SHEARMAN & STERLING LLP
ABU DHABI
FAX: (81 3) 5251-1602 FUKOKU SEIMEI BUILDING, 5TH FLOOR BEIJING
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TOKYO 100-0011 DUSSELDORF
FRANKFURT
HONG KONG
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MENLO PARK
MUNICH
NEW YORK
PARIS
April 18, 2005 ROME
SAN FRANCISCO
SAO PAULO
SINGAPORE
TOKYO
TORONTO
WASHINGTON, D.C.
Mr. Larry Spirgel
Assistant Director
Division of Corporation Finance
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549-0305
U.S.A.
RE: Pioneer Corporation
Form 20-F for the fiscal year ended March 31, 2004
Filed on August 6, 2004
File No. 1-7616
Dear Mr. Spirgel:
We have received your letter dated March 16, 2005 with comments on Pioneer
Corporation's Form 20-F for the fiscal year ended March 31, 2004 (the "2004
Form 20-F"). On behalf of Pioneer Corporation, we are transmitting the
following responses to your comments. The terms "we", "us", "our" and "the
Company" below refer to Pioneer Corporation and, to the extent the context
so requires, Pioneer Corporation and its consolidated subsidiaries. Defined
terms used but otherwise not defined herein have the meanings set forth in
the 2004 Form 20-F.
To assist you in the reviewing process, we have preceded each response with
a copy (in bold type) of the comment as stated in your letter.
Shearman & Sterling LLP is a limited liability partnership organized in the
United States under the laws of the State of Delaware, which laws limit the
personal liability of partners.
Securities and Exchange Commission
Page 2
Form 20-F for the fiscal year ended March 31, 2004
Comment #1
Item 5. Operating and Financial Review and Prospects
Critical accounting policies, page 34
Please refer to your discussion on the valuation of inventories. Tell us in
more detail why you consider the valuation of inventories, allowance for
doubtful accounts to be critical such that the nature of estimates or
assumptions is material due to the levels of subjectivity and judgment
necessary to account for highly uncertain matters or the susceptibility of
such matters to change; and the impact of the estimates and assumptions on
financial condition or operating performance is material. Tell us and
disclose in future filings how accurate the estimates of the net realizable
value have been in the past, and provide sensitivity analysis depicting
reasonably likely scenarios had other variables been chosen in the
determination of your estimates. Refer to SEC Interpretive Release no.
33-8350 Commission Guidance Regarding Management's Discussion and Analysis
of Financial Condition and Results of Operations.
The valuation of allowance for doubtful accounts requires us to evaluate our
customers' credit worthiness, paying history, economic conditions and other
factors to estimate the future bad debt losses. An annual average of JPY 2.7
billion of bad debt losses was incurred by the Company during the three
years ended March 31, 2002, which made us consider the estimate of the
allowance for doubtful accounts to be critical.
However, considering the fact that actual bad debt losses and the provision
for doubtful accounts in recent years have not been material to the results
of operations, we plan to remove the valuation of the allowance for doubtful
accounts from the critical accounting policies and estimates in future
filings. Actual bad debt losses for fiscal 2003 and fiscal 2004 were JPY 0.8
billion and JPY 0.01 billion, respectively, and the provision charges
(reversals) for doubtful accounts were JPY 0.4 billion and (JPY 0.7
billion), respectively.
The majority of our products are produced for the consumer electronics
market, and our inventory is susceptible to quickly changing demands and
selling prices. For the purpose of properly valuing our inventory, we
provide inventory reserves for excess, slow-moving and obsolete inventory.
Inventory with no potential for future sale or potential use by the Company
is subject to write-off and, inventory which is considered to be obsolete or
slow-moving, but salable at reduced prices is written down to estimated net
realizable value. As of March 31, 2004, the reserves for inventories to be
written-off and written-down to net realizable value were JPY 5.3 billion
and JPY 3.0 billion, respectively. Net realizable value is the most critical
factor for inventory valuation and estimating net realizable value requires
assumptions as to uncertain matters such as selling prices and salable
quantities to be made based upon judgment about future market prices of
competing products and customer demand.
The challenges in estimating net realizable value with precision are
illustrated by our experience during the year ended March 31, 2003. At that
time, we considered certain
Securities and Exchange Commission
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products to be obsolete or slow-moving, and reduced their carrying value to
an estimated net realizable value of JPY 1.3 billion as of March 31, 2003.
The Company was then able to sell these products, and the proceeds from the
sale were JPY 2.2 billion after deducting direct selling expenses. The JPY
0.9 billion difference in net realizable value between estimated and actual
arose from an effort to sell these products at prices higher than the
Company's estimates of market value, efforts to sell scrap products, and
challenges in making precise forecasts about market conditions including
price trends and customer demand. The estimate of net realizable value at
the end of fiscal 2003 was based on the estimate about various factors
affecting inventory valuation, and the estimate was considered to be
appropriate at that time. Because of the level of unpredictability, we
believe it is impracticable to provide an indicative sensitivity analysis
using a measure by which the estimate of net realizable value could be
likely to differ. To provide investors with an understanding of the impact
of these judgments, we intend to disclose the movement of our inventory
reserves in the manner set forth below.
The following is the proposed disclosure for inventory valuation in future
filings (updated as appropriate for the periods presented):
The majority of our products are produced for the consumer electronics
market, and our inventory is susceptible to quickly changing demands and
selling prices. For the purpose of properly valuing our inventory, we
record inventory reserves for excess, slow-moving and obsolete inventory.
Inventory with no potential for future sale or potential use by the
Company is subject to write-off and, inventory which is considered to be
obsolete or slow-moving, but salable at reduced prices, is written down
to estimated net realizable value. Estimating net realizable value
requires assumptions as to uncertain matters such as selling prices and
salable quantities to be made based upon judgment about future market
prices of competing products and customer demand, taking current market
conditions into consideration.
As of March 31, 2004, an inventory reserve of JPY 8.3 billion included a
JPY 5.3 billion reserve for inventories to be written off and a JPY 3.0
billion reserve for inventories written down to net realizable value. The
following table sets forth the changes in inventory reserve during fiscal
2004.
(Billions of yen)
Beginning Provision Reversal Other Ending
8.5 4.9 (4.2) (0.9) 8.3
Comment #2
None of the critical accounting estimates that you include in your current
disclosures include the sensitivity analysis or other quantitative
information as required per this release. Revise your disclosures to include
sensitivity analysis and other quantitative information when it is
reasonably available. For additional guidance, refer to Item 303 of
Regulation S-K as well as the Commission's
Securities and Exchange Commission
Page 4
Interpretive Release on Management's Discussion and Analysis of Financial
Condition and Results of Operation which is located on our website at:
http://www.sec.gov/rules/interp/33-8350.htm.
In response to the Staff's comment, we will include the quantitative
discussion set forth in response to the Staff's preceding comment. In
addition, for pension benefit costs, we will include quantitative
information and a sensitivity analysis as to discount rates and expected
long-term rates of return in future filings.
Comment #3
Item 5F. Tabular disclosure of contractual obligations, page 51
It appears that the table of contractual obligations includes only principal
payments on debt and credit facilities. Revise the table to also include
your obligations for interest payments on debt.
In response to the Staff's comment, we will include our interest payments in
the tabular disclosure of contractual obligations in future filings.
Comment #4
Item 15 Control and Procedures, page 88
We note your disclosures in second paragraph that "... there have been no
significant changes in Pioneer's internal controls or in other factors that
could significantly affect these controls subsequent to the date our most
recent evaluation of such controls." Supplementally, confirm whether there
was any change in your internal control over financial reporting identified
in connection with an evaluation thereof that occurred during the period
covered by the annual report that has materially affected, or is reasonably
likely to materially affect, your internal control over financial reporting.
Please see Item 15(d) of Form 20-F. Please also revise your future filings
accordingly.
We confirm that no change in the internal control over financial reporting
was identified in connection with the evaluation required thereof that
occurred during the period covered by the annual report on Form 20-F for the
period ended March 31, 2004, that has materially affected, or is reasonably
likely to materially affect, our internal control over financial reporting.
