Hisamitsu Pharmaceutical Co., Inc.

FINANCIAL REPORTFiscal 2001

Contents

Management Policies …………………………………… 1
Review of Operations …………………………………… 3
Financial Review ………………………………………… 5
Consolidated Balance Sheet …………………………… 8
Consolidated Statement of Income ………………… 10
Consolidated Statement of Stockholders' Equity … 11
Consolidated Statement of Cash Flows …………… 12
Notes to Consolidated Financial Statements ……… 13
Report of Independent Certified Public Accountants 24

Management Policies(1) Fundamental Management Policies

Hisamitsu Pharmaceutical Co., Inc. (the Company) begins with a patch and patch-relating
technology, namely, transdermal therapeutic system (TTS) technology. The Company adheres to
its philosophy, “Improving Quality of Life (QOL) for People in the World” with the aid of TTS
technology.
Since first entering the pharmaceutical industry in 1847, the Company has been engaged in
the sale and manufacture of pharmaceuticals actively seeking to enhance people’s healththrough supplying the pharmaceuticals applied to the skin, particularly analgesic and antiinflammatory patches. Thanks to our persistent efforts, the Company has now become a leading
company for transdermal patches. SALONPAS, one of our mainstay products, is known as apioneer in the realm of the transdermal patch. A registered trademark in over 100 countries, thename SALONPAS, is globally associated with a quality patch for reliving pains andinflammation.
Patches, which are able to cure diseases by simply applying to the skin, are lately attracting
considerable attention from viewpoints of improving medication to treat patients as well as
improving QOL for patients. Throughout the world, the Company’s transdermal patches areproudly hailed as an embodiment of the unique Japanese “therapeutic culture.” The efficacy ofthis “culture of patch therapy” and the impressive benefits that it brings are being conveyed
throughout the world. Taking this as our corporate mission under the banner, Salonpas therapy,
we are proceeding with the development of our business with this philosophy always in mind.

(2) Fundamental Profit Sharing Policy

The Company maintains a fundamental policy of rewarding stockholders with stabledividends, and at a new phase of business, it adds either special or commemoration dividends toregular dividends to distribute profits to stockholders. The Company uses its internal reserves
principally for investments in research and development (R&D), strengthening sales, expanding
production facilities and developing overseas business activities.
The Company declares to pay cash dividends for the current year, the payout ratio of which is
not less than 10%, considering further enhancement of management, further development ofbusiness and necessary internal reserves, in addition to the difficult operating conditions
surrounding the Company.

(3) Mid-term Strategies

The Company intends to become a pharmaceutical company oriented toward its own R&D in
its own way, aggressively trying to create new transdermal pharmaceuticals for topical andsystemic use meeting properly the needs of medical institutions through TTS studies.
The Company’s mid-term strategies are:・ To increase cash flows from operating activities through the aggressive development ofsales activities of existing transdermal analgesic and anti-inflammatory products for
ethical use and over-the-counter (OTC) use.
・ To further specialize in R&D activities of new transdermal pharmaceuticals for topicaland systemic use, intending to pursue high net profits and high corporate value.
・ To promote global development of the Company’s new products based on the TTS
technology.
1Through these activities, the Company sets its mid-term goal in management to keep returnon equity (ROE) of more than 15% and to increase net income up ¥10,000 million ($86,207
thousand) by the end of fiscal 2005.

(4) Measures for Enhancing Corporate Governance

The Company, aiming to improve its corporate governance scheme, is clearly dividing theinherent functions of its board of directors into two, that is, the decision-making and supervising
function and the business-executing function to promote quicker decision-making as well as toclarify the authority and responsibility of the board of directors.
Additionally, in order to raise the degree of managerial transparency, the Company is striving
to actively open its information to the public as well as maintaining smooth communications
with stockholders and investors through aggressive investor relation (IR) activities.

2

Review of Operations(1) Overview of Fiscal 2001 ended February 28, 2001

Widespread economic depression in Japan has continued throughout fiscal 2001, ended
February 28, 2001, and there were no signs of recovery due primarily to sluggish domestic
demand due to low personal consumption and decreases in capital expenditures by industry.
The Japanese Government’s policy of restraining health care costs has been strengthening
year by year. The Government implemented reforms to the National Health Insurance (NHI)
scheme, intending to increase the portion of health care costs shared by patients. As a result,effective April 1, 2000, the Government executed a cut in NHI drug reimbursement prices
averaging 7.0% across the industry. These measures have adversely affected the businessperformance of the whole pharmaceutical industry, including the Company, for fiscal 2001.
The pharmaceutical industry has been experiencing keen competition due to the full-scale
entry of foreign pharmaceutical manufactures into the domestic market for ethicalpharmaceuticals. Additionally, the OTC product market has been stagnant, directly reflecting
flat personal consumption due to the domestic economic depression, despite successive efforts bycompanies to diversify their existing products to differentiate them from others. This has further
intensified sales competition in this market.
Against this harsh situation, the Company and its subsidiaries (the Companies) have been
active in every operating field.
(Pharmaceuticals and related products segment)
With respect to ethical pharmaceuticals, the Company’s medical representatives developed
pharmaceutical information activities primarily focussing on topical analgesic and antiinflammatory pharmaceuticals to properly meet the needs of medical institutions. The Company
made improvements to both transdermal patch, MOHRUS TAPE, and transdermal gel patch,
MOHRUS, to make them easy to use, and strove to promote them into medical institutions.
Regarding over-the-counter (OTC) products, the Company also promoted sales activities
concentrating on topical analgesic and anti-inflammatory pharmaceuticals despite the stagnant
market reflecting flat personal consumption. Additionally, the Company attempted to steadily
penetrate into the cosmetic market with facial gel packs, to which the Company’s own
transdermal technology has been applied. In January this year, the Company launched
LIFECELLA MEN’S MASK to have a large assortment of facial packs as well as to cultivate newconsumers. During the year the Company introduced onto the OTC market DEKO-DEKO COOL,a first-aid pad for cooling fever, and AIR-SALONPAS INDOMETHACIN, an analgesic and antiinflammatory spray, and promoted its quick acceptance in the OTC market.
The Company primarily oriented its R & D activities toward creating new transdermal
preparations, making steady progress on a long series of fundamental and applied studies.
Additionally, the Company endeavored to elevate the efficiency of its overall management aswell as to improve the results of operations.
During the year, the Company promoted the following activities relating to common
stock.
(1) In accordance with the resolution of the Board of Directors on February 24, 2000,
the Company purchased 605 thousand shares of par value common stock out of profits
for a total amount of ¥974 million ($8,396 thousand) from the stock market and retired
them by the time of the 2000 annual meeting of stockholders on May 25, 2000.
3

(2) In accordance with the resolution of the Board of Directors on May 25, 2000, theCompany made stock split at the ratio of one share of par value common stock into twoshares on August 21, 2000. As a result, the Company issued 47,523 thousand
additional shares of common stock.

(Cable television broadcasting and other segment)
The Companies continued to aggressively develop cable television broadcasting and otherbusinesses in order to achieve successful results.

(2) Outlook for Fiscal 2002 ending February 28, 2002

It is anticipated that the domestic ethical pharmaceutical market will drastically shrink,depending on the trend of future reforms to the NHI pharmaceutical reimbursement pricesystem. Under these unprecedented serious circumstances, the Company will aggressively
continue providing pharmaceutical information to medical institutions and try to create newtransdermal preparations to exactly meet medical needs.
Although the domestic OTC market has long been in a slump, the Company will actively
accelerate increased sales of OTC products as well as develop new OTC products properly
meeting the needs and concerns of its customers.
Regarding overseas sales development, the Company’s International Business Department
will play an important role in the global development of the Company’s brand including trade
marks, manufacturing technology and quality control of products.
The Company, being fully aware of its responsibility as a pharmaceutical enterprise, will
devote itself to improve its business performance through the strengthening of its sales,
increasing productivity, speedier R & D activities, streamlining of management and building up
of its corporate constitution.
Additionally, the Companies are intending to further develop cable television broadcastingand other businesses to improve results.
It is too early to predict the consolidated results of operations for the next year ending
February 28, 2002, but the Companies expect that, in the absence of unforeseen circumstances,both net sales and net income will show a moderate increase.

4

Financial Review
The consolidated financial statements included the accounts of the Company and its ten
significant subsidiaries (the “Companies”), and investments in two affiliated companies were
accounted for using the equity method.
The Company was only required to file non-consolidated financial statements in prior years,
and, therefore, comparative consolidated financial statements for the prior year are notpresented.

Results of Operations

Net Sales(Pharmaceuticals and related products segment)
During fiscal 2001, ended February 28, 2001, the Companies have faced very difficult
operating circumstances as a whole. With regard to ethical pharmaceuticals, the Government
executed a cut in pharmaceutical reimbursement prices under the NHI scheme averaging 7.0%
across the pharmaceutical industry. This reduction adversely affected the performance for fiscal
2001 of the whole pharmaceutical industry.
Under these circumstances, regarding ethical pharmaceuticals, the Company actively
promoted pharmaceutical information activities meeting the diversifying healthcare needs of
medical institutions, centering on its main products, such as analgesic and anti-inflammatory
products for external use. Of these products, the Company aggressively disseminated andgathered product information for both ketoprofen patch, MOHRUS TAPE, and ketoprofen gel
patch, MOHRUS, in order to enable them to steadily penetrate into medical institutions.
Additionally, November of last year, the Company filed the application for additional indications
for ESTRADIOL, a transdermal patch for treating menopause, to osteoporosis.
With respect to over-the-counter (OTC) products, the Company strove to principally promote
the sale of analgesic and anti-inflammatory pharmaceuticals for external use despite thestagnant OTC market reflecting decreased personal consumption. The Company successfullylaunched new products consisting of DECO-DECO COOL, a first aid pad for cooling fever, in
April last year, AIR SALONPAS INDOMETHACIN, an aerosol compounded concomitantly withl-menthol and indomethacin for relieving muscular pains and inflammation, in August last year
and LIFECELLA MEN’S MASK, a facial gel pack for men’s use, in January this year.
In the pharmaceuticals and related products segment, the Companies recorded net sales of¥63,180 million ($544,655 thousand).
(Cable Television Broadcasting Segment and Other Segment)
The Companies continued to aggressively develop the cable television broadcasting business,making an aggressive entry into the cable internet business. Net sales for the cable television
broadcasting and other segment were ¥2,060 million ($17,759 thousand).
As a result, the consolidated net sales for the Companies totaled ¥65,240 million ($562,414
thousand).

5

Costs and Expenses
Cost of sales amounted to ¥20,068 million ($173,000 thousand), rendering the cost of
sales as a percentage of net sales at 30.8%. Selling, general and administrative expenses
totaled ¥25,746 million ($221,948 thousand), and R & D expenses amounted to ¥5,435
million ($46,854 thousand), with the ratio of R & D expenses to net sales at 8.3%.
Operating income was determined as ¥13,991 million ($120,612 thousand) by deducting
costs and expenses from net sales, yielding the ratio of operating income to net sales of
21.4%.
Other expenses, net of other income, totaled ¥2,012 million ($17,345 thousand),primarily reflecting the lump-sum amortization of prior service cost under the contributory
pension plan of ¥2,032 million ($17,517 thousand).
Net Income
Income before income taxes was ¥11,979 million ($103,267 thousand). Net income was¥6,788 million ($58,517 thousand) by deducting current income taxes and minority
interest in net income of consolidated subsidiaries and by adding deferred income taxes.
The effective tax rate was approximately equal to 42.2%. Diluted net income per share ofcommon stock was ¥72.70 ($0.63), and the Company paid its
stockholders cash dividends per share of ¥7.00 ($0.06).

Financial Position

At February 28, 2001, total assets stood at ¥80,706 million ($695,741 thousand). Total
current assets amounted to ¥38,029 million ($327,836 thousand), principally consisting ofnotes and accounts receivable of ¥18,538 million ($159,811 thousand) and cash anddeposits of ¥11,246 million ($96,948 thousand).
Property, plant and equipment, less accumulated depreciation, were ¥33,963 million($292,784 thousand) and intangible assets were ¥273 million ($2,353 thousand).
Investments and other non-current assets totaled ¥8,441 million ($72,768 thousand), andmajor components included investment securities of ¥3,694 million ($31,845 thousand) andnon-current deferred tax assets of ¥1,586 million ($13,672 thousand).
Total current liabilities amounted to ¥24,816 million ($213,931 thousand), primarily
consisting of trade notes and accounts payable of ¥8,936 million ($77,034 thousand) andother notes and accounts payable of ¥7,514 million ($64,776 thousand). Working capital
was calculated as ¥13,213 million ($113,905 thousand), and the current ratio as 153.2%.
Total long-term liabilities were ¥6,153 million ($53,043 thousand). Major components
included long-term debt due after one year of ¥2,341 million ($20,181 thousand) andemployees’ retirement benefits of ¥2,359 million ($20,336 thousand). Unsecured 1.0%
bonds, due 2001, issued with warrants are not included in liabilities in the balance
sheet because the Company entered into a debt assumption agreement with a financial
institution, paying the necessary amounts for redemption and interest payments on thebonds. However, the Company remains contingently liable for the bonds through June25, 2001.
Total stockholders’ equity amounted to ¥49,182 million ($423,983 thousand), primarilyreflecting retained earnings of ¥34,719 million ($299,302 thousand), common stock of¥8,460 million ($72,931 thousand) and additional paid-in capital of ¥8,227 million($70,922 thousand), leaving the ratio of stockholders’ equity to total assets of 60.9%.
6Cash Flows

Cash and cash equivalents at end of year totaled ¥12,526 million ($107,983 thousand),an increase of ¥5,685 million ($49,009), compared to those at beginning of year. This
primarily resulted from increased cash flows provided by operating activities with anincrease in net sales of the Company.
Operating activities provided net cash of ¥12,280 million ($105,862 thousand). This
principally came from income before income taxes of ¥11,979 million ($103,267 thousand)and depreciation and amortization of ¥2,851 million ($24,578 thousand) despite income
taxes paid of 5,101 million ($43,974 thousand).
Investing activities used net cash of ¥5,130 million ($44,224 thousand), primarilyreflecting payments for purchases of property, plant and equipment of ¥3,597 million($31,009 thousand) and payment for purchase for investment securities of ¥1,350 million($11,638 thousand). Major capital investments were made for the expansion andupgrading of the production and laboratory facilities, as well as the construction of a newstorehouse with a fully computerized distribution system.
Financing activities consumed net cash of ¥1,507 million ($12,991 thousand). This is
primarily due to repayment of long-term debt of ¥2,607 million ($22,474 thousand) andpayment for purchase of treasury stock of ¥1,162 million ($10,017 thousand) for
retirement despite net increase in bank loans of ¥2,586 million ($22,293 thousand).

7

Consolidated Balance SheetHISAMITSU PHARMACEUTICAL CO., INC.
February 28, 2001
Thousands of
U.S. dollars
Millions of yen(Note 1)ASSET
Current assets:
Cash and deposits (Note 3) ………………………………
Notes and accounts receivable:
Trade notes (Note 15) ……………………………………
Trade accounts ……………………………………………
Marketable securities (Note 4) ……………………………
Inventories (Note 5) …………………………………………
Deferred tax assets (Note 11) ……………………………
Other current assets ………………………………………
Less allowance for doubtful accounts …………………
Total current assets ……………………………………
Property, plant and equipment:
Land (Note 6) …………………………………………………
Buildings and structures (Note 9) ………………………
Machinery and equipment (Note 9) ……………………
Tools, furniture and fixtures ………………………………
Construction in progress …………………………………
Less accumulated depreciation ……………………………
Intangible assets ………………………………………………
Investments and other non-current assets:
Investment securities (Notes 4 and 9) …………………
Investment in non-consolidated subsidiaries
and affiliates ………………………………………………
Deferred tax assets (Note 11) ……………………………
Deferred tax assets relating toland revaluation (Note 6) ………………………………
Other investments and other non-current assets ……
Less allowance for doubtful accounts …………………

See accompanying notes.

8¥11,246$96,948

4,991
13,547
1,345
4,896
972
1,120
(88)
38,02943,026
116,785
11,59542,207
8,379
9,655
(759)
327,836

12,217
23,384
15,8919,621
1,423
62,536(28,573)
33,963

105,319
201,586
136,991
82,94012,267539,103(246,319)
292,784

273

2,353

3,694

31,845

706
1,586

6,086
13,672

641
1,818
(4)
8,441
¥ 80,706

5,526
15,673(34)
72,768$695,741

Thousands of
U.S. dollars
Millions of yen(Note 1)
LIABILITIES AND STOCKHOLDERS’ EQUITYCurrent liabilities:
Short-term bank loans (Note 9) ……………………………
Long-term debt due within one year (Note 9) …………
Notes and accounts payable:
Trade ……………………………………………………………
Construction …………………………………………………
Other …………………………………………………………
Income taxes payable (Note 11) ……………………………
Reserve for sales returns ……………………………………
Reserve for employees’ bonuses ……………………………
Other current liabilities ………………………………………
Total current liabilities …………………………………

¥3,122637$26,914
5,491

8,936
296
7,514
3,404
194
467
246
24,81677,034
2,552
64,77629,345
1,672
4,026
2,121
213,931

Long-term liabilities:
Long-term debt due after one year (Note 9) ……………
Retirement benefits (Note 10) ………………………………
Directors’ and corporate auditors’ retirement benefits …
Other non-current liabilities …………………………………
Total long-term liabilities ………………………………

2,341
2,359
768
685
6,153

20,181
20,336
6,621
5,905
53,043

Minority interests …………………………………………………

555

4,784

8,460
8,227
(894)
34,719
(468)
(2)
(860)
49,182¥ 80,706

72,931
70,922(7,707)299,302(4,034)(17)(7,414)423,983$695,741

Contingent liabilities (Note 15)
Stockholders’ equity (Notes 13 and 14):
Common stock, par value ¥50 per share:
Authorized−180,000,000 shares
Issued−95,108,490 shares …………………………………
Additional paid-in capital ……………………………………
Loss on land revaluation (Note 6) …………………………
Retained earnings ……………………………………………
Translation adjustments ………………………………………
Treasury stock, at cost ………………………………………
Common stock owned by subsidiary ………………………
Total stockholders’ equity ………………………………

9

Consolidated Statement of Income
HISAMITSU PHARMACEUTICAL CO., INC.
Year ended February 28, 2001

Net sales ……………………………………………………………
Costs and expenses:
Cost of sales ……………………………………………………
Selling, general and administrative …………………………
Research and development ……………………………………
Operating income …………………………………………………
Other income (expense):
Interest and dividend income ………………………………
Interest expense …………………………………………………
Equity in earnings of affiliates ……………………………
Gain on sales of property, plant and equipment ………
Gain on sales of investment securities ……………………
Governmental subsidy …………………………………………
Loss on sales and disposals of property, plantand equipment ………………………………………………
Write-down of investment securities ………………………
Write-down of golf-club memberships ………………………
Prior service cost under the contributory
pension plan (Note 10) ……………………………………
Other−net ………………………………………………………
Income before income taxes ……………………………………
Income taxes (Note 11):
Current ……………………………………………………………
Deferred ……………………………………………………………
Minority interests in net income of
consolidated subsidiaries ……………………………………
Net income …………………………………………………………

Amounts per share of common stock (Note 2):
Net income ………………………………………………………
Diluted net income ……………………………………………
Cash dividends applicable to the year ……………………
See accompanying notes.

10

Millions of yen¥ 65,240

Thousands of
U.S. dollars(Note 1)$562,414

20,06825,746
5,435
51,24913,991

173,000
221,948
46,854
441,802120,612

103
(173)
50
2
8
159

888
(1,492)
431
17
69
1,371

(202)
(274)
(168)

(1,742)(2,362)(1,448)(2,032)515(2,012)
11,979(17,517)4,440(17,345)
103,267

5,771
(718)

49,750(6,190)138¥ 6,788

1,190$58,517

Yen

U.S. dollars(Note 1)

¥ 72.82
72.70
7.00$ 0.630.63
0.06

Consolidated Statement of Stockholders’ Equity
HISAMITSU PHARMACEUTICAL CO., INC.
Year ended February 28, 2001

Common stock:
Balance at beginning of year ………………………………………
Shares issued upon exercise of warrants (Note 14) …………
Balance at end of year ……………………………………………
Additional paid-in capital:
Balance at beginning of year ………………………………………
Shares issued upon exercise of warrants (Note 14) …………
Balance at end of year ……………………………………………
Loss on land revaluation:
Balance at beginning of year ………………………………………
Land revaluation, net of tax (Note 6) ……………………………
Balance at end of year ……………………………………………
Retained earnings:
Balance at beginning of year ………………………………………
Net income ……………………………………………………………
Cumulative effect of adopting
tax effect accounting (Note 11) …………………………………
Cash dividends paid …………………………………………………
Bonuses to directors and corporate auditors …………………
Retirement of common stock (Note 14) …………………………
Balance at end of year ……………………………………………
Translation adjustments:
Balance at beginning of year ………………………………………
Adjustments from translation offoreign currency financial statements …………………………
Balance at end of year ……………………………………………
Treasury stock:
Balance at beginning of year ………………………………………
Treasury stock purchased …………………………………………
Balance at end of year ……………………………………………
Common stock purchased by subsidiary:
Balance at beginning of year ………………………………………
Common stock purchased by subsidiary …………………………
Balance at end of year ……………………………………………
Number of shares of common stock:
Balance at beginning of year ………………………………………
Retirement of common stock (Note 14) …………………………
Shares issued upon exercise of warrants (Note 14) …………
Stock split (Note 14) …………………………………………………
Balance at end of year ……………………………………………

See accompanying notes.
11

Million of yen

Thousands of
U.S. dollars(Note 1)

¥ 8,41446¥ 8,460$ 72,534
397$ 72,931¥ 8,17552¥ 8,227$ 70,474
448$ 70,922

¥

$

¥

―
(894)
(894)

―
(7,707)$ (7,707)¥27,662
6,788$238,466
58,517

1,783
(481)
(59)
(974)
¥34,719

15,371(4,147)(509)(8,396)$299,302¥(478)$ (4,121)

¥

10
(468)

87
$ (4,034)

¥
¥

(1)
(1)
(2)

¥

(736)
(124)
¥ (860)48,063,166(605,000)
127,419
47,522,905
95,108,490

$
$

(9)
(8)
(17)

$ (6,345)(1,069)$ (7,414)

Consolidated Statement of Cash FlowsHISAMITSU PHARMACEUTICAL CO., INC.
Year ended February 28, 2001

Millions of yen

Thousands of
U.S. dollars(Note 1)

¥ 11,979$103,267

2,851
53

24,578
457

64
(103)
173
(64)
(50)
274
168

552
(888)
1,492
(552)
(431)
2,362
1,448

202
471
(727)
(337)
1,926
(59)
630
17,451102(172)(5,101)
12,2801,741
4,060(6,267)(2,905)
16,604(509)
5,431
150,440879(1,483)(43,974)
105,862

Cash flows from investing activities:
Payments for purchases of property, plant and equipment ……
Proceeds from sales of property, plant and equipment …………
Payments for purchases of intangible assets ……………………
Payments for purchases of marketable securities ………………
Proceeds from sales of marketable securities ……………………
Payment for purchase of investment securities …………………
Payments on loans receivable…………………………………………
Other ………………………………………………………………………
Net cash used in investing activities ………………………

(3,597)81(186)(3,300)3,359(1,350)(204)
67(5,130)(31,009)698(1,603)(28,448)
28,957(11,638)(1,759)578(44,224)

Cash flows from financing activities:
Net increase in bank loans ……………………………………………
Repayment of long-term debt …………………………………………
Proceeds from exercise of warrants …………………………………
Payment for purchase of treasury stock ……………………………
Proceeds from sales of treasury stock ………………………………
Cash dividends paid ……………………………………………………
Other ………………………………………………………………………
Net cash used in financing activities ………………………

2,586(2,607)98(1,162)
183
(481)
(124)
(1,507)22,293(22,474)845(10,017)
1,578(4,147)(1,069)(12,991)

Effect of exchange rate changes on cash and cash equivalents…
Net increase in cash and cash equivalents …………………………
Cash and cash equivalents at beginning of year …………………
Cash and cash equivalents at end of year …………………………

42
5,685
6,841
¥ 12,526

362
49,00958,974$ 107,983

Cash flows from operating activities:
Income before income taxes …………………………………………
Adjustments to reconcile net income before taxes
to net cash provided by operating activities:
Depreciation and amortization ……………………………………
Increase in employees’ retirement benefits ……………………
Increase in directors’ and corporate
auditors’ retirement benefits ……………………………………
Interest and dividend income ………………………………………
Interest expense ………………………………………………………
Foreign exchange gain ………………………………………………
Equity in earnings of affiliated companies ……………………
Write-down of investment securities………………………………
Write-down of golf-club memberships ……………………………
Loss on sales and disposal of property,
plant and equipment ………………………………………………
Decrease in notes and accounts receivable ……………………
Increase in inventories ………………………………………………
Increase in other current assets …………………………………
Increase in notes and accounts payable …………………………
Bonuses to directors and statutory auditors ……………………
Other ……………………………………………………………………
Subtotal …………………………………………………………………
Interest and dividend income received …………………………
Interest paid ……………………………………………………………
Income taxes paid ……………………………………………………
Net cash provided by operating activities …………………

See accompanying notes.
12Notes to Consolidated Financial Statements
HISAMITSU PHARMACEUTICAL CO., INC.
Year ended February 28, 2001

1. Basis of Consolidated Financial Statements

Hisamitsu Pharmaceutical Co., Inc. (the “Company”) and its consolidated domestic
subsidiaries maintain their accounts and records in accordance with the provisions set forth in
the Japanese Commercial Code and the Securities and Exchange Law and in conformity withaccounting principles and practices generally accepted in Japan, which are different from theaccounting and disclosure requirements of International Accounting Standards. The accounts ofoverseas consolidated subsidiaries are based on their accounting records maintained inconformity with generally accepted accounting principles and practices prevailing in therespective countries of domicile.
The accompanying consolidated financial statements are a translation of the audited
consolidated financial statements of the Company which were prepared in accordance withaccounting principles and practices generally accepted in Japan from the accounts and records
maintained by the Company and its consolidated subsidiaries and were filed with the Minister ofFinance as required by the Securities and Exchange Law. The Company was only required tofile non-consolidated financial statements in prior years, and, therefore, comparative
consolidated financial statements for the prior years are not presented.
In preparing the accompanying consolidated financial statements, certain reclassifications
have been made in the consolidated financial statements issued domestically in order to present
them in a form which is more familiar to readers outside Japan.
The translation of the Japanese yen amounts into U.S. dollars are included solely for theconvenience of the reader, using the prevailing exchange rate at February 28, 2001, which was￥116 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 this or at any rate of exchange.

2. Summary of Significant Accounting Policies

Consolidation
The consolidated financial statements include the accounts of the Company and its ten
significant subsidiaries (the “Companies”). All significant intercompany balances, transactions
and profits have been eliminated.
The consolidated financial statements for the year ended February 28, 2001 were prepared inaccordance with the revised Accounting Principles for Consolidated Financial Statements (theRevised Accounting Principles), which are effective from years ended March 31, 2000. Under the
Revised Accounting Principles, companies are required to consolidate all significant investees
which are controlled through substantial ownership of majority voting rights or existence of
certain conditions.
In the elimination of investments in subsidiaries, the assets and liabilities of the subsidiaries,
including the portion attributable to minority shareholders, are evaluated using fair value at thetime the Company acquired control of the respective subsidiaries.

13Equity Method
Investments in two affiliated companies are accounted for using the equity method.
However, non-consolidated subsidiaries are not accounted for using the equity method, since theCompany’s equity in earnings in the aggregate is not material in relation to the consolidated net
income and retained earnings. The consolidation difference between cost of an investment andequity in its net assets at the date of acquisition is expensed in the year of acquisition.
Cash and Cash Equivalents and Cash Flow Statements
In preparing the consolidated statements of cash flows, cash on hand, readily-available
deposits and short-term highly liquid investments with maturities of not exceeding three months
at the time of purchase are considered to be cash and cash equivalents.
Marketable Securities and Investment Securities
Marketable equity securities included in both current assets and investments arestated at cost. Cost is determined by the moving average method. Other securities arealso stated at cost. If a decline in value below cost of an individual security is judged
to be material and other than temporary, the carrying value is written down.
Allowance for Doubtful Accounts
The allowance for doubtful accounts is provided in amounts sufficient to cover possible
losses on collection. It is determined by adding individually estimated uncollectible
amounts to an amount calculated by formula as permitted by the Corporation Tax Law
of Japan with respect to the remaining receivables.
The allowance for doubtful accounts for the overseas consolidated subsidiaries isprovided in amounts calculated from individually estimated uncollectible accounts.
Allowance for Sales Returns
The allowance for sales returns is provided in the limited amount calculated byformula as permitted by the Corporation Tax Law of Japan to cover possible losses onsales returns after the balance sheet date.
Inventories
Inventories are stated at cost (first-in, first-out method).
Property, Plant and Equipment
Property, plant and equipment are stated at cost less accumulated depreciation exceptthat certain land was revalued at fair value as of February 28, 2001. Depreciation isprovided over estimated useful lives as permitted by the Corporation Tax of Japan.
Depreciation of property, plant and equipment is determined by the declining balancemethod except that the straight line method is primarily adopted by the overseas
consolidated subsidiaries.
Intangible Assets
Intangible assets are stated at cost less accumulated amortization and amortized by
the straight line method. Amortization is provided over estimated useful lives aspermitted by the Corporation Tax of Japan, except that the amortization of internallyused software is determined using the straight line method over the estimated usefullife (five years).

14

Bond and Note Issue Expenses and Bond Issue Discounts
Bond and note issue expenses and bond issue discounts are charged to income as
incurred.
Income Taxes
The Companies provided income taxes at the amounts currently payable for the year ended
February 29, 2000. Effective March 1, 2000, the Companies adopted the new accounting
standard, which recognizes tax effects of temporary differences between the carrying amounts ofassets and liabilities for tax and financial reporting. The assets and liability approach is used torecognize deferred tax assets and liabilities for the expected future tax consequences of
temporary differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes.
The amount of deferred income taxes attributable to the net tax effects of the temporary
differences at March 1, 2000 is reflected as an adjustment to the retained earnings brought
forward from the previous year.
Reserve for Employees’ Bonuses
The Company and its domestic consolidated subsidiaries provided the reserve for
employees’ bonuses in the portion of estimated future payments applicable to the current
year.
Retirement Benefits and Pension Plan
Lump-sum benefit plan
Under the terms of the Company’s and domestic subsidiaries’ retirement plans,
substantially all employees are entitled to a lump-sum payment at the time of retirement.
The amount of the retirement benefit is, in general, based on the length of service, basesalary at the time of retirement and reason for retirement. The liability for lump-sum
payments is stated at the amount which would be required if all eligible employees
voluntarily retired at the balance sheet date.
1996 pension plan
Commencing from July 1996, 30% of the above benefits are covered by a contributory
funded pension. The benefits are payable either as a monthly pension or, under certain
circumstances at the option of retiring employees, in a lump-sum amount. The portion of
the liability for the unfunded lump-sum benefit plan, which is no longer required due tothe introduction of this plan, is reversed at the same rate as amortization of priorservice costs.
1966 pension plan
The Company also has had a contributory funded pension plan since 1966 which
covers retirement benefits for employees who retire at the mandatory retirement age or
those with over 20 years of service who terminate their employment under certain
circumstances. These employees are, in general, entitled to a lump-sum payment or anannuity.
Both prior service costs for 1996 pension plan and 1966 pension plan are expensed
when incurred.
Directors’ and corporate auditors’ retirement benefits
Retirement benefits for directors and corporate auditors under the Company’s unfunded
plan are provided in the amount that would be required if they retired at the balance
sheet date.

15

Finance Leases
Finance leases which do not transfer ownership are accounted for in the same manneras operating leases in accordance with generally accepted accounting principles in Japan.
Foreign Currency Translation
Current and non-current receivables and payables denominated in foreign currencies
are translated into Japanese yen at the exchange rates in effect at the balance sheet
date, except for those hedged by forward exchange contracts. The resulting exchange
gains and losses are credited or charged to income.
Guaranteed notes payable denominated in foreign currencies and hedged by forward
exchange contracts are translated into Japanese yen at the contracted forward exchange
rates. The discount on forward contracts is deferred and amortized over the life of theforward contracts.
The assets and liabilities of consolidated overseas subsidiaries are translated into
Japanese yen at the exchange rates in effect at the balance sheet date. Revenue andexpense accounts are translated at the average exchange rates prevailing during the year.
Net Income per Share of Common Stock
Computations of net income per share of common stock assuming no dilution are
based on the weighted average number of shares outstanding during each fiscal year.
For the purpose of computing net income per share assuming dilution, the average
number of shares has been changed by the number of shares which would have beenoutstanding assuming the retirement of treasury stock, exercise of warrants and stock
split at the beginning of the year.

3. Cash and Cash Equivalents

Cash and cash equivalents at February 28, 2001 for the consolidated statement ofcash flows consisted of the following:
Millions of yen
Cash and deposits …………………………
¥ 11,246
Add: Marketable securities ………………
1,345
Less: Time deposits with maturities
over three months ………………
(65)
Cash and cash equivalents ………………
¥ 12,526

16

Thousands of
U.S. dollars$ 96,948
11,595(560)$107,983

4. Marketable Securities and Investment Securities

The aggregate carrying values and market values of marketable securities andinvestment securities at February 28, 2001 were as follows:

Marketable securities ……………
Investment securities ……………

Millions of yen
Carrying
Market
value
value
¥
―
¥
―
3,357
3,527
¥ 3,357¥ 3,527

Thousands of
U.S. dollars
Carrying
Market
value
value
$
―
$
―
28,94030,405$28,940$30,405

The above table does not include the following marketable securities and investment
securities:

Marketable securities:
Marketable securities in investment trusts ……
Governmental securities fund ………………………
Free financial fund ……………………………………
Money management fund ……………………………
Investment securities:
Unlisted securities, excluding over-the-countershares …………………………………………………

Millions of yen

Thousands of
U.S. dollars

¥ 645
300
300
100

$5,561
2,586
2,586
862

¥1,043$8,991

5. Inventories

Inventories at February 28, 2001 consisted of the following:

Goods and products ……………………
Raw materials …………………………
Work in process …………………………
Supplies …………………………………

Millions of yen¥ 3,479493
246
678¥ 4,896

6. Land Revaluation

Thousands of
U.S. dollars$ 29,991
4,250
2,121
5,845
$ 42,207

As at February 28, 2001, pursuant to the Law of Revaluation of Land and the
Revision thereof (the “Law”), certain land for business operations was revalued at fairmarket value. Due to the revaluation, land was reduced by ¥1,535 million ($13,233
thousand) to ¥11,774 million ($101,500 thousand) as at February 28, 2001, and therelated loss was reported in a separate component of stockholders’ equity as “Loss onland revaluation”, net of tax.

17

7. Derivative Transactions

Status of derivative transactions:
The Companies utilize forward currency exchange and interest rate swap transactions
to control risks related to foreign currencies and interests rates.
Forward currency exchange contracts are used to hedge the risk of fluctuations inforeign currency exchange rates with respect to foreign currency transactions, and interest
rate swap transactions are used to reduce the risk of fluctuations in interest rates inrelation to notes payable.
The Companies principally use derivative transactions in connection with managing
its market risk and not for speculation or dealing purposes. The Companies deal withhighly rated domestic banks as counterparty to these transactions to minimize credit risk
exposure.
Derivative transactions are, depending on materiality, subject to resolution of theBoard of Directors or approval by the General Manager of the Finance and Accounting
Department and contracted by the Finance and Accounting Department. The actual
results of the derivative transactions are reported to the Board of Directors after theend of each year.
Market values of derivative transactions
The Companies had no derivative contracts outstanding at February 28, 2001.

8. Lease Information

Finance leases which do not transfer ownership are accounted for in the same manneras operating leases in accordance with generally accepted accounting principles in Japan.

The original lease obligations of the Companies amounted to ¥1,327 million ($11,440
thousand) for the year ended February 28, 2001.
Lease payments for finance leases which do not transfer ownership to lessees
amounted to ¥288 million ($2,483 thousand) in 2001. Future minimum leases payments,
including financing cost, required under such leases at February 28, 2001 are as follows:

Due within one year …………………………
Due after one year ……………………………

18

Millions of yen
¥ 231
232
¥ 463

Thousands of
U.S. dollars$ 1,991
2,000$ 3,991

9. Short-term Bank Loans and Long-term Debt

Short-term bank loans are represented generally by notes maturing within one year.
Annual interest rates at February 28, 2001, ranged from 0.73% to 0.99%.
Long-term debt at February 28, 2001 consisted of the following:

Unsecured long-term bank loans ……………
Secured long-term bank loans …………………
Less amounts due within one year …………

Millions of yen¥ 1,516
1,462
2,978
(637)
¥ 2,341

Thousands of
U.S. dollars$ 13,069
12,603$ 25,672(5,491)$ 20,181

The annual interest rates of the bank loans ranged from 0.73% to 3.49% with theweighted average being 1.71% at February 28, 2001.
At February 28, 2001 assets pledged as collateral for short-term bank loans of ¥162
million ($1,396 thousand) and for secured long-term bank loans were as follows:

Buildings and structures …………………
Machinery and equipment ………………
Investment securities ………………………

Millions of yen¥ 1,049272
416¥ 1,737

Thousands of
U.S. dollars$ 9,043
2,345
3,586$ 14,974

The annual maturities of long-term debt are as follows:
Years ending February 28/29
2003 ………………………………………
2004 ………………………………………
2005 ………………………………………
2006 ………………………………………
Thereafter …………………………………

19

Millions of yen
¥ 619
734
321
305
362
¥ 2,341

Thousands of
U.S. dollars$ 5,336
6,328
2,767
2,629
3,121
$ 20,181

Contingent liability for debt assumption
The Company entered into a debt assumption agreement with the Mitsubishi Trustand Banking Corporation on January 13, 2000, and paid the necessary amounts forredemption and interest payments on certain bonds. Consequently, although the bonds are
not included in liabilities in the balance sheet, the Company remains contingently liable
for the following bonds with warrants that are exercisable at an price per share of ¥957($8.250) through June 25, 2001.

Unsecured 1.0% bonds, due 2001
issued with warrants …………………

(Millions of yen)Ending balance

Redemption date

¥ 1,250

June 25, 2001

If all the outstanding warrants had been exercised at February 28, 2001, 127 thousand
additional shares of common stock would have been issued.

10. Retirement Benefits and Pension Plan

Pension assets and unamortized prior service costs under the contributory fundedpension plan established in 1996 amounted to ¥3,462 million ($29,845 thousand) and¥640 million ($5,517 thousand), respectively, at February 28, 2001.
Pension assets and unamortized prior service costs under the contributory fundedpension plan established in 1966 amounted to ¥1,368 million ($11,793 thousand) and¥338 million ($2,914 thousand), respectively, at February 28, 2001.
Charges to income with respect to the employees’ lump-sum retirement benefits planand the funded pension plans amounted to ¥1,597 million ($13,767 thousand) in 2001.
The reversal of reserve for retirement benefits amounted to ¥82 million ($707 thousand)for the year ended February 28, 2001.
Charges to income with respect to directors’ and corporate auditors’ retirement benefits
amounted to ¥66 million ($569 thousand) for the year ended 2001.
Prior service cost for the Company’s 1996 pension plan was charged to income when
paid. Since the yield on investments of the pension plan was lowered, the Company
changed its expected rate from 5.5% to 2,9% from the current year. Additionally priorservice cost incurred as a result of this change was stated as ‘Prior service cost under
the contributory pension plan’ in the other income (expense) in the consolidated
statements of income.

11. Income Taxes

The Company is subject to a number of taxes based on income, which, in theaggregate, indicate a statutory rate in Japan of approximately 42% for the year ended
February 28, 2001.
The following table summarizes the significant differences between the statutory tax
rate and the Company’s effective tax rate for financial statement purposes for the year
ended February 28, 2001:

20

Statutory tax rate …………………………………
Non-deductible expenses ……………………………
Non-taxable dividend income ……………………
Per capita inhabitant tax …………………………
Other …………………………………………………
Effective tax rate ……………………………………

41.7%
3.1
(0.1)
0.1
(2.6)
42.2%

Significant components of the Company’s deferred tax assets as of February 28, 2001
are as follows:
Millions of yen

Thousands of
U.S. dollars

¥ 671
355
321
307
276
266
103
61
153
136
2,649
(91)
¥2,558$ 5,784
3,060
2,767
2,647
2,379
2,293
888
526
1,319
1,172
22,835(784)$22,051

Deferred tax assets:
Retirement benefits ……………………………………………
Valuation loss on investment securities …………………
Directors’ and corporate auditors’ retirement benefits …
Accrued enterprise tax ………………………………………
Long-term accounts payable …………………………………
Accounts payable ………………………………………………
Valuation loss on investment in capital …………………
Excess employees’ bonuses accrued ………………………
Deficit brought forward ………………………………………
Other ……………………………………………………………
Total deferred tax assets ………………………………………
Valuation allowance ………………………………………………
Net deferred tax assets …………………………………………

12. Segment Information

The Companies are primarily engaged in the manufacture and sale ofpharmaceuticals in Japan and overseas.
(1) Business segment
The operations of the Companies are classified into three business segments, which
include ‘pharmaceuticals and related products’, ‘cable television broadcasting’ and ‘other’.
As more than 90% of the consolidated net sales and operating income for the year
ended February 28, 2001 were from the pharmaceuticals and related products segment,
the disclosure of business segment information has been omitted.
(2) Geographic area
As more than 90% of the consolidated net sales and operating income for the year
ended February 28, 2001 were made in Japan, the disclosure of segment information bygeographic area has been omitted.
(3) Overseas sales
As overseas sales for the year ended February 28, 2001 were not more than 10% of
the consolidated net sales, the disclosure of overseas sales information has been omitted.

2113. Stockholders' Equity

The Commercial Code of Japan provides that an amount equal to at least 10% of cash
dividends and other cash appropriations shall be set aside as a legal reserve until suchreserve equals 25% of the amount of common stock. This reserve is not available fordividends but may be used to reduce a deficit by resolution of the stockholders or may
be capitalized by resolution of the Board of Directors.
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 Commercial Code of Japan.

14. Common Stock(1) Retirement of common stock
In accordance with the resolution of the Board of Directors on February 24, 2000, theCompany purchased 605 thousand shares of par value common stock out of profits fora total amount of ¥974 million ($8,396 thousand) from the stock market and retired themby the time of the 2000 annual meeting of stockholders held on May 25, 2000.
(2) Exercise of warrants
As a result of exercise of the outstanding warrants, 127,419 additional shares ofcommon stock were issued during the year ended February 28, 2001.
(3) Stock split
In accordance with the resolution of the Board of Directors on May 25, 2000, theCompany made stock split as follows:
Effective date of stock split: August 21, 2000.
Split ratio: Split one share of par value common stock into two shares

As a result of the stock split, 47,523 thousand additional shares of common stock
were issued.

15. Contingent Liabilities
Contingent liabilities at February 28, 2001 were as follows:
Millions of yen………………
¥ 37

Notes receivable discounted
Guarantee of loans ofsubsidiaries and affiliates ………………
Debt assumption agreement (Note 9) ……

22

1,303
1,250

Thousands of
U.S. dollars$ 319
11,233
10,776

16. Subsequent Events(1) Appropriation of retained earnings
At the 2001 annual meeting of stockholders held on May 24, 2001, the appropriationof retained earnings for the year ended February 28, 2001 was duly approved as follows:

Cash dividends−¥7.00 ($0.06) per share ……………………
Bonuses to directors
and corporate auditors ……………………
Reserve for retirement of common stock …

Millions of yen

Thousands of
U.S. dollars¥ 666$ 5,741

61
3,000

526
25,862(2) Establishment of a new subsidiary
On April 25, 2001, the Company established GenoFunction, Inc., a wholly-owned
subsidiary, as follows:a) Capital: ¥1,200 million ($10,345 thousand)b) Issued common stock: 24,000 shares of common stockThis subsidiary primarily promotes comprehensive gene discovery using hybrid
ribozyme and viral vectors, as well as contract research on gene function analysis.

23

Report of Independent Certified Public Accountants
To the Stockholders and the Board of Directors of
HISAMITSU PHARMACEUTICAL CO., INC.
We have audited the accompanying consolidated balance sheet of HISAMITSU
PHARMACEUTICAL CO., INC. (a Japanese corporation) and subsidiaries as of February
28, 2001, and the related consolidated statements of income, stockholders’ equity and cash
flows for the year ended February 28, 2001, expressed in Japanese yen. Our audits weremade in accordance with generally accepted auditing standards in Japan and, accordingly,
included such tests of the accounting records and such other auditing procedures as we
considered necessary in the circumstances.
In our opinion, the consolidated financial statements referred to above present fairly
the consolidated financial position of HISAMITSU PHARMACEUTICAL CO., INC. andsubsidiaries as of February 28, 2001, and the consolidated results of their operations andtheir cash flows for the year ended February 28, 2001, in conformity with accounting
principles generally accepted in Japan.
Also, in our opinion, the U.S. dollar amounts in the accompanying consolidated
financial statements have been translated from Japanese yen on the basis set forth inNote 1.
Fukuoka, JapanMay 25, 2001

(Member Firm of Andersen Worldwide SC)

Statement on Accounting Principles and Auditing Standards
This statement is to remind users that accounting principles and auditing standards
and their application in practice may vary among nations and therefore could affect,
possibly materially, the reported financial position and results of operations. The
accompanying financial statements are prepared based on accounting principles generally
accepted in Japan, and the auditing standards and their application in practice are thosegenerally accepted in Japan. Accordingly, the accompanying consolidated financial
statements and the auditors’ report presented above are for users familiar with Japanese
accounting principles, auditing standards and their application in practice.

24