UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington,

WASHINGTON, D.C. 20549

FORM 20-F

oREGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g)
OF THE SECURITIES EXCHANGE ACT OF 1934

[OR] REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (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

þANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended March 31, 2004

For the fiscal year ended March 31, 2001OR

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

Commission file number 1-7616

PIONEER KABUSHIKI KAISHA
(Exact name of Registrant as specified in its charter)

PIONEER CORPORATION
(Translation of Registrant’s name into English)

JAPAN
(Jurisdiction of incorporation or organization)

4-1, MEGURO 1-CHOME, MEGURO-KU, TOKYO 153-8654, JAPAN
(Address of principal executive offices)

Securities registered pursuant to Section 12(b) of the Act.

   
Title of each class
 Name of each exchange on which registered


Common Stock, par value 50 yen
per share, each represented by
one American Depositary Share
 New York Stock Exchange


Securities 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.

   
  Outstanding as of
March 31, 20012004
Title of class(Japan time)

 (Japan time)
Common Stock 179,894,370175,430,874

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.

YesXNo


Yesþ Noo

Indicate by check mark which financial statement item the registrant has elected to follow.

Item 17XItem 18


2Item 17þ Item 18o




TABLE OF CONTENTS

Certain Defined Terms
Cautionary Statement with Respect to Forward-Looking Statements
PART I
Item 1. Identity of Directors, Senior Management and Advisers
Item 2. Offer Statistics and Expected Timetable
Item 3. Key Information
Item 4. Information on the Company
Item 5. Operating and Financial Review and Prospects
Item 6. Directors, Senior Management and Employees
Item 7. Major Shareholders and Related Party Transactions
Item 8. Financial Information
Item 9. The Offer and Listing
Item 10. Additional Information
Item 11. Quantitative and Qualitative Disclosures About Market Risk
Item 12. Description of Securities Other than Equity Securities
PART II
Item 13. Defaults, Dividend Arrearages and Delinquencies
Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds
Item 15. [Reserved]
Item 16. [Reserved]
PART III
Item 17. Financial Statements
Item 18. Financial Statements
Item 19. Exhibits
Index to Consolidated Financial Statements and Schedules
Independent Auditors’ Report
Consolidated Balance Sheets
Consolidated Statements of Income
Consolidated Statements of Shareholders’ Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Independent Auditors’ Report on Supplemental Information
Supplemental Notes to Consolidated Financial Statements to Conform with Regulation S-X
Valuation and Qualifying Accounts
Articles of Incorporation
MPEG-2 Patent Portfolio License


TABLE OF CONTENTS

EX-13.(a) Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906
     
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Item 16. [Reserved]    
 
PART III  91
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Item 17. Financial Statements90EX-1.01 The Articles of Incorporation, as amended and currently in effect
Item 18. Financial Statements90EX-12.01 Certification of Chief Executive Officer pursuant to Section 302
EX-12.02 Certification of Chief Financial Officer pursuant to Section 302
Item 19. Exhibits90

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Certain Defined Terms

As used herein, the term “Pioneer” refers to Pioneer Corporation, the registrant, and “we” and “our” refer to Pioneer and its consolidated subsidiaries as a group, unless the context otherwise indicates.

References in this annual report to fiscal years refer to the 12-month periods ended March 31 of each calendar year.

Billion is used in the American sense of one thousand million.

Cautionary Statement with Respect to Forward-Looking Statements

Statements made in this annual report with respect to our current plans, estimates, strategies and beliefs, and other statements that are not historical facts are forward-looking statements about our future performance. Forward-looking statements include but are not limited to those statements using words such as “believe,” “expect,” “plans,“intend,“strategy,“plan,“prospects,“aim,” “forecast,” “estimate,” “project,” “anticipate,” “may”“strategy,” “prospects,” “may,” “might” or “might”“will” and words of similar meaning in connection with a discussion of future operations, financial performance, events or financial performance.conditions. From time to time, oral or written forward-looking statements may also be included in other materials released to the public. These statements are based on our management’s assumptions and beliefs in light of the information currently available to it. We caution you that a number of important risks and uncertainties could cause actual results to differ materially from those discussed in the forward-looking statements, and therefore you should not place undue reliance on them. You also should not rely on anybelieve that it is our obligation of ours to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. We disclaim any such obligation. Risks and uncertainties that might affect us include, but are not limited to, (i) general economic conditions in the markets in which we sell our markets,products, particularly levels of consumer spending; (ii) exchange rates, particularly between the yen and the U.S. dollar, euro, and other currencies in which we make significant sales or in which our assets and liabilities are denominated; (iii) our ability to continue to design and develop and win acceptance of our products and services, which are offered in highly competitive markets characterized by continual new product introductions, rapid developmentdevelopments in technology and subjective and changing consumer preferences; (iv) our ability to implement successfully our business strategies; (v) our ability to compete and develop and implement successful sales and distribution strategies in light of technological developments in and affecting our businesses; (vi) our continued ability to devote sufficient resources to research and development, and capital expenditures;expenditure; (vii) our ability to continuously enhance our brand image; (viii) the success of our joint ventures and alliances; and (viii)(ix) the outcome of contingencies.

PART I

Item 1. Identity of Directors, Senior Management and Advisers

          Not applicable

Item 2. Offer Statistics and Expected Timetable

          Not applicable

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Item 3. Key Information

A. Selected financial data

The following table presents selected consolidated financial information for us atdata as of the dates and for the periods indicated. We derived the consolidated statement of income data for each of the three years indicated,in the period ended March 31, 2004 and has been derivedthe consolidated balance sheet data as of March 31, 2003 and 2004 from our audited consolidated financial statements include elsewhere herein. We derived the consolidated statement of income data for each of the two years in the period ended March 31, 2001 and the consolidated balance sheet data as of March 31, 2000, 2001 and 2002 from our audited consolidated financial statements which are not included elsewhere herein, whichherein. Our audited consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”), except for segment data which is prepared in accordance with the regulations under the Securities and Exchange Law of Japan.

                       
    (In millions of yen, except per share data)
    
    Year ended March 31
    
    1997 (4) 1998 1999 2000 2001
    
 
 
 
 
Consolidated Statement of Income Data:
                    
Operating revenue (1)  ¥568,521   ¥579,435   ¥589,065   ¥615,871   ¥647,069 
Gross profit (2)  187,629   193,122   190,118   187,296   199,680 
Operating income (1)  8,137   28,872   20,116   23,593   33,819 
Income before income taxes and extraordinary items  1,581   18,836   12,533   27,808   34,193 
Net income  2,512   6,163   1,159   13,075   18,298 
Net income per share of common stock and
per American Depositary Share (ADS) (3):
                    
  Basic  13.99   34.32   6.45   72.81   101.76 
  Diluted  13.99   34.32   6.45   72.80   101.70 
 
Operating revenue from unaffiliated customers by business segment (1):                    
 Electronics  509,820   522,254   535,487   548,737   586,629 
 AV Software  42,757   37,587   33,370   47,674   39,910 
 Patent Licensing  15,944   19,594   20,208   19,460   20,530 
 
Operating income by business segment (1):                    
 Electronics  (6,926)  16,872   8,541   4,731   13,831 
 AV Software  1,283   (3,163)  (5,422)  196   125 
 Patent Licensing  12,859   14,553   16,588   18,426   19,734 
 Corporate and elimination  921   610   409   240   129 
 
 
Consolidated Balance Sheet Data:
                    
Total assets  ¥566,666   ¥595,553   ¥592,407   ¥601,137   ¥605,156 
Short-term borrowings  54,125   54,899   46,153   41,318   37,571 
Current portion of long-term debt  8,630   8,835   6,455   37,235   7,996 
Long-term debt, less current portion  62,404   58,097   82,958   47,060   38,304 
Shareholders’ equity  325,885   330,098   313,244   312,460   336,995 
Number of shares outstanding (in thousands)  179,573   179,573   179,573   179,588   179,894 
                     
  Year ended March 31
  2000
 2001
 2002
 2003
 2004
  (In millions of yen, except per share data)
Consolidated Statement of Income Data:
                    
Operating revenue (Note 5) (Note 6) ¥575,559  ¥610,171  ¥629,777  ¥677,259  ¥700,885 
Operating income from continuing operations (Note 5) (Note 6)  16,443   32,641   16,660   30,765   43,719 
Income from continuing operations before income taxes (Note 6)  25,756   34,216   14,472   28,079   41,848 
Income (loss) from discontinued operations, net of tax (Note 6)  1,173   (53)  565   136   4,475 
Net income  13,075   18,298   8,047   16,078   24,838 
Per share of common stock and per American Depositary Share (ADS) (Note 1):                    
Income from continuing operations:                    
Basic  66.28   102.06   41.56   89.48   116.07 
Diluted  66.27   102.00   41.55   89.48   115.18 
Net income:                    
Basic  72.81   101.76   44.70   90.24   141.58 
Diluted  72.80   101.70   44.69   90.24   140.52 
 
Consolidated Balance Sheet Data:
                    
Total assets ¥601,137  ¥605,156  ¥645,129  ¥647,029  ¥722,542 
Short-term borrowings  41,318   37,571   45,867   29,893   23,327 
Current portion of long-term debt  37,235   7,996   2,551   974   4,510 
Long-term debt, less current portion  47,060   38,304   35,677   32,196   89,691 
Shareholders’ equity  312,460   336,995   347,003   318,393   332,938 
Common stock  48,452   48,843   49,049   49,049   49,049 
Number of shares issued (in thousands)  179,588   179,894   180,064   180,064   180,064 

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    (In millions of yen, except per share data
    and percentage amounts)
    
    Year ended March 31
    
    1997 (4) 1998 1999 2000 2001
    
 
 
 
 
Other Data:
                    
Capital expenditures  ¥35,085   ¥26,898   ¥33,070   ¥25,458   ¥42,183 
Research and development (R&D) expenses  30,323   31,042   31,131   33,265   37,105 
EBITDA, as defined (5)  33,379   49,231   46,165   62,267   65,979 
Cash flows from operating activities  34,657   36,015   37,904   45,390   51,241 
Cash flows from investing activities  (32,881)  (31,836)  (38,157)  11,984   (41,581)
Cash flows from financing activities  (5,288)  (744)  13,112   (4,139)  (46,567)
EBITDA, as defined, margin (6)  5.87%  8.50%  7.84%  10.11%  10.20%
Operating margin (7)  1.43%  4.98%  3.41%  3.83%  5.23%
Net income margin (8)  0.44%  1.06%  0.20%  2.12%  2.83%
Return on equity (9)  0.79%  1.88%  0.36%  4.18%  5.63%
Return on assets (10)  0.45%  1.06%  0.20%  2.19%  3.03%
Cash dividends declared per share of common stock and
per ADS (11):
                    
    Interim      (in yen)     2.50   5.00   5.00   7.50 
        (in U.S. dollars)     0.02   0.04   0.05   0.07 
    Year-end   (in yen)  5.00   5.00   5.00   5.00   7.50 
        (in U.S. dollars)  0.04   0.04   0.04   0.05   0.06 

Notes:

                     
  Year ended March 31
  2000
 2001
 2002
 2003
 2004
  (In millions of yen, except per share data
and percentage amounts)
Other Data:
                    
Capital expenditures (Note 6) ¥25,435  ¥41,944  ¥46,909  ¥40,493  ¥57,978 
Research and development (R&D) expenses  33,265   37,105   39,050   45,388   51,483 
Cash flows from operating activities (Note 6)  45,615   51,141   57,358   91,509   60,378 
Cash flows from investing activities (Note 6)  11,759   (41,481)  (51,396)  (35,228)  (52,754)
Cash flows from financing activities (Note 6)  (4,139)  (46,567)  (4,207)  (34,680)  51,827 
Return on equity (Note 2)  4.2%  5.6%  2.4%  4.8%  7.6%
Return on assets (Note 3)  2.2%  3.0%  1.3%  2.5%  3.6%
Cash dividends declared per share of common stock and per ADS (Note 4):         ��          
Interim (in yen)  5.00   7.50   7.50   7.50   12.50 
(in U.S. dollars)  0.05   0.07   0.06   0.06   0.12 
Year-end (in yen)  5.00   7.50   7.50   10.00   12.50 
(in U.S. dollars)  0.05   0.06   0.06   0.08   0.11 

Notes:(1)1.In fiscal 2000, we changed the reporting ofBasic income from patentscontinuing operations and related expenses, which had been previously presented in “Other income (expenses).” The gross patent revenue is presented as “Royalty revenue” and the related expenses are included in “Selling, general and administrative expenses.” Previously reported amounts have been reclassified to conform to this presentation.
(2)Gross profit represents operating revenue minus cost of sales.
(3)Basic net income per share of common stock and per ADS hasAmerican Depositary Share (“ADS”) have been computed based on the weighted average number of shares outstanding during each year. Diluted income from continuing operations and net income per share of common stock and ADS hashave been computed on the basis that all dilutive warrants and stock options were exercised. One ADS represents one share of common stock.
 
(4)Employee-related restructuring charges in fiscal 1997, which had been previously reported as non-operating other expenses, have been classified as operating expenses.
(5)EBITDA represents net income plus minority interests, equity in earnings, interest expense (net), income taxes, depreciation and amortization. EBITDA is provided because it is a measure commonly used by investors to analyze and compare companies on the basis of operating performance. EBITDA is not a measurement of financial performance under U.S. GAAP and should not be construed as a substitute for operating income, net income or cash flows from operating activities for purposes of analyzing our operating performance, financial position and cash flows. Our EBITDA is not necessarily comparable with similarly titled measures of other companies.

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(6)EBITDA as a percentage of operating revenue.
(7)Operating income as a percentage of operating revenue.
(8)Net income as a percentage of operating revenue.
(9)2.Net income as a percentage of average shareholders’ equity.
 
(10)3.Net income as a percentage of average total assets.
 
(11)4.Cash dividends in U.S. dollars are based on the noon buying rate in yen for cable transfers in New York City as certified for customs purposes by the Federal Reserve Bank of New York on the date of the dividend payment.
5.In fiscal 2003, we adopted EITF (Emerging Issues Task Force) 01-9 “Accounting for Consideration Given by a Vendor to a Customer (Including a Reseller of the Vendor’s Products).” The adoption resulted in a reduction in net sales and a corresponding decrease in selling, general and administrative expenses, with no effect on operating income. Also, starting fiscal 2003, we classified losses on sale and disposal of fixed assets, which were previously included in “Other—net” in “Other income (expense),” into “Selling, general and administrative expenses.” Previously reported amounts have been reclassified accordingly.
6.As a result of the sale of subsidiaries in the audio/video software business in fiscal 2004, the gain on such sale, as well as the operating results of the discontinued operations, are presented as a separate line item in consolidated statements of income in accordance with Statement of Financial Accounting Standards No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” Previously reported amounts have been reclassified accordingly.

6


Exchange rates (yen per U.S. dollar)

The exchange rate between the yen and the U.S. dollar, based upon the noon buying rate in yen for cable transfers in New York City as certified for customs purposes by the Federal Reserve Bank of New York, was ¥117.32¥110.60 = US $1.00US$1.00 on September 18, 2001.

                  
   Average High Low Period-end
   
 
 
 
Year ended March 31
                
 1997  ¥113.21   ¥104.49   ¥124.54   ¥123.72 
 1998  123.57   111.42   133.99   133.29 
 1999  128.10   108.83   147.14   118.43 
 2000  110.02   101.53   124.45   102.73 
 2001  111.65   104.19   125.54   125.54 
 
2001
                
 March      117.33   125.54   125.54 
 April      121.68   126.75   123.57 
 May      118.88   123.67   118.88 
 June      119.13   124.73   124.73 
 July      122.85   125.85   125.00 
 August      118.75   124.87   118.75 
August 3, 2004.
                 
Year ended March 31 Average High Low Period-end
2000 ¥110.02  ¥101.53  ¥124.45  ¥102.73 
2001  111.65   104.19   125.54   125.54 
2002  125.64   115.89   134.77   132.70 
2003  121.10   115.71   133.40   118.07 
2004  112.97   104.18   120.55   104.18 
2004
                
February      105.36   109.59     
March      104.18   112.12     
April      103.70   110.37     
May      108.50   114.30     
June      107.10   111.27     
July      108.21   111.88     

For purposes of preparing our financial statements, we use rates obtained from the Tokyo foreign exchange market, which differ from the rates listed above.

B. Capitalization and indebtedness

          Not applicable

C. Reasons for the offer and use of proceeds

          Not applicable

D. Risk factors

This section describes some of the risks that could affect our business. The factors listed below should be considered in connection with any forward-looking statements given in this annual report and should be read in conjunction with “Item 5. Operating and Financial Review and Prospects.” They are subject to theCautionary Statement with Respect to Forward-Looking Statements appearing elsewhere.elsewhere in this annual report. This list is necessarily incomplete, as some risks may be as yet unknown to us. Any risk factor has the potential to adversely affect our business results, share price and financial condition.

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Economic conditions may adversely affect our business results and financial condition

Demand for consumer electronics products, which account for a significant proportion of our worldwide operating revenue, may be affected by general economic trends in the countries or regions in which our products are sold. Purchases of our products are, to a significant extent, discretionary. Similarly, demand for our business use products and for components we manufacture that go into products of third parties is affected by general economic trends in the various markets in which we sell our products. Economic downturns and resulting declines of demand in our major markets, including Japan, North America, Europe and Asia, may thus adversely affect our business results and financial condition.

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Additionally, our operations may be indirectly affected by the economic conditions of regions where our competitors manufacture their products. For example, if a competitor enjoys lower local labor costs, it may be able to offer similar products at a lower price. As a result, our sales may be adversely affected. Also, a decrease in the value of the local currency in a region that produces parts and raw materials may lead to a decrease in production costs (on a yen or a U.S. dollar basis) not only to us but to other manufacturers as well. Such a trend may in turn bring about vigorous export competition and price-cutting, both of which could adversely affect our business results and financial condition.

Fluctuations in foreign currency exchange rates may adversely affect our business results and financial condition

Our operations involve the global production and distribution of products. Revenue and expense items that are denominated in local currency, such as sales, expenses and assets in each region, are translated into yen in preparing our consolidated financial statements. Depending on the rate of exchange at the time of currency translation, the values of such items in yen may be affected, even if their value has not changed in their original currency. Therefore,Also, fluctuations in foreign currency exchange rates may affect the local prices of our products and negatively impact their competitiveness in local markets. Generally, an appreciation of the yen against other currencies, particularly the yen against the U.S. dollar and the euro, in which we make significant sales, may adversely affect our business results and financial condition and business results.condition.

An increase in the value of currencies in regions where we operate and produce may lead to an increase in the costs of manufacturing and procurement in those regions. Such an increase could accordingly adversely affect our profit margins and reduce our price competitiveness, thereby adversely affecting our business results. We engage in currency hedging transactions to attempt to minimize the negative effects of short-term fluctuations of foreign exchange rates among major currencies such as the U.S. dollar, euro and yen. However, as a result of mid-to-long-term exchange rate volatility, we cannot execute planned procurement, production, logistics, and sales activities with any certainty and, consequently, fluctuations in exchange rates may adversely affect our business results and financial condition.

If we are unable to innovate and to develop attractive new products, our future growth and profitability may be adversely affected

We derive a substantial portion of our revenues from sales of innovative new products. We expect that sales of our new products — products—currently including DVD-related products, plasma and organic light-emitting diode (“OLED”) displays and car navigation systems — will continue to account for a substantial portion of our revenues, and we expect our future growth to rely primarily on the continued development and sale of innovative new products.

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While we believe that we are capable of continuing to develop innovative and attractive new products, the industry in which we operate is characterized by rapid changes, including technological changes. The process of developing and marketing new products is inherently complex and uncertain, and there are a number of risks, including the following:

 We cannot assure youThere can be no assurance that we will have adequate funding and resources necessary for investments in new products and technologies.
 
 We cannot assure youThere can be no assurance that our long-term investments and commitment of significant resources will result in successful new products or technologies. For example, we have invested substantial resources in the expansion of our production capacity at our Shizuoka plantfor plasma display panels (“PDPs”) to meet anticipated demand, for plasma display panels, but such demand may not materialize.
 
 We cannot assure youThere can be no assurance that we can anticipate successfully the new products and technologies

8


which will gain market acceptance and that such products can be successfully marketed.
 
 We cannot assure youThere can be no assurance that our newly developed products or technologies can be successfully protected as proprietary intellectual property rights.
 
 Our products may become obsolete due to rapid advancements in technology and changes in consumer preferences.
A delay in commercializing new technologies now under development may prevent us from keeping up with market demand. For example, if we lag behind our competitors in the commercialization of active-matrix full-color OLED displays, which are now under development in our affiliated company, ELDis, Inc., we may not secure significant portions of this market.

Our failure to anticipate adequately changes in the industry and the market, and to develop attractive new products, including any of the risks described above, may reduce our future growth and profitability and may adversely affect our business results and financial condition.

Benefits may not be gained from the acquisition of the shares in NEC Plasma Display Corporation (“NPD”), the subsidiary of NEC Corporation (“NEC”), and related intellectual property rights held by NEC

On July 1, 2004, Pioneer and NEC concluded the stock transfer agreement under which NEC will transfer to Pioneer 100% of the issued share capital of its subsidiary, NPD, and the intellectual property rights relating to plasma displays held by NEC. See “Item 4.A. History and development of the Company—Principal capital expenditures, investments and divestitures.”

The expected acquisition of the shares in NPD and related intellectual property right held by NEC may not yield expected benefits to us. Achieving these benefits depends on the timely, efficient and successful execution of a number of post-acquisition events, including integrating the business of NPD into our operations, distribution networks, marketing programs and information systems. Our ability to integrate the operations of NPD may be adversely affected by many factors, including information system integration and employee relations. In addition, NPD may not perform as we expect.

Furthermore, a significant portion of NPD’s customers for original equipment manufacturer (“OEM”) products are major players in the electronics industry who are in direct competition with us. There can be no assurance that such customers will not cease to utilize NPD’s services.

Any failure to realize the benefits expected from the acquisition, or the failure of NPD to perform as we anticipate, could have a material adverse effect on our business results and financial condition.

As our exposure to the PDP market as a result of the acquisition of NPD will increase significantly, lack of growth in the PDP market may adversely affect our business results and financial condition

The acquisition of NPD will increase our production capacity significantly. In addition, we are focusing on the plasma display business to establish it as a core of our business. If the plasma display market does not grow as we anticipate, such increased production capacity may not be used efficiently or in a cost-effective manner. There can be no assurance that the PDP market will continue to grow. Any such lack of growth may adversely affect our business results and financial condition.

Competition generally, and especially on price and standardization of products, may adversely affect our business results and financial condition

The electronics industry, including the audio, video and car electronics industry, is intensely competitive. We expect to face increased competition in the various product and geographic markets in which we

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operate. Our competitors include manufacturers and distributors, some of which have greater capital resources available for research, development, production and marketing. In addition, as new technology develops and as new electronics products gain increased market acceptance, it is possible that new competitors or alliances among existing competitors may emerge and rapidly acquire significant market share. While we believe we are aone of the leading global manufacturerinnovators of advanced, high-quality and value-added electronics products, we cannot assure youthere can be no assurance that we will be able to compete effectively in the future. Pricing pressures or loss of potential customers resulting from our failure to compete effectively may adversely affect our business results and financial condition.

For example, competitors in the plasma display market may substantially increase their production capabilities or introduce alternative products at a lower price and in advance of our products.cause market competition to intensify further. Moreover, due to standardization and the relative ease of imitation of products such as DVD players, competition from manufacturers in emerging markets may also continue to intensify. Our research into the development of new products generally requires large costs that competitive imitators may not need to incur. In an aggressive price-cutting environment we may find it difficult to maintain or increase our market share or remain profitable against low-cost and low-budget competitors.

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Failure of our DVD-recorder format to gain broad market acceptance may adversely affect our business results and financial condition

Currently, there are a number of competing recording formats for digital versatile discs (DVDs)(“DVDs”): the DVD-RW, format commercialized by us, Sony, Sharp and others, the DVD-RAM, format commercialized by Matsushita, Hitachi and Toshiba and the DVD+RW, format commercialized by Philips.as rewritable formats, and the DVD-R and the DVD+R, as write-once formats. Each of the recording disc formats makes use of its own distinct technology and is generally incompatible with other formats.

Our DVD recorders for home-use adopt DVD-RW and DVD-R formats, while our recordable DVD drives for PCs support DVD-RW/+RW and DVD-R/+R format recording and DVD-RAM format playback.

The question of which format will prevail as the industry standard is not yet settled. Should the DVD-RW formatour adopted formats fail to be accepted as thede facto industry standard, or otherwise fails to gain wide acceptance, our business results and financial condition wouldwill be adversely affected.

AsSubstantial decline in our royalty revenue as a result of the expiration of our existing patents relating to laser optical disc technologies may adversely affect our royalty revenue is expected to decline substantially, starting in fiscal 2003business results and financial condition

OurThe licensing of our patent license and other intellectual property rights make a significant contribution to our net income. Although less than five percent2% of our revenue isin fiscal 2004 was generated by our worldwide patents relating to laser optical disc technologies, these rights were responsible for between approximately 60%-80%26% of our operating income in the last three fiscal years.2004. The legal protections afforded these rights have a limited duration under applicable laws, and the length of protection varies from country to country or region. In addition,A significant portion of such patents will expirepatent rights have expired in Europe and Japan starting induring fiscal 2003.2003 and 2004. As a result, our royalty revenue is expectedhas declined substantially from previous years and may continue to decline substantially. Whilein the future. This decline in royalty revenue may in turn have an adverse impact on our business results. At the same time, we are tryingworking to develop newacquire patents owned by third parties and acquire third party patent rights, welicensing such patents. We do not expect that the revenue, if any, from such new patents will be sufficient to offset the decrease in royalty revenue resulting from the expiration of our existing patents. Royalty revenue from patent licensing also depends to a material degree on the sales of patented products by our licensees, making it hard for us to predict actual royalty revenue amounts. For a discussion of our patent licensing business, see “Item 4.B. Business overview–overview—Nature of operations.operations.

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If we are unable to manage successfully the risks inherent in our international activities and our overseas expansion, our business results and financial condition could be adversely affected

A substantial portion of our manufacturing and marketing activity is conducted outside Japan, including in the United States, Europe, and in developing and emerging markets in Asia. There are a number of risks inherent in doing business in such overseas markets, including the following:

 unexpectedUnexpected legal or regulatory changes;
 
 unfavorableUnfavorable political or economic factors;
 
 difficultiesDifficulties in recruiting and retaining personnel;
 
 lessLabor disputes including strikes;
Less developed technological infrastructure, which can affect our production or other activities or result in lower customer acceptance of our products and services;
Potentially adverse tax consequences; and
 
 potentially adverse tax consequences.Social, political or economic turmoil due to terrorism, war, or other factors.

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In order to produce our products competitively and to reduce costs, we areaim to continue expanding our production and parts procurement in the processShanghai and Guang Dong areas of establishing new production facilities in the People’s Republic of China (China)(“China”). We plan to invest a total of ¥10 billion by fiscal 2003 to build production capacities for various products, including DVD-related components and car stereo products, in the Shanghai and Dongguan areas. In addition, we intend to rely significantly on electronics manufacturing services (EMS) arrangements in China to help minimize our plant investments and parts inventories. In opening a new manufacturing facility, however, it typically takes time to achieve success in production. Therefore, there is no guarantee that cost savings will be realized in the immediate term, if at all. Furthermore,Nevertheless, we may experience difficulties in managing a production facility and entering into business arrangements in China in light of unexpected events, including political or legal change,changes, labor shortages or strikes or changes in economic conditions in China. Furthermore, the outbreaks of epidemics such as SARS (“Severe Acute Respiratory Syndrome”) or avian influenza in China may, depending on how they develop, adversely impact our operations in China, including delays in production due to travel restrictions on employees, as well as disruptions in parts procurement and factory operations. Accordingly, such incidents could have an adverse impact on our business results and financial condition. For more information on our China plants, see “Item 4.B. Business overview–Production.4.A. History and development of the Company—Principal capital expenditures, investments and divestitures.

Our dependence on certain third-party manufacturers and suppliers for parts and components could adversely affect our business results and financial condition

While we strive to produce key components and parts internally, we are dependent on a number of outside manufacturers and suppliers. Third parties manufacture some of our most important components and parts, including semiconductors. Our arrangements with third-party manufacturers and suppliers are generally on a renewable short-term basis. While we have sought to assure supply where necessary through strategic alliances and other measures, we cannot assure youthere can be no assurance that we will not face shortages of key components from time to time. See “Item 4.B. Business overview–overview—Raw materials and sources of supplysupply” for a discussion of our outside manufacturers and suppliers. If we are forced to change contractour contracted manufacturers and suppliers, this could result in a reduction in the availability of components and parts essential to us or in an increase of our costs. In addition, in periods of high demand for consumer electronics products and aswhen new components such as next generation semiconductors are improved,introduced, producers of components and parts may not be able to produce enough components to satisfymeet our demand on a timely basis. We may also experience shortages or other material disruptions in our supply of components and parts due to natural disasters or other events beyond our control. Shortages of key components could result in increases in their prices, insufficient supply and quality control problems, and could adversely affect our business results and financial condition, as well as lead to strained relationships with our original equipment manufacturing (OEM)OEM customers.

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Our performance in the OEM business is substantially dependent on the performance of our customers’ business

We caterprovide our OEM business to automobile manufacturers, electronics manufacturers, personal computer (PC)(“PC”) makers, the broadcasting industry and other large-scale businesses worldwide. The products we supply include car stereo products, car navigation systems, DVD-R/RW drives, settopDVD-ROM drives, set-top boxes for cable TVcable-TV and digital satellite broadcast and organic electroluminescent (OEL) displays for cellular phones.OLED displays. Sales to business customers in these areas are significantly affected by the respective customers’ business results and by factors that are beyond our control. Further, price cuttingprice-cutting to meet customer demands may cause a reduction in our profit margin. The under-performance of a customers’ business, the unexpected termination of contracts, changes in the purchasing practices of our OEM customers or aggressive price cuttingprice-cutting to satisfy a large business customer’s demands may adversely affect our business results and financial condition.

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Because our products and technologies are dependent on the service of capable engineers and other key personnel, difficulty in recruitingand developing key personnel could have an adverse impact on our future growth, business results and financial condition

Our products and technologies are complex, and our future growth and success depend to a significant extent on the service of capable engineers and other key personnel, and hiring and training additional highly-skilled engineers and other competent personnel are important for our success.

Failure to recruit and develop key personnel may adversely affect our future growth, business results and financial condition. On the other hand, aggressive hiring of, among others, capable engineers who are experienced with the latest technology, may increase, sometimes substantially, both recruiting and actual labor costs. In addition, continued re-training of currently employed personnel, which may introduce higher costs, might also be necessary to maintain a superior level of innovation and technological advance. Such increased costs could have an adverse impact on our business results and financial condition.

Limits on intellectual property protection may make us vulnerable to competition from third parties that use our technology and expertise

While we have developed technology and expertise which differentiate our products from those of our competitors, some of our unique technology and expertise is either not fully capable of being protected by intellectual property rights or protected only to a limited extent pursuant to legal limitations in certain jurisdictions. Accordingly,Although we have the ability to diminish illegal imports of such products into certain jurisdictions through exercise of our legal rights, we may be unable to effectively to prevent third parties from using our intellectual property rights to produce products similar to ours. In addition, we may be unable to prevent third parties from developing technologies that are similar or superior to our technology, or from designing around or reverse engineering our patents and trade secrets. Moreover, our future products and technology might later be found to infringe upon a third party’s intellectual property rights.

Product defects resulting in a large-scale product recall or successful products liability claimclaims against us could result in a significant cost or impact on our reputation and adversely affect our business results and financial condition

We manufacture various products at our plants worldwide in accordance with internationally accepted quality controlquality-control standards. We cannot be certain, however, that all of our products are defect-free and may not be recalled at some later date. Furthermore, although we maintain insurance against product liability claims, we cannot be certain that such insurance can adequately satisfy the liabilities ultimately incurred. In addition, insurance may not continue to be available on terms acceptable to us. A large-scalelarge-

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scale product recall or a successful products liability claim against us could result in a significant costcosts or have a negative impact on our reputation, which may in turn lead to a decrease in sales, adversely affecting our business results and financial condition.

Failure to achieve the goals of collaborations, tie-ups, and joint ventures with third parties may adversely affect our business results and financial condition

As part of our technological development process, we conduct many joint activities with other companies in the form of collaborations, technological tie-ups, or joint ventures intended to optimize management resources and utilize the synergy of combined technologies. We expect to continue to adopt an active approach to exploiting these opportunities. If differences arise among the participants of these joint activities due to managerial, financial or other reasons, we may not achieve the goals of these development projects, which may in turn adversely affect our business results and financial condition.

Governmental regulation may limit our activities or increase our costs of operations

Various regulations by governmentsPioneer’s business and operations are subject to various forms of government regulation in countries in which we do business, such asincluding required business/investment approvals, as well as export regulations based on national security or other reasons and other export/import regulations such as tariffs, apply to us.tariffs. In addition, commercial, antitrust, patent, consumer, taxation, exchange control and environment/recycling laws and regulations also apply. If we are unable to comply with these regulations, they can serve to limit our activities. In addition, even if we are able to comply,compliance with these regulations could result in increased costs. Accordingly, these regulations could adversely affect our business results and financial condition. See “Item 4.B. Business overview–overview—Governmental regulationregulation” for a discussion of certain government regulations applicable to us.

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DamagesDamage to our Shizuoka plantproduction facilities as a result of disasters, power outages or similar events may significantly reduce our production capacity, and adversely affect our business results and financial condition

OurWe periodically carry out disaster prevention checks and facility maintenance at all of our facilities to minimize potential negative impact caused by disruptions on our manufacturing lines. There can be no assurance, however, that we can completely prevent or mitigate the effect of a disaster, outage or other disruption at our production facilities. For example, our plasma display products are currently manufactured mainly at our Shizuoka plant,and Yamanashi plants, and we are in the process of further expanding our manufacturing lines at Shizuoka. We expect to continue to manufacture our plasma display panels there. Accordingly, our plasma display panel production capacity could be significantly reduced in the event of a major earthquake or other disruption of operations at the Shizuoka plant. We periodically carryand Yamanashi plants.

Employee retirement benefit costs and obligations may adversely affect our business results and financial condition

Pioneer is obligated to pay certain employee retirement benefit costs and obligations to qualifying employees upon their retirement. The amount of such employee retirement benefit costs and obligations are dependent on assumptions used in the relevant actuarial calculations. These assumptions include discount rates, future compensation levels, return on assets, retirement rates and mortality rates, which are based upon current statistical data, as well as long-term returns on pension plan assets and other factors. If actual results differ from the assumptions or assumptions are changed, the resulting effects are accumulated and systematically recognized over future periods and, therefore, generally affect recognized expense and recorded obligations in future periods. Our pension benefit costs have been increasing in recent fiscal years due to declining discount rates and negative returns on pension plan assets, and further

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declines of discount rates and lower returns on pension plan assets may adversely affect our business results and financial condition. In connection with the return to the Japanese government of responsibility for pension obligations under the governmental welfare component of our pension plan, we will transfer some of our pension plan assets to the Japanese government. Such transfer will be accounted for upon completion of the transfer to the government in accordance with U.S. GAAP and may result in a negative impact on our business results and financial condition. The impact of the transfer depends on pension plan assets to be transferred.

Changes in business or economic conditions or other uncertain or unforeseen factors may make it difficult for us to achieve strategic aims and targets

Consistent with the strategies set out disaster prevention checksin “Item 4.B. Business overview—Strategy,” we announced in fiscal 1999 our “Pioneer Group Vision,” a medium-term initiative, with the intent of revitalizing us and facility maintenanceour business through the achievement of two financial targets by the end of March 2006, as well as four business targets. See “Item 4.B. Business overview—Strategic Focus—‘Pioneer Group Vision’.” However, changes in business or economic conditions or other uncertain or unforeseen factors, including (but not limited to) the risks and uncertainties set out inCautionary Statement with Respect to Forward-Looking Statements, may make it difficult for us to achieve our aims or meet the targets that have been set in time or at all, of our facilitiesor to minimize potential negative impact caused by disruptions at the manufacturing lines. We cannot assure you, however,maintain such aims or targets. There can be no assurance that we can completely preventwill be successful in achieving our strategic aims or mitigatemeeting the effect of a disaster, outagequantitative or other disruption atqualitative targets set out in “Pioneer Group Vision” or that our major facilities, includingmanagement will not change such aims or targets in the Shizuoka plant.future.

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Item 4. Information on the Company

A. History and development of the Company

Overview

We develop, manufacture and sell electronics products such as audio, video and car electronics on a global scale, as well as plan, produce and distribute audio/video (AV) software. We are one of the leading manufacturers of advanced, high-quality and value-added electronics products and one of the leading innovators of differentiated DVD products and plasma displays. We also have the largest worldwide market share of car electronics products and are the leading producer of OEL displays. Our primary markets are Japan, North America, Europe and Asia.

We classify our business groups into three segments: “Electronics,” “AV Software” and “Patent Licensing.”

History

Pioneer was incorporated under the Japanese Commercial Code of Japan (the “Commercial Code”) as a joint stock company (Kabushiki Kaisha) in May 1947, with the name Fukuin Denki Kabushiki Kaisha, succeeding to the business founded in January 1938 by the late Mr. Nozomu Matsumoto. The present name, Pioneer Kabushiki Kaisha, was adopted in June 1961. Its English name was changed from “Pioneer Electronic Corporation” to “Pioneer Corporation” in June 1999.

Our business dates from January 1938 when we began the manufacture of audio speakers. In June 1955 we commenced the manufacture of audio amplifiers. During the 1960s, we expanded our line of products to include hi-fi stereo sets and components, hi-fi car stereos, as well as telephone-related equipment. Since the early 1960s we have established business offices and subsidiaries in and outside Japan to support our expanding manufacturing and sales activities. During the 1970s we further expanded our business to include equipment related to cable-TV systems. Pioneer’s shares of common stock were listed on the Tokyo Stock Exchange and Osaka Securities Exchange in October 1961 and April 1968, respectively. In addition, Pioneer’s ADSsAmerican Depositary Shares (“ADSs”) were listed on the New York Stock Exchange (“NYSE”) in December 1976.

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In the 1980s, we began to expand our business base to include AVaudio/video (“AV”) equipment. We started marketing laser disc (LD)(“LD”) players and LDs, and commenced our own music and video software business in Japan. Also, we introduced the world’s first car compact disc (CD)(“CD”) players. We also broadened our business base in commercial and industrial markets with such products as optical memory disc drives for use in computers, laser karaoke (sing-along) systems and multiscreen video systems.

In the 1990s, we released to the Japanese consumer market the world’s first car navigation system incorporating the Global Positioning System (GPS)(“GPS”). In addition, we further built on our technology and expertise in optical disc products, and introduced DVD players and thin-profile color plasma displays and began supplying digital direct-broadcast satellite (DBS)(“DBS”) decoders to a European pay-TV company. Our other recent industry firsts include four-color OELOLED displays and DVD recorders.

In fiscal 2001, we started supplying to PC makers DVD-R/RWrecordable DVD drives that can record up to seven times as much data as conventional CD-R/RW drives. In fiscal 2002, we introduced to the Japanese consumer market hard disk drive (“HDD”) car navigation systems with faster search and display of routes to designated destinations. In fiscal 2003, we launched in Japan DVD recorders equipped with large-capacity HDDs, as well as car navigation systems incorporating a data communication module for access to the latest map data. Also, in June 2003, we began introducing recordable DVD drives for PC use, which are compatible with DVD-R, -RW, +R and +RW discs, to worldwide markets. In fiscal 2004, we started supplying passive-matrix full color OLED display panels in cellular phones.

Registered office

Pioneer’s registered office is located at 4-1, Meguro 1-chome, Meguro-ku, Tokyo 153-8654, Japan. ItsPioneer’s telephone number is 81-3-3494-1111.

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Principal capital expenditures, investments and divestitures

In fiscal 1999, 20002002, 2003 and 2001,2004, our capital expenditures consisted principally of facilities for production and molds for production and totaled ¥33,070¥46,909 million, ¥25,458¥40,493 million and ¥42,183¥57,978 million, respectively. Capital expendituresThey were paid for principally out of our internally generated working capital. The facilities for production comprised those for OELOLED displays and DVD pickups, and plants and machinery for plasma displays. See the table in “Item 4.D. Property, plants and equipment,” for a list of our principal plants.

In fiscal 2001,2004, in order to meet fast-growing demand for DVD recorders and recordable DVD drives, we commenced installation of ainvested ¥1.3 billion in building the second manufacturing line for optical pickups, which are key parts of DVD recorders and recordable DVD drives, at Guang Dong Plant in China. This line started its operation in November 2003 and our plant in Shizuoka, Japan, to respond to potential increasedoverall production capacity for optical pickups reached one million units per month.

To address expanding demand for plasma displays.displays, in fiscal 2004, we invested ¥22 billion in building a more efficient production system, including the building of new manufacturing lines at our plants in Shizuoka and Yamanashi, in Japan. Our overall production capacity increased about 67% to 250 thousand units annually through the expansion of the Shizuoka Plant, which was completed in August 2003. The Shizuoka plantongoing building of a new line of the Yamanashi Plant is expected to beginbe completed by fall of 2004 and increase our total production capacity to 600 thousand units annually. In fiscal 2005, we plan to spend approximately ¥30 billion, including ¥6.2 billion paid by June 30, 2004, in October 2001. Whenrelation to PDP-related capital expenditure not including investment related to the acquisition of NPD as described below.

On July 1, 2004, Pioneer and NEC concluded the stock transfer agreement under which NEC will transfer to Pioneer 100% of the issued share capital of its plasma display manufacturing subsidiary, NPD, and the intellectual property rights relating to plasma displays held by NEC. We expect to invest approximately ¥40 billion in the acquisition of NPD and NEC’s intellectual property rights in fiscal 2005. This acquisition is expected to be completed by September 30, 2004. With this acquisition and the new line of the Yamanashi Plant as described above, our total capacity is expected to be increased from 50,000 at present toadd up to 150,000more than one million units pera year. In order to carry out this investment, on March 5, 2004 we issued the aggregate principal amount of ¥60,000 million of its Euro Yen Zero Coupon Convertible Bonds due 2011. See “Item 4.B. Business overview—Strategic Focus—‘Pioneer Group Vision’.”

To furtherIn order to improve cost competitivenessmanagement efficiency by concentrating resources in strategic businesses, in July 2003 we reached agreements to sell 100% of our shares in two of its wholly-owned subsidiaries, Pioneer LDC, Inc. (“PLDC”) and Pioneer Entertainment (USA) Inc. (“PEUSA”), to reallocate a major portionDentsu Inc. (“Dentsu”), Japan’s largest comprehensive advertising agency. These subsidiaries were engaged in the AV software businesses in Tokyo, Japan and in California, U.S.A., respectively. The transfer of production to China, Pioneer established two production subsidiaries in China inall the shares of PLDC, and 90% of the shares of PEUSA owned by us was completed by fiscal 2001. These plants2004. The remaining shares of PEUSA owned by us are expected to be operationaltransferred to Dentsu by September 30, 2006.

In March 2004, Q-Tec, Inc., which was a 99.26% owned subsidiary of Pioneer, became an independent company through a Management Buyout after it acquired all of the shares owned by Pioneer, forming a business alliance with Vision Capital Corporation and Memory-Tech Corporation. Q-Tech, Inc. is one of the largest manufacturers in the fallJapanese postproduction industry which offers high-quality total services including editing of 2001,video and audio products such as animation, movies, commercials, and broadcast programs, DVD encoding/authoring and pressing.

The amount paid to us in respect of these sales of subsidiaries that are mainly for DVD pickups, DVD-R/RW drives and car electronics products. See “Item 4.B. Business overview–Production.” In addition, Pioneer established a holding companyengaged in the first half ofaudio/video business was ¥4.9 billion in fiscal 2002, which coordinates the activities of Pioneer’s local subsidiaries and affiliates2004. See Note 3 in China“Notes to raise their operating efficiency.Consolidated Financial Statements.”

In fiscal 2001, Tohoku Pioneer Corporation, Pioneer’s majority-owned subsidiary, started a joint venture company with Semiconductor Energy Laboratory Co., Ltd. and Sharp Corporation. The joint venture plans to start manufacturing and marketing continuous grain (CG) silicon thin-film transistor (TFT) substrates for use in active-matrix full-color OEL displays in the fall of 2002.16

In fiscal 2000, we recorded an impairment loss of ¥2,100 million on real property of an LD plant in Japan closed during the year. The expected net realizable value and, thus, the carrying amount of the facility at the end of fiscal 2000 was ¥2,341 million.

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B. Business overview

Industry overview

The electronics industry is currently experiencing a major shift from analog technology to digital technology in many communications and consumer entertainment applications. Digital technology is a means of transmitting, processing and storing data by converting it into binary code, as opposed to the conventional analog method, which uses a direct and variable electrical current. Digital technology is generally more resistant to interference or loss of quality, providing enhanced sound and clearer and sharper pictures (for example, music and video on CDs and DVDs). Together with its compression/decompression technologies, digitalization speeds data transmission and allows networks to handle far greater amounts of data efficiently. The proliferation of digital technologies in telecommunications has been a key element in the convergence of communications and computing technologies.

Digital technologies have led to a revolution in consumer electronics, with analog LPs being replaced by digital CDs, analog prerecorded video cassettes and LDs being replaced by DVDs, and analog TV broadcast signals likely being replaced by digital TV broadcast signals.

Product standardization and intense competition among leading manufacturers has led to declining product prices and shorter product life. Digitalization and the convergence of consumer electronics, telecommunications and computing technologies provide those companies with technological expertise in the storage, transmission and display of digital data with the opportunity to introduce innovative and differentiated applications and products.

We believe we have always been at the forefront of digital technology. Our expertise in digital storage and retrieval has led to developments in some of the digital products, including car CD players and DVD recorders, both of which were the first to be mass-marketed.

Strategy

We aim to be a leading provider of advanced, high quality,high-quality, value-added AV electronics products worldwide for consumer and business use. Our corporate philosophy is to “Move the Heart and Touch the Soul,” with products that are designed to bring joyincrease satisfaction, comfort and entertainment toconvenience in everyday life.

To achieve our goals, we are pursuing the following strategies:

 Developdevelop innovative, technologically-advanced products that meet and stimulate market demanddemand;
 
 Enhanceenhance our brand equityrecognition and promote customer satisfactionsatisfaction;
 
 Leverageleverage our leadership position in the car electronics businessbusiness;
 
 Focusfocus on our strategic products targeting global marketsmarkets; and
 
 Adoptadopt optimal production methods to maximize profitability and streamline our administrative and service functionsprofitability.

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Develop innovative, technologically-advanced products that meet and stimulate market demand

We believe our core strength is our ability to innovate. Throughout our history, we have focused on the development of unique products, and have attempted to be the front-runner and market leader in our product areas. Such areas have included dynamic speakers, car audio, LD and car navigation systems. We intend to continue to take advantage of such strategy and gain consumer confidence by introducing differentiated products into the market ahead of our competitors.

Consistent with our strategy, we have recently introduced into the market several newcutting-edge products, such as plasma displays and digital broadcast settop boxes.DVD products. In the DVD market, we were the first to commercialize a DVD recorder. We were also the first to introduce a four-color OELOLED display to the market. We intend to continue to take advantage of this strategy and attract customers by introducing differentiated products into the market ahead of our competitors.

Enhance our brand equityrecognition and promote customer satisfaction

The cornerstone of our business foundation lies in the quality of our products and consumers’ confidence in our products.their ability to inspire consumer confidence. Accordingly, we focus on the enhancement of our brand image and customer satisfaction. In addition to the extensive quality control and assurance measures on the production side, we invest in various marketing campaigns to maintain and enhance the value of our brand. Combined with our new worldwide brand slogan of “Sound. Vision. Soul,sound. vision. soul,” we aim to establish Pioneer as a brand driven by innovation and clearly differentiating ourselves from our competitors. We believe customer satisfaction is based not only on reliability and technology, but also on the impact of the quality of sound or vision delivered by our products.

Leverage our leadership position in the car electronics business

We believe one of our strengths lies in our core business segment, the car electronics business. We leadare one of the leading manufacturers in the world consumer market for car audio products.products and car navigation systems. We were the first in the industry to introduce car navigation systems to the Japanese consumer market in fiscal 1991 and have been maintainingmaintained a leading position by offering affordably priced and easy-to-operate DVD-ROM typeand advanced HDD-equipped models. To further strengthen this product line,In addition, in November 2002 we introducedreleased in Japan in June 2001 a newthe consumer market the world’s first car navigation system incorporatingthat incorporates a hard disk drive (HDD), which has substantially fasterdata communication module for access times than those ofto the existing DVD-ROM drive models.

latest map data. Sales in this category are gradually shifting from the consumer market to the OEM market as automobile manufacturers place greater emphasis on differentiation of their cars, and we intend to further expand our market share by increasing OEM sales.

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Focus on our strategic products targeting global markets

We focus on our strategic products where we canare more likely to secure the “first-mover advantage” oras a means of establishing market leadership. As part of our efforts to secure these leading market positions, we strive to play a major role in setting product standards. For example, we are currently promoting the DVD-RW format used forin DVD recorders and DVD-R/RWrecordable DVD drives. This format has already gained support from other major consumer electronics companies such as Sony Corporation and Sharp.Sharp Corporation (“Sharp”). We also aim to differentiate ourselves by introducing to targeted markets innovative plasma displays, OELOLED displays and HDD car navigation systems. We market these strategic products on a global basis. Although certain technological customization is required, most of our key products are currently sold in virtually all major economies in the world.

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Adopt optimal production methods to maximize profitability and streamline our administrative and service functions

We strive to adopt ideal production methods catered to each type of product and market demand. While we focus on reducing manufacturing and operating costs, our goal is to achieve overall efficiency in production by, for example, taking into account the proximity of the end-market, production facilities and labor costs. Consequently, amongwe have increased the proportion of our strategic productsproduction in China. To meet the fast-growing demand for plasma displays, we have built a more efficient production system at our plasma display panel manufacturing subsidiary. We are in the process of establishingbuilding our fourth production facilitiesline in China for certain DVD products, andJapan, which is expected to start operation by fall of 2004. Moreover, the acquisition of NPD is expected to be completed by September 2004. Following these measures, we plan to produceestablish in fall 2004 an increased volumeoverall production system capable of plasma displays in our expanded facility in Shizuoka, Japan. Moreover, we plan to make use of electronics manufacturing services (EMS) in China for outsourcing to help reduce further capital investment and investment in inventories.yielding more than one million panels annually. To enhance cost competitiveness and achieve economies of scale, we sell our key products on an OEM basis to other manufacturers. We are also streamlining our administrative and service functionsIn addition, we introduced supply chain management to promoteoptimize efficiency and cut costs. Accounting, payroll,of inventory management and other administrative functions which were previously undertaken by our local offices in Japan, were consolidated in fiscal 2001 and are now carried out by Pioneer Shared Services Japan Corporation, a wholly-owned Pioneer subsidiary. Similarly, we have established an internal shared services company in the U.S. in order to economize our corporate support system. We believe that reducing overall costs is imperative to maintain our competitiveness and increase product penetration in the markets.control worldwide.

Strategic FocusVision 2005”Pioneer Group Vision”

Consistent with the strategies described above, in fiscal 1999 we announced “Vision 2005,“Pioneer Group Vision,” a medium-term initiative. As partinitiative, with the intent of “Vision 2005,” we setrevitalizing Pioneer and its business through the achievement of two financial targets by the end of ¥1,200 billion of consolidated operating revenue and return on equity (ROE) of 10% byMarch 2006, as well as four business targets. They are as follows.

Financial targets for the fiscal 2006 (corresponding figures for fiscal 2001 were ¥647 billion and 5.63%, respectively), and established the following business-related objectives:year ending March 2006:

¥1.2 trillion of consolidated operating revenue
ROE (Return on Equity) in excess of 10%

Business targets

(i) to become a leaderNo. 1 in the DVD industryworldwide

We believe the DVD format will becomeremain the dominant high-density, high-capacity medium for sound, video and data recording, storage and playback.playback for the foreseeable future. As a leaderone of the leaders in the LD format, the precursor to the DVD,this field, we have been well-positioned as a resultintroduced attractive models of our accumulated expertise through development of LDs to help establish the standardization of the DVD format and innovate new products such asconsumer-use DVD recorders, based on the DVD-RW format for consumer use and DVD-R/RWDVD home theater systems, DVD car navigation systems as well as recordable DVD drives for PC use. WithPioneer believes that these DVD products have a competitive edge in design, function and price, contributing to the introductionexpansion of theits DVD recorder in December 1999 in Japan and our plan to introduce it by the end of 2001 in the United States, we expect our DVD business to undergo further expansion.business.

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(ii) to establishEstablishing a business foundation for plasma displays and OELOLED displays

We believe large-screen plasma displays offer significant advantages over cathode ray tubes (CRTs)(“CRTs”) and liquid crystal displays (“LCDs”). Among other advantages, it is technically easier to enlarge plasma displays are thinnerthan CRTs and lighter than CRTs.LCDs. Thus, we expect that plasma display panels in the future will capture a substantial portion of the larger-screen TV market, in which currently CRTsis expanding with the advent of high-quality pictures such as DVD and projection TVs are dominant.digital TV broadcast. Since introducing the first plasma displays in fiscal 1998, we have established a solid presence both in consumer and commercial markets worldwide as a result of our highexcellent reputation for the large-screen high-resolution images of our plasma displays. To meet the expected rising demand, we will expand our production capacity in October 2001 through the establishment of a second line at our Shizuoka plant in Japan.

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OELOLED display is another type of display, which we have beenare promoting aggressively. OLEDs are particularly well-suited for small size displays, such as cellular phone displays. In fiscal 1998, we became the first in the world to market car electronics products equipped with an OELOLED display, and in fiscal 2000 we were the first and currentlyin the only companyworld to mass-produce four-color OELOLED displays. OELs are particularly well-suited for small size displays, and in fiscal 2001 we commenced deliveries of OEL displays for use in cellular phones of a major U.S. cellular phone maker. To further strengthen our market position, in fiscal 2001, Tohoku Pioneer Corporation, Pioneer’s majority-owned subsidiary, established a joint venture company, ELDis, Inc., in fiscal 2001 with Semiconductor Energy Laboratory Co., Ltd. and Sharp Corporation to manufacture continuous grain (CG) silicon TFT substrates for active-matrix full-color OEL displays.

(iii) to develop and strengthen lines of network-related productsmanufacture active-matrix full-color OLED displays.

(iii) From stand-alone to network

Our current approach is to develop network-related products drawing upon our strength as an AVa consumer- and business-use electronics product manufacturer. We believe we have a competitive advantage in the interface function, where information is delivered to users. We believe we have an excellent brand image, as well as many years of experience in analog/digital cable-TV and digital broadcast markets through the sale of our settopset-top boxes. We are strengthening the synergy of digital home network-linkage of entertainment/information systems, such as AV components, DVD players, DVD recorders, plasma displays and settopset-top boxes.

(iv) to expand our key deviceToward the key-device, key-technologies business and develop our key technologies

To keep up with the accelerated pace of change in the electronics industry, it is important for us to promote key technologies and key devices, collaborating with third parties when beneficial. We believe such collaboration generates synergies that can create new advances in our key technologies and optimizes the use of our resources.

We believe that a producer of key devices is better able to develop and offer broader product differentiation and to influence the direction of market trends than a company that merely assembles products. Our strategically important key devices are DVD pickups, plasma display panel modules, speaker units, CD mechanisms for car manufacturers and OELOLED display panels for mobile phone companies.

Nature of operations

We develop, design, manufacture and sell electronics products such as audio, video and car electronics on a global scale, as well as plan, produce and distribute AV software.scale. We are one of the leading innovators of differentiated DVD products and plasma displays. We are also haveone of the largest worldwide market shareleading manufactures of car electronicsaudio products such asand car navigation systems and arein the leading producer of OEL displays.consumer market.

Our principal production activities are carried out in Japan and Asia.Asia, including Japan. Our products are generally sold under our own brand names, principally “Pioneer.” Our primary markets are Japan, North America, Europe and Asia. WeAsia and we sell our products to customers in consumer and business markets through sales

19


offices in Japan, and through sales subsidiaries of Pioneer and independent distributors outside of Japan. In addition, on an OEM basis, we market certain products, such as car electronics products, DVD-R/RWrecordable DVD drives, digital broadcast set-top boxes and broadcast settop boxes,OLED displays to other companies.

18As a result of the sale of subsidiaries in the audio/video software business in fiscal 2004, the gain from such sale, as well as the operating results of the discontinued operations, are presented net of tax as a separate line item in the consolidated statement of income in accordance with Statement of Financial Accounting Standards No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.”


We classifyAlso, in fiscal 2004, we changed our business groups into three segments: “Electronics,segment classification for certain businesses. Results related to DVD drives for PCs have been moved from “Others” to “Home Electronics,“AV Software” and “Patent Licensing.” We further break down our “Electronics” segment into three product groups: “Audio/Video,” “Carresults related to plasma displays for business use have been moved from “Home Electronics” andto “Others.” Operating revenue consists of net salesCorresponding figures for both “Electronics” and “AV Software,” plus royalty revenue from “Patent Licensing.”the previous fiscal years have been restated accordingly. (The consolidated financial statements included in this annual report and the financial information below are prepared in accordance with U.S. GAAP, except for segment data which is prepared in accordance with therelevant regulations under the Securities and Exchange Law of Japan. Specifically, such segment information is required to be reported by reportable industrial segment, whereas segment information is required to be reported by reportable operating segment under U.S. GAAP.)

The profit margins in the “Patent Licensing” segment are substantially higher than those in the other twothree segments, since costs related to patent licensing are limited principally to amortization of patent rights and expenses for licensing activities.

The following table sets forth our operating revenue from unaffiliated customers by business segment for the respective periods indicated:

Operating Revenue from Unaffiliated Customers by Business SegmentSegments
(In millions of yen, except for percentage amounts)

                            
     Year ended March 31
     
     1999 2000 2001
     
 
 
Electronics
                        
  Audio/Video                        
   Domestic ¥49,515   8.4% ¥56,482   9.2% ¥50,566   7.8%
   Overseas  137,524   23.3   133,547   21.7   140,583   21.7 
      
   
   
   
   
   
 
   187,039   31.7   190,029   30.9   191,139   29.5 
  Car Electronics                        
   Domestic  79,294   13.5   82,353   13.3   89,891   13.9 
   Overseas  181,590   30.8   163,520   26.6   154,987   23.9 
      
   
   
   
   
   
 
   260,884   44.3   245,873   39.9   244,878   37.8 
  Others                        
   Domestic  42,635   7.2   45,492   7.4   62,846   9.7 
   Overseas  44,929   7.7   67,343   10.9   87,766   13.6 
      
   
   
   
   
   
 
   87,564   14.9   112,835   18.3   150,612   23.3 
      
   
   
   
   
   
 
  Domestic  171,444   29.1   184,327   29.9   203,293   31.4 
  Overseas  364,043   61.8   364,410   59.2   383,336   59.2 
      
   
   
   
   
   
 
 Total ¥535,487   90.9% ¥548,737   89.1% ¥586,629   90.6%
      
   
   
   
   
   
 
AV Software
                        
  Domestic ¥23,392   4.0% ¥23,788   3.8% ¥27,690   4.3%
  Overseas  9,978   1.7   23,886   3.9   12,220   1.9 
      
   
   
   
   
   
 
 Total ¥33,370   5.7% ¥47,674   7.7% ¥39,910   6.2%
      
   
   
   
   
   
 
Patent Licensing
 ¥20,208   3.4% ¥19,460   3.2% ¥20,530   3.2%
      
   
   
   
   
   
 
Total Operating Revenue ¥589,065   100.0% ¥615,871   100.0% ¥647,069   100.0%
      
   
   
   
   
   
 
                         
  Year ended March 31
  2002
 2003
 2004
  (In millions of yen, except for percentage amounts)
Home Electronics                        
Domestic ¥70,678   11.2% ¥86,766   12.8% ¥78,798   11.2%
Overseas  189,131   30.0   191,202   28.2   202,684   29.0 
  
 
Total ¥259,809   41.3% ¥277,968   41.0% ¥281,482   40.2%
  
 
Car Electronics                        
Domestic ¥95,578   15.2% ¥105,736   15.6% ¥121,708   17.4%
Overseas  162,094   25.7   175,354   25.9   170,479   24.3 
  
 
Total ¥257,672   40.9% ¥281,090   41.5% ¥292,187   41.7%
  
 
Others                        
Domestic ¥49,283   7.8% ¥62,137   9.2% ¥62,792   9.0%
Overseas  45,425   7.2   43,480   6.4   52,603   7.4 
  
 
Total ¥94,708   15.0% ¥105,617   15.6% ¥115,395   16.4%
  
 
Patent Licensing ¥17,588   2.8% ¥12,584   1.9% ¥11,821   1.7%
  
 
Total Operating Revenue ¥629,777   100.0% ¥677,259   100.0% ¥700,885   100.0%
  
 

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ElectronicsHome Electronics:

Audio/Video:

This groupsegment includes stereo systems, receivers, amplifiers, tuners, CD players, CD recorders, minidisc (MD) systems, cassette tape decks, speaker systems, DVD players, DVD recorders, LD players, online karaoke systems,recordable DVD drives, DVD-ROM drives, home-use plasma displays, projection TVs, stereo systems, individual stereo components, equipment for cable-TV systems, digital broadcast set-top boxes and multiscreen video systems.telephones.

Sales by product for fiscal 2001 in the Audio/Video group is as follows:Recordable DVD players, which were initially introduced in fiscal 1997, have grown to accountdrives accounted for the largest sales in this group. Stereo systems also accountedsegment for a significant portion of sales. Sales of ourfiscal 2004. In addition, home-use plasma displays which were first introduced in fiscal 1998, mainly for business use, are rapidly growing for both business and (in the form of TV screens) household purchases, contributing substantiallycontributed significantly to sales in this group. In North America, both projection TVs and AV receivers accounted for a material portion ofsegment. Moreover, DVD recorders contributed significantly to sales in this group.segment reflecting a large increase in sales during fiscal 2004.

We believe the traditional home audio markets of Japan, North America and Europe have matured and accordingly, price competition in these markets is strong. We do not expect the traditional home audio markets in these regions to grow substantially. We believe growth will come from new products, such as DVD-related products and plasma displays. In our DVD business, we are shifting the emphasis from price-competitive DVD players to higher value-added DVD recorders and DVD home theater systems which merge audiosystems. Moreover, our DVD-related products as computer peripherals have shifted from DVD-ROM drives to recordable DVD drives. In our plasma display business, we continue to promote vigorously 50- and video technologies, and43-inch models of high-definition plasma displays.

DVD is a unified format for high density digital storage media of audio and video such as movies/video clips/concerts, as well as of computer data. The market for DVD players has been expanding dramatically worldwide. JEITA (Japandisplays in the worldwide market. Japan Electronics and Information Technology Industry Association)Association (“JEITA”) forecasts an approximately 50%37% increase in consumer DVD player and DVD recorder sales worldwide, from 1662 million units in 20002003 to 2585 million in 2001. In the2008, and strong growth in recordable DVD player market, we have introduced unique value-added products, such as DVD home theater systems and slim design (2.2 inchdrives from 23 million units in height) DVD players. The DVD recorder based on the DVD-RW format2003 to 88 million units in 2006 worldwide. It also forecasts that we are vigorously promoting can record high-quality audio/video content from a varietysales of sources, such as TV and direct-broadcasting satellite programs, repeatedly about 1,000 times onto a rewritable DVD. In fiscal 2000, we began marketing the DVD recorder as video recording/editing equipment for household consumers, for the first time in the industry. The recorder introduced subsequently in fiscal 2001 can also record onto more affordable write-once DVD-R discs with DVD-R format. In July 2001, we further launched a new model with lower prices in Japan, and plan to do so in North America and Europe in fiscal 2002. We have begun mass-producing DVD recorders using the DVD-RW format, thereby striving to further lower retail prices and seeking to set thede facto industry standard.

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Plasma displays are another product that we believe to have commercial potential. In comparison with conventional CRTs and projection TVs, plasma displays feature a screen which is larger yet very slim, only about 4.9 inches in depth. These displays are lighter than CRTs and projection TVs and have wider viewing angles than projection TVs. We expect that these characteristics will help plasma displays capture a substantial portion of the larger-screen TV market in the near future, in which CRTs and projection TVs currently are dominant. Our plasma displays have achieved a high reputation both in the consumer and business markets for their high-resolution, high-quality pictures since the introduction of the first model to the market in fiscal 1998. Our plasma displays are currently used mainly at shopping malls, airports, train stations, and other public and commercial venues. They also increasingly meet household demand for large-screen enjoyment of high-quality pictures from DVDs and other sources. We introduced new plasma displays for business use to the Japanese market in August 2001. Our 50-inch XGA plasma display has improved peak brightness by 60% and bright area contrast by 80% compared with our previous models, realized sharper high-definition images even when viewed under bright light conditions, and achieved a 20% decrease in power consumption compared with its predecessor model. We will introduce these new models for both consumer and business markets outside Japan at the end of 2001. We also plan to launch 43-inch plasma displays worldwide will increase approximately 8 times, from 1 million units in fiscal 2002.2003 to 8 million in 2008.

Car Electronics:

This groupsegment includes car stereos, car CD players, car MD players, car DVD players,AV systems, car speakers and car navigation systems.

Sales by product for fiscal 2001 in the Car Electronics group is as follows: Car CD playersOverall, car stereos accounted for the largest sales in this group. Of these, our car stereos equipped with OEL displays were well received by consumers due to clear images from a wide viewing angle range. Also, cassette car stereos accountedsegment for a significant portion of sales in this group.fiscal 2004. In Japan, our car navigation systems accounted for a significant portion ofthe largest sales, while overseas car stereos accounted for the largest sales in this group.segment. Sales based on OEM accounted for 32.3% in this segment.

Both in Japan and outside Japan, sales in this group are generally made in the consumer market and to automobile manufacturers on an OEM basis for installation in new cars on production lines or as optional parts. Sales in this category are gradually shifting from the consumer market to the OEM market, as automobile manufacturers place greater emphasis on differentiation of their cars. Our strong brand recognition in both markets is helping us maintain our leading market share of car electronics products on a global basis. We plan to shift manufacturing of car electronics products to China in order to meet price competition.

We werebecame the first manufacturer in the industryworld to introduce car navigation systems for the consumer market when we launched our first car navigation systems to the Japanese consumer market in fiscal 1991.1991, and since then have maintained a leading position by offering affordably-priced and easy-to-operate DVD-ROM and advanced HDD-equipped models. We have substantial expertiseplan to expand this business in Europe and North America, where the markets are expanding recently. JEITA forecasts that sales of car navigation systems and have been one ofworldwide will increase approximately 2 times, from 5.2 million units in 2003 to 10 million in 2008. In November 2002, we released in the consumer market leaders. Carthe world’s first car navigation systems showsystem that incorporates a data communication module for access to the current position oflatest map data. In the car they are installed in, by receivingaudio business, we also strive to widen our market share with new products and processing signalsinnovations, such as car CD players with OLED displays and in-car entertainment systems. As we keep introducing innovative car electronics products, we will continue to seek to distinguish our products from GPS orbiting satellites controlled by the United States Department of Defense. The information is given on maps displayed on a small in-car TV, as well as through voice guidance. Map information is generally stored on CD-ROMs or DVD-ROMs. The system also provides hotel, restaurant guide and other valuable information, and displays possible routes the driver could take. Currently, most of the market for our car navigation systems is in Japan.competitors.

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In June 2001 we introduced in Japan a new car navigation system incorporating a HDD, which has substantially faster access times than those of the existing DVD-ROM drive model. The new model is receiving favorable acceptance from our customers for its attractive and convenient features, such as its quicker search and display of routes to designated destinations, and its “music server” function with a storage capacity of approximately 20 audio CDs.

Others:

This group includes products primarily for business use, such as OEL display panels, equipment for cable-TV systems, DVD-ROM drives, DVD-R/RW drives, factory automation systems, digital broadcast settop boxes, and telephones for consumer use.

Sales by product for fiscal 2001 in this group is as follows: Settop boxes of cable-TV systems and digital broadcast accounted for the largest sales in this group. DVD-ROM drives also accounted for a significant portion of sales in this group. In Japan, telephones accounted for a significant portion of sales in this product group and factory automation systems, such as for car-related systems like air bags, fuel ignition devices and fuel supply devices, also contributed to sales.

We began shipment of OEL display panels in North America in fiscal 2001 on an OEM basis to a major U.S. cellular phone maker. OEL display panels offer many advantages over alternative display panels: self-lighting emission, an ultra-thin profile, low-power consumption, and clear images throughout a wide viewing angle range. We were the first in the world to market an OEL display in fiscal 1998 and the first and only company to start mass-producing four-color (blue, green, yellow and red) OEL displays in fiscal 2000. In addition, we expect to start manufacturing in the fall of 2002, through a joint venture company, continuous grain (CG) silicon TFT substrates for a higher-resolution active-matrix full-color OEL display.

In fiscal 2001, we began supplying DVD-R/RW drives to PC makers on an OEM basis. The DVD-R/RW drives can record both on a write-once blank DVD-R disc and a rewritable blank DVD-RW disc up to seven times as much data as that of a CD-R or CD-RW disc. In fiscal 2002, we launched a Pioneer-brand DVD-R/RW drive, the world’s first model that reads and writes data on all DVD-R, DVD-RW, CD-R and CD-RW discs.

Terrestrial broadcasting, cable TV and digital-broadcast satellite (DBS) are rapidly shifting into digital technology. We have been providing digital DBS settop boxes to a pay TV company in Europe since fiscal 1998. In fiscal 2000 we shipped digital cable-TV settop boxes to U.S. operators. In fiscal 2001 we started distributing digital DBS settop boxes in Japan and digital terrestrial broadcast settop boxes to a broadcast company in the United Kingdom.

AV Software

This segment includes the production, manufacture and sale of prerecorded DVDs, LDs, videocassettes, CDs and optical disc manufacturing systems.

Sales in this segment are substantially smaller than those of the Electronics segment. Characteristically, they show much volatility year to year, depending upon the presence or absence of hit movie and music titles. The main markets of this segment are Japan and North America. Sales analysis by product for fiscal 2001 in this segment is as follows: DVDs accounted for the largest sales in this category, due mainly to the expansion of the DVD player market, especially in Japan. In North America, prerecorded videocassettes of the hit animation titlePokémoncontributed to sales in this segment.

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Patent LicensingLicensing:

This segment includes the licensing of patents related primarily to laser optical disc technologies.

Most of the royalty revenue from this segment is obtained from patent, license and other intellectual property rightslicensing patents relating to laser optical disc technologies that are held by Discovision Associates (“DVA”), our wholly-owned U.S. partnership. These intellectual propertyThe legal protections afforded these rights expire over time, althoughhave a limited duration under applicable laws, and the periods involved depend on thelength of protection varies from country to country or by region. While continuingAlthough a significant portion of these patents have expired in certain countries/regions such as Japan and Europe, some have not expired and DVA continues to research andcollect royalty revenue. We are currently seeking to develop new technologies, we also acquiresources of revenue by acquiring patents held by third parties.

Royalty revenue from patentparties and licensing of digital playback equipment, such as CD-ROM drives, accounted for a substantial portion of revenue in this segment in fiscal 2001. In addition, patent licensing of digital discs contributed significantly to royalty revenue.patents.

Revenue from the Patent Licensing segment is substantially less than from our other segments, constituting less than 5%2% of operating revenue for fiscal 2001.2004. However, the contribution of this segment to our operating income is substantialsignificant compared to its contribution to our operating revenue, constituting between approximately 60%-80%26% of our operating income in each offiscal 2004.

Others:

This segment includes products primarily for business use, such as business-use plasma displays, business-use AV systems, OLED display panels, factory automation systems and devices and parts.

Devices and parts, including semiconductors related to laser pickups, accounted for the last threelargest sales in this segment for fiscal years. A number of these patents will expire starting2004. Factory automation systems and business-use plasma displays also contributed materially to sales in this segment.

OLED displays, which are particularly well-suited for small size displays, such as cellular phone displays are expected to become the next generation display. In fiscal 2000, we were the first in the world to mass-produced four-color OLED displays. In fiscal 2004, we started supplying passive-matrix full color OLED display panels in cellular phones. To strengthen our market position, in fiscal 2003, which will result2001, Tohoku Pioneer Corporation, Pioneer’s majority-owned subsidiary, established a joint venture company, ELDis, Inc., in a substantial decrease in royalty revenue.fiscal 2001 with Semiconductor Energy Laboratory Co., Ltd. and Sharp to develop and manufacture active-matrix full-color OLED displays.

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Principal markets

The following table sets forth our operating revenue from unaffiliated customers by geographic market for the respective periods indicated:

Operating Revenue by Geographic Market
(In millions of yen, except for percentage amounts)

                         
  Year ended March 31
  
  1999 2000 2001
  
 
 
Japan  ¥194,836   33.1%  ¥208,115   33.8%  ¥230,983   35.7%
North America  176,611   30.0   200,930   32.6   213,592   33.0 
Europe  141,013   23.9   135,728   22.0   126,019   19.5 
Other Regions  76,605   13.0   71,098   11.6   76,475   11.8 
   
   
   
   
   
   
 
Total  ¥589,065   100.0%  ¥615,871   100.0%  ¥647,069   100.0%
   
   
   
   
   
   
 
                         
  Year ended March 31
  2002
 2003
 2004
  (In millions of yen, except for percentage amounts)
Japan ¥215,539   34.2% ¥254,639   37.6% ¥263,298   37.6%
North America  189,599   30.1   190,147   28.1   170,711   24.3 
Europe  131,046   20.8   132,977   19.6   146,250   20.9 
Other Regions  93,593   14.9   99,496   14.7   120,626   17.2 
   
 
   
 
   
 
   
 
   
 
   
 
 
Total ¥629,777   100.0% ¥677,259   100.0% ¥700,885   100.0%
   
 
   
 
   
 
   
 
   
 
   
 
 

Note:
Note:Operating revenue by geographic market represents revenue from unaffiliated customers, based on the geographic location of each unaffiliated customer.

Seasonality

Global sales inof the Electronics segmentconsumer electronics products are seasonal. Sales for the third quarter (ending December 31) of each fiscal year are generally higher than those of other quarters of the same fiscal year, due to increased demand during the year-end holiday season. In Japan, sales of car electronics products generally increase in the summer months, due to increased car usage for summer vacations.

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Marketing channels

We sell our products to a large number of retailers and distributors through our sales offices in Japan and through Pioneer’s sales subsidiaries and independent distributors outside Japan. In addition, we market certain products, such as car electronics products and DVD-R/RWrecordable DVD drives, on an OEM basis to other manufacturers for resale under their own brand names. Our business is not materially dependent upon any particular customer or group of customers. Most of our sales are made from inventory rather than against customer orders. Our products are generally are sold under our own brand names, principally “Pioneer.”

After-sales service

We maintain a policy of providing repair and other services in the countries where our products are sold. In Japan, after-sales service is provided through Pioneer’s wholly-owned service subsidiary, Pioneer Services Network Corporation (PSN)(“PSN”), and authorized servicing companies. Pioneer established PSN in fiscal 2001April 2000 to enhance the efficiency of our operations for after-sales services and to offer such services with higher quality. In countries where Pioneer’s subsidiaries are located, such as the United States and certain European countries, after-sales services are provided by such subsidiaries or through their authorized independent servicing companies. In other countries, such services are generally performed by our local distributors.

In line with general industry practice, most of the products we sell to consumers are provided with a warranty for free repair work, generally for a period of one year from the date of purchase. Parts are kept available for after-sales service for a period ranging generally from two to eight years after discontinuation of production, depending on the characteristics of the parts.

Production23

We manufacture our products globally at our 42 plants. See the table in “Item 4.D. Property, plants and equipment,” of this annual report for a list of our principal plants. To enhance cost competitiveness and protect against currency fluctuations, we are expanding manufacturing and local parts procurement outside Japan. In line with this strategy, in the fall of 2001, production will start at two new plants in China (in the Shanghai and Dongguan areas), mainly for DVD pickups, DVD-R/RW drives and car electronics products. We plan to invest a total of ¥10 billion in these facilities by fiscal 2003. These facilities will take advantage of China’s recently fast-improving production infrastructure, and expand China’s role as our worldwide manufacturing site that will help reduce production costs further and compete better worldwide. Also, we intend to increase our use of electronics manufacturing services (EMS), mainly in China, to help minimize our plant investment and parts inventories, thereby boosting the efficiency of production and assets. Our goal is to increase China’s production share (including use of EMS) in our total production volume in yen to 35% in fiscal 2003. Such share in fiscal 2000 and fiscal 2001 were 3% and 12%, respectively.

In fiscal 2000, we reviewed overall production systems to reduce costs further, and restructured some production sites. We closed an LD manufacturing plant in Japan and audio product plants in the United States and France, and sold an optical disc manufacturing plant in the United States.

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Raw materials and sources of supply

We purchase a variety of raw materials and parts for use in the manufacture of our products. We generally maintain two or more suppliers to prevent a shortage of raw materials and parts. In accordance with corporate policy, however, we develop and manufacture certain key parts internally for our products, including plasma display panels, laser pickups and certain integrated circuits (ICs)(“ICs”) and large-scale integrations (LSIs)(“LSIs”). We also purchase certain completed products, then sell them under our own brand names.

No single unaffiliated source accounted for more than 7%5% of total supply purchases in fiscal 2001.2004. We have not experienced any material difficulties in obtaining raw materials, parts and products and believe that we will continue to be able to obtain them to meet our needs.

Semiconductors account for the largest percentage of parts purchased in fiscal 20012004 (on a yen basis), representing approximately 40% of our total purchases. We purchase semiconductors from various suppliers, mainly pursuant to the terms of our basic supply agreement. Our basic supply agreement generally has a term of one year, with an automatic renewal clause. Where we do not have two or more suppliers, we seek longer term contracts or bulk purchases and place our order 3three to 4four months earlier than our usual practice to reduce the risk of being unable to obtain key parts. We purchase a portion (approximately 10%) of our semiconductor parts, which are custom madecustom-made for our needs in accordance with our designs and specifications, from STMicroelectronics N.V. While we do not currently have an alternative source for the type of semiconductors supplied by STMicroelectronics N.V., we have entered into a strategic alliance with STMicroelectronics N.V. to assuresecure a stable source of supply.

The political instability in the Middle East affects the stable supply of petroleum which may cause an increase in the price of plastic materials used in our products. In addition, the rapid economic growth in China may cause a shortage of steel materials and nonferrous metals. We continue our effort to procure a stable supply of these materials and maintain costs at appropriate levels.

To date, the prices of parts and other principal raw materials used by us to produce its products have remained relatively stable.

We plan to increase the percentage of raw materials and parts we purchase through online network systems, including the Internet. We believe this will contribute to more timely manufacturing and a decrease in production costs.

Patents and licenses

We hold a variety of patents, including those relating to laser optical disc technology, in Japan and other countries, while we in turn are licensed to use a number of patents owned by third parties. We consider certain patents licensed from third parties to be important to our business. In particular, the patents licensed from Dolby Laboratories Licensing Corporation, U.S.A. for such devices as noise reduction, from Koninklijke Philips Electronics N.V., the Netherlands for CD products and LD products, from Thomson Licensing S.A., France for CD products and LD products and from MPEG LA, L.L.C., U.S.A. for digital video products, are utilized in products accounting for a substantial portion of our net sales. Termination of such license agreements would have a material adverse effect on our business, although we have no reason to believe that such termination will occur.

Research and Development24

Our R&D activities have played a crucial role in the development of our business. Our R&D program currently centers on optical recording/playback, flat-panel displays, digital signal processing, information/communications, and core LSIs. In fiscal 1999, 2000 and 2001, our R&D expenses were ¥31,131 million, ¥33,265 million and ¥37,105 million, respectively, or 5.3%, 5.4% and 5.7% of our operating revenue, respectively. We plan to continue to spend more than 5% of operating revenue on R&D each year. As at March 31, 2001, approximately 3,200 employees were engaged worldwide in R&D and product and production technique improvement.

25


Our R&D activities are carried out mainly in Japan at The Corporate Research & Development Laboratories, as well as the AV & Recording Development Center, the Information & Communication Development Center and the Optical Technology Center. We are actively engaged in the development of system software related to digital TV and of digital network technologies at Pioneer Research Center USA, Inc., Pioneer’s wholly-owned subsidiary in the United States. Product improvement activities are the responsibility of the production engineering departments at our various manufacturing facilities both in Japan and overseas.

During fiscal 2001, we announced the advent of new improved design and dimensions for OEL displays. Our innovations in moisture barrier and low-temperature film-formation technologies enabled use of a plastic substrate. This development led to the creation of a revolutionary 0.2-mm-thin OEL display that is flexible enough to bend, is able to display moving pictures, and is strong enough to resist breakage. These moisture barrier and low-temperature film-formation technologies are compatible with another exclusive Pioneer technology that enables selective placement of three organic materials—the primary colors of red, green and blue, respectively—for optimal emission of light. We believe these innovations will help us to develop a full-color OEL “film” display in the near future. This development, if achieved, would expand the use of OEL displays for cellular phones, mobile computers and a growing array of popular new products.

Competition

We believe that we compete successfully and that we have a strong positionare one of leading innovators with respect to car electronics, plasma displays and DVD-related products. Our products, however, are exposed to intense competition in Japan and overseas. Our competitors, which vary in size, area of distribution, range of products and financial resources, are principally companies based in Japan and Europe, some of which are large, integrated home electric or electronic appliance manufacturers having substantially larger capital resources than we do.us. The electronics industry in general has been subject to substantial price competition in light of slowerdecreased demand. In addition, electronics companies in Asia, particularly those from Korea and Taiwan,China, pose a severe threat through price competition with products possessing simplified functions at lower prices.competition. To counter thethis intense competition, we place great emphasis on extensive marketing to stimulate demand offor innovative and value-added products. Furthermore, we concentrate our efforts on technological research, quality control, sales promotion and the lowering of production costs by increasing procurement of parts and products made outside Japan and other measures. See also “Item 3.D. Risk factors–factors—Competition generally, and especially on price and standardization of products, may adversely affect our business results and financial conditioncondition” and “Item 4.B. Business overview–Strategy.overview—Strategy.

Import restrictions

In certain areas of the world, our products encounter tarifftariffs and other import restrictions. Tariffs applied to our products vary depending upon the classification of such products and the countries into which such products are imported. Import restrictions, such as prohibitions on imports of certain products, vary from nation to nation. To respond to this situation, we manufacture our products in certain locations outside Japan as well as commissioning their production to independent manufacturers.

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Governmental regulation

Our business activities are subject to various governmental regulations in countries in which we operate, including regulations relating to business/investment approvals, export regulations including those related to national security considerations, tariffs, antitrust, intellectual property, consumer and business taxation, exchange controls, anand environmental and recycling requirements.

25


C. Organizational structure

Our basic corporate structure, including some but not all of our operating subsidiaries, is shown in the following chart:

(FLOWCHART)(ORGANIZATIONAL CHART)

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The following table sets forth the principal subsidiaries owned, directly or indirectly, by Pioneer.

         
  Country of Ownership interest  
Name of subsidiaryincorporationOwnership interestPrincipal business

 incorporation
 and voting interest
 Principal business
Tohoku Pioneer Corporation Japan  67.0%67.0% Manufacture of car electronics products, Factory automation systems and OELOLED display panels
 
Pioneer VideoDisplay Products Corporation Japan  100.0%100.0% Manufacture and distribution of optical discs, ICs and LSIsplasma displays
 
Shizuoka Pioneer
Micro Technology Corporation
 Japan  100.0%100.0% Manufacture and distribution of displaysICs and equipment for cable-TV systemsLSIs
 
Pioneer North America, Inc. U.S.A.  100.0%100.0% Coordination of the activities of Pioneer’s U.S.North American subsidiaries and affiliates
 
Pioneer Electronics (USA) Inc. U.S.A.  100.0%100.0% Distribution of electronics products and customer support of our products and strategic shared services of Pioneer’s U.S. subsidiaries
 
Pioneer Electronics Capital Inc. U.S.A.  100.0%100.0% Financing to Pioneer and its subsidiaries
 
Discovision Associates* U.S.A.  100.0%100.0% Licensing of worldwide patents relating to laser optical disc technologies
 
Pioneer Europe NV Belgium  100.0%100.0% Coordination of the activities of Pioneer’s European subsidiaries and affiliates, and distribution of electronics products
 
Pioneer Electronics Asiacentre, Pte. Ltd. Singapore  100.0%100.0% Coordination of the activities of Pioneer’s Asian subsidiaries and affiliates, and manufacture and distribution of electronics products
Pioneer China Holding Co., Ltd.China100.0%Coordination of the activities of Pioneer’s Chinese subsidiaries and affiliates and distribution of electronics products

*Discovision Associates (DVA) is a general partnership organized under the laws of the State of California in the United States.

2827


D. Property, plants and equipment

Our manufacturing operations are conducted principally in Japan, Southeast Asia and China. Of the total of 4234 plants, 2016 plants are in Japan and the remaining 2218 are outside Japan. The following table sets forth information, as of March 31, 2001,2004, with respect to our principal plants.

       
    
Name of plantFloor space  
(Name of company   (square feet)  
Name of plantLocation[of which leased space]Principal Products
owns the plant)
 Location
 [leased space]
 Principal products
(Japan)
Japan
 
Shizuoka PlantFukuroi, Shizuoka610,000 Plasma displays, Projection TVs, Equipment for cable-TV systems
       
Shizuoka Plant
(Pioneer Display Products Corporation)
Fukuroi, Shizuoka786,000Plasma displays
Tendo Plant
(Tohoku Pioneer Corporation)
Tendo, Yamagata504,000Car stereos, Car speakers, Loudspeakers
Tokorozawa Plant
(Pioneer Corporation)
 Tokorozawa, Saitama 489,000490,000  Stereo systems, Individual stereo component units,components, DVD players, DVD-R/RWRecordable DVD drives for PCs, DVD recorders
 
Tendo PlantTendo, Yamagata458,000 Cassette car stereos, Car CD/MD players, Car speakers, Loudspeakers
Kawagoe Plant
(Pioneer Corporation)
 Kawagoe, Saitama 414,000 Cassette carCar stereos, Car CD/MD players, Car navigation systems
 
Yonezawa Plant
(Tohoku Pioneer Corporation)
 Yonezawa, Yamagata  
Kofu PlantNakakoma, Yamanashi363,000 DVDs, DVD-R/RW discs, CDs, Plasma display panels
234,000  OLED displays
 
Kokubo Plant
(Pioneer Micro Technology Corporation)
 Kofu, Yamanashi 191,000 
[77,000]
204,000 ICs, LSIs
 
Tendo the 2nd Plant
(Tohoku Pioneer Corporation)
 Tendo, Yamagata  186,000 Factory automation systems
 
Towada the 2nd Plant
(Towada Electronics Corporation)
 Towada, Aomori 158,000 DVD players, DVD-R/RW drives, Cassette car stereos, Car CD players
134,000  DVD-RW pickups, Car stereos
 
YonezawaNiike PlantYonezawa, Yamagata151,000 OEL displays, Car speakers, Car CD players
Fukuroi Plant
(Pioneer Display Products Corporation)
 Fukuroi, Shizuoka 134,000 Speaker systems, AV racksPlasma displays
Yamanashi Plant
(Pioneer Display Products Corporation)
Nakakoma, Yamanashi102,000Plasma displays

2928


       
    
Name of plantFloor space  
(Name of company   (square feet)  
Name of plantLocation[of which leased space]Principal Products
owns the plant)
 Location
 [leased space]
 Principal products
(
Outside Japan)Japan
      
Shanghai Plant
(Shanghai Pioneer Speakers Ltd.)
Shanghai, China420,000Car speakers
Mexico Plant
(Pioneer Speakers, S.A. de C.V.)
Baja California,
Mexico
352,000Car speakers
Shanghai Plant
(Pioneer Technology (Shanghai) Co., Ltd.)
Shanghai, China337,000Car AV systems, Car stereos
Thailand Plant
(Pioneer Manufacturing (Thailand) Co., Ltd.)
 Ayutthaya, Thailand 300,000 Cassette carCar stereos, Car CD players, Stereo systems
 
Taiwan PlantTao Yuan, Taiwan281,000 Speaker systems
Malaysia PlantJohor, Malaysia262,000 Stereo systems, CD players, Cassette car stereos, Car CD players
Shanghai PlantShanghai, China233,000 Speaker systems, Laser pickups
Mexico PlantBaja California, Mexico232,000 Speaker systems
Guang Dong Plant
(Pioneer Technology (Dongguan) Co., Ltd.)
 Guang Dong, China 231,000 295,000Recordable DVD drives
Malaysia Plant
[230,000](Pioneer Technology (Malaysia) Sdn. Bhd.)
Johor, Malaysia262,000Stereo systems, Car stereos
Guang Dong Plant
(Dongguan Monetech Electronic Co., Ltd.)
Guang Dong, China249,000 Speaker systems
 
California Plant
(Pioneer Electronics Technology, Inc.)
 California, U.S.A. 186,000 185,000 Projection TVs,Plasma displays, Speaker systems
 
U.K. Plant
(Pioneer Technology (U.K.) Ltd.)
 West Yorkshire,
United Kingdom
 184,000 Stereo systems, CD players, Tuners, Digital DBS decoders,Plasma displays, DVD recorders

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Name of plantwhich owns the plant)
Floor space
(Name of company(square feet)
Location
[leased space]
Principal products
Ohio Plant
(Pioneer Industrial Components, Inc.)

Others
 Ohio, U.S.A. 157,000 Cassette carCar stereos Car CD players
Other (11(7 plants in Japan and 138 plants outside Japan) 1,856,000 1,253,000
[112,000]45,000]

  
 
Total   6,890,000 7,182,000
[419,000]45,000]
  
   
 

Most of the buildings of these plants and the land (except those in China) on which they are located are owned by us.

As of March 31, 2001,2004, we owned our headquartersheadquarters’ buildings in Tokyo withhaving an approximate aggregate floor space of 336,000 square feet. We lease approximately 34,000 square feet as additional head office space in Tokyo.

We also own an employee training center in Tokyo with an approximate floor space of 17,000 square feet, and R&D facilities with an approximate aggregate floor space of 282,000294,000 square feet.

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Our sales office buildings in Japan and outside Japan are mainly leased. The head office buildings of some distribution subsidiaries outside Japan are owned by us. Land and buildings for the Fukuroi Plant, the Ohio Plant R&D facilities, and one of our headquartersheadquarters’ buildings with an aggregate book value of ¥16,416¥11,902 million were pledged as collateral for certain loans aton March 31, 2001.2004.

In fiscal 2004, in order to meet fast-growing demand for DVD recorders and recordable DVD drives, we invested ¥1.3 billion in building the second manufacturing line for optical pickups, which are key parts of DVD recorders and recordable DVD drives, at Guang Dong Plant in China. This line started November 2003 and our overall production capacity for optical pickups reached one million units per month.

To address expanding demand for plasma displays, in fiscal 2004, we invested ¥22 billion in building a more efficient production system, including the building of new manufacturing lines at our plants in Shizuoka and Yamanashi, in Japan. Our overall production capacity increased about 67% to 250 thousand units annually through the expansion of the Shizuoka Plant completed in August 2003. The ongoing building of a new line of the Yamanashi Plant is expected to be completed by fall of 2004 and increase our total production capacity to 600 thousand units annually. In fiscal 2005, we plan to spend approximately ¥30 billion in relation to PDP-related capital expenditure not including investment related to the acquisition of NPD as described below.

On July 1, 2004, Pioneer and NEC concluded the stock transfer agreement under which NEC will transfer to Pioneer 100% of the issued share capital of its plasma display manufacturing subsidiary, NPD and the intellectual property rights relating to plasma displays held by NEC. We expect to invest approximately ¥40 billion in the acquisition of NPD and NEC’s intellectual property rights in fiscal 2005. This acquisition is expected to be completed by September 30, 2004. NPD’s plant has an approximate aggregate floor space of 867,000 square feet in Izumi, Kagoshima, Japan. With this acquisition and the

30


new line of the Yamanashi Plant as described above, our total capacity will add up to more than one million units a year. In order to apply to this investment, on March 5, 2004 we issued the aggregate principal amount of ¥60,000 million of Euro Yen Zero Coupon Convertible Bonds due 2011.

We intend to fund the capital requirement to fulfill these capital expenditure plans through internally generated cash, except for the acquisition of NPD.

We are constructing two plantsconstantly engaged in Chinaupgrading, modernizing and revamping the operations of our manufacturing facilities, based on our assessment of market needs and prospects. As a result, it would be unreasonably difficult to further improve cost competitiveness. The foregoing table astrack the exact productive capacity and the extent of March 31, 2001utilization of each of our manufacturing facilities. We believe that our manufacturing facilities are generally all operating within normal operating capacity and not substantially below capacity. Additionally, we believe that there does not include them.exist any material environmental issues that may affect the utilization of our assets.

We believe that our properties are adequate to carry on our current business, though additional investment in plant and equipment is being made to ensurepromote continued growth.

Item 5. Operating and Financial Review and Prospects

You should read the following discussion and analysis of our financial condition and results of operations together with “Item 3.A. Selected financial data” and our audited consolidated financial statements and notes to such statements appearing elsewhere in this annual report. These consolidated financial statements have been prepared in accordance with U.S. GAAP, except for segment data which is prepared in accordance with the regulations under the Securities and Exchange Law of Japan.

Overview

We develop, design, manufacture and sell home electronics products such as audio, video and car electronics products on a global scale. We are one of the leading innovators of DVD products, plasma displays and car navigation systems. We are also one of the leading manufactures in the world consumer market of car audio products and car navigation systems. In addition, we derive revenue from the manufacture and sale of industrial electronics, such as factory automation systems and parts and from the licensing of patents that we own.

During fiscal 2004, the global economy was supported by continued expansion of the U.S. economy, despite uncertainties in Iraq and other parts of the world. In Japan, where we have the largest sales, the economy exhibited signs of recovery. However, uncertainties remain as to whether this trend will lead to a sustainable growth. In the consumer electronics market, the popularity of newer products, such as flat panel TVs and DVD recorders, rose, while price competition for these products intensified worldwide. In foreign exchange markets, the average value of the yen during fiscal 2004 was approximately 8% higher against the U.S. dollar and approximately 9% lower against the euro compared with fiscal 2003. In these economic conditions, our operating revenue for fiscal 2004 was ¥700.9 billion, up 3.5% from fiscal 2003. Operating income was ¥43.7 billion, a 42.1% increase from ¥30.8 billion recorded in fiscal 2003, and net income increased to ¥24.8 billion, a 54.5% increase from ¥16.1 billion posted in fiscal 2003.

We classify our business groups into four segments: “Home Electronics,” “Car Electronics,” “Patent Licensing” and “Others.” Main products in each segment are as follows: “Home Electronics” includes the manufacture and sale of audio/video equipment for home use, equipment for cable-TV systems, digital broadcast set-top boxes, home telephones, computer peripheral equipment, devices and others. “Car Electronics” includes the manufacture and sale of car audio products, car navigation systems, and others. “Patent Licensing” includes the licensing of patents related to optical disc recording and playback equipment, and others. “Others” includes manufacture and sale of factory automation system, parts, and others. The following are operating revenue and operating income by business segment for the three segments: “Electronics,” “AV Software” and “Patent Licensing.” We further break down our “Electronics” segment into three product groups: Audio/Video, Car Electronics, and Others. “Electronics”years ended March 31, 2004. “Car Electronics” is our largest segment by revenue, accounting for 90.6% of operating revenue (net sales plus royalty revenue) in fiscal 2001. In fiscal 2001, Audio/Video group, Car Electronics group and Others accounted for 29.5%, 37.8% and 23.3%, respectively, of operating revenue. The “AV Software” and “Patent Licensing” segments accounted for 6.2% and 3.2%, respectively,41.7% of operating revenue in fiscal 2001.2004.

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Operating Revenue and Operating Income by Business Segments

                         
  Year ended March 31
  2002
 2003
 2004
  (In millions of yen, except for percentage amounts)
Operating Revenue:                        
Home Electronics ¥259,809   41.3% ¥277,968   41.0% ¥281,482   40.2%
Car Electronics  257,672   40.9%  281,090   41.5%  292,187   41.7%
Patent Licensing  17,588   2.8%  12,584   1.9%  11,821   1.7%
Others  94,708   15.0%  105,617   15.6%  115,395   16.4%
   
 
   
 
   
 
   
 
   
 
   
 
 
Total ¥629,777   100.0% ¥677,259   100.0% ¥700,885   100.0%
   
 
   
 
   
 
   
 
   
 
   
 
 
Operating Income (Loss):                        
Home Electronics ¥(5,717)     ¥3,878      ¥2,099     
Car Electronics  16,071       26,126       28,936     
Patent Licensing  16,837       10,736       11,398     
Others  (5,790)      8       1,096     
Corporate and Elimination  (4,801)      (9,983)      190     
   
 
       
 
       
 
     
Total ¥16,660      ¥30,765      ¥43,719     
   
 
       
 
       
 
     

Note:    Operating revenue represents revenue from unaffiliated customers.

Our products are generally sold under our own brand names, principally “Pioneer.” Our primary markets forare Japan, North America, Europe and Asia and we sell our products basedto customers in consumer and business markets through sales offices in Japan, and through sales subsidiaries of Pioneer and independent distributors outside of Japan. In addition, on an OEM basis, we market certain products, such as car electronics products, recordable DVD drives, digital broadcast set-top boxes and OLED displays to other companies. The following are operating revenuesrevenue from unaffiliated customers by geographic market for the three years ended March 31, 2004.

Operating Revenue by Geographic Market

                         
  Year ended March 31
  2002
 2003
 2004
  (In millions of yen, except for percentage amounts)
Japan ¥215,539   34.2% ¥254,639   37.6% ¥263,298   37.6%
North America  189,599   30.1   190,147   28.1   170,711   24.3 
Europe  131,046   20.8   132,977   19.6   146,250   20.9 
Other Regions  93,593   14.9   99,496   14.7   120,626   17.2 
   
 
   
 
   
 
   
 
   
 
   
 
 
Total ¥629,777   100.0% ¥677,259   100.0% ¥700,885   100.0%
   
 
   
 
   
 
   
 
   
 
   
 
 

Note:Operating revenue by geographic market represents revenue from unaffiliated customers, based on the geographic location of each unaffiliated customer.

Our principal production activities are carried out in Asia, including Japan. We have been expanding production activities in China. The production in China accounted for approximately 29% of total production in fiscal 2001 were2004, compared with 22% in fiscal 2003 and 18% in fiscal 2002.

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Home Electronics, Car Electronics and Others

In our home electronics business, we experienced significant price competition for conventional DVD players due to increasing competition. At the same time, we continue to see strong growth in demand within the Japanese market and overseas for DVD recorders and recordable DVD drives, although sales of our CD-ROM/R/RW drives and DVD-ROM drives have shown a decrease. Demand for plasma displays, which has been conspicuous in Japan, (36%), North America (33%)is expanding in the overseas market. In our car electronics business, severe worldwide competition has led to strong downward pressure on prices. However, the popularity of our car navigation systems, which we believe is a major area of our operations, continues to increase. Our royalty revenue from the licensing of worldwide patents for our laser optical disc technologies has started to decline substantially as a significant portion of our patents in Japan and Europe (20%).

Electronicsexpired during fiscal 2003 and 2004.

The electronics industry is characterized by rapid technological changes, and our ability to introduce attractive new products to the market significantly affects the operating results of this segment. During the past five years, the decline of sales of LD hardware and software adversely affected the operating results of this segment. The decline was due to the shift of the consumer demand from LDs to DVDs as well as the shift of demand in the karaoke market in Japan from LD systems to online systems. During the same period,our electronics businesses. Our sales of new products such as DVD-related products, including DVD players,recorders and recordable DVD drives for PCs, plasma displays, car navigation systems digital broadcast settop boxes and DVD-ROM drives for PC useOLED displays have grown rapidly.

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In fiscal 2004, sales of such new products accounted for approximately 47% of our total sales. We expect to continue concentrating our resources on these strategic products in order to further expand sales.

The electronics industry is also characterized by continuing sales price decreases in most product categories, making it important for us to continually improve the efficiency of our manufacturing, distribution, service and administrative functions. As an example of our effort, in the past five years, we have increased the percentage of our manufacturing outside Japan from 35%51% in fiscal 2000 to 59%65% in fiscal 2004 in terms of the yen value of cost of goods produced, mainly by expanding production facilities in Southeast Asia and China. We intend to build or contract for additional manufacturing capacity outside Japan over the next several years with particular emphasis on China.

Operating income for this segment for fiscal 1999, 2000 and 2001 were ¥8.5 billion, ¥4.7 billion and ¥13.8 billion, respectively, accounting for 42.5%, 20.1% and 40.9% of total operating income for eachAs a result of the three years.sale of subsidiaries in the audio/video software business in fiscal 2004, the gain from such sale, as well as the operating results of the discontinued operations, are presented net of tax as a separate line item in the consolidated statement of income in accordance with Statement of Financial Accounting Standards No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” See Note 3 in “Notes to Consolidated Financial Statements.”

AV SoftwareAlso, in fiscal 2004, we changed our business segment classification for certain businesses. Results related to DVD drives for PCs have been moved from “Others” to “Home Electronics”, and results related to plasma displays for business use have been moved from “Home Electronics” to “Others.” Corresponding figures for the previous fiscal years have been restated accordingly.

The AV software industry is very volatile and dependent upon the presence or absence of hit movie and music titles. Accordingly, its success in any years is very difficult to predict.

Operating income (loss) for this segment for fiscal 1999, 2000 and 2001 were (¥5.4 billion), ¥0.2 billion and ¥0.1 billion, respectively.

Patent Licensing

Our royalty revenue from Patent Licensing depends to a material extent on the amounts of sales of patented products by our licensees, making it difficult for us to predict actual royalty revenue each year. Therefore, trends in the PC market have an influence on our royalty revenue. In addition, a significant portion of our patentspatent rights in Japan and Europe relating to laser optical disc technologies will expire starting inexpired during fiscal 2003.2003 and fiscal 2004. Accordingly, we expecthave started to experience a substantial decrease in operating revenue and operating income from this segment. We are researching and developing new technologies, and we purchasecurrently working to acquire patents held by third parties from time to time, whichand licensing such patents. Although these operations may generate additional revenue to help offset a portion of this expected decline. Wedecline, we do not however, expect that the revenue, if any, from such new patents will be sufficient to offset the decrease in royalty revenue resulting from the expiration of our existing patents.

Operating income for this segment for fiscal 1999, 2000 and 2001 were ¥16.6 billion, ¥18.4 billion and ¥19.7 billion, respectively, accounting for 82.5%, 78.1% and 58.4% of total operating income for each of the three years. The profit margins in this segment are substantially higher than those in other segments, since costs related to this segment are limited principally to amortization of patent rights and expenses for licensing activities.33


Currency fluctuations

We are affected to some extent by fluctuations in foreign currency exchange rates, particularlyrates. We are principally exposed to fluctuations in the value of the Japanese yen against the U.S. dollar, euro and, to a much lesser extent, other currencies of countries where we conduct our business. Our consolidated financial statements, which are presented in Japanese yen, are affected by foreign currency exchange fluctuations through both translation risk and transaction risk.

Translation risk is the risk that our consolidated financial statements for a particular period or for a particular date will be affected by changes in the prevailing exchange rates of the currencies in which our subsidiaries prepare their financial statements against the Japanese yen. The functional currency for all of our significant foreign operations is the local currency. Generally, all asset and liability accounts of foreign operations are translated into Japanese yen using the exchange rates at balance sheet date and all revenue and expense accounts are translated using weighted average exchange rates for the periods. Even though the fluctuations of currencies against the Japanese yen can be substantial and, therefore, significantly impact comparisons with prior periods and among various geographic markets, the translation effect is a reporting consideration, included in the other comprehensive income, and does not reflect our underlying results of operations.

Transaction risk is the risk that the currency structure of our costs and liabilities will deviate from the currency structure of sales proceeds and assets. Transaction risk mainly derives from the fact the currencies of the countries we manufacture our products may be different from the currencies we sell our products in different countries.

Derivative financial instruments are utilized by us to reduce risks from the fluctuations in foreign exchange rates but are not held or issued for trading purposes. To hedge certain purchase and sale commitments anticipated and not yet committed transactions denominated other than functional currencies, we enter into forward exchange contracts and purchases and writes currency options. Written options are entered into only with purchased options in order to reduce the hedging cost.

Critical accounting policies and estimates

The following analysis of financial conditions and results of operations discusses our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America, except for segment data which is prepared in accordance with the regulations under the Securities and Exchange Law of Japan.

The preparation of our financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the euro. Generally, a weakeningdisclosure of contingent assets and liabilities at the date of the yen againstfinancial statements and the reported amounts of revenues and expenses during the reporting period. On an on-going basis, management evaluates its estimates and judgments, including those related to customer incentives, bad debts, inventories, investments, income taxes, financing operations, warranty obligations, retirement benefits, and contingencies and litigation. Management bases its estimates and judgments on historical experience and on various other currenciesfactors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities and the reported amount of revenue and expenses that are not readily apparent from other sources. Actual results may differ from these estimates due to the inherent uncertainty involved in making estimates.

We believe the following critical accounting policies, among others, affect our more significant judgments and estimates used in the preparation of our consolidated financial statements.

34


Revenue recognition

Sales are generally recorded when merchandise is shipped to customers based on purchase orders or when services are rendered to the third parties. In certain cases, terms of the contract require the product to pass customer inspection after shipment and we record the sale upon satisfactory customer acceptance. Royalty revenue is recognized based on royalty statements from licensees. Estimated reductions to revenue are recorded for customer incentive offerings. Sales incentives that are dependent on future customer performance such as volume incentive rebates or co-operative advertising are accrued based on estimates when the original sale is recorded. Rebates and incentives given directly to consumers are accrued earlier of when the program becomes effective or the program is announced, to the extent related sales have been recognized. Estimates of future customer performance such as purchase volume, early payments and consumer rebate redemption rate are based on experience and such estimates are reviewed monthly, quarterly or annually depending on the type of incentive. Should a greater proportion of customers redeem incentives than we estimate, additional reductions to revenue may be required.

Allowances for doubtful accounts

We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. The changes of allowance for doubtful accounts are disclosed in Note 19 to consolidated financial statements.

Warranties

We provide for the estimated cost of product warranties at the time revenue is recognized. While we engage in extensive product quality programs and processes, including actively monitoring and evaluating the quality of our component suppliers, our warranty obligation is affected by product failure rates and service costs including parts and labor that may be incurred in correcting a product failure. The estimate of warranty cost is based on historical information, and should actual product failure rates or service costs differ from our estimates, revisions to the estimated warranty liability may be required. Our warranty reserve as of March 31, 2004 is ¥5.4 billion.

Inventories

We write down inventory for estimated obsolescence in amounts equal to the difference between the cost of inventory and the estimated market value based upon assumptions about future demand and market conditions. As of the end of fiscal 2004, such inventory reserve amounted to ¥8.3 billion. If future demand or market conditions are less favorable than those projected by the management, additional inventory write-downs may be required.

35


Impairment of investments

We hold minority interests in customers and financial institutions for the purpose of maintaining long-term relationships, some of which are in publicly traded companies whose share prices are highly volatile and some of which are in non-publicly traded companies whose value is difficult to determine. We record an impairment charge when we believe an investment has experienced a positive effectdecline in value that is other than temporary. For investments in publicly traded companies, we assume the decline is other than temporary when market value is less than cost for a period of six to nine months, or sooner depending on severity of decline or other factors. For investments in non-publicly traded companies, an impairment is presumed to be other than temporary when net assets of the investee decline generally by 30% to 50% due to losses incurred. Such presumption may be overcome if there is evidence to support the judgment that the decline in net assets of the investee is temporary. The factors that are considered in the judgment include business plans and estimated future cash flows of the investee. Impairment losses recognized in income during fiscal 2004 as a result of decline in prices of stocks in our portfolio was ¥0.2 billion. The unrealized losses in the portfolio at the end of fiscal 2004 were immaterial. Future adverse changes in stock market conditions or poor operating results of underlying investments could result in losses that may not be reflected in an investment’s current carrying value, thereby possibly requiring an impairment charge in the future.

Deferred tax assets

We record a valuation allowance to reduce deferred tax assets to the amount that we believe is more likely than not to be realized. While we have considered future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for the valuation allowance, in the event that we determine that we will not be able to realize all or part of the net deferred tax assets in the future, an adjustment to the deferred tax assets would be charged to income in the period such determination is made. Likewise, should we determine that we will be able to realize deferred tax assets in the future in excess of the net recorded amount, an adjustment to the deferred tax assets would increase income in the period such determination was made.

Pension benefit costs

Employee retirement benefit costs and obligations are dependent on assumptions used in the actuarial calculations. These assumptions include discount rates, future compensation levels, retirement rates and mortality rates which are based upon current statistical data, as well as long-term returns on plan assets and other factors.

Our principal pension plans are our Japanese defined benefit pension plans. Pioneer and its domestic subsidiaries sponsors trusteed non-contributory defined benefit pension plans and a contributory welfare pension plan. The contributory welfare pension plan was established under the Japanese Welfare Pension Insurance Law (“JWPIL”), and is composed of a substitutional portion based on the pay-related part of the pension benefits prescribed by JWPIL and a corporate portion based on a defined benefit pension arrangement established at our discretion. Pension plans for our overseas subsidiaries are insignificant with aggregate pension assets and obligations amounting to less than 10% of those of our Japanese pension plans.

For pension plans in Japan, the discount rates are based on the market yield from Japanese Government Bonds adjusted for the assumed duration of the pension benefit payment for current employees. The discount rate for our domestic contributory welfare pension plan is further adjusted to reflect pension obligations that can be transferred to the Japanese government. To determine the expected long-term rates of return on our pension plan assets, we consider mainly the current and target asset allocations, as

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well as historical and expected returns on various categories of plan assets. If actual results differ from the assumptions or assumptions are changed, the resulting effects are accumulated and systematically recognized over future periods and, therefore, generally affect recognized expense and the recorded obligations in future periods.

As of March 31, 2004, the actual asset allocation was equity securities 46%, debt securities 30%, other 24%, compared with target asset allocation of equity securities 56%, debt securities 41%, other 3%. The higher actual allocation for other assets resulted from our temporary shift from market sensitive assets to highly liquid assets as we plan to apply for transfer of pension obligations and assets for a substitutional portion of our contributory welfare pension plan.

Total net periodic pension costs for our pension plans in Japan for fiscal 2002, 2003 and 2004 were ¥5.0 billion, ¥8.1 billion and ¥10.1 billion, respectively, each representing 0.8%, 1.2% and 1.4% of operating income. A strengtheningrevenue. Declines of discount rates and negative returns on plan assets that continued through fiscal 2003 adversely affected our pension benefit costs. Amortization of the yen against other currencies hasunrecognized net actuarial loss, which is a component of pension benefit costs and represents a systematic expense recognition of the opposite effect. The yen was generally stronger against the U.S. dollareffects of changes in assumptions and the eurodifferences between assumptions and actual results, for our domestic pension plans increased to ¥4.1 billion in fiscal 2004 from ¥2.9 billion in fiscal 2003 and ¥2.0 billion in fiscal 2002, although such amortization is expected to decrease in fiscal 2005 due to higher than expected returns on plan assets during fiscal 20002004. The increases in our pension costs are also attributable to increases of service cost mainly resulted from a decline of discount rate, and decreases of expected return on assets reflecting reduction of expected rate of return and decline of plan assets through the first halfend of fiscal 20012003. Lowering the discount rates for pension plans in Japan by 0.5 percentage point would have increased the projected benefit obligation at the end of fiscal 2004 by approximately ¥13 billion and would increase the pension cost for fiscal 2005 by approximately ¥1.1 billion. Lowering the expected rate of return on plan assets by 0.5 percentage point would increase the pension cost for fiscal 2005 by approximately ¥0.5 billion.

A. Operating results

Fiscal 2004 compared with fiscal 2003

Operating revenue

Operating revenue, the sum of net sales and royalty revenue, for fiscal 2004 was ¥700.9 billion, up 3.5% from fiscal 2003.

Net sales amounted to ¥689.1 billion, a 3.7% increase over fiscal 2003. Net sales in Japan came to ¥263.3 billion, up 3.4% from fiscal 2003, and overseas net sales increased 3.8% to ¥425.8 billion.

Home Electronicsnet sales increased 1.3% over fiscal 2003, amounting to ¥281.5 billion, primarily as a result of increased sales of plasma displays, DVD recorders and recordable DVD drives for PCs, while sales of DVD players, set-top boxes and audio products decreased. Sales of plasma displays grew overseas while sales in Japan decreased. Sales of DVD recorders, particularly models with a hard disk drive, increased both in Japan and overseas to more than twice the levels in respective corresponding periodsfiscal 2003 in terms of units sold, while the amount of net sales did not grow so fast because of declining average selling prices. Consumer demand for DVD products is shifting rapidly from DVD players to DVD recorders particularly in Japan. Accordingly, our marketing effort has shifted from DVD players to DVD recorders. Sales of recordable DVD drives for PCs increased overseas. In Japan,Home Electronicssales decreased by 9.2% to ¥78.8 billion as a result of decreased sales of plasma displays and DVD players, although sales of DVD recorders increased. Overseas, sales increased by 6.0% to ¥202.7 billion. This primarily reflects a large increase in the previous year, but weakened duringsale of plasma displays in each overseas market, DVD recorders in North America and Europe, and recordable DVD drives for PCs in Europe and Asia, offsetting sales declines of digital cable-TV set-top boxes in North America, digital broadcast set-top boxes in Europe and audio products in

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North America and Europe. Sales increase of plasma displays, DVD recorders and recordable DVD drives overseas were attributable to growth of sales quantity, and declines in sales of digital cable-TV set-top boxes and digital broadcast set-top boxes were due to decreases of units sold.

Car Electronicsnet sales rose 3.9% to ¥292.2 billion, primarily as a result of sales growth of car navigation systems. In Japan, net sales increased 15.1% to ¥121.7 billion, mainly due to increased sales of car navigation systems in the consumer market and to automobile manufacturers. Sales of car audio products to automobile manufacturers increased as well. Overseas net sales decreased 2.8% to ¥170.5 billion, primarily due to decreased sales of car audio products to automobile manufacturers in North America. Sales of car navigation systems rose in North America and Europe, and sales of car audio products increased in other areas.

Royalty revenue fromPatent Licensingdecreased 6.1% to ¥11.8 billion, compared to that of fiscal 2003. This was attributable to expiration of our optical disc-related patents in certain areas.

Net sales forOthersrose 9.3% over fiscal 2003 to ¥115.4 billion, reflecting primarily increased sales of factory automation systems, OLED display panels and other component parts. In Japan, net sales increased slightly by 1.1% to ¥62.8 billion. This primarily resulted from increased sales of cellular phone-related devices, mainly OLED display panels, partially offset by a decrease in sales of commercial karaoke products resulting from the sale of the karaoke business subsidiaries in the second half of fiscal 2001. During fiscal 2002 to date, the yen has remained weak against other currencies, particularly the U.S. dollar.

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Reclassification

In fiscal 2000, we changed the reporting of “income from patents, net of related expenses,” which had been previously presented in “other income (expenses).” Gross patent revenue is presented as “royalty revenue,” and the related expenses are included in “selling, general and administrative (SGA) expenses.” The figures for the previous years have been reclassified in order to conform to this presentation. Operating income originally reported for fiscal 1999 was ¥5.1 billion, compared with the revised operating income of ¥20.1 billion. This classification change had no effect on income before income taxes and net income.

Beginning with fiscal 2001, “Minority interest in income of subsidiaries,” which had been previously included in Other — net of “Other income (expenses),” is reported separately. Previously reported amounts have been reclassified to conform to this presentation. Income before income taxes originally reported for fiscal 1999 and 2000 were ¥12.1 billion and ¥27.8 billion, respectively, compared with revised ¥12.5 billion and ¥27.8 billion for fiscal 1999 and 2000, respectively. This classification change had no effect on operating income and net income.

A. Operating results

Fiscal 2001 compared with fiscal 2000

Summary

In the first half of fiscal 2001, economic conditions in the United States and Europe were generally favorable while conditions in Japan were sluggish to weak. In the second half of fiscal 2001, the U.S. economy began to weaken and subsequently conditions in Europe and Japan also deteriorated. As for foreign exchange markets, the average value of the yen during fiscal 2001 was substantially unchanged against the U.S. dollar and approximately 15% higher against the euro, when compared to levels of fiscal 2000. Despite such economic conditions, we recorded our highest-ever operating revenue at ¥647.1 billion, up 5.1% from fiscal 2000. Operating income was ¥33.8 billion, a 43.3% increase over the ¥23.6 billion recorded in fiscal 2000, while net income amounted to ¥18.3 billion compared to ¥13.1 billion posted in fiscal 2000, a 39.9% increase.

Impact of foreign exchange fluctuations

The stronger yen against the euro had a negative impact on our operating performance. We estimate that operating revenue and operating income would have been approximately ¥20.4 billion and ¥6.0 billion higher, respectively, if exchange rates had remained unchanged from fiscal 2000. Such estimates are obtained by simply applying the yen’s average exchange rates in fiscal 2000 to foreign currency denominated operating revenue, cost of sales and SGA expenses, and do not include the effect of changes to sales prices implemented to meet the foreign exchange fluctuations.

Net sales and royalty revenue

Net sales amounted to ¥626.5 billion, a 5.1% increase over fiscal 2000. Net sales in Japan rose 11.0% to ¥231.0 billion.2003. Overseas, net sales despite the higher value of the yen against the euro particularly in the first half of fiscal 2001, increased 1.9% to ¥395.6 billion. On a local currency basis, overseas sales increased 7.2% from fiscal 2000.

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Electronics segment sales amounted to ¥586.6 billion,were up 6.9% from fiscal 2000.

Audio/Video group sales of ¥191.1 billion remained substantially unchanged from fiscal 2000. Such sales reflect primarily a worldwide increase in sales of plasma displays, especially for business markets, and DVD players, offset by reduced sales of stereo systems. Plasma display sales grew by more than 70% in terms of both units and revenue. Sales of DVD players by units increased by more than 40% although revenue growth was more moderate because of declining sales prices. In Japan, Audio/Video group sales dropped 10.5% to ¥50.6 billion, mainly due to decreased sales of compact stereo systems, although sales of plasma displays increased greatly in both the consumer and business markets. Overseas sales rose 5.3% to ¥140.6 billion, mainly due to increased sales of DVD players and plasma displays, though sales in Europe were adversely affected by the weakness of the euro.
Car Electronics group sales amounted to ¥244.9 billion, substantially the same as in fiscal 2000. Although sales to car manufacturers increased, sales of car audio products to consumer markets decreased. Sales in Japan increased 9.2% to ¥89.9 billion primarily due to increased sales of car audio products to car manufacturers. Sales to the consumer market in Japan slightly decreased although sales of car MD/CD players and car navigation systems increased. Overseas sales decreased 5.2% from fiscal 2000 to ¥155.0 billion. While sales of car audio products to car manufacturers increased, particularly in North America, sales of car audio products to the consumer market decreased. This decrease reflected a sharp decline in Europe due to intensified competition and the influence of the weakened euro. Sales in Asia outside of Japan and in Central America and South America increased from fiscal 2000.
Others sales rose 33.5% over fiscal 2000 to ¥150.6 billion. The sales growth of digital cable-TV settop boxes, digital broadcast settop boxes and factory automation systems contributed to the increase, but sales of CD-ROM drives decreased as we withdrew from the CD-ROM drive market and shifted to DVD-ROM drives. In Japan, sales climbed by 38.1% to ¥62.8 billion, reflecting increased sales of factory automation systems, cable-TV settop boxes and DVD-ROM drives. Overseas sales were up 30.3% from fiscal 2000 to ¥87.8 billion. Sales of digital cable-TV settop boxes in North America increased, as did sales of digital broadcast settop boxes in Europe.

AV Software segment sales fell 16.3% from fiscal 2000 to ¥39.9 billion. Sales in Japan increased 16.4%21.0% over fiscal 20002003 to ¥27.7¥52.6 billion, primarily due to goodincreased sales of DVD software such as the hit movieU-571. However, overseas sales declined by 48.8% to ¥12.2 billion. This decline was due to a large decline in sales of animation videocassettes in North America, caused by a lack of big hits such as fiscal 2000’sPokémonseries. A decline in sales offactory automation systems, mainly optical disc manufacturing systems in Asia accountedAsia. The increasing popularity of DVDs as recording media is a major factor of increased orders for the decrease,optical disc manufacturing systems. Sales of semiconductors related to laser pickups in China and business-use plasma displays worldwide increased as well.

Royalty revenue from the Patent Licensing segment increased 5.5% to ¥20.5 billion from ¥19.5 billion in fiscal 2000, due mainly to a rise in royalties related to recording equipment such as CD-R/RW drives. A successful negotiation with customers for a lump-sum settlement of past period royalties also contributed to the increase. Without the lump-sum settlement, revenue would have decreased approximately 6% from fiscal 2000 to ¥18.4 billion.

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Cost of salesOperating costs and selling, general and administrative expenses

Cost of sales increased to ¥447.4¥487.3 billion from fiscal 2000’s ¥428.6 billion.2003’s ¥473.2 billion, consistent with the increase in net sales. However, cost of sales as a percentage of operating revenue cost of sales decreased 0.5declined 0.4 percentage points to 69.1%69.5%, despite the adverse effecteffects of the stronger yen,keen price competition, particularly against the euro in the first half of fiscal 2001. The improved gross profit margin resulted partly from successful cost reductions in strategicfor home electronics products such as plasma displays and DVD products. Also, the favorable effects of the measures taken in fiscal 2000 to improve profitability, such as cost reduction realized through reorganization of production activityrecorders. Gross profit margin in the softwarecar electronics business shutting down LD plantsimproved as a result of cost reductions in fiscal 2000, contributed to the improvedcar navigation systems. For recordable DVD drives, gross profit margin improved as well as a result of cost reductions, contributing to overall gross profit margin improvement in almost same significance with contribution from car electronics business. Also, exchange rate fluctuations favorably affected gross profit margin. A weaker yen against the euro increased net sales in terms of yen, and a stronger yen against currencies in Asian countries, where our major production facilities are located, reduced production costs in terms of yen.

SGASelling, general and administrative (“SGA”) expenses increaseddecreased by 1.3%1.4% or ¥2.2¥2.3 billion over fiscal 20002003 to ¥165.9¥166.4 billion. However,This primarily reflected decreases in personnel-related expenses, special retirement allowances and various operating expenses. Personnel-related expenses in fiscal 2004 decreased by ¥1.9 billion, reflecting the sale of subsidiaries in the karaoke business in the second half of fiscal 2003. The decrease of special retirement allowances was due to ¥1.4 billion special termination benefits recorded by Tohoku Pioneer Corporation, a subsidiary in Japan, for its voluntary early retirement plan implemented in June 2002. Such benefits were not incurred in fiscal 2004. In addition to these decreases, reductions in various operating expenses led to an overall decrease of SGA expenses, offsetting the unfavorable impact of a $14 million (¥1.5 billion) one-time payment to Gemstar-TV Guide International, Inc. as part of resolving pending litigation, ¥2.0 billion provided for estimated costs for free inspection and repair of certain plasma TVs, and a ¥1.7 billion increase in advertising expenses. The ratio of SGA expenses to operating revenue decreased 1.0by 1.2 percentage pointpoints to 25.6%23.7%. Personnel-related expenses

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Loss on sale and sales promotion expenses increased, as did royalty expenses relatingdisposal of fixed assets decreased by ¥1.1 billion. The decrease was mainly attributable to DVD technologies. On the other hand, the stronger yen reduced the expenses of overseas subsidiaries in yen terms by approximately ¥4.0 billion. We recorded a ¥1.2 billion impairment loss in certain intangible assets related to the karaoke business, in addition to a ¥1.9 billion impairment losslosses recorded in fiscal 2000.2003 for the conversion of optical disc production facilities at the plant in Yamanashi, Japan into plasma display panel production facilities, which are planned to start operations in fiscal 2005.

R&D expenditures, which are included in cost of sales and SGA expenses, increased 11.5%13.4% to ¥37.1¥51.5 billion, representing 5.7%7.3% of operating revenue. The increase primarily reflected increased activityR&D activities to enhance our technological advantage in developing third-generationour strategic products such as car navigation systems, plasma displays, DVD recorders and OLED displays.

Operating income

Operating income in fiscal 2004 was ¥33.8¥43.7 billion, a 43.3%42.1% increase over the ¥23.6from ¥30.8 billion recorded in fiscal 2000 —2003, mainly resulting from increased operating revenue and annet sales, improved gross profit margin.margins and decreased SGA expenses. Operating income for theHome Electronicssegment almost tripledwas ¥2.1 billion in fiscal 2004 compared with ¥3.9 billion in fiscal 2003, despite increased profit from DVD drives for PCs. The decrease mainly reflected a downward trend in market product prices, slack set-top box business and increased SGA expenses, including a one-time payment to ¥13.8Gemstar-TV Guide International, Inc. and provisions for plasma TV service costs. Operating income for theCar Electronicssegment in fiscal 2004 amounted to ¥28.9 billion, reflecting a substantialup 10.8% from fiscal 2003. Increased sales increase and improved gross profit margin mainly for strategic products such as plasma displays and DVD products. The AV Software segment posted ¥0.1 billionmargins primarily due to cost reductions in operating income, almostcar navigation systems are the same as fiscal 2000’s ¥0.2 billion. A large decline in sales of animation videocassettes in North America was offset by increased sales of DVD software in Japan. Furthermore, in fiscal 2001, we did not have the expenses incurred in fiscal 2000 in connection with the closing of an LD plant in Japan.main reasons. In thePatent Licensingsegment, operating income increased 7.1% to ¥19.7¥11.4 billion due mainly to an increasefrom ¥10.7 billion, despite a decrease in royalty revenue.revenue, mainly due to decreases in operating expenses.Otherssegment, which broke even in fiscal 2003, posted ¥1.1 billion operating income in fiscal 2004. The increases in sales of OLED display panels and other component parts as well as factory automation systems improved profitability.

Other income (expenses)

Other income,expense, on a net basis, decreased from ¥4.2 billion to ¥0.4 billion. This decrease was primarily due to a ¥12.5 billion gain recorded in fiscal 2000 in connection with the initial public offering of Pioneer’s subsidiary, Tohoku Pioneer Corporation, in March 2000. Gains on the sale of marketable equity securities and other investments also decreased to ¥1.6 billion from fiscal 2000’s ¥4.8 billion. Foreign exchange losses decreased by ¥3.9 billion, from ¥5.1 billion to ¥1.2 billion, reflecting a decrease, when compared to fiscal 2000, in exchange losses resulting from depreciation of the euro. Losses on the sale and impairment of fixed assets also decreased by ¥3.8 billion, from ¥4.7 billion to ¥0.9 billion. The losses in fiscal 2000 included losses recognized on the write-down of the real property for a closed LD plant in Japan, the sale of a laser optical disc manufacturing plant in the U.S. and disposal of facilities resulting from the downsizing of the karaoke business. The balance of interest income, less interest expense (net interest) improved to an income of ¥0.6 billion from an expense of ¥1.6 billion, mainly due to an increase in interest income as a result of an increase in the average balance of cash available for short-term investment.

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Income before income taxes

Income before income taxes rose to ¥34.2 billion, a 23.0% increase compared with ¥27.8 billion for fiscal 2000.

Income taxes

Income tax as a percentage of pre-tax income (the effective tax rate) declined from 54.7% in fiscal 2000 to 41.9% in fiscal 2001, almost the same level as the normal statutory tax rate of 42.0% in Japan. This decline was mainly due to increased profits of subsidiaries in the U.S. and Southeast Asian countries, where statutory income tax rates are relatively low. Also, the improved profit-and-loss of certain subsidiaries in Japan and Europe, which had operating loss carryforwards, helped the effective tax rate to decline. Some of the subsidiaries were benefited by the utilization of operating loss carryforwards.

Minority interest in income of subsidiaries

Minority interest in income of subsidiaries for fiscal 2001 primarily consists of the earnings of Tohoku Pioneer Corporation, attributable to its minority shareholders, and amounted to ¥1.4 billion, compared with less than ¥0.1 billion in fiscal 2000.

Equity in earnings (losses) of affiliated companies

Equity in earnings (losses) of affiliated companies registered a loss of ¥0.1 billion, compared with a gain of ¥0.5 billion for fiscal 2000.

Net income

Net income was ¥18.3 billion, a 39.9% increase over fiscal 2000’s ¥13.1 billion. Basic net income per share of common stock was ¥101.76, compared with fiscal 2000’s ¥72.81. Diluted net income per share was ¥101.70, compared with fiscal 2000’s ¥72.80. Return on assets came to 3.0%, compared with 2.2% in fiscal 2000. Return on equity was 5.6%, versus 4.2% in fiscal 2000.

Fiscal 2000 compared with fiscal 1999

Summary

In fiscal 2000, the U.S. economy showed strong growth and the European economies continued to advance. In Asia, excluding Japan, economies continued to recover. In Japan, although clear signs for economic recovery were not seen, there were favorable factors such as increases in capital expenditure, mainly in the area of information technologies. As for foreign exchange markets, the average value of the yen in fiscal 2000 was approximately 15% higher against the U.S. dollar and approximately 25% higher against the euro, when compared to levels of fiscal 1999. Despite such economic conditions, our operating revenue was ¥615.9 billion, a 4.6% increase over fiscal 1999. We recorded operating income of ¥23.6 billion compared to ¥20.1 billion in fiscal 1999 and net income of ¥13.1 billion compared to ¥1.2 billion in fiscal 1999.

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Impact of foreign exchange fluctuations

During fiscal 2000, the yen’s appreciation against major foreign currencies had significant effects on our reported revenue and earnings. We estimate that operating revenue and operating income would have been higher by approximately ¥70.8 billion and ¥30.8 billion, respectively, if the yen’s exchange rate had remained unchanged from fiscal 1999. Such estimates are obtained by simply applying the yen’s average exchange rates in fiscal 1999 to foreign currency denominated operating revenue, cost of sales and SGA expenses, and do not include the effect of changes in selling prices to meet the foreign exchange fluctuations.

Net sales and royalty revenue

Net sales amounted to ¥596.4 billion, a 4.8% increase over fiscal 1999. Net sales in Japan rose 6.8% to ¥208.1 billion, and overseas sales increased 3.8% to ¥388.3 billion despite the appreciation of the yen against the U.S. dollar and the euro. On a local currency basis, overseas sales increased 22.0% from fiscal 1999.

Electronics segment sales amounted to ¥548.7 billion, up 2.5% from fiscal 1999.

Audio/Video group sales increased 1.6% from fiscal 1999 to ¥190.0 billion. The increase primarily reflects sales growth of plasma displays and DVD players worldwide, which was partly offset by a decline in sales of LD players of ¥6.9 billion or 70.3%. Sales of plasma displays almost tripled on a unit basis and more than doubled in revenue. Sales of DVD players on a unit basis more than doubled although growth in terms of revenue was much more moderate because of declining sales prices. Sales in Japan rose by 14.1% to ¥56.5 billion, mainly from the DVD recorder introduced in December 1999, and growth of plasma displays for home and business markets. Continuing growth of DVD players and compact stereo systems also contributed. Overseas sales declined by 2.9% to ¥133.5 billion, mainly due to the yen’s appreciation and the sales decline of LD players, although sales of DVD players continued to be strong worldwide and sales of plasma displays, primarily for business use, grew in North America and Europe.
Car Electronics group sales amounted to ¥245.9 billion, a decrease of 5.8% over fiscal 1999. Overall sales were adversely affected by the 10.0% decline of overseas sales to ¥163.5 billion. This decline was due mainly to the stronger yen, which resulted in decreased sales in yen terms, and sluggish sales in Central America and South America due to difficult economic conditions in these regions. Sales of car CD players, including models with OEL displays, were strong in North America and Europe. In Japan, sales increased 3.9% to ¥82.4 billion. Car MD/CD stereo products, including models with OEL displays, enjoyed strong sales as market demand shifted from cassette car stereo to CD- or MD-equipped models. Car navigation system sales, especially DVD-ROM equipped models, increased in the consumer market.

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Sales of Others increased 28.9% over fiscal 1999 to ¥112.8 billion, mainly reflecting sales growth of DVD-ROM drives and cable-TV settop boxes, while sales of CD-ROM drives decreased significantly reflecting the shift of our production from CD-ROM drives to DVD-ROM drives. Sales increased in Japan by 6.7% to ¥45.5 billion, reflecting good sales results for DVD-ROM drives, factory automation equipment and cable-TV settop boxes. Overseas sales increased 49.9% to ¥67.3 billion despite the appreciation of the yen. This reflected an increase of DVD-ROM drive sales worldwide, as well as sales growth of digital cable-TV settop boxes in North America. Growth in device business sales, particularly for speaker units, also contributed to the increase of overseas sales.

AV Software segment sales increased 42.9% from fiscal 1999 to ¥47.7 billion. In Japan, sales increased 1.7% to ¥23.8 billion. DVD sales increased as the market shifted from LD to DVD. Overseas sales were ¥23.9 billion, 2.4 times that of fiscal 1999. This was due to successful sales in North America of animation videocassettes, including the hitPokémonseries.

Royalty revenue from the Patent Licensing segment decreased 3.7% to ¥19.5 billion due mainly to the yen’s appreciation. However, on a local currency basis, royalty revenue increased 10.0%, particularly from patents for recording products such as CD-R/RW drives and digital discs.

Cost of sales and selling, general and administrative expenses

Cost of sales increased to ¥428.6 billion from fiscal 1999’s ¥398.9 billion. Cost of sales as a percentage of operating revenue increased 1.9 percentage points to 69.6%. The increase mainly resulted from the yen’s appreciation, which was partly offset by favorable effects of our efforts to cut costs. These efforts included closing of an LD manufacturing plant in Japan, shifting of production capacity for audio products from the U.S. and the U.K. to Southeast Asia and China, and centralizing of the part procurement function in Japan to reduce costs and improve operational efficiency. Company-wide cost reduction efforts also helped minimize the negative impact of the yen’s higher value.

SGA expenses decreased by ¥6.3 billion or 3.7% from fiscal 1999 to ¥163.7 billion. The yen’s appreciation reduced the expenses of overseas subsidiaries in terms of yen by approximately ¥11.8 billion. Also, sales promotion expense decreased, especially in overseas markets. Such decrease was partly offset by an increase in royalty expense mainly relating to DVD products and a ¥1.9 billion impairment loss recognized on certain intangible assets as a result of the decision to downsize our karaoke business. The ratio of SGA expenses to operating revenue decreased 2.3 percentage points to 26.6%.

Expenditures on R&D, which are included in cost of sales and SGA expenses, increased 6.9% to ¥33.3 billion, representing 5.4% of operating revenue.

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Operating income

Operating income increased 17.3% to ¥23.6 billion. A large increase in overseas sales on a local currency basis, measures taken to cut costs and increased profit in the Patent Licensing segment were the main factors for the rise. The increase was realized despite negative effects of the stronger yen during fiscal 2000. Operating income for the Electronics segment decreased 44.6% to ¥4.7 billion, reflecting mainly negative effects of the stronger yen and expenses of reorganizing the audio and karaoke businesses. AV Software segment posted an operating income of ¥0.2 billion compared with an operating loss of ¥5.4 billion in fiscal 1999. This turnaround was attributable to a large sales increase and cost reductions realized as a result of closing an LD manufacturing plant in Japan in the first half of fiscal 2000. For the Patent Licensing segment, operating income increased 11.1% to ¥18.4 billion. The increase resulted from a reduction of expenses related to licensing activities, although revenue in terms of yen decreased due to the stronger yen.

Other income (expenses)

Other income, on a net basis, increased from an expense of ¥7.6¥2.7 billion to an income of ¥4.2¥1.9 billion. This was primarily due to a ¥12.5 billion gain recorded in connection with the initial public offering of Pioneer’s subsidiary, Tohoku Pioneer Corporation, in March 2000. For a detailed discussion of the initial public offering, see Note 18 to our Consolidated Financial Statements included in this annual report. At this moment, we have no plans for other initial public offerings by subsidiaries. Other income also included a ¥4.8 billion gain on sale of marketable equity securities and other investments, while such gain in fiscal 1999 was ¥1.0 billion. Foreign exchange losses were ¥5.1 billion compared to ¥0.3 billion gains in fiscal 1999. The difference was mainly due to exchange loss incurred by a European subsidiary, reflecting the depreciation of the euro against the yen and the U.S. dollar. Other income also reflected a ¥4.7 billion loss on sale and impairment of fixed assets, which were recognized in connection with closing of an LD plant in Japan, sale of an optical disc manufacturing plant in the U.S. and disposal of facilities resulting from the downsizing of the karaoke business. The netNet interest (interest income, less interest expense) was almost the same as in fiscal 2003, representing an expense of ¥1.6¥0.7 billion, substantially unchangedwith both interest income and interest expense decreasing. The decrease of interest income mainly reflected a decline of interest rates in the U.S. financial market, and the decrease of interest expense mainly reflected reductions of interest bearing short-term and long-term borrowings. A ¥0.8 billion gain on sale of subsidiaries’ stock posted in fiscal 2003 resulted from the sale of karaoke related subsidiaries. Foreign exchange loss decreased by ¥0.8 billion, to a ¥1.2 billion loss. The losses in fiscal 1999’s2004 primarily arose from conversion of U.S. dollar receivables into yen due to the yen’s appreciation against the U.S. dollar during fiscal 2004, although such losses decreased when compared with losses incurred in fiscal 2003. Other—net was income of ¥0.1 billion compared with expense of ¥1.5¥0.7 billion. A ¥1.1 billion decrease of losses on write-down of investments to ¥0.2 billion in fiscal 2004, compared with ¥1.3 billion losses recorded in fiscal 2003, accounted for the difference in Other—net. During fiscal 2004, the prices of stock in our portfolio recovered, and significant write-downs were not recorded.

Income before income taxes

Income before income taxes rosein fiscal 2004 increased 49.0% to ¥27.8¥41.8 billion from ¥28.1 billion in fiscal 1999’s ¥12.5 billion.2003, mainly due to increased operating income.

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Income taxes

Income taxes as a percentage of pre-tax income (the effective tax rate) was 54.7%44.4%, an increase of 12.2 percentage points compared with 32.2% in fiscal 2000, compared with2003 and was 2.4% higher than the normal statutory tax rate of 42.0% in Japan. WhileIn fiscal 2003, valuation allowances, which had been provided for a gain recognizedtax benefit, the realization of which had been judged as unlikely, were reversed as profitability of subsidiaries particularly in connection withJapan improved. The reversal was the public offering of Tohoku Pioneer Corporation’s new stock had an effect of reducingmain reason for the effective tax rate, among other things, losses incurred by certain subsidiaries, mainly in Europe, resulted in a higher effective tax rate. Thelower effective tax rate for fiscal 2000 decreased substantially2003. The 2.4% deviation from fiscal 1999’s 94.3%. The decreasethe normal statutory tax rate was primarily due mainly to ¥0.7 billion in charges resulting from the settlement of a ¥4.3 billion additional deferred incomeproposed assessment from U.S. tax expenseauthorities, and losses incurred in fiscal 1999 asat certain subsidiaries. Meanwhile, a result of the recalculation of year-end net deferred tax assets reflecting a1.0% reduction of the Japanese corporate income tax rate in Japan effective from fiscal 2005 had an effect of increasing deferred income taxes by ¥0.4 billion and by ¥0.8 billion in fiscal 2004 and 2003, respectively.

Minority interest in losses (earnings) of subsidiaries

Minority interest in earnings of subsidiaries, which came into effect on April 1, 1999. In addition,primarily consists of the gain recognized on the sale and issuanceearnings of Tohoku Pioneer Corporation’s stockCorporation and its subsidiaries attributable to its minority shareholders, amounted to ¥0.7 billion in fiscal 2000 contributed2004 compared with losses of ¥0.02 billion in fiscal 2003.

Equity in losses of affiliated companies

Equity in losses of affiliated companies was ¥2.2 billion in fiscal 2004 compared with ¥3.1 billion in fiscal 2003. The decrease in loss is mainly attributable to the decrease of our effective tax rate.research and development costs incurred by ELDis, Inc., where active-matrix full-color OLED displays are still in development.

39Income from continuing operations


Minority interestIncome from continuing operations in income of subsidiaries

Minority interest in income of subsidiaries was less than ¥0.1fiscal 2004 increased 27.7% to ¥20.4 billion compared with ¥0.4from ¥15.9 billion in fiscal 1999.2003 mainly due to the increase in operating income.

EquityIncome from discontinued operations, net of tax

Income from discontinued operations, net of tax, of ¥4.5 billion in earnings (losses)fiscal 2004 is comprised mainly of affiliated companiesa ¥1.8 billion gain on the sale of discontinued operations and ¥2.3 billion tax benefit primarily in connection with loss on investments in stocks of subsidiaries sold. ¥0.1 billion in fiscal 2003 solely represented net income of the subsidiaries sold.

Equity in earnings of affiliated companies was comparable with fiscal 1999 at ¥0.5 billion.

Net income

Net income in fiscal 2004 was ¥13.1¥24.8 billion, a 54.5% increase compared with ¥1.2 billion posted in fiscal 1999.2003’s ¥16.1 billion. Basic net income per share of common stock in fiscal 2004 was ¥72.81,¥141.58, compared with ¥6.45 for¥90.24 in fiscal 1999.2003. Diluted net income per share in fiscal 2004 was ¥72.80,¥140.52 compared with ¥6.45 for fiscal 1999. Return on assets for fiscal 2000 was 2.2%, compared with 0.2%¥90.24 in fiscal 1999. Return on equity was 4.2%, compared with 0.4% in fiscal 1999.2003.

40


Fiscal 2003 compared with fiscal 2002

Operating revenue

Operating revenue, the sum of net sales and royalty revenue, for fiscal 2003 was ¥677.3 billion, up 7.5% from fiscal 2002.

Net sales amounted to ¥664.7 billion, an 8.6% increase over fiscal 2002. Net sales in Japan came to ¥254.6 billion, up 18.1% from fiscal 2002, and overseas net sales increased 3.4% to ¥410.1 billion.

Home Electronicsnet sales increased 7.0% over fiscal 2002, amounting to ¥278.0 billion, primarily as a result of increased sales of plasma displays, DVD recorders and recordable DVD drives for PCs, and despite decreased sales of compact stereo systems worldwide. Net sales of plasma displays, particularly for home use, grew both in Japan and overseas to approximately twice the levels in fiscal 2002 both in terms of units sold and yen. In Japan, sales of DVD recorders increased as a result of successful introduction of the models with a large-capacity HDD in the second half of fiscal 2003. Sales of recordable DVD drives to PC makers increased both in Japan and overseas despite generally lower PC demand, primarily reflecting a shift in demand from DVD-ROM drives toward recordable DVD drives. As a result of the increased sales of DVD recorders, plasma displays and recordable DVD drives with growth of home telephones sales, totalHome Electronicssales in Japan increased by 22.8% to ¥86.8 billion despite decreased sales of compact stereo systems. Overseas, sales increased 1.1% to ¥191.2 billion. This primarily reflects a large increase in the sale of plasma displays, increased sales of recordable DVD drives and a favorable effect of the yen’s depreciation against the euro, which increased sales in terms of yen in Europe, offsetting falling sales of digital broadcast set-top boxes in Europe and compact stereo systems in North America and Europe.

Car Electronicsnet sales rose 9.1% to ¥281.1 billion, growing both in Japan and overseas. In Japan, net sales increased 10.6% to ¥105.7 billion, mainly due to continuing increased sales in the consumer market of two types of car navigation systems, advanced HDD models and affordable, easy-to-operate DVD models. Overseas net sales also increased 8.2% to ¥175.4 billion, primarily due to growing sales of car CD players in consumer markets, particularly in North America, reflecting changes in consumer demands from cassette car stereos to car CD players. Sales of car audio products to automobile manufacturers increased as well, mainly in North America.

Royalty revenue fromPatent Licensingdecreased 28.5% to ¥12.6 billion, compared to that of fiscal 2002. This was attributable to a decline in royalty revenue from digital recording products such as CD-R drives, resulting from lower PC demand, and expiration of our optical disc-related patents in some areas.

Net sales forOthersrose 11.5% over fiscal 2002 to ¥105.6 billion. In Japan, net sales increased 26.1% to ¥62.1 billion. This primarily reflected sales growth of cellular phone-related devices, including OLED displays. Overseas, net sales were down 4.3% from fiscal 2002 to ¥43.5 billion, primarily due to decreased sales of speaker devices for cellular phones, although sales of optical disc manufacturing systems in Asia increased.

Operating costs and expenses

Cost of sales increased to ¥473.2 billion from fiscal 2002’s ¥442.9 billion associated with an increase in net sales. However, cost of sales as a percentage of operating revenue declined 0.4 percentage points to 69.9%. Gross profit margin in car electronics business improved as a result of cost reductions in car navigation systems and favorable effects of higher sales of car electronics products, absorbing factory overhead. A weaker yen against the euro favorably affected gross profit margin, as well.

41


SGA expenses increased by 1.1% or ¥1.9 billion over fiscal 2002 to ¥168.7 billion. Personnel-related expenses increased by ¥6.3 billion. This primarily reflected increased costs for pension plans in Japan and overseas due to declines of discount rates used in calculation of pension obligations and lower returns from pension assets as a result of poor conditions in the stock markets worldwide. On the other hand, advertising and sales promotion expense decreased compared with fiscal 2002, when we vigorously promoted the Pioneer brand name and our strategic products such as plasma displays worldwide. The ratio of SGA expenses to operating revenue decreased 1.6 percentage points to 24.9%.

Losses on sale and disposal of fixed assets increased by ¥1.2 billion. The increased losses were mainly attributable to losses incurred in conversion of optical disc production facilities at the Kofu Plant in Yamanashi, Japan into plasma display panel production facilities to satisfy growing demand for plasma displays. This conversion is in line with our policy to concentrate business resources to strategically selected business areas.

R&D expenditures, which are included in cost of sales and SGA expenses, increased 16.2% to ¥45.4 billion, representing 6.7% of operating revenue. The increase primarily reflected R&D activities to enhance our technological advantage in strategic products such as car navigation systems, plasma displays, DVD recorders and digital cable-TV set-top boxes.

Operating income

Operating income in fiscal 2003 was ¥30.8 billion, an 84.7% increase from ¥16.7 billion recorded in fiscal 2002, mainly resulting from increased net sales and improved gross profit margin. Operating income for theHome Electronics segment was ¥3.9 billion in fiscal 2003 compared with a loss of ¥5.7 billion in fiscal 2002, reflecting increased profit from plasma displays, primarily as a result of expanded production and improved production efficiency. A successful introduction of DVD recorders with HDD was another reason for the turnaround of the profitability of this segment. Increased sales and cost reduction of recordable DVD drives for PCs also contributed to the improvement. Operating income for theCar Electronicssegment in fiscal 2003 amounted to ¥26.1 billion, up 62.6% from fiscal 2002. Increased sales both in Japan and overseas, and improved production efficiency as well as cost reductions in car navigation systems are the main reasons. In thePatent Licensingsegment, operating income decreased to ¥10.7 billion from ¥16.8 billion, mainly due to a decline in royalty revenue.Otherssegment in fiscal 2003 broke even, compared with ¥5.8 billion operating loss posted in fiscal 2002. This primarily reflects increased sales of cellular phone-related devices. Another reason for the improvement in operating income was that the costs incurred in fiscal 2002 in connection with withdrawal from certain businesses were no longer incurred in fiscal 2003.

Other income (expenses)

Other expense, on a net basis, increased from an expense of ¥2.2 billion to ¥2.7 billion. Net interest (interest income, less interest expense) was an expense of ¥0.7 billion, compared with an expense of ¥0.3 billion in fiscal 2002, mainly due to decreased interest income, which reflected declining interest rates in the U.S. financial market. Gain on sale of subsidiaries’ stock was ¥0.8 billion in fiscal 2003, while there was no gain on the sale of subsidiaries in fiscal 2002. The sale of subsidiaries, mainly in karaoke-related business, was also in line with our policy to concentrate business resources to strategically selected business areas. Foreign exchange gain (loss) swung from ¥0.3 billion gain recorded in fiscal 2002 to ¥2.0 billion loss in fiscal 2003. The losses in fiscal 2003 primarily arose from conversion of U.S. dollar deposits and receivables into yen due to the yen’s appreciation against the U.S. dollar during fiscal 2003. Other—net decreased from expense of ¥2.2 billion to expense of ¥0.7 billion. Losses on write-down of investments decreased to ¥1.4 billion in fiscal 2003, compared with ¥2.3 billion losses recorded in fiscal

42


2002, as the decline in market value of our investments in marketable equity securities was smaller in fiscal 2003.

Income before income taxes

Income before income taxes in fiscal 2003 increased 94.0% to ¥28.1 billion from ¥14.5 billion in fiscal 2002, mainly due to the increase in operating income.

Income taxes

Income taxes as a percentage of pre-tax income (the effective tax rate) was 32.2%, a 12.1% decrease compared with 44.3% in fiscal 2002 and 9.8% lower than the normal statutory tax rate of 42.0% in Japan. The main reason for the differences was the reversal of valuation allowances, which had been provided for a tax benefit, the realization of which had been judged as unlikely, as profitability of subsidiaries particularly in Japan improved. Profits posted in our overseas subsidiaries, for which income tax rates are lower than in Japan, were another reason for the difference with the normal statutory tax rate in Japan. Meanwhile, a 1.0% reduction of tax rate in Japan effective from fiscal 2005 had the effect of increasing deferred income taxes by ¥0.8 billion.

Minority interest in losses (earnings) of subsidiaries

Minority interest in earnings of subsidiaries, which primarily consists of the earnings of Tohoku Pioneer Corporation and its subsidiaries attributable to its minority shareholders, amounted to losses of ¥0.02 billion in fiscal 2003 compared with ¥0.5 billion in fiscal 2002.

Equity in losses of affiliated companies

Equity in losses of affiliated companies was ¥3.1 billion in fiscal 2003 compared with ¥0.1 billion in fiscal 2002. The increased loss is mainly attributable to research and development cost incurred in ELDis, Inc., where active-matrix full-color OLED displays are still in development.

Income from continuing operations

Income from continuing operations in fiscal 2003 came to ¥15.9 billion, more than twice the fiscal 2002 amount of ¥7.5 billion, mainly due to the increase in operating income.

Income from discontinued operations, net of tax

Income from discontinued operations, net of tax, which represented profit and loss of sold subsidiaries, decreased to ¥0.1 billion in fiscal 2003, compared with ¥0.6 billion in fiscal 2002.

Net income

Net income in fiscal 2003 was ¥16.1 billion, almost double that of fiscal 2002’s ¥8.0 billion. Basic net income per share of common stock in fiscal 2003 was ¥90.24, compared with ¥44.70 in fiscal 2002. Diluted net income per share in fiscal 2003 was ¥90.24 compared with ¥44.69 in fiscal 2002.

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Segment Informationinformation

The following segment information iswas prepared pursuant to therelevant regulations under the Securities and Exchange Law of Japan, which has been disclosed in Japan, and is not in accordance with U.S. GAAP.

Business Segments

                       
    (In millions of yen)
    
    Year ended March 31, 2001
    
                Corporate and    
    Electronics AV software Patent Licensing Eliminations Consolidated
    
 
 
 
 
Operating revenue:                    
 Unaffiliated customers  ¥586,629   ¥39,910   ¥20,530      ¥647,069 
 Inter-segment  723   4,776   1,883   ¥(7,382)   
   
   
   
   
   
 
  Total  ¥587,352   ¥44,686   ¥22,413   ¥(7,382)  ¥647,069 
Operating income  ¥13,831   ¥125   ¥19,734   ¥129   ¥33,819 
Identifiable assets  ¥444,742   ¥36,175   ¥5,926   ¥118,313   ¥605,156 
Depreciation and amortization  ¥28,867   ¥3,002   ¥536      ¥32,405 
Capital expenditures (additions to fixed assets)  ¥37,720   ¥5,125   ¥26      ¥42,871 
                       
    (In millions of yen)
    
    Year ended March 31, 2000
    
                Corporate and    
    Electronics AV software Patent Licensing Eliminations Consolidated
    
 
 
 
 
Operating revenue:                    
 Unaffiliated customers  ¥548,737   ¥47,674   ¥19,460      ¥615,871 
 Inter-segment  926   6,860   1,901   ¥(9,687)   
   
   
   
   
   
 
  Total  ¥549,663   ¥54,534   ¥21,361   ¥(9,687)  ¥615,871 
Operating income  ¥4,731   ¥196   ¥18,426   ¥240   ¥23,593 
Identifiable assets  ¥412,871   ¥36,561   ¥5,256   ¥146,449   ¥601,137 
Depreciation and amortization  ¥29,428   ¥2,419   ¥1,005      ¥32,852 
Capital expenditures (additions to fixed assets)  ¥29,642   ¥1,127   ¥741      ¥31,510 

                         
  Year ended March 31, 2004
                  Corporate and  
  Home Electronics Car Electronics Patent Licensing Others Eliminations Consolidated
  
  (In millions of yen)
Operating revenue:                        
Unaffiliated customers ¥281,482  ¥292,187  ¥11,821  ¥115,395     ¥700,885 
Inter-segment  1,399   2,460   2,057   36,860  ¥(42,776)   
  
 
Total ¥282,881  ¥294,647  ¥13,878  ¥152,255  ¥(42,776) ¥700,885 
Operating income ¥2,099  ¥28,936  ¥11,398  ¥1,096  ¥190  ¥43,719 
Identifiable assets ¥182,001  ¥158,913  ¥3,447  ¥109,582  ¥268,599  ¥722,542 
Depreciation and amortization ¥15,858  ¥13,798  ¥362  ¥8,272  ¥2,621  ¥40,911 
Capital expenditures (additions to fixed assets) ¥32,783  ¥13,648  ¥248  ¥7,340  ¥4,434  ¥58,453 
                         
  Year ended March 31, 2003
                  Corporate and  
  Home Electronics Car Electronics Patent Licensing Others Eliminations Consolidated
  
  (In millions of yen)
Operating revenue:                        
Unaffiliated customers ¥277,968  ¥281,090  ¥12,584  ¥105,617     ¥677,259 
Inter-segment  1,718   1,271   2,014   41,780  ¥(46,783)   
  
 
Total ¥279,686  ¥282,361  ¥14,598  ¥147,397  ¥(46,783) ¥677,259 
Operating income ¥3,878  ¥26,126  ¥10,736  ¥8  ¥(9,983) ¥30,765 
Identifiable assets ¥172,316  ¥153,644  ¥4,357  ¥130,275  ¥186,437  ¥647,029 
Depreciation and amortization ¥11,596  ¥13,370  ¥1,550  ¥7,822  ¥1,900  ¥36,238 
Capital expenditures (additions to fixed assets) ¥16,798  ¥13,997  ¥398  ¥6,774  ¥3,004  ¥40,971 

Note: “Electronics” includes the manufactureIn fiscal 2004, we changed business segment classification for certain businesses. Results related to DVD drives have been moved from “Others” to “Home Electronics,” and sale of AV equipment for consumer and commercial use, such as hi-fi stereo component systems, DVD players, LD players,results related to plasma displays and car audio products.  
“AV Software” includesfor business use have been moved from “Home Electronics” to “Others.” Corresponding figures for the production, manufacture and sale of DVDs, LDs, CDs and other AV media.
“Patent Licensing” includes the licensing of patents related to laser optical disc technology.previously reported Business Segments have been reclassified accordingly.

4144


Geographic Segments

                           
    (In millions of yen)
    
    Year ended March 31, 2001
    
                    Corporate and    
    Japan North America Europe Other Regions Eliminations Consolidated
    
 
 
 
 
 
Operating revenue:                        
 Unaffiliated customers  ¥242,900   ¥210,886   ¥125,806   ¥67,477      ¥647,069 
 Inter-area  257,733   5,726   129   130,425   ¥(394,013)   
   
   
   
   
   
   
 
  Total  ¥500,633   ¥216,612   ¥125,935   ¥197,902   ¥(394,013)  ¥647,069 
Operating income (loss)  ¥6,551   ¥20,285   ¥(1,626)  ¥5,644   ¥2,965   ¥33,819 
Identifiable assets  ¥271,232   ¥118,005   ¥61,487   ¥71,808   ¥82,624   ¥605,156 
Depreciation and amortization  ¥22,603   ¥2,716   ¥2,403   ¥4,683      ¥32,405 
Capital expenditures (additions to fixed assets)  ¥29,628   ¥3,345   ¥1,481   ¥8,417      ¥42,871 
                           
    (In millions of yen)
    
    Year ended March 31, 2000
    
                    Corporate and    
    Japan North America Europe Other Regions Eliminations Consolidated
    
 
 
 
 
 
Operating revenue:                        
 Unaffiliated customers  ¥227,064   ¥197,274   ¥135,599   ¥55,934      ¥615,871 
 Inter-area  232,035   6,758   681   89,136   ¥(328,610)   
   
   
   
   
   
   
 
  Total  ¥459,099   ¥204,032   ¥136,280   ¥145,070   ¥(328,610)  ¥615,871 
Operating income (loss)  ¥(6,320)  ¥18,662   ¥1,044   ¥4,948   ¥5,259   ¥23,593 
Identifiable assets  ¥272,996   ¥96,241   ¥59,704   ¥52,996   ¥119,200   ¥601,137 
Depreciation and amortization  ¥22,654   ¥3,442   ¥2,601   ¥4,155      ¥32,852 
Capital expenditures (additions to fixed assets)  ¥20,219   ¥2,839   ¥2,076   ¥6,376      ¥31,510 
                         
  Year ended March 31, 2004
                  Corporate and  
  Japan North America Europe Other Regions Eliminations Consolidated
  
  (In millions of yen)
Operating revenue:                        
Unaffiliated customers ¥294,198  ¥168,194  ¥145,390  ¥93,103     ¥700,885 
Inter-area  278,071   8,082   967   182,929  ¥(470,049)   
  
 
Total ¥572,269  ¥176,276  ¥146,357  ¥276,032  ¥(470,049) ¥700,885 
Operating income ¥18,456  ¥11,467  ¥2,044  ¥9,595  ¥2,157  ¥43,719 
Identifiable assets ¥233,601  ¥46,034  ¥61,754  ¥99,237  ¥281,916  ¥722,542 
Depreciation and amortization ¥26,014  ¥2,450  ¥2,130  ¥7,696  ¥2,621  ¥40,911 
Capital expenditures (additions to fixed assets) ¥40,314  ¥2,650  ¥2,113  ¥8,942  ¥4,434  ¥58,453 
                         
  Year ended March 31, 2003
                  Corporate and  
  Japan North America Europe Other Regions Eliminations Consolidated
  
  (In millions of yen)
Operating revenue:                        
Unaffiliated customers ¥271,248  ¥187,858  ¥132,776  ¥85,377     ¥677,259 
Inter-area  272,393   7,594   700   168,128  ¥(448,815)   
  
 
Total ¥543,641  ¥195,452  ¥133,476  ¥253,505  ¥(448,815) ¥677,259 
Operating income (loss) ¥16,463  ¥11,091  ¥(462) ¥7,415  ¥(3,742) ¥30,765 
Identifiable assets ¥222,372  ¥55,940  ¥57,092  ¥91,695  ¥219,930  ¥647,029 
Depreciation and amortization ¥22,503  ¥3,484  ¥1,843  ¥6,508  ¥1,900  ¥36,238 
Capital expenditures (additions to fixed assets) ¥24,030  ¥3,132  ¥2,019  ¥8,786  ¥3,004  ¥40,971 

Note: Operating revenue reported in geographic segment information above represents revenuethat of the parent companyPioneer and its domestic subsidiaries in Japan, and each subsidiary in North America, Europe, and Other Regions.

42

45


B. Liquidity and capital resources

Cash flows

Summarized Consolidated Statements of Cash Flows

         
  Year ended March 31
  2003
 2004
  (In millions of yen)
Net cash provided by operating activities ¥91,509  ¥60,378 
Net cash used in investing activities  (35,228)  (52,754)
Net cash provided by (used in) financing activities  (34,680)  51,827 
   
 
   
 
 
Effect of exchange rate changes on cash and cash equivalents  (6,234)  (9,512)
   
 
   
 
 
Net increase in cash and cash equivalents ¥15,367  ¥49,939 
   
 
   
 
 

Fiscal 20012004 compared with fiscal 20002003

NetIn fiscal 2004, net cash provided by operating activities was ¥51.2¥60.4 billion. Net income from continuing operations adjusted for non-cash expenses such as depreciation and amortization, deferred income taxes, and equity in losses of affiliated companies was the main source of the positive cash flows, generating ¥72.5 billion. ¥12.1 billion a ¥5.9 billion increase compared to fiscal 2000. The increase was principallyused in cash requirement from operating assets and liabilities. Among operating assets and liabilities, trade receivables increased primarily due to our overall improved profitability. Net incomeincreases in net sales. An increase in prepaid expenses and other current assets primarily resulted from increases in recoverable value-added taxes and similar indirect taxes in various countries where operations are expanding. Inventories increased despiteprimarily for plasma displays, car navigation systems and factory automation systems. However, the absencenegative impact of a ¥12.5 billion gainincreased inventories on sale and issuance of subsidiary stock realized in fiscal 2000. Increases in notes and accounts receivable werecash flows was largely offset by athe increase of trade payables, reflecting increased purchase of materials. Plasma display inventory increased as display panel work in process inventory was built up for overseas markets. Increase in car navigation system inventory was mostly for OEM customers, and increases of factory automation system inventory reflected increased orders. Although net cash provided by operating activities decreased compared with the amount in fiscal 2003, the ¥60.4 billion was enough to cover the net cash used in investing activities. The decrease in inventoriesnet cash provided by operating cash flows in comparison with the amount in fiscal 2001. Increase in notes and2003 is primarily due to the increase of accounts receivable, reflected strong salestrade, which is mainly attributable to increase of operating revenue in the last few months offourth quarter. The fourth quarter in fiscal 20012004 operating revenue was 4.7% or ¥8.2 billion higher than operating revenue in comparison with the equivalent period of fiscal 2000. The decrease in inventories was the result of our efforts to control and reduce inventories.2003.

Net cash used in investing activities was ¥41.6¥52.8 billion infor fiscal 2001, compared to ¥12.02004, comprised mainly ¥58.0 billion used in cash generated in fiscal 2000. A substantial part of the difference was the receipt in fiscal 2000 of ¥28.8 billion in proceeds from the sale and issuance of subsidiary stock. Also, payment for the purchase of fixed assets increased, reflectingand ¥4.9 billion proceeds from sale of discontinued operation. Among the ¥58.0 billion capital expenditure, investment related to plasma displays amounted to ¥22.0 billion, investment in production facilities in China amounted to ¥5.5 billion. The net cash used in investing activities in fiscal 2004 increased by ¥17.6 billion compared to ¥35.2 billion in fiscal 2003. The investments in the expansion of the plasma display production facilities and expansion of production capacitycapacities for plants in China. In addition, paymentChina accounted for investment securities was ¥5.8 billion, compared with ¥0.5 billion for fiscal 2000, and primarily consiststhe most of investment of ¥4.5 billion in a joint venture company for manufacturing and marketing thin-film transistor substrates in active-matrix OEL displays. The result was also affected due to a decrease of ¥4.4 billion in proceeds from the sale of available-for-sale securities.increase.

Net cash provided by financing activities in fiscal 2004 was ¥51.8 billion and was mainly comprised of ¥60.5 billion cash provided by issuance of convertible bonds, ¥4.4 billion used in financing activities was ¥46.6 billion in fiscal 2001, compared with ¥4.1 billion cash used in fiscal 2000. Financing activities for fiscal 2001 included redemption of ¥30.0 billion in unsecured bonds at maturity andthe reduction of other short-term and long-term borrowings.borrowings, and ¥3.9 billion used in dividends payment. On March 5, 2004,

46


we issued zero coupon convertible bonds due 2011, with proceeds of ¥60.5 billion after deducting ¥1.6 billion issuance cost. The proceeds of the issue are planned to be applied principally towards investments in the plasma display business and the enhancement of distribution channels in Europe and China. In fiscal 2003, financing activities included ¥21.1 billion used in reducing short-term and long-term borrowings, ¥2.7 billion used in payments of dividends and ¥11.6 billion used in purchase of shares of Pioneer’s common stock.

As a result cashof these activities and cash equivalents decreased by ¥30.7 billion to ¥121.1 billion at the endeffect of fiscal 2001 from ¥151.8 billion at the end of fiscal 2000, although the weaker yen increasedexchange rate changes on cash and cash equivalents of overseas subsidiaries, in terms of yen by ¥6.2 billion.

Fiscal 2000 compared with fiscal 1999

Cash flows overall improved compared with fiscal 1999. An increase in net income and proceeds from sale of a subsidiary’s stock were the main causes. Also, reduced purchase of fixed assets, successful reduction of inventories and partial sale of investment in securities, reflecting our drive to downsize assets, contributed to the improvement.

Net cash provided by operating activities amounted to ¥45.4 billion in fiscal 2000, compared to ¥37.9 billion cash provided in fiscal 1999. An increase in net income, a decrease in inventories and an increase in accounts payable contributed to the improvement, although accounts receivable increased, reflecting strong sales in the last few months of fiscal 2000.

43


Net cash provided by investing activities was ¥12.0 billion in fiscal 2000, compared to ¥38.2 billion in cash used in investing activities in fiscal 1999. This change mainly reflected ¥28.8 billion in proceeds from sale and issuance of a subsidiary’s stock in fiscal 2000. Also, payment for purchase of fixed assets decreased by ¥7.6 billion from the previous year’s investments, which included purchase of facilities for OEL displays and expanded production of DVD products. In addition, increase in proceeds from sale of assets helped cash flows to improve in fiscal 2000. Assets sold in fiscal 2000 included marketable equity securities, other investment securities and laser optical disc production facilities in the U.S.

Net cash used in financing activities was ¥4.1 billion, compared to ¥13.1 billion cash provided by financing activities in fiscal 1999. In fiscal 2000, ¥4.1 billion was used mainly for repayment of long-term debt, while in fiscal 1999, ¥25.0 billion was raised through the issuance of unsecured bonds in Japan, though a part of the proceeds was used in reducing short-term borrowings and repaying long-term debt.

As a result, cash and cash equivalents increased by ¥49.7¥49.9 billion to ¥151.8¥192.4 billion at the end of fiscal 20002004, from ¥102.1¥142.5 billion at the end of fiscal 1999, despite a ¥3.5 billion negative effect of the stronger yen on cash equivalents of overseas.2003.

Capital requirements

Our requirements for operating capital primarily are for the purchase of raw materials and parts for use in the manufacture ofmanufacturing our products. Also, operatingOperating expenses, including manufacturing expenses and SGA expenses, require a substantial amount of operating capital. Payroll and payroll-benefits related expenses, and marketing expenses such as advertising and sales promotion account for a material portion of operating expenses. Our expenditure for R&D is recorded as a part of various operating expenses, and payroll for R&D related personnel accounts for a material portion of R&D expenses.

Purchase commitments outstanding as of March 31, 2001 for property, plant and equipment and advertising were ¥2.5 billion. This included a part ofAlso, our ¥51 billion capital expenditure plan for fiscal 2005 is expected to require ¥68.0 billion, a ¥10.0 billion increase from ¥58.0 billion in fiscal 2002 primarily for production facilities and production molds. The fiscal 2002 plan includes investments to complete2004, reflecting mainly expansion of plasma display production facilitiesfacilities.

On July 1, 2004, we concluded an agreement with NEC under which NEC will transfer to us 100% of the issued share capital of its plasma display manufacturing subsidiary, NPD, and the intellectual property rights relating to plasma display held by NEC. We expect to invest approximately ¥40.0 billion in the acquisitions scheduled effective as of September 30, 2004. A part of the ¥60.5 billion proceeds from issuance of convertible bonds on March 5, 2004 will be used in this investment.

We plan to apply for transfer of pension obligations and assets for substitutional portion of a contributory welfare pension plan. As of March 31, 2004 our contributory welfare pension plans maintains sufficient plan assets to complete two new plants in China. Also includedthe required transfer of plan assets, therefore, we do not expect additional cash requirement from this transfer.

We believe that our ability to generate positive operating cash flows and liquidity discussed in the purchase commitments was a part of our fiscal 2002 advertisement spending plan of ¥15 billion, which increased from ¥10 billion spent in fiscal 2001 in orderfollowing financial management section provide sufficient resources to support the growth of our new DVDfund future operating capital requirements and plasma display products.capital expenditures.

Financial Managementmanagement

At present, funds required for operating capital and capital expenditure are generally financed through internally generated cash or debt financing. Short-term

With regard to debt financing, short-term debt financing with maturity of one year or less is utilized primarily to fund operating capital requirements. Therefore, in principle, such short-term borrowing isShort-term borrowings are generally arranged locally in the currency in which each consolidated company carries out its operations. As of March 31, 2001,2004, short-term borrowings of ¥37.6¥23.3 billion with weighted average interest rate of 1.74% comprised bank loans in 15seven different currencies, principally yen, euro, Singapore dollars and U.S. dollars.Japanese yen. On the other hand, long-term borrowingborrowings to finance long-term funding requirements such as investment in production facilities isare generally arranged in Japan on a fixed interest rate basis. As of March 31, 2001,2004, substantially all of the long-term debt of ¥46.3¥94.2 billion, including the portion due within one year, were fixed rate yen borrowings and werewas comprised of ¥19.9¥62.1 billion zero coupon convertible bonds due 2011 including ¥2.1 billion unamortized issue premium, ¥6.5 billion loans principally from banks maturing serially through 2013 with fixed interest rates ranging from 3.06% to 3.90%, ¥15.0 billion 2.35% unsecured bonds due 2005, ¥10.0 billion 2.80% unsecured bonds due 2008, and capital lease obligations and other loans arranged locally.

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We believe that our soundAs for liquidity, cash and cash equivalent amounted to ¥192.4 billion at the end of fiscal 2004, which are held principally in Japanese yen, the U.S. dollars and euro. Cash and cash equivalents comprised cash on hand, cash in banks including time deposit, and investment in highly liquid financial positioninstruments provided by major international banks and abilityfinancial institutions. In addition, uncommitted and unused credit lines amounted to generate positive operating¥229.6 billion as of March 31, 2004 are available if there were needs for additional borrowings arising from a possible decrease in cash flows togetherfrom operating activities due to seasonal factors such as investment in inventory for high-sales seasons, or as a result of fluctuations in customer demands.

As a part of our effort to enhance efficiencies of cash balance held by subsidiaries, we arrange intercompany loans between the companies in different region. To hedge the exposure to foreign exchange and interest rate fluctuations, we enter into currency swap contracts with an unused credit linebanks, changing currency and interest features of ¥203.1intercompany finance transactions. The currency swap contracts effectively changes, in substance, the U.S. dollar floating interest rate intercompany borrowings into Japanese yen fixed and floating interest rates borrowings and euro fixed interest rate borrowings.

During fiscal 2003, we purchased 5.1 million shares of Pioneer’s common stock from the market for ¥11.5 billion provide sufficient resources to fund future requirements for operating capital and for capital expenditures relatedpursuant to the expansionapproval at the general shareholders’ meeting held in June 2002. At the general shareholders’ meeting held on June 29, 2004, our shareholders approved an amendment to the Articles of production capacity for strategic products and other projects.Incorporation which permits the purchase of shares of Pioneer’s common stock to be made upon resolution of the Board of Directors. This amendment allows us more flexibility in the purchase of shares of Pioneer’s common stock.

C. Research and development, patents and licenses, etc.

Our R&D activities have played a crucial role in the development of our business. Our R&D program currently centers on optical recording/playback,high-density recording, flat-panel displays, digital signal processing, information/communications, and core LSIs. In fiscal 1999, 20002002, 2003, and 2001,2004 our R&D expenses were ¥31,131¥39,050 million, ¥33,265¥45,388 million and ¥37,105¥51,483 million respectively, or 5.3%6.2%, 5.4%6.7% and 5.7%7.3%, respectively, of our operating revenue. We currently plan to continue to spend more than 5%6% of operating revenue on R&D each year.

AsOur research and development of new technologies is carried out mainly in Japan at March 31, 2001, approximately 3,200 employees werethe Corporate Research & Development Laboratories, as well as the AV & Recording Systems Development Center, Information & Communication Development Center and PDP Development Center. In November 2003, we established the Mobile Systems Development Center in Japan to develop advanced car electronics-related technologies, such as next-generation car navigation systems. At Pioneer Research Center USA, Inc. (“PRA”), one of our overseas wholly-owned subsidiaries, we are also actively engaged worldwide in R&Dresearch of new technologies, and productdevelopment of system software related to digital TV and of digital network technologies. At another wholly-owned overseas subsidiary in the United Kingdom, Pioneer Digital Design Centre, Ltd., we are researching cutting-edge technologies related to digital TV for use in Europe. Product development and production technique improvement.improvement activities are the responsibility of each business unit, and are carried out in our various manufacturing facilities both in Japan and overseas.

Multiple-Layer Optical Discs

During fiscal 2004, we succeeded in developing dual-layer disc technology for DVD-R recording, enabling up to 8.5 gigabytes of data to be recorded onto one side of a disc. Such performance, almost equal to levels of existing dual-layer DVD-ROM discs, allows conventional DVD-Video players to be compatible with discs using this technology. Compatible DVD recorders will also be developed with relative ease. The new discs will raise DVD recording capacity to approximately 4 hours in SP mode

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and 12 hours in EP mode—almost double the recording capacity of DVD-R discs currently on the market. The Company is further improving this format’s performance and will propose this format to the DVD Forum.

In the field of Blu-ray Disc, which is particularly well-suited for digital high-definition images and is expected to be the next-generation large-capacity optical disc, Pioneer has also succeeded in developing a prototype of playback-only four-layer disc with 100-gigabyte capacity on one side. The multiple-layer structure of the Blu-ray Disc format requires higher-precision control than DVDs for determining the thickness of layers between the disc surface and each layer. Pioneer has achieved this through collaboration with Hitachi Chemical Co., Ltd., involving joint development of photopolymer sheets suited for optical disc material.

Home AV Network

PRA launched the Digital Entertainment Network Initiative (“DENi”) in 2002. In January 2003, PRA and the six other consumer electronics company members of DENi drew up comprehensive technical specifications for simplifying network connection among home-use audio/video products. The new DENi technology takes advantage of Ethernet and Internet Protocol, which are commonly used for computer networking, and enables in-home connection and sharing of audio and video sources among rooms which are distant from one another, without troublesome additional cabling. PRA took the lead among DENi members in promoting this technology, and in July 2003, the Consumer Electronics Association (“CEA”) of the United States adopted the DENi proposal as the digital entertainment network standard, CEA-2008. PRA is expected to continue to advance home network technologies and promote unified industry standards.

D. Trend information

The following is a description of the most significant recent trends in each of our business segments.

Home Electronics business segment

(i)Audio/Video group

Global demand forTraditional audio/video products has struggled recently, which we believe has resulted incontinue to be exposed to downward price pressure and stagnantslower sales. This, in turn, has negatively impacted our production levels and our inventory. We have responded and willexpect to continue to respond to such downward pressure in sales and production through the introduction of new value-added products and models in the Audio/Video group,Home Electronics, including home theater systems, DVD-related products and plasma displays.

DVD products.players and recorders.As a result of the dramatic expansion of the market for DVD players, they have become commodity products and suffer from significant price competition. DVD products washas been one of our fastest growing product areas during the past several fiscal years, and we believe we are well-positioned to face the competition because of our accumulated expertise through LD development, our expected reduction of costs as a result of shifting production to China and introduction ofour efforts to introduce new innovative, products.value-added products such as DVD recorders. Recently, demand for the DVD recorders, especially those with HDDs for long-time recording, has rapidly expanded, and these products have started to replace VCRs. There are, however, a number of competing digital recording disc formats: the DVD-RW, format commercialized by us, Sony, Sharp and others, the DVD-RAM, format commercialized by Matsushita, Hitachi and Toshiba, and the DVD+RW, format commercialized by Philips. We believe thatas rewritable formats, and the DVD-RW format we endorse has an advantageous position because, among other features, (a) discs recorded byDVD-R, the DVD+R formats, as write-once formats.

Recordable DVD recorders on DVD-RW format are compatible with a numberdrives.Demand for recordable DVD drives is growing rapidly, although sales of DVD playersCD-ROM/R/RW drives and DVD-ROM drives while the DVD-RAM discs are not, and (b) the DVD-RWhave shown a decrease. This reflects great demand for DVD recording of personalized content using PCs, and the DVD-RAM formats are approved by thetendency of PC makers to include recordable DVD Forum that is responsible for the standardization of various DVD formats.

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drives in PC systems as part of their sales strategies to differentiate their PC lineups. This sales trend is expected to continue. In fiscal 2004, we launched recordable DVD drives for PCs, which are compatible with DVD-R, -RW, +R and +RW discs, to worldwide markets, and also models enabling high-speed recording of up to 8X write speed with DVD-R and +R and up to 4X with DVD-RW and +RW discs.

Plasma displays.The large-screen display market for plasma displays has been expanding in recent years, and several manufacturers in Japan and South Korea have started mass production of plasma displays that compete with ours. Mostour products. Each company is increasing investment and expanding production. As the number of companies entering this market increases, it is expected that the unit price will continue to decrease due to intensifying competition. In particular, in the market for displays under the 40-inch size, plasma displays are subject to increasingly intense competition from liquid crystal displays. As a result of this trend, we plan to expand production of our plasma display manufacturers have only beenline, while focusing on 40-inch panelsnew products such as 50- and larger because the 30-inch would compete directly with cathode ray tube (CRT) TVs. In order to retain our competitive position, we introduced in August 2001 new plasma displays for business use in Japan,43-inch models, which consume less electricity, and providehave higher contrast. We are also increasing production and manufacturing of the 43-inch panels, as well as the 50-inch panels, with a view to maintaining our position in the plasma display business over the longer term.resolution.

(ii)Car Electronics group

Global new car sales appear to be on the decline, which will likely have an adverse effect on the sale of car electronics products. The worsening business climate in North America and severeSevere competition in the car electronics business in Japanworldwide has led to strong downward pressure on prices. Furthermore, the weak euro may continue to hurt the competitiveness of Japanese manufacturers. However, the popularity of car navigation products,systems, which we believe is a strongmajor area of ours,our operations, continues to increase. For example, sales of our advanced HDD models and our affordable, easy-to-operate DVD models remain strong. These new models have been well received by consumers due to their attractive and convenient features. With its outstanding technologies, we remain a leader in the car navigation market; however, our competitors have started commercializing models that are similar to our products. In June 2001 weJapan, the increase in demand for car navigation systems has been conspicuous, and the markets in North America and Europe show signs of expansion. We introduced in Japan a newthe spring of 2004 in both markets compact 1-DIN-sized units featuring all car navigation system incorporating a hard disk drive (HDD), which has substantially faster access times thanfunctions as well as those offor CD/MP3/DVD-Video playback. Also in the existing DVD-ROM drive model. Thecar audio business, we plan to widen our market share with new model is receiving favorable acceptance from our customers for its attractiveproducts and convenient features.innovations, such as car CD players with OLED displays.

There is also a trend in the car electronics industry of increasedthat OEM sales to car manufacturers. Pioneer intendsmanufacturers are increasing. We intend to increase itsour efforts to market itselfourselves towards such car manufacturers and strengthen itsour foothold in OEM sales as well.

(iii)Others groupPatent Licensing

DVD-R/RW drives.In the computer industry, severe pricing pressure, strong demand for higher-performance products and short product life are characteristic, and it is getting more difficult for suppliers of such products as CD-ROM drives and DVD-ROM drives to remain profitable. To counter these trends, we are focusing on high-value added products such as DVD-R/RW drives, both for PC makers and for the consumer market. The DVD-R/RW drives can record both on a write-once blank DVD-R disc and a rewritable blank DVD-RW disc up to seven times as much data as that of a CD-R or CD-RW disc.

Settop boxes. The cable-TV industry, to which we began supplying settop boxes in the late 1970s, is transforming to the use of digital systems which provide advanced features such as multi-channel capacity and interactive services. With respect to this trend, we put emphasis on developing and marketing digital models. In fiscal 2000 we started shipping digital cable-TV settop boxes in the U.S.
A similar trend toward digitalization can be seen in terrestrial broadcasting and direct-broadcast satellites (DBS). Accordingly, we have been providing digital DBS settop boxes in Europe since fiscal 1998, and in fiscal 2001 we started distributing digital DBS settop boxes in Japan and digital terrestrial broadcast settop boxes in the United Kingdom.

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OEL displays. There are two major trends in this market. The first trend is the development of products for full-color display, which encompasses: (i) the development of organic materials with long life and high luminance efficiency, (ii) the development of production processes to achieve high yield, and (iii) the stability of supply of low-temperature poly-silicon TFT substrates. Second is the formation of alliances, which is likely to substantially accelerate expansion in the OEL display business. A string of new entrants, including major electronics companies, has announced technological developments since 1999. To meet the competition, we also have created an alliance with Semiconductor Energy Laboratory Co., Ltd. and Sharp Corporation for the development of continuous grain (CG) silicon TFT for active-matrix full-color OEL displays. Continuous grain (CG) silicon TFT would represent a significant advance over low-temperature poly-silicon TFT substrates currently in use. We expect to commercialize, through a joint venture established with alliance partners, full-color OEL displays using continuous grain (CG) silicon TFT in the fall of 2002.

AV software business segment

The AV software industry is very volatile and dependent upon the presence or absence of hit movie and music titles. Accordingly, its success in any year is very difficult to predict.

Patent licensing segment

We are in acurrent patent business environment, wherenearly every company follows a policy of emphasizingactively protecting their patent rights, and the number of patent lawsuits are increasing noticeably.has increased considerably. The value of patents is increasingly recognized, and there is intensive patent utilizationcompanies are seeking to maximize the utility of their patents through the transfer or licensing of patent rights. While poor economic conditions favor purchasers of patent rights, purchase prices generally are increasing because of the growing importance of such intellectual property.

We expect that ourOur royalty revenue from the worldwide licensing of worldwide patents relating to laser optical disc technologies will declinehas declined substantially from previous years, as a significant portion of our patent rights expire startingpatents in Japan and Europe has expired during fiscal 2003.2003 and 2004. We intend to attempt to reduce the decline in royalty revenue through the acquisitionby acquiring patents from third parties and licensing of third party patent rights and increased enforcement of our existing patents, while we continue to research and develop new technologies that could provide us with future royalties from licensing.such patents. We do not, however, expect that the revenue, if any, from such new patents will be sufficient to offset the decrease in royalty revenue resulting from the expiration of our existing patents. See “Item 4.B. Business overview–overview—Nature of operationsoperations—Patent Licensinglicensing” for more information on our patent Licensinglicensing business.

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Others

OLED displays. With the entry of other companies, market competition in OLED displays is becoming even more intense, while each company in this market is proceeding with the development of full-color OLED displays. To meet the competition, Tohoku Pioneer Corporation, Pioneer’s majority-owned subsidiary, established a joint venture company, ELDis, Inc., in fiscal 2001 with Semiconductor Energy Laboratory Co., Ltd. and Sharp to develop and manufacture active-matrix full-color OLED displays.

E. Off-balance sheet arrangements

We are a party to off-balance sheet arrangements by providing guarantees to third parties who provide loans to our affiliated companies. For each guarantee, we would have to pay the guaranteed amount, if affiliated companies were to default on a payment within contract periods of one year to nine years. The maximum potential amount of undiscounted future payments we could be required to make under the guarantee is ¥25.5 billion as of March 31, 2004.

Also, we have equity ownership interest in ELDis, Inc., which is 45% owned by Tohoku Pioneer Corporation, our 67% owned subsidiary, and is accounted for by the equity method. At March 31, 2004, it is reasonably possible that Tohoku Pioneer Corporation is the primary beneficiary or holds a significant variable interest in ELDis, Inc. ELDis, Inc. is a development state enterprise and established to manufacture and market new products such as thin film transistor substrates for active-matrix OLED. The related disclosure is provided in Note 21 in “Notes to Consolidated Financial Statements.”

F. Tabular disclosure of contractual obligation

The following summarizes our contractual obligations at March 31, 2004.

                     
      Payment Due by Period
      Less than      
  Total 1 year 1-3 years 3-5 years More than 5 years

 
  (In billions of yen)
Contractual obligations:                    
Long-term debt  92.1   4.5   16.1   10.5   61.0 
Operating leases  7.9   2.5   2.5   1.1   1.8 
Purchase commitment  3.1   3.1             

 

Notes:1.Total long-term debt of ¥92.1 billion does not include ¥2.1 billion unamortized issue premium on convertible bonds.
2.Contractual obligations do not include ¥0.3 billion deferred income which is presented as other long-term liabilities on the consolidated balance sheet.

The ¥3.1 billion purchase commitment outstanding as of March 31, 2004 was for property, plant and equipment and advertising. This included a part of our ¥68.0 billion capital expenditure plan in fiscal 2005. The planned increase in capital expenditure in fiscal 2005 from ¥58.0 billion in fiscal 2004 mainly reflects expansion of plasma display production facilities.

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New Accounting Standards

Employers’ Disclosures about Pensions and Other Postretirement Benefits

In December 2003, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 132 (revised 2003), “Employers’ Disclosures about Pensions and Other Postretirement Benefits.” The revised SFAS No. 132 retains the disclosure requirements in the original statement and requires additional disclosures about pension plan assets, benefit obligations, cash flows, benefit costs and other relevant information. The new disclosures are effective for financial statements with fiscal years ended after December 15, 2003. However, the revised SFAS No. 132 provides that disclosures of information about foreign plans and estimated future benefit payment shall be effective for fiscal years ending after June 15, 2004. See Note 9 in “Notes to Consolidated Financial Statements” for these disclosures.

Impairment of Investments in Securities

In November 2003, the EITF reached a consensus on Issue No. 03-1 (“EITF No. 03-1”), “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments,” as it relates to disclosures for SFAS No. 115. In addition to the disclosures already required by SFAS No. 115, EITF No. 03-1 requires both quantitative and qualitative disclosures for marketable equity and debt securities. The new disclosure is effective for fiscal years ended after December 15, 2003. See Note 4 in “Notes to Consolidated Financial Statements” for this disclosure.

In March 2004, EITF reached another consensus on EITF No. 03-1 which presents the guidance for the assessment of other-than-temporary impairment. The guideline should be used to determine whether an investment is other-than-temporarily impaired and provides 3 steps for assessment. The guidance is applicable for investments in debt and equity securities that are within the scope of SFAS No. 115, and cost method equity investments. The investor should make an evidenced-based judgment about a market price recovery of investment by considering the severity (extent to which fair value is below cost) and the duration (period of time that a security has been impaired) of impairment in relation to the forecasted market price recovery. An other-than-temporary impairment should be recognized in earnings in an amount equal to the difference between the investor’s adjusted cost basis and its fair value at the balance sheet date of the reporting period for which the assessment is made. The guidance is required to be applied for fiscal years beginning after June 15, 2004. The adoption of the guidance will not have a material impact on our consolidated financial position, result of operation or cash flow.

Transfer to the Japanese Government of the Substitutional Portion of Employer Pension Fund Liabilities

In January 2003, the EITF reached a consensus on Issue No. 03-2 (“EITF No. 03-2”), “Accounting for the Transfer to the Japanese Government of the Substitutional Portion of Employer Pension Fund Liabilities.” EITF No. 03-2 addresses accounting for the transfer to Japanese government of a substitutional portion of a domestic contributory welfare pension plan, which is a defined benefit pension plan established by the Welfare Pension Insurance Law. EITF No. 03-2 requires employers to account for the entire separation process of a substitutional portion from an entire plan (including a corporate portion) upon completion of the transfer to the government of the substitutional portion of the benefit obligation and related plan assets as a culmination of a series of steps in a single settlement transaction. Under this approach, the difference between the fair value of the obligation and the assets required to be transferred to the government should be accounted for and separately disclosed as a subsidy.

October 29, 2003, we received approval from the government for an exemption from the obligation to pay benefits for future employee service related to the substitutional portion. In addition, we will submit another application to separate the remaining substitutional portion related to past service by our

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employees. We are expected to receive final approval from the government for our second application during the year ending March 31, 2005. Upon receipt of the final approval, we will be relieved of all obligations pertaining to the substitutional portion by transferring the benefit obligation and the related government-specified portion of the plan assets, which will be computed by the government. The related gain or loss, which is expected to be recorded during the year ending March 31, 2005 based on completion of the entire process, has not yet been determined because the amount of the benefit obligation and the related plan assets to be transferred to the government may change significantly.

Revenue Recognition

In December 2003, the Securities and Exchange Commission (“SEC”) issued Staff Accounting Bulletins (“SAB”) No. 104, “Revenue Recognition,” which supersedes SAB No. 101, “Revenue Recognition in Financial Statements,” and updates portions of the interpretative guidance included in Topic 13 of the codification of SAB in order to make this interpretative guidance consistent with current authoritative accounting guidance. SAB No. 104 rescinds the SEC’s Revenue Recognition in Financial Statements Frequently Asked Questions and Answers (“FAQ”) issued with SAB No. 101 that had been codified in SAB Topic 13. Selected portions of the FAQ have been incorporated into SAB No. 104. The revenue recognition principles of SAB No. 101 remain largely unchanged by the issuance of SAB No. 104. The adoption of SAB No. 104 did not have an effect on our consolidated results of operations or financial position.

Consolidation of Variable Interest Entities

In January 2003, the FASB issued FASB Interpretation No. 46 (“FIN 46”), “Consolidation of Variable Interest Entities, an Interpretation of Accounting Research Bulletins No. 51, Consolidated Financial Statements,” and subsequently revised in December 2003 with the issuance of FIN 46 (revised 2003). This interpretation requires certain variable interest entities to be consolidated by the primary beneficiary of the entity if the equity investors in the entity do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. We are required to apply this interpretation for periods ending after April 1, 2004. We are currently evaluating the impact of the adoption of the revised FIN 46 on our financial position and results of operations. It is reasonably possible that we are a primary beneficiary of or hold a significant variable interest in a variable interest entity. See Note 21 in “Notes to Consolidated Financial Statements” for the required disclosures.

Earnings per Share

In March 2004, the EITF reached a consensus on Issue No. 03-06 (“EITF No. 03-06”), “Participating Securities and the Two-Class Method Under FASB Statement No. 128, Earnings Per Share.” EITF No. 03-06 addresses a number of questions regarding the computation of earnings per share by companies that have issued securities other than common stock that contractually entitle the holder to participate in dividends and our earnings when, and if, it declares dividends on its common stock. The Issue also provides further guidance in applying the two-class method of calculating earnings per share, clarifying what constitutes a participating security and how to apply the two-class method of computing earnings per share once it is determined that a security is participating, including how to allocate undistributed earnings to such a security. EITF No. 03-06 is effective for fiscal periods beginning after March 31, 2004. We are evaluating the potential impact of the Issue on our financial statements.

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Item 6. Directors, Senior Management and Employees

A. Directors and senior management

Pioneer’s Directors, Executive Officers and Corporate Auditors as of SeptemberJuly 1, 2001,2004, and their pertinent information, such as position and business experience, are as follows:

Directors

Pioneer’s Mobile Entertainment Company
     
Name Current Position  
(Date of birth)(Month of expiration)Prior Position

 (Month and year of expiration)
 Prior Position
Kanya Matsumoto Chairman and Representative Director of June 1996:
(June 12, 1930) Pioneer
(June 2002)2005)
 Vice Chairman and Representative Director of Pioneer
 
Kaneo Ito President and Representative Director of June 1991:
(Apr. 30, 1936) PioneerDirector; Chief Executive Officer
(June 2002)2005)
 Senior Managing Director and Representative Director, andDirector; General Manager of International Business Group; and in charge of overseas operations and Public Relations Division of Pioneer
 
Yoshimichi Inada Executive Vice President
Akira NiijimaSenior Managing Director and Representative June 2000:2002:
(Sept. 8, 1936)Mar. 9, 1944) Representative Director of Pioneer;Director; Chief Financial Officer; and in charge of technologies, productionadministration and qualityexport control in general; in charge of Components Business Division, Procurement Center and Strategic IT Division of Pioneergeneral
(June 2003)2005)
 Executive ViceSenior Managing Director; President and Representative Director; General Manager of Procurement Center; in charge of Components Business Division; in charge of technologies, production, OEM business, and export management in general of PioneerPioneer’s Home Entertainment Company
 
Katsuhiro AbeTakashi Kobayashi Senior Managing Director and June 2000:2002:
(Nov. 16, 1936)Sept. 27, 1940) Representative Director of Pioneer;Director; in charge of administration in general;Corporate Communications Division, Customer Satisfaction Planning and Coordination Division, Intellectual Property Division, and Business Development Division
(June 2005)
Senior Managing Director; in charge of export management in generalCorporate Communications Division, Customer Satisfaction Planning and General Manager of Corporate PlanningCoordination Division, of Pioneer
(June 2003)Intellectual Property Division, and Business Development Division
Tamihiko Sudo Senior Managing Director andJune 2003:
(Apr. 28, 1947)Representative Director; in chargePresident of administration in generalPioneer’s Mobile Entertainment Company
(June 2005)
Managing Director; President of Pioneer

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Koichi ShimizuManaging Director; in chargeJapanese Ambassador Extraordinary and Plenipotentiary to Belgium
     
Name Current Position  
(Date of birth)(Month of expiration)Prior Position

 (Month and year of expiration)
 Prior Position
Takashi KobayashiHajime Ishizuka Senior Managing Director of Pioneer; in chargeJune 1998:
(Sept. 27, 1940)of Corporate Communications Division, Customer Satisfaction Planning and Coordination Division, Intellectual Property Division, Division of Environmental Preservation, and Business Development Division of Pioneer
(June 2003)
Managing Director and General Manager of Subsidiaries Management and Coordination Division; in charge of Investor Relations Division, Public Relations Division and Customer Satisfaction Planning and Coordination Division, and of software business of Pioneer

Shoichi YamadaManaging Director of Pioneer andNov. 1995:
(Nov. 22, 1941)President of Pioneer’s Mobile Entertainment Company
(June 2003)
Director and General Manager of International Business Group of Pioneer

Akira NiijimaManaging Director of Pioneer and June 2000:2003:
(Mar. 9, 1944)May 3, 1947) Representative Director; President of Pioneer’s Home Entertainment Business Company
(June 2003)2005)
 Managing DirectorDirector; President of Pioneer’s Components Business Company; and General Manager of Corporate Planning Division; in charge of PersonnelInternational Business Division of Pioneer

Hiroshi Aiba Director of Pioneer and General Manager Apr. 2000:
(Sept. 15, 1940)of External Relations Division of Pioneer
(June 2003)
Director and General Manager of Business Systems Division of Pioneer

Tadahiro Yamaguchi Director of Pioneer andManaging Director; Executive Vice June 1997:2002:
(Mar. 24, 1946) Vice President of Pioneer’s Plasma Display Business Company (in charge of technologies and production; and Plant Manager of Ohmori Plant
(June 2005)
Managing Director; Executive Vice President of Pioneer’s Home Entertainment Company (in charge of technologies)
(June 2003)technologies, production and quality control); in charge of Cable & Satellite Systems Division; and Plant Manager of Tokorozawa Plant
 Director
Satoshi MatsumotoManaging Director; GeneralJune 2002:
(Apr. 15, 1954)Manager of Environmental Preservation Group
(June 2005)
Managing Director; General Manager of Division of Environmental Preservation
Osamu YamadaManaging Director; GeneralApr. 2002:
(Mar. 16, 1944)Manager of Research and Development Group; and General Manager of Home Electronics Business Group of PioneerCorporate Research and Development Laboratories

Shinji Yasuda(June 2005) DirectorSenior Executive Officer; General Manager of PioneerResearch and Managing DirectorDevelopment Group
 July 2000:
June 2003:
(June 10, 1945)Feb. 3, 1944) of Pioneer China Holding Co., Ltd.technologies, production and quality control in general; General Manager of Procurement Center; and in charge of Strategic IT Division
(June 2003)2005)
 Director; General Manager of Production Management and Coordination Division; General Manager of Procurement Center; and in charge of China Project of Pioneer

Strategic IT Division
Toshihisa KogaTatsuhiro Ishikawa Director of Pioneer and Executive ViceDec. 2001 to present:
(Apr. 4, 1939)(June 2005)Attorney-at-Law
Shunichi SatoDirector Apr. 1997:2000:
(Apr. 29, 1940)Feb. 10, 1941) President of Pioneer’s Mobile Entertainment Company
(June 2002)2005)
 President of Pioneer Automotive Electronics Sales, Inc.

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Executive Officers

Accounting Division
     
Name Current Position  
(Date of birth)(Month of expiration)Prior Position

 (Month and year of expiration)
 Prior Position
Satoshi MatsumotoMasaru Saotome Director of Pioneer and General ManagerSenior Managing Executive Officer; Nov. 1995:June 2003:
(Apr. 15, 1954)of Division of Environmental Preservation of Pioneer
(June 2002)Aug. 20, 1944)
 President of Pioneer’s Plasma Display Business Company
(June 2005)
Senior Managing Executive Officer; Executive Vice President of Pioneer’s Home Entertainment Company (in charge of sales and Representative Directormarketing); and General Manager of Pioneer Music Works, Inc.Display Business Division
     
Kazunori Yamamoto Senior Managing Executive Officer of Pioneer andOfficer; June 1999:2001:
(Oct. 21, 1942) PresidentGeneral Manager of Pioneer North America, Inc. and President of Pioneer Electronics (USA) Inc.International Business Group
(June 2003)2005)
 Senior Executive Officer of Pioneer andOfficer; President of Pioneer North America, Inc.
     
Shungo MinatoKiyoshi Uchida Senior Executive Officer of Pioneer andOfficer; June 1999:Feb. 2003:
(Apr. 11, 1943)Mar. 28, 1951) Managing DirectorPresident of Pioneer Europe NVPioneer’s Industrial Solutions and Entertainment Company
(June 2003)2005)
 Senior Executive OfficerOfficer; in charge of Pioneer and Chairman and Managing Director of Pioneer Europe NVBusiness Systems Division
     
Koichi ShimizuSeiichiro Kurihara Senior Executive Officer of Pioneer andOfficer; June 1999:2001:
(Feb. 3, 1944)Mar. 15, 1943) Managing DirectorGeneral Manager of Pioneer Electronics Asiacentre Pte. Ltd.Intellectual Property Division
(June 2003)2005)
 Executive OfficerOfficer; General Manager of Pioneer and Vice President of Pioneer’s Mobile Entertainment Company (in charge of technologies and production)Intellectual Property Division
     
Masaru SaotomeMasao Kawabata Senior Executive Officer of Pioneer andOfficer; General Manager June 1999:2001:
(Aug. 20, 1944)10, 1948)of Corporate Communications Division
(June 2005)
 Executive Vice PresidentOfficer; General Manager of Pioneer’s Home Entertainment Company (in charge of sales and marketing)
(June 2003)
Executive Officer of Pioneer and Executive Vice President of Pioneer’s Home Entertainment Company (in charge of sales and marketing)Corporate Communications Division
     
Haruhiko TanakaYoshio TaniyamaSenior Executive Officer;June 2001:
(Nov. 9, 1948)General Manager of Corporate Planning Division
(June 2005)
 Executive OfficerOfficer; General Manager of Pioneer andMar. 2000:Finance Division
(Mar. 27, 1947)Executive Vice President of Pioneer’s Home Entertainment Company (in charge of production and quality control)
(June 2003)
Executive Vice President of Pioneer’s Home Entertainment Company (in charge of production and quality control)
     
Tamihiko SudoHideki OkayasuSenior Executive Officer; General ManagerJune 2001:
(May 12, 1950)of Finance and Accounting Division
(June 2005)
 Executive OfficerOfficer; General Manager of Pioneer andMar. 2000:
(Apr. 28, 1947)Executive Vice President of Pioneer’s Mobile Entertainment Company
(June 2003)
Executive Vice President of Pioneer’s Mobile Entertainment Company

5056


     
Name Current Position  
(Date of birth)(Month of expiration)Prior Position

 (Month and year of expiration)
 Prior Position
Hajime IshizukaExecutive Officer of Pioneer and GeneralJune 2000:
(May 3, 1947)Manager of Components Division; in charge of International Business Division of Pioneer (June 2003)Executive Officer and General Manager of International Division of Pioneer
Seiichiro KuriharaExecutive Officer of Pioneer and GeneralJune 1998:
(Mar. 15, 1943)Manager of Intellectual Property Division of PioneerGeneral Manager of Intellectual Property Division of Pioneer
(June 2003)
Koki Aizawa Executive Officer of Pioneer and DeputyOfficer; General Jan.June 2001:
(Dec. 19, 1944) General Manager of Research and DevelopmentExternal Relations Division of Pioneer
(June 2005)
 Executive Officer; Deputy General Manager of Research and Development DivisionGroup; and General Manager of Pioneer
(June 2003)Corporate Research and Development Laboratories
   
Toshihiko Norizuki Executive Officer of Pioneer and GeneralOfficer; Managing June 2001:
(May 23, 1945) Manager of Business Systems Division and Plant Manager of Ohmori PlantDirector of Pioneer (June 2003)China Holding Co., Ltd.
(June 2005)
 Executive Officer; General Manager of Business Systems Division and Plant Manager of Ohmori Plant of Pioneer
   
Buntarou Nishikawa Executive Officer of Pioneer and GeneralOfficer; Executive Vice President July 1997:June 2001:
(Mar. 24, 1946) Manager of Domestic Sales Division, Pioneer’s Mobile Entertainment CompanyCompany; and General Manager of OEM Sales Division
(June 2003)2005)
 Executive Officer; General Manager of Domestic Sales Division of Pioneer’s Mobile Entertainment Company
   
Osamu Takada Executive Officer of Pioneer andOfficer; General Sept. 1999:June 1998:
(July 27, 1948) Manager of Personnel Division of Pioneer (June 2003)
(June 2005)
 General Manager of Personnel Division of Pioneer
   
Masao KawabataExecutive Officer of Pioneer and GeneralApr. 2000:
(Aug. 10, 1948)Manager of Corporate Communications Division of PioneerGeneral Manager of Corporate Communications Division of Pioneer
(June 2003)
  
Sumitaka Matsumura Executive Officer of Pioneer andOfficer; Deputy Jan. 2001:
(Oct. 10, 1948) General Manager of Research and Development DivisionGroup; and in charge of PioneerAV & Recording Systems Development Center
(June 2005)
 Deputy General Manager of Research and Development DivisionGroup; and General Manager of PioneerAV & Network Development Center
  
Chojuro YamamitsuExecutive Officer; DeputySep. 2002:
(Mar. 26, 1946)General Manager of Environmental Preservation Group (in charge of Eco Products)
(June 2003)2005)
Executive Officer; Deputy General Manager of Research and Development Group; General Manager of Engineering; and in charge of Information & Communication Development Center and PDP Development Center
Kenji SatoExecutive Officer; GeneralJune 1998:
(Aug. 29, 1947)
Manager of General Administration Division
(June 2005)
General Manager of General Administration Division

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51


     
Name Current Position  
(Date of birth)(Month of expiration)Prior Position

 (Month and year of expiration)
 Prior Position
Yoshio TaniyamaYoichi Sato Executive OfficerOfficer; Deputy General ManagerJune 2003:
(Jan. 15, 1950)of Research and Development Group and General Manager of PDP Development Center
(June 2005)
Executive Officer; General Manager of Engineering Division of Display Business Division of Pioneer’s Home Entertainment Company
Toshiyuki ItoExecutive Officer; ManagingJuly 2002:
(Oct. 17, 1950)Director of Pioneer andElectronics Asiacentre, Pte. Ltd.
(June 2005)
Managing Director of Pioneer Electronics Asiacentre, Pte. Ltd.
Susumu KotaniExecutive Officer; ManagingSept. 2002:
(Apr. 12, 1950)Director of Pioneer Europe NV
(June 2005)
Managing Director of Pioneer Europe NV
Ryoji MenjoExecutive Officer; General Sept. 1999:Sep. 1997:
(Nov. 19, 1948)22, 1947) Manager of FinanceCustomer Satisfaction Planning and Coordination Division of Pioneer
(June 2003)2005)
 General Manager of FinanceCustomer Satisfaction Planning and Coordination Division of Pioneer

Hideki OkayasuTsutomu Haga Executive Officer Officer; PresidentJuly 2003:
(June 2, 1948)of Pioneer and GeneralNorth America, Inc.
(June 2005)
President of Pioneer Electronics (USA) Inc.
Akira HaenoExecutive Officer; Plant July 2000:
(May 12, 1950)Feb. 14, 1949) Manager of Accounting Division of Pioneer (June 2003)Kawagoe Plant and General Manager of AccountingProduction Division of Pioneer’s Mobile Entertainment Company
(June 2005)
Managing Director of Pioneer

Technology Belgium NV

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Corporate Auditors

(Date of birth)
NameCurrent Position
(Month and year of expiration)
Prior Position
Makoto Koshiba Corporate Auditor (full time) of Pioneer Sept. 1999:
(Nov. 21, 1943) (June 2003)2007) Director andDirector; General Manager of Accounting Division; in charge of Finance Division of Pioneer

Makito Baba Corporate Auditor of Pioneer June 1997:
(Oct. 9, 1934)(June 2003)Shinji Yasuda Corporate Auditor (full time) of Pioneer

Masanori Iijima Corporate Auditor of PioneerApr. 1955 to present:July 2001:
(Nov. 27, 1928)June 10, 1945) (June 2003)2007) Attorney-at-Law

Director; Managing Director of Pioneer China Holding Co., Ltd.
Terumichi Tsuchida Corporate Auditor of Pioneer July 1998 to present:
(Aug. 22, 1921) (June 2004)2008) Advisor of Meiji Yasuda Life Insurance Company
Isao MoriyaCorporate AuditorMar. 1968 to present:
(Sept. 5, 1937)(June 2007)Certified Public Accountant
Keiichi NishikidoCorporate AuditorJan. 1994 to present:
(May 2, 1953)
(June 2007)
Attorney-at-Law; Managing Partner of Kohwa Sohgoh Law Offices, Japan

All of the above persons, with the exception of Messrs. Masanori IijimaTatsuhiro Ishikawa, Shunichi Sato, Terumichi Tsuchida, Isao Moriya and Terumichi Tsuchida,Keiichi Nishikido devote themselves full time to our business.

There is noNone of the persons listed above was selected as a director, corporate auditor or member of senior management pursuant to an arrangement or understanding between any Director, Executive Officerwith our major shareholders, customers, suppliers or Corporate Auditor and any other person pursuant to which he or she was elected as Director, Executive Officer or Corporate Auditor.others.

Mr. Kanya Matsumoto is the uncle of Mr. Satoshi Matsumoto. Mr. Kaneo Ito is married to a first cousin of Mr. Kanya Matsumoto. Mr. Yoshio Taniyama is a first cousin of Mr. Kanya Matsumoto and a brother-in-law of Mr. Kaneo Ito.

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B. Compensation

The aggregate amount of compensation (including bonuses and stock-based compensation) paid by Pioneer to all Directors, Executive Officers and Corporate Auditors of Pioneer as a group for fiscal 20012004 totaled ¥811¥1,238 million. Also, as part of Pioneer’s incentive compensation arrangements for Directors and Executive Officers, Pioneer has issued in Japan bonds with detachable warrants.warrants in Japan in fiscal 2002. Upon the issuance of bonds with detachable warrant bondswarrants by Pioneer, it distributed the warrants at fair market value to both Directors and Executive Officers of Pioneer, and certain other executive employees as a part of their remuneration. In fiscal 2003, Pioneer changed its incentive compensation arrangements and issued share acquisition rights for its shares of common stock to Directors, Executive Officers and certain employees, and certain directors/officers of certain of its subsidiaries. See “Item 6.E. Share ownership” for further information.

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The aggregate amount set aside as lump-sum severance indemnities by Pioneer during fiscal 20012004 for Directors, Executive Officers and Corporate Auditors of Pioneer totaled ¥100¥500 million. The aggregate amount is calculated by the formula as defined in the regulations of Pioneer concerning the retirement allowance. Provision is made for lump-sum severance payments for Directors, Executive Officers and Corporate Auditors of Pioneer on a basis considered adequate for such future payments as may be approved by the shareholders. (See Note 79 in “Notes to Consolidated Financial Statements.”)

C. Board practices

Pioneer’s Articles of Incorporation provide for a Board of Directors of three or more members and for three or more Corporate Auditors. All Directors and Corporate Auditors are elected at general meetings of shareholders. In general, under the Articles of Incorporation of Pioneer, the term of office of Directors expires at the conclusion of the ordinary general meeting of shareholders held with respect to the last closing of accounts within two yearsone year after their assumption of office and in the case of Corporate Auditors, within threefour years after their assumption of office; however, Directors and Corporate Auditors may serve any number of consecutive terms. With respect to eachFor information regarding the expiration of the term of office for each of the Directors and Corporate Auditors, see “Item 6.A. Directors and senior management.”

The Directors constitute the Board of Directors, which has the ultimate responsibility for administration of our affairs. The Board of Directors may elect from among its members a Chairman and Director, a Vice Chairman and Director, a President and Director, one or more Executive Vice Presidents and Directors, Senior Managing Directors and Managing Directors. From among the Directors referred to above, the Board of Directors elects one or more Representative Directors. Each of the Representative Directors has the authority to individually to represent Pioneer in the conduct of its affairs.

Pioneer introduced a Corporate Executive Officer (shikko yakuin) system in June 1999 to improve management efficiency and speed up decision-making. Executive Officers are basically elected at the meeting of the Board of Directors held immediately after the ordinary general meeting of shareholders. In general, the term of office of Executive Officers expires at the conclusion of the ordinary general meeting of shareholders held with respect to the last closing of accounts within two yearsone year after their assumption of office. With respect to eachFor information regarding the expiration of the term of office of each of the Executive Officers, see “Item 6.A. Directors and senior management.” The Board of Directors may elect from among Executive Officers one or more Senior Managing Executive Officers and Senior Executive Officers. Each of the Executive Officers has the authority to individually to operate businesses of which he or she is in charge under the control of the Board of Directors and Representative Directors.

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The Corporate Auditors of Pioneer are not required to be and are not certified public accountants. However, at least one of the Corporate Auditors is required to be a person who has not been a Director,director, executive officer, general manager or employee of Pioneer or any of its subsidiaries during the five-year period prior to his or her election as a Corporate Auditor. After the conclusion of the ordinary general meeting of shareholders to be held with respect to the first fiscal year ending on and after May 1, 2005, at least half of the Corporate Auditors will be required to be persons who have not been a director, executive officer, general manager or employee of Pioneer or any of its subsidiaries at any time prior to their election as Corporate Auditors. The Corporate Auditors may not at the same time be Directors, Executive Officers,directors, executive officers, general managers or employees of Pioneer or any of its subsidiaries.

Each Corporate Auditor has the statutory duty to supervise the administration by the Directors of Pioneer’s affairs and also to examine the financial statements and business reportsreport to be submitted by the Board of Directorsa Representative Director at the general meeting of shareholders. They are entitled toshall attend meetings of the Board of Directors but are not entitled to vote. In addition to Corporate Auditors, independent certified public

60


accountants or an audit corporation must be appointed by general meetings of shareholders. Such independent certified public accountants or audit corporation have, as their primary statutory duties, the duties to examine the financial statements proposed to be submitted by the Board of Directorsa Representative Director at general meetings of shareholders and to report their opinion thereon to the Board of Corporate Auditors and the Directors.Representative Director.

The Corporate Auditors constitute the Board of Corporate Auditors. The Board of Corporate Auditors has a statutory duty to prepare and submit its audit report to the Board of Directorsa Representative Director each year. A Corporate Auditor may note his or her opinion in the audit report if his or her opinion is different from the opinion expressed in the audit report. The Board of Corporate Auditors is empowered to establish audit principles, method of examination by Corporate Auditors of Pioneer’s affairs, and financial position and other matters concerning the performance of the Corporate Auditors’ duties.

There are no contractual arrangements providing for benefits to Directors upon termination of service. Also see “Item 10.B. Memorandum and articles of association–Directors.association—Directors.

Significant Differences in Corporate Governance Practices Between Pioneer Corporation and U.S. Companies Listed on the NYSE

Pursuant to home country practices exemptions granted by the NYSE, Pioneer is permitted to follow certain corporate governance practices complying with Japanese laws, regulations and stock exchange rules in lieu of NYSE’s listing standards. Pioneer’s corporate governance practices and those followed by U.S. companies under the NYSE listing standards (“NYSE Corporate Governance”) have the following significant differences:

Directors

Pioneer currently has two (2) non-management directors on its board of directors who satisfy the requirements of “outside directors” under the Commercial Code of Japan. “Outside director” is defined as a director who does not engage in the execution of business operations of a company and who (i) has never been a director responsible for the execution of business operations, an executive officer, a manager, or other employee of the company or any of its subsidiaries, and (ii) is not a director responsible for the execution of business operations or executive officer of any subsidiary of the company, and (iii) is not a manager or other employee of the company or any of its subsidiaries. The Commercial Code of Japan and related legislation (including the Law concerning Exceptional Measures to the Commercial Code with respect to Auditing, etc. of Joint Stock Corporations (the “Special Exception Law”), and collectively, the “Code”) do not require Japanese companies with boards of corporate auditors, such as Pioneer, to have any independent (in the meaning given by the NYSE listing standards) or outside (in the meaning given by the Code) directors on their boards of directors. Consistent with most Japanese companies but unlike NYSE Corporate Governance, Pioneer’s non-management directors do not hold regularly scheduled sessions without management. Moreover, the Code does not require, and accordingly Pioneer does not have, an internal corporate body or committee comprised of only independent or outside directors.

Committees

Under the Code, Pioneer has elected to structure its corporate governance system as a company with a board of corporate auditors, which has a statutory duty to monitor, review and report on the administration of the affairs of Pioneer. Pioneer, consistent with other Japanese companies with boards of corporate auditors, but unlike NYSE Corporate Governance, does not have specified committees,

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including those that are responsible for director nomination, corporate governance and executive compensation.

Pursuant to the Code, Pioneer’s board of directors nominates and submits a proposal for appointment of directors for shareholder approval. The shareholders vote on such nomination at Pioneer’s general meeting of shareholders. The Code requires that the respective total amount of remuneration to be paid to all directors and all corporate auditors must be determined by a resolution of the general meeting of shareholders, unless their remuneration is provided for in the Articles of Incorporation. The distribution of remuneration among directors is broadly delegated to Pioneer’s board of directors and the distribution of remuneration among corporate auditors is determined by consultation among Pioneer’s corporate auditors.

Audit Committee

Pioneer plans to avail itself of paragraph (c) (3) of Rule 10A-3 of the U.S. Securities Exchange Act of 1934 as amended, which provides a general exemption from the audit committee requirements to a foreign private issuer with a board of corporate auditors, subject to certain requirements which continue to be applicable under Rule 10A-3.

Consistent with the requirements of the Code, Pioneer elects its corporate auditors through a resolution adopted at a general meeting of shareholders. Pioneer currently has five (5) corporate auditors, which exceeds a minimum of three (3) corporate auditors required pursuant to the Code.

Unlike NYSE Corporate Governance, the Code, among others, does not require corporate auditors to have expertise in accounting or other special knowledge and experience. Under the Code, the board of corporate auditors may determine the auditing policies, method of investigating the conditions of the business and the assets of a company, and may resolve other matters concerning the execution of the corporate auditor’s duties, prepare corporate auditors’ reports and give consent to proposals of the nomination of corporate auditors and registered public accounting firms.

Pioneer currently has three (3) corporate auditors who satisfy the requirements of “outside auditors” under the Special Exception Law. Unlike NYSE Corporate Governance, under the Code, at least one of the corporate auditors of Pioneer must be an “outside” person, who was not a director, executive officer, manager, or employee of Pioneer or any of its subsidiaries during the five-year period prior to such corporate auditor’s election. After the conclusion of the ordinary general meeting of shareholders to be held with respect to the first fiscal year ending on and after May 1, 2005, at least half of the corporate auditors will be required to be persons who have not been a director, executive officer, manager, or employee of Pioneer or any of its subsidiaries at any time prior such corporate auditor’s election. Corporate auditors may not at the same time be directors, executive officers, managers, or employees of Pioneer or any of its subsidiaries.

Corporate Governance Guidelines

Unlike NYSE Corporate Governance, Pioneer is not required to adopt or disclose corporate governance guidelines under Japanese laws and regulations, including the Code and the Securities and Exchange Law of Japan or stock exchange rules. However, Pioneer is required to disclose policies and the present status of its corporate governance in its annual securities report and certain other disclosure documents in accordance with the Securities and Exchange Law of Japan and regulations thereunder, and stock exchange rules in respect of timely disclosure.

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Code of Business Conduct and Ethics

Unlike NYSE Corporate Governance, under Japanese law (including the Code and the Securities and Exchange Law of Japan), and stock exchange rules, Pioneer is not required to adopt and disclose a code of business conduct and ethics for directors, officers and employees. However, Pioneer maintains a “Pioneer Group Code of Conduct” which we believe is consistent with the Code of Ethics described under Section 406 of the Sarbanes-Oxley Act. See “Item 16B. Code of Ethics.”

Shareholder Approval of Equity Compensation Plans

Unlike NYSE Corporate Governance, in which material revisions to equity-compensation plans of the listed companies are subject to shareholder approval, pursuant to the Code, if Pioneer desires to adopt an equity-compensation plan under which stock acquisition rights are granted on specially favorable terms to the recipients under the plan, then Pioneer must obtain shareholder approval by a “special resolution” of a general meeting of shareholders, where the quorum is one-third of the total number of voting rights and the approval of at least two-thirds of the voting rights represented at the meeting is required.

D. Employees

The following table sets forth the number of our employees at the end of the period indicated.
            
  Year ended March 31
  
  1999 2000 2001
  
 
 
Number of employees  23,647   27,414   28,871 
  
 
 

             
  Year ended March 31
  2002
 2003
 2004
Number of employees  31,220   34,656   36,360 
   
 
   
 
   
 
 

Pioneer and six of its subsidiaries in Japan have their respective labor unions for the employees of each company. Each such labor union is affiliated with the Japanese Electrical Electronic & Information Union. All employees except management, supervisory and certain other employees must become union members. We have not been materially affected by any work stoppages or difficulties in connection with labor negotiations or disputes and consider our labor relations to be good.

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E. Share ownership

The total number of shares of Pioneer’s common stock owned by our Directors, Executive Officers and Corporate Auditors as a group as of March 31, 20012004 is as follows:

%
         
Title of class
 Identity of person or group
 Number of shares ownedPercent of class

 

Percent of class
Common Stock Directors, Executive2,742,789 shares*1.52%
Officers and Corporate

Auditors as a group
 4,323,042 shares*  2.46

*Except for Mr. Kanya Matsumoto, Chairman of Pioneer, who owns 2,616,3593,785,359 shares of common stock, which constitutes 1.45%2.15% of all outstanding shares as of March 31, 2001,2004, none of Pioneer’s Directors, Executive Officers and Corporate Auditors is the owner of more than one percent of Pioneer’s common stock.

Pioneer has granted the following outstanding warrants to subscribe for shares of common stock to its Directors, Executive Officers and certain executive employees, and certain directors/officers of certain of its subsidiaries as part of their compensation.
             
  Total number of        
  shares covered by   Current exercise Number of shares
  warrants   price issued
Fiscal year granted (in thousands) Exercise period per share (in thousands)

 
 
 
 
1999  269  From July 1, 1999 to June 8, 2001 ¥2,783  269 
 
2000  320  From July 3, 2000 to September 12, 2002 ¥2,188  222 
 
2001  191  From July 2, 2001 to September 11, 2003 ¥4,674   
 
2001  93  From July 2, 2001 to September 25, 2003 ¥4,839   
 
2002  413  From July 1, 2002 to August 26, 2004 ¥3,266   

5563


             
    Total number of      
    shares covered by   Current exercise Number of shares
    warrants   price exercised
Fiscal year granted
 (in thousands)
 Exercise period
 per share
 (in thousands)
 2001   191  From July 2, 2001 to September 11, 2003 ¥4,674 
 
 2001   93  From July 2, 2001 to September 25, 2003 ¥4,839 
 
 2002   413  From July 1, 2002 to August 26, 2004 ¥3,266 

Pioneer has also granted the following share subscription rights to subscribe for its shares of common stock to certain of its employees:

           
  Total number of      
  shares covered by   Current exercise Number of shares
  option   price issued
Fiscal year granted (in thousands) Exercise period per share (in thousands)

 
 
 
 
2001  191  From July 1, 2002 to June 30, 2005 ¥4,400 
 
2002  191  From July 1, 2003 to June 30, 2006 ¥3,791 
employees.
             
    Total number of      
    shares covered by   Current exercise Number of shares
    option   price exercised
Fiscal year granted
 (in thousands)
 Exercise period
 per share
 (in thousands)
 2001   191  From July 1, 2002 to June 30, 2005 ¥4,400 
 
 2002   191  From July 1, 2003 to June 30, 2006 ¥3,791 

Pioneer has granted the following share acquisition rights for its shares of common stock to its Directors, Executive Officers and certain employees, and certain directors/officers of certain of its subsidiaries.

             
    Total number of      
    shares covered by   Current exercise Number of shares
    option   price exercised
Fiscal year granted
 (in thousands)
 Exercise period
 per share
 (in thousands)
 2003   564  From July 1, 2004 to June 29, 2007 ¥2,477 
 
 2004   313  From July 1, 2005 to June 30, 2008 ¥2,951 
 
 2005   350  From July 3, 2006 to June 30, 2009 ¥2,944 

As of March 31, 2004, Pioneer holds 4,632,962 shares as treasury stock with the purchase of 5,002 shares and disposal of 1,068 shares both in the market in fiscal 2004.

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Item 7. Major Shareholders and Related Party Transactions

A. Major shareholders

Major shareholders that owned 5% or more of Pioneer’s voting securities as of March 31, 20012004 on the register of shareholders were as follows:

             
      Number of shares Percentage of
Title of class Name (in thousand) outstanding shares

 
 
 
Common Stock Japan Trustee Services Bank, Ltd. (Trust Account)  15,142   8.41%
             
      Number of shares Percentage of
Title of class
 Name
 (in thousands)
 outstanding shares
Common Stock Japan Trustee Services Bank, Ltd.
(Trust Account)
  16,366  9.32%
 
Common Stock The Master Trust Bank of Japan, Ltd.
(Trust Account)
  14,196  8.09%

Japan Trustee Services Bank, Ltd. is aand The Master Trust Bank of Japan, Ltd. are securities processing services company.companies. We understand that this shareholder isthese shareholders are not the beneficial owner of our voting securities, but we do not have available further information concerning such beneficial ownership.

To our knowledge, there are no major shareholders that were beneficial owners of 5% or more of Pioneer’s voting securities during the past three years.

All shareholders of Pioneer have the same voting rights, subject to the limitation on exercise as set forth in “Item 10.B. Memorandum and articles of association–association—Common stockstock—Voting rights.”

As of March 31, 2001,2004, there were 179,894,370175,430,874 shares of common stock outstanding, of which 1,733,4302,086,930 shares (1.18%) were held in the form of ADRs (0.96%)American Depositary Receipts (ADRs) and 14,609,95919,552,181 shares (8.12%(11.1%) were held of record in the form of common stock by residents in the United States (based solely on their addresses). The number of registered ADR holders of record (including DTC) was 86,87, and the number of registered holders of record in the United States (based solely on their addresses) of shares of common stock, including those who held shares through a Japanese securities clearing system, was 98.76.

To our knowledge, Pioneer is not directly or indirectly owned or controlled by any other corporation or by the Japanese or any foreign government.

To our knowledge, there is no arrangement, the operation of which may at a subsequent date result in a change in control of Pioneer.

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B. Related party transactions

     None

C. Interests of experts and counsel

     Not applicable

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Item 8. Financial Information

A. Consolidated statements and other financial information

Consolidated financial statements

See the Consolidated Financial Statements and Schedules beginning on page F-1.

Legal proceedings

In common with numerous other industrial companies conducting a global business, we are party to various lawsuits and administrative proceedings in the ordinary course of our business. Based on the advice of counsel in the respective matters, except as described below, we do not expect such lawsuits or administrative proceedings, individually or in the aggregate, to have a material effect on our financial condition and business results.

In fiscalDuring the year ended March 31, 2001, we received a notice of proposed assessment from the German tax authorities for approximately DM55EUR21 million (¥3,0752,706 million translated at the current foreign exchange rate at March 31, 2004) relating to a tax position taken in prior years concerning intercompany purchase prices. We officially challenged the proposed assessment by arbitration procedures. There was no progress in this matter during the year ended March 31, 2004. In the opinion of management, it is not possible at this time to determine the ultimate resolution of this matter.

In June 2004, we received preliminary information from the United States Internal Revenue Service (“IRS”) proposing additional taxes of approximately US$58 million (¥6,148 million translated at the foreign exchange rate at March 31, 2001)2004) relating to a tax position taken in prioran adjustment to transfer prices between affiliated companies for the years concerning
inter-company purchase prices.ended March 31, 2000 through 2002. We officially challengedintend to contest the proposed assessment by arbitration procedures,adjustment. In the opinion of management, it is not possible at this time to determine the ultimate outcome of which will be final and binding on both sides when concluded. A decision is expected by December 2001.this matter.

We are alsowere a defendant in a lawsuitlegal proceedings in the United States in which the plaintiff, Gemstar-TV Guide International, Inc. (“Gemstar”), alleges patent infringement. The plaintiff has not yet specified damages. We have denied the allegations and have filedcertain of its affiliates alleged that we had infringed certain of their patents. On February 24, 2004, we fully settled all disputes and legal proceedings with Gemstar and we made a counterclaim against the plaintiff and another company relatedpayment of US$14 million to the alleged patent infringement. In addition, the same plaintiff alleges patent infringement relating to our production and sale of certain products. The plaintiff has not yet specified damages. This case has been stayed by the District Court. Also, in February 2001, the plaintiff filed a separate complaint involving the same patents before the International Trade Commission, alleging patent infringement relating to our importation to and sale of the same products in the United States.Gemstar.

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Dividend policy

Pioneer normally pays cash dividends twice per year. Pioneer’s Board of Directors recommends year-end dividends to be paid following the end of each fiscal year. This recommended year-end dividend must then be approved by shareholders at the ordinary general meeting of shareholders usually held in June of each year. Immediately following approval of the dividend at the shareholders’ meeting, Pioneer pays the dividend to holdersshareholders and pledges of record at the preceding March 31. In addition to these year-end dividends, Pioneer may pay interim dividends in the form of cash distributions from its retained earnings to its shareholders of record as of September 30 in each year by resolution of its Board of Directors and without shareholder approval. Pioneer normally pays interim dividends in December. See “Item 10.B. Memorandum and articles of association–association—Common stockstock—Dividends.

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The following table sets forth the dividends paid by Pioneer for each of the periods shown. The U.S. dollar equivalents for the dividends shown are based on the noon buying rate for cable transfertransfers in New York City as certified for customs purposes by the Federal Reserve Bank of New York for yen on the date of the dividend payment:

          
  Dividend per share
  
Record date Yen Dollars

 
 
March 31, 1997  ¥5.00  $0.04 
September 30, 1997  ¥2.50  $0.02 
March 31, 1998  ¥5.00  $0.04 
September 30, 1998  ¥5.00  $0.04 
March 31, 1999  ¥5.00  $0.04 
September 30, 1999  ¥5.00  $0.05 
March 31, 2000  ¥5.00  $0.05 
September 30, 2000  ¥7.50  $0.07 
March 31, 2001  ¥7.50  $0.06 
         
  Dividend per share
Record date
 Yen
 Dollars
March 31, 2000  ¥  5.00   $0.05 
September 30, 2000  7.50   0.07 
March 31, 2001  7.50   0.06 
September 30, 2001  7.50   0.06 
March 31, 2002  7.50   0.06 
September 30, 2002  7.50   0.06 
March 31, 2003  10.00   0.08 
September 30, 2003  12.50   0.12 
March 31, 2004  12.50   0.11 

On September 18, 2001,Pioneer’s policy on dividends allows for continued and stable dividend payment. In addition, Pioneer announced that, subject todetermines the approval ofappropriate dividend amount taking into consideration its Board of Directors to be obtained in October 2001, the interim dividend payable to shareholders of record as of September 30, 2001 will be 7.50 yen per share.

Pioneer currently intends to continue to pay dividends on its common stock in amounts similar to those paid for fiscal 2001. The payment and the amount of any future dividends, however, are subject to the level of our currentfinancial condition, consolidated business results and future business forecast including earnings, our financial condition and other factors, including statutory restrictions on the payment of dividends.factors.

B. Significant changes

There were no significant changes nor have any relevant facts occurred after the date of the financial statements included in this annual report.report other than disclosed therein.

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Item 9. The Offer and Listing

A. Offer and listing details

The following table sets forth for the period indicated the reported high and low sales prices per share of Pioneer’s Common Stock on the Tokyo Stock Exchange (TSE) and per share of Pioneer’s ADSsAmerican Depositary Shares (“ADSs”) on the New York Stock Exchange (NYSE).Exchange. See “Item 9.C. Markets,” regarding the markets for Pioneer’s shares.

                   
   Tokyo Stock Exchange New York Stock Exchange
   Price per share of Common Stock Price per share of ADS
   (yen) (U.S. dollars)
   
 
 High Low High Low
 
 
 
 
 
Annual highs and lows
  
Year ended March 31                
 1997  ¥2,650   ¥1,810  $23.88  $16.00 
 1998  3,160   1,850   27.25   15.13 
 1999  2,920   1,720   21.13   14.88 
 2000  3,690   1,711   34.75   16.13 
 2001  4,940   2,085   45.38   20.50 
 
Quarterly highs and lows
  
Fiscal 2000                
 1st quarter  2,405   1,956   19.69   16.13 
 2nd quarter  2,495   1,711   20.88   16.63 
 3rd quarter  3,080   1,751   29.75   16.75 
 4th quarter  3,690   2,630   34.75   26.63 
 
Fiscal 2001  
 1st quarter  4,350   2,085   40.50   20.50 
 2nd quarter  4,940   3,500   45.38   32.00 
 3rd quarter  4,580   2,710   42.50   24.13 
 4th quarter  3,750   2,720   30.94   23.45 
 
Monthly highs and lows
             
2001  
 March  3,750   2,720   30.40   23.45 
 April  3,930   3,020   31.75   25.18 
 May  4,250   3,570   34.70   30.50 
 June  3,950   3,580   32.25   29.25 
 July  3,920   2,960   31.05   24.00 
 August  3,430   2,355   27.71   19.51 
                 
  Tokyo Stock Exchange New York Stock Exchange
  Price per share of Common Stock Price per share of ADS
  (yen)
 (U.S. dollars)
Annual highs and lows High
 Low
 High
 Low
Year ended March 31,                
2000  ¥3,690   ¥1,711   $34.75   $16.13 
2001  4,940   2,085   45.38   20.50 
2002  4,250   2,150   34.70   16.75 
2003  2,860   1,805   21.98   14.83 
2004  3,370   2,225   31.25   18.90 
 
Quarterly highs and lows
                
Fiscal 2003                
1st quarter  2,860   1,981   21.65   16.75 
2nd quarter  2,260   1,900   18.60   16.00 
3rd quarter  2,490   1,805   19.50   14.83 
4th quarter  2,620   2,070   21.98   17.95 
Fiscal 2004                
1st quarter  2,840   2,225   23.75   18.90 
2nd quarter  3,030   2,515   25.75   20.85 
3rd quarter  2,995   2,505   28.31   23.30 
4th quarter  3,370   2,875   31.25   27.01 
Fiscal 2005                
1st quarter  3,390   2,635   30.85   23.75 
 
Monthly highs and lows
                
2004                
January  3,370   2,875   31.25   27.24 
February  3,270   2,930   30.16   27.01 
March  3,250   2,890   30.00   27.04 
April  3,390   3,000   30.85   28.55 
May  3,120   2,660   28.80   23.76 
June  2,880   2,635   26.46   23.75 
July 2,850  2,310  25.90  21.20 

B. Plan of distribution

     Not applicable

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C. Markets

The primary market for shares of Pioneer’s common stock is the Tokyo Stock Exchange (TSE)(“TSE”). Pioneer’s shares of common stock have been listed on the TSE since October 1961 and on the Osaka Securities Exchange since April 1968.

Since December 1976, Pioneer’s American Depositary Shares (ADSs)ADSs have been listed and traded on the New York Stock Exchange (NYSE)(“NYSE”), having been traded on the United States over-the-counter market since February 1970. Pioneer’s ADSs, each representing one share of common stock, are evidenced by American Depositary Receipts (ADRs)ADRs issued by Citibank, N.A., New York, as Depositary.

In addition, Curaçao Depositary Shares of Pioneer, evidenced by Curaçao Depositary Receipts, have been listed and traded on the Euronext Amsterdam since February 1969.

D. Selling shareholders

     Not applicable

E. Dilution

     Not applicable

F. Expenses of the issue

     Not applicable


Item 10. Additional Information

A. Share capital

     Not applicable

B. Memorandum and articles of association

Organization

Pioneer is a joint stock corporation(kabushiki kaisha)incorporated in Japan under the Commercial Code(shoho)of Japan. It is registered in the Commercial Register(shogyo tokibo)maintained by the Meguro Branch Office of the Tokyo Legal Affairs Bureau.

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Objects and purposes

Article 2 of the Articles of Incorporation of Pioneer provides that its purpose is to engage in the following lines of business: manufacture and sale of electronic and electrical machinery and appliances, optical instruments, medical instruments, and other machinery and appliances; planning, production, manufacture and sale of audio, video and computer software; manufacture and sale of woodworks, agricultural products and plant for their cultivation; sale of foods and beverages including liquor, and operation of restaurants and amusement facilities; sale and purchase, rental and lease, and management of real estate and real estate agency business; publishing and printing business, advertising agency business, construction business and non-life insurance agency business; acquisition, management and transfer of industrial property rights, copyrights and other intellectual property rights; and all business incidental and related to each and every one of the businesses in the preceding businesses.

manufacture and sale of electronic and electrical machinery and appliances;
manufacture and sale of optical instruments, medical instruments, and other machinery and appliances;
planning, production, manufacture and sale of audio, video and computer software;
manufacture and sale of woodwork;
manufacture and sale of agricultural products and plants for their cultivation;

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sale of food and beverages, including liquor, and operation of restaurants and amusement facilities;
sale and purchase, rental and lease, and management of real estate and real estate agency business;
publishing and printing business, advertising agency business, construction business and non-life insurance agency business;
acquisition, management and transfer of industrial property rights, copyrights and other intellectual property rights; and
all business incidental and related to each and every one of the businesses in the preceding paragraphs.

Directors

Under the Commercial Code, eachEach Director has executive powers and duties to manage the affairs of Pioneer and each Representative Director, who is elected from among the Directors by the Board of Directors, has the statutory authority to represent Pioneer in all respects. Under the Commercial Code, the Directors must refrain from engaging in any business competing with Pioneer unless approved by the Board of Directors and any Director who has a material interest in the subject matter of a resolution to be taken by the Board of Directors cannot vote on such resolution. The total amount of remuneration to Directors and that to Corporate Auditors are subject to the approval of the general meeting of shareholders. Within such authorized amounts the Board of Directors and the Board of Corporate Auditors respectively determine the compensation to each Director and Corporate Auditor.

Except as stated below, neither the Commercial Code nor Pioneer’s Articles of Incorporation make special provisions as to the Directors’ or Corporate Auditors’ power to vote in connection with their compensation; the borrowing power exercisable by a Representative Director (or a Director who is given power by a Representative Director to exercise such power), their retirement age or requirement to hold any shares of capital stock of Pioneer. The Commercial Code specifically requires the resolution of the Board of Directors for a company to acquire or dispose of material assets; to borrow a substantial amount of money; to employ or discharge from employment important employees, such as general managers; and to establish, change or abolish material corporate organization such as a branch office.offices. The Regulations of the Board of Directors of Pioneer require a resolution of the Board of Directors for Pioneer to borrow a largesubstantial amount of money or to give a guaranteeguarantees in a largesubstantial amount. There is no written rule as to what constitutes a “large”“substantial” amount in these contexts. However, it has been the general practice of Pioneer’s Board of Directors to adopt a resolution for a borrowing or guaranteeing in an amount not less than ¥100 million or its equivalent.

Common stock

General

Set forth below is information relating to Pioneer’s Common Stock, including brief summaries of the relevant provisions of Pioneer’s Articles of Incorporation and Share Handling Regulations, as currently in effect, and of the Commercial Code of Japan and related legislation. The discussion of the Commercial Code below reflects certain amendments to the Commercial Code (the “2001 Amendments”), which will become effective on October 1, 2001.

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In order to assert shareholders’ rights against Pioneer, a shareholder must have its name and address registered on Pioneer’s register of shareholders, in accordance with Pioneer’s Share Handling Regulations. The registered beneficial holder of deposited shares underlying the ADSs is the Depositary for the ADSs. Accordingly, holders of ADSs will not be able to directly to assert shareholders’ rights to Pioneer.

A holder of shares may choose, at its discretion, to participate in the central clearing system for share certificates under the Law Concerning Central Clearing of Share Certificates and Other Securities of Japan. Participating shareholders must deposit certificates representing all of the shares to be included in this clearing system with the Japan Securities Depository Center, Inc. (“JASDEC”). If a holder is not a participating institution in JASDEC, it must participate through a participating institution, such as a securities company or a commercial bank having a clearing account with JASDEC. All shares deposited

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with JASDEC will be registered in the name of JASDEC on Pioneer’s register of shareholders. Each participating shareholder will in turn be registered on Pioneer’s register of beneficial shareholders and be treated in the same way as shareholders registered on Pioneer’s register of shareholders. For the purpose of transferring deposited shares, delivery of share certificates is not required. Entry of the share transfer in the booksbook maintained by JASDEC for participating institutions, or in the book maintained by a participating institution for its customers, has the same effect as delivery of share certificates. The registered beneficial ownersshareholders may exercise the rights attached to the shares, such as voting rights, and will receive dividends (if any) and notices to shareholders directly from Pioneer. The shares held by a person as a registered shareholder and those held by the same person as a registered beneficial ownershareholder are aggregated for these purposes. Beneficial ownersshareholders may at any time withdraw their shares from deposit and receive share certificates.

Authorized capital

Article 5 of the Articles of Incorporation of Pioneer provides that the total number of shares authorized to be issued by Pioneer is four hundred million (400,000,000) shares.

As of March 31, 2001, 179,894,3702004, 180,063,836 shares of common stock with a par value of 50 yen per share were issued and outstanding.(including 4,632,962 shares held as treasury stock).

The 2001 Amendments eliminate the concept of “par value” ofAll shares of capital stock. Thus, on and after October 1, 2001, all shares of capitalcommon stock of Pioneer will have no par value.

Dividends

The Articles of Incorporation of Pioneer provide that the accounts shall be closed on March 31 of each year and thatyear. Year-end dividends, if any, shall be paid to shareholders, beneficial shareholders and pledgees of record as of the end of such day. After the close of the fiscal period, the Board of Directors prepares, among other things, a proposed allocation of profits for dividends and other purposes; this proposal is submitted to the Board of Corporate Auditors of Pioneer and to independent certified public accountants and then submitted for approval to the ordinary general meeting of shareholders, which is normally held in June each year. In addition to provisions for dividends, if any, and for the legal reserve and other reserves, the allocation of profits customarily includes a bonus to Directors and Corporate Auditors. In addition to year-end dividends, the Board of Directors may by its resolution declare a cash distribution pursuant to Article 293-5 of the Commercial Code (an “interim dividend”) to shareholders, beneficial shareholders and pledgees of record as of the end of each September 30 of each year, without shareholders’ approval, but subject to the limitations described below.

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The Commercial Code provides that a company may not make any distribution of profit by way of dividends or interim dividends for any fiscal period unless it has set aside in its legal reserve an amount equal to at least one-tenth of the amount paid by way of appropriation of retained earnings for such fiscal period or equal to one-tenth of the amount of such interim dividends, until the aggregate amount of additional paid-in capital and legal reserve is at least one-quarter of its stated capital.capital on a non-consolidated basis. Under the Commercial Code, Pioneer is permitted to distribute profits by way of year-end or interim dividends out of the excess of its net assets, on a non-consolidated basis, over the aggregate of:

(i) its stated capital;
 
(ii) its additional paid-in capital;
 
(iii) its accumulated legal reserve;
 
(iv) the legal reserve to be set aside in respect of the fiscal period concerned; and
 
(v) the excess, if any, of unamortized expenses incurredsuch other amounts as are set out in preparation for commencement of business and in connection with R&D over the aggregate of amounts referred to in (ii), (iii) and (iv) above; and
(vi)if certain assets of Pioneer are stated at market value pursuant to the provisionsan ordinance of the Commercial Code, the excess, if any,Ministry of the aggregate amount of their market value over the aggregate acquisition cost thereof.Justice.

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In the case of interim dividends, the net assets are calculated by reference to the non-consolidated balance sheet as at the last closingdate of Pioneer’s accounts,the preceding fiscal year, but adjusted to reflect; (x)(a) the legal reserve to be set aside in respect of interim dividends; (b) any subsequent payment by way of appropriation of retained earnings and transfer to legal reserve in respect thereof; (y)(c) any subsequent transfer of retained earnings to stated capital; and (z)(d) if Pioneer has been authorized, pursuant to a resolution of an ordinary general meeting of shareholders, a resolution of the Board of Directors or both, to purchase shares of its common stock (see “Item 10.B. Memorandum and articles of association–Common stockRepurchaseAcquisition by Pioneer of its common stock) below), the total amount of the purchase price of such shares so authorized by such resolutionsresolution that may be paid by Pioneer,Pioneer; and (e) such other amounts as are set out in an ordinance of the Ministry of Justice, provided that (x) if Pioneer reduces its stated capital, additional paid-in capital or accumulated legal reserve after the end of the preceding fiscal year, the amount so reduced, less the amount paid to shareholders upon such reduction and certain other amounts, and (y) such other amounts as are set out in an ordinance of the Ministry of Justice, shall be added to the amount distributable as interim dividends as described above. Interim dividends may not be paid where thereif it is a riskanticipated that at the end of the fiscal year there might not be any excess of net assets, overon a non-consolidated basis, will be less than the aggregate of the amounts referred to in (i) through (vi)(v) above.

Under its Articles of Incorporation, Pioneer is not obligated to pay any dividends which are left unclaimed for a period of three years after the date on which they first became payable.

Stock splits

Pioneer may at any time split shares in issue into a greater number of shares by resolution of the Board of Directors, and may amend its Articles of Incorporation to increase the number of the authorized shares to be issued in proportion to the relevantallow such stock split in principle pursuant to a resolution of the Board of Directors, rather than relying on a special resolution of a general meeting of shareholders, which is otherwise required for amending the Articles of Incorporation.

In the event of a stock split, generally, shareholders will not be required to exchange share certificates for new share certificates, but certificates representing the additional shares resulting from the stock split will be issued to shareholders. When a stock split is to be made, Pioneer must give public notice of the stock split, specifying the record date therefor, at least two weeks prior to such record date. In addition, promptly after the stock split takes effect, Pioneer must give notice to each shareholder specifying the number of shares to which such shareholder is entitled by virtue of the stock split.

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General meeting of shareholders

The ordinary general meeting of shareholders to settle accounts of Pioneer for each fiscal year is normally held in June in each year in or near Meguro-ku or in Minato-ku, Tokyo, Japan. In addition, Pioneer may hold an extraordinary general meeting of shareholders whenever necessary by giving notice of convocation thereof at least two weeks prior to the date set for the meeting.

Notice of convocation of a shareholders’ meeting, setting forth the place, time and purpose thereof, must be mailed to each shareholder having voting rights (or, in the case of a non-resident shareholder, to his or her standing proxy or mailing address in Japan) at least two weeks prior to the date set for the meeting. Such notice may be given to shareholders by electronic means, subject to the consent of the relevant shareholders. The record date for an ordinary general meeting of shareholders is March 31 of each year.

Any shareholder or group of shareholders holding at least 3% of the total number of voting rights for a period of six months or more may require the convocation of a general meeting of shareholders for a particular purpose. Unless such shareholders’ meeting is convened promptly or a convocation notice of

72


a meeting which is to be held not later than eight weeks from the day of such demand is dispatched, the requiring shareholder may, upon obtaining a court approval, convene such shareholders’ meeting.

Any shareholder or group of shareholders holding at least 300 voting rights or one percent1% of the total outstandingnumber of voting rights for a period of six months or more may propose a matter to be considered at a general meeting of shareholders by submitting a written request to a Representative Director at least sixeight weeks prior to the date set for such meeting.

Voting rights

So long as Pioneer maintains the unit share system (see “Item 10.B. Memorandum and articles of association–Common stock“Unit”‘Unit’ share system) below; currently 100 shares constitute one unit) a shareholderholder of shares constituting one or more wholefull units is entitled to one voting right per unit of shares subject to the limitations on voting rights set forth in the following paragraph.two sentences. A corporate shareholder more than one-quarter of whose total voting rights are directly or indirectly owned by Pioneer may not exercise its voting rights with respect to shares of common stock of Pioneer that it owns. In addition, Pioneer may not exercise its voting rights with respect to its shares that it owns. If Pioneer eliminates from its Articles of Incorporation the provisions relating to the unit of shares, holders of common stock will have one voting right for each share they hold. Except as otherwise provided by law or by the Articles of Incorporation, a resolution can be adopted at a general meeting of shareholders by a majority of the number of voting rights representedof all the shareholders present at the meeting. The Commercial Code and Pioneer’s Articles of Incorporation provide, however, that the quorum for the election of Directors and Corporate Auditors shall not be less than one-third of the total number of voting rights.rights of all the shareholders. Pioneer’s shareholders are not entitled to cumulative voting in the election of Directors. A corporate shareholder more than one-quarter of whose outstanding shares are directly or indirectly owned by Pioneer may not exercise its voting rights with respect to shares of common stock of Pioneer that it owns. Shareholders may exercise their voting rights through proxies, provided that the proxies are also shareholders holding voting rights. Pioneer’s shareholders also may cast their votes in writing.writing, or exercise their voting rights by electronic means pursuant to the method thereof determined by the Board of Directors.

The Commercial Code providesand Pioneer’s Articles of Incorporation provide that in order to amend the Articles of Incorporation and in certain other instances, including, a reduction of stated capital, the removal of a Director or Corporate Auditor, dissolution, merger or consolidation withpursuant to a certain exception under which shareholdersa shareholders’ resolution is not required, the transfer of the whole or an importanta substantial part of the business, the taking over of the whole of the business of any other corporation withpursuant to a certain exception under which shareholdersa shareholders’ resolution is not required, share exchange or share transfer for the purpose of establishing 100 percent100% parent-subsidiary relationships withpursuant to a certain exception under which shareholdersa shareholders’ resolution is not required, splitting of the corporation into two or more corporations withpursuant to a certain exception under which shareholdersa shareholders’ resolution is not required, or any offeringissue of new shares at a “specially favorable” price (or any offeringissue of convertible bonds or bonds with warrantsshare acquisition rights to subscribe for newor acquire shares of capital stock (“share acquisition rights”) or bonds with share acquisition rights at a “specially favorable” conversion or exercise conditions)terms) to any persons other than shareholders, or granting to Directors and/or employees rights to subscribe for new shares if the Articles of Incorporation so permit, the quorum shall be a majorityone-third of the total voting rights and the approval of all the shareholders, ofand approval by at least two-thirds of the voting rights of all the shareholders represented at the meeting is required (the “special shareholders resolutions”).

64Issue of additional shares and pre-emptive rights


Subscription rights

Holders of Pioneer’s shares of common stock have no pre-emptive rights under its Articles of Incorporation. Authorized but unissued shares may be issued at such times and upon such terms as the Board of Directors determines, subject to the limitations as to the offeringissue of new shares at a “specially favorable” price mentioned underVoting rights”rights above. The Board of Directors may, however, determine that shareholders shall be given subscription rights regarding a particular issue of new shares, in which case such rights must be given on uniform terms to all shareholders as at a record date of which

73


not less than two weeks’ prior public notice must be given. Each of the shareholders to whom such rights are given must also be given notice of the expiry thereof at least two weeks prior to the date on which such rights expire.

RightsSubject to subscribe for new sharescertain conditions, Pioneer may be made generally transferableissue share acquisition rights or bonds with share acquisition rights by a resolution of the Board of Directors. WhetherHolders of share acquisition rights or bonds with share acquisition rights may exercise their rights to acquire a certain number of shares within the exercise period as prescribed in the terms of their share acquisition rights and bonds with share acquisition rights. Upon exercise of share acquisition rights, Pioneer will make subscription rights generally transferable in future rights offerings will depend uponbe obliged to issue the circumstances at the timenecessary number of such offerings. If subscription rights are not made generally transferable, transfers by a non-resident of Japan or a corporation organized under the laws of a foreign country or whose principal office is located in a foreign country will be enforceable against Pioneer and third parties only if Pioneer’s prior written consent to each such transfer is obtained. When such consent is necessary in the future for the transfer of subscription rights, Pioneer intends to consent, on request, to all such transfers by such a non-resident or foreign corporation.

The Commercial Code permits a company to provide in its articles of incorporation that it may, by a special shareholders resolution, grant to its directors and/or employees rights to subscribe for new shares if there exists a justifiable reason. Article 10or alternatively to transfer the relevant number of Pioneer’s Articles of Incorporation provides that Pioneer may grant to its Directors and/or employees rights to subscribe for new shares pursuant to the provisions of the Commercial Code.held by it as treasury stock.

Liquidation rights

In the event of a liquidation of Pioneer, the assets remaining after payment of all debts, and liquidation expenses and taxes will be distributed among shareholders in proportion to the respective numbers of shares of common stock held.held by them.

Record date

March 31 is the record date for Pioneer’s year-end dividends. So long as Pioneer maintains in its Articles of Incorporation a provision for the unit of shares,share system, the shareholders and beneficial shareholders who are registered as the holders of one unitor more full units of shares or more in Pioneer’s registersregister of shareholders and/or that of beneficial shareholders at the end of each March 31 are also entitled to exercise shareholders’ rights at the ordinary general meeting of shareholders with respect to the fiscal year ending on such March 31. September 30 is the record date for interim dividends. In addition, Pioneer may set a record date for determining the shareholders and/or beneficial shareholders entitled to other rights pertaining to the shares of Common Stock of Pioneer, and for other purposes, by a resolution of the Board of Directors and giving at least two weeks’ prior public notice.

The price of shares generally goes ex-dividends or ex-rights on Japanese stock exchanges on the third business day prior to a record date (or if the record date is not a business day, the fourth business day prior thereto), for the purpose of dividends or rights offerings.

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RepurchaseAcquisition by Pioneer of its common stock

Except as otherwise permitted by the Commercial Code as set out below, Pioneer or any of its subsidiaries cannot acquire Pioneer’s common stock except by means of a reduction of capital in the manner prescribed by the Commercial Code.

Pioneer may acquire its own shares through a stock exchange on which such shares are listed (pursuant to an ordinary resolution of its common stock in response to a shareholder’s request for purchasean ordinary general meeting of his/her shares representing less than one unit. See “Item 10.B. Memorandum and articles of association–Common stock“Unit” share system—Repurchase by Pioneer of shares constituting less than a unit.”

Pioneer’s Articles of Incorporation provide that it may purchase up to 17,000,000 shares of common stock byshareholders or a resolution of the Board of Directors forDirectors), by way of tender offer (pursuant to an ordinary resolution of an ordinary general meeting of shareholders or a resolution of the purposeBoard of retiringDirectors), by purchase from a specific party other than a subsidiary of Pioneer (pursuant to a special resolution of an ordinary general meeting of shareholders) or from a subsidiary of Pioneer (pursuant to a resolution of the same with distributable profits. No such purchaseBoard of Directors). If shares are purchased by Pioneer pursuant to a resolution of the Board of Directors, maythen the reason for the purchase, as well as the kind, number and aggregate purchase price of such shares must be made afterreported to the conclusion ofshareholders at the ordinary general meeting of shareholders for the fiscal year endingto be held immediately after such purchase of shares. When such acquisition is made by Pioneer from a specific party other than a subsidiary of Pioneer, any other shareholder may make a request to a Representative Director, more than five calendar days prior to the Board resolution. No Board resolution has been made for this purpose.

In addition, Pioneer’s Articlesrelevant shareholders’ meeting, to include him or her as a seller in the proposed purchase. Any such acquisition of Incorporation provideshares must satisfy certain requirements, including that, it may purchase upin cases other than the acquisition by Pioneer of its own shares pursuant to 30,000,000 shares of common stock at a total price not exceeding ¥70 billion by a resolution of the Board of Directors, the total amount of the purchase price may not exceed the amount of the retained earnings available for dividend payments after taking into account any reduction, if any, of the purpose of retiring the same withstated capital, additional paid-in capital. No Board resolutioncapital or legal reserve

74


(if such reduction of the stated capital, additional paid-in capital or legal reserve has been made for this purpose.

The above provisions of Pioneer’s Articles of Incorporation were made before the 2001 Amendments come into force. However, Pioneer may acquire its shares of common stock byauthorized pursuant to a resolution of the Board of Directors pursuant to the above authorization by the Articles of Incorporation until therelevant ordinary general meeting of shareholders forshareholders), minus the fiscal year ending March 31, 2002.

Under the Commercial Code as amended by the 2001 Amendments, in order for Pioneer to purchase its own shares a resolution of an ordinary general meeting of shareholders is required with respect to (i) the total number of shares and the total acquisition price which Pioneer may purchase during the period ending the conclusion of the next ordinary general meeting of shareholders, or (ii) if the purchase(s) is/areamount to be made from a specified person or persons, the identity of such person(s). The total amount of purchase price referred to above cannot exceed the amount which can be distributed as dividends as described under“Dividends” above. The shareholders resolution for (ii) above shall be by a special shareholders resolution and any shareholder who received a convocation notice of the general meeting of shareholders where the resolution on item (ii) above is sought may require Pioneer in writing not later than five days prior to the date set for the meeting to include him/her as the seller of his/her shares in the proposed purchase(s). Any purchase by Pioneer of its shares pursuant to the shareholders resolutions except in the case of (ii) above should be made either on the stock exchange orpaid by way of tender offer. Shares so purchased mayappropriation of retained earnings for the relevant fiscal year and the amount to be retired bytransferred from retained earnings to stated capital. If Pioneer purchases shares pursuant to a resolution of the Board of Directors, orthe total amount of the purchase price may not exceed the amount of the retained earnings available for an interim dividend payment minus the amount of any interim dividend Pioneer actually paid. However, if it is anticipated that the net assets on the non-consolidated balance sheet as at the end of the relevant fiscal year will be less than the aggregate amount of the stated capital, additional paid-in capital and other items as described in (i) through (v) to “Dividends” above, Pioneer may not acquire such shares.

Shares acquired by Pioneer may be held by it for any period or may be cancelled by resolution of the Board of Directors. Pioneer may also transfer to any person the shares held by it, subject to a resolution of the Board of Directors, and subject also to other requirements similar to those applicable to the issuance of new shares, as described in “Issue of additional shares and pre-emptive rights” above. Pioneer may also utilize its treasury shares.stock for the purpose of transfer to any person upon exercise of share acquisition rights or for the purpose of acquiring another company by way of merger, share exchange or corporate split through exchange of treasury stock for shares or assets of the acquired company.

“Unit” share system

The 2001 Amendments abolish the unit share(tan-i-kabushiki) system existing under the Commercial Code before the 2001 Amendments and a new unit share system calledtangen-kabushiki is now introduced as described below.

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Different from the existing unit share system, whether or not to adopt the new unit share system by providing in its Articles of Incorporation for the number of shares constituting the new unit is at the discretion of Pioneer. However, under the 2001 Amendments, it is deemedPioneer provide that Pioneer has provided in the Articles of Incorporation 100 shares as its newconstitute one unit of shares and that a provision is also made in the Articles of Incorporation that no share certificate for any number less than a full new unit shall be issued.stock. Although the number of shares constituting a newone unit will be deemed to beis included in the Articles of Incorporation, any amendment to the Articles of Incorporation reducing (but not increasing) the number of shares constituting aone unit or eliminating the provisions for the unit of shares may be made by the resolution of the Board of Directors rather than by the special shareholders resolution, which is otherwise required for amending the Articles of Incorporation. The number of shares constituting one new unit, however, cannot exceed 1,000 or one two-hundredth (1/200) of all issued shares.

—Voting rights under the new unit share system

Under the new unit share system, shareholdersShareholders shall have one voting right for each unit of shares that they hold. Any number of shares less than a full unit will carry no voting rights.

—Share certificates for less than a unit

Under the new unit share system, Pioneer has an option either to issue share certificates for less than a unit of shares or to provide in its Articles of Incorporation not to issue share certificates for less than a unit of shares. As stated above, upon the 2001 Amendments coming into effect, Pioneer is deemed to have provided in the Articles of Incorporation not to issue share certificates for less than a unit of shares. Unless Pioneer’s Board of Directors adopts a resolution to eliminate the provision for the unit shares from the Articles of Incorporation or the shareholders amend the Articles of Incorporation by a special shareholders resolution to eliminate the provision not to issue share certificates for less than a unit of shares, a share certificate for any number of shares less than aone full unit will in general not be issued. As the transfer of shares normally requires the delivery of the share certificates therefor, any fraction of a unit for which no share certificates are issued is not transferable.

—Repurchase by Pioneer of shares constituting less than a unit

A holder of shares constituting less than one unit may require Pioneer to purchase such shares at their market value.

—Effectvalue in accordance with the provisions of the Share Handling Regulations of Pioneer. In addition, the Articles of Incorporation of Pioneer provide that a holder of shares constituting less than one full unit share system on holdersmay request Pioneer to sell to such holder such amount of ADRsshares which will, when added together with the shares constituting less than one full unit held by such holder, constitute one full unit of stock, in accordance with the provisions of the Share Handling Regulations of Pioneer.

A holder who owns ADRs evidencing less than 100 ADSs will indirectly own less than a wholeone full unit of shares of common stock. Although, as discussed above, under the unit share system (whether the existing unit share system or the new unit share system) holders of less than aone full unit have the right to require Pioneer to purchase their shares or sell shares held by Pioneer to such holders, holders of ADRs evidencing ADSs that represent other than integral multiples of whole unitsa unit are unable to withdraw the underlying shares of common stock representing less than aone full unit and, therefore, are unable, as a practical matter, to exercise the rights to require Pioneer to purchase such

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underlying shares or sell shares held by Pioneer to such holders unless Pioneer’s Articles of Incorporation are amended to eliminate the provision not to issue share certificates for the numbers of shares less than a unit. See “Item 12. Description of Securities Other than Equity Securities–Withdrawal of shares on cancellation of ADSs.” As a result, access to the Japanese markets by holders of ADRs through the withdrawal mechanism will not be available for dispositions of shares of common stock in lots less than aone full unit. The unit share system does not affect the transferability of ADSs, which may be transferred in lots of any size.

67Sale by Pioneer of shares held by shareholders whose location is unknown


Pioneer is not required to send a notice to a shareholder if a notice to such shareholder fails to arrive at the registered address of the shareholder in Pioneer’s register of shareholders or at the address otherwise notified to Pioneer continuously for five years or more.

In addition, Pioneer may sell or otherwise dispose of shares of common stock for which the location of the shareholder is unknown. Generally, if (i) notices to a shareholder fail to arrive continuously for five years or more at the shareholder’s registered address in Pioneer’s register of shareholders or at the address otherwise notified to Pioneer, and (ii) the shareholder fails to receive dividends on the shares continuously for five years or more at the address registered in Pioneer’s register of shareholders or at the address otherwise notified to Pioneer, Pioneer may sell or otherwise dispose of the shareholder’s shares by a resolution of the Board of Directors and after giving at least three months’ prior public and individual notice, and may hold or deposit the proceeds of such sale or disposal of shares at the then market price of the shares for the shareholder, the location of which is unknown.

Reporting of substantial shareholdings

The Securities and Exchange Law of Japan and regulations thereunder require any person, regardless of residence, who has become, beneficially and solely or jointly, a holderholder(s) of more than five percent5% of the total issued shares of capital stock of a company listed on any Japanese stock exchange or whose shares are traded on the over-the-counter market in Japan to file with the DirectorDirector-General of a competent Local Finance Bureau of Ministry of Finance within five business days a report concerning such shareholdings.

A similar report must also be filed in respect of any subsequent change of one percent1% or more in any such holding or any change in material matters set out in reports previously filed, with certain exceptions. For this purpose, shares issuable to such person upon conversion of convertible securities or exercise of share subscription warrants or share acquisition rights are taken into account in determining both the number of shares held by such holder and the issuer’s total issued share capital. Copies of such report must also be furnished to the issuer of such shares and all Japanese stock exchanges on which the shares are listed or (in the case of shares traded over-the-counter) the Japan Securities Dealers Association.

Except for the general limitation under Japanese anti-trust and anti-monopoly regulations against holding of shares of capital stock of a Japanese corporation which leads or may lead to a restraint of trade or monopoly, and except for general limitations under the Commercial Code or Pioneer’s Articles of Incorporation on the rights of shareholders applicable regardless of residence or nationality, there is no limitation under Japanese laws and regulations applicable to Pioneer or under its Articles of Incorporation on the rights of non-resident or foreign shareholders to hold the shares of common stock of Pioneer or exercise voting rights thereon.

There is no provision in Pioneer’s Articles of Incorporation that would have an effect of delaying, deferring or preventing a change in control of Pioneer and that would operate only with respect to merger, consolidation, acquisition or corporate restructuring involving Pioneer.

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C. Material contracts

Pioneer is party to a patent portfolio license, dated July 29, 1999 between itself as licensee and MPEG LA, L.L.C., as licensing administrator on behalf of various licensors, in respect of a patent portfolio covering the video data compression and data transport standard known as the “MPEG-2 Standard.” The agreement, which expires in 2004 subject to the right of renewal for successive periods, establishes the royalty payable by Pioneer and its licensed affiliates for use of the patent portfolio more fully described in the contract. A copy of the contract has been filed as an exhibit to this annual report.     None

D. Exchange controls

The Japanese Foreign Exchange and Foreign Trade Law currently in effectof Japan and its related cabinet orders and ministerial ordinances (the “Law”“Foreign Exchange Regulations”), does not affect or restrict govern the rightsacquisition and holding of a non-resident or foreign corporation to acquire or hold shares of common stock of Pioneer exceptby “exchange non-residents” and by “foreign investors.” The Foreign Exchange Regulations currently in effect do not, however, affect transactions between exchange non-residents to purchase or sell shares outside Japan using currencies other than Japanese yen.

Exchange non-residents are:

individuals who are not resident in Japan; and
corporations whose principal offices are located outside Japan.

Generally, branches and other offices of non-resident corporations that inare located within Japan are regarded as exchange residents of Japan. Conversely, branches and other offices of Japanese corporations located outside Japan are regarded as exchange non-residents.

Foreign investors are:

individuals who are exchange non-residents;
corporations that are organized under the laws of foreign countries or whose principal offices are located outside Japan; and
corporations (1) of which 50% or more of their shares are held by individuals who are exchange non-residents and/or corporations (a) that are organized under the laws of foreign countries or (b) whose principal offices are located outside Japan or (2) a majority of whose officers, or officers having the power of representation, are individuals who are exchange non-residents.

In general, the event of acquisition of shares of a Japanese company (such as the shares of common stock unless such acquisitionof Pioneer) by an exchange non-resident from an exchange resident of Japan is made through a securities company or other financial institution, the acquiring non-resident or foreign corporation isnot subject to a post-transaction reporting requirement under the Law. However,any prior filing requirements. In certain limited circumstances, however, the Minister of Finance hasmay require prior approval of an acquisition of this type. While prior approval, as described above, is not required, in the powercase where an exchange resident of Japan transfers shares of a Japanese company (such as the shares of common stock of Pioneer) for consideration exceeding ¥100 million to imposean exchange non-resident, the exchange resident of Japan who transfers the shares is required to report the transfer to the Minister of Finance within 20 days from the date of the transfer, unless the transfer was made through a licensing requirementbank, securities company or financial futures trader licensed under Japanese law.

If a foreign investor acquires shares of a Japanese company that is listed on a Japanese stock exchange (such as the shares of common stock of Pioneer) or that is traded on an over-the-counter market in certain acquisitionsJapan and, as a result of the acquisition, the foreign investor, in extremelycombination with any existing holdings, directly or indirectly holds 10% or more of the issued shares of the relevant company, the foreign investor must file a report of the acquisition with the Minister of Finance and any other competent Ministers having jurisdiction over that Japanese company within 15 days from and including the date of the acquisition, except where the offering of the company’s shares was made overseas. In limited circumstances. circumstances, such as where the foreign investor is in a country that is not listed on an exemption schedule in the Foreign Exchange Regulations, a prior notification of the acquisition must be filed with the Minister of Finance and any other competent Ministers, who may then modify or prohibit the proposed acquisition.

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Under the Law,Foreign Exchange Regulations, dividends paid on and the proceeds offrom sales in Japan of shares of common stock of Pioneer held by exchange non-residents of Japan may in generalgenerally be converted into any foreign currency and repatriated abroad.

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E. Taxation

The discussion below is not intended to constitute a complete analysis of all tax consequences relating to the acquisition, ownership and disposition of shares of common stock and ADSs. Prospective purchasers and holders of the shares of common stock or ADSs should consult their own tax advisors concerning the tax consequences of their particular situations.

The following discussion is a general summary of the principal Japanese national and U.S. federal and Japaneseincome tax consequences of the acquisition, ownership and disposition of shares of common stock or ADSs by an investor that holds those shares or ADSs, as capital assets (generally, property held for investment).ADSs. This summary does not purport to address all material tax consequences that may be relevant to holders of shares of common stock or ADSs, and does not take into account the specific circumstances of any particular investors, some of which (such as tax-exempt entities, banks, insurance companies, broker-dealers, traders in securities that elect to use a mark-to-market method of accounting for their securities holdings, regulated investment companies, real estate investment trusts, investors liable for alternative minimum tax, investors that own or are treated as owning 10% or more of ourPioneer’s voting stock, investors that hold shares of common stock or ADSs as part of a straddle, hedge, conversion or constructive sale transaction or other integrated transaction, persons that hold shares of common stock or ADSs through a partnership or other pass-through entity and investorsU.S. Holders (as defined below) whose functional currency is not the U.S. dollar) may be subject to special tax rules. This summary is based on the national or federal tax laws and regulations of Japan and of the United States, judicial decisions, published rulings and administrative pronouncements as in effect onat the date hereof, as well as on the current income tax convention between the United States and Japan, (the “Treaty”), all of which are subject to change (possibly with retroactive effect), and and/or to differing interpretations. The discussion on the tax laws of Japan below reflects certain amendment to certain Japanese tax laws, which will become effective on October 1, 2001, along with the amendment to the Commercial Code of Japan. In this regard,

U.S. holdersHolders should note that the United States and Japan recently announced that they will begin formal renegotiationratified the new income tax convention (the “New Treaty”), which is to replace its predecessor income tax convention signed on March 8, 1971 (the “Prior Treaty”). The New Treaty entered into force on March 30, 2004 and shall be applicable in Japan, in place of the Prior Treaty, commencing October 2001.(i) with respect to taxes withheld at source, for amounts taxable on or after July 1, 2004, and (ii) with respect to taxes on income which are not withheld at source and the enterprise taxes, as regards income for any taxable year beginning on or after January 1, 2005 (subject to certain transitional rules with respect to both items (i) and (ii) above). The Prior Treaty shall cease to have effect in relation to any tax from the date on which the New Treaty shall be applicable (subject to certain transitional rules allowing for exceptions). Where relevant, U.S. Holders are urged to confirm whether they are entitled to the treaty benefit provided under the Prior Treaty or the New Treaty, as the case may be, with their tax advisors. In addition, this summary is based in part upon the representations of the depositary and the assumption that each obligation in the deposit agreement referred to in “Item 12. Description of Securities Other than Equity Securities–Description of the American Depositary Shares,”for ADSs and in any related agreement will be performed in accordance with its terms.

For purposes of this discussion, a “U.S. Holder” is any beneficial owner of shares of common stock or ADSs that, for U.S. federal income tax purposes, is:

 an individuala citizen or individual resident of the United States,
 
 a corporation or other entity taxable as a corporation for U.S. federal income tax purposes organized in or under the laws of the United States, or any State, or the District of Columbia,
 
 an estate the income of which is subject to U.S. federal income tax without regard to its source, or
 
 a trust that is (i) subject to the primary supervision of a U.S. court and the control of one or more U.S. persons, or (ii) that has a valid election in effect under applicable TreatyTreasury regulations to be treated as a U.S. person.

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An “Eligible U.S. Holder” is a U.S. Holder that:

 is a resident of the United States for purposes of the Prior Treaty or the New Treaty, as applicable from time to time,
 
 does not maintain a permanent establishment or fixed base in Japan to which shares of common stock or ADSs are attributable and through which the U.S. Holder carries on or has carried on business (or, in the case of an individual, performs or has performed independent personal services), and
 
 is not otherwise ineligibleeligible for benefits under the Prior Treaty or the New Treaty, as applicable, with respect to income and gain derived in connection with the shares of common stock or ADSs.

A “Non-U.S. Holder” is any beneficial ownerThe U.S. federal income tax consequences of a partner in a partnership holding shares of common stock or ADSs that is notgenerally will depend on the status of the partner and the activities of the partnership. Partners in a U.S. Holder.

partnership holding shares of common stock or ADSs should consult their own tax advisors. This summary does not address any aspects of U.S. federal tax law other than income taxation, and does not discuss any aspects of Japanese tax law other than national income taxation, inheritance and gift taxation and securities transfer taxation. This summary also does not cover any state or local, or non-U.S., non-Japanese tax considerations. Investors are urged to consult their tax advisoradvisors regarding the U.S. federal, state and local and Japanese and other tax consequences of acquiring, owning and disposing of shares of common stock or ADSs. In particular, where relevant, investors are urged to confirm their status as Eligible U.S. Holders with their tax advisors and to discuss with their tax advisors any possible consequences of their failure to qualify as Eligible U.S. Holders.

In general, taking into account the earlier assumptions,assumption, for purposes of the Prior Treaty and the New Treaty, as applicable, and for U.S. federal income and Japanese income tax purposes, beneficial owners of ADRs evidencing ADSs will be treated as the owners of the shares of common stock represented by those ADSs, and exchanges of shares of common stock for ADSs, and exchanges of ADSs for shares of common stock, will not be subject to U.S. federal income tax or Japanese income tax.

The discussion below is intended for general information only and does not constitute a complete analysis of all tax consequences relating to the acquisition, ownership and disposition of shares of common stock or the ADSs. Investors in shares of common stock or the ADSs should consult their own tax advisors concerning the tax consequences of their particular situations.

Japanese taxation

The following is a summary of the principal Japanese tax consequences (limited to national taxes) to holders of shares of common stock of Pioneer or ADRs evidencing ADSs representing shares of common stock of Pioneer who are either individuals who are not residents of Japan or non-Japanese corporations, without a permanent establishment in Japan (“non-resident Holders”).

Generally, an individual who is a non-resident of Japan or a non-Japanese corporation is subject to Japanese withholding tax on dividends paid by a Japanese corporation. Pioneer withholds taxes from dividends it pays as required by Japanese law. Stock splits in themselves are not subject to Japanese income tax.

In the absence of an applicable tax treaty, convention or agreement reducing the maximum rate of Japanese withholding tax or allowing exemption from Japanese withholding tax, the rate of Japanese withholding tax applicable to dividends paid by Japanese corporations to individuals who are non-residents of Japan or non-Japanese corporations is 20%. However, with respect to dividends paid on listed shares issued by a Japanese corporation (such as the shares of common stock of Pioneer) to any corporate or individual shareholders (including those shareholders who are non-Japanese corporations or

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Japanese non-resident individuals, such as non-resident Holders), except for any individual shareholder who holds 5% or more of the total issued shares of the relevant Japanese corporation, the aforementioned 20% withholding tax rate is reduced to (i) 7% for dividends due and payable on or before March 31, 2008, and (ii) 15% for dividends due and payable on or after April 1, 2008. At the date of this document,annual report, Japan has income tax treaties, conventions or agreements whereby the above-mentioned withholding tax rate is reduced, in most cases to 15 percent for portfolio investors with, among other countries, Australia, Belgium, Canada, Denmark, Finland, France, Germany, Ireland, Italy, Luxembourg, Thethe Netherlands, New Zealand, Norway, Singapore, Spain, Sweden, Switzerland, the United Kingdom and the United States.

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U.K.

Under the Prior Treaty, as currently in force, the maximum rate of Japanese withholding tax which may be imposed on dividends paid by a Japanese corporation to Eligible U.S. Holders generally isthat are portfolio investors was limited to 15% of the gross amount actually distributed. AnHowever, under the New Treaty which would become applicable to dividends declared by Pioneer on or after July 1, 2004, the maximum rate of Japanese withholding tax which may be imposed on dividends paid by a Japanese corporation to Eligible U.S. Holders that are portfolio investors is generally limited to 10% of the gross amount actually distributed, and dividends paid by a Japanese corporation to Eligible U.S. Holders that are pension funds is exempt from Japanese taxation by way of withholding or otherwise unless such dividends are derived from the carrying on of a business, directly or indirectly, by such pension funds.

If the maximum tax rate provided for in the income tax treaty applicable to dividends paid by Pioneer to any particular non-resident Holder is lower than the withholding tax rate otherwise applicable under Japanese tax law or any particular non-resident Holder is exempt from Japanese income tax with respect to such dividends under the income tax treaty applicable to such particular non-resident Holder, such non-resident Holder who is entitled to a reduced rate of or exemption from Japanese withholding tax on payment of dividends on Pioneer’s shares of common stock is required to submit an Application Form for Income Tax Convention Regarding Relief from Japanese Income Tax on Dividends in advance through Pioneer to the relevant tax authority before such payment of dividends. A standing proxy in Japan for non-resident Holders of a non-resident holder of common stockJapanese corporation may provide this application service. With respect to ADRs,ADSs, this reduced rate or exemption is applicable if the Depositary or its agent will apply for this reduced rate on behalf of Eligible U.S. Holders by submittingsubmits two Application Forms (one before payment of dividends, the other within eight months after Pioneer’s fiscal year-end) to the Japanese tax authorities. To claim this reduced rate an Eligible U.S.or exemption, any relevant non-resident Holder of ADRsADSs will be required to file a proof of taxpayer status, residence and beneficial ownership (as applicable) and to provide other information or documents as may be required by the Depositary. An Eligible U.S.A non-resident Holder who does notis entitled, under an applicable tax treaty, to a reduced treaty rate lower than the withholding tax rate otherwise applicable under Japanese tax law or an exemption from the withholding tax, but failed to submit anthe required application in advance will be entitled to claim the refund of withholding taxes withheld in excess of the rate under an applicable tax treaty (if such non-resident Holder is entitled to a reduced treaty rate under the Treatyapplicable income tax treaty) or the whole of the withholding tax withheld (if such non-resident Holder is entitled to an exemption under the applicable income tax treaty) from the relevant Japanese tax authority.

If Pioneer purchases shares of its common stock by way of a tender offer, individualdoes not assume any responsibility to ensure withholding at the reduced treaty rate or not withholding for shareholders who sold the shares to Pioneer in such tender offer and who are residents of Japan or non-residents of Japan having a permanent establishment within Japan, if such purchases are made on or before March 31, 2002, willwould be subject to Japanese taxationeligible under an applicable to gains realized by individuals from sales of shares – 26 percent separate taxation upon filing tax returns (although up to March 31, 2003, the taxpayers may choose a 1.05% withholding tax on the gross sales proceeds). However, this is an interim measure applicable to the period ending March 31, 2002, and after such date, unless the present treatment is extended, a similar treatment as those currently applicable to foreign corporations having a permanent establishment within Japan as discussed in the next sentence will be applicable. If the sellers are foreign corporations having a permanent establishment within Japan, the portion of the proceeds received from Pioneer corresponding to the excess over the aggregate of the portions attributable to stated capital and additional paid-in capital will be deemed dividends and subject to taxation on dividends and the rest of the net proceeds will be subject to taxation treatment on gains realized from sales of shares. For non-resident individuals having no permanent establishment within Japan, no Japanese income tax will accrue, except in certain exceptional circumstances. For foreign corporations having no permanent establishment within Japan, the portion of the proceeds received from Pioneer which is deemed dividends as discussed in the third sentence of this paragraph will be subject to withholding tax (generally 20%, subject to applicable income tax treaty provisions); otherwise, except in certain exceptional cases, no further Japanese tax will be imposed.but do not follow the required procedures as stated above.

Gains derived by a non-resident of Japan or a non-Japanese corporation from the sale of shares of common stock or ADRsADSs outside Japan or from the sale of shares of common stock within Japan by a non-resident of JapanHolder holding such shares or ADSs as a non-Japanese corporation not having a permanent establishment in Japan,portfolio investor are, in general, not subject to Japanese income or corporation tax. Eligible U.S. Holders are not subject to Japanese income or corporation tax with respect to such gains under the Prior Treaty and the New Treaty, as applicable.

Japanese inheritance orand gift taxtaxes at progressive rates may be payable by an individual who has acquired shares of common stock or ADRsADSs as a legatee, heir or donee even though neither the individual nor the deceased nor donor is a Japanese resident.

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Holders of shares of common stock of Pioneer or ADSs should consult their tax advisors regarding the effect of these taxes and, in the case of U.S. Holders, the possible application of the Estate and Gift Tax Treaty between the U.S. and Japan.

U.S. federal income taxation

U.S. Holders

The following discussion is a summary of the principal U.S. federal income tax consequences to holders of shares of common stock and ADSs that are U.S. Holders and that hold those shares or ADSs as capital assets (generally, for investment purposes).

Taxation of Dividends

Subject to the passive foreign investment company rules discussed below, under U.S. federal income tax law, the gross amount of any distribution made by us in respect of shares of common stock or ADSs (without reduction for Japanese withholding taxes) will constitute a taxable dividend to the extent paid out of current or accumulated earnings and profits, as determined forunder U.S. federal income tax purposes. Aprinciples. The U.S. dollar amount of such a dividend generally will be included in the gross income of a U.S. Holder, as ordinary income, when the dividend is actually or constructively received by the U.S. Holder, in the case of shares of common stock, or by the depositary, in the case of ADSs. The dividendDividends paid by us will not be eligible for the dividends received deduction generally allowed to U.S. corporations in respect of dividends received from other U.S. corporations. ASubject to certain exceptions for short-term and hedged positions, and provided that we are not a passive foreign investment company (as discussed below), dividends received by certain U.S. Holders (including individuals) prior to January 1, 2009 with respect to the shares of common stock or ADSs will be subject to U.S. federal income taxation at a maximum rate of 15%. Investors should be aware that the U.S. Treasury Department has announced its intention to promulgate rules pursuant to which shareholders (and intermediaries) will be permitted to rely on certifications from issuers to establish that dividends qualify for the reduced rate of U.S. federal income taxation. Because such procedures have not yet been issued, we are not certain that we will be able to comply with them. U.S. Holders of ADSs or shares of common stock should consult their own tax advisors regarding the availability of the reduced rate in the light of their own particular circumstances.

The U.S. dollar amount of a dividend paid in Japanese yen will be included in gross income in a U.S. dollar amountdetermined based on the Japanese yen/U.S. dollar exchange rate in effect on the date that dividend is included in the gross income of the U.S. Holder, regardless of whether the payment is converted into dollars.dollars on such date. Generally, any gain or loss resulting from currency exchange fluctuations during the period from the date the dividend payment is included in the gross income of a U.S. Holder through the date that payment is converted into U.S. dollars (or the U.S. Holder otherwise disposed of)the Japanese yen) will be treated as U.S. source ordinary income or loss. U.S. Holders should consult their own tax advisors regarding the calculation and U.S. federal income tax treatment of foreign currency gain or loss.

To the extent, if any, that the amount of any distribution received by a U.S. Holder in respect of shares of common stock or ADSs exceeds our current and accumulated earnings and profits as determined under U.S. federal income tax principles, the distribution first will be treated as a tax-free return of capital to the extent the U.S. Holder’s adjusted tax basis in those shares or ADSs, and any balance in excess of that adjusted tax basis will be treatedthereafter as U.S. source capital gain. We do not expect to compute our earnings and profits under U.S. federal income tax principles, and therefore holders should assume that our distributions generally will be treated as paid out of our earnings and profits for U.S. federal income tax purposes.

Distributions of additional shares of common stock that are made to U.S. Holders with respect to their shares of common stock or ADSs and that are part of apro rata distribution to all of our shareholders generally will not be subject to U.S. federal income tax.

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For U.S. foreign tax credit purposes, dividends included in gross income by a U.S. Holder in respect of shares of common stock or ADSs will constitute income from sources outside the United States and generally will be treated separately, together with other items of “passive income” (or, in the case of some holders, “financial services income”) in computing foreign tax credit limitations. Subject to generally applicable limitations under U.S. federal income tax law and the Treaty, any Japanese withholding tax imposed in respect of a Pioneer dividend paid by us in respect of shares of common stock or ADSs may be claimed either as a credit against the U.S. federal income tax liability of a U.S. Holder or, if the U.S. Holder does not elect to take a credit for any foreign taxes that year, as a deduction from that holder’sU.S. Holder’s taxable income. In general, special rules will apply to the calculation of foreign tax credits in respect of dividend income that is subject to preferential rates of U.S. federal income tax. Additionally, special rules apply to individuals whose foreign source income during the taxable year consists entirely of “qualified passive income” and whose creditable foreign taxes paid or accrued during the taxable year do not exceed $300 ($600 in the case of a joint return). Further, under some circumstances, a U.S. Holder that:

 has held shares of common stock or ADSs for less than a specified minimum period, or
 
 is obligated to make payments related to our dividends,

will not be allowed a foreign tax credit for foreign taxes imposed on Pioneerour dividends. Finally, foreign tax credits may not be allowed in respect of arrangements in which the U.S. Holder’s expected economic return, after non-U.S. taxes, is insubstantial. U.S. Holders are urged to consult their tax advisors regarding the availability of the foreign tax credit under their particular circumstances. The Internal Revenue Service (the “IRS”) has expressed concern that parties to whom ADSs are released may be taking actions that are inconsistent with the claiming of foreign tax credits by U.S. Holders of ADSs. Accordingly, investors should be aware that the discussion above regarding the creditability of Japanese withholding tax on dividends could be affected by future actions that may be taken by the IRS.

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Taxation of Capital Gains and Losses

In general subject to the passive foreign investment company rules discussed below, upon a sale or other taxable disposition of shares of common stock or ADSs, a U.S. Holder will recognize gain or loss for U.S. federal income tax purposes in an amount equal to the difference between the amount realized on the sale or other taxable disposition and the U.S. Holder’s adjusted tax basis in those shares or ADSs. ThatADSs (which is generally the U.S. dollar cost thereof). Subject to the passive foreign investment company rules discussed below, such gain or loss recognized on the sale or other taxable disposition generally will be capital gain or loss and, if the U.S. Holder’s holding period for those shares or ADSs exceeds one year, will be long-term capital gain or loss. SomeCertain U.S. Holders, including individuals, are eligible for preferential rates of U.S. federal income tax in respect of net long-term capital gain. Under U.S. federal tax law, the deduction of capital losses is subject to limitations. Any gain or loss recognized by a U.S. Holder in respect of the sale or other taxable disposition of shares of common stock or ADSs generally will be treated as derived from U.S. source income or losssources for U.S. foreign U.S. tax credit purposes.

WePassive Foreign Investment Companies

Based on current estimates of our income and asset, we do not believe that we are for U.S. federal income tax purposes, a passive foreign investment company (a “PFIC”), for U.S. federal income tax purposes, and we intend to continue our operations in such a manner that it is highly unlikely that we will notwould become a PFIC in the future.future although no assurances can be made regarding determination of our PFIC status in the current or any future taxable year. The PFIC determination is made annually and generally is based on either the valueportion of our assets (including goodwill) and compositionor the portion of income.our income being characterized as passive under the PFIC rules. If we become a PFIC, unless a U.S. Holder elects to be taxed annually on a mark-to-market basis with respect to his/herits shares of common stock or ADSs, any gain realized on a sale or other taxable disposition of

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shares of common stock or ADSs and certain “excess distributions” (generally distributions in excess of 125% of the average distribution over a three-year period, or shorter holding period for the shares of common stock or ADSs) would be treated as realized ratably over the U.S. Holder’s holding period for the shares of common stock or ADSs and forADSs; amounts allocated to prior years during or after which we arewere a PFIC would be taxed at the highest ordinary income tax rate in effect for each such year, to which the gain or excess distribution was allocated, together withand an additional interest charge in respectmay apply to the portion of the U.S. federal income tax attributableliability on such gains or distributions treated under the PFIC rules as having been deferred by the U.S. Holder. Moreover, dividends that a U.S. Holder receives from us will not be eligible for the reduced U.S. federal income tax rates described above if we are a PFIC either in the taxable year of the distribution or the preceding taxable year (and instead will be taxable at rates applicable to ordinary income). If a mark-to-market election were made, a U.S. Holder would take into account each such year.year the appreciation or depreciation in value of its shares of common stock or ADSs, which would be treated as ordinary income or (subject to limitations) ordinary loss, as would gains or losses on actual dispositions of shares of common stock or ADSs. Any U.S. Holder who owns shares of common stock or ADSs during any taxable year that we are a PFIC would be required to file Internal Revenue Service Form 8621. U.S. Holders are urged to consult their tax advisors concerning the U.S. federal income tax consequences of holding our shares of common stock or ADSs if we were considered a PFIC in any year.

Non-U.S. Holders

DistributionsThe following discussion is a summary of the principal U.S. federal income tax consequences to beneficial holders of shares of common stock or ADSs that are neither U.S. Holders nor partnerships for U.S. federal income tax purposes (“Non-U.S. Holders”).

Subject to the discussion below on “Backup withholding and information reporting,” distributions received by a Non-U.S. Holder in respect of shares of common stock or ADSs generally will not be subject to any U.S. federal income or withholding tax, unless the Non-U.S. Holder conducts a trade or business within the United States, and the distributions are effectively connected with that trade or business.

ASubject to the discussion below on “Backup withholding and information reporting,” a Non-U.S. Holder generally will not be subject to U.S. federal income tax in respect of gain recognized on a sale or other disposition of shares of common stock or ADSs, unless the gain is effectively connected with a trade or business conducted by the Non-U.S. Holder within the United States, or the Non-U.S. Holder is an individual who was present in the United States for 183 or more days in the taxable year of the disposition and other conditions are met.

If an income tax treaty applies to a Non-U.S. Holder, it may require, as a condition for the Non-U.S. Holder to be subject to U.S. federal income taxation on dividends or capital gains that are effectively connected with trade or business conducted by a Non-U.S. Holder in the United States, that the dividends or capital gains be attributable to a permanent establishment or fixed base that the Non-U.S. Holder maintains in the United States.

Income that is effectively connected with a U.S. trade or business of a Non-U.S. Holder, and, if an income tax treaty applies and so requires, is attributable to a U.S. permanent establishment or fixed base of the Non-U.S. Holder, generally will be taxed in the same manner as the income of a U.S. Holder. In addition, however, under certain circumstances, any such effectively connected income that is realized by a corporate Non-U.S. Holder may be subject to an additional “branch profits tax” at the rate of 30% or at a lower rate that may be prescribed by an applicable income tax treaty.

7383


Backup withholding and information reporting

In general, except in the case of certain exempt recipients (such as corporations) information reporting requirements will apply to dividends on shares of common stock or ADSs paid to U.S. Holders in the United States or through certain U.S. related financial intermediaries and to the proceeds received upon the sale, exchange or redemption of shares of common stock or ADSs by U.S. Holders within the United States or through certain U.S. related financial intermediaries. Furthermore, backup withholding currently at a rate of 28% may apply to those amounts if a U.S. Holder fails to provide an accurate tax identification number or to report interest and dividends required to be shown on its U.S. federal income tax returns. The amount of backup withholding imposed on a payment to a U.S. Holder will be allowed as a credit againstreturns or makes other appropriate certifications in the holder’s U.S. federal income tax liability.required manner.

Dividends on shares of common stock or ADSs paid to Non-U.S. Holders and proceeds received upon the sale, exchange or redemption of shares of common stock or ADSs by Non-U.S. Holders generally are exempt from information reporting and backup withholding. However, a holderNon-U.S. Holder may be required to provide certification of his or her non-U.S. status in order to obtain that exemption.

Persons required to establish their exempt status generally must provide such certification on IRS Form W-9, entitled Request for Taxpayer Identification Number and Certification, in the case of U.S. persons, and on IRS Form W-8BEN, entitled Certificate of Foreign Status (or other appropriate IRS Form W-8), in the case of non-U.S. persons. Back up withholding is not an additional tax. The amount of backup withholding imposed on a payment generally may be claimed as a credit against the holder’s U.S. federal income tax liability provided that the required information is properly furnished to the IRS.

THE SUMMARY OF U.S. FEDERAL INCOME AND JAPANESE TAX CONSEQUENCES SET OUT ABOVE IS INTENDED FOR GENERAL INFORMATION PURPOSES ONLY. INVESTORS IN THE COMMON STOCK OR ADSs ARE URGED TO CONSULT WITH THEIR OWN TAX ADVISORS WITH RESPECT TO THE PARTICULAR TAX CONSEQUENCES TO THEM OF OWNING OR DISPOSING OF COMMON STOCK OR ADSs, BASED ON THEIR PARTICULAR CIRCUMSTANCES.

F. Dividends and paying agents

     Not applicable

G. Statement by experts

     Not applicable

H. Documents on display

It is possible to read and copy documents referred to in this annual report on Form 20-F that have been filed with the SEC at the SEC’s public reference room located at 450 Fifth Street, NW, Washington, D.C. 20549. You can also access the documents at the SEC’s website (http://www.sec.gov/).

I. Subsidiary information

     Not applicable

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Item 11. Quantitative and Qualitative Disclosures About Market Risk

We operate internationally, giving rise to exposure to market risks from changes in foreign exchange rates and interest rates. In an effort to manage potential adverse effects caused by market fluctuations in foreign exchange rates and interest rates, we hedge these market risks by selectively using derivative financial instruments. However, we do not hedge all of our exposure, and the extent of hedge as well as type of hedging instruments to be used depends on factors including, but not limited to, type of risks exposed, market conditions and hedging cost. We do not hold or issue derivative financial instruments for trading purposes. To minimize credit risks from derivative financial instruments, we limit counterparties to reputable international financial institutions.

Marketable securities held by us are exposed to risk from changes in equity prices and consist entirely of available-for-sale securities. We do not take hedging measures against the market exposures on those securities.

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Foreign exchange risk

To hedge certain purchase and sale commitments and anticipated but not yet committed transactions denominated in other than functional currencies, we enter into forward exchange contracts and purchasespurchase and writeswrite currency options. Written options are entered into only with purchased options.

The following table provides information about our derivative financial instruments related to foreign currency exchange transactions as of March 31, 2001 and 2000,2004, which have been translated into yen at the rate as of such date, together with the related weighted average contractual exchange rates at March 31, 2001 and 2000.2004. All of the contracts mature within one year.

There are no option contracts outstanding as of March 31, 2001

                             
Forward exchange contract                 Millions of yen except average rates

Functional currency Yen THB Euro A$ S$    

 
 
 
 
 
    
Sell/Buy US$/Yen THB/US$ Euro/Yen A$/Yen A$/US$ US$/S$ Total

Contract amounts  ¥11,647   ¥32   ¥7,544   ¥301   ¥186   ¥123   ¥19,833 
Average contractual exchange rates  115.37   36.429   107.01   59.98   0.5158   1.795     
Fair value  ¥(660) ¥1   ¥(86)  ¥(1)  ¥9   ¥0   ¥(737)

 
                     
Currency option         Millions of yen except average rates

Functional currency Yen A$ 

 
 
Sell/Buy US$/Yen Yen/US$ A$/US$ US$/A$ Total

Notional amount  ¥1,487   ¥1,486   ¥434   ¥434   ¥3,841 
Average execution rate  119.30   0.00838   0.55   0.58     
Fair value  ¥(6)  ¥(8)  ¥(46)  ¥67   ¥7 

 
                         
March 31, 2000
 
Forward exchange contract         Millions of yen except average rates

Functional currency Yen Euro A$    

 
 
 
Sell/Buy US$/Yen Yen/US$ Euro/Yen A$/Yen A$/US$ Total

Contract amounts  ¥5,658   ¥2,582   ¥4,290   ¥77   ¥183   ¥12,790 
Average contractual exchange rates  106.43   0.00937   106.46   66.96   0.6616     
Fair value  ¥79   (¥103)  ¥212   ¥5   ¥13   ¥206 

 
                         
Currency option             Millions of yen except average rates

Functional currency Yen A$    

 
 
Sell/Buy US$/Yen Yen/US$ Yen/A$ A$/US$ Euro/A$ Total

Notional amount  ¥2,452   ¥1,226   ¥506   ¥159   ¥28   ¥4,371 
Average execution rate  106.21   0.00942   73.56   0.66   0.62     
Fair value  ¥19   ¥26   ¥26   ¥9   ¥0   ¥80 

2004.

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Forward exchange contract as of March 31, 2004

 
Functional currency Yen
 EUR
 A$
 THB
 NT$
 SEK
  
Sell/Buy
 US$/Yen
 EUR/Yen
 A$/US$
 THB/US$
 US$/NT$
 NOK/SEK
 Total
  (In millions of yen except average rates)
   
Contract amounts ¥5,409  ¥12,338  ¥1,041  ¥870  ¥744  ¥103  ¥20,505 
Average contractual exchange rates  110.40   134.10   0.6894   39.5017   33.23   1.0588     
Fair value ¥248  ¥542  ¥(87) ¥(2) ¥(6) ¥0  ¥695 

 

85


To change the currency and interest rate features of intercompany finance transactions, we have entered into currency swap contracts with banks. Currency swap contracts effectively changed, in substance, the U.S. dollarsdollar floating interest rate intercompany borrowings into yen fixed and floating interest rate borrowings and Euro/Belgian franc floatingeuro fixed interest rate borrowings. The foreign exchange risk inherent in our currency swap as of March 31, 2001 and 20002004 is summarized as follows:

                          
Currency swap as of March 31, 2001         Millions except average rates

           Expected maturity date    
   Contract amounts (year ending March 31)    
   
 
    
   Sell Buy 2002 2003 Total Fair value

Functional currency: Yen  ¥17,193  US$150  ¥11,300   ¥5,893   ¥17,193   ¥1,673 
 Average contractual exchange rate          113.54   117.85         
Functional currency: Euro EUR110 US$100  ¥12,016       ¥12,016   ¥367 
 Average contractual exchange rate          0.91             

 
Currency swap as of March 31, 2000         Millions except average rates

           Expected maturity date    
   Contract amounts (year ending March 31)    
   
 
    
   Sell Buy 2001 2002 Total Fair value

Functional currency: Yen  ¥21,676  US$190  ¥10,376   ¥11,300   ¥21,676   ¥(1,324) 
 Average contractual exchange rate          115.55   113.54         
Functional currency: Euro EUR50 US$50  ¥5,056       ¥5,056   ¥286 
 Average contractual exchange rate          1.01             

Currency swap as of March 31, 2004

 
          Expected maturity date  
  Contract amounts
 (year ending March 31)
  
  Buy Sell 2005 2006 2007 Total Fair value

 
  (Millions except average rates)
Functional currency: Yen ¥24,540  US$200      ¥18,665  ¥5,875  ¥24,540  ¥(3,106)
Average contractual exchange rate              124.43   117.50         
Functional currency: Euro  EUR82  US$100  ¥10,566          ¥10,566  ¥(73)
Average contractual exchange rate          1.220                 

 

With respect to interest rate risk inherent in our currency swaps as of March 31, 2001 and 2000,2004, see “Item 11. Quantitative and Qualitative Disclosures About Market Risk–Interest rate risk.

76


Interest rate risk” below.

Interest rate risk

The following table provides information about interest rate risk inherent in the aforementioned currency swaps as of March 31, 2001 and 2000 is summarized2004. Variable interest rates are determined using formulas such as follows:

                         
Currency swap as of March 31, 2001         Millions except average rates

           Expected maturity date    
   Contract amounts (year ending March 31)    
   
 
    
   Sell Buy 2002 2003 Total Fair value

Functional currency: Yen
Variable (US$) to Fixed (Yen)
  ¥17,193  US$150  ¥11,300   ¥5,893   ¥17,193   ¥1,673 
      Average pay rate           0.39%  0.43%        
      Average receive rate           6.11%  5.45%        
Functional currency: Euro
Variable (US$) to Variable (Euro)
 EUR110 US$100  ¥12,016       ¥12,016   ¥367 
      Average pay rate           4.93%            
      Average receive rate           5.53%            

 
Currency swap as of March 31, 2000         Millions except average rates

           Expected maturity date    
   Contract amounts (year ending March 31)    
   
 
    
   Sell Buy 2001 2002 Total Fair value

Functional currency: Yen
Variable (US$) to Fixed (Yen)
  ¥21,676  US$190  ¥10,376   ¥11,300   ¥21,676   ¥(1,324)
      Average pay rate           0.55%  0.40%        
      Average receive rate           6.26%  6.15%        
Functional currency: Belgian Francs
Variable (US$) to Variable (Euro)
 EUR50 US$50  ¥5,056       ¥5,056   ¥286 
      Average pay rate           3.95%            
      Average receive rate           5.81%            

LIBOR+a.

As a partial hedge of our variable interest rate debt, we entered into an interest rate swap agreement during fiscal 2000. The purpose of the swap is to fix the interest rate on variable rate debt and reduce certain exposures to interest rate fluctuations. The information related to the interest rate swap as of March 31, 2000 is as follows:

                          
Interest rate swap as of March 31, 2000      Millions of yen except average rates

           Expected maturity date    
   Contract amounts (year ending March 31)    
   
 
    
   Pay Receive 2001 2002 Total Fair value

Variable to fixed (Yen)   1.57%  0.92%      ¥1,000   ¥1,000   ¥(9)

Currency swap as of March 31, 2004

 
          Expected maturity date  
  Contract amounts
 (year ending March 31)
  
  Buy Sell 2005 2006 2007 Total Fair value

 
  (Millions except average rates)
Functional currency: Yen                            
Variable (US$) to Fixed (Yen) ¥12,590   US$100      ¥12,590      ¥12,590  ¥(2,028)
Average pay rate              0.41%            
Average receive rate              1.18%            
Fixed (US$) to Fixed (Yen) ¥11,950  US$100      ¥  6,075  ¥5,875  ¥11,950  ¥(1,078)
Average pay rate              (0.65)%  (1.35)%        
Average receive rate              2.88%  1.21%        
Functional currency: Euro                            
Variable (US$) to Fixed (Euro)  EUR82  US$100  ¥10,566          ¥10,566  ¥(73)
Average pay rate          2.13%                
Average receive rate          1.12%                

 

7786


PrincipalThe following table provides information about principal cash flows by expected maturity dates, weighted average interest rates, and fair value of our debt obligations as of March 31, 2001 and 2000 are as follows:

                                       
Long-term debt (including due within one year) as of March 31, 2001 Millions of yen except average rates

      Expected maturity date (year ending March 31)    
    Functional 
    
    Currency 2002 2003 2004 2005 2006 Thereafter Total Fair value

Fixed rate (Yen) Yen  ¥7,560   2,412   1,556   5,796   15,306   12,262   ¥44,892   ¥46,492 
 Average interest rate      1.77%  2.37%  3.09%  3.91%  2.38%  2.99%  2.65%    
Variable rate (US$) US$                  620       620   620 
 Average interest rate                      4.47%      4.47%    
Interest free loan (PTE) PTE  82   41                   123   123 
           Total      ¥7,642   2,453   1,556   5,796   15,926   12,262   ¥45,635   ¥47,235 

                                       
Long-term debt (including due within one year) as of March 31, 2000 Millions of yen except average rates

      Expected maturity date (year ending March 31)    
    Functional 
    
    Currency 2001 2002 2003 2004 2005 Thereafter Total Fair value

Fixed rate (Yen) Yen  ¥36,445   6,806   2,656   1,556   6,296   27,592   ¥81,351   ¥82,539 
 Average interest rate      2.13%  1.98%  2.32%  3.09%  3.91%  2.65%  2.46%    
Variable rate (Yen) Yen      1,000                   1,000   994 
 Average interest rate          0.92%                  0.92%    
Variable rate (US$) US$                      531   531   531 
 Average interest rate                          4.70%  4.70%    
Variable rate (Others) Others  342                       342   342 
 Average interest rate      6.94%                      6.94%    
Interest free loan (PTE) PTE  76   76   38               190   190 
           Total      ¥36,863   7,882   2,694   1,556   6,296   28,123   ¥83,414   ¥84,596 

2004. The interest rate on the variable rate debt is determined based on prevailing market rates for tax-exempt municipal bonds in the U.S.

Long-term debt (including due within one year) as of March 31, 2004

                                     
      Expected maturity date (year ending March 31)
    
  Functional                
  Currency 2005 2006 2007 2008 2009 Thereafter Total Fair value

 
      (In millions of yen except average rates)    
Fixed rate (Yen) Yen ¥4,507   15,314   248   247   10,244   63,063  ¥93,623  ¥88,929 
Average interest rate      3.87%  2.37%  3.77%  3.77%  2.82%  0.06%  0.95%    
Variable rate (US$) US$     528                   528   528 
Average interest rate          1.29%                  1.29%    
Interest free loan (US$) US$  3   6   2               11   11 
Interest free loan (EUR) EUR      9   5   25           39   39 

 
Total     ¥4,510   15,857   255   272   10,244   63,063  ¥94,201  ¥89,507 

 

EquityMarket price riskrisks on available-for-sale securities

We do not own any marketable securities for trading purposes. Our equity investment portfolio consists almost entirely of securities issued by Japanese companies. AtThe following table sets forth maturity dates and cost and fair values of debt securities in our investment portfolio, and the cost and fair values of equity securities therein, at March 31, 2001 and 2000, cost, fair value, and unrealized holding gains (net) on marketable equity securities are summarized as follows:

         
  Millions of yen

  2001 2000

Cost  ¥9,773   ¥9,067 
Fair value  23,658   31,696 
Unrealized holding gains (net)  13,885   22,629 

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2004.

         
  2004
  Cost
 Fair value
  (In millions of yen)
Debt securities (by contractual maturities)        
Maturing over one year ¥106  ¥107 
Equity securities ¥6,520  ¥24,409 

 

Item 12. Description of Securities Other than Equity Securities

Description of the American Depositary Shares

Citibank, N.A. acts as the depositary bank for our American Depositary Shares. Citibank’s depositary offices are located at 111 Wall Street, New York, New York 10005. American Depositary Shares are frequently referred to as “ADSs” and represent ownership interests in securities that are on deposit with the custodian. ADSs are normally represented by certificates that are commonly known as “American Depositary Receipts” or “ADRs.” The depositary bank typically appoints a custodian to safekeep the securities on deposit. In this case, the custodian is The Bank of Tokyo-Mitsubishi, Ltd., located at 3-2, Nihombashi Hongoku-cho 1-chome, Chuo-ku, Tokyo 103-0021, Japan.

We appointed Citibank as depositary bank pursuant to a deposit agreement. A copy of the deposit agreement is on file with the SEC under cover of a Registration Statement on Form F-6. You may obtain a copy of the deposit agreement from the SEC’s Public Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549. Please refer to Registration Number 333-10566, when retrieving such copy.

We are providing you with a summary description of the material terms of the ADSs and of your material rights as an owner of ADSs. Please remember that summaries by their nature lack the precision of the information summarized and that a holder’s rights and obligations as an owner of ADSs will be determined by reference to the terms of the deposit agreement and not by this summary. We urge you to review the deposit agreement in its entirety.

Each ADS represents the right to receive one share of common stock on deposit with the custodian, subject to the limitation on the withdrawal of shares of common stock due to the restriction under Japanese law described under“Withdrawal of shares on cancellation of ADSs” below. An ADS will also represent the right to receive any other property received by the depositary bank or the custodian on behalf of the owner of the ADS but that has not been distributed to the owners of ADSs because of legal restrictions or practical considerations.

If you become an owner of ADSs, you will become a party to the deposit agreement and therefore will be bound to its terms and to the terms of the ADR that evidences your ADSs. The deposit agreement and the ADR specify our rights and obligations as well as your rights and obligations as owner of ADSs and those of the depositary bank. As an ADS holder you appoint the depositary bank to act on your behalf in certain circumstances. The deposit agreement and the ADRs are governed by New York law. However, our obligations to the holders of shares of common stock will continue to be governed by the laws of Japan, which may be different from the laws of the United States.

As an owner of ADSs, you may hold your ADSs either by means of an ADR registered in your name or through a brokerage or safekeeping account. If you decide to hold your ADSs through your brokerage or safekeeping account, you must rely on the procedures of your broker or bank to assert your rights as ADS owner. Please consult with your broker or bank to determine what those procedures are.

Dividends and distributions

As a holder, you generally have the right to receive the distributions we make on the securities deposited with the custodian. Your receipt of these distributions may be limited, however, by practical considerations and legal limitations. Holders will receive such distributions under the terms of the deposit agreement in proportion to the number of ADSs held as of a specified record date.

79


Distributions of cash

Whenever we make a cash distribution for the securities on deposit with the custodian, we will notify the depositary bank and deposit the funds with the custodian. Upon receipt of such notice and of confirmation of the deposit of the requisite funds, the depositary bank will arrange for the funds to be converted into U.S. dollars and for the distribution of the U.S. dollars to the holders, subject to     Not applicable laws and regulations.

The conversion into U.S. dollars will take place only if practicable and if the U.S. dollars are transferable to the United States. The amounts distributed to holders will be net of the fees, expenses, taxes and governmental charges payable by holders under the terms of the deposit agreement. The depositary will apply the same method for distributing the proceeds of the sale of any property (such as undistributed rights) held by the custodian in respect of securities on deposit.

Distributions of shares

Whenever we make a free distribution of common stock for the securities on deposit with the custodian, we will notify the depositary bank and deposit the applicable number of shares of common stock with the custodian. Upon receipt of notice of such deposit, the depositary bank will either distribute to holders new ADSs representing the shares of common stock deposited or modify the ADS-to-common stock ratio, in which case each ADS you hold will represent rights and interests in the additional share of common stock so deposited. Only whole new ADSs will be distributed. Fractional entitlements will be sold and the proceeds of such sale will be distributed as in the case of a cash distribution. The distribution of new ADSs or the modification of the ADS-to-common stock ratio upon a distribution of shares of common stock will be made net of the fees, expenses, taxes and governmental charges payable by holders under the terms of the deposit agreement. In order to pay such taxes or governmental charges, the depositary bank may sell all or a portion of the new shares of common stock so distributed.

No such distribution of new ADSs will be made if it would violate a law (i.e., the U.S. securities laws) or if it is not operationally practicable. If the depositary bank does not distribute new ADSs as described above, it will use its best efforts to sell the shares of common stock received and will distribute the proceeds of the sale as in the case of a distribution of cash.

Distributions of rights

Whenever we intend to distribute rights to purchase additional shares of common stock, we will give prior notice to the depositary bank and we will assist the depositary bank in determining whether it is lawful and reasonably practicable to distribute rights to purchase additional ADSs to holders.

The depositary bank will establish procedures to distribute rights to purchase additional ADSs to holders and to enable such holders to exercise such rights if it is lawful and reasonably practicable to make the rights available to holders of ADSs, and if we provide all of the documentation contemplated in the deposit agreement (such as opinions to address the lawfulness of the transaction). You may have to pay fees, expenses, taxes and other governmental charges to subscribe for the new ADSs upon the exercise of your rights. The depositary bank is not obligated to establish procedures to facilitate the distribution and exercise by holders of rights to purchase new shares of common stock other than in the form of ADSs.

80


The depositary bank will not distribute the rights to you if:

We do not timely request that the rights be distributed to you or we request that the rights not be distributed to you; or
We fail to deliver satisfactory documents to the depositary bank; or
It is not reasonably practicable to distribute the rights.

The depositary bank will sell the rights that are not exercised or not distributed if such sale is lawful and reasonably practicable. The proceeds of such sale will be distributed to holders as in the case of a cash distribution. If the depositary bank is unable to make any rights available to holders or to sell the rights, it will allow the rights to lapse.

Other distributions

Whenever we intend to distribute property other than cash, shares of common stock or rights to purchase additional shares of common stock, we will notify the depositary bank in advance and will indicate whether we wish such distribution to be made to you. If so, we will assist the depositary bank in determining whether such distribution to holders is lawful and reasonably practicable.

If it is reasonably practicable to distribute such property to you and if we provide all of the documentation contemplated in the deposit agreement, the depositary bank will distribute the property to the holders in proportion to the number of ADSs held by them and in a manner it deems practicable.

The distribution will be made net of fees, expenses, taxes and governmental charges payable by holders under the terms of the deposit agreement. In order to pay such taxes and governmental charges, the depositary bank may sell all or a portion of the property received.

The depositary bank will not distribute the property to you and will sell the property if:

We do not request that the property be distributed to you or if we ask that the property not be distributed to you; or
We do not deliver satisfactory documents to the depositary bank; or
The depositary bank determines that all or a portion of the distribution to you is not reasonably practicable.

The proceeds of such a sale will be distributed to holders as in the case of a cash distribution.

Redemption

Our common stock is not subject to redemption at our option. We may repurchase our common stock as described under “Item 10.B. Memorandum and articles of association–Common stockRepurchase by Pioneer of its common stock.” If, in the future, deposited securities include redeemable securities, the following provisions will apply.

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Whenever we decide to redeem any of the securities on deposit with the custodian, we will notify the depositary bank. If it is reasonably practicable and if we provide all of the documentation contemplated in the deposit agreement, the depositary bank will mail notice of the redemption to the holders.

The custodian will be instructed to surrender the securities being redeemed for payment of the applicable redemption price. The depositary bank will convert the redemption funds received into U.S. dollars under the terms of the deposit agreement and will establish procedures to enable holders to receive the net proceeds from the redemption upon surrender of their ADSs to the depositary bank. You may have to pay fees, expenses, taxes and other governmental charges upon the redemption of your ADSs. If less than all ADSs are being redeemed, the ADSs to be retired will be selected by lot or on apro ratabasis, as the depositary bank may determine.

Changes affecting common stock

The shares of common stock held on deposit for your ADSs may change from time to time. For example, there may be a change in nominal or par value, a split-up, cancellation, consolidation or reclassification of such common stock or a recapitalization, reorganization, merger, consolidation or sale of assets.

If any such change were to occur, your ADSs would, to the extent permitted by law, represent the right to receive the securities received in respect of the common stock held on deposit. The depositary bank may in such circumstances deliver new ADSs to you or call for the exchange of your existing ADSs for new ADSs. If the depositary bank may not lawfully distribute such securities to you, the depositary bank may sell such securities and distribute the net proceeds to you as in the case of a cash distribution.

Issuance of ADSs upon deposit of common stock

The depositary bank may create ADSs on your behalf if you or your broker deposits common stock with the custodian by your order. The depositary bank will deliver these ADSs to the person you indicate only after you pay any applicable issuance fees and any charges and taxes payable for the transfer of the shares of common stock to the custodian. Your ability to deposit common stock and receive ADSs may be limited by U.S. and Japanese legal considerations applicable at the time of deposit.

The issuance of ADSs may be delayed until the depositary bank or the custodian receives confirmation that all required approvals have been given and that the shares of common stock have been duly transferred to the depositary bank or its nominee or if deposit is made by book-entry transfer, confirmation of such transfer in the books of the Japan Securities Depository Center. The depositary bank will only issue ADSs in whole numbers.

When you, or your broker on your behalf, make a deposit of shares of common stock, you will be responsible for transferring good and valid title to the depositary bank. As such, you will be deemed to represent and warrant that:

The shares of common stock are duly authorized, validly issued, fully paid, non-assessable and legally obtained.
All preemptive (and similar) rights, if any, with respect to such common stock have been validly waived or exercised.
You are duly authorized to deposit the shares of common stock.

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The shares of common stock presented for deposit are free and clear of any lien, encumbrance, security interest, charge, mortgage or adverse claim, and are not, and the ADSs issuable upon such deposit will not be, “restricted securities” (as defined in the deposit agreement).
The shares of common stock presented for deposit have not been stripped of any rights or entitlements.

If any of the representations or warranties are incorrect in any way, we and the depositary bank may, at your cost and expense, take any and all actions necessary to correct the consequences of the misrepresentations.

Withdrawal of shares on cancellation of ADSs

As a holder, you will be entitled to present your ADSs to the depositary bank for cancellation and then receive the corresponding number of underlying common stock. Your ability to withdraw the shares of common stock may be limited by U.S. and Japanese considerations applicable at the time of withdrawal. Under the Commercial Code of Japan, as currently in effect, Pioneer is generally not permitted to issue share certificates representing the number of shares less than a full unit (currently, 100 shares). Thus, under the provisions of the deposit agreement, holders of ADSs representing any number less than a whole unit or any integral multiple thereof may not withdraw that portion of ADSs representing less than a whole unit of shares. The depositary bank will promptly notify you of the amount of shares, if any, that are not deliverable and will deliver to you a new receipt or receipts evidencing such non-deliverable portion. Trading of such portion of ADSs is possible on the New York Stock Exchange or over-the-counter market.

In order to withdraw the shares of common stock evidenced by your ADSs, you will be required to pay to the depositary its fees, charges and expenses for cancellation of ADSs and the withdrawal of shares of common stock and all applicable taxes and governmental charges payable in connection with such surrender and withdrawal. You assume the risk for delivery of all funds and securities upon withdrawal. Once canceled, the ADSs will not have any rights under the deposit agreement.

If you hold an ADR registered in your name, the depositary bank may ask you to provide proof of identity and genuineness of any signature and such other documents as the depositary bank may deem appropriate before it will cancel your ADSs. The withdrawal of the shares of common stock represented by your ADSs may be delayed until the depositary bank receives satisfactory evidence of compliance with all applicable laws and regulations. Please keep in mind that the depositary bank will only accept ADSs for cancellation that represent a whole number of securities on deposit. In addition, as described above, the depositary bank will cancel ADSs for the withdrawal of shares of common stock only in an amount representing a whole unit or an integral multiple thereof.

You will have the right to withdraw the securities represented by your ADSs at any time except for:

Temporary delays that may arise because (i) the transfer books for the common stock or ADSs are closed, or (ii) shares of common stock are immobilized on account of a shareholders’ meeting or a payment of dividends.
Obligations to pay fees, taxes and similar charges.
Restrictions imposed because of laws or regulations applicable to ADSs or the withdrawal of securities on deposit.

83


The deposit agreement may not be modified to impair your right to withdraw the securities represented by your ADSs except to comply with mandatory provisions of law.

Voting rights

As a holder, you generally have the right under the deposit agreement to instruct the depositary bank to exercise the voting rights for the shares of common stock represented by your ADSs. The voting rights of holders of common stock are described in “Item 10.B. Memorandum and articles of association–Common stockVoting rightsand“Unit” share system.”

At our request, the depositary bank will distribute to you any notice of shareholders’ meeting received from us together with information explaining how to instruct the depositary bank to exercise the voting rights of the securities represented by ADSs.

If the depositary bank timely receives voting instructions from a holder of ADSs, it will endeavor to vote the securities represented by the holder’s ADSs in accordance with such voting instructions.

Please note that the ability of the depositary bank to carry out voting instructions may be limited by practical and legal limitations and the terms of the securities on deposit. We cannot assure you that you will receive voting materials in time to enable you to return voting instructions to the depositary bank in a timely manner. In the case of securities for which no voting instructions have been received in time, you will be deemed to have authorized and instructed the depositary to give a discretionary proxy to a person designated by us. We have agreed, notwithstanding anything else contained in the deposit agreement, however, that we will not knowingly allow any shares of common stock to be voted without specific instructions if we shall not have provided notice of the meeting and the reference materials in aid of voting furnished to our shareholders on a timely basis. Furthermore, no such discretionary proxy will be given with respect to any matter as to which we inform the depositary that (i) we do not wish such proxy to be given, (ii) substantial opposition exists or (iii) your rights will be adversely affected. In addition, the depositary shall not have any obligation to give such discretionary proxy if we do not deliver to the depositary an opinion as to compliance with Japanese law and a representation letter as to the foregoing items (i) through (iii).

To the extent the aggregate of the ADSs voted for or against a proposal do not constitute integral multiples of a unit, the remainders in excess of the highest integral multiple of a unit will be disregarded.

84


Fees and charges

As an ADS holder, you will be required to pay the following service fees to the depositary bank:

ServiceFees


Issuance of ADSsUp to 5¢ per ADS issued
Cancellation of ADSsUp to 5¢ per ADS canceled
Exercise of rights to purchase additional ADSsUp to 5¢ per ADS issued
Distribution of cash dividendsNo fee (so long as prohibited by the NYSE)
Distribution of ADSs pursuant to stock dividend or other free stock distributionsNo fee (so long as prohibited by the NYSE)
Distribution of cash proceeds (i.e., upon sale of rights or other entitlements)Up to 2¢ per ADS held

As an ADS holder, you will also be responsible to pay certain fees and expenses incurred by the depositary bank and certain taxes and governmental charges such as:

Fees for the transfer and registration of shares of common stock charged by the registrar and transfer agent for the common stock in Japan (i.e., upon deposit and withdrawal of shares of common stock).
Expenses incurred for converting foreign currency into U.S. dollars.
Expenses for cable, telex and fax transmissions and for delivery of securities.
Taxes and duties upon the transfer of securities (i.e., when shares of common stock are deposited or withdrawn from deposit).

We have agreed to pay certain other charges and expenses of the depositary bank. Note that the fees and charges you may be required to pay may vary over time and may be changed by us and by the depositary bank. You will receive prior notice of such changes.

Amendments and termination

We may agree with the depositary bank to modify the deposit agreement at any time without your consent. We undertake to give holders 30 days’ prior notice of any modifications that would materially prejudice any of their substantial rights under the deposit agreement. We will not consider to be materially prejudicial to your substantial rights any modifications or supplements that are reasonably necessary for the ADSs to be registered under the Securities Act of 1933 or to be eligible for book-entry settlement, in each case without imposing or increasing the fees and charges you are required to pay. In addition, we may not be able to provide you with prior notice of any modifications or supplements that are required to accommodate compliance with applicable provisions of law.

85


You will be bound by the modifications to the deposit agreement if you continue to hold your ADSs after the modifications to the deposit agreement become effective. The deposit agreement cannot be amended to prevent you from withdrawing the shares of common stock represented by your ADSs (except in order to comply with mandatory provisions of applicable law).

We have the right to direct the depositary bank to terminate the deposit agreement. Similarly, the depositary bank may in certain circumstances on its own initiative terminate the deposit agreement. In either case, the depositary bank must give notice to the holders at least 30 days before termination. Upon termination, the following will occur under the deposit agreement:

For a period of six months after termination, you will be able to request the cancellation of your ADSs and the withdrawal of the shares of common stock represented by your ADSs and the delivery of all other property held by the depositary bank in respect of those shares on the same terms as prior to the termination. During such six months’ period the depositary bank will continue to collect all distributions received on the shares of common stock on deposit (i.e., dividends) but will not distribute any such property to you until you request the cancellation of your ADSs.
After the expiration of such six months’ period, the depositary bank may sell the securities held on deposit. The depositary bank will hold the proceeds from such sale and any other funds then held for the holders of ADSs in a non-interest bearing account. At that point, the depositary bank will have no further obligations to holders other than to account for the funds then held for the holders of ADSs still outstanding.

Books of depositary

The depositary bank will maintain ADS holder records at its depositary office. You may inspect such records at such office during regular business hours but solely for the purpose of communicating with other holders in the interest of business matters relating to the ADSs and the deposit agreement.

The depositary bank will maintain in New York facilities to record and process the issuance, cancellation, combination, split-up and transfer of ADRs. These facilities may be closed from time to time, to the extent not prohibited by law.

Limitations on obligations and liabilities

The deposit agreement limits our obligations and the depositary bank’s obligations to you. Please note the following:

We and the depositary bank are obligated only to take the actions specifically stated in the deposit agreement without negligence or bad faith.
The depositary bank disclaims any liability for any failure to carry out voting instructions, for any manner in which a vote is cast or for the effect of any vote, provided it acts in good faith and in accordance with the terms of the deposit agreement.

86


The depositary bank disclaims any liability for any failure to determine the lawfulness or practicality of any action, for the content of any document forwarded to you on our behalf or for the accuracy of any translation of such a document, for the investment risks associated with investing in common stock, for the validity or worth of the common stock, for any tax consequences that result from the ownership of ADSs, for the credit-worthiness of any third party, for allowing any rights to lapse under the terms of the deposit agreement, for the timeliness of any of our notices or for our failure to give notice.
We and the depositary bank will not be obligated to perform any act that is inconsistent with the terms of the deposit agreement.
We and the depositary bank disclaim any liability if we are prevented or forbidden from acting on account of any law or regulation, any provision of our Articles of Incorporation, any provision of any securities on deposit or by reason of any act of God or war or other circumstances beyond our control.
We and the depositary bank disclaim any liability by reason of any exercise of, or failure to exercise, any discretion provided for the deposit agreement or in our Articles of Incorporation or in any provisions of securities on deposit.
We and the depositary bank further disclaim any liability for any action or inaction in reliance on the advice or information received from legal counsel, accountants, any person presenting shares of common stock for deposit, any holder of ADSs or authorized representatives thereof, or any other person believed by either of us in good faith to be competent to give such advice or information.
We and the depositary bank also disclaim liability for the inability by a holder to benefit from any distribution, offering, right or other benefit which is made available to holders of shares of common stock but is not, under the terms of the deposit agreement, made available to you.
We and the depositary bank may rely without any liability upon any written notice, request or other document believed to be genuine and to have been signed or presented by the proper parties.

Pre-release transactions

The depositary bank may, in certain circumstances, issue ADSs before receiving a deposit of shares of common stock or release shares of common stock before receiving ADSs for cancellation. These transactions are commonly referred to as “pre-release transactions.” The deposit agreement limits the aggregate size of pre-release transactions and imposes a number of conditions on such transactions (i.e., the need to receive collateral, the type of collateral required, the representations required from brokers, etc.). The depositary bank may retain the compensation received from the pre-release transactions.

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Taxes

You will be responsible for the taxes and other governmental charges payable on the ADSs and the securities represented by the ADSs. We, the depositary bank and the custodian may deduct from any distribution the taxes and governmental charges payable by holders and may sell any and all property on deposit to pay the taxes and governmental charges payable by holders. You will be liable for any deficiency if the sale proceeds do not cover the taxes that are due.

The depositary bank may refuse to issue ADSs, to deliver, transfer, split and combine ADRs or to release securities on deposit until all taxes and charges are paid by the applicable holder. The depositary bank and the custodian may take reasonable administrative actions to obtain tax refunds and reduced tax withholding for any distributions on your behalf. However, you may be required to provide to the depositary bank and to the custodian proof of taxpayer status and residence and such other information as the depositary bank and the custodian may require to fulfill legal obligations. You are required to indemnify us, the depositary bank and the custodian for any claims with respect to taxes based on any tax benefit obtained for you.

Foreign currency conversion

The depositary bank will arrange for the conversion of all foreign currency received into U.S. dollars if such conversion is practical, and it will distribute the U.S. dollars in accordance with the terms of the deposit agreement. You may have to pay fees and expenses incurred in converting foreign currency, such as fees and expenses incurred in complying with currency exchange controls and other governmental requirements.

If the conversion of foreign currency is not practical or lawful, or if any required approvals are denied or not obtainable at a reasonable cost or within a reasonable period, the depositary bank may take the following actions in its discretion:

Convert the foreign currency to the extent practical and lawful and distribute the U.S. dollars to the holders for whom the conversion and distribution is lawful and practical.
Distribute the foreign currency to holders for whom the distribution is lawful and practical.
Hold the foreign currency (without liability for interest) for the applicable holders.

Other available information

We will transmit to the depositary English translations of notices, reports and communications which are made generally available by us to holders of our common stock, copies of our annual reports, as well as other notices provided to holders of our common stock. The depositary has agreed to make available copies of such notices, reports and communications at our expense to each holder of ADSs.

88


PART II

Item 13. Defaults, Dividend Arrearages and Delinquencies

     None

Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds

     Not applicable

Item 15. [Reserved]Controls and Procedures

(a)As of the end of the period covered by this annual report, we performed an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures. Disclosure controls and procedures are designed to ensure that the material financial and non-financial information required to be disclosed in Form 20-F and filed with the Securities and Exchange Commission is recorded, processed, summarized and reported in a timely manner. The evaluation was performed under the supervision of Kaneo Ito, Pioneer’s Chief Executive Officer, and Akira Niijima, Pioneer’s Chief Financial Officer. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable, rather than absolute, assurance of achieving the desired control objectives. Managerial judgment was necessary to evaluate the cost-benefit relationship of possible controls and procedures. Based on the foregoing, Pioneer’s Chief Executive Officer and Chief Financial Officer have concluded that Pioneer’s disclosure controls and procedures were effective.
(b)During the annual period covered by the annual report, there have been no significant changes in Pioneer’s internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation of such internal controls. Therefore, no corrective actions were taken.

Item 16. [Reserved]

89Item 16A. Audit Committee Financial Expert

Pioneer maintains a corporate auditor system, in accordance with the Japanese Commercial Code (the “Code”) and the Law concerning Exceptional Measures to the Commercial Code with respect to Auditing, etc. of Joint Stock Corporations (the “Special Exception Law”). Rule 10A-3(c)(3) under the Exchange Act prescribes a general exemption from the audit committee member independence requirements for a foreign private issuer maintaining, among others, a board of corporate auditors established and selected pursuant to home country laws. Pioneer’s Board of Corporate Auditors is comprised of five Corporate Auditors, three of whom are outside Corporate Auditors. Each Corporate Auditor has been appointed at its shareholders’ meetings and has certain statutory powers independently, including auditing the business affairs and accounts of Pioneer.

88


At the present time, Pioneer’s Board of Corporate Auditors has determined that it does not have an audit committee financial expert serving on the Board of Corporate Auditors. The qualifications for, and powers of, the Corporate Auditor delineated in the Code and the Special Exception Law are different from those anticipated for any audit committee financial expert. Corporate Auditors have the authority to be given reports from a certified public accountant or an accounting firm concerning audits, including technical accounting matters. At the same time, each Corporate Auditor has the authority to consult internal and external experts on accounting matters. Pioneer’s Board of Corporate Auditors has confirmed that each Corporate Auditor should fulfill the requirements under Japanese laws and regulations and otherwise follow Japanese corporate governance practices. In addition, its Board of Corporate Auditors has a former General Manager of Accounting Division of Pioneer, Mr. Makoto Koshiba, as a full time Corporate Auditor, and a certified public accountant of Japan, Mr. Isao Moriya, as an outside Corporate Auditor. Accordingly, it is not necessarily in Pioneer’s best interest to nominate as Corporate Auditor a person who meets the definition of audit committee financial experts. Although Pioneer does not have an audit committee financial expert on its Board of Corporate Auditors, Pioneer believes that Pioneer’s current corporate governance system, taken as a whole, including the Corporate Auditors’ ability to consult internal and external experts, is fully equivalent to a system having an audit committee financial expert on its Board of Corporate Auditors.

PART IIIItem 16B. Code of Ethics

We have adopted the Pioneer Group Code of Conduct (the “Code of Conduct”) for all officers and employees of the Pioneer Group. The Code of Conduct is publicly available on our website at www.pioneer.co.jp. If we make any substantive amendments to the Code of Conduct or grant any waivers, including any implicit waiver, from a provision of this code to our chief executive officer, principal financial officer or corporate controller, we will disclose the nature of such amendment or waiver on our website.

Item 16C. Principal Accountant Fees and Services

Aggregate fees billed to the Company for the fiscal years ended March 31, 2003 and 2004 by our principal accounting firm, Deloitte Touche Tohmatsu (a Japanese member firm of Deloitte Touche Tohmatsu, Swiss Verein), the other member firms of Deloitte Touche Tohmatsu (Swiss Verein), and their respective affiliates (collectively, “Deloitte Touche Tohmatsu”), were as follows.

         
  Year ended March 31
  2003
 2004
  (In millions of yen)
Audit Fees (1) ¥329  ¥339 
Audit-Related Fees (2)  13   42 
Tax Fees (3)  39   43 
All Other Fees (4)  46   7 
   
 
   
 
 
Total ¥427  ¥431 
   
 
   
 
 

(1)Includes fees for the audit of our annual financial statements included in our Form 20-F and for services that normally would be provided in connection with statutory and regulatory filings or engagements. This category also may include services that generally only the independent accountant reasonably can provide, such as comfort letters, statutory audits, attest services, consents and assistance with and review of documents filed with the SEC.

89


(2)Includes fees for assurance and related services that traditionally are performed by the independent accountant which include employee benefit plan audits, due diligence related to mergers and acquisitions, accounting consultations and audits in connection with acquisitions, internal control reviews, attest services that are not required by statute or regulation and consultation concerning financial accounting and reporting standards.
(3)Includes fees for all services performed by professional staff in the independent accountant’s tax division except those services related to the audit, such as review of the tax provision (which would be included in the Audit Fee category). Typically, it would include fees for tax compliance, tax planning, and tax advice. Tax compliance generally involves preparation of original and amended tax returns, claims for refund and tax payment-planning services. Tax planning and tax advice encompass a diverse range of services, including assistance with tax audits and appeals, tax advice related to mergers and acquisitions, employee benefit plans and requests for rulings or technical advice from taxing authorities.
(4)Includes fees for other than the services reported in paragraphs (1) through (3). All other fees for fiscal 2003 include consulting services relating to reorganization of our subsidiaries and the management of software development process.

Policy and procedures of the Board of Corporate Auditors for pre-approval

In accordance with the regulations of the SEC, the Board of Corporate Auditors has adopted the policy and procedures for the pre-approval regarding the engagements of the independent audit firm and its affiliates (the “auditor”). The following is a summary of the policy and procedures.

All audit and permissible non-audit services provided by the auditor to Pioneer and its consolidated subsidiaries must be pre-approved by the Board of Corporate Auditors, prior to the engagement of the auditor. In the case that pre-approvals are requested, the description of the services including types of the service, periods of the service, and estimated fees, must be submitted to the Board of Corporate Auditors. Our pre-approval procedures have two different forms, “Comprehensive pre-approval” and “Individual pre-approval.” Under the “Comprehensive pre-approval” procedure, all audit and permissible non-audit services scheduled for the following fiscal year are pre-approved by resolution of the Board of Corporate Auditors meeting. All audit and permissible non-audit services regarding the specific projects which are not included in the “Comprehensive pre-approval” must be subject to the “Individual pre-approval.” For the purpose of providing such pre-approval in a timely manner, the Board of Corporate Auditors may delegate “Individual pre-approval” authority to full time Corporate Auditors. Full-time Corporate Auditors shall report any “Individual pre-approval” decisions to the Board of Corporate Auditors meeting to be held immediately after such pre-approval.

None of the services provided by the auditor in fiscal 2003 and 2004 were waived from the pre-approval requirement pursuant to paragraph (c)(7)(i)(C) of Rule 2-01 of Regulation S-X.

Item 16D. Exemptions from the Listing Standards for Audit Committees

     Not applicable

Item 16E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers

     Not applicable

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PART III

Item 17. Financial Statements

     See Consolidated Financial Statements and Schedules.Statements. Reference is made to Item 19 for a list of all financial statements filed as part of this annual report.

Item 18. Financial Statements

     We have responded to Item 17 in lieu of responding to this Item.

Item 19. Exhibits

     
Consolidated financial statements Page

Consolidated Financial Statements and Schedules
Index to Consolidated Financial Statements and Schedules  F-1
Report of Independent Auditors’ ReportRegistered Public Accounting Firm  F-2
 
Consolidated Balance Sheets as of March 31, 20002003 and 20012004  F-3
 
Consolidated Statements of Income for the years ended March 31, 1999, 20002002, 2003 and 20012004F-5
 
Consolidated Statements of Shareholders’ Equity for the years ended March 31, 1999, 20002002, 2003 and 20012004F-6
 
Consolidated Statements of Cash Flows for the years ended March 31, 1999, 20002002, 2003 and 20012004F-7
 
Notes to Consolidated Financial Statements  F-8
 

Supplemental information to conform with Regulation S-X:
Independent Auditors’ ReportF-27
Supplemental Notes to Consolidated Financial Statements to Conform with Regulation S-XF-28
Schedules for the Years Ended March 31, 1999, 2000 and 2001
II—Valuation and Qualifying Accounts
F-29
(Note—Schedules other than those listed above are omitted because of the absence of the conditions under which they are required or because the information called for is included in the consolidated financial statements or notes thereto)

Exhibits

Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
     
Exhibits1.01 
1.01 The Articles of Incorporation, as amended and currently in effect (English translation)
4.a (1)12.01 MPEG-2 Patent Portfolio License dated July 29, 1999, byCertification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
12.02Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
13.(a)Certification of Chief Executive Officer and between MPEG LA, L.L.C. and Pioneer Corporation

9091


SIGNATURES

SIGNATURES

The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this annual report on its behalf.

PIONEER CORPORATION
(Registrant)
Date: August 6, 2004By/s/ Akira Niijima

Akira Niijima
Chief Financial Officer

92


INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

    
  Page
PIONEER CORPORATIONConsolidated financial statements
(Registrant)

 
Date: September 20, 2001By       /s/ Katsuhiro Abe

Katsuhiro Abe
Chief Financial Officer

91


INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES

   
Page
  
Consolidated Financial Statements and SchedulesF-2 
Independent Auditors’ ReportF-2    
 F-3 
 F-5 
 F-6 
 F-7 
F-8    
Supplemental information to conform with Regulation S-X:  
Independent Auditors’ ReportF-8 F-27  
Supplemental Notes to Consolidated Financial Statements to Conform with Regulation S-XF-28  
Schedules for the Years Ended March 31, 1999, 2000 and 2001
     II—Valuation and Qualifying Accounts
F-29  
(Note—Schedules other than those listed above are omitted because of the absence of the conditions under which they are required or because the information called for is included in the consolidated financial statements or notes thereto)

F-1


Report of Independent Auditors’ ReportRegistered Public Accounting Firm

To the Board of Directors and Shareholders of Pioneer Corporation:

We have audited the accompanying consolidated balance sheets of Pioneer Corporation and subsidiaries as of March 31, 20002003 and 2001,2004, and the related consolidated statements of income, shareholders’ equity, and cash flows for each of the three years in the period ended March 31, 20012004 (all expressed in Japanese yen). These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with auditingthe standards generally accepted inof the United States of America.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 includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

The accompanying consolidated financial statements do not present segment information concerning the Company’s operations which, in our opinion, is required for a complete presentation of the Company’s consolidated financial statements in accordance with accounting principles generally accepted in the United States of America.

In our opinion, except for the omission of segment information disclosures, such consolidated financial statements present fairly, in all material respects, the financial position of Pioneer Corporation and subsidiaries as of March 31, 20002003 and 2001,2004, and the results of their operations and their cash flows for each of the three years in the period ended March 31, 20012004, in conformity with accounting principles generally accepted in the United States of America.

Our audits also comprehended the translation of Japanese yen amounts into U.S. dollar amounts and, in our opinion, such translation has been made in conformity with the basis stated in Note 1. Such U.S. dollar amounts are presented solely for the convenience of readers outside Japan.

/s/ Deloitte Touche Tohmatsu



Deloitte Touche Tohmatsu
Tokyo, Japan

May 2, 20013, 2004, except for Note 23.a and b, as to which the dates are June 29, 2004 and July 1, 2004, respectively.

F-2


Consolidated Balance Sheets

Pioneer Corporation and Subsidiaries
March 31
               
            Thousands of
            U.S. Dollars
    Millions of Yen (Note 1)
    
 
Assets 2000 2001 2001

Current assets:
            
 Cash and cash equivalents—            
  Cash, including time deposits of ¥83,197 million—
$670,944 thousand (¥100,410 million in 2000)
 ¥151,805  ¥121,127  $976,831 
 Marketable securities (Note 3)  1,606   1,598   12,887 
 Trade receivables—            
  Notes  7,174   8,079   65,153 
  Accounts  99,890   116,594   940,274 
  Allowance for doubtful notes and accounts  (5,077)  (5,895)  (47,540)
 Inventories (Note 4)  91,517   94,429   761,524 
 Deferred income taxes (Note 8)  18,297   21,897   176,589 
 Prepaid expenses and other current assets  26,735   30,783   248,250 

  Total current assets  391,947   388,612   3,133,968 

Investments and long-term receivables:
            
 Marketable equity securities (Note 3)  31,590   23,639   190,637 
 Investments in and advances to affiliated companies (Note 5)  1,915   6,395   51,573 
 Sundry investments (Notes 3 and 15)  5,464   4,887   39,411 
 Long-term receivables, less allowance for doubtful accounts
of ¥3,926 million—$31,661 thousand (¥3,916 million in 2000)
  1,699   76   613 

   40,668   34,997   282,234 

Property, plant and equipment(Note 6):
            
 Land  25,170   25,876   208,677 
 Buildings  101,478   105,256   848,839 
 Machinery and equipment  215,845   224,278   1,808,694 
 Construction in progress  2,581   3,490   28,145 

  Total  345,074   358,900   2,894,355 
 Accumulated depreciation  (211,325)  (219,143)  (1,767,283)

   133,749   139,757   1,127,072 

Patents and other assets:
            
 Patents, net of accumulated amortization of ¥23,048 million—
$185,871 thousand (¥18,964 million in 2000)
  3,763   3,484   28,097 
 Other assets (Note 8)  31,010   38,306   308,919 

   34,773   41,790   337,016 

  Total ¥601,137  ¥605,156  $4,880,290 

             
          Thousands of 
          U.S. Dollars 
  Millions of Yen
  (Note 1)
 
Assets 2003  2004  2004 

 
Current assets:
            
Cash and cash equivalents—            
Cash, including time deposits of ¥88,425 million— $834,198 thousand (¥44,413 million in 2003) ¥142,480  ¥192,419  $1,815,274 
Trade receivables—            
Notes  5,252   2,988   28,189 
Accounts  113,135   112,411   1,060,481 
Allowance for doubtful notes and accounts (Note 19)  (4,519)  (3,344)  (31,547)
Inventories (Note 5)  93,620   107,806   1,017,038 
Deferred income taxes (Note 10)  29,958   28,886   272,509 
Prepaid expenses and other current assets  36,056   38,622   364,358 

 
Total current assets  415,982   479,788   4,526,302 

 
Investments and long-term receivables:
            
Available-for-sale securities (Note 4)  14,831   24,516   231,283 
Investments in and advances to affiliated companies (Note 6)  7,841   5,573   52,575 
Sundry investments (Note 17)  2,907   3,383   31,915 
Long-term receivables, less allowance for doubtful accounts of ¥190 million—$1,792 thousand (¥112 million in 2003) (Note 19)  292   253   2,387 

 
Total investments and long-term receivables  25,871   33,725   318,160 

 
Property, plant and equipment(Note 8):
            
Land  25,548   25,050   236,321 
Buildings  107,309   113,863   1,074,179 
Machinery and equipment  237,086   239,081   2,255,481 
Construction in progress  6,132   7,568   71,396 

 
Total  376,075   385,562   3,637,377 
Accumulated depreciation  (230,376)  (229,361)  (2,163,783)

 
Net property, plant and equipment  145,699   156,201   1,473,594 

 
Other assets:
            
Intangible assets (Note 7)  15,619   18,966   178,925 
Deferred income taxes (Note 10)  35,734   24,276   229,019 
Other  8,124   9,586   90,434 

 
Total other assets  59,477   52,828   498,378 

 
Total assets ¥647,029  ¥722,542  $6,816,434 

 
See notes to consolidated financial statements.

F-3


                
             Thousands of
             U.S. Dollars
     Millions of Yen (Note 1)
     
 
Liabilities and Shareholders' Equity 2000 2001 2001

Current liabilities:
            
 Short-term borrowings (Note 6)  ¥  41,318  ¥37,571  $302,992 
 Current portion of long-term debt (Note 6)  37,235   7,996   64,484 
 Accounts payable—trade  43,043   45,877   369,975 
 Accrued liabilities—            
  Taxes on income  5,513   6,008   48,452 
  Payroll  13,701   14,799   119,347 
  Other  44,519   48,196   388,677 
 Dividends payable  898   1,349   10,879 
 Other current liabilities  16,508   16,029   129,266 

   Total current liabilities  202,735   177,825   1,434,072 

Long-term liabilities:
            
 Long-term debt (Note 6)  47,060   38,304   308,903 
 Accrued pension and severance cost (Note 7)  16,743   30,472   245,742 
 Deferred income taxes (Note 8)  1,718   721   5,814 
 Other long-term liabilities  3,045   2,276   18,355 

   68,566   71,773   578,814 

Commitments and contingent liabilities(Note 17)
            
Minority interests
  17,376   18,563   149,702 

Shareholders’ equity(Note 9):
            
 Common stock, ¥50 par value—            
  Authorized— 400,000,000 shares            
  Issued—179,587,798 shares—2000 and 179,894,370 shares—2001  48,452   48,843   393,895 
 Additional paid-in capital  80,705   81,458   656,919 
 Retained earnings  219,745   235,345   1,897,944 
 Accumulated other comprehensive income (Note 11)  (36,442)  (28,651)  (231,056)

   312,460   336,995   2,717,702 

   Total  ¥601,137  ¥605,156  $4,880,290 

             
          Thousands of 
          U.S. Dollars 
  Millions of Yen
  (Note 1)
 
Liabilities and Shareholders’ Equity 2003  2004  2004 

 
Current liabilities:
            
Short-term borrowings (Note 8) ¥29,893  ¥23,327  $220,066 
Current portion of long-term debt (Note 8)  974   4,510   42,547 
Trade payables  67,173   79,439   749,425 
Accrued liabilities—            
Taxes on income  8,653   9,341   88,123 
Payroll  17,616   17,604   166,075 
Royalty  14,111   18,688   176,302 
Other  36,784   35,626   336,094 
Warranty reserve (Note 19)  6,493   5,419   51,123 
Dividends payable  1,754   2,193   20,689 
Other current liabilities  23,079   27,151   256,141 

 
Total current liabilities  206,530   223,298   2,106,585 

 
Long-term liabilities:
            
Long-term debt (Note 8)  32,196   89,691   846,142 
Accrued pension and severance cost (Note 9)  70,800   57,143   539,085 
Deferred income taxes (Note 10)  496   1,327   12,519 
Other long-term liabilities  335   301   2,839 

 
Total long-term liabilities  103,827   148,462   1,400,585 

 
Commitments and contingent liabilities(Note 20)
            
Minority interests
  18,279   17,844   168,340 

 
Shareholders’ equity(Note 11):
            
Common stock, No par value            
Authorized—400,000,000 shares            
Issued—180,063,836 shares—2003 and 2004  49,049   49,049   462,726 
Capital surplus  82,159   82,464   777,962 
Retained earnings  253,266   273,718   2,582,245 
Accumulated other comprehensive loss (Note 13)  (55,629)  (61,829)  (583,292)
Treasury stock, at cost 4,629,028 shares—2003 and 4,632,962 shares—2004  (10,452)  (10,464)  (98,717)

 
Total shareholders’ equity  318,393   332,938   3,140,924 

 
Total liabilities and shareholders’ equity ¥647,029  ¥722,542  $6,816,434 

 
See notes to consolidated financial statements.

F-4


Consolidated Statements of Income

Pioneer Corporation and Subsidiaries
Year ended March 31
                  
               Thousands of
               U.S. Dollars
   Millions of Yen (Note 1)
   
 
   1999 2000 2001 2001

Operating revenue:
                
 Net sales ¥568,857  ¥596,411  ¥626,539  $5,052,734 
 Royalty revenue  20,208   19,460   20,530   165,564 

   589,065   615,871   647,069   5,218,298 

Operating costs and expenses:
                
 Cost of sales  398,947   428,575   447,389   3,607,975 
 Selling, general and administrative  170,002   163,703   165,861   1,337,589 

   568,949   592,278   613,250   4,945,564 

Operating income
  20,116   23,593   33,819   272,734 
Other income (expenses):
                
 Interest income  3,107   3,072   4,920   39,677 
 Gain on sale and issuance of subsidiary stock (Note 18)     12,491       
 Foreign exchange gain (loss)  330   (5,132)  (1,192)  (9,613)
 Interest expense  (4,622)  (4,679)  (4,301)  (34,685)
 Other—net (Note 12)  (6,398)  (1,537)  947   7,637 

   (7,583)  4,215   374   3,016 

Income before income taxes
  12,533   27,808   34,193   275,750 
Income taxes(Note 8):
                
 Current  9,111   12,097   15,011   121,057 
 Deferred  2,343   3,119   (691)  (5,573)

   11,454   15,216   14,320   115,484 

Income before minority interest and equity in earnings (losses)
  1,079   12,592   19,873   160,266 
Minority interest in income of subsidiaries
  (386)  (18)  (1,445)  (11,653)
Equity in earnings (losses) of affiliated companies(Note 5)
  466   501   (130)  (1,048)

Net income
 ¥1,159  ¥13,075  ¥18,298  $147,565 

   Yen U.S. Dollars
    
 
    1999 2000 2001 2001

Per share of common stock and per American Depositary Share:
                
 Net income (Note 16)                
    Basic  ¥  6.45   ¥72.81   ¥101.76   $0.82 
    Diluted  6.45   72.80   101.70   0.82 

 Cash dividends ¥10.00   ¥10.00   ¥  15.00   $0.12 

                 
              Thousands of 
              U.S. Dollars 
  Millions of Yen
  (Note 1)
 
  2002  2003  2004  2004 

 
Operating revenue:
                
Net sales ¥612,189  ¥664,675  ¥689,064  $6,500,604 
Royalty revenue  17,588   12,584   11,821   111,519 

 
Total operating revenue  629,777   677,259   700,885   6,612,123 

 
Operating costs and expenses:
                
Cost of sales  442,924   473,239   487,297   4,597,142 
Selling, general and administrative  166,862   168,736   166,415   1,569,953 
Loss on sale and disposal of fixed assets  3,331   4,519   3,454   32,585 

 
Total operating costs and expenses  613,117   646,494   657,166   6,199,680 

 
Operating income from continuing operations
  16,660   30,765   43,719   412,443 
Other income (expenses):
                
Interest income  2,985   2,153   1,420   13,396 
Gain on sale of subsidiaries’ stock     768       
Foreign exchange gain (loss)  295   (2,045)  (1,244)  (11,736)
Interest expense  (3,314)  (2,814)  (2,154)  (20,321)
Other—net (Note 14)  (2,154)  (748)  107   1,010 

 
Total other income (expenses)  (2,188)  (2,686)  (1,871)  (17,651)

 
Income from continuing operations before income taxes
  14,472   28,079   41,848   394,792 
Income taxes(Note 10):
                
Current  10,795   14,477   17,829   168,198 
Deferred  (4,379)  (5,445)  758   7,151 

 
Total income taxes  6,416   9,032   18,587   175,349 

 
Income from continuing operations before minority interest and equity in losses
  8,056   19,047   23,261   219,443 
Minority interest in losses (earnings) of subsidiaries
  (504)  21   (654)  (6,170)
Equity in losses of affiliated companies(Note 6)
  (70)  (3,126)  (2,244)  (21,170)

 
Income from continuing operations  7,482   15,942   20,363   192,103 
Income from discontinued operations, net of tax (Note 3)  565   136   4,475   42,217 

 
Net income
 ¥8,047  ¥16,078  ¥24,838  $234,320 

 
                 
  Yen
  U.S. Dollars
 
 2002 2003 2004 2004 

 
Per share of common stock and per American Depositary Share(Notes 7 and 18):
                
Basic:                
Continuing operations ¥41.56  ¥89.48  ¥116.07  $1.10 
Discontinued operations  3.14   0.76   25.51   0.24 

 
Net income ¥44.70  ¥90.24  ¥141.58  $1.34 

 
Diluted:                
Continuing operations ¥41.55  ¥89.48  ¥115.18  $1.09 
Discontinued operations  3.14   0.76   25.34   0.24 

 
Net income ¥44.69  ¥90.24  ¥140.52  $1.33 

 
See notes to consolidated financial statements.

F-5


Consolidated Statements of Shareholders’ Equity

Pioneer Corporation and Subsidiaries
Year ended March 31
                          
       Millions of Yen
       
                   Accumulated    
   Outstanding     Additional     Other Total
   Number of Common Paid-in Retained Comprehensive Shareholders'
   Shares Stock Capital Earnings Income (Loss) Equity

Balance at March 31, 1998  179,572,708   ¥48,431   ¥80,555   ¥209,102   ¥  (7,990)  ¥330,098 
Comprehensive income                        
 Net income              1,159       1,159 
 Other comprehensive income (loss)                  (16,274)  (16,274)
                       
 
Comprehensive income (loss)                      (15,115)
Value ascribed to warrants (Note 10)          56           56 
Cash dividends (¥10.00 per share)              (1,795)      (1,795)

Balance at March 31, 1999  179,572,708   48,431   80,611   208,466   (24,264)  313,244 
Comprehensive income                        
 Net income              13,075       13,075 
 Other comprehensive income (loss)                  (12,178)  (12,178)
                       
 
Comprehensive income                      897 
Exercise of warrants  15,090   21   21           42 
Value ascribed to warrants (Note 10)          73           73 
Cash dividends (¥10.00 per share)              (1,796)      (1,796)

Balance at March 31, 2000  179,587,798   48,452   80,705   219,745   (36,442)  312,460 
Comprehensive income                        
 Net income              18,298       18,298 
 Other comprehensive income                  7,791   7,791 
                       
 
Comprehensive income                      26,089 
Exercise of warrants  306,572   391   391           782 
Value ascribed to warrants
and stock option (Note 10)
          362           362 
Cash dividends (¥15.00 per share)              (2,698)      (2,698)

Balance at March 31, 2001  179,894,370   ¥48,843   ¥81,458   ¥235,345   ¥(28,651)  ¥336,995 

       Thousands of U.S. Dollars (Note 1)
       
                   Accumulated    
           Additional     Other Total
       Common Paid-in Retained Comprehensive Shareholders'
       Stock Capital Earnings Income (Loss) Equity

Balance at March 31, 2000     $390,742  $650,847  $1,772,137  $(293,887) $2,519,839 
Comprehensive income                        
 Net income              147,565       147,565 
 Other comprehensive income                  62,831   62,831 
                       
 
Comprehensive income                      210,396 
Exercise of warrants      3,153   3,153           6,306 
Value ascribed to warrants and stock option (Note 10)          2,919           2,919 
Cash dividends ($0.12 per share)              (21,758)      (21,758)

Balance at March 31, 2001     $393,895  $656,919  $1,897,944  $(231,056) $2,717,702 

                             
      Millions of Yen
 
  Number of              Accumulated        
  Shares              Other      Total 
  issued  Common  Capital  Retained  Comprehensive  Treasury  Shareholders’ 
  (Thousands)  Stock  Surplus  Earnings  Loss  Stock  Equity 

 
Balance at March 31, 2001  179,894  ¥48,843  ¥81,458  ¥235,345   ¥(28,651)      ¥336,995 
Comprehensive income:                            
Net income              8,047           8,047 
Other comprehensive income                  3,915       3,915 
                           
 
 
Comprehensive income                          11,962 
Exercise of warrants  170   206   206               412 
Value ascribed to warrants and stock options (Note 12)          346               346 
Purchase and sale of treasury stock, net                     ¥(12)  (12)
Cash dividends (¥15.00 per share)              (2,700)          (2,700)

 
Balance at March 31, 2002  180,064   49,049   82,010   240,692   (24,736)  (12)  347,003 
Comprehensive income (loss):                            
Net income              16,078           16,078 
Other comprehensive loss                  (30,893)      (30,893)
                           
 
 
Comprehensive loss                          (14,815)
Value ascribed to stock options (Note 12)          149               149 
Purchase of treasury stock (Note 11)                      (11,566)  (11,566)
Sales of treasury stock              (412)      1,126   714 
Cash dividends (¥17.50 per share)              (3,092)          (3,092)

 
Balance at March 31, 2003  180,064   49,049   82,159   253,266   (55,629)  (10,452)  318,393 
Comprehensive income (loss):                            
Net income              24,838           24,838 
Other comprehensive loss                  (6,200)      (6,200)
                           
 
 
Comprehensive income                          18,638 
Value ascribed to stock options (Note 12)          305               305 
Purchase of treasury stock (Note 11)                      (14)  (14)
Sales of treasury stock                      2   2 
Cash dividends (¥25.00 per share)              (4,386)          (4,386)

 
Balance at March 31, 2004  180,064  ¥49,049  ¥82,464  ¥273,718   ¥(61,829) ¥(10,464)  ¥332,938 

 
                         
  Thousands of U.S. Dollars (Note 1)
             Accumulated       
             Other     Total 
 Common Capital Retained Comprehensive Treasury Shareholders’ 
 Stock Surplus Earnings Loss Stock Equity 

 
Balance at March 31, 2003 $462,726  $775,085  $2,389,302  $(524,802) $(98,604) $3,003,707 
Comprehensive income (loss):                        
Net income          234,320           234,320 
Other comprehensive loss              (58,490)      (58,490)
                       
 
Comprehensive income                      175,830 
Value ascribed to stock options (Note 12)      2,877               2,877 
Purchase of treasury stock (Note 11)                  (132)  (132)
Sales of treasury stock                  19   19 
Cash dividends ($0.24 per share)          (41,377)          (41,377)

 
Balance at March 31, 2004 $462,726  $777,962  $2,582,245  $(583,292) $(98,717) $3,140,924 

 
See notes to consolidated financial statements.

F-6


Consolidated Statements of Cash Flows

Pioneer Corporation and Subsidiaries
Year ended March 31
                    
                 Thousands of
                 U.S. Dollars
     Millions of Yen (Note 1)
     
 
     1999 2000 2001 2001

Operating activities:
                
 Net income ¥1,159  ¥13,075  ¥18,298  $147,565 
 Adjustments to reconcile net income to net cash provided
by operating activities:
                
  Depreciation and amortization  32,117   32,852   32,405   261,331 
  Minority interest in income of subsidiaries  386   18   1,445   11,653 
  Equity in (earnings) losses of affiliated companies, less dividends  (159)  (250)  136   1,097 
  Deferred income taxes  2,343   3,119   (691)  (5,573)
  Provision for pension and severance cost, less payments  3,228   1,763   (1,993)  (16,073)
  Loss on sale of fixed assets  2,683   2,641   914   7,371 
  (Gain) loss on sale and write-down of investments and securities  876   (4,151)  (254)  (2,048)
  Impairment losses of fixed assets     3,972   1,163   9,379 
  Gain on sale and issuance of subsidiary stock     (12,491)      
  Increase in notes and accounts receivable  (4,443)  (12,500)  (6,729)  (54,266)
  Decrease in inventories  1,159   6,416   5,786   46,661 
  (Increase) decrease in prepaid expenses and other current assets  8,640   (691)  (2,430)  (19,597)
  Increase (decrease) in accounts payable—trade  (8,903)  5,536   177   1,428 
  Increase (decrease) in accrued taxes on income  (2,149)  185   (1,204)  (9,710)
  Increase in other accrued liabilities  999   3,820   1,184   9,548 
  Other  (32)  2,076   3,034   24,468 

   Net cash provided by operating activities  37,904   45,390   51,241   413,234 

Investing activities:
                
 Payment for purchase of fixed assets  (33,070)  (25,458)  (42,183)  (340,185)
 Payment for investment securities  (716)  (476)  (5,798)  (46,758)
 Payment for available-for-sale securities  (3,065)  (1,046)  (1,233)  (9,943)
 Proceeds from sale of fixed assets and investment securities  2,569   5,675   5,631   45,411 
 Proceeds from sale of available-for-sale securities  1,423   6,140   1,789   14,427 
 Proceeds from sale and issuance of subsidiary stock     28,780       
 Decrease in loans  1,446   1,835   410   3,306 
 Other  (6,744)  (3,466)  (197)  (1,589)

   Net cash provided by (used in) investing activities  (38,157)  11,984   (41,581)  (335,331)

Financing activities:
                
 Proceeds from long-term debt  32,650   2,000       
 Payment of long-term debt  (9,898)  (6,292)  (37,760)  (304,516)
 Increase (decrease) in short-term borrowings  (7,548)  1,158   (7,078)  (57,081)
 Dividends paid  (1,795)  (1,796)  (2,247)  (18,121)
 Other  (297)  791   518   4,178 

   Net cash provided by (used in) financing activities  13,112   (4,139)  (46,567)  (375,540)

Effect of exchange rate changes on cash and cash equivalents  (1,706)  (3,493)  6,229   50,234 

Net increase (decrease) in cash and cash equivalents
  11,153   49,742   (30,678)  (247,403)
Cash and cash equivalents, beginning of year  90,910   102,063   151,805   1,224,234 

Cash and cash equivalents, end of year
 ¥102,063  ¥151,805  ¥121,127  $976,831 

                 
              Thousands of 
              U.S. Dollars 
  Millions of Yen
  (Note 1)
 
  2002  2003  2004  2004 

 
Operating activities:
                
Net income ¥8,047  ¥16,078  ¥24,838  $234,320 
Adjustments to reconcile net income to net cash provided by operating activities:                
Income from discontinued operations, net of tax  (565)  (136)  (4,475)  (42,217)
Depreciation and amortization  36,666   36,238   40,911   385,953 
Minority interest in (losses) earnings of subsidiaries  504   (21)  654   6,170 
Equity in losses of affiliated companies, less dividends  79   3,184   2,248   21,208 
Deferred income taxes  (4,379)  (5,445)  758   7,151 
Provision for pension and severance cost, less payments  378   3,812   3,579   33,764 
Loss on sale and disposal of fixed assets  3,331   4,519   3,454   32,585 
Write-down of available-for-sale securities and sundry investments  2,341   1,369   245   2,311 
(Gains) losses on sale of available-for-sale securities and sundry investments  (54)  20   (37)  (349)
Gain on sale of subsidiaries’ stock     (768)      
Stock-based compensation expenses  346   149   305   2,877 
Decrease (increase) in trade notes and accounts receivable  (2,134)  8,481   (10,186)  (96,094)
Decrease (increase) in inventories  3,034   838   (20,707)  (195,349)
Increase in prepaid expenses and other current assets  (4,097)  (1,122)  (12,413)  (117,104)
Increase in trade payables  9,879   13,221   18,989   179,142 
Increase (decrease) in accrued taxes on income  (1,632)  5,450   3,782   35,679 
Increase in other accrued liabilities  3,275   8,172   7,654   72,208 
Other  2,339   (2,530)  779   7,349 

 
Net cash provided by operating activities  57,358   91,509   60,378   569,604 

 
Investing activities:
                
Payment for purchase of fixed assets  (46,909)  (40,493)  (57,978)  (546,962)
Payment for investment securities  (4,566)  (1,543)  (595)  (5,613)
Payment for available-for-sale securities  (2,031)  (10)  (53)  (500)
Payment for other assets  (1,013)  (568)  (953)  (8,990)
Proceeds from sale of fixed assets  1,564   2,982   1,458   13,754 
Proceeds from sale of discontinued operations        4,897   46,198 
Proceeds from sale of investment securities  638   103   53   500 
Proceeds from sale of available-for-sale securities  177   3,493   156   1,472 
Decrease in loans receivable  731   169   5   47 
Other  13   639   256   2,415 

 
Net cash used in investing activities  (51,396)  (35,228)  (52,754)  (497,679)

 
Financing activities:
                
Proceeds from issuance of convertible bonds [net of issuance cost ¥1,586 million ($14,962 thousand)]        60,514   570,887 
Payment of long-term debt  (7,560)  (4,914)  (934)  (8,811)
Increase (decrease) in short-term borrowings  5,866   (16,214)  (3,509)  (33,104)
Proceeds from issuance of common stock  412          
Purchase of treasury stock (Note 11)  (159)  (11,566)  (14)  (132)
Proceeds from sale of treasury stock  147   714   2   19 
Dividends paid  (2,699)  (2,688)  (3,947)  (37,236)
Dividends paid to minority interests  (214)  (12)  (285)  (2,689)

 
Net cash provided by (used in) financing activities  (4,207)  (34,680)  51,827   488,934 

 
Effect of exchange rate changes on cash and cash equivalents  4,231   (6,234)  (9,512)  (89,736)

 
Net increase in cash and cash equivalents
  5,986   15,367   49,939   471,123 
Cash and cash equivalents, beginning of year  121,127   127,113   142,480   1,344,151 

 
Cash and cash equivalents, end of year
 ¥127,113  ¥142,480  ¥192,419  $1,815,274 

 
See notes to consolidated financial statements.

F-7


Notes to Consolidated Financial Statements

Pioneer Corporation and Subsidiaries


1. Basis of presentation and significant accounting policies:

1) Basis of Presentation


Basis of Financial Statements—
The accompanying consolidated financial statements are stated in Japanese yen, the currency of the country in which Pioneer Corporation (Pioneer Kabushiki Kaisha) (the “parent company”) is incorporated. The translation of Japanese yen amounts into U.S. dollar amounts for the year ended March 31, 20012004 is included solely for the convenience of readers outside Japan and has been made at the rate of ¥124¥106 to U.S.$1.00, the approximate rate of exchange prevailing at the Tokyo Foreign Exchange Market at March 31, 2001.2004. Such translation should not be construed as a representation that Japanese yen amounts could be converted into U.S. dollars at the above or any other rate.

     The accompanying consolidated financial statements have been prepared on the basis of accounting principles generally accepted in the United States of America (“U.S. GAAP”) except for the omission of segment information concerning the operations of the parent company and its majority-owned subsidiaries (together, the “Company”), as required by Statement of Financial Accounting Standards (“SFAS”) No. 131.

     The accompanying consolidated financial statements reflect the adjustments which management believes are necessary to conform them with U.S. GAAP. Effect has been given in the consolidated financial statements to adjustments which, because of either customary accounting practices in Japan or income tax law requirements, have not been entered in the Company’s general books of account. The major adjustments include those relating to (1) accounting for pension costs, (2) accounting for leases, and (3) accounting for foreign currency translation.

Nature of Operations —Operations—
The Company is engaged in the development, manufacture and sale of electronics products such as audio, video and car electronics, and of AV (audio/video) software on a global scale.products. The Company is one of the leading manufacturers of consumer, commercialconsumer- and industrial AV products, including those employing laser optical disc technologies.
commercial-use electronics such as audio, video and car electronics on a global scale.

     The principal production activities of the Company are carried out in Japan and Southeast Asia.Asia including Japan. The Company’s products are generally sold under its own brand names, principally “Pioneer.” The principal markets for the Company are Japan, the United States of America, European countries and Asia. The Company sells its products to customers in consumer commercial and industrialcommercial markets through its sales offices in Japan, and its sales subsidiaries and independent distributors overseas. On an original-equipment-manufacturer basis, the Company markets certain products, such as car electronics products, to other companies.

Use of Estimates—
The preparation of the 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 the disclosure of contingent assets and liabilities at the dates of these statements and the reported amounts of revenues and expenses during the reporting period.

     Due to the inherent uncertainty involved in making estimates, actual results could differ from those estimates.

2) Summary of Significant Accounting Policies


Consolidation and Investments in Affiliated Companies —Companies—
The consolidated financial statements include the accounts of the parent company and its majority-owned subsidiaries. Investments in 20% to 50% owned companies are accounted for by the equity method of accounting. The excess of the cost of the investment in subsidiaries and 20% to 50% owned companies over the equity in the net assets at the date of acquisition is amortized over a 5-to-10-year period, with the exception of minor amounts which are charged to income in the year of acquisition, unless it is determined that the value of such investment should be written down to fair value. All significant intercompany transactions have been eliminated.

     Gains and losses resulting from the issuance of subsidiaries’ stock are recognized in consolidated earnings.

Foreign Currency Translation—
For all significant foreign operations, the functional currency is the local currency. Generally, all asset and liability accounts of foreign operations are translated into Japanese yen at year-end rates and all revenue and expense accounts are translated at rates prevailing at the time of the transactions. The resulting translation adjustments are accumulated and reported as a component of shareholders’ equity.
accumulated other comprehensive income (loss).

     Foreign currency receivables and payables are translated at year-end exchange rates and resulting exchange gains and losses are recognized in earnings currently.

F-8


Revenue Recognition—
Sales are generally recorded when merchandise is shipped to customers based on purchase orders or when services are rendered to the third parties. Because of the short delivery time, in all cases, the shipment date is equivalent to the delivery date. In certain cases, terms of the contract require the product to pass customer inspection after shipment and the Company records the sale upon satisfactory customer acceptance. Royalty revenue is recognized based on royalty statements from licensees.

F-8


Cash and Cash Equivalents—
Consolidated cashCash and cash equivalents include cash on hand and deposits in bank including time deposits. The Company considers all time deposits with an original maturity of one year or less to be cash equivalents. Generally, suchSuch time deposits can be withdrawn at any time without diminution of the principal amount.

Marketable and OtherAvailable-for-Sale Securities—
Under SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities,” all debt securities and marketable equity securities held by the Company are classified as available-for-sale securities, and are carried at their fair values with unrealized gains and losses reported as a component of shareholders’ equity. Other investments other than marketable securities are stated at cost or less. The cost of securities is determined using the average-cost method.

     The Company reviews the fair value of its available-for-sale securities on a regular basis to determine if the fair value of any individual security has declined below its cost and if such decline is other than temporary. If the decline in value is judged to be other than temporary, the cost basis of the security is written down to fair value and the resulting realized loss is included in the consolidated statements of income. For such marketable debt and equity securities, we assume the decline is other than temporary when market value is less than cost for a period of six to nine months, or sooner depending on severity of decline or other factors.

Sundry Investments—
Sundry investments are stated at cost and are written down if the value of investments is estimated to have declined and such decline is judged to be other than temporary.

Inventories—
Inventories are valued at the lower of cost, which is determined principally by the average-cost method, or market.market, which is net realizable value. Inventories are reviewed periodically and items considered to be slow moving or obsolete are written down to market, net realizable value.

Property, Plant and Equipment and Depreciation—
Property, plant and equipment are stated at cost. Depreciation is computed principally using the declining-balance method for assets located in Japan and under the straight-line method for assets located outside Japan, using rates based on the estimated useful lives of the assets.

     The principal ranges of estimated useful lives are as follows:

Buildings3–6515-65 years
Machinery and equipment2–172-10 years

Patents—Goodwill and Other Intangible Assets—
Under SFAS No. 142, “Goodwill and Other Intangible Assets,” acquired goodwill and other intangible assets that are determined to have an indefinite life are no longer amortized. Instead, the carrying value of these assets are reviewed for impairment at least annually, or more frequently if events or changes in circumstances indicate that the asset might be impaired. Intangible assets that are determined to have a definite life are amortized over their estimated useful lives. At March 31, 2004, the Company had no goodwill. Amortization of intangible assets with definite lives is computed using the straight-line method with no residual value. The cost of patents purchased when the Company acquired the business of a partnership, Discovision Associates, areis amortized based on the straight-line basis over 10–20seven to nineteen years and software is amortized principally over two to five years.

Long-Lived Assets—
On April 1, 2002, the Company adopted SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” which applied to all long-lived assets.

The Company reviews its long-lived assets and certain identifiable intangibles for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset group may not be recoverable. For the purpose of assessment of an impairment loss, the Company groups long-lived assets with other assets and liabilities at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. When the sum of expected future cash flows is less than the carrying amount of the asset group, an impairment loss is recognized.
     During Such impairment loss is measured as the year ended March 31, 2000,amount by which the carrying amount of the asset group exceeds the fair value of the asset group.

     In fiscal 2003, the Company sold its subsidiaries’ stock and recorded an impairment lossgains of ¥1,872 million related to previously purchased intangible assets of its karaoke business reflecting reduced revenue expectations from the business and ¥2,100 million related to a factory facility closed during the year.
     During the year ended March 31, 2001, the Company recorded an additional impairment loss of ¥1,163 million ($9,379 thousand) related to intangible assets of its¥768 million. The subsidiaries’ main operation was karaoke business.

Warranty Reserve—
The Company engages in extensive product quality programs and processes including actively monitoring and evaluating the quality of component suppliers. The Company’s warranty obligation is affected by product failure rates and service costs incurred in correcting product failure. The Company provides for the estimated cost of product warranties at the time revenue is recognized. These estimates are established using historical information.

Long-term Debt—
Premiums and issuance costs of long-term debt are amortized over the term of long-term debt using the interest method.

F-9


Income Taxes—
Income taxes are provided based on the asset and liability method of accounting. Deferred income taxes are recorded to reflect the tax consequences in future years of differences between the tax basis of assets and liabilities and their financial reporting amounts at year-end. These deferred taxes are measured by applying currently enacted tax laws. A valuation allowance is established to reduce deferred tax assets if it is more likely than not that all, or some portion, of such deferred tax assets will not be realized.

Sales Incentives—
Certain costs incurred by the Company in connection with the reseller’s purchase or promotion of the Company’s products are classified as a reduction of revenues in accordance with Emerging Issues Task Force (“EITF”) 01-9, “Accounting for Consideration Given by a Vendor to a Customer.”

Research and Development Costs and Advertising Cost—
Research and development costs and advertising cost are expensed as incurred.

Shipping and Handling Charges—
Shipping and handling costs totaled ¥9,646 million, ¥10,373 million and ¥11,282 million ($106,434 thousand) for the years ended March 31, 2002, 2003 and 2004, respectively, and are included in selling, general and administrative expenses in the consolidated statements of income.

Accounting for Stock-Based Compensation—
The Company accounts for its stock-based compensation agreements using the fair value based method in accordance with SFAS No. 123, “Accounting for Stock-Based Compensation.”

Earnings per Share—
Basic net income per share has been computed by dividing net income available to holders of common stock by the weighted-average number of shares of common stock outstanding during each year. Diluted net income per share reflects the potential dilution and has been computed on the basis that all dilutive warrants and stock optionspotential common stocks were exercised.

F-9


Derivatives—
Derivative financial instruments utilized by the Company are comprised principally of foreignforward exchange forward contracts, currency options and currency swaps. ForeignForward exchange forward contracts and currency options, the majority of which mature within six months, and currency swaps, which mature from 20012004 to 2003,2006, are designated as hedges ofutilized to hedge exposures to foreign exchange risk and interest risk. The Company does not hold or issue derivative financial instruments for trading purposes.
     Gains and losses on hedges of existing assets and liabilities are included in the carrying amounts of those assets and liabilities and are ultimately recognized in other income (expenses). Gains and losses related to qualifying hedges of firm commitments or anticipated transactions are also deferred and are recognized in other income (expenses) or as adjustments of carrying amounts when the hedged transaction occurs. Unrealized gains and losses on forward contracts including foreign currency options intended as hedges for foreign currency risk of anticipated transactions with companies within the consolidated group are recognized currently in other income (expenses).

Reclassifications—
In fiscal 2001, “Minority interest in income of subsidiaries” previously included in Other—net of “Other income (expenses)” is presented separately. Previously reported amounts have been reclassified to conform to this presentation.
New Accounting Standard—
In June 1998, the Financial Accounting Standards Board issued     The Company adopted SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended by SFAS No. 138.138, “Accounting for Certain Derivative Instruments and Certain Hedging Activities—an amendment of FASB Statement No. 133,” and by SFAS No. 133 requires an entity to recognize all derivatives as either assets or liabilities in the statement149, “Amendment of financial position and measure those instruments at fair value. Gains or losses resulting from changes in the values of those derivatives would be accounted for depending on the use of the derivative and whether it qualifies for hedge accounting. The Company will adopt SFAS No. 133 on April 1, 2001.Derivative Instruments and Hedging Activities.” Under SFAS No. 133, all derivative instruments are recognized in the balance sheet at their fair values and changes in fair value are recognized immediately in earnings, unless the derivatives qualify as hedges of future cash flows. For derivatives qualifying as hedges of future cash flows, the effective portion of changes in fair value is recorded in other comprehensive income, then recognized in earnings along with the related effects of the hedged items. Any ineffective portion of hedges is reported in earnings as it occurs.

     Forward exchange contracts, currency swaps and currency options are utilized to hedge certain foreign currency and interest rate exposures. However, none of these derivatives were designated as hedging instruments under SFAS No. 133 at March 31, 2003 and 2004. Unrealized gains and losses on such instruments are recognized currently in earnings.

Reclassifications—
As a result of the sales of subsidiaries for the year ended March 31, 2004, the gain on such sale, as well as the business results of the discontinued operations, are presented as a separate line in consolidated statements of income. Reclassifications have been made to previously reported consolidated statements of income and consolidated statements of cash flows related to discontinued operations to conform to this presentation.

F-10


     Other reclassifications and format changes have been made to prior year amounts to conform to the current year presentation.

New Accounting Standards—
In December 2003, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 132 (revised 2003), “Employers’ Disclosures about Pensions and Other Postretirement Benefits.” The revised SFAS No. 132 retains the disclosure requirements in the original statement and requires additional disclosures about pension plan assets, benefit obligations, cash flows, benefit costs and other relevant information. The new disclosures are effective for financial statements with fiscal years ended after December 15, 2003. However, the revised SFAS No. 132 provides that disclosures of information about foreign plans and estimated future benefit payment shall be effective for fiscal years ending after June 15, 2004. See Note 9 to the consolidated financial statements for these disclosures.

     In November 2003, the EITF reached a consensus on Issue No. 03-1 (“EITF No. 03-1”), “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments,” as it relates to disclosures for SFAS No. 115. In addition to the disclosures already required by SFAS No. 115, EITF No. 03-1 requires both quantitative and qualitative disclosures for marketable equity and debt securities. The new disclosure is effective for fiscal years ended after December 15, 2003. See Note 4 to the consolidated financial statements for this disclosure.

     In March 2004, EITF reached another consensus on EITF No. 03-1 which presents the guidance for the assessment of other-than-temporary impairment. The guideline should be used to determine whether an investment is other-than-temporarily impaired and provides 3 steps for assessment. The guidance is applicable for investments in debt and equity securities that are within the scope of SFAS No. 115, and cost method equity investments. The investor should make an evidenced-based judgment about a market price recovery of investment by considering the severity (extent to which fair value is below cost) and the duration (period of time that a security has been impaired) of impairment in relation to the forecasted market price recovery. An other-than-temporary impairment should be recognized in earnings in an amount equal to the difference between the investor’s adjusted cost basis and its fair value at the balance sheet date of the reporting period for which the assessment is made. The guidance is required to be applied for fiscal years beginning after June 15, 2004. The adoption of this standardthe guidance will not have a material impact on the Company’s consolidated financial position, result of operation or cash flow.

     In January 2003, the EITF reached a consensus on Issue No. 03-2 (“EITF No. 03-2”), “Accounting for the Transfer to the Japanese Government of the Substitutional Portion of Employer Pension Fund Liabilities.”

     EITF No. 03-2 addresses accounting for the transfer to Japanese government of a substitutional portion of a domestic contributory welfare pension plan, which is a defined benefit pension plan established by the Welfare Pension Insurance Law. EITF No. 03-2 requires employers to account for the entire separation process of a substitutional portion from an entire plan (including a corporate portion) upon completion of the transfer to the government of the substitutional portion of the benefit obligation and related plan assets as a culmination of a series of steps in a single settlement transaction. Under this approach, the difference between the fair value of the obligation and the assets required to be transferred to the government should be accounted for and separately disclosed as a subsidy.

     October 29, 2003, the Company received approval from the government for an exemption from the obligation to pay benefits for future employee service related to the substitutional portion.

     In addition, the Company will submit another application to separate the remaining substitutional portion related to past service by its employees. The Company is expected to receive final approval from the government for its second application during the year ending March 31, 2005. Upon receipt of the final approval, the Company will be relieved of all obligations pertaining to the substitutional portion by transferring the benefit obligation and the related government-specified portion of the plan assets, which will be computed by the government. The related gain or loss, which is expected to be recorded during the year ending March 31, 2005 based on completion of the entire process, has not yet been determined because the amount of the benefit obligation and the related plan assets to be transferred to the government may change significantly.

F-11


     In December 2003, the Securities and Exchange Commission (“SEC”) issued Staff Accounting Bulletins (“SAB”) No. 104, “Revenue Recognition,” which supersedes SAB No. 101, “Revenue Recognition in Financial Statements,” and updates portions of the interpretative guidance included in Topic 13 of the codification of SAB in order to make this interpretative guidance consistent with current authoritative accounting guidance. SAB No. 104 rescinds the SEC’s Revenue Recognition in Financial Statements Frequently Asked Questions and Answers (“FAQ”) issued with SAB No. 101 that had been codified in SAB Topic 13. Selected portions of the FAQ have been incorporated into SAB No. 104. The revenue recognition principles of SAB No. 101 remain largely unchanged by the issuance of SAB No. 104. The adoption of SAB No. 104 did not have an effect on the consolidated results of operations or cash flows.financial position of the Company.

     In January 2003, the FASB issued FASB Interpretation No. 46 (“FIN 46”), “Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51, Consolidated Financial Statements,” and subsequently revised in December 2003 with the issuance of FIN 46 (revised 2003). This interpretation requires certain variable interest entities to be consolidated by the primary beneficiary of the entity if the equity investors in the entity do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. The Company is required to apply this Interpretation for periods ending after April 1, 2004. The Company is currently evaluating the impact of the adoption of the revised FIN 46 on its financial position and results of operations. It is reasonably possible that the Company is a primary beneficiary of or holds a significant variable interest in a variable interest entity. See Note 21 for the required disclosures.


2. Supplemental cash flow information:

Selected cash payments and noncash activities for the years ended March 31, 1999, 20002002, 2003 and 20012004 were as follows:

                  
               Thousands of
   Millions of Yen U.S. Dollars
   
 
   1999 2000 2001 2001

Cash payment for interest ¥4,607  ¥4,608  ¥4,889  $39,427 
Cash payment for income taxes  11,266   11,953   16,245   131,008 
Noncash investing activities:                
 Capitalized lease obligations incurred  1,082   259   141   1,137 

                 
              Thousands of 
  Millions of Yen
  U.S. Dollars
 
  2002  2003  2004  2004 

 
Cash payment for interest ¥3,281   ¥2,654  ¥2,458  $23,189 
Cash payment for income taxes  12,580   9,047   14,260   134,528 
Noncash investing activities:                
Sales of discontinued operations:                
Transferred assets        14,932   140,868 
Transferred liabilities        (11,823)  (111,538)
Foreign currency translation adjustments        (37)  (349)
Gain on sales        1,825   17,217 

 
Cash received—net        4,897   46,198 

 

F-10F-12



3. Discontinued operations:

In accordance with SFAS No. 144, the Company presents the results of discontinued operations as a separate line item in the consolidated statements of income under “Income from discontinued operations, net of tax.”

     In order to improve management efficiency by concentrating resources in strategic business, the Company reached an agreement to sell 100% of its shares in two of its wholly-owned subsidiaries, Pioneer LDC, Inc. and Pioneer Entertainment (USA) Inc., to Dentsu Inc., Japan’s largest comprehensive advertising agency. These subsidiaries were engaged in the audio/video software businesses in Tokyo, Japan and in California, the United States of America, respectively. The transfer of 100% of the shares of Pioneer LDC, Inc. and 90% of the shares of Pioneer Entertainment (USA) Inc. owned by the Company were each completed in the year ended March 31, 2004. The remaining shares of Pioneer Entertainment (USA) Inc. are expected to be transferred to Dentsu Inc. by September 30, 2006.

     In March 2004, Q-Tec, Inc., which was a 99.26% owned subsidiary of the Company, became an independent company through a Management Buyout after acquiring all of the shares owned by the Company, with a business alliance Vision Capital Corporation and Memory-Tech Corporation. Q-Tec, Inc. is one of the larger manufacturers in the Japanese postproduction industry which offers high-quality total services including editing of video and audio products such as animation, movies, commercials, and broadcast programs, DVD encoding/authoring and pressing.

     Summarized selected financial information for the years ended March 31, 2002, 2003 and 2004 for the discontinued operations reclassified during the year ended March 31, 2004 is as follows:

                 
              Thousands of 
  Millions of Yen
  U.S. Dollars
 
  2002  2003  2004  2004 

 
Operating revenue ¥32,348  ¥35,009  ¥16,650  $157,075 

 
Operating income ¥1,281  ¥587  ¥382  $3,604 

 
Income before income taxes ¥871  ¥551  ¥340  $3,208 
Gain on sale of discontinued operations        1,825   17,217 
Income taxes (benefit)  306   415   (2,310)  (21,792)

 
Income from discontinued operations ¥565  ¥136  ¥4,475  $42,217 

 

     The assets and liabilities for sold subsidiaries, excluding intercompany balances, at March 31, 2003 are summarized as follows:

Millions of Yen

Current assets¥15,585
Property, plant and equipment, less depreciation407
Other assets558

Total assets¥16,550

Current liabilities¥9,200
Long-term liabilities61

Total liabilities¥9,261

F-13



3.4. Available-for-sale securities:

Cost, gross unrealized holding gains, gross unrealized holding losses and the aggregate fair value of available-for-sale securities at March 31, 20002003 and 20012004 were as follows:

                                   
    Millions of Yen
    
    2000 2001
    
 
        Gross Gross         Gross Gross    
        Unrealized Unrealized         Unrealized Unrealized    
        Holding Holding Aggregate     Holding Holding Aggregate
    Cost Gains Losses Fair Value Cost Gains Losses Fair Value

Marketable equity securities:                                
 Current ¥104  ¥3  ¥1  ¥106  ¥19        ¥19 
 Non-current  8,963   23,298   671   31,590   9,754  ¥14,972  ¥1,087   23,639 
Marketable debt securities:                                
 Current  1,558      58   1,500   1,614      35   1,579 
 Non-current  134      9   125   128      28   100 

  Total ¥10,759  ¥23,301  ¥739  ¥33,321  ¥11,515  ¥14,972  ¥1,150  ¥25,337 

                                           
                            Thousands of U.S. Dollars
                            
                            2001
                            
                                Gross  Gross    
                                Unrealized  Unrealized    
                                Holding  Holding  Aggregate
                            Cost Gains  Losses  Fair Value

Marketable equity securities:            
 Current                         $153        $153 
 Non-current                          78,661  $120,742  $8,766   190,637 
Marketable debt securities:                                        
 Current                          13,016      282   12,734 
 Non-current                          1,033      226   807 

  Total                         $92,863  $120,742  $9,274  $204,331 

                                 
  Millions of Yen
 
  2003
      2004
 
      Gross  Gross          Gross  Gross   
      Unrealized  Unrealized          Unrealized  Unrealized    
      Holding  Holding  Aggregate      Holding  Holding  Aggregate 
  Cost  Gains  Losses  Fair Value  Cost  Gains  Losses  Fair Value 

 
Marketable equity securities:                                
Non-current  ¥6,636   ¥8,187   ¥63   ¥14,760   ¥6,520   ¥17,890   ¥1   ¥24,409 
Marketable debt securities:                                
Non-current  85      14   71   106   1      107 

 
Total  ¥6,721   ¥8,187   ¥77   ¥14,831   ¥6,626   ¥17,891   ¥1   ¥24,516 

 
                 
  Thousands of U.S. Dollars
 
  2004
 
      Gross  Gross    
      Unrealized  Unrealized    
      Holding  Holding  Aggregate 
  Cost  Gains  Losses  Fair Value 

 
Marketable equity securities:                
Non-current  $61,509   $168,774   $9   $230,274 
Marketable debt securities:                
Non-current  1,000   9      1,009 

 
Total  $62,509   $168,783   $9   $231,283 

 

     The following table presents fair value and gross unrealized losses of available-for-sale marketable equity securities, aggregated by length of time that the individual securities have been in a continuous unrealized loss position at March 31, 2004.

                 
  Millions of Yen
  Thousands of U.S. Dollars
 
  Less than 12 Months
  Less than 12 Months
 
  Fair  Unrealized  Fair  Unrealized 
  Value  Losses  Value  Losses 

 
Marketable equity securities  ¥14   ¥1   $132   $9 

 

F-14


     At March 31, 2004, the fair values of marketable debt securities by contractual maturities for securities classified as available-for-sale due in one year through five years were ¥107 million ($1,009 thousand).

     Gross realized gainsgain on available-for-sale securities for the yearsyear ended March 31, 1999, 2000 and 2001 were ¥1,1232004 was ¥43 million ¥3,655 million and ¥1,556 million ($12,548406 thousand), respectively.. Gross realized losses for the years ended March 31, 1999, 20002003 and 20012004 were ¥152 million, ¥292¥16 million and ¥2¥6 million ($1657 thousand), respectively. There was no gross realized gain or loss on available-for-sale securities recorded for the year ended March 31, 2002 and no gross realized gain on available-for-sale securities was recorded for the year ended March 31, 2003.

     The Company holds marketable equity securities of customers and financial institutions for the purpose of maintaining long-term relationships, whose share prices are highly volatile. The Company has one investment in Japan which was in an unrealized loss position due to the share price’s poor performance at March 31, 2004. The duration of the impairment was less than six months. The Company evaluated the near-term prospects of the issuer in relation to the severity and duration of the impairment. Based on that evaluation and the Company’s ability and intent to hold this investment for a reasonable period of time sufficient for a forecasted recovery of fair value, the Company does not consider this investment to be other-than-temporarily impaired at March 31, 2004. For the years ended March 31, 2002, 2003 and 2004, losses on other than temporary impairment of marketable equity securities were ¥1,828 million, ¥1,346 million and ¥27 million ($255 thousand), respectively.

     At March 31, 2001, the fair values of marketable debt securities which were classified as available-for-sale due in one year and due over one year were ¥128 million ($1,033 thousand) and ¥1,551 million ($12,508 thousand), respectively.

F-11


4.5. Inventories:

Inventories at March 31, 20002003 and 20012004 comprise the following:

               
           Thousands of
    Millions of Yen  U.S. Dollars
   
 
    2000   2001   2001

Finished products¥48,657  ¥52,501  $423,395 
Work in process 18,481   16,921   136,460  
Materials and supplies 24,379   25,007   201,669 

 Total ¥91,517  ¥94,429  $761,524  

             
          Thousands of 
  Millions of Yen
  U.S. Dollars
 
  2003  2004  2004 

 
Finished products  ¥50,202  ¥51,360  $484,528 
Work in process  19,158   27,956   263,736 
Materials and supplies  24,260   28,490   268,774 

 
Total  ¥93,620  ¥107,806  $1,017,038 

 


5.6. Investments in and advances to affiliated companies:

Investments in and advances to affiliated companies principally represent the Company’s equity in the underlying assets of 20% to 50% owned companies. Dividends received from companies accounted for on an equity basis were ¥305¥9 million, ¥251¥58 million and ¥6¥4 million ($4938 thousand), respectively, for the years ended March 31, 1999, 20002002, 2003 and 2001.2004.

     Retained earnings include the parent company’s and its consolidated subsidiaries’ equity in undistributed earnings of 20% to 50% owned companies accounted for on an equity basis in the amount of ¥245 million and ¥310 million ($2,925 thousand) at March 31, 2003 and 2004, respectively.

     Summarized financial information of companies owned 20% to 50%, including ELDis, Inc., 45% owned by Tohoku Pioneer Corporation, a 67% owned subsidiary, accounted for by the equity method of accounting is as follows:

F-15


             
          Thousands of 
  Millions of Yen
  U.S. Dollars
 
  2003  2004  2004 

 
Current assets  ¥19,802   ¥10,619  $100,179 
Property, plant and equipment  27,209   28,978   273,377 
Other assets  338   393   3,708 

 
Total assets  ¥47,349   ¥39,990  $377,264 

 
Current liabilities  ¥  4,857   ¥  2,822  $26,622 
Long-term liabilities  27,430   27,110   255,755 
Shareholders’ equity  15,062   10,058   94,887 

 
Total liabilities and shareholders’ equity  ¥47,349   ¥39,990  $377,264 

 
                 
              Thousands of 
  Millions of Yen
  U.S. Dollars
 
Year ended March 31 2002  2003  2004  2004 

 
Net sales  ¥7,404   ¥7,845   ¥8,408   $79,321 
Gross profit  996   808   1,004   9,472 
Net loss  237   6,802   5,023   47,387 

 


6.7. Intangible assets:

Intangible assets subject to amortization acquired during the year ended March 31, 2004 totaled ¥9,687 million ($91,387 thousand) and primarily consist of software of ¥8,860 million ($83,585 thousand) and patents of ¥240 million ($2,264 thousand). The weighted average amortization periods for software, patents and total acquired during the year ended March 31, 2004 are 4.0 years, 6.3 years and 4.5 years, respectively.

     Intangible assets subject to amortization are comprised of the following:

                         
                  Thousands of 
  Millions of Yen
  U.S. Dollars
 
2003
  2004
  2004
 
  Gross      Gross      Gross    
  Carrying  Accumulated  Carrying  Accumulated  Carrying  Accumulated 
  Amount  Amortization  Amount  Amortization  Amount  Amortization 

 
Software  ¥23,726   ¥(11,441)  ¥31,161   ¥(15,412)  $293,972   $(145,396)
Patents  25,472   (23,623)  22,798   (21,426)  215,075   (202,132)
Other  2,850   (1,365)  2,693   (848)  25,406   (8,000)

 
Total  ¥52,048   ¥(36,429)  ¥56,652   ¥(37,686)  $534,453   $(355,528)

 

     The aggregate amortization expense for intangible assets for the years ended March 31, 2003 and 2004 was ¥7,949 million and ¥6,109 million ($57,632 thousand), respectively. The estimated aggregate amortization expense for intangible assets for the next five years is as follows:

         
     Thousands of 
Year ending March 31Millions of Yen U.S. Dollars 

 
2005  ¥5,969   $56,311 
2006  4,616   43,547 
2007  2,955   27,877 
2008  1,793   16,915 
2009  1,222   11,528 

 

F-16


     Amounts previously reported for net income and basic and diluted earnings per share for the year ended March 31, 2002 are reconciled to amounts adjusted to exclude the amortization expense related to goodwill and net income and basic and diluted earnings per share for the years ended March 31, 2003 and 2004 as follows:

                 
              Thousands of 
  Millions of Yen
  U.S. Dollars
  2002  2003  2004  2004 

 
Reported net income  ¥8,047   ¥16,078   ¥24,838   $234,320 
Add back: Goodwill amortization  748          

 
Adjusted net income  ¥8,795   ¥16,078   ¥24,838   $234,320 

 
                 
  Yen
  U.S. Dollars
 
  2002  2003  2004  2004 

 
Basic earnings per share:                
Reported net income  ¥44.70   ¥90.24   ¥141.58   $1.34 
Goodwill amortization  4.15          

 
Adjusted net income  ¥48.85   ¥90.24   ¥141.58   $1.34 

 
Diluted earnings per share:                
Reported net income  ¥44.69   ¥90.24   ¥140.52   $1.33 
Goodwill amortization  4.15          

 
Adjusted net income  ¥48.84   ¥90.24   ¥140.52   $1.33 

 


8. Short-term borrowings and long-term debt:

Short-term borrowings at March 31, 20002003 and 20012004 comprise the following:

               
            Thousands of
    Millions of Yen U.S. Dollars
    
 
    2000 2001 2001

Bank loans            
 Weighted average interest rate 3.54% at March 31, 2000
and 3.61% at March 31, 2001:
            
  Unsecured ¥41,318  ¥37,571  $302,992 

             
          Thousands of 
  Millions of Yen
  U.S. Dollars
 
  2003  2004  2004 

 
Bank loans:            
Weighted-average interest rate 2.01% at March 31, 2003 and 1.74% at March 31, 2004:            
Uncollateralized  ¥29,893   ¥23,327   $220,066 

 

F-12F-17


Long-term debt at March 31, 20002003 and 20012004 comprises the following:

              
           Thousands of
   Millions of Yen U.S. Dollars
   
 
   2000 2001 2001

Loans, principally from banks, maturing serially through 2031
interest ranging from 0.88% to 4.00% at March 31, 2000 and 2001:
            
 Secured ¥8,700  ¥6,792  $54,774 
 Unsecured  18,967   13,100   105,645 
2.15% Unsecured bonds due 2000  30,000       
2.35% Unsecured bonds due 2005  15,000   15,000   120,968 
2.80% Unsecured bonds due 2008  10,000   10,000   80,645 
Long-term capital lease obligations, 3.27% to 7.00% at March 31, 2000 and
3.15% to 7.00% at March 31, 2001, due principally to 2005
  881   665   5,363 
Industrial development U.S. dollar revenue bonds due 2005 with fluctuating
interest rates (4.70% at March 31, 2000, and 3.70% at March 31, 2001), subject to maximum
rates of 15% in 2000 and 2001 and other
  747   743   5,992 

 Total  84,295   46,300   373,387 
Less—Portion due within one year  37,235   7,996   64,484 

 Total ¥47,060  ¥38,304  $308,903 

             
          Thousands of 
  Millions of Yen
  U.S. Dollars
 
  2003  2004  2004 

 
Loans, principally from banks, maturing serially through 2013 interest ranging from 1.85% to 3.90% at March 31, 2003 and from 3.06% to 3.90% at March 31, 2004:            
Collateralized  ¥   3,048   ¥   2,804   $   26,453 
Uncollateralized  4,370   3,680   34,717 
2.35% Uncollateralized bonds due 2005  15,000   15,000   141,509 
2.80% Uncollateralized bonds due 2008  10,000   10,000   94,340 
Zero coupon convertible bonds due 2011, including unamortized issue premium, ¥2,079 million ($19,613 thousand) (effective annual rate 0.5%)     62,079   585,651 
Industrial development U.S. dollar revenue bonds due 2005 with fluctuating interest rates (1.59% at March 31, 2003 and 1.29% at March 31, 2004), subject to maximum rate of 15% in 2003 and 2004 and other  752   638   6,019 

 
Total  33,170   94,201   888,689 
Less—Portion due within one year  974   4,510   42,547 

 
Total  ¥32,196   ¥89,691   $846,142 

 

     The outstanding bondsbond indentures generally require the parent company to provide collateral for the outstanding bonds if the parent company provides collateral to new bonds issued in Japan.

     On March 5, 2004, the parent company issued ¥60,000 million zero coupon convertible bonds due 2011 (bonds with stock acquisition rights) (“Bonds”) at 103.5% of their principal amount. The Bonds do not bear interest. The stock acquisition rights are not transferable separately from the Bonds. The Bonds are traded on the London Stock Exchange’s market for listed securities. The Bonds were issued in the denomination of ¥5 million each and each bondholder is entitled to exercise the stock acquisition right from April 1, 2006 until February 18, 2011 (unless previously redeemed) into common shares at an initial conversion price, subject to adjustment in certain events, of ¥4,022 ($37.94). Market price of common stock at the date of issuance of the Bonds was ¥3,220 ($30.38).

     Parent company may redeem all, but not some of the Bonds, with advance irrevocable notice to bondholders in each case (1) if the closing price of common stock for each of the 30 consecutive trading days is at least 120% of the conversion price on or after March 4, 2007 and prior to maturity, or (2) if the laws or regulations of Japan having power to tax is changed, or (3) if a resolution is passed at the general meeting of shareholders of the parent company to become a wholly-owned subsidiary of another company.

     The stock acquisition right is also exercisable on or after March 19, 2004 if the parent company issues an irrevocable notice to bondholders for (2) or (3) above, or if a resolution passes at a general meeting of shareholders of parent company (a) for any consolidation or amalgamation of parent company with any company, or (b) for any split of parent company’s business, or (c) for the parent company to become a wholly-owned subsidiary of another company.

     The parent company will redeem the outstanding Bonds at 100% of their principal amount on March 4, 2011.

     Unused lines of credit for short-term financing at March 31, 2004 approximated ¥224,631 million ($2,119,160 thousand) of which ¥30,000 million ($283,019 thousand) relates to commercial paper programs. Unused commitments for long-term financing arrangements at March 31, 2004 amounted to ¥5,000 million ($47,170 thousand). There were no commitment fees.

Land and buildings with a book value of ¥16,416¥11,902 million ($132,387112,283 thousand) were pledged as collateral for certain long-term loans of the Company at March 31, 2001.2004.

F-18


     The aggregate annual maturities of long-term debt during the five years ending March 31, 20062009 are as follows:

                
 Thousands of Thousands of 
Year ending March 31 Millions of Yen U.S. Dollars Millions of Yen U.S. Dollars 



2002 ¥7,996 $64,484 
2003 2,672 21,548 
2004 1,623 13,089 
2005 5,821 46,944   ¥   4,510  $   42,547 
2006 15,926 128,435  15,857 149,594 
2007 255 2,406 
2008 272 2,566 
2009 10,244 96,642 



     Substantially all short-term and long-term loans from banks are made under agreements which, as is customary in Japan, provide that the bank may, under certain conditions, require the borrower to provide collateral (or additional collateral) or guarantors with respect to the loans, and that the bank may treat any collateral, whether furnished as security for short-term or long-term loans or otherwise, as collateral for all indebtedness to such bank. The Company has no compensating balance arrangements with any lending bank.

F-13


7.9. Pension plans and accrued severance cost:

The parent company and major domestic subsidiaries have trusteed non-contributory defined benefit pension plans which cover substantially all of their employees. The benefits are in the form of annuity payments and/or lump-sum payments and are based on points and length of service and conditions under which termination occurs. The Company’s policy is to fund amounts required to maintain sufficient plan assets to provide for accrued benefits, subject to the limitation on deductibility imposed by the Japanese income tax laws. The plan assets are invested primarily in interest-bearing securities, marketable equity securities and loan receivables. In February 2000, the parent company agreed with its labour union to amend its non-contributory pension plans in several respects. A major change was a change in the benefits calculation factor from basic salary amounts to points based on the position of and length of services rendered by employees. The amendment generated an unrecognized prior service gain of ¥9,728 million.

     The Company also sponsors a domestic contributory welfare pension plan covering substantially all of its Japanese employees. The benefits of the welfare pension plan are primarily based on years of service and on the average compensation during years of service and subject to governmental regulations. The welfare plan consists of a basic component, which has been specified by the Japanese government’s welfare pension regulations, and an additional componentcomponents established by the Company. During the year ended March 31, 2003, the Company established a new component within the welfare pension plan. The new component covers a part of the parent company’s employees. Management considers that a portion of the contributory plans,plan, which areis administered by a board of trustees composed of management and labor representatives, represents a welfare pension plan carried on behalf of the Japanese government. Management believes that the benefit obligation for the additional component is approximately one fifthone-fifth of the total benefit obligation. The welfare pension plan is funded in conformity with the funding requirements of applicable governmental regulations.

     The plan assets and pension obligation for the non-contributory plans and the contributory plan of the parent company and certain subsidiaries are invested primarilymeasured at March 31 in interest-bearing securities, marketable equity securities and loan receivables.
     In September 2000, the Company amended its domestic contributory welfare pension plan in accordance with the amendment of Welfare Pension Insurance Act. A major change was a reduction of future pension benefit payments effective April 2000 and raising the eligibility age for pension benefit payments effective April 2002. The amendment generated an unrecognized prior service gain of ¥5,301 million ($42,750 thousand).
each fiscal year.

     Net periodic benefit costs for the non-contributory plans and the contributory plan of the parent company and certain domestic subsidiaries for 1999, 2000the years ended March 31, 2002, 2003 and 20012004 consisted of the following:

                                  
                           Thousands of
   Millions of Yen U.S. Dollars
   
 
   1999 2000 2001 2001
   
 
 
 
   Non-     Non-     Non-     Non-    
   Contributory Contributory Contributory Contributory Contributory Contributory Contributory Contributory
   Plans Plan Plans Plan Plans Plan Plans Plan

Service cost ¥3,654  ¥955  ¥3,178  ¥1,288  ¥2,519  ¥1,312  $20,315     $10,581 
Interest cost  2,274   2,451   2,152   2,649   1,732   2,954   13,968   23,822 
Expected return on assets  (1,281)  (1,438)  (1,328)  (1,508)  (2,091)  (2,450)  (16,863)  (19,758)
Amortization of unrecognized net actuarial loss  927   401   577   651   171   276   1,379   2,226 
Amortization of unrecognized net assets at date of application  (163)  (344)  (163)  (344)  (163)  (344)  (1,315)  (2,774)
Amortization of unrecognized prior service gain  (9)     (9)     (535)     (4,315)   

 Net periodic benefit cost ¥5,402  ¥2,025  ¥4,407  ¥2,736  ¥1,633  ¥1,748  $13,169  $14,097 

F-14F-19


                                 
Thousands of 
  Millions of Yen
  U.S. Dollars
 
  2002
  2003
  2004
  2004
 
  Non-      Non-      Non-      Non-    
  contributory  Contributory  contributory  Contributory  contributory  Contributory  contributory  Contributory 
  Plans  Plan  Plans  Plan  Plans  Plan  Plans  Plan 

 
Service cost ¥2,657  ¥1,288  ¥2,884  ¥2,400  ¥2,892  ¥2,860  $27,283  $26,981 
Interest cost  1,662   2,926   1,695   3,195   1,518   3,301   14,321   31,142 
Expected return on assets  (1,907)  (2,245)  (1,606)  (1,941)  (1,386)  (1,741)  (13,075)  (16,425)
Amortization of unrecognized net actuarial loss  744   1,287   1,021   1,853   1,632   2,428   15,396   22,906 
Amortization of unrecognized net assets at date of application  (163)  (344)  (163)  (344)  (160)  (344)  (1,510)  (3,245)
Amortization of unrecognized prior service gain  (535)  (364)  (535)  (364)  (535)  (364)  (5,047)  (3,434)

 
Net periodic benefit cost ¥2,458  ¥2,548  ¥3,296  ¥4,799  ¥3,961  ¥6,140  $37,368  $57,925 

 
Actuarial assumptions used to determine net periodic pension cost:
                                
Discount rate  2.8%  4.5%  2.7%  4.3%  2.2%  4.1%        
Rate of salary increase  *  3.1%  *  2.7%  *  2.6%        
Long-term rate of return on plan assets  4.5%  4.5%  3.9%  3.9%  3.9%  3.9%        

 

*Non-contributory plans are not pay-related.

F-20


Reconciliations of beginning and ending balances of benefit obligations and the fair value of the plan assets are as follows:

                           
                    Thousands of
    Millions of Yen U.S. Dollars
    
 
    2000 2001 2001
    
 
 
    Non-     Non-     Non-    
    Contributory Contributory Contributory Contributory Contributory Contributory
    Plans Plan Plans Plan Plans Plan

Change in benefit obligation:
                        
 Benefit obligation at beginning of year ¥61,430  ¥52,988  ¥54,016  ¥59,113  $435,613  $476,718 
 Service cost  3,178   1,288   2,519   1,312   20,315   10,581 
 Interest cost  2,152   2,649   1,732   2,954   13,968   23,822 
 Plan participants’ contribution     1,031      1,050      8,468 
 Plan benefit amendments  (9,728)        (5,301)     (42,750)
 Actuarial (gain) loss  (503)  2,032   3,041   6,627   24,524   53,443 
 Benefits paid  (2,513)  (875)  (1,917)  (732)  (15,460)  (5,903)

  Benefit obligation at end of year ¥54,016  ¥59,113  ¥59,391  ¥65,023  $478,960  $524,379 

Change in plan assets:
                        
 Fair value of plan assets at beginning of year ¥36,652  ¥42,083  ¥46,459  ¥54,436  $374,669  $439,000 
 Actual return on plan assets  8,905   10,667   (5,934)  (6,473)  (47,855)  (52,202)
 Employer contribution  3,415   1,530   3,726   1,618   30,049   13,048 
 Plan participants’ contribution     1,031      1,050      8,468 
 Benefits paid  (2,513)  (875)  (1,917)  (732)  (15,460)  (5,903)

  Fair value of plan assets at end of year ¥46,459  ¥54,436  ¥42,334  ¥49,899  $341,403  $402,411 

Funded status ¥(7,557) ¥(4,677) ¥(17,057) ¥(15,124) $(137,557) $(121,968)
Unrecognized actuarial loss  8,561   9,993   19,456   25,267   156,903   203,766 
Unrecognized net assets at the date of application  (1,135)  (2,329)  (972)  (1,985)  (7,838)  (16,008)
Unrecognized prior service gain  (9,840)     (9,305)  (5,301)  (75,040)  (42,750)

  Net amount recognized ¥(9,971) ¥2,987  ¥(7,878) ¥2,857  $(63,532) $23,040 

Amounts recognized in the statement of financial position consist of:
                        
 Accrued benefit liabilities ¥(11,398) ¥(2,336) ¥(14,181) ¥(12,965) $(114,363) $(104,557)
 Accumulated other comprehensive income  1,427   5,323   6,303   15,822   50,831   127,597 

  Net amount recognized ¥(9,971) ¥2,987  ¥(7,878) ¥2,857  $(63,532) $23,040 

Accumulated benefit obligation at end of year
 ¥51,333  ¥56,772  ¥56,515  ¥62,864  $455,766  $506,968 

Actuarial assumptions:
                        
 Discount rate  3.2%  5.0%  2.8%  4.5%        
 Rate of salary increase  –*   3.1%  *   3.1%        
 Long-term rate of return on plan assets  3.5%  3.5%  4.5%  4.5%        

*Non-contributory plans are not pay-related after February 2000 amendment.
                         
                  Thousands of 
  Millions of Yen
  U.S. Dollars
 
  2003
  2004
  2004
 
  Non-      Non-      Non-    
  contributory  Contributory  contributory  Contributory  contributory  Contributory
  Plans  Plan  Plans  Plan  Plans  Plan

 
Change in benefit obligation:
                        
Benefit obligation at beginning of year ¥62,802  ¥74,305  ¥69,446  ¥80,512  $655,151  $759,547 
Service cost  2,884   2,400   2,892   2,860   27,283   26,981 
Interest cost  1,695   3,195   1,518   3,301   14,321   31,142 
Plan participants’ contribution     1,063      659      6,217 
Actuarial loss (gain)  5,086   534   (3,004)  (543)  (28,340)  (5,123)
Lump-sum cash payments  (2,607)     (1,429)     (13,481)   
Benefits paid  (414)  (985)  (507)  (1,129)  (4,783)  (10,651)
Decrease due to sales of discontinued operations        (451)     (4,255)   

 
Benefit obligation at end of year ¥69,446  ¥80,512  ¥68,465  ¥85,660  $645,896  $808,113 

 
Change in plan assets:
                        
Fair value of plan assets at beginning of year ¥41,167  ¥49,778  ¥35,923  ¥44,639  $338,896  $421,123 
Actual return on plan assets  (6,198)  (7,963)  5,739   5,670   54,142   53,491 
Employer contribution  3,975   2,746   4,040   2,381   38,113   22,462 
Plan participants’ contribution     1,063      659      6,217 
Lump-sum cash payments  (2,607)     (1,429)     (13,481)   
Benefits paid  (414)  (985)  (507)  (1,129)  (4,783)  (10,651)
Decrease due to sales of discontinued operations        (391)     (3,689)   

 
Fair value of plan assets at end of year ¥35,923  ¥44,639  ¥43,375  ¥52,220  $409,198  $492,642 

 
Funded status ¥(33,523) ¥(35,873) ¥(25,090) ¥(33,440) $(236,698) $(315,471)
Unrecognized actuarial loss  36,474   42,383   27,476   35,483   259,208   334,745 
Unrecognized net assets at the date of application  (646)  (1,297)  (486)  (953)  (4,585)  (8,991)
Unrecognized prior service gain  (8,235)  (4,573)  (7,700)  (4,209)  (72,642)  (39,708)

 
Net amount recognized ¥(5,930) ¥640  ¥(5,800) ¥(3,119) $(54,717) $(29,425)

 
Amounts recognized in the statement of financial position consist of:
                        
Accrued benefit liabilities ¥(31,037) ¥(33,013) ¥(23,017) ¥(27,302) $(217,142) $(257,566)
Accumulated other comprehensive income  25,107   33,653   17,217   24,183   162,425   228,141 

 
Net amount recognized ¥(5,930) ¥640  ¥(5,800) ¥(3,119) $(54,717) $(29,425)

 
Accumulated benefit obligation at end of year ¥66,960  ¥77,652  ¥66,392  ¥79,522  $626,340  $750,208 

 
Actuarial assumptions used to determine benefit obligations:
                        
Discount rate  2.2%  4.1%  2.5%  4.1%        
Rate of salary increase  *  2.6%  *  2.6%        

 

F-15*Non-contributory plans are not pay-related.

F-21


     The unrecognized prior service gain, is being amortized over 18 years. Thethe unrecognized actuarial loss and the unrecognized net assets at the date of initial application are being amortized over the average remaining service period of employees, both for the non-contributory plans and for the contributory plan.

     To determine the expected long-term rate of return on pension plan assets, the Company considers the current and target asset allocations, as well as historical and expected returns on various categories of plan assets, adjusted as deemed appropriate to reflect more recent capital market experiences as well as the rate of inflation and interest rates.

     The pension plan weighted-average asset allocations at March 31, 2003 and 2004, by asset category are as follows:

         
Asset category 2003  2004 

 
Equity securities  44%  46%
Debt securities  35%  30%
Real estate and other  21%  24%

 
Total  100%  100%

 

     The Company’s investment policy is to maintain a diversified portfolio of asset classes with the primary goal of producing an adequate return that, when combined with the Company’s contribution, will maintain the fund’s ability to meet future cash requirements for pension benefit payments. For primary domestic pension plans, the target asset allocation is established based on long-term pension plan asset/liability studies, and the current weighted-average target asset allocation for these plans is; equity securities 56%, debt securities 41%, other 3%. All the assets are externally managed and investment managers have discretion to carry out investment operations within their respective mandates specified by the Company.

     Substantially all of the employees of major U.S. and European subsidiaries are covered by a defined benefit pension plan.plans. The projected benefit obligationsobligation for the planplans and related fair value of plan assets were ¥2,551are as follows:

             
          Thousands of 
  Millions of Yen
  U.S. Dollars
 
  2003  2004  2004 

 
Projected benefit obligation ¥10,732  ¥12,574   $118,623 
Plan assets  6,248   7,656   72,226 

 
Actuarial assumptions used to determine benefit obligation (PBO weighted):
            
Discount rate  6.1%  5.6%    
Rate of salary increase  3.9%  4.0%    

 

     Net periodic pension costs for these plans for the years ended March 31, 2002, 2003 and 2004 are as follows:

                 
              Thousands of 
  Millions of Yen
  U.S. Dollars
 
  2002  2003  2004  2004 

 
Total net periodic pension cost  ¥1,034   ¥872   ¥748   $7,057 

 
Actuarial assumptions used to determine net periodic pension cost:
                
Discount rate  6.2%  6.5%  6.1%    
Rate of salary increase  4.3%  4.3%  3.9%    
Long-term rate of return on plan assets  7.2%  7.5%  7.6%    

 

     Accumulated other comprehensive income of ¥557 million and ¥ 3,194 million, respectively,($5,255 thousand) was recorded for European plans at March 31, 2000 and ¥3,509 million ($28,298 thousand) and ¥3,188 million ($25,710 thousand), respectively, at March 31, 2001.
2004.

F-22


     With respect to directors, provision is made for lump-sum severance indemnities on a basis considered adequate for such future payments as may be approved by the shareholders.
     The net charges

     In February 2002, the Company announced the closure of the Hiwada plant in Fukushima, Japan because of the transfer of production sites to incomeChina. In relation to this closure, the Company recorded special termination benefits for worldwide pension plans and severance indemnitiesemployees’ voluntary termination of ¥906 million for the yearsyear ended March 31, 1999, 20002002. In June 2002, Tohoku Pioneer Corporation implemented a voluntary early retirement plan. In relation to this plan, the Company recorded special termination benefits of ¥1,424 million. These special termination benefits were included in the selling, general and 2001 were ¥8,849administrative expenses.

     The Company expects to contribute ¥5,756 million ¥10,087 million and ¥4,560 million ($36,77454,302 thousand), respectively. to its domestic defined benefit plan in the year ending March 31, 2005.


8.10. Income taxes:

The Company is subject to a number of different income taxes which, in the aggregate, indicate a normal statutory tax rate of approximately 47.5% for the year ended March 31, 1999 and 42% for the years ended March 31, 20002002, 2003 and 20012004 in Japan.
A change in the tax rate was enacted in Japan in March 2003 and the normal effective statutory tax rate effective for the year beginning April 1, 2004 was changed from 42% to 41%.

     Income tax expense for the year ended March 31, 20002004 included a ¥510¥682 million charge($6,434 thousand) charges resulting from the settlement of a proposed assessment from the U.S. Internal Revenue Service relating to a tax position taken in prioran adjustment to transfer prices between affiliated companies for the years in connection with a business realignment.
ended March 31, 1997 through 1999.

     The Company’s provision for income taxes differed from the provision for income taxes at the normal statutory tax rates in Japan as follows:

                  
               Thousands of
   Millions of Yen U.S. Dollars
   
 
   1999 2000 2001 2001

Computed tax expense at normal statutory tax rate ¥5,953  ¥11,679  ¥14,361  $115,815 
Increase (decrease) resulting from:                
 Changes in valuation allowance, net of effects of
carryforward loss expiration and exchange rate changes
  1,750   7,076   2,004   16,161 
 Expenses not deductible for tax purpose  256   223   563   4,540 
 Difference in foreign and Japanese tax rates  (1,878)  (1,790)  (2,739)  (22,089)
 Effect of tax rate change on deferred taxes  4,293   384       
 Write down of investment in a subsidiary        (1,092)  (8,806)
 Effect of tax on gain from sale and issuance of subsidiary stock     (1,747)      
 Other  1,080   (609)  1,223   9,863 

Provision for income taxes ¥11,454  ¥15,216  ¥14,320  $115,484 

                 
              Thousands of 
  Millions of Yen
  U.S. Dollars
 
  2002  2003  2004  2004 

 
Computed tax expense at normal statutory tax rate ¥6,078  ¥11,793  ¥17,576  $165,811 
Increase (decrease) resulting from:                
Changes in valuation allowance  507   (3,007)  (3,701)  (34,915)
Expenses not deductible for tax purpose:                
Domestic  713   269   280   2,642 
Foreign  221   439   149   1,406 
Amortization of goodwill  314          
Difference in foreign and Japanese tax rates  (1,934)  (1,595)  (1,608)  (15,170)
Effect of tax rate change on deferred taxes     835   447   4,217 
Tax benefit for discontinued operations        3,025   28,538 
Tax credit for research and development expenses  (186)  (530)  (898)  (8,472)
Other  703   828   3,317   31,292 

 
Provision for income taxes ¥6,416  ¥9,032  ¥18,587  $175,349 

 

F-16F-23


Total income taxes provided for the years ended March 31, 1999, 20002002, 2003 and 20012004 are as follows:

                 
              Thousands of
  Millions of Yen U.S. Dollars
  
 
  1999 2000 2001 2001

Provision for income taxes ¥11,454  ¥15,216  ¥14,320  $115,484 
Shareholders’ equity—directly charged (credited):                
Minimum pension liability adjustments  (2,362)  5,657   (6,456)  (52,064)
Net unrealized gains on securities  480   (639)  (3,638)  (29,339)

Total ¥9,572  ¥20,234  ¥4,226  $34,081 

                 
              Thousands of 
  Millions of Yen
  U.S. Dollars
 
  2002  2003  2004  2004 

 
Provision for income taxes on income from continuing operations ¥6,416  ¥9,032  ¥18,587  $175,349 
Provision for income taxes (benefit) on income from discontinued operations  306   415   (2,310)  (21,792)
Shareholders’ equity—directly charged (credited):                
Minimum pension liability adjustments  (6,460)  (8,927)  6,953   65,594 
Net unrealized gains on securities  (1,502)  (899)  4,009   37,821 

 
Total ¥(1,240) ¥(379) ¥27,239  $256,972 

 

Income from continuing operations before income taxes and income tax expense comprised the following components:

                 
              Thousands of 
  Millions of Yen
  U.S. Dollars
 
  2002  2003  2004  2004 

 
Income (loss) from continuing operations before income taxes:                
Domestic ¥(4,187) ¥10,137  ¥18,481  $174,349 
Foreign  18,659   17,942   23,367   220,443 

 
  ¥14,472  ¥28,079  ¥41,848  $394,792 

 
Income taxes—Current:                
Domestic ¥3,684  ¥6,643  ¥10,799  $101,877 
Foreign  7,111   7,834   7,030   66,321 

 
  ¥10,795  ¥14,477  ¥17,829  $168,198 

 
Income taxes—Deferred:                
Domestic ¥(4,490) ¥(3,296) ¥(385) $(3,632)
Foreign  111   (2,149)  1,143   10,783 

 
  ¥(4,379) ¥(5,445) ¥758  $7,151 

 

F-24


The significant components of the deferred tax assets and liabilities at March 31, 20002003 and 20012004 are as follows:

                          
                   Thousands of
   Millions of Yen U.S. Dollars
   
 
   2000 2001 2001
   
 
 
   Deferred Deferred Deferred Deferred Deferred Deferred
   Tax Tax Tax Tax Tax Tax
   Assets Liabilities Assets Liabilities Assets Liabilities

Inventories ¥6,738     ¥7,398     $59,661   
Marketable equity securities  281  ¥7,324   30  ¥2,800   242  $22,581 
Accrued expenses  5,566      6,406      51,661    
Tax loss carryforwards  17,284      13,278      107,081    
Pension and severance cost  6,745      12,951      104,444    
Land  2,266      2,052      16,548    
Depreciation  2,165   348   1,890   330   15,242   2,661 
Royalty receivable  1,385      1,491      12,024    
Other  9,215   1,937   15,324   2,421   123,581   19,524 

 Total  51,645   9,609   60,820   5,551   490,484   44,766 
Valuation allowance  (16,503)     (17,792)     (143,484)   

 Total ¥35,142  ¥9,609  ¥43,028  ¥5,551  $347,000  $44,766 

                         
                  Thousands of 
  Millions of Yen
  U.S. Dollars
 
  2003
  2004
  2004
 
  Deferred  Deferred  Deferred  Deferred  Deferred  Deferred 
  Tax  Tax  Tax  Tax  Tax  Tax 
  Assets  Liabilities  Assets  Liabilities  Assets  Liabilities 

 
Inventories ¥8,197     ¥6,911     $65,198    
Marketable equity securities  3,831   ¥1,018   2,971   ¥5,017   28,028  $47,330 
Accrued expenses  9,106      10,411      98,217    
Tax loss carryforwards  11,723      9,297      87,708    
Pension and severance cost  28,341      22,268      210,075    
Land  2,216      1,840      17,358    
Depreciation  1,563   387   1,907   302   17,991   2,849 
Royalty receivable  1,395      974      9,189    
Other  18,384   2,863   15,574   3,408   146,925   32,151 

 
Total  84,756   4,268   72,153   8,727   680,689   82,330 
Valuation allowance  (15,292)     (11,591)     (109,349)   

 
Total ¥69,464   ¥4,268  ¥60,562   ¥8,727  $571,340  $82,330 

 

F-17The changes in the valuation allowance for the years ended March 31, 2002, 2003 and 2004 are as follows:

                     
  Millions of Yen
 
  Balance at              Balance at 
  Beginning          Translation  End 
Valuation allowance of Period  Addition  Deduction  Adjustments  of Period 

 
2002 ¥17,792   ¥ 2,720  ¥(2,762)  ¥   549  ¥18,299 
2003  18,299   5,741   (8,912)  164   15,292 
2004  15,292   1,956   (5,469)  (188)  11,591 

 
                     
  Thousands of U.S. Dollars
 Balance at             Balance at 
 Beginning         Translation End 
Valuation allowanceof Period Addition Deduction Adjustments of Period 

 
2004 $144,264  $18,453  $(51,594)  $(1,774) $109,349 

 


     The valuation allowance principally relates to deferred tax assets for loss carryforwards of subsidiaries.
     During

     Decrease in valuation allowance for the yearsyear ended March 31, 2000 and 2001,2003 was mainly due to the reversal of valuation allowances were increased by ¥4,774 million and ¥1,289 million ($10,395 thousand), respectively.
     Deferredallowance which had been provided for a tax assets—non-currentbenefit, the realization of ¥8,954 million and ¥16,301 million ($131,459 thousand) are includedwhich had been judged as unlikely, as profitability of subsidiaries improved. Decrease in other assets invaluation allowance for the accompanying consolidated balance sheets atyear ended March 31, 2000 and 2001, respectively.
2004 was mainly due to the reversal of valuation allowance for discontinued operations.

F-25


     At March 31, 2001,2004, the Company has tax loss carry-forwardscarryforwards which are available to reduce taxable income in subsequent periods. If not utilized, such loss carryforwards expire as follows:

               
 Thousands of Thousands of 
Year ending March 31Year ending March 31 Millions of Yen U.S. Dollars Millions of Yen U.S. Dollars 



2002  ¥  2,636 $21,258 
2003 2,465 19,879 
2004 3,962 31,951 
20052005 2,973 23,976  ¥706 $6,660 
20062006 292 2,355  152 1,434 
2007 1,138 10,736 
2008 1,512 14,264 
2009 1,557 14,689 
ThereafterThereafter 25,034 201,887  17,319 163,387 



Total ¥22,384 $211,170 
Total ¥37,362 $301,306 

     No provision for income taxes is recognized on undistributed earnings of foreign subsidiaries wherethat are not expected to be remitted in the Company considers that such earnings are reinvested or would not, under the present Japanese tax laws, be subject to additional taxation should they be distributed to the parent company.foreseeable future. Undistributed earnings of foreign subsidiaries (including related cumulativeforeign currency translation adjustments) at March 31, 20002003 and 20012004 amounted to approximately ¥88,328¥133,923 million and ¥111,506¥116,689 million ($899,2421,100,840 thousand), respectively. It is not practical to estimate the amount of taxes that might be payable on the eventual remittance of such earnings.

     The domestic undistributed earnings would not, under the present Japanese tax laws, be subject to additional taxation.


9.11. Shareholders’ equity:

Common Stock and Additional Paid-in Capital—Capital Surplus—
As permitted by the Commercial Code of Japan (the “Code”) prior to April 1, 1991, the parent company had made free share distributions which were accounted for by a transfer from additional paid-in capital surplus to common stock or without any transfers in the capital accounts.

     Companies in the United States issuing shares in similar transactions would be required to account for them as stock dividends. Had the distributions been accounted for in the manner adopted by the United States companies, ¥179,076 million ($1,444,1611,689,396 thousand) would have been transferred from retained earnings to appropriate capital accounts as of March 31, 2001.2004.

Retained Earnings—
Retained earnings consist of legal reserve and unappropriated retained earnings.

     The parent company is subject to the Code providesamendments which became effective from October 1, 2001. Prior to October 1, 2001, the Code required at least 50% of the issue price of new shares, with a minimum of the par value thereof, to be designated as stated capital as determined by resolution of the Board of Directors. Proceeds in excess of amounts designated as stated capital were credited to capital surplus. Effective October 1, 2001, the revised Code eliminated common stock par values resulting in all shares being recorded with no par value.

     Prior to October 1, 2001, the Code also provided that an amount at least equal to 10% of allthe aggregate amount of cash dividends and certain other cash payments which are made as an appropriation of retained earnings applicable to each fiscal period shall be appropriated and set aside as a legal reserve until such reserve equals 25% of stated capital. Effective October 1, 2001, the revised Code allows for such appropriations to be determined based on total capital stock.
     Undersurplus and legal reserve. The amount of total capital surplus and legal reserve which exceeds 25% of stated capital is available for appropriations by resolution of the shareholders.

     The Code permits companies to transfer a portion of capital surplus and legal reserve to stated capital by resolution of the Board of Directors. The Code also permits companies to transfer a portion of unappropriated retained earnings, available for dividends, to stated capital by resolution of the shareholders.

     Prior to October 1, 2001, the Code imposed certain restrictions on the purchase and sale of treasury stock. Effective October 1, 2001, the Code eliminated these restrictions allowing companies to purchase treasury stock by a resolution of the shareholders at the general shareholders’ meeting and dispose of such treasury stock by resolution of the Board of Directors on and after April 1, 2002.

F-26


     The amount available for dividends under the Code was ¥135,697 million ($1,280,160 thousand) as of March 31, 2004, that is based on unappropriatedthe amount recorded in the parent company’s general books and records maintained in accordance with accepted Japanese accounting practices. The adjustments are included in the accompanying consolidated financial statements to conform with U.S. GAAP, but are not recorded in the books, and have no effect on the determination of retained earnings available for dividends under the Code. In addition to the provision that requires an appropriation for a legal reserve in connection with the cash payment as recordeddescribed above, the Code imposes certain limitations on the booksamount of retained earnings available for dividends.

At the general shareholders meeting held on June 27, 2002, the shareholders of the parent company. Certain adjustments, not recorded oncompany authorized the purchase of up to 10,000,000 shares of the parent company’s books, are reflectedcommon stock. In August 2002, November 2002 and February 2003, the parent company purchased 1,610,000 shares, 2,000,000 shares and 1,500,000 shares of their common stock, respectively, in the financial statementsmarket for the aggregate cost of ¥11,492 million as describeda publicly announced plan to improve capital efficiency pursuant to a revision in Note 1. At March 31, 2001, retained earnings recorded on the parent company’s books of account were ¥142,752 million ($1,151,226 thousand).
Code.

The appropriations of retained earnings for the year ended March 31, 2001,2004, which have been incorporated in the accompanying financial statements, will be proposed for approval at the general shareholders’ meeting to be held on June 28, 2001,29, 2004, and will be recorded in the parent company’s general books of account after shareholders’ approval.

F-18


10.12. Stock-based compensation plans:

The Company has two types of stock-based compensation plans as incentive plans for directors and selected employees.

Warrant plan—
Upon issuance of detachable warrant bonds by the parent company, a consolidated subsidiary purchased all of the bonds and the Company distributed the warrants at fair market value to directors and certain employees of the Company as a part of their remuneration. These warrants vest over one year and expire in three years from the date of issuance.

Stock option plan—
In accordance with approval ofat shareholders’ meetingmeetings on June 29, 2000 and June 28, 2001, the Company granted share subscription rights to employees. Also, in accordance with approval at shareholders’ meeting on June 27, 2002 and June 27, 2003, the Company granted share acquisition rights to directors and certain employees of the Company. These options vest over two years and expire in five years from the date of grant. The Company recorded the fair value of the stock option as a part of their remuneration.

     A summary of information for the Company’ sCompany’s stock-based compensation plans is as follows:

                 
      Yen
  
          Weighted-Average Number of
      Weighted-Average Grant Date Shares
Year Plan Exercisable Period Exercise Price Share Price (Thousands)

 
2001 Stock option From July 1, 2002 to June 30, 2005 ¥4,400  ¥4,250   191 
2002 Warrant From July 1, 2002 to August 26, 2004  3,266   2,700   413 
2002 Stock option From July 1, 2003 to June 30, 2006  3,791   3,750   191 
2003 Stock option From July 1, 2004 to June 29, 2007  2,477   2,170   564 
2004 Stock option From July 1, 2005 to June 30, 2008  2,951   2,845   313 

 
                   
        Yen    
        
    
            Weighted-Average Number of
        Weighted-Average Grant Date Shares
Year Plan Exercisable Period Exercise Price Share Price (Thousands)

1999 Warrant From July 1, 1999 to June 8, 2001 ¥2,783  ¥2,520   269 
2000 Warrant From July 3, 2000 to September 12, 2002  2,188   1,925   320 
2001 Warrant From July 2, 2001 to September 25, 2003  4,729   4,543   284 
2001 Stock option From July 1, 2002 to June 30, 2005  4,400   4,250   191 

                   
        U.S. Dollars
        
            Weighted-Average 
        Weighted-Average Grant Date 
Year Plan Exercisable Period Exercise Price Share Price                      

2001 Warrant From July 2, 2001 to September 25, 2003 $38.14  $36.64 
2001 Stock option From July 1, 2002 to June 30, 2005  35.48   34.27 

                 
          U.S. Dollars
              Weighted-Average
          Weighted-Average Grant Date
Year Plan Exercisable Period Exercise Price Share Price

 
2004  Stock option From July 1, 2005 to June 30, 2008 $27.84  $26.84 

 

F-27


     Remuneration cost recognized for stock-based compensation plans for the years ended March 31, 1999, 20002002, 2003 and 20012004 were ¥56¥346 million, ¥73¥149 million and ¥362¥305 million ($2,9192,877 thousand), respectively.

     The weighted-average fair value per share at the date of grant for the warrants and the stock options granted during the years ended March 31, 1999, 20002002, 2003 and 20012004 were ¥ 208, ¥228¥573, ¥704 and ¥762¥907 ($6.15)8.56), respectively,respectively. The fair value of the warrants and werethe stock options granted on the date of grant, which is amortized to expense over the vesting period, is estimated using the Black-Scholes option-valuation model.model with the following weighted-average assumptions:

             
  2002 2003 2004

 
Risk-free interest rate  0.25%  0.24%  0.34%
Expected lives 3.48 years 3.48 years 3.48 years
Expected volatility  50.61%  52.81%  48.13%
Expected dividends  0.41%  0.69%  0.88%

 

F-19


     A summary of the status of the Company’s warrants and options as of March 31, 1999, 20002002, 2003 and 2001,2004, and changes during the years is as follows:

                  
        Weighted-Average Exercise
       Weighted-Average Price per Share
   Number of Shares Remaining Life 
   (Thousands) (Years) Yen U.S. Dollars

Outstanding at March 31, 1998              
 Granted  269      ¥2,783 
 Exercised              

    
Outstanding at March 31, 1999  269   2.3   2,783 
 Granted  320       2,188     
 Exercised  (15)      2,783 

    
Outstanding at March 31, 2000  574   1.9   2,452     
 Granted  475       4,597  $37.07 
 Exercised  (306)      2,551   20.57 

Outstanding at March 31, 2001  743   2.4  ¥3,782  $30.50 

Exercisable at March 31, 2000  254      ¥2,783     

Exercisable at March 31, 2001  268      ¥2,338  $18.85 

                 
          Weighted-Average Exercise 
      Weighted-Average  Price per Share
  Number of Shares Remaining Life    
  (Thousands) (Years) Yen U.S. Dollars

 
 
 
 
 
Outstanding at March 31, 2001  743   2.4   ¥3,782     
Granted  604       3,432     
Exercised  (170)      2,425     

 
    
Outstanding at March 31, 2002  1,177   2.5   ¥3,798     
Granted  564       2,477     
Expired  (98)      2,188     

 
Outstanding at March 31, 2003  1,643   2.5   ¥3,441     
Granted  313       2,951  $27.84 
Expired  (284)      4,728   44.60 

 
Outstanding at March 31, 2004  1,672   2.4  ¥3,131  $29.54 

 
Exercisable at March 31, 2003  888       ¥3,977     

 
Exercisable at March 31, 2004  795      ¥3,664  $34.57 

 


11.13. Other comprehensive income:

Change in accumulated other comprehensive income (loss) is as follows:

                 
  Millions of Yen
  
          Cumulative Foreign Total Accumulated
  Minimum Pension Net Unrealized Currency Translation Other Comprehensive
  Liability Adjustments Gains on Securities Adjustments Income (Loss)

Balance at March 31, 1998 ¥(8,005) ¥12,122  ¥(12,107) ¥(7,990)
Adjustments for the year  (2,611)  544   (14,207)  (16,274)

Balance at March 31, 1999  (10,616)  12,666   (26,314)  (24,264)
Adjustments for the year  7,824   (919)  (19,083)  (12,178)

Balance at March 31, 2000  (2,792)  11,747   (45,397)  (36,442)
Adjustments for the year  (8,847)  (5,085)  21,723   7,791 

Balance at March 31, 2001 ¥(11,639) ¥6,662  ¥(23,674) ¥(28,651)

   

Thousands of U.S. Dollars
  
          Cumulative Foreign Total Accumulated
  Minimum Pension Net Unrealized Currency Translation Other Comprehensive
  Liability Adjustments Gains on Securities Adjustments Income (Loss)

Balance at March 31, 2000 $(22,516) $94,734  $(366,105) $(293,887)
Adjustments for the year  (71,347)  (41,008)  175,186   62,831 

Balance at March 31, 2001 $(93,863) $53,726  $(190,919) $(231,056)

                 
  Millions of Yen
          Foreign Currency  Total Accumulated
  Minimum Pension  Net Unrealized  Translation  Other Comprehensive
  Liability Adjustments  Gains on Securities  Adjustments  Income (Loss)

 
Balance at March 31, 2001 ¥(11,639) ¥6,662  ¥(23,674) ¥(28,651)
Adjustments for the year  (8,848)  (2,079)  14,842   3,915 

 
Balance at March 31, 2002  (20,487)  4,583   (8,832)  (24,736)
Adjustments for the year  (12,188)  (1,235)  (17,470)  (30,893)

 
Balance at March 31, 2003  (32,675)  3,348   (26,302)  (55,629)
Adjustments for the year  9,745   5,755   (21,700)  (6,200)

 
Balance at March 31, 2004 ¥(22,930) ¥9,103  ¥(48,002) ¥(61,829)

 
                 
  Thousands of U.S. Dollars
          Foreign Currency  Total Accumulated
  Minimum Pension  Net Unrealized  Translation  Other Comprehensive
  Liability Adjustments  Gains on Securities  Adjustments  Income (Loss)

 
Balance at March 31, 2003 $(308,255) $31,585  $(248,132) $(524,802)
Adjustments for the year  91,934   54,293   (204,717)  (58,490)

 
Balance at March 31, 2004 $(216,321) $85,878  $(452,849) $(583,292)

 

F-20F-28


Tax effects allocated to each component of other comprehensive income (loss) and reclassification adjustments are as follows:

                  
   Millions of Yen
   
   Before-Tax Tax (Expense) Minority Net-of-Tax
   Amount or Benefit Interest Amount

1999:                
Minimum pension liability adjustments ¥  (4,973) ¥2,362     ¥(2,611)
Net unrealized gains on securities:                
 Unrealized holding gains arising during year  1,978   (940) ¥  17   1,055 
 Less—Reclassification adjustment for gains realized in net income  (971)  460      (511)
   
 Net unrealized gains  1,007   (480)  17   544 
Cumulative foreign currency translation adjustments  (14,328)     121   (14,207)

Other comprehensive income (loss) ¥(18,294) ¥1,882  ¥138  ¥(16,274)

2000:                
Minimum pension liability adjustments ¥  13,471  ¥(5,657) ¥  10  ¥7,824 
Net unrealized gains on securities:                
 Unrealized holding gains arising during year  1,194   (500)  (41)  653 
 Less—Reclassification adjustment for gains realized in net income  (2,711)  1,139      (1,572)
   
 Net unrealized losses  (1,517)  639   (41)  (919)
Cumulative foreign currency translation adjustments  (19,561)     478   (19,083)

Other comprehensive income (loss)  ¥   (7,607) ¥(5,018) ¥447  ¥(12,178)

2001:                
Minimum pension liability adjustments ¥(15,375) ¥  6,456  ¥   72  ¥ (8,847)
Net unrealized gains on securities:                
 Unrealized holding losses arising during year  (7,432)  3,121   45   (4,266)
 Less—Reclassification adjustment for gains realized in net income  (1,308)  517   (28)  (819)
   
 Net unrealized losses  (8,740)  3,638   17   (5,085)
Cumulative foreign currency translation adjustments  22,353      (630)  21,723 

Other comprehensive income (loss) ¥  (1,762) ¥10,094   ¥(541) ¥  7,791 

                  
   Thousands of U.S. Dollars
   
   Before-Tax Tax (Expense) Minority Net-of-Tax
   Amount or Benefit Interest Amount

2001:                
Minimum pension liability adjustments $(123,992) $52,064  $    581  $(71,347)
Net unrealized gains on securities:                
 Unrealized holding losses arising during year  (59,936)  25,170   363   (34,403)
 Less—Reclassification adjustment for gains realized in net income  (10,548)  4,169   (226)  (6,605)
   
 Net unrealized losses  (70,484)  29,339   137   (41,008)
Cumulative foreign currency translation adjustments  180,266      (5,080)  175,186 

Other comprehensive income (loss) $  (14,210) $81,403  $(4,362) $  62,831 

                 
  Millions of Yen
  Before-Tax Tax (Expense) Minority Net-of-Tax
  Amount or Benefit Interest Amount

 
2002:                
Minimum pension liability adjustments ¥(15,380) ¥6,460  ¥72  ¥(8,848)
Net unrealized gains on securities:                
Unrealized holding losses arising during year  (5,404)  2,270   7   (3,127)
Less—Reclassification adjustment for losses realized in net income  1,828   (768)  (12)  1,048 
  
 
Net unrealized losses  (3,576)  1,502   (5)  (2,079)
Foreign currency translation adjustments  15,338      (496)  14,842 

 
Other comprehensive income (loss) ¥(3,618) ¥7,962  ¥(429) ¥3,915 

 
2003:                
Minimum pension liability adjustments ¥(21,255) ¥8,927  ¥140  ¥(12,188)
Net unrealized gains on securities:                
Unrealized holding losses arising during year  (3,502)  1,472   7   (2,023)
Less—Reclassification adjustment for losses realized in net income  1,366   (573)  (5)  788 
  
 
Net unrealized losses  (2,136)  899   2   (1,235)
Foreign currency translation adjustments  (18,178)     708   (17,470)

 
Other comprehensive income (loss) ¥(41,569) ¥9,826  ¥850  ¥(30,893)

 
2004:                
Minimum pension liability adjustments ¥16,803  ¥(6,953) ¥(105) ¥9,745 
Net unrealized gains on securities:                
Unrealized holding gains arising during year  9,790   (4,013)  (16)  5,761 
Less—Reclassification adjustment for gains realized in net income  (10)  4      (6)
  
 
Net unrealized gains  9,780   (4,009)  (16)  5,755 
Foreign currency translation adjustments:                
Foreign currency translation adjustments arising during year  (23,010)     912   (22,098)
Less—Reclassification adjustment for losses realized in net income  398         398 
  
 
Net foreign currency translation adjustments  (22,612)     912   (21,700)

 
Other comprehensive income (loss) ¥3,971  ¥(10,962) ¥791  ¥(6,200)

 
                 
  Thousands of U.S. Dollars
  Before-Tax Tax (Expense) Minority Net-of-Tax
  Amount or Benefit Interest Amount

 
2004:                
Minimum pension liability adjustments $158,519  $(65,594) $(991) $91,934 
Net unrealized gains on securities:                
Unrealized holding gains arising during year  92,359   (37,859)  (151)  54,349 
Less—Reclassification adjustment for gains realized in net income  (94)  38      (56)
  
 
Net unrealized gains  92,265   (37,821)  (151)  54,293 
Foreign currency translation adjustments:                
Foreign currency translation adjustments arising during year  (217,076)     8,604   (208,472)
Less—Reclassification adjustment for losses realized in net income  3,755         3,755 
  
 
Net foreign currency translation adjustments  (213,321)     8,604   (204,717)

 
Other comprehensive income (loss) $37,463  $(103,415) $7,462  $(58,490)

 

F-21F-29


12.


14. Supplemental information:

Supplemental information for the years ended March 31, 1999, 20002002, 2003 and 20012004 is as follows:

                 
              Thousands of
  Millions of Yen U.S. Dollars
  
 
  1999 2000 2001 2001

Research and development expenses charged to cost and expenses ¥31,131  ¥33,265  ¥37,105  $299,234 
Advertising costs charged to expense as incurred  11,694   10,682   10,434   84,145 

                 
              Thousands of
  Millions of Yen
 U.S. Dollars
  2002 2003 2004 2004

 
Research and development expenses charged to cost and expenses ¥39,050  ¥45,388  ¥51,483  $485,689 
Advertising costs charged to expense as incurred  12,352   11,089   12,813   120,877 

 

Other—net as shown in other income (expenses) for the years ended March 31, 1999, 20002002, 2003 and 20012004 consisted of the following:

                  
               Thousands of
   Millions of Yen U.S. Dollars
   
 
   1999 2000 2001 2001

Net gains (losses) on sale and write-down of investments and securities ¥(876) ¥4,151  ¥   254  $2,048 
Losses on sale and impairment of fixed assets  (2,683)  (4,741)  (914)  (7,371)
Other  (2,839)  (947)  1,607   12,960 

 Total ¥(6,398) ¥(1,537) ¥   947  $7,637 

                 
              Thousands of
  Millions of Yen
 U.S. Dollars
  2002 2003 2004 2004

 
Write-down of available-for-sale securities and sundry investments ¥(2,341) ¥(1,369) ¥(245) $(2,311)
Gains (losses) on sale of available-for-sale securities and sundry investments  54   (20)  37   349 
Other  133   641   315   2,972 

 
Total ¥(2,154) ¥(748) ¥107  $1,010 

 

13.


15. Leased assets:

The Company leases certain land, machinery and equipment, office space, warehouses, computer equipment and employees’ residential facilities primarily under operating leases.

     Rental expenses under operating leases for the years ended March 31, 1999, 20002002, 2003 and 20012004 aggregated ¥8,389¥6,058 million, ¥8,765¥6,068 million and ¥5,962¥6,268 million ($48,08159,132 thousand), respectively. Such rentals relate principally to cancelable leases which are renewable upon expiration.

     The net minimum rental payments under operating leases that have initial or remaining noncancelable lease terms in excess of one year at March 31, 20012004 are as follows:

       
    Thousands of
Year ending March 31 Millions of Yen U.S. Dollars

 
2005 ¥2,467 $23,274
2006 1,512  14,264
2007 1,026  9,679
2008 694  6,547
2009 486  4,585
Thereafter 1,760  16,604

 
     Total minimum future rentals ¥7,945 $74,953 

 
                  
       Thousands of
Year ending March 31 Millions of Yen U.S. Dollars

2002 ¥2,803  $22,605 
2003  1,405   11,330 
2004  1,013   8,169 
2005  696   5,613 
2006  368   2,968 
Thereafter  989   7,976 

 Total minimum future rentals¥7,274  $58,661 

F-22F-30


14.


16. Financial instruments:

Derivatives—
The Company operates internationally, giving rise to exposure to market risks from changes in foreign exchange rates and interest rates. Derivative financial instruments are utilized by the Company to reduce those risks but are not held or issued for trading purposes.

     To hedge certain purchase and sale commitments and anticipated but not yet committed transactions denominated in other than functional currencies, the Company enters into forward exchange contracts and purchases and writes currency options. Written options are entered into only with purchased options.

     The notional amounts of forward exchange contracts as of March 31, 20002003 and 20012004 were ¥12,790¥8,496 million and ¥19,833¥20,505 million ($159,944193,443 thousand), respectively. The notional amounts of currency options purchased were ¥3,117¥1,558 million and ¥1,921 million ($15,492 thousand) as of March 31, 2000 and 2001, respectively.2003. The notional amount of currency options written was ¥1,254¥1,558 million and ¥1,920 million ($15,484 thousand) as of March 31, 2000 and 2001, respectively.

2003.

     To change currency and interest rate features of intercompany finance transactions, the Company entered into currency swap contracts with banks. Currency swap contracts effectively changed, in substance, the U.S. dollars floating interest rate intercompany borrowings into Japanese yen fixed and floating interest rate borrowings and the euro floatingfixed interest rate borrowings. The notional amounts of currency swap contracts as of March 31, 20002003 and 20012004 were ¥26,732¥32,255 million and ¥29,209¥35,106 million ($235,556331,189 thousand), respectively.

Concentration of Credit Risk—
The Company distributes its products to a diverse group of domestic and foreign customers. Trade receivables arising from these sales represent credit risk to the Company. However, due to the large number and diversity of the Company’s customer base, concentration of credit risk with respect to trade receivables is limited. The Company performs ongoing credit evaluation of its customers’ financial condition and, generally, requires no collateral from its customers.

     Derivative financial instruments that the Company holds or issues may expose the Company to credit risks if the counterparties are unable to meet the terms of such contracts.

     The Company minimizes credit risk exposure of these derivatives by limiting the counterparties to major international banks and financial institutions as well as avoiding concentration with certain counterparties, and also by making frequent credit reviews of these counterparties. Management does not expect to incur any significant losses as the result of counterparty default.

     The net cash requirements arising from the previously mentioned risk management activities are not expected to be material.

F-23F-31


15.


17. Fair value of financial instruments:

The following table presents the carrying amounts and fair values of the Company’s financial instruments at March 31, 20002003 and 2001:

                          
                   Thousands of
   Millions of Yen U.S. Dollars
   
 
   2000 2001 2001
   
 
 
   Carrying Fair Carrying Fair Carrying Fair
   Amounts Value Amounts Value Amounts Value

Assets:                        
 Long-term receivables ¥1,699  ¥1,699  ¥76  ¥76  $613  $613 
Liabilities:                        
 Long-term debt, including current maturity  84,295       46,300       373,387     
 Less—Capital lease obligations  881       665       5,363     
   
       
       
     
 Long-term debt—net  83,414   84,596   45,635   47,235   368,024   380,927 
Derivatives—unrealized gains (losses):                        
 Forward exchange contracts  276   206   (737)  (737)  (5,944)  (5,944)
 Currency swap  (958)  (1,038)  2,069   2,040   16,685   16,452 
 Interest rate swap  (3)  (9)            
 Currency option  27   80   7   7   56   56 

2004:
                         
                  Thousands of
  Millions of Yen
 U.S. Dollars
  2003
 2004
 2004
  Assets (Liabilities)
 Assets (Liabilities)
 Assets (Liabilities)
  Carrying Fair Carrying Fair Carrying Fair
  Amounts Value Amounts Value Amounts Value

 
Assets:                        
Available-for-sale securities ¥14,831  ¥14,831  ¥24,516  ¥24,516  $231,283  $231,283 
Long-term receivables  292   288   253   244   2,387   2,302 
Other financial instruments:                        
Forward exchange contracts  13   13   790   790   7,453   7,453 
Liabilities:                        
Long-term debt, including current maturity  (33,170)  (34,730)  (94,201)  (89,507)  (888,689)  (844,406)
Other financial instruments:                        
Forward exchange contracts  (250)  (250)  (95)  (95)  (896)  (896)
Currency swap  (2,076)  (2,076)  (3,179)  (3,179)  (29,991)  (29,991)
Currency option  (7)  (7)            

 

Estimation of Fair Values—
The following notes summarize the major methods and assumptions used in estimating the fair values of financial instruments.

     Short-term financial instruments are valued at their carrying amounts included in the consolidated balance sheets, which are reasonable estimates of fair value due to the relatively short period to maturity of the instruments. This approach is applied to cash and cash equivalents, trade receivables, short-term borrowings and accounts payable—trade.

trade payables.

     The carrying amounts and the fair values of available-for-sale securities are disclosed in Note 3.

4.

     Sundry investments included equity interests in non-public companies, amounting to ¥3,916¥2,404 million and ¥3,764¥2,855 million ($30,35426,934 thousand) at March 31, 20002003 and 2001,2004, respectively, and memberships amounting to ¥1,423¥503 million and ¥1,023¥528 million ($8,2504,981 thousand) at March 31, 20002003 and 2001,2004, respectively. The corresponding fair values at those dates were not computed as such estimation is not practicable.

     The fair values of long-term receivables were estimated by a discounting estimated future cash flows using current interest rates.

     The fair values of the Company’s long-term debt were estimated using a discounted cash flow analysis based on incremental borrowing rates for similar types of borrowing arrangements.

     The fair values of forward exchange contracts were estimated based on the quoted market rates of similar contracts. The currency swap and the interest rate swap were valued at replacement cost. The fair values of foreign currency options were measured using valuation models.

F-24     The fair values of the Company’s contingent liabilities for guarantees of loans are not significant.

F-32


16.


18. Basic and diluted earnings per share:

A reconciliation of the numerators and denominators of basic and diluted net income per share computation for the years ended March 31, 1999, 20002002, 2003 and 20012004 is as follows:

                  
               Thousands of
    Millions of Yen U.S. Dollars
    
 
   1999     2000 2001 2001

Net income available to common shareholders ¥1,159 ¥13,075  ¥18,298  $147,565 

 

    
    Number of Shares (Thousands)

    
Weighted average common shares outstanding 179,573  179,574   179,813     
Effect of dilutive warrants        –  32   103 

    
Diluted common shares outstanding 179,573  179,606   179,916     

    
 

      Yen     U.S. Dollars

Net income per share
     Basic ¥6.45 ¥72.81  ¥101.76  $0.82 
     Diluted    6.45  72.80   101.70      0.82 

                 
             Thousands of 
 Millions of Yen
 U.S. Dollars
 
 2002 2003 2004 2004 

 
Income from continuing operations ¥7,482  ¥15,942  ¥20,363  $192,103 
Effect of dilution—Zero coupon convertible bonds        (21)  (198)

 
Income from continuing operations—diluted ¥7,482  ¥15,942  ¥20,342  $191,905 

 
Income from discontinued operations, net of tax ¥565  ¥136  ¥4,475  $42,217 

 
Net income ¥8,047  ¥16,078  ¥24,838  $234,320 
Effect of dilution—Zero coupon convertible bonds        (21)  (198)

 
Net income—diluted ¥8,047  ¥16,078  ¥24,817  $234,122 

 
             
  Number of Shares (Thousands) 

 
Weighted-average common shares outstanding  180,032   178,168   175,433 
Effect of dilutive convertible bonds        1,115 
Effect of dilutive warrants  32   2    
Effect of stock options     1   61 

 
Diluted common shares outstanding  180,064   178,171   176,609 

 
                 
  Yen  U.S. Dollars 

 
Basic net income per share:                
Income from continuing operations ¥41.56  ¥89.48  ¥116.07  $1.10 
Income from discontinued operations, net of tax  3.14   0.76   25.51   0.24 

 
    
Net income ¥44.70  ¥90.24  ¥141.58  $1.34 

 
    
Diluted net income per share:                 
Income from continuing operations ¥41.55  ¥89.48  ¥115.18  $1.09 
Income from discontinued operations, net of tax  3.14   0.76   25.34   0.24 

 
    
Net income ¥44.69  ¥90.24  ¥140.52  $1.33 

 

17.F-33



19. Supplemental schedule:

The changes in the allowance for doubtful receivables for the years ended March 31, 2002, 2003 and 2004 are as follows:

                     
  Millions of Yen
  Balance at Charged (Credited) Deductions for    
  Beginning to Costs and Accounts Translation Balance at End
Allowance for Doubtful Receivables of Period Expenses Written Off Adjustments of Period

 
2002 ¥9,821  ¥(153) ¥(4,660) ¥311  ¥5,319 
2003  5,319   411   (765)  (334)  4,631 
2004  4,631   (667)  (13)  (417)  3,534 

 
                     
  Thousands of U.S. Dollars
  Balance at Charged (Credited) Deductions for    
  Beginning to Costs and Accounts Translation Balance at End
Allowance for Doubtful Receivables of Period Expenses Written Off Adjustments of Period

 
2004 $43,689  $(6,293) $(123) $(3,934) $33,339 

 

The changes in the warranty reserve for the year ended March 31, 2004 are as follows:

                     
  Millions of Yen
  Balance at            
  Beginning         Translation Balance at End
Warranty Reserve of Period Provision Payments Adjustments of Period

 
2002 ¥5,478  ¥10,976  ¥(10,290) ¥317  ¥6,481 
2003  6,481   7,642   (7,374)  (256)  6,493 
2004  6,493   6,050   (6,669)  (455)  5,419 

 
                     
  Thousands of U.S. Dollars
  Balance at            
  Beginning         Translation Balance at End
Warranty Reserve of Period Provision Payments Adjustments of Period

 
2004 $61,255  $57,075  $(62,915) $(4,292) $51,123 

 

F-34



20. Commitments and contingent liabilities:

Commitments outstanding at March 31, 20012004 for the purchase of property, plant and equipment and advertisement payments approximated ¥2,455¥3,114 million ($19,79829,377 thousand).

     Contingent liabilities at March 31, 20012004 principally for loans guaranteed in the ordinary course of business amounted to ¥3,333¥25,634 million ($26,879241,830 thousand).

     Loans guaranteed at March 31, 2004 are as follows:

           
    Guaranteed Amount
        Thousands of
Guarantee for Guaranteed until Millions of Yen U.S. Dollars

 
Affiliated company May 31, 2012—October 22, 2012 ¥25,000  $235,849 
Affiliated company October 25, 2004—March 31, 2005  502   4,736 

 
Total   ¥25,502  $240,585 

 

     The Company entered into these guarantee agreements to sustain the business relationships.

     The Company will be required to pay the guaranteed amounts if the affiliated companies are unable to repay.

     During the year ended March 31, 2001, the Company received a notice of proposed assessment from the German tax authorities for approximately DM55EUR 21 million (¥3,0752,706 million translated at the current foreign exchange rate at March 31, 2001)2004) relating to a tax position taken in prior years concerning intercompany purchase prices. The Company officially challenged the proposed assessment by arbitration procedures. There was no progress during the year ended March 31, 2004. In the opinion of management, it is not possible at this time to determine the ultimate resolution of this matter.


21. Variable interest entity:

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18. Gain on sale of interestELDis, Inc. was established in subsidiary:

In March 2000, the Company sold a portion of its holdings in its wholly2001 to manufacture and market new products, thin film transistor substrates for active-matrix organic light-emitting diode. ELDis, Inc., 45% owned subsidiary,by Tohoku Pioneer Corporation, through an initial public offering reducing the Company’s ownership to 67.0%.a 67% owned subsidiary is accounted for by equity method of accounting.

     At March 31, 2004, total assets and total of common stock and capital surplus of ELDis, Inc. was ¥35,496 million ($334,868 thousand) and ¥20,000 million ($188,679 thousand), respectively. At March 31, 2004, it is reasonably possible that Tohoku Pioneer Corporation engagesis the primary beneficiary of or holds a significant variable interest in theELDis, Inc., a development manufacture and sale of electronics products.

     4,000 thousand shares were newly issued at ¥4,252 per share and 2,600 thousand shares were sold by the Company. The net cash proceeds from issuance of stock and sale of stock were ¥17,008 million and ¥11,772 million, respectively.
     Gain on issuance of stock was ¥7,136 million and gain on sale of existing stock was ¥5,355 million. Deferred taxes have been provided onstage enterprise. Tohoku Pioneer Corporation’s maximum exposure to loss as a certain portion of gains from the issuance of new shares as the Company considers that it is possible to sell a partresult of its shareholdings while keeping its majority ownership.involvement with ELDis, Inc. at March 31, 2004 is as follows:
         
      Thousands of
Variable interests Millions of Yen U.S. Dollars

 
Investments in equity ¥9,000  $84,906 
Guarantee of loans  25,000   235,849 

 
Total ¥34,000  $320,755 

 

19.


22. Remuneration of directors, executive officers and officers:corporate auditors:

The aggregate remuneration (including bonuses and stock-based compensation [See[see Note 10]12]) charged to income by the parent company for directors, executive officers and officerscorporate auditors for the years ended March 31, 1999, 20002002, 2003 and 20012004 totaled ¥740¥876 million, ¥733¥965 million and ¥811¥1,238 million ($6,54011,679 thousand), respectively.

F-26F-35



23. Subsequent events:

INDEPENDENT AUDITORS’ REPORT ON SUPPLEMENTAL INFORMATION

Toa. In June 2004, we received preliminary information from the BoardUnited States Internal Revenue Service proposing additional taxes of Directors and Shareholders of Pioneer Corporation:

We have auditedapproximately $58 million (¥6,148 million translated at the consolidated financial statements of Pioneer Corporation and subsidiaries as offoreign exchange rate at March 31, 2004) relating to an adjustment to transfer prices between affiliated companies for the years ended March 31, 2000 through 2002. We intend to contest the adjustment. In the opinion of management, it is not possible at this time to determine the ultimate outcome of this matter.

b. On July 1, 2004, the Company and 2001, and for eachNEC Corporation (“NEC”) concluded the stock transfer agreement under which NEC will transfer to the Company 100% of the three years inissued share capital of its plasma display manufacturing subsidiary, NEC Plasma Display Corporation (“NPD”) and the period ended March 31, 2001, and our report thereon appears on page F-2. Our audits were conductedintellectual property rights relating to plasma displays held by NEC. We expect to pay approximately ¥40,000 million ($377,358 thousand) for the purposeacquisition of forming an opinion on the basic financial statements takenNPD and NEC’s intellectual property rights which is scheduled to be effective as a whole. The supplemental information listed in the index to consolidated financial statements and schedules is presented for the purpose of additional analysis and is not a required part of the basic financial statements. This supplemental information is the responsibility of the Company’s management. Such information has been subjected to the auditing procedures applied in our audits of the basic financial statements and, in our opinion, is fairly stated in all material respects when considered in relation to the basic financial statements taken as a whole.September 30, 2004.

/s/ Deloitte Touche Tohmatsu
Deloitte Touche Tohmatsu
Tokyo, Japan

May 2, 2001F-36

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PIONEER CORPORATION AND SUBSIDIARIES

SUPPLEMENTAL NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
TO CONFORM WITH REGULATION S-X

A.SHORT-TERM BORROWINGS AND LONG-TERM DEBT
Unused lines of credit for short-term financing at March 31, 2001, approximated ¥193,760 million of which ¥30,000 million relates to commercial paper programs. Unused commitments for long-term financing arrangements at March 31, 2001 amounted to ¥9,300 million. There were no commitment fees.
B.INCOME TAXES
Income before income taxes and income tax expense was comprised of the following components:

              
   Millions of Yen
   
   Year Ended March 31
   
   1999 2000 2001
   
 
 
Income (loss) before income taxes:            
 Domestic ¥(3,254) ¥8,342  ¥5,967 
 Foreign  15,787   19,466   28,226 
   
   
   
 
  ¥12,533  ¥27,808  ¥34,193 
   
   
   
 
Income taxes—Current:            
 Domestic ¥2,148  ¥2,883  ¥4,906 
 Foreign  6,963   9,214   10,105 
   
   
   
 
  ¥9,111  ¥12,097  ¥15,011 
   
   
   
 
Income taxes—Deferred:            
 Domestic ¥3,398  ¥2,927  ¥(872)
 Foreign  (1,055)  192   181 
   
   
   
 
  ¥2,343  ¥3,119  ¥(691)
   
   
   
 

C.SHAREHOLDERS’ EQUITY
Retained earnings at March 31, 2001, include the parent company’s and its consolidated subsidiaries’ equity in undistributed earnings of 20% to 50% owned companies accounted for on an equity basis in the amount of ¥125 million.

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SCHEDULE II

PIONEER CORPORATION AND SUBSIDIARIES

VALUATION AND QUALIFYING ACCOUNTS

YEARS ENDED MARCH 31, 1999, 2000 AND 2001

           
  Millions of Yen
Allowance for 
Doubtful Notes Balance at Charged to Deductions   Balance at
and Accounts Beginning Costs and for Accounts   End of
Receivables of Period Expenses Written Off Other Period

 
 
 
 
 
        (a)  
 
1999 ¥  11,143 ¥  1,156 ¥     (798) ¥   (503) ¥  10,998
2000      10,998        908      (2,466)       (447)       8,993
2001        8,993     1,164         (861)       525       9,821

(a)Collection of accounts previously written off, translation adjustments, and effects of newly consolidated subsidiaries.

F-29