Amendment #1 to Form 10-K

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K/A

Amendment No. 1

 

(Mark One)

 

[X]    Annual Report Pursuant to Section 13 or 15(d) of the Securities

Exchange Act of 1934

 

For the fiscal year ended: December 31, 2003

 

[_]    Transition Report Pursuant to Section 13 or 15(d) of the Securities

Exchange Act of 1934

 

For the transition period from:    to 1-4471 (Commission File Number)

 

XEROX CORPORATION

(Exact name of registrant as specified in its charter)

 

New York      16-0468020
(State of incorporation)      (I.R.S. Employer Identification No.)

 

P.O. Box 1600, Stamford, Connecticut

(Address of principal executive offices)

 

06904

(Zip Code)

 

Registrant’s telephone number, including area code:    (203) 968-3000


This Form 10-K/A Amendment No. 1 is being filed, as required by Regulation S-X, solely for the purpose of filing the Financial Statements of Fuji Xerox Co., Limited.

 

PART IV

 

Item 15.    Exhibits, Financial Statement Schedules, and Reports on Form 8-K.

 

(a)   (1)  Index to financial statements and financial statement schedules, filed as part of this report:

 

Financial Statements

 

Report of Independent Auditors*

 

Consolidated Statements of Income for each of the years in the three-year period ended December 31, 2003*

 

Consolidated Balance Sheets as of December 31, 2003 and 2002*

 

Consolidated Statements of Cash Flows for each of the years in the three-year period ended December 31, 2003*

 

Consolidated Statements of Common Shareholders’ Equity for each of the years in the three-year period ended December 31, 2003*

 

Notes to Consolidated Financial Statements*

 

Financial Statement Schedule:

 

II - Valuation and qualifying accounts*

 

All other schedules are omitted as they are not applicable, or the information required is included in the financial statements or notes thereto.

 

    (2)  Supplementary Data

 

I—Financial Statements of Fuji Xerox Co., Ltd. and Subsidiaries (financial statements required by Regulation S-X which are excluded from the annual report to shareholders by Rule 14a-3(b))

 

Report of Independent Registered Public Accounting Firm

 

Consolidated Balance Sheets as of March 31, 2004 and March 31, 2003

 

Consolidated Statements of Income for the year ended March 31, 2004 and March 31, 2003

 

Consolidated Statements of Stockholders’ Equity for the year ended March 31, 2004 and March 31, 2003

 

Consolidated Statements of Cash Flows for the year ended March 31, 2004 and March 31, 2003

 

Notes to Consolidated Financial Statements

 

II—Financial Statements of Fuji Xerox Co., Ltd. and Subsidiaries (financial statements required by Regulation S-X which are excluded from the annual report to shareholders by Rule 14a-3(b))

 

Consolidated Balance Sheet as of March 31, 2002 and 2001*

 

Consolidated Statements of Income for the year ended March 31, 2002, the three month period ended March 31, 2001 and the year ended December 31, 2000*

 

Consolidated Statements of Comprehensive Income for the year ended March 31, 2002, the three month period ended March 31, 2001 and the year ended December 31, 2000*

 

Consolidated Statements of Stockholders’ Equity for the year ended March 31, 2002, the three month period ended March 31, 2001 and the year ended December 31, 2000*

 

Consolidated Statements of Cash Flows for the year ended March 31, 2002, the three month period ended March 31, 2001 and the year ended December 31, 2000*

 

Notes to Consolidated Financial Statements*


*   Previously filed

 

2


All other schedules are omitted as they are not applicable, or the information required is included in the financial statements or notes thereto.

 

(3)  Other Data:

 

Quarterly Results of Operations*

 

Five Years in Review*

 

Commercial and Industrial (Article 5) Schedule*

 

(4)  The exhibits filed herewith or incorporated herein by reference are set forth in the Index of Exhibits included herein.

 

(b)   A Current Report on Form 8-K dated October 23, 2003 reporting Item 12 “Results of Operations and Financial Condition” was furnished, and a Current Report on Form 8-K dated November 14, 2003 reporting Item 5 “Other Events” was filed during the last quarter of the period covered by this report.

 

(c)   Exhibit 31(a) Certification of CEO pursuant to Rule 13a-14(a) or Rule 15d-14(a).

 

  (b)   Certification of CFO pursuant to Rule 13a-14(a) or Rule 15(d)-14(a).

 

(d)   Exhibit 32 — Certification of CEO and CFO Pursuant to 18 U.S.C.§ 1350, as Adopted Pursuant to § 906 of the Sarbanes-Oxley Act of 2002.

 

(e)   The financial statements required by Regulation S-X (17 CFR 210) which are excluded from the annual report to shareholders by Rule 14a-3(b), including (1) separate financial statements of subsidiaries not consolidated and fifty percent or less owned persons, (2) separate financial statements of affiliates whose securities are pledged as collateral, and (3) schedules, are filed under Item 15(a) of this Report which are incorporated herein by reference.

*   Previously filed

 

3


SIGNATURES

 

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this amendment to be signed on its behalf by the undersigned, thereunto duly authorized.

 

 

XEROX CORPORATION

By:

   /S/    GARY R. KABURECK
    

Vice President and

Chief Accounting Officer

 

June 30, 2004

 

4


SCHEDULE I

Financial Statements of Fuji Xerox Co., Limited

(Financial statements required by Regulation S-X which are excluded
from the annual report to shareholders by Rule 14a-3(b))

Consolidated Financial Statements

Fuji Xerox Co., Ltd. and Subsidiaries

March 31, 2004


Report of Independent Registered Public Accounting Firm

 

The Board of Directors and Stockholders

Fuji Xerox Co., Ltd.

 

We have audited the accompanying consolidated balance sheets of Fuji Xerox Co., Ltd. and subsidiaries as of March 31, 2004 and 2003 and the related consolidated statements of income, stockholders’ equity and cash flows for the years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

 

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Fuji Xerox Co., Ltd. and subsidiaries at March 31, 2004 and 2003 and the consolidated results of their operations and their cash flows for the years then ended in conformity with U.S. generally accepted accounting principles.

 

As discussed in Note 2 to the consolidated financial statements, effective April 1, 2003 the Company changed its method of accounting for asset retirement obligations.

 

/s/    Ernst & Young ShinNihon

Tokyo, Japan

April 21, 2004

 

1


Fuji Xerox Co., Ltd. and Subsidiaries

 

Consolidated Balance Sheets

 

     March 31

 
     2004

    2003

 
     (Millions of yen)  

Assets

                

Current assets:

                

Cash and cash equivalents

   ¥ 43,201     ¥ 53,969  

Receivables, net (Note 3)

     186,370       167,989  

Due from stockholders (Note 15)

     25,818       20,888  

Finance receivables, net (Note 4)

     22,377       24,144  

Inventories (Note 5)

     69,607       73,488  

Deferred income taxes (Note 11)

     25,021       24,544  

Other current assets

     8,055       6,671  
    


 


Total current assets

     380,449       371,693  

Finance receivables, net (Note 4)

     46,243       48,906  

Investments (Note 6)

     23,901       18,147  

Property, plant and equipment, net (Note 7)

     168,148       168,715  

Deferred income taxes (Note 11)

     72,065       74,131  

Goodwill(Notes 8 and 18)

     111,334       111,455  

Other assets

     87,736       81,653  
    


 


Total assets

   ¥ 889,876     ¥ 874,700  
    


 


Liabilities and stockholders’ equity

                

Current liabilities:

                

Short-term debt (Note 9)

   ¥ 63,035     ¥ 80,019  

Payables (Note 15)

     155,161       135,228  

Accrued income taxes (Note 11)

     11,461       11,625  

Accrued expenses and other current liabilities

     74,810       68,533  
    


 


Total current liabilities

     304,467       295,405  

Long-term debt (Note 9)

     94,115       98,448  

Retirement and severance benefits (Note 12)

     171,645       189,798  

Deferred income taxes and other liabilities (Note 11)

     13,807       5,575  

Commitments and contingencies (Notes 10 and 17)

                

Minority interests

     10,520       26,123  

Stockholders’ equity (Note 13):

                

Common stock, with no par value:

                

Authorized – 80,000,000 shares

                

Issued – 40,000,000 shares

     20,000       20,000  

Retained earnings

     336,170       314,094  

Accumulated other comprehensive income (loss) (Note 14)

     (60,848 )     (74,743 )
    


 


Total stockholders’ equity

     295,322       259,351  
    


 


Total liabilities and stockholders’ equity

   ¥ 889,876     ¥ 874,700  
    


 


 

See notes to consolidated financial statements.

 

2


Fuji Xerox Co., Ltd. and Subsidiaries

 

Consolidated Statements of Income

 

     Year ended March 31

 
     2004

    2003

 
     (Millions of yen)  

Operating revenue (Note 15):

                

Equipment sales

   ¥ 333,170     ¥ 312,104  

Service and rentals

     354,744       348,065  

Consumables and other

     314,356       301,833  
    


 


       1,002,270       962,002  

Costs and expenses (Note 15):

                

Cost of equipment sales

     234,706       225,692  

Cost of service and rentals

     139,466       135,253  

Consumables and other

     176,234       180,737  
    


 


       550,406       541,682  

Research and development expenses

     84,420       73,844  

Selling, general and administrative expenses

     307,648       292,912  
    


 


       942,474       908,438  
    


 


Operating income

     59,796       53,564  

Other income (expense):

                

Interest and dividend income

     6,422       6,381  

Interest expenses

     (3,240 )     (4,049 )

Exchange losses, net

     (2 )     (841 )

Other, net

     (6,401 )     (3,571 )
    


 


       (3,221 )     (2,080 )
    


 


Income before income taxes, minority interests, equity in net earnings of affiliated companies and cumulative effect of change in accounting principle

     56,575       51,484  

Income taxes (Note 11):

                

Current

     26,335       26,697  

Deferred

     (2,932 )     (1,584 )
    


 


       23,403       25,113  
    


 


Income before minority interests, equity in net earnings of affiliated companies and cumulative effect of change in accounting principle

     33,172       26,371  

Minority interests

     (3,172 )     (4,675 )

Equity in net earnings of affiliated companies

     2,560       1,690  
    


 


Income before cumulative effect of change in accounting principle

     32,560       23,386  

Cumulative effect of change in accounting for asset retirement obligations, net of related income taxes (Note 2)

     (1,695 )     —    
    


 


Net income

   ¥ 30,865     ¥ 23,386  
    


 


 

See notes to consolidated financial statements.

 

3


Fuji Xerox Co., Ltd. and Subsidiaries

 

Consolidated Statements of Stockholders’ Equity

 

     Common
stock


   Retained
earnings


   

Accumulated
other
comprehensive

income (loss)


    Total
stockholders’
equity


 
     (Millions of yen)  

Balance at March 31, 2002

   ¥ 20,000    ¥ 304,588     ¥ (26,310 )   ¥ 298,278  

Comprehensive income (loss):

                               

Net income

     —        23,386       —         23,386  

Unrealized gains on securities

     —        —         (138 )     (138 )

Unrealized derivative loss

     —        —         (82 )     (82 )

Foreign currency translation

     —        —         (8,863 )     (8,863 )

Minimum pension liability

     —        —         (39,350 )     (39,350 )
                           


Net comprehensive loss

                            (25,047 )

Cash dividends

     —        (13,880 )     —         (13,880 )
    

  


 


 


Balance at March 31, 2003

     20,000      314,094       (74,743 )     259,351  

Comprehensive income (loss):

                               

Net income

     —        30,865       —         30,865  

Unrealized gains on securities

     —        —         716       716  

Unrealized derivative loss

     —        —         (134 )     (134 )

Foreign currency translation

     —        —         (1,111 )     (1,111 )

Minimum pension liability

     —        —         14,424       14,424  
                           


Net comprehensive income

                            44,760  

Cash dividends

     —        (8,789 )     —         (8,789 )
    

  


 


 


Balance at March 31, 2004

   ¥ 20,000    ¥ 336,170     ¥ (60,848 )   ¥ 295,322  
    

  


 


 


 

See notes to consolidated financial statements.

 

4


Fuji Xerox Co., Ltd. and Subsidiaries

 

Consolidated Statements of Cash Flows

 

     Year ended March 31

 
     2004

    2003

 
     (Millions of Yen)  

Operating activities

                

Net income

   ¥ 30,865     ¥ 23,386  

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

                

Depreciation and amortization

     55,763       60,326  

Increase in retirement and severance benefits, net of cash contributions

     7,700       4,292  

Deferred income taxes

     (2,932 )     (1,584 )

Loss on disposal of property, plant and equipment

     5,007       8,059  

Equity in earnings of affiliates, less dividends

     (1,483 )     (856 )

Minority interests in earnings of subsidiaries

     3,172       4,675  

Changes in operating assets and liabilities:

                

Receivables

     (22,932 )     2,367  

Finance receivables

     5,744       5,025  

Inventories

     4,207       7,517  

Payables

     20,681       4,930  

Accrued income taxes

     (1,158 )     3,650  

Accrued expenses and other current liabilities

     4,126       1,755  

Other, net

     (2,174 )     (2,469 )
    


 


Net cash provided by operating activities

     106,586       121,073  

Investing activities

                

Proceeds from sales of property, plant and equipment

     1,174       1,761  

Capital expenditures

     (49,049 )     (44,722 )

Payments for purchases of software

     (24,755 )     (24,981 )

Acquisition of businesses, net of cash acquired

     (17,085 )     (17,481 )

Other, net

     2,749       1,701  
    


 


Net cash used in investing activities

     (86,966 )     (83,722 )

Financing activities

                

Proceeds from long-term debt

     5,524       5,340  

Repayments of long-term debt

     (13,297 )     (11,988 )

Decrease in short-term debt, net

     (10,847 )     (22,306 )

Increase (decrease) in commercial paper, net

     (2,000 )     11,000  

Dividends paid

     (8,789 )     (13,880 )
    


 


Net cash used in financing activities

     (29,409 )     (31,834 )

Effect of exchange rate changes on cash and cash equivalents

     (979 )     (1,369 )
    


 


Net increase (decrease) in cash and cash equivalents

     (10,768 )     4,148  

Cash and cash equivalents at beginning of year

     53,969       49,821  
    


 


Cash and cash equivalents at end of year

   ¥ 43,201     ¥ 53,969  
    


 


Cash paid during the year for:

                

Interest

   ¥ 3,298     ¥ 4,237  

Income taxes

     26,078       23,684  

 

See notes to consolidated financial statements.

 

5


Fuji Xerox Co., Ltd. and Subsidiaries

 

Notes to Consolidated Financial Statements

 

March 31, 2004

 

1. Description of Business

 

Fuji Xerox Co., Ltd. (the “Company”) was established as a joint venture owned equally by Fuji Photo Film Co., Ltd. and Xerox Limited, a wholly-owned subsidiary of Xerox Corporation. On March 30, 2001, Fuji Photo Film Co., Ltd. acquired an additional 25% interest through the acquisition of shares from Xerox Limited. After the acquisition, Fuji Photo Film Co., Ltd. became the controlling stockholder.

 

The Company operates primarily in Japan, China, the Asia Pacific and other regions. The Company has five factories in Japan, two in China (Shenzhen and Shanghai) and one in Korea.

 

The Company’s principal business is the manufacture and sale of office automation equipment such as copiers and printers and providing related services.

 

Domestic revenues and overseas revenues from China, the Asia Pacific and other regions based on the location of customers were 74% and 26%, respectively, for the year ended March 31, 2004 and 76% and 24%, respectively, for the year ended March 31, 2003.

 

2. Summary of Significant Accounting Policies

 

The Company and its domestic subsidiaries maintain their records and prepare their financial statements in accordance with accounting principles generally accepted in Japan. The Company’s foreign subsidiaries maintain their records and prepare their financial statements in conformity with the conventions of their countries of domicile. Certain reclassifications and adjustments have been incorporated in the consolidated financial statements to conform them to accounting principles generally accepted in the United States of America. These adjustments have not been recorded in the Company’s statutory books of account.

 

Significant accounting policies, after reflecting the adjustments referred to above, are summarized as follows:

 

Consolidation Policy

 

The consolidated financial statements include the accounts of the Company and its majority-owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. For purpose of financial reporting, certain foreign subsidiaries have a February 28 fiscal year end. Therefore, the Company recognizes the results of operations and financial position of such subsidiaries on a basis of a one month lag. There have been no significant transactions with such subsidiaries during the period from March 1 to March 31.

 

Investments in affiliates in which the Company’s ownership is 20% to 50% are accounted for by the equity method.

 

6


Fuji Xerox Co., Ltd. and Subsidiaries

 

Notes to Consolidated Financial Statements (continued)

 

2. Summary of Significant Accounting Policies (continued)

 

Use of Estimates

 

The preparation of financial statements requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.

 

Foreign Currency Translation

 

Foreign currency financial statements have been translated into Japanese yen at the rates of exchange in effect at the balance sheet date for assets and liabilities and the average exchange rates prevailing during the period for revenue and expense items. Gains and losses resulting from foreign currency transactions are included in other income (expenses), and those resulting from translation of foreign currency financial statements are excluded from the statement of income and are accumulated in other comprehensive income (loss), a separate component of stockholders’ equity.

 

Cash Equivalents

 

The Company considers all highly liquid investments which are readily convertible into cash and have original maturities of three months or less on the date of purchase to be cash equivalents.

 

Concentration of Credit Risk

 

The majority of cash and cash equivalents are maintained with financial institutions. Deposits with these banks may exceed the amount of insurance provided on such deposits, however, these deposits typically may be redeemed upon demand and, therefore, bear minimal risk.

 

The Company sells products to customers primarily in Japan, China, the Asia Pacific and other regions. The Company has no customer whose revenues were more than 10% of consolidated revenue. The Company performs ongoing credit evaluations of customers, and generally does not require collateral. Allowances are maintained for potential credit losses and such losses have been within management’s expectations.

 

Allowance for Doubtful Receivables

 

The provisions for losses on uncollectible trade and finance receivables are determined principally on the basis of past collection experience applied to ongoing evaluations of receivables and evaluations of the risks of repayment.

 

7


Fuji Xerox Co., Ltd. and Subsidiaries

 

Notes to Consolidated Financial Statements (continued)

 

2. Summary of Significant Accounting Policies (continued)

 

Marketable Securities and Investment Securities

 

The Company has classified its marketable and investment securities as available-for-sale which are reported at fair value with unrealized gains and losses, net of related taxes, excluded from the statement of income and included in other comprehensive income (loss) to be reported as a separate component of stockholders’ equity. The Company does not hold any trading securities or held-to-maturity securities. Realized gains and losses on the sale of available-for-sale securities are determined by the moving-average method. When a decline in value of a marketable security is deemed to be other-than-temporary, the Company recognizes an impairment loss to the extent of the decline. In determining if and when such a decline in value is other-than-temporary, the Company evaluates market conditions, trends of earnings, and other key measures.

 

Inventories

 

Inventories are valued at the lower of cost or market with cost generally being determined by the weighted average method.

 

Property, Plant and Equipment

 

Depreciation of property, plant and equipment is computed principally by the declining balance method based on estimated useful lives, except for the rental machines and buildings that were acquired on or after April 1, 1998. Depreciation of the rental machines and buildings that were acquired on or after April 1, 1998 is computed by the straight-line method. The following summarizes the estimated useful lives of property, plant and equipment by major class:

 

Rental machines

   2 –3 years

Buildings and structures

   3 – 50

Machinery and equipment

   4 – 17

Vehicles

   3 – 7

Tools, furniture and fixtures

   2 – 20

 

Software

 

Certain costs incurred to develop or obtain internal use computer software are capitalized and amortized on a straight-line basis principally over 5 years. Capitalized software for internal use with a cost and accumulated amortization of ¥76,273 million and ¥26,025 million as of March 31, 2004 and ¥65,306 million and ¥25,205 million as of March 31, 2003, respectively, were included in other assets. Amortization expenses of internal use software for the years ended March 31, 2004 and 2003 were ¥9,015 million and ¥8,143 million, respectively.

 

8


Fuji Xerox Co., Ltd. and Subsidiaries

 

Notes to Consolidated Financial Statements (continued)

 

2. Summary of Significant Accounting Policies (continued)

 

Goodwill and Other Intangible Assets

 

Goodwill represents the excess of purchase price over the fair value of the net assets acquired. Until March 31, 2002, it had been amortized on a straight-line basis over the periods of 20 to 40 years, except for goodwill acquired in a business combination completed after June 30, 2001.

 

In July 2001, the Financial Accounting Standards Board (“FASB”) issued Statement No. 142, “Goodwill and Other Intangible Assets” (“FAS 142”), which requires that goodwill and certain other intangible assets having indefinite lives no longer be amortized to earnings, but instead be subject to periodic testing for impairment. Intangible assets determined to have finite lives will continue to be amortized over their useful lives.

 

The Company adopted FAS 142 effective April 1, 2002, except for any goodwill and any other indefinite lived intangible assets that were acquired in a business combination completed after June 30, 2001 for which the new rules have been applied since July 1, 2001. As of the date of adoption, the Company had goodwill amounting to ¥98,839 million on which no impairment was recognized as a result of the initial transition impairment test. Indefinite lived intangible assets as of that date were not material.

 

The Company performs annual goodwill impairment test as of January 1 comparing the fair value of a reporting unit, generally based on discounted future cash flows, with its carrying amount including goodwill. If the carrying amount of a reporting unit exceeds its fair value, an impairment loss is measured as the difference between the fair value and the carrying amount of goodwill of that particular reporting unit.

 

Impairment of Long-Lived Assets

 

The Company evaluates long-lived assets, excluding goodwill and other intangible assets not being amortized, for impairment whenever events or changes in business circumstances indicate the carrying amount of the assets may not be fully recoverable. If an evaluation is required, the estimated future undiscounted cash flows associated with an asset group would be compared to the asset group’s carrying amount to determine if a writedown is required. If this evaluation indicates that the assets will not be recoverable, the carrying value of the Company’s assets would be reduced to their estimated fair value.

 

Long-lived assets to be disposed of by sale are evaluated at the lower of carrying amount or fair value less cost to sell.

 

9


Fuji Xerox Co., Ltd. and Subsidiaries

 

Notes to Consolidated Financial Statements (continued)

 

2. Summary of Significant Accounting Policies (continued)

 

Revenue Recognition

 

The Company recognizes revenue when it is realized or realizable and earned. The Company considers revenue realized or realizable and earned when it has persuasive evidence of an arrangement, the products or services have been provided to customers, the sales price is fixed or determinable, and collectibility is reasonably assured.

 

The above conditions are generally met when products are delivered to customers for product sales, services are performed or at the inception of leases for revenue from sales-type leases. Associated interest income on sales-type leases is recognized using the effective interest method with the allocation based on the net investment in outstanding leases. Rental from operating leases are recognized as earned over the respective lease terms. Consumable and other includes revenue from toners, ink, papers and copy services, which are recognized upon shipment of consumables or when services are rendered. Certain sales incentives are deducted from revenue.

 

The Company generally sells or leases copiers with maintenance service contracts. Under the Emerging Issues Task Force Issue 00-21, “Revenue Arrangements with Multiple Deliverables” (“EITF 00-21”), the deliverables must be divided into separate units of accounting when the individual deliverables have value to the customer on a stand-alone basis, when there is objective and reliable evidence of the fair value of the undelivered elements, and if the arrangement includes a general right to return the delivered element, delivery or performance of the undelivered element is considered probable. The relative fair value of each unit should be determined and the total consideration of the arrangement should be allocated among the individual units based on their relative fair value. The Company recognizes revenue on the sales of copier upon delivery to customers and revenue on the maintenance service over the term of the contracts based on the respective fair value. Leases are accounted for in accordance with the provisions of FAS 13. EITF was effective for revenue arrangements entered into after June 30, 2003, however, it did not have a significant impact on the Company’s financial position or results of operations.

 

Shipping and Handling Costs

 

The Company includes shipping and handling costs, which totaled ¥20,737 million and ¥14,737 million for the years ended March 31, 2004 and 2003, respectively, in selling, general and administrative expenses.

 

Advertising Costs

 

Included in selling, general and administrative expenses are advertising costs which are expensed as incurred. Advertising costs amounted to ¥ 8,613 million and ¥10,394 million for the years ended March 31, 2004 and 2003, respectively.

 

10


Fuji Xerox Co., Ltd. and Subsidiaries

 

Notes to Consolidated Financial Statements (continued)

 

2. Summary of Significant Accounting Policies (continued)

 

Income Taxes

 

Income taxes are accounted for under the liability method. Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the period in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rate is recognized in income in the period that includes the enactment date. Valuation allowances are established to reduce deferred tax assets to their net realizable value if it is more likely than not that some portion or all of the deferred tax assets will not be realized.

 

Derivative Financial Instruments

 

The Company recognizes all derivatives as either assets or liabilities in the statement of financial position and measures those instruments at fair value. Derivatives that are not hedges must be adjusted to fair value through income. If the derivative is a hedge, depending on the nature of the hedge, to the extent the hedge is effective, changes in fair value will either be offset against the change in fair value of the hedged assets, liabilities, or firm commitments through earnings, or recognized in other comprehensive income until the hedged item is recognized in earnings.

 

Asset Retirement Obligations

 

In June 2001, the FASB issued FAS 143, “Accounting for Asset Retirement Obligations,” which addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. Upon initial recognition of a liability, the cost is capitalized as part of the related long-lived asset and allocated to expense over the useful life of the asset. The Company adopted this standard on April 1, 2003 and recorded a noncash charge of ¥1,695 million, net of related income taxes of ¥1,413 million, related to lease arrangements for certain offices to reflect the cumulative effect of change in accounting principle.

 

Reclassifications

 

Certain amounts in prior years’ consolidated financial statements and related footnotes have been reclassified to conform to the presentation in the current year.

 

11


Fuji Xerox Co., Ltd. and Subsidiaries

 

Notes to Consolidated Financial Statements (continued)

 

3. Receivables

 

Receivables at March 31, 2004 and 2003 are summarized as follows:

 

     2004

    2003

 
     (Millions of yen)  

Trade:

                

Notes

   ¥ 8,644     ¥ 9,376  

Accounts

     167,040       152,935  

Other

     12,403       7,774  
    


 


       188,087       170,085  

Less allowance for doubtful receivables

     (1,717 )     (2,096 )
    


 


     ¥ 186,370     ¥ 167,989  
    


 


 

4. Finance Receivables

 

Finance receivables are recorded for sales-type leases resulting from the marketing of the Company’s equipment. The components of finance receivables at March 31, 2004 and 2003 are as follows:

 

     2004

    2003

 
     (Millions of yen)  

Gross receivables

   ¥ 85,228     ¥ 90,661  

Unearned income

     (13,520 )     (14,635 )

Less allowance for doubtful receivables

     (3,088 )     (2,976 )
    


 


       68,620       73,050  

Less current portion

     (22,377 )     (24,144 )
    


 


     ¥ 46,243     ¥ 48,906  
    


 


 

The future minimum lease payments to be received under sales-type leases as of March 31, 2004 are summarized as follows:

 

     (Millions of yen)

Year ending March 31:

      

2005

   ¥ 30,602

2006

     23,076

2007

     16,951

2008

     10,392

2009

     3,857

2010 and thereafter

     350
    

Total future minimum lease payments

   ¥ 85,228
    

 

12


Fuji Xerox Co., Ltd. and Subsidiaries

 

Notes to Consolidated Financial Statements (continued)

 

5. Inventories

 

Inventories at March 31, 2004 and 2003 are summarized as follows:

 

     2004

   2003

     (Millions of yen)

Finished goods

   ¥ 42,887    ¥ 46,339

Parts

     5,669      6,209

Raw materials

     9,533      7,516

Work in process

     7,686      7,847

Supplies

     3,832      5,577
    

  

     ¥ 69,607    ¥ 73,488
    

  

 

6. Investments

 

Investments at March 31, 2004 and 2003 are summarized as follows:

 

     2004

   2003

     (Millions of yen)

Investments in affiliates

   ¥ 18,863    ¥ 14,214

Investment securities

     5,038      3,933
    

  

     ¥ 23,901    ¥ 18,147
    

  

 

Investments in affiliates accounted for by the equity method at March 31, 2004 and 2003 were as follows :

 

     2004

   2003

     (Millions of yen)

FUJIFILM Logictics Co., Ltd.

   ¥ 4,216    ¥ —  

Xerox International Partnership

     8,547      8,434

Taiwan Fuji Xerox Corporation

     4,048      4,079

Other investments

     2,052      1,701
    

  

Investments in affiliates

   ¥ 18,863    ¥ 14,214
    

  

 

At April 1, 2003, Fuji Xerox Distribution Co., Ltd (FXDC), a wholly owned subsidiary involved with distribution of the Company’s products was merged with FUJIFILM Logistics Co., Ltd. (FFL), a wholly owned subsidiary of Fuji Photo Film Co., Ltd. As a result, the Company obtained a 39% interest of FFL by replacing 100% ownership of FXDC. The transaction was accounted for as a reorganization of entities under common control. The carrying value of the business contributed was equal to the equity in net assets received.

 

13


Fuji Xerox Co., Ltd. and Subsidiaries

 

Notes to Consolidated Financial Statements (continued)

 

6. Investments (continued)

 

Xerox International Partnership (XIP) is a joint venture 51% owned by Xerox Corporation and 49% owned by the Company.

 

Taiwan Fuji Xerox Corporation is a joint venture 48% owned by the Company.

 

There are no significant differences between the carrying value of the investments and the amount of the underlying equity in net assets. There is no readily determinable market value for the Company’s significant affiliates.

 

Investment securities mainly consist of available-for-sale securities and certain non-marketable equity securities. The cost, gross unrealized gains, gross unrealized losses, and fair value for available-for-sale securities by major security type at March 31, 2004 and 2003 are summarized as follows:

 

     2004

 
     Cost

    Gross
unrealized
gains


   Gross
unrealized
losses


   Fair
value


 
     (Millions of yen)  

Japanese and foreign government debt securities

   ¥ 100     ¥ 3    ¥ —      ¥ 103  

Corporate debt securities

     106       —        —        106  

Equity securities

     1,459       1,232      24      2,667  
    


 

  

  


       1,665       1,235      24      2,876  

Less due within one year

     (30 )     —        —        (30 )
    


 

  

  


     ¥ 1,635     ¥ 1,235    ¥ 24    ¥ 2,846  
    


 

  

  


     2003

 
     Cost

    Gross
unrealized
gains


   Gross
unrealized
losses


   Fair
value


 
     (Millions of yen)  

Japanese and foreign government debt securities

   ¥ 100     ¥ 7    ¥ —      ¥ 107  

Corporate debt securities

     60       —        3      57  

Equity securities

     1,571       211      215      1,567  
    


 

  

  


       1,731       218      218      1,731  

Less due within one year

     (30 )     —        —        (30 )
    


 

  

  


     ¥ 1,701     ¥ 218    ¥ 218    ¥ 1,701  
    


 

  

  


 

14


Fuji Xerox Co., Ltd. and Subsidiaries

 

Notes to Consolidated Financial Statements (continued)

 

6. Investments (continued)

 

Non-marketable equity and other securities, which are carried at cost, are ¥2,192 million and ¥2,232 million at March 31, 2004 and 2003, respectively. All investments are reduced to net realizable value for other-than-temporary declines in value.

 

Gross realized losses on available-for-sale securities, which include the losses recognized on declines in value considered as other-than-temporary, were ¥50 million and ¥671 million for the years ended March 31, 2004 and 2003, respectively. Gross realized gains from the sales of available-for-sale securities for the years ended March 31, 2004 and 2003 were ¥8 million and ¥245 million, respectively. Realized gains and losses and declines in value considered as other-than-temporary are included in other income (expense).

 

7. Property, Plant and Equipment

 

Property, plant and equipment at March 31, 2004 and 2003 are summarized as follows:

 

     2004

    2003

 
     (Millions of yen)  

Rental machines

   ¥ 82,993     ¥ 84,283  

Land

     22,132       22,104  

Buildings and structures

     159,908       153,018  

Machinery and equipment

     55,182       54,847  

Vehicles

     2,981       3,586  

Tools, furniture and fixtures

     178,277       179,815  

Construction in progress

     5,098       4,020  
    


 


       506,571       501,673  

Accumulated depreciation

     (338,423 )     (332,958 )
    


 


     ¥ 168,148     ¥ 168,715  
    


 


 

Accumulated depreciation of rental machines at March 31, 2004 and 2003 are ¥58,487 million and ¥59,761 million, respectively.

 

15


Fuji Xerox Co., Ltd. and Subsidiaries

 

Notes to Consolidated Financial Statements (continued)

 

8. Goodwill

 

The changes in goodwill during the years ended March 31, 2004 and 2003 were as follows:

 

     (Millions of yen)  

Balance at April 1, 2002

   ¥ 98,839  

Acquisition

     15,693  

Impairment

     —    

Other

     (3,077 )
    


Balance at March 31, 2003

     111,455  

Acquisition

     —    

Impairment

     —    

Other

     (121 )
    


Balance at March 31, 2004

   ¥ 111,334  
    


 

Other primarily consists of foreign exchange translation adjustments.

 

9. Short-Term Debt and Long-Term Debt

 

Short-term debt at March 31, 2004 and 2003 are summarized as follows:

 

     2004

   2003

     (Millions of yen)

Short-term debt, mainly to banks

   ¥ 39,993    ¥ 51,359

Commercial paper

     12,000      14,000

Current installments of long-term debt

     11,042      14,660
    

  

     ¥ 63,035    ¥ 80,019
    

  

 

The weighted average interest rates on short-term debt at March 31, 2004 and 2003 were 3.8% and 3.2%, respectively. The weighted average interest rates on commercial paper outstanding at March 31, 2004 and 2003 were 0.018% and 0.02%, respectively.

 

16


Fuji Xerox Co., Ltd. and Subsidiaries

 

Notes to Consolidated Financial Statements (continued)

 

9. Short-Term Debt and Long-Term Debt (continued)

 

Long-term debt at March 31, 2004 and 2003 consist of the following:

 

     2004

    2003

 
     (Millions of yen)  

Unsecured loans from banks and insurance companies due 2004 to 2012, with weighted average interest rates of approximately 1.42% at March 31, 2004 and 1.54% at March 31, 2003

   ¥ 49,946     ¥ 53,975  

Unsecured yen medium term notes:

                

1.49% medium term notes, due 2004

     —         5,000  

0.94% medium term notes, due 2004

     —         3,200  

0.20% medium term notes, due 2005

     3,000       3,000  

0.20% medium term notes, due 2005

     3,400       3,400  

1.99% medium term notes, due 2006

     5,000       5,000  

0.36% medium term notes, due 2006

     3,800        

Unsecured yen bonds:

                

0.62% bonds, due 2007

     3,000       3,000  

0.65% bonds, due 2007

     7,500       7,500  

1.63% bonds, due 2008

     5,000       5,000  

1.01% bonds, due 2009

     6,100       6,100  

1.01% bonds, due 2009

     2,000       2,000  

1.99% bonds, due 2011

     10,000       10,000  

1.52% bonds, due 2012

     3,000       3,000  

Other

     3,411       2,933  
    


 


       105,157       113,108  

Less current installments

     (11,042 )     (14,660 )
    


 


Long-term debt, excluding current installments

   ¥ 94,115     ¥ 98,448  
    


 


 

The aggregate annual maturities of long-term debt outstanding at March 31, 2004 are as follows:

 

     (Millions of yen)

Year ending March 31:

      

2005

   ¥ 11,042

2006

     11,017

2007

     24,406

2008

     5,406

2009

     24,769

2010 and thereafter

     28,517
    

     ¥ 105,157
    

 

17


Fuji Xerox Co., Ltd. and Subsidiaries

 

Notes to Consolidated Financial Statements (continued)

 

9. Short-Term Debt and Long-Term Debt (continued)

 

As is customary in Japan, both short-term and long-term bank loans are made under general agreements which provide that security and guarantees for present and future indebtedness will be given upon request of the bank, and that the bank shall have the right to offset cash deposits against obligations that have become due or, in the event of default, against all obligations due to the bank.

 

10. Lease Commitments

 

The Company and its subsidiaries occupy certain offices and other facilities and use certain equipment under operating lease arrangements. Lease deposits of ¥19,043 million and ¥21,000 million as of March 31, 2004 and 2003, respectively, are included in other assets. The future minimum lease payments required under operating leases which, at March 31, 2004, have initial or remaining noncancelable lease term in excess of one year are summarized as follows:

 

     (Millions of yen)

Year ending March 31:

      

2005

   ¥ 1,823

2006

     1,368

2007

     863

2008

     631

2009

     497

2010 and thereafter

     390
    

Total future minimum lease payments

   ¥ 5,572
    

 

Rental expense under operating leases were ¥28,186 million and ¥27,212 million for the years ended March 31, 2004 and 2003, respectively.

 

11. Income Taxes

 

Income taxes applicable to the Company and its domestic subsidiaries comprise corporation, inhabitants’ and enterprise taxes which, in the aggregate, result in a statutory tax rate of approximately 42%. A change in the Japanese local tax regulations, enacted in March 2003 and effective on April 1, 2004, reduces the enterprise tax rate from 9.6% to 7.2%. When effective, the combined Japanese statutory tax rate will be reduced from approximately 42% to 40.5%. The lower combined statutory tax rate resulted in reductions of the Company’s deferred tax assets of ¥1,207 million and ¥2,612 million as of March 31, 2004 and 2003, respectively.

 

18


Fuji Xerox Co., Ltd. and Subsidiaries

 

Notes to Consolidated Financial Statements (continued)

 

11. Income Taxes (continued)

 

The effective tax rates reflected in the consolidated statements of income for the years ended March 31, 2004 and 2003 differ from the statutory tax rate due to the following reasons:

 

     2004

    2003

 

Japanese statutory tax rate

   42.0 %   42.0 %

Expenses not deductible for tax purposes

         2.1           2.0  

Lower effective tax rates of other countries

   (3.6 )   (2.7 )

Reduction in deferred tax assets resulting from change in tax rate

   2.1     5.1  

R&D Credit

   (2.4 )   (1.2 )

Other

   1.2     3.6  
    

 

Effective tax rates

   41.4 %   48.8 %
    

 

 

Income before taxes for the years ended March 31, 2004 and 2003 was taxed in the following jurisdictions:

 

     2004

   2003

     (Millions of yen)

Domestic

   ¥ 41,287    ¥ 40,506

Foreign

     15,288      10,978
    

  

     ¥ 56,575    ¥ 51,484
    

  

 

The provision (benefit) for income taxes for the years ended March 31, 2004 and 2003 consisted of the following:

 

     2004

    2003

 
     (Millions of yen)  

Current:

                

Domestic

   ¥ 23,328     ¥ 23,157  

Foreign

     3,007       3,540  
    


 


       26,335       26,697  

Deferred:

                

Domestic

     (4,683 )     (1,099 )

Foreign

     1,751       (485 )
    


 


       (2,932 )     (1,584 )
    


 


     ¥ 23,403     ¥ 25,113  
    


 


 

19


Fuji Xerox Co., Ltd. and Subsidiaries

 

Notes to Consolidated Financial Statements (continued)

 

11. Income Taxes (continued)

 

The tax effects of temporary differences that give rise to the deferred tax assets and liabilities at March 31, 2004 and 2003 are presented below:

 

     2004

    2003

 
     (Millions of yen)  

Deferred tax assets:

                

Inventory valuation allowance

   ¥ 3,973     ¥ 4,949  

Intercompany profits in inventory

     2,890       2,967  

Depreciation of property, plant and equipment

     5,269       5,069  

Investment securities

     2,726       3,007  

Accrued bonus

     10,482       9,325  

Compensated absences

     2,773       2,628  

Accrued expenses

     2,776       1,727  

Retirement and severance benefits

     25,955       18,980  

Minimum pension liability adjustments

     37,795       49,018  

Net operating loss carryforwards

     817       443  

Other

     9,488       6,892  
    


 


       104,944       105,005  

Less valuation allowance

     (478 )     —    
    


 


Total deferred tax assets

     104,466       105,005  

Deferred tax liabilities:

                

Reserve for tax purposes

     (1,091 )     (1,368 )

Lease accounting

     (3,419 )     (2,231 )

Accelerated depreciation

     (1,654 )     (637 )

Goodwill

     (8,151 )     (5,469 )

Other

     (699 )     (319 )
    


 


Total deferred tax liabilities

     (15,014 )     (10,024 )
    


 


Net deferred tax assets

   ¥ 89,452     ¥ 94,981  
    


 


 

The net change in the total valuation allowance, which primarily relates to deferred tax asset on net operating loss carry-forwards, was an increase of ¥478 million and a decrease of ¥314 million for the years ended March 31, 2004 and 2003, respectively.

 

At March 31, 2004, certain subsidiaries of the Company have net operating loss carryforwards for income tax purposes amounting to ¥2,476 million, which are available to offset future taxable income, if any. The amount will expire through 2009.

 

The Company has not recognized a deferred tax liability for the undistributed earnings of its foreign subsidiaries and affiliates amounting to approximately ¥50,979 million and ¥40,707 million at March 31, 2004 and 2003, respectively, as the Company considers such earnings to be permanently invested. Deferred income taxes have also not been provided on undistributed earnings of its domestic subsidiaries as such earnings, if distributed in the form of dividends, are not taxable under present tax laws.

 

20


Fuji Xerox Co., Ltd. and Subsidiaries

 

Notes to Consolidated Financial Statements (continued)

 

12. Retirement and Severance Benefits

 

The Company and its domestic subsidiaries have funded and unfunded defined benefit severance plans. Under the plans, employees are entitled to lump-sum payments, or lump-sum and pension annuity payments, based on their current rate of pay and the length of service upon retirement or termination of employment for reasons other than dismissal for cause. The funding policy is to make actuarially determined contributions to provide the plans with sufficient assets to meet future benefit payment requirements.

 

The Company and certain of its domestic subsidiaries also have defined benefit pension plans covering substantially all of their employees. The plans consist of two portions: a governmental welfare contributory plan (which would otherwise be provided by the Japanese government) and an additional non-contributory defined benefit plan. The pension benefits are determined based on years of service and compensation as stipulated in the pension plan’s regulations. This plan is funded in conformity with the requirements of the Welfare Pension Insurance Law of Japan.

 

In January 2003, the Company obtained the approval of the Japanese government to eliminate future benefit obligations related to the governmental welfare component of the defined benefit plan, over which the Japanese government will take responsibility. The Company obtained the final approval from the Japanese government in January 2004 under which the Company will be relieved of all past benefit obligations under the governmental welfare component of the plans, with the transfer to the government of certain specified amounts, to be computed by a government specified formula, from the assets of the Company’s pension plans. The entire settlement process is planned to be made during the year ending March 31, 2005. The Company will account for the elimination of future benefit obligations and relief of past obligations with the transfer of assets as the culmination of a series of steps in a single settlement transaction. Based on current assumptions, the Company estimates that this transaction would result in a decrease of approximately ¥181,000 million in the benefit obligations. However, the ultimate gain or loss to be recognized for the year ending March 31, 2005 has not been determined.

 

Most foreign subsidiaries have various retirement plans, primarily defined contribution plans, covering substantially all of their employees. The funding policy for such defined contribution plans is to contribute annually an amount equal to a certain percentage of the participant’s annual salary.

 

The Company uses a March 31 measurement date for the majority of its plans.

 

21


Fuji Xerox Co., Ltd. and Subsidiaries

 

Notes to Consolidated Financial Statements (continued)

 

12. Retirement and Severance Benefits (continued)

 

Reconciliation of beginning and ending balances of the benefit obligations and the fair value of the plan assets, the funded status and amounts recognized in the consolidated balance sheets are as follows:

 

     2004

    2003

 
     (Millions of yen)  

Changes in benefit obligations:

                

Benefit obligations at beginning of year

   ¥ 509,235     ¥ 451,509  

Service cost

     15,665       18,160  

Interest cost

     11,096       11,237  

Plan participants’ contributions

     —         1,857  

Actuarial loss

     21,575       31,419  

Benefits paid

     (4,847 )     (4,546 )

Foreign currency translation and other

     (3,630 )     (401 )
    


 


Benefit obligations at end of year

     549,094       509,235  

Changes in plan assets:

                

Fair value of plan assets at beginning of year

     240,283       258,165  

Actual gain (loss) on plan assets

     43,123       (38,095 )

Employers’ contributions

     20,042       21,320  

Plan participants’ contributions

     —         1,857  

Benefits paid

     (3,537 )     (3,150 )

Foreign currency translation and other

     (1,065 )     186  
    


 


Fair value of plan assets at end of year

     298,846       240,283  
    


 


Funded status

     (250,248 )     (268,952 )

Unrecognized net actuarial loss

     190,649       223,546  

Unrecognized prior service costs (credit)

     (13,984 )     (15,979 )

Unrecognized net transition obligation

     1,756       2,060  
    


 


Net amount recognized

   ¥ (71,827 )   ¥ (59,325 )
    


 


     2004

    2003

 
     (Millions of yen)  

Amounts recognized in the consolidated balance sheets consist of:

                

Retirement and severance benefits

   ¥ (166,693 )   ¥ (184,820 )

Additional minimum liability adjustments:

                

Intangible asset

     3,859       4,464  

Accumulated other comprehensive loss, pretax

     91,007       121,031  
    


 


Net amount recognized

   ¥ (71,827 )   ¥ (59,325 )
    


 


 

The accumulated benefit obligations for defined benefit pension plans were ¥464,566 million and ¥464,925 million at March 31, 2004 and 2003, respectively.

 

22


Fuji Xerox Co., Ltd. and Subsidiaries

 

Notes to Consolidated Financial Statements (continued)

 

12. Retirement and Severance Benefits (continued)

 

Components of net periodic benefit cost for the years ended March 31, 2004 and 2003 are as follows:

 

          2004

    2003

 
          (Millions of yen)  
    

Components of net periodic benefit cost:

                
    

Service cost

   ¥ 15,665     ¥ 18,160  
    

Interest cost

     11,096       11,237  
    

Expected return on plan assets

     (7,131 )     (7,712 )
    

Recognized net actuarial loss

     11,768       7,228  
    

Amortization of unrecognized prior service costs (credit)

     (1,226 )     (1,287 )
    

Amortization of unrecognized net transition obligation

     304       304  
         


 


    

Net periodic benefit cost

   ¥ 30,476     ¥ 27,930  
         


 


The assumptions used to determine benefit obligations in accounting for the plans are as follows:  
          2004

    2003

 
    

Weighted-average discount rate

     2.0 %     2.2 %
    

Rate of future compensation increase

     2.0 %     2.0 %
The assumptions used to net periodic benefit cost in accounting for the plans are as follows:  
          2004

    2003

 
    

Weighted-average discount rate

     2.2 %     2.5 %
    

Rate of future compensation increase

     2.0 %     2.5 %
    

Expected long-term rate of return on plan assets

     3.0 %     3.0 %

 

An increase in benefit obligations resulting from the change in the discount rate is included in actuarial loss in the table of changes in benefit obligations presented above.

 

The expected long-term rate of return on plan assets reflects the plan’s asset allocation and an evaluation of the historical behavior of the Company’s portfolio.

 

23


Fuji Xerox Co., Ltd. and Subsidiaries

 

Notes to Consolidated Financial Statements (continued)

 

12. Retirement and Severance Benefits (continued)

 

The Company’s target allocation in 2005 and actual weighted-average asset allocations at March 31, 2004 and 2003, by asset category, are as follows:

 

Asset Category


   Target
Allocation


    2004

    2003

 

Equity securities

   59 %   36.3 %   48.8 %

Debt securities

   41 %   31.4 %   45.7 %

Cash and cash equivalents

   —   %   31.9 %   5.5 %

Real estate and other

   —   %   0.4 %   0.0 %
    

 

 

Total

       100 %   100.0 %   100.0 %
    

 

 

 

As a result of the impending transfer of governmental welfare plan to the Japanese government, as described before, the Company gradually shifted the asset allocation to increase cash and cash equivalents from other categories. Upon completion of the transfer, the Company will implement an amended defined benefit pension plan and a new defined contribution plan. Although the details of the new plans, including asset allocation, have not been defined, the investment policies for the new pension plans will be designated to meet future benefit payment requirement. The asset allocation above is based on the existing pension plan.

 

Although the amount is subject to change due to pension plan amendments, the Company expects to contribute approximately ¥22,000 million to the defined benefit pension plans for the year ending March 31, 2005.

 

Payments to directors and statutory auditors, corporate officers and part-time employees are based on separate plans. As of March 31, 2004 and 2003, ¥4,952 million and ¥4,978 million, respectively have been accrued and are included in the liability for retirement and severance benefits in the accompanying consolidated balance sheets.

 

Total charges to income for retirement and severance benefits for the years ended March 31, 2004 and 2003 amounted to ¥31,046 million and ¥28,548 million, respectively.

 

24


Fuji Xerox Co., Ltd. and Subsidiaries

 

Notes to Consolidated Financial Statements (continued)

 

13. Stockholders’ Equity

 

The Japanese Commercial Code, amended effective on October 1, 2002, provides that an amount equal to at least 10% of appropriations paid in cash be appropriated as a legal reserve until an aggregated amount of additional paid-in-capital and the legal reserve equals 25% of common stock.

 

The accompanying consolidated financial statements do not include any provision for cash dividends in the amount of ¥7,438 million proposed by the Company for the year ended March 31, 2004.

 

The amount available for dividends under the Commercial Code of Japan is based on the amount recorded in the Company’s nonconsolidated books of account in accordance with financial accounting standards of Japan and approximated ¥236,246 million at March 31, 2004.

 

14. Other Comprehensive Income (Loss)

 

The components of accumulated other comprehensive income (loss), net of tax, at March 31, 2004 and 2003 are summarized as follows:

 

     2004

    2003

 
     (Millions of yen)  

Unrealized gains on securities

   ¥ 716     ¥ —    

Unrealized derivative hedging gains (losses)

     (204 )     (70 )

Foreign currency translation adjustments

     (7,861 )     (6,750 )

Minimum pension liability adjustments

     (53,499 )     (67,923 )
    


 


     ¥ (60,848 )   ¥ (74,743 )
    


 


 

25


Fuji Xerox Co., Ltd. and Subsidiaries

 

Notes to Consolidated Financial Statements (continued)

 

14. Other Comprehensive Income (Loss)

 

Related tax effects allocated to the change in each component of other comprehensive income (loss) for the years ended March 31, 2004 and 2003 are as follows:

 

     2004

 
     Pre-tax
amount


    Tax (expense)
or benefit


    Net-change

 
     (Millions of yen)  

Unrealized gains on securities:

                        

Increase in unrealized gains

   ¥ 1,165     ¥ (476 )   ¥ 689  

Reclassification adjustments

     46       (19 )     27  
    


 


 


       1,211       (495 )     716  

Unrealized derivative loss:

                        

Increase in unrealized hedge derivative loss

     (1,671 )     696       (975 )

Reclassification adjustments

     1,437       (596 )     841  
    


 


 


       (234 )     100       (134 )

Foreign currency translation adjustments

     (1,111 )     —         (1,111 )

Minimum pension liability adjustments

     24,242       (9,818 )     14,424  
    


 


 


     ¥ 24,108     ¥ (10,213 )   ¥ 13,895  
    


 


 


     2003

 
     Pre-tax
amount


    Tax (expense)
or benefit


    Net-change

 
     (Millions of yen)  

Unrealized gains on securities:

                        

Decrease in unrealized gains

   ¥ (338 )   ¥ 142     ¥ (196 )

Reclassification adjustments

     100       (42 )     58  
    


 


 


       (238 )     100       (138 )

Unrealized derivative loss:

                        

Increase in unrealized hedge derivative loss

     (1,552 )     651       (901 )

Reclassification adjustments

     1,413       (594 )     819  
    


 


 


       (139 )     57       (82 )

Foreign currency translation adjustments

     (8,863 )     —         (8,863 )

Minimum pension liability adjustments

     (68,709 )     29,359       (39,350 )
    


 


 


     ¥ (77,949 )   ¥ 29,516     ¥ (48,433 )
    


 


 


 

26


Fuji Xerox Co., Ltd. and Subsidiaries

 

Notes to Consolidated Financial Statements (continued)

 

15. Accounts and Transactions with Stockholders

 

Accounts receivable from and payable to stockholders and their affiliates at March 31, 2004 and 2003 are summarized as follows:

 

     Accounts

     Receivable

   Payable

     (Millions of yen)

2004

             

Fuji Photo Film Co., Ltd. and affiliates

   ¥ 3,339    ¥ 6,097

Xerox Corporation and affiliates

     22,479      5,861

2003

             

Fuji Photo Film Co., Ltd. and affiliates

   ¥ 3,297    ¥ 2,566

Xerox Corporation and affiliates

     17,591      5,294

 

Transactions with stockholders and their affiliates for the years ended March 31, 2004 and 2003 are summarized as follows:

 

     Transactions

     Sales

   Purchases

   Royalties
and other
expenses


   Expenses
recovered


     (Millions of yen)

2004

                           

Fuji Photo Film Co., Ltd. and affiliates

   ¥ 12,874    ¥ 8,448    ¥ 28,007    ¥ —  

Xerox Corporation and affiliates

     112,894      16,386      15,316      3,107

2003

                           

Fuji Photo Film Co., Ltd. and affiliates

   ¥ 12,023    ¥ 8,551    ¥ 876    ¥ —  

Xerox Corporation and affiliates

     92,935      14,418      14,590      4,435

 

The Company pays a royalty to Xerox Corporation based on its revenue; as defined, for the use of certain trademarks and technology, through March 2009 under a Technology Agreement. From 2004, the Company pays FUJIFILM Logistics Co., Ltd. for transportation, warehousing and handling charges for the Company’s products, which is determined based on the size, weight of product and transportation distance, etc.

 

The Company has a long term supply agreement with Xerox Corporation, which was entered into in December 1990 and is effective through December 2005, with an extension right if both parties agree. Under the agreement, the Company made a prepayment of approximately US$70 million and was entitled to purchase specified products at cost, without mark-ups, from Xerox Corporation. As of March 31, 2004, the unamortized balance of the prepayment amounted to approximately US$12.1 million (¥1,458 million).

 

27


Fuji Xerox Co., Ltd. and Subsidiaries

 

Notes to Consolidated Financial Statements (continued)

 

16. Financial Instruments

 

The Company has various financial instruments, including derivative instruments, which are exposed to credit-related losses in the event of non-performance by the counterparties. The Company utilizes numerous counterparties to ensure that there are no significant concentrations of credit risk with any individual counterparty or groups of counterparties. The Company’s policies prescribe monitoring of creditworthiness and exposure on a counterparty-by-counterparty basis.

 

The Company operates internationally, giving rise to exposure to market risks from changes in foreign exchange rates and interest rates. Certain derivative instruments have been entered into by the Company to manage those exposures. These instruments are held for hedging purposes and include forward foreign exchange contracts, currency swap agreements, interest rate swap agreements and cross currency interest rate swap agreements.

 

Forward foreign exchange contracts and currency swap agreements are agreements to exchange different currencies at specified exchange rates on a specific future date. Interest rate swap agreements have the effect of changing floating rate to fixed rate interest or fixed rate to floating rate interest. Certain agreements are combinations of interest rate and foreign currency swap transactions.

 

Fair Values of Financial Instruments

 

The estimated fair values of financial instruments at March 31, 2004 and 2003 are summarized as follows:

 

     2004

    2003

 
     Carrying
amount


    Estimated
fair value


    Carrying
amount


    Estimated
fair value


 
     (Millions of yen)  

Marketable securities

   ¥ 30     ¥ 30     ¥ 30     ¥ 30  

Investment securities

     5,038       5,038       3,933       3,933  

Long-term debt, including current portion

     (105,157 )     (106,439 )     (113,108 )     (117,347 )

Foreign exchange contracts

     8       8       (429 )     (429 )

Currency swap agreements

     (1,652 )     (1,652 )     (711 )     (711 )

Interest rate swap agreements

     (403 )     (403 )     (818 )     (818 )

Cross currency interest rate swap agreements

     (308 )     (308 )     (691 )     (691 )

 

28


Fuji Xerox Co., Ltd. and Subsidiaries

 

Notes to Consolidated Financial Statements (continued)

 

16. Financial Instruments (continued)

 

Fair Values of Financial Instruments (continued)

 

Fair value estimates are made at a specific point in time, based on relevant market information and appropriate valuation methodologies. However, these estimates are subjective in nature and involve uncertainties and matters of significant judgment and, therefore, cannot be determined with precision. The effect of using different assumptions and/or estimation methodologies may be material to the estimated fair value amounts. The following methodologies and assumptions were used by the Company in estimating the fair value of its financial instruments.

 

Cash and Cash Equivalents, Receivables, Short-Term Debt, Payables and Accrued Expenses and Other Current Liabilities: The carrying amounts approximate fair value because of the short maturity of these instruments.

 

Marketable Securities and Investment securities: The fair values of the marketable securities and investment securities (exclusive of non-marketable equity and other securities) are based on quoted market prices.

 

Long-Term Debt: The fair values of long-term debt instruments are based on the present value of future cash flows associated with each instrument discounted using the current borrowing rate for similar debt instruments of comparable maturity.

 

Derivative Financial Instruments: The fair values of forward foreign exchange contracts, currency swap agreements, interest rate swap agreements and cross currency interest rate swap agreements are estimated based on quotes from brokers and reflect the estimated amounts that the Company would receive (or pay) to terminate the contracts at the reporting date.

 

Accounting for and Reporting of Derivative Instruments and Hedging Activities

 

The Company is exposed to the risk of changes in foreign exchange rates and interest rates. To manage these risks, the Company enters into various hedging transactions that have been authorized pursuant to its policies and procedures as described below. The Company does not purchase or hold derivative financial instruments for trading purposes.

 

Information with Respect to Cash Flow Hedges:

 

The Company has entered into forward foreign exchange contracts to protect against the increase or decrease in value of forecasted intercompany purchases or export sales denominated in foreign currencies over the next year (maximum length of time is through July 2004).

 

29


Fuji Xerox Co., Ltd. and Subsidiaries

 

Notes to Consolidated Financial Statements (continued)

 

16. Financial Instruments (continued)

 

Accounting for and Reporting of Derivative Instruments and Hedging Activities (continued)

 

In addition, the Company entered into a currency swap and cross currency interest rate swaps that effectively convert a portion of the underlying debt amounts to fixed interest rate and to functional currencies for the next two years (maximum length of time is through May 2006), thus reducing the impact of foreign currency exchange rate and interest rate changes on future income. The forecasted cash flows associated with approximately ¥10,708 million of the outstanding debt of the Company were designated as the hedged items to a currency swap and cross currency interest rate swaps at March 31, 2004.

 

Changes in fair value of those derivative instruments designated and qualifying as cash flow hedges of variability of cash flows are reported in other comprehensive income, net of applicable taxes. These amounts are reclassified into earnings in the same period and same line item as the hedged items affect earnings. The amount of gains or losses on derivatives or portions thereof that were either ineffective as hedges or excluded from the assessment of hedge effectiveness were immaterial to the financial position or operating results of the Company.

 

At March 31, 2004, the Company expects to reclassify ¥316 million of net losses on derivatives from accumulated other comprehensive income to earnings during the next twelve months due to actual export sales and import purchases and the payment of the underlying debt.

 

Derivatives not designated as hedges:

 

Derivatives not designated as hedges include certain interest rate swaps and forward foreign exchange contracts which have been entered into by the Company and certain of its subsidiaries. Although these derivatives are effective as hedges from an economic perspective, the Company did not designate these contracts as hedges as required in order to apply hedge accounting. As a result, the Company reported the changes in the fair value of these derivatives in other income (expenses).

 

30


Fuji Xerox Co., Ltd. and Subsidiaries

 

Notes to Consolidated Financial Statements (continued)

 

17. Commitments and Contingencies

 

The Company guarantees certain indebtedness of others and other obligations. At March 31, 2004, the maximum potential amount of future payments (undiscounted) the Company as a guarantor could be required to make under the guarantee was ¥27,560 million, most of which are guarantees of their employees’ mortgage loans to financial institutions. In the event of insolvency of their employees, the Company will need to pay the default mortgage on behalf of the employees. These guarantees are secured by the mortgaged property. The term of the mortgage loan guarantees are from 5 to 30 years. As of March 31, 2004, the carrying amount of the liability for the Company’s obligations under the guarantee was insignificant.

 

18. Acquisitions

 

During the year ended March 31, 2004, the Company and its marketing subsidiaries purchased the stock of certain marketing subsidiaries from the respective minority shareholders in order to increase the Company’s ownership from 51% to primarily 81% for the purpose of restructuring its marketing channels. On a combined basis, the Company paid ¥17,085 million in cash. The excess of the net assets acquired over the acquisition cost have been allocated to the assets acquired. There was no goodwill recognized from these transactions.

 

In February 2003, the Company purchased certain printer business operations for ¥17,481 million, in cash, in order to strengthen its core business and increase its market share as a leading provider of laser printers. As a result of the acquisition, the Company recorded ¥15,693 million of goodwill, which is being amortized for tax purposes on a straight-line basis over 5 years but is not amortized for accounting purpose, and ¥565 million for patents, which is amortized on a straight-line basis over 8 years for both accounting and income tax purposes. The results of operation of the acquired printer business was included in the Company’s consolidated financial statements since the acquisition date.

 

The unaudited pro forma financial information assumes that the printer business acquired in the fiscal year ended March 31, 2003 had been acquired at the beginning of the fiscal year. This pro forma financial information is presented for information purpose only and is not necessarily indicative of the results of future operations. Pro forma unaudited net sales and net income would have been ¥989,532 million and ¥25,188 million, respectively, for the year ended March 31, 2003.

 

31