CANON SALES CO., INC. ANNUAL REPORT

Transcription

1 CANON SALES CO., INC. ANNUAL REPORT 2003 Year Ended December 31, 2003

2 Canon Sales Co., Inc., is the independent marketing arm of Canon Inc. wholesaling and retailing a broad range of products developed and manufactured by Canon. In addition to the parent company, the Canon Sales Group currently includes 20 consolidated subsidiaries. Its operations are concentrated in the following business areas: business solutions, consumer equipment and industrial equipment. The Group s new vision outlines its goal to evolve as a first-rate solutions provider that maximizes the creativity of the individual. Accordingly, the Group is currently implementing a variety of strategic measures. CONTENTS CONSOLIDATED FINANCIAL HIGHLIGHTS 1 TO OUR STOCKHOLDERS 2 REVIEW OF OPERATIONS 5 FINANCIAL SECTION 11 BOARD OF DIRECTORS AND CORPORATE AUDITORS 31 CORPORATE INFORMATION 31 Disclaimer Regarding Forward-Looking Statements This annual report contains forward-looking statements about the performance and management plans of Canon Sales Co., Inc., based on management s assumptions in light of current information. The following factors may therefore influence actual results. These factors include consumer trends in Japan as well as other major global markets, private capital expenditures, currency fluctuations, notably against the U.S. dollar, materials prices, and political turmoil in certain countries and regions. 2 CANON SALES CO., INC.

3 Consolidated Financial Highlights Canon Sales Co., Inc. and Consolidated Subsidiaries Years ended December 31, 2003 and 2002 Millions of yen U.S. dollars Net sales by merchandise group Business solutions , ,220 $4,326,000 Business equipment , ,151 2,322,206 Service and support , ,069 2,003,794 Consumer equipment , ,061 2,042,608 Industrial equipment... 71,656 61, ,682 Other... 3,936 16,567 36,785 Total , ,585 7,075,075 Net income... 7,043 3,436 65,822 Total stockholders equity , ,797 2,105,766 Total assets , ,298 $4,629,869 Yen U.S. dollars Net income per share $0.43 Notes: 1. The accompanying financial figures have been presented in U.S. dollars by translating all Japanese yen amounts at 107 to US$1, the prevailing exchange rate as of December 31, Prior to the year ended December 31, 2003, the Company divided its operations into the business machines, optical products, cameras and other segments. Effective January 1, 2003, the Company has adopted the following four segments: business solutions, consumer equipment, industrial equipment and other. Net Sales Net Income (Loss) Net Income (Loss) per Share (Billions of yen) (Billions of yen) (Yen) Canon Sales Co., Inc. Annual Report

4 To Our Stockholders Haruo Murase President and CEO Completion of New Group Management Framework In fiscal 2003, ended December 31, 2003, the Canon Sales Group took bold steps to strengthen its operations. In line with this goal, we completed a revamping of our Group management framework to enhance competitiveness. This involved bolstering Canon System & Support Inc. as well as making Canon Software Inc. and Canon System Solutions Inc. consolidated subsidiaries. We also relocated our headquarters to Shinagawa, Tokyo, and brought a new integrated information system online. This new framework will be a starting point for our renewed drive to improve Group management. Eight companies now form the core of the Group. These include four internal companies: Professional Equipment, Consumer Marketing, Business Solutions and Industrial Equipment; and four consolidated subsidiaries: Canon System & Support, Canon Software, Canon System Solutions and Canotech Co., Inc. With this framework now in place, we will push ahead with more customer-focused Group management and reinforce our position in the industry as a leading provider of innovative solutions. Improved Sales and Income Consolidated net sales in the period under review increased 8.8%, compared with the previous fiscal year, to billion. In the business solutions segment, sales of color multifunctional products (MFPs) equipment with copying, printing, scanning and facsimile functions and color laser-beam printers 2 Canon Sales Co., Inc. Annual Report 2003

5 (LBPs) were firm while maintenance services and office supply sales increased. In the consumer equipment segment, we secured top share of the domestic digital camera market in terms of units shipped per year. Sales in this segment strengthened significantly as shipments of ink-jet printers, including personal-use MFPs, increased at a rate that outpaced market growth. In the industrial equipment segment, we maintained a top share of the market for wafer imaging equipment, the core product in our semiconductor manufacturing equipment lineup, and posted improved overall sales as capital investment by semiconductor manufacturers picked up. Consolidated operating income totaled 17.0 billion, up 56.1%. This reflected improved net sales and gross margin, which countered higher expenses stemming from the relocation of our Company headquarters and the installation of the integrated information system. Consolidated net income amounted to 7.0 billion, an increase of 104.9%. Year-end cash dividends were maintained at 9.00 per share, bringing cash dividends for the full term to Building on the Foundations for Growth From fiscal 2004 onwards, we will build on the foundations for growth that have been laid thus far while cultivating new business areas for the next stage of our expansion. The Canon Sales Group s vision is to evolve as a first-rate solutions provider that maximizes the creativity of the individual. To this end, we have drawn up a three-year management plan that will guide us from fiscal 2004 through fiscal The plan s fiscal targets are shown below. Three-Year Management Plan Targets Billions of yen Consolidated net sales Consolidated operating income Consolidated net income Having adopted a growth strategy with a strong emphasis on securing profit, we are aiming for significant percentage increases in operating and net income, exceeding those of net sales. Accordingly, we will ensure that Group companies become even more cost-efficient. To achieve profitable growth the first strategy of the three-year management plan we intend to expand highly profitable businesses while simplifying our operations and organization. Our focus in the business solutions segment will be on color MFPs for office use, color LBPs and other high-value-added products as we further develop our information technology (IT) services business. In light of slim profit margins in our computer sales business, we have decided to scale back sales of computers as independent units but continue selling them as parts of business solutions packages. Our goal in the consumer equipment segment is to boost sales of competitive products that Canon Sales Co., Inc. Annual Report

6 generate high profits, such as digital cameras and ink-jet printers. As for the industrial equipment segment, we aim to improve profitability and establish a solid business that can withstand changing market conditions. Groupwide steps to secure profitable growth include reviewing work processes for maximum efficiency and allocating more human resources to bolster sales capabilities. Full utilization of our integrated information system will ensure improved productivity of sales and services and greater customer satisfaction. In addition, we expect to reduce logistical costs by integrating related systems of Group companies. The second strategy of our three-year management plan is to record industry-leading sales in mainstay product categories and reinforce our dominant position in the market for such products as plain-paper copiers (PPCs), LBPs, digital cameras and steppers. In the near future, we aim to become the principal supplier of ink-jet printers and one of the top suppliers of color MFPs and digital video cameras. For us, becoming number one means more than just achieving the greatest market share. It also means being the top company in terms of value provided to customers a vital condition for profitability. The plan s third strategy is to develop our IT services business into a steady source of profit. In fiscal 2003, we included the results of Canon System Solutions and Canon Software in our consolidated accounts for the first time, thereby creating a solid base for our document and mission critical solutions, network integration, and service and support businesses. In fiscal 2004, we will reinforce our IT services business by strengthening cooperation between Group companies to create an organization that maximizes the expertise of our 2,500 system engineers. All employees are acutely aware of the need for the Group to fulfill its responsibility as a corporate citizen. Accordingly, we are stepping up efforts to reinforce compliance and adhere to a strict code of corporate ethics. We are also making concerted efforts to enhance our environmental management system, which has already earned ISO certification the International Organization for Standardization s endorsement of environmental management systems and develop businesses in the environment conservation field. In these and all our endeavors, we look forward to the continued support and cooperation of our stockholders. March 2004 Haruo Murase President and CEO 4 Canon Sales Co., Inc. Annual Report 2003

