I

 

 

 

 

 

 

 

 

 

 

II

 

 

 

 

 

 

 

 

 

 

III

 

 

 

 

 

 

IV

 

 

 

 

 

 

 

 

V

 

 

 

 

 

Net sales

 

Income before income taxes

 

Net income attributable to Canon Inc.

 

Canon Inc. stockholders’ equity

 

Total equity

 

Total assets

 

Canon Inc. stockholders’ equity per share (yen)

 

Net income attributable to Canon Inc. stockholders per share:

 

Basic (yen)

 

Diluted (yen)

 

Canon Inc. stockholders’ equity to total assets (%)

 

Cash flows from operating activities

 

Cash flows from investing activities

 

Cash flows from financing activities

 

Cash and cash equivalents at end of period

 

Number of employees

Consolidated

Parent-alone

 

Office

 

Consumer

 

Industry and Others

 

 

Total

 

 

Office

 

Consumer

 

Industry and Others

 

Eliminations

 

 

Total

 

 

Hewlett-Packard Company

Nagasaki Canon Inc.
Nagasaki, Japan

 

Total number of issued shares

If the Company effects a share split or a share consolidation after the date of the allotment of the share options, the Exercise Price will be adjusted by the following calculation formula, with any fractional amount of less than one yen to be rounded up to one yen:

=Exercise Price before adjustment ´

 

If, after the date of allotment of share options, the Company issues common shares at a price lower than the then market price thereof or disposes common shares owned by it, the Exercise Price will be adjusted by the following calculation formula, with any fractional amount of less than one yen to be rounded up to one yen; however, the Exercise Price will not be adjusted in the case of the exercise of share options:

 

Number of Issued and Outstanding Shares +

 

In the case of a merger, a company split or capital reduction after the date of allotment of share options, or in any other analogous case requiring the adjustment of the Exercise Price, the Exercise Price shall be appropriately adjusted within a reasonable range.

One share option may not be exercised partially.

Each holder of share options must continue to be a director, executive officer or employee of the Company until the end of the Company’s general meeting of shareholders regarding the final business term within 2 years from the end of the Ordinary General Meeting of Shareholders for the 107th Business Term of the Company.

Holders of share options will be entitled to exercise their share options for 2 years, and during the exercisable period, even after they lose their positions as directors, executive officers or employees. However, if a holder of share options loses such position due to resignation at his/her initiative, or due to dismissal or discharge by the Company, his/her share options will immediately be forfeited.

No succession by inheritance is authorized for the share options.

Any other conditions for the exercise of share options may be established by the Board of Directors.

If the Company effects a share split or a share consolidation after the date of the allotment of the share options, the Exercise Price will be adjusted by the following calculation formula, with any fractional amount of less than one yen to be rounded up to one yen:

=Exercise Price before adjustment ´

 

If, after the date of allotment of share options, the Company issues common shares at a price lower than the then market price thereof or disposes common shares owned by it, the Exercise Price will be adjusted by the following calculation formula, with any fractional amount of less than one yen to be rounded up to one yen; however, the Exercise Price will not be adjusted in the case of the exercise of share options:

     Number of Issued and Outstanding Shares +

 

 

In the case of a merger, a company split or capital reduction after the date of allotment of share options, or in any other analogous case requiring the adjustment of the Exercise Price, the Exercise Price shall be appropriately adjusted within a reasonable range.

One share option may not be exercised partially.

Each holder of share options must continue to be a director, executive officer or employee of the Company until the end of the Company’s general meeting of shareholders regarding the final business term within 2 years from the end of the Ordinary General Meeting of Shareholders for the 108th Business Term of the Company.

Holders of share options will be entitled to exercise their share options for 2 years, and during the exercisable period, even after they lose their positions as directors, executive officers or employees. However, if a holder of share options loses such position due to resignation at his/her initiative, or due to dismissal or discharge by the Company, his/her share options will immediately be forfeited.

No succession by inheritance is authorized for the share options.

Any other conditions for the exercise of share options may be established by the Board of Directors.

Issued Shares (share)

Capital Stock (millions of yen)

Additional Paid-in Capital (millions of yen)

State Street Bank and Trust Company 505223

 

Shares without voting rights

 

Shares with restricted voting rights (Treasury stock, etc.)

 

Shares with restricted voting rights (Others)

 

Shares with full voting rights (Treasury stock, etc.)

 

 

Shares with full voting rights (Others)

 

Fractional unit shares

 

Total number of issued shares

 

Total voting rights held by all shareholders

 

Canon Inc.

 

Horie Mfg. Co., Ltd.

