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Kyocera 20-F 2007
Form 20-F Amendment No.1
Table of Contents

 


SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 


FORM 20-F/A

(Amendment No. 1)

 


 

¨ 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, 2007

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, 2007, 188,649,089 shares of common stock were outstanding, comprised of 184,820,723 Shares and 3,828,366 American Depositary Shares (equivalent to 3,828,366 Shares).

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  x    No  ¨

If this report is an annual transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.    Yes  ¨    No  x

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 whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check One):

Large accelerated filer  x    Accelerated filer  ¨    Non-accelerated filer   ¨

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
Explanatory Note    1
Item 15.   Controls and Procedures    2
Item 18.   Financial Statements    3
Item 19.   Exhibits    4


Table of Contents

Explanatory Note

On July 5, 2007, Kyocera filed with the Securities and Exchange Commission its annual report on Form 20-F for the year ended March 31, 2007 (the “Original Form 20-F”), which included its consolidated balance sheets as of March 31, 2006 and 2007 and its consolidated statements of income, shareholders’ equity and cash flows for the years ended March 31, 2005, 2006 and 2007 together with the report of MISUZU PricewaterhouseCoopers. On June 27, 2007, Kyocera appointed Kyoto Audit Corporation as its accounting auditor under the Corporation Act of Japan and as its independent registered accounting firm for purposes of its consolidated financial statements filed with the Securities and Exchange Commission. Kyocera is filing this Form 20-F/A (Amendment No. 1) to re-file its consolidated financial statements for the year ended March 31, 2007 together with the report of Kyoto Audit Corporation thereon. The consolidated financial statements being re-filed with this Form 20-F/A (Amendment No. 1) are in all other respects identical to those previously filed as part of the Original Form 20-F and do not reflect any subsequent information or events other than the re-filing of the consolidated financial statements and audit report of Kyoto Audit Corporation thereon. This Form 20-F/A (Amendment No. 1) also includes a report of Kyoto Audit Corporation with respect to the evaluation by Kyocera’s management of the effectiveness of Kyocera’s internal control over financial reporting as of March 31, 2007.

There are no further changes to the Original Form 20-F. All information in this Form 20-F/A (Amendment No. 1) is as of July 5, 2007 and does not reflect any subsequent information or events other than the re-filing of the consolidated financial statements and audit report of Kyoto Audit Corporation thereon and the inclusion of the report of Kyoto Audit Corporation with respect to the evaluation by Kyocera’s management of the effectiveness of Kyocera’s internal control over financial reporting referred to above.

 

1


Table of Contents

Item 15. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Kyocera’s management, with the participation of its principal executive and principal financial officers, evaluated the effectiveness of Kyocera’s disclosure controls and procedures (as defined in Rules 13a-15(e) under the U.S. Securities Exchange Act of 1934) as of March 31, 2007. Based on that evaluation, Kyocera’s principal executive and principal financial officers concluded that the disclosure controls and procedures were effective as of that date.

Management’s Report on Internal Control Over Financial Reporting

Kyocera’s management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rules 13a-15(f) under the U.S. Securities Exchange Act of 1934). Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Kyocera’s management, with the participation of its principal executive and principal financial officers, evaluated the effectiveness of Kyocera’s internal control over financial reporting using the criteria set forth in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on this evaluation, Kyocera’s management concluded that Kyocera’s internal control over financial reporting was effective as of March 31, 2007. Kyocera’s independent registered public accounting firm, Kyoto Audit Corporation, has issued an audit report on management’s assessment of the company’s internal control over financial reporting, which appears on page F-1 of this Form 20-F/A (Amendment No. 1).

Evaluation of Changes in Internal Control Over Financial Reporting

Kyocera’s management, with the participation of its principal executive and principal financial officers, also carried out an evaluation of changes in our internal control over financial reporting during the year ended March 31, 2007. Based upon that evaluation, there was no change in Kyocera’s internal control over financial reporting that occurred during the year ended March 31, 2007 that materially affected, or is reasonably likely to materially affect, Kyocera’s internal control over financial reporting.

 

2


Table of Contents

Item 18. Financial Statements

The information required by this item is set forth beginning on page F-1 of this Form 20-F/A (Amendment No. 1).

 

   

Description

   Page
(1)   Report of Independent Registered Public Accounting Firm related to the Consolidated Financial Statements listed below    F-1
(2)   Consolidated Balance Sheets at March 31, 2006 and 2007    F-2 & F-3
(3)   Consolidated Statements of Income for the years ended March 31, 2005, 2006 and 2007    F-4
(4)   Consolidated Statements of Stockholders’ Equity for the years ended March 31, 2005, 2006 and 2007    F-5
(5)   Consolidated Statements of Cash Flows for the years ended March 31, 2005, 2006 and 2007    F-6
(6)   Notes to the Consolidated Financial Statements    F-7 to F-35
(7)   SCHEDULE II. Valuation and Qualifying Accounts for the years ended March 31, 2005, 2006 and 2007    F-36

 

3


Table of Contents

Item 19. Exhibits

 

Exhibit
Number
  

Description

1.1    Articles of Incorporation (English translation) (incorporated by reference to the Registrant’s annual report on Form 20-F filed on June 29, 2006)
1.2    Share Handling Regulations of the Registrant (English translation) (incorporated by reference to the Registrant’s annual report on Form 20-F filed on June 29, 2006)
1.3    Regulations of the Board of Directors of the Registrant (English translation) (incorporated by reference to the Registrant’s annual report on Form 20-F filed on June 29, 2006)
1.4    Regulations of the Board of Corporate Auditors of the Registrant (English translation) (incorporated by reference to the Registrant’s annual report on Form 20-F filed on July 5, 2007)
2.1    Specimen common stock certificate of the Registrant (incorporated by reference to the Registrant’s annual report on Form 20-F filed on September 24, 2001)
2.2    Deposit Agreement, dated as of June 29, 1998 among Kyocera Corporation, Citibank N.A. as Depositary and all owners and holders from time to time of American Depositary Receipts, including the form of American Depositary Receipt, as amended by Amendment No.1 thereto, dated as of January 5, 1999 (incorporated by reference to the Registrant’s annual report on Form 20-F filed on September 24, 2001)
8.1    List of Significant Subsidiaries (incorporated by reference to the Registrant’s annual report on Form 20-F filed on July 5, 2007)
11.1    Code of Ethics (incorporated by reference to the Registrant’s annual report on Form 20-F filed on July 5, 2007)
12.1    Certification of the principal executive officer of the Registrant required by Rule 13a-14(a)
12.2    Certification of the principal financial officer of the Registrant required by Rule 13a-14(a)
13.1    Certification of the principal executive officer of the Registrant required by Rule 13a-14(b) and Section 1350 of Chapter 63 of Title 18 of the United States Code
13.2    Certification of the principal financial officer of the Registrant required by Rule 13a-14(b) and Section 1350 of Chapter 63 of Title 18 of the United States Code
15.1    Consent of Kyoto Audit Corporation with respect to its report on the audit of the financial statements included in this Form 20-F/A

Kyocera has not included as exhibits certain instruments with respect to its long-term debt, the amount of debt authorized under each of which does not exceed 10% of its total assets, and it agrees to furnish a copy of any such instrument to the Securities and Exchange Commission upon request.

 

4


Table of Contents

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Stockholders of

Kyocera Corporation

We have completed an integrated audit of Kyocera Corporation’s 2007 consolidated financial statements and of its internal control over financial reporting as of March 31, 2007 and audits of its 2005 and 2006 consolidated financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Our opinions, based on our audits, are presented below.

Consolidated financial statements

In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of Kyocera Corporation and its consolidated subsidiaries (“Kyocera”) at March 31, 2006 and 2007, and the results of their operations and their cash flows for each of the three years in the period ended March 31, 2007 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the accompanying index present fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedule are the responsibility of Kyocera’s management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit of financial statements includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

As discussed in Note 1 to the consolidated financial statements, Kyocera changed the manner in which it accounts for defined benefit pensions effective March 31, 2007.

Internal control over financial reporting

Also, in our opinion, management’s assessment, included in the “Management’s Report on Internal Control over Financial Reporting” appearing under Item 15, that Kyocera maintained effective internal control over financial reporting as of March 31, 2007 based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), is fairly stated, in all material respects, based on those criteria. Furthermore, in our opinion, Kyocera maintained, in all material respects, effective internal control over financial reporting as of March 31, 2007, based on criteria established in Internal Control - Integrated Framework issued by the COSO. Kyocera’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express opinions on management’s assessment and on the effectiveness of Kyocera’s internal control over financial reporting based on our audit. We conducted our audit of internal control over financial reporting in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. An audit of internal control over financial reporting includes obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we consider necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

/s/ Kyoto Audit Corporation
Kyoto Audit Corporation
Kyoto, Japan
June 28, 2007

 

F-1


Table of Contents

Consolidated Balance Sheets

Kyocera Corporation and Consolidated Subsidiaries

March 31, 2006 and 2007

(Yen in millions and U.S. dollars and shares in thousands–Note 2)

 

ASSETS

   2006     2007     2007  

Current assets:

      

Cash and cash equivalents (Note 13)

   ¥ 300,809     ¥ 282,208     $ 2,391,593  

Short-term investments (Notes 4 and 13)

     87,942       213,495       1,809,280  

Trade receivables (Notes 7):

      

Notes

     24,597       25,033       212,144  

Accounts

     210,393       236,380       2,003,220  

Short-term finance receivables (Notes 3, 5 and 13)

     39,505       —         —    
                        
     274,495       261,413       2,215,364  

Less allowances for doubtful accounts and sales returns

     (7,425 )     (5,960 )     (50,508 )
                        
     267,070       255,453       2,164,856  

Inventories (Notes 6)

     190,564       209,188       1,772,780  

Deferred income taxes (Note 16)

     40,411       45,390       384,661  

Other current assets

     33,872       40,757       345,398  
                        

Total current assets

     920,668       1,046,491       8,868,568  
                        

Investments and advances:

      

Investments in and advances to affiliates and unconsolidated subsidiaries (Note 7)

     7,355       10,093       85,534  

Securities and other investments (Notes 4 and 13)

     553,377       690,568       5,852,271  
                        
     560,732       700,661       5,937,805  

Long-term finance receivables (Notes 3, 5 and 13)

     80,970       —         —    

Property, plant and equipment, at cost (Note 9):

      

Land

     58,286       56,806       481,407  

Buildings

     249,506       261,998       2,220,322  

Machinery and equipment

     697,383       729,636       6,183,356  

Construction in progress

     13,473       7,362       62,390  
                        
     1,018,648       1,055,802       8,947,475  

Less accumulated depreciation

     (733,302 )     (774,896 )     (6,566,916 )
                        
     285,346       280,906       2,380,559  

Goodwill (Note 8)

     31,351       32,894       278,763  

Intangible assets (Note 8)

     31,227       24,657       208,958  

Other assets (Notes 10 and 16)

     21,228       44,855       380,127  
                        
   ¥ 1,931,522     ¥ 2,130,464     $ 18,054,780  
                        

The accompanying notes are an integral part of these statements.

