Amendment No.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, 2002

 

[_]    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


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 Accountants*

 

Consolidated Statements of Operations for each of the years in the three-year period ended December 31, 2002*

 

Consolidated Balance Sheets as of December 31, 2002 and 2001*

 

Consolidated Statements of Cash Flows for each of the years in the three-year period ended December 31, 2002*

 

Consolidated Statements of Common Shareholders’ Equity for each of the years in the three-year period ended December 31, 2002*

 

Notes to Consolidated Financial Statements*

 

Financial Statement Schedules

 

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 Auditors

 

Consolidated Balance Sheet as of March 31, 2003

 

Consolidated Statement of Income for the year ended March 31, 2003

 

Consolidated Statement of Stockholders’ Equity for the year ended March 31, 2003

 

Consolidated Statement of Cash Flows for the year ended 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.

 

(2)  Supplementary Data:

 

Quarterly Results of Operations*

 

Five Years in Review*

 

Commercial and Industrial (Article 5) Schedule*

 

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

 

(b)   Current Reports on Form 8-K dated October 2, 2001, October 3, 2001, October 12, 2001, November 16, 2001, November 19, 2001, November 20, 2001, November 27, 2001, December 20, 2001 and December 27, 2001 reporting Item 5 “Other Events” and a Current Report on Form 8-K dated September 28, 2001 (filed October 5, 2001) reporting Item 4 “Changes in Registrant’s Certifying Accountant” and Item 5 “Other Events” were filed during the last quarter of the period covered by this Report.

 

(c)   Exhibit 99.1 — Certification of CEO and CFO Pursuant to 18 U.S.C.§ 1350, as Adopted Pursuant to § 906 of the Sarbanes-Oxley Act of 2002.

 

(d)   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, 2003

 

4


CERTIFICATIONS PURSUANT TO RULE 13a-14 UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED

 

I, Anne M. Mulcahy, Chairman of the Board and Chief Executive Officer, certify that:

 

1.   I have reviewed this Amendment No. 1 to Annual Report on Form 10-K (“Annual Report”) of Xerox Corporation;

 

2.   Based on my knowledge, this Annual Report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this Annual Report;

 

3.   Based on my knowledge, the financial statements, and other financial information included in this Annual Report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this Annual Report.

 

4.   The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

 

a)   Designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this Annual Report is being prepared;

 

b)   Evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this Annual Report (the “Evaluation Date”); and

 

c)   Presented in this Annual Report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

 

5.   The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrants’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions);

 

a)   All significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

 

b)   Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

 

6.   The registrant’s other certifying officers and I have indicated in this Annual Report whether there which significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

 

June 30, 2003

 

    /S/    ANNE M. MULCAHY    

Anne M. Mulcahy

Principal Executive Officer

 

5


CERTIFICATIONS PURSUANT TO RULE 13a-14 UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED

 

I, Lawrence A. Zimmerman, Senior Vice President and Chief Financial Officer, certify that:

 

1.   I have reviewed this Amendment No. 1 to Annual Report on Form 10-K (“Annual Report”) of Xerox Corporation;

 

2.   Based on my knowledge, this Annual Report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this Annual Report;

 

3.   Based on my knowledge, the financial statements, and other financial information included in this Annual Report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this Annual Report.

 

4.   The registrant’s other certifying offices and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

 

a)   Designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this Annual Report is being prepared;

 

b)   Evaluated the effectiveness of the registrant’s discloure controls and procedures as of a date within 90 days prior to the filing date of this Annual Report (the “Evaluation Date”); and

 

c)   Presented in this Annual Report our Conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

 

5)   The registrant’s other certifying officers and I have disclosed , based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

 

a)   All significant deficiencies in the design of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors and material weaknesses in internal controls; and

 

b)   Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal controls; and

 

6.   The registrant’s other certifying officers and I have indicated in this Annual Report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

 

June 30, 2003

 

    /S/    LAWRENCE A. ZIMMERMAN    
Lawrence A. Zimmerman
Principal Financial Officer

 

6


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, 2003


Report of Independent Auditors

 

The Board of Directors and Stockholders

Fuji Xerox Co., Ltd.

 

We have audited the accompanying consolidated balance sheet of Fuji Xerox Co., Ltd. and subsidiaries as of March 31, 2003 and the related consolidated statements of income, stockholders’ equity and cash flows for the year 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 audit.

 

We conducted our audit in accordance with auditing standards generally accepted in the United States of America. 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 audit provides 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, 2003 and the consolidated results of their operations and their cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America.

 

As discussed in Note 2 to the consolidated financial statements, effective April 1, 2002 the Company changed its method of accounting for goodwill and other intangible assets.

 

/s/ Ernst & Young

 

Tokyo, Japan

April 21, 2003

 

 

1


Fuji Xerox Co., Ltd. and Subsidiaries

 

Consolidated Balance Sheet

 

    

March 31,

2003


 
     (Millions of yen)  

Assets

        

Current assets:

        

Cash and cash equivalents

   ¥ 53,969  

Receivables (Note 3)

     167,989  

Due from stockholders (Note 15)

     20,888  

Finance receivables (Note 4)

     24,144  

Inventories (Note 5)

     73,488  

Deferred income taxes (Note 11)

     24,544  

Other current assets

     6,671  
    


Total current assets

     371,693  

Finance receivables (Note 4)

     48,906  

Investments (Note 6)

     18,147  

Net property, plant and equipment (Note 7)

     168,715  

Deferred income taxes (Note 11)

     74,131  

Goodwill, less accumulated amortization (Notes 8 and 18)

     111,455  

Other assets

     81,653  
    


Total assets

   ¥ 874,700  
    


Liabilities and stockholders’ equity

        

Current liabilities:

        

Short-term debt (Note 9)

   ¥ 80,019  

Payables

     135,228  

Accrued income taxes (Note 11)

     11,625  

Accrued expenses and other current liabilities

     68,533  
    


Total current liabilities

     295,405  

Long-term debt (Note 9)

     98,448  

Retirement and severance benefits (Note 12)

     189,798  

Deferred income taxes and other liabilities (Note 11)

     5,575  

Commitments and contingencies (Notes 10 and 17)

        

Minority interests

     26,123  

Stockholders’ equity (Note 13):

        

Common stock, with no par value:

        

Authorized - 80,000,000 shares

        

Issued         - 40,000,000 shares

     20,000  

Retained earnings

     314,094  

Accumulated other comprehensive income (loss) (Note14)

     (74,743 )
    


Total stockholders’ equity

     259,351  
    


Total liabilities and stockholders’ equity

   ¥ 874,700  
    


 

See notes to consolidated financial statements.

 

2


Fuji Xerox Co., Ltd. and Subsidiaries

 

Consolidated Statement of Income

 

    

For the year ended

March 31,

2003


 
     (Millions of Yen)  

Operating revenue (Note 15):

        

Equipment sales

   ¥ 312,104  

Service and rentals

     348,065  

Consumables and other

     301,833  
    


       962,002  

Costs and expenses (Note 15):

        

Cost of equipment sales

     225,692  

Cost of service and rentals

     135,253  

Consumables and other

     180,737  
    


       541,682  

Research and development expenses

     73,844  

Selling, general and administrative expenses

     292,912  
    


       908,438  
    


Operating income

     53,564  

Other income (expense):

        

Interest and dividend income

     6,381  

Interest expenses

     (4,049 )

Exchange gains (losses), net

     (841 )

Other, net

     (1,881 )
    


       (390 )
    


Income before income taxes and minority interests

     53,174  

Income taxes (Note 11):

        

Current

     26,697  

Deferred

     (1,584 )
    


       25,113  
    


Income before minority interests

     28,061  

Minority interests

     (4,675 )
    


Net income

   ¥

23,386

 

 

See notes to consolidated financial statements.

 

3


Fuji Xerox Co., Ltd. and Subsidiaries

 

Consolidated Statement 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 gains

                    (82 )     (82 )

Foreign currency translation

                    (8,863 )     (8,863 )

Minimum pension liability

                    (39,350 )     (39,350 ))
                           


Net comprehensive income (loss)

                            (25,047 )

Cash dividends

            (13,880 )             (13,880 )
    

  


 


 


Balance at March 31, 2003

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

  


 


 


 

See notes to consolidated financial statements.

 

4


Fuji Xerox Co., Ltd. and Subsidiaries

 

Consolidated Statement of Cash Flows

 

    

For the year ended

March 31,

2003


 
     (Millions of Yen)  

Operating activities

        

Net income

   ¥ 23,386  

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

        

Depreciation and amortization

     60,326  

Gain on sales of securities

     (245 )

Write down of securities

     671  

Increase in retirement and severance benefits

     4,292  

Deferred income taxes

     (1,584 )

Loss on disposal of property, plant and equipment

     8,059  

Equity in earnings of affiliates, less dividends

     (1,690 )

Minority interests in earnings of subsidiaries

     4,675  

Changes in operating assets and liabilities:

        

Receivables

     2,367  

Finance receivables

     5,025  

Inventories

     7,517  

Payables

     4,930  

Accrued income taxes

     3,650  

Accrued expenses and other current liabilities

     1,755  

Other, net

     (2,061 )
    


Net cash provided by operating activities

     121,073  

Investing activities

        

Proceeds from sales of property, plant and equipment

     1,761  

Capital expenditures

     (44,722 )

Payments for purchases of software

     (24,981 )

Payments for purchase of securities

     (45 )

Proceeds from sales of securities

     323  

Acquisition of businesses, net of cash acquired

     (17,481 )

Other, net

     1,423  
    


Net cash used in investing activities

     (83,722 )

Financing activities

        

Proceeds from long-term debt

     5,340  

Repayments of long-term debt

     (11,988 )

Decrease in short-term debt, net

     (22,306 )

Increase in commercial paper, net

     11,000  

Dividends paid

     (13,880 )
    


Net cash used in financing activities

     (31,834 )

Effect of exchange rate changes on cash and cash equivalents

     (1,369 )
    


Net increase in cash and cash equivalents

     4,148  

Cash and cash equivalents at beginning of year

     49,821  
    


Cash and cash equivalents at end of year

   ¥ 53,969  
    


Cash paid during the year for:

        

Interest

   ¥ 4,237  

Income taxes

     23,684  

 

See notes to consolidated financial statements.

 

5


Fuji Xerox Co., Ltd. and Subsidiaries

 

Notes to Consolidated Financial Statements

March 31, 2003

 

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, the Asia Pacific and Oceania 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, collectively referred to as the Document Services Business. Other businesses include logistics and educational services which are not significant.

 

Domestic revenues and overseas revenues from Southeast Asia, Oceania and other regions based on the location of customers were 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.

 

6


Fuji Xerox Co., Ltd. and Subsidiaries

 

Notes to Consolidated Financial Statements (continued)

 

2.   Summary of Significant Accounting Policies (continued)

 

Consolidation Policy (continued)

 

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

 

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 and Southeast Asia. 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.

 

7


Fuji Xerox Co., Ltd. and Subsidiaries

 

Notes to Consolidated Financial Statements (continued)

 

2.   Summary of Significant Accounting Policies (continued)

 

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. Allowances for doubtful accounts receivable balances were ¥2,096 million as of March 31, 2003. Allowances for doubtful finance receivables were ¥2,976 million as of March 31, 2003.

 

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.

 

Depreciation

 

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

 

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 that 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 definitive 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.

 

Impairment of Long-Lived Assets

 

In August 2001, the FASB issued FAS 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” which addresses financial accounting and reporting for the impairment or disposal of long-lived assets. As of April 1, 2002, the Company adopted FAS 144. Under the provisions of FAS 144, the Company reviews 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 the asset would be compared to the asset’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. The adoption of FAS 144 was not significant to the operating results and financial position of the Company.

 

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.

 

9


Fuji Xerox Co., Ltd. and Subsidiaries

 

Notes to Consolidated Financial Statements (continued)

 

2.   Summary of Significant Accounting Policies (continued)

 

Revenue Recognition (continued)

 

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, inks, papers and copy services which are recognized upon shipment of consumables or when services are rendered. Certain sales incentives are deducted from revenue.

 

Shipping and Handling Costs

 

The Company includes shipping and handling costs, which totaled ¥14,737 million for the year ended March 31, 2003, 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 ¥10,394 million for the year ended March 31, 2003.

 

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.

 

10


Fuji Xerox Co., Ltd. and Subsidiaries

 

Notes to Consolidated Financial Statements (continued)

 

2.   Summary of Significant Accounting Policies (continued)

 

Derivative Financial Instruments

 

Effective January 1, 2001, the Company adopted FAS 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended. FAS 133 established accounting and reporting standards for derivative instruments and hedging activities. It requires an entity to recognize all derivatives as either assets or liabilities in the statement of financial position and measure 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, 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.

 

New Accounting Standards

 

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. The Company will adopt this standard on April 1, 2003. The Company is currently assessing the impact on its financial position and results of operations.

 

In November 2002, the FASB issued Interpretation No. 45 (“FIN 45”), “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others,” which elaborates on the disclosure to be made by a guarantor in its financial statements about its obligations under certain guarantees that it has issued. It also clarifies that a guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. The Company adopted the initial measurement and initial recognition provisions on a prospective basis for guarantees issued or modified after December 31, 2002 and the disclosure provisions of FIN 45 as of March 31, 2003. The Company does not expect this interpretation will have a material effect on the Company’s financial position or results of operations.

 

11


Fuji Xerox Co., Ltd. and Subsidiaries

 

Notes to Consolidated Financial Statements (continued)

 

2.   Summary of Significant Accounting Policies (continued)

 

New Accounting Standards (continued)

 

In January 2003, the FASB issued FIN 46, “Consolidation of Variable Interest Entities,” which addresses when business enterprises should consolidate variable interest entities (“VIEs”) as defined in the Interpretation. The Company does not use VIEs to finance its operations and, accordingly, this interpretation has no impact on the its financial position or results of operations.

 

3.   Receivables

 

Receivables at March 31, 2003 are summarized as follows:

 

    

(Millions of

yen)


 

Trade:

        

Notes

   ¥ 9,376  

Accounts

     152,935  

Other

     7,774  
    


       170,085  

Less allowance for doubtful receivables

     (2,096 )
    


     ¥ 167,989  
    


 

4.   Finance Receivables

 

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

 

    

(Millions of

yen)


 

Gross receivables

   ¥ 90,661  

Unearned income

     (14,635 )

Less allowance for doubtful receivables

     (2,976 )
    


       73,050  

Less current portion

     (24,144 )
    


     ¥ 48,906  
    


 

12


Fuji Xerox Co., Ltd and Subsidiaries

 

Notes to Consolidated Financial Statements (continued)

 

4.   Finance Receivables (continued)

 

The future minimum lease payments to be received under sales-type leases as of March 31, 2003 are summarized as follows:

 

    

(Millions of

yen)


Year ending March 31:

      

2004

   ¥ 32,333

2005

     24,869

2006

     17,815

2007

     10,799

2008

     4,340

2009 and thereafter

     505
    

Total future minimum lease payments

   ¥ 90,661
    

 

5.   Inventories

 

Inventories at March 31, 2003 are summarized as follows:

 

    

(Millions of

yen)


Finished goods

   ¥ 46,339

Parts

     6,209

Raw materials

     7,516

Work in process

     7,847

Supplies

     5,577
    

     ¥ 73,488
    

 

6.   Investments

 

Investments at March 31, 2003 are summarized as follows:

 

    

(Millions of

yen)


Investments in affiliates

   ¥ 14,214

Investment securities

     3,933
    

     ¥ 18,147
    

 

13


Fuji Xerox Co., Ltd and Subsidiaries

 

Notes to Consolidated Financial Statements (continued)

 

6.   Investments (continued)

 

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

 

     Cost

   Gross
unrealized
gains


   Gross
unrealized
losses


   Fair
value


     (Millions of yen)

Japanese and foreign government debt securities

   ¥ 100    ¥ 7    ¥ —      ¥ 107

Corporate debt securities

     30      —        3      27

Equity securities

     1,552      211      196      1,567

Other

     2,232      —        —        2,232
    

  

  

  

     ¥ 3,914    ¥ 218    ¥ 199    ¥ 3,933
    

  

  

  

 

Investment securities – other consists of certain non-listed equity securities which are carried at cost but 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 ¥671 million for the year ended March 31, 2003. Proceeds from the sales of available-for-sale securities for the years ended March 31, 2003 were ¥323 million. Of those sales, gross realized gains from the sales of available-for-sale securities for the year ended March 31, 2003 was ¥245 million. Realized gains and losses and declines in value considered as other-than-temporary are included in other income (expense).

 

Net unrealized gains on available-for-sale securities, net of the related income taxes, decreased by ¥138 million for the year ended March 31, 2003.

 

The cost and estimated fair value of debt securities at March 31, 2003, by contractual maturity, are shown below. The expected maturities based on contract terms may differ from the actual maturities because the issuers of the securities may have the right to prepay the obligations without penalties.

 

     Cost

  

Fair

value


     (Millions of yen)

Due within one year

   ¥ 30    ¥ 30

Due after one year through five years

     100      107

Due after 10 years

     30      27
    

  

     ¥ 160    ¥ 164
    

  

 

14


Fuji Xerox Co., Ltd and Subsidiaries

 

Notes to Consolidated Financial Statements (continued)

 

7.   Property, Plant and Equipment

 

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

 

    

(Millions of

yen)


 

Rental machines

   ¥ 84,283  

Land

     22,104  

Buildings and structures

     153,018  

Machinery and equipment

     54,847  

Vehicles

     3,586  

Tools, furniture and fixtures

     179,815  

Construction in progress

     4,020  
    


       501,673  

Accumulated depreciation

     (332,958 )
    


     ¥ 168,715  
    


 

8.   Goodwill

 

The changes in goodwill during the year ended March 31, 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  
    


 

Other primarily consists of foreign exchange translation adjustments.

 

Accumulated amortization of goodwill at March 31, 2002, prior to the adoption of FAS 142, amounted to ¥12,053 million.

 

9.   Short-Term Debt and Long-Term Debt

 

Short-term debt at March 31, 2003 is summarized as follows:

 

    

(Millions of

yen)


Short-term debt, mainly to banks

   ¥ 51,359

Commercial paper

     14,000

Current installments of long-term debt

     14,660
    

     ¥ 80,019
    

 

The weighted average interest rates on short-term debt was 3.2 %.

 

The weighted average interest rates on commercial paper outstanding at March 31, 2003 was 0.02%.

 

15


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, 2003 consist of the following:

 

    

(Millions of

yen)


 

Unsecured loans from banks and insurance companies due 2004 to 2012, with weighted average interest rate of approximately 1.54%

   ¥ 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  

0.18% medium term notes, due 2005

     3,000  

0.20% medium term notes, due 2005

     3,400  

1.99% medium term notes, due 2006

     5,000  

Unsecured yen bonds:

        

0.62% bonds, due 2007

     3,000  

0.65% bonds, due 2007

     7,500  

1.63% bonds, due 2008

     5,000  

1.01% bonds, due 2009

     6,100  

1.01% bonds, due 2009

     2,000  

1.99% bonds, due 2011

     10,000  

1.52% bonds, due 2012

     3,000  

Other

     2,933  
    


       113,108  

Less current installments

     (14,660 )
    


Long-term debt, excluding current installments

   ¥ 98,448  
    


 

The aggregate annual maturities of long-term debt outstanding at March 31, 2003 are as follows:

 

    

(Millions of

yen)


Year ending March 31:

      

2004

   ¥ 14,660

2005

     12,367

2006

     15,980

2007

     16,962

2008

     8,140

2009 and thereafter

     44,999
    

     ¥ 113,108
    

 

16


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 ¥21,000 million as of March 31, 2003 are included in other assets. The future minimum lease payments required under operating leases which, at March 31, 2003, have initial or remaining noncancelable lease term in excess of one year are summarized as follows:

 

    

(Millions of

yen)


Year ending March 31:

      

2004

   ¥ 1,643

2005

     845

2006

     513

2007

     362

2008

     185

2009 and thereafter

     197
    

Total future minimum lease payments

   ¥ 3,745
    

 

Rental expense under operating leases was ¥27,212 million for the year ended March 31, 2003.

 

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 a reduction of the Company’s deferred tax assets of ¥2,612 million as of March 31, 2003.

 

17


Fuji Xerox Co., Ltd and Subsidiaries

 

Notes to Consolidated Financial Statements (continued)

 

11.   Income Taxes (continued)

 

The effective tax rate reflected in the consolidated statement of income for the year ended March 31, 2003 differs from the statutory tax rate due to the following reasons:

 

Japanese statutory tax rate

   42.0 %

Expenses not deductible for tax purposes

   1.9  

Reversal of prior years’ accruals

   (0.6 )

Reduction in deferred tax assets from change in tax rate

   4.9  

Other

   (1.0 )
    

Effective tax rates

   47.2 %
    

 

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

 

    

(Millions of

yen)


Domestic

   ¥ 40,147

Foreign

     13,027
    

     ¥ 53,174
    

 

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

 

    

(Millions of

yen)


 

Current:

        

Domestic

   ¥ 23,157  

Foreign

     3,540  
    


       26,697  

Deferred:

        

Domestic

     (1,099 )

Foreign

     (485 )
    


       (1,584 )
    


     ¥ 25,113  
    


 

18


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, 2003 are presented below:

 

    

(Millions of

yen)


 

Deferred tax assets:

        

Inventory reserve

   ¥ 4,949  

Intercompany profits in inventory

     2,967  

Depreciation of property, plant and equipment

     5,069  

Investments and other assets

     3,007  

Accrued bonus

     9,325  

Compensated absences

     2,628  

Retirement and severance benefits

     18,980  

Minimum pension liability adjustments

     49,018  

Net operating loss carryforwards

     443  

Other

     8,619  
    


Total deferred tax assets

     105,005  

Deferred tax liabilities:

        

Reserve for tax purposes

     (1,368 )

Lease accounting

     (2,231 )

Accelerated depreciation

     (637 )

Other

     (5,788 )
    


Total deferred tax liabilities

     (10,024 )
    


Net deferred tax assets

   ¥ 94,981  
    


 

The net change in the total valuation allowance was a decrease of ¥314 million for the year ended March 31, 2003.

 

At March 31, 2003, certain subsidiaries of the Company have net operating loss carryforwards for income tax purposes amounting to ¥1,170 million, which are available to offset future taxable income, if any. The amount will expire through 2005.

 

The Company has not recognized a deferred tax liability for the undistributed earnings of its foreign subsidiaries amounting to approximately ¥40,707 million at March 31, 2003 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.

 

19


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.

 

On January 30, 2003, the Company received the approval of the Japanese government to eliminate future benefit obligations related to the governmental welfare component, over which the Japanese government will take responsibility. After the Company receives the final approval from the Japanese government, the Company will be relieved of all past benefit obligations under the governmental welfare component of the plans, with the transfer to the Japanese government of certain specified amounts which will be provided from assets of the Company’s pension plans. The Company anticipates that it will receive final approval prior to its fiscal year ending March 31, 2004. The amount of assets to be transferred to the Japanese government will be computed by a government specified formula. 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 ¥171,000 million, in benefit obligations.

