More Dreams for Your Life ANNUAL REPORT 2004

Transcription

1 More Dreams for Your Life ANNUAL REPORT 2004 Fiscal Year Ended December 31, 2004

2 Founded in 1891, Lion has always been a leader in Japan 's household products market, developing new products that anticipate the needs of the times. In addition to being No.1 in the area of oral care products, Lion ranks among the top in the market shares of laundry detergents, household cleaners and antiperspirants and deodorants. Lion 's business also expands into the fields of over-the-counter pharmaceuticals and chemicals. Its business extends into major Asian countries where it has established presence for over 40 years mainly with its popular household products. Currently, Lion employs 5,721 people worldwide. Lion products are produced in five locations in Japan as well as in eight countries/regions. Our new corporate slogan In order to maintain healthy minds and bodies through our own efforts, we need to have good daily habits. Lion wants to be able to propose good daily habits; we want to provide products, services, and information that help people to take care of themselves. Over the years, we have cultivated a corporate image that emphasizes qualities like friendliness and stability. Adding to this, our new slogan expresses Lion s commitment to provide products that support daily life and to keep on creating new value for customers. CONTENTS Consolidated Financial Highlights 1 Social Contributions 28 Lion At a Glance 2 Consumer Relations 29 Message from the President 4 Employee Relations 30 Special Feature 6 Safety and Disaster Prevention 31 Outline of VIP II 09 6 Research & Development 32 Interview with the President 8 Corporate Governance 33 Segment Strategies Home Products Board of Directors, Executive Officers and Corporate Auditors 34 Oral Care Products 12 Financial Section 36 Beauty Care Pruducts 14 Management's Discussion and Analysis 36 Household Products Year Selected Consolidated Financial Data 44 Pharmaceutical Products 18 Consolidated Financial Statements 46 Chemicals 20 Notes to Consolidated Financial Statements 51 International 22 Independent Auditors' Report 61 Sustainable Development 24 Non-Consolidated Financial Statements 62 Sustainable Development Policy 24 Major Affiliates and Related Companies 64 Environmental Protection 25 Investor Information 65 Cautionary Information with Respect to Forward-Looking Statements Statements contained in this report regarding the plans, strategies, and beliefs of the Lion Group that are not historical facts constitute forward-looking statements about future operational results. As such, they are based on the judgments of Lion s management made in consideration of currently available data. Actions based solely on these statements should be avoided. Potential risk factors that could cause actual results to differ materially from those anticipated include, without limitation, general economic conditions, currency exchange rates, sudden technological evolution, and customer preference.

3 Consolidated Financial Highlights Lion Corporation and Consolidated Subsidiaries Years ended December 31, 2004 and 2003 FOR THE YEAR Net sales Operating income Income (loss) before income taxes Net income (loss) Millions of yen (except per share data) 309,514 6,021 (5,017) (4,723) 308,545 9,865 13,985 10,946 % change 0.3 % (39.0) - - Dollars in thousands except per share amounts / $ 2,970,100 57,785 (48,151) (45,329) Per share data: Net income (loss) (16.66) % $ (0.16) Cash dividends AT YEAR-END Shareholders equity 101, ,105 (9.9)% $ 969,406 Total assets 235, ,199 (5.5) 2,258,950 Note : U.S. dollar amounts have been translated from yen, for convenience only, at the rate of = $1.00, in effect at the balance sheet date. Net Sales Operating Income ROE ( million) ( million) (%) 400,000 10, ,000 8, , , , ,000 2,000-4 (4.4) 0 0 (11.7) * Manufacture prices are revised in 2001, 2002, 2003 and

4 Lion At a Glance Home Products Oral 14.7% Household 48.4% % of net sales Beauty 11.3% Lion's Home Products operations consist of three divisions. Oral Care Products is the leader in its field in Japan. This division supplies toothpastes, toothbrushes, and other products that support oral hygiene based on three main themes: preventive dentistry, oral aesthetics, and aging well. Beauty Care Products delivers the beauty of cleanliness and the beauty of health in the form of shampoos, body washes, antiperspirant deodorants and other products that are made primarily from ingredients derived from plants. These products are created with top priority given to making them gentle on the human body. In our Household Products division, too, we use mostly botanical materials and deliver products such as laundry detergents and household cleaners that anticipate consumers needs and help make life pleasant and convenient. ( Includes sales of International Division.) Pharmaceutical Products 10.4% % of net sales Our Pharmaceutical Products Division has been in operation for more than 40 years, and is one of Lion s core businesses. Our focus is on common medical problems, and our goal is to develop and deliver products that support the health care of each individual consumer. We make use of the technologies in which we excel the most, and develop a wide range of applications for them. We already have highly effective and distinctive products like Bufferin, Japan s top brand of analgesics, and our Smile series of eyedrops, which is finely tailored to a variety of needs. In 2005, we will add products in new categories, including New Guromont and Guronsan health tonic drinks and Varsan insecticides. We aim to increase our growth potential more than ever through synergy effects. Chemicals 10.7% % of net sales Lion s Chemicals Division has a lineup of numerous highly functional products that are tailored to meet the needs of specific industrial clients. Our main products are all kinds of surfactants, fatty acid methyl esters and other oleo-chemicals, and electro-conductive carbon and related compounds. We use Lion s technological capabilities to develop eco-friendly industrial products, with a focus on EPOC (ecology, performance, and oleo-chemicals). In addition to earning high praise from industrial customers, these eco-friendly products provide wide-ranging support for people s daily lives, through our contributions to various industries. International ( Sales are included in Home Products.) Since Lion first started doing business in Malaysia in 1960, the company s International Division has grown steadily. We expanded mainly by establishing joint ventures with reputable local companies, primarily within Asia, and working in these partnerships with the goal of co-prosperity. Currently, the ASEAN region is our main target area overseas. We collaborate with our local partners to develop local brands that meet the needs of customers in each market, and at the same time we foster the development of global brands by selling high value-added products under the same brand names across national borders. In July of 2004, we completed an enlargement of our plant in Qingdao, China, and in December we acquired the Household Business (Home & Personal Care Division) of South Korea s CJ Corporation. In the future, we intend to speed up implementation of our comprehensive strategies for expansion in the Asia region, which includes Northeast Asia. 02

5 Product categories (Oral Care) : toothpastes, toothbrushes, mouthwashes, breath fresheners, interdental products, etc. Net Sales 250,000 ( million) Operating Income ( million) 20,000 Product categories (Beauty Care) : shampoos, conditioners, hair-styling products, hair-nourishment treatments, beauty soaps, liquid hand soaps, body washes, facial cleansing products, basic skin care products, antiperspirant deodorants, etc. Product categories (Household) : laundry detergents, delicate laundry care products, stain removers, bleach, fabric softeners, wrinkle relaxer, dishwashing detergents, household cleaners, kitchen-related products, cooking-aid products, industrial cleaners, etc. 200, , ,000 50, ,000 10,000 5, Product categories : analgesics, cold medicines, eyedrops, gum-disease products, denture products, analgesic and anti-inflammatory poultices, gastrointestinal medicines, allergy-care products, semi-adhesive cooling pads for fevers, and for feet and legs, medicinal skin care products, prescription drugs (antiplatelet drugs and analgesics), etc. Net Sales 40,000 30,000 20,000 ( million) Operating Income ( million) 2,500 2,000 1,500 1,000 10, Product categories : natural fat and oil derivatives (glycerin, fatty esters, fatty amines, fatty amides), specialty chemicals and chelating agents, electro-conductive carbon black products, surface active agents (anionic, nonionic, cationic, amphoteric, polymer surfactants), etc. Net Sales 40,000 30,000 ( million) Operating Income ( million) 2,500 2,000 1,500 20,000 1,000 10, Application of Ketjenblack Water-based scouring agent used in electornics products Major products : toothpastes, toothbrushes, shampoos, conditioners, hair-nourishment treatments, beauty soaps, body washes, facial cleansing products, laundry detergents, bleach, fabric softeners, dishwashing detergents, household cleaners, eye care products, denture products, baby care products, etc. 03

6 Message from the President Lion launched its first Value Innovation Plan (VIP) in 2001, with the goal of re-orienting management toward increasing corporate value. In 2004, based on the results we achieved through VIP, we began implementing a second three-year medium-term management plan called VIP II. Later, we reviewed this plan in light of the fact that we had added two new fields to Household Products and Pharmaceutical Products (our core businesses) through M&As implemented in accordance with our growth strategy, and in light of the fact that the business environment remained very harsh. The result was a new five-year business plan that we call VIP II 09, which covers Everyone at Lion is pulling together and working hard to make VIP II 09 a success. Sadayoshi Fujishige President Engines of Growth: Two New Businesses This year, we acquired two new business units in order to promote growth in our core fields of Household Products and Pharmaceutical Products. One of these acquisitions was Chugai Pharmaceutical Co., Ltd. s OTC (over-the-counter) drug business, which we expect will boost our Pharmaceutical Products Division s sales by about 50%, to around 50 billion yen. The new unit includes health tonic drinks, insecticides, and other products, few of which overlap with products in our existing pharmaceutical business. The new unit and the existing business have the potential to complement each other in terms of both technology and marketing, allowing us to strengthen our market position even further through the synergistic effects of our holdings. The other acquisition was the former Home & Personal Care Division of CJ Corporation, in South Korea. We acquired an 81% stake in this business after it was spun off by CJ Corp. It is South Korea s third largest manufacturer of household consumer products, with sales currently amounting to about 15 billion yen. We intend to use Lion s marketing expertise and other abilities to raise the unit s profile in the South Korean market. We also intend to reinforce it so it will be able to serve as a hub from which to expand our business in China and the rest of Northeast Asia. The Goals of VIP II 09 The purpose of Lion s VIP II 09 is to increase corporate value by creating value for customers, which we will do by helping people to lead pleasant, comfortable lives through the pursuit of cleanliness, health and beauty. Through systematic selection and focus one of the basic strategies of VIP II we are forging a corporate growth track aimed at significant improvement in profitability and further expansion of our operations. By quickly realizing synergistic effects from combining our existing businesses with the newly acquired ones, we will give a strong push to 04

7 profit structure reforms, especially to cost reduction and aggressive marketing aimed at boosting brand value. In addition, we will establish the kind of corporate makeup that can generate profits even in a harsh economic environment; we aim to achieve ROE of 10% by the final year of the plan, which ends in December Lion s management philosophy calls for instituting a corporate culture of tenacity and creativity. Based on this philosophy, we will engage the entire company in speeding up business operations, further improving responsiveness to customers and markets, and pursuing value for customers. We aim to become the leading company in the fields of household products, OTC drugs, and functional foods, all of which are products that help people to lead comfortable lives. At the same time, as a leader in corporate environmental responsiveness, we intend to fulfill our social responsibility to help create a sustainable, recycling-oriented society, both through company-wide environmental protection, and through the development of environmentally friendly products. Like the original VIP II, VIP II 09 identifies our core businesses as Home Products (oral care, household, and beauty care), which already contributes a large proportion of our profits, and Pharmaceutical Products, where we anticipate future growth. The plan calls for boosting brand value in these core businesses in Japan and in other parts of Asia, by improving our product development capabilities and beefing up investment in marketing. Furthermore, VIP II 09 maintains the positioning of Chemicals as a potential core business, one that we aim to build up as an underpinning for Lion s future. In this segment we will foster the development of unique, high added-value products, principally in the field of environmental solutions based on surface science, which we call EPOC (ecology, performance, and oleo-chemicals). Results for the Fiscal Year Ended December 2004 Although we have been promoting growth-oriented reforms as discussed above, this fiscal year we faced a particularly tough business environment, with unfavorable weather added to intensified competition and other difficulties. So although our net sales were higher than the previous year s, profits ended up declining. Sales for the fiscal year amounted to billion yen, a slight increase over the year before. This figure includes the effects of price revisions in our Home Products business, and of our withdrawal from some businesses in our Food Products business (which was counted as part of Other Businesses this year for the first time). When we adjust our calculations to account for these changes, net sales effectively amounted to 102% of the previous year s level. Despite the fact that the overall Japanese market for the kind of general household goods that we sell shrank by 1% during 2004, our sales in that market rose by 1%. I think this shows that we have recovered our growth potential. In our Pharmaceuticals business, too, sales were up 2% and in our potential core business of Chemicals, they rose 5%, showing a healthy amount of growth. Although we implemented cost-reduction measures ahead of schedule, there were a number of factors that suppressed operating income. For example, materials costs rose due to the surge in crude oil prices, and sales promotion costs were higher than expected partly because of a new law requiring that retail prices be displayed with consumption tax included, which contributed to continued decline in market prices in the Home Products sector, and partly as a result of increased competition. As a result, operating income amounted to 6.02 billion yen, a drop of 39% year-on-year. In order to solidify our fiscal base and enable the company to make investments that support active growth in the future, two steps we took this fiscal year were: (1) writing off all of the goodwill arising from the acquisition of Chugai Pharmaceutical s OTC drug business at once, and (2) adoption of asset-impairment accounting earlier than planned, which entailed writing off losses mainly on real estate assets whose market value had declined. These steps contributed to our posting of a net loss of 4.72 billion yen for the year. Despite the outcome of the fiscal year ended December 2004, I feel confident that in the coming years we can succeed at building corporate value by achieving continuous growth and greater profitability while fulfilling our corporate social responsibilities. This confidence stems from the fact that we will be boldly following VIP II 09 under a corporate governance system that has been strengthened by the adoption of an executive officer system, among other improvements. March 31, 2005 Sadayoshi Fujishige President 05

8 SPECIAL FEATURE Outline of VIP II 09 Continuous growth and increased profitability Increase corporate value Increasing brand value Fulfilling corporate social responsibilities Returning value to stakeholders Fundamental improvement of the profit structure Restructuring of the growth foundation Three reforms Rapid improvement of management capabilities Providing value for customers Effective and efficient approaches toward customers Creating value for customers Enhancing planning and development capabilities as sources of value Corporate culture of tenacity and creativity 1. Consolidated Performance Targets (2009) Net sales Ordinary income Return on equity (ROE) 400 billion yen (average annual growth of 5.4%) 20 billion yen (ratio of ordinary income to net sales 5.0%) OVER 10% 2. Purpose of VIP II 09: "Increase Corporate Value" Lion aims to increase its corporate value by creating value for customers, through the pursuit of cleanliness, health and beauty, as a company that helps people to lead pleasant, comfortable lives. As a company that is always in the vanguard when it comes to caring for the environment, we will fulfill our social responsibility to help create an ecologically sustainable society. Lion s management philosophy calls for instituting a corporate culture of tenacity and creativity, and we want to make the most of this in our pursuit of value for customers. We aim to become the leading company in the fields of household products, OTC drugs, and functional foods, all of which are products that help people to lead comfortable lives. (1) Stage 1 ( ) The entire company will work together and focus on the success of the two new businesses that we acquired in 2004 (new OTC categories and household products business in South Korea). Even more than before, we will thoroughly implement the three reforms that Lion began pursuing under previous medium-term management plans: restructuring of the growth foundation, fundamental improvement of the profit structure, and rapid improvement of management capabilities. We will focus our investments in order to boost capabilities that support the creation of value for customers, especially R&D and marketing capabilities. (2) Stage 2 ( ) We will firmly establish a profit-oriented corporate constitution and return profits to stakeholders. When deciding how to allocate resources, we will give priority to expanding new business domains, in order to further augment growth and achieve a substantial increase in profitability. 3. Most Important Measures in VIP II 09 Reform 1 Restructuring of the Growth Foundation In VIP II 09, our focus is on the creation of value for customers. We aim to enhance brand strength in our core businesses and expand into new fields by bringing highly distinctive, high added-value products to the market. 1) Strengthening core businesses and fostering new businesses and product categories Core businesses Home Products (1) Domestic operations We will strive to enhance Lion s market position in our main fields, and to cultivate peripheral fields, by continuously developing highly distinctive products in advance of our competitors, based on an accurate reading of consumers needs. (2) Overseas operations We aim to aggressively expand the scale of our overseas 06

9 operations by boosting brand strength in the ASEAN region and by quickly strengthening our growth foundation in northeast Asia, primarily through the South Korean household products business that we acquired at the end of 2004 and through our operations in China. Pharmaceutical Products We will move quickly to realize synergistic benefits from the combination of existing operations with newly acquired OTC categories, and actively add new products under our major brands. In addition, we will work hard to expand into new fields, such as health care products that enhance QOL (quality of life). Potential core business Chemicals We intend to develop this segment into a high-margin business that will support Lion's future growth. We will develop a stable, highly efficient foundation for supplying customers, and develop unique, high added-value products, principally in the field we call EPOC (ecology, performance and oleo-chemicals: environmental solutions business based on surface science). of items being manufactured, in order to boost efficiency among our overseas affiliates as well as in Japan. We will raise productivity by introducing cutting-edge technologies and radical innovations in production processes. In addition, we will improve the operational systems used in our Chemical Products division, expand our raw materials business, and further reduce the cost of raw materials used in-house. 2) Establishing optimal supply chain management We will enhance our distribution systems in order to make shipping more cost-efficient than ever. Along with reorganizing our distribution subsidiaries, we will gradually increase shipping of products directly from our plants to customers in order to achieve a low-cost and stable product supply system. 3) Increasing productivity Group-wide, we will enhance IT infrastructure, consolidate or outsource administrative operations, and reorganize affiliated companies in order to increase productivity even further. 2) Reinforcing our development and planning capacities Lion will continue to focus investment of our management resources on the improvement of our product development capabilities, which create value for customers, and on improving our marketing capabilities, which allow us to communicate that value accurately. We will further enhance our consumer research in order to get a more scientific grasp of consumers ideas and behavior and make use of that knowledge in product development. We will establish special budgets for developing new businesses and work to achieve quick and effective start-ups. We will promote the use of even more vegetable-derived and highly biodegradable raw materials, and focus more than ever on producing environmentally friendly products. Reform 2 Fundamental Improvement of the Profit Structure VIP II 09 calls for a third round of total cost reduction ( ) aimed at saving the company 10 billion yen and achieving a consolidated break-even-point ratio of under 90%. We will continue to implement cost reductions on a project basis, primarily through the Committee for Improving the Profit Profile. 1) Reducing product costs Lion has already formed a group of highly productive factories as a result of consolidating domestic production sites. Next we will review production systems and the roster Reform 3 Rapid Improvement of Management Capabilities We will instill a corporate culture of tenacity and creativity by means of human-resource development and organizational revitalization. We will also focus on activities designed to meet our corporate social responsibilities. 1) Enhancement of human resources and revitalization of the organization We will actively cultivate specialists in such areas as technology, development, finance and law. We will also build up our human resources through mid-career recruitment from outside the Company. We will study possibilities for an in-house system of employing seniors, with an eye toward adoption of such a system. 2) Proactively fulfilling corporate social responsibilities (CSR) Lion will work proactively to fulfill our corporate social responsibilities, and strive to contribute to society by making the most of the Company s unique qualities. Our focus will be on developing in-house CSR programs and systems, environmental protection activities, and contributing to local cultures and communities. Furthermore, we will strive to attain more comprehensive awareness of legal compliance issues throughout the Company, and to further strengthen our corporate governance structure. 07