 

F-2


Table of Contents

            LIABILITIES, MINORITY INTERESTS AND STOCKHOLDERS’ EQUITY                

   2006     2007     2007  

Current liabilities:

      

Short-term borrowings (Notes 3, 9 and 13)

   ¥ 90,865     ¥ 15,250     $ 129,237  

Current portion of long-term debt (Notes 3, 9 and 13)

     16,347       5,853       49,602  

Notes and accounts payable:

      

Trade

     103,503       100,295       849,958  

Other

     51,997       49,134       416,390  

Accrued liabilities:

      

Payroll and bonus

     37,998       41,680       353,220  

Income taxes

     27,658       36,475       309,110  

Other

     31,414       33,391       282,975  

Other current liabilities (Note 16)

     18,841       24,110       204,322  
                        

Total current liabilities

     378,623       306,188       2,594,814  
                        

Long-term debt (Notes 3, 9 and 13)

     33,360       7,283       61,720  

Accrued pension and severance liabilities (Note 10)

     27,092       16,297       138,110  

Deferred income taxes (Note 16)

     125,686       206,858       1,753,034  

Other non-current liabilities

     12,742       12,355       104,703  
                        

Total liabilities

     577,503       548,981       4,652,381  
                        

Minority interests in subsidiaries

     64,942       66,923       567,144  

Commitments and contingencies (Notes 14)

      

Stockholders’ equity (Note 15):

      

Common stock:

      

Authorized 600,000 shares

      

Issued 191,309 shares

     115,703       115,703       980,534  

Additional paid-in capital

     161,994       162,363       1,375,958  

Retained earnings

     967,576       1,055,293       8,943,161  

Accumulated other comprehensive income

     72,947       203,056       1,720,814  

Common stock in treasury, at cost (Note 11):
3,554 shares at March 31, 2006 and 2,660 shares at March 31, 2007

     (29,143 )     (21,855 )     (185,212 )
                        

Total stockholders’ equity

     1,289,077       1,514,560       12,835,255  
                        
   ¥ 1,931,522     ¥ 2,130,464     $ 18,054,780  
                        

The accompanying notes are an integral part of these statements.

 

F-3


Table of Contents

Consolidated Statements of Income

Kyocera Corporation and Consolidated Subsidiaries

For the three years ended March 31, 2007

(Yen in millions and U.S. dollars and shares in thousands, except per share amounts–Note 2)

 

     2005     2006     2007     2007  

Net sales (Note 7)

   ¥ 1,173,660     ¥ 1,173,544     ¥ 1,283,897     $ 10,880,483  

Cost of sales

     852,527       835,042       900,470       7,631,102  
                                

Gross profit

     321,133       338,502       383,427       3,249,381  

Selling, general and administrative expenses

     223,473       238,807       248,325       2,104,449  
                                

Profit from operations

     97,660       99,695       135,102       1,144,932  

Other income (expenses):

        

Interest and dividend income

     6,443       8,990       15,472       131,119  

Interest expense (Note 12)

     (1,275 )     (1,301 )     (1,647 )     (13,958 )

Foreign currency transaction gains (losses), net (Note 12)

     2,606       (316 )     (65 )     (551 )

Equity in (losses) earnings of affiliates and unconsolidated subsidiaries (Note 7)

     (1,678 )     (1,216 )     2,621       22,212  

(Losses) gains on sales and maturities of securities, net

     (2,084 )     1,472       3,819       32,365  

Gains on exchange for the shares (Note 4)

     —         5,294       24       203  

Gain on sale of investment in an affiliate (Note 7)

     —         6,931       26       220  

Loss on impairment of investment in an affiliate (Note 7)

     —         (3,492 )     —         —    

Other, net

     2,341       1,180       1,188       10,068  
                                
     6,353       17,542       21,438       181,678  
                                

Income from continuing operations before income taxes and minority interests

     104,013       117,237       156,540       1,326,610  

Income taxes (Note 16):

        

Current (Note 14)

     52,606       46,240       53,765       455,636  

Deferred

     5,608       520       (4,878 )     (41,339 )
                                
     58,214       46,760       48,887       414,297  
                                

Income from continuing operations before minority interests

     45,799       70,477       107,653       912,313  

Minority interests

     (3,142 )     (4,389 )     (6,324 )     (53,593 )
                                

Income from continuing operations

     42,657       66,088       101,329       858,720  

Income from discontinued operations (Notes 3, 12 and 18)

     3,251       3,608       5,175       43,856  
                                

Net income

   ¥ 45,908     ¥ 69,696     ¥ 106,504     $ 902,576  
                                

Earnings per share (Note 19):

        

Income from continuing operations:

        

Basic

   ¥ 227.52     ¥ 352.44     ¥ 538.52     $ 4.56  

Diluted

     227.47       352.21       537.35       4.55  

Income from discontinued operations:

        

Basic

     17.34       19.24       27.51       0.24  

Diluted

     17.34       19.22       27.44       0.24  

Net income:

        

Basic

     244.86       371.68       566.03       4.80  

Diluted

     244.81       371.43       564.79       4.79  

Cash dividends declared per share:

        

Per share of common stock

     80.00       100.00       110.00       0.93  

Weighted average number of shares of common stock outstanding:

        

Basic

     187,489       187,514       188,160    

Diluted

     187,528       187,640       188,573    

The accompanying notes are an integral part of these statements.

 

F-4


Table of Contents

Consolidated Statements of Stockholders’ Equity

Kyocera Corporation and Consolidated Subsidiaries

For the three years ended March 31, 2007

(Yen in millions and U.S. dollars and shares in thousands–Note 2)

 

     Common
Stock
   Additional
Paid-in
Capital
    Retained
Earnings
(Note 15)
    Accumulated Other
Comprehensive Income
(Note 15)
    Treasury Stock
(Notes 11 and 15)
    Comprehensive
Income
 

Balance, March 31, 2004 (187,484)

   ¥ 115,703    ¥ 162,091     ¥ 881,969     ¥ 22,046     ¥ (31,356 )  

Net income for the year

          45,908         ¥ 45,908  

Foreign currency translation adjustments

            6,704         6,704  

Minimum pension liability adjustment - net of taxes of ¥125 (Note 10)

            (152 )       (152 )

Net unrealized losses on securities - net of taxes of ¥11,909 (Note 4)

            (18,441 )       (18,441 )

Reclassification adjustments for net losses on securities - net of taxes of ¥1,234 (Note 4)

            1,661         1,661  

Net unrealized losses on derivative financial instruments (Note 12)

            (27 )       (27 )

Reclassification adjustments for net losses on derivative financial instruments (Note 12)

            48         48  
                   

Total comprehensive income for the year

              ¥ 35,701  
                   

Cash dividends

          (11,249 )      

Purchase of treasury stock (21)

              (170 )  

Reissuance of treasury stock (18)

        (5 )         146    

Stock option plan of a subsidiary

        (25 )        
                                         

Balance, March 31, 2005 (187,481)

     115,703      162,061       916,628       11,839       (31,380 )  

Net income for the year

          69,696         ¥ 69,696  

Foreign currency translation adjustments

            21,396         21,396  

Minimum pension liability adjustment - net of taxes of ¥322 (Note 10)

            (428 )       (428 )

Net unrealized gains on securities - net of taxes of ¥29,400 (Note4)

            42,054         42,054  

Reclassification adjustments for net gains on securities - net of taxes of ¥1,206 (Note 4)

            (1,866 )       (1,866 )

Net unrealized losses on derivative financial instruments (Note 12)

            (75 )       (75 )

Reclassification adjustments for net losses on derivative financial instruments (Note 12)

            27         27  
                   

Total comprehensive income for the year

              ¥ 130,804  
                   

Cash dividends

          (18,748 )      

Purchase of treasury stock (20)

              (170 )  

Reissuance of treasury stock (294)

        (67 )         2,407    
                                         

Balance, March 31, 2006 (187,755)

     115,703      161,994       967,576       72,947       (29,143 )  

Net income for the year

          106,504         ¥ 106,504  

Foreign currency translation adjustments

            10,474         10,474  

Minimum pension liability adjustment - net of taxes of ¥108 (Note 10)

            (82 )       (82 )

Net unrealized gains on securities - net of taxes of ¥70,986 (Note 4)

            103,334         103,334  

Reclassification adjustments for net gains on securities - net of taxes of ¥6 (Note 4)

            (1,313 )       (1,313 )

Net unrealized gains on derivative financial instruments (Note 12)

            89         89  

Reclassification adjustments for net losses on derivative financial instruments (Note 12)

            49         49  
                   

Total comprehensive income for the year

              ¥ 219,055  
                   

Adjustment for initially applying SFAS No. 158 - net of taxes of ¥12,035 (Note 10)

            17,558      

Cash dividends

          (18,787 )      

Purchase of treasury stock (24)

              (251 )  

Reissuance of treasury stock (918)

        127           7,539    

Stock option plans of subsidiaries

        242          
                                         

Balance, March 31, 2007 (188,649)

   ¥ 115,703    ¥ 162,363     ¥ 1,055,293     ¥ 203,056     ¥ (21,855 )  
                                         

Balance, March 31, 2006

   $ 980,534    $ 1,372,831     $ 8,199,797     $ 618,195     $ (246,975 )  

Net income for the year

          902,576         $ 902,576  

Foreign currency translation adjustments

            88,763         88,763  

Minimum pension liability adjustment - net of taxes of $915 (Note 10)

            (695 )       (695 )

Net unrealized gains on securities - net of taxes of $601,576 (Note4)

            875,712         875,712  

Reclassification adjustments for net gains on securities - net of taxes of $51 (Note 4)

            (11,127 )       (11,127 )

Net unrealized gains on derivative financial instruments (Note 12)

            754         754  

Reclassification adjustments for net losses on derivative financial instruments (Note 12)

            415         415  
                   

Total comprehensive income for the year

              $ 1,856,398  
                   

Adjustment for initially applying SFAS No. 158 - net of taxes of $ 101,992 (Note 10)

            148,797      

Cash dividends

          (159,212 )      

Purchase of treasury stock

              (2,127 )  

Reissuance of treasury stock

        1,076           63,890    

Stock option plans of subsidiaries

        2,051          
                                         

Balance, March 31, 2007

   $ 980,534    $ 1,375,958     $ 8,943,161     $ 1,720,814     $ (185,212 )  
                                         

The accompanying notes are an integral part of these statements.

 

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Consolidated Statements of Cash Flows

Kyocera Corporation and Consolidated Subsidiaries

For the three years ended March 31, 2007

(Yen in millions and U.S. dollars in thousands –Note 2)

 

     2005     2006     2007     2007  

Cash flows from operating activities:

        

Net income

   ¥ 45,908     ¥ 69,696     ¥ 106,504     $ 902,576  

Adjustments to reconcile net income to net cash provided by operating activities:

        

Depreciation and amortization

     65,909       73,186       82,182       696,457  

Provision for doubtful accounts

     (18 )     (466 )     (494 )     (4,186 )

Write-down of inventories

     10,405       8,446       11,328       96,000  

Deferred income taxes

     5,608       (218 )     (4,878 )     (41,339 )

Minority interests

     3,142       4,389       6,324       53,593  

Losses (gains) on sales and maturities of securities, net

     2,037       (1,652 )     (3,819 )     (32,365 )

Equity in losses (earnings) of affiliates and unconsolidated subsidiaries (Note 7)

     1,678       1,216       (2,621 )     (22,212 )

Gain on sales of investment in an affiliate (Note 7)

     —         (6,931 )     (26 )     (220 )

Loss on impairment of investment in an affiliate (Note 7)

     —         3,492       —         —    

Gains on sales of investment in subsidiaries (Note 3)

     —         —         (8,252 )     (69,932 )

Gains on exchange for the shares (Note 4)

     —         (5,294 )     (24 )     (203 )

Foreign currency adjustments

     (2,391 )     272       160       1,356  

Change in assets and liabilities:

        

Decrease (increase) in receivables

     68,558       (9,237 )     (32,626 )     (276,492 )

(Increase) decrease in inventories

     (25,598 )     21,263       (25,100 )     (212,712 )

Decrease (increase) in other current assets

     14       (3,331 )     (1,901 )     (16,110 )

(Decrease) increase in notes and accounts payable

     (31,914 )     14,390       6,015       50,975  

Increase (decrease) in accrued income taxes

     13,566       (4,720 )     9,066       76,830  

(Decrease) increase in other current liabilities

     (1,744 )     3,284       11,111       94,161  

Decrease in other non-current liabilities

     (11,464 )     (118 )     (7,062 )     (59,847 )

