Hisamitsu Pharmaceutical Co., Inc.

ANNUAL REPORTFiscal 2000

Contents
Management Policies …………………………………………
Review of Operations …………………………………………
Financial Review ………………………………………………
Five Year Summary…………………………………………
Non-consolidated Balance Sheets …………………………
Non-consolidated Statements of Income …………………
Non-consolidated Statements of Stockholders' Equity …
Non-consolidated Statements of Cash Flows ……………
Notes to Non-consolidated Financial Statements ………
Report of Independent Certified Public Accountants …

1

2
3
5
7
8
10
11
12
13
22

Management Policies(1) Fundamental Management Policies
Throughout its history, Hisamitsu Pharmaceutical Co., Inc. (the Company) has been
aiming at being “a company which devotes itself to better health for people” adhering to its
philosophy, “Customers First”.

(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
to regular 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 declared cash dividends of ¥10.00 per share for the current year, which isthe same amount as the previous year, considering further enhancement of management,
further development of business and necessary internal reserves, in addition to the difficult
operating conditions surrounding the Company.

(3) Medium-range Strategies
The Company intends to become a pharmaceutical company oriented toward its own
R & D in its own way, aggressively trying to create new pharmaceuticals and pharmaceuticalpreparations through transdermal therapeutic system (TTS) studies.
The Company ’s medium-range strategies are to increase cash flows from operating
activities through the active development of domestic sales activities of existing transdermal
analgesic and anti-inflammatory products for ethical use and over-the-counter (OTC) use
andto build up future assets through R & D activities of new transdermal pharmaceuticals for
topical use and systemic use as well as through the global development of the Company’s
brand including trade marks, manufacturing technology and quality control.
Through these activities, the Company sets its medium-range goal in management tokeep return on equity (ROE) more than 10%.

(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 andsupervising function and the business-executing function to promote quicker
decision-making
as well as to clarify the authority and responsibility of the board of directors.
Additionally, the Company is actively promoting personnel changes to nurture its staff
and to activate its organization as well as to heighten the degree of organizational
2

transparency.

3

Review of Operations(1) Overview of Fiscal 2000 ended February 29, 2000
During the year ended February 29, 2000, there has been no reduction in pharmaceuticalreimbursement prices under the National Health Insurance (NHI) system which theGovernment implemented in the three previous years. But nationwide there were lively
deliberations on extensive reforms to the NHI system, including the NHI pharmaceuticalreimbursement price system and the Company has, therefore, faced very unsettled operating
conditions.
Against this harsh situation, the Company has been active in every operating field. 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. Of thesepharmaceuticals, the Company especially promoted aggressive gathering and disseminatingof pharmaceutical information about MOHRUS TAPE, a transdermal patch, and MOHRUS,
a transdermal gel patch.
Regarding over-the-counter (OTC) products, the Company also promoted sales activities
concentrating on topical analgesic and anti-inflammatory pharmaceuticals despite thestagnant market reflecting flat personal consumption. Additionally, the Company attempted
to steadily penetrate the cosmetic market for facial packs, to which the Company’s own
transdermal technology has been applied. The Company launched LIFECELLA ORANGEMASK and LIFECELLA ESTE MASK in April and October last year, respectively, to have alarge assortment of facial packs as well as to cultivate new consumers. Also in October, theCompany introduced onto the OTC market HISAMITSU KAYUMIDOME SPRAY, a
medicine to relieve itching, 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.
In
October last year, the Company succeeded in receiving manufacturing approval and a licensefor ESTRANA, a transdermal estradiol patch for treating menopause, which had been jointly
developed with Novartis Pharma K.K.
In order to improve production efficiency and product quality, the Company enhanced andrestructured its manufacturing facilities. In December last year, the Company’s Kyushu
Head Office and Tosu Plant acquired “ISO 14001” certification, which is an International
Standard of the Environmental Management System.
Additionally, the Company endeavored to elevate the efficiency of its overall management
as well as to improve the results of operations.

4As a result, the total net sales of the Company for fiscal 2000 ended February 29, 2000
amounted to ¥54,627 million ($501,165 thousand), an 11.2% increase over the previous year.
Operating income increased 12.7% over the previous year to ¥11,185 million ($102,615
thousand), and net income rose 15.6% to ¥4,478 million ($41,083 thousand).