10 SPECIAL FEATURE Interview with the President Q A What are the goals and strategies of Value Innovation Plan Part II 09 (VIP II 09)? Q A What kind of strategies do you have in mind for Lion s core brands? VIP II 09 aims for even further strengthening of the capabilities that support growth and profitability. It positions the main brands of our core businesses (Home Products and Pharmaceutical Products) as core brands, and proposes strategic strengthening of these brands through the development and focused cultivation of high added-value products in line with our commitment to creating value for customers and developing products that are friendly to the environment. In our Home Products core business, we have been consolidating brands and products, identifying brands for focused advertising, and making concentrated investments of our advertising budget in line with previous versions of VIP. VIP II 09 adds the concept of thorough pursuit of customer satisfaction. Accordingly, we will boost development of innovative and highly VIP II 09 s performance objective is ROE of at least 10% distinctive products that propose new ways of living, based on in 2009, which is the final year of the plan. research into consumer behaviors and product evaluation From a strategic point of view, the time span covered technology. In addition, we will concentrate on cultivating our by the plan is divided into two stages. During Stage 1 core brands with the aim of doubling the number of our brands ( ), the whole company will concentrate on the success of the two new businesses that Lion that are number one in their category and doubling the number acquired at the end of 2004 (new OTC categories and that bring in 10 billion yen in sales. We intend to achieve this by South Korean CJ Lion business). At the same time, we further reinforcing pull strategies aimed at aptly communicating will practice even more thorough selection and focus our products customer value. Such strategies include advertising (a basic VIP II strategy) and continue to pursue the campaigns conducted in coordination with retail outlets and three VIP II reforms: restructuring of the growth increased advertising expenses. foundation, fundamental improvement of the profit In Pharmaceutical Products, too, our goal is to increase brand structure, and rapid improvement of management strength more than ever by actively introducing new products capabilities. that make use of Lion s proprietary technologies under our In Stage 2 ( ), the goals will be further major brands (including the new OTC drug brands), and by growth and substantial improvement in profitability. reinforcing point-of-sale development. Toward these ends, the Company will consolidate its capacity to generate profits, return profits to stakeholders, and allocate resources with priority on expansion of new business domains and acquisition and development of new businesses, including more M&As and business tieups. One of our major policies is restructuring of the growth foundation. To accomplish this, we will cooperate on a company-wide basis to seek greater brand value in Home Products and Pharmaceutical Products, including the two new business areas, by developing and marketing high added-value products that create value for customers and are friendly to the environment. To accomplish fundamental improvement of the profit structure, we will implement a third round of total cost reductions ( ) to reduce costs by 10 billion yen. Cost reductions will continue to be promoted on a project basis, primarily through the Committee for Improving the Profit Profile. Rapid improvement of management capabilities will mean steering the organization toward taking on challenging new business fields by cultivating a corporate culture of tenacity and creativity. In addition, we will initiate activities aimed at fulfilling our corporate social responsibilities. Lion will make focused investments of cash flow generated through the measures described above, in order to increase capabilities related to creating and delivering value for customers particularly capacities that support research, development, and marketing. This will lead to additional increase in corporate value. 08

11 Q A Q A What about future expansion of international business? We see overseas expansion as an important element of Lion s growth strategy. In 2004 we expanded proactively, for example by acquiring the Home & Personal Care Division that was formerly part of CJ Corporation, in South Korea. VIP II 09 s geographical focus is on Japan and the rest of Asia. We see the ASEAN region and Northeast Asia in particular as target areas for promoting growth. In the ASEAN region, we have a business base that rests on joint venture relationships we have cultivated over the course of many years. From that base, we will promote growth by actively introducing new products and making focused investments. In Northeast Asia, we intend to raise our profile in the South Korean market by using our management resources, technology, and marketing expertise in the new household products business that we acquired in South Korea. In China, we increased our capacity for turning out oral care products by completing the construction of a new factory in This will allow us to expand our business in China as well as to increase existing exports to Japan. In the future, we will press forward with the implementation of strategies aimed at the entire Northeast Asian economic sphere, for example by coordinating product supply with our South Korean base. How does Lion intend to fulfill its corporate social responsibilities (CSR) in the future? Q A At the end of 2004 you acquired Chugai Pharmaceutical Co. s OTC business. How will you continue to develop your pharmaceutical business? VIP II 09 positions Pharmaceutical Products as a core business alongside Home Products. We have been building up our OTC business, which we see as a top priority task. In the Japanese OTC market, there is growing demand for products related to self-medication due to recent health care system reforms and to increasing awareness of health-related issues. We view this trend as an important business opportunity. We believe there is great potential for growth in this business through the creation of products that appropriately meet consumers needs, for example by preventing and alleviating diseases rather than just curing them. The addition of the OTC business that we acquired in 2004 gives us a stronger operational base. We intend to build brand value by increasing our product development capabilities through active application of Lion s core technologies, the proprietary technologies that we acquired from Chugai Pharmaceutical Co. and outside technologies, and by making the most of the marketing strengths that we cultivated in our Home Products business. Under VIP II 09, first of all, in 2005 we want to introduce new products under our main brands and take other steps to actively develop marketing and sales strategies that improve our market standing, in order to realize synergistic benefits from the integration of the new OTC business with our existing business. In addition, we will expand into new fields, such as products that improve quality of life (QOL). Lion Corporation wants to actively contribute to society by providing customers with products and services that allow them to feel greater satisfaction in the areas of cleanliness, health and beauty. Moreover, we aim to further increase corporate value, as a highly reliable company that meets the expectations of the various stakeholders that we interact with, including shareholders, customers, trading partners, local communities and employees. In terms of specific measures, we have already taken steps to strengthen our corporate governance systems, for example by introducing an executive officer system and establishing a management evaluation committee consisting of outside experts. And in 2005, we plan to fortify our CSR promotion systems through measures like establishing a CSR Promotion Department. We will actively engage in environmental protection activities aimed at realizing a sustainable, recycling-oriented society, and in activities designed to broaden exchange with local communities in order to contribute to society. In these and other ways, we will do our best to fulfill our corporate social responsibilities. 09

12 Segment Strategies HOME PRODUCTS Overall Strategy for Home Products Operation According to the Value Innovation Plan Part II 09 (VIP II 09) that we begin implementing in 2005, we intend to raise the overall growth potential for Lion s Home Products Operation by focusing more than ever on using the strength of our existing operational foundation to develop core brands. So far we have pursued the development of attractive products, strong point-of-sale management, and building a basis for high profitability as our top priorities. Based on our achievements in these areas, we will speed up implementation of our growth strategies. Achievements in 2004 In the Home Products Operation, we implemented the following innovations according to VIP II: (1) Restructuring of the Growth Foundation, (2) Fundamental Improvement of the Profit Structure, and (3) Rapid Improvement of Management Capabilities 1 Restructuring of the Growth Foundation We concentrated the allocation of management resources toward our core brands, in order to boost brand strength. By selecting brands for advertising placement, we were able to greatly enhance the market presence of our major brands and achieve an increase in sales compared to the previous year. Lion Field Marketing Co., Ltd. (LFM) is a subsidiary that specializes in point-of-sale management. Its roughly 300 Store Coordinators track about 7,000 major retail outlets. Thanks to their efforts, we achieved a significant reduction in loss of sales opportunities at stores, and our promotional plans and new product introductions were carried out quickly and well. For example, LFM implemented point-of-sale promotions for Ban antiperspirant deodorant at major retail stores, in coordination with an advertising campaign. When we launched Clinica s anti-caries series of products, LFM 2 3 created display areas that emphasized the theme of preventive dentistry. And within two weeks of the launch of our new fabric softener, Day-Fresh Soflan, it was already on the shelves of more than 80% of stores, which was about half the time it took to achieve this kind of store coverage in the past. Fundamental Improvement of the Profit Structure We moved forward with improvements like lowering our cost-to-sales ratio, reducing distribution inventories, and streamlining our competition costs. Rapid Improvement of Management Capabilities We introduced profit management on a unit-by-unit basis, thereby clarifying each operational division s accountability for generating profits. Because of this, every employee throughout the company is gaining awareness of the need to generate profits. Major Policies for 2005 In the future, competition is expected to grow tougher than ever in Japan s household products market. We cannot expect any significant growth in terms of quantitative demand, and the deflationary trend of prices is likely to continue. Nevertheless, by actively developing and cultivating attractive products that are not only outstanding in terms of their functionality, but also offer consumers an entirely new way of life, we intend to consolidate our operational basis as Japan s top producer of household products and become a company that can survive in competition with global corporations. In order to achieve this goal, we will resolutely pursue a longterm brand development strategy whereby our basic policies are creating number one brands and 10 billion-yen mega-brands, and boosting growth potential through focused development of core brands, and whereby we steadily implement measures aimed at Creating Strong Brands, Creating Strong Product Displays, and Creating a Strong Network. 10

13 Creating Strong Brands We will dedicate all our energies to making more of our brands into either mega-brands with over 10 billion yen in sales, or number one brands in their respective categories. We will do this by continuously introducing new, high added-value products that incorporate the latest technology in major product fields, and by steadfastly developing our core brands. At the same time, we will strive to develop innovative products that create new markets, like Kafunguard, which we launched at the end of this fiscal year. We will aim to boost our profitability even further, by focusing our advertising outlays, proposing and implementing more rational pricing policies, and by pursuing even further cost reductions. to changes in the mass retail market, for example by actively proposing point-of-sale promotions and product planning ideas designed for individual stores or for specific types of retail operations. Both Lion s Home Products and Pharmaceutical Products Divisions develop and sell oral care products. By promoting oral care display areas that include all of these products, we would like to increase their appeal among consumers and distributors. Creating Strong Networks The Japanese market for household products is undergoing rapid structural changes. For example, the top retail chains are taking an increasing share of the market, and, year by year, daily-use items account for a larger proportion of sales at drugstores. Lion intends to build strong networks by bolstering strategic corporate relationships with drugstore chains and other growing retail businesses. We aim to establish strong strategic partnerships with products as the key by coordinating our functions with those of wholesalers, based on our Lion-kai network with its tradition of connecting Lion and the wholesalers who distribute our products. Creating Strong Brands: New product presentation Creating Strong Product Displays Through retail-store management support closely coordinated with LFM, we will build stronger retail outlets by increasing the number of stores that carry our products and by improving distribution in terms of both volume and speed. At the same time, we will use a sales support system to win even greater trust from the major chains that we do business with, by refining our ability to propose marketing plans and shelving allocation plans tailored to individual retail chains. Lion will respond appropriately and quickly Creating Strong Product Displays: Store Coordinators (LFM) make sure products are in place Creating Strong Networks: Holding a presentation to wholesalers and retail stores 11

14 Oral Care Products We aim to control a 40% share of the Japanese market for toothpastes and toothbrushes in 2006 As one of Japan s leading companies in the oral care field, Lion will actively expand our operations by providing high value-added products and information to help improve consumers health and quality of life based on three themes: preventive dentistry, oral aesthetics, and aging well. Lion has five highly competitive brands that we particularly want to develop. We call these our growth brands : Clinica, Dentor Systema, Dentor amino, Prime, and Between. We plan to use our own unique, sophisticated technology to actively introduce new products under these brands, and to focus our advertising placements in order to develop a number one brand in each product category. In 2006, we want to capture more than 40% of both of our major markets, toothpastes and toothbrushes. (From left) Dentor Systema Medicated Interdental Gel, Dentor Systema Dental Rinse, Dentor Systema Toothpaste, Dentor Systema Toothbrush Achievements in 2004 Under the heading of preventive dentistry, we re-staged our Clinica brand of caries prevention products with the goal of establishing a comprehensive tooth decay prevention brand. We introduced new products and made concentrated advertisement placements not only in the toothpaste and toothbrush categories, but also in peripheral categories like breath fresheners and dental products. As a result, we achieved double-digit year-onyear growth for the brand as a whole. We launched a renewed version of Dentor Systema toothpaste with IPMP (isopropyl methylphenol), a new antibacterial agent that penetrates into communities of the bacteria that cause periodontal disease and kills these Net Sales 50,000 ( million) bacteria. This new product, using new technology available exclusively to Lion, has been expanding its market share nicely. In connection with oral aesthetics, in October we introduced new Prime Stain-Off, a toothpaste with a "beads scrub" component that restores the natural whiteness of teeth. By stimulating consumers awareness of tooth-whitening toothpastes, we worked to re-expand a market that had been in decline. Despite the deflationary trend of the Japanese economy, we succeeded in stopping the decline of prices for our oral care products at retail stores throughout 2004, by using advertising and point-of-sale promotions to convince consumers of the functionality and other high added value of each of our products. 40,000 30,000 Preventive dentistry Reaching a new stage of self-care 20,000 Three main themes 10, Oral aesthetics Healthy and beautiful Aging well Staying comfortable through the years 12

15 Segment Strategies HOME PRODUCTS Basic Strategies of VIP II 09 Of our three main themes, preventive dentistry, oral Prime and Etiquette, which support oral aesthetics and aesthetics, and aging well, we will place particular support each individual s presentation of a personal image. emphasis on preventive dentistry. As Japanese society continues to age, people are becoming We will strengthen preventive dentistry products for selfcare, centering on Clinica in the cavity-fighting field and problems and overall health. We will recreate our Hitect more interested in the relationship between age-related oral Dentor Systema for gum disease prevention. brand with products that are very effective at helping people Whitening teeth and preventing bad breath have a great deal age well by preventing age-related oral problems before to do with emotional health. We will strengthen products like they occur. Our Three Main Themes Theme Preventive dentistry Oral aesthetics Aging well Function Gum disease prevention Tooth decay prevention Interdental cleaning Whitening Bad breath prevention Age-related oral problem prevention Brand Dentor Systema (toothpaste, toothbrushes, mouthwash, interdental brushes, etc.) Dentor Amino (toothpaste) Clinica (toothpaste, toothbrushes, mouthwash, dental floss, etc.) Between (toothbrushes, interdental brushes) Prime (toothpaste) Etiquette (toothpaste, mouthwash, breath freshener) Hitect (toothpaste) Brand Strategies We will concentrate investment of our management resources in our five growth brands in order to make them into mega-brands that exceed 10 billion yen in sales or number one brands in their respective fields. We will develop new categories around the periphery of oral care where we expect to see growth, such as Major Policies for 2005 We will implement measures aimed at developing Dentor Systema into a comprehensive periodontal disease prevention brand. We will actively introduce new products using new technologies in peripheral categories like mouthwash and interdental brushes, and re-stage the brand as a comprehensive brand for restoring periodontal health through self-care in the early stages of gum disease. We will use marketing strategies that clearly differentiate this label from Dentor amino, which is aimed at fostering good oral health in order to prevent periodontal problems from occurring in the first place. Meanwhile, we will develop Clinica, which we re-staged in 2004, as the number one brand for preventive dentistry, with the goal of zero cavities. Among the toothpastes, we will focus on developing Clinica Toothpaste for Caries Risk Control. In the toothbrush category, we will further step up breath fresheners and dental products. We will further strengthen coordination between product development, advertising, and sales in order to increase brand value; we will improve both the quantity and quality of comprehensive communication with consumers. advertising and promotions for Clinica toothbrushes to establish this brand as the number three brand of Lion toothbrushes following Systema and Between. In addition, as the market for mouthwashes continues to expand, we will also focus on cultivating these products by increasing our product lineup and stepping up advertising. In the whitening toothpaste sector, we will add new items under the Prime brand and work to develop it into the number one brand. We currently have 17 brands under the three themes of preventive dentistry, oral aesthetics, and aging well. We will reduce this number and reorganize our brand structure with a focus on brands that are either already number one in their category or have a good chance of reaching that position. We will focus particularly on strengthening our five growth brands by further concentrating our advertising budget to support them. Special Topic Penetrating antibacterial agent IPMP (isopropyl methylphenol) When bacteria that cause periodontal disease form "biofilm" communities between the teeth and gums, it becomes difficult for antibacterial agents to penetrate into the film-like mass. This hinders the action of conventional antibacterial agents and antibiotics, and has been cited as a major cause of periodontal disease. Lion became the first in Japan to succeed in creating a periodontal disease biofilm model, and used the model to discover that IPMP is extremely effective at penetrating deep into the biofilm and at killing bacteria inside it. Based on this knowledge, Lion released the world s first toothpaste containing IPMP, Dentor Systema Lion. Conventional products Dentor Systema Biofilm It s difficult for antibacterial agents to penetrate inside bacterial communities Antibacterial agents contained in conventional products are blocked by the barrier function of periodontal disease biofilm and cannot reach inside where they have a chance to kill bacteria. IPMP penetrates deep inside bacterial communities The antibacterial agent IPMP penetrates periodontal disease biofilm and kills bacteria deep inside. It also contains an antiinflammatory ingredient that prevents periodontal disease. 13

16 Beauty Care Products We aim to make mega-brands (over 10 billion yen in sales) of Kireikirei in 2006 and Shokubutsu-Monogatari (Plant Story) in 2007 Our Value Innovation Plan Part II 09 (VIP II 09) defines the Beauty Care Products Division s business domain as a field that offers consumers the beauty of cleanliness and the beauty of health in the form of differentiated concepts and technologies. In the hair care field, our highest-priority categories are shampoos, conditioners, hair-nourishment treatments and hair-styling products, and in skin care we place the most emphasis on bath products, liquid hand soaps, and antiperspirant deodorants. Our goal is to establish a strong, number one brand in each category. In order to achieve this goal, we intend to develop unique new products that make use of proprietary technologies, and to strengthen our appeal to consumers through point-of-sale offers that are coordinated with advertising campaigns. (From left) Kireikirei Medical Foaming Hand Soap, Shokubutsu-Monogatari (Plant Story) Herb Blend Conditioner, Shokubutsu-Monogatari (Plant Story) Herb Blend Shampoo, Men s Ban Zero Medicated Deodorant Spray Achievements in 2004 In 2004, we introduced Kireikirei medical foaming hand soap which was designed to be easy for small children to use. In addition to expanding the liquid hand soap market, we succeeded in increasing our own liquid hand soap sales by 20%. Kireikirei is the number one brand of liquid hand soap in Japan, accounting for some 40% of the market. Through research at the genetic level, Lion discovered for the first time in the world a human hair growth mechanism. Based on this technology, in October 2003 we began selling a new hair-nourishment treatment called, Mouhatsuryoku Innovate. In 2004, the market for hair- Net Sales 50,000 ( million) nourishment treatments became more competitive than ever with the introduction of competing products, but Mouhatsuryoku Innovate maintained its popularity and Lion achieved year-on-year growth in our hair-nourishment treatment segment as a whole. With a complete renewal of Ban in 2003, we made a big gain in market share and became the number two brand of antiperspirant deodorant. Using proprietary nanotechnology, we released a new version of Ban with greatly enhanced capacity for absorbing perspiration. Lion Field Marketing Co., Ltd. got the product distributed to retail stores faster than competing products and strengthened point-of-sale promotion so that we were able to maintain about the same level of market share as the previous year despite increased competition. 40,000 30,000 20,000 10, Discussing promotional strategies for new products 14

17 Segment Strategies HOME PRODUCTS Basic Strategies of VIP II 09 Give top priority to introducing new products and active deodorants, and hair-nourishment treatments. marketing in categories where we already have strong Pursue across-the-board differentiation in concepts, brands or unique technologies, such as 2-in-1 product quality, and marketing in order to create unique conditioning shampoos, liquid hand soaps, antiperspirant products in each category. Brand Strategies Shokubutsu-Monogatari (Plant Story) is a comprehensive general-use brand that includes shampoos, conditioners, body washes, beauty soaps, and facial-cleansing products. Kireikirei is a comprehensive medicinal brand that includes body washes and medicated soaps, with a focus on liquid hand soaps. We aim to cultivate both of these brands into mega-brands that exceed 10 billion yen in sales. We will also focus on strengthening other major brands like Soft-in-One, Free & Free Damage Aid, Mouhatsuryoku, and Ban. We aim to achieve the top market share for each of these brands in their respective product categories. Principal Brands and Product Categories In Shower After Shower Hair Care Shokubutsu-Monogatari (Plant Story) Shampoos, conditioners Body washes, beauty soaps, facial-cleansing products, basic skin care products Soft-in-One 2-in-1 conditioning shampoos Free & Free (Damage Aid) Shampoo Conditioner Hair treatments Hair-styling products Mouhatsuryoku (Innovate) Shampoo Conditioner Hair-nourishment treatment Skin Care Kireikirei Liquid hand soaps, body washes, medicated soaps Ban Antiperspirant deodorants Major Policies for 2005 In 2005, our main aim is to capture the markets for shampoo, conditioner, body wash, liquid hand soap, antiperspirant deodorant, and hair-nourishment treatment, all of which are large-scale markets where we can make the most of Lion s technology and brand strength. Especially in the shampoo, conditioner, and body wash segments, we will make a strong push to recreate our Shokubutsu-Monogatari (Plant Story) label by introducing new products that use herb-blending technology to deliver a moisturizing effect that clearly distinguishes the brand from the competition. Under the Kireikirei brand, we will introduce a Kireikirei body wash that targets families with children in the lower elementary grades, in order to develop Kireikirei into a comprehensive medicinal brand. At the same time, we will launch Kireikirei products that offer improved functionality and ease of use in order to help continuously improve customer satisfaction with Kireikirei as the number one brand of liquid hand soap. Our aim is to establish an overwhelming position as number one in this field. In the antiperspirant deodorant segment, we will respond to the need for variety by introducing a new fragrance, Sweet Muscat, to our line of Ban Powder Spray antiperspirant deodorants. With seven scents, it is the number one brand used by young Japanese. We renewed our Ban Zero brand, which is highly effective at suppressing odor, with a new main target of working men and women who have a strong awareness of social etiquette. In addition, we launched Men s Ban Zero Medicated Deodorant Spray as a result of research into the difference between men s and women s body odors. This is a completely new product that is the first in the world to be specifically formulated to suppress male body odor, and we are using it to actively develop the growing market for antiperspirant deodorants used by men. Furthermore, in the area of hair-nourishment treatments, we will use advertising and point-of-sale promotions to thoroughly spread the word about the effectiveness of Mouhatsuryoku Innovate; our goal is to make it the number one brand in the hair-nourishment market for high-priced, medicated cosmetics. Special Topic Suppressing the male body odor that women dislike According to a study conducted by Lion, almost all women in their twenties and thirties said yes when asked Have you ever had an unpleasant experience with the body odor of someone of the opposite sex? After researching differences between female and male body odor, Lion identified androstenone as the component of male body odor that women find unpleasant. Androstenone is produced when bacteria commonly found on the skin break down a male hormone derivative called androsterone sulfate. Lion s research found that women disliked the smell of androstenone by itself, and confirmed that they found it even more objectionable when mixed with the odor of perspiration or other elements of body odor. Lion was the first in the world to discover that apricot kernel extract is very effective for suppressing the creation of androstenone. In the spring of 2005, the company plans to begin selling a completely new version of Men's Ban Zero Medicated Deodorant Spray that will make use of this technology. Body odor particular to men Substances that cause odor Male body odor Sweat and sebum Bacterial growth and oxidation Androsterone sulfate (male hormone derivative) metabolism Apricot kernel extract Sebum (skin oil) metabolites Androstenone 15

18 Household Products Our challenge is to raise our brands status and actively expand our operations Amid changing markets and intensifying competition, our Household Division is working to increase the brand value and reform the profit structure of key items like laundry detergents, fabric softeners, and dishwashing detergents, in order to secure stable sales and profits into the future. Specifically, we will introduce new products and concentrate our promotional activities so that we can make Top, Acron, and Powerful Charmy the number one brands in their respective fields, and further improve the brand status of Soflan, Look, and Reed. Furthermore, in order to strengthen the growth potential of our operations, we will introduce new products that predict consumers needs, and we will actively take on the challenges of new fields. (From left) Soflan with Fragrance and Deodorant (fabric softener), Top (laundry detergent), Ofuro no Look (bath cleaner) Achievements in 2004 In laundry detergents, we achieved a double-digit increase in year-on-year net sales thanks to measures like the introduction of a new version of Blue Dia, with improved stain removal action and an all-paper, ecofriendly container, and thanks to aggressive point-of-sale promotions focused on Top, our major brand. In fabric softeners, competition heated up more than ever due to the entry of a new player in the market from outside Japan. We minimized our loss of market share and helped stimulate demand in the high added-value sector of this market by introducing new Day-Fresh Soflan, with a highly effective deodorant function. In the market for dishwashing detergents, we introduced Charmy Liv in response to a new demand for making Net Sales 150,000 ( million) dishwashing a joy to look forward to. Amid fierce competition, our overall sales of dishwashing detergents exceeded the previous year s results thanks to Lion Field Marketing Co. s success at rapidly distributing the new product and getting it displayed on store shelves in synch with coordinated advertising. Our Guard Series of products boasts Eleguard, Rainguard, and other products that are number one in their respective categories. Thanks to the development and launch of Kafunguard anti-pollen spray which offers an easy solution to indoor pollen problems and creates a new type of market Guard Series sales far exceeded those of the previous year. 120,000 90,000 60,000 30, Introducing new products to wholesalers and retailers 16

19 Segment Strategies HOME PRODUCTS Basic Strategies of VIP II 09 Achieve stable earnings Work on lowering overall costs and optimizing competition costs; aim to secure stable earnings. Reform the structure of competition costs Continue with shift toward pull-type brand development measures, entailing concentration of advertising Brand Strategies In the fields of laundry detergents, fabric softeners, and dishwashing detergents, we will further expand our mega-brands, which exceed 10 billion yen in sales, (Top, Soflan, Charmy, and Blue Dia) through focused new product introductions, sales promotions, and sales campaigns aimed at the core brands. expenses, etc. Aim to create number one brands and to improve the market standing of brands. Secure potential for growth Expand operational scope and opportunities for earning revenues by focusing on fields where there is room for growth, and by taking on the challenge of entering new fields. In delicate laundry care products, bleach, household cleaners, and cooking-aid products, we will expand the scale and scope of our operations and further develop Look and number one brands like Acron and Reed, by concentrating advertising on key products and by reinforcing point-of-sale promotions. Goals for Each Brand Category Laundry detergents Delicate laundry care products Fabric softeners Water repellents, anti-static agents, anti-pollen spray Dishwashing detergents Automatic dishwasher detergents Household cleaners Cooking-aid products Brand Top Blue Dia Acron Soflan Guard Series Charmy Powerful Charmy Look Reed Goal No. 1 brand in category Further expand 10 bln-yen brand No. 1 brand in category Develop into 20 bln-yen brand Maintain status as No. 1 brand in each category Further expand 10 bln-yen brand No. 1 brand in category Further improve market standing Further improve market standing Major Policies for 2005 In the first half of 2005, our top priority will be reforming the profit structure of our laundry detergents and fabric softeners. At the same time, we will also actively introduce new products and implement sales promotions aimed at furthering increasing the brand strength of our major brands. Top with enzyme power is the major brand in our laundry detergent segment. We will be the first manufacturer in Japan to introduce a detergent containing new Stainzyme, an enzyme that can break down food stains even after they have set in over time, which will be one more step in Top s evolution as a detergent with superior cleaning power. In addition, we have already sold more than 40 million units of Heyaboshi (Hang-to-Dry Indoors) Top since its introduction in This product was designed to prevent laundry from developing an unpleasant odor when hung to dry indoors, and we will improve this odor prevention feature further by adding an antibacterial ingredient. Meanwhile, consumers who shop for fabric softener say that their second priority after softness is fragrance. We plan to give our product a strong boost by introducing Soflan with Fragrance and Deodorant, an enhanced version that offers consumers a choice of either floral or citrus aromas. The market for detergents formulated specifically for use in automatic dishwashers is expected to grow in the future. We aim to reclaim our top share of the Japanese market for automatic dishwasher detergent by introducing Powerful Charmy, which will be the first product in Japan to combine an ingredient that lifts off food residue with enzyme power in order to quickly remove grains of rice, tea stains, and other types of residue that are considered to be difficult for automatic dishwashers to handle. In the household cleaners category, we will take on the challenge of expanding into a new area by introducing an improved version of Look for washing machine tubs, which can remove even caked-on mold stains. Special Topic "High-Tech" silica to prevent rupturing of cedar pollen Despite the fact that people suffer from allergic symptoms caused by cedar pollen inside their homes as well as outside, there has not yet been a product that offers an easy solution to the problem of indoor pollen. Lion Corporation researched the possibility of preventing runny noses and sneezing by stopping cedar pollen from rupturing and releasing the allergens contained inside. As a result, we discovered that we could use "high-tech silica" that we developed consisting of ultrafine (about 10 nanometers in diameter) silica particles coated with a special inorganic oxide to completely envelope the surface of each pollen grain and inhibit rupturing of the outer wall. Furthermore, since we realized that most of the pollen that causes problems indoors was brought inside after it clung to clothing worn outdoors, we developed our Kafunguard anti-pollen spray for clothing and fabric with an anti-static agent that simultaneously prevents pollen from being brought indoors on clothing. We began selling this product in December Cedar pollen Rupture inhibiting agent Allergen Kafunguard s pollen rupture inhibiting agent completely covers the outer wall of each cedar pollen grain. As it dries, the silica beads cluster together and firmly envelope the pollen grains, preventing them from rupturing. 17

20 Pharmaceutical Products We aim to be Japan s number two supplier of OTC pharmaceuticals, with 60 billion yen in net sales in 2006 (From left) Varsan SP Jet (insecticide), New Guromont (health tonic drink), Stoppa Anti-Diarrhea Medicine, Bufferin A (analgesic) In Japan, there is growing demand for products related to self-medication due to recent health care system reforms and to Japanese people s increasing awareness of health-related issues. We expect to see expansion in the market for OTC (over-the-counter) drugs and other health care products that help prevent disease or improve quality of life (QOL). Lion s Pharmaceutical Products Division is one of the company s core businesses. In addition to fostering growth in fields where we are already active eye care products, gastrointestinal medicines, gum disease treatments, and analgesic and anti-inflammatory poultices we are actively expanding into new product categories like health tonic drinks, and insecticides through the acquisition of Chugai Pharmaceutical Co., Ltd. s OTC business. As a result, we aim to be a comprehensive manufacturer of OTC pharmaceuticals with net sales of 60 billion yen in Achievements in 2004 Stoppa Anti-Diarrhea Medicine was introduced in December 2003, using Lion s unique "fast-disintegrating tablet" technology. The idea of a medicine that offers immediate relief from a single tablet taken without water was so well received by consumers that we developed a new market for anti-diarrhea medicine. In July 2004 we launched Stoppa Stomachic Medicine based on the same concept and succeeded in creating a new type of demand in the market for digestive medicines. We introduced Smile Contact Pure, the first eye drops, Net Sales 35,000 30,000 25,000 20,000 ( million) other than products in single-use containers, that do not contain a preservative agent. What Smile Contact Pure does contain is an ingredient that provides extremely effective protection for the cornea. The Japanese market for eye drops aimed at contact lens wearers continues to grow by double digits every year. Lion s overall eye drop sales grew by more than 10 percent year on year thanks to the success of our new products and to increased sales of Smile 40EX, which is the top selling item in Japan in its category. We launched New Medinurse HP Cream, which is the only medicinal hand cream with a heparin-like substance on the OTC market in Japan. It is extremely effective for moisturizing and soothing dry, cracked hands, suppressing inflammation, and stimulating blood flow in the hands. This product revitalized a market that had been slumping recently due to a lack of differentiation in terms of product effectiveness. Our sales in this product category were more than five times those of the previous year. 15,000 10,000 5,

21 Segment Strategies Basic Strategies of VIP II 09 In 2006, we aim to be Japan s number two manufacturer of OTC pharmaceuticals, with 60 billion yen in net sales. We will actively take up the challenge of expanding the quantitative scope of our pharmaceuticals business, both by fostering our existing businesses and through the acquisition and revitalization of the OTC division from Chugai Pharmaceutical Co. In order to build a solid foundation for high profitability, we will boost our growth capacity by focusing management resources on the development of OTC products and strengthening our brands and point-ofsale presence. Also, we will raise efficiency and lower total costs throughout the division. We will boldly pioneer new OTC markets by using proprietary technology to develop unique, highperformance, high added-value products. We position dental materials as an emerging business. By entering the teeth-whitening field and expanding the dental materials field mainly by cultivating nursing and elderly care products, we intend to pursue a growth strategy aimed at achieving 5 billion yen in sales in these categories. Analgesics and anti-inflammatory poultices (Halix) Medicinal skin-care products (Medinurse) (Pairacne) Analgesics (Bufferin) Cold medicines (Kids Bufferin) (Alpen) Gastrointestinal medicines (Stoppa) (Chugai Ichoyaku) Allergy-care products (Alfresh ) Lion s original technologies + Drug production technologies Strengthening of OTC businesses Brand development + New businesses Eyedrops (Smile) Health tonic drinks (New Guromont) (Guronsan) Semi-adhesive cooling pads (Hiepita) (Kyusoku Jikan) Gum-disease treatments (Dent-health) Insecticides (Varsan) Brand Strategies Designate Bufferin, Smile, Stoppa, Dent-health, Halix, Guronsan, Varsan, and Pairacne as brands slated for focused investment and expanded operations. Concentrate on developing these brands by introducing new products using proprietary technologies and by Major Policies for 2005 We acquired strong brands like Guronsan, New Guromont, and Varsan from Chugai Pharmaceutical Co. We will actively invest in advertising in order to cultivate these into megabrands with over 10 billion yen in sales. We plan to use proprietary technology to introduce new products under our major existing brands like Bufferin, Smile, Stoppa, Dent-health and Halix. We also aim to realize strong growth and revenues from our existing businesses. In order to boost our sales capacity, we will introduce a aggressively investing in marketing. Expand each brand into a comprehensive brand that offers a variety of methods for treating and preventing relevant symptoms; promote the creation of megabrands. new trading system and greatly increase the size of our sales force, including sales people who specialize in making rounds among retail stores. In order to establish a high-profit structure, we will aggressively promote total cost reduction, which includes lowering product costs, reorganizing our product lineup, and reducing distribution costs. We will aim for major expansion and creation of new markets in our dental products business by actively introducing products in new fields, as well as in the self-prevention field. Special Topic "Halix ID Clear Plaster" with new "transparent film " Offers both more effective relief from pain and inflammation thanks to sealed-in penetration and greater convenience of use thanks to lack of odor and discreet appearance. The key to achieving effective pain relief from a plaster lies in releasing the active ingredient (indomethacin) from the base material and getting it to permeate the hard, outermost layer of the skin. The Halix ID Clear Plaster that we began selling in November 2004 has a "transparent film" that forms a highly effective seal to control moisture loss, and the plaster s base material (PAC-55) has a high water content (75%) and a slightly acidic makeup that is easy on the skin. The high water content raises transdermal absorption of indomethacin by creating pathways through the outer epidermis, and thereby delivers superlative pain relief. In addition, the "transparent film" doesn t show through even when worn under a white shirt, and its faint menthol aroma is completely sealed in, so no one can smell or see the plaster. Transparent film Injured area Base material with high water content Indomethacin Skin Indomethicin Permeation 19

22 Chemicals We aim to achieve 37 billion yen in sales in 2006 Our Major Businesses and Products AOA Oleo-chemicals Palm carotene Nonionic Surfactants Palm: raw material for surfactants Carbon Dielectric carbon and an example of use (IC tray) By 2003, our Chemicals Division had thoroughly streamlined total costs by withdrawing from low-profit businesses, cutting fixed expenses, and taking other cost-reducing measures. This allowed us to establish the operational foundation we need in order to grow as outlined in VIP II 09. Now our attention is on EPOC (ecology, performance, and oleo-chemicals) as we work to develop eco-friendly industrial chemicals and high-performance products that respond to each customer s specific needs. We are focusing on developing and introducing products that embody our company s proprietary technologies, especially in our three main businesses: AOA (alkylene oxide adducts), oleo-chemicals, and carbon, and by doing so we aim to achieve 37 billion yen in consolidated sales in Achievements in 2004 AOA In our AOA business, we have finished the shift from alkylphenol surfactants to fatty alcohol-based nonionic surfactants that have excellent biodegradability. We bolstered our cost competitiveness in this area, expanded sales channels both domestically and internationally, and increased our market share. Oleo-chemicals In the oleo-chemicals business, our vegetable-derived methylesters have earned high praise from chemical companies all over the world, mainly for use in natural Net Sales 35,000 30,000 25,000 20,000 15,000 10,000 ( million) surfactants. We aggressively developed new sales channels, including overseas, and sales grew by double digits compared to the previous year. Our carotene, extracted from palm oil, accounts for 70% of the world market for natural mixed carotene. We also hold 40% of the world market for tocotrienol-rich palm oil fractions. In 2004, carotene sales exceeded previous-year levels by 35%, while tocotrienol sales rose 40% year on year. Carbon In our carbon segment, we won high praise from companies in Japan, America, and Europe for our electroconductive carbon black (Ketjenblack). The same level of conductivity can be achieved by using just 1/3 1/4 the quantity of Ketjenblack as is required when using competing products. Ketjenblack holds the biggest share of the market for high-performance electro-conductive carbon black. In addition, we have been meeting demand for conductive materials used in electronic devices, office equipment, and auto parts, etc., by using unique Lion technology to disperse Ketjenblack in conductive compounds. Sales of such compounds in 2004 jumped 25% over the previous year. 5,

23 Segment Strategies Basic Strategies of VIP II 09 Establish an operational structure that supports growth potential and earning capacity, by cultivating EPOC and other high-performance products. Position AOA, oleo-chemicals, and carbon, our areas of particular technological strength, as our company s three core businesses. Develop each of them into a 5 billion-yen business between 2006 and Expand operations by developing differentiated, highperformance products for the growing markets of China and Southeast Asia. Increase cost competitiveness by reducing overall costs, including costs at manufacturing subsidiaries, in diverse areas including purchasing, production, and logistics. Major Policies for 2005 Laundry detergents consist mainly of anionic surfactants. The one most commonly used all over the world is petroleum-derived LAS (linear alkylbenzene sulfonate), but Lion s MES (methyl ester sulfonate) has been attracting attention due to its strong detergency, excellent biodegradability, and consequent low burden on the environment. The conventional wisdom used to be that instability during transport would make it difficult to sell MES to outside buyers. However, we are very close to reaching a technological solution to this problem, and we have begun seriously considering steps such as increasing production capacity with an eye toward expanding this business very soon. As the food supplement market continues to expand, we are also developing natural mixed carotene and tocotrienol, which we extract at our palm oil refining plant, as a promising component of supplements. Demand for electro-conductive carbon has been growing day by day. In order to meet the surge in demand that is occurring particularly overseas, we will start production in Taiwan. Our AOA sales are mainly directed at manufacturers of toiletry products. We are working on expanding sales channels both in Japan and abroad (East Asia and Southeast Asia), and on developing new applications. We aim for rapid growth and high profitability. Until recently, we addressed environmental concerns by supplying de-inking agents used for recycling paper, and water-based industrial detergents free of organic solvents. By making these products from different materials that are even more environment-friendly, such as MEE (methyl ester ethoxylate), we aim to develop new customers. In our industrial detergent business, which offers solutions to individual customers, we expect to see a big increase in demand from manufacturers of semiconductors and office equipment, including silicon wafers, liquid crystal displays, and hard disk drives. Client companies in this market are becoming increasingly environmentally conscious, so as we develop this field, we will benefit from our great capacity to provide sophisticated technologies based on surface chemistry one of our basic technologies and from the highly eco-friendly nature of our water-based detergents. Palm Plantation in Malaysia Special Topic Innovation in the field of industrial detergents During the manufacture of mechanical parts and electronic components, cleaning processes have a major impact on product quality and productivity. Because mechanical force cannot be used, in the past manufacturers used organic solvents that are harmful to human health and to the environment. To address this problem, we used sophisticated micro-emulsion technology, based on surface chemistry, to develop our SUNWASH series of water-based detergents consisting of special combinations of surfactants to scour dirt off of products and dissolve it in water. These products are widely used in the manufacture of precision components such as liquid crystal panels and optical lenses. Another example of how we contribute to the Dirt (Excess liquid crystals) development of leading-edge technologies is our technical collaboration with a manufacturer of high-precision abrasive compounds. We are working together to develop advanced, ultra high-precision cleaning processes needed to enable the manufacture of next-generation, high-capacity hard disks used in computers and digital household appliances. Panel (object to be washed) Detergent 1 minute later 3 minutes later 5 minutes later Cleaning liquid crystal panel gaps using micro-emulsion technology (immersion at room temperature) 21

24 International Capturing Northeast Asia a market with 500 million people (From left) Shokubutsu-Monogatari (Plant Story) Body Wash, Top (laundry detergent), Systema Toothbrushes, Systema Toothpaste Lion s Value Innovation Plan Part II 09 (VIP II 09) positions our international division as a driver of growth. In addition to the ASEAN region, which has been our most important target, we are working actively to capture the huge Northeast Asian market. In 2004, we acquired the Household Business (Home & Personal Care Division) of CJ Corporation, South Korea s third largest manufacturer of household consumer products. In July of the same year, we completed an enlargement of our plant in Qingdao, China, doubling our production capacity there and giving us a base for expansion not only in mainland China, but in the entire Northeast Asian region. We will continue to accelerate growth in our ASEAN business by introducing more high added-value products under global brands like Shokubutsu-Monogatari (Plant Story) and Systema, as well as local-brand products that cater to local preferences. At the same time, we plan to combine these activities in the ASEAN region with aggressive development in Northeast Asia, to speed up implementation of our overall strategy for expansion in Asia. Achievements in 2004 In Thailand, we improved our profitability by cutting costs through joint purchasing and rationalization of formulations and packaging materials. Sales also grew significantly, attributing to the rapid growth of fabric softeners and toothpastes. In toothbrushes, our premium brand Systema received consistently strong support from consumers for its high-performance and boosted further our market share. In Malaysia, Top laundry detergent (introduced there in 2003) continued to enjoy exceptional growth. We extended the product line to include a low-suds version, and exceeded our original sales target substantially. Strong performances by Fresh and White toothpaste and Shokubutsu- Monogatari (Plant Story) body wash also contributed to a significant increase in sales. In Indonesia, we achieved rapid and sustainable top line growth, made possible by yet another year of outstanding performance by Emeron and Zinc shampoos, as well as Ciptadent toothpaste. To prepare for aggressive, expansion in the long term, we started construction of a factory which is scheduled to start producing liquid products like shampoos and dishwashing detergents in the second half of Speedy and timely product development is another key factor and we have reinforced our regional R&D staff for this purpose. China is an area where we are especially promoting growth. With the completion of our factory extension in Qingdao in July 2004, we doubled our toothpaste production capacity to gear up for a full-court press in the field of oral care. Signing of share purchase agreement related to acquisition of CJ Corporation's Household Business 22

25 Segment Strategies Basic Strategies of VIP II 09 ASEAN We will further reinforce our operational foundation, which is based on strong cooperative ties with prominent local companies that are our joint venture partners. We will also actively introduce new and improved products in all countries, and support each product launch with focused investment in marketing aimed at brand building. By doing so, we aim to boost our growth potential by making more of our brands the number one player in their respective markets. Brand Strategies Using innovative technologies and marketing know-how from Japan, we introduce in our overseas markets high added-value products under established brands that we share with Japan such as Systema, Shokubutsu- Monogatari (Plant Story) and Top. We position these as global brands which we want to build into premium brands. Northeast Asia We will make a full-fledged entry into the South Korean market by bringing expertise in marketing, R&D, and production technology to our South Korean venture, CJ Lion Corporation, and by strengthening our sales structure. In the future, we expect CJ Lion to serve not only as a base for expansion in Korea, but also as a business hub from which we can target the entire Northeast Asian economic zone, with its population of half a billion people in South Korea, Japan, and the coastal region of China. We will work closely with our local joint ventures, in terms of both technology and marketing, to develop products tailored to the environments and consumer preferences found in each country s market. We expect that the resulting local brands will enable us to gain a broad consumer base. Major Policies for 2005 In Thailand, we will groom Systema toothbrushes to be the number one brand, and promote the Systema brand as a total oral care brand that includes toothpaste and other major oral care products. Through aggressive investment in brand building, we are working to expand the overall scale of our oral care business. In Beauty Care and Household Products, we will concentrate on developing and strengthening marketing of global brands like Shokubutsu-Monogatari (Plant Story) body wash and Free & Free Damage Aid hair treatments for colored and damaged hair. In Malaysia, we will concentrate on fostering laundry detergents, toothpastes, and body washes as priority categories. In laundry detergents, we will use a two-brand strategy (premium and economy) to expand our market share, while in body washes we will work to make Shokubutsu-Monogatari (Plant Story) the number one brand through attractive product line extensions. In addition, we will strengthen ties with major retail chains to further enhance our in-store presence, as well as working closely with wholesalers to boost store coverage. Meanwhile, in Indonesia, we will strive to expand our market Special Topic share by focusing on toothpaste, shampoo, and dishwashing detergent as priority categories. In the shampoo sector in particular, we will further develop the Emeron and Zinc brands through formula improvements and product line extensions. In China, we will build Lion as our flagship brand with a focus on oral care. Using our Qingdao plant with its increased production capacity as a base, and concentrating on Shandong Province as our key geographical area, we will work actively to develop Tokko toothpaste and Systema toothbrushes. In South Korea, we see laundry and dishwashing detergents as our core category, with oral care as the key business for further expansion, and beauty care as a new market we want to develop. We plan to actively launch innovative new products using Lion s advanced technology, and to introduce global brands that are gaining popularity in the ASEAN region. In 2005, we aim to establish a strong foundation for product planning, development and sales. To facilitate this, we will strengthen the ties between Japanese researchers and production technicians and local management in South Korea, rebuild our sales structure, and ensure that these activities contribute to future growth. Meeting unmet needs: Top in Malaysia & Singapore; Free & Free Damage Aid in Thailand and Hong Kong In Malaysia, Top laundry detergent, with unique properties that support indoor drying, solves a problem experienced in many households and receives overwhelming support from consumers. As a result, in 2004, sales of Top detergent more than doubled from the previous year and we secured a significant share of the high added-value segment. The same product was also launched in Singapore in 2004 and enjoyed similar success. Free & Free Damage Aid hair treatment was introduced to the Thai market in January 2004, and to Hong Kong in June. This innovative product provides a solution to consumers who are troubled by damaged hair. It has gained wide popularity in both Thailand and Hong Kong, where hair coloring is in style. Both Top laundry detergent and Free & Free Damage Aid hair treatment are global-brand products that are also very well received in Japan for their highly differentiated concepts and proven effectiveness. Product promotion in front of Hong Kong store 23

26 Sustainable Development From Good Morning to Good Night, More Dreams for Your Life Since Lion s founding, our corporate philosophy has been to enhance the happiness and lifestyle of each and every customer by providing superior products that are useful in daily life. We also actively perform Responsible Care* 1 activities that fulfill our obligations to all of our stakeholders. Because Lion s main products are usually discharged with waste water, consideration for the aquatic environment is an important issue for us, and we were among the first to address this issue. We have consistently striven to reduce the burden that our products place on the global environment. For example, in the 1960s, we developed highly biodegradable AOS ( -olefin sulfonate) and introduced the world s first synthetic laundry detergent containing AOS. Then in the 1970s, we became the first company worldwide to launch phosphate-free laundry detergent, and we took a leading role in promoting the use of detergents without phosphates. In the 1990s, we developed a vegetable-derived detergent ingredient called MES, which is extremely biodegradable, and initiated a landmark shift from using non-renewable resources such as oil, coal or natural gas to using renewable, botanical ingredients. The issue of corporate social responsibility, which includes responsibility for the environment and contributing to society, is attracting more attention than ever. In the Value Innovation Plan Part II 09 (VIP II 09) that we began implementing in 2005, one central theme is the importance of always fulfilling our social responsibilities as a leading, environmentally-conscious company aiming to realize sustainable recycling-oriented society. Our new corporate slogan From Good Morning to Good Night, More Dreams for Your Life expresses Lion s desire to help customers realize more of their dreams and wishes by continuously providing products that support their daily life. Lion Corporation intends to enhance its internal organizational structures and systems, engage in company-wide environmental protection activities and develop eco-friendly products, contribute to local culture and communities, and work to further strengthen our awareness of legal compliance issues. Through these actions, we will do our best to justify the trust of all stakeholders, including shareholders, customers, trading partners, local communities and employees, and to achieve continuous growth. * 1 Responsible Care is a framework under which companies that handle certain chemical substances voluntarily engage in environmental, safety, and health management in every phase of their operations, including development, production, distribution, use, and disposal. In addition, it involves communication and activities aimed at increasing the public s trust in participating corporations. 24

27 Sustainable Development Environmental Protection Environmental Guidelines Lion has formulated new environmental guidelines that make the company s attitude toward environmental protection clearer. On August 1, 2004, we established an Environmental Conservation Office. We intend to upgrade the Lion Group's contributions toward environmental protection by instituting company-wide, comprehensive environmental management systems. Environmental Guidelines In order to promote sustainable society, the company will work voluntarily and proactively to reduce any burdens on the environment that result from its business activities. 1. Aiming for a sustainable society Set up an environmental management system and protect the global environment by continuously maintaining and improving the system. 2. Compliance with legal and other requirements Strictly comply with laws and regulations related to environmental protection. Also, establish and follow voluntary standards of conduct. 3. Environmental objectives and verification of progress toward attaining them Get an accurate understanding of how our corporate activity affects the environment. Establish targets for improvement to the extent that is technically and economically possible. Also, formulate and implement an environmental management program, and regularly verify the status of its implementation. 4. Publicize guidelines among all employees and promote all-lion activities Inform all staff, including employees of associated companies, of Lion's Environmental Guidelines. Work to raise awareness of environmental protection, and promote environmental management activities throughout Lion and associated companies. 5. Promote information disclosure Maintain and enhance communication with stakeholders connected with Lion's businesses. These Environmental Guidelines are available to be perused freely, and will be provided to anyone upon request. April 1, 2004 Reduction of Waste Products We have been working on reducing waste generation and recycling or reusing waste products in order to help create a recycling-oriented society. In our production division, we aim for even further qualitative improvements in the zero emissions* 1 status that all of our plants have already attained. Waste Volume Reduction and Improvements in Recycling In keeping with the spirit of the Basic Law for Promoting the Creation of a Recycling-Oriented Society, every division at Lion is working to reduce the amount of waste products it generates. Here are some examples of the efforts made by divisions in 2003: Production Division Consolidated production bases Reduced waste generation through the introduction of new technologies for manufacturing intermediary materials used in detergents Reduced waste by reusing effluents resulting from the cleaning of equipment in preparation for production switches Office and Research Divisions Reduced waste generation and increased recycling rate by instituting thorough separation of waste materials Expanded utilization of re-usable packaging for product deliveries Thoroughly tracked waste generation data, etc. As a result of these efforts, Lion succeeded in decreasing the overall amount of waste generated and in raising our recycling rate. In 2003, we reduced our final disposal volume* 2 by 84 tons compared with Overall Amount of Waste Generated (in tons) 8,000 7,000 6,000 5, ,011 7,139 6,411 6,391 6,573 5, Improving the Quality of the Zero Emissions Status Achieved by the Production Division Zero emissions status was achieved in 1999 at the Tokyo and Odawara factories, in 2000 at the Akashi factory, and in 2002 at the Chiba, Kawasaki* 3 and Osaka factories. Currently, Lion is working on improving the quality of the zero emissions status at these facilities by enabling the use of more efficient means of recycling waste products. * 1 Lion s definition of zero emissions: at least 99% of total waste products generated are re-used. Residue remaining after recycling or re-use is not taken into account. * 2 Final disposal volume: the volume of waste products disposed of as trash; does not include residue remaining after recycling or re-use * 3 The Kawasaki factory was closed in July

28 Sustainable Development PREVENTING GLOBAL WARMING AND POLLUTION OF AIR AND WATER Lion has established long-term goals related to the prevention of global warming, and we are taking concrete steps to achieve those goals. We have also devised a variety of measures for preventing air and water pollution. Initiatives aimed at preventing global warming The Third Session of the Conference of the Parties to the United Nations Framework Convention on Climate Change (COP3)* 1 was convened in Kyoto in At the conference, the Japanese government committed to reducing the nation s emissions of greenhouse gases* 2 between 2008 and 2012 to 6% below the 1990 amount. Based on that promise, Lion set its own 2010 target for greenhouse gas emissions at 10% below the 1990 level. In order to help achieve this target, each division has taken on its own independent measures, as shown below. Mainly, we are working on reducing greenhouse gases by reducing energy use. Production Division Consolidation of production bases Reduction of energy consumption through new technologies for producing intermediary ingredients used in detergent manufacture Use of innovative production technology to increase production capacity of detergent drying facilities while simultaneously cutting energy consumption Introduction of energy-efficient equipment, etc. Office and Research Divisions Reduction of electricity usage by making employees more aware of the need to turn off lights and equipment when not needed Thorough management of heating and cooling in buildings Installation of energy-efficient fluorescent lights Introduction of low-emission vehicles for business use, etc. Energy Consumption (in CO2 equivalents* 3 ) Index compared to 1990 base 100% 94% 93% 88% 84% 79% Total energy consumption 106,093 99,302 98,765 93,452 88,599 83,406 (Tons of CO2) 120, ,000 80,000 60,000 40,000 20, ,160 4,820 5,373 5,389 5,049 4,643 5,212 4, ,196 4,923 3,783 95,113 88,880 88,733 83,600 79,100 74, As a result of efforts like these, in 2003 we reduced our overall emissions of CO2 by 5,193 tons compared to the previous year, and by 5% compared to the 1990 index. In addition, we estimated the amount of chlorofluorocarbons and other greenhouse gases being used at each of our facilities, in freezers and fire extinguishers, etc., and have begun switching to other types of gas that are less prone to causing global warming. * 1 The United Nations Framework Convention on Climate Change: aimed at reducing future emissions of greenhouse gases, took effect in * 2 Greenhouse gases: gases such as carbon dioxide and methane, which are said to raise the earth s temperature. *3 CO2 equivalents: units of estimated carbon dioxide emissions, calculated on the basis of energy consumption by using a carbon dioxide emissions coefficient derived from a study by Japan s Ministry of the Environment. Preventing Air Pollution In order to prevent air pollution, Lion conducts environmental impact assessments and implements management controls and improvements as necessary. NOx emissions were on the rise at all of our plants due to the introduction of cogeneration facilities. In 2003, however, we succeeded in reducing them through careful management and stable equipment operation. Increased production levels at our Osaka factory caused dust levels to rise. In the future, Lion will focus on reducing overall emissions, including NOx and SOx. Protection of Water Resources Lion manages its water usage and discharge of effluents so as to protect the planet s water resources. We are working on further reducing the burdens we place on the aquatic environment. At Lion s Tokyo factory, we reviewed our waste-water management mechanisms and succeeded in conserving more water. Additional steps taken in our offices and research divisions included the introduction of more efficient, water-saving sanitation equipment. We further reduced both water usage and effluent volumes by consolidating production sites. We also succeeded in reducing COD* 4 by carefully managing effluents that result from the washing of production equipment. * 4 COD: Chemical Oxygen Demand. A water pollution index based on the amount of oxygen needed to oxidize and break down organic substances. Offices Research Factories *Some figures have been amended after scrutiny 26

29 DEVELOPING PRODUCTS THAT ARE IN HARMONY WITH THE ENVIRONMENT Lion has voluntarily established three principles that we follow when developing environmentally friendly composition of products. We are committed to developing high-quality, high-performance products that are friendly to the environment, and we work especially hard to protect the aquatic environment. Principle 1: Use highly biodegradable surfactants* 1 Lion developed its own surfactants, AOS* 1 and MES* 2. Because they are highly biodegradable, they do not remain in the environment for a long time. In our fabric softeners, too, we use highly biodegradable TES (esterquats based on triethanolamine). * 1 AOS ( -olefin sulfonate) is a readily biodegradable surfactant. * 2 MES (methyl ester sulfonate) is a vegetable-derived surfactant that is highly biodegradable. Its detergency is superior to that of LAS. Principle 2: Reduce the amount of organic matter generated with each usage We have been enhancing the effectiveness of our laundry detergents in order to reduce the amount used. One load of wash using our Top brand detergent generates about one fifth the amount of organic matter that would result from doing the same load using soap powder. Using less detergent causes less water pollution. Principle 3: Use vegetable-derived raw materials Lion developed MES, a surfactant made from palm and coconut oil, because it imposes less of a strain on environmental systems, and because it can be produced without fear of depleting natural resources. MES is used in Lion's Top, Heyaboshi (Hang-to-Dry Indoors) Top, and Blue Dia brands of laundry detergents, as well as in other products. It is highly biodegradable and has excellent detergency. Using a high-purity distillation method based on Lion s own original technology, we extract only the necessary substances from botanical materials and use them to make soaps, shampoos, and body washes under our Shokubutsu-Monogatari (Plant Story) label. Success at reducing the amount of material required to wash clothing g 25g 15g Amount of detergent required with 30 liters of water: ENVIRONMENTALLY RESPONSIBLE CONTAINERS AND PACKAGING As part of Lion s active promotion of the 3R's Reduce, Re-use, and Recycle we have implemented a variety of initiatives aimed at reducing the volume of containers and packaging that we use. REDUCE We have steadily reduced the volume of material used in containers and packaging. In the case of Top laundry detergent, for example, we achieved this by making the product itself more compact; we improved performance to the point that far less detergent is required for each load of laundry. Also, by redesigning the package, we were able to reduce the weight of the product container by 69%. REUSE Lion is working hard to increase the number of products that we sell as refills, in order to make effective use of resources and reduce household rubbish. As of the end of 2003, Lion sold 43 refill products, in a wide range of categories including shampoos, conditioners, dishwashing detergents, laundry detergents, and fabric softeners. RECYCLE Lion has developed technology that allows us to use recycled PET resin* 3 in transparent bottles, which was previously thought to be extremely difficult. We are also working on boosting the proportion of recycled paper that we use in our containers and packaging, including the use of cardboard boxes made of 100% recycled paper. In order to facilitate effective use of recyclable materials, we label containers so consumers can identify the materials they are made of* 4, and provide additional information that is useful for recycling plants* 5. Lion also promotes recycling by finding innovative ways to make it easier to separate different materials used in a single container. *3 PET (polyethylene terephthalate) resin is widely used for making containers for liquid products like beverages, detergents, etc. * 4 Under Japan s Law for Promotion of Effective Utilization of Resources, certain types of containers and packaging must bear symbols that indicate whether they are made of plastic, paper, PET, steel, or aluminum. * 5 Although it is not required to do so by law, Lion displays specific information about plastics and other materials used in packaging, in order to facilitate recycling. 27

30 Sustainable Development Social Contributions Lion Corporation wants to grow along with our customers, communities, and society. We work hard to contribute to society in many ways. For example, Lion supports education and academic activities, helps visually impaired citizens, and contributes to local communities by sponsoring a variety of cultural and social welfare activities. Education & Support for Academic Activities Our products are of great interest to dentistry and home economics associations, and we support education and research in these fields. In 2001, we established the Lion Dental Research Awards to support studies in preventive dentistry and to encourage young researchers. We established these awards at the International Association for Dental Research the world s largest dental research association and at four dental research groups in Japan. In each case, we present a certificate and a grant to a researcher who conducted a creative study. In the field of home economics, we present the Torajiro Kobayashi Award, in the form of a supplementary grant, to the winners of the Japan Society of Home Economics Award. In addition, we present Lion Award certificates and grants to outstanding research presenters selected at the annual conference of the National Home Economics Education Association, and Lion Awards to high school students who give excellent presentations at the research competition sponsored by the Future Homemakers of Japan. Concern for the Visually Impaired In order to ensure that our visually impaired customers can also use our products with confidence, in 1991 we began publishing a Braille edition of the Lion Product Catalog twice a year. We distribute it free of charge upon request. Later, we added large print and CD-ROM versions of the catalog. In November 2003, we began distributing an magazine called Lion Product and Lifestyle Information Oto (Audio) Mail, which is compatible with screen reading software for the visually impaired. The magazine is issued four times a year, and contains information that is useful for daily life, including information about new products. In addition, we make identifying indentations on our shampoo containers (including refills) so that customers can distinguish shampoo from conditioner even if their vision is impaired or if they have their eyes shut while washing their hair. Community Service Inviting Children from orphanage to View Sumida River Fireworks Event The roof of Lion s headquarters is an ideal place from which to view the Sumida River fireworks event held annually in Tokyo. We started a tradition of inviting children from a local orphanage to enjoy the display from this privileged vantage point, and having an employee volunteer put on a stuffed Lion suit to greet the children. We organized this event for the sixth time in 2004, and our employee volunteers enjoyed it along with the children. A Variety of Activities to Promote Oral Health Lion Foundation for Dental Health Lion established the Lion Foundation for Dental Health in 1964 as a means of contributing to society. The foundation promotes independent activities aimed at improving oral health by educating the public about oral care, and sponsors activities that promote preventive and therapeutic dentistry. In 2004, it marked 40 years. One example of the foundation s educational activities is the yearly Mass Tooth Brushing Exercise for Schoolchildren, that was started in The foundation also conducts dental health activities and lectures tailored to people in various stages of life, including groups of parents and children, kindergartens and schools, adults in their workplaces, senior citizens, and people with disabilities. In addition, it disseminates the results of studies on the relationship between oral health and overall health through various channels, including its independent activities, the foundation s website, and mass media. Mass Tooth Brushing Exercise for Schoolchildren 28

31 Consumer Relations Because Lion Corporation supplies items for daily household use, our relationship with our consumers is of top importance. We work hard so that we can always deliver superior products, enhance two-way communication, and satisfy our consumers. Systems for Providing Consumers with Superior Products Providing superior products that are useful in daily life is a crucial part of Lion s management philosophy. Ever since our founding, we have striven to supply our consumers with products that are reliable, safe, and convenient. In order to make that possible, we have instituted systems for assuring the quality of every product, at every stage from planning to sales. In other words, we have established systems that allow us to offer superior products. Flow of Lion s quality assurance system Product Planning Gather information about consumer needs and determine desired product quality Product Development Determine specific design quality and develop product Have consumers test of product before launch to confirm degree of satisfaction Production Control production processes so as to always be able to produce the same quality as the developed product Sales Understand consumers opinions and reflect them in product improvements and further development Interface with Consumers In 1971, we established our Consumer Center as the gateway for receiving questions, complaints, and opinions about our products, services, etc. Today, it continues to operate under the name Consumer Service Office. In order to satisfy our consumers, we provide appropriate and timely responses. Also, we have established systems for working on a company-wide basis to handle any issues that consumers have made us aware of by expressing their opinions. In July 2003, we added a consumer support section to our Japanese-language website, and made communication more convenient by beginning in earnest to receive questions by . At the same time, we posted an FAQ (frequently asked questions) section on our website. This allows consumers to confirm the answers to common questions about our products 24 hours a day, even outside the hours when our telephone support lines are operating. Ping-Pong System Product Planning Division Consumers Consumer Service Office Input of consumers opinions Search system Ping-Pong Plus Research & Development Division Production Division Consumer Service support system Office Division Turning Consumers Views into Action The opinions we receive from consumers are a precious resource. Our Consumer Service Office created a system for data-basing the comments we receive so that we can reflect consumers opinions in product improvement and development. We named this system the Ping-Pong System, because we want to have smooth, two-way communication with consumers. Product development; product improvement; product labeling improvement Products Information gathered through the Consumer Service Office is quickly communicated to each department and at the same time made available to all employees. This information is then put to use in product development and other areas. 29

32 Sustainable Development Employee Relations We do our best to create working environments that allow each employee to fully realize his or her potential. We do this by raising awareness of corporate ethics, establishing employee training systems aimed at increasing job satisfaction, and by offering support for the maintenance of physical and emotional health. Establishment of Corporate Ethics Committee After the adoption and publication of the Lion Group Charter for Corporate Behavior, we created the Corporate Ethics Committee in April Then, in order to enhance the committee s relationship with our internal auditing function, we put our Auditing Office in charge of corporate ethics and we assigned a corporate ethics manager to our Auditing Office in order to clarify accountability. To further spread and establish awareness of ethical concerns, we conduct thorough training at each employee level, and are reinforcing our monitoring activities. Employee Training Systems At Lion Corporation, we consider each individual employee to be an asset that has a decisive impact on the future of the company. For employees who want to study and improve their capabilities, we offer training geared toward the various employee levels, elective training, specialized training for specific job types, and self-development assistance programs. These programs help us keep employees motivated, especially through the self-development assistance program, which offers a wide range of choices. In Order to be a Healthy Company In February of 2000 we established our basic policy on health management. The company strives to create pleasant and comfortable working environments, and at the same time supports self-directed health management that respects each employee s values and lifestyle. In addition, we actively promote mental health by holding seminars on relaxation and communication skills, monitoring stress levels among individuals and within workplaces, educating employees about stress management, and offering individual counseling. Lion Employees Oral Health Program Since we recognize that dental health is an important part of overall health, we conduct dental examinations as part of regular Lion Employee Training System Management-level Employees Increasing job performance capability Seminars for each employee level Elective training Management training Marketing Finance Mid-level employee training Training of new hires Seminars for employees in specific jobs Specialized training for production division Specialized training for research and technical divisions Specialized training for office and marketing divisions Specialized training for sales division Worldwide Inspection of overseas distribution (advanced) Self-planned overseas study Reporting at overseas academic conferences Inspection of overseas distribution (basic) Correspondence courses for staff who want to use their talents internationally Registration of employees who want to use their talents internationally Self-development assistance programs Outside study Academic study within Japan Overseas study Research groups Study/Research groups Lion Challenge Cup Correspondence courses General education, Languages, Business skills, Acquisition of licenses/qualifications, Business career 30

33 Safety and Disaster Management Safety provides a basis for continuous development of our business activities. We began company-wide deployment of our Safety, Hygiene and Disaster Management System with the goal of having zero accidents and zero disasters among our employees, at all of our workplaces. Company-wide deployment of our Safety, Hygiene and Disaster Management System* 1 In 2003, Lion introduced a Safety, Hygiene and Disaster Management System that we have deployed throughout the company. The system s goals are: (1) organized action, (2) systematic performance of work, (3) clarification of rights and responsibilities, (4) legal compliance, and (5) identification of elements that could cause disaster. We built a companywide safety system, and each workplace is using that system as a foundation for active expansion. Our production and research divisions, in particular, are conducting risk assessments and linking the results to improvements in the handling of risky or harmful ingredients, operations and processes in their daily operations. A wide range of employees is involved in these efforts, including assembly line workers and office workers. In addition, by instituting horizontal activities that involve employees from multiple workplaces, we have lots of hands and eyes engaged in nipping danger in the bud. We also do risk assessments based on what we learn through our close call suggestion program in which we share examples of near accidents and come up with ways to prevent recurrence and through danger prediction training. Occurrence of Accidents in Facilities Number of Work-related Accidents (not including those related to commuting) (no. of incidents) (case) Production Division Research Division 7* 2 1 In addition, we rank our equipment in order of importance, and conduct regular inspections and preventative maintenance according to predetermined methods and schedules. Lion s managers use plan-docheck-action cycles, meaning they personally visit work sites and verify that each workplace is actually implementing its maintenance plans, and check the extent to which maintenance goals are being achieved. In other words, every member of the company whether top executive or assembly line worker cooperates to improve the level of safety, hygiene, and disaster prevention observed at Lion. Response to Emergency Situations Lion has written down, in manuals and policies directed at the entire Lion Group, the procedures to be followed by its organizations and individual employees in the event of a safety or environment-related emergency. In order to ensure that these procedures can actually be followed, the company regularly conducts educational and practice sessions. Examples of practical training include fire extinguishing, evacuation, and issuing of disaster alerts. Training sessions are conducted not only during weekday business hours, but also at night and on holidays. In order to prepare for all kinds of situations, drills are sometimes conducted under unusual circumstances, such as when only a few people are available to respond, or when only women are present. * 1 Safety, Hygiene and Disaster Management System: a system for ensuring that businesses conduct safety, hygiene and disaster prevention activities in their workplaces on an ongoing basis. Please refer to the Guideline Concerning Occupational Health and Safety Management Systems issued in 1999 by Japan s Labor Ministry (now called Ministry of Health, Labour and Welfare) * 2 Includes one fatal accident 31

34 Sustainable Development Research & Development Developing Products that Delight Consumers At Lion, we start by getting a good grasp of individual consumers needs and wants. Our Marketing Planning and Research and Development divisions work closely together to develop products that respond to those needs, are useful in everyday life, and can delight our customers. Organizational Structure Designed to Enhance Research Effectiveness Our research and development is conducted by Development Research Laboratories, which belong to each business unit and engage in product development, and by our Research & Technology Headquarters, which researches new technologies and develops basic technologies. Because each business unit coordinates planning, development and marketing functions for each product category, we can quickly develop products that respond to market demands. This structure also allows us to manage brands comprehensively. The diagram below shows the functions of the Applied Research and Research Supporting sections that make up our Research & Technology Headquarters. Based on close cooperation between technical and marketing units, the Research & Technology Headquarters provides solid support to the product development efforts of each business unit. We believe that our Research and Development Division has important roles to play in order to enable Lion to achieve continuous corporate growth. The division must anticipate upcoming changes from a long-term perspective, create new value through the development of overwhelmingly distinct technologies, and transform mature, existing businesses into growth businesses. Lion's Core Competencies Supporting the Creation of Innovative Products Materials Science Research With surface science, polymer science and reaction science as our core technologies, we develop next-generation cleaning and surface modification technologies, and new functional materials. Biological Science Research With a focus on advanced biotechnology and metabolism inhibition, we work on understanding the mechanisms that cause various afflictions such as hair loss, dermatological sensitivities, atopic dermatitis, and dental and gum diseases, and develop preventive and curative measures. Business Units (Oral Care, Beauty Care, Household, Pharmaceutical, Chemicals) Development Research Laboratories Works closely with Marketing Division to generate products that meet each customer s needs and are a source of great delight Research & Technology Headquarters Applied Research Creates the seeds of new technologies based on life science, surface science, polymer science, and process technologies Research Supporting Supports product and technological development through various means, including development of fragrances for products, research into human and environmental safety, and analysis of physical properties and mechanisms Process Development Research We develop technological innovations aimed at achieving high productivity in the manufacturing of major products like toothpastes, laundry detergents and fabric softeners, while at the same time reducing environmental burdens imposed by manufacturing processes. We also develop things like technologies that support new delivery formats and manufacturing processes for our core surfactants. Aromatic & Perfumery Research We start by analyzing trends in people's preferences regarding fragrances, and develop fragrances and flavors that fit each product concept. In addition, we develop new technologies that make use of fragrances. Human Safety Evaluation Research We evaluate the safety of our products for humans and for the environment, so that customers will be able to use our products with confidence. We also release Responsible Care information in a timely manner, both within the company and to the outside. Analytical Research We use the latest analytical techniques to solve technological problems and support product development through structural analysis of materials, exploration of the mechanisms behind phenomena, and development of new ways to analyze a compound s components. 32

35 Corporate Governance Our Basic Thinking and Progress in Implementing Policies The basic aim of our Value Innovation Plan Part II 09 (VIP II 09) is to increase corporate value, i.e. shareholder value. In order to realize that goal, we are working on enhancing our corporate governance system. We know that we must separate the executive and supervisory functions of our management in order to increase transparency, bolster the effectiveness of management s supervisory function, and speed up decision-making. At Lion, we use an auditing system for supervising our corporate management. As of this fiscal year, we moved forward with the separation of executive and supervisory functions by introducing an executive officer system. In the past, the Board of Directors handled management decisionmaking and supervisory functions as well as job execution. We have now separated these functions so that the Board of Directors is responsible for decision-making and supervisory functions while the executive officers are in charge of job execution functions involving the various business units and other key business areas. In addition to strengthening the Board s supervisory function, this new system reinforces our ability to respond to changes in the business environment by speeding up both decision-making and job execution. Moreover, as part of our overall efforts aimed at enhancing and reinforcing an effective corporate governance system, we established a Management Evaluation Committee to allow us to reflect the evaluations and opinions of outside experts as we determine our future management. Lion s Corporate Governance System Shareholders Meeting Management Evaluation Committee Report Management Conference Opinions and advice on legal compliance and management policies Suggestions Board of Directors (Management Supervision) Decisions on execution of key job execution issues Executive supervison of directors Supervision of executive officers Report Executive Officers (Job Execution) Commission Audit Auditors (Compliance Audit) (Business Audit) Opinions and advice on legal compliance Audit Accounting Auditor Business Units / Functional Section (Job Execution) Audit Audit Dept. (Internal Audit) Spreading ethics awareness, and keeping it Corporate Ethics Committee 33

36 Sustainable Development Board of Directors, Executive Officers and Corporate Auditors As of March 30, 2005 Board of Directors Seated from left: Sadayoshi Fujishige, Michinao Takahashi, Hiroyuki Hirashima, Yasuhisa Kinugasa, Makoto Imai Standing from left: Tetsuo Yamada, Shuji Yamada, Kazuo Ohbu, Naokazu Kubo, Norihiro Ohno Executive General Managers in Charge of Operating Segments From left: Kazuo Obayashi, Yasunobu Horiguchi, Haruo Iwasaki, Naokazu Kubo, Kenjiro Kobayashi, Yuji Watari, Keikichi Sugiyama 34

37 Representative Director and Chairman Michinao Takahashi Chairman of the Board of Directors Meeting Representative Director and President Sadayoshi Fujishige Chief Executive Officer Representative Director and Executive Vice President Hiroyuki Hirashima Assistant to President Pharmaceutical Products Division, International Division (including general overseas affairs), Purchasing Headquarters, Corporate Planning, and Strategic Business Development Representative Director and Senior Executive Director Yasuhisa Kinugasa Logistics Planning & Development, Finance, System, Public Relations, and Investor Relations Executive Directors Makoto Imai Chemicals Division; Executive General Manager of Production Headquarters Shuji Yamada Secretary, Personnel, General Affairs, Legal Affairs, CSR and Corporate Ethics Tetsuo Yamada Home Products Business Kazuo Ohbu Executive General Manager of Research & Technology Headquarters Naokazu Kubo Executive General Manager of Home Products Sales Headquarters Director Norihiro Ohno Director of Corporate Planning Department Standing Corporate Auditors Yasutaka Hashimoto Tsuneo Ohashi Corporate Auditors Kosaku Onishi Masakazu Matsuo Executive Officers, Senior Eiji Natsukawa Director of Home Products Business Planning Department Haruo Iwasaki Executive General Manager of Pharmaceutical Products Division Yasunobu Horiguchi Executive General Manager of Chemicals Division Executive Officers Mitsuharu Kachi Executive General Manager of Purchasing Headquarters Teruhisa Satsuki Director of Research Planning & Administration Department, Research & Technology Headquarters Kenjiro Kobayashi Executive General Manager of Oral Care Products Division Yuji Watari Executive General Manager of Beauty Care Products Division Keikichi Sugiyama Executive General Manager of Household Products Division Takemi Miyasaka General Manager of Tokyo Sales Head Office, Home Products Sales Headquarters Kunio Okanaga General Manager of Osaka Sales Head Office, Home Products Sales Headquarters Kazuo Obayashi Executive General Manager of International Division Hirofumi Kanao Director of Production Coordinating Department, Production Headquarters 35

38 Management s Discussion and Analysis INTRODUCTION LION's Business Lion is a leading company in the fields of cleanliness, health care and beauty care. We develop, manufacture, and sell a wide-range of products, mainly personal care and household products, in Japan and other Asian nations. The majority of our business activities belong to the following three divisions. Home Products As Lion s largest core business, Home Products generates about 75% of the company s net sales. Japan s household products market is a fiercely competitive market comprising numerous product categories. Lion offers products in 50 categories that together amount to a 1.6 trillion market. Unit prices have been dropping for several years because of the overall deflationary trend in the Japanese economy. However, volume has been steadily growing, so sales have remained little changed. Within this household products market, we participate in three domains: Oral Care Products, mainly toothpastes and toothbrushes, Beauty Care Products, such as shampoos and beauty soaps, and Household Products such as laundry and dishwashing detergents. As of the end of 2004, we offered products under 44 brand names, in 50 categories. Some of our toothpastes, toothbrushes and beauty soaps are the top sellers in their category, and many of our other products rank among the top products in their respective categories. In addition, we have established joint ventures with reputable companies overseas, mainly within Asia. For more than 40 years, we have been manufacturing and selling Lion products, almost all of which are products for household use, through international partnerships aimed at Pharmaceutical Products 10.4% Sales by consolidated segment for the fiscal year 2004 Chemicals 10.7% Other Businesses 4.5% Home Products 74.4% mutual prosperity. In December, 2004, we acquired the Home & Personal Care Division of CJ Corporation, in South Korea, and began expanding our overseas business more actively. Lion s standing in major household products markets in Japan: 2004 Toothpastes Toothbrushes Beauty soaps (including liquid hand soaps) Antiperspirant deodorants Laundry detergents Fabric softeners Dishwashing detergents Market size in Japan (In billions of yen) Lion s ranking in the market Pharmaceutical Products Despite progress toward deregulation in the last several years, Japan s pharmaceutical industry basically remains subject to strict regulations that govern development, production and sales. There are two main categories of pharmaceutical products sold in Japan: prescription drugs, which can only be purchased at a pharmacy with a doctor s prescription, and OTC (over-the-counter) drugs, which do not require a prescription and are sold by general retailers as well as pharmacies. We mostly handle the latter, whose prices are set freely in the market, rather than prescription drugs, whose prices are regulated by the Health Insurance Law. Accordingly, we can expect to remain largely unaffected by future revisions of National Health Insurance drug prices. Japan has an enormous pharmaceutical market. Worth 6 trillion, it is the second largest in the world, amounting to 17% of the world market for pharmaceutical products. Lion participates in the OTC portion of this market, which is worth about 800 billion. Although the OTC market has been shrinking in recent years as a result of the deflationary trend in the Japanese economy, we believe it will start growing again as Japanese society continues to age, due to a surge in self-medication resulting from health care system reforms and increased health-consciousness among the public. Sales from the Pharmaceutical Products Division currently make up about 10% of Lion s net sales, but we expect that the division s sales in 2005 will increase by 50% over the previous year due to the acquisition of Chugai Pharmaceutical Co., Ltd. s OTC business. There are few areas of overlap between the new business and our existing business, and we expect to reap significant synergy effects. Our pharmaceuticals business also includes items that can be purchased at convenience stores and other general retailers (Source: survey conducted by Lion Corp.) 36

39 Major pharmaceuticals markets in which Lion participated in 2004 Analgesics Eyedrops Analgesic and anti-inflammatory products Market size in Japan (In billions of yen) Lion s ranking in the market (Source: survey conducted by Lion Corp.) Chemicals Our chemicals business offers a variety of functional products, including mainly surfactants, oleo-chemicals and carbon compounds. As a chemicals manufacturer, we play a major role in solving the environmental issues and other problems that Lion s industrial clients face. We supply manufacturers in Japan and abroad with a number of industrial chemical products which, unlike products like toothpastes and detergents, are rarely seen directly in daily life. Other Businesses Most of our business in this category consists of construction contracting for manufacturing facilities, etc., building and other property maintenance, and shipping and storage operations. Because our Food Products business has become less important as a result of restructuring, this fiscal year we began including foods in the Other Businesses category. Management Principles We believe that everything starts in the marketplace. Based on this idea, we see Lion as having a two-fold corporate mission: providing customers with products and services that offer increased satisfaction in the pursuit of cleanliness, health and beauty, and actively contributing to society. We intend to maintain positive, healthy relationships with all of our stakeholders, including shareholders, customers, trading partners, surrounding community members and employees. While striving to further increase corporate value, we will enhance corporate governance, make our management highly transparent and conduct prompt and appropriate information disclosure, and execute our business activities with concern for environmental protection and other social responsibilities. We believe that our top priority in terms of business performance is the continuous, stable return of profits to shareholders, which is to be achieved by increasing our consolidated earning capacity. In order to boost corporate growth potential and build a durable business foundation, we will retain a portion of our profits to invest in R&D and production facilities, and to use for acquiring outside resources Forward-Looking Statements In this annual report, all sentences containing words such as "believe," "anticipate," "estimate," "expect" or any similar words or expressions, as well as all numbers related to future earnings, constitute forward-looking statements that management made using management's best judgment and the maximum information available at the time the report was created. Such statements are not historical facts. The company s actual future earnings may differ greatly from these estimates and predictions as a result of uncertain factors in the business environment or as a result of various risk factors that are mentioned later in this annual report. RESULTS OF OPERATIONS Business Environment On the whole, Japan's economy moved toward recovery in the fiscal year through December 2004, thanks to strong private-sector capital investment and exports. This was evidenced by a gradual increase in consumer spending. However, the recovery appeared to be hindered in the second half of the fiscal year by such factors as a surge in crude oil prices. Most of the Lion Group s business is in the domestic market for daily-use consumer goods. Although this market seems to have stopped shrinking, the continued decline of prices at retail outlets, unfavorable weather, and natural disasters combined to make the business environment a very difficult one. Overview In this tough environment, the Lion Group strove to develop our main brands in line with our Value Innovation Plan Part II (VIP II), which is aimed at increasing corporate value. We achieved a slight increase in net sales compared to the previous year. We also succeeded in establishing a basis for future growth, by acquiring two new business units that we integrated into our core businesses. We actively pursued reductions in manufacturing costs and decreased fixed expenses, for example by trimming our payroll. We invested the resources that were freed up through these actions in building up our main brands and developing new products, so our operating income margin declined to 2.0%. This term we posted a net loss of 4,723 million, but this was because we posted extraordinary losses of 13,560 million, including a one-time write-off of goodwill related to the acquisition of Chugai Pharmaceutical Co., Ltd. s OTC business. 37

40 Net sales Cost ratio Operating income margin Net income (loss) Earnings (loss) per share basic* (in yen) (in millions of yen or %, except earnings per share) , % 2.0 (4,723) (16.66) , % , *See note 2 (m) of the Notes to Consolidated Financial Statements , % 2.7 5, Newly Included Consolidated Subsidiaries and Affiliated Companies In the fiscal year ended December 2004, Lion added CJ Lion Corporation, a household products manufacturing and sales company in South Korea, as one of our consolidated subsidiaries. During the term we also removed Lion Oleochemical Co., Ltd. from the scope of consolidation. Net Sales Our net sales in this fiscal year increased slightly, relative to the previous year, to 309,514 million. We achieved this increase by focusing on priority brands and moving forward with business structure reforms. Sales rose primarily in the areas of toothbrushes, liquid hand soaps, laundry detergents and eyedrops. Cost of Sales Our cost of sales increased by 179 million to 149,150 million, due to the increase in net sales and other factors. Our cost ratio decreased 0.1 percentage point from 48.3% to 48.2%. This fiscal year, we aggressively promoted measures to reduce product costs, including streamlining of product formulations and lowering of purchasing costs. We also implemented group-wide cost-cutting measures that included improving yields at production plants, trimming manufacturing expenses, and other streamlining measures at affiliated companies as well as at Lion Corporation. As a result, in the two-year period from January 2003 to December 2004 we succeeded in reducing costs by 9 billion. On the other hand, because a surge in crude oil products caused materials costs to rise, and because changes in our sales structure pushed up our cost of sales, the cost of sales ratio declined by only 0.1 percentage point. Selling, General and Administrative Expenses This fiscal year, our selling, general and administrative expenses increased 3.1% to 154,341 million. The main reasons for the increase in selling, general and administrative expenses were development costs associated with the launch of new products, and sales and marketing expenses made necessary by falling retail prices amid intensified competition. (in millions of yen) Selling, general and administrative expenses Sales incentive expenses Sales promotion expenses Freight and storage expenses Advertising expenses Salaries and allowances R&D expenses Other % to net sales % of net sales % of net sales 154,341 12,575 58,719 15,336 21,536 14,119 7,844 24, % ,708 12,154 53,465 15,275 21,735 14,142 7,835 25, % ,393 12,740 50,521 15,454 20,642 14,572 8,030 24, % Net Sales 400,000 ( million) Cost Ratio 60 (%) SGA Expenses to Net Sales 60 (%) , , , * Manufacture prices are revised in 2001, 2002, 2003 and 2004.

41 Operating Income Our operating income decreased by 39.0% this fiscal year to 6,021 million. Our operating income margin declined from 3.2% to 2.0%. Although we promoted total cost reduction centered on trimming manufacturing costs, we were affected by the increases in raw materials costs and in sales and marketing expenses. Other Income and Expenses We posted an extraordinary loss amounting to 13,560 million. This figure includes a one-time write-off of goodwill associated with the acquisition of Chugai Pharmaceutical Co., Ltd. s OTC business, early adoption of assetimpairment accounting, and the cost of a voluntary early retirement program. Income Taxes This fiscal year, our income taxes amounted to 1,689 million. This was 1,574 million less than the previous year because we posted a net loss before income tax. Net Income Because we posted an extraordinary loss, we ended up with a net loss of 4,723 million for this fiscal year, representing a big drop from last year s profit. The net loss per share was OPERATING REVIEW BY SEGMENT Home Products Net sales in this segment amounted to 230,398 million, down 0.3% from the previous year. The Japanese household products market in which the Lion Group participates seems to have finished shrinking in scale, but competition among manufacturers remains as fierce as ever, and retail prices are still on the decline. In addition, unfavorable weather affected the already harsh business environment. Given this environment, we worked on developing our priority brands by introducing distinctive new products and actively investing in marketing. Although we made progress with total cost reduction, especially in the area of manufacturing costs, our operating income decreased to 11,249 million (down 32.2% from the previous year) because we invested actively in advertising and sales promotion aimed at developing new products and our priority brands. Also, on Dec. 30, 2004, we acquired the Home & Personal Care Division of South Korea s CJ Corporation, in order to expand our business in Northeast Asia (Japan, coastal areas of China, and South Korea). Oral Care Products We introduced three new toothpastes this term: Dentor Systema with a new antibacterial agent to prevent periodontal disease, Prime Stain-Off, to restore teeth to their original sparkling whiteness, and Clinica Toothpaste for Caries Risk Control, which promotes remineralization of tooth enamel. However, sales remained little changed from the previous year due to fierce market competition. In the toothbrush market, we added a hard-bristle version to the Dentor Systema series, which enjoyed solid sales. We also launched Between Maxi, whose super-fine, serrated-cut bristles offer the comfort of ultra-clean brushing, and an improved Clinica toothbrush with durable bristles that keep their shape and their ability to remove plaque for a long time. Toothbrush sales exceeded the previous-year level by quite a bit. Operating Incom/Operating Incom Margin ( million, %) 10,000 5 Earnings (Loss) Per Share 40 ( ) Net Sales in Home Products 300,000 ( million) 8, , ,000 6, ,000 4, ,000 2, , (44.32) (16.66) Operating Income Margin (right scale) * Manufacture prices are revised in 2001, 2002, 2003 and

42 Mouthwash sales increased greatly over the year before, thanks to the launch of Clinica Dental Rinse for Caries Risk Control, which prevents tooth decay from beginning and hinders its progress where it has already occurred. All told, oral care product sales increased 2.8% over the previous year, to 45,358 million. Beauty Care Products In the shampoo and conditioner sector, we worked hard at sales promotion with the goal of boosting Shokubutsu- Monogatari (Plant Story) and Soft-in-One, but the competition was intense, and sales declined compared to the previous year. In the hair styling arena, we introduced refill and minisize versions of Free & Free Damage Aid for color-treated hair. Nevertheless, sales did not rise to the previous year s level due to stagnation in the overall market. Among hair-nourishment treatments, we enjoyed steady sales of medicated Mouhatsuryoku Innovate, which stimulates the growth of strong hair that does not easily fall out, but sales did not grow due to overall decline in the scale of this market. Sales of liquid hand soaps grew significantly compared to the year before. This was partly due to a new addition to our Kireikirei series, Kireikirei Medical Foaming Hand Soap, which was designed to be easy to use for small children who have trouble making soap lather. This product was very well received by customers. Amid intensified competition in the market for antiperspirant deodorants, we introduced Ban Powder Spray, which effectively counters the sticky, uncomfortable sensation that accompanies perspiration. This was a hit with customers, and sales rose slightly compared to a year earlier. As a result, net sales of Beauty Care Products amounted to 35,109 million, down 16.7% from the previous fiscal year. Household Products In laundry detergents, we introduced an improved version of Blue Dia with enhanced stain removal action. Top with enzymes that break down skin oils and Heyaboshi (Hangto-Dry Indoors) Top remain popular with consumers. Sales grew significantly compared to the year before. We released an improved version of Super Temanashi Bright bleach that is even more effective at removing yellowing and grime. It and Temanashi Bright sold well, and bleach sales increased quite a bit relative to the previous year. In the fabric softener market, competition was intense. Although we introduced new Day-Fresh Soflan with longlasting fragrance, softness and deodorizing power, sales did not increase. In dishwashing detergents, we released Charmy Liv with fruit acids to boost cleaning action. Still, sales of dishwashing detergents remained near the previous year's level. Of our household cleaning products, while enjoying steady sales of Toire no Look (toilet bowl cleaner), which removes even stubborn stains under the rim, we released the new Kabitori Look Powerful Gel, a mold-removing gel that adheres strongly to surfaces and dissolves mold effectively. Overall, sales of household cleaners rose slightly year-on-year. In the area of cooking aids, we began selling two improved products in our Reed series: storage bags and freezer bags with zip-lock seals that are easier to open and close. However, our main Reed product cooking paper was affected by tougher competition, and overall sales declined. As a result, net sales in Household Products rose 3.5% from the previous year to 149,930 million. Pharmaceutical Products This fiscal year, we took the initiative of introducing new products that use unique technology to provide high added value, and have the potential to create new demand. Sales in Pharmaceutical Products increased 1.9% over the previous year to 32,162 million. Although we reduced total costs, particularly manufacturing and logistics expenses, we needed to spend more in order to develop our new products and major brands, so operating income decreased 7.2% from the previous year to 2,231 million. Also, on Dec. 29, 2004 we acquired Chugai Pharmaceutical Co., Ltd. s OTC business in order to strengthen our Pharmaceutical Products division. In the analgesics market, we implemented a sales promotion campaign for Bufferin A, emphasizing its quick effectiveness and gentleness on the stomach, but because the overall market was stagnant, sales fell below the previous year s level. In cold medicines, we introduced new Bien Syrup S under our Kids Bufferin Cold Syrup line. We also added an orange-flavored version of the Cold Syrup, and sales increased nicely. In the eye care field, we enjoyed good sales of Smile 40- EX eyedrops containing three types of vitamins, and of New Smile Contact with a cornea-protecting ingredient. Eye care sales increased greatly compared to a year earlier. As for anti-inflammatory poultices, we introduced new Halix ID Clear Plasters (both cool and hot types), which are inconspicuous because they are transparent and have no 40

43 smell. Plaster sales grew nicely. We also saw a good increase in sales of gastrointestinal medicines. We launched new Stoppa Stomachic Medicine while enjoying good sales of Stoppa Anti-Diarrhea Medicine. Both products can be taken anywhere, without water. Chemicals Our Chemicals division faced a harsh business environment as a sharp rise in crude oil prices pushed up the cost of raw materials while retail prices declined. Faced with this situation, we actively promoted highly distinctive products both in Japan and overseas. Our chemical sales amounted to 33,108 million, up 4.7% from the previous year. Although we made advances in improving profitability through steps like streamlining manufacturing processes and materials costs, operating income was 1,623 million, a decrease of 19.8% year on year. In the surfactants field, we introduced a new nonionic surfactant for the still-expanding Chinese market. Meanwhile, in Japan, we aggressively promoted sales of urethane ingredients. Overall, we achieved a slight increase in sales compared to the year before. In oleo-chemicals, the characteristics of our high-purity, plant-derived fatty-acid methylesters have found favor among industrial clients in Japan and abroad for use in the manufacture of detergents. These products sold well. Carotene has attracted attention as a naturally derived ingredient that fights cancer. It is widely used in health foods, and sales were good. Demand for electro-conductive carbons is growing, mostly for use in office equipment, automotive parts, and nickel metal-hydride (NiMH) batteries used in hybrid electric vehicles. Sales greatly exceeded the previous year s results. Net Sales in Pharmaceutical Products ( million) 35,000 Other Businesses Due to an increase in projects completed by our construction contracting business, sales in this segment increased 82.1% from the year before, to 13,844 million. Operating income was 258 million, down 13.7%. Please note that our Foods division is now included in this segment as a result of restructuring. Due to this change, Other Businesses sales grew by 3,867 million this term, while operating income declined by 194 million. LIQUIDITY AND CAPITAL RESOURCES Liquidity We, the management of Lion Corporation, believe that our ability to generate cash from operating activities and to continue investing in growth areas is the foundation of Lion s financial strength and an important element that supports the enhancement of Lion s corporate and shareholder value. We believe that in the fiscal year ending December 2005, Lion will be able to secure sufficient liquidity to allow the company to maintain and expand its operations. Liquidity is one of the most important elements needed to sustain corporate activities. We continue to strive to maintain appropriate liquidity, to secure the funds needed to support business activities, and to preserve a healthy balance sheet. Cash Flows Cash flows generated by operating activities resulted in an overall increase of 4,270 million. Although cash flow decreased because we posted a net loss before income tax and because of a decline in accounts payable, it rose overall because of such factors as increased depreciation Net Sales in Chemicals ( million) 50,000 30,000 40,000 25,000 20,000 30,000 15,000 20,000 10,000 5,000 10,

44 and amortization expenses and smaller accounts receivable. Cash flows from investing activities resulted in a decrease of 10,059 million, due to outlays for the acquisition of both tangible and intangible assets and for the acquisition of subsidiary shares. Cash flows from financing activities included income from long-term debt, but after making dividend payments and repurchasing Lion s treasury stocks, we ended up with a decrease of 1,553 million. As a result, our balance of cash and cash equivalents at the end of the fiscal year, factoring in the effect of exchange rate fluctuations, was 24,480 million, down 7,520 million from the end of the previous fiscal year. Cash flows from operating activities Cash flows from investing activities Cash flows from financing activities Effect of exchange rate changes on cash and cash equivalents Net change Cash and cash equivalents at end of year The balance sheet We, the management, continually strive to maintain a highly liquid balance sheet. Total assets Current ratio Debt-to-equity ratio Book value per share (in yen) ,270 (10,059) (1,553) 104 (7,237) 24, , % ,753 (5,023) (9,856) (217) 1,654 32,001 (in millions of yen, %, yen) , % (in millions of yen) ,109 (18,686) (8,433) (104) (1,115) 30, , % As of the end of fiscal 2004, our total assets stood at 235,405 million, down 5.5% from the previous year. Current assets decreased 18.7% to 113,019 million. Inventories increased due to the increase in subsidiaries, but cash, deposits, and marketable securities decreased because of the acquisition of new businesses. Intangible assets increased by 8,454 million to 10,547 million, partly as a result of these acquisitions, while property, plant and equipment decreased somewhat, to 68,641 million, due to asset-impairment accounting for land, etc. In addition, our total liabilities decreased 2.6% to 132,167 million because a drop in current liabilities outweighed a rise in long-term borrowings. Meanwhile, our shareholders equity decreased 9.9% to 101,021 million because we posted a net loss and increased our holdings of treasury stock. Financial Strategies The management of Lion Corporation formulates financial strategies aimed at minimizing the company s cost of capital and maximizing Lion s corporate and shareholder value. Debt financing and borrowings At Lion, we consider opportunities for expanding the company s business and determine the best amount of funds to raise and which methods to use in light of our cash flow situation and the market environment at any given time. At the end of fiscal 2004, our short-term borrowings totaled 6,742 million and long-term borrowings amounted to 6,277 million. Dividend policy As Lion s management, we believe that our top priority is the continuous, stable return of profits to shareholders, Current Ratio (%) Capital Expenditures ( million) Total Assets ( million) ,000 23, ,000 10, , , ,000 5, ,000 50,

45 which is to be achieved by increasing our corporate group s earning capacity. This fiscal year, Lion posted a net loss of per share, and in accordance with the above policy, we decided to pay a dividend of 8 per share. Rather than paying according to a fixed payout ratio or dividend yield, we have a policy of paying a steady amount of dividends. We intend to maintain this policy in the future, while always taking into account the company s needs related to research and development, capital investment and internal reserves. Stock Repurchases In fiscal 2004, we repurchased our own shares from the market at a cost of 5,548 million. MARKET RISKS Foreign Currencies Lion procures a minimal amount of raw materials and products from overseas, for which we pay in foreign currencies. Thus, the risk of fluctuations in currency markets to which we are exposed is negligible. In addition, we make use of currency exchange forward contracts to avoid currency fluctuation risks. Currency exchange forward contracts related to our day-to-day operations are concluded in accordance with our in-house regulations by our Finance Department or by the administrative division of our subsidiaries. Stock Prices Lion holds various listed and unlisted shares that are exposed to share-price fluctuation risk. As we employ current-value accounting, we have evaluated all of our listed shares at their market values as of the end of this fiscal year, and the difference between the book values and current values are recorded as part of the shareholders equity on our balance sheet. We have posted a total of 15,484 million as of the end of the fiscal year in listed shares on our balance sheet. Of this, 3,606 million representing the difference between the book values and the market values as of the end of this fiscal year, excluding its expected future taxes under tax-effect accounting, was posted as unrealized holding gains on other securities in our shareholders equity. Derivative Financial Instruments Derivative trading itself is accompanied by its own risks. The most important of these are market risks and credit risks. Market risk refers to the chance that a particular trading position will incur a profit or loss due to changes in the market. The exchange forward contracts used by Lion are vulnerable to currency fluctuations. Credit risk refers to the possibility that a trading partner will fail to meet its obligations, thereby making it impossible for us to secure anticipated future results were we to continue trading with the partner. Because we conduct derivative trading with banks that have appropriate credit ratings, however, we believe there is negligible risk that our trading partners will fail to meet their obligations. In addition to the risks described above, we may be exposed to non-financial or imponderable risks in the course of our normal business operations. Such risks include country risks, credit risks and legal risks, but because of their unpredictable nature, we do not address them in this annual report. As of the end of this fiscal year, we were not involved in any ongoing litigation. Total Shareholders' Equity/Equity Ratio ( million, %) 150, , , Equity Ratio (right scale) 0 43

46 11-Year Selected Consolidated Financial Data Lion Corporation and Consolidated Subsidiaries Income statement data: Net sales Cost of sales Gross profit Selling, general and administrative expenses Operating income Income (loss) before income taxes Net income (loss) Balance sheet data: Total assets Property, plant and equipment, net Long-term liabilities Total liabilities Total shareholders' equity Other selected data: Capital expenditure *4 R&D expenditure Depreciation and amortization *4 No. of employees Common share data: Earnings (loss) per share - basic *1 Earnings per share - fully diluted Dividends paid per share Book value per share *2 No. of common shares outstanding No. of common shares - fully diluted Financial ratios (%, times): As a percent of net sales: Gross profit Selling, general and administrative expenses Operating income Income (loss) before income taxes Net income (loss) Return on equity Current ratio Debt-to-equity ratio Inventory turnover 2004 * * * *3 309, , , ,341 6,021 (5,017) (4,723) 235,405 68,641 35, , ,021 23,266 7,844 14,352 5,721 (16.66) ,515, % (1.6) (1.5) (4.4) x 308, , , ,708 9,865 13,985 10, ,199 69,262 32, , ,105 7,290 7,835 7,853 5, ,515, % x 308, , , ,393 8,398 10,477 5, ,210 73,225 43, , ,871 6,697 8,030 8,698 5, ,515, % x 308, , , ,712 6,276 (25,464) (13,856) 243,405 78,275 41, , ,587 7,558 8,845 9,420 5,620 (44.32) ,289, % (8.3) (4.5) (11.7) x *1 See note 2 (m) of the Notes to Consolidated Financial Statements. *2 Following the amendments to accounting rules in 2001, the figures for book value per share are calculated using the number of shares issued minus the treasury stocks. *3 Manufacture prices are revised in 2001, 2002, 2003 and *4 Includes the effects of intangible assets. 44

47 45 332, , , ,428 8,195 10,145 8, ,736 81,670 19, , ,563 7,986 9,425 10,170 6, ,332, % x 342, , , ,353 7,954 10,544 5, ,052 86,914 20, , ,363 5,910 10, ,896, % x 346, , , ,191 7,138 8,030 4, ,149 90,665 20, , ,221 8,543 11, ,399, ,197, % x 355, , , ,672 8,336 9,131 5, ,341 94,843 26, , ,192 10,530 11, ,399, ,266, % x 345, , , ,407 8,070 9,024 4, ,893 97,118 57, , ,705 13, ,357, ,810, % x 339, , , ,908 9,632 9,861 4, , ,666 67, ,583 95,594 13, ,489, % x 331, , , ,575 6,852 11,559 6, ,265 96,623 71, ,887 85,377 13, ,866, % x Millions of yen (Except per share amounts)

48 Consolidated Balance Sheets Lion Corporation and Consolidated Subsidiaries December 31, 2004 and 2003 Thousands of U.S. Millions of yen dollars [Note 1 (b)] ASSETS Current assets: Cash and time deposits Short-term investments [Note 3] Trade notes and accounts receivable Inventories [Note 4] Deferred income taxes [Note 6] Prepaid expenses and other current assets Less allowance for doubtful accounts Total current assets 27,263 55,528 24,966 2,790 4,407 (1,936) 113,019 30,929 19,998 57,673 22,393 4,545 5,171 (1,714) 138,996 $ 261, , ,583 26,777 42,293 (18,583) 1,084,536 Property, plant and equipment: Land Buildings and structures Machinery and equipment Construction in progress Less accumulated depreciation Property, plant and equipment, net 20,190 62, ,138 3,515 (151,513) 68,641 24,338 60, ,477 1,381 (152,254) 69, , ,929 1,287,196 33,732 (1,453,922) 658,685 Intangible assets: Trademarks [Note 2(h)] Patent rights and other [Note 2(h)] Total intangible assets 8,098 2,448 10,547 1, ,092 77,717 23, ,210 Investments and other assets: Investment securities [Note 3] Investments in non-consolidated subsidiaries and affiliates Long-term loans receivable Deferred income taxes [Note 6] Other Less allowance for doubtful accounts Investments and other assets, net 17,868 7, ,836 1,295 (292) 43,197 17,329 6, ,457 1,200 (357) 38, ,470 68,710 3, ,559 12,428 (2,808) 414,519 Total assets 235, ,199 $ 2,258,950 See accompanying notes to consolidated financial statements. 46

49 LIABILITIES AND SHAREHOLDERS' EQUITY Thousands of U.S. Millions of yen dollars [Note 1 (b)] Current liabilities: Short-term loans payable [Note 5] Current portion of long-term debt [Note 5] Trade notes and accounts payable Other payables Accrued income taxes Accrued expenses Allowance for losses on gurantees Other [Note 6] Total current liabilities 6, ,440 8, ,446 4,529 96,211 7, ,693 6,318 2,230 26, , ,464 $ 64, ,435 77,593 8, ,777 43, ,250 Long-term liabilities: Long-term debt [Note 5] Accrued retirement benefits [Note 7] Other [Note 6] Total long-term liabilities 6,277 25,763 3,913 35, ,903 3,928 32,190 60, ,227 37, ,027 Total liabilities 132, ,654 1,268,277 Minority interests in consolidated subsidiaries 2,216 1,438 21,268 Contingent liabilities [Note 9] Shareholders' equity: Common stock: Authorized 592,619,000 shares; Issued and outstanding 313,515,346 shares in 2004 and 2003 Capital surplus [Note 8(c)] Retained earnings [Note 8(c)] Unrealized holding gain on other securities [Note 2(e)] Foreign currency translation adjustments 34,433 31,549 48,992 3,606 (1,014) 117,568 34,433 31,505 56,076 2,891 (1,091) 123, , , ,133 34,610 (9,739) 1,128,184 Treasury stock, at cost [Note 8(a)(b)] (16,546) (11,709) (158,779) Total shareholders' equity 101, , ,406 Total liabilities and shareholders' equity 235, ,199 $ 2,258,950 47

50 Consolidated Statements of Operations Lion Corporation and Consolidated Subsidiaries Years ended December 31, 2004 and 2003 Millions of yen Thousands of U.S. dollars [Note 1 (b)] Net sales Cost of sales Gross profit Selling, general and administrative expenses [Note 10] Operating income , , , ,341 6, , , , ,708 9,865 $ 2,970,100 1,431,253 1,538,847 1,481,062 57,785 Other income: Interest and dividend income Equity in earnings of non-consolidated subsidiaries and affiliates Gain on return of substitutional portion of national government welfare pension fund plan Other Total other income 509 1,579 1,003 3, ,444 1,801 12,356 4,887 15,154 9,625 29,667 Other expenses: Interest expense Amortization of goodwill Loss on impairment of fixed assets [Note 2(g)] Loss on restructuring of subsidiaries and affiliates Early retirement payments Loss on closedown of a plant Other Total other expense 178 6,385 4, ,125 14, ,590 1,888 1,311 1,261 8,235 1,712 61,271 44,065 4,180 3,980 20, ,603 (Loss) income before income taxes Income taxes [Note 2(j)]: Current Deferred (Loss) income before minority interests (5,017) 1,689 (2,277) (587) (4,430) 13,985 3,264 (414) 2,850 11,135 (48,151) 16,213 (21,851) (5,638) (42,513) Minority interests in earnings of consolidated subsidiaries Net (loss) income (293) (189) (4,723) 10,946 (2,816) $ (45,329) Per share of common stock [Note 2(m)]: Net (loss) income Net income, as adjusted for dilution Cash dividends Weighted-average number of shares of common stock (Thousands) See accompanying notes to consolidated financial statements. Yen (16.66) , ,828 U.S. dollars [Note 1 (b)] $ (0.16)

51 Consolidated Statements of Shareholders' Equity Lion Corporation and Consolidated Subsidiaries Years ended December 31, 2004 and 2003 Millions of yen Balance at December 31, 2002 Net income Unrealized holding gain on other securities (net change during the year) Foreign currency translation adjustments (net change during the year) Cash dividends Bonuses to directors and corporate auditors Increase due to subsidiaries newly included in consolidation, net Treasury stock acquired, net [Note 8(a)] Gain on sales of treasury stock Balance at December 31, 2003 Net loss Unrealized holding gain on other securities (net change during the year) Foreign currency translation adjustments (net change during the year) Cash dividends Bonuses to directors and corporate auditors Increase due to subsidiaries and affiliates newly included in consolidation and excluded from consolidation, net Treasury stock acquired, net [Note 8(a)] Gain on sales of treasury stock Other, net Balance at December 31, 2004 Number of shares issued 313,515, ,515, ,515,346 Common stock 34,433 34,433 34,433 Capital surplus 31, , ,549 Retained earnings 47,566 10,946 (2,384) (78) 25 56,076 (4,723) (2,311) (95) 46 (0) 48,992 Unrealized holding gain on other securities 1,023 1,867 2, ,606 Foreign currency translation adjustments (699) (391) (1,091) 76 (1,014) Treasury stock (5,952) (5,757) (11,709) (4,836) (16,546) Balance at December 31, 2003 Net loss Unrealized holding gain on other securities (net change during the year) Foreign currency translation adjustments (net change during the year) Cash dividends Bonuses to directors and corporate auditors Increase due to subsidiaries and affiliates newly included in consolidation and excluded from consolidation, net Treasury stock acquired, net [Note 8 (a)] Gain on sales of treasury stock Other, net Balance at December 31, 2004 $ 330,426 $ 330,426 $ 302,323 Thousands of U.S. dollars [Note 1(b)] 430 $ 302,754 $ 538,108 (45,329) (22,176) (913) 449 (4) $ 470,133 $ 27,745 6,865 $ 34,610 $ (10,471) 732 $ (9,739) $ (112,366) (46,413) $ (158,779) See accompanying notes to consolidated financial statements. 49

52 Consolidated Statements of Cash Flows Lion Corporation and Consolidated Subsidiaries Years ended December 31, 2004 and 2003 Cash flows from operating activities: (Loss) income before income taxes Depreciation and amortization Decrease in accrued retirement benefits Interest and dividend income Interest expense Loss on impairment of fixed assets Equity in earnings of non-consolidated subsidiaries and affiliates Decrease in trade notes and accounts receivable Increase in inventories Decrease in trade notes and accounts payable Increase in accrued expenses and other payables Other, net Subtotal Interest and dividends received Interest paid Income taxes paid Net cash provided by operating activities Thousands of U.S. Millions of yen dollars [Note 1 (b)] (5,017) 14,352 (2,195) (509) 178 4,592 (1,579) 3,256 (1,213) (5,055) 1,692 (3,300) 5,200 2,252 (167) (3,015) 4,270 13,985 7,853 (9,852) (309) 184 (801) 1,078 (2,333) (993) 3,657 8,388 20,857 1,901 (193) (5,812) 16,753 $ (48,151) 137,730 (21,071) (4,887) 1,713 44,066 (15,154) 31,253 (11,644) (48,516) 16,241 (31,673) 49,906 21,614 (1,603) (28,934) 40,983 Cash flows from investing activities: Decrease in time deposits Purchases of short-term investments Redemption of short-term investments Purchases of property, plant and equipment Proceeds from sales of property, plant and equipment Purchases of intangible assets Purchases of investment securities Proceeds from sales of investment securities Perchases of investments in subsidiaries Additions to loans receivable Proceeds from loans receivable Other, net Net cash used in investing activities 3,144 (4,999) 17,998 (11,030) 31 (13,986) (109) 711 (3,618) (411) 2,617 (406) (10,059) (12,999) 13,598 (6,356) 1,265 (39) (1,143) 757 (367) (5,023) 30,179 (47,978) 172,714 (105,852) 300 (134,218) (1,054) 6,828 (34,721) (3,945) 25,116 (3,898) (96,528) Cash flows from financing activities: Increase in short-term loans payable Repayment of short-term loans payable Increase in long-term loans payable Proceeds from sales of treasury stock Purchases of treasury stock Cash dividends Cash dividends to minority shareholders Other, net Net cash used in financing activities Effect of exchange rate changes on cash and cash equivalents Net change in cash and cash equivalents Cash and cash equivalents at beginning of year [Note 2 (d)] Cash and cash equivalents of newly consolidated subsidiaries Cash and cash equivalents of subsidiaries excluded from consolidation Cash and cash equivalents at end of year [Note 2 (d)] See accompanying notes to consolidated financial statements. 8,163 (8,455) 6, (5,548) (2,315) (81) (227) (1,553) 104 (7,237) 32,001 (283) 24,480 6,561 (8,440) 241 (5,701) (2,387) (64) (64) (9,856) (217) 1,654 30, ,001 78,332 (81,138) 57,576 8,756 (53,246) (22,224) (777) (2,186) (14,905) 1,003 (69,447) 307,086 (2,723) $ 234,915 50

53 Notes to Consolidated Financial Statements Lion Corporation and Consolidated Subsidiaries Note 1: Basis of Presentation of Consolidated Financial Statements (a) The accompanying consolidated financial statements of Lion Corporation (the Company ) and its consolidated subsidiaries have been compiled from the financial statements filed with the Director of the Kanto Local Finance Bureau, as required by the Securities and Exchange Law of Japan. These financial statements have been prepared from the accounts maintained by the Company in accordance with the provisions set forth in the Commercial Code of Japan and with accounting principles and practices generally accepted and applied in Japan, which may differ in certain material respects from accounting principles and practices generally accepted in countries and jurisdictions other than Japan. In preparing the financial statements, certain reclassifications have been made and additional financial information has been provided for the convenience of readers outside Japan. (b) The Company and its domestic consolidated subsidiaries maintain their accounting records in Japanese yen, and its foreign consolidated subsidiaries maintain their accounting records in the currencies of their countries of domicile. The U.S. dollar amounts included in the consolidated financial statements, solely for the convenience of the reader, represent the arithmetic results of translating yen amounts into U.S. dollar amounts at = US$1.00, the approximate rate of exchange in effect on December 31, This translation should not be construed as a representation that the yen amounts have been or could be converted into U.S. dollars at the above or any other rate. (c) As permitted under the Securities and Exchange Law of Japan, amounts of less than one million yen have been omitted. As a result, the totals shown in the financial statements do not necessarily agree with the sum of the individual amounts. Note 2: Summary of Significant Accounting Policies (a) Principles of Consolidation The consolidated financial statements include the accounts of the Company and its significant companies controlled directly or indirectly by the Company in accordance with the accounting standards for consolidation. Companies over which the Company exercises significant influence in terms of their operating and financial policies have been included in the accompanying consolidated financial statements on an equity basis. The consolidated subsidiaries for the year ended December 31, 2004 were as follows: Lion Chemical Co., Ltd./ Lion Business Service Co., Ltd./ Lion Hygiene Co., Ltd./ Lion Trading Co., Ltd./ Lion Packaging Co., Ltd./ Lion Engineering Co., Ltd./ Leo Field Promotions Co., Ltd./ Lion Logistics Service Company, Ltd./ Lion Dental Products Co., Ltd./ Lion Building Maintenance Co., Ltd./ Lion Field Marketing Co., Ltd./ C.com s Company, Ltd./ Lion Cordial Support Co., Ltd./ Ipposha Oil Industries Co., Ltd./ McCormick-Lion Limited/ Lion Home Products (International) Ltd./ Lion Corporation (Singapore) Pte. Ltd./CJ Lion Corporation/ Lion Daily Necessities Chemicals (Qingdao) Co., Ltd./ Lion Corporation (Thailand) Ltd./ Lion Advertising Ltd. CJ Lion Corporation was incorporated in December 2004 and has been initially included in consolidation effective the year ended December 31, The unconsolidated subsidiaries numbered 11 and 12 as of December 31, 2004 and 2003, respectively. Their aggregate total assets, retained earnings, net sales and net income were not significant. The equity method has been applied, however, in accounting for the investments in four non-consolidated subsidiaries and six affiliates for the year ended December 31, 2004 and in five non-consolidated subsidiaries and six affiliates for the year ended December 31, Investments in non-consolidated subsidiaries and affiliates, other than those accounted for by the equity method, are stated principally at cost determined by the moving-average method. The difference between investment costs and equity in net assets acquired is being amortized over 10 years or charged to income if the amount is not significant. (b) Foreign Currency Translation All current and long-term monetary assets and liabilities denominated in foreign currencies are translated into Japanese yen at the exchange rates in effect at the balance sheet date. Foreign exchange gain/loss on translation is 51

54 recognized in the consolidated statements of operations to the extent that the underlying assets and liabilities are not hedged by forward foreign exchange contracts or currency swap contracts. The financial statements of the overseas consolidated subsidiaries and affiliates are translated into Japanese yen at the rates of exchange in effect at the balance sheet date for all assets and liabilities, at the average rates for income and expense accounts, and at historical rates for shareholders equity. Differences arising from translation are presented as Foreign currency translation adjustments in a separate component of shareholders equity in the accompanying consolidated balance sheets. (c) Derivatives The Company and certain consolidated subsidiaries utilize derivative financial instruments to hedge their exposure to fluctuation in interest rates and foreign exchange rates. Derivative financial instruments and foreign currency transactions are accounted for as follows: (i) all derivatives are recognized as either assets or liabilities and measured at fair value, and gain/loss on derivative transactions is recognized in the consolidated statements of operations, and (ii) because of the high correlation of their effectiveness, gain/loss on derivatives positions which qualify as hedges is deferred until the maturity of each underlying hedged transaction. (d) Cash Equivalents For purposes of the consolidated statements of cash flows, the Company considers deposits with banks and shortterm investments with original maturities of three months or less to be cash equivalents. (e) Securities Securities are classified into one of the following categories based on management s intent in holding them: (i) heldto-maturity debt securities, (ii) other securities (marketable), and (iii) other securities (non-marketable). (i) Held-to-maturity debt securities are stated at their amortized cost. (ii) Other securities (marketable) are stated at fair value, with any unrealized holding gain or loss, net of the applicable taxes, stated as a separate component of shareholders equity. (iii) Other securities (non-marketable) are stated at cost by the moving-average method. Debt securities due within one year are stated as current and all other securities are stated as non-current in the consolidated balance sheets. (f) Inventories Inventories are stated at cost determined primarily by the first-in, first-out method for merchandise and finished products, and by the moving-average method for other inventories. (g) Property, Plant and Equipment and Depreciation Property, plant and equipment is stated at cost. Depreciation is computed by the declining-balance method based on the estimated useful lives of the respective assets, except that certain consolidated subsidiaries have adopted the straight-line method. Effective the year ended December 31, 2004, the Company and its domestic consolidated subsidiaries have adopted a new accounting standard for impairment of fixed assets. This standard requires that tangible and intangible fixed assets are carried at cost less depreciation, and are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. In addition, companies are required to recognize an impairment loss in their consolidated statements of operations if certain indicators of asset impairment exist and if the book value of an asset exceeds the undiscounted sum of its future cash flows. This standard states that impairment losses should be measured as the excess of the book value over the higher of (i) the fair market value of the assets, net of disposal costs and (ii) the present value of the future cash flows arising from ongoing utilization of the assets and their eventual disposition. This standard covers land, factories, buildings, and other forms of property, plant and equipment as well as intangible assets. Fixed assets are to be grouped at the lowest level for which there are identifiable cash flows which are independent of the cash flows of other groups of assets. As a result, a loss on impairment of land, buildings and structures in the amount of 4,592 million (US$44,065 thousand) was recognized and loss before income taxes increased by 4,592 million (US$44,065 thousand) for the year ended December 31, (h) Intangible Assets Trademarks, patent rights and certain capitalized software are amortized by the straight-line method over their estimated useful lives. Goodwill is amortized in the year when a transaction is conducted. 52

55 (i) Research and Development Expenses Research and development expenses are charged to income as incurred. (j) Income Taxes The Company and its domestic consolidated subsidiaries have adopted tax-effect accounting, which requires the recognition of income taxes by the asset and liability method. Under the asset and liability method, deferred tax assets and liabilities are determined based on the differences between financial reporting and the tax bases of the assets and liabilities and are measured using the enacted tax rates and laws which will be in effect when the differences are expected to reverse. (k) Allowance for Losses on Guarantees The allowance for losses on guarantees is recognized based on an estimate of probable losses arising from the performance of obligations under guarantee arrangements taking into account the financial condition of the individual companies subject to these guarantees. (l) Accrued Retirement Benefits Employees of the Company or certain domestic consolidated subsidiaries terminating their employment are generally entitled to lump-sum severance payments determined by reference to their current basic rate of pay, length of service and the conditions under which the termination occurs. The Company and its domestic consolidated subsidiaries have adopted the accounting standard for employees retirement benefits and provide for this liability based on the actuarial present value of their defined retirement benefit plan and the related pension plan assets recognized as of each balance sheet date. The Company and certain consolidated subsidiaries also provide for retirement allowances to directors and corporate auditors based on their internal regulations at an estimate of the amount which would be required to be paid if all directors and corporate auditors retired at the balance sheet date. (m) Net Income and Dividends per Share The computation of basic net income (loss) per share is based on dividing net income (loss) available to common shareholders by the weighted-average number of common shares outstanding during the year (exclusive of the dilutive effect of stock options). Diluted net income per share was computed based on the net income available for distribution to the shareholders and the weighted-average number of shares of common stock outstanding during each year after giving effect to the dilutive potential of shares of common stock to be issued upon the exercise of stock options for the year ended December 31, 2004 and In determining the hypothetical shares repurchased, we use the average stock price for the period. Cash dividends per share represent the cash dividends proposed by the Board of Directors as applicable to each respective year together with the interim cash dividends paid. (n) Consumption Tax Transactions subject to consumption tax are recorded at amounts exclusive of consumption tax. Note 3: Securities Marketable and investment securities at December 31, 2004 and 2003 consisted of the following: Thousands of Millions of yen U.S. dollars Current: Marketable equity securities Government and corporate bonds Investment trusts and other Subtotal 19,998 19,998 $ Non-current: Marketable equity securities Government and corporate bonds Investment trusts and other Subtotal Total 15,484 1,003 1,381 17,868 17,868 14,267 1,503 1,558 17,329 37, ,586 9,628 13, ,470 $ 171,470 53

56 The acquisition cost and related fair value of other securities at December 31, 2004 were as follows: Millions of yen Other securities: Marketable equity securities Total Acquisition cost 9,393 9,393 Fair value 15,484 15,484 Unrealized gains 6,160 6,160 Unrealized losses Thousands of U.S. dollars Other securities: Marketable equity securities Total Acquisition cost $ 90,142 $ 90,142 Fair value $ 148,586 $ 148,586 Unrealized gains $ 59,118 $ 59,118 Unrealized losses $ 675 $ 675 Held-to-maturity debt securities and other securities whose fair value was not determinable at December 31, 2004 are summarized as follows: Thousands of Millions of yen U.S. dollars Held-to-maturity debt securities: Non-marketable yen-denominated foreign bonds Carrying value 500 Carrying value $ 4,798 Other securities: Non-marketable equity securities 1,381 $ 13,255 At December 31, 2004, the redemption schedule for securities with maturity dates which are classified as held-tomaturity debt securities and other securities was as follows: Millions of yen Held-to-maturity debt securities Other securities Total Due within one year Due after one year through five years Due after five years through ten years Held-to-maturity debt securities Other securities Total Due within one year $ $ Thousands of U.S. dollars Due after one year through five years $ $ Due after five years through ten years $ 4,830 $ 4,830 Note 4: Inventories Inventories at December 31, 2004 and 2003 consisted of the following: Merchandise and finished products Work in process Raw materials Supplies Total ,855 2,188 2,798 1,124 24,966 Millions of yen Thousands of U.S. dollars ,145 3,368 2, ,393 $ 180,933 20,999 26,858 10,793 $ 239,583 54

57 Note 5: Short-Term Loans Payable and Long-Term Debt Short-term loans payable, principally from banks, generally represented 365-day notes with average interest rates of 1.30% and 1.43% for 2004 and 2003, respectively. Long-term debt at December 31, 2004 and 2003 consisted of the following: Millions of yen Thousands of U.S. dollars Long-term loans payable from banks with average rates of 1.92% and 3.19% for 2004 and 2003, respectively. 6, $ 60,712 Less:current portion Total 48 6, $ 60,242 Note 6: Deferred Income Taxes The significant components of deferred tax assets and liabilities at December 31, 2004 and 2003 were as follows: Deferred tax assets: Allowance for doubtful accounts Accrued retirement benefits Amortization of goodwill Loss on devaluation of investment in a subsidiary Loss on impairment of fixed assets Allowance for losses on guarantees Write-off of investment in a subsidiary Accrued enterprise tax Tax loss carryforwards Unrealized intercompany profits Other Valuation allowance Total deferred tax assets Deferred tax liabilities: Special tax-purpose reserve Gain on contribution of securities to pension trust Unrecognized holding gain on other securities Other Total deferred tax liabilities Net deferred tax assets Thousands of Millions of yen U.S. dollars ,270 2, , ,855 (83) 29,123 (1,097) (5,712) (2,478) (243) (9,532) 19, ,434 2,240 1,812 1, ,603 (131) 27,042 (1,215) (5,644) (1,975) (318) (9,153) 17,889 $ 6, ,730 24,937 2,106 2,159 1,320 45,698 4,065 27,400 (796) 279,470 (10,530) (54,821) (23,781) (2,340) (91,473) $ 187,996 At December 31, 2004 and 2003, deferred tax liabilities which were not offset by deferred tax assets amounted to 35 million (US$339 thousand) and 113 million, respectively, and have been included in liabilities. A reconciliation of the differences between the statutory tax rate and the effective tax rate for the years ended December 31, 2004 and 2003 is summarized as follows: Statutory tax rate: Permanent differences, net 42.1% (2.6) 42.1% 1.0 Equity in earnings of non-consolidated subsidiaries and affiliates 12.8 (5.7) Tax benefits realized on losses of subsidiaries (0.3) Adjustment for deferred tax assets resulting from change in statutory tax rate (7.1) 2.8 Loss on impairment of fixed assets (31.8) Consolidated adjustment for loss on restructuring of subsidiaries and affiliates (14.4) Other Effective tax rates (1.7) 11.7% (5.1) 20.4% 55

58 Note 7: Accrued Retirement Benefits The Company and certain domestic consolidated subsidiaries have defined benefit pension plans. The primary plans are the Lion Pension Fund of the Company and the tax-qualified pension plans of certain consolidated subsidiaries. In addition, the Company has a pension trust. The Company and certain consolidated subsidiaries also have lumpsum severance indemnity plans. In certain cases, additional severance indemnities are paid when an employee retires. The Company received the related approval of exemption from any future benefit obligation from the national government welfare pension fund plan on August 13, 2003 and returned the substitutional portion of the national government welfare pension fund plan ( the substitutional portion ). In this connection, gain on return of the substitutional portion was recognized in the amount of 9,444 million for the year ended December 31, The Company amended its retirement benefit plan and launched the revised Lion Pension Fund, a cash balance plan in April This amendment resulted in a decrease in the projected benefit obligation in the amount of 7,640 million (US$73,314 thousand) for the year ended December 31, The following table sets forth the funded and accrued status of the plans, and the amounts recognized in the consolidated balance sheets at December 31, 2004 and 2003 for the Company s and consolidated subsidiaries defined benefit pension plans: Projected benefit obligation Fair value of pension plan assets Funded status Unrecognized actuarial loss Unrecognized prior service cost Unrecognized pension plan assets Accrued employees retirement benefits 2004 (72,405) 46,105 (26,300) 8,703 (6,621) (745) (24,963) Millions of yen (79,368) 38,279 (41,089) 13, (27,101) Thousands of U.S. dollars $ (694,807) 442,428 (252,379) 83,522 (63,539) (7,151) $ (239,548) Retirement allowances to directors and corporate auditors, included in Accrued retirement benefits in the consolidated balance sheets, totaled 800 million (US$7,678 thousand) and 801 million at December 31, 2004 and 2003, respectively. The components of net periodic retirement benefit expenses for the years ended December 31, 2004 and 2003 were as follows: Thousands of Millions of yen U.S. dollars Service cost Interest cost Expected return on pension plan assets Amortization of actuarial loss Amortization of prior service cost Net periodic retirement benefit expenses ,171 1,837 (876) 971 (1,018) 3, ,610 2,974 (1,977) 1,474 (200) 4,881 $ 20,834 17,628 (8,411) 9,319 (9,775) $ 29,595 The assumptions used for the years ended December 31, 2004 and 2003 are set forth as follows : Discount rate: Expected rates of return on pension plan assets: Recognition period for actuarial gain/loss: Amortization period for prior service cost: % 2.5% 3.5% 5.5% 16 years 16 years 5 years 5 years 56

59 Note 8: Shareholders Equity (a) Treasury stock As approved by the shareholders at meeting held on on March 30, 2004 and March 28, 2003, the Company repurchased 8,990 thousand shares of common stock during the year ended December 31, 2004 for an aggregate cost of 5,548 million (US$53,245 thousand) and 10,503 thousand shares of common stock during the year ended December 31, 2003 for an aggregate cost of 5,701 million. In order to meet the requests of shareholders who have odd lot shares of common stock, the Company repurchased 296 thousand shares of common stock during the year ended December 31, 2004 for an aggregate cost of 180 million (US$1,735 thousand) and 215 thousand shares of common stock during the year ended December 31, 2003 for an aggregate cost of 118 million. In addition, at the request of certain shareholders, the Company also sold 41 thousand shares of common stock for a total of 22 million (US$211 thousand) during the year ended December 31, 2004 and 130 thousand shares of common stock for a total of 62 million during the year ended December 31, (b) Stock option plan Directors, corporate auditors and certain eligible employees of the Company were allocated stock options for the purchase of an aggregate of 14,212 thousand shares of common stock as of December 31, Based on the exercise of these stock options, the Company sold 1,825 thousand shares of common stock for a total of 870 million (US$8,356 thousand) during the year ended December 31, The balance of the stock options may be exercised through March 31, (c) Legal reserve In accordance with the Commercial Code of Japan, the Company and its domestic consolidated subsidiaries have provided a legal reserve by appropriating retained earnings. If the total balance of this reserve and capital surplus reaches one-fourth of a company's common stock, the company may not appropriate retained earnings to its legal reserve. In addition, by resolution of the shareholders, a company can transfer this reserve up to a certain limit of its legal reserve to retained earnings if the total balance of the reserve and the capital surplus account exceeds one-fourth of the company s common stock. Note 9: Contingent Liabilities Contingent liabilities at December 31, 2004 and 2003 were as follows: As guarantors of indebtedness of non-consolidated subsidiaries, affiliates and employees Endorsed notes receivable Total Thousands of Millions of yen U.S. dollars , ,446 4, ,415 $ 32, $ 33,070 Note 10: Research and Development Expenses For the years ended December 31, 2004 and 2003, research and development expenses, all of which have been included in selling, general and administrative expenses, amounted to 7,844 million (US$75,278 thousand) and 7,835 million, respectively. 57

60 Note 11: Leases Non-cancelable leases are accounted for as operating leases regardless of whether such leases are classified as operating or finance leases, except that lease agreements which stipulate the transfer of ownership of the leased property to the lessee are accounted for as finance leases. For the years ended December 31, 2004 and 2003, lease expenses for finance leases without an ownership transfer totaled 662 million (US$6,361 thousand) and 760 million, respectively. The pro forma data concerning acquisition costs, accumulated depreciation, net book value and depreciation expense of the leased assets, including the interest portion thereon, are summarized as follows: Thousands of Millions of yen U.S. dollars Acquisition costs Accumulated depreciation Net book value Depreciation 2,959 (1,926) 1, ,359 (1,987) 1, $ 28,399 (18,488) $ 9,911 $ 6,361 Future minimum lease payments due subsequent to December 31, 2004 and 2003, including the interest portion thereon, are summarized as follows: Within one year Over one year Total ,032 Millions of yen Thousands of U.S. dollars ,371 $ 3,983 5,927 $ 9,911 Note 12: Segment Information Business Segment Information The Company and its consolidated subsidiaries operate principally in four business segments: home products, pharmaceutical products, chemical products and other. Operations in the home products segment involve the manufacture and sale of personal care products, such as toothpastes, toothbrushes, laundry detergents and soaps, dishwashing detergents and cleansers and fabric softeners. Operations in the pharmaceutical products segment involve the manufacture and sale of analgesic medicines, eyedrop solutions, inflammation and pain-relieving first-aid products. Operations in the chemical products segment involve the manufacture and sale of surface active agents and fatty acid nitrogen compounds. Operations in the other segment involve the manufacture of spices,seasonings and salad dressings, plant construction, building maintenance, transportation and storage. 58

61 Business Segment Years ended December 31 Net sales: Home products: Sales to outside customers Intersegment sales Total Pharmaceutical products: Sales to outside customers Intersegment sales Total Chemical products: Sales to outside customers Intersegment sales Total Other: Sales to outside customers Intersegment sales Total Eliminations of intersegment sales Consolidated total Operating expenses: Home products Pharmaceutical products Chemical products Other Eliminations of intersegment operating expenses Consolidated total Operating income: Home products Pharmaceutical products Chemical products Other Eliminations of intersegment profit Consolidated total Identifiable assets: Home products Pharmaceutical products Chemical products Other Corporate and eliminations Consolidated total Depreciation and amortization: Home products Pharmaceutical products Chemical products Other Corporate and eliminations Consolidated total Loss on impairment of fixed assets Home products Pharmaceutical products Chemical products Other Corporate and eliminations Consolidated total Capital expenditures: Home products Pharmaceutical products Chemical products Other Corporate and eliminations Consolidated total , ,398 32,162 32,162 33,108 33,108 13,844 13, , ,149 29,930 31,485 13,585 9, ,492 11,249 2,231 1, (9,341) 6, ,384 35,036 27,863 3,412 36, ,405 6,397 6, , ,535 4,592 8,136 13, ,266 Millions of yen 231, ,109 31,575 31,575 31,619 31,619 14,241 14, , ,515 29,170 29,596 14,002 11, ,680 16,594 2,405 2, (11,395) 9, ,062 28,489 29,552 7,019 35, ,199 6, ,853 6, ,290 Thousands of U.S. dollars $ 2,210,904 2,210, , , , , , ,856 $ 2,970,100 $ 2,102, , , ,371 89,639 $ 2,912,315 $ 107,947 21,415 15,577 2,485 (89,639) $ 57,785 $ 1,270, , ,377 32, ,266 $ 2,258,950 $ 61,389 63,722 7, ,550 $ 137,730 $ ,522 $ 44,065 $ 78, ,315 6, ,527 $ 223,264 59

62 Geographical Segment Information As the overseas sales of the Company and its consolidated subsidiaries for the years ended December 31, 2004 and 2003 constituted less than 10% of consolidated net sales, geographical segment information has not been disclosed. Note 13: Derivatives The Company and certain consolidated subsidiaries utilize derivative financial instruments primarily to hedge their exposure to fluctuation in interest rates and foreign exchange rates. As a matter of policy, the Company and these consolidated subsidiaries do not engage in derivatives, trading for speculative purposes. The Company and certain consolidated subsidiaries do not anticipate nonperformance by any of the counterparties to such transactions, all of whom are domestic financial institutions and trading companies with high credit ratings. Derivative transactions are controlled by the Finance Department of the Company or the Administrative Section of each consolidated subsidiary based on their internal rules. Derivatives positions at December 31, 2004 and 2003 have been measured at fair value but unrealized gain/loss is deferred until the underlying hedged transactions become due or expire because they qualify as hedges under the accounting standard for derivative financial instruments and for foreign currency transactions. Note 14: Subsequent Events (a) During the period from January 1, 2005 to March 30, 2005, the Company repurchased 1 million shares of its own common stock at an aggregate cost of 605 million (US$ 5,813 thousand) pursuant to a resolution of the Board of Directors. (b) On March 30, 2005, a stock option plan under which the Company allocated stock options for the purchase of an aggregate 636 thousand shares of common stock to certain eligible employees of the Company was approved at a meeting of the shareholders. The stock options may be exercised during the period from April 1, 2008 through March 31, (c) On March 30, 2005, the following appropriations of retained earnings were approved at a meeting of the Company's shareholders: Thousands of Millions of yen U.S. dollars Year-end cash dividends ( 4.00 (US$0.04) per share) Bonuses to directors and corporate auditors 1, $ 10,

63 Independent Auditors' Report 61

64 Non-Consolidated Balance Sheets (For information purposes only) Lion Corporation December 31, 2004 and 2003 Thousands of U.S. Millions of yen dollars [Note (b)] ASSETS Current assets: Cash and time deposits Short-term investments Trade notes and accounts receivable Inventories Deferred income taxes Other current assets Less allowance for doubtful accounts Total current assets 23,025 51,433 17,660 2,488 3,920 (1,894) 96,635 26,910 19,998 54,450 15,412 4,072 4,295 (1,268) 123,872 $ 220, , ,468 23,884 37,625 (18,175) 927,313 Property, plant and equipment: Machinery and equipment Other Less accumulated depreciation Property, plant and equipment, net 92,527 79,536 (125,635) 46,428 94,990 82,005 (127,409) 49, , ,236 (1,205,603) 445,527 Investments and other assets: Investment securities Long-term loans receivable and other assets Deferred income taxes Less allowance for doubtful accounts Investments and other assets, net Total assets 33,362 20,008 16,120 (134) 69, ,420 29,225 14,036 12,840 (158) 55, , , , ,694 (1,286) 665,548 $ 2,038,388 LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Trade notes and accounts payable Other current liabilities Total current liabilities 44,690 45,072 89,763 47,779 50,994 98,774 $ 428, , ,367 Long-term liabilities: Long-term debt Accrued retirement benefits Other Total long-term liabilities Total liabilities 6,000 23,872 2,464 32, ,100 25,954 2,479 28, ,208 57, ,083 23, ,307 1,171,674 Shareholders' equity: Common stock Capital surplus Retained earnings Unrealized holding gain on other securities Treasury stock, at cost Total shareholders' equity 34,433 31,549 37,292 3,590 (16,546) 90,320 34,433 31,505 45,092 2,874 (11,709) 102, , , ,859 34,454 (158,779) 866,714 Total liabilities and shareholders' equity 212, ,403 $ 2,038,388 62

65 Non-Consolidated Statements of Operations (For information purposes only) Lion Corporation Years ended December 31, 2004 and 2003 Net sales Cost of sales Gross profit Selling, general and administrative expenses Operating income , , , ,014 4, , , , ,771 1,600 Millions of yen Thousands of U.S. dollars [Note (b)] $ 2,565,809 1,228,390 1,337,419 1,322,061 15,358 Other income: Interest and dividend income Gain on return of substitutional portion of national government welfare pension fund plan Other Total other income 3, ,245 3,054 9,444 1,707 14,207 31,605 9,134 40,738 Other expenses: Interest expense Loss on impairment of fixed assets Amortization of goodwill Loss on restructuring of subsidiaries and affiliates Early retirement payments Loss on closedown of a plant Other Total other expense 193 4,267 6, ,722 13, ,435 1,888 1, ,667 1,857 40,950 61,271 5,758 3,219 16, ,585 (Loss) income before income taxes Income taxes: Current Deferred Net (loss) income (7,658) 38 (2,267) (2,229) (5,428) 4,869 1,591 (487) 1,103 3,765 (73,489) 367 (21,762) (21,396) $ (52,093) Yen U.S. dollars [Note (b)] Net (loss) income per share Net income per share, as adjusted for dilution (19.04) $ (0.18) Basis of Presentation of Non-Consolidated Financial Statements (a) (b) (c) The accompanying non-consolidated financial statements of Lion Corporation (the"company") have been compiled from the financial statements filed with the Director of the Kanto Local Finance Bureau, as required by the Securities and Exchange Law of Japan and have been prepared in accordance with accounting principles and practices generally accepted and applied in Japan, which may differ in certain material respects from accounting principles and practices generally accepted in countries and jurisdictions other than Japan. In preparing these financial statements, certain reclassifications have been made for the convenience of readers outside Japan. The Company maintains its accounting records in Japanese yen. The U.S.dollar amounts included in the non-consolidated financial statements, solely for the convenience of the reader, represent the arithmetic results of translating yen amounts into U.S. dollar amounts at = U.S. $1.00, the approximate rate of exchange in effect on December 31, This translation should not be construed as a representation that the yen amounts have been or could be converted into U.S. dollars at the above or any other rate. As permitted under the Securities and Exchange Law of Japan, amounts of less than one million yen have been omitted. As a result, the totals shown in the accompanying non-consolidated financial statements do not necessarily agree with the sum of the individual amounts. 63

66 Major Affiliates and Related Companies As of December 31, 2004 Related companies Lion Chemical Co., Ltd.* Manufacture and marketing of surfactants, detergents and raw materials for diverse industrial products Lion Business Service Co., Ltd.* Real estate rental, dealing, and brokerage Management of employee welfare facilities Lion Hygiene Co., Ltd.* Manufacture and marketing of institutional-use kitchen cleaners, etc. Lion Trading Co., Ltd.* Marketing of industrial-use products related to household products Lion Packaging Co., Ltd.* Manufacture and marketing of synthetic resin containers, etc. Lion Engineering Co., Ltd.* Facility design, construction, and maintenance Leo Field Promotions Co., Ltd.* Sales promotion-related activities Lion Field Marketing Co., Ltd.* Sales promotion-related activities Lion Logistics Service Company, Ltd.* Shipping and warehousing Lion Building Maintenance Co., Ltd.* Building maintenance and management Lion Dental Products Co., Ltd.* Marketing of oral-care products C.com's Company, Ltd.* Sales and marketing of SCM systems Lion Cordial Support Co., Ltd.* Human resources services Ipposha Oil Industries Co., Ltd.* Manufacture and marketing of surfactants, etc. McCormick-Lion Limited* Manufacture and marketing of foods Lion Akzo Co., Ltd.** Manufacture and marketing of fatty acid nitrogen derivatives, etc. Ketjen Black International Company** Manufacture and marketing of carbon black Calp Corporation** Manufacture of processed chemicals Bristol-Myers Lion Ltd.** Manufacture and marketing of pharmaceuticals Planet, Inc.** Utilization of VANs The Lion Foundation for Dental Health Activities to promote good oralcare habits International business affiliates Taiwan Lion Chemical Industry (Taiwan) Co., Ltd. 50, Cheng Tai Rd., Sec. 3, Wu Ku Hsiang, Taipei Hsien, Taiwan Phone: ~3 Hong Kong Lion Home Products (International) Ltd.* 21st Floor, Sing Pao Building, 101 King s Rd., North Point, Hong Kong, S.A.R., The People s Republic of China Phone: Thailand Lion Corporation (Thailand) Ltd.* 666 Rama III Rd., Yannawa, Bangkok 10120, Thailand Phone: Malaysia Southern Lion Sdn. Bhd.** 3, Jalan Firma 2, Kawasan Perindustrian, Tebrau, Johor Bahru, Johor, Malaysia Phone: Singapore Lion Corporation (Singapore) Pte. Ltd.* 221 Kallang Bahru, Lion Building, Singapore Phone: Indonesia P.T. Lion Wings Jalan Inspeksi, Cakung Drain Timur No.1, Jakarta Timur 13920, Indonesia Phone: China Lion Daily Necessities Chemicals (Qingdao) Co., Ltd.* No. 336 Taihangshan Rd., Qingdao Economic and Technical Development Zone, Qingdao City, Shangdong Province, The People s Republic of China Phone: /5858 South Korea CJ Lion Corporation* 11F, Chungjeong Tower, 464, 3-ga, Chungjeong-ro, Seodaemun-ku, Seoul , Korea Phone: * Consolidated subsidiaries **Affiliates accounted for using the equity method 64

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