 

Total

High

Low

Toshizo Tanaka

 

Masahiro Osawa

 

Haruhisa Honda    

Masahiro Haga

 

Kengo Uramoto

 

Kenichi Nagasawa

 

Consolidated Balance Sheets
as of March 31, 2010 and December 31, 2009

 

 

Consolidated Statements of Income
for the three months ended March 31, 2010 and
for the three months ended March 31, 2009

 

 

Consolidated Statements of Cash Flows
for the three months ended March 31, 2010 and
for the three months ended March 31, 2009

 

 

Notes to Consolidated Financial Statements

 

Current assets:

Cash and cash equivalents (Note 14)

Short-term investments (Note 2)

Trade receivables, net (Note 3)

Inventories (Note 4)

Prepaid expenses and other current assets (Note 10)

 

Total current assets

 

Noncurrent receivables (Note11)

Investments (Note 2)

Property, plant and equipment, net (Note 5)

Intangible assets, net

Other assets (Note 10)

 

Total assets

 

 

Current liabilities:

Short-term loans and current portion of long-term debt

Trade payables (Note 6)

Accrued income taxes

Accrued expenses

Other current liabilities (Note 10)

 

Total current liabilities

 

Long-term debt, excluding current portion

Accrued pension and severance cost

Other noncurrent liabilities

 

Total liabilities

 

Commitments and contingent liabilities (Note 11)

 

Equity:

Canon Inc. stockholders’ equity (Note 8):

Common stock

(Number of authorized shares)

(Number of issued shares)

Additional paid-in capital

Legal reserve

Retained earnings

Accumulated other comprehensive loss

Treasury stock, at cost

(Number of shares)

 

Total Canon Inc. stockholders’ equity

Noncontrolling interests (Notes 8)

 

Total equity (Notes 8)

 

Total liabilities and equity

 

 

Net sales

 

Cost of sales

 

Gross profit

 

Operating expenses:

Selling, general and administrative expenses (Note 14)

Research and development expenses

 

 

 

Operating profit

 

Other income (deductions):

Interest and dividend income

Interest expense

Other, net (Notes 10, 13 and 14)

 

 

 

Income before income taxes

 

Income taxes

 

Consolidated net income

 

Less: Net income (loss) attributable to noncontrolling interests

 

Net income attributable to Canon Inc.

 

 

Net income attributable to Canon Inc. stockholders per share (Note 9):

Basic

Diluted

Cash flows from operating activities:

Consolidated net income

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

Depreciation and amortization

Loss on disposal of property, plant and equipment

Deferred income taxes

Decrease in trade receivables

(Increase) decrease in inventories

Increase (decrease) in trade payables

Decrease in accrued income taxes

Increase (decrease) in accrued expenses

Increase (decrease) in accrued (prepaid) pension and severance cost

Other, net

Net cash provided by operating activities

 

Cash flows from investing activities:

Purchases of fixed assets (Note 5)

Proceeds from sale of fixed assets (Note 5)

Purchases of available-for-sale securities

Proceeds from sale and maturity of available-for-sale securities

Decrease in time deposits, net

Acquisitions of subsidiaries, net of cash acquired

Purchases of other investments

Other, net

Net cash used in investing activities

 

Cash flows from financing activities:

Proceeds from issuance of long-term debt

Repayments of long-term debt

Increase (decrease) in short-term loans, net (Note7)

Dividends paid

Repurchases of treasury stock, net

Other, net

Net cash used in financing activities

 

Effect of exchange rate changes on cash and cash equivalents

Net change in cash and cash equivalents

Cash and cash equivalents at beginning of period

Cash and cash equivalents at end of period

 

Supplemental disclosure for cash flow information:

Cash paid during the period for:

Interest

Income taxes

The Company issued convertible debentures in the United States in May 1969 and established a program in which its American Depositary Receipts (ADRs) were traded in the U.S. over-the-counter market. Since then, under the U.S. Securities Act of 1933 and the U.S. Securities Exchange Act of 1934, the Company has prepared its annual consolidated financial statements in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) and filed them with the U.S. Securities and Exchange Commission on Form 20-F. The Company’s ADRs were listed on the NYSE in September 2000 after being quoted on NASDAQ from February 1972 to September 2000.

Canon’s consolidated financial statements are prepared in accordance with the recognition and measurement criteria of accounting principles generally accepted in the United States. Certain disclosures have been omitted.

The number of consolidated subsidiaries and affiliated companies that were accounted for on the equity method basis as of March 31, 2010 and December 31, 2009 are summarized as follows:

Consolidated subsidiaries

Affiliated companies

 

Total

The consolidated financial statements include the accounts of the Company, its majority owned subsidiaries and those variable interest entities where the Company or its consolidated subsidiaries are the primary beneficiaries. All significant intercompany balances and transactions have been eliminated.

