Hisamitsu Pharmaceutical Co., Inc.

FINANCIAL REPORTFiscal 2002

Contents

Management Policies …………………………………… 1
Review of Operations …………………………………… 3
Financial Review ………………………………………… 5
Consolidated Balance Sheets
Sheets ………………………… 8
Consolidated Statements
Statements of Income ………………… 10
Consolidated Statements
Statements of Share
Shareholders'
hareholders' Equity … 11
Consolidated Statements
Statements of Cash Flows …………… 12
Notes to Consolidated Financial Statements ……… 13
Report of Independent Certified Public Accountants
Accountants 27

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, adhering
to its motto, “Customers First”, has adopted the management philosophy, “Improving Quality ofLife (QOL) for People in the World” through creation, manufacture and sale of pharmaceuticalproducts derived from TTS studies.
Under this philosophy, the Company is actively developing corporate activities to satisfy
customers through providing customers with pharmaceutical products meeting their needs bothat home and abroad and finally making efforts to enhance its market capitalization.

(2) Fundamental Profit
Profitit-sharing Policy

The Company, recognizing profit-sharing to shareholders as the most important task, maintains
and continues rewarding shareholders with stable dividends and, additionally, it flexibly takes
such financial measures as acquiring treasury stock, which is considered as effective
profit-sharing to shareholders.
The Company applies its internal reserves principally for future business development,that is, promoting research and development (R&D), strengthening sales, expanding production
facilities and developing overseas business activities.

(3) MidMid-term Strategies

In line with the fundamental management policies, the Company aims at becoming apharmaceutical company oriented toward its own R&D in its own way, aggressively trying tocreate new transdermal pharmaceuticals both for topical use and systemic use meeting properly
the needs of medical institutions through TTS studies.
The Company has settled the mid-term targets to achieve “net income of ¥10,000 million($74,627 thousand) and return on equity (ROE) of 15% by the fiscal 2005 ending February 28,
2005”. Thanks to our persistent efforts, the Company has just attained the ROE target three
years earlier than expected and it will make further efforts to achieve the net income target aswell as to keep the ROE target of more than 15%. Additionally the Company has set a new
mid-term target to achieve by fiscal 2006 ending February 28, 2006, expecting further growth.
In order to build up its future assets, the Company also aims at increasing cash flows fromoperating activities, promoting R & D of new transdermal pharmaceuticals for topical use andsystemic use as well as establishing worldwide the Company’s brand including trade marks,
designs, manufacturing technology and quality control system.

(4) Measures for Enhancing Corporate Governance

The Company is striving to establish and maintain the management system meeting global
standards in order to hold lively discussions in the board of directors’ meeting as well as topromote quicker decision-making there, and it is striving to further strengthen its corporate
governance system.

1

Intending to raise the degree of managerial transparency, the Company is also striving toactively open its information to the public as well as maintaining smooth communications withshareholders and investors through aggressive investor relation (IR) activities.

(5) Concept and Policy of Reducing Investment Unit

The Company recognizes that reducing the investment unit may be necessary to expand theclass of general investors as well as promoting its stock circulation. However, at present, theCompany has not yet determined a concrete plan and time for reducing the investment unit.

2

Review of Operations(1) Overview of Fiscal 2002 ended Febru
Februaryary 28, 2002

The Japanese economic depression has continued throughout fiscal 2002, and this has shown nosigns of recovery due primarily to sluggish domestic demand coming from low personal
consumption and decreases in capital expenditures by industry.
The Japanese Government has been strengthening the policy of restraining healthcare costs
year by year and has been trying to implement radical reforms in the National Health
Insurance (NHI) scheme, intending to increase the portion of health care costs shared bypatients.
Despite these difficult operating conditions, 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 (MR)developed pharmaceutical information activities primarily focusing on topical analgesic andanti-inflammatory pharmaceuticals to properly meet the needs of medical institutions. The
Company made improvements both to transdermal patch, MOHRUS TAPE, and transdermal
gel patch, MOHRUS, to make them easy to use, and strove to introduce them into as many
medical institutions as possible. Additionally, the Company aggressively developed enlightening
activities for ESTRANA, an estradiol-contained patch for treating menopause, emphasizing theefficacy of a hormone replacement therapy (HRT).
Regarding over-the-counter (OTC) products, the Company concentrated on topical analgesic
and anti-inflammatory pharmaceuticals to develop sales activities through emphasizing theadvantage of “Enhanced penetration into the skin by occlusion” despite the stagnant market
reflecting flat personal consumption. In order to meet the diversifying customers’ needs, theCompany aggressively launched onto the OTC market six new products, which included ananalgesic and anti-inflammatory rolled patch SALONPAS ROLL, an eye drop GANRYOALFIRST, three masks for facial packs LIFECELLA WHITENING MASK, LIFECELLATENNEN-DORO MASK and LIFECELLA KUBI-URUOI MASK, and a first-aid patch forcooling fever, DECO-DECO COOL S.
The Company primarily oriented its R & D activities toward creating new transdermal
preparations for topical use and systemic use, making steady progress on a long series offundamental and applied studies. On the other hand, the Company tried to promote clinical
trials in Europe. For this purpose, the Company has been constructing a new plant for
preparing products for clinical trials in the R & D center.
In the production division, the Company has recently constructed a new manufacturing
plant in the Tosu area to increase production efficiency as well as product quality.
Additionally, the Company endeavored to elevate the efficiency of its overall management
as well as to improve business results.

3

(Cable television broadcasting and other segment)
The Companies continued to aggressively develop the cable television broadcasting business(broadcasting area: cities of Kurume, Ohkawa and Yanagawa in Fukuoka prefecture and Saga
city in Saga prefecture), as well as other businesses including production and sale of laboratory
animals to expand the market. Moreover, the Companies strove to improve business results,
promoting the streamlining of management.
As a result of the above operating activities in each business segment, the consolidated net
sales for the Companies totaled ¥69,538 million ($518,940 thousand), an increase of 6.6% overthe previous year. Regarding income, the consolidated operating income amounted to ¥15,921
million ($118,813 thousand), an increase of 13.8%, and net income amounted to ¥8,607 million($64,231 thousand), a 26.8% increase over the previous year. All these figures were record highs
for the Companies.

(2) Outlook for Fiscal 2003 ending February 28, 2003

Effective April 1, 2002, the Government executed a cut in NHI pharmaceutical reimbursement
prices, an average of 6.3% across the industry. In addition to this reduction, an increased shareof healthcare costs paid by patients will possibly be implemented from the coming April. It is,therefore, anticipated that the domestic ethical pharmaceutical market will drastically shrink,depending on the trend of further reforms in the NHI pharmaceutical reimbursement pricesystem. Despite these unprecedented serious circumstances, the Company will aggressively
continue providing pharmaceutical information to medical institutions and challenge to create
new transdermal preparations to exactly meet medical needs.
Although the domestic OTC market has long been in a slump, the Company will actively try
to increase sales of OTC products as well as develop new OTC products properly meeting theneeds and concerns of its customers.
Regarding overseas sales development, the Company is trying to develop clinical trials of theCompany’s products, especially MORUS TAPE, in the Europe and the U. S. as well as establish
worldwide the Company’s brand including trade marks, manufacturing technology and quality
control of products.
Additionally, the Companies are intending to further accelerate sales activities in the cable
television broadcasting segment and other businesses to achieve better results.
The Companies, being fully aware of their responsibility for corporate citizenship, will
devote themselves to improve their business performance through the strengthening of theirsales, increasing productivity, speedier R & D activities, streamlining of management andbuilding up of their corporate constitution.
Referring to the consolidated results of operations for the next year ending February 28,
2003, the Companies are expecting that, in the absence of unforeseen circumstances, net sales
will show approximately the same figure as the previous year but net income will show anincrease of about 10% over the previous year.
Concerning cash dividends for the next year ending February 28, 2003, the Company has
declared to reward shareholders with a dividend of ¥10.00 per share of common stock, whichcorresponds to an increase of ¥1.00 per share over the previous year.

4Financial
Financial Review

The consolidated financial statements included the accounts of the Company and its twelve
significant subsidiaries (the “Companies”), and investments in two affiliated companies were
accounted for using the equity method.

(1) Results of Operations
Operations

Net Sales(Pharmaceuticals and related products segment)
With regard to ethical pharmaceuticals, the Company actively promoted pharmaceuticalinformation activities meeting the diversifying healthcare needs of medical institutions,centering on its core products, such as analgesic and anti-inflammatory products for externaluse. Of these products, the Company aggressively disseminated and gathered productinformation about both ketoprofen patch MOHRUS TAPE and ketoprofen gel patch MOHRUS,
in order to enable them to steadily introduce them into medical institutions.
With respect to over-the-counter (OTC) products, although the OTC market has been very
stagnant during fiscal 2002, the Company strove to principally promote the sale of analgesic
and anti-inflammatory pharmaceuticals for external use. During the year, in order to keep up
with customers’ diversifying needs, the Company successfully launched six new products
consisting of an analgesic and anti-inflammatory rolled patch SALONPAS ROLL, an eye dropGANRYO ALFIRST, three masks for facial packs LIFECELLA WHITENING MASK,
LIFECELLA TENNEN-DORO MASK, LIFECELLA KUBI-URUOI MASK and a first-aid padfor cooling fever DECO-DECO COOL S.
In the pharmaceuticals and related products segment, net sales recorded ¥67,224 million($501,672 thousand), a 6.4% increase over the previous year.
(Cable Television Broadcasting and Other Segment)
The Companies continued to aggressively develop the cable television broadcasting business(broadcasting area: cities of Kurume, Ohkawa and Yanagawa in Fukuoka prefecture and Saga
city in Saga prefecture), as well as other businesses including production and sale of laboratory
animals to expand the market. Additionally, the Companies strove to improve business results,
promoting the streamlining of management.
In the cable television broadcasting and other segment, net sales were ¥2,314 million($17,268 thousand), a 12.9% increase over the previous year.
As a result, the consolidated net sales for the Companies totaled ¥69,538 million ($518,940
thousand), an increase of 6.6% over the previous year. Briefly speaking, this increase reflects
the significantly increased sales of both ketoprofen patches MOHRUS TAPE and ketoprofen
gel patches MOHRUS.
Costs and Expenses
Cost of sales amounted to ¥20,710 million ($154,552 thousand), a 3.2% increase over theprevious year, rendering the cost of sales as a percentage of net sales at 29.8%. Selling,
general and administrative expenses totaled ¥26,635 million ($198,769 thousand), a 3.5%
increase and R & D expenses also increased 15.4% to ¥6,272 million ($46,806 thousand)with the ratio of R & D expenses to net sales at 9.0%.

5Operating income was ¥15,921 million ($118,813 thousand), a 13.8% increase over theprevious year, by deducting costs and expenses from net sales, yielding the ratio of
operating income to net sales of 22.9%.
Other expenses, net of other income, totaled ¥258 million ($1,925 thousand), an 87.2%
decrease from the previous year, primarily reflecting prior service cost under thecontributory pension plan in the previous year due to the change in the method of
accounting for severance and retirement benefits.
Net Income
Income before income taxes was ¥15,663 million ($116,888 thousand), a 30.8% increaseover the previous year, and net income was ¥8,607 million ($64,231 thousand), a 26.8%
increase, by deducting current income taxes, deferred income taxes and minority interestin net income of consolidated subsidiaries.
The effective tax rate was 44.6%. Net income per share of common stock was ¥91.99($0.69), a 26.3% increase over the previous year and the Company paid its
shareholders cash dividends per share of ¥9.00 ($0.07).

(2) Financial Position

At February 28, 2002, total assets amounted to ¥82,893 million ($618,604 thousand), a
2.7% increase over the previous year. Total current assets amounted to ¥37,424 million($279,283 thousand), a 1.6% decrease from the previous year. This principally reflected
decreases in notes and accounts receivable, deferred tax assets and short-term
investments despite a significant increase in cash and time deposits.
Property, plant and equipment, less accumulated depreciation, were ¥33,962 million($253,448 thousand), which was approximately the same as the previous year. Intangible
assets increased to ¥625 million ($4,664 thousand).
Investments and other non-current assets totaled ¥10,882 million ($81,209 thousand),a 28.9% increase, principally resulting from markedly increased investment securities.
Total current liabilities amounted to ¥20,048 million ($149,612 thousand), a 19.2%
decrease from the previous year. This principally came from marked decreases in both
short-term bank loans and income taxes payable. Working capital increased 31.5% to¥17,376 million ($129,671 thousand), and the current ratio increased to 186.7%, compared
to previous year of 153.2%.
Total long-term liabilities were ¥6,890 million ($51,418 thousand), a 12.0% increaseover the previous year, primarily resulting from deferred tax liabilities relating to land
revaluation despite significantly decreased long-term debt due after one year.
Total shareholders’ equity increased 12.8% to ¥55,474 million ($413,985 thousand). This
increase primarily came from retained earnings and gain on land revaluation despite
increased treasury stock.

6

(3) Cash Flows

Operating activities generated net cash of ¥13,078 million ($97,597 thousand), a 6.5%
increase over the previous year. This principally resulted from markedly increased income
before income taxes with an increase in net sales.
Investing activities used net cash of ¥6,589 million ($49,172 thousand), a 28.4%
increase over the previous year, primarily reflecting payments for purchases of property,
plant and equipment of ¥4,481 million ($33,441 thousand) and payment for purchase forinvestment securities of ¥3,168 million ($23,642 thousand). Major capital investments
were made for the construction of a new manufacturing plant in the Tosu area as well as
a new pilot plant to prepare products for clinical trials in the R & D center.
Financing activities consumed net cash of ¥5,527 million ($41,246 thousand), a 266.8%
increase over the previous year. This is primarily due to repayments of short-term bankloans and payment for purchase of treasury stock.
As a result, cash and cash equivalents at end of year totaled ¥13,560 million($101,194 thousand), an increase of ¥1,034 million ($7,716), compared to cash and cash
equivalents at beginning of year, principally resulting from increased cash flows
provided by operating activities with an increase in net sales of the Company.

7

Consolidated Balance Sheets
SheetsHISAMITSU PHARMACEUTICAL CO., INC.
February 28, 2002 and 2001

ASSET
Current assets:
assets:Cash and time deposits (Note 3) ……………
Notes and accounts receivable:
Trade notes (Note 15) ………………………
Trade accounts ………………………………
Short-term investments (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:
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 nonnon-current assets:
Investment securities (Notes 4 and 9) ……
Investment in non-consolidated subsidiaries
and affiliated companies (Note 4) ………
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 ………

Millions of yen
2002
2001
¥ 12,882¥ 11,246$ 96,134

3,106
14,219
877
4,574
308
1,489
(31)
37,424

4,991
13,547
1,345
4,896
972
1,120
(88)
38,02923,179106,112
6,545
34,134
2,298
11,112(231)
279,283

11,39822,002
15,7199,657
3,816
62,592(28,630)
33,962

12,217
23,384
15,8919,621
1,423
62,536(28,573)
33,96385,060164,194
117,306
72,06728,478467,105(213,657)
253,448

625

273

4,664

6,384

3,694

47,642

712
2,103

706
1,586

5,313
15,694

―

641

―

1,887
(204)
10,882¥ 82,893

1,818
(4)
8,441
¥ 80,706

14,082(1,522)
81,209$ 618,604

See accompanying notes.

8

Thousands of
U.S. dollars(Note 1)
2002

Millions of yen
2002
2001

Thousands of
U.S. dollars(Note 1)
2002

¥ 3,122637$ 2,590
9,157

8,936
296
7,514
3,404
194
467
246
24,81662,3583,776
53,500
9,157
1,470
3,589
4,015
149,612

1,353

2,341

10,097

LIABILITIES AND SHARESHAREHOLDERS’
HAREHOLDERS’ EQUITYCurrent liabilities:
liabilities:
Short-term bank loans (Note 9) ……………
¥ 347
Long-term debt due within one year (Note 9)
1,227
Notes and accounts payable:
Trade …………………………………………
8,356
Construction …………………………………
506
Other ……………………………………………
7,169
Income taxes payable (Note 11) ……………
1,227
Reserve for sales returns ……………………
197
Reserve for employees’ bonuses ……………
481
Other current liabilities ………………………
538
Total current liabilities …………………
20,04820,048LongLong-term liabilities:
liabilities:
Long-term debt due after one year (Note 9)
Deferred tax liabilities relating toland revaluation (Note 6) …………………
Severance and retirement benefits (Note 10)
Retirement benefits………………
Directors’ and corporate auditors’
retirement benefits …………………………
Other non-current liabilities …………………
Total longlong-term liabilities ………………

1,955
2,711
―

―
―
2,359

14,59020,231
―

804
67
6,890

768
685
6,153

6,000
500
51,418

Minority interests …………………………………

481

555

3,589

8,474
―
8,242
2,729
38,976(43)(361)(1,683)(860)
55,474¥82,893

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

63,239―61,507
20,366
290,866(321)(2,694)(12,560)(6,418)413,985$618,604

Contingent liabilities (Note 15)
Shareholders’hareholders’ equity (Notes 13 and 14):
Common stock:
Authorized−380,000,000 shares
Issued−95,164,895 shares in 2002 ………
−95,108,490 shares in 2001 ………
Additional paid-in capital ……………………
Gain (loss) on land revaluation (Note 6) …
Retained earnings ………………………………
Unrealized holding losses on securities ……
Translation adjustments ………………………
Treasury stock, at cost ………………………
Common stock purchased by a subsidiary
Total share
shareholders’hareholders’ equity ………………

9

Consolidated
onsolidated Statements of Income
HISAMITSU PHARMACEUTICAL CO., INC.
Years ended February 28, 2002 and 2001

Net sales ………………………………………………
Costs and expenses:
expenses:
Cost of sales ………………………………………
Selling, general and administrative …………
Research and development ………………………
Operating income ……………………………………
Other income
income (expense):(expense):
Interest and dividend income …………………
Interest expense ……………………………………
Equity in earnings of affiliated companies …
Gain on sales of property, plant and equipment
Gain on sales of investment securities ………
Reversal of allowance for doubtful accounts…
Transition obligation for employees’
retirement benefits ……………………………
Governmental subsidy ……………………………
Loss on sales and disposals of property,
plant and equipment …………………………
Write-down of investment securities …………
Write-down of golf-club memberships …………
Prior service cost under the contributory
pension plan ……………………………………
Provision for allowance for doubtful accounts
Other−net …………………………………………
Income before income taxes ………………………
Income taxes (Note 11):
Current ………………………………………………
Deferred ……………………………………………
Minority interests in net income of
consolidated subsidiaries ………………………
Net income ……………………………………………

Millions of yen
2001
2002
¥ 69,538¥ 65,240
20,71026,635
6,272
53,617
15,921

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

154,552
198,769
46,806400,127
118,813

149
(77)
47
267
―
60

103

1,112

(173)
50
2
8
―

(575)
351
1,993
―
448

318
38

―
159

2,373
284

(502)
(434)
(464)

(202)
(274)
(168)

(3,746)(3,239)(3,463)

―
(156)
496
(258)
15,663(2,032)―515(2,012)
11,979―(1,164)
3,701(1,925)
116,888

4,216
2,774

5,771
(718)

31,46320,701

66

138¥ 8,607¥ 6,788

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

2002

2001

¥ 91.99¥ 72.82

91.99
9.00

72.70
7.00

See accompanying notes.

10

Thousands of
U.S. dollars(Note 1)
2002
$ 518,940

493
64,231$

U.S. dollars(Note 1)
2002
$

0.69
0.69
0.07

Consolidated Statements of Share
Shareholders’hareholders’ Equity

Hisamitsu Pharmaceutical Co., Inc.
Years ended February 28, 2002 and 2001

Thousands of
U.S. dollars

Common stock:
Balance at beginning of year ………………………
Shares issued upon exercise of warrants (Note 14)
Balance at end of year ………………………………

Million of yen
2002
2001

(Note 1)
2002

¥ 8,460
14¥ 8,474¥ 8,41446¥ 8,460$ 63,134105$ 63,239¥ 8,22715¥ 8,242¥ 8,17552¥ 8,227$ 61,395
112$ 61,507¥ (894)
3,623¥ 2,729¥―(894)¥ (894)$ (6,671)
27,037$ 20,366¥ 34,719
8,607¥ 27,662
6,788$ 259,097
64,231

―
(666)
(61)
―
(3,623)¥ 38,976

1,783
(481)
(59)
(974)
―
¥ 34,719―(4,970)(455)―(27,037)$ 290,866¥¥$

Additional paidpaid-in capital:
Balance at beginning of year ………………………
Shares issued upon exercise of warrants (Note 14)
Balance at end of year ………………………………
Gain (loss(loss)oss) on land revaluation:
Balance at beginning of year ………………………
Land revaluation, net of tax (Note 6) ……………
Balance at end of year
year ………………………………

Retained earnings:
Balance at beginning of year ………………………
Net income ………………………………………………
Cumulative effect of adopting
tax effect accounting …………………………………
Cash dividends paid ……………………………………
Bonuses to directors and corporate auditors ……
Retirement of common stock (Note 14) ……………
Land revaluation adjustment (Note 6) ……………
Balance at end of year ………………………………
Unrealized holding losses on securities:
Balance at beginning of year ………………………
Valuation losses …………………………………………
Balance at end of year ………………………………
Translation adjustments:
Balance at beginning of year ………………………
Adjustments from translation offoreign currency financial statements ……………
Balance at end of year ………………………………

¥

―
(43)
(43)
(43)

¥

―
―
―

$

―
(321)
(321)

¥ (468)¥ (478)$ (3,493)

107¥ (361)10¥ (468)799$ (2,694)¥(2)(1,681)¥(1,683)

¥
¥

(1)
(1)
(2)

$
(15)
(12,545)$(12,560)¥ (860)―¥ (860)¥ (736)(124)¥ (860)$ (6,418)―$ (6,418)

2002
Number of shares of common stock:
Balance at beginning of year ……………………… 95,108,490
Retirement of common stock (Note 14) ……………
―
Shares issued upon exercise of warrants (Note 14)
56,405
Stock split (Note 14) …………………………………
―Balance at end of year ……………………………… 95,164,895

2001

Treasury stock:
Balance at beginning of year ………………………
Treasury stock purchased ……………………………
Balance at end of year ………………………………

Common stock purchased by a subsidiary:
subsidiary:
Balance at beginning of year ………………………
Common stock purchased by a subsidiary ………
Balance at end of year ………………………………

See accompanying notes.

11

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

Consolidated Statements of Cash FlowsHISAMITSU PHARMACEUTICAL CO., INC.
Years ended February 28, 2002 and 2001

Millions of yen
2001
2002

Thousands of
U.S. dollars(Note 1)
2002

¥11,979$116,888

2,851

20,552

―
53
(103)
173
(50)
274
168

20,231(17,605)(1,112)
575
(351)
3,239
3,463

202
471
(727)
(337)
1,926
(59)
630
17,451102(172)(5,101)
12,280

3,746
9,396
2,672
(2,724)(4,172)(455)(9,776)
144,567
1,351(597)(47,724)
97,597(3,597)81(186)(3,300)3,359(1,350)(137)(5,130)(33,441)
13,134(3,940)(25,373)
24,627(23,642)(537)(49,172)2,586―(2,607)98(1,162)
183
(481)
(124)
(1,507)(19,776)
1,291(5,590)239(12,895)
455(4,970)―(41,246)

42
5,685
6,841
¥ 12,526

537
7,716
93,478$ 101,194

Cash flows from operating activities:
activities
Income before income taxes ……………………………………… ¥15,663
Adjustments to reconcile net income before taxes
to net cash provided by operating activities:
Depreciation and amortization …………………………………
2,754
Increase in allowance for severance andretirement benefits ……………………………………………
2,711
Increase (decrease) in retirement benefits ………………… (2,359)
Interest and dividend income …………………………………
(149)
Interest expense ……………………………………………………
77
Equity in earnings of affiliated companies …………………
(47)
Write-down of investment securities …………………………
434
Write-down of golf-club memberships …………………………
464
Loss on sales and disposal of property,
plant and equipment …………………………………………
502
Decrease in notes and accounts receivable …………………
1,259(Increase) decrease in inventories ………………………………
358
Increase in other current assets ………………………………
(365)
Increase (decrease) in notes and accounts payable ………
(559)
Bonuses to directors and corporate auditors ………………
(61)
Other ………………………………………………………………… (1,310)
Subtotal ……………………………………………………………
19,372
19,372
Interest and dividend income received ………………………
181
Interest paid ………………………………………………………
(80)
Income taxes paid……………………………………………… (6,395)
Net cash provided by operating activities
13,078activities ……………
Cash flows from investing activities:
activities
Payments for purchases of property, plant and equipment(4,481)
Proceeds from sales of property, plant and equipment ……
1,760
Payments for purchases of intangible assets …………………
(528)
Payments for purchases of marketable securities …………… (3,400)
Proceeds from sales of marketable securities …………………
3,300
Payments for purchases of investment securities …………… (3,168)
Other ……………………………………………………………………
(72)
Net cash used in investing activities ………………… (6,589)
Cash flows from financing activities:
activities
Net increase (decrease) in bank loans ………………………… (2,650)(2,650)
Proceeds from long-term debt ……………………………………
173
Repayment of long-term debt ……………………………………
(749)
Proceeds from exercise of warrants ……………………………
32
Payment for purchase of treasury stock………………………… (1,728)(1,728)Proceeds from sales of treasury stock …………………………
61
Cash dividends paid ………………………………………………
(666)
Other ……………………………………………………………………
―
Net cash used in financing activities ………………… (5,527)
Effect of exchange rate changes on cash and cash equivalents
72
ncrease in cash and cash equivalents ………………………
1,034
Net iincrease
Cash and cash equivalents at beginning of year ………………
12,526
Cash and cash equiv
equivalents
alents at end of year (Note 3) …………… ¥ 13,560

See accompanying notes.
12Notes to Consolidated Financial Statements
HISAMITSU PHARMACEUTICAL CO., INC.
Years ended February 28, 2002 and 2001

1. Basis of Consolidated Financial Statements
Statements

Hisamitsu Pharmaceutical Co., Inc. (the “Company”) and its consolidated domestic
subsidiaries maintain their official accounting records in Japanese yen and in accordance withthe provisions set forth in the Japanese Commercial Code (the “Code”) and accounting
principles and practices generally accepted in Japan (“Japanese GAAP”). The accounts ofoverseas subsidiaries are based on their accounting records maintained in conformity withgenerally accepted accounting principles and practices prevailing in the respective countries of
domicile. Certain accounting principles and practices generally accepted in Japan are different
from International Accounting Standards and standards in other countries in certain respects
as to application and disclosure requirements. Accordingly, the accompanying financial
statements are intended for use by those who are informed about Japanese accounting
principles and practices.
The accompanying financial statements have been restructured and translated into English(with some expanded descriptions and the inclusion of statements of shareholders’ equity) fromthe consolidated financial statements of 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 Securities and Exchange Law. Some supplementary information included in thestatutory Japanese language consolidated financial statements, but not required for fairpresentation is not presented in the accompanying financial statements.
The translation of the Japanese yen amounts into U.S. dollars are included solely for theconvenience of readers, using the prevailing exchange rate at February 28, 2002, which was￥134.00 to U.S. $1.00. 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 any other rate of exchange.

2. Summary of Significant Accounting Policies

Consolidation
The consolidated financial statements include the accounts of the Company and its
significant subsidiaries (the “Companies”). The accounts of twelve and ten subsidiaries havebeen consolidated in the years ended February 28, 2002 and 2001, respectively. All significant
intercompany balances, transactions and profits have been eliminated.
The consolidated financial statements for the years ended February 28, 2002 and 2001 wereprepared in accordance with the revised Accounting Principles for Consolidated Financial
Statements (the New Accounting Principles), which are effective from years ending after March
31, 2000. Under the New Accounting Principles, companies are required to consolidate all
significant investees which are controlled through substantial ownership of majority voting
rights or the existence of certain conditions.
The foreign subsidiaries are consolidated based on their financial statements for their fiscal
year ended December 31, because the difference between the closing date of the subsidiaries
and that of the Company does not exceed three months..

13

In the elimination of investments in subsidiaries, the assets and liabilities of thesubsidiaries, including the portion attributable to minority shareholders, are evaluated using
the fair value at the time the Company acquired control of the respective subsidiaries.
Equity Method
Investments in two affiliated companies are accounted for using the equity method. However,unconsolidated subsidiaries are not accounted for using the equity method, since the Company’s
equity in earnings in the aggregate is not material in relation to the consolidated net income
and retained earnings. The consolidation difference between the 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
In preparing the consolidated statements of cash flows, cash on hand, readily-available bankdeposits and short-term highly liquid investments with maturities of not exceeding threemonths at the time of purchase are considered to be cash and cash equivalents.
Shorthort-term Investments
Investments and Investment Securities
Prior to March 1, 2001, marketable equity securities included in both current assets andinvestments were stated at cost. Cost was determined by the moving average method.
Other securities were also stated at cost. If a decline in value below cost of an individual
security was judged to be material and other than temporary, the carrying value waswritten down.
Effective March 1, 2001, the Companies adopted the new Japanese accounting
standard for financial instruments (“Opinion Concerning Establishment of AccountingStandard for Financial Instruments”, issued by the Business Accounting Deliberation
Council on January 22, 1999).
Upon applying the new accounting standard, all companies are required to examine
the intent of holding each security and classify those securities as (a) securities held for
trading purposes (hereinafter, “trading securities”), (b) debt securities intended to be held
to maturity (hereinafter, “held-to-maturity debt securities”), (c) equity securities issued bysubsidiaries and affiliated companies, and (d) all other securities that are not classified inany of the above categories (hereinafter, “available-for-sale securities”).
Trading securities are stated at fair market value. Gains and losses realized on
disposal and unrealized gains and losses from market value fluctuations are recognized asgains and losses in the period of the change.
Held-to-maturity debt securities are stated at amortized cost. Equity securities issued
by subsidiaries and affiliated companies which are not consolidated or accounted for using
the equity method are stated at moving average cost.
Available-for-sale securities with available fair market values are stated at fairmarket value at the year-end. Unrealized gains and unrealized losses on these securities
are reported, net of applicable income taxes, as a separate component of shareholders’equity. Realized gains and losses on sale of such securities are computed using moving
average cost.
Debt securities with no available fair value are stated at amortized cost, net of theamount considered not collectible. Other securities with no fair market value are statedprincipally at moving average cost.

14

If the market value of held-to-maturity debt securities, equity securities issued byunconsolidated subsidiaries and affiliated companies, and available-for-sale securities
declines significantly, such securities are stated at fair market value and the difference
between fair market value and the carrying amount is recognized as loss in the period of
the decline. If the fair market value of equity securities issued by unconsolidated
subsidiaries and affiliated companies not on the equity method is not readily available,
such securities should be written down to net asset value with a corresponding charge in
the income statement in the event net asset value declines significantly. In these cases,
such fair market value or the net asset value will be the carrying amount of the
securities at the beginning of the next year.
Based on the examination of the intent of holding each security upon application of
the new accounting standard at March 1, 2001, trading securities as well as
held-to-maturity debt securities and available-for-sale securities maturing within one year
from the balance sheet date are included in current assets, and other securities areincluded in investments and other non-current assets. As a result, at February 28, 2002
investment securities decreased by ¥73 million ($545 thousand) compared with what
would have been reported under the previous accounting policy.
As a result of adopting the new accounting standard for financial instruments,
including the effects on securities, the allowance for doubtful accounts, discounted tradenotes and the revaluation of golf-club memberships, income before income taxes decreasedby ¥555 million ($4,142 thousand).
Allowance for Doubtful Accounts
The allowance for doubtful accounts is provided in amounts sufficient to cover possible
losses on collection. In prior years it was determined by adding individually estimateduncollectible amounts to an amount calculated by formula as permitted by the
Corporation Tax Law of Japan with respect to the remaining receivables.
Effective for the year ended February 28, 2002, the Companies adopted a new
accounting policy for allowance for doubtful accounts. The allowance for doubtful
accounts is provided in amounts sufficient to cover possible losses on collection. It isdetermined by adding individually estimated uncollectible amounts to an amountcalculated based on the percentage of the Companies’ past doubtful debt loss against thebalance of total 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 by formulaas permitted by the Corporation Tax Law of Japan to cover possible losses on sales
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, 2002 and 2001.
Depreciation is provided over estimated useful lives as permitted by the Corporation Taxof Japan.

15

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 thestraight line method. Amortization is provided over estimated useful lives as permitted by
the Corporation Tax of Japan, except that the amortization of internally used software isdetermined using the straight line method over the estimated useful life of five years.
Income Taxes
The Companies provided income taxes at the amounts currently payable for the year ended
February 28, 2000. Effective March 1, 2000, the Companies adopted the New AccountingStandard, which recognizes tax effects of temporary differences between the carrying amountsof assets and liabilities for tax and financial reporting. Under the New Accounting Standard,
the provision for income taxes is computed based on the pre-tax income included in thestatements of income.
The assets and liability approach is used to recognize deferred tax assets and liabilities forthe expected future tax consequences of temporary differences between the carrying amounts ofassets 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, 2001 is reflected as an adjustment to the retained earnings brought
forward from the previous year.
Reserve for Employees’
Employees’ Bonuses
The Companies provided the reserve for employees’ bonuses in the portion of estimatedfuture payments applicable to the current year.
Severance and Retirement Benefits
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. Prior to March 1, 2001 theliability for lump-sum payments was stated at the amount which would be required if alleligible 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. Prior to March
1, 2001 the portion of the liability for the unfunded lump-sum benefit plan, which was nolonger required due to the introduction of this plan, was reversed at the same rate asamortization of prior service 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 thosewith 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.

16

Prior to March 1, 2001 both prior service costs for 1996 pension plan and 1966
pension plan were expensed when incurred.
Effective March 1, 2001, the Companies adopted the new accounting standard,“Opinion on Setting Accounting Standard for Employees‘ Severance and Pension Benefits”,
issued by the Business Accounting Deliberation Council on June 16, 1998 (“NewAccounting Standard”).
Under the New Accounting Standard, the liabilities and expenses for severance andretirement benefits are determined based on the amounts actuarially calculated using
certain assumptions.
The Companies provided for employees’ severance and retirement benefits at February
28, 2002 based on the estimated amounts of projected benefit obligation and the fairvalue of the plan assets at that date.
The excess of the total of the fair value of pension assets as of March 1, 2001 andthe liabilities for severance and retirement benefits recorded as of March 1, 2001 overthe projected benefit obligation (the “net transition gain”) amounted to ¥318 million($2,373 thousand). All of the net transition gain was recognized as other income in theyear ended February 28, 2002. Prior service costs are amortized in equal amounts
principally over two years commencing from the date of change. Actuarial gains andlosses are recognized as income or expense in equal amounts principally over five years
commencing from the succeeding period.
As a result of the adoption of the New Accounting Standard, in the year ended
February 28, 2002, severance and retirement benefit expenses decreased by ¥20 million($149 thousand). Since the net transition gain of ¥318 million ($2,373 thousand) was
included in other income, income before income taxes increased by ¥338 million ($2,522
thousand) compared with what would have been recorded under the previous accounting
standard.
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.
Finance Leases
Finance leases which do not transfer ownership are accounted for in the same manner as
operating leases in accordance with Japanese GAAP.
Foreign Currency Translation
Short-term receivables and payables denominated in foreign currencies are translated into
Japanese yen at the exchange rates at the balance sheet date. Prior to March 1, 2001, long-term
receivables and payables denominated in foreign currencies were translated at historicalexchange rates.
Effective March 1, 2001, the Companies adopted the revised accounting standard for foreign
currency translation, “Opinion Concerning Revision of Accounting Standard for Foreign
Currency Translation” issued by the Business Accounting Deliberation Council on October 22,
1999 (the “New Accounting Standard”). Under the New Accounting Standard, long-term
receivables and payables denominated in foreign currencies are also translated into Japanese
yen at the year-end rate. The effect on the consolidated income statement of adopting the
New Accounting Standard was immaterial.

17

Financial statements of consolidated overseas subsidiaries are translated into Japanese yenat the year-end rate, except that shareholders’ equity accounts are translated at historical rates
and income statement items resulting from transactions with the Company at the rates used by
the Company.
Net Income per Share of Common Stock
Computations of net income per share of common stock assuming no dilution are basedon 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 dilutive warrants andstock split at the beginning of the year.

3. Cash and Cash Equivalents

Cash and cash equivalents at February 28, 2002 and 2001 for the consolidated statementof cash flows consisted of the following:Thousands ofMillions of yen
U.S. dollars
2002
2001
2002
Cash and time deposits ……………………… ¥ 12,882¥ 11,246$ 96,134
Less: Time deposits with maturities
exceeding three months ……………
(99)
(65)
(739)
Securities excluding free financial fundand money management fund ……
(100)
―
(746)
Add: Short-term highly liquid investmentswith maturities of not exceeding
three months …………………………
877
1,345
6,545
Cash and cash equivalents ………………… ¥ 13,560¥12,526$101,194

4．ShortShort-term Investments and Investment Securities
A. The following tables summarize acquisition costs, book values and fair values of
securities with available fair values as of February 28, 2002.
(a) Held-to-maturity debt securities
Securities with available fair values exceeding book values:
Millions of yen
Book value Fair value Difference
Government bonds ……………………………
¥ 751
¥ 751
¥
―

Government bonds ……………………………

18

Thousands of U.S. dollars
Book value Fair value Difference$ 5,604$ 5,604$―

Securities with available fair values not exceeding book values:
Millions of yen
Book value Fair value Difference
Government bonds ……………………………
¥ 1,800¥ 1,799¥(1)

Government bonds ……………………………

Thousands of U.S. dollars
Book value Fair value Difference$ 13,433$ 13,425$(8)(b) Available-for-sale securities
Securities with book values (fair values) exceeding acquisition costs:
Millions of yen
Acquisition
cost
Book value Difference
Equity securities ………………………………
¥ 1,155¥ 1,626¥ 471

Equity securities ………………………………

Thousands of U.S. dollars
Acquisition
cost
Book value Difference$ 8,619$12,134$ 3,515

Securities with book values (fair values) not exceeding acquisition costs:
Millions of yen
Acquisition
cost
Book value
Difference
Equity securities ………………………………
¥ 2,457¥ 1,921¥ (536)Equity securities ………………………………

Thousands of U.S. dollars
Acquisition
cost
Book value Difference$ 18,336$ 14,336$ (4,000)

B. The following tables summarize book values of securities with no available fair values
as of February 28, 2002.
(a) Available-for-sale securities:
Non-listed equity securities(excluding securities traded over-the-counter) ……
Free financial fund ………………………………………
Money management fund ………………………………
Total …………………………………………………………

Millions of yen¥ 1,098240501¥ 1,839(b) Equity securities of subsidiaries and affiliated companies:
Millions of yen
Subsidiaries …………………………………………………
¥ 445
Affiliated companies ………………………………………
267
Total …………………………………………………………
¥ 712

19

Thousands of
U.S. dollars$ 8,194
1,791
3,739$13,724
Thousands of
U.S. dollars$ 3,3211,992$ 5,313

C. Maturities of held-to-maturity debt securities at February 28, 2002 are as follows:

Government bonds

Government bonds

Millions of yen
Over one year
but within
five years¥ 2,450………

Withinone year
¥ 100

………

Thousands of U.S. dollars
Over one year
Withinbut within
one yearfive years
Total
$ 746
$ 18,284$ 19,030

Total¥ 2,550

D. Investment securities with available fair market values
The aggregate carrying values and market values of investment securities at February
28, 2001 were as follows:

Investment securities ………………………

Millions of yen
Carrying
Marketvalue
value¥ 3,357¥ 3,527

E. Marketable securities and investment securities with no available fair market values
The following securities were not included in the above table and their carrying values
at February 28, 2001 were as follows:
Millions of yen
Marketable securities:
Marketable securities in investment trusts …………
¥ 645
Governmental securities fund ……………………………
300
Free financial fund …………………………………………
300
Money management fund …………………………………
100
Investment securities:
Unlisted securities, excluding over-the-counter shares
1,043
Total………………………………………………………………… ¥ 2,388

5．Inventories

Inventories at February 28, 2002 and 2001 consisted of the following:

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

20

Millions of yen
2002
2001
¥ 3,318¥ 3,479
453
493
258
246
545
678
¥ 4,574¥ 4,896

Thousands of
U.S. dollars
2002$ 24,761
3,381
1,925
4,067
$ 34,134

6. Land Revaluation

As at February 28, 2001, pursuant to the Law of Revaluation of Land and the revision
thereof, certain land for business operations was revalued at fair market value. The
related gain (loss) was reported in a separate component of shareholders’ equity as “Gain(loss) on land revaluation”, net of tax.
Gain or loss on land evaluation was provided as a loss component in shareholders’equity in the previous year, but provided as a gain component in the year ended
February 28, 2002. This resulted from the Company selling the land of the former Tokyo
Head Office whose book value after revaluation was less than that before revaluation.

7. Derivative Transactions

Use of derivative transactions:
The Companies utilize forward currency exchange and interest rate swap transactions tocontrol risks related to foreign currencies and interest 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
their 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, 2002 and 2001.

8. Lease Information

Finance leases which do not transfer ownership to lessees are accounted for in the samemanner as operating leases in accordance with Japanese GAAP.

The original lease obligations of the Companies for machinery, equipment, tools,
furniture, fixtures and software amounted to ¥1,276 million ($9,522 thousand) and ¥1,327
million at February 28, 2002 and 2001, respectively.
Lease payments for finance leases which do not transfer ownership to lessees
amounted to ¥354 million ($2,642 thousand) and ¥288 million for the years ended
February 28, 2002 and 2001, respectively.

21

Future minimum leases payments, including financing cost, required under such leases
at February 28, 2002 and 2001 are as follows:

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

Millions of yen
2002
2001
¥ 290
¥ 231
523
232
¥ 813
¥ 463

Thousands of
U.S. dollars
2002$ 2,164
3,903$ 6,067

9. ShortLoans
oans and LongShort-term Bank L
ong-term Debt

Short-term bank loans are represented generally by notes maturing within one year.
The annual interest rate at February 28, 2002 was 0.83%.
Long-term debt at February 28, 2002 and 2001 consisted of the following:Thousands ofMillions of yen
U.S. dollars
2002
2001
2002
Unsecured long-term bank loans ……………
¥ 1,532¥ 1,516$ 11,433
Secured long-term bank loans ………………
1,048
1,462
7,821
2,580
2,978
19,254
Less amounts due within one year …………
(1,227)(637)(9,157)¥ 1,353¥ 2,341$ 10,097

The annual interest rates of the bank loans ranged from 0.19% to 4.50% with theweighted average being 1.31% at February 28, 2002.
At February 28, 2002 and 2001, assets pledged as collateral for short-term bank loans
including long-term debt due within one year of ¥473 million ($3,530 thousand) andsecured long-term bank loans were as follows:

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

Millions of yen
2002
2001
¥ 477
¥ 1,049
748
272
416
416
¥1,641¥ 1,737

Thousands of
U.S. dollars
2002$ 3,560
5,582
3,104$ 12,246

The annual maturities of long-term debt are as follows:

Years ending February 28/29
2004 ………………………………………
2005 ………………………………………
2006 ………………………………………
2007 ………………………………………
Thereafter………………………………

22

Millions of yen
¥
339
331
174
142
367
¥ 1,353

Thousands of
U.S. dollars$ 2,530
2,470
1,298
1,060
2,739
$ 10,097

10．
10．Severance and Retirement Benefits
As explained in Note 2. Summary of Significant Accounting Policies, effective March 1,
2001, the Companies adopted the new accounting standard for employees’ severance andretirement benefits, under which the liabilities and expenses for severance and retirement
benefits are determined based on the amounts obtained by actuarial calculations.
The liabilities for severance and retirement benefits included in the liability section of
the consolidated balance sheet as of February 28, 2002 consisted of the following.

Projected benefit obligation …………………………………
Unrecognized prior service cost ……………………………
Fair value of pension assets……………………………
Unrecognized actuarial differences ………………………
Accrued pension cost …………………………………………
Liability for severance and retirement benefit ……

Millions of yen¥ (8,697)
(117)
5,559
725
(181)
¥ (2,711)

Thousands of
U.S. dollars$ (64,903)(873)
41,4855,411(1,351)$ (20,231)

Included in the consolidated statement of income for the year ended February 28,
2002 are severance and retirement benefit expenses comprising the following:

Severance costs−benefits earned during the year ……
Interest cost on projected benefit obligation ……………
Expected return on plan assets ……………………………
Net transition gain …………………………………………
Adjustment to prior service costs …………………………
Severance and retirement benefit expenses …………

Millions of yen
¥
598
203
(133)
(318)
(117)
¥
233

Thousands of
U.S. dollars$ 4,463
1,515(993)(2,373)(873)$ 1,739

The discount rate is 2.50%. The rates of expected return on plan assets used by theCompany are 2.90% for the 1996 pension plan and 2.30% for the 1966 pension plan. The
estimated amount of all retirement benefits to be paid at future retirement dates isallocated equally to each service year using the estimated number of total service years.
Prior service costs are recognized as an expense in equal amounts over two years
commencing from the date of the change, and actuarial gains and losses are recognized in
the income statement as an expense in equal amounts over five years, commencing fromthe following year.
Charges to income with respect to directors’ and corporate auditors’ retirement benefits
amounted to ¥55 million ($410 thousand) and ¥66 million for the years ended February
28, 2002 and 2001, respectively.

11．
11．Income Taxes
The Companies are subject to a number of taxes based on income, which, in theaggregate, indicate a statutory rate in Japan of approximately 41.7% for the years ended
February 28, 2002 and 2001.

23

The following table summarizes the significant differences between the statutory tax
rate and the Companies’ effective tax rates for financial statement purposes for the years
ended February 28, 2002 and 2001:
2002
41.7%
41.7%
3.0
(0.1)
0.1
(0.1)
44.6 %

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

2001
41.7 %
3.1
(0.1)
0.1
(2.6)
42.2 %

Significant components of the Companies’ deferred tax assets as of February 28, 2002
and 2001 are as follows:

Deferred tax assets:
Excess severance and retirement benefits ……
Excess retirement benefits ………………………
Valuation loss on investment securities ………
Directors’ and corporate auditors’
retirement benefits ………………………………
Accrued enterprise tax ……………………………
Long-term accounts payable ……………………
Accrued expenses …………………………………
Valuation loss on investment in capital ………
Excess employees’ bonuses accrued ……………
Net unrealized holding loss on securities ……
Losses carried forward ……………………………
Other …………………………………………………
Total deferred tax assets ……………………………
Valuation allowance …………………………………
Net deferred tax assets ……………………………

Millions of yen
2002
2001
¥

758
―
566

336
105
―
7
330
104
31
84
174
2,495
(84)
¥ 2,411
2,411¥

Thousands of
U.S. dollars
2002

―
671
355

$ 5,657
―
4,224

321
307
276
266
103
61
―
153
136
2,649
(91)
¥ 2,558

2,507
784
―
52
2,463
776
231
627
1,298
18,619(627)$ 17,992

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, whichare “pharmaceuticals and related products”, “cable television broadcasting” and “other”.
Since more than 90% of the consolidated net sales and operating income for the years
ended February 28, 2002 and 2001 were from the pharmaceuticals and related products
segment, the disclosure of business segment information is not required.

24

(2) Geographic area
Since more than 90% of the consolidated net sales and operating income for the years
ended February 28, 2002 and 2001 were made in Japan, the disclosure of segment
information by geographic area is not required.
(3) Overseas sales
Since overseas sales for the years ended February 28, 2002 and 2001 were not morethan 10% of the consolidated net sales, the disclosure of overseas sales information is not
required.

13．
13．Shareholders'
hareholders' Equity
Under the Code, the entire amount of the issue price of share is required to be accounted
for as common stock, although a company may, by resolution of its board of directors,
account for an amount not exceeding 50% of the issue price of the new shares asadditional paid-in capital.
Effective October 1, 2001, the Code provides that an amount equal to at least 10% of
cash dividends and other cash appropriations shall be appropriated and set aside as alegal reserve until the total amount of legal reserve and additional paid-in capital equals
25% of common stock. The legal reserve and additional paid-in capital may be used toeliminate or reduce a deficit by resolution of the shareholders’ meeting or may becapitalized by resolution of the Board of Directors. On condition that the total amount oflegal reserve and additional paid-in capital remains being equal to or exceeding 25% ofcommon stock, they are available for dividends by the resolution of shareholders’ meeting.
Legal reserve is included in retained earnings in the accompanying financial statements.
The maximum amount that the Company can distribute as dividends is calculated
based on the unconsolidated financial statements of the Company in accordance with the
Code.

14. C
Commonommon Stock(1) Exercise of warrants
As a result of exercise of the outstanding warrants, 56,405 additional shares of common
stock were issued during the year ended February 28, 2002.
(2) Retirement of common stock
In accordance with the resolution of the Board of Directors on February 24, 2000, theCompany purchased 605 thousand shares of common stock out of profits for a
total amount of ¥974 million from the stock market and retired them by the time of the2000 annual meeting of shareholders held on May 25, 2000.
(3) Stock split
In accordance with the resolution of the Board of Directors on May 25, 2000, theCompany authorized a stock split as follows:
Effective date of stock split: August 21, 2000.
Split ratio: Split one share of common stock into two shares.
As a result of the stock split, 47,523 thousand additional shares of common stock
were issued.

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15.
15. Contingent Liabilities

Contingent liabilities at February 28, 2002 were as follows:

Notes receivable discounted ………………

Millions of yen¥
52

Thousands of
U.S. dollars
$
388

16.
16. Subsequent Events(1) Appropriation of retained earnings
At the 2002 annual meeting of shareholders held on May 23, 2002, the appropriation ofretained earnings for the year ended February 28, 2002 was duly approved as follows:

Cash dividends−¥9.00 ($0.07) per share ……………………
Bonuses to directors
and corporate auditors ……………………

Millions of yen

Thousands of
U.S. dollars¥ 847$ 6,32156418(2) Reduction in additional paid-in capital and legal reserve
At the 2002 annual meeting of shareholders mentioned above, it was duly approved thatthe amount of total additional paid-in capital and legal reserve which exceeds 25% of theCompany’s stated capital was transferred to retained earnings in accordance with therevised Code. As a result of this transfer, the additional paid-in capital was reduced to¥2,118 million ($15,806 thousand) and legal reserve to zero.
(3) Acquisition of treasury stock
At the 2002 annual meeting of shareholders mentioned above, it was duly approved that,in accordance with the Code, the Company could acquire 14,000 thousand shares ofcommon stock within the limited total amount of ¥28,000 million ($208,955 thousand) fora period of time ranging from the termination of the 2002 annual meeting ofshareholders to the 2003 annual meeting of shareholders.

26

Report of Independent Certified Public Accountants
To the Shareholders and the Board of Director
Directorss of
HISAMITSU PHARMACEUTICAL
PHARMACEUTICAL CO., INC.
We have audited the accompanying consolidated balance sheets of HISAMITSU
PHARMACEUTICAL CO., INC. (a Japanese corporation) and subsidiaries as of February
28, 2002 and 2001, and the related consolidated statements of income, shareholders’equity and cash flows for the years then ended, expressed in Japanese yen. Our audits
were made 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, 2002 and 2001, and the consolidated results of theiroperations and their cash flows for the years then ended, in conformity with accounting
principles generally accepted in Japan (Note 1) applied on a consistent basis during theperiods, except as noted in the following paragraph.
As explained in Note 2, in the year ended February 28, 2002, HISAMITSU
PHARMACEUTICAL CO., INC. and subsidiaries adopted new Japanese accounting
standards for employees’ severance and retirement benefits, financial instruments andforeign currency translation.
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 23, 2002

Asahi & Co.

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