IZUMI Co., Ltd.

2007
A N NUAL R E POR T

S I X - Y EAR F I NANC IAL S UM M ARY
Thousands of
U.S. dollars(Note 1)Millions of yen

Revenues
Operating income
Income before income taxes
and minority interests
Net income
Net income/revenues
Total net assets (Note 2)
Total assets

2007

2006

2005

2004

2003

2002

2007

Mar. 2006–
Feb. 2007

Mar. 2005–
Feb. 2006

Mar. 2004–
Feb. 2005

Mar. 2003–
Feb. 2004

Mar. 2002–
Feb. 2003

Mar. 2001–
Feb. 2002–Mar. 2006–
Feb. 2007¥446,821
24,144¥436,825
22,706¥426,437
19,771¥407,648
18,079¥383,098
15,994¥363,714
14,784$3,772,552
203,850

19,737
13,1582.94%
105,005
335,545

21,490
11,583
2.65%
88,542313,086

18,0899,601
2.25%
85,519318,893

16,8888,713
2.14%
84,354295,927

11,8345,600
1.46%
76,892
273,484

9,493
4,832
1.33%
74,132
268,655

166,641
111,094
2.94%
886,567
2,833,038
U.S. dollars(Note 1)Yen

Per share (Note 3):
Net income—basic
Net income—diluted
Cash dividends declared¥ 251.80
223.8832.00¥ 216.60
192.6926.00¥ 166.88
155.0224.00¥ 148.07
—
23.00

¥

95.23
94.21
23.00

¥

81.46
79.40
21.00

$

2.13
1.89
0.27

Notes 1: Yen amounts are translated into U.S. dollars, solely for convenience, at the prevailing exchange rate on February 28, 2007, ¥118.44 = U.S. $1.
2: By application of the new accounting standard for presentation of net assets in the balance sheet, minority interests in consolidated subsidiaries and gain on deferred hedges are included in total net assets forthe year ended February 28, 2007.
3: See Note 2 (21) of Notes to Consolidated Financial Statements.

Izumi
Predominant Retail Chainwith Regional Links
CONTENTSPROFILE01

TO OUR STOCKHOLDERS

02

SPECIAL FEATURE Izumi: Background to Robust Growth

04

CONSOLIDATED STATEMENTS OF INCOME

09

CONSOLIDATED BALANCE SHEETS

10

CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS

12

CONSOLIDATED STATEMENTS OF CASH FLOWS

13

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

14

REPORT OF INDEPENDENT AUDITORS

20

DIRECTORS AND CORPORATE AUDITORS21

CORPORATE DATA

21

PROF I LE

Izumi Co., Ltd. (“Izumi” or the “Company”) takes pride in being the predominant retail chain in the Chugoku,
Shikoku and Kyushu regions of Japan. As of February 2007, Izumi’s hypermarkets and food supermarkets extended

to 70 locations. In 1990, Izumi opened its first You Me Town hypermarket. In the ensuing period, the Company has
worked to become number one in these regions in terms of scale and product lineup, with You Me Town contributing
significantly to the Company’s continued growth. In providing one-stop service, featuring a broad shopping lineup as
well as an array of restaurants, amusements, cultural and community offerings and other facilities, You Me Town outlets
deliver everything customers want to buy or do, all under one roof. Through the You Me Town business model, Izumi isfully meeting the wishes of an increasing number of customers.
During the fiscal year under review, Izumi boosted its efforts to review and upgrade store layouts, displays and its
product lineup, strengthened its existing stores and opened new stores with a particular focus on capturing top
positions in its operating regions. As a result of these activities, Izumi enjoyed an increase in revenues and earnings,
recording its eighth consecutive year of growth. Perceiving its stores as “organic and dynamic” assets, Izumi willcontinue to serve its customers by better responding to their needs and providing region-specific services.
(Billions of yen)

30
500

REVENUES AND OPERATING INCOME(Fiscal years ended February 28/29)

20 400

300
10

200

0

0

Revenues
Operating Income

2000

2001

2002

2003

2004

2005

2006

2007

288.3
8.1

346.8
10.3

363.7
14.8

383.1
16.0

407.6
18.1

426.4
19.8

436.8
22.7

446.8
24.1
01

TO O UR S TOC K HO L DE RS

During the fiscal year ended February 28, 2007, Izumi
continued its focus on maximizing customer satisfaction, refurbishing its existing stores and expanding its
predominant chain of regional You Me Town outlets.
These efforts resulted in Izumi achieving its eighthconsecutive year of growth.

Yasuaki Yamanishi
President

Overview of the YearW

ith sluggish personal consumption resulting from a slowdown in earnings, there were still no discernible
signs of a recovery in fiscal 2007, the fiscal year ended February 28, 2007. In addition, conditions in theretail industry continued to be unfavorable due to unseasonable weather and intensifying competition

across all areas of the business. Against this backdrop, Izumi continued its focus on maximizing customer satisfaction
and accelerated management and business operation reforms.

Improving Management and Operating StructureThanks to a robust sales performance, reduction in cost of sales and the implementation of cost
structure reforms, the non-consolidated operating income ratio continued to show a year-on-year
improvement, from 5.0% to 5.4%. Consolidated operating income ratio likewise edged up from 5.4% to 5.7%.

The Group has enhanced its mainstay retail operations, emphasizing the fresh, the exciting and the surprising inhigher value creation for its stores, products and services. As a result of the increased value of goods in particular,
the average price per sales increased by 1.1% year on year, thereby contributing to improved revenues.

02

H IG HLIG HTS
Consolidated revenues rose 2.3% year on year to ¥446.8 billion ($3,772.6 million)
Consolidated operating income increased 6.3% year on year to ¥24.1 billion ($203.9 million)
Consolidated net income jumped 13.6% year on year to ¥13.1 billion ($111.1 million)
Stabilized existing store sales, with non-consolidated existing store sales edging up 0.8% year on year
Tapped growth in demand for high-value-added goods and reversed the trend to push up the average
price per sales by 1.1% year on year
Continued efforts to reduce the cost of sales and implement cost structure reforms:
Non-consolidated operating income ratio increased 0.4 percentage point to 5.4%.
Consolidated operating income ratio rose 0.3 percentage point to 5.7%.
Consolidated ROE was 14.0%, up 0.7 percentage point from the previous fiscal year.

Status of Consolidated Subsidiaries

Although X-Sell Inc. suffered a loss as a result of a write-down of ¥550 million in its inventory value, thecard-service business Youme Card Co., Ltd. continued to improve its operating revenues. The building
maintenance company Ideo Co., Ltd. expanded orders outside the Group, which included maintenance

operations for public facilities. Izumi Food Service Co., Ltd. achieved a strong performance in its in-store restaurant
operations.
Accounting for these factors, consolidated revenues for the fiscal year ended February 28, 2007 increased 2.3%
year on year to ¥446.8 billion. Consolidated operating income rose 6.3% to ¥24.1 billion, while consolidated net income
jumped 13.6% to ¥13.2 billion. These figures represent our eighth consecutive year of increased revenues and profits.
Adding a year-end dividend of ¥16 to the interim dividend of ¥16 already distributed, the full-year dividend for fiscal
2007 is ¥6 higher than that in the previous fiscal year.
We will step up efforts to further strengthen our existing stores and develop new neighborhood shopping centerswith the aim of doubling our dominance in the regions where we operate and achieving future growth.

Yasuaki Yamanishi
President

03

S P E C I A L F E AT U R E
Izumi: Background to Robust Growth

Customer satisfaction is the source of Izumi’s business profits,
and we regard our strenuous efforts to maximize customer satisfaction as the shortest way to meet the expectations of our
suppliers, shareholders and employees. In order to survive andprosper in a constantly changing environment, the Company
has committed itself to improving the vigor of its stores on adaily basis.

Izumi Co., Ltd.

W

ith an increasing number of closures and a lull in openings in the general merchandising store sector,
competition in the Chugoku and Kyushu regions has eased somewhat. In these circumstances,

Izumi introduced detailed merchandising for each shop floor and concentrated on strengthening existing stores bydifferentiating them with the introduction of high-value-added products. The Company also worked to attract a larger

(%)

105

number of customers by replacing underperforming tenants and constructing new store buildings to complement its
existing You Me Town outlets, which continue to be the preeminent regional tenanted facilities.

