On the Right Path
ANNUAL REPORT 2014
For the year ended April 30, 2014

AIN PHARMACIEZ at a Glance

Aiming to play a key role in society
as Japan’s leading dispensing pharmacy company.

Contents
Interview with the President

1

Corporate Governance18

Consolidated Financial Highlights

6
8
8
10
12
13

Business Segment Strategy
Dispensing Pharmacy Business
Drug and Cosmetic Store Business

16
16
17

Financial Section
Management’s Discussion and Analysisof Financial Condition and Results of Operations
Consolidated Balance Sheet
Consolidated Statement of Income
Consolidated Statement of Comprehensive Income
Consolidated Statement of Changes in Net Assets
Consolidated Statement of Cash Flows
Notes to Consolidated Financial Statements
Independent Auditor’s Report20

Feature: The Ability to Adapt to Change
Operating Environment
Store Opening Strategy
Increasing Earnings from Generic Drugs
Hiring and Training Pharmacists
Increasing the Efficiency of	  Existing Dispensing Pharmacies

Investor Information

54

14

20
24
26
26
27
28
29
53

Forward-looking Statements
This annual report contains forecasts and projections concerning the plans, strategies and performance of AIN PHARMACIEZ INC. and its subsidiaries andaffiliates. These forecasts and projections constitute forward-looking statements that are not historical facts, but are based on assumptions and beliefs inaccordance with data currently available to management. These forward-looking statements are subject to a number of risks and uncertainties that include, but
are not limited to, economic conditions, intense competition in the healthcare industry, demand, foreign exchange rates, tax systems, and laws and regulations.
As such, AIN PHARMACIEZ INC. wishes to caution readers that actual results may differ materially from those projected.

Interview with the President

Sales and profits rose year on year, but results fell short ofour start-of-year targets due to delayed store openings anddifficult negotiations with drug wholesalers. The operating
environment for dispensing pharmacies is likely to remainchallenging for some time after drug price and dispensing fee
revisions and an increase to consumption tax in April 2014, as
well as a severe shortage of qualified pharmacists.
However, I believe the current market offers significant
opportunities for AIN PHARMACIEZ, because we can leverage
our strengths as the leading company in the dispensing

July 30, 2014

pharmacy sector.
We will continue to work on building a dominant positionin the market by playing a key role in sector restructuring.

Kiichi Otani
President and Representative Director

AIN PHARMACIEZ INC. ANNUAL REPORT 20141

Interview with the President

Fiscal 2014 Review

Q. What are your thoughts about the Group’s performance in fiscal 2014?
A. Our performance was slightly disappointing, because we were targeting stronger
growth.
Store openings fell short of our targets due to delayed construction plans after the Great
East Japan Earthquake and a slower-than-expected shift away from prescriptions filled byhospitals, leading to a shortfall in sales versus our targets. Difficult negotiations with drug
wholesalers were also a factor behind the weaker-than-expected results.
In fiscal 2014, ended April 30, 2014, net sales rose 10.1% year on year to ¥170.2 billion, operating
income increased 4.3% to ¥10.1 billion, and net income rose 3.6% to ¥5.2 billion. Although sales andprofits increased, results were below our forecasts.
In the dispensing pharmacy business, we planned to open a total of 80 pharmacies in fiscal 2014.
Although we achieved our targets for pharmacies opened at medical malls and pharmacies acquired
through M&A deals, only 62 dispensing pharmacies were opened overall due to a shortfall of 18
dispensing pharmacies near hospitals through organic business growth. Difficult negotiations withdrug wholesalers were another reason behind the weaker-than-expected profits. Performance in the
drug and cosmetic store business was largely flat year on year.

Q. The dispensing pharmacy sector as a whole faces a shortage of qualified pharmacists.
How successful was the AIN PHARMACIEZ Group in recruiting pharmacists in fiscal 2014?

A.

We recruited 251 pharmacists, less than our target of 300. However, we were thesector’s leading recruiter of pharmacists in fiscal 2014 (see the figure on page 3). The shortageof pharmacists is likely to play a key role in spurring sector restructuring.

History of Growth
Net sales

Dispensing pharmacy business

Drug and cosmetic store business

Operating margin

Others(¥ million)(%)

180,000

9

160,000

8

140,000

7

120,000

6

100,000

5

80,0004

60,0003

40,0002

20,000

1

0

M&A
deals
Revisions
to medical
expenses

2002/4

2003/4

2004/4

2005/4

2006/4

2007/4

Imagawa Yakuhin

AIN TOKAI

Rejoice

MEDICAL
HEARTLAND

Asahi Pharmacy

AIN MEDICAL SYSTEMS
Rejoice
Pharmacy

DAICHIKU

2008/4

2009/4

2010/4

2011/4

2012/42013/4

2014/4

6 M&As(33 stores)

9 M&As(21 stores)

11 M&As(28 stores)

13 M&As(22 stores)

SUNWOOD

-1.3%

±0

-0.6%

+0.17%+0.52%+0.46%+0.22%

-6.3%

-4.2%

-6.7%

-5.2%

-5.75%-6.0%-2.65%

Dispensing fees

2 AIN PHARMACIEZ INC. ANNUAL REPORT 2014

Drug prices0Recruiting enough pharmacists is vital to realizing our store opening strategy and delivering continued
growth. However, due to factors such as changes in curriculums after the shift to six-year courses at
pharmacy colleges, the pass rate for students taking the national pharmacist exam has fallen. We
expect this trend to continue.
Against that backdrop, I believe the Group did well to hire 251 pharmacists, despite missing ourtarget. Our recruitment program was also the most successful in the sector (see the figure below). Witha growing number of small and mid-size dispensing pharmacies struggling to hire even one pharmacist,
we think many of the smaller players in the sector will be forced to close their operations due to a lackof personnel. This is likely to be a major factor driving M&A deals and sector restructuring.

StrategyQ.

Please tell us about the competitive environment in the dispensing pharmacies sector at
the moment.

A. Some companies have weak balance sheets after overstretching themselves in M&A,
but AIN PHARMACIEZ stands out in terms of business scale and the strength of its finances (seethe figure below). We expect larger companies to be caught up in restructuring once M&As
involving smaller dispensing pharmacies wind down. I remain confident that AIN PHARMACIEZ
will be the leading company in the sector over the long term.
Declining drug price margins and changes that make it harder to secure dispensing fees, coupled withthe shortage of pharmacists, are spurring increased M&A activity among smaller dispensing pharmacies
that are unable to respond to those trends. Intensifying competition to acquire those companies is also
driving acquisition prices higher.
At AIN PHARMACIEZ, we keep a close eye on investment efficiency, only acquire dispensing
pharmacies that offer the potential for mutual synergies when they become part of the Group. Thisapproach means we can take pride in having one of the strongest financial positions in the sector. OverHigh Profitability and Stable Recruitment

Sound Financial Structure—Comparison of net sales, operating margin and number of newly
graduated pharmacists hired among major companies operating
dispensing pharmacies in Japan

Operating margin (%)

8.0

SOGO
MEDICAL
[146]

6.0

4.0

Qol
[123]
40,00080,000120,000(¥ million)

AIN
PHARMACIEZ
75,957
18,46017,253
1,206
40.0%

Average of
3 competitors*
21,096
8,348
22,615-14,267
28.4%

AIN
PHARMACIEZ
71,264
18,846
13,0585,787
41.5%

Average of
3 competitors*
23,547
8,821
28,965-20,144
26.9%

Fiscal 2014		
160,000

200,000

Net sales (¥ million)
AIN PHARMACIEZ INC.
NIHON CHOUZAI Co., Ltd.
SOGO MEDICAL CO., LTD.
Qol Co., Ltd.
Aisei Pharmacy Co., Ltd.

Fiscal 2013		

Market capitalization
Cash on hand in banks
Interest-bearing debt
Net cash
Shareholders’ equity ratioNIHON
CHOUZAI[NA]

Aisei
Pharmacy
[119]

2.0

0

AIN
PHARMACIEZ[251]—Comparison of financial indexes among major companies
operating dispensing pharmacies in Japan

Notes: 1. Spheres represent market
capitalization as of April 30, 2014.
2. The figures in square brackets [ ]represent the number of newly
graduated pharmacists hired in 2014.

Source: Operating margin and net sales are complied by AIN PHARMACIEZ fromthe above companies’ financial results for fiscal 2014. Number of newly
graduated pharmacists is based on the PHARMACY NEWSBREAK
on May 1, 2014.

Market capitalization
Cash on hand in banks
Interest-bearing debt
Net cash
Shareholders’ equity ratio(¥ million)*3 competitors: NIHON CHOUZAI Co., Ltd., SOGO MEDICAL CO., LTD., Qol Co., Ltd.
Source: Compiled by AIN PHARMACIEZ from the above companies’ financial results forfiscal 2014.

AIN PHARMACIEZ INC. ANNUAL REPORT 20143

Interview with the President

the medium and long term, I believe sector restructuring will spread to larger dispensing pharmacy
companies once M&As involving smaller dispensing pharmacies wind down. We will ensure ourbalance sheet is strong enough to make major investments, so that we can take advantage of major
opportunities when they arise.
We also plan to step up our pharmacy opening program. In fiscal 2015, we are targeting 120 new
dispensing pharmacies, including pharmacies acquired through M&A deals. We will continue to open
pharmacies through organic growth and through our M&A strategy in order to drive sales and profits.

Q. How do you plan to respond to the latest revisions to drug prices and dispensing fees?
A. We will secure dispensing fees by actively developing our home-based dispensing
services and promoting generic drugs, two areas that the government is focusing on. We
also aim to protect our margins by dealing directly with drug companies through our drug
wholesaling subsidiary.
The government’s policy for curbing national medical expenses became much clearer in the latest
revisions to drug prices and dispensing fees. That trend is likely to continue. Drug prices account for
70–80% of sales at dispensing pharmacies, so any revisions have a significant impact on earnings
structures at pharmacies.
We will continue implementing strategies to overcome this issue, such as leveraging our sector-leading
economies of scale and using our generic drug wholesale subsidiary WHOLESALE STARS Co., Ltd. (WSS)
to expand generic drug dispensing (see page 12 for more details). We already deal directly with makers
of generic drugs, leading to higher drug price margins and a number of other benefits. Going forward,
we plan to build on this advantage by strengthening the capabilities of WSS and expanding the volumeof direct business with drug makers. Also, we are putting more effort into hiring and training pharmacists
and into boosting the efficiency of existing dispensing pharmacies in order to secure dispensing fees andattract customers with even better services (see pages 13–15 for more details).

Q. How are the medical malls performing and what is your outlook for the business?
A. We are building up our expertise in the medical mall business and earnings are gaining
momentum. We will continue to push ahead with the development of medical malls, as they
are highly profitable and a key part of our strategy.
Some medical malls took longer than we expected to become profitable, butearnings are now starting to gain momentum. Since we started the full-scale
development of medical malls, the occupancy rate for doctors has risen, which
is helping to lift the overall occupancy rate for medical malls. Medical malls tend
to take longer to become profitable than dispensing pharmacies near hospitals,
but once they do move into the black, we expect them to make contributions to
the Group’s sales and profits over the medium and long term. We view medicalmalls as a key part of our strategy and we plan to continue actively developing
the business.

Clinics

AIN Pharmacy UZUMASA TENJINGAWA

Q. What is your outlook and growth strategy for the drug and cosmetic store business?
A. We have implemented a number of initiatives in the business, but growth has remained
flat. We plan to continue searching for ways to generate growth, including testing out new
store formats.

4 AIN PHARMACIEZ INC. ANNUAL REPORT 2014

We have seen success from a range of measures to change product lineups andintroduce innovative sales areas at our drug and cosmetics stores. Going forward,
we plan to boost the gross margin and roll out new store formats from fiscal
2016 to drive growth.
ainz & tulpe NU chayamachi

Q. What are your medium- and long-term forecasts for the Group?
A. Even though we expect to achieve double-digit growth over the medium term, weneed to follow a cautious management approach. We are targeting net sales of ¥300 billion
over the next few years, hopefully within the next five. I believe sales at that level would give
us a dominant position in the sector.
We are targeting consolidated net sales of ¥300 billion in the next
Scale of Businessfew years. When sales reach that level, we estimate the Group will
—Our Dispensing Pharmacy Store Network
have1,000 pharmacies nationwide, 4,000–5,000 pharmacists and616 pharmacies nationwide
a market share of around 4%, giving us even greater economies(As of end-Fiscal 2014)of scale. We expect our size, combined with various competitive
advantages built up over many years, to result in a dominant
Hokkaido 85
position in the sector.
The dispensing pharmacy sector is not seeing much progresson consolidation (see the figure ”Dispensing Pharmacy Company
Tohoku 87
Market Share“ on page 9). As the market leader, our market share
Hokuriku 15
is still only 2%. However, consolidation in the dispensing pharmacy
sector could approach levels seen in other sectors (leading market
Chugoku, Shikoku
Kanto, Koshinetsu 315
Kyushu, Okinawa
shares of 39% in convenience store sector, 22% in electronics
27
Kinki
Tokai
56
retailing sector) if restructuring moves ahead as expected, which31
could drive extremely rapid growth in the Group’s market share. In
other words, AIN PHARMACIEZ still has significant room to expand.
Branches
Group companies
To continue expanding, we have to grow sales, increase
operating efficiency and constantly adjust our business model. We
are doing everything we can to prepare for any growth opportunities that emerge in the sector.

Q.

To close, what message can you give investors about your resolve and vision for theGroup.

A. The dispensing pharmacy sector is likely to face a tough operating environment overthe next few years. This presents significant opportunities for companies like us with strong
finances, a dominant position in terms of scale, and a robust corporate culture. Our strategy at
the moment may look low-key, but we are waiting quietly in the wings to make our move.
The recent hike to consumption tax and revisions to drug prices and dispensing fees are two major
negatives for the sector. This is likely to create an even larger gap in the sector between well-run
companies and those that are not. This in turn will drive restructuring in the sector, with dispensing
pharmacies exiting the field or selling their operations because they are unable to secure drug pricemargins or respond to changes in the industry due to the shortage of pharmacists and other factors.
AIN PHARMACIEZ is the leading company in the sector with powerful advantages in terms ofmarket share, profitability and finances. I believe we are well-placed to deliver rapid growth once
restructuring starts in earnest and the dispensing pharmacy sector becomes more consolidated. Goingforward, we will continue to boost the Group’s corporate value, while also fulfilling our role as a key
part of Japan’s healthcare system. We remain committed to making AIN PHARMACIEZ the most trustedname in Japan’s dispensing pharmacy sector.

AIN PHARMACIEZ INC. ANNUAL REPORT 20145

Consolidated Financial Highlights

Net Sales and Growth Rate(¥ million)

170,225

180,000

Operating Income and Operating Margin(%)

Net Sales

150,000

Up 10.1%

15
120,000

10.1

90,00010

60,000530,00002010/4 2011/4 2012/4 2013/4 2014/4

Net Sales

0

Growth Rate

Net sales grew at a doubledigit pace, rising 10.1%
year on year due to 65 store
openings across the Group,
including pharmacies
acquired through M&A
deals.

Net Income and Return on Sales
6,000

5,259
3.1

4,000

1
0

Net Income

42

2010/4 2011/4 2012/4 2013/4 2014/4

Net Income

10,113

10,000

10
8

5.9

8,000

6

6,000
4

4,000

2

2,000
0

2010/4 2011/4 2012/4 2013/4 2014/4

Operating Income

0

Operating
IncomeUp 4.3%Operating income
increased 4.3% year
on year on the back ofbusiness reforms and costadjustments.

Operating Margin(%)(¥ million)

5

Up 3.6%3

2,000

12,000Total Assets and Shareholders’ Equity Ratio(%)(¥ million)(%)(¥ million)

20

Net income increased
3.6% year on year to¥ 5,259 million, a newrecord for the Group.

0

Return on Sales

120,000

101,382

100,000

41.5

80,00050
40
30

60,00020

40,00010

20,00002010/4 2011/4 2012/4 2013/4 2014/4

Total Assets

0Shareholders’Equity Ratio

Up 1.5percentage
points

The shareholders’ equity
ratio rose due to therepayment of short- andlong-term debts (down¥4,493 million year onyear).

Shareholders’ Equity Ratio

11-year Financial Summary
2004/4

2005/4

2006/4

2007/445,227
3,886
1,766
855

57,091
5,230
2,875
930

76,303
7,145
3,083
1,215

81,307
7,970
2,888
1,010

1,240
444

1,536
458

2,087
648

1,620
773

8,019
8,019
25,131

9,095
9,095
38,887

10,352
10,352
41,66910,71011,326
49,84911,024,650
905
148
27

11,210,350
1,446
193
44

11,304,000
1,684
218
43

11,320,000
1,947
247
43

Per share information (¥):
Net income
Net assets
Cash dividends

74.72
724.5712.0

79.92
807.6815.0

104.53912.4318.0

89.34
946.1718.0

Stock information (based on the closing price as of April 30) (¥):
Stock price

1,390

2,050

2,370

1,500

Ratios (%):
Operating margin
Return on sales *3
Return on assets (ROA) *4
Return on equity (ROE) *5
Shareholders’ equity ratio

3.9
1.9
3.5
10.7
31.9

5.0
1.6
2.9
10.9
23.4

4.0
1.6
3.0
12.5
24.8

3.6
1.2
2.2
9.6
21.5

For the year:
Net sales
Selling, general and administrative expenses
Operating income
Net income
Capital expenditures*1
Depreciation and amortization *1
At the end of the year:
Equity capital*2
Total net assets
Total assets
Number of shares outstanding (shares)
Number of employees (persons)
Number of stores : Dispensing pharmacy business
Number of stores : Drug and cosmetic store business

6 AIN PHARMACIEZ INC. ANNUAL REPORT 2014

Net Income per Share

Cash Dividends per Share

(¥)

(¥)

400

200

100

2010/4 2011/4 2012/4 2013/4 2014/4¥ +- 050
40

The increase reflected
growth in net income
and a decline in the
average number of shares
outstanding during the
fiscal year (down 7,254
shares year on year).

Total Number of Stores

Dividend per share¥60.00; dividend payout
ratio 18.2%, down 0.6
percentage points year
on year.

30
20
10
0

2010/4 2011/4 2012/4 2013/4 2014/4

Prescription Volume(thousands)

( )
800

500

616

300
200
100

2010/4 2011/4 2012/4 2013/4 2014/4

12,88912,000Up 54 stores

600

400

14,000Total Numberof Stores

675
59

700

0

Cash Dividends
per Share60

60

Up ¥11.71

300

0

70

Net Income
per Share

330.08Up 6.8%10,0008,000

The Group added 65
stores through new
openings and M&A deals
and closed 11 stores,
resulting in a total of 675.

6,000
4,000
2,000
0

Prescription
Volume2010/4 2011/4 2012/4 2013/4 2014/4

Dispensing pharmacy
Drug and cosmetic store

The number ofprescriptions written rose
825,000 year on year,
mainly reflecting a fullyear contribution frompharmacies opened in theprevious fiscal year.

(¥ million)

2008/4

2009/4

2010/4

2011/4

2012/42013/4

2014/4106,231
9,203
4,444
1,615

115,387
9,948
5,296
2,127

125,495
10,744
6,492
3,131

129,387
11,981
8,107
3,916

142,790
12,83910,253
4,899

154,560
14,7409,701
5,075

170,225
15,635
10,113
5,259

1,914
968

2,891
1,119

2,573
1,286

2,750
1,560

5,870
1,749

7,235
2,212

6,328
2,258

12,04012,70757,546

16,071
16,10962,032

21,445
21,49265,89829,45029,49876,94033,69533,74585,90838,31238,356
95,83942,122
42,240101,382

11,361,000
2,582
356
45

12,831,376
2,741
375
46

14,101,164
2,918
397
49

15,941,004
3,104
448
53

15,940,790
3,326
494
56

15,940,740
3,551
560
61

15,854,190
3,806
616
59

142.36
1,059.78
20.0

170.74
1,252.54
30.0

228.081,520.81
40.0

255.67
1,847.46
45.0

307.35
2,113.79
50.0

318.372,403.43
60.0

330.082,656.86
60.0

1,490

1,481

2,920

3,115

4,290

4,765

4,495

4.2
1.5
3.0
14.2
20.9

4.6
1.8
3.6
15.1
25.9

5.2
2.5
4.9
16.7
32.5

6.3
3.0
5.5
15.4
38.3

7.2
3.4
6.0
15.5
39.2

6.3
3.3
5.6
14.1
40.0

5.9
3.1
5.3
13.1
41.5

Note:
Amounts of less than one million yen
were rounded down.
*1: The amounts of capital expendituresand depreciation and amortization
prior to the fiscal year ended April
30, 2007 are on a non-consolidated
basis.
*2: Equity capital =Total net assets – Minority interests*3: Return on sales =Net income / Net sales × 100*4: Return on assets =Net income / Total assets(yearly average) × 100*5: Return on equity =Net income / Equity capital(yearly average) × 100

AIN PHARMACIEZ INC. ANNUAL REPORT 20147

Feature

The Ability to Adapt to Change

Operating Environment
Japan’s dispensing pharmacy market has grown in unique ways.
It is one of Japan’s few growth markets, but the competitive environment is becoming
increasingly challenging. In this section we look at medium- and long-term trends in the operating
environment, focusing on the risks and opportunities for the AIN PHARMACIEZ Group.

A Growth Market
Japan’s dispensing pharmacy market wasworth roughly ¥7.0 trillion in fiscal 2013
and we estimate the market will continue
expanding at around 3–5% annually.
Japan is one of the first countries in theworld to become a super-aging society,and about 35% of prescriptions are stillfilled by hospitals, which will increasingly
be filled outside hospitals. These factors
are likely to support continued growth inprescription demand could support
growth in market share.

the dispensing pharmacy market.
Risks• The criteria for calculating dispensing
fees could become stricter as theJapanese government works to curb
national medical expenses.

• Adapting to changes in the operating
environment and implementing
strategies tailored to government policy
offers potential for further growth.

Opportunities• More M&A opportunities are likely toemerge if the operating environment
becomes more challenging.

• Opening dispensing pharmacies inlocations that can effectively tap

Dispensing Pharmacy Market(¥ trillion)

Dispensing pharmacy market value

Non-hospital dispensing ratio

Ratio of elderly people

12

(%)

80.0%

10

54.0%

8

67.0%

80

7.0

60

6

4.2
4
2
0

40

29.1%

24.1％

19.5%

11.5%
11.0%

20

0.47
1989 1990

1995

2000

2005

2010

2004-2013:
annualized growth of 5.8%

20152020 (April to

0

March year)
14 onwards:
annualized growth of 3.0–5.0%

Source: AIN PHARMACIEZ estimates,
based on data from the Japan
Pharmaceutical Association,
dispensing cost trends issued by
the Ministry of Health, Labour andWelfare, Population Estimates ofthe Ministry of Internal Affairs andCommunications Statistical Bureau,
and Cabinet Office White Paper on
the Aging Society.

Generic Drug Promotion
The government aims to increase thegeneric drug dispensing ratio from
50.1% in February 2014 to 60.0%
by March 2018. At the moment, thegovernment is actively promoting genericdrugs by awarding dispensing pharmacies
additional reimbursement points(premiums) for generic drug dispensing.
Risks• Generic drugs are cheaper than new
drugs, so when the generic drug
dispensing ratio rises, the drug pricemargin shrinks, which has a negative
impact on earnings at dispensing
pharmacies.

Our Growth
Strategy

8 AIN PHARMACIEZ INC. ANNUAL REPORT 2014

• The government may end its system ofpremiums for generic drug dispensing.
Opportunities

Action Program for the Promotionof the Use of Generic Drugs(Oct. 2007 to Mar. 2013)

Roadmap to Further
Promote the Use ofGeneric Drugs (Apr. 2013~)

Based on previous methodology(%)
et• Creating an earnings structure that
Based on international methodology
targ
60.0%
60
New
benefits from the promotion of
51.2%
50
generic drugs could boost the Group’s
34.3%
33.2%
40
competitive advantage. (In the short30
term, create a pharmacy network that
secures premiums by promoting generic 20
drugs; in the long term, strengthen the 10
Group’s negotiating position to secure02009 2010 2011 2012 2013 20142018
(Target)generic drug price margins on par with
Note: Based on data for March each year.
margins for original drugs)

Source: AIN PHARMACIEZ compiles based on the policies
released by the Ministry of Health, Labour andWelfare.

Our growth strategy is tailored to the characteristics of the local market, but is also designed torespond dynamically to changes in the operating environment, such as government policy. Bybuilding on our strengths, we plan to secure a dominant position in the market over the medium
to long term.

Drug Price Reductions
The Japanese government revises drug
prices and dispensing fees once every
two years as part of its strategy to curb
national medical expenses. This has led
to a downward trend in drug prices.

in negotiations with prescription drug
wholesalers.

Risks• Drug price margins are a key source ofincome for dispensing pharmacies, so
their earnings structures are affected bydrug price revisions.
• Reductions to drug prices make itharder to secure drug price margins

Opportunities• Building a stronger position in drug
price negotiations will help to securedrug price margins.

The Changing Role of Dispensing Pharmacies
Japan has roughly 57,000 dispensing
pharmacies, which are mostly run bysmall-scale family businesses.
Japan’s dispensing pharmacy market
is fragmented, with the top five major
companies accounting for only 6.5% of
the market, including the Group’s leading
market share of 2%.
As Japan’s society ages, dispensing
pharmacies are being asked to play aradically different role in patient health.
Dispensing pharmacies now need to beable to offer higher-quality services suchas management of left over prescription
medicines, patient health management,
and support for community healthcare, in
addition to their conventional role of drug
dispensing. Dispensing fees could also be
revised so that only dispensing pharmacies
that can provide these kinds of services
will receive premiums. Dispensing
pharmacies that step up to this new roleby adapting to changes will be rewarded
appropriately, while those that cannot
could fall by the wayside.

• Dispensing pharmacy performance
could be negatively affected if they failto respond to dispensing fee revisions.

(Fiscal 2014)

Top 5 major companies*
6.5%

Opportunities

Top 50major companies
17.3%• Hiring top-class pharmacists andproviding them with training on an
ongoing basis will enable the provisionof high-quality services.

Others82.7%• Only companies that can adapt tochanges in the operating environment *Top 5 major companies:
AIN PHARMACIEZ INC., NIHON CHOUZAI Co., Ltd. ,will be able to deliver sustained growth. KRAFT Inc., Qol Co., Ltd., SOGO MEDICAL CO., LTD.

Source: AIN PHARMACIEZ estimates, based on datafrom DRUG Magazine (July 2013) and FY2012
dispensing fee statistics released by the Ministryof Health, Labour and Welfare.

The Changing Role of Dispensing Pharmacies
BeforeBeforeSupport community healthcare
Support for self medication
24-hour services
Support for home healthcare
and home nursing care services
Management ofleft over medicines

Focused on dispensing

Risks

Promotion of generic drugs• Failure to attract or train pharmacists could
limit the ability of dispensing pharmacies
to provide high-quality services.

Characteristics of Dispensing
Pharmacies in Japan
Healthcare system• All Japan’s citizens are enrolled in publichealth insurance.
• Patients can use any hospital or
dispensing pharmacy.
• The government sets official drug
prices.
• Patients have to return to their doctors
for repeat prescriptions.
• The over-the-counter drug market
accounts for less than 10% of the total
pharmaceutical market.

Store Opening
Strategy

Dispensing Pharmacy Company Market Share

Drug usage guidance

Drug usage guidance

Drug dispensing

Drug dispensing

Dispensing Pharmacy Earnings Model
Total store sales *1
Sales fromdrugs

Dispensing
fees *2

Purchasing cost of drugs
Drug price margin
Pharmaceuticalmanagement fees
Technical fees(includes premiums forgeneric drug dispensing)Store operation costs+ Store labor costs
SG&A expenses
Gross profit
Operating income*1: Dispensing pharmacies receive 0-30% of medical expenses depending on the type of insurance ofcustomers.
Dispensing pharmacies then charge the remainder of medical expenses to health insurance bodies such as
national health insurance.
*2: Dispensing fees comprise pharmaceutical management fees and technical fees for pharmacists.
These fees are added depending on the services at pharmacies.

Increasing
Earnings from
Generic Drugs

Hiring and Training
Pharmacists

Increasing the
Efficiency of Existing
Dispensing Pharmacies

See pages 10–15
for more details

AIN PHARMACIEZ INC. ANNUAL REPORT 20149

Feature: The Ability to Adapt to ChangeStore Opening Strategy
We are actively opening stores and pursuing M&A opportunities to drive top-line growth.
We are channeling business resources into dispensing pharmacies located near major hospitals,
as these locations are ideally suited to efficiently tapping prescription demand in the Japanesemarket over the medium and long term. We are also developing medical malls as an important
medium- and long-term growth strategy and actively using M&A to rapidly expand our network ofdispensing pharmacies.

Dispensing pharmacies located near hospitals
Dispensing pharmacies near hospitals offer significant
benefits for users and allow us to leverage our competitive
advantages. We therefore plan to continue channelingbusiness resources into this format.

AIN PHARMACIEZ Dispensing Pharmacies LocatedNear Hospitals: Breakdown by Location
Others8%

Primary location(with rival pharmacies)
28%

Secondary location
15%
Primary location(without rival pharmacies)
49%

HospitalComparison of Dispensing Pharmacies by Number ofMonthly Prescriptions
National
average
AIN Pharmacy AIZU WAKAMATSU

Dispensing pharmacies build close links with local
hospitals, exchanging information to ensure sufficient
drugs are in stock and minimizing the risk of dispensing
errors. This format is the most popular type of pharmacy
in Japan, as they are in convenient locations and have
won the trust of patients. These locations can efficiently
target prescription demand, leading to higher profits (seethe figures below for more details). The close proximity of

24.2

38.3

AIN
PHARMACIEZ 5.7
Group

33.8

18.2

20.4

600
–1,3991,400–1,7991,800–2,499

0
–599

0

20

12.7 4.6 7.2

13.0

40

15.1

6.8

2,500 More than
–2,999 3,000
80

60

100
(%)

Source: Comparison of dispensing pharmacies by number of prescriptions (Ministry of Health, Labour andWelfare data for March 2013) and AIN PHARMACIEZ dispensing pharmacies (As of October 2013)

Comparison of Investment Efficiency
Dispensing pharmacies located near hospitals

Dispensing pharmacies not located near hospitals(¥ million)

In

Out

Cash

205
175

200

145
115

150

85

100

52
18

50
0

-23
-50
-100

-64
1

2

3

4

Source: AIN PHARMACIEZ’s estimates

10 AIN PHARMACIEZ INC. ANNUAL REPORT 2014

5

6

7

8

(¥ million)

235

9

10 Elapsed
years

In

250

Investment / recovered value

Investment / recovered value

250

Out

Cash

200
150

93

100

60

50

7

0
-50

-47

-56

-52

-43

-30

-100

1

2

3

4

5

Source: AIN PHARMACIEZ

31

-13

6

7

8

9

10 ElapsedyearsHospital

dispensing pharmacies to local hospitals also means they
can carefully monitor prescription trends and drug usage,
allowing them to manage inventories more accurately.
In addition, building a nationwide chain of thesedispensing pharmacies can generate economies of scale indrug procurement and dispensing equipment development,
leading to lower costs and more efficient pharmacy
operations.

Medical Malls
We began the full-scale development of medical malls in
April 2012. We are involved in all stages of the process,from medical mall design and efforts to attract tenants
through to the actual development of the facility. Our
strategy is to create more locations for dispensing
pharmacies. We plan to accelerate growth by actively
working to develop medical zones.
We are targeting locations in urban areas with a highlevel of customer traffic, such as station buildings. These
locations boost the visibility of the clinics, resulting in higher
profitability. We see these medical malls driving the Group’s
growth over the medium term, and we plan to open
roughly 10 medical malls each year.
Advantages of our medical malls• Convenience: By teaming up with major property
developers, we can secure highly accessible prime
locations.
• Quality healthcare: We can attract top-class medical
practitioners through strong relationships with leading
medical institutions.
• Profitable: The above two factors ensure our medicalmalls attract patients, supporting higher prescription
volumes.

AIN Pharmacy HIGASHINAEBO

M&A Deals
In conjunction with store openings, we are actively pursuing
M&A opportunities as another important part of our
growth strategy.
Under our M&A strategy, we emphasize investment
efficiency, only targeting dispensing pharmacies withthe potential to improve their profitability after joining
the Group. Currently, M&A deal costs are rising due toincreased competition for acquisition targets. Due to ourleading position in the sector, we have access to extensive
information about M&A opportunities, allowing us toconsistently acquire new targets while ensuring we pay
a fair price. The Group has other advantages in M&A
negotiations, such as a solid financial base, strong cash flow(see the figure ”Sound Financial Structure“ on page 3) andhigh-quality training for dispensing pharmacists (see page
13 for more details).

One of Japan’s largest medical floors and AIN Pharmacy ABENO HARUKAS opened in ABENO HARUKAS in April 2014

Clinics
ClinicAIN Pharmacy ABENO HARUKAS

The reception of the medical floor

AIN PHARMACIEZ INC. ANNUAL REPORT 201411

Feature: The Ability to Adapt to Change

Increasing Earnings from Generic Drugs
The Japanese government is actively promoting wider use of generic drugs as part of its policy to
curb national medical expenses. The future of dispensing pharmacy companies will largely dependon their ability to contribute to this policy by increasing the generic drug dispensing ratio, and onwhether they can build operating structures that are resilient to declines in earnings caused bylower generic drug price margins and other factors. One of our strengths has been the steps wehave taken to preempt changes in the government’s generic drug policy.

Anticipating moves by the government to expand its genericdrug promotion policies, we established WHOLESALE STARS
Co., Ltd. (WSS) in 2006, the first dedicated generic drug
wholesaler to be set up by a dispensing pharmacy company
in Japan. WSS is playing a key role in boosting the Group’s
earnings.
Normally, an increase in the generic drug dispensing
ratio results in lower drug price margins, which can weighon dispensing pharmacy sales and profits. However, WSS
helps AIN PHARMACIEZ to minimize this risk. The subsidiaryoffers other benefits as well.

Close Cooperation Between WSS and Our Pharmacies

Benefits of using WSS• WSS allows us to negotiate directly with generic drugmakers, so wholesaler margins also flow the Group.
• WSS sells roughly 90% of its products to Group
companies, which means it can accurately monitor
total generic drug usage volume across the Group,
making it easier to negotiate with drug companies.
AIN PHARMACIEZ is also the largest buyer of genericdrugs in Japan’s dispensing pharmacy sector, giving us
a strong position in negotiations with drug makers.
• WSS can instruct Group dispensing pharmacies topromote certain generic drugs, giving it significant

Promoting the use of genericdrugs at our pharmacies

Net Sales and Ordinary Income of WSS(¥ million)

Warehouse of WSS

control over drug selection and usage volume andenabling it to maintain margins.
In April 2013, the government announced a new genericdrug policy for the next five years. This policy and othermeasures indicate that the government plans to continue
promoting the use of generic drugs over the medium term.
Amid this trend, WSS will allow us to further boost thecompetitiveness of the AIN PHARMACIEZ Group.
Advantages of Generic Drug Procurement Using WSS

10,975 (¥ million)
2,000
1,888

12,000The headquarters of WSS

Previous approach

WSS approach

Generic drug makers

10,000Net Sales

9,770
6,000

1,000

4,000

Ordinary Income

1,500
8,000

Dealing directlywith drug makers
Leading wholesalers

500
2,000
0

2007

Drugs

2008

2009

2010

2011

Dispensing equipments, etc.

2012

2013

1,204
2014 (FY)0WSS
No significant difference indrug price margins on original
drugs and generic drugs

Wholesaler margins
also flow to Group

Ordinary income

AIN PHARMACIEZ dispensing pharmacies

12 AIN PHARMACIEZ INC. ANNUAL REPORT 2014

Hiring and Training Pharmacists
Amid rising national medical expenses caused by Japan’s aging society, dispensing pharmacies arelikely to play a key role in local healthcare provision. One of those areas is home healthcare, anddispensing pharmacies will need to hire enough pharmacists to provide this service. Hiring andtraining pharmacists on a sustained basis is also vital to support an aggressive dispensing pharmacy
opening program. AIN PHARMACIEZ has therefore put the highest priority on securing personnel.

The role of pharmacists is changing rapidly. Pharmacists
now need to be able to provide high-quality services, suchas management of left over prescription medication andsupport for patient health management, including selfmedication using over-the-counter drugs, in addition to theirconventional role of drug dispensing. Also, the governmentis encouraging dispensing pharmacies to play a greaterrole in community healthcare by teaming up with medical
institutions to provide home-based dispensing services. Japanis likely to face a lack of dispensing pharmacies that arecapable of meeting these demands.
Since its founding, AIN PHARMACIEZ has focused on
hiring and training pharmacists on an ongoing basis as partof consistent efforts to improve the quality and number of
its pharmacists.
• Quality: Pharmacists involvedin home healthcare services andpatient health management havea much closer connection to thelives of patients, so they needto have an even higher level ofexpertise and communication
skills. AIN PHARMACIEZ has one

Specialist skills are needed
to ensure sterile preparationof prescriptions f or homebased dispensing services

Comparison of Ability to Secure Dispensing Premiumsof the best personnel training and education systems inthe sector, helping newly hired pharmacists to progressively
improve their skills.
• Numbers: The shift to home healthcare will lead to awider scope of work for pharmacists, creating a need formore personnel. In fiscal 2014, the AIN PHARMACIEZGroup hired 251 pharmacists, the most in the sector, fora total of 2,916 pharmacists as of April 30, 2014.
Our ability to attract large numbers of high-quality
pharmacists will allow us to contribute to the government’s
policy of community healthcare and boost profits bysecuring more reimbursement points. We plan to continue
actively hiring pharmacists to support our bold plans forbusiness expansion over the medium and long term.

Training for newly qualified pharmacists

Number of Graduates Hired

Ratio of Dispensing Pharmacies that Meet Standards
for Dispensing System Premiums*
Standards for dispensing system premiums 1
Standards for dispensing system premiums 2
Total

National
AverageAIN
PHARMACIEZ

46.8%
5.8%
52.6%

79.4%
4.8%
84.2%

Note: Standards for dispensing system premiums: Dispensing pharmacies receive additional
reimbursement points (premiums) if they meet certain standards requested by thegovernment, such as the number of visits for home-based dispensing services and therequired number of inventory items.
Source: National average based on data as of April 1, 2014, disclosed by RISFAX on June 26,
2014; AIN PHARMACIEZ as of April 2014.		

Ratio of Dispensing Pharmacies that Receive Premiumsfor Generic Drug Dispensing Systems
Generic drug dispensing system premiums 1
Generic drug dispensing system premiums 2
Total

National
AverageAIN
PHARMACIEZ

27.7%
20.2%
47.9%

39.5%
39.9%
79.4%

Increase in number ofpharmacists hired

No new
graduatesfrom pharmacy
college courses(persons)
400

New graduatesfrom six-year pharmacy
college courses(new curriculam)

(%)
10
8

300

6

251

200

100

0

1.9

1.9

2.7

2.3

2.6

2.9

2.2

2.8

251
3.4

4
2

2006 20072008 2009 2010 2011

53
28
2012 2013 2014 (FY)0

Pharmacist
General positions
Ratio of newly qualified pharmacists hired by the Company

Source: National average based on data as of July 2014, disclosed by PHARMACY
NEWSBREAK on July 17, 2014; AIN PHARMACIEZ as of July 2014.		

AIN PHARMACIEZ INC. ANNUAL REPORT 201413

Feature: The Ability to Adapt to Change

Increasing the Efficiency of
Existing Dispensing Pharmacies
We are working to increase the efficiency of existing dispensing pharmacies in order to boost
earnings and improve service provision. We launched a new pharmacy-led project in autumn 2012
to reinforce the dispensing pharmacy operating structure ahead of the increase in consumption tax
and dispensing fee revisions in April 2014. We are now rolling out the project across our network.

Under the project, we are ensuring drug inventories are at
appropriate levels and reviewing dispensing operations basedon feedback from dispensing pharmacy staff. The project
has delivered significant results so far, with the number of
inventory turnover days falling from 28.7 in January 2013 to

19.9 in April 2014, the inventory value down roughly 18%
year on year and labor costs also declining. Patient waitingtimes have also fallen substantially, leading to an increase in
the ratio of prescriptions filled.

Progress of Our Pharmacy-led Project: Optimizing Inventory Value*1
2014/4
Net sales: ¥170,225 million
2013/4
Net sales: ¥154,560 million(¥ million)

10,000
8,000
6,000

7,715
(28.7)

8,000*(estimate)

4,000

4,050
(14.3)

2,000
0

Number ofdispensing pharmacies*3

9,530*2(estimate)

2

6,264
(22.3)

5,619(19.2)

6,454(21.8)

6,313(19.9)

1
2013

4

7

10

1
2014

4

544

560

577

589

597

616

*1: Total for dispensing pharmacies at four
core companies including WSS inventories.
(Inventory turnover days shown in brackets.)*2: The estimated values are based on pro-rata
calculations for the number of stores andinventory items using a benchmark inventory
value for January 2013.
*3: Total at end of each quarter period.

Renovation at the AIN Pharmacy NISHISHINJUKU

Know-how from our pharmacy-led project was used to renovate AIN Pharmacy NISHISHINJUKU, which made it more efficient.
< Before >< After>
Layout figure

Layout figure

Counters where customers
receive their medicine

Dispensing room

14 AIN PHARMACIEZ INC. ANNUAL REPORT 2014

Counters where customers
receive their medicine

Dispensing room

Case study: AIN Pharmacy ITABASHI
Progress at the AIN Pharmacy ITABASHI(¥ million)

Full launch of the project

140

Sales

120
100

6,423

5,530

7,000
6,000

7.4%

8.9%

5,000
4,000

60
3,000
40

Prescription volume

Of the 13 model pharmacies where the project has been
implemented, the AIN Pharmacy ITABASHI achieveda particularly fast improvement in earnings. Annual
costs at the pharmacy have been reduced by around¥1 million through the following measures.

2,000

20

1,000

3 4 5 6 7 8 9 10 11 12 1 2 3
2013
2014
Ratio of labor cost to net sales
Prescription volume

0

Sales

0

AIN Pharmacy ITABASHI< Measures >< Results >From the point the prescription is received until
the drugs are dispensed, time savings of six
seconds were identified for each process, with thesavings applied to a total of 100 possible processes(6 seconds × 100 processes = 10 minutes).
This was achieved without changing thepharmacy’s layout or installing new equipment.

(May-Oct 2013)• Waiting times reduced
Increase in customer satisfaction		• Waiting time:
BeforeAfter

24 minutes

		

14 minutes• Increase in number of prescriptions filledby pharmacists

Higher profits		• Personnel:
		Pharmacists
Back office staffs

				Project meeting in the pharmacy

Before

18
10

After

16
7

• Gross margin:

		

6.3%

10.5%

How our pharmacy-led project is improving the ratio of prescriptions filled
The ratio of prescriptions filled tends to be affected by the location of the dispensing pharmacy. Our pharmacy-led project to revitalize
existing pharmacies has led to a reduction in patient waiting times. This is helping to attract customers from rival dispensing pharmacies,
which is supporting an improvement in the ratio of prescriptions filled.

Prescription

Prescription

Secondary location

Prescription

AIN
Pharmacy
Primary location

Prescription

Secondary location

AIN
Pharmacy
Prescription

Primary location

Prescription
Tertiary location or
pharmacies not near hospitals

Tertiary location or
pharmacies not near hospitals

AIN PHARMACIEZ INC. ANNUAL REPORT 201415

Business Segment Strategy

Dispensing Pharmacy Business

AIN PHARMACIEZ will expand its business through M&A deals and new dispensing
pharmacy openings, focusing on locations near hospitals and in medical malls. The
role of dispensing pharmacies is changing in Japan as healthcare becomes moresophisticated and the population ages. Dispensing pharmacies now have to play a partin home healthcare and become centers of healthcare provision for local communities.
Recognizing the importance of this trend, the AIN PHARMACIEZ Group is actively taking
steps to provide home-based dispensing services through all its dispensing pharmacies.
Home-based Dispensing Services (AIN PHARMACIEZ Group)
Fiscal 2013

Fiscal 2014

Fiscal 2015
targets

51

175

600

2,163,170

2,671,389

3,000,000

224,393

254,917300,000

No. of dispensing pharmacies *1
Home-based dispensing service sales(¥ thousand)*2
No. of visits *2

Shoichi Shudo
Senior Managing Director,
General Manager of
Dispensing Pharmacy Division*1 Number of AIN PHARMACIEZ dispensing pharmacies that have received technical fees for home-based dispensing services.
*2 Includes visits those are not eligible for technical fees for home-based dispensing services.

Case study: Promoting Home Healthcare

Aiming to promote the provision of home healthcare by all ourpharmacists, whenever and wherever patients need support,
the 13 dispensing pharmacies in the Group’s No.1 North Kanto
area worked to boost dispensing pharmacy efficiency andactively participated in home-based dispensing services. As
of September 2013, we had provided these services to 272
patients. Also, the gross margin for dispensing pharmacies in
the whole area improved 2.28 percentage points comparedwith the previous fiscal year and the ratio of labor costs to
net sales declined 0.61 percentage point, contributing to asignificant improvement in earnings.
Home-based dispensing services

Progress in the No.1 North Kanto Area		Sep. 2012

Sep. 2013

866

1,624

Gross margin (%)

8.39

10.67

Ratio of labor costs to net sales (%)

15.51

14.90

Technical fees related to home-based
dispensing services (¥ tnousand)

An AIN PHARMACIEZ vehicle used for home-based
dispensing services

16 AIN PHARMACIEZ INC. ANNUAL REPORT 2014

Drug and Cosmetic Store Business

The drug and cosmetic store business specializes in selecting and selling highly original
drug & cosmetics products. Consequently, beauty care products account for roughly
70% of sales, which sets our stores apart from conventional drug stores (see the figure
below). Our stores mainly target female shoppers and are located in urban areas withhigh customer traffic. We have put considerable effort into designing our stores so thatthey are clean and bright, encouraging customers to spend more time browsing for
products. Going forward, we plan to create an even more appealing product lineup andrefresh our branding, along with efforts to boost gross margins.
Kaori Suzuki
General Manager ofDrug and Cosmetic Store Division

Sales by ItemAIN PHARMACIEZ
5.8%

National average
6.5%

13.7%

14.6%

3.5%

6.9%

4.9%

Beauty careproducts

72.1%

3.3%

Food /
everyday items /other

OTC drugs
Healthcare / baby / welfare products
Health supplements

54.0%

14.7%

Beauty care products
Food / everyday items / other
Prescription drugs

ainz & tulpe SANNOMIYA SANKITA-DORI

Source: AIN PHARMACIEZ is FY 2014 sales data; national average is June 2014 data from“Monthly Report on the Current Survey of Mass Merchandise Specialty Retailers,”
Ministry of Economy, Trade and Industry.

ainz & tulpe ABENO solaha

Case Study: Handling OTC Drugs at Our Dispensing Pharmacies
Leveraging the expertise we have built up supplying
OTC drugs through our drug and cosmetic stores,
we now handle a wide range of OTC drugs at our
dispensing pharmacies, such as AIN Pharmacy ABENOHARUKAS and AIN Pharmacy OTEMACHI. Through close
cooperation with the dispensing pharmacy business, weplan to promote self-medication and help customers
improve their quality of life by supplying category 1
medicines, as well as products such as cosmetics forserious skin conditions and health supplements.

OTC drug sales area in AIN Pharmacy
ABENO HARUKASOTC drug sales area in
AIN Pharmacy OTEMACHIAIN PHARMACIEZ INC. ANNUAL REPORT 201417

Corporate Governance(As of July 31, 2014)

AIN PHARMACIEZ assumes responsibility for people’s health and the well-being of the wider community through its
business activities. We promote a highly efficient and transparent management system and implement ongoing initiatives
toward enhancement of corporate governance.

BASIC POLICY FOR CORPORATE GOVERNANCE
Dispensing pharmacies and drug and cosmetic store chains are
the key business areas being developed by AIN PHARMACIEZ.
Both of these businesses are characterized by a responsibility
towards people’s health, and as such, we recognize theindispensability of continuing with sound and transparent
business activities that prioritize compliance.
We have adopted a corporate auditor system to oversee
not only key management decisions and the business executionof directors, but also general corporate management. In orderto ensure the effective mutual management oversight of
directors, the Board of Directors convenes more than once amonth, while a management meeting is held for directors andthe standing corporate auditor on a weekly basis.
To minimize potential risks, the Internal Audit Officeensures comprehensive compliance with basic pharmacy
regulations, while the Safety Policy Office conducts analysis andimplements measures to prevent drug dispensing errors.

Outline of Corporate GovernanceCorporate governance structure

Corporate Auditor Governance System

Chairman of the Board

Kiichi Otani

Number of directors

13 (including three outside directors)

Number of corporate auditors

Four (including three outside corporate auditors)

Board of Directors meetings in fiscal 2014

Number of meetings: 18 (more than once every month)
Examples of resolutions: Annual budget, issues related to new businesses, store openings

Board of Corporate Auditor meetingsin fiscal 2014

Number of meetings: 18
Examples of resolutions: Audit policy, audit plans and business division audits

Management Meetings in fiscal 2014

51

Key meetings attended by corporate auditors

Board of Directors meetings, Board of Corporate Auditor meetings, Management Meetings

Independent director appointment

The Company specifies Toshiaki Kobayashi as an Independent Corporate Auditors pursuant to
the regulations of the Tokyo Stock Exchange and has notified them to the said stock exchange.

Systems to strengthen and promote Groupmanagement

Group Management Meetings (weekly)

Accounting auditor

Ernst & Young ShinNihon LLC

General Meeting of Shareholders
Appointment

Appointment

Board ofCorporate Auditors

Board of Directors
Outside Directors
Appointment

Appointment

Audit
Appointment

Representative
Directors

Compliance
Committee

Board ofManaging Directors

Management
Meeting

18 AIN PHARMACIEZ INC. ANNUAL REPORT 2014

Cooperation

Reporting

Reporting
Drug and Cosmetic Store Division

Accounting Auditors
Audit

ReportingBusiness execution

Executive Officers

Appointment

Dispensing Pharmacy Division

Audit
Administration
Department

Internal Audit OfficeOUTSIDE DIRECTORS AND OUTSIDE CORPORATE
AUDITORSREMUNERATION FOR DIRECTORS AND AUDITORSThe Board of Directors is comprised of 13 members, including
three outside directors. Three of the Company’s four corporate
auditors are outside corporate auditors. There are no conflictsof interest between the Company and its outside directors andoutside corporate auditors. The outside directors and outside
corporate auditors have been appointed on the basis that they
have the ability to fulfill their roles, possess expert knowledge
about the nature of the Company’s business, and have a highlevel of independence. One of these outside corporate auditors
has been designated as the Company’s independent officer.

The maximum total amount of remuneration for directors
was determined by a resolution at the 44th Ordinary General
Meeting of Shareholders held on July 30, 2013 to be ¥300
million annually (does not include payments made to directors
for their duties as employees; the maximum total amount foroutside directors was determined to be ¥50 million annually).
The maximum total amount of remuneration for corporate
auditors was set at ¥30 million annually at the 22th Ordinary
General Meeting of Shareholders held on July 30, 1991.The
actual amount each year is determined within this limit via
discussions among the corporate auditors.
The amount of remuneration for directors and corporate
auditors for the year ended April 2014 is as follows.

Reasons for selection of outside directors

Hikaru Minami

Hikaru Minami has specialist knowledge andexperience as a senior manager at a leading
retailer and in the logistics division of a major
trading company. We believe he can contributeto all areas of the Company’s management
by providing advice to the Board of Directors
and other bodies and by monitoring businessexecution.

Tsuyoshi Kobayashi

Tsuyoshi Kobayashi has specialist knowledge
and experience as a senior manager at aleading retailer, particularly in the financial
and planning divisions. We believe he cancontribute to all areas of the Company’s
management by providing advice to theBoard of Directors and other bodies and bymonitoring business execution.

Ko Mori

Ko Mori’s background is with Marubeni
Corporation, which contributes to the Retirement
Benefit Trust (Marubeni Corporation accountmanaged by Mizuho Trust & Banking Co., Ltd.), a
major shareholder in the Company. Ko Mori also
has experience working at MARUBENI SAFENET
CO., LTD., which has a business relationship with
the Company through insurance contracts.

Item

Directors(excluding outside
directors)
Corporate auditors(excluding outside
corporate auditors)
Outside directors andoutside corporate
auditors

Akira Ibayashi

Toshiaki Kobayashi

Toshiaki Kobayashi has accumulated significant
experience through an extensive career withthe former Ministry of Finance and otherorganizations. We believe he can contributeto the Company’s internal control system byproviding advice to the Board of Directors, theBoard of Corporate Auditors and other bodies
and by monitoring business execution.

Tomonori Ito

Tomonori Ito has specialist knowledge fromworking at an investment bank and experience
as a graduate school professor. We believe
he can contribute to the Company’s internal
control system by providing advice to theBoard of Directors, the Board of Corporate
Auditors and other bodies and by monitoringbusiness execution.

Remuneration by type(¥ million)
Basic
Bonus
remuneration

Numberof eligible
individuals

191

162

28

8

6

6

–

1

26

26

1

5

STATUS OF ACCOUNTING AUDITS
Three certified public accountants from Ernst & Young
ShinNihon LLC conducted the accounting audits of AIN
PHARMACIEZ based on the Companies Act and Financial
Instruments and Exchange Act. Audit fees for the year endedApril 2014 are as follows.
(¥ thousand)Reasons for selection of outside corporate auditors
Akira Ibayashi has specialist knowledge fromworking at financial institutions and experience
as a corporate auditor at other companies. We
believe he can contribute to the Company’s
internal control system by providing advice tothe Board of Directors, the Board of Corporate
Auditors and other bodies and by monitoringbusiness execution.

Total
remuneration(¥ million)

Compensation paid foraudit certification activities

The Company
Consolidated
subsidiaries
Total

Compensation paid for
non-audit activities

40,300–––40,300–AIN PHARMACIEZ INC. ANNUAL REPORT 201419

Financial Section

Management’s Discussion and Analysis of Financial Condition
and Results of Operations

BUSINESS ENVIRONMENT SURROUNDING THE
AIN PHARMACIEZ GROUP
The core business of the AIN PHARMACIEZ Group (the Group)is the dispensing pharmacy business that includes preparing
and dispensing drugs based on prescriptions. Drug prices
and dispensing fees* are stipulated by the Ministry of Health,Labour and Welfare.
As part of its policy to curb national medical expenses,
the ministry revises drug prices and dispensing fees every
two years. Earnings at dispensing pharmacies are the total ofdispensing fees and sales of drugs, so earnings are affected bythese revisions.
Under drug price revisions in April 2014, the averagedrug price was reduced by 2.65%. Also, under dispensing
fee revisions, the dispensing fee system is being changed toreflect the functions of dispensing pharmacies in order toimprove pharmaceutical management and promote homebased dispensing services. The dispensing fee revisions are also
designed to encourage even wider use of generic drugs.
The gap in performance is widening between companies in
the industry, which are struggling with changes to their profit
structures resulting from revisions to dispensing fees and othersystems. However, the Group regards these changes in theoperating environment as a perfect opportunity to push ahead
with its strategy of further increasing profitability.
* Dispensing fees comprise pharmaceutical management fees and technical feesfor pharmacists.

BUSINESS OVERVIEW FOR THE FISCAL YEARUNDER REVIEW
During the fiscal year ended April 30, 2014, the Japanese
economy recovered steadily, despite signs of a pullback indemand after spiking ahead of the consumption tax hike. The
upturn in the economy reflected an improvement in corporate
earnings and employment conditions, as well as a broaderbased pickup in capital expenditure and other areas.
In this economic environment, the Group worked to
expand its business by opening new dispensing pharmacies andusing M&A, while also pushing ahead with the comprehensive
development of medical malls and the urban drug and cosmetic
store business. The Group also aimed to boost profitability byrevitalizing existing stores and dispensing pharmacies.
For the fiscal year under review, the Group reported net
sales of ¥170,225 million, an increase of 10.1% year on year,
reflecting the opening of new dispensing pharmacies and

20 AIN PHARMACIEZ INC. ANNUAL REPORT 2014

M&As. Operating income rose 4.3% to ¥10,113 million andnet income increased 3.6% year on year to ¥5,259 million.
As of the end of the fiscal year, the number of stores in theGroup totaled 675, a net increase of 54 stores from the end of
the previous fiscal year.

BUSINESS OVERVIEW FOR THE FISCAL YEARUNDER REVIEWDispensing Pharmacy BusinessIn the dispensing pharmacy business, sales continued to rise
at existing dispensing pharmacies, supported by growth inaverage sales per prescription due to an increase in longer-termprescriptions.
Under the dispensing fee revisions in April 2014, dispensing
pharmacies are being encouraged to play a much greater rolein community healthcare and to promote even wider use ofgeneric drugs.
For some time, the Group has been preparing for the
impact of these dispensing fee revisions through a pharmacyled project that reviews and rebuilds all dispensing processes
at each dispensing pharmacy in order to improve dispensing
pharmacy efficiency and upgrade patient services. The Groupis also building links with local healthcare service providers,mainly in the area of home-based dispensing, and working topromote wider use of generic drugs in order to fulfill the newroles being asked of dispensing pharmacies.
In business development, the Group continued to pushahead with business expansion by opening new dispensing
pharmacies, primarily dispensing pharmacies near hospitals
and medical malls, and through M&A deals. In medical malldevelopment, the Group was involved in the development of
one of Japan’s largest medical floors, in ABENO HARUKAS,
a new mixed-use skyscraper (Osaka). This culminated in the
opening of a new medical mall dispensing pharmacy called Ain
Pharmacy ABENO HARUKAS in April 2014.
During the fiscal year under review, the Group opened
62 dispensing pharmacies, including those operated by 13
companies that became Group subsidiaries through M&A
deals, and closed six dispensing pharmacies, resulting in a totalof 616.
The dispensing pharmacy business reported net sales of¥151,472 million, an increase of 10.3% year on year, andsegment income of ¥12,772 million, up only 0.9% due tohigher drug procurement costs.

Drug and Cosmetic Store BusinessIn the drug and cosmetic store business, the market
environment remained challenging due to a narrowing
competitive gap between companies in the sector and theemergence of new competitors from sector consolidation andrealignment that also extends to other business sectors, as well
as regulatory changes related to online sales of OTC drugs.
Against this backdrop, the Group continued to open ainz &tulpe urban drug stores to meet consumer needs.
Ainz & tulpe is a specialist, highly original drug andcosmetic store retail concept that the Group is rolling out in
urban areas with high customer traffic. The Group continued
to reinforce merchandising lineups at ainz & tulpe stores,
particularly drug and cosmetic products, in order to boost sales
capabilities and increase the gross margin.
In sales promotion, the Group worked to expand thecustomer base using a range of different communication tools
tailored to customer segments, such as emails for Ainz Point
Club members and communication apps such as LINE andTwitter.
During the fiscal year under review, the Group opened anumber of ainz & tulpe format stores. These included ainz &tulpe SANNOMIYA SANKITA-DORI (Chuo-ku, Kobe), ainz &tulpe ABENO solaha (Abeno-ku, Osaka) and ainz & tulpe NU
chayamachi (Kita-ku, Osaka), opened as part of efforts to build
a dominant position in the Kyoto-Osaka-Kobe area. The Groupalso closed five stores, mainly suburban stores, resulting in aGroup total of 59 stores at the end of the fiscal year.
The drug and cosmetic store business reported net salesof ¥17,985 million, an increase of 7.5% year on year, mainlyreflecting a rush in demand before the increase to consumption
tax and contributions from new stores. Although gross profit
declined due to the closure of five stores, segment income rose
65.8% year on year to ¥23 million.
Other Businesses
Net sales of other businesses totaled ¥767 million, an increaseof 43.9% year on year, and segment losses totaled ¥218
million, an improvement of ¥179 million year on year.

Financial Position
Total assets at the end of the fiscal year under review totaled¥101,382 million, up ¥5,542 million due to an increase ininventories and fixed assets related to new store openings andM&A.
Consolidated current assets at the end of the fiscal year
under review increased by ¥1,172 million to ¥44,334 million.
This mainly reflected cash on hand and in banks of ¥18,846
million, an increase of ¥386 million compared with the previous
fiscal year, merchandise of ¥9,578 million, an increase of¥1,762 million due to business expansion, and other accounts
receivable of ¥5,679 million, down ¥1,500 million.

Fixed assets at the end of the fiscal year under review
increased by ¥4,371 million to ¥57,048 million compared to¥52,676 million at the end of the previous fiscal year.
This was mainly due to an increase in fixed assets related
to investment in new stores and expansion in the asset baseat consolidated subsidiaries that became part of the Groupthrough M&A deals. Property, plant and equipment, mainly
buildings and structures, increased by ¥2,033 million to¥19,583 million, while goodwill rose ¥442 million to ¥20,017
million.
In addition, investments and other assets increasedby ¥1,814 million year on year to ¥16,334 million, chiefly
reflecting an increase in deposits and guarantees.
Liabilities increased by ¥1,659 million to ¥59,142 million
compared to ¥57,483 million at the end of the previous fiscal
year.
This mainly reflected accounts payable of ¥28,002 million,up ¥3,917 million year on year due to growth in procurement
related to new store openings and store acquisitions through
M&A, versus short-term debt of ¥6,535 million, down ¥947
million, and long-term debt of ¥4,502 million, down ¥3,545
million, due to progress with debt repayments.
As a result of the above, the balance of current liabilities
increased by ¥4,662 million from the previous year-end balanceof ¥45,686 million to ¥50,349 million, and the balance of longterm liabilities decreased by ¥3,003 million from the previous
year-end balance of ¥11,796 million to ¥8,793 million.
Net assets increased by ¥3,883 million to ¥42,240 million
compared to ¥38,356 million at the end of the previous fiscal
year.
Retained earnings increased ¥4,302 million year on year to¥26,007 million due to growth in surplus funds, while treasury
stock increased ¥411 million to ¥417 million due to a sharebuyback.
As a result of the above factors, the shareholders’ equity
ratio improved 1.5 percentage points to 41.5%, comparedwith 40.0% at the end of the previous fiscal year. ROA declined
0.3 percentage point from the previous fiscal year to 5.3%,
while ROE dropped 1.0 percentage point to 13.1%.

BASIC POLICIES FOR PROFIT DISTRIBUTION
The Company considers the return of profits to shareholders as
an important management issue. Our basic policy is to repay
our investors proportionate to the profit we make, and tomaintain these at stable levels.
Internal reserves are held to strengthen the corporate
structure and in preparation for new store openings and future
development of the business. We will make effective use of
these funds to generate profits to be returned to shareholders
in the future.
The Company’s basic policy is to pay dividends fromretained earnings once per year at the end of the fiscal year.

AIN PHARMACIEZ INC. ANNUAL REPORT 201421

For the fiscal year under review, the Company plans to pay
a dividend from retained earnings of ¥60 per share, the samelevel as the dividend for the previous fiscal year.
In view of profit forecasts, plans for investment and otherfactors, the Company intends to pay an ordinary dividend fromretained earnings of ¥60 per share for the fiscal year ending
April 30, 2015, the same level as the planned dividend for the
fiscal year under review.

Cash Flows
In the fiscal year under review, cash on hand and in banks
increased ¥295 million (1.6%) year on year to ¥18,735 million.
This reflected operating cash flow generated by dispensing
pharmacy and drug and cosmetic store businesses, which was
mainly used to actively invest in new store openings and M&A.
Cash flows from each category and their relevant factors
are as follows.
Cash Flows from Operating Activities
Net cash provided by operating activities was ¥14,662 million,
an increase of 43.7% year on year.
The main items that were positive for cash flow wereincome before income taxes and minority interests of ¥10,265
million, as well as depreciation and amortization of ¥2,258
million, amortization of goodwill of ¥2,033 million and increasein notes and accounts payable-trade of ¥3,075 million related
to business expansion through new store openings and M&A.
The main items that were negative for cash flow wasincome taxes paid of ¥4,603 million.
Cash Flows from Investing Activities
Net cash used in investing activities totaled ¥7,749 million, adecrease of 8.9% year on year.
This mainly reflected payments of ¥3,460 million forpurchases of property, plant and equipment related to the
opening of new urban drug stores and dispensing pharmacies,and ¥2,410 million for purchases of shares in subsidiaries due
to changes in the scope of consolidation related to sharesacquired in 13 companies through M&A deals.
Cash Flows from Financing Activities
Net cash used in financing activities totaled ¥6,617 million,
compared with cash of ¥803 million provided the previous
fiscal year.
This was mainly attributable to net short-term debt
repayment of ¥318 million and net long-term debt repaymentof ¥4,373 million.
Purchase of treasury stock of ¥411 million and cash
dividends paid of ¥956 million also had a negative impact on
cash flows from financing activities.

22 AIN PHARMACIEZ INC. ANNUAL REPORT 2014

Business and Other Risks
The following factors may affect the Group’s operating results,
stock price and financial position. Forward-looking statementsin this annual report are based on judgments by the AIN
PHARMACIES Group at the end of the fiscal year under review.
1. Laws and Regulations
a.Regulations under the Pharmaceutical Affairs Law andother laws
We operate dispensing pharmacies under various permits,
licenses, registrations and notifications including those set forth
by the Pharmaceutical Affairs Law, the Health Insurance Law
and the Pharmacists Law, under the supervision of the Ministryof Health, Labour and Welfare, and of prefectural health andwelfare departments. The drug and cosmetic store businessalso involves sales of drugs, which are similarly regulated under
the Pharmaceutical Affairs Law.
b. Easing of drug sales regulations
Under the Law for Partial Revision of the Pharmaceutical Affairs
Law (Law No. 69, June 14, 2006), which includes a review ofthe sales system for over-the-counter (OTC) drugs, OTC drugs
are categorized into three groups by risk. It has thus become
possible to sell the two lower-risk categories of drugs as a“registered seller,” not requiring a pharmacist.
Factors such as the entry into the market of firms fromother industries as a result of a continuing trend in the future
to deregulate drug sales may affect the Group’s performance.
2. Business Overview
The Group’s dispensing pharmacy business operates a chain of
specialist dispensing pharmacies. These dispensing pharmacies
are mainly located near major hospitals (targeting demand
from patients with prescriptions written by those hospitals)
and near medical malls (targeting demand from patients withprescriptions written by those mixed medical facilities).
As the dispensing pharmacy business accounted for
89.0% of net sales in the fiscal year under review, we plan tocontinue the multi-store operation mainly based on dispensing
pharmacies. Accordingly, the Group’s operating results may beaffected by the success or failure of the store opening policies
and by trends in competitors’ store openings.
Furthermore, sales of dispensing pharmacies significantly
depend on the medical institutions that write prescriptions.
Therefore, some hard-to-predict factors including the issuanceof non-hospital prescriptions by the medical institutions orsuspension/discontinuation of operations thereof may affect
the Group’s performance.
3. Industry Trends
The revenues in our dispensing pharmacy business come frompharmacy operations involving the dispensing and supplyingof prescription drugs. The drug prices and dispensing fees are
set by the Ministry of Health, Labour and Welfare. As a wayto contain medical expenses, both medical treatment feesand drug prices are being revised in stages. Changes in profit
structure resulting from factors such as revisions in the medical
treatment fee system could continue to affect the Group’s
performance and financial position.
4. Attracting Qualified Staff
Dispensing pharmacies and drugstores (stores for Category
1 Drugs) are required by the Pharmaceutical Affairs Law tohave at least one pharmacist on site; the Pharmacists Law
stipulates that the dispensing of drugs must be handled by apharmacist. The Group continues to have a policy of expansion
by aggressively opening new stores, but if it becomes difficult
to secure qualified pharmacists, this could affect our store
openings and our performance.
5. Risk of Loss of Trust in the Groupa. In dispensing operations
In our dispensing pharmacy business, pharmacists dispenseand supply prescription drugs that affect the human body.
This business carries the risk that medical accidents might becaused through dispensing errors. The Group recognizes thatany medical accidents could have a severely damaging effecton society’s confidence in the Group, and we place the highest
priority on measures in all aspects to prevent this risk frommaterializing.

7. Interest Rate Risk
In the Group’s promotion of business expansion based on
actively promoting new store openings and M&A, costs forordinary store openings are covered by its own resources within
the range of operating cash flow, while in some cases of large
scale M&A, costs are partially financed by borrowings fromfinancial institutions.
To flexibly respond to these capital needs, the Group seeks
to maintain a certain level of liquidity. As of the end of the
fiscal year under review, the balance of cash on hand and inbanks was ¥18,846 million, while the balance of short- andlong-term debts of the Group was ¥11,038 million.
We focus on the possibility of return on investment andseek to reduce interest-bearing debt in implementing M&A.
However, if the Group fails to secure an adequate returnon its M&A investment, or due to interest rate fluctuations
associated with conditions of the financial market, the Group’s
financial position and operating results including interest
expenses may be affected.

b. Protection of Personal Data
We possess patient data in the dispensing pharmacy business,
including medical histories and prescription information, andwe possess personal data in the drug and cosmetic store
business obtained for the Ainz Point Club Card. The Group hascompleted development of personal information protection
systems and rules for the handling of such information. The
Company acquired the Privacy Mark accreditation in thehealthcare, medical and social service fields.
However, we believe it is possible that any accidental
or illegal leakage of personal data may not only affect our
performance but also lead to a loss of society’s confidence in
the Group.
6 Business Strategy Risk
We have promoted the expansion of the business scale throughactively promoting new openings of dispensing pharmacies andM&A. Our basic policies regarding M&A strategy require us tocarefully examine target companies and determine the amountto be paid for acquisitions thereof in order to stably secure a
profitability level that exceeds the amortization of goodwill to
be incurred. If matters do not go as planned, however, we may
incur loss on valuation of shares in subsidiaries and impairment
loss on goodwill, which may have an adverse impact on theGroup’s operating results and financial position.

AIN PHARMACIEZ INC. ANNUAL REPORT 201423

AIN PHARMACIEZ INC.
CONSOLIDATED BALANCE SHEETAS OF APRIL 30, 2014

Millions of yen
2014
2013

ASSETS
Current assets:
Cash on hand and in banks (Notes 2 and 4)
Notes and accounts receivable (Note 4)
Other accounts receivable
Inventories (Note 3)
Deferred tax assets (Note 10)
Short-term loans
Other current assets
Allowance for doubtful accounts
Total current assets¥

18,847
6,719
5,680
9,759
1,245
708
1,376
44,335¥-

18,460
7,044
7,181
7,944
955
445
1,142
(10)
43,162Thousands of
U.S. dollars(Note 1(1))
2014$

183,855
65,54555,40995,20012,145
6,907
13,423432,494-

Property, plant and equipment (Note 6):
Buildings and structures, net
LandConstruction in progress
Other property, plant and equipment, net
Total property, plant and equipment

9,962
6,699
682
2,241
19,584

8,248
6,031
1,102
2,170
17,55097,181
65,3506,653
21,861
191,045

Investments and other assets:
Investments in securities (Notes 4 and 5)
Deferred tax assets (Note 10)Long-term loans
Deposits and guarantees
Goodwill
Other intangible fixed assets
Other investments and other assets
Allowance for doubtful accounts
Total investments and other assets
Total assets

2,559
1,068
1,801
8,081
20,017
1,112
3,065
(240)
37,464¥ 101,383

2,790
946
1,348
6,986
19,575
1,031
2,720
(268)
35,12895,84024,963
10,41817,56978,831
195,269
10,84829,900(2,341)
365,467
989,006

See accompanying notes.

24 AIN PHARMACIEZ INC. ANNUAL REPORT 2014¥$

Millions of yen
2014
2013

LIABILITIES AND NET ASSETS
Current liabilities:
Accounts payable (Note 4)
Short-term debt (Notes 4 and 7)
Accrued income taxes
Deposits received
Allowance for bonuses to employees
Allowance for bonuses to directors
Reserve for reward obligations
Other current liabilities
Total current liabilities
Long-term liabilities:
Long-term debt (Notes 4 and 7)
Lease obligations
Allowance for retirement benefits (Note 9)
Net defined benefit liability
Other long-term liabilities
Total long-term liabilities

Thousands of
U.S. dollars(Note 1(1))
2014¥

28,002
6,535
3,080
8,687
1,149
12
332
2,551
50,349

4,503
1,454
1,927
909
8,793

¥

24,085
7,483
2,427
7,906
1,099
13
316
2,358
45,687

8,049
1,223
1,659

-

866
11,797$273,164
63,75030,04684,743
11,209117
3,239
24,885491,162

43,927
14,184-

18,798
8,867
85,777-

Net Assets: (Note 11)
Shareholders’ equity
Common stock
8,683
Authorized - 44,000,000 shares in 2014 and 2013
Issued - 15,944,106 shares in 2014 and 2013
Capital surplus
7,873
Retained earnings
26,007
Treasury stock (89,916 shares in 2014 and 3,366 shares in 2013)(417)
Total shareholders’ equity
42,146
Accumulated other comprehensive income (loss):
Unrealized holding gains on securities
35
Remeasurments of defined benefit plans(58)
Total accumulated other comprehensive (loss) income(24)
Minority interests
118
Total net assets
42,240Total liabilities and net assets¥ 101,383

¥

8,683

84,704

7,873
21,705(6)
38,25576,802
253,702(4,068)411,140

58

341
(566)
(234)
1,151
412,057
989,006

58
44
38,357
95,840-$AIN PHARMACIEZ INC. ANNUAL REPORT 201425

AIN PHARMACIEZ INC.
CONSOLIDATED STATEMENT OF INCOME
YEAR ENDED APRIL 30, 2014

Net sales (Note 15)
Cost of sales
Gross profit
Selling, general and administrative expenses
Operating income (Note 15)
Other income (expense):
Interest and dividend income
Gains on investments in partnership
Commissions received
Real estate rental revenue
Consignment income
Interest expenses
Losses on sales of accounts receivables
Gains on sales of investments in securities
Refund of premium for cancelled insurance
Losses on sales of investments in securities
Losses on disposal and sales of fixed assets
Impairment losses on fixed assets
Directors’ retirement benefits
Other, net¥

Income before income taxes and minority interests
Income taxes (Note 10):
Current
DeferredIncome before minority interests
Minority interests in income (loss)
Net income¥

Millions of yen
2014
2013
170,226¥ 154,561
144,477
130,118
25,74924,442
15,635
14,741
10,113
9,701

Thousands of
U.S. dollars(Note 1(1))
2014$ 1,660,579
1,409,394
251,185
152,522
98,654

111
45
33
74
144
(102)
(86)
50
214
(336)
(190)
194
153
10,266

118
80
71
91
134
(144)
(79)
119
(124)
(132)
(159)
(320)
337
(7)
9,695

1,083
439
322
722
1,405
(995)
(839)
488
2,088
(3,278)(1,853)
1,892
1,493
100,146

5,207
(274)
4,933
5,333
74
5,259

4,597
29
4,626
5,069
(6)
5,075

50,795(2,673)
48,12252,024722
51,302¥$AIN PHARMACIEZ INC.
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
YEAR ENDED APRIL 30, 2014

Income before minority interests
Other comprehensive income
Unrealized holding (losses) gains on securities
Total other comprehensive (loss) income
Total comprehensive income
Comprehensive income attributable toshareholders of the parent
Comprehensive income (loss) attributable tominority interests
See accompanying notes.

26 AIN PHARMACIEZ INC. ANNUAL REPORT 2014

Millions of yen
2014
¥
5,333

Millions of yen
2013
¥
5,069

Thousands of
U.S. dollars(Note 1(1))
2014$
52,024

(23)
(23)
5,310

339
339
5,408

(224)
(224)
51,800

5,236

5,414

51,078

74

(6)

722

AIN PHARMACIEZ INC.
CONSOLIDATED STATEMENT OF CHANGES IN NET ASSETSYEAR ENDED APRIL 30, 2014

Thousands ofsharesBalance at April 30, 2012
Net income
Cash dividends paid
Acquisition of treasury stock
Net change in items other than those in shareholders’ equity
Net changes during the year
Balance at April 30, 2013
Net income
Cash dividends paid
Acquisition of treasury stock
Net change in items other than those in shareholders’ equity
Net changes during the year
Balance at April 30, 2014

15,944

15,944

15,944

Millions of yen

Shareholders' equity

Number ofshares ofcommon stock

Common stock

-

¥

8,683

8,683

¥

8,683

-

Retainedearnings

Capital surplus

¥

7,873

7,873

¥

7,873

-

¥

¥

17,426
5,075
(797)
4,278
21,705
5,259
(956)
4,303
26,007

Treasury stock

¥

¥

(6)
(0)
(0)
(6)
(412)
(412)
(417)

¥

¥

Balance at April 30, 2013
Net income
Cash dividends paid
Acquisition of treasury stock
Net change in items other than those in shareholders’ equity
Net changes during the year
Balance at April 30, 2014$

84,704$84,704-$76,802$76,802-$$

211,735
51,302(9,326)
41,976
253,702

¥

(281)
339
339
58
(23)
(23)
35

¥

¥

(58)
(58)
(58)

¥

(281)
339
339
58
(81)
(81)
(24)

¥

Minority
interests¥¥

Total net assets

51

(6)
(6)
44
74
74
118

¥

¥

33,746
5,075
(797)
(0)
333
4,611
38,357
5,259
(956)
(412)
(8)
3,884
42,240

Accumulated other comprehensive income (loss)

Retainedearnings

Capital surplus

¥

Total
accumulated
othercomprehensive
income (loss)

Remeasurmentsof defined
benefit plans

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

Shareholders' equity

Common stock

33,977
5,075
(797)
(0)
4,278
38,255
5,259
(956)
(412)
3,891
42,146

Accumulated other comprehensive income (loss)
Unrealized
holding gains(losses) on
securities

Total
shareholders’equity$$(59)(4,019)(4,019)(4,068)

Unrealized
holding gains(losses) on
securities

Total
shareholders’equityTreasury stock$$

373,183
51,302(9,326)(4,019)37,957411,140

$

$

566

(224)
(224)
341

Total
accumulated
othercomprehensive
income (loss)

Remeasurmentsof defined
benefit plans

$

$

(566)
(566)
(566)

$

$

566

(790)
(790)
(234)

Minority
interests

$

429

$

722
722
1,151

Total net assets

-

$

$

374,178
51,302(9,326)(4,019)(78)
37,889412,057

See accompanying notes.

AIN PHARMACIEZ INC. ANNUAL REPORT 201427

AIN PHARMACIEZ INC.
CONSOLIDATED STATEMENT OF CASH FLOWSYEAR ENDED APRIL 30, 2014

Cash flows from operating activities:
Income before income taxes and minority interests
Depreciation and amortization
Impairment losses on fixed assets
Amortization of goodwill
Decrease in allowance for doubtful accounts
Increase in reserve for reward obligations
Increase in allowance for retirement benefits
Increase in net defined benefit liability
Increase in allowance for bonuses to employees
Interest and dividend income
Interest expenses
Gains on investments in partnerships
Gains on donations of property, plant and equipment(Gains) losses on sales of investments in securities
Losses on disposal and sales of fixed assets
Gains on transfer of business
Decrease in accounts receivable(Increase) decrease in inventories
Increase in other assets
Decrease (increase) in other accounts receivable
Increase in accounts payable
Increase (decrease) in other liabilities
SubtotalInterest and dividends received
Interest paid
Income taxes paid
Net cash provided by operating activities

Millions of yen
2014
2013
¥ 10,266
2,259
190
2,033
(45)
16
154
38
(111)
102
(45)
(12)
(50)
332
1,110
(1,485)
(199)
1,552
3,075
84
19,264105(103)(4,604)
14,663¥Thousands of
U.S. dollars(Note 1(1))
2014

9,695
2,213
159
1,784
(7)
14
202
115
(118)
144
(80)
(18)
5
112
(12)
4,673
505
(196)
(4,269)475(223)
15,171125(145)(4,948)
10,204$ 100,146
22,037
1,853
19,832
(439)
156
1,502
371
(1,083)
995
(439)
(117)
(488)
3,239
10,828(14,486)(1,941)
15,14029,997
819
187,923
1,024(1,005)(44,913)143,040

Cash flows from investing activities:
Payments for purchases of property, plant and equipment
Proceeds from sales of property, plant and equipment
Proceeds from transfer of business
Payments for purchases of investments in securities
Proceeds from sales of investments in securities
Purchases of subsidiaries' shares resulting in obtaining controls
Payments for loans receivable
Proceeds from collections of loans receivable
Payments for investments in capital
Payments for purchase of intangible fixed assets
Increase in other investments
Net cash used in investing activities(3,460)
466
(121)
322
(2,410)(3,173)
2,545
(0)
(794)
(1,126)(7,749)(3,267)
325
65
(559)
1,240
(2,923)
(579)
734
(743)
(956)
(1,839)(8,503)(33,753)
4,546(1,180)3,141(23,510)(30,953)
24,827(0)(7,746)(10,984)(75,593)

Cash flows from financing activities:
Net (repayments) proceeds from short-term debts
Proceeds from long-term debts
Repayments of long-term debts
Repayments of lease obligations
Payments for purchase of treasury stock
Cash dividends paid
Net cash (used in) provided by financing activities

(318)
137
(4,510)
(558)
(412)
(956)
(6,618)851
6,440(5,258)
(431)
(0)
(797)
804

(3,102)
1,336(43,996)(5,443)(4,019)(9,326)(64,560)

296
18,440¥ 18,735

2,504
15,935¥ 18,440

2,888
179,885$ 182,763

Net increase in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of the year (Note 2)
See accompanying notes.

28 AIN PHARMACIEZ INC. ANNUAL REPORT 2014

AIN PHARMACIEZ INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTSYEARS ENDED APRIL 30, 2014 AND 2013

1. Summary of significant accounting policies(1) Basis of presenting consolidated financial statements
The accompanying consolidated financial statements have been prepared in accordance with theprovisions set forth in the Japanese Financial Instruments and Exchange Law and its related
accounting regulations, and in conformity with accounting principles generally accepted in Japan("Japanese GAAP"), which are different in certain respects as to application and disclosure
requirements of International Financial Reporting Standards.
The accompanying consolidated financial statements have been reclassified and translated into
English from the consolidated financial statements of AIN PHARMACIEZ INC. (the “Company”)
prepared in accordance with Japanese GAAP and filed with the appropriate Local Finance Bureau of
the Ministry of Finance as required by the Financial Instruments and Exchange Law. Some
supplementary information included in the statutory Japanese language consolidated financial
statements, but not required for fair presentation, is not presented in the accompanying consolidated
financial statements.
The translations of the Japanese yen amounts into U.S. dollars are included solely for the convenienceof readers outside Japan, using the prevailing exchange rate at April 30, 2014, which was ¥102.51 to
U.S. $1. The convenience translations should not be construed as representations that the Japanese
yen amounts have been, could have been, or could in the future be, converted into U.S. dollars at thisor any other rate of exchange.
As permitted by the Financial Instruments and Exchange Law of Japan, amounts of less than one
million yen have been omitted. As a result, the totals shown in the accompanying consolidated financial
statements (both in yen and U.S. dollars) do not necessarily agree with the sums of the individual
amounts.
(2) Consolidated statement of cash flows
In preparing the consolidated statement of cash flows, cash on hand, readily-available deposits andshort-term highly liquid investments with maturities not exceeding three months at the time of purchaseare considered to be cash and cash equivalents.
(3) Basis of consolidation and accounting for investments in affiliates
The consolidated financial statements comprise the accounts of the Company and its 24 and 19
subsidiaries as of April 30, 2014 and 2013, respectively. All significant intercompany accounts andtransactions have been eliminated in consolidation. All companies are required to consolidate all
significant investees which are controlled through ownership of majority voting rights or existence of
certain conditions.
The investments in affiliates are stated at their underlying equity value. All companies are required toaccount for investments in affiliates (20% to 50% owned and certain others that are 15% to 20%
owned) by the equity method, in principle.
Of consolidated subsidiaries, MEDIWEL Corp. closes its accounts on April 30. The account closing
date for a consolidated subsidiary in the dispensing pharmacy business is the end of April. The accountclosing date for two consolidated subsidiaries in the dispensing pharmacy business is the end of
February. The account closing date of other consolidated subsidiaries is the end of March 31. Financial
statements as of these respective closing dates are used in preparing the consolidated financial
statements. However, necessary adjustments are made to important transactions that occur between
these subsidiaries’ account closing dates and the account closing date for the consolidated financial
statements.

AIN PHARMACIEZ INC. ANNUAL REPORT 201429

(4) Securities
The Company and its consolidated subsidiaries examine the intent of holding each security and classify
those securities other than equity securities issued by subsidiaries and affiliates: (a) securities held for
trading purposes (hereafter, "trading securities"), (b) debt securities intended to be held to maturity(hereafter, "held-to-maturity debt securities"), (c) other securities that are not classified in any of theabove categories (hereafter, "available-for-sale securities").
Trading securities are carried at fair value and held-to-maturity debt securities are carried at amortizedcost. Marketable securities classified as available-for-sale securities are carried at fair value withchanges in unrealized holding gains or losses, net of the applicable income taxes, included directly in
net assets. Non-marketable securities classified as available-for-sale securities are carried at cost.
Cost of securities sold is determined by the moving average method.
(5) Inventories
Dispensed drugs were stated at lower of cost or market, cost being determined using the gross averagemethod. Merchandise was stated at lower of cost or market, cost being determined using the retailmethod. Supplies were stated at cost determined using the last purchase method.
(6) Depreciation and amortization
Depreciation of property, plant and equipment other than leased assets is computed by the
declining-balance method at rates based on the useful lives, except that the straight-line method isapplied to buildings acquired after April 1, 1998. The useful lives of major property, plant andequipment are summarized as follows:
Buildings and structures: 10 to 50 years
The straight-line method is applied over a three-year period for assets with an acquisition price of¥100,000 or more and less than ¥200,000.
Amortization of software other than leased assets used by the Company and its consolidated
subsidiaries is computed by the straight-line method over the useful lives, 5 years. Amortization of
long-term prepaid expenses is computed by the straight-line method. Amortization of goodwill iscomputed by the straight-line method over a period (5 to 20 years).
Leased assets capitalized under finance leases are depreciated over the lease terms of the respective
assets with no residual value. Finance lease transactions that do not transfer ownership thatcommenced prior to April 1, 2008, are accounted for under methods pertaining to standard leasetransactions.
(7) Impairment of fixed assets
Fixed assets are reviewed for impairment whenever events or changes in circumstances indicate thatthe carrying amount may not be recoverable. When amounts of undiscounted future cash flows of fixed
assets are less than the carrying amounts, the fixed assets are determined to be impaired. Then, anamount by which the carrying amount exceeds the recoverable amount is recognized as an impairment
loss.
The Company and its consolidated subsidiaries identify group of assets by store as the smallest
identifiable group of assets that generates cash inflows from continuing use that are largely
independent of the cash inflows from other assets or groups of assets. With respect to non-performing
assets, real estate is regarded as an independent asset group.
The recoverable amount of the asset group is measured by the respective net selling prices. The land
is assessed based on the appraisal value by an independent real estate appraiser. The fair value of
construction in progress and store facilities is the disposal value from which costs of disposal are
deducted.
(8) Deferred charges
Amortization of stock issuance cost is computed by the straight-line method over 3 years.

30 AIN PHARMACIEZ INC. ANNUAL REPORT 2014

(9) Allowance for doubtful accounts
The Company and its consolidated subsidiaries provide an allowance for doubtful accounts forprobable collection losses by applying the actual rate of bad debt losses experienced in a pastreference period for normal receivables and by individual assessment of collectability for doubtfulreceivables.
(10) Bonuses to employees
Allowance for bonus to employees is provided for payments to employees of the Company and its
consolidated subsidiaries at the amount expected to be paid in respect of the calculation period ended
on the balance sheet date.
(11) Bonuses to directors
Allowance for bonus to directors is provided for payments to directors of the Company and its
consolidated subsidiaries at the amount expected to be paid in respect of the calculation period ended
on the balance sheet date.
(12) Reserve for reward obligations
In terms of the estimated redeemable amount of the purchase points given in the parent company’s
Drug and Cosmetic Store Business, the Company sets a reserve based on actual redemptions in thepast.
(13) Retirement benefits
Retirement benefits covering all employees are provided through two plans: a lump-sum benefit plan
and a defined-benefit pension plan. Upon retirement or termination of employment, employees are
generally entitled to lump-sum or annuity payments based on their current rate of pay, length of service
and cause of termination.
The Company and some of its consolidated subsidiaries revised a retirement benefits plan in October,2012 and recognize prior service costs for the year ended April 30, 2013.
The Company and some of its consolidated subsidiaries employ the simplified method when computing
retirement benefit obligations for the year ended April 30, 2014.
In calculating the retirement benefit obligation, the straight-line basis is used to attribute the expected
benefit attributable to the respective fiscal year. Unrecognized prior service cost is amortized on astraight-line basis over a period (six years) within the employees’ average remaining service period at
incurrence. Unrecognized actuarial gains and losses are recognized in expenses using thedeclining-balance method over a period (six years) within the average of the estimated remaining
service period, commencing from the year after the year in which they are incurred.
(14) Income taxes
Deferred tax assets and liabilities are determined based on the differences between financial reporting
and the tax bases of the assets and liabilities and are measured using the enacted tax rates and laws
which will be in effect when the differences are expected to reverse.
(15) Amounts per share of common stock
Basic net income per share is computed based on the weighted average number of shares of common
stock outstanding during the year.
Diluted net income per share is computed based on the weighted average number of shares ofcommon stock outstanding each year after giving effect to the dilutive potential of common shares to beissued upon conversion of the convertible bonds.
Net assets per share are computed based on the net assets excluding minority interests, and thenumber of common stock outstanding at the year end.
Cash dividends per share represent the actual amount declared as applicable to the respective years.

AIN PHARMACIEZ INC. ANNUAL REPORT 201431

(16) Consumption taxes
The Company and its consolidated subsidiaries are accounted for using the tax excluded method.
With regard to consumption taxes and other taxes that are not subject to deduction, the related
expenses are reported in the fiscal year in which they are incurred.
However, consumption taxes and other taxes that are not subject to deduction but related to fixed
assets are recorded in “Other investments and other assets” within “Investments and other assets” andamortized using the straight-line method.
Accrued consumption taxes are indicated in the corresponding “other” sections within current assets
and current liabilities.
(17) Changes in accounting policies due to application of revised accounting standards
The Company and its subsidiaries have adopted the “Accounting Standard for Retirement Benefits”(Accounting Standards Board of Japan (“ASBJ”) Statement No. 26, revised on May 17, 2012, the“Accounting Standard”) and the Guidance on “Accounting Standard for Retirement Benefits” (ASBJ
Guidance No. 25, revised on May 17, 2012, the “Guidance”) applicable from the fiscal year ended April
30, 2014 (excluding the provisions set out in the main text of Paragraph 35 and Paragraph 67 of the
Accounting Standard and the Guidance, respectively). Accordingly, the amount deducted plan assets
from retirement benefit obligation, unrecognized actuarial gains (losses) and unrecognized prior service
cost are reported as “Net defined benefit liability” from the fiscal year ended April 30, 2014.
In accordance with the transitional treatment stipulated in Paragraph 37 of the Accounting Standard,
the effect of the changes is reported as “Remeasurements of defined benefit plans” in “Accumulated
other comprehensive income” from the fiscal year ended April 30, 2014.
As a result of this change, ¥1,927 million ($18,798 thousand) was recognized as “Net defined benefit
liability.” Accumulated other comprehensive income decreased by ¥58 million ($566 thousand). Net
assets per share decreased by ¥3.67 ($0.036).
(18) Unapplied accounting standards(a) Accounting Standard for Retirement Benefits (ASBJ Statement No. 26, revised on May 17, 2012)
Guidance on Accounting Standard for Retirement Benefits (ASBJ Guidance No.25 revised on
May 17, 2012)
The accounting standard has been revised in light of improving financial reporting and trend
toward international convergence, mainly on changes in accounting methods for unrecognized
net actuarial gains or losses and unrecognized prior service cost and enhancement of disclosure
items as well as changes of calculation methods for retirement benefit obligation and service cost.
The Company and its subsidiaries intend to adopt the changes on calculation methods for
retirement benefit obligation and service cost from the fiscal year beginning on May 1, 2014.
Effects of adoption of the revised accounting standard are currently evaluated.
(b) Revised Accounting Standard for Business Combinations (ASBJ Statement No. 21, revised on
September 13, 2013)
Revised Accounting Standard for Consolidated Financial Statements (ASBJ Statement No. 22,
revised on September 13, 2013)
Revised Accounting Standard for Business Divestitures (ASBJ Statement No. 7, revised on
September 13, 2013)
Revised Accounting Standard for Earnings per Share (ASBJ Statement No. 2, revised on
September 13, 2013)
Revised Guidance on Accounting Standard for Business Combinations and Accounting Standard
for Business Divestitures (ASBJ Guidance No. 10, revised on September 13, 2013)
Revised Guidance on Accounting Standard for Earnings per Share (ASBJ Guidance No. 4,
revised on September 13, 2013)
The accounting standard has been revised mainly on (i) the treatment of a change in the parent
company’s ownership interest in a subsidiary in the case where the parent company retains
control over the subsidiary upon additionally acquiring the shares of the subsidiary or other cases,(ii) the treatment of acquisition-related costs, (iii) the presentation of net income and the change inpresentation from minority interests to non-controlling interests, and (iv) the provisional

32 AIN PHARMACIEZ INC. ANNUAL REPORT 2014

accounting treatment.
The Company and its consolidated subsidiaries intend to adopt (i) to (iii) from the fiscal year
beginning on May 1, 2015, and (iv) for business combinations after the fiscal year beginning on
May 1, 2015.
Effects of adoption of the accounting standard are currently being examined.
(19) Reclassification and restatement
Certain prior year amounts have been reclassified to conform to the current year presentation.
These reclassifications and restatement had no impact on previously reported results of operations.

2. Cash and cash equivalents(1) Reconciliations of cash on hand and in banks shown in the consolidated balance sheet and cash
and cash equivalents shown in the consolidated statement of cash flows as of and for the years
ended April 30, 2014 are as follows:
Thousands ofMillions of yen
U.S. dollars
2014
2013
2014
Cash on hand and in banks¥ 18,847¥ 18,460$183,855
Less: Time deposits with maturities
exceeding three months
(111)
(21)
(1,083)
Cash and cash equivalents¥ 18,735¥ 18,440$ 182,763(2) The following table summarizes assets acquired and liabilities assumed through the acquisition ofshares of the companies relating acquisition cost and net disbursement:(a) Major breakdown of assets and liabilities of companies newly included in the consolidated
financial statements for the years ended April 30, 2014 and 2013 due to the acquisition of shares(i) Acquisition of shares of 13 companies in the dispensing pharmacy business for the year endedApril 30, 2014
The following is the summary of assets acquired and liabilities assumed through the acquisitionof shares of the companies relating acquisition cost and net disbursement.

Current assets
Fixed assets
Goodwill
Current liabilities
Long-term liabilities
Acquisition cost of the companies
Cash and cash equivalents held by
the companies
Net disbursement due to theacquisition

Millions of yen
2014¥ 2,111936
2,165(1,863)
(225)
3,125

Thousands of
U.S. dollars
2014$ 20,593
9,131
21,120(18,174)(2,195)30,485(714)(6,965)¥ 2,410$ 23,510(ii) Acquisition of shares of 11 companies in the dispensing pharmacy business for the year endedApril 30, 2013
The following is the summary of assets acquired and liabilities assumed through the acquisitionof shares of the companies relating acquisition cost and net disbursement.

AIN PHARMACIEZ INC. ANNUAL REPORT 201433

Current assets
Fixed assets
Goodwill
Current liabilities
Long-term liabilities
Acquisition cost of the companies
Cash and cash equivalents held by
the companies
Net disbursement due to theacquisition

Millions of yen
2013¥ 1,463
826
3,104(1,547)
(592)
3,254
(331)
¥ 2,923

3. Inventories
Inventories at April 30, 2014 and 2013 consisted of the following:

Merchandise
Supplies

Millions of yen
2014
2013
¥ 9,579¥ 7,817181
128¥ 9,759¥ 7,944

Thousands of
U.S. dollars
2014$ 93,445
1,766$ 95,200

4. Financial instruments(1) Qualitative information on financial instruments(a) Policies for using financial instruments
The Company and its consolidated subsidiaries have expanded business by opening dispensing
pharmacies and drug and cosmetic stores and through M&A activities. Operating cash flows
provide the majority of the funds the Company and its consolidated subsidiaries require to fund its
shop openings. The Company and its consolidated subsidiaries secure additional funding as
needed for M&A activities through bank borrowings and issuance of new shares and invests inhighly liquid financial assets.
(b) Details of financial instruments used and the exposures to risk and how they arise
Notes and accounts receivable, which relate to trade receivables, are mostly composed ofprescription dispensing fees receivable from National Health Insurance associations and theSocial Insurance Medical Care Fee Payment Fund. In addition, most of other accounts receivable
are collected in a short period. Therefore, these do not entail any risk.
Investment securities, which are principally equity securities held for the purpose of maintaining
operating relationships with other companies, involve the risk of market price fluctuations.
Lease deposits and guarantee deposits are primarily deposits placed with the owners ofproperties that the Company leases for the operation of dispensing pharmacies and drugstores.
Such deposits involve lessor credit risk.
Notes and accounts payable, which relate to purchases, are payable within three months.
With respect to borrowings, the Company raises funds primarily as working capital or in relation tocapital expenditures. Redemption periods on such debts are typically twenty one years from thedate of borrowing, at the longest.

34 AIN PHARMACIEZ INC. ANNUAL REPORT 2014

(c) Policies and systems for risk management
Management of credit risk (the risk that a business partner will default on its business transactions)
As the Company’s notes and accounts receivable, which relate to sales, are mostly composed ofprescription dispensing fees receivable from National Health Insurance associations and the Social
Insurance Medical Care Fee Payment Fund, and most of other accounts receivable are alsocollected in a short period, no particular risk management is employed.
Securities held to maturity are based on the Company’s Marketable Securities Investment
Standards. Such investments are based on careful decisions, following internal screenings ofinvestees and investment amounts. Furthermore, such investments are monitored regularly,
determining the investee’s financial status throughout the investment period to quickly determine
and minimize potential repayment difficulties.
The Company manages default risk on lease deposits and guarantee deposits through the credit
control upon making contract periods and regular credit screening.
Management of market risk (the risk of exchange and interest rate fluctuations)
The Company and its consolidated subsidiaries raise funds mainly through long-term debt. With
regard to investment securities, the Company and its consolidated subsidiaries regularly check thefinancial conditions of the issuers of unlisted securities. The Company and its consolidated
subsidiaries review on an ongoing basis the status of their holdings of listed securities, taking into
consideration market conditions and their relationships with the issuing companies.
Management of liquidity risk associated with fund procurement (the risk of being unable to execute
payments when due)
To manage liquidity risk, the Company and its consolidated subsidiaries create cash flow plans
based on annual capital expenditures forecasts. These plans are updated each month, based onrevised operating performance and forecast figures. To ensure the Company’s ability to respondflexibly to sudden demands for funding in relation to M&A activities, the Company maintains acertain level of liquidity, including through issuance of new shares.
(2) Fair values of financial instruments
Carrying values and fair values of the financial instruments on the consolidated balance sheet at April
30, 2014 and 2013 are summarized in the following table:
AssetsThousands ofMillions of yen
U.S. dollars
2014
2013
2014
Carrying value
Cash on hand and in banks¥ 18,847¥ 18,460$ 183,855
Notes and accounts receivable
6,719
7,044
65,545
Other accounts receivable
5,680
7,181
55,409Investment in securities
1,762
2,102
17,189Deposits and guarantees
7,948
6,852
77,534
Total
40,955
41,639399,522
Fair value
Cash on hand and in banks
18,847
18,460183,855
Notes and accounts receivable
6,719
7,044
65,545
Other accounts receivable
5,680
7,181
55,409Investment in securities
1,778
2,126
17,345
Deposits and guarantees
7,718
6,702
75,290Total
40,741
41,513
397,434
Difference
Cash on hand and in banks
Notes and accounts receivable
Other accounts receivable
Investment in securities
16
24
156
Deposits and guarantees
(230)
(150)
(2,244)Total¥ (214)¥ (126)$ (2,088)

AIN PHARMACIEZ INC. ANNUAL REPORT 201435

Liabilities
Carrying value
Accounts payable
Short-term debt including current
portion of long-term debt
Deposits received
Long-term debt
Total
Fair value
Accounts payable
Short-term debt including current
portion of long-term debt
Deposits received
Long-term debt
Total
Difference
Accounts payable
Short-term debt including current
portion of long-term debt
Deposits received
Long-term debt
Total

Thousands of
U.S. dollars
2014

Millions of yen
2014
2013
¥ 28,002
6,535¥ 24,085
7,483$ 273,164
63,7508,687
4,503
47,727

7,906
8,049
47,52384,74343,927465,584

28,002
6,539

24,085
7,490

273,164
63,7898,687
4,512
47,7407,906
8,056
47,53784,74344,015465,711

4

7

39

9
¥ 12

7
¥ 15

88
$ 117

Method of calculating the fair value of financial instruments and matters related to available-for-salesecurities and derivative transactions:
Assets:(a) Cash on hand and in banks, notes and accounts receivable, and other accounts receivable
As these instruments are settled in the short term, their carrying value approximates fair value.
(b) Investment in securities
The fair values of equity securities are determined by their prices on stock exchanges. The fairvalues of bonds are determined by the prices indicated by the counterparty financial institutions, or
the Company determines credit risk from the standpoint of credit management, according to
repayment amount and contract period, and these amounts are discounted to their present value
using appropriate rates of interest.
(c) Deposits and guarantees
The Company determines credit risk from the standpoint of credit management, according to
repayment amount and contract period. These amounts are discounted to their present value using
appropriate rates of interest.
Liabilities:(a) Accounts payable, short-term debt and deposits received
As these instruments are settled in the short term, their carrying value approximates fair value. The
fair value of current portion of long-term debt included in short-term debt is determined bydiscounting the total amount of principal and interest by the assumed interest rate on new
borrowings of the same type.
(b) Long-term debt
The fair value of long-term debt is determined by discounting the total amount of principal andinterest by the assumed interest rate on new borrowings of the same type.
Financial instruments for which fair value is not readily determinable:
The fair values of unlisted equity securities with carrying amounts of ¥797 million ($7,775 thousand)and ¥688 million as of April 30, 2014 and 2013, respectively, are not readily determinable.

36 AIN PHARMACIEZ INC. ANNUAL REPORT 2014

The redemption schedule for monetary claims and securities with maturity dates as of April 30,
2014 and 2013 are summarized as follows:
Millions of yen

1 year or
less

Cash on hand and in banks
Notes and accounts receivable

Other accounts receivable

Investment securities
Debt securities
Deposits received
Total

Other accounts receivable

Investment securities
Debt securities
Deposits received
Total

More than
10 years¥ 18,455
6,719
5,680

¥-

¥-

¥-

480
1,526
¥ 32,859

89
2,392¥ 2,482

2,609¥ 2,6091,554¥ 1,554

1 year or
less

Cash on hand and in banks
Notes and accounts receivable

2014
More thanMore than
5 years
1 year but
but less
less than
than 10
5 years
years

Thousands of
U.S. dollars
2014
More thanMore than
5 years
1 year but
but less
less than 5than 10
years
years

More than
10 years$ 180,031
65,54555,409

$-

$-

$-

4,682
14,886$ 320,544

868
23,334$ 24,212

25,451$ 25,451

15,159$ 15,159

Millions of yen

1 year or
less

Cash on hand and in banks
Notes and accounts receivable

Other accounts receivable

Investment securities
Debt securities
Deposits received
Total

2013
More thanMore than
5 years
1 year but
but less
less than
than 10
5 years
years

More than
10 years¥ 18,193
7,044
7,181

¥-

¥-

¥-

480
901
¥ 33,798

119
3,017¥ 3,136

2,046¥ 2,046

1,021¥ 1,021AIN PHARMACIEZ INC. ANNUAL REPORT 201437

5. Securities(1) The following tables summarize acquisition costs, carrying values and differences of securities withavailable fair values as of April 30, 2014 and 2013:
Other securities:
Securities with carrying values exceeding acquisition costs

Acquisition cost
Equity securities
Bonds
Limited partnerships
and similar
investments
Other
Total
Carrying value
Equity securities
Bonds
Limited partnerships
and similar
investments
Other
Total
Difference
Equity securities
Bonds
Limited partnerships
and similar
investments
Other
Total

Millions of yen
2014
2013

Thousands of
U.S. dollars
2014

¥ 368
-

¥ 510
-

$ 3,590
-

92
460

110
103
724

897
4,487

455
-

585
-

4,439
-

103
558

115
117
817

1,005
5,443

87
-

74
-

849
-

11
¥ 98

5
14
¥ 93

107
$ 956

Other securities:
Securities with carrying values not exceeding acquisition costs

Acquisition cost
Equity securities
Bonds
Limited partnerships
and similar
investments
Other
Total
Carrying value
Equity securities
Bonds
Limited partnerships
and similar
investments
Other
Total

38 AIN PHARMACIEZ INC. ANNUAL REPORT 2014

Millions of yen
2014
2013

Thousands of
U.S. dollars
2014

¥ 369
569

¥ 355
599

$ 3,600
5,551

301
10
1,248

335
1,289

2,936
98
12,174

324
569

352
599

3,161
5,551

301
10
1,204

335
1,285

2,936
98
11,745

Difference
Equity securities
Bonds
Limited partnerships
and similar
investments
Other
Total

(44)
-

(3)
-

(429)
-

¥ (44)¥ (3)$ (429)Equity securities included stocks of non-consolidated subsidiaries and affiliates of ¥2 million ($20
thousand) and ¥2 million at April 30, 2014 and 2013, respectively.
(2) The following table summarizes total sales amounts of other securities sold, and amounts of therelated gains and losses in the years ended April 30, 2014 and 2013:
Thousands ofMillions of yen
U.S. dollars
2014
2013
2014
Total sales ofother securities sold¥ 293
¥ 1,333$ 2,858
Related gains
50
119
488
Related losses
124(3) The following table summarizes impairment losses on other securities in the years ended April 30,
2014 and 2013:
Thousands ofMillions of yen
U.S. dollars
2014
2013
2014
Other securities with fair value
Other securities without fair value

¥1

¥2

$10

AIN PHARMACIEZ INC. ANNUAL REPORT 201439

6. Leases
The following pro forma amounts represent the acquisition costs, accumulated depreciation,
impairment losses and net balance of leased assets as of April 30, 2014 and 2013, which would havebeen reflected in the consolidated balance sheets if finance lease accounting had been applied to thefinance leases currently accounted for as operating leases as allowed under Japanese GAAP.

Acquisition cost
Buildings
Other fixed assets
Intangible fixed assets
Total
Accumulated depreciation
Buildings
Other fixed assets
Intangible fixed assets
Total
Impairment losses
Buildings
Other fixed assets
Intangible fixed assets
Total
Net balance
Buildings
Other fixed assets
Intangible fixed assets
Total

Thousands of
U.S. dollars
2014

Millions of yen
2014
2013
¥ 207
56
23
286

¥ 207
82
65
354

$ 2,019
546
224
2,790

170
36
23
229

160
56
42
258

1,658
351
224
2,234

-

-

-

37
20
¥ 57

47
26
24
¥96

361
195
$ 556

Future minimum lease payments as of April 30, 2014 and 2013 for finance leases currently accounted
for as operating leases are summarized as follows:
Thousands ofMillions of yen
U.S. dollars
2014
2013
2014
Due within one year
Due after one year
Total

¥ 28
88
¥ 116

¥ 27
109
¥ 135

$ 273
858
$1,132

The following table summarizes details of lease expenses, reversal of impairment losses for leased
assets, depreciation, interest expense and impairment losses, if they had been capitalized:
Thousands ofMillions of yen
U.S. dollars
2014
2013
2014
Lease expense
Reversal of impairment losses forleased assets
Depreciation
Interest expense
Impairment losses

¥ 45

¥ 100

$ 439

16
21
-

66
25
-

156
205
-

Equivalent interest is calculated by applying the interest method to allocate for each fiscal year over theterm of the lease the difference between the total lease amount and the equivalent acquisition price ofthe leased asset.

40 AIN PHARMACIEZ INC. ANNUAL REPORT 2014

Remaining lease expenses for non-cancellable operating lease transactions are as follows:
Thousands ofMillions of yen
U.S. dollars
2014
2013
2014
Due within one year
Due after one year
Total

¥ 608
4,139
¥ 4,746

¥ 569
4,109
¥4,678$ 5,931
40,377$46,298

7. Short-term debt and long-term debt
Short-term debt and long-term debt at April 30, 2014 and 2013 consisted of the following:Thousands ofMillions of yen
U.S. dollars
2014
2013
2014
Short-term bank loans with aweighted-average interest rate of
0.4%
Current portion of long-term debt
with a weighted-average interest rateof 0.6%
Current portion of lease obligation
with a weighted-average interest rateof 1.3%Long-term debt (2015-2034) with aweighted-average interest rate of
0.6%
Lease obligation (2015-2022) with aweighted-average interest rate of
1.5%
Total

¥ 3,307¥ 3,555$ 32,260

3,229

3,928

31,499

567

499

5,531

4,503

8,049

43,927

1,454¥ 13,059

1,223¥ 17,254

14,184$ 127,392

At April 30, 2014 and 2013, the carrying amounts of assets pledged as collateral for long-term debt are
as follows:
Assets pledged as collateral:Thousands ofMillions of yen
U.S. dollars
2014
2013
2014
Buildings
Land
Investments in securities
Total
Liabilities corresponding tocollateral:

Accounts payable
Long-term debt
Total

¥ 20
11
6
¥ 37

¥5
28
6
¥ 39

$ 195
107
59
$ 361

Millions of yen
2014
2013

Thousands of
U.S. dollars
2014

¥2
60
¥ 62

¥3
25
¥ 28

$ 20
585
$ 605

AIN PHARMACIEZ INC. ANNUAL REPORT 201441

The aggregate annual maturities of long-term debt at April 30, 2014 are as follows:
Thousands ofYear ending April 30,
Millions of yen
U.S. dollars
2015¥ 3,229$ 31,499
2016
2,589
25,2562017
1,237
12,067
2018
394
3,844
2019
142
1,385
The aggregate annual maturities of lease obligations at April 30, 2014 are as follows:
Thousands ofYear ending April 30,
Millions of yen
U.S. dollars
2015
¥ 567
$ 5,531
2016
518
5,053
2017
438
4,273
2018
288
2,809
2019
109
1,063

8. Sales, disposal and impairment of fixed assets(1) Gains and losses on sales of fixed assets for the years ended April 30, 2014 and 2013 are as
follows:
Gains on sales of fixed assets:
Thousands ofMillions of yen
U.S. dollars
2014
2013
2014
Buildings and structures
Land
Other property, plant andequipment
Other intangible fixed assets
Total
Losses on sales of fixed assets:

Buildings and structures
Land
Construction in progress
Other property, plant andequipment
Other intangible fixed assets
Other investments and otherassets
Disposal cost
Total

42 AIN PHARMACIEZ INC. ANNUAL REPORT 2014

¥4

¥ 17
1

$39

0
0
¥4

3
¥ 21

0
0
$ 39

Millions of yen
2014
2013

Thousands of
U.S. dollars
2014

¥6
174
-

¥ 84
11

$ 59
1,697
-

0
-

11
9

0
-

¥ 181

0
16
¥ 132

$ 1,766

(2) Losses on disposal of fixed assets for the years ended April 30, 2014 and 2013 are as follows:
Thousands of
U.S. dollars
2014

Millions of yen
2014
2013
Buildings and structures
Other property, plant andequipment
Goodwill
Other intangible fixed assets
Deposits and guarantees
Other investments and otherassets
Disposal cost
Total

¥ 27

¥0

$ 263

8
2
5
63

0
-

78
20
49
615

21
30
¥ 155

¥0

205
293
$ 1,512(3) For the years ended April 30, 2014 and 2013, the Company recognized impairment losses for thefollowing property groups:
Thousands ofMillions of yen
U.S. dollars
2014
2013
2014
Property group
Description of assets
StoresStore facilities
¥ 120
¥ 136
$ 1,171
Real estate
Land
21
7
205
Stores and real estateStore facilities and land
43419
Leasehold properties
Store facilities
6
15
59
Total
¥ 190
¥ 159
$ 1,853

9. Retirement benefits(1) Defined-benefit pension plan(a) Reconciliation of the beginning and the ending balance of retirement benefit obligation (excluding
the amount of the simplified method)
Thousands ofMillions
U.S. dollarsof yen2014
2014
Balance as of May 1, 2013
¥ 1,803$ 17,589
Service costs
225
2,195
Interest cost on retirement benefit obligation
18
176
Actuarial gains (losses) incurred
102
995
Pension and severance payments
(60)
(585)
Other
(1)
(10)
Balance as of April 30, 2014
¥ 2,087$ 20,359(b) Reconciliation of the beginning and the ending balance of plan assets (excluding the amount of
the simplified method)

Balance as of May 1, 2013
Expected return on plan assets
Actuarial gains (losses) incurredBusiness owner’s contribution
Pension and severance payments
Balance as of April 30, 2014

Millionsof yen
2014
¥ 325
2
7
86
(14)
¥ 406

Thousands of
U.S. dollars
2014$ 3,170
20
68
839
(137)
$ 3,961

AIN PHARMACIEZ INC. ANNUAL REPORT 201443

(c) Reconciliation of the beginning and the ending balance of liabilities of the simplified method
Thousands ofMillions
U.S. dollarsof yen2014
2014
Balance as of May 1, 2013
¥ 213
$ 2,078
Retirement benefit expenses
72
702
Business owner’s contribution
(36)
(351)
Pension and severance payments
(27)
(263)
Other
24
234
Balance as of April 30, 2014
¥ 246
$ 2,400(d) Reconciliation of the retirement benefit obligation and plan assets to net defined benefit liability
and net defined benefit asset reported on the consolidated balance sheet
Thousands ofMillions
U.S. dollarsof yen2014
2014
Funded retirement benefit obligation¥ 2,311$ 22,544
Plan assets(451)(4,400)Subtotal
1,860
18,145
Unfunded retirement benefit obligation
67
654
Net of liability and asset reported on the
consolidated balance sheet
1,927
18,798Net defined benefit liability
1,927
18,798Net of liability and asset reported on the
consolidated balance sheet¥ 1,927$ 18,798(e) Retirement benefit expenses for the years ended April 30, 2014 comprised the following:ThousandsofMillionsU.S.
of yendollars
2014
2014
Service costs¥ 225$ 2,195
Interest cost on retirement benefit obligation
18
176
Expected return on plan assets(2)(20)
Amortization of actuarial losses
68
663
Amortization of prior service costs
(35)
(341)
Retirement benefit expenses calculated under
the simplified method
72
702
Retirement benefit expenses¥ 347$ 3,385(f) Remeasurements of defined benefit plans
The breakdown of remeasurements of defined benefit plans (before deducting tax effect) is asshown below:
Thousands ofMillions of
U.S. dollars
yen
2014
2014
Unrecognized prior service costs¥ (152)$ (1,483)
Unrecognized actuarial gains
244
2,380
Total
¥ 92
$ 897
(g) Plan assets(i) Percentages for major categories within total plan assets are as follows:
2014
Bonds
6%
Stocks5%
General account
63%
Other
26%
Total
100%

44 AIN PHARMACIEZ INC. ANNUAL REPORT 2014

(ii) Method of establishing the long-term expected return on plan assets
The long-term expected return on plan assets is determined by taking into consideration
current and expected allocation of plan assets, as well as the current and future long-term
expected profitability of the diverse assets that constitute the plan assets.
(h) Actuarial assumptions used in accounting for the Company’s plans as of April 30, 2014 areprincipally as follows:
2014
Weighted average discount rate
Weighted average expected rate of
return on plan assets

1.0%
0.75%

(2) Retirement benefit obligation as of April 30, 2013 consists of the following:

Retirement benefit obligation
Plan assets at fair value
Unfunded retirement benefit obligation
Unrecognized actuarial gains
Unrecognized prior service costs
Net retirement benefit obligation
Allowance for retirement benefits

Millions ofyen2013¥ (2,015)
325(1,690)218(187)(1,659)¥ (1,659)(3) Retirement benefit expenses for the years ended April 30, 2013 comprised the following:

Service costs
Interest cost on retirement benefit obligation
Expected return on plan assets
Amortization of actuarial losses
Amortization of prior service costs
Additional retirement allowance paid
Retirement benefit expenses

Millionsof yen
2013
¥ 325
15
(2)
102
(21)
22
¥ 440

(4) Actuarial assumptions used in accounting for the Company’s plans as of April 30, 2013 areprincipally as follows:
2013
Discount rate
Expected rate of return on plan assets
Allocation of estimated amount of
retirement benefits
Amortization period for actuarial gains
or losses
Amortization period for changes inaccounting standards
Amortization period for prior service
costs

1.0%
0.75%
Straightline
method6 years
1
6

AIN PHARMACIEZ INC. ANNUAL REPORT 201445

10. Income taxes
The aggregate statutory income tax rate used for calculation of deferred income tax assets andliabilities for the years ended April 30, 2014 and 2013 was 37.7%.
(1) The following table summarizes the significant differences between the statutory tax rate and theeffective tax rates for consolidated financial statement purposes for the years ended April 30, 2014
and 2013:
Statutory tax rate
Non-deductible expenses
Per capita inhabitant tax
Amortization of goodwill
Valuation allowance
Other
Effective tax rates

2014
37.7%
0.6
1.8
4.9
0.5
2.6
48.1%

2013
37.7%
0.7
1.7
5.2
0.2
2.2
47.7%

(2) Significant components of deferred tax assets and liabilities as of April 30, 2014 and 2013 are as
follows:
Thousands ofMillions of yen
U.S. dollars
2014
2013
2014
Deferred tax assets:
Impairment losses
¥ 463
¥ 445
$ 4,517
Excess of allowance for bonuses
404
412
3,941
Excess of reserve for rewards obligation
117
119
1,141
Net defined benefit liabilities
649
6,331
Allowance for retirement benefits
589
Other
1,290
931
12,584Sub-total deferred tax assets
2,923
2,495
28,514
Valuation allowance
476
461
4,643
Total deferred tax assets
2,447
2,034
23,871
Deferred tax liabilities:
Capitalized removal costs
(88)
(95)
(858)
Net unrealized holding gains on securities
(19)
(32)
(185)
Valuation of land
(61)
Other
(57)
(50)
(556)
Total deferred tax liabilities
(165)
(237)
(1,610)Net deferred tax assets¥ 2,283¥ 1,797$ 22,271(3) Adjustment of deferred tax assets and liabilities for enacted changes in tax laws and rates
The “Act on Partial Revision of the Income Tax Act” was promulgated on March 31, 2014, repealing the“Special Reconstruction Corporation Tax” effective for fiscal years beginning on or after April 1, 2014.
Accordingly, the statutory effective tax rate used for calculating deferred income tax assets anddeferred income tax liabilities was reduced from 37.7% to 35.3%, resulting in a temporary difference inassets or liabilities realized in the fiscal year beginning April 1, 2014.
The effect of this change in the tax rate is immaterial to the consolidated financial statements.

46 AIN PHARMACIEZ INC. ANNUAL REPORT 2014

11. Net assets
Under Japanese laws and regulations, the entire amount paid for new shares is required to be
designated as common stock. However, a company may, by a resolution of the Board of Directors,
designate an amount not exceeding one-half of the price of the new shares as additional paid-in capital,
which is included in capital surplus.
Under the Japanese Corporate Law (the “Law”), in cases where a dividend distribution of surplus ismade, the smaller of an amount equal to 10% of the dividend or the excess, if any, of 25% of common
stock over the total of additional paid-in-capital and legal earnings reserve must be set aside asadditional paid-in capital or legal earnings reserve. The legal earnings reserve is included in retained
earnings in the accompanying consolidated balance sheets.
Under the Law, the legal earnings reserve and additional paid-in capital could be used to eliminate or
reduce a deficit or could be capitalized by resolution of the shareholders’ meeting.
Additional paid-in capital and legal earnings reserve may not be distributed as dividends. However, alladditional paid-in capital and all legal earnings reserve may be transferred to other capital surplus andretained earnings, respectively, which are potentially available for dividends.
The maximum amount that the Company can distribute as dividends is calculated based on the
non-consolidated financial statements of the Company in accordance with the Law.

12. Commitment
The Company entered into overdraft agreements with 20 and 21 banks as of April 30, 2014 and 2013,
respectively, to finance working capital requirements. The outstanding balances of such overdrafts asof April 30, 2014 and 2013 are as follows:
Thousands ofMillions of yen
U.S. dollars
2014
2013
2014
Total overdraft available¥ 23,950¥ 22,100$ 233,636
Amount utilized
3,300
3,550
32,192
Outstanding balance¥ 20,650¥ 18,550$ 201,444

13. Contingencies
The Company has contingent liabilities for the claims for lease deposits and guarantee deposits paid toowners of shops, due to their transfers to third parties. Such contingent liabilities amounted to ¥1,256
million ($12,252 thousand) and ¥1,462 million as of April 30, 2014 and 2013, respectively.

14. Amounts per share
Net assets per share at April 30, 2014 and 2013 and basic and diluted net income per share for theyears then ended are as follows:
Yen
U.S. dollars
2014
2013
2014
Net assets per share¥ 2,657¥ 2,403$ 25.92
Basic net income per share
330
318
3.22
Diluted net income per share
Cash dividends per share attributable to the year
60
60
0.59
Cash dividends per share represent the cash dividends declared as applicable to the respective years,
including dividends to be paid after the end of the year and not accrued in the accompanying
consolidated financial statements.

15. Segment information(1) Overview of reporting segments
Reporting segments of the Company and its consolidated subsidiaries are composed of thoseindividual business units for which separate financial information is available, from which the board
AIN PHARMACIEZ INC. ANNUAL REPORT 201447

of directors makes decisions regarding the allocation of management resources and for which
operating performance can be evaluated, allowing the reporting segments to be analyzed
periodically.
The Company and its consolidated subsidiaries divide their operations into two main businesses,
the Dispensing Pharmacy business and the Drug and Cosmetic Store business, and the Other
business. The Dispensing Pharmacy business primarily includes the dispensing pharmacy business,sale of generic drugs, staff dispatching and introduction services and consulting business. The Drugand Cosmetic Store business primarily includes the urban and suburban drug stores and cosmetic
specialty stores. The Other business primarily involves real estate rental business. The Company
and its consolidated subsidiaries plan and execute strategies for each business.
Consequently, the business operations of the Company and its consolidated subsidiaries areclassified into the three following reporting segments: Dispensing Pharmacy, Drug and Cosmetic
Store and Other.
(2) Methods of calculating sales, income (loss), assets and other items by reporting segment
Methods of accounting for reported business segments are in principle the same as those indicatedin Note 1 “Summary of Significant Accounting Policies.” Income or loss of reporting segments are
based on ordinary income. Income or loss between segments and transfer amounts are based onmarket prices.
(3) Information on sales, income (loss), assets and other items by reporting segment as of and for theyears ended April 30, 2014 and 2013 is summarized as follows:
Millions of yen
2014
Sales
Sales to third parties
Intersegment sales
Total sales
Segment income(loss)
Segment assets
Other
Depreciation andamortization
Amortization of
goodwill
Impairment losses
Increase of tangible
and intangible
assets48 AIN PHARMACIEZ INC. ANNUAL REPORT 2014

Dispensing

Drug andpharmacy

cosmetic store

Other

Total

Adjustments

Consolidated¥ 151,473
151,473¥ 17,986
17,986

¥ 767
479
1,247

¥ 170,226
479
170,705

¥0
(479)
(479)

¥ 170,226
170,226

12,772¥ 85,491

24¥ 7,650(219)¥ 5,419

12,577¥ 98,560(1,990)¥ 2,823

10,587¥ 101,383¥ 1,633

¥ 235

¥ 91

¥ 1,958¥ 129¥ 2,087

2,028
77

5
106

6

2,033
190

-

2,033
190

3,062

369

378

3,809

760

4,569

Thousands of U.S. dollars
2014
Sales
Sales to third parties
Intersegment sales
Total sales
Segment income(loss)
Segment assets
Other
Depreciation andamortization
Amortization of
goodwill
Impairment losses
Increase of tangible
and intangible
assetsDispensing

Drug andpharmacy

cosmetic store$ 1,477,641
1,477,641$ 175,456
175,456$ 7,482
4,673
12,165$ 1,660,579
4,673
1,665,252$0(4,673)(4,673)$ 1,660,579
1,660,579

124,593$ 833,977

234$ 74,627(2,136)$ 52,863

122,690$ 961,467(19,413)$ 27,539

103,278$ 989,006$ 15,930$ 2,292$ 888$ 19,101$ 1,258$ 20,359

19,783
751

49
1,034

59

19,832
1,853-

19,832
1,853

29,870

3,600

3,687

37,157

7,414

44,571

Other

Total

Adjustments

Consolidated

Millions of yen
2013
Sales
Sales to third parties
Intersegment sales
Total sales
Segment income(loss)
Segment assets
Other
Depreciation andamortization
Amortization of
goodwill
Impairment losses
Increase of tangible
and intangible
assetsDispensing

Drug andpharmacy

cosmetic store

Other

Total

Adjustments

Consolidated¥ 137,292
137,292¥ 16,736
16,736

¥ 533
137
670

¥ 154,561
137
154,697¥(137)(137)¥ 154,561
154,561

12,656¥ 80,710

14¥ 7,049(398)¥ 3,962

12,272¥ 91,720(1,980)¥ 4,119

10,293¥ 95,840¥ 1,577

¥ 260

¥ 71

¥ 1,909¥ 38¥ 1,947

1,779
7

5
129

15

1,784
152

7

1,784
159

3,575

373

812

4,761

550

5,310

Amortization of goodwill and unamortized balances by reporting segment as of and for the years endedApril 30, 2014 and 2013 are summarized as follows:
Millions of yen
2014
Amortization of goodwill
Unamortized balances of goodwill

Dispensing

Drug andpharmacy

cosmetic store¥ 2,028
20,017

Other

¥5
-

Adjustments¥-¥-

Consolidated¥ 2,033
20,017

Thousands of U.S. dollars
2014
Amortization of goodwill
Unamortized balances of goodwill

Dispensing

Drug andpharmacy

cosmetic store$ 19,783
195,269

Other

$ 49
-

Adjustments$-$-

Consolidated$ 19,832
195,269

Millions of yen
2013
Amortization of goodwill
Unamortized balances of goodwill

Dispensing

Drug andpharmacy

cosmetic store¥ 1,779
19,569

¥5
5

Other

Adjustments¥-¥-

Consolidated¥ 1,784
19,575AIN PHARMACIEZ INC. ANNUAL REPORT 201449

16. Comprehensive income
Each component of other comprehensive income (loss) for the years ended April 30, 2014 and 2013
was the following:

Unrealized holding gains (losses) on securities:
Gains arising during the year
Reclassification adjustments to gains(losses)Amount before income tax effect
Income tax effectTotal Unrealized holding (losses) gains on
securities
Total other comprehensive (loss) income

Millions of yen
2014
2013

Thousands of
U.S. dollars
2014

¥ 14
(50)

¥ 491
33

$ 137
(488)

(36)
(13)
(23)

524
185
339

(351)
(127)
(224)

¥ (23)¥ 339$ (224)

17. Business combinations
For the year ended April 30, 2014
(1) Business combinations
During the fiscal year ended April 30, 2014, the Company and its consolidated subsidiaries AINMEDIO Inc. and Daichiku Co., Ltd. acquired for cash consideration the shares in thirteen companies
in the dispensing pharmacy business, which became consolidated subsidiaries.
Through this business combination, the AIN PHARMACIEZ Group aims to increase its market sharein the dispensing pharmacy business and anticipates greater economies of scale.
The Group decided to conduct this acquisition after taking into due consideration the profitability of
the acquired companies, their potential return on investment and their ability to secure stablerevenues and profits above and beyond the amortizable goodwill generated through this acquisition.
(2) Acquisition price and details
Consideration for acquisition
Expenses related directly to acquisition
Cost of acquisition¥2,937 million ($28,651 thousand)¥187 million ($1,824 thousand)¥3,125 million ($30,485 thousand)(3) Amount of goodwill generated, its sources, and its amortization method and term(a) Amount of goodwill generated¥2,165 million ($21,120 thousand)
The identification or evaluation of assets and liabilities, such as estimates of deferred tax assets,
valuations of land and estimates of various reserves, are based on reasonable information available
as of April 30, 2014. As the period between their acquisition and the end of the fiscal year is short,the available information is insufficient, therefore the allocation of acquisition costs is not complete.
Consequently, asset and liability amounts, including goodwill, may change.
(b) Sources of goodwill
Goodwill is the cost amount paid over the fair value of asset acquired and liabilities assumed andrecoverable through the future operation by utilizing the AIN PHARMACIEZ Group’s management
resources and economies of scale.
(c) Goodwill amortization method and term
Straight-line method over 15–20 years

50 AIN PHARMACIEZ INC. ANNUAL REPORT 2014

For the year ended April 30, 2013
(1) Business combinations
During the fiscal year ended April 30, 2013, the Company and its consolidated subsidiary Asahi
Pharmacy Co., Ltd. acquired for cash consideration the shares in eleven companies in thedispensing pharmacy business, which became consolidated subsidiaries.
Through this business combination, the AIN PHARMACIEZ Group aims to increase its market sharein the dispensing pharmacy business and anticipates greater economies of scale.
The Group decided to conduct this acquisition after taking into due consideration the profitability of
the acquired companies, their potential return on investment and their ability to secure stablerevenues and profits above and beyond the amortizable goodwill generated through this acquisition.
(2) Acquisition price and details
Consideration for acquisition¥3,178 million
Expenses related directly to acquisition¥76 million
Cost of acquisition¥3,254 million(3) Amount of goodwill generated, its sources, and its amortization method and term(a) Amount of goodwill generated¥3,104 million
The identification or evaluation of assets and liabilities, such as estimates of deferred tax assets,
valuations of land and estimates of various reserves, are based on reasonable information available
as of April 30, 2013. As the period between their acquisition and the end of the fiscal year is short,the available information is insufficient, therefore the allocation of acquisition costs is not complete.
Consequently, asset and liability amounts, including goodwill, may change.
(b) Sources of goodwill
Goodwill is the cost amount paid over the fair value of asset acquired and liabilities assumed andrecoverable through the future operation by utilizing the AIN PHARMACIEZ Group’s management
resources and economies of scale.
(c) Goodwill amortization method and term
Straight-line method over 10–15 years

18. Subsequent events
Not applicable.

19. Quarterly Information(1) Quarterly net sales for the year ended April 30, 2014 are as follows:
Thousands ofMillions of yen
U.S. dollars
2014
2014
Three months ended July 31, 2013
¥ 41,215$ 402,058
Six months ended October 31, 2013
83,025809,921Nine months ended January 31, 2014
126,043
1,229,568
Twelve months ended April 30, 2014
170,226
1,660,579(2) Quarterly income before income taxes and minority interests for the year ended April 30, 2014 is asfollows:
Thousands ofMillions of yen
U.S. dollars
2014
2014
Three months ended July 31, 2013
¥ 2,675$ 26,095
Six months ended October 31, 2013
5,318
51,878Nine months ended January 31, 2014
7,899
77,056
Twelve months ended April 30, 2014
10,266100,146AIN PHARMACIEZ INC. ANNUAL REPORT 201451

(3) Quarterly net income for the year ended April 30, 2014 is as follows:
Thousands ofMillions of yen
U.S. dollars
2014
2014
Three months ended July 31, 2013
¥ 1,517$ 14,799
Six months ended October 31, 2013
2,899
28,280Nine months ended January 31, 2014
4,284
41,791
Twelve months ended April 30, 2014
5,259
51,302(4) Quarterly net income per share for the year ended April 30, 2014 is as follows:
Yen
U.S. dollars
2014
2014
Three months ended July 31, 2013
¥ 95.16$ 0.93Six months ended October 31, 2013
181.891.77
Nine months ended January 31, 2014
268.77
2.62
Twelve months ended April 30, 2014
330.083.22(5) Quarterly net income per share for each accounting period of the year ended April 30, 2014 is asfollows:
Yen
U.S. dollars
2014
2014
Three months ended July 31, 2013
¥ 95.16$ 0.93Three months ended October 31, 2013
86.72
0.85
Three months ended January 31, 2014
86.88
0.85
Three months ended April 30, 2014
61.31
0.60

52 AIN PHARMACIEZ INC. ANNUAL REPORT 2014

AIN PHARMACIEZ INC. ANNUAL REPORT 201453

Investor Information

Directors and Corporate
Auditors

Corporate Data

Stock Information

Corporate NameAIN PHARMACIEZ INC.

Transfer Agent
Mizuho Trust & Banking Co., Ltd.

Head Office
5-2-4-30, Higashisapporo,
Shiroishi-ku, Sapporo,
Hokkaido 003-0005, Japan

Stock Listings
First Section of the Tokyo Stock
Exchange(Fiscal 2014)(Fiscal 2014)(As of July 31, 2014)

President and Representative
Director
Kiichi Otani
		
Executive Vice Presidents andRepresentative Director
Hiromi Kato		
Senior Managing Directors
Masahito Sakurai
Shoichi Shudo
Toshihide Mizushima
Managing Director
Miya Oishi
		
Directors
Mitsugu Takazawa
Rieko Kimei
Hidehiro Awaji
Masato Sakai
Hikaru Minami*1
Tsuyoshi Kobayashi*1
Ko Mori*1
Corporate Auditors
Kouichi Kawamura
Akira Ibayashi*2
Toshiaki Kobayashi*2
Tomonori Ito*2

Established
August 1969
Paid-in Capital¥ 8,682 million
Number of Employees
Consolidated: 3,806
Non-consolidated: 2,517
Business Lines• Dispensing Pharmacy Business
Management and franchise
operation of dispensing pharmacies
and consulting services for the
opening of dispensing pharmacies• Drug and Cosmetic StoreBusiness
Management of drug and cosmetic
stores and consulting services for the
opening of shopping centers

Securities Code Number
9627
Fiscal Year
May 1 to April 30 of the following year
Ordinary General Meeting of
Shareholders
July
Date of Record
April 30
(The Company will announce otherdates as and when required.)
Number of Shares Outstanding
15,944,106 shares(including treasury stock)
Number of Shareholders
2,072

Notes: 1. Outside directors
2. Outside corporate auditors

Major Shareholders		

(As of April 30, 2014)

Shareholders

Number ofshares held
(thousandshares)Shareholding
ratio (%)

Kiichi Otani

1,654

10.43

Retirement Benefit Trust managed
by Mizuho Trust & Banking Co., Ltd.
(Marubeni Corporation account)*2;
Trust & Custody Services Bank, Ltd. as a Trustee of Retrust

1,240

7.82

Seven & i Holdings Co., Ltd.

1,240

7.82

The Hokkaido Bank, Ltd.

786

4.96

ML PRO SEGREGATION ACCOUNT

500

3.15

Japan Trustee Services Bank, Ltd. (Trust Account)

372

2.35

Yoshiaki Imagawa

351

2.22

STATE STREET BANK AND TRUST COMPANY

341

2.15

The Norinchukin Bank

300

1.89

BBH FOR FIDELITY PURITAN TR: FIDELITY SR INTRINSICOPPORTUNITIES FUND

300

1.89

Notes: 1. The figure excludes 89,916 shares of the treasury stock owned by the Company.
2. Shares held in the Retirement Benefit Trust managed by Mizuho Trust & Banking Co., Ltd.
(Marubeni Corporation account) are part of Marubeni Corporation’s retirement benefit trust.

54 AIN PHARMACIEZ INC. ANNUAL REPORT 2014

AIN PHARMACIEZ INC.