7 Review of Operations Business Solutions 6 Consumer Equipment 8 Industrial Equipment 10 We introduced internal company systems in January 2003 namely, the Professional Equipment Unit, Business Solutions Unit, Consumer Marketing Unit and Industrial Equipment Unit with the aim of clarifying responsibility and facilitating prompt decision making in each market segment. Moreover, our newly built headquarters in Shinagawa, the Canon S Tower, will open in April as the center for managing the Group s vastly reorganized corporate structure. The first stage of our new Groupwide Information System will come on line in May 2003, which will serve as Canon Sales Co., Inc. Annual Report

8 Review of Operations Business Solutions Percentage of Net Sales: 61.1% Business Equipment Business-Use Multifunctional Peripherals Japan s market for conventional plain-paper copiers (PPCs) and multifunctional peripherals (MFPs) for office applications has fallen steadily in recent years in terms of both units shipped and value. Nonetheless, in fiscal 2003 robust demand for color MFPs led to solid gains in volume and value of sales of business equipment. Encouraged by strong demand for the ir C3200 color unit, launched in fiscal 2002, in September 2003 we released the ir C3100, an inexpensive unit designed for office use. At the same time, we launched advertising and promotional campaigns for both series to highlight our newly expanded lineup. The success of these and other efforts to encourage consumers to shift from monochrome to color units boosted our share of the domestic market to nearly 25%. In March 2003, we further broadened our lineup with the distinctive ir 3310 series, which features our proprietary Java-based Multifunctional Embedded Application Platform (MEAP). During the period, we began selling print-on-demand (POD) presses manufactured by Heidelberg Druckmaschinen AG of Germany in the Japanese market. As well as reinforcing our selection of high-end products, this move signaled an aggressive push into the corporate centralized reproduction department (CRD) market. Category sales rose sharply as large-lot orders from several convenience store chains bolstered sales of color MFPs. With color units accounting for an increased percentage of overall demand, sales of monochrome MFPs declined. ir C3100 Satera LBP5800 Laser-Beam Printers The market for laser-beam printers remained in a slump in fiscal 2003, with both shipments and value again falling below the level of the previous period. Sales volume for monochrome laserbeam printers edged down, while sales value plunged approximately 25%. Despite a decline in prices, shipments of color laser-beam printers climbed 20%, spurred by a 100%-plus increase in sales of units that accommodate A4-size print media. During the period, we stepped up sales efforts for our mid-class office-use laser-beam printer lineup, now offered under the Satera brand name. Intensive promotional efforts for the compact LBP-2410, the first new unit in the Satera lineup which was released in February 2003 and became one of the year s major hits helped the model capture an almost 50% share of the domestic market for color laser-beam printers. In October 2003, we augmented the Satera lineup with another three new models. Special point-of-purchase (POP) items, mock-ups and other support tools for retailers succeeded in increasing the number of stores featuring Satera displays. Soaring sales of the LBP-2410 supported an increase in overall sales of color laser-beam printers. Sales of monochrome laser-beam printers were also up. Toner cartridges performed well, reflecting a growing need for cartridges for color laser-beam printers. Business Peripherals The document scanner market expanded as rising demand for image scanning in business settings spurred increases in both shipments and value. We released two new models in October 2003, both of which were received favorably. In May 2003, we introduced a new full-color business card printer and launched an advertising campaign that focused on the merits of companies producing their own business cards. In the area of label printers, in October we began offering a new model that uses pigment-based inks. Such efforts prompted an increase in large-lot orders for document scanners from financial institutions, bolstering category sales. Sales of card and label printers also expanded, supported by firm demand for existing models. image PROGRAF W6200 Computer Products Despite a marginal increase in Japan s computer market in terms of units shipped, plummeting prices continued to push down value. Our sales of personal computers for business applications were favorable, owing to attractive Web-based sales support systems offered by major computer 6 Canon Sales Co., Inc. Annual Report 2003

9 manufacturers and intensified sales efforts for original model computers produced by leading global computer manufacturers. During the period, we also stepped up efforts to develop attractive business solutions combining Canon-brand products with information appliance (IA) servers. While computers will continue to be a key component of our solutions business, in light of increasingly narrow margins we have decided to scale back sales of computers as independent units. Service and Support Maintenance/Support Services Sales of maintenance services for MFPs rose slightly in fiscal 2003, reflecting the shift toward color units. In the area of professional services, we recorded an increase of more than 10%, reflecting a steady increase in contract renewals and successful efforts to secure new contracts, notably for IT management services. Group company Canon System & Support Inc. registered robust sales gains, particularly in the area of maintenance services for office-use MFPs. Canon Software Inc. expanded its operations, which include the development of software for Canon products and applications for use in mission critical solutions. Canon System Solutions Inc. which joined the Canon Sales Group in January 2003 and is cooperating with the parent company in the development of mission critical solutions, security services and tailored software packages continued to see sales advance. Canotec Co., Ltd., further expanded its network integration business. Note: Service and Support is the official name of the category within the Business Solutions segment that encompasses Canon Sales maintenance and support services and software businesses. Software In fiscal 2003, efforts focused on introducing new products in crucial areas and upgrading existing products. Against a backdrop of rising demand for effective enterprise document management systems, Livelink, an advanced electronic document management system (EDMS) that combines collaboration and knowledge management, continued to enjoy top market share. Sales of Livelink also contributed substantially to software sales. Report Viewer, a Web-compatible electronic form transmission system and our core document solutions product, also supported software sales gains. Sales of Multiplatform reporting system imageware Form Manager also registered a sharp increase. Software sales gains were also attributable to brisk sales of business intelligence products. During the period, we released Hyperion Performance Suite, a successor to the popular Brio Intelligence utility. imageware Form Manager 2004 Canon Sales Co., Inc. Annual Report

