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Annual Report 2006IZUMI Co., Ltd.

izumi AR 06_C1-4_入稿用 06.8.18 9:57 AM ページ C3tenants

hou s e hold g o od s

You Me Town
Delivering Dreams with
“One-Stop” Service
foods

c l o t h i ng

CONTENTSSEVEN-YEAR FINANCIAL SUMMARYTO OUR STOCKHOLDERS
SPECIAL FEATURE: Sales Strategies by Business Segment
CONSOLIDATED STATEMENTS OF INCOMECONSOLIDATED BALANCE SHEETSCONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITYCONSOLIDATED STATEMENTS OF CASH FLOWSNOTES TO CONSOLIDATED FINANCIAL STATEMENTSREPORT OF INDEPENDENT AUDITORSDIRECTORS AND CORPORATE AUDITORSCORPORATE DATA

1
2
4
9
10
12
13
14
20
21
21

COVER PHOTO: Izumi’s latest flagship You Me Town store, in Yatsushiro, Kumamoto Prefecture, prior to its opening in June 2005.

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25
22.7

20
19.8
18.1

15

16.0
14.8

Izumi Co., Ltd.

OPERATING INCOME

10

10.3

(Billions of yen)

8.1

5

0

Izumi Co., Ltd. (“Izumi” or the “Company”) takes pridein being the predominant retail chain in the Chugoku,
Shikoku and Kyushu Regions. As of February 2006, its
hypermarkets and food supermarkets extended to 70
locations in the area. In 1990, Izumi opened its first
You Me Town hypermarket. In the ensuing period, theCompany has worked to become number one in the regionin terms of scale and product lineup, with You Me Town
significantly contributing to the Company’s continued
growth. Buoyed by the support of You Me Town, Izumi
enjoyed an increase in revenues and earnings in the fiscal
year ended February 28, 2006, the seventh consecutive
year of growth.
Through the You Me Town business model, Izumi
strives to realize the dreams of an increasing number ofcustomers. In providing one-stop service, featuring a broad
shopping lineup as well as an array of amusements,
restaurants, cultural and community offerings, and otherfacilities, You Me Town delivers everything customers
want to buy or do, all under one roof.

450

436.8
426.4
407.6

400

383.1
363.7
346.8

350

300

288.3

250

200

150

100

50

REVENUE(Billions of yen) 0

00

01

02

03

04

05

06

(Fiscal year ended February 28/29)

SEVEN-YEAR FINANCIAL SUMMARY
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 stockholders’ equity
Total assets

2006
Mar. 2005–
Feb. 2006

2005
Mar. 2004–
Feb. 2005

2004
Mar. 2003–
Feb. 2004

2003
Mar. 2002–
Feb. 2003

2002
Mar. 2001–
Feb. 2002

2001
Mar. 2000–
Feb. 2001

2000
Mar. 1999–
Feb. 2000

2006
Mar. 2005–
Feb. 2006¥436,825
22,706¥426,437
19,771¥407,648
18,079¥383,098
15,994¥363,714
14,784¥346,811
10,285¥288,343
8,134$3,756,988
195,287

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

7,790
3,415
0.98%
71,810270,757

3,360
1,437
0.50%
74,471
236,785

184,828
99,622
2.65%
761,521
2,692,750
U.S. dollars(Note 1)Yen

Per share (Note 2):
Net income — basic
Net income — diluted
Cash dividends declared¥ 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

¥

53.66
48.87
21.00

¥

21.99
20.36
21.00

$

1.86
1.66
0.22

Notes 1: Yen amounts are translated into U.S. dollars, solely for convenience, at the prevailing exchange rate on February 28, 2006, ¥116.27 = U.S. $1.
2: See Note 2 (19) of Notes to Consolidated Financial Statements.
Izumi Annual Report 2006 ... 1

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T O O U R S T OC K H OL D E R S

Izumi continued its focus on
customer satisfaction andaccelerated reforms to bothmanagement and business operations.
Yasuaki Yamanishi
President

HIGHLIGHTS

Consolidated revenues rose 2.4% year on year to ¥436.8 billion ($3,757.0 million)
Consolidated operating income increased 14.8% year on year to ¥22.7 billion ($195.3 million)
Net income jumped 20.6% year on year to ¥11.6 billion ($99.6 million)
Established store sales remained stable, with non-consolidated established store sales edging
up 0.3% year on year
Efforts continued to reduce the cost of sales and implement cost structure reforms:
Non-consolidated operating income ratio increased 0.5 of a percentage point to 5.0%,
Consolidated operating income ratio rose 0.6 of a percentage point to 5.4%.
Consolidated ROE was 13.3%, up 2.0 percentage points from the previous fiscal year.

2 ... Izumi Annual Report 2006

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In fiscal 2006, the fiscal year ended February 28, 2006, conditions in the retail industry were mixed. On the
one hand, the operating environment benefited from an extraordinarily harsh winter, which contributed to arecovery in winter apparel sales. On the other hand, reforms to the pension and taxation systems and expectations of an increased burden on household budgets led to an increase in selective consumer spending patterns and intense competition across all business types. Against this backdrop, Izumi continued its focus on
customer satisfaction and accelerated reforms to both management and business operations.

Improving Management and Operating Structure
The Company redoubled efforts to reduce the cost of sales and implement cost structure reforms. As a result,the non-consolidated operating income ratio improved 0.5 of a percentage point to 5.0% and the consolidated operating income ratio climbed 0.6 of a percentage point to 5.4%.
With the aim of securing stable established store sales, Izumi undertook from the customer’s perspective
a comprehensive review of its product lineup, store layouts and prices in its mainstay retail business during
the fiscal year under review. Efforts were also made to reform the cost structure, with particular focus on the
gross profit margin at directly managed stores.

