LAWSON, INC.

LAWSON, INC.

ANNUAL REPORT 2004

Tokyo Headquarters:
East Tower, Gate City Osaki
11-2, Osaki 1-chome, Shinagawa-ku,
Tokyo 141-8643, Japan
URL http://www.lawson.co.jp/

The
Difference
Is Here

ANNUAL REPORT 2004

This annual report is printed on recycled paper.

Printed in Japan

Year ended February 29, 2004

Consolidated Financial Highlights

Corporate Data

LAWSON, INC. and Subsidiaries
Years Ended February 29, 2004 and February 28, 2003 and 2002

For the Year:Net sales of all stores
Total operating revenues
Operating income
Income before income taxes and minority interests
Net income

Millions of Yen

Percent
ChangeThousands of
U.S. Dollars(1)

2004

2003

2002

2004/2003

2004¥1,288,297
245,601
38,08732,923
18,571¥1,294,042
250,334
34,107
17,6038,861¥1,285,557
256,116
36,36329,02816,123(0.4)%
(1.9)
11.7
87.0
109.6

$11,752,390
2,240,476
347,446
300,338
169,413

COMPANY NAMEESTABLISHEDLAWSON, INC.

April 15, 1975

ADDRESSCAPITAL

Tokyo Headquarters:¥58,506,644,000

East Tower, Gate City Osaki
11-2, Osaki 1-chome, Shinagawa-ku, Tokyo 141-8643, JapanAUTHORIZED SHARES
412,300,000

Per Share Data (Yen and dollars):
Net income
Cash dividends
At Year-End:Total assets
Total shareholders’ equity

Osaka Headquarters:

¥

176
41

¥

82
41

¥

146
41

114.6%–¥ 354,831
154,317¥ 342,599
151,864¥ 342,934
149,827

3.6%
1.6

7,821
7,472
349
75.4
3,127

7,625
7,291
334
62.1
2,712

7,734
7,179
555
55.8
1,922

2.6%
2.5
4.5
13.3
15.3

Store Network:
Number of stores(2)Franchised storesCompany-owned stores
Ratio of liquor-licensed stores (%)
Stores with ATMs

$

1.61
0.37

$ 3,236,918
1,407,745

Notes: 1. The U.S. dollar amounts represent translations of Japanese yen at the approximate exchange rate at February 29, 2004, of ¥109.62=$1.
2. The number of stores does not include stores of Shanghai Hualian Lawson Co., Ltd.

9-1, Toyotsu-cho, Suita-shi, Osaka 564-0051, JapanSHARES ISSUED
107,600,000

EMPLOYEESSHAREHOLDERS

3,148 (Consolidated)

48,156

BUSINESS ACTIVITIESMAJOR SHAREHOLDERS

Franchise chain development of

Shareholder

Lawson convenience stores
1. M.C. Retail Investment Co., Ltd.
NET SALES OF ALL STORES¥1,288.2 billion (Consolidated) (Fiscal 2003)

Shareholdings(Shares)

Shareholdings(%)

32,089,300

30.8

8,618,100

9.4

5,939,500

5.7

2. Japan Trustee Services Bank, Ltd.
(Trust account)
3. Marubeni Foods Investment Co., Ltd.
4. The Master Trust Bank of Japan, Ltd.

NUMBER OF STORES
7,821 (Consolidated, as of February 29, 2004)

Contents
OPERATING REGION(Trust account)
5. NOMURA SECURITIES CO., LTD.

5,326,200

5.1

3,607,900

3.5

6. Nintendo Co., Ltd.

3,447,000

3.3

7. BNP Paribas Securities (Japan) Limited

1,570,800

1.5

1,509,500

1.4

8. Mitsui Asset Trust and Banking Company,

To Shareholders, Other Investors,
Customers, Franchise Owners,
Store Crew and Employees

2

Corporate Governance
Expectations of Niinami’s Reforms

8
9

Lawson Challenge 2004: Making All the Difference
A Progress Report on Lawson Challenge 2004
Taste the Difference
See the Difference
Experience the Difference11

Note: The 3,283,384 shares of treasury stock held by Lawson are notincluded in the above table.