Existing Store Information
Percentage year-on-year ( YOY) change

100

95
Number of Customers Counted
Average Amount Spent per Customer
Average Price per Sale
Average Number of Items Purchased

90
2000

04

2001

2002

2003

2004

2005

2006

2007

Clothing

Net sales / YOY existing store sales / Gross Profit Margin(Billions of yen)

(%)

(%)

90

100

38

92.5

101.1

100.7

99.8

64.8

65.9

37.4

96.1

60

62.6

61.4

62.1

80

36.6

0

0

03

n the clothing segment, we accelerated activities to establish more

37.3

37

30

I

38.1
37.6

04

05

06

36

03

07

04

05

06

07

to the strategies of:customer-centered sales areas in our stores. These activities

1. Achieving store differentiation through provision of high-value-

included discovering new products and expanding purchase channels,

added, high-end merchandise

creating more customer-friendly shopping areas in a relaxed atmos-

2. Utilizing display and layout changes to bring more excitement

phere, boosting visual merchandising and enhancing service skills.

to the shopping experience, with products and brands renewed

Contrary to the previous fiscal year’s increase in sales due to theon a weekly basis

influence of a harsh winter, the unseasonable weather throughout the

3. Focusing on visual merchandising such as utilizing fixtures andyear under review dampened existing store sales to record 99.8% oflighting to enhance product appeal and improving store pres-the level of the previous fiscal year. The actual existing store sales figure,entation and customer services

however, managed to stay above the industry average. The grossContributing to the favorable financial results, these endeavors led

profit margin, however, improved 0.5 percentage point, to 38.1%.

to an improvement in the ratio of loss due to merchandise price dis-Achieving these results in such difficult circumstances is attributed

HouseholdGoods

counts by 0.6 percentage point over the previous fiscal year.

Net sales / YOY existing store sales / Gross Profit Margin(Billions of yen)

(%)

(%)

50

100

32

40
30

102.0

99.8
33.2

95.3

95.7

31.8

32.1

33.9

100.1
34.2

31.5
31.1

80

31

20

30.9

30.8
30.5

10
0

0

03

W

e have expanded our range of value-added products in thehousehold goods segment that are not susceptible to the

04

05

06

07

30

03

04

05

06

07

Three features distinguished Izumi’s activities in the fiscal year
under review:

vagaries of the weather and have also carved out a niche by featur-

1. Withstanding adverse effects from climate instability by devel-ing specialist stores that offer distinctive, differentiated merchandise.

oping merchandise unaffected by the vagaries of weather

While competitors suffered from the harsh business conditions,

2. Differentiating store offerings by providing high-value-added

Izumi recorded existing store sales of 100.1% of the level of the pre-products that are manufactured based on anticipated customer needs

vious fiscal year. The gross profit margin also improved by 0.4 per-

3. Reflecting changes in market needs by the swift introduction

centage point to reach 31.5%.
Izumi has restricted its field of operations in household goods tothose items where it can secure competitive advantage. Products
outside these fields—including books, toys, furniture and sportingof high-demand products in the bedding, stationery, giftwareand kitchen-related product categories
These measures had a pronounced effect on revenues, improving
the operating income ratio.

goods—have been left to specialist stores with superior know-how.

05

Foods

Net sales / YOY existing store sales / Gross Profit Margin(Billions of yen)

(%)

(%)

180

100

27

100.4

100.4

98.8

98.0

123.9

122.8

126.8

127.7

128.2

03

04

05

06

07

98.1

120

26.7
26.5

80

26

0

25

26.3

26.3

26.3

04

05

06

60

0

W

hile improving the variety, quality and freshness of local

03

07

fruits, sashimi (thin-sliced raw fish), ready-made hamburger

produce in our stores, we have made steady progress inpatties and health foods

establishing flexible sales areas through weekly product lineup reviews.

3. Improving food product quality and freshness

These activities enabled us to make year-on-year improvements in

In conjunction with these measures, we expanded our policy of

existing store sales by 0.4 percentage point and to edge up gross profit

local production for local consumption and differentiated our

margin by 0.4 percentage point to 26.7%.

stores by their higher proportion of local produce. Increasing

Izumi continues to delegate responsibility for product procurement

the volume of local produce handled had a positive impact on

and lineup strategies to individual store managers in order to meet thesegment performance, raising sales by approximately 20%.

needs of their local customers. The specific initiatives are:Over the long term, the foods segment has grown into the most

1. Allowing for flexible weekly strategies throughout the year tostable and profitable business, contributing greatly to Izumi's revenue

facilitate effective sales area reviews

growth.

2. Expanding the sales of high-value-added products such as cut

Tenants

Net sales / YOY existing store sales / Gross Profit Margin(Billions of yen)

(%)

(%)

150

100

9

80

8

0

7

120

99.5

102.5
97.5

90
60

82.3

86.5

03

04

102.1

96.0
98.0

104.6

05

06

8.1

111.8

8.2

8.1

8.1

05

06

8.0

30
0

I

n retail tenant operations, we have endeavored to enhance thevalue of our premises by minimizing the number of underper-

forming tenants, while at the same time seeking out promising replacements with whom to build relationships of trust.
Sales in the fiscal year under review improved by 2.1 percentage
points year on year on an existing store basis.
Tenants play an important role in enhancing the value of our existing stores and attracting customers. Thus, our focus is on the intro-

07

03

04

07

have been geared toward:
1. Promoting tenant replacement to better satisfy customer needs
in each region
2. Increasing commercial accumulation of tenanted outlets by constructing separate buildings that complement existing outlet buildings
The result, assisted by the economic recovery, was that sales atfashion-related tenants remained steady over the fiscal year and thisexerted a beneficial effect on Izumi’s directly managed stores.

duction of Japan’s leading specialty stores boasting considerable brandWith the construction and management of new stores, Izumi strives

power in a variety of fields. This policy empowers You Me Town outlets

to introduce new brands and large-scale tenants to each region. This

to deliver to customers the most comprehensive lineup of merchan-in turn contributes to the continued competitive advantage of the You

dise in each region.

Me Town brand. Looking ahead, the tenants segment will likely support

Our retail tenant-related activities in the fiscal year under review

06

Izumi’s earnings growth.

S P E C I A L F E AT U R E

Subsidiaries

O

perating revenues at X-Sell Inc. fell due to the closure of 10 stores. The subsidiary also wrote-down ¥550 million
in inventory depreciation during the first half, producing a loss for the fiscal year under review. However, X-Sell is

now converting its mass import brand stores into select designer boutiques, pursuing more originality in its productlineup and offering a more pleasurable selection and shopping experience.
Although regional competition subsided, You Me Town Kumamoto Co., Ltd. was very innovative in introducing
powerful specialty stores and in further upgrading food court services, resulting in improved revenues during the second
half. We are continuing with our efforts to buttress the outlet’s sales floors as we aim to maintain and expand ourleading position in the region.
The card-service business, Youme Card Co., Ltd., realized improvements in operating income and net income
compared to the previous fiscal year. Izumi Food Service Co., Ltd. had reported a decline in operating income as a resultof its “scrap and build” policy but succeeded in narrowing net loss during the fiscal year under review. Ideo Co., Ltd.
suffered a slight decline in net income despite increased operating income from its tenants business.

Topics
X-Sell Inc.

Ideo Co., Ltd.

The sense of space and tranquility incorporated into the design

Having gone to great lengths to develop start-up businesses,of the X-Sell store in Saga,

Ideo was selected as desig-

which opened in 2006, resulted

nated management provider

in a sales floor with a more

for four public facilities.

sophisticated ambience.

Youme Card Co., Ltd.

Izumi Food Service Co., Ltd.

The Youme Card international card, which also serves as a

Izumi Food Service holds the nation’s leading Baskin Robbins

credit card, was redesigned and a new points system launched.

31 Ice Cream franchise, with
21 stores in operation, andhas also obtained registeredtrademarks for three more
directly managed food outlets.

07

S P E C I A L F E AT U R E

Outlook for Continued GrowthAs Izumi seeks internal growth through strengthening existing stores and enhancing their profitability, we will also
continue our successful strategy of vigorous openings of You Me Town shopping centers. You Me Town willbolster its position as the dominant retail chain in the Chugoku, Shikoku and Kyushu regions. Through its directly
managed stores and its collaboration with leading tenants, Izumi responds to the needs of a wide customer base fromthe youthful to the mature, with a focus on housewives. Izumi develops stores that cater for demand that changes
depending on the day of the week and time of day.

Flurry of You Me Town Store OpeningsNew building plans already in place for large-scale You Me Town developments will increase the brand’s
overriding competitiveness in the areas in which it predominates. Major store openings include You Me Town

Beppu and You Me Town Hiroshima, which are scheduled to open in winter 2007 and spring 2008, respectively. Plans
call for You Me Town Izumo to open its doors in the summer of 2008, with You Me Town Mitoyo and You Me Town
Marugame following in the fall of the same year.

Store Name

Planned Opening Site Area (approx.)

Winter 2007

21,400 m2

21,000 m2

1,300

You Me Town Hiroshima

Spring 2008

50,000 m2

38,750 m2

2,600

You Me Town Izumo

Summer 2008

106,000 m2

33,500 m2

3,100

You Me Town Mitoyo

Fall 2008

67,900 m2

22,000 m2

2,000

You Me Town Marugame

Fall 2008

43,000 m2

32,000 m2

2,000

Located where Izumi’s business began, You Me Town Hiroshima is scheduled to open in the heartof Hiroshima City—which encompasses a market of 1.3 million people—in spring 2008. With a perfectly balanced layout to cater for everyday essentials during the week and entertainment on
weekends, You Me Town Hiroshima will offer new
discoveries and pizzazz that far outstrip department
stores in terms of the levels of excitement and08

No. of Parking
Spaces (approx.)

You Me Town Beppu

Izumi Group’s Flagship Store: You Me Town Hiroshima

enjoyment.

Store Area
(approx.)

C O N S O L I D AT E D S TAT E M E N T S O F I N C O M E
Thousands of
U.S. dollars
Izumi Co., Ltd. and its subsidiaries
For the years ended February 28, 2007 and 2006

(Note 3)

Millions of yen

2007

2006

2007

¥426,830
19,991¥418,086
18,739$3,603,766
168,786

446,821436,825

3,772,552

COST OF SALES

330,456

321,663

2,790,071

Gross profit

116,365

115,162

982,481

92,221

92,456778,631

24,14422,706

203,850305(1,424)
442
1
5
(326)
169
(4,011)432

243(1,538)435
116
85(1,166)
98
—
511

2,575
(12,023)3,732
8
42(2,752)
1,427(33,865)
3,647(4,407)(1,216)(37,209)

19,737

21,490166,641

9,501(3,043)

9,553
(662)

80,217(25,692)

6,458

8,891

54,525

13,27912,599112,116

121

1,016

1,022

¥ 13,158¥ 11,583$ 111,094

REVENUES:Net sales
Other operating revenues

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES (Note 12)
Operating income
OTHER INCOME (EXPENSES):Interest and dividend income
Interest expense
Purchase discounts
Gain on sale of investments in securities
Gain on sale of property and equipment
Loss on sale or disposal of property and equipment
Foreign exchange gains
Impairment loss (Note 5)
Other, net
Income before income taxes and minority interests
INCOME TAXES (Note 12):Current
DeferredIncome before minority interests
MINORITY INTERESTS
Net income

U.S. dollars(Note 3)Yen

PER SHARE:
Net income (Note 2 (21)):
Basic
DilutedCash dividends declared¥251.80223.8832.00¥216.60
192.69
26.00

$2.13
1.89
0.27

The accompanying notes are an integral part of these statements.

09

C O N S O L I D AT E D B A L A N C E S H E E T S
Thousands of
U.S. dollars
Izumi Co., Ltd. and its subsidiaries
As of February 28, 2007 and 2006

(Note 3)

Millions of yen

2007

2006

2007

¥ 11,614
12,889¥ 12,251
12,222

10,814
2,705

8,814
1,767

91,303
22,83913,519(1,685)

10,581(883)

114,142(14,226)

11,834

9,698

99,916Inventories
Deferred income taxes (Note 13)
Other current assets

24,872
2,757
3,190

23,6652,357
2,535

209,996
23,27826,933

Total current assets

67,15662,728567,004

1,696
8,182
1,647

1,093
7,428
1,596

14,32069,081
13,906

11,525

10,11797,307

223,842
37,044

207,880
35,741

1,889,919
312,766

Less-accumulated depreciation

260,886(132,738)

243,621(122,535)

2,202,685(1,120,719)

Land
Construction in progress

128,148
99,7072,604

121,086
90,853
3,285

1,081,966
841,835
21,986

230,459

215,224

1,945,787

13,314
4,159
8,932

14,704
1,648
8,665

112,41135,11575,414¥ 335,545¥ 313,086$ 2,833,038

ASSETS
CURRENT ASSETS:
Cash and bank deposits
Short-term loans receivable
Notes and accounts receivable:
Trade
Other
Less-allowance for doubtful accounts

INVESTMENTS AND ADVANCES:
Investments in non-consolidated subsidiaries and affiliates
Investments in securities (Notes 4 and 7)
Other investments and advances

PROPERTY AND EQUIPMENT (Notes 5, 6 and 7):
Buildings and structures
Machinery, equipment, vehicles and other

OTHER ASSETS:
Fixed leasehold deposits
Deferred income taxes (Note 13)
Other

The accompanying notes are an integral part of these statements.

10$

98,058108,823

Thousands of
U.S. dollars(Note 3)

Millions of yen

2007

2006

2007

¥43,585
24,060¥33,504
18,848$367,992
203,141

16,865
11,26015,925
8,793

142,393
95,06928,125
5,136
1,452
39
698
7,046

24,718
5,812
1,421
—
946
6,306

237,462
43,364
12,260329
5,893
59,490110,141

91,555929,931

79,537
5,672
23,416
1,063
1,100
9,611

98,461
5,344
22,115
1,002—
595

671,538
47,889197,704
8,975
9,287
81,147

230,540

219,072

1,946,471

19,614—
22,491
76,888—
19,614
22,32064,238

165,603—
189,894
649,173(21,761)
—
2,334
66
(25)
5,398

—
(19,653)
2,027
—
(4)
5,472

(183,730)—
19,706557(211)
45,575

105,005

94,014

886,567¥335,545¥313,086$2,833,038

LIABILITIES AND NET ASSETSCURRENT LIABILITIES:
Short-term borrowings (Note 7)
Current portion of long-term debt (Note 7)
Notes and accounts payable:
Trade
Other
Income taxes payable
Accrued bonuses to employees
Accrued bonuses to directors and corporate auditors
Allowance for point discounts
Other current liabilities
Total current liabilities
LONG-TERM DEBT (Note 7)
ACCRUED SEVERANCE INDEMNITIES (Note 8)
LEASE DEPOSITS RECEIVED
DEFERRED INCOME TAXES (Note 13)
ALLOWANCE FOR LOSS ON GUARANTEESOTHER LIABILITIES
Total liabilities
COMMITMENTS AND CONTINGENT LIABILITIES (Note 9)
NET ASSETS (Note 11):
Common stock, no par value:
Authorized:
February 28, 2007—195,243,000 shares
February 28, 2006—195,243,000 shares
Issued:February 28, 2007—61,558,710 shares
February 28, 2006—61,558,710 shares
Additional paid-in capital
Retained earnings
Less–treasury stock at cost:
February 28, 2007—9,652,302 shares
February 28, 2006—9,255,077 shares
Net unrealized gains on securities
Gain on deferred hedges
Less–foreign currency translation adjustments
Minority interests in consolidated subsidiaries
Total net assets

11

C O N S O L I D AT E D S TAT E M E N T S O F C H A N G E S I N N E T A S S E T S
Millions of yen
Stockholders’ equity

Izumi Co., Ltd. and its subsidiaries
For the years ended February 28, 2007, 2006 and 2005

Number ofshares ofcommon stock(thousands)

Commonstock

Additional
paid-in
capitalRetainedearnings

Revaluation and translation adjustments
Treasurystock
at costNet
Foreign
Minority
unrealized Gain on
currencyinterests in
gains
deferred translation consolidated
on securities hedges adjustments subsidiaries

BALANCE AT FEBRUARY 29, 2004
61,559Net income for the year
Cash dividends
Directors’ and corporate auditors’ bonuses
Net unrealized gains on securities
Foreign currency translation adjustments
Increase in treasury stock, net¥19,614 ¥22,315 ¥45,823 ¥ (3,930) ¥ 535
9,601(1,381)(25)445