(2) Outlook for Fiscal 2001 ending February 28, 2001
With respect to ethical pharmaceuticals, in April 2000, the Government executed a cut inpharmaceutical reimbursement prices averaging 7.0% across the industry, and it isanticipated 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
promote 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 brandincluding trade marks, manufacturing technology and quality control of products.
In order to promote global environmental protection, the Company intends to get “ISO
14001” certification for the Utsunomiya Plant following the Kyushu Head Office and Tosu
Plant.
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.
At the board of directors’ meeting held on February 24, 2000, the Company resolved toacquire and retire 800 thousand shares of par value common stock out of profits within thelimited total amount of ¥1,500 million by the time of the 2000 annual meeting ofstockholders
to be held on May 25, 2000. Subsequently, the Company purchased 605 thousand shares ofcommon stock for a total amount of ¥974 million ($8,936 thousand) from the stock
market and retired them.
It is too early to predict the non-consolidated results of operations for the next year
endingFebruary 28, 2001, but the Company expects, in the absence of unforeseen circumstances,net
sales of ¥60,200 million and net income of ¥5,300 million, and will declare cash dividends of¥10.00 per share, which is the same as for the current year.
5Financial Review
Results of Operations
Although the Company has faced very unsettled operating conditions during fiscal 2000,
ended February 29, 2000, it has been active in every operating field in order to further
improve its business performance. As a result, net sales recorded a new high for theCompany of ¥54,627 million ($501,165 thousand), a 11.2% increase over the previous year.
Briefly speaking, the record sales of the Company were principally due to the markedly
increased sales of such products for ethical use as MOHRUS TAPE, a ketoprofen patch, andMOHRUS, a ketoprofen gel patch. During the year under review, the Company successfullylaunched LIFECELLA ORANGE MASK and LIFECELLA ESTE MASK, facial sheet packs,
onto the cosmetic market and HISAMITSU KAYUMIDOME SPRAY, an anti-itching spray,
onto the over-the-counter pharmaceutical market as well as ESTRANA, an estradiol patch
for treating menopause, onto the ethical pharmaceutical market. The total sales of these new
products also made a large contribution to the markedly increased net sales of the Company.
Cost of sales increased 4.8% over the previous year t o ¥16,669 million ($152,927
thousand), whereas cost of sales as a percentage of net sales declined to 30.5%. This
figure was 1.9% lower than the previous year of 32.4% , principally reflecting themarkedly increased net sales.
Selling, general and administrative expenses climbed 16.0% t o ¥21,848 million($200,440 thousand), principally due to the increased selling expenses. R & D expenses
also rose 10.5% t o ¥4,925 million ($45,183 thousand), and the ratio of R & D expenses
to net sales was 9.0%, which was approximately equal to the previous year (9.1%).
Operating income, despite the overall increases in costs and expenses, rose 12.7% to¥11,185 million ($102,615 thousand), principally reflecting the markedly increased net
sales.
Other expenses, net of other income, sharply fell 21.3% t o ¥1,397 million ($12,816
thousand), primarily as the result of a significant decrease in loss on sales of
securities.
Income before income taxes jumped 20.1% to ¥9,788 million ($89,799 thousand), andincome taxes also jumped 24.2% to ¥5,310 million ($48,716 thousand), leaving net
income of ¥4,478 million ($41,083 thousand), a 15.6% increase over the previous year.
As a result, the effective tax rate was determined as 54.3%, which was higher than theprevious year of 52.5%. Net income per share of common stock assuming dilution
climbed 14.5% t o ¥93.09 ($0.854), and the Company paid its stockholders cash dividends
per share of ¥10.00 ($0.092).

6

Financial Position
At February 29, 2000, total assets amounted to ¥67,272 million ($617,174 thousand),a 2.2% increase over the previous year end. Total current assets amounted to ¥29,851
million ($273,862 thousand), a 7.1% increase, primarily reflecting markedly increased
cash and cash equivalents which fully covered significantly decreased notes and accounts
receivable.
Property, plant and equipment went down 2.5% to ¥31,341 million ($287,532
thousand), whereas investments and non-current receivables went up 3.9% t o ¥6,080
million ($55,780 thousand).
Total current liabilities increased 16.3% to ¥20,533 million ($188,376 thousand),principally as the result of marked increases in long-term debt due within one year,
accounts payable and income taxes payable.
L o n g -term debt due after one year sharply dropped 84.7% to ¥994 million ($9,119
thousand). This drop was mainly due to entering into a debt assumption agreementwith the Mitsubishi Trust and Banking Corporation, paying the necessary amounts forredemption and interest payments on such bonds as Deutsche Mark guaranteed notesdue 2000 and unsecured 1.0% bonds due 2001, as well as to transferring the current
portion of long-term debt to current liabilities.
Total stockholders’ equity grew 10.7% t o ¥42,589 million ($390,725 thousand),primarily reflecting the overall increases in retained earnings. This growth significantly
improved the ratio of stockholders’ equity to total assets of 63.3%, as compared with theprevious year end of 58.4%.

