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)

Net income attributable to Canon Inc. stockholders
per share: 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

Canon’s consolidated financial statements are prepared in accordance with U.S. generally accepted accounting principles.

Consumption tax is excluded from the stated amount of net sales.

Canon adopted SFAS No.160 “Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB No.51” in the first quarter beginning January 1, 2009. Prior year amounts have been reclassified or adjusted to conform to SFAS 160.

Consolidated

Parent-alone

The number of employees represents the total number of employees including seasonal workers as well as others who do not work full time. The Company had 2,687 temporary employees on average during the three months ended June 30, 2009.

Business Machines

Cameras

Optical and other products

 

Total

 

Amount of production is calculated by sales price.

Consumption tax is excluded from the stated amount of production.

Business Machines

Cameras

Optical and other products

 

Total

 

Consumption tax is excluded from the stated amount of net sales.

Canon’s sales to its significant customer are summarized as follows:

Hewlett-Packard Company

 

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:

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 lose effect.

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:

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 lose effect.

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)

The Dai-Ichi Mutual Life Insurance Co.

Japan Trustee Services Bank, Ltd. (Trust Account)

Japan Trustee Services Bank, Ltd. (Trust Account 4G)

Moxley & Co.

The Master Trust Bank of Japan, Ltd. (Trust Account)

JPMorgan Chase & Co. 380055

Mizuho Corporate Bank, Ltd.

State Street Bank and Trust Company

Sompo Japan Insurance Inc.

State Street Bank and Trust Company 505225

 

total

 

Apart from the above shares, The Dai-Ichi Mutual Life Insurance Co. and Mizuho Corporate Bank, Ltd. held 6,180,000 shares and 7,704,000 shares, respectively, contributed to a trust fund for its retirement and severance plans.

Moxley & Co. is a nominee of JPMorgan Chase Bank, which is the depositary of Canon’s ADRs (American Depositary Receipts.)

Apart from the above shares, the Company owns 99,281,668 shares (7.44% of total issued shares) of treasury stock.

Mizuho Corporate Bank, Ltd. and its three affiliated companies listed below submitted a report on large share holdings to the Kanto Local Finance Bureau on July 23, 2007 in their joint names and reported that they owned 71,888,936 shares (5.39%) of the Company as of July 13, 2007 in total as detailed below. However, the Company has not confirmed the status of these holdings as of June 30, 2009.

Mizuho Corporate Bank, Ltd.

Mizuho Bank, Ltd.

Mizuho Trust & Banking Co., Ltd.

Dai-Ichi Kangyo Asset Management Co., Ltd.

(Subsequently renamed as Mizuho Asset Management Co., Ltd.)

 

total

 

 

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

High

Low

Yasuo Mitsuhashi

Toshiaki Ikoma

Junji Ichikawa

Akiyoshi Moroe

Yukiaki Hashimoto

Hiroyuki Suematsu

Kazuhiro Akiyama

 

Consolidated Balance Sheets
as of June 30, 2009 and December 31, 2008

 

 

Consolidated Statements of Income
for the six months ended June 30, 2009 and
for the three months ended June 30, 2009

 

 

Consolidated Statement of Cash Flows
for the six months ended June 30, 2009

 

 

Notes to Consolidated Financial Statements

Current assets:

Cash and cash equivalents (Note 13)

Short-term investments (Note 2)

Trade receivables, net (Note 3)

Inventories (Note 4)

Prepaid expenses and other current assets (Note 9)

 

Total current assets

 

Noncurrent receivables (Note10)

Investments (Note 2)

Property, plant and equipment, net (Note 5)

Intangible assets, net

Other assets

 

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 9)

 

Total current liabilities

Long-term debt, excluding current instalments

Accrued pension and severance cost

Other noncurrent liabilities

 

Total liabilities

 

Commitments and contingent liabilities (Note 10)

 

Equity:

Canon Inc. stockholders’ equity (Note 7):

Common stock

(Number of authorized shares)

(3,000,000,000

)

(3,000,000,000

)

(Number of issued shares)

(1,333,763,464

)

(1,333,763,464

)

Additional paid-in capital

Legal reserve

Retained earnings

Accumulated other comprehensive income (loss)

Treasury stock, at cost

(Number of shares)

(99,281,668

)

(99,275,245

)

 

Total Canon Inc. stockholders’ equity

Noncontrolling interests (Notes 1 and 7)

 

Total equity (Notes 1 and 7)

 

Total liabilities and equity

 

 

Net sales

 

Cost of sales

 

Gross profit

 

Operating expenses:

Selling, general and administrative expenses (Note 13)

Research and development expenses

 

 

 

Operating profit

 

Other income (deductions):

Interest and dividend income

Interest expense

Other, net (Notes 9, 12 and 13)

 

 

 

Income before income taxes

 

Income taxes

 

Consolidated net income (Note 1)

 

Less: Net income (loss) attributable to noncontrolling interests (Note 1)

 

Net income attributable to Canon Inc. (Note 1)

 

Net income attributable to Canon Inc. stockholders per share (Note 8):

Basic

Diluted

Cash dividends per share

Cash flows from operating activities:

Consolidated net income

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

Depreciation and amortization

Gain on disposal of property, plant and equipment

Deferred income taxes

Decrease in trade receivables

Decrease in inventories

Decrease in trade payables

Decrease in accrued income taxes

Decrease in accrued expenses

Increase 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

Increase in time deposits

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

Decrease in short-term loans

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 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. Additionally, in the accompanying consolidated financial statements, the segment information is disclosed in conformity with financial accounting standards of Japan, not with U.S. generally accepted accounting principles.

The number of consolidated subsidiaries and affiliated companies that were accounted for on the equity basis as of June 30, 2009 is 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 under Financial Accounting Standards Board (“FASB”) Interpretation No. 46 (revised December 2003) (“FIN 46R”), “Consolidation of Variable Interest Entities.” All significant intercompany balances and transactions have been eliminated.

In February 2008, the FASB issued Staff Position (“FSP”) No. FAS 157-2, “Effective Date of FASB Statement No. 157,” which delays the effective date of SFAS 157 for one year for certain nonfinancial assets and liabilities. Canon adopted SFAS 157 in the first quarter beginning January 1, 2009 for all nonfinancial assets and liabilities that are recognized or disclosed at fair value in the financial statements. This adoption did not have a material impact on Canon’s consolidated results of operations and financial condition. See Note 12 for the disclosures required by SFAS 157.

In December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business Combinations” (“SFAS 141R”). SFAS 141R establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, any noncontrolling interest in the acquiree and the goodwill acquired in a business combination. SFAS 141R also establishes disclosure requirements to enable the evaluation of the nature and financial effects of the business combination. SFAS 141R is effective for fiscal years beginning on or after December 15, 2008 and was adopted by Canon for any business combinations with an acquisition date on or after January 1, 2009. This adoption did not have a material impact on Canon’s consolidated results of operations and financial condition as of or for the period ended June 30, 2009.

In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB No. 51” (“SFAS 160”). SFAS 160 establishes accounting and reporting standards for ownership interests in subsidiaries held by parties other than the parent, the amount of consolidated net income attributable to the parent and to the noncontrolling interest, changes in a parent’s ownership interest, and the valuation of retained noncontrolling equity investments when a subsidiary is deconsolidated. SFAS 160 also establishes disclosure requirements that clearly identify and distinguish between the interests of the parent and the interests of the noncontrolling owners. SFAS 160 is effective for fiscal years beginning on or after December 15, 2008 on a prospective basis, except for certain presentation and disclosure requirements, which will be applied retrospectively for all periods presented, and was adopted by Canon in the first quarter beginning January 1, 2009. Upon the adoption of SFAS 160, noncontrolling interests, which were previously referred to as minority interests and classified between total liabilities and stockholders’ equity on the consolidated balance sheets, are now included as a separate component of total equity. In addition, consolidated net income on the consolidated statements of income now includes the net income (loss) attributable to noncontrolling interests. These financial statement presentation requirements have been adopted retrospectively and prior year amounts in the consolidated financial statements have been reclassified or adjusted to conform to SFAS 160. This adoption did not have a material impact on Canon’s consolidated results of operations and financial condition.

In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133” (“SFAS 161”). SFAS 161 amends and expands the current disclosures required by SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities” (“SFAS 133”). SFAS 161 requires entities to provide greater transparency about how and why an entity uses derivative instruments, how derivative instruments and related hedged items are accounted for under SFAS 133 and its interpretations, and how derivative instruments and related hedged items affect an entity’s financial position, result of operations and cash flows. SFAS 161 does not change the existing standards relative to recognition and measurement of derivative instruments and hedging activities. SFAS 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008 and was adopted by Canon in the first quarter beginning January 1, 2009. The adoption of SFAS 161 did not have an impact on Canon’s consolidated results of operations and financial condition. See Note 9 for the disclosures required by SFAS 161.

In April 2009, the FASB issued FSP No. FAS 107-1 and APB 28-1, “Interim Disclosures about Fair Value of Financial Instruments” (“FSP FAS 107-1 and APB 28-1”), which requires disclosure about fair value of financial instruments for interim periods. FSP FAS 107-1 and APB 28-1 is effective for interim periods ending after June 15, 2009 and was adopted by Canon prospectively, beginning in the second quarter ending June 30, 2009. This adoption did not have a material impact on Canon’s consolidated results of operations and financial condition. See Note 11 for the disclosures required by FSP FAS 107-1 and APB 28-1.

In April 2009, the FASB issued FSP No. FAS 115-2 and FAS 124-2, “Recognition and Presentation of Other-Than-Temporary Impairments” (“FSP FAS 115-2 and FAS 124-2”). FSP FAS 115-2 and FAS 124-2 amends the other-than-temporary impairment guidance for debt securities to make the guidance more operational and to improve the presentation, coupled with the requirement to additionally disclose other-than-temporary impairments on debt and equity securities in the financial statements. FSP FAS 115-2 and FAS 124-2 is effective for interim periods ending after June 15, 2009 and was adopted by Canon prospectively, beginning in the second quarter ending June 30, 2009. This adoption did not have a material impact on Canon’s consolidated results of operations and financial condition. See Note 2 for the disclosures required by FSP FAS 115-2 and FAS 124-2.

In April 2009, the FASB issued FSP No. FAS 157-4, “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly” (“FSP FAS 157-4”), which provides guidance for fair value measurements under circumstances where the volume and level of activity for the asset or liability have significantly decreased and identifying circumstances that indicate if a transaction is not orderly, along with the requirement of expanded disclosure. FSP FAS 157-4 is effective for interim periods ending after June 15, 2009 and was adopted by Canon prospectively, beginning in the second quarter ending June 30, 2009. This adoption did not have a material impact on Canon’s consolidated results of operations and financial condition. See Note 12 for the disclosures required by FSP FAS 157-4.

In May 2009, the FASB issued SFAS No. 165, “Subsequent Events” (“SFAS 165”). SFAS 165 addresses the accounting treatments and disclosures that an entity shall make about events or transactions that occurred after the balance sheet date but before the financial statements are issued or are available to be issued. SFAS 165 is effective for fiscal years and interim periods ending after June 15, 2009 and was adopted by Canon prospectively, beginning in the second quarter ending June 30, 2009. This adoption did not have a material impact on Canon’s consolidated results of operations and financial condition. See Note 14 for the disclosures required by FSP SFAS 165.

In December 2008, the FASB issued FSP No. FAS 132(R)-1, “Employers’ Disclosures about Postretirement Benefit Plan Assets” (“FSP FAS 132R-1”). FSP FAS 132R-1 requires additional disclosures about plan assets including investment allocation, fair value of major categories of plan assets, development of fair value measurements, and concentrations of risk. FSP FAS 132R-1 is effective for fiscal years ending after December 15, 2009 and is required to be adopted by Canon in the year ending December 31, 2009. Canon is currently evaluating the requirements of these additional disclosures, but does not expect the adoption of FSP FAS 132R-1 to have an impact on Canon’s 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

 

 

Noncurrent:

Available-for-sale:

Government bonds

Corporate debt securities

Fund trusts

Equity securities

 

 

Current:

Available-for-sale:

Government bonds

Fund trusts

 

 

Noncurrent:

Available-for-sale:

Government bonds

Corporate debt securities

Fund trusts

Equity securities

 

Maturities of available-for-sale debt securities and fund trusts included in short-term investments and investments in the accompanying consolidated balance sheets were as follows at June 30, 2009:

 

Due within one year

 

Due after one year through five years

 

Due after five years through ten years

 

 

 

 

Trade receivables are summarized as follows:

 

Notes

Accounts

Less allowance for doubtful receivables

 

 

 

Inventories are summarized as follows:

 

Finished goods

Work in process

Raw materials

 

 

 

Property, plant and equipment are stated at cost less accumulated depreciation and are summarized as follows:

Land

Buildings

Machinery and equipment

Construction in progress

 

 

Less accumulated depreciation

 

 

 

Fixed assets presented in the consolidated statement of cash flows includes property, plant and equipment and intangible assets.

Trade payables are summarized as follows:

 

Notes

Accounts

 

 

 

The change in the carrying amount of total equity, equity attributable to Canon Inc. stockholders and equity attributable to noncontrolling interests in the consolidated balance sheet for the six months ended June 30, 2009 was as follow:

 

Balance at December 31, 2008

 

Dividends paid to stockholders of Canon Inc.

Dividends paid to noncontrolling interests

Capital transaction by consolidated subsidiaries
and affiliated companies and other

 

Comprehensive income:

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 June 30, 2009

A reconciliation of the numerator and denominator of basic and diluted net income per share computations is as follows:

Net income attributable to Canon Inc.

Average common shares outstanding

Net income attributable to Canon Inc.
stockholders per share:

Basic

Diluted

Canon operates internationally, exposing it to the risk of changes in foreign currency exchange rates. Canon assesses foreign currency exchange rate risk by continually monitoring changes in the exposures and by evaluating hedging opportunities. Derivative financial instruments are comprised principally of foreign exchange contracts utilized by the Company and certain of its subsidiaries to reduce the risk. 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, because most of the counterparties are internationally recognized financial institutions 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 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, which are denominated in foreign currencies. In accordance with Canon’s risk management policy, a specific portion of the 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 that have been designated and qualify 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 that the hedged items affect earnings. Substantially all amounts recorded in accumulated other comprehensive income (loss) as of June 30, 2009 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 hedge ineffectiveness.

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 June 30, 2009 and December 31, 2008 are set forth below:

To sell foreign currencies

To buy foreign currencies

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 statement of income for the six and three months ended June 30, 2009.

Foreign exchange contracts

Foreign exchange contracts

Foreign exchange contracts

Foreign exchange contracts

As of June 30, 2009, commitments outstanding for the purchase of property, plant and equipment approximated ¥35,677 million, and commitments outstanding for the purchase of parts and raw materials approximated ¥52,008 million.

Canon occupies sales offices and other facilities under lease arrangements accounted for as operating leases. Deposits made under such arrangements aggregated ¥14,295 million and ¥14,223 million at June 30, 2009 and December 31, 2008, respectively, and are included in noncurrent receivables in the accompanying consolidated balance sheets.

Future minimum lease payments required under noncancelable operating leases are ¥16,158 million (within one year) and ¥39,117 million (after one year), at June 30, 2009.

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 to make in the event of default is ¥20,628 million at June 30, 2009. The carrying amounts of the liabilities recognized for Canon’s obligations as a guarantor under those guarantees at June 30, 2009 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 six months ended June 30, 2009 is summarized as follows:

Balance at December 31, 2008

Addition

Utilization

Other

 

Balance at June 30, 2009

 

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. In May 2004, VG Wort filed a civil lawsuit against Hewlett-Packard GmbH seeking levies on multi-function printers sold in Germany during the period from 1997 through 2001. This is an industry test case under which Hewlett-Packard GmbH represents other companies sharing common interests, and Canon has undertaken to be bound by the final decision of this court case. In 2008, the Federal Supreme Court delivered its short judgment in favor of VG Wort, whereby the court decided that, for MFPs sold during the period from 1997 through 2001, the same full tariff as applicable to photocopiers (EUR 38.35 to EUR 613.56 per unit, depending on the printing speed and color printing capability) should be applied. Hewlett-Packard GmbH filed a claim with the Federal Constitutional Court challenging the judgment of the Federal Supreme Court in August 2008. In June 2009, the Federal Constitutional Court rejected Hewlett-Packard GmbH’s claim. For the multi-function printers sold during the period from 2002 through 2007, VG Wort made a request for arbitration with Canon before an arbitration court in January 2007, and the arbitration court delivered their settlement proposal in December 2008. However, VG Wort rejected such settlement proposal in January 2009. Subsequently, in March 2009, a German industrial association BITKOM and VG Wort entered into a settlement about the tariffs on the multi-function printers sold in Germany during the period from 2002 to 2007. Canon acceded to this settlement and this dispute regarding copyright levy tariff on the multi-function printers sold from 2002 to 2007 has been now resolved. With respect to the period from 1997 to 2001, although the Federal Constitutional Court rejected Hewlett-Packard GmbH’s claim, it does not affect Canon as it had no sales of multi-function printers in Germany during that period. With regard to single-function printers, VG Wort filed a separate lawsuit in January 2006 against Canon seeking payment of copyright levies, 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. Canon, other companies and the industry associations have expressed opposition to such extension of the levy scope. 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. As mentioned above, the dispute over the tariff on the multi-function printers sold in Germany during the period from 2002 to 2007 was already resolved by means of settlement. Still, 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.

Canon is involved in various claims and legal actions, including those noted above, arising in the ordinary course of business. In accordance with SFAS No. 5, “Accounting for Contingencies,” Canon has recorded provisions for liabilities when it is probable that liabilities have been incurred and the amount of loss can be reasonably estimated. Canon reviews these provisions at least quarterly and adjusts these provisions to reflect the impact of the negotiations, settlements, rulings, advice of legal counsel and other information and events pertaining to a particular case. Based on its experience, Canon believes that any damage amounts claimed in the specific matters discussed above are not a meaningful indicator of Canon’s potential liability. In the opinion of management, the ultimate disposition of the above mentioned matters would not have a material adverse effect on Canon’s consolidated financial position, results of operations, or cash flows. However, litigation is inherently unpredictable. While Canon believes that it has valid defenses with respect to legal matters pending against it, it is possible that Canon’s consolidated financial position, results of operations, or cash flows could be materially affected in any particular period by the unfavorable resolution of one or more of these matters.

The fair values of Canon’s financial instruments as of June 30, 2009 and December 31, 2008 are set forth below. The following summary excludes cash and cash equivalents, time deposits, trade receivables, finance receivables, noncurrent receivables, short-term loans, trade payables and accrued expenses, for which fair values approximate their carrying amounts. The summary also excludes debt and equity securities disclosed in Note 2.

Long-term debt, including
  current installments

Foreign exchange
   contracts:

Assets

Liabilities

The following methods and assumptions are used to measure the fair value in the above table.

The fair values of Canon’s long-term debt instruments are based either on the quoted price in the most active market or the present value of future cash flows associated with each instrument discounted using Canon’s current borrowing rate for similar debt instruments of comparable maturity.

The fair values of foreign exchange contracts are measured based on the market price obtained from financial institutions.

Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instruments. These estimates are subjective in nature and involve uncertainties and matters of significant judgement and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates.

At June 30, 2009 and December 31, 2008, respectively , one customer accounted for approximately 18% and 19% of consolidated trade receivables, respectively. Although Canon does not expect that the customer will fail to meet its obligations, Canon is potentially exposed to concentrations of credit risk if the customer failed to perform according to the terms of the contracts.

SFAS 157 defines fair value as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. SFAS 157 establishes a three-level fair value hierarchy that prioritizes the inputs used to measure fair value as follows:

- Inputs are quoted prices in active markets for identical assets or liabilities.

- Inputs are quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable, and inputs that are derived principally from or corroborated by observable market data by correlation or other means.

- Inputs are derived from valuation techniques in which one or more significant inputs or value drivers are unobservable, which reflect the reporting entity’s own assumptions about the assumptions that market participants would use in establishing a price.

The following tables present Canon’s assets and liabilities that are measured at fair value on a recurring basis consistent with the fair value hierarchy provisions of SFAS No. 157.

Assets:

Cash and cash equivalents

Available-for-sale (current):

Government bonds

Available-for-sale (noncurrent):

Government bonds

Corporate debt securities

Fund trusts

Equity securities

Derivatives

 

Total assets

 

Liabilities:

Derivatives

 

Total liabilities

 

Assets:

Cash and cash equivalents

Available-for-sale (current):

Government bonds

Fund trusts

Available-for-sale (noncurrent):

Government bonds