10 Review of Operations Consumer Equipment Percentage of Net Sales: 28.9% Cameras and Video Cameras Digital Cameras In fiscal 2003, shipments of digital cameras in the Japanese market climbed 29%, to 8.4 million, while sales value rose 17%. The period also witnessed intensified competition among the top players in the market, of which there are six, including Canon. During the period, consumers responded positively to nine new high-performance additions to the PowerShot and IXY series of compact digital cameras, all of which deliver outstanding resolution and cost effectiveness. Robust sales of the IXY DIGITAL L, released in October 2003, reflected extensive television advertising and promotional activities developed to appeal to female consumers, the principal target customers for this model. Robust sales of attractive core models and effective sales efforts enabled us to achieve the top share of this competitive market. We also continued to drive the single-lens reflex (SLR) market s shift to digital with the release of EOS 10D, in March 2003, and EOS Kiss Digital, in September 2003, completing our full line of digital SLR cameras. Owing in part to standout sales of EOS Kiss Digital, which puts top-flight digital technology in the hands of the consumer, our share of the digital SLR camera market rose to approximately 70%. Reflecting firm sales of compact digital cameras, including the top-of-the-line IXY DIGITAL 400, sales in the digital camera category in fiscal 2003 rose well above the level of the preceding period. EOS Kiss Digital IXY DV M2 Video Cameras Japan s video camera market expanded in terms of units shipped, thanks to rising demand for more compact, lighter models with higher resolution. In terms of value, however, the market remained level with fiscal 2002 as heightened price competition among manufacturers and retailers combined to drive down prices. In February 2003, we augmented our lineup with the IXY DV M2, a high-performance digital video camera that realizes superb image quality for both still shots and video, and launched an intense advertising and promotional campaign to publicize the model s outstanding features and establish a strong presence. The top-selling digital video camera in Japan in fiscal 2003, the IXY DV M2 supported a substantial increase in overall category sales despite a generally stagnant market. Ink-Jet Printers and Personal-Use Multifunctional Peripherals The Japanese market for ink-jet printers continued to decline gently in fiscal 2003 in terms of units shipped and value. In contrast, growth in the market for personal-use MFPs, which boast printing, copying and scanning functions, accelerated as shipments soared 175% from the fiscal 2002 level. MFPs accounted for 20% of printers sold to first-time buyers and 50% of those sold to users replacing conventional models, indicating that market growth is largely due to greater consumer awareness of the benefits of personal-use MFPs. The entry of several new firms during the period intensified competition in a market previously dominated by Canon Sales and two other firms. During the period, we released the PIXUS series of conventional printers. This series of 10 models, which centers on PIXUS 990i, boasts exceptional Canon image quality, as well as outstanding speed. Distinctive, high-value-added PIXUS printers are also compatible with PictBridge, an industry standard enabling a range of digital photo solutions, including direct printing of still photos from digital cameras without the use of a computer. In October 2003, we began selling the mid-range PIXUS 560i and the high-end PIXUS 860i, both of which contributed significantly to category sales. We also recorded robust sales of the notebook-sized PIXUS 50i, introduced in March Canon Sales Co., Inc. Annual Report 2003

11 Rising demand for digital photo printing, a consequence of the increasing popularity of digital cameras, boosted demand for ink cartridges and other related supplies. In the area of personal-use MFPs, we released five new units in the high-performance PIXUS MP series. Introduced in March 2003, the PIXUS MP700 the core model in the PIXUS MP series, designed to meet the needs of individuals and small office/home office (SOHO) users saw firm sales. The PIXUS MP370 and MP360, two entry-level models introduced in October 2003, were offered primarily as photo printers and boosted our position in this key market. The release of these and other highly competitive models, together with expanded advertising and promotional efforts, reinforced our share of the markets for ink-jet printers and personal-use MFPs. Category sales also exceeded the previous period. Other Products Despite a decline in the overall market for scanners, we succeeded in maintaining our top market share by stepping up sales efforts for the high-end CanoScan 9900 F and introducing new midrange models. The market for electronic dictionaries expanded both in terms of value and volume during the term, which was highlighted by a 45% increase in sales value, a consequence of rising unit prices for consumer-use models. Released in October 2003, the wordtank V70 the first electronic dictionary to feature handwriting recognition and vocal pronunciation in Chinese, as well as Japanese and English was the top-selling electronic dictionary in Japan during the period. Sales of calculators during the period were flat despite the introduction of a highly popular new product, which enables us to secure the number two spot in the Japanese market. As a consequence of these and other achievements, we registered an increase in sales of electronic dictionaries and calculators. Sales of facsimiles rose in terms of units shipped. In October 2003, we introduced the FAXPHONE CF-SL50. This is our first model to employ thermal wax transfer technology and marks our debut in the market for thermal wax transfer facsimiles, currently the dominant type in the industry. PIXUS 990i wordtank V70 Canon Sales Co., Inc. Annual Report

12 Review of Operations Industrial Equipment Percentage of Net Sales: 9.5% FPA-6000AS4 DIGI SUPER 100xs Semiconductor Production Equipment Robust sales of digital household electronics products in Japan prompted device manufacturers to step up capital investment in fiscal 2003, particularly for system large-scale integration (LSI), charge-coupled devices (CCDs) and flash memory chips, reversing a downward trend that began in As a consequence, the market for semiconductor production equipment recovered by 50% from the fiscal 2002 level in terms of units shipped. Despite firm capital investment by manufacturers in the Republic of Korea and Taiwan, the market for mirror-projection equipment remained level with the previous period, reflecting slack conditions in Japan. During the period, we sought to boost sales of wafer imaging equipment by aggressively promoting competitive new products and enhancing support services. These and other efforts enabled us to attract new customers and repeat orders from existing customers, and to maintain our leading share of the domestic market. The FPA-6000AS4, a new Canon argon-fluoride (ArF) scanning stepper released in July 2003, allowed us to claim the top share of the market for stateof-the-art steppers. Firm sales of key krypton-fluoride (KrF) scanning steppers, notably the FPA- 5000ES4 and the newly released FPA-6000ES5, pushed sales up from the fiscal 2002 level. In the area of mirror-projection equipment, in February 2003 we released Canon s MPA-7800 and MPA-7800CF fifth-generation mask aligners (1,200mm x 1,300mm) and sought to cultivate new customers. Repeat orders from existing customers enabled us to maintain a stable market share. Sales of ashers were also up from fiscal 2002, owing to repeat orders from existing customers for core products, notably Canon s MAS-8220 microwave asher. We also saw robust sales of rapid thermal processing (RTP) systems from U.S. firm Mattson Technology, Inc., as well as interferometric metrology systems and the ZMI series of displacement measuring interferometer systems manufactured by Zygo Corporation, also of the United States. Optical Equipment This category encompasses sales of broadcasting equipment, surveillance cameras and medical equipment. In the period under review, sales of broadcasting equipment benefited from stable replacement demand, primarily from broadcasters, owing to the commencement of digital broadcasting. Sales efforts centered on DIGI SUPER 100xs, a high-definition television (HDTV)-compatible portable lens featuring the world s highest zoom (100x). Orders for the lens for field use from Tokyo s key broadcasters contributed to brisk sales. Sales of surveillance cameras were spurred by rising demand for more effective security systems. During the period, we focused on expanding sales of a Canon surveillance camera with an advanced electronic 20x zoom function that allows round-the-clock monitoring. In the area of medical equipment, sales of CXDI series digital X-ray cameras rose strongly, contributing significantly to overall category sales. Sales of ophthalmic equipment, particularly nonmydriatic retinal cameras and tonometers, were also firm. We also saw an increase in sales of intraocular lenses (IOLs) by securing large-lot orders, enabling us to substantially boost shipments. 10 Canon Sales Co., Inc. Annual Report 2003

13 Financial Section CONTENTS Six-Year Consolidated Financial Summary Financial Review Consolidated Balance Sheets Consolidated Statements of Operations Consolidated Statements of Stockholders Equity Consolidated Statements of Cash Flows Notes to Consolidated Financial Statements Independent Auditors Report Canon Sales Co., Inc. Annual Report