Other, net

     1,827       3,410       3,757       31,839  
                                

Total adjustments

     99,615       101,381       43,140       365,593  
                                

Net cash provided by operating activities

     145,523       171,077       149,644       1,268,169  
                                

Cash flows from investing activities:

        

Payments for purchases of available-for-sale securities

     (81,946 )     (98,219 )     (44,582 )     (377,814 )

Payments for purchases of held-to-maturity securities

     (10,141 )     (11,070 )     (26,867 )     (227,685 )

Payments for purchases of investments and advances

     (11,858 )     (224 )     (307 )     (2,602 )

Sales and maturities of available-for-sale securities

     40,955       50,090       99,230       840,932  

Maturities of held-to-maturity securities

     8,719       2,340       27,889       236,347  

Proceeds from sales of investment in an affiliate (Note 7)

     —         24,133       60       508  

Proceeds from sales of investment in subsidiaries (Note 3)

     —         —         24,602       208,492  

Payments for purchases of property, plant and equipment

     (59,381 )     (91,436 )     (64,751 )     (548,737 )

Payments for purchases of intangible assets

     (4,820 )     (10,589 )     (8,215 )     (69,619 )

Proceeds from sales of property, plant and equipment, and intangible assets

     2,920       3,350       2,693       22,822  

Acquisition of businesses, net of cash acquired (Note 20)

     (2,794 )     3       (756 )     (6,407 )

Deposit of negotiable certificate of deposits and time deposits

     (112,903 )     (132,286 )     (356,169 )     (3,018,381 )

Withdrawal of negotiable certificate of deposits and time deposits

     95,220       100,923       203,076       1,720,983  

Other, net

     3,535       (2,482 )     (7,606 )     (64,458 )
                                

Net cash used in investing activities

     (132,494 )     (165,467 )     (151,703 )     (1,285,619 )
                                

Cash flows from financing activities:

        

(Decrease) increase in short-term debt

     (18,490 )     23,363       9,369       79,398  

Proceeds from issuance of long-term debt

     21,077       19,876       1,928       16,339  

Payments of long-term debt

     (58,720 )     (48,458 )     (13,361 )     (113,229 )

Dividends paid

     (12,614 )     (20,473 )     (20,632 )     (174,847 )

Purchase of treasury stock

     (170 )     (170 )     (251 )     (2,127 )

Sales of treasury stock

     142       2,339       7,666       64,966  

Other, net

     1,431       234       (5,364 )     (45,458 )
                                

Net cash used in financing activities

     (67,344 )     (23,289 )     (20,645 )     (174,958 )
                                

Effect of exchange rate changes on cash and cash equivalents

     3,775       7,896       4,103       34,772  
                                

Net decrease in cash and cash equivalents

     (50,540 )     (9,783 )     (18,601 )     (157,636 )

Cash and cash equivalents at beginning of year

     361,132       310,592       300,809       2,549,229  
                                

Cash and cash equivalents at end of year

   ¥ 310,592     ¥ 300,809     ¥ 282,208     $ 2,391,593  
                                

The accompanying notes are an integral part of these statements.

 

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Notes to The Consolidated Financial Statements

Kyocera Corporation and Consolidated Subsidiaries

1. ACCOUNTING POLICIES

Financial Statements Presentation:

The accounts of Kyocera Corporation and its Japanese subsidiaries are generally maintained in accordance with accounting principles generally accepted in Japan. Adjustments, which are not recorded in KC and its Japanese subsidiaries’ books of account, have been booked to the accompanying consolidated financial statements in order to present them in conformity with accounting principles generally accepted in the United States of America.

Basis of Consolidation and Accounting for Investments in Affiliated Companies:

The consolidated financial statements include the accounts of Kyocera Corporation, its majority-owned subsidiaries and a variable interest entity for which Kyocera Corporation is a primarily beneficiary under the Financial Accounting Standard Board Interpretation No. 46 (revised December 2003), “Consolidation of Variable Interest Entities.” The consolidated variable interest entity for which Kyocera Corporation is the primary beneficiary does not have a material effect on Kyocera’s financial position and result of operations. All significant intercompany transactions and accounts are eliminated. Investments in 20% to 50% owned companies are accounted for under the equity method, whereby Kyocera includes in net income its equity in the earnings or losses from these companies.

Revenue Recognition:

Kyocera sells various types of products, including fine ceramic parts, semiconductor parts, and telecommunications equipment. Kyocera recognizes revenue upon completion of the earnings process, which occurs when products are shipped or delivered to customers 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. Most of 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

For after-service costs to be paid during warranty periods, Kyocera accrues a product warranty liability for claims under warranties relating to the products that have been sold. Kyocera records an estimated product warranty liability based on its historical repair experience.

Revenue from financial services

In addition to the tangible products as discussed above, Kyocera also provided certain services, primarily financial services provided by Kyocera Leasing Co., Ltd. (KLC) until August 2006. Revenue from direct financing leases was recognized over the term of the lease, and amortization of unearned lease income was recognized using the interest method. Interest income on installment loans was recognized on an accrual basis. Interest income was no longer accrued at the time the collection of the interest was past due 1 year or more, or the collection of the principal was past due 6 months or more. The interest received from cash payments on impaired loans was recorded as income, unless the collectibility of the remaining investments was doubtful, in which case the cash receipt was recorded as collection of the principal.

Cash and Cash Equivalents:

Cash and cash equivalents include time deposits and certificates of deposit with original maturities of three months or less.

Translation of Foreign Currencies:

Assets and liabilities of consolidated foreign subsidiaries and affiliates accounted for under the equity method are translated into Japanese yen at the exchange rates in effect on the respective balance sheet dates. Operating accounts are translated at the average rates of exchange for the respective years. Translation adjustments result from the process of translating foreign currency financial statements into Japanese yen. These translation adjustments, which are not included in the determination of net income, are reported in other comprehensive income.

Assets and liabilities denominated in foreign currencies are translated at the exchange rates in effect at the respective balance sheet dates, and resulting transaction gains or losses are included in the determination of net income.

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 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.

Inventories:

Inventories are stated at the lower of cost or market. Cost is determined by the average method for approximately 57% and 62% of finished goods and work in process as well as approximately 24% and 21% of raw materials and supplies at March 31, 2006 and 2007, respectively. The first-in, first-out method is applied to the other inventories. Kyocera recognizes estimated write-down of inventories for excess, slow-moving and obsolete inventories.

Securities:

Certain investments in debt and equity securities are accounted for under the Statement of Financial Accounting Standards (SFAS) No. 115 “Accounting for Certain Investments in Debt and Equity Securities.” Securities classified as available-for-sale securities are recorded at the fair value, with unrealized gains and losses excluded from income and reported in other comprehensive income, net of taxes. Securities classified as held-to-maturity securities are recorded at amortized cost. Kyocera evaluates whether the declines in fair value of debt and equity securities with readily determinable fair values are other-than-temporary. Other-than-temporary declines in fair value are recorded as a realized loss with a new cost basis. This evaluation is based mainly on the duration and the extent to which the fair value is less than cost, and the anticipated recoverability in fair value.

 

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Property, Plant and Equipment and Depreciation:

Property, Plant and Equipment are recorded at cost less accumulated depreciation. Kyocera provides for depreciation of buildings, machinery and equipment over their estimated useful lives primarily on the declining balance method. The principal estimated useful lives used for computing depreciation are as follows:

 

Buildings    2 to 50 years
Machinery and equipment    2 to 20 years

The cost of maintenance, repairs and minor renewals is charged to expense in the year incurred; major renewals and betterments are capitalized.

When assets are sold or otherwise disposed of, the profits or losses thereon, computed on the basis of the difference between depreciated costs and proceeds, are credited or charged to income in the year of disposal, and costs and accumulated depreciation are removed from the accounts.

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. Intangible assets with definite useful lives are amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairment whenever events or changes in circumstances indicate that their carrying amount may not be recoverable.

The principal estimated useful lives for intangible assets are as follows:

 

Patent rights    2 to 8 years
Software    2 to 5 years

Impairment of Long-Lived Assets:

Pursuant to SFAS No.144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” Kyocera reviews 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 group 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.

Derivative Financial Instruments:

Kyocera utilizes derivative financial instruments to manage its exposure resulting from fluctuations of foreign currencies and interest rates. These derivative financial instruments include foreign currency forward contracts and interest rate swaps. Kyocera does not hold or issue such derivative financial instruments for trading purposes.

Kyocera applies SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended by SFAS No. 138, “Accounting for Certain Derivative Instruments and Certain Hedging Activities an Amendment of Financial Accounting Standards Board (FASB) Statement No. 133.” All derivatives are recorded as either assets or liabilities on the balance sheet and measured at fair value. Changes in the fair value of derivatives are charged in current earnings. However cash flow hedges which meet the criteria of SFAS No. 133 may qualify for hedge accounting treatment. Changes in the fair value of the effective portion of these hedge derivatives are deferred in other comprehensive income and charged to earnings when the underlying transaction being hedged occurs.

Kyocera designates certain foreign currency forward contracts and certain interest rate swaps as cash flow hedges under SFAS No. 133. Most of Kyocera’s foreign currency forward contracts are entered into as hedges of existing foreign currency denominated assets and liabilities and as such do not qualify for hedge accounting. Accordingly, Kyocera records changes in fair value of these foreign currency forward contracts currently in earnings. It is expected that such changes will be offset by corresponding gains or losses on the underlying assets and liabilities.

        Kyocera formally documents all relationships between hedging instruments and hedged items, as well as its risk management objective and strategy for undertaking various hedge transactions. This process includes all derivatives designated as cash flow hedge are linked to specific assets and liabilities on the balance sheet or forecasted transactions. Kyocera also formally assesses, both at the hedge’s inception and on an ongoing basis, whether the derivatives that are used in hedging transactions are highly effective in offsetting cash flows of hedged items. When it is determined that a derivative is not highly effective as a hedge or that it has ceased to be a highly effective hedge, Kyocera discontinues hedge accounting prospectively. When hedge accounting is discontinued, the derivative will continue to be carried on the balance sheet at its fair value, with deferred unrealized gains or losses charged immediately in current earnings.

 

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Stock-Based Compensation:

Prior to April 1, 2006, Kyocera accounted for stock-based compensation in accordance with SFAS No. 148, “Accounting for Stock-Based Compensation-Transition and Disclosure,” an Amendment of FASB Statement No. 123, “Accounting for Stock-Based Compensation.” As allowed by SFAS No. 148, Kyocera measured stock-based compensation expense using the intrinsic value method in accordance with Accounting Principles Board (APB) Opinion No. 25, “Accounting for Stock Issued to Employees,” and its related interpretations. Effective April 1 2006, Kyocera adopted SFAS No. 123 (revised 2004) (SFAS No. 123R), “Share – Based Payment” and recognized the cost resulting from share-based payment transactions in financial statements by adopting fair-value based measurement method in accordance with SFAS No. 123R. Under the modified prospective method of adoption for SFAS No.123R, Kyocera recognized compensation cost which includes: (a) compensation cost for all stock options granted prior to, but not yet vested as of April 1, 2006, and (b) compensation cost for all stock options granted or modified subsequent to April 1, 2006.

The following table illustrates the effect on income from continuing operations, net income and earnings per share if Kyocera had applied the fair value recognition provisions of SFAS 123 for the years ended March 31, 2005 and 2006.

(Yen in millions except per share amounts)

 

     Years ended March 31,  
     2005     2006  

Income from continuing operations, as reported

   ¥ 42,657     ¥ 66,088  

Add: Stock-based employee compensation expense included in reported income - net of taxes

     (25 )     —    

Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards - net of taxes

     (2,772 )     (1,550 )
                

Pro forma income from continuing operations

     39,860       64,538  

Income from discontinued operations

     3,251       3,608  
                

Pro forma net income

   ¥ 43,111     ¥ 68,146  
                

Earnings per share:

    

Income from continuing operations:

    

Basic, as reported

   ¥ 227.52     ¥ 352.44  

Basic, pro forma

     212.60       344.18  

Diluted, as reported

     227.47       352.21  

Diluted, pro forma

     212.55       343.94  

Net income:

    

Basic, as reported

     244.86       371.68  

Basic, pro forma

     229.94       363.42  

Diluted, as reported

     244.81       371.43  

Diluted, pro forma

     229.89       363.17  

 

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Earnings and Cash Dividends per Share:

Basic earnings per share is computed based on the weighted average number of shares outstanding during each period. Diluted earnings per share assumes the dilution that could occur if all stock options were exercised and resulted in the issuance of common stock.

