Kyocera 6-K 2006
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
Report of Foreign Private Issuer
Pursuant to Rule 13a-16 or 15d-16 of
the Securities Exchange Act of 1934
For the month of December 2006
Commission File Number: 1-07952
6 Takeda Tobadono-cho, Fushimi-ku,
Kyoto 612-8501, Japan
Indicate by check mark whether the registrant files or will file annual reports under cover of Form 20-F or Form 40-F:
Form 20-F X Form 40-F
Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Registration S-T Rule 101(b)(1):
Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Registration S-T Rule 101(b)(7):
Indicate by check mark whether by furnishing the information contained in this Form, the registrant is also thereby furnishing the information to the Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934.
Yes No X
If Yes is marked, indicate below the file number assigned to the registrant in connection with Rule 12g3-2(b); 82-
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereto duly authorized.
Date: December 19, 2006
Item 1. Summary of Kyocera Corporation and its Consolidated Subsidiaries
1. Selected Financial Data
(1) Consolidated Financial Data
The interim consolidated financial statements and the consolidated financial statements are expressed rounding off to millions of yen.
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(2) Non-Consolidated Financial Data
2. Business Overview
In August 2006, Kyocera Corporation sold its shares of Kyocera Leasing Co., Ltd., a subsidiary engaged in financing business, to Diamond Lease Company Limited., reflecting a part of promoting its policy of business selection and concentration and the financing business was accounted as a discontinued operation for the six months ended September 30, 2006 (the first half). Except this sale, there is no material change in the business of Kyocera Corporation and its consolidated subsidiaries (Kyocera) for the first half.
3. Scope of Consolidation and Application of the Equity Method
Kyocera Corporation sold Kyocera Leasing Co., Ltd., a 100% subsidiary, to Diamond Lease Company Limited in the first half. As a result of this sale, Kyocera Corporation discontinued to apply subsidiary to Kyocera Leasing Co., Ltd.
As of September 30, 2006, Kyocera had 63,235 employees, of whom 2,616 work in the Fine Ceramic Parts Group, 10,029 work in the Semiconductor Parts Group, 5,605 work in the Applied Ceramic Products Group, 22,240 work in the Electronic Device Group, 3,081 work in the Telecommunications Equipment Group, 12,699 work in the Information Equipment Group, 1,495 work in the Optical Equipment Group, 3,900 work in Others and 1,570 work in Corporate. Kyocera Corporation had 12,457 employees.
Kyocera Corporations labor union does not belong to labor unions organized by industry. The labor unions of several subsidiaries belong to labor unions organized by industry. There is no material item to be specifically addressed regarding relationship between labor and management.
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Item 2. Business Results and Financial Position
1. Summary of Financial Results
(1) Consolidated Financial Results
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Kyocera develops, produces and markets various kinds of products for the telecommunications and information processing and environmental preservation markets. Kyocera Corporation was established in 1959 as a manufacturer of ceramic parts for electronic equipment and has been expanding and diversifying its business mainly through merger and acquisition activities, as well as applying its ceramic technologies to the areas of semiconductor parts, electronic components, telecommunication, metal processing, medical and dental implants and solar energy fields. Kyocera develops, produces and markets a variety of parts and devices for electronic equipment such as computers, automobiles, printers and copiers as well as consumer electronic products such as mobile phone handsets and digital still cameras. Kyocera earns revenue and income and generates cash from sales of these products.
Kyoceras revenue and profits mostly come through sales of products and providing services in IT industries, including electronic equipment industries. During the first half, in the electronics industry, a year-on-year increase in production of mobile phone handsets and digital TVs led to a considerable increase in demand for electronic components for these products. Kyocera achieved an increase in orders, production, sales and income from continuing operations before income taxes in the first half compared with the previous first half in both the components and equipment businesses thanks to active efforts to launch new products in the favorable market environment and to improved productivity. In addition, tax refunds in the amount of ¥4,356 million accompanying the correction disposition related to transfer pricing adjustment.
Kyoceras sales in overseas markets increased by 16.5% compared with the previous first half. Since almost all overseas sales were denominated in the U.S. dollars or Euro, the yen depreciated ¥6 against the U.S. dollar and ¥10 against the Euro compared with the average exchange rates in the previous half, respectively. As a result, net sales after translation into yen were pushed up by approximately ¥ 21.8 billion compared with the previous first half.
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1) Fine Ceramic Parts Group
Orders, production and sales in this reporting segment increased significantly compared with the previous first half. This was mainly because a recovery in the semiconductor industry led to a considerable increase in demand for ceramic parts for semiconductor fabrication equipment. As a result, operating profit in this reporting segment increased significantly compared with the previous first half.