We agree to disclose information with respect to the foregoing in future
filings.
Comment #5
Financial Statements
Notes to Consolidated Financial Statements
Note 2. Summary of significant accounting policies
Securities and Exchange Commission
Page 5
Tell us more in detail about your revenue recognition for royalties. Explain
to us how you recognize royalty revenues based on royalty statements from
the licensees.
Royalty revenue, which are based on actual amounts produced or sold by the
licensee, is recognized when either a royalty report or payment is received
from the licensee, whichever is earlier. Until such time, this revenue is
not considered to have met the recognition criterion of being fixed or
determinable, nor is collectibility reasonably assured. Typically, a royalty
report shows information about the manufacturer, model name of the licensed
products, sales amount, sales quantity, royalty rate, and royalty amount
due. We usually receive reports from our licensees on a quarterly basis.
Approximately one-third of licensees submit payments along with their
quarterly report. For the remaining licensees, we establish a receivable
when we receive the quarterly report.
Comment #6
Inventories, page F-9
Please disclose the nature of cost elements included in the finished goods
and work in process inventories disclosed in Note 5 on page F-15. Please
refer to Rule 5-02.6(b) of Regulation S-X.
In response to the Staff's comment, we will, in future filings, elaborate on
the Inventories accounting policy in Note 2 to include the following:
Cost of finished goods and work in process inventories include the cost
of materials, labor and applied factory overhead. Applied factory
overhead includes depreciation on production related assets, utilities
of the production area, and production tools and equipment that are not
capitalized.
Comment #7
Sales incentives, page F-10
Your disclosure on sales incentives refers to your policy on "certain costs
incurred by the company in connection with reseller's purchase or
promotion", however, we note on page 35 that you provide to your customers
different types of sales incentives. In this regard provide us with more
details of these incentive programs for resellers and retailers. Tell us and
expand your accounting policy for each of these types of arrangements (i.e.,
product discount, volume-based rebates, consumer promotion.) Explain to us
the nature of your estimates in relation to each of the incentive programs.
Also, tell us the nature of any other incentive, rebate, cooperative
advertising or other promotional programs provided by the Company to its
customers and how the company accounts for items, including the amounts
involved.
Securities and Exchange Commission
Page 6
We mainly offer sales incentives for consumer products, and record such
incentives as a reduction of revenue in accordance with Emerging Issues Task
Force ("EITF") Issue No. 01-9, "Accounting for Consideration Given by a
Vendor to a Customer." These incentives are generally classified into five
categories: Discounts, Rebates (to retailers), Consumer rebates, Cash
discounts, and Promotional incentive allowances.
Discounts:
We offer promotional discounts on specified products for specified periods.
Also, we often offer a price protection program to retailers when the
promotional discount program is announced. These discounts are accounted for
as reductions of revenue. The discount amount deducted from revenue for
fiscal 2004 was JPY 57.2 billion.
Promotional discounts are deducted from invoices to retailers and recorded
as sales reductions at the time of sale. No estimate is required to account
for the promotional discount.
Under the price protection program, we offer discounts for the retailers'
inventory at the time of the program announcement to compensate for the
difference between the discounted prices and higher prices the retailers
paid for their inventory. Typically, the maximum amount of price protection
discounts is the lesser of the quantity of the inventory the retailer orders
during the promotional period or retailers' quantity of inventory on-hand at
the time the program is announced. Price protection discounts are accrued
when the program is announced by estimating discounts to be claimed by the
retailers. Such estimates are based on forecasted order quantities during
the promotional period and assumptions as to the amount of inventory that
retailers have on hand.
Rebates (to retailers):
Contractual rebates, which are based on fixed rebate rates in the contracts
with customers, are accrued at the time of sale based on actual sales
amounts and contracted rebate rates. No estimation is required to account
for the contractual rebates.
Volume incentive rebates are accrued at the time of original sale based on
historical sales rates for specific retailers and the estimated volume
incentive rebate rate the retailer will eventually achieve. Since the volume
rebate rate eventually applied to each retailer is dependent on the amount
of the retailer's future purchases and is not precisely determinable at the
time of the sale, assumptions must be used as to the volume rate levels each
retailer will achieve. These assumptions are made based upon historical
experience. Our sales history information provides us with information about
volume incentive rebate rates each retailer achieved in the past. The amount
of rebates, including both contractual rebates and volume incentive rebates,
deducted from sales for fiscal 2004 was JPY 32.5 billion.
Consumer rebates:
We occasionally offer incentives directly to consumers in the form of
mail-in rebates, under which consumers who purchase specific products are
required to mail in the
Securities and Exchange Commission
Page 7
coupons or other specific proof of purchase for redemption. Consumer rebates
are accrued at the later of when the related sales are recognized and when
the program is announced. The actual amounts of consumer rebates are
dependent upon consumers' future actions, and our estimates are based upon
assumptions as to quantities to be purchased by consumers during the program
period and consumer redemption rates, which is determined based on
historical experience about consumer response to consumer rebate programs.
The amount deducted from sales for consumer rebates was JPY 1.5 billion for
fiscal 2004.
Cash discounts:
Cash discounts are given for early payments in accordance with terms of the
contract with customers and are recorded as a reduction of revenue at the
time of original sale. The estimate of the cash discounts is based upon
information about customers' payment histories. The amount of cash discounts
deducted from sales was JPY 2.9 billion for fiscal 2004.
Promotional incentive allowances:
We provide reimbursements for the purpose of supporting retailers' sales
promotions of our products. The cost mainly includes subsidies for
advertising, displaying, cost of other sales promotion materials, and
salaries of temporary floor sales personnel. We account for all the subsidy
reimbursements to retailers as a reduction from sales. Certain promotional
allowances, such as co-op advertising, are determined as certain percentages
of the respective sales amount and are recorded at the time of the sale.
Although reimbursement for such incentives requires dealers to perform the
sales promotion of our products, we assume, based on historical experience,
that almost all the dealers will eventually perform the sales promotion and
submit claims for reimbursement. Other allowances, whose amounts are not
determined by a factor of sales, are recorded when the subsidy is offered
and the amount becomes reasonably determinable. Examples for this type of
allowance are display allowances determined by the number of units displayed
on the sales floor, and allowances based on agreements to share the cost
incurred by the dealers for items such as new signboards, new display racks
and salaries of temporary floor sales personnel. For fiscal 2004, JPY 4.7
billion of customer support was deducted from sales.
The following is our proposed footnote disclosure of the significant
accounting policy for sales incentives.
Costs incurred by the Company in connection with sales incentives related
to the purchase or promotion of our products are classified as a reduction
of revenues in accordance with Emerging Issues Task Force ("EITF") Issue
No. 01-9, "Accounting for Consideration Given by a Vendor to a Customer."
Such costs include the estimated cost of promotional discounts, retailer
price protection, dealer rebates, consumer rebates, cash discounts, and
support for retailers' promotion of the Company's products. Sales
incentives that are dependent on future customer performance are
Securities and Exchange Commission
Page 8
estimated and recorded at the later of when the original sale is recorded
and when the incentive is offered.
* * *
If you have any questions or comments regarding the foregoing, please do not
hesitate to contact the undersigned by telephone at +81-3-5251-0232, by fax
at +81-3-5251-1602 or by email at masahisa.ikeda@shearman.com, or Pioneer
Corporation (attention: Akira Niijima) by telephone at +81-3-3495-4926, by
fax at +81-3-3495-4431 or by email at pioneer_shr@post.pioneer.co.jp.
Very truly yours,
/s/ Masahisa Ikeda
Masahisa Ikeda
Shearman & Sterling
cc: Gopal Dharia (Securities and Exchange Commission)
Ivette Leon (Securities and Exchange Commission)
Akira Niijima (Pioneer Corporation)
Hideki Okayasu (Pioneer Corporation)
Paul M. Gallagher (Deloitte Touche Tomatsu)
Toshihiko Matsumiya (Deloitte Touche Tomatsu)
Emiko Takashima (Deloitte Touche Tomatsu)