IZUMI CO., LTD.

Annual Report>>> 2002

IZUMI CO., LTD.
2-12, Kyobashi-cho, Minami-ku,
Hiroshima 732-0828, Japan
Tel: (082) 264-3211

Printed in Japan

FINANCIAL HIGHLIGHTS
Thousands of
U.S. dollars(Note 1)Millions of yen

2002
Mar. 2001–
Feb. 2002

2001
Mar. 2000 –Feb. 2001

2000
Mar. 1999 –Feb. 2000

1999
Mar. 1998 –Feb. 1999

2002
Mar. 2001–
Feb. 2002¥363,714¥346,811¥288,343¥278,799$2,714,284

Operating income

14,784

10,285

8,134

5,714

110,328

Income before income taxes

9,493

7,790

3,360

877

70,843

Net income

4,832

3,415

1,437

342

36,060Net income/revenues

1.33%

0.98%

0.50%

0.12%

Revenues—

Total stockholders’ equity

74,132

71,81074,471

74,309553,224

Total assets

268,655

270,757

236,785

232,768

2,004,888

Okayama13

Per share (Note 2):
Net income — basic¥81.46¥53.66¥21.99¥ 5.17$0.61

Net income — diluted

79.40

48.87

20.36

—

0.59

Cash dividends declared

21.00

21.00

21.00

21.00

0.16

Hyogo
1

Shimane4

U.S. dollars(Note 1)

Yen

Hiroshima
34
Yamaguchi
10

Notes 1. U.S. dollar amounts are translated from yen, for convenience only, at the rate of ¥134 = U.S. $1, the rate of exchange on February 28, 2002.
2. See Note 2 of Notes to Consolidated Financial Statements
Saga
1

Kagawa1

Fukuoka8
Oita
1

Nagasaki1

As of February 28, 2002

Store Network

Profile1

Izumi Co., Ltd. is the number one retail chain in Western Japan’s Chugoku region, with 74 stores

To Our Stockholders

2

throughout Hiroshima, Okayama, Yamaguchi, Shimane and Hyogo Prefectures; Kagawa Prefecture inSpecial Feature

4

Shikoku; and Fukuoka, Saga, Oita and Nagasaki Prefectures in Kyushu. Izumi has steadily expanded theConsolidated Statements of Income

9geographic focus of its dominant area strategy with outlets, stores and merchandise that respond toConsolidated Balance Sheets

10changes in the purchasing and lifestyle needs of customers in its operating area.

Consolidated Statements of Stockholders’ Equity

12

Consolidated Statements of Cash Flows13

Notes to Consolidated Financial Statements

14

Report of Independent Accountants

20

Directors and Corporate Auditors

21

Corporate Data

21

CONTENTS

In the 21st century, Izumi aims to maintain its reputation as the number one retail chain for customer
satisfaction. As it expands development of Youme Town mega-shopping centers in Kyushu, Izumi willcontinue to foster customer loyalty with an enhanced product lineup and quality service.

PROFILE>>> 1

The above initiatives produced the following results:

TO OUR STOCKHOLDERS

Consolidated revenues rose 4.9% to ¥363,714 million (US$2,714 million).
Consolidated operating income increased 43.7% to ¥14,784 million (US$110 million).

The fiscal year under review, ended February 28, 2002, was a record-setting one for Izumi Co., Ltd.

Consolidated net income per share jumped 51.8% to ¥81.46.
A dip in non-consolidated existing store sales was contained to 0.2%, and retail performance in the Kyushu region contributed to a
2.8% increase in non-consolidated sales.

Initiatives and Performance for
the Fiscal Year Under Review

The protracted recession and lackluster consumer spending unleashed a flood of structuraltransformations in the industry in the form of increased bankruptcies and other trends that
produced an even more discouraging operational environment.
To address such developments, Izumi designated the fiscal year under review as a period
for intense structural reinforcement, and aimed to strengthen its corporate base through coststructure reforms related to procurement and marketing, reduction in interest-bearing debt
and concentration on personnel education and training.

The non-consolidated gross profit margin rose 0.5 percentage point, the ratio of selling, general and administrative expenses to
net sales edged down 0.4 percentage point, and reform of the cost structure contributed to a 1.1 percentage point rise in theoperating income margin to 3.9%.
A lump-sum write-off was performed for ¥2,480 million in differences arising from change in accounting standards for retirement
benefits.
Free cash flows of ¥10,000 million produced by brisk sales and restriction of new store openings was applied to the reduction ofinterest-bearing debt, resulting in a year-end balance of ¥137,700 million.
As a result of the above factors, return on shareholders’ equity (ROE) was 6.6%.

Augmenting Brand Strength and Marketing Capabilities
Amid ongoing deflation, Izumi worked to prevent further declines in per-customer spending bypromoting high-value-added merchandise. Additionally, strengthened ties with suppliers

Targets for the Current Fiscal
Year

In addition to the severe economic conditions, difficulties in the Japanese government andscandals among Japanese companies are aggravating consumer anxieties. Accordingly, Izumi

enabled the Company to procure hot-selling products and rotate stock on sales floors for themust strive more than ever to gain the trust of its customers. At the same time, the retailstart of each season, thereby producing increased store visits.

industry is on the verge of a sweeping structural transformation as the struggle for corporate

Such achievements produced brisk sales at existing stores, and signaled a measure ofsurvival progresses.

success in cost-structure reforms geared toward improving the gross margin ratio with

We aim to transform our organizational structure and reaffirm Izumi’s corporate mission to

reduced procurement costs.

provide customers with genuine satisfaction, while further accelerating operational reforms
and pursuing the construction of a competitively streamlined store network and high-margin

New Store Openings and Capital Investment

cost structure.

Izumi opened Youme Town Omuta as the Company’s 11th store in Kyushu. The branch is

We thank our stockholders for their support and ask for their continued guidance in our

expected to act as a catalyst in revitalizing commerce in the area, and has already achieved

future endeavors.

impressive sales performance as a result of having the largest store space and strongest
customer pull in the region. The Company will also continue investing in renewal of existing

Yasuaki Yamanishi
President

stores to meet the current needs of customers.
Since this capital investment limited cash flows provided by operating activities, surplus
funds were allocated to retire interest-bearing debt.

Consolidated
4,832

14,7845.17

99/2 00/2 01/2 02/2
Operating lncome (Millions of yen)

21.99

342

2 <<<

99/2 00/2 01/2 02/2(%)
Gross Profit as a
Percentage of Net Sales

53.66

1,437

5,714

99/2 00/2 01/2 02/2
(Millions of yen)
Revenues

81.46

3,415

8,134

information technology (IT) to raise decision-making capabilities at the retail store level.

10,285

23.8

Net Income
Net Income per Share

24.0

24.4

24.3

288,343

in addition to a horizontal operational structure. Moreover, we increased investment in

278,799

women, younger staff and part-time employees, and pursued merit-based personnel policies

363,714

Organizationally, the Company augmented personnel training, encouraged the promotion of

346,811

Galvanizing Personnel

99/2 00/2 01/2 02/2
(Millions of yen)
Net Income/Net Income per Share>>> 3industry must rely on an efficient system supported by standardization

SPECIAL FEATURE

while also tailoring its services to the myriad needs of each customer.
One example is the richly unique array of regional cultures and

The Japanese retail industry is facing a form of survival of the fittest stemming from excessive floor space,
as well as penetration of overseas companies and increased alliances that are producing a more turbulent
environment in which market share can fluctuate dramatically.

regionally based needs produced by Japan’s long, elaborate history
and convoluted geography. Sales vary by region and the difference in tastes is obvious, evenin the fully established consumables market.