Cash FlowsNet cash provided by operating activities suddenly rose 82.2% t o ¥11,587 million($106,303 thousand), compared to cash provided by operating activities in the previous
year of ¥6,359 million.
Investing activities used net cash of ¥3,566 million ($32,716 thousand), a 20.0%
decrease from the previous year of ¥4,455 million, primarily reflecting a marked
decrease in capital expenditures, an increase in investments in marketable securities
and a significant increase in proceeds from sales of marketable securities.
Financing activities consumed net cash of ¥4,341 million ($39,825 thousand), a
103.8% increase, compared to cash used by financing activities in the previous year of¥2,130 million. This increase principally resulted from increased repayment of long-term
debt.
In consequence, cash and cash equivalents during the year rose ¥3,680 million($33,762 thousand), resulting in cash and cash equivalents at the end of the year of¥5,631 million ($51,661 thousand).

7

Five Year Summary
HISAMITSU PHARMACEUTICAL CO., INC.
Years ended February 28/29

Millions of yen (except for per share amounts)
2000
1999
1998
1997
1996
Results o f operations for the year:
Net sales …………………………………… ¥54,627
Cost of sales …………………………………
16,669Selling, general and administrative
expenses ……………………………………
21,848
Research and development expenses …
4,925
Depreciation and amortization …………
2,464
Operating income …………………………
11,185
Other income (expense) ……………………
(1,397)
Income before income taxes ……………
9,788
Net income …………………………………
4,478¥49,114
15,902¥46,858
15,391¥40,468
14,732¥36,583
14,043

18,830
4,458
2,483
9,924
(1,776)
8,148
3,872

17,995
3,916
2,225
9,556
(2,224)
7,332
2,412

14,119
4,045
2,305
7,572
(2,673)
4,899
1,830

13,314
3,951
2,182
5,275
(1,539)
3,736
1,676

¥ 93.23
93.09
10.00

¥ 81.46
81.30
10.00

¥ 51.37―
10.00¥ 38.98―
8.00¥ 35.70―
8.00

Financial position at the year end:
Long-term debt …………………………… ¥ 9 9 4
Stockholders’ equity ………………………
42,589Total assets …………………………………
67,272Working capital ……………………………
9,318
Property, plant and equipment …………
31,341
Capital expenditures ………………………
2,703¥ 6,492
38,47365,844
10,20332,131
3,427¥ 6,698
34,181
66,306
6,036
32,807
3,951¥ 5,199
32,20963,176
4,216
30,025
2,946¥10,987
30,81566,873
7,983
29,673
3,017

Per share of common stock (Yen):
Net income assuming no dilution ……
Net income assuming dilution ………
Cash dividends applicable to the year8

Non-consolidated Balance Sheets
HISAMITSU PHARMACEUTICAL CO., INC.
February 28/29, 2000 and 1999
Thousands of
U.S. dollars
Millions of yen(Note 1)
2000
1999
2000
ASSETS
Current assets:
Cash and cash equivalents ………………………
Marketable securities (Note 4) …………………
Notes and accounts receivable …………………
Inventories (Note 5) ………………………………
Prepaid expenses ……………………………………
Other current assets ………………………………
Less allowance for doubtful accounts …………
Total current assets …………………………
Property, plant and equipment (Note 7):
Land …………………………………………………
Buildings and structures …………………………
Machinery and equipment ………………………
Construction in progress …………………………
Less accumulated depreciation …………………
Investments and non-current receivables:
Investments in subsidiaries and affiliates ……
Investment securities (Notes 4 and 7) ………
Loans to subsidiaries and affiliates ……………
Loans to employees ………………………………
Other investments and non-current receivables
Less allowance for doubtful accounts …………

¥ 5,631630
18,974
3,895
708
129
(116)
29,851¥ 1,951
2
21,638
3,644
637
150
(161)
27,861$ 51,661
5,780
174,073
35,7346,495
1,183(1,064)
273,862

13,296
19,602
21,8491,011
55,758(24,417)
31,341

13,812
19,083
21,180796
54,871(22,740)
32,131

121,981
179,835
200,450
9,275
511,541(224,009)
287,532

1,198
2,335
820
205
2,132
(610)
6,080
¥ 67,272

1,033
2,098
870
185
2,950
(1,284)
5,852¥ 65,844

10,991
21,422
7,523
1,881
19,559(5,596)55,780$617,174

See accompanying notes.

9LIABILITIES AND STOCKHOLDERS’ EQUITYCurrent liabilities:
Short-term bank loans (Note 7) …………………
Long-term debt due within one year (Note 7)
Notes and accounts payable ……………………
Income taxes payable (Note 10) …………………
Notes payable construction ………………………
Reserve for loss on loan guarantees …………
Other current liabilities …………………………
Total current liabilities ………………………

Long-term debt due after one year (Note 7) …
Retirement benefits (Note 8) ………………………
Other non-current liabilities ………………………

Thousands of
U.S. dollars
Millions of yen(Note 1)
2000
1999
2000
¥

―
2,299
13,775
2,686
162
594
1,017
20,533¥400
445
12,503
1,865
250
658
1,537
17,658$―21,092
126,376
24,642
1,486
5,450
9,330
188,376

994
2,957
199

6,492
3,087
134

9,119
27,128
1,826

8,414
―
8,175
990
25,01042,589¥ 67,272

―
8,329
8,078
930
21,13638,473¥ 65,844

77,193―75,000
9,083
229,449
390,725$617,174

Contingent liabilities (Note 13)
Stockholders’ equity (Notes 11 a n d 14):
Common stock, par value ¥50 per share:
Authorized−100,000,000 shares
Issued−48,063,166 shares in 2000 …………
47,885,657 shares in 1999 …………
Additional paid-in capital …………………………
Legal reserve…………………………………………
Retained earnings …………………………………
Total stockholders’ equity ……………………

10

Non-consolidated Statements of Income
HISAMITSU PHARMACEUTICAL CO., INC.
Years ended February 28/29, 2000, 1999 and 1998

2000

Millions of yen
1999¥ 49,114¥ 46,858

1998

Thousands of
U.S. dollars(Note 1)
2000
$501,165

16,66921,8484,925
43,442
11,185

15,902
18,8304,458
39,1909,924

15,391
17,995
3,916
37,302
9,556

152,927
200,440
45,183
398,550
102,615

86
(249)
―
92

105
(314)
―
47

101
(399)
(122)
107

789
(2,284)
―
844

(665)
(6)
(164)
(99)

(436)
(466)
―
―

(129)
(51)
―
―

(6,101)(55)(1,505)
(908)

63

8

(386)

578

(222)

(170)

(1,203)(2,037)(529)
296(1,397)
Income before income taxes ……………………
9,788
Income taxes (Note 10) ……………………………
5,310
Net income ………………………………………… ¥ 4,478

(267)
(283)
(1,776)
8,148
4,276

¥ 3,872―(142)(2,224)7,332
4,920¥ 2,412(4,853)
2,716(12,816)
89,79948,716$ 41,083

2000

Yen
1999

1998

U.S. dollars(Note 1)2000

¥ 93.23¥ 81.46¥ 51.37

93.09
10.00

81.30
10.00

―
10.00

Net sales…………………………………………… ¥ 54,627

Costs and expenses :Cost of sales ………………………………………
Selling, general and administrative …………
Research and development ……………………
Operating income…………………………………

Other income (expense) :Interest and dividend income ………………
Interest expense …………………………………
Bond and note issue expenses and discountForeign exchange gains ………………………
Loss on sales of property,
plant and equipment …………………………
Loss on sales of securities ……………………
Loss on debt assumption ………………………
Loss on cancellation of swap contracts ……
Reversal of (provision for) losses on
guarantees of loans to an affiliate ………
Write-down of investments in
subsidiaries and affiliates …………………
Prior service cost undert h e c o n tributory pension plan ……………
Other−net ………………………………………

Amounts per share of common stock :Net income assuming no dilution…………
Net income assuming dilution ………………
Cash dividends applicable to the year ……

See accompanying notes.

11

$

0.855
0.854
0.092

Non-consolidated Statements of Stockholders’ Equity
HISAMITSU PHARMACEUTICAL CO., INC.
Years ended February 28/29, 2000, 1999 and 1998

Shares o fcommonstock
Balance at February 28, 199 7 …… 46,955,403
Net income …………………………
―
Cash dividends paid ………………
―Bonuses to directors
and corporate auditors ………
―
Transfer to legal reserve ………
―Balance at February 28, 199 8 …… 46,955,403
Net income …………………………
―
Cash dividends paid ……………
―Bonuses to directors
and corporate auditors ………
―
Transfer to legal reserve ………
―
Shares issued upon exerciseof warrants ………………………
930,254
Balance at February 28, 199 9 …… 47,885,657
Net income …………………………
―
Cash dividends paid ……………
―Bonuses to directors
and corporate auditors ………
―
Transfer to legal reserve ………
―
Shares issued upon exerciseof warrants ………………………
177,509
Balance at February 29, 2000 …… 48,063,166

Balance at February 28, 199 9 …………………
Net income ………………………………………
Cash dividends paid ……………………………
Bonuses to directors and corporate au ditors
Transfer to legal reserve ………………………
Shares issued upon exercise of warrants …
Balance at February 29, 2000 …………………

Commonstock¥ 7,884――

Millions of yen
Additional
paid-in
Legalcapitalreserve¥ 7,570
¥ 820
―
―
―
―

Retainedearnings¥15,935
2,412
(376)

―
―
7,884
―
―

―
―
7,570
―
―

―
50
870
―
―

(64)
(50)
17,857
3,872
(470)

―
―

―
―

―
60

(63)
(60)

445
8,329
―
―

508
8,078
―
―

―
930
―
―

―
21,136
4,478
(479)

―
―

―
―

―
60

(65)
(60)

85
¥ 8,41497¥ 8,175―990―¥25,010¥

Thousands of U.S. dollars (Note 1)
Additional
Commonpaid-in
Legal
Retained
stock
capitalreserve earnings$ 76,413$ 74,110$ 8,533 $193,908―――
41,083―――(4,395)
―
―
―
(597)
―
―
550
(550)
780
890
―
―
$ 77,193$ 75,000$ 9,083 $229,449

See accompanying notes.

12Non-consolidated Statements of Cash FlowsHISAMITSU PHARMACEUTICAL CO., INC.
Years ended February 28/29, 2000, 1999 and 1998

Cash flows from operating activities :Net income ………………………………………………
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization ……………………
Loss on sales of property, plant and equipment
Loss on sales of securities …………………………
Provision for (reversal of) losses on
guarantees of loans to an affiliate ……………
Write-down of investments in
subsidiaries and affiliates ………………………
Provision for (reversal of) retirement benefits…
Changes in assets and liabilities:
Decrease (increase) in notes andaccounts receivable ……………………………
(Increase) in inventories …………………………
Decrease (increase) in other current assets …
Increase in notes and accounts payable………
Increase (decrease) in income taxes payable…
Increase (decrease) inother current liabilities ………………………
Other ……………………………………………………
Total adjustments ………………………………
Net cash provided by operating activities …

2000

Millions of yen
1999

Thousands of
U.S. dollars(Note 1)
1998
2000

¥ 4,478¥ 3,872¥ 2,412$ 41,083

2,464
665
(6)

2,483
436
466

2,225
129
51

22,606
6,101
(55)

(63)

(8)

386

(578)

222
(130)

170
(690)

1,203
(48)

2,037
(1,193)

2,664
(251)
27
1,426
821

(336)
(172)
307
541
(1,390)(4,590)
(381)
(78)
3,586
1,198

24,440(2,303)248
13,083
7,532

(492)
(238)
7,109
11,587

(82)
762
2,487
6,359

(212)
235
3,704
6,116

(4,514)(2,184)65,220106,303

Cash flows from investing activities :Capital expenditures ……………………………………
Investments in subsidiaries and affiliates…………
Investments in marketable securities ………………
Proceeds from sales of marketable securities ……
Loans to subsidiaries and affiliat es ………………
Collection on loans ……………………………………
Other ………………………………………………………
Net cash used in investing activities ………

(2,703)(388)(4,753)
3,874
(95)
138
361
(3,566)(3,427)(265)(1,310)
994
(444)
16
(19)
(4,455)(3,951)
21
(729)
377
(320)
283
(340)
(4,659)(24,798)(3,560)(43,606)
35,541
(872)
1,266
3,313
(32,716)

Cash flows from financing activi ties:
Increase (decrease) in short -term bank loans ……
Proceeds from long-term debt ………………………
Repayment of long-term debt ………………………
Cash dividends paid ……………………………………
Shares issued upon exercise of warrants …………
Net cash used in financing activities ………

(400)
500
(4,144)(479)
182(4,341)(2,500)
400
(513)
(470)
953
(2,130)(2,200)1,850(4,495)(376)−(5,221)(3,670)4,587(38,018)(4,394)
1,670(39,825)

Increase (decrease) in cash and cash equivalents …
Cash and cash equivalents at beginning of year …
Cash and cash equivalents at end of year …………

3,680
1,951
¥ 5,631

(226)
2,177
¥ 1,951(3,764)
5,941¥ 2,177

33,762
17,899$51,661

Supplemental disclosures of cash flow information:
Cash paid during the year:
Interest …………………………………………………
Income taxes …………………………………………

¥ 249
4,490

¥

¥

$ 2,284
41,193

See accompanying notes.
13

402
4,724

487
2,700

Notes to Non-consolidated Financial Statements
HISAMITSU PHARMACEUTICAL CO., INC.
Years ended February 28/29, 2000, 1999 and 1998

1. Basis of presenting non-consolidated financial statements
HISAMITSU PHARMACEUTICAL CO., INC. (the “Company”) maintains its accounts
and records in accordance with the provisions set forth in the Japanese Commercial Codeand the Securities and Exchange Law and in conformity with accounting principles andpractices generally accepted in Japan, which are different from the accounting anddisclosure requirements of International Accounting Standards.
The accompanying non -consolidated financial statements are a translation of theaudited non-consolidated financial statements of the Company which were prepared inaccordance with accounting principles and practices generally accepted in Japan from theaccounts and records maintained by the Company and were filed with the Minister ofFinance (“MOF”) as required by the Securities and Exchange Law.
In preparing the accompanying non-consolidated financial statements, certain
reclassifications have been made in the non-consolidated financial statements issued
domestically in order to present them in a form which is more familiar to readers outside
Japan. The non-consolidated statements of cash flows have been prepared for the purposeof inclusion in the non-consolidated financial statements, although such statements are
not customarily prepared in Japan and are not required to be filed with MOF.
The translation of the Japanese yen amounts into U.S. dollars are included solely forthe convenience of the reader, using the prevailing exchange rate at February 29, 2000,
which was ¥109 to U.S.$1. The convenience translations should not be construed as
representationｓthat 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. Significant accounting policies

Reporting entity
The financial statements include only the accounts of the Company. The accounts of its
subsidiaries are not consolidated.
Cash and cash equivalents
Cash and cash equivalents consist of cash and time deposits due within one year.
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.

14

Securities
Marketable equity securities included in both current assets and investments arestated at cost. Cost is determined by the moving average method. Other securities,
including investments in subsidiaries and affiliates, are also 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.
Inventories
Inventories are stated at cost (first-in, first-out method).
Property, plant and equipment
Property, plant and equipment are carried at cost. Depreciation is provided overestimated useful lives as permitted by the Corporation Tax of Japan. Depreciation ofproperty, plant and equipment is determined by the declining balance method andamortization of intangible fixed assets and prepaid expenses by the straight line method.
The useful lives of buildings (excluding building fixtures) were shortened in thecurrent year in accordance with a tax law revision in 1998. This change increased
depreciation expense by ¥65 million ($596 thousand) and decreased operating income andincome before income taxes each by ¥59 million ($541 thousand) as compared with theuseful lives used in the previous year.
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
Income taxes are provided in amounts currently payable for each period based on
taxable income and for the amortization of unrealized exchange gains resulting from theapplication of the forward exchange contract rates to guaranteed notes denominated inforeign currencies. Other tax effects resulting from timing differences in recognizing
revenues and expenses for financial statements and tax returns are not recorded.
Reserve for employees’ bonuses
Prior to the year ended February 29, 2000 the reserve for employees’ bonuses wasprovided in amounts based on the bonus payment period as permitted by the Corporation
Tax Law of Japan. In line with a tax law revision in 1998, the Company changed themethod of accounting for this reserve to be provided in the portion of estimated future
payments applicable to the current year. The effect of this change was not material.
Retirement benefits
Lump-sum benefit plan
Under the terms of the Company’s retirement plan, substantially all employees areentitled 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, base salary at the time ofretirement 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 thebalance sheet date.

15

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 Company’scontributions to the plan include amortization of prior service costs at 50% of theremaining balance per year. The portion of the liability for the unfunded lump-sum
benefit plan, which is no longer required due to the introduction of this plan, is being
reversed at the same rate as amortization 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
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. The Company’s contributions to the plan include amortization of prior service
costs at 50% of the remaining balance per year.
Since the yield on investments of the pension plan was less than projected, theCompany changed its expected interest rate from 5.5% to 2.3% in the year ended
February 29, 2000. Additional prior service costs incurred as a result of this change of¥529 million ($4,853 thousand) are stated as prior service cost under the contributory
pension plan in the statements of income.
Directors’ and corporate auditors’ plan
Retirement benefits for directors and corporate auditors under the Company’s unfunded
plan are included in the liability for retirement benefits 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 manneras operating leases in accordance with generally accepted accounting principles in Japan.
Foreign currency translation
Current receivables and payables denominated in foreign currencies are translated into
Japanese yen at the exchange rate in effect at the balance sheet date. The resulting
exchange gains and losses are credited or charged to income. Non-current receivables andpayables denominated in foreign currencies are translated at historical rates, except for
those hedged by forward exchange contracts.
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.
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 increased by the number of shares which would have beenoutstanding assuming the exercise of warrants at the beginning of each fiscal year or at
the date of issuance. Net income per share assuming dilution for 1998 is not shownsince the results are not dilutive.
16

3．Accounting change
In the year ended February 28, 1998 and prior years, prior service cost was charged
to income when paid. Commencing with the year ended February 28, 1999, to strengthen
the financial position of the plan, the Company changed the method of accounting to
expense prior service cost when incurred, considering that the investment performance offund assets has worsened and anticipating recurring prior service cost in the future. Th eeffect of this change was to decrease income before income taxes by ¥267 million.

4．Marketable securities and investment securities
The aggregate carrying values and market values of marketable securities andinvestment securities at February 28/29, 2000 and 1999 were as follows:
Millions of yen
2000
1999
Carrying
MarketCarrying
Market
value
value
value
value
Marketable securities … ¥
1
¥
1
¥
2
¥
2
Investment securities …
2,335
3,078
2,098
2,686
¥ 2,336¥ 3,079¥ 2,100¥ 2,688

Thousands of
U.S. dollars
2000
Carrying
Market
value
value
$
9
$
9
21,422
28,239$21,431$28,248

Additional marketable securities in investment trusts of ¥629 million ($5,771 thousand)were included in marketable securities at February 29, 2000.