 

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.

 

20


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 sheet are as follows:

 

    

(Millions of

yen)


 

Changes in benefit obligations:

        

Benefit obligations at beginning of year

   ¥ 451,509  

Service cost

     18,160  

Interest cost

     11,237  

Plan participants’ contributions

     1,857  

Actuarial loss

     31,419  

Benefits paid

     (4,546 )

Foreign currency translation and other

     (401 )
          

Benefit obligations at end of year

     509,235  

Changes in plan assets:

        

Fair value of plan assets at beginning of year

     258,165  

Actual loss on plan assets

     (38,095 )

Employers’ contributions

     21,320  

Plan participants’ contributions

     1,857  

Benefits paid

     (3,150 )

Foreign currency translation and other

     186  
          

Fair value of plan assets at end of year

     240,283  
    


Funded status

     (268,952 )

Unrecognized net actuarial loss

     223,546  

Unrecognized prior service costs (credit)

     (15,979 )

Unrecognized net transition obligation

     2,060  
    


Net amount recognized

   ¥ (59,325 )
    


    

(Millions of

yen)


 

Amounts recognized in the consolidated balance sheet consist of:

        

Retirement and severance benefits

   ¥ (184,820 )

Additional minimum liability adjustments:

        

Intangible asset

     4,464  

Accumulated other comprehensive loss, pre tax

     121,031  
    


Net amount recognized

   ¥ (59,325 )
    


 

21


Fuji Xerox Co., Ltd and Subsidiaries

 

Notes to Consolidated Financial Statements (continued)

 

12.   Retirement and Severance Benefits (continued)

 

The plan assets consist principally of corporate equity securities, government securities and corporate debt securities. Unrecognized prior service cost has been amortized on the straight-line method over the average remaining service period of employees expected to receive benefits under the plan.

 

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

 

    

(Millions of

yen)


 

Components of net periodic benefit cost:

        

Service cost

   ¥ 18,160  

Interest cost

     11,237  

Expected return on plan assets

     (7,712 )

Recognized net actuarial loss

     7,228  

Amortization of unrecognized prior service costs (credit)

     (1,287 )

Amortization of unrecognized net transition obligation

     304  
    


Net periodic benefit cost

   ¥ 27,930  
    


 

The assumptions used in accounting for the plans are as follows:

 

Weighted-average discount rate

   2.2 %

Rate of future compensation increase

   2.0 %

Expected long-term rate of return on plan asset

   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.

 

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

 

Total charges to income for these benefits for the year ended March 31, 2003 amounted to ¥28,548 million.

 

22


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 ¥3,880 million proposed by the Company for the year ended March 31, 2003.

 

The amount available for dividends under the Japanese Commercial Code is based on the amount recorded in the Company’s nonconsolidated books of account in accordance with financial accounting standards of Japan. The adjustments included in the accompanying consolidated financial statements to have them conform with accounting principles generally accepted in the United States of America, but not recorded in the books of account, have no effect on the determination of retained earnings available for dividends under the Japanese Commercial Code. The amount available for dividends in the Company’s nonconsolidated books of account under the Japanese Commercial Code amounted to ¥222,065 million at March 31, 2003.

 

14.   Other Comprehensive Income (Loss)

 

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

 

    

(Millions of

yen)


 

Net unrealized derivative gains(losses)

   ¥ (70 )

Foreign currency translation adjustments

     (6,750 )

Minimum pension liability adjustments

     (67,923 )
    


     ¥ (74,743 )
    


 

23


Fuji Xerox Co., Ltd and Subsidiaries

 

Notes to Consolidated Financial Statements (continued)

 

14.   Other Comprehensive Income (Loss) (continued)

 

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

 

    

Before-tax

amount


    Tax (expense)
or benefit


    Net-of-tax
amount


 
     (Millions of yen)  

Unrealized gains on securities:

                        

Decrease in unrealized gains

   ¥ (338 )   ¥ 142     ¥ (196 )

Less reclassification adjustments

     100       (42 )     58  
    


 


 


       (238 )     100       (138 )

Unrealized derivative gains:

                        

Increase in unrealized derivative gains

     (1,552 )     651       (901 )

Less 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 )
    


 


 


 

15.   Accounts and Transactions with Stockholders

 

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

 

     Accounts

     Receivable

   Payable

     (Millions of yen)

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 year ended March 31, 2003 are summarized as follows:

 

     Transactions

     Sales

   Purchases

   Royalties
and other
expenses


   Expenses
recovered


     (Millions of yen)

Fuji Photo Film Co., Ltd. and affiliates

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

Xerox Corporation and affiliates

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

 

24


Fuji Xerox Co., Ltd and Subsidiaries

 

Notes to Consolidated Financial Statements (continued)

 

15.   Accounts and Transactions with Stockholders (continued)

 

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.

 

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, 2003, the unamortized balance of the prepayment amounted to approximately US$ 22.3 million (¥2,680 million).

 

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 debt into fixed rate or fixed rate debt into floating rate. Certain agreements are combinations of interest rate and foreign currency swap transactions. The floating rates are mainly based on the three-month or six-month LIBOR (London Inter-Bank Offered Rate).

 

25


Fuji Xerox Co., Ltd and Subsidiaries

 

Notes to Consolidated Financial Statements (continued)

 

16.   Financial Instruments (continued)

 

Fair Values of Financial Instruments

 

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

 

     Carrying
amount


    Estimated
fair value


 
     (Millions of yen)  

Marketable securities

   ¥ 30     ¥ 30  

Investment securities

     3,933       3,933  

Long-term debt, including current portion

     (113,108 )     (117,347 )

Foreign exchange contracts

     (429 )     (429 )

Currency swap agreements

     (711 )     (711 )

Interest rate swap agreements

     (818 )     (818 )

Cross currency interest rate swap agreements

     (691 )     (691 )

 

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 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 form brokers and reflect the estimated amounts that the Company would receive (or pay) to terminate the contracts at the reporting date.

 

26


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

 

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.

 

Foreign Currency Risk Management:

 

In the normal course of business, the Company is exposed to foreign exchange risk in the following areas:

 

    Transaction exposures, such as both existing and forecasted sales and purchases and payables/receivables resulting from such transactions

 

    Exposure of non-functional-currency-denominated debt

 

In order to mitigate the impact of currency exchange rate fluctuations, the Company continually assesses its exposure to currency risks and hedges a portion of those risks through the use of derivative instruments, principally forward foreign exchange contracts. The Company does not enter into the type of derivative instruments for purpose other than risk management. Responsibility for managing the Company’s currency exposures and use of currency derivatives is centralized within the finance department and in order to contract foreign currency derivative instruments, the authorization of the finance director is required.

 

Interest Rate Risk Management:

 

The Company uses variable-rate debt to finance its operations. As the debt obligations expose the Company to variability in interest payments due to changes in interest rates, management believes it is prudent to limit the variability of a portion of its interest payments. To meet this objective, management enters into interest rate swap agreements to manage fluctuations in cash flows resulting from interest rate risk. These swaps change the variable-rate cash flow exposure on the debt obligations to fixed-rate cash flows. Under the terms of the interest rate swaps, the Company receives variable interest rate payments and makes fixed interest rate payments, thereby creating the equivalent of fixed-rate debt.

 

The Company assesses interest rate risk by continually identifying and monitoring changes in interest rate exposures that may adversely impact expected future cash flows and by evaluating hedging opportunities. The Company maintains risk management control systems within the finance department to monitor interest rate risk attributable to both the Company’s outstanding or forecasted debt obligations. The risk management control systems involve the use of analytical techniques to estimate expected changes in interest rates on the Company’s future cash flows.

 

27


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)

 

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 currency over the next year (maximum length of time is through August 2003). When the yen weakens significantly against the foreign currencies (primarily the U.S. dollars), the increase in value of future foreign currency cost or revenue is offset by gains or losses in the value of the forward exchange contracts designated as hedges. Conversely, when the yen strengthens, the increase or decrease in the value of future foreign currency cash flow is offset by gains or losses in the value of the forward contracts.

 

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 three 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 ¥11,289 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, 2003.

 

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 amounts which were reclassified from accumulated other comprehensive income to other income (expense), net of related tax effect, were net gains of ¥819 million for the year ended March 31, 2003. 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, 2003, the Company expects to reclassify ¥32 million of net gains 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.

 

28


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)

 

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).

 

17.   Commitments and Contingencies

 

Guarantees

 

The Company guarantees certain indebtedness of others and other obligations. At March 31, 2003, the maximum potential amount of future payments (undiscounted) the Company as a guarantor could be required to make under the guarantee was ¥31,070 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, 2003, the carrying amount of the liability for the Company’s obligations under the guarantee was insignificant.

 

Loss contingencies

 

In October 2002, the Company announced a recall in order to repair defects free of charge for printer engines sold to OEMs or used in the Company’s products. The provision charged to income during the year was ¥5,800 million, of which ¥3,491 million has been incurred. The balance of the accrual at March 31, 2003 amounted to ¥2,309 million. The Company’s management is of the opinion that the remaining accrual is sufficient to cover remaining costs and uncertainties and will be utilized during the year ending March 31, 2004.

 

29


Fuji Xerox Co., Ltd and Subsidiaries

 

Notes to Consolidated Financial Statements (continued)

 

18.   Acquisitions

 

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 purposes, 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 certain 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 for the year ended March 31, 2003 were ¥989,532 million and ¥25,188 million, respectively.

 

30


SCHEDULE II

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, 2002
(unaudited)


 


Fuji Xerox Co., Ltd. and Subsidiaries

Consolidated Balance Sheets
(unaudited)

 

 

March 31

 

 

 


 

 

 

2002

 

2001

 

 

 


 


 

 

 

(Millions of yen)

 

Assets

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

¥

49,821

 

¥

37,026

 

 

Marketable securities (Note 4)

 

 

30

 

 

33

 

 

Receivables (Notes 5 and 20)

 

 

191,301

 

 

190,037

 

 

Finance receivables (Note 6)

 

 

27,069

 

 

24,949

 

 

Inventories (Note 7)

 

 

81,146

 

 

94,657

 

 

Prepaid expenses and other current assets (Notes 8 and 15)

 

 

28,106

 

 

24,537

 

 

 



 



 

Total current assets

 

 

377,473

 

 

371,239

 

Finance receivables (Note 6)

 

 

53,694

 

 

50,401

 

Investments (Notes 4 and 9)

 

 

47,608

 

 

51,617

 

Net property, plant and equipment (Note 10)

 

 

182,343

 

 

185,480

 

Deferred income taxes (Note 15)

 

 

42,804

 

 

24,704

 

Goodwill, less accumulated amortization (Notes 11 and 24)

 

 

98,839

 

 

86,147

 

Other assets

 

 

43,429

 

 

42,410

 

 

 



 



 

Total assets

 

¥

846,190

 

¥

811,998

 

 

 



 



 

Liabilities and stockholders’ equity

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Short-term debt (Note 12)

 

¥

90,730

 

¥

171,357

 

 

Payables (Notes 14 and 20)

 

 

130,985

 

 

131,817

 

 

Accrued income taxes (Note 15)

 

 

7,996

 

 

8,525

 

 

Accrued expenses and other current liabilities (Note 16)

 

 

68,517

 

 

60,261

 

 

 

 



 



 

Total current liabilities

 

 

298,228

 

 

371,960

 

Long-term debt (Note 12)

 

 

107,997

 

 

48,284

 

Retirement and severance benefits (Note 17)

 

 

116,370

 

 

79,706

 

Commitments and contingencies (Notes 13 and 23)

 

 

 

 

 

 

 

Minority interests

 

 

25,317

 

 

23,527

 

Stockholders’ equity (Note 18):

 

 

 

 

 

 

 

 

Common stock, with no par value:

 

 

 

 

 

 

 

 

Authorized - 80,000,000 shares
Issued        - 40,000,000 shares

 

 

20,000

 

 

20,000

 

 

Retained earnings

 

 

304,588

 

 

284,236

 

 

Accumulated other comprehensive income (loss) (Note 19)

 

 

(26,310

)

 

(15,715

)

 

 

 



 



 

Total stockholders’ equity

 

 

298,278

 

 

288,521

 

 

 



 



 

Total liabilities and stockholders’ equity

 

¥

846,190

 

¥

811,998

 

 

 



 



 

See notes to consolidated financial statements.

2



Fuji Xerox Co., Ltd. and Subsidiaries

Consolidated Statements of Income
(unaudited)

 

 

Year ended
March 31,
2002

 

Three-month
period ended
March 31,
2001

 

Year ended
December 31,
2000

 

 

 


 


 


 

 

 

(Millions of yen)

 

Operating revenue (Note 20):

 

 

 

 

 

 

 

 

 

 

 

Sales

 

¥

310,311

 

¥

69,833

 

¥

316,156

 

 

Service and rentals

 

 

347,663

 

 

83,682

 

 

339,947

 

 

Other

 

 

284,856

 

 

68,201

 

 

249,530

 

 

 

 



 



 



 

 

 

 

942,830

 

 

221,716

 

 

905,633

 

Costs and expenses (Note 20):

 

 

 

 

 

 

 

 

 

 

 

Cost of sales

 

 

228,024

 

 

50,291

 

 

229,476

 

 

Cost of service and rentals

 

 

132,691

 

 

34,065

 

 

124,852

 

 

Other

 

 

177,176

 

 

42,800

 

 

153,190

 

 

 

 



 



 



 

 

 

 

537,891

 

 

127,156

 

 

507,518

 

 

Research and development expenses

 

 

64,167

 

 

16,348

 

 

66,322

 

 

Selling, general and administrative expenses

 

 

297,523

 

 

72,269

 

 

299,025

 

 

 

 



 



 



 

 

 

 

899,581

 

 

215,773

 

 

872,865

 

 

 



 



 



 

Operating income

 

 

43,249

 

 

5,943

 

 

32,768

 

Other income (expenses):

 

 

 

 

 

 

 

 

 

 

 

Interest and dividend income

 

 

6,745

 

 

1,726

 

 

6,590

 

 

Interest expenses

 

 

(4,959

)

 

(1,479

)

 

(5,041

)

 

Exchange gains (losses), net

 

 

2,971

 

 

22

 

 

(1,330

)

 

Other, net

 

 

(6,854

)

 

(871

)

 

1,769

 

 

 

 



 



 



 

 

 

 

(2,097

)

 

(602

)

 

1,988

 

 

 



 



 



 

Income before income taxes and minority interests

 

 

41,152

 

 

5,341

 

 

34,756

 

Income taxes (Note 15):

 

 

 

 

 

 

 

 

 

 

 

Current

 

 

22,601

 

 

6,698

 

 

12,656

 

 

Deferred

 

 

(6,751

)

 

(3,227

)

 

3,074

 

 

 

 



 



 



 

 

 

 

15,850

 

 

3,471

 

 

15,730

 

 

 



 



 



 

Income before minority interests

 

 

25,302

 

 

1,870

 

 

19,026

 

Minority interests

 

 

4,424

 

 

752

 

 

3,903

 

 

 



 



 



 

Income before cumulative effect of change in accounting principle

 

 

20,878

 

 

1,118

 

 

15,123

 

Cumulative effect of change in accounting for derivative instruments and hedging activities, net (Note 2)

 

 

  

 

 

197

 

 

—  

 

 

 



 



 



 

Net income

 

¥

20,878

 

¥

1,315

 

¥

15,123

 

 

 



 



 



 

See notes to consolidated financial statements.

3



Fuji Xerox Co., Ltd. and Subsidiaries

Consolidated Statements of Comprehensive Income
(unaudited)

 

 

Year ended
March 31,
2002

 

Three-month
period ended
March 31,
2001

 

Year ended
December 31,
2000

 

 

 


 


 


 

 

 

(Millions of yen)

 

Net income

 

¥

20,878

 

¥

1,315

 

¥

15,123

 

Other comprehensive income (loss), net of taxes (Note 19):

 

 

 

 

 

 

 

 

 

 

 

Change in net unrealized gains on securities

 

 

(104

)

 

(18

)

 

(3,075

)

 

Change in net unrealized derivative gains

 

 

(493

)

 

505

 

 

—  

 

 

Foreign currency translation adjustments

 

 

9,299

 

 

4,214

 

 

5,354

 

 

Minimum pension liability adjustments

 

 

(19,297

)

 

(3,107

)

 

(6,169

)

 

 



 



 



 

 

 

 

(10,595

)

 

1,594

 

 

(3,890

)

 

 



 



 



 

Net comprehensive income

 

¥

10,283

 

¥

2,909

 

¥

11,233

 

 

 



 



 



 

See notes to consolidated financial statements.

4



Fuji Xerox Co., Ltd. and Subsidiaries

Consolidated Statements of Stockholders’ Equity
(unaudited)

 

 

Common stock

 

Retained
earnings

 

Accumulated
other
comprehensive
income (loss)

 


Total
stockholders’
equity

 

 

 


 


 


 


 

Balance at December 31, 1999

 

¥

20,000

 

¥

283,798

 

¥

(13,419

)

¥

290,379

 

Comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

—  

 

 

15,123

 

 

—  

 

 

15,123

 

 

Other (Note 19)

 

 

—  

 

 

—  

 

 

(3,890

)

 

(3,890

)

Cash dividends (Note 18)

 

 

—  

 

 

(8,000

)

 

—  

 

 

(8,000

)

 

 



 



 



 



 

Balance at December 31, 2000

 

 

20,000

 

 

290,921

 

 

(17,309

)

 

293,612

 

Comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

—  

 

 

1,315

 

 

—  

 

 

1,315

 

 

Other (Note 19)

 

 

—  

 

 

—  

 

 

1,594

 

 

1,594

 

Cash dividends (Note 18)

 

 

—  

 

 

(8,000

)

 

—  

 

 

(8,000

)

 

 



 



 



 



 

Balance at March 31, 2001

 

 

20,000

 

 

284,236

 

 

(15,715

)

 

288,521

 

Comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

—  

 

 

20,878

 

 

—  

 

 

20,878

 

 

   Other (Note 19)

 

 

—  

 

 

—  

 

 

(10,595

)

 

(10,595

)

Cash dividends (Note 18)

 

 

—  

 

 

(526

)

 

—  

 

 

(526

)

 

 



 



 



 



 

Balance at March 31, 2002

 

¥

20,000

 

¥

304,588

 

¥

 (26,310

)

¥

298,278

 

 

 



 



 



 



 

See notes to consolidated financial statements.

5



Fuji Xerox Co., Ltd. and Subsidiaries

Consolidated Statements of Cash Flows
(unaudited)

 

 

Year ended
March 31,

2002

 

Three-month
period ended

March 31,

2001

 

Year ended
December 31,

2000

 

 

 


 


 


 

 

 

(Millions of yen)

 

Operating activities

 

 

 

 

 

 

 

 

 

 

Net income

 

¥

20,878

 

¥

1,315

 

¥

15,123

 

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

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

67,406

 

 

17,734

 

 

63,386

 

 

Loss on disposal of inventories

 

 

4,537

 

 

582

 

 

2,534

 

 

Gain on sales of marketable securities

 

 

(223

)

 

—  

 

 

(3,182

)

 

Write down of marketable securities

 

 

1,459

 

 

167

 

 

707

 

 

Increase (decrease) in retirement and severance benefits

 

 

2,860

 

 

(1,205

)

 

(20,771

)

 

Deferred income taxes

 

 

(6,751

)

 

(3,227

)

 

3,074

 

 

Loss on disposal of property, plant and equipment

 

 

8,026

 

 

1,861

 

 

8,388

 

 

Equity in earnings of affiliates, less dividends

 

 

(1,569

)

 

(338

)

 

(1,091

)

 

Minority interests in earnings of subsidiaries

 

 

4,424

 

 

752

 

 

3,903

 

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

 

 

 

Receivables

 

 

4,204

 

 

7,532

 

 

(11,639

)

 

Finance receivables

 

 

2,656

 

 

2,732

 

 

(1,774

)

 

Inventories

 

 

13,167

 

 

(10,996

)

 

(5,913

)

 

Payables

 

 

(7,845

)

 

(7,466

)

 

2,869

 

 

Accrued income taxes

 

 

(1,545

)

 

(308

)

 

2,022

 

 

Accrued expenses and other current liabilities

 

 

9,026

 

 

8,056

 

 

(5,662

)

 

Other, net

 

 

5,326

 

 

(1,264

)

 

10,160

 

 

 

 



 



 



 

Net cash provided by operating activities

 

 

126,036

 

 

15,927

 

 

62,134

 

Investing activities

 

 

 

 

 

 

 

 

 

 

Proceeds from sales of property, plant and equipment

 

 

603

 

 

140

 

 

2,143

 

Capital expenditures

 

 

(54,790

)

 

(10,802

)

 

(65,270

)

Payments for purchases of software

 

 

(13,960

)

 

(523

)

 

(18,758

)

Payments for purchases of marketable and investment securities

 

 

(984

)

 

(1,144

)

 

(1,029

)

Proceeds from sales of marketable and investment securities

 

 

376

 

 

131

 

 

3,954

 

Payments for acquisitions of businesses, net of cash acquired

 

 

(14,857

)

 

—  

 

 

(66,189

)

Other, net

 

 

5,155

 

 

1,520

 

 

4,270

 

 

 



 



 



 

Net cash used in investing activities

 

 

(78,457

)

 

(10,678

)

 

(140,879

)

Financing activities

 

 

 

 

 

 

 

 

 

 

Proceeds from long-term debt

 

 

64,666

 

 

24,430

 

 

54,461

 

Repayments of long-term debt

 

 

(30,891

)

 

(38,281

)

 

(33,990

)

(Decrease) increase in short-term debt, net

 

 

(41,987

)

 

9,814

 

 

56,981

 

(Decrease) increase in commercial paper, net

 

 

(27,000

)

 

5,000

 

 

(25,000

)

Dividends paid

 

 

(526

)

 

(8,000

)

 

(8,000

)

 

 



 



 



 

Net cash (used in) provided by financing activities

 

 

(35,738

)

 

(7,037

)

 

44,452

 

Effect of exchange rate changes on cash and cash equivalents

 

 

954

 

 

248

 

 

273

 

 

 



 



 



 

Net increase (decrease) in cash and cash equivalents

 

 

12,795

 

 

(1,540

)

 

(34,020

)

Cash and cash equivalents at beginning of period

 

 

37,026

 

 

38,566

 

 

72,586

 

 

 



 



 



 

Cash and cash equivalents at end of period

 

¥

49,821

 

¥

37,026

 

¥

38,566

 

 

 



 



 



 

See notes to consolidated financial statements.

6



Fuji Xerox Co., Ltd. and Subsidiaries

Notes to Consolidated Financial Statements
(unaudited)

March 31, 2002

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 of the United Kingdom, a 100%-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’s territory, as established by Xerox Corporation, extends to the Asia Pacific and Oceania regions and 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 low-end laser printers and providing related services, collectively referred to as the Document Services Business. Other businesses include logistics and educational services which are not significant.

Domestic revenues and overseas revenues from Southeast Asia, Oceania and other regions based on the location of customers represented 79% and 21% of total revenues, respectively, for the year ended March 31, 2002.

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 subsidiaries. All significant intercompany balances and transactions have been eliminated on consolidation.

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

7



Fuji Xerox Co., Ltd. and Subsidiaries

Notes to Consolidated Financial Statements (continued)
(unaudited)

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 statements 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 to be cash equivalents.

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.

Inventories

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

8



Fuji Xerox Co., Ltd. and Subsidiaries

Notes to Consolidated Financial Statements (continued)
(unaudited)

2.  Summary of Significant Accounting Policies (continued)

Depreciation

Depreciation of property, plant and equipment is computed principally by the declining balance method based on estimated useful lives, except for the rental machines acquired on or after January 1, 1999 and buildings acquired on or after April 1, 1998. Depreciation of the rental machines acquired on or after January 1, 1999 and buildings 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

Goodwill and Long-Lived Assets

Goodwill, which represents the excess of purchase price over the fair value of the net assets acquired, is being amortized on a straight-line basis over the periods of 20 to 40 years, except for that acquired in a business combination completed after June 30, 2001. Long-lived assets and goodwill are reviewed for impairment whenever events or changes in business circumstances indicate that the carrying amount may not be fully recoverable. In reviewing for impairment, the Company compares the carrying value of such assets to the estimated undiscounted future cash flows expected from the use of the assets and their eventual disposition. An impairment loss, equal to the difference between the assets’ fair value and their carrying value, is recognized when the estimated future cash flows are less than their carrying amount.

In July 2001, the Financial Accounting Standards Board 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 definitive lives will continue to be amortized over their useful lives. The Company will adopt FAS 142 on April 1, 2002 and is currently assessing the financial impact of the impairment of goodwill and other intangible assets.

Revenue Recognition

Generally, revenue is recognized after services are rendered or products are shipped. Revenue from sales-type leases is recognized at the inception of the lease. Associated interest income is recognized using the interest method with the allocation based on the net investment in outstanding leases. Revenue from other leases is accounted for as operating leases; the rentals under such leases are included in revenue as earned over the terms of the respective leases.

9



Fuji Xerox Co., Ltd. and Subsidiaries

Notes to Consolidated Financial Statements (continued)
(unaudited)

2.  Summary of Significant Accounting Policies (continued)

Shipping and Handling Costs

The Company includes shipping and handling costs, which totaled ¥13,456 million for the year ended March 31, 2002, ¥3,205 million for the three-month period ended March 31, 2001, and ¥12,870 million for the year ended December 31, 2000, 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 ¥8,114 million for the year ended March 31, 2002, ¥2,094 million for the three-month period ended March 31, 2001, and ¥10,325 million for the year ended December 31, 2000.

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 bases. 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 rates is recognized in income in the period that includes the enactment date.

Derivative Financial Instruments

The Company and certain of its subsidiaries have entered into foreign exchange contracts and interest rate agreements for hedging currency and interest rate exposures. These instruments include forward foreign exchange contracts, currency swap agreements and interest rate swap agreements.

Effective January 1, 2001, the Company adopted FAS 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended by FAS 138. FAS 133 established accounting and reporting standards for derivative instruments and hedging activities. It requires an entity to recognize all derivatives as either assets or liabilities in the statement of financial position and measure 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, 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. Upon adoption of FAS 133, the Company recorded a gain of ¥197 million, net of the related income tax effect, as the net transition adjustment in the consolidated statement of income and a net transition gain of ¥376 million, net of the related income tax effect, in accumulated other comprehensive income.

10



Fuji Xerox Co., Ltd. and Subsidiaries

Notes to Consolidated Financial Statements (continued)
(unaudited)

2.    Summary of Significant Accounting Policies (continued)

Derivative Financial Instruments (continued)

Prior to the adoption of FAS 133, the change in the value of forward foreign exchange contacts or currency swap contracts hedging existing assets and liabilities denominated in foreign currencies were offset by the foreign exchange gains or losses of the underlying assets or liabilities being hedged. The discounts or premiums on the instruments were amortized over the lives of the contracts using the straight-line method. For interest rate swaps, the net amounts paid or received and net amounts accrued through the end of the accounting period were included in interest expense.

Reclassifications

Certain reclassifications of prior periods’ financial statements and related footnote amounts have been made to conform with the current year presentation.

3.    Change in Fiscal Year-End

The Company changed the date of its fiscal year-end from December 31 to March 31 effective the fiscal year ended March 31, 2001. Accordingly, the accompanying consolidated statements of income, comprehensive income, stockholders’ equity and cash flows are presented for the year ended March 31, 2002, the three-month period ended March 31, 2001 and the year ended December 31, 2000.

4.    Marketable Securities and Investment Securities

Marketable securities and investment securities consist of available-for-sale securities. The cost, gross unrealized gains, gross unrealized losses, and fair value for such securities by major security type at March 31, 2002 and 2001 are summarized as follows:

 

 

Cost

 

Gross
unrealized
gains

 

Gross
unrealized
losses

 

Fair value

 

 

 



 



 



 



 

 

 

(Millions of yen)

 

March 31, 2002

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Marketable securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Bank debt securities

 

¥

30

 

¥

—  

 

¥

—  

 

¥

30

 

 

 



 



 



 



 

 

Investment securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Japanese and foreign government debt securities

 

¥

100

 

¥

 11

 

¥

—  

 

¥

111

 

 

Corporate debt securities

 

 

30

 

 

—  

 

 

3

 

 

27

 

 

Equity securities

 

 

1,841

 

 

460

 

 

205

 

 

2,096

 

 

 



 



 



 



 

 

 

¥

1,971

 

¥

471

 

¥

208

 

¥

2,234

 

 

 



 



 



 



 

11



Fuji Xerox Co., Ltd. and Subsidiaries

Notes to Consolidated Financial Statements (continued)
(unaudited)

4.    Marketable Securities and Investment Securities (continued)

 

 

Cost

 

Gross
unrealized
gains

 

Gross
unrealized
losses

 

Fair value

 

 

 


 


 


 


 

 

 

(Millions of yen)

 

March 31, 2001

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Marketable securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Bank debt securities

 

¥

33

 

¥

—  

 

¥

—  

 

¥

33

 

 

 

 



 



 



 



 

 

Investment securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Japanese and foreign government debt securities

 

¥

100

 

¥

14

 

¥

—  

 

¥

114

 

 

Corporate debt securities

 

 

30

 

 

—  

 

 

2

 

 

28

 

 

Equity securities

 

 

2,308

 

 

740

 

 

334

 

 

2,714

 

 

 

 



 



 



 



 

 

 

¥

2,438

 

¥

754

 

¥

 336

 

¥

2,856

 

 

 



 



 



 



 

The difference between the amounts disclosed above for investment securities and the amounts shown at Note 9 are due to certain non-listed equity securities which are carried at cost but are reduced to net realizable value for other-than-temporary declines in market value.

Gross realized losses on available-for-sale securities, which include the gross unrealized losses considered as other-than-temporary, were ¥1,459 million for the year ended March 31, 2002, ¥167 million for the period ended March 31, 2001, and ¥707 million for the year ended December 31, 2000. Proceeds from the sales of available-for-sale securities for the year ended March 31, 2002, the period ended March 31, 2001 and the year ended December 31, 2000 were ¥376 million, ¥131 million and ¥3,954 million, respectively. Of those sales, gross realized gains from the sales of available-for-sale securities for the years ended March 31, 2002 and December 31, 2000 were ¥223 million and ¥3,182 million, respectively. Such gains for the period ended March 31, 2001 were insignificant. Realized gains and losses and declines in value considered as other-than-temporary are included in other income (expenses).

Net unrealized gains on available-for-sale securities, net of the related taxes, decreased by ¥104 million, ¥18 million and ¥3,075 million for the year ended March 31, 2002, the period ended March 31, 2001, and the year ended December 31, 2000, respectively.

12



Fuji Xerox Co., Ltd. and Subsidiaries

Notes to Consolidated Financial Statements (continued)
(unaudited)

4.    Marketable Securities and Investment Securities (continued)

The cost and estimated fair value of debt securities at March 31, 2002, by contractual maturity, are shown below. The expected maturities based on contract terms may differ from the actual maturities because the issuers of the securities may have the right to prepay the obligations without penalties.

 

 

Cost

 

Fair value

 

 

 



 



 

 

 

(Millions of yen)

 

Due within one year

 

¥

30

 

¥

30

 

Due after one year through five years

 

 

130

 

 

138

 

 

 



 



 

 

 

¥

160

 

¥

168

 

 

 



 



 

5.    Receivables

Receivables at March 31, 2002 and 2001 are summarized as follows:

 

 

March 31

 

 

 


 

 

 

2002

 

2001

 

 

 



 



 

 

 

(Millions of yen)

 

Trade:

 

 

 

 

 

 

 

 

Notes

 

¥

12,766

 

¥

12,786

 

 

Accounts

 

 

168,933

 

 

167,714

 

Other

 

 

12,341

 

 

11,390

 

 

 



 



 

 

 

 

194,040

 

 

191,890

 

Less allowance for doubtful receivables

 

 

(2,739

)

 

(1,853

)

 

 



 



 

 

 

¥

191,301

 

¥

190,037

 

 

 



 



 

6.    Finance Receivables

Finance receivables represent receivables recorded on sales-type leases resulting from the marketing of the Company’s equipment. The components of finance receivables at March 31, 2002 and 2001 are as follows:

 

 

March 31

 

 

 


 

 

 

2002

 

2001

 

 

 



 



 

 

 

(Millions of yen)

 

Gross receivables

 

¥

99,555

 

¥

 91,601

 

Unearned income

 

 

(15,608

)

 

(14,487

)

Unguaranteed residual value

 

 

47

 

 

433

 

Less allowance for doubtful receivables

 

 

(3,231

)

 

(2,197

)

 

 



 



 

 

 

 

80,763

 

 

75,350

 

Less current portion

 

 

(27,069

)

 

(24,949

)

 

 



 



 

 

 

¥

53,694

 

¥

 50,401

 

 

 



 



 

13



Fuji Xerox Co., Ltd. and Subsidiaries

Notes to Consolidated Financial Statements (continued)
(unaudited)

6.    Finance Receivables (continued)

The future minimum lease payments to be received under sales-type leases as of March 31, 2002 are summarized as follows:

 

 

(Millions of
yen)

 

 

 



 

Year ending March 31:

 

 

 

 

 

2003

 

¥

35,960

 

 

2004

 

 

26,101

 

 

2005

 

 

19,708

 

 

2006

 

 

12,331

 

 

2007

 

 

4,885

 

 

2008 and thereafter

 

 

570

 

 

 

 



 

 

Total future minimum lease payments

 

¥

99,555

 

 

 

 



 

7.    Inventories

Inventories at March 31, 2002 and 2001 are summarized as follows:

 

 

March 31

 

 

 


 

 

 

2002

 

2001

 

 

 


 


 

 

 

(Millions of yen)

 

Merchandise

 

¥

49,236

 

¥

62,104

 

Parts

 

 

5,349

 

 

6,637

 

Raw materials

 

 

10,409

 

 

9,955

 

Work in process

 

 

10,789

 

 

10,180

 

Supplies

 

 

5,363

 

 

5,781

 

 

 


 


 

 

 

¥

81,146

 

¥

94,657

 

 

 


 


 

8.    Prepaid Expenses and Other Current Assets

Prepaid expenses and other current assets at March 31, 2002 and 2001 comprise the following:

 

 

March 31

 

 

 


 

 

 

2002

 

2001

 

 

 



 



 

 

 

(Millions of yen)

 

Advance payments

 

¥

1,072

 

¥

1,016

 

Deferred income taxes – current

 

 

20,245

 

 

14,990

 

Other

 

 

6,789

 

 

8,531

 

 

 



 



 

 

 

¥

28,106

 

¥

24,537

 

 

 



 



 

14



Fuji Xerox Co., Ltd. and Subsidiaries

Notes to Consolidated Financial Statements (continued)
(unaudited)

9.    Investments

Investments at March 31, 2002 and 2001 are summarized as follows:

 

 

March 31

 

 

 


 

 

 

2002

 

2001

 

 

 



 



 

 

 

(Millions of yen)

 

Investments in affiliates

 

¥

15,164

 

¥

14,725

 

Investment securities

 

 

4,354

 

 

5,235

 

Lease deposits and other

 

 

28,090

 

 

31,657

 

 

 



 



 

 

 

¥

47,608

 

¥

51,617

 

 

 



 



 

10.  Property, Plant and Equipment

Property, plant and equipment at March 31, 2002 and 2001 are summarized as follows:

 

 

Cost

 

Accumulated
depreciation

 

Net book
value

 

 

 



 



 



 

 

 

(Millions of yen)

 

March 31, 2002

 

 

 

 

 

 

 

 

 

 

 

Rental machines

 

¥

85,661

 

¥

 58,157

 

¥

27,504

 

 

Land

 

 

22,623

 

 

—  

 

 

22,623

 

 

Buildings and structures

 

 

155,333

 

 

89,358

 

 

65,975

 

 

Machinery and equipment

 

 

59,081

 

 

40,799

 

 

18,282

 

 

Vehicles

 

 

3,840

 

 

3,007

 

 

833

 

 

Tools, furniture and fixtures

 

 

185,205

 

 

140,775

 

 

44,430

 

 

Construction in progress

 

 

2,696

 

 

—  

 

 

2,696

 

 

 

 



 



 



 

 

 

¥

514,439

 

¥

332,096

 

¥

182,343

 

 

 

 



 



 



 

March 31, 2001

 

 

 

 

 

 

 

 

 

 

 

Rental machines

 

¥

84,214

 

¥

50,778

 

¥

33,436

 

 

Land

 

 

20,340

 

 

—  

 

 

20,340

 

 

Buildings and structures

 

 

146,159

 

 

80,189

 

 

65,970

 

 

Machinery and equipment

 

 

53,560

 

 

36,422

 

 

17,138

 

 

Vehicles

 

 

4,607

 

 

3,203

 

 

1,404

 

 

Tools, furniture and fixtures

 

 

168,975

 

 

125,737

 

 

43,238

 

 

Construction in progress

 

 

3,954

 

 

—  

 

 

3,954

 

 

 

 



 



 



 

 

 

¥

481,809

 

¥

296,329

 

¥

185,480

 

 

 

 



 



 



 

15



Fuji Xerox Co., Ltd. and Subsidiaries

Notes to Consolidated Financial Statements (continued)
(unaudited)

11.  Goodwill

The cost, accumulated amortization and net book value of goodwill at March 31, 2002 and 2001 are summarized as follows:

 

 

March 31

 

 

 


 

 

 

2002

 

2001

 

 

 



 



 

 

 

(Millions of yen)

 

Cost

 

¥

110,891

 

¥

93,864

 

Accumulated amortization

 

 

12,052

 

 

7,717

 

 

 



 



 

Net book value

 

¥

98,839

 

¥

86,147

 

 

 



 



 

12.  Short-Term Debt and Long-Term Debt

Short-term debt at March 31, 2002 and 2001 are summarized as follows:

 

 

March 31

 

 

 


 

 

 

2002

 

2001

 

 

 



 



 

 

 

(Millions of yen)

 

Short-term debt, mainly to banks

 

¥

74,690

 

¥

110,466

 

Commercial paper

 

 

3,000

 

 

30,000

 

Current installments of long-term debt

 

 

13,040

 

 

30,891

 

 

 



 



 

 

 

¥

90,730

 

¥

171,357

 

 

 



 



 

The weighted average interest rates on short-term debt outstanding at March 31, 2002 and 2001 were 3.2% and 2.2%, respectively.

16



Fuji Xerox Co., Ltd. and Subsidiaries

Notes to Consolidated Financial Statements (continued)
(unaudited)

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

Long-term debt at March 31, 2002 and 2001 consist of the following:

 

 

March 31

 

 

 


 

 

 

2002

 

2001

 

 

 



 



 

 

 

(Millions of yen)

 

Unsecured loans from banks and insurance companies due 2003 to 2012, with interest rates ranging from 0.1% to 8.7% in 2002 and 0.7% to 12.8% in 2001

 

¥

60,208

 

¥

39,275

 

Unsecured yen medium term notes:

 

 

 

 

 

 

 

 

0.77% medium term notes, due 2002

 

 

—  

 

 

3,000

 

 

Medium term notes, due 2003, with interest rates of 0.25% in 2002 and 0.28% in 2001

 

 

5,000

 

 

5,000

 

 

1.49% medium term notes, due 2004

 

 

5,000

 

 

5,000

 

 

0.94% medium term notes, due 2004

 

 

3,200

 

 

3,200

 

 

0.20% medium term notes, due 2005

 

 

3,000

 

 

—  

 

 

1.99% medium term notes, due 2006

 

 

5,000

 

 

5,000

 

 

0.33% medium term notes, due 2002

 

 

—  

 

 

3,700

 

Unsecured yen bonds:

 

 

 

 

 

 

 

 

0.62% bonds, due 2007

 

 

3,000

 

 

—  

 

 

0.65% bonds, due 2007

 

 

7,500

 

 

—  

 

 

1.63% bonds, due 2008

 

 

5,000

 

 

5,000

 

 

1.01% bonds, due 2009

 

 

6,100

 

 

—  

 

 

1.01% bonds, due 2009

 

 

2,000

 

 

—  

 

 

1.99% bonds, due 2011

 

 

10,000

 

 

10,000

 

 

1.52% bonds, due 2012

 

 

3,000

 

 

—  

 

Other

 

 

3,029

 

 

—  

 

 

 



 



 

 

 

 

121,037

 

 

79,175

 

Less current installments

 

 

(13,040

)

 

(30,891

)

 

 



 



 

Long-term debt, excluding current installments

 

¥

107,997

 

¥

48,284

 

 

 



 



 

17



Fuji Xerox Co., Ltd. and Subsidiaries

Notes to Consolidated Financial Statements (continued)
(unaudited)

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

The aggregate annual maturities of long-term debt outstanding at March 31, 2002 are as follows:

 

 

(Millions of
yen)

 

 

 


 

Year ending March 31:

 

 

 

 

 

2003

 

¥

13,040

 

 

2004

 

 

14,599

 

 

2005

 

 

6,427

 

 

2006

 

 

6,102

 

 

2007

 

 

22,805

 

 

2008 and thereafter

 

 

58,064

 

 

 

 



 

 

 

¥

121,037

 

 

 

 



 

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.

13.  Lease Commitments

The Company and its subsidiaries occupy certain offices and other facilities and use certain equipment under operating lease arrangements. The future minimum lease payments required under operating leases which, at March 31, 2002, have initial or remaining noncancelable lease term in excess of one year are summarized as follows:

 

 

(Millions of
yen)

 

 

 


 

Year ending March 31:

 

 

 

 

 

2003

 

¥

2,600

 

 

2004

 

 

1,900

 

 

2005

 

 

1,017

 

 

2006

 

 

446

 

 

2007

 

 

246

 

 

2008 and thereafter

 

 

72

 

 

 

 



 

 

Total future minimum lease payments

 

¥

6,281

 

 

 

 



 

Rental expenses under operating leases for the year ended March 31, 2002, the period ended March 31, 2001 and the year ended December 31, 2000 were ¥31,010 million, ¥7,862 million and ¥30,744 million, respectively.

18



Fuji Xerox Co., Ltd. and Subsidiaries

Notes to Consolidated Financial Statements (continued)
(unaudited)

14.  Payables

Payables at March 31, 2002 and 2001 are summarized as follows:

 

 

March 31

 

 

 


 

 

 

2002

 

2001

 

 

 



 



 

 

 

(Millions of yen)

 

Notes

 

¥

14,834

 

¥

 26,291

 

Accounts

 

 

116,151

 

 

105,526

 

 

 



 



 

 

 

¥

130,985

 

¥

131,817

 

 

 



 



 

15.  Income Taxes

Income taxes applicable to the Company and its domestic subsidiaries comprise corporation, inhabitants’ and enterprise taxes which, in the aggregate, resulted in a statutory tax rate of approximately 42%.

The effective tax rates reflected in the 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 differ from the statutory tax rate due to the following reasons:

 

 

Percent of pretax earnings

 

 

 


 

 

 

Year ended
March 31,
2002

 

Three-month
period ended
March 31,
2001

 

Year ended
December 31,
2000

 

 

 



 



 



 

Japanese statutory tax rate

 

 

42.0

%

 

42.0

%

 

42.0

%

Expenses not deductible for tax purposes

 

 

2.7

 

 

12.3

 

 

4.1

 

Reversal of prior years’ accruals

 

 

(5.4

)

 

—  

 

 

—  

 

Other

 

 

(0.8

)

 

10.7

 

 

(0.8

)

 

 



 



 



 

Effective tax rates

 

 

38.5

%

 

65.0

%

 

45.3

%

 

 



 



 



 

19



Fuji Xerox Co., Ltd. and Subsidiaries

Notes to Consolidated Financial Statements (continued)
(unaudited)

15.  Income Taxes (continued)

The tax effects of temporary differences that give rise to the deferred tax assets and liabilities at March 31, 2002 and 2001 are presented below:

 

 

March 31

 

 

 


 

 

 

2002

 

2001

 

 

 



 



 

 

 

(Millions of yen)

 

Deferred tax assets:

 

 

 

 

 

 

 

 

Inventory reserve

 

¥

4,987

 

¥

 5,053

 

 

Intercompany profit on inventory

 

 

2,791

 

 

2,839

 

 

Depreciation of property, plant and equipment

 

 

5,547

 

 

3,833

 

 

Investments and other assets

 

 

4,737

 

 

3,797

 

 

Accrued bonus

 

 

7,120

 

 

4,301

 

 

Compensated absences

 

 

2,047

 

 

1,664

 

 

Retirement and severance benefits

 

 

14,977

 

 

13,022

 

 

Minimum pension liability adjustments

 

 

21,474

 

 

6,717

 

 

Net operating loss carryforwards

 

 

885

 

 

318

 

 

Other

 

 

8,816

 

 

8,558

 

 

 



 



 

 

 

 

73,381

 

 

50,102

 

 

Less valuation allowance

 

 

(314

)

 

(666

)

 

 



 



 

Total deferred tax assets

 

 

73,067

 

 

49,436

 

 

 



 



 

Deferred tax liabilities:

 

 

 

 

 

 

 

 

Net unrealized gains on marketable securities and investment securities

 

 

(110

)

 

(176

)

 

Net unrealized derivative gains

 

 

(9

)

 

(366

)

 

Reserve for tax purposes

 

 

(1,793

)

 

(2,406

)

 

Lease accounting

 

 

(3,207

)

 

(269

)

 

Accelerated depreciation

 

 

(1,657

)

 

(1,410

)

 

Other

 

 

(3,242

)

 

(5,115

)

 

 



 



 

Total deferred tax liabilities

 

 

(10,018

)

 

(9,742

)

 

 



 



 

Net deferred tax assets

 

¥

63,049

 

¥

39,694

 

 

 



 



 

Net deferred tax assets at March 31, 2002 and 2001 are reflected in the accompanying consolidated balance sheets under the following captions:

 

 

March 31

 

 

 


 

 

 

2002

 

2001

 

 

 



 



 

 

 

(Millions of yen)

 

Prepaid expenses and other current assets

 

¥

20,245

 

¥

14,990

 

Deferred income taxes

 

 

42,804

 

 

24,704

 

 

 



 



 

 

 

¥

63,049

 

¥

39,694

 

 

 



 



 

20



Fuji Xerox Co., Ltd. and Subsidiaries

Notes to Consolidated Financial Statements (continued)
(unaudited)

15.  Income Taxes (continued)

The net change in the total valuation allowance was a decrease of ¥352 million for the year ended March 31, 2002, an increase of ¥20 million for the three-month period ended March 31, 2001 and a decrease of ¥628 million for the year ended December 31, 2000.

At March 31, 2002, certain subsidiaries of the Company have net operating loss carryforwards for income tax purposes amounting to ¥3,403 million, which are available to offset against future taxable income, if any. Approximately ¥1,898 million of the operating losses will expire through 2007 while the remainder has an indefinite carryforward period.

The Company has not recognized a deferred tax liability for the undistributed earnings of its foreign subsidiaries amounting to approximately ¥32,861 million at March 31, 2002 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.

16.  Accrued Expenses and Other Current Liabilities

Accrued expenses and other current liabilities at March 31, 2002 and 2001 comprise the following:

 

 

March 31

 

 

 






 

 

 

2002

 

2001

 

 

 



 



 

 

 

(Millions of yen)

 

Accrued expenses

 

¥

53,252

 

¥

41,764

 

Accrued royalty

 

 

3,119

 

 

3,001

 

Advances from customers

 

 

4,302

 

 

3,765

 

Other

 

 

7,844

 

 

11,731

 

 

 



 



 

 

 

¥

68,517

 

¥

60,261

 

 

 



 



 

17.  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.

21



Fuji Xerox Co., Ltd. and Subsidiaries

Notes to Consolidated Financial Statements (continued)
(unaudited)

17.  Retirement and Severance Benefits (continued)

The Company and certain of its domestic subsidiaries also have defined benefit pension plans covering substantially all of their employees. The plan consists 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. During the year ended March 31, 2002, the Company made certain amendments, which resulted in a decrease in the benefit obligation of ¥14,726 million.

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.

Reconciliations 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:

 

 

March 31

 

 

 






 

 

 

2002

 

2001

 

 

 



 



 

 

 

(Millions of yen)

 

Changes in benefit obligations:

 

 

 

 

 

 

 

 

Benefit obligations at beginning of year

 

¥

396,891

 

¥

361,553

 

 

Service cost

 

 

18,795

 

 

4,716

 

 

Interest cost

 

 

11,810

 

 

2,931

 

 

Plan participants’ contributions

 

 

2,149

 

 

537

 

 

Plan amendment

 

 

(14,726

)

 

—  

 

 

Actuarial loss

 

 

39,800

 

 

29,497

 

 

Acquisition

 

 

1,135

 

 

—  

 

 

Benefits paid

 

 

(4,345

)

 

(2,343

)

 

 

 



 



 

 

Benefit obligations at end of year

 

 

451,509

 

 

396,891

 

Changes in plan assets:

 

 

 

 

 

 

 

 

Fair value of plan assets at beginning of year

 

 

246,295

 

 

232,992

 

 

Actual (loss) return on plan assets

 

 

(8,718

)

 

9,860

 

 

Acquisition

 

 

272

 

 

—  

 

 

Employers’ contributions

 

 

21,030

 

 

4,713

 

 

Plan participants’ contributions

 

 

2,149

 

 

537

 

 

Benefits paid

 

 

(2,863

)

 

(1,807

)

 

 

 



 



 

 

Fair value of plan assets at end of year

 

 

258,165

 

 

246,295

 

 

 

 



 



 

Funded status

 

 

(193,344

)

 

(150,596

)

Unrecognized net actuarial loss

 

 

153,548

 

 

97,919

 

Unrecognized prior service costs (credit)

 

 

(17,266

)

 

(2,674

)

Unrecognized net transition obligation

 

 

2,364

 

 

5,166

 

 

 



 



 

Net amount recognized

 

¥

(54,698

)

¥

(50,185

)

 

 



 



 

22



Fuji Xerox Co., Ltd. and Subsidiaries

Notes to Consolidated Financial Statements (continued)
(unaudited)

17.  Retirement and Severance Benefits (continued)

 

 

March 31

 

 

 






 

 

 

2002

 

2001

 

 

 



 



 

 

 

 

(Millions of yen)

 

Amounts recognized in the consolidated balance sheets consist of:

 

 

 

 

 

 

 

Retirement and severance benefits

 

¥

(111,001

)

¥

(74,753

)

Prepaid pension and severance costs

 

 

925

 

 

—  

 

Additional minimum liability adjustments:

 

 

 

 

 

 

 

 

Intangible asset

 

 

4,249

 

 

8,575

 

 

Deferred tax assets - noncurrent

 

 

21,474

 

 

6,717

 

 

Minority interest

 

 

1,082

 

 

—  

 

 

Accumulated other comprehensive loss, net of tax

 

 

28,573

 

 

9,276

 

 

 

 



 



 

Net amount recognized

 

¥

(54,698

)

¥

(50,185

)

 

 



 



 

The plan assets consist principally of corporate equity securities, government securities and corporate debt securities. Unrecognized prior service cost has been amortized on the straight-line method over the average remaining service period of employees expected to receive benefits under the plan.

Components of net periodic benefit cost for the year ended March 31, 2002, the three-month period ended March 31, 2001 and the year ended December 31, 2000 are as follows:

 

 

Year ended
March 31,
2002

 

Three-month
period ended
March 31,
2001

 

Year ended
December 31,
2000

 

 

 



 



 



 

 

 

 

(Millions of yen)

 

Components of net periodic benefit cost:

 

 

 

 

 

 

 

 

 

 

 

Service cost

 

¥

18,795

 

¥

4,716

 

¥

15,558

 

 

Interest cost

 

 

11,810

 

 

2,931

 

 

11,016

 

 

Expected return on plan assets

 

 

(10,047

)

 

(2,475

)

 

(10,308

)

 

Recognized net actuarial loss

 

 

2,946

 

 

983

 

 

680

 

 

Amortization of unrecognized prior service costs (credit)

 

 

(134

)

 

(33

)

 

(61

)

 

Amortization of unrecognized net transition obligation

 

 

2,802

 

 

76

 

 

304

 

 

 

 



 



 



 

 

Net periodic benefit cost

 

¥

26,172

 

¥

6,198

 

¥

17,189

 

 

 

 



 



 



 

23



Fuji Xerox Co., Ltd. and Subsidiaries

Notes to Consolidated Financial Statements (continued)
(unaudited)

17.  Retirement and Severance Benefits (continued)

The assumptions used in accounting for the plans are as follows:

 

 

Year ended
March 31,
2002

 

Three-month
period ended
March 31,
2001

 

Year ended
December 31,
2000

 

 

 



 



 



 

Weighted-average discount rate

 

 

2.5

%

 

3.0

%

 

3.0

%

Rate of future compensation increase

 

 

2.5

%

 

2.5

%

 

2.5

%

Expected long-term rate of return on plan asset

 

 

4.0

%

 

4.0

%

 

4.0

%

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

Payments to directors and statutory auditors, corporate officers and part-time employees are based on separate plans. Amounts of ¥5,369 million and ¥4,953 million have been accrued as of March 31, 2002 and 2001, respectively, and are included in the liability for retirement and severance benefits in the accompanying consolidated balance sheets.

Total charges to income for these benefits for the year ended March 31, 2002, the period ended March 31, 2001 and the year ended December 31, 2000 amounted to ¥27,127 million, ¥6,864 million and ¥18,543 million, respectively.

18.  Stockholders’ Equity

On October 1, 2001, an amendment (the “Amendment”) to the Commercial Code of Japan (the “Code”) became effective. The Amendment eliminates the stated par value of the Company’s outstanding shares which results in all outstanding shares having no par value as of October 1, 2001. The Amendment also provides that share issuances after September 30, 2001 will be of shares with no par value. Before the Amendment, the Company’s shares had a par value of ¥500 per share.

The Code provides that an amount equal to at least 10% of the amount to be disbursed as a distribution of earnings be appropriated to the legal reserve until the total of such reserve and the additional paid-in capital account equals 25% of the common stock account. The Code also provides to the extent that the sum of additional paid-in capital account and the legal reserve account exceed 25% of the common stock account then the amount of the excess (if any) is available for appropriations by resolution of the stockholders. Legal reserve amounting to ¥5,988 million is included in retained earnings in the consolidated balance sheet at March 31, 2002.

24



Fuji Xerox Co., Ltd. and Subsidiaries

Notes to Consolidated Financial Statements (continued)
(unaudited)

18.  Stockholders’ Equity (continued)

Cash dividends charged to retained earnings during the year ended March 31, 2002, the period ended March 31, 2001 and the year ended December 31, 2000 represent dividends paid out during the period. The accompanying consolidated financial statements do not include any provision for cash dividends in the amount of ¥8,400 million proposed by the Company for the year ended March 31, 2002.

19.  Other Comprehensive Income (Loss)

The accumulated other comprehensive income (loss) in the consolidated balance sheets at March 31, 2002 and 2001 are summarized as follows:

 

 

March 31

 

 

 


 

 

 

2002

 

2001

 

 

 



 



 

 

 

(Millions of yen)

 

Net unrealized gains on securities

 

¥

138

 

¥

242

 

Net unrealized derivative gains

 

 

12

 

 

505

 

Foreign currency translation adjustments

 

 

2,113

 

 

(7,186

)

Minimum pension liability adjustments

 

 

(28,573

)

 

(9,276

)

 

 



 



 

 

 

¥

(26,310

)

¥

(15,715

)

 

 



 



 

Related tax effects allocated to each component of other comprehensive income (loss) for the year ended March 31, 2002, the period ended March 31, 2001 and the year ended December 31, 2000 are as follows:

 

 

Before-tax
amount

 

Tax (expense)
or benefit

 

Net-of-tax
amount

 

 

 



 



 



 

 

 

(Millions of yen)

 

Year ended March 31, 2002

 

 

 

 

 

 

 

 

 

 

 

Unrealized gains on securities:

 

 

 

 

 

 

 

 

 

 

 

Decrease in unrealized gains

 

¥

(179

)

¥

76

 

¥

(103

)

 

Less reclassification adjustments

 

 

(1

)

 

—  

 

 

(1

)

 

 



 



 



 

 

 

 

(180

)

 

76

 

 

(104

)

 

Unrealized derivative gains:

 

 

 

 

 

 

 

 

 

 

 

Increase in unrealized derivative gains

 

 

658

 

 

(276

)

 

382

 

 

Less reclassification adjustments

 

 

(1,508

)

 

633

 

 

(875

)

 

 



 



 



 

 

 

 

(850

)

 

357

 

 

(493

)

 

Foreign currency translation adjustments

 

 

9,299

 

 

––  

 

 

9,299

 

 

Minimum pension liability adjustments

 

 

(34,055

)

 

14,758

 

 

(19,297

)

 

 



 



 



 

 

 

¥

(25,786

)

¥

15,191

 

¥

(10,595

)

 

 



 



 



 

25



Fuji Xerox Co., Ltd. and Subsidiaries

Notes to Consolidated Financial Statements (continued)
(unaudited)

19.  Other Comprehensive Income (Loss) (continued)

 

 

Before-tax
amount

 

Tax (expense)
or benefit

 

Net-of-tax
amount

 

 

 



 



 



 

 

 

(Millions of yen)

 

Period ended March 31, 2001

 

 

 

 

 

 

 

 

 

 

 

Unrealized gains on securities:

 

 

 

 

 

 

 

 

 

 

 

Decrease in unrealized gains

 

¥

(14

)

¥

6

 

¥

(8

)

 

Less reclassification adjustments

 

 

166

 

 

(176

)

 

(10

)

 

 



 



 



 

 

 

 

152

 

 

(170

)

 

(18

)

 

Unrealized derivative gains:

 

 

 

 

 

 

 

 

 

 

 

Increase in unrealized derivative gains

 

 

1,093

 

 

(459

)

 

634

 

 

Less reclassification adjustments

 

 

(222

)

 

93

 

 

(129

)

 

 



 



 



 

 

 

 

871

 

 

(366

)

 

505

 

 

Foreign currency translation adjustments

 

 

4,390

 

 

(176

)

 

4,214

 

 

Minimum pension liability adjustments

 

 

(5,357

)

 

2,250

 

 

(3,107

)

 

 



 



 



 

 

 

¥

56

 

¥

1,538

 

¥

1,594

 

 

 



 



 



 

Year ended December 31, 2000

 

 

 

 

 

 

 

 

 

 

 

Unrealized gains on securities:

 

 

 

 

 

 

 

 

 

 

 

Decrease in unrealized gains

 

¥

(2,827

)

¥

1,188

 

¥

(1,639

)

 

Less reclassification adjustments

 

 

(2,475

)

 

1,039

 

 

(1,436

)

 

 



 



 



 

 

 

 

(5,302

)

 

2,227

 

 

(3,075

)

 

Foreign currency translation adjustments

 

 

5,473

 

 

(119

)

 

5,354

 

 

Minimum pension liability adjustments

 

 

(10,636

)

 

4,467

 

 

(6,169

)

 

 



 



 



 

 

 

¥

(10,465

)

¥

6,575

 

¥

(3,890

)

 

 



 



 



 

20.  Accounts and Transactions with Stockholder Companies

Before March 30, 2001, the outstanding capital stock of the Company was owned in equal amounts by Fuji Photo Film Co., Ltd. and Xerox Limited, a 100%-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.

26



Fuji Xerox Co., Ltd. and Subsidiaries

Notes to Consolidated Financial Statements (continued)
(unaudited)

20.  Accounts and Transactions with Stockholder Companies (continued)

Accounts and transactions with stockholder companies and their affiliates for the year ended March 31, 2002, the period ended March 31, 2001 and the year ended December 31, 2000 are summarized as follows:

 

 

Accounts

 

 

 


 

 

 

Receivables

 

Payables

 

 

 


 


 

 

 

(Millions of yen)

 

March 31, 2002

 

 

 

 

 

 

 

 

Fuji Photo Film Co., Ltd. and affiliates

 

¥

3,152

 

¥

2,118

 

 

Xerox Limited and affiliates

 

 

2,924

 

 

890

 

 

Xerox Corporation and affiliates

 

 

10,426

 

 

5,206

 

March 31, 2001

 

 

 

 

 

 

 

 

Fuji Photo Film Co., Ltd. and affiliates

 

¥

2,890

 

¥

2,374

 

 

Xerox Limited and affiliates

 

 

4,364

 

 

801

 

 

Xerox Corporation and affiliates

 

 

15,639

 

 

6,999

 

December 31, 2000

 

 

 

 

 

 

 

 

Fuji Photo Film Co., Ltd. and affiliates

 

¥

2,673

 

¥

1,616

 

 

Xerox Limited and affiliates

 

 

4,924

 

 

369

 

 

Xerox Corporation and affiliates

 

 

16,919

 

 

6,545

 


 

 

Transactions

 

 

 


 

 

 

Sales

 

Purchases

 

Royalties
and other
expenses

 

Expenses
recovered

 

 

 


 


 


 


 

 

 

(Millions of yen)

 

March 31, 2002

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fuji Photo Film Co., Ltd. and affiliates

 

¥

12,151

 

¥

7,552

 

¥

793

 

¥

—  

 

 

Xerox Limited and affiliates

 

 

10,184

 

 

8,889

 

 

164

 

 

153

 

 

Xerox Corporation and affiliates

 

 

44,638

 

 

8,467

 

 

14,552

 

 

3,312

 

March 31, 2001

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fuji Photo Film Co., Ltd. and affiliates

 

¥

2,946

 

¥

1,899

 

¥

3

 

¥

––  

 

 

Xerox Limited and affiliates

 

 

2,610

 

 

1,864

 

 

60

 

 

25

 

 

Xerox Corporation and affiliates

 

 

10,181

 

 

5,005

 

 

3,288

 

 

277

 

December 31, 2000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fuji Photo Film Co., Ltd. and affiliates

 

¥

7,479

 

¥

5,463

 

¥

––  

 

¥

––  

 

 

Xerox Limited and affiliates

 

 

12,033

 

 

5,549

 

 

154

 

 

164

 

 

Xerox Corporation and affiliates

 

 

50,820

 

 

9,560

 

 

14,527

 

 

3,399

 

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.

27



Fuji Xerox Co., Ltd. and Subsidiaries

Notes to Consolidated Financial Statements (continued)
(unaudited)

21.  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 agreement, 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 debt into fixed rate or fixed rate debt into floating rate. Certain agreements are combinations of interest rate and foreign currency swap transactions. The floating rates are mainly based on the three-month or six-month LIBOR (London Inter-Bank Offered Rate).

Fair Values of Financial Instruments

The estimated fair values of financial instruments at March 31, 2002 and 2001 are summarized as follows:

 

 

March 31

 

 

 


 

 

 

2002

 

2001

 

 

 


 


 

 

 

Carrying
amount

 

Estimated
fair value

 

Carrying
amount

 

Estimated
fair value

 

 

 


 


 


 


 

 

 

(Millions of yen)

 

Marketable securities

 

¥

30

 

¥

30

 

¥

33

 

¥

33

 

Investment securities

 

 

4,354

 

 

4,354

 

 

5,235

 

 

5,235

 

Long-term debt

 

 

(121,037

)

 

(121,845

)

 

(79,175

)

 

(80,109

)

Foreign exchange contracts

 

 

336

 

 

336

 

 

1,186

 

 

1,186

 

Currency swap agreements

 

 

(382

)

 

(382

)

 

70

 

 

70

 

Interest rate swap agreements

 

 

(660

)

 

(660

)

 

435

 

 

435

 

Cross currency interest rate swap agreements

 

 

(776

)

 

(776

)

 

—  

 

 

—  

 

28



Fuji Xerox Co., Ltd. and Subsidiaries

Notes to Consolidated Financial Statements (continued)
(unaudited)

21.  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 values because of the short maturity of these instruments.

Marketable Securities and Investment securities: The fair values of the marketable securities and investment 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 form 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.

Foreign Currency Risk Management:

In the normal course of business, the Company is exposed to foreign exchange risk in the following areas:

Transaction exposures, such as both existing and forecasted sales and purchases and payables/receivables resulting from such transactions

 

 

Exposure of non-functional-currency-denominated debt

29



Fuji Xerox Co., Ltd. and Subsidiaries

Notes to Consolidated Financial Statements (continued)
(unaudited)

21.  Financial Instruments (continued)

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

In order to mitigate the impact of currency exchange rate fluctuations, the Company continually assesses its exposure to currency risks and hedges a portion of those risks through the use of derivative instruments, principally forward foreign exchange contracts. The Company does not enter into the type of derivative instruments for purpose other than risk management. Responsibility for managing the Company’s currency exposures and use of currency derivatives is centralized within the finance department and in order to contract foreign currency derivative instruments, the authorization of the finance director is required.

Interest Rate Risk Management:

The Company uses variable-rate debt to finance its operations. As the debt obligations expose the Company to variability in interest payments due to changes in interest rates, management believes it is prudent to limit the variability of a portion of its interest payments. To meet this objective, management enters into interest rate swap agreements to manage fluctuations in cash flows resulting from interest rate risk. These swaps change the variable-rate cash flow exposure on the debt obligations to fixed-rate cash flows. Under the terms of the interest rate swaps, the Company receives variable interest rate payments and makes fixed interest rate payments, thereby creating the equivalent of fixed-rate debt.

The Company assesses interest rate risk by continually identifying and monitoring changes in interest rate exposures that may adversely impact expected future cash flows and by evaluating hedging opportunities. The Company maintains risk management control systems within the finance department to monitor interest rate risk attributable to both the Company’s outstanding or forecasted debt obligations. The risk management control systems involve the use of analytical techniques to estimate expected changes in interest rates on the Company’s future cash flows.

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 currency over the next year (maximum length of time is through September 2002). When the yen weakens significantly against the foreign currencies (primarily the U.S. dollars), the increase in value of future foreign currency cost or revenue is offset by gains or losses in the value of the forward exchange contracts designated as hedges. Conversely, when the yen strengthens, the increase or decrease in the value of future foreign currency cash flow is offset by gains or losses in the value of the forward contracts.

30



Fuji Xerox Co., Ltd. and Subsidiaries

Notes to Consolidated Financial Statements (continued)
(unaudited)

21.   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 three years (maximum length of time is through April 2004), thus reducing the impact of foreign currency exchange rate and interest rate changes on future income. The forecasted cash flows associated with approximately ¥12,756 million of the outstanding debts of the Company were designated as the hedged items to a currency swap and cross currency interest rate swaps at March 31, 2002.

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 amounts which were reclassified from accumulated other comprehensive income to other income (expenses), net of related tax effect, were net gains of ¥875 million for the year ended March 31, 2002. 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, 2002, the Company expects to reclassify ¥107 million of net gains 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).

31



Fuji Xerox Co., Ltd. and Subsidiaries

Notes to Consolidated Financial Statements (continued)
(unaudited)

22.  Supplemental Disclosures of Cash Flow Information

 

 

March 31

 

December 31,

 

 

 






 

 

 

 

2002

 

2001

 

2000

 

 

 



 



 



 

 

 

(Millions of yen)

 

Cash paid during the period for:

 

 

 

 

 

 

 

 

 

 

 

Interest

 

¥

7,226

 

¥

1,297

 

¥

4,894

 

 

Income taxes

 

 

23,317

 

 

7,148

 

 

10,634

 

23.  Commitments and Contingencies

At March 31, 2002, commitments outstanding for the purchase of property, plant and equipment approximated ¥707 million. Contingent liabilities for loans guaranteed by the Company, mainly on behalf of employees, amounted to approximately ¥34,906 million.

24.  Acquisitions

In September 2001, the Company acquired a laser printer business for ¥15,781 million in cash. This acquisition was accounted for by the purchase method. The excess of costs over the fair value of net assets acquired of ¥12,345 million resulting from this acquisition is recorded as goodwill and is subject to periodic testing for impairment.

In January 2000, the Company acquired a color printer business in Asia Pacific area for ¥6,957 million in cash. This acquisition was accounted for by the purchase method. The excess of costs over the fair value of net assets acquired of ¥6,257 million resulting from this acquisition is being amortized on a straight-line basis over 20 years.

In December 2000, the Company acquired 100% of the outstanding capital stock of Xerox (Hong Kong) Limited and Xerox China Investments (Bermuda) Limited for ¥61,586 million in cash. This acquisition was accounted for by the purchase method. The excess of costs over the fair value of net assets acquired of ¥50,244 million resulting from this acquisition is being amortized on a straight-line basis over 20 years.

32