BALANCE AT FEBRUARY 28, 2005
61,559Net income for the year
Cash dividends
Directors’ and corporate auditors’ bonuses
Gain on appropriation of treasury stock
Net unrealized gains on securities
Foreign currency translation adjustments
Increase in treasury stock, net
Other increase (Note 12)¥19,614 ¥22,315 ¥54,018 ¥(11,404) ¥ 980
11,583(1,361)
(12)
5
17
1,047

BALANCE AT FEBRUARY 28, 2006
61,559Net income for the year
Cash dividends
Directors’ and corporate auditors’ bonuses
Gain on appropriation of treasury stock
Increase in treasury stock, net
Net adjustment to retained earnings due
to change in scope of consolidation(Note 2 (1))
Items other than changes instockholders’ equity¥19,614 ¥22,320 ¥64,238 ¥(19,653) ¥2,027
13,158(1,622)
(71)
171
617
(2,725)BALANCE AT FEBRUARY 28, 2007

¥—

¥ (3)

¥

—

¥

—

(1)
(7,474)
¥—

¥ (4)

0
(8,266)
10
¥—

¥ (4)

¥5,472

307

66

(21)

(74)

¥19,614 ¥22,491 ¥76,888 ¥(21,761) ¥2,334

¥66

¥(25)

¥5,398BALANCE AT FEBRUARY 28, 2006
Net income for the year
Cash dividends
Directors’ and corporate auditors’ bonuses
Gain on appropriation of treasury stock
Increase in treasury stock, net
Net adjustment to retained earnings due
to change in scope of consolidation
Items other than changes instockholders’ equity$165,603 $188,450 $542,368 $(165,932) $17,114 $ —111,094(13,695)
(599)
5,209
1,444
(23,007)$ (34)$46,200

557

(177)

(625)

BALANCE AT FEBRUARY 28, 2007

$165,603 $189,894 $649,173 $(183,730) $19,706 $557$(211)$45,575

61,559

1,185

Thousands of U.S. dollars (Note 3)

10,005
2,592

The consolidated statements of changes in net assets for the year ended February 28, 2007 are presented under the new standard.
The accompanying notes are an integral part of these statements.

12

C O N S O L I D AT E D S TAT E M E N T S O F C A S H F L O W S
Thousands of
U.S. dollars
Izumi Co., Ltd. and its subsidiaries
For the years ended February 28, 2007 and 2006

(Note 3)

Millions of yen

2007

2006

2007

¥ 19,737
11,200
(860)
(305)
1,424
(5)
326
(1)
4,011
(1,999)(1,200)931(1,202)¥ 21,490
11,397
50
(243)
1,538
(85)
1,166
(116)
—
(1,288)
460
295
2,534

$ 166,641
94,563(7,261)(2,575)
12,023
(42)
2,752
(8)
33,865(16,878)(10,132)
7,861(10,149)

32,057306(1,452)(10,216)

37,198255(1,521)(8,962)

270,660
2,584(12,259)(86,255)

Net cash provided by operating activities

20,69526,970174,730

CASH FLOWS FROM INVESTING ACTIVITIES:Payments for purchases of property and equipment
Payments for purchases of intangible assets
Payments for purchases of investments in securities
Proceeds from sale of property and equipment
Proceeds from sale of investments in securities
Other, net(16,273)
(725)
(578)
369
86
1,909

(15,074)(602)(1,169)
1,478
593
3,436

(137,395)(6,121)(4,880)3,115
726
16,118Net cash used in investing activities(15,212)(11,338)(128,437)

10,081
5,700(18,625)—(2,725)(1,692)

5,712
14,233(21,215)(5,000)(8,266)(1,445)

85,115
48,126(157,253)—(23,007)(14,286)(7,261)(15,981)(61,305)(18)(1,796)
12,251
1,159

0
(349)
12,600—(152)(15,164)
103,436
9,786¥ 11,614¥ 12,251$ 98,058

CASH FLOWS FROM OPERATING ACTIVITIES:
Income before income taxes and minority interests
Depreciation and amortization
Provision for allowance for doubtful accounts
Interest and dividend income
Interest expense
Gain on sale of property and equipment
Loss on sale or disposal of property and equipment
Gain on sale or revaluation of investments in securities
Impairment loss
Increase in notes and accounts receivable
Decrease (increase) in inventories
Increase in trade notes and accounts payable
Other, net
Sub-totalInterest and divided income received
Interest expense paid
Income taxes paid

CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in short-term borrowings
Increase in long-term loans
Repayment of long-term loans
Redemption of bonds
Payment for purchases of treasury stock
Dividends paid
Net cash used in financing activities
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
Cash and cash equivalents of newly consolidated subsidiaries
Cash and cash equivalents at end of year
The accompanying notes are an integral part of these statements.

13

N O T E S T O C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S
Izumi Co., Ltd. and its subsidiaries
For the years ended February 28, 2007 and 2006

1. BASIS OF PRESENTATION OF CONSOLIDATEDFINANCIAL STATEMENTS
The accompanying consolidated financial statements of Izumi Co., Ltd.
(the “Company”) and its subsidiaries (collectively, the “Companies”)
are prepared on the basis of accounting principles generally accepted inJapan, which are different in certain respects to the application and disclosure requirements of International Financial Reporting Standards, andare compiled from the consolidated financial statements prepared by theCompany as required by the Securities and Exchange Law of Japan.
Certain items presented in the consolidated financial statements
submitted to the Director of the Kanto Finance Bureau in Japan havebeen reclassified in these accounts for the convenience of readers
outside Japan.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(1) Basis of consolidation and accounting for investments inaffiliates
As at February 28, 2007, the accompanying consolidated financial statements included the accounts of the Company and 21 of its subsidiaries, ofwhich four subsidiaries were newly consolidated due to completion of thecivil rehabilitation procedures, and two subsidiaries were excluded due tomerger. As at February 28, 2006, 19 subsidiaries were consolidated.
Investments in all affiliates (20%-to-50% owned companies) areaccounted for using the equity method. As at February 28, 2007, theCompany had eight affiliates, of which four affiliates were newly
accounted for due to acquisition of common stock. As at February 28,
2006, the Company had four affiliates.
Two non-consolidated subsidiaries, NIKONIKODO Co., Ltd. and Izumi
International Limited, were not accounted for using the equity method
due to civil rehabilitation and temporary control, respectively. Investmentsin these companies were stated at cost as at February 28, 2006.

(2) Elimination and consolidation
For the purposes of preparing the consolidated financial statements,
all significant inter-company transactions and account balances have been
eliminated.
Unrealized profits on sale of assets among the Companies havebeen entirely eliminated, and the portions attributable to minority interests
are credited to net income. The depreciation expense has been adjusted
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 the net assets of such
subsidiaries, the Company follows the step-by-step acquisition method toinclude equity in the net income of subsidiaries subsequent to the date ofacquisition in the consolidated financial statements. Any differences
between the costs of investments in subsidiaries and the amount ofunderlying equity in the net assets of subsidiaries are charged to income
as incurred.

(3) Cash and cash equivalents
Cash and cash equivalents included in the consolidated statements ofcash flows are composed of cash in hand, bank deposits able to be withdrawn on demand and short-term investments with an original maturity of
three months or less and which represent a minor risk of material fluctuation in value.

(4) Translation of foreign currencies
All monetary assets and liabilities denominated in foreign currencies,
whether long-term or short-term, are translated into Japanese yen at theexchange rates prevailing at the balance sheet date. Resulting gains andlosses are included in net profit or loss for the period.
Assets and liabilities of foreign subsidiaries and affiliates are translated into Japanese yen at the exchange rates prevailing at the balance
sheet date. Profit and loss accounts for the year are translated into
Japanese yen using the average exchange rate during the year.
Differences in yen amounts arising from the use of different rates are presented as “foreign currency translation adjustments” in net assets.

(5) Investments in securities
Available-for-sale securities for which market quotations are available arestated at fair value. Unrealized gains on these securities are reported as“Net unrealized gains on securities” in net assets at a net-of-tax amount,

14

and unrealized losses on these securities are included in net profit or loss
for the period. Available-for-sale securities with no available market
quotations are stated at 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 of theindividual security is written down and charged to the income statement.

