DDI CORPORATION ANNUAL REPORT Dream Communications. Printed in Japan

Transcription

1 DDI CORPORATION ANNUAL REPORT 1999 Dream Communications Printed in Japan

2 Selected Financial Data Millions of yen DI was established in June 1984 as Dai-ni Denden Planning Company. It changed its name to DDI Corporation in April 1985, as the liberalization of the telecommunications sector was taking place, and received permission to operate as a Type 1 Telecommunications Carrier in June DDI began to provide leased circuit services in October 1986 and long-distance telephone services in September 1987, thus bringing competition to the Japanese telecommunications market, which had previously been monopolized by Nippon Telegraph and Telephone Corporation (NTT). The DDI Group subsequently expanded into cellularphone services in 1989 and Personal Handy-phone System (PHS) services in In Years ended March 31 Consolidated statements of income: Total operating revenues Operating income Income before income taxes Net income (loss) Consolidated balance sheets Total assets Total shareholders equity Interest-bearing debt Per share data (yen) Net income (loss) Cash dividends ,246,582 1,178,345 1,016, , ,391 69,874 79,611 46,194 82,895 87,313 49,715 65,018 37,880 75,569 75,645 17,061 8,310 (26,161) 4,281 29,604 1,585,848 1,296,747 1,055, , , , , , , ,704 1,068, , , , ,474 7,501 3,807 (12,031) 1,969 14,121 1,790 1,790 1,790 1, November 1998 it began satellite-based global telecommunications operations based on the IRIDIUM and International services. The DDI Group will continue to expand its activities in the future as it evolves into an integrated telecommunications services provider. Notes: 1. For purposes of comparison, net income and cash dividends per share for the fiscal years prior to fiscal 1995 have been restated to reflect the 11:1 stock split. 2. Interest-bearing debt consists of short-term loans and current portion of long-term loans, long-term loans, bonds and long-term accounts payable. 3. Certain amounts relating to Enterprise taxes, Amortization of goodwill, Equity in income of Unconsolidated Subsidiaries and Affiliates shown in the consolidated financial statements for the years ended March 31, 1998, 1997, 1996 and 1995 have been reclassified to conform with the 1999 presentation. Table of Contents 1 Selected Financial Data 2 To Our Shareholders 4 The Japanese Telecommunications Industry in the Fiscal Year Ended March DDI s Business Operations 10 DDI s Network Services 13 DDI s Cellular-Phone Services 16 DDI s PHS Services 20 DDI s IRIDIUM Services 23 DDI s Overseas Mobile Services 24 Financial Highlights Response to the Y2K Problem 26 Consolidated Balance Sheets 28 Consolidated Statements of Income 29 Consolidated Statements of Shareholders Equity 30 Consolidated Statements of Cash Flows 31 Notes to Consolidated Financial Statements 37 Report of Independent Accountants 38 Scope of Consolidation 39 Corporate Data 1

3 To Our Shareholders reflected in increased demand for data communications services. made a number of changes to its system of charges. It launched diverse. In addition to the growth of personal telecommunica- DDI responded by cutting charges for its Frame Relay Service a new plan that combines a basic charge with a certain amount tions, the Internet and other types of data communications are and launching a new Cell Relay Service to support high-volume of free call time and also introduced discount services. C-Mail, a expected to have a growing influence on various aspects of soci- data communications. It further enhanced its competitiveness in mail service for cellular telephones, and the EZweb service, ety. The DDI Group has developed the following strategies in the high-growth field of data communications by adding new which allows Internet access from cdmaone telephones, were preparation for these changes. service options to its DION Internet connection system. introduced in April The improvement of network infrastructure continued. DDI acquired the Japan Information Highway (JIH) system, a largecapacity submarine cable encircling the entire Japanese archi- PHS Services The advantages of PHS relative to cellular-telephone services are 1. Group Integration to Match Market Needs DDI is converting its network to fiberoptic technology and building an IP network to support data communications. These pelago. It also continued to convert its network to fiberoptic shrinking in terms of charges and functions. In an effort to enhancements will enable it to respond flexibly to the demand cable. These enhancements will further reinforce network relia- expand its user base, DDI introduced new charging plans and ser- for high-speed, large-capacity services. Founder and Chairman Emeritus Kazuo Inamori President and Chairman Yusai Okuyama bility while ensuring that DDI is able to keep pace with future growth in the demand for telecommunications services. vices and continued to improve the functionality of its network. However, the business environment was extremely harsh, and As customer needs become more sophisticated and diverse, DDI will also enhance its ability to market its services through a The globalization of the Japanese telecommunications business continued in the fiscal year 1999, ended March 31, There were also further moves toward deregulation, including changes to the Telecommunications Business Law. An expanding influx of both Japanese and foreign companies into the market was reflected in escalating competition based on both services and prices. There was also evidence of accelerating change in the structure of the industry, including mergers, transfers of operations and business partnerships among carriers. A conspicuous feature of trends in the telecommunications market was the rapid growth of demand for mobile telephone services. There was also further diversification of consumer needs, including increased demand for Internet access and other data communications services. The focus of the market continued to shift from fixed-line to wireless communications, and from voice to data communications. In this market environment, DDI focused on the expansion of its long-distance, international, cellular telephone, PHS and Iridium services. DDI s non-consolidated profit in fiscal year 1999 was affected by a reduction in long-distance telephone charges in February 1998, and by the growing popularity of discount services. Operating revenues rose by 13.0% over the previous year s level to 605,510 million, and recurring profit declined by 23.3% to 33,648 million. Net income was 29.0% lower at 16,867 million. On a consolidated basis, operating revenues increased by 5.8% to 1,246,582 million, while recurring profit declined by 20.0% to 50,866 million. Net income was 105.3% higher at 17,061 million. Long-Distance Services DDI worked to enhance its competitiveness primarily through International Services The provision of a seamless domestic international service has been a cherished goal for DDI. In June 1998, it signed network interconnection services with Japanese and overseas carriers and other organizations covering the provision of international telecommunications services. In October 1998, it began to offer low-cost international telephone services. Users can now call almost any location on Earth at affordable prices simply by dialing the 0078 access number. Growth is also predicted for international data communications. DDI s acquisition of the PC-1 submarine optical fiber cable, which links Japan and the United States, will allow it to respond flexibly to demand in this area. Preparations for the establishment of cellular-telephone services in Brazil and Paraguay also continued. Services were launched in December 1998 in Brazil, and in May 1999 in Paraguay. Cellular-Phone Services The DDI CELLULAR Group achieved steady growth in its subscriber base, which increased by 22.4% to 5,298,900 as of March 31, In July 1998 KANSAI CELLULAR TELEPHONE Co., KYUSHU CELLULAR TELEPHONE Co. and OKINAWA CELLULAR TELEPHONE Co. launched a new service based on the cdmaone technology, which is superior to the PDC system in terms of both voice quality and suitability for data communications. The new service was subsequently introduced by CHUGOKU CELLULAR TELEPHONE, HOKURIKU CELLULAR TELEPHONE and SHIKOKU CELLULAR TELEPHONE in March 1999, and by HOKKAIDO CELLULAR TELEPHONE Co. and TOHOKU CELLULAR TELEPHONE Co. in April Seamless other PHS operators made major changes in their operations. The number of subscribers registered with the Pocket Telephone companies reached a peak of 3,617,000 in July This was followed by net declines each month until February DDI sought to halt this trend by introducing a number of innovations, including the P-Mail DX (P-Mail Deluxe) telephone with enhanced mail functions, and the Moji Denwa (Text Phone), which was specially designed to take advantage of the data communications capabilities of PHS. These measures brought a return to net growth, and by March 1999 the total number of subscribers was only 0.8% below the previous year s level at 3,457,000. IRIDIUM Services The Iridium Service is a global satellite phone and pager service based on low-orbit satellites. Services began on a trial basis in November 1998, and full service was launched in January In February and May the charges were adjusted to make the service more convenient to customers. The number of subscribers stood at 1,200 as of March 31, The slow start is attributable to delays in the launch of the service and the introduction of terminals. DDI is also working to ensure the success of the global Iridium venture. It is a shareholder in IRIDIUM SOUTH PACIFIC PTY LTD. in Australia and IRIDIUM SOUTHEAST ASIA CO., LTD. in Thailand. These companies were established to provide Iridium services in the South Pacific and Southeast Asia. Future Outlook The Japanese telecommunications industry is entering a period of major change. NTT restructuring took effect in July 1999, and new market participants, including foreign companies, are starting to offer a full range of services. These and other devel- consulting approach as a provider of comprehensive solutions that include the design of corporate communications systems. In April 1999 it established DDI Network Systems to handle its solutions business. Members of the DDI Group have joined forces to develop and provide the EZweb service, which was launched in April EZweb allows users to access Internet information from a cellular telephone. Access is via DION, an Internet connection service operated by DDI. 2. Reducing Reliance on the NTT Network Until now DDI has connected to the NTT network via relay exchanges. It is now moving closer to users by introducing group center (GC) connections at local exchanges. This will lower DDI s reliance on the NTT network and reduce the amount of access charges paid to NTT. DDI also plans to reduce the reliance of the CELLULAR TELEPHONE companies on the NTT network by enabling them to use group connections via the DDI network. This change, which has already been implemented for the PHS companies, will also bring savings in the amount of access charges paid to NTT. Group connections are expected to enhance the earnings of all group companies. Founder and Chairman Emeritus Kazuo Inamori pricing strategies, including the introduction of new discounts nationwide coverage was established in April 1999, when IDO opments are expected to bring a proliferation of low-cost to make services more accessible to existing users, especially in the area of voice calls. The expansion of the Internet was launched cdmaone services in the Tokyo and Tokai regions. To improve the competitiveness of existing services, DDI services and trigger fierce competition among carriers. Telecommunications user profiles are becoming increasingly President and Chairman Yusai Okuyama 2 3

4 The Japanese Telecommunications Industry in the Fiscal Year Ended March 1999 The Japanese telecommunications industry has entered an era of fierce competition, amid the easing of regulations and the flurry of mergers and realignments. Competition is now focused more on one-stop teleservice than on price, and companies are vying to provide an array of convenient new services as the use of the Internet and data communications continues to grow. Since 1998, the Japanese telecommunications industry has entered, in many ways, a new phase. Restrictions on carrier services have been removed and the distinction between international and domestic services has become meaningless. There has been an accelerating process of mergers and alliances across national borders, and both Internet use and mobile telecommunications have expanded rapidly. These changes are being driven by deregulation in the various telecommunications fields, by the NTT split-up, by changing user needs and by rapid advances in technology. One major change was the approval of international simple resale line connections in December This move means that carriers other than traditional international telephone companies now have increased opportunities to move into the international market. The growth of cross-border mergers and alliances has accelerated since the removal, in January 1998, of restrictions on foreign ownership of new common carriers (NCCs). In July 1998 the KDD Law was repealed, and in July 1999 the NTT split-up took effect. These changes have allowed KDD to move into domestic communications and NTT to move into the international communications market. The telecommunications industry faces a number of key issues. One debate concerns the planned introduction, in the spring of 2001, of preferential connections and the long-term incremental cost method for NTT charges. Number portability is another focus of debate, including portability between fixed-line and mobile systems. The long-term incremental cost method is especially important because of its implications for a reduction of the heavy cost burden imposed on NCCs through NTT access charges. The NTT split-up involved changes to the NTT Law. NTT was split up under a holding company structure into one long-distance carrier and two regional telephone companies serving eastern and western Japan. One effect of this law change will be the establishment of rules for fair competition between NTT and other carriers in the area of local telecommunications. Hitherto, there has been a de facto monopoly for NTT. The NTT restructuring must lead to the creation of a fair and competitive environment. The industry cannot afford anti-competitive collusion, in such areas as personnel, financing, Principal Access Charges Type Fiscal Year Ended March 1999 Fiscal Year Ended March 1998 Fiscal Year Ended March 1997 ZC connection (telephone) 1.27/call /second 11.98/3 minutes 1.28/call /second 12.92/3 minutes 1.65/call /second /3 minutes ZC connection (ISDN) 2.59/call /second 17.84/3 minutes 3.67/call /second 25.59/3 minutes 2.61/call /second 25.99/3 minutes GC connection (telephone) 0.99/call /second 5.81/3 minutes 0.99/call /second 6.19/3 minutes 1.27/call 0.028/second 6.31/3 minutes PHS local communications 1.66/call /second 11.99/3 minutes 1.71/call minutes 13.10/3 minutes 2.16/call /second 15.17/3 minutes 4 5

5 procurement of supplies and management information, between NTT s long-distance company, nology. Since then there has been a shift to digital technology. In the past all digital cellular Total Number of Portable-Phone Subscribers All Carriers and DDI CELLULAR TELEPHONE Group which will be the dominant carrier, and its local telephone companies. These issues are certain to be the focus of continuing debate. telephone companies in Japan used PDC as their standard system. However, sound quality is poor with PDC, and data transmission speeds are lim- 41,530,000 The Ministry of Posts and Telecommunications has recommended to NTT that it introduce flatrate charging for its Internet connection services. ited to 9.6kbps. As a result, the technology is not really suitable for high-quality voice communications or Internet communications. Another 31,526,870 The low level of Internet use in Japan compared with the level in the United States is attributable in part to usage-based connection charges. There is disadvantage is that PDC is a uniquely Japanese standard, which means that global roaming is not available to Japanese users. 20,876,820 likely to be considerable debate over the timing of the move to flat-rate charges. One major change in user needs has been the shift from fixed-line to mobile telephones. This trend is symbolized by the shrinkage in the NTT It was in this environment that DDI began to introduce cdmaone in July In April 1999 it launched a nationwide service in partnership with IDO. The new system provides high-quality voice communications and 64kbps data 4,331, ,000 10,204,023 1,959,100 3,423,700 4,328,500 5,298,900 fixed-line subscriber base for the first time in the history of NTT. The number of fixed-line connections fell from 61.3 million in the year to March transmission. In addition, it supports global roaming. Its introduction is expected to trigger another phase of rapid growth in the Japanese All Carriers Portable-phone Subscribers DDI CELLULAR TELEPHONE Group , to 60.4 million in the year to March 1998, cellular telephone market. Moreover, the CDMA and to 58.4 million in the year to March The combined cellular telephone and PHS mar- technology used in the cdmaone system is the base technology for the next generation of cellu- Total Number of PHS Subscribers All Carriers and DDI POCKET TELEPHONE Group ket expanded from 26.9 million users fiscal 1997 to 38.2 million in fiscal March 1998, and to 47.3 million in fiscal New advances in technology have been accompanied by growing interest in Internet- lar telephones, which will be able to support even higher data transmission speeds. The International Telecommunications Union is now developing a world standard for this new cellular telephone system, called IMT ,029,691 6,727,023 5,780,000 based IP networking as a new trend in fixed-line Advances in technology are also bringing telephone use. In the United States voice and data traffic are both transmitted via IP networks and some carriers are by-passing existing telephone exchange networks. Japanese telecommunications companies are also examining the concept of IP networks. Another area of interest is the use of WDM technology. This can dramati- mobile communications and computers ever closer together. The ability to send and receive e- mail and browse the web without connecting to a computer is likely to become a standard feature of cellular telephones. In the future, users who buy cellular telephones or PHS units are likely to regard an address as a normal adjunct to 1,508, ,400 2,880,600 3,486,600 3,457,700 cally increase the transmission capacity of fiber a telephone number. optic networks. Until the early 1990s mobile telecommunications were predominantly based on analog tech All Carriers PHS Subscribers DDI POCKET TELEPHONE Group

6 NETWORK SERVICES 10 DDI s foundation is its digital microwave and optic fiber network connecting the entire nation of Japan and extending overseas. This network is rapidly evolving to accommodate the explosion in IP (Internet-related) traffic. CELLULAR-PHONE SERVICES 13 Through rapid conversion to digital, now including the amazingly clear-sounding cdmaone technology, DDI s CELLULAR- PHONE network has grown to serve almost nine million subscribers as it meets the growing needs of a mobile society. PHS SERVICES 16 PHS (Personal Handy-phone System) technology offers a level of convenience and flexibility unprecedented in consumer personal mobile communications. New technologies are sweeping in a new era of smart, affordable voice and data communication. IRIDIUM SERVICES 20 DDI has taken a major leadership role in supporting Iridium in Japan and the Asia-Pacific region. Introduced less than a year ago, Iridium fulfills the dream of anywhere, anytime communications independent of terrestrial phone systems. OVERSEAS MOBILE SERVICES 23 Overseas business is a new strategic element of DDI s medium- to long-term growth. By partnering with local and international investors in new markets overseas, DDI is bringing global communications excellence to the world at large. DDI S BUSINESS OPERATIONS Comprehensive telecommunications by the one provider for all markets With a seamlessly integrated, high-fiber network of five core operations, the DDI Group delivers the ideal environment for both global and personal communications. 8 9

7 DDI S NETWORK SERVICES Surpassing excellence in every aspect of telecom expertise In fiscal 1999, the year ended March 31, 1999, DDI s operating revenues increased by 13.0% or 605,510 million, while its operating income declined by 21.1% to 34,788 million compared with the previous fiscal year. Capital expenditure was 28.8% lower at 66,548 million. Though the reduction in long-distance call charges in February 1998 led to a fall in revenue, there was increased revenue from peripheral activities in the form of sales of terminals and other items to CELLULAR TELEPHONE companies. Profit was down, mainly because of the price reduction. Increased income from data communications should help to boost both revenue and profit in the year in fiscal Securing New Income Sources DDI sees the high-growth area of data communications services as a major new source of income. In July 1997 it launched DDI Integrated Open Network (DION) to provide Internet access services. As of the end of March 1999, there were 147,200 subscribers. It has introduced a charging plan for individual users of the DION dialup service, and for corporate customers it now offers the DION Standard 2 charging plan. These plans have made Internet access more affordable and offered a continuous connection service. In May 1998 the UP Link Server technology developed by Unwired Planet, Inc. was adopted for the DION network. The UP Link Server supports the Wireless Application Protocol (WAP). Its addition to the DION network allows users to access the Internet through the DION network, from cellular or PHS telephones equipped with the UP Browser. With the UP Server, it is possible to access information from around the world from a telephone without using a notebook computer or other equipment. There is also easy access to various other applications, including and schedule management. DDI has taken a consultative approach to the marketing of its data transmission services. It is also enhancing its capacity to meet continuing growth in the demand for data communications due to the expansion of Internet-related markets. In June 1998 it introduced an ATM Leased Circuit Service and in December launched the Cell Relay Service, which supports superhigh-speed, high-bandwidth data communications. To improve the competitiveness of the Frame Relay Service, domestic charges were reduced in February 1999, and international charges were reduced in March In the year ended March 1999, the number of subscribers for DDI s long-distance telephone service increased by 3.1% to 1.68 million circuits. In addition DDI sees the high-growth area of data communications services as a major new source of income and is converting all voice networks to IP networks as it seeks to provide a total information solution for every customer need

8 DDI S NETWORK SERVICES to aggressive marketing of its existing system, DDI introduced the new Danzen Hiruwari (Daytime Ultra- Discount) service. For a flat monthly charge of 200, subscribers can enjoy calling during business hours at after-hours charging rates. If total charges exceed 1,000, an additional 25% discount is provided on calls to five destinations. In October 1998 DDI began to offer international telephone services through interconnections with KDD, Teleglobe of Canada and C&W of the United Kingdom. DDI is able to price a 3-minute daytime weekday call between Japan and the United States at a very competitive 168, compared with 240 through KDD ( 216 with discount). The improvement of network infrastructure is a continuing priority for DDI. To provide for future growth in telecommunications demand, DDI is building a fiberoptic network to complement its existing wireless network. The domestic trunk backbone is KDD s Japan Information Highway (JIH), which is being converted to optical technology. DDI also anticipates growth in the demand for international data communications. Recently it signed memoranda covering the purchase of 1.5Gbps of capacity on the PC-1 submarine cable link between Japan and the United States. In addition, DDI plans to invest actively in the development of a next-generation IP network suitable for data communications. DDI does not have direct links to its customers and it must pay access charges to NTT, which has a virtual monopoly over local networks. The reduction of those access charges is a crucial priority. DDI hopes to achieve this goal by changing its connection method. In the past its network was linked to NTT networks through zone centers (ZCs) transit switches. In April 1998 it began to use group centers (GCs) local exchanges near users. GC access rates were 5.81 per three minutes, compared with for ZC connections as of March 31, In the year to March 2000, DDI plans to establish connections to around 700 of the approximately 1,600 GCs in Japan. Another goal is the reduction of access charges paid by DDI Group companies for access through the DDI network. Revenues from CELLULAR-Phone Services The eight CELLULAR TELEPHONE companies are consolidated subsidiaries of DDI. All offer services based on cdmaone and PDC digital technology and the TACS analog system. In fiscal 1999, the year ended March 1999, their operating revenues amounted to 690,606 million, an increase of 15.5% over the previous year s result, while operating income was 41.0% lower at 30,338 million. Capital investment increased by 90.8% to 273,751 million, including 184,700 million in expenditure on cdmaone facilities. Though revenues increased, thanks to growth in the cdmaone subscriber base and other factors, profit came under pressure from increased sales expenses, especially in relation to the marketing of cdmaone. We aim to achieve growth in both revenues and profits in the year to March 2000 through a substantial increase in the number of cdmaone subscribers By March 31, 1999, the eight CELLULAR TELE- PHONE companies had a cumulative total of 5,298,900 DDI S CELLULAR-PHONE SERVICES subscribers, an increase of 22.4% compared with the previous fiscal year s total. The group s market share reached 26% in all service areas except the Tokyo/Tokai region. In the Tokyo/Tokai region, services are provided by two TU- KA Cellular companies, which increased their aggregate subscriber base by 26.5% to 2,061,000. The cdmaone system is highly competitive for a variety of reasons, including its excellent voice quality and compatibility with high-speed data communications. The DDI Cellular Group has worked with Nippon Idou Tsushin Corp. (IDO) to develop nationwide seamless coverage with the new system, and in April the service became available throughout Japan. Moreover, cdmaone telephones now compare favorably with existing PDC types, thanks to development of lighter, more compact models with improved standby times. In April 1999 two enhanced services, EZweb and C-Mail, were introduced to take advantage of the data communications capabilities of the cdmaone system. The EZweb service is provided through EZserver, a Wireless Application Protocol cdmaone technologies for a new age of telecommunications With voice quality that rivals standard telephones, cdmaone is the de facto performance standard for wireless telephones around the world. And the same qualities that make it such a clear winner for voice will soon give it a performance edge in high-speed mobile data transmission

9 DDI S CELLULAR-PHONE SERVICES Growth in Subscribers among the DDI CELLULAR Group and Two TU-KA Cellular Telephone Companies (Unit/Thousand) 3,423 4,328 5,298 (WAP) gateway. Cellular telephones with the EZbrowser function can be used to send and receive and access a variety of information sites without the need to connect to a computer or other equipment. The introduction of this service has facilitated Internet access in a mobile environment. C-Mail is a stored mail communications service provided through the cdmaone system. Text messages can be sent and received between C-Mail configured cellular telephones, and text messages and can be received even from telephones without the C-Mail function. The data communications capabilities of the cdmaone system will be further enhanced with the introduction of a 64Kbps packet data transmission service in December Other changes that have enhanced the attractiveness of the service to customers , , , , DDI CELLULAR Group TU-KA Cellular Group include the introduction of Tanoshi-Mail, which works under the PDC system and supports text message services not only between cellular telephones, but also between P-Mail configured PHS telephones. Preparing for IMT-2000 In the fiscal year 1999 ended March 1999, the DDI International Mobile Telecommunications-2000 (IMT- CELLULAR Group worked to strengthen its competi- 2000) is a next-generation mobile communications system tiveness by cutting basic charges and other prices, intro- using the 2 GHz band. The Radiocommunications Sector ducing new charging plans, and expanding discount of the International Telecommunications Union (ITU-R) services. Charges for calls from NTT subscriber tele- is currently studying international standards for the sys- phones to cellular telephones were cut in October tem. The Association of Radio Industries and Businesses In the case of KANSAI CELLULAR TELEPHONE, for (ARIB) is meanwhile working to develop standards in example, the call time for 10 was increased from 10 Japan. DDI and IDO have established a joint venture, the seconds to 12 seconds. In January 1999, the basic charges for cdmaone and PDC telephones were reduced by 200 for the standard plan and 100 for the Low Call plan. In addition, the ratio of weekday, daytime call charges to standard plan charges was lowered from 1.5 to 1.4. In October 1998 the new Komi-Komi call plan was introduced. The basic charge under this plan includes a specific amount of free call time. Discount services were also enhanced. For example, the Nakayoshi discount plan, which was launched in May 1998, provides special discounts for calls to designated numbers. DDI-IDO Joint Laboratory, to carry out research and development activities in preparation for the introduction of IMT The two companies previously entered into a similar arrangement for cdmaone. The aim of the research program is to develop and evaluate a radio transmission system that will be compatible with the existing cdmaone system. Through this work, DDI and IDO will contribute to the establishment of standard specifications for IMT They will also work with manufacturers to improve their technology and competitiveness in preparation for commercialization. Cellular-phone Service Rate Chart (KANSAI CELLULAR) (as of August 1999) Standard Low Call Set Plan Contract Business Handling Charge 2,700 2,700 2,700 Basic Monthly Usage Charge (yen) Call Charge Cellular phone to cellular phone Daytime on weekday Nighttime on weekday Daytime and nighttime on Sat., Sun. and Holidays Midnight, early morning *Free-minute rates shown in Set Plan are for cdmaone TACS 4,400 PDC 4,400 cdmaone 4,600 sec/ 10 Inside own network 18.0 Other Area 16.0 Inside own network 29.0 Other Area 26.5 Inside own network 32.5 Other Area 29.0 Inside own network 45.0 Other Area 40.0 yen/3min TACS 3,400 PDC 3,400 cdmaone 3,500 yen/3min 1.4 times Standard Same as Standard Jumbo 8,900 Up to 4,000 of free-minute * calls included in monthly charge 20/min Irrespective of calling time or distance Plan L 5,700 5,900 Up to 3,000 of free-minute * calls included in monthly charge 30/min Irrespective of calling time or distance Plan S 3,900 4,000 Up to 1,400 of free-minute * calls included in monthly charge 40/min Irrespective of calling time or distance 14 15

10 The cumulative subscriber base of the nine POCKET TELEPHONE companies decreased by 0.8% to 3,457,700, and their market share reached 59.8%. After a period of continuous decline between July 1998 and February 1999, Subscribers of the DDI POCKET TELEPHONE Group (Unit/Thousand) the number of subscribers showed net growth in March This reflected efforts to attract new customers. PHS offers call charges lower than cellular telephone charges, and the system is also excellent for high-speed data com- 2,880 3,486 3,457 munications. As in the previous year, there was continuing growth in the use of the system for non-voice communications. In fiscal 1999, text message calls accounted for about 48% of total traffic, compared with 28% in the year to March These non-voice modes of communication are especially popular with young people. In October 1998 the DDI POCKET TELEPHONE companies reduced the cost of a three-minute daytime, 776 weekday call placed from PHS units to cellular telephones from 180 to 150 for customers on standard plans, and from 180 to 90 for calls placed at other DDI S PHS SERVICES times. As part of their efforts to expand the user base, the DDI POCKET TELEPHONE companies also launched the Anshin-da Phone (Peace of Mind Phone) service in April Flexible foresight leads to expanding capabilities The wireless ISDN technology of PHS fulfills the need for affordable and flexible voice and high-speed data communications. Improvements in voice, text and high-speed data capabilities and performance are expanding its role in multi-function personal communication. Operating revenues for the year ended March 1999 amounted to 331,300 million, a 3.6% increase compared with the previous year s result. Operating income increased by 191.4% to 9,972 million, while capital expenditure decreased by 38.7% to 61,146 million. Traffic increase, cost reductions and other factors were reflected in the first operating surplus since the launch of services. Under this plan, which limits the numbers to which calls can be placed, the monthly basic charge is reduced to 980, compared with a normal charge of 2,700. There is no limit on incoming calls. The service was designed primarily to provide peace of mind to other family members by having children and the elderly carry PHS units. Another money-saving plan was introduced for people who use telephones in the daytime, such as housewives. In June 1999 a range of charging packages was launched. With Super Pack S, the customer pays a basic monthly charge of 3,300. This includes 1,200 worth of free calls, which allows the user to talk for up to 115 minutes. Customers can talk free for as long as 348 minutes with the Super Pack L. The 5,000 basic monthly 16 17

11 DDI S PHS SERVICES charge includes 3,000 worth of free calls. These new products were developed to attract new customers by offering the services at reduced cost. The package concept is designed to promote customer confidence. Services were further enhanced with the opening of the P-Mail Deluxe (DX) Center in December The facility supports the P-Mail DX system, which permits the transmission of messages up to 1,000 characters long, and P-mail, which carries 20-character text messages. February 1999 saw the launch of the Moji Denwa (Text Telephone) specified non-voice communications. This dedicated terminal is designed to exploit the data information services. In the summer of 1999, 64kbps data communications and image-capable terminals was introduced. Measures to improve call quality included the establishment or expansion of base stations and the enhancement of network handover functions. Together with improvements in terminal capabilities, these changes will ensure that customers are able to place calls without interruption, even when moving. The POCKET TELEPHONE companies will continue to strengthen the competitiveness of their services and inform users about the advantages of PHS technology. communications capabilities and text messaging capabilities of PHS technology. The new service is limited to certain types of communications. Text mail and handwritten messages and drawings can be exchanged between dedicated terminals, and Internet mail can be sent or received either directly or via the P-Mail Deluxe Center. The system also supports access to text-based PHS Charge Table (as of August 1999) Contract Business Handling Charge Standard Anshin-da Phone * Super Pack-S Super Pack-L 2,700 2,700 2,700 Monthly Charge 2, ,300 5,000 Call Charge Daytime sec. yen Nighttime sec. yen Midnight sec. yen Local area Up to 1,200 of Up to 3,000 of adjacent, 30km 60km 100km Same as Standard free minutes is included in the monthly charge Over 1,200, 1.2 times free minutes is included in the monthly charge Over 3,000, 2 times 160km Standard Standard 160km *Anshin-da Phone rates apply to up to two pre-assigned call destinations 18 19

12 DDI S IRIDIUM SERVICES In Front and up front, we re a leader DDI supports Iridium throughout Japan and the Asia Pacific. Launched in November 1998, Iridium provides full-time communication anywhere on the globe when conventional communication is unavailable. It s the best choice when nothing else even comes close. Providing Iridium Services for the Asia Pacific The Iridium Service uses 66 low-earth-orbit satellites to allow communications outside of areas covered by ground-based cellular-telephone systems, and in locations without a communications infrastructure. It is a cellular telephone and pager service covering the entire world. Services are provided by local carriers in each region. NIPPON IRIDIUM CORPORATION is the provider in Japan. The parent organization for the promotion of the Iridium scheme is the American Iridium company, Iridium LLC. In addition to proposing the overall business plan, this company also owns and operates the satellites. NIPPON IRIDIUM CORPORATION has an 11.2% shareholding in Iridium LLC and participates in its management by appointing three directors. Commencement of Services in November 1998 NIPPON IRIDIUM CORPORATION prepared for the start of services by building a gateway station and establishing a marketing structure based primarily on the DDI Cellular Group. In March 1998 it obtained approval for its service contract and charges. The satellite network was completed approximately one year after the launch of the first satellite in May After a series of communication tests, commercial services were launched in November Until the end of December, the service was provided on a trial basis, and users were not required to pay the basic charge. Charges for Iridium Services (The following charges were approved in August 1999.) Iridium Satellite Iridium Paging Service Service Stand-Alone With Iridium Satellite Service Sign-Up Charge 10,000 5,000 Basic Monthly Usage Charge US$50/month US$90/month US$30/month 20 21

13 DDI S IRIDIUM SERVICES Outgoing Call Charges from Iridium Satellite Service (Call charge unit: $U.S.) Origin Destination Call Charge Iridium Satellite Service in Japan Targets, Subscriber Numbers Subscriber Telephone or Surface CELLULAR PHONE The Iridium Service allows calls to be placed using a single cellular-phone terminal in areas where communication was previously difficult or outside of groundbased cellular-telephone service areas. There is strong demand for this type of service from government agencies, local authorities, the media, construction firms, fishing companies, business people on overseas trips, and anyone who needs to communicate in mountainous areas, at sea, in overseas locations with poor telecommunications infrastructure, or in emergencies. Iridium satellite telephones were carried by Mitsuro Oba on his successful solo expedition across Antarctica, and by a Japanese team participating in relief operations following a disaster in South America. All praised the excellent sound clarity of the Iridium Service and its ability to support communications in extreme conditions. Further recognition of the Iridium Service came in January 1999, when it was designated as a communications system for the Global Maritime Distress and Safety System (GMDSS). As of March 31, 1999, the number of subscribers stood at 1,200. The slow start reflects the fact that cellular satellite telephones manufactured by Kyocera did Iridium Satellite Service Iridium Pager Subscriber Telephone or Surface CELLULAR PHONE ($0.274/10 sec.) ($0.534/10 sec.) not become available until April, with the result that only Motorola models were available. Reduction of Charges Charges for calls placed from international waters were reduced in February In May 1999 the charging system was simplified and charges were reduced. These changes are intended to make the system more accessible to users. Overseas Telephone Business The worldwide trend toward deregulation of the telecommunications sector prompted DDI to make plans for the international expansion of its telephone business. It has already established cellular-telephone services in Brazil and Paraguay. Following the liberalization of the Brazilian cellular-telephone market, DDI joined with leading local companies and other investors to establish Global Telecom S.A. The new company obtained licenses to provide cellular-telephone services in the States of Parana and Santa Catalina, and provision of services commenced in December There is a strong demand for the lowcost, high-quality service offered by the new company in these relatively high-income regions, where previously the only provider was a state monopoly. DDI believes that this is a very promising market. The cdmaone system used by the DDI CELLULAR Group in Japan has been adopted in Brazil. Brazilian users will therefore enjoy the additional advantage of global roaming. DDI also had the opportunity to enter the cellulartelephone market in Paraguay. In September 1998 it established Hola Paraguay S.A. with leading local companies and other investors. The new company began to provide services in may Participation in Overseas Iridium Ventures DDI sees participation in overseas Iridium ventures as a way of ensuring the global success of the Iridium scheme. It has invested in companies in the South Pacific and Southeast Asia. It has a 25% shareholding in the Australian company Iridium South Pacific PTY. Ltd., which was established in April 1998 to provide Iridium services in the South Pacific. It also owns a 25% shareholding in a Thai subsidiary, Iridium Southeast Asia Co., Ltd., which will launch Iridium services in Southeast Asia in September Iridium satellite telephone services have been available in both regions since November DDI S OVERSEAS MOBILE SERVICES Sharing extensive telecommunications operating experience worldwide In growing its international telecommunications infrastructure, DDI is partnering with telecommunications and local companies around the world as an experienced operator of demonstrated flexibility, and technical foresight