13
17
19

STOCK EXCHANGE LISITNGS

Financial Section

21

Osaka Securities Exchange (1st Section)

Directors, Corporate Auditors and Executive Officers

50

Corporate Data

51

All 47 Japanese prefectures; Shanghai,
PRC (joint venture)

Limited (Trust Account)
9. The Chase Manhattan Bank, NA London
Secs Lending Omnibus Account

1,256,800

1.2

10. Mellon Bank Treaty Clients Omnibus

1,252,757

1.2Tokyo Stock Exchange (1st Section)

STOCK TRANSFER AGENT
The Mitsubishi Trust and Banking Corporation
1-4-5, Marunouchi, Chiyoda-ku, Tokyo, Japan(As of February 29, 2004)

Forward-looking Statements
This annual report contains forward-looking statements about the future plans, strategies, beliefs and performance of LAWSON and its subsidiaries. These forwardlooking statements are not historical facts. They are expectations, estimates, forecasts and projections based on information currently available to the company and are
subject to a number of risks, uncertainties and assumptions, which, without limitation, include economic trends, competition in the Japanese convenience store
industry, personal consumption, market demand, the tax system and other legislation. As such, actual results may differ materially from those projected.

LAWSON, INC. AR 04

51

The Japanese convenience store sector is undergoing
dramatic change. Until a few years ago, our customers were primarily men in their 20s and 30s. Now ourcustomer base is expanding as the ratio of women,
middle-aged men and elderly men using our storesincreases.
Amid this change, I decided to review the highgrowth management plan we unveiled two years ago
as part of our rigorous pursuit of customer satisfaction. Moving forward, LAWSON aims to develop achain of stores that match the needs of customers ineach region, rather than promoting uniform store
management and product lineups. And I want everyone in the Lawson family to create greater customer
satisfaction by doing the basics right. I believe

this will result in future growth in
the earnings of franchise owners
and LAWSON.
As we make steady progress with our various reforms, I am convinced that Lawson Challenge 2004
is taking us in the right direction. I hope this annual
report will help you understand my thinking on customer satisfaction, and show that we are pushingahead in pursuit of even greater corporate value.

Takeshi Niinami
President and CEO

LAWSON, INC. AR 04

1

To Shareholders, Other Investors, Customers,
Franchise Owners, Store Crew and Employees

The fact is that theJapanese retail industry remains a difficult
market in which tooperate. We recorded
higher earnings in thefiscal year ended February 29, 2004, but weposted lackluster
earnings in the previous two years, theresult mainly of actions to deal with
unproductive assets.
The earnings offranchise owners, ourimportant business
partners, driftedslightly lower. For
management,
prevailingagainst this stiffcompetition anddriving earnings
higher are an
extremely important focus.

TAKESHI NIINAMI
President and CEO

2

LAWSON, INC. AR 04

A Dynamically
Changing Operating
Environment

service, are in demand, too. These

It has been almost three decades

nience stores, most notably insince the first convenience store

cities. And fueling this competi-

opened in Japan. In the ensuingtion is the increasing entry ofyears, the Japanese convenienceother players into the market, such

store industry has devoted its

as supermarkets and drug storesenergies to increasing conveniencethat are open till late. Under thesefor customers. Today, the industry

circumstances, convenience storesfaces a wildly changing operating

can no longer hope to gain theenvironment and customers’

patronage of customers using past

expectations of convenience storespractices. In fact, these changes

are also in a state of flux.

are a real threat to companies that

Let’s examine this change. In

dynamics have ignited more
intense competition among conve-

persist in operating as they always

the past, convenience stores

have. On the other hand, compa-

targeted customers in their 20s

nies such as LAWSON that haveand 30s. But their number isembraced this change and are

declining due to Japan’s low birth-

prepared to take up new chal-

Increasingly, the major
customer group is
middle-aged andsenior citizens. And, as
women play a greater role in
all aspects of society, we arealso seeing thisgroup become aheavier user of convenience stores. The

lenges stand to benefit fromchange in the customer mix has

two years, the result mainly ofnaturally resulted in new demands

actions to deal with unproductive

being placed on the convenience

assets. And the earnings of franchise

store. In particular, products thatowners, our important business

respond to heightening healthpartners, drifted slightly lower.

consciousness are in greater

For management, therefore, ourdemand. Greater levels of cus-

highest priorities are to prevailrate and aging population.

growth opportunities.
But there are other challenges.
Persistent deflationary trends
continue to create an extremely
difficult operating environment,
particularly for the retail industry.
While we recorded higher earnings in the fiscal year ended
February 29, 2004, we posted
lackluster earnings in the previous

tomer satisfaction (CS), especiallyagainst this stiff competition towith respect to the quality ofdrive earnings higher.

Our Goals

Customer satisfaction will win

convenience store model, a chain

Based on LAWSON’s corporate

the support of customers, which inoperated in a uniform manner in aphilosophy of “Making life more

turn will translate into higher

drive for efficiency, with everything

convenient for customers andearnings for franchise owners andrevolving around Tokyo, has its

contributing to local communities

finally profits for LAWSON. The

limits. We are thus aiming to moveby valuing people and seeking

realization of customer satisfaction

away from the past model of ainnovative approaches,” franchiseand pursuit of profits is by no

convenience store that pursued

owners across the country aremeans antithetical. In fact, theefficiency above everything else.

goalof being “the ‘hot’
station in the neighborhood.” This slogan is our

two are connected. If you can’tvision of the type of chain we

Customer satisfaction creates

aspire to become. The word “hot”

customers that create profits,

Our goal is to createa model that isaligned to change inour operating environment and customers’ needs.

means providing the “hottest”

which allow you to create moreThose needs differ greatly de-products, information and services

customer satisfaction. Our role aspending on the region. Existing

to meet the needs of customers inmanagers is to ensure that thismodels cannot cope adequately

each region, as well as “warm” incycle is operating properly. In

with this change. Rather than athe sense that customers find ourshort, we recognize that it isTokyo-centered nationwide chain

stores welcoming. “Station”

important to generate continuous

operation, what’s required aremeans a place to relax and take aearnings to deliver customer

stores and sales areas fashioned tobreak. Customer satisfaction issatisfaction. For this we arematch the needs of each respective

essential to realizing this vision,

implementing more measures andregion. The emphasis must be on

and we believe that it depends onoffering more leadership than everindividuality in store operations andthe following three elements. The

to lift store earnings. And as part

individual stores. This was our

product development capabilities. Theof efforts to instill this mindset inmotivation for introducing the

LAWSON we have switched toregional headquarters system inoperating stores with thefirst iscontinuously generate profits, you
won’t be able to continuously
satisfy customers. It’s like a cycle.

second is what we call theusing earnings rather than sales as

fiscal 2003. Through a process ofThree Challenge
Practices: creating stores

our key benchmark for the mea-

trial and error, we have attempted

surement of performance. Thisto make the most of this systemand store layouts that strike aapplies to performance evaluations

over the past year. While the major

chord with customers; keepingof employees, too.

benefits from the introduction of

stores clean; and serving custom-

convenient locations.

this system will come later, it has
expedited decision making at a

Increasing customer satisfaction is

Building the Lawson
Model ConvenienceStorethus our main focus.

In what is a difficult operating

across our operations, development

environment for convenienceand product divisions. There havestores, I believe the conventional

been other benefits as well.

ers with courtesy. Third islevel closer to customers andfacilitated smoother communication

LAWSON, INC. AR 04

3

This system has moved us further

to make investments and a strong

such as the local procurement ofdown the road to creating stores

financial position. This process

regional materials and ingredients

offering greater satisfaction that

had largely been completed asthat form the basis of thesematch regional characteristics.

planned at the end of February

products.

Toward even higher levels of

2004 and, while the benefits won’t

convenience and with an eye onmaterialize until fiscal 2004 or

pursuing a higher added-value

future change in our operating

thereafter, we are still hopeful that

proposition unique to Lawson.

environment, we are engaged in

the realignment will produce

There are three watchwords:

the continuous development ofsignificant benefits in terms ofcommitment, authentic and a

new formats that add extra value

improved product quality. I havesense of value.

and dimensions to the functions of

no doubt that the improved pro-existing convenience stores,

ductivity and investments in thehealth consciousness, we are

thereby responding to changing

latest equipment resulting fromprogressively eliminating artificial

customer needs.

this realignment will result in morecoloring and preservatives fromdelicious products. Achieving costbento-boxes, rice balls, preparedshouldn’t be interpreted as asavings is important to thebreads and other original products

complete overhaul of our existing

strength of our product lineup, too.

and we are restricting the use ofmodel. The new model merely

While procurement costs rose infood additives to the bare mini-

improves on the existing standard-fiscal 2003 due to a rise in themum. Moreover, we initiated theized model that has its limits inprice of rice as a result of a cool

Natural Project to com-some respects. The constant, andsummer, we are seeing the ben-municate these sorts of LAWSON

it’s an important point, is that weefits of reviews of purchasing

activities and progress we aresatisfy customers with the basic

practices conducted by the Raw

making with them to customers inconvenience store functions. For

Materials Procurement Depart-an easily understandable manner.

this is the essence of customer
satisfaction.

ment in the form of lower costs.

Another element of our approach

These savings will be reinvested in

to safe, healthy and tasty foods is

improving product quality in fiscal

the Natural Lawson format. As of

2004. Our goal is to provide

February 29, 2004, there were 13

higher-quality products imbuing aof these stores, mainly in Tokyosense of value.

and Kanagawa Prefecture.

But make no mistake, thisLAWSON,

Strengthening the
Product Lineup

And to respond to increasing(Offering Safe, Healthy and Tasty

In addition to these actions,

Products Customers Can Trust)customers don’t understand thesetting Lawson apart from other

we have responded
to different regional
tastes and other preferences.

companies. To this end, we have

Under the leadership of regional

Product appearance and image

restructured our network of contract

headquarters, we are creating(store and LAWSON brand) have amanufacturers, concentrating on

products matched more closely to

lot to do with how customers

mega-vendors with the wherewithal

regions, implementing measures

evaluate the taste of products.

Original products are important to4

Through these measures, we are

LAWSON, INC. AR 04

But all of this is meaningless if
quality of our products, no matter
how delicious they might be.

Original products areimportant to setting
Lawson apart fromother companies. To
this end, we have restructured our networkof contract manufacturers, concentrating
on mega-vendors withthe wherewithal to
make investments anda strong financial position. We are alsoseeing the benefitsof reviews of raw
material purchasing
practices in theform of lower
costs. In fiscal
2004, thesesavings will be
reinvested in improving productquality. Our goal
is to provide
higher-quality
products imbuing
a sense of value.

That’s why, as well as raisingneed to ensure they are realized.

product quality, we are endeavor-

Taking this a step further, in fiscal

ing to make store environments

2004 we plan to put in place anmore appealing.

effective system for education andtraining and hold seminars tar-

The Three Challenge
Practices

geted at franchise owners and

LAWSON has a nationwide network

addition to skills-based training,

7,821 stores (as of

we are also fostering a mindset for

February 29, 2004) in all 47

serving customers at stores in theprefectures in Japan. But just one

right way.

store with a low level of awarenessof customer satisfaction could

We also hold Lawson
Seminars twice a year inundermine a customer’s confi-

each region throughout thedence in the whole Lawson

country at which we assemble

chain—regardless of how hardfranchise owners. In the past,other stores are trying in thisthese seminars were used mainly

respect. This is the nature of chain

to familiarize attendees with ouroperations. Stores with a low

products every six months. But

awareness of or no interest infrom this fiscal year we havecustomer satisfaction have noreconfigured these seminars asplace in the Lawson chain. Headstudy forums for franchise owners

Office will monitor these storesand crew to learn what individual

and, in certain circumstances,stores should do to realize ourthey may be asked to leave thevision of “the ‘hot’ station in the

Lawson chain. Nothing less thanneighborhood.” The feedback has

the firm resