SECURITIES AND EXCHANGE
COMMISSION
Form 20-F
( ) 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
For the fiscal year ended December 31, 1999
-----------------
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from____ to ____
Commission file number 0-12131
CANON KABUSHIKI KAISHA
(Name of Registrant in Japanese as specified in its charter)
CANON INC.
(Name of Registrant in English as specified in its charter)
JAPAN
(Jurisdiction of incorporation or organization)
30-2, Shimomaruko 3-chome, Ohta-ku, Tokyo 146-8501, Japan
(Address of principal executive offices)
Securities registered or to be registered pursuant to
Section 12(b) of the Act.
Title of each class Name of each exchange on which registered
None None
------------------- -------------------------------------------------
Securities registered or to be registered pursuant to
Section 12(g) of the Act.
Common stock* (par value 50 Japanese yen per share)
--------------------------------------------------------------------------------
(Title of Class)
--------------------------------------------------------------------------------
(Title of Class)
Securities for which there is a reporting obligation
pursuant to Section 15(d) of the Act.
Common stock* (par value 50 Japanese yen per share)
--------------------------------------------------------------------------------
(Title of Class)
* American Depositary Receipts for 50,000,000 American Depositary Shares,
each American Depositary Share representing 1 share of common stock of
Canon Inc., were registered under the Securities Act of 1933.
This form contains 82 pages.
<PAGE>
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.
Common stock: Yen 50 par value per share
Outstanding as of December 31, 1999: 871,555,698 shares
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No .
----------- -------
Indicate by check mark which financial statement item the registrant has elected
to follow.
Item 17 X Item 18
--- ---
All information contained in this Report is as of December 31, 1999 unless
otherwise specified.
As used herein, "Canon" and the "Company" refer to Canon Inc. and its
subsidiaries and Canon Inc., respectively, unless the context otherwise
indicates.
On March 31, 2000, the noon buying rate for yen in New York City as reported by
the Federal Reserve Bank of New York was Yen102.73=U.S.$1.
2
<PAGE>
PART I
Cautionary Statement for Purposes of the "Safe Harbor" Provisions of the United
States Private Securities Litigation Reform Act of 1995. The Private Securities
Litigation Reform Act of 1995 provides a "safe harbor" for forward-looking
statements. This Form 20-F contains certain forward-looking statements,
including, but not limited to, statements regarding the intent, belief or
current expectations of Canon with respect to the introduction of new products,
trends affecting Canon's financial condition or results of operations and
Canon's future business policies and strategies. Such statements include, but
are not limited to, statements under the following headings: (i) Item 1.
"Description of Business", (ii) Item 3. "Legal Proceedings" and (iii) Item 9.
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." These forward-looking statements are not guarantees of future
performance and involve risks and uncertainties, and actual results may differ
materially from those projected or implied in the forward-looking statements.
These risks and uncertainties include, but are not limited to, economic
conditions and changes in the regulatory and competitive environment in which
the Company operates. See the related cautionary statement under Item 9.
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Item 1. Description of Business
Overview:
The Company was incorporated under the laws of Japan in 1937 to produce and sell
Japan's first focal plane shutter 35mm still camera, which was developed by its
predecessor company, Precision Optical Research Laboratories, which was
organized in 1933.
Utilizing technology obtained through the development of photographic and
optical products, Canon entered the business machines field. With the successful
introduction of electronic calculators in 1964, Canon continued to expand its
operations to include plain paper copying machines, electronic typewriters,
Japanese-language word processors, faxes, laser beam printers, computers and
bubble jet printers.
Canon is now one of the world's leading manufacturers of plain paper copying
machines, laser beam and bubble jet printers and cameras.
Canon sells its products principally under the Canon brand name and through
sales subsidiaries. These subsidiaries are responsible for marketing and
distribution to retail dealers in an assigned territory. Approximately 70% of
the Company's consolidated net sales in 1999 were generated outside Japan;
approximately 35% in the Americas, 28% in Europe and 7% in other areas.
Canon's strategy is to develop innovative high value-added products which
incorporate advanced technologies. The following is a list of some of Canon's
most innovative products:
o In 1968: The first plain paper copying machine using alternative
technology to the xerographic process
o In 1976: The 35mm single-lens reflex (SLR) camera with a built-in
microcomputer
o In 1982: The small and light plain paper copying machine incorporating
a replaceable cartridge for easy maintenance
3
<PAGE>
o In 1983: The compact laser beam printer
o In 1987: The digital laser full-color plain paper copying machine
o In 1988: The color bubble jet copying machine utilizing Canon's
original bubble jet printing technology
o In 1990: The notebook-sized bubble jet printer with a replaceable
cartridge
o In 1992: The digital integration copying machine
o In 1996: The Advanced Photo System cameras
o In 1997: LCD color filter utilizing Canon's original bubble jet
technology
o In 1998: The CXDI-11 X-ray Digital Camera, a medical imaging product
with the LANMIT (Large Area New-MIS sensor and TFT) sensor.
In 1999 Canon Inc. and Toshiba Corporation announced an agreement to collaborate
on developing and establishing mass-production technologies for SED
(Surface-conduction Electron-emitter Display) with potential in large-screen
wall-mounted displays.
Canon's research and development activities range from basic research to
product-oriented research directed at maintaining and increasing the
technological leadership of Canon's products in the market.
Canon manufactures the majority of its products in Japan, but in an effort to
reduce the currency exchange risks, Canon has increased overseas production and
the use of local parts. Canon has manufacturing subsidiaries in the United
States, Germany, France, United Kingdom, Taiwan, China, Malaysia, Thailand and
Mexico, and manufacturing joint ventures in Italy and Korea.
As a concerned member of the world community, Canon emphasizes recycling, and
has increased its use of clean energy sources and cleaner manufacturing
processes. Canon has also adopted programs to collect and recycle used
cartridges and to refurbish used copy machines. In addition, it has removed
certain environmentally unfriendly chemicals from all of its manufucturing
processes.
Products:
Canon's products are divided into the following three product groups: business
machines, cameras and optical and other products.
Business machines
The business machines product group is divided into three sub-groups consisting
of copying machines, computer peripherals and business systems.
Copying machines o Canon manufactures, markets and services a wide range of
copying machines, including the NP series copying machines, utilizing
alternative technology to the xerographic system; the GP series digital copying
machines; the CLC series full color digital copying machines and the PC series
personal copying machines.
[NP series copying machines]
o In 1990 Canon made its entry into the high-end black-and-white copying
machine market by introducing the NP9800, an 83 pages-per-minute (ppm)
copying machine.
o In 1997 Canon released the NP6085, an 85 ppm copying machine which
features a touch sensitive LCD control panel.
o In 1998 Canon introduced the NP6551 with a rate of 50 letter-size ppm
and a touch sensitive LCD control panel.
4
<PAGE>
o In 1999 Canon released the NP6035F, the first "Factory Produced New
Models", which are manufactured by converting existing products to new
models by adding new features or functions, thereby furthering Canon's
commitment to conserve the environment and reduce waste.
[GP series digital copying machines]
o In 1992 Canon entered the digital copying machine market by
introducing the GP55.
o In 1996 Canon launched the GP200 series of multifunction digital
copying machines worldwide, using Canon's Surface Rapid Fusing (SURF)
technology to reduce energy consumption and warm-up time, and
functioning as copying machines, faxes, scanners or printers.
o In 1999 Canon released the ImageRUNNER 330 and the ImageRUNNER 440 in
the United States. These are multifunction digital copying machines
each with a rate of 33 and 40 letter-size ppm. Canon introduced the
imageCLASS2200 Series in 1999, which has a rate of 16 letter-size ppm
and with the capability to add network printing, faxing, or scanning
functions.
[CLC series full color digital copying machines]
o In 1987 Canon introduced the world's first digital laser full-color
plain paper copying machine and has since then improved its line-up of
color copying machines. The digital format of copying machines allows
users to both create and reproduce full color copies, and when an
optional Intelligent Processing Unit (IPU) or video adapter is
incorporated, these copying machines are capable of connecting to
computer systems.
o In 1998 Canon introduced the CLC2400, which has a rate of 24
letter-size ppm and many features of the CLC1000.
o In 1999 Canon launched the imageCLASS2100, with the rate of 6ppm in
full-color A4 copies and provides smooth and non glossy color images
using a new spherical toner.
[PC series personal copying machines]
o In 1982 Canon introduced a plain paper copying machine, the smallest
and lightest in the world at that time and the first to contain the
entire imaging mechanism in a user-replaceable cartridge. Since then,
Canon has retained its strong position in the personal copying machine
market.
o In 1998 Canon released the PC400/420 with RAPID Fusing System, which
eliminates warm-up time.
This category also includes the related sales of paper and chemicals, service
charges and sales of replacement parts.
Computer peripherals o Computer peripherals include laser beam printers (LBPs),
bubble jet (BJ) printers and scanners.
Canon's LBPs are relatively small in size, easy to maintain, and have
high-quality printing capabilities. This is attributable to Canon's expertise in
laser beam printing and plain paper copying technologies and the adoption of a
user-replaceable toner cartridge system which contains optical components.
o In 1995 the LBP-730 was introduced in Japan. This model features the
LIPS IV page description language with 600 dpi resolution for data
processing and Canon's On-Demand fusing technology, reducing power
consumption and warm-up periods.
5
<PAGE>
o In 1997 Canon introduced the LBP-2460, a high-end, 24 ppm printer to
Asia, Oceania, and Europe. Canon also released the LBP-750/740, an A3
machine with excellent cost performance, in Japan.
o In 1998, the LBP-840/850 with 1,200 dpi printing at 16 ppm was
introduced in Japan. In the overseas market, Canon released the
LBP-1760 with a rate of 17 letter-size ppm and the C LBP 460PS, a
full-color A4/letter-size printer.
o In 1999, Canon launched the LBP910, with an output of 22 ppm,
resolution of 1,200 dpi X 1,200 dpi and network function and
LBP2160/2260, with 6 ppm color and 24 ppm monochrome output in Japan.
In the overseas market, Canon released the LBP800, which has a rate of
8 ppm monochrome output and zero warm-up time.
Most Canon LBP sales are on an original equipment manufacture (OEM) basis.
Canon continues to incorporate its exclusive bubble jet technology into a range
of new products through the following series of products:
o In 1995 Canon introduced the BJC-210 full-color desktop printer.
o In 1997 Canon launched the BJC-7000 and BJC-4300 series. The BJC-7000
is the world's first printer offering water-resistant color printing
on plain paper. The BJC-4300/4650 offers cartridge option to convert
the printer into a scanner.
o In 1998 Canon released the BJC-5000 with a dual cartridge system, the
first Canon bubble jet printer to be fully developed and produced for
worldwide shipment by a subsidiary outside of Japan.
o In 1999 the BJ F850, which features new technologies and Photo Inks
for output indistinguishable from conventional photographs, was
introduced in Japan. Canon also introduced the BJC-6000, with 5 ppm
color and 8 ppm monochrome output, 1,440 X 720 dpi resolution and Six
Colors Individual Ink Cartridge System in the overseas market.
Canon offers entry-level (300-600 dpi) and mid-level (1200 dpi) flatbed image
scanners, as well as film scanners for both 35mm and Advanced Photo System film.
o In 1996 Canon introduced the CanoScan 300 and 600, flatbed color image
scanners. The 300 model featutres a resolution of 300 X 600 dpi, while
the 600 achieves 600 X 1,200 dpi resolution.
o In 1998 the CanoScan 620P with a new contact image sensor (LED
Indirect Exposure) and 600 dpi resolution was released.
o In 1999 Canon introduced the CanoScan FB 630P, featuring 600 X 1,200
dpi/36-bit color scanning and slim design (1.5 inches thick).
Business systems o Business systems include fax machines, work stations and
personal computers. Also included are micrographic equipment such as desktop
electronic filing systems, wordprocessing systems, desktop publishing systems
and calculators.
Canon produces a broad range of fax machines, from G4 machines for digital
networking to small and economical machines for personal use.
o In 1992 Canon expanded its line of desktop plain paper fax machines
(PPFs) with built-in laser beam printers. Canon also introduced new
PPFs with built-in bubble jet printers.
o In 1997 Canon introduced the Laser Class 8500 and the Laser Class
9000/9500. The Laser Class 8500 is network compatible and can be
turned into a printer/scanner. The
6
<PAGE>
Laser Class 9000/9500, a super G3 fax, has a 33.6 Kbps modem speed and
transmits one page in about 3 seconds.
o In 1998 the multiPass C3500/C5500, a fax machine with color bubble jet
printing, copying and scanning function, was introduced.
o In 1999 Canon introduced the Laser Class 9000L. This machine features
super G3 Dual Line Option, which allows faxes to be sent and received
simultaneously.
The majority of the work stations and personal computers sold by Canon are
manufactured by third parties under the manufacturers' own brand names, while
some are sold by Canon on an OEM basis. In 1997 Canon made a strategic
withdrawal from the personal computer business in the United States.
In 1989 Canon released the Canofile 250, an electronic filing system featuring
high-speed input and easy referencing of documentation through use of a
magneto-optical disk (MOD). To further strengthen its line of micrographic
equipment, Canon introduced the Microprinter 90 in 1992, a compact
reader-printer that displays original documents on screen or prints images on
plain paper. In 1994 Canon released the new CF510/520 computer-controlled
electronic filing systems, featuring easy-to-read larger screens and improved
software.
Cameras
Canon manufactures and markets a wide range of 35mm SLR cameras (focal plane
shutter cameras with interchangeable lenses), leaf shutter (L/S) cameras (35mm
cameras with fixed lenses) the Advanced Photo System cameras and digital
cameras. Canon also manufactures and markets camcorders, lenses and various
camera accessories.
o In 1987 Canon introduced a new auto-focus SLR camera system called the
Electro-Optical System (EOS) series. Canon has since added new models
such as the economical EOS Rebel, and the EOS ELAN featuring a unique
bar-code programming function and a quiet film transport system.
o In 1998 Canon introduced the EOS-3, the first commercial application
of the CMOS sensor, featuring 45-point area autofocus (AF) and
eye-controlled focus.
o In 1999 Canon released the EOS Rebel 2000, entry-level model,
featuring 7-point AF and 35-zone AE, as a successor of the EOS Rebel
G.
Canon also produces various types of leaf shutter cameras.
o In 1998 the Sure Shot 85Zoom with 38-85mm 2.2 X power zoom lens and
3-point, 280-step autofocus system, was released.
o In 1999 Canon introduced the Sure Shot Classic 120, featuring 38-120mm
3.2 X power zoom lens and 3-point, dual-hybrid autofocus system, while
incorporating classic design elements.
In 1996 Canon started to produce cameras for the Advanced Photo System, which
has smaller film than 35mm film, the negatives of which contain magnetically
coded information for three print types, in addition to that for dates, titles,
and shooting conditions.
o In 1997 Canon released the ELPH Jr., an L/S camera.
o In 1998 the ELPH 370Z, an L/S camera with 23-69mm 3Xpower zoom lens
and 3-point autofocus system, was introduced.
o In 1999 Canon released the ELPH 2, with 23-46mm 2Xpower zoom lens,
which is
7
<PAGE>
smaller than the original ELPH.
Canon manufactures digital video camcorders.
o In 1997 Canon released the Optura and XL1, two digital camcorder
models. The Optura produces high-quality movie and still images, and
comes with a lens unit equipped with a 14X optical zoom and a 35X
digital zoom, as well as an optical image stabilizer. The XL1 features
an exclusive XL lens-mount system which, when used with the optional
EF to XL mount adapter, allows it to utilize a range of Canon's
extensive lineup of EF lenses.
o In 1998 Canon introduced the ZR, a digital camcorder with 11X optical
zoom plus 44X digital zoom and an image stabilization system. The
VISTURA with 16X optical zoom plus 64X digital zoom, a 2.8-inch LCD
display, and a shift-type optical image stabilization system adapted
from the technology used in Canon's AF EOS lenses was also introduced
in 1998.
o In 1999 Canon introduced the ELURA and the GL1. The ELURA features 12X
optical zoom with 48X digital zoom, image stabilization system, DV
terminal, and a 2.5-inch LCD display. The GL1 is equipped with 3CCD
image sensors, 20X optical zoom with 100X digital zoom, image
stabilization system, DV terminal, and a 2.5-inch LCD display.
Canon entered the digital camera market in 1996.
o In 1997 Canon released the PowerShot 350 which has a color LCD and a
removable 2MB memory card.
o In 1998 Canon released the PowerShot A5, equipped with a 810,000 pixel
CCD and the PowerShot Pro70, equipped with a 1,680,000 pixel CCD and a
2.5X zoom lens.
o In 1999 Canon released the PowerShot S10 with a 2.1 megapixel CCD, a
2X zoom lens, USB interface and TYPE II CompactFlash memory card
compatibility.
o In March 2000, Canon released the PowerShot S20 with a 3.3 megapixel
CCD, a 2X zoom lens, USB interface and TYPE II CompactFlash memory
card compatibility.
Optical and other products
Canon's optical products include semiconductor production equipment,
broadcasting lenses and medical equipment.
Canon manufacturers steppers and aligners, tools necessary for semiconductor
chip production.
o In 1997 Canon released the MPA-5000, mirror projection mask aligner,
for the mass production of 20-inch flat panel display substrates.
o In 1998 the FPA-3000EX5, a Krypton Fluoride (KrF) excimer-laser
stepper for the mass production of 64Mb and 256Mb DRAMs was
introduced. The FPA-5000ES2, a KrF excimer-laser scanning stepper
featuring less than 0.18-micron linewidth patterning, which supports
high-volume semiconductor production on 300-mm silicon wafers was also
introduced in 1998.
o In 1999 Canon introduced the FPA-5000AS1, an Argon Fluoride (ArF)
excimer-laser scanning stepper capable of realizing 0.13-micron
linewidth for 1Gb-class DRAMs and 1GHz-class microprocessor process
development on either 200 or 300mm wafer substrates. The FPA-3000EX6,
a KrF excimer-laser stepper for the mass production on 200mm wafers of
256Mb DRAMs was also introduced in 1999.
Optical products also include broadcasting lenses and medical equipment such as
X-ray cameras,
8
<PAGE>
retinal cameras, autorefractometers and image-processing equipment for
computerized diagnostic systems.
o In 1998 Canon introduced the CXDI-11 X-ray Digital Camera, a medical
imaging product with the LANMIT sensor, which measures 430mm X 430mm
(17in X 17in) and produces precise, high-resolution X-ray images in
4,096 gray-scale.
o In 1999 CXDI-12 X-ray Digital Camera, a table-type adaptation of
CXDI-11, was introduced.
Canon also manufactures electronic components which are sold primarily to
equipment manufacturers. Such products include magnetic heads for audio and
video tape recorders, micro-motors for printers and other components.
Canon has also been developing a cost efficient solar-power system. This system
uses amorphous silicon technology, which Canon has been working on in relation
to copying machines since 1977. In 1996 Canon introduced the Roof-Integrated
Solar Panels, which reduce material and construction costs by integrating the
solar panels upon the roof structure.
Marketing and Distribution:
Sales of Canon products are made primarily through sales subsidiaries which have
responsibility for specific geographic areas. Each sales subsidiary arranges for
market research, the selection of sales channels, advertising and promotion in
their geographic territory.
In Japan, sales are made by Canon Sales Co., Inc. mainly to dealers and outlets.
Most optical products however, are sold by Canon Inc. directly to end-users.
In the Americas, sales are made by Canon U.S.A., Inc., Canon Canada, Inc. and
Canon Latin America, Inc., to retail outlets. Some copying machine sales are
made directly to end-users and a portion of other business machines' sales are
made through distributors.
In Europe, Canon Europa N.V. sells primarily through sales subsidiaries or
independent distributors to dealers and retail outlets in each locality. Copying
machines are also sold directly to end-users by Canon (U.K.) Ltd. in the United
Kingdom, by Canon Deutschland GmbH in Germany and by Canon France S.A. in
France.
Sales in Southeast Asia and Oceania are conducted through sales subsidiaries in
those areas. In addition, Canon sells copying machines to independent
distributors who resell them in China.
Canon also sells laser beam printers on an OEM basis to Hewlett-Packard Co.
Hewlett-Packard resells these printers under the "HP LaserJet" name. During the
year ended December 31, 1999, such sales constituted approximately 20% of
consolidated net sales.
Service:
In Japan and in overseas markets, product service is provided by independent
retail outlets and designated service centers, which receive technical training
assistance from Canon. Canon also services its products directly.
Most of Canon's business machines carry warranties of varying terms depending
upon the model and the country of sales. Cameras and accessories carry a
one-year warranty against defective
9
<PAGE>
materials or workmanship.
Canon services its copying machines and supplies replacement drums, parts, toner
and paper. In Japan, most customers enter into a maintenance service contract,
under which Canon provides maintenance services, replacement drums and parts in
return for a charge per-copy. Copying machines not covered by a service contract
receive maintenance services from time to time on a fee for service basis,
either from Canon or local dealers.
10
<PAGE>
Canon's net sales by product group and geographic area:
<TABLE>
Net sales by product group Years ended December 31
--------------------------------
(Millions of yen)
1999 1998 1997
------------------- ----------------------- ------------------------
Yen % Yen % Yen %
<S> <C> <C> <C> <C> <C> <C>
Business machines:
Copying machines 842,082 32.1 896,641 31.7 899,205 32.6
Computer peripherals 965,499 36.8 1,064,304 37.7 964,808 34.9
Business systems 356,350 13.6 397,272 14.0 436,053 15.8
---------- -------- -------------- -------- -------------- ---------
Total business machines 2,163,931 82.5 2,358,217 83.4 2,300,066 83.3
Cameras 277,349 10.6 267,636 9.5 247,766 9.0
Optical and other products 180,985 6.9 200,416 7.1 213,193 7.7
---------- -------- -------------- -------- -------------- ---------
Total 2,622,265 100.0 2,826,269 100.0 2,761,025 100.0
========== ======== ============== ======== ============== =========
</TABLE>
<TABLE>
Net sales by geographic area Years ended December 31
---------------------------------
(Millions of yen)
1999 1998 1997
--------------- --------------- ----------------
Net sales to unaffiliated customers:
<S> <C> <C> <C>
Japan Yen 791,399 796,406 904,545
Americas 912,676 1,003,683 887,302
Europe 736,570 841,400 765,580
Others 181,620 184,780 203,598
--------------- --------------- ----------------
Total 2,622,265 2,826,269 2,761,025
--------------- --------------- ----------------
Intercompany transfers to geographic areas:
Japan 1,205,021 1,312,405 1,226,130
Americas 14,468 21,523 17,793
Europe 3,645 3,126 3,842
Others 179,527 198,702 190,602
--------------- --------------- ----------------
Eliminations (1,402,661) (1,535,756) (1,438,367)
--------------- --------------- ----------------
Total -- -- --
--------------- --------------- ----------------
Total net sales and transfers:
Japan 1,996,420 2,108,811 2,130,675
Americas 927,144 1,025,206 905,095
Europe 740,215 844,526 769,422
Others 361,147 383,482 394,200
--------------- --------------- ----------------
Eliminations (1,402,661) (1,535,756) (1,438,367)
--------------- --------------- ----------------
Total Yen 2,622,265 2,826,269 2,761,025
=============== =============== ================
</TABLE>
Note: Net sales by geographic area is based on the location of the sales company
of Canon.
11
<PAGE>
The contribution to total operating profit by each category of Canon's activity
is discussed in Item 9.
Research and Development:
Research and development (R&D) is one of the most important aspects of Canon's
operations. Canon believes that the competitiveness and superiority of its
products can be attributed primarily to its research and development activities.
Canon employs approximately 6,700 engineers and scientists who are involved in
the fields of precision mechanics, electronics, optics, applied physics and
organic and inorganic chemistry. Canon had research and development expenditures
of (Y)177,922 million in 1999, (Y)176,967 million in 1998, and (Y)170,793
million in 1997, respectively. Canon's strategy is to emphasize the application
of advanced technologies to competitive new products, to conduct research on
improving manufacturing techniques and to engage in basic research for the
future.
Canon's research and development activities are conducted at five primary
centers: the Core Technology Development Headquarters (where research and
development of component engineering and base technology, such as new materials,
nanotechnology, and production engineering are conducted); Platform Technology
Development Headquarters (platform technologies for digital network devices);
Display Development Headquarters (display devices); Internet Business
Development Headquarters (new business based on internet technology); Ecology
Research Center (solar cell batteries). In addition, Canon maintains research
and development centers for each of its product divisions.
As a technology-intensive firm, Canon generates a significant number of patented
innovations every year. The ownership of patents is important to Canon, but
Canon does not believe that the expiration of any single patent or group of
related patents will materially affect the conduct of its business.
Sources of Supply:
Canon purchases a variety of parts and raw materials, such as glass, aluminum,
plastics, steel and chemicals for use in product manufacturing. All finished and
semi-finished products purchased from outside sources are produced according to
Canon's designs and specifications. The most important parts purchased by Canon
are large scale integrated circuits (LSIs) which are used in most of its
products. Some of the circuits are manufactured in-house. Canon has not
experienced any difficulty in obtaining parts or raw materials and believes that
it will be able to continue to obtain them in sufficient quantities to meet its
needs.
Environmental Protection:
Canon has been working on antipollution strategies for many years. In 1993 Canon
implemented its "New Principles for Environmental Assurance" to promote a
comprehensive response to environmental concerns.
These principles are:
1) to contribute to society by developing products, production technology
and evaluation technology and by conducting all corporate activity in
a manner which is consistent with the principles of environmental
conservation.
2) to implement environmental impact assessments prior to product
development,
12
<PAGE>
and to design and manufacture products that minimize resource and
energy consumption.
3) to undertake worldwide environmentally sound manufacturing by reducing
waste and energy consumption.
4) to work together with governments on environmental strategies.
5) to actively support local and regional environmental protection
movements as a good corporate citizen.
6) to boost awareness of environmental conservation among Canon employees
through training and education.
According to these guidelines, Canon not only observes relevant environmental
laws and regulations throughout the world, but also establishes its own stricter
internal standards to help protect the environment.
Canon established the Environmental Audit Department in 1993 specifically for
the purpose of performing environmental audits and designating environmental
auditors. In Japan, internal audits of 26 sites have been conducted every two
years. The Environmental Audit Department, using a team of independent
specialists, is currently working at the steady pace of one audit per month.
Canon completely eliminated the use of ozone-depleting chlorofluorocarbons in
manufacturing and production in 1992, and halted all use of trichloroethane in
1993. Canon is also working to develop technologies which eliminate hazardous
material from the manufacturing process.
In addition, Canon is emphasizing product recycling and refurbishment. In 1990,
Canon initiated a unique program whereby cartridges from Canon personal copying
machines and laser beam printers are collected and then recycled at Canon Dalian
Business Machines, Inc. in China. Custom Integrated Technology, Inc. in Virginia
U.S. began to refurbish used copying machines in 1996, thereby promoting the
reuse of equipment that has reached the end of its normal life. In 1997,
cartridge recycling also started at Industrial Resource Technologies, Inc. in
Virginia and Canon Bretagne S.A. in France. In 1998, Canon announced plans to
expand copying machine remanufacturing activities to the Japanese market. In
1999, Canon became the first company in Japan to adopt the Type III Eco-Label
featuring detailed indications of environmental data over the life cycle of our
product. Canon also started publishing the "Ecology Brochure" and "Environmental
Report" containing detailed information on the environmental aspects of its
products and operations.
13
<PAGE>
Item 2. Description of Property
Canon's manufacturing operations are conducted primarily at 16 plants in Japan
and 13 plants in other countries. Canon owns all of the buildings and the land
on which its plants are located, with the minor exception of leases of land and
floor space by its subsidiaries. The names and locations of Canon's plants and
other facilities, their approximate floor space at December 31, 1999 and the
principal activities or products manufactured therein are as follows:
<TABLE>
Floor Space
(Thousands Principal Activities or
Name and Location of square feet) Products Manufactured
----------------- -------------- -----------------------
<S> <C> <C>
(Domestic)
Shimomaruko Headquarters, Tokyo 1,621 Corporate headquarters,
development of business machines
and cameras, patents, purchasing,
quality assurance and research and
planning for production engineering
and technology
Canon Research Center, Kanagawa 137 Research and development (R&D)
in software and systems
Ecology Research Center, Kyoto 93 R&D in solar-power systems
Hiratsuka Development Center, 466 R&D in semiconductors,
Kanagawa electron devices and display
Ayase Office, 296 R&D in semiconductors
Kanagawa
Kosugi Office, 398 R&D in software and systems
Kanagawa
Fuji-Susono Research Park, 958 R&D in electrophotographic
Shizuoka technologies
Tamagawa Plant, Kanagawa 409 Bubble jet printer consumables
Fukushima Plant, Fukushima 619 Business machines, primarily
bubble jet printers
Toride Plant, Ibaraki 1,858 Copying machines, laser beam
printers and copying machine
consumables and development
of business machines
14
<PAGE>
Floor Space
(Thousands Principal Activities or
Name and Location of square feet) Products Manufactured
----------------- -------------- -----------------------
(Ueno Plant, Mie 543 Copying machine and laser beam
printer consumables
Ami Plant, Ibaraki 1,160 Business machines, tools and
production equipment, and optical
products
Utsunomiya Plant, 1,452 Camera lenses, optical products
Tochigi and development of optical products
Canon Electronics Inc. Plants, 1,124 Electronic components,
Saitama and Gunma micrographic equipment, laser beam
printers and cameras parts
Copyer Co., Ltd. Plants, 351 Copying machines and copying
Tokyo,Yamanashi and Fukui machine consumables
Canon Precision Inc. Plants, 740 Micro-motors, precision parts,
Tokyo, Aomori and Fukushima metal mold parts and laser beam
printer consumables
Canon Aptex Inc. Plants, 454 Copying machine parts and
Ibaraki and Tokyo accessories
Canon Chemicals Inc. Plants, 1,359 Copying machine and laser beam
Ibaraki and Kanagawa printer consumables
Canon Components Inc. Plant, 734 Electronic components, bubble jet
Saitama printer consumables and color filter
Oita Canon Inc. Plant, 316 35mm and Advanced Photo System
Oita cameras, digital video camcorders
and digital cameras
Nagahama Canon Inc. Plant, 919 Laser beam printers, bubble jet
Shiga printers, laser beam printer
consumables and solar panels
Nippon Typewriter Co., Ltd. Plant, 1,520 Parts for business machines
Ibaraki
Oita Canon Material Co., Ltd. Plant, 1,163 Copying machine and laser beam
Oita printer consumables
15
<PAGE>
Floor Space
(Thousands Principal Activities or
Name and Location of square feet) Products Manufactured
----------------- -------------- -----------------------
(Overseas)
Canon Virginia, Inc. Plants, 1,084 Copying machines, laser beam
Newport News and Tappahannock, printers and refurbishment of
Virginia, U.S. copying machines
Canon Business Machines, Inc. Plants, 264 Development and manufacture of
Costa Mesa, California, U.S. and bubble jet printers and manufacture
Tijuana, B.C., Mexico of copying machine supplies
Canon Giessen GmbH Plant, 359 Copying machines, copying
Giessen, Germany machine consumables and bubble jet
printer consumables
Canon Bretagne S.A. Plant, 506 Copying machines, copying machine
Liffre, France consumables and laser beam printers
Canon Manufacturing U.K. Ltd. Plant, 197 Manufacture of bubble jet printers
Glenrothes Fife, United Kingdom
Canon Inc., Taiwan Plant, 449 Development and manufacture of
Taiwan 35mm SLR cameras and leaf shutter
cameras and manufacture of
Advanced Photo System cameras
Canon Opto (Malaysia) Sdn. Bhd. Plant, 534 Leaf shutter cameras,
Selangor, Malaysia Advanced Photo System cameras,
video and camera lenses
Canon Dalian Business Machines, Inc. 1,039 Laser beam printer consumables
Plant,
Dalian, China
Canon Zhuhai, Inc. Plant, 765 Leaf shutter cameras, laser beam
Zhuhai, China printers and fax machines
Tianjin Canon Co., Ltd. Plant, 157 Copying machines
Tianjin, China
Guang-Dong United Optical Instrument 14 Leaf shutter cameras
Co. Plant,
Guang Dong, China
16
<PAGE>
Floor Space
(Thousands Principal Activities or
Name and Location of square feet) Products Manufactured
----------------- -------------- -----------------------
Canon Hi-Tech (Thailand) Ltd. Plant, 830 Copying machines, bubble jet
Phra Nakhon Si Ayutthaya, Thailand printers and fax machines
Canon Engineering (Thailand) Ltd. 128 Molds for business machine parts
Plant,
Phra Nakhon Si Ayutthaya, Thailand
</TABLE>
Canon considers its manufacturing and other facilities to be well maintained and
believes that its plant capacity is adequate for its current requirements.
At December 31, 1999, land, buildings and related equipment having a book value
of (Y)10,822 million were subject to mortgages securing (Y)4,327 million of
Canon's indebtedness.
17
<PAGE>
Item 3. Legal Proceedings
Canon and certain of its subsidiaries are defendants in a number of pending
lawsuits. However, based upon information available to Canon, management of the
Company does not expect such lawsuits to have a material effect on Canon's
financial condition or results of operations.
Item 4. Control of Registrant
(a) The Company is not directly or indirectly owned or controlled by any other
corporation or by any government.
(b) (1) To the Company's best knowledge, no person owned more than ten percent
of the Company's common stock as of March 31, 2000.
(2) The total number of shares of the Company's common stock owned by the
Directors and Corporate Auditors as of March 31, 2000 was as follows:
Number Percent
Title of Class Identity of Person or Group of Shares Owned of Class
-------------- --------------------------- --------------- --------
Common stock Directors and Corporate 237,647 0.03%
Auditors
(c) None
Item 5. Nature of Trading Market
The common stock of the Company, par value 50 yen per share (the "Shares"), has
been listed on the Tokyo Stock Exchange since 1949 and is traded on the First
Section of that exchange. The shares are also listed on five other regional
stock exchanges in Japan.
The Tokyo Stock Exchange is the principal stock exchange in Japan. The Tokyo
Stock Exchange publishes the Tokyo Stock Price Index (the "TOPIX"), an index of
the market value of all the stocks which are listed on the First Section of the
exchange. The Nikkei Stock Average, an index of 225 selected stocks traded on
the First Section of the Tokyo Stock Exchange, which is computed by a private
corporation, is another widely followed index. The following table sets forth
the reported high and low sales prices of the Shares on the Tokyo Stock Exchange
and the closing highs and lows of the foregoing indices during the periods
indicated:
18
<PAGE>
<TABLE>
Price per Nikkei Stock
Period Share (yen) TOPIX Average (yen)
------ ----------------- ---------------------- -------------------------
High Low High Low High Low
---- --- ---- --- ---- ---
<S> <C> <C> <C> <C> <C> <C> <C>
1998 1st Quarter 3,280 2,660 1,300.30 1,120.61 17,264.34 14,664.44
2nd Quarter 3,340 2,970 1,254.74 1,156.47 16,536.66 14,715.38
3rd Quarter 3,400 2,500 1,280.73 1,043.57 16,731.92 13,406.39
4th Quarter 2,840 1,930 1,164.59 980.11 15,207.77 12,879.87
1999 1st Quarter 3,120 2,170 1,269.76 1,048.33 16,378.78 13,232.74
2nd Quarter 3,600 2,715 1,425.64 1,292.07 17,782.79 15,972.68
3rd Quarter 4,100 2,740 1,535.23 1,420.64 18,532.58 16,821.06
4th Quarter 4,200 2,725 1,722.20 1,460.23 18,934.34 17,254.17
</TABLE>
As of December 31, 1999, approximately 16.6% of the outstanding Shares were
held of record by 229 persons resident in the United States.
Co-ownership shares in a Global Bearer Certificate are listed on the Frankfurt
Stock Exchange.
Since the 1969 public offering in the United States of U.S.$9,000,000 principal
amount of the Company's 6 1/2 % Convertible Debentures due 1984, there has been
limited trading in the over-the-counter market in the Company's American
Depositary Receipts ("ADRs"). The depositary of the ADRs is Morgan Guaranty
Trust Company of New York. Each ADR evidences American Depositary Shares
("ADSs"), which, effective from March 16, 1998, represent one Share each. The
ADSs have been quoted on the National Association of Securities Dealers
Automated Quotation system ("NASDAQ") since 1972 under the symbol CANNY. The
actual and adjusted reported high and low sales prices of the ADSs on the NASDAQ
are as follows:
Period Price per ADS (U.S. dollars)
------ ----------------------------
High Low
---- ---
1998 1st Quarter 24.963 21.200
2nd Quarter 24.563 22.063
3rd Quarter 24.000 18.500
4th Quarter 23.375 17.000
1999 1st Quarter 25.938 19.250
2nd Quarter 29.250 23.000
3rd Quarter 33.625 26.625
4th Quarter 40.938 25.750
19
<PAGE>
Item 6. Exchange Controls and Other Limitations Affecting Security Holders
(a) Information with respect to Japanese exchange regulations affecting the
Company's security holders is as follows:
The Foreign Exchange and Foreign Trade Law of Japan, as amended and effective
from April 1, 1998, and the cabinet orders and ministerial ordinances thereunder
(the "Foreign Exchange Regulations") govern certain aspects relating to the
issuance of securities (including bonds, convertible bonds, bonds with warrants
and shares) by the Company and the acquisition and holding of such securities by
"non-residents of Japan" and by "foreign investors" as hereinafter defined.
"Non-residents of Japan" are defined as individuals who are not resident in
Japan and corporations whose principal offices are located outside Japan.
Generally, branches and other offices of Japanese corporations located outside
Japan are regarded as non-residents of Japan, while branches and other offices
located within Japan of non-resident corporations are regarded as residents of
Japan. "Foreign investors" are defined to be (i) individuals not resident in
Japan, (ii) corporations which are organized under the laws of foreign countries
or whose principal offices are located outside Japan, (iii) corporations of
which 50% or more of the shares are held by (i) and / or (ii) above and (iv)
corporations in respect of which (a) a majority of the officers are non-resident
individuals or (b) a majority of the officers having the power to represent the
corporation are non-resident individuals.
Issuance of Securities by the Company:
Under the Foreign Exchange Regulations, the issue of securities outside Japan by
the Company is, in principle, not subject to a prior notification requirement,
but subject to a post reporting requirement of the Minister of Finance. Under
the Foreign Exchange Regulations as currently in effect, payments of principal,
premium and interest in respect of securities and any additional amounts payable
pursuant to the terms thereof may in general be paid when made without any
restrictions under the Foreign Exchange Regulations.
Acquisition of Shares:
In general, the acquisition of shares of stock of a Japanese company listed on
any Japanese stock exchange or traded in any over-the-counter market in Japan
("listed shares") by a non-resident of Japan from a resident of Japan is not
subject to a prior notification requirement, but subject to a post reporting
requirement of the Minister of Finance by such resident.
In the case where a foreign investor intends to acquire listed shares (whether
from a resident or a non-resident of Japan, from another foreign investor or
from or through a designated securities company) and as a result of such
acquisition the number of shares held, directly or indirectly, by such foreign
investor would become 10% or more of the total outstanding shares of the
company, the foreign investor must generally report such acquisition to the
Minister of Finance and other Ministers having jurisdiction over the business of
the subject company within 15 days from and including the date of such
acquisition. In certain exceptional cases, a prior notification is required in
respect of such acquisition.
20
<PAGE>
Acquisition of Shares upon Conversion of Convertible Bonds or Exercise of
Warrants:
The acquisition by a non-resident of Japan of shares upon conversion of his
convertible bonds or upon exercise of his warrants is exempted from the
notification and reporting requirements described under "Acquisition of Shares"
above.
Dividends and Proceeds of Sales:
Under the Foreign Exchange Regulations currently in effect, dividends paid on,
and the proceeds of sale in Japan of, the shares held by non-residents of Japan
may be converted into any foreign currency and repatriated abroad. The
acquisition of shares by non-resident shareholders by way of stock splits is not
subject to any of the aforesaid notification requirements.
(b) Reporting of Substantial Shareholdings:
The Securities and Exchange Law of Japan requires any person who has become,
beneficially and solely or jointly, a holder of more than 5% of the total
outstanding voting 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 Minister of Finance within five business days a report
concerning such share ownership. A similar report must also be made in respect
of any subsequent change of 1% or more in any such holding. Copies of any 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
over-the-counter shares) the Japan Securities Dealers Association. For this
purpose, shares issuable upon the conversion of convertible bonds or exercise of
warrants held by such holder are taken into account in determining both the size
of a holding and a company's total outstanding share capital.
Item 7. Taxation
Generally, a non-resident of Japan or a non-Japanese corporation is subject to
Japanese withholding tax on dividends paid by Japanese corporations. Stock
splits, subject to the following, are not subject to Japanese income tax.
However, a transfer of retained earnings or legal reserve (but, in general, not
additional paid-in capital) to stated capital (whether made in connection with a
stock split or otherwise) is treated as a dividend payment to shareholders for
Japanese tax purposes and is, in general, subject to Japanese income tax. No
such transfer would be necessary in connection with a stock split if the total
par value of the shares in issue after the stock split does not exceed the
stated capital.
Pursuant to the tax convention between the United States and Japan as currently
in force, a Japanese withholding tax at the rate of 15% is imposed, generally,
on dividend payments made by a Japanese corporation to a United States resident
or corporation, unless the recipient of the dividend has a permanent
establishment in Japan and the shares with respect to which such dividends are
paid are effectively connected with such permanent establishment.
The amount of such withholding tax imposed on dividends payable to the holders
of the Shares and ADRs who reside in a country other than the United States is
dependent upon the provisions of such conventions or agreements as may exist
between such country and Japan. In the absence of any convention or agreement,
the rate of Japanese withholding tax imposed on dividends paid by Japanese
companies is 20%.
Gains derived from the sale outside Japan of the Shares or ADRs by a
non-resident of Japan or a
21
<PAGE>
non-Japanese corporation, or from the sale of the Shares within Japan by a
non-resident of Japan or by a non-Japanese corporation not having a permanent
establishment in Japan, are in general not subject to Japanese income or
corporation taxes. Japanese inheritance and gift taxes at progressive rates may
be payable by an individual who has acquired Shares or ADRs as a distributee,
legatee or donee.
22
<PAGE>
Item 8. Selected Financial Data
(Millions of yen except per share data and yen exchange rates)
<TABLE>
1999 1998 1997 1996 1995
------------ ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Net sales (Y) 2,622,265 2,826,269 2,761,025 2,558,227 2,165,626
Net income 70,234 109,569 118,813 94,177 55,036
Advertising 67,544 76,911 75,800 68,354 53,033
Research and development 177,972 176,967 170,793 150,085 125,253
Depreciation 155,682 159,888 137,777 117,263 104,474
Capital expenditure 200,386 221,401 219,779 176,357 123,560
Long-term debt 165,277 180,320 226,889 192,254 298,055
Stockholders' equity 1,202,003 1,155,520 1,109,511 1,007,434 880,150
Total assets 2,587,532 2,728,329 2,872,779 2,644,452 2,506,152
Per share data:
Net income:
Basic (Y) 80.66 126.10 137.73 111.29 65.96
Diluted 79.50 123.93 134.60 106.96 62.73
Cash dividends declared 17.00 17.00 17.00 15.00 13.00
Cash dividends declared
(U.S. dollars) $ 0.164 0.134 0.134 0.128 0.125
Yen exchange rates per
U.S. dollar:
Year end (Y) 102.16 113.08 130.45 115.77 103.42
Average 112.79 130.88 121.85 109.31 94.14
High 101.53 113.08 111.42 103.92 80.63
Low 124.45 147.14 131.08 116.13 104.45
</TABLE>
Notes:
1. The above financial data are provided in conformity with United States
generally accepted accounting principles.
2. Canon adopted Statement of Financial Accounting Standards No. 115 ("SFAS
115"), "Accounting for Certain Investments in Debt and Equity Securities,"
from the fiscal year beginning January 1, 1999, and has applied SFAS 115
retroactively to the consolidated financial statements for the prior years.
See Note 3 of Notes to Consolidated Financial Statements.
3. Yen exchange rates are the noon buying rates for yen in New York City as
reported by the Federal Reserve Bank of New York.
23
<PAGE>
Item 9. Management's Discussion and Analysis of Financial Condition and Results
of Operations
(a) Results of Operations
The appreciation of the yen adversely affected the financial performance of
Canon in 1999. Net sales decreased 7.2% to (Y)2,622,265 million while net income
decreased 35.9% to (Y)70,234 million.
Summarized results of operations for the past four years are as follows:
<TABLE>
(Millions of yen except per share amounts)
1999 change 1998 change 1997 change 1996
------------ ----------- ------------ ----------- ------------ -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales (Y)2,622,265 - 7.2% (Y)2,826,269 + 2.4% (Y)2,761,025 + 7.9% (Y)2,558,227
Operating profit 176,056 - 32.5 260,778 - 4.8 274,034 + 24.0 221,036
Income before +
income taxes 156,072 - 34.8 239,513 + 2.0 234,805 28.5 182,765
Net income 70,234 - 35.9 109,569 - 7.8 118,813 + 26.2 94,177
Net income
per share:
Basic 80.66 - 36.0 126.10 - 8.4 137.73 + 23.8 111.29
Diluted 79.50 - 35.9 123.93 - 7.9 134.60 + 25.8 106.96
</TABLE>
Note: See Note 1 of Item 8.
Sales:
During 1999, the U.S. economy remained strong against a backdrop of healthy
domestic demand, and the European economy expanded slightly though the value of
the euro against other major currencies declined in the second half. The Asian
region showed signs of recovery owing to increased exports, particularly from
the Republic of Korea and Thailand. In Japan, indications of an economic
turnaround reflected increased public works expenditures, but sluggish consumer
spending and private sector capital investment prevented a full-scale recovery.
During this period, the average yen-dollar exchange rate was approximately
(Y)113/U.S.$1, reflecting a 15% increase in the average value of the yen from
that of 1998. The average yen-euro exchange rate also appreciated by 20% to
approximately (Y)120/euro 1. Using the average 1998 exchange rates, 1999 net
sales would have increased 3.4% from 1998.
In 1998, the Southeast Asian economies remained weak and the Japanese markets
suffered from weak consumer spending and concerns over the stability of the
Japanese banking systems. The average yen-dollar exchange rate was approximately
(Y)131/U.S.$1, reflecting a (Y)10 increase in the average value of the U.S.
dollar from that of 1997, while the average yen-deutsch mark exchange rate fell
from approximately (Y)70/DM1 during the previous year to (Y)74/DM1.
In 1997, the Southeast Asian economies experienced severe financial problems and
the markets were weak as economy the stagnated. The average yen-dollar exchange
rate was approximately (Y)121/U.S.$1, reflecting a (Y)12 increase in the average
value of the U.S. dollar from that of 1996. The yen strengthened against
Deutschmark. The average yen-deutsch mark exchange rate was approximately
(Y)70/DM1, reflecting a (Y)2 decrease in the average value of the deutsch mark
versus 1996.
24
<PAGE>
Canon's sales by products are summarized as follows:
<TABLE>
(Millions of yen)
1999 change 1998 change 1997 change 1996
------------ ------------- ------------- ------------ ------------- ----------- ------------
Business machines:
<S> <C> <C> <C> <C> <C> <C> <C>
Copying machines (Y) 842,082 - 6.1% 896,641 - 0.3% 899,205 + 9.8% 818,909
Computer
peripherals 965,499 - 9.3 1,064,304 + 10.3 964,808 + 9.9 878,170
Business machines 356,350 - 10.3 397,272 - 8.9 436,053 - 1.0 440,532
--------- ------ --------- ------ --------- ------ ----------
Total business
machines 2,163,931 - 8.2 2,358,217 + 2.5 2,300,066 + 7.6 2,137,611
--------- -------- --------- ------ --------- ------ ----------
Cameras 277,349 + 3.6 267,636 + 8.0 247,766 + 15.9 213,760
Optical and other
products 180,985 - 9.7 200,416 - 6.0 213,193 + 3.1 206,856
--------- -------- --------- ------ --------- ------ ----------
Total (Y) 2,622,265 - 7.2 2,826,269 + 2.4 2,761,025 + 7.9 2,558,227
========= ======== ========= ====== ========= ====== ==========
</TABLE>
Sales of business machines (copying machines, computer peripherals and business
systems) accounted for 82.5% of net sales and decreased 8.2% to (Y)2,163,931
million in 1999. In 1998, business machine sales grew 2.5% in comparison to an
increase of 7.6% in 1997.
Sales of copying machines (including digital, color, office and personal models)
decreased 6.1% to (Y)842,082 million in 1999. Sales of the digital machines
showed significant growth in all regions, particularly in the Americas and
Europe. Color machines also performed well in most markets. In comparison, sales
of analogue machines decreased as buyers shifted toward digital products.
Although total sales of copying machines grew in terms of local currencies, the
value of these sales decreased in terms of yen.
Sales of copying machines decreased in 1998 owing to the weak domestic market
but showed healthy growth in 1997.
Sales of computer peripherals in 1999 (mainly laser beam, bubble jet printers
and scanners) slipped 9.3% to (Y)965,499 million. Laser beam printer sales
showed a decrease mainly because the release of several new products in late
1998 temporarily lessened overall demand in 1999 while the consumables continued
to grow steadily. New bubble jet printers released in the Japanese market were
well received but overseas sales decreased due to severe price competition. The
new compact scanner released during the period sold well.
Sales of computer peripherals increased substantially in both 1998 and 1997.
Sales of business systems (including faxes, computers, micrographics,
Japanese-language word processors and calculators) decreased 10.3% to (Y)356,350
million in 1999. Sales of faxes, especially in multifunction faxes, declined due
to severe price competition.
Sales of business systems decreased in 1998 and in 1997. The decrease in 1998
mainly reflected a decline in sales of computers in Japan and Canon's withdrawal
from the electronic typewriter business in 1998.
Sales of cameras increased by 3.6% to (Y)277,349 million in 1999, owing mainly
to the introduction
25
<PAGE>
of new digital cameras and digital video camcorders. Sales of 35mm and Advanced
Photo System cameras decreased due to the appreciation of the yen. Cameras
accounted for 10.6% of net sales.
Sales of cameras increased in both 1998 and 1997, led by a growth in sales of
the Advanced Photo System cameras.
Sales of optical and other products (including steppers and aligners for
semiconductor chip production, broadcasting lenses, and medical equipment)
decreased 9.7% to (Y)180,985 million in 1999. Stepper-related sales were
negatively impacted by restricted capital investment by semiconductor
manufacturers which was caused by the sluggish semiconductor market through the
first half of 1999. Optical and other products contributed 6.9% to net sales.
Sales of optical and other products decreased in 1998 because of restrained
capital investments by semiconductor manufacturers but increased in 1997.
A geographical analysis indicates that net sales in 1999 decreased in Japan, the
Americas and Europe, but increased elsewhere.
In Japan, overall sales declined slightly by 0.8% in 1999, primarily due to the
decrease in sales of computers and optical products. Sales of computer
peripherals and cameras showed substantial growth. Sales in the Americas
decreased 9.2% in 1999. The decrease was mainly attributable to the appreciation
of the yen against the U.S. dollar. Product groups other than business systems
and optical and other products increased sales in terms of the U.S. dollar.
Sales in Europe decreased 12.8% in 1999. Product groups other than optical and
other products increased sales in terms of the euro but the stronger yen against
the euro adversely affected regional sales. Sales in other areas increased by
1.4%, reflecting the economic recovery in the regions.
In 1998, net sales increased in Europe and the Americas mainly due to favorable
changes in exchange rates but decreased in Japan and other areas. In 1997, all
areas experienced some growth, with Europe showing double-digit growth.
The summary of net sales by region is provided below:
<TABLE>
(Millions of yen)
1999 change 1998 change 1997 change 1996
-------------- ------------ -------------- ------------- -------------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
Japan (Y) 755,704 - 0.8% 761,776 - 11.2% 857,993 + 3.5% 828,829
Americas 913,377 - 9.2 1,005,648 + 12.7 891,979 + 8.8 819,737
Europe 741,657 - 12.8 850,226 + 9.6 775,592 + 10.4 702,516
Others 211,527 + 1.4 208,619 - 11.4 235,461 + 13.7 207,145
-------------- ------------ -------------- ---------------------------- ------------ --------------
Total (Y) 2,622,265 - 7.2 2,826,269 + 2.4 2,761,025 + 7.9 2,558,227
============== ============ ============== ============= ============== ============ ==============
</TABLE>
Note: This summary of sales by region is based on the location of the customer.
26
<PAGE>
Earnings:
Operating profit in 1999 decreased 32.5% to (Y)176,056 million or 6.7% of net
sales. This compares with 9.2% in 1998 and 9.9% in 1997.
In 1999, the appreciation of the yen adversely affected net sales by
approximately (Y)300,000 million. The appreciation of the yen lowered gross
profit ratio (gross profit to net sales) by approximately 4.5% including
positive effects on the overseas production and the use of local parts
suppliers. On the other hand, successful Canon's efforts aimed at reducing
production costs and increasing sales of high-value-added products favorably
affected the gross profit ratio. As a result, the gross profit ratio to net
sales was 42.9% in 1999 as compared to 44.5% in 1998.
Selling, general and administrative expenses decreased 4.8% to (Y)948,269
million, or 36.2% of net sales, an increase of 0.9% from the previous year. The
decrease was mainly attributable to Canon's efforts to reduce selling expenses,
such as advertising and sales promotions. On the contrary R&D expenditure during
1999 slightly increased by 0.5% to (Y)177,922 million, representing 6.8% of net
sales.
In 1998, Canon's operating profit decreased 4.8% to (Y)260,778 million or 9.2%
of net sales. The depreciation of the yen positively influenced net sales by
approximately (Y)124,000 million. However, most of this influence was eliminated
at the gross profit level due to price reductions made to increase Canon's
competitive position in the world markets.
In 1997, Canon's operating profit increased 24.0% to (Y)274,034 million. The
depreciation of the yen positively affected net sales by approximately
(Y)102,800 million. Approximately 80% of this influence was eliminated at the
gross profit level due to price reductions.
The disclosures of segment information by product as required in Japan for the
years ended December 31, 1999, 1998 and 1997 are provided on page 28, and the
disclosures of segment information by geographic area as required in Japan for
the years ended December 31, 1999, 1998 and 1997 are shown on page 29.
27
<PAGE>
Segment information by product:
<TABLE>
1999 (Millions of yen)
----------
Business Optical and Corporate and
machines Cameras other products eliminations Consolidated
------------ ----------- ---------------- --------------- ------------
Net sales
<S> <C> <C> <C> <C> <C> <C>
Unaffiliated customers (Y) 2,163,931 277,349 180,985 -- 2,622,265
Intersegment -- -- 79,413 (79,413) --
--------- ------- ------- ------- ---------
Total 2,163,931 277,349 260,398 (79,413) 2,622,265
--------- ------- ------- ------- ---------
Operating cost and expenses 1,902,053 258,382 273,631 12,143 2,446,209
--------- ------- ------- ------- ---------
Operating profit (Y) 261,878 18,967 (13,233) (91,556) 176,056
========= ======= ======= ======= =========
Assets (Y) 1,256,667 155,204 252,071 923,590 2,587,532
Depreciation and amortization 114,451 12,285 12,860 18,515 158,111
Capital expenditure 143,269 12,880 17,856 26,381 200,386
1998
----------
Business Optical and Corporate and
machines Cameras other products eliminations Consolidated
------------ ----------- ---------------- --------------- ------------
Net sales
Unaffiliated customers (Y) 2,358,217 267,636 200,416 -- 2,826,269
Intersegment -- -- 80,179 (80,179) --
--------- ------- ------- --------- ---------
Total 2,358,217 267,636 280,595 (80,179) 2,826,269
--------- ------- ------- --------- ---------
Operating cost and expenses 2,041,532 240,429 275,946 7,584 2,565,491
--------- ------- ------- --------- ---------
Operating profit (Y) 316,685 27,207 4,649 (87,763) 260,778
========= ======= ======= ========= =========
Assets (Y) 1,438,218 159,896 239,884 890,331 2,728,329
Depreciation and amortization 117,179 11,695 9,925 22,988 161,787
Capital expenditure 149,072 14,019 17,296 41,014 221,401
1997
----------
Business Optical and Corporate and
machines Cameras other products eliminations Consolidated
------------ ----------- ---------------- --------------- ------------
Net sales
Unaffiliated customers (Y) 2,300,066 247,766 213,193 -- 2,761,025
Intersegment -- -- 71,844 (71,844) --
--------- ------- ------- --------- ---------
Total 2,300,066 247,766 285,037 (71,844) 2,761,025
--------- ------- ------- --------- ---------
Operating cost and expenses 1,981,113 225,652 259,573 20,653 2,486,991
--------- ------- ------- --------- ---------
Operating profit (Y) 318,953 22,114 25,464 (92,497) 274,034
========= ======= ======= ========= =========
Assets (Y) 1,433,626 163,095 232,436 1,043,622 2,872,779
Depreciation and amortization 102,789 9,963 8,793 18,270 139,815
Capital expenditure 148,834 13,953 17,097 39,895 219,779
</TABLE>
Notes:
1. General corporate expenses of (Y)91,540 million, (Y)88,064 million and
(Y)92,677 million in 1999, 1998 and 1997, respectively, are included in
"Corporate and eliminations."
2. Corporate assets of (Y)923,863 million, (Y)892,863 million and (Y)1,045,127
million in 1999, 1998 and 1997, respectively, which mainly consist of cash
and cash equivalents, marketable securities and corporate properties, are
included in "Corporate and eliminations."
28
<PAGE>
Segment information by geographic area:
1999 (Millions of yen)
-------------
<TABLE>
Corporate
and
Japan Americas Europe Others eliminations Consolidated
---------------- --------------- ------------- -------------- -------------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales
Unaffiliated customers (Y) 791,399 912,676 736,570 181,620 -- 2,622,265
Intersegment 1,205,021 14,468 3,645 179,527 (1,402,661) --
--------------- -------------- ------------ ------------- ------------ --------------
Total 1,996,420 927,144 740,215 361,147 (1,402,661) 2,622,265
Operating cost and expenses 1,791,871 898,900 727,215 350,482 (1,322,259) 2,446,209
--------------- -------------- ------------ ------------- ------------ --------------
Operating profit (Y) 204,549 28,244 13,000 10,665 (80,402) 176,056
=============== ============== ============ ============= ============ ==============
Assets (Y) 1,328,376 298,624 338,630 138,251 483,651 2,587,532
=============== ============== ============ ============= ============ ==============
1998
-------------
Corporate
and
Japan Americas Europe Others eliminations Consolidated
---------------- --------------- ------------- -------------- -------------- ---------------
Net sales
Unaffiliated customers (Y) 796,406 1,003,683 841,400 184,780 -- 2,826,269
Intersegment 1,312,405 21,523 3,126 198,702 (1,535,756) --
--------------- -------------- ------------ ------------- ------------ --------------
Total 2,108,811 1,025,206 844,526 383,482 (1,535,756) 2,826,269
Operating cost and expenses 1,831,816 1,002,166 820,257 370,036 (1,458,784) 2,565,491
--------------- -------------- ------------ ------------- ------------ --------------
Operating profit (Y) 276,995 23,040 24,269 13,446 (76,972) 260,778
=============== ============== ============ ============= ============ ==============
Assets (Y) 1,384,473 328,634 391,354 136,843 487,025 2,728,329
=============== ============== ============ ============= ============ ==============
1997
-------------
Corporate
and
Japan Americas Europe Others eliminations Consolidated
---------------- --------------- ------------- -------------- -------------- ---------------
Net sales
Unaffiliated customers (Y) 904,545 887,302 765,580 203,598 -- 2,761,025
Intersegment 1,226,130 17,793 3,842 190,602 (1,438,367) --
--------------- -------------- ------------ ------------- ------------ --------------
Total 2,130,675 905,095 769,422 394,200 (1,438,367) 2,761,025
Operating cost and expenses 1,832,174 883,698 733,016 371,221 (1,333,118) 2,486,991
--------------- -------------- ------------ ------------- ------------ --------------
Operating profit (Y) 298,501 21,397 36,406 22,979 (105,249) 274,034
=============== ============== ============ ============= ============ ==============
Assets (Y) 1,477,052 353,027 397,824 165,691 479,185 2,872,779
=============== ============== ============ ============= ============ ==============
</TABLE>
Notes:
1. General corporate expenses of (Y)91,540 million, (Y)88,064 million and
(Y)92,677 million in 1999, 1998 and 1997, respectively, are included in
"Corporate and eliminations."
2. Corporate assets of (Y)923,863 million, (Y)892,863 million and (Y)1,045,127
million in 1999, 1998 and 1997, respectively, which mainly consist of cash
and cash equivalents, marketable securities and corporate properties, are
included in "Corporate and eliminations."
29
<PAGE>
Operating profit for business machines decreased by (Y)54,807 million in 1999.
This decrease mainly reflected the decline of the gross profit ratio reflecting
the appreciation of the yen. The operating profit ratio also decreased by 1.3%
to 12.1%. In 1998, operating profit for business machines decreased by (Y)2,268
million to (Y)316,685 million, mainly due to reduced sales of copying machines.
In 1997, operating profit for business machines increased by (Y)50,177 million
to (Y)318,953 million. This increase was due to significant growth in sales of
copying machines, laser beam and bubble jet printers.
Operating profit for cameras decreased by (Y)8,240 million to (Y)18,967 million
in 1999. The strong yen reduced the gross profit ratio from cameras and the
operating profit ratio also declined 3.4% to 6.8%. Operating profit for cameras
increased both in 1998 and 1997, reflecting increased sales of Advanced Photo
System and 35mm cameras.
Operating profit for optical and other products in 1999 decreased by (Y)17,882
million to an operating loss of (Y)13,233 million, mainly attributable to the
semiconductor market decline. Operating profit for optical and other products
decreased both in 1998 and 1997 due to the slowdown of the semiconductor market.
Income before income taxes in 1999 was (Y)156,072 million, a 34.8% decrease from
the previous year, or 6.0% of net sales. Interest expenses decreased (Y)8,525
million to (Y)20,356 million, mainly owing to the reduction of short-term loans.
The loss attributable to equity in earnings of affiliated companies decreased
(Y)2,390 million to net loss of (Y)2,848 million, primary due to the recovery of
a semiconductor-related affiliated company. In 1999, foreign exchange losses of
(Y)3,387 million were recorded, compared to an exchange gains of (Y)1,189
million in 1998.
Income before income taxes in 1998 was (Y)239,513 million, accounting for 8.5%
of net sales. Other net deductions significantly improved from (Y)23,362 million
to (Y)4,960 million due to the decrease in foreign exchange losses.
Income before income taxes in 1997 was (Y)234,805 million, accounting for 8.5%
of net sales. Interest expenses decreased by (Y)4,055 million, while foreign
exchange losses increased (Y)7,140 million due mainly to the devaluation of
Asian currencies.
Net income in 1999 was (Y)70,234 million, a 35.9% decrease compared to the
previous year, representing a 2.7% return on sales. While Japanese normal income
tax rates declined by 4% to 47%, the ratio of income taxes to income before
income taxes rose by 2.1% to 53.8%. Of this increase, 3.2% was due to the effect
of changing Japanese income tax rates on net deferred tax assets.
Net income in 1998 and 1997 was (Y)109,569 million and (Y)118,813 million,
respectively. Return on sales in 1998 and 1997 was 3.9% and 4.3%, respectively.
Foreign Operations and Foreign Currency Transactions:
Canon's marketing activities are performed by subsidiaries in each region in
local currencies, while the cost of goods sold is generally in yen. Given
Canon's current structure, appreciation of the yen has a negative impact on
Canon's net sales and gross profit ratio. To reduce the financial risks from
changes in foreign exchange rates, Canon utilizes derivative financial
instruments which are comprised principally of forward currency exchange
contracts.
The return on foreign operation sales is usually lower than domestic operations
because foreign
30
<PAGE>
operations consist mainly of marketing activities. The return on foreign
operation sales in 1999, 1998 and 1997 was 1.8%, 2.1% and 2.5%, respectively.
This compares with 2.7%, 3.9% and 4.3% on total operations for such years,
respectively.
(b) Liquidity
Cash and cash equivalents in 1999 decreased by (Y)18,729 million to (Y)480,453
million compared with (Y)499,182 million in 1998 and (Y)647,097 million in 1997.
Net cash provided by operating activities in 1999 was (Y)308,917 million,
compared with (Y)279,220 million in 1998 and (Y)184,200 million in 1997. This
increase is attributable mainly to the significant reduction of inventory
levels.
Net cash used in investing activities in 1999 decreased to (Y)200,982 million,
compared with (Y)247,947 million in 1998 and (Y)206,711 million in 1997. Capital
expenditure decreased by (Y)21,015 million to (Y)200,386 million compared to
1998. The introduction of a new production system helped to reduce certain part
of capital expenditure required for production.
A decrease of net cash used in financing activities in 1999 and 1998 was mainly
owing to the reduction of short-term loans, reflecting Canon's policy to improve
its financial structure. Net cash provided by (used in) financing activities in
1999 was (Y)(122,823) million, compared to (Y)(177,862) million in 1998 and
(Y)21,440 million in 1997.
Capital expenditure in 1999 amounted to (Y)200,386 million compared with
(Y)221,401 million in 1998 and (Y)219,779 million in 1997. In 1999, major
capital expenditure included the expansion and maintenance of production
capabilities, construction of a new plant for consumables and new corporate
headquarters and sales offices. Funds required for investments have been
generated internally from operations.
(c) Capital Resources
At December 31, 1999, Canon had outstanding commitments of approximately
(Y)25,830 million to purchase property, plant and equipment for use in the
ordinary course of its business. Canon anticipates that funds needed to fulfill
these commitments will be generated internally from operations.
Working capital in 1999 decreased by (Y)14,593 million to (Y)609,730 million
compared with (Y)624,323 million in 1998 and (Y)647,762 million in 1997. The
decrease was primarily attributable to the reduction of inventory levels.
The working capital ratio (current assets to current liabilities) for 1999 was
1.70 compared with 1.60 for 1998 and 1.53 for 1997.
Return on assets fell to 2.6% in 1999, compared with 3.9% in 1998 and 4.3% in
1997. This decline was due mainly to a decrease in net income. Return on
stockholders' equity also fell to 6.0% in 1999, compared with 9.7% in 1998 and
11.2% in 1997.
(d) New Accounting Standards
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 ("SFAS 133"), "Accounting for Derivative
Instruments and Hedging
31
<PAGE>
Activities". SFAS 133 establishes accounting and reporting standards for
derivative instruments and for hedging activities, and requires that an entity
recognize all derivatives as either assets or liabilities in the balance sheet
and measure those instruments at fair value. SFAS 133, as amended, is effective
for fiscal years beginning after June 15, 2000. Canon will adopt SFAS 133 for
the year beginning January 1, 2001 and is currently assessing the impact of
adopting SFAS 133. However, based on its limited use of derivative financial
instruments, management does not anticipate that the adoption of SFAS 133 will
have a material effect on Canon's consolidated financial position or results of
operations.
In December 1999, the Securities Exchange Commission ("SEC") issued Staff
Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial
Statements". SAB101 summarizes certain of the SEC staff's views in applying
generally accepted accounting principles to revenue recognition in financial
statements. Canon will adopt SAB 101 for the year beginning January 1, 2000 and
is in the process of determining the impact that adoption will have on its
consolidated financial statements.
(e) Item 9A Market Risk Management
Market Risk Exposures:
Canon is exposed to markets risk, including changes in foreign exchange rates,
interest rates and prices of marketable securities and marketable investments.
In order to hedge the risks of changes in foreign exchange rates and interest
rates, Canon uses derivative financial instruments. Canon does not hold or issue
derivative financial instruments for trading purposes. Although the use of
derivative financial instruments exposes Canon to the risk of credit-related
losses in the event of non-performance by counterparties, Canon believes that
its counterparties are creditworthy and does not expect such losses, if any, to
be significant.
Equity Price Risk:
Canon holds marketable securities and marketable investments included in current
assets for short-term investment. In general, highly-liquid and low-risk
instruments are preferred in the portfolio. Marketable securities and marketable
investments included in noncurrent assets are held as longer-term investments.
Canon does not hold marketable securities and marketable investments for trading
purposes.
Maturities and fair values of such marketable securities and marketable
investments were as follows at December 31, 1999 and 1998.
<TABLE>
(Millions of yen)
1999 1998
----------------------------- ------------------------------
Cost Fair Value Cost Fair Value
--------- ------------ ------------ ----------
<S> <C> <C> <C> <C>
Due within one year (Y) 1,745 1,732 1,234 1,223
Due after one year through five years 3,004 4,484 4,755 4,965
Due after five years 5,377 5,741 1,437 1,463
Equity securities 24,772 116,720 19,496 33,752
------ ------- ------ ------
(Y) 34,898 128,677 26,922 41,403
</TABLE>
32
<PAGE>
Foreign Exchange Risk:
Canon's international operations and foreign currency indebtedness expose Canon
to the risk of changes in foreign currency exchange rates. To manage this
exposure, Canon enters into foreign exchange contracts. With respect to risks
related to its sales revenue, Canon currently has a policy of entering into
foreign exchange contracts that cover approximately 30-50% of the amount of
foreign currency cash flows that Canon, at a given time, anticipates it will
receive within the immediately succeeding two to three month period. Canon also
enters into foreign exchange contracts from time to time to hedge a portion of
the risk of fluctuation in foreign currency exchange rates associated with
long-term debt that is denominated in foreign currencies. Foreign exchange
contracts related to such long-term debt have the same maturity as the
underlying debt.
The following table provides information about Canon's major derivative
financial instruments related to foreign currency exchange transactions existing
at December 31, 1999 and 1998, which is translated into yen at the rate used
herein as of such date, together with the related weighted average contractual
exchange rates at December 31, 1999 and 1998. This table does not include
amounts related to foreign exchange contracts entered into in connection with
long-term debt denominated in foreign currencies which eliminate all foreign
currency exposures. All of the foreign exchange contracts described in the
following table as of December 31, 1999 have a contractual maturity date in
2000.
<TABLE>
1999 (Millions of yen except average contractual rates)
---- ---------------------------------------------------------
Forwards to sell foreign currencies U.S.$/Yen euro/Yen Others Total
----------------------------------------- ------------- -------------- ------------- --------------
<S> <C> <C> <C> <C> <C>
Contract amounts (Y) 123,813 45,037 2,081 170,931
Estimated fair value 953 579 (104) 1,428
Average contractual rates 102.38 103.84
1998 (Millions of yen except average contractual rates)
---- ---------------------------------------------------------
Forwards to sell foreign currencies U.S.$/Yen DM/Yen Others Total
----------------------------------------- ------------- -------------- ------------- --------------
Contract amounts (Y) 80,296 24,199 794 105,289
Estimated fair value 4,367 714 (128) 4,953
Average contractual rates 121.25 70.84
</TABLE>
33
<PAGE>
Interest Rate Risk:
Canon's exposure to the market risk of changes in interest rates relates
primarily to its debt obligations. Canon has long-term debt with both fixed
rates and floating rates. Interest rate swaps may be entered into from time to
time by Canon to hedge cash flows of interest and debt when determined by Canon
to be appropriate based on market conditions.
The following tables provide information about Canon's derivative financial
instruments and other financial instruments that are sensitive to changes in
interest rates. For debt obligations, the table presents principal cash flows
and related weighted average interest rates by expected maturity dates. For
interest rate swaps, the table presents notional principal amounts and weighted
average interest rates by expected maturity dates. Notional principal amounts
are used to calculate the contractual payments to be exchanged under the
contracts. The table presents information for obligations existing at December
31, 1999 and 1998, which is translated into yen at the rate used herein as of
such date, together with the related weighted average contractual interest rates
at December 31, 1999 and 1998.
<TABLE>
Long-term debt (including due within one year) (Millions of yen )
---------------------------------------------------- ----------------------------------------------------------
Average *
interest Expected maturity date (year ended December 31, 1999)
rates ----------------------------------------------------------------
Total 2000 2001 2002 2003 2004 Thereafter Estimated
fair value
---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Japanese yen notes 2.27% (Y)111,920 -- 19,920 37,000 10,000 20,000 25,000 116,233
Japanese yen
convertible 1.20% 21,254 -- 9 5,248 -- -- 15,997 55,734
debentures
Swiss franc note with
warrants 0.74% 6,984 6,984 -- -- -- -- -- 6,994
Loans, principally
from banks 3.69% 50,193 18,090 15,966 9,407 2,152 674 3,904 49,303
---------------------------------------------------------------------------------------------------------------
Total (Y)190,351 25,074 35,895 51,655 12,152 20,674 44,901 228,264
---------------------------------------------------------------------------------------------------------------
Long-term debt (including due within one year) (Millions of yen )
---------------------------------------------------- ----------------------------------------------------------
Average *
interest Expected maturity date (year ended December 31, 1998)
rates
----------------------------------------------------------------
Total 1999 2000 2001 2002 2003 Thereafter Estimated
fair value
---------------------------------------------------------------------------------------------------------------
U.S. dollar bonds 9.75% (Y) 8,099 8,099 -- -- -- -- -- 8,142
Japanese yen notes 2.29% 109,920 -- -- 19,920 35,000 10,000 45,000 110,046
Japanese yen
convertible 1.20% 23,125 -- 9 -- 5,574 -- 17,542 50,486
debentures
Swiss franc note with
warrants 0.65% 45,918 36,970 8,948 -- -- -- -- 44,193
Loans, principally
from banks 4.53% 59,418 21,091 17,786 10,781 2,710 527 6,523 58,609
---------------------------------------------------------------------------------------------------------------
Total (Y)246,480 66,160 26,743 30,701 43,284 10,527 69,065 271,476
---------------------------------------------------------------------------------------------------------------
</TABLE>
*All long-term debt is fixed rate except loans, principally from banks which
include both fixed and floating rate debt.
34
<PAGE>
<TABLE>
Interest rate swaps (Millions of yen )
------------------------------------------------------------------------------------------------------------------
Expected maturity date (year ended December 31, 1999)
-------------------------------------------------------------------
Notional Average Average Total 2000 2001 2002 2003 2004 Thereafter Estimated
principal amount receive pay fair value
(million) rate rate
------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(Y) 60,000 1.66% 0.88% (Y) 60,000 -- 40,000 20,000 -- -- -- 2,113
U.S.$ 468 6.02% 6.11% 47,929 4,316 15,130 28,483 -- -- -- 161
------------------------------------------------------------------------------------------------------------------
Interest rate swaps (Millions of yen )
-------------------------------------------------------------------------------------------------------------------
Expected maturity date (year ended December 31, 1998)
--------------------------------------------------------------------
Notional Average Average Total 1999 2000 2001 2002 2003 Thereafter Estimated
principal amount receive pay fair value
(million) rate rate
------------------------------------------------------------------------------------------------------------------
(Y) 61,000 1.78% 0.50% (Y) 61,000 1,000 -- 40,000 20,000 -- -- 2,388
Sfr 22 4.63% 2.06% 1,821 -- 847 -- -- 974 -- (1)
U.S.$ 498 6.31% 5.77% 57,657 19,587 12,445 25,625 -- -- -- (48)
------------------------------------------------------------------------------------------------------------------
</TABLE>
(f) Regarding the Environment
Canon is not aware of any sites that may have a material adverse effect on its
liquidity, financial position or results of operations. It is difficult to
estimate future environmental expenditure because of the many uncertainties
involved, including the future status of the law, regulations, technology and
information. Nevertheless, Canon believes that capital expenditure and expenses
incurred in complying with current laws for environmental protection will not
have a material effect upon its liquidity, financial position or results of
operations.