Status of Consolidated Subsidiaries
Conditions at consolidated subsidiaries remained solid. In the card-service business, Youme Card Co., Ltd.
focused on increasing the volume of credit card transactions, while building maintenance company Ideo Co.,
Ltd. expanded orders outside the Group. Implementing measures to close underperforming stores, X-Sell Inc.
made progress in improving its operating structure. Accordingly, consolidated subsidiary ordinary income rose
21.5% compared with the previous fiscal year to ¥5.6 billion.
Accounting for the aforementioned factors, consolidated revenues for the fiscal year ended February 28, 2006
increased 2.4% year on year to ¥436.8 billion. Consolidated operating income rose 14.8% to ¥22.7 billion,
while net income jumped 20.6% to ¥11.6 billion. These figures represent our seventh consecutive year ofincreased revenues and profits.
Buoyed by these favorable results, the Company has raised the cash dividend per share from last year’slevel of ¥24.00 to ¥26.00, as a way of returning profits to stockholders.

Yasuaki Yamanishi
President

Izumi Annual Report 2006 ... 3

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SPECIAL FEATURE

Sales Strategies by Business Segment
Basic Policy
In the retail industry, store strategies relating to layout and development and those relating to
products and sales are opposite sides of the same coin. Inextricably linked, both are essential to securing a high level of customer satisfaction resulting in revenues and profits.
Under the You Me Town brand, Izumi focuses on opening hypermarkets in western Japan,
including Chugoku, Kyushu and Shikoku, areas in which the Company maintains significant
competitive advantage. Collaborating with leading tenants, the Company’s directly managed
store division strives to provide an unrivaled product lineup in each region and to ensure highlevels of customer traffic. Based on this store strategy, Izumi has enjoyed seven consecutive
years of increased revenues and profits.
Complementing this store strategy, Izumi has positioned high-value-added products and services as integral to promoting customer satisfaction. Through a lineup of fresh and innovative
products and services, the Company strives to excite its customers and to leave a lasting impression. Unlike the major markets of Tokyo and Osaka, the smaller niche markets in which Izumi
operates dictate targeting a broad customer base. In an effort to appeal to all ages, Izumi
implements the following product and sales strategies.

You Me Town New StoreThe new You Me Town Yatsushiro store opened in June 2005. Located in
Yatsushiro City, Kumamoto Prefecture, the store boasts a store area of 28,100
square meters, 90 tenants and parking for 2,200 vehicles. Collaborating withlocal government and shopping areas, the store strives to reenergize thesurrounding district while providing Kumamoto’s largest range of products throughdistinctive tenants.

You Me Town Saga
Izumi plans to open You Me Town Saga in Saga Prefecturewith a store area of 50,000 square meters in the second halfof the fiscal year ending February 28, 2007.

4 ... Izumi Annual Report 2006

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101.1

100.7

100.1

Y O Y E X I S T I N G S T O R E S A L E S (%)

96.1
92.5
64.8

65
62.6
61.4

62.1

60.3

60

55

50

45

40

02

03

04

05

06

N E T S A L E S (Billions of yen)

Clothing
While many in the general merchandise store industry have suffered from a slump in clothing
operations, Izumi has enjoyed relatively high rates of growth irrespective of industry peaks andtroughs. This competitive advantage is attributed to the Company’s fundamental policies. Firstly,
Izumi procures products from a customer perspective and coordinates a total package including
effective displays to enhance value and appeal. Secondly, the Company builds the most attractive
fashion zone in each region based on the You Me Town platform.
To ensure customer appeal, Izumi adopts a five-point plan to:
1. Ensure a comprehensive range of high-value-added urban-life clothing,
2. Build a merchandising system that successfully combines the Company’s directly
owned store format with brand tenants,
3. Promote excitement and change through displays, with products and brands
renewed on a weekly basis,
4. Develop independent specialty stores outside the target markets of existing
tenants, and5. Focus on visual merchandising such as utilizing fixtures and lighting to enhance
product appeal.
These simple concepts are not new to the retail industry. What sets Izumi apart from its competitors, however, is the Company’s ability to mold these concepts into a unique mix, together with
its You Me Town brand that creates an optimal fashion zone in each region, through skillful application of management resources and savvy attention to customer trends.

Izumi Annual Report 2006 ... 5

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102.0
99.8

99.5

Y O Y E X I S T I N G S T O R E S A L E S (%)

95.3

95.7

31.8

32.1

35

33.9

33.2
31.6

30

25

20

15

10

02

03

04

05

06

N E T S A L E S (Billions of yen)

Household Goods
Given its extremely broad range, maintaining a comprehensive lineup in household-related
products is problematic and an impediment to robust profits. At You Me Town, however, it isimperative that customers are consistently provided with a wide choice.
In an effort to overcome these problems, Izumi has restricted its field of operations to those household goods in which it can secure competitive advantage. Products outside these fields including
books, toys, furniture and sporting goods, have been left to specialist stores with superior know-how.
In the fields in which it is active, Izumi strives to differentiate itself from competitors by delivering unique value. At the same time, the Company collaborates with external parties to further
distinguish Izumi from other companies.
In specific terms, the Company develops a product range catering to the elderly and healthconscious, areas that are expanding in the domestic market. This differs from many of its competitors, who handle stationery and children’s goods, markets that are considered to be mature.
In addition, Izumi has established collaborative arrangements with Nihon Ryutsu Sangyo Co., Ltd.
and through bulk orders has reduced procurement costs of national brands. Furthermore, througharrangements with Matsumoto Kiyoshi Co., Ltd. and other parties, Izumi is endeavoring to augment
its product lineup and provide customers with even greater value.
Looking ahead, Izumi will work toward sales recovery and increased profits in household goods
by selectively allocating management resources and further distinguishing the Company on thebasis of both product price and customer service.

6 ... Izumi Annual Report 2006

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98.1
100.4

99.6

98.8

Y O Y E X I S T I N G S T O R E S A L E S (%)

98.0

130
127.7
126.8
124.5

123.9
122.8

120

110

100

02

03

04

05

06

N E T S A L E S (Billions of yen)Foods
Mirroring its diverse weather conditions, Japan boasts a wide variety of food products andsignificant variation in tastes among regions. Accordingly, Izumi is faced with the real needto review its lineup of food products on a store-by-store basis. To this end, authority for productprocurement and management is delegated to individual stores. In this manner, each store
strives to precisely match the specific needs of its customers.
In the fiscal year under review, Izumi reinforced its product lineups with increased emphasis
on fresh food and local preferences. Adopting the theme “local production for local consumption,”
Izumi attracted significant praise for its efforts to link producers with consumers.
In the area of prepared food, Izumi has consistently worked to develop a high-value-added
menu while swiftly withdrawing slow-moving products. In this manner, the Company has fostereda source of high earnings. In recent years, Izumi has accelerated growth, buoyed by the growing
trend toward quick and easy meals.
Izumi has established a weekly product development plan for its processed foods. In an effort
to compete on both price and non-price factors, the Company strives to consistently deliver highly
sought products, while providing new experiences on a weekly basis all year round.
Despite the impacts of a weak market for fresh food and intense competition, Izumi secured
a high market share for holiday season and other special event projects. This, and the dominant market position of its You Me Town stores, contributed significantly to profits. Over thelong term, foods are expected to provide Izumi with a major portion of its profit, while contributing to increased stability.

Izumi Annual Report 2006 ... 7

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102.5

100.1

99.5

Y O Y E X I S T I N G S T O R E S A L E S (%)

97.5

96.0

120
104.6
98.0
86.5

90

82.3

81.0

60

30

0

02

03

04

05

06

N E T S A L E S (Billions of yen)

Tenants
Tenant quality is a key factor in attracting customers. In addition to the general merchandise ofits directly managed departments, You Me Town outlets are supplemented by a variety of brandproducts from Japan’s leading specialty stores, delivering to customers a comprehensive lineup.
The synergy Izumi creates with its tenants distinguishes You Me Town from other shopping
centers. Despite the regional nature of its operations, Izumi is able to introduce leading brands
due to the overwhelming market dominance of You Me Town outlets, which provide long-term
benefits to Izumi and its tenants alike. This success in turn increases credibility and attracts moreleading brands. Based on this positive operating cycle, You Me Town outlets are able to maintainand expand their leading positions in respective regions.
Furthermore, in its fashion zones Izumi strives to develop a complementary relationship between
directly managed departments and tenants. As communication between parties increases on adaily basis, a sense of common ownership emerges, enhancing the value and impact of marketing plans. This collaboration contributes to significant drawing power ensuring a constant level ofhigh customer flows.
With the construction and management of new stores, Izumi strives to introduce new brands
and large-scale tenants to each region. This in turn contributes to the continued competitive advantage of the You Me Town brand. With existing outlets, Izumi actively strives to replace underperforming tenants and ensure a consistently high level of competitiveness.
From an earnings perspective, directly managed operations account for approximately 70% of
retail profits, with tenant operations providing the remainder. The defining feature of tenant operations is its stability over the long term. Looking ahead, tenants are expected to support earnings growth.

8 ... Izumi Annual Report 2006

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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, 2006 and 2005

(Note 3)

Millions of yen

2006

2005

2006

¥418,086¥412,442$3,595,820

18,73913,995

161,168

436,825

426,437

3,756,988

COST OF SALES

321,663

318,975

2,766,518

Gross profit

115,162

107,462

990,470

92,456

87,691

795,183

22,706

19,771

195,287

243

246

2,090

Interest expense(1,538)435(1,676)451(13,228)

Purchase discounts
Gain on sales of investments in securities

116

23

998

Gain on sales of property and equipment

85

—

731

REVENUES:Net sales
Other operating revenues

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

Loss on sales or disposal of property and equipment

3,741(1,166)(424)(10,028)

Foreign exchange gains

98

151

842

Other, net

511

(453)

4,395

(1,216)(1,682)(10,459)

21,49018,089184,828

Current

9,553

8,090

82,162

Deferred

(662)

(264)

(5,694)

8,891

7,826

76,46812,59910,263

108,360

1,016

662

8,738

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

Income before minority interests
MINORITY INTERESTS
Net income¥ 11,583

¥

9,601

¥

99,622

U.S. dollars(Note 3)Yen

PER SHARE:
Net income (Note 2 (19)):
Basic¥216.60¥166.88$1.86

Diluted192.69155.02

1.66

26.00

24.00

0.22

53,15657,474

Cash dividends declared
WEIGHTED AVERAGE NUMBER OF SHARES (thousands)
The accompanying notes are an integral part of these statements.

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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, 2006 and 2005

(Note 3)

Millions of yen

2006

2005

2006

ASSETS
CURRENT ASSETS:
Cash and bank deposits
Short-term loans receivable¥ 12,251¥

12,623$

105,367

12,222

13,476105,117

Trade

8,814

7,526

75,806

Other

1,767

1,755

15,198

10,581

9,281

91,004

(883)

(834)

(7,595)

9,698

8,447

83,409Inventories

23,66524,125203,535

Deferred income taxes (Note 11)

2,357

1,934

20,272Other current assets

2,535

2,751

21,80362,72863,356

539,503

Investments in non-consolidated subsidiaries and affiliates

1,093

1,052

9,400

Investments in securities (Notes 4 and 6)

7,428

4,999

63,886

Other investments and advances

1,596

1,610

13,727

10,117

7,661

87,013

Buildings and structures

207,880

203,797

1,787,907

Machinery, equipment, vehicles and other

35,741

36,274

307,397

Notes and accounts receivable:

Less–allowance for doubtful accounts

Total current assets

INVESTMENTS AND ADVANCES:

PROPERTY AND EQUIPMENT (Notes 5 and 6) :243,621240,071

2,095,304(122,535)(114,189)(1,053,883)

121,086

125,882

1,041,421

Land

90,85389,534

781,397

Construction in progress

3,285

4,149

28,253215,224

219,565

1,851,071

Fixed leasehold deposits

14,704

16,868

126,464

Deferred income taxes (Note 11)

1,648

2,080

14,174

Other

8,665

9,363

74,525¥ 313,086¥ 318,893$ 2,692,750Less–accumulated depreciation

OTHER ASSETS:

The accompanying notes are an integral part of these statements.