14 Six-Year Consolidated Financial Summary Canon Sales Co., Inc. and Consolidated Subsidiaries Years ended December For the year: Net sales , , , , , ,803 $7,075,075 Cost of sales , , , , , ,880 4,742,907 Gross profit , , , , , ,923 2,332,168 Selling, general and administrative expenses , , , , , ,780 2,173,411 Operating income... 16,987 10,885 19,397 20,512 18,178 19, ,757 Income (loss) before income taxes and minority interests... 20,438 6,873 (63,280) 15,313 13,770 12, ,009 Income taxes (credit)... 13,219 3,361 (28,407) 7,966 7,257 6, ,542 Net income (loss)... 7,043 3,436 (32,831) 6,460 6,345 6,512 65,822 At year-end: Total assets , , , , , ,704 4,629,869 Total stockholders equity , , , , , ,925 2,105,766 Yen U.S. dollars (Note 1) Per share of common stock: Net income (loss) (Note 2)... )( )(222.96,(217.39) 0, , , $,(0.43. Cash dividends (Note 3) ) Stockholders equity... 1, , , , , , ) Notes: 1. The accompanying financial figures have been presented in U.S. dollars by translating all Japanese yen amounts at 107 to US$1, the prevailing exchange rate as of December 31, Net income (loss) per share is based on the weighted average number of shares of common stock outstanding during the respective fiscal years. 3. Cash dividends per share are the amounts applicable to the respective fiscal years, including dividends to be paid after the end of the year. 12 Canon Sales Co., Inc. Annual Report 2003

15 Financial Review Results of Operations Sales Canon Sales recorded an 8.8% gain in consolidated net sales in fiscal 2003, ended December 31, 2003, to billion, reflecting strong sales of new products in its color multifunctional peripheral, digital camera and ink-jet printer lineups. Business solutions sales rose 10.4%, to billion, owing in part to robust sales of color multifunctional peripherals and improved sales of toner cartridges for laserbeam printers. In the consumer equipment segment, growth in compact digital camera sales outpaced market growth. This offset a decrease in domestic ink-jet printer sales that suffered as the market for personal-use multifunctional peripherals expanded. As a result, segment sales climbed 10.3%, to billion. In the industrial equipment segment, sales totaled 71.7 billion, up 16.1%, owing to efforts to cultivate new customers and the recovery from a two-year decline in capital investments in the semiconductor industry. Earnings Operating income climbed 56.1%, to 17.0 billion. This was attributable to a rise in gross profit, which countered an increase in selling, general and administrative expenses, including costs involving the relocation of the Company s headquarters and the construction of the integrated information system. Gross profit improved as a result of our efforts to boost net sales while holding down cost of sales. The Company posted net income of 7.0 billion, up 104.9%, reflecting a gain on return of substitutional portion of governmental welfare pension program, which offset expenses related to restructuring of consolidated subsidiaries and a one time amortization of consolidation differences accompanying the purchase of Canon System Solutions Inc. Net income per share was 46.24, compared with in the previous fiscal year.* Cash dividends per share applicable to the year were maintained at *In fiscal 2003, the Company adopted the accounting standard for net income per share and related guidance (Accounting Standards Board Statement No. 2, Accounting Standard for Earnings Per Share and Financial Standards Implementation Guidance No. 4, Implementation Guidance for Accounting Standard for Earnings Per Share, issued by the Accounting Standards Board of Japan). Financial Position Total assets of Canon Sales as of December 31, 2003, amounted to billion, a slight increase from the fiscal 2002 year-end. Significant factors included an increase in notes and accounts receivable owing to a rise in net sales, and a decrease in cash and cash equivalents partially reflecting payments for redemption of bonds. The sum of total current liabilities and total long-term liabilities amounted to billion, down 2.5%. This was mostly attributable to an increase in notes and accounts payable due to purchases from Canon Inc., a rise in accrued expenses owing to advertising campaigns, greater redemption of bonds and a decrease in liability for employees retirement benefits. As a consequence of these factors, total stockholders equity rose 2.0%, to billion. Return on equity (ROE) was 3.2%, compared with 1.6% in the previous period. Stockholders equity ratio increased to 45.5%, from 44.6%. Stockholders equity per share amounted to 1,496.74, up from 1, Cash Flows Cash and cash equivalents at end of year totaled billion, 12.6 billion lower than at the beginning of the period. This reflected an increase in notes and accounts receivable resulting from improved net sales, an increase in inventories, and payments related to the construction of the Company s new headquarters in Shinagawa, Tokyo. Net cash provided by operating activities amounted to 23.7 billion, compared with 36.3 billion in the previous period. This change was mainly attributable to income before income taxes and minority interests of 20.4 billion, depreciation and amortization of 8.5 billion, an increase in notes and accounts receivable of 14.3 billion, and an increase in notes and accounts payable of 8.6 billion. Net cash used in investing activities totaled 16.3 billion, a decrease from 26.9 billion used in fiscal This was primarily the result of 18.7 billion in payments for purchase of property, plant and equipment, 9.6 billion in proceeds from sales of investments in subsidiaries and 9.4 billion in payments for purchase of investments in subsidiaries. Net cash used in financing activities amounted to 20.3 billion, compared with 13.9 billion used in the previous period, owing mainly to 10.0 billion in payments for redemption of bonds. 900 Return on Sales (ROS) (Billions of yen) Working Capital (Billions of yen) 300 Stockholders Equity and Return on Equity (ROE) (%) (Times) (Billions of yen) (%) Net Sales ROS Current Assets Current Liabilities Current Ratio Stockholders Equity ROE Canon Sales Co., Inc. Annual Report

16 Consolidated Balance Sheets Canon Sales Co., Inc. and Consolidated Subsidiaries December 31, 2003 and 2002 ASSETS Current assets: Cash and cash equivalents , ,448 $1,157,150 Notes and accounts receivable , ,497 1,342,785 Inventories (Note 4)... 65,272 57, ,019 Deferred tax assets (Note 8)... 4,597 2,724 42,963 Other current assets... 8,064 4,773 75,363 Allowance for doubtful receivables... (342) (461) (3,196) Total current assets , ,028 3,225,084 Property, plant and equipment (Note 9): Land... 41,438 42, ,271 Buildings and structures... 70,520 68, ,065 Machinery , Vehicles Furniture and fixtures... 20,535 24, ,916 Rental assets... 14,707 18, ,449 Construction in progress... 13,093 Total , ,820 1,376,056 Accumulated depreciation... (42,621) (59,103) (398,327) Net property, plant and equipment , , ,729 Intangible assets: Software... 5,344 4,918 49,944 Utilization rights ,215 Other intangible assets Total intangible assets... 5,842 5,768 54,598 Investments and other assets: Investments in securities (Note 3)... 3,598 4,863 33,626 Long-term loans receivable Lease deposits... 9,958 11,802 93,065 Deferred tax assets (Note 8)... 24,204 33, ,206 Other investments... 3,599 4,899 33,636 Allowance for doubtful receivables... (1,570) (1,481) (14,673) Total investments and other assets... 39,853 53, ,458 Total assets , ,298 $4,629,869 See accompanying notes to consolidated financial statements. 14 Canon Sales Co., Inc. Annual Report 2003

17 LIABILITIES AND STOCKHOLDERS EQUITY Current liabilities: Notes and accounts payable , ,556 $1,308,262 Short-term bank loans (Note 5)... 4,135 Current portion of long-term debt (Note 5)... 10,000 10,000 93,458 Accrued income taxes... 4, ,065 Accrued consumption tax payable... 2,205 1,744 20,607 Accrued expenses... 28,112 18, ,729 Reserves... 4,379 2,550 40,925 Other current liabilities... 9,091 5,668 84,963 Total current liabilities , ,172 1,851,009 Long-term liabilities: Long-term debt (Note 5)... 25,000 35, ,645 Deferred tax liabilities (Note 8) ,645 Liability for employees retirement benefits (Note 6).. 39,294 54, ,234 Liability for directors and corporate auditors retirement benefits (Note 2) ,421 Consolidation differences... 2,639 6,835 24,663 Other long-term liabilities... 1,701 1,650 15,897 Total long-term liabilities... 69,283 98, ,505 Minority interests... 2, ,589 Contingent liabilities (Note 10) Stockholders equity (Notes 7 and 11): Common stock: Authorized 299,500,000 shares; Issued 150,523,896 shares in 2003 and Issued 151,023,896 shares in ,303 73, ,075 Capital surplus... 82,484 82, ,878 Retained earnings... 69,289 65, ,561 Net unrealized gain (loss) on available-for-sale securities (175) 2,710 Foreign currency translation adjustments... (18) (168) Treasury stock... (31) (218) (290) Total stockholders equity , ,797 2,105,766 Total liabilities and stockholders equity , ,298 $4,629,869 Canon Sales Co., Inc. Annual Report

18 Consolidated Statements of Operations Canon Sales Co., Inc. and Consolidated Subsidiaries Years ended December 31, 2003 and Sales , ,585 $7,075,075 Cost of sales , ,044 4,742,907 Gross profit , ,541 2,332,168 Selling, general and administrative expenses , ,656 2,173,411 Operating income... 16,987 10, ,757 Other income (expenses): Interest and dividend income Interest expense... (1,007) (1,152) (9,411) Loss on disposal and devaluation of inventories... (3,986) (2,095) (37,253) Gain on sales of investments in securities Loss on sales and disposal of property and equipment... (3,489) (1,156) (32,608) One time amortization of consolidation differences... (9,784) (712) (91,439) Gain on return of substitutional portion of governmental welfare pension program... 22, ,402 Expenses related to restructuring of consolidated subsidiaries... (1,087) (10,159) Expenses related to relocation of headquarters... (728) (6,804) Provision for directors and corporate auditors retirement benefits for prior year... (788) (7,364) Other net... 2, ,925 3,451 (4,012) 32,252 Income before income taxes and minority interests... 20,438 6, ,009 Income taxes (Note 8): Current... 5,439 2,136 50,832 Deferred... 7,780 1,225 72,710 13,219 3, ,542 Income before minority interests... 7,219 3,512 67,467 Minority interests ,645 Net income... )(37, ,436 $0(265,822 Yen U.S. dollars (Note 1) Per share of common stock (Note 2): Net income $0.43. Cash dividends applicable to the year ) See accompanying notes to consolidated financial statements. 16 Canon Sales Co., Inc. Annual Report 2003

19 Consolidated Statements of Stockholders Equity Canon Sales Co., Inc. and Consolidated Subsidiaries Years ended December 31, 2003 and 2002 Millions of yen Net unrealized Foreign Number of gain (loss) on currency shares of Common Capital Retained available-for-sale translation Treasury common stock stock surplus earnings securities adjustments stock Balance at December 31, ,023,896 73,303 82, ,797 0(89) (380) 0(12) Net income... 3,436 Cash dividends... (2,718) Bonuses to directors... (84) Adjustment due to decrease in consolidated subsidiaries... (26) Loss on disposal of treasury stock due to exchange of stock... (317) Net unrealized loss on available-for-sale securities... (86) Foreign currency translation adjustments Increase in treasury stock net... (206) Balance at December 31, ,023,896 73,303 82, ,405 (175) (0. (218) Net income... 7,043 Cash dividends... (2,714) Bonuses to directors... (81) Adjustment due to increase in consolidated subsidiaries Gain on disposal of treasury stock... 2 Net unrealized gain on available-for-sale securities Foreign currency translation adjustments... (18) Retirement of treasury stock... (500,000) (432) 432 Increase in treasury stock net... (245) Balance at December 31, ,523,896 73,303 82, ,289 (290 0(18) 0(31) U.S. dollars (Note 1) Foreign Net unrealized currency Common Capital Retained gain on available- translation Treasury stock surplus earnings for-sale securities adjustments stock Balance at December 31, $685,075 $770,860 $611,262 $(1,636) $00. $(2,037) Net income... 65,822 Cash dividends... (25,364) Bonuses to directors... (757) Adjustment due to increase in consolidated subsidiaries Gain on disposal of treasury stock Net unrealized gain on available-for-sale securities... 4,346 Foreign currency translation adjustments... (168) Retirement of treasury stock... (4,037) 4,037 Increase in treasury stock net... (2,290) Balance at December 31, $685,075 $770,878 $647,561 $(2,710 $(168) $0,(290) See accompanying notes to consolidated financial statements. Canon Sales Co., Inc. Annual Report

20 Consolidated Statements of Cash Flows Canon Sales Co., Inc. and Consolidated Subsidiaries Years ended December 31, 2003 and Cash flows from operating activities Income before income taxes and minority interests , ,873 $0,191,009 Adjustments for: Depreciation and amortization... 8,519 8,805 79,617 Amortization of consolidation differences... (939) (560) (8,775) One time amortization of consolidation differences... 9, ,439 Decrease in allowance for doubtful receivables... (141) (201) (1,318) Provision for employees retirement benefits... 5,482 2,978 51,234 Provision for directors and corporate auditors retirement benefits ,766 Interest and dividend income... (89) (890) (832) Interest expense... 1,007 1,152 9,411 Equity in earnings of nonconsolidated subsidiaries and affiliates... (18) (117) (168) Loss on sales and disposal of property, plant and equipment... 3,477 1,018 32,495 Gain on return of substitutional portion of governmental welfare pension program... (22,192) (207,402) Gain on sales of subsidiaries... (512) (4,785) Gain on sales of investments in securities... (14) (86) (131) (Increase) decrease in notes and accounts receivable... (14,251) 17,783 (133,187) (Increase) decrease in inventories... (6,709) 926 (62,701) Increase in notes and accounts payable... 8,623 6,980 80,589 Other... 13,681 (4,169) 127,860 Cash generated from operations... 26,549 41, ,121 Interest paid... (848) (1,152) (7,925) Interest and dividends received Income taxes paid... (2,121) (4,684) (19,822) Net cash provided by operating activities... 23,671 36, ,224 Cash flows from investing activities Proceeds from sale of marketable securities Payments for purchase of property, plant and equipment... (18,684) (14,739) (174,617) Payments for purchase of intangible assets... (1,222) (2,562) (11,420) Payments for purchase of investments in securities... (127) (579) (1,187) Proceeds from sales of investments in securities Payments for purchase of investments in subsidiaries... (8) (10,593) (75) Payments for purchase of investments in subsidiaries accompanying changes of scope of consolidation... (9,346) (87,346) Proceeds from sales of investments in subsidiaries accompanying changes of scope of consolidation... 9,555 89,299 Decrease (increase) in time deposits (65) 879 Other... 3,407 1,000 31,841 Net cash used in investing activities... (16,258) (26,869) (151,944) Cash flows from financing activities Decrease in short-term bank loans... (6,830) (1,931) (63,832) Payments for redemption of bonds... (10,000) (5,000) (93,458) Payments for purchase of treasury stock... (543) (4,090) (5,074) Dividends paid... (2,733) (2,868) (25,542) Other... (199) (1,860) Net cash used in financing activities... (20,305) (13,889) (189,766) Effect of exchange rate changes on cash and cash equivalents... (6) (28) (56) Net decrease in cash and cash equivalents... (12,898) (4,511) (120,542) Cash and cash equivalents at beginning of year , ,045 1,275,215 Cash and cash equivalents of newly consolidated subsidiaries at beginning of year ,589 Decrease in cash and cash equivalents resulting from exclusion of consolidated subsidiaries... (12) (86) (112) Cash and cash equivalents at end of year , ,448 $1,157,150 See accompanying notes to consolidated financial statements. 18 Canon Sales Co., Inc. Annual Report 2003

21 Notes to Consolidated Financial Statements 1. Basis of Presenting Consolidated Financial Statements The accompanying consolidated financial statements of Canon Sales Co., Inc. (the Company ), and its consolidated subsidiaries have been prepared in accordance with accounting principles and practices generally accepted in Japan and have been compiled from those prepared by the Company as required under the Securities and Exchange Law of Japan. Accordingly, the accompanying consolidated financial statements are not intended to present the consolidated financial position, results of operations and cash flows in accordance with accounting principles and practices generally accepted in countries and jurisdictions other than Japan. The U.S. dollar amounts are included solely for convenience of the reader and are stated, as a matter of arithmetical computation only, at the exchange rate of 107=US$1, being the rate prevailing at December 31, These translations should not be construed as representations that the Japanese yen amounts actually represent, or have been or could be converted into, U.S. dollars at that or any other rate. 2. Summary of Significant Accounting Policies (a) Principles of Consolidation The accompanying consolidated financial statements as of December 31, 2003, include the accounts of the Company and its 20 (18 in 2002) significant subsidiaries. Investments in nonconsolidated subsidiaries and affiliated companies are accounted for by the equity method. All intercompany accounts and transactions are eliminated in consolidation. The excess of acquisition costs over net assets acquired is amortized generally over five years. Consolidation differences in debit for which the Company is unable to readily determine when gains will be realized are written down as incurred. (b) Cash Equivalents For purposes of the statement of cash flows, the Company considers deposits with banks less than three months due to be cash equivalents. (c) Investments in Securities Available-for-sale marketable securities are stated at fair market value, with unrealized gain or loss, net of the applicable taxes, reported as a separate component of stockholders equity. Available-for-sale marketable securities whose fair value is not readily determinable are stated at cost determined by the moving-average method. (d) Inventories Inventories are valued at cost. Cost is determined mainly by the moving-average method. (e) Property, Plant and Equipment Property, plant and equipment are stated at cost. Depreciation is computed by the declining-balance method for property, plant and equipment, except for buildings purchased after April 1, 1998 (exclusive of furniture and fixtures), the buildings and structures of the Company s Makuhari office and certain buildings and structures of subsidiaries, which are depreciated by the straight-line method, at rates based on the estimated useful lives of the assets. The useful lives are as follows: buildings, mainly 50 years; furniture and fixtures, mainly five years. Normal repairs and maintenance, including minor renewals and improvements, are charged to income as incurred. (f) Employee Retirement and Severance Benefits The Company and its consolidated subsidiaries have defined benefit retirement plans. These include the governmental welfare pension program, tax-qualified retirement pension plans and lump-sum severance payments. Effective January 1, 2001, the Company and its consolidated subsidiaries adopted a new accounting standard Canon Sales Co., Inc. Annual Report

22 for employee retirement benefits and accounted for the liability for retirement benefits based on projected benefit obligations and retirement plan assets at the balance sheet date. The governmental welfare pension program comprises a substitutional portion, managed by the Company and its consolidated subsidiaries on behalf of the government, and a corporate portion, established at the discretion of the Company and its consolidated subsidiaries. Pursuant to the enactment of the Defined Benefit Pension Plan Law, in April 2002, the Company obtained permission from Japan s Ministry of Health, Labour and Welfare for exemption from future benefit obligations with respect to the substitutional portion of the governmental welfare pension program on March 1, Certain consolidated subsidiaries of the Company similarly obtained permission for exemption on January 1, The Company and certain domestic consolidated subsidiaries have also established retirement benefit trusts. In addition, a certain overseas consolidated subsidiary has a defined contribution pension plan. (g) Leases Noncancelable lease transactions are accounted for as operating leases regardless of whether such leases are classified as operating leases or capital leases, except that lease agreements which stipulate the transfer of ownership of the leased property to the lessee are accounted for as capital leases. (h) Allowance for Doubtful Receivables An allowance for doubtful receivables is provided in the amount required to cover possible losses on collection. It is determined by adding individually estimated uncollectible amounts for specific items to an amount based on the actual rate of uncollected receivables of the Company in prior years. (i) Appropriation of Retained Earnings Under the Japanese Commercial Code (the Code ) and the Articles of Incorporation of the Company, the plan for appropriation of retained earnings (primarily for cash dividend payments) proposed by the Board of Directors must be approved at the stockholders meeting, which is held within three months after the end of each fiscal year. The appropriation of retained earnings reflected in the accompanying consolidated financial statements represents the results of such appropriation applicable to the immediately preceding financial year, which were approved at the stockholders meeting and disposed of during that year. Dividends are paid to stockholders of record at the end of the fiscal year. As is customary practice in Japan, payments of bonuses to directors and corporate auditors, which constitute a part of the appropriations cited above, are made out of retained earnings instead of being charged to income for the fiscal year. (j) Income Taxes Deferred tax assets are recorded to reflect the impact of temporary differences between assets and liabilities recognized for financial reporting purposes and such amounts recognized for tax purposes. These deferred taxes are measured by applying the normal statutory rate of income taxes to the temporary differences. (k) Translation of Foreign Currency Accounts All short-term and long-term monetary receivables and payables denominated in foreign currencies are translated into Japanese yen at the current exchange rates at the balance sheet date. The foreign exchange gains and losses from translation are recognized in the statements of operations. (l) Foreign Currency Financial Statements The balance sheet accounts, and revenue and expense accounts of the foreign subsidiaries are translated into Japanese yen at the current exchange rates except for stockholders equity, which is translated at the historical exchange rate. (m) Per Share Amount of Common Stock Net income per share is based on the weighted average number of shares of common stock outstanding during the respective fiscal years. 20 Canon Sales Co., Inc. Annual Report 2003

23 Effective January 1, 2003, the Company has adopted the new accounting standard for net income per share issued by the Accounting Standards Board of Japan. Under the new standards, net income per share is calculated using net income available to holders of common shares which is computed more precisely than under previous standards and weighted average number of shares outstanding for the period. Cash dividends per share presented in the accompanying consolidated statements of operations are dividends applicable to the respective fiscal years, including dividends to be paid after the end of the respective fiscal years. (n) Provision for Directors and Corporate Auditors Retirement Benefits The Company pays lump-sum retirement benefits to directors, the amount of which is determined based upon the Company s internal regulations. Prior to the year ended December 31, 2003, retirement benefits for directors and corporate auditors were charged to income when paid. Effective January 1, 2003, the Company has changed its accounting method, and in accordance with the Company s internal regulations a reserve is provided for such benefits at the amount that would be required if all directors and corporate auditors retired at the end of the fiscal year. The amount recognized as retirement benefits attributable to past years 788 million (US$7,364 thousand) was recorded as an extraordinary loss. As a result, operating income increased by 384 million (US$3,589 thousand) and income before income taxes and minority interests decreased by 404 million (US$3,775 thousand) compared to the amounts that would have been recorded had the previous method been applied. 3. Investments in Securities The carrying amounts and aggregate fair values of investments in securities at December 31, 2003 and 2002, were as follows: Millions of yen 2003 Cost Unrealized gains Unrealized losses Fair value Securities classified as: Available-for-sale; Equity securities... 2, (173) 2,939 Total... 2, (173) 2,939 Millions of yen 2002 Cost Unrealized gains Unrealized losses Fair value Securities classified as: Available-for-sale; Equity securities... 2, (382) 2,046 Total... 2, (382) 2,046 U.S. dollars (Note 1) 2003 Cost Unrealized gains Unrealized losses Fair value Securities classified as: Available-for-sale; Equity securities... $22,925 $6,159 $(1,617) $27,467 Total... $22,925 $6,159 $(1,617) $27,467 Canon Sales Co., Inc. Annual Report