2) Semiconductor Parts Group
Orders, production and sales in this reporting segment increased compared with the previous first half due to active demand for ceramic packages used in digital consumer equipment such as mobile phone handsets. As a result, operating profit in this reporting segment increased significantly compared with the previous first half.
3) Applied Ceramic Products Group
Orders, production and sales in this reporting segment increased in the first half compared with the previous first half due to the favorable performance of the solar energy business, amid an expanding global market spurred by rising environmental awareness, and also to increased sales of cutting tools for the automotive industry. Operating profit from solar energy business decreased due to costs for repair of defects in a portion of the products sold overseas up to the year ended March 31, 2004. Kyocera provides long-term warranties for such products, and accordingly set aside a reservation in the amount of approximately ¥3.9 billion in the first half for warranty costs. As a result, operating profit in this reporting segment as a whole decreased as compared with the previous first half.
4) Electronic Device Group
Orders, production and sales increased substantially in this reporting segment compared with the previous first half. Along with a particularly significant increase of operating at AVX Corporation, a U.S. subsidiary, compared with the previous first half, demand for capacitors, crystal-related components and connectors, etc., expanded due to strong production activity for digital consumer equipment. As a result, operating profit in this reporting segment increased significantly compared with the previous first half.
5) Telecommunications Equipment Group
Orders, production and sales in this reporting segment increased compared with the previous first half due mainly to favorable sales of new models of mobile phone handsets in the domestic market. Operating profit also improved significantly compared with the previous first half, due to the positive effect of increased sales in the domestic mobile phone handset business and to decreased loss at Kyocera Wireless Corp., a U.S. subsidiary.
6) Information Equipment Group
Orders, production and sales in this reporting segment increased compared with the previous first half due to sales growth of digital multifunctional products and printers overseas and to the positive effect of the yens depreciation against the Euro and the U.S. dollar. As a result, operating profit in this reporting segment increased compared with the previous first half.
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7) Optical Equipment Group
Orders, production and sales in this reporting segment decreased compared with the previous first half due mainly to the downsizing of the camera equipment business, while operating loss was reduced by effects of a decrease in expenses for structural reforms.
Orders, production and sales in Others increased compared with the previous first half due to sales growth in the telecommunications engineering business at Kyocera Communication Systems Co., Ltd. Operating profit also increased due primarily to an increase in profits in the electronic device materials business at Kyocera Chemical Corporation.
Sales increased compared with the previous first half due to burgeoning demand for products in the Fine Ceramic Parts Group and the Semiconductor Parts Group.
2) United States of America
Sales of the Semiconductor Parts Group and the Electronic Device Group increased due to expanded demand for components for digital consumer products. Sales of the Information Equipment Group also increased.
Sales increased compared with the previous first half due to expanded component demand, particularly in the Electronic Device Group.
Increased demand for solar energy products and products in the Electronic Device Group, coupled with sales growth in the Information Equipment Group, resulted in an increase in sales compared with the previous first half.
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Sales increased due to sales growth in the Telecommunications Equipment Group and the Information Equipment Group.
(2) Cash flow
Cash and cash equivalent at September 30, 2006 decreased by ¥37,058 million to ¥263,751 million compared with at March 31, 2006.
1) Cash flow from operating activities
Net cash provided by operating activities for the first half decreased by ¥23,849 million to ¥ 47,923 million from the previous first half of ¥71,772 million. Although net income increased by ¥29,279 million, cash and cash equivalent in connection with receivables and inventories decreased compared with the previous first half.
2) Cash flow from investing activities
Net cash used in investing activities in the first half decreased by ¥49,007 million to ¥74,084 million from the previous first half of ¥123,091 million. This was due to decreases in payment for purchases of available-for-sale securities and property, plant, equipment and intangible assets and an increase in maturities of held-to-maturity securities, which exceeded decreases in sales and maturities of available-for-sale securities.
3) Cash flow from financing activities
Net cash used in financing activities for the first half increased by ¥3,422 million to ¥13,079 million from the previous first half of ¥9,657 million. This was due to a decrease in proceeds from issuance of long-term debt and an increase in payments of long-term debt, which exceeded an increase in short-term debt.
2. Production, Orders and Distribution
Production, orders and distribution of Kyocera are disclosed related to each reporting segment in 1. Summary of Financial Results.
3. Management Challenges
Kyocera aims to maintain ongoing sales expansion and high profitability in its components and equipment businesses in order to be a creative company that continues to grow. In this regard, Kyocera has implemented several initiatives outlined below to quickly achieve its target of a pre-tax profit ratio of 15% or higher.
1) Reinforce the Amoeba Management System Kyocera is strengthening its Amoeba Management System, which is unique management resource of Kyocera and remains a source of competitive advantage over other companies. It has been a major driving force for growth since its foundation. Kyocera plans to reinforce this system to revitalize operations across development, manufacturing, sales and back office divisions. The aim is to boost ability to achieve targets.
