the basis of
management units, and the similarity of products and services in type, use,
production method and marketing method. The seven segments are Information &
Telecommunication Systems, Electronic Devices, Power & Industrial Systems,
Digital Media & Consumer Products, High Functional Materials & Components,
Logistics, Services & Others and Financial Services. Each segment includes the
Company's subsidiaries and affiliates engaged in related production, marketing
and service activities.
Information & Telecommunication Systems
Products and services provided by Hitachi in this segment include systems
integration, computer hardware, software and telecommunications equipment and
components. This segment groups products with many common technological aspects,
facilitating operations management.
Hitachi's computer business consists of hardware products, software and
solutions business. Customers are business entities in various industries,
national and local governments, and, to a lesser extent, individuals. Among the
hardware products Hitachi offers, disk array subsystems, hard disk drives,
servers and mainframes are more significant than other products. In order to
meet market requirements, these products need to be built to achieve high
performance while meeting cost parameters of customers. Hitachi also develops
and offers various software packages designed to enhance the productivity of
customers. Systems integration, consulting and outsourcing form the core of the
solutions business in which customized solutions are developed and offered to
customers with Hitachi's hardware and software products, as well as other
venders' products, to deliver systems that help customers achieve their business
objectives. This segment also provides telecommunications equipment
15
and components such as switches and fiber optic components, which are delivered
to customers in data and telecommunication industries.
The computer industry is extremely competitive. The speed of technology
development in both hardware and software is very fast, and failure or delay to
introduce the products or services that incorporate the latest technology would
materially diminish Hitachi's market presence. Customers are highly sensitive to
the cost effectiveness of their investments in information technology, which
leads to intense price competition particularly in hardware products.
Over the medium term, in accordance with changing market requirements, Hitachi
intends to expand its solutions business in growing areas, such as network
business and outsourcing business. In overseas markets, especially in North
America, Hitachi focuses on storage solutions business integrating its
large-capacity disk array subsystems, software and related services and drives
expansion in its IT solutions business. In accordance with this strategy,
Experio Solutions Corporation (currently Hitachi Consulting Corporation), a
subsidiary of the Company, acquired the e-Business Consulting Group of Grant
Thornton LLP, an accounting and management-consulting firm, in October 2000 and
two IT consulting companies in fiscal 2001 and expanded its business, including
by hiring consultants from Arthur Andersen LLP in fiscal 2002.
In June 2002, the Company and IBM entered into an agreement under which their
respective hard disk drive operations would be transferred to a new standalone
company and the Company would then purchase a majority ownership in the new
company. The purpose of the transaction was to strengthen hard disk drive
operations in a highly competitive market. The deal closed on December 31, 2002
and the new company, Hitachi Global Storage Technologies, Inc., commenced
operations on January 1, 2003. Hitachi believes the new company will be able to
realize increased competitiveness in the hard disk drive industry, including as
a result of access to the combined R&D capabilities of Hitachi and IBM, an
expanded product line-up, increased production capacity and an enhanced global
sales and support network.
Hitachi believes strategic alliances are important to improve time to market
requirements. The Company entered into an alliance with IBM in the field of
servers and joined Microsoft Corporation in establishing a joint-venture company
in the system solutions business for enterprises in fiscal 2000. The Company and
one of its subsidiaries entered into an agreement with Sun Microsystems, Inc. in
the area of storage systems including cross-license, distribution and
development of storage software in fiscal 2001.
In fiscal 2002, the segment accounted for 19% of total revenues before
eliminations and posted operating income of JPY 110,523 million.
Electronic Devices
The Electronic Devices segment provides semiconductors, liquid crystal displays,
semiconductor manufacturing equipment, test and measurement equipment and
medical electronics equipment. Semiconductors and liquid crystal displays form
the nucleus of this segment.
Semiconductors are used extensively in many industries, including computers,
digital consumer products and automobiles. Hitachi's product line for
semiconductors consists of system LSIs, semiconductor memories and other
multi-purpose semiconductors. Hitachi develops and manufactures advanced memory
chips. Recently, Hitachi has been giving more emphasis on system LSIs which
combine memories, microprocessors and other components on a single chip and are
capable of performing complex tasks.
Two notable features of the semiconductor market are rapid technological changes
and significant price fluctuations with changes in the supply-demand balance.
Technology becomes obsolete in a very short period of time, and new industry
standards for any product line may be established very quickly. Prices for DRAMs
in particular are under pressure due to increasing commoditization and intense
competition among companies with large production capacity that specialize in
this market. The industry is responding to these circumstances by
16
seeking ways to spread investment risks by outsourcing manufacture to foundries,
setting up joint ventures and forming alliances.
In accordance with changing market requirements, Hitachi has consolidated its
semiconductor manufacturing bases and sold non-strategic business such as
semiconductor silicon crystal operations in an effort to redefine the scope of
its operation. In December 1999, Hitachi, together with NEC Corporation,
established a joint-venture company called Elpida Memory, Inc. which is engaged
in the DRAM business. The new company has integrated DRAM business including
development, marketing and manufacturing.
In the face of the sluggish demand and sharp declines in prices, during fiscal
2001, Hitachi implemented reforms to restore profitability. The reforms include
right-sizing of production by integrating product lines and cutting the
workforce.
In addition, on April 1, 2003, the Company transferred its semiconductor
operations centered in system LSIs to a new company incorporated jointly by the
Company and Mitsubishi. Hitachi expects the new company, Renesas, to improve
semiconductor competitiveness by permitting more flexible management and
realizing synergies between the advanced technologies of the Company and
Mitsubishi. Renesas is expected to be accounted for under the equity method by
Hitachi which will likely result in assets and liabilities of Renesas'
operations being excluded from Hitachi's consolidated balance sheet.
The display business is highly competitive and characterized by significant
price fluctuations with changes in the supply-demand balance. In light of the
difficult business conditions, during fiscal 2001, Hitachi decided to withdraw
from cathode ray tubes for PC monitors, as well as cathode ray tubes for direct
view color televisions in North America, to concentrate its resources on the
flat panel display operations.
In fiscal 2002, the segment accounted for 15% of total revenues before
eliminations and posted an operating loss of JPY 23,242 million.
Power & Industrial Systems
In this segment, Hitachi offers power plants, industrial machinery, construction
machinery, automotive equipment, transportation equipment and other products and
related services for power utilities and industry.
Power companies are the main customers of the power sector. In this sector,
Hitachi must respond to customer demand for low-priced products with high added
value. In addition, in recent years Hitachi has given high priority to
environmental protection in its product design. The entry of independent power
producers into the domestic electric power industry brought about by
deregulation has put pressure on power companies to lower electricity prices.
This causes more intense price competition among vendors to match lower
electricity prices. Since the orders the sector receives are generally for large
items with long delivery periods, a portion of the purchase price from those
orders is generally paid in advance to finance the production of the items.
The industrial systems sector covers products used in numerous industries and is
strongly influenced by trends in public works spending and private-sector plant
and equipment investment. Market demands focus primarily on low price, high
added value and the capability of products to be integrated into systems. The
number of product types is vast and production is frequently done in small lots
or on order. The industry includes many small-to-medium-sized specialty
manufacturers and competition for orders is fierce.
Hitachi optimizes its response to the needs and priorities of segment customers
by strategically combining technologies from Hitachi's diverse fields of
operation, especially from the technologies of information systems and
electronics field.
On October 1, 2002, the Company made UNISIA JECS CORPORATION a wholly-owned
subsidiary through a share exchange. The purpose of the transaction was to
strengthen Hitachi's competitiveness in the automotive
17
products business. UNISIA JECS CORPORATION changed its name to Hitachi Unisia
Automotive, Ltd. on the same date.
In fiscal 2002, the segment accounted for 22% of total revenues before
eliminations and posted operating income of JPY 53,253 million.
Digital Media & Consumer Products
In this segment, Hitachi manufactures and sells products in two main categories:
digital media products and consumer products. The former includes optical disk
drives, TVs, mobile phones and LCD projectors, while the latter comprises room
air conditioners, refrigerators, washing machines and other appliances. All
products have a broad range of customers dominated by general consumers.
Home electrical equipment manufacturers are responding to customer demand for
low price and high added value by cutting costs and developing differentiated
product lines. Success in this segment will also depend considerably on the
development of products geared to advances in new multimedia-related markets.
In order to achieve low-cost production and have access to growing markets,
Hitachi has expanded overseas production, especially in Southeast Asia. Hitachi
also has introduced supply chain management to shorten lead times and hold
minimum inventory. Hitachi is a well-recognized brand associated with high
reliability and quality.
On April 1, 2002, the consumer products operation of the Company was separated
and integrated with related subsidiaries of the Company to form Hitachi Home &
Life Solutions, Inc. for the purpose of enabling the consumer products business
to be managed with more speed and flexibility.
In fiscal 2002, the segment accounted for 12% of total revenues before
eliminations and posted operating income of JPY 6,204 million.
High Functional Materials & Components
This segment includes fabricated chemical and metal products supplied as parts
or materials to downstream manufacturers of mainly electric and electronic
products. For example, Hitachi Chemical Co., Ltd. manufactures products based on
its resin technology and serves industrial markets such as semiconductors,
liquid crystal displays and automobiles. Hitachi Metals, Ltd. manufactures and
sells magnetic and electronic materials and parts. They include specialty steels
such as materials for mobile phones and automobile engine parts. Hitachi Cable,
Ltd. manufactures and sells electronic materials and components for
semiconductors and mobile phones as well as cable and wire products used for
transmission of power and telephone signals.
As more products in this segment become more closely dependent upon and driven
by capabilities in electronics technology, Hitachi's strength in electronics
technology is expected to provide Hitachi with an advantage in introducing new
products with such technology. Since the portion of materials and components
used for semiconductors, liquid crystal displays, mobile phones and other
IT-related products has increased in recent years, the business results have
been significantly affected by the business climate of IT industry.
In fiscal 2002, the segment accounted for 12% of total revenues before
eliminations and posted operating income of JPY 18,301 million.
18
Logistics, Services & Others
This segment includes various businesses not covered by other segments,
primarily consisting of sales from general trading, transportation and property
management services conducted by consolidated subsidiaries of the Company.
Hitachi has set up sales subsidiaries by region and by product. Hitachi also has
many subsidiaries that were established to offer various services related to
Hitachi's business operations internally, such as printing and food services.
In fiscal 2002, the segment accounted for 14% of total revenues before
eliminations and posted operating income of JPY 10,352 million.
Financial Services
Financial services originated to extend credit to purchasers of Hitachi
products. This segment currently provides leases, loan guarantees and insurance
services and conducts business in the area of securitization and outsourcing
services.
On October 1, 2000, Hitachi Credit Corporation, a subsidiary of the Company,
merged with Hitachi Leasing, Ltd., an affiliate of the Company, for the purpose
of strengthening management and promoting business development in the area of
financial services. The merged company changed its name to Hitachi Capital
Corporation.
In fiscal 2002, the segment accounted for 6% of total revenues before
eliminations and posted operating income of JPY 12,067 million.
Competition
Hitachi is subject to intense competition in each of its businesses. Among its
major competitors are some of the top-ranking industrial companies in Japan,
U.S., Europe and Asia. Depending on the nature of the business, the competition
is marked by rapid progress in technology or the need to reduce costs to meet
customer requirements. In addition, Hitachi is facing more competition against
companies that focus exclusively on specific market segments. See "Segment
Information" in this Item for details of competition in each segment.
Seasonality
Hitachi's revenues in fourth quarters ended March 31 tend to be higher than
those in other quarters due in part to the purchase customs of governmental
agencies in Japan.
Sources of Supply
Hitachi purchases a wide variety of raw materials, parts and components from
many suppliers in Japan and abroad. In general, Hitachi is not dependent on any
single source of supply for its raw materials, parts and components. In light of
the fact that Japan produces very few of the raw materials Hitachi uses in its
manufacturing processes, Hitachi monitors the availability of raw materials on a
regular basis. There are currently no particular shortages of energy, raw
material, parts or components that are likely to materially affect Hitachi's
business. Although prices of certain raw materials, parts and components that
Hitachi purchases are volatile, such as petroleum products, copper, aluminum and
semiconductor memories, Hitachi does not think, at the present time, the price
volatility for any specific raw materials, parts and components may materially
affect Hitachi's results of operations in the near future.
Intellectual Property and Licenses
Hitachi holds numerous patents, trademark rights and copyrights. While Hitachi
considers them to be valuable assets and important for its operations, it
believes that its business is not dependent to any material extent upon any
single patent, trademark right, copyright or any related group of such rights it
holds.
19
Hitachi also has many licenses and technical assistance agreements covering a
wide variety of products. Such licenses and technical assistance agreements
grant Hitachi the rights to use certain Japanese and foreign patents or the
rights to receive certain technical information. Hitachi is not materially
dependent on any single such agreement.
Hitachi has granted licenses and technical assistance to various companies
located in Japan and overseas. In certain instances, Hitachi has entered into
cross-licensing agreements with other major international electronics and
electrical equipment manufacturers.
Government Regulations
Hitachi's business activities are subject to various governmental regulations in
countries where it operates, which include investment approvals, export
regulations, tariffs, antitrust, intellectual property, consumer and business
taxation, exchange controls, and environmental and recycling requirements. At
present, Hitachi manages to operate its business without any significant
difficulty in coping with such regulations.
C. Organizational Structure
The table below shows major subsidiaries of Hitachi, Ltd. as of March 31, 2003.
Country of Ownership ratio of
Name of company incorporation voting rights
--------------- ------------- -------------
(1) Information & Telecommunication Systems
Hitachi Communication Technologies, Ltd. Japan 100.0%
Hitachi Electronics Services Co., Ltd. Japan 100.0
Hitachi Information Systems, Ltd. Japan 51.4
Hitachi Software Engineering Co., Ltd. Japan 51.8
Hitachi Systems & Services, Ltd. Japan 100.0
Hitachi Computer Products (America), Inc. U.S.A. 100.0
Hitachi Computer Products (Asia) Corp. Philippines 100.0
Hitachi Computer Products (Europe) S.A.S. France 100.0
Hitachi Data Systems Holding Corp. U.S.A. 100.0
Hitachi Global Storage Technologies Netherlands B.V. Netherlands 100.0
(2) Electronic Devices
Eastern Japan Semiconductor Technologies, Inc. Japan 100.0%
Hitachi Displays, Ltd. Japan 100.0
Hitachi Electronics Engineering Co., Ltd. Japan 100.0
Hitachi High-Technologies Corporation Japan 67.6
Hitachi Medical Corporation Japan 63.4
Hitachi Semiconductor and Devices Sales Co., Ltd. Japan 100.0
Northern Japan Semiconductor Technologies, Inc. Japan 100.0
Trecenti Technologies, Inc. Japan 100.0
Hitachi Electronic Devices (USA), Inc. U.S.A. 100.0
Hitachi Nippon Steel Semiconductor Singapore Pte. Ltd. Singapore 92.0
Hitachi Semiconductor (America) Inc. U.S.A. 100.0
Hitachi Semiconductor (Europe) GmbH Germany 100.0
Hitachi Semiconductor (Malaysia) Sdn. Bhd. Malaysia 90.0
20
Country of Ownership ratio of
Name of company incorporation voting rights
--------------- ------------- -------------
(3) Power & Industrial Systems
Babcock-Hitachi Kabushiki Kaisha Japan 100.0%
Hitachi Air Conditioning Systems Co., Ltd. Japan 100.0
Hitachi Building Systems Co., Ltd. Japan 100.0
Hitachi Construction Machinery Co., Ltd. Japan 56.4
Hitachi Engineering Co., Ltd. Japan 100.0
Hitachi Engineering & Services Co., Ltd. Japan 100.0
Hitachi Industrial Equipment Systems Co., Ltd. Japan 100.0
Hitachi Industries Co., Ltd. Japan 100.0
Hitachi Kiden Kogyo, Ltd. Japan 54.9
Hitachi Plant Engineering & Construction Co., Ltd. Japan 56.3
Hitachi Unisia Automotive, Ltd. Japan 100.0
Hitachi Via Mechanics, Ltd. Japan 100.0
Japan Servo Co., Ltd. Japan 57.8
Hitachi Automotive Products (USA), Inc. U.S.A. 100.0
Taiwan Hitachi Co., Ltd. Taiwan 61.5
(4) Digital Media & Consumer Products
Hitachi Home & Life Solutions, Inc. Japan 100.0%
Hitachi Maxell, Ltd. Japan 52.1
Hitachi Media Electronics Co., Ltd. Japan 100.0
Hitachi Home Electronics (America), Inc. U.S.A. 100.0
Shanghai Hitachi Household Appliances Co., Ltd. China 60.0
(5) High Functional Materials & Components
Hitachi Cable, Ltd. Japan 53.3%
Hitachi Chemical Co., Ltd. Japan 51.7
Hitachi Metals, Ltd. Japan 55.0
(6) Logistics, Services & Others
Chuo Shoji, Ltd. Japan 100.0%
Hitachi Life Corporation Japan 100.0
Hitachi Mobile Co., Ltd. Japan 64.8
Hitachi Transport System, Ltd. Japan 59.9
Nikkyo Create, Ltd. Japan 100.0
Hitachi America, Ltd. U.S.A. 100.0
Hitachi Asia Ltd. Singapore 100.0
Hitachi (China), Ltd. China 100.0
Hitachi Europe Ltd. U.K. 100.0
(7) Financial Services
Hitachi Capital Corporation Japan 55.3%
Hitachi Insurance Services, Ltd. Japan 100.0
21
D. Property, Plants and Equipment
Most of Hitachi's plants, offices and other fixed assets are located in Japan.
Hitachi considers its properties to be well maintained and believes its plant
capacity is adequate for its current needs. Certain of Hitachi's properties such
as land and buildings are subject to mortgages in respect of bonds and loans.
The total outstanding balance of the secured loans and bonds as of March 31,
2003 was JPY 31,920 million.
The following table shows relevant property data in relation to major lines of
business as of March 31, 2003.
Name Location Area Principal products
---- -------- ---- ------------------
(thousands of
square meters)
In Japan
Hitachi, Ltd.:
Semiconductor & Integrated Tokyo, etc. 601 Semiconductors
Circuits
Thermal & Hydroelectric Ibaraki 3,636 Power generating equipment, Turbines
Systems Division, etc.
Sales Offices Osaka, etc. 226 -
Research & Development Group Tokyo, etc. 930 -
Head Office Tokyo 905 -
Enterprise Server Division Kanagawa 203 Mainframes
Device Development Center Tokyo 67 Semiconductors
Automotive Products Ibaraki 609 Automotive products
Internet Systems Platform Kanagawa 234 PCs
Division
Data Storage Systems Division Kanagawa 67 Hard disk drives
Subsidiaries:
Hitaka Works Ibaraki, etc. 1,049 Electronic materials and components
(Hitachi Cable, Ltd.)
Hitachi Displays, Ltd. Chiba 517 Liquid crystal displays
Yasugi Works Shimane 1,111 Special steels
(Hitachi Metals, Ltd.)
Head Office Tokyo 16 -
(Hitachi Software Engineering
Co., Ltd.)
Kyoto Works Kyoto 313 Magnetic recording media
(Hitachi Maxell, Ltd.)
Head Office Tokyo 206 -
(Hitachi Building Systems
Co., Ltd.)
Tsuchiura Plant Ibaraki, etc. 5,471 Hydraulic excavators
(Hitachi Construction Machinery
Co., Ltd.)
Tsuchiura Works Ibaraki 562 Electronic materials and components
(Hitachi Cable, Ltd.)
Densen Works Ibaraki 123 Electronic materials and components
(Hitachi Cable, Ltd.)
Tochigi Works Tochigi 1,095 Refrigerators, Air conditioners
(Hitachi Home & Life Solutions,
Inc.)
22
Name Location Area Principal products
---- -------- ---- ------------------
(thousands of
square meters)
Overseas Subsidiaries:
Hitachi Global Storage California 1,572 Hard disk drives
Technologies Netherlands B.V. U.S.A., etc.
Hitachi Metals America, Ltd. New York, 2,903 Automotive components
U.S.A., etc.
Hitachi Computer Products Binan, 83 Hard disk drives
(Asia) Corp. Philippines
Hitachi Semiconductor Landshut, 63 Semiconductors
(Europe) GmbH Germany
For information on Hitachi's plan for capital investment for the fiscal year
ending March 31, 2004, see "A. History and Development of the Company" in this
Item.
23
Item 5. Operating and Financial Review and Prospects
A. Operating Results
Overview
Hitachi provides highly diversified products and services and conducts business
throughout the world. Hitachi's results of operations therefore are affected by
various aspects of the economic environment, particularly capital investment in
the private sector and consumer spending in Hitachi's main market sectors.
In fiscal 2002, the Japanese economy was buoyed by firm consumer confidence but
failed to make a full-fledged recovery because of continued stagnant
private-sector plant and equipment investment and declines in public-sector
spending. Japan's GDP grew 3.2% in fiscal 2000, declined by 1.2% in fiscal 2001
and grew 1.6% in fiscal 2002.
Outside Japan, in fiscal 2002, the economic environment was marked by the slow
pace of the economic recovery in the United States and a deepening slump in
Europe, but generally vigorous economic activity in Asia.
Overseas sales, a significant part of which are denominated in U.S. dollars,
were 31% of total revenues in fiscal 2000 and 32% of total revenues in fiscal
2001 and 2002. Fluctuations in foreign currency exchange rates may affect
Hitachi's financial results, which are reported in Japanese yen, through the
translation of foreign currencies to Japanese yen. The Japanese yen on average
did not change substantially against the U.S. dollar during fiscal 2000,
weakened against the U.S. dollar during fiscal 2001 and strengthened against the
U.S. dollar during fiscal 2002, each as compared with the preceding fiscal year.
Hitachi employs forward exchange contracts and cross currency swap agreements to
reduce the impact of foreign currency exchange fluctuations. In addition, to
alleviate the adverse effects of foreign currency exchange fluctuations, when
Hitachi believes it is appropriate, it seeks to manufacture outside Japan and
procure materials and parts locally. Hitachi expects to finance foreign currency
investments by such foreign currency it has on hand. When the amount on hand is
insufficient, Hitachi may enter into forward exchange contracts to reduce the
impact of foreign currency exchange fluctuations. For additional information
regarding foreign currency fluctuations, see "Item 4. Information on the Company
- B. Business Overview - Sales and Distribution."
The business circumstances surrounding Hitachi have been increasingly
challenging. Some of its businesses are in stagnant industries. In addition,
globalization of markets and commoditization of electronic products is
continuing to intensify price competition in the business sectors in which
Hitachi is engaged. However, Hitachi's ability to close or sell unprofitable
businesses is limited, including due to the underdeveloped M&A market in Japan
and the importance of preserving customer goodwill. A large portion of Hitachi's
manufacturing is done domestically, which means that a strengthening of the yen
reduces Hitachi's cost competitiveness. Hitachi is responding to these
circumstances by closing or downsizing unprofitable operations where feasible,
seeking joint ventures with competitors, reallocating employees from overstaffed
businesses to growth businesses, and reorganizing the geographic allocation of
its manufacturing facilities.
In the face of the increasingly difficult business environment due primarily to
global economic slowdowns and worldwide decline in demand for IT-related
products, during fiscal 2001, Hitachi implemented management measures to raise
management efficiency and strengthen competitiveness. The measures include the
withdrawal from unprofitable businesses such as cathode ray tubes for PC
monitors, the reorganization and streamlining of production bases and facilities
for semiconductors and digital media products operations, and the introduction
of an early retirement benefits program. In addition, Hitachi has accelerated
the pace of certain corporate projects, including a project aimed at reducing
materials purchasing costs and a project aimed at improving turnover of assets.
For a description of the charges associated with the restructuring measures, see
"Restructuring."
24
Following its medium-term business plan launched in November 1999 and ending
March 2003, in January 2003, Hitachi launched a new medium-term management plan
defining the direction and goals of its businesses through the fiscal year
ending March 31, 2006. The plan includes, among other things, a realignment of
Hitachi's business portfolio which may be implemented by exiting certain
businesses, increasing focus on targeted businesses and creating new businesses
in an effort to achieve increased profitability and alteration of its corporate
governance structure in an effort to improve the efficiency and transparency of
management. In addition, under the plan, Hitachi expects to pursue further
growth in the global markets by identifying competitive businesses and
channeling management resources into those businesses. Hitachi also expects
under the plan to continue to improve cash-flow management by increasing the
efficiency of working capital use while making selective investments, and
further to reduce procurement costs. See "Item 4. Information on the Company -
A. History and Development of the Company" and "Item 6. Directors, Senior
Management and Employees."
Hitachi is currently aware of no governmental economic, fiscal, monetary or
political policies or factors that have materially affected, or could materially
affect, directly or indirectly, Hitachi's operations or investment by U.S.
shareholders.
Hitachi's total revenues rose 5% in fiscal 2000, decreased 5% in fiscal 2001 and
rose 2% in fiscal 2002 on a year-on-year basis, respectively. Hitachi posted net
income of JPY 104,380 million in fiscal 2000, a net loss of JPY 483,837 million
in fiscal 2001 and net income of JPY 27,867 million in fiscal 2002.
The analysis of revenues by industry and geographic segment and description of
restructuring measures by industry segment mentioned below are based on the
information presented in "Item 4. Information on the Company - B. Business
Overview - Segment Information." Hitachi believes that this presentation may be
useful in understanding Hitachi's results of operations. Revenues by segment
include intersegment transactions which Hitachi adjusts for in calculating total
revenues. Hitachi has changed industry segment classifications starting from the
fiscal year ended March 31, 2002. Accordingly, results of operations by industry
segment for the preceding fiscal year have been restated on the basis of the new
classification.
Restructuring
For fiscal 2000, Hitachi recorded a restructuring charge of JPY 8,814 million,
primarily associated with the reorganization and streamlining of its domestic
and overseas operations in the areas of consumer products and power and
industrial systems. The restructuring charge included special termination
benefits of JPY 5,275 million for 772 employees. The special termination
benefits accrual of JPY 2,371 million as of March 31, 2001, which was related to
the voluntary termination of 336 employees, was paid in fiscal 2001.
In the face of an increasingly difficult business environment due primarily to
global economic slowdowns and worldwide decline in demand for IT-related
products, during fiscal 2001, Hitachi implemented restructuring measures to
reduce cost structure and focus on strategic businesses, primarily by reducing
its work force and withdrawing from unprofitable businesses.
For fiscal 2001, Hitachi recorded restructuring charges of JPY 288,096 million
in connection with the restructuring measures. The restructuring charges
included a cost of JPY 185,105 million primarily for special termination
benefits for 22,422 employees under the early retirement benefits program
introduced by the Company and certain of its subsidiaries. Payments of JPY
73,252 million were made in fiscal 2001 and special termination benefits accrual
of JPY 114,266 million as of March 31, 2002, which was related to the voluntary
termination of 10,077 employees, was paid in fiscal 2002. In addition, the
restructuring charges included a loss on fixed assets in the amount of JPY
51,316 million, a loss on disposal of inventories in the amount of JPY 19,451
million, and lease termination and business partner compensation of JPY 11,487
million. The details of the restructuring measures were as follows.
Information & Telecommunication Systems incurred restructuring charges of JPY
63,790 million, including a cost of JPY 45,294 million primarily for special
termination benefits. In March 2002, Hitachi decided to exit its
telecommunications equipment business in North America, except for the related
after-services, by March 2002, due to the significant downturn in the market and
the bankruptcy of a major customer. In this connection, the Company and certain
subsidiaries disposed of inventories and fixed assets. The charges in connection
with such restructuring amounted to JPY 23,369 million, including accrual of JPY
9,342 million mainly for special termination benefits. The liabilities
recognized were paid by March 2003. Sales in this business line were
approximately JPY 30 billion and operating income was negative. Restructuring
measures related to the telecommunications equipment business were expected to
decrease personnel, depreciation and other costs by approximately JPY 7 billion.
Hitachi believes that it realized substantially such effect in fiscal 2002.
25
Electronic Devices recorded restructuring charges of JPY 82,718 million,
including a cost of JPY 46,301 million primarily for special termination
benefits. Restructuring measures in this segment included withdrawal from the
cathode ray tubes business and realignment of the semiconductor business. In
July 2001, due to intense competition and general overcapacity in the market,
Hitachi decided to shut down several plants and production lines of PC monitors
in Japan, Singapore and Malaysia, and the direct view color TV product line in
the U.S. Consequently, the Company and certain subsidiaries disposed of
inventories and fixed assets. The charges in connection with such restructuring
amounted to JPY 30,412 million, and the amount of JPY 13,921 million for special
termination benefits and JPY 4,851 million mainly for cancellation penalties
were accrued. The liabilities for special termination benefits were paid by
March 2003 and the remaining liabilities were substantially paid by March 2002.
Sales in this business line were approximately JPY 80 billion and operating
income was negative. Restructuring measures related to the cathode ray tubes
business were expected to decrease costs by approximately JPY 21 billion.
Hitachi believes that it realized substantially such effect in fiscal 2002.
In October 2002, Hitachi also decided to realign its semiconductor business by
reorganizing its semiconductor product lines and facilities primarily in Japan.
This realignment was in response to a sharp decline in prices of semiconductor
products and general overcapacity in the market, which was primarily due to a
decline in demand for semiconductor products used in PCs and mobile
communications equipment. With respect to front-end manufacturing processing,
production of semiconductor products on older lines with low utilization rates
was transferred to new lines in order to optimize utilization of certain lines.
As a result, the number of active lines was reduced from 19 to 15 by March 2002,
and from 15 to 13 by December 2002. Also, reorganization and consolidation of
back-end production bases reduced the number of bases from 13 to 11 by March
2002, and from 11 to 9 by March 2003. The associated restructuring charges
amounted to JPY 45,510 million, including accrual of JPY 37,156 million. The
liabilities for special termination benefits in the amount of JPY 28,479 million
were paid out by March 2003, and the liabilities in the amount of JPY 8,677
million incurred mainly for removal costs were substantially paid by March 2002.
These restructuring measures were expected to decrease costs by approximately
JPY 23 billion. Hitachi believes that it realized substantially all of such
effect in fiscal 2002.
Power & Industrial Systems recorded restructuring charges of JPY 53,833 million,
including a cost of JPY 49,723 million primarily for special termination
benefits for employees of the Company and its domestic subsidiaries. The
restructuring measures were implemented in an effort to increase profitability
by reducing fixed costs.
Digital Media & Consumer Products recorded restructuring charges of JPY 39,245
million, including a cost of JPY 21,510 million primarily for special
termination benefits. Affected by the slowdown of the global economy, prices of
color TVs declined due to increased competition. And against this backdrop,
Hitachi sought to strengthen competitiveness of its TV operations on a global
scale by consolidating its manufacturing operations and streamlining sales
channels. As part of its restructuring of digital media and consumer products
operations in the Asian region, Hitachi decided to transfer its product
management, R&D capabilities, manufacturing of color TVs and production of
vacuum cleaners in Singapore to certain subsidiaries in China, Indonesia and
Thailand. In addition, Hitachi decided to liquidate a sales and manufacturing
subsidiary in the U.K. and reorganized sales channels in Europe in February
2002. Hitachi disposed of inventories and fixed assets in the process of
implementing its restructuring measures. The charges in connection with such
restructuring amounted to JPY 9,581 million. The liabilities for special
termination benefits in the amount of JPY 3,634 million were paid by March 2002
and the liabilities for lease termination and others amounted to JPY 2,719
million, which were substantially paid by March 2002. Sales in this business
line were approximately JPY 57 billion and operating income was almost breakeven
in fiscal 2001. These restructuring measures were expected to decrease costs for
personnel and depreciation by approximately JPY 50 billion for the following
fiscal year. Hitachi believes it realized substantially such effect for fiscal
2002.