10 ... Izumi Annual Report 2006

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Thousands of
U.S. dollars(Note 3)

Millions of yen

2006

2005

2006

¥ 33,504¥ 27,792$ 288,157

18,84825,665

162,105Trade

15,925

15,630136,966

Other

8,793

14,46775,62524,71830,097

212,591

Income taxes payable

5,812

4,905

49,987

Accrued bonuses

1,421

1,375

12,222

LIABILITIES AND STOCKHOLDERS’ EQUITYCURRENT LIABILITIES:
Short-term borrowings (Note 6)
Current portion of long-term debt (Note 6)
Notes and accounts payable

Allowance for point discounts

946

881

8,136

6,306

5,488

54,23691,55596,203

787,434

LONG-TERM DEBT (Note 6)

98,461

103,649

846,831

ACCRUED SEVERANCE INDEMNITIES (Note 7)

5,344

5,136

45,962LEASE DEPOSITS RECEIVED

22,11522,285

190,204

DEFERRED INCOME TAXES (Note 11)

1,002

1,006

8,618

595

463

5,117

219,072

228,742

1,884,166

5,472

4,632

47,063

19,614—

168,693

Other current liabilities
Total current liabilities

OTHER LIABILITIES
Total liabilities
COMMITMENTS AND CONTINGENT LIABILITIES (Note 8)
MINORITY INTERESTS IN CONSOLIDATED SUBSIDIARIESSTOCKHOLDERS’ EQUITY (Note 10):
Common stock, no par value:
Authorized:
February 28, 2006—195,243,000 shares
February 28, 2005—195,243,000 shares
Issued:February 28, 2006—61,558,710 shares—

19,614—

Additional paid-in capital

February 28, 2005—61,558,710 shares

22,32022,315

191,967

Retained earnings

64,23854,018552,490

Net unrealized gains on securities

2,027

980

17,434

(4)

(4)

(34)

Less–foreign currency translation adjustments
Less–treasury stock at cost:
February 28, 2006—7,518,537 shares(19,653)—(169,029)

February 28, 2005—6,250,126 shares—(11,404)—

88,54285,519761,521¥313,086¥318,893$2,692,750

Total stockholders’ equity

Izumi Annual Report 2006 ... 11

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C O N S O L I D AT E D S TAT E M E N T S O F S T O C K H O L D E R S ’ E Q U I T Y
Millions of yen

Izumi Co., Ltd. and its subsidiaries
For the years ended February 28, 2006, 2005 and February 29, 2004

BALANCE AT FEBRUARY 28, 2003

Number ofshares ofcommon stock(thousands)

Retainedearnings

Net
unrealized
gains
on securities

Foreigncurrencytranslation
adjustments

Treasurystock
at cost61,559 ¥19,614 ¥22,315 ¥38,573

¥ 221

¥(4)

¥ (3,827)

Commonstock

Additional
paid-in
capital

Net income for the year

—

—

—

8,713

—

—

—

Cash dividends

—

—

—

(1,442)———

Directors’ and corporate auditors’ bonuses

—

—

—

(21)

—

—

—

Net unrealized gains on securities

—

—

—

—

314

—

—

Foreign currency translation adjustments

—

—

—

—

—

1

—

Increase in treasury stock, net

—

—

—

—

—

—

(103)

—

—

—

0

—

—

—

61,559 ¥19,614 ¥22,315 ¥45,823

¥ 535

¥(3)

¥ (3,930)

Increase due to application of equity method
to additional subsidiaries and affiliates
BALANCE AT FEBRUARY 29, 2004
Net income for the year

—

—

—

9,601

—

—

—

Cash dividends

—

—

—

(1,381)———

Directors’ and corporate auditors’ bonuses

—

—

—

(25)

—

—

—

Net unrealized gains on securities

—

—

—

—

445

—

—

Foreign currency translation adjustments

—

—

—

—

—

(1)

—

Increase in treasury stock, net

—

—

—

—

—

—

(7,474)61,559 ¥19,614 ¥22,315 ¥54,018

¥ 980

¥(4)

¥(11,404)

BALANCE AT FEBRUARY 28, 2005
Net income for the year

—

—

—

11,583———

Cash dividends

—

—

—

(1,361)———

Directors’ and corporate auditors’ bonuses

—

—

—

(12)

—

—

—

Gain on appropriation of treasury stock

—

—

5

—

—

—

17

Net unrealized gains on securities

—

—

—

—

1,047

—

—

Foreign currency translation adjustments

—

—

—

—

—

0

—

Increase in treasury stock, net

—

—

—

—

—

—

(8,266)

Other increase (Note 11)

—

—

—

10

—

—

—

61,559 ¥19,614 ¥22,320 ¥64,238¥2,027¥(4)¥(19,653)

BALANCE AT FEBRUARY 28, 2006

Thousands of U.S. dollars (Note 3)

BALANCE AT FEBRUARY 28, 2005
Net income for the year

$168,693 $191,924 $464,591 $ 8,429——

99,622—$(34) $ (98,082)——

Cash dividends——(11,706)———

Directors’ and corporate auditors’ bonuses

—

—

(103)

—

—

—

Gain on appropriation of treasury stock

—

43

—

—

—

146

Net unrealized gains on securities

—

—

—

9,005

—

—

Foreign currency translation adjustments

—

—

—

—

0

—

Increase in treasury stock, net

—

—

—

—

—

(71,093)

Other increase (Note 11)

—

—

86

—

—

—

BALANCE AT FEBRUARY 28, 2006
The accompanying notes are an integral part of these statements.

12 ... Izumi Annual Report 2006

$168,693 $191,967 $552,490 $17,434$(34) $(169,029)

izumi AR 06_財務_初校戻し 06.8.18 9:56 AM ページ 13

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, 2006 and 2005

(Note 3)

Millions of yen

2006

2005

2006

¥ 21,490
11,397
50
(243)
1,538
(85)
1,166
(116)
(1,288)
460
295
2,534

¥ 18,089
11,461
356
(246)
1,676
—
424
(23)
(553)
(1,900)(1,964)(231)$ 184,828
98,022430(2,090)13,228(731)
10,028(998)(11,077)
3,957
2,537
21,79437,198255(1,521)(8,962)

27,089268(1,691)(7,700)319,928
2,193(13,082)(77,079)

Net cash provided by operating activities

26,97017,966

231,960

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 sales of property and equipment
Proceeds from sales of investments in securities
Acquisition, net of cash acquired
Other, net(15,074)(602)(1,169)
1,478
593
—
3,436

(21,645)
(255)
(605)
338
635
148
265

(129,646)(5,178)(10,054)
12,712
5,100—
29,552

Net cash used in investing activities(11,338)(21,119)(97,514)

5,712
14,233(21,215)(5,000)—5,596
18,950(23,642)(5,000)19,95549,127
122,413(182,463)(43,003)
—

—

180

—

—
(8,266)(1,445)(196)(8,855)(1,468)—(71,093)(12,428)(15,981)5,520(137,447)

0(349)
12,600—0
2,367
10,18449

0(3,001)
108,368—¥ 12,251¥ 12,600$ 105,367

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 sales of property and equipment
Loss on sales or disposal of property and equipment
Gain on sales or revaluation of investments in securities
Increase in notes and accounts receivable
Increase (decrease) in inventories
Increase (decrease) 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
Additions to long-term loans
Repayment of long-term loans
Redemption of bonds
Proceeds from issue of bonds
Proceeds from issue of stocks to minority interests
in consolidated subsidiary
Payment of liquidation dividends to minority interests
in consolidated subsidiary
Payment for purchases of treasury stock
Dividends paid
Net cash provided by (used in) financing activities
Effect of exchange rate changes on cash and cash equivalents
Net increase (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.
Izumi Annual Report 2006 ... 13

izumi AR 06_財務_初校戻し 06.8.18 9:56 AM ページ 14

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, 2006 and 2005

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 in Japan, which are different in certain respects
as to application and disclosure requirements from International
Financial Reporting Standards, and are compiled from the consolidated financial statements prepared by the Company 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 have been reclassified in these accounts for theconvenience of readers outside Japan.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(1) Basis of consolidation and accounting for investments inaffiliates
As at February 28, 2006, the accompanying consolidated financial
statements included the accounts of the Company and 19 of its
subsidiaries, of which one subsidiary was excluded due toliquidation and one subsidiary was merged. As at February 28,
2005, 21 subsidiaries were consolidated.
Investments in all affiliates (20%-to-50% owned companies)
are accounted for using the equity method. The company
had four affiliates as at February 28, 2006 and 2005,
respectively.
Two non-consolidated subsidiaries, NIKONIKODO Co., Ltd.
and Izumi International Limited, were not accounted for using theequity method due to civil rehabilitation and temporary control,
respectively. Investments in these companies were stated at cost.

(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 sales of assets among the Companies
have been entirely eliminated, and the portions attributable tominority 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-stepacquisition method to include equity in the 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 the
net assets of subsidiaries are charged to income as incurred.

(3) Cash and cash equivalents
Cash and cash equivalents included in the consolidated statementsof cash flows are composed of cash in hand, bank deposits able tobe 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 the exchange rates prevailing at the balance sheet

14 ... Izumi Annual Report 2006

date. Resulting gains and losses are included in net profit or loss
for the period.
Assets and liabilities of the 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 aretranslated into Japanese yen using the average exchange rate during
the year. Differences in yen amounts arising from the use ofdifferent rates are presented as “foreign currency translation
adjustments” in stockholders’ equity.

(5) Investments in securities
Held-to-maturity securities are stated at amortized cost adjusted forthe amortization of premiums and the accretion of discounts tomaturity.
Available-for-sale securities for which market quotations areavailable are stated at fair value. Unrealized gains on these securities are reported as “Net unrealized gains on securities” in stockholders’ equity at a net-of-tax amount, and unrealized losses onthese securities are included in net profit or loss for the period.
Available-for-sale securities with no available market quotations arestated 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 of the individual security is written down.

(6) Derivatives
Derivative financial instruments are stated at fair value and changes
in the fair value are recognized as gains or losses unless the derivative financial instruments are used for hedging purposes. If thederivative financial instruments are used as hedges and meet certain
hedging criteria, the Companies 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 foreign exchange forward contracts,
currency swap contracts or currency option contracts are used ashedges and meet certain hedging criteria, the hedged items arestated 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 theretail method.
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 andadditions 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
and equipment retired or otherwise disposed of are eliminated fromthe related accounts and the gain or loss on disposal is credited or
charged to income.
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 the following, which are depreciated using the straightline method:

izumi AR 06_財務_初校戻し 06.8.18 9:56 AM ページ 15• 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 orafter 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,
are amortized using the straight-line method over the estimateduseful 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 Japanissued “Accounting Standard for Impairment of Fixed Assets”. The
standard requires that fixed assets be reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. An impairment
loss shall be recognized in the income statement by reducing thecarrying amount of impaired assets or a group of assets to therecoverable amount to be measured as the higher of net selling
price and value in use.
The standard shall be effective for fiscal years beginning on orafter April 1, 2005. However, earlier adoption is permitted for fiscal
years beginning on or after April 1, 2004 and for fiscal years
ending between March 31, 2004 and March 30, 2005.
The Companies have not yet applied this new standard nor
have determined the effect of applying it on the consolidated
financial statements.

(11) Bond issuance costs
Bond issuance costs are charged to income as incurred.

(12) Allowance for doubtful accounts
An allowance for doubtful accounts is provided in preparation for
the risk of uncollectible accounts. This consists of the estimateduncollectible amount with respect to identified doubtful receivables
and an amount calculated based on the historical bad debt ratiowith respect to the remaining receivables.

(13) Accrued bonuses
An accrued bonus is provided for in preparation for payment ofbonuses to employees based on the amount estimated to bepayable.

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

(15) Accrued severance indemnities
Accrued retirement indemnities to employees represent the estimated present value of projected benefit obligations in excess ofthe fair value of the plan assets except that, as permitted underJapanese accounting standards, unrecognized actuarial differences
are amortized on a straight-line basis over 6 to 11 years from thenext year in which they arise and unrecognized past service costs
are amortized on a straight-line basis over 6 to 11 years from theyear in which they arise.
Certain subsidiaries provide for accrued severance indemnities
at 100% of the liability which would be required to be paid if alleligible employees voluntarily terminated their employment at thebalance sheet date.
The Company and a consolidated subsidiary provide for lumpsum severance benefits with respect to directors and corporate
auditors. While the Company and the consolidated subsidiary haveno legal obligation to do so, it is customary practice in Japan tomake lump-sum payments to directors or corporate auditors uponretirement. Such liabilities are not funded.