The current business climate has brought both considerable opportunities and risks for companies inJapan. Limiting risks and maximizing opportunities will demand a sounder corporate base. Without one inplace, the Company will not be able to ride out the current storm.

Rather than working to ensure that each of its stores is identical to all others, Izumi
assesses the desirable scale and product lineup of a targeted store given the culture of that
region. Control of daily operations is then transferred to the respective branch, which

The most reliable foundation for many companies is undoubtedly the support of customers, andaccordingly, most of these companies have strategies in the form of business models for obtaining this
support. Since management determined that scrutinizing the efficacy of Izumi’s business model andencouraging an adaptive approach to changes in the market environment would be indispensable toward
strengthening the corporate base, efforts were made to refine this model toward a more streamlined
framework. The result is outlined below in three themes: (1) Key to Effectiveness, (2) Adaptation to
Fluctuations in Operational Environment, and (3) Core Group Strategies.

becomes responsible for developing its own unique product line based on regional tastes,
lifestyles and the policies of competitors. This is Izumi’s key to producing added value for its
customers and differentiating its stores from competitors that are pursuing the samemeasures toward uniformity.

Enforcement of Market Dominance Strategy
While one advantage of market dominance strategy lies in its efficiency in such areas asStreamlined Business Model

Izumi’s business model advocates concentrated investment of limited management resources

distribution and sales promotions, its most crucial role is as an aid toward securing stronger

into fields that will directly produce increased customer support.

customer support and establishing a competitive edge through meticulous understanding of
the unique qualities of a given region.

Range of Core Businesses

Izumi has applied this strategy in the Chugoku region in tandem with concentrated

Izumi has defined its core business as the supply of daily products in the generalinvestment following store openings, to achieve overwhelming market share in the targeted

merchandise store (GMS) business.

area. Furthermore, the Company has reallocated the earnings made in the Chugoku region to

In GMS, the desire of customers to comfortably make all their purchases of useful

Existing-Store Sales Growth

products at one location is universal, and is an appealing business target to strive for. Izumi

(%)

Y-o-Y
sales growth

Percentageof net sales

Youme Town

(1.2)

35

Others

(3.0)

27

KyushuOther regions

2.8

31

4.5

7

Total

(0.2)

100

has built up a wealth of management resources in such areas as personnel and operational

further investment in Kyushu.
The Kyushu market has yet to experience intense competition despite being a vast, richoperational domain in Japan, making it an attractive site for further store expansion. While

Chugoku

expertise as a result of its historical concentration on addressing these kinds of needs. The
Company has maintained that effective business expansion can be achieved only by
concentrating on fields of core competence with available management resources, rather thanby carelessly dabbling in fields outside its expertise.
Izumi has been able to avoid directly facing the demands inherent in handling avant-garde

management was initially puzzled by the cultural differences in Kyushu compared with
Chugoku, it quickly made the necessary adjustments to win the support of area customers.
Kyushu currently represents 30% of the Company’s total net sales, making it the second of
Izumi’s market dominant areas.

(Fiscal year ended February 28, 2002)

and specialty lines itself by entrusting that role to competent stores specializing in those areas.

Policy of Store Supremacy
Rather than applying a generic model to its expansion, Izumi holds to a established principle

Adapting to Myriad Needs

4 <<<in its pursuit of store openings tailored to regional traits—namely that of producing only the

The supply of daily products requires a balance between achieving uniformity in all chain

kinds of stores guaranteed to be favored in a given area. Only a store with a reputation as thestores in operation while also adapting to the varying needs of customers. A company in thisbest in a region, owing to such merits as proper scale, product lineup, services and ease of

A Business Model That Cre ates Value <<<>>> 5

access, is capable of achieving the level of overwhelming customer favor needed to
outdistance the competition. Conversely, any store other than the area leader will beincapable of drawing the level of customers necessary to stay competitive.
Izumi has established Youme Town as the preeminent retail store in the Kyushu area. In
addition to developing the most spacious, comfortable shopping atmosphere of any store indisplays and increase customer convenience.

the area, the sales floors of Youme Town offer an area-tailored product lineup and leading
specialty stores for each product category. Youme Town will uphold its rigorous standards ofWith a strong degree of customer loyalty toward Youme Town, Izumi

maintaining its edge as the regional leader by providing more valuable products and services

successfully initiated procurement of high-class brands once supplied only tothat continue to fuel store sales.

department stores to form a volume zone with a higher price range than forprevious products.

Izumi has designated its core business as the supply of daily goods, shifted management

In this way, Izumi is taking control of change and undertaking frequent reforms

resources accordingly and pursued far-reaching measures to tailor services to the diverse

to maintain a fresh look without being bound by previous approaches.

needs of its customer base, an approach that has gradually built it up and shored up the
corporate base. Furthermore, restriction of the area of targeted expansion has made it easier

Fostering Employees That Advance Change

to broaden customer support and gain a competitive advantage, while the reputation of Izumi

Our store employees are the personnel actually implementing Izumi’s core strategy of finely

stores as a leader in the area has secured continued growth.
The only reason that Izumi can rely on a simplified business model is because of its

tailoring efforts to meet diverse needs that arise on the sales floor, analyzing daily sales

determination to invest management resources in a way that is congruent with such

patterns and applying those results to store operation. We are in the process of gathering

environmental factors as regional properties, and to pursue customer satisfaction above all

employees who are willing to be of service to customers, and who have the aptitude andelse. The Company’s business model is fueled by a strong desire to please customers andwillingness to tackle the finer details of daily operations. As the Company continues to grow,has been transformed into a simplified yet highly sound framework for scouting out areas ofhighly motivated staff are increasingly offering their services to provide higher corporate valueinterest, as well as for testing and refining strategies for greater market dominance to fueland stronger bonds among employees.
In the personnel system, efforts are being made to provide opportunities for staff with ability

continued growth in corporate performance.

and motivation, and to engineer a system in which compensation is tied to performance. Izumi

In line with this business model, Izumi aims to adapt to a range of unfolding developments

is also continuing its support of a tiered training structure and career advancement forand stimulate further growth.

motivated employees, and working to rid the Company of favoritism based on age or gender

Adaptation to Change Creates
Value

A business model must constantly be monitored to poll whether its effectiveness has waned

to encourage personnel to take on greater responsibilities. Additionally, the Company isin the face of environmental changes. In the rapidly fluctuating product procurement andimplementing a merit-based structure that applies to every level from management to part-time

marketing fields in particular, efficiency in a business model equates with adaptability tostaff, promoting a fixed-age retirement system and incentives for managerial staff, andchange. Izumi is therefore working to address a multitude of needs while maintaining a

introducing a personnel assessment system that prevents employee motivation from waning

broader focus on adaptation to overlying trends in the midst of daily operations.

while rewarding success.

Enacting Change
Izumi aims to please customers by taking a more active role in directing change day-to-day onGroup-Driven Creation ofValue

Izumi has spun off a portion of its businesses charged with the function of implementing theCompany’s business model. This policy was pursued in the interest of specialization thatthe sales floor. For example, we will shorten the display life of our lines and step up thelimits the business range of each subsidiary for a more simplified Group structure. In thislaunch of new and seasonal lines to secure a greater portion of sales early in their marketableway, each subsidiary acquires market competitiveness through the process of mastering its

period. Further, we will ensure that our store products are always in line with the current

given field, and attainment of the ideal business model gradually becomes a reality.

season through the swift introduction of successive product lines.
The Company will also reorganize the classification of its products and build a store spacethat marks a break with past looks. This will help enable Izumi to raise brand strength inFurther, management hopes that these subsidiaries will establish their own businessmodels, aim to transcend their roles as subsidiaries and achieve autonomous growth tobecome future engines of growth for the Group.

individual items, stock products in a timely fashion, raise the effectiveness of product store

6 <<<

>>> 7

CONSOLIDATED STATEMENTS OF INCOME

X-Sell Inc.
An enterprise specializing in the import of overseas designer products, X-Sell Inc. uses Europe as
its procurement route to market a wide array of brands at reasonable prices. Active nationwide
expansion has earned Izumi the No. 1 spot in the retail industry and produced high levels of

2001

2002

¥353,830¥338,002$2,640,523

9,884

8,809

73,761

363,714346,8112,714,284

COST OF SALES

269,013257,477

2,007,560

Gross profit

94,701

89,334

706,724

79,91779,049596,396

14,784

10,285

110,328

244

302

1,821

REVENUES:Net sales
Other operating revenues

33

26.4
22

formidable one given its continual addition of new

22.0

19.8

The barrier of entry into competition with Izumi is a

2002

39

31.9

drawing in large numbers of customers.

Izumi Co., Ltd. and subsidiaries
For the years ended February 28, 2002 and 2001

40.0

growth. The high tenancy rates of Youme Town are also

Thousands of
U.S. dollars(Note 3)

Millions of yen

16

18

procurement routes and acquisition of specialized expertise in
the retail industry. For this reason, management is convinced

98/2 99/2 00/2 01/2 02/2

that the considerable room for store expansion nationwide will

Net Sales/Number of Stores(Billions of yen/Stores)Net Sales
Number of Storesproduce continued growth for this subsidiary.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Operating income
OTHER INCOME (EXPENSES):

Youme Card Co., Ltd.

products. Agreements with the post office as well as 36 major regional banks and theirInterest expense

2.2

2.1

5.3

6.4

8.0

8.8

and Chugoku—and even internationally through the offering of such highly recognizedcards as Visa and MasterCard.

10.0

ATMs have made Izumi’s cards the most widely used, convenient alternatives in Kyushu

2.7

Interest and dividend income

12.2

Youme Card Co., Ltd. handles house cards, credit cards and cash cards, and works to provide a wider range of services in its card

services were added, and is currently augmenting its(2,872)(18,500)

(56)

801

(418)

Gain (loss) on revaluation of investments in securities, net

(473)

17

(3,530)

46

727

343

(1,524)(661)(11,373)

—

(794)

—

(1,049)(15)(7,828)(5,291)(2,495)(39,485)

9,493

7,790

70,843Current

5,624

3,244

41,970

Deferred(1,474)265(11,000)

4,150

3,509

30,970

5,343

4,281

39,873

511

866

3,813

Gain on sales of property and equipment
Loss on sales or disposal of property and equipment

Youme Card got its beginning as Izumi’s in-store point
card system, but has gradually increased its client base as(2,479)Gain (loss) on revaluation of short-term investments, net

Loss on liquidation of subsidiaries and affiliates
00/2 01/2 02/2
Credit Card/Cashing Balance

01/2

02/2

Card Members

00/2(Millions)

Other, net

Credit Card
(Billions of yen)Cashinghighly profitable credit cashing service business.

Income before income taxes and minority interests
INCOME TAXES (Note 11):
3.8

Ideo Co., Ltd., which handles the security and electricity management of Izumi stores, formed a business3.0

alliance with a leading electrical works company to augment its technological capabilities. This move has

4.4

Ideo Co., Ltd.

reduced the fixed costs at Izumi stores dramatically.

Income before minority interests

Additionally, Ideo has made progress in applying for the patent of a revolutionary energy saving system, and is
expanding orders through the pursuit of marketing at non-Company stores throughout Japan.

00/2
Net Sales

01/2

02/2

(Billions of yen)

MINORITY INTERESTS
Net income

¥

4,832

¥

3,415

$

36,060Izumi Food Service Co., Ltd.
While the in-store food court that Izumi Food Service Co., Ltd. operates is a valuable asset for

PER SHARE:

accordingly shifted course to attract specialty stores and scrap
5.4

4.8

the food court model with the aim of rapidly invigorating store

Net income:
Basic

3.8

sales.

U.S. dollars(Note 3)Yen

attracting customers, some setbacks have been experienced in profitability. Izumi has

DilutedThe business was successful in developing authentic-looking

Cash dividends declared¥81.46¥53.66

$0.61

79.40

48.87

0.59

21.00

21.00

0.16

59,32063,641

specialty stores, such as an Italian restaurant that conjures up theatmosphere of Naples. While using the pull of Youme Town toattract greater numbers of customers, Izumi will begin concentrating
expansion on roadside stores outside outlet facilities.

8 <<<

00/2
Net Sales

01/2

02/2

WEIGHTED AVERAGE NUMBER OF SHARES (thousands)(Billions of yen)

The accompanying notes are an integral part of these statements.

>>> 9

CONSOLIDATED BALANCE SHEETS
Thousands of
U.S. dollars(Note 3)

Millions of yen

Izumi Co., Ltd. and subsidiaries
As of February 28, 2002 and 2001

2002

2001

2002

ASSETS

Thousands of
U.S. dollars(Note 3)

Millions of yen

2002

2001

2002

¥ 18,353¥ 18,902$ 136,963

33,341

17,033248,813Trade

13,34813,504

99,612

Other

7,582

6,842

56,582

20,93020,346

156,194

LIABILITIES AND STOCKHOLDERS’ EQUITYCURRENT ASSETS:
Cash and bank deposits (Note 13)
Short-term investments (Note 4)

CURRENT LIABILITIES:
¥

8,781

¥ 11,016$

65,530

Short-term borrowings (Note 6)

—

107

—

8,996

7,667

67,134

Trade

3,694

3,284

27,567

Other

1,082

916

8,075

4,776

4,200

35,642

Income taxes payable

4,284

1,968

31,970

(595)

(503)

(4,440)Accrued bonus

1,586

1,609

11,836

4,181

3,697

31,202Other current liabilities

3,749

3,134

27,978Inventories

21,062

19,984

157,179

Total current liabilities

82,24362,992

613,754

Deferred income taxes (Note 11)

1,310

888

9,776

Other current assets

3,454

2,410

25,776

LONG-TERM DEBT (Note 6)

86,011

111,826

641,873

47,78445,769356,597

ACCRUED SEVERANCE INDEMNITIES

4,441

2,338

33,142LEASE DEPOSITS RECEIVED

16,382

16,872

122,254

DEFERRED INCOME TAXES (Note 11)

Short-term loans receivable
Notes and accounts receivable:Less, allowance for doubtful accounts