High Functional Materials & Components recorded restructuring charges of JPY
25,693 million, including a cost of JPY 11,613 million primarily for special
termination benefits. Other restructuring charges were primarily related to the
disposal of fixed assets due to weak demand for IT-related products,
particularly for mobile phone related parts. Restructuring measures in this
segment involved streamlining the product lines mainly in Japan, and shutting
down manufacturing plants in Malaysia and Japan. The charges in connection with
such restructuring amounted to JPY 23,474 million, and liabilities in the amount
of JPY 11,940 million were accrued mainly for special termination benefits. The
liabilities were paid by March 2003. These measures were expected to decrease
costs by approximately JPY 16 billion for the following fiscal year, and Hitachi
believes that it realized substantially such effect in fiscal 2002.
Other segments incurred restructuring charges of JPY 22,817 million, including a
cost of JPY 10,664 million primarily for special termination benefits.
In addition to the restructuring charges above, JPY 46,115 million of impairment
losses for long-lived assets, of which JPY 37,442 million were related to the
semiconductor and display operations, were recognized.
For fiscal 2002, Hitachi did not record any restructuring charges.
26
Fiscal 2001 Compared with Fiscal 2000
Hitachi's total revenues in fiscal 2001 were JPY 7,993,784 million, a decrease
of 5% from the preceding fiscal year. Overseas sales declined 3% over the same
period, to JPY 2,549,122 million.
Revenues in Information & Telecommunication Systems rose 2%, to JPY 1,829,661
million, from the preceding fiscal year primarily as a result of increased sales
of software, systems integration and other services as well as an increase in
sales of large-capacity storage systems, partially offset by a decrease in sales
of telecommunications equipment due to weak demand by telecommunications
carriers. Revenues in Electronic Devices dropped 26%, to JPY 1,487,200 million,
from the preceding fiscal year primarily due to a sharp decline in sales of
semiconductors resulting from a sluggish demand for personal computers and
mobile communications equipment as well as falling semiconductor prices and, to
a lesser degree, due to a decline in sales of liquid crystal displays owing
primarily to falling prices. Revenues in Power & Industrial Systems declined 2%,
to JPY 2,266,895 million, from the preceding fiscal year primarily due to a
decrease in sales of construction machinery and industrial equipment, partially
offset by an increase in sales of nuclear power systems owing to the delivery of
large orders. Revenues in Digital Media & Consumer Products rose 11%, to JPY
1,170,744 million, from the preceding fiscal year primarily due to an increase
in sales of optical storage drives resulting from the establishment of a
consolidated subsidiary jointly with LG Electronics Inc. of the Republic of
Korea. Sales of air conditioners remained largely unchanged from the preceding
fiscal year, while sales of refrigerators and washing machines dropped due to a
decrease in volumes of and prices for such products. Revenues in High Functional
Materials & Components declined 15%, to JPY 1,250,248 million, from the
preceding fiscal year primarily due to a decrease in sales of materials and
components for semiconductors, liquid crystal displays and mobile communications
equipment owing primarily to weak demand for such products. Revenues in
Logistics, Services & Others declined 11%, to JPY 1,430,825 million, from the
preceding fiscal year primarily due to a decrease in sales by consolidated
subsidiaries of semiconductors and liquid crystal displays as well as a decrease
in sales of logistics services. Revenues in Financial Services declined 4%, to
JPY 567,138 million, from the preceding fiscal year primarily due to the slow
pace of the semiconductor manufacturing equipment leasing business and stagnant
demand for personal financial services.
An analysis by geographic segment shows that revenues of the Company and its
consolidated subsidiaries located in Japan dropped 9%, to JPY 7,027,116 million,
from the preceding fiscal year primarily due to decreased demand in the
semiconductor and liquid crystal display markets. Revenues of consolidated
subsidiaries of the Company located in Asia (other than Japan) declined 1%, to
JPY 956,378 million, from the preceding fiscal year primarily owing to flagging
demand for semiconductors and liquid crystal displays. Revenues of consolidated
subsidiaries of the Company located in North America declined 4%, to JPY 876,341
million, from the preceding fiscal year primarily due to a decrease in sales of
semiconductors and IT products, partially offset by an increase in sales of
thermal power station equipment. Revenues of consolidated subsidiaries of the
Company located in Europe dropped 6%, to JPY 397,108 million, from the preceding
fiscal year primarily due to a decrease in sales of semiconductors and liquid
crystal displays. Revenues of consolidated subsidiaries of the Company located
in Other Areas increased 9%, to JPY 58,749 million, from the preceding fiscal
year.
Hitachi's cost of sales during fiscal 2001 amounted to JPY 6,184,396 million,
approximately the same as the preceding fiscal year. The ratio of cost of sales
to total revenues increased 4% from the preceding fiscal year, to 77%, due to a
drop in total revenues. Selling, general and administrative expenses amounted to
JPY 1,926,803 million, approximately the same as the preceding fiscal year, and
was 24% of total revenues.
Hitachi recorded impairment losses for long-lived assets in the amount of JPY
46,115 million due primarily to the significant decline in demand for and prices
of semiconductor products. Restructuring charges increased significantly, to JPY
288,096 million, from JPY 8,814 million in the preceding fiscal year. For a
description of the restructuring charges, see "Restructuring."
Interest income declined 31% from the preceding fiscal year, to JPY 22,481
million, due in part to a decline in interest rates. Dividends received
decreased 36% from the preceding fiscal year, to JPY 6,134 million, mainly due
to lower dividend payments by companies in which Hitachi invests because of the
weak business performance of certain of those companies. Other income amounted
to JPY 7,424 million, consisting of foreign exchange gain, compared to JPY
27,544 million in the preceding fiscal year, which included net gain on
securities in the amount of JPY 9,334 million, JPY 15,651 million of gross
realized gains on contributions of available-for-sale securities to pension fund
trusts and JPY 2,559 million of equity in earnings of affiliated companies.
Interest charges declined 22% from the preceding fiscal year, to JPY 45,830
million, due in part to a decline in borrowings. Other deductions increased
significantly, to JPY 124,655 million, from JPY 20,697 million in the preceding
fiscal year primarily due to a net loss on securities in the amount of JPY
80,938 million. Equity in earnings of affiliated companies included in other
deductions posted a net loss of JPY 35,756 million primarily due to the poor
results by affiliated companies engaged in the semiconductor business.
A loss before income taxes and minority interests in fiscal 2001 amounted to JPY
586,072 million compared to income before income taxes and minority interests of
JPY 323,655 million in the preceding fiscal year. Net loss was JPY 483,837
million in fiscal 2001, compared to net income of JPY 104,380 million in the
preceding fiscal year.
27
Fiscal 2002 Compared with Fiscal 2001
Hitachi's total revenues in fiscal 2002 were JPY 8,191,752 million, an increase
of 2% from the preceding fiscal year. Overseas sales increased 4% over the same
period, to JPY 2,645,209 million.
Revenues in Information & Telecommunication Systems rose 4%, to JPY 1,899,651
million, from the preceding fiscal year, due primarily to two factors. First,
sales of hard disk drives and disk array systems increased, reflecting steady
demand from business enterprises. Second, sales of systems integration and other
services increased. Increased sales of these products and services, however,
were partially offset by a decrease in sales of telecommunications equipment due
to weak demand by telecommunications carriers. Revenues in Electronic Devices
rose 6%, to JPY 1,570,069 million, from the preceding fiscal year primarily due
to two factors. First, sales of system LSIs increased, most notably
microcontrollers for automotive applications and liquid crystal display drivers
for mobile phones. In addition, sales of small and medium-size liquid crystal
displays increased due to expansion in demand for mobile phones with color
liquid crystal display panels. Increased sales of these products, however, were
partially offset by a decline in sales of cathode ray tubes for PC monitors due
to Hitachi's withdrawal from such business. Revenues in Power & Industrial
Systems increased 1%, to JPY 2,297,068 million, from the preceding fiscal year
primarily as a result of an increase in sales of construction machinery, driven
by vigorous demand in overseas markets, particularly in China, and automotive
products, as a result of the consolidation of UNISIA JECS CORPORATION through an
exchange of shares. Increased sales of these products, however, were partially
offset by a decrease in sales of industrial equipment due to sluggish
private-sector plant and equipment investment in Japan and maintenance services
for power plants. Revenues in Digital Media & Consumer Products rose 3%, to JPY
1,205,551 million, from the preceding fiscal year primarily due to an increase
in sales of optical storage products, plasma display TVs and batteries for
mobile phones because of growth in demand for such products. Increased sales of
these products, however, were partially offset by a decrease in sales of air
conditioners and refrigerators because of a fall in prices for such products.
Revenues in High Functional Materials & Components amounted to JPY 1,248,550
million, approximately the same as the preceding fiscal year. An increase in
sales of materials and components for semiconductors and liquid crystal displays
due primarily to steady demand for such products was partially offset by a
decline in sales of submarine fiber-optic cables and other cables and wires.
Revenues in Logistics, Services & Others increased 1%, to JPY 1,449,594 million,
from the preceding fiscal year primarily due to an increase in sales of
information-related products by overseas trading companies as well as increased
sales of logistics services. Increased sales of these products and services,
however, were partially offset by the absence of sales from a subsidiary engaged
in monorail passenger service operations, since this subsidiary was sold during
fiscal 2001. Revenues in Financial Services increased 2%, to JPY 579,267
million, from the preceding fiscal year due to inclusion of sales of a leasing
company acquired during fiscal 2001 as well as the inclusion of large orders for
leased software. These sales were partially offset by the slow pace of the
leasing business for corporate clients and stagnant demand for personal
financial services.
An analysis by geographic segment shows that revenues of the Company and its
consolidated subsidiaries located in Japan rose 4%, to JPY 7,317,570 million,
from the preceding fiscal year primarily due to the firm growth in information
systems business, notably systems integration, as well as the rebound of
semiconductors. Revenues of consolidated subsidiaries of the Company located in
Asia (other than Japan) rose 5%, to JPY 1,002,234 million, from the preceding
fiscal year primarily due to an increase in sales of information-related
products, notably hard disk drives. Revenues of consolidated subsidiaries of the
Company located in North America declined 4%, to JPY 841,335 million, from the
preceding fiscal year primarily due to a decrease in sales of power generation
equipment, partially offset by an increase in sales of storage-related
businesses. Revenues of consolidated subsidiaries of the Company located in
Europe increased 3%, to JPY 407,997 million, from the preceding fiscal year
primarily due to an increase in sales of hard disk drives partially offset by a
decrease in sales of semiconductors and liquid crystal displays. Revenues of
consolidated subsidiaries of the Company located in Other Areas increased 20%,
to JPY 70,318 million, from the preceding fiscal year.
28
Hitachi's cost of sales during fiscal 2002 amounted to JPY 6,240,493 million, an
increase of 1% from the preceding fiscal year. The ratio of cost of sales to
total revenues decreased 1% from the preceding fiscal year, to 76%, due in part
to Hitachi's efforts to reduce materials purchasing costs. Selling, general and
administrative expenses declined 7%, to JPY 1,798,292 million, from the
preceding fiscal year due in part to the restructuring measures Hitachi took
during the preceding fiscal year to reduce fixed costs. The ratio of selling,
general and administrative expenses to total revenues also decreased 2% from the
preceding fiscal year, to 22%.
In fiscal 2002, Hitachi recorded impairment losses for long-lived assets in the
amount of JPY 8,474 million, the majority of which were recorded with respect to
the Company's equipment which provides semiconductor product development and
design services.
Interest income declined 37% from the preceding fiscal year, to JPY 14,158
million, primarily due to a decrease in financial assets held by the Company and
a decline in U.S. interest rates. Dividends received increased 45% from the
preceding fiscal year, to JPY 8,921 million, mainly because of increased
dividend payments by companies in which Hitachi invests, due, in turn, to
recovery in business performance of certain of those companies. Other income
amounted to JPY 23,658 million, consisting of net gain on sale and disposal of
rental assets and other property, compared to JPY 7,424 million consisting of
foreign exchange gain in the preceding fiscal year.
Interest charges declined 25% from the preceding fiscal year, to JPY 34,338
million, primarily due to a decrease in borrowings and a decline in U.S.
interest rates. Other deductions declined significantly, to JPY 60,064 million,
from JPY 124,655 million in the preceding fiscal year primarily due to a
decrease in a net loss on securities from the preceding fiscal year. Hitachi
recorded a net periodic benefit cost of JPY 24,857 million as other deductions
for fiscal 2002 due to its adoption of Emerging Issues Task Force (EITF) Issue
No.03-2, "Accounting for the Transfer to the Japanese Government of the
Substitutional Portion of Employee Pension Fund Liabilities," which provides
guidance with respect to accounting for transfer of the substitutional portion
of the Employee Pension Fund to the Japanese government. This cost arose from
the remeasurement of the substitutional portion of the benefit obligation by the
Company and certain subsidiaries in accordance with the EITF. For additional
information on the accounting treatment of the transfer of the substitutional
portion of the Employee Pension Fund to the Japanese government, see note (10)
to the consolidated financial statements. Equity in earnings of affiliated
companies included in other deductions reflected a net loss of JPY 15,803
million, compared to a net loss of JPY 35,756 million in the preceding fiscal
year, primarily due to the poor results of affiliated companies engaged in the
semiconductor memories business. A net loss on securities included in other
deductions amounted to JPY 660 million, compared to a net loss of JPY 80,938
million in the preceding fiscal year. In addition, other deductions include a
foreign exchange loss of JPY 18,262 million, primarily due to the appreciation
of the Japanese yen during fiscal 2002.
Income before income taxes and minority interests in fiscal 2002 amounted to JPY
96,828 million, compared to a loss before income taxes and minority interests of
JPY 586,072 million in the preceding fiscal year.
Income taxes in fiscal 2002 amounted to an expense of JPY 52,662 million,
compared to a benefit of JPY 71,114 million in the preceding fiscal year.
Minority interests in fiscal 2002 amounted to income of JPY 16,299 million,
which decreased net income by the same amount, compared to a loss of JPY 31,121
million in the preceding fiscal year.
Net income in fiscal 2002 was JPY 27,867 million, compared to a net loss of JPY
483,837 million in the preceding fiscal year.
29
B. Liquidity and Capital Resources
The analysis made in this Item covers the three-year period from fiscal 2000 to
fiscal 2002. Management considers maintaining an appropriate level of liquidity
and securing adequate funds for current and future business operations to be
important financial objectives. Through efficient management of working capital
and selective investment in new plant and equipment, Hitachi is working to
optimize the efficiency of capital utilization throughout its business
operations. Hitachi endeavors to improve its cash management by centralizing
such management within its group. Hitachi's internal sources of funds include
cash flows generated by operating activities and cash on hand. Management also
considers short-term investments as an immediately available source of funds. In
addition, Hitachi raises funds both directly from the capital markets and
indirectly from Japanese and international commercial banks.
Net cash provided by operating activities was JPY 646,518 million, JPY 482,866
million and JPY 535,433 million in fiscal 2002, 2001 and 2000, respectively. The
increase in fiscal 2002 was caused primarily by posting net income compared to a
large net loss in the preceding fiscal year. This increase was partially offset
by a decrease in accrued expenses and retirement and severance benefits due to
special severance payments arising during fiscal 2002 under the early retirement
program implemented in the preceding fiscal year. The decrease in fiscal 2001
was caused primarily by posting a large net loss, partially offset by a
reduction in receivables and inventories under a project aimed at improving
turnover of assets.
Net cash used in investing activities was JPY 619,285 million, JPY 272,871
million and JPY 370,717 million in fiscal 2002, 2001 and 2000, respectively. The
increase in fiscal 2002 was due in part to an increase in purchase of
investments and subsidiaries' common stock arising from Hitachi's purchase of
hard disk drive operations from IBM and new shares of Elpida Memory, Inc. Cash
flows for capital expenditures and purchase of assets to be leased during fiscal
2002, 2001 and 2000 were JPY 782,861 million, JPY 874,766 million and JPY
995,727 million, respectively. The decrease in capital expenditures in fiscal
2002 reflects Hitachi's more stringent selection of capital investment and the
decrease in fiscal 2001 reflects Hitachi's curbing of expenditures in the
semiconductor field. Management's policy is to finance capital expenditures
primarily by internally generated funds and to a lesser extent by funds raised
by the issuance of debt and equity securities in domestic and foreign capital
markets. Management has made more selective capital expenditures for recent
years in order to conserve capital while maintaining the ability to grow in
competitive markets. As of March 31, 2003, Hitachi's capital commitments for the
purchase of property, plant and equipment amounted to JPY 30,214 million.
Net cash used in financing activities was JPY 207,170 million, JPY 578,112
million and JPY 159,507 million in fiscal 2002, 2001 and 2000, respectively.
These outflows in financing activities were chiefly due to Hitachi's efforts to
reduce interest-bearing debt by improving cash management within the Company and
its subsidiaries. In fiscal 2002, proceeds from long-term debt amounted to JPY
375,802 million, a decrease of JPY 197,571 million from fiscal 2001, while
payments on long-term debt amounted to JPY 547,759 million compared to JPY
743,385 million in fiscal 2001. In fiscal 2002, proceeds from sale of common
stock by subsidiaries were JPY 1,872 million, compared to JPY 42,466 million in
fiscal 2001, which consisted primarily of proceeds from the issuance of common
stock by OpNext, Inc. As part of its business strategy, the Company may take one
of its wholly-owned subsidiaries public through an issuance of the stock of such
subsidiary.
Hitachi relies for its liquidity principally on cash and other working capital
as well as bond issuances, bank loans and other uncommitted sources of
financing. While Hitachi has maintained committed facilities for issuing
commercial paper in the U.S. market, the aggregate amount of such facilities is
limited. In fiscal 2002, the Company concluded commitment line agreements with a
number of banks under which the Company may borrow any amount it requires up to
a total of JPY 120,000 million in order to ensure efficient access to operating
funds. The commitment line agreements generally provide for a one-year term,
renewable upon mutual agreement between the Company and each of the lending
banks. Certain of its subsidiaries also hold lines of credit arrangements. The
unused lines for the Company and its subsidiaries totaled to JPY 147,042 million
as of March 31, 2003.
At the end of fiscal 2002, the total of Hitachi's short-term debt and long-term
debt amounted to JPY 2,840,598 million, a decrease of JPY 157,626 million from
at the end of fiscal 2001. The decrease was chiefly due to Hitachi's efforts to
reduce interest-bearing debt. Short-term debt totaled JPY 825,860 million,
consisting of borrowings mainly from banks and commercial paper. Long-term debt
was JPY 1,512,152 million, mainly
30
consisting of debentures, convertible debentures and loans principally from
banks and insurance companies. Current installments of long-term debt came to
JPY 502,586 million. Hitachi's debt is not significantly affected by seasonal
factors. In general, there are no material restrictions on Hitachi's use of
borrowings. For further details including the maturity and interest rates, see
note (9) to the consolidated financial statements.
The Company's current debt ratings (long-term/short-term) are: A2/P-1 by
Moody's; A-/A-1 by S & P; and AA-/a-1+ by R&I. With its current ratings, the
Company believes that its access to the global capital markets will remain
sufficient for its financing needs. However, the downgrade of its debt ratings
is likely to increase the cost of debt finance by the Company. Hitachi seeks to
maintain a stable credit rating in order to ensure financial flexibility for
liquidity and capital management, and to continue to maintain access to
sufficient funding resources through capital markets.
In fiscal 2002, the above activities and the effect of foreign exchange rate
fluctuations decreased cash and cash equivalents by JPY 201,203 million from
fiscal 2001. Cash and cash equivalents at the end of fiscal 2002 amounted to JPY
828,171 million, primarily held in Japanese yen and a substantial part in U.S.
dollars. Short-term investments, the change of which is classified as investing
activities, are considered as an immediately available source of funds.
Short-term investments at the end of fiscal 2002 amounted to JPY 186,972
million, an increase of JPY 8,039 million from at the end of fiscal 2001. As a
result of the foregoing, the total of cash and cash equivalents and short-term
investments at the end of fiscal 2002 was JPY 1,015,143 million, a decrease of
JPY 193,164 million from at the end of fiscal 2001.
The transfer of funds from a subsidiary to a parent company in the form of cash
dividends is restricted pursuant to the Commercial Code of Japan or regulatory
requirements of foreign countries where such subsidiary is located. Although the
Company's subsidiaries are subject to such restrictions, Hitachi does not expect
such restrictions to have a significant impact on the ability of Hitachi to meet
its cash obligations.
Management believes that Hitachi's current financial position including working
capital as indicated by these figures is adequate for its present requirements
and business operations, and is seeking to ensure that the level of liquidity
and the access to capital resources be maintained in order to successfully
conduct its future operations in highly competitive markets.
The Company and its subsidiaries assess foreign currency exchange rate risk and
interest rate risk by continually monitoring changes in these exposures and by
evaluating hedging opportunities. Hitachi uses certain derivative financial
instruments in order to reduce such risks, and does not enter into derivative
financial instruments for any purpose other than hedging. For additional
information on financial instruments and derivative financial instruments, see
notes (22) and (24) to the consolidated financial statements.
Pursuant to the provisions of Article 210 of the Commercial Code of Japan, the
Company, at the Tokyo Stock Exchange, purchased 66,338,000 shares of its own
common stock for the aggregate amount of JPY 29,934 million during May 2003.
In May 2003, the Company issued unsecured debentures in the amount of JPY 80,000
million. The debentures mature in ten years and the coupon rate is 0.72%. The
procured funds are used primarily for redemption of convertible debentures.
In June 2003, the Company announced that it reached an agreement with its labor
union on a basic framework for pension plan reform centered on the introduction
of the cash balance plan. Under the cash balance plan, the pension benefit
obligation is adjusted automatically in correlation to market interest trends.
The Company expects that the cash balance plan will enable stable administration
of its pension system and reduce the impact of interest rate and stock market
volatility on Hitachi's financial results.
In July and August 2003, Hitachi sold most of its shares of NITTO DENKO
CORPORATION, which was accounted for under the equity method by Hitachi, for the
aggregate amount of approximately JPY 140 billion.
31
The proceeds of such sales are expected to be used to secure funding for
Hitachi's implementation of its business portfolio realignment and to increase
Hitachi's focus on targeted businesses.
The following tables show Hitachi's contractual obligations and other commercial
commitments as of March 31, 2003.
Payments due by period
--------------------------------------------------------------------------
Contractual Less than After
obligations Total 1 year 1-3 years 4-5 years 5 years
-----------------------------------------------------------------------------------------------------
(Millions of yen)
Long-term debt 1,994,671 497,450 915,047 289,420 292,754
Capital lease obligations 20,067 5,136 6,935 3,763 4,233
Operating leases 44,292 13,174 17,450 5,090 8,578
-----------------------------------------------------------------------------------------------------
March 31
Other commercial ----------------------
commitments 2003
-----------------------------------------------------
(Millions of yen)
Lines of credit 662,737
Purchase of property, plant
and equipment 30,214
Trade notes discounted
and endorsed 28,563
Guarantees 628,627
-----------------------------------------------------
See note (15) to the consolidated financial statements.
Off-balance Sheet Arrangements
Hitachi uses off-balance sheet Special Purpose Entities (SPE) to securitize and
sell certain trade and lease receivables. The purpose of such securitization
transactions is to enable Hitachi to access the capital markets for liquidity.
In these securitizations, trade and lease receivables are sold to the SPE which
are in turn packaged mainly into asset-backed commercial papers by the SPE for
sale to third party investors. In certain securitizations, the SPE require
Hitachi to retain subordinated residual interests to the investors. These
retained subordinated residual interests are not material. The SPE and the
investors have no recourse to Hitachi when there are failures by the debtors of
trade and lease receivables to pay when due. Accordingly, Hitachi's contingent
liability exposure is limited to the retained subordinated residual interests.
No officers, directors or employees of Hitachi have any investments in the SPE.
The SPE meet the accounting criteria for off-balance sheet treatment and are not
consolidated under generally accepted accounting principles in the United States
of America.
32
The amount of off-balance sheet arrangements as of March 31, 2003 is as follows:
March 31
--------------------
2003
----------------------------------------------------------
(Millions of yen)
Securitized lease receivables 382,861
Securitized trade receivables 291,223
----------------------------------------------------------
Total 674,084
----------------------------------------------------------
See note (1) (f) to the consolidated financial statements.
C. Research and Development
Viewing research and development (R&D) activity as a key investment for the
future, Hitachi conducts its R&D in a number of areas from materials to
production technology. Hitachi focuses on basic R&D with a long-term vision but
also strives to achieve more immediate benefits by introducing new products.
Hitachi's R&D expenditures amounted to JPY 435,579 million in fiscal 2000, JPY
415,448 million in fiscal 2001 and JPY 377,154 million in fiscal 2002. The ratio
of R&D expenditures to total revenues remained at approximately 5% over these
three years. The decreases in fiscal 2001 and fiscal 2002 reflect Hitachi's more
stringent selection of R&D activities.
Hitachi recognizes the importance of the Information & Telecommunication Systems
segment and the Electronic Devices segment as sources of new technologies that
can be applied to other segments. Therefore, Hitachi places emphasis on these
segments in allocating R&D resources. In fiscal 2002, expenditures in the
Information & Telecommunication Systems segment and the Electronic Devices
segment accounted for 32% and 28% of total R&D expenditures, respectively.
To achieve higher efficiency, Hitachi has reinforced the link between R&D
activities and marketing activities under the control of each business operation
while maintaining its focus on long-term research at independent corporate
laboratories. Hitachi's global R&D activities include cooperation with
universities and companies in the U.S. and Europe.
D. Trend Information
In fiscal 2001, Hitachi's business results significantly deteriorated due
primarily to global economic slowdowns and worldwide decline in demand for
IT-related products. In the face of the difficult business environment, during
fiscal 2001, Hitachi implemented management measures to raise management
efficiency and strengthen competitiveness. The measures include the withdrawal
from unprofitable businesses, the reorganization and streamlining of production
bases and facilities and the introduction of an early retirement benefits
program.
In January 2003, Hitachi launched a new medium-term management plan defining the
direction and goals of its businesses through the fiscal year ending March 31,
2006. The plan includes, among other things, a realignment of Hitachi's business
portfolio which may be implemented by exiting certain businesses, increasing
focus on targeted businesses and creating new businesses in an effort to achieve
increased profitability and alteration of its corporate governance structure in
an effort to improve the efficiency and transparency of management. In addition,
under the plan, Hitachi expects to pursue further growth in the global markets
by identifying competitive businesses and channeling management resources into
those businesses. Hitachi also expects under the plan to
33
continue to improve cash-flow management by increasing the efficiency of working
capital use while making selective investments, and further to reduce
procurement costs. See "Item 4. Information on the Company - A. History and
Development of the Company" and "Item 6. Directors, Senior Management and
Employees."
In December 2002, the Company purchased a majority ownership in a
newly-established company to which IBM's hard disk drive operations were
transferred. The new company, a majority-owned subsidiary of the Company,
commenced operations on January 1, 2003. The sales of the new company are
expected to be included in Hitachi's consolidated statement of income for the
fiscal year ending March 31, 2004. In April 2003, the Company transferred its
semiconductor operations centered in system LSIs to a new company, Renesas,
incorporated jointly by the Company and Mitsubishi. The new company is expected
to be accounted for under the equity method by the Company which will likely
result in the sales of such operations, included in Hitachi's consolidated
statement of income for the fiscal year ended March 31, 2003, to be excluded in
the fiscal year ending March 31, 2004.
Management believes that the Japanese economy is unlikely to stage any
significant recovery for some time and that an upturn in the U.S. economy is
uncertain. Under continuing difficult business circumstances, Hitachi expects
total revenues for the fiscal year ending March 31, 2004 to decrease, due in
part to the transfer of its semiconductor operations to Renesas, as described in
the preceding paragraph. In addition, Hitachi expects net income for the fiscal
year ending March 31, 2004 to decrease, due in part to poor results from its
hard disk drive operations.
Factors that could cause actual results to differ materially from those expected
or implied in any forward-looking statements in this section include, but are
not limited to, rapid and significant declines in product prices and uncertainty
as to Hitachi's ability to implement restructuring measures. In addition, see
"Cautionary Statement" beginning on page 2 and "Item 3. Key Information - D.
Risk Factors" for other examples of factors that could cause actual results to
differ materially from those anticipated.
E. Critical Accounting Policies
The preparation of the consolidated financial statements of Hitachi in
conformity with accounting principles generally accepted in the United States
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. Certain accounting estimates
are particularly sensitive because of their significance to the financial
statements and because of the possibility that future events affecting the
estimate may differ significantly from management's current judgments.
Management considers the accounting estimates discussed in this section to be
critical accounting estimates for two reasons. First, the estimates require
Hitachi to make assumptions about matters that are highly uncertain at the time
the accounting estimate is made. Second, different estimates that Hitachi
reasonably could have used for the accounting estimate in the current period, or
changes in the accounting estimate that are reasonably likely to occur from
period to period, could have a material impact on the presentation of Hitachi's
financial condition, changes in financial condition or results of operations.
Management believes the following represents Hitachi's critical accounting
policies.
Impairment of long-lived assets
Hitachi reviews the carrying value of its long-lived assets held and used, and
intangible assets that do not have indefinite useful lives, whenever events or
changes in circumstances indicate that the carrying value of the assets may not
be recoverable. Hitachi performs the initial impairment review using estimates
of undiscounted future cash flows. If the carrying value of the asset is
considered impaired based upon the review, an impairment charge is recorded for
the amount by which the carrying value of the asset exceeds its estimated fair
value. Although management believes that the estimates of future cash flows and
fair value are reasonable, changes in estimates resulting in lower future cash
flows and fair value due to unforeseen changes in business assumptions
34
could negatively affect the valuations of the long-lived assets.
Goodwill and other intangible assets
All goodwill and other intangible assets with indefinite useful lives are not
amortized but are tested for impairment in accordance with SFAS No.142,
"Goodwill and Other Intangible Assets," on an annual basis or between annual
tests if an event occurs or circumstances change in a manner that would more
likely than not reduce the fair value of these assets below their carrying
value. Fair value for these assets is determined using a discounted cash flow
analysis, which is based on various assumptions, including forecasted
operational results set forth in Hitachi's authorized business plan. Although
management believes that the estimates of future cash flows and fair value are
reasonable, changes in estimates resulting in lower future cash flows and fair
value due to unforeseen changes in the business environment could negatively
affect the valuations and the amount of the impairment charge. Goodwill and
other intangible assets with indefinite useful lives acquired after June 30,
2001 but prior to the adoption of SFAS No.142 on April 1, 2002 are not amortized
but are reviewed for impairment in accordance with Accounting Principles Board
Opinion (APB) No. 17 and SFAS No.121.
Deferred tax assets
In assessing the realizability of the deferred tax assets, the management
considers whether it is more likely than not that a portion or all of the
deferred tax assets will not be realized. The ultimate realization of Hitachi's
deferred tax assets is dependent on whether Hitachi is able to generate future
taxable income in specific tax jurisdictions during the periods in which
temporary differences become deductible. Management has scheduled the expected
future reversals of the temporary differences and projected future taxable
income in making this assessment. Based on these factors, management believes
that it is more likely than not that Hitachi will realize the benefits of these
temporary differences, net of the existing valuation allowance as of March 31,
2003. However, the amount of deferred tax assets may be different if Hitachi
does not realize estimated future taxable income during the carry forward
periods as originally expected.
Retirement benefits
Hitachi has a significant amount of employee retirement benefit costs which are
developed from actuarial valuations. Inherent in these valuations are key
assumptions in estimating pension costs including mortality, withdrawal,
disablement and retirement, changes in compensation, discount rate and expected
return on plan assets. Hitachi is required to estimate the key assumptions by
taking into account various factors including personnel demographics, current
market conditions and expected trends in interest rates. Hitachi determines the
discount rate by looking to available information about rates implicit in return
on high-quality fixed-income governmental and corporate bonds. Accordingly, the
discount rate is likely to change from period to period based on these ratings.
A decrease in the discount rate results in an increase in actuarial pension
benefit obligations. Increases and decreases in the pension benefit obligation
affect the amount of the actuarial gain or loss which is amortized into income
over the service lives of employees. A decrease in the expected return on plan
assets would increase the pension benefit obligation. Changes in the key
assumptions may have a material effect on Hitachi's financial position and
results of operations. Management believes that estimation of the key
assumptions is reasonable under the various underlying factors.
Allowance for doubtful accounts
Hitachi is required to estimate the collectibility of its notes and accounts
receivable. A considerable amount of judgment is required in assessing the
ultimate realization of these receivables, including the current
creditworthiness of each customer. Such assessment includes an examination of
factors such as business conditions, turnover of receivables and financial
positions for significant customers. Significant changes in required reserves
have been recorded in recent periods and may occur in the future due to the
current market environment. Any deterioration in customer credit rating may
adversely affect net income.
Investments in securities
Hitachi holds various investments in securities and equity method investments. A
decline in fair value of securities and equity method investments below carrying
value that is deemed other than temporary results in a write-down of the
carrying value to the fair value as a new cost basis. The amount of the
write-down is included
35
in earnings. Management regularly reviews each investment in security and equity
method investment for possible impairment based on criteria such as the extent
to which the carrying value exceeds market value, the duration of that market
decline and the financial condition of and specific prospects of the issuer.
F. New Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS No.
143, "Accounting for Asset Retirement Obligations," which addresses financial
accounting and reporting for obligations associated with the retirement of
tangible long-lived assets and the related asset retirement costs. The standard
applies to legal obligations associated with the retirement of long-lived assets
that result from the acquisition, construction, development and (or) normal use
of the asset. SFAS No. 143 requires that the fair value of a liability for an
asset retirement obligation be recognized in the period in which it is incurred
if a reasonable estimate of fair value can be made. Hitachi is required and
plans to adopt the provisions of SFAS No. 143 for the fiscal year beginning
April 1, 2003. SFAS No. 143 will have no material impact on Hitachi's
consolidated financial position or results of operations.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." This statement addresses financial accounting
and reporting for costs associated with exit or disposal activities and
nullifies the FASB's Emerging Issues Task Force (EITF) Issue No. 94-3,
"Liability Recognition for Certain Employee Termination Benefits and Other Costs
to Exit an Activity (including Certain Costs Incurred in a Restructuring)." SFAS
No. 146 applies to costs associated with an exit activity that does not involve
an entity newly acquired in a business combination covered by EITF Issue No.
95-3, "Recognition of Liabilities in Connection with a Purchase Business
Combination," or with a disposal activity covered by SFAS No. 144. This
statement requires that a liability for a cost associated with an exit or
disposal activity be recognized when the liability is incurred and measured at
fair value. The provisions of the statement are effective for exit or disposal
activities that are initiated after December 31, 2002. The adoption of this
statement did not have a material effect on Hitachi's financial position or
results of operations.
In January 2003, FASB issued Interpretation No. 46, "Consolidation of Variable
Interest Entities, an interpretation of ARB No. 51." This interpretation
addresses the consolidation by business enterprises of variable interest
entities as defined in the interpretation. The interpretation applies
immediately to variable interests in variable interest entities created and
acquired after January 31, 2003. For variable interest in a variable interest
entity created before February 1, 2003, the interpretation is applicable no
later than the beginning of the first interim or annual reporting period
beginning after June 15, 2003. The application of this interpretation did not
have a material effect on Hitachi's consolidated financial statements for the
year ended March 31, 2003 and is not expected to have a material effect for the
year ending March 31, 2004.
36
Item 6. Directors, Senior Management and Employees
A. Directors and Senior Management
The Company, by special resolution of the general meeting of shareholders held
on June 25, 2003, adopted a new corporate governance structure (the "Committee
System") recently permitted as a form of corporate organization pursuant to the
amended Commercial Code and the amended Law for Special Exceptions to the
Commercial Code Concerning Audit, etc. of Kabushiki-Kaisha of Japan (together,
hereinafter referred to as the "Commercial Code"). Each company adopting the
Committee System, such as the Company, is required to establish within its board
of directors a nominating, audit and compensation committee, a majority of the
members of each of which must be outside directors who are not executive
officers of the company, and to have executive officers responsible for
executing the business of the company. The Commercial Code defines an outside
director of a company as a director who is not engaged in the business affairs
of the company and has never assumed the position of executive director (a
director who is engaged in the business affairs of a company), executive
officer, manager or employee of the company or its subsidiaries, and who does
not currently assume the position of executive director or executive officer of
its subsidiaries or the position of manager or employee of the company or its
subsidiaries. Under the Committee System, a company is not allowed to have
corporate auditors but is instead required to delegate auditing function
responsibilities to the audit committee. For more information, see "C. Board
Practices" below.
Set forth below are the names of the Company's Directors and Executive Officers
as of September 1, 2003. All Directors were elected at the Company's general
meeting of shareholders held on June 25, 2003. Three Directors, Mr. Etsuhiko
Shoyama, Mr. Yoshiki Yagi and Mr. Yoshiro Kuwata, concurrently assume the office
of Executive Officer. Ms. Ginko Sato, Mr. Hiromichi Seya, Mr. Akira Chihaya and
Mr. Toshiro Nishimura are outside Directors who fulfill the qualification
requirements as provided for in the provision of the Commercial Code. All
Executive Officers were subsequently appointed at the meeting of the Board of
Directors held on June 25, 2003.
Directors
Current position and principal Business experience, including
Name position outside the Company experience in the Company, and functions
---- ---------------------------- ----------------------------------------
(Date of birth)
Tsutomu Kanai Chairman of the Board and 5/1958 Joined Hitachi, Ltd.
(Feb. 26, 1929) Director 6/1985 Group Executive, Power Group
Executive Managing Director
6/1987 Senior Executive Managing Director
6/1989 Executive Vice-President and Director
6/1991 President and Director
4/1999 Chairman of the Board and Director
Etsuhiko Shoyama President and Chief Executive 4/1959 Joined Hitachi, Ltd.
(Mar. 9, 1936) Officer 6/1991 General Manager, Consumer Electronics
Director Division
Director
6/1993 Executive Managing Director
6/1995 Senior Executive Managing Director
6/1997 Executive Vice-President and Director
4/1999 President and Director
6/2003 President, Chief Executive Officer and Director
37
Current position and principal Business experience, including
Name position outside the Company experience in the Company, and functions
---- ---------------------------- ----------------------------------------
(Date of birth)
Yoshiki Yagi Executive Vice President and 4/1960 Joined Hitachi, Ltd.
(Feb. 27, 1938) Executive Officer 6/1988 General Manager, Accounting Controls Dept.
Director 6/1991 Director
6/1993 Executive Managing Director
6/1997 Senior Executive Managing Director
4/1999 Executive Vice President and Director
6/2003 Executive Vice President, Executive Officer and
Director
Yoshiro Kuwata Executive Vice President and 6/1961 Joined Hitachi, Ltd.
(Sep. 1, 1936) Executive Officer 7/1992 General Manager, Overseas Operations
Director Promotion Office
6/1993 Director
6/1995 Executive Managing Director
6/1997 Senior Executive Managing Director
4/1999 Executive Vice President and Director
6/2003 Executive Vice President, Executive Officer and
Director
Shigemichi Matsuka Director 4/1961 Joined Hitachi, Ltd.
(May 19, 1937) 6/1989 General Manager, Omika Works
6/1991 Director
6/1993 Executive Managing Director
6/1997 Senior Executive Managing Director
4/1999 Executive Vice President and Director
4/2001 Director
6/2001 Corporate Auditor
6/2003 Director
Kotaro Muneoka Director 4/1964 Joined Hitachi, Ltd.
(Oct. 30, 1940) 6/1997 General Manager, Corporate Personnel &
Education Dept.
Director
4/1999 Senior Vice President and Director
4/2001 Director
6/2001 Corporate Auditor
6/2003 Director
Ginko Sato Director 7/1990 Assistant Minister of Labour
(Jul. 6, 1934) 10/1991 Ambassador Extraordinary and Plenipotentiary of
President, Japan Association for Japan to Kenya
the Advancement of Working Women 7/1995 Commissioner, Securities and Exchange
Surveillance Commission
7/1998 Chairperson, Securities and Exchange
Surveillance Commission
8/2001 President, Japan Association for the
Advancement of Working Women
6/2003 Director
Hiromichi Seya Director 3/1992 President, Asahi Glass Company, Limited
(Oct. 7, 1930) 6/1998 Chairman & CEO, Asahi Glass Company, Limited
Chairman of the Board, Asahi 6/2002 Chairman of the Board, Asahi Glass Company,
Glass Company, Limited Limited
6/2003 Director
38
Current position and principal Business experience, including
Name position outside the Company experience in the Company, and functions
---- ---------------------------- ----------------------------------------
(Date of birth)
Akira Chihaya Director 4/1998 Representative Director and President, NIPPON
(Mar. 6, 1935) STEEL CORPORATION
Representative Director and 4/2003 Representative Director and Chairman of the
Chairman of the Board, NIPPON Board, NIPPON STEEL CORPORATION
STEEL CORPORATION 6/2003 Director
Toshiro Nishimura Director 4/1961 Member of the First Tokyo Bar Association
(Apr. 10, 1933) 5/1966 Senior Partner of Nishimura & Partners
Attorney at Law 6/2003 Director
Hiroshi Kuwahara Director 4/1960 Joined Hitachi, Ltd.
(Nov. 23, 1935) 6/1989 General Manager, Industrial Processing Division
Chairman of the Board and Director
Representative Executive 6/1991 Executive Managing Director
Officer, Hitachi Maxell, Ltd. 6/1993 Senior Executive Managing Director
6/1995 Executive Vice-President and Director
6/1999 Vice Chairman of the Board and Director
1/2001 Director
Executive member of Council for Science &
Technology Policy, Cabinet Office
1/2003 Vice Chairman of the Board and Director
4/2003 Director
6/2003 Chairman of the Board and Representative
Executive Officer, Hitachi Maxell, Ltd.
Takashi Kawamura Director 4/1962 Joined Hitachi, Ltd.
(Dec. 19, 1939) 6/1992 General Manager, Hitachi Works
Chairman of the Board and 6/1995 Director
Representative Executive 6/1997 Executive Managing Director
Officer, Hitachi Software 4/1999 Executive Vice President and Director
Engineering Co., Ltd. 4/2003 Director
6/2003 Chairman of the Board and Representative
Executive Officer, Hitachi Software Engineering
Co., Ltd.
Masayoshi Hanabusa Director 6/1991 President and Representative Director, Hitachi
(Oct. 10, 1934) Credit Corporation (currently Hitachi Capital
Chairman of the Board and Corporation)
Director, Hitachi Capital 6/2001 Chairman of the Board and Representative
Corporation Director, Hitachi Capital Corporation
6/2003 Chairman of the Board and Director, Hitachi
Capital Corporation
Director
Members of each committee are as follows.
Nominating Committee: Tsutomu Kanai (Chairman), Etsuhiko Shoyama, Ginko
Sato, Hiromichi Seya, Toshiro Nishimura
Audit Committee: Shigemichi Matsuka (Chairman), Kotaro Muneoka, Ginko Sato,
Hiromichi Seya, Toshiro Nishimura
Compensation Committee: Tsutomu Kanai (Chairman), Etsuhiko Shoyama,
Hiromichi Seya, Akira Chihaya, Toshiro Nishimura
39
Executive Officers
Name Current position and principal Business experience, including
---- position outside the Company experience in the Company, and functions
(Date of birth) ---------------------------- ----------------------------------------
Etsuhiko Shoyama President and Chief Executive See "Directors."
(Mar. 9, 1936) Officer
Director
Yoshiki Yagi Executive Vice President and See "Directors."
(Feb. 27, 1938) Executive Officer
Director
Yoshiro Kuwata Executive Vice President and See "Directors."
(Sep. 1, 1936) Executive Officer
Director
Kazuo Kumagai Executive Vice President and 4/1961 Joined Hitachi, Ltd.
(Mar. 2, 1938) Executive Officer 6/1989 Deputy General Manager, Secretary's Office
6/1993 Director
6/1997 Executive Managing Director
4/1999 Senior Vice President and Director
4/2001 Executive Vice President and Director
6/2003 Executive Vice President and Executive Officer
Katsukuni Hisano Executive Vice President and 4/1962 Joined Hitachi, Ltd.
(Mar. 2, 1940) Executive Officer 6/1995 General Manager, Hitachi Works
6/1997 Director
4/1999 Senior Vice President and Director
6/2002 Director
10/2002 Senior Vice President and Director
4/2003 Executive Vice President and Director
6/2003 Executive Vice President and Executive Officer
Takao Matsui Senior Vice President and 4/1963 Joined Hitachi, Ltd.
(Mar. 18, 1939) Executive Officer 6/1993 General Manager, Kansai Area Operation
6/1997 Director
4/1999 General Manager, Sales Management Division
6/1999 Retired from Director
6/2001 Senior Vice President and Director
6/2003 Senior Vice President and Executive Officer
Isao Ono Senior Vice President and 4/1968 Joined Hitachi, Ltd.
(May 23, 1944) Executive Officer 4/2002 General Manager, Information Business Group and
(General Manager, Information President & CEO, Information & Telecommunication
Business Group) Systems
6/2002 Senior Vice President and Director
4/2003 General Manager, Information Business Group
6/2003 Senior Vice President and Executive Officer
Masaharu Sumikawa Senior Vice President and 4/1972 Joined Hitachi, Ltd.
(Jul. 2, 1943) Executive Officer 2/2002 President, Power & Industrial Systems and CEO,
Power systems operation
6/2002 Senior Vice President and Director
6/2003 Senior Vice President and Executive Officer
40
Name Current position and principal Business experience, including
---- position outside the Company experience in the Company, and functions
(Date of birth) ---------------------------- ----------------------------------------
Michiharu Nakamura Senior Vice President and 4/1967 Joined Hitachi, Ltd.
(Sep. 9, 1942) Executive Officer 4/2001 General Manager, Research & Development Group
(General Manager, Research & 6/2003 Senior Vice President and Executive Officer
Development Group)
Hiromi Kuwahara Senior Vice President and 4/1968 Joined Hitachi, Ltd.
(Aug. 23, 1945) Executive Officer 4/2003 General Manager, Corporate Strategy
(General Manager, Corporate 6/2003 Senior Vice President and Executive Officer
Strategy)
Minoru Tsukada Vice President and Executive 4/1969 Joined Hitachi, Ltd.
(Jan. 1, 1947) Officer 4/2003 General Manager, Kansai Area Operation
(General Manager, Kansai Area 6/2003 Vice President and Executive Officer
Operation)
Yoshito Tsunoda Vice President and Executive 4/1971 Joined Hitachi, Ltd.
(Sep. 20, 1944) Officer 4/2003 President & CEO, Urban Planning and Development
(President & CEO, Urban Planning Systems
and Development Systems) 6/2003 Vice President and Executive Officer
Hiroaki Nakanishi Vice President and Executive 4/1970 Joined Hitachi, Ltd.
(Mar. 14, 1946) Officer 4/2003 General Manager, Global Business
(General Manager, Global Business) 6/2003 Vice President and Executive Officer
Tadahiko Ishigaki Vice President and Executive 4/1968 Joined Hitachi, Ltd.
(Jan. 14, 1946) Officer 4/2003 General Manager, Corporate Marketing
(General Manager, Corporate 6/2003 Vice President and Executive Officer
Marketing)
Shozo Saito Vice President and Executive 4/1970 Joined Hitachi, Ltd.
(Nov. 5, 1945) Officer 4/2003 President & CEO, Power & Industrial Systems
(President & CEO, Power & 6/2003 Vice President and Executive Officer
Industrial Systems)
Manabu Shinomoto Vice President and Executive 7/1971 Joined Hitachi, Ltd.
(Mar. 30, 1948) Officer 4/2003 CEO, Platform and network systems operation,
(CEO, Platform and network systems Information & Telecommunication Systems
operation, Information & 6/2003 Vice President and Executive Officer
Telecommunication Systems)
Takuya Tajima Vice President and Executive 4/1968 Joined Hitachi, Ltd.
(Jan. 21, 1945) Officer 4/2003 CEO, Social and industrial infrastructure systems
(CEO, Social and industrial operation, Power & Industrial Systems
infrastructure systems operation, 6/2003 Vice President and Executive Officer
Power & Industrial Systems)
Takashi Hatchoji Vice President and Executive 4/1970 Joined Hitachi, Ltd.
(Jan. 27, 1947) Officer 4/2003 General Manager, Legal and Corporate
(General Manager, Legal and Communications and General Manager, Corporate
Corporate Communications and Auditing
General Manager, Corporate 6/2003 Vice President and Executive Officer
Auditing)
41
Name Current position and principal Business experience, including
---- position outside the Company experience in the Company, and functions
(Date of birth) ---------------------------- ----------------------------------------
Kazuo Furukawa Vice President and Executive 4/1971 Joined Hitachi, Ltd.
(Nov. 3, 1946) Officer 4/2003 President & CEO, Information & Telecommunication
(President & CEO, Information & Systems
Telecommunication Systems) 6/2003 Vice President and Executive Officer
Makoto Ebata Executive Officer 4/1970 Joined Hitachi, Ltd.
(Feb. 23, 1947) (General Manager, Group Management 2/2002 General Manager, Group Management Office
Office) 6/2003 Executive Officer
Yasuo Sakuta Executive Officer 4/1972 Joined Hitachi, Ltd.
(Oct. 6, 1945) (General Manager, Intellectual 8/2001 General Manager, Intellectual Property Group
Property Group) 6/2003 Executive Officer
Takao Suzuki Executive Officer 4/1969 Joined Hitachi, Ltd.
(Jan. 12, 1946) (General Manager, Chugoku Area 4/2003 General Manager, Chugoku Area Operation
Operation) 6/2003 Executive Officer
Koichiro Nishikawa Executive Officer 4/1970 Joined Hitachi, Ltd.
(Jul. 12, 1947) (General Manager, Business 4/2003 General Manager, Business Development
Development) 6/2003 Executive Officer
Tsugio Momose Executive Officer 4/1970 Joined Hitachi, Ltd.
(Jun. 30, 1945) (President & CEO, Ubiquitous 4/2002 President & CEO, Ubiquitous Platform Systems
Platform Systems) 6/2003 Executive Officer
Kazuhiro Mori Executive Officer 4/1969 Joined Hitachi, Ltd.
(Oct. 7, 1946) (General Manager, Chubu Area 2/1999 General Manager, Chubu Area Operation
Operation) 6/2003 Executive Officer
Iwao Hara Executive Officer 4/1970 Joined Hitachi, Ltd.
(May 11, 1945) (General Manager, Human Capital) 4/2003 General Manager, Human Capital
6/2003 Executive Officer
Takashi Miyoshi Executive Officer 4/1970 Joined Hitachi, Ltd.
(Sep. 25, 1947) (General Manager, Finance) 4/2003 General Manager, Finance
6/2003 Executive Officer
Taiji Hasegawa Executive Officer 4/1969 Joined Hitachi, Ltd.
(Feb. 18, 1947) (President & CEO, Automotive 4/2003 President & CEO, Automotive Systems
Systems) 6/2003 Executive Officer
Masahiro Hayashi Executive Officer 4/1969 Joined Hitachi, Ltd.
(Apr. 11, 1946) (CEO, System solutions operation, 4/2003 CEO, System solutions operation, Information &
Information & Telecommunication Telecommunication Systems
Systems) 6/2003 Executive Officer
There are no family relationships between any Director or Executive Officer and
any other Director or Executive Officer of the Company.
42
B. Compensation
The aggregate amount of compensation, including bonuses but excluding retirement
allowances, paid by Hitachi during the year ended March 31, 2003 to all
Directors and Corporate Auditors of the Company who served during that year was
JPY 602 million.
Under the corporate governance system prior to June 25, 2003, in accordance with
customary Japanese business practice, when a Director or Corporate Auditor
retires, a proposal to pay a lump-sum retirement allowance is submitted at a
general meeting of shareholders for approval. After the shareholders' approval
is obtained, the amount of the retirement allowance for a Director or Corporate
Auditor is fixed by the Board of Directors and the Board of Corporate Auditors
and generally reflects his position at the time of retirement, the length of his
service as a Director or Corporate Auditor and the retiring member's
contribution to the Company's performance. The Company does not set aside
reserves for such retirement payments. The aggregate amount of retirement
allowances paid during the year ended March 31, 2003 to retired Directors of the
Company was JPY 86 million. With the adoption of the Committee System in June
2003, the Compensation Committee determines the matters relating to the
compensation including retirement allowances for each Director and Executive
Officer. See "C. Board Practices."
In June 2000, the ordinary general meeting of shareholders of the Company
approved a stock option plan under which rights to subscribe for 527,000 shares
of Common Stock of the Company were granted to 14 Directors and 57 employees
including Senior Corporate Officers, Corporate Officers, Managing Officers and
Corporate Fellows. The exercise price of the rights is JPY 1,451 per share and
the rights are exercisable from July 27, 2001 until July 26, 2005.
In June 2001, the ordinary general meeting of shareholders of the Company
approved a stock option plan under which rights to subscribe for 1,090,000
shares of Common Stock of the Company were granted to 13 Directors and 64
employees including Senior Corporate Officers, Corporate Officers, Managing
Officers and Corporate Fellows. The exercise price of the rights is JPY 1,270
per share and the rights are exercisable from August 4, 2002 until August 3,
2006.
In June 2003, the ordinary general meeting of shareholders of the Company
approved a stock option plan. Pursuant to such approval, the Board of Directors
set and approved the details of the plan under which rights to subscribe for
1,305,000 shares of Common Stock of the Company were granted to a total of 85
persons, including Directors, Executive Officers, Corporate Officers and Fellows
of the Company. The exercise price of the rights is JPY 561 per share and the
rights are exercisable from August 1, 2004 through July 31, 2007. See note (26)
to the consolidated financial statements.
C. Board Practices
The Company, by special resolution of the general meeting of shareholders held
on June 25, 2003, adopted the Committee System pursuant to the amended
Commercial Code. Each company adopting the Committee System is required to
establish within its board of directors a nominating, audit and compensation
committee, a majority of the members of each of which must be outside directors
who are not executive officers of the company, and to have executive officers
responsible for executing the business of the company. Under the Committee
System, a company is not allowed to have corporate auditors but is instead
required to delegate auditing function responsibilities to the audit committee.
Through the adoption of the Committee System, the Company aims to clear the way
for much speedier management with the strict separation of execution of business
and supervision thereof and simultaneously foster fair and highly transparent
management.
The Company's amended Articles of Incorporation provide for a Board of Directors
of not more than 20 members. All Directors are elected at a general meeting of
shareholders. The Company's Articles of Incorporation provide that the Board of
Directors must appoint a Chairman of the Board from among its members. The term
of office
43
of a Director expires at the close of the ordinary general meeting of
shareholders relating to the last closing of accounts within one year after the
relevant Director's assumption of office. A Director may serve any number of
consecutive terms. The term of office of the Directors currently in office will
expire at the close of the ordinary general meeting of shareholders to be held
within three months from March 31, 2004.
Under the Committee System, the Board of Directors focuses on the functions of
decision-making with respect to fundamental management policies and certain
important matters prescribed by law, as well as supervision of execution by the
Directors and Executive Officers of their respective duties. The Board of
Directors has, by resolution, delegated to the Executive Officers most of its
authority to make decisions with regard to the Company's business affairs.
The Nominating Committee is authorized to determine the particulars of proposals
concerning the election and dismissal of Directors to be submitted to a general
meeting of shareholders. As stated above, a majority of the members of the
Nominating Committee must be outside Directors.
The Compensation Committee is authorized to determine the policy on the
determination of the particulars of compensation for each Director and Executive
Officer and determine the particulars of compensation for each Director and
Executive Officer in accordance with the established policy. In addition,
pursuant to the Board of Directors Regulations of the Company, the Compensation
Committee is authorized to determine the policy on the grant of stock options.
As stated above, under the Commercial Code, a majority of the members of the
Compensation Committee must be outside Directors.
The Audit Committee is authorized to audit the execution by the Directors and
Executive Officers of their respective duties and determine the particulars of
proposals concerning the election, dismissal and non-retention of the Company's
outside auditor to be submitted to the general meeting of shareholders. The
Audit Committee has the statutory duty to examine the financial statements and
business reports prepared by Executive Officers designated by the Board of
Directors and to prepare its audit report to be submitted to the Board of
Directors. Pursuant to the Board of Directors Regulations of the Company, the
Audit Committee has the authority to pre-approve audit and non-audit services
provided by the outside auditor for the purpose of complying with applicable
U.S. law and regulations. As stated above, a majority of the members of the
Audit Committee must be outside Directors. In addition, a member of the Audit
Committee may not concurrently be an Executive Officer, a manager or any other
employee of the Company or any of its subsidiaries, or a director who is engaged
in the business affairs of any of such subsidiaries.
For a list of the members of each committee, see "A. Directors and Senior
Management" above.
The Company's Articles of Incorporation provide for a maximum of 40 Executive
Officers. All Executive Officers are appointed by the Board of Directors. The
term of office of an Executive Officer expires at the close of the first meeting
of the Board of Directors after the ordinary general meeting of shareholders
relating to the last closing of accounts within one year after the relevant
Executive Officer's assumption of office. An Executive Officer may serve any
number of consecutive terms. The term of office of the Executive Officers
currently in office will expire at the close of the first meeting of the Board
of Directors after the ordinary general meeting of shareholders to be held
within three months from March 31, 2004.
Under the Committee System, Executive Officers have the power to make decisions
on matters delegated to them by the Board of Directors. An Executive Officer
executes the business affairs of the Company within the scope of assignment
determined by the Board of Directors. From among the Executive Officers, the
Board of Directors must appoint one or more Representative Executive Officers.
Each of the Representative Executive Officers has the statutory authority to
represent the Company generally in the conduct of its affairs. Pursuant to the
Company's Articles of Incorporation, the Board of Directors must appoint a
President and Chief Executive Officer who must also be a Representative
Executive Officer.
No Directors have service contracts with Hitachi providing for benefits upon
termination of service as a Director.
Pursuant to the Commercial Code and the Company's Articles of Incorporation, the
Company may, by resolution of the Board of Directors, exempt any Director and
Executive Officer from liabilities to the Company arising in respect of his/her
failure to execute duties to the extent provided in laws or regulations. In
addition, the
44
Company has entered into an agreement with each outside Director to limit such
Director's liabilities to the Company arising in respect of his/her failure to
execute duties to the maximum aggregate amount provided in the items of
paragraph 19 of Article 266 of the Commercial Code.
D. Employees
The following table shows the number of full-time employees of Hitachi by
industry segment as of March 31, 2001, 2002 and 2003.
As of March 31
------------------------------------------------------
2001 2002 2003
---- ---- ----
Information & Telecommunication Systems 65,864 68,381 83,304
Electronic Devices 50,152 42,216 41,763
Power & Industrial Systems 74,935 72,250 76,685
Digital Media & Consumer Products 37,389 33,742 33,046
High Functional Materials & Components 57,101 52,720 48,821
Logistics, Services & Others 31,124 30,197 29,520
Financial Services 4,012 4,184 4,116
Corporate 3,320 3,299 3,273
------- ------- -------
Total 323,897 306,989 320,528
======= ======= =======
The activities of the Hitachi Workers Union and those unions representing the
employees of certain domestic subsidiaries are organized under the Federation of
Hitachi Group Workers Unions. Each company has a collective bargaining agreement
with its workers union. Under the agreements, all employees of the Company and
its domestic subsidiaries that have labor unions, except management and a
limited number of other employees, must become union members. The collective
bargaining agreements are customarily for two-year terms and the present
provisions, other than those relating to wages, extend to March 31, 2004.
Hitachi considers its relations with the labor unions to be excellent and there
have been no significant strikes or labor disputes in recent years.
45
E. Share Ownership
The following table shows the number of shares of Common Stock owned by the
Directors and Executive Officers of the Company as of June 25, 2003. The total
amount is 0.02% of total shares issued.
Name Position Number of shares owned
---- -------- ----------------------
(shares)
Tsutomu Kanai Chairman of the Board and Director 68,500
Etsuhiko Shoyama President, Chief Executive Officer and Director 51,000
Yoshiki Yagi Executive Vice President, Executive Officer 65,250
and Director
Yoshiro Kuwata Executive Vice President, Executive Officer 24,700
and Director
Shigemichi Matsuka Director 31,000
Kotaro Muneoka Director 21,000
Ginko Sato Director 0
Hiromichi Seya Director 2,000
Akira Chihaya Director 0
Toshiro Nishimura Director 0
Hiroshi Kuwahara Director 29,600
Takashi Kawamura Director 35,000
Masayoshi Hanabusa Director 5,050
Kazuo Kumagai Executive Vice President and Executive Officer 23,000
Katsukuni Hisano Executive Vice President and Executive Officer 17,000
Takao Matsui Senior Vice President and Executive Officer 19,200
Isao Ono Senior Vice President and Executive Officer 44,000
Masaharu Sumikawa Senior Vice President and Executive Officer 15,000
Michiharu Nakamura Senior Vice President and Executive Officer 15,000
Hiromi Kuwahara Senior Vice President and Executive Officer 10,000
Minoru Tsukada Vice President and Executive Officer 10,000
Yoshito Tsunoda Vice President and Executive Officer 15,000
Hiroaki Nakanishi Vice President and Executive Officer 10,000
Tadahiko Ishigaki Vice President and Executive Officer 17,250
Shozo Saito Vice President and Executive Officer 19,050
Manabu Shinomoto Vice President and Executive Officer 10,000
Takuya Tajima Vice President and Executive Officer 18,000
Takashi Hatchoji Vice President and Executive Officer 24,000
Kazuo Furukawa Vice President and Executive Officer 14,000
Makoto Ebata Executive Officer 11,000
Yasuo Sakuta Executive Officer 10,000
Takao Suzuki Executive Officer 10,000
Koichiro Nishikawa Executive Officer 16,150
Tsugio Momose Executive Officer 16,050
Kazuhiro Mori Executive Officer 10,000
Iwao Hara Executive Officer 11,050
Takashi Miyoshi Executive Officer 10,000
Taiji Hasegawa Executive Officer 13,050
Masahiro Hayashi Executive Officer 10,050
-------
Total 730,950
=======
46
The aggregate number of shares to be subscribed for by the rights granted to the
Directors and Executive Officers, listed above, under the stock option plans
approved in June 2000, 2001 and 2003 is 193,000, 440,000 and 795,000 shares,
respectively. For additional information on the Company's stock option plan, see
"B. Compensation" of this Item.
No Director or Executive Officer has different voting rights from any other
shareholder of the Company's Common Stock.
Hitachi Employees' Shareholding Association owned approximately 80,448 thousand
shares as of March 31, 2003, which amounted to 2.4% of total shares issued. The
Association consists of employees of the Company and certain of its
subsidiaries. Membership in the Association is voluntary.
Item 7. Major Shareholders and Related Party Transactions
A. Major Shareholders
The following table provides information concerning shareholders holding more
than five percent of the outstanding Common Stock as of March 31, 2003.
Percent
Title of class Name Number of shares owned of class
-------------- ---- ---------------------- --------
(thousand shares)
Common Stock Japan Trustee Services Bank, Ltd. 212,081 6.3%
Common Stock NATS CUMCO* 172,918 5.1%
Common Stock The Master Trust Bank of Japan, Ltd. 169,035 5.0%
* NATS CUMCO is the nominee name for the aggregate of the Company's
American Depositary Receipts (ADRs) holders.
Major shareholders of the Company do not have different voting rights from any
other shareholder of the Company's Common Stock.
As of March 31, 2003, approximately 12.3% of the Company's Common Stock was
owned by 192 United States shareholders as a whole, including the Depositary's
nominee as one shareholder of record, the percentage ownership of which was
about 5.1%.