5．Inventories
Inventories at February 28/29, 2000 and 1999 consisted of the following:

Finished products ……………………
Work in process ………………………
Raw materials and supplies ………

Millions of yen
2000
1999
¥ 2,830¥ 2,667
257
240
808
737
¥ 3,895¥ 3,644

Thousands of
U.S. dollars
2000$ 25,963
2,358
7,413
$ 35,734

6. Derivative transactions
The Company enters into 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 in foreign 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 in relation tonotes payable.
The Company principally uses deriv ative transactions in connection with managing its
market risk and not for speculation or dealing purposes. The Company deals with highly
rated domestic banks as counterparty to these transactions to minimize credit risk
exposure.

17

Derivative transactions are entered into by the administrative division in accordancewith established policies approved by the Board of Directors, and the actual results ofthe derivative transactions are reported to the Board of Directors after the end of eachyear.
Outstanding positions as of February 29, 2000 were as follows:
Forward currency exchange transactions:Thousands of
U.S. dollars
2000

Millions of yen

2000
1999
Current
Current
Contracted
market Unrealized Contracted
market Unrealized UnrealizedType of transaction
amountamountgain
amountamountgain
gain
Purchase
Deutsche Marks … ¥
―
¥
―
¥
―
¥
23
¥
24
¥
1
$
―

The market value amounts are based on the year end forward rate. Forward currency
exchange contracts for which the forward rates were used to translate year end
receivables or payables denominated in foreign currencies are excluded from the aboveschedule.
Interest rate swap transactions:Type of transaction

Thousands ofMillions of yen
U.S. dollars
2000
1999
2000
Amount ofAmount ofPrincipal
p r i ncipal
Principal
principal
Principal
amountdue overamountdue overamountof contract
one yearof contract
one yearof contract

Variable ratereceived for fixed rate …

¥

―

¥

―

¥ 4,885¥ 4,885$―

The contracted amounts of principal represent the principals of the swap transactions
and are not appropriate to be used for the measurement of market and credit risks.
The Company cancelled the derivative transa ctions since it no longer had notes andbonds denominated in foreign currencies to be hedged at the year end due to entering
into a debt assumption agreement with a financial institution.

7. Short-term loans and long-term debt

Short-term bank loans are represented generally by notes maturing within one year.
Annual interest rates at February 29, 2000, ranged from 0.59% to 3.49%.
Long-term debt at February 28/29, 2000 and 1999 consisted of the following:18

Secured bank loans due through 200 3 …
Unsecured bank loans due 2003 …………
Deutsche Mark guaranteed notesdue 2000 with interest floating
at the London Interbank Offering
rate plus 0.25% ……………………………
Unsecured 1.0% bonds withstock purchase warrants
payable in yen, due 2001 ………………
Less amounts due within one year……

Millions of yen
2000
1999
¥ 2,905¥ 2,856
388
407

Thousands of
U.S. dollars
2000$ 26,651
3,560

―

2,424

―

―
3,293
2,299
¥ 994

1,250
6,937
445
¥ 6,492―
30,211
21,092$ 9,119

The annual interest rates of the secured bank loans ranged from 0.59% to 3.49% withthe weighted average being 2.50% at February 29, 2000.
The unsecured 1.0% bonds were issued with detachable warrants that entitle theholder to purchase shares of common stock at an exercise price per share of ¥957($8.78). These warrants are exercisable through June 25, 2001.
If all the outstanding warrants had been exercised at February 29, 2000, 197 thousand
additional shares of common stock would have been issued.
At February 29, 2000 assets pledged as collateral for secured long-term bank loans(including amounts due within one year) and for the bank guarantee of the DeutscheMark notes were as follows:

Land ……………………………………………
Buildings−net ofaccumulated depreciation ………………
Investment securities ………………………

Millions of yen¥ 7,319

Thousands of
U.S. dollars$ 67,147

219
105¥ 7,643

2,009
963$ 70,119T h e annual maturities of long-term debt are as follows:
Years ending February 28/ 2 92002 ………………………………………
2003 ………………………………………
2 0 0 4 ………………………………………

Millions of yen
¥ 460
521
13
¥
994

19

Thousands of
U.S. dollars$ 4,220
4,780
119$ 9,119

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:(Millions of yen)Ending balance
Redemption date
Deutsche Mark guaranteed notesd u e 2 0 0 0 ……………………………
¥ 2,424( 4 0 m i l lion DM)
Unsecured 1.0% bonds due 2001 ……
¥ 1,250

November 30, 2000
June 25, 2001

8．Retirement benefits
Pension assets and unamortized prior service costs under the contributory fundedpension plan established in 1996 amounted to ¥2,016 million ($18,495 thousand) and¥1,244 million ($11,412 thousand), respectively, at February 29, 2000.
Pension assets and unamortized prior service costs under the contributory fundedpension plan established in 1966 amounted to ¥1,026 million ($9,413 thousand) and¥630 million ($5,780 thousand), respectively, at February 29, 2000.
Charges to income with respect to the employees’ lump-sum retirement benefits planand the funded pension plans amounted to ¥781 million ($7,165 thousand), ¥986 millionand ¥404 million in 2000, 1999 and 1998, respectively. The reversal of reserve forretirement benefits amounted to ¥169 million ($1,550 thousand) for the year ended
February 29, 2000.
Charges to income with respect to directors’ and corporate auditors’ retirement benefits
amounted to ¥133 million ($1,222 thousand), ¥72 million and ¥73 million for the years
2000, 1999 and 1998, respectively.
At February 29, 2000 the provision for retirement benefits for directors and corporate
auditors is included in the liability for retirement benefits in the amount of ¥702 million($6,440 thousand).

