FANCL Corporation Non-consolidated Financial Statements for the Interim Period of the Fiscal Year Ending March 31, 2007 This document has been translated from the original Japanese as a guide for non-japanese investors. It contains forward-looking statements based on a number of assumptions and beliefs made by management in light of information currently available. Actual financial results may differ materially depending on a number of factors, including changing economic conditions, legislative and regulatory developments, delay in new product launches, and pricing and product initiatives of competitors. 1
SUMMARY OF FINANCIAL STATEMENTS (non-consolidated) Interim results for the Fiscal Year Ending March 31, 2007 FANCL CORPORATION November 1, 2006 Stock exchange listings: Tokyo 1 st section, code number 4921 www.fancl.co.jp Contact: Shoji Shiba Executive Officer/Genenal Manager of Administrative Headquarters Telephone: +81-45-226-1200 Representative: Kenji Fujiwara, CEO and Representative Director Date of board meeting: November 1, 2006 Date of interim dividend payment: December 4, 2006 An interim dividend system is used. The minimum share trading unit is 100 shares. 1) Non-consolidated results for the interim of Fiscal 2006 (April 1, 2006 to ) (1) Sales and Income Millions of yen, rounded down Year ended Change % Change % Net sales... 36,512 0.6 36,312 9.5 74,628 Operating income... 1,541-36.3 2,418 774.5 4,727 Ordinary income... 2,115-29.6 3,002 265.0 5,833 Net income... 1,118-27.1 1,535 583.1 2,848 Earnings per share ( )... 17.31 72.11 133.30 Earnings per share (diluted) ( )... 17.08 71.54 132.32 Notes: 1. Average number of shares outstanding during the : : 64,639,172 shares. : 21,298,831 shares : 21,370,955 shares On April 1, 2006, FANCL implemented a 3-for-1 share split of the shares held by shareholders as of. Previous per share figures adjusted to reflect the average number of shares issued during the current are: Interim net income per share: : 24.04 : 44.43 Interim net income per share (diluted): : 23.85 : 44.11 2. 3. There has been no change in accounting methods used Year-on-year change for net sales, operating income, ordinary income and net income reflects a comparison with the same in the previous fiscal year. (2) Non-consolidated Financial Position Millions of yen, rounded down Total assets... 68,360 66,787 68,554 Shareholders equity... 60,113 57,981 59,464 Shareholders equity/total assets (%)... 87.9 86.8 86.7 Shareholders equity per share ( )... 928.64 2,714.52 2,762.32 Note: Number of shares outstanding at end of : : 64,725,190 shares. : 21,359,728 shares : 21,527,106 shares Number of treasury shares held at ends of : : 5,451,410 shares. : 2,032,472 shares : 1,865,094 shares On April 1, 2006, FANCL implemented a 3-for-1 share split of the shares held by shareholders as of. Previous per share figures adjusted to reflect the average number of shares issued during the current are: Net assets per share: : 904.84 : 920.77 2) Non-consolidated forecasts for the fiscal year ending March 31, 2007 (April 1, 2006 to March 31, 2007) Millions of yen FY ending March 31, 2007 Net sales... 74,500 Ordinary income... 5,200 Net income... 2,700 Note: Non-consolidated net income per share forecast for the fiscal year ending March 31, 2007: 41.71 3) Dividends March 31, 2007 (Actual) March 31, 2007 (Forecast) Interim dividend per share ( ) 25.00 12.00 -- Full-year dividend per share ( ) 30.00 -- 12.00 Annual dividend per share ( ) 55.00 24.00 On April 1, 2006, FANCL implemented a 3-for-1 share split of the shares held by shareholders as of. Previous per share figures adjusted to reflect the average number of shares issued during the current are: Dividend per share: March 30, 2006: 8.33 : 10.00 2 This forecast contains forward-looking statements that are based on management s estimates, assumptions and projections at the time of publication. A number of factors could cause actual results to differ materially from expectations.