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2) Boost profitability in the equipment business
Kyocera has been conducting fundamental structural reforms in the Telecommunications Equipment Group over the past two years as a means of raising profitability. The positive effects of the reform have been reflected in steadily improving business performance in the first half. In the second half of the year ending March 31, 2007 and onward, Kyocera will strive to expand its sales and profits by maximizing group-wide synergies to promote business development.
Kyocera also seeks to further improve business performance in the Information Equipment Group. To achieve this, Kyocera will expand sales of multifunctional products and printers that are distinctive from the competition through effective utilization of component and device technology within Kyocera. Kyocera will also continue to release new high-value-added products, such as color and network compatible models.
4. Significant Patents and Licenses
New significant license agreements concluded in the first half are as follows.
Agreement concerning stock transfer
Kyocera Corporation and Diamond Lease Company Limited reached an agreement for the transfer of 100% of the shares of Kyocera Leasing Co., Ltd. from Kyocera to Diamond Lease on July 27, 2006 and Kyocera Corporation transferred its shares to Diamond Lease Company Limited in August 1, 2006.
5. Research and Development Activities
Kyocera aims to be a creative company that continues to grow. To achieve this objective, Kyocera seeks to enhance its components and equipment businesses and create new technologies, products and businesses by integrating group-wide management resources while advancing, focusing and integrating technological capabilities. Kyocera will channel its energies into two high-growth-potential areas; the markets for telecommunications and information processing and for environmental preservation. R&D activities are conducted in all of these markets in the realms of materials, components, devices and equipment.
Specific initiatives in each reporting segment are as follows.
1) Fine Ceramic Parts Group
By leveraging competitive advantages in fine ceramic materials technology, process technology and design technology, Kyocera can strengthen the development of fine ceramic components for next-generation semiconductor fabrication equipment and large LCD fabrication equipment, as well as high-quality, cost-competitive sapphire substrates for LEDs, which are expected to have growing application in the lighting field going forward. In the growing automotive market, efforts are being undertaken to develop products that meet the need for advanced electronics and growing concerns with safety and the environment. Specific projects include the development of glow plugs by fully utilizing the high temperature durability of ceramics and piezo actuators that enable precision control for the fuel injection of diesel engine cars, which are becoming more widespread in Europe.
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2) Semiconductor Parts Group
Kyocera is developing new ceramic and organic packages for digital consumer equipment, an area in which demand is expected to continue expanding. In the ceramic package business, Kyocera is developing sophisticated, small, slim packages in response to advancements in mobile phones, and low-temperature co-fired multilayer substrates built in various functionalities. Elsewhere, efforts are being made to develop packages for sensors in the automotive market and ceramic substrates for the medical equipment market to keep pace with the growing application of ceramic packages. In the organic packages business, Kyocera is also developing high density printed wiring boards for next-generation MPUs and their peripheral devices.
3) Applied Ceramic Products Group
Kyocera is working on the development of products for the environmental preservation market. In solar energy business, which is becoming increasingly mainstream, Kyocera is developing various next-generation solar batteries while striving to further enhance conversion efficiency. Kyocera is also working toward the practical application of solid oxide fuel cells (SOFCs) for residential use, which are expected to be the next-generation distributed power generation system for small-scale power sources.
4) Electronic Device Group
Kyocera is developing various products for the digital consumer equipment market as the increasing sophistication of items in this sector is expected to bring about the need for a more diverse array of components for them. Products developed by Kyocera include smaller, higher-capacitance ceramic capacitors and low-inductance ceramic capacitors, ultra-small low-frequency crystal units, ceramic resonators and shock sensors. Kyocera is also developing GPS (Global Positioning System) modules and various capacitors by utilizing enhanced material properties.
In the thin-film devices, Kyocera is developing thermal printheads for high-resolution digital photo printers, and LCDs for industrial use equipped with an LED backlight to meet needs from an environmental perspective. Work is also being done towards the commercial application of organic light emitting diode displays that realize low power consumption and that have moving image quality seen as outstanding for mobile equipment.
5) Telecommunications Equipment Group
Kyocera is developing advanced CDMA handsets with terrestrial digital TV and IP telephony capabilities for the mobile telecommunications market, which is characterized by diversifying functionality. Development is also proceeding for sophisticated PHS base stations and handsets with multiple service capability in response to the increasing speed of data transmission in the domestic PHS market. Further, Kyocera is strengthening the development of wireless broadband systems capable of stable high-speed, high-volume data transmission, such as iBurstTM related equipment.
6) Information Equipment Group
Kyocera is working on the development of new products based on its unique ECOSYS concept, realized by the amorphous silicon drum with superior wear resistance. These new products focus on color capability and increased speed. Besides seeking to expand its color model lineup, Kyocera is also developing document solutions equipment that can handle the integrated management of documents and digital information.
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7) Optical Equipment Group
Through the fusion of electronic material and device technologies in the optical field held within the Group, Kyocera is developing various lenses, such as aspheric lens and optical components.
The Kyocera Chemical Group is working on the development of semiconductors and LCD related materials. Specifically, it is developing high-temperature photo-sensitive resins used to protect the surface of semiconductors as well as photo spacers for LCDs. It is also pushing ahead with the development of materials for capacitors and solar cells, thereby maximizing synergies with Kyocera businesses.
The Kyocera Communication Systems Group is developing technologies for mobile communications equipment, including next-generation mobile phones, for FMC (Fixed Mobile Convergence) related products with wireless technology, and for wave measurement tools. It is also developing general authentication and security technologies that are ideal for various advanced networks.
Research and development expenses for the first half increased by ¥929 million, or 3.2%, to ¥30,257 million, compared with the previous first half, which accounted for 4.9% of Kyoceras total net sales. Research and development expenses by reporting segment were as follows; the Fine Ceramic Parts Group: ¥1,976 million (increased by ¥438 million, or 28.5% compared with the previous first half), the Semiconductor Parts Group: ¥1,783 million (decreased by ¥14 million, or 0.8%); the Applied Ceramic Products Group: ¥2,014 million (decreased by ¥36 million, or 1.8%); the Electronic Device Group: ¥5,822 million (increased by ¥522 million, or 9.8%); the Telecommunications Equipment Group: ¥7,897 million (decreased by ¥200 million, or 2.5%); the Information Equipment Group; ¥8,584 million (increased by ¥85 million, or 1.0%); the Optical Equipment Group: ¥344 million (decreased by ¥257 million, or 42.8%); and Others: ¥1,837 million (increased by ¥391 million, or 27.0%).
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Item 3. Equipment and Facilities
1. Information on Equipment and Facilities
There was no material change in equipment and facilities in the first half.
2. Plan for new additions or disposal
(1) New Additions
In the first half, there was no material change in plan for new additions, which prepared on March 31, 2006.
(2) Material Sale and Disposal of Equipment and Facilities
Kyocera does not plan to sell or dispose equipment or facilities that significantly affect its production capability, except for its sale and disposal of ordinary renewal of equipment and facilities.
Item 4. Information on Kyocera Corporation
1. Authorized Capital and Common Stock
(1) Number of Authorized Capital and Common Stock
<Number of Shares of Common Stock Issued>
As of September 30, 2006, and December 19, 2006, 191,309,290 shares of common stock were issued, registered on Tokyo Stock Exchange, Osaka Securities Exchange in Japan and New York Stock Exchange in the United States as follows:
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(2) Stock Acquisition Rights
The following table shows stock acquisition rights issued pursuant to Articles 280-20 and 280-21 of the former Commercial Code of Japan.
<Stock acquisition rights approved at the stockholders meeting held on June 25, 2003>
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<Stock acquisition rights approved at the stockholders meeting held on June 25, 2004>
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<Stock acquisition rights approved at the stockholders meeting held on June 28, 2005>
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(3) Status of Common Stock and Capital
(4) Major Shareholders
The following table shows the ten largest shareholders of record of Kyocera Corporation as of September 30, 2006.
(Note 1) Kyocera Corporation which holds 3,305 thousand shares of treasury stock without voting rights is excluded from the list of major shareholders above.
(Note 2) Nats Cumco represents the registered name of Citibank, N.A. which is a depositary of American Depositary Share of Kyocera Corporation.
(Note 3) On August 15, 2006, in accordance with the Securities and Exchange Law of Japan, Mitsubishi UFJ Financial Group informed Kyocera Corporation that they became a holder of over 5% of the total issued voting shares of Kyocera Corporation, and they held shares of Kyocera Corporation as shown in the following table as of July 31, 2006. However, they were not included in the above major shareholders as a single major holder because all of certain partners of Mitsubishi UFJ Financial Group were not the shareholders of record as of September 30, 2006.
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(5) Voting Rights
The following table shows voting rights of common stock of Kyocera Corporation as of September 30, 2006.
Kyocera Corporation held treasury stocks of 3,304,500 shares, and its ownership to total number of shares issued was 1.73% as of September 30, 2006.
2. Price Range of Shares
The following table shows price range of shares of Kyocera Corporation for the six months ended September 30, 2006.
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The following table shows the change in members of Directors since Kyocera Corporation filed its Annual Report (Yuukashouken-houkokusho) for the year ended March 31, 2006 with the Director of the Kanto Local Finance Bureau of the Ministry of Finance pursuant to the Securities and Exchange Law of Japan on June 26, 2006.
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Item 5. Accounting Information
1. Interim Consolidated Financial Statements and Interim Non-consolidated Financial Statements
(1) Pursuant to the article 81 of Regulations Concerning the Terminology, Forms and Preparation Methods of Interim Consolidated Financial Statements (Ministry of Finance Ordinance No. 24, 1999), the interim consolidated financial statements are prepared in conformity with the accounting principles generally accepted in the United States of America (U.S. GAAP).
(2) Pursuant to Regulations Concerning the Terminology, Forms and Preparation Methods of Interim Financial Statements (Ministry of Finance Ordinance No. 38, 1977, Regulation for Interim Financial Statements), the interim non-consolidated financial statements have been prepared in accordance with accounting principles generally accepted in Japan (Japanese GAAP).
The interim non-consolidated financial statements for the six months ended September 30, 2005 are prepared in conformity with pre-amendment of Regulation for Interim Financial Statements. The interim non-consolidated financial statements for the six months ended September 30, 2006 are prepared in conformity with amended Regulation for Interim Financial Statements.
2. Independent Accountants Report
In accordance with the article 193-2 of the Securities Exchange Law, the interim consolidated financial statements and the interim non-consolidated financial statements for the six months ended September 30, 2005 are reviewed by ChuoAoyama PricewaterhouseCoopers. The interim consolidated financial statements and the interim non-consolidated financial statements for the six months ended September 30, 2006 are reviewed by Misuzu PricewaterhouseCoopers. ChuoAoyama PricewaterhouseCoopers was renamed Misuzu PricewaterhouseCoopers on September 1, 2006.
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1. CONSOLIDATED FINANCIAL STATEMENTS
< CONSOLIDATED BALANCE SHEETS >
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< CONSOLIDATED STATEMENTS OF INCOME >
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< CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY >
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< CONSOLIDATED STATEMENTS OF CASH FLOWS >
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<Notes to the Interim Consolidated Financial Statements>
1. Accounting Principles, Procedures and Financial Statements Presentation
In December 1975, Kyocera Corporation filed a registration statement, Form S-1 and a registration form for American Depositary Receipt (ADR), in accordance with the Securities Exchange Act of 1933, with the United States Securities and Exchange Commission (SEC) and made a registration of its common stock and ADR there. In accordance with the mentioned act, Kyocera Corporation again filed Form S-1 and a registration form for ADR with SEC in February 1980, and listed its ADR on the New York Stock Exchange in May 1980.
Kyocera Corporation has filed Form 20-F as an annual report, which is prepared in accordance with U.S. GAAP with SEC once a year in order to conform to the section 13 of the Securities Exchange Act of 1934. Kyocera Corporation and its consolidated subsidiaries (Kyocera) have also prepared interim consolidated financial statements in accordance with U.S. GAAP. The followings are accounting principles and regulations with which Kyocera is required to comply: Regulations for filing and reporting to SEC (Regulation S-X, Accounting Series Releases, Staff Accounting Bulletins, and etc.), Statements of Financial Accounting Standards Board (SFAS), Accounting Principles Board (APB) Opinions and Accounting Research Bulletin (ARB), and etc.
The following paragraphs describe the major differences between U.S. GAAP and Japanese GAAP, and where the significant differences exist, the amount of effect to income before income taxes pursuant to Japanese GAAP are also disclosed.
(1) Revenue Recognition
Kyocera adopts Staff Accounting Bulletin (SAB) No. 104 Revenue Recognition in Financial Statements.
(2) Foreign Currency Translation and Forward Exchange Contracts
Assets and liabilities denominated in foreign currencies and financial statements of foreign subsidiaries are translated based on SFAS No. 52 Foreign Currency Translation. Forward exchange contracts are accounted for by 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 SFAS No. 133.
(3) Accrued Pension and Severance Costs
Accrued pension and severance costs are computed based on SFAS No. 87 Employers Accounting for Pensions. This effect for the six months ended September 30, 2005, 2006 and for the year ended March 31, 2006 amounted to ¥416 million, ¥539 million and ¥124 million, respectively.
(4) Minority Interests
Minority interests is presented as a separate category between liabilities and stockholders equity in the consolidated balance sheets.
(5) Comprehensive Income
Kyocera applies SFAS No. 130 Reporting Comprehensive Income and discloses comprehensive income in stockholders equity. According to this standard, comprehensive income is defined as the change in equity except for capital transaction and it consists of net income and other comprehensive income. Other comprehensive income includes foreign currency translation adjustments, minimum pension liability adjustments, net unrealized gains (losses) on securities and net unrealized gains (losses) on derivative financial instruments.
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(6) Stock Issuance Costs
Stock issuance costs, net of tax are deducted from the additional paid-in capital.
(7) Business Combinations
Kyocera adopts SFAS No. 141 Business Combinations.
(8) Goodwill and Other Intangible Assets
Kyocera adopts SFAS No. 142 Goodwill and Other intangible assets.
(9) Derivative Financial Instruments
Kyocera adopts SFAS No. 133, as amended by SFAS No. 138.
2. Summary of Accounting Policies
The accounts of Kyocera Corporation and its Japanese subsidiaries are generally maintained to conform to Japanese accounting practices. Adjustments, including the applicable income tax effects, which are not recorded in Kyocera Corporations books of account, have been made to the accompanying interim consolidated financial statements in order to present them in conformity with accounting principles generally accepted in the United States of America.
(1) Basis of Consolidation and Accounting for Investments in Affiliated Companies
The interim 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 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 Kyoceras financial position and result of operations.
All significant inter-company transactions and accounts are eliminated. Investments in 20% to 50% owned companies and insignificant subsidiaries are accounted for by the equity method, whereby Kyocera includes in net income its equity in the earnings or losses of these companies.
(2) 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 and delivered to the customer in accordance with the terms of an agreement of sale, there is a fixed or determinable selling price, title and risk of loss have been transferred, and collectibility is reasonably assured. These conditions are satisfied at the time of delivery to customers in domestic sales (FOB destination) and at the time of shipment (FOB shipping) for export sales.
Kyocera records an estimated sales return allowance at the time of sales based on its historical returns experience.
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 based on its historical repair experience.
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(3) Cash and Cash Equivalents
Cash and cash equivalents include time deposits and certificates of deposit with original maturities of three months or less.
(4) Translation of Foreign Currencies
Assets and liabilities of consolidated foreign subsidiaries and affiliates accounted for by 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.
(5) 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. Kyoceras 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 customers 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 are stated at the lower of cost or market. Cost is determined by the average method for approximately 55% and 61% and 57% of finished goods and work in process at September 30, 2005, 2006 and March 31, 2006, respectively, and by the first-in, first-out method for all other inventories. Kyocera recognizes estimated write-down of inventories for excess, slow-moving and obsolete inventories.
Certain investments in debt and equity securities are accounted for by SFAS No. 115 Accounting for Certain Investments in Debt and Equity Securities. Securities classified as available-for-sale are recorded at the fair value, with unrealized gains and losses excluded from income and reported in other comprehensive income, net of tax. Securities classified as held-to-maturity securities are recorded at amortized cost.
(8) 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:
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 accounts.
Kyocera has adopted SFAS No. 142. This required 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 and 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 amortizations for intangible assets are as follows:
(10) Impairment of long-lived assets
Kyocera has adopted SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. This requires Kyocera to review its long-lived assets and intangible assets with definite useful lives for impairment periodically. Long-lived assets and intangible assets with definite useful lives are considered to be impaired when the expected undiscounted cash flow from the asset is less than its carrying value. A loss on impairment is recognized based on the amount by which the carrying value exceeds the fair value of the long-lived assets and intangible assets with definite useful lives.
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(11) 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, as amended by SFAS No. 138. 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 designated certain interest rate swaps and foreign currency forward contracts as cash flow hedges under SFAS No. 133 to hedge cash inflow or outflow related with existing assets, liabilities or forecasted transactions such as purchase commitments and sales. Most of foreign currency forward contracts are entered into as hedges of existing foreign currency denominated assets and liabilities and as such do not qualify for special 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 hedges 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.
(12) 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 APB Opinion No. 25, Accounting for Stock Issued to Employees, and its related interpretations. In fiscal 2007, Kyocera adopted SFAS No. 123 (revised 2004) (SFAS No. 123R), Share-Based Payment. This statement is a revision of SFAS No.123 and supersedes APB Opinion No. 25 and its related interpretations. Kyocera 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.
(13) 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 period in which they are paid.
(14) Research and Development Expenses and Advertising Expenses
Research and development expenses and advertising expenses are charged to operations as incurred.
(15) Use of Estimates
The preparation of consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
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(16) New Accounting Standards
In December 2004, the FASB issued SFAS No. 123R. 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. Kyocera adopted SFAS No.123R effective on April 1 2006, and the impact of SFAS No. 123R was ¥ 158 million on Kyoceras consolidated results of operations for the six months ended September 30, 2006.
In June 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes (FIN 48) which clarifies the accounting for uncertainty in income taxes recognized in the financial statements in accordance with FASB Statement 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 FIN 48 on the Consolidated Financial Statements.
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 SFAS No. 157 in its 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, 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 is required to initially recognize the funded status of its defined benefit plans and to provide the required disclosures in accordance with SFAS No. 158 as of the year ending March 31, 2007. 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 SFAS No. 158 on the consolidated financial statements.