Hitachi is not directly or indirectly owned or controlled by any other
corporation, by any foreign country or by any other natural or legal person
severally or jointly. To the knowledge of Hitachi, there are no arrangements,
the operation of which may at a subsequent date result in a change in control of
Hitachi.
B. Related Party Transactions
No loans have been extended to Directors or Executive Officers of the Company
except home loans extended to certain Directors by a subsidiary of the Company
engaged in the business of financial services. These loans were (1) made or
provided in the ordinary course of the business of such subsidiary; (2) of a
type that is generally made available by such subsidiary to the public; and (3)
made by such subsidiary on market terms, or terms that are no more favorable
than those offered by such subsidiary to the general public for such extensions
of credit. The aggregate outstanding balance of such loans to Directors as of
March 31, 2003 was JPY 130 million, and the largest aggregate outstanding
balance during fiscal 2002 was JPY 132 million.
C. Interests of Experts and Counsel
Not applicable.
47
Item 8. Financial Information
A. Consolidated Statements and Other Financial Information
Consolidated Financial Statements
See "Item 17. Financial Statements."
Legal Proceedings
The Company and certain of its subsidiaries are subject to several legal and
arbitration proceedings and claims which have arisen in the ordinary course of
business. However, based upon the information currently available to Hitachi,
management of the Company does not expect those legal and arbitration
proceedings and claims to have a material effect on Hitachi's financial
condition or results of operations.
Dividend Policy
The Company views enhancement of the long-term and overall interests of
shareholders as an important management objective. The industrial sector
encompassing the information systems and electronics and other primary
businesses of the Company is undergoing rapid technological innovation and
changes in market structure. This makes vigorous upfront investment in R&D and
plant and equipment essential for securing and maintaining market
competitiveness and improving profitability. Dividends are therefore decided
based on medium-to-long term business plans with an eye to ensuring the
availability of internal funds for reinvestment and the stable growth of
dividends, with appropriate consideration of the Company's financial condition
and results of operations.
For information on restrictions imposed by the indentures relating to the
Company's unsecured convertible debentures on its ability to pay cash dividends,
see note (9) to the consolidated financial statements.
The Company paid a dividend of JPY 6 per share for fiscal 2002.
B. Significant Changes
No significant changes have occurred since the date of the annual financial
statements included in this report.
Item 9. The Offer and Listing
A. Offer and Listing Details
The primary market for the Company's Common Stock is the Tokyo Stock Exchange
(the "TSE"). The Common Stock is traded on the First Section of the TSE and is
also listed on four other Japanese stock exchanges: Osaka, Nagoya, Fukuoka and
Sapporo. In addition, the Company's Common Stock is listed on Euronext
Amsterdam, the Frankfurt Stock Exchange, the Luxembourg Stock Exchange and
Euronext Paris. In the United States, the Company's American Depositary Shares
("ADSs") are listed and traded on the New York Stock Exchange (the "NYSE") in
the form of American Depositary Receipts ("ADRs"). There may from time to time
be a differential between the Common Stock's price on exchanges outside the
United States and the market price of the ADSs in the United States.
ADRs are issuable pursuant to the Deposit Agreement dated July 9, 1963, as
amended and restated on March 6, 1981 and as further amended on February 17,
1982 (the "Deposit Agreement"), among Hitachi, Ltd., Citibank, N.A. as
Depositary (the "Depositary"), and the holders of ADRs. Each ADR evidences ADSs,
each representing 10 shares of Common Stock deposited under the Deposit
Agreement with The Fuji Bank, Limited, Tokyo, or The Industrial Bank of Japan,
Limited, Tokyo, as agents of the Depositary, or any successor or successors to
such agent or agents. On April 1, 2002, all the rights, liabilities and
obligations of The Fuji Bank, Limited and The Industrial Bank of Japan, Limited
under the Deposit Agreement were succeeded by Mizuho Corporate Bank, Ltd.
48
The following table sets forth for the periods indicated the reported high and
low sales prices of the Company's Common Stock on the TSE and the reported high
and low sales prices of the Company's ADSs on the NYSE.
Tokyo Stock Exchange New York Stock Exchange
Price Per Share Price Per American
of Common Stock Depositary Share
--------------- ----------------
(Yen) (U.S. Dollars)
High Low High Low
---- --- ---- ---
Annual Information
Fiscal year ended March 31
--------------------------
1999 1,015 532 77.000 40.188
2000 1,709 814 164.500 67.000
2001 1,549 899 146.250 73.750
2002 1,380 745 113.000 57.000
2003 997 398 77.950 33.330
Quarterly Information
Fiscal year ended March 31, 2002
--------------------------------
1st quarter 1,380 1,012 113.000 80.500
2nd quarter 1,214 775 98.000 64.050
3rd quarter 979 777 79.000 65.500
4th quarter 1,008 745 76.500 57.000
Fiscal year ended March 31, 2003
--------------------------------
1st quarter 997 736 77.950 61.250
2nd quarter 800 592 66.550 49.030
3rd quarter 619 398 50.650 33.330
4th quarter 557 412 45.190 34.750
Fiscal year ended March 31, 2004
--------------------------------
1st quarter 520 366 43.500 31.300
Monthly Information
March 2003 505 412 43.000 34.750
April 2003 441 366 37.290 31.300
May 2003 478 402 40.650 34.500
June 2003 520 465 43.500 39.800
July 2003 643 514 53.500 44.480
August 2003 642 484 54.740 40.950
Notes: (a) Prices per share of Common Stock are as reported by the TSE.
(b) Prices per American Depositary Share are based upon one American
Depositary Share representing 10 shares of Common Stock and are as
reported by the NYSE via the NYSEnet system.
B. Plan of Distribution
Not applicable.
C. Markets
See "A. Offer and Listing Details" in this Item.
D. Selling Shareholders
Not applicable.
49
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
Hitachi, Ltd. was incorporated in Japan under the Commercial Code. It is
registered in the Commercial Register (shogyo tokibo) maintained by the Tokyo
Legal Affairs Bureau of the Ministry of Justice.
Objects and Purposes
Article 2 of the Articles of Incorporation of the Company provides that its
purpose is to carry on the following businesses: manufacture and sale of
electrical machinery and appliances; manufacture and sale of industrial
machinery and appliances; manufacture and sale of rolling stock; manufacture and
sale of telecommunication and electronic machinery and appliances; manufacture
and sale of lighting and household machinery and appliances; manufacture and
sale of optical and medical machinery and instruments; manufacture and sale of
measuring and other general machinery and appliances; manufacture and sale of
materials related to the products mentioned in any of the foregoing items;
preparation and sale of software; preparation and sale of images, software and
data related to multimedia; leasing and maintenance services of the products
mentioned in any of the foregoing items; supply of electricity;
telecommunication, information processing and information supply services, as
well as broadcasting; undertaking of commercial transactions and payment
transactions by utilizing the Internet; provision of results of research and
development related to biotechnology; consulting on any of the foregoing items;
licensing of industrial property rights and know-how; undertaking of engineering
related to any of the foregoing items; design, supervision and undertaking of
construction work; money lending, factoring, debt guarantee and investment
advisory business; home health care support business under the Health Care
Insurance Law and the operation of health care and nursing facilities; any and
all businesses related to the foregoing items.
Directors
Under the Committee System, the Board of Directors focuses on the functions of
decision-making with respect to fundamental management policies and certain
important matters prescribed by law, as well as supervision of execution by the
Directors and Executive Officers of their respective duties. The Board of
Directors may, by resolution, delegate to the Executive Officers its authority
to make decisions with regard to the Company's business affairs.
Under the Commercial Code, the adoption of a resolution of the Board of
Directors requires a majority vote of the Directors present who must in turn
constitute a majority of the full Board of Directors. Any Director who has a
conflict of interest or a vested interest with respect to any given resolution
cannot participate in voting for the resolution. Under the Commercial Code, each
Director must refrain from engaging in any business competing with the Company
unless approved by the Board of Directors.
50
The Commercial Code provides that, under the Committee System, the Compensation
Committee established within the Board of Directors determines matters relating
to compensation for each Director and Executive Officer. A member of the
Compensation Committee cannot participate in voting for any resolution relating
to his/her own compensation.
There is no mandatory retirement age for the Directors required by the
Commercial Code or the Company's Articles of Incorporation. No shares are
required for a Director's qualification under the Commercial Code or the
Company's Articles of Incorporation.
Pursuant to the Commercial Code, under the Committee System, the Board of
Directors has, by resolution, delegated to Executive Officers powers regarding
the incurrence by the Company of a significant amount of debt.
Common Stock
Dividends
Under the Company's Articles of Incorporation, its financial accounts will
be closed on March 31 of each year and annual dividends, if any, will be
paid to shareholders of record as of that date. The Commercial Code permits
a joint stock corporation to distribute retained earnings by way of interim
dividends if the articles of incorporation of a company so provide. The
Company's Articles of Incorporation permit it to make interim dividends and
such interim dividends, if any, will be paid to shareholders of record as
of September 30 of each year.
Under the Company's Articles of Incorporation, the Company is not obligated
to pay any dividends which are left unclaimed for a period of three years
after the date on which they first became payable.
Voting Rights
A shareholder is generally entitled to one vote per one unit of shares with
respect to whole units of shares, as described in this paragraph and under
"Unit Share System" below. In general, under the Commercial Code, a
resolution can be adopted at a general meeting of shareholders by a
majority of the number of voting rights represented at the meeting. The
Commercial Code and the Company's Articles of Incorporation require for the
election of Directors a quorum of not less than one-third of the total
number of voting rights of all the shareholders. The Company's shareholders
are not entitled to cumulative voting in the election of directors. A
corporate shareholder whose voting rights are in turn more than one-quarter
directly or indirectly owned by the Company does not have voting rights.
The Company does not have voting rights with respect to its own shares.
Shareholders may cast their votes in writing and may also exercise their
voting rights through proxies, provided that those proxies are also
shareholders who have voting rights. Shareholders may also cast their votes
by electronic means in accordance with the Company's Share Handling
Regulations.
The Commercial Code and the Company's Articles of Incorporation provide
that a quorum of not less than one-third of the voting rights of all the
shareholders must be present at a shareholders' meeting to approve any
material corporate actions such as: a reduction of the stated capital;
amendment of the Articles of Incorporation; the removal of a Director;
establishment of a 100% parent-subsidiary relationship by way of share
exchange or share transfer; a dissolution, merger or consolidation; a
company split; 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; and any issuance of new shares at a "specially favorable"
price (or any issuance of rights to subscribe for or acquire shares ("stock
acquisition rights") with "specially favorable" conditions or of bonds or
debentures with stock acquisition rights with "specially favorable"
conditions) to persons other than shareholders. At least two-thirds of the
voting rights represented at the meeting must approve these actions.
Issue of Additional Shares and Pre-emptive Rights
Holders of the Company'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 Executive Officers determine,
subject to the limitations as to the issuance of new shares at a "specially
favorable" price
51
mentioned above. Executive Officers may determine that shareholders be
given subscription rights to new shares, in which case they must be given
on uniform terms to all shareholders as of a record date of which not less
than two weeks' prior public notice must be given. Each of the shareholders
to whom such subscription rights are given must also be given at least two
weeks' prior notice of the date on which such rights expire.
Rights to subscribe for shares of Common Stock given to the shareholders
may be made generally transferable by Executive Officers. If subscription
rights are not made generally transferable, a transfer by a foreign
investor not resident in Japan will be enforceable against the Company and
third parties only if prior written consent to each such transfer is
obtained from the Company. When such consent is necessary in the future for
the transfer of subscription rights, the Company intends to consent, on
request, to all such transfers by foreign investors not resident in Japan.
Pursuant to the Commercial Code, the Company may issue stock acquisition
rights. Except where the issuance of stock acquisition rights would be on
"specially favorable" terms, Executive Officers may determine the issuance
of stock acquisition rights other than those for stock option purposes,
which in contrast, must be approved by 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,
the Company 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 a liquidation of the Company, the assets remaining after
payment of all debts and liquidation expenses and taxes will be distributed
among the holders of shares of Common Stock in proportion to the respective
numbers of shares of Common Stock held by each of them.
Stock Splits
The Company, by decision of the Executive Officers, may at any time split
shares of Common Stock in issue. When Executive Officers decide to effect a
stock split, the Company may amend its Articles of Incorporation without
shareholder approval to increase the number of authorized shares in
proportion to the stock split if the Company has only one class of
outstanding shares.
Generally, shareholders do not need to exchange share certificates for new
ones following a stock split; however, certificates representing the
additional shares resulting from the stock split will be issued to
shareholders. Before a stock split, the Company must give public notice of
the stock split specifying the record date for the stock split, not less
than two weeks prior to the record date. In addition, promptly after the
stock split takes effect, the Company must send notice to each shareholder
specifying the number of shares to which each such shareholder is entitled.
Unit Share System
Pursuant to the Commercial Code, the Company has designated 1,000 shares as
one unit of shares. Under the unit share system, a shareholder is generally
entitled to one voting right for each unit of shares. The Company may not
issue share certificates for a number of shares not constituting a whole
number of units unless the Company deems the issuance of such share
certificates to be necessary for shareholders. Since transfers of less than
one unit of the underlying shares of common stock are normally prohibited
under the unit share system, under the Deposit Agreement currently in
force, the right of ADR holders to surrender their ADRs and withdraw the
underlying shares of common stock may only be exercised as to whole units
of common stock.
Although the number of shares which constitute one unit is stipulated in
the Articles of Incorporation, Executive Officers have the power to amend
the Articles of Incorporation to reduce the number of shares which
constitute one unit or abolish the unit share system. Pursuant to the
Commercial Code, the number of shares constituting one unit, however,
should neither exceed 1,000 nor one-two hundredths of the total number of
outstanding shares of the Company.
52
A holder of shares representing less than one unit may at any time require
the Company to purchase his/her shares. These shares will be purchased at
(a) the closing price of the shares reported by the Tokyo Stock Exchange on
the day when the request to purchase is made or (b) if no sale takes place
on the Tokyo Stock Exchange on that day, the price at which sale of shares
is effected on such stock exchange immediately thereafter. However, because
holders of ADSs representing less than one unit are not able to withdraw
the underlying shares from deposit, these holders will not be able to
exercise this right as a practical matter.
The Company's Articles of Incorporation also provide that a holder of
shares representing less than one unit may require the Company to sell any
fractional shares it may have to such holder so that the holder can raise
his/her fractional ownership up to a whole unit. These shares will be sold
at (a) the closing price of the shares reported by the Tokyo Stock Exchange
on the day when the request to sell becomes effective or (b) if no sale
takes place on the Tokyo Stock Exchange on that day, the price at which
sale of shares is effected on such stock exchange immediately thereafter.
However, because holders of ADSs representing less than one unit are not
able to withdraw the underlying shares from deposit, these holders will not
be able to exercise this right as a practical matter.
Acquisition by the Company of Shares
Under the Commercial Code, the Company may acquire shares of its Common
Stock for any purpose subject to authorization by (i) ordinary resolution
of an ordinary general meeting of shareholders for (a) purchases of its
shares on any Japanese stock exchange on which its shares are listed or (b)
tender offers, or (ii) special resolution of an ordinary general meeting of
shareholders for purchases of its shares from a specific shareholder other
than a subsidiary of the Company. In the case of (ii) above, any other
shareholder may make a request directly to an Executive Officer, five days
prior to the relevant shareholders' meeting, that the Company also acquire
the shares held by such requesting shareholder.
Any such acquisition of shares by the Company must satisfy certain
requirements, including that the total amount of the purchase price may not
exceed the amount of the retained earnings available for annual dividend
payments after taking into account any reduction of the stated capital,
capital surplus or legal reserve (if such reduction is authorized by a
resolution of the relevant general meeting of shareholders) less the sum of
the amount to be paid by way of appropriation of retained earnings and the
amount of retained earnings to be transferred to the stated capital in
respect of the relevant fiscal year pursuant to a resolution of such
general meeting of shareholders. The Company may hold the shares acquired
in compliance with the provisions of the Commercial Code, and Executive
Officers may generally dispose or cancel such shares.
A resolution of the ordinary general meeting of shareholders held on June
25, 2003 authorizes the Company to acquire up to 300 million shares for up
to JPY 150 billion prior to the ordinary general meeting of shareholders
held in 2004.
General Meeting of Shareholders
The Company normally holds its ordinary general meeting of shareholders within
three months following the date of closing of accounts of each year in Tokyo.
The record date for an ordinary general meeting of shareholders is March 31 of
each year. In addition, the Company may hold an extraordinary general meeting of
shareholders whenever necessary by giving at least two weeks' advance notice.
Under the Commercial Code, notice of any shareholders' meeting must be mailed to
each shareholder having voting rights or, in the case of a non-resident
shareholder, to his resident proxy or mailing address in Japan in accordance
with the Company's Share Handling Regulations, at least two weeks prior to the
date of the meeting. Under the Commercial Code, such notice may be given to
shareholders by electronic means, subject to the consent by the relevant
shareholders.
Reporting of Substantial Shareholdings
The Securities and Exchange Law of Japan, as amended, requires any person who
has become, beneficially and solely or jointly, a holder of more than 5% of the
total issued voting 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 Prime Minister of Japan within five business days a
report concerning such share holdings. A similar report must also be made in
respect of any subsequent change of one percentage point or more in any such
holding. For
53
this purpose, shares issuable to such person upon exercise of any rights to
subscribe for or acquire shares 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.
There is no provision in the Company's Articles of Incorporation that would have
an effect of delaying, deferring or preventing a change in control of the
Company and that would operate only with respect to a merger, acquisition or
corporate restructuring involving the Company.
C. Material Contracts
None.
D. Exchange Controls
The Foreign Exchange and Foreign Trade Law of Japan, as amended, and the cabinet
orders and ministerial ordinances thereunder (the "Foreign Exchange Law") govern
certain matters relating to the issuance of equity-related securities by the
Company and the acquisition and holding of shares of Common Stock or ADSs
representing such shares by "exchange non-residents" and by "foreign investors"
as hereinafter defined. The Foreign Exchange Law currently in effect does not
affect the right of an exchange non-resident to purchase or sell an ADS outside
Japan.
"Exchange non-residents" are defined under the Foreign Exchange Law as
individuals who are not resident in Japan and corporations whose principal
offices are located outside Japan. Generally branches and other offices of
Japanese corporations located outside Japan are regarded as exchange
non-residents, but branches and other offices located within Japan of
non-resident corporations are regarded as residents of Japan. "Foreign
investors" are defined to be (i) individuals not resident in Japan, (ii)
corporations which are organized under the laws of foreign countries or whose
principal offices are located outside Japan and (iii) corporations of which (a)
50% or more of the shares are held by (i) and/or (ii) above, (b) a majority of
officers consists of non-resident individuals or (c) a majority of the officers
having the power of representation consists of non-resident individuals.
Dividends and Proceeds of Sales
Under the Foreign Exchange Law, dividends paid on, and the proceeds of
sales in Japan of, shares of Common Stock held by exchange non-residents in
general may be converted into any foreign currency and repatriated abroad.
The acquisition of shares of Common Stock by exchange non-resident
shareholders by way of stock splits is not subject to any requirements
under the Foreign Exchange Law.
Acquisition of Shares
Under the Foreign Exchange Law, acquisition of shares of a Japanese company
listed on any Japanese stock exchange or traded on the over-the-counter
market in Japan ("listed shares") by an exchange non-resident from a
resident of Japan is generally not subject to a prior filing requirement.
In case a foreign investor acquires listed shares (whether from a resident
of Japan or an exchange non-resident, from another foreign investor or from
or through a designated securities company) and as a result of such
acquisition the number of shares held directly or indirectly by such
foreign investor would become 10% or more of the total outstanding shares
of the company, the foreign investor is required to make a subsequent
report on such acquisition to the Minister of Finance and other Ministers
having jurisdiction over the business of the subject company (the
"Competent Ministers"). In certain exceptional cases, a prior filing is
required and the Competent Ministers may recommend the modification or
abandonment of the proposed acquisition and, if the foreign investor does
not accept the recommendation, order its modification or prohibition.
The deposit of shares of Common Stock by an exchange non-resident of Japan,
the issuance of ADRs in exchange therefor and the withdrawal of the
underlying shares of Common Stock by an exchange non-resident upon
surrender of ADRs are not subject to any requirements under the Foreign
Exchange Law, except where
54
as a result of such deposit or withdrawal the aggregate number of shares of
Common Stock held by the Depositary (or its nominee) or the holder
surrendering ADRs, as the case may be, would be 10% or more of the total
outstanding shares of Common Stock, in which event a subsequent reporting
may be required as described above.
E. Taxation
Japanese Taxation
The discussion of Japanese taxation set forth below is intended only as a
summary and does not purport to be a complete analysis or discussion of all the
potential Japanese tax consequences that may be relevant to the ownership of the
Company's shares or American depositary shares by a person who is not a resident
of Japan.
A non-resident of Japan or a non-Japanese corporation is generally subject to a
Japanese withholding tax on cash dividends. Stock splits, in general, are not
subject to Japanese withholding tax since they are characterized merely as an
increase in the number of shares (as opposed to an increase in the value of the
shares) from a Japanese tax perspective. Due to the 2001 Japanese tax
legislation effective April 1, 2001, a conversion of retained earnings or legal
earned reserve into stated capital is not deemed a dividend payment to
shareholders for Japanese tax purposes and therefore such a conversion does not
trigger Japanese withholding taxation.
Pursuant to the tax treaty between the United States and Japan ("the Treaty")
currently in force, a Japanese withholding tax at the rate of 15% is imposed, in
general, on dividend payments made by a Japanese corporation to a U.S. resident
or corporation, unless the recipient of the dividend has a "permanent
establishment" in Japan and the shares with respect to which such dividends are
paid are effectively connected with such "permanent establishment." For Japanese
tax purposes, the treaty rate generally supersedes the tax rate under domestic
tax law. However, due to the so-called "preservation doctrine" under Article
4(2) of the Treaty, and/or due to Article 3-2 of the Special Measurement Law for
the Income Tax Law, Corporation Tax Law and Local Taxes Law with respect to the
Implementation of Tax Treaties, if the tax rate under domestic tax law is lower
than the treaty rate, the domestic tax rate applies.
The amount of withholding tax imposed on dividends payable to the holders of the
Company's shares or ADRs who reside in a country other than the United States is
dependent upon the provisions of such treaties or agreements as may exist
between such country and Japan. In the absence of any applicable treaty 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 generally 20%. However,
with respect to dividends paid on listed shares issued by a Japanese corporation
(such as the shares of Common Stock of the Company) to any corporate or
individual shareholders (including those shareholders who are non-Japanese
corporations or Japanese non-resident individuals), except for any individual
shareholder who holds 5% or more of the outstanding total of the shares issued
by the relevant Japanese corporation, the aforementioned 20% withholding tax
rate is reduced to (i) 10% for dividends due and payable on or after April 1,
2003 but on or before December 31, 2003, (ii) 7% for dividends due and payable
on or after January 1, 2004 but on or before March 31, 2008, and (iii) 15% for
dividends due and payable on or after April 1, 2008.
Gains derived from the sale outside Japan of shares of Common Stock or ADRs by a
non-resident of Japan or a non-Japanese corporation, or from the sale of the
shares within Japan by a non-resident of Japan as an occasional transaction or
by a non-Japanese corporation not having a permanent establishment in Japan, are
in general not subject to Japanese income or corporation taxes. Japanese
inheritance and gift taxes at progressive rates may be payable by an individual
who has acquired shares of Common Stock or ADRs as a distributee, legatee or
donee.
United States Federal Income Taxation
The following summarizes the material U.S. federal income tax consequences
applicable to a beneficial owner of Common Stock or ADRs that holds the Common
Stock or ADRs as a capital asset, that is entitled to the benefits of the income
tax convention between the United States and Japan (or the Tax Convention), and
that, for U.S. federal income tax purposes, is (1) a citizen or resident of the
United States, (2) a corporation, or other entity taxable as a corporation,
organized under the laws of the United States or of any political subdivision of
the United States, or (3) an estate or trust the income of which is includible
in gross income for U.S. federal income
55
tax purposes regardless of its source. Such beneficial owner is referred to as a
U.S. holder. This summary does not apply to certain U.S. holders that are
members of a special class of holders subject to special rules, and does not
take into account circumstances particular to a U.S. holder.
Subject to the discussion regarding passive foreign investment companies (or
PFICs) below, dividends received by a U.S. holder, including the amount of any
Japanese taxes withheld, other than certain pro rata distributions of Common
Stock or rights to acquire Common Stock to all shareholders (including ADR
holders), will be includible in the income of the U.S. holder as ordinary
dividend income to the extent of the current or accumulated earnings and profits
(as determined for U.S. federal income tax purposes) of the Company. A U.S.
holder will not be entitled to a dividends-received deduction for dividends
received from the Company. The amount a U.S. holder will be required to include
in income for any dividend paid in Japanese yen will be equal to the U.S. dollar
value of the Japanese yen received, calculated by reference to the exchange rate
in effect on the date of receipt by the ADR depositary in the case of U.S.
holders of ADRs, or by the shareholder in the case of U.S. holders of Common
Stock, regardless of whether the payment is in fact converted into U.S. dollars
at that time. If the Japanese yen received in the distribution are not converted
into U.S. dollars on the date of receipt, U.S. holders will have a basis in the
Japanese yen equal to their U.S. dollar value on the date of receipt. Any gain
or loss on a subsequent conversion or other disposition of the Japanese yen will
be generally treated as U.S. source ordinary income or loss. Subject to
applicable limitations and restrictions, Japanese taxes withheld at the rate
provided in the Tax Convention from dividend distributions by the Company will
be eligible for credit against a U.S. holder's U.S. federal income tax
liability. The limitation on foreign taxes eligible for credit is calculated
separately with respect to specific classes of income. For this purpose,
dividends distributed by the Company will constitute "passive income" or, in the
case of certain U.S. holders, "financial services income."
Subject to the discussion regarding PFICs below, gain or loss realized by a U.S.
holder on the sale, exchange or other disposition of Common Stock or ADRs will
be subject to U.S. federal income tax as capital gain or loss in an amount equal
to the difference between the amount realized on the disposition and the U.S.
holder's adjusted tax basis in the Common Stock or ADRs. The gain or loss will
generally be U.S. source income or loss.
Special adverse U.S. federal income tax rules apply if a U.S. holder holds stock
or ADRs of a company that is treated as a PFIC for any taxable year during which
the U.S. holder held stock or ADRs. Based upon certain management estimates of
the Company and the nature of the business activities to be conducted by the
Hitachi corporate group, the Company believes it will not be considered a PFIC
for the taxable year 2003 or future taxable years. However, since PFIC
determinations are made based on the composition of the Company's income and
assets and the value of its assets from time to time, there can be no assurance
that the Company will not be considered a PFIC for any taxable year.
F. Dividends and Paying Agents
Not applicable.
G. Statement by Experts
Not applicable.
H. Documents on Display
The documents filed by the Company with the U.S. Securities and Exchange
Commission (the "SEC") can be inspected at its public reference room located at
450 Fifth Street, N.W., Washington D.C. 20549. The documents filed via the
Electronic Data Gathering, Analysis, and Retrieval system can be also available
for inspection on the SEC's website (http://www.sec.gov).
I. Subsidiary Information
Not applicable.
56
Item 11. Quantitative and Qualitative Disclosures About Market Risk
Primary market risk exposure
Hitachi operates globally and is exposed to market risks from changes in foreign
currency exchange rates, interest rates and equity security prices. Hitachi uses
certain derivative financial instruments in order to reduce these market risks,
and does not enter into derivative financial instruments for any purpose other
than hedging purpose. Hitachi is also exposed to credit-related losses in the
event of non-performance by counterparties to the financial instruments and
derivative financial instruments, but it is not expected that any counterparties
will fail to meet their obligations, because most of the counterparties are
internationally recognized financial institutions and contracts are diversified
into a number of major financial institutions.
Equity price risk
Hitachi holds marketable securities which are subject to price risks arising
from changes in their market prices for such securities. Marketable securities
classified as short-term investments are considered to be highly liquid and low
risk in the investment portfolio, and those classified as investments and
advances are held as long-term investments.
The tables below provide information about the contractual maturities of
available-for-sale securities and held-to-maturity securities and fair value of
the market risk sensitive securities as of March 31, 2003 and 2002, regardless
of the consolidated balance sheet classification as follows.
(Millions of yen)
-----------------
Carrying Amount (year ended March 31, 2003) Fair Value
------------------------------------------------------------------------------
Contractual maturity date
------------------------------------------------------------
Due after one
Due within year through Due after
one year five years five years Total
-------------- ---------------- --------------- ------------
Available-for-sale securities
Equity securities 159,178 159,178
Debt securities 52,443 38,228 77,288 167,959 167,959
Other securities 47,845 5,707 17,255 70,807 70,807
Held-to-maturity securities 6,057 1,380 107 7,544 7,539
(Millions of yen)
-----------------
Carrying Amount (year ended March 31, 2002) Fair Value
------------------------------------------------------------------------------
Contractual maturity date
------------------------------------------------------------
Due after one
Due within year through Due after
one year five years five years Total
-------------- ---------------- --------------- ------------
Available-for-sale securities
Equity securities 282,522 282,522
Debt securities 62,111 46,550 74,822 183,483 183,483
Other securities 31,549 14,827 21,276 67,652 67,652
Held-to-maturity securities 4,866 5,654 497 11,017 11,008
57
Foreign currency exchange rate risk and interest rate risk
Hitachi has assets and liabilities which are exposed to foreign currency
exchange rate risks and interest rate risks. Hitachi enters into forward
exchange contracts, cross currency swap agreements and interest rate swaps for
the purpose of hedging these risk exposures.
(1) Foreign currency exchange rate risk
Hitachi principally uses forward exchange contracts to manage certain
foreign currency exchange exposures principally from the exchange of U.S.
dollars (USD) and Euros (EUR) into Japanese yen (JPY). These contracts,
which principally mature within one year, are primarily used to fix
future net cash flows principally from trade receivables and payables
recognized, and forecasted transactions, which are denominated in foreign
currencies. Hitachi measures the volume and due date of future net cash
flows by currencies every month. In accordance with the policy, a certain
portion of measured net cash flows is covered using forward exchange
contracts.
Hitachi principally enters into cross currency swap agreements with the
same maturities as underlying debts to fix cash flows from long-term
debts denominated in foreign currencies. The hedging relationship between
these derivative financial instruments and the hedged items is highly
effective in achieving offsetting changes in foreign exchange rates.
The tables below provide information about Hitachi's financial
instruments that are sensitive to foreign currency exchange rates,
including primary forward exchange contracts to sell U.S. dollars (USD)
and Euros (EUR) as of March 31, 2003 and 2002. The tables present the
contract amounts in Japanese yen (JPY) equivalents and weighted average
contractual exchange rates by expected maturity dates. Cross currency
swap agreements and the corresponding foreign currency denominated debt
instruments are not included in the table below because all foreign
currency exposures in cash flows are eliminated.
58
Forward exchange contracts (year ended March 31, 2003) (Millions of yen)
-------------------------------------------------------------------------------------------------------------------------
Expected maturity date
----------------------------------------------------------------
Estimated
2004 2005 Total fair value
--------------- ---------------- ---------------- --------------
Forward exchange contracts
(Pay USD/Receive JPY) contract amount 128,925 - 128,925 (49)
Average contractual exchange rate (JPY/USD) 119.80 - 119.80
Forward exchange contracts
(Pay EUR/Receive JPY) contract amount 38,162 - 38,162 (1,111)
Average contractual exchange rate (JPY/EUR) 125.31 - 125.31
Forward exchange contracts (year ended March 31, 2002) (Millions of yen)
-------------------------------------------------------------------------------------------------------------------------
Expected maturity date
----------------------------------------------------------------
Estimated
2003 2004 Total fair value
--------------- ---------------- ---------------- --------------
Forward exchange contracts
(Pay USD/Receive JPY) contract amount 65,452 - 65,452 (2,728)
Average contractual exchange rate (JPY/USD) 127.27 - 127.27
Forward exchange contracts
(Pay EUR/Receive JPY) contract amount 24,300 - 24,300 (465)
Average contractual exchange rate (JPY/EUR) 112.83 - 112.83
(2) Interest rate risk
Hitachi's exposure to interest rate risk is related principally to debt
obligations. These debt obligations expose Hitachi to variability in the
future cash outflow of interest payments due to changes in interest
rates. To minimize the variability caused by interest rate risk, Hitachi
principally enters into interest rate swaps to manage fluctuations in
cash flows resulting from interest rate risk. The interest rate swaps
principally change the variable-rate cash flows on debt obligations to
fixed-rate cash flows principally associated with medium-term notes by
entering into receive-variable, pay-fixed interest rate swaps. Under the
interest rate swaps, Hitachi receives variable interest rate payments and
makes fixed interest rate payments, thereby creating fixed-rate long-term
debt.