Total current assets

INVESTMENTS AND ADVANCES:
Investments in securities (Note 4)

4,687

4,626

34,978Other investments and advances

2,222

2,379

16,582

6,909

7,005

51,560Current portion of long-term debt (Note 6)
Notes and accounts payable:

1,021

1,011

7,619

OTHER LIABILITIES

172

29

1,283

Total liabilities

190,270

195,068

1,419,925

4,253

3,879

31,73919,614—

146,373

CONTINGENT LIABILITIES (Note 8)

MINORITY INTERESTS IN CONSOLIDATED SUBSIDIARIESPROPERTY AND EQUIPMENT (Note 5):
Buildings and structures

170,597

165,952

1,273,112

Machinery, equipment, vehicles and other

27,92827,008208,418

198,525

192,960

1,481,530(87,675)(79,081)(654,291)

110,850

113,879

827,239

February 28, 2001—195,817,000 shares

72,532

72,942541,283

Issued:

856

1,304

6,388

184,238

188,125

1,374,910

Less, accumulated depreciation
Land
Construction in progress

Common stock, no par value:
Authorized:
February 28, 2002—195,243,000 shares

February 28, 2002—61,558,710 shares—

19,614—

Additional paid-in capital

February 28, 2001—62,132,710 shares

22,282

23,056

166,284

Retained earnings

34,36830,872

256,478

268

—

2,000

Net unrealized holding gains on securities

OTHER ASSETS:
Fixed leasehold deposits

STOCKHOLDERS’ EQUITY (Note 10):

18,07918,764

134,918

Less, foreign currency translation adjustments
Less, treasury stock at cost

Deferred income taxes (Note 11)

2,335

1,444

17,425

Other

9,310

9,650

69,478¥268,655¥270,757$2,004,888

Total stockholders’ equity

(5)

—

(38)

(2,395)(1,732)(17,873)

74,132

71,810553,224¥268,655¥270,757$2,004,888

The accompanying notes are an integral part of these statements.

10 <<<>>> 11CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITYCONSOLIDATED STATEMENTS OF CASH FLOWS
Thousands of
U.S. dollars(Note 3)

Millions of yen

Izumi Co., Ltd. and subsidiaries
For the years ended February 28, 2002 and 2001

BALANCE AT FEBRUARY 29, 2000

Number ofshares ofcommon stock(thousands)

65,033

Commonstock

Additional
paid-in
capitalRetainedearnings¥19,614¥25,792¥29,077Net
unrealized
holding gains
on securities

Foreigncurrencytranslation
adjustments——

Treasurystock
at cost¥(12)

Net income for the year

—

—

—

3,415

—

—

—

Cash dividends

—

—

—

(1,346)———

Directors’ and corporate auditors’ bonus
Common stock repurchased and cancelled

—

—

—

(51)

—

—

—

(2,900)—(2,736)

—

—

—

—

Effects of subsidiaries newly consolidated

—

—

—

(223)

—

—

—

Increase in treasury stock, net

—

—

—

—

—

—

(1,720)62,133

19,61423,05630,872——(1,732)BALANCE AT FEBRUARY 28, 2001
Net income for the year

—

—

—

4,832

—

—

—

Cash dividends

—

—

—

(1,304)———

Directors’ and corporate auditors’ bonus

—

—

—

(32)

—

—

—

Common stock repurchased and cancelled

(574)

—

(774)

—

—

—

—

Net unrealized holding gains on securities

—

—

—

—

¥268

—

—

Foreign currency translation adjustments

—

—

—

—

—

¥(5)

—

Increase in treasury stock, net

—

—

—

—

—

—

(663)

61,559¥19,614¥22,282¥34,368

¥268

¥(5)

¥(2,395)

BALANCE AT FEBRUARY 28, 2002

Thousands of U.S. dollars (Note 3)

BALANCE AT FEBRUARY 28, 2001
Net income for the year

$146,373$172,060$230,388

—

—

—

—

36,060——Cash dividends——(9,731)——

Directors’ and corporate auditors’ bonus

—

—

(239)

—

—

Common stock repurchased and cancelled—(5,776)———

Net unrealized holding gains on securities

—

—

—

$2,000

—

—

$(38)

Foreign currency translation adjustments

—

—

—

Increase in treasury stock, net

—

—

—

$146,373$166,284$256,478

BALANCE AT FEBRUARY 28, 2002
The accompanying notes are an integral part of these statements.

$(12,925)——(4,948)$2,000$(38) $(17,873)

Izumi Co., Ltd. and subsidiaries
For the years ended February 28, 2002 and 2001

Millions of yen

2002

2001

2002

¥ 9,494
10,509
75
(244)
2,479
(46)
1,524
(16)
(343)
(1,053)
(232)
2,612

¥ 7,790
10,458
609
(302)
3,214
(727)
661
(1,256)(169)(2,466)542(2,549)$ 70,851
78,425560(1,821)
18,500(343)
11,373(119)(2,560)(7,858)(1,731)
19,492

SubtotalInterest and dividend income received
Interest expense paid

24,759245(2,380)15,805300(3,128)

184,769
1,828(17,761)

Income taxes paid

(3,103)(2,833)(23,157)

Net cash provided by operating activities

19,521

10,144

145,679

CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of short-term investments
Payments for purchases of property and equipment
Proceeds from sales of property and equipment
Payments for purchases of intangible assets
Payments for purchases of investments in securities
Acquisition, net of cash acquired
Proceeds from sales of investments in securities
Other, net

5(7,774)
460
(353)
(658)
134
226
(326)

1,484
(18,850)
2,037(1,944)
(544)
—
1,753
1,497

37
(58,015)
3,433(2,634)(4,911)1,000
1,687(2,433)

Net cash used in investing activities(8,286)(14,567)(61,836)(999)
15,103(19,658)—(5,000)785(1,900)—(1,364)(58)
22,899(12,934)
9,933(13,545)
1,330(2,736)120(1,402)(7,455)
112,709(146,702)—(37,313)
5,858(14,179)—(10,179)

Net cash provided by (used in) financing activities(13,033)

3,607(97,261)

Effect of exchange rate changes on cash and cash equivalents
Net decrease in cash and cash equivalents
Cash and cash equivalents at beginning of year(5)
(1,803)
10,464

—
(816)
9,217

(37)
(13,455)
78,089Cash and cash equivalents of newly consolidated subsidiaries

—

2,063

—

¥ 8,661¥ 10,464$ 64,634

CASH FLOWS FROM OPERATING ACTIVITIES:
Income before income taxes
Depreciation and amortization
Provision for allowance for doubtful accounts
Interest and dividend income
Interest expense
Gain on sales of property and equipment
Loss on sales or disposal of property and equipment
Gain on sales or revaluation of short-term investments
Increase in notes and accounts receivable
Increase in inventories
Increase in trade notes and accounts payable
Other, net

CASH FLOWS FROM FINANCING ACTIVITIES:
Decrease in short-term borrowings
Additions to long-term loans
Repayment of long-term loans
Proceeds from issuance of debentures
Redemption of debentures
Proceeds from sales of treasury stock
Payments for purchases of treasury stock
Contribution from minority shareholders
Dividends paid

Cash and cash equivalents at end of year (Note 13)
The accompanying notes are an integral part of these statements.

12 <<<>>> 13NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Izumi Co., Ltd. and subsidiaries
For the years ended February 28, 2002 and 2001

1. BASIS OF PRESENTATION OF CONSOLIDATED FINANCIAL
STATEMENTS
The accompanying consolidated financial statements have been
prepared based on the accounts maintained by IZUMI CO., LTD. (the“Company”) and all its subsidiaries (collectively, the “Companies”) in
accordance with the provisions set forth in the Commercial Code ofJapan and the Securities and Exchange Law, and in conformity withaccounting principles and practices 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 Kanto Finance Bureau in Japan havebeen reclassified in these accounts for the convenience of readers
outside Japan.
The consolidated financial statements are not intended topresent the consolidated financial position, results of operations andcash flows in accordance with accounting principles and practices
generally accepted in countries and jurisdictions other than Japan.
Consolidated statements of cash flows has been required to beprepared with effect for the years ended February 28, 2001 and2002 in accordance with a new accounting standard.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(1) Basis of consolidation and accounting for investments inaffiliates
The accompanying consolidated financial statements as of and for theyear ended February 28, 2002 include the accounts of the Company
and all of its subsidiaries. The Company had 18 subsidiaries as ofFebruary 28, 2002, among which 2 subsidiaries were newly
consolidated due to acquisition of their stocks. For the year ended
February 28, 2001, 16 subsidiaries were consolidated.
Investments in all affiliates (20% to 50% owned companies) areaccounted for by the equity method. The Company had 4 and 3
affiliates as of February 28, 2002 and 2001, respectively.
(2) Elimination and consolidation
For purposes of preparing the consolidated financial statements, allsignificant intercompany transactions and account balances have been
eliminated.
Unrealized profits on sales of assets among the Companies havebeen entirely eliminated, and the portions attributable to minority
interests are credited to net income. Depreciation expense has beenadjusted in connection with the elimination of unrealized profits
included in depreciable assets.
Regarding the elimination of investments in shares of
consolidated subsidiaries, together with the underlying equity in net
assets of such subsidiaries, the Company follows the step-by-stepacquisition method to include equity in net income of subsidiaries
subsequent to the date of acquisition in the consolidated financial
statements. Any differences between the costs of investments in
subsidiaries and the amount of underlying equity in net assets ofsubsidiaries are charged to income as incurred.
(3) Cash and cash equivalents
Cash and cash equivalents in the consolidated statements of cash
14 <<<

flows are composed of cash on hand, bank deposits withdrawn on
demand, and short-term investments with an original maturity of threemonths or less and are readily convertible to cash and represent a
minor risk of fluctuation in value.
(4) Translation of foreign currencies
Effective from the year ended February 28, 2002, the Companies
adopted the revised Japanese accounting standard for foreign
currency translation, which was effective for the periods beginning on
or after March 1, 2001. Under the revised standard, all monetary
assets and liabilities denominated in foreign currencies, whether longterm or short-term, are translated into Japanese yen at the exchange
rates prevailing at the balance sheet date and resulting gains andlosses are included in the determination of net income. The adoptionof the new method had no impact to the accompanying consolidated
financial statements.
Assets and liabilities of foreign consolidated subsidiaries and anaffiliate accounted for by the equity method are translated into
Japanese yen at the exchange rates in effect at the respectivebalance sheet dates. Operating accounts are translated at the
average rates of exchange for the respective years. Translation
adjustments result from the process of translating foreign currency
financial statements into Japanese yen. These translation adjustments,
which are not included in the determination of net income, arereported separately as a component of stockholders’ equity.
(5) Short-term investments and investments in securities
Prior to March 1, 2001, listed securities in short-term investments
and investments in securities were valued at the lower of cost or
market, cost being determined by the moving-average method. Other
securities were valued at cost, cost being determined by the movingaverage method.
Effective March 1, 2001, the Companies adopted the new
accounting standard for financial instruments and changed theirvaluation method of securities.
Held-to-maturity securities are stated at amortized cost adjusted
for the amortization of premiums and the accretion of discounts tomaturity.
Available-for-sale securities whose fair value is readily
determinable are stated at fair value as of the end of the year.
Unrealized gains on these securities, net of applicable deferred tax
assets/liabilities and minority interests, are not reflected in earnings
but directly reported in a separate component of stockholders’ equity
and unrealized losses are included in net profit or loss for the period.
Realized gains or losses on sales of such securities are computed
using moving-average cost. Other securities with no available fairmarket value are stated at moving average cost.
If a decline in fair value below cost of an individual security is
judged to be material and other than temporary, the carrying value ofthe individual security is written down.
The effect of adoption of the new standard on net income was
immaterial.
The Companies reconsidered the holding purposes of securities
outstanding at March 1, 2001 and reclassified securities from shortterm investments in current assets to investments in securities in

non-current assets. As a result of this reclassification, short-term
investments decreased and investment in securities increased by ¥57
million ($425 thousand).
(6) Derivatives
The new accounting standard for financial instruments, effective fromthe year ended February 28, 2002, requires companies to state
derivative financial instruments at fair value and to recognize changes
in the fair value as gains or losses unless derivative instruments areused for hedging purposes. In accordance with the new accounting
standard for financial instruments stated above, the Company adopted
the method which defers gains and losses resulting from changes infair value of derivative financial instruments until the hedgedtransactions occur. When foreign currency exchange forward
contracts, currency swap contracts or currency option contracts meetcertain conditions, the hedged items are stated by the forward
exchange contract rates. If interest rate swap agreements are used ashedges and meet certain hedging criteria, the net amount to be paidor received under the interest rate swap agreements is added to or
deducted from the interest on the assets or liabilities for which theswap agreements were executed.
(7) Inventories
Inventories are stated at cost, being determined by the following
methods:
Merchandise in shops
Retail method (inventory valuation
based on the ratio of cost to selling
price)
Merchandise in
distribution center
Last purchase invoice method
Supplies
Last purchase invoice method(8) Depreciation of property and equipment
Property and equipment, including significant renewals and additions,are carried at cost.
Cost of property and equipment retired or otherwise disposed ofand related accumulated depreciation are eliminated from therespective accounts and the resulting gain or loss is reflected inincome.
Depreciation of property and equipment is computed on the
declining-balance method at rates based on the estimated useful lives
or lease contract term of assets prescribed by corporate tax laws,
except for the following, which are depreciated by the straight-line
method:• A large-scale and compound-type shopping center• Buildings built on the leasehold land
• Property and equipment of two consolidated subsidiaries• Buildings (excluding building improvements) acquired on or after
April 1, 1998
Minor assets with acquisition costs of ¥100 thousand or more but lessthan ¥200 thousand are depreciated over three years on a straightline basis.
Normal repairs and maintenance, including minor renewals andimprovements, are charged to income as incurred.

(9) Intangible assets
Capitalized software costs, included in other assets, for internal use
are amortized on a straight-line basis over the estimated useful life
(five years) of the software. Other intangible assets, included in otherassets, are amortized on a straight-line basis over the period regulated
by corporate tax laws.
(10) Allowance for doubtful accounts
Allowance for doubtful accounts is provided in preparation for possible
risk of uncollectible accounts. It consists of the estimated uncollectible
amount with respect to identified doubtful receivables and an amountcalculated on the historical bad debt ratio with respect to remaining
receivables.
Effective March 1, 2001, the Companies adopted the newJapanese accounting standard for financial instruments, and changed
its method of providing allowance for doubtful accounts and of
accounting for golf membership rights. The adoption of the new
method had no impact to the accompanying consolidated financial
statements.
(11) Accrued bonus
Accrued bonus is provided in preparation for payment of bonus toemployees based on the amount estimated to be paid.
(12) Retirement benefit plans
Employees of the Companies, with more than one year’s service, areentitled to receive lump-sum indemnities upon termination. The
amount of the benefits is determined by reference to current basic
rate of pay, length of service and condition under which thetermination occurs. The amount of severance indemnities to be paidby the Company is reduced by the benefits payable under anexternally funded non-contributory pension plan. Consolidated
subsidiaries have no such externally funded pension plan.
Effective March 1, 2001, the Companies adopted the newJapanese accounting standard for retirement benefits. The net
transition obligation at date of the adoption is all expensed in thecurrent year. Actuarial gains or losses are amortized on a straight-line
basis over 6 to 8 years from the next year in which they arise. Until
the year ended February 28, 2001, the accrued severance
indemnities of the Company represented 40 per cent of the liability,
which the Company would be required to pay (reduced by the benefits
payable under the non-contributory pension plan) if all eligible
employees voluntarily terminated employment at the balance sheet
date. As a result of adopting the new standard, net pension expense
for the year ended February 28, 2002 has increased by ¥2,192
million ($16,358 thousand), operating income has increased by ¥294
million ($2,194 thousand) and income before income taxes has
decreased by ¥2,192 million ($16,358 thousand), as compared withthe amounts which would have been reported if the previous standard
had been applied consistently.
Certain subsidiaries provide for the accrued severance
indemnities at 100% of the liability, which would be required to be
paid if all eligible employees voluntarily terminated employment at thebalance sheet date.
The Company and a consolidated subsidiary provide for lumpsum severance benefits with respect to directors and corporate>>> 15

auditors. While the Company and the consolidated subsidiary have nolegal obligation, it is a customary practice in Japan to make lump-sum
payments to a director or a corporate auditor upon retirement. Suchliabilities are not funded.
(13) Leases
Finance leases other than those that are deemed to transfer theownership of leased assets to lessees are accounted for by themethod similar to that applicable to ordinary operating leases.
(14) Consumption taxes
Consumption taxes are imposed at a flat rate of 5% on all domestic
consumption of goods and services (with certain exemptions). The
consumption taxes withheld on revenues and the consumption taxes
paid on purchases are both excluded from the amounts of relevant
items in the accompanying consolidated statements of income.
(15) Income taxes
Income taxes of the Companies consist of corporate income tax, local
inhabitant tax and enterprise tax.
Deferred Income taxes are determined using the asset andliability approach, whereby deferred tax assets and liabilities arerecognized in respect of temporary differences between the tax basisof assets and liabilities and those as reported in the financial
statements. Deferred tax assets and liabilities are measured by using
currently enacted tax rates, and the effect on these deferred tax
assets and liabilities of a change in tax rates is recognized in incomein the period that includes the enactment date.
(16) Net income and cash dividends per share
Basic net income per share of common stock is based on theweighted average number of shares of common stock outstanding
during each period. Diluted net income per share assumes theconversion of outstanding convertible debentures.
Cash dividends per share include those declared with respect tothe earnings for the respective periods for which the dividends were
proposed by the Board of Directors. Dividends are charged to retained
earnings in the year in which they are paid.
3. UNITED STATES DOLLAR AMOUNTS
Amounts in U.S. dollars are included solely for the convenience ofreaders outside Japan. The rate of ¥134 = U.S.$1, the rate ofexchange on February 28, 2002, 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 this rate or any other rate.
4. SHORT-TERM INVESTMENTS AND INVESTMENTS IN
SECURITIES
Held-to-maturity debt securities at February 28, 2002, which havereadily available determinable fair value, are summarized as follows:

Government
Bonds
16 <<<

Carrying
value

Marketvalue

Valuation
gain

Carrying
value

Market
value

¥602

¥602

¥0

$4,493$4,493Thousands of
U.S. dollars

Millions of yen
Grossunrealized
Acquisition Carrying
gains
cost
value
(losses)

Securities withunrealised
holding gains:
Equity securities
OthersSecurities withunrealised
holding losses:
Equity securities¥2,828 ¥3,311
56
66
2,884 3,377

Grossunrealized
Carrying
gains
value
(losses)Acquisition
cost¥483 $21,105 $24,709 $3,604
10
417
493
75
493
21,522 25,202 3,679

241
186¥3,125 ¥3,563

(55)
1,799
1,388 (410)¥438 $23,321 $26,590 $3,269

Securities at February 28, 2002, which have no readily determinable
fair value, are summarized as follows:

Available-for-sale securities:
Non-listed equity securities¥195$1,455

Total sales of available-for-sales securities in the year ended February
28, 2002 amounted to ¥398 million ($2,970 thousand) and related
gains and losses amounted to ¥16 million ($119 thousand) and ¥204
million ($1,522 thousand).
Marketable securities included in short-term investments andinvestments in securities at February 28, 2001, which were primarily
stated at cost, are summarized as follows:
Millions of yen
Carrying
value

Short-term investments:
Equity securities
Investments in securities:
Equity securities
Debt securities
OthersValuation
gain$0

5. LEASES
Information for finance lease transactions other than those that are
deemed to transfer the ownership of leased assets to lessees issummarized below:(1) Acquisition cost equivalent amount, accumulated depreciationequivalent amount and net book value equivalent amount of theleased amount and net book value equivalent amount of theleased assets at February 28, 2002 and February 28, 2001, if
capitalized, are summarized as follows:
Millions of yen
2002
Equipment
andvehiclesMarketvalue

Valuation
gain

Total

Equipment
andvehiclesOther

Amount equivalent to:
Acquisitioncost$ 25,343 $ 71,731 $ 97,075
Accumulated
depreciation(11,112) (33,768) (44,881)
Net book value $ 14,231 $ 37,963 $ 52,194

The acquisition cost equivalent amount is calculated includinginterest portion as the outstanding future lease payments are
immaterial to the year-end balance of property and equipment.
(2) Amounts equivalent to outstanding future lease payments at
February 28, 2002 and February 28, 2001, which include interest
portion, are summarized as follows:
Millions of yen
2002
2001

¥

57

3,401
401
133
3,935
¥3,992

¥

61

¥

3,589
401
133
4,123
¥4,184

Due within one year
Due after one year
Total

¥1,991
5,003¥6,994¥1,775
5,305¥7,080162
30$14,858
37,336$53,194(3) Lease payments and depreciation expense equivalent amount for
the years ended February 28, 2002 and February 28, 2001 wereas follows:
Millions of yen
2002
2001

499

Thousands of
U.S. dollars
2002

4

188
—
—
188
¥192

¥ 50

Total

Thousands of U.S. dollars

Carrying amounts of securities excluded from the information
presented above at February 28, 2001 are as follows:

Short-term investments:
Discount bonds
Investments in securities:
Unlisted equity securities
Debt securities with remaining
maturity of one year or less
Unlisted overseas debt securities

Other

2001

Amount equivalent to:
Acquisitioncost¥ 3,396 ¥ 9,612 ¥13,008 ¥ 3,241 ¥ 8,190 ¥11,431
Accumulated
depreciation(1,489) (4,525) (6,014) (1,066) (3,285) (4,351)
Net book value ¥ 1,907 ¥ 5,087 ¥ 6,994 ¥ 2,175 ¥ 4,905 ¥ 7,080

Thousands of
U.S. dollars

Millions of yen

Millions of yen

Thousands of
U.S. dollars

Millions of yen

Available-for-sale securities at February 28, 2002, which havereadily determinable fair value, are summarized as follows:

Lease payments
Depreciation expenseequivalent amountThousands of
U.S. dollars
2002¥1,977¥1,669$14,754

1,977

1,669

14,754(4) Computing method of depreciation expense equivalent amount
Depreciation expense equivalent amount is determined based on
the straight-lime method over the lease term of the leased assets
with no residual value.

6. SHORT-TERM BORROWINGS AND LONG-TERM DEBT
Short-term borrowings are primarily represented by bank overdrafts,
bearing interest at the weighted average interest rate of 1.25% at
February 28, 2002.
Long-term debt at February 28, 2002 and February 28, 2001
consisted of the following:
Millions of yen
2002
2001

Loans from banks and insurancecompanies, due from April 2002
to March 2020 with weighted
average interest rates of 2.07%
at February 28, 2002
SecuredUnsecured
1.7% Japanese yen unsecured
convertible debentures due
August 2002
2.025% Japanese yen unsecured
debentures due March 2002
2.325% Japanese yen unsecured
debentures due March 2003
2.175% Japanese yen unsecured
debentures due October 2003
2% Japanese yen unsecured
debentures due December 2001
1.53% Japanese yen unsecured
debentures due March 2004
1.84% Japanese yen unsecured
debentures due March 2005
Less, portion due within one year

Thousands of
U.S. dollars
2002¥ 75,298
14,96390,261¥ 92,2942,474
94,768$ 561,926
111,664
673,590

4,091

4,091

30,530

5,000

5,000

37,313

5,000

5,000

37,313

5,000

5,000

37,313

—

5,000

—

5,000

5,000

37,313

5,000
5,000
119,352
128,859(33,341)(17,033)¥ 86,011 ¥111,826

37,314
890,686(248,813)$ 641,873

The aggregate annual maturities of long-term debt outstandingat February 28, 2002 are as follows:
Years ending the last of February:

2004
2005
2006
2007
2008 and thereafter

Millions of yen

Thousands of
U.S. dollars¥26,145
18,42812,355
5,403
23,680¥86,011$195,112
137,522
92,20240,321
176,716$641,873

Assets pledged as collateral and related secured debt at
February 28, 2002 are summarized as follows:

Assets pledged as collateral:
Land
Buildings
Investments in securities
Debt secured by the above:
Short-term borrowings
Long-term loans

Millions of yen

Thousands of
U.S. dollars¥ 57,566
61,194
4,579¥123,339$429,597
456,672
34,171$920,440

8,320
75,298¥ 83,618

62,090561,925$624,015>>> 17

7. RETIREMENT BENEFIT PLANS
The funded status of the Companies at February 28, 2002 aresummarized as follows:

Projected benefit obligation
Unrecognised net actuarial losses
Plan assets at fair value
Accrued severance indemnities

Millions of yen

Thousands of
U.S. dollars¥ 5,100110(1,649)¥ 3,561$ 38,060
821(12,306)$ 26,575

Pension and severance costs of the Companies included thefollowing components for the year ended February 28, 2002:

Service cost
Interest cost
Expected return on plan assets
Amortisation of net transaction obligation
Payment for extra supplementary benefits
and so on

Millions of yen

Thousands of
U.S. dollars

¥ 485
142
(29)
2,487

$ 3,6191,060(216)
18,559138¥3,223

1,030$24,052

Pension benefits are attributed to periods of employee service
based on years of service by the straight-line method.
Assumptions used in the accounting for the defined benefit
plans for the year ended February 28, 2002 are as follows:
Discount rate
2.5% – 2.8%
Expected long-term rate of return on plan assets
2.0%
8. CONTINGENT LIABILITIESThe Company was contingently liable for guarantees of loans fromfinancial institutions made by affiliates and other, totaling ¥4,794
million ($35,776 thousand) at February 28, 2002.
9. DERIVATIVE FINANCIAL INSTRUMENTS(1) Status of transactiona) Nature of transactions
The Companies use derivative instruments, which compriseforeign currency exchange forward contracts, currency swap
contracts, currency option contracts and interest rate swap
agreements.
b) Purpose of transactions and policy to use transactions
The Companies use foreign currency exchange forward
contracts, currency swap contracts and currency option
contracts to minimize exposure and to reduce risk fromexchange rate fluctuation in import transactions. The
Companies also use interest rate swap agreements to hedge
against exposure of interest rate fluctuation and to adapt thelong-term fixed interest rate to the current rate in line with thechange in the market rate. The Companies do not use
speculative transactions.

18 <<<

c) Risks in transactions
Derivative instruments used by the Companies are exposed torisk from market rate fluctuation. Counterparties are highly
creditworthy domestic banks and, therefore, the Companies do
not expect losses due to non-performance of counterparties.
d) Risk management
Derivative transactions are managed and approved byresponsible decision-making bodies such as management
meetings and executed by related departments.
e) Other
The contract or notional amount shown in the “Market value
etc. of transactions” below is not indicative of the quantity ofmarket risk.
(2) Market value etc. of transactions
Contract or notional amount, market value and valuation gain orloss of derivative instruments at February 28, 2001 aresummarized as follows:
Millions of yen
Contract ornotional amountOver
MarketTotal
one yearvalue

Currency option:
Purchase—call (U.S. dollars)
Sale—call (U.S. dollars)Interest rate swap:
Receipt in fixed rate andpayment in variable rate
Receipt in variable rate andpayment in fixed rate

Valuation
gain

¥320
320
¥640

¥200
200
¥400

¥36
(8)
¥28

¥36
(8)
¥28

¥24,000¥1,000

¥ 667

¥ 667

14,938¥38,938

2,125¥3,125

(241)
¥ 426

(241)
¥ 426

The fair value is quoted from financial institutions with which theCompanies make currency option contracts and interest rate swap
agreements.
Excluded from the above disclosure are foreign currency
exchange forward contracts relating to receivables and payables
denominated in foreign currency of which yen settlement amounts
were fixed at the contracted forward rates and recorded at suchamounts in the balance sheets or eliminated at such amounts inconsolidation procedures.
Effective from the year ended February 28, 2002, theCompanies state derivative instruments at fair value, so the schedule
is not listed.

10. STOCKHOLDERS’ EQUITY
Under the Commercial Code of Japan (the “Code”), the entire amountof the issue price of new shares issued is required to be capitalized asstated capital, although the Company may, by resolution of its Boardof Directors, capitalize an amount not exceeding one-half of the issue
price of the new shares as additional paid-in capital.
The Code requires a domestic company to appropriate as a legal
reserve an amount equal to at least 10% of the amount paid out by itas appropriation of retained earnings (including any payment by wayof annual dividend and bonuses to directors and statutory auditors) forthe period or equal to 10% of any interim dividend until the sum of thelegal reserve and the additional paid-in capital equals 25% of its
stated capital. The legal reserve and additional paid-in capital may betransferred to stated capital through suitable director actions or used
to reduce a deficit through suitable stockholder actions.
Under the Code, the appropriation of retained earnings(including year-end cash dividend payment) proposed by the Board of
Directors should be approved at stockholders’ meeting, which mustbe held within three months after the balance sheet date. The
appropriation of retained earnings reflected in the accompanying
consolidated financial statements represents the results of suchappropriations which are applicable to the immediately preceding fiscal
year but which are approved by the stockholders’ meeting anddisposed of during the current year.
As is customary practice in Japan, the payment of bonuses todirectors and corporate auditors is made out of retained earnings
instead of being charged to income for the year and constitutes a partof the appropriations cited above.
11. INCOME TAXESThe Companies are subject to a number of different taxes based on
income, which, in aggregate, result in statutory income tax rates ofapproximately 41.7% for the years ended February 28, 2002 and2001.
Reconciliation of the difference between the statutory income
tax rates and the effective income tax rates for the year ended
February 28, 2001 is as follows:
2001

Statutory income tax rate
Increase (decrease) in taxes resulting from:Entertainment expenses and other which
are permanently non-tax-deductible
Dividend income and other which arepermanently non-taxable
Per capita inhabitant taxes and other
Valuation allowance provided for tax loss
carryforwards of subsidiaries
Effective income tax rate

41.7%

0.4
(0.5)
2.1
1.3
45.0%

The reconciliation schedule for the year ended February 28,
2002 is not listed because the difference between the statutory
income tax rates and the effective income tax rates is within 5% of
the statutory income tax rates.
The significant components of deferred tax assets and liabilities
at February 28, 2002 and February 28, 2001 were as follows:

Millions of yen
2002
2001

Deferred tax assets:
Allowance for doubtful accounts¥ 290
Property and equipment
114
Intangible assets
166
Investments in securities
335
Interest on land newly acquired—
Accrued enterprise tax
359
Accrued bonus
343
Accrued severance indemnities
1,490
Fair value adjustments ofconsolidated subsidiaries
423
Tax loss carryforwards
174
Excess depreciation and amortization
310
Other
170
4,174
Deferred tax liabilities:
Reserve for special depreciation(72)
Reserve for advanced depreciationof fixed assets(263)
Fair value adjustments ofconsolidated subsidiaries(1,011)
Unrealized holding gains on securities(205)(1,551)
Net deferred tax assets¥ 2,623¥

Thousands of
U.S. dollars
2002

290
152
155
326
123
174
257
564

$ 2,164
851
1,239
2,500
—
2,679
2,560
11,119

423
88
—
144
2,696

3,157
1,298
2,313
1,269
31,149

(79)

(537)

(275)

(1,962)(1,021)—(1,375)¥ 1,321(7,545)(1,530)(11,574)$ 19,575

12. RELATED PARTY TRANSACTIONSThe Company purchased ¥10,781 million ($80,455 thousand) ofmerchandise from Japan Logistics Industry Co., Ltd. (“JLI”) for theyear ended February 28, 2002. A representative director and vicepresident of JLI, Mr. Yasuaki Yamanishi, is also a representative
director and the president of the Company and owns 1.60% of theCompany’s voting stock. At February 28, 2002, the Company had
accounts payable of ¥1,237 million ($9,231 thousand) and depositeda guarantee money of ¥483 million ($3,604 thousand) to JLI.
The Company leases a building of Higashi-Hiroshima shop from
Izumi Kosan K.K. (“Izumi”) with lease payments of ¥341 million($2,545 thousand) for the year ended February 28, 2002. Izumi is amajority-owned subsidiary of a company wholly owned by Mr. Yasuaki
Yamanishi and his relatives. The lease terms are the same as thosefor third parties. At February 28, 2002, the Company depositedguarantee money of ¥4,127 million ($30,799 thousand) to Izumi,
which was determined based on the total construction costs of thebuilding and the area occupied by the Company.
13. SUPPLEMENTARY CASH FLOW INFORMATIONCash and cash equivalents at February 28, 2002 and 2001 consistedof the following:
Millions of yen
2002
2001

Cash and bank deposits
Less, time deposits with deposit
term of over three months
Cash and cash equivalents¥8,781Thousands of
U.S. dollars
2002¥11,016$65,530

(120)
(552)
¥8,661 ¥10,464(896)$64,634>>> 19REPORT OF INDEPENDENT ACCOUNTANTS

DIRECTORS AND CORPORATE AUDITORS

To the Board of Directors
Izumi Co., Ltd.

Chairman
Yoshimasa Yamanishi

Full-Time Corporate Auditor
Akira Tsumura

We have audited the accompanying consolidated balance sheets of Izumi Co., Ltd. and its subsidiaries as of February 28, 2002 and 2001, andthe related consolidated statements of income, stockholders' equity and cash flows for each of the two years in the period ended February 28,
2002, all expressed in Japanese yen. Our audits were made in accordance with auditing standards, procedures and practices generally
accepted and applied in Japan and, accordingly, included such tests of the accounting records and such other auditing procedures as we
considered necessary in the circumstances.

President
Yasuaki Yamanishi

Corporate Auditors
Yoshiharu Kanasugi
Toyomi Takimoto
Jiro Matsubara

In our opinion, the consolidated financial statements referred to above present fairly the consolidated financial position of Izumi Co., Ltd. and its
subsidiaries as of February 28, 2002 and 2001, and the consolidated results of their operations and cash flows for each of the two years in the
period ended February 28, 2002 in conformity with accounting principles and practices generally accepted in Japan (see Note 1) applied on aconsistent basis.

Directors
Takashi Kaneko
Hiroaki Bando

Executive Vice President
Hiromasa Takanishi(as of May 28, 2002)

As described in Note 2, effective from the year ended February 28, 2002, Izumi Co., Ltd. and its subsidiaries have adopted the new Japanese
accounting standards for financial instruments, retirement benefits, and foreign currency translation.
The amounts expressed in U.S. dollars, provided solely for the convenience of the readers, have been translated on the basis set forth in Note 3
to the accompanying consolidated financial statements.

CORPORATE DATACHUOAOYAMA AUDIT CORPORATION

Hiroshima, JapanMay 23, 2002

Head Office2-22, Kyobashi-cho,
Minami-ku, Hiroshima,
Hiroshima Prefecture 732-0828, Japan
Tel.: (082) 264-3211

Transfer Agent and Registrar
Japan Securities Agents, Ltd.
2-4, Nihonbashi-Kayaba-cho, 1-chome,
Chuo-ku, Tokyo 103-8202, Japan

Date of Establishment
October 27, 1961

Annual Meeting of Stockholders
The annual meeting of stockholders of the Company isnormally held in May each year in Hiroshima, Japan. In
addition, the Company may hold an extraordinary meetingof stockholders whenever necessary by giving at least
two weeks’ advance notice to stockholders.

Paid-in Capital¥19,614 million (as of February 28, 2002)
Securities Traded
Common Stock
Tokyo Stock Exchange, First Section
Osaka Securities Exchange, First Section
Hiroshima Stock Exchange

20 <<<

Auditors
ChuoAoyama Audit Corporation>>> 21