Financial Information

Business Risk Factors

The following issues regarding business and financial status, as described in the Yuka Shoken Hokokusho (Japanese-language business report), are issues that could significantly influence investors in their decisions regarding Aderans.
 Please note that forward-looking statements presented below are based on assumptions made by the directors and executive officers of the Group―that is, Aderans and its consolidated subsidiaries―as of the consolidated fiscal year-end, February 28, 2013.

1. Products

With its emphasis on total hair-related solutions, the Aderans Group addresses concerns that clients have about their hair through its wig business, underpinned by a strong domestic presence as well as a high profile in the United States, Europe and Asia, excluding Japan, and its hair transplantation business in the United States.
 Because of this focus on hair-related products and services, the Group's fiscal results could be severely eroded if other companies were to discover and bring to market hair loss treatments, such as a revolutionary hair-growth wonder drug or an innovative hair-volumizing technique, which would eliminate the need for wigs, or if other companies were to engineer and commercialize medical techniques superior to existing hair transplantation procedures.
In addition, a key client segment of the Group is men in their 20s and 30s in Japan. However demographic trends in Japan still indicate a shrinking percentage of young people within the national population, and the prospect of fewer potential clients, or changes in attitudes towards thinning hair (the popularity of a baldlook, for example) could have a significant impact on the results of the Group.

2. Production and distribution bases

i) The production of wigs is executed mainly by subsidiaries in Thailand and the Philippines, as well as through OEM arrangements in South Korea, China, Indonesia and elsewhere. These facilities utilize proprietary know-how in manufacturing the Group's products, so it would be difficult for them to substitute materials and components with those used in competitors' products to complete orders for wigs and other hair-replacement products.
 Consequently, certain events―primarily, the two scenarios described below―could prevent the delivery of products to clients and seriously erode fiscal results.

a) If fire, natural disaster, labor unrest, outbreak of disease or some other obstacle to normal operations undermines production capabilities.

b) If a change in the political or economic environment in the aforementioned nations interrupts the procurement of necessary materials or disrupts the supply of finished products.

 With respect to overseas production, we are working to ensure stable product supply, shorter delivery times and higher product quality. To this end, for example, we are building a second plant in the Philippines and our own plant in Laos. If it becomes difficult to recruit sufficient employees for these plants, there could be an impact on the Group's business performance.

ii) To enhance the efficiency of domestic distribution, the Group products are handled through a facility in Urayasu, Chiba Prefecture. If a large-scale natural disaster or some other catastrophic event were to sever transportation routes and/or completely destroy distribution facilities, the situation could hinder the receipt and shipment of wigs and other hair-replacement products as well as upset distribution processes linking domestic salons and production subsidiaries. Such situations could damage the Group's fiscal results.

3. Impact of legal regulations and ability to secure talented staff

i) In Japan, the Company's business activities are subject to several laws, including the Barbers Law and the Beauticians Law―both related to the Environmental Sanitation Law―as well as the Consumer Contract Law, the Specified Products Trading Law, the Installment Sales Law, the Law for Preventing Unjustifiable Lagniappes and Misleading Representation, and Act on Regulation of Transmission of Specified Electronic Mail.
 Legislative revisions to the aforementioned laws or the creation of new laws and ordinances might have an impact on Group results, depending on the content of such amendments and additions.
 Of note, in the course of its business activities, the Company employs approximately 900 barbers and hairstylists licensed under the Barbers Law and the Beauticians Law to provide services at its salons. If the Company's ability to hire and retain qualified staff is restricted by the introduction and/or enforcement of new rules, the resulting shortage of essential personnel could undercut the provision of services to clients and hinder salon operations. This could erode business performance.

ii) The hair transplantation business in the United States depends on the services of physicians to perform the necessary medical procedures.
 However, in the United States, each state grants eligible physicians a license to practice in that state only, so visiting physicians must acquire the requisite medical license(s) from the state(s) in which they plan to provide treatment. If regulations were to be newly established that hinder the assignment of physicians across state lines, the fiscal results of companies involved in the hair transplantation business might be adversely affected.

4. Information management (personal information leaks)

i) The Group's business activities address the hair-related concerns of ordinary people. If client information were to leak outside corporate systems, the disclosure could cause the affected clients significant psychological or emotional distress. Client dissatisfaction could impair future marketing results.
 We rely heavily upon computer network systems for maintaining and utilizing client information. The loss of server-stored data, through either manmade or natural disaster, could also adversely impact business results.

ii) Information leaks regarding clients who undergo hair transplantation procedures in the United States could hamper the business activities of the Group subsidiaries providing medical services. This could damage the Group's fiscal results.

5. Research and development

In collaboration with university research departments, we invest money in new product development and hair-regeneration research, with the aim of addressing concerns that many people have about hair loss.
 However, this effort carries elements of uncertainty about the extent to which research results will contribute to future profit, because it is impossible to predict how much time will be required to successfully complete research and development.

6. Advancing overseas operations

In the course of advancing its overseas business, the Aderans Group can potentially confront a host of obstacles, including cultural and religious differences, political instability, uncertain economic trends, specific legal systems and investment rules, changes in tax systems, insufficient labor resources, and labor-related problems, as well as acts of terrorism, war, or other geopolitical circumstances. Such risks could have a significant impact on the Group's business performance.

7. M&As, etc.

The Group has identified M&As as one strategy for expanding its overseas business. When considering a potential M&A, our policy is to conduct meticulous preliminary checks of the target company's financial status and make decisions based on risks that we identify. However, the appearance of contingent liabilities, changes in business conditions, and other factors could make it impossible to realize the synergies and income initially envisioned by the Group, and its business performance could be significantly impacted as a result.