Cash dividends per share are those declared with respect to the earnings for the respective periods for which dividends are proposed by the Board of Directors. Dividends are charged to retained earnings in the year in which they are paid.

Research and Development Expenses and Advertising Expenses:

Research and development expenses and advertising expenses are charged to operations as incurred.

Use of Estimates:

Preparation of consolidated financial statements in conformity with generally accepted accounting principles requires managements’ estimates and assumption if it is expected to have any impacts on assets and liabilities, which includes contingently arose, at the period end date, and also on revenue and expenses during the period. However, the results may possibly differ from the estimates.

Accounting Changes:

In November 2004, the Financial Accounting Standards Board (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 was effective for inventory costs incurred during fiscal years beginning after June 15, 2005. The adoption of SFAS No. 151 did not have a material impact on Kyocera’s consolidated results of operations and financial position.

In May 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections—a replacement of APB Opinion No. 20 and FASB Statement 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 was effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. The adoption of SFAS No. 154 did not have a material impact on Kyocera’s consolidated results of operations and financial position.

In December 2004, the FASB issued SFAS No. 123R, “Share-Based Payment.” 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 (SEC) staff postponed implementation of SFAS No. 123R. Kyocera adopted SFAS No.123R effective April 1, 2006, and the impact of adoption of SFAS No. 123R was ¥333 million ($2,822 thousand) on Kyocera’s consolidated results of operations for the year ended March 31, 2007.

In September 2006, SEC staff published Staff Accounting Bulletin No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements” (SAB No. 108). SAB No. 108 provides guidance on the consideration of the effects of prior year misstatements in quantifying current year misstatements for the purpose of a materiality assessment. SAB No. 108 requires quantification of the effects of financial statement errors by two approaches generally referred to as “rollover” and “iron curtain”. SAB No. 108 shall be effective for fiscal years ending after November 15, 2006. The adoption of SAB No. 108 did not have a material impact on Kyocera’s consolidated results of operations and financial position.

        In September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans-an amendment of FASB Statements No.87, 88, 106, and 132 (R)”, which requires an employer to recognize the overfunded or underfunded status of its defined benefit postretirement plans as an asset or liability in its statement of financial position and to recognize changes in that funded status in the year in which the changes occur through comprehensive income. Kyocera recognized the funded status of its defined benefit plans and provided the required disclosures in accordance with SFAS No. 158 as of the year ended March 31, 2007. For the impact of adoption of SFAS No. 158 on Kyocera’s consolidated results of operations and financial position, see Note 10 to the Consolidated Financial Statements in this annual report. SFAS No. 158 also requires an employer to measure the funded status of a plan as of the date of its year end statement of financial position. Kyocera will be required to measure the funded status of its plans at the date of its year end as of the year ending March 31, 2009. Kyocera is currently evaluating the impact of adoption of this requirement for measurement date in its consolidated results of operations and financial position.

 

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Recently Issued Accounting Standards:

In June 2006, the FASB issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes-an interpretation of FASB Statement No.109” (FIN 48) which clarifies the accounting for uncertainty in income taxes recognized in the financial statements in accordance with SFAS No. 109, “Accounting for Income Taxes.” FIN 48 also provides guidance on derecognition, classification, interest and penalties, disclosure and transitional measures. FIN 48 shall be effective for fiscal years beginning after December 15, 2006. Kyocera is currently evaluating the impact of adoption of FIN 48 in its consolidated results of operations and financial position.

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements.” The purpose of SFAS No. 157 is to define fair value, establish a framework for measuring fair value and enhance disclosures about fair value measurements. The measurement and disclosure requirements are effective beginning after November 15, 2007. Kyocera is currently evaluating the impact of adoption of SFAS No. 157 in its consolidated results of operations and financial position.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities—Including an amendment of FASB Statement No. 115”. SFAS No.159 provides companies with an option to report selected financial assets and liabilities at fair value. Unrealized gains and losses on items for which the fair value option has been elected will be recognized in earnings. SFAS No.159 is effective for fiscal years beginning after November 15, 2007 and Kyocera will adopt SFAS No. 159 effective April 1, 2008. Kyocera is currently evaluating the impact of adoption of SFAS No. 159 in its consolidated results of operations and financial position.

Reclassifications:

Certain reclassifications of previously reported amounts have been made to the consolidated statements of income, cash flows and corresponding footnotes for the year ended March 31, 2005 and 2006 in order to conform to the current year presentation. Such reclassifications have no effect on net assets, net income and cash flows.

2. U.S. DOLLAR AMOUNTS

The consolidated financial statements as of and for the year ended March 31, 2007 presented herein are expressed in the Japanese yen, and, solely for the convenience of the readers, have been translated into the U.S. dollar at the rate of ¥118 for US$1, the rate prevailing on March 30, 2007.

This translation should not be construed as a representation that the yen amounts shown could be so converted into the U.S. dollar at ¥118 for US$1 or at any other rate.

3. DISCONTINUED OPERATIONS

On August 1, 2006, Kyocera sold 100% of the shares of KLC (presently Diamond Asset Finance Company Limited) to Diamond Lease Company Limited (presently Mitsubishi UFJ Lease & Finance Company Limited) for ¥25,274 million ($214,186 thousand), aimed to concentrate Kyocera’s management resources on its core businesses to enhance and improve its corporate value. Kyocera has accounted for the results of operations and the sale of KLC less income taxes, as discontinued operations in accordance with SFAS No.144, “Accounting for the Impairment or Disposal of Long-Lived Assets” in its consolidated statements of income. Accordingly, the prior years’ financial statements and related footnote disclosures have been reclassified.

For comparative purposes, the components of the income from discontinued operations, which had been reported as the “Others” segment previously, are summarized as follows:

 

     (Yen in millions and U.S. dollars in thousands)
     Years ended March 31,
     2005    2006    2007    2007

Net sales

   ¥ 9,069    ¥ 9,213    ¥ 1,779    $ 15,076

Income before income taxes

     3,517      4,150      862      7,305

Income taxes

     266      542      381      3,229

Net income

     3,251      3,608      481      4,076

Gain on sales of discontinued operations - net of taxes of ¥3,534 ($ 29,949)

     —        —        4,694      39,780

Income from discontinued operations

     3,251      3,608      5,175      43,856

The financial positions of discontinued operations at March 31, 2006 are summarized as follows:

 

     (Yen in millions)
     March 31, 2006

Short-term finance receivables

   ¥ 48,121

Long-term finance receivables

     80,971

Other assets

     4,981
      

Total assets

     134,073
      

Short-term borrowings

     80,351

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

     25,857

Other liabilities

     11,772
      

Total liabilities

   ¥ 117,980
      

 

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4. INVESTMENTS IN DEBT AND EQUITY SECURITIES

Available-for-sale securities are recorded at fair value, with unrealized gains and losses excluded from income and reported in other comprehensive income, net of tax. Held-to-maturity securities are recorded at amortized cost. In gross unrealized gains and losses on equity securities, ¥111,178 million of gross unrealized gain at March 31, 2006 and ¥289,853 million ($2,456,381 thousand) of gross unrealized gain at March 31, 2007 were derived from a fluctuation in the market value of the shares of KDDI Corporation (KDDI) held by Kyocera Corporation.

Other-than-temporary loss on debt and equity securities with readily determinable fair values for the years ended March 31, 2005, 2006 and 2007 amounted to ¥1 million, ¥113 million and ¥797 million ($6,754 thousand), respectively.

Due to the merger of Mitsubishi Tokyo Financial Group, Inc. and UFJ Holdings, Inc., on October 1, 2005, Kyocera’s holding shares in UFJ Holdings, Inc. were exchanged for shares of the new company, Mitsubishi UFJ Financial Group. As a result of this share exchange, Kyocera recognized a gain in the amount of ¥5,281 million for the year ended March 31, 2006 in accordance with Emerging Issues Task Force (EITF) 91-5, “Nonmonetary Exchange of Cost-Method Investments.”

Investments in debt and equity securities at March 31, 2006 and 2007, included in short-term investments (current assets) and in securities and other investments (non-current assets) are summarized as follows:

 

     (Yen in millions)
     March 31,
     2006    2007
     Cost*    Aggregate
Fair Value
   Gross
Unrealized
Gains
   Gross
Unrealized
Losses
   Cost*    Aggregate
Fair Value
   Gross
Unrealized
Gains
   Gross
Unrealized
Losses

Available-for-sale securities:

                       

Corporate debt securities

   ¥ 3,745    ¥ 3,908    ¥ 184    ¥ 21    ¥ 3,842    ¥ 4,033    ¥ 194    ¥ 3

Other debt securities

     133,758      132,660      29      1,127      74,563      74,574      71      60

Equity securities

     274,985      415,950      141,059      94      272,653      585,274      312,724      103
                                                       

Total available-for-sale securities

     412,488      552,518      141,272      1,242      351,058      663,881      312,989      166
                                                       

Held-to-maturity securities:

                       

Other debt securities

     34,398      34,015      —        383      33,512      33,447      —        65
                                                       

Total held-to-maturity securities

     34,398      34,015      —        383      33,512      33,447      —        65
                                                       

Total investments in debt and equity securities

   ¥ 446,886    ¥ 586,533    ¥ 141,272    ¥ 1,625    ¥ 384,570    ¥ 697,328    ¥ 312,989    ¥ 231
                                                       

 

     (U.S. dollars in thousands)
    

March 31, 2007

     Cost*    Aggregate
Fair Value
   Gross
Unrealized
Gains
   Gross
Unrealized
Losses

Available-for-sale securities:

           

Corporate debt securities

   $ 32,559    $ 34,178    $ 1,644    $ 25

Other debt securities

     631,890      631,983      602      509

Equity securities

     2,310,619      4,959,949      2,650,203      873
                           

Total available-for-sale securities

     2,975,068      5,626,110      2,652,449      1,407
                           

Held-to-maturity securities:

           

Other debt securities

     284,000      283,449      —        551
                           

Total held-to-maturity securities

     284,000      283,449      —        551
                           

Total investments in debt and equity securities

   $ 3,259,068    $ 5,909,559    $ 2,652,449    $ 1,958
                           

 

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At March 31, 2007, the contractual maturities of available-for-sale and held-to-maturity securities are summarized as follows:

 

     (Yen in millions and U.S. dollars in thousands)
     March 31, 2007
     Available-for-Sale    Held-to-Maturity    Available-for-Sale    Held-to-Maturity
     Cost*    Aggregate
Fair Value
   Cost*    Aggregate
Fair Value
   Cost*    Aggregate
Fair Value
   Cost*    Aggregate
Fair Value

Due within 1 year

   ¥ 24,168    ¥ 24,295    ¥ 17,110    ¥ 17,062    $ 204,814    $ 205,890    $ 145,000    $ 144,593

Due after 1 year to 5 years

     52,338      52,391      16,402      16,385      443,542      443,991      139,000      138,856

Due after 5 years

     1,899      1,921      —        —        16,093      16,280      —        —  

Equity securities

     272,653      585,274      —        —        2,310,619      4,959,949      —        —  
                                                       
   ¥ 351,058    ¥ 663,881    ¥ 33,512    ¥ 33,447    $ 2,975,068    $ 5,626,110    $ 284,000    $ 283,449
                                                       
* Cost represents amortized cost for held-to-maturity securities and acquisition cost for available-for-sale securities. The cost basis of the individual securities is written down to fair value as a new cost basis when other-than-temporary impairment is recognized.