9．Finance leases
Lease payments for non-capitalized finance leases for the years ended February 28/29,
2000, 1999 and 1998 were ¥264 million ($2,422 thousand), ¥244 million and ¥245
million, respectively.
Future minimum leases payments, including financing cost, required under such leases
at February 29, 2000 are as follows:

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

20

Millions of yen
¥ 281
429
¥ 710

Thousands of
U.S. dollars$ 2,578
3,936$ 6,514

10．Income taxes
Taxes on income consist of corporation, enterprise and inhabitants taxes. The aggregate
normal statutory rate of taxes on income was approximately 47%, 51% and 51% for
the years ended February 28/29, 2000, 1999 and 1998, respectively. Primarily as a resultof (1) expenses not deductible for tax purposes and (2) the effects of timing differences inrecognizing revenues and expenses for financial statements and tax returns, the actual
effective tax rates differed from the aggregate normal statutory rates.

11．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.

12. Related party transactions

Sales to non-consolidated subsidiaries and affiliates for the year ended February
28/29, 2000 and 1999, were ¥735 million ($6,743 thousand) and ¥475 million,
respectively.
Receivables from and payables to non-consolidated subsidiaries and affiliates atFebruary 28/29, 2000 and 1999, were as follows:

Trade accounts receivable ………………
Trade accounts payable …………………

Millions of yen
2000
1999
¥ 1,420 ¥ 1,725
131
72

Thousands of
U.S. dollars
2000$13,0281,202

13. Contingent liabilities

Contingent liabilities at February 29, 2000 were as follows:
Millions of yen………………
¥ 100

Notes receivable discounted
Guarantee of loans ofsubsidiaries and affiliates ………………
D e b t assumption agreements (See Note 7)

1,179
3,674

Thousands of
U.S. dollars$ 917
10,81633,706

Guarantee of loans of subsidiaries and affiliates is shown after deducting the reserve
for loss on loan guarantees of ¥594 million ($5,450 thousand).

21

14. Subsequent events(1) At the 2000 annual meeting of stockholders held on May 25, 2000, theappropriation of retained earnings for the year ended February 29, 2000 was duly
approved as follows:

Cash dividends−¥10.00 ($0.092) per share ………………
Bonuses to directors
and corporate auditors ……………………
Reserve for retirement of common stock …
Transfer to legal reserve ……………………

Millions of yen

Thousands of
U.S. dollars¥ 481$ 4,409

59
1,870
60

541
17,156550(2) At the board of directors held on February 24, 2000, the Company resolved toacquire and retire 800 thousand shares of par value common stock out of profits
within the limited total amount of ¥1,500 million by the time of the 2000 annual
meeting of stockholders to be held on May 25, 2000. During the period, theCompany purchased 605 thousand shares of common stock for a total amount of¥974 million ($8,936 thousand) from the stock market and retired them.

22

Report of Independent Certified Public Accountants
The Board of Directors
HISAMITSU PHARMACEUTICAL CO., INC.
We have audited the accompanying non -consolidated balance sheets of HISAMITSU
PHARMACEUTICAL CO., INC., a Japanese corporation, at February 28/29, 2000 and
1999, and the related non-consolidated statements of income, stockholders’ equity andcash flows for each of the three years in the period ended February 29, 2000, expressedin Japanese yen. Our audits were made in accordance with generally accepted auditing
standards in Japan and, accordingly, included such tests of the accounting records andsuch other auditing procedures as we considered necessary in the circumstances.
In our opinion, the non -consolidated financial statements referred to above present
fairly the non-consolidated financial position of HISAMITSU PHARMACEUTICAL CO.,INC. at February 28/29, 2000 and 1999, and the non-consolidated results of its operations
and its cash flows for each of the three years in the period ended February 29, 2000, in
conformity with accounting principles generally accepted in Japan applied on a consistentbasis, except for the change in the method of accounting for prior service cost of apension plan in 1999 as referred to in Note 3.
We have also reviewed the translation of the 2000 financial statements into U.S.
dollars on the basis described in Note 1. In our opinion, such U.S. dollar amounts havebeen properly translated on such basis.
Fukuoka, JapanMay 26, 2000
Asahi & Co.
(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 non-consolidated financial
statements and the auditors’ report presented above are for users familiar with Japanese
accounting principles, auditing standards and their application in practice.

23