Certain reclassifications of previously reported amounts have been made to the consolidated statements of income, cash flows and corresponding footnote disclosures for the six months ended September 30, 2005 and for the year ended March 31, 2006 to conform to the current period presentation. Such reclassifications have no effect on Kyoceras stockholders equity, net income and cash flows.
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3. Discontinued Operations
On August 1, 2006, Kyocera sold 100% of the shares of Kyocera Leasing Co., Ltd. (KLC) to Diamond Lease Company Limited for ¥25,274 million, aimed to concentrate management resources on its businesses to enhance and improve its corporate value. The results of operations of KLC had been reported as the Others segment previously. Kyocera has accounted for the results of operations and the sale of KLC less appreciable income tax, 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 periods financial statements and related footnote disclosures have been reclassified.
The results of operations of discontinued operations for the six months ended September 30, 2005 and 2006 and for the year ended March 31, 2006 are summarized as follows:
The financial positions of discontinued operations as of September 30, 2005 and March 31, 2006 are summarized as follows:
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4. Investment in Debt and Equity Securities
Investments in debt and equity securities as of September 30, 2005, 2006 and March 31, 2006, included in short-term investments (current assets) and in securities and other investments (non-current assets) are summarized as follows:
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5. Assets Pledged as Collateral and Liabilities with Assets Pledged
Kyoceras assets pledged as collateral for long-term debt at September 30, 2005, 2006 and at March 31, 2006 amounted to ¥5,876 million, ¥5,857 million and ¥5,692 million of property and equipment, net of accumulated depreciation, respectively.
Kyoceras current portion of long-term debt with assets pledged at September 30, 2005, 2006 and at March 31, 2006 amounted to ¥527 million, ¥577 million and ¥702 million, respectively. Kyoceras long-term debt (excluding current portion) with assets pledged at September 30, 2005, 2006 and at March 31, 2006 amounted to ¥3,783 million, ¥3,082 million and ¥3,447 million, respectively.
Kyoceras investment in WILLCOM, INC., which was ¥4,618 million at September 30, 2005 and ¥3,571 million at March 31, 2006 accounted for by the equity method, was pledged as collateral for loans from financial institutions of WILLCOM, INC.
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6. Derivative Financial Instruments and Hedging Activities
Kyoceras activities expose it to a variety of market risks, including the effects of changes in foreign currency exchange rates and interest rates. Approximately 60% of Kyoceras revenues are generated from overseas customers, which exposes to foreign currency exchange rates. These financial exposures are monitored and managed by Kyocera as an integral part of its overall risk management program. Kyoceras 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 Kyoceras 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 uses 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 exposes itself to credit risk. Credit risk is the failure of the counterparty to perform under the terms of the derivative contract. 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 interest rate swaps mainly to convert a portion of its variable rate debt to fixed rates. Kyocera charged deferred net loss of ¥27 million, ¥8 million and ¥27 million from accumulated other comprehensive income to interest expense in the consolidated statement of income, for the six months ended September 30, 2005 and 2006 and for the year ended March 31, 2006, respectively.
Also, 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 commitments and sales. Kyocera charged deferred net loss of ¥23 million from accumulated other comprehensive income to income from discontinued operations in the consolidated statement of income for the six months ended September 30, 2006.
Kyoceras 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. The gain and losses on both the derivatives and the foreign currency-denominated trade receivable and payables are recorded as foreign currency transaction gains (losses) in the consolidated statements of income. Kyocera also utilizes indexed share options to decrease the adverse effects that price fluctuations of the holding securities may have on its consolidated results of operations
Kyocera does not adopt hedge accounting for such derivatives.
The aggregate contract amounts of derivative financial instruments to which hedge accounting is not applied are as follows:
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7. Commitments and Contingencies
At September 30, 2006, Kyocera had contractual obligations for the acquisition or construction of property, plant and equipment aggregating ¥19,836 million principally due within one year.
Kyocera is lessee under long-term operating leases primarily for office space and equipment. Future minimum lease commitments under non-cancelable operating leases at September 30, 2006 are as follows:
Kyocera has purchase agreements for a part of its anticipated amount of a certain material. Under the agreements, Kyocera purchased ¥1,133 million for the six months ended September 30, 2006 and is obligated to purchase ¥91,688 million by the end of December 2018.
Kyocera guarantees the debt of a customer, employees and an unconsolidated subsidiary. At September 30, 2006, each amount of these guarantees was ¥34 million, ¥160 million and ¥550 million. The financial guarantees are made in the form of commitments and letters of awareness issued to financial institutions and generally obligate Kyocera to make payments in the event of default by the borrowers. Kyocera also guarantees the leasing debts of customers of the Information Equipment Group. At September 30, 2006, the amount of such guarantee was ¥324 million.
Kyocera is subject to various lawsuits and claims, which arise, in the ordinary course of business. Kyocera consults with legal counsel and assesses the likelihood of adverse outcome of these contingencies. Kyocera records liabilities for these contingencies when the likelihood of an adverse outcome is probable and amount is reasonably estimate. However, based on the information available, management believes that damages, if any, resulting from these actions will not have a significant effect on Kyoceras consolidated results of operations and financial position.
8. Accumulated Other Comprehensive Income
Kyoceras accumulated other comprehensive income is as follows:
9. Supplemental Expense Information
Research and development expenses for the six months ended September 30, 2005, 2006 and for the year ended March 31, 2006 amounted to ¥29,328 million, ¥30,257 million and ¥57,436 million, respectively.
Advertising expenses for the six months ended September 30, 2005, 2006 and for the year ended March 31, 2006 amounted to ¥5,010 million, ¥5,694 million and ¥10,840 million, respectively.
Shipping and handling costs for the six months ended September 30, 2005, 2006 and for the year ended March 31, 2006 amounted to ¥6,474 million, ¥7,527 million and ¥13,984 million, respectively, and were included in selling, general and administrative expenses in the consolidated statements of income.
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10. Segment Reporting
Main products or businesses of each reporting segment are as follows;
Kyocera has sold its share in Kyocera Leasing Co., Ltd. (KLC), a subsidiary engaged financial services included in Others,, as a result, business results and profit on sales for KLC for the first half have been recorded as income from discontinued operations in conformity with accounting principles generally accepted in the U.S.
Additionally, commencing in the first half, results of Precision Machine Division of Kyocera Corporation, previously included within Corporate, has been reclassified into Others.
Accordingly, previously reported results of related segments for September 30, 2005 and 2006 and for the year ended March 31, 2006 have been reclassified.
Inter-segment sales, operating revenue and transfers are made with reference to prevailing market prices. Transactions between reportable segments are immaterial and not shown separately. Operating profit for each reporting segment represents net sales, less related costs and operating expenses, excluding corporate revenue and expenses, equity in earnings (losses), income taxes and minority interest.
Information by reporting segments for the six months ended September 30, 2005 and 2006 and for the year ended March 31, 2006 is summarized as follows:
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Geographic Segments (Sales by Region)
There are no individual countries of which proportion of sales to Kyoceras consolidated net sales is material in Asia, Europe and Others.
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Geographic Segments (Sales and Operating Profit by Geographic area)
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11. Earnings Per Share
A reconciliation of the numerators and the denominators of basic and diluted earnings per share (EPS) computations is as follows:
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12. Supplemental Cash Flow Information
Supplemental information related to the consolidated statements of cash flows is as follows:
13. Notice of tax assessment based on transfer pricing adjustment
On March 28, 2005, Kyocera Corporation received a notice of tax assessment based on transfer pricing adjustments from the Osaka Regional Tax Bureau stating that, in the Bureaus judgment, allocation of profit earned from transfers of products between Kyocera Corporation and its overseas subsidiaries was not appropriate for the five years from the year ended March 31, 1999 through the year ended March 31, 2003. The notice indicated that income should be adjusted upwards ¥24,394 million and that resultant additional tax, including local taxes, etc., amounted to ¥12,748 million. On May 24, 2005, Kyocera Corporation filed a complaint against tax assessment based on transfer pricing adjustments with the Osaka Regional Tax Bureau.
On September 25, 2006, Kyocera Corporation received an opposition decision letter from the Bureau that voided a portion of the original disposition. In accordance with this opposition decision, ¥4,356 million of tax refunds, including local taxes, is recognized as income tax benefits for the six months ended September 30, 2006. Kyocera Corporation remains in disagreement with the decision concerning the portion of the original disposition that was not voided, and therefore on October 23, 2006, Kyocera Corporation submitted a written claim for examination with the Osaka Board of Tax Appeals. Concurrently, Kyocera Corporation is undertaking comprehensive deliberations that include consideration of a motion for mutual agreement procedures with the aim of avoiding double taxation within Kyocera.
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14. Sale of Share of Taito Corporation
On September 28, 2005, Kyocera Corporation sold its entire holding of shares of Taito Corporation (Taito) (36.02% of outstanding shares), an equity-method affiliate, engaged in the amusement business, in a tender offer bid for Taito shares by Square Enix Co., Ltd., one of the leading companies in the game software industry. As a result of this sale of Taito shares, Kyocera Corporation recorded a gain of ¥6,931 million for the six months ended September, 2005.
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Non-Consolidated Results of Kyocera Corporation (parent company)
for the Six Months Ended September 30, 2006
The interim non-consolidated financial statements are in conformity with accounting principles generally accepted in Japan.
1. Results for the six months ended September 30, 2006 :
(1) Results of operations :
1. Average number of common stock outstanding during the period :
2. Change in accounting policies : None
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(2) Financial position :
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