Proceeds from sales of available-for-sale securities and the related gross realized gains and losses for the years ended March 31, 2005, 2006 and 2007 are as follows:

 

     (Yen in millions and U.S. dollars in thousands)
     Years ended March 31,
     2005    2006    2007    2007

Proceeds from sales of available-for-sale securities

   ¥ 22,662    ¥ 48,173    ¥ 99,171    $ 840,432

Gross realized gains

     2,015      2,769      6,055      51,314

Gross realized losses

     4,224      1,346      2,305      19,534

For the purpose of computing gains and losses, the cost of those securities is determined by the moving average method.

Kyocera’s available-for-sale securities were classified by its length of an unrealized loss position at March 31, 2006 and 2007 as follows:

 

     (Yen in millions)
     March 31, 2006
     within 1 year    over 1 year    Total
     Aggregate
Fair Value
   Gross
Unrealized
Losses
   Aggregate
Fair
Value
   Gross
Unrealized
Losses
   Aggregate
Fair Value
   Gross
Unrealized
Losses

Corporate debt securities

   ¥ 1,012    ¥ 21    ¥ —      ¥ —      ¥ 1,012    ¥ 21

Other debt securities

     131,942      1,127      —        —        131,942      1,127

Equity securities

     1,252      87      25      7      1,277      94
                                         
   ¥ 134,206    ¥ 1,235    ¥ 25    ¥ 7    ¥ 134,231    ¥ 1,242
                                         
     (Yen in millions)
     March 31, 2007
     within 1 year    over 1 year         Total
     Aggregate
Fair Value
   Gross
Unrealized
Losses
   Aggregate
Fair
Value
   Gross
Unrealized
Losses
   Aggregate
Fair Value
   Gross
Unrealized
Losses

Corporate debt securities

   ¥ 529    ¥ 3    ¥ —      ¥ —      ¥ 529    ¥ 3

Other debt securities

     50,867      60      —        —        50,867      60

Equity securities

     1,700      103      —        —        1,700      103
                                         
   ¥ 53,096    ¥ 166    ¥ —      ¥ —      ¥ 53,096    ¥ 166
                                         
     (U.S. dollars in thousands)
     March 31, 2007
     within 1 year    over 1 year    Total
     Aggregate
Fair Value
   Gross
Unrealized
Losses
   Aggregate
Fair
Value
   Gross
Unrealized
Losses
   Aggregate
Fair Value
   Gross
Unrealized
Losses

Corporate debt securities

   $ 4,483    $ 25    $ —      $ —      $ 4,483    $ 25

Other debt securities

     431,076      509      —        —        431,076      509

Equity securities

     14,407      873      —        —        14,407      873
                                         
   $ 449,966    $ 1,407    $ —      $ —      $ 449,966    $ 1,407
                                         

        At March 31, 2006 and 2007, the number of individual available-for-sale securities in an unrealized loss position held by Kyocera were 33 and 38, respectively.

 

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5. FINANCE RECEIVABLES

On August 1, 2006, Kyocera sold 100% of the shares of KLC. Detailed information regarding this transaction is described in Note 3.

Finance receivables at March 31, 2006 consist of the following:

 

     (Yen in millions)  
     March 31, 2006  

Investments in financing leases :

  

Minimum lease payments receivable

   ¥ 7,469  

Unearned lease income

     (639 )
        
     6,830  

Less-allowance for doubtful accounts

     (501 )
        
     6,329  

Less-current portion

     (2,499 )
        
   ¥ 3,830  
        

Other finance receivables

   ¥ 119,911  

Less-allowance for doubtful accounts

     (5,831 )
        
     114,080  

Less-current portion

     (36,940 )
        
   ¥ 77,140  
        
   ¥ 80,970  
        

Investments in financing leases consisted primarily of direct financing leases of telecommunications equipment and information equipment. Other finance receivables consisted primarily of installment loans to unrelated third parties.

Investments in loans of ¥5,146 million at March 31, 2006 were considered to be impaired, for which valuation allowances at March 31, 2006 were provided of ¥3,567 million, calculated under SFAS No.114, “Accounting by Creditors for Impairment of a Loan” and included in allowances for doubtful accounts.

The average recorded investments in impaired loans for the years ended March 31, 2005 and 2006 were ¥9,567 million and ¥6,179 million, respectively. The related recognized interest income for the years ended March 31, 2005 and 2006 were, ¥43 million and ¥34 million, respectively.

The principal amount of the loan on which interest income was no longer accrued at March 31, 2006 was ¥6,207 million, and at March 31, 2006 there was no loan, on which the collection of the principal was past due ninety days or more and on which interest income was still accrued.

Changes in allowances for doubtful accounts on finance receivables are as follows:

 

     (Yen in millions)  
     Years ended March 31,  
     2005     2006  

Beginning balance

   ¥ 36,315     ¥ 14,919  

Provision charged to income

     508       326  

Charge-offs

     (21,904 )     (8,913 )
                

Ending balance

   ¥ 14,919     ¥ 6,332  
                

 

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6. INVENTORIES

Inventories at March 31, 2006 and 2007 are as follows:

 

     (Yen in millions and U.S. dollars in thousands)
     March 31,
     2006    2007    2007

Finished goods

   ¥ 95,492    ¥ 106,135    $ 899,449

Work in process

     38,425      44,806      379,712

Raw materials and supplies

     56,647      58,247      493,619
                    
   ¥ 190,564    ¥ 209,188    $ 1,772,780
                    

7. INVESTMENTS IN AND ADVANCES TO AFFILIATES

Kyocera Corporation owned a 36.02% interest in Taito Corporation, a major affiliate which operates in the electric amusement business and accounted for its investment under the equity method. On September 28, 2005, Kyocera Corporation sold its entire holding of shares of Taito Corporation in a tender offer bid for Taito shares by Square Enix Co., Ltd., one of the leading companies in the game software industry. As a result of this sale of Taito Corporation shares, Kyocera Corporation recorded a gain of ¥6,931 million for the year ended March 31, 2006.

Kyocera Mita Corporation owns a 30% interest in Triumph-Adler AG Group (TA), which is a distributor of office equipment and accounted for its investment under the equity method. Kyocera recognized loss on impairment of investment in an affiliate of ¥3,492 million due to an extended decline in its market value for the year ended March 31, 2006.

Kyocera Corporation owns a 30% interest in WILLCOM, INC., which operates a Personal Handyphone System (PHS) business and is accounted for its investment under the equity method.

On March 31, 2006 and 2007, TA was a listed company. The market values of investment in TA at March 31, 2006 and 2007 were ¥2,669 million and ¥3,375 million ($28,602 thousand), respectively.

Related party transactions with the affiliates, accounted for under the equity method is as follows:

 

           (Yen in millions and U.S. dollars in thousands)
           March 31,
           2006     2007    2007

Kyocera’s investments in and advances to affiliates

     ¥ 7,107     ¥ 9,818    $ 83,203

Kyocera’s trade receivables from affiliates

       15,851       13,940      118,136
     (Yen in millions and U.S. dollars in thousands)
     Years ended March 31,
             2005                     2006                     2007          2007

Kyocera’s equity in (losses) earnings of affiliates

   ¥ (1,712 )   ¥ (1,311 )   ¥ 2,593    $ 21,975

Kyocera’s sales to affiliates

     21,320       42,822       39,189      332,110

 

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8. GOODWILL AND OTHER INTANGIBLE ASSETS

Intangible assets subject to amortization are summarized as follows:

 

     (Yen in millions and U.S. dollars in thousands)
     March 31,
     2006    2007    2007
     Gross Carrying
Amount
   Accumulated
Amortization
   Gross Carrying
Amount
   Accumulated
Amortization
   Gross Carrying
Amount
   Accumulated
Amortization

Patent rights

   ¥ 31,755    ¥ 15,546    ¥ 29,008    ¥ 17,710    $ 245,830    $ 150,085

Software

     24,314      13,019      27,626      16,876      234,119      143,017

Other

     6,754      3,031      6,562      3,955      55,610      33,517
                                         
   ¥ 62,823    ¥ 31,596    ¥ 63,196    ¥ 38,541    $ 535,559    $ 326,619
                                         

The carrying amount of intangible assets other than goodwill having an indefinite life at March 31, 2006 and 2007 were not significant.

Intangible assets acquired during the year ended March 31, 2007 totaled ¥5,710 million ($48,390 thousand) and primarily consist of patent rights of ¥626 million ($5,305 thousand) and software of ¥4,661 million ($39,500 thousand).

The weighted average amortization periods for patent rights and software are 5 years and 4 years, respectively.

Total amortization of intangible assets during the years ended March 31, 2005, 2006 and 2007 amounted to ¥7,008 million, ¥10,042 million and ¥11,666 million ($98,864 thousand), respectively.

The estimated aggregate amortization expenses for intangible assets for the next five years are as follows:

 

Years ending March 31,

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

2008

   ¥ 9,433    $ 79,941

2009

     7,504      63,593

2010

     4,539      38,466

2011

     1,359      11,517

2012

     435      3,686

The changes in the carrying amounts of goodwill by reporting segment for the years ended March 31, 2006 and 2007 are as follows:

 

     (Yen in millions and U.S. dollars in thousands)  
     Fine Ceramic
Parts Group
   Semiconductor
Parts Group
   Applied Ceramic
Products Group
   Electronic
Device Group
  

Information

Equipment Group

   Others     Total  

Balance at March 31, 2005

   ¥ —      ¥ —      ¥ 6,293    ¥ 17,099    ¥ 586    ¥ 4,132     ¥ 28,110  

Goodwill acquired during the year

     100      912      150      754      44      5       1,965  

Translation adjustments and reclassification to other accounts

     —        —        603      619      54      —         1,276  
                                                   

Balance at March 31, 2006

     100      912      7,046      18,472      684      4,137       31,351  

Goodwill acquired during the year

     —        —        —        2,699      —        19       2,718  

Impairment of goodwill

     —        —        —        —        —        (1,478 )     (1,478 )

Translation adjustments and reclassification to other accounts

     —        —        60      239      5      (1 )     303  
                                                   

Balance at March 31, 2007

   ¥ 100    ¥ 912    ¥ 7,106    ¥ 21,410    ¥ 689    ¥ 2,677     ¥ 32,894  
                                                   

Balance at March 31, 2006

   $ 847    $ 7,729    $ 59,712    $ 156,542    $ 5,797    $ 35,059     $ 265,686  

Goodwill acquired during the year

     —        —        —        22,873      —        161       23,034  

Impairment of goodwill

     —        —        —        —        —        (12,525 )     (12,525 )

Translation adjustments and reclassification to other accounts

     —        —        508      2,026      42      (8 )     2,568  
                                                   

Balance at March 31, 2007

   $ 847    $ 7,729    $ 60,220    $ 181,441    $ 5,839    $ 22,687     $ 278,763  
                                                   

        Kyocera performed the annual impairment test of goodwill and other intangible assets and recorded an impairment loss of ¥1,478 million ($12,525 thousands), which caused by stagnant sales and profit results in a reporting unit in the “Others” segment in the three months ended March 31, 2007. The impairment charge reflected the overall decline in the fair value of a domestic subsidiary. The fair value of the subsidiary was estimated principally using the expected present value of future cash flow.

 

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9. SHORT-TERM BORROWINGS AND LONG-TERM DEBT

Short-term borrowings at March 31, 2006 and 2007 are comprised of the following:

Loans, principally from banks with average interest rate of 0.71% and 5.17% at March 31, 2006 and 2007, respectively.