(16) Leases
Leases that transfer substantially all risks and rewards of ownershipof the assets 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 withaccounting principles and practices generally accepted in Japan.

(17) 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.

(18) 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 method, whereby deferred tax assets and liabilities are recognized 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 applicable tax rates, and the effect on these deferred tax
assets and liabilities of a change in tax rates is recognized inincome in the period that includes the application date.

(19) Net income and cash dividends per share
Basic earnings per share of common stock are based on theweighted average number of shares of common stock outstanding
during each period. Net income is adjusted by deducting bonuses
paid to directors and corporate auditors as well as the payment ofdividends to shareholders of preferred stocks to be recognized as an
appropriation of retained earnings, from net income in the consolidated statements of income, 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 proposed by the Board of Directors. Dividends are charged toretained 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 ¥116.27 = U.S.$1, the rate ofexchange on February 28, 2006 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.

Izumi Annual Report 2006 ... 15

izumi AR 06_財務_初校戻し 06.8.18 9:56 AM ページ 16

4. INVESTMENTS IN SECURITIES(1) Held-to-maturity debt securities at February 28, 2006 andMillions of yen

2005, which have readily available determinable fair value,
are summarized as follows:

Sales
Gross realized gains
Gross realized losses

Millions of yen

2006
Carrying
value

Securities withvaluation gains:
Government bonds
Securities withvaluation losses:
Government bonds

2005
Valuation
gains(losses)Market
value

—

—

—

Carrying
value

¥60

Valuation
gains(losses)Marketvalue¥60

Thousands of
U.S. dollars(Note 3)

¥0

2006

2005

2006

¥500
116
0

¥208
23
—

$4,300998
05. LEASES
Information on finance lease transactions other than those leases
that are deemed to transfer the ownership of the assets to thelessees is summarized below:(1) As lessee:

Total

—

—

—

—

—

—

—

—

—

¥60

¥60

¥0

a) The acquisition cost, accumulated depreciation and net bookvalue of leased assets at February 28, 2006 and 2005,
if capitalized, are summarized as follows:
Millions of yen

2006(2) Available-for-sale securities at February 28, 2006 and 2005
which have readily determinable fair value, are summarized
as follows:
Millions of yen

2006

Acquisition
cost

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

Carrying
value

2005
Gross
unrealized
gains(losses)Acquisition
cost

Gross
unrealized
Carrying
gains
value
(losses)Amount to:
Acquisition cost
Accumulated
depreciation
Net book value

Other¥ 2,738¥ 5,153

2005
Equipment
andvehicles

Total

Total

¥ 7,891 ¥ 2,779 ¥ 6,564 ¥ 9,343(2,241)(3,883)(6,124)¥¥ 1,270¥ 1,767 ¥

497

Other

(1,994) (4,553) (6,547)
785 ¥ 2,011 ¥ 2,796

Thousands of U.S. dollars(Note 3)

¥3,702 ¥7,122 ¥3,420

154

146

¥3,093 ¥4,745 ¥1,652(8)¥3,856 ¥7,268 ¥3,412

6

5

(1)

¥3,099 ¥4,750 ¥1,651

2006

Amount to:
Acquisition cost
Accumulated
depreciation
Net book value

Thousands of U.S. dollars(Note 3)

$ 23,549 $ 44,319 $ 67,868(19,274) (33,396) (52,670)$ 4,275 $ 10,923 $ 15,198

The acquisition cost is calculated including the interest portion
as the outstanding future lease payments are immaterial to
the year-end balance of property and equipment.

2006

Securities withunrealized gains:
Equity securities $31,840 $61,254 $29,414
Securities withunrealized losses:
Equity securities
1,325 1,256
(69)
Total

Equipment
andvehiclesb) Amounts of outstanding future lease payments at February
28, 2006 and 2005, which include the interest portion,
are summarized as follows:$33,165 $62,510 $29,345
Millions of yen(3) Available-for-sale securities at February 28, 2006 and2005, which have no readily determinable fair value,
are summarized as follows:
Millions of yen

Available-for-sale securities
Non-listed equity securities

Thousands of
U.S. dollars(Note 3)

2006

2005

2006

¥160

¥189

$1,376

2006

2005

2006

Due within one year
Due after one year

¥ 970
797

¥1,2371,560$ 8,343
6,855

Total

¥1,767¥2,797$15,198c) Lease payments and depreciation expense for the years ended
February 28, 2006 and 2005 are as follows:
Millions of yen(4) Total sales of available-for-sale securities for the years ended
February 28, 2006 and 2005 are summarized as follows:

Thousands of
U.S. dollars(Note 3)

Lease payments
Depreciation expense

Thousands of
U.S. dollars(Note 3)

2006

2005

2006

¥1,386
1,386¥1,675
1,675$11,921
11,921d) Method of asset depreciation
The depreciation expense is determined based on the straightline method over the lease term of the leased assets assuming
no residual value.

16 ... Izumi Annual Report 2006

izumi AR 06_財務_初校戻し 06.8.18 9:56 AM ページ 17(2) As lessor:a) The acquisition cost, accumulated depreciation and net bookvalue of leased assets at February 28, 2006 and 2005 aresummarized as follows:
Thousands of
U.S. dollars(Note 3)

Millions of yen

Amount to:
Acquisition cost
Accumulated
depreciation
Net book value

2006

2005

2006

Equipment
and vehicles

Equipment
and vehicles

Equipment
and vehicles

¥ 75

¥40

$ 645

(18)

(9)

(155)

¥ 57

¥31

$ 490

The aggregate annual maturities of long-term debt outstandingat February 28, 2006 are as follows:
Years ending the last day of February

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

2008
2009
2010
2011
2012 and thereafter¥24,423
13,17627,344
7,930
25,588$210,054
113,323
235,177
68,203220,074¥98,461$846,831

Total

Assets pledged as collateral and related secured debt at
February 28, 2006 are summarized as follows:
Thousands of
U.S. dollars(Note 3)

Millions of yenb) Amounts of outstanding future income at February 28, 2006
and 2005, which include the interest portion, aresummarized as follows:
Millions of yen

Thousands of
U.S. dollars(Note 3)

2006

2005

2006

Due within one year
Due after one year

¥13
49

¥ 6
30

$112
421

Total

¥62

¥36

$533

c) Lease income and depreciation expense for the years ended
February 28, 2006 and 2005 are as follows:
Millions of yen

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

2006

2005

2006

¥10
8

¥8
6

$86
69

6. 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 0.53%
and 0.90% at February 28, 2006 and 2005, respectively.
Long-term debt at February 28, 2006 and 2005, consistedof the following:
Millions of yen

2006

2005

Loans from banks and insurancecompanies, due from March 2006
to February 2018 with weighted
average interest rates of 1.43% and1.44% at February 28, 2006 andFebruary 28, 2005, respectively.
Secured¥ 54,082 ¥ 55,801
Unsecured
43,24948,513Thousands of
U.S. dollars(Note 3)

2006

2006

2005

2006

Assets pledged as collateral:
Land
Buildings
Investments in securities¥ 61,435 ¥ 60,173
72,65374,6791,766
1,897$ 528,382
624,865
15,189Total¥135,854 ¥136,749$1,168,436

Debt secured by the above:
Short-term borrowings
Long-term debt

¥

$

Total

¥ 63,036 ¥ 65,018

8,954 ¥ 9,217
54,08255,80177,010465,142$ 542,152

7. RETIREMENT BENEFIT PLANS
Employees of the Companies with more than one year's service areentitled to receive lump-sum indemnities upon retirement. The
amount of the benefits is determined by reference to current basic
rate of pay, length of service and conditions under which retirement
occurs. In January 2005, the company terminated an externally
funded non-contributory pension plan.
The funded status of the Companies at February 28, 2006
and 2005 is summarized as follows:
Millions of yen

Thousands of
U.S. dollars(Note 3)

2006

2005

2006

Projected benefit obligation
Unrecognized net actuarial differences
Unrecognized past service costs¥4,236(52)
324¥4,127(181)
337$36,432
(447)
2,787

Accrued severance indemnities¥4,508¥4,283$38,772

Pension and severance costs of the Companies included thefollowing components for the years ended February 28, 2006 and2005:$ 465,142
371,970

97,331

104,314

837,112

—

5,000

—

Millions of yen

1.84% Japanese yen unsecured
straight bonds due March 2005
0.00% Japanese yen unsecured
convertible bonds due July 2009

19,97820,000171,824Less, portion due within one year

117,309(18,848)

129,314(25,665)

1,008,936(162,105)

Service costs
Interest costs
Expected return on plan assets
Realized net actuarial losses
Amortization of unrecognized past
service costs
Other¥ 98,461 ¥103,649$ 846,831

Net periodic pension costs

Thousands of
U.S. dollars(Note 3)

2006

2005

2006

¥464
78
—
33

¥506
105
(18)
16

$3,990
671
—
284

(57)
117

(4)
16

(490)
1,006

¥635

¥621

$5,461

Izumi Annual Report 2006 ... 17

izumi AR 06_財務_初校戻し 06.8.18 9:56 AM ページ 18

Thousands of U.S. dollars(Note 3)Pension 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, 2006 and 2005 are
as follows:
Discount rate
Expected rate of return on plan assets

2006

2005

1.5%–2.0%—

1.5%–2.0%
1.0%

8. COMMITMENTS AND CONTINGENT LIABILITIESThe Company was contingently liable for guarantees of loans fromfinancial institutions taken out by affiliates and others, totaling¥3,113 million ($26,774 thousand) and ¥3,578 million at
February 28, 2006 and 2005, respectively.

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 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 fluctuation and to adapt the long-term fixedinterest rate to the current rate in line with changes in themarket rate. The Companies do not use derivative instruments
for speculative trading purposes.
c) Risks in transactions
Derivative instruments used by the Companies are exposed torisk from market rate fluctuations. Counter-parties are highly
creditworthy domestic banks and, therefore, the Companies
do not expect losses due to non-performance by thesecounter-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, 2006 and 2005:
Millions of yen

2006

2005

Contract
amountFair Unrealized
marketgains
value(losses)

Foreign currency
exchange forward
contracts
Currency option
contracts

¥

¥—

3,872

43

43

12,811

(38)

Total

¥3,872¥43¥43¥12,962¥(15) ¥(15)—

18 ... Izumi Annual Report 2006¥—

Contract
amount¥Fair Unrealized
marketgains
value(losses)151 ¥ 23

¥ 23
(38)

2006
Contract
amountFairmarketvalue

Unrealized
gains(losses)

Foreign currency
exchange forward
contracts
Currency option
contracts

$

370

370

Total

$33,302 $370

$370

— $ —

33,302$ —The fair value is quoted by financial institutions with which
the Companies conclude foreign currency exchange forward
contracts and currency option contracts.
Derivative transactions with hedge accounting applied are
excluded from the above table.