(6) Derivatives
Derivative financial instruments are stated at fair value and changes in thefair value are recognized as gains or losses unless the derivative financial
instruments are used for hedging purposes. If the derivative financial
instruments are used as hedges and meet certain hedging criteria, theCompanies defer recognition of gains and losses resulting from changes
in the fair value of derivative financial instruments until the related losses
or gains on the hedged items are realized. In the event that foreignexchange forward contracts, currency swap contracts or currency option
contracts are used as hedges and meet certain hedging criteria, thehedged items are stated at the forward exchange contract rates. If interest rate swap agreements are used as hedges and meet certain hedging
criteria, the net amount to be paid or received under the interest rate
swap agreements is added to or deducted from the interest on the assets
or liabilities for which the swap agreements were executed.

(7) Inventories
Inventories are valued at cost. Cost is determined principally by the retailmethod.
Supplies are carried at cost. Cost is determined by the lastpurchase price method.

(8) Depreciation of property and equipment
Property and equipment are stated at cost. Significant renewals and additions are capitalized; normal repairs and maintenance including minor
renewals and improvements are charged to income as incurred.
The cost and accumulated depreciation applicable to property andequipment retired or otherwise disposed of are eliminated fromthe related accounts and the gain or loss on disposal is credited or
charged to the income statement.
Depreciation of property and equipment is computed using thedeclining-balance method over the estimated useful lives or lease contract
term of assets prescribed by Japanese corporate tax laws, except for thefollowing, which are depreciated using the straight-line method:• A large-scale, compound-type shopping center• Buildings built on leasehold land
• Property and equipment of two consolidated subsidiaries• Buildings (excluding building improvements) acquired on or after
April 1, 1998
Minor assets with an acquisition cost of ¥100 thousand or more,
but less than ¥200 thousand, are depreciated over three years on
a straight-line basis.

(9) Intangible assets
Capitalized software costs for internal use, included in other assets, areamortized using the straight-line method over the estimated useful life of
the software (five years). Other intangible assets, included in other assets,
are amortized using the straight-line method over the period stipulated by
Japanese corporate income tax laws.

(10) 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 orchanges in circumstances indicate that the carrying amount of an asset
may not be recoverable. An impairment loss shall be recognized in theincome statement by reducing the carrying amount of impaired assets ora group of assets to the recoverable amount to be measured as thehigher of net selling price and value in use.
The Companies applied this standard with effect from the year
ended February 28, 2007. As a result of this application, income before
income taxes and minority interests decreased by ¥4,011 million ($33,865
thousand) for the year ended February 28, 2007. Further details of theimpairment loss is shown in Note 5.
Accumulated loss on impairment is directly deducted from therelated assets in accordance with the revised rule concerning
consolidated financial statements.

(11) Allowance for doubtful accounts
An allowance for doubtful accounts is provided in preparation for the riskof uncollectible accounts. This consists of the estimated uncollectible
amount with respect to individually identified doubtful receivables and an
amount calculated based on the historical bad debt ratio with respect tothe remaining receivables.

(12) Accrued bonuses to employees
An allowance is made for bonuses to employees and is provided forbased on the amount estimated to be payable to employees at thebalance sheet date.

(13) Accrued bonuses to directors and corporate auditors
An allowance is made for bonuses to directors and corporate auditors
and is provided based on the amount estimated to be payable todirectors and corporate auditors at the balance sheet date.
Effective from the year ended February 28, 2007, the Companies
applied “Accounting standard for directors’ bonus” (Accounting Standard
Board of Japan Statement No. 4 issued on November 29, 2005 by the
Accounting Standards Board of Japan).
As a result of the application of this standard, operating profit,
ordinary income and income before income taxes for the year ended
February 28, 2007 decreased by ¥39 million ($329 thousand).

(14) Allowance for point discounts
An allowance for point discounts is provided for estimated future usage ofpoints that entitle customers to receive reductions in the price of futurepurchases, based on past experience.

(15) Accrued severance indemnities
Accrued retirement indemnities to employees represent the estimatedpresent value of projected benefit obligations in excess of the fair value ofthe plan assets except that, as permitted under Japanese accounting
standards, unrecognized actuarial differences are amortized on a straightline basis over 6 to 11 years from the next year in which they arise andunrecognized past service costs are amortized on a straight-line basis
over 6 to 11 years from the year in which they arise.
Certain subsidiaries provide for accrued severance indemnities at
100% of the liability which would be required to be paid if all eligible
employees voluntarily terminated their employment at the balance
sheet date.
The Company and certain subsidiaries provide for lump-sum
severance benefits with respect to directors and corporate auditors. While
the Company and certain subsidiaries have no legal obligation to do so, it
is customary practice in Japan to make lump-sum payments to directors
or corporate auditors upon retirement. Such liabilities are not funded.

(16) Allowance for loss on guarantees(20) Accounting standard for presentation of net assets inthe balance sheet
Effective from the year ended February 28, 2007, the Companies haveapplied “Accounting standards for presentation of net assets in thebalance sheet (Accounting Standards Board of Japan Statement No. 5)”,and “Implementation guidance for Accounting standards for presentationof net assets in the balance sheet (Accounting Standards of Japan
Guidance No. 8)” both issued by the Accounting Standard Board ofJapan on December 9, 2005.
“Net assets” in the balance sheets for this year is presented according to the revision of “Regulations concerning the Terminology, Form and
Presentation Methods of Consolidated Financial Statements” dated April
25, 2006.
Total stockholders’ equity as at February 28, 2007, as presented previously incurred have accounted for ¥99,541 million ($840,434 thousand).

(21) Net income and cash dividends per share
Basic earnings per share of common stock are based on the weighted
average number of shares of common stock outstanding during eachperiod. Net income is adjusted by deducting bonuses paid to directors
and corporate auditors as well as the payment of dividends toshareholders of preferred stocks to be recognized as an appropriation ofretained earnings, from net income in the consolidated statements ofincome, and the calculation of earnings per share is made on that
adjusted net income basis.
Cash dividends per share include those declared with respect to net
income for the respective periods for which the dividends were proposedby the Board of Directors. Dividends are charged to retained earnings in
the year in which they are paid.

(22) Reclassification
Certain reclassifications of the accompanying consolidated financial statements as of and for the year ended February 28, 2006 have been madeto conform to the 2007 presentation.

3. UNITED STATES DOLLAR AMOUNTS
Amounts in U.S. dollars are included solely for the convenience of readers
outside Japan. The rate of ¥118.44 = U.S. $1, the rate of exchange on
February 28, 2007 has been used in translation. The inclusion of suchamounts is not intended to imply that the Japanese yen has been or
could be readily converted, realized or settled in U.S. dollars at this rate or
any other rate.

4. INVESTMENTS IN SECURITIES(1) Available-for-sale securities at February 28, 2007 and 2006 whichhave readily determinable fair value are summarized as follows:

The Company provides an allowance for potential loss on guarantees ofloans from financial institutions taken by affiliates and others.

Millions of yen

2007

Leases that transfer substantially all risks and rewards of ownership of theassets are accounted for as capital leases. Leases which do not transfer
ownership of the assets at the end of the lease term are accounted for as
operating leases, in accordance with accounting principles and practices
generally accepted in Japan.

(18) 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 onpurchases are both excluded from the amounts of relevant items in theaccompanying consolidated statements of income.

Securities withunrealized gains:
Equity securities
Securities withunrealized losses:
Equity securities
Total

Acquisition
cost

Carrying
value¥3,757¥7,637¥3,880¥3,702 ¥7,122 ¥3,420

438¥4,195393¥8,030(45)¥3,835154
146(8)¥3,856 ¥7,268 ¥3,412

Acquisition Carrying
cost
value

Gross
unrealized
gains(losses)Thousands of U.S. dollars(Note 3)2007(19) 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 and liability
method, whereby deferred tax assets and liabilities are recognized in
respect of temporary differences between the tax basis of assets andliabilities and those as reported in the financial statements. Deferred
tax assets and liabilities are measured by using currently applicabletax rates, and the effect on these deferred tax assets and liabilities ofa change in tax rates is recognized in income in the period of theapplication date.

2006
Gross
unrealized
gains(losses)(17) Leases

Securities withunrealized gains:
Equity securities
Securities withunrealized losses:
Equity securities
Total$31,721 $64,480 $32,759

(380)
3,318
3,698
$35,419 $67,798 $32,379

15

(2) Available-for-sale securities at February 28, 2007 and 2006, whichhave no readily determinable fair value, are summarized as follows:
Thousands of
U.S. dollars(Note 3)

Millions of yen

Available-for-sale securities
Non-listed equity securities

2007

2006

2007

¥152

¥160

$1,283

The acquisition cost is calculated including the interest portion as
the outstanding future lease payments are immaterial to the yearend balance of property and equipment.
b) Amounts of outstanding future lease payments and allowance for
impairment loss at February 28, 2007 and 2006, which include theinterest portion, are summarized as follows:
Millions of yen(3) Total sales of available-for-sale securities for the years ended
February 28, 2007 and 2006 are summarized as follows:
Thousands of
U.S. dollars(Note 3)

Millions of yen

Sales
Gross realized gains
Gross realized losses

2007

2006

2007

¥86
1
14

¥500
116
0

$726
8
118

5. IMPAIRMENT LOSS

Due within one year
Due after one year
Total
Allowance for impairment loss

Location(Prefecture)

Operating stores(42 groups)
Rental assets(2 groups)
Idle assets(1 group)
Total

Hiroshima, Okayama,
Fukuoka, Others
Hiroshima,
Yamaguchi
TottoriClassification

Millionsof yenThousands of
U.S. dollars(Note 3)Land

¥2,020$17,055

Buildings andstructures
Others

1,710

14,438281

2,372¥4,011$33,865

The Companies group their fixed assets by the minimum cash-generating unit (“CGU”), such as stores, rental assets and idle assets by individual. Impairment loss was recognized and recorded in “Other income(expenses)” in accordance with new “Accounting Standard for
Impairment of Fixed Assets.” An impairment loss is recognized when the
carrying amount of assets in a CGU exceeds the recoverable value of theassets. This may be triggered by land that has significantly depreciated invalue, CGUs that will be closed in the near future or which have madeconsecutive operating losses.
Recoverable value of the group of assets is the higher amount of
net selling price or value in use. Net selling price was primarily calculated
based on independent appraisals, and value in use was calculated by discounting estimated future cash flows to which 4.07% to 4.21% discountrate was applied.

6. LEASES(1) As lessee:a) The acquisition cost, accumulated depreciation, accumulated impairment loss and net book value of leased assets at February 28, 2007
and 2006, if capitalized, are summarized as follows:
Millions of yen

2007
Equipment
andvehiclesAmount to:
Acquisition cost
Accumulated
depreciation
Accumulated
impairment loss
Net book value

Other

Total

Other

Lease payments
Reversal of allowance
for impairment loss
on leased property
Depreciation expense
Impairment loss

¥ 2,738 ¥ 5,153 ¥ 7,891(2,470)(2,996)(5,466)(2,241) (3,883) (6,124)

(15)
612 ¥

(15)
807

¥

—
—
—
497 ¥ 1,270 ¥ 1,767

2007

2006

2007

¥924

¥1,386$7,801

13
924
28

—
1,386
—

110
7,801
236

(2) As lessor:a) The acquisition cost, accumulated depreciation and net book valueof leased assets at February 28, 2007 and 2006 are summarized asfollows:
Millions of yen

Amount to:
Acquisition cost
Accumulated
depreciation
Net book value

Thousands of
U.S. dollars(Note 3)

2007

2006

2007

Equipment
and vehicles

Equipment
and vehicles

Equipment
and vehicles

¥210

¥ 75

$1,773

(39)
¥171

(18)
¥ 57

(329)
$1,444b) Amounts of outstanding future income at February 28, 2007 and2006, which include the interest portion, are summarized as follows:

Due within one year
Due after one year
Total

Thousands of
U.S. dollars(Note 3)

2007

2006

2007

¥ 39
147
¥186

¥13
49
¥62

$ 329
1,241
$1,570c) Lease income and depreciation expense for the years ended
February 28, 2007 and 2006 are as follows:
Millions of yen

2007

Amount to:
Acquisition cost $ 22,501 $ 30,589 $ 53,090
Accumulated
depreciation(20,854) (25,296) (46,150)
Accumulated
impairment loss
—
(126)
(126)
Net book value $ 1,647 $ 5,167 $ 6,814

Thousands of
U.S. dollars(Note 3)d) Method of asset depreciation
The depreciation expense is determined based on the straight-line
method over the lease term of the leased assets assuming no residual value.

Thousands of U.S. dollars(Note 3)

16

$4,694
2,246$6,940$ 126

Millions of yen

Total¥ 6,288

¥

2007

¥ 970
797
¥1,767—

Millions of yen¥ 3,623

—
195

2006

¥556
266
¥822
¥ 15

2006
Equipment
andvehicles¥ 2,665¥

2007c) Lease payments, reversal of allowance for impairment loss on leased
property, depreciation expense and impairment loss for the years
ended February 28, 2007 and 2006 are as follows:

For the year ended February 28, 2007, the Companies recognized impairment loss for the following groups of assets.
Description

Thousands of
U.S. dollars(Note 3)

Lease income
Depreciation expense amountThousands of
U.S. dollars(Note 3)

2007

2006

2007

¥22
21

¥10
8

$186
177

7. SHORT-TERM BORROWINGS AND LONG-TERM DEBT
Short-term borrowings are primarily represented by bank overdrafts,
bearing interest at the weighted average interest rates of 0.98% and0.53% at February 28, 2007 and 2006, respectively.
Long-term debt at February 28, 2007 and 2006 consisted of
the following:Thousands of
U.S. dollars(Note 3)

Millions of yen

2007

Loans from banks and insurancecompanies, due from March 2007
to February 2018 with weighted
average interest rates of 1.42%
and 1.43% at February 28,
2007 and 2006, respectively.
SecuredUnsecured
0.00% Japanese yen unsecured
convertible bonds due July 2009
Less, portion due within one year

2007

2006

¥ 51,630
32,777
84,407¥ 54,082
43,24997,331

19,19019,978103,597
117,309(24,060)(18,848)¥ 79,537 ¥ 98,461$ 435,917
276,739712,656
162,023874,679(203,141)$ 671,538

The aggregate annual maturities of long-term debt outstanding at
February 28, 2007 are as follows:
Years ending the last day of February:

2009
2010
2011
2012
2013 and thereafter
Total

Millions of yen

Thousands of
U.S. dollars(Note 3)

¥20,629
30,265
8,699
8,083
11,861¥79,537$174,172
255,530
73,446
68,246100,144$671,538

Assets pledged as collateral and related secured debt at February
28, 2007 are summarized as follows:
Thousands of
U.S. dollars(Note 3)

Millions of yen

2007

2006

2007

Assets pledged as collateral:
Land
Buildings
Investments in securities
Total¥ 65,567
71,175
1,328¥138,070¥ 61,435
72,653
1,766¥135,854$ 553,589
600,937
11,212$1,165,738

Debt secured by the above:
Short-term borrowings
Other current liabilities
Long-term debt
Other liabilities
Total¥ 10,050
1,002
51,63010,354¥ 73,036¥ 8,954—
54,082—¥ 63,036$

84,8538,460
435,91787,420$ 616,650

Millions of yen

Service costs
Interest costs
Realized net actuarial losses
Amortization of unrecognized past
service costs
Other
Net periodic pension costs

Thousands of
U.S. dollars(Note 3)

2007

2006

2007

¥399
80
17

¥464
78
33

$3,369
675
144

(61)
130
¥565

(57)
117
¥635

(515)
1,097
$4,770Pension benefits are attributed to periods of employee service
based on year of service using the straight-line method.
Assumptions used in the accounting for the defined benefit plans
for the years ended February 28, 2007 and 2006 are as follows:
Discount rate

2007

2006

1.5%–2.0%

1.5%–2.0%

9. COMMITMENTS AND CONTINGENT LIABILITIESThe Company was contingently liable for guarantees of loans from financial institutions taken out by affiliates and others, totaling ¥2,641 million($22,298 thousand) and ¥3,113 million at February 28, 2007 and 2006,
respectively.

10. DERIVATIVE FINANCIAL INSTRUMENTS(1) Status of transactionsa) Nature of transactions
The Companies use derivative instruments, which comprise foreign
currency exchange forward contracts, currency swap contracts, currency option contracts and interest rate swap agreements.
b) Purpose and policy of transactions
The Companies use foreign currency exchange forward contracts,
currency swap contracts and currency option contracts to minimize
exposure and to reduce risk from exchange rate fluctuation in
import transactions. The Companies also use interest rate swap
agreements to hedge against exposure to interest rate fluctuationand to adapt the long-term fixed interest rate to the current rate inline with changes in the market rate. The Companies do not use
derivative instruments for speculative trading purposes.
c) Risks in transactions
Derivative instruments used by the Companies are exposed to risk
from market rate fluctuations. Counter-parties are highly creditworthy domestic banks and, therefore, the Companies do not expect
losses due to non-performance by these counter-parties.
d) Risk management
Derivative transactions are managed and approved by responsible
decision-making bodies such as management meetings, and executed by the related departments.

(2) Market value of transactions
The Companies had the following derivative contracts outstanding at
February 28, 2007 and 2006:

8. RETIREMENT BENEFIT PLANS

Millions of yen

Employees of the Companies with more than one year’s service are entitled to receive lump-sum indemnities upon retirement. The amount of thebenefits is determined by reference to current basic rate of pay, length ofservice and conditions under which retirement occurs.
The funded status of the Companies at February 28, 2007 and 2006
is summarized as follows:
Millions of yen

Projected benefit obligation
Unrecognized net actuarial differences
Unrecognized past service costs
Accrued severance indemnities

Pension and severance costs of the Companies included the following components for the years ended February 28, 2007 and 2006:2007

Currency option
contracts

2006

2007

¥4,556(34)
262¥4,784¥4,236(52)
324¥4,508$ 38,467
(287)
2,212
$ 40,392

Contract Fair market Unrealized
amountvalue
gains¥1,732¥3,872

¥91

¥91

¥43

¥43

Thousands of U.S. dollars(Note 3)Thousands of
U.S. dollars(Note 3)

2007

2006

Contract Fair market Unrealized
amount
value
gains

2007

Currency option
contracts$14,623

$768

$768

The fair value is quoted by financial institutions with which theCompanies conclude foreign currency exchange forward contracts andcurrency option contracts.
Derivative transactions with hedge accounting applied are excluded
from the above table.

1711. NET ASSETS
Through May 1, 2006, the Company and its domestic subsidiaries are
subject to the Commercial Code of Japan (the “Code”). Under the Codethe entire amount of the issue price of new shares issued is required tobe capitalized as stated common stock, although the Company may, byresolution of its Board of 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 it asappropriation of retained earnings (including any payment by way ofannual dividend and bonuses to directors and corporate auditors) for theperiod or equal to 10% of any interim dividend, until the sum of the legal
reserve and the additional paid-in capital equals 25% of its statedcommon stock. The legal reserve and additional paid-in capital may betransferred to stated common stock through suitable director action orused to reduce a deficit through suitable stockholder action.
Under the Code, the appropriation of retained earnings (including
year-end cash dividend payment) proposed by the Board of Directors
should be approved at a stockholders’ meeting, which must be held
within three months of the balance sheet date. The appropriation ofretained earnings reflected in the accompanying consolidated financial
statements represents the results of such appropriations which are applicable to the immediately preceding fiscal year but which are approved by
the stockholders’ meeting and disposed 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 insteadof being charged to income for the year and constitutes a part of theappropriations cited above.
On May 1, 2006, a new Corporate Law (the “Law”) became
effective, which reformed and replaced the Code with various revisions
that would, for the most part, be applicable to events or transactions
which occur on or after May 1, 2006 and for the years ending on or after
May 1, 2006. The significant changes in the Law that affect financial andaccounting matters are summarized below.
a) Dividends: The Law allows Japanese companies to pay dividends
at any time during the year in addition to the year-end dividend
upon resolution at the stockholders’ meeting. For Japanese companies that meet certain criteria such as, having the Board of
Directors, having independent auditors, having the Board of
Corporate Auditors, and the term of service of the directors is prescribed as one year rather than two years of normal term by its articles of incorporation, the Board of Directors may declare dividends(except for dividends in kind) if the company has prescribed so in
its articles of incorporation. The Law permits Japanese companies
to distribute dividends-in-kind (non-cash assets) to stockholders
subject to certain limitations and additional requirements. The Law
continues to provide certain limitations on the amounts available fordividends or the purchase of treasury stock. The limitation is definedas the amount available for distribution to the stockholders, but theamount of net assets after dividends must be maintained at no lessthan ¥3 million.
b) Increase/decrease and transfer of common stock, reserve andsurplus: The Law requires that an amount equal to 10% of dividends must be appropriated as a legal reserve (of retained
earnings) or as additional paid-in capital (of capital surplus)
depending on the equity account charged upon the payment ofsuch dividends until the total aggregate amount of legal reserve andadditional paid-in capital equals 25% of the common stock. Under
the Law, the total amount of additional paid-in capital and legal
reserve may be reversed without the limitation of threshold that theCode provided. The Law also provides that common stock, legal
reserve, additional paid-in capital, other capital surplus and retained
earnings can be transferred among the accounts under certain
conditions upon resolution of the stockholders.
c) Treasury stock: The Law continues to provide for Japanese companies to repurchase/dispose of treasury stock just as the Code did.
The amount of treasury stock purchased cannot exceed the amountavailable for distribution to the stockholders which is determined bya specific formula.

18(1) Type and number of issued shares
Type of stock

Number of shares
as of February 28,
2006

Number of shares
increased

Number of shares
decreased

Number of shares
as of February 28,
2007

Common stock

61,558,710——

61,558,710(2) Type and number of shares of treasury stock
Type of stock

Number of shares
as of February 28,
2006

Number of shares
increased

Number of shares
decreased

Number of shares
as of February 28,
2007

Common stock

9,255,077

657,184

259,959

9,652,302

The increase in treasury stock is from purchases in the open market
and purchases of non-full unit stocks. The decrease in treasury
stock is from distribution of treasury stock when exercising stock
warrants.

(3) Stock warrants
Number of shares subject to stock warrants
Type of stock
warrants

Unsecuredconvertible
bondsType of stock

Number of shares
as of February 28,
2006

Commonstock

6,591,224

Number of shares Number of shares
increased
decreased—

Number of shares
as of February 28,
2007

6,331,243

259,981

The balance of stock warrants as of February 28, 2007 is ¥19,190
million ($162,023 thousand). The amount payable on the stock
warrant exercise date is ¥3,301 ($27.87). However, on March 1,
2007, a share split (2 for 1) was made, resulting in an amountpayable on the stock warrant exercise date of ¥1,515 ($12.79)(4) Matters related to dividendsa) Dividend payments
Millions ofyen

Thousands of
U.S dollars U.S dollars(Note 3)(Note 3)

Yen

Total amount
Dividendof cashdividends per share

Record date

Effective
date

Total amountof cashDividend
dividends
per share

Resolution

Type

May 25, 2006
Stockholders’meeting

Commonstock¥757¥14.00February 28, May 26,
2006
2006

$6,392$0.12

October 11, 2006, Common
Board of directors’
stockmeeting¥865¥16.00August 31, October 26, $7,303
2006
2006

$0.14

b) Dividends whose record date is within the year ended February 28,
2007, but effective after the year-end
Millions ofyen

Resolution

Type

May 24, 2007
Stockholders’meeting

Commonstock

Total amountof cashDividend
dividends per share¥858

Thousands of
U.S dollars U.S dollars(Note 3)(Note 3)Yen

¥16.00Record date

Effective
date

Total amountof cashDividend
dividends
per share

February 28, May 25,
2007
2007

$7,244$0.14

12. DETAILS OF SELLING, GENERAL AND ADMINISTRATIVE
EXPENSESThe following are the major elements of “operating expenses” for theyears ended February 28, 2007 and 2006.
Millions of yen

Advertising and promotion
Shipping expense
Allowance for doubtful accounts
Salaries and bonus expense
Welfare expense
Accrued bonus
Pension costs
Real estate rental fees
Utilities expense
Depreciation expense

Thousands of
U.S. dollars(Note 3)

2007

2006

2007

¥ 5,896
4,095
776
32,595
1,544
5,673
541
9,268
5,269
10,326¥ 5,899
3,803
799
32,950
1,414
5,402
600
10,203
5,395
10,621$ 49,780
34,574
6,552
275,203
13,03647,8984,568
78,251
44,48787,183

13. INCOME TAXESThe Companies are subject to a number of different taxes based on
income, which, in aggregate, result in statutory income tax rates ofapproximately 40.4% for the years ended February 28, 2007 and 2006.
The other increase of ¥10 million in the Consolidated Statements of
Changes in Net Assets for the year ended February 28, 2006, resulted
from a change in the statutory income tax rate.
The reconciliation of the difference between the statutory income
tax rates and the effective income tax rates for the year ended February
28, 2007 is as follows:
Statutory income tax rate
Increase (decrease) in tax resulting from:Entertainment expenses and other which arepermanently non-tax-deductible
Dividend income and other income which ispermanently non-taxable
Per capita inhabitant taxes and other
Valuation allowance
Other
Effective income tax rate

40.4%

0.1%
(0.2%)
1.1%(8.8%)
0.1%
32.7%

The reconciliation schedule for the year ended February 28, 2006 is
not disclosed because the difference between the statutory income tax
rates and the effective income tax rates is less than 5% of the statutory
income tax rates.
The significant components of deferred tax assets and liabilities atFebruary 28, 2007 and 2006 were as follows:
Thousands of
U.S. dollars(Note 3)

Millions of yen

2007

Deferred tax assets:
Allowance for doubtful accounts
Property and equipment
Intangible assets
Investments in securities
Accrued enterprise tax
Accrued bonus
Accrued severance indemnities
Fair value adjustments ofconsolidated subsidiaries
Evaluation losses on investments
in consolidated subsidiaries
Tax loss carried forward
Excess depreciation andamortization
Allowance for point discounts
Impairment loss
Provision for loss on guarantees
Other
Total
Valuation allowance
Total
Deferred tax liabilities:
Reserve for special depreciation
Reserve for advanced
depreciation of fixed assets
Fair value adjustments ofconsolidated subsidiaries
Unrealized gains onavailable-for-sale securities
Unrealized gains on
property and equipment
Other
Net deferred tax assets

¥

222
237
276
88
378
1,091
2,299

2007

2006

¥

205
163
254
36
434
1,064
2,089

$

1,875
2,001
2,330
743
3,192
9,211
19,411

355

355

2,997

1,901
3,109

—
73

16,05026,250sum of three tax components; a) an income based component, b) a value
added component and c) a capital based component. For the year ended
February 28, 2006, the value added component and the capital based
component of this tax amounting to ¥308 million were included in selling,
general and administrative expenses, in accordance with Practical Solution
Report No. 12, issued by the Accounting Standards Board of Japan on
February 13, 2004. As a result, selling, general and administrative expenses
increased by ¥308 million and operating income and income before
income taxes and minority interests decreased by the equivalent amount.

14. RELATED PARTY TRANSACTIONS
For the years ended February 28, 2007 and 2006, the Company
purchased ¥12,030million ($101,570 thousand) and ¥11,612 millionof merchandise from Japan Logistics Industry Co., Ltd. (“JLI”),
respectively. Representative Director and Vice President of JLI, Mr.
Yasuaki Yamanishi, is also a representative director and the President of
the Company and owns 2.02% of the Company’s voting stock. At
February 28, 2007 and 2006, the Company had accounts payable of¥1,176 million ($9,929 thousand) and ¥1,184 million, and deposit
guarantee money of ¥50million ($422 thousand) to JLI, respectively.
For the year ended February 28, 2007, the Company purchased theCompany’s subsidiary stocks from Mr. Hiromasa Takanishi’s relatives for¥57 million ($481 thousand). Mr. Hiromasa Takanishi is a Representative
Director and the Vice President of the Company and owns 0.03% of theCompany’s voting stock. The purchase price was based on the latest
selling price.
For the years ended February 28, 2007 and 2006, the Company
leased the Higashi-Hiroshima shop building from Izumi Kosan K.K.
(“Izumi”) with lease payments of ¥341 million ($2,879 thousand). Izumi isa majority-owned subsidiary of a company which is wholly owned by Mr.
Yasuaki Yamanishi and his relatives and owns 4.01% of the Company’s
voting stock. The lease terms are the same as those for third parties. At
February 28, 2007 and 2006, the Company paid guarantee money of¥1,745 million ($14,733 thousand) and ¥2,221 million respectively, toIzumi. These amounts were determined based on the area occupied by
the Company relative to the total area of the building.

15. SUPPLEMENTARY CASH FLOW INFORMATIONCash and cash equivalents at February 28, 2007 and 2006 consisted of
the following:
Millions of yen

Cash and bank deposits
407
283
1,334
459
426
12,865(4,082)
8,783

324
383
—
—
489
5,869
(104)
5,765

3,436
2,389
11,263
3,875
3,597
108,620(34,464)
74,156

(176)

(192)

(1,486)

(210)

(218)

(1,773)

(985)

(984)

(8,316)(1,549)(1,350)(13,078)(10)(0)(2,930)¥ 5,853(10)(8)(2,762)¥ 3,003(85)(0)(24,738)$ 49,418

On March 31, 2003, the Japanese National Diet approved various
changes to the calculation of the statutory local enterprise tax, effective
April 1, 2004. Under the amended legislation, enterprise tax will be theThousands of
U.S. dollars(Note 3)

2007

2006

2007

¥11,614¥12,251$98,058

16. SUBSEQUENT EVENTThe board of directors of the Company approved the stock split of thecompany’s shares at the board of directors meeting held on February 5,
2007. Details of the stock split are as follows:(1) Each share of common stock will be split into two shares on March 1,
2007.
a) Number of shares to be increased by the stock split:
61,558,710b) Method of stock split:
Each share of common stock held by stockholders listed orrecorded on the final register of stockholders and the final register of beneficial stockholders as of February 28, 2007 will be
split into two shares.
(2) Effective date: March 1, 2007
The net assets and net income per share for the years ended
February 2006 and 2007 are as follows, on the assumption that thisstock split took place at the beginning of each year:
U.S. dollars(Note 3)Yen

Per share:

Net assets
Net income–basic
Net income–diluted

2007

2006

2007

¥959.49¥125.90¥111.94¥845.76¥108.30¥ 96.34

$8.10
$1.06
$0.95

19

R E P O R T O F I N D E P E N D E N T AU D I T O R S

To the Board of Directors and Shareholders of
Izumi Co., Ltd.

We have audited the accompanying consolidated balance sheets of Izumi Co., Ltd. and its subsidiaries as of February 28, 2006
and 2007, and the related consolidated statements of income, changes in net assets, 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 audit in accordance with auditing standards generally accepted in Japan. Those standards require that weplan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free ofmaterial 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 presentation. 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 Izumi Co., Ltd. and its subsidiaries as of February 28, 2006 and 2007, and the consolidated results of theiroperations and their cash flows for the years then ended in conformity with accounting principles generally accepted in Japan.
As described in Note 2 (10), effective for the year ended February 28, 2007, Izumi Co., Ltd. and its subsidiaries changed theiraccounting policy for impairment of fixed assets.
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 3 to the accompanying consolidated financial statements.

Misuzu Audit Corporation
Hiroshima, JapanMay 24, 200720

D I R E C T O R S A N D C O R P O R AT E AU D I T O R S

CHAIRMAN

FULL-TIME CORPORATE AUDITOR

Yoshimasa Yamanishi

Kuniaki Kawamoto

PRESIDENTCORPORATE AUDITORS

Yasuaki Yamanishi

Toyomi Takimoto
Jiro Matsubara
Yasuyuki Tudo

MANAGING DIRECTOR

Tsunehiko Yoshida(as of May 24, 2007)

DIRECTOR

Yuichiro Kajiwara

C O R P O R AT E D ATAHEAD OFFICE

TRANSFER AGENT AND REGISTRAR

2-22, Kyobashi-cho,
Minami-ku, Hiroshima,
Hiroshima Prefecture 732-0828, Japan
Tel.: (082) 264-3211

The Sumitomo Trust & Banking Co., Ltd.
4-5-33, Kitahama, Chuo-ku,
Osaka 540-8639, JapanDATE OF ESTABLISHMENTANNUAL MEETING OF STOCKHOLDERS

October 27, 1961

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, 2007)
SECURITIES TRADED

Common Stock
Tokyo Stock Exchange, First Section
Osaka Securities Exchange, First Section

AUDITORS

Misuzu Audit Corporation

21

IZUMI CO., LTD.
2-22, Kyobashi-cho, Minami-ku,
Hiroshima 732-0828, Japan
Tel: (082) 264-3211

This report is printed on recycled paper.
Printed in Japan