In October 2009, the FASB issued new accounting guidance for revenue recognition under multiple-deliverable arrangements. This guidance modifies the criteria for separating consideration under multiple-deliverable arrangements and requires allocation of the overall consideration to each deliverable using the estimated selling price in the absence of vendor-specific objective evidence or third-party evidence of selling price for deliverables. As a result, the residual method of allocating arrangement consideration will no longer be permitted. The guidance also requires additional disclosures about how a vendor allocates revenue in its arrangements and about the significant judgments made and their impact on revenue recognition. This guidance is effective for fiscal years beginning on or after June 15, 2010 and is required to be adopted by Canon no later than the first quarter beginning January 1, 2011 (with early adoption permitted). The provisions are effective prospectively for revenue arrangements entered into or materially modified after the effective date, or retrospectively for all prior periods. Canon is currently evaluating the effect that the adoption of this guidance will have on its consolidated results of operations and financial condition.

In October 2009, the FASB issued new accounting guidance for software revenue recognition. This guidance modifies the scope of the software revenue recognition guidance to exclude from its requirements non-software components of tangible products and software components of tangible products that are sold, licensed, or leased with tangible products when the software components and non-software components of the tangible product function together to deliver the tangible product’s essential functionality. This guidance is effective for fiscal years beginning on or after June 15, 2010 and is required to be adopted by Canon no later than the first quarter beginning January 1, 2011 (with early adoption permitted) using the same effective date and the same transition method used to adopt the guidance for revenue recognition under multiple-deliverable arrangements. Canon is currently evaluating the effect that the adoption of this guidance will have on its consolidated results of operations and financial condition.

The cost, gross unrealized holding gains, gross unrealized holding losses and fair value for available-for-sale securities by major security types are as follows:

Current:

Available-for-sale:

Government bonds

Corporate bonds

 

 

 

 

Noncurrent:

Available-for-sale:

Government bonds

Corporate bonds

Fund trusts

Equity securities

 

 

 

Current:

Available-for-sale:

Government bonds

 

 

Noncurrent:

Available-for-sale:

Government bonds

Corporate bonds

Fund trusts

Equity securities

 

 

 

 

Due within one year

Due after one year through five years

Due after five years through ten years

 

 

 

 

Notes

Accounts

Less allowance for doubtful receivables

 

 

 

 

Finished goods

Work in process

Raw materials

 

 

 

 

Land

Buildings

Machinery and equipment

Construction in progress

 

 

Less accumulated depreciation

 

 

 

 

Notes

Accounts

 

 

 

On March 9, 2010, Canon acquired 34.8 % of the total outstanding shares of Océ N.V. (“Océ”), which is listed on NYSE Euronext Amsterdam, through a fully self-funded public cash tender offer for consideration of ¥ 38,785 million, in addition to the 22.9% interest Canon held before the public cash tender offer. Subsequent to the acquisition date, Canon acquired an additional 9.8 % of the total outstanding shares of Océ for consideration of ¥ 10,918 million during the post-acceptance period of the tender offer and also acquired 0.6% for consideration of ¥ 671 million through market purchases. In addition, Canon acquired Océ’s convertible cumulative financing preference shares representing 19.1% of the total outstanding shares of Océ for consideration of ¥ 8,027 million. As a result, Canon’s aggregate interest represents 87.2 % of the total outstanding shares of Océ.

The acquisition was accounted for using the acquisition method. Prior to the March 9, 2010 acquisition date, Canon accounted for its 22.9% interest in Océ using the equity method. The acquisition-date fair value of the previous equity interest of ¥ 25,508 million was remeasured using the quoted price of Océ’s common stock on the acquisition date and included in the measurement of the total acquisition consideration. In connection with the acquisition, Canon repaid ¥ 55,378 million of Océ’s existing bank debt, and is included in decrease in short-term loans in the consolidated statement of cash flows.

Océ is engaged in research and development, manufacture and sale of document management systems, printing systems for professionals and high-speed, wide format digital printing systems. Canon and Océ have complementary technologies and products and would benefit from this strong business relationship. Amid the increasingly competitive printing industry, Canon is further strengthening its business foundation in order to solidify its position as one of the global leaders. Canon aims to provide diversified solutions to its customers in the printing industry by making Océ a consolidated subsidiary.

Although Canon is allocating the amount paid for acquisition to the acquired assets and assumed liabilities, such allocation is incomplete as of the issuance date of the consolidated financial statements.