10. STOCKHOLDERS’ EQUITY
Under the Commercial Code of Japan (the “Code”) the entire
amount of the issue price of new shares issued is required to becapitalized as stated common stock, although the Company may,by resolution of its Board of Directors, capitalize an amount notexceeding one half of the issue price of the new shares asadditional paid-in capital.
The Code requires a domestic company to appropriate, asa legal reserve, an amount equal to at least 10% of the amount
paid out by it as appropriation of retained earnings (including any
payment by way of annual dividend and bonuses to directors andcorporate auditors) for the period or equal to 10% of any interim
dividend, until the sum of the legal reserve and the additional paidin capital equals 25% of its stated common stock. The legal
reserve and additional paid-in capital may be transferred to statedcommon stock through suitable director action or used to reducea deficit through suitable stockholder action.
Under the Code, the appropriation of retained earnings(including year-end cash dividend payment) proposed by the Boardof Directors should be approved at a stockholders’ meeting, whichmust be held within three months of 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 part of 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 40.4% and 41.7% for the years ended February 28,
2006 and 2005, respectively. The other increase of ¥10 million($86 thousand) in the Consolidated Statement of Stockholders’Equity resulted from a change in the statutory income tax rate.
The reconciliation schedule for the years ended February 28,
2006 and 2005 is not disclosed because the difference between
the statutory income tax rate and the effective income tax rate isless than 5% of the statutory income tax rate.
The significant components of deferred tax assets and liabilities
at February 28, 2006 and 2005 were as follows:izumi AR 06_財務_初校戻し 06.8.18 9:56 AM ページ 19

Millions of yen

2006

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
Tax loss carry-forwards
Excess depreciation andamortization
Allowance for point discounts
Other

¥

Thousands of
U.S. dollars(Note 3)

2005

2006

195
149
204
27
414
552
1,940

$ 1,763
1,402
2,184
309
3,733
9,151
17,967

355
73

355
174

3,053
628

324
383
489

355
357
401

2,787
3,294
4,206

205
163
254
36
434
1,064
2,089

¥

Total

5,869

5,123

50,477

Valuation allowance

(104)

(85)

(894)

Total

5,765

5,038

49,583

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

(192)

(142)

(1,651)

(218)

(226)

(1,875)

(984)

(985)

(8,463)(1,350)(667)(11,611)

(10)
(8)

(10)
—

(86)
(69)

(2,762)(2,030)(23,755)¥ 3,003¥ 3,008$ 25,828

thousand) and ¥1,158 million, and deposit guarantee money of¥50 million ($430 thousand) and ¥572 million to JLI, respectively.
For the years ended February 28, 2006 and 2005,
the Company leased the Higashi-Hiroshima shop building from
Izumi Kosan K.K. (“Izumi”) with lease payments of ¥341 million($2,933 thousand). Izumi is a majority-owned subsidiary of acompany which is wholly owned by Mr. Yasuaki Yamanishi and his
relatives. The lease terms are the same as those for third parties.
At February 28, 2006 and 2005, the Company paid guaranteemoney of ¥2,221 million ($19,102 thousand) and ¥2,698 million
respectively, to Izumi. These amounts were determined based on
the total construction costs of the building and the area occupiedby the Company.

13. SUPPLEMENTARY CASH FLOW INFORMATIONCash and cash equivalents at February 28, 2006 and 2005
consisted of the following:Thousands of
U.S. dollars(Note 3)

Millions of yen

2006

2005

2006

Cash and bank deposits
Less-time deposits with deposit
terms of over 3 months¥12,251¥12,623$105,367

—

(23)

—

Cash and cash equivalents¥12,251¥12,600$105,367

For the year ended February 28, 2005, Kowa-shokuhin Co.,
Ltd. and its subsidiary were newly consolidated. The assets and liabilities of these subsidiaries at the time of consolidation, cash paid
for the capital and cash received in conjunction with the purchasesof consolidated subsidiaries were as follows:
Millions of yen

On March 31, 2003, the Japanese National Diet approved
various changes to the calculation of the statutory local enterprisetax, effective April 1, 2004. Under the amended legislation, enterprise tax will be the sum 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, thevalue added component and the capital based component of thistax amounting to ¥308 million ($86 thousand) were included inselling, general and administrative expenses, in accordance with
Practical Solution Report No. 12, issued by the AccountingStandards Board of Japan on February 13, 2004. As a result,selling, general and administrative expenses increased by ¥308
million ($2,649 thousand) and operating income and income
before income taxes and minority interests decreased by theequivalent amount.

12. RELATED PARTY TRANSACTIONS

2005

AssetsLiabilities
Negative goodwill
Investments in affiliates
Minority interests¥ 2,794(2,644)
(17)
(3)
(100)

Cash paid for the capital
Cash and cash equivalents of consolidated
subsidiaries
Cash received in conjunction withthe purchases of consolidated subsidiaries

30
178
¥

148

14. SUBSEQUENT EVENT
Pursuant to the resolution of the Board of Directors’ meeting heldon May 9, 2005, the Company repurchased its own shares on May
11, 2005 as follows:(1) Number of shares repurchased: 867,000 shares(2) Repurchase price: ¥2,640 ($25,205) per share
Total amount: ¥2,289 million ($21,854 thousand)(3) Method of repurchase: Through ToSTNet-2(closing price orders) of Tokyo Stock Exchange

For the years ended February 28, 2006 and 2005, the Company
purchased ¥11,612 million ($99,871 thousand) and¥11,705 million of 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 2.0% of theCompany’s voting stock. At February 28, 2006 and 2005,
the Company had accounts payable of ¥1,184 million ($10,183

Izumi Annual Report 2006 ... 19

izumi AR 06_財務_初校戻し 06.8.18 9:56 AM ページ 20

REPORT OF INDEPENDENT AUDITORS

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 2005, and the related consolidated statements of income, shareholders’ equity, and cash flows for the years thenended, all expressed in Japanese yen. These consolidated financial statements are the responsibility of the Company’s
management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards 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 2005, and the consolidated results of
their operations and their cash flows for the years then ended in conformity with accounting principles generally acceptedin Japan.
As described in Note 14, Izumi Co., Ltd. repurchased its own shares of ¥2,289 million on May 11, 2005.
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.

ChuoAoyama PricewaterhouseCoopers

Hiroshima, Japan
June 27, 2006

20 ... Izumi Annual Report 2006

izumi AR 06_C1-4_入稿用 06.8.18 9:57 AM ページ 21

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

EXECUTIVE VICE PRESIDENT

Hiromasa Takanishi(as of May 26, 2006)

DIRECTORS

Umeno Mashimo
Heijiro Natsuhara

C O R PO 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, 2006)
SECURITIES TRADED

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

AUDITORS

ChuoAoyama PricewaterhouseCoopers

Izumi Annual Report 2006 ... 21

izumi AR 06_C1-4_入稿用 06.8.18 9:57 AM ページ C1

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