(g) Year 2000
Canon's State of Readiness
Canon considers continued attention to the Year 2000 (Y2K) issue as one of its
most important management tasks. In 1998 Canon formed a Y2K committee with the
participation of major Canon Group companies. This committee coordinated all
aspects of the Y2K preparations of Canon Group.
Prior to the beginning of the year 2000, Canon established the countermeasures
headquarters to test and confirm compliance of our utilities, information
infrastructure, main information systems, manufacturing facilities and major
suppliers during the year end/beginning. However, Canon's management has so far
remained unaffected by Y2K-related problems. Although Canon Group sales
companies established a special team to handle customer communications, no
specific product-related issues have arisen.
Costs
Canon and major Canon Group companies consigned external software companies to
ensure Y2K compliance. For the Canon Group as a whole, these activities involved
costs of approximately (Y)1,800 million for the period up to and including
December 31, 1999.
35
<PAGE>
Y2K-related costs also arose in other areas. However, these costs are not
material to Canon's business operations, financial condition or results of
operations.
(h) Looking Forward
In 2000, Canon expects that the overall U.S. economy will remain favorable and
the European economy will show economic expansion supported by an increase of
exports reflecting the lower value of the euro against major currencies. Canon
expects personal spending and capital investment in Japan to continue to improve
slightly. The markets in which Canon operates are expected to grow steadily, as
demand for information and communications equipment shifts further toward
products with digital, network and color functions. Nevertheless, the operating
environment will continue to feel pressure from increasing customer demands for
improved performance and from intense price competition. Canon expects an
increase in demand for semiconductors to an increase in capital investment by
manufactures will lead to growing demand for Canon's semiconductor production
equipment. As nearly 70% of Canon's products are distributed overseas and a
large portion of these products are manufactured at plants in Japan, the
appreciation of the yen has a negative impact on Canon's operating results.
Under these circumstances, Canon will devote all of its energies and resources
to improving business results by introducing attractive and competitive products
that meet customer needs and by continuing management reformation activities
aimed at enhancing the efficiency of development, production, sales and
distribution.
The foregoing discussion in the "Management's Discussion and Analysis of
Financial Condition and Results of Operations" contains forward-looking
statements that reflect management's current views with respect to certain
future events and financial performance. Actual results may differ materially
from those projected or implied in the forward-looking statements. Further,
certain forward-looking statements are based upon assumptions of future events
that may not prove to be accurate. The following important factors could cause
actual results to differ materially from those projected or implied in any
forward-looking statements: exchange rate fluctuations; the uncertainty of
Canon's ability to implement its plans to localize production and other measures
to reduce the impact of exchange rate fluctuations; uncertainty of economic
conditions in Canon's major markets; uncertainty of continued demand for Canon's
high-value-added products; uncertainty in the continued growth of computer and
related markets; uncertainty of increased demand for Canon's semiconductor
production equipment; Canon's ability to continue to develop products and to
market products that incorporate new technologies on a timely basis, at
competitive prices and with the ability to achieve market acceptance; the
possibility of losses resulting from foreign currency transactions designed to
reduce financial risks from changes in foreign exchange rates; and inventory
risk due to shifts in market demand.
36
<PAGE>
Item 10. Directors and Officers of Registrant
Directors and Corporate Auditors of the Company as of March 31, 2000 were as
follows:
Director/
Age as of Corporate
Name March 31, 2000 Position Auditor since
---- -------------- -------- -------------
Fujio Mitarai 64 President and C.E.O. March, 1981
Takashi Kitamura 59 Senior Managing Director March, 1989
Ichiro Endo 59 Senior Managing Director March, 1989
Yukio Yamashita 60 Senior Managing Director March, 1991
Takashi Saito 58 Managing Director March, 1991
Toshizo Tanaka 59 Managing Director March, 1995
Yusuke Emura 55 Managing Director March, 1993
Kinya Uchida 61 Managing Director March, 1995
Akira Tajima 59 Managing Director March, 1995
Haruo Murase 60 Director March, 1991
Toru Takahashi 57 Director March, 1991
Nobuyoshi Tanaka 54 Director March, 1993
Kohtaro Miyagi 59 Director March, 1995
Tsuneji Uchida 58 Director March, 1997
Junji Ichikawa 57 Director March, 1997
Muneo Adachi 57 Director March, 1997
Hajime Tsuruoka 56 Director March, 1997
Teruomi Takahashi 56 Director March, 1999
Hironori Yamamoto 56 Director March, 1999
Akiyoshi Moroe 55 Director March, 1999
Kunio Watanabe 55 Director March, 1999
Ikuo Soma 53 Director March, 1999
Shuichi Ishizuki 62 Corporate Auditor March, 1998
Takenori Matsuoka 60 Corporate Auditor March, 1995
Tadashi Ohe 55 Corporate Auditor March, 1994
Tetsuo Yoshizawa 54 Corporate Auditor March, 1998
Directors and Corporate Auditors are elected at the annual meeting of
shareholders for a two-year term and three-year term of office, respectively,
and may serve any number of consecutive terms. There is no arrangement or
understanding between a Director or a Corporate Auditor and any other person
pursuant to his election as a Director or a Corporate Auditor.
All Directors and Messrs. Shuichi Ishizuki and Takenori Matsuoka, Corporate
Auditors, have been employed by the business of the Company on a full-time basis
for more than five years.
37
<PAGE>
Item 11. Compensation of Directors and Officers
(a) The aggregate amount of compensation, including bonuses but excluding
retirement allowances, paid by the Company in 1999 to all Directors and
Corporate Auditors of the Company who served during 1999 was approximately
(Y)1,274 million.
(b) Directors and Corporate Auditors are not covered by the Company's
retirement program. However, in accordance with customary Japanese business
practice, when a Director or a Corporate Auditor retires, a proposal to pay
a lump-sum retirement allowance is submitted to an annual meeting of
shareholders for approval.
In 1999, the Company paid retirement allowances aggregating (Y)1,003
million to eight Directors.
Item 12. Options to Purchase Securities from Registrant or Subsidiaries
(a) None
(b) None
Item 13. Interest of Management in Certain Transactions
None
PART II
Item 14. Description of Securities to be Registered
None
PART III
Item 15. Defaults Upon Senior Securities
None
Item 16. Changes in Securities and Changes in Security for Registered Securities
(a) As a result of amendments to the Japanese Commercial Code which became
effective on October 1, 1982 (the "Amendments"), the Deposit Agreement
dated May 1, 1969, which constituted the American Depositary Receipts for
10,000,000 American Depositary Shares (ADSs), each ADS representing five
Shares, was amended and restated as of October 1, 1982 (the "amended
Deposit Agreement").
38
<PAGE>
Under the Amendments, the Company was required to adopt a "unit" of Shares.
At its annual meeting of shareholders held on March 30, 1982, the Company
adopted 1,000 Shares as one unit, effective from October 1, 1982.
The adoption of a unit of Shares has, inter alia, the following
consequences:
(i) Except under certain limited circumstances, the Company may issue
share certificates only for Shares constituting one or more complete
units. Since the transfer of Shares normally requires delivery of the
certificates therefor, fractions of a unit for which no share
certificates have been issued are not transferable.
(ii) A holder of Shares not constituting one or more complete units may at
any time require the Company to purchase such Shares at their last
reported sale price on the Tokyo Stock Exchange on the day when such
request is made or, if no sale takes place on the Tokyo Stock Exchange
on that day, the price at which the first sale of the Shares is
effected on the Tokyo Stock Exchange thereafter, less the usual
brokerage commission and securities transfer tax.
(iii) A holder of Shares representing less than one unit cannot exercise
any voting rights with respect to such Shares. A person (except a
corporate shareholder more than one-quarter of whose outstanding
Shares are, directly or indirectly, owned by the Company) holding at
least one unit of Shares has one vote per Share with respect to those
Shares constituting one or more complete unit.
As a result of the Amendments, the depositary under the Deposit
Agreement may be unable to deliver share certificates with respect to
those Shares otherwise deliverable upon the surrender of ADRs which do
not constitute one or more complete units. In such case, the amended
Deposit Agreement provides that the depositary will promptly advise
the holder of the amount of such Shares, deliver to the holder a new
ADR evidencing such Shares, and notify the holder of the additional
amount of ADRs which the holder must surrender in order for the
depositary to effect delivery of share certificates for all of Shares
represented by the holder's ADSs.
Effective from March 16, 1998, the Company changed the ratio of ADSs to
Shares from five Shares to one Share. In this regard, four additional ADSs
for each ADS held were distributed to holders of ADS. Existing ADRs remain
valid and do not need to be exchanged for new ones.
(b) None
(c) None
(d) None
39
<PAGE>
PART IV
Item 17. Financial Statments
Consolidated Financial Statement of Canon Inc. and Subsidiaries:
Page
Number
------
Independent Auditors' Report 41
Consolidated Balance Sheets as of December 31, 1999 and 1998 42
Consolidated Statements of Income for the years ended
December 31, 1999, 1998 and 1997 43
Consolidated Statements of Stockholders' Equity for the years
ended December 31, 1999, 1998 and 1997 44
Consolidated Statements of Cash Flows for the years ended
December 31, 1999, 1998 and 1997 45
Notes to Consolidated Financial Statements 46
Schedule:
Independent Auditors' Report on Schedule 41
Schedule II Valuation and Qualifying Accounts for the
years ended December 31, 1999, 1998 and 1997 71
All other schedules are omitted as permitted by the rules and regulations
of the Securities and Exchange Commission as they are not applicable.
Financial statements of non-consolidated subsidiaries and affiliates, 20% to 50%
owned, are omitted because none of these subsidiaries and affiliates constitute
a significant subsidiary or an affiliate as of or for the year ended December
31, 1999.
40
Independent Auditors' Report
The Board of Directors
Canon Inc.:
We have audited the consolidated financial statements (expressed in yen) of
Canon Inc. and subsidiaries as listed in the accompanying index. In connection
with our audits of the consolidated financial statements, we also have audited
the financial statement schedule as listed in the accompanying index. These
consolidated financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements and financial statement
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards in the 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 segment information required to be disclosed in financial statements under
United States generally accepted accounting principles is not presented in the
accompanying consolidated financial statements. Foreign issuers are currently
exempted from such disclosure requirement in Securities Exchange Act filings
with the United States Securities and Exchange Commission.
In our report dated February 8, 1999, our opinion on the 1998 and 1997
consolidated financial statements of Canon Inc. and subsidiaries was qualified
because of the effects of the departure from Statement of Financial Accounting
Standards No. 115 in accounting for certain investments in debt and equity
securities. As described in note 1(f) of the notes to the consolidated
financial statements, Canon Inc. and subsidiaries have changed their method of
accounting for such investments in debt and equity securities and restated
their 1998 and 1997 consolidated financial statements to conform with United
States generally accepted accounting principles. Accordingly, our present
opinion on the accompanying 1998 and 1997 consolidated financial statements, as
presented herein, is different from that expressed in our previous report.
In our opinion, except for the omission of the segment information as discussed
in the third paragraph of this report, the consolidated financial statements
referred to above present fairly, in all material respects, the financial
position of Canon Inc. and subsidiaries at December 31, 1999 and 1998, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1999, in conformity with United States
generally accepted accounting principles.
Also in our opinion, the related financial statement schedule, when considered
in relation to the basic consolidated financial statements taken as a whole,
presents fairly, in all material respects, the information set forth therein.
/s/ KPMG
Tokyo, Japan
February 8, 2000
<PAGE>
CANON INC. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 1999 and 1998
<TABLE>
Millions of yen
--------------------------------
1999 1998
---- ----
Assets
Current assets:
<S> <C> <C>
Cash and cash equivalents (Y) 480,453 499,182
Marketable securities (notes 3 and 7) 9,003 7,470
Trade receivables (notes 4 and 7) 376,472 412,375
Inventories (notes 5 and 7) 436,250 549,257
Prepaid expenses and other current assets (note 10) 184,411 197,433
---------- ----------
Total current assets 1,486,589 1,665,717
Noncurrent receivables and restricted funds (note 17) 29,771 50,309
Investments (notes 3 and 7) 166,464 83,212
Net property, plant and equipment (notes 6 and 7) 746,824 742,312
Other assets (notes 9 and 10) 157,884 186,779
---------- ----------
Total assets (Y) 2,587,532 2,728,329
========== ==========
Liabilities and Stockholders' Equity
Current liabilities:
Short-term loans (note 7) 298,399 403,332
Trade payables (note 8) 364,664 401,527
Income taxes (note 10) 45,915 61,328
Accrued expenses 117,390 127,905
Other current liabilities (note 10) 50,491 47,302
---------- ----------
Total current liabilities 876,859 1,041,394
Long-term debt, excluding current installments (note 7) 165,277 180,320
Accrued pension and severance cost (note 9) 132,826 132,818
Other noncurrent liabilities (note 10) 11,325 12,228
---------- ----------
Total liabilities 1,186,287 1,366,760
---------- ----------
Minority interests 199,242 206,049
---------- ----------
Stockholders' equity:
Common stock of (Y) 50 par value.
Authorized 2,000,000,000 shares;
issued and outstanding 871,555,698 shares in 1999 and
870,305,870 shares in 1998 (notes 7 and 11) 163,969 163,033
Additional paid-in capital (notes 7 and 11) 376,848 375,913
Legal reserve (note 12) 33,518 31,396
Retained earnings (notes 10 and 12) 735,975 682,663
Accumulated other comprehensive income (loss)
(notes 3, 9, 10 and 14) (108,307) (97,485)
Total stockholders' equity 1,202,003 1,155,520
---------- ----------
Commitments and contingent liabilities (note 17)
Total liabilities and stockholders' equity (Y) 2,587,532 2,728,329
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
42
<PAGE>
CANON INC. AND SUBSIDIARIES
Consolidated Statements of Income
Years ended December 31, 1999, 1998 and 1997
<TABLE>
Millions of yen
--------------------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Net sales (Y) 2,622,265 2,826,269 2,761,025
Cost of sales 1,497,940 1,569,197 1,528,364
---------- ---------- ----------
Gross profit 1,124,325 1,257,072 1,232,661
Selling, general and administrative expenses 948,269 996,294 958,627
---------- ---------- ----------
Operating profit 176,056 260,778 274,034
Other income (deductions):
Interest and dividend income 10,222 12,576 13,922
Interest expense (20,356) (28,881) (29,789)
Other, net (9,850) (4,960) (23,362)
---------- ---------- ----------
(19,984) (21,265) (39,229)
---------- ---------- ----------
Income before income taxes and minority interests 156,072 239,513 234,805
Income taxes (note 10) 83,939 123,843 109,364
---------- ---------- ----------
Income before minority interests 72,133 115,670 125,441
Minority interests 1,899 6,101 6,628
---------- ---------- ----------
Net income (Y) 70,234 109,569 118,813
========== ========== ==========
(Y)
--------------------------------------
Net income per share (notes 1 (p) and 15):
Basic (Y) 80.66 126.10 137.73
Diluted 79.50 123.93 134.60
======= ======= =======
Dividends per common share (note 12) 17.00 17.00 17.00
======= ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
43
<PAGE>
CANON INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
Years ended December 31, 1999, 1998 and 1997
<TABLE>
Millions of yen
--------------------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Common stock:
Balance at beginning of year (Y) 163,033 160,411 150,565
Conversion of convertible debt (notes 11 and 13) 936 2,622 9,846
--------- ---------- ----------
Balance at end of year 163,969 163,033 160,411
--------- ---------- ----------
Additional paid-in capital:
Balance at beginning of year 375,913 372,398 359,011
Conversion of convertible debt (notes 11 and 13) 935 2,612 9,779
Increase arising from issuance of subsidiaries' common
stock, conversion of convertible debt and exercise of
warrants of subsidiaries and other transfers - 903 3,608
--------- ---------- ----------
Balance at end of year 376,848 375,913 372,398
--------- ---------- ----------
Legal reserve:
Balance at beginning of year 31,396 28,467 26,770
Transfers from retained earnings (note 12) 2,122 2,934 1,728
Transfers to minority interests arising from
issuance of subsidiaries' common stock,
conversion of convertible debt and exercise of
warrants of subsidiaries and other transfers - (5) (31)
--------- ---------- ----------
Balance at end of year 33,518 31,396 28,467
--------- ---------- ----------
Retained earnings:
Balance at beginning of year 682,663 592,268 489,617
Net income for the year 70,234 109,569 118,813
Cash dividends (note 12) (14,797) (15,619) (13,727)
Transfers to legal reserve (note 12) (2,122) (2,934) (1,728)
Transfers to minority interests arising from
issuance of subsidiaries' common stock, conversion
of convertible debt and exercise of warrants of
subsidiaries and other transfers (3) (621) (707)
--------- ---------- ----------
Balance at end of year 735,975 682,663 592,268
--------- ---------- ----------
Accumulated other comprehensive income (loss)
(notes 3, 9, 10 and 14):
Balance at beginning of year (97,485) (44,033) (18,529)
Other comprehensive income (loss) for the year,
net of tax (10,822) (53,452) (25,504)
--------- ---------- ----------
Balance at end of year (108,307) (97,485) (44,033)
--------- ---------- ----------
Total stockholders' equity (Y) 1,202,003 1,155,520 1,109,511
========= ========== ==========
Disclosure of comprehensive income:
Net income for the year 70,234 109,569 118,813
Other comprehensive income (loss) for the year,
net of tax (note 14) (10,822) (53,452) (25,504)
--------- ---------- ----------
Total comprehensive income for the year (Y) 59,412 56,117 93,309
========= ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
44
<PAGE>
CANON INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended December 31, 1999, 1998 and 1997
<TABLE>
Millions of yen
---------------------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Net income (Y) 70,234 109,569 118,813
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 158,111 161,787 139,815
Loss on disposal of property and equipment 8,814 6,631 8,289
Deferred income taxes (5,972) 1,941 (9,618)
Decrease (increase) in trade receivables (1,231) 1,640 (66,975)
Decrease (increase) in inventories 107,913 15,737 (43,895)
Increase (decrease) in trade payables (22,950) (46,636) 31,527
Increase (decrease) in income taxes (13,966) 607 (12,459)
Increase in accrued expenses 3,206 9,386 12,962
Other, net 4,758 18,558 5,741
------- ------- -------
Net cash provided by operating activities 308,917 279,220 184,200
------- ------- -------
Cash flows from investing activities:
Capital expenditure (200,386) (221,401) (219,779)
Proceeds from sale of property, plant and equipment 6,104 3,404 4,330
Payment for purchase of marketable securities (12,349) (5,386) (8,635)
Proceeds from sale of marketable securities 6,637 9,439 5,145
Payment for purchase of investments (9,770) (28,111) (6,797)
Other 8,782 (5,892) 19,025
------- ------- -------
Net cash used in investing activities (200,982) (247,947) (206,711)
------- ------- -------
Cash flows from financing activities (note 13):
Proceeds from long-term debt (Y) 23,811 34,903 70,768
Repayment of long-term debt (75,005) (29,458) (98,693)
Increase (decrease) in short-term loans (51,871) (167,295) 51,030
Dividends paid (note 12) (14,797) (15,619) (13,727)
Other (4,961) (393) 12,062
------- ------- -------
Net cash provided by (used in) financing activities (122,823) (177,862) 21,440
------- ------- -------
Effect of exchange rate changes on cash and cash equivalents (3,841) (1,326) (3,578)
------- ------- -------
Net change in cash and cash equivalents (18,729) (147,915) (4,649)
Cash and cash equivalents at beginning of year 499,182 647,097 651,746
Cash and cash equivalents at end of year (Y) 480,453 499,182 647,097
======= ======= =======
Cash paid during the year for:
Interest (Y) 19,321 21,083 27,120
Income taxes 103,877 121,295 131,441
======= ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
45
<PAGE>
CANON INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(1) Basis of Presentation and Significant Accounting Policies
(a) Description of Business
The Company and subsidiaries (collectively "Canon") is a
high-technology oriented company which operates globally and has
numerous core businesses. Originally a 35mm camera maker, Canon is
now one of the world's leading manufacturers in other fields, such as
copying machines and computer peripherals, mainly laser beam and
bubble jet printers. Canon's products also include business systems
such as faxes, computers, micrographics, Japanese-language word
processors and calculators. Canon's camera business consists mainly
of SLR cameras, compact cameras, video camcorders and digital
cameras. Optical related products include steppers and aligners used
in semiconductor chip production, broadcasting lenses and medical
equipment. Canon's sales in 1999 were distributed as follows: copying
machines-32%, computer peripherals-37%, business systems-13%,
cameras-11%, and optical and other products-7%.