Hitachi has long-term debt including amounts due within one year with
fixed and floating interest rates. The tables below provide information
about Hitachi's financial instruments that are sensitive to changes in
interest rates, including debt obligations. For debt obligations, the
tables below present principal cash flows in Japanese yen (JPY)
equivalents and related weighted average interest rates by expected
maturity dates. However, the tables do not include information in
relation to short-term borrowings because the Company believes that their
risk exposures are insignificant. For interest rate swaps, the table
below presents primary notional amounts by currencies and weighted
average pay/receive interest rates by expected maturity dates. Notional
amounts are used to calculate the contractual payments to be exchanged
under the contract. The tables present the contract amounts in Japanese
yen equivalents and weighted average contractual pay/receive rates by
expected maturity dates.
59
Long-term debt (year ended March 31, 2003) (Millions of yen)
----------------------------------------------------------------------------------------------------------------------------
Expected maturity date
--------------------------------------------------------------------------------------------
Estimated
2004 2005 2006 2007 2008 Thereafter Total fair value
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Fixed rate (notes and debentures):
----------------------------------------------------------------------------------------------------------------------------
JPY debentures 87,770 32,193 290,500 60,000 37,865 174,998 683,326 718,318
Average interest rate 2.35% 2.30% 2.32% 1.69% 1.66% 1.65% 2.15%
JPY convertible debentures 93,933 231,541 - - 6,757 - 332,231 338,778
Average interest rate 1.36% 1.38% - - 0.00% - 1.32%
JPY medium term notes 34,895 23,025 6,403 9,338 23,924 24,110 121,695 121,916
Average interest rate 1.06% 1.24% 1.36% 1.37% 1.51% 1.87% 1.29%
USD medium term notes 1,288 - - 1,313 - - 2,601 2,804
Average interest rate 4.60% - - 5.92% - - 5.39%
Floating rate (notes and debentures):
----------------------------------------------------------------------------------------------------------------------------
JPY debenture - 2,960 - - 3,000 7,000 12,960 13,553
Average interest rate - 0.34% - - 0.44% 0.63% 0.42%
JPY medium term notes 51,719 18,551 2,919 3,075 4,614 19,877 100,755 100,755
Average interest rate 0.55% 0.75% 1.03% 1.11% 1.12% 1.32% 0.82%
USD medium term notes 7,212 18,030 - 1,574 - - 26,816 26,816
Average interest rate 1.69% 1.72% - 1.98% - - 1.72%
Other currency medium
term notes and debentures 147 228 - 353 - - 728 728
Average interest rate 3.85% 3.85% - 3.83% - - 3.84%
Fixed and floating rate (loans):
----------------------------------------------------------------------------------------------------------------------------
Loans, principally from 220,486 177,291 111,406 54,494 83,113 66,769 713,559 720,457
Banks
Average interest rate 2.19% 1.92% 1.78% 1.72% 1.62% 1.71% 1.85%
Weighted average floating rates are based on forward interest rates as of March
31, 2003.
60
Long-term debt (year ended March 31, 2002) (Millions of yen)
----------------------------------------------------------------------------------------------------------------------------
Expected maturity date
--------------------------------------------------------------------------------------------
Estimated
2003 2004 2005 2006 2007 Thereafter Total fair value
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Fixed rate (notes and debentures):
----------------------------------------------------------------------------------------------------------------------------
JPY debentures 30,993 86,165 33,000 290,500 60,000 161,992 662,650 696,303
Average interest rate 2.48% 2.50% 2.47% 2.50% 1.98% 2.06% 2.42%
USD debentures 25,483 - - - - - 25,483 25,848
Average interest rate 6.63% - - - - - 6.63%
JPY convertible debentures 21,364 93,933 231,542 - - - 346,839 368,373
Average interest rate 1.39% 1.38% 1.42% - - - 1.40%
USD convertible debenture 26 - - - - - 26 26
Average interest rate 1.75% - - - - - 1.75%
JPY medium term notes 32,280 15,308 10,418 5,436 11,136 20,503 95,081 95,230
Average interest rate 1.45% 1.80% 1.99% 2.05% 2.15% 2.67% 1.85%
USD medium term notes 1,999 1,291 - - 1,316 - 4,606 4,832
Average interest rate 4.49% 4.60% - - 5.92% - 5.02%
Floating rate (notes and debentures):
----------------------------------------------------------------------------------------------------------------------------
JPY debenture - - 4,983 - - 3,000 7,983 7,983
Average interest rate - - 1.31% - - 0.50% 1.09%
JPY medium term notes 20,638 51,480 8,449 2,995 3,038 39,887 126,487 126,487
Average interest rate 0.82% 0.92% 1.47% 1.60% 1.66% 1.74% 1.19%
USD medium term notes 6,352 7,996 19,988 - 1,578 1,947 37,861 37,861
Average interest rate 3.20% 3.33% 3.02% - 6.15% 8.93% 3.51%
Other currency medium
term notes and debentures 1,085 - - - - - 1,085 1,085
Average interest rate 2.26% - - - - - 2.26%
Fixed and floating rate (loans):
----------------------------------------------------------------------------------------------------------------------------
Loans, principally from
Banks 222,696 231,555 163,793 86,327 48,772 91,850 844,993 847,265
Average interest rate 2.19% 1.08% 1.00% 0.53% 0.43% 0.56% 0.89%
Weighted average floating rates are based on forward interest rates as of March
31, 2002.
61
Interest rate swaps (year ended March 31, 2003) (Millions of yen)
----------------------------------------------------------------------------------------------------------------------------
Expected maturity date
--------------------------------------------------------------------------------------------
Estimated
2004 2005 2006 2007 2008 Thereafter Total fair value
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Notional amounts (JPY):
----------------------------------------------------------------------------------------------------------------------------
Variable to Fixed 47,042 13,717 54,386 49,157 20,159 6,452 190,913 (3,945)
Average pay rate 1.62% 1.53% 1.46% 1.55% 1.63% 2.76% 1.57%
Average receive rate 0.51% 0.49% 0.50% 0.62% 0.63% 1.15% 0.53%
Fixed to Variable 12,500 7,557 13,000 40,000 11,000 32,000 116,057 3,789
Average pay rate 0.59% 0.64% 0.68% 0.79% 0.68% 0.90% 0.68%
Average receive rate 2.19% 2.19% 2.23% 2.09% 2.07% 1.91% 2.15%
Variable to Variable 22,000 3,000 4,500 4,000 - - 33,500 (5)
Average pay rate 0.55% 1.49% 2.01% 1.01% - - 0.99%
Average receive rate 0.73% 1.74% 2.25% 1.32% - - 1.20%
Notional amounts (USD):
----------------------------------------------------------------------------------------------------------------------------
Variable to Fixed 6,851 18,030 1,923 - - - 26,804 (557)
Average pay rate 3.53% 3.55% 4.31% - - - 3.57%
Average receive rate 1.29% 1.28% 1.30% - - - 1.29%
Fixed to Variable 7,971 - - - - - 7,971 37
Average pay rate 1.76% - - - - - 1.76%
Average receive rate 0.43% - - - - - 0.43%
Notional amounts (STP):
----------------------------------------------------------------------------------------------------------------------------
Variable to Fixed 53,574 32,256 15,393 1,451 - - 102,674 (1,047)
Average pay rate 4.67% 4.39% 4.38% 4.96% - - 4.57%
Average receive rate 3.62% 3.66% 3.81% 4.01% - - 3.65%
Weighted average pay/receive rates are based on forward interest rates as of
March 31, 2003.
62
Interest rate swaps (year ended March 31, 2002) (Millions of yen)
----------------------------------------------------------------------------------------------------------------------------
Expected maturity date
--------------------------------------------------------------------------------------------
Estimated
2003 2004 2005 2006 2007 Thereafter Total fair value
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Notional amounts (JPY):
----------------------------------------------------------------------------------------------------------------------------
Variable to Fixed 46,090 49,749 18,759 64,360 30,051 29,546 238,555 (5,394)
Average pay rate 1.73% 1.54% 1.47% 1.37% 1.35% 1.17% 1.53%
Average receive rate 0.76% 0.54% 0.56% 0.58% 0.81% 1.22% 0.66%
Fixed to Variable 32,000 15,500 4,557 13,000 26,999 32,500 124,556 4,163
Average pay rate 0.39% 0.27% 0.29% 0.30% 0.37% 0.20% 0.32%
Average receive rate 2.06% 2.18% 2.11% 2.12% 1.92% 2.15% 2.09%
Variable to Variable 12,250 24,000 3,000 3,500 1,000 5,505 49,255 131
Average pay rate 0.64% 0.38% 0.92% 1.19% 0.01% 0% 0.57%
Average receive rate 0.81% 0.70% 1.58% 1.97% 1.18% 1.38% 1.00%
Notional amounts (USD):
----------------------------------------------------------------------------------------------------------------------------
Variable to Fixed 25,653 4,397 10,926 800 - - 41,776 (561)
Average pay rate 5.48% 4.66% 4.78% 7.03% - - 5.19%
Average receive rate 1.90% 1.87% 1.87% 1.87% - - 1.89%
Fixed to Variable 26,650 - - - - - 26,650 1,480
Average pay rate 2.02% - - - - - 2.02%
Average receive rate 6.63% - - - - - 6.63%
Variable to Variable 3,065 - - - - 1,333 4,398 470
Average pay rate 2.18% - - - - 1.93% 2.03%
Average receive rate 2.54% - - - - 3.68% 3.23%
Notional amounts (STP):
----------------------------------------------------------------------------------------------------------------------------
Variable to Fixed 81,643 25,632 3,797 949 1,454 - 113,475 (467)
Average pay rate 5.57% 5.82% 5.40% 5.33% 4.96% - 5.61%
Average receive rate 4.41% 4.77% 4.84% 4.53% 4.08% - 4.50%
Weighted average pay/receive rates are based on forward interest rates as of
March 31, 2002.
Factors that could cause actual results to differ materially from those
projected or implied in any forward-looking statements in this section include,
but are not limited to, ability of counterparties to the financial instruments
to perform contractual obligations; the general economic condition in the
markets where financial assets Hitachi holds are traded; and the volatility of
the market prices of securities, interest rates and foreign currency exchange
rates. In addition, see "Item 3. Key Information - Risk Factors" for other
examples of factors that could cause actual results to differ materially from
those projected.
63
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
None.
Item 15. Controls and Procedures
An evaluation was carried out, under the supervision and with the participation
of the Company's management including its Chief Executive Officer and principal
financial officer, of the effectiveness of its disclosure controls and
procedures (as defined in Rule 13a-15(e) of the Securities Exchange Act) as of a
date within 90 days prior to the filing date of this report. Based on that
evaluation, the Chief Executive Officer and principal financial officer
concluded that the disclosure controls and procedures as of such date were
effective to ensure that information required to be disclosed by the Company in
the reports that it files or submits under the Securities Exchange Act is
recorded, processed, summarized and reported, within the time periods specified
in the SEC's rules and forms.
There have been no significant changes in the Company's internal controls over
financial reporting that occurred subsequent to the date of its most recent
evaluation that has materially affected, or is reasonably likely to materially
affect, the Company's internal control over financial reporting.
Item 16. [Reserved]
Item 16A. Audit Committee Financial Expert
Not applicable because this Form 20-F covers a period ending before July 15,
2003.
Item 16B. Code of Ethics
Not applicable because this Form 20-F covers a period ending before July 15,
2003.
Item 16C. Principal Accountant Fees and Services
Not applicable because this Form 20-F covers a period ending before December 15,
2003.
Item 16D. Exemptions from the Listing Standards for Audit Committees
Not applicable.
64
PART III
Item 17. Financial Statements
Consolidated Financial Statements of Hitachi, Ltd. and
Subsidiaries:
Page
Number
------
Independent Auditors' Report 66
Consolidated Balance Sheets as of March 31, 2003 and 2002 67
Consolidated Statements of Income for the years ended
March 31, 2003, 2002 and 2001 69
Consolidated Statements of Stockholders' Equity for the
years ended March 31, 2003, 2002 and 2001 70
Consolidated Statements of Cash Flows for the years
ended March 31, 2003, 2002 and 2001 71
Notes to Consolidated Financial Statements 72
Schedule:
Independent Auditors' Report 66
Schedule II Reserves for the years ended March 31,
2003, 2002 and 2001 123
All other schedules are omitted as permitted by the rules and regulations
of the Securities and Exchange Commission, as the required information is
presented in the notes to consolidated financial statements, or the
schedules are not applicable.
Financial statements of affiliates are omitted because none of these meets
the 20% level tests.
65
Independent Auditors' Report
The Board of Directors and Stockholders
Hitachi, Ltd.:
We have audited the consolidated financial statements of Hitachi, Ltd. and
subsidiaries as listed in the accompanying index. In connection with our audits
of the consolidated financial statements, we also have audited the financial
statement schedule as listed in the accompanying index. These consolidated
financial statements and financial statement schedule are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
consolidated financial statements and financial statement schedule based on our
audits.
We conducted our audits in accordance with 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.
The segment information required to be disclosed in financial statements under
accounting principles generally accepted in the United States of America is not
presented in the accompanying consolidated financial statements. Foreign issuers
are presently exempted from such disclosure requirement in Securities Exchange
Act filings with the United States Securities and Exchange Commission.
In our opinion, except for the omission of segment information, as discussed in
the third paragraph, the consolidated financial statements referred to in the
first paragraph above present fairly, in all material respects, the financial
position of Hitachi, Ltd. and subsidiaries as of March 31, 2003 and 2002, and
the results of their operations and their cash flows for each of the years in
the three-year period ended March 31, 2003 in conformity with accounting
principles generally accepted in the United States of America. Also in our
opinion, the related financial statement schedule, when considered in relation
to the basic consolidated financial statements taken as a whole, presents
fairly, in all material respects, the information set forth therein.
KPMG
Tokyo, Japan
May 15, 2003, except as to Note 27 which is as of May 30, 2003
66
HITACHI, LTD.
AND SUBSIDIARIES
Consolidated Balance Sheets
March 31, 2003 and 2002
Yen (millions)
----------------------
Assets 2003 2002
------ ---- ----
Cash and cash equivalents 828,171 1,029,374
Short-term investments (note 2) 186,972 178,933
Trade receivables:
Notes (note 6) 155,277 206,867
Accounts (notes 3 and 6) 1,942,470 1,929,029
Allowance for doubtful receivables and
unearned income (40,520) (35,891)
---------- ---------
Net trade receivables 2,057,227 2,100,005
---------- ---------
Inventories (note 4) 1,187,529 1,214,399
Prepaid expenses and other current assets (note 8) 496,490 457,392
Investment in leases (notes 5 and 6) 437,076 527,432
Investments and advances,
including affiliated companies (note 2) 726,442 834,907
Property, plant and equipment (notes 5 and 9):
Land 445,283 383,781
Buildings 1,838,853 1,748,509
Machinery and equipment 5,709,409 5,510,651
Construction in progress 67,909 97,790
---------- ---------
8,061,454 7,740,731
Less accumulated depreciation 5,460,404 5,226,307
---------- ---------
Net property, plant and equipment 2,601,050 2,514,424
---------- ---------
Other assets (notes 7 and 8) 1,658,432 1,058,788
---------- ---------
10,179,389 9,915,654
========== =========
See accompanying notes to consolidated financial statements.
67
HITACHI, LTD.
AND SUBSIDIARIES
Consolidated Balance Sheets
March 31, 2003 and 2002
Yen (millions)
----------------------
Liabilities and Stockholders' Equity 2003 2002
------------------------------------ ---- ----
Short-term debt (note 9) 825,860 833,838
Current installments of long-term debt (notes 5 and 9) 502,586 366,083
Trade payables:
Notes 71,934 92,799
Accounts 1,140,130 991,037
Accrued expenses 799,211 882,148
Income taxes (note 8) 54,091 60,518
Advances received 252,861 334,172
Other current liabilities (note 8) 358,555 324,670
Long-term debt (notes 5 and 9) 1,512,152 1,798,303
Retirement and severance benefits (note 10) 1,932,646 1,049,054
Other liabilities (note 8) 124,573 80,064
---------- ---------
Total liabilities 7,574,599 6,812,686
---------- ---------
Minority interests 751,578 798,744
Stockholders' equity:
Common stock (notes 9 and 11) 282,032 282,032
Capital surplus (note 11) 562,214 527,010
Legal reserve (note 12) 111,309 110,751
Retained earnings (notes 9 and 12) 1,655,029 1,643,248
Accumulated other comprehensive loss (note 14) (755,525) (258,484)
Treasury stock (note 13) (1,847) (333)
---------- ---------
Total stockholders' equity 1,853,212 2,304,224
Commitments and contingencies (note 15)
---------- ---------
10,179,389 9,915,654
========== =========
See accompanying notes to consolidated financial statements.
68
HITACHI, LTD.
AND SUBSIDIARIES
Consolidated Statements of Income
Years ended March 31, 2003, 2002 and 2001
Yen (millions)
----------------------------------------
2003 2002 2001
---- ---- ----
Revenues:
Product sales (note 3) 7,235,069 7,005,470 7,425,460
Financial and other services 956,683 988,314 991,522
----------- ------------ ----------
Total revenues 8,191,752 7,993,784 8,416,982
Cost of sales:
Product sales (5,617,932) (5,563,709) (5,518,014)
Financial and other services (622,561) (620,687) (637,009)
----------- ------------ ----------
Total cost of sales (6,240,493) (6,184,396) (6,155,023)
Selling, general and administrative expenses (1,798,292) (1,926,803) (1,919,647)
Impairment losses for long-lived assets (note 16) (8,474) (46,115) -
Restructuring charges (note 17) - (288,096) (8,814)
Interest income 14,158 22,481 32,428
Dividends received 8,921 6,134 9,641
Other income (note 18) 23,658 7,424 27,544
Interest charges (34,338) (45,830) (58,759)
Other deductions (note 18) (60,064) (124,655) (20,697)
----------- ------------ ----------
Income (loss) before income taxes and minority interests 96,828 (586,072) 323,655
Income taxes (note 8) (52,662) 71,114 (164,861)
----------- ------------ ----------
Income (loss) before minority interests 44,166 (514,958) 158,794
Minority interests (16,299) 31,121 (54,414)
----------- ------------ ----------
Net income (loss) 27,867 (483,837) 104,380
=========== ============ ==========
Net income (loss) per share (note 19): Yen
----------------------------------------
Basic 8.31 (144.95) 31.27
=========== ============ ==========
Diluted 8.19 (144.95) 30.32
=========== ============ ==========
See accompanying notes to consolidated financial statements.
69
HITACHI, LTD.
AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
Years ended March 31, 2003, 2002 and 2001
Yen (millions)
------------------------------------
2003 2002 2001
---- ---- ----
Common stock (notes 9 and 11):
Balance at beginning of year 282,032 281,754 281,738
Conversion of convertible debentures - 278 16
----------- ----------- -----------
Balance at end of year 282,032 282,032 281,754
=========== =========== ===========
Capital surplus (note 11):
Balance at beginning of year 527,010 501,243 499,081
Conversion of convertible debentures 370 359 1,069
Increase arising from issuance of common stock and other 34,834 25,408 1,093
----------- ----------- -----------
Balance at end of year 562,214 527,010 501,243
=========== =========== ===========
Legal reserve (note 12):
Balance at beginning of year 110,751 109,815 106,885
Transfers from retained earnings 554 978 2,971
Transfers to minority interests arising from conversion of subsidiaries'
convertible debentures (24) (5) (17)
Transfers from (to) minority interests arising from issuance of
subsidiaries' common stock and other 28 (37) (24)
----------- ----------- -----------
Balance at end of year 111,309 110,751 109,815
=========== =========== ===========
Retained earnings (notes 9 and 12):
Balance at beginning of year 1,643,248 2,157,136 2,082,541
Net income (loss) 27,867 (483,837) 104,380
Cash dividends (10,013) (28,373) (28,371)
Transfers to legal reserve (554) (978) (2,971)
Net transfer to minority interests arising from conversion of
subsidiaries' convertible debentures (291) (64) (347)
Net transfer from (to) minority interests arising from newly consolidated
subsidiaries and other (5,228) (636) 1,904
----------- ----------- -----------
Balance at end of year 1,655,029 1,643,248 2,157,136
=========== =========== ===========
Accumulated other comprehensive loss (note 14):
Balance at beginning of year (258,484) (188,446) 17,442
Other comprehensive loss, net of reclassification adjustments (495,861) (69,948) (205,111)
Net transfer from (to) minority interests arising from conversion of
subsidiaries' convertible debentures 30 1 (9)
Net transfer to minority interests arising from issuance of
subsidiaries' common stock and other (1,210) (91) (768)
----------- ----------- -----------
Balance at end of year (755,525) (258,484) (188,446)
=========== =========== ===========
Treasury stock (note 13):
Balance at beginning of year (333) - -
Acquisition for treasury (1,514) (333) -
----------- ----------- -----------
Balance at end of year (1,847) (333) -
=========== =========== ===========
Total stockholders' equity 1,853,212 2,304,224 2,861,502
=========== =========== ===========
Comprehensive loss (note 14):
Net income (loss) 27,867 (483,837) 104,380
Other comprehensive loss arising during the year (492,476) (114,912) (194,560)
Reclassification adjustments for net loss (gain)
included in net income (loss) (3,385) 44,964 (10,551)
----------- ----------- -----------
Comprehensive loss (467,994) (553,785) (100,731)
=========== =========== ===========
See accompanying notes to consolidated financial statements.
70
HITACHI, LTD.
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended March 31, 2003, 2002 and 2001
Yen (millions)
-------------------------------
2003 2002 2001
---- ---- ----
Cash flows from operating activities (note 21):
Net income (loss) 27,867 (483,837) 104,380
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Depreciation 480,274 529,418 505,507
Impairment losses for long-lived assets 8,474 46,115 -
Deferred income taxes (35,526) (182,072) 12,505
Equity in earnings of affiliated companies 15,803 35,756 (2,559)
Gain on sale of investments and subsidiaries' common stock (54,849) (4,035) (17,437)
Impairment of investment in securities 65,828 76,867 6,876
Loss (gain) on disposal of rental assets and other property (14,064) 59,687 19,165
Income (loss) applicable to minority interests 16,299 (31,121) 54,414
(Increase) decrease in receivables 2,280 450,904 (72,035)
(Increase) decrease in inventories 7,994 261,229 (128,477)
(Increase) decrease in prepaid expenses and other current assets 3,170 (999) (38,234)
Increase (decrease) in payables 96,777 (271,698) 95,855
Increase (decrease) in accrued expenses and retirement and
severance benefits (71,969) 70,813 8,171
Increase (decrease) in accrued income taxes (5,825) (48,174) 26,337
Increase (decrease) in other liabilities 11,989 (69,671) (62,858)
Other 91,996 43,684 23,823
--------- --------- ---------
Net cash provided by operating activities 646,518 482,866 535,433
Cash flows from investing activities (note 21):
(Increase) decrease in short-term investments (8,162) 253,236 198,610
Capital expenditures (323,825) (429,835) (463,585)
Purchase of assets to be leased (459,036) (444,931) (532,142)
Collection of investment in leases 411,522 469,108 421,527
Proceeds from disposal of rental assets and other property 142,973 59,574 70,442
Proceeds from sale of investments and subsidiaries' common stock 167,350 55,354 50,473
Purchase of investments and subsidiaries' common stock (262,424) (129,527) (125,473)
Purchase of software (152,492) (112,506) (36,405)
Other (135,191) 6,656 45,836
--------- --------- ---------
Net cash used in investing activities (619,285) (272,871) (370,717)
Cash flows from financing activities (note 21):
Decrease in short-term debt (12,490) (408,514) (5,153)
Proceeds from long-term debt 375,802 573,373 518,872
Payments on long-term debt (547,759) (743,385) (642,594)
Proceeds from sale of common stock by subsidiaries 1,872 42,466 13,342
Dividends paid to stockholders (9,973) (28,318) (28,235)
Dividends paid to minority stockholders of subsidiaries (13,108) (13,401) (15,739)
Acquisition of common stock for treasury (1,514) (333) -
--------- --------- ---------
Net cash used in financing activities (207,170) (578,112) (159,507)
--------- --------- ---------
Effect of exchange rate changes on cash and cash equivalents (21,266) 15,888 18,962
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents (201,203) (352,229) 24,171
Cash and cash equivalents at beginning of year 1,029,374 1,381,603 1,357,432
--------- --------- ---------
Cash and cash equivalents at end of year 828,171 1,029,374 1,381,603
========= ========= =========
See accompanying notes to consolidated financial statements.
71
HITACHI, LTD.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(1) Basis of Presentation and Summary of Significant Accounting Policies
(a) Basis of Presentation
Hitachi, Ltd. (the Company) and its domestic subsidiaries maintain
their books of account in conformity with the financial accounting
standards of Japan, and its foreign subsidiaries in conformity with
those of the countries of their domicile.
The consolidated financial statements presented herein have been
prepared in a manner and reflect the adjustments which are
necessary to conform them with accounting principles generally
accepted in the United States of America. Management of the Company
has made a number of estimates and assumptions relating to the
reporting of assets and liabilities and the disclosure of
contingent assets and liabilities to prepare these financial
statements. Actual results could differ from those estimates.
(b) Principles of Consolidation
The consolidated financial statements include the accounts of the
Company and those of its majority-owned subsidiaries, whether
directly or indirectly controlled. Intercompany accounts and
significant intercompany transactions have been eliminated in
consolidation.
Investments in corporate joint ventures and affiliated companies
that are accounted for using the equity method primarily relate to
20% to 50% owned companies to which the Company has the ability to
exercise significant influence over operational and financial
policies of the investee company. Investments of less than 20% or
where the Company does not have significant influence are accounted
for using the cost method. On a continuous basis, but no less
frequently than at the end of each semi-annual period, the Company
evaluates the carrying amount of its ownership interests in
investee companies for possible impairment. Factors considered in
assessing whether an indication of other than temporary impairment
exists include the achievement of business plan objectives and
milestones including cash flow projections and the results of
planned financing activities, the financial condition and prospects
of each investee company, the fair value of the ownership interest
relative to the carrying amount of the investment, the period of
time the fair value of the ownership interest has been below the
carrying amount of the investment and other relevant factors.
Impairment to be recognized is measured based on the amount by
which the carrying amount of the investment exceeds the fair value
of the investment. Fair value is determined based on quoted market
prices, projected discounted cash flows or other valuation
techniques as appropriate.
(c) Cash Equivalents
For the purpose of the statement of cash flows, the Company
considers all highly liquid investments with insignificant risk of
changes in value which have maturities of generally three months or
less when purchased to be cash equivalents.
(d) Foreign Currency Translation
Foreign currency financial statements have been translated in
accordance with Statement of Financial Accounting Standards (SFAS)
No. 52, "Foreign Currency Translation." Under this standard, the
assets and liabilities of the Company's subsidiaries located
outside Japan are translated into Japanese yen at the rates of
exchange in effect at the balance sheet date. Income and expense
items are translated at the average exchange rates prevailing
during the year. Gains and losses resulting from foreign currency
transactions are included in other income (deductions), and those
resulting from translation of financial statements are excluded
from the consolidated statements of income and are reported in
other comprehensive income.
72
HITACHI, LTD.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(e) Investment in Securities
The Company classifies investments in securities that have readily
determinable fair values and all investments in debt securities in
three categories, such as held-to-maturity securities, trading
securities and available-for-sale securities.
Held-to-maturity securities are debt securities that the Company
has the positive intent and ability to hold to maturity. Trading
securities are debt and equity securities that are bought and held
principally for the purpose selling them in the near term.
Available-for-sale securities are debt and equity securities not
classified as either held-to-maturity securities or trading
securities.
Held-to-maturity securities are reported at amortized cost. Trading
securities are reported at fair value, with unrealized gains and
losses included in earnings. Available-for-sale securities are
reported at fair value, with unrealized gains and losses reported
in other comprehensive income.
A decline in fair value of any available-for-sale or
held-to-maturity security below the amortized cost basis that is
deemed to be other than temporary results in a write-down of the
amortized cost basis to fair value as a new cost basis and the
amount of the write-down is included in earnings.
On a continuous basis, but no less frequently than at the end of
each semi-annual period, the Company evaluates the cost basis of an
available-for-sale security for possible impairment. Factors
considered in assessing whether an indication of other than
temporary impairment exists include: the degree of change in ratio
of market prices per share to book value per share at date of
evaluation compared to that at date of acquisition, the financial
condition and prospects of each investee company, industry
conditions in which the investee company operates, the fair value
of an available-for-sale security relative to the cost basis of the
investment, the period of time the fair value of an
available-for-sale security has been below the cost basis of the
investment and other relevant factors.
The Company evaluates the cost basis of a held-to-maturity security
for possible impairment by taking into consideration the financial
condition, business prospects and credit worthiness of the issuer.
The published credit ratings of investee companies that are
generally "BB" or lower are considered an indication of other than
temporary impairment.
Impairment to be recognized is measured based on the amount by
which the carrying amount of the investment exceeds the fair
value of the investment. Fair value is determined based on quoted
market prices, projected discounted cash flows or other valuation
techniques as appropriate.
The cost of a security sold or the amount reclassified out of
accumulated other comprehensive income into earnings was determined
by the average method.
73
HITACHI, LTD.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(f) Securitization
The Company and certain subsidiaries have securitized certain
financial assets such as lease receivables, trade receivables and
others. In the securitization process, securitized assets are sold
to Special Purpose Entities (SPE) which are funded through the
issuance of asset-backed securities to investors. When the Company
and its subsidiaries sell the financial assets to the SPE in a
securitization transaction, the carrying amount of the financial
assets is allocated based on relative fair values to the portions
to be retained and sold. The Company and its subsidiaries recognize
a gain or loss for the difference between the net proceeds received
and the allocated carrying amount of the assets sold when the
transaction is consummated.
Fair values are based on the present value of estimated future cash
flows which take into consideration various factors such as
expected credit loss and others.
(g) Inventories
Inventories are stated at the lower of cost or market. Cost is
determined by the specific identification method for job order
inventories and generally by the average method for raw materials
and other inventories.
(h) Property, Plant and Equipment
Property, plant and equipment are stated at cost. Property, plant
and equipment are principally depreciated by the declining-balance
method, except for some assets which are depreciated by the
straight-line method, over the following estimated useful lives:
Buildings
Buildings and building equipment 3 to 50 years
Structures 7 to 60 years
Machinery and equipment
Machinery 4 to 13 years
Vehicles 4 to 7 years
Tools, furniture and fixtures 2 to 20 years
(i) Goodwill and Other Intangible Assets
Effective April 1, 2002, the Company accounts for goodwill and
other intangible assets in accordance with SFAS No. 142," Goodwill
and Other Intangible Assets." Goodwill and intangible assets with
indefinite useful lives are no longer amortized, but instead are
tested for impairment at least annually in accordance with the
provisions of this statement. Intangible assets with finite useful
lives are amortized over their respective estimated useful lives
and are reviewed for impairment in accordance with SFAS No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets."
