May 1, 2012

Performance Forecast for the Fiscal Year Ending December 31, 2012

Annual Report 2011
Year ended December 31, 2011

POLA ORBIS HOLDINGS INC. (the Company ) has made the following revisions to the consolidated
performance forecast announced on February 14, 2012 for the ﬁrst half and full-year periods of the ﬁscal
year ending December 31, 2012. The revisions factor in the impact of purchasing Australian-based
Jurlique International Pty Ltd, which became a wholly owned subsidiary when share acquisition
procedures were completed on February 3, 2012.

Performance Forecast for the Fiscal Year Ending December 31, 2012
Revisions to the Consolidated Performance Forecast for the First Half of Fiscal 2012
(From January 1, 2012 to June 30, 2012)
Net Sales

Operating Income

Net Income

Net Income
Per Share

Millions of Yen

Millions of Yen

Millions of Yen

Yen

Previous Forecast (A)82,200

5,500

2,700

48.84

Current Forecast (B)86,400

4,700

2,000

36.18

Amount Changes (B-A)

4,200

– 800

– 700

−

Percent Changes (%)

5.1– 14.5– 25.9−78,937

5,534

2,989

54.08

(Reference):
Actual Results for First Half of
Fiscal 2011

Revisions to the Consolidated Performance Forecast for Fiscal 2012
(From January 1, 2012 to December 31, 2012)
Net Sales

Operating Income

Net Income

Net Income
Per Share

Millions of Yen

Millions of Yen

Millions of Yen

Yen

Previous Forecast (A)172,000

13,7007,000

126.62Current Forecast (B)

182,000

13,8007,000

126.62

Amount Changes (B-A)

10,000

100

−

−

5.8

0.7

−

−

166,657

12,853

8,039

145.43

Percent Changes (%)(Reference):
Actual Results for Fiscal 2011

Depreciation and Amortization Costs Relating to Jurlique s Acquisition
The Company expects approximately ¥1,500 million to ¥1,600 million of depreciation and amortization
costs to impact its performance in ﬁscal 2012, with amortization costs of ¥700 million to ¥800 million
factoring in inventory valuation diﬀerences, which will be reﬂected entirely in the ﬁscal 2012 statements.
(In particular, the Company anticipates these costs to have a heavier impact in the ﬁrst half.)
Annual depreciation and amortization costs are expected to reach ¥800 million to ¥900 million fromﬁscal 2013 onward.
Note: The ﬁgures above are based on current estimates and may diﬀer from actual results.

Table of Contents

Financial Highlights

2

Overview of Our Business4

Inspire all people
and touch their hearts.

Our Expertise6

Our Vision

8

President’s Message/An Interview with the President

10Special Feature 1: POLA ORBIS Group’s
Expansion in China

16

The POLA ORBIS Group is committed to providing distinctly uniqueproducts and services to you, the customer, backed with the assuranceof solid scientific testing. We make every effort to contribute toimproving the global cosmetics culture as well as preserving the global
environment in the name of beauty and health. We aim to build a brandthat will be forever admired and trusted in every corner of the globe.
Achieving this requires us to approach each and every challenge withhumility, and to identify precisely what makes people happy, stemmingfrom our very own personal experiences. With this in mind, we, thePOLA ORBIS Group, spend our days at work and at home full ofvitality and with a smile on our faces.

Special Feature 2: POLA Brand Evolutionof the Door-to-Door Sales Business18

At a Glance

20

Review of Operations

22

Research & Development

27

Corporate Governance28

Directors and Corporate Auditors

31

Corporate Social Responsibility

32

History34

Investors’ FAQ

35

Financial Section

40

Corporate Information /Stock Information

85

Forward-looking statements
This annual report contains projections of performance and other projections based on information available as of February 14,
2012 and certain assumptions judged to be reasonable. Actual performance may materially differ from these projections resulting
from changes in the economic environment and other risks and uncertainties.

Financial Highlights
POLA ORBIS HOLDINGS INC. and Consolidated Subsidiaries

Net sales

Operating income andOperating margin

Millions of yen

Net income

Millions of yen

180,000

166,657

162,332

170,838

15,000165,253

12,27010,868120,000

10,000Millions of yen

15

9,000

7.7

7.4

50

0

0

0

0

0

2008

2009

2010

2011

2010

2011

2011

¥170,838¥162,332¥165,253¥166,657$2,143,784

10,868

9,706

12,27012,853

165,339

6.4

6.0

7.4

7.7

Net income

6,559

4,059

7,086

8,039

103,419

Net income per share

127.91

79.16

137.36145.43

1.87

Net assets

137,564

140,890

153,104

157,057

2,020,298

Total assets

180,664

181,909

187,771

193,027

2,482,987

Net assets per share

2,677.47

2,743.87

2,767.55

2,839.36

36.52

Cash flows from operating activities

16,41912,53017,906

14,401

185,250

Cash flows from investing activities(5,808)(4,374)(40,367)(3,444)(44,304)

Cash flows from financing activities

36(1,125)(2,789)(4,093)(52,653)

Cash and cash equivalents at end of year

61,803

68,81743,50750,246646,342

Depreciation and amortization

4,602

4,973

5,361

5,374

69,134

Capital expenditure

5,655

8,639

6,245

5,048

64,934Equity ratio (%)

76.0

77.4

81.5

81.3

Return on equity (%)

4.9

2.9

4.8

5.2

Return on assets (%)

5.2

5.7

6.6

7.0

Price-earnings ratio (times)*3

—

—

12.3

14.3

Number of employees*4

3,603

3,713

3,773

3,812

Average number of temporary-hired workers

2,103

1,906

1,872

1,864

Operating results

2008

2009

Operating income

79.16

4,059
3,000

2011

2009

Net sales*2

5

2010

145.43(Except per share data)

2008

100

6,000

5,000

2009

137.36127.9160,0002008

Years ended December 31

150

7,086

6,559
10

6.0

8,039

Thousands of U.S. dollars*1

Millions of yen(Except per share data)

Yen

12,853

9,706

6.4

%

Net income per share

2010

2011

Operating margin (%)

2008

2009

2010

2011

Financial position

Net assets per share
Yen

3,000

2,839.36

2,743.87

Cash flows
from operating activities

Cash flows
from investing activities

Cash flows
from financing activities

Millions of yen

Millions of yen

Millions of yen

20,0002,677.47

17,906

16,4192,767.55

14,401

15,0002,000

012,530-10,000

1,500-3,444-5,808 -4,374-20,000

10,000

5,000

2008

2009

2010

0

2011

Cash and cash equivalents
at end of year

61,803

2008

2009

2010

2010

2011

-50,000-4,500
2008

2009

2010

2011

Return on equity-4,093
2008

2009

2010

2011

Return on assets

%

%

%

10

10

8

8

80
50,24620,000

0

2009

100
68,81740,0002008-2,789-40,367

Financial indicators

80,00043,507-3,000-40,000

Equity ratio

Millions of yen

60,000-1,125-1,500-30,000

1,000

0Cash flows

36

0

2011

76.0

77.4

81.5

81.3

60

6

40

4

20

2

0

2008

2009

2010

2011

0

4.8

4.9

5.2

6

5.2

5.7

6.6

7.0

4

2.9

2

2008

2009

2010

2011

0

2008

2009

2010

2011

*1 Dollar amounts are shown for convenience only and are calculated based on the prevailing exchange rate of U.S.$1=¥77.74 as of December 31, 2011.
*2 Net sales do not include consumption taxes.
*3 The price-earnings ratio is not shown for fiscal 2008 and 2009 as the stock was not listed.
*4 The number of employees is the number of people working for the POLA ORBIS Group.

2

POLA ORBIS HOLDINGS INC.

ANNUAL REPORT 20113

Introduction

Overview of
Our Business

Flagship Brands

The POLA ORBIS Group is engaged in businesses related to beauty and health, centering on cosmetics, asegment that dates back to 1929 and the establishment of POLA INC. Today, the Group develops its two
flagship brands, POLA—high-prestige products available under a consulting-based sales format—and
ORBIS—original-concept products provided through mail-order and at retail stores—along with several
other brands matched to a specific sales channel and price bracket to attract target customers. The Group
subscribes to a multi-brand strategy designed to utilize the unique qualities and well-defined identity ofeach brand to fuel growth and capture bigger shares in various markets. Group companies are guided bya holding company structure to ensure dynamic, fast-paced execution of business activities.

Brand Portfolio
Overseas brands

Flagship brands

Brands under development

POLA INC.

ORBIS Inc.

Boasts strengths built on leading-edge technology in the fields of anti-aging
and skin-whitening and promotes consulting-based sales through a domestic
network of about 4,500 sales offices and more than 135,000 POLA LADIES.

Provides original-concept product OIL-CUT—which trumped conventional
industry wisdom about oil-free skincare—along with services that have earned
a high level of customer satisfaction. Utilizes mail-order channels, such as
Internet shopping and catalogs, as well as retail stores, to market products.

High-prestige

Overseas Brands

New

Price range

PrestigeNew

H2O PLUS HOLDINGS, LLC

Operations hinge on a cosmetics brand with organic benefits, exemplified byingredients made from the herbs grown on the company’s own 153-acre farmin South Australia under pesticide-free, organic farming methods. Sales
activities in 20 countries.

Promotes products made with natural, sea-derived ingredients, such as
seaweed, through a marketing network of more than 2,000 locations in 24
countries, primarily in North America and Asia.

Middle-tierBrands under Development

Mass-market

Market size
4

Jurlique International Pty Ltd

POLA ORBIS HOLDINGS INC.

We meet customers’ diversifying needs by developing brands appropriate to specific sales
channels and price brackets.

ORLANE JAPON INC.

ACRO INC.

FUTURE LABO INC.

decencia INC.

pdc INC.

Exclusive distributor of
ORLANE, a luxury brand ofanti-aging skincare cosmetics
from France with a 60-year
history, sold mainly at
department stores in Japan.

Promotes THREE, aprestige brand of natural
skincare products andfresh-idea makeup items at
department stores.

Offers products withexceptional properties
through TV shopping
channels.

Markets products for dry,
sensitive skin primarily
through mail-order sales.

Sells reasonably priced
cosmetics through generalretail channels, such as
drugstores.

ANNUAL REPORT 20115

Introduction

Our Expertise

The POLA ORBIS Group has inherited an enduring commitment to “make and sell our products
ourselves” since the start of our business, and this fundamental approach has given form to a uniquevalue chain integrating everything from research and development through sales. Our strengths as agroup are skincare development technology and direct selling and a global network.

Strength 2

DIRECT SELLING
We believe that the direct-selling approach is the best way to tailor suggestions on skincare options to each customer. Thisapproach also provides us with a conduit for collecting customer information and allows us to fine-tune brand management andboost the rate of repeat customers.

Growth through new sales format POLA THE BEAUTY
A national sales force of more than 135,000 POLA LADIES
provides POLA products directly to customers through face-to-facecontact. Customer information is consolidated within the network
and underpins efforts to anticipate customer needs and boost levelsof customer satisfaction. In 2005, we opened the first POLA THE
BEAUTY store andbegan cultivating a new

Strength １

model for direct selling.
The store network

SKINCARE

achieved a 10% increasein sales over theprevious fiscal year.

Because women feel that skincare products are essential to their daily routine, the skincare field is known for market stability and ahigh rate of repeat customers—and subsequently high profitability as well—and the fact that companies can easily separate themselves

Utilizing mail-order customer data to boost earning powerfrom the competition with distinctive research themes and technologies. With these factors in mind, the POLA ORBIS Group pursues
business activities with an emphasis on skincare, and skincare thus represents approximately 60% of the Group’s sales.

For three straight years, the ORBIS online store has taken the top spotin the After-sales Service Satisfaction Rating (online shop category)

Developing original anti-aging andsurvey conducted by Nikkei Business, Japan’s leading businessskin-whitening ingredientspublication. The solid reputation of the online store is tangible

We have built a database of about 13 million entries fromconvenience to customers. Efficient marketing techniques utilizing

information given to us in the course of business by customers

customer data has pushed ORBIS’s operating margin above 10%.

evidence of the company’s efforts to provide greater purchasing

about their skin. With this information and leading-edge
technologies as our tools, we delve into the realm of skincare.
Concerted efforts are directed toward the development ofingredients for anti-aging and skin-whitening formulas, and wehave originated numerous active ingredients, exemplified by theskin-whitening ingredient Rucinol®.

Strength 3

GLOBAL NETWORK
A distribution network encompassing 35 countries and efforts to reinforce our overseas business structure and sales expansion
capabilities will contribute significantly to the realization of our long-term vision.

Utilize distribution network in growth markets; quickly
expand sales channels
We maintain a 35-country distribution network, hinging on the
structures of H2O PLUS and Jurlique. By increasing sales points,
we will bring our brands and associated products to more womenand set the stage for expansion in China and other parts of Asia
where economies are still maintaining amazing growth.

6

POLA ORBIS HOLDINGS INC.

ANNUAL REPORT 20117

Our Vision

STAGE 1

To ensure further growth and create additional corporate value, we formulated a long-term vision for the
POLA ORBIS Group that looks ahead to 2020 and embarked on a medium-term management plan thatruns from fiscal 2011 through fiscal 2013. We will draw on three areas of strength—skincare development
technology, direct selling and a global network—and emphasize business practices designed to achieve
stable domestic growth and accelerate development of the Group’s presence overseas with the aim of
becoming a global organization in the field of beauty and health.

2011‒2013 Medium-term Management Plan
Generate stable proﬁts with ﬂagship brands
and invest funds to implement growth strategy

CAGR of

2% ‑3%

1 Generate stable profits withManagement
indicators

Net sales￥250 billion or more

Operating margin

Strategy

13% ‑15%

We will continue to add new locations to thefavorably performing POLA THE BEAUTY
network, aiming to have 600 stores in operation
by 2013. We will direct concerted efforts into
luxury skincare products and services andpromote our original style of consulting.

(Top level in the industry)

20% or higher

Billions of yen

Domestic and overseas:
Accelerate growth throughM&A and alliances

Grow flagshipbrands overseas,
centering on Asia

■ Implement measures to rebuild
We will promote brand rebuilding designed toensure stable growth and enhanced profitability
five years down the road and will strive toredefine brand value and boost recognition in themarket.

P24 Review of Operations

Domestic:
Achieve stable
growth in Japan(CAGR of around 2%)

160

STAGE 1

STAGE 2

Generate stable profitsand create a successful
business model overseas■ Enhance brand
Strategy

Become a highly profitableglobal organization

POLA ORBIS HOLDINGS INC.

2016

2020

5

Reinforce the operating base
Year

2013

2 Accelerate growth of the portfolio of brands

3 Develop the Group’s presence overseas by capitalizingon the Group’s strengths■ Develop door-to-door sales channels in China■ Consulting-based sales in Russia and neighboring countries■ Mail-order sales business in China■ Accelerate growth and improve profitability in Asia
■ Achieve synergistic effects
We will draw on proven direct-selling capabilities to develop activities overseas.
Our primary targets for POLA are China and Russia. For ORBIS, we will launchInternet sales of ORBIS products in China while further growing such business in
Taiwan and South Korea. Recent events, particularly the acquisitions of U.S.-based
H2O PLUS and Australia-based Jurlique, are fueling an accelerated push to expand
overseas sales beyond the current geographical emphasis in Asia.

P16 Special Feature 1: POLA ORBIS Group s Expansion in China

Strategy

4 Reinforce R&D capabilities■ Reinforce skincare ingredient development capabilities
We will reinforce development capabilities, with an emphasis on skincare
ingredients, particularly those for anti-aging and whitening applications, andcontinue to allocate 2%-3% of net sales toward this effort. We aim to raise
ingredient development expertise to new heights.

P27 Research & Development

STAGE 3

Accelerate developmentof the Group’s
presence overseas(Please see next page for more details)

8

Strategy

the ORBIS brandOverseas:(10% in Japan) in 2013

P26 Review of Operations

Invest
proﬁts250

10% or higher 9%As customer needs diversify, we are promoting five brands under development thatwill contribute to growth. By developing brands appropriate to specific sales
channels and price brackets, we will establish brand identity and raise respective
market shares, which will underpin a higher market share for the Group as a whole.

P22 Review of Operations

Consolidated
net sales

Operating marginunder development

skincare cosmetics

Overseas sales ratio

CAGR offlagship brands■ Increase profits from POLA THE BEAUTY■ Increase market share in luxury

Toward Long-term Vision 2020

Operating income

Consolidated net sales

Management
indicators

Strategy

Introduction

recognition (unaided recall)■ Business process
management■ Concentration oncore competence■ Step up personnel
training

To achieve the goals presented above, we will build a framework that facilitates healthy business expansion
based on autonomous and independent management of operations by each company within the Group. This
will include measures to prevent inefficient investment, implement business process management based on
key performance indicators (KPIs), and cultivate personnel with the potential to climb the corporate ladder
within the Group.

P28 Corporate Governance

ANNUAL REPORT 20119

President’s Message

By steadily implementing the growth strategies ofour medium-term management plan, we are moving
ever closer to realizing our goal of becoming a globalorganization trusted by people around the world.
The POLA ORBIS Group has maintained the sameemphasis on its business since the day we started businessin 1929 through activities in the cosmetics industry andother businesses related to “beauty, health and culture.”
As we will celebrate our second anniversary of POLAORBIS HOLDINGS’ December 2010 listing on the First
Section of the Tokyo Stock Exchange in 2012, the Group is
directing concerted efforts into growth strategies that willtake corporate development to new heights.
In fiscal 2011, ended December 31, 2011, the domestic
cosmetics industry encountered challenges, particularly
the impact of the Great East Japan Earthquake and aprolonged economic downturn, which left the status of
the market rather uncertain. In this operating
environment, the POLA ORBIS Group adhered to its
medium-term management plan, which served topromote stable growth in the core beauty care business inJapan and to forge a stronger presence overseas. The latter
was highlighted by the acquisition of two companies—one
in the United States and one in Australia. Our efforts wererewarded with higher sales and higher income.
Guided by the philosophy “Inspire all people and touch
their hearts,” we will accelerate globalization efforts andstrive, as a corporate group that has earned the trust andbusiness of customers around the world, to maintain agrowth trend.
Satoshi Suzuki
President

10 POLA ORBIS HOLDINGS INC.

An Interview with the President

Update on the Medium-term Management Plan

Q
A	
What were the highlights of the Group’s
performance in fiscal 2011?
 e achieved increases in sales and income,Wbuoyed by solid results from our flagship brand
POLA, and we accelerated overseas
development through M&A activities.

The domestic cosmetics market environment remained
difficult in fiscal 2011, mainly due to persistently
lackluster economic conditions and sluggish consumer
activity following the Great East Japan Earthquake.
Nevertheless, we were able to secure increases in sales
and income for the second consecutive year by executing
strategies in our core beauty care business thatsuccessfully drew on our solid reputation in the skincare
industry and direct-selling capabilities.
POLA charted growth along the expected trajectory,
substantiated by favorable expansion in sales through
POLA THE BEAUTY stores, up 10.4% overall—or
8.8% higher on an existing store basis—and positivemarket reception to new products, particularly those in
the B.A series. The number of POLA LADIES has been
increasing, and the number of sales offices rose, soundly
reversing the downward trend of past years. These results
indicate that POLA has completed its evolution from thetraditional door-to-door sales format to a new businessmodel better matched to prevailing customer needs andthat the stage is now set for growth into the future.
ORBIS pushed ahead with efforts to reinforce
Internet sales and showed a 3.3-percentage point
improvement in its ratio of Internet sales to total sales.
This underpinned enhanced cost efficiency, which
supported a 5.8% improvement in income.
In brands under development, THREE, which
debuted in autumn 2009, continued to show favorable
results. On an existing store basis, sales jumped morethan 30% over fiscal 2010, and we are expecting further
growth in the future.
With regard to overseas activities, specifically theacquisitions of H2O PLUS and Jurlique—the latter
officially joining the Group in February 2012—we haveaccelerated progress toward our long-term vision of

becoming a highly profitable global organization by 2020.
The rewards for these efforts were higher sales andhigher income in fiscal 2011, with net sales inching up
0.8%, to ¥166,657 million, operating income rising
4.8%, to ¥12,853 million, and net income climbing
13.5%, to ¥8,039 million.
▶ For more details, go to P20: At a GlanceQA hat are the Company’s criteria for selecting
W
acquisition targets?
 e look at four points, generally, which serveW
as guideposts for M&A activities.

POLA ORBIS HOLDINGS is applying two strategies
in its efforts to expedite enhanced growth overseas: first,
it is establishing a stronger presence in markets outside
Japan by utilizing the strengths of the POLA and
ORBIS brands, and second, it is pursuing M&A
activities that will deliver mutual benefits to the parties
involved. Potential acquisition targets must satisfy four
conditions.
1. Have well-defined brand concepts and qualities thatstand out from the competition
2. Present high potential for business expansion in Asia,
particularly China
3. Promote opportunities for synergy with management
resources of the Group
4. Possess excellent management structures
From this perspective, H2O PLUS and Jurlique—thetwo overseas companies that recently joined theGroup—boast extremely attractive brands, and we cancertainly expect significant growth from them in theyears to come.

H2O PLUS products

Jurlique products

ANNUAL REPORT 201111

An Interview with the President

Future Market Environment and Growth Strategies

Q
AAny predictions on the market environment?

whitening skincare fields and has a strategically highratio of skincare sales to total sales.
In overseas development, a key region for the Groupis Asia, especially China, which is still a growing market.
Like women in Japan, women in China and the rest of
Asia are very keen on skincare, and they have similarskin characteristics and perceptions about beauty.
Because of these commonalities, we should be able to
make full use of the 13-million-entry database on theskin characteristics of Japanese women as well asaccumulated R&D know-how to raise our profile andboost sales in Asia.

I n Japan, we can expect wider demand for antiaging and whitening skincare products.
Overseas, the countries of Asia where economic
conditions are still favorable will be markets ofparticular interest.

The domestic cosmetics market will probably shrink
some more, albeit slightly, overall, and the businessenvironment will undoubtedly be tough. That said, alook at the market by product category indicates a
relatively favorable shift in demand for skincare, andinterest in high-performance cosmetics, particularly antiaging and whitening skincare products, is actually
expanding thanks to a demographic balance tipped
toward seniors and a trend toward heightened beauty
consciousness among consumers. In this demand
scenario, the Group is certainly well-placed to capture alarger share of the domestic cosmetics market because it
possesses overwhelming strengths in the anti-aging and▶ For more details, go to P35: Investors’ FAQQA hat activities are planned for domesticW
operations?
 t POLA, the emphasis will be on development ofA
the POLA THE BEAUTY network, and at
ORBIS, the priority will be brand rebuilding. The
goal will be to improve profitability.

At POLA, the plan is to expand the network of POLA
THE BEAUTY stores to 600 locations by 2013, andtoward this end, POLA will seek to secure high growthby continuing to open new stores and boosting efficiency
at existing stores. Paralleling these efforts, management
will be considering a next-generation business model,
which will include a new POLA THE BEAUTY conceptthat facilitates a more flexible approach to store openings
in blank-slate areas and urban zones. On the productfront, the spotlight will be on anti-aging and whitening
skincare. In April 2012, POLA will launch a summeroriented anti-aging series to reinforce the B.A series.
At ORBIS, brand rebuilding is the priority with goalsof improved profitability and stable growth within thenext five years. ORBIS will be working to accelerate thetransition from mail-order catalog sales to Internet sales,
boost spending per customer while trimming costs, andOperating income

Consolidated net sales

Management
indicators

be more environmentally conscious. ORBIS will also
reorganize the distribution and logistics side of businessto enhance services and cut fixed costs and delivery costsat the same time. On the product front, ORBIS willraise the profile of its skincare products by adding newvalue to the 100% OIL-CUT (oil free) brand concept.
The THREE brand is sure to sustain favorable growth
in Japan. The original concept of this brand—using
domestically produced ingredients, such as green tea seedoils—is piquing interest overseas as well, which bodes wellfor development of this brand abroad in the near future.

CAGR of 10% or higher

CAGR of 2% ‑3%

Operating margin

9% (10% in Japan) in 2013

Toward Long-term Vision 2020
Management
indicators

Net sales￥250 billion or more

Operating margin

13% ‑15% (Top level in the industry)

Strategy 1

Overseas sales ratio

20% or higher

Domestic and overseas:
Accelerate growth throughM&A and alliances

Overseas:

Grow flagshipbrands overseas,
centering on Asia

Growth Strategies

Consolidated net sales
Billions of yen
250

Generate stable profits withflagship brands■ Increase profits from POLA THE BEAUTY■ Increase market share in luxury
skincare cosmetics■ Implement measures to rebuild
the ORBIS brand

STAGE 1(Please see next page for more details)

Develop the Group’s presence overseas bycapitalizing on the Group’s strengths■ Develop door-to-door sales channels in China■ Consulting-based sales in Russia and neighboring countries■ Mail-order sales business in China〈NEW〉■ Accelerate growth and improve profitability in Asia

〈NEW〉

■ Achieve synergistic effects
Reinforce R&D capabilities

STAGE 3

Accelerate developmentof the Group’s presence overseas

Become a highly profitableglobal organization

Strategy 5

Reinforce the operating base

Year
2013

12 POLA ORBIS HOLDINGS INC.

STAGE 2Strategy 3

Strategy 4

Achieve stable
growth in Japan(CAGR of around 2%)

Generate stable profits and create a successful
business model overseas

Accelerate growth of the portfolio of brands
under development

Invest
proﬁtsDomestic:

160

Strategy 2

2016

2020

ANNUAL REPORT 201113

An Interview with the President

Building Higher Corporate Value

Q
AWhat is on the overseas activity agenda?
 e will accelerate multi-brand development inW
Asian markets, particularly China, and aim forhigher overseas sales and a larger market share.

Our long-term vision is to achieve consolidated net salesof ¥250 billion and an overseas sales ratio of at least 20%
by 2020.
Business models that made flagship brands successful
in Japan will be applied to overseas markets as well. For
instance, seeking to start door-to-door sales in China,
POLA established an overseas subsidiary there in 2011
and is making progress on the necessary preparations toacquire licensing as quickly as possible. Meanwhile,
ORBIS launched Internet sales in China through its own
website and will now embark in earnest on doorway
pages and promotions to encourage wider use.
Overseas brands H2O PLUS and Jurlique will both
begin shipping to luxury cosmetics stores in China. All
combined, sales per store should rise and both brands
should sustain double-digit growth. Also, looking tofoster synergies through the application of management
resources within the Group, we will emphasize
development of new products in each brandunderpinned by the skincare technologies of POLACHEMICAL INDUSTRIES.
The Group will adhere to its multi-brand strategy,
through which approaches to different markets andtarget customers hinge on specific sales channels, pricing
and concepts. Each brand will further expand its sales,

POLA products

14 POLA ORBIS HOLDINGS INC.

and the Group’s presence in overseas markets will
inevitably grow stronger.
▶ For more details, go to P16: Special Feature 1

QA hat is the Company planning with regard toW
R&D?
 e will continue to concentrate investment inWskincare, where market needs are most stable.