 

Balance at December 31, 2009

 

Dividends paid to stockholders of Canon Inc.

Dividends paid to noncontrolling interests

Acquisition of subsidiaries

Capital transactions by consolidated subsidiaries and affiliated companies and other

 

Comprehensive income (loss):

Net income

Other comprehensive income (loss), net of tax

Foreign currency translation adjustments

Net unrealized gains and losses on securities

Net gains and losses on derivative instruments

Pension liability adjustments

 

Total comprehensive income

 

 

Balance at March 31, 2010

 

 

Balance at December 31, 2008

Dividends paid to stockholders of Canon Inc.

Dividends paid to noncontrolling interests

Capital transactions by consolidated subsidiaries and affiliated companies and other

 

Comprehensive income (loss):

Net income (loss)

Other comprehensive income (loss), net of tax

Foreign currency translation adjustments

Net unrealized gains and losses on securities

Net gains and losses on derivative instruments

Pension liability adjustments

 

Total comprehensive income (loss)

 

 

Balance at March 31, 2009

Net income attributable to Canon Inc.

Average common shares outstanding

Effect of dilutive securities:

Stock options

 

Diluted common shares outstanding

 

Net income attributable to Canon Inc. stockholders per share:

Basic

Diluted

The computation of diluted net income per share for the three months ended March 31, 2010 excludes certain outstanding stock options because the effect would be anti-dilutive. The computation of diluted net income per share for the three months ended March 31, 2009 excludes outstanding stock options because the effect would be anti-dilutive.

Canon operates internationally, exposing it to the risk of changes in foreign currency exchange rates. Derivative financial instruments are comprised principally of foreign exchange contracts utilized by the Company and certain of its subsidiaries to reduce the risk. Canon assesses foreign currency exchange rate risk by continually monitoring changes in the exposures and by evaluating hedging opportunities. Canon does not hold or issue derivative financial instruments for trading purposes. Canon is also exposed to credit-related losses in the event of non-performance by counterparties to derivative financial instruments, but it is not expected that any counterparties will fail to meet their obligations. Most of the counterparties are internationally recognized financial institutions and selected by Canon taking into account their financial condition, and contracts are diversified across a number of major financial institutions.

Canon’s international operations expose Canon to the risk of changes in foreign currency exchange rates. Canon uses foreign exchange contracts to manage certain foreign currency exchange exposures principally from the exchange of U.S. dollars and euros into Japanese yen. These contracts are primarily used to hedge the foreign currency exposure of forecasted intercompany sales and intercompany trade receivables that are denominated in foreign currencies. In accordance with Canon’s policy, a specific portion of foreign currency exposure resulting from forecasted intercompany sales are hedged using foreign exchange contracts which principally mature within three months.

Changes in the fair value of derivative financial instruments designated as cash flow hedges, including foreign exchange contracts associated with forecasted intercompany sales, are reported in accumulated other comprehensive income (loss). These amounts are subsequently reclassified into earnings through other income (deductions) in the same period as the hedged items affect earnings. Substantially all amounts recorded in accumulated other comprehensive income (loss) as of March 31, 2010 are expected to be recognized in earnings over the next 12 months. Canon excludes the time value component from the assessment of hedge effectiveness. Changes in the fair value of a foreign exchange contract for the period between the date that the forecasted intercompany sales occur and its maturity date are recognized in earnings and not considered to be an ineffective hedge.

Canon has entered into certain foreign exchange contracts to primarily offset the earnings impact related to fluctuations in foreign currency exchange rates associated with certain assets denominated in foreign currencies. Although these foreign exchange contracts have not been designated as hedges as required in order to apply hedge accounting, the contracts are effective from an economic perspective. The changes in the fair value of these contracts are recorded in earnings immediately.

Contract amounts of the foreign exchange contracts as of March 31, 2010 and December 31, 2009 are set forth below:

To sell foreign currencies

To buy foreign currencies

The following tables present Canon’s derivative instruments measured at gross fair value as reflected in the consolidated balance sheets as of March 31, 2010 and December 31, 2010.

Assets:

Foreign exchange contracts

Liabilities:

Foreign exchange contracts

Assets:

Foreign exchange contracts

Liabilities:

Foreign exchange contracts

The following tables present the effect of Canon’s derivative instruments on the consolidated statements of income for the three months ended March 31, 2010 and 2009.

Foreign exchange contracts

Foreign exchange contracts

Foreign exchange contracts

Foreign exchange contracts

As of March 31, 2010, commitments outstanding for the purchase of property, plant and equipment approximated ¥14,613 million, and commitments outstanding for the purchase of parts and raw materials approximated ¥60,050 million.