74
HITACHI, LTD.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(j) Capitalized Software Costs
Costs incurred for computer software developed or obtained for
internal use are capitalized and amortized on a straight-line basis
over their estimated useful lives. In addition, the Company and its
subsidiaries develop certain computer software to be sold where
related costs are capitalized after establishment of technological
feasibility. Such capitalized costs are amortized based on the
ratio of each software's expected future revenue to current year's
revenue.
(k) Retirement and Severance Benefits
The Company accounts for retirement and severance benefits in
accordance with SFAS No. 87, "Employers' Accounting for Pensions."
Unrecognized gains and losses are amortized using the straight-line
method over the average remaining service period of active
employees.
(l) Derivative Financial Instruments
The Company accounts for derivative financial instruments in
accordance with SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," as amended. SFAS No. 133
requires that all derivative financial instruments, such as forward
exchange and interest rate swap contracts, be recognized in the
financial statements as either assets or liabilities and measured
at fair value regardless of the purpose or intent for holding them.
The Company designates and accounts for hedging derivatives as
follows:
. "Fair value" hedge: a hedge of the fair value of a recognized
asset or liability or of an unrecognized firm commitment. The
changes in fair value of the recognized assets or liabilities or
unrecognized firm commitment and the derivatives are recorded in
earnings if the hedge is considered highly effective.
. "Cash flow" hedge: a hedge of a forecasted transaction or of the
variability of cash flows to be received or paid related to a
recognized asset or liability. The changes in the fair value of
the derivatives designated as cash flow hedges are recorded as
other comprehensive income if the hedge is considered highly
effective. This treatment is continued until earnings are
affected by the variability in cash flows or the unrecognized
firm commitment of the designated hedged item, at which point
changes in fair value of the derivative is recognized in income.
. "Foreign currency" hedge: a hedge of foreign-currency fair value
or cash flow. The changes in fair value of the recognized assets
or liabilities or unrecognized firm commitment and the
derivatives are recorded as either earnings or other
comprehensive income if the hedge is considered highly effective.
Recognition as earnings or other comprehensive income is
dependent on the treatment of foreign currency hedges as fair
value or cash flow hedges.
The Company follows the documentation requirements as prescribed by
the standard, which includes risk management objective and strategy
for undertaking various hedge transactions. In addition, a formal
assessment is made at the hedge's inception and periodically on an
ongoing basis, as to whether the derivative used in hedging
activities is highly effective in offsetting changes in fair values
or cash flows of hedged items. Hedge accounting is discontinued for
ineffective hedges, if any. Subsequent changes in the fair value of
derivatives related to discontinued hedges are recognized in
earnings immediately.
75
HITACHI, LTD.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(m) Revenue Recognition
Staff Accounting Bulletin No. 101 (SAB 101) expresses certain views
of the United States Securities and Exchange Commission (SEC) in
applying generally accepted accounting principles to revenue
recognition in the financial statements. In accordance with SAB
101, we generally recognize revenue when persuasive evidence of an
arrangement exists, delivery has occurred or services are rendered,
the sales price is fixed and determinable and collectibility is
probable. Our more specific revenue recognition policies based on
the type of revenue earned and our product offerings are discussed
below.
The Company enters into transactions that include multiple element
arrangements which may include any combinations of hardware
products, related software products, installment and maintenance.
When some elements are delivered prior to others in an arrangement,
revenue is deferred until the delivery of the last service element,
unless transactions are such that vendor specific objective
evidence ("VSOE") of fair value of the undelivered elements is
available, the functionality of the delivered element is not
dependent on the undelivered elements and delivered elements
represents the culmination of the earnings process. VSOE is the
price charged by the Company to an external customer for the same
element when such element is sold separately. The Company allocates
revenue on software arrangements involving multiple elements to
each element based on its relative fair value.
Product Sales:
Revenue from sales of these products are recognized when title and
risk of loss have been transferred to the customer. Depending upon
the terms of the contract or arrangement with the customer, this
may occur at the time of shipment, when installation is completed
or upon the attainment of customer acceptance. The Company's policy
is not to accept product returns unless the products are defective.
The conditions of acceptance are governed by the terms of the
contract or customer arrangement and those not meeting the
predetermined specification are not recorded as revenue. Product
warranties are offered on our products and a warranty accrual is
established when sales are recognized and is based on estimated
future costs of repair and replacement principally using our
historical experience of warranty claims.
Price protections are provided to the Company's semiconductor
memory business customers and retailers of the Company's consumer
products business. Price protection is provided to compensate the
customers and retailers for decline in product's value due mainly
to competition. Price protection granted to our customers is
classified as a reduction of revenue on our consolidated statement
of income. In addition, it is our policy to accrue reasonably and
reliably estimated price adjustment at the later of the date at
which the related sales are recognized, or the date at which the
price protection is offered. The estimate is made based primarily
upon historical experience or agreement on the adjustment rate and
the number of units that are subject to such adjustment (e.g.,
units in distribution channel).
76
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AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Product revenues which are recognized upon shipment are IT system
products, Large Scale Integrated Circuits, semiconductor
manufacturing equipment, test and measurement equipments,
construction equipment, displays, disk drives, televisions, air
conditioners, batteries, magnetic tapes, high functional materials,
cable products and automotive equipment. Product revenues which are
recognized upon acceptance or shipment are railway vehicles.
Product revenues that are recognized upon acceptance are medical
electronic devices, industrial machinery and equipment, nuclear,
thermal and hydroelectric power plant, and elevators and
escalators.
Revenue from sales of tangible products under long-term
construction type arrangements, principally in connection with the
construction of nuclear, thermal and hydroelectric power plants,
are recognized under the percentage-of-completion method. Under the
percentage-of-completion method, revenue is recognized as
percentage of estimated total revenue that incurred costs to date
bear to estimated total costs after giving effect to estimates of
costs to complete based upon most recent information. Any
anticipated losses on fixed price contracts are charged to
operations when such losses can be estimated. Provisions are made
for contingencies (i.e. performance penalty, benchmarking, etc.) in
the period in which they become known pursuant to specific contract
terms and conditions and are estimable.
The Company recognizes revenue in accordance with the provisions of
Statement of Position No. 97-2, "Software Revenue Recognition" as
amended by Statement of Position No. 98-9. Revenue from software
consists of software licensing, customized software development and
post contract customer support. Revenues from software license
arrangements are recognized upon shipment of the software if
evidence of the arrangement exists, pricing is fixed and
determinable and collectibility is probable. Customized software
revenue is recognized upon customer acceptance. Revenue from post
contract customer support is amortized over the period of the post
contract customer support. Consulting and training services are
recognized when the services are rendered.
Our standard software license agreement provides for a limited
warranty that the license will operate substantially in accordance
with the functionality described in the documentation provided with
the products. The standard software license does not provide for
right of return. We provide for warranty at the time of revenue
recognition using our historical experience of warranty claims. To
date such warranty provisions have been insignificant.
Service Revenues:
Service revenues from maintenance and distribution services are
recognized upon completion of service delivery. Revenue from time
service contracts is recognized as services are rendered. Revenue
from long-term fixed price service contracts such as support or
maintenance contracts is recognized ratably over the contractual
period. Finance lease income is recognized at level rates of return
over the term of the leases. Operating lease income is recognized
on a straight-line basis over the term of the lease.
77
HITACHI, LTD.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(n) Advertising
Advertising costs are charged to the statement of income as
incurred.
(o) Research and Development Costs
Research and development costs are charged to the statement of
income as incurred. Costs incurred in connection with the
development of software products are accounted for in accordance
with SFAS No.86, "Accounting for the Costs of Computer Software to
Be Sold, Leased or Otherwise Marketed." Development costs incurred
in the research and development of new software products and
enhancements to existing products are expensed as incurred until
technological feasibility has been established.
(p) Income Taxes
Deferred income taxes are accounted for under the asset and
liability method in accordance with SFAS No. 109, "Accounting for
Income Taxes." Deferred tax assets and liabilities are recognized
for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases and operating loss and
tax credit carryforwards. Under this method, deferred tax assets
and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. Under SFAS No.
109, the effect on deferred tax assets and liabilities of a change
in tax rates is recognized in income in the period that includes
the enactment date.
(q) Sales of Stock by Subsidiaries
The change in the Company's proportionate share of subsidiary
equity resulting from issuance of stock by the subsidiaries is
accounted for as an equity transaction.
(r) Treasury Stock
Treasury stock is accounted for by the cost method.
(s) Net Income Per Share
Net income per share is computed in accordance with SFAS No. 128,
"Earnings per Share." This standard requires a dual presentation of
basic and diluted net income per share amounts on the face of the
statement of income. Under this standard, basic net income per
share is computed based upon the weighted average number of shares
of common stock outstanding during each year. Diluted net income
per share reflects the potential 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 that then shared in the earnings of the Company.
78
HITACHI, LTD.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(t) Stock-based Compensation
As of March 31, 2003, the Company has two stock-based employee
compensation plans, which are described more fully in note 26. The
Company accounts for those plans under the recognition and
measurement principles of Accounting Principles Board Opinion (APB)
No. 25, "Accounting for Stock Issued to Employees." No stock-based
employee compensation cost is reflected in net income, as all
options granted under those plans had an exercise price not less
than market value of the underlying common stock on the date of
grant.
SFAS No. 123, "Accounting for Stock-based Compensation," prescribes
the recognition of compensation expense based on the fair value of
options on the grant date and allows continuous application of APB
No. 25 if certain pro forma disclosures are made assuming
hypothetical fair value method application. The Company elected to
continue applying APB No. 25, however, the pro forma effects of
applying SFAS No. 123 on net income (loss) and the per share
information for the years ended March 31, 2003, 2002 and 2001 were
not material.
(u) Disclosures about Segments of an Enterprise and Related Information
SFAS No. 131, "Disclosures about Segments of an Enterprise and
Related Information," was issued in June 1997. This standard
establishes standards for the manner in which a public business
enterprise is required to report financial and descriptive
information about its operating segments. This standard defines
operating segments as components of an enterprise for which
separate financial information is available and evaluated regularly
as a means for assessing segment performance and allocating
resources to segments. A measure of profit or loss, total assets
and other related information is required to be disclosed for each
operating segment. Further, this standard requires the disclosure
of information concerning revenues derived from the enterprise's
products or services, countries in which it earns revenue or holds
assets and major customers. This standard is effective for the
Company's fiscal year ended March 31, 1999. However, foreign
issuers are presently exempted from the segment disclosure
requirements of SFAS No. 131 in Securities Exchange Act filings
with SEC, and the Company has not presented the segment information
required to be disclosed in the footnotes to the consolidated
financial statements under SFAS No. 131.
79
HITACHI, LTD.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(v) New Accounting Standards
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations," which addresses financial accounting and
reporting for obligations associated with the retirement of
tangible long-lived assets and the associated asset retirement
costs. The standard applies to legal obligations associated with
the retirement of long-lived assets that result from the
acquisition, construction, development and (or) normal use of the
asset. SFAS No. 143 requires that the fair value of a liability for
an asset retirement obligation be recognized in the period in which
it is incurred if a reasonable estimate of fair value can be made.
The Company is required and plans to adopt the provisions of SFAS
No. 143 for the fiscal year beginning April 1, 2003. SFAS No. 143
will have no material impact on the consolidated financial position
or results of operations.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." This statement
addresses financial accounting and reporting for costs associated
with exit or disposal activities and nullifies the FASB's Emerging
Issues Task Force (EITF) Issue No. 94-3, "Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring)."
SFAS No. 146 applies to costs associated with an exit activity that
does not involve an entity newly acquired in a business combination
covered by EITF Issue No. 95-3, "Recognition of Liabilities in
Connection with a Purchase Business Combination," or with a
disposal activity covered by SFAS No. 144. This statement requires
that a liability for a cost associated with an exit or disposal
activity be recognized when the liability is incurred and measured
at fair value. The provisions of the statement are effective for
exit or disposal activities that are initiated after December 31,
2002. The adoption of this statement did not have a material effect
on the Company's financial position or results of operations.
In January 2003, the FASB issued Interpretation No. 46,
"Consolidation of Variable Interest Entities, an interpretation of
ARB No. 51." This interpretation addresses the consolidation by
business enterprises of variable interest entities as defined in
the interpretation. The interpretation applies immediately to
variable interests in variable interest entities created and
acquired after January 31, 2003. For variable interest in a
variable interest entity created before February 1, 2003, the
interpretation is applicable no later than the beginning of the
first interim or annual reporting period beginning after June 15,
2003. The application of this interpretation did not have a
material effect on the Company's consolidated financial statements
for the year ended March 31, 2003 and is not expected to have a
material effect for the year ending March 31, 2004.
80
HITACHI, LTD.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(2) Investment in Securities
Short-term investments as of March 31, 2003 and 2002 are as follows:
Yen (millions)
----------------------
2003 2002
---- ----
Investment in securities:
Available-for-sale securities 100,288 93,660
Held-to-maturity securities 6,057 4,866
Trading securities 80,627 80,407
---------- ----------
Short-term investments 186,972 178,933
========== ==========
Investments and advances, including affiliated companies as of March 31,
2003 and 2002 are as follows:
Yen (millions)
----------------------
2003 2002
---- ----
Investment in securities:
Available-for-sale securities 297,656 439,997
Held-to-maturity securities 1,487 6,151
Securities without readily determinable
fair values 75,860 73,639
Investments in affiliated companies 237,024 240,748
Advances and others 114,415 74,372
---------- ----------
Investments and advances,
including affiliated companies 726,442 834,907
========== ==========
The following is a summary of the amortized cost basis, gross unrealized
holding gains, gross unrealized holding losses and aggregate fair value of
available-for-sale securities by the consolidated balance sheets
classification as of March 31, 2003 and 2002.
Yen (millions)
--------------------------------------------------------------------------------------------------
2003 2002
----------------------------------------------- -----------------------------------------------
Amortized Gross Gross Aggregate Amortized Gross Gross Aggregate
cost basis gains losses fair value cost basis gains losses fair value
---------- ----- ------ ---------- ---------- ----- ------ ----------
Short-term investments:
Debt securities 52,432 61 50 52,443 62,114 48 51 62,111
Other securities 47,897 5 57 47,845 31,717 4 172 31,549
-------- -------- ------- -------- -------- -------- ------- --------
100,329 66 107 100,288 93,831 52 223 93,660
Investments and advances:
Equity securities 115,999 51,951 8,772 159,178 173,204 116,411 7,093 282,522
Debt securities 117,394 606 2,484 115,516 125,059 589 4,276 121,372
Other securities 23,033 75 146 22,962 36,741 234 872 36,103
-------- -------- ------- -------- -------- -------- ------- --------
256,426 52,632 11,402 297,656 335,004 117,234 12,241 439,997
-------- -------- ------- -------- -------- -------- ------- --------
356,755 52,698 11,509 397,944 428,835 117,286 12,464 533,657
======== ======== ======= ======== ======== ======== ======= ========
Debt securities consist mainly of national, local and foreign governmental
bonds, debentures issued by banks and corporate bonds. Other securities
consist mainly of investment trusts.
81
HITACHI, LTD.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The proceeds from sale of available-for-sale securities for the years ended
March 31, 2003, 2002 and 2001 are JPY 112,861 million, JPY 62,783 million
and JPY 167,923 million, respectively. The gross realized gains on the sale
of those securities for the years ended March 31, 2003, 2002 and 2001 are
JPY 40,119 million, JPY 6,585 million and JPY 10,525 million, respectively,
while gross realized losses on the sale of those securities for the years
ended March 31, 2003, 2002 and 2001 are JPY 4,660 million, JPY 2,700
million and JPY 460 million, respectively.
In addition, during the year ended March 31, 2001, certain subsidiaries
contributed available-for-sale securities to pension fund trusts in the
amount of JPY 25,684 million. Gross realized gains on those contributions
for the year ended March 31, 2001 were JPY 15,651 million. For the years
ended March 31, 2003, 2002 and 2001 the amount of the net unrealized
holding gain or loss on available-for-sale securities that has been
included in accumulated other comprehensive loss is a loss of JPY 60,907
million, JPY 97,972 million and JPY 61,073 million, respectively, and the
amount of gains and losses reclassified out of accumulated other
comprehensive loss is net gain of JPY 5,999 million, net loss of JPY 74,842
million and net gain of JPY 30,892 million, respectively.
Various held-to-maturity securities are held by certain subsidiaries. Gross
unrealized holding gains and losses of these securities were not material.
Trading securities consist mainly of investments in trust accounts. The
portions of trading losses for the years ended March 31, 2003, 2002 and
2001 that relate to trading securities still held at the balance sheet date
are JPY 437 million, JPY 2,356 million and JPY 13,659 million,
respectively.
82
HITACHI, LTD.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The contractual maturities of debt securities and other securities
classified as Investments and advances in the consolidated balance sheets
as of March 31, 2003 are as follows:
Yen (millions)
-------------------------------------
Held-to- Available-
maturity for-sale Total
-------- -------- -----
Due within five years 1,380 43,935 45,315
Due after five years 107 94,543 94,650
------ -------- --------
1,487 138,478 139,965
====== ======== ========
Expected redemptions may differ from contractual maturities because these
securities are redeemable at the option of the issuers.
The aggregate fair values of investments in affiliated companies based on
the quoted market price as of March 31, 2003 and 2002 are JPY 179,884
million and JPY 241,589 million, respectively. The aggregate carrying
amount of such investments as of March 31, 2003 and 2002 are JPY 127,343
million and JPY 167,805 million, respectively.
As of March 31, 2003, recognitions of other than temporary declines in
values of investments in certain affiliated companies resulted in the
difference of JPY 25,061 million between the carrying amount and the amount
of underlying equity in net assets. In addition, equity method goodwill of
JPY 11,145 million is included in investments in certain affiliated
companies as of March 31, 2003 and 2002.
83
HITACHI, LTD.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(3) Receivables
The aggregated annual maturities of the long-term trade receivables after
March 31, 2004 included in Trade receivables- Accounts are as follows:
Yen
Years ending March 31 (millions)
--------------------- ----------
2005 26,889
2006 1,699
2007 1,299
2008 1,224
Thereafter 3,440
--------
34,551
========
Sales on an installment contract basis for the years ended March 31, 2003,
2002 and 2001 totaled JPY 14,618 million, JPY 17,647 million and JPY 11,663
million, respectively.
(4) Inventories
Inventories as of March 31, 2003 and 2002 are summarized as follows:
Yen (millions)
------------------------
2003 2002
---- ----
Finished goods 373,317 347,391
Work in process 646,932 711,226
Raw materials 167,280 155,782
----------- -----------
1,187,529 1,214,399
=========== ===========
Inventories include items associated with major contracts which, because of
long-term processing requirements, have been or are expected to be
performed over a period of more than 12 months. Those items as of March 31,
2003 and 2002 aggregated JPY 40,585 million and JPY 72,886 million,
respectively.
(5) Leases
The Company and certain subsidiaries are lessors of manufacturing machinery
and equipment under financing and operating leasing arrangements with terms
ranging from 3 to 6 years.
Machinery and equipment at cost under operating leases and accumulated
depreciation as of March 31, 2003 amounted to JPY 1,207,877 million and JPY
895,013 million, respectively. The leased assets are recorded at cost and
depreciated using the straight-line method over their estimated useful
lives.
84
HITACHI, LTD.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The following table shows the future minimum lease receivables of financing
and non-cancelable operating leases as of March 31, 2003 and the future
minimum lease receivables of financing leases as of March 31, 2002:
Yen (millions)
--------------
2003
----
Financing Operating
Years ending March 31 leases leases
--------------------- ------ ------
2004 177,413 53,566
2005 133,530 42,131
2006 87,493 28,651
2007 49,049 14,705
2008 22,291 4,910
Thereafter 26,462 5,876
------------ ------------
Total minimum payments to be received 496,238 149,839
============
Amount representing executory costs (28,364)
Unearned income (25,591)
Allowance for doubtful receivables (5,207)
------------
Net investment in financing leases 437,076
============
Yen (millions)
--------------
2002
----
Financing
leases
------
Total minimum payments to be received 619,574
Amount representing executory costs (42,205)
Unearned income (43,056)
Allowance for doubtful receivables (6,881)
------------
Net investment in financing leases 527,432
============
Allowance for doubtful receivables is determined on the basis of loss
experiences and assessment of inherent risks.
The Company and certain subsidiaries lease certain manufacturing machinery
and equipment. The amount of leased assets at cost under capital leases as
of March 31, 2003 and 2002 amounted to JPY 32,669 million and JPY 20,154
million, respectively, and accumulated depreciation as of March 31, 2003
and 2002 amounted to JPY 14,231 million and JPY 9,782 million,
respectively.
85
HITACHI, LTD.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
In March 2003, the Company entered into a sale and lease back agreement for
its headquarter land and building for a total proceeds of JPY 40,000
million. The lease back is classified as an operating lease with a term of
thirty-eight months. A part of the gain on sale of JPY 8,551 million which
represents the present value of the minimum lease payments over the lease
term has been deferred and will be recognized over the lease term.
The following table shows the future minimum lease payments of capital and
non-cancelable operating leases as of March 31, 2003:
Yen (millions)
--------------
Capital Operating
Years ending March 31 leases leases
--------------------- ------ ------
2004 5,774 13,174
2005 4,976 10,868
2006 2,857 6,582
2007 2,293 3,132
2008 2,078 1,958
Thereafter 4,607 8,578
------------ ------------
Total minimum lease payments 22,585 44,292
============
Amount representing executory costs (654)
Amount representing interest (1,864)
------------
Present value of net minimum lease payments 20,067
Less current portion of capital lease obligations 5,136
------------
Long-term capital lease obligations 14,931
============
(6) Securitization
For the years ended March 31, 2003 and 2002, Hitachi Capital Corporation
(HCC), a financing subsidiary, transferred lease receivables. In these
transactions, HCC sold mainly lease receivables to Special Purpose Entities
(SPE), and the SPE issued asset-backed commercial papers to investors. The
investors and the SPE have no recourse to HCC's other assets for failure of
debtors to pay when due. HCC retained servicing responsibilities and
subordinated interests, but has not recorded a servicing asset or liability
since the cost to service the receivables approximates the servicing
income. The retained interests are not material and subordinate to
investors' interests. For the years ended March 31, 2003 and 2002, gains
recognized on the transfer of lease receivables amounted to JPY 8,278
million and JPY 6,261 million, respectively.
The table below summarizes certain cash flows received from and paid to the
SPE during the years ended March 31, 2003 and 2002:
Yen (millions)
--------------------
2003 2002
---- ----
Proceeds from transfer of lease receivables 249,430 252,210
Servicing fees received 27 36
Purchases of delinquent or ineligible assets (8,174) (7,242)
86
HITACHI, LTD.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Quantitative information about delinquencies, net credit losses, and
components of lease receivables subject to transfer and other assets
managed together as of and for the year ended March 31, 2003 are as
follows:
Yen (millions)
--------------------------------------
Principal
amount of
Total receivables
principal 90 days or
amount of more past Net credit
receivables due losses
----------- --- ------
Total assets managed or transferred:
Lease receivables 819,937 950 1,720
Assets transferred (382,861)
-----------
Assets held in portfolio 437,076
===========
For the years ended March 31, 2003 and 2002, the Company and certain
subsidiaries sold trade receivables mainly through the SPE which
securitized these receivables. In these securitizations, the Company and
certain subsidiaries retained servicing responsibility. No servicing asset
or liability has been recorded because the fees for servicing the
receivable approximate the related costs. In addition, the Company and
certain subsidiaries retained subordinated interests which were not
material.
During the years ended March 31, 2003 and 2002, proceeds from transfer of
trade receivables were JPY 1,080,805 million and JPY 482,831 million,
respectively and losses recognized on those transfers were JPY 2,965
million and JPY 621 million, respectively.
(7) Goodwill and Other Intangible Assets
In accordance with SFAS No. 142, "Goodwill and Other Intangible Assets," on
April 1, 2002, the Company reassessed the useful lives of previously
recognized intangible assets and completed an impairment test. No
impairment loss was recognized.
Intangible assets excluding goodwill acquired during the year ended March
31, 2003 and related amortization expense amounted to JPY 262,460 million,
and JPY 86,095 million, respectively. The main component of intangible
assets subject to amortization was capitalized software. Amortization of
capitalized computer software costs for software to be sold, leased or
otherwise marketed is charged to cost of sales.
87
HITACHI, LTD.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Intangible assets excluding goodwill as of March 31, 2003 and April 1,
2002 are presented below:
Yen (millions)
---------------------------------------------------------------------------------------------
March 31, 2003 April 1, 2002
--------------------------------------------- --------------------------------------------
Gross carrying Accumulated Net carrying Gross carrying Accumulated Net carrying
amount amortization amount amount amortization amount
------ ------------ ------ ------ ------------ ------
Amortized intangible assets
Software 288,066 169,239 118,827 216,200 128,228 87,972
Software for internal use 290,204 132,917 157,287 191,539 107,100 84,439
Other 153,130 47,997 105,133 71,652 39,113 32,539
------- ------- ------- ------- ------- ------
731,400 350,153 381,247 479,391 274,441 204,950
======= ======= ======= ======= ======= =======
Unamortized intangible
assets 13,603 - 13,603 8,165 - 8,165
The changes in the carrying amount of goodwill for the year ended March
31, 2003 are as follows:
Yen (millions)
---------------------------------------------------------------------------------------------
Balance at Acquired Translation Balance
beginning of during Impairment adjustment at end of
the year the year loss and other the year
-------- -------- ---- --------- --------
Goodwill 27,299 39,986 (4,235) (2,733) 60,317
The following table shows the estimated aggregate amortization expense
for the next five years.
Years ending March 31 Yen (millions)
--------------------- --------------
2004 80,813
2005 76,043
2006 65,633
2007 56,128
2008 48,909
88
HITACHI, LTD.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The following tables show reconciliation of reported net income (loss),
basic net income (loss) per share and diluted net income (loss) per share
to the amounts adjusted to exclude the amortization expense of goodwill
for the years ended March 31, 2003, 2002 and 2001:
Yen (millions)
-----------------------------
2003 2002 2001
---- ---- ----
Reported net income (loss) 27,867 (483,837) 104,380
Goodwill amortization - 785 307
------ -------- -------
Adjusted net income (loss) 27,867 (483,052) 104,687
====== ======== =======
Yen
-----------------------------
2003 2002 2001
---- ---- ----
Reported basic net income (loss) per share 8.31 (144.95) 31.27
Goodwill amortization - 0.23 0.09
---- -------- -------
Adjusted basic net income (loss) per share 8.31 (144.72) 31.36
==== ======== =======
Yen
-----------------------------
2003 2002 2001
---- ---- ----
Reported diluted net income (loss) per share 8.19 (144.95) 30.32
Goodwill amortization - 0.23 0.09
---- -------- -------
Adjusted diluted net income (loss) per share 8.19 (144.72) 30.41
==== ======= =======
89
HITACHI, LTD.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(8) Income Taxes
Components, as either domestic or foreign, of income (loss) before income
taxes and minority interests, and income taxes attributable to continuing
operations are as follows:
Yen (millions)
-----------------------------------
2003
-----------------------------------
Domestic Foreign Total
-------- ------- -----
Income before income taxes and minority interests 69,248 27,580 96,828
Income taxes:
Current tax expense 76,782 11,406 88,188
Deferred tax expense (benefit) (38,996) 3,470 (35,526)
--------- --------- --------
37,786 14,876 52,662
Yen (millions)
-----------------------------------
2002
-----------------------------------
Domestic Foreign Total
-------- ------- -----
Loss before income taxes and minority interests (538,556) (47,516) (586,072)
Income taxes:
Current tax expense 100,698 10,260 110,958
Deferred tax benefit (176,170) (5,902) (182,072)
--------- --------- --------
(75,472) 4,358 (71,114)
Yen (millions)
-----------------------------------
2001
-----------------------------------
Domestic Foreign Total
-------- ------- -----
Income before income taxes and minority interests 282,372 41,283 323,655
Income taxes:
Current tax expense 134,639 17,717 152,356
Deferred tax expense 7,157 5,348 12,505
--------- --------- --------
141,796 23,065 164,861
90
HITACHI, LTD.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Significant components of income tax expense (benefit) attributable to
continuing operations and other comprehensive income (loss), net of
reclassification adjustments, for the years ended March 31, 2003, 2002 and
2001 are as follows:
Yen (millions)
------------------------------
2003 2002 2001
---- ---- ----
Continuing operations:
Current tax expense 88,188 110,958 152,356
Deferred tax benefit (exclusive of the effects of
other components listed below) (20,525) (263,449) (892)
Adjustments of deferred tax assets and liabilities for
enacted changes in tax laws and rates in Japan 27,993 - -
Change in valuation allowance (42,994) 81,377 13,397
-------- -------- --------
52,662 (71,114) 164,861
Other comprehensive income (loss), net of
reclassification adjustments:
Minimum pension liability adjustments (333,700) (59,985) (149,588)
Net unrealized holding gain on
available-for-sale securities (27,878) (9,717) (37,832)
Cash flow hedges (335) (646) 490
-------- -------- --------
(361,913) (70,348) (186,930)
-------- -------- --------
(309,251) (141,462) (22,069)
======== ======== ========
The Company and its domestic subsidiaries are subject to a national
corporate tax of 30%, an inhabitant tax of between 17.3% and 20.7% and a
deductible business tax between 5% and 10.08%, which in the aggregate
resulted in a combined statutory income tax rate of approximately 41.8% for
the years ended March 31, 2003, 2002 and 2001.
On March 31, 2003, a reduction of income tax rate for business tax was
enacted in Japan, and is effective from April 1, 2004. With this adoption,
the aggregated statutory income tax rate for domestic companies will be
approximately 40.8% for the year ending March 31, 2005.
The Company adopted the consolidated taxation system effective from the
year ended March 31, 2003. Under the consolidated taxation system, the
Company has consolidated, for Japanese tax purpose, all wholly-owned
domestic subsidiaries. A temporary 2% surtax for the period between April
1, 2002 through March 31, 2004 is assessed for adopting the consolidated
taxation system. The aggregated statutory income tax rate for the
consolidated group for tax purposes will be approximately 43.6% for the
year ending March 31, 2004.
In accordance with EITF Issue No. 93-13, "Effect of a Retroactive Change in
Enacted Tax Rates That Is Included in Income from Continuing Operations,"
the Company determined the tax effect of retroactive changes or changes in
enacted tax rates on current and deferred tax assets and liabilities, and
included the cumulative tax effect in the amount of JPY 27,993 million in
income from continuing operations for the year ended March 31, 2003.
