canon sales co., inc.canon sales co., inc. annual report 2004 3 rose 7.7%, to ¥815.5 billion, and...

CANON SALES CO., INC.

ANNUAL REPORT

2004Year Ended December 31, 2004

CANON SALES CO., INC.2

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, currencyfluctuations, notably against the U.S. dollar, materials prices and political turmoil in certain countries and regions.

Photo Credit

Cover photograph of broadcasting equipment courtesy of J.League Photos Inc.

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 16 consolidated subsidiaries.

Its operations are concentrated in the following business segments: Business Solutions,

Consumer Equipment and Industrial Equipment.

The Group’s vision outlines its goal to evolve as a first-rate solutions provider that maximizes

the creativity of the individual. As it strives toward this goal, the Group also seeks to boost

revenue and income through more efficient operations. It therefore makes concerted efforts to

expand high-revenue businesses and reduce costs through superior inventory and logistical

systems. Equally important, the Group is firmly committed to strict compliance and effective,

customer-oriented management.

C O N T E N T S

Consolidated Financial Highlights ...................................... 1

To Our Stockholders .......................................................... 2

Review of Operations ........................................................ 5

Financial Section .............................................................. 15

Board of Directors and Corporate Auditors ........................ 35

Corporate Information ...................................................... 35

Canon Sales Co., Inc. Annual Report 2004 1

Net Sales Net Income (Loss) Net Income (Loss) per Share(Billions of yen) (Billions of yen) (Yen)

99 00 01 02 03 04 99 00 01 02 03 04 99 00 01 02 03 04

786.8

695.6

757.0794.9

3.4

7.0

-32.8

42.0

-217.4

42.8

23.0

46.2

840

630

420

210

0

720.3

14

7

0

-28

-35

12.490

45

0

-125

-250

815.5

6.3 6.5

81.8

Consolidated Financial HighlightsCanon Sales Co., Inc. and Consolidated SubsidiariesYears ended December 31, 2004 and 2003

Thousands ofMillions of yen U.S. dollars

2004 2003 2004

Net sales by merchandise group

Business Solutions.................................................. ¥473,428 ¥462,882 $4,552,192

Business Equipment ............................................ 236,564 248,476 2,274,654

Service and Support ............................................ 236,864 214,406 2,277,538

Consumer Equipment ............................................. 239,085 218,559 2,298,894

Industrial Equipment ............................................... 102,998 71,656 990,366

Other ...................................................................... — 3,936 —

Total ..................................................................... 815,511 757,033 7,841,452

Net income .............................................................. 12,364 7,043 118,885

Total stockholders’ equity ..................................... 234,158 225,317 2,251,519

Total assets ............................................................. ¥482,337 ¥495,396 $4,637,856

Yen U.S. dollars

Net income per share ............................................. ¥81.78. ¥46.24. $0.79

Note: The accompanying financial figures have been presented in U.S. dollars by translating all Japanese yen amounts at ¥104 to US$1, the prevailingexchange rate as of December 31, 2004.

Canon Sales Co., Inc. Annual Report 20042

Business reorganization yields record

consolidated operating income

In fiscal 2004, ended December 31, 2004, Canon

Sales Co., Inc. and its consolidated subsidiaries

transformed sales and services structures and

revamped operations to facilitate its development

as an organization that creates added value.

In the Business Solutions segment, our strategy

for business-use multifunctional products (MFPs)

centered more on providing integrated hardware

and software solutions than promoting stand-alone

sales of MFPs. Segment sales improved as the

continuing shift from monochrome to color equipment

boosted revenue from maintenance services and

supplies. At the same time, cooperation among

Group companies in the area of information technology

(IT) services began to generate results.

Efforts in the Consumer Equipment segment

focused on promoting an approach to digital

To Our Stockholders

photography whereby users enjoy every aspect

of the creative process—from taking a photograph

to printing the final image at home. As a result,

we secured the largest share of the compact digital

camera market for the second consecutive year

and the leading share of the ink-jet printer market

for the first time in eight years.

In the Industrial Equipment segment, endeavors

to raise customer satisfaction allowed us to maintain

top share of the semiconductor production

equipment market. This factor plus strong sales

of new imports other than semiconductor production

equipment contributed to higher segment revenue.

Canon Sales also promoted a thorough reas-

sessment of business processes in each segment

to ensure better streamlining, which entailed

collaborating with Canon to reorganize inventory

and logistical systems.

Owing to the above, consolidated net sales

Haruo MurasePresident and CEO


rose 7.7%, to ¥815.5 billion, and consolidated

operating income leapt 72.3%, to a record high

of ¥29.3 billion. Both results should be attributed

to several years of business reorganization.

Consolidated net income also improved significantly,

surging 75.6%, to ¥12.4 billion.

Year-end cash dividends remained at ¥11.00

per share, bringing cash dividends for the full term

to ¥22.00, up ¥4.00 compared with the previous

fiscal year-end.

Further developing as an integrated provider

of imaging and information-related solutions

The three-year management plan, running from

fiscal 2005 through fiscal 2007, outlines the further

development of Canon Sales into an integrated

provider of imaging and information-related solutions.

Such a change is in line with our Group vision of

evolving as a first-rate solutions provider that

maximizes the creativity of the individual. The plan’s

fiscal targets are shown in the table below.

From fiscal 2005, the Industrial Equipment

segment will be impacted by the downward phase

of the semiconductor industry’s business cycle.

Nevertheless, we expect the performances of the

Business Solutions and Consumer Equipment

segments to compensate for any loss in this segment.

The first strategy of the three-year management

plan is to promote profitable growth. Our goal is to

achieve an ordinary income margin of 5.0% by

fiscal 2010 by expanding highly profitable

businesses and improving cost efficiency.

In the Business Solutions segment, our objectives

are to facilitate the shift to color equipment,

enhance IT services and scale back less profitable

businesses, including stand-alone sales of computers

and sales of paper for plain-paper copiers (PPCs).

Our challenge in the Consumer Equipment

segment will be to further strengthen sales of digital

cameras, digital video cameras, compact photo

printers, and personal-use printers and MFPs.

This will bolster sales of cartridges and photo

paper, as users print more photographs at home.

Along with these efforts, we will channel our energies

into boosting sales of such professional equipment

as digital single-lens reflex (SLR) cameras and

interchangeable lenses, in addition to value-added

large format printers. As part of a drive to revamp

business processes, our focus will be on reducing

parts inventory, improving supply chain management

(SCM) and ensuring more efficient logistics through

cooperation with Canon.

The second strategy of the three-year manage-

ment plan is to record top sales in mainstay product

categories by providing the highest value to

customers, thereby bolstering our brand. This

entails more than merely winning the largest

market share. It also requires that we become

No. 1 in terms of product quality, services, tech-

nology, customer relations or any other standard

by which we are judged. In doing so, we aim to

maintain top market position for PPCs—a category

Three-Year Management Plan Targets

FY2005 FY2006 FY2007

Consolidated net sales ¥825.0 ¥870.0 ¥920.0

Consolidated operating income 25.0 29.5 33.0

Consolidated net income 12.5 16.1 18.2

(Billions of yen)


which includes business-use MFPs—laser-beam

printers (LBPs), digital cameras, ink-jet printers,

scanners, steppers and television camera lenses.

Our sights are also set on seizing the greatest

shares of the business-use color MFP, color LBP

and digital video camera markets in the near future.

Developing IT services businesses into a steady

source of profit is the third strategy of the plan.

With a vision of establishing the Canon brand in

the IT services market, we are focusing on the

following five areas:

1. Information Services such as document

solutions, knowledge management and

content management;

2. Backbone Systems, including enterprise

resource planning (ERP), customer relations

management (CRM), production management,

portable data terminals and electronic medical

charts;

3. Network Integration, encompassing network

construction, our Internet data center (iDC)

and other Internet-related services;

4. Professional Services, which offers a full

range of services, from consulting to system

construction and management; and

5. Service and Support, centered on equipment

maintenance services.

Our goal is to raise IT services sales from ¥236.9

billion in fiscal 2004 to ¥305 billion in fiscal 2007.

To accomplish this, we will reinforce our businesses

with a view to future mergers and acquisitions.

The fourth strategy of the three-year management

plan is to improve the quality of our workforce by

introducing a new personnel system and enhancing

employee education and corporate training.

Finally, the fifth strategy requires us to fulfill our

duty as a responsible corporate citizen. Accordingly,

we will make concerted efforts to reinforce our

compliance system, maintain strict information

security and privacy standards, promote internal

control evaluations and ensure more effective

environmental management.

In these and all our endeavors, we look forward

to the continued loyal support and understanding

of our stockholders, investors and other stakeholders.

March 2005

Haruo Murase

President and CEO


R E V I E W O FO P E R AT I O N S

Business Solutions ........................................ 6

Consumer Equipment ................................... 9

Industrial Equipment .................................. 13



■ Business Equipment

Business-use Multifunctional Products

Having recovered in terms of sales volume and

value in fiscal 2003, the business-use multifunc-

tional product (MFP) market continued to grow

substantially in fiscal 2004, spurred on by

launches of new color MFPs from most makers.

Increased color MFP sales—accounting for over

30% of business-use MFP sales—led to higher

revenue from maintenance services and boosted

sales in this subcategory.

Our basic policy for fiscal 2004 was to become

No. 1 in market share and sales growth. We therefore

reinforced MFP sales through a carefully planned

strategy to promote the shift from monochrome to

color MFPs. In August 2004, we launched the

iR C3220 series of color MFPs with enhanced

features, including our proprietary Java-based

Multifunctional Embedded Application Platform

(MEAP). The series, which replaced the iR C3200

Percentage ofNet Sales: 58.1%

series—a solid source of revenue in fiscal 2003—

also sold well, amounting to approximately 20% of

color MFP shipments in Japan in fiscal 2004. As a

result, total business-use MFP sales improved as

increases in color MFP sales offset a drop in sales

of monochrome MFPs.

In fiscal 2005, we will take further steps to

secure the top market share and persist with the

above strategy to promote the shift to color

MFPs. In addition, we will continue to develop

such promotional campaigns as Ask Canon! and

provide business solutions that meet users’ needs.

Laser-Beam Printers

In fiscal 2004, color laser-beam printer (LBP) sales

were firm, owing to the steady market shift toward

color equipment. Monochrome LBP sales dipped

slightly as customers realized that the newer, faster

models, when strategically positioned within the work-

place, could manage the combined workload of several

older units. This factor outweighed solid replacement

demand for monochrome units as part of mission-

critical systems. As a consequence, total LBP

shipments remained almost level and total sales in

terms of value declined, compared with fiscal 2003.

During the period under review, we strove hard

to expand an ongoing sales campaign centering

on LBP5700, a color LBP with A3-size capabilities

launched in fiscal 2004. Despite such efforts, color

iR C3220 Satera LBP5700 POWER PROJECTOR SX50 Scan To Office

B U S I N E S SSOLUTIONS

R E V I E W O F O P E R A T I O N S


LBP sales fell 10%, owing to a drop in sales of

LBPs using A4-size print media only, which countered

higher sales of A3 units.

In February 2004, we commenced sales of the

LBP3800 and LBP3700 models, the mainstays in

our lineup of A3 monochrome LBPs. To substantially

boost replacement demand, we capitalized on the

high-speed printing capabilities of monochrome

LBPs, as well as their low running costs—made

possible by our cartridge value packs.

As a result, total LBP sales declined only 5%,

despite harsh market conditions. In addition, sales

revenue from toner cartridges and other supplies

grew. This mainly reflected highly profitable color

cartridge sales that surpassed monochrome cartridge

sales, owing to firm sales of A3 color LBPs.

In fiscal 2005, we will implement a series of color

LBP launches and expand sales of business-use A3

color LBPs.

■ Service and Support

Maintenance/Support Services

Although the number of leased units in operation

remained level in fiscal 2004, sales of maintenance

services for such equipment rose. This was attributable

to stronger sales of Maintenance Guarantee (MG)

maintenance services for color MFPs due to

increased use of color equipment. Sales of

maintenance services for hardware other than

business-use MFPs more than doubled, compared

with the previous fiscal year, as a result of measures

taken to expand Canon Service Pack (CSP) sales.

In our Professional Services business, we capitalized

on customers’ growing concern about information

security. To this end, we launched several hard

disk-related services, including the removal of

MFP hard disks, which are given to customers for

disposal or safekeeping.

During the period under review, our MFP-related

business, which previously focused exclusively on

installation and maintenance, expanded to include

a broad spectrum of new services such as paid-for

demonstrations on equipment operation. This

expansion led to an approximately 8% increase

in Professional Services sales.

In addition, subsidiary Canon System &

Support Inc., which operates a network of 181

branches across Japan, registered steady

increases in sales of equipment as well as

Maintenance/Support Services.

Software

The overall software market showed signs of a

steady recovery in fiscal 2004 after emerging from

a period of stagnancy the year before. The market

also demonstrated a particular interest in network

security, personal information protection and

compliance-related products. Given this environment,

we revamped the imageWARE series of products

that allow users to enhance business-use MFP

functions. Products in the series sold well, especially

Publishing Manager, a publishing tool for printing

and binding documents. In the area of network

security, firm sales of anti-virus and data protection

software from Group company Canon System

Solutions Inc. were accompanied by improved

consulting sales.

In October 2004, we launched Scan To Office

and NetSpot Accountant—applications compatible

with MEAP installed in the iR series of business-use

MFPs. Both products will play a significant role

in differentiating our MFPs from those of our

competitors.

Note: “Service and Support” is the official name of the category

within the Business Solutions segment that encompasses

Canon Sales’ Maintenance/Support Services and Software

businesses.



The market responded extremely well to the

addition of integrated circuit (IC) card personal

identification functions that provide security for

MEAP-enabled equipment. Our plan is to propose

various IC card-centered solutions, as information

security—even the security of copiers handling

paper documents—becomes an important concern,

especially for large corporations. We also aim to

build a sales system with the ability to respond

swiftly to customer needs and offer the most suitable

proposals. This will entail enhancing employee

training on the utilization of sales channels.

Within the Canon Sales Group, Canon Software

Inc. launched new businesses including information

security management system (ISMS) consulting

services. Having acquired ISMS certification, the

subsidiary took this step to capitalize on expertise

in this area. Canon System Solutions substantially

increased sales in its system integration and support

services business by cultivating new customers.

In addition, sales of its tailored software packages,

including the proprietary security software

GUARDIANWALL, and server solutions grew

steadily. As a reflection of the efforts above, the

subsidiary posted record net sales and income.

Also, Canotec Co., Inc., which became Canon

Network Communications Inc. on January 1,

2005, strove to reinforce its business centered

on network integration.

Projectors

In fiscal 2004, sales remained flat in the projector

market, where demand polarized between smaller,

less-expensive models for business meetings and

educational purposes and the increasingly popular

high-end models with 3000–4000 lm (lumens)

specifications. In this environment, we expanded

sales promotion activities focused on the Realis

SX50, the first Canon projector.

Large Format Printers

The market for large format printers, which

accommodate print media larger than A1-size,

remained unchanged during the fiscal year under

review. From fiscal 2005, however, the market is

expected to expand. Primary reasons are

enhanced printing capabilities on various media

and the use of solution-based sales suited to

each segment of the poster printing market,

including point of purchase (POP) displays. We

sought to boost brand recognition in this area,

mainly by boosting sales of the W6200, which

was introduced to the market in November 2004.

Advertisement in Fiscal 2004




CONSUMEREQUIPMENT


■ Cameras and Video Cameras

Digital Cameras

In fiscal 2004, the digital camera market grew

1.3% in terms of shipments. Sales in terms of

value, however, edged down 0.7% reflecting a

9% drop in average unit prices due to intensified

competition between retailers in a mature market.

Slim, lightweight digital cameras with large liquid

crystal displays (LCDs) became best sellers,

accounting for 75% of the digital camera sales

market.

In this environment, we took steps to bolster

brand recognition, particularly for the IXY DIGITAL

series, by launching a series of commercials. As a

result, in every month of fiscal 2004, at least two

models from this popular series ranked among

Japan’s top ten cameras in terms of shipments.

This success played a major part in securing our

leading share of the compact digital camera market.

We anticipate greater demand for equipment

that enables consumers to print photographs at

home, as digital cameras become more common.

Accordingly, we channeled more energies and

resources into our new photo printer business.

To establish our name in this market, we introduced

the SELPHY series of compact photo printers.

The small, attractive and user-friendly design of

the SELPHY series appealed to consumers,

resulting in monthly sales rising to over 10,000

units during the period under review.

In fiscal 2005, we plan to focus on demand for

replacement and additional equipment as ownership

of digital cameras increases. At the same time,

however, we will ensure marketing that carefully

targets every category of consumer. Our goal is to

launch more desirable products, by reinforcing

cooperation between planning and research

departments and constantly monitoring purchasing

trends, consumer preferences and technological

developments.

The digital single-lens reflex (SLR) camera market

in fiscal 2004 featured products from all key makers

and experienced dynamic growth with the arrival

of new entry-level items. The rise in shipments

was mainly attributable to an increase in consumer

electronics sales channels through which consumers

purchase digital SLR cameras.

EOS 20DIXY DIGITAL 50 SELPHY CP400


wordtank V80

In the professional-use market, we established

our EOS DIGITAL brand, developing a solid reputation

among news organizations. This was demonstrated

during the Athens 2004 Olympic Games, where

90% of the digital SLR cameras used by news

organizations were EOS-1Ds Mark IIs.

We anticipate further growth in the digital SLR

camera market in fiscal 2005, despite intensifying

competition among producers. To capitalize on

this opportunity, we will utilize well-planned sales

promotion activities that target each category of user.

Video Cameras

The video camera market, which was initially

expected to remain firm throughout the period

under review, shrank, owing to the industry’s

inability to cultivate new demand. Sales in terms

of value fell, as increased competition reduced

average unit prices by approximately 10%.

Recently, video cameras using digital versatile

discs (DVDs), Secure Digital (SD) memory cards

and hard disk drives (HDDs) to record images

have appeared on the market. Developers of

new media, particularly next-generation DVDs,

will fight hard to ensure their format of recordable

media prevails. We will therefore assess new

trends and adjust our marketing strategies

appropriately.

During the period under review, we persisted in

our efforts to enhance the reputation of our mainstay

digital video cameras. To this end, we appealed to

customers by further promoting digital video cameras

that realize image quality sufficient for both still

shots and video—a concept we introduced in

fiscal 2003. At the top end of the market, we

launched the XL2 in August 2004. The product

met with strong market approval, owing to thorough

market research followed by advertising and sales

campaigns targeting professionals in the creative field.

In fiscal 2004, digital video camera sales

improved as we built on the previous year’s

considerable achievements and strengthened the

foundations of our business. Sales in terms of

shipments rose to record levels, ranking us third in

the industry by market share. In fiscal 2005, we

will reinforce our position in the video camera market

by enhancing our lineup and winning a sizable

share of sales in each price category.

■ Ink-Jet Printers and Personal-use MFPs

The market for ink-jet printers showed few signs

of growth in fiscal 2004, as the consumer shift to

MFPs accelerated. In October 2004, we launched

three MFPs with substantially enhanced functions

to bolster the perception of MFPs as value-added

devices distinct from regular ink-jet printers.

PIXUS iP4100IXY DV M3



In addition to revamping MFPs, we introduced a

completely new set of ink-jet printers. Through

these changes, we created a full lineup of ink-jet

printers and MFPs catering to every market

segment, ranging from the lower to upper price

ranges. The new products, which featured

improved designs and functions such as auto-

matic double-sided printing, stimulated demand,

particularly from users replacing older models. As

a result, ink-jet printer and MFP shipments

increased, giving us top share of the market in

terms of units shipped per annum.

In fiscal 2005, consumers will increasingly

switch to MFPs, although the overall market will

remain flat. In light of this, we aim to maintain our

leading market share by placing the appropriate

emphasis on sales of each product in our compre-

hensive lineup. In addition, we will pursue sales

and advertising strategies focusing on the key

theme of promoting photograph printing at home.

■ Other Products

Personal-use Facsimiles

The personal-use facsimile market remained firm

in terms of shipments throughout fiscal 2004.

Plunging unit prices, however, caused a sharp

drop in the total value of annual sales. This situation

impacted our business, despite efforts to ensure

profitability and a market share over 10% by

expanding and reinforcing sales channels. In contrast,

ink film sales were steady, owing to the increased

number of personal-use facsimiles owned by

consumers.

We expect solid sales from this subcategory, as

personal-use facsimiles become an integral part of

every Japanese home. Our estimates reveal that

45% of households possessed a facsimile as of

March 2004. In fiscal 2005, we will persist with the

aforementioned drive to return our personal-use

facsimile business to profitability and seize a

double-digit share of the market.



Scanners

The scanner market continued to contract, shrinking

approximately 35%, compared with the previous

fiscal year. In response, we promoted a product

strategy to maximize profits. This strategy won us

the largest market share in terms of shipments for

the fifth consecutive year and the No. 1 share as

measured by value of sales for the first time.

Moreover, Canon products occupied the top three

places in the yearly domestic rankings of best-selling

scanners.

During the period under review, we successfully

cultivated demand by promoting new PDF (portable

document format) document management and

filing system capabilities in addition to existing

functions such as film scanning.

Calculators and Electronic Dictionaries

In fiscal 2004, sales revenue and income from

calculators and electronic dictionaries improved.

We recorded sales over ¥3.0 billion for the first

time in 10 years and achieved an unbroken run of

13 profitable years. Electronic dictionaries made a

particularly strong contribution to the increase in

sales. This success was attributable to our focus

on electronic dictionaries for high school exam

preparation as well as other models containing

Chinese dictionaries. In fiscal 2005, we plan to

launch several new products to keep our monthly

share of the market above 10%.



INDUSTRIALEQUIPMENT


■ Semiconductor Production Equipment

Fine Pattern Aligners

Capital investment by semiconductor manufacturers,

which had remained high for several years, slowed

slightly in the second half of fiscal 2004. Capacity

utilization of production lines also declined.

In April 2004, we launched the FPA-6000 ES6

with a krypton-fluoride (KrF) lens that reduces

costs by functioning in a wider array of numerical

aperture (NA) and illumination conditions. As part

of our drive to boost orders, we established sales

teams with full-time members specially chosen for

a particular project. This step was taken as we

targeted demand for new 300mm-wafer production

lines, which most companies have announced

their intention to install, and imaging devices—an

area promising continuous growth. Sales in terms

of value improved considerably compared with the

previous fiscal year and our market share expanded

from less than 55% to over 60%.

Mirror Projection Aligners

From the second half of fiscal 2003 until the middle

of fiscal 2004, worldwide demand for wafer imaging

equipment strengthened, reflecting continued

investment by Japanese, Korean and Taiwanese

companies in large LCD factories. During the period

under review, however, shipments fell as a conse-

quence of dwindling capital investment in the latter

half of fiscal 2004.

To counter this, we launched two mirror projection

aligners in July 2004: the MPA-8000 and the

MPA-8500 for sixth and seventh generation glass

substrates, respectively. The launches were

accompanied by global sales activities focusing

on large LCD production lines for flat panel

televisions.

Others

In July 2004, we commenced sales of MS-100,

a manually controlled etcher produced by Alcatel

Vacuum Technology France SA, targeting the

research and development market. In addition,

we began sales of Zygo Corporation’s PTI 250

series of small aperture interferometer systems,

resulting in many orders for the highly rated

series—particularly from existing customers.

FPA-6000 ES6Fine pattern aligner

MPA-8500Mirror projection aligner

HJ22ex7.6BHDTV camera lens




■ Optical Equipment

This category encompasses a range of products

including broadcasting equipment, network cameras

and video recorders, and medical equipment. We

have singled out for review the performances of

our broadcasting equipment and network

camera and video recorder businesses.

Broadcasting Equipment

The spread of terrestrial digital television broad-

casting has encouraged television companies to

invest in high-definition television (HDTV) cameras.

We look forward to growing demand in this area—

especially from broadcasters seeking to replace

existing equipment. Owing to the appeal of such

products as the HJ22ex7.6B lens launched in fiscal

2004, we received a considerable volume of orders

for studio and portable broadcasting lenses.

Network Cameras and Video Recorders

The developing market for network cameras is

expected to benefit from a steady rise in demand.

Although most network cameras are currently

used for general monitoring, we anticipate increasing

demand for products that can function as security

cameras to guarantee safety and prevent crime.

Responding to the needs of the market, we

commenced sales of VK-64, a network video

recorder that simultaneously records video from

various places in remote locations. Other new

products included the VB-C50i and VB-C50Fi

network cameras featuring extremely powerful

optical zooms, high sensitivity to light and night

mode functions for infrared image capture.


C O N T E N T S

Six-Year Consolidated Financial Summary .......................................... 16

Financial Review ................................................................................... 17

Consolidated Balance Sheets .............................................................. 18

Consolidated Statements of Operations .............................................. 20

Consolidated Statements of Stockholders’ Equity .............................. 21

Consolidated Statements of Cash Flows ............................................. 22

Notes to Consolidated Financial Statements ....................................... 23

Report of Independent Auditors ........................................................... 34

Financial Section


Six-Year Consolidated Financial SummaryCanon Sales Co., Inc. and Consolidated SubsidiariesYears ended December 31

Thousands ofMillions of yen U.S. dollars (Note 1)

2004 2003 2002 2001 2000 1999 2004

For the year:Net sales .............................. ¥815,511 ¥757,033 ¥695,585 ¥786,828 ¥794,917 ¥720,259 $7,841,452Cost of sales......................... 547,011 507,491 467,044 542,732 541,199 504,370 5,259,721Gross profit ........................... 268,500 249,542 228,541 244,096 253,718 215,889 2,581,731Selling, general and administrative expenses ..... 239,226 232,555 217,656 224,699 233,206 197,711 2,300,250Operating income ................. 29,274 16,987 10,885 19,397 20,512 18,178 281,481Income (loss) before income taxes and minority interests ................ 20,186 20,438 6,873 (63,280) 15,313 13,770 194,096Income taxes (credit) ............ 7,666 13,219 3,361 (28,407) 7,966 7,257 73,711Net income (loss) .................. 12,364 7,043 3,436 (32,831) 6,460 6,345 118,885

At year-end:Total assets .......................... 482,337 495,396 495,298 514,698 518,958 486,176 4,637,856Total stockholders’ equity ..... 234,158 225,317 220,797 220,418 256,959 257,740 2,251,519

Yen U.S. dollars (Note 1)

Per share of common stock:Net income (loss) (Note 2) .... ¥)(281.78 ¥0,046.24 ¥)(222.96 ¥,(217.39) ¥0,042.77 ¥0,042.01 $,(0.79.Cash dividends (Note 3) ....... 22.00 18.00 18.00 18.00 18.00 18.00 0.21)Stockholders’ equity ............. 1,562.23 1,496.74 1,464.43 1,459.60 1,701.44 1,706.64 15.02)

Notes: 1. The accompanying financial figures have been presented in U.S. dollars by translating all Japanese yen amounts at ¥104 to US$1,the prevailing exchange rate as of December 31, 2004.

2. Net income (loss) per share is based on the weighted average number of shares of common stock outstanding during therespective fiscal years.

3. Cash dividends per share are the amounts applicable to the respective fiscal years, including dividends to be paid after the end ofthe year.


Financial Review

Results of OperationsSalesConsolidated net sales rose 7.7% in fiscal 2004, endedDecember 31, 2004, to ¥815.5 billion, mainly owing tobrisk sales of color multifunctional products (MFPs),digital cameras, ink-jet printers and semiconductorproduction equipment. Business Solutions sales totaled ¥473.4 billion, up 2.3%,reflecting considerably stronger sales of color MFPs andexpanding sales of toner cartridges for laser-beam printers(LBPs). Sales of Consumer Equipment climbed 9.4%, to¥239.1 billion, as Canon Sales secured the top share ofthe compact digital camera market for the second con-secutive year and the largest share of the ink-jet printermarket for the first time in eight years. Industrial Equip-ment sales surged 43.7%, to ¥103.0 billion, partly as aresult of product launches that stimulated substantialincreases in orders from new and existing customers.

EarningsOperating income reached a record high of ¥29.3 billion,an increase of 72.3% compared with the previous fiscalyear, attributable to a decrease in selling, general andadministrative expenses as a percentage of gross profit.This improvement occurred as higher gross profit coun-tered greater advertising and sales promotion expenses—incurred during a drive to expand sales—and hikes inperformance-based remuneration due to better businessresults. Net income leapt 75.6%, to ¥12.4 billion, despite ahigher loss on disposal and devaluation of inventories,expenses related to redemption of bonds and loss onimpairment of fixed assets. Net income per share was ¥81.78, compared with¥46.24 in fiscal 2003. Cash dividends per share applicableto the year were ¥22.00, up ¥4.00.

Financial PositionTotal assets of Canon Sales as of December 31, 2004,shrank 2.6%, to ¥482.3 billion. Significant items in this

result included an increase in notes and accounts receiv-able due to improved net sales, a decrease in cash andcash equivalents accompanying the redemption of long-term debt and a reduction of inventories. The sum of total current liabilities and total long-termliabilities fell 8.2%, to ¥245.5 billion, mainly reflectingredemption of long-term debt, which offset rises in notesand accounts payable and liability for employees’retirement benefits. As a result of the above factors, total stockholders’equity amounted to ¥234.2 billion, a gain of 3.9%. Returnon equity (ROE) was 5.4%, compared with 3.2% in theprevious fiscal year. Stockholders’ equity ratio was 48.5%,up from 45.5% a year earlier. Stockholders’ equity pershare reached ¥1,562.23, compared with ¥1,496.74 infiscal 2003.

Cash FlowsCash and cash equivalents at end of year were ¥98.8 bil-lion, ¥25.0 billion lower than at the beginning of the period,owing primarily to payments for redemption of bonds of¥35.0 billion. Net cash provided by operating activities amounted to¥22.1 billion, compared with ¥23.7 billion in the previousperiod. Contributing factors included income beforeincome taxes and minority interests of ¥20.2 billion, depre-ciation and amortization of ¥8.7 billion, provision foremployees’ retirement benefits of ¥5.4 billion, increasein notes and accounts receivable of ¥22.6 billion anddecrease in inventories of ¥8.5 billion. Net cash used in investing activities totaled ¥8.0 billion,compared with ¥16.3 billion in fiscal 2003, primarily com-prising payments for purchase of property and equipmentof ¥7.7 billion. Net cash used in financing activities amounted to ¥39.0billion, compared with ¥20.3 billion in the previous period,mostly owing to payments for redemption of bonds of¥35.0 billion.

0

300

600

900

-5.0

0.0

0.5

1.0

1.5

99 00 01 02 03 04

Return on Sales (ROS)

0

100

200

300

400

99 00 01 02 03 04 99 00 01 02 03 04

Working Capital

0

100

200

300

Total Stockholders’ Equityand Return on Equity (ROE)

0.0

0.6

1.2

1.8

2.4

-15

0

2

4

6(%) (%)(Times)

Net SalesROS

Total Stockholders’ EquityROE

Total Current AssetsTotal Current LiabilitiesCurrent Ratio

(Billions of yen) (Billions of yen) (Billions of yen)


Consolidated Balance SheetsCanon Sales Co., Inc. and Consolidated SubsidiariesDecember 31, 2004 and 2003


ASSETS 2004 2003 2004

Current assets:Cash and cash equivalents .................................... ¥198,844 ¥123,815 $1,950,423Notes and accounts receivable .............................. 166,360 143,678 1,599,615Inventories (Note 4) ................................................ 56,887 65,272 546,990Deferred tax assets (Note 8) .................................. 5,731 4,597 55,106Other current assets .............................................. 7,700 8,064 74,039Allowance for doubtful receivables ......................... (298) (342) (2,865)

Total current assets.......................................... 335,224 345,084 3,223,308

Property and equipment (Note 9):Land ...................................................................... 40,884 41,438 393,115Buildings and structures ........................................ 70,817 70,520 680,933Machinery .............................................................. 4 4 38Vehicles ................................................................. 27 34 260Furniture and fixtures ............................................. 19,156 20,535 184,192Rental assets ......................................................... 15,311 14,707 147,221Construction in progress ........................................ 542 — 5,212

Total ................................................................. 146,741 147,238 1,410,971Accumulated depreciation ..................................... (43,815) (42,621) (421,298)

Net property and equipment ............................ 102,926 104,617 989,673

Intangible assets:Software ................................................................ 5,009 5,344 48,163Utilization rights...................................................... 360 451 3,462Other intangible assets .......................................... 30 47 288

Total intangible assets ...................................... 5,399 5,842 51,913

Investments and other assets:Investments in securities (Notes 3 and 10) ............. 4,348 3,598 41,808Long-term loans receivable .................................... 15 64 144Lease deposits ...................................................... 9,286 9,958 89,288Deferred tax assets (Note 8) .................................. 23,073 24,204 221,856Other investments .................................................. 3,402 3,599 32,712Allowance for doubtful receivables ......................... (1,336) (1,570) (12,846)

Total investments and other assets .................. 38,788 39,853 372,962

Total assets...................................................... ¥482,337 ¥495,396 $4,637,856

See accompanying notes to consolidated financial statements.



LIABILITIES AND STOCKHOLDERS’ EQUITY 2004 2003 2004

Current liabilities:Notes and accounts payable ................................. ¥142,186 ¥139,984 $1,367,173Current portion of long-term debt (Note 5) ............. — 10,000 —Accrued income taxes ........................................... 5,343 4,287 51,375Accrued consumption tax payable ......................... 3,872 2,205 37,231Accrued expenses ................................................. 29,721 28,112 285,779Reserves ................................................................ 4,676 4,379 44,962Other current liabilities............................................ 10,014 9,091 96,288

Total current liabilities ....................................... 195,812 198,058 1,882,808

Long-term liabilities:Long-term debt (Note 5) ........................................ — 25,000 —Deferred tax liabilities (Note 8) ................................ 184 176 1,769Liability for employees’ retirement benefits (Note 6) .. 44,741 39,294 430,202Liability for directors’ and corporate auditors’ retirement benefits (Note 2) .................................. 546 473 5,250Consolidation differences ....................................... 1,928 2,639 18,538Other long-term liabilities ....................................... 2,242 1,701 21,558

Total long-term liabilities ................................... 49,641 69,283 477,317

Minority interests ................................................... 2,726 2,738 26,212

Contingent liabilities (Note 11)

Stockholders’ equity (Notes 7 and 12):Common stock:

Authorized—299,500,000 shares;Issued—150,523,896 shares in 2004 and 2003 ... 73,303 73,303 704,837

Capital surplus ....................................................... 82,522 82,484 793,480Retained earnings .................................................. 78,599 69,289 755,760Net unrealized gain on available-for-sale securities ............................................................. 678 290 6,519Foreign currency translation adjustments ............... (24) (18) (231)Treasury stock ....................................................... (920) (31) (8,846)

Total stockholders’ equity ................................ 234,158 225,317 2,251,519

Total liabilities and stockholders’ equity ........... ¥482,337 ¥495,396 $4,637,856


Consolidated Statements of OperationsCanon Sales Co., Inc. and Consolidated SubsidiariesYears ended December 31, 2004 and 2003


2004 2003 2004

Net sales ................................................................. ¥815,511 ¥757,033 $7,841,452Cost of sales .......................................................... 547,011 507,491 5,259,721

Gross profit ............................................................ 268,500 249,542 2,581,731Selling, general and administrative expenses .... 239,226 232,555 2,300,250

Operating income .................................................. 29,274 16,987 281,481Other income (expenses):

Interest and dividend income ................................. 96 89 923Interest expense .................................................... (468) (1,007) (4,500)Loss on disposal and devaluation of inventories .... (6,262) (3,986) (60,211)Loss on impairment of fixed assets ........................ (866) — (8,327)Expenses related to redemption of bonds ............. (1,660) — (15,962)Gain on sales of investments in securities .............. 23 14 221Loss on sales and disposal of property and equipment ........................................................... (1,267) (3,489) (12,183)One time amortization of consolidation differences ... — (9,784) —Gain on return of substitutional portion of governmental welfare pension program ............... — 22,192 —Expenses related to restructuring of consolidated subsidiaries .......................................................... (100) (1,087) (961)Expenses related to relocation of headquarters ..... — (728) —Provision for directors’ and corporate auditors’ retirement benefits for prior year .......................... — (788) —Other—net ............................................................. 1,416 2,025 13,615

(9,088) 3,451 (87,385)

Income before income taxes and minority interests .................................................. 20,186 20,438 194,096

Income taxes (Note 8):Current .................................................................. 7,919 5,439 76,144Deferred ................................................................. (253) 7,780 (2,433)

7,666 13,219 73,711Income before minority interests ............................ 12,520 7,219 120,385

Minority interests ....................................................... 156 176 1,500

Net income ............................................................... ¥)(12,364 ¥007,043 $0(118,885

Yen U.S. dollars (Note 1)

Per share of common stock (Note 2):Net income ............................................................ ¥81.78. ¥46.24 $0.79.Cash dividends applicable to the year.................... 22.00) 18.00 0.21.



Millions of yen

Net unrealized ForeignNumber of gain (loss) on currencyshares of Common Capital Retained available-for-sale translation Treasury

common stock stock surplus earnings securities adjustments stock

Balance at December 31, 2002 ........... 151,023,896 ¥73,303 ¥82,482 ¥65,405 ¥(175) ¥(0—. ¥(218)Net income ........................................... 7,043Cash dividends ..................................... (2,714)Bonuses to directors ............................. (81)Adjustment due to increase in consolidated subsidiaries .................... 68Gain on disposal of treasury stock ........ 2Net unrealized gain on available-for-sale securities ................. 465Foreign currency translation adjustments ... (18)Retirement of treasury stock ................. (500,000) (432) 432Increase in treasury stock—net ............. (245)

Balance at December 31, 2003 ........... 150,523,896 ¥73,303 ¥82,484 ¥69,289 ¥(290 ¥0(18). ¥0(31)Net income ........................................... 12,364Cash dividends ..................................... (3,005)Bonuses to directors ............................. (75)Adjustment due to increase in consolidated subsidiaries .................... 26Gain on disposal of treasury stock ........ 38Net unrealized gain on available-for-sale securities ................. 388Foreign currency translation adjustments ... (6)Employee welfare fund ............................ (0)Increase in treasury stock—net ............. (889)

Balance at December 31, 2004 ........... 150,523,896 ¥73,303 ¥82,522 ¥78,599 ¥(678 ¥0(24) ¥(920)

Thousands of U.S. dollars (Note 1)

ForeignNet unrealized currency

Common Capital Retained gain on available- translation Treasurystock surplus earnings for-sale securities adjustments stock

Balance at December 31, 2003 .................................. $704,837 $793,115 $666,240 $2,789 $(173) $0,(298)Net income ................................................................. 118,885Cash dividends ........................................................... (28,894)Bonuses to directors ................................................... (721)Adjustment due to increase in consolidated subsidiaries .......................................... 250Gain on disposal of treasury stock .............................. 365Net unrealized gain on available-for-sale securities ...... 3,730Foreign currency translation adjustments .................... (58)Employee welfare fund ................................................ (0)Increase in treasury stock—net ................................... (8,548)

Balance at December 31, 2004 .................................. $704,837 $793,480 $755,760 $6,519 $(231) $(8,846)


Consolidated Statements of Stockholders’ EquityCanon Sales Co., Inc. and Consolidated SubsidiariesYears ended December 31, 2004 and 2003


Consolidated Statements of Cash FlowsCanon Sales Co., Inc. and Consolidated SubsidiariesYears ended December 31, 2004 and 2003


2004 2003 2004

Cash flows from operating activitiesIncome before income taxes and minority interests ......................... ¥020,186 ¥020,438 $0,194,096Adjustments for:

Depreciation and amortization ..................................................... 8,699 8,519 83,644Loss on impairment of fixed assets .............................................. 866 — 8,327Amortization of consolidation differences ..................................... (674) (939) (6,481)One time amortization of consolidation differences....................... — 9,784 —Decrease in allowance for doubtful receivables ............................ (278) (141) (2,673)Provision for employees’ retirement benefits ................................ 5,447 5,482 52,375Provision for directors’ and corporate auditors’ retirement benefits ...................................................................................... 73 403 702Interest and dividend income ....................................................... (96) (89) (923)Interest expense .......................................................................... 2,106 1,007 20,250Equity in earnings of nonconsolidated subsidiaries and affiliates ... — (18) —Loss on sales and disposal of property, plant and equipment ...... 1,260 3,477 12,115Gain on return of substitutional portion of governmental welfare pension program ....................................................................... — (22,192) —Gain on sales of subsidiaries ........................................................ — (512) —Gain on sales of investments in securities .................................... (23) (14) (221)Increase in notes and accounts receivable ................................... (22,647) (14,251) (217,760)Decrease (increase) in inventories ................................................ 8,519 (6,709) 81,914Increase in notes and accounts payable ...................................... 2,204 8,623 21,192Other ........................................................................................... 5,440 13,681 52,308

Cash generated from operations ..................................................... 31,082 26,549 298,865Interest paid ................................................................................. (2,259) (848) (21,721)Interest and dividends received .................................................... 94 91 904Income taxes paid ....................................................................... (6,864) (2,121) (66,000)Net cash provided by operating activities ..................................... 22,053 23,671 212,048

Cash flows from investing activitiesProceeds from sale of marketable securities ................................... 3 — 29Payments for purchase of property and equipment ......................... (7,685) (18,684) (73,894)Payments for purchase of intangible assets .................................... (1,190) (1,222) (11,442)Payments for purchase of investments in securities ......................... (232) (127) (2,231)Proceeds from sales of investments in securities ............................. 96 73 923Payments for purchase of investments in subsidiaries ....................... — (8) —Payments for purchase of investments in subsidiaries accompanying changes of scope of consolidation ........................ — (9,346) —Proceeds from sales of investments in subsidiaries accompanying changes of scope of consolidation ........................ — 9,555 —Decrease in time deposits ............................................................... 5 94 48Other .............................................................................................. 1,040 3,407 10,000

Net cash used in investing activities ............................................. (7,963) (16,258) (76,567)Cash flows from financing activities

Decrease in short-term bank loans .................................................. — (6,830) —Payments for redemption of bonds ................................................. (35,000) (10,000) (336,538)Payments for purchase of treasury stock ........................................ (1,109) (543) (10,664)Dividends paid ................................................................................ (3,064) (2,733) (29,462)Other .............................................................................................. 128 (199) 1,231

Net cash used in financing activities ............................................. (39,045) (20,305) (375,433)Effect of exchange rate changes on cash and cash equivalents ......... (2) (6) (19)Net decrease in cash and cash equivalents ........................................ (24,957) (12,898) (239,971)Cash and cash equivalents at beginning of year ................................. 123,815 136,448 1,190,529Cash and cash equivalents of newly consolidated subsidiaries at beginning of year .......................................................................... 46 277 442Decrease in cash and cash equivalents resulting from exclusion of consolidated subsidiaries ................................................................. (60) (12) (577)Cash and cash equivalents at end of year .......................................... ¥098,844 ¥123,815 $1,950,423



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 consoli-dated subsidiaries are prepared on the basis of accounting principles generally accepted in Japan, which are differ-ent in certain respects as to application and disclosure requirements of International Financial Reporting Standards,and are compiled from the consolidated financial statements prepared by the Company as required by theSecurities and Exchange Law of Japan.

The U.S. dollar amounts are included solely for convenience of the reader and are stated, as a matter ofarithmetical computation only, at the exchange rate of ¥104=US$1, being the rate prevailing at December 31, 2004.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 ConsolidationThe accompanying consolidated financial statements as of December 31, 2004, include the accounts of theCompany and its 17 (20 in 2003) significant subsidiaries. Investments in nonconsolidated subsidiaries and affiliatedcompanies 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 writtendown as incurred.

(b) Cash EquivalentsFor purposes of the consolidated statements of cash flows, the Company and its consolidated subsidiariesconsider deposits with banks less than three months due to be cash equivalents.

(c) Investments in SecuritiesThe held-to-maturity debt securities are stated at amortized cost. Available-for-sale marketable securities are statedat fair market value, with unrealized gain or loss, net of the applicable taxes, reported as a separate component ofstockholders’ equity. Available-for-sale marketable securities whose fair value is not readily determinable are statedat cost determined by the moving-average method.

(d) InventoriesInventories are valued at cost. Cost is determined mainly by the moving-average method.

(e) Property, Plant and EquipmentProperty, plant and equipment are stated at cost. Depreciation is computed by the declining-balance method forproperty, plant and equipment, except for buildings purchased after April 1, 1998 (exclusive of furniture andfixtures), all buildings and structures of the Company’s Makuhari office and all property and equipment of certainsubsidiaries, which are depreciated by the straight-line method, at rates based on the estimated useful lives of theassets. The useful lives are as follows: buildings, mainly 50 years; furniture and fixtures, mainly five years. Normalrepairs and maintenance, including minor renewals and improvements, are charged to income as incurred.

(f) Accounting for Impairment of Fixed AssetsOn August 9, 2002, the Business Accounting Council issued “Statement of Opinion: Accounting for Impairment ofFixed Assets” and on October 31, 2003, the Accounting Standards Board (ASB) of Japan issued ASB GuidanceNo. 6, “Guidance for Accounting Standard for Impairment of Fixed Assets.” Since early adoption of the newaccounting standards and guidelines is permitted for fiscal years ending on or after March 31, 2004, the Companyhas applied them to its consolidated financial statements for fiscal 2004, ended December 31, 2004. As a conse-quence, income before income taxes and minority interests was impacted by an impairment loss of ¥866 million


($8,327 thousand). The accumulated losses on impairment of fixed assets are deducted directly from each asset’sacquisition cost in accordance with the new accounting standards and guidelines.

(g) Employee Retirement and Severance BenefitsThe Company and its consolidated subsidiaries have defined benefit retirement plans. These include corporatepension plans, tax-qualified retirement pension plans and lump-sum severance payments.

Effective January 1, 2001, the Company and its consolidated subsidiaries adopted a new accounting standardfor employee retirement benefits and accounted for the liability for retirement benefits based on projected benefitobligations and retirement plan assets at the balance sheet date.

The Company and certain domestic consolidated subsidiaries have also established retirement benefit trusts. Inaddition, a certain overseas consolidated subsidiary has a defined contribution pension plan.

(h) LeasesNoncancelable lease transactions are accounted for as operating leases regardless of whether such leases areclassified as operating leases or capital leases, except that lease agreements which stipulate the transfer ofownership of the leased property to the lessee are accounted for as capital leases.

(i) Allowance for Doubtful ReceivablesAn allowance for doubtful receivables is provided in the amount required to cover possible losses on collection. It isdetermined by adding individually estimated uncollectible amounts for specific items to an amount based on theactual rate of uncollected receivables of the Company in prior years.

(j) Appropriation of Retained EarningsUnder the Japanese Commercial Code (the “Code”) and the Articles of Incorporation of the Company, the plan forappropriation of retained earnings (primarily for cash dividend payments) proposed by the Board of Directors mustbe approved at the stockholders’ meeting, which is held within three months after the end of each fiscal year. Theappropriation of retained earnings reflected in the accompanying consolidated financial statements represents theresults of such appropriation applicable to the immediately preceding financial year, which were approved at thestockholders’ meeting and disposed of during that year. Dividends are paid to stockholders of record at the end ofthe fiscal year.

As is customary practice in Japan, payments of bonuses to directors and corporate auditors, which constitute apart of the appropriations cited above, are made out of retained earnings instead of being charged to income forthe fiscal year.

(k) Income TaxesDeferred tax assets and liabilities are recorded to reflect the impact of temporary differences between assets andliabilities recognized for financial reporting purposes and such amounts recognized for tax purposes. Thesedeferred taxes are measured by applying the normal statutory rate of income taxes to the temporary differences.

(l) Translation of Foreign Currency AccountsAll short-term and long-term monetary receivables and payables denominated in foreign currencies are translatedinto Japanese yen at the current exchange rates at the balance sheet date. The foreign exchange gains and lossesfrom translation are recognized in the consolidated statements of operations.

(m) Foreign Currency Financial StatementsThe balance sheet accounts and revenue and expense accounts of the foreign subsidiaries are translated intoJapanese yen at the current exchange rates except for stockholders’ equity, which is translated at the historicalexchange rate.

(n) Per Share Amount of Common StockNet income per share is based on the weighted average number of shares of common stock outstanding duringthe respective fiscal years.

Effective January 1, 2003, the Company has adopted the new accounting standard for net income per shareissued by the ASB of Japan. Under the new standards, net income per share is calculated using net income avail-able 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.

(o) Provision for Directors’ and Corporate Auditors’ Retirement BenefitsThe Company pays lump-sum retirement benefits to directors, the amount of which is determined based upon theCompany’s internal regulations. Prior to the year ended December 31, 2003, retirement benefits for directors andcorporate auditors were charged to income when paid. Effective January 1, 2003, the Company has changed itsaccounting method, and in accordance with the Company’s internal regulations a reserve is provided for such ben-efits at the amount that would be required if all directors and corporate auditors retired at the end of the fiscal year.

3. Investments in Securities

The carrying amounts and aggregate fair values of investments in securities at December 31, 2004 and 2003, wereas follows:

Millions of yen

2004

Book value Unrealized gains Unrealized losses Fair value

Securities classified as:Held-to-maturity;

Government bonds .................................. ¥231 ¥0 ¥—. ¥231

Millions of yen

2004

Cost Unrealized gains Unrealized losses Fair value

Securities classified as:Available-for-sale;

Equity securities ....................................... ¥1,886 ¥1,277 ¥(147) ¥3,016Other ....................................................... 500 1 — 501

Total ......................................................... ¥2,386 ¥1,278 ¥(147) ¥3,517

Millions of yen

2003



Equity securities ....................................... ¥1,950 ¥659 ¥(173) ¥2,436Other ....................................................... 503 0 — 503

Total ......................................................... ¥2,453 ¥659 ¥(173) ¥2,939


2004

Book value Unrealized gains Unrealized losses Fair value

Securities classified as:Held-to-maturity;

Government bonds .................................. $2,221 $0 $—. $2,221



2004



Equity securities ....................................... $18,135 $12,278 $(1,413) $29,000Other ....................................................... 4,807 10 — 4,817

Total ......................................................... $22,942 $12,288 $(1,413) $33,817

Available-for-sale securities whose fair value is not readily determinable as of December 31, 2004 and 2003, wereas follows:

Carrying amount


2004 2003 2004

Available-for-sale:Equity securities .............................................................. ¥451 ¥470 $4,337

4. Inventories

Inventories at December 31, 2004 and 2003, were composed of the following:Thousands of

Millions of yen U.S. dollars (Note 1)

2004 2003 2004

Merchandise ........................................................................ ¥50,143 ¥56,137 $482,144Service parts ........................................................................ 3,912 6,469 37,615Work in progress .................................................................. 2,080 1,869 20,000Supplies ............................................................................... 579 544 5,567Other ................................................................................... 173 253 1,664

¥56,887 ¥65,272 $546,990

5. Short-Term Bank Loans and Long-Term Debt

Long-term debt at December 31, 2004 and 2003, consisted of the following:Thousands of


2004 2003 2004

Bonds .................................................................................. ¥00,0—. ¥35,000 $000,0—.Less current portion ............................................................. — 10,000 —

¥00,0—. ¥25,000 $000,0—.


In fiscal 2004, Canon Sales entered into debt assumption agreements for the redemption of its first, fifth and sixthissues of domestic unsecured bonds. Having effectively transferred the debt obligation to other parties, theCompany treated the debt as repaid. Description of the bonds repaid is as follows:

Issue priceBond type (Millions of yen) Interest rate Date of maturity

First Domestic Unsecured Bond .............................. ¥10,000 2.950% June 29, 2007Fifth Domestic Unsecured Bond .............................. ¥10,000 2.270% July 8, 2008Sixth Domestic Unsecured Bond............................. ¥05,000 1.880% July 8, 2005

6. Employee Retirement and Severance Benefits

The Company and its domestic consolidated subsidiaries have defined benefit retirement plans. These includecorporate pension plans, 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, 2004 and 2003, consisted of the following:Thousands of


2004 2003 2004

Projected benefit obligation .................................................. ¥136,756 ¥131,483 $1,314,962Fair value of plan assets ....................................................... (93,255) (91,246) (896,683)Unrecognized transitional obligation ..................................... (43) (85) (413)Unrecognized actuarial loss .................................................. (18,692) (18,904) (179,731)Unrecognized prior service cost ........................................... 19,872 17,981 191,077Prepaid pension cost ........................................................... 103 65 990

Net liability ........................................................................ ¥044,741 ¥039,294 $0,430,202

The components of net period benefit costs for the years ended December 31, 2004 and 2003, were as follows:Thousands of


2004 2003 2004

Service cost ......................................................................... ¥(7,157 ¥(07,832 $(68,818Interest cost ......................................................................... 3,260 3,457 31,346Expected return on plan assets ............................................ (3,010) (2,836) (28,942)Amortization of transitional obligation ................................... 43 124 413Amortization of prior service cost ......................................... (1,535) (269) (14,760)Amortization of actuarial loss ................................................ 1,436 746 13,808Benefit cost for defined contribution pension plan ................ 2 2 19Gain on return of substitutional portion of governmental welfare pension program .................................................... — (22,192) —

Net periodic benefit costs ................................................ ¥(7,353 ¥(13,136) $(70,702


Assumptions used for the years ended December 31, 2004 and 2003, were principally as follows:

2004 2003

Discount rate....................................................... 2.5% 2.5%Expected rate of return on plan assets ................ 1.5%~4.0% 1.5%~4.0%Amortization period of prior service cost .............. 10~18 years 10~18 yearsRecognition period of actuarial gain or loss ......... 10~18 years 10~18 yearsAmortization 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 1,2001.

The Code was revised whereby common stock par value was eliminated, resulting in all shares being recordedwith no par value and at least 50% of the issue price of new shares being recorded as common stock and theremaining net proceeds as additional paid-in capital, which is included in capital surplus. The Code permitsJapanese companies, upon approval by their Board of Directors, to issue shares to existing stockholders withoutconsideration as a stock split. Such issuance of shares generally does not give rise to changes within thestockholders’ accounts.

The revised Code also provides that an amount equal to at least 10% of the aggregate amount of cash dividendsand certain other appropriations of retained earnings associated with cash outlays applicable to each fiscal periodshall be appropriated as a legal reserve (a component of retained earnings) until such reserve and additional paid-incapital equals 25% of common stock. The amount of total additional paid-in capital and legal reserve that exceeds25% of common stock may be available for dividends by resolution of the stockholders. In addition, the Codepermits the transfer of a portion of additional paid-in capital and legal reserve to common stock by resolution ofthe Board of Directors.

The revised Code eliminated restrictions on the repurchase and use of treasury stock, allowing Japanese compa-nies to repurchase treasury stock by a resolution of the stockholders at the general stockholders’ meeting anddispose of such treasury stock by resolution of the Board of Directors, commencing April 1, 2002. The repurchasedamount of treasury stock cannot exceed the amount available for future dividends plus the amount of commonstock, additional paid-in capital or legal reserve to be reduced in the case where such reduction was resolved atthe general stockholders’ meeting.

Dividends are approved by the stockholders at a meeting held subsequent to the fiscal year to which the divi-dends 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, 2004 and2003.

For the year ending December 31, 2005, pro forma standard taxation will be introduced, which will reduce theincome-based tax rate. As a result, the statutory tax rate for the year ending December 31, 2005, will beapproximately 40.0%.


The effective tax rates for the years ended December 31, 2004 and 2003, differed from the normal tax ratefollowing the adoption of tax-effect accounting for the following reasons:

2004 2003

Normal tax rate ............................................................................................................. 42.0% 42.0%Entertainment and other expenses permanently not deductible for tax purposes ...... 1.8 1.3Per-capita levy for inhabitants tax .............................................................................. 1.6 1.6Tax effect of loss carryforwards ................................................................................. (0.1) (0.2)Gain on amortization of consolidation differences ...................................................... (1.4) (1.9)Loss on amortization of consolidation differences ...................................................... — 20.1Valuation allowance ................................................................................................... (4.8) —Effect of pro forma standard taxation ........................................................................ 1.3 5.9Reduction due to IT-related tax incentives ................................................................. (0.5) (2.9)Other ........................................................................................................................ (1.9) (1.2)

Effective tax rates following the adoption of tax-effect accounting ................................. 38.0% 64.7%

The effects of significant temporary differences, which resulted in deferred tax assets and liabilities as ofDecember 31, 2004 and 2003, were as follows:


2004 2003 2004

Deferred tax assets:Loss on disposal and devaluation of inventories ............... ¥01,034 ¥00,583 $009,942Accrued business tax and business office tax .................. 601 580 5,779Accrued bonuses to employees ....................................... 1,274 1,160 12,250Software depreciation ...................................................... 1,877 1,628 18,048Loss on impairment of fixed assets .................................. 364 — 3,500Allowance for doubtful receivables ................................... 353 505 3,394Liability for employee retirement benefits .......................... 20,262 21,678 194,827Other ............................................................................... 4,151 4,690 39,914

Gross deferred tax assets ............................................ 29,916 30,824 287,654Less: valuation allowance ............................................. (366) (1,452) (3,519)

Total deferred tax assets .................................................. ¥29,550 ¥29,372 $284,135

Deferred tax liabilities:Deferred capital gain ........................................................ ¥02,265 ¥00,274 $022,548Special depreciation reserve ............................................. 123 172 1,183Other ............................................................................... 542 301 5,211

Total deferred tax liabilities ................................................ 930 747 8,942

Net deferred tax assets ........................................................ ¥28,620 ¥28,625 $275,193


9. Leases

(a) Finance LeasesLease payments for finance leases excluding subleases, except for lease agreements which stipulate the transferof ownership of the lease property to the Company and its subsidiaries, were ¥2,966 million ($28,519 thousand)and ¥2,875 million for the years ended December 31, 2004 and 2003, respectively.

(For Lessee)Future minimum lease payments subsequent to December 31, 2004 and 2003, were summarized as follows:


2004 2003 2004

Future minimum lease payments:Within one year ................................................................ ¥2,977 ¥3,079 $28,625Thereafter ........................................................................ 2,037 4,075 19,586

¥5,014 ¥7,154 $48,211

Future minimum lease payments included the following subleases:Thousands of


2004 2003 2004

Future minimum lease payments:Within one year ................................................................ ¥173 ¥125 $1,663Thereafter ........................................................................ 188 188 1,808

¥361 ¥313 $3,471

Acquisition cost, accumulated depreciation and net book value of leased property as of December 31, 2004 and2003, excluding subleases were summarized as follows:


2004 2003 2004

Acquisition cost:Machinery and vehicles .................................................... ¥00,323 ¥00,187 $003,106Furniture and fixtures........................................................ 9,585 9,883 92,163Software .......................................................................... 1,383 1,273 13,298

¥11,291 ¥11,343 $108,567

Accumulated depreciation:Machinery and vehicles .................................................... ¥00,103 ¥00,076 $000,991Furniture and fixtures........................................................ 5,652 3,790 54,346Software .......................................................................... 883 636 8,490

¥06,638 ¥04,502 $163,827

Net book value:Machinery and vehicles .................................................... ¥00,220 ¥0,0111 $002,115Furniture and fixtures........................................................ 3,933 6,093 37,817Software .......................................................................... 500 637 4,808

¥44,653 ¥06,841 $344,740


(For Lessor)Future minimum lease payments which consist of subleases subsequent to December 31, 2004 and 2003, weresummarized as follows:


2004 2003 2004


¥361 ¥313 $3,471

(b) Operating Leases (Noncancelable)

(For Lessee)Future minimum lease payments subsequent to December 31, 2002 and 2001, were summarized as follows:


2004 2003 2004


¥323 ¥20 $3,106

10. Assets Pledged as Collateral

Assets pledged as collateral for deferred payment of customs duties as of December 31, 2004 and 2003, were asfollows:


2004 2003 2004

Investments in securities ...................................................... ¥231 ¥— $2,221

11. Contingent Liabilities

Contingent liabilities at December 31, 2004 and 2003, were as follows:Thousands of


2004 2003 2004

Guarantees for employees’ housing loans ............................ ¥00,288 ¥337 $032,769Contingent liabilities related to the reduction of corporate bonds by debt assumption ................................................. 25,000 — 240,385

¥25,288 ¥337 $243,154


12. Subsequent Event

On March 29, 2005, the following appropriations of retained earnings were approved at the stockholders’ meetingof the Company:


Cash dividends ............................................................................................ ¥1,648 $15,846Bonuses to directors .................................................................................... 71 683

¥1,719 $16,529

13. Segment Information

(a) Business Segment Information

Millions of yen

2004

Business Consumer Industrial Corporate andYear ended or as of December 31 Solutions Equipment Equipment Total eliminations Consolidated

Net sales:Unaffiliated customers ........... ¥473,428 ¥239,085 ¥102,998 ¥815,511 ¥000,0—. ¥815,511Intersegment ......................... — — — — — —

Total .................................. 473,428 239,085 102,998 815,511 — 815,511Operating expenses .................. 463,848 227,266 95,123 786,237 — 786,237

Operating income...................... 9,580 11,819 7,875 29,274 — 29,274

Assets ....................................... 200,683 77,495 93,195 371,373 110,964 482,337Depreciation and amortization ... 6,965 751 983 8,699 — 8,699Loss on impairment of fixed assets ............................. 866 — — 866 — 866Capital expenditures .................. 17,256 512 1,282 9,050 — 9,050

Millions of yen

2003

Business Consumer Industrial Corporate andYear ended or as of December 31 Solutions Equipment Equipment Other Total eliminations Consolidated

Net sales:Unaffiliated customers ........... ¥462,882 ¥218,559 ¥71,656 ¥3,936 ¥757,033 ¥000,0—. ¥757,033Intersegment ......................... — — — — — — —

Total .................................. 462,882 218,559 71,656 3,936 757,033 — 757,033

Operating expenses .................. 460,761 207,450 67,816 4,019 740,046 — 740,046

Operating income (loss) ............. 2,121 11,109 3,840 (83) 16,987 — 16,987

Assets ....................................... 213,802 76,908 74,254 — 364,964 130,432 495,396Depreciation and amortization ... 6,806 576 867 270 8,519 — 8,519Capital expenditures .................. 15,947 1,617 1,654 129 19,347 — 19,347


Thousands of U.S. dollars

2004

Business Consumer Industrial Corporate andYear ended or as of December 31 Solutions Equipment Equipment Total eliminations Consolidated

Net sales:Unaffiliated customers ........... $4,552,192 $2,298,894 $990,366 $7,841,452 $0,000,0—. $7,841,452Intersegment ......................... — — — — — —

Total .................................. 4,552,192 2,298,894 990,366 7,841,452 — 7,841,452Operating expenses .................. 4,460,076 2,185,250 914,645 7,559,971 — 7,559,971

Operating income ...................... 92,116 113,644 75,721 281,481 — 281,481

Assets ....................................... 1,929,644 745,144 896,106 3,570,894 1,066,962 4,637,856Depreciation and amortization ... 66,971 7,221 9,452 83,644 — 83,644Loss on impairment of fixed assets ............................. 8,327 — — 8,327 — 8,327

Capital expenditures.................. 69,769 4,923 12,327 87,019 — 87,019

(b) Geographic Segment InformationAs international sales of the Company and its consolidated subsidiaries for the years ended December 31, 2004and 2003, constituted less than 10% of consolidated net sales, geographic segment information is not disclosed.


Report of Independent Auditors


Group VisionEvolving as a first-rate solutions provider that maximizes the creativity of the individual

Capitalization¥73,303,082,757

Date of EstablishmentFebruary 1, 1968

HeadquartersCanon S Tower, 16-6, Konan 2-chome,Minato-ku, Tokyo 108-8011, Japan

Number of EmployeesConsolidated: 15,489Nonconsolidated: 6,760(As of December 31, 2004)

ActivitiesDomestic marketer of Canon Inc. products;also handles related operations

Main Locations of OperationsHead office, Makuhari office and branches(Sapporo, Sendai, Nagoya, Osaka, Hiroshimaand Fukuoka)(As of April 1, 2005)

Canon Sales Web Site (Investor Relations)http://cweb.canon.jp/co-profile/ir-e

Stock ListingCanon Sales Co., Inc., common stock is traded onthe First Section of the Tokyo Stock Exchange.

DirectorsKazunori AsadaMasayasu SaitoToshiyuki SanematsuMotoo FukuiYasuhiko KudoHajime IwakiKenichiro GotoOsamu SasakiTetsuo Yoshida

President and CEOHaruo Murase

Managing DirectorsKeiji NagataKeiji DomonKoji AshizawaHiroshi ShibuyaFumitaka YamadaMasami Kawasaki

Corporate AuditorsYoshifumi SuzukiNobuo IshidoTetsuo YoshizawaKunihiro Nagata

(As of April 1, 2005)

Board of Directors and Corporate Auditors

Corporate Information

Canon S Tower

Annual General MeetingCanon Sales Co., Inc., holds its annual general meetingfor stockholders in March of each year.

Principal Companies of the Canon Sales GroupCanon System & Support Inc.Canon B.M. Tokyo Inc.Canon B.M. Kanagawa Inc.Canon B.M. Osaka Inc.Canon Software Inc.Canon Software Technology & Research Inc.Canon Software America Inc.Canon System Solutions Inc.Canon Control System (SHANGHAI) Inc.Canon Network Communications Inc.Canon Supercomputing S.I. Inc.Solution Service Inc.Canon Trading Inc.Canon Response Service Inc.Canon Human-net Inc.Canon Facility Management Inc.

(As of April 1, 2005)

Canon Sales Co., Inc.

HeadquartersCanon S Tower, 16-6, Konan 2-chome, Minato-ku, Tokyo 108-8011, Japan

Canon Sales Web Site (Investor Relations)http://cweb.canon.jp/co-profile/ir-e

canon sales co., inc.canon sales co., inc. annual report 2004 3 rose 7.7%, to ¥815.5 billion, and...

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