24 Available-for-sale securities whose fair value is not readily determinable as of December 31, 2003 and 2002, were as follows: Carrying amount Available-for-sale: Equity securities $4,393 Total $4, Inventories Inventories at December 31, 2003 and 2002, were composed of the following: Merchandise... 56,137 47,219 $524,645 Service parts... 6,469 6,912 60,458 Work in progress... 1,869 2,383 17,467 Supplies ,084 Other ,365 65,272 57,047 $610, Short-Term Bank Loans and Long-Term Debt The annual interest rate applicable to the short-term bank loans for the year ended December 31, 2002, was 0.55%. Long-term debt at December 31, 2003 and 2002, consisted of the following: Bonds... 35,000 45,000 $327,103 Long-term debt ,000 45, ,103 Less current portion... 10,000 10,000 93,458 25,000 35,150 $233, Canon Sales Co., Inc. Annual Report 2003

25 The Company issued the following four bonds, the first two on July 1, 1997, and the latter two on July 8, 1998: Issue price Bond type (Millions of yen) Interest rate Date of maturity First Domestic Unsecured Bond... 10, % June 29, 2007 Second Domestic Unsecured Bond... 10, % June 30, 2004 Fifth Domestic Unsecured Bond... 10, % July 8, 2008 Sixth Domestic Unsecured Bond... 05, % July 8, Employee Retirement and Severance Benefits The Company and its domestic consolidated subsidiaries have defined benefit retirement plans. These include the governmental welfare pension program, tax-qualified retirement pension plans and lump-sum severance payments. Effective January 1, 2001, the Group adopted a new accounting standard for employee retirement benefits. The liability for employee retirement benefits as of December 31, 2003 and 2002, consisted of the following: Projected benefit obligation , ,874 $1,228,813 Fair value of plan assets... (91,246) (117,378) (852,766) Unrecognized transitional obligation... (85) (209) (794) Unrecognized actuarial loss... (18,904) (33,486) (176,673) Unrecognized prior service cost... 17,981 16, ,047 Prepaid pension cost Net liability , ,694 $0,367,234 The components of net period benefit costs for the years ended December 31, 2003 and 2002, were as follows: Service cost... (07,832 10,392 $(073,196 Interest cost... 3,457 4,537 32,309 Expected return on plan assets... (2,836) (3,590) (26,505) Amortization of transitional obligation ,159 Amortization of prior service cost... (269) (1,257) (2,514) Amortization of actuarial loss ,055 6,972 Benefit cost for defined contribution pension plan Gain on return of substitutional portion of governmental welfare pension program... (22,192) (207,402) Net periodic benefit costs... (13,136) 12,207 $(122,766) Canon Sales Co., Inc. Annual Report

26 Assumptions used for the years ended December 31, 2003 and 2002, were principally as follows: Discount rate % 2.5% Expected rate of return on plan assets %~4.0% 3.0%~4.0% Amortization period of prior service cost... 10~18 years 10~18 years Recognition period of actuarial gain or loss... 10~18 years 10~18 years Amortization period of transitional obligation... 5 years for certain 5 years for certain consolidated subsidiaries consolidated subsidiaries 7. Stockholders Equity Japanese companies are subject to the Code to which certain amendments became effective as of October 1, The Code was revised whereby common stock par value was eliminated, resulting in all shares being recorded with no par value and at least 50% of the issue price of new shares being recorded as common stock and the remaining net proceeds as additional paid-in capital, which is included in capital surplus. The Code permits Japanese companies, upon approval by their Board of Directors, to issue shares to existing stockholders without consideration as a stock split. Such issuance of shares generally does not give rise to changes within the stockholders accounts. The revised Code also provides that an amount equal to at least 10% of the aggregate amount of cash dividends and certain other appropriations of retained earnings associated with cash outlays applicable to each fiscal period shall be appropriated as a legal reserve (a component of retained earnings) until such reserve and additional paid-in capital equals 25% of common stock. The amount of total additional paid-in capital and legal reserve that exceeds 25% of common stock may be available for dividends by resolution of the stockholders. In addition, the Code permits the transfer of a portion of additional paid-in capital and legal reserve to common stock by resolution of the Board of Directors. The revised Code eliminated restrictions on the repurchase and use of treasury stock, allowing Japanese companies to repurchase treasury stock by a resolution of the stockholders at the general stockholders meeting and dispose of such treasury stock by resolution of the Board of Directors, commencing April 1, The repurchased amount of treasury stock cannot exceed the amount available for future dividends plus the amount of common stock, additional paid-in capital or legal reserve to be reduced in the case where such reduction was resolved at the general stockholders meeting. Dividends are approved by the stockholders at a meeting held subsequent to the fiscal year to which the dividends are applicable. Semiannual interim dividends may also be paid upon resolution of the Board of Directors, subject to certain limitations imposed by the Code. 8. Income Taxes The normal statutory rate of income taxes was approximately 42.0% for the years ended December 31, 2003 and Canon Sales Co., Inc. Annual Report 2003

27 The effective tax rates for the years ended December 31, 2003 and 2002, differed from the normal tax rate following the adoption of tax-effect accounting for the following reasons: Normal tax rate % 42.0% Entertainment and other expenses permanently not deductible for tax purposes Dividend income and other income permanently not deductible for tax purposes... (1.1) (2.2) Per-capita levy for inhabitants tax Tax effect of loss carryforwards... (0.2) (3.1) Gain on amortization of consolidation differences... (1.9) (3.4) Loss on amortization of consolidation differences Loss on sales of subsidiaries Effect of pro forma standard taxation Reduction due to IT-related tax incentives... (2.9) Other... (0.1) (0.7) Effective tax rates following the adoption of tax-effect accounting % 48.9% The effects of significant temporary differences, which resulted in deferred tax assets and liabilities as of December 31, 2003 and 2002, were as follows: Deferred tax assets: Loss on disposal and devaluation of inventories... 01,583 00,525 $005,449 Accrued business tax and business office tax ,420 Accrued bonuses to employees... 1, ,841 Software depreciation... 1,628 1,090 15,215 Allowance for doubtful receivables ,720 Liability for employee retirement benefits... 21,678 32, ,598 Other... 4,690 3,705 43,832 Gross deferred tax assets... 30,824 38, ,075 Less: valuation allowance... (1,452) (170) (13,570) Total deferred tax assets... 29,372 38,665 $274,505 Deferred tax liabilities: Deferred capital gain... 02,274 02,582 $022,561 Special depreciation reserve ,607 Other ,813 Total deferred tax liabilities ,936 6,981 Net deferred tax assets... 28,625 35,729 $267,524 Canon Sales Co., Inc. Annual Report

28 On March 31, 2003, Cabinet Order No. 9, entitled Reform of a Portion of Local Tax Law, was issued and this reform will apply to fiscal years commencing January 1, As a result of this reform, the normal statutory rate of income taxes to be used for the calculation of deferred income taxes concerning temporary differences, which are expected to be realized or settled on or after January 1, 2005, has been changed from 42.0% to 40.0%. As a result of this change, deferred tax assets decreased by 1,111 million (US$10,383 thousand), and income taxes deferred and net unrealized gain on available-for-sale securities increased by 1,105 million (US$10,327 thousand) and 6 million (US$56 thousand), respectively, for the year ended December 31, Leases (a) Finance Leases Lease payments for finance leases excluding subleases, except for lease agreements which stipulate the transfer of ownership of the lease property to the Company and its subsidiaries, were 2,875 million ($26,869 thousand) and 1,140 million for the years ended December 31, 2003 and 2002, respectively. (For Lessee) Future minimum lease payments subsequent to December 31, 2003 and 2002, were summarized as follows: Future minimum lease payments: Within one year... 3,079 1,697 $28,776 Thereafter... 4,075 2,953 38,084 7,154 4,650 $66,860 Future minimum lease payments included the following subleases: Future minimum lease payments: Within one year $1,168 Thereafter , $2, Canon Sales Co., Inc. Annual Report 2003

29 Acquisition cost, accumulated depreciation and net book value of leased property as of December 31, 2003 and 2002, excluding subleases were summarized as follows: Acquisition cost: Machinery and vehicles... 00,187 0,147 $001,748 Furniture and fixtures... 9,883 5,445 92,365 Software... 1,273 1,091 11,897 11,343 6,683 $106,010 Accumulated depreciation: Machinery and vehicles... 00,076 0,057 $000,710 Furniture and fixtures... 3,790 1,820 35,421 Software ,944 04,502 2,281 $142,075 Net book value: Machinery and vehicles... 00,111 0,090 $001,038 Furniture and fixtures... 6,093 3,625 56,944 Software ,953 46,841 4,402 $363,935 (For Lessor) Future minimum lease payments which consist of subleases subsequent to December 31, 2003 and 2002, were summarized as follows: Future minimum lease payments: Within one year $1,168 Thereafter , $2,925 (b) Operating Leases (Noncancelable) (For Lessee) Future minimum lease payments subsequent to December 31, 2002 and 2001, were summarized as follows: Future minimum lease payments: Within one year $065 Thereafter $187 Canon Sales Co., Inc. Annual Report

30 10. Contingent Liabilities Contingent liabilities at December 31, 2003 and 2002, were as follows: Guarantees for employees housing loans $3, Subsequent Event On March 26, 2004, the following appropriations of retained earnings were approved at the stockholders meeting of the Company: Cash dividends... 1,354 $12,654 Bonuses to directors ,414 $13, Segment Information Prior to the year ended December 31, 2003, the Company divided its operations into the business machines, optical products, cameras and other segments. With the introduction of an internal company system, the Company revamped this breakdown to coincide with its operational management structure and better reflect product and market characteristics, thereby improving the transparency of operational management and the relevance of segment information. Effective January 1, 2003, the Company divides its operations into business solutions, consumer equipment, industrial equipment and other. (a) Business Segment Information Millions of yen 2003 Business Consumer Industrial Corporate and Year ended or as of December 31 solutions equipment equipment Other Total eliminations Consolidated Net sales: Unaffiliated customers , ,559 71,656 3, , ,0. 757,033 Intersegment... Total , ,559 71,656 3, , ,033 Operating expenses , ,450 67,816 4, , ,046 Operating income (loss)... 2,121 11,109 3,840 (83) 16,987 16,987 Assets ,802 76,908 74, , , ,396 Depreciation and amortization... 6, ,519 8,519 Capital expenditures... 15,947 1,617 1, ,347 19, Canon Sales Co., Inc. Annual Report 2003

31 Millions of yen 2002 Business Consumer Industrial Corporate and Year ended or as of December 31 solutions equipment equipment Other Total eliminations Consolidated Net sales: Unaffiliated customers , ,061 61,737 16, , ,0. 695,585 Intersegment... Total , ,061 61,737 16, , ,585 Operating expenses , ,801 59,977 17, , ,700 Operating income (loss)... 2,649 7,260 1,760 (784) 10,885 10,885 Assets ,896 62,048 61,690 26, , , ,298 Depreciation and amortization... 6, ,180 8,805 8,805 Capital expenditures... 11,553 1,041 1, ,901 14,901 U.S. dollars 2003 Business Consumer Industrial Corporate and Year ended or as of December 31 solutions equipment equipment Other Total eliminations Consolidated Net sales: Unaffiliated customers... $4,326,000 $2,042,608 $669,682 $36,785 $7,075,075 $0,000,0. $7,075,075 Intersegment... Total... 4,326,000 2,042, ,682 36,785 7,075,075 7,075,075 Operating expenses... 4,306,178 1,938, ,794 37,561 6,916,318 6,916,318 Operating income (loss)... 19, ,823 35,888 (776) 158, ,757 Assets... 1,998, , ,963 3,410,879 1,218,990 4,629,869 Depreciation and amortization... 63,608 5,383 8,103 2,523 79,617 79,617 Capital expenditures ,037 15,112 15,458 1, , ,813 (b) Geographic Segment Information As international sales of the Company and its consolidated subsidiaries for the year ended December 31, 2003, constituted less than 10% of consolidated net sales, geographic segment information is not disclosed. Canon Sales Co., Inc. Annual Report

32 Independent Auditors Report 30 Canon Sales Co., Inc. Annual Report 2003

33 Board of Directors and Corporate Auditors President and CEO Haruo Murase Managing Directors Keiji Nagata Keiji Domon Koji Ashizawa Hiroshi Shibuya Fumitaka Yamada Masami Kawasaki Directors Hiroyuki Yoshino Kazunori Asada Masayasu Saito Toshiyuki Sanematsu Motoo Fukui Yasuhiko Kudo Hajime Iwaki Kenichiro Goto Corporate Auditors Yoshifumi Suzuki Nobuo Ishido Tetsuo Yoshizawa Kunihiro Nagata (As of March 31, 2004) Corporate Information Group Vision Evolving as a first-rate solutions provider that maximizes the creativity of the individual Capitalization 73,303,082,757 Date of Establishment February 1, 1968 Headquarters Canon S Tower, 16-6, Konan 2-chome, Minato-ku, Tokyo , Japan Number of Employees Consolidated: 15,404 Nonconsolidated: 6,963 (As of December 31, 2003) Activities Domestic marketer of Canon Inc. products; also handles related operations Locations of Operations Head office, branches, outlets and operating offices, totaling 60 (As of December 31, 2003) Canon Web Site Annual General Meeting Canon Sales Co., Inc., holds its annual general meeting for stockholders in March of each year. Principal Companies of the Canon Sales Group Canon System & Support Inc. Canon Software Inc. Canon System Solutions Inc. Canotec Co., Inc. Canon B.M. Tokyo Inc. Gunma Canon B.M. Inc. Canon B.M. Saitama Inc. Canon B.M. Kanagawa Inc. Canon B.M. Osaka Inc. Canon Supercomputing S.I. Inc. Niigata Canotec Co., Inc. Canon Trading Inc. Canon Response Service Inc. Canon Human-Net Inc. Canon Facility Management Inc. (As of March 31, 2004) Stock Listing Canon Sales Co., Inc., common stock is traded on the First Section of the Tokyo Stock Exchange. Canon S Tower Canon Sales Co., Inc. Annual Report