The R&D investment spotlight will remain on skincare,with POLA emphasizing new products under the B.A
series and ORBIS pursuing the development ofinnovative OIL-CUT (oil-free) technology.
▶ For more details, go to P27: Research & Development

QA hat measures are being taken to reinforce theWoperating base, according to the medium-term
management plan?
 e Group as a whole is engaged in efforts toThcultivate human resources with skills
appropriate for global application.

The development of human resources is an important
theme for us, primarily because we are accelerating
efforts to establish flagship brands overseas but also
because we now have overseas brands within the Groupand we want to see these brands grow as well. EachGroup company utilizes personnel exchanges to develop
human resources who can perform on the global
business stage.

ORBIS products

THREE products

QA hat is the Company doing to enhanceW
corporate governance?
 ighly independent outside corporate auditorsH
sit on our Board of Corporate Auditors andbring objective opinions to the table, which
underpins efforts to ensure sound management
practices and improve management efficiency
throughout the Group.

Reinforcing corporate governance is recognizedthroughout the Group as a management priority. In 2011,
the world’s view of Japanese companies was tarnished by aseries of incidents—an unfortunate situation.
At POLA ORBIS HOLDINGS, our corporate
governance structure hinges on the corporate auditor
system. Of the three corporate auditors on the Board of
Corporate Auditors, two come from outside the Company
and their high degree of independence strengthens
oversight from a compliance perspective. In addition, ouroutside corporate auditors attend general meetings ofshareholders, meetings of the Board of Directors andsessions of the Group Strategy Meeting, which involves
executive-level participation from principal subsidiaries
and where key strategies of the Group are discussed. They
also have access to corporate documents, such as reports
from directors, employees and the accounting auditor, andobserve the execution of duties by directors.
Of note, when we were traveling the business roadtoward the acquisitions of H2O PLUS and Jurlique,sessions of the Group Strategy Meeting were filled withdiscussion, precipitated by comments from the thirdparty perspective of outside corporate auditors who
broached such issues as a firm definition of acquisition
price and approaches conscious of post-merger
integration requirements and other global standards for
M&As. The role of outside corporate auditors is toobjectively state opinions on critical management
decisions, and the recent acquisitions certainly provided
another great opportunity for outside corporate auditors
to fully demonstrate this function.
We will continue to ensure sound management
practices and improve management efficiency

throughout the Group with persistent efforts to reinforce
corporate governance.
▶ For more details, go to P28: Corporate GovernanceQA hat is the Company’s policy on return ofW
profits to shareholders?
 e emphasize a balance between shareholderW
returns and investment for growth. With this inmind, we anticipate a ¥5 increase in the dividend
for fiscal 2012.

Our basic policy is to ensure a stable dividend withincreases pegged to profit improvement, and weemphasize a balance between return of profits toshareholders and investment that sustains businessactivities and corporate growth. Based on this policy, thefiscal 2011 dividend was set at ¥45 per share. For fiscal
2012, given expectations of a third consecutive year of
higher sales and higher operating income, we plan toraise dividends by ¥5, to ¥50 per share.
▶ For more details, go to P39: Investors’ FAQQA ooking ahead 10 years, how do you see theL
POLA ORBIS Group?
I would like the Group to be respectedworldwide, with brands with originality that
underscore our relationship with customers andresonate with them everywhere.

Our goal is to establish the POLA ORBIS Group as ahighly profitable global organization in the field of“beauty and health,” and all members of the Group are
working steadily toward the stated goals of consolidated
net sales of ¥250 billion, an overseas sales ratio of at least
20% and a top-of-the-industry operating margin by 2020.
I hope that even as the Group expands in scope, itwill be known for “brands with originality”—brands thatvalue close customer contact and good relationships.
This will encourage product loyalty among customers allover the world and raise even further our long-standing
reputation, thereby perpetuating our status as a respected
corporate group.
ANNUAL REPORT 201115

Special Feature 1: POLA ORBIS Group’s Expansion in China

Special Feature 1

Developing Overseas Brands Using Worldwide Distribution Network

POLA ORBIS Group’s
Expansion in China

H2O PLUS products, featuring sea-derived nutrients fromsuch marine botanicals as seaweed, are created under a welldefined concept and sold at more than 2,000 high-end retail

Establishing position as a global organization in the field of“beauty and health”

H2O PLUS HOLDINGS, LLC

points in 24 countries, primarily in North America and Asia.

H2O PLUS began sales in China in 2003. For the last few years,

The POLA ORBIS Group has several of its brands in China: POLA, ORBIS, H2O PLUS and Jurlique. We
will continue to promote our multi-brand strategy for Group brands as we strive to secure a bigger share of thehuge market that China represents.

it has sustained more than double-digit annual growth there. A
major benefit of the H2O brand, from a business perspective, isthat about 75% of sales comes from the highly profitableskincare segment. H2O PLUS will continue to strengthen its

The cosmetics market in China has expanded rapidly over the last few
Growth of Skincare Market
2015: ¥1,400 billion
years. The skincare segment in particular averaged annual growth of 20%,
2010-2015(Forecast)between 2005 and 2010. High growth is expected to continue, with market
CAGR 12％
scale likely to reach that of Japan by 2015.
2010: ¥800 billion
2005-2010
Consumers are bombarded with beauty information, which has prompted
CAGR 20％an increase in the number of women who are highly beauty conscious. A
2005: ¥300 billion
well-defined brand policy is therefore essential if the Group is to capitalize on
Note: Data based on Company estimatesthis favorable market environment and capture market share.
In its China expansion efforts, POLA ORBIS HOLDINGS is concentrating on four Group brands: POLA
and ORBIS, with strengths in direct selling; and H20 PLUS and Jurlique, with well-defined brand concepts
and extensive distribution networks.

brand presence in this expanding market and strive to increase

OasisTM series

sales points, specifically through a process launched in 2010 touse major local agents to reinforce sales in mainland China.
H2O PLUS is expected to contribute significantly to higher
sales in China in the coming years.

H2O PLUS store

Jurlique products are made with plants and botanicals grownon its own farm in Australia using pesticide-free organic
farming methods. Adhering to a brand attitude emphasizing

Flagship Brand Development Draws on Strengths Cultivated in Japannatural ingredients, Jurlique has earned a solid reputation in

Jurlique International Pty Ltd

the 20 countries where its organic skincare products are sold.

Jurlique entered mainland China on its own in 2009, but from

POLA INC.

ORBIS Inc.

In 2005, POLA kicked off

In 2005, ORBIS

concept of organic-origin ingredients, Jurlique offers its products

marketing activities inopened a location ofthrough directly operated stores and high-end department stores.

mainland China at directly

ORBIS THE SHOP

2012 it is developing its presence in this market as a wholly
owned subsidiary of POLA ORBIS HOLDINGS. Under its

operated stores and at

Training of POLA LADIESin Hong Kong, and in

Recognized as a prestige line of organic-ingredient skincare, theChinese version of ORBIS shopping website

department stores. Currently, the company enjoys the image of2009 it began developing the store network in mainland China.

store development efforts, Jurlique is very selective about locationa high-prestige brand sold mainly at high-end department

In July 2011, ORBIS opened its own mail-order site uponand interior layout to ensure that its environment is fully

stores, such as Jiu Guang. Moving forward, the plan is forcompletion of the preparations for the site’s platform, namelyreflective of the brand’s refined image. Jurlique will make every

POLA to put know-how accumulated in Japan into play inorder delivery and payment structure. The task now is toeffort to acquire more brand recognition, and it aims to increase

China through door-to-door sales. Toward this objective,enhance promotions and increase the number of site visits.

the number of stores selling Jurlique products and sales per store.

POLA set up an overseas subsidiary in Shenyang, Liaoning

Rosewater Balancing Mist

Jurlique brand has evolved into a highly profitable business. In its

Jurlique’s farm in Australia

Jurlique store

Province, in July 2011.
16 POLA ORBIS HOLDINGS INC.

ANNUAL REPORT 201117

Special Feature 2: POLA Brand Evolution of the Door-to-Door Sales BusinessSpecial Feature 2

POLA Brand Evolutionof the Door-to-Door Sales Business
In Japan’s increasingly challenging cosmetics market, the POLA brand continues to attract customers. The
driver of growth is a successful new sales format—POLA THE BEAUTY. This page and the next highlight the
new business model that integrates door-to-door sales and retail sales and showcases the reinvigorated frontline
sales network that has been created.
■ The door-to-door sales conundrum■ “Consulting First”—the impetus for evolution

Door-to-door sales had been in a slump prior to 2000,
mainly because the graying of POLA LADIES was
weakening the frontline sales structure, more women joining
the workforce presented fewer points of contact with newcustomers, and efforts to build a strong image for the POLA
brand had been insufficient.

The original idea for POLA THE BEAUTY appeared in“Consulting First,” a corporate message drafted in 2000. It
stated that consulting was POLA’s vital value, andarticulation of this idea prompted changes in door-to-doorsales with consulting and esthetic treatments.

Frontline Strength Supports Domestic Growth of POLA Brand
Sales branch manager* cultivates the skills of many POLA LADIES and * District manager with more than
¥10 million in monthly sales
oversees a frontline sales network posting ¥90 million in monthly sales
Holding the reins of several POLA THE BEAUTY stores and sales offices, this manager develops the skills of a staff who will
reshape the next generation and gives them wings to fly.
The debut of POLA THE BEAUTY marked a big change forgoals into words, but it’s my job to create the environment in

POLA. Through this concept, the company has achieved

which they can discover what it is they really want.

success on several fronts, such as improving the image of the

I’ve spent more than 30 years with POLA, but it has been

POLA brand and attracting new customers. It has been sevenin the last 10 years that I’ve seen particularly significant

years since the first store opened, and the biggest change thatchanges, such as the advancement of POLA LADIES, mostI’ve seen during this time is in the recruitment of POLA

notably Satoko Wakisaka and Kazumi Mori, to positions as

LADIES. Once quite inconceivable, the number of newsales branch managers while still in their 20s. Today, POLA isuniversity graduates applying for the position of POLA LADY

energized in terms of a frontline sales network and humanis on the rise, and university students are among those who

resources, and I firmly believe the company will continue todrop by stores to see what the job entails. POLA has obviously

grow and grow.

become a very attractive career option for young adults.
In my position, staff education is my biggest responsibility.

Development of POLA THE BEAUTY (Introduction of Customer-Attracting Business Model)
POLA THE BEAUTY stores are street-level locations integrating sales, consulting and comprehensive esthetic treatments. The first store

When I feel a POLA LADY is ready to advance in her career, I
have to consider such things as the placement of staff aroundher and create the right environment. Pairing up people causes

opened in 2005. Under the conventional door-to-door sales format, POLA LADIES visited customers. With POLA THE BEAUTY, ana chemical reaction, so to speak, so I have to make sure I’ve got

additional format was introduced—customers also visited POLA LADIES. The combination of marketing styles transformed frontline

the right combination to generate good results. I also place a

Kazuko Hashiguchi, Sales Branch Manager

operations significantly. Most notably, by setting up sales points in high-traffic areas, POLA attracted the attention of new customers and washigh premium on speaking freely. The LADIES can put theirHigashi-Yamazaki Sales Office, Kyoto

particularly successful in cultivating a customer base—women in their 20s and 30s—that had been out of reach through the door-to-door sales
format. POLA also created opportunities for women to experience skin analysis and try out esthetic treatments, an approach intended to spark
an interest in POLA products and services and encourage repeat customer visits. Another change came through an increase in applications fromyoung women wishing to become POLA LADIES, which rejuvenated and energized frontline operations. POLA THE BEAUTY is a key toYoung sales branch managers light
POLA’s way into the futurecontinued growth, and POLA will therefore continue to expand the store network.

Customer Management System Introduced

Support Structure Enhanced

B.A Brand Strengthened

Slim (Sales for Lucid IT Management), a
customer database system, allows the head
office to consolidate and maintain point-of-salecustomer data, such as purchase frequency andquantity of items as well as spending per
customer. By analyzing customer data andapplying the results to operations, POLA isable to share the status of sales laterally throughthe frontline sales network and anticipate
customer needs.

In 2005, POLA brought its domestic sales
companies under a headquarters structure tofacilitate direct communication of head officestrategies to frontline operations. The Field
Counselor System was introduced around thistime as well, establishing a structure toprovide fine-tuned management and support
for the sales activities of shop owners and
POLA LADIES.

A change in branding led to a shift in strategy
that thrust the B.A brand into a marketing
spotlight. The brand acquired a prestigious,
high-quality image, which prompted anincrease in spending per customer.

Energized Sales
Frontline

Number of sales
points (sales
offices) in fiscal
2011 up 31

18 POLA ORBIS HOLDINGS INC.

Rejuvenated Sales
Frontline
Average age difference
between POLA THE
BEAUTY LADIES
and existing-format
door-to-door POLALADIES about 20
years

I signed up as a POLA LADY because I had just had my firstI started working for POLA right out of university. I saw thechild and the sales office offered daycare. That was 10 years

job extending beyond my young adult years as a career I could

ago. POLA is a company that presents opportunities equallycontinue after marriage and for many years to come—work

to everyone, and I have always been able to freely say and dothat I could take pride in. POLA has the corporate culture

as I want.

that has allowed me to realize this. If you think of work as a

A valuable lesson I have learned through my work is to

Successes Through Business Model Evolution
POLA THE BEAUTY
Growth Rate
Up 10.4% (or 8.8%
on an existing store
basis)In 2010, two POLA LADIES, both just 29 years old, were promoted to the position of sales branch manager, and they
continue to grow in an environment conducive to opportunities that offer great potential.

Younger Customers

B.A Sales

Brand Reputation

About 60% of new
customers are in their
20s and 30s

Up 12.3%

B.A awarded best
cosmetic product by
women’s magazinesand beauty magazines
in Japan a total of 45
times

terrible chore, it will be. But POLA has established methods

embrace change in myself. If I don’t change my ways, thoseto help its LADIES, even those with no formal sales

around me won’t change either. But if I make a real effort toexperience, achieve their targets, so the POLA road is open tochange, good results appear, and theanyone who wants to travel it.

POLA approach to work, which evaluates

I will continue to do my part toresults fairly, is a perfect match for me.

increase the number of POLA LADIES
and energize the frontline sales network
to enrich the human interaction aspect of
the job still further.

Satoko Wakisaka, Sales Branch Manager

Kazumi Mori, Sales Branch Manager

ANNUAL REPORT 201119

At a Glance
Consolidated net sales

Beauty Care

¥166,657

Cosmetics business, emphasizing
skincare products and services, andfashion businessmillionNet sales breakdown by brand■ Fiscal 2011 Operating Results

H2O PLUS and brands under development

Buoyed by solid sales of flagship brand POLA and H2O PLUS, which became apart of the Group in the third quarter, net sales increased for the second consecutive
year. Efforts to enhance the profitability of flagship brands POLA and ORBIS weresuccessful and helped boost the year-on-year percentage change in profits, evensurpassing the percentage increase in net sales.

6%

Consolidated
operating income¥12,853

ORBIS¥3,089 million

63%

million

POLA INC.

ORBIS Inc.

P22

Net sales breakdown
by business segment
Real Estate

POLA

31%

Net sales

Others180

Billions of yen

150.3

153.1

154.8

12

120

8

60

4

0

2009*

2010

2011

0

10.2

10.8

2010

2011

7.9

2009*

* Amounts for fiscal 2009 are unaudited and provided for reference only.

Real Estate

Beauty Care

¥154,778 million

Consolidated net sales

Rental business utilizing
portfolio assets effectively

180

Net sales

Operating income

Billions of yen

Billions of yen

6

1.8

4

Billions of yen

3.2

165.3

166.7

3.1

0

1.6

1.2

1.3

1.3

2010

2011

0.6

2009*

2010

2011

0

2009*

B.A RED series

EXCELLENT ENRICH series

OasisTM series■ Fiscal 2011 Operating Results
Amid a prolonged trend toward low rents and persistently difficult businessconditions, tenancy contracts for condominiums and other redevelopment properties
were brisk and enabled this business segment to deliver results on a par with theprevious fiscal year.
Brote Ookurayama* Amounts for fiscal 2009 are unaudited and provided for reference only.

120

Others

60

0

3.1

2
162.3

P26

Operating income

Billions of yen¥8,790 million

H2O PLUS and brands under development

P24

2009

2010

2011

Pharmaceuticals,building maintenanceand commercial
printing businesses

Consolidated
operating income

Net sales

Operating income (loss)

Billions of yen

Billions of yen

12

0.6

8

8.8

9.1

8.8

0.3

0.2

0

4
0

■ Fiscal 2011 Operating Results
0.5

2009*

2010

2011

-1.0

-0.7
2009*

2010

2011

* Amounts for fiscal 2009 are unaudited and provided for reference only.

Billions of yen

The pharmaceuticals business became profitable with favorable sales of new andgeneric drugs.
The building maintenance business was adversely affected by a reduction in orders
following the March 11 disasters and recorded a year-on-year decline in sales.
We withdrew from the commercial printing business in the third quarter, parallelingthe sale of consolidated subsidiary P.O. MEDIA SERVICE INC. in July 2011.

Topical antifungal agent Lulicon

15
12.3
10

12.9

Segment Change

A new segment classification was introduced in fiscal 2011.

* Some business activities under the previous Cosmetics business segment were transferred to the Others segment.

9.7

Previous

Cosmetics

Fashion

Real Estate

Pharmaceuticals

Others5

Current
0

2009

2010

20 POLA ORBIS HOLDINGS INC.

Beauty Care

Real Estate

Others2011
ANNUAL REPORT 201121

Review of Operations

Overview of POLA’s Operations

Other:The POLA Brand

About

High-prestige productswith personalized service
offered door to door

Products

Strength in anti-aging and whitening skincare products

Services

Consulting, skin analysis, esthetic services

Sales
channels● Door-to-door sales (POLA THE BEAUTY, Esthe Inn,

5%

POLA’s sales
breakdown bysales channel(Fiscal 2011)

and other sales channels)● Other (department stores, business use, overseas)

Overseasdevelopment Russia, China, Thailand, and 12 other nations and regions

Door-to-door sales:
About

95%

B.A series

Net sales

Operating income¥97,353 million ¥6,168 million(Up 0.8%)(Up 10.3%)■ Sales Channels

Strategy Success

Strategy Success

Sales of B.A series

POLA THE BEAUTY stores

Up

12.3%

Sales per customer
Net sales

Operating income andOperating margin

Billions of yen

100

96.4

97.4

％

5.6
4.7

50

4

25

2

2009

2010

2011

0

4.9

5.8

6.2

6.3

9

6

3

2009

2010

Operating income
Operating margin

Notes: 1. Net sales and operating income are on a consolidated basis.
2. Amounts on pages 22 and 23 are unaudited and provided for reference only.

22 POLA ORBIS HOLDINGS INC.

1.8%

12

8

6

75

0

Up

Billions of yen

96.5

2011

0

TOPICS■ Products & Services

POLA continued to strengthen B.A, its popular antiaging skincare series. In fiscal 2011, POLA
endeavored to expand the target market with theAugust launch of the entry-level B.A RED series. B.A
THE MASK, based on a revolutionary formula,debuted in October and generated sales of more than
50% above the initial target. In addition, POLA
continued to offer opportunities for POLA LADIES
to upgrade their skills and also improved consultingbased sales activities to support wider sales of prestige
skincare products. These efforts were rewarded with a
1.8% increase in sales per customer.

B.A THE MASK captures best cosmetic productawards (skincare category) from all three majordomestic beauty magazines! A landmark achievement!

533 locations(An increase of 33 stores)

POLA THE BEAUTY net sales growth
Up

10.4%

(Reference: Sales through Esthe Inn down 0.2%; sales throughexisting door-to-door channel down 7.7%)

Sales through POLA THE BEAUTY stores remained
brisk. As planned, POLA expanded its store network,
opening 33 new locations in fiscal 2011, and bringing
the total number of stores in operation to 533. This
supported a 10.4% increase in net sales over theprevious fiscal year. After the new stores opened,
POLA increased the number of POLA LADIES, andthe stores successfully attracted new customers, which
underpinned an 8.8% improvement in net sales atexisting stores. The total number of sales offices,
including POLA THE BEAUTY stores, reached 4,553
as of December 31, 2011, up 31 from fiscal 2010,setting the stage for stable growth into the future.

B.A THE MASK, which debuted in October 2011, hasbeen well received in the market, substantiated by awards
for best cosmetic product (skincare category) from all
three major domestic beauty magazines. The product wasrecognized for its revolutionary formula, which allows users
to apply the foam to the skin without the need to rinse it
off, and the characteristically high level of customer
satisfaction that the B.A brand enjoys. For a single productto earn the top award in the skincare category of all threemajor domestic beauty magazines’ annual product reviews
is a first, and this landmark achievement will lift the profileof the B.A brand even higher.

Three major domestic beauty magazines

ANNUAL REPORT 201123

Review of Operations

The ORBIS Brand

Overview of ORBIS’s Operations

100% OIL-CUT (oil-free)

Products

100% OIL-CUT (oil-free), fragrance-freeand pigment-free products

Services“Fulfillment system” featuring free shippingand free returns and exchanges within 30 days

Sales
channels

Mail-order, stores and overseas sales

skincare products with superb
customer service via mail-ordersales and retail stores

Other:About

30%
ORBIS’s sales
breakdown bysales channel(Fiscal 2011)

Overseasdevelopment Taiwan, South Korea, China and Hong Kong

Mail-order sales:
About

70%

CLEAR series

Net sales

Operating income¥47,918 million ¥6,526 million(Up 5.8%)(Down 2.9%)■ Sales Channels

Strategy Success

Strategy Success

Sales ratio of skincare products to new
customer sales

Ratio of Internet sales to total sales

Up
Sales per customer
Net sales

Operating income andOperating margin

Billions of yen

Billions of yen

60
49.4

47.9

45

6.2
6

30

4

15

2

2009

2010

2011

0

6.5
18

5.4
11.3

12.5

13.6
12

6

2009

2010

Operating income
Operating margin

Notes: 1. Net sales and operating income are on a consolidated basis.
2. Amounts on pages 24 and 25 are unaudited and provided for reference only.

24 POLA ORBIS HOLDINGS INC.

Up

0.9%

14.0 ppt

StoresUpUp

3.3 ppt(Internet sales hovered at approximately ¥16.0 billion)

0.4%

24

8
47.7

0

Mail-orders％

TOPICS■ Products & Services

2011

0

ORBIS is accelerating efforts to strengthen its skincare
series, and fiscal 2011 marked the renewal of flagshipseries AQUA FORCE, in March, and WHITENING, in
July. In addition, in December ORBIS debuted the
EXCELLENT ENRICH series for women in their 40s
and older. This series utilizes innovative technology
based on a 100% oil-free concept to seal in moisture, afeature that has generated brisk sales.
Although the disasters that struck Japan in March2011 caused a year-on-year drop in net sales, ORBIS
was successful in its efforts to promote products,
particularly skincare, and to boost sales per customer.
These achievements underpinned a 5.8% improvementin operating income.

To strengthen Internet sales, ORBIS introduced an
abridged digital version of its product catalog and a
one-to-one marketing system based on customer
profiles. These efforts were favorably rewarded with a
3.3 percentage point improvement in the ratio ofInternet sales to total sales and a 1.9 percentage point
increase in the rate of repeat mail-order customers. In
addition, profitability increased owing to a reduction in
print media costs. Meanwhile, it was a persistent
struggle to boost sales at department stores and similar
sales channels owing to the difficulty in attracting
customers in the wake of the Great East Japan
Earthquake.

ORBIS’s mail-order site wins top honors! No. 1 inonline shop category for after-sales service
satisfaction by Nikkei Business survey for third
straight year!
Since the inception of its Internet sales business, ORBIS has
applied a customer perspective in its efforts to enhance the
shopping experience, exemplified by free shipping even for
single-item orders and free returns and exchanges within 30
days. This emphasis on customer service has put the online
store in the top spot for three straight years in the Nikkei
Business survey After-sales Service Satisfaction Ranking(online shop category). Another star on the corporate reportcard came from the 2011 Japanese Customer Satisfaction
Index survey, an evaluation undertaken by the Service
Productivity & Innovation for Growth forum on behalf ofthe Ministry of Economy,
Trade and Industry, inwhich ORBIS was
ranked highest in
customer satisfaction in
the mail-order sales
category. The company
was chosen from among
several well-known
mail-order site entries.

ORBIS shopping website

ANNUAL REPORT 201125

Research & Development

Review of Operations

H2O PLUS and Brands under Development
Net sales¥9,506 million(Up 32.2%)

Operating loss

¥1,907 million(Widened by 19.5%)

Net sales■ H2O PLUS
On July 1, 2011, H2O PLUS became a wholly owned consolidated subsidiary,with its business results included in the Group’s consolidated accounts from thethird quarter of fiscal 2011. Net sales were favorable in North America and in thegrowing markets of Asia, particularly China and Hong Kong, which drove net
sales to ¥1,851 million. However, H2O PLUS recorded an operating loss of ¥81
million after amortization of goodwill.

Billions of yen

9

6

6.3

3

0

2009

■ Brands under development
All five brands under development delivered higher sales. Of note, THREE, which
was launched in 2009, showed a dramatic improvement in sales, soaring 50%
over the previous fiscal year. pdc marked a favorable increase in sales with solid
demand for products sold only at variety shops and products made incollaboration with retail stores. Meanwhile, the operating loss deteriorated owing
to prior investment in the OEM business to develop products for the future.

7.2

2010

POLA Yokohama R&D Center

Reference
Purchase price: ¥8,174 million (including ¥377 million for advisory fees, etc.)
Goodwill will be amortized equally over 20 years.

12

9.5

Nearly all the cosmetics under our flagship brands are the result of integrated
research, development and production by POLA CHEMICAL INDUSTRIES,
INC. The company draws on a database of 13 million entries about customers’ skinand concentrates the investment of corporate resources into the development ofanti-aging and whitening skincare products. These efforts have yielded various
rewards, including the discovery of innovative concepts in skincare and thedevelopment of proprietary ingredients.
Seeking to harness synergies with the new subsidiaries H2O PLUS and
Jurlique, we will apply the products developed by POLA CHEMICALINDUSTRIES to H2O PLUS and Jurlique.

■ Discovering new concepts in the fight■ Developing ingredients for anti-aging

Newly discovered concepts in skincare include “antiglycation,” which prevents proteins and sugars from binding
and thereby causing skin to lose its luster, and “pH control
skin whitening,” which slows the production of melanin byshifting the pH balance within melanocytes toward theacidity side.

Rucinol * is a quasi-drug ingredient recognized for its skinwhitening effects and approved for use by Japan’s Ministry of
Health, Labour and Welfare. This ingredient is a perfect
example of pioneering efforts to develop unique ingredients
based on concepts discovered through leading-edge research.

Cosmetics research

R&D of new ingredients

against brown spots and wrinkles

and whitening skincare®

* Rucinol® is a registered trademark of POLA CHEMICAL INDUSTRIES, INC.

2011

Note: Amounts are unaudited and provided for reference only.

Real Estate
Net sales¥3,089 million(Down 0.4%)

Operating income

Net sales were generally in line with the previous fiscal year, down just 0.4%, to¥3,089 million, underpinned by favorable demand for condominiums at a
redevelopment property that was completed and opened for tenancy in
September 2010. These units are suitable for families with young children.
Operating income slipped slightly from the previous fiscal year, edging down
1.6%, to ¥1,283 million.

¥1,283 million■ Another discovery in the field of whitening skincare(Down 1.6%)

Others

Net sales¥8,790 million(Down 3.0%)

Operating income¥501 million(Up 124.9%)

26 POLA ORBIS HOLDINGS INC.

TOPICSFor the first time since the Group entered the pharmaceuticals business, thebusiness turned a profit, bolstered by brisk sales of generic drugs and such products
as Lulicon antifungal agent for topical use. However, the building maintenancebusiness incurred a drop in orders due to the impact of the March earthquake. As aresult, net sales declined 3.0%, to ¥8,790 million, while operating income soared
124.9%, to ¥501 million. The Group withdrew from the commercial printing
business following the July 2011 sale of all equity in consolidated subsidiary P.O.
MEDIA SERVICE INC.
Reference
Commercial printing business results in fiscal 2010
Net sales: ¥3,717 million (external net sales accounted for ¥592 million)
Operating income: ¥284 million
Net income: ¥177 million

It is generally understood that ultraviolet light is the primary factor in the
production of melanin, which in high concentrations shows up as brownspots on the skin. In 2011, POLA CHEMICAL INDUSTRIES made alandmark discovery, establishing that a certain dermis-expressed peptide is
responsible for causing melanin-producing melanocytes to increase in size.
Researchers then identified this peptide as the melanocyte enlargement factor
Adrenomedullin (ADM).
In addition, researchers found that an extract of the botanical marjoram*
was effective in suppressing ADM activity and went on to successfully develop
Rucinol® CX, the world’s first compound prepared with marjoram extract.
WHITE SHOT CX, featuring Rucinol® CX, debuted in February 2012 and isalready hailed by many customers as a milestone achievement in skincare.
* Marjoram extract is derived from the leaves of sweet marjoram, a herb in the mint family(Scientific name: Origanum majorana).

No ADM

Effect of ADM on
melanocyte formation
The addition of ADM caused
two dendrites—melanocyte
branches—(top photo) toincrease to nine (bottom photo).

Add ADM

After 24 hours

POLA WHITE SHOT CXANNUAL REPORT 201127

Corporate Governance
Basic approach

The Board of Directors and Group Strategy Meetings

Internal audits and audits by corporate auditors

Internal control system

The POLA ORBIS Group follows a multi-brand strategy, witheach operating company in the Group essentially allowed to
manage its operations autonomously and independently. As
the holding company, POLA ORBIS HOLDINGS INC.
retains management control over each operating company
with the aim of increasing shareholder value by ensuringsound and efficient management.
The Group has formulated the POLA ORBIS Group
Action Platform (hereafter “Action Platform”) that sets out
regulations governing legal compliance, environmental
protection, investor relations and other matters. All executives
and employees are required to make a pledge to act inaccordance with the Action Platform.

The Board of Directors, comprising seven directors, is
responsible for improving the performance of the Group andemploys a system that facilitates rapid decisions regarding themanagement of Group companies and key issues facing theGroup. The directors are entrusted with the necessary
authority to carry out these duties. Corporate auditors also
attend meetings of the Board of Directors and offer their frankopinions.
Meetings of the Board of Directors are held at least once
every month. In fiscal 2011, the Board of Directors met 27
times (including extraordinary meetings). The directors had a
100% attendance record.
In addition to fulfilling its duties as set out by law and theCompany’s Articles of Incorporation, the Board of Directors
contributes to corporate governance by passing resolutions andreporting on important management matters, such as theanalysis of differences between monthly forecasts and actual
performance, and conducting discussions in response to theviews of each director and corporate auditor.
Group Strategy Meetings are held with the aim ofincreasing the profits and supporting the development of theentire Group. Group Strategy Meetings are attended by theCompany’s directors and corporate auditors, as well as byGroup company presidents, directors, or others appointed byresolutions of the Board of Directors. The meeting deliberates
on important Company and Group company matters that arereported to it by the Group companies.

The Company’s Board of Corporate Auditors comprises one
full-time corporate auditor and two part-time outside
corporate auditors as defined by Article 2-16 of Japan’sCompanies Act. Corporate auditors attend the General
Meeting of Shareholders, meetings of the Board of Directors,
Group Strategy Meetings and other important meetings,
where they receive reports from directors, employees and theaccounting auditor and monitor the executive duties of thedirectors.
The Company’s Internal Audit Office (seven staff as ofDecember 31, 2011) serves as its internal audit department.
The Internal Audit Office is under the direct control of theCompany’s President, separating from other lines of businessexecution. From its independent and objective position, theInternal Audit Office strives to conduct highly effective
internal audits to ensure sound and appropriate managementat Group companies.
The Company’s corporate auditors work together with theinternal audit department (Internal Audit Office), receiving
reports on internal audits in principle every month andclosely sharing information. The Company also works toincrease the effectiveness and efficiency of audits byconducting audits with the participation of the accounting
auditor (Ernst & Young ShinNihon LLC) as well as theinternal audit department and corporate auditors. All threeparties share their views on the content of audit reports andmanagement issues.

The Company’s Board of Directors has passed a resolutionthat sets out the basic policy for the internal control system
related to the following areas: ensuring directors carry out
their executive duties efficiently; retaining and managing
information related to the executive duties of the directors;
formulating regulations for loss and crisis management andother systems; implementing measures to upgrade thecompliance system; implementing measures to upgrade thesystem that ensures appropriate business practices at Group
companies; establishing a system for individuals who are
required to support the corporate auditors and their duties inthe event that the corporate auditors request such a person;
establishing a system that allows directors and employees toprovide reports to corporate auditors; establishing a systemthat allows the submission of reports to other corporate
auditors; establishing a system to ensure other corporate
auditors carry out their duties effectively; formulating andimproving the Company’s basic policy on eliminating antisocial forces; and financial reporting.

Features of the Group’s corporate governanceframework
The Company has a Board of Directors and a Board of
Corporate Auditors. The President of the Company is the
Chairman of the Board of Directors while the full-time
corporate auditor is the Chairman of the Board of Corporate
Auditors. The Company holds Group Strategy Meetings(management meetings) every month. Operational
responsibility has been clarified under a pure holding
company that oversees operating companies responsible formultiple cosmetics brands.

Director remuneration

Corporate Governance Structure
General Meeting of Shareholders
Appointment / Dismissal

Appointment /Dismissal

Board of Directors
Appointment /Dismissal

President

ReportingOperational audits/
Accounting audits
Supervision
ReportingInternal Audit OfficeGroup Strategy Meeting

Reporting

Resolution
Accounting audits

ReportingGroup companies / departments

28 POLA ORBIS HOLDINGS INC.

Coordination
among three
entities

Board of Corporate
Auditors

Operational audits

Accounting Auditor

Appointment /Dismissal

Total amounts available for remuneration for directors andcorporate auditors are determined in accordance with theshare transfer plan drawn up when the Company wasestablished. Remuneration for directors is decided by the
Board of Directors based on the Company’s regulations up
to the aforementioned maximum allowable level, and takes
into account factors such as each director’s contribution to
the Company’s earnings. Remuneration for corporate
auditors is decided by deliberation among the Board of
Corporate Auditors up to the aforementioned maximum
allowable level and is based on the respective duties andresponsibilities of each corporate auditor.
In addition, in March 2012 the Company introduced astock-compensation-type stock options program. Stockacquisition rights will be granted to each director in each fiscal
year during his or her respective time in office, based on the
Company’s regulations.
In fiscal 2011, a total of ¥227 million was paid to 10
directors and corporate auditors, of which a total of ¥13
million was paid to the two outside corporate auditors.

Compliance system
The Group CSR Committee has been established directly
below the Board of Directors and is responsible for thecompliance system across the Group. Additionally, Group
companies have also, depending on their size, established a
CSR office or CSR support administrator to support thecompliance system within each Group company. Awarenessis likewise promoted through a CSR handbook which is
distributed to all Group executives and employees, while all
executives and employees are required to submit a written
pledge to act in accordance with the Action Platform.

Risk management system
In order to mitigate risk in the Group’s business activities
and minimize any losses, the Company has established risk
management regulations to ensure continuous and stablebusiness operation. Risk management under normal conditions
is conducted by the Boards of Directors of Group companies,
which deliberate and decide on risk management matterssuch as basic policy, annual plans, budget allocation, thecomposition of working groups, progress management, andthe development of remedial measures and their follow-up.
Meanwhile, the Company has established crisis control
regulations to provide a fundamental framework in the eventof major risk events (crises) that have a significant impact on
the Group’s management and that require a rapid response.
All executives and employees at Group companies are
required to be aware that crisis control is an important partof management and business activities when carrying out
their duties.

ANNUAL REPORT 201129

Corporate GovernanceDirectors and Corporate Auditors (As of March 29, 2012)

Interview with Outside Corporate Auditor

Directors

From the Viewpoint ofan Outside Corporate Auditor

Satoshi Suzuki

Takao Miura

Representative Director
and President

Executive Vice President

Motto:

Akio Sato
Lawyer, Outside Corporate Auditor

Activities as an outside corporate auditor
As an outside corporate auditor for POLA ORBISHOLDINGS, I attend the meetings of the Boardof Directors and the Board of Corporate Auditors
as well as Group Strategy Meetings, which bringkey executives from Group companies together, andcorporate auditor liaison meetings, which involve
corporate auditors from principal Group companies.
I offer my opinions at these various meetings.
Function of an outside corporate auditor
I believe the function of an outside corporate auditor
is, in the course of auditing duties, to incorporate thetrends and share the comments seen and heard
outside a company into discussions that take place atvarious executive-level meetings—and so I
participate in these meetings and make my opinions
known from a perspective external to the Company.
Noteworthy features and evaluation of theCompany’s corporate governance structure
The POLA ORBIS Group maintains anorganizational structure that places key executives
at Group companies as full-time members in
regularly held management-level meetings.
Participants are encouraged to touch on subjects
other than issues associated with their own
companies and are therefore able to add an
independent perspective to discussions covering
topics that impact the entire Group. Few

30 POLA ORBIS HOLDINGS INC.

AMUSE Inc., Auditor (External)
GMO HOSTING & SECURITY, INC., External Auditor
Infoteria Corporation, Auditor

companies have a discussion structure that allows
executives of Group companies to become full-timemembers at high-level management meetings. The
POLA ORBIS Group actively embraces this kindof cross-organizational discussion structure. It is amajor aspect of the Company’s corporate
governance structure and, I believe, a highly
commendable feature.
Efforts to further enrich corporate governance
POLA ORBIS HOLDINGS is a pure holding
company at the top of a corporate group which
now includes an overseas company that joined theGroup in 2011. Consequently, it will become
increasingly important from a corporate governance
perspective for the Company to reinforce
cooperation throughout the Group in the areas ofmanagement, finance and personnel, while stillpreserving the independence of each Group
company. I have always been impressed by theextensive business expertise of the Company’s
executives. But to better fulfill the corporate social
responsibilities of a listed company with global
aspirations, management must, with a level ofdetermination commensurate with all that businessexpertise, enhance the Group’s corporate
governance structure to match the evolving scopeof the Group’s operations and to secure knowledge
vital to constructive participation in management
meetings.

Find happiness in giving
happiness

Motto:
Revere heaven,love man

Akira Fujii

Naoki Kume

Hiroki Suzuki

Director

Director

Director

Motto:

Motto:

Be yourself

What doesn’t kill you
makes you stronger

Motto:He who does not pause
to consider what is
distant shall findsorrow near at handYasuo Iwazaki

Tsuneo MachidaDirector

Director

Motto:

Motto:Creativity opens the door
to new worlds

Think globally,
act locallyCorporate Auditors

Kuniaki Hoshi

Akio Sato

Motohiko Nakamura

Corporate Auditor

Outside Corporate
AuditorOutside Corporate
AuditorMotto:

Motto:

Always do your best

Cool head,but warm heart

Motto:
Always aspire tosomething greater

Note: Akio Sato and Motohiko Nakamura are Outside Auditors as stipulated in Article 2, Paragraph 16 of Japan’s Companies Act.

ANNUAL REPORT 201131

Corporate Social Responsibility
Perpetuating our long-held spirit to “find happiness in giving happiness,” the POLA ORBIS Group strives to build a corporate
brand that is loved and trusted by society. Our corporate social responsibility (CSR) activities reflect efforts to cultivate this spirit

Support for Areas Affected by the Great East Japan Earthquake
We hold in our hearts all those whose lives have been disrupted by
the events of the Great East Japan Earthquake of March 11, 2011. We
hope and pray that life is returning to normal as quickly as possible.

and “fulfill our responsibilities as a good corporate citizen in contributing to society.”

Selective CSR

Business CSR

The POLA ORBIS Group undertakes
CSR activities in three areas:
fundamental, business and selective.
Of these, business CSR takes center
stage with programs that encourage
cooperation with stakeholders throughthe Group’s core business. These
programs emphasize efforts to enhancecustomer and employee satisfaction
and thereby ensure sustainable
development, promote high-quality
products and services, invigorate local
economies and industries, and create
employment opportunities bygenerating new value.

The POLA ORBIS Group continues to contribute to reconstruction in
the disaster areas and provide support to people who have been
affected by the earthquake and tsunami.

Hopes and prayers for a quick recovery in a disaster-devastated region
are given tangible form

Going into the community

Through products

Volunteers provided a

At POLA Fair (exhibition

welcome esthetic respiteand sales show), POLA

to people at emergency

offered Tohoku specialty

shelters. They offeredproducts to support the

facials, handcare andrecovery of industry in

As a brand, spotlighting natural ingredients of Japan andseeking to energize local economies and utilize naturalingredients in products

other treatments in thethe disaster-affectedcharacteristic POLA styleareas. A variety of items

and were rewarded with

were available, including

smiles of appreciation frombags, accessories and

The autumn 2009 launch of THREE marked the start of social contribution

so many people.

furniture made with

Fundamental CSR

from an ingredient perspective. For THREE, we cast a spotlight on natural

materials produced in Miyagi and Iwate prefectures as

ingredients that had not been utilized in Japan before and worked with local

well as food products, such as Sendai miso.

producers to develop the raw materials for cosmetics. We believe that
products featuring ingredients made in Japan will be well received by women
not only in Japan but also overseas.

THREE

The “i·tsu·mo* project” is a program designed to help people affected bydisaster hit. The program comprises activities in three themes: restore
natural surroundings, repair the social structure and enrich life.

opportunities to deepen communication as artists work with citizens tolocations, making it increasingly difficult for residents of small towns topaint pictures on temporary housing

address all their shopping needs. So POLA converted a 12-meter bus into a

to create warm and welcoming

department store on wheels with sofas and mirrors to create a boutique-likeenvironments. The effort has garneredatmosphere. The bus travels all over Japan. The novel shopping concept has

Great East Japan Earthquake.
32 POLA ORBIS HOLDINGS INC.

Fund-raising
campaign

Raise funds“Adding a Touch of Warmth Project.” This project is designed to promote

department store and supermarket operators to withdraw from theseand by year-end had visited 54 locations, including areas affected by the

ORBIS customers● Percentage ofsales donated● Donation in the formof a gift certificate

An example of activities under the enrich life theme is support for the

In many rural communities in Japan, the shrinking retail market has forced

well received. The bus rolled out in October 2011 on an extended sales trip“i·tsu·mo project” Structure

the Great East Japan Earthquake get back to the life they knew before

Moving Salon delivers beauty to customers in rural areas
without easy access to storesdrawn considerable interest, especially from rural customers, and has been“i·tsu·mo project” and “Adding a Touch of Warmth Project”

Moving Salonsuch comments as “Thank you” and“I’m so pleased that my home got

Transmit
information“i·tsu·mo project”
Support activities

Restore natural
surroundings

Repair thesocial structure

Enrich life

Employees’ volunteer activities
People in affected areas

some makeup, too.”* Japanese term suggesting “daily” or “normal”

ANNUAL REPORT 201133

History

Investors’ FAQ

1929

Shinobu Suzuki founds the business in Shizuoka Prefecture.

1940

POLA CHEMICAL INDUSTRIES INC. is established (incorporated).

1946

POLA Cosmetics, Inc. is established (incorporated).

1954

The Shizuoka Factory is completed.

Q1 What do you make of recent trends in the domestic cosmetics market?
Consumer demand for skincare, particularly anti-aging and whitening products, isA high. This is our forte, and we should be able to fully demonstrate our strengths to

1961

The Yokohama Factory is completed. Fuji Printing, Ltd. (currently P.O. MEDIA SERVICE INC.) is established.

1964

The Yokohama R&D Center is completed.

1971

POLA Real Estate Inc. is established and the real estate business is launched.

1976

The POLA Research Institute of Beauty & Culture is established.

1977

The Fukuroi Factory is completed.

1979

The POLA Foundation for the Promotion of Traditional Japanese Culture is established.

1983

POLA CHEMICAL becomes a major investor in KAYAKU CO., LTD. and enters the pharmaceuticals business.

1984

ORBIS Inc. is established and the mail-order sales business is launched.
POLA GTS Inc. (currently P.O. TECHNO SERVICE INC.) is established and the building maintenance business is launched.

1986

POLA CHEMICAL wins the high award at the 14th annual IFSCC (International Federation of Societies of Cosmetic Chemists) Congress heldin Barcelona, Spain.

1987

ORBIS starts full-fledged business activities (in the Tokyo metropolitan area).

1988

ORBIS first publishes its nationwide catalog.

1993

POLA Daily Cosme Inc. (currently pdc INC.) is established and the personal cosmetics business is launched.

1994

POLA CHEMICAL wins the highest award at the 18th IFSCC Congress held in Venice, Italy.

1996

POLA CHEMICAL wins a high award at the 19th IFSCC Congress held in Sydney, Australia. The Pola Art Foundation is established.

1997

ORBIS receives ISO9001 certification. The Shizuoka and Fukuroi Factories receive ISO9002 certification.

1998
1999

POLA wins the highest award at the 20th IFSCC Congress held in Cannes, France.
The Shizuoka and Fukuroi Factories receive ISO9001 certification.

The first retail store “ORBIS THE SHOP” in Marui, Ikebukuro, Tokyo opens.
The Shizuoka and Fukuroi Factories receive ISO14001 certification.
New business announcement by POLA aimed at “A thorough commitment to customer first,” “Selection and concentration of businesses,”

2002

2005

The Fukuroi Factory receives the Prime Minister’s Award, recognizing it as an Outstanding Green Plant.
POLA THE BEAUTY premium esthetic salons are launched.
ORBIS acquires the Privacy Mark, certifying proper handling of personal information.
POLA ORBIS HOLDINGS INC. is established and the Group transitions to a pure holding company system.

2006

P.O. REAL ESTATE INC. is established and carries on the real estate business.
The Group becomes a major investor in the FUTURE LABO group, and the TV mail-order sales business is launched.

2007

POLA Cosmetics, INC. is renamed to POLA INC. The pharmaceutical company POLA PHARMA INC. is established.
ORLANE JAPON INC. is established through a joint venture with Orlane S.A. of France. decencia INC. is established.

2008

ACRO INC. is established. POLA CHEMICAL wins the highest award at the 25th IFSCC Congress held in Barcelona, Spain.

2010

POLA ORBIS HOLDINGS INC. is listed on the Tokyo Stock Exchange First Section.

2011
2012

R&D in the fields of anti-aging and whitening skincare,which will push the ratio up even more. In these key
skincare fields, the Group has a considerable assortmentof original ingredients with the potential for exclusive
use that other companies do not have. This presents anadvantage that the Group can utilize to develop superior
products to those of its rivals.
By price bracket, we will continue to enhance highprestige products headlined by POLA.
By sales channel, for ORBIS we will build on theunrivaled excellence of mail-order services. For POLA, wewill seek further growth—around 10%—for the progressive
POLA THE BEAUTY business model to offset persistently
lower sales from the door-to-door format.
These efforts should yield stable growth of 1%–2%
for the Group in the domestic market.

1. Domestic Cosmetics Shipments

2. Breakdown of Skincare Market by Product Function (skin lotions)

Billions of yen（Akira Fujii, Director, PR & IR and CSR divisions）

%

1,500

100
80

1,000

60

“Reform of corporate culture and management.”
The POLA Museum of Art opens at Sengokuhara in Hakone, and the POLA Museum Annex opens in Ginza.

2004

The domestic cosmetics market is shrinking slightly
overall. However, a breakdown by category reveals thatskincare remains relatively favorable, compared withmakeup. (Graph 1)
Moreover, demand for anti-aging and whitening
skincare products is brisk, owing to the graying of
consumers in Japan and a trend toward heightened
beauty consciousness. (Graph 2)
By price bracket, high-prestige products are doing
well, while middle-tier products are struggling. (Graph 3)
By sales channel, mail-order sales have been charting
an upward path for the past few years. (Graph 4)
Given these market conditions, the Group is wellplaced to demonstrate its strengths.
On a consolidated basis, skincare accounts for 60% ofsales, considerably higher than the industry average of
45%, and we will continue to concentrate investment in

ORBIS The Net (EC site) opens.
POLA’s corporate message, “Consulting First POLA,” is announced.

2000

meet market needs.

The Group acquires all outstanding shares in H2O PLUS HOLDINGS, LLC.
P.O. MEDIA SERVICE INC. is sold.
The Group acquires all outstanding shares in Jurlique International Pty Ltd.

34 POLA ORBIS HOLDINGS INC.

40

500

20
0

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Forecast
Non-skincare
Skincare0

2007

Anti-aging

Whitening

2008

2009

Moisturizing

2010

Other

Source: The Office of Current Survey for Mining and Manufacturing, Ministry of Economy, Trade andIndustry; 2011 forecast based on Company estimates

Source: Marketing Handbook of Cosmetics 2011, by Fuji Keizai Group

3. Trends by Price Bracket

4. Trends by Sales Channel

Billions of yen

Billions of yen

2,500

2,500

2,000

2,000

1,500

1,500

1,000

1,000

500

500

0
Mass-market

2011
Forecast

2008
Middle-tier

2009

2010

Prestige

High-prestige

Source: Marketing Handbook of Cosmetics 2011, by Fuji Keizai Group

2011

0

2008

Drugstores, mass retailers
Mail-order

2009
Department stores

2010

2011

Door-to-door sales

Business use, other

Source: Marketing Handbook of Cosmetics 2011, by Fuji Keizai GroupANNUAL REPORT 201135

Investors’ FAQ

Q2 How does the door-to-door sales system work?
POLA concludes consignment sales contracts with POLA LADIES—sales office
A managers and sales representatives—who sell products to POLA customers. The doorto-door sales system has merits for all involved, benefiting the company, POLALADIES and customers.
Merits for POLA
• Product ownership resides with POLA until the orderis delivered to customers, preventing discounts andresale and enabling POLA to maintain its highprestige brand image.
• Under the sales commission system, POLA LADIES
receive compensation based on actual sales. Therefore,
an increase in the number of POLA LADIES does
not precipitate a fixed increase in costs, such as
personnel expenses.
• The head office, with access to all sales data, can apply
it to marketing activities. All inventory data is
consolidated and managed at the head office.
• Sales are recorded at the time a POLA LADY sells to acustomer, reducing the risk of returned products.
Merits for POLA LADIES• Under the consignment sales contract, POLA LADIES
are not required to pay for the products they supply tocustomers, nor do they incur any inventory risk.
• Contracts are signed between sales office managers,

with sales know-how, and POLA LADIES so thateach LADY is able to receive guidance and advice
from her manager whenever necessary.
• The compensation system is directly linked to revenues,
so a POLA LADY who enthusiastically pursues sales
will be rewarded with higher compensation.
• A POLA LADY can assemble her own staff andbecome a sales office manager or shop owner.
Merits for Customers• POLA LADIES are assigned to customers, andthrough face-to-face consulting and sales activities
they are always able to suggest the products mostsuitable for each customer.
• Purchasing history is maintained not only by acustomer’s assigned POLA LADY but also by storesand the head office, so customers can be assured of
personalized services and follow-up assistance.
• Customer comments and other feedback reach thehead office through the frontline structure.
(Mitsuru Noda, General Manager, Sales Organization Service Division, POLA INC.)

Sales Flowchart
In general, sales contracts are transactions between manufacturers and wholesalers and stores. As such, it is difficult for manufacturers to obtaincustomer information as well as control prices. Under POLA’s consignment sales contracts, products belong to the company until they are passedby hand to purchasing customers, which enables the company to collect customer information and control prices.

Consignment sales contract

Customers
2 Sales

1 Consignment
4 Payment
5 Commissions

Sales offices(POLA LADIES)

Information

3 Payment

Information

Sales contract

Customers
1 Wholesaling

Manufacturers
2 Payment

36 POLA ORBIS HOLDINGS INC.

Warehouses
andStores

3 Retail sales

4 Payment

Q3 Why is POLA THE BEAUTY so successful?
POLA THE BEAUTY has become readily recognizable as a place to purchase POLA
A products, prompting not only an increase in customer visits but also an increase in
POLA LADIES.
The traditional door-to-door sales format had two maindrawbacks. From a customer point of view, it wasdifficult to know where POLA products could bepurchased; and from a company perspective, the doorto-door format precluded access to women in their 20s
and 30s—a demographic group that the company
needed to develop for the future. But thanks to POLA
THE BEAUTY, places to purchase POLA products are
now a familiar sight. As a result, the company has
attracted many new customers, 60% of whom are in
their 20s and 30s, a key age group for POLA.
Also, development of the POLA THE BEAUTY
network put the role of POLA LADIES in the publiceye, prompting an increase in the number of women
wishing to sign up as POLA LADIES. Furthermore,enhanced support from the head office inspired more
women to embrace their entrepreneurial spirit, whichenergized the frontline structure and inevitably
contributed to higher sales.
(Seiko Sueyoshi, General Manager, Customer Development Division, POLA INC.)

POLA THE BEAUTY

Q4 What keeps even existing POLA THE BEAUTY stores growing?
POLA THE BEAUTY, which evolved out of the door-to-door business, naturally sees
A an aggregate increase in customer visits when a new store opens, but the ongoing PR
activities of POLA LADIES also bring in new customers.
POLA maintains a system that assigns a POLA LADY toeach customer, and each POLA LADY receives salescommissions based on her actual sales. New POLALADIES must actively implement measures to attract
their own customers. Also, the sales office manager incharge of a store has know-how in traditional door-todoor sales and can guide POLA LADIES in executing
the off-site PR activities needed to build a base ofcustomers.
These are the factors that lead to an increasing number of
new customers at existing stores and ensure sustained growth.
POLA does not rely on new store openings alone toachieve growth but rather complements store
development efforts with activities to foster continuous
growth at existing stores as well.

(Seiko Sueyoshi, General Manager, Customer Development Division, POLA INC.)

Ratio of Sales by Business Format / Number of POLA THE BEAUTY Stores%

Number of stores

800

100
About 30%

About 20%
600

75
533
50
380

400
About 40%

2005

POLA THE BEAUTY

200

About 30%45
0About 40%

About 40%

25

600

2008
Esthe Inn2011
Traditional door-to-door sales02013
TargetNumber of stores

ANNUAL REPORT 201137

Investors’ FAQ

Q5
difference is in initial investment costs at store openings. For POLA THE
A The
BEAUTY, the start-up costs are covered by POLA while sales office managers shoulder
What’s the difference between POLA THE BEAUTY and Esthe Inn*? Is respective
profitability different as well?

such costs for Esthe Inn locations. If POLA THE BEAUTY can sustain its high-growth
results, the profitability of this network will exceed that of Esthe Inn in the future.
* Esthe Inn: Sales office where customers visit and have esthetic treatments

POLA THE BEAUTY and Esthe Inn are the same inthat both operate on the consignment sales system andboth offer POLA’s specific style of consulting and fullesthetic treatments.
But before POLA THE BEAUTY came into
existence, sales office managers covered the initialinvestment required to open a store. This placed limits
on spending associated with site selection and interior
design and inevitably restricted growth. So when POLA
THE BEAUTY was rolled out, the company took the
big step of carrying all initial investment costs associatedwith store openings, including security deposits andrenovation costs. As a result, sales office managers wereable to open stores in better locations than those of
Esthe Inn, such as areas with high pedestrian traffic, andensure a consistently refined interior design throughout
the network. Another difference between the two store
formats reflects customer lifestyles. Esthe Inn is ideal for

women who prefer consulting in a relaxed suburban
setting, while POLA THE BEAUTY is geared toward
women who enjoy esthetic treatments in a stylish spacein the city.
In terms of profitability, Esthe Inn delivers higher
profits than POLA THE BEAUTY, owing todepreciation of the head office’s initial investment costs
involved in the opening of POLA THE BEAUTY stores.
Beginning in 2005, the company opened POLA THE
BEAUTY stores at a rate of 100 per year, culminating ina network of 500 by 2010. Then, based on such factors
as store efficiency, the company slowed the pace to 30
new stores a year. Consequently, an upward ratio ofdepreciated POLA THE BEAUTY stores to total storesin operation will parallel expanding sales from existing
stores, boosting the POLA THE BEAUTY contribution
to profits and most likely pushing profitability abovethat of Esthe Inn.
(Seiko Sueyoshi, General Manager, Customer Development Division, POLA INC.)

makes ORBIS’s OIL-CUT formula so unique that other companies cannot
Q6 Whatduplicate it?
was ORBIS’s own scientific formula that led to the industry’s first
A Itoil-freecosmetics.
When natural plant and animal oils and other easily
oxidized oil content go through the oxidation process,they develop into various types of skin damage, fromdark spots and wrinkles to rough patches. That is why
ORBIS has advocated oil-free skincare based on its OILCUT concept. Moisture is far more essential to skin thanoil, so from our early days, we pursued research in thisarea, leading to the 1987 announcement of OIL-CUT(oil-free) skincare. The news trumped conventional ideas

in the cosmetics industry, but we were convinced thatthe skin’s own rejuvenating mechanism could beenhanced by enabling theskin to retain vitalmoisture and using thepower of water to nurture
the outermost layer of theepidermis. For items thatcannot be made without
CLEAR series

38 POLA ORBIS HOLDINGS INC.

oils—such as specialty skincare and makeup, including
lipstick and foundation—we use oils processed andstabilized under proprietary techniques to make themless susceptible to oxidation. This scientific formula,unique to ORBIS, is crucial to the OIL-CUT concept
and facilitates the development of products without
easily oxidized oils in the ingredient list.
(Tsuneo Machida, Representative Director and President, ORBIS Inc.)

Q7 Why does boosting the Internet sales ratio for ORBIS lead to higher profitability?
sales help the company cut costs, such as catalog production and
A Internet
mailing costs.
By raising the ratio of Internet sales to overall sales,
ORBIS can trim expenses, such as publication andmailing costs for printed materials, particularly catalogs,
as well as costs associated with call center operations. A
positive side-benefit of lower printing-related costs is
reduced impact on the environment.

We are now focusing on better one-to-one
communication with our Internet customers, whichshould spur an increase in purchasing amounts andimprove the rate of repeat customers. Complemented bystep-by-step cost reductions, higher Internet sales will
help us achieve higher profitability.
(Tsuneo Machida, Representative Director and President, ORBIS Inc.)

Q8 Is there a standard for implementing M&As?
deciding factors are a well-defined brand concept that complements the existing
A The
multi-brand strategy and a capacity for expansion in Asia.
The two recently acquired companies—H2O PLUS and
Jurlique—represent distinctive global brands built on
well-defined concepts. At the time of acquisition, theprimary criteria were clear brand concepts and a growing
presence in Asia, including China, which is a market ofstrategic interest to the POLA ORBIS Group. Anothermajor criterion is to work out approaches to achieve
anticipated synergies with existing operations within theGroup in the “beauty and health” field.

In setting acquisition prices, we examine presented
plans and apply several methods, including comparable
company analysis and discounted cash flow analysis, topinpoint a value. The opinions of several financial institutions are also integral to the decision-making process.
Naturally, any further M&As will depend on the opportunities that arise, but we will continue to consider this as a
viable approach to Group development moving forward.
(Naoki Kume, Director, Finance/Management Planning Division)

Q9 How does the Company view shareholder returns?
policy is to maintain stable dividends and to consider increases matched to
A Our
profit growth.
We recognize that the return of profits to shareholders is
an important management priority, and our basic policy
with regard to dividends is to ensure a stable dividendwith increases commensurate with profit improvement. Inline with this policy, we are planning a dividend increasein fiscal 2012, corresponding to growth in consolidated
operating income and taking into account recent revisions
to the tax system and the Group’s financial status.
From a liquidity perspective, we do not intend to
execute any treasury stock buybacks at the present time.
(Naoki Kume, Director, Finance/Management Planning Division)
ANNUAL REPORT 201139

Four-year Summary of Selected Financial Data
POLA ORBIS HOLDINGS INC. and Consolidated Subsidiaries

Thousands of U.S. dollars*1

Millions of yen(Except per share data)

Years ended December 31(Except per share data)

2008

2009

2010

2011

2011

¥170,838¥162,332¥165,253¥166,657$2,143,784

10,868

9,706

12,27012,853

165,339

6.4

6.0

7.4

7.7

Net income

6,559

4,059

7,086

8,039

103,419

Net income per share

127.91

79.16

137.36145.43

1.87

Net assets

137,564

140,890

153,104

157,057

2,020,298

Total assets

180,664

181,909

187,771

193,027

2,482,987

Net assets per share

2,677.47

2,743.87

2,767.55

2,839.36

36.52

Operating results
Net sales*2
Operating income
Operating margin (%)

Financial Section

Financial position

Contents

Four-year Summary of Selected Financial Data

41

Management’s Discussion and Analysis

42

Consolidated Balance Sheets

50

Cash flows from operating activities

16,41912,53017,906

14,401

185,250

Consolidated Statements of Income

52

Cash flows from investing activities(5,808)(4,374)(40,367)(3,444)(44,304)

Consolidated Statement of Comprehensive Income

52

Cash flows from financing activities

36(1,125)(2,789)(4,093)(52,653)

Consolidated Statements of Changes in Net Assets

53

Cash and cash equivalents at end of year

61,803

68,81743,50750,246646,342

Consolidated Statements of Cash Flows

Depreciation and amortization

4,602

4,973

5,361

5,374

69,13455

Capital expenditure

5,655

8,639

6,245

5,048

64,934

Notes to Consolidated Financial Statements

57

Report of Independent Auditors

84

Equity ratio (%)

76.0

77.4

81.5

81.3

Return on equity (%)

4.9

2.9

4.8

5.2

Return on assets (%)

5.2

5.7

6.6

7.0

Price-earnings ratio (times)*3

—

—

12.3

14.3

Number of employees*4

3,603

3,713

3,773

3,812

Average number of temporary-hired workers

2,103

1,906

1,872

1,864

Cash flows

Financial indicators*1 Dollar amounts are shown for convenience only and are calculated based on the prevailing exchange rate of U.S.$1=¥77.74 as of December 31, 2011.
*2 Net sales do not include consumption taxes.
*3 The price-earnings ratio is not shown for fiscal 2008 and 2009 as the stock was not listed.
*4 The number of employees is the number of people working for the POLA ORBIS Group.

40 POLA ORBIS HOLDINGS INC.

ANNUAL REPORT 201141

Management’s Discussion and Analysis
Summary of Business Results
In fiscal 2011, ended December 31, 2011, the domestic
cosmetics market was characterized by flat trends after
recovering somewhat from the Great East Japan Earthquake
and associated disasters. In overseas cosmetics markets, theEuropean financial crisis and fiscal tightening slowed global
growth, although the general trend toward expansion
continued, supported by ongoing growth in demand
within Asia, especially in China and India.
Navigating this market environment with a three-year
management plan just launched this fiscal year, the Groupendeavored to accurately identify changes on the businesshorizon, improve the profitability of domestic flagshipbrands and raise the profile of brands under development
while promoting aggressive overseas development in Asia,
especially China. As a result, the Company achieved anincrease in sales and income for two concecutive periods.
Regarding Group status, in July 2011 POLA ORBISHOLDINGS (“the Company”) made H2O PLUS
HOLDINGS, LLC (“H2O PLUS”) a wholly owned
subsidiary. The newly consolidated company’s businessresults were included in the consolidated performance fromthe third quarter. Meanwhile, all stock in P.O. MEDIASERVICE INC., the Group’s commercial printing
business, was sold in July 2011 with the aim of channelingmanagement resources into the Beauty Care segment.

Analysis of Operating Results:
Comparison of Fiscal 2011 and Fiscal 2010
Net sales
Net sales edged up 0.8% year on year, to ¥166,657
million, reflecting higher sales from flagship brand POLA
and the inclusion of sales from H2O PLUS, which cameunder the scope of consolidation from the third quarter.
Cost of sales, and selling, general andadministrative expenses
Cost of sales inched up 0.4% year on year, to ¥33,461
million, paralleling higher sales. The cost of sales ratio to
net sales decreased 0.1 percentage point, to 20.1%, as themain cause of the increase in cost of sales—making H2O
PLUS a wholly owned subsidiary—was almost totallyoffset by an improved ratio of typically higher-margin
skincare sales to total sales at POLA and ORBIS.
Consequently, gross profit rose 1.0%, to ¥133,196
million.
Selling, general and administrative expenses increased
0.6%, to ¥120,342 million. This slight upward movement
reflects an increase in sales commissions at POLA, in linewith higher sales, as well as elevated personnel costs andadministrative expenses associated with the consolidationof H2O PLUS. The ratio of selling, general andadministrative expenses to net sales dipped 0.2 percentage
point from the previous fiscal year, improving to 72.2%
due to the Group’s activities, including cost reduction by
improving operating efficiency.

Operating income
Operating income grew 4.8%, to ¥12,853 million, andthe operating margin rose 0.3 percentage point, to 7.7%,
compared with fiscal 2010 results.

non-current assets.
Net income per share rose from ¥137.36 in fiscal 2010
to ¥145.43 in fiscal 2011. Return on equity also rose,from 4.8% to 5.2%.

Income before income taxes and minority interests
Income before income taxes and minority interests
dropped 6.4% year on year, to ¥11,255 million. The
primary reasons for this decrease were a ¥582 million
increase in impairment loss, a ¥954 million loss on
adjustment for changes of accounting standard for asset
retirement obligations and a ¥467 million loss on disaster,which in total overshadowed a ¥144 million increase ininterest and dividend income, a ¥289 million decrease inforeign exchange loss and ¥529 million in gain on sale ofsubsidiary’s stocks.

Reduced income taxes

Net income
Net income climbed 13.5%, to ¥8,039 million, buoyedprimarily by a ¥1,812 million decline in corporate
taxes, following the sale of a subsidiary’s stocks and・Tax rate: FY2010: 41.9% ⇒ FY2011: 28.7%
IncomeTaxes

・Tax effects due to real estate sales: -¥1,427
million・Change in effective tax rate due to eliminationof losses brought forward: -¥610 million

Business segment performance
Effective from fiscal 2011, the Group adopted the
management approach described in “Accounting Standard
for Disclosures about Segments of an Enterprise andRelated Information” and “Guidance on AccountingStandard for Disclosures about Segments of an Enterpriseand Related Information,” and has divided the Group’sbusinesses into two reportable segments: “Beauty Care”
and “Real Estate.” Consequently, the previously disclosed

Factors Impacting Net Income
Positive impact

Negative impact+1,263

Millions of yen

9,000

+169

Due to gross profit growth
resulting from improved costof sales ratio

Due to reduction in print media
and other costs at ORBIS+1,729Due to decrease in tax costs from sale of commercial printing
business; change in tax rate due to elimination of losses
brought forward, and tax effects due to real estate sales

8,039
7,086
-170

Due to staff
increases at
H2O PLUS
andelsewhere

6,000

Net sales
Gross margin
Billions of yen

180

120

170.8

80.0

%

162.3

165.3

166.7

79.8

79.8

79.9

90

Billions of yen

10.9
80

70

60

2008

2009

2010

2011

42 POLA ORBIS HOLDINGS INC.

60

%

15

10
6.4

0

Net income
Net income per share

Operating income
Operating margin

5

0

2008

12.3
9.7

7.4

12.9
7.7

Billions of yen

2011

7.1

6.6
7

5

2010

8.0

8

3

137.36

6
4

6.0

2009

9

127.91

4.1

2008

2009

2011

Due to rise insales
commissions
resulting fromincreased POLA
sales

Partly due tohigheramortization
costs
resulting fromH2O PLUS
acquisition

3,000-1,358Due to asset
retirement
obligations anddisaster-related
losses

150

50

2010

+953 from
FY2010

-276

200

100

79.16

2
0

145.43

Yen

-404

0

Selling, general and administrative expenses: -680
0FY2010Net
incomeGrossprofitPersonnel
expensesSales
commissions

Sales-related
expenses

Administrative
expenses

Other income(expenses)

Income taxes

FY2011
Net
incomeANNUAL REPORT 201143

Management’s Discussion and Analysis

segments “Cosmetics Business” and “Fashion Business”
are now included under “Beauty Care,” and“Pharmaceuticals Business” and “Other Business” areincluded under “Others.”
Actual business results for fiscal 2010 have been statedaccording to current reportable segment classifications.

and sales promotion campaigns were successful, resulting
in sharp sales growth compared with the previous year. In
July, the Group established a consolidated overseas
subsidiary in Shenyang, China, with a view to developing
door-to-door sales operations.
In the ORBIS brand, the Group strove to increase therate of repeat purchases and improve profitability, partly
through renewing skincare products, bolstering Internet
sales and streamlining sales costs. The business generated
steady sales from the NEW WHITENING series,
introduced in July, and the EXCELLENT ENRICH
series, which was conceived as a skincare product for
women in their 40s and older and was launched in
December. However, ORBIS struggled to re-attract
customers to its stores since the earthquake and tsunami
disaster, and domestic net sales fell year on year. In
overseas markets, the Group made full-fledged efforts to
expand, which included the launch of Internet sales in
China in July. Despite such efforts, overseas sales shrankyear on year, as South Korean sales were impacted byconcerns over rumored radioactive contamination after
the disaster, and by yen appreciation.
Brands under development posted higher sales thanin the previous fiscal year, mainly due to robust sales of
products under the THREE and pdc labels. In addition,
H2O PLUS performed well in China, Hong Kong andother parts of Asia, as well as in North America, leading
to year-on-year sales growth.
As a result of the above, net sales—sales to externalcustomers—generated by the Beauty Care segment for fiscal
2011 reached ¥154,778 million, edging up 1.1% year on year,
while operating income totaled ¥10,787 million, up 6.1%.

Beauty Care
The Beauty Care segment hinges on flagship brands
POLA and ORBIS and five brands under development—
pdc, FUTURE LABO, ORLANE, decencia and THREE.
During the third quarter, the Group added H2O PLUS, a
new brand, to its lineup.
In the POLA brand, efforts were focused on creating
sales channels matched to market needs through thedevelopment of department store outlets andcustomer-attracting POLA THE BEAUTY stores, which
integrate cosmetics, consulting and esthetic treatments.
Efforts were also directed toward boosting customer
satisfaction through measures to enhance the sales
techniques and consulting skills of sales partners. The
Great East Japan Earthquake in March took a toll on
operations, mainly in eastern Japan. In April, however,new products were launched in the B.A series—a flagshipseries of the POLA brand—and sales in western Japan
were robust. In addition, the B.A RED series—the entrylevel series in the B.A brand—and B.A THE MASK, basedon a new formula, were launched in August and October,
respectively. Through such ongoing efforts to bolster
several series, domestic net sales grew year on year. In
overseas markets, operations were impacted by yen
appreciation. In Thailand, however, new product launches

Beauty Care

Real Estate

Net sales
Operating income

Net sales
Operating income(Left axis)

Billions of yen

Billions of yen

180

12

120

154.8

153.1

150.3
7.9

10.2

OthersBillions of yen

Billions of yen

4.5

10.8
8

3.0

4

1.5

6

3.2

3.1

3.1

4

Billions of yen

12

3

9.1

8.8

8.8

4
60

1.6

1.3

1.3

2

0.2

0

2

0.5

1
0

Billions of yen

200

180.7

orders due to the impact of the earthquake and tsunami
disaster resulted in a year-on-year decline.
As a result of the above, net sales—sales to externalcustomers—generated by the Others segment for fiscal
2011 totaled ¥8,790 million, down 3.0% year on year,
while operating income reached ¥501 million, up 124.9%.

Analysis of Financial Position
Assets, liabilities and net assets
Assets
As of December 31, 2011, total assets stood at ¥193,027
million, up 2.8% from the end of the previous fiscal year.
Total current assets rose 3.6% from December 31,
2010, to ¥111,093 million, with key changes including a¥16,001 million increase in cash and deposits, which
offset a ¥13,757 million decrease in short-term
investments in securities owing to redemption of
maturing bond securities and investment funds.
Net property, plant and equipment settled at ¥49,420
million, 4.3% less than at December 31, 2010.
Net intangible assets jumped 193.2% from December
31, 2010, to ¥12,137 million, primarily because of a¥3,583 million increase in goodwill arising from theacquisition of H2O PLUS HOLDINGS, LLC and thebooking of ¥4,153 million in trademark rights.
Total investments and other assets reached ¥20,376
million, down 17.7% from December 31, 2010. Thisdecrease was mainly attributable to a ¥3,956 million
reduction in investments in securities.

Net assets
Equity ratio(Left axis)

Billions of yen

8

OthersThe Others segment comprises the pharmaceuticals,building maintenance and printing businesses. In July, allof the stock in the consolidated subsidiary P.O. MEDIASERVICE INC. was sold. With this move, the Group
withdrew from the commercial printing business from thethird quarter of fiscal 2011.
The pharmaceuticals business draws on results
accumulated by Group companies in research related tocosmetics and quasi-pharmaceuticals to develop and sell
new drugs for dermatological conditions. During fiscal
2011, an increase in Lulicon customers, coupled with brisk
sales of generic drugs, resulted in year-on-year growth.
The building maintenance business caters primarily tothe needs of Group companies. In fiscal 2011, a drop in

Total assets

Net sales
Operating income (loss)(Left axis)

Real Estate
The Real Estate segment concentrates on the leasing of
office buildings in major cities. Current efforts are
directed toward sustaining rents while also aiming forhigher rents and raising occupancy rates by creating
attractive office environments. In fiscal 2011, the businessenvironment remained harsh, with an ongoing downward
trend in rents. Nevertheless, the Group made steadyprogress with tenancy contracts for rental apartments andother redeveloped properties, resulting in segment
performance on a par with the previous year.
As a result of the above, net sales—sales to externalcustomers—generated by the Real Estate segment for
fiscal 2011 totaled ¥3,089 million, down 0.4% year on
year, while operating income reached ¥1,283 million,
down 1.6%.

181.9

187.8

193.0

Billions of yen

%

180

137.6

150

Cash flows fromoperating activities

120

76.0

140.9

153.1

157.1

81.5

81.3

90

20

17.9

16.4
80

77.4

Billions of yen

100

15

14.4
12.5

10
60

50

70

5

-0.7
0

2009*

2010

2011

0

* Amounts for fiscal 2009 are unaudited and provided
for reference only.

44 POLA ORBIS HOLDINGS INC.

0

2009*

2010

2011

0

* Amounts for fiscal 2009 are unaudited and provided
for reference only.

-1
2009*
2010
2011
* Amounts for fiscal 2009 are unaudited and provided

0

2008

2009

2010

2011

0

2008

2009

2010

2011

60

0

2008

2009

2010

2011

for reference only.

ANNUAL REPORT 201145

Management’s Discussion and Analysis

Liabilities
As of December 31, 2011, total liabilities were ¥35,969
million, up 3.8% from the end of the previous fiscal year.
Total current liabilities edged up 0.7% from December
31, 2010, to ¥23,788 million, with key changes includinga ¥688 million increase in income taxes payable due toelimination of losses brought forward, and a ¥655 million
decrease in notes and accounts payable–trade.
Total non-current liabilities rose 10.3%, to ¥12,180
million. This was largely due to a ¥1,223 million increasein “other,” owing to the booking of asset retirement
obligations associated with the adoption of AccountingStandard for Asset Retirement Obligations, and to a ¥511
million decrease in provision for retirement benefits.
Net assets
As of December 31, 2011, total net assets were ¥157,057
million, up 2.6% from the end of the previous fiscal year.
The primary component of this change was a ¥4,723
million increase in retained earnings.
Consequently, net assets per share jumped ¥71.81
from the end of fiscal 2010 to ¥2,839.36 at the end of
fiscal 2011. The equity ratio slipped 0.2 percentage point,
to 81.3%.
Cash flows
The balance of cash and cash equivalents as of December
31, 2011 was ¥50,246 million, up ¥6,738 million, fromthe end of the previous fiscal year.
Cash flows from operating activities
Net cash provided by operating activities dropped 19.6%,
to ¥14,401 million. The primary components
contributing to an increase in net cash were ¥11,255
million in income before income taxes and minority
interests, ¥5,359 million in depreciation andamortization, and a ¥954 million non-cash adjustment
associated with the adoption of Accounting Standard for
Asset Retirement Obligations. Major components leading
to a decrease in net cash were ¥2,339 million in income
taxes paid and a ¥1,215 million increase in notes andaccounts receivable–trade.
Cash flows from investing activities
Net cash used in investing activities declined 91.5%, to¥3,444 million. This decrease is mainly attributable to¥48,800 million in proceeds from sales and redemptionof short-term investments in securities. The proceeds
largely offset the ¥30,897 million in purchase of shortterm investments in securities as well as the ¥9,476
million in purchase of investments in securities for
46 POLA ORBIS HOLDINGS INC.

investing surplus capital in line with investment plans. In
addition, they offset the ¥8,923 million in purchase ofinvestment in subsidiary due to the acquisition of H2O
PLUS HOLDINGS, LLC and the ¥2,421 million used topurchase property, plant and equipment accompanying
the renewal of production facilities.
Cash flows from financing activities
Net cash used in financing activities rose 46.7%, to ¥4,093
million. The increase was primarily attributable to theapplication of ¥3,300 million in cash dividends paid.
Sources of funds and policy on fund liquidity
Sources of working capital and capital expenditure forGroup operations are internal funds and bank loans. Of
funds raised from external sources, interest-bearing debt
reached ¥3,063 million as of December 31, 2011, up ¥9
million from a year earlier, as a ¥262 million increase inlease obligations overshadowed a decrease of ¥253 million
in short-term loans payable through repayment ofoverseas subsidiary bank loans. The Company introduceda cash management system in fiscal 2010 to boost fundefficiency for the whole Group by concentrating funding
operations for subsidiaries at the Company.
The Company adheres to fund management
regulations and standards to ensure appropriate
management of operating funds and surplus funds. Thus
guided, the balance of cash and deposits stood at ¥50,679
million on December 31, 2011, up ¥16,001 million froma year earlier. This balance rose mainly because of inflow
from redemption of maturing bond securities andinvestment funds, which offset an increase in loans andinvestments, paralleling the acquisition of H2O PLUS.

Basic Policy on Profit Distribution and
Dividends for Fiscal Years 2011 and 2012
Profit distribution is an underlying principle of theCompany’s management. As such, the Company’s basic
policy is to pay stable and ongoing dividends to all of its
shareholders.
The Company distributes retained earnings twice ayear, through an interim dividend and a year-end
dividend. Based on Article 454-5 of Japan’s Companies
Act and the Company’s Articles of Incorporation, theGeneral Meeting of Shareholders is responsible forapproving the year-end dividend, while the Board of
Directors is responsible for approving the interim
dividend.
Based on the aforementioned policy, the Company
plans to use retained earnings to pay an annual dividend

per common share of ¥45.00, comprising an interim
dividend of ¥20.00 and a year-end dividend of ¥25.00 for
fiscal 2011. Internal reserves shall be invested to reinforce
the Group’s operating structure and support futurebusiness development. For fiscal 2012, taking into
account earnings forecasts and other factors, theCompany plans to increase its annual dividend percommon share to ¥50.00, comprising an interim
dividend of ¥25.00 and a year-end dividend of ¥25.00.

Business Risks
For businesses and other aspects of the POLA ORBISGroup, risks that are considered to be critical for investors
in making investment decisions are described below. As of
December 31, 2011, future-related matters have been
identified by the Group within, unless otherwise noted.
1) Damage to brand value
The Group has multi-brands such as POLA and ORBIS.
Through conscientious business management and supplyof products and services catering to customers’ trust, theGroup is working to maintain and enhance its brandimage. However, the operating results and financial
position of the Group may be adversely affected in theevent of negative opinions and rumors about the Group’s
products and services that spread, trust is lost and brandvalue is impaired.
2) Competition within the GroupIn accordance with its multi-brand, multi-channel
strategy, the Group develops existing brands by
categorizing them by target (demographic base), pricebracket, and market channel, preventing competition
from occurring between brands. However, the operating
results and financial position of the Group may be
adversely affected in the event that competition occurs
within the Group in the course of maximizing the valuesof existing brands and accelerating multi-brand evolution
in the future as the Group’s strategy.
3) Securing sales partners (Sales managers and POLALADIES)
POLA INC., the core of the Group’s Beauty Caresegment, operates its business through door-to-door sales
based on consignment sales agreements. Securing sales
partners based on consignment sales agreements is an
important activity for business expansion and issomething the Group consistently works on. However, if
regulations under the Act on Specified Commercial
Transactions are tightened or the working environmentchanges, sufficient human resources may not be available
because implementation of measures for securing them
may become difficult and POLA LADY applicants may
decrease. As a result, the operating results and financial
position of the Group may be adversely affected.
4) Strategic investment activities
The Group makes strategic investments for overseas
expansion concentrated in China, M&A, and new
businesses. For decision making on strategic investment
activities, the Group collects and examines the necessary
information. However, the operating results and financial
position of the Group may be adversely affected in theevent that results initially intended are not achieved due
to various unexpected environmental changes, etc.
5) Cosmetics market environment
The domestic cosmetics market has reached maturity andthe trend in product shipments has shifted from generally
flat to a gradual decline. Against this backdrop,competition has increased due to the reorganization of
corporate groups via M&A deals, new competitors haveentered the market from different industries, and theinfluence of distributors and retailers has increased
through cooperation/integration. Consequently, theoperating results and financial position of the Group may
be adversely affected in the event that the Group cannot
properly respond to unexpected changes in thecompetitive environment.
6) Research & development
R&D is one source of the Group’s competitive strength,
and it intends to maintain its investment in this area. To
carry out R&D effectively and efficiently, the Group
implements R&D activities in accordance with an annual
plan. If development of a new product requires a long
period, the results may be seen in subsequent years. In
some cases, when the results as planned cannot be
achieved, extension of the period or an increase ininvestment may be required; otherwise commercialization
may not be achieved as a result. Furthermore, even after
commercialization, the product may not necessarily be
accepted by customers due to various reasons. If theinitially intended results of R&D cannot be achieved assuch, the operating results and financial position of theGroup may be adversely affected.
7) Manufacturing and quality assurance
The Group works to secure the necessary volume of raw
materials required for the manufacture of products at an
appropriate price by using diversified sources of supply
ANNUAL REPORT 201147

Management’s Discussion and Analysis

and by maintaining favorable relations with suppliers,
based on the overall supervision of divisions within theGroup responsible for procuring raw materials. However,
if an unexpected situation occurs resulting from external
factors, problems may arise in the procurement ofnecessary raw materials.
The Group’s cosmetics are manufactured at threelocations: in Japan, at POLA CHEMICAL INDUSTRIES
INC.’s Fukuroi Factory and Shizuoka Factory, both in
Shizuoka Prefecture, and in the United States at H2O
PLUS HOLDINGS, LLC’s Chicago Factory, in Illinois.
Pharmaceutical products are made at two locations: inJapan, at KAYAKU CO., LTD.’s Saitama Factory andTokorozawa Factory, both in Saitama Prefecture. We areundertaking efforts to verify quality control and quality
maintenance. However, should any problems arise inproduct quality, the operating results and financial
position of the Group may be adversely affected.
8) Overseas business activities
The Group’s main sales points are in Japan, but Group
companies have expanded into Asia, particularly China,
as well as the BRICS (Brazil, Russia, India, China andSouth Africa), where market expansion is expected. The
Group currently subscribes to a policy of further
development overseas.
Since these overseas business activities contain the riskof social dislocation due to unexpected economic/politicaluncertainty, labor problems, terrorism/war, infectious
diseases, etc., the operating results and financial positionof the Group may be adversely affected.

11) Information security
The Group carefully manages the handling of confidential
information, including personal information and R&D
information through the implementation of internal
audits, the use of an information security system, theestablishment of internal codes of conduct, and education
initiatives by the section in charge of CSR and various
committees. However, if such information is leaked forany reason, a claim for damage may be filed against theGroup or damage to its image may arise. As a result, thebusinesses of the Group may be adversely affected.
12) Material litigation
Although lawsuits that could seriously affect the Group
have not been filed in fiscal 2011, the operating results
and financial position of the Group may be adversely
affected in the event of material lawsuits in the future andjudgments disadvantageous to the Group.

9) Currency exchange
The Group takes exchange rate risks into consideration
for monetary materiality for clearance of foreign currency
due to the increase in import/export transactions andloans to foreign subsidiaries as a result of expansion ofoverseas business activities. Additionally, since the figures
denominated in local currency of foreign consolidated
subsidiaries are converted to yen when consolidated
financial statements are prepared, changes in the exchange
rate may affect the operating results and financial positionof the Group.

13) Disasters
The major productions bases of the Group are the
Fukuroi Factory and Shizuoka Factory of POLACHEMICAL INDUSTRIES INC. Lines for
manufacturing different products are installed in thesefactories and the backup manufacturing capacities
between the factories are limited. Therefore, productsupply may be affected in the event that manufacturing is
disabled or production capacity drops at either of thesefactories as a result of natural disasters.
Further, since both factories are close to each other,product supply may be interrupted for a long period in
the event of a large-scale earthquake in the Tokai region.
Similarly, pharmaceutical products are produced in the
Saitama Factory and Tokorozawa Factory of KAYAKUCO., LTD. Since both factories are close to each other,product supply may be interrupted for a long period in
the event of a large-scale earthquake in the Kanto region.
Furthermore, a large-scale earthquake as well as otherdisasters and accidents may occur in areas other thanthese two locations and interrupt the procurement ofmaterials and components and the supply and sale ofproducts, which might have an adverse effect on theoperating results of the Group.

10) Limit of protection for intellectual property rights
Although the Group takes actions to protect its
intellectual property rights, third parties may infringe
upon intellectual properties through unexpected means.
Consequently, the business activities of the Group may be
adversely affected by the illegal misuse of technologies
and the creation of counterfeit goods.

14) Spread of infectious diseases
If the spread of infectious diseases occurs, resulting insignificant impact on society, service and sales
activities must be voluntarily suspended and sales
offices must be closed because of the nature of daily
face-to-face business activities of customers and business
partners. Consequently, the operating results of the

48 POLA ORBIS HOLDINGS INC.

Group may be adversely affected domestically andoverseas.
15) Risks of the pharmaceuticals businessIn the pharmaceuticals business, an enormous investment
in R&D is needed before a new pharmaceutical productcan get to market, and operating losses persisted for along time up until fiscal 2010. In fiscal 2011, R&D
investment on new pharmaceutical products turned a
profit, showing operating income, thanks to enhanced
efficiency in the investment process itself, mainly throughjoint development efforts with other companies. The
Company aims to maintain the business’s profitability
and make every effort to increase its profits. However, avariety of potentially problematic risks could arise, such asa sudden change in the business environment, a delay innew pharmaceutical product development, and a shift inthe management direction of partner companies involvedin joint development with the Group’s pharmaceuticals
business. Such situations could return the business to an
operating loss position, and if the loss expanded or
persisted long term, it may adversely affect the operating
results of the Group.

Outlook for Fiscal 2012
Although the Japanese economy has continued to recovergradually since the global financial crisis and the Great
East Japan Earthquake disaster, the outlook for thebusiness environment remains unclear, owing to suchfactors as ongoing yen appreciation and the European
financial crisis. Against this backdrop, the Group is
striving to respond rapidly to shifts in the market
environment, promoting business activities in line withits medium-term management plan, and focusing on
building an operating structure to support sustained
growth over the medium to long term. The Company will
work toward attaining its consolidated earnings targets bycontinuing to implement the Group’s main strategic goals
in its medium-term management plan—“improve theprofitability of flagship brands and further promote themulti-brand strategy,” “increase growth potential throughglobal business expansion (overseas expansion byleveraging the Group’s strengths),” and “reinforce theoperating structure.”
After the acquisition of shares in Jurlique International
Pty Ltd, an Australian cosmetics company, has been
finalized, the Group will assess the amount by which thepurchase is likely to impact earnings, and will make aprompt disclosure in the event of forecast revisions.

For the fiscal year ending December 31, 2012, theGroup forecasts, on a consolidated basis, net sales of¥172,000 million, up 3.2% year on year, operating
income of ¥13,700 million, up 6.6%, and net income of¥7,000 million, down 12.9%.
Fiscal 2012 performance forecasts
Millions of yen
YoY change

Consolidated

FY2012
Full year

Amount%Net sales¥172,000

5,342

3.2%

Beauty care

160,200

5,421

3.5%

Real estate

2,900

-189

-6.1%

Others

8,900

109

1.2%

Operating income

13,700846

6.6%Beauty care

12,000

1,212

11.2%

Real estate

1,100

-183

-14.3%

Others300-201-40.2%

Reconciliations

300

19

7.1%

7,000

-1,039-12.9%Net income

This report contains projections of performance and other projections based on information
currently available and certain assumptions judged to be reasonable. Actual performance may
differ materially from these projections resulting from changes in the economic environment andother risks and uncertainties.

Significant Accounting Policies andAssumptions
The Group’s consolidated financial statements are preparedin accordance with accounting principles generally
accepted in Japan (“Japanese GAAP”). The preparation of
consolidated financial statements requires management toselect and apply certain accounting policies and makeassumptions that affect the reported amounts anddisclosure of assets and liabilities and of revenues andexpenses. These assumptions are based on reasonable
judgments taking into account historical performance andother factors. However, actual results could differ fromthese assumptions due to inherent uncertainties. Pleaserefer to Note 1 to Consolidated Financial Statements formore detailed accounting policies.

ANNUAL REPORT 201149

Consolidated Balance Sheets
POLA ORBIS HOLDINGS INC. and Consolidated Subsidiaries

December 31

December 31
Thousands of U.S.
dollars (Note 3)

Millions of yen
2011

2010

2011

Assets2011

Notes and accounts payable – trade (Note 18)¥ 34,678$ 651,910

Notes and accounts receivable – trade (Note 18)

20,71919,543

266,528

Short-term investments in securities (Notes 4, 18 and 19)

18,412

32,169236,847

Lease obligations (Note 6)

Merchandise and finished goods

9,664

9,421

124,313

Accounts payable – other (Notes 18 and 20)

Work in process

1,648

1,644

21,211

Raw materials and supplies

4,351

4,276

55,973

Deferred tax assets (Note 15)

3,478

2,917

44,746

Other

2,208

2,653

28,402

Allowance for doubtful accounts

2011

Current liabilities¥ 50,679

		 Total current assets

2010

Liabilities and net assets

Current assets
Cash and deposits (Notes 4, 5 and 18)

Thousands of U.S.
dollars (Note 3)

Millions of yen

(69)

(74)

(890)

111,093

107,230

1,429,043

Short-term loans payable (Notes 6 and 18)

¥

2,894
1,500

¥

3,549
1,753

$

37,22919,295

623

425

8,016

11,391

10,848

146,537

Income taxes payable

1,806

1,118

23,241

Provision for bonuses

1,561

1,653

20,090

Provision for directors’ bonuses

45

41

587

Provision for sales returns

76

90

984

Provision for point program

1,605

1,700

20,647

—

32

—

2,283

2,411

29,37623,78823,623306,006

Provision for loss on business liquidation
Other
		 Total current liabilities
Non-current liabilities
Lease obligations (Note 6)

Property, plant and equipment (Note 13)

939

875

12,090

Provision for retirement benefits (Note 8)

6,795

7,306

87,413

Provision for directors’ retirement benefits

367

325

4,725
1,703

Buildings and structures

57,12058,954

734,765

Provision for environmental measures

132

132

Machinery, equipment and vehicles

11,834

11,972

152,231

Deferred tax liabilities

317

—

4,089

Land

20,761

22,296

267,068

Other

3,627

2,404

46,660

Leased assets

2,893

1,712

37,220		 Total non-current liabilities

12,18011,044

156,682

4,078

		Total liabilities

35,96934,667

462,689

Construction in progress
Other
		 Total property, plant and equipment
Accumulated depreciation
		 Net property, plant and equipment

317

302

19,172

19,029

246,617

112,099

114,268

1,441,982

Net assets (Note 9)(62,679)(62,616)(806,269)

Shareholders’ equity

49,42051,651

635,713

Common stock		 Authorized: 200,000,000 shares

Intangible assets
Goodwill, net (Note 22)

3,583

—

46,098Other intangible assets, net (Note 13)

8,553

4,140

110,026

12,1374,140

156,125

		 Net intangible assets

Contingent liabilities (Note 7)		Issued: 57,284,039 shares at December 31, 2011 and
57,284,039 shares at December 31, 2010

10,00010,000128,633

Capital surplus

90,71890,718

1,166,944

Retained earnings

59,46954,746764,978

Treasury stock, at cost		(2,000,000 shares at December 31, 2011 and		2,000,000 shares at December 31, 2010)(2,199)(2,199)(28,288)

157,988

153,265

2,032,267

(35)

210

(457)

9

—

121

(991)

(475)

(12,747)(1,017)(264)(13,084)

86

103

1,115

		 Total net assets

157,057

153,104

2,020,298

			 Total liabilities and net assets¥193,027¥187,771$2,482,987

		 Total shareholders’ equity
Accumulated other comprehensive income (Note 14)

Investments and other assets
Investments in securities (Notes 18 and 19)
Long-term loans receivable

13,582

17,538

174,719

57

51

736

Deferred tax assets (Note 15)

3,415

3,748

43,928

Other

3,486

3,563

44,850Allowance for doubtful accounts

(165)

(151)

(2,130)		 Total investments and other assets
			Total assets
See notes to consolidated financial statements.

50 POLA ORBIS HOLDINGS INC.

20,37624,750262,105¥193,027¥187,771$2,482,987

Unrealized gain (loss) on available-for-sale securities
Deferred gain (loss) on hedges
Foreign currency translation adjustments
		 Total accumulated other comprehensive income
Minority interests

See notes to consolidated financial statements.

ANNUAL REPORT 201151

Consolidated Statements of Income

Consolidated Statements of Changes in Net Assets

POLA ORBIS HOLDINGS INC. and Consolidated Subsidiaries

POLA ORBIS HOLDINGS INC. and Consolidated Subsidiaries

Years ended December 31

Millions of yen
Thousands of U.S.
dollars (Note 3)

Millions of yen
2011

2010

2009

2011

¥166,657¥165,253¥162,332$2,143,784

Cost of sales (Notes 10, 11, 17 and 21)

33,46133,321

32,843

430,431

Net sales (Notes 17 and 21)

Common shares(Thousands)

Balance at December 31, 2008

161,592

Commonstock¥10,000

Capitalsurplus¥203,036

Retainedearnings¥45,650

Accumulated
othercomprehensive
Treasury stock,
incomeat cost(Note 14)

Minority
interests

Total
net assets¥(121,293)¥253¥137,564¥(83)

		 Gross profit

133,196

131,932

129,488

1,713,352

Dividends from retained earnings(1,025)(1,025)

Selling, general and administrative expenses (Notes 10, 12, 17, 21 and 23)

120,342

119,661

119,782

1,548,013

		Operating income

12,853

12,2709,706

165,339

Net income

4,059

4,059

Other income (expenses) (Notes 13 and 17)
Interest and dividend income

565

420

350

7,271

Interest expense

(53)

(103)

(120)

(685)
(1,562)

Disposal of treasury stock—

Retirement of treasury stock—

Change in scope of consolidation

1

1

Accumulated othercomprehensive income

Foreign exchange gain (loss)

(121)

(410)

226

Equity in losses of affiliates

(24)

—

(1)

(311)

Gain on sale of subsidiary’s stocks

529

—

—

6,813

Loss on disposal of non-current assets

(389)

(235)

(412)

(5,008)

Impairment loss

(754)

(172)

(387)

(9,710)Loss on disaster

(467)

—

—

(6,009)Loss on adjustment for changes of accounting standard for asset
retirement obligations

(954)

—

—

(12,272)

71

262

(904)

924

Balance at December 31, 2009
Dividends from retained earnings(1,025)(1,025)

Net income

7,086

7,086

Other, net(1,597)(239)(1,249)(20,550)

11,255

12,0308,456

144,788

Current

3,492

1,757

1,538

44,929Deferred

(266)

3,281

2,945

(3,427)

		 Income before income taxes and minority interests
Income taxes (Note 15)

		 Income before minority interests
Minority interests in net loss of consolidated subsidiaries
Net income
Per share information (Note 23)
Basic net income per common share

3,226

5,038

4,483

41,502

8,029

6,992

3,972

103,286

(94)

(10)
¥

8,039

¥

7,086

¥

51,591,731

51,284,039

Cash dividends declared per common share¥ 45.00¥ 40.00¥20.00$0.57

See notes to consolidated financial statements.

Consolidated Statement of Comprehensive Income
Year ended December 31
Millions of yen

Thousands of U.S.
dollars (Note 3)

2011

2011

¥8,029$103,286

Other comprehensive income (Note 14)
Deferred gain (loss) on hedges
Foreign currency translation adjustments
		 Total other comprehensive income
Comprehensive income (Note 14)(246)(3,168)

9

121

(521)

(6,712)(758)(9,759)¥7,270$ 93,527¥7,287$ 93,737¥ (16)$ (210)(104,308)

203,036

48,685(121,293)

287

(79)

(79)

173

140,890

2,376

4,398

6,775

(114,695)

114,695——

Accumulated othercomprehensive income

Deferred gain (loss) on hedges

55,284,039

10,000(137)

Change in scope of consolidation

U.S. dollars(Note 3)Weighted average common shares outstanding

Unrealized gain (loss) on available-for-sale securities

Retirement of treasury stock

Change in unrealized gain (loss)
on available-for-sale securities$1.87

161,592

Disposal of treasury stock(133)¥79.16(137)

Minority interests$ 103,419

Yen

507
—

Foreign currency translation
adjustments(87)¥137.36

507

Deferred gain (loss) on hedges

4,059¥145.43

Income before minority interests

Change in unrealized gain (loss)
on available-for-sale securities

Foreign currency translation
adjustments

(46)

(46)

(504)

(504)

Minority interests
Balance at December 31, 2010

57,28410,00090,71854,746(2,199)

(264)

(70)

(70)

103

153,104

Dividends from retained earnings(3,317)(3,317)

Net income

8,039

8,039

Disposal of treasury stock—

Retirement of treasury stock—

Change in scope of consolidation—

Accumulated othercomprehensive income
Change in unrealized gain (loss)
on available-for-sale securities

(246)

(246)

Deferred gain (loss) on hedges

99Foreign currency translation
adjustments

(515)

(515)

Minority interests
Balance at December 31, 201157,284¥10,000¥ 90,718¥59,469¥(2,199)¥(1,017)

(16)

(16)

¥ 86

¥157,057

Comprehensive income attributable to:
Owners of the parent
Minority interests
See notes to consolidated financial statements.

52 POLA ORBIS HOLDINGS INC.

ANNUAL REPORT 201153

Consolidated Statements of Changes in Net Assets

Consolidated Statements of Cash Flows

POLA ORBIS HOLDINGS INC. and Consolidated Subsidiaries

POLA ORBIS HOLDINGS INC. and Consolidated Subsidiaries

Years ended December 31

Thousands of U.S. dollars(Note 3)

Balance at December 31, 2010

Commonstock

CapitalsurplusRetainedearnings$128,633$1,166,944$704,226

Accumulated
othercomprehensive
Treasury stock,
incomeat cost(Note 14)

Minority
interests

Total
net assets$(28,288)$1,325$1,969,439$ (3,401)

Dividends from retained earnings(42,668)(42,668)

Net income

103,419

103,419

Disposal of treasury stock—

Retirement of treasury stock—

Change in scope of consolidation—

Accumulated othercomprehensive income
Change in unrealized gain (loss)
on available-for-sale securities(3,168)(3,168)Deferred gain (loss) on hedges

121

121

Foreign currency translation
adjustments(6,635)(6,635)

Minority interests
Balance at December 31, 2011
See notes to consolidated financial statements.

$128,633$1,166,944$764,978$(28,288)$(13,084)

Thousands of U.S.
dollars (Note 3)

Millions of yen
2011

2010

2009

2011

¥11,255¥12,030¥ 8,456$144,788

Cash flows from operating activities
Income before income taxes and minority interests
	Adjustments to reconcile income before income taxes andminority interests to net cash flows from operating
activities:
		 Depreciation and amortization

5,359

5,019

4,912

68,936

		 Impairment loss

754

172

387

9,710

		 Non-recurring depreciation on non-current assets

15

341

61

197

		 Amortization of goodwill

91

80

80

1,180
(6,813)

		 Gain on sale of subsidiary’s stocks

(529)

—

—

		 Gain on sales of non-current assets

(3)

(20)

(30)

(48)

		 Loss on disposal of non-current assets

389

235

412

5,008

		 Loss on disaster

467

—

—

6,009

		 Loss on adjustment for changes of accounting standard
for asset retirement obligations

954

—

—

12,272

		 Increase (decrease) in allowance for doubtful accounts

5

(33)

(2)

69

(425)

(434)

(295)

(5,469)

(210)

(210)

		 Decrease in provision for retirement benefits$1,115$2,020,298

		 Increase (decrease) in provision for loss on		business liquidation

(28)

(6)

19

(367)

		 Increase (decrease) in other provisions

(139)

689

(576)

(1,797)

		 Interest and dividend income(7,271)

(565)

(420)

(350)

		 Interest expense

53

103

120

685

		 Foreign exchange loss (gain)

95

307

(142)

1,225

		 Reversal of foreign currency translation adjustments

—

—

24

(661)
—

—

		 Equity in losses of affiliates

1311(1,215)

(734)

590

(15,632)

62

1,454

314

801

		 Increase (decrease) in notes and accounts
		 payable – trade

(388)

289

(319)

(5,002)

		 Increase (decrease) in consumption taxes payable

(210)

481

(178)

(2,712)

		 Decrease (increase) in other assets

(47)

(97)

271

(606)

		 Increase (decrease) in other liabilities

476

(155)

(450)

6,133

Changes in operating assets and liabilities
		 Decrease (increase) in notes and accounts
		 receivable – trade
		 Decrease in inventories

		Other

97

38

855

1,248

Subtotal

16,547

18,681

14,137

212,855
8,197

		 Interest and dividends received

637

378

352

		 Interest paid

(36)

(103)

(97)

(471)

(2,339)(1,049)(1,810)(30,088)(5,243)

		 Income taxes paid
		 Payments for loss on disaster		Other payments
			Net cash provided by operating activities

(407)

—

—

—

—

(50)

—

¥14,401¥17,906¥12,530$185,250

See notes to consolidated financial statements.

54 POLA ORBIS HOLDINGS INC.

ANNUAL REPORT 201155

Consolidated Statements of Cash Flows

Notes to Consolidated Financial Statements

POLA ORBIS HOLDINGS INC. and Consolidated Subsidiaries

POLA ORBIS HOLDINGS INC. and Consolidated Subsidiaries

Years ended December 31
Thousands of U.S.
dollars (Note 3)

Millions of yen
2011

2010

2009

2011

¥ (1,281)¥ (1,013)¥ (2,454)$ (16,488)

989

2,315

4,858

12,733

		 Purchase of short-term investments in securities(30,897)(34,857)(4)(397,452)

		Proceeds from sales and redemption of short-term
investments in securities

48,80022,146

1,402

627,739

		Purchase of property, plant and equipment(2,421)(4,095)(6,588)(31,148)

		Proceeds from sales of property, plant and equipment

1,310

53

122

16,855

		Purchase of intangible assets(1,641)(1,191)(1,360)(21,114)

		Purchase of investments in securities(9,476)(23,484)(0)(121,902)

19

25

147

248

(448)

(104)

(206)

(5,764)

Cash flows from investing activities
		 Payments into time deposits
		 Proceeds from withdrawal of time deposits		Proceeds from sales of investments in securities		Payments for disposal of non-current assets		Purchase of long-term prepaid expenses

(76)

(85)

(281)

(983)

		Payments for lease and guarantee deposits

(171)

(318)

(207)

(2,201)

162

179

157

2,095

(8,923)——(114,785)
8,094		Proceeds from collection of lease and guarantee
deposits		Purchase of investment in subsidiary		Proceeds from sale of investment in subsidiary

629

—

—

		Other

(17)

63

38

(228)

(3,444)(40,367)(4,374)(44,304)

			 Net cash used in investing activities
Cash flows from financing activities
		 Net increase (decrease) in short-term loans payable
		 Cash dividends paid
		 Cash dividends paid to minority shareholders
		 Repayments of lease obligations(254)(8,232)—(3,277)(3,300)(1,025)(1,025)(42,450)

—

(3)

—

—

(538)

(303)

(99)

(6,924)

		 Proceeds from disposal of treasury stock

—

6,775

—

—

			 Net cash used in financing activities(4,093)(2,789)(1,125)(52,653)

Effect of exchange rate changes on cash and cash
equivalents

(124)

(60)

(15)

(1,606)

Net increase (decrease) in cash and cash equivalents

6,738(25,310)7,014

86,685

Cash and cash equivalents at beginning of year (Note 4)

43,507

68,81761,803559,656

Cash and cash equivalents at end of year (Note 4)¥50,246¥43,507¥68,817$646,342

See notes to consolidated financial statements.

56 POLA ORBIS HOLDINGS INC.

Note 1 Summary of Significant Accounting Policies
1.1. Basis of presentation
The accompanying consolidated financial statements of
POLA ORBIS HOLDINGS INC. (the “Company”) andits consolidated subsidiaries (collectively, the “Group”)
have been prepared in accordance with the provisions set
forth in the Japanese Financial Instruments and Exchange
Law and its related accounting regulations, and in
conformity with accounting principles generally acceptedin Japan (“Japanese GAAP”), which are different incertain respects as to the application and disclosure
requirements of International Financial ReportingStandards – (“IFRS”).
Under Japanese GAAP, a consolidated statement ofcomprehensive income is required from the fiscal year
ended December 31, 2011 (“fiscal 2011”) and has beenpresented herein. Accordingly, accumulated othercomprehensive income is presented in the consolidatedbalance sheet and the consolidated statement of changes
in net assets. Information with respect to othercomprehensive income for the year ended December 31,
2010 (“fiscal 2010”) is disclosed in Note 14.
Certain amounts in the consolidated financial
statements of the prior years have been reclassified toconform to the current year’s presentation forcomparative purposes. For the convenience of readers
outside Japan, certain presentations in the consolidated
financial statements filed with the Director of the Kanto
Local Finance Bureau in Japan have been reclassified andrearranged.
1.2. Principles of consolidation
The accompanying consolidated financial statements
include the accounts of the Company and its subsidiaries.
All companies included in the scope of consolidation havea fiscal year ending December 31.
Under the control or influence concept, thosecompanies in which the Company, directly or indirectly,
can control over their operations are consolidated, andthose companies over which the Company has the ability
to exercise significant influence are accounted for using
the equity method. All significant inter-company
balances, transactions and material unrealized profit
included in assets resulting from the inter-company
transactions have been eliminated in consolidation.
29 subsidiaries were included in the scope of
consolidation at December 31, 2011 (26 and 27 at
December 31, 2010 and 2009, respectively). THAIPOLA CO., LTD. was a non-consolidated subsidiary at

December 31, 2009 as it was in the process of liquidationand its total assets, net sales, net losses and retained
earnings attributable to the Group had no significant
impact on the consolidated financial statements. One
affiliated company was accounted for using the equity
method at December 31, 2011. There were no affiliates at
December 31, 2010 and 2009.
Changes in significant subsidiaries and affiliates infiscal 2011 compared to fiscal 2010 are as following:
H2O PLUS HOLDINGS, LLC; H2O PLUS, LLC:
CSW H2O Holdings, Inc.; and H2O PLUS CANADACORP. were included in the scope of consolidation
following the acquisition of all outstanding shares in
H2O PLUS HOLDINGS, LLC. POLA CHINA
BEAUTY CO., LTD. was newly established and includedin the scope of consolidation.
POLA (SHANGHAI) CO., LTD. was excluded fromthe scope of consolidation as it was merged with POLA
TRADING (SHANGHAI) CO., LTD. In addition, theGroup sold its shares in P.O. MEDIA SERVICE INC.
and excluded it from the scope of consolidation.
B2O IMPORT AND TRADE OF COSMETICS
AND PERFUMES LIMITED was newly established andaccounted for using the equity method.
Changes in significant subsidiaries in fiscal 2010
compared to fiscal 2009 are as following:
ORBIS CHINA HONG KONG LIMITED was
newly established and included in the scope of
consolidation.
HYUNWOO CO., LTD. and POLA KOREA INC.
were excluded from the scope of consolidation due toliquidation.
1.3. Unification of accounting policies applied toforeign subsidiaries
According to Task Force (PITF) No. 18, “Practical
Solution on Unification of Accounting Policies Applied toForeign Subsidiaries for the Consolidated Financial
Statements” (issued on May 17, 2006), the Company andits consolidated subsidiaries use uniform accounting
policies and procedures for like transactions and otherevents in similar circumstances in preparing consolidated
financial statements. Financial statements of foreign
consolidated subsidiaries prepared in accordance witheither IFRS or accounting principles generally accepted in
the United States (“U.S. GAAP”) are used as adjusted forcertain items unless they are not material. They areincluding the following:
ANNUAL REPORT 201157

Notes to Consolidated Financial Statements

1. Amortization of goodwill
2. Scheduled amortization of actuarial gain or loss ofpensions that has been directly recorded in the equity
3. Expensing capitalized development costs of R&D
4. Cancellation of the fair value model accounting forproperty, plant, and equipment and investment properties
and incorporation of the cost model accounting
5. Recording the prior years’ effects of changes inaccounting policies in the income statement whereretrospective adjustments to financial statements havebeen incorporated
1.4. Business combination
The purchase method of accounting is used to account for
acquired business. Assets and liabilities of consolidated
subsidiaries are evaluated using the full fair value method
at the acquisition date. The difference between the cost ofpurchased businesses and the fair value of their net assets
is recorded as goodwill or negative goodwill (i.e. bargain
purchase) after purchased businesses’ identifiable assets
and liabilities are measured at their fair value at theacquisition date. Goodwill is amortized using the straightline method over 20 years. Negative goodwill isrecognized in profit or loss in the period in which thebusiness combination took place.
Goodwill or negative goodwill recognized prior to
fiscal 2011 is amortized on the straight-line method overa reasonably estimated period. The goodwill or negative
goodwill whose amortized period is not able to bereasonably estimated is amortized over 4 years. Immaterial
amounts of goodwill or negative goodwill, however, arecharged to income in the acquisition year.
1.5. Cash equivalents
Cash and cash equivalents consist of cash on hand, cash
in banks which can be withdrawn at any time and shortterm investments with a maturity of three months or lesswhen purchased which can easily be converted to cash
and are subject to little risk of change in value.
1.6. Inventories
Inventories held for sale in the ordinary course of businessare stated at cost. The cost of merchandise, finishedgoods, work in process and raw materials is determinedon the monthly moving average method, and the cost of
supplies is determined on the last purchase price method.
At each fiscal year-end, the carrying amount of
inventories in the balance sheets may be written down to
net realizable value if net realizable value is lower than its
carrying amount.

58 POLA ORBIS HOLDINGS INC.

1.7. Investments in securities
Securities are classified into held-to-maturity or availablefor-sale securities depending on management’s intent.
Held-to-maturity securities are recorded at amortized costusing the straight-line method.
Marketable securities classified as available-for-salesecurities are recorded at fair value. Unrealized holding
gains or losses on available-for-sale securities are reported
as a component of net assets. Cost of securities sold isdetermined using the moving average method.
Non-marketable securities classified as available-for-salesecurities are recorded at cost which is determined using
the moving average method. Investments in limited
partnerships (investments defined as securities under
Article 2.2 of the Financial Instruments and Exchange
Law of Japan) are recorded at net equity based on
financial statements for the most recent account closing as
provided in the partnership agreement.

method similar to that applicable to operating leasetransactions, and corresponding information is provided
in the notes to the accompanying consolidated financial
statements.
Lease transactions other than finance lease transactions
are accounted for as operating leases and the related
payments are charged to income as incurred.

1.14. Allowance for doubtful accounts
The Company and its domestic consolidated subsidiaries
record allowance for doubtful accounts based on historicalloss ratio for performing receivables, and based on
individual assessment of uncollectible amounts for certain
receivables. Foreign consolidated subsidiaries mainly
estimate unrecoverable amounts on an individual basis.

1.11. Impairment on non-current assets
The Group reviews non-current assets for impairment
whenever events or changes in circumstances based on
external or internal sources of information indicate thatthe carrying amount may not be recoverable. When such
events or changes in circumstances occur, a recoverability
test is required to be performed. An individual asset or
asset group is impaired if its carrying amount exceeds theamount to be recovered through use or sale of such asset
or asset group.

1.8. Property, plant and equipment and depreciation
Property, plant and equipment are stated at cost.
Depreciation of property, plant and equipment(excluding leased assets) of the Company and its domestic
consolidated subsidiaries is calculated using the decliningbalance method, except buildings (excluding building
fixtures) acquired on or after April 1, 1998 for which
depreciation is calculated using the straight-line method.
Depreciation of property, plant and equipment (excluding
leased assets) of the foreign consolidated subsidiaries iscalculated using the straight-line method based on thelocal accounting standards of each country.
Estimated useful lives mainly range from 10 to 50
years for buildings and structures and 7 to 15 years formachinery, equipment and vehicles.
Property, plant and equipment with acquisition costgreater than ¥100,000 and less than ¥200,000 are
depreciated evenly over 3 years.

1.12. Retirement benefits
The Company and its domestic consolidated subsidiaries
have defined benefit plans including a cash balance plan,
lump sum retirement payment plan and qualified pension
plan to cover the majority of their employees (including
corporate officers).
For the employees (including corporate officers) of
certain foreign consolidated subsidiaries, defined
contribution pension plans and lump sum retirement
payment plans are provided.
Certain subsidiaries may make an additional lump sum
retirement payment, which is expensed as incurred.
Accrued retirement benefits and prepaid pension costfor employees (including corporate officers) of theCompany and its domestic consolidated subsidiaries areprovided for based on the estimated amount of projected
benefit obligation and the fair value of the pension plan
assets at the fiscal year end. Prior service cost is amortizedusing the straight-line method over a certain period (10years), which is within the average remaining service yearsof the employees (including corporate officers). Actuarial
gains or losses are amortized from the following fiscal year
after recognition using the straight-line method over acertain period (10 years through 14 years), which iswithin the average remaining service years of theemployees (including corporate officers).

1.15. Provisions
Provision for directors’ and employees’ bonuses
To provide for the payment of directors’ and employees’
bonuses, a portion of the estimated bonus payment
attributable to each fiscal year is recorded.
Provision for sales returns
Provisions are set up to cover future losses arising fromsales returns based on the past return ratios.
Provision for point program
Provisions are set up to cover future discounts andcommemorative gifts under the point program plan basedon the estimated future outflows.
Provision for loss on business liquidation
Losses arising from business terminations are provided forbased on the estimated loss amounts.
Provision for environmental measures
Provisions are set up to cover the estimated charges for
disposal of waste (polychlorinated biphenyl (PCB)).

1.9. Intangible assets
Intangible assets (excluding leased assets) are amortizedusing the straight-line method.
Software for internal use is amortized using thestraight-line method over its estimated useful life of 5
years.
1.10. Leases
Finance leases that do not transfer ownership are
capitalized and depreciated using the straight-line method
over the lease term with zero residual value. However,finance leases entered into on or prior to December 31,
2008 are not capitalized but accounted for using a

1.13. Directors’ retirement benefits
Accrued retirement benefits for directors and corporate
auditors are provided at an amount to be required at the
fiscal year end according to internal regulations.

1.16. Research and development costs
The costs for research and development are charged toincome as incurred.
1.17. Income taxes
Income taxes are accounted for using the asset andliability approach. Deferred tax assets and liabilities arerecognized in the accompanying consolidated financial
statements with respect to the differences between
financial reporting and the tax bases of the assets andliabilities, and measured using the enacted tax rates andlaws which will be in effect when the differences are
expected to reverse.
The consolidated tax return is filed by the Company
and its wholly owned domestic consolidated subsidiaries.
Deferred tax assets are recognized based on the estimateof consolidated tax bases.
1.18. Consumption tax and local consumption tax
The tax-exclusion accounting method is applied.
1.19. Per share information
Basic net income per share is computed by dividing net
income available to common shareholders by the
ANNUAL REPORT 201159

Notes to Consolidated Financial Statements

weighted-average common shares outstanding during theperiod. The number of shares used in the computations
was 55,284 thousand shares in fiscal 2011. (51,591
thousand and 51,284 thousand shares for fiscal 2010 and2009, respectively.) The diluted net income per shareassumes dilution that would occur if stock acquisitionrights were exercised. The Company did not havesecurities or contingent stock agreements with potentiallydilutive effect during fiscal 2011, 2010 and 2009.
Cash dividends per share presented in theaccompanying consolidated statements of income are
dividends applicable to the respective years, including
dividends to be paid after year-end.
1.20. Foreign currency translation
Receivables and payables denominated in foreign
currencies are translated into yen at year-end exchange
rates, and differences arising from the translation are
included in the accompanying consolidated statements ofincome.
All assets and liabilities of the foreign consolidated

subsidiaries are translated into yen at year-end exchange
rates, while revenue and expenses are translated at the
average exchange rate for the year. Adjustments totranslate those accounts into Japanese yen are presented as
foreign currency translation adjustments and minority
interests in net assets of the accompanying consolidatedbalance sheets.
1.21. Derivative financial instruments
The Group hedges the risk arising from its exposure tofluctuations in foreign currency exchange rates. Foreign
currency options are utilized to reduce those risks. The
Group does not enter into derivatives for trading or
speculative purposes. Derivative instruments are stated atfair value, and accounted for using deferred hedge
accounting. Recognition of gains and losses resulting
from changes in the fair values of derivative financial
instruments are deferred until the related losses and gains
on the hedged items are recognized if the derivative
financial instruments are used as hedges and meet certain
hedging criteria.

Note 2 Changes in Accounting Policy and Disclosures
Newly adopted accounting policies and disclosuresin fiscal 2011
2.1. Accounting standard for asset retirement
obligations
Effective from fiscal 2011, the Group adopted“Accounting Standard for Asset Retirement Obligations”(ASBJ Statement No. 18, issued on March 31, 2008) and“Guidance on Accounting Standard for Asset Retirement
Obligations” (ASBJ Guidance No. 21, issued on March
31, 2008).
As a result, operating income declined by ¥66 million(U.S.$859 thousand), and income before income taxes
and minority interests decreased by ¥1,032 million(U.S.$13,277 thousand) for the year ended December 31,
2011.
2.2. Accounting standard for presentation ofcomprehensive income
Effective from fiscal 2011, the Group adopted“Accounting Standard for Presentation of Comprehensive

60 POLA ORBIS HOLDINGS INC.

Income”(ASBJ Statement No. 25, issued on June 30,2010) and a related amendment.
Accumulated other comprehensive income and total
accumulated other comprehensive income are newly
presented in the consolidated balance sheets and theconsolidated statements of changes in net assets.
Information with respect to other comprehensive income
for fiscal 2010 is disclosed in Note 14.
Newly adopted accounting policies and disclosuresin fiscal 2010
2.3. Accounting standard for retirement benefits
Effective from fiscal 2010, the Group adopted “Partial
Amendments to Accounting Standard for Retirement
Benefits (Part 3)” (ASBJ Statement No. 19, issued on July
31, 2008). The impact of this change on operating
income, income before income taxes and minority
interests and net income for fiscal 2010 was immaterial.

Note 3 U.S. Dollar Amounts
The accompanying consolidated financial statements are presented in yen, and solely for the convenience of readers
outside Japan, certain amounts have been translated into U.S. dollars at the rate of U.S.$1 = ¥77.74, the approximate
rate of exchange prevailing at December 31, 2011. This translation should not be construed as a representation that all
amounts shown could be converted into U.S. dollars at such a rate.

Note 4 Cash Flows Information
4.1. Cash and cash equivalents consist of the following:Thousands of U.S.
dollars

Millions of yen

December 31

Cash and deposits
Short-term investments in securities
Less:
Time deposits with maturities exceeding three months
Stocks and bonds with maturities exceeding three months
Cash and cash equivalents

2011

2010

2009

2011

¥50,679
18,412¥34,678
32,169¥42,132
30,984$651,910
236,847(1,432)(17,412)¥50,246(1,170)(22,169)¥43,507(2,480)(1,819)¥68,817(18,431)(223,984)$646,342

4.2. Cash flows from business combination
In fiscal 2011, the Company acquired all outstanding shares in H2O PLUS HOLDINGS, LLC (“H2O PLUS”). The
assets and liabilities at the acquisition date, reconciliation from acquisition cost to net cash used for the purchase ofinvestment in subsidiary are as follows:
Current assets
Non-current assets
Current liabilities
Non-current liabilities
Acquisition cost
Repayments of loans payable of H2O PLUS
Cash and cash equivalents of H2O PLUS
Net cash used for purchase of investment in H2O PLUS

Millions of yen¥1,029
8,935
(857)
(933)
8,174
838
(89)
¥8,923In fiscal 2011, the Company sold all outstanding shares in P.O. MEDIA SERVICE INC. (“P.O. MEDIA”). The assets
and liabilities at the date of sale, reconciliation from gain on sale of subsidiary’s stock to net cash provided by proceedsfrom sale of investment in subsidiary are as follows:
Current assets
Non-current assets
Current liabilities
Non-current liabilities
Gain on sale of subsidiary’s stock
Sales price in shares in P.O. MEDIA
Cash and cash equivalents of P.O. MEDIA
Net cash provided by proceeds from sale of investment in P.O. MEDIA

Millions of yen

¥630
407
(724)
(86)
529
756
(126)
¥629

4.3. Significant non-cash transactions
Assets and liabilities related to finance lease transactions newly recorded were ¥800 million (U.S.$10,292 thousand) in
fiscal 2011 (¥893 million and ¥819 million in fiscal 2010 and 2009, respectively).
Asset retirement obligations newly recorded were ¥1,374 million (U.S.$17,678 thousand) in fiscal 2011 due to theadoption of the accounting standard for asset retirement obligations.

ANNUAL REPORT 201161

Notes to Consolidated Financial Statements

Note 5 Pledged Assets

8.2. The components of net periodic retirement benefit costs are as follows:

Assets pledged as collateral for operating transactions are as follows:
Thousands of U.S.
dollars

Millions of yen

December 31

Cash and deposits

2011

2010

¥27

¥41

2011

$534

Note 6 Short-term and Long-term Debt
Short-term and long-term debt consists of the following:Thousands of U.S.
dollars

Millions of yen

December 31

Short-term loans payable
Lease obligations
Less: current portion

2011

2010

¥1,753
1,300
(425)
¥ 875

¥1,500
1,563
(623)
¥ 939

2011

$19,295
20,106(8,016)$12,090

The weighted average interest rate of short-term loans payable and lease obligations is as follows:
December 31

Short-term loans payable
Lease obligations- current portion
Lease obligations- long term

2011

2010

1.21%
2.67%
2.69%

0.65%
2.25%
2.23%

Years ending December 31

Millions of yen

2012
2013
2014
2015
2016
Total

¥ 623
509
322
85
12
¥1,552Thousands of U.S.
dollars$ 8,016
6,557
4,143
1,099
157
$19,973

Note 7 Contingent Liabilities
Contingent liabilities consist of the following:Thousands of U.S.
dollars

Millions of yen

Guarantees of loans
Employees’ mortgages
Total

2011

2010

2011

¥334
¥334

¥429
¥429

$4,303$4,303Note 8 Retirement Benefits
Thousands of U.S.
dollars

Millions of yen

Projected benefit obligation
Fair value of plan assets
Unfunded retirement benefit obligation
Unrecognized prior service cost
Unrecognized actuarial losses
Provision for retirement benefits

62 POLA ORBIS HOLDINGS INC.

2011

Service cost
Interest cost
Expected return on plan assets
Amortization of prior service cost
Amortization of actuarial losses
Additional lump-sum payment
Net periodic retirement benefit costs

2010

¥786
186
(74)
(89)
116
5
¥931

¥758
178
(77)
(89)
98
7
¥876

2009

2011

¥732
242
(68)
(75)
90
48
¥970

$ 9,756
2,298(995)(1,149)1,265
95$11,270

Retirement benefit costs of certain consolidated subsidiaries which apply the simplified method were included in“Service cost.”
8.3. Assumptions used in accounting for the above plans are as follows:
Years ended December 31

2011

Discount rate
Expected rate of return on plan assets

1.50%
1.50%

2010

2009

1.50%
1.50%

1.50%
1.50%

Note 9 Net Assets
Information regarding changes in net assets is summarized as follows:
9.1. Shares issued and outstanding/Treasury stock
Common stockThousands of shares

Shares issued

161,592—(104,308)
57,284——57,284

Balance at December 31, 2009
Increase
Decrease
Balance at December 31, 2010
Increase
Decrease
Balance at December 31, 2011

Treasury stock

110,308—(108,308)
2,000
—
—
2,000

Under Article 178 of the Japanese Corporate Law, the Company canceled 104,308 thousand shares of treasury stock inaccordance with a resolution of the Board of Directors on May 26, 2010. The Company reissued 4,000 thousand sharesof treasury stock for its public offering in the First Section of the Tokyo Stock Exchange on December 10, 2010. As aresult, as of December 31, 2010, treasury stock decreased by 108,308 thousand shares to 2,000 thousand shares.
9.2. Dividends

8.1. Provision for retirement benefits consists of the following:
December 31

Years ended December 31

Prior service cost is amortized using the straight-line method over a certain period (10 years), which is within the
average remaining service years of the employees (including corporate officers). Actuarial gains or losses are amortizedfrom the following fiscal year after gains or losses are recognized using the straight-line method over a certain period(10 years through 14 years), which is within the average remaining service years of the employees (including corporate
officers).

At December 31, 2011, the annual maturities of lease obligations are as follows:

December 31

Thousands of U.S.
dollars

Millions of yen

2011¥12,444(5,356)
7,087
378
(670)
¥ 6,795

2010¥12,770(5,159)
7,610
467
(770)
¥ 7,3062011$160,073(68,900)
91,173
4,863(8,622)$ 87,413

Dividends paid
Year ended December 31, 2011
Millions of yen Thousands of U.S. dollars
Resolution

Annual Meeting of
Shareholders on March 30, 2011
Board of Directors’ Meetingon July 29, 2011

Type of shares Total dividends

Commonstock
Commonstock

Total dividends

Yen

U.S. dollars

Dividends per share Dividends per share¥2,211$28,445¥40.00$0.51¥1,105$14,222¥20.00$0.26

Record date

Effective date

December March 31,
31, 2010
2011
June 30, September
2011
12, 2011

ANNUAL REPORT 201163

Notes to Consolidated Financial Statements

Note 12 Selling, General and Administrative Expenses

Year ended December 31, 2010
Resolution

Type of shares

Annual Meeting of
Shareholders on March 30, 2010

CommonstockMillions of yen

Yen

Total dividends

Dividends per share¥1,025¥20.00Record date

Effective date

December 31,
2009

March 31,2010

Resolution

Annual Meeting of
Shareholders on March 29, 2012

Type of shares

Commonstock

Source ofdividends

Retainedearnings

Thousands of
U.S. dollars

Yen

U.S. dollars

Total dividends Total dividends Dividends per share Dividends per share Record date

¥1,382$17,778¥25.00$0.32

December31, 2011

Effective dateMarch
30, 2012

Dividends with the record date in fiscal 2010 and the effective date in fiscal 2011
Year ended December 31, 2010

Resolution

Annual Meeting of
Shareholders on March 30, 2011

Type of shares

Commonstock

Source ofdividends

Retainedearnings

Millions of yen

Yen

Total dividends

Dividends per share¥2,211¥40.00Record date

December 31,
2010

Effective date

March 31,2011

The accompanying consolidated financial statements do not include any provision for the year-end dividend of ¥25.00(U.S.$0.32) per share, aggregating to ¥1,382 million (U.S.$17,778 thousand), in respect of fiscal 2011 which is to beapproved on March 29, 2012.

Note 10 Research and Development Costs
The costs of ¥3,629 million (U.S.$46,689 thousand), ¥3,652 million and ¥4,281 million for research anddevelopment were expensed for fiscal 2011, 2010 and 2009, respectively, as incurred, and included in selling, generaland administrative expenses and cost of sales.

Note 11 Cost of Sales
Provision for sales returns included in cost of sales consists of the following:Thousands of U.S.
dollars

Millions of yen

Years ended December 31

Reversal of provision for sales returns
Provision for sales returns

2011

¥90
¥76

2010

¥90
¥90

2009

¥197
¥ 90

2011

$1,159$ 984

Thousands of U.S.
dollars

Millions of yen

Years ended December 31

Dividends with the record date in fiscal 2011 and the effective date in fiscal 2012
Year ended December 31, 2011
Millions of yen

Selling, general and administrative expenses mainly consist of the following:

Sales commission
Promotion expenses
Advertising expenses
Packing and transportation expenses
Salaries, allowances and bonuses
Welfare expenses
Retirement benefit expenses
Provision for bonuses
Provision for point program
Depreciation and amortization
Amortization of goodwill
Other
Total

2011

¥ 43,477
16,676
7,373
4,438
17,882
2,869
733
1,331
1,602
3,345
91
20,521¥120,3422010¥ 43,073
16,627
7,366
4,562
17,645
2,764
754
1,428
1,701
2,912
80
20,745¥119,661

2009¥ 43,390
15,427
7,496
4,556
18,253
2,689
750
1,149
1,520
2,833
80
21,635¥119,782

2011$ 559,266
214,510
94,85357,088230,025
36,9099,435
17,125
20,61343,031
1,180
263,972$1,548,013

Note 13 Other Income (Expenses)
13.1. Loss on disposal of non-current assets mainly consists of the following:Thousands of U.S.
dollars

Millions of yen

Years ended December 31

Buildings and structures
Other property, plant and equipment
Intangible assets
Removal and demolition
Other, net
Total

2011

¥ 54
12
35
255
32
¥389

2010

¥ 68
29
5
104
28
¥235

2009

¥127
122
71
66
23
¥412

2011

$ 695
155
457
3,283
415
$5,00813.2. Loss on disaster of ¥467 million (U.S.$6,009 thousand) related to the Great East Japan Earthquake forfiscal 2011 consists of restoration expenses for non-current assets of ¥140 million (U.S.$1,807 thousand),donations to the earthquake-hit region of ¥134 million (U.S.$1,734 thousand) and other of ¥191 million(U.S.$2,467 thousand)13.3. Gain on sale of subsidiary’s stocks of ¥529 million (U.S.$6,813 thousand) arose from sales of shares in
P.O. MEDIA SERVICE INC.
13.4. Impairment loss consists of the following:Thousands of U.S.
dollars

Millions of yen

Years ended December 31

Domestic
Stores
Offices
Idle assets
Investment property
Non-current asset held for sale
Overseas
Stores
OfficesTotal

64 POLA ORBIS HOLDINGS INC.

2011

2010

2009

2011

¥ 47
17
—
102
550

¥ 84
28
38
—
—

¥114
169
—
—
—

$ 617
224
—
1,314
7,085

36
—
¥754

20
1
¥172

38
65
¥387

468
—
$9,710ANNUAL REPORT 201165

Notes to Consolidated Financial Statements(1) The recoverable amount of stores and offices wasdetermined for the group of assets that generated cash
inflows that were largely independent of the cash
inflows from other assets or groups of assets. The
recoverable amount of investment properties, asset
held for sale and idle assets were determined for theindividual asset.
(2) The recoverable amount of stores and offices wasdetermined by using value-in-use based on theundiscounted future cash flows expected to begenerated from the continued use. For stores andoffices scheduled for closure, the fair value less costs

to sell based on the expected amount for sale was used
to determine the recoverable amount. The recoverable
amount of investment properties is the higher of fairvalue less costs to sell based on real estate appraisal
values and value in use based on the undiscounted
future cash flows. The recoverable amount of assets
held for sale and other assets was measured by using
fair value less costs based on the expected amount forsale or real estate appraisal values. Value-in-use ofstores and offices was assessed as zero as no future
cash flows were expected to be generated.

Thousands of U.S.
dollars

Millions of yen

Gain on sales of non-current assets
Reversal of foreign currency translation adjustments
Loss on valuation of investments in securities
Loss on advanced depreciation deduction of non-current
assets (1)Non-recurring depreciation on non-current assets (2)Other, net
Total(1) Loss on advanced depreciation deduction of noncurrent assets of ¥517 million for fiscal 2010 consistsof buildings and structures of ¥318 million, land of¥198 million and other property, plant andequipment of ¥0 million. Loss on advanced
depreciation deduction of non-current assets is theamount directly reduced from the acquisition cost of
substitute assets.

2011

—
—
—

¥537
661
—

2010

¥ 30
—
(848)

2009

2011

—
—
¥71
¥71

(517)
(341)
(78)
¥262

—
(61)
(25)
¥(904)

—
—
$924
$924

—
—
—

(2) Non-recurring depreciation on non-current assets of¥341 million for fiscal 2010 consist of buildings andstructures of ¥335 million, machinery, equipment
and vehicles of ¥1 million and other property, plantand equipment of ¥3 million. Buildings andstructures of ¥61 million was recognized as nonrecurring depreciation on non-current assets for 2009.
Non-recurring depreciation on non-current assets wasrecorded as the useful lives of the assets to be retired
after the next fiscal year were reviewed.

Note 14 Comprehensive Income

14.1. Comprehensive income:Millions of yen

66 POLA ORBIS HOLDINGS INC.

2010

Unrealized gain (loss) on available-for-sale securities
Foreign currency translation adjustments
Total¥ (46)(501)¥(548)

Note 15 Income Taxes
15.1. Deferred tax assets and liabilities consist of the following:Thousands of U.S.
dollars

Millions of yen

Deferred tax assets:
Provision for bonuses
Provision for retirement benefits
Loss on valuation of inventories
Loss on disposal of non-current assets
Impairment loss
Loss on valuation of investments in securities
Unrealized loss on available-for-sale securities
Non-recurring depreciation on non-current assets
Provision for point program
Unrealized inter-company profit
Net carry-forward of unused tax losses
Enterprise tax payable
Asset retirement obligations
Other
Less valuation allowance
Total deferred tax assets
Deferred tax liabilities:
Unrealized gain on available-for-sale securities
Restoration cost for asset retirement obligations
Goodwill, trademark rights and other intangible assets
Other
Total deferred tax liabilities
Deferred tax assets, net

2011

2010

2011

¥ 594
2,400
621
—
14,435
302
118
—
637
1,024
7,864
226
487
1,054
(22,345)
7,422

¥ 663
2,949
740
167
17,591
388
—
155
671
378
6,141
268
—
873
(24,154)
6,835$ 7,469
30,8788,000—
185,685
3,887
1,521
—
8,194
13,181
101,170
2,916
6,273
13,562(287,438)
95,482

(163)
(124)
(535)
(22)
(847)

(169)
—
—
—
(169)

(2,108)(1,604)(6,893)(291)(10,897)¥6,575¥6,666$84,585

15.2. The reconciliations between the statutory tax rate and the effective tax rate are as follows:

Comprehensive income and other comprehensive income for fiscal 2010 consist of the following:

Comprehensive income attributable to owners of the parent
Comprehensive income attributable to minority interests
Total

Millions of yen

December 31

13.5. “Other, net” mainly consists of the following:
Years ended December 31

14.2. Other comprehensive income:2010¥6,534(91)¥6,443

Statutory income tax rate
Expenditure not allowable for income tax purposes (entertainment expense, etc.)
Per capita inhabitants’ tax
Increase (decrease) in valuation allowance
Adjustments to the book values of investments
Tax credits for research and development costs
Reduction in deferred tax assets at reporting date due to revision of tax law
Reversal of foreign currency translation adjustments
Other
Effective income tax rate

2011

40.7%
1.3
0.4
(10.7)
(4.6)
(2.3)
3.8
—
0.1
28.7%

2010

40.7%
1.1
0.3
1.8
—
—
—
(2.2)
0.2
41.9%

2009

40.7%
1.5
0.5
2.3
4.0
—
—
—
3.9
53.0%

ANNUAL REPORT 201167

Notes to Consolidated Financial Statements

April 1, 2012. Accordingly, the effective corporate tax
rates of the Group at which deferred tax assets andliabilities arising from temporary differences are measured
when the differences are expected to reverse are as
follows: 40.7% until December 31, 2012; 38.0% fromJanuary 1, 2013 to December 31, 2015; and 35.6% afterJanuary 1, 2016 are applied to the years when the asset isrealized or the liability is settled.
Net deferred tax assets declined by ¥408 million(U.S.$5,259 thousand), and deferred income tax expense
recognized in fiscal 2011 increased by ¥432 million(U.S.$5,558 thousand) as a result of this change.

15.3. Revision of deferred tax assets and liabilities due
to change in statutory income tax rate.
On December 2, 2011, the “Act for Partial Revision of
the Income Tax Act etc. for the Purpose of Creating
Taxation System Responding to Changes in Economic
and Social Structures” (Act No. 114 of 2011) and the“Act on Special Measures for Securing Financial
Resources Necessary to Implement Measures for
Reconstruction Following the Great East Japan
Earthquake” (Act No. 117 of 2011) were passed. Under
these revisions, the statutory corporate tax rates willchange effective from fiscal years beginning on or after

Note 16 Leases

Future minimum lease payments are as follows:
December 31

Due within 1 year
Due after 1 year
Total

2011

16.1.2. Accounting treatment for the finance leases
entered into on or prior to December 31, 2008
The finance leases entered into on or prior to December
31, 2008 are not capitalized but accounted for using amethod similar to that applicable to operating leasetransactions.
If such leases were capitalized, their depreciation oramortization would be determined on the straight-line
method over the lease term with zero residual value.
Acquisition cost, accumulated depreciation oramortization, accumulated impairment loss and net bookvalue of such leases would be as follows:

16.1. Finance leases that do not transfer ownership16.1.1. Accounting treatment for the finance leases
entered into on or after January 1, 2009
The finance leases entered into on or after January 1,
2009 are capitalized. They primarily consist of interior
and furniture and fixtures for retail stores included inbuildings and structures or other property, plant andequipment, and are depreciated using the straight-line
method over the lease term with zero residual value.

Acquisition
cost

¥ 413

Accumulated
depreciation/amortization¥ 354

Accumulated
impairment
loss

¥ 3

Net bookvalue

Acquisition
cost

Accumulated
depreciation/amortization¥ 55¥1,036¥ 798

Accumulated
impairment
loss

December 31

2011

Allowance for impairment loss on leased assets

¥5

2010

¥25

2011

$74

¥ 5

Net book
value

¥ 232

—

—

—

—

681

433

—

248

1,116
—
¥1,529922—¥1,277

9
—
¥12

183
—
¥238

2,418
8
¥4,144

1,818
7¥3,058

23
0
¥29

576
0
¥1,056

Buildings and structures
Machinery, equipment and vehicles
Other property, plant and equipment, including tools, furniture and fixtures
Intangible assets (software)
Total

Acquisition
cost

Accumulated
depreciation/amortization

Accumulated
impairment
loss

Net book
value

14,356

11,870123

2,362$19,669$16,429$166$3,073$ 5,312$ 4,559

Thousands of U.S.
dollars

Millions of yen

Years ended December 31

Lease payments
Reversal of impairment loss on leased assets
Depreciation and amortization
Interest expense
Impairment loss

2011

2010

¥1,250
39
1,134
69
¥ 13

¥627
21
568
27
¥ 1

2009

¥1,596
45
1,448
120
¥ 56

$ 42

$ 710

2011

$8,066
272
7,312
356
$ 14

Interest expense is calculated as the difference between the aggregate lease payments and the acquisition cost of leased
assets, allocated over the lease term using the effective interest method.
16.2. Operating lease transactions
Future minimum lease payments under non-cancelable operating lease arrangements are as follows:
December 31

2011

68 POLA ORBIS HOLDINGS INC.

2011

$2,6752,496$5,172Thousands of U.S.
dollars

Millions of yen

Thousands of U.S.
dollars

Millions of yen

2010

Thousands of U.S. dollars

December 31

2009¥1,1671,136¥2,304

Balance of allowance for impairment loss on leased assets is as follows:

Millions of yen
2011

Buildings and structures
Machinery, equipment andvehiclesOther property, plant andequipment, including tools,
furniture and fixtures
Intangible assets (software)
Total

2010

¥ 698
437
¥1,136

¥208
194
¥402

Lease payments, reversal of impairment loss on leased assets, depreciation and amortization, interest expense andimpairment loss are as follows:(As a lessee)

December 31

Thousands of U.S.
dollars

Millions of yen

Due within 1 year
Due after 1 year
Total

2011

¥ 7
3
¥11

2010

¥ 7
11
¥19

2009

¥ 7
19
¥26

2011

$100
44
$144

Note 17 Investment and Rental Property
Effective from fiscal 2010, the Group adopted“Accounting Standard for Disclosures about Fair Value ofInvestment and Rental Property” (ASBJ Statement No.
20, issued on November 28, 2008) and “Guidance on
Accounting Standard for Disclosures about Fair Value ofInvestment and Rental Property” (ASBJ Guidance No.
23, issued on November 28, 2008).
17.1. Overview
The Group owns office buildings and residential
properties for lease in Tokyo and other areas. Net rental

income was ¥1,504 million (U.S.$19,356 thousand) in
fiscal 2011, (¥1,507 million in fiscal 2010) (rental
income is recorded under sales and non-other income,while rental expenses are recorded under cost of sales,
selling, general and administrative expenses, and nonother expenses). Impairment loss of ¥606 million(U.S.$7,798 thousand) in fiscal 2011 (¥38 million in
fiscal 2010), loss on disaster of ¥83 million (U.S.$1,061
thousand) in fiscal 2011 and non-recurring depreciationof ¥341 million from investment and rental properties infiscal 2010 were recorded under other losses.

ANNUAL REPORT 201169

Notes to Consolidated Financial Statements

17.2. Fair value of investment properties
The carrying amount on the consolidated balance sheets, net change, the fair value of these properties, and the method
used for calculating the fair value of investment and rental properties are as follows:
December 31, 2011

Millions of yen
Carrying amount

Balance at December 31, 2010

¥24,067

Net increase¥(2,087)

December 31, 2011

Fair value
Balance at December 31, 2011

¥21,980¥23,417

Net increase¥649

December 31, 2011

Fair value
Balance at December 31, 2010

¥24,067$309,584

At December 31, 2010

¥45,348

Thousands of U.S. dollars
Carrying amount

Balance at December 31, 2010

¥41,381Millions of yen
Carrying amount

Balance at December 31, 2009At December 31, 2011

Net increase$(26,847)

Fair value
Balance at December 31, 2011

$282,737

At December 31, 2011

$532,306

1. The carrying amounts present acquisition cost less accumulated depreciation and accumulated impairment loss.
2. Components of change
Increase: In fiscal 2011: Refurbishment of office building for lease: ¥185 million (U.S.$2,387 thousand)Transfer due to changes in the use of properties: ¥146 million (U.S.$1,884 thousand)In fiscal 2010: Acquisition of residential properties for lease: ¥1,393 million
Refurbishment of office buildings for lease: ¥244 million
Decrease: I n fiscal 2011: Sales of office building and idle assets: ¥1,222 million (U.S.$15,723 thousand)Impairment loss and non-recurring depreciation on office buildings and idle assets:¥621 million (U.S.$7,996 thousand)
Depreciation on office buildings and residential properties for lease: ¥571 million(U.S.$7,352 thousand)In fiscal 2010: Impairment loss and non-recurring depreciation on idle assets: ¥373 million
Depreciation on office buildings and residential properties for lease: ¥588 million
3. Method for calculating fair values
The fair values of major properties are determined by the amounts using appraisal certificates provided byindependent real estate assessors. For other properties, however, the fair value of land is determined by the amountadjusted using the indices considered to properly reflecting market price, and the fair values of depreciable assets
such as buildings are determined by the carrying amounts on the consolidated balance sheets.

Note 18 Financial Instruments
Effective from fiscal 2010, the Group adopted “Accounting Standard for Financial Instruments” (ASBJ Statement
No. 10, issued on March 10, 2008) and “Implementation Guidance on Disclosures about Fair Value of Financial
Instruments” (ASBJ Guidance No. 19, issued on March 10, 2008).

18.1.2. Description of financial instruments, risks andrisk management policy
Trade receivables such as notes and accounts are exposed
to customers’ credit risk. In order to manage such risk,
the Group manages payment dates and outstandingbalances by individual customer and review customers’
credit status on a regular basis in accordance with credit
management policy.
Investments in securities consist of financial
instruments with low risk such as held-to-maturity debt
securities, but some of them are exposed to the risk offluctuations in market price. The Group reviews theprices on a quarterly basis in order to manage such risk.
Notes and accounts payable – trade and accounts
payable – other are due within one year. The interestbearing liabilities mainly include short-term loans
payable and lease obligations. Short-term loans aremainly funding for operating transactions, and leaseobligations are mainly funding for capital investments.
Loans payable with floating interest rates are exposed to
the risk of interest rate fluctuations but they are all shortterm in nature.

The Group executes and manages derivativetransactions in accordance with the internal policy
governing the authorization of transactions. The use ofderivatives is limited only to the extent necessary tohedge foreign exchange risk, and also the counterpartiesare limited to financial institutions with high credit
standing in order to mitigate credit risk.
Furthermore, trade payables and interest-bearing
liabilities are exposed to liquidity risk, but the Groupmanages such risk by, for example, preparing the cash
management schedule on a monthly basis.
18.1.3. Supplementary information on fair value offinancial instruments
Fair value of financial instruments is based on the quoted
price in the active market. A reasonable valuation
technique is used if a quoted price is not available. The
values may change under different assumptions as suchcalculation incorporates variable factors. Also, thecontract amounts disclosed in “Derivative transactions”
do not represent market risk related to derivativetransactions. For detailed information on derivativetransactions, see Note 20 “Derivative transactions.”

18.2. Fair value of financial instruments
The carrying amount, fair value of financial instruments and the difference between them consist of the following:
Millions of yen
2011

December 31¥ 50,679
20,650Fair value¥ 50,679
20,650Difference

29,312
2,446¥103,089

28,694
2,446¥102,471¥(617)—¥(617)(i) Notes and accounts payable – trade(ii) Short-term loans payable(iii) Accounts payable – otherTotal liabilities

2,894
1,500
11,391¥ 15,786

2,894
1,500
11,391¥ 15,786————

Derivative transactions (*2)

¥

¥

—

(i) Cash and deposits(ii) Notes and accounts receivable – trade (*1)(iii) Investments in securities
Held-to-maturity securities
Available-for-sale securities
Total assets

Carrying amount

15

15

—
—

18.1. Overview of financial instruments
18.1.1. Policies on financial instruments
The Group only utilizes low risk, short-term financial instruments for cash management, and it raises funds throughborrowings from banks and by issuing corporate bonds in the capital market. Derivatives are utilized only to the extent
necessary to hedge foreign currency risk arising from transactions denominated in foreign currencies. The Group does notenter into derivative transactions for speculative or trading purposes.

70 POLA ORBIS HOLDINGS INC.

ANNUAL REPORT 201171

Notes to Consolidated Financial Statements

2. Financial instruments for which fair values are not readily available consist of the following:

Millions of yen
2010

December 31(i) Cash and deposits(ii) Notes and accounts receivable – trade (*1)(iii) Investments in securities
Held-to-maturity securities
Available-for-sale securities
Total assets

Carrying amount(i) Notes and accounts payable – trade(ii) Short-term loans payable(iii) Accounts payable – otherTotal liabilities¥ 34,678
19,48145,061
4,425¥103,647

45,104
4,425¥103,689

¥42
—
¥42

3,549
1,753
10,848¥ 16,151

3,549
1,753
10,848¥ 16,151

—
—
—
—

(21)

¥

(21)

—
—

—

Thousands of U.S. dollars
2011

December 31(i) Cash and deposits(ii) Notes and accounts receivable – trade (*1)(iii) Investments in securities
		 Held-to-maturity securities
		 Available-for-sale securities
Total assets

Carrying amount

Fair value$ 651,910
265,638$ 651,910
265,638

377,058
31,470$1,326,077

369,133
31,470$1,318,132

Difference——

37,22919,295
146,537$ 203,061

37,22919,295
146,537$ 203,061————

Derivative transactions (*2)

$

$

—

204

(*1) Notes and accounts receivable – trade are presented net of allowance for doubtful accounts.
(*2) Receivables and payables arising from derivative transactions are presented on a net basis, with net payables presented in parenthesis.

1. Calculation method of fair value of financial
instruments and information about securities andderivative transactions
Assets	(i) Cash and deposits, (ii) Notes and accounts
receivable – trade
Carrying value is used for fair value as they are shortterm in nature; the fair value approximates the
carrying value.
	(iii) Investments in securities
The fair value of stock is determined on the quoted priceon stock exchanges and the fair value of debt securities isdetermined on the quoted prices provided by financial
institutions. For the short-term investments in securities,
their fair values approximate carrying value.

72 POLA ORBIS HOLDINGS INC.

December 31

Unlisted stock
Capital contribution to investment in a limited
partnership
Total

Thousands of U.S. dollars

2011

2010

2011

Carrying amount

Carrying amount

Carrying amount

175
¥236

189
¥221

2,259
$3,038¥ 60¥ 32

Millions of yen
2011

December 31

Cash and deposits
Notes and accounts receivable – trade
Investments in securities
Held-to-maturity debt securities (corporate bonds)
Held-to-maturity debt securities (other)
Available-for-sale securities with maturities (other)
Total

Due within 1 year

¥50,679
20,650800
16,612
1,008¥89,751

Due after 1 year
through 5 years

Derivative transactions
The fair value of derivative transactions is determinedbased on the quoted price provided by financial
institutions.
For further information, refer to Note 20 “Derivativetransactions.”

Due after 5 years
through 10 years

—
—

—
—

—
—
¥167
¥167

¥ 1,000
10,900¥11,900

Due after 10 years

—
—

—
—
—
—

Millions of yen
2010

December 31

Cash and deposits
Notes and accounts receivable – trade
Investments in securities
Held-to-maturity debt securities (corporate bonds)
Held-to-maturity debt securities (other)
Available-for-sale securities with maturities (other)
Total

Due within 1 year

Due after 1 year
through 5 years

9,907
19,5291,010¥84,607¥ 2,103
13,520—¥15,624¥34,678
19,481

Due after 5 years
through 10 years

—
—

—
—

—
—
¥178
¥178

Due after 10 years

—
—

—
—
—
—

Thousands of U.S. dollars

For notes related to securities by holding purpose, refer toNote 19 “Investments in securities.”
Liabilities
	(i) Notes and accounts payable – trade, (ii) Short-termloans payable and (iii) Accounts payable – other
Carrying value is used for fair value as they are short termin nature; the fair value approximates the carrying value.

$ 779

These financial instruments are not included in 3 “Investments in securities” as their fair values are unavailable andfuture cash flows are not determinable.
3. Redemption schedule of monetary receivables and investments in securities with maturities is as follows:$(7,945)—$(7,945)(i) Notes and accounts payable – trade(ii) Short-term loans payable(iii) Accounts payable – otherTotal liabilities

204

Millions of yen

Difference¥ 34,678
19,481¥

Derivative transactions (*2)

Fair value

2011

December 31

Cash and deposits
Notes and accounts receivable – trade
Investments in securities
Held-to-maturity debt securities (corporate bonds)
Held-to-maturity debt securities (other)
Available-for-sale securities with maturities (other)
Total

Due within 1 year

Due after 1 year
through 5 years

Due after 5 years
through 10 years

10,294
213,689
12,974$1,154,506$ 12,863
140,210—$153,074——$2,148$2,148$ 651,910
265,638————

Due after 10 years

—
—

—
—
—
—

4. For the repayment schedule of lease obligations at December 31, 2011 and 2010, refer to Note 6 “Short-term and Longterm Debt.”

ANNUAL REPORT 201173

Notes to Consolidated Financial Statements

Note 19 Investments in Securities

Thousands of U.S. dollars
2011

December 31

19.1. Marketable securities classified as held-to-maturity securities consist of the following:
Millions of yen
2011

December 31

Securities with fair value exceeding carrying
amountCorporate bonds
Other
Subtotal
Securities with carrying amount exceeding fairvalue
Corporate bonds
Other
Subtotal
Total

Carrying amount

Fair value

2010
Difference

Carrying amount

Fair value

Difference¥ 1,800
4,800
6,600

¥ 1,826
4,821
6,648

¥ 26
21
47

¥ 6,311
13,031
19,343¥ 6,369
13,117
19,486

¥ 57
85
143

—
22,712
22,712¥29,312—22,04622,046¥28,694

—
(665)
(665)
¥(617)

5,699
20,01825,718¥45,061

5,692
19,92425,617¥45,104

(7)
(93)
(100)
¥ 42

Thousands of U.S. dollars
2011

December 31

Securities with fair value exceeding carrying amountCorporate bonds
Other
Subtotal
Securities with carrying amount exceeding fair value
Corporate bonds
Other
Subtotal
Total

Carrying amount

Fair value

Difference$ 23,158
61,74784,905$ 23,492
62,02685,518$292,193292,193$377,058

283,594
283,594$369,113(8,559)(8,559)$(7,945)

Securities with carrying amount exceeding acquisition cost
Stock
Other
Subtotal
Securities with acquisition cost exceeding carrying amount
Stock
Other
Subtotal
Total

Unlisted stock of ¥60 million (U.S.$779 thousand) at
December 31, 2011 (¥32 million at December 31, 2010)
and capital contribution to investment in a limited
partnership of ¥175 million (U.S.$2,259 thousand) at
December 31, 2011 (¥189 million at December 31, 2010)
were carried in the accompanying consolidated balance

Carrying amount

Acquisition cost

Difference$ 7,635—
7,635$ 1,720—
1,720$5,915—
5,915

10,971
12,863
23,834$31,470

15,165
12,86328,029$29,749(4,194)—(4,194)$1,721sheets. They are not included in “available-for-salesecurities” in the above table as quoted price is unavailable
and their fair value is not readily determinable.
Investment in affiliates of ¥57 million (U.S.$736
thousand) which is accounted for using the equity method
was included in unlisted stock in fiscal 2011.

19.3. Available-for-sale securities sold during fiscal 2011, 2010 and 2009 consist of the following:

334
279
613

Millions of yen
2011

Years ended December 31

Stock
Other
Total

Amount sold

¥14
—
¥14

Aggregate
Aggregate
gains on sales losses on salesof securities
of securities
Amount sold

—
—
—

¥14
—
¥14

¥ 11
247
¥258

2010

2009

Aggregate
gains
on salesof securities

Aggregate
gains
on salesof securities

¥1
5
¥6

Securities with carrying amount exceedingacquisition cost
Stock
Other
Subtotal
Securities with acquisition cost exceeding
carrying amount
Stock
Other
Subtotal
Total

74 POLA ORBIS HOLDINGS INC.

¥ 10
138
¥149

—
¥37
¥37

¥1
2
¥3

2011

Millions of yen

December 31

¥ 0
27
¥27

Aggregate
losses on salesof securities

Thousands of U.S. dollars

19.2. Marketable securities classified as available-for-sale securities consist of the following:
2011

Aggregate
losses on salesof securities
Amount soldYear ended December 31

2010

Carrying amount

Acquisition cost

Difference

Carrying amount

Acquisition cost

Difference

¥ 593
—
593

¥ 133
—
133

¥459
—
459

¥ 548
732
1,280

¥ 133
730
863

¥414
2
416

852
1,000
1,852
¥2,446

1,178
1,000
2,178
¥2,312

(326)
—
(326)
¥133

1,144
2,000
3,145
¥4,425

1,178
2,000
3,179
¥4,042

(33)
—
(33)
¥382

Stock
Other
Total

Amount sold

$182
—
$182

Aggregate gains on salesof securities———

Aggregate losses on salesof securities

$188
—
$188

ANNUAL REPORT 201175

Notes to Consolidated Financial Statements

Note 20 Derivative Transactions
Derivative transactions related to a foreign currency to which hedge accounting is applied consist of thefollowing:
Millions of yen

December 31
Accounting method

Deferred hedge
accounting basis

Thousands of U.S. dollars

2011
Hedging instruments

Foreign currency
options (2)Sell (Put)Australian dollar
Purchase (Call)
Australian dollar
Total

Hedged item

Contract
amountMaturity
over 1 year

described in Note 1. Segment income is based on
operating income. The amounts of inter-segment
unrealized profit and transfer are calculated based onmarket prices.

21.2. Calculation method for net sales, income (loss),
assets and other items by reportable segment
The accounting policies and measures for the Group’sreportable business segments are generally the same as2011
Contract
amountFair value (1)Maturity
over 1 year

21.3. Information about net sales and income (loss) by reportable segment
Fair value (1)Millions of yen
2011
Reportable Segments

Forecasted foreign
currency transaction
Forecasted foreign
currency transaction

Year ended or at December 31¥12,812—¥ (1)$164,806—$ (21)

13,326¥26,138

—
—

17
¥15

171,421$336,228

—

226
$204

(1) The fair value is determined on the quoted prices provided by financial institutions.
(2) No premium is paid to the broker in the foreign currency options.
Derivative transactions related to a foreign currency to which hedge accounting is not applied consist of thefollowing:
Millions of yen
2010
Contract
amountDecember 31

Non-market transactions
Foreign exchange forwards
		Purchase			Euro
Total

¥ 69
¥ 69

Maturity
over 1 year——

Fair value (*)

Unrealized
gain/loss¥ (21)¥ (21)¥ (21)¥ (21)Net sales
Sales to external customers
Inter-segment sales or transfers
Total
Segment income
Segment assets
Other items
Depreciation and amortization
Amortization of goodwill
Increase in property, plant andequipment and intangible assets

Reconciliations Consolidated total(Note 2)
(Note 3)

Beauty Care

Real Estate

Subtotal

Others (Note 1)

Subtotal¥154,778
100
154,878
10,787
111,405¥3,089
659
3,748
1,283
28,512¥157,867
759
158,627
12,071
139,917¥8,7905,781
14,571
501
10,367¥166,657
6,541
173,199
12,573150,285—¥(6,541)(6,541)280
42,742¥166,557—
166,657
12.853
193,027

4,339
91

637
—

4,977
91

282
—

5,260
91

113
—

5,374
91

4,516

¥ 273

4,790

¥ 193

¥ 4,983

¥

¥

¥

64

¥

5,048

Notes: 1. “Others” comprises business operations that are not categorized as reportable segments and include the pharmaceuticals, building maintenance and printing businesses.
2. Reconciliations consist of the following:(1) The segment income reconciliation of ¥280 million (U.S.$3,602 thousand) includes inter-segment transaction eliminations of ¥2,351 million (U.S.$30,247 thousand) minus
corporate expenses of ¥2,071 million (U.S.$26,644 thousand), not allocated to each segment. Corporate expenses are primarily the Company’s administrative expenses notallocated to reportable segments.
(2) The segment assets reconciliation of ¥42,742 million (U.S.$549,809 thousand) includes corporate assets of ¥88,517 million (U.S.$1,138,635 thousand), not allocated to eachsegment, minus inter-segment eliminations of ¥45,775 million (U.S.$588,825 thousand). Corporate assets are primarily the Company’s financial assets and assets in theadministrative division not allocated to reportable segments.
(3) Reconciliations of depreciation and amortization, and increases in property, plant and equipment, and intangible assets are depreciation and amortization, and increases inproperty, plant and equipment, and intangible assets related to corporate assets and inter-segment eliminations, respectively.
3. Segment income is adjusted for operating income reported in the consolidated statements of income.
4. Amortization and increase in long-term prepaid expenses are included in depreciation and amortization, and increases in property, plant and equipment, and intangible assets,
respectively.
5. Depreciation and amortization in the Beauty Care segment includes non-recurring depreciation on non-current assets of ¥15 million (U.S.$197 thousand).

(*) The fair value is determined on forward exchange rate.

Millions of yen
2010
Reportable Segments

Note 21 Segment Information
Effective from fiscal 2011, the Group adopted“Accounting Standard for Disclosures about Segments ofan Enterprise and Related Information” (ASBJ Statement
No. 17, issued on March 27, 2009) and “Guidance on
Accounting Standard for Disclosures about Segments ofan Enterprise and Related Information” (ASBJ Guidance
No. 20, issued on March 21, 2008).
21.1. General information about reportable segments
A reportable segment is a component of the Group forwhich discrete financial information is available andwhose operating results are regularly reviewed by the
Board of Directors to make decisions about resources tobe allocated to the segment and assess its performance.
The Group primarily develops, manufactures and markets
cosmetics and related products. It promotes a multibrand strategy of holding a range of brands and winning

76 POLA ORBIS HOLDINGS INC.

Year ended or at December 31

market share for each of its high profile brands in orderto satisfy the diversifying needs of its customers based on
their values. Comprehensive strategies are planned andproducts are marketed by each brand name in Japan andoverseas. In addition to its cosmetics business, a variety ofbusinesses is conducted to contribute to the Group’s
profits. Therefore, reportable segments consist of the
Beauty Care business, the Group’s core business, and theReal Estate business, which indirectly supports theGroup’s core business. The Beauty Care business
manufactures and markets cosmetics and health foods
and sells fashion items (women’s underwear, women’s
apparel and jewelry) under the following brand names:
POLA, ORBIS, pdc, FUTURE LABO, ORLANE JAPON,
decencia, THREE, and H2O PLUS. The Real Estatebusiness is engaged in the leasing of office buildings andresidential properties.

Net sales
Sales to external customers
Inter-segment sales or transfers
Total
Segment income
Segment assets
Other items
Depreciation and amortization
Amortization of goodwill
Increase in property, plant andequipment and intangible assets

Reconciliations Consolidated total(Note 2)
(Note 3)

Beauty Care

Real Estate

Subtotal

Others (Note 1)

Subtotal¥153,091
56
153,148
10,165
105,070¥3,102
631
3,734
1,304
28,856¥156,194688
156,882
11,470133,926¥9,0597,150
16,209223
15,253¥165,253
7,838
173,092
11,693
149,179—¥(7,838)(7,838)576
38,592¥165,253—
165,253
12,270187,771

4,082
—

561
—

4,643
—

345
80

4,989
80

372
—

5,361
80

¥ 3,799¥2,249¥ 6,049

¥ 211

¥

6,260

¥

(15)

¥

6,245

Notes: 1. “Others” comprises business operations that are not categorized as reportable segments and include the pharmaceuticals, building maintenance and printing businesses.
2. Reconciliations consist of the following:(1) The segment income reconciliation of ¥576 million includes inter-segment transaction eliminations of ¥2,483 million minus corporate expenses of ¥1,906 million, not allocated toeach segment. Corporate expenses are primarily the Company’s administrative expenses not allocated to reportable segments.
(2) The segment assets reconciliation of ¥38,592 million includes corporate assets of ¥78,180 million, not allocated to each segment, minus inter-segment eliminations of ¥39,588
million. Corporate assets are primarily the Company’s financial assets and assets in the administrative division not allocated to reportable segments.
(3) Reconciliations of depreciation and amortization, and increases in property, plant and equipment and intangible assets are depreciation and amortization, and increases inproperty, plant and equipment, and intangible assets related to corporate assets and inter-segment eliminations, respectively.
3. Segment income is adjusted for operating income reported in the consolidated statements of income.
4. Amortization and increase in long-term prepaid expenses are included in depreciation and amortization, and increases in property, plant and equipment, and intangible assets,
respectively.
5. Depreciation and amortization in the Beauty Care segment includes non-recurring depreciation on non-current assets of ¥341 million.

ANNUAL REPORT 201177

Notes to Consolidated Financial Statements

21.6. Information about amortization and balance of goodwill by reportable segment

Thousands of U.S. dollars
2011

Millions of yen

Reportable Segments

Year ended or at December 31

Net sales
Sales to external customers
Inter-segment sales or transfers
Total
Segment income
Segment assets
Other items
Depreciation and amortization
Amortization of goodwill
Increase in property, plant andequipment and intangible assets

Beauty Care

Real Estate

Subtotal$1,990,975
1,291
1,992,267
138,767
1,433,048$39,736
8,483
48,22016,513366,769$2,030,712
9,775
2,040,487
155,281
1,799,818$

55,825
1,180

8,205
—

58,103$ 3,516

Others (Note 1)

64,031
1,180$

Subtotal$113,071
74,373
187,4446,454
133,358$2,143,784
84,1482,227,932
161,736
1,933,177

3,637—

61,619$—$(84,148)(84,148)
3,602
549,80967,668
1,180

2,488

$

$2,143,784—
2,143,784
165,3392,482,987

1,465—

64,107$

831

69,134
1,180$

64,93821.4. Information related to reportable segment

Millions of yen
2011
Cosmetics

Sales to external customers¥141,453

Reportable Segments

Year ended or at December 31

Amortization of goodwill
Goodwill

Beauty Care

¥ 91
¥3,583

Real Estate——

OthersSubtotal¥ 91¥3,583——

Reconciliations

—
—

Total

¥ 91
¥3,583Thousands of U.S. dollars
2011
Reportable Segments

Year ended or at December 31

Amortization of goodwill
Goodwill

Beauty Care

$ 1,180$46,098

Real Estate——

OthersSubtotal$ 1,180$46,098——

Reconciliations

—
—

Total

$ 1,180$46,098

21.7.Segment information under former accounting standard

21.4.1. Sales information by product and service
Year ended December 31

2011

Reconciliations Consolidated total(Note 2)
(Note 3)

Fashion

Others¥13,324

Total¥11,879¥166,657

21.7.1. Business segment information
The Group’s operations are primarily focused on businesses related to the beauties and health, and classified into fivebusiness segments: “Cosmetics,” “Fashion,” “Pharmaceuticals,” “Real Estate,” and “Other,” based on internalmanagement purposes. Financial information summarized by business type for fiscal 2010 and 2009 is as follows:
Millions of yen
2010

Thousands of U.S. dollars

Year ended or at December 31

2011Year ended December 31

Cosmetics

Sales to external customers$1,819,572

Fashion

Others$171,403

Total$152,808$2,143,784

21.4.2. Information by geographical area
Information by geographical area is omitted, as both sales and assets of the domestic segment account for more than
90% of the total sales and assets of all segments for fiscal 2011.
21.4.3. Information by customer
Information by customer is omitted, as there are no external customers for which sales account for more than 10% of
net sales presented in consolidated statements of income for fiscal 2011.

2011
Reportable Segments
Beauty Care

¥101

Real Estate¥649

OthersSubtotal¥751—

Reconciliations

¥3

Total

¥754

Thousands of U.S. dollars
2011
Reportable Segments

Year ended December 31

Impairment loss

78 POLA ORBIS HOLDINGS INC.

Beauty Care

$1,310Real Estate$8,356

Subtotal$9,667

Others—Pharmaceuticals

Real Estate

OthersTotal

Elimination or
corporate

Consolidated¥139,650
50¥139,710
129,237
10,472¥ 39,566
4,245
172¥ 3,716¥13,453
0¥13,453
13,905(452)¥ 6,514135—¥
88¥6,936—¥6,936
7,286(349)¥2,419259—¥ 183¥ 3,102673¥ 3,775
2,471
1,304¥16,434561—¥ 2,249¥2,101
6,142¥8,243
7,843
399¥4,42068—¥ 22¥165,253
6,865¥172,119
160,743
11,375¥ 69,355
5,270
172¥ 6,260—¥ (6,865)¥ (6,865)(7,761)895¥118,416
90
(0)
¥
(15)

¥165,253—¥165,253
152,982
12,270¥187,771
5,361
172¥ 6,245

Millions of yen

Year ended or at December 31

Millions of yen

Impairment loss

Fashion2009

21.5. Information about impairment loss of non-current assets by reportable segment

Year ended December 31

Net sales
Sales to external customers
Inter-segment sales and transfers
Total
Operating expenses
Operating income (loss)
Total assets
Depreciation and amortization
Impairment loss
Capital expenditures

Cosmetics

Reconciliations

$42

Total

$9,710Net sales
Sales to external customers
Inter-segment sales and transfers
Total
Operating expenses
Operating income (loss)
Total assets
Depreciation and amortization
Impairment loss
Capital expenditures

Cosmetics

FashionPharmaceuticals

Real Estate

OthersTotal

Elimination or
corporate

Consolidated¥136,219
7¥136,226
127,805
8,420¥ 29,715
3,714
285¥ 6,367¥14,1370¥14,137
14,485(347)¥ 8,514
168
—
¥ 421

¥6,74442¥6,787
8,172(1,384)¥2,352
386
103
¥ 437

¥ 3,216474¥ 3,691
2,092
1,598¥17,641582—¥ 1,151¥2,014
6,352¥8,366
7,914
452¥4,07371—¥ 43¥162,332
6,876¥169,209
160,470
8,739¥ 62,297
4,923
388¥ 8,422—¥ (6,876)¥ (6,876)(7,843)966¥119,612
50
(1)
¥
216

¥162,332——
152,626
9,706¥181,909
4,973
387¥ 8,639

Notes: 1. Primary products for each business segment consist of the following:(1) Cosmetics: Cosmetics (B.A series, APEX-i, AQUA FORCE, CLEAR, Pure Natural, White Diamante, Sowan Hypnotique, “Tsutsumu” series, THREE), and health foods (KENBISANSEN)(2) Fashion: Ladies’ underwear (Sofical), ladies’ apparel (amian, Crea+mure) and jewelry (LA VIE D’OR)(3) Pharmaceuticals: Pharmaceutical products (Lulicon Cream 1%, Lulicon Solution 1%, Alosenn)(4) Real Estate: Office buildings and residential properties for lease(5) Others: Printing, and building maintenance, etc.
2. Operating expenses include operating expenses not allocated to each segment (¥1,906 million and ¥1,904 million for fiscal 2010 and 2009, respectively), under “Elimination or
corporate,” which mainly consist of the Company’s administrative expenses.
3. Assets include corporate assets (¥156,506 million and ¥123,964 million at December 31, 2010 and 2009, respectively), under “Elimination or corporate,” which mainly consist of
surplus funds (cash and deposits, and investments in securities) at the Company, and assets related to administrative operations.
4. Depreciation and amortization and capital expenditures include amortization and the increase of long-term prepaid expenses, respectively.
5. Depreciation and amortization for the Cosmetics business include non-recurring depreciation (¥341 million and ¥61 million for fiscal 2010 and 2009, respectively).
ANNUAL REPORT 201179

Notes to Consolidated Financial Statements

21.7.2. Geographical segment information
Geographical segment information is omitted, as both sales and assets of the domestic segment account for more than
90% of the total sales and assets of all segments for fiscal 2010 and 2009.
21.7.3. Overseas sales
Overseas sales are omitted as they account for less than 10% of the consolidated net sales for fiscal 2010 and 2009.

22.3. Breakdown of acquisition cost
Purchase consideration
Acquisition-related costs
Acquisition cost

Cash
Advisory fees

¥7,797377¥8,17422.4. Information regarding allocation of
acquisition cost

Note 22 Business Combination
Business Combination—Acquisition of H2O PLUS HOLDINGS, LLC
On May 29, 2011, the Company’s Board of Directors approved a definitive agreement to acquire directly andindirectly all outstanding shares of H2O PLUS HOLDINGS, LLC (“H2O PLUS”), a Chicago-based leading
developer, manufacturer and marketer of sea-derived natural skincare products mainly in North America and Asia.
Following the acquisition, H2O PLUS was made a wholly owned subsidiary of the Company on July 1, 2011. As aresult of the transaction, CSW H2O Holdings, Inc., a pure holding company of H2O PLUS, and H2O PLUS, LLC
and H2O PLUS CANADA CORP., two subsidiaries of H2O PLUS, have also become wholly owned subsidiaries of
the Company.

22.4.1. Breakdown of significant assets acquired andliabilities assumed at the acquisition date

22.1. Outline of business combination

Significant intangible assets excluding goodwill after
allocation consist of the following:

22.1.1. Names and main businesses of acquiredcompanies
a. H2O PLUS HOLDINGS, LLC(a) Name:(b) Business:(c) Capital:

H2O PLUS HOLDINGS, LLC
Holding company(manufacture and marketing of cosmetics
products via subsidiary)
US$35,663 thousand (At December 31, 2010)

b. CSW H2O Holdings, Inc.
(a) Name:

CSW H2O Holdings, Inc.

(b) Business:

Holding company(c) Capital:

US$17,000 thousand (At December 31, 2010)c. H2O PLUS, LLC(a) Name:

H2O PLUS, LLC(b) Business:

Manufacture and marketing of cosmetics
products(c) Capital:

US$35,663 thousand (At December 31, 2010)

d. H2O PLUS CANADA CORP.
(a) Name:

H2O PLUS CANADA CORP.

(b) Business:

Marketing of cosmetics products(c) Capital:

C$8,802 thousand (At December 31, 2010)22.1.2. Names of selling investor groups andindividuals
a. Williams Capital Partners, L.P.
b. NMS Fund, LP
c. Directors and Former Directors of H2O PLUS

80 POLA ORBIS HOLDINGS INC.

22.1.3. Reason for business combination
To become a highly profitable global company — theCompany’s long-term strategic goal — by strengthening
its global business base through the acquisition of H2O
PLUS, which has developed retail points of distribution
in 22 countries, mainly in North America and Asia, andthree other companies, as of July 1, 2011.
22.1.4. Date of business combination
July 1, 201122.1.5. Legal method used for business combination
Purchase of Shares in Cash22.1.6. Names of companies and percentage of voting
rights acquired after business combinationa. H2O PLUS HOLDINGS, LLC 100%b. CSW H2O Holdings, Inc.

100%

c. H2O PLUS, LLC

100%

d. H2O PLUS CANADA CORP. 100%22.1.7. Identification of acquirer
POLA ORBIS HOLDINGS INC. is identified as theacquirer, as it acquired all outstanding shares of H2O
PLUS HOLDINGS, LLC, directly and indirectly, andretained 100 per cent of the voting rights in H2O PLUS
HOLDINGS, LLC, and three other companies.
22.2. Period for which the financial results of theacquired companies are included in the
consolidated financial statements
From July 1, 2011 through December 31, 2011

The amount of goodwill recognized is
attributable to reasonable estimatesof future earnings potential, including
expected synergies, as a result of
anticipated business development.

c. Amortization method andperiodUsing the straight-line method over
20 years.

22.5. Estimated impact on the consolidated results forfiscal 2011 assuming the acquisition had been
completed as of the beginning of fiscal 2011 andcalculation method$ 12,631
109,625$122,256
10,51911,456$ 21,975

Trademark rights (Indefinite-lived intangible
asset)
Customer-related intangible assets(Amortized by weighted-average method over
13 years)Millions of yen

Net sales
Operating loss

Thousands of U.S. dollars

Current assets
Non-current assets
Total assets
Current liabilities
Non-current liabilities
Total liabilities¥1,461¥ (106)(Calculation Method and Significant Assumptions for the
Estimated Amounts)
1) The estimated impact is the difference between the
net sales and operating income (loss) of the acquiredcompanies assuming the acquisition had been
completed as of the beginning of fiscal 2011 and thenet sales and operating income (loss) included in the
consolidated statements of income. The advisory fees
relating to the combination paid by H2O PLUS
HOLDINGS, LLC and three other companies havenot been included in the difference.
2) The estimated amounts in Japanese yen shown above
are converted using the average exchange rate fromJanuary 1, 2011 through June 30, 2011, ¥82.04 to
US$1.
3) The estimated amounts above are not audited.

Thousands of U.S. dollars$30,433$22,994

22.4.2. Amount of goodwill recognized, reason forrecognition, amortization method and perioda. Amount of goodwill
recognizedb. Reason for recognition
Millions of yen¥3,675 million

Note 23 Per Share Information
For fiscal 2011, 2010 and 2009, basic net income per share is computed based on the net income available for
distribution to shareholders of common stock and the weighted average common shares outstanding. Diluted net
income per share is not computed as there are no potentially dilutive common stock to be issued upon exercise of
warrants and stock subscription rights.
Net assets per share are computed based on the net assets excluding minority interests and common shares outstandingat year-end.

Net income per share and assumptions used for calculations are as follows:

Thousands of U.S.
dollars

Millions of yen

Years ended December 31

Numerator:
Net income attributable to common stock
Denominator:
Weighted average common shares outstanding (thousandsof shares)
Basic net income per share

2011

2010

2009

2011

¥8,039¥ 7,086¥ 4,059$103,419

51,591

51,284¥137.36¥79.1655,284¥145.43

Yen

U.S. dollars$1.87

ANNUAL REPORT 201181

Notes to Consolidated Financial Statements

Net assets per share and assumptions used for calculations are as follows:
Thousands of U.S.
dollars

Millions of yen

At December 31

Numerator:
Total net assets
Amount deducted from total net assets[Of which, minority interests]
Net assets attributable to common stock
Denominator:
Common shares issued (thousands of shares)
Treasury stock (thousands of shares)
Common shares outstanding used in the calculation of net assets per share(thousands of shares)
Net assets per share

2011

2010

2011

¥157,057
86(86)¥156,971¥153,104
103(103)¥153,001$2,020,298
1,115(1,115)$2,019,183

57,2842,000

57,2842,000

55,284¥2,839.00

Yen

55,284¥2,767.00

U.S. dollars$36.52

Note 24 Related Party Transactions
Effective from fiscal 2009, the Group adopted“Accounting Standard for Related Party Disclosures”(ASBJ Statement No. 11, issued on October 17, 2006)
and “Guidance on Accounting Standard for Related Party
Disclosures” (ASBJ Guidance No. 13, issued on October
17, 2006).
As a result, transactions between the Company’s
consolidated subsidiaries and the Company’s parent
company or major shareholders (corporations only) are
included in the scope of related party transactions
disclosures.
The POLA Art Foundation (“the Foundation”), theCompany’s major shareholder, was established tocontribute to the advancement and development of

culture through activities such as supporting young artists
and preserving and displaying artworks. The Company
supports its aims and provides donations. The
Foundation has a voting rights ratio of 35.6% of theCompany at December 31, 2010. Satoshi Suzuki,
President of the Company, concurrently holds the post as
director of the Foundation.
The amount of donations is determined by theCompany’s Board of Directors based on the request fromthe Foundation, taking into consideration of theFoundation’s activities, purpose and necessary operating
costs. The Company donated ¥110 million in fiscal 2010.
There were no related party transactions in fiscal 2011.

Note 25 Significant Subsequent Events
25.1. Establishment of significant subsidiary andbusiness combination
On November 30, 2011, the Company’s Board of
Directors approved a definitive agreement to acquire all
outstanding shares in Jurlique International Pty Ltd.
(“Jurlique”), an Australia-based leading developer,
manufacturer and marketer of natural organic skin andbody care products, mainly operating in Asia, the UnitedStates and Europe. In addition, the Board also approved aresolution to establish two special purpose companies(SPCs) in Australia for acquiring all outstanding shares in
Jurlique. The two SPCs were established on December

82 POLA ORBIS HOLDINGS INC.

19, 2011. Following their establishment, the procedurefor investing in the two SPCs was finalized on January
31, 2012. The acquisition of shares in Jurlique wascompleted on February 3, 2012. Jurlique and the two
SPCs became specific subsidiaries defined in Cabinet
Office Ordinance on Disclosure of Corporate Affairs, etc.
(Article 19 (10)), under which a subsidiary is defined as a
specific subsidiary when its capital is more than 10% of
its parent’s capital, and shall be filed with the Director of
the Kanto Local Finance Bureau when changes in specificsubsidiaries.

25.1.1. Establishment of significant subsidiary(1) Reason for establishment
Two special purpose companies (SPCs) were establishedin Australia to acquire all outstanding shares in Jurlique.
(2) Outline of SPCsi) Pola Orbis Jurlique Holdings Pty Ltd.

iv) Date of business combination
February 3, 2012v) Legal method used for business combination
Purchase of shares in cashvi) Names of companies and percentage of voting rights
after business combinationa. Name:Pola Orbis Jurlique Holdings Pty
Ltd.

a. Jurlique International Pty Ltd

b. Business:

Holding company

c. Capital:

A$189,300 thousandd. Established date:

December 19, 2011

e. Investment date:

January 31, 2012ii) Pola Orbis Jurlique Pty Ltd.
a. Name:Pola Orbis Jurlique Pty Ltd.

b. Business:

Holding company

c. Capital:

A$338,800 thousandd. Established date:

December 19, 2011

(3) Details on Acquisition of SPCsi) Pola Orbis Jurlique Holdings Pty Ltd.
a. Acquisition cost:

A$339,300 thousandb. Ownership ratio:

100%ii) Pola Orbis Jurlique Pty Ltd.
a. Acquisition cost:

A$338,800 thousand(A$338,800 thousand)*b. Ownership ratio:

100% (100%)**The figures in parentheses are the acquisition cost of the shares that the Company indirectly
holds in Pola Orbis Jurlique Pty Ltd and the ownership ratio.

25.1.2. Business combination-acquisition of Jurlique(1) Outline of business combinationi) Name and main business of acquired company
a. Name:Jurlique International Pty Ltd.

b. Business:

Manufacturing and marketing ofcosmetics productsc. Capital:

A$72,389 thousand (At June 26,
2011)ii) Names of selling investor groups and individuals
a. JJHP, LLC
b. CPH Products Pty Limitedc. Ulrike Klein Investments Pty
Limitedd. Other entities and Directors of
Jurliqueiii) Reason for business combination
To become a highly profitable global company—theCompany’s long-term strategic goal—by strengthening its
global business base through the acquisition of Jurlique,which has nine subsidiaries in five countries, and has
developed retail points of distribution in 20 countries
and regions, mainly in Asia, the United States andEurope. (The figures are as of November 30, 2011.)

100%(2) Breakdown of acquisition cost
Purchase consideration
Expenses directly related
to acquisition
Acquisition cost

Cash
Advisory fees

Millions of yen¥22,700(Estimated)¥500¥23,200(Estimated)(Estimated)

1) Purchase consideration and the expenses directly related
to the acquisition are provisional as of December 31,
2011.
2) Amount of assets acquired, liabilities assumed andgoodwill recognized on the acquisition date, amortization
method and period of goodwill have not yet determined
as of the time of disclosure of this report.

25.2. Termination of directors’ retirement benefit planand introduction of stock-based compensationplan
On February 28, 2012, the Company’s Board of
Directors approved a resolution under which thedirectors’ retirement benefit plan was terminated and astock-based compensation plan to the directors of theCompany and its subsidiaries was introduced. This
resolution was also approved at the General Meeting of
Shareholders on March 29, 2012.
Under the resolution, the stock-based compensation
plan based on Article 361 of the Japanese Corporate Law
is described as follows:. The Company grants stock options to the Company’s
directors and its subsidiaries’ directors in the form of
new share subscription rights.
. The stock options granted to the directors will betransferred from the treasury stock of the Company on
the exercise of stock options.
. The maximum number of shares to be issued is 70,000
common shares.
. One yen per share will be contributed to the capital on
the exercise of stock options.
. The exercise period of the options is within 30 years
from the next date granted. The stock options granted
vest after directors’ retirement and have a 15-year life.

ANNUAL REPORT 201183

Report of Independent Auditors

Corporate Information(As of December 31, 2011)

Company name

POLA ORBIS HOLDINGS INC.

Foundation

September 29, 2006

Capital¥10 billion

Number of
employees

3,812 (for the Group) 80 (for the Company)

Major Group companies (As of March 31, 2012)

Beauty Care business
POLA INC.
ORBIS Inc.
POLA CHEMICAL INDUSTRIES INC.

Full-time employees
(Excluding those on loan to other companies, including those on loan from other companies)
Excluding temporary workers

Fiscal year-end

December 31

General meeting ofshareholders

March

Business description

Business management of the entire Group

Head office

2-2-3 Nishigotanda, Shinagawa-ku,
Tokyo 141-0031, Japan

FUTURE LABO INC.
MEDI LABO INC.
ORLANE JAPON INC.
decencia INC.
ACRO INC.

Real Estate business
P.O. REAL ESTATE INC.

Stock listing

Tokyo Stock Exchange, First Section

TSE code

4927

Share register

1-4-5 Marunouchi, Chiyoda-ku,
Tokyo Mitsubishi UFJ Trust and Banking Corporation

Other businesses
POLA PHARMA INC.

Stock Information

200,000,000 shares

Total number of issued shares

57,284,039 shares
11,583

Number of shareholders
Composition of shareholders

By number of shares
Financial instruments firms

0.28%

Individuals, etc.

Other corporations

36.65%

34.51%

Foreign corporations, etc.

19.15%

By number of shareholders
Financial institutions

0.25%
0.21%

Financial instruments firms
Other corporations

0.89%

Foreign corporations, etc.

Individuals, etc.

KAYAKU CO., LTD.
P.O. TECHNO SERVICE INC.

(As of December 31, 2011)

Total number of authorized shares

9.41%

H2O PLUS HOLDINGS, LLC
pdc INC.

(Business activities conducted at 1-7-7 Ginza, Chuo-ku, Tokyo)

Financial institutions

Jurlique International Pty Ltd

1.36%

Principal shareholders
Shareholders

Number of shares Percentage ofheld (Thousands) shareholding (%)

The Pola Art Foundation

19,654

35.6

Satoshi Suzuki

12,774

23.1

Japan Trustee Services Bank, Ltd.
(Trust Account)

1,719

3.1

The Chase Manhattan Bank, N.A.
London S.L. Omnibus Account

1,306

2.4

Naoko Nakamura

1,192

2.2

POLA ORBIS HOLDINGS Employees’
Stockholding

1,094

2.0

The Master Trust Bank of Japan, Ltd.
(Trust Account)

976

1.8

SSBT OD05 OMNIBUS ACCOUNT TREATY CLIENTS

940

1.7

Northern Trust Co AVFC Re Northern Trust
Guernsey. Irish Clients.

870

1.6

The Bank of New York Treaty JASDEC Account

588

1.1

Notes: 1. The number of shares is rounded down to the nearest thousand shares.
2. In addition to the above, the Company holds 2,000 thousand shares oftreasury stock.
3. The percentage of shareholding is calculated by deducting shares of treasury stock.

97.30%

84 POLA ORBIS HOLDINGS INC.

ANNUAL REPORT 201185

POLA ORBIS HOLDINGS INC.
POLA GINZA BUILDING 1-7-7 Ginza,
Chuo-ku, TOKYO 104-0061 JAPAN
Tel. +81-3-3563-5517
www.po-holdings.co.jp/en/