Sales are made principally under the Canon brand name, almost
entirely through sales subsidiaries. These subsidiaries are
responsible for marketing and distribution and primarily sell to
retail dealers in their geographical area. Approximately 70% of
consolidated net sales in 1999 were generated outside Japan, with 35%
in the Americas, 28% in Europe and 7% in other areas.
Canon's manufacturing operations are conducted primarily at 16 plants
in Japan and 13 overseas plants which are located in the United
States, Germany, France, United Kingdom, Taiwan, China, Malaysia,
Thailand, and Mexico.
Canon sells laser beam printers on an OEM basis to Hewlett-Packard
Co.; such sales constituted approximately 20% of consolidated sales
for the year ended December 31, 1999. Canon believes it is highly
unlikely that it would lose such OEM business in the near term.
(b) Basis of Presentation
The Company and its domestic subsidiaries maintain their books of
account in conformity with financial accounting standards of Japan.
Foreign subsidiaries maintain their books in conformity with
financial accounting standards of the countries of their domicile.
The accompanying consolidated financial statements reflect the
adjustments which management believes are necessary to conform them
with United States generally accepted accounting principles.
(c) Principles of Consolidation
The consolidated financial statements include the accounts of Canon
after elimination of all significant intercompany balances and
transactions.
(d) Cash Equivalents
For purposes of the statements of cash flows, Canon considers all
highly-liquid debt instruments purchased with an original maturity of
three months or less to be cash equivalents.
46
<PAGE>
CANON INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(e) Translation of Foreign Currencies
Foreign currency financial statements have been translated in
accordance with Statement of Financial Accounting Standards No. 52
("SFAS 52"), "Foreign Currency Translation". Under SFAS 52, assets
and liabilities of the Company's subsidiaries located outside Japan
are translated into Japanese yen at the rates of exchange in effect
at the balance sheet date. Income and expense items are translated at
the average exchange rates prevailing during the year. Gains and
losses resulting from translation of financial statements, including
gains and losses from hedging and intercompany transactions, net of
related taxes, are included in other comprehensive income (loss) and
are accumulated in stockholders' equity as foreign currency
translation adjustments.
Gains and losses resulting from other foreign currency transactions
are included in other income (deductions) (see note 19).
(f) Marketable Securities and Marketable Investments
During 1999, Canon changed its method of accounting for certain
investments in debt and equity securities and restated the
consolidated financial statements as of and for the years ended
December 31, 1998 and 1997 to apply Statement of Financial Accounting
Standards No. 115 ("SFAS 115"), "Accounting for Certain Investments
in Debt and Equity Securities". Under SFAS 115, certain investments
in debt and equity securities should be classified as trading,
available-for-sale, or held-to-maturity securities. Trading
securities are bought and held principally for the purpose of selling
them in the near term. Held-to-maturity securities are those
securities in which Canon has the ability and intent to hold the
security until maturity. All securities not included in trading or
held-to-maturity are classified as available-for-sale.
Trading and available-for-sale securities are recorded at fair value.
Held-to-maturity securities are recorded at amortized cost, adjusted
for the amortization or accretion of premiums or discounts.
Unrealized holding gains and losses on trading securities are
included in earnings. Unrealized holding gains and losses, net of the
related tax effect, on available-for-sale securities are excluded
from earnings and are reported as a separate component of other
comprehensive income until realized.
Prior to the application of SFAS 115, marketable securities and
marketable investments held for temporary and long-term investment
purposes were carried predominantly at the lower of cost or market.
The cost of such securities was based on the average cost.
As a result of the application of SFAS 115, total assets increased
(Y)7,732 million, stockholders' equity increased (Y)7,442 million and
comprehensive income decreased (Y)3,059 million in the consolidated
financial statements as of and for the year ended December 31, 1998,
and comprehensive income decreased (Y)15,065 million in the
consolidated financial statements for the year ended December 31,
1997. There were no effects on previously reported net income for the
years ended December 31, 1998 or 1997.
47
<PAGE>
CANON INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(g) Inventories
Inventories are stated at the lower of cost or market. Cost is
determined principally by the average method for domestic inventories
and the first-in, first-out method for overseas inventories.
(h) Investments in Affiliated Companies
Of the investments in affiliated companies owned 20% to 50%, certain
investments are accounted for on the equity basis and the others are
carried at cost. Canon's equity in undistributed earnings of the
latter companies is not significant.
Canon's share of the net earnings (loss) of companies carried at
equity, included in other income (deductions), and dividends received
from those companies for the years 1999, 1998 and 1997 are as
follows:
Millions of yen
--------------------------------
1999 1998 1997
---- ---- ----
Net loss (Y) (2,848) (5,238) (4,282)
Dividends received 40 188 30
(i) Depreciation
Depreciation is calculated principally by the declining-balance
method over the estimated useful lives of the assets.
(j) Goodwill
The excess of cost over underlying equity at acquisition dates of
investments in subsidiaries and affiliated companies is being
amortized principally over 10 years.
(k) Income Taxes
Canon accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109 ("SFAS 109"), "Accounting for
Income Taxes". Under the asset and liability method of SFAS 109,
deferred tax assets and liabilities are recognized for the estimated
future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and
liabilities and their respective tax bases and operating loss and tax
credit carryforwards. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income
in the years in which those temporary differences are expected to be
recovered or settled. Under SFAS 109, the effect on deferred tax
assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date.
(l) Employee Retirement and Severance Benefits
The Company and certain of its subsidiaries have various employee
retirement and severance defined benefit plans covering substantially
all employees who meet eligibility requirements (see note 9).
48
<PAGE>
CANON INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(m) Advertising
The costs of advertising are expensed as incurred.
(n) Derivatives
Canon does not hold derivative financial instruments for trading
purposes. Derivative financial instruments held by Canon are
comprised principally of foreign exchange contracts to manage
currency risk and interest rate swaps to manage interest rate risk.
Derivative financial instruments that are designated and effective to
hedge forecasted transactions for which there is no firm commitment
are marked to market, and gains and losses on such derivatives are
recorded in other income (deductions). Foreign currency derivative
financial instruments generally qualify for hedge accounting if their
maturity dates correspond to hedged existing assets and liabilities
denominated in foreign currencies, and gains and losses on such
derivative financial instruments are recognized and recorded in other
income (deductions) at end of year and at settlement, as are the
offsetting foreign exchange losses and gains on the hedged items.
Gains and losses on the hedging derivative financial instruments that
are designated and effective as hedges of firm commitments are
deferred and recognized in income when the sale of the hedged items
occurs. Amounts receivable or payable under derivative financial
instruments used to manage interest rate risks arising from financial
assets and liabilities are recognized as a component of interest
income or expense of such related underlying assets or liabilities
(see note 16).
(o) Issuance of Stock by Subsidiaries
The change in the Company's proportionate share of subsidiary equity
resulting from issuance of stock by the subsidiaries is accounted for
as an equity transaction.
(p) Net Income per Share
Basic net income per share has been computed by dividing net income
available to common stockholders by the weighted-average number of
common shares outstanding during each year. Diluted net income per
share reflects the potential dilution and has been computed on the
basis that all convertible debentures were converted at beginning of
the year or at time of issuance (if later), and that all dilutive
warrants were exercised (less the number of treasury shares assumed
to be purchased from the proceeds using the average market price of
the Company's common shares).
(q) Use of Estimates
Management of Canon has made a number of estimates and assumptions
that affect the reported amounts of assets, liabilities, revenues and
expenses, and the disclosure of contingent assets and liabilities to
prepare these financial statements in conformity with generally
accepted accounting principles. Actual results could differ from
those estimates.
49
<PAGE>
CANON INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(r) Long-Lived Assets and Long-Lived Assets to Be Disposed Of
Canon's long-lived assets and certain identifiable intangibles are
reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable.
Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future net cash
flows (undiscounted and without interest charges) expected to be
generated by the asset. If such assets are considered to be impaired,
the impairment to be recognized is measured by the amount by which
the carrying amount of the assets exceed the fair value of the
assets. Assets to be disposed of are reported at the lower of the
carrying amount or fair value less costs to sell.
(s) New Accounting Standards
In June 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 133 ("SFAS 133"),
"Accounting for Derivative Instruments and Hedging Activities". SFAS
133 establishes accounting and reporting standards for derivative
instruments and for hedging activities, and requires that an entity
recognize all derivatives as either assets or liabilities in the
balance sheet and measure those instruments at fair value. SFAS 133,
as amended, is effective for fiscal years beginning after June 15,
2000. Canon will adopt SFAS 133 for the year beginning January 1,
2001 and is currently assessing the impact of adopting SFAS 133.
However, based on its limited use of derivative financial
instruments, management does not anticipate that the adoption of SFAS
133 will have a material effect on Canon's consolidated financial
position or results of operations.
(t) Reclassifications
Certain reclassifications have been made to the prior years'
consolidated financial statements to conform the presentation used
for the year ended December 31, 1999.
(2) Foreign Operations
Amounts included in the consolidated financial statements relating to
subsidiaries operating in foreign countries are summarized as follows:
Millions of yen
--------------------------------------
1999 1998 1997
---- ---- ----
Total assets (Y) 917,810 987,828 1,109,388
Net assets 326,631 364,623 358,122
Net sales 1,830,866 2,029,863 1,856,480
Net income 32,876 42,505 47,073
50
<PAGE>
CANON INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(3) Marketable Securities and Marketable Investments
Marketable securities and marketable investments consist of
available-for-sale securities. The carrying amount, gross unrealized
holding gains, gross unrealized holding losses and fair value for such
securities by major security type at December 31, 1999 and 1998 are as
follows:
<TABLE>
Millions of yen
-------------------------------------------
Gross Gross
Unrealized Unrealized
Holding Holding
Cost Gains Losses Fair Value
---- ----- ------ ----------
<S> <C> <C> <C>
1999:
Current:
Available-for-sale:
Japanese and foreign
governmental bond
securities 45 - - 45
Corporate debt securities (Y) 2,543 373 - 2,916
Bank debt securities 157 - - 157
Fund trusts 1,962 1,470 - 3,432
Equity securities 2,039 432 18 2,453
------ ------- --- ------
(Y) 6,746 2,275 18 9,003
====== ======= === ======
Noncurrent:
Available-for-sale:
governmental bond
securities 156 - - 156
Japanese and foreign
Corporate debt securities 5,099 84 - 5,183
Bank debt securities 164 - 96 68
Fund trusts - - - -
Equity securities 22,733 91,534 - 114,267
------ ------- --- ------
(Y) 28,152 91,618 96 119,674
====== ======= === ======
</TABLE>
51
<PAGE>
CANON INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
<TABLE>
Millions of yen
-------------------------------------------
Gross Gross
Unrealized Unrealized
Holding Holding
Cost Gains Losses Fair Value
---- ----- ------ ----------
<S> <C> <C> <C> <C>
1998:
Current:
Available-for-sale:
Japanese and foreign
governmental bond
securities (Y) 553 8 -- 571
Corporate debt securities 2,845 167 -- 3,012
Bank debt securities 443 12 -- 455
Fund trusts 1,973 45 -- 2,018
Equity securities 1,142 282 -- 1,424
----- --- --- -----
(Y) 6,956 514 -- 7,470
----- --- --- -----
Noncurrent:
Available-for-sale:
Japanese and foreign
governmental bond
securities 206 4 -- 210
Corporate debt securities 1,174 42 -- 1,216
Bank debt securities 188 -- 53 135
Fund trusts 44 -- -- 44
Equity securities 18,354 13,974 -- 32,328
------ --- --- -----
(Y) 19,966 14,020 53 33,933
====== ====== == ======
</TABLE>
52
<PAGE>
CANON INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Net unrealized gain on available-for-sale securities, net of related taxes
and minority interests, increased by (Y)41,257 million in 1999, and
decreased by (Y)3,059 million and (Y)15,065 million in 1998 and 1997,
respectively.
Maturities of marketable securities and marketable investments classified
as available-for-sale were as follows at December 31, 1999:
Millions of yen
---------------
Cost Fair Value
---- ----------
Due within one year (Y) 1,745 1,732
Due after one year through five years 3,004 4,484
Due after five years 5,377 5,741
Equity securities 24,772 116,720
------ -------
(Y) 34,898 128,677
====== =======
Proceeds from sale of available-for-sale securities were (Y)6,637 million,
(Y)9,439 million and (Y)5,145 million in 1999, 1998 and 1997, respectively.
Realized gains and losses during the years 1999, 1998 and 1997 were
insignificant.
(4) Trade Receivables
Trade receivables are summarized as follows:
Millions of yen
----------------
1999 1998
---- ----
Notes (Y) 31,989 39,519
Accounts 359,572 389,291
Less allowance for doubtful receivables 15,089 16,435
------- -------
(Y) 376,472 412,375
======= =======
(5) Inventories
Inventories comprised the following:
Millions of yen
----------------
1999 1998
---- ----
Finished goods (Y) 308,529 397,459
Work in process 114,666 135,706
Raw materials 13,055 16,092
------- -------
(Y) 436,250 549,257
======= =======
53
<PAGE>
CANON INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(6) Property, Plant and Equipment
--- -----------------------------
Property, plant and equipment are stated at cost less accumulated
depreciation and are summarized as follows:
Millions of yen
----------------
1999 1998
---- ----
Land (Y) 148,722 117,670
Buildings 614,136 571,513
Machinery and equipment 871,207 873,345
Construction in progress 26,331 48,557
--------- ---------
1,660,396 1,611,085
Less accumulated depreciation 913,572 868,773
--------- ---------
(Y) 746,824 742,312
========= =========
(7) Short-term Loans and Long-term Debt
Short-term loans consisted of the following:
Millions of yen
----------------
1999 1998
---- ----
Bank borrowings (Y) 72,645 98,465
Acceptances payable by foreign
subsidiaries 200,680 238,707
Long-term debt due within one year 25,074 66,160
------- -------
(Y) 298,399 403,332
======= =======
The weighted average interest rates on short-term loans outstanding at
December 31, 1999 and 1998 were 5.18% and 5.14%, respectively.
At December 31, 1999, unused short-term credit facilities for issuance of
commercial paper amounted to (Y)60,540 million.
A substantial portion of the acceptances payable by foreign subsidiaries
was secured by the subsidiaries' inventories and trade receivables.
54
<PAGE>
CANON INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Long-term debt consisted of the following:
<TABLE>
Millions of yen
---------------
1999 1998
---- ----
<S> <C> <C>
Loans, principally from banks, maturing in installments through
2029; bearing weighted average interest of 3.69% and 4.53% at
December 31, 1999 and 1998, respectively, partially secured by
mortgage of property,
plant and equipment and marketable securities (Y) 50,193 59,418
9-3/4% U.S. dollar bonds, due 1999 - 8,099
2-7/20% Japanese yen notes, due 2001 19,920 19,920
2-1/20% Japanese yen notes, due 2002 5,000 5,000
2-3/5% Japanese yen notes, due 2002 20,000 20,000
1-7/50% Japanese yen notes, due 2002 2,000 -
1-3/5% Japanese yen notes, due 2002 10,000 10,000
2-3/10% Japanese yen notes, due 2003 5,000 5,000
1-53/100% Japanese yen notes, due 2003 5,000 5,000
2-23/40% Japanese yen notes, due 2004 10,000 10,000
2-1/40% Japanese yen notes, due 2004 10,000 10,000
1-22/25% Japanese yen notes, due 2005 5,000 5,000
2-19/20% Japanese yen notes, due 2007 10,000 10,000
2-27/100% Japanese yen notes, due 2008 10,000 10,000
5/8% - 3/4% Swiss franc notes with warrants
issued by subsidiaries, due 1999 - 2000 :
Principal amount 7,055 47,427
Less unamortized discount 71 1,509
------- -------
6,984 45,918
------- -------
1% Japanese yen convertible debentures, due 2002 5,248 5,574
1-2/10% Japanese yen convertible debentures, due 2005 5,763 6,178
1-3/10% Japanese yen convertible debentures, due 2008 10,234 11,364
Other 9 9
------- -------
190,351 246,480
Less amount due within one year 25,074 66,160
------- -------
(Y) 165,277 180,320
======= =======
</TABLE>
55
<PAGE>
CANON INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The aggregate annual maturities of long-term debt outstanding at December
31, 1999 were as follows:
Millions of yen
---------------
2000 (Y) 25,074
2001 35,895
2002 51,655
2003 12,152
2004 20,674
Later years 44,901
-------
(Y) 190,351
=======
Property, plant and equipment with a book value at December 31, 1999 of
(Y)10,822 million were mortgaged to secure long-term debt.
As is customary in Japan, both short-term and long-term bank loans are made
under general agreements which provide that security and guarantees for
present and future indebtedness will be given upon request of the bank, and
that the bank shall have the right to offset cash deposits against
obligations that have become due or, in the event of default, against all
obligations due the bank. Long-term agreements with lenders other than
banks also generally provide that Canon must give additional security upon
request of the lender.
The 1% Japanese yen convertible debentures due 2002 are currently
convertible into approximately 3,506,000 shares of common stock at a
conversion price of (Y)1,497.00 per share. The debentures are redeemable at
the option of the Company between January 1, 2000 and December 31, 2001 at
premiums ranging from 2% to 1%, and at par thereafter, or, dependent on a
particular circumstance, at par.
The 1-2/10% Japanese yen convertible debentures due 2005 are currently
convertible into approximately 3,850,000 shares of common stock at a
conversion price of (Y)1,497.00 per share. The debentures are redeemable at
the option of the Company between January 1, 2000 and December 31, 2004 at
premiums ranging from 5% to 1%, and at par thereafter, or, dependent on a
particular circumstance, at par.
The 1-3/10% Japanese yen convertible debentures due 2008 are currently
convertible into approximately 6,836,000 shares of common stock at a
conversion price of (Y)1,497.00 per share. The debentures are redeemable at
the option of the Company between January 1, 2002 and December 31, 2007 at
premiums ranging from 6% to 1%, and at par thereafter, or, dependent on a
particular circumstance, at par.
56
<PAGE>
CANON INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(8) Trade Payables
--------------
Trade payables are summarized as follows:
Millions of yen
----------------
1999 1998
---- ----
Notes (Y) 113,512 159,104
Accounts 251,152 242,423
------- -------
(Y) 364,664 401,527
======= =======
(9) Employee Retirement and Severance Benefits
The Company and certain of its subsidiaries have contributory and
noncontributory defined benefit plans covering substantially all employees
after one year of service. Other subsidiaries sponsor unfunded retirement
and severance plans. Benefits payable under the plans are based on employee
earnings and years of service. The contributory plan includes a portion of
the governmental welfare pension benefits which would otherwise be provided
by the Japanese government in accordance with the Welfare Pension Insurance
Law in Japan. Management considers that a portion of the contributory
plans, which are administered by a board of trustees composed of management
and labor representatives, represents a welfare pension plan carried on
behalf of the Japanese government. These contributory and noncontributory
plans are funded in conformity with the funding requirements of applicable
Japanese governmental regulations.
Net periodic benefit cost for Canon's employee retirement and severance
defined benefit plans for 1999, 1998 and 1997 consisted of the following
components:
Millions of yen
---------------
1999 1998 1997
---- ---- ----
Service cost - benefits earned
during the year (Y) 31,295 25,307 21,228
Interest cost on projected
benefit of obligation 15,599 14,360 13,123
Expected return on plan assets (10,393) (11,510) (8,539)
Net amortization 6,566 4,244 2,655
------ ------ ------
(Y) 43,067 32,401 28,467
====== ====== ======
57
<PAGE>
CANON INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Reconciliations of beginning and ending balances of the benefit
obligations and the fair value of the plan assets are as follows:
<TABLE>
Millions of yen
---------------
1999 1998
---- ----
<S> <C> <C>
Change in benefit obligations:
Benefit obligations at beginning of year (Y) 491,102 396,838
Service cost 31,295 25,307
Interest cost 15,599 14,360
Plan participants' contributions 3,403 3,333
Actuarial loss (gain) (16,983) 56,392
Benefits paid (6,067) (5,070)
Other (271) (58)
-------- --------
Benefit obligations at end of year 518,078 491,102
-------- --------
Change in plan assets:
Fair value of plan assets at beginning of year 270,713 239,338
Actual return on plan assets 17,336 11,394
Employer contributions 26,022 21,718
Plan participants' contributions 3,403 3,333
Benefits paid (6,067) (5,070)
-------- --------
Fair value of plan assets at end of year 311,407 270,713
-------- --------
Funded status 206,671 220,389
Unrecognized actuarial loss (136,119) (166,254)
Unrecognized net transition obligation being
recognized over 22 years (6,025) (6,369)
-------- --------
Net amount recognized 64,527 47,766
Adjustments to recognize minimum liability:
Intangible assets 6,025 6,369
Amount included in accumulated other comprehensive 62,274 78,683
-------- --------
Income (loss), gross of tax 68,299 85,052
-------- --------
Accrued pension and severance cost recognized in the
consolidated balance sheets (Y) 132,826 132,818
======== ========
Actuarial present vale of accumulated benefit obligations
at end of year (Y) 444,233 403,531
======== ========
Actuarial assumptions:
Discount rate 3.00% 3.00%
Assumed rate of increase in future
compensation levels 3.60 4.00
Expected long-term rate on plan assets 4.00% 5.00%
</TABLE>
58
<PAGE>
CANON INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Directors and certain employees are not covered by the programs described
above. Benefits paid to such persons and meritorious service payments are
charged to income as paid, since amounts vary with circumstances, and it is
therefore not practicable to compute the liability for future payments.
(10) Income Taxes
Total income taxes were allocated as follows:
<TABLE>
Millions of yen
------------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Income before income taxes and minority interests (Y) 83,939 123,843 109,364
Stockholders' equity - accumulated other
comprehensive income (loss):
Foreign currency translation
adjustments (239) (674) (3)
Net unrealized gains on securities 37,286 (4,399) (15,480)
Minimum pension liability adjustments 7,712 (17,345) (15,126)
-------- -------- --------
(Y) 128,698 101,425 78,755
======== ======== ========
</TABLE>
59
<PAGE>
CANON INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Domestic and foreign components of income before income taxes and minority
interests ("income before income taxes"), and the current and deferred
income tax expense (benefit) attributable to such income before income
taxes are summarized as follows:
Millions of yen
---------------------------------
Japanese Foreign Total
-------- ------- -----
1999:
Income before income taxes (Y) 100,044 56,028 156,072
======== ======= ========
Income taxes:
Current (Y) 64,197 25,714 89,911
Deferred (2,097) (3,875) (5,972)
-------- ------- --------
(Y) 62,100 21,839 83,939
======== ======= ========
1998:
Income before income taxes (Y) 172,303 67,210 239,513
-------- ------- --------
Income taxes:
Current (Y) 97,437 24,465 121,902
Deferred 3,453 (1,512) 1,941
-------- ------- --------
(Y) 100,890 22,953 123,843
-------- ------- --------
1997:
Income before income taxes (Y) 160,543 74,262 234,805
======== ======= ========
Income taxes:
Current (Y) 90,293 28,689 118,982
Deferred (6,999) (2,619) (9,618)
-------- ------- --------
(Y) 83,294 26,070 109,364
======== ======= ========
60
<PAGE>
CANON INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The Company and its domestic subsidiaries are subject to a number of taxes
based on income, which in the aggregate resulted in a normal tax rate of
approximately 47.0% in the year ended December 31, 1999 and 51.0% in the
years ended December 31, 1998 and 1997.
Amendments to Japanese tax regulations were enacted into law on March 24,
1999 and on March 31, 1998. As a result of these amendments, the normal
income tax rate is to be reduced from approximately 51.0% to 47.0%
effective from Canon's fiscal year beginning January 1, 1999 and from
approximately 47.0% to 42.0% effective from Canon's fiscal year beginning
January 1, 2000. Current income taxes were calculated at the rate of 47.0%
and 51.0% in effect for the years ended December 31, 1999 and 1998,
respectively. Deferred income tax assets and liabilities as of December
31, 1999 and 1998 were measured at a rate of principally 42.0% and 47.0%,
respectively. The effects of the income tax rate reduction on deferred
income tax balances as of December 31, 1999 and 1998 are presented below.
The significant components of deferred income tax expense (benefit)
attributable to income before income taxes are as follows:
<TABLE>
Millions of yen
--------------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Deferred tax expense (exclusive of the effects of
other components listed below) (Y) (16,181) (5,638) (9,674)
Adjustments to deferred tax assets and
liabilities for enacted changes in tax laws and rates 10,209 8,014 491
Decrease in the beginning-of-the-year balance of the
valuation allowance for deferred tax assets - (435) (435)
------- ------- -------
(Y) (5,972) 1,941 (9,618)
======= ======= =======
</TABLE>
A reconciliation of the Japanese normal income tax rate and the effective
income tax rate as a percentage of income before income taxes is as
follows:
<TABLE>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Japanese normal income tax rate 47.0% 51.0% 51.0%
Increase (reduction) in income taxes resulting from:
Expenses not deductible for tax purposes 1.0 0.9 1.2
Tax benefits not recognized on operating
losses of subsidiaries 1.2 0.3 0.5
Income of foreign subsidiaries taxed at lower
than Japanese normal tax rate (6.1) (5.7) (5.7)
Tax credit for increased research and development
expenses (0.5) (0.8) (1.6)
Effect of enacted changes in tax laws and rates 6.5 3.3 0.1
Other 4.7 2.7 1.1
----- ----- -----
Effective income tax rate 53.8% 51.7% 46.6%
===== ===== =====
</TABLE>
61
<PAGE>
CANON INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Net deferred income tax assets and liabilities are reflected on the
accompanying consolidated balance sheets under the following captions:
Millions of yen
---------------
1999 1998
---- ----
Prepaid expenses and other current assets (Y) 75,431 86,740
Other assets 47,211 79,121
Other current liabilities (1,033) (1,121)
Other noncurrent liabilities (5,320) (6,402)
--------- --------
(Y) 116,289 158,338
========= ========
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at
December 31, 1999 and 1998 are presented below:
<TABLE>
Millions of yen
---------------
1999 1998
---- ----
<S> <C> <C>
Deferred tax assets:
Inventories - intercompany profits and write-downs (Y) 51,476 60,994
Accrued business tax 3,366 5,652
Accrued pension and severance cost 25,544 20,574
Minimum pension liability adjustments 26,155 36,981
Property, plant and equipment - intercompany profits 7,015 6,810
Research and development - costs capitalized for
tax purposes 21,371 21,223
Depreciation 11,386 8,703
Other 32,713 30,891
-------- --------
Total gross deferred tax assets 179,026 191,828
Less valuation allowance 4,191 4,722
-------- --------
Net deferred tax assets 174,835 187,106
-------- --------
Deferred tax liabilities:
Land including deferred gain on sale (3,629) (4,446)
Unamortized debt issuance cost (359) (587)
Accounts receivable - allowance for doubtful (3,810) (4,449)
Undistributed earnings of foreign subsidiaries and
affiliated companies (4,471) (4,880)
Net unrealized gains on securities (39,396) (6,815)
Other (6,881) (7,591)
-------- --------
Total gross deferred tax liabilities (58,546) (28,768)
-------- --------
Net deferred tax assets (Y) 116,289 158,338
======== ========
</TABLE>
62
<PAGE>
CANON INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The valuation allowance for deferred tax assets as of January 1, 1998 was
(Y)4,990 million. The net change in the total valuation allowance for the
years ended December 31, 1999 and 1998 was a decrease of (Y)531 million
and (Y)268 million, respectively.
Based upon the level of historical taxable income and projections for
future taxable income over the periods which the net deductible temporary
differences are expected to reverse, management believes it is more likely
than not Canon will realize the benefits of these deferred tax assets, net
of the existing valuation allowances at December 31, 1999.
At December 31, 1999, Canon had net operating losses carried forward for
income tax purposes of approximately (Y)7,668 million which were available
to reduce future income taxes, if any. Approximately (Y)6,833 million of
the operating losses expire through 2007 while the remainder have an
indefinite carryforward period.
Income taxes have not been accrued on undistributed income of domestic
subsidiaries and affiliated companies as distributions of such income are
not taxable under present circumstances.
Canon has not recognized deferred tax liabilities of approximately
(Y)22,089 million for the portion of undistributed earnings of foreign
subsidiaries that arose in 1999 and prior years because Canon currently
does not expect those unremitted earnings to reverse and become taxable to
the Company in the foreseeable future. Deferred tax liabilities will be
recognized when Canon expects that it will recover those undistributed
earnings in a taxable manner, such as through receipt of dividends or sale
of the investments. As of December 31, 1999, such undistributed earnings
of these subsidiaries were approximately (Y)289,006 million.
(11) Common Stock
During 1999, 1998 and 1997, the Company issued 1,249,828 shares, 3,506,936
shares and 13,184,712 shares, respectively, of common stock in connection
with conversion of convertible debt. Conversion into common stock of
convertible debt issued subsequent to October 1, 1982 and exercise of
warrants were accounted for in accordance with the provisions of the
Japanese Commercial Code by crediting one-half of the conversion price and
exercise price to each of the common stock account and the additional
paid-in capital account.
63
<PAGE>
CANON INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(12) Legal Reserve and Cash Dividends
The Japanese Commercial Code provides that an amount equal to at least 10%
of appropriations paid in cash be appropriated as a legal reserve until
such reserve equals 25% of stated capital. This reserve is not available
for dividends but may be used to reduce a deficit or may be transferred to
stated capital. Certain foreign subsidiaries are also required to
appropriate their earnings to legal reserves under the laws of the
respective countries. Canon's equity in retained earnings or deficit of
affiliated companies owned 20% to 50% accounted for on the equity basis
aggregating negative (Y)4,668 million at December 31, 1999 is included in
retained earnings.
Cash dividends and appropriations to the legal reserve charged to retained
earnings during the years 1999, 1998 and 1997 represent dividends paid out
during those years and the related appropriations to the legal reserve.
Provision has not been made in the accompanying consolidated financial
statements for the semiannual dividend of (Y)8.50 per share, aggregating
(Y)7,408 million, subsequently proposed by the Board of Directors in
respect of the year ended December 31, 1999, or for the related
appropriation to the legal reserve.
Cash dividends per common share are computed based on dividends declared
with respect to earnings for the periods.
The amount of retained earnings available for dividends under the Japanese
Commercial Code is based on the amount recorded in the Company's
nonconsolidated books of account in accordance with financial accounting
standards of Japan. The adjustments included in the accompanying
consolidated financial statements to have them conform with United States
generally accepted accounting principles, but not recorded in the books of
account, have no effect on the determination of retained earnings
available for dividends under the Japanese Commercial Code. Retained
earnings in the Company's nonconsolidated books of account under the
Japanese Commercial Code amounted to (Y)521,552 million at December 31,
1999.
(13) Noncash Financing Activities
In 1999, 1998 and 1997, common stock issued and additional paid-in capital
arising from conversion of convertible debt amounted to (Y)1,871 million,
(Y)5,234 million and (Y)19,625 million, respectively.
65
<PAGE>
CANON INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(14) Other Comprehensive Income (Loss)
Change in accumulated other comprehensive income (loss) is as follows:
<TABLE>
Millions of yen
---------------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Foreign currency translation adjustments:
Balance at beginning of year (Y) (66,372) (32,644) (36,739)
Adjustments for the year (60,776) (33,728) 4,095
--------- -------- -------
Balance at end of year (127,148) (66,372) (32,644)
--------- -------- -------
Net unrealized gains on securities:
Balance at beginning of year 7,442 10,501 25,566
Adjustments for the year 41,257 (3,059) (15,065)
--------- -------- -------
Balance at end of year 48,699 7,442 10,501
--------- -------- -------
Minimum pension liability adjustments:
Balance at beginning of year (38,555) (21,890) (7,356)
Adjustments for the year 8,697 (16,665) (14,534)
--------- -------- -------
Balance at end of year (29,858) (38,555) (21,890)
--------- -------- -------
Total accumulated other comprehensive income (loss)
Balance at beginning of year (97,485) (44,033) (18,529)
Adjustments for the year (10,822) (53,452) (25,504)
--------- -------- -------
Balance at end of year (Y) (108,307) (97,485) (44,033)
========= ======== =======
</TABLE>
65
<PAGE>
CANON INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Tax effects allocated to each component of other comprehensive income
(loss) and reclassification adjustments are as follows:
<TABLE>
Millions of yen
---------------------------------------
Tax
Before-tax (expense) Net-of-tax
amount or benefit amount
------ ---------- ------
<S> <C> <C> <C>
1999:
Foreign currency translation adjustments:
Amount arising during the year on
investments in foreign entities held at
end of year (Y) (61,023) 239 (60,784)
Reclassification adjustments for the
portion of gains and losses realized
upon sale or liquidation of investments
in foreign entities 8 - 8
--------- ---------- ----------
Net change in foreign currency
translation adjustments during the year (61,015) 239 (60,776)
Net unrealized gains on securities:
Amount arising during the year on
securities during the year 79,789 (37,914) 41,875
Reclassification adjustments for gains and
losses realized in net income (1,246) 628 (618)
--------- ---------- ----------
Net change in net unrealized gains on
securities during the year 78,543 (37,286) 41,257
Minimum pension liability adjustments 16,409 (7,712) 8,697
--------- ---------- ----------
Other comprehensive income (loss) (Y) 33,937 (44,759) (10,822)
1998:
Foreign currency translation adjustments (Y) (34,402) 674 (33,728)
Net unrealized gains on securities:
Amount arising during the year on
securities held at end of year (9,897) 5,642 (4,255)
Reclassification adjustments for gains
and losses realized in net income 2,439 (1,243) 1,196
--------- ---------- ----------
Net change in net unrealized gains on
securities during the year (7,458) 4,399 (3,059)
Minimum pension liability adjustments (34,010) 17,345 (16,665)
--------- ---------- ----------
Other comprehensive income (loss) (Y) (75,870) 22,418 (53,452)
--------- ---------- ----------
1997:
Foreign currency translation adjustments (Y) 4,092 3 4,095
Net unrealized gains on securities (30,545) 15,480 (15,065)
Minimum pension liability adjustments (29,660) 15,126 (14,534)
--------- ---------- ----------
Other comprehensive income (loss) (Y) (56,113) 30,609 (25,504)
--------- ---------- ----------
</TABLE>
66
<PAGE>
CANON INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(15) Net Income per Share
A reconciliation of the numerators and denominators of the basic and
diluted net income per share computations is as follows:
<TABLE>
Millions of yen
-----------------------------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Net income available to common stockholders (Y) 70,234 109,569 118,813
Effect of dilutive securities:
1% Japanese yen convertible debentures, due 2002 45 43 96
1-2/10% Japanese yen convertible debentures, due 2005 50 59 112
1-3/10% Japanese yen convertible debentures, due 2008 89 108 205
Other - (2) (3)
----------- ----------- ----------
Diluted net income (Y) 70,418 109,777 119,223
----------- ----------- ----------
Number of shares
-----------------------------------------------
Average common shares outstanding 870,699,219 868,915,888 862,664,129
Dilutive effect of:
1% Japanese yen convertible debentures, due 2002 3,649,401 3,991,367 5,687,040
1-2/10% Japanese yen convertible, due 2005 4,029,084 4,609,783 6,722,111
1-3/10% Japanese yen convertible, due 2008 7,369,714 8,220,954 10,599,248
Other 15,994 25,427 90,902
----------- ----------- ----------
Diluted common shares outstanding 885,763,412 885,763,419 885,763,430
----------- ----------- ----------
Yen
-----------------------------------------------
Net income per share:
Basic (Y) 80.66 126.10 137.73
Diluted 79.50 123.93 134.60
</TABLE>
67
<PAGE>
CANON INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(16) Foreign Exchange Risk Management and Interest Rate Risk Management
Canon operates internationally which exposes Canon to the risk of changes
in foreign exchange rates and interest rates. Derivative financial
instruments are comprised principally of foreign exchange contracts and
interest rate swaps utilized by the Company and certain of its
subsidiaries to reduce these risks. Canon does not hold or issue financial
instruments for trading purposes.
The contract amounts of derivative financial instruments summarized in the
following paragraphs do not represent amounts exchanged by the parties and
thus are not a measure of the exposure of Canon through its use of
derivative financial instruments. Canon is exposed to the risk of
credit-related losses in the event of nonperformance by counterparties to
foreign exchange contracts and interest rate swaps, but it does not expect
any counterparties to fail given their high credit ratings.
Contract amounts of foreign exchange contracts and interest rate swaps at
December 31, 1999 and 1998 are set forth below:
Millions of yen
---------------
1999 1998
---- ----
Forwards and swaps:
To sell foreign currencies (Y) 170,931 105,289
To buy foreign currencies 12,110 54,222
Receive-fixed interest rate swaps 41,024 91,379
Pay-fixed interest rate swaps 66,905 29,099
The Company and certain of its subsidiaries enter into foreign exchange
forward contracts and currency swaps to hedge the risk of fluctuation in
foreign currency exchange rates associated with certain trade receivables,
long-term debt and anticipated sales transactions (including firm
commitments) denominated in foreign currencies. The terms of these foreign
exchange contracts rarely extend beyond three months except for those
related to long-term debt denominated in foreign currencies which have the
same terms as underlying debts. Interest rate swap contracts are generally
used by the Company and certain of its subsidiaries to offset changes in
the rates paid on long-term debt. Interest rate swap contracts outstanding
at December 31, 1999 mature between 2000 and 2002.
(17) Commitments and Contingent Liabilities
At December 31, 1999, commitments outstanding for the purchase of
property, plant and equipment approximated (Y)25,830 million. Contingent
liabilities for guarantees of bank loans to employees and to affiliated
and other companies amounted to approximately (Y)66,943 million.
Canon occupies sales offices and other facilities under lease arrangements
accounted for as operating leases. Deposits made under such arrangements
aggregated (Y)20,188 million and (Y)23,754 million at December 31, 1999
and 1998, respectively, and are reflected in noncurrent receivables and
restricted funds on the accompanying consolidated balance sheets.
<PAGE>
CANON INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Future minimum lease payments required under noncancellable operating
leases that have initial or remaining lease terms in excess of one year as
of December 31, 1999 are:
Millions
Year ending December 31: of yen
------
2000 (Y) 10,820
2001 8,036
2002 5,899
2003 4,399
2004 3,268
Later years 7,092
------
Total future minimum lease payments (Y) 39,514
======
(18) Disclosures about the Fair Value of Financial Instruments
Cash and cash equivalents, Trade receivables, Short-term loans, Trade
payables, Accrued expenses
The carrying amount approximates fair value because of the short maturity
of these instruments.
Marketable securities and Investments
The fair values of Canon's marketable securities and investments are based
on quoted market prices.
Noncurrent receivables and restricted funds
The fair values of Canon's noncurrent receivables and restricted funds are
based on the present value of future cash flows through estimated
maturity, discounted using estimated market discount rates. Their carrying
amounts at December 31, 1999 and 1998 totaled (Y)29,771 million and
(Y)50,309 million, respectively, which approximate fair values.
Long-term debt
The fair values of Canon's long-term debt instruments are based on the
quoted price in the most active market or the present value of future cash
flows associated with each instrument discounted using Canon's current
borrowing rate for similar debt instruments of comparable maturity.
Derivative financial instruments (see note 16)
The fair values of derivative financial instruments, consisting
principally of foreign exchange contracts and interest rate swaps, all of
which are used for purposes other than trading, are estimated by obtaining
quotes from brokers.
69
<PAGE>
CANON INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The estimated fair values of Canon's financial instruments at December 31,
1999 and 1998 are summarized as follows:
<TABLE>
Millions of yen
------------------------------
1999 1998
---- ----
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
------ ---------- ------ ----------
<S> <C> <C> <C> <C>
Nonderivatives:
Assets:
Marketable securities and Investments (Y) 141,546 141,546 51,402 51,402
Liabilities:
Long-term debt, including current
installments (190,351) (228,264) (246,480) (271,476)
Derivatives relating to:
Trade receivables and anticipated
sales transactions:
Assets 1,385 1,635 4,786 5,076
Liabilities (947) (207) (342) (123)
Long-term debt, including current
installments:
Foreign exchange contracts:
Assets - - 446 666
Liabilities (2,155) (2,155) (1,904) (1,768)
Interest rate swaps:
Assets 369 2,377 811 2,957
Liabilities (71) (103) (119) (634)
</TABLE>
Limitations
Fair value estimates are made at a specific point in time, based on
relevant market information and information about the financial
instruments. These estimates are subjective in nature and involve
uncertainties and matters of significant judgment and therefore cannot be
determined with precision. Changes in assumptions could significantly
affect the estimates.
(19) Supplementary Expense Information
Millions of yen
-------------------------------
1999 1998 1997
---- ---- ----
Research and development (Y) 177,922 176,967 170,793
Depreciation of property, plant
and equipment 155,682 159,888 137,777
Rent 48,236 53,923 55,227
Advertising 67,544 76,911 75,800
Exchange loss (gain) 3,387 (1,189) 11,200
70
<PAGE>
Schedule II
CANON INC. AND SUBSIDIARIES
Valuation and Qualifying Accounts
Years ended December 31, 1999, 1998 and 1997
(Millions of yen)
<TABLE>
Balance at Add Deduct Add (deduct) Balance
beginning charge to bad debts translation at end
of period income written off adjustments of period
---------- --------- ----------- ------------ ---------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1999:
Allowance for doubtful
receivables (Y) 16,435 4,622 3,685 (2,283) 15,089
====== ===== ===== ====== ======
Year ended December 31, 1998:
Allowance for doubtful
receivables (Y) 15,997 6,275 4,239 (1,598) 16,435
====== ===== ===== ====== ======
Year ended December 31, 1997:
Allowance for doubtful
receivables (Y) 14,772 5,386 4,751 590 15,997
====== ===== ===== ====== ======
</TABLE>
71
<PAGE>
Item 19. Financial Statements and Exhibits
(a) The following financial statements and schedule are filed in Part IV,
Item 17 of this report:
Consolidated Financial Statements of Canon Inc. and
Subsidiaries:
Page
Number
------
Independent Auditors' Report 41
Consolidated Balance Sheets as of December 31, 1999 and 1998 42
Consolidated Statements of Income for the years ended
December 31, 1999, 1998 and 1997 43
Consolidated Statements of Stockholders' Equity for the years
ended December 31, 1999, 1998 and 1997 44
Consolidated Statements of Cash Flows for the years ended
December 31, 1999, 1998 and 1997 45
Notes to Consolidated Financial Statements 46
Schedule:
Independent Auditors' Report on Schedule 41
Schedule II Valuation and Qualifying Accounts for the
years ended December 31, 1999, 1998 and 1997 71
(b) The following exhibit is filed as part of this report:
Exhibit 1.1 English Translation of Share Handling Regulations,
as amended 74
72
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange Act of
1934, the registrant certifies that it meets all of the requirements for filing
on Form 20-F and has duly caused this annual report to be signed on its behalf
by the undersigned, thereunto duly authorized.
CANON INC.
----------------------------
(Registrant)
By /s/ Toshizo Tanaka
--------------------------
(Managing Director)
Canon Inc.
30-2, Shimomaruko 3-chome,
Ohta-ku, Tokyo 146-8501, Japan
Date June 9, 2000
--------------
73
<PAGE>
EXHIBIT INDEX
Sequentially
Numbered Page
-------------
Exhibit 1.1 English Translation of Share Handling Regulations,
as amended 75
74
<PAGE>
(Translation)
SHARE HANDLING REGULATIONS
OF
CANON INC.
(as amended October 1, 1999)
Chapter I. General Provisions
(Object)
Article 1. With regard to the denominations of share certificates,
the handling of shares of the Company and the fees
therefor, what are provided for in these Regulations shall
govern, pursuant to Article 8 of the Articles of
Incorporation. The handling of shares relative to
beneficial owners shall be as provided in Chapter IX
hereof.
(Denominations of share certificates)
Article 2. The share certificates of the Company shall be in
denominations representing one share, five shares, ten
shares, fifty shares, one-hundred shares, five-hundred
shares, one-thousand shares and ten-thousand shares;
provided, however, that in respect of any number of shares
of less than one hundred, a share certificate representing
such number of shares may be issued.
2. Not withstanding the preceding paragraph, with regard to
any number of shares falling short of the number of shares
to constitute on unit of shares as provided for in Article
6 of the Articles of Incorporation (hereinafter referred to
as "less-than-one-unit shares"), share certificates
representing such less-than-one-unit shares (hereinafter
referred to as "certificates for less-than-one-unit
shares") shall not be issued unless it is permitted to
issue such share certificates under any law or ordinance.
(Transfer agent)
Article 3. The transfer agent of the Company, its place of handling
business and its intermediary offices shall be as follows:
Transfer agent:
Dai-Ichi Kangyo Fuji Trust & Banking Co., Ltd.
6-2, Marunouchi 1-chome, Chiyoda-ku, Tokyo
75
<PAGE>
Its place of handling the business:
6-2, Marunouchi 1-chome, Chiyoda-ku, Tokyo
Transfer Agency Department, Dai-Ichi Kangyo Fuji Trust &
Banking Co., Ltd.
Its intermediary offices:
Branches of Dai-Ichi Kangyo Fuji Trust & Banking Co., Ltd.
Head Office and Branches of Yasuda Trust & Banking Co., Ltd.
(Matters to be handled by the transfer agent)
Article 4. Any application, request, notification, notice or the
like to be made or given in respect of any procedure under
these Regulations, payment of dividends or other matters
the handling of which the Company has entrusted to the
transfer agent shall be directed to the transfer agent.
(Method of application, request, notification and notice)
Article 5. Any application, request, notification, notice or the
like to be made or given under the preceding Article shall
be in the form prescribed by the Company and affixed with
the seal filed as provided in Article 12.
2. When any application, request, notification, notice or the
like under the preceding Article is made or given by an
agent, a document evidencing the power of representation
shall be submitted.
Chapter II. Registration of transfer
(Registration of transfer)
Article 6. In case of an application for registration of transfer
of shares because of assignment, the application shall be
submitted in the prescribed form, together with the share
certificate.
2. The registration of transfer of less-than-one-unit shares
acquired through assignment may be applied for if and only
if the acquiring party is a shareholder appearing on the
register of shareholders.
3. In case of an application for registration of transfer of
shares for causes other than
76
<PAGE>
assignment, the procedure
under paragraph 1 shall be followed and in addition, a
document evidencing the acquisition shall be submitted at
the request of the Company; provided, however, that when
the share certificate has not been issued, it is not
necessary to submit the share certificate.
(Registration of transfer in cases otherwise provided for in laws or ordinances)
Article 7. In case it is required to take special procedure under
laws or ordinances with regard to transfer of shares, the
application shall be submitted in the prescribed form,
together with the share certificate and a document
evidencing the completion of such procedures.
Chapter III. Registration of Pledge and Indication of Trust Property
(Registration of pledge or cancellation thereof)
Article 8. In case of an application for registration of a pledge
or for alteration or cancellation thereof, the application
shall be submitted in the prescribed form, together with
the share certificate.
(Indication of trust property or cancellation thereof)
Article 9. In case of an application for indication of trust
property or for cancellation thereof, the application shall
be submitted in the prescribed form, together with the
share certificate.
Chapter IV. Non-Possession of Share Certificates
(Notice of non-possession of share certificates)
Article 10. In case of notice of non-possession of share
certificate, the written notice shall be submitted in the
prescribed form, together with the share certificate;
provided, however, that when the share certificate has not
been issued, it is not necessary to submit the share
certificate.
2. The share certificates in respect of which notice has been
given under the preceding paragraph shall be treated as not
issued, and shall not be deposited.
77
<PAGE>
(Application for delivery of non-possessed share certificate)
Article 11. In order for a shareholder who has given notice of
non-possession of share certificate to apply for the
issuance of such share certificate, he/she shall submit the
application in the prescribed form; provided, however, that
no such application shall be made for issuance of any
certificate for less-than-one-unit shares.
Chapter V. Various Notifications
(Notification of addresses, names and seals of shareholders, etc.)
Article 12. Shareholders, registered pledgees or their legal
representatives shall file notification of their addresses,
names and seals in the prescribed form; provided, however,
that foreigners may substitute their specimen signatures
for seals.
2. The same shall also apply in case of any change occurring
in the matters notified under the preceding paragraph.
(Notification of places at which shareholders, etc. residing in foreign
countries are to receive notices)
Article 13. Shareholders, registered pledgees or their legal
representatives who reside in foreign countries shall, in
addition to the procedures under the preceding Article,
either appoint their standing proxies or set up the places
at which to receive notices, in Japan, and shall file
notification of such matters.
2. The provisions of the preceding Article shall apply mutatis
mutandis to standing proxies.
(Representative of corporation)
Article 14. If a shareholder is a corporation, such shareholder
shall file notification of its representative. In case of a
change in such representative, notification shall be filed
in the prescribed form, together with a certified extract
of the corporate register.
(Representative of jointly-owned share)
Article 15. The shareholders who own shares jointly shall select
their representative and file notification of such
representative in the prescribed form. The same shall also
apply in case of any change occurring in such
representative.
78
<PAGE>
(Alteration of matters stated in the register of shareholders and in the share
certificate)
Article 16. When a person desires to have the matters stated in the
register of shareholders and in the share certificate
altered for any of the causes mentioned below, he/she shall
submit the notification in the prescribed form, together
with the share certificate and a certified extract of the
family register or the corporate register; provided,
however, that when the share certificate has not been
issued, it is not necessary to submit the share certificate.
(1) Change of family name or given name;
(2) Appointment, change or discharge of legal
representatives, such as a person having
parental power, a guardian, etc.;
(3) Change of trade name or corporate name;
(4) Change of corporate organization.
Chapter VI. Re-Issuance of Share Certificates, etc.
(Re-issuance due to division, consolidation, etc.)
Article 17. In case of an application for issuance of new share
certificates for any of the causes mentioned below, the
application shall be submitted in the prescribed form,
together with the share certificates; provided, however,
that when the share certificates have not been issued it is
not necessary to submit the share certificates.
(1) Division or consolidation of share certificates;
(2) In case a combined total of the shares represented by
the certificates for less-than-one-unit shares and the
less-than-one-unit shares for which no certificates
have been issued has reached one or more units of
shares in number.
2. In the case of the preceding paragraph, no application shall
be made for the issuance of any certificate for
less-than-one-unit shares.
(Re-issuance due to loss)
Article 18. In case of an application for issuance of a new share
certificate due to loss of share certificate, the
application shall be submitted in the prescribed form,
together with the authenticated copy or a certified copy of
the judgment of annulment.
(Re-issuance due to defacement or destruction)
Article 19. In case of an application for issuance of a new share
certificate due to defacement or
79
<PAGE>
destruction of share certificate, the application shall be
submitted in the prescribed form, together with the share
certificate; provided, however, that if it is difficult to
ascertain the indication on the share certificate concerned
or the genuineness thereof, the procedure under the
preceding Article shall be followed.
Chapter VII. Purchase of Less-than-one-unit Shares
(Request for purchase)
Article 20. In the event that a shareholder requests to have
his/her less-than-one-unit shares purchased, the request
shall be submitted, in the prescribed form, together with
the share certificates; provided, however, that when the
share certificates have not been issued, it is not
necessary to submit the share certificates.
(Determination of purchase price)
Article 21. The per-share purchase price of less-than-one-unit
shares shall be an amount equal to the final price on the
market provided by the Tokyo Stock Exchange on the day on
which the request is made at the transfer agent's place of
handling the business or any of its intermediary offices
mentioned in Article 3; provided, however, that if there is
no trading on such day, such purchase price shall be an
amount equal to the price at which the first sale and
purchase transaction is validly concluded thereafter.
2. If the request for purchase is made on a holiday for the
market mentioned in the preceding paragraph, such purchase
price shall be an amount equal to the price at which the
first sale and purchase transaction is validly concluded on
the first trading day of that Exchange occurring after such
holiday.
3. The per-share purchase price mentioned in the preceding two
paragraphs multiplied by the number of the shares requested
to be purchased shall be the purchase price.
(Payment of purchase price)
Article 22. The purchase price of the shares in respect of which a
request to have them purchased was received shall be paid,
in principle, not later than the 6th business day of the
transfer agent counting from the day following the date of
determination of the purchase price, in such manner as
designated in the request for purchase, subject, however,
to the deduction of the purchase commission mentioned in
Article 25.
80
<PAGE>
(Time of passing of shares)
Article 23. The shares in respect of which a request to have them
purchased was received shall pass to the Company at such
time as the procedure for payment under the preceding
Article has been taken.
2. Notwithstanding the provision of the preceding paragraph,
if a request for purchase is made from the day as of which
the shares become ex-dividend (including interim dividend)
or ex-rights to the day as of which such dividends or
rights become conclusive, no registration of transfer of
such shares shall be made until the day as of which such
dividend or rights become conclusive.
Chapter VIII. Fees
(Fee for issuance of new share certificates)
Article 24. For issuance of new share certificates upon application
for delivery of share certificates not in possession or
upon division, defacement or destruction of share
certificates, the fee shall be in such amount as shall be
equal to the amount of the stamp tax; provided, however,
that no fee shall be charged in case of a division made for
the Company's own reason.
(Purchase commission)
Article 25. The purchase commission for less-than-one-unit shares
shall be an amount obtainable by prorating the amount of
the sale and purchase entrustment fee established by the
Tokyo Stock Exchange for the number of shares constituting
one unit of shares of the Company according to the number
of less-than-one-unit shares purchased.
Chapter IX. Special Handling Relative to Beneficial Owners
(Making entries in the beneficial owners list)
Article 26. The Company shall make entries in the beneficial owners
list pursuant to notifications regarding beneficial owners
and beneficial owner entry forms submitted by the Japan
Securities Depository Center (hereinafter referred to as
"Center").
81
<PAGE>
(Beneficiary owner entry form)
Article 27. Beneficial owners shall submit the beneficial owner
entry forms through the participants; provided, however,
that in case where the total number of deposited shares is
less than one unit, a beneficial owner entry form shall not
be submitted.
(Matching and identification of shareholder)
Article 28. When a shareholder stated in the register of
shareholders and a beneficial owner stated in the
beneficial owners list is confirmed as being identical
pursuant to the stated address and name, the number of
shares stated in the register of shareholders and the
number of shares stated in the beneficial owners list shall
be added together for the purpose of such shareholder's
exercise of rights.
(Various notifications of beneficial owners)
Article 29. The provisions of Chapter V shall apply mutatis
mutandis to beneficial owners; provided, however, that the
submission of share certificate is not required with
respect to the alteration of the matters stated in the
beneficial owners list.
2. In the event that a beneficial owner submits the
notification mentioned in the preceding paragraph, he/she
shall submit the same through a participant; provided,
however, that when only the filed seal is to be altered, it
is not necessary to submit the notification through the
participant.
(Purchase of less-than-one-unit shares of beneficial owners)
Article 30. The provisions of Chapter VII shall apply mutatis
mutandis to beneficial owners; provided that in case where
a beneficial owner requests its less-than-one-unit share to
be purchased, he shall make the request through the
participant and the Center.
(Miscellaneous)
Article 31. Handling relative to beneficial owners shall be
performed pursuant to the provisions of this chapter;
provided, however, that in respect of matters which are not
covered in this chapter, various regulations of the Center
shall be observed.
82