 

     (Yen in millions and U.S. dollars in thousands)  
     March 31,  
     2006     2007     2007  

Unsecured*

   ¥ 90,865     ¥ 15,250     $ 129,237  
Long-term debt at March 31, 2006 and 2007 are comprised of the following:  
Loans, principally from banks with interest rates ranging from 0.15% to 5.45% and from 0.15% to 5.82% at March 31, 2006 and 2007, respectively.   
     (Yen in millions and U.S. dollars in thousands)  
     March 31,  
     2006     2007     2007  

Secured

   ¥ 4,149     ¥ 3,256     $ 27,593  

Unsecured *

     45,558       9,880       83,729  
                        
     49,707       13,136       111,322  

Less, portion due within one year

     (16,347 )     (5,853 )     (49,602 )
                        
   ¥ 33,360     ¥ 7,283     $ 61,720  
                        

* See note 3 for more information.

Aggregate maturities of long-term debt at March 31, 2007 are as follows:

 

Years ending March 31,

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

2009

   ¥ 1,899    $ 16,093

2010

     1,488      12,610

2011

     1,370      11,610

2012

     1,020      8,644

2013 and thereafter

     1,506      12,763
             
   ¥ 7,283    $ 61,720
             

Kyocera’s assets pledged as collateral of property, plant and equipment, net of accumulated depreciation for long-term debt at March 31, 2006 and 2007 were ¥5,692 million and ¥5,374 million ($45,542 thousand), respectively.

 

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10. BENEFIT PLANS

Adoption of SFAS No. 158:

As of March 31, 2007, Kyocera adopted SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans-an amendment of FASB Statements No. 87, 88, 106 and 132 (R),” which requires an employer to recognize the over funded or under funded status of its defined benefit postretirement plans as an asset or liability in its consolidated balance sheet and to recognize changes in that funded status in the year in which the changes occur through comprehensive income. Kyocera initially recognized the funded status of its defined benefit plans and to provide the required disclosures in accordance with this standard at March 31, 2007.

The following tables show the incremental effect of the applying SFAS No. 158 at March 31, 2007 on the consolidated balance sheet line items listed below. These adjustments had no effect on Kyocera’s consolidated statements of income and cash flows for the year ended March 31, 2007.

 

     (Yen in millions)  
     Before Application
of SFAS No. 158
    Adjustments     After Application
of SFAS No. 158
 

Investments in and advances to affiliates and unconsolidated subsidiaries

   ¥ —       ¥ 1,033     ¥ 1,033  

Intangible assets

     12       (12 )     —    

Deferred tax assets

     8,354       (2,555 )     5,799  

Prepaid benefit cost

     568       23,614       24,182  

Accrued benefit liability

     17,856       (4,931 )     12,925  

Deferred tax liabilities

     1,466       9,480       10,946  

Minority interests in subsidiaries

     (942 )     (27 )     (969 )

Accumulated other comprehensive income (loss)

     (2,139 )     17,558       15,419  
     (U.S. dollars in thousands)  
     Before Application
of SFAS No. 158
    Adjustments     After Application
of SFAS No. 158
 

Investments in and advances to affiliates and unconsolidated subsidiaries

   $ —       $ 8,754     $ 8,754  

Intangible assets

     102       (102 )     —    

Deferred tax assets

     70,797       (21,653 )     49,144  

Prepaid benefit cost

     4,813       200,119       204,932  

Accrued benefit liability

     151,322       (41,788 )     109,534  

Deferred tax liabilities

     12,424       80,339       92,763  

Minority interests in subsidiaries

     (7,983 )     (229 )     (8,212 )

Accumulated other comprehensive income (loss)

     (18,127 )     148,796       130,669  

Domestic:

a. Defined benefit plans

At March 31, 2007, Kyocera Corporation and its major domestic subsidiaries sponsor funded defined benefit pension plans or unfunded retirement and severance plans for their employees.

Kyocera Corporation adopted a variable expected interest rate for benefits paid for pensioners, which is linked with the long- term interest rate prevailing in Japan instead of a fixed expected interest rate, effective April 2004.

Benefits under the plan of Kyocera Corporation were previously calculated based on base salary, employee’s position, length of service period and conditions at the time of retirement. However, after April 2005, Kyocera adopted “point system” whereby benefits under the plan are calculated according to (i) accumulated “points” that are earned based on employee’s position, extent of contribution and length of service period during employment, and (ii) conditions at the time of retirement. In addition, employees were provided an option to receive lifetime pension payments for the full amount of their retirement payment, while after April 2005, employees are provided an option to receive lifetime pension payments for 50% of their retirement payment and 50% of pension payments for 20 years in maximum. These amendments reduced the projected benefit obligation of the pension plan for Kyocera Corporation. This effect of the reduction in the projected benefit obligation was reflected as a prior service cost.

Major domestic subsidiaries also amended their benefit plans and adopted the “point system” effective April 2006. As a result of this amendment, their projected benefit obligations decreased and such decreases were reflected as prior service costs.

 

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The funded statuses of the benefit plans at Kyocera Corporation and its major domestic subsidiaries at March 31, 2006 and 2007 are as follows:

 

     (Yen in millions and U.S. dollars in thousands)  
     March 31,  
     2006     2007     2007  

Change in projected benefit obligations:

      

Projected benefit obligation at beginning of year

   ¥ 104,484     ¥ 110,530     $ 936,695  

Service cost

     6,661       7,873       66,720  

Interest cost

     2,045       2,098       17,780  

Actuarial loss (gain)

     1,464       (1,792 )     (15,186 )

Benefits paid

     (3,292 )     (3,355 )     (28,432 )

Amendment

     (832 )     (5,329 )     (45,161 )
                        

Projected benefit obligation at end of year

     110,530       110,025       932,416  

Change in plan assets:

      

Fair value of plan assets at beginning of year

     107,265       119,920       1,016,271  

Actual return on plan assets

     6,482       2,033       17,229  

Employer contribution

     9,043       8,935       75,720  

Benefits paid

     (2,870 )     (3,236 )     (27,423 )
                        

Fair value of plan assets at end of year

     119,920       127,652       1,081,797  
                        

Funded status

   ¥ 9,390     ¥ 17,627     $ 149,381  
                        

Amounts recognized in the consolidated balance sheets consist of:

      

Prepaid benefit cost

   ¥ 657     ¥ 24,182     $ 204,932  

Accrued benefit liability

     (17,239 )     (6,555 )     (55,551 )
                        

Net amount recognized

   ¥ (16,582 )   ¥ 17,627     $ 149,381  
                        

Reconciliation from funded status to amounts recognized in the consolidated balance sheets consist of:

      

Funded status

   ¥ 9,390       —         —    
                        

Unrecognized net transition obligation

     (522 )     —         —    

Prior service cost not yet recognized

     55,051       —         —    

Unrecognized actuarial loss

     (28,557 )     —         —    
                        

Net amount recognized

   ¥ (16,582 )     —         —    

Amounts recognized in accumulated other comprehensive income (loss) consist of:

      

Net transition obligation

     —       ¥ (337 )   $ (2,856 )

Prior service cost

     —         55,642       471,542  

Actuarial loss

     —         (26,235 )     (222,330 )
                        

Accumulated other comprehensive income

     —       ¥ 29,070     $ 246,356  
                        
     (Yen in millions and U.S. dollars in thousands)  
     March 31,  
     2006     2007     2007  

Accumulated benefit obligation at end of year

   ¥ 106,963     ¥ 108,037     $ 915,568  

Pension plans with an accumulated benefit obligation in excess of plan assets at the end of year are as follows:

      

Projected benefit obligation

   ¥ 25,731     ¥ 17,614     $ 149,271  

Accumulated benefit obligation

     22,477       17,211       145,856  

Fair value of plan assets

     8,653       11,059       93,720  

 

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Net periodic pension costs at Kyocera Corporation and its major domestic subsidiaries in the years ended March 31, 2005 , 2006 and 2007, include the following components:

 

     (Yen in millions and U.S. dollars in thousands)  
     Years ended March 31,  
     2005     2006     2007     2007  

Service cost

   ¥ 6,494     ¥ 6,661     ¥ 7,873     $ 66,720  

Interest cost

     2,385       2,045       2,098       17,780  

Expected return on plan assets

     (1,789 )     (2,159 )     (2,870 )     (24,322 )

Amortization of transition obligation

     221       221       185       1,568  

Amortization of prior service cost

     (2,283 )     (4,445 )     (4,739 )     (40,161 )

Recognized actuarial loss

     1,243       1,350       1,310       11,101  
                                

Net periodic pension cost

   ¥ 6,271     ¥ 3,673     ¥ 3,857     $ 32,686  
                                

Transition obligation, actuarial loss, and prior service cost expected to be amortized at Kyocera Corporation and its major domestic subsidiaries in the year ending March 31, 2008 are as follows:

 

     (Yen in millions and U.S. dollars in thousands)  
     Year ending March 31,  
     2008     2008  

Amortization of transition obligation

   ¥ 226     $ 1,915  

Amortization of prior service cost

     (4,320 )     (36,610 )

Recognized actuarial loss

     1,047       8,873  

Assumptions used to determine projected benefit obligations at Kyocera Corporation and its major domestic subsidiaries at March 31, 2006 and 2007 are as follows:

 

     March 31,
     2006   2007

Discount rate

   1.75% -2.00%   1.75% -2.00%

Assumptions used to determine net periodic pension costs at Kyocera Corporation and its major domestic subsidiaries for the years ended March 31, 2005 , 2006 and 2007 are as follows:

 

     Years ended March 31,
     2005   2006   2007

Discount rate

   2.00%   2.00%   1.75%-2.00%

Expected long-term rate of return on plan assets

   2.00%-2.50%   2.00%-2.50%   2.00%-2.50%

Rate of increase in compensation levels

   3.00%   —     —  

Kyocera Corporation and its domestic subsidiaries use a December 31 measurement date for their plans. Certain domestic subsidiaries use a March 31 measurement date for their plans. Kyocera Corporation and its domestic subsidiaries, which currently use a December 31 measurement date, will use a March 31 measurement date upon the adoption of measurement provision of SFAS No. 158 for the year ending March 31, 2009.

Rate of increase in compensation levels was not used in the calculation of projected benefit obligation and net periodic pension costs for the years ended March 31, 2006 and 2007 under the “point system.”

Kyocera Corporation and its major domestic subsidiaries determine its expected long-term rate of return on plan assets based on the defined yields of life insurance company general account, which occupies major part of plan assets categories, and their consideration of the current expectations for future returns and the historical returns of other plan assets categories in which they invest.

Plan assets categories at Kyocera Corporation and its major domestic subsidiaries at March 31, 2006 and 2007 are as follows:

 

     March 31,
     2006    2007

Life insurance company general account

   65.1%    58.6%

Equity securities

   21.9%    25.6%

Debt securities

   9.5%    8.2%

Cash and cash equivalents

   2.2%    1.4%

Other

   1.3%    6.2%
         
   100.0%    100.0%
         

 

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Kyocera Corporation and its major domestic subsidiaries manage and operate their plan assets with a target of obtaining better performance more than earnings from the expected rate of return on plan assets to ensure the sources of funds sufficient to cover the pension benefits paid to participants and beneficiaries into the future. In terms of the plan assets management, they make appropriate investment choices and optimal portfolios with a consideration of its performances, expected returns and risks, and entrusts their plan assets to the fund trustees which can be expected to be the most appropriate to accomplish Kyocera’s objective. They also make an effort to maintain their portfolios within reasonable allocations of plan assets. They evaluate their categories of plan assets allocations and can change their portfolios when it is needed. Their long-term strategy is to allocate approximately 60% Life insurance company general account which assures fixed income, and approximately 30% equity and debt securities and approximately 10% cash and other for their defined benefit plans.

Kyocera Corporation and its major domestic subsidiaries forecast to contribute ¥8,753 million ($74,178 thousand) to the defined benefit pension plans in the year ending March 31, 2008.