Non-consolidated Interim Balance Sheets Millions of yen ASSETS % % % I. Current assets: Cash and cash equivalents... 7,675 7,861 8,735 Accounts receivable... 5 5 6 Trade accounts receivable... 7,912 7,703 7,606 Marketable securities... 7,912 8,625 6,926 Inventories... 2,353 2,453 2,176 Deferred tax assets... 391 346 392 Short-term loans to affiliate companies... 1,054 894 754 Others... 1,128 689 807 Allowance for doubtful accounts... (35) 32 (37) Total current assets... 28,399 41.5 28,546 41.6 27,368 41.0 II. Fixed assets: Tangible fixed assets Buildings... 6,168 6,293 6,122 Machinery and fittings... 129 145 159 Land... 7,176 7,176 7,260 Construction in progress... 71 57 1 Others... 1,059 1,033 975 Total tangible fixed assets... 14,605 21.4 14,706 21.5 14,519 21.7 Intangible fixed assets... 1,812 2.7 1,317 1.9 796 1.2 Investments and other assets Shares in affiliates... 6,944 6,939 6,939 Long-term loans to affiliated companies... 5,679 6,224 6,813 Deferred tax assets... 750 714 481 Long-term deposits... 4,000 -- -- Guarantee money... 2,422 2,437 2,327 Insurance reserve... 266 266 502 Others... 4,237 8,165 7,117 Allowance for doubtful accounts... (758) (764) (78) Total investments and other assets... 23,542 34.4 23,983 35.0 24,103 36.1 Total fixed assets... 39,961 58.5 40,007 58.4 39,419 59.0 Total Assets... 68,360 100.0 68,554 100.0 66,787 100.0 3
Non-consolidated Interim Balance Sheets Millions of yen LIABILITIES % % % I. Current liabilities: Accounts payable... 2,116 2,588 2,532 Accrued liabilities... 2,594 2,979 3,209 Accrued income taxes... 918 1,100 830 Allowance for bonuses... 782 683 796 Others... 683 667 425 Total current liabilities... 7,095 10.4 8,018 11.7 7,794 11.7 II. Long-term liabilities: Allowance for retirement bonuses... 899 820 788 Allowance for directors retirement bonuses.. 189 188 162 Others... 61 60 60 Total long-term liabilities... 1,151 1.7 1,070 1.6 1,012 1.5 Total liabilities... 8,247 12.1 9,089 13.3 8,806 13.2 SHAREHOLDERS EQUITY I. Common stock... -- -- 10,795 15.7 10,795 16.2 II. Capital reserve Additional paid-in capital... -- -- 11,706 11,706 Other capital reserve Gain on sale of treasury stock... -- 140 46 Total capital reserve... -- -- 11,846 17.2 11,752 17.6 III. Retained earnings Legal reserve... -- 267 267 Voluntary reserve... -- 39,400 39,400 Unappropriated retained earnings... -- 3,713 2,934 Total retained earnings... -- 43,380 63.3 42,601 63.8 IV. Net Unrealized holding gain on -- 66 0.1 43 0.0 V. Treasury stock... -- (6,624) (9.6) (7,211) (10.8) Total shareholders equity... -- 59,464 86.7 57,981 86.8 Total Liabilities and Shareholders Equity... -- 68,554 100.0 66,787 100.0 NET ASSETS I. Common stock 3... 10,795 15.8 -- -- -- -- II. Capital reserve... Additional paid-in capital... 11,706 -- -- -- -- Other capital reserve... Gain on sale of treasury stock... 149 -- -- -- -- Total capital reserve... 11,855 17.3 -- -- -- -- III. Retained earnings Legal reserve... 267 -- -- -- -- Voluntary reserve... Contingent reserve... 40,900 -- -- -- -- Unappropriated retained earnings... 2,686 -- -- -- -- Total retained earnings... 43,853 64.1 -- -- -- -- Treasury stock... (6,455) (9.4) NET ASSETS Total shareholders equity... 60,049 0.0 -- -- -- -- Valuation and translation gain Net unrealized holding gain on other securities... 56 0.1 -- -- -- -- Total valuation and translation gain... 56 0.1 -- -- -- -- Share warrants... 6 0.0 -- -- -- -- Total net assets... 60,113 87.9 -- -- -- -- Total Liabilities and Net Assets... 68,360 100.0 -- -- -- -- 4
Non-consolidated Interim Statements of Income April 1 to April 1 to Millions of yen FY ended March 31, 2006 Net sales... 36,512 100.0 36,312 100.0 74,628 100.0 Cost of sales... 13,393 36.7 13,264 36.5 27,814 37.3 Gross profit... 23,118 63.3 23,047 63.5 46,813 62.7 Selling, general and administrative expenses... 21,577 59.1 20,629 56.8 42,086 56.4 Operating income... 1,541 4.2 2,418 6.7 4,727 6.3 Non operating income... 717 2.0 708 1.9 1,458 2.0 Non operating expenses... 143 0.4 124 0.3 352 0.5 Ordinary income... 2,115 5.8 3,002 8.3 5,833 7.8 Extraordinary income... -- -- -- -- 24 0.0 Extraordinary expenses... 229 0.6 444 1.2 1,301 1.7 Income before income taxes... 1,885 5.2 2,557 7.0 4,555 6.1 Income taxes... 841 679 1,566 Adjustment for income taxes... (75) 342 140 Net income... 1,118 3.1 1,535 4.2 2,848 3.8 Retained earnings brought forward... -- 1,398 1,398 Interim dividend... -- -- 533 Interim unappropriated earnings... -- 2,934 3,713 5
Changes to Non-consolidated shareholders equity during the interim April 1 to (Millions of yen) Shareholders equity Capital surplus Profit reserve Capital Capital reserve Other capital surplus Total capital surplus Profit reserve Other profit reserve Contingent reserve Earned surplus carried forward Total profit reserve Treasury stock Total Shareholders equity Shareholders funds as of 10,795 11,706 140 11,846 267 39,400 3,713 43,380 (6,624) 59,397 Changes during the interim Dividends (645) (645) (645) Interim net income 1,118 1,118 1,118 Acquisition of treasury stock (1) (1) Sale of treasury stock 8 8 171 180 Accumulation of contingent reserve 1,500 (1,500) Other net Total change during the interim Shareholders funds as of 8 8 1,500 (1,026) 473 169 651 10,795 11,706 149 11,855 267 40,900 2,686 43,853 (6,455) 60,049 Valuation and translation differences Valuation differences and other marketable securities Total valuation and translation differences Stock options (Millions of yen) Total net assets Shareholders funds as of 66 66 59,464 Changes during the interim Dividends (645) Interim net income 1,118 Acquisition of treasury stock (1) Sale of treasury stock 180 Accumulation of contingent reserve Other net (9) (9) 6 (3) Total change during the interim (9) (9) 6 648 Shareholders funds as of 56 56 6 60,113 6
Significant items for the Preparation of Non-consolidated Financial Statements Item (1) Basis and method for valuation of assets 1) Other marketable securities: Stocks with market At lower of cost or market by the moving average method, based on the market closing price on the last day of the. (Valuation gains and losses resulting are calculated by the full net capital costing method; cost of disposal is calculated by the moving average method.) 1) Other marketable securities: Stocks with market value: At lower of cost or market by the moving average method, based on the market closing price on the last day of the. (Valuation gains and losses resulting are calculated by the full capital costing method; cost of disposal is calculated by the moving average method.) (2) Depreciation of Fixed Assets Stocks with no market value: At cost by the average method 2) Derivatives: Market value method 3) Inventories Finished goods, work in process, raw materials: At cost by the average method Merchandise: At cost by the monthly average method Supplies: At cost by the last purchase price method 1) Tangible fixed assets: The estimated useful lives for such assets are as follows: Buildings and structures: 3 50 years Machinery and equipment: 2 22 years (3) Allowances 1) Allowance for doubtful accounts: 2) Allowance for bonuses: 3) Allowance for retirement bonuses: 2) Intangible fixed assets: Straight-line method, with the exception of software intended for internal use, which is amortized by the straight-line method over its estimated useful life (five years) 3) Long-term prepaid expenses: Straight-line method 1) Allowance for doubtful accounts: The Company makes provisions against estimated uncollectible receivables sufficient to cover possible losses on the collection of receivables based on a review of the potential for recovery of individual receivables. 2) Allowance for bonuses: To prepare for future bonus payments to employees, the Company makes provisions in the amount accrued based on the estimated payment. 3) Allowance for retirement bonuses: To prepare for future retirement benefit payments to employees, the Company makes provisions in the amount recognized as accruing at the end of the consolidated fiscal year based on the estimated retirement benefit obligation and pension assets at the end of the consolidated fiscal year. Actuarial gains and losses are charged to income on a straight-line basis over a certain number of years (five years) within the average remaining years of service starting from the year after the gain or loss arises. 3) Allowance for retirement bonuses: To prepare for future retirement benefit payments to employees, the Company makes provisions based on the estimated retirement benefit obligation and pension assets at the end of the consolidated fiscal year. Actuarial gains and losses are charged to income on a straight-line basis over a certain number of years (five years) within the average remaining years of service starting from the year after the gain or loss arises. 7
Item (4) Lease Accounting (5) Hedge accounting 4) Allowance for directors retirement bonuses: For the parent company and domestic affiliate companies to prepare for future retirement bonus payments to directors, the necessary provisions at the interim based on internal regulations are made. (Additional Information) Following the passage of a motion at the 26 th. Ordinary General Meeting of Shareholders, held June 17, 2006, to abolish the system of retirement allowances for directors, and to pay, instead, a retirement allowance to each resigning board member and corporate auditor corresponding to their term in office, the parent company has reported no reserves for retirement benefits for directors and corporate auditors in the since. 4) Allowance for directors retirement bonuses: To prepare for future retirement bonus payments to directors, the Company makes the necessary provisions at the interim based on internal regulations. Finance leases other than those which transfer the right of ownership to the lessee are accounted for in the same manner as ordinary operating lease transactions. 1) Hedge accounting policy: Derivative instruments are accounted for using deferral hedge accounting. Forward exchange contracts meeting the appropriate criteria are accounted for using the allocation method. 2) Hedging instruments/targets: Forward exchange contracts/payables or forecast transactions denominated in foreign currencies. 3) Policy regarding use of hedging: The Company enters into forward exchange and interest rate swap contracts in the normal course of its business to manage currency and interest rate exposure. 4) Method of assessing hedge effectiveness: As a rule, the Company uses individual forward exchange contracts and thus does not assess hedge effectiveness. 5) Other risk management information relevant to hedge accounting: The Company has formulated standards to govern its use of derivatives. The use of derivatives in daily business is managed by the Accounting Department, which reports to the Board of Directors on the progress of transactions. Consolidated subsidiaries do not engage in derivative transactions. (6) Others All transactions are posted in amounts prior to deduction of consumption and other taxes. 4) Allowance for directors retirement bonuses: To prepare for future retirement bonus payments to directors, the Company makes the necessary provisions at the end of the fiscal year based on internal regulations. 8
Change in accounting treatment (Accounting standards for presentation of net assets in balance sheet) From this interim consolidated accounting the company has applied Accounting standards for Presentation of net Assets in Balance Sheet, Accounting Standards Board of Japan (ASBJ) Statement No. 5 of December 27, 2005 and Guidance on Accounting Standards for Presentation of Net Assets in the Balance Sheet, ASBJ Implementation Guidance No. 8 of December 9, 2005. The amount corresponding to total assets to date is Yen 72,510 million. Net assets in the interim consolidated balance sheet during this interim consolidated accounting, have been prepared in line with revised provisions covering balance sheets, following amendments to the provisions on balance sheets. (Accounting standards covering stock options) From this interim consolidated accounting the company has applied Accounting Standards for Stock Options, Accounting Standards Board of Japan (ASBJ) Statement No. 8 December 27, 2005, and Guidance on Accounting Standards for Stock Options, ASBJ Implementation Guidance No. 11 of May 31, 2006. As a result, operating profit, current profit, and interim net income before taxes and other adjustments each declined Yen 6.0 million. Accounting standards for impairment of fixed assets: Accounts have been prepared in accordance with Accounting Standards for Impairment of Fixed Assets (issued by the Accounting Standards Board of Japan on August 9, 2002) and the Financial Accounting Standards Implementation Guidance No. 6, Implementation Guidance for Accounting Standards for Impairment of Fixed Assets (issued by the Accounting Standards Board of Japan on October 31, 2003). In accordance with the adoption of these standards and implementation guidance, impairment losses of 237 million on land and buildings have been recorded as an extraordinary loss. Compared to the former accounting standard, this resulted in a decrease in net income before taxes and other adjustments for the of 237 million and Interim net income before taxes and other adjustments declined by the same amount when compared with original accounting methods. Accumulated impairment losses on the aforementioned land and buildings, these shall be directly deducted from the amount in the land and buildings account based on the revised provisions covering interim consolidated financial statements. Accounting standards for impairment of fixed assets: Accounts have been prepared in accordance with Accounting Standards for Impairment of Fixed Assets (issued by the Accounting Standards Board of Japan on August 9, 2002) and the Financial Accounting Standards Implementation Guidance No. 6, Implementation Guidance for Accounting Standards for Impairment of Fixed Assets (issued by the Accounting Standards Board of Japan on October 31, 2003). In accordance with the adoption of these standards and implementation guidance, impairment losses of 237 million on land and buildings have been recorded as an extraordinary loss. Compared to the former accounting standard, this resulted in a decrease in net income before taxes and other adjustments for the of 237 million. The land and buildings referred to above were disposed of during the fiscal year. 9
Additional information ---------------------------- ----------------------------- Transfer of portion of manufacturing to subsidiary On April 1, 2005, the Cosmetic manufacturing division was transferred to wholly-owned subsidiary FANCL Biken Co., Ltd. in an effort to strengthen our operating base by enhancing the collective operating efficiencies of our manufacturing division. Change in the method of disclosure Interim balance sheet Until the interim ended, Long-term deposits were recorded in Others under Investments and other assets. the end of the current interim, only items in excess of 5% of the total asset value will be recorded. At the end of the interim ending, long-term deposits were 3.0 billion. ------------------------------ 10
Important Items *1 Tangible Fixed Asset Accumulated Depreciation: 7,018 million *1 Tangible Fixed Asset Accumulated Depreciation: 5,980 million *1 Tangible Fixed Asset Accumulated Depreciation: 6,573 million *2 *3 The company also guarantees bank borrowings of 17 million (US$ 150,000) to our non-consolidated subsidiary FANCL International, Inc.) *4 *2 The accounts contain advanced depreciation allowances of 23 million for buildings. Amounts reported in the balance sheet have been deducted to account for this advanced depreciation allowance. --------------------- *4 Consumption taxes Amounts adjusted for canceling the balance of consumption taxes on suspense payments with those on receipts included in balances at the end of the interim are contained under Other current liabilities. *2 *3 The company also guarantees bank borrowings of 33 million (US$ 280,000) to our non-consolidated subsidiary FANCL International, Inc.) *4 11
Notes to Non-Consolidated Interim Statements of Income 1. Non Operating income Interest earned 69 Dividends received 71 Income from investment in anonymous associations 87 Net refund of insurance premiums 115 2. Non Operating expenses Loss on inventories 115 3. Depreciation Tangible fixed assets Intangible fixed assets 4. Extraordinary loss Allowance for retirement benefits for directors 474 185 126 1. Non Operating income Interest earned Dividends received Income from investment in anonymous associations Net refund of insurance premiums 61 70 82 141 2. Non Operating expenses Loss on inventories 100 3. Depreciation Tangible fixed assets Intangible fixed assets 4. Extraordinary loss Allowance for retirement benefits for directors Impermanent losses Loss on disposal of fixed asset 487 130 71 237 74 1. Non Operating income Interest earned Dividends received Income from investment in anonymous associations Net refund of insurance premiums 2. Non Operating expenses Loss on inventories 3. Depreciation Tangible fixed assets Intangible fixed assets 4. Extraordinary Loss Allowance for retirement benefits for directors Impermanent losses Loss on disposal of fixed asset Allowance for doubtful accounts (Millions of yen) 118 77 161 323 304 976 266 71 237 113 717 5 Impairment losses millions of yen Application Type Value Place Yokohama Bldg. 39 Office Sakae-ku Land 198 The FANCL Group mainly conducts asset grouping on a business category basis. Idle assets are grouped on a facility unit basis. The company has processed 237 million of impairment accounting where the recoverable value of idle assets undercuts the book value. The company has calculated the recoverable value of idle assets via net sale value, and using the appraisal value to calculate fair market value. 5 Impairment losses millions of yen Application Type Value Place Yokohama Bldg. 39 Office Sakae-ku Land 198 The FANCL Group mainly conducts asset grouping on a business category basis. Idle assets are grouped on a facility unit basis. The company has processed 237 million of impairment accounting where the recoverable value of idle assets undercuts the book value. The company has calculated the recoverable value of idle assets via net sale value, and using the appraisal value to calculate fair market value. 12
Changes to Non-consolidated shareholders equity during the consolidated interim April 1 to 1. Type of treasury stock and number of common shares (thousand shares) Number of shares as of Increase of shares during interim April 1 to September 30, 2006 Decrease of shares during interim April 1 to September 30, 2006 Number of shares as of Common shares (note 1,2) 1,865 3,730 144 5,451 Total 1,865 3,730 144 5,451 Note: 1. Increases of 3,730 thousand in common stock for treasury purposes are based on increases of 3,730 thousand stocks through a stock split of 3:1 ordinary shares executed on April 1, 2006, and 796 stocks as a result of purchases of odd lot shares. 2. Reductions of 144 thousand in common stock for treasury purposes were due to a decrease of 144 thousand stocks via the exercise of share warrants, and 368 stocks as a result of sales of odd lot shares. 13
Leases (Millions of yen) 1. Finance leases in which the right of ownership is not transferred to the lessee 1. Purchase cost, accumulated depreciation and balance at end of Purchase cost Accumulated depreciation Balance at end of Machinery and 590 541 48 equipment Other 822 278 543 Total 1,412 820 592 1 Finance leases in which the right of ownership is not transferred to the lessee 1. Purchase cost, accumulated depreciation and balance at end of Purchase cost Accumulated depreciation Balance at end of Machinery and 590 442 147 equipment Other 777 199 578 Total 1,367 642 725 1 Finance leases in which the right of ownership is not transferred to the lessee 1. Purchase cost, accumulated depreciation and balance at end of Purchase cost Accumulated depreciation Balance at end of Machinery and 590 492 97 equipment Other 804 247 557 Total 1,394 739 655 2. Future lease payments Within one year More than one year Total 174 376 551 2. Future lease payments Within one year 258 More than one year 426 Total 685 2. Future lease payments Within one year 227 More than one year 404 Total 632 3. Outstanding lease payments and depreciation Outstanding lease 161 payments Depreciation expenses 136 Interest expense 7 4. Method of calculating depreciation and interest expenses Method of calculating interest expense 2. Future lease payments (Millions of yen) Within one year 0 More than one year 1 Total 2 3. Outstanding lease payments and depreciation Outstanding lease 160 payments Depreciation expenses 138 Interest expense 5 4. Method of calculating depreciation and interest expenses Method of calculating depreciation expense Depreciation expense is calculated by the straight -line method over the lease term of the lease asset assuming no residual value. Method of calculating interest expense Interest expense is calculated by the interest method, whereby the difference between total lease payment and purchase cost is distributed in equal installments over the term of the lease. 2. Future lease payments (Millions of yen) Within one year 0 More than one year 2 Total 2 3. Outstanding lease payments and depreciation Outstanding lease 281 payments Depreciation expenses 263 Interest expense 15 4. Method of calculating depreciation and interest expenses Method of calculating interest expense 2. Future lease payments (Millions of yen) Within one year 0 More than one year 1 Total 2 14
2. Securities Interim ending Not applicable since shares of subsidiary and affiliate companies are valued at market Interim ending Not applicable since shares of subsidiary and affiliate companies are valued at market Fiscal year ending Not applicable since shares of subsidiary and affiliate companies are valued at market (Per share information) Please refer to the Consolidated financial statements 15