Canon occupies sales offices and other facilities under lease arrangements accounted for as operating leases. Deposits made under such arrangements aggregated ¥14,107 million and ¥14,210 million at March 31, 2010 and December 31, 2009, respectively, and are included in noncurrent receivables in the accompanying consolidated balance sheets.

Canon provides guarantees for bank loans of its employees, affiliates and other companies. The guarantees for the employees are principally made for their housing loans. The guarantees of loans of its affiliates and other companies are made to ensure that those companies operate with less financial risk.

For each guarantee provided, Canon would have to perform under a guarantee if the borrower defaults on a payment within the contract periods of 1 year to 30 years, in the case of employees with housing loans, and of 1 year to 10 years, in the case of affiliates and other companies. The maximum amount of undiscounted payments Canon would have had to make in the event of default is ¥18,200 million at March 31, 2010. The carrying amounts of the liabilities recognized for Canon’s obligations as a guarantor under those guarantees at March 31, 2010 were not significant.

Canon also issues contractual product warranties under which it generally guarantees the performance of products delivered and services rendered for a certain period or term. Estimated product warranty costs are recorded at the time revenue is recognized and are included in selling, general and administrative expenses. Estimates for accrued product warranty costs are based on historical experience. Changes in accrued product warranty cost for the three months ended March 31, 2010 and 2009 is summarized as follows:

Balance at December 31, 2009

Addition

Utilization

Other

 

Balance at March 31, 2010

 

Balance at December 31, 2008

Addition

Utilization

Other

 

Balance at March 31, 2009

 

In October 2003, a lawsuit was filed by a former employee against the Company at the Tokyo District Court in Japan. The lawsuit alleges that the former employee is entitled to ¥45,872 million as reasonable remuneration for an invention related to certain technology used by the Company, and the former employee has sued for a partial payment of ¥1,000 million and interest thereon. On January 30, 2007, the Tokyo District Court of Japan ordered the Company to pay the former employee approximately ¥33.5 million and interest thereon. On the same day, the Company appealed the decision. On February 26, 2009, the Intellectual Property High Court of Japan issued a judgment in the appellate court review and ordered the Company to pay the former employee approximately ¥69.6 million, consisting of reasonable remuneration of approximately ¥56.3 million and interest thereon. On March 12, 2009, the Company appealed the decision to the Supreme Court.

In Germany, Verwertungsgesellschaft Wort (“VG Wort”), a collecting agency representing certain copyright holders, has filed a series of lawsuits seeking to impose copyright levies upon digital products such as PCs and printers, that allegedly enable the reproduction of copyrighted materials, against the companies importing and distributing these digital products. VG Wort filed a lawsuit in January 2006 against Canon seeking payment of copyright levies on single-function printers, and the court of first instance in Düsseldorf ruled in favor of the claim by VG Wort in November 2006. Canon lodged an appeal against such decision in December 2006 before the court of appeals in Düsseldorf. Following a decision by the same court of appeals in Düsseldorf on January 23, 2007 in relation to a similar court case seeking copyright levies on single-function printers of Epson Deutschland GmbH, Xerox GmbH and Kyocera Mita Deutschland GmbH, whereby the court rejected such alleged levies, in its judgment of November 13, 2007, the court of appeals rejected VG Wort’s claim against Canon. VG Wort appealed further against said decision of the court of appeals before the Federal Supreme Court. In December 2007, for a similar Hewlett-Packard GmbH case relating to single-function printers, the Federal Supreme Court delivered its judgment in favor of Hewlett-Packard GmbH and dismissed VG Wort’s claim. VG Wort has already filed a constitutional complaint with the Federal Constitutional Court against said judgment of the Federal Supreme Court. Likewise, after rejection by the Federal Supreme Court of an appeal by VG Wort in relation to Canon’s single-function printers case in September 2008, VG Wort lodged a claim before the Federal Constitutional Court. Canon received a brief from the Federal Constitutional Court in September 2009 to enable the Court to decide on whether to accept the claim, and Canon responded to it in November 2009. In 2007, an amendment of German copyright law was carried out, and a new law has been effective from January 1, 2008 for both multi-function printers and single-function printers. The new law sets forth that the scope and tariff of copyright levies will be agreed between industry and the collecting society. Industry and the collecting society, based on the requirement under the new law, reached an agreement in December 2008. This agreement is applicable retroactively from January 1, 2008 and will remain effective through end of 2010. However, in Canon’s assessment, the final outcome of the court case regarding the single-function printers sold in Germany before January 1, 2008 remains uncertain.