Estimated future benefit payments at Kyocera Corporation and its major domestic subsidiaries are as follows:

 

Years ending March 31,

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

2008

   ¥ 4,368    $ 37,017

2009

     5,372      45,525

2010

     5,420      45,932

2011

     5,269      44,653

2012

     5,843      49,517

2013 to 2017

     32,453      275,025

b. Other plan

Kyocera Corporation and its major domestic subsidiaries also provide for lump-sum severance benefits with respect to directors and corporate auditors. To reserve future payments of lump-sum severance benefits to directors and corporate auditors, annual provisions are made in the accounts for the estimated cost of this termination plan, which is not funded.

Foreign:

a. Pension plans

Kyocera International, Inc. and its consolidated subsidiaries (KII) and AVX Corporation and its consolidated subsidiaries (AVX) which are both consolidated U.S. subsidiaries of Kyocera Corporation, maintain non-contributory defined benefit pension plans in the U.S. and contributory defined benefit pension plans outside the U.S. The KII plan covers substantially all full-time employees in the U.S., of which benefits are based on years of service and the employees’ average compensation. AVX sponsors various defined benefit pension plans covering certain employees. Pension benefits provided to certain U.S. employees covered under collective bargaining agreements are based on a flat benefit formula. Effective December 31, 1995. AVX froze benefit accruals under its domestic non-contributory defined benefit pension plan for a significant portion of the employees covered under collective bargaining agreements. AVX’s pension plans for certain European employees provide for benefits based on a percentage of final pay. AVX’s funding policy is to contribute amounts sufficient to meet minimum funding requirements as set forth in employee benefit and tax laws.

 

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The following table sets forth the funded statuses of the KII’s and AVX’s plans at March 31, 2006 and 2007:

 

     (Yen in millions and U.S. dollars in thousands)  
     March 31,  
     2006     2007     2007  

Change in benefit obligations:

      

Benefit obligation at beginning of year

   ¥ 22,142     ¥ 26,854     $ 227,576  

Service cost

     433       538       4,559  

Interest cost

     1,252       1,431       12,127  

Plan participants’ contributions

     90       98       830  

Actuarial loss (gain)

     2,590       (491 )     (4,161 )

Benefits paid

     (979 )     (987 )     (8,364 )

Amendment

     —         154       1,305  

Foreign exchange adjustment

     1,272       1,884       15,967  
                        

Benefit obligation at end of year

     26,800       29,481       249,839  

Change in plan assets:

      

Fair value of plan assets at beginning of year

     16,893       19,681       166,788  

Actual return on plan assets

     2,079       1,927       16,330  

Employer contribution

     630       1,095       9,280  

Plan participants’ contributions

     90       98       830  

Benefits paid

     (979 )     (987 )     (8,364 )

Other expenses

     (621 )     (64 )     (542 )

Foreign exchange adjustment

     1,589       1,359       11,517  
                        

Fair value of plan assets at end of year

     19,681       23,109       195,839  

Funded status

   ¥ (7,119 )   ¥ (6,372 )   $ (54,000 )

Amounts recognized in the consolidated balance sheets consist of:

      

Intangible assets

   ¥ 21     ¥ —       $ —    

Accrued benefit liability

     (5,615 )     (6,372 )     (54,000 )

Accumulated other comprehensive loss

     4,614       —         —    
                        

Net amount recognized

   ¥ (980 )   ¥ (6,372 )   $ (54,000 )
                        

Reconciliation from funded status to amounts recognized in the consolidated balance sheets consist of:

      

Funded status

   ¥ (7,119 )     —         —    
                        

Prior service cost not yet recognized

     (15 )     —         —    

Unrecognized actuarial loss

     (6,124 )     —         —    
                        

Net amount recognized

   ¥ (980 )     —         —    

Amounts recognized in accumulated other comprehensive Income (loss) consist of:

      

Prior service cost

     —       ¥ (159 )   $ (1,347 )

Actuarial loss

     —         (3,782 )     (32,051 )
                        

Accumulated other comprehensive loss

     —       ¥ (3,941 )   $ (33,398 )
                        
     (Yen in millions and U.S. dollars in thousands)  
     March 31,  
     2006     2007     2007  

Accumulated benefit obligation at end of year

   ¥ 25,054     ¥ 27,567     $ 233,619  

Pension plans with an accumulated benefit obligation in excess of plan assets at the end of year:

      

Projected benefit obligation

   ¥ 26,800     ¥ 19,685     $ 166,822  

Accumulated benefit obligation

     25,054       19,510       165,339  

Fair value of plan assets

     19,681       14,725       124,788  
                        

 

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KII’s and AVX’s net periodic pension costs in the years ended March 31, 2005 , 2006 and 2007 include the following components:

 

     (Yen in millions and U.S. dollars in thousands)  
     Years ended March 31,  
     2005     2006     2007     2007  

Service cost

   ¥ 845     ¥ 433     ¥ 538     $ 4,559  

Interest cost

     1,186       1,252       1,431       12,127  

Expected return on plan assets

     (1,118 )     (1,283 )     (1,482 )     (12,559 )

Amortization of prior service cost

     13       13       17       144  

Recognized actuarial loss

     166       163       238       2,017  
                                

Net periodic pension cost

   ¥ 1,092     ¥ 578     ¥ 742     $ 6,288  
                                

KII’s and AVX’s actuarial losses and prior service costs expected to be amortized in the year ending March 31, 2008 are as follows:

 

     (Yen in millions and U.S. dollars in thousands)
     Year ending March 31,
     2008    2008

Amortization of prior service cost

   ¥ 15    $ 127

Recognized actuarial loss

     196      1,661

KII’s and AVX’s assumptions used to determine projected benefit obligations at March 31, 2006 and 2007 are as follows:

 

     March 31,
     2006    2007

Discount rate

   4.25%-5.50%    4.40%-6.00%

Rate of increase in compensation levels

   2.00%-4.50%    3.40%-4.50%

KII’s and AVX’s assumptions used to determine net periodic pension costs in the years ended March 31, 2005 , 2006 and 2007 are as follows:

 

     Years ended March 31,
     2005    2006    2007

Discount rate

   5.25%-6.00%    4.50%-6.00%    4.25%-5.50%

Rate of increase in compensation levels

   1.25%-4.50%    1.25%-4.50%    3.00%-4.50%

Expected long-term rate of return on plan assets

   7.00%-8.50%    6.30%-8.50%    6.40%-8.50%

KII and AVX use a December 31 measurement date for their plans. KII and AVX determine their expected long-term rate of return on plan assets based on the consideration of the current expectations for future returns and the historical returns of other plan assets categories in which they invest.

KII’s and AVX’s plan assets categories at March 31, 2006 and 2007 are as follows:

 

     March 31,  
     2006     2007  

Equity securities

   65.9 %   65.9 %

Debt securities

   33.2 %   30.5 %

Cash and cash equivalents

   0.9 %   2.2 %

Other

   —       1.4 %
            
   100.0 %   100.0 %
            

KII’s long-term strategy is for target allocation of 65%-75% equity securities and 15%-35% debt securities for its defined benefit plans. AVX’s long-term strategy is for target allocation of 40% equity and 60% fixed income for its U.S. defined benefit plans and 60% equity and 40% fixed income for its non-U.S. defined benefit plans.

AVX forecasts to contribute ¥931 million ($7,890 thousand) to the defined benefit pension plans in the year ending March 31, 2008.

KII’s and AVX’s estimated future benefit payments are as follows:

 

Years ending March 31,

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

2008

   ¥ 964    $ 8,169

2009

     1,004      8,508

2010

     1,072      9,085

2011

     1,136      9,627

2012

     1,203      10,195

2013 to 2017

     7,148      60,576

 

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b. Savings plans

KII and AVX maintain retirement savings plans which allow eligible U.S. employees to defer part of their annual compensation.

AVX also maintains non-qualified deferred compensation programs which permit key employees to annually elect to defer a portion of their compensation until retirement.

Contributions to the plans for the years ended March 31, 2005, 2006 and 2007 were ¥853 million, ¥928 million and ¥1,003 million ($8,500 thousand), respectively.

11. STOCK OPTION PLANS

Kyocera Corporation:

Kyocera Corporation granted directors, corporate auditors, corporate executive officers and certain key employees of Kyocera with stock option plans until the year ended March 31, 2006. Under the plans, they were granted options to purchase Kyocera Corporation’s shares of common stock at a price determined by the higher of (1) multiplying by 1.1 the average market price of Kyocera Corporation’s common stock in previous month of the date of the grant or (2) the market price of Kyocera Corporation’s common stock at the date of grant and an option’s maximum term is 5 years. All options vested and are exercisable.

At March 31, 2007, Kyocera Corporation reserved 2,113 thousand shares of its common stock for the plans.

The following table summarizes information on stock option plans for the year ended March 31, 2007:

 

     Number of
Options
(in thousands)
    Weighted Average
Exercise Price
   Weighted
Average
Contractual
life remaining
(years)
  

Aggregated
Intrinsic Value

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

Outstanding at March 31, 2006

   3,087     ¥ 8,498            

Granted

   —         —      $ —           

Exercised

   (918 )     8,344      70.71       ¥ 2,103    $ 17,822

Expired and cancelled

   (56 )     8,531      72.30         
                            

Outstanding at March 31, 2007

   2,113     ¥ 8,564    $ 72.58    1.5    ¥ 5,380    $ 45,593
                    

Exercisable at March 31, 2007

   2,113     ¥ 8,564    $ 72.58    1.5    ¥ 5,380    $ 45,593
                    

The total aggregate intrinsic value of options exercised is ¥16 million, ¥626 million and ¥2,103 million ($17,822 thousand) for the years ended March 31, 2005, 2006 and 2007, respectively.

At March 31, 2007, there was no unrecognized compensation costs related to unvested awards. The total aggregate fair value of options vested was ¥2,419 million and ¥1,248 million for the years ended March 31, 2005 and 2006, respectively.

Because Kyocera granted no stock options during the year ended March 31, 2007 and requisite service period of Kyocera’s stock options granted prior to April 1, 2006 did not attribute to the year ended March 31, 2007, no stock based compensation expense was recognized for the year ended March 31, 2007.

Cash received from the exercise of stock options was ¥120 million, ¥2,332 million and ¥7,654 million ($64,864 thousand) for the years ended March 31, 2005, 2006 and 2007, respectively.

Kyocera’s weighted average fair value is estimated at the date of grant using Black Scholes model. Kyocera estimated expected life, volatility and expected dividends by considering historical record.

The following are significant weighted average assumptions used estimating the fair value of options issued under the Kyocera’s stock option plans:

 

     Years ended March 31,  
     2005     2006  

Fair value

   ¥ 1,946     ¥ 959  

Interest rate

     0.39 %     0.20 %

Expected life

     3.7 years       2.7 years  

Volatility

     39.09 %     28.00 %

Expected dividends

     1.00 %     1.30 %

AVX Corporation:

        AVX has four fixed stock option plans. Under the 1995 stock option plan, as amended, AVX could grant options to employees for the purchase of up to an aggregate of 9,300 thousand shares of common stock. Under the non-employee directors’ stock option plan, as amended, AVX could grant options for the purchase of up to an aggregate of 650 thousand shares of common stock. No awards were made under these two plans after August 1, 2005. Under the 2004 stock option plan AVX may grant options to employees for the purchase of up to an aggregate of 10,000 thousand shares of common stock. Under the 2004 non-employee directors’ stock option plan, AVX may grant options for the purchase of up to an aggregate of 1,000 thousand shares of common stock. Under all plans, the exercise price of each option shall not be less than the market price of AVX’s stock on the date of grant and an option’s maximum term is 10 years. Options granted under the 1995 stock option plan and the 2004 stock option plan vest as to 25% annually and options granted under the non-employee directors’ stock option plan and the 2004 non-employee directors’ stock option plan vest as to one third annually. Requisite service periods related to all of the plans begin on the grant date. The number of shares of common stock available for future issuance under all of the plans, consisting of options available to be granted and options currently outstanding, was 15,300 thousand at March 31, 2007.

Options exercised under the AVX’s stock option plans are issued from the AVX’s treasury shares.

 

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Activity under the AVX’s stock option plans is summarized as follows:

 

     Number of
Options
(in thousands)
    Weighted
Average
Exercise Price
   Weighted
Average
contractual
life remaining
(years)
   Aggregated
Intrinsic Value
(Yen in millions and U.S.
dollars in thousands)
 

Outstanding at March 31, 2006

   4,813     $ 14.72        

Granted

   513       15.27        

Exercised

   (430 )     10.27       ¥ 323     $ 2,737  

Expired and cancelled

   (75 )     18.62        
                    

Outstanding at March 31, 2007

   4,821     $ 15.14    5.11    ¥ 33     $ 280  
                

Exercisable at March 31, 2007

   3,564     $ 15.69    4.03    ¥ (207 )   $ (1,754 )
                

The total aggregate intrinsic value of options exercised is ¥14 million, ¥120 million and ¥323 million ($2,737 thousand) for the years ended March 31, 2005, 2006 and 2007, respectively.

Unvested share activity under the AVX’s stock options plans at March 31, 2007 is summarized as follows:

 

     Number of Options
(in thousands)
    Weighted Average
Grant- Dated Fair Value

Unvested balance at March 31, 2006

   1,382     $ 5.65

Options granted

   513       5.44

Option forfeited

   (36 )     5.60

Options vested

   (602 )     6.57
            

Unvested balance at March 31, 2007

   1,257     $ 5.39
        

At March 31, 2007, ¥438 million ($3,712 thousand) of total unrecognized compensation costs related to unvested awards is expected to be recognized over the vesting period, approximately four years. The total aggregate fair value of options vested is ¥658 million, ¥497 million and ¥463 million ($3,924 thousand) for the years ended March 31, 2005, 2006 and 2007, respectively.

The weighted average estimated fair value of the AVX’s stock options granted at grant date market prices was $6.07, $4.91 and $5.44 per option for the years ended March 31, 2005, 2006 and 2007, respectively. The consolidated statement of income includes ¥263million ($2,229 thousand), net of ¥45 million ($381 thousand) of tax benefit, in stock based compensation expense for the year ended March 31, 2007.

Cash received from the exercise of stock options was ¥31 million, ¥646 million and ¥ 516 million ($4,373 thousand) for the years ended March 31, 2005, 2006 and 2007, respectively. Excess tax benefit from stock-based payment arrangements was ¥78 million ($661 thousand) for the year ended March 31, 2007.

AVX’s weighted average fair value is estimated at the date of grant using Black Scholes model. AVX estimated volatility by considering the AVX’s historical stock volatility. AVX calculated the dividend yield based on historical dividend paid. In accordance with SFAS No. 123R AVX has estimated forfeitures in determining the weighted average fair value calculation. The forfeiture rate used for the year ended March 31, 2007 was 6.4%. The following are significant weighted average assumptions used for estimating the fair value of options issued under the AVX’s stock option plans:

 

     Years ended March 31,  
     2005     2006     2007  

Interest rate

   3.53 %   4.00 %   4.90 %

Expected life

   4 years     4 years     5 years  

Volatility

   55.97 %   55.74 %   35.25 %

Expected dividends

   1.07 %   1.31 %   0.98 %

Kyocera Wireless Corp. (KWC):

KWC provides key employees with stock options. The options become vested gradually over a four-year period provided participants remain a KWC employee. The exercise price shall not be less than 85% of the fair value of the common stock at the time the option is granted, and the grant has a maximum term of 10 years. Since KWC’s securities are not traded on any stock change, KWC’s Board of Directors is responsible for determining the fair value using reasonable means. KWC may grant options to all key employees for the purchase for up to an aggregate of 3,800 thousand shares of common stock. The issuance of new options under this plan has been suspended as of April 1, 2006.

Activity under the KWC’s stock option plans is summarized as follows:

 

     Number of
Options
(in thousands)
    Weighted
Average
Exercise Price
   Weighted
Average
contractual
life remaining
(years)
   Aggregated
Intrinsic Value
(Yen in millions and U.S.
dollars in thousands)
 

Outstanding at March 31, 2006

   2,124     $ 2.33        

Granted

   —         —          

Exercised

   —         —          

Expired and cancelled

   (585 )     2.41        
                    

Outstanding at March 31, 2007

   1,539     $ 2.30    5.45    ¥ (363 )   $ (3,076 )
                

Exercisable at March 31, 2007

   1,253     $ 2.38    5.45    ¥ (307 )   $ (2,602 )
                

 

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Unvested share activity under the KWC’s stock options plans at March 31, 2007 is summarized as follows:

 

     Number of Options
(in thousands)
    Weighted Average
Grant- Dated Fair Value

Unvested balance at March 31, 2006

   669     $ 0.92

Options granted

   —         —  

Option forfeited

   (149 )     1.11

Options vested

   (234 )     0.87
            

Unvested balance at March 31, 2007

   286     $ 0.87
        

At March 31, 2007, ¥36 million ($305 thousand) of total unrecognized compensation costs related to unvested awards is expected to be recognized over the vesting period, approximately four years. The total aggregate fair value of options vested is ¥78 million, ¥76 million and ¥22 million ($186 thousand) for the years ended March 31, 2005, 2006 and 2007, respectively.

The weighted average estimated fair value of the KWC’s stock options granted at grant date was $1.43 and $0.63 per option for the years ended March 31, 2005 and 2006, respectively. The consolidated statement of income includes ¥(25) million and ¥25 million ($212 thousand) in stock based compensation expense for the years ended March 31, 2005 and 2007, respectively.

KWC’s weighted average fair value is estimated at the date of grant using Black Scholes model. KWC estimated volatility by considering historical volatility. The following are significant weighted average assumptions used for estimating the fair value of options issued under the KWC’s stock option plans:

 

     Years ended March 31,  
     2005     2006  

Fair value

   $ 1.43     $ 0.63  

Interest rate

     3.65 %     4.21 %

Expected life

     5 years       5 years  

Volatility

     45.00 %     45.00 %

Expected dividends

     —         —    

12. DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES

Kyocera’s activities are exposed it to a variety of market risks, including the effects of changes in foreign currency exchange rates and interest rates. Approximately 60% of Kyocera’s revenues are generated from overseas customers, which exposes Kyocera to foreign currency exchange rates fluctuations. These financial exposures are monitored and managed by Kyocera as an integral part of its overall risk management program. Kyocera’s risk management program focuses on the unpredictability of financial markets and seeks to reduce the potentially adverse effects that the volatility of these markets may have on its operating results.

Kyocera maintains a foreign currency risk management strategy that uses derivative financial instruments, such as foreign currency forward contracts, to minimize the volatility in its cash flows caused by changes in foreign currency exchange rates. Movements in foreign currency exchange rates pose a risk to Kyocera’s operations and competitive position, since exchange rates changes may affect the profitability, cash flows, and business and/or pricing strategies of non Japan-based competitors. These movements affect cross-border transactions that involve, but not limited to, direct export sales made in foreign currencies and raw material purchases incurred in foreign currencies.

Kyocera maintains an interest rate risk management strategy that may use derivative financial instruments, such as interest rate swaps, to minimize significant, unanticipated cash flow fluctuations caused by interest rate volatility.

By using derivative financial instruments to hedge exposures to changes in exchange rates and interest rates, Kyocera became exposed itself to credit risk. Credit risk is the failure of the counterparty to perform under the terms of the derivative contracts. When the fair value of a derivative contract is positive, the counterparty owes Kyocera, which creates repayment risk for Kyocera. When the fair value of a derivative contract is negative, Kyocera owes the counterparty and, therefore, it does not possess repayment risk. Kyocera minimizes the credit (or repayment) risk in derivative financial instruments by (1) entering into transactions with creditworthy counterparties, (2) limiting the amount of exposure to each counterparty, and (3) monitoring the financial condition of its counterparties.

Cash Flow Hedges

Kyocera uses certain foreign currency forward contracts designated as cash flow hedges to protect against foreign currency exchange rate risks inherent in its forecasted transactions related to purchase and sales.

        Kyocera charged deferred net gains of ¥30 million and net losses of ¥27 million and ¥8 million ($68 thousand) from accumulated other comprehensive income to foreign currency transaction gains (losses), net in the consolidated statements of income for the years ended March 31, 2005, 2006 and 2007, as a result of the execution of the hedged transactions.

Also, Kyocera uses interest rate swaps mainly to convert a portion of its variable rate debt to fixed rates. Kyocera charged deferred net losses of ¥78 million and ¥23 million ($195 thousand) from accumulated other comprehensive income to income from discontinued operations in the consolidated statements of income for the years ended March 31, 2005 and 2007. Kyocera charged deferred net losses of ¥18 million ($152 thousand) from accumulated other comprehensive income to equity in (losses) earnings of affiliates in the consolidated statement of income for the year ended March 31, 2007.

Kyocera recognized net losses of ¥75 million and net gains of ¥63 million ($534 thousand) in accumulated other comprehensive income at March 31, 2006 and 2007, respectively

 

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Other Derivatives

Kyocera’s main direct foreign export sales and some import purchases are denominated in the customers’ and suppliers’ local currency, principally the U.S. dollar, Euro and STG. Kyocera purchases foreign currency forward contracts with terms normally lasting less than three months to protect against the adverse effects that exchange-rate fluctuations may have on foreign-currency-denominated trade receivables and payables. Kyocera does not adopt hedge accounting for such derivatives. The gains and losses on both the derivatives and the foreign-currency-denominated trade receivables and payables are recorded as foreign currency transaction gains (losses), net in the consolidated statements of income.

The aggregate contract amounts of derivative financial instruments to which hedge accounting is not applied are as follows:

 

     (Yen in millions and U.S. dollars in thousands)
     March 31,
     2006    2007    2007

Foreign currency forward contracts to sell

   ¥ 118,911    ¥ 135,227    $ 1,145,992

Foreign currency forward contracts to purchase

     8,572      14,961      126,788

Interest rate swaps

     13,000      —        —  

13. FAIR VALUE OF FINANCIAL INSTRUMENTS

The fair values of financial instruments at March 31, 2006 and 2007 and the methods and assumptions used to estimate the fair value are as follows:

 

    (Yen in millions and U.S. dollars in thousands)  
    March 31,  
    2006     2007     2007  
    Carrying
Amount
    Fair Value     Carrying
Amount
    Fair Value     Carrying
Amount
    Fair Value  

Non-derivatives:

           

Assets:

           

Cash and cash equivalents (a)

  ¥ 300,809     ¥ 300,809     ¥ 282,208     ¥ 282,208     $ 2,391,593     $ 2,391,593  

Short-term investments (b)

    87,942       87,791       213,495       213,447       1,809,280       1,808,873  

Short-term finance receivables (c)

    36,940       36,946       —         —         —         —    

Securities and other investments (b)

    553,377       553,144       690,568       690,527       5,852,271       5,851,924  

Long-term finance receivables (c)

    77,140       77,164       —         —         —         —    
                                               
  ¥ 1,056,208     ¥ 1,055,854     ¥ 1,186,271     ¥ 1,186,182     $ 10,053,144     $ 10,052,390  
                                               

Liabilities:

           

Short-term borrowings (a)

  ¥ (90,865 )   ¥ (90,865 )   ¥ (15,250 )   ¥ (15,250 )   $ (129,237 )   $ (129,237 )

Current portion of long-term debt (c)

    (16,347 )     (16,367 )     (5,853 )     (5,880 )     (49,602 )     (49,831 )

Long-term debt (c)

    (33,360 )     (33,470 )     (7,283 )     (7,285 )     (61,720 )     (61,737 )
                                               
  ¥ (140,572 )   ¥ (140,702 )   ¥ (28,386 )   ¥ (28,415 )   $ (240,559 )   $ (240,805 )
                                               

Derivatives: