Annual Reports

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  • 20-F (Jun 30, 2015)
  • 20-F (Jun 30, 2014)
  • 20-F (Jun 28, 2013)
  • 20-F (Jun 29, 2012)

 
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Kyocera 20-F 2005
Annual Report
Table of Contents

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 


 

FORM 20-F

 


 

¨ 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, 2005

 

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

OR

 

¨ SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

Date of event requiring this shell company report

 

For the transition period from              to             

 

Commission file number: 1-7952

 


 

Kyocera Kabushiki Kaisha

(Exact name of Registrant as specified in its charter)

 

Kyocera Corporation

(Translation of Registrant’s name into English)

 


 

Japan  

6, Takeda, Tobadono-cho, Fushimi-ku,

Kyoto 612-8501, Japan

(Jurisdiction of incorporation or organization)   (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          


Common Stock (“Shares”)*   New York Stock Exchange

 

Securities registered or to be registered pursuant to Section 12(g) of the Act.

None

(Title of Class)

 

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act.

None

(Title of Class)

 


 

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.

 

As of March 31, 2005, 187,481,084 shares of common stock were outstanding, comprised of 183,237,380 Shares and 4,243,704 American Depositary Shares (equivalent to 4,243,704 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  ¨    Item 18  x

 

If this is an annual report, indicated by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

 

* Not for trading, but only in connection with the registration of the American Depositary Shares, each representing one share of Common Stock.

 



Table of Contents

TABLE OF CONTENTS

 

          Page

     Cautionary Statement Regarding Forward-Looking Statements    4

PART I

   6

    Item 1.

   Identity of Directors, Senior Management and Advisers    6

    Item 2.

   Offer Statistics and Expected Timetable    6

    Item 3.

   Key Information    6
     A. Selected Financial Data    6
     B. Capitalization and Indebtedness    7
     C. Reasons for the Offer and Use of Proceeds    7
     D. Risk Factors    7

    Item 4.

   Information on Kyocera Corporation and its Consolidated Subsidiaries    11
     A. History and Development of Kyocera Corporation and its Consolidated Subsidiaries    11
     B. Business Overview    13
     C. Organizational Structure    24
     D. Property, Plants and Equipment    29

    Item 5.

   Operating and Financial Review and Prospects    31
     A. Operating Results    31
     B. Liquidity and Capital Resources    57
     C. Research and Development, Patent and Licenses, and etc.    61
     D. Trend Information    64
     E. Off-Balance Sheet Arrangements    65
     F. Tabular Disclosure of Contractual Obligations    66

    Item 6.

   Directors, Senior Management and Employees    67
     A. Directors and Senior Management    67
     B. Compensation    72
     C. Board Practices    73
     D. Employees    73
     E. Share Ownership    73

    Item 7.

   Major Shareholders and Related Party Transactions    81
     A. Major Shareholders    81
     B. Related Party Transactions    81
     C. Interests of Experts and Counsel    82

    Item 8.

   Financial Information    82
     A. Consolidated Statements and Other Financial Information    82
     B. Significant Changes    82

    Item 9.

   The Offer and Listing    83
     A. Offering and Listing Details    83
     B. Plan of Distribution    84
     C. Markets    84
     D. Selling Shareholders    84
     E. Dilution    85
     F. Expenses of the Issue    85

    Item 10.

   Additional Information    85
     A. Share Capital    85
     B. Memorandum and Articles of Association    85
     C. Material Contracts    94
     D. Exchange Controls    94
     E. Taxation    94
     F. Dividends and Paying Agents    99
     G. Statement by Experts    99

 

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     H. Documents on Display    99
     I. Subsidiary Information    99

    Item 11.

   Quantitative and Qualitative Disclosures About Market Risk    99

    Item 12.

   Description of Securities Other Than Equity Securities    102
PART II    102

    Item 13.

   Defaults, Dividend Arrearages and Delinquencies    102

    Item 14.

   Material Modification to Rights of Security Holders and Use of Proceeds    102

    Item 15.

   Controls and Procedures    102

    Item 16A.

   Audit Committee Financial Expert    104

    Item 16B.

   Code of Ethics    104

    Item 16C.

   Principal Accountant Fees and Services    104

    Item 16D.

   Exemptions from the Listing Standards for Audit Committees    105

    Item 16E.

   Purchase of Equity Securities by the Issuer and Affiliated Purchasers    106
PART IV    107

    Item 17.

   Financial Statements    107

    Item 18.

   Financial Statements    107

    Item 19.

   Exhibits    108

 

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Cautionary Statement Regarding Forward-Looking Statements

 

This annual report on Form 20-F contains “forward-looking statements” within the meaning of Section 21E of the U.S. Securities and Exchange Act of 1934. To the extent that statements in this Form 20-F do not relate strictly to historical or current facts, they may constitute forward-looking statements. These forward-looking statements are based upon our current assumptions and beliefs in the light of the information currently available to us, but involve known and unknown risks, uncertainties and other factors. Such risks, uncertainties and other factors may cause our actual actions or results to differ materially from those discussed in or implied by the forward-looking statements. We undertake no obligation to publicly update any forward-looking statement after the date of this Form 20-F, but investors are advised to consult any further disclosures by us in our subsequent filings pursuant to the U.S. Securities Exchange Act of 1934.

 

Important risks, uncertainties and other factors that may cause our actual results to differ materially from our expectations are generally set forth in Item 3.D “Risk Factors” of this Form 20-F and include, without limitation:

 

    general economic conditions in our markets, which are primarily Japan, North America, Europe, and Asia, including in particular China ;

 

    the effect of foreign exchange fluctuations on our results of operations, particularly between the yen and each of the U.S. dollar and the Euro, in which we make significant sales;

 

    our ability to launch innovative products and otherwise meet the advancing technical requirements of our customers, particularly in the highly competitive markets for ceramics, semiconductors and electronic components;

 

    the level of continuing demand for existing products of our competitors and the pricing of those products, and their ability to introduce new products;

 

    the extent and pace of future growth or contraction in information technology (IT)-related markets around the world, including those for communications and personal computers;

 

    the level of continuing demand for, and timing of sales of, our existing products;

 

    declining prices for our products and services;

 

    the effect of future acquisitions on our financial condition and results of operations;

 

    the effect of prevailing interest rates and the performance of equity and other financial markets generally;

 

    the timing of new product introductions and market acceptance for our new products;

 

    an increase in the incidence of product returns;

 

    events that may impact negatively on our markets or supply chain, including terrorist acts and outbreaks of diseases;

 

and other risks discussed under Item 3.D “Risk Factors” and elsewhere in this Form 20-F.

 

Presentation of Certain information

 

As used in this Form 20-F, references to “Kyocera,” “we,” “our” and “us” are to Kyocera Corporation and, except as the context otherwise requires, its consolidated subsidiaries.

 

Also, as used in this Form 20-F:

 

    “U.S. dollar” or “$” means the lawful currency of the United States of America, “yen” or “¥” means the lawful currency of Japan and “Euro” means the lawful currency of the European Union.

 

    “U.S. GAAP” means accounting principles generally accepted in the United States of America, and “Japanese GAAP” means accounting principles generally accepted in Japan.

 

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    “ADS” means an America Depositary Share, each representing one share of Kyocera’s common stock, and “ADR” means an American Depositary Receipt evidencing ADSs.

 

    “fiscal 2005” refers to Kyocera’s fiscal year ended March 31, 2005, and other fiscal years are referred to in a corresponding manner.

 

    Unless otherwise indicated, we have translated the yen amounts for the year ended March 31, 2005 and as of March 31, 2005 presented in this Form 20-F into U.S. dollars solely for your convenience. The rate we used for such translations was ¥107.00 = $1.00, which was the noon buying rate in New York City for cable transfers in foreign currencies as certified for customs purposes by the Federal Reserve Bank of New York on March 31, 2005, rounded to the nearest yen. These translations do not imply that the yen amounts actually represent, or have been or could be converted into, equivalent amounts in the U.S. dollars.

 

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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

 

The selected consolidated financial data set forth below for each of the five fiscal years ended March 31 have been derived from Kyocera’s consolidated financial statements that are prepared in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP).

 

You should read the U.S. GAAP selected consolidated financial data set forth below together with Item 5 “Operating and Financial Review and Prospects” and Kyocera’s Consolidated Financial Statements included in this Form 20-F.

 

       (Yen in millions, U.S. dollars and shares in thousands, except per share amounts)

       2001

     2002

     2003

     2004

     2005

     2005

Years ended March 31:

                                                     

Net sales

     ¥ 1,285,053      ¥ 1,034,574      ¥ 1,069,770      ¥ 1,140,814      ¥ 1,180,655      $ 11,034,159

Profit from operations

       207,200        51,561        83,388        108,962        100,968        943,626

Income before cumulative effect of change in accounting principle

       216,236        33,791        43,421        68,086        45,908        429,047

Net income

       216,236        31,953        41,165        68,086        45,908        429,047

Earnings per share :

                                                     

Income before cumulative effect of change in accounting principle:

                                                     

Basic

     ¥ 1,143.78      ¥ 178.74      ¥ 233.02      ¥ 364.79      ¥ 244.86      $ 2.29

Diluted

       1,140.46        178.59        232.97        364.78        244.81        2.29

Net income:

                                                     

Basic

       1,143.78        169.02        220.91        364.79        244.86        2.29

Diluted

       1,140.46        168.88        220.86        364.78        244.81        2.29

Weighted average number of shares outstanding:

                                                     

Basic

       189,053        189,050        186,338        186,643        187,489         

Diluted

       189,604        189,204        186,382        186,649        187,528         

Cash dividends declared per share:

                                                     

Per share of common stock

     ¥ 60      ¥ 60      ¥ 60      ¥ 60      ¥ 80         

Per share of common stock *

     $ 0.51      $ 0.49      $ 0.49      $ 0.55      $ 0.74         

At March 31:

                                                     

Total assets

     ¥ 1,728,056      ¥ 1,645,458      ¥ 1,635,014      ¥ 1,794,758      ¥ 1,745,519      $ 16,313,262

Long-term debt

       52,306        96,856        60,736        70,608        33,557        313,617

Common stock

       115,703        115,703        115,703        115,703        115,703        1,081,336

Stockholders’ equity

       1,018,772        1,036,185        1,000,207        1,150,453        1,174,851        10,979,916

Depreciation

     ¥ 67,096      ¥ 76,252      ¥ 64,988      ¥ 60,861      ¥ 58,790      $ 549,439

Capital expenditures

     ¥ 105,944      ¥ 54,631      ¥ 40,614      ¥ 54,937      ¥ 63,176      $ 590,430

* Translated into the U.S. dollars based on the exchange rates at each payment date

 

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The following table shows the exchange rates for Japanese yen per $1.00 based upon the noon buying rate in New York City for cash transfers in foreign currencies as certified for customs purposes by the Federal Reserve Bank of New York:

 

     High

   Low

   Average

   Period-end

Years ended March 31,

                           

2001

   ¥ 125.54    ¥ 104.19    ¥ 110.96    ¥ 125.54

2002

     134.77      115.89      125.05      132.70

2003

     133.40      115.71      121.94      118.07

2004

     120.55      104.18      112.75      104.18

2005

     114.30      102.26      107.49      107.22

Calendar Year 2005

                           

March

     107.49      103.87      105.25      107.22

April

     108.67      104.64      107.19      104.64

May

     108.17      104.41      106.60      107.97

June

     110.91      106.64      108.75      110.91

July

     113.42      110.47      111.95      112.25

August

     112.12      109.37      110.61      110.84

 

The noon buying rate for Japanese yen on September 14, 2005 was $1.00 = ¥ 110.27

 

B. Capitalization and Indebtedness

 

Not Applicable.

 

C. Reasons for the Offer and Use of Proceeds

 

Not Applicable.

 

D. Risk Factors

 

You should carefully read the risks described below before making an investment decision.

 

(1) Continued or increasing weakness in the Japanese or global economy may significantly reduce demand for Kyocera’s products

 

The Japanese economy showed stable growth due mainly to an expanded market for digital home appliances and favorable trends in the automotive industry in the first half of fiscal 2005. However, in the second half of fiscal 2005, the economic outlook has been uncertain and has been affected by inventory reductions in the IT-related industries. The current global economic outlook, including for the U.S., also remains uncertain, and Kyocera believes there will continue to be instability considering the yen’s appreciation and the rise in prices of oil and certain materials. Kyocera is substantially dependent for its growth on the markets for semiconductors and components for mobile phone handsets and PC-related equipment. Though these markets have been expanding favorably in accordance with growing demand for digital appliances, these may be adversely affected by sluggish consumer spending brought by economic recession.

 

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(2) Unexpected changes in economic, political and legal conditions in China, in which Kyocera is becoming increasingly active, may have an adverse effect on Kyocera’s business

 

Based on its expectation that the Chinese markets for cellular telephones and IT-related products, including personal computers and printers, will continue to grow rapidly, Kyocera has been making substantial investments in new production and marketing facilities in China. Kyocera now has four principal production facilities, located in Shanghai, Dongguan and Guiyang, Tianjin and Kyocera plans to make substantial additional investments to increase production capacity at these sites and to increase its marketing and distribution capabilities in China. Although the Chinese economy has been growing at a rapid rate in recent years, and the central government has been increasingly utilizing market forces as opposed to central economic planning, growth has been uneven among various regions of the country and among various sectors of the economy. Unexpected changes in the central government’s economic policy or in the business climate including those due to changes in institutional systems in various parts of the country may adversely affect its IT-related markets, in which Kyocera seeks to sell its products. In addition, China is in the process of developing a comprehensive system of laws and regulations dealing with economic matters, such as currency controls, and foreign corporations currently active in the country, such as Kyocera, face risks and uncertainties including enforcement of contractual terms, administrative intrusion by local governments and difficulty with expatriation of profits.

 

(3) Kyocera sells a diverse variety of products, and in each of its businesses Kyocera is subject to intense competitive pressures, including in terms of price, technological change, product development, quality and speed of delivery, and these pressures are likely to increase in the near term

 

Kyocera sells a wide variety of products and therefore faces a broad range of competitors from large international companies to relatively small, rapidly growing and highly specialized companies. Kyocera has a variety of businesses in different industries while many of its competitors specialize in one or more of these business areas. As a result, Kyocera may not fund or invest in certain of its businesses to the same degree as its competitors, or these competitors may have greater financial, technical, and marketing resources available to them than the portion of its business against which they compete. While some of the factors that drive competition vary by product area, price and speed of delivery are factors in all areas of Kyocera’s business. Price pressure has been intense, and thus Kyocera predicts that its production prices will continue to be down over fiscal 2006 partly depending on the demand and competition situation. In production businesses in which Kyocera produces specialized parts for its customers’ products, its competitive position depends significantly on being involved early in the process of creating a new product that fits its customers’ needs. This requires maintaining close ties with customers so that Kyocera can ensure that it is able to meet required specifications and be the first supplier to create and deliver the product. Kyocera’s gross margins may be reduced if it cannot maintain these important relationships or market share or if it is forced in the future to further reduce prices in response to the actions of its competitors.

 

(4) Small manufacturing delays or defects resulting from outsourcing or internal manufacturing processes can adversely affect Kyocera’s production yields and operating results

 

Kyocera ordinarily outsources the fabrication of certain components and sub-assemblies of its products, often to sole source suppliers or a limited number of suppliers. Kyocera has experienced occasional delays in obtaining components and sub-assemblies because the manufacturing process for these items is very complex and requires a long lead-time. Kyocera’s revenues derived from sales of these products will be materially and adversely affected if Kyocera is unable to obtain a high quality, reliable and timely supply of these components and sub-assemblies. In addition, any reduction in the precision of these components will result in sub-standard end products and will cause delays and interruptions in Kyocera’s production cycle.

 

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Within Kyocera’s manufacturing facilities, minute impurities, difficulties in the production process or other factors can cause a substantial percentage of its products to be rejected or non-functional. These factors can result in lower than expected production yields, which delay product shipments and may materially and adversely affect Kyocera’s operating results. Because the majority of Kyocera’s costs of manufacture are relatively fixed, production yield and capacity utilization rate are critical to its financial results.

 

(5) Since a significant percentage of Kyocera’s revenues have been from foreign sales in recent years, various export risks may disproportionately affect its revenues

 

Kyocera’s sales to customers located outside Japan accounted for 60% of its total revenues in fiscal 2005. Kyocera believes that international sales will continue to account for a significant percentage of its revenues. Therefore, the following export risks may disproportionately affect Kyocera’s revenues:

 

    a strong yen may make Kyocera’s products less attractive to foreign purchasers;

 

    political and economic instability may inhibit export of Kyocera’s products;

 

    Kyocera may experience difficulties in the timeliness of collection of accounts receivable due from foreign customers and be forced to write off those receivables;

 

    tariffs and other barriers may make Kyocera’s products less cost competitive;

 

    shipping costs of Kyocera’s products may increase;

 

    Kyocera may have difficulty in staffing and managing its international operations; and

 

    the laws of certain foreign countries may not adequately protect Kyocera’s trade secrets and intellectual property.

 

(6) Currency exchange rate fluctuations could adversely affect Kyocera’s financial results

 

Kyocera conducts business in countries outside of Japan, which exposes it to fluctuations in foreign currency exchange rates. Kyocera may enter into short-term forward exchange transaction to hedge this risk according to its outlook on future exchange rates; nevertheless, fluctuations in foreign currency exchange rates could have an adverse effect on its business. Fluctuations in foreign currency exchange rates may affect its results of operations and the value of its foreign assets, which in turn may adversely affect reported earnings and the comparability of period-to-period results of operations. Changes in currency exchange rates may affect the relative prices at which Kyocera and foreign competitors sell products in the same market. In addition, changes in the value of the relevant currencies may affect the cost of imported items required in its operations.

 

(7) Industry demand for skilled employees, particularly engineering and technical personnel, exceeds the number of personnel available

 

Kyocera’s future success depends, in part, on its ability to attract and retain certain key personnel, including engineering, operational and management personnel. Kyocera anticipates that it will need to hire additional skilled personnel in all areas of its business. The competition for attracting and retaining these employees, especially engineers in key fields, including software design in telecommunications, is intense. Because of this intense competition for these skilled employees, Kyocera may be unable to retain its existing personnel or attract additional qualified employees in the future.

 

(8) Insufficient protection of Kyocera’s trade secrets and patents could have a significant adverse impact on its competitive position

 

Kyocera’s success and competitive position depend on protecting its trade secrets and other intellectual property. Kyocera’s strategy is to rely both on trade secrets and patents to protect its manufacturing and sales processes and products, but reliance on trade secrets is only an effective business practice insofar as trade secrets remain undisclosed and a proprietary product or process is not reverse engineered or independently developed. Kyocera takes certain measures to protect its trade secrets, including executing nondisclosure agreements with certain of its employees, joint venture partners, customers and suppliers. If parties breach these agreements or the measures Kyocera takes are not properly implemented, Kyocera may not have an adequate remedy. Disclosure of its trade secrets or reverse engineering of its proprietary products, processes or devices could materially and adversely affect its business, financial condition and results of operations.

 

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Kyocera is actively pursuing patents on some of its recent inventions, but these patents may not be issued. Even if these patents are issued, they may be challenged, invalidated or circumvented. In addition, the laws of certain other countries may not protect Kyocera’s intellectual property to the same extent as Japanese laws.

 

(9) Kyocera may require licenses to continue to manufacture and sell certain of its products, the expense of which may adversely affect its results of operations

 

From time to time Kyocera has received, and may receive in the future, notice of claims of infringement of other parties’ proprietary rights and licensing offers to commercialize third party patent rights. Although Kyocera is not currently involved in any litigations relating to its intellectual property except in the ordinary course of its business, Kyocera cannot assure that:

 

    infringement claims (or claims for indemnification resulting from infringement claims) will not be asserted against Kyocera,

 

    future assertions against Kyocera will not result in an injunction against the sale of infringing or allegedly infringing products or otherwise significantly impair its business and results of operations; or

 

    Kyocera will not be required to obtain licenses, the expense of which may adversely affect its results of operations.

 

(10) Future initiatives and in-process research and development may not produce the desired results

 

Kyocera intends to expand its product lines to satisfy customer demand in its target markets. Unexpected technical delays in completing these initiatives could lengthen development schedules and result in lower revenues based on the products or technologies developed from these initiatives. There can be no assurance that the products derived from Kyocera’s in-process research and development activities will achieve market acceptance.

 

(11) Kyocera may have to incur impairment losses on its investments in equity securities

 

Kyocera holds investments in equity securities of companies not affiliated with itself, which Kyocera generally holds on a long-term basis for business relationship purposes. A substantial portion of these investments consists of shares of common stock of public companies in Japan, including KDDI Corporation (a Japanese telecommunication service provider), and Japanese financial institutions. As of March 31, 2005, the aggregate fair value of equity securities included in available-for-sale securities was ¥343,208 million ($3,208 million), with gross unrealized gains in the amount of ¥71,448 million ($668 million) and gross unrealized losses in the amount of ¥246 million ($2 million). If there is a decline in the fair value, i.e., the market price, of the shares Kyocera holds in those companies over a period of time, and it determines that the decline is other-than-temporary, Kyocera will need to record an impairment loss for the applicable fiscal period. During fiscal 2005, Kyocera recorded losses on impairment of investment securities in the amount of ¥132 million ($1million), mainly due to management’s estimation that certain non-public companies in which Kyocera invested would need considerable time to show profitability in their operating activities. For some of the equity securities Kyocera owns, including the KDDI shares, Kyocera intends to keep its ownership at the current level in light of the importance of its business relationships with the issuers of these equity securities. For other equity securities in its portfolio, although Kyocera may dispose of them over time, market conditions may not permit it to do so at the time, speed or price it may wish.

 

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(12) As a holder of ADSs, you will have fewer rights than a shareholder has and you will have to act through the depositary to exercise those rights

 

The rights of shareholders under Japanese law to take various actions, including voting their shares, receiving dividends and distributions, bringing derivative actions, examining a company’s accounting books and records and exercising appraisal rights, are available only to holders of record. Because the depositary, through its custodian agents, is the record holder of the Shares underlying the ADSs, only the depositary can exercise those rights in connection with the deposited Shares. The depositary will make efforts to vote the Shares underlying your ADSs as instructed by you and will pay to you the dividends and distributions collected from us. However, in your capacity as an ADS holder, you will not be able to bring a derivative action, examine our accounting books and records or exercise appraisal rights through the depositary.

 

(13) Rights of shareholders under Japanese law may be more limited than under the law of other jurisdictions

 

Our Articles of Incorporation, Regulations of the Board of Directors, Regulations of the Board of Corporate Auditors and the Japanese Commercial Code govern our corporate affairs. Legal principles relating to such matters as the validity of corporate procedures, directors’ and officers’ fiduciary duties and shareholders’ rights may be different from those that would apply if we were a U.S. company. Shareholders’ rights under Japanese law may not be as extensive as shareholders’ rights under the laws of the United States. You may have more difficulty in asserting your rights as a shareholder than you would as a shareholder of a U.S. corporation. In addition, Japanese courts may not be willing to enforce liabilities against us in actions brought in Japan which are based upon the securities laws of the United States or any U.S. state.

 

(14) Because of daily price range limitations under Japanese stock exchange rules, you may not be able to sell your shares of our Common Stock at a particular price on any particular trading day, or at all

 

Stock prices on Japanese stock exchanges are determined on a real-time basis by the equilibrium between bids and offers. These exchanges are order-driven markets without specialists or market makers to guide price formation. To prevent excessive volatility, these exchanges set daily upward and downward price fluctuation limits for each stock, based on the previous day’s closing price. Although transactions may continue at the upward or downward limit price if the limit price is reached on a particular trading day, no transactions may take place outside these limits. Consequently, an investor wishing to sell at a price above or below the relevant daily limit may not be able to sell his or her shares at such price on a particular trading day, or at all.

 

(15) Foreign exchange fluctuations may affect the dollar value of our ADSs and dividends payable to holders of our ADSs

 

Market prices for our ADSs may fall if the value of the yen declines against the U.S. dollar. In addition, the U.S. dollar amount of cash dividends and other cash payments made to holders of our ADSs would be reduced if the value of the yen declines against the U.S. dollar.

 

Item 4. Information on Kyocera Corporation and its Consolidated Subsidiaries

 

A. History and Development of Kyocera Corporation and its Consolidated Subsidiaries

 

Kyocera Corporation is a joint stock corporation that was incorporated under the laws of Japan in 1959 with the name Kyoto Ceramic Kabushiki Kaisha. Its name was changed to Kyocera Kabushiki Kaisha (or Kyocera Corporation) in 1982. Our corporate headquarters is at 6 Takeda Tobadono-cho, Fushimi-ku, Kyoto 612-8501, Japan. Our telephone number is +81-75-604-3500.

 

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Our business originally consisted of the manufacture of ceramic parts for electronic equipment. In the 1960’s, we expanded our business and technology horizontally into the design and production of fine ceramic parts, ceramic integrated circuit (“IC”) packages and electronic components. In the 1970s, we began to produce consumer-related products, including cutting tools, ceramics for medical and dental uses, jewelry and solar energy products.

 

In the 1980’s, we diversified into new strategic fields. In 1982, we merged with Cybernet Electronics Corporation, a telecommunications equipment manufacturer in which we had made an equity investment three years earlier. We expanded into another new business through the acquisition of Yashica Co., Ltd., a camera and camera lens manufacturer. We also played a leading role in the establishment of DDI Corporation (currently KDDI Corporation), which has become one of Japan’s leading providers of telecommunications services. In 1989, we gained a presence in the electronic connector market through our acquisition of Elco Corporation (currently Kyocera Elco Corporation).

 

In the 1990’s, we strengthened our position as an internationally integrated electronic components manufacturer through our merger with AVX Corporation, a maker of capacitors and other passive electronic components, in January 1990.

 

In the middle of the 1990’s, Kyocera developed two main business categories, its “Components Business,” in which Kyocera provides parts and devices such as fine ceramics parts, semiconductor parts, electronic components and devices and applied ceramic products to mainly electronic equipment manufacturers in IT industrial fields, and its “Equipment Business,” in which Kyocera manufactures and sells telecommunications and information equipment and optical instruments, such as mobile handsets, PHS-related products, copiers, multifunctional products, printers, and digital still cameras to distributors or directly to customers.

 

Since 2000, we have further enhanced our position as a market leader in telecommunications and information equipment. In February 2000, we acquired the code division multiple access (“CDMA”) mobile phone handset business from QUALCOMM Inc. to create our United States subsidiary, Kyocera Wireless Corp. In April 2000, we invested in Kyocera Mita Corporation, a manufacturer of copiers and other document solutions equipment, to make it a wholly-owned subsidiary, and in April 2002, we transferred Kyocera Corporation’s printer business into Kyocera Mita Corporation to further enhance our information equipment business by pursuing group synergies.

 

In addition, we also strengthened our Components Business resources to become a leading company in IT-related applications. In August 2002, we made Toshiba Chemical Corporation (currently Kyocera Chemical Corporation) a wholly-owned subsidiary through a share exchange in order to reinforce its electronic components and materials businesses by pursuing group synergies between fine chemical technologies and fine ceramic technologies.

 

With the aim of becoming a more global enterprise and enhancing its profitability, Kyocera has been expanding its production in China through three Chinese production bases located in Shanghai, Dongguan and Guiyang. Kyocera also established a sales company, Kyocera (Tianjin) Sales and Trading Corporation, in March 2003 to cultivate the Chinese market. We are enhancing our marketing ability for both our products manufactured in China as well as our products imported into China. In addition, we established a subsidiary, Kyocera (Tianjin) Solar Energy Co., Ltd. to assemble solar modules, production of which commenced in November 2003, and to respond to market needs swiftly.

 

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In August 2003, we made Kinseki, Limited (currently Kyocera Kinseki Corporation), a major producer of artificial crystal-related products, a wholly-owned subsidiary through a share exchange to strengthen our Electronic Device Group. To further enhance our organic circuit board business by pursuing group synergies, we also made an agreement with IBM Corporation and IBM Japan, Ltd. for the transfer from IBM Japan to Kyocera of its Surface Laminar Circuitry (“SLC”) business. In September 2003, we completed the transfer of IBM Japan’s SLC business from IBM Japan to a newly-established wholly-owned subsidiary, Kyocera SLC Technologies Corporation. In April 2004, Kyocera integrated the organic material components business into Kyocera SLC Technologies Corporation and the marketing division of Kyocera Kinseki Corporation was merged into the marketing division of the electronic components of Kyocera Corporation and the manufacturing division of crystal related components of Kyocera Corporation was transferred to Kyocera Kinseki Corporation through corporate splits.

 

In September 2004, Kyocera and Kobe Steel, Ltd. established “Japan Medical Materials Corporation (JMM)” and Kyocera Corporation transferred its medical materials business to JMM through corporate splits. The shareholding ratios of Kyocera and Kobe Steel in JMM are 77% and 23%, respectively.

 

We made a strategic decision during fiscal 2005 to downsize the camera business due mainly to sluggish business performance resulting from intensified price competition. We are concentrating instead on the optical components business based on our accumulated optical technology. Please see “Restructuring Activities” in Item 5 “Operating and Financial Review and Prospects “ of this Form 20-F for details.

 

For a discussion of recent and current capital expenditures, please see Item 5 “Operating and Financial Review and Prospects “ of this Form 20-F. We have had no recent significant divestitures nor are any significant divestitures currently being made.

 

B. Business Overview

 

Overview

 

We are engaged in numerous high-tech fields, from fine ceramic components to electronics devices, equipment, services and networks. Our manufacturing and distribution operations are conducted worldwide. As of March 31, 2005, we have 136 subsidiaries and 8 affiliates outside Japan and 31 subsidiaries and 6 affiliates in Japan. Our customers include individuals, corporations, governments and governmental agencies. For information on our sales by category of activity and information on our sales by geographic area and product segment, see Item 5.A “Operating Results” of this Form 20-F.

 

Business Strategy

 

We strive to be a “creative company that continues to grow.” To achieve this goal, we promote “high-value-added diversification.” Based on the technologies we currently possess and will acquire, we will strive to exploit new markets by advancing and specializing those technologies, or integrating technologies from both within and outside the Kyocera group. The goal of “diversification” is to create a cluster of businesses whose technological power allows them to overcome the competition and equal specialist manufactures in competitiveness. Our “diversification” is based on the premise that we will select “high-value-added” businesses that promise future growth and concentrate our management resources on them. Kyocera will continue to promote its “high-value-added diversification” strategy to add greater value to each of our components and equipment businesses.

 

1. Criteria of “High-Value-Added Business”

 

We define “high-value-added business” as components and equipment businesses generating a pre-tax profit ratio of 15% or more. Whether or not to remain in a particular business is based on our judgment as to whether there exists a need in the relevant market and the possibility of serving that market need with the current or attainable technologies. Our unique management system allows us to make accurate and swift assessments of individual business conditions to facilitate timely decision-making and maximize synergies among businesses and to identify “high-value-added businesses.”

 

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2. Promotion of “High-Value-Added Diversification”

 

By promoting the development of business diversification, we aim to drive stable and continuous corporate growth in a rapidly changing business environment. The most important management resource for successful business diversification is technological prowess. Based on this conviction, we strive to expand and diversify applications through advancement and specialization of technical expertise, thereby promptly responding to the variety of market needs brought about by rapid changes in society. We also view sales competency and brand awareness as vital management resources for business expansion, and constantly work to strengthen these elements to maintain a sound financial position and to enable the pursuit of new business development and market creation. To achieve “high-value-added diversification,” we have the three following management policies.

 

(1) Efficient Resource Management

 

We plan to concentrate management resources into “high-value-added” business fields and its candidates. With the objective of outperforming the competition and becoming the leader in each business area, we will strive to create new markets and technologies through the integration of Group resources, including technical and sales competencies, while utilizing external management resources as necessary. Authorization of decision-making with respect to planning, execution and control of the business is delegated to each Corporate Business Group to act as an independent company, in order to speed up management decision-making processes. Moreover, a prime emphasis is placed on cash flows, in particular, boosting returns on capital investment, improving inventory control and shortening lead-times.

 

(2) Emphasizing Consolidated Group Results

 

We aim to increase the profitability of each operating segment on a consolidated basis by strengthening ties between Kyocera Group companies and each Corporate Business Group of Kyocera Corporation, and by maximizing synergies we will also employ a global strategy in each business and strive to optimize R&D, production and sales structures.

 

In addition, since June 1, 2005, Kyocera implemented a new executive officer system to enhance Kyocera Group’s management organization under a global consolidation system, and accordingly, appointed a Chief Executive Officer (CEO), a Chief Financial Officer (CFO) and a Chief Operating Officer (COO). The CEO takes responsibility for mid and long-term Group management policy and strategy formulation and execution, while the CFO is responsible for constructing and executing a financial strategy for the Group that ensures the effective implementation of these management strategies. The COO is in charge of daily management issues and business execution to achieve yearly management plans. At the same time, Kyocera also introduced a new corporate business group system, headed by the executive officers. These business group leaders are responsible for each product line on a consolidated basis.

 

(3) Focusing on Stockholder Value

 

In order to increase stockholder value (market capitalization), we seek to generate a higher return on investment to maximize future profits and cash flows. Moreover, we plan to offer a stock option plan to senior managers to further increase value by ensuring their interests are in line with those of stockholders and investors.

 

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Operations

 

Kyocera had previously classified its operations into four reporting segments, namely, “Fine Ceramics Group,” “Electronic Device Group,” “Equipment Group” and “Others.” However, taking into consideration of changes in the size of the operations of each business division and changes in management structure, management has changed its reporting segments for fiscal 2005.

 

Kyocera currently has eight reporting segments as follows: “Fine Ceramic Parts Group,” “Semiconductor Parts Group,” “Applied Ceramic Products Group,” “Electronic Device Group,” “Telecommunications Equipment Group,” “Information Equipment Group,” “Optical Equipment Group” and “Others.”

 

Kyocera’s principal products or services offered by each reporting segment are as follows.

 

Fine Ceramic Parts Group:

 

Information & Telecommunication Components,

Sapphire Substrates,

Semiconductor Process Equipment Components, LCD

Process Equipment Components,

Automotive & ITS related Components,

General Industrial Ceramic Components

 

Semiconductor Parts Group:

 

Ceramic Packages for Surface Mount Devices,

Ceramic Multilayer Package / Multilayer Substrates,

Metallized Products,

Optical Communication Ceramic Packages / Components,

Organic Multilayer Packages / Substrates

 

Applied Ceramic Products Group:

 

Residential & Industrial Photovoltaic Generating Systems,

Solar Cells / Modules,

Cutting Tools, Micro Drills,

Dental & Orthopedic Implants,

Jewelry & Applied Ceramic related products

 

Electronic Device Group:

 

Ceramic Chip Capacitors,

Tantalum Capacitors,

Timing Devices (Temperature Compensated Crystal Oscillators (TCXOs),

Voltage Controlled Oscillators (VCOs)),

RF Modules,

Ceramic Resonators / Filters,

Thermal Printheads,

LED Printheads,

Amorphous Silicon Drums,

Liquid Crystal Displays,

Connectors

 

Telecommunications Equipment Group:

 

CDMA Mobile Phone Handsets and Base Stations,

PDC Mobile Phone Handsets,

PHS Related Products

(PHS Handsets, PHS Base Stations, Wireless Local Loop Systems,

High Speed Wireless Data Communications Systems)

 

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Information Equipment Group:

 

ECOSYS Non-cartridge Printers and Copiers

Digital Network Multi-function Products

 

Optical Equipment Group:

 

Optical Modules

Digital Still Cameras

Single-lens Reflex Cameras

Compact Cameras

Camera Lenses

Optical Modules

 

Others:

 

Chemical Materials for Electronic Components,

Insulators, Resin Products,

Telecommunications Network Systems,

Computer Network Systems

IT Solutions Services

Consulting Services

Leasing Services

Hotel Business

Real Estate Development,

Insurance Agent & Travel Agent Business

 

(1) Fine Ceramic Parts Group

 

Products in this reporting segment are widely used in the computing, telecommunications, automotive and various industrial sectors. These products are made from a variety of ceramic materials, such as silicon carbide, silicon nitrides and zirconia as well as alumina, utilizing their characteristics of heat resistance, corrosion resistance and wear resistance.

 

Products Kyocera develops, manufactures and sales in this reporting segment include substrates, which are thin ceramic bases used by manufacturers for hybrid integrated circuit (IC) foundations. Kyocera also produces substrates for thermal printheads, ceramic/alumina tape substrates for thin film chip resistors, substrate for HDD thin film magnetic heads, parts for LCD fabrication equipment, sapphire substrates for LCD projectors and LEDs, parts for semiconductor fabrication equipment, mechanical seals for pumps, engine components for the automobile industry, friction tight discs and thread guides for yarn texturing machines in the textile industry, rings for fishing rods, nozzles and parts for paper-making machinery.

 

(2) Semiconductor Parts Group

 

Kyocera develops, manufactures and sales inorganic (ceramic) and organic packages in this reporting segment.

 

Ceramic packages have the characteristics of being air and water tight and corrosion resistant and also have the ability to dissipate heat efficiently. In addition, they have a superior capacity for use in high frequency and embedded passive components.

 

Kyocera develops, produces and sales ceramic packages for ceramic IC or other semiconductor and electronic components. The most common types of ceramic IC packages Kyocera develops, makes and sales are multilayer packages, including SMD packages and pin grid arrays. Kyocera also develops, produces and sales opto-electronic packages and ceramic parts for fiberoptic communications connectors. SMD packages are used for surface acoustic wave (SAW) filters and oscillators, which are mostly inserted into mobile phone handsets. Pin grid arrays are sold to manufacturers of MPUs and of other logic ICs, which are principally inserted into information equipment and peripherals. Kyocera also produces ceramic packages for charge-coupled-devices (CCDs) and complementary metal oxide semiconductor (CMOS) devices, which are mainly used in camera-equipped mobile phone handsets.

 

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In organic package business, Kyocera established a specialized high density organic circuit board manufacturer, Kyocera SLC Technologies Corporation (KST),.KST develops, produces and sales system in a package substrates (SiP) used in miniature and high functional electronic equipment such as mobile phone handsets, digital still cameras and mobile music players and organic packages for high-end application specific integrated circuits (ASICs). In addition, KST is working on the mass-production of a new organic package for next-generation micro processor units (MPUs) and peripheral devices for digital consumer products. On June 29, 2005, we reached agreement to purchase the land, buildings and other assets where KST is based, in Yasu City, Japan, from IBM Japan Ltd.

 

(3) Applied Ceramic Products Group

 

This reporting segment consists of four product lines: 1) Solar Energy Products, 2) Cutting Tools, 3) Dental and Orthopedic Implants and, 4) Jewelry and Applied Ceramic Related Products.

 

1) Solar Energy Products

 

Kyocera develops, manufactures and sales solar cells and modules, applied solar cell products and photovoltaic systems for generating electricity. We are expanding our solar cell production capacity in Japan and have commenced assembling solar modules through KYOCERA (Tianjin) Solar Energy Co., Ltd. in China, which was established as manufacture and sales subsidiary of solar modules in May 2003. In addition, Kyocera constructed a solar module assemble facility in Tijuana, Mexico for the U.S market in October 2004. To increase sales in Europe, Kyocera plans to construct a new plant for solar module in Czech Republic.

 

2) Cutting Tools

 

Kyocera produces cutting tools for metal processing in industrial production, particularly in the automotive industry. To expand the cutting tools business, Kyocera Corporation acquired Tycom Corporation (currently a consolidated subsidiary, Kyocera Tycom Corporation), which was a U.S major manufacturer of carbide cutting tools for the printed circuit board industry, in January 2001. Kyocera aims to be a market leader in the cutting tools business by pursuing synergies between Kyocera Tycom Corporation and Kyocera.

 

3) Dental and Orthopedic Implants

 

Kyocera established Japan Medical Materials Corporation (JMM) with Kobe Steel, Ltd. by integrating each of the medical material businesses of the two companies in September 2004. JMM produces a wide range of orthopedic and dental applications such as dental and orthopedic implants, artificial knee joint replacement systems, and ceramic materials helping heal hip fractures through a combination with other material and processing technologies of ceramics and titanium alloys and integrating business resources such as development, manufacturer, marketing and sales channels with Kyocera and Kobe Steel, Ltd.

 

4) Jewelry and Applied Ceramic Related Products

 

Kyocera produces recrystallized jewelry, mainly synthetic emeralds, alexandrines and rubies. These stones are manufactured using a single crystal growth technology developed by us, and are chemically and physically equivalent to natural stones. We have introduced recrystallized jewelry products to meet consumer needs and to cultivate our sales network. Kyocera also produces applied ceramic related products such as kitchen knives utilizing ceramic and its characteristics of wear resistance and resistance from acid and alkalinity corrosion.

 

(4) Electronic Device Group

 

Our electronic device group develops, manufactures and sells high quality and cost competitive electronic components and devices for the telecommunications and information processing industry. This field creates demand for miniaturization, low voltage, high frequency and low energy consumption, and we produce high-value-added products such as miniature ceramic capacitors with high capacitance capacitors, tantalum capacitors, miniature timing devices such as a temperature compensated crystal oscillators (TCXOs) or voltage-controlled oscillators (VCOs), and high frequency modules for mobile phone handsets and PCs. We also produce thin-film devices such as thermal printheads, amorphous silicon drums and LCDs for audio visual electronic equipment, office automation equipment and industrial equipment.

 

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We are strengthening manufacturing and sales activity in China to enhance price competitiveness and cultivate new markets. We commenced the production of ceramic capacitors and timing devices in Shanghai Kyocera Electronics Co., Ltd. in fiscal 2001. In fiscal 2004, we established a sales company in Tianjin and started marketing of products made both in China and in other areas around the world through this company due to expansion of the sales in China.

 

To expand the business of this reporting segment, we are pursuing synergies with subsidiaries. AVX Corporation and its consolidated subsidiaries (AVX), which produce and market ceramic capacitors, tantalum capacitors and other passive components for telecommunications and information equipment, have a global manufacturing and sales network. AVX is a major contributor to our Electronic Device Group sales and pursue synergies in the development and manufacturing of the ceramic capacitor business. In the timing device business, Kyocera Corporation acquired Kinseki, Limited (currently a consolidated subsidiary, Kyocera Kinseki Corporation) through a share exchange in August 2003. The marketing division of Kyocera Kinseki Corporation and its consolidated subsidiaries (Kyocera Kinseki) were merged into the marketing division of the electronic components of Kyocera Corporation and the manufacturing division of crystal related components of Kyocera Corporation was transferred to Kyocera Kinseki in April 2004 through corporate splits to pursue synergies in development, manufacturing and sales.

 

(5) Telecommunications Equipment Group

 

This reporting segment includes CDMA mobile phone handsets and base stations, PDC mobile phone handsets and PHS-related products such as PHS mobile phone handsets and base stations. These products are produced mainly for KDDI Corporation (KDDI) and WILLCOM, Inc. (WILLCOM), as well as for other Asian and U.S. telecommunication service providers. KDDI is a telecommunications service company, in which we made an equity investment when it was founded in 1984, when the telecommunications business, which had previously been monopolized by a national telephone company, was opened to private companies. KDDI and KDDI’s subsidiaries are currently engaged in providing long distance and international telephone services and cellular services. WILLCOM, formerly DDI Pocket Inc. Company, was renamed in February 2005, and provides PHS services. Our shareholding ratio in WILLCOM is 30%.

 

We aim to be a top supplier of CDMA mobile phone handsets. This technology has become one of the fastest growing mobile phone protocols. We acquired the CDMA mobile phone handset business of Qualcomm Inc. and established Kyocera Wireless Corp., a wholly-owned subsidiary in February 2000. In addition, we established a joint venture, Kyocera Zhenhua Communication Equipment Co., Ltd., which develops, manufactures, sells and provides after-sale servicing of CDMA mobile phone handsets in Guiyang City in China in December 2001, and commenced the production of CDMA mobile phone handsets for China in January 2002. We aim to become a leader in the CDMA market by pursuing a global marketing strategy with bases in Japan, the United States and China, and to optimize our global product development and production structure.

 

The other major area in Telecommunications Equipment Group is PHS-related business. This business is expanded by cultivating new markets overseas through our three telecommunication systems based on PHS technology. Specifically, we seek to expand sales of PHS systems through the expansion of PHS mobile phone handsets and base stations in China. We plan to spread the same PHS system prevailing in China to other Asian countries as well as promote new PHS mobile phone handsets and base stations with high speed data transmission services through WILLCOM in Japan. We also promote sales of Wireless Local Loop (WLL) systems in countries where fixed phone networks are not as yet widespread. Furthermore, we have promoted wireless Internet systems, which enable Internet services to be used at broadband speed with wireless technology. To promote these three systems in the appropriate markets, we expect to increase sales of PHS-related products.

 

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(6) Information Equipment Group

 

The major products in this reporting segment comprise page printers, digital copiers and multifunction products. Our products market under the name of “ECOSYS” and have a long life cycle and cartridge-free technology utilizing our thin film products, amorphous silicon drums.

 

In April 2000, Kyocera Mita Corporation became one of our wholly-owned subsidiaries. Kyocera Corporation’s ECOSYS printer department was transferred into this subsidiary through corporate splits, enabling us to build a unified presence in the document solutions business. Further efficiencies have resulted from the integration of our printer and copier sales operations with those of Kyocera Mita Corporation. We have enhanced our line up of our products through the standardization of engines between printers and multi function products (MFPs). In addition, we established a plant, Kyocera Mita Office Equipment (Dongguan) Co., Ltd in Dongguan, China mainly to strengthen price competitiveness.

 

We expect further strong demand for color printers, copiers and MFPs. We are focusing on expanding a comprehensive color-capable product line up of printers, copiers and MFPs with inexpensive running costs, as well as monochrome products.

 

(7) Optical Equipment Group

 

This reporting segment includes digital still cameras, optical modules, compact cameras, SLR cameras and lenses.

 

To enhance cost competitiveness in the camera business, we mass produce digital still cameras through our joint venture, Dongguan Shilong Kyocera Optics Co., Ltd. However, we could not improve profitability in the camera business due mainly to a rapid demand shift from conventional still cameras to digital still cameras and a continuous market price hike in digital still cameras. As a result, we made a decision to downsize our camera business and focus on the optical module business.

 

In the optical module business, we decided to significantly downsize our camera business including digital still cameras and film cameras, and to focus on optical components business, during fiscal 2005. We commenced the production and sale of optical modules for camera - equipped phones in fiscal 2005. We plan to expand the application of optical modules and units for automobiles, monitoring systems in LCD projectors and rear-projection TVs.

 

(8) Others

 

This reporting segment includes revenues from telecommunication network systems, financial services such as leasing and credit financing, office leasing, and other services in Japan and Asia. This segment also includes the development, manufacturing and sales of electronic component materials, electric insulators and synthetic resin molded parts.

 

Kyocera Leasing Co., Ltd. is principally involved in providing credit financing services and commercial leasing services for copiers, MFPs and other equipment. It therefore supports the operations of our Equipment Group.

 

Kyocera Communication Systems Co., Ltd. and its consolidated subsidiaries (KCCS) operate a total telecommunications network system business from system development to design, construction and maintenance services. KCCS also expands data center services for mobile content distribution services and IT solutions services for business users by developing new products featuring network services as well as system integration services.

 

Kyocera Chemical Corporation, which joined in Kyocera in August 2002, mainly produces electronic component materials. Kyocera Chemical Corporation will develop new products by pursuing synergies with fine chemical technologies and our components technologies such as the Electronic Device Group.

 

Sales and Distribution

 

Our products are marketed worldwide by our own sales personnel, as well as through sales companies, compensated solely on a commission basis, and by independent distributors. We have regional sales and design application personnel in strategic locations to provide technical and sales support for independent manufacturers’ representatives and independent distributors. We believe that this combination of distribution channels provides a high level of market penetration and efficient coverage of our customers on a cost-effective basis.

 

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Most of all our sales of the Fine Ceramic Parts Group, the Semiconductor Parts Group and the Electronic Device Group worldwide are made directly to manufacturers who incorporate them into their own products. However, the Applied Fine Ceramics Group, which creates products such as ceramic cutting tools, recrystallized jewelry, solar energy products and various other applied fine ceramics products, tend to be sold to distributors and wholesalers. Jewelry sales are made mainly through direct sales shops and agencies in Japan. Sales of consumer solar energy products are made through direct sales shops, as well as through sales distributors. BIOCERAM (orthopedic and dental implants) are in some cases supplied directly to dentists and hospitals. In the Telecommunications Equipment Group, our domestic sales of mobile handsets comprise sales mainly to KDDI Corporation and WILLCOM INC., and we also sell our handsets to communication providers directly in overseas markets. The Information Equipment Group, in particular, makes products such as page printers, copiers and digital multifunctional products sales, both in the domestic market and abroad, made under our own brand name through distributors and wholesalers. Sales of optical modules in the Optical Equipment Group for mobile phone handsets are made directly to mobile phone handsets manufacturer. Financing and leasing services are provided to companies and individuals in Japan. Office renting and other services are provided to companies outside our group, mainly in Japan. Our telecommunication network engineering service and data center service are provided directly to customers and users.

 

Domestic sales are made in yen, while overseas sales are made in a variety of currencies, but predominantly in U.S. dollars and the Euro.

 

Sources and Availability of Raw Materials and Supplies

 

We purchase a variety of raw materials. The principal ones in terms of volume are alumina (a mineral substance produced from bauxite and from which aluminum is made), zircon, titania, silicon nitride, Tungsten and Tantalum, used for the products of the Fine Ceramic Parts Group, the Semiconductor Parts Group, the Applied Fine Ceramics Group and the Electronic Device Group, and each material is subject to price volatility. In terms of costs, gold, which is primarily used in the production process for IC packages in the Semiconductor Parts Group and is also subject to price volatility, is the most significant raw material. Our policy is to protect ourselves from fluctuations in the price of gold by keeping a small gold inventory and by pricing products generally on a “gold adder” system so that customers pay for the gold contained in semiconductor parts at a rate which approximates our cost. Our main supplies are ICs, Liquid Crystals and Printed Circuit Board, used for the products of the Electronic Device Group, the Telecommunications Equipment Group and the Information Equipment Group, such as thin-film devices, mobile handsets, printers, copiers and optical instruments.

 

As we typically receive our supply of these raw materials and supplies from several large companies which we feel are reliable sources, we have not generally experienced, and we do not anticipate, any difficulty in obtaining raw materials or supplies, or in meeting fuel requirements. Although oil prices have risen recently, the increases have not materially affected our purchase price of certain oil-related supplies.

 

During fiscal 2005, no single supplier accounted for a significant portion of our consolidated purchases of raw materials and supplies. However, a number of components and sub-assemblies used in our products are sourced to sole source suppliers. These tend to be complex, precision components that are sometimes produced only by a limited number of suppliers or a single supplier that may own intellectual property related to the component or sub-assembly.

 

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Patents and Licenses

 

Our success and competitive position depend on a number of significant patents, licenses and trade secrets relating to our manufacturing and sales processes and products. The following table sets forth information, as of March 31, 2005, with respect to our significant patents and license agreements. Under all of the following agreements, we are permitted to produce products using the licensed technology and we pay a fee to the counterparty based on the amount of sales of those products.

 

Counterparty


  

Country


  

Contents


  

Period


Semiconductor Energy Laboratory Co., Ltd.    Japan    License under patents regarding amorphous silicon drums and devices using such drums    From February 15, 1994 to patent expiration
International Business Machines Corporation    United States   

License under patents regarding ceramic products, electric/ electronic parts and components

License under patents regarding information processing systems

   From June 30, 1995 to patent expiration
Qualcomm Incorporated    United States    License under patents regarding cellular phones using CDMA technology    From August 31, 1996 to patent expiration
Solar Physics Corporation    United States    License under patents regarding amorphous silicon drums and devices using such drums    From February 5, 1997 to patent expiration
Johnson Marthey Semiconductor Packages, Inc.    United States    License regarding semiconductor packages and printed circuit boards    From June 11, 1997 to June 11, 2007
Philips Electronics N.V.    Netherlands    License under patents regarding global system for mobile communication (“GSM”) cellular handsets    From February 15, 1999 to February 11, 2009
Hitachi Displays, Ltd.    Japan    License under patents regarding liquid crystal display elements    From April 1, 1999 to March 31, 2007
NEC Corporation    Japan    License under patents regarding PDC handsets and PHS handsets    From July 1, 2000 to September 14, 2010
Advanced Ceramics Research Incorporated    United States    License to use technology and patents regarding ceramic fiber    From September 15, 2000 to patent expiration
Eastman Kodak Company    United States    License under patents regarding digital camera    From April 1, 2002 to March 31, 2012

 

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Counterparty    


  

Country


    

Contents


    

Period


Forgent Networks, Inc./

Compression Labs, Inc.

   United States      License under patents regarding digital camera      From October 30, 2002 to September 17, 2007
Toshiba Corporation    Japan      License under patents regarding aluminum nitride      From January 1, 2003 to December 31, 2007
Seiko Epson Corporation    Japan      License under patents regarding LCD panel modules (Super twisted nematic (“STN”)      From January 1, 2003 to December 31, 2007
Koninklijke Philips Electronics N.V.    Netherlands      License under patents regarding PDC handsets and PHS handsets      From March 19, 2003 to patent expiration
NEC Corporation    Japan     

License under patents regarding telecommunications handsets

based on STD-T53 and IS-95 standard.

    

From August 1, 2003

to April 28, 2015

International Business Machines Corporation    United States     

License under patents regarding

SLC technology

     From September 1, 2003 to patent expiration
Motorola Incorporated    United States      License under patents regarding mobile phone      From July 1, 2004 to June 30, 2009
Openwave Systems Inc.    United States      Master Browser License regarding mobile phones using CDMA      From September 27, 2004 to September 27, 2005
Ricoh Company, LTD    Japan      License under patents regarding electronic photo printer      From June 1, 2001 to May 31, 2006
Ricoh Company, LTD    Japan      License under patents regarding electronic photo printer      From January 1, 2002 to December 31, 2007
Canon Incorporated    Japan      License under patents regarding electronic photograph     

From April 1, 2002

to patent expiration

Ricoh Company, LTD    Japan      License under patents regarding facsimile technology     

From June 1, 2004

to May 31, 2009

 

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Competitive Position

 

(a) Fine Ceramic Parts Group

 

Products in this segment are highly specialized to the needs of our customers, primarily secondary manufacturers who incorporate our products in their own products. Therefore, our competitive position is largely dependent on maintaining close contacts with, and being first to meet the needs of, secondary manufacturers. We compete with different ceramic manufacturers depending on the product.

 

(b) Semiconductor Parts Group

 

In this segment, our goal is to further strengthen our competitive position by becoming a “Total Package Supplier” in the world market. To offer opportunities for higher-added-value products, we are strengthening our R&D activities to develop new applications for telecommunication areas such as wireless and optical communications. In the ceramic package field, SMD packages is one example. We believe that we can maintain our market leadership in the area of ceramic packages and satisfy customer needs by applying our technological and managerial expertise.

 

In the organic package field, we are a relative late comer and we compete with plastic electronic device manufacturers. To strengthen our technological expertise and expand our business, we acquired the Surface Laminar Circuitry business of IBM Japan in September 2003 and established Kyocera SLC Technologies Corporation (KST). In April 2004, we integrated our management resources into KST. In addition, a new plant in Ayabe, Kyoto City, Japan is under construction during fiscal 2005, and has been completed in June 2005. We aim to strengthen our organic material components business going forward.

 

(c) Applied Fine Ceramics Group

 

The consciousness of environmental protection is evident worldwide. We are a secondary global manufacturer of solar cells and modules. To be a market leader in the solar energy business, we expect to expand out solar cell production line with capacity of 20MW per month during fiscal 2006. We are a major supplier in the Japanese indexable market in cutting tools, and our major application of this business is in the automotive industry. Although we have a lot of global competitors, we expect to introduce new facilities to handle new material processing internally and create an in-house integrated production line to expand global market share.

 

(d) Electronic Device Group

 

As we entered this area of production as we increased our capability to produce technologically advanced products for the Fine Ceramic Parts Group, we believe we are a unique electronic device manufacturer compared with our competitors. We produce not only passive components but also crystal related products, connectors and thin-film devices. In this segment, one of our advantages is the supply of a wide range of components. However, the products in this segment are largely standardized, so competition is based largely on price, quality and delivery time.

 

Kyocera is one of the major manufacturers by sales volume of capacitors and timing devices. Most of our competitors in this segment are Japanese manufacturers. However, AVX, a U.S. subsidiary, competes against overseas manufacturers in producing tantalum capacitors. Our thin-film products, such as thermal printheads, or amorphous silicon drums, are market-leading products in applications for printers and copiers.

 

In addition, to promote this business, we are continuing to seek synergies within Kyocera Group and reduce costs. We strive to optimize our development, production, and sales throughout our global network, and to maximize our production and sales operations in China to reduce manufacturing costs and enhance price competitiveness.

 

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(e) Telecommunications Equipment Group

 

In the Japanese market, our main competitors for cellular handsets are Japanese manufacturers that launch handsets in Japanese market. In the cellular handset market outside Japan, Kyocera competes with U.S., European and Asian manufacturers. We are currently a middle-class supplier in terms of units volume in the global CDMA cellular handsets market. In terms of PHS-related products, our main competitors are Japanese manufacturers.

 

(f) Information Equipment Group

 

We compete with Japanese and the U.S. manufacturers producing information equipment such as copiers and printers on a global basis.

 

(g) Optical Instruments Group

 

In the optical instruments field, Japanese manufacturers are our main competitors for both cameras and camera modules for cellular handsets.

 

Government Regulation

 

There are some governmental regulations specifically applicable to industries in which Kyocera operates, however, they currently do not have material effects on Kyocera’s business.

 

C. Organizational Structure

 

We had 181 subsidiaries and affiliates as of March 31, 2005. Our management structure is based on a group segment structure. Therefore, the management of each segment is conducted uniformly regardless of whether the group’s operations are conducted by us as the parent company or by one of our subsidiaries.

 

The following table sets forth information, as of March 31, 2005, with respect to our significant subsidiaries.

 

Name


  

Country of
Incorporation


   Percentage
held by
Kyocera


   

Main Business


Fine Ceramic Parts Group                
Kyocera Industrial Ceramics Corp.    United States    100.00 %   Manufacture and sale of fine ceramic-related products and sale of electronic devices
Kyocera Asia Pacific Pte. Ltd.    Singapore    100.00 %   Sale of fine ceramic-related products and electronic devices
Kyocera Fineceramics GmbH    Germany    100.00 %   Sale of fine ceramic-related products and electronic devices
Semiconductor Parts Group                
Kyocera SLC Technologies Corp.    Japan    100.00 %   Manufacture and sale of organic multilayer printed circuit board

 

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Name


  

Country of
Incorporation


   Percentage
held by
Kyocera


   

Main Business


Kyocera America, Inc.    United States    100.00 %   Manufacture and sale of fine ceramic-related parts
Kyocera Mexicana, S.A. de C.V.    Mexico    100.00 %   Manufacture of ceramic-related products, solar energy products and telecommunications equipment
Shanghai Kyocera Electronics Co., Ltd.    China    90.00 %   Manufacture and sale of semiconductor parts and electronic devices
Applied Ceramic Products Group                
Kyocera Solar Corp.    Japan    100.00 %   Sale of solar energy products
Japan Medical Materials Corp.    Japan    77.00 %   Development, manufacture and sale of medical materials and equipment
Kyocera Solar, Inc.    United States    100.00 %   Manufacture and sale of solar energy products
Kyocera Tycom Corp.    United States    100.00 %   Manufacture and sale of micro drills
Kyocera (Tianjin) Solar Energy Co., Ltd.    China    90.00 %   Manufacture and sale of solar energy products
Kyocera Precision Tools Korea Co., Ltd.    Korea    90.00 %   Manufacture and sale of cutting tools
Electronic Device Group                
Kyocera Kinseki Corp.    Japan    100.00 %   Manufacture and sale of electronic device products
Kyocera Elco Corp.    Japan    100.00 %   Manufacture and sale of electronic devices
Kyocera Display Institute Co., Ltd.    Japan    100.00 %   R&D, manufacture and sale of organic electro luminescence display
AVX Corporation    United States    70.42 %   Manufacture and sale of electronic devices

 

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Name


  

Country of
Incorporation


   Percentage
held by
Kyocera


   

Main Business


Kyocera Elco Korea Co., Ltd.    Korea    100.00 %   Manufacture and sale of electronic devices
Kyocera Elco Hong Kong Ltd.    Hong Kong    100.00 %   Sale of electronic devices
Telecommunications Equipment Group                
Kyocera Wireless Corp.    United States    100.00 %   Manufacture and sale of telecommunications equipment
Kyocera Wireless (India) PVT. Limited    India    100.00 %   R&D of telecommunications equipment
Kyocera Telecommunications Research Corp.    United States    100.00 %   R&D of telecommunications equipment
Kyocera Zhenhua Communication Equipment Co., Ltd.    China    70.00 %   Manufacture and sale of telecommunications equipment
Information Equipment Group                
Kyocera Mita Corp.    Japan    100.00 %   Manufacture and sale of information equipment
Kyocera Mita Japan Corp.    Japan    100.00 %   Sale of information equipment
Kyocera Mita America, Inc.    United States    100.00 %   Sale of information equipment
Kyocera Mita Office Equipment (Dongguan) Co., Ltd.    China    90.00 %   Manufacture and sale of information equipment
Kyocera Mita Europe B.V.    Netherlands    100.00 %   Sale of information equipment
Kyocera Mita Deutschland GmbH    Germany    100.00 %   Sale of information equipment
Kyocera Mita (U.K.) Ltd.   

United

Kingdom

   100.00 %   Sale of information equipment
Kyocera Mita France S.A.    France    100.00 %   Sale of information equipment
Kyocera Mita Italia S.P.A.    Italy    100.00 %   Sale of information equipment

 

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Name


  

Country of
Incorporation


   Percentage
held by
Kyocera


   

Main Business


Kyocera Mita Australia PTY. LTD.    Australia    100.00 %   Sale of information equipment
Optical Equipment Group                
Kyocera Optec Co., Ltd.    Japan    100.00 %   Manufacture and sale of optical instruments
Kyocera Yashica do Brasil Indústria e Comércio Ltda.    Brazil    100.00 %   Manufacture and sale of optical instruments
Yashica Hong Kong, Co., Ltd.    Hong Kong    100.00 %   Intermediary services as to sale of optical instruments
Universal Optical Industries, Ltd.    Hong Kong    100.00 %   Manufacture and sale of optical instruments
Dongguan Shilong Kyocera Optics Co., Ltd.    China    90.00 %   Manufacture and sale of optical instruments and cutting tools
Others                
Kyocera Leasing Co., Ltd.    Japan    100.00 %   Various leasing services, property management and financing services
Kyocera Communication Systems Co., Ltd.    Japan    76.30 %   Provision of IT services
Kyocera Realty Development Co., Ltd.    Japan    100.00 %   Real estate services
Hotel Kyocera Co., Ltd.    Japan    100.00 %   Hotel management and operations
Hotel Princess Kyoto Co., Ltd.    Japan    100.00 %   Hotel management and operations
Kyocera International Co., Ltd.    Japan    100.00 %   Insurance and travel agency
Kyocera Chemical Corporation    Japan    100.00 %   Manufacture and sale of electronic materials
Piazza Investment Co., Ltd.    Hong Kong    100.00 %   Real estate leasing

 

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Name


  

Country of
Incorporation


   Percentage
held by
Kyocera


   

Main Business


Shanghai Kyocera Realty Development Co., Ltd.    China    100.00 %   Real estate leasing

 

In addition to the above consolidated subsidiaries, Kyocera had 118 other consolidated subsidiaries as of March 31, 2005, including Kyocera International Inc., a wholly-owned U.S. subsidiary which is a holding company established to own Kyocera’s subsidiaries in North America. Kyocera also had interests in two subsidiaries accounted for by the equity method and 14 affiliates accounted for by the equity method as of March 31, 2005.

 

AVX, in our Electronic Device Group, is one of our most significant subsidiaries. Most of the electronic devices we produce for overseas sales are distributed by AVX by utilizing AVX’s wide range of marketing channels. In addition, we market passive components produced by AVX in the Japanese market. We also utilize AVX’s manufacturing process for ceramic capacitors to improve productivity and to enhance our competitiveness. In addition, AVX introduced our materials technologies into its ceramic capacitor production. We have been seeking better ways to cooperate in expanding our electronic device businesses. Currently, five of our directors are members of AVX’s board of directors and AVX’s chief executive officer is one of our directors. Within our Electronic Device Group, we have a close relationship with AVX in marketing, manufacturing, and research and development, and we are seeking and pursuing synergies to be a leading passive component manufacturer. AVX posted net income of $55,732 thousand in fiscal 2005, compared to a net loss of $107,606 thousand in fiscal 2004. Our results of operations and financial condition for fiscal 2004 were adversely affected due to AVX’s weak performance. See Item 5.A “Operating Results” of this Form 20-F.

 

Changed in Organization Structure in fiscal 2005

 

1) Kinseki, Ltd., a wholly-owned subsidiary, and Kyocera Corporation re-organized their operations related to crystal components on April 1, 2004. The marketing division of Kinseki Ltd. was merged into the marketing division of the electronic component of Kyocera Corporation and the manufacturing division of crystal related components of Kyocera Corporation was transferred to Kinseki Ltd. At the same time, Kinseki Ltd. changed its name to Kyocera Kinseki Corporation (Kyocera Kinseki).

 

2) On April 1, 2004, Kyocera integrated its organic material components business into Kyocera SLC Technologies Corporation (KST), a wholly owned subsidiary. Management resources relating to the organic material components business were concentrated in KST to enhance synergistic effects within Kyocera and to expand the business base.

 

3) On June 21, 2004, the Carlyle Group (Carlyle), Kyocera, KDDI Corporation (KDDI) and DDI Pocket, Inc. (DDI Pocket) reached an agreement pursuant to which a consortium of Kyocera and Carlyle would acquire the business of DDI Pocket, a subsidiary of KDDI. Under the agreement, Kyocera invested 30% in the company that succeeded DDI Pocket’s business, the name of which was changed to “WILLCOM, Inc.” in February 2005 (the “New Co”). In cooperation with New Co, Kyocera will endeavor to expand sales in its PHS-related business by carving out new markets in Japan as well as overseas.

 

4) Kyocera and Kobe Steel, Ltd. established “Japan Medical Materials Corporation (JMM)” on September 1, 2004 by merging the medical materials businesses of both companies and commenced operation on the same day. JMM will benefit from the integration of the specialized expertise of both companies in material and processing technologies, while maximizing synergies by integrating their development, production and marketing divisions. JMM will also seek to expand its business worldwide, as a dedicated manufacturer of medical materials.

 

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5) On December 17, 2004, Kyocera announced the transfer of its domestic sales division for solar energy products (which handles sales of solar power generation systems for use by domestic public sector industries) by means of a corporate split to Kyocera Solar Corporation, a consolidated subsidiary of Kyocera, in April 2005. The aim of this move is to expand sales of solar-related products to domestic public sector industries.

 

D. Property, Plants and Equipment

 

Our manufacturing operations are conducted in Japan, the United States, Mexico, El Salvador, Brazil, the United Kingdom, Germany, France, the Czech Republic, Singapore, South Korea, Hong Kong, China, Taiwan, Malaysia, Indonesia, Israel, Thailand and Philippines. As of March 31, 2005, we had property, plants and equipment with a net book value of ¥258,997 million ($2,421 million). During the five years ended March 31, 2005, we invested a total of ¥319,302 million ($2,984 million) for additions to property, plants and equipment. Our property, plants and equipment are not subject to any material encumbrances or environmental issues.

 

The following table sets forth information, as of March 31, 2005, with respect to our manufacturing facilities with floor space of more than 100,000 square feet.

 

Name of Plant


  

Location


  

Status


   Floor Space

  

Lease

Expires


  

Principal Products

Manufactured


               (in thousands
of square feet)
         

Japan

                        

Hokkaido Kitami Plant

   Kitami, Hokkaido    Owned    294         Fine ceramic parts, mobile phone handsets

Fukushima Tanagura Plant

   Tanagura, Fukushima    Owned    126         Telecommunications Equipment

Koriyama Plant

   Koriyama, Fukushima    Owned    152         Electronic parts and materials

Nagano Okaya Plant

   Okaya, Nagano    Owned    422         Fine ceramic parts, Electronic components

Kawasaki Plant

   Kawasaki, Kanagawa    Owned    172         Electronic parts and materials

Kawaguchi Plant

   Kawaguchi, Saitama    Owned    497         Electronic parts and materials

Ise Plant

   Ise, Mie    Owned    102         Solar module

Tamaki Plant

   Tamaki, Mie    Owned    200         Non-cartridge printers and copiers, digital network multi function equipment

Shiga Plant

   Gamo and Higashi-Ohmi, Shiga    Owned    1,613         Fine ceramic parts, Semiconductor parts, Electronic components, Solar cells

Osaka Hirakata Plant

   Hirakata, Osaka    Owned    410         Non-cartridge printers and copiers, digital network multi function equipment

Kagoshima Sendai Plant

   Satsuma-Sendai, Kagoshima    Owned    1,504         Fine ceramic parts, Semiconductor parts, Electronic components

Kagoshima Kokubu Plant

   Kokubu, Kagoshima    Owned    1,946         Fine ceramic parts, Semiconductor parts, Electronic components

Kagoshima Hayato Plant

   Hayato, Kagoshima    Owned    231         Electronic components

 

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Table of Contents

Name of Plant


  

Location


  

Status


   Floor Space

   Lease
Expires


  

Principal Products

Manufactured


               (in thousands
of square feet)
         

Yamagata Higashine Plant

   Higashine, Yamataga    Owned    379         Electronic parts

Shiga Yasu Plant

   Yasu, Shiga    Leased    146    2014    Organic multilayer printed circuit board

United States

                        

Balboa Plant

   San Diego, California    Owned    300         Semiconductor parts

Campus Plant

   San Diego, California    Leased    415    2008    Mobile phone handsets

Mountain Home Plant

   Mountain Home, North Carolina    Owned    134         Cutting tool

Myrtle Plant

   Myrtle Beach, South Carolina    Owned    559         Electronic components

Olean Plant

   Olean, New York    Owned    110         Electronic components

Raleigh Plant

   Raleigh, North Carolina    Owned    206         Electronic components

South Carolina Plant

   Fountain Inn, Carolina    Owned    300         Non-cartridge printers and copiers, digital network multi function equipment
Mexico                         

Tijuana Plant

   Tijuana    Owned    117         Semiconductor parts
El Salvador                         

San Salvador Plant

   San Salvador    Owned    306         Electronic components
United Kingdom                         

Paignton Plant

   Paignton, England    Owned    128         Electronic components

Coleraine Plant

   Coleraine, Northern Ireland    Owned    185         Electronic components
Germany                         

Betzdorf Plant

   Betzdorf    Owned    102         Electronic components
France                         

Saint-Apollinaire Plant

   Saint-Apollinaire    Leased    321    2007    Electronic components
Czech Republic                         

Lanskroun Plant

   Lanskroun    Leased    239    2017    Electronic components

Lanskroun Plant

   Lanskroun    Owned    281         Electronic components

Uherske Hradiste Plant

   Uherske Hradiste    Owned    319         Electronic components
Hong Kong                         

Hong Kong Plant

   Hong Kong    Leased    183    2008    Non-cartridge printers and copiers, digital network multi function equipment
China                         

Tianjin Plant

   Tianjin, China    Owned    500         Electronic components

Shilong Plant

   Dongguan, Canton    Leased    1,460    2017    Non-cartridge printers and copiers, digital network multi function equipment

 

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Name of Plant


  

Location


  

Status


   Floor Space

   Lease
Expires


  

Principal Products

Manufactured


          (in thousands
of square feet)
              

Shilong Plant

   Dongguan, Canton    Leased    156    2008    Non-cartridge printers and copiers, digital network multi function equipment

Shilong Plant

   Dongguan, Canton    Leased    523    2016   

Optical equipments

Cutting tools

Shanghai Putong Plant

   Shanghai    Leased    1,026    2023   

Semiconductor parts,

Electronic components

Malaysia                         

Penang Plant

   Penang    Owned    149         Electronic components

Singapore

                        

Singapore Plant

   Singapore    Owned    128         Electronic parts and materials
Thailand    Thailand    Owned    264         Electronic parts

Thailand Plant

                        
Philippines                         

Philippines Plant

   Philippines    Owned    135         Electronic parts

 

Item 5. Operating and Financial Review and Prospects

 

A. Operating Results

 

You should read the discussion of our financial condition and results of operations together with our consolidated financial statements and information included in this Form 20-F. This discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of certain factors, including, but not limited to, those set forth under Item 3.D “Risk Factor” and elsewhere in this Form 20-F.

 

Overview

 

Kyocera produces and distributes various kinds of products for the telecommunications and information processing, environmental protection and quality of life markets. Kyocera Corporation was established in 1959 as a manufacturer of ceramic parts for electronic equipment and has been expanding and diversifying its business, mainly through active merger and acquisition activities, as well as by applying its ceramic technologies to the areas of semiconductor parts, electronic components, telecommunication, metal processing, medical and dental implants and the solar energy fields. Kyocera develops, produces and distributes a variety of parts and devices for electronic equipment such as computers, automobiles, printers and copiers as well as consumer electronic products such as mobile phone handsets and digital still cameras. Kyocera earns revenue and income and generates cash from sales of these products.

 

Kyocera divides its worldwide operations into eight reporting segments for its financial reporting purposes: the Fine Ceramic Parts Group, the Semiconductor Parts Group, the Applied Ceramic Products Group (former “Consumer-Related Products” business), the Electronic Device Group, the Telecommunications Equipment Group, the Information Equipment Group, the Optical Equipment Group (former “Optical Instruments” business) and Others. The net sales of these segments (including inter-segment net sales) accounted for 6.2%, 10.8%, 8.0%, 22.3%, 21.3%, 20.4%, 3.0% and 10.0%, respectively, of Kyocera’s total net sales for the fiscal year ended March 31, 2005 (fiscal 2005). Also, in fiscal 2005, net sales to Japan, the United States, Asia, Europe and Other accounted for 40.0%, 21.0%, 17.3%, 14.9% and 6.8%, respectively.

 

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Kyocera derives a substantial portion of its revenue from sales of products and services in electronic equipment industries, including IT industries. In fiscal 2005, the business environment surrounding the components business, which includes the Fine Ceramic Parts Group, the Semiconductor Parts Group and the Electronic Device Group, changed considerably from the first half of fiscal 2005 to the second half of fiscal 2005. Components demand for mobile phone handsets, computer equipment and digital consumer products, which showed strong growth in the first half of fiscal 2005, slowed down in the second half of fiscal 2005 as companies engaged in the manufacture of electronic equipment were forced to make production adjustments in order to reduce their inventories. Price declines of key components also accelerated in the second half of fiscal 2005 in accord with these factors. Similar product sales price declines were also seen in Kyocera’s finished products, particularly CDMA mobile phone handsets, Personal Handyphone System (PHS)-related products, information equipment such as printers and copiers, and digital still cameras.

 

Kyocera’s electronic equipment-related businesses were therefore faced with an extremely difficult business environment in the second half of fiscal 2005. Nevertheless, businesses in non-electronic equipment-related industries made positive contributions to Kyocera’s consolidated results in fiscal 2005, in particular the Applied Ceramic Products Group. Such areas included solar power generation systems spurred by rising environmental concerns and cutting tools for which demand increased considerably due to robust production activities at automobile manufacturers.

 

As a result of favorable market conditions in the first half of fiscal 2005, Kyocera enjoyed year-on-year increases in sales in the Fine Ceramic Parts Group, the Semiconductor Parts Group and the Electronic Device Group.

 

Sales in the Applied Ceramic Products Group increased significantly compared with fiscal 2004. Meanwhile, sales in the Information Equipment Group also increased due to steady growth in sales of monochrome copiers, printers and digital multifunction products (MFPs) in Europe.

 

Conversely, in the Telecommunications Equipment Group, which develops, manufactures and sells products such as CDMA mobile phone handsets for Japan and the United States and PHS-related products for China, sales decreased compared with fiscal 2004. The main reasons for this decrease were intense price competition in these two product areas in Japan and overseas, and inventory reduction of PHS-related products in China.

 

In the Optical Equipment Group, which includes digital still cameras and optical modules for camera-equipped mobile phone handsets as its key products, Kyocera decided to considerably downsize the digital still camera and conventional still camera businesses in fiscal 2005, which led to a marked decline in sales in the camera business. However, Kyocera also commenced the manufacture and sale of optical modules in fiscal 2005. Consequently, sales in Optical Equipment Group increased compared with fiscal 2004.

 

To make the components and equipment businesses highly profitable, our specific business developments aimed at accomplishing the aforementioned goals are as follows.

 

(1) Enhance Profitability of Equipment Business

 

Kyocera intends to improve performance in the Telecommunications Equipment Group and the Optical Equipment Group, which that was sluggish in fiscal 2005. In the mobile phone handset business, Kyocera plans to implement additional structural reforms at Kyocera Wireless Corp. to improve its profitability. With regard to PHS-related products, Kyocera will strive for business expansion through the introduction of next-generation base stations and handsets in line with the commencement of new high-speed data communication services in Japan. In addition to creating new markets and launching more cost-competitive products overseas, Kyocera will also strive to capture new customers for its high speed wireless internet systems. Kyocera seeks to boost profitability in the optical equipment business by maximizing the positive effects of structural reforms executed in fiscal 2005. Other initiatives aimed at improving profitability in this business include expanding the business for optical components, especially optical modules for mobile phone handsets, and increasing productivity at production sites in China.

 

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Table of Contents

(2) Enhance Profitability of Components Business

 

Kyocera will aggressively pursue improvements in productivity through production process reforms implemented up until now. In fiscal 2006, Kyocera plans to promote, strengthen and reinforce a business foundation that we believe will drive future business development. Specifically, investments will be strategically and aggressively channeled into businesses focused on solar energy products, ceramic components for semiconductor and LCD fabrication equipment, organic packages, cutting tools, LCDs and organic EL displays to further improve profitability.

 

Results of Operations

 

Fiscal 2005 compared with Fiscal 2004

 

Net sales

 

In fiscal 2005, Kyocera’s net sales increased by ¥39,841 million ($372 million), or 3.5%, to ¥1,180,655 million ($11,034 million) compared with ¥1,140,814 million in fiscal 2004.

 

The increase in net sales was due mainly to growth in demand for major components used in mobile phone handsets, computer-related equipment and digital consumer products, which boosted revenues from sales in the Fine Ceramic Parts Group, the Semiconductor Parts Group and the Electronic Device Group in the first half of fiscal 2005. The business environment in the second half of fiscal 2005 changed considerably from the first half of fiscal 2005. Components demand for mobile phone handsets and digital consumer products slowed down, due to stagnant demand after the Olympic Games and production adjustment for reducing inventories by set manufacturers in the second half of fiscal 2005. Total sales from the Fine Ceramic Parts Group, the Semiconductor Parts Group and the Electronic Device Group amounted to ¥217,810 million ($2,036 million) in the second half of fiscal 2005, a decrease of ¥29,048 million ($271 million) or 11.8%, compared with ¥246,858 million ($2,307 million) in the first half of fiscal 2005. Full-year sales of these reporting segments increased by ¥30,220 million ($282 million), or 7.0%, to ¥464,668 million ($4,343 million) compared with ¥434,448 million in fiscal 2004.

 

Sales in the Applied Ceramic Products Group and the Information Equipment Group rose by boosting sales in new products through the year. Sales in the Applied Ceramic Products Group increased by ¥15,592 million ($146 million), or 19.9% and sales in the Information Equipment Group increase by ¥26,953 million ($252 million), or 12.6%, respectively. Conversely, revenue from the Telecommunications Equipment Group in fiscal 2005 decreased by ¥51,869 million ($485 million), or 17.1% compared with fiscal 2004, due to a delayed release of new CDMA mobile phone handsets to the North American market and stagnant demand for PHS-related products caused by inventory reductions in China.

 

A detailed analysis and discussion about Kyocera’s net sales and by reporting and geographic segments are as follows:

 

Net sales by reporting segment

 

The following table shows a breakdown of Kyocera’s total consolidated net sales for fiscal 2004 and fiscal 2005 for Kyocera’s eight reporting segments: the Fine Ceramic Parts Group, the Semiconductor Parts Group, the Applied Ceramic Products Group, the Electronic Device Group, the Telecommunications Equipment Group, the Information Equipment Group, the Optical Equipment Group and Others.

 

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Table of Contents
     Years ended March 31,

 
     (Yen in millions and U.S. dollars in thousands)

 
     2004

    2005

    2005

 

Fine Ceramic Parts Group

   ¥ 68,758     ¥ 73,711     $ 688,888  

Semiconductor Parts Group

     108,784       127,960       1,195,888  

Applied Ceramic Products Group

     78,287       93,879       877,374  

Electronic Device Group

     256,906       262,997       2,457,916  

Telecommunications Equipment Group

     302,787       250,918       2,345,028  

Information Equipment Group

     214,192       241,145       2,253,692  

Optical Equipment Group

     29,297       35,776       334,355  

Others

     100,505       118,040       1,103,177  

Adjustments and eliminations

     (18,702 )     (23,771 )     (222,159 )
    


 


 


     ¥ 1,140,814     ¥ 1,180,655     $ 11,034,159  
    


 


 


 

Fine Ceramic Parts Group

 

Sales in this segment increased by ¥4,953 million ($46 million), or 7.2%, to ¥73,711 million ($689 million) compared with ¥68,758 million in fiscal 2004. In particular, components demand for semiconductor and LCD fabrication equipment and sapphire substrates for LEDs grew favorably.

 

Semiconductor Parts Group

 

Sales in this segment increased by ¥19,176 million ($179 million), or 17.6%, to ¥127,960 million ($1,196 million) compared with ¥108,784 million in fiscal 2004. Sales of ceramic packages and organic packages used in mobile phone handsets and digital consumer products rose.

 

Applied Ceramic Products Group

 

Sales in this segment increased by ¥15,592 million ($146 million), or 19.9%, to ¥93,879 million ($877 million) compared with ¥78,287 million in fiscal 2004. Sales of solar modules and solar power generation systems expanded in Europe and Japan. Sales of cutting tools for automotive industry also grew.

 

Electronic Device Group

 

Sales in this segment increased by ¥6,091 million ($57 million), or 2.4%, to ¥262,997 million ($2,458 million) compared with ¥256,906 million in fiscal 2004. A full year sales contribution from Kyocera Kinseki resulted in an increase in sales in this segment. Sales of thin-film devices also expanded considerably, as sales grew for LCDs both in Japan and overseas and for thermal printheads for digital photo printers. In addition, sales at AVX, which account for approximately 53% of the net sales in this segment, and at Kyocera Kinseki grew steadily, supported by strong demand for digital consumer products through more active market environment for the electronic industry in the first half of fiscal 2005.

 

Telecommunications Equipment Group

 

Sales in this segment decreased by ¥51,869 million ($485 million), or 17.1%, to ¥250,918 million ($2,345 million) compared with ¥302,787 million in fiscal 2004. Sales of mobile phone handsets decreased both in Japan and overseas. Sales at KWC declined due to a delayed launch of new CDMA handsets in the U.S. and intensified price competition of mobile phone handsets. Sales of mobile phone handsets in Japan also decreased, due to the delayed introduction of new models and negative impact of inventory reduction by a PDC carrier. Sales of PHS-related products dropped due to inventory reduction in China.

 

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Information Equipment Group

 

Sales in this segment increased by ¥26,953 million ($252 million), or 12.6%, to ¥241,145 million ($2,254 million) compared with ¥214,192 million in fiscal 2004. This increase was due to expanded sales of mid- and high-speed digital MFPs and the sales contribution of new models, such as low- and mid- speed models in Europe.

 

Optical Equipment Group

 

Sales in this segment increased by ¥6,479 million ($61 million), or 22.1%, to ¥35,776 million ($334 million) compared with ¥29,297 million in fiscal 2004. In this segment, Kyocera decided to downsize the camera business and focus on the optical components business. As a result, sales of digital still cameras dropped. However, sales of optical modules used in mobile phone handsets contributed to sales for the first time, which resulted in year-on-year growth in this segment. Optical modules sales accounted for approximately 40% of sales in this segment.

 

Others

 

Sales in this segment increased by ¥17,535 million ($164 million), or 17.4%, to ¥118,040 million ($1,103 million) compared with ¥100,505 million in fiscal 2004.

 

Sales in Kyocera Communication Systems Co., Ltd. and its consolidated subsidiaries, which accounts for approximately 61% of this segment net sales, increased due to a growth in sales of telecommunications engineering and data center businesses.

 

Kyocera Chemical Corporation and its consolidated subsidiaries (Kyocera Chemical) increased sales due to the steady growth of flexible printed circuit boards, molding dies of components for automobiles and casting resin.

 

Net Sales by geographic segments

 

The following table shows a breakdown of Kyocera’s total consolidated net sales for fiscal 2004 and fiscal 2005, distinguishing between domestic and overseas sales and, in respect of overseas sales, showing the geographical areas in which such sales were made:

 

     Years ended March 31,

     (Yen in millions and U.S. dollars in thousands)

     2004

   2005

   2005

Japan

   ¥ 456,807    ¥ 472,417    $ 4,415,112

United States

     251,326      248,333      2,320,869

Asia

     194,302      203,848      1,905,122

Europe

     156,929      175,850      1,643,458

Others

     81,450      80,207      749,598
    

  

  

     ¥ 1,140,814    ¥ 1,180,655    $ 11,034,159
    

  

  

 

Sales in Japan, which accounted for 40.0% of total net sales, increased by ¥15,610 million ($146 million), or 3.4%, to ¥472,417 million ($4,415 million) compared with ¥456,807 million in fiscal 2004. Kyocera’s sales in overseas markets, which accounted for 60.0% of total net sales, increased by ¥24,231 million ($226 million), or 3.5%, to ¥708,238 million ($6,619 million) compared with ¥684,007 million in fiscal 2004.

 

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Sales in overseas markets are denominated primarily in U.S. dollars and the Euro. Compared with fiscal 2004, the yen appreciated against the U.S. dollar and depreciated against the Euro. In terms of net sales, the negative effects of the rising yen against the U.S. dollar outweighed the positive impact of the weak yen against the Euro. Accordingly, consolidated net sales after translation into yen were pushed down by approximately ¥21,200 million ($198 million) compared with fiscal 2004.

 

Sales in Japan increased due mainly to a full year contribution from Kyocera Kinseki and Kyocera SLC Technologies Corporation, which became consolidated subsidiaries in fiscal 2004 and contributed to increased sales of semiconductor and LCD fabrication components, and solar modules and solar power generation systems. In addition, sales of optical modules for camera-equipped mobile phone handsets contributed to sales for the first time in fiscal 2005, and resulted in a sales increase of the Optical Equipment Group.

 

The weak yen against the Euro produced a positive impact on sales in Europe, and sales growth in Europe was stronger than in other overseas markets. Sales in Europe expanded by ¥18,921 million ($177 million), or 12.1%, to ¥175,850 million ($1,643 million) compared with ¥156,929 million in fiscal 2004, due to increased sales in the Information Equipment Group and solar energy products supported by expansion of demand, particularly in Germany. Sales in Asia rose by ¥9,546 million ($89 million), or 4.9%, to ¥203,848 million ($1,905 million) compared with ¥194,302 million in fiscal 2004. In fiscal 2004, Kyocera Corporation acquired 100% of the shares of Kyocera Kinseki and established new sales subsidiaries of AVX Corporation to pursue group synergies within the Electronic Device Group and to expand this business. Synergy effects through these measures were evident in fiscal 2005, as sales of mobile phone handsets increased in India through active marketing by Kyocera Wireless Corp. and its consolidated subsidiaries (KWC). Sales in the United States decreased by ¥2,993 million ($28 million), or 1.2%, to ¥248,333 million ($2,321 million) compared with ¥251,326 million in fiscal 2004, due mainly to downturn sales in the Telecommunications Equipment Group.

 

Cost of sales and gross profit

 

In fiscal 2005, cost of sales decreased by ¥5,157 million ($48 million), or 0.6%, to ¥855,067 million ($7,991 million) from ¥860,224 million in fiscal 2004. Raw material costs of ¥386,262 million ($3,610 million) accounted for 45.2%, and labor costs of ¥158,427 million ($1,481 million) accounted for 18.5%. The ratio of cost of sales to net sales was 72.4%, a decrease of 3.0 points compared with 75.4% in fiscal 2004. In fiscal 2004, cost of sales contained a write-down amounting to ¥10,351 million of current inventories of tantalum materials and purchase commitments based on long-term contracts at AVX, labor costs totaling ¥13,735 million related to the transfer of the substitutional portion of Employee Pension Funds (EPF) of Kyocera Corporation and Kyocera Mita Corporation and its consolidated subsidiaries (KMC) to the Japanese government, and a reduction of labor costs of ¥2,821 million by the withdrawal from EPF at Kyocera Chemical. Aside from the special factors stated above, cost of sales in fiscal 2005 substantially increased due to increases of sales in the Fine Ceramic Parts Group, the Semiconductor Parts Group, the Applied Ceramic Products Group, the Electronic Device Group, the Information Equipment Group, and the Optical Equipment Group.

 

In fiscal 2005, Kyocera recorded ¥5,421 million ($51 million) as restructuring costs in the Telecommunications Equipment Group and the Optical Equipment Group. In the Optical Equipment Group, losses of ¥4,918 million ($46 million) related to reduction of inventories, were recorded to downsize the camera business. In the Telecommunications Equipment Group, restructuring charges of ¥503 million ($5 million) were recorded at KWC with the transfer of production to Mexico, where more cost-effective labor is possible. As a result, gross profit increased by ¥44,998 million ($421 million), or 16.0%, in fiscal 2005 to ¥325,588 million ($3,043 million) from ¥280,590 million in fiscal 2004. The gross profit ratio increased by 3.0 point from 24.6% to 27.6%.

 

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SG&A expenses and profit from operations

 

Selling, general and administrative (SG&A) expenses in fiscal 2005 increased by ¥52,992 million ($495 million), or 30.9%, to ¥224,620 million ($2,099 million) compared with ¥171,628 million in fiscal 2004. Labor cost was ¥111,461 million ($1,042 million), or 49.6% of total SG&A, and sales promotion and advertising cost was ¥39,175 million ($366 million), or 17.4% of total SG&A. The proportion of SG&A expenses to net sales rose by 4.0 points to 19.0% in fiscal 2005 compared with 15.0% in fiscal 2004. The transfer of the substitutional portion of EPF of Kyocera Corporation and KMC resulted in the deduction of SG&A expenses of ¥32,652 million, while the withdrawal from EPF at Kyocera Chemical resulted in a deduction of ¥3,132 million in fiscal 2004. Excluding the special items above, the increase in SG&A expenses in fiscal 2005 reflected an increase in costs associated with aggressive R&D activities and an increase in advertising expenses, mainly at KMC. As a result, profit from operations decreased by ¥7,994 million ($75 million), or 7.3%, to ¥100,968 million ($944 million) compared with ¥108,962 million in fiscal 2004. The gross margin fell by 1.0 point to 8.6% in fiscal 2005 compared with 9.6% in fiscal 2004.

 

Interest and dividend income

 

Interest and dividend income in fiscal 2005 increased by ¥1,513 million ($14 million), or 31.0%, to ¥6,396 million ($60 million) compared with ¥4,883 million in fiscal 2004. This was mainly because KDDI Corporation (KDDI) increased its corporate dividend per share thanks to a favorable business performance, thus increasing dividend income on Kyocera’s investments in KDDI. Kyocera has an investment policy aimed at low risk, stability and liquidity, and does not typically invest in high-risk financial instruments only for pursuing profitability.

 

Interest expense

 

Interest expense in fiscal 2005 decreased by ¥11 million ($0 million), or 0.9%, to ¥1,275 million ($12 million) compared with ¥1,286 million in fiscal 2004. The Japanese financial market was still in a low-interest climate, and therefore there was no material fluctuation in interest expense.

 

Foreign currency translation

 

During fiscal 2005, the yen appreciated by ¥5, or 4.4%, against the U.S. dollar and depreciated by ¥2, or 1.5%, against Euro compared with fiscal 2004, respectively. At March 31, 2005, the yen depreciated by ¥1, or 0.9%, against the U.S. dollar and depreciated by ¥10, or 7.8%, against Euro compared with at March 31, 2004, respectively. The net effect of foreign currency fluctuations was a gain of ¥2,618 million ($24 million).

 

Kyocera typically enters into forward exchange contracts to minimize currency exchange risks on foreign currency denominated receivables and payables. Kyocera confines its use of derivative financial instruments to the hedging of its foreign exchange exposures, and does not utilize derivative transactions for trading purposes.

 

Gains and losses from investments

 

In fiscal 2005, Kyocera’s earnings or losses on equity-method investments resulted in losses of ¥1,678 million ($16 million), a fall of ¥4,253 million ($40 million), compared with earnings of ¥2,575 million in fiscal 2004. Kyocera’s equity in earnings or losses of affiliates and unconsolidated subsidiaries in fiscal 2005 was derived mainly from interests in WILLCOM, INC. (WILLCOM) and Taito Corporation (Taito).

 

Kyocera Corporation owned a 13.33% interest in WILLCOM, which was formerly known as DDI Pocket, Inc. (DDI Pocket) and which changed its name in February 2005. WILLCOM operates a PHS business. In October 2004, Kyocera purchased an additional 16.67% ownership interest for ¥9,993 million ($93 million) to expand sales in its PHS-related business. Due to its cumulative ownership interest of 30%, Kyocera Corporation accounts for its investment by the equity method. As WILLCOM recorded a net loss due to an increase in operating costs related to its business expansion in fiscal 2005, Kyocera recorded a loss on its equity-method investment in WILLCOM.

 

Kyocera Corporation owns a 36.02% interest in Taito, a major affiliate which operates in electronic amusement business. In fiscal 2005, Taito’s net income decreased compared with fiscal 2004 due to a sluggish sales of home-use game machines, an additional investment in production facilities for game machines and costs of opening new game arcades, in spite of an increase in sales of commercial-use game machines. As a result, Kyocera’s earning on its equity-method investment in Taito decreased.

 

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In fiscal 2005, losses on impairment of investment securities amounted to ¥132 million ($1 million), a decrease of ¥898 million ($8 million), compared with ¥1,030 million in fiscal 2004. Losses recorded in fiscal 2005 and fiscal 2004 were due mainly to management’s estimation that certain non-public companies in which Kyocera invested would still need considerable time to recover profitability in their operating activities.

 

Income before income taxes

 

In fiscal 2005, Kyocera recorded an increase in operating profit due to higher sales, especially in the components business, and to various cost-reduction activities. In contrast, however, a significant decrease in profits was recorded in the equipment business. Despite higher revenues from sales of the Information Equipment Group, such as digital MFPs, the Telecommunications Equipment Group slumped due to repair costs for defective products, and restructuring charges were recorded in line with the policy to downsize the camera business. Consequently, income before income taxes decreased by ¥7,510 million ($70 million), or 6.5%, to ¥107,530 million ($1,005 million) compared with ¥115,040 million in fiscal 2004. In fiscal 2004 Kyocera also recorded a settlement gain of ¥18,917 million for a substitutional portion of EPF and ¥5,953 million of a withdrawal gain of EPF at a subsidiary.

 

Operating profit by reporting segment

 

The following table shows a breakdown of Kyocera’s consolidated income before income taxes, and operating profit for fiscal 2004 and fiscal 2005 for Kyocera’s eight reporting segments: the Fine Ceramic Parts Group, the Semiconductor Parts Group, the Applied Ceramic Products Group, the Electronic Device Group, the Telecommunications Equipment Group, the Information Equipment Group, the Optical Equipment Group and Others.

 

     Years ended March 31,

 
     (Yen in millions and U.S. dollars in thousands)

 
     2004

    2005

    2005

 

Fine Ceramic Parts Group

   ¥ 10,239     ¥ 11,535     $ 107,804  

Semiconductor Parts Group

     10,603       17,550       164,019  

Applied Ceramic Products Group

     10,297       17,129       160,084  

Electronic Device Group

     5,047       35,406       330,897  

Telecommunications Equipment Group

     5,082       (14,918 )     (139,421 )

Information Equipment Group

     31,986       36,186       338,187  

Optical Equipment Group

     (5,826 )     (15,387 )     (143,804 )

Others

     9,683       13,019       121,673  
    


 


 


       77,111       100,520       939,439  

Corporate

     34,871       8,683       81,149  

Equity in earnings (losses) of affiliates and unconsolidated subsidiaries

     2,575       (1,678 )     (15,682 )

Adjustments and eliminations

     483       5       47  
    


 


 


Income before income taxes

   ¥ 115,040     ¥ 107,530     $ 1,004,953  
    


 


 


 

Fine Ceramic Parts Group

 

Operating profit in this segment increased by ¥1,296 million ($12 million) or 12.7%, to ¥11,535 million ($108 million) compared with ¥10,239 million in fiscal 2004. This was due primarily to improvement of manufacturing efficiency by higher sales of fine ceramic components used in semiconductor and LCD fabrication equipment and sapphire substrates.

 

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Semiconductor Parts Group

 

Operating profit in this segment increased by ¥6,947 million ($65 million) or 65.5%, to ¥17,550 million ($164 million) compared with ¥10,603 million in fiscal 2004. This was due primarily to improved capacity utilization by higher sales of ceramic packages used in mobile phone handsets, and due to reduced costs through the utilization of China-based production facilities.

 

Applied Ceramic Products Group

 

Operating profit in this segment increased by ¥6,832 million ($64 million) or 66.3%, to ¥17,129 million ($160 million) compared with ¥10,297 million in fiscal 2004. Sales in the solar energy business increased steadily supported by a rising global orientation towards clean energy. Meanwhile, profit in this business also grew as Kyocera reduced costs through the utilization of China-based production facilities established in fiscal 2004. Brisk markets led to increases in both sales and profits of cutting tools and dental and orthopedic implants.

 

Electronic Device Group

 

Operating profit in this segment increased by ¥30,359 million ($284 million) or 601.5%, to ¥35,406 million ($331 million) compared with ¥5,047 million in fiscal 2004. In fiscal 2004, AVX wrote down ¥10,351 million of inventories of tantalum materials and purchase commitments based on long-term contracts, and also booked a restructuring charge of ¥2,975 million associated with the closure of its overseas ferrite manufacturing facilities and headcount reductions. In fiscal 2005, despite deterioration in the markets for capacitors and connectors in the second half, the absence of large-scale write-downs and restructuring charges that were evident in fiscal 2004, together with improved productivity led to strong growth in profit.

 

Telecommunications Equipment Group

 

Operating profit in this segment substantially decreased by ¥20,000 million ($187 million) to a loss of ¥14,918 million ($139 million) compared with income of ¥5,082 million in fiscal 2004. This decrease was due to significant operating losses recorded at KWC. KWC recorded significant losses due to decline in market prices, some defective products, and the relocation costs of production sites. Furthermore, repair costs for defective software and delays in the market introduction of new products in Japan also led to losses.

 

Information Equipment Group

 

Operating profit in this segment increased by ¥4,200 million ($39 million) or 13.1%, to ¥36,186 million ($338 million) compared with ¥31,986 million in fiscal 2004. This increase was due primarily to a steady growth in sales of digital MFPs and an increase in sales of high-value-added products. Lower costs achieved through a China-based production facility also contributed to the increase in operating profit.

 

Optical Equipment Group

 

Operating loss in this segment increased by ¥9,561 million ($89 million) to ¥15,387 million ($144 million) compared with a loss of ¥5,826 million in fiscal 2004. This reflected higher-than-expected costs associated with the launch of the optical module business in fiscal 2005, and restructuring charges related to the downsizing of the camera business in fiscal 2005.

 

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Others

 

Operating profit in this segment increased by ¥3,336 million ($31 million) or 34.5%, to ¥13,019 million ($122 million) compared with ¥9,683 million in fiscal 2004. This was due primarily to increased earnings in KCCS, arising from improved development efficiency and lower costs, as well as increased sales in Kyocera Chemical, especially in the businesses related to flexible printed circuit boards.

 

Corporate

 

Corporate income and losses constitute income and expenses related to the provision of management-related services by Kyocera’s head office to each reporting segment, together with any profit-and-loss items that management judges not to belong within the above reporting segments, such as litigation expenses or losses on impairment of investment securities. In fiscal 2005, Kyocera recorded Corporate income of ¥8,683 million ($81 million). This represented a decrease of ¥26,188 million ($245 million), or 75.1%, compared with Corporate income of ¥34,871 million in fiscal 2004. The main contributors in fiscal 2005 were interest and dividends. The income in fiscal 2004 included ¥18,917 million of a settlement gain for a substitutional portion of EPF, ¥5,953 million of a withdrawal gain of EPF at a subsidiary, and ¥2,284 million of a gain on reversal of excess accruals resulting from a settlement of litigation in the LaPine Case. As a result, Corporate gain decreased markedly compared with fiscal 2004.

 

Taxes

 

Current and deferred income taxes in fiscal 2005 increased by ¥8,170 million ($76 million), or 16.2%, to ¥58,480 million ($547 million) compared with ¥50,310 million in fiscal 2004. The effective tax rate of 54.4% in fiscal 2005 was 10.7 points higher than 43.7% in fiscal 2004. Kyocera Corporation received a notice of tax assessment based on transfer pricing adjustments from the Osaka Regional Tax Bureau stating that, in the Bureau’s judgment, allocation of profit earned from transfers of products between Kyocera Corporation and its overseas subsidiaries was not appropriate for five years from the year ended March 31, 1999 through the year ended March 31, 2003, and this resulted in additional current income taxes of ¥12,748 million ($119 million). Although the final resolution of the proposed tax assessment is not certain, management believes the ultimate disposition of this matter will not have a material impact on the results of operations.

 

Minority interests

 

Minority interests are principally related to AVX, which accounted for an approximately 30% minority ownership interest in fiscal 2005. Minority interests decreased by ¥6,498 million ($61 million) to a loss in minority interests of ¥3,142 million ($29 million), compared with a gain in minority interests of ¥3,356 million in fiscal 2004. This was mainly due to an increase in AVX’s net income because AVX recorded onetime charges related to a write-down of inventories and restructuring activities in fiscal 2004, and there were no such costs in fiscal 2005.

 

Results of Operations

 

Fiscal 2004 compared with Fiscal 2003

 

Net sales

 

In fiscal 2004, Kyocera’s net sales of increased by ¥71,044 million, or 6.6%, to ¥1,140,814 million compared with ¥1,069,770 million in fiscal 2003.

 

The increase in net sales was due mainly to growth in demand for components used in mobile phone handsets, digital consumer products and computer-related equipment, which boosted revenues from the Semiconductor Parts Group and the Electronic Device Group. Revenues from the Telecommunications Equipment Group and the Information Equipment Group also rose as Kyocera successfully introduced new mobile phone handsets and digital multifunction products (MFPs), and developed new markets. The new consolidations of Kinseki, Limited and its consolidated subsidiaries (Kinseki) and Kyocera SLC Technologies Corporation (KST) during fiscal 2004 also contributed to an increase in net sales. In addition, net sales increased due to that there was a full-year sales contribution in fiscal 2004 from Kyocera Chemical, of which sales was contributed only for eight months in fiscal 2003 after becoming a consolidated subsidiary in August 2002. Excluding the contributions to net sales due to the new consolidations of Kinseki and KST, the year-on-year growth in consolidated net sales in fiscal 2004 would have increased by 4.4% compared with 6.6% actually recorded.

 

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A detailed analysis and discussion about Kyocera’s net sales and by reporting and geographic segments are as follows;

 

Net sales by reporting segment

 

The following table shows a breakdown of Kyocera’s total consolidated net sales for fiscal 2003 and fiscal 2004 for Kyocera’s eight reporting segments: the Fine Ceramic Parts Group, the Semiconductor Parts Group, the Applied Ceramic Products Group, the Electronic Device Group, the Telecommunications Equipment Group, the Information Equipment Group, the Optical Equipment Group and Others.

 

     Years ended March 31,

 
     (Yen in millions)

 
     2003

    2004

 

Fine Ceramic Parts Group

   ¥ 64,333     ¥ 68,758  

Semiconductor Parts Group

     103,602       108,784  

Applied Ceramic Products Group

     70,932       78,287  

Electronic Device Group

     227,962       256,906  

Telecommunications Equipment Group

     292,703       302,787  

Information Equipment Group

     202,022       214,192  

Optical Equipment Group

     35,059       29,297  

Others

     85,084       100,505  

Adjustments and eliminations

     (11,927 )     (18,702 )
    


 


     ¥ 1,069,770     ¥ 1,140,814  
    


 


 

Fine Ceramic Parts Group

 

Sales in this segment increased by ¥ 4,425 million, or 6.9%, to ¥ 68,758 million compared with ¥ 64,333 million in fiscal 2003. Sapphire substrates for LCD projectors and LEDs particularly generated year-on-year growth. Sales of components for semiconductor and LCD fabrication equipment also grew, due mainly to increased demand stemming from the ongoing shift toward large-panel LCDs.

 

Semiconductor Parts Group

 

Sales in this segment increased by ¥ 5,182 million, or 5.0%, to ¥ 108,784 million compared with ¥ 103,602 million in fiscal 2003. Demand for ceramic packages increased, especially for image-sensor devices used in camera-equipped mobile phone handsets and digital still cameras (DSCs). In addition, the new consolidation of KST from September 2003 contributed to an increase in sales.

 

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Applied Ceramic Products Group

 

Sales in this segment increased by ¥ 7,355 million, or 10.4%, to ¥ 78,287 million compared with ¥ 70,932 million in fiscal 2003. Expansion of demand for solar power generation systems contributed to increased sales in this segment. Sales of cutting tools also increased, due mainly to higher demand in Asia associated with increased production activities in the industry.

 

Electronic Device Group

 

Sales in this segment increased by ¥28,944 million, or 12.7%, to ¥256,906 million compared with ¥227,962 million in fiscal 2003.

 

Sales posted by AVX, which accounts for approximately 50% of this segment net sales, were flat at $1,137 million in fiscal 2004 on its functional currency of the U.S. dollars, but declined year-on-year by ¥10,478 million or 7.6% in yen due to the yen’s appreciation against the U.S. dollar. The net effect of the consolidation of Kinseki, which became a wholly owned subsidiary in August 2003 largely offset this. Sales of connectors at Kyocera Elco Corporation and its consolidated subsidiaries grew steadily, and sales of thin-film devices increased year-on-year due mainly to higher sales of color STN (Super Twisted Nematic) LCDs for mobile phone handsets and thermal printheads. Other contributions to an increase in sales of this segment included increased production at facilities in China of ceramic capacitors and timing devices as a result of rising demand for electronic equipment such as mobile phone handsets, PCs and digital still cameras.

 

Telecommunications Equipment Group

 

Sales in this segment increased by ¥ 10,084 million, or 3.4%, to ¥ 302,787 million compared with ¥ 292,703 million in fiscal 2003, primarily reflected higher sales at KWC. KWC generated sales growth in North American and Latin American markets in fiscal 2004 through increased customer numbers and an aggressive launch program for mid-range handset models for the Christmas season. In Japan, Kyocera missed launch opportunities due to delays in its new model development processes, which had a negative impact on Kyocera’s mobile phone handset business, resulting in a year-on-year decline in sales. Sales of high-end CDMA mobile phone handsets in China failed to generate significant sales growth due to price erosion.

 

Information Equipment Group

 

Sales in this segment increased by ¥ 12,170 million, or 6.0%, to ¥ 214,192 million compared with ¥ 202,022 million in fiscal 2003. Sales growth of information equipment in fiscal 2004 which was operated by Kyocera Mita Corporation and its consolidated subsidiaries was primarily driven by lineup expansion resulting from the launch of color models, notably in Europe. Another factor was the receipt of large volume orders overseas as customers valued the reliability of Kyocera-branded products more highly.

 

Optical Equipment Group

 

Sales in this segment decreased by ¥ 5,762 million, or 16.4%, to ¥ 29,297 million compared with ¥ 35,059 million in fiscal 2003. Sales of conventional still cameras materially reduced due to declines in their prices and an ongoing contraction in their market. On the contrary, sales of DSCs increased during fiscal 2004, largely as a result of the launch of 12 new models, including five that feature an “R-TUNE” image-processing chip that enables a camera to operate in continuous image-capture mode until the memory capacity limit is reached.

 

Others

 

Sales in this segment increased by ¥15,421 million, or 18.1%, to ¥100,505 million compared with ¥85,084 million in fiscal 2003.

 

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KCCS increased its sales from both its business information systems and telecommunications engineering businesses following the development of new products and services. Sales of Kyocera Chemical also contributed to this segment due to the fact that its full-year results were reflected in fiscal 2004, whereas only eight months’ sales were reflected in fiscal 2003.

 

Net Sales by geographic segments

 

The following table shows a breakdown of Kyocera’s total consolidated net sales for fiscal 2003 and fiscal 2004, distinguishing between domestic and overseas sales and, in respect of overseas sales, showing the geographical areas in which such sales were made:

 

     Years ended March 31,

     (Yen in millions)

     2003

   2004

Japan

   ¥ 423,190    ¥ 456,807

United States

     264,755      251,326

Asia

     178,384      194,302

Europe

     144,293      156,929

Others

     59,148      81,450
    

  

     ¥ 1,069,770    ¥ 1,140,814
    

  

 

In the above table, the amounts shown by geographical area reflect sales based on the location of Kyocera’s customers.

 

Sales in Japan for fiscal 2004, which accounted for 40.0% of total net sales, increased by ¥33,617 million, or 7.9%, to ¥456,807 million compared with ¥423,190 million for fiscal 2003. This was due primarily to higher sales of solar systems and an increase in sales at KCCS. This also reflected sales from newly consolidated subsidiaries such as Kinseki and KST. Kyocera’s sales in overseas markets for fiscal 2004, which accounted for 60.0% of total net sales, increased by ¥37,427 million, or 5.8%, to ¥684,007 million compared with ¥646,580 million for fiscal 2003. Sales in overseas markets are denominated primarily in the U.S. dollars and the Euros. Compared with fiscal 2003, the overall impact of exchange rate fluctuations on sales for fiscal 2004 was negative as the effect of the yen’s appreciation against the U.S. dollar outweighed the effect of the yen’s depreciation against the Euro. The net negative impact on sales amounted to approximately ¥42,700 million. If the foreign exchange rates prevailing in fiscal 2003 were applied to foreign currency-denominated sales for fiscal 2004, consolidated net sales for fiscal 2004 would have increased by 10.6% from fiscal 2003, compared with the increase of 6.6% actually recorded for fiscal 2004. Kyocera’s sales in the U.S. for fiscal 2004 declined 5.1 % compared with fiscal 2003. The effect of the yen’s appreciation against the U.S. dollar depressed Kyocera’s sales for fiscal 2004 by approximately ¥37,800 million compared with fiscal 2003, and particularly sales from the Electronic Device Group in the U.S. also declined. Kyocera’s sales in Asia for fiscal 2004 increased by 8.9% compared with fiscal 2003. This increase reflected high demand for the Electronic Device Group and Kyocera’s other components business due to brisk production activities of mobile phone handsets and computer-related equipment. Kyocera’s sales in Europe for fiscal 2004 increased by 8.8% compared with fiscal 2003, due primarily to growth in demand for photovoltaic modules used in solar power generating systems, particularly in Germany, and to higher sales of printers and digital MFPs. The effect of the yen’s depreciation against the Euro also had a positive impact on sales for fiscal 2004 of approximately ¥9,800 million.

 

Sales in Japan for fiscal 2003, which accounted for 39.6% of total sales, increased by 3.6% compared with fiscal 2002. This was due primarily to growing sales in CDMA mobile handsets with a built-in camera and fine ceramic parts for LCD projectors. Sales in overseas markets for fiscal 2003, which accounted for 60.4% of total sales, increased by 3.3% compared with fiscal 2002, due mainly to strong demand for information equipment, such as copiers and printers, and for telecommunications equipment, in particular, PHS-related products. Sales in the U.S. for fiscal 2003 decreased by 8.6%, due mainly to a decrease in sales of optical communications components such as ceramic packages and optical fiber connector components. Sales in Asia for fiscal 2003, increased by 20.2% compared with fiscal 2002. Products of the Electronic Device Group and telecommunications equipment such as CDMA handsets and PHS-related products mainly contributed to expanded sales in this region. Sales in Europe for fiscal 2003 increased by 2.0%, due mainly to sales growth of information equipment including printers and copiers.

 

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Cost of sales and gross profit

 

In fiscal 2004, cost of sales increased by ¥63,966 million, or 8.0%, to ¥860,224 million from ¥796,258 million in fiscal 2003.

 

Raw material costs increased by ¥74,797 million in fiscal 2004 compared with fiscal 2003. This mainly reflected increased sales and production activities of telecommunications equipment and higher production levels for digital cameras, a write-down amounted to ¥10,351 million of current inventories of tantalum materials and purchase commitments based on long-term contracts at AVX, and the effects of the new consolidation of Kinseki and KST.

 

Subcontractor costs increased by ¥7,452 million in fiscal 2004, principally as a result of increased production activities of telecommunications and information equipment and fine ceramic parts. Subcontractor costs also increased due to an expansion of outsourcing processes related to software development programs.

 

Other cost of sales increased by ¥18,564 million in fiscal 2004. This reflected increased royalty payments attributable to higher sales of telecommunications and information equipment, an increase in reserves for product warranty to take account of higher returns with telecommunications equipment in particular and increased purchases of consumables related to higher production volumes of fine ceramic parts and telecommunications equipment as well as the effects of the consolidation of Kinseki and KST. In addition, the excess accrual of ¥2,284 million was reversed as a reduction of other cost of sales to account for the difference between accrued litigation expenses following a settlement of LaPine litigation and the cash settlement.

 

Depreciation and amortization decreased by ¥2,510 million as a result of lower capital expenditures in recent years and the effects of the yen’s appreciation against the U.S. dollar.

 

The transfer of the substitutional portion of Employee Pension Funds (“EPF”) of Kyocera Corporation and KMC to the Japanese government resulted in a one-time amortization of unrecognized actuarial losses and a recognition of the difference between projected benefit obligation and accumulated benefit obligation, which represented an increase in labor costs totaling ¥13,735 million. Furthermore, the withdrawal from EPF at Kyocera Chemical also resulted in a reduction of labor costs of ¥2,821 million.

 

As a result, gross profit increased by ¥7,078 million, or 2.6%, in fiscal 2004 to ¥280,590 million from ¥273,512 million in fiscal 2003.The gross profit ratio decreased by 1.0 point from 25.6% to 24.6%.

 

SG&A expenses and profit from operations

 

Selling, general and administrative (SG&A) expenses in fiscal 2004 decreased by ¥18,496 million, or 9.7%, to ¥171,628 million compared with ¥190,124 million in fiscal 2003.

 

This reflected an increase in advertising expenses due to expand sales of telecommunications and information equipment coupled with higher sales commissions and service expenses associated with increased sales volumes, plus the effects of the consolidation of Kinseki and KST. Restructuring charges at AVX of ¥2,975 million related to the closure of overseas ferrite manufacturing facilities and headcount reductions also resulted in an increase in SG&A expenses in fiscal 2004.

 

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The transfer of the substitutional portion of EPF of Kyocera Corporation and KMC to the Japanese government resulted in a one-time amortization of unrecognized actuarial losses and a recognition of the difference between projected benefit obligation and accumulated benefit obligation, which represented an increase in labor costs totaling ¥5,843 million. In addition, the difference between accumulated benefit obligation for a substitutional portion of EPF and the related government-specified portion of plan assets of EPF was recorded as a reduction of SG&A expenses of ¥38,495 million. Furthermore, the withdrawal from EPF at Kyocera Chemical resulted in a deduction of labor costs of ¥3,132 million.

 

The substantial reductions associated with the changes in EPF resulted in a significant decrease in SG&A expenses in fiscal 2004, despite an increase in net sales. A proportion of SG&A expenses to net sales fell by 2.8 points to 15.0% in fiscal 2004 compared with that of 17.8% in fiscal 2003. As a result, profit from operations increased by ¥25,574 million, or 30.7%, to ¥108,962 million compared with ¥83,388 million in fiscal 2003.

 

Interest and dividend income

 

Interest and dividend income in fiscal 2004 decreased by ¥311 million, or 6.0%, to ¥4,883 million compared with ¥5,194 million in fiscal 2003. Kyocera has an investment policy ensuring security and liquidity.

 

Interest expense

 

Interest expense in fiscal 2004 decreased by ¥146 million, or 10.2%, to ¥1,286 million compared with ¥1,432 million in fiscal 2003. A decrease in foreign currency-denominated borrowings, which are typically at higher interest rates than yen-denominated borrowings, was more than offset by higher interest expense due to the consolidation of Kinseki.

 

Foreign currency translation

 

During fiscal 2004 the yen appreciated by ¥9, or 7.4%, against the U.S. dollar and depreciated by ¥12, or 9.9%, against the Euro compared with fiscal 2003, respectively. The net effect of foreign currency fluctuations was a loss of ¥1,546 million, as a result of the yen being worth 11.7% more against the U.S. dollar at March 31, 2004 compared with at March 31, 2003. This principally resulted in losses of KMC arising from the translation of trade receivables denominated in foreign currencies.

 

Kyocera typically enters into forward exchange contracts to minimize currency exchange risks on foreign currency denominated receivables and payables. (Payables are usually in small amounts.) It has no significant unhedged monetary assets, liabilities or firm contract-related commitments denominated in foreign currencies other than restricted cash, certain time deposits and the functional currencies of Kyocera’s overseas operations. Kyocera confines its use of derivative financial instruments to the hedging of its foreign exchange exposures, and does not utilize derivative transactions for trading purposes.

 

Gains and losses from investments

 

Kyocera’s equity in earnings of affiliates and unconsolidated subsidiaries in fiscal 2004 was derived mainly from interests in Taito Corporation (Taito), Kinseki, S.K. TELETECH CO., Ltd. (SKTT). Earnings on equity-method investments amounted to ¥2,575 million, a fall of ¥517 million, or 16.7%, compared with ¥3,092 million in fiscal 2003.

 

Kyocera Corporation owns a 36.02% interest in Taito, which is the major affiliate and operates in electronic amusement business. Taito’s sales of game arcades in fiscal 2004 increased compared with fiscal 2003. Sales of coin-operated game machine also increased due to the launch of new models. Although Taito’s net sales and income before income taxes in fiscal 2004 increased compared to fiscal 2003, the net income decreased compared to fiscal 2003. This is because the effective income tax rate was higher in fiscal 2004 as carryforward losses were utilized in fiscal 2003, and Taito applied the regular effective tax rate in fiscal 2004. As a result, Kyocera’s equity in earnings of Taito decreased.

 

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Kyocera Corporation owned a 28.09% interest in Kinseki, Limited. On August 1, 2003, Kyocera Corporation made Kinseki, Limited a wholly-owned subsidiary through exchange of shares. Kyocera’s equity in earnings of Kinseki, Limited in fiscal 2004 was for four months (from April to July). For detailed information of this business combination, see Note 3 to The Consolidated Financial Statements included in this Form 20-F.

 

Kyocera Corporation owned a 27.48% interest in SKTT. Kyocera’s equity in earnings of SKTT decreased compared to fiscal 2003. On March 26, 2004, Kyocera sold all of its shares of SKTT. As a result, Kyocera recorded the gain of ¥491 million.

 

In fiscal 2004, losses on devaluation of investment securities amounted to ¥1,030 million, a decrease of ¥1,853 million compared with ¥2,883 million in fiscal 2003. Losses recorded in fiscal 2004 was due mainly to management’s estimation that certain non-public companies in which Kyocera invested would need considerable periods to show profitability in their operating activities. Losses recorded in fiscal 2003 were attributable mainly to a prolonged decline in the market value of Japanese bank stock held by Kyocera Corporation.

 

Income before income taxes

 

In fiscal 2004, increases in operating profits in the Fine Ceramic Parts Group, the Semiconductor Parts Group, the Applied Ceramic Products Group and the Information Equipment Group outweighed the negative effects of a decline in operating profit in the Electronic Device Group, primarily due to one-time charges related to inventory write-downs and restructuring activities at AVX, and lower operating profits in the Telecommunications Equipment Group and the Optical Equipment Group. Kyocera also recorded a settlement gain of ¥18,917 million for a substitutional portion of EPF as mentioned in the descriptions of cost of sales and SG&A. Income before income taxes increased by ¥39,003 million, or 51.3%, to ¥115,040 million compared with ¥76,037 million in fiscal 2003.

 

As with net sales, the overall impact of exchange rate fluctuations on income before income taxes in fiscal 2004 was negative as the effect of the yen’s appreciation against the U.S. dollar outweighed the effect of the yen’s depreciation against the Euro. The net impact on income before income taxes amounted to approximately ¥3,900 million. If the foreign exchange rates prevailing in fiscal 2003 were applied, consolidated income before income taxes would have shown a year-on-year increase of 56.5%, compared with the 51.3% increase actually recorded.

 

A detailed analysis and discussion about Kyocera’s income before income taxes, and operating profit by reporting segments are as follows.

 

Operating profit by segment

 

The following table shows a breakdown of Kyocera’s consolidated income before income taxes, and operating profit for fiscal 2003 and fiscal 2004 for Kyocera’s eight reporting segments: the Fine Ceramic Parts Group, the Semiconductor Parts Group, the Applied Ceramic Products Group, the Electronic Device Group, the Telecommunications Equipment Group, the Information Equipment Group, the Optical Equipment Group and Others.

 

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     Years ended March 31,

 
     (Yen in millions)

 
     2003

    2004

 

Fine Ceramic Parts Group

   ¥ 9,674     ¥ 10,239  

Semiconductor Parts Group

     3,738       10,603  

Applied Ceramic Products Group

     5,385       10,297  

Electronic Device Group

     11,816       5,047  

Telecommunications Equipment Group

     18,314       5,082  

Information Equipment Group

     23,351       31,986  

Optical Equipment Group

     (1,645 )     (5,826 )

Others

     7,412       9,683  
    


 


       78,045       77,111  

Corporate

     (5,619 )     34,871  

Equity in earnings of affiliates and unconsolidated subsidiaries

     3,092       2,575  

Adjustments and eliminations

     519       483  
    


 


Income before income taxes

   ¥ 76,037     ¥ 115,040  
    


 


 

Commencing in fiscal 2004, operating profit of the Precision Machine Division of Kyocera Corporation, previously included in “Others” was changed to “Corporate.” Previously published net sales and operating profits of such reporting segments for fiscal 2003 have been reclassified accordingly.

 

Fine Ceramic Parts Group

 

Operating profit in this segment increased by ¥ 565 million, or 5.8%, to ¥ 10,239 million compared with ¥ 9,674 million in fiscal 2003, due primarily to higher sales of components used in semiconductor and LCD fabrication equipment and sapphire substrates.

 

Semiconductor Parts Group

 

Operating profit in this segment increased substantially by ¥ 6,865 million, or 183.7%, to ¥ 10,603 million compared with ¥ 3,738 million in 2003, due to expanded production efficiencies of SMD ceramic packages in China accompanied with stable growth in demand. Increased sales and higher manufacturing productivity also improved the profitability of organic material components and optical communications components and packages.

 

Applied Ceramic Products Group

 

Operating profit in this segment increased by ¥ 4,912 million, or 91.2%, to ¥ 10,297 million compared with ¥ 5,385 million in fiscal 2003, due primarily to improved production yields with solar power generation systems and reduced manufacturing costs for cutting tools through higher levels of China-based production.

 

Electronic Device Group

 

Operating profit in this segment decreased by ¥6,769 million, or 57.3%, to ¥5,047 million compared with ¥11,816 million in fiscal 2003. The decline in profits was due primarily to an operating loss recorded at AVX for fiscal 2004. AVX wrote down ¥10,351 million of current inventories of tantalum materials and purchase commitments based on long-term contracts, and also booked a restructuring charge of ¥2,975 million associated with the closure of its overseas ferrite manufacturing facilities and headcount reductions. As a result, operating loss in fiscal 2004 at AVX increased materially compared with fiscal 2003.

 

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Elsewhere, in the first half of fiscal 2004, Kyocera Corporation transferred its manufacturing lines for ceramic capacitors from the Kitami Plant in Hokkaido, Japan to Shanghai, China and to other plants in Japan. However, through internal efforts toward improved yields and higher productivity of ceramic capacitors contributed to increased profits remarkably in the second half of fiscal 2004. Other factors contributing to higher segment profits included positive effects from increased sales of connectors and substantially improved profitability with thin-film products as LCD sector. In addition, increased demand for optical low-pass filters used in DSCs helped Kinseki Limited post markedly higher profit margins compared with fiscal 2003.

 

Telecommunications Equipment Group

 

Operating profit in this segment decreased by ¥ 13,232 million, or 72.3%, to ¥ 5,082 million compared with ¥ 18,314 million in fiscal 2003, due primarily to declined sales of mobile phone handsets in Japan and China and to price erosion of PHS-related products. Compared with fiscal 2003, KWC reduced its operating loss as improved quality control systems and higher sales started to feed through into increased profits from the second half of fiscal 2004.

 

Information Equipment Group

 

Operating profit in this segment increased by ¥ 8,635 million, or 37.0%, to ¥ 31,986 million compared with ¥ 23,351 million in fiscal 2003. This was due primarily to strong sales of printers and digital MFPs combined with reduced costs arising from increased China-based production and an ongoing shift toward the use of common engines across printer and digital MFP product ranges.

 

Optical Equipment Group

 

Operating loss in this segment increased by ¥ 4,181 million to ¥ 5,826 million compared with operating loss of ¥ 1,645 million in fiscal 2003. Poor sales of conventional still cameras combined with development costs for the “R-TUNE” engine and higher promotional costs for DSCs resulted in an operating loss.

 

Others

 

Operating profit in this segment increased by ¥ 2,271 million, or 30.6%, to ¥ 9,683 million compared with ¥ 7,412 million in fiscal 2003. This was due primarily to increased earnings at KCCS, which arose from improved development efficiency in information systems operations as well as shortened installation times and cost reductions in the telecommunications engineering business.

 

Corporate

 

Corporate gains and losses constitute income and expenses related to the provision of management-related services by Kyocera’s head office to each reporting segment, together with any profit-and-loss items that management judges not to belong within the above reporting segments, such as litigation expenses or losses on devaluation of investment securities. In fiscal 2004, Kyocera recorded Corporate gain of ¥34,871 million. Compared with Corporate loss of ¥5,619 million recorded in fiscal 2003, Corporate gain improved by ¥40,490 million. This was partly due to a decrease in expenses associated with the provision of management-related services by Kyocera’s head office, and the absence of losses of ¥8,042 million on devaluation of investment in Japanese banks and Kinseki following a recovery of share prices on Japanese stock markets in fiscal 2004. This increase in Corporate gain also included special items recorded in fiscal 2004, such as ¥18,917 million of a settlement gain for a substitutional portion of EPF at Kyocera Corporation and KMC, ¥5,953 million of a withdrawal gain of EPF at Kyocera Chemical, and ¥2,284 million of a gain on reversal of excess accruals resulting from a settlement of the LaPine Case.

 

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Taxes

 

Current and deferred income taxes in fiscal 2004 increased by ¥17,530 million, or 53.5%, to ¥50,310 million compared with ¥32,780 million in fiscal 2003. The effective tax rate of 43.7% in fiscal 2004 was 0.6 points higher than that of 43.1% in fiscal 2003. This was due mainly to an increase in pre-tax losses, recorded at certain foreign subsidiaries taxed at lower rates than Japanese statutory tax rate of 42.0%, increased, and valuation allowances on deferred tax assets were also recorded at those subsidiaries.

 

Minority interests

 

Minority interests were principally related to AVX, which accounted for an approximately 30% minority ownership interest in fiscal 2004. Minority interests increased by ¥3,192 million to ¥3,356 million compared with ¥164 million in fiscal 2003. This was due to increased losses incurred by one-time charges related to a write-down of inventories and restructuring activities.

 

Business Combinations and Investments

 

Investment in WILLCOM, INC. in fiscal 2005

 

On June 21, 2004, the Carlyle Group (Carlyle), Kyocera, KDDI and DDI Pocket reached an agreement that a consortium of Carlyle, Kyocera and KDDI would acquire the business of DDI Pocket, a subsidiary of KDDI. Under the agreement, the company that succeeds DDI Pocket’s business, the name of which was changed to WILLCOM in February 2005, was invested 30% by Kyocera. In cooperation with WILLCOM, Kyocera will endeavor to expand sales in its PHS-related business by carving out new markets in Japan as well as overseas.

 

Establishment of Japan Medical Materials Corporation in fiscal 2005

 

On May 21, 2004, Kyocera reached an agreement with Kobe Steel, Ltd. (Kobe Steel) to merge the medical material operations of both companies into a successor company, Japan Medical Materials Corporation, which was established on September 1, 2004. As a dedicated manufacturer of medical materials, the successor company is expected to benefit from the integration of the specialized expertise of Kyocera and Kobe Steel in material processing technologies, while maximizing synergies by integrating development, production and marketing divisions. It also seeks to expand its business worldwide.

 

Investment in Kinseki, Limited in Fiscal 2004

 

On August 1, 2003, Kyocera Corporation made Kinseki, Limited, which is in the business of manufacturing crystal components and which had been a 28.09%-owned subsidiary, its wholly-owned subsidiary through a share exchange. Under the share exchange, a total of 2,529,154 shares of common stock of Kyocera Corporation were allocated to Kinseki, Limited’s minority shareholders in return for the remaining 25,291,542 shares (71.91 %) of Kinseki, Limited’s shares not previously owned by Kyocera Corporation. On April 1, 2004, Kinseki changed its name to “Kyocera Kinseki Corporation.”

 

Investment in Kyocera SLC Technologies Corporation in Fiscal 2004

 

On June 30, 2003, in order to reinforce the business of organic circuit boards, Kyocera Corporation and IBM Japan, Ltd. reached an agreement for the transfer to Kyocera Corporation from IBM Japan, Ltd. of the SLC (Surface Laminar Circuitry: laminated highdensity printed circuit board) business of Yasu Site of IBM Japan, Ltd., and have executed a business transfer agreement. Kyocera Corporation acquired this business in exchange for cash of ¥8,594 million. Kyocera Corporation incorporated a new successor company, “Kyocera SLC Technologies Corporation”, on August 12, 2003, which commenced operation on September 1, 2003.

 

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Investment in Kyocera Chemical Corporation in Fiscal 2003

 

On May 16, 2002, Kyocera Corporation and Toshiba Chemical Corporation, which manufactures and sells electronic parts and materials, reached an agreement whereby Kyocera Corporation would make Toshiba Chemical Corporation a wholly-owned subsidiary of Kyocera Corporation through a share exchange. Kyocera entered into this transaction in order to reinforce the business of electronic parts and materials held by Toshiba Chemical Corporation and the Electronic Device Group and other divisions of Kyocera. On August 1, 2002, Kyocera Corporation issued 990,990 shares of common stock of Kyocera Corporation in exchange for 45,045,000 shares (100%) of Toshiba Chemical Corporation held by its shareholders. On the same day, Toshiba Chemical Corporation was renamed as Kyocera Chemical Corporation.

 

Restructuring Activities

 

In fiscal 2005, Kyocera recorded ¥7,369 million ($69 million) of restructuring costs which consisted of ¥6,866 million ($64 million) related to the structural reform of the Optical Equipment Group and ¥503 million ($5 million) related to the reform of the Telecommunications Equipment Group.

 

Structural reform in the Optical Equipment Group was focused on downsizing the camera business. Since the acquisition of Yashica Co., Ltd. in 1983, Kyocera has advanced its optical instruments business centered on the camera business under the CONTAX, KYOCERA and YASHICA brands. With the shift from still to digital cameras in the camera market in 2004, Kyocera pushed ahead with the production and sale of digital cameras best suited to consumer needs. The digital camera market has expanded considerably on a global scale, however, and because the optical instruments business was unable to achieve sufficient cost reductions to counter the ensuing intense cost competition with competitors, it was forced into a difficult business situation. As a result of extensive investigation into how to effectively utilize management resources under the policies of “business selection and concentration” and “high-value-added diversification,” Kyocera decided to significantly downsize the Optical Equipment Group in fiscal 2005.

 

As part of the program to scale back this business, Kyocera decided to close two overseas sales companies, Yashica Kyocera GmbH Group and Kyocera Optics Inc., during fiscal 2005. Costs associated with the closure of two overseas sales companies amounted to ¥3,285 million ($31 million), including expenses mainly related to headcount reductions.

 

In addition to the closure of overseas sales companies, a further ¥3,581 million ($33 million) in restructuring losses in fiscal 2005 was spent to downsize the domestic camera business. This included the implementation of sales promotions to reduce inventory.

 

Kyocera also recorded ¥503 million ($5 million) as restructuring costs in connection with transferring production in the Telecommunications Equipment Group. This amount was primarily used on the personnel reduction at KWC.

 

On May 5, 2005 (Japan Time), Kyocera decided to outsource the manufacture of mobile phone handsets of KWC, a U.S. subsidiary, and to sell KWC’s manufacturing equipment and inventories to Flextronics International Ltd. (Flextronics), a leading provider of electronics manufacturing services. KWC intends to reduce its manufacturing costs significantly and to improve its profitability rapidly by taking cost-down activities upon its procurements of parts and materials through a strong promotion of the outsourcing to Flextronics, and by making fixed costs related to the manufacturing of mobile phone handsets into variable costs. KWC will also enhance its business operation through specializing in the research, development, sales and marketing of mobile phone handsets.

 

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Receipt of a Notice of Tax Assessment based on Transfer Pricing Adjustments and Filing Complaint against it

 

On March 28, 2005, Kyocera Corporation received a notice of tax assessment based on transfer pricing adjustments from the Osaka Regional Tax Bureau stating that, in the Bureau’s judgment, allocation of profit earned from transfers of products between Kyocera Corporation and its overseas subsidiaries was not appropriate for the five years from the year ended March 31, 1999 through the year ended March 31, 2003. The notice indicated that income should be adjusted upwards ¥24,394 million ($228 million) and that resultant additional tax, including local taxes, etc., amounted to ¥12,748 million ($119 million). Kyocera recognized this amount of ¥12,748 million ($119 million) as current income taxes in its consolidated statement of income for the year ended March 31, 2005, and made cash payments of ¥8,631 million ($81 million) on March 29, 2005 and ¥4,117 million ($38 million) on April 28, 2005.

 

On May 24, 2005, Kyocera Corporation filed a complaint against tax assessment based on transfer pricing adjustments with the Osaka Regional Tax Bureau. Although the final resolution of the proposed tax assessment is not certain, management believes the ultimate disposition of this matter will not have a material impact on the results of operations.

 

Settlement of LaPine Case in Fiscal 2004

 

On September 1, 1994, the International Chamber of Commerce issued its award with respect to the arbitration between Kyocera Corporation and LaPine Technology Corporation (LTC), Prudential-Bache Trade Corporation (PBTC) (presently renamed Prudential- Bache Trade Services, Inc.), et al. for the alleged breach of an agreement by Kyocera Corporation in connection with the reorganization of LTC. The award ordered Kyocera Corporation to pay to LTC and PBTC as damages, approximately $257 million, including interest, arbitration costs and attorney’s fees. Kyocera Corporation filed a motion to vacate, modify and correct the award in the U.S. District Court for the Northern District of California pursuant to an agreement between the parties providing for broad judicial examination of arbitration awards.

 

With respect to this case, Kyocera Corporation subsequently appealed to the Ninth Circuit Court of Appeals and then to the Supreme Court of the United States asserting the validity of the provision for broad judicial examination of arbitration awards. On December 22, 2003, Kyocera Corporation reached an agreement with Prudential Securities Group, Inc., Prudential Equity Group, Inc., LaPine Technology Corporation and LaPine Holding Company to settle all claims in pending litigation between the parties. Kyocera Corporation has paid $331.5 million pursuant to this settlement and recorded ¥35,454 million as cash payment in its consolidated financial statements in fiscal 2004.

 

Kyocera had recognized a provision for accrued litigation expenses as cost of sales in fiscal 2004. The excess accrual of ¥2,284 million was reversed as a reduction of cost of sales to account for the difference between accrued litigation expenses and the cash settlement in fiscal 2004.

 

Transfer to the Japanese Government of the Substitutional Portion of Employee Pension Fund Liabilities in Fiscal 2004

 

In fiscal 2004, Kyocera Corporation and KMC transferred to the Japanese government the substitutional portion of EPF liabilities and the related government-specified portion of plan assets of EPF upon approval by the Ministry of the Health, Labor and Welfare in Japan.

 

Kyocera Corporation and KMC adopted Emerging Issues Task Force (EITF) Issue No. 03-02, “Accounting for the Transfer to the Japanese Government of the Substitutional Portion of Employee Pension Fund Liabilities” for the settlement process of the substitutional portion of EPF, and recorded ¥18,917 million of a settlement gain for the substitutional portion of EPF. Detailed information regarding this transfer process of and settlement gain for the substitutional portion of EPF is described in Note 10 to The Consolidated Financial Statements included in this Form 20-F.

 

Critical Accounting Policies and Estimates

 

Kyocera’s consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States of America. The preparation of these consolidated financial statements requires the use of estimates, judgments, and assumptions that affect the reported amounts of assets and liabilities at the date of consolidated financial statements and the reported amounts of revenues and expenses during the periods presented. Actual results may differ from these estimates, judgments and assumptions.

 

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An accounting estimate in Kyocera’s consolidated financial statements is a critical accounting estimate if it requires Kyocera to make assumptions about matters that are highly uncertain at the time the accounting estimate is made, and either different estimates that Kyocera reasonably could have used in the current period, or changes in the accounting estimate that are reasonably likely to occur from period to period, would have a material impact on the presentation of Kyocera’s financial condition, changes in financial condition or results of operations. Kyocera has identified the following critical accounting policies with respect to its financial presentation.

 

Allowances for doubtful accounts

 

Kyocera maintains allowances for doubtful accounts related to both trade and finance receivables for estimated losses resulting from customers’ inability to make timely payments, including interest on finance receivables. Kyocera’s estimates are based on various factors including the length of past due payments, historical experience and current business environments. In circumstances where it is aware of a specific customer’s inability to meet its financial obligations, a specific allowance against these amounts is provided considering the fair value of assets pledged by the customer as collateral.

 

A substantial portion of allowances for doubtful accounts is recorded with respect to finance receivables of KLC in the Others segment, which provides credit financing and commercial leasing services. Based on the factors discussed above, KLC sets estimated recovery percentages that are applied to the amount of receivables to determine future cash flow. On a case-by-case basis, adjustments are made to the amount of allowances so determined in light of particular customers’ circumstances. KLC continuously monitors the correlation between the allowances so determined and the actual loss experienced, and makes an appropriate modification to the schedule of percentages for determining allowance amounts.

 

At March 31, 2005, KLC had ¥14,919 million ($139 million) of allowances for doubtful accounts against ¥122,084 million ($1,141 million) of finance receivables, which comprise over 70% of Kyocera’s allowances for doubtful accounts.

 

Inventory valuation

 

Kyocera estimates the amount of write-downs required to properly value inventory. Write-downs are provided for excess, slow moving and obsolete inventory as well as valuation losses required to adjust recorded cost to its market value. Kyocera generally considers all inventory aged over 12 months to be slow-moving or obsolete. Kyocera also records inventory write-downs based on its projections of future demand, market conditions and related management-led initiatives even though the age of corresponding inventory is shorter than 12 months.

 

In fiscal 2005, as a result of continuous strict controls and adjustments on inventories, Kyocera recognized inventory write-downs of ¥10,405 million ($97 million). The amounts of these inventory write-downs by reporting segments appear in Note 18 to The Consolidated Financial Statements included in this Form 20-F. A large portion of these inventory write-downs arose from inventories of mobile handsets, information equipment and optical instruments. These products were subject to a decrease in demand and a decline in price, or became obsolete because of their short product lives. In the optical instruments business and the telecommunications equipment business, Kyocera implemented structural reforms to improve future profitability and recognized inventory write-downs or losses on disposal based on business plans.

 

The majority of Kyocera’s inventories are produced for the IT industry. Each of these products generally has a short product life, and is susceptible to market demand and price fluctuations. In light of the impacts by segments, inventory write-downs primarily affect all segments except Others. If market conditions and demand in the information technology industry are less favorable than Kyocera’s projections, additional write-downs may be required.

 

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Impairment of securities and investments

 

Kyocera records impairment charges for debt and equity securities and investments in affiliates and unconsolidated subsidiaries accounted for by the equity method when it believes that the decline of value is considered to be other-than-temporary. Kyocera regularly reviews each security and investment for impairment based on the extent to which the fair value is less than cost, the duration of the decline, the anticipated recoverability of fair value in the future and the financial conditions of the issuer. Poor operating results of the issuers of these securities or adverse changes in the market may cause impairment losses in future periods.

 

In fiscal 2005, Kyocera recognized losses on impairment of investment securities amounting to ¥132 million ($1 million), which was attributable mainly to management’s estimation that certain non-public companies in which Kyocera invested would need considerable periods to gain profitability in their operating activities.

 

Kyocera Corporation is currently a major shareholder of KDDI. The price fluctuation of the KDDI shares may affect Kyocera’s financial conditions. At March 31, 2005, the unrealized gain of ¥55,056 million ($515 million) on KDDI shares held by Kyocera Corporation decreased compared with that of ¥87,125 million at March 31, 2004 reflecting a fluctuation of the market price of the KDDI shares during fiscal 2005. As the operating results of KDDI recently grew steadily, the performance of KDDI shares is considered to be stable. For detailed information on the gross unrealized gain or loss, see Note 4 to The Consolidated Financial Statements in this Form 20-F.

 

Impairment of long-lived assets

 

Kyocera has adopted Statement of Financial Accounting Standards (SFAS) No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” This requires Kyocera to review its long-lived assets and intangible assets with definite useful lives for impairment periodically. Long-lived assets and intangible assets with definite useful lives are considered to be impaired when the expected undiscounted cash flow from the asset is less than its carrying value. A loss on impairment is recognized based on the amount by which the carrying value exceeds the fair value of the long-lived assets and intangible assets with definite useful lives. In fiscal 2005, Kyocera did not recognize any losses on impairment of long-lived assets or intangible assets with definite useful lives.

 

Goodwill and other intangible assets

 

Kyocera has adopted SFAS No.142, “Goodwill and Other Intangible Assets.” This requires that, rather than being amortized, goodwill and intangible assets with indefinite useful lives are tested for impairment at least annually, and also following any events or changes in circumstances that might lead to impairment. The impairment review of goodwill and other intangible assets conducted by Kyocera in fiscal 2003 indicated that there was an impairment loss on goodwill within the Applied Ceramic Products Group related to the acquisition of Kyocera Tycom Corporation and its consolidated subsidiaries (KTC), a U.S. subsidiary, which manufactures and sells micro drills for the information technology industry. A consolidated impairment loss of ¥3,175 million was booked as a cumulative effect of change in accounting principle. With the assistance of a third-party appraiser, Kyocera arrived at the implied fair value of goodwill using the discounted cash flow methodology, taking into the account sluggishness in KTC’s markets. Kyocera also undertook a review for impairment of goodwill and other intangible assets in fiscal 2005. The results of this review revealed no indications of any impairment in the carrying values of such assets.

 

Deferred tax assets

 

Kyocera records deferred tax assets with valuation allowances to adjust their carrying amounts when it believes that it is more likely than not that the assets will not be realized. The valuation of deferred tax assets principally depends on the estimation of future taxable income and feasible tax planning strategies. If future taxable income is lower than expected due to future market conditions or poor operating results, significant adjustments to deferred tax assets may be required. At March 31, 2005, deferred tax assets amounted to ¥78,819 million ($737 million), which Kyocera considers will reasonably be realized in the future compared with the amounts of taxable income and income taxes in fiscal 2005. In fiscal 2005, a U.S. subsidiary recorded a valuation allowance for its deferred tax assets based on expected recoverability of those assets considering current operating conditions.

 

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Benefit plans

 

Projected benefit obligations and plan assets are determined on an actuarial basis and are significantly affected by the assumptions used in their calculation, such as the discount rates, the expected long-term rate of return on plan assets, the rate of increase in compensation levels and other assumptions. Kyocera determines the discount rate by referencing the yield on high quality fixed income securities such as Japanese Government Bonds. The expected return on plan assets is determined based on the rate of historical earnings and Kyocera’s expectation of future performance of the funds in which plan assets are invested. The rate of increase in compensation levels is determined based mainly on results of operations and inflation. Kyocera annually reviews the assumptions underlying its actuarial calculations, making adjustments based on current market conditions, if necessary. If Japanese and global financial markets stagnate, Kyocera may be required to decrease its assumptions of the discount rate and the expected long-term rate of return on plan assets and, a decrease in such assumptions will lead to an increase in projected benefit obligations and net periodic pension costs. Particularly, an increase in projected benefit obligations may negatively affect Kyocera’s accrued pension and severance liabilities in the consolidated balance sheet and labor costs included in cost of sales and selling, general and administrative expenses in the consolidated statement of income. An increase in accumulated benefit obligations may also require Kyocera to record additional minimum pension liability in accumulated other comprehensive income.

 

In fiscal 2004, Kyocera Corporation and KMC transferred to the Japanese government the substitutional portion of EPF liabilities and the related government-specified portion of plan assets of EPF. Kyocera Corporation and KMC adopted EITF Issue No. 03-02, “Accounting for the Transfer to the Japanese Government of the Substitutional Portion of Employee Pension Fund Liabilities” for the settlement process of the substitutional portion of EPF, and recorded ¥18,917 million of a settlement gain for the substitutional portion of EPF. As a result of this settlement, Kyocera’s projected benefit obligation decreased by ¥71,243 million and plan assets decreased by ¥29,493 million, respectively. This decrease in projected benefit obligation is particularly considered to lead to a reduction of a potential negative impact on Kyocera’s financial conditions and results of operations. Detailed information regarding this transfer process of and settlement gain for the substitutional portion of EPF is described in Note 10 to The Consolidated Financial Statements included in this Form 20-F.

 

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Sensitivity analysis of benefit plans

 

The following table illustrates the effect of assumed changes in discount rates and the expected rate of return on plan assets, with assuming all other assumptions consistent, for Kyocera Corporation’s benefit plan which account for a significant portion of Kyocera’s projected benefit obligations and net periodic pension costs.

 

     Yen in millions

 
    

Effect on pre-tax income
for the year ending

March 31, 2006


   

Effect on PBO

as of March 31, 2005


 

Discount rates

            

0.5% decrease

   (645 )   6,929  

0.5% increase

   616     (6,344 )

Expected rate of return on plan assets

            

0.5% decrease

   (505 )   —    

0.5% increase

   505     —    

 

Contingencies

 

Kyocera is subject to various lawsuits and claims which arise in the ordinary course of business. Kyocera consults with legal counsel and assesses the likelihood of adverse outcomes of these contingencies. Kyocera records liabilities for these contingencies when the likelihood of an adverse outcome is probable and the amount is reasonably estimable. In making these estimates, Kyocera considers the progress of the lawsuits, the situations of other companies that are subject to similar lawsuits and other relevant factors. The amounts of liabilities accrued are based on estimates and may be significantly affected by further developments or the resolution of these contingencies in the future.

 

Revenue recognition

 

Kyocera sells various types of products, including fine ceramic parts, semiconductor parts, and telecommunication equipment. Kyocera recognizes revenue upon completion of the earnings process, which occurs when products are shipped or delivered to the customer in accordance with the terms of an agreement of sale, there is a fixed or determinable selling price, title and risk of loss have been transferred, and collectibility is reasonably assured. These conditions are satisfied at the time of delivery to customers in domestic sales (FOB destination) and at the time of shipment (FOB shipping) for export sales.

 

Sales returns

 

Kyocera records an estimated sales return allowance at the time of sales based on its historical returns experience.

 

Products warranty

 

At the time of sale, Kyocera accrues a product warranty liability for claims under warranties relating to the products that have been sold. Kyocera records an estimated based on its historical repair experience.

 

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Revenue from financial services

 

In addition to the tangible products as discussed above, Kyocera also provides certain services, primarily financial services provided by KLC, a wholly-owned subsidiary of Kyocera. Revenue from direct financing leases is recognized over the term of the lease, and amortization of unearned lease income is recognized using the interest method. Interest income on installment loans is recognized on an accrual basis.

 

New Accounting Standards

 

In March 2004, EITF concluded its discussion of Issue No. 03-01, “The Meaning of Other-Than-Temporary Impairment and its Application to Certain Investments.” EITF Issue No. 03-01 provides accounting guidance regarding the determination of when an impairment (i.e. fair value is less than carrying value) of debt and marketable equity securities and investments accounted for under the cost method should be considered other-than-temporary and recognized in earnings. EITF Issue No. 03-01 also requires annual disclosures of certain quantitative and qualitative factors of debt and marketable equity securities classified as available-for-sale or held-to-maturity that are in an unrealized loss position at the balance sheet date, but for which an other-than-temporary impairment has not been recognized. The disclosure requirements of EITF Issue No. 03-01 were effective December 31, 2003. The accounting guidance of EITF Issue No. 03-01 was effective in reporting periods beginning after June 15, 2004. The adoption of this statement did not have a material impact on Kyocera’s consolidated results of operations and financial position.

 

In November 2004, the FASB issued SFAS No. 151, “Inventory Costs an amendment of ARB No. 43, Chapter 4.” SFAS No. 151 requires that all abnormal idle facility expense, freight, handling costs, and spoilage be recognized as current-period charges regardless of whether they meet the criterion of “so abnormal.” In addition, SFAS No. 151 requires that allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. SFAS No. 151 is effective for inventory costs incurred during fiscal years beginning after June 15, 2005. The adoption of SFAS No. 151 will not have a material impact on Kyocera’s consolidated results of operations and financial position.

 

In December 2004, the FASB issued SFAS No. 123 (revised 2004) (SFAS No. 123R), “Share-Based Payments.” This statement is a revision of SFAS No. 123, “Accounting for Stock-Based Compensation.” SFAS No. 123R supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees,” and its related interpretations. SFAS No. 123R requires that the cost resulting from all share-based payment transactions be recognized in the financial statements. SFAS No. 123R establishes fair value as the measurement objective in accounting for share-based payment arrangements and requires all entities to apply a fair-value based measurement method in accounting for share-based payment transactions with employees except for equity instruments held by employee share ownership plans. SFAS No. 123R was announced to be effective as of the beginning of the first fiscal year that would begin after June 15, 2005, however, on April 14, 2005, the Securities and Exchange Commission Staff postponed implementation of SFAS No. 123R and Kyocera plans to adopt SFAS No. 123R effective fiscal 2007. Kyocera has not completed its evaluation of the effect that SFAS No. 123R will have, but believes that the effect will be consistent with the pro forma disclosures. Detailed information is described in Note 1: “Stock-Based Compensation” included in this Form 20-F.

 

In December 2004, the FASB issued SFAS No. 153, “Exchanges of Non-monetary Assets - An Amendment of APB Opinion No. 29.” SFAS No. 153 eliminates the exception to fair value accounting for exchanges of similar productive assets contained in APB Opinion No. 29 and replaces it with a general exception for exchange transactions that do not have commercial substance. The exception in APB Opinion No. 29 required certain non-monetary asset exchanges to be recorded on a carryover basis with no gain/loss recognition. Under SFAS No. 153, exchange transactions with commercial substance are required to be accounted for at fair value with gain/loss recognition on assets surrendered in exchange transactions. Kyocera will be required to adopt SFAS No. 153 on July 1, 2005, and believes the adoption of SFAS No. 153 will not have a material impact on Kyocera’s consolidated results of operations and financial position.

 

In March 2005, the FASB issued Interpretation (FIN) No. 47, “Accounting for Conditional Asset Retirement Obligations-an interpretation of SFAS No. 143.” This Interpretation clarifies use of the term conditional asset retirement obligation in SFAS No. 143, “Accounting for Asset Retirement Obligation.” FIN No. 47 requires recognition of a liability for the fair value of a conditional asset retirement obligation when incurred if the liability’s fair value can be reasonably estimated. FIN No. 47 is effective no later than the end of fiscal years ending after December 15, 2005. Kyocera is currently evaluating the impact of FIN No. 47 on its consolidated results of operations and financial position.

 

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In May 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections - a replacement of APB Opinion No. 20 and SFAS No. 3.” SFAS No. 154 replaces APB Opinion No. 20, Accounting Changes, and SFAS No. 3, Reporting Accounting Changes in Interim Financial Statements, and changes the requirements for the accounting for and reporting of a change in accounting principle. SFAS No. 154 applies to all voluntary changes in accounting principle. It also applies to changes required by an accounting pronouncement when the pronouncement does not include specific transition provisions. APB Opinion No. 20 previously required that most voluntary changes in accounting principle be recognized by including in net income of the period of the change the cumulative effect of changing to the new accounting principle. SFAS No. 154 requires retrospective application to prior periods’ financial statements of changes in accounting principle. SFAS No. 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. The impact of SFAS No. 154 will depend on the changes, if any, that Kyocera may identify and record in a future period.

 

B. Liquidity and Capital Resources

 

Capital resources

 

Fiscal 2005 compared with Fiscal 2004

 

In the short term, Kyocera expects cash demands for working capital and funds for capital expenditures required for the expansion of operations, purchases of Kyocera Corporation’s common stock, and payments of dividends to stockholders. Kyocera’s primary source of short-term liquidity is cash generated by operations. Certain subsidiaries also generate capital in the form of loans from financial institutions. At March 31, 2005, Kyocera’s short-term borrowings and long-term debt including current portion totaled ¥144,164 million ($1,347 million). The ratio to total assets of 8.3% was still at a low level of dependence. Most borrowings were denominated in yen but certain borrowings were denominated in foreign currencies, such as the U.S. dollar. Details of these borrowings are described in Item 5 F “Tabular Disclosure of Contractual obligations.”

 

At March 31, 2005, Kyocera’s working capital totaled ¥551,218 million ($5,152 million), a decrease of ¥5,839 million ($55 million), or 1.0%, from ¥557,057 million at March 31, 2004. This was due mainly to decreases in cash and cash equivalents as a result of purchases of government bonds and negotiable certificate of deposits in consideration of the current and future financial position in accordance with our investment policy, and in notes and accounts payable as a result of decreases of orders and production in the Telecommunications Equipment Group. Cash from operations has generally been sufficient for Kyocera to fund its working capital requirements and to fulfill its future capital expenditures, debt repayments and other obligations. Kyocera’s net cash provided by operating activities in fiscal 2005 was ¥145,523 million ($1,360 million) and cash and cash equivalents at March 31, 2005 was ¥310,592 million ($2,903 million). In Kyocera’s opinion, working capital is sufficient for present and predictable future requirements.

 

Capital expenditures in fiscal 2005 increased by ¥8,239 million ($77 million), or 15.0%, to ¥63,176 million ($590 million) from ¥54,937 million in fiscal 2004. R&D expenditures increased by ¥7,768 million ($73 million), or 16.7%, to ¥54,398 million ($508 million) from ¥46,630 million in fiscal 2004. Nearly all capital and R&D expenditures were funded using cash in hand or cash generated by operations.

 

During fiscal 2006, Kyocera projects total capital expenditures to be approximately ¥100,000 million ($935 million). Kyocera plans to invest in new factories and facilities mainly to expand business of organic packages, ceramic parts for LCD fabrication equipment, solar cells and modules, and LCDs for industrial equipment, and to commercialize the organic electro luminescence display business.

 

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For fiscal 2006, Kyocera projects total R&D expenditures to be approximately ¥53,000 million ($495 million). Kyocera believes that Kyocera needs to invest its resources continuously in the development of new business areas and improved technology in order to create new products, commercialize advanced technologies and thereby secure future earnings streams.

 

Kyocera Corporation undertakes purchases of its common stock to facilitate the implementation of flexible capital policies and develop its business in a dynamic manner in response to changes in the operating environment.

 

In fiscal 2005, Kyocera Corporation paid cash dividends totaling ¥11,249 million ($105 million), 60 yen (0.6 dollar) per share. Kyocera Corporation received approval at the general meeting of shareholders held on June 28, 2005 for the payment of year-end dividends totaling ¥9,374 million ($88 million), 50 yen (0.5 dollar) per share, on June 29, 2005 to all stockholders of record on March 31, 2005.

 

Kyocera believes cash in hand and cash from operations will be sufficient to fund all cash requirements outlined above, at least through fiscal 2006. Consequently, Kyocera does not currently intend to use any other external financing sources that might affect its credit agency ratings. If cash generated by operations are insufficient for funding purposes, Kyocera retains other financing options, including external sources, such as short-term or long-term borrowings as well as financing directly in the capital markets through issuances of debt or equity securities. As evidenced by an equity ratio to assets of 67.3% at March 31, 2005, Kyocera maintains a strong financial position, which leads Kyocera to believe that any capital requirements could be secured from external sources at a relatively low cost. Kyocera also maintains good business relationships with several major Japanese financial institutions.

 

Any future significant deterioration in market demand for Kyocera’s products, or a slump in product prices to levels substantially below those projected by Kyocera, could adversely affect Kyocera’s operating results and financial position, possibly resulting in reduced liquidity.

 

Fiscal 2004 compared with Fiscal 2003

 

Kyocera’s primary source of short-term liquidity is cash generated by operations. Certain subsidiaries also generate capital in the form of loans from financial institutions. Details of these borrowings are described in Item 5.F “Tabular Disclosure of Contractual Obligations” of this Form 20-F.

 

At March 31, 2004, Kyocera’s working capital totaled ¥557,057 million, an increase of ¥100,209 million from ¥456,848 million at March 31, 2003. This was due mainly to increases in trade accounts receivables of ¥27,833 million and in inventories of ¥14,038 million associated with higher levels of orders and net sales. Short-term finance receivables also increased by ¥39,299 million due to transfers from long-term finance receivables. Kyocera strives to maintain high liquidity and increase operating cash flows by reducing inventories through shorter lead-times and by enhancing collection terms of trade receivables. Cash from operations has generally been sufficient for Kyocera to fund its working capital requirements and to fulfill its future capital expenditures, debt repayments and other obligations.

 

Capital expenditures in fiscal 2004 increased by ¥14,323 million to ¥54,937 million from ¥40,614 million in fiscal 2003. R&D expenditures decreased by ¥638 million to ¥46,630 million from ¥47,268 million in fiscal 2003. Nearly all capital and R&D expenditures were funded using cash in hand or cash generated by operations.

 

During fiscal 2005, Kyocera expected cash demands for working capital and funds for capital expenditures required for the expansion of operations and projected total capital expenditures to be approximately ¥62,000 million. Since capacity utilization is already high in the Fine Ceramics and the Electronic Device Group operations, capital spending plans in fiscal 2005 include investments in additional production capacity to respond to projected demand growth trends. In the Equipment Group operations, Kyocera aims to increase its market share through investments in new mobile communications equipment. Kyocera also anticipates short-term cash expenditures for the purchase of Kyocera Corporation’s common stock and the payment of dividends to stockholders.

 

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For fiscal 2005 Kyocera projected total R&D expenditures to be approximately ¥51,000 million. Details are given in the following section, under “Research and Development, Patent and Licenses, and etc.”

 

Kyocera Corporation undertook purchases of its common stock to facilitate the implementation of flexible capital policies and develop the business in a dynamic manner in response to changes in the operating environment.

 

In fiscal 2004, Kyocera Corporation paid cash dividends totaling ¥11,174 million. Kyocera Corporation received approval at the general meeting of shareholders held on June 25, 2004 for the payment of year-end dividends totaling ¥5,624 million on June 28, 2004 to all stockholders of record on March 31, 2004.

 

Cash flow

 

Fiscal 2005 compared with Fiscal 2004

 

     Years ended March 31,
(Yen in millions and U.S. dollars in thousands)


 
     2004

    2005

    2005

 

Cash flows from operating activities

   ¥ 62,575     ¥ 145,523     $ 1,360,028  

Cash flows from investing activities

     29,581       (132,494 )     (1,238,262 )

Cash flows from financing activities

     (20,422 )     (67,344 )     (629,383 )

Cash and cash equivalents at end of year

     361,132       310,592       2,902,729  

 

Net cash provided by operating activities in fiscal 2005 increased by ¥82,948 million ($775 million), or 132.6%, to ¥145,523 million ($1,360 million) from ¥62,575 million in fiscal 2004. This was due to a significant decrease in receivables by collection, including short-term finance receivables, although net income decreased by ¥22,178 million ($207 million), or 32.6%, to ¥45,908 million ($429 million) compared with fiscal 2004. KLC, which provides financial services, collected large-lot loans, and these collections resulted in the decrease in receivables. In addition, due to the settlement regarding the LaPine Case of ¥35,454 million in fiscal 2004, net cash provided by operating activities in fiscal 2005 increased compared with fiscal 2004. A decrease in notes and accounts payable due to decreases of production in the Telecommunications Equipment Group offset an increase in net cash provided by operating activities.

 

Net cash used in investing activities in fiscal 2005 increased by ¥162,075 million ($1,515 million) to ¥132,494 million ($1,238 million) from net cash provided by investing activities of ¥29,581 million in fiscal 2004. This was due mainly to increases in purchases of government bonds and deposits of negotiable certificate of deposits in consideration of market trends and current and future financial position according to our investment policy. In addition, in fiscal 2005, there was no cash inflow from withdrawal of restricted cash for settlement regarding the LaPine Case.

 

Net cash used in financing activities in fiscal 2005 increased by ¥46,922 million ($439 million), or 229.8%, to ¥67,344 million ($629 million) from ¥20,422 million in fiscal 2004. This was due mainly to a decrease in proceeds from issuance of long-term debt and an increase in repayments of long-term debt.

 

The yen’s depreciation against the U.S. dollar and Euro between March 31, 2004 and 2005 resulted in increases in cash and cash equivalents of ¥3,775 million ($35 million).

 

At March 31, 2005, cash and cash equivalents totaled ¥310,592 million ($2,903 million). This represented a decrease of ¥50,540 million ($472 million), or 14.0%, from ¥361,132 million at March 31, 2004. Most of Kyocera’s cash and cash equivalents were denominated in yen but certain cash and cash equivalents, mainly in overseas subsidiaries, were denominated in foreign currencies, such as U.S. dollar.

 

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Fiscal 2004 compared with Fiscal 2003

 

     Years ended March 31,
(Yen in millions)


 
     2003

    2004

 

Cash flows from operating activities

   ¥ 160,754     ¥ 62,575  

Cash flows from investing activities

     (58,512 )     29,581  

Cash flows from financing activities

     (74,662 )     (20,422 )

Cash and cash equivalents at end of year

     298,310       361,132  

 

Net cash provided by operating activities in fiscal 2004 decreased by ¥98,179 million to ¥62,575 million from ¥160,754 million in fiscal 2003, due primarily to a net increase in receivables due to higher sales of cellular handsets at KWC and increased inventories at KMC related to the receipt of large contract orders. In addition, Kyocera made a cash payment totaling ¥35,454 million in December 2003 related to the settlement of the LaPine case.

 

Net cash provided by investing activities in fiscal 2004 amounted to ¥29,581 million compared with net cash used in investing activities of ¥58,512 million in fiscal 2003, reflecting increased sale and redemption of securities, which resulted in a cash inflow of ¥77,487 million (a rise of ¥43,137 million compared with a corresponding cash inflow of ¥34,350 million in fiscal 2003) and the settlement of the LaPine case, which resulted in a release of restricted cash totaling ¥52,983 million. Such increase was offset partly by payments for purchases of property, plant and equipment totaling ¥58,869 million included capital expenditures within Kyocera’s solar energy and information equipment businesses and investments to raise manufacturing productivity for fine ceramic parts and electronic components.

 

Net cash used in financing activities in fiscal 2004 decreased by ¥54,240 million to ¥20,422 million from ¥74,662 million in fiscal 2003. This was due mainly to a significant fall in purchases of treasury stock from ¥42,010 million in fiscal 2003 to ¥33 million in fiscal 2004.

 

At March 31, 2004, the yen’s appreciation against the U.S. dollar had a negative impact on cash and cash equivalents in the amount of ¥8,912 million.

 

At March 31, 2004, cash and cash equivalents totaled ¥361,132 million. This represented an increase of ¥62,822 million from ¥298,310 million at March 31, 2003.

 

Assets, liabilities and stockholders’ equity

 

Kyocera’s total assets at March 31, 2005 decreased by ¥49,239 million ($460 million), or 2.7%, to ¥1,745,519 million ($16,313 million), compared with ¥1,794,758 million at March 31, 2004. Cash and cash equivalents decreased by ¥50,540 million ($472 million), or 14.0%, to ¥310,592 million ($2,903 million), due mainly to purchases of government bonds and deposits with over 3 months original maturities.

 

Short-term investments increased by ¥31,083 million ($290 million), or 806.3%, to ¥34,938 million ($327 million), due mainly to increases in deposits with over 3 months original maturities and bonds matured within one year which were reclassified from securities and other investments.

 

Short-term and long-term finance receivables decreased by ¥51,837 million ($484 million), or 32.6%, to ¥107,228 million ($1,002 million), due mainly to collection of large-lot loans by Kyocera Leasing Co., Ltd. (KLC). Short-term and long-term finance receivables also included finance lease receivables.

 

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Inventories increased by ¥16,217 million ($152 million), or 8.2%, to ¥213,411 million ($1,994 million). This was due mainly to increases in inventories held at March 31, 2005 by KMC associated with large orders, mainly in Europe, and by AVX associated with increased sales.

 

Securities and other investments increased by ¥341 million ($3 million). An increase by purchases of government bonds was offset by a decrease in market value at March 31, 2005 of KDDI stock and other equity securities compared with March 31, 2004.

 

Total property, plant and equipment at cost, net of accumulated depreciation, increased by ¥4,477 million ($42 million), or 1.8%, to ¥258,997 million ($2,421 million). Capital expenditure in fiscal 2005 was ¥63,176 million ($590 million) and depreciation in fiscal 2005 was ¥58,790 million ($549 million).

 

Kyocera’s total liabilities at March 31, 2005 decreased by ¥80,881 million ($756 million), or 13.7%, to ¥510,186 million ($4,768 million), compared with ¥591,067 million at March 31, 2004.

 

Total debt, comprised of short-term borrowings and long-term debt including due within one year, decreased by ¥55,781 million ($521 million), or 27.9%, to ¥144,164 million ($1,347 million), due mainly to debt repayments by KLC and KMC.

 

Trade notes and accounts payable decreased by ¥23,887 million ($223 million), or 21.6%, to ¥86,872 million ($812 million), due mainly to decreases of orders and production in the Telecommunications Equipment Group in Kyocera Corporation and KWC.

 

Minority interests in subsidiaries, principally AVX, increased by ¥7,244 million ($68 million), or 13.6%, to ¥60,482 million ($565 million), compared with ¥53,238 million at March 31, 2004. This was due mainly to an establishment of Japan Medical Materials Corporation on September 1, 2004 by Kyocera Corporation and Kobe Steel, Ltd. and the profit recorded by AVX in fiscal 2005, in contrast to losses recorded in fiscal 2004.

 

Total stockholders’ equity at March 31, 2005 increased by ¥24,398 million ($228 million), or 2.1%, to ¥1,174,851 million ($10,980 million), compared with ¥1,150,453 million at March 31, 2004. Retained earnings at March 31, 2005 increased by ¥34,659 million ($324 million), or 3.9%, due to net income for fiscal 2005 of ¥45,908 million ($429 million) offset by cash dividend payments of ¥11,249 million ($105 million).

 

Accumulated other comprehensive income decreased by ¥10,207 million ($95 million), or 46.3%, to ¥11,839 million ($111 million). Net unrealized gains on securities decreased by ¥16,780 million ($157 million), or 28.3%, due mainly to a decrease in market value at March 31, 2005 of KDDI stock and other equity securities compared with March 31, 2004. Foreign currency translation adjustments increased by ¥6,704 million ($63 million), or 18.8% due to the depreciation of the yen against Euro.

 

The stockholders’ equity ratio at March 31, 2005 was 67.3%, an increase of 3.2 points compared with 64.1% at March 31, 2004.

 

C. Research and Development, Patent and Licenses, and etc.

 

We are deeply committed to the constant pursuit of technological advancement in order to invent and develop new materials and new products, to improve and enhance existing products and to identify new applications for them and for the technology related to them.

 

Basic research and development activities are carried out at three research laboratories: the Kagoshima R&D Center, which concentrates on ceramic materials and processing technology, the Yokohama R&D Center, which works on technology relating to communications equipment, and the Keihanna R&D Center located in Kyoto, which carries out research on electronic and optical devices. In addition, each product division which is in charge of a product category or sub-category has its own research and development department staffed with a number of engineers working on improving existing products and manufacturing processes, as well as developing new products.

 

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Kyocera aims to continuously increase sales and boost profitability in each component and equipment business by promoting a strategy of “high-value-added diversification.” In order to realize this goal, we aggressively develop new technologies and new products by pursuing sophisticated and specialized technical expertise through the integration of component and equipment technologies.

 

(1) Fine Ceramic Parts Group

 

Kyocera is strengthening the development of large fine ceramic components and sapphire substrates for next-generation semiconductor and LCD fabrication equipment and LEDs by leveraging materials, processing and design technologies for fine ceramics. Moving forward, we view the automotive market as one area of prospective growth in the coming years. To this end, we have placed emphasis on the development of products that meet demand for more environmentally-friendly and safer vehicles with advanced electronics. One specific area we are working on is fuel-injection systems components for diesel engines.

 

(2) Semiconductor Parts Group

 

Kyocera is working to develop smaller, thinner ceramic packages with enhanced internal functional elements for semiconductors and electronic components used in digital consumer products in response to the rising demand for more sophisticated equipment. In addition, we are developing organic packages for next-generation MPUs and their peripheral devices.

 

(3) Applied Ceramic Products Group

 

In the environmental protection market, Kyocera is seeking to develop thinner silicon substrates to boost the conversion efficiency of solar cells, which are increasing in popularity, and to make effective use of resources. In addition, we are stepping up efforts to enable the practical home-use of Solid Oxide Fuel Cells (SOFC), expected to be the next-generation distributed power generation system for small-scale power sources.

 

In the cutting tool business, we are working to strengthen our product lineup, especially for the automotive industry, to cover a wider range of processing applications and to meet demand for long-life and stable processing equipment.

 

(4) Electronic Device Group

 

Kyocera promotes the development of various electronic devices for digital consumer products that feature high performance and consume less power. Capacitors are gradually getting smaller, while being able to hold greater capacity. We are endeavoring to improve both the size and capacity of our capacitors by exploiting the material characteristics of ceramics, tantalum and niobium oxide. We are also increasing the development of high-value-added products such as low-inductance capacitors. In addition, we are concentrating efforts into the development of functional components such as RF modules for next-generation telecommunications and information terminals.

 

In thin-film devices, Kyocera is developing thermal printheads capable of enhanced resolution for the consumer use color printer market, as well as eco-friendly LCDs for RoHS* Directive compliant industrial equipment and products with LED backlight displays.

 

Furthermore, we are working to develop the commercial viability of organic EL displays as small to mid-size displays for mobile and industrial equipment.

 


* RoHS: Restriction of the use of certain Hazardous Substances in electrical and electronic equipment.

 

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A European Union (EU) regulation prohibits the use of specific hazardous substances and forms part of EU Directive that makes it obligatory for automobile and electric equipment manufacturers in EU to implement measures to protect the environment, such as the recycling of products.

 

(5) Telecommunications Equipment Group

 

Kyocera promotes the development of CDMA dual-band mobile phones compatible with differing frequencies by making full use of components and devices throughout the Kyocera Group. We are also developing high-performance PHS base stations and handsets in line with the commencement of new high-speed data communication services in Japan. In addition, we aggressively develop the Voice over Internet Protocol (VoIP) related equipment.

 

(6) Information Equipment Group

 

Kyocera intends to swiftly enhance its range of color machines based on the “ECOSYS” concept of long life and economy, by incorporating a photoreceptor amorphous silicon drum with outstanding resistance to wear.

 

(7) Optical Equipment Group

 

Kyocera is developing optical modules for mobile phones with high pixel cameras and zoom capability as well as optical components for projectors and rear-projection TVs, by utilizing its technologies of optical, electronic devices and semiconductor parts throughout the Group.

 

(8) Others

 

Kyocera Chemical are working to develop precision molding products using magnesium alloys to enable faster recording speeds in image pickup devices. It also seeks to create synergistic effects with Kyocera’s solar energy business through the development of solar cell materials.

 

KCCS is focusing on the development of authentication and security technologies suitable for the infrastructure of expanding next-generation networks as well as new services for positioning systems and VoIP.

 

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Research and development expenses for the years ended March 31, 2003, 2004 and 2005 amounted to ¥47,268 million, ¥46,630 million and ¥54,398 million ($508 million), respectively. R&D expenses by reporting segments were as follows:

 

          (Yen in Millions)

 

Reporting segment


   Amount of R&D expense
in fiscal 2005


   Increase (Decrease) compared with fiscal
2004


 
        Amount

    %

 

Fine Ceramic Parts Group

   4,252    1,262     42.2  

Semiconductor Parts Group

   2,890    (424 )   (12.8 )

Applied Ceramic Products Group

   2,747    303     12.4  

Electronic Device Group

   11,416    1,929     20.3  

Telecommunications Equipment Group

   14,972    828     5.9  

Information Equipment Group

   13,270    2,627     24.7  

Optical Equipment Group

   2,636    (149 )   (5.4 )

Others

   2,215    1,392     169.1  
    
  

 

Total

   54,398    7,768     16.7  
    
  

 

 

For fiscal 2006, Kyocera projects total R&D expenditures to be approximately ¥53,000 million ($495 million).

 

We have a variety of patents in Japan and other countries, and hold licenses for the use of patents from others. Details are set forth in Item 4 B “Patents and Licenses” in this Form 20-F.

 

D. Trend Information

 

The following statements contain forward- looking statements. They are based on estimates and assumptions of our management about the future and are subject to significant uncertainty. You should read these statement in conjunction with the Item 3.D “Risk Factors” in this Form 20-F, which describe factors that may contribute to actual events or our results of operations differing from that stated in the forward looking statements below, including changes in the Japanese or world economies and demand for our products.

 

The information below should be read in conjunction with other sections within Item 5 “Operating and Financial Review and Prospects” of this Form 20-F, which contains some of the trend information required by this item.

 

The results for the three months ended June 30, 2005

 

With respect to our first quarterly financial results, which cover the three months period ended June 30, 2005, please refer to our report on Form 6-K submitted on July 28, 2005.

 

Market Trends

 

In the telecommunications and information processing market, key area for Kyocera, rising popularity of advanced handsets featuring high-pixel color LCDs, built-in cameras and other advanced functions including GPS (global positioning system) and hard disk drive is expected to propel demand for mobile phone handsets. In addition, stable growth is predicted to continue in PC-related and digital cameras, while strong growth in demands for DVD recorders and flat panel digital TVs is anticipated. Kyocera expects these growths will produce positive impact on our business.

 

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Kyocera believes that the measures we have already taken, including structural reforms and other initiatives to improve profitability, as well as preparatory moves targeted at future expansion, will drive our growth in the medium term. They lay the path to continued “high-value-added diversification,” which is the cornerstone for achieving our strategic objective to expand sales and profits continuously over the coming years and decades, subject to some uncertainties such as economic conditions in the markets, fluctuations in exchange rates and our ability to launch innovative products.

 

Sales of Shares of Taito Corporation

 

On August 22, 2005, Kyocera’s Board of Directors determined to tender its entire holding of shares of Taito Corporation (Taito) (133,260 shares, approximately 36.02% of outstanding shares), an equity-method affiliate, engaged in the amusement business, in a tender offer bid for Taito shares by Square Enix Co., Ltd. (Square Enix), one of the leading companies in the game software industry.

 

Square Enix has not set a limit on the maximum number of shares to be purchased in this tender offer. A condition to this tender offer, however, is that if the total number of share certificates tendered in this tender offer From August 23, 2005 through September 21, 2005 amounts to less than the intended amount of shares to be purchased (247,900 shares which account for 67% of the outstanding shares), this tender offer will not be conducted, so if that condition is not satisfied, there will not be a tender offer.

 

Currently, the game amusement industry in Japan is facing dramatic changes in industrial structure, along with developments in information and communication technologies. In order to timely and appropriately respond to such structural changes, it is essential to pursue a broad business structure by expanding product and service line-ups.

 

Under these circumstances, where the industry is experiencing material changes, Kyocera considered ways in which Taito could create new value and continue to develop.

 

Both Square Enix and Taito are in the game amusement industry, but they do not overlap in terms of their principle businesses and categories of game software, and can accordingly supplement each other. Kyocera decided to sell its Taito shares to support these companies’ mutual determination that the best way for them to promote their respective advantages is through operation as consolidated group companies, thereby creating new value and increasing their respective capacities to be industry leaders and inovators.

 

E. Off-Balance Sheet Arrangements

 

We are not a party to any material off-balance sheet arrangements. In addition, we have no unconsolidated special purpose financing or partnership entities that are likely to create material contingent obligations.

 

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F. Tabular Disclosure of Contractual Obligations

 

The following tables provide information about Kyocera’s contractual obligations and other commercial commitments that will affect Kyocera’s liquidity for the next several years, as of March 31, 2005. Kyocera anticipates that funds to be required to fulfill these debt obligations and commitments will be generated internally from operations.

 

Contractual obligations            


                              (Yen in millions)

    

Less than

1 year


   2-3 years

   4-5 years

   Thereafter

   Total

Short-term borrowings (A)

   ¥ 66,556    ¥ —      ¥ —      ¥ —      ¥ 66,556

Long-term debt (including due within one year) (A)

     44,051      28,757      2,500      2,300      77,608

Supply agreement material used in operation (B)

     5,904      —        —        —        5,904

Operating Leases

     6,705      8,981      2,353      3,075      21,114

Obligations for the acquisition or construction of property, plant and equipment

     20,405      —        —        —        20,405
    

  

  

  

  

Total Contractual Obligations

   ¥ 143,621    ¥ 37,738    ¥ 4,853    ¥ 5,375    ¥ 191,587
    

  

  

  

  

Contractual obligations            


             (U.S. dollars in thousands)

    

Less than

1 year


   2-3 years

   4-5 years

   Thereafter

   Total

Short-term borrowings (A)

   $ 622,019    $ —      $ —      $ —      $ 622,019

Long-term debt (including due within one year) (A)

     411,691      268,757      23,365      21,495      725,308

Supply agreement material used in operation (B)

     55,178      —        —        —        55,178

Operating Leases

     62,663      83,935      21,991      28,738      197,327

Obligations for the acquisition or construction of property, plant and equipment

     190,701      —        —        —        190,701
    

  

  

  

  

Total Contractual Obligations

   $ 1,342,252    $ 352,692    $ 45,356    $ 50,233    $ 1,790,533
    

  

  

  

  

 

(A) At March 31, 2005, Kyocera’s contractual obligations mainly comprised of short-term borrowings and long-term debt including those due within one year, which amounted to ¥66,556 million ($622 million) and ¥77,608 million ($725 million), respectively. Approximately 80% of those debts were attributable to KMC and KLC. KLC provides financial services such as credit financing and leasing. Due to the nature of its operations, KLC had ¥48,913 million ($457 million) of short-term borrowings and ¥47,671 million ($446 million) of long-term debt from banks and other financial institutions at March 31, 2005 as the primary source of funding for operating its business.

 

(B) AVX has a supply agreement for a significant portion of its anticipated material used in operation in its ordinary course of business.

 

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Item 6. Directors, Senior Management and Employees

 

A. Directors and Senior Management

 

Since June 1, 2005, Kyocera implemented a new executive officer system to enhance Kyocera Group’s management organization under a global consolidation system, and accordingly, appointed a Chief Executive Officer (CEO), a Chief Financial Officer (CFO) and a Chief Operating Officer (COO). The CEO takes responsibility for mid and long-term Group management policy and strategy formulation and execution, while the CFO is responsible for constructing and executing a financial strategy for the Group that ensures the effective implementation of these management strategies. The COO is in charge of daily management issues and business execution to achieve yearly management plans. At the same time, Kyocera also introduced a new corporate business group system, headed by the executive officers. These business group leaders are responsible for each product line on a consolidated basis.

 

The following table shows Kyocera’s Directors and Corporate Auditors as of July 1, 2005.

 

Name        


    

Date of Birth


    

Position


    

    Since    


Kensuke Itoh      December 17, 1937      Director and Executive Advisor      1975
Yasuo Nishiguchi      October 9, 1943      Representative Director, Chairman and Chief Executive Officer      1987
Masahiro Umemura      August 8, 1943      Representative Director, Vice Chairman and Chief Financial Officer (General Manager of Corporate Development Group)      1991
Makoto Kawamura      August 13, 1949      Representative Director, President and Chief Operating Officer     

2001

(President

2005)

Yuzo Yamamura      December 4, 1941      Director (President and Representative Director of KYOCERA ELCO CORPORATION)      2003
Naoyuki Morita      April 8, 1942      Director (President and Representative Director of KYOCERA COMMUNICATION SYSTEMS CO., LTD.)      2003
Koji Seki      December 8, 1937      Director (Chairman and Representative Director of KYOCERA MITA CORPORATION)      1989
Michihisa Yamamoto      November 13, 1942      Director (President and Representative Director of KYOCERA OPTEC CO., LTD., and General Manager of Corporate Optical Equipment Group)      1987

 

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Name        


    

Date of Birth


    

Position


    

Since


Noboru Nakamura      October 6, 1944      Director (President and Representative Director of KYOCERA CHEMICAL CORPORATION)      1991
Isao Kishimoto      November 30, 1943      Director (President and Representative Director of KYOCEA KINSEKI CORPORATION)      1993
Hisao Hisaki      July 2, 1946      Director (President of KYOCERA (TIANJIN) SALES AND TRADING CORPORATION)      1991
Rodney N. Lanthorne      February 5, 1945      Director (President of KYOCERA INTERNATIONAL, INC.)      1989
John S. Gilbertson      December 4, 1943      Director (President and Chief Executive Officer, Director of AVX CORPORATION)      1995
Yasuo Akashi      May 29, 1944      Full-time Corporate Auditor      2003
Yoshihiko Nishikawa      September 11, 1945      Full-time Corporate Auditor      2005
Osamu Nishieda      January 10, 1943      Corporate Auditor(Attorney At Law)      1993
Shinji Kurihara      July 19, 1932      Corporate Auditor(Chairman of TAKEDA Hospital Management Institute)      2003
Shigekazu Tamura      February 18, 1950      Corporate Auditor(Certified Public Accountant)      2005

 

Kensuke Itoh has served as a Director and the Executive Advisor of Kyocera Corporation since 2005. He became a Director in 1975, a Managing Director in 1979, and a Senior Managing Director in 1981 and the Chairman of the Board and Representative Director in 1999. He joined Kyocera Corporation in 1959 and has served as Representative Director of Kyocera Purple Sanga Ltd. and Representative Director of Kyoto Fashion Center Ltd.

 

Yasuo Nishiguchi has served as a Representative Director, the Chairman and Chief Executive Officer of Kyocera Corporation since 2005. He became a Director in 1987, a Managing Director in 1989 and a Senior Managing and Representative Director in 1992 and the President and Representative Director in 1999. He joined Kyocera Corporation in 1975 and has served as the Representative Director of Kyocera Leasing Co., Ltd., Representative Director of Kyocera Communication Systems Co., Ltd., Representative Director of Kyocera ELCO Corporation, Chairman of the Board of Directors of Shanghai Kyocera Electronics Co., Ltd., Chairman of the Board of Directors of Dongguan Shilong Kyocera Optics Co., Ltd., Chairman of the Board of Directors of Kyocera Zhenhua Communication Equipment Co., Ltd., Chairman of the Board of Directors of Kyocera Mita Office Equipment (Dongguan) Co., Ltd., Chairman of the Board of Directors of Kyocera (Tianjin) Sales and Trading Corporation, Chairman of the Board of Directors of Kyocera (Tjianjin) Solar Energy Co., Ltd., Representative Director of Kyocera SLC Technologies Corporation, Representative Director of Kyocera Display Institute Co., Ltd., Representative Director of Japan Medical Materials Corporation and Representative Director of Kyocera Realty Development.

 

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Masahiro Umemura has served as a Representative Director, the Vice Chairman and Chief Financial Officer of Kyocera Corporation since 2005. He became a Director in 1991, a Managing Director in 1993 and a Senior Managing and Representative Director in 1997 and an Executive Vice President and Representative Director in 1999. He joined Kyocera Corporation in 1966 and has served as General Manager of the Corporate Development Group of Kyocera Corporation, the Chairman of the Board of Directors of Shanghai Kyocera Realty Development Co., Ltd. and the Chairman of the Board of Directors of Shanghai Kyocera Trading Co., Ltd.

 

Makoto Kawamura has served as a Representative Director, the President and Chief Operating Officer of Kyocera Corporation since 2005. He became a Director in 2001 and retired in 2003. He rejoined as a Representative Director, the President and Chief Operating Officer in 2005. He joined Kyocera Corporation in 1973.

 

Yuzo Yamamura rejoined Kyocera Corporation as a Director in 2003. He first became a Director in 1987, and retired in 1993. He rejoined Kyocera Corporation as a Senior Managing and Representative Director in 1995 and retired again in 1999. He originally joined Kyocera Corporation in 1965 and has served as the President and Representative Director of Kyocera ELCO Corporation.

 

Naoyuki Morita rejoined Kyocera Corporation as a Director in 2003. He first became a Director in 1987, a Managing Director in 1989 and a Senior Managing and Representative Director in 1995, and he retired in 1999. He originally joined Kyocera Corporation in 1967 and has served as the President and Representative Director of Kyocera Communication Systems Co., Ltd.

 

Koji Seki rejoined Kyocera Corporation as a Director in 2003. He first became a Director in 1989 and a Managing Director in 1999, and he retired in 2001. He originally joined Kyocera Corporation in 1982 and has served as the Chairman of the Board and Representative Director of Kyocera Mita Corporation.

 

Michihisa Yamamoto has served as a Director of Kyocera Corporation since 1987. He became a Director in 1987, and a Managing Director in 1989 and a Senior Managing and Representative Director in 1992 and an Executive Vice President and a Representative Director in 1999. He joined Kyocera Corporation in 1970 and has served as the President and Representative Director of Kyocera Optec Co., Ltd.

 

Noboru Nakamura has served as a Director of Kyocera Corporation since 2003. He became a Director in 1991, a Managing Director in 1995, a Senior Managing and Representative Director in 1997 and an Executive Vice President and Representative Director in 1999. He joined Kyocera Corporation in 1967 and has served as the President and Representative Director of Kyocera Chemical Corporation.

 

Isao Kishimoto has served as a Director of Kyocera Corporation since 2003. He became a Director in 1993, a Managing Director in 1997 and a Senior Managing Director in 2001. He joined Kyocera Corporation in 1967 and has served as the President and Representative Director of Kyocera Kinseki Corporation.

 

Hisao Hisaki has served as a Director of Kyocera Corporation since 1991. He joined Kyocera Corporation in 1969 and has served as the President and Representative Director of Kyocera Tianjin Sales and Trading Corporation.

 

Rodney N. Lanthorne has served as a Director of Kyocera Corporation since 2003. He became a Director in 1989, a Managing Director in 1990 and a Senior Managing and Representative Director in 1999. He joined Kyocera International, Inc. in 1979 and has served as the President and Director of Kyocera International, Inc.

 

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John S. Gilbertson has served as a Director of Kyocera Corporation since 2003. He became a Director in 1995 and a Managing Director in 1999. He joined AVX Corporation in 1981 and has served as the President and Chief Executive Officer of AVX Corporation.

 

Yasuo Akashi has served as a Full-time Corporate Auditor of Kyocera Corporation since 2003. He served as a Senior Managing and Representative Director of Kyocera Corporation from 1997. He became a Director in 1991 and a Managing Director in 1993. He joined Kyocera Corporation in 1967.

 

Yoshihiko Nishikawa has served as a Corporate Auditor of Kyocera Corporation since 2005. He became a Director in 1995 and retired in 2003. He joined Kyocera Corporation in 1970.

 

Osamu Nishieda has served as a Corporate Auditor of Kyocera Corporation since 1993. He has served as an In-House Council of Kyocera Corporation.

 

Shinji Kurihara has served as a Corporate Auditor of Kyocera Corporation since 2003. He has served as the Representative Director of Takeda Management Institution.

 

Shigekazu Tamura has served as a Corporate Auditor of Kyocera Corporation since 2005. He is registered as the Certified Public Accountant defined by the Certified Public Accountant Law of Japan.

 

Kyocera has adopted an “executive officer system” pursuant to the Commercial Code of Japan, of which objectives are to establish corporate governance appropriate for a global corporation, together with a decision making system responsive to the business environment, and to train the next generation of senior executives.

 

The following table shows Kyocera’s Executive Officers as of July 1, 2005.

 

Name


    

Position        


Yasuo Nishiguchi      Chief Executive Officer (Representative Director, Chairman)
Masahiro Umemura      Chief Financial Officer (Representative Director, Vice Chairman, General Manager of Corporate Development Group)
Makoto Kawamura      Chief Operating Officer (Representative Director, President)
Isao Yukawa      Senior Managing Executive Officer (General Manager of Corporate Solar Energy Group)
Tatsumi Maeda      Managing Executive Officer (Deputy General Manager of Corporate Solar Energy Group)
Hisashi Sakumi      Managing Executive Officer (General Manager of Corporate Environment and Education Group)
Tsutomu Yamori      Managing Executive Officer (General Manager of Corporate General Affairs Human Resources Group)
Takashi Itoh      Managing Executive Officer (General Manager of Corporate Purchasing Group)
Tetsuo Kuba      Managing Executive Officer (General Manager of Corporate Fine Ceramics Group and Corporate Semiconductor Components Group)
Osamu Nomoto      Managing Executive Officer (General Manager of Corporate Electronic Components Group)

 

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Name


    

Position        


Eiichi Toriyama      Managing Executive Officer (Deputy General Manager of Corporate Electronic Components Group and General Manager of Corporate Electronic Components Sales Division)
Akiyoshi Okamoto      Senior Executive Officer (General Manager of SHANGHAI KYOCERA ELECTRONICS CO., LTD.)
Keijiro Minami      Senior Executive Officer (General Manager of Corporate Legal & Intellectual Property Group)
Goro Yamaguchi      Senior Executive Officer (Deputy General Manager of Corporate Semiconductor Components Group and General Manager of Corporate Semiconductor Components Sales Division)
Yasushi Matsumura      Senior Executive Officer (General Manager of Corporate Thin-Film Devices Group)
Tetsuo Okada      Senior Executive Officer (Representative Director and President of KYOCERA MITA CORPORATION)
Yoshihito Ota      Executive Officer (General Manager of Office of the Chief Executives)
Yasuyuki Yamamoto      Executive Officer (General Manager of Corporate Mobile Communication Equipment Group)
Junichi Jinno      Executive Officer (General Manager of Corporate Communication Systems Equipment Group)
Gen Takayasu      Executive Officer (General Manager of Corporate Communication Devices Division, Corporate Semiconductor Components Group)
Nobuhiro Ochiai      Executive Officer (General Manager of Corporate Capacitor Division, Corporate Electronic Components Group)
Jyunzo Katsuki      Executive Officer (Deputy General Manager of Corporate Electronic Components Sales Division, Corporate Electronic Components Group)
Yukihiro Takarabe      Executive Officer (General Manager of Corporate Cutting Tool Group)
Takashi Naruko      Executive Officer (General Manager of Jewelry & Application Products Division)
Masakazu Mitsuda      Executive Officer (General Manager of Corporate Business Systems Administration Group)
Toshimi Gejima      Executive Officer (General Manager of Automotive Components Division)
Michiaki Furuhashi      Executive Officer (General Manager of General Affairs Division, Corporate General Affairs Human Resources Group)
Mitsuru Imanaka      Executive Officer (Representative Director and President of KYOCERA FINE CERAMICS GmbH)

 

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Name


    

Position        


Shoichi Aoki     

Executive Officer

(General Manager of Corporate Financial & Accounting Group)

Hiroshi Togi     

Executive Officer

(General Manager of Corporate Ceramic Packages Division, Corporate Semiconductor Components Group)

Yoshihiro Kano     

Executive Officer

(Deputy General Manager of Corporate Development Group)

Yoichi Yamashita     

Executive Officer

(General Manager of Corporate Business Strategy Group)

Robert Whisler     

Executive Officer

(Director and President of KYOCERA AMERICA INC.)

John Rigby     

Executive Officer

(Director and President of KYOCERA INDUSTRIAL CERAMICS CORPORATION)

 

B. Compensation

 

The aggregate amount of compensation, including bonuses, paid by Kyocera Corporation and its certain subsidiaries in the fiscal year ended March 31, 2005 to all Directors, Executive Officers and Corporate Auditors of Kyocera Corporation and its certain subsidiaries was ¥1,185 million ($11 million). The aggregate amount includes compensation and bonuses paid during the three months ended June 30, 2004 to one Corporate Auditor who retired on June 25, 2004, and excludes the lump sum retirement allowance paid to one Corporate Auditor. The number of Directors, Executive Officers and Corporate Auditors to whom the above aggregate amount relates differs from the number of Directors, Executive Officers and Corporate Auditors as of the filing date of this Form 20-F.

 

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 to the ordinary general meeting of shareholders for approval. After such approval, the amount to be paid to each Director or Corporate Auditor is fixed by the Board of Directors in accordance with Kyocera Corporation’s internal regulations. Annual provisions are made in the accounts of Kyocera Corporation for the estimated cost of the retirement allowance for Directors and Corporate Auditors.

 

The annual provisions and costs charged to income for such retirement allowance for fiscal 2005 were ¥129 million ($1 million).

 

We have neither disclosed to our shareholders nor otherwise made public any of the information specified in this item for individually named Directors, Officers or Corporate Auditors.

 

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C. Board Practices

 

In accordance with the requirements of the Commercial Code of Japan (the “Commercial Code”), our Articles of Incorporation provide for not more than five Corporate Auditors. Corporate Auditors are elected at a general meeting of shareholders, and their normal term of office is four years. However, Corporate Auditors may serve any number of consecutive terms. One of the Corporate Auditors must be a person who was not a Director or employee of Kyocera Corporation or its subsidiaries during the five-year period prior to such Corporate Auditor’s election (and, after the close of the ordinary general meeting of shareholders relating to fiscal 2006, at least half of them must be persons who have not been Directors or employees of Kyocera Corporation or its subsidiaries). Corporate Auditors form the Board of Corporate Auditors. Corporate Auditors are under a statutory duty to oversee the administration of our affairs by the Directors, to examine our financial statements and business reports to be submitted by the Board of Directors to the general meetings of shareholders and to report their opinions thereon to the shareholders. They are obliged to attend meetings of the Board of Directors and to express their opinions, but they are not entitled to vote. Corporate Auditors also have a statutory duty to provide their report on the audit report prepared by our independent certified public accountants to the Board of Corporate Auditors, which must submit its audit report to the Board of Directors. The Board of Corporate Auditors will also determine matters relating to the duties of the Corporate Auditors, such as audit policy and methods of investigation of our affairs.

 

Kyocera Corporation has no remuneration committee. Matters of remuneration are decided by top management as a group. None of our Directors have contracts with us providing for benefits upon termination. It is customary to provide lump-sum severance benefits to Directors and Corporate Auditors upon retirement and we provide such benefits in accordance with our internal regulations.

 

There is no arrangement or understanding between any Director or Corporate Auditor and any other person pursuant to which he was elected as a Director or a Corporate Auditor.

 

There is no family relationship between any Director or Corporate Auditor and any other Director or Corporate Auditor.

 

The rights of ADR holders, including their rights relating to corporate governance practice, are provided in the Amended and Restated Deposit Agreement and an amendment thereto which are included in an exhibit to this Form 20-F. See also Item 10.B “Memorandum and Articles of Association” of this Form 20-F.

 

D. Employees

 

At March 31, 2005, Kyocera had 58,559 employees, of whom 2,713 work in the Fine Ceramic Parts Group, 7,539 work in the Semiconductor Parts Group, 4,306 work in the Applied Ceramic Products Group, 21,091 work in the Electronic Device Group, 5,587 work in the Telecommunications Equipment Group, 10,321 work in the Information Equipment Group, 2,659 work in the Optical Equipment Group, 3,237 work for Others and 1,106 work in Corporate. Kyocera’s number of employees at March 31, 2005 increased by 689 compared with the number of employees of 57,870 at March 31, 2004.

 

Kyocera Corporation had 12,682 employees, and their average age and average service years were 37.9 and 15.1, respectively.

 

Most regular employees of Kyocera Corporation, other than management, are members of the Kyocera Union. Over 90% of Kyocera Corporation’s regular employees are members of this union. The Kyocera Union is only open to Kyocera Corporation employees, not to our Japanese or overseas subsidiaries. The employees at three of our subsidiaries in Japan are unionized. Employees at our Japanese subsidiaries are not otherwise unionized. In the United States, our employees are generally unionized, while in other countries subsidiaries are unionized on a case-by-case basis. Employees of our overseas subsidiaries belong to labor unions organized by industry, as opposed to a company specific union like the Kyocera Union. There is no material item to be specifically addressed regarding relationships between labor and management.

 

E. Share Ownership

 

As of March 31, 2005, Kyocera’s Directors, Corporate Auditors and Executive Officers owned 8,572,234 shares of Kyocera Corporation in total (8,552,561 shares of common stock of Kyocera Corporation and 19,673 ADSs of Kyocera Corporation), or 4.6% of the outstanding shares of Kyocera Corporation. The numbers of shares owned by each Directors, Corporate Auditors and Executive Officers are shown in the following table.

 

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Name


 

Title


    

Number of Shares


Kazuo Inamori

  Chairman Emeritus and Director      6,806,165

Kensuke Itoh

  Chairman of the Board and Representative Director      557,072

Yasuo Nishiguchi

  President and Representative Director      4,095

Masahiro Umemura

  Executive Vice President and Representative Director      5,000

Michihisa Yamamoto

  Executive Vice President and Representative Director      9,232

Yuzo Yamamura

  Director      82,000

Naoyuki Morita

  Director      5,600

Koji Seki

  Director      4,318

Noboru Nakamura

  Director      3,100

Isao Kishimoto

  Director      4,100

Hisao Hisaki

  Director      3,171

Rodney N. Lanthorne

  Director      3,478 (ADR)

John S. Gilbertson

  Director      16,195 (ADR)

Atsushi Mori

  Corporate Auditor      10,000

Yasuo Akashi

  Corporate Auditor      6,323

Osamu Nishieda

  Corporate Auditor      1,000,037

Shinji Kurihara

  Corporate Auditor      500

Isao Yukawa

  Managing Executive Officer      1,200

Hisashi Sakumi

  Managing Executive Officer      9,000

Tsutomu Yamori

  Managing Executive Officer      2,000

Eiichi Toriyama

  Managing Executive Officer      1,000

Makoto Kawamura

  Managing Executive Officer      1,000

Tatsumi Maeda

  Managing Executive Officer      1,100

 

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Name


 

Title


    

Number of Shares


Akiyoshi Okamoto

  Senior Executive Officer      4,864

Takashi Itoh

  Senior Executive Officer      9,000

Yoshihiko Nishikawa

  Senior Executive Officer      2,102

Tetsuo Kuba

  Executive Officer      1,000

Osamu Nomoto

  Executive Officer      1,315

Gen Takayasu

  Executive Officer      500

Nobuhiro Ochiai

  Executive Officer      1,000

Yasuyuki Yamamoto

  Executive Officer      —  

Junichi Jinno

  Executive Officer      —  

Keijiro Minami

  Executive Officer      300

Goro Yamaguchi

  Executive Officer      3,600

Junzo Katsuki

  Executive Officer      800

Yukihiro Takarabe

  Executive Officer      300

Takashi Naruko

  Executive Officer      600

Masakazu Mitsuda

  Executive Officer      900

Yoshihito Ota

  Executive Officer      900

Yasushi Matsumura

  Executive Officer      100

Toshimi Gejima

  Executive Officer      1,400

Michiaki Furuhashi

  Executive Officer      7,867

 

Stock Option Plans

 

On June 25, 2003, the stockholders approved Kyocera Corporation’s Board of Directors resolution for approval of the issuance of stock acquisition rights (Plan 2003) to directors, corporate auditors, corporate executive officers and certain key employees of Kyocera. This approval of stock acquisition rights for Plan 2003 is intended to enable the grant of stock options and the kind and the maximum number of shares to be issued is 1,100,000 shares of common stock of Kyocera Corporation. The stock acquisition rights for Plan 2003 were issued as of September 1, 2003 to 1,390 persons to acquire amounts ranging from 600 to 8,000 shares of common stock each, or to acquire 1,070,100 shares of common stock in the aggregate. The exercise price and the exercisable period of Plan 2003 have been set at ¥7,900 per share, and from October 1, 2003 to September 30, 2008, respectively. Kyocera Corporation will cover the stock acquisition rights for Plan 2003 by utilizing its holdings of common stock of Kyocera Corporation (treasury stock).

 

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On June 25, 2004, the stockholders approved Kyocera Corporation’s Board of Directors resolution for approval of the issuance of stock acquisition rights (Plan 2004) to directors, corporate auditors, corporate executive officers and certain key employees of Kyocera. This approval of stock acquisition rights for Plan 2004 is intended to enable the grant of stock options and the kind and the maximum number of shares to be issued is 1,500,000 shares of common stock of Kyocera Corporation. The stock acquisition rights for Plan 2004 were issued as of September 1, 2004 to 1,644 persons to acquire amounts ranging from 600 to 8,000 shares of common stock each, or to acquire 1,243,300 shares of common stock in the aggregate. The exercise price and the exercisable period of Plan 2004 have been set at ¥8,725 per share, and from October 1, 2004 to September 30, 2008, respectively. Kyocera Corporation will cover the stock acquisition rights for Plan 2004 by utilizing its holdings of common stock of Kyocera Corporation (treasury stock).

 

As of August 31, 2005, the amount of common stock to be issued upon the exercise of all outstanding options issued to Directors, Corporate Auditors and Executive Officers is set forth in further detail in the following table. Note, however, that there can be no assurances that the options described above will be exercised in whole or in part.

 

Option Holder


 

Title


    

Total Options

Outstanding


    

Exercise Price per Share


Kensuke Itoh

  Director and Executive Advisor     

8,000 (Plan 2003)

8,000 (Plan 2004)

    

7,900 YEN (Plan 2003)

8,725 YEN (Plan 2004)

Yasuo Nishiguchi

  Representative Director, Chairman and Chief Executive Officer     

8,000 (Plan 2003)

8,000 (Plan 2004)

    

7,900 YEN (Plan 2003)

8,725 YEN (Plan 2004)

Masahiro Umemura

  Representative Director, Vice Chairman and Chief Financial Officer     

6,000 (Plan 2003)

6,000 (Plan 2004)

    

7,900 YEN (Plan 2003)

8,725 YEN (Plan 2004)

Makoto Kawamura

  Representative Director, President and Chief Operating Officer     

4,000 (Plan 2003)

4,000 (Plan 2004)

    

7,900 YEN (Plan 2003)

8,725 YEN (Plan 2004)

Yuzo Yamamura

  Director     

6,000 (Plan 2003)

6,000 (Plan 2004)

    

7,900 YEN (Plan 2003)

8,725 YEN (Plan 2004)

Naoyuki Morita

  Director     

6,000 (Plan 2003)

6,000 (Plan 2004)

    

7,900 YEN (Plan 2003)

8,725 YEN (Plan 2004)

Koji Seki

  Director     

6,000 (Plan 2003)

6,000 (Plan 2004)

    

7,900 YEN (Plan 2003)

8,725 YEN (Plan 2004)

Michihisa Yamamoto

  Director     

6,000 (Plan 2003)

6,000 (Plan 2004)

    

7,900 YEN (Plan 2003)

8,725 YEN (Plan 2004)

Noboru Nakamura

  Director     

6,000 (Plan 2003)

6,000 (Plan 2004)

    

7,900 YEN (Plan 2003)

8,725 YEN (Plan 2004)

Isao Kishimoto

  Director     

5,500 (Plan 2003)

5,500 (Plan 2004)

    

7,900 YEN (Plan 2003)

8,725 YEN (Plan 2004)

Hisao Hisaki

  Director     

5,000 (Plan 2003)

5,000 (Plan 2004)

    

7,900 YEN (Plan 2003)

8,725 YEN (Plan 2004)

Rodney N. Lanthorne

  Director     

4,500 (Plan 2003)

4,500 (Plan 2004)

    

7,900 YEN (Plan 2003)

8,725 YEN (Plan 2004)

John S. Gilbertson

  Director     

4,500 (Plan 2003)

4,500 (Plan 2004)

    

7,900 YEN (Plan 2003)

8,725 YEN (Plan 2004)

 

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Table of Contents

Option Holder


 

Title


    

Total Options

Outstanding


    

Exercise Price per Share


Yasuo Akashi

  Corporate Auditor     

3,000 (Plan 2003)

3,000 (Plan 2004)

    

7,900 YEN (Plan 2003)

8,725 YEN (Plan 2004)

Yoshihiko Nishikawa

  Corporate Auditor     

3,000 (Plan 2003)

3,000 (Plan 2004)

    

7,900 YEN (Plan 2003)

8,725 YEN (Plan 2004)

Osamu Nishieda

  Corporate Auditor     

—  

—  

    

7,900 YEN (Plan 2003)

8,725 YEN (Plan 2004)

Shinji Kurihara

  Corporate Auditor     

—  

—  

    

7,900 YEN (Plan 2003)

8,725 YEN (Plan 2004)

Shigekazu Tamura

  Corporate Auditor     

—  

—  

    

7,900 YEN (Plan 2003)

8,725 YEN (Plan 2004)

Isao Yukawa

  Senior Managing Executive Officer     

4,000 (Plan 2003)

4,000 (Plan 2004)

    

7,900 YEN (Plan 2003)

8,725 YEN (Plan 2004)

Tatsumi Maeda

  Managing Executive Officer     

4,000 (Plan 2003)

4,000 (Plan 2004)

    

7,900 YEN (Plan 2003)

8,725 YEN (Plan 2004)

Hisashi Sakumi

  Managing Executive Officer     

4,000 (Plan 2003)

4,000 (Plan 2004)

    

7,900 YEN (Plan 2003)

8,725 YEN (Plan 2004)

Tsutomu Yamori

  Managing Executive Officer     

4,000 (Plan 2003)

4,000 (Plan 2004)

    

7,900 YEN (Plan 2003)

8,725 YEN (Plan 2004)

Takashi Itoh

  Managing Executive Officer     

3,000 (Plan 2003)

3,000 (Plan 2004)

    

7,900 YEN (Plan 2003)

8,725 YEN (Plan 2004)

Tetsuo Kuba

  Managing Executive Officer     

2,500 (Plan 2003)

2,500 (Plan 2004)

    

7,900 YEN (Plan 2003)

8,725 YEN (Plan 2004)

Osamu Nomoto

  Managing Executive Officer     

2,500 (Plan 2003)

2,500 (Plan 2004)

    

7,900 YEN (Plan 2003)

8,725 YEN (Plan 2004)

Eiichi Toriyama

  Managing Executive Officer     

4,000 (Plan 2003)

4,000 (Plan 2004)

    

7,900 YEN (Plan 2003)

8,725 YEN (Plan 2004)

Akiyoshi Okamoto

  Senior Executive Officer     

3,000 (Plan 2003)

3,000 (Plan 2004)

    

7,900 YEN (Plan 2003)

8,725 YEN (Plan 2004)

Keijiro Minami

  Senior Executive Officer     

2,500 (Plan 2003)

2,500 (Plan 2004)

    

7,900 YEN (Plan 2003)

8,725 YEN (Plan 2004)

Goro Yamaguchi

  Senior Executive Officer     

2,500 (Plan 2003)

2,500 (Plan 2004)

    

7,900 YEN (Plan 2003)

8,725 YEN (Plan 2004)

Yasushi Matsumura

  Senior Executive Officer     

600 (Plan 2003)

2,500 (Plan 2004)

    

7,900 YEN (Plan 2003)

8,725 YEN (Plan 2004)

Tetsuo Okada

  Senior Executive Officer     

2,500 (Plan 2003)

3,000 (Plan 2004)

    

7,900 YEN (Plan 2003)

8,725 YEN (Plan 2004)

Yoshihito Ota

  Executive Officer     

2,500 (Plan 2003)

2,500 (Plan 2004)

    

7,900 YEN (Plan 2003)

8,725 YEN (Plan 2004)

Yasuyuki Yamamoto

  Executive Officer     

2,500 (Plan 2003)

2,500 (Plan 2004)

    

7,900 YEN (Plan 2003)

8,725 YEN (Plan 2004)

Junichi Jinno

  Executive Officer     

2,500 (Plan 2003)

2,500 (Plan 2004)

    

7,900 YEN (Plan 2003)

8,725 YEN (Plan 2004)

Gen Takayasu

  Executive Officer     

2,500 (Plan 2003)

2,500 (Plan 2004)

    

7,900 YEN (Plan 2003)

8,725 YEN (Plan 2004)

Nobuhiro Ochiai

  Executive Officer     

2,500 (Plan 2003)

2,500 (Plan 2004)

    

7,900 YEN (Plan 2003)

8,725 YEN (Plan 2004)

 

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Option Holder


 

Title


    

Total Options

Outstanding


    

Exercise Price per Share


Junzo Katsuki

  Executive Officer     

2,500 (Plan 2003)

2,500 (Plan 2004)

    

7,900 YEN (Plan 2003)

8,725 YEN (Plan 2004)

Yukihiro Takarabe

  Executive Officer     

2,500 (Plan 2003)

2,500 (Plan 2004)

    

7,900 YEN (Plan 2003)

8,725 YEN (Plan 2004)

Takashi Naruko

  Executive Officer     

2,500 (Plan 2003)

2,500 (Plan 2004)

    

7,900 YEN (Plan 2003)

8,725 YEN (Plan 2004)

Masakazu Mitsuda

  Executive Officer     

2,500 (Plan 2003)

2,500 (Plan 2004)

    

7,900 YEN (Plan 2003)

8,725 YEN (Plan 2004)

Toshimi Gejima

  Executive Officer     

600 (Plan 2003)

2,500 (Plan 2004)

    

7,900 YEN (Plan 2003)

8,725 YEN (Plan 2004)

Michiaki Furuhashi

  Executive Officer     

600 (Plan 2003)

2,500 (Plan 2004)

    

7,900 YEN (Plan 2003)

8,725 YEN (Plan 2004)

Mitsuru Imanaka

  Executive Officer     

1,200 (Plan 2003)

1,200 (Plan 2004)

    

7,900 YEN (Plan 2003)

8,725 YEN (Plan 2004)

Shoichi Aoki

  Executive Officer     

600 (Plan 2003)

600 (Plan 2004)

    

7,900 YEN (Plan 2003)

8,725 YEN (Plan 2004)

Hiroshi Togi

  Executive Officer     

600 (Plan 2003)

600 (Plan 2004)

    

7,900 YEN (Plan 2003)

8,725 YEN (Plan 2004)

Yoshihiro Kano

  Executive Officer     

600 (Plan 2003)

600 (Plan 2004)

    

7,900 YEN (Plan 2003)

8,725 YEN (Plan 2004)

Yoichi Yamashita

  Executive Officer     

600 (Plan 2003)

600 (Plan 2004)

    

7,900 YEN (Plan 2003)

8,725 YEN (Plan 2004)

Robert Whisler

  Executive Officer     

2,500 (Plan 2003)

2,500 (Plan 2004)

    

7,900 YEN (Plan 2003)

8,725 YEN (Plan 2004)

John Rigby

  Executive Officer     

2,500 (Plan 2003)

2,500 (Plan 2004)

    

7,900 YEN (Plan 2003)

8,725 YEN (Plan 2004)

          
      

Total

        

160,900 (Plan 2003)

167,100 (Plan 2004)

      
          
      

 

On June 28, 2005, the stockholders approved Kyocera Corporation’s Board of Directors resolution for approval of the issuance of stock acquisition rights (Plan 2005) to directors, corporate auditors, corporate executive officers and certain key employees of Kyocera. This approval of stock acquisition rights for Plan 2005 is intended to enable the grant of stock options and the kind and the maximum number of shares to be issued is 1,500,000 shares of common stock of Kyocera Corporation. The stock acquisition rights for Plan 2005 were issued as of September 1, 2005 to 1,715 persons to acquire amounts ranging from 600 to 8,000 shares of common stock each, or to acquire 1,301,900 shares of common stock in the aggregate. The exercise price and the exercisable period of Plan 2005 have been set at ¥8,619 per share, and from October 1, 2005 to September 30, 2008, respectively. Kyocera Corporation will cover the stock acquisition rights for Plan 2005 by utilizing its holdings of common stock of Kyocera Corporation (treasury stock).

 

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The following table shows the options of Plan 2005 issued to Directors, Corporate Auditors and Executive Officers as of September 1, 2005.

 

Option Holder        


  

Title


    

Total Options

Issued


Kensuke Itoh

   Director and Executive Advisor      8,000

Yasuo Nishiguchi

   Representative Director, Chairman and Chief Executive Officer      8,000

Masahiro Umemura

  

Representative Director, Vice Chairman and Chief

Financial Officer

     8,000

Makoto Kawamura

   Representative Director, President and Chief Operating Officer      8,000

Yuzo Yamamura

   Director      6,000

Naoyuki Morita

   Director      6,000

Koji Seki

   Director      6,000

Michihisa Yamamoto

   Director      6,000

Noboru Nakamura

   Director      6,000

Isao Kishimoto

   Director      6,000

Hisao Hisaki

   Director      5,000

Rodney N. Lanthorne

   Director      4,500

John S. Gilbertson

   Director      4,500

Yasuo Akashi

   Corporate Auditor      3,000

Yoshihiko Nishikawa

   Corporate Auditor      3,000

Osamu Nishieda

   Corporate Auditor      —  

Shinji Kurihara

   Corporate Auditor      —  

Shigekazu Tamura

   Corporate Auditor      —  

Isao Yukawa

   Senior Managing Executive Officer      4,300

Tatsumi Maeda

   Managing Executive Officer      4,000

Hisashi Sakumi

   Managing Executive Officer      4,000

Tsutomu Yamori

   Managing Executive Officer      4,000

 

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Option Holder


  

Title


    

Total Options

Issued


Takashi Itoh

   Managing Executive Officer      4,000

Tetsuo Kuba

   Managing Executive Officer      4,000

Osamu Nomoto

   Managing Executive Officer      4,000

Eiichi Toriyama

   Managing Executive Officer      4,000

Akiyoshi Okamoto

   Senior Executive Officer      3,000

Keijiro Minami

   Senior Executive Officer      3,000

Goro Yamaguchi

   Senior Executive Officer      3,000

Yasushi Matsumura

   Senior Executive Officer      3,000

Tetsuo Okada

   Senior Executive Officer      4,000

Yoshihito Ota

   Executive Officer      2,500

Yasuyuki Yamamoto

   Executive Officer      2,500

Junichi Jinno

   Executive Officer      2,500

Gen Takayasu

   Executive Officer      2,500

Nobuhiro Ochiai

   Executive Officer      2,500

Junzo Katsuki

   Executive Officer      2,500

Yukihiro Takarabe

   Executive Officer      2,500

Takashi Naruko

   Executive Officer      2,500

Masakazu Mitsuda

   Executive Officer      2,500

Toshimi Gejima

   Executive Officer      2,500

Michiaki Furuhashi

   Executive Officer      2,500

Mitsuru Imanaka

   Executive Officer      2,500

Shoichi Aoki

   Executive Officer      2,500

Hiroshi Togi

   Executive Officer      2,500

 

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Option Holder


  

Title


  

Total Options

Issued


Yoshihiro Kano

   Executive Officer    2,500

Yoichi Yamashita

   Executive Officer    2,500

Robert Whisler

   Executive Officer    3,000

John Rigby

   Executive Officer    3,000
         

Total

        182,300
         

 

Item 7. Major Shareholders and Related Party Transactions

 

A. Major Shareholders

 

As far as is known to us, Kyocera is not, directly or indirectly, owned or controlled by any other corporation or by the Japanese or any foreign government, and there is no arrangement which may at a subsequent date result in a change in control of Kyocera.

 

Under the Securities and Exchange Law of Japan, any person that becomes a holder (together with its related persons) of 5% of the total issued voting shares of a company listed on any Japanese stock exchange (including ADSs representing such shares) must file a report with the Director of the relevant Local Finance Bureau and send a copy of such report to the company. A similar report must also be filed if the percentage holding of a holder of more than 5% of the total issued voting shares of a company increases or decreases by 1% or more.

 

On April 13, 2005, in accordance with the Securities and Exchange Law of Japan, Morgan Stanley Japan Limited informed Kyocera Corporation that Morgan Stanley Japan Limited and its related partners became a holder of over 5% of the total issued voting shares of Kyocera Corporation, and they held shares of Kyocera Corporation as show in the following table as of March 31, 2005. However, they were not included in the above major shareholders as a single major holder because not all partners of Morgan Stanley Japan Limited were shareholders of record as of March 31, 2005.

 

According to Citibank N.A., depositary for Kyocera’s ADSs, as of March 31, 2005, 4,240,142 shares of Kyocera’s common stock were held in the form of ADSs and there were 868 ADS holders of record in the United States. According to Kyocera’s register of shareholders, as of March 31, 2005, there were 85,356 holders of Kyocera’s common stock of record worldwide. As of March 31, 2005, there were 117 record holders of Kyocera’s common stock with addresses in the United States, holding 21,081,863 shares of the outstanding common stock on that date. Because some of these shares were held by brokers or other nominees, the number of record holders with addresses in the United States might not fully show the number of beneficial owners in the United States.

 

B. Related Party Transactions

 

Significant customer

 

In fiscal 2005, Kyocera’s sales to KDDI amounted to ¥89,937 million ($841 million), or 7.6% of consolidated net sales. As KDDI sold its PHS business in October 2004, Kyocera’s sales of PHS-related products has not been included in sales to KDDI since then. In addition, Kyocera’s sales of mobile phone handsets to KDDI decreased. KDDI provides telecommunication services, and Kyocera sells mainly telecommunications equipment to KDDI. Kyocera Corporation made an equity investment in KDDI when it was founded and currently, a director of Kyocera Corporation is a member of the board of directors of KDDI. At March 31, 2005, Kyocera Corporation’s equity interest in KDDI was 13.5%. Kyocera serves KDDI as an independent vendor in terms of price determination, remittance conditions and product distribution. All of the agreements and ongoing contractual commitments between Kyocera and KDDI have been made on an arm’s-length basis. Kyocera expects that KDDI will remain a significant customer in the future.

 

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C. Interests of Experts and Counsel

 

Not Applicable.

 

Item 8. Financial Information

 

A. Consolidated Statements and Other Financial Information

 

Financial Statements

 

The information required by this item is set forth beginning on page F-2 of this Form 20-F.

 

Dividend Policy

 

Since the listing of its shares, Kyocera Corporation has endeavored to increase dividends per share in line with improvements in performance. Kyocera Corporation has also boosted dividends by actively undertaking free share distributions and stock splits. Traditionally, Kyocera Corporation has set dividend amounts with the goal of maintaining stable dividends to shareholders. In the interest of shareholders, however, Kyocera has decided, commencing with the year-end dividend relating to fiscal 2005, to change this policy to establish a greater linkage between dividend amounts and the Group’s performance. In particular, Kyocera will determine dividend amounts based on an overall assessment that will take into consideration capital expenditures necessary for the further development of Kyocera Group from a medium to long-term perspective, while also aiming for a payout ratio of approximately 20 to 25% on a consolidated basis.

 

Kyocera’s goal of constantly enhancing profitability will ensure greater returns for stockholders to meet their expectations. In order to be a “creative company that continues to grow in the 21st century”, Kyocera will strive at the same time to be a market leader in the three strategic areas of “telecommunications and information processing,” “environmental protection” and “quality of life.” To realize this goal, Kyocera will aggressively strive to cultivate new businesses and markets and to develop new technologies, acquiring external management resources when necessary. Kyocera will maintain a healthy and stable financial position and therefore, internal reserves shall be utilized for this purpose.

 

Kyocera Corporation decided that the year-end dividend for the year ended March 31, 2005 should be 50 yen per share in the ordinary general meeting of shareholders on June 28, 2005. When aggregated with the interim dividend 30 yen per share, the total annual dividend amount was 80 yen per share.

 

We held board of directors meeting for the interim dividend on October 28, 2004.

 

B. Significant Changes

 

Except as disclosed in this Form 20-F, there have been no significant changes since March 31, 2005.

 

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Item 9. The Offer and Listing

 

A. Offering and Listing Details

 

Price Range of Shares

 

The principal non-United States market on which the shares of Common Stock of Kyocera Corporation are traded is the Tokyo Stock Exchange, the largest stock exchange in Japan. The American Depositary Shares of Kyocera Corporation, each representing one share of Common Stock of Kyocera Corporation, are traded on the New York Stock Exchange. Citibank, N.A. acts as the Depositary in respect of the American Depositary Shares. Common Stock of Kyocera Corporation is also listed on the Osaka Securities Exchange in Japan.

 

     Tokyo Stock Exchange

   New York Stock Exchange

     Price per Share of
Common Stock (yen)


   Price per American
Depositary Share
(U.S. dollars)*


Years ended March 31        


   High

   Low

   High

   Low

2001

   ¥ 19,500    ¥ 9,000    $ 186.60    $ 73.82

2002

     12,900      7,000      105.72      53.77

2003

     10,070      5,630      80.27      47.96

2004

     8,970      5,570      84.66      47.25

2005

     9,630      7,080      90.90      67.81

Most Recent 6 months        


   High

   Low

   High

   Low

March, 2005

   ¥ 8,080    ¥ 7,540    $ 77.55    $ 70.48

April, 2005

     7,820      7,090      74.75      67.20

May, 2005

     8,420      7,540      77.20      72.68

June, 2005

     8,500      8,140      78.45      74.86

July, 2005

     8,670      7,820      78.02      70.45

August, 2005

     8,040      7,640      72.65      69.01

* The prices of American Depositary Shares are based upon reports by the New York Stock Exchange, with all fractional figures rounded up to the nearest two decimal points.

 

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The following table shows the information about high and low sales prices for each quarterly period in fiscal 2004 and 2005 in respect of the shares of Common Stock of Kyocera Corporation on the Tokyo Stock Exchange, and the American Depositary Shares on the New York Stock Exchange.

 

For Voting Securities by Fiscal Quarter

 

            2004

            1st

     2nd

     3rd

     4th

Common Stock:

                                        

Market price per share (A)

   — High      ¥ 7,320      ¥ 8,150      ¥ 7,280      ¥ 8,970
     — Low        5,570        6,400        6,180        7,140

Cash dividends paid per share

            30.00        —          30.00        —  

American Depositary Share:

                                        

Market price per share (B)

   — High      $ 61.34      $ 69.30      $ 67.56      $ 84.66
     — Low        47.25        54.50        57.40        66.25

Cash dividends paid per share (C)

            0.25        —          0.27        —  
            2005

            1st

     2nd

     3rd

     4th

Common Stock:

                                        

Market price per share (A)

   — High      ¥ 9,630      ¥ 9,380      ¥ 8,320      ¥ 8,080
     — Low        8,110        7,370        7,080        7,120

Cash dividends paid per share

            30.00        —          30.00        —  

American Depositary Share:

                                        

Market price per share (B)

   — High      $ 90.90      $ 86.20      $ 77.23      $ 77.58
     — Low        71.10        67.81        68.86        68.67

Cash dividends paid per share (C)

            0.28        —          0.29        —  

(A) Price on the Tokyo Stock Exchange
(B) Price on the New York Stock Exchange
(C) Translated into U.S. dollars based on the exchange rates at each respective payment date

 

B. Plan of Distribution

 

Not Applicable.

 

C. Markets

 

See Item 9.A. of this Form 20-F for information on the markets on which our common stock is listed or quoted.

 

D. Selling Shareholders

 

Not Applicable.

 

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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

 

General

 

Set out below is certain information regarding the organization and shares of Kyocera Corporation, including brief summaries of certain provisions of the Articles of Incorporation, the Share Handling Regulations and the Regulations of the Board of Directors of Kyocera Corporation and of the Commercial Code relating to joint stock corporations (kabushiki kaisha) and certain related legislation, all as currently in effect, except where references are made to the New Company Law (as defined below).

 

A law to modernize and make overall amendments to the Commercial Code was promulgated on July 26, 2005. As a result of such amendments, the provisions governing joint stock corporations, which are currently included in the Commercial Code, will be embodied in a new company law (the “New Company Law”). The New Company Law will come into effect within one and a half years after its promulgation and is currently expected to take effect in the spring of 2006. Descriptions of the New Company Law are made below to the extent necessary or appropriate in the context.

 

Organization

 

Kyocera Corporation is a joint stock corporation (kabushiki kaisha) incorporated in Japan under the Commercial Code. It is registered in the Commercial Register maintained by the Kyoto Local Registry Office of the Ministry of Justice.

 

Objects and Purposes

 

The objects of Kyocera Corporation are set forth in Article 2 of its Articles of Incorporation, as follows:

 

(1) Manufacture and sale of and research on fine ceramics and various kinds of products utilizing fine ceramics;

 

(2) Manufacture and sale of and research on single crystal materials and various kinds of products utilizing single crystal materials;

 

(3) Manufacture and sale of and research on composite materials;

 

(4) Manufacture and sale of and research on specialty plastics;

 

(5) Manufacture and sale of and research on measurement instruments for electronics;

 

(6) Manufacture and sale of and research on electronic and electric instruments and parts thereof;

 

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(7) Manufacture and sale of and research on component parts of automobiles;

 

(8) Manufacture and sale of and research on precious metals, precious stones and semiprecious stones and various kinds of products utilizing precious metals, precious stones and semiprecious stones;

 

(9) Manufacture and sale of and research on accessories and interior and exterior decorations and ornaments;

 

(10) Wholesales and retail sale of health foods;

 

(11) Manufacture and sale of and research on material and equipment for medical use;

 

(12) Manufacture and sale of and research on equipment utilizing solar energy;

 

(13) Manufacture and sale of and research on optical machinery and instruments and precision machinery and instruments and parts hereof;

 

(14) Manufacture and sale of and research on machinery and equipment for business use and machinery and equipment for industrial use and parts thereof;

 

(15) Manufacture and sale of and research on photosensitive materials for photographic use;

 

(16) Design, control and contract of construction relating to public works, building, electric equipment and piping construction;

 

(17) Sale, purchase, lease, maintenance and brokerage of real estate;

 

(18) Lease, maintenance and management of facilities relating to sports, recreation, medical care, hotels and restaurants, and the travel agency business;

 

(19) Road freight handling and warehousing;

 

(20) Business relating to non-life insurance agency and life insurance canvassing, and general leasing, factoring and finance business;

 

(21) Sale and purchase of various kinds of plants and technology related thereto;

 

(22) Design and sale of software relating to computers;

 

(23) Disposition through sale and the like and acquisition through purchase and the like of patents and other industrial property rights and know-how appertaining to the preceding items and acting as intermediary in such transactions;

 

(24) Businesses relating to import and export of any of the foregoing items; and

 

(25) All commercial activities relating or incidental to any of the foregoing.

 

Directors

 

Under the Commercial Code, the Board of Directors has the ultimate responsibility for the management of Kyocera Corporation and each Representative Director, who is elected from among the members of the Board of Directors, has the statutory authority to represent Kyocera Corporation in all respects. Under both the Commercial Code and the Regulations of the Board of Directors of Kyocera Corporation, the Directors must refrain from engaging in any business competing with Kyocera Corporation unless approved by the Board of Directors and any Director who has a material interest in the subject matter of a resolution to be taken by the Board of Directors cannot vote in such resolution. The Commercial Code and the Articles of Incorporation of Kyocera Corporation provide that remuneration of Directors and Corporate Auditors shall be determined at a general meeting of shareholders.

 

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Except as stated below, neither the Commercial Code nor Kyocera Corporation’s Articles of Incorporation make any special provision as to a Director’s or Corporate Auditor’s power to vote in connection with their compensation; or the borrowing powers exercisable by a Representative Director (or a Director who is given power by a Representative Director to exercise such powers), their retirement age or requirement to hold any shares of capital stock of Kyocera Corporation.

 

The Commercial Code specifically requires a resolution of the Board of Directors for a joint stock corporation, among other things, to acquire or dispose of material assets; to borrow substantial amounts of money; to employ or discharge from employment important employees, such as executive officers; to establish, change or abolish a material corporate organization such as a branch office; or to issue bonds. The Regulations of the Board of Directors of Kyocera Corporation require a resolution of the Board of Directors for Kyocera Corporation, among other things, to issue of bonds or bonds with stock acquisition rights; to borrow, lend or contribute a significant amount of money; to give a guarantee of a significant amount of debt; or to waive the right to receive a significant amount of money. The Regulations of the Board of Directors of Kyocera Corporation defines a “significant amount” as five billion yen or more with respect to borrowing and one hundred million yen or more with respect to other matters. The Regulations of the Board of Directors of Kyocera Corporation also require a resolution of the Board of Directors to approve any transaction between a Director and Kyocera Corporation; allocate remuneration and bonuses of Directors as previously determined or approved by the general meeting of shareholders ; or determine the amount and manner of payment of retirement allowances or condolence money payable to Directors, determination of which has been previously entrusted to the Board of Directors by the general meeting of shareholders. Under the New Company Law, a resolution of the Board of Directors will also be specifically required for the establishment of a control system to ensure adequacy of Kyocera Corporation’s affairs, such as a control system to ensure the exercise of Directors’ duty to comply with laws and regulations and the Articles of Incorporation of Kyocera Corporation.

 

Capital Stock

 

Authorized capital

 

Article 5 of the Articles of Incorporation of Kyocera Corporation provides that the total number of shares authorized for issuance by Kyocera Corporation is 600,000,000 shares. If shares of common stock are retired, the number of shares so retired shall be deducted from the total number of shares authorized to be issued by Kyocera Corporation.

 

Dividends

 

General

 

The Articles of Incorporation of Kyocera Corporation provide that the fiscal year of Kyocera Corporation shall be a period commencing on April 1 in each year and ending on March 31 of the following year, and the accounts of each fiscal year shall be settled on March 31 of each year. Correspondingly, the Articles of Incorporation provide that dividends shall be paid to shareholders or pledgees who are registered on the shareholders register of Kyocera Corporation as of the end of March 31 in each year. After the close of the fiscal period, the Board of Directors prepares, among other things, a proposed allocation of profits for dividends and other purposes; this proposal is submitted for approval to the ordinary general meeting of shareholders, which is normally held in June each year. In addition to year-end dividends, Kyocera Corporation may, by resolution of the Board of Directors, distribute cash as interim dividends, pursuant to Article 293-5 of the Commercial Code (an “interim dividend”) to shareholders or pledgees of record at the end of each September 30, without shareholders’ approval, but subject to the limitation described below.

 

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In Japan the “ex-dividend” date and the record date for dividends precede the date of determination of the amount of the dividend to be paid. The market price of shares generally goes ex-dividend on the third business day prior to the record date.

 

Under its Articles of Incorporation, Kyocera Corporation is not obligated to pay any dividends that are not collected within three years from the date when the payment thereof became due.

 

Under the New Company Law, distribution of dividends will take the form of distribution of Surplus (as defined in “– Restriction on Dividends”). Kyocera Corporation will be permitted to make distributions of Surplus to its shareholders any number of times per fiscal year pursuant to resolutions of its general meeting of shareholders, subject to certain limitations described in “– Restriction on Dividends”. Distribution of Surplus will be required in principle to be authorized by a resolution of a general meeting of shareholders. Distributions of Surplus will, however, be permitted pursuant to a resolution of the Board of Directors if (a) the Articles of Incorporation of Kyocera Corporation so provide, (b) the normal term of office of its Directors is one year and (c) its non-consolidated annual financial statements and certain documents for the latest fiscal year present fairly its assets and profit and loss, as required by an ordinance of the Ministry of Justice. In an exception to the above rule, even if the requirements described in (a) through (c) are not met, Kyocera Corporation will be permitted to make distributions of Surplus in cash to its shareholders by resolutions of the Board of Directors once per fiscal year if its Articles of Incorporation so provide. This exception is designed to enable companies to make interim dividend payments substantially in the same manner as they are permitted to do so under the Commercial Code.

 

Distributions of Surplus may be made in cash or in kind in proportion to the number of shares held by each shareholder. A resolution of a general meeting of shareholders or the Board of Directors authorizing a distribution of Surplus must specify the kind and aggregate book value of the assets to be distributed, the manner of allocation of such assets to shareholders, and the effective date of the distribution. If a distribution of Surplus is to be made in kind, Kyocera Corporation may, pursuant to a resolution of a general meeting of shareholders or (as the case may be) the Board of Directors, grant a right to its shareholders to require Kyocera Corporation to make such distribution in cash instead of in kind. If no such right is granted to shareholders, the relevant distribution of Surplus must be approved by a special resolution of a general meeting of shareholders (see “Voting Rights” with respect to a “special resolution”).

 

Restriction on Dividends

 

The Commercial Code provides that a company may not make any distribution of profit by way of year-end dividends or interim dividends for any fiscal period unless it sets aside in its legal reserve an amount equal to at least (A) one-tenth of the amount paid out by it as appropriation of retained earnings (including any payments of year-end dividend and bonuses to Directors and Corporate Auditors) for such fiscal period or (B) one-tenth of any interim dividend, as the case may be, until the sum of its legal reserve and its additional paid-in capital is at least one-quarter of its stated capital.

 

Under the Commercial Code, Kyocera Corporation is permitted to distribute profits by way of year-end dividends out of the excess of its net assets, as appearing on its non-consolidated balance sheet as of the end of the last fiscal year, over the aggregate of, as appearing on the same balance sheet where relevant:

 

(i) its stated capital;

 

(ii) its additional paid-in capital;

 

(iii) its accumulated legal reserve;

 

(iv) the legal reserve to be set aside in respect of the fiscal period concerned and any other proposed payment by way of appropriation of retained earnings; and

 

(v) such other amounts as are set forth in an ordinance of the Ministry of Justice of Japan.

 

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Kyocera Corporation may also pay interim dividends out of the excess of its net assets as appearing on its non-consolidated balance sheet as of the last day of the immediately preceding fiscal year, over the aggregate of the amounts stated in (i) through (iv) above and (a) the legal reserve to be set aside in respect of the interim dividends concerned, (b) any amount subsequently paid by way of appropriation of retained earnings, (c) any amount subsequently transferred from retained earnings to stated capital, (d) if Kyocera Corporation has been authorized by a resolution of an ordinary general meeting of shareholders or the Board of Directors to purchase shares, the total amount of the purchase price of such shares to be paid by Kyocera Corporation and (e) such other amounts as are set out in an ordinance of the Ministry of Justice of Japan. Kyocera Corporation may not pay any interim dividends where there is a risk that at the end of the fiscal year net assets might be less than the aggregate of the amounts referred to in (i) through (v) above.

 

Under the New Company Law, when Kyocera Corporation makes a distribution of Surplus (except for any such distribution used for bonuses to Directors or Corporate Auditors), it must set aside in its additional paid-in capital or legal reserve an amount equal to one-tenth of the amount of Surplus so distributed, as required by an ordinance of the Ministry of Justice. The amount of Surplus at any given time must be calculated in accordance with the following formula:

 

A + B + C + D - [E + F + G]

 

In the above formula:

 

“A”    =    the total amount of (a) assets and (b) the book value of treasury stock less the total amount of (v) liabilities, (w) stated capital, (x) additional paid-in capital, (y) legal reserve and (z) certain other amounts set forth in an ordinance of the Ministry of Justice, each such amount being that appearing on Kyocera Corporation’s non-consolidated balance sheet as of the end of the last fiscal year
“B”    =    (if Kyocera Corporation has disposed of its treasury stock after the end of the last fiscal year) the amount of the consideration for such treasury stock received by Kyocera Corporation less the book value thereof
“C”    =    (if Kyocera Corporation has reduced its stated capital after the end of the last fiscal year) the amount of such reduction less the portion thereof that has been transferred to additional paid-in capital or legal reserve (if any)
“D”