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A Roadmap for
Industry Leadership
Annual Report 2004
Year Ended May 31, 2004
Japan Medical Dynamic Marketing, INC.
Maintaining...
Profile
Japan Medical Dynamic Marketing, INC. (Japan MDM) has satisfied the
growing need for medical services by maintaining a balanced profile of
trading and manufacturing functions and developing high-value-added,
own-brand products. “Contributing to medical care,” is one of the guid-
ing principles of Japan MDM. The fiscal year ended May 31, 2004 proved
a challenging year for the company. The anticipated revision of Japan’s
Pharmaceutical Affairs Law next fiscal year and other developments
suggest that difficult industry conditions will continue in the near term.
To achieve stable growth in this challenging environment, Japan MDM
has formulated a new medium-term management plan, covering a five-
year period that began in the fiscal year ended May 31, 2004, built upon
five strategies. The plan positions these five years as a period that will
see us establish the strong operating infrastructure needed to deliver
stable growth.
Guided by the principle of “contributing to medical care,” we remain
committed to becoming a company worthy of your trust.
Contents
Consolidated Financial Highlights 1
To Our Stockholders 2
An Interview With Top Management 4
Corporate Governance 16
Financial Section 17
Investor Information 38
Corporate Data 39
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This annual report includes forward-looking statements based on a number of assumptions and beliefs in light of the information currently available to manage-
ment and subject to significant risks and uncertainties. Actual financial results may differ materially depending on a number of factors, including adverse economic
conditions, currency exchange rate fluctuations, adverse legislative and regulatory developments, delays in new product launches, the pricing and product
initiatives of competitors, the inability of the company to market existing and new products effectively, interruptions in production, infringements of the company’s
intellectual property rights and the adverse outcome of material litigation.
[ Consolidated Financial Highlights ]
Japan Medical Dynamic Marketing, INC. and its Subsidiary
Thousands of
Millions of yen U.S. dollars
Years ended May 31, 2002 2003 2004 2004
For the year:
Net sales ¥12,658 ¥13,944 ¥13,736 $124,817
Net income 1,706 1,886 2,042 18,551
At year-end:
Total assets ¥23,677 ¥23,487 ¥23,024 $209,213
Stockholders’ equity 9,883 11,192 12,521 113,772
Yen U.S. dollars
Per share:
Net income — primary ¥101.26 ¥95.84 ¥106.38 $0.97
Cash dividends 20.00 25.00 25.00 0.23
Note: U.S. dollar figures have been calculated at the rate of ¥110.05=US$1, the approximate rate of exchange on May 31, 2004.
Net Sales Net Income Operating Profit Ratio
(Millions of yen) (Millions of yen) (%)
15,000 2,500 50
12,000 2,000 40
9,000 1,500 30
6,000 1,000 20
3,000 500 10
0 0 0
’00 ’01 ’02 ’03 ’04 ’00 ’01 ’02 ’03 ’04 ’00 ’01 ’02 ’03 ’04
1
[ To Our Stockholders ]
Trends in Japan’s Medical
Device Industry
Japan’s amended Pharmaceutical
Affairs Law will go into effect on April
1, 2005. Under the revised law,
companies that hold permission to
manufacture or import and sell
Review of Fiscal 2004, Ended medical products will be required to
May 31, 2004 obtain permission in each product
Fiscal 2004 was the most difficult category to manufacture and sell
year Japan MDM has ever experi- products by March 31, 2005.
enced. In September 2003, a defect As of April 2004, all new medical
forced us to suspend sales of tro- products must be examined by an
chanteric nails, a new product that was expected to make a strong independent administrative agency for approval. When compared
contribution to fiscal 2004 results. The defect occurred in just one to the previous system, the examination and approval process
in approximately 3,000 cases. However, top management decided has been simplified. However, to guarantee safety controls after
to suspend sales of the product on the grounds that safety is the manufacturing and sales, companies are now required to establish
most important requirement of medical devices. This decision had a team responsible for safety management in accordance with Good
a significant impact on our earnings. Sales growth in mainstay Vigilance Practice (GVP) standards. In addition, to ensure product
orthopedic trauma devices and joint replacement products alone quality, as a condition of obtaining permission to engage in manu-
were not enough to enable us to reach our sales targets and achieve facturing and sales, companies are required to designate an individual
a recovery in earnings. and a special team responsible for product quality assurance in
accordance with Good Quality Practice (GQP) standards.
Operating highlights of fiscal 2004 were as follows: To ensure that Japan MDM meets the provisions of the
• Consolidated net sales were ¥13,736 million, down 1.5% from amended Pharmaceutical Affairs Law, we will appoint a qualified
the previous fiscal year. person as the compliance officer, and we are also planning to
• Operating profit fell 8.7% year on year to ¥3,713 million. establish a special team to supervise compliance.
• The operating profit ratio was 27.0%, down 2.2 percentage
points.
• ROE was 17.2%.
• Earnings per share was ¥106.38.
• We paid a dividend of ¥25.00 per share for fiscal 2004, the
same level as in the previous fiscal year.
2
On the global expansion front, we will also step up marketing
activities in North America, Europe and Asia to steadily raise sales
in these regions. Japan MDM will devote resources to orthope-
dics, focusing on the thriving North American market. This focus
will enable us to shift more rapidly from an investment phase to
recouping those investments in the North American market. As
Background to the Medium-term Management Plan part of this effort, we anticipate that Ortho Development Corpora-
As explained in our fiscal 2003 annual report, our EMF System, tion will contribute greatly to business operations and earnings.
which had been positioned as a strategic global product, struggled Overall, I’m confident that by reinforcing existing businesses
in North America, leading to a disappointing performance. Then, developed so far, while steadily executing our global strategy, we
in fiscal 2004, we voluntarily suspended sales of our new tro- can rebuild a strong Japan MDM.
chanteric nail product, which also impacted sales.
Two successive years of disappointment for stockholders and Restoring Trust in Japan MDM
investors is a serious matter. Management held discussions on By implementing our five strategies, we aim to assemble a pow-
what course Japan MDM should pursue, particularly in light of our erful operating structure that can deliver consistent growth with-
vision of contributing to medical care. We came to the conclusion out relying on any single product. I believe that Japan MDM has
that we must first explain to stakeholders where we aim to take the unwavering vision and potential required to succeed and that
Japan MDM in the future, in the form of a new five-year medium- we are following the right course. Japan MDM will become a pow-
term management plan. erful organization that will not be swayed by economic conditions
or developments in the medical care industry. Every effort will be
Building a Strong Japan MDM—Overview of Our made to attain the numerical targets in our management plan.
Medium-term Management Plan We will endeavor to build a Japan MDM that can achieve stable
Our plan has five strategies: (1) a domestic sales strategy; (2) a growth even 10 to 15 years from now, to ensure that we remain a
domestic marketing strategy; (3) an overseas marketing strategy; company worthy of the trust of stockholders and all other investors.
(4) product development; and (5) new alliances. Our main goal is The support and guidance of all stakeholders, including stock-
to build a strong Japan MDM that can deliver steady long-term growth, holders, will be vital to achieving our goals.
even 10 to 15 years from now. Executives responsible for each area
will explain the details of the five strategies in this annual report.
During the five years covered by the medium-term manage- September 2004
ment plan, we intend to move aggressively to strengthen our trading
functions. We will fully utilize our powerful marketing network to
offer new product proposals to existing customers. To offer a wider
variety of products, we plan to roll out third and fourth product
lines, which do not overlap with those of DePuy Orthopaedics, Kenichi Higashi, President
Inc. and Ortho Development Corporation, as quickly as possible.
3
[ An Interview With Top Management ]
A Roadmap for Medium-term Success
Kenichi Higashi, President
Japan Medical Dynamic Marketing, INC.
Question >
Japan MDM announced its new five-year medium-term management
plan in January 2004. Please tell us the story behind the development
of this plan.
Answer >
We deeply regret the fact that our results have fallen short of the expectations of stockholders and other investors
over the past two fiscal years. In the fiscal year ended May 31, 2003, the EMF System, a strategic product for global
expansion, suffered setbacks. Then in the fiscal year under review, we voluntarily withdrew our new trochanteric
nail product from the market, which impacted sales and resulted in a lackluster performance on the whole. Taking
this situation seriously, we formulated a new five-year medium-term management plan. Executives responsible for
key strategies will explain the numerical targets of the plan in greater detail later. In drafting this plan, our deepest
concern was to ensure that we would stay true to our guiding principle of “contributing to medical care,” and win
back the trust of our stockholders and all other stakeholders.
Question >
Please summarize the main points of your new medium-term management
plan.
Answer >
The new medium-term management plan runs through the May 2008 fiscal year. The plan positions these five
years as a period for building the operating base needed to deliver consistent growth 10 to 15 years down the
road, no matter what the business environment will be.
Our three pillars of earnings are (1) trading functions; (2) R&D-driven manufacturing functions; and (3) global
expansion. I’d like to take on new challenges in each of these areas.
First, we will build on our existing customer relationships and marketing network to import and sell new
orthopedic products in Japan. We plan to strengthen our trading functions by meeting the challenge of creating
new marketing channels. Next, we will pursue the goal of becoming an R&D-driven manufacturer in step with our
global expansion drive. Since Ortho Development Corporation is a major supplier of orthopedic devices to the U.S.
market, we must market products overseas that do not overlap with their product development and sales activities.
Capital investments and R&D will be key priorities for developing a steady stream of own-brand products.
4
19,500
The medium-term management
plan aims to see Japan MDM achieve
the following four primary numerical
Performance
targets:
(1) Increase consolidated net sales
to ¥19.5 billion, from ¥13.9 billion
in fiscal 2003.
Targets
(2) Generate sales of ¥16.5 billion
in Japan and ¥3.0 billion overseas,
mainly in North America.
(3) Hold on to a 25% share of the
Millions of yen orthopedics trauma devices market
and increase our share of the joint
replacements market from 3% to 6%.
(4) Increase operating profit to ¥5.0
billion, from ¥4.0 billion in fiscal
13,900
2003.
5,000
3,000
4,000
500
Net Overseas Operating Net Overseas Operating
Sales Sales Profit Sales Sales Profit
2003 2008
5
Maintaining the Momentum of Our Domestic Sales Strategy
Kenichi Higashi, President
Japan Medical Dynamic Marketing, INC.
Question >
Please discuss the domestic orthopedics market and your sales strategy for
products in that market.
Answer >
Japan’s orthopedic trauma devices market is worth approximately ¥38.5 billion, while the joint replacements and
spinal fixation devices markets amount to approximately ¥96.0 billion. We can expect annual growth rates of 5% in
the orthopedics market, despite slowing growth due to lower reimbursement prices under Japan’s National Health
Insurance system.
During the period covered by the medium-term management plan, we will expand our presence in the field of
spinal fixation devices. These devices require greater attention to safety because they are applied near the spinal cord.
With safety as a top priority, Japan MDM has established a team of specialists to oversee spinal fixation device opera-
tions. We currently supply two categories of spinal fixation devices, and we intend to expand our lineup in the field.
In our mainstay orthopedic trauma devices, we will apply the lessons learned from our recent experience with
trochanteric nails to reinforce our product lineup. Together with suppliers, we will work to improve our structure so
as to make sales less susceptible to the performance of individual products. Fiscal 2005 and subsequent years will
see us undertake several product renewal projects that will help strengthen our sales base and fortify our position
as the leading company in this field.
Robust sales of joint replacement products are being recorded in Japan and North America. To take full
advantage of this situation, we will strive to gain higher product evaluations in both markets. Japan MDM will make
every effort to strengthen its presence in this field by introducing new materials and building stronger ties with
large-scale users.
Question >
Please tell us about the sales of the EMF System, beds for medical care and
other non-core products.
Answer >
We are facing difficult conditions both in Japan and overseas. Sales results have been less than satisfactory, and we
think there are several reasons for this.
The biggest single factor, I think, was that we lacked proper marketing experience both in Japan and overseas.
Another important factor was that our product lineup was insufficient. Based on this analysis, we plan to separate
respective marketing activities for orthopedics and medical devices. We are also establishing a dedicated sales team
for medical devices. To expand our product lineup, we will strengthen the marketing efforts of this team, alongside
own-brand products. Our plan is to actively introduce a product lineup that leverages our collective strengths.
We will adopt a long-term view as we develop a system for providing medical devices that meets the needs of
frontline medical practitioners.
6
37.0%
2008
Sales Targets for Own-brand Products
Own-brand products now represent 28.0% of our total sales.
Our goal is to raise this figure to 37.0% by fiscal 2008. In
order to reach our target, we will pour resources into the
development and sale of spinal fixation devices and joint
replacements. 2003
23.5%
7
Driving Our Domestic Marketing Strategy Forward
Itsuro Numata, Director
Japan Medical Dynamic Marketing, INC.
Question >
Please tell us about any new functions or organizations being established
as you implement your aggressive sales strategy.
Answer >
We are taking steps to improve our sales as we pursue our sales strategy. There are four themes for improving our
marketing system.
First, we must create a sales structure with closer ties to medical institutions and medical practitioners. In Japan,
we intend to reinforce the sales network we already have in place. Our network for large urban areas (Tokyo,
Osaka, and Nagoya) has one salesperson for every 860,000 people. We want to improve this ratio to one salesperson
for every 750,000 people. Our plan is to carry out more detailed follow-up activities.
Secondly, we must reinforce our sales of medical devices by forming groups that specialize in neurosurgery and
ICU-related medical devices. As we move to strengthen our marketing bases in large cities, we want to develop at
least 10 salespersons into specialists in these types of medical devices. Currently, we are focusing on our EMF System
and Cincinnati Sub-Zero’s Blanketrol® II. Here, we want to introduce third and fourth product lines to broaden our
product offering. We also must obtain stronger clinical evaluations in order to form closer ties with medical institutions.
Next, to support such a sales system, we will divide our marketing system into four marketing groups: orthope-
dic trauma devices, joint replacements, spinal fixation devices, and medical devices. With this plan, we should be
able to formulate more accurate sales and marketing strategies. In addition, we will deepen relationships with our
strategic partner, DePuy Orthopaedics, Inc. and our subsidiary, Ortho Development Corporation, to help upgrade
their products and related instruments, to facilitate the smooth launch of new products and raise customer satisfac-
tion at medical institutions.
Finally, we will take actions to enhance our product lineup, including the launch of products of other companies
that do not overlap with Ortho Development Corporation’s product development in the field of spinal fixation
devices. To accomplish this goal, we will establish a team of specialists to oversee spinal fixation device operations.
Our target is to generate annual sales of at least ¥1.0 billion in spinal fixation devices.
8
The most important aspect of our
domestic sales strategy is to strengthen
our sales system. We intend to increase
our sales force from the current 150
salespersons to 180, and secure 10
specialists in medical devices. We also
plan to form a team of specialists to
oversee spinal fixation devices. Our aim
2008
is to strengthen our sales networks by
increasing our sales force and forming
dedicated sales teams, and to build
2003 strong relationships with customers.
150 180
Projected
Increase
in Salespersons
9
Accelerating Our Overseas Marketing Strategy
Masao Okawa,
Managing Director, Japan Medical Dynamic Marketing, INC.
President and Chief Executive Officer, Ortho Development Corporation
Question >
The EMF System faced an uphill battle in the U.S. market in the previous
year. How are EMF System sales currently trending?
Answer >
EMF System sales in the U.S. remain sluggish. However, evaluations of the EMF System remain high and progress
is being made in persuading dealers in each region to take another look at the product. In addition, although sales
have been low, a steadily growing number of medical institutions are using the product in surgery. The growing
adoption of the EMF System is starting to lift sales of related disposable supplies.
We also plan to hold workshops and take part in academic conferences to promote greater uptake of this product.
Question >
What specific strategies will Ortho Development Corporation implement to
achieve its sales target of ¥3.0 billion by the May 2008 fiscal year?
Answer >
Ortho Development Corporation is currently performing very well in orthopedics, but sales have been sluggish in
the neurosurgery field. However, generating ¥3.0 billion sales at Ortho Development Corporation in fiscal 2008
should not be too difficult. We cannot set our hopes too high in neurosurgery, due to the lack of positive signs at
present. However, we have reason to be optimistic in orthopedics. We will continue to target markets in three
fields—hip-joint replacements, knee-joint replacements, and spinal fixation devices. Ortho Development Corpora-
tion has achieved a measure of success in the knee-joint replacement market in the United States. Currently, we
are in a position to introduce a succession of new hip-joint replacement and spinal fixation devices, and within the
next several years, we will be able to operate in our three targeted orthopedic fields. Strengthening our product
lineup will pave the way for us to expand our presence in the U.S. orthopedics market, which is estimated to be
worth US$3.0 billion.
Although our operations are currently limited to only a handful of regions because we are only marketing knee-
joint replacements, we will be able to expand geographically as we deepen our product lineup.
10
Expanding Our U.S. Presence
Japan MDM began full-fledged marketing efforts in the U.S. in
the fiscal year ended May 31, 2002. The dark blue areas in the
map below indicate states where we are already operating. The
light blue areas indicate states where we plan to operate in the
future. Ortho Development Corporation and Japan MDM have
steadily developed a presence in states with relatively high con-
centrations of seniors, such as Texas, Florida and Arizona.
States currently covered
States planned to be covered
11
Shifting Innovation into High Gear
Isamu Nakahira, Director
Japan Medical Dynamic Marketing, INC.
Question >
Please tell us about the roles of domestic and overseas units in product
development.
Answer >
We plan to clearly establish areas of responsibility for product development on the basis of proximity to the largest
markets for a given product category. More specifically, this will make Ortho Development Corporation responsible
for product development in the orthopedics field. Japan MDM will play the central role in the medical devices field.
Three themes are essential for success — moving ahead with a development system that fully reflects the needs of
frontline medical practitioners and marketing activities; shortening development lead times; and developing appealing
new products. We are setting our sights on marketing orthopedic products in Japan, alongside the U.S. Concur-
rently, we will also develop medical devices for the U.S. market. All of this means that it is important for the product
development divisions of Ortho Development Corporation and Japan MDM to understand each other’s activities,
and it is essential that the marketing divisions in each company develop a closer relationship.
In our future orthopedics development work in the U.S., our efforts in knee-joint replacements, hip-joint replacements
and spinal fixation devices will be intensified. The current development program will be steadily accelerated.
Regarding the development of medical devices in Japan, we will concentrate on various applications of the
EMF System, including research of other applications beyond the neurosurgery field, and also improving beds for
medical care.
Question >
Can you give us an overview of applications for the EMF System under
development?
Answer >
The development of EMF System applications is a very important theme, especially for making our products more
appealing to medical practitioners. In the field of neurosurgery, for example, these applications have facilitated the
use of neurological endoscopes in surgery. Currently, the techniques are monopolar, although bipolar applications
are being studied. While neurosurgery markets are limited, applications that can be used in other fields can be
developed, enabling us to stimulate demand in an expanded range of fields. Currently, orthopedic surgery and
urology applications are also being studied.
12
Priority Projects
The products in this table are ongoing or completed development projects at Commercialized
Japan MDM and Ortho Development Corporation. Filed for regulatory approval/certification
Under development
KASMTM (Knee Articulating Spacer Mold)
Application Target: Knee
Status: Commenced sales in North America in 2004
IBSTM Allograft
Application Target: Spine
Status: Commenced sales in North America in 2004
EnvisionTM Cervical Plate
Application Target: Spine
Status: Commenced sales in North America in 2004
Balanced KneeTM Revision Tibia
Application Target: Knee
Status: Commenced sales in North America in 2004
Cervical Allograft
Application Target: Spine
Status: Sales in North America scheduled to commence in 2005
EncompassTM Hip System
Application Target: Hip
Status: Sales in North America scheduled to commence in 2005
Balanced KneeTM Revision Femur
Application Target: Femur
Status: Sales in North America scheduled to commence in 2005
Integrated Spine System
Application Target: Spine
Status: Under joint development with the New York Hospital for Special Surgery
13
Looking to Form Alliances
Kenichi Higashi, President
Japan Medical Dynamic Marketing, INC.
Question >
Please explain your strategy for forming business alliances.
Answer >
The two pillars of Japan MDM’s operations are its trading and manufacturing functions. However, manufacturing
involves product development, a process that is very time consuming. It is essential that our manufacturing func-
tions are strengthened to make them a firm and dependable source of earnings. We also need to pursue and build
alliances in order to strengthen our trading functions.
Japan MDM has established the following guidelines for the formation of business alliances.
• Restrict alliances to the medical field.
• Within the medical field, position orthopedics and medical devices as priority areas, and consider areas in
which synergies can be developed with existing businesses.
• Consider alliances that will not hinder our manufacturing function.
• Consider business fields with a potential market value of ¥1.0 billion or more.
We plan to carefully consider specific alliances, focusing on those that have the potential to capture synergies.
In February 2004, we concluded an exclusive agreement with Spine Next S.A. on the domestic sales of spinal
fixation devices. This is an example of an alliance that fits our strategy. This agreement will give us a stronger product
lineup of spinal fixation devices, an orthopedics field where we were a late entrant, and will raise our collective strengths
in the orthopedics field.
14
Since 1981, Japan MDM has concluded
a series of five-year contracts with
DePuy Orthopaedics, Inc. to act as
its exclusive sales agent in Japan
for orthopedic trauma devices.
Japan MDM renews this contract Since 1981, Japan MDM has had an
DePuy every year to ensure a stable alliance with Cincinnati Sub-Zero
Orthopaedics, Inc. supply of products to the Japa- Products, Inc. to import and sell body
nese market. temperature management products
in Japan. These products are
designed to maintain the body
temperature of a patient
Cincinnati Sub-Zero undergoing surgery.
Products, Inc.
Japan
Medical Dynamic
In February 2004, Japan MDM
Marketing, INC. concluded a contract with Spine Next
S.A. for the exclusive rights to sell, in
Japan, spinal fixation devices manu-
factured by this company.
Spine Next S.A.
A Growing Network of Alliances
Since 1994, Ortho Development
Ortho Development
Corporation, a majority-owned
Corporation subsidiary, has played a key role in
Japan MDM’s global business strat-
egy. This includes the development
and manufacture of joint replacements
and spinal fixation devices for sale in
the U.S. and export to Japan, as well as
the sale of the EMF System in the U.S.
15
[ Corporate Governance ]
Director President Director
Yuichi Tamura Kenichi Higashi Itsuro Numata
Director Managing Director Managing Director Director
Hiroshi Kusakabe Masao Okawa Yasuki Ogawa Isamu Nakahira
(Advisor)
Japan MDM has a Board of Corporate Auditors that includes one standing auditor, and a C.P.A. with ample
auditing experience to serve as an outside auditor. The corporate auditors attend Board of Directors’ meet-
ings to monitor the performance of duties and business execution on the part of directors and executives.
Management believes that this auditing function, which has been upgraded and reinforced, provides a
corporate governance structure appropriate for Japan MDM. There are no conflicts of interest between the
company and its outside directors in terms of personal, capital, or business relationships.
The Board of Directors is the company’s highest decision-making body, following the general meeting of
stockholders. The Board deliberates on corporate management strategy and other important matters affect-
ing the company as a whole. The Board endeavors to make rapid and effective decisions in response to
changes in the operating environment.
Regarding systems for internal control, the Planning and Administration Department, which reports directly
to the president, conducts periodic internal audits. The company is also taking actions to establish risk
management, compliance, and internal checks and balances, including the appointment of a compliance
officer at Management Headquarters.
16
[ Financial Section ]
Contents
Selected Financial Summary 18
Management’s Discussion and Analysis of Operations 19
Consolidated Balance Sheets 24
Consolidated Statements of Income 26
Consolidated Statements of Stockholders’ Equity 27
Consolidated Statements of Cash Flows 28
Notes to the Consolidated Financial Statements 29
Report of Independent Accountants 37
17
[ Selected Financial Summary ]
Japan Medical Dynamic Marketing, INC. and its Subsidiary
Thousands of
U.S. dollars
Millions of yen (Note 1)
Years ended May 31, 1999 2000 2001 2002 2003 2004 2004
For the year:
Net sales ¥ 9,627 ¥10,901 ¥11,727 ¥12,658 ¥13,944 ¥13,736 $124,817
Domestic 9,627 10,816 11,564 12,345 13,408 12,884 117,074
Overseas – 85 163 313 536 852 7,743
Cost of sales 2,710 2,729 3,020 3,154 3,398 3,386 30,772
Gross profit 6,917 8,172 8,707 9,504 10,546 10,350 94,045
SG&A expenses 4,565 4,999 5,168 6,255 6,478 6,637 60,306
Operating profit 2,352 3,173 3,539 3,249 4,068 3,713 33,739
Net income 964 1,479 1,768 1,706 1,886 2,042 18,551
Cash flows from operating activities – 360 700 (539) 877 1,840 16,724
Cash flows from investing activities – 1,442 (184) (1,111) (1,008) (1,030) (9,362)
Cash flows from financing activities – (1,822) (660) 2,054 (288) (369) (3,353)
Weighted-average number of
shares issued (in thousands) 10,788 11,269 14,038 16,848 18,527 18,524
At year-end:
Total assets ¥15,745 ¥15,743 ¥19,430 ¥23,677 ¥23,487 ¥23,024 $209,213
Current assets 8,592 10,472 12,014 15,536 16,250 16,355 148,613
Current liabilities 6,606 6,100 7,116 9,685 6,303 4,901 44,531
Long-term debt 5,244 2,665 1,440 1,762 4,838 5,145 46,749
Stockholders’ equity 3,722 6,823 8,370 9,883 11,192 12,521 113,772
Number of employees 307 314 361 406 403 416
Japan MDM 251 278 307 337 342 352
Ortho development 56 36 54 69 61 64
Number of stockholders – 1,807 3,028 3,796 6,133 7,553
U.S. dollars
Yen (Note 1)
Per share (Note 2 (13)):
Net income – primary ¥ 89.40 ¥131.25 ¥125.94 ¥101.26 ¥ 95.84 ¥106.38 $0.97
Stockholders’ equity 365.54 583.28 596.11 586.67 598.24 672.11 6.11
Cash dividends 15.00 18.00 18.00 20.00 25.00 25.00 0.23
Ratios:
Gross profit ratio (%) 71.85 74.97 74.25 75.08 75.63 75.35
Operating profit ratio (%) 24.44 29.11 30.18 25.67 29.17 27.03
Net income ratio (%) 10.01 13.57 15.08 13.48 13.53 14.86
Return on equity (%) 32.40 28.18 23.27 18.69 17.89 17.22
Notes
1: U.S. dollar figures have been calculated at the rate of ¥110.05=US$1, the approximate rate of exchange on May 31, 2004.
2: Statements of cash flows were prepared effective from the fiscal year ended May 31, 2000.
18
[ Management’s Discussion and Analysis of Operations ]
Japan Medical Dynamic Marketing, INC. and its Subsidiary
Operating Results
Overview
In the year under review, Japan’s medical sector saw the steady implementation of large-scale and far-reaching measures aimed at
reforming the healthcare system. In this climate, curbs on medical spending were further tightened through, among other steps, an
increase in co-payments required of patients and a revision of medical service fees in April 2004, which resulted in a reduction in
reimbursement prices*1. With the full implementation of the amended Pharmaceutical Affairs Law in April 2005, there will also be
a greater focus on post-marketing safety and quality control. This is anticipated to have a significant impact on the medical sector’s
profit structure.
In this environment, Japan MDM sought to reinforce its spinal fixation devices segment by concluding a contract with France-based
Spine Next S.A. for the exclusive sale of this company’s products in Japan. Other steps were taken to upgrade Ortho Development
Corporation’s product development and sales framework in the U.S. and the sales system in Japan. Meanwhile, problems with the
recently launched trochanteric nails prompted the Company to voluntarily suspend sales of this product. As a consequence, the
orthopedic trauma devices segment struggled. This had an impact on overall performance in the year under review, resulting in the first
drop in net sales since Japan MDM listed on the Tokyo Stock Exchange.
In the artificial joint replacements segment, proprietary products continued to sell well. U.S. consolidated subsidiary Ortho
Development Corporation, responsible for developing and manufacturing these products, achieved profitable operations on a non-
consolidated basis.
*1: Set in accordance with Japan’s Pharmaceuticals Affairs Law, these prices represent the component of medical fees covered by the National Health Insurance
(NHI) system that are reimbursed to medical institutions by the Japanese government.
Consolidated Performance
Japan MDM’s net sales are derived from the sale of existing mainstay orthopedic trauma device products, mainly manufactured by U.S.-
based DePuy Orthopaedics, Inc.; artificial joint replacements and spinal fixation devices manufactured by U.S. subsidiary Ortho Develop-
ment Corporation; and products developed in-house such as medical beds and the EMF System.
For fiscal 2004, ended May 31, 2004, net sales declined ¥208 million, or 1.5%, to ¥13,736 million (US$124,817 thousand).
Japan MDM recorded lower overall sales of orthopedic trauma devices, which account for just under 70% of net sales. This reflected
the voluntary withdrawal from the market of trochanteric nails, a promising new product, and a lull in demand for new products. Artificial
joint replacements manufactured by Ortho Development Corporation continued to post steady growth, which offset the drop in sales
of orthopedic trauma devices. As a result, sales of own-brand products as a percentage of net sales increased 4.5 percentage points
from the previous fiscal year to 28.0%. Japan MDM aims to raise this percentage to 50% over the long term.
Net Sales by Product Share of Own-brand Products vs. Net Sales
(Millions of yen) (Millions of yen / %)
15,000 4,000 40
12,000
3,000 30
9,000
2,000 20
6,000
1,000 10
3,000
0 0 0
’00 ’01 ’02 ’03 ’04 ’00 ’01 ’02 ’03 ’04
Orthopedic trauma devices Own-brand product net sales (left axis)
Joint replacements Ratio of own-brand products to net sales (%)
Others (right axis)
19
Gross profit declined ¥196 million, or 1.9%, to ¥10,350 million (US$94,045 thousand). The gross profit ratio deteriorated 0.3 of
a percentage point to 75.3%.
Operating profit dropped ¥355 million, or 8.7%, to ¥3,713 million (US$33,739 thousand). Selling, general and administrative
(SG&A) expenses increased ¥159 million, or 2.5% year on year. Notably, depreciation and amortization increased ¥178 million, due to
a rise in medical equipment. Faced with declining sales, Japan MDM moved to curb variable expenses such as transportation, sales
promotion, personnel and travel costs. As a result, a total reduction in expenses of ¥139 million was achieved.
Other income, net, improved ¥547 million to ¥22 million (US$199 thousand). The main factor behind this improvement was
foreign exchange gains of ¥492 million (US$4,468 thousand). This included a gain of ¥158 million arising from an exchange rate
difference between accounts payable and the return of trochanteric nail products to inventories, and a gain of approximately ¥332
million on foreign currency statement translation related to Ortho Development Corporation. The Company also booked a gain of ¥31
million on the sale of investments in securities, due to the sale of shares in Orthovita, Inc. following the termination of Japan MDM’s
contract with this company.
As a result of the above, income before income taxes rose ¥192 million, or 5.4%, to ¥3,735 million (US$33,938 thousand). Net
income increased ¥156 million, or 8.3%, to ¥2,042 million (US$18,551 thousand), and net income per share rose ¥10.54 to ¥106.38
(US$0.97). For the year under review, Japan MDM paid a full-year dividend per share of ¥25.00 (US$0.23), representing a payout ratio
of 23.5%. One of the Company’s management goals is to achieve a payout ratio of at least 30%.
Overseas Sales vs. Share of Net Sales Operating Profit
(Millions of yen / %) (Millions of yen)
1,000 10 5,000
800 8 4,000
600 6 3,000
400 4 2,000
200 2 1,000
0 0 0
’00 ’01 ’02 ’03 ’04 ’00 ’01 ’02 ’03 ’04
U.S. (Ortho Development Corporation) (left axis)
Other (exports from Japan) (left axis)
Share of net sales (%) (right axis)
20
Segment Information
Breakdown of Consolidated Sales
Millions of yen
Years ended May 31, 2002 2003 2004
1
Japan MDM*
Orthopedic trauma devices ¥ 9,478 ¥10,022 ¥ 9,234
Joint replacements*2 1,893 2,578 2,813
Spinal fixation devices 120 81 97
Medical beds 7 25 33
High frequency surgical instruments (EMF) 106 62 94
Other medical devices 772 642 650
Subtotal 12,379 13,414 12,920
Ortho Development Corporation*3
Joint replacements 209 349 445
Spinal fixation devices 45 144 343
High frequency surgical instruments (EMF) 20 32 28
Other medical devices 2 4 –
Subtotal 278 530 816
Total ¥12,658 ¥13,944 ¥13,736
*1 Sales derived from the domestic market and partly from exports to the U.S.
*2 Imported from Ortho Development Corporation
*3 Sold in the U.S.
Total sales of orthopedic trauma devices declined ¥788 million, or 7.9%, to ¥9,234 million. This primarily reflected the voluntary
suspension of sales of newly launched trochanteric nails, due to problems with these products. The market for orthopedic trauma
devices in Japan is currently valued at around ¥40.0 billion. Although the sector is faced with a reduction in reimbursement prices due
to healthcare system reforms, the market is anticipated to grow due to Japan’s ageing population. Japan MDM’s goal is to remain the
industry leader with a market share of at least 25%.
Total sales of joint replacements increased ¥331 million, or 11.3%, to ¥3,258 million. U.S. subsidiary Ortho Development Corpo-
ration develops and manufactures these products for Japan MDM. Hip replacements continue to find growing acceptance, while knee
replacements are also selling well in both Japan and the U.S. In this climate, Ortho Development Corporation launched a new product
in the knee replacement field in fiscal 2004, called Revision Knee (Tibia). In Japan, the market for joint replacements is valued at some
¥80.0 billion. Despite being a relative latecomer to this market, Ortho Development Corporation is rapidly increasing its market share,
making full use of Japan MDM’s existing sales network. Ultimately aiming to capture a 10% share of the market, Ortho Development
Corporation is strengthening the research and development of new products.
Total sales of spinal fixation devices almost doubled, increasing ¥215 million year on year to ¥440 million. Although there was no
marked rise in sales in Japan, two new products developed by Ortho Development Corporation in the U.S., IBS™ and Cervical Plate,
helped to boost sales by nearly ¥200 million.
Total sales of high frequency surgical instruments increased ¥28 million, or 29.8%, to ¥122 million. In the domestic market, budget
cuts at hospitals have delayed the approval of capital equipment spending for new systems, and this is limiting sales growth. However,
with awareness of Japan MDM products clearly growing among physicians, the Company is steadily building its presence in the market.
Japan MDM is also strengthening its position in overseas markets too, primarily by rebuilding its sales framework and reviewing its
medical equipment sales agency network.
21
Impact of Changes in Foreign Exchange Rates
As a company that markets imported products procured from overseas manufacturers on a U.S.-dollar-denominated basis, exchange
rate fluctuations have a significant bearing on Japan MDM’s operating results. Japan MDM also manufactures products in the U.S. at
subsidiary Ortho Development Corporation, where all manufacturing costs are denominated in U.S. dollars.
Japan MDM takes a conservative approach toward mitigating the risk of exchange rate fluctuations. Japan MDM concludes long-
term forward foreign currency contracts and uses other hedging instruments to minimize the impact of foreign exchange fluctuations on
the Company’s ability to meet sales forecasts. The average settlement exchange rate for fiscal 2004 was ¥94.08 to the U.S. dollar.
Japan MDM has entered into forward foreign currency contracts for settlements involving about 80% of budgeted accounts payable for
the fiscal year ending May 31, 2005, at the settlement exchange rate of ¥110 to the U.S. dollar. Forward foreign currency contracts
covering about 70% of all budgeted accounts payable for the fiscal year ending May 31, 2006, at the average exchange rate of
¥104.00 have also been concluded.
Financial Position and Liquidity
As of May 31, 2004, total current assets were ¥16,355 million (US$148,613 thousand), an increase of ¥105 million, or 0.6% from a year
earlier. Although the ¥1,473 million recorded in the previous year for forward exchange contracts and others*1 was no longer a factor in the
year under review, cash on hand and in banks increased ¥499 million, to ¥1,270 million (US$11,541 thousand), while prepaid expenses
and other increased ¥739 million, to ¥1,030 million, mainly due to the booking of accounts due for returned merchandise.
As of May 31, 2004, property, plant and equipment totaled ¥5,286 million (US$48,037 thousand), an increase of ¥312 million, or
6.3%, compared to a year earlier. This reflected a rise in tools, furniture and fixtures of ¥401 million, in line with business growth.
Investments and advances were ¥464 million (US$4,216 thousand), down ¥825 million, or 64.0%, from a year earlier. This drop
was mainly attributable to the absence of ¥764 million recorded for forward exchange contracts and others*1 in the previous year.
Investment in securities declined ¥58 million, mainly due to the sale of shares in Orthovita, Inc. following the termination of Japan
MDM’s contract with this company.
As a result, total assets declined ¥463 million, or 2.0%, to ¥23,024 million (US$209,213 thousand) at the end of the year
under review.
As of May 31, 2004, total current liabilities were ¥4,901 million (US$44,531 thousand), down ¥1,402 million, or 22.2%, from a
Net Income Total Assets
(Millions of yen) (Millions of yen)
2,500 25,000
2,000 20,000
1,500 15,000
1,000 10,000
500 5,000
0 0
’00 ’01 ’02 ’03 ’04 ’00 ’01 ’02 ’03 ’04
22
year ago. The main reason was the absence of deferred gains on hedging instruments of ¥1,473 million*1 recorded in the previous
year. Short-term bank borrowings and the current portion of long-term debt declined ¥314 million, to ¥2,108 million.
Long-term debt increased ¥307 million, or 6.3%, to ¥5,145 million (US$46,749 thousand). Although bank borrowings fell ¥258
million, to ¥4,023 million, notes payable for property, plant and equipment, mainly long-term payments for medical equipment,
increased ¥590 million, to ¥1,122 million.
Stockholders’ equity increased ¥1,329 million, or 11.9%, to ¥12,521 million (US$113,772 thousand). The increase in net income
was the main factor. The stockholders’ equity ratio improved 6.7 percentage points to 54.4%. Stockholders’ equity per share was
¥672.11 (US$6.11), ¥73.87 more than at the previous fiscal year-end.
*1 Recorded as unrealized gains on forward exchange contracts. Based on the application of hedge accounting, the same figure is recorded in both current assets
and current liabilities and has no effect on earnings.
Cash Flows
In the fiscal year ended May 31, 2004, operating activities provided net cash of ¥1,840 million (US$16,724 thousand), ¥963 million
more than in the previous fiscal year. This mainly reflected efforts to minimize the increase in inventories, which was ¥1,007 million less
than in the previous fiscal year, at ¥246 million, and a cash inflow of ¥27 million from an increase in accounts payable, compared to a
cash outflow of ¥613 million due to a decrease in accounts payable in the previous year. This was due to steps to reduce payments for
imported products, which had been a drain on funds until the previous fiscal year.
Investing activities used net cash of ¥1,030 million (US$9,362 thousand), approximately on par with the level in the previous fiscal
year. This mainly reflected an increase of ¥254 million for the purchase of property, plant and equipment to ¥1,067 million, partially
offset by proceeds from sale of investments in securities of ¥79 million, due to the sale of shares in Orthovita, Inc. following the
termination of Japan MDM’s contract with this company.
Financing activities used net cash of ¥369 million (US$3,353 thousand), ¥81 million more than in the previous fiscal year. The net
decrease in interest-bearing debt was ¥572 million, compared to a net increase of ¥83 million in the previous year, while proceeds
from sale of property brought in installments totaled ¥1,104 million. Cash dividends were ¥464 million (US$4,205 thousand), ¥128
million, or 38.1%, higher than fiscal 2003.
As a result of the above, cash and cash equivalents increased ¥499 million to ¥940 million (US$8,542 thousand) as of May
31, 2004.
Stockholders’ Equity & Stockholders’ Equity Ratio Cash Flows
(Millions of yen / %) (Millions of yen)
15,000 100 2,000
12,000 80
1,000
9,000 60
0
6,000 40
-1,000
3,000 20
0 0 -2,000
’00 ’01 ’02 ’03 ’04 ’00 ’01 ’02 ’03 ’04
Stockholders’ equity (left axis) Cash flows from operating activities
Stockholders’ equity ratio (%) (right axis) Cash flows from investing activities
Cash flows from financing activities
23
[ Consolidated Balance Sheets ]
Japan Medical Dynamic Marketing, INC. and its Subsidiary
As of May 31, 2003 and 2004
Thousands of
U.S. dollars
Millions of yen (Note 1)
ASSETS 2003 2004 2004
Current Assets:
Cash on hand and in banks ¥ 771 ¥ 1,270 $ 11,541
Trade receivables 2,526 2,518 22,881
Less: allowance for bad debts (8) (5) (47)
2,518 2,513 22,834
Inventories (Note 3) 10,923 10,994 99,902
Deferred tax assets (Note 6) 274 366 3,325
Forward exchange contracts and others (Note 9) 1,473 – –
Deferred losses on hedging instruments (Note 9) – 182 1,658
Prepaid expenses and other 291 1,030 9,353
Total current assets 16,250 16,355 148,613
Investments and Advances:
Investment in securities (Note 4) 280 222 2,013
Forward exchange contracts and others (Note 9) 764 – –
Deferred losses on hedging instruments (Note 9) – 2 19
Other 245 240 2,184
1,289 464 4,216
Property, Plant and Equipment (Less: Accumulated Depreciation):
Buildings and structures 979 920 8,364
Machinery, equipment and vehicles 211 212 1,930
Tools, furniture and fixtures 1,550 1,951 17,729
Construction in progress 57 31 285
Land 2,177 2,172 19,729
4,974 5,286 48,037
Deferred Tax Assets (Note 6) 518 503 4,572
Deferred Charges and Intangibles 456 416 3,775
¥23,487 ¥23,024 $209,213
The accompanying notes are an integral part of the statements.
24
Thousands of
U.S. dollars
Millions of yen (Note 1)
LIABILITIES AND STOCKHOLDERS’ EQUITY 2003 2004 2004
Current Liabilities:
Short-term bank borrowings ¥ 1,000 ¥ 600 $ 5,452
Current portion of long-term debt (Note 5) 1,422 1,508 13,703
Accounts payable 778 971 8,825
Income taxes payable 972 1,074 9,757
Deferred gains on hedging instruments (Note 9) 1,473 – –
Forward exchange contracts and others (Note 9) – 182 1,658
Other current liabilities 658 566 5,136
Total current liabilities 6,303 4,901 44,531
Long-term Debt (Note 5) 4,838 5,145 46,749
Accrued Retirement Benefits (Note 7) 390 456 4,142
Deferred Gains on Hedging Instruments (Note 9) 764 – –
Forward Exchange Contracts and Others (Note 9) – 1 19
Stockholders’ Equity
Common stock 1,826 1,826 16,596
Authorized: 37,728,000 shares at May 31, 2003 and 2004
Issued: 18,533,116 shares at May 31, 2003 and 2004
Additional paid-in capital 1,411 1,411 12,826
Retained earnings (Note 13) 7,818 9,286 84,376
Unrealized gains on securities 15 9 82
Adjustment on foreign currency statement translation 143 12 102
11,213 12,544 113,982
Less: Treasury stock (21) (23) (210)
11,192 12,521 113,772
Contingent Liabilities (Note 10)
¥23,487 ¥23,024 $209,213
25
[ Consolidated Statements of Income ]
Japan Medical Dynamic Marketing, INC. and its Subsidiary
For the years ended May 31, 2003 and 2004
Thousands of
U.S. dollars
Millions of yen (Note 1)
2003 2004 2004
Net Sales (Note 11) ¥13,944 ¥13,736 $124,817
Cost of Sales (Note 12) 3,398 3,386 30,772
Gross profit 10,546 10,350 94,045
Selling, General and Administrative Expenses 6,478 6,637 60,306
Operating profit 4,068 3,713 33,739
Other Income / (Expenses):
Interest and dividend income 4 3 24
Interest expense (202) (193) (1,749)
Foreign exchange gains 35 492 4,468
Losses on disposal of inventory (175) (55) (499)
Losses on write-down of inventory (28) (215) (1,951)
Losses on sale/disposal of property and equipment, net (74) (48) (432)
Losses on write-down of investment in securities (8) – –
Losses on write-down of golf club membership (16) – –
Amortization of unrealized net obligation of transition
from adopting new accounting standard for retirement benefits (29) (29) (267)
Gains on prior period adjustments – 14 130
Gains on sale of property, plant and equipment – 1 1
Gains on sale of investments in securities – 31 284
Other, net (32) 21 190
(525) 22 199
Income before income taxes 3,543 3,735 33,938
Income Taxes (Note 6)
Current 1,870 1,809 16,437
Deferred (213) (116) (1,050)
1,657 1,693 15,387
Net income ¥ 1,886 ¥ 2,042 $ 18,551
U.S. dollars
Yen (Note 1)
Per Share (Note 2 (13))
Net income – primary ¥ 95.84 ¥106.38 $0.97
Cash dividends 25.00 25.00 0.23
Weighted Average Number of Shares Issued (in Thousands) 18,527 18,524
The accompanying notes are an integral part of the statements.
26
[ Consolidated Statements of Stockholders’ Equity ]
Japan Medical Dynamic Marketing, INC. and its Subsidiary
For the years ended May 31, 2003 and 2004
Millions of yen
Number of Additional
shares of Common paid-in Retained
common stock stock capital earnings
Balance at May 31, 2002 16,848,288 ¥1,826 ¥1,411 ¥6,378
Net income for the year ended May 31, 2003 – – – 1,886
Cash dividends – – – (336)
Bonuses to directors and statutory auditors – – – (110)
Stock split (1.1 for 1) 1,684,828 – – –
Balance at May 31, 2003 18,533,116 ¥1,826 ¥1,411 ¥7,818
Net income for the year ended May 31, 2004 – – – 2,042
Cash dividends – – – (464)
Bonuses to directors and statutory auditors – – – (110)
Balance at May 31, 2004 18,533,116 ¥1,826 ¥1,411 ¥9,286
Thousands of U.S. dollars (Note 1)
Number of Additional
shares of Common paid-in Retained
common stock stock capital earnings
Balance at May 31, 2003 18,533,116 $16,596 $12,826 $71,033
Net income for the year ended May 31, 2004 – – – 18,551
Cash dividends – – – (4,208)
Bonuses to directors and statutory auditors – – – (1,000)
Balance at May 31, 2004 18,533,116 $16,596 $12,826 $84,376
The accompanying notes are an integral part of the statements.
27
[ Consolidated Statements of Cash Flows ]
Japan Medical Dynamic Marketing, INC. and its Subsidiary
For the years ended May 31, 2003 and 2004
Thousands of
U.S. dollars
Millions of yen (Note 1)
2003 2004 2004
Cash Flows from Operating Activities:
Income before income taxes ¥ 3,543 ¥ 3,735 $ 33,938
Adjustment for:
Depreciation and amortization 724 902 8,196
Provision for accrued retirement benefits 106 65 598
Interest and dividend income (4) (3) (24)
Interest expense 202 193 1,749
Foreign exchange (gains) / losses 70 (66) (599)
Losses on sale/disposal of property and equipment 74 48 432
Gains on sale of investments in securities – (31) (284)
Losses on write-down of investment in securities 8 – –
Gains on sale of property, plant and equipment – (0) (1)
Losses on write-down of golf-club membership 16 – –
(Increase) / Decrease in trade receivables (113) 197 1,788
Increase in inventories (1,253) (246) (2,238)
Increase in accounts receivable, other relating to returned merchandise – (911) (8,280)
Increase / (Decrease) in accounts payable (613) 27 246
Increase in unpaid bonuses to employees 26 6 59
Increase / (Decrease) in consumption tax payable 101 (56) (505)
Other 16 (180) (1,631)
Sub-total 2,903 3,680 33,444
Interest and dividend income received 7 2 20
Interest expense paid (127) (135) (1,232)
Income taxes paid (1,906) (1,707) (15,508)
Net cash provided by operating activities 877 1,840 16,724
Cash Flows from Investing Activities:
Transfer to time deposits (3,500) – –
Transfer from time deposits 3,500 – –
Purchase of investment securities in subsidiaries (122) – –
Purchase of property, plant and equipment (813) (1,067) (9,699)
Proceeds from sale of property, plant and equipment 4 6 54
Purchase of intangible assets (137) (55) (495)
Proceeds from sale of investments in securities – 79 714
Purchase of investment securities (200) – –
Proceeds from unrealized gains on forward exchange contracts
and other similar hedging instruments 260 – –
Other – 7 64
Net cash used in investing activities (1,008) (1,030) (9,362)
Cash Flows from Financing Activities:
Proceeds from sale of property bought in installments 434 1,104 10,035
Payment of installment payables (453) (435) (3,958)
Increase in short-term bank borrowings (2,981) (400) (3,635)
Proceeds from long-term debt 5,000 1,500 13,630
Repayment of long-term debt (1,937) (1,672) (15,193)
Payments to acquire treasury stock (15) (2) (27)
Cash dividends (336) (464) (4,205)
Net cash used in financing activities (288) (369) (3,353)
Effect of Exchange Rate Changes on Cash and Cash Equivalents 32 58 524
Net Increase / (Decrease) in Cash and Cash Equivalents (387) 499 4,533
Cash and Cash Equivalents at Beginning of Year 828 441 4,009
Cash and Cash Equivalents at End of Year ¥ 441 ¥ 940 $ 8,542
The accompanying notes are an integral part of the statements.
28
[ Notes to the Consolidated Financial Statements ]
Japan Medical Dynamic Marketing, INC. and its Subsidiary
1. Basis of Presenting the Consolidated Financial Statements
The accompanying consolidated financial statements have been prepared from the accounts maintained by Japan Medical Dynamic Marketing, INC. (the
“Company”) and its consolidated subsidiary (the “Companies”) in accordance with the provisions set forth in the Japanese Commercial Code (the
“Code”) and the Securities and Exchange Law in conformity with accounting principles generally accepted in Japan, which are different in certain respects
as to application and disclosure requirements of International Accounting Standards.
Certain items presented in the consolidated financial statements submitted to the Director of the Kanto Finance Bureau in Japan have been
reclassified for the convenience of readers outside Japan.
The standards, procedures and practices to audit such financial statements are those generally accepted and applied in Japan.
Amounts in U.S. dollars are included solely for the convenience of readers outside Japan. The rate of ¥110.05=U.S.$1, the rate of exchange on May
31, 2004, has been used in translation. The inclusion of such amounts is not intended to imply that Japanese yen have been or could be readily
converted, realized or settled in U.S. dollars at the rate or any other rate.
2. Summary of Significant Accounting Policies
(1) Scope of Consolidation and Elimination
The Company had only one subsidiary, Ortho Development Corporation as of May 31, 2003 and 2004. The consolidated financial statements include
the accounts of the Company and its subsidiary at May 31, 2003 and 2004.
In the year ended May 31, 2002, the Company purchased an additional 1,000,000 shares in its subsidiary. As a result, the ownership of the
Company in its subsidiary was increased from 86.0 percent to 96.0 percent.
(2) Elimination of Inter-company Accounts
For the purposes of preparing the consolidated financial statements, all significant inter-company transactions, account balances and unrealized profits
among the Companies have been entirely eliminated, and the portion attributable to minority interests is charged/credited to “Minority interests”.
(3) Consolidated Statements of Cash Flows and Cash and Cash Equivalents
Reconciliation of cash and cash equivalents of the consolidated statements of cash flows and account balances of the consolidated balance sheets
is made as follows:
Thousands of
Millions of yen U.S. dollars
2003 2004 2004
Cash and bank deposits ¥ 771 ¥1,270 $11,541
Time deposits with deposit term of over 3 months (330) (330) (2,999)
Cash and cash equivalents ¥ 441 ¥ 940 $ 8,542
(4) Inventories
Merchandise and products are valued at lower of cost or market cost, cost being determined by the average method.
Raw materials, work-in process and supplies are valued at cost, cost being determined by the average method.
(5) Financial Instruments
(a) Derivatives
All derivatives are stated at fair value, with changes in fair value included in net profit or loss for the period in which they arise, except for derivatives that
are designated as “hedging instruments” (see (c) Hedge Accounting).
(b) Securities
Securities held by the Company are classified as follows;
Other securities for which market quotations are available are stated at fair value.
Net unrealized gains or losses on these securities are reported as a separate item in the stockholders’ equity at a net-of-tax amount.
Other securities for which market quotations are unavailable are stated at cost.
(c) Hedge Accounting
Gains or losses arising from changes in fair value of the derivatives designated as “hedging instruments” are deferred as an asset or liability and included
in net profit or loss in the same period during which the gains and losses on the hedged items or transactions are recognized. In accordance with the
exceptional measures, the Company does not record forward exchange contracts at market value but translates the underlying foreign currency denomi-
nated accounts payable hedged by these contracts into yen using the contractual rate as long as the specific criteria are met. In accordance with the
special measures, the Company does not record interest rate swap arrangements at market value but charges or credits net cash flows from the hedged
interest-bearing borrowings as the arrangements satisfy the specific criteria for applying the accounting treatment.
The derivatives designated as hedging instruments by the Company are forward exchange contracts, currency swap contracts, currency option
contracts and interest rate swap contracts. The related hedged items are trade accounts payable and interest expenses on bank borrowings.
29
The Company has employed several derivative financial instruments for hedge purposes, such as foreign exchange forward contracts and other
derivative contracts, in order to limit their exposures to losses resulting from adverse fluctuations in foreign currency exchange rates.
The Company assesses the effectiveness of its hedging activities by reference to the accumulated gains or losses on the hedging instruments in
comparison with the accumulated settlements on the related hedged items over the period from the commencement of the hedge to the end of the
fiscal year. As an exception to the above, the Company does not assess the hedge effectiveness of interest rate swaps, which is accounted for in
accordance with the special treatment measures for hedge accounting.
(6) Property, Plant and Equipment
Property, plant and equipment are stated at cost. Depreciation is computed on the declining-balance method over the estimated useful lives of assets.
The range of useful lives is as follows:
Buildings and structures 6 to 65 years
Machinery, equipment and vehicles 5 to 17 years
Tools, furniture and fixtures 2 to 15 years
(7) Accounting Standard for Impairment of Fixed Assets
On August 9, 2002, the Business Accounting Council in Japan issued “Accounting Standard for Impairment of Fixed Assets”. The standard requires that
fixed assets be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be
recoverable. An impairment loss shall be recognized in the income statement by reducing the carrying amount of impaired assets or a group of assets to
the recoverable amount to be measured as the higher of net selling price and value in use.
The standard shall be effective for fiscal years beginning April 1, 2005. However, an earlier adoption is permitted for fiscal years beginning April 1,
2004 and for fiscal years ending between March 31, 2004 and March 30, 2005.
The Company has not yet applied this new standard. However, the management believes that an application of the new standard would not have
significant impact on the Company’s consolidated financial statements.
(8) Foreign Currency Translation
All assets and liabilities of the foreign subsidiary are translated into Japanese yen at the exchange rates prevailing at the balance sheet date and the
stockholders’ equity at the beginning of the year is translated into Japanese yen at the historical rates.
Differences in yen amounts arising from the use of different rates are presented as “foreign currency translation adjustments” in the stockholders’
equity section.
(9) Accrued Retirement Benefits
Effective from the year ended May 31, 2001, the Company and its subsidiary adopted the new Japanese accounting standard for retirement benefits.
As of May 31, 2001 the balance of “Accrued Retirement Benefits” represents the estimated present value of projected benefit obligations in excess
of the fair value of the plan assets except that, as permitted under the new accounting standard, the unrecognized transition amount arising from adopting
the new accounting standard of ¥146 million at June 1, 2000 (the beginning of the year) is amortized on a straight-line basis over 5 years, and
unrecognized actuarial differences are amortized on a straight-line basis over the period of 10 years from the next year in which they arise.
The Company has provided for the accrued cost of retirement benefits payable to directors and statutory auditors it would be required to pay, if all
eligible directors and statutory auditors had retired at the balance sheet date.
(10) Income Taxes
Income taxes are determined using the asset and liability approach, where deferred tax assets and liabilities are recognized for temporary differences
between the basis of assets and liabilities and their reported amount in the financial statements.
(11) Amortization
Amortization of deferred charges is computed on the straight-line method. Research and development costs and new share expenses are charged to
income when incurred.
(12) Allowance for Bad Debts
Allowance for bad debts is provided for in an amount that is deemed sufficient to cover estimated future losses.
(13) Net Income and Dividends per Share
Net income per share of common stock is based upon the weighted average number of shares of common stock outstanding during each year
appropriately adjusted for a subsequent stock-split, if any. Cash dividends per share shown for each period in the accompanying consolidated statements
of income represent dividends declared as applicable to the respective periods.
(14) Accounting for Consumption Tax
Consumption tax is imposed at the flat rate on all domestic consumption of goods and services (with certain exemptions). The consumption tax imposed
on the Company’s sales to customers is withheld by the Company at the time of sale and is subsequently paid to the national government. The
consumption tax withheld upon sale is not included in the amount of “Net Sales” and the consumption tax paid by the Company on the purchases of
goods and services from vendors is not included either in the amounts of costs and expenses in the accompanying consolidated statements of income.
The net balance of consumption tax withheld and paid is included in “Consumption tax payable” in the accompanying consolidated balance sheets.
30
3. Inventories
Inventories at May 31, 2003 and 2004 consisted of the following:
Thousands of
Millions of yen U.S. dollars
2003 2004 2004
Merchandise ¥ 9,935 ¥10,268 $93,311
Products 586 294 2,667
Raw materials 206 268 2,433
Work-in-process 196 164 1,491
¥10,923 ¥10,994 $99,902
4. Investments in Securities
A comparison of the aggregate cost and fair value of other securities for which market quotations are available at May 31, 2004 was as follows:
Millions of yen
At May 31, 2004
Gross Gross
unrealized unrealized Fair
Cost gains losses value
Other securities for which market quotations are available—
Equity securities ¥6 ¥15 ¥– ¥21
¥6 ¥15 ¥– ¥21
Thousands of U.S. dollars
At May 31, 2004
Gross Gross
unrealized unrealized Fair
Cost gains losses value
Other securities for which market quotations are available—
Equity securities $51 $140 $– $191
$51 $140 $– $191
Other securities sold during the years ended May 31, 2003 and 2004 were as follows:
Carrying amount
Thousands of
Millions of yen U.S. dollars
2003 2004 2004
Proceeds from sales ¥– ¥79 $714
Gain on sale ¥– ¥31 $284
Loss on sale ¥– ¥ – $ –
Other securities for which market quotations are unavailable at May 31, 2003 and 2004 were as follows:
Carrying amount
Thousands of
Millions of yen U.S. dollars
2003 2004 2004
Equity securities ¥202 ¥201 $1,822
Total ¥202 ¥201 $1,822
31
5. Long-term Debt
Long-term debt at May 31, 2003 and 2004 consisted of the following:
Thousands of
Millions of yen U.S. dollars
2003 2004 2004
Long-term bank borrowings ¥ 5,703 ¥ 5,531 $ 50,259
Notes payable for property, plant and equipment 532 1,122 10,193
Other 25 – –
6,260 6,653 60,452
Less: current portion of long-term debt (1,422) (1,508) (13,703)
¥ 4,838 ¥ 5,145 $ 46,749
The aggregate annual maturities of long-term bank borrowings at May 31, 2004 were as follows:
Millions of Thousands of
Years ending May 31, yen U.S. dollars
2005 ¥1,508 $13,703
2006 773 7,024
2007 250 2,272
2008 3,000 27,260
¥5,531 $50,259
6. Income Taxes
Income taxes in Japan applicable to the Company for the years ended May 31, 2003 and 2004 consisted of corporate income tax (national), enterprise
tax (local) and resident income taxes (local) at the approximate rates indicated as follows:
Rates on taxable income
2003 2004
Corporate income tax 30.00% 30.00%
Enterprise tax 10.08 10.08
Resident income taxes 6.21 6.21
46.29% 46.29%
Statutory tax rate in effect to reflect the deductibility of enterprise tax when paid 42.05% 42.05%
Following the enactment of the Law to Partially Amend the Local Tax Law (Law No.9, 2003) on March 31, 2003, in the fiscal year ended May 31,
2003 the tax rate applicable to temporary differences expected to be settled by May 31, 2004 is 42.05%, while a tax rate of 42.18% is applied to
temporary differences expected to be settled thereafter.
32
As of May 31, 2003 and 2004, significant components of deferred tax assets and liabilities consisted of the following:
Thousands of
Millions of yen U.S. dollars
2003 2004 2004
Deferred tax assets (current):
Accrued enterprise taxes ¥ 87 ¥ 95 $ 865
Accrued bonus to employees 104 127 1,150
Write-down of inventory – 58 529
Unrealized profits in inventories 33 22 201
Accrued expenses 6 20 180
Supplies for research and development 12 14 125
Other 34 45 414
Total deferred tax assets (current) 276 381 3,464
Deferred tax liabilities (current) (2) (1) (9)
Deferred state taxes in an overseas subsidiary – (14) (130)
Net deferred tax assets (current) 274 366 3,325
Deferred tax assets (noncurrent):
Net operating loss carryforward in an overseas subsidiary 414 299 2,721
Accrued retirement benefits 140 174 1,585
Research and development expenses in an overseas subsidiary 83 74 671
Losses on write-down of golf club membership 42 43 387
Other 33 19 176
Less: Valuation allowance (92) – –
Total deferred tax assets (non-current) 620 609 5,540
Deferred tax liabilities (non-current):
Unrealized revaluation gains in assets held by an overseas subsidiary (9) (6) (60)
Accelerated depreciation (82) (94) (850)
Unrealized gains on securities (11) (6) (58)
Total deferred tax liabilities (102) (106) (968)
Net deferred tax assets (non-current) 518 503 4,572
Net deferred tax assets ¥ 792 ¥ 869 $7,897
As of May 31, 2003 and 2004, reconciliation of the statutory tax rate and the effective income tax rate were as follows:
2003 2004
Statutory tax rate 42.05% 42.05%
Increase (decrease) in taxes resulting from permanent differences 2.90 2.87
Other 1.83 0.42
Effective income tax rate 46.78% 45.34%
7. Accrued Retirement Benefits and Pension Plan
The reserve for retirement benefits as of May 31, 2003 and 2004 is analyzed as follows:
Thousands of
Millions of yen U.S. dollars
2003 2004 2004
Projected benefit obligations ¥380 ¥449 $4,083
Unrecognized difference arising from change in accounting for retirement benefits (58) (29) (266)
Unrecognized net actuarial gain or loss 46 19 173
Reserve for retirement benefits ¥368 ¥439 $3,990
33
The accrued retirement benefits account on the consolidated balance sheets includes the following accrued cost of retirement benefits payable to
directors and statutory auditors.
Thousands of
Millions of yen U.S. dollars
2003 2004 2004
Accrued cost of retirement benefits payable to directors and statutory auditors ¥22 ¥17 $152
Net expense related to retirement benefits for the years ended May 31, 2003 and 2004 were as follows:
Thousands of
Millions of yen U.S. dollars
2003 2004 2004
Service cost ¥ 63 ¥59 $539
Interest cost 10 10 86
Amortization of difference arising from change in accounting in retirement benefits 29 29 267
Amortization of unrecognized net actuarial gain or loss 4 (4) (39)
Other 1 2 23
¥107 ¥96 $876
Assumptions used in calculation of the above information were as follows:
2003 2004
Discount rate 2.5% 2.0%
Method of attributing the projected benefits to periods of service Straight-line basis Straight-line basis
Amortization of difference arising from change in accounting in retirement benefits 5 years 5 years
Amortization of unrecognized actuarial differences 10 years 10 years
8. Finance Leases
The Company and its subsidiary have various operating lease agreements. Certain key information on such lease contracts of the Company and its
subsidiary for the years ended May 31, 2003 and 2004 was as follows:
Thousands of
Millions of yen U.S. dollars
2003 2004 2004
The scheduled maturities of future lease rental payments on such lease contracts
as of May 31, 2003 and 2004 were as follows:
Due within one year ¥23 ¥13 $119
Due over one year 26 15 133
¥49 ¥28 $252
9. Information on Derivatives
(1) Company’s Policy, Transactions and Purpose of Derivative Transactions
The Company uses derivative financial instruments, which comprise principally of foreign exchange forward contracts and currency swap transactions, to
reduce its exposure to market risks from fluctuations in foreign currency exchange rates on payables denominated in foreign currencies. The Company
does not hold or issue derivative financial instruments for trading purposes. The Company has entered into the forward exchange contracts as a hedge
against transactions in foreign currencies. The foreign exchange forward contracts are used by the Company to minimize exposure and to reduce risk from
exchange rate fluctuations in the ordinary course of its operations.
All derivatives are stated at fair value with changes in fair value included in net profit or loss for the period in which they arise, except for derivatives
that are designated as “hedging instruments” (see 2(5)(c) Hedge Accounting).
(2) Risk of Transactions
The derivative transactions have market risks associated with market price volatility. Although the Company may be exposed to losses in the event of
nonperformance by counterparties or currency fluctuations, it does not anticipate significant losses from the arrangements described above.
(3) Management of Transaction
The Company has internal rules for derivative transactions. The derivative transactions of the Company have been executed and controlled by the finance
and accounting department, which ensures checks and balances under internal rules. In addition, the status of derivative transactions and necessary
countermeasures have been reported to and discussed at ordinary meetings of the Board of Directors on a monthly basis.
34
10. Contingent Liabilities
The Company was contingently liable for trade notes discounted by banks in the aggregate amount of ¥2,452 million (US$22,282 thousand) at May
31, 2004.
11. Segment Information
(1) Geographical Segment Information
Geographical segment information for the years ended May 31, 2003 and 2004 is summarized as follows:
For the year ended May 31, 2003
Millions of yen
Sales to Inter-
outside segment Total Operating Operating
customers sales sales expenses profit Assets
Geographical Segment
Japan ¥13,414 ¥ 4 ¥13,418 ¥ 8,950 ¥4,468 ¥24,075
North America 530 1,095 1,625 1,937 (312) 2,422
Total 13,944 1,099 15,043 10,887 4,156 26,497
Elimination of inter-segment
sales/profit or common asset – (1,099) (1,099) (1,011) (88) (3,010)
Consolidated total ¥13,944 ¥ – ¥13,944 ¥ 9,876 ¥4,068 ¥23,487
For the year ended
For the year ended May 31, 2004 May 31, 2004
Millions of yen Thousands of U.S. dollars
Sales to Inter-
outside segment Total Operating Operating Operating
customers sales sales expenses profit Assets profit Assets
Geographical Segment
Japan ¥12,920 ¥ 6 ¥12,926 ¥ 9,001 ¥3,925 ¥23,297 $35,666 $211,697
North America 816 1,283 2,099 2,087 12 2,682 105 24,372
Total 13,736 1,289 15,025 11,088 3,937 25,979 35,771 236,069
Elimination of inter-segment
sales/profit or common asset – (1,289) (1,289) (1,065) (224) (2,955) (2,032) (26,856)
Consolidated total ¥13,736 ¥ – ¥13,736 ¥10,023 ¥3,713 ¥23,024 $33,739 $209,213
(2) Industrial Segment Information and Overseas Sales Information
Industrial segment information and overseas sales information for the years ended May 31, 2003 and 2004 are not disclosed, because the Companies
have one segment only and neither net sales of overseas subsidiary nor overseas sales of the Companies are material (less than 10% of the consolidated
net sales amount).
35
12. Related Party Information
Material transactions of the Company with its related companies and individuals, excluding transactions with its consolidated subsidiary which are
eliminated in the consolidated financial statements and other than those disclosed elsewhere in these financial statements, for the years ended May 31,
2003 and 2004, were as follows:
As of May 31, 2004 Millions of yen
Equity
ownership
percentage Volume of transactions made
Name of related company/ Paid-in Principal by the Description of the in the year ended May 31,
individual capital business Company Company’s transactions 2003 2004
DOLF MAEJIMA Production of
CO., LTD. ¥10 million metal materials – Purchase of products ¥3 ¥10
The terms and conditions on the above transactions are the same as those of arm’s-length transactions.
The account balances arising from these related party transactions shown above are none or nominal, if any, at May 31, 2003 and 2004.
13. Subsequent Event
(1) Appropriation of Retained Earnings
The stockholders’ meeting of the Company held on August 20, 2004 approved the payment of cash dividends in the aggregate amount of ¥464 million
(US$4,208 thousand) (¥25.00 per share) to stockholders of record as of May 31, 2004 and the payment of directors’ bonuses in the aggregate amount
of ¥71 million (US$645 thousand).
(2) Stock Option Plan
The Company has adopted a stock option plan pursuant to the provisions of Article 280-20, 21 of the Commercial Code of Japan.
It was approved by the stockholders at the general meeting held on August 20, 2004 and the plan grants options to purchase shares of common
stock of the Company during the period from September 1, 2006 to August 31, 2008 to directors and employees of the Company and its subsidiary.
The maximum number of share options is 550,000 and the exercise price of the options is determined at the average market quotation during the
preceding month of option granting, subject to certain adjustment.
36
[ Report of Independent Accountants ]
The Board of Directors and shareholders of
Japan Medical Dynamic Marketing, INC.
We have audited the accompanying consolidated balance sheets of Japan Medical Dynamic Marketing, INC. and its subsidiary
as of May 31, 2003 and 2004, and the related consolidated statements of income, stockholders’ equity, and cash flows for the
years then ended, all expressed in Japanese yen. These consolidated financial statements are the responsibility of the Company’s
management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards, procedures and practices generally accepted and applied in
Japan. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consoli-
dated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presen-
tation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated
financial position of Japan Medical Dynamic Marketing, INC. and its subsidiary as of May 31, 2003 and 2004, and the consoli-
dated results of their operations and their cash flows for the years then ended in conformity with accounting principles and
practices generally accepted in Japan.
The amounts expressed in U.S. dollars, which are provided solely for the convenience of the reader, have been translated on the
basis set forth in Note 1 to the accompanying consolidated financial statements.
ChuoAoyama PricewaterhouseCoopers
Tokyo, Japan
August 25, 2004
37
[ Investor Information ]
As of May 31, 2004
Stock listing: Tokyo Stock Exchange (First Section, Ticker Code: 7600)
Transfer agent: The Chuo Mitsui Trust & Banking Company, Limited
Common stock: Authorized: 37,728,000 shares
Issued: 18,533,116 shares
* Japan MDM conducted a 1.1-for-1 stock split on July 22, 2002, resulting in an increase in common stock
outstanding from 16,848,288 shares to 18,533,116 shares.
Number of stockholders: 7,553
Major stockholders:
Stockholdings Voting rights
Stockholder (Shares) (%)
The Master Trust Bank of Japan, Ltd. (Trust Account) 1,994,800 10.82
Japan Trustee Services Bank, Ltd. (Trust Account) 1,466,000 7.95
Takashi Watanabe 1,444,800 7.84
Yasuo Watanabe 1,012,064 5.49
Motohiro Shimazaki 914,102 4.96
The Nomura Trust and Banking Co., Ltd. (Trust Account) 432,800 2.34
I.T.T. Co., Ltd. 396,000 2.14
Hiroshi Kusakabe 390,529 2.11
Trust & Custody Services Bank, Ltd. (Pension Tokkin Account) 390,500 2.11
The Chase Manhattan Bank, NA London 343,800 1.86
Stock price and trading volume on the Tokyo Stock Exchange
(¥)
6,000
High
Low
Stock Price
4,000
1.2 for 1
stock split
(Shares) 1.1 for 1 2,000
2,000,000 stock split
1,500,000
Trading Volume 0
1,000,000
500,000
0
2000 2001 2002 2003 2004
38
[ Corporate Data ]
As of May 31, 2004
Company name: Japan Medical Dynamic Marketing, INC.
Address: 12-2, Ichigayadaimachi, Shinjuku-ku, Tokyo 162-0066, Japan
Phone: +81-3-3341-6545
Fax: +81-3-3341-6752
URL: http://www.jmdm.co.jp/
Board of Directors and PRESIDENT: Kenichi Higashi
Corporate Auditors: MANAGING DIRECTORS: Masao Okawa
Yasuki Ogawa
DIRECTORS: Yuichi Tamura
Itsuro Numata
Isamu Nakahira
Hiroshi Kusakabe (Advisor)
STANDING AUDITOR: Sonoo Ichikawa
AUDITORS: Takeo Suzuki
Shuzo Ohara
Akira Nozaki
(As of August 20, 2004)
Number of employees: 416 (Consolidated)
Established: May 28, 1973
Capital: ¥1,826 million
Business activities: • Import and sale of medical devices
• Development, manufacture and sale of domestic medical products
• Promotion of medical products to medical professionals and major hospitals throughout Japan
• Provision of training and services to local distributors
Major overseas partners: DePuy Orthopaedics, Inc. (U.S.)
Cincinnati Sub-Zero Products, Inc. (U.S.)
Spine Next S.A. (FRANCE)
Subsidiary: Ortho Development Corporation
12187 South Business Park Drive, Draper, Utah 84020, USA
Phone: +1-800-429-8339, +1-801-553-9991
Fax: +1-801-553-9993
E-mail: info@orthodevelopment.com
URL: http://www.odev.com
For further information, Corporate Strategy Department
please contact: Japan Medical Dynamic Marketing, INC.
Phone: +81-3-3341-6705
Fax: +81-3-3341-6673
39
This annual report is printed on recycled paper.
Printed in Japan