91
HITACHI, LTD.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Reconciliations between the combined statutory income tax rate and the
effective income tax rate as a percentage of income (loss) before income
taxes and minority interests are as follows:
2003 2002 2001
---- ---- ----
Combined statutory income tax rate 41.8% (41.8)% 41.8%
Equity in earnings of affiliated companies 6.8 2.6 (0.3)
Impairment of investments in affiliated companies 10.8 - -
Adjustment of net gain on sale of investments in
subsidiaries and affiliated companies 5.6 0.5 0.0
Expenses not deductible for tax purposes 12.9 6.7 6.0
Enacted changes in tax laws and rates in Japan 28.9 - -
Change in valuation allowance (44.4) 13.9 4.1
Difference in statutory tax rates of foreign
subsidiaries (9.1) 5.0 (2.3)
Other 1.1 1.0 1.6
---- ----- ----
Effective income tax rate 54.4% (12.1)% 50.9%
==== ===== ====
The tax effects of temporary differences and carryforwards that give rise
to significant portions of the deferred tax assets and liabilities as of
March 31, 2003 and 2002 are presented below:
Yen (millions)
---------------------
2003 2002
---- ----
Total gross deferred tax assets:
Retirement and severance benefits 736,731 387,345
Accrued expenses 183,990 168,165
Property, plant and equipment, due to differences in
depreciation 34,521 35,822
Net operating loss carryforwards 288,113 319,822
Other 286,259 271,332
--------- ---------
1,529,614 1,182,486
Valuation allowance (187,687) (239,965)
--------- ---------
1,341,927 942,521
Total gross deferred tax liabilities:
Deferred profit on sale of properties (35,421) (35,795)
Tax purpose reserves regulated by Japanese tax laws (31,563) (33,728)
Net unrealized gain on securities (8,951) (42,517)
Other (32,702) (13,531)
--------- ---------
(108,637) (125,571)
--------- ---------
Net deferred tax asset 1,233,290 816,950
========= =========
92
HITACHI, LTD.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
In addition to the above, income taxes paid on net intercompany profit on
assets remaining within the group, which had been deferred in accordance
with Accounting Research Bulletin No. 51, "Consolidated Financial
Statements," as of March 31, 2003 and 2002 are reflected in the
accompanying consolidated balance sheets under the following captions:
Yen (millions)
----------------------
2003 2002
---- ----
Prepaid expenses and other current assets 12,269 12,042
Other assets 63,951 63,077
------ ------
76,220 75,119
====== ======
Net deferred tax assets as of March 31, 2003 and 2002 are reflected in the
accompanying consolidated balance sheets under the following captions:
Yen (millions)
----------------------
2003 2002
---- ----
Prepaid expenses and other current assets 274,865 237,209
Other assets 976,368 595,588
Other current liabilities (5,454) (4,822)
Other liabilities (12,489) (11,025)
--------- -------
Net deferred tax asset 1,233,290 816,950
========= =======
Under the tax laws of various jurisdictions in which the Company and its
subsidiaries operate, the valuation allowance was recorded against deferred
tax assets for deductible temporary differences, net operating loss
carryforwards and tax credit carryforwards. The net change in the total
valuation allowance for the years ended March 31, 2003 and 2002 was a
decrease of JPY 52,278 million and an increase of JPY 82,344 million,
respectively.
In assessing the realizability of deferred tax assets, management of the
Company considers whether it is more likely than not that some portion or
all of the deferred tax assets will not be realized. The ultimate
realization of deferred tax assets is entirely dependent upon the
generation of future taxable income in specific tax jurisdictions during
the periods in which these deductible differences become deductible.
Although realization is not assured, management considered the scheduled
reversals of deferred tax liabilities and projected future taxable income
in making this assessment. Based on these factors, management believes it
is more likely than not the Company will realize the benefits of these
deductible differences, net of the existing valuation allowance as of March
31, 2003.
As of March 31, 2003, the Company and various subsidiaries have operating
loss carryforwards of JPY 725,579 million which are available to offset
future taxable income, if any. Operating loss carryforwards of JPY 619,001
million expire by March 31, 2008, and JPY 106,578 million expire in various
years thereafter or do not expire.
93
HITACHI, LTD.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(9) Short-term and Long-term Debts
The components of short-term debt as of March 31, 2003 and 2002 are
summarized as follows:
Yen (millions)
---------------------
2003 2002
--------- ---------
Borrowings not from affiliates, mainly from banks 481,867 647,886
Commercial paper 254,536 139,239
Borrowings from affiliates 89,457 46,713
------- -------
825,860 833,838
======= =======
The weighted average interest rates on short-term debt outstanding as of
March 31, 2003 and 2002 are 0.1% and 0.2%, respectively.
The components of long-term debt as of March 31, 2003 and 2002 are
summarized as follows:
Yen (millions)
---------------------
2003 2002
--------- ---------
Mortgage debentures:
Due 2004, interest 2.1%, issued by a subsidiary 300 400
Unsecured notes and debentures:
Due 2006, interest 3.45% debenture 200,000 200,000
Due 2003-2018, interest 0.028-5.92%, issued by
subsidiaries 748,581 760,836
Unsecured convertible debentures:
6th series, due 2003, interest 1.3% 92,828 92,828
7th series, due 2004, interest 1.4% 218,471 218,471
Due 2003-2008, interest 0.6-1.8%, issued by
subsidiaries 20,932 35,566
Loans, principally from banks and insurance companies:
Secured by various assets and mortgages on property,
plant and equipment, maturing 2003-2011,
interest 0.93-8.77% 31,620 14,692
Unsecured, maturing 2003-2015, interest 0.5225-
7.04% 681,939 830,301
Capital lease obligations 20,067 11,292
--------- ---------
2,014,738 2,164,386
Less current installments 502,586 366,083
--------- ---------
1,512,152 1,798,303
========= =========
94
HITACHI, LTD.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The aggregate annual maturities of long-term debt after March 31, 2004 are
as follows:
Years ending March 31 Yen (millions)
--------------------- ----------------
2005 508,283
2006 413,699
2007 132,101
2008 161,082
Thereafter 296,987
---------
1,512,152
=========
The Company and its subsidiaries provide their investment in certain
subsidiaries as collateral for bank loans of JPY 14,240 million.
The collateralized number of shares and their fair values as of March 31,
2003 are as follows:
Yen
(millions)
----------
Number of Collateralized Fair value
shares owned Percent of number of shares as of
Subsidiary name in thousand ownership in thousand March 31, 2003
-------------------------------------------- ----------- --------- ----------- --------------
Hitachi Capital Corporation 71,074 55.3% 13,000 17,602
Hitachi Maxell, Ltd. 51,528 52.1 800 1,426
Hitachi Powdered Metals Co., Ltd. 17,072 53.3 4,700 2,637
As is customary in Japan, both short-term and long-term bank loans are made
under general agreements which provide that security and guarantees for
present and future indebtedness will be given upon request of the bank, and
that the bank shall have the right, as the obligations become due, or in
the event of their default, to offset cash deposits against such
obligations.
Generally, the mortgage debenture trust agreements and certain secured and
unsecured loan agreements provide, among other things, that the lenders or
trustees shall have the right to have any distribution of earnings,
including the payment of dividends and the issuance of additional capital
stock, submitted to them for prior approval and also grant them the right
to request additional security or mortgages on property, plant and
equipment.
The unsecured convertible debentures due in 2003 are redeemable in whole or
in part, at the option of the Company, from October 1, 1996 to September
30, 2002 at premiums ranging from 6% to 1%, and at par thereafter. The
debentures are currently convertible into approximately 49,503,000 shares
of common stock, based on a fixed conversion price not less than the fair
market value of the Company's common stock on the date of issuance.
Commencing September 30, 1999, the Company is required to make annual
payments to the Trustee of JPY 10 billion less the aggregate amounts of the
debentures converted, repurchased or redeemed which have not been deducted
before.
95
HITACHI, LTD.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The unsecured convertible debentures due in 2004 are redeemable in whole or
in part, at the option of the Company, from October 1, 1997 to September
30, 2003 at premiums ranging from 6% to 1%, and at par thereafter. The
debentures are currently convertible into approximately 128,945,000 shares
of common stock, based on a fixed conversion price not less than the fair
market value of the Company's common stock on the date of issuance.
Commencing September 30, 1999, the Company is required to make annual
payments to the Trustee of JPY 20 billion less the aggregate amounts of the
debentures converted, repurchased or redeemed which have not been deducted
before.
In accordance with Trustee agreements for the unsecured debentures due in
2003 and 2004 as mentioned above, the 16,977,000 shares of investments in
Hitachi Software Engineering Co., Ltd. and the 48,401,000 shares of
investments in Hitachi High-Technologies Co., Ltd. are held in trust. The
fair values of the shares held in trust as of March 31, 2003 are JPY 31,747
million and JPY 81,749 million, respectively.
Pursuant to the terms of the indentures under which the unsecured
convertible debentures due in 2004 were issued, accumulated cash dividends
(including interim dividends) paid by the Company for the fiscal years
beginning after March 31, 1989 may not exceed accumulated net income in the
audited consolidated statements of income for the fiscal years beginning
after March 31, 1989 plus JPY 65,000 million as long as these debentures
are outstanding. In determining the accumulated cash dividends, interim
cash dividends to be paid on and after April 1, 1990 are considered to be a
part of the cash dividends of the previous fiscal year. As of March 31,
2003, the accumulated cash dividends and the accumulated net income
including JPY 65,000 million, which are defined by the above terms,
amounted to JPY 419,072 million and JPY 452,233 million, respectively.
(10) Retirement and Severance Benefits
(a) Defined benefit plans
The Company and its domestic subsidiaries have a number of contributory and
noncontributory pension plans to provide retirement and severance benefits
to substantially all employees.
Under unfunded defined benefit pension plans, employees are entitled to
lump-sum payments based on the current rate of pay and the length of
service upon retirement or termination of employment for reasons other than
dismissal for cause.
Directors and certain employees are not covered by the programs described
above. Benefits paid to such persons and meritorious service awards paid to
employees in excess of the prescribed formula are charged to income as paid
as it is not practicable to compute the liability for future payments since
amounts vary with circumstances.
96
HITACHI, LTD.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
In addition to unfunded defined benefit pension plans, the Company and
certain of its subsidiaries contribute to each Employees Pension Fund (EPF)
as is stipulated by the Japanese Welfare Pension Insurance Law and other
pension plans. The pension plans under the EPF are composed of the
substitutional portion of Japanese Welfare Pension Insurance and the
corporate portion which is the contributory defined benefit pension plan
covering substantially all of their employees and provides benefits in
addition to the substitutional portion. The Company, certain of its
subsidiaries and their employees contribute the pension premiums for the
substitutional portion and the corporate portion to each EPF. The plan
assets of each EPF cannot be specifically allocated to the individual
participants nor to the substitutional and corporate portions.
The benefits for the substitutional portion are based on standard
remuneration scheduled by the Welfare Pension Insurance Law and the length
of participation. The benefits of the corporate portion are based on the
current rate of pay and the length of service. Under EPF pension plans, the
participants are eligible for these benefits after a one-month period of
participation in the plan. EPF contributions and cost for the
substitutional portion were determined in accordance with the open
aggregate cost method (actuarial funding method) as stipulated by the
Welfare Pension Insurance Law. Contributions and cost for the corporate
portion were determined in accordance with the entry age normal cost method
(actuarial funding method).
Net periodic benefit costs for the funded benefit pension plans and the
unfunded lump-sum payment plans for the years ended March 31, 2003, 2002
and 2001 consist of the following components:
Yen (millions)
--------------------------
2003 2002 2001
---- ---- ----
Service cost 112,948 110,173 117,104
Interest cost 97,161 118,094 115,163
Expected return on plan assets for the period (71,679) (77,194) (86,879)
Amortization of transition asset (421) (421) (421)
Amortization of prior service (benefit) cost (10,115) (2,999) 218
Recognized actuarial loss 107,478 60,867 25,869
Transfer to defined contribution pension plan 5,167 3,807 -
Curtailment and settlement loss 700 1,823 -
Employees' contributions (16,558) (18,330) (18,111)
------- ------- -------
Net periodic benefit cost 224,681 195,820 152,943
======= ======= =======
Unrecognized transition asset, unrecognized prior service benefit and cost
and unrecognized actuarial gain and loss are amortized using the
straight-line method over the average remaining service period of active
employees.
97
HITACHI, LTD.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Reconciliations of beginning and ending balances of the benefit obligation
of the funded defined benefit pension plans and the unfunded defined
benefit pension plans and the fair value of the plan assets, and actuarial
assumptions used at March 31, 2003 and 2002 are as follows:
Yen (millions)
--------------------------
2003 2002
---- ----
Change in benefit obligation:
Benefit obligation at beginning of year 3,022,170 3,016,520
Service cost 112,948 110,173
Interest cost 97,161 118,094
Plan amendments (17,138) (23,110)
Actuarial loss 681,822 49,427
Benefits paid (223,946) (177,974)
Acquisitions and divestitures 106,792 (1,725)
Transfer to defined contribution pension plan (7,882) (72,476)
Curtailment and settlement (14,396) 387
Foreign currency exchange rate changes (4,156) 2,854
---------- ----------
Benefit obligation at end of year 3,753,375 3,022,170
---------- ----------
Change in plan assets:
Fair value of plan assets at beginning of year 1,767,560 1,835,533
Actual return on plan assets (283,651) (108,453)
Employers' contributions 121,036 116,196
Employees' contributions 16,558 18,330
Benefits paid (141,917) (95,718)
Acquisitions and divestitures 52,198 (568)
Transfer to defined contribution pension plan (3,582) -
Settlement (9,634) -
Foreign currency exchange rate changes (4,894) 2,240
---------- ----------
Fair value of plan assets at end of year 1,513,674 1,767,560
---------- ----------
Funded status (2,239,701) (1,254,610)
Unrecognized transition asset (831) (1,252)
Unrecognized prior service benefit (86,411) (74,277)
Unrecognized actuarial loss 1,713,702 786,913
---------- ----------
Net amount recognized in the consolidated balance sheet (613,241) (543,226)
---------- ----------
Amounts recognized in the consolidated balance sheet consist of:
Prepaid benefit cost 861 3,974
Accrued benefit cost (1,932,646) (1,049,054)
Intangible asset 4,765 735
Accumulated other comprehensive loss 1,313,779 501,119
---------- ----------
Net amount recognized (613,241) (543,226)
---------- ----------
Actuarial assumptions on a weighted-average basis:
Discount rate 2.5% 3.7%
Expected rate of return on plan assets 3.7% 3.9%
Rate of compensation increase 3.3% 3.2%
98
HITACHI, LTD.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The components of the net periodic benefit cost are determined using the
assumptions as of the beginning of the fiscal year, and the components of
benefit obligation are determined using the assumptions as of the end of
the fiscal year.
The projected benefit obligation, accumulated benefit obligation, and fair
value of plan assets for the pension plan with accumulated benefit
obligations in excess of plan assets were JPY 3,744,219 million, JPY
3,428,655 million and JPY 1,503,085 million, respectively, as of March 31,
2003, and JPY 2,981,740 million, JPY 2,739,092 million and JPY 1,730,108
million, respectively, as of March 31, 2002.
On June 15, 2001, the Japanese government issued a new law concerning the
defined benefit plan. This law allows a company, at its own discretion, to
apply for an exemption from the future benefit obligation and return the
past benefit obligation of the substitutional portion of the EPF to the
government. Under the new law, a company may apply for the exemption from
the future benefit obligation on or after April 1, 2002 and the return of
the past benefit obligation on or after July 1, 2003. The past benefit
obligation and the related pension assets will be returned to the
government on or after September 1, 2003. In accordance with the new law,
the Company and certain subsidiaries obtained an approval for the
exemption from the future benefit obligation on or after April 2002 and
will apply for the return of the past benefit obligation.
The Company's plans to return the substitutional portion of the EPF to the
government had been considered in the actuarial assumptions. In January
2003, the FASB issued EITF Issue No. 03-2, "Accounting for the Transfer to
the Japanese Government of the Substitutional Portion of Employee Pension
Fund Liabilities," which addresses accounting for the transfer of the
substitutional portion of the EPF to the Japanese government. The EITF
requires employers to account for the entire separation process of the
transfer of the substitutional portion as a single settlement transaction
upon the completion of the transfer to the government of the benefit
obligation and related plan assets. In addition, the EITF requires
employers to measure the obligation at current market rates of interest
that could be obtained in a transaction with a third-party,
nongovernmental entity to settle the obligation.
The Company and certain subsidiaries remeasured the substitutional portion
of the benefit obligation at April 1, 2002 in accordance with EITF Issue
No. 03-2. As a result of this remeasurement, the benefit obligation as of
April 1, 2002 and net periodic benefit costs for the year ended March 31,
2003 increased by JPY 283,084 million and JPY 24,857 million,
respectively.
(b) Defined contribution plans
Certain subsidiaries have a number of defined contribution plans.
Effective December 31, 2001, the Company implemented a defined
contribution plan allowing employees to transfer a portion of their
unfunded defined benefit plans to the new defined contribution plan. The
amount to be transferred to the new plan will be contributed over 8 years.
The Company will make contributions in accordance with the plan
provisions.
The amount of cost recognized for the Company's and certain subsidiaries'
contribution to the plans for the years ended March 31, 2003 and 2002 were
JPY 6,895 million and JPY 3,557 million, respectively.
99
HITACHI, LTD.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(11) Common Stock
The Company has authorized for issuance 10 billion shares of common
stock. The Japanese Commercial Code (JCC) had required designation of par
value to all common stock at least 50% of new share issuance price, or
the common stock par value prescribed by the JCC. Effective October 1,
2001, the JCC was amended to eliminate the provision of common stock par
value resulting in all common stock being recorded with no par value.
Issued shares, changes in shares and the amount of common stock for the
years ended March 31, 2003, 2002 and 2001 are summarized as follows:
Yen(millions)
-------------
Issued shares Amount
------------- ------
Balance as of March 31, 2000 3,337,900,251 281,738
Issued upon conversion of convertible debentures 31,606 16
------------- -------
Balance as of March 31, 2001 3,337,931,857 281,754
Issued upon conversion of convertible debentures 549,184 278
------------- -------
Balance as of March 31, 2002 3,338,481,041 282,032
Issued under exchange offerings 29,643,245 -
------------- -------
Balance as of March 31, 2003 3,368,124,286 282,032
============= =======
Issued shares under exchange offerings for the year ended March 31, 2003
include the issuance of 25,143,245 shares as discussed in note 25.
Conversions of convertible debt issued subsequent to October 1, 1982 into
common stock were accounted for in accordance with the provisions of the
JCC by crediting one-half of the conversion price to each of the common
stock account and the capital surplus account.
100
HITACHI, LTD.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(12) Legal Reserve and Cash Dividends
The Japanese Commercial Code (JCC) had provided that earnings in an
amount equal to at least 10 percent of appropriations of retained
earnings to be paid in cash should be appropriated as a legal reserve
until such reserve equals 25 percent of stated common stock. This legal
reserve was not available for dividends but might be used to reduce a
deficit by resolution of the shareholders or might be transferred to
stated common stock by resolution of the Board of Directors.
Effective October 1, 2001, the JCC was amended to require earnings in an
amount equal to at least 10 percent of appropriations of retained
earnings to be paid in cash should be appropriated as a legal reserve
until total additional paid in capital and legal reserve equals 25
percent of stated common stock. Either additional paid in capital or
legal reserve may be available for dividends by resolution of the
shareholders to the extent that the amount of total additional paid in
capital and legal reserve exceeds 25 percent of stated common stock.
Cash dividends and appropriations to the legal reserve charged to
retained earnings during the years ended March 31, 2003, 2002 and 2001
represent dividends resolved during those years and the related
appropriations to the legal reserve. Provision had not been made in the
accompanying consolidated financial statements for the dividend for the
second half year of JPY 3.0 per share, aggregating JPY 10,094 million,
subsequently would be proposed by the Board of Directors at the ordinary
general shareholders' meeting in respect to the year ended March 31,
2003.
Cash dividends per share for the years ended March 31, 2003, 2002 and
2001 are computed at JPY 6.0, JPY 3.0 and JPY 11.0, respectively, based
on dividends declared with respect to earnings for the periods.
(13) Treasury Stock
The Japanese Commercial Code (JCC) had imposed certain restrictions on
acquisition and disposal of treasury stock. Effective October 1, 2001,
the JCC eliminated the provision of these restrictions and allowed
acquisitions of treasury stock to the extent of funds appropriated by a
resolution of shareholders.
As of March 31, 2003, the Company held 3,216,077 shares of the Company's
common stock as treasury stock as a result of acquisitions of shares from
shareholders holding less than a trading lot (1,000 shares) upon request
by the shareholder pursuant to the provisions of the JCC. The
shareholders may request the Company to acquire their shares below a
trading lot as any number of shares below a trading lot cannot be
publicly traded and does not carry on a voting right.
In April 2003, the Board of Directors proposed to acquire up to
300,000,000 shares of the Company's common stock for aggregate
acquisition price not exceeding JPY 150,000 million as treasury stock for
the period from the close of the ordinary general shareholders' meeting
to the close of the next ordinary general shareholders' meeting, pursuant
to the provisions of the JCC. This proposal is subject to an approval at
the ordinary general shareholders' meeting on June 25, 2003.
At the ordinary general shareholders' meeting on June 26, 2002, the
Company was approved to acquire up to 300,000,000 shares of its common
stock for aggregate acquisition price not exceeding JPY 300,000 million
as treasury stock for the period from the close of the ordinary general
shareholders' meeting to the close of the next ordinary general
shareholders' meeting, pursuant to the provision of the JCC. In May 2003,
based on this approval, the Company acquired its own shares as indicated
in note 27.
101
HITACHI, LTD.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(14) Accumulated Other Comprehensive Loss
Accumulated other comprehensive loss, net of related tax effects,
displayed in the consolidated statements of stockholders' equity is
classified as follows:
Yen (millions)
-------------------------------
2003 2002 2001
---- ---- ----
Foreign currency translation adjustments:
Balance at beginning of year (38,012) (57,647) (77,577)
Other comprehensive income (loss),
net of reclassification adjustments (21,833) 19,986 20,804
Net transfer from (to) minority interests arising from
conversion of subsidiaries' convertible debentures 7 - (3)
Net transfer to minority interests arising from issuance
of subsidiaries' common stock and other (1,110) (351) (871)
-------- -------- --------
Balance at end of year (60,948) (38,012) (57,647)
-------- -------- --------
Minimum pension liability adjustments:
Balance at beginning of year (260,100) (182,936) -
Other comprehensive loss (438,799) (77,338) (182,936)
Net transfer from minority interests arising from
conversion of subsidiaries' convertible debentures 20 - -
Net transfer from (to) minority interests arising from
issuance of subsidiaries' common stock and other (37) 174 -
-------- -------- --------
Balance at end of year (698,916) (260,100) (182,936)
-------- ------- --------
Net unrealized holding gain on available-for-sale securities:
Balance at beginning of year 39,997 51,041 95,019
Other comprehensive loss,
net of reclassification adjustments (35,082) (11,132) (43,991)
Net transfer from (to) minority interests arising from
conversion of subsidiaries' convertible debentures 1 1 (6)
Net transfer from (to) minority interests arising from
issuance of subsidiaries' common stock and other (42) 87 19
-------- -------- --------
Balance at end of year 4,874 39,997 51,041
-------- -------- --------
102
HITACHI, LTD.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Yen (millions)
---------------------------------
2003 2002 2001
---- ---- ----
Cash flow hedges:
Balance at beginning of year (369) 1,096 -
Other comprehensive income (loss),
net of reclassification adjustments (147) (1,464) 1,012
Net transfer from minority interests arising from
conversion of subsidiaries' convertible debentures 2 - -
Net transfer from (to) minority interests arising from
issuance of subsidiaries' common stock and other (21) (1) 84
-------- -------- --------
Balance at end of year (535) (369) 1,096
-------- -------- --------
Total accumulated other comprehensive loss:
Balance at beginning of year (258,484) (188,446) 17,442
Other comprehensive loss,
net of reclassification adjustments (495,861) (69,948) (205,111)
Net transfer from (to) minority interests arising from
conversion of subsidiaries' convertible debentures 30 1 (9)
Net transfer to minority interests arising from
issuance of subsidiaries' common stock and other (1,210) (91) (768)
-------- -------- --------
Balance at end of year (755,525) (258,484) (188,446)
======== ======== ========
103
HITACHI, LTD.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The following is a summary of reclassification adjustments by each
classification of other comprehensive income (loss) arising during the
years ended March 31, 2003, 2002 and 2001 and the amounts of income tax
expense or benefit allocated to each component of other comprehensive
income (loss), including reclassification adjustments.
Yen (millions)
----------------------------------
2003
----------------------------------
Before-tax Tax benefit Net-of-tax
amount (expense) amount
------ --------- ------
Other comprehensive loss arising during the year:
Foreign currency translation adjustments (21,294) - (21,294)
Minimum pension liability adjustments (744,779) 305,980 (438,799)
Net unrealized holding gain on available-for-sale
securities (54,607) 22,789 (31,818)
Cash flow hedges (953) 388 (565)
--------- -------- --------
(821,633) 329,157 (492,476)
Reclassification adjustments for net loss (gain) included in
net income:
Foreign currency translation adjustments (539) - (539)
Net unrealized holding gain on available-for-sale
securities (5,642) 2,378 (3,264)
Cash flow hedges 707 (289) 418
--------- -------- --------
(5,474) 2,089 (3,385)
Other comprehensive loss, net of reclassification
adjustments:
Foreign currency translation adjustments (21,833) - (21,833)
Minimum pension liability adjustments (744,779) 305,980 (438,799)
Net unrealized holding gain on available-for-sale
securities (60,249) 25,167 (35,082)
Cash flow hedges (246) 99 (147)
--------- -------- --------
(827,107) 331,246 (495,861)
========= ======== ========
104
HITACHI, LTD.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Yen (millions)
----------------------------------
2002
----------------------------------
Before-tax Tax benefit Net-of-tax
amount (expense) amount
------ --------- ------
Other comprehensive income (loss) arising during the year:
Foreign currency translation adjustments 19,511 - 19,511
Minimum pension liability adjustments (132,882) 55,544 (77,338)
Net unrealized holding gain on available-for-sale
securities (97,342) 40,679 (56,663)
Cash flow hedges (948) 526 (422)
---------- ---------- --------
(211,661) 96,749 (114,912)
Reclassification adjustments for net loss (gain) included in
net loss:
Foreign currency translation adjustments 475 - 475
Net unrealized holding gain on available-for-sale
securities 78,232 (32,701) 45,531
Cash flow hedges (767) (275) (1,042)
---------- ---------- --------
77,940 (32,976) 44,964
Other comprehensive income (loss), net of reclassification
adjustments:
Foreign currency translation adjustments 19,986 - 19,986
Minimum pension liability adjustments (132,882) 55,544 (77,338)
Net unrealized holding gain on available-for-sale
securities (19,110) 7,978 (11,132)
Cash flow hedges (1,715) 251 (1,464)
---------- ---------- --------
(133,721) 63,773 (69,948)
========== ========== ========
105
HITACHI, LTD.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Yen (millions)
----------------------------------
2001
----------------------------------
Before-tax Tax benefit Net-of-tax
amount (expense) amount
------ --------- ------
Other comprehensive income (loss) arising during the year:
Foreign currency translation adjustments 18,990 - 18,990
Minimum pension liability adjustments (314,158) 131,222 (182,936)
Net unrealized holding gain on available-for-sale
securities (55,311) 22,759 (32,552)
Cash flow hedges 2,742 (804) 1,938
--------- ---------- ---------
(347,737) 153,177 (194,560)
Reclassification adjustments for net loss (gain) included in
net income:
Foreign currency translation adjustments 1,814 - 1,814
Net unrealized holding gain on available-for-sale
securities (19,652) 8,213 (11,439)
Cash flow hedges (1,670) 744 (926)
--------- ---------- ---------
(19,508) 8,957 (10,551)
Other comprehensive income (loss), net of reclassification
adjustments:
Foreign currency translation adjustments 20,804 - 20,804
Minimum pension liability adjustments (314,158) 131,222 (182,936)
Net unrealized holding gain on available-for-sale
securities (74,963) 30,972 (43,991)
Cash flow hedges 1,072 (60) 1,012
--------- ---------- ---------
(367,245) 162,134 (205,111)
========= ========== =========
106
HITACHI, LTD.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(15) Commitments and Contingencies
The Company and its operating subsidiaries are contingently liable for loan
guarantees to its affiliates in the amount of approximately JPY 38,599
million as of March 31, 2003.
Hitachi Capital Corporation (HCC), a financing subsidiary of the Company,
provides guarantees to financial institutions for extending loans to
customers of HCC. As of March 31, 2003, the undiscounted maximum potential
future payments under such guarantees amounted to JPY 590,028 million of
which JPY 139,878 million is covered by consumer credit insurance. The
Company has accrued JPY 1,751 million as an obligation to stand ready to
perform over the term of the guarantees.
HCC provides certain revolving lines of credit to its credit card holders
in accordance with the terms of the credit card business customer service
contracts. Furthermore, HCC provides credit facilities to parties in
accordance with the service agency business contracts from which temporary
payments on behalf of such parties are made. In addition, the Company
provides a loan commitment to an affiliated company.
The outstanding balance of the revolving lines of credits, credit
facilities and a loan commitment as of March 31, 2003 is as follows:
Yen (millions)
-------------
Total commitment available 664,634
Amount utilized (1,897)
-------
Balance available 662,737
=======
A portion of the revolving lines of credit which are pending credit
approval cannot be utilized.
The Company and certain of its subsidiaries hold line of credit
arrangements with banks in order to secure source of working capital. The
unused line of credit as of March 31, 2003 amounted to JPY 147,042 million.
As of March 31, 2003, outstanding commitments for the purchase of property,
plant and equipment were approximately JPY 30,214 million.
107
HITACHI, LTD.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The Company and its subsidiaries generally warrant its products over
respective warranty periods. The accrued product warranty costs are based
primarily on historical experience of actual warranty claims. Change in
accrued product warranty cost for the year ended March 31, 2003 is as
follows:
Yen (millions)
--------------
2003
----
Balance at beginning of year 98,865
Addition 26,740
Utilization (20,987)
Other 679
-------
Balance at end of year 105,297
=======
It is a common practice in Japan for companies, in the ordinary course of
business, to receive promissory notes in the settlement of trade accounts
receivable and to subsequently discount such notes to banks or to transfer
them by endorsement to suppliers in the settlement of accounts payable.
As of March 31, 2003 and 2002, the companies were contingently liable for
trade notes discounted and endorsed in the following amounts:
Yen (millions)
--------------------
2003 2002
---- ----
Notes discounted 3,639 3,452
Notes endorsed 24,924 33,062
------ ------
28,563 36,514
====== ======
The Company and certain subsidiaries are subject to several legal
proceedings and claims which have arisen in the ordinary course of business
and have not been finally adjudicated. These actions when ultimately
concluded and determined will not, in the opinion of management, have a
material adverse effect on the financial position and results of operations
of the Company and certain subsidiaries.
108
HITACHI, LTD.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(16) Impairment losses for long-lived assets
Under the provision of SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets" the Company and certain subsidiaries
recognized impairment losses for the year ended March 31, 2003 in the
amount of JPY 8,474 million. The majority of the impairment losses were
recorded by the Company's Device Development Center, which provides
semiconductor product development and design services. The significant
decline in the demand for such development resulted from the Company's
realignment of the semiconductor operations.
The impairment losses were measured as the amount by which the carrying
amount of the assets exceeded their fair values. In calculating those fair
values, the Company and certain subsidiaries used present value techniques
based on the estimated future cash flows expected to result from the use of
the assets and their eventual disposition.
Under the provision of SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," certain
subsidiaries recognized impairment losses for the year ended March 31, 2002
in the amount of JPY 46,115 million. Impairment losses resulted due mainly
to the significant decline in demand and prices of semiconductor products.
(17) Restructuring charges
Certain losses incurred in the reorganization of the Company's operations
are considered as restructuring charges. Components and related amounts
of the restructuring charges, before the related tax effects, for the
years ended March 31, 2003, 2002 and 2001 are as follows:
Yen (millions)
-------------------------------
2003 2002 2001
---- ---- ----
Special termination benefits - 185,105 5,275
Loss on fixed assets - 51,316 914
Loss on disposal of inventories - 19,451 -
Lease termination and business partner compensation - 11,487 -
Cost incurred in association with employee termination
including retraining and outplacement - 7,404 -
Others - 13,333 2,625
------- --------- --------
Total restructuring charges - 288,096 8,814
======= ========= ========
109
HITACHI, LTD.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the year ended March 31, 2002, the Company and certain subsidiaries
incurred restructuring charges in the amount of JPY 288,096 million. The
restructure resulted from the Company's corporate strategy to realign its
organization to cope with the weak global demand for IT related products,
intense price competition and continuous economic slow down in Japan. The
restructuring charges by major division are as follows:
Yen (millions)
-------------------------------------------------------------------------
Digital High
Media & Functional
Electronic Consumer Materials &
IT Systems Devices Products Components Other Total
---------- ------- -------- ---------- ----- -----
Special termination benefits 45,294 46,301 21,510 11,613 60,387 185,105
Loss on fixed assets 2,220 25,695 7,485 10,321 5,595 51,316
Loss on disposal of
inventories 14,548 1,902 1,410 275 1,316 19,451
Lease termination and business
partner compensation 877 3,061 5,486 276 1,787 11,487
Cost incurred in association
with employee termination
including retraining and
outplacement 678 2,210 2,318 894 1,304 7,404
Others 173 3,549 1,036 2,314 6,261 13,333
------ ------ ------ ------ ------ -------
Total restructuring charges 63,790 82,718 39,245 25,693 76,650 288,096
====== ====== ====== ====== ====== =======
The Company provided special termination benefits to those employees
voluntarily leaving the Company. The accrued special termination
benefits were recognized at the time voluntary termination was offered
and benefits accepted by the employees. An analysis of the accrued
special termination benefits for the years ended March 31, 2003, 2002
and 2001 is as follows:
Yen (millions)
------------------------------------
2003 2002 2001
---- ---- ----
Balance at beginning of the year 114,266 2,371 18,545
New charges - 185,105 5,275
(employees to be terminated) - 22,422 772
Cash payments (114,213) (73,252) (21,567)
(employees actually terminated) 10,077 12,681 6,538
Foreign currency exchange rate changes (53) 42 118
--------- --------- --------
Balance at end of the year - 114,266 2,371
========= ========= ========
Restructuring charges related to lease termination and business partner
compensation, cost incurred in association with employee termination
including retraining and outplacement, and others have been accrued as
liabilities. Majority of the liabilities were paid by March 2002. In
addition to the liabilities above, special termination benefits have been
accrued as liability and were substantially paid by March 2003.
110
HITACHI, LTD.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The following represent significant restructuring activities by business
line:
1. Information & Telecommunication Systems ("IT Systems") division
restructured its telecommunications business in North America. The
exit strategy called for a complete exit except for the after-service
business by March 2002. The decision culminated as the result of
bankruptcy filing by its major customer and required liquidation of
all financial assets and obligations of the business. As a result, the
Company and certain subsidiaries disposed inventories and fixed
assets. The charges in connection with such restructuring amounted to
JPY 23,369 million, including accrual of JPY 9,342 million mainly for
special termination benefits. The liabilities recognized were paid by
March 2003.
2. Electronic Devices division decided to shut down several cathode ray
tube monitor-manufacturing plants and production lines in Japan,
Singapore and Malaysia, and direct view color televisions product
lines in North America. This decision was due to intense competition
and general overcapacity in the market. The exit plan called for a
complete exit from the business by the end of April 2002 and involved
the Company and certain subsidiaries disposing inventories and fixed
assets. The charges in connection with such restructuring amounted to
JPY 30,412 million, and the amount of JPY 13,921 million for special
termination benefits and JPY 4,851 million mainly for cancellation
penalties were accrued. The liabilities for special termination
benefits were paid by March 2003 and the remaining liabilities were
substantially paid by March 2002.
Semiconductor facilities and production lines were reorganized in
Japan in response to a sharp decline in semiconductor product prices
and general overcapacity in the market. This stagnation was as the
result of decline in demand for semiconductor products used in PCs and
mobile communications equipment. The reorganization plan included
moving front-end production operations to newer lines to maximize
efficiency and back-end production bases were consolidated to fewer
numbers of bases. The associated restructuring charges amounted to JPY
45,510 million, including accrual of JPY 37,156 million. The
liabilities for special termination benefits in the amount of JPY
28,479 million were paid out by March 2003, and the liabilities in the
amount of JPY 8,677 million incurred mainly for removal costs were
substantially paid by March 2002.
3. Digital Media & Consumer Products division restructured its television
manufacturing plants and related distribution network in order to
address the general weakness in consumer demand for consumer products.
This restructuring was in response to the slow down of the global
economy and general decline in the color television prices. In order
to strengthen the global competitiveness, the Company decided to
consolidate its manufacturing operation and streamlining the sales
channels. As part of the restructuring effort within Asia, the Company
decided to transfer color television product management, R&D and
manufacturing capabilities, and vacuum cleaner production from
Singapore to certain subsidiaries in China, Indonesia and Thailand.
One of the Company's UK sales and manufacturing subsidiary was
liquidated in February 2002 in an effort to reorganize the European
sales channel. The Company disposed of inventories and fixed assets in
the process of implementing its restructuring measures. The charges in
connection with such restructuring amounted to JPY 9,581 million. The
liabilities for special termination benefits in the amount of JPY
3,634 million were paid by March 2002, and the liabilities for lease
termination and others amounted to JPY 2,719 million were almost paid
by March 2002.
4. In High Functional Materials & Components division, the mobile
telephone parts business was restructured as the result of weak demand
for information technology related parts and supplies. Restructuring
measures taken included streamlining of the production lines in Japan,
and shutting down of manufacturing plants in Malaysia and Japan. The
charges in connection with such restructuring amounted to JPY 23,474
million, and the JPY 11,940 million were accrued mainly for special
termination benefits. The liabilities were paid by March 2003.
5. Restructuring charge of JPY 76,650 million of which JPY 60,387 million
represented special termination benefits were incurred in the other
remaining businesses of the Company.
(18) Other Income and Other Deductions
"Other deductions" for the year ended March 31, 2003, the Company and
certain subsidiaries recorded a net periodic benefit cost of JPY 24,857
million which were generated as the result of adopting EITF Issue No. 03-2
"Accounting for the Transfer to the Japanese Government of the
Substitutional Portion of Employee Pension Fund Liabilities" as shown in
note 10.
"Other deductions" for the years ended March 31, 2003 and 2002 and "Other
income" for the year ended March 31, 2001 includes the net loss on
securities in the amount of JPY 660 million and JPY 80,938 million and the
net gain on securities in the amount of JPY 9,334 million, respectively. In
addition, JPY 15,651 million of gross realized gains on contributions of
available-for-sale securities to pension fund trusts is included in "Other
income" for the year ended March 31, 2001. Equity in earnings of affiliated
companies included in "Other deductions" for the years ended March 31, 2003
and 2002 and "Other income" for the year ended March 31, 2001 is a loss of
JPY 15,803 million, JPY 35,756 million and a gain of JPY 2,559 million,
respectively.
For the year ended March 31, 2003 net gain on sale and disposal of rental
assets and other property, classified as "Other income," amounted to JPY
23,658 million while net loss on sale and disposal of rental assets and
other property of JPY 15,150 million and JPY 7,776 million were included in
"Other deductions" for the years ended March 31, 2002 and 2001,
respectively.
111
HITACHI, LTD.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(19) Net Income (Loss) Per Share Information
The reconciliations of the numbers and the amounts used in the basic and
diluted net income (loss) per share computations are as follows:
Number of shares
-----------------------------------------------
2003 2002 2001
---- ---- ----
Weighted average number of shares on
which basic net income (loss) per share
is calculated 3,351,624,705 3,337,850,007 3,337,926,578
Effect of dilutive securities:
5th series convertible debentures - - 28,442,656
6th series convertible debentures - - 49,502,986
7th series convertible debentures - - 128,944,696
-------------- -------------- --------------
Number of shares on which diluted net
income (loss) per share is calculated 3,351,624,705 3,337,850,007 3,544,816,916
============== ============== ==============
Yen (millions)
-----------------------------------------------
2003 2002 2001
---- ---- ----
Net income (loss) applicable to common
stockholders 27,867 (483,837) 104,380
Effect of dilutive securities:
5th series convertible debentures - - 325
6th series convertible debentures - - 831
7th series convertible debentures - - 2,065
Other (402) - (119)
-------- -------- --------
Net income (loss) on which diluted
net income (loss) per share is calculated 27,465 (483,837) 107,482
======== ======== ========
Yen
-----------------------------------------------
Net income (loss) per share:
Basic 8.31 (144.95) 31.27
Diluted 8.19 (144.95) 30.32
The net loss per share computation for the year ended March 31, 2002
excludes all series convertible debentures because their effect would have
been antidilutive. The net income per share computation for the year ended
March 31, 2003 excludes 6th and 7th series convertible debentures because
their effect would have been antidilutive. In addition, 5th series
convertible debentures were redeemed in March 2002.
112
HITACHI, LTD.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(20) Supplementary Income Information
Yen (millions)
-----------------------------------
2003 2002 2001
---- ---- ----
Taxes other than income taxes consist
of the following:
Property 45,318 43,396 43,825
Welfare 203,196 202,369 198,447
Other 12,277 15,596 15,828
--------- --------- ---------
260,791 261,361 258,100
========= ========= =========
Maintenance and repairs 83,660 89,786 106,542
Research and development expense 377,154 415,448 435,579
Provision for retirement and severance
benefits and pension expense 224,681 195,820 152,943
Advertising expense 52,165 55,075 50,940
Rent 156,552 155,237 148,463
Exchange (gain) loss 18,262 (7,424) 11,307
(21) Supplementary Cash Flows Information
Yen (millions)
-----------------------------------
2003 2002 2001
---- ---- ----
Cash paid during the year for:
Interest 35,932 52,881 50,073
Income taxes 94,013 159,132 126,019
Convertible debentures issued by the Company of JPY 556 million in 2002 and
JPY 32 million in 2001 were converted into common stock. Convertible
debentures issued by subsidiaries of JPY 4,728 million in 2003, JPY 579
million in 2002 and JPY 2,305 million in 2001 were converted into
subsidiaries' common stock. Capital lease assets of JPY 4,050 million in
2003, JPY 3,874 million in 2002 and JPY 4,672 million in 2001 were
capitalized.
During the years ended March 31, 2003 and 2001, the Company acquired and
integrated some of its subsidiaries and affiliates through exchange of
equity securities procedure as shown in note 25.
The proceeds from sale of securities classified as available-for-sale
discussed in note 2 are included in both "(Increase) decrease in short-term
investments" and "Proceeds from sale of investments and subsidiaries'
common stock" on the consolidated statements of cash flows.
113
HITACHI, LTD.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(22) Derivative Instruments and Hedging Activities
Overall risk profile
The major manufacturing bases of the Company and its subsidiaries are
located in Japan and Asia. The selling bases are located globally, and the
Company and its subsidiaries generate approximate 30% of their sales from
overseas. These sales are mainly denominated in U.S. dollar or Euro. As a
result, the Company and its subsidiaries are exposed to market risks from
changes in foreign currency exchange rate.
The financing subsidiaries in London, New York and Singapore issue U.S.
dollar denominated, variable rate, medium-term notes mainly through the
Euro markets to finance its overseas long-term operating capital. As a
result, the Company and its subsidiaries are exposed to market risks from
changes in foreign currency exchange rate and interest rate.
The Company and its subsidiaries are also exposed to credit-related losses
in the event of non-performance by counterparties to derivative financial
instruments, but it is not expected that any counterparties will fail to
meet their obligations, because most of the counterparties are
internationally recognized financial institutions and contracts are
diversified into a number of major financial institutions.
Risk management policy
The Company and its subsidiaries assess foreign currency exchange rate risk
and interest rate risk by continually monitoring changes in these exposures
and by evaluating hedging opportunities. It is the Company's policy that
the Company and its subsidiaries do not enter into derivative financial
instruments for any purpose other than hedging purposes.
Foreign currency exchange rate risk management
The Company and its subsidiaries have assets and liabilities which are
exposed to foreign currency exchange rate risk and, as a result, they enter
into forward exchange contracts and cross currency swap agreements for the
purpose of hedging these risk exposures.
In order to fix the future net cash flows principally from trade
receivables and payables recognized, which are denominated in foreign
currencies, the Company and its subsidiaries on a monthly basis measure the
volume and due date of future net cash flows by currencies. In accordance
with their policy, a certain portion of measured net cash flows is covered
using forward exchange contracts, which principally mature within one year.
The Company and its subsidiaries enter into cross currency swap agreements
with the same maturities as underlying debts to fix cash flows from
long-term debts denominated in foreign currencies. The hedging relationship
between the derivative financial instrument and its hedged item is highly
effective in achieving offsetting changes in foreign currency exchange
rates.
114
HITACHI, LTD.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Interest rate risk management
The Company's and its subsidiaries' exposure to interest rate risk is
related principally to long-term debt obligations. These debt obligations
expose the Company and its subsidiaries to variability in the future cash
outflow of interest payments due to changes in interest rates. Management
believes it is prudent to minimize the variability caused by interest rate
risk.
To meet this objective, the Company and its subsidiaries principally enter
into interest rate swaps to manage fluctuations in cash flows resulting
from interest rate risk. The interest rate swaps principally change the
variable-rate cash flows on debt obligations to fixed-rate cash flows
principally associated with medium-term notes by entering into
receive-variable, payfixed interest rate swaps. Under the interest rate
swaps, the Company and its subsidiaries receive variable interest rate
payments and make fixed interest rate payments, thereby creating fixed-rate
long-term debt. The hedging relationship between the interest rate swaps
and its hedged item is highly effective in achieving offsetting changes in
cash flows resulting from interest rate risk.
Fair value hedge
Changes in fair value of both recognized assets and liabilities, and
derivative financial instruments designated as fair value hedges of these
assets and liabilities are recognized in other income (deductions).
Derivative financial instruments designated as fair value hedges include
forward exchange contracts associated with operating transactions and cross
currency swap agreements associated with financing transactions.
The sum of the amount of the hedging ineffectiveness and net gain or loss
excluded from the assessment of hedge effectiveness is not material for the
years ended March 31, 2003, 2002 and 2001, respectively.
Cash flow hedge
Foreign Currency Exposure
Changes in fair value of forward exchange contracts designated and
qualifying as cash flow hedges of forecasted transactions and recognized
assets and liabilities are reported in accumulated other comprehensive
income (AOCI). These amounts are reclassified into earnings in the same
period as the hedged items affect earnings.
The sum of the amount of the hedging ineffectiveness and net gain or loss
excluded from the assessment of hedge effectiveness is not material for the
years ended March 31, 2003, 2002 and 2001.
It is expected that approximately gains of JPY 130 million of AOCI relating
to existing forward exchange contracts will be reclassified into other
income and other deductions during the year ending March 31, 2004.
As of March 31, 2003, the maximum length of time over which the Company and
its subsidiaries are hedging their exposure to the variability in future
cash flows associated with foreign currency forecasted transactions is
approximately 12 months.
115
HITACHI, LTD.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Interest Rate Exposure
Changes in fair values of interest rate swaps designated as hedging
instruments for the variability of cash flows associated with long-term
debt obligations are reported in AOCI. These amounts subsequently are
reclassified into interest charges as a yield adjustment in the same period
in which the hedged debt obligations affect earnings.
Interest charges for the years ended March 31, 2003, 2002 and 2001 includes
losses of JPY 497 million, gains of JPY 667 million and losses of JPY 1,357
million, respectively, which represents the component excluded from the
assessment of hedge effectiveness.
During the year ending March 31, 2004, approximately losses of JPY 476
million of AOCI related to the interest rate swaps are expected to be
reclassified into interest charges as a yield adjustment of the hedged debt
obligations.
The contract or notional amounts of derivative financial instruments held
as of March 31, 2003 and 2002 are summarized as follows:
Yen (millions)
-----------------------
2003 2002
---- ----
Forward exchange contracts:
To sell foreign currencies 187,093 105,054
To buy foreign currencies 27,584 15,489
Cross currency swap agreements:
To sell foreign currencies 51,789 71,798
To buy foreign currencies 128,717 170,802
Interest rate swaps 484,961 606,847
(23) Concentrations of Credit Risk
The Company and its subsidiaries generally do not have significant
concentrations of credit risk to any counterparties nor any regions,
because those are diversified and spread globally.
(24) Fair Value of Financial Instruments
The following methods and assumptions are used to estimate the fair values
of financial instruments:
Investment in securities
The fair value of investment in securities is estimated based on quoted
market prices for these or similar securities.
Long-term debt
The fair value of long-term debt is estimated based on quoted market prices
or the present value of future cash flows using the companies' incremental
borrowing rates for similar borrowing arrangements.
Cash and cash equivalents, Trade receivables, Short-term debt and Trade
payables
The carrying amount approximates the fair value because of the short
maturity of these instruments.
116
HITACHI, LTD.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Derivative financial instruments
The fair values of forward exchange contracts, cross currency swap
agreements and interest rate swaps are estimated on the basis of the market
prices of derivative financial instruments with similar contract
conditions.
The carrying amounts and estimated fair values of the financial instruments
as of March 31, 2003 and 2002 are as follows:
Yen (millions)
------------------------------------------------------
2003 2002
------------------------ ------------------------
Carrying Estimated Carrying Estimated
amounts fair values amounts fair values
------- ----------- -------- -----------
Investment in securities:
Short-term investments 186,972 186,972 178,933 178,933
Investments and advances 299,143 299,138 446,148 446,139
Derivatives (Assets):
Forward exchange contracts 668 668 225 225
Cross currency swap agreements 279 279 3,456 3,456
Interest rate swaps 1,921 1,921 2,672 2,672
Long-term debt (2,014,738) (2,064,192) (2,164,386) (2,222,585)
Derivatives (Liabilities):
Forward exchange contracts (1,333) (1,333) (3,128) (3,128)
Cross currency swap agreements (3,045) (3,045) (7,778) (7,778)
Interest rate swaps (3,853) (3,853) (3,021) (3,021)
It is not practicable to estimate the fair value of investments in unlisted
common stock because of the lack of a market price and difficulty in
estimating fair value without incurring excessive cost. The carrying
amounts of these investments at March 31,2003 and 2002 totaled JPY 75,860
million and JPY 73,639 million, respectively.
117
HITACHI, LTD.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(25) Merger and Acquisition
On May 28, 2002, the Company signed a share exchange agreement with Hitachi
Unisia Automotive, Ltd., former UNISIA JECS Corporation (UJ), to assume
full ownership of UJ by exchanging 0.197 shares of the Company's common
stock for each share of UJ common stock outstanding. The Company and UJ
obtained third party valuations of the respective share prices which were
used as a basis in negotiating the share exchange ratio. On October 1,
2002, the Company issued 25,143,245 shares of common stock, in the amount
of JPY 23,635 million based on the quoted market price of JPY 940 per share
as of the announcement date, April 18, 2002, for exchange with the UJ
registered shareholders as of September 30, 2002.
UJ manufactures automotive systems and components that support every area
of basic vehicle function. The Company has strategically targeted the
automotive products business and the purpose of making UJ a wholly owned
subsidiary is to further expand this business.
The effects of the acquisition to the balance sheet as of October 1, 2002
are as follows:
Yen (millions)
-------------
Current assets 68,427
Non-current assets 121,248
Goodwill 10,435
Current liabilities (99,453)
Non-current liabilities (76,120)
Net assets acquired (23,635)
Net assets previously acquired (902)
The results of operations of UJ for the period from October 1, 2002 to
March 31, 2003 are included in the accompanying consolidated statements of
income. On a pro forma basis, revenue, net income and the per share
information of the Company, with assumed acquisition dates for UJ of April
1, 2002 and 2001, respectively, would not differ materially from the amount
reported in the accompanying consolidated financial statements as of and
for the years ended March 31, 2003 and 2002.
On December 31, 2002, the Company purchased a majority ownership in a
company to which hard disk drive operations and related intellectual
property portfolio had been transferred from International Business
Machines Corp. (IBM) for a total cash purchase price, subject to
adjustment, of JPY 243,480 million. This purchase price adjustment may
reduce the purchase price and the amount of goodwill recorded upon
acquisition. The purchase price is payable in three installments, of which
the first installment payment was paid on December 31, 2002 with the
remaining payments due in December 2003 and 2005.
On January 1, 2003, this company began operating as Hitachi Global Storage
Technologies Netherlands B.V. (HGST). HGST offers full array of hard-disk
and this acquisition will complement and expand the Company's product
portfolio, production capacity, research and development and distribution
channel globally.
118
HITACHI, LTD.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Upon closing, the Company obtained full voting rights to HGST and, as a
result, has consolidated all of its assets and liabilities in the
consolidated balance sheet, with the remaining installment payments
recorded as liabilities.
The effects of this purchase as of December 31, 2002 are as follows:
Yen (millions)
-------------
Current assets 106,357
Non-current assets 184,326
Goodwill 13,653
Current liabilities (24,737)
Non-current liabilities (32,159)
Net assets acquired (247,440)
The purchase price upon closing is as follows:
Yen (millions)
-------------
Cash paid to IBM as of December 31, 2002 169,680
Cash to be paid to IBM 73,800
Direct acquisition costs 3,960
-------
Total purchase price 247,440
=======
In-process research and development assets amounting to JPY 2,787 million
have been acquired as part of the purchase and have been written off at the
date of acquisition as these assets are considered as not having
alternative use. The write-off has been recorded as selling, general and
administrative expenses.
The results of operations of the acquired company on December 31, 2002 are
included in the accompanying consolidated statements of income. On a pro
forma basis, revenue, net loss and the per share information of the
Company, with assumed acquisition dates of April 1, 2002 and 2001,
respectively, are as follows:
Yen (millions)
------------------------
2003 2002
---- ----
Revenue 8,541,202 8,480,778
Net loss (149,891) (529,055)
Yen
-----------------------
2003 2002
---- ----
Basic net loss (44.72) (158.50)
Diluted net loss (44.84) (158.50)
119
HITACHI, LTD.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
On October 1, 2000, Hitachi Credit Corporation acquired all common stock of
Hitachi Leasing, Ltd. in exchange for 13,386,240 shares of Hitachi Credit
Corporation's common stock. Prior to this transaction, the ownership of
Hitachi Credit Corporation, a core financial service business, and Hitachi
Leasing, Ltd., a leasing and other corporate financing service business,
were 53.4% and 50.0%, respectively. Consequently, the surviving entity
changed its name to Hitachi Capital Corporation and became the Company's
53.0% owned subsidiary. The merger was accounted for using the purchase
method and the Company consolidated Hitachi Leasing, Ltd. and its
subsidiaries as if it had been merged effective April 1, 2000. The excess
of purchase price over net assets acquired of the 50% interest in Hitachi
Leasing, Ltd. not previously owned by the Company was not material.
The effects of the purchase to the balance sheet as of April 1, 2000 are as
follows:
Yen (millions)
-------------
Cash and cash equivalent 49,768
Investment in leases 736,505
Other assets 73,018
Short-term and long-term debt (743,985)
Other liabilities (90,532)
On a pro forma basis, revenue, net income and the per share information of
the Company, with the assumed acquisition of April 1, 1999, would not
differ materially from the amount reported in the accompanying consolidated
financial statements as of and for the year ended March 31, 2000.
On October 1, 2000, Kokusai Electric Co., Ltd. merged into Yagi Antenna
Co., Ltd. and Hitachi Denshi, Ltd. and changed its name to Hitachi Kokusai
Electric Inc. Prior to the merger, Kokusai Electric Co., Ltd. and Yagi
Antenna Co., Ltd., manufacturers and distributors of wireless
telecommunication equipment, were 26.7% and 40.9% owned affiliates of the
Company. Hitachi Denshi Co., Ltd., a manufacturer and distributor of
broadcasting and telecommunication equipment, was a 63.7% owned subsidiary
of the Company. Kokusai Electric Co., Ltd. issued common stock in exchange
for common stock of Yagi Antenna Co., Ltd. and Hitachi Denshi, Ltd. As a
result, Hitachi Kokusai Electric Inc. became a 37.4% owned affiliate of the
Company and is accounted for using the equity method. Total assets and net
assets of Hitachi Denshi, Ltd. and its subsidiaries as of September 30,
2000 amounted to approximately JPY 56,959 million and JPY 23,237 million,
respectively.
On October 31, 2000, Hitachi Consulting Corporation (former Experio
Solutions Corporation (Experio)), a wholly owned subsidiary of the Company,
acquired the e-business consulting department of Grant Thornton LLP for JPY
15,674 million in cash. In addition, Experio issued its common stock valued
at JPY 1,601 million to the department partners in lieu of a cash payment,
and accordingly became a 91.4% owned subsidiary of the Company. The
acquisition was recorded under the purchase method and the results of
operations of the acquired e-business consulting have been included in the
consolidated financial statements since the date of acquisition. This
transaction resulted in an excess of purchase price over net assets
acquired of JPY 15,895 million, which was amortized on the straight-line
method over 10 years. The amortization has been terminated effective April
1, 2002, with the implementation of SFAS No. 142, "Goodwill and Other
Intangible Assets."
120
HITACHI, LTD.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The allocation of acquisition costs to the assets and liabilities acquired
is as follows:
Yen (millions)
-------------
Assets acquired 2,009
Goodwill 15,895
Liabilities assumed (263)
Common stock issued to department partners (1,601)
Direct acquisition costs (366)
Cash paid to Grant Thornton (15,674)
On a pro forma basis, revenue, net income and the per share information of
the Company with the assumed acquisition of April 1, 2000 and 1999 would
not differ materially from the amount reported in the accompanying
consolidated financial statements as of and for the years ended March 31,
2001 and 2000.
(26) Stock Option Plans
The Company has two stock option plans under which non-employee directors
and certain employees have been granted stock options to purchase the
Company's common stock. Under these stock option plans, options were
granted at prices not less than market value at the date of grant, are
exercisable from one year after the date of grant and expire 5 years after
the date of grant. Under APB No. 25, the Company recognized no compensation
expense related to employee stock options for the years ended March 31,
2003, 2002 and 2001 as no options were granted at a price below the market
price on the day of the grant.
A summary of stock option plans activity for the years ended March 31,
2003, 2002 and 2001 is as follows:
2003 2002 2001
---------------------- ---------------------- --------------------
Weighted- Weighted- Weighted-
average average average
Stock exercised Stock exercised Stock exercised
options price options price options price
(shares) (yen) (shares) (yen) (shares) (yen)
------- ----- -------- ----- -------- -----
Outstanding at beginning of year 1,437,000 1,314 527,000 1,451 - -
Granted - - 1,090,000 1,270 527,000 1,451
Forfeited (272,000) 1,311 (180,000) 1,451 - -
--------- ----- --------- ----- ------- ------
Outstanding at end of year 1,165,000 1,314 1,437,000 1,314 527,000 1,451
========= ===== ========= ===== ======= ======
Weighted-average remaining
contractual life 3.1 years 4.1 years 4.3 years
Options exercisable at end of year 1,165,000 shares 347,000 shares -
The exercise prices of the stock options outstanding as of March 31, 2003
are JPY 1,451 and JPY 1,270.
121
HITACHI, LTD.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
In addition, in April 2003, the Board of Directors decided to propose the
adoption of stock option plans for non-employee directors, executive
officers and certain employees to general shareholders' meeting to be held
in June 2003. In accordance with the proposals, options to purchase the
Company's common stock less than 1,500,000 shares were granted at prices
not less than market value at the date of grant, are exercisable from one
year after the date of grant and expire 4 years after the date of grant.
(27) Subsequent Events
On April 1, 2003, Renesas Technology Corp., which focuses on system LSI
(Large Scale Integration) operation, was incorporated through a corporate
split procedure, where Semiconductor & Integrated Circuits operations of
the Company and Mitsubishi Electric Corporation were spun-off. Renesas
Technology Corp. was capitalized with JPY 50,000 million through the
issuance of 5,000,000 shares of common stock. The Company and Mitsubishi
Electric Corporation received 2,750,000 shares and 2,250,000 shares,
respectively. Renesas Technology Corp. is to be accounted for under the
equity method by the Company as major decisions require consensus between
the Company and Mitsubishi Electric Corporation in accordance with the
joint venture agreement and assets and liabilities of the operations will
be excluded from the consolidated balance sheet. Total assets and net
assets of the operations as of April 1, 2003 amounted to approximately JPY
596,118 million and JPY 147,443 million, respectively.
On April 28, 2003, the Company decided to issue up to JPY 300,000 million
of straight bonds by May 2005. On May 27, 2003, the Company issued JPY
80,000 million of straight bonds with a 0.72% interest rate. These bonds,
which are unsecured with interest payable semi-annually, are due May 27,
2013.
As indicated in note 13, at the ordinary general shareholders' meeting on
June 26, 2002, the Company was approved to acquire up to 300,000,000 shares
of its common stock for an aggregate acquisition price not exceeding JPY
300,000 million as treasury stock pursuant to the Japanese Commercial Code.
On April 28, 2003, the Company announced that it would acquire up to
80,000,000 shares of its common stock for an aggregate acquisition price
not exceeding JPY 30,000 million. The share purchase is specifically
limited to shares traded during the period from May 1 through May 30, 2003
on the Tokyo Stock Exchange. The Company acquired a total of 66,338,000
shares for JPY 29,934 million during this period.
122
Schedule II
-----------
HITACHI, LTD.
AND SUBSIDIARIES
Reserves
Years ended March 31, 2003, 2002 and 2001
(In millions of yen)
Balance at Charged Net decrease Bad debts Balance
beginning to in unearned written at end
of period income income off of period
---------- --------- ------------ --------- ---------
Year ended March 31, 2003:
Allowance for doubtful
receivables 34,884 9,656 -- (4,772) 39,768
Unearned income-
installment financing 1,007 -- (255) -- 752
---------- --------- ------------ --------- ---------
35,891 9,656 (255) (4,772) 40,520
========== ========= ============ ========= =========
Year ended March 31, 2002:
Allowance for doubtful
receivables 21,028 19,200 -- (5,344) 34,884
Unearned income-
installment financing 1,231 -- (224) -- 1,007
---------- --------- ------------ --------- ---------
22,259 19,200 (224) (5,344) 35,891
========== ========= ============ ========= =========
Year ended March 31, 2001:
Allowance for doubtful
receivables 14,430 11,307 -- (4,709) 21,028
Unearned income-
installment financing 7,767 -- (6,536) -- 1,231
---------- --------- ------------ --------- ---------
22,197 11,307 (6,536) (4,709) 22,259
========== ========= ============ ========= =========
123
Item 18. Financial Statements
Not applicable.
Item 19. Exhibits
1.1 Articles of Incorporation of Hitachi, Ltd., as amended (English
Translation)
1.2 Share Handling Regulations of Hitachi, Ltd., as amended (English
Translation)
1.3 Board of Directors Regulations of Hitachi, Ltd. (English Translation)
12.1 Certification of Chief Executive Officer or Equivalent Pursuant to
Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934
12.2 Certification of Chief Financial Officer or Equivalent Pursuant to
Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934
13.1 Certification of Chief Executive Officer or Equivalent Pursuant to
Rule 13a-14(b) or 15d-14(b) of the Securities Exchange Act of 1934 and
Section 1350 of Chapter 63 of Title 18 of the United States Code
13.2 Certification of Chief Financial Officer or Equivalent Pursuant to
Rule 13a-14(b) or 15d-14(b) of the Securities Exchange Act of 1934 and
Section 1350 of Chapter 63 of Title 18 of the United States Code
124
SIGNATURES
The registrant hereby 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.
Hitachi, Ltd.
------------------------
(Registrant)
Date: September 30, 2003 By /s/ Takashi Hatchoji
-----------------------------------------
Takashi Hatchoji
Vice President and Executive Officer
125
Exhibit Index
1.1 Articles of Incorporation of Hitachi, Ltd., as amended (English
Translation)
1.2 Share Handling Regulations of Hitachi, Ltd., as amended (English
Translation)
1.3 Board of Directors Regulations of Hitachi, Ltd. (English Translation)
12.1 Certification of Chief Executive Officer or Equivalent Pursuant to
Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934
12.2 Certification of Chief Financial Officer or Equivalent Pursuant to
Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934
13.1 Certification of Chief Executive Officer or Equivalent Pursuant to
Rule 13a-14(b) or 15d-14(b) of the Securities Exchange Act of 1934 and
Section 1350 of Chapter 63 of Title 18 of the United States Code
13.2 Certification of Chief Financial Officer or Equivalent Pursuant to
Rule 13a-14(b) or 15d-14(b) of the Securities Exchange Act of 1934 and
Section 1350 of Chapter 63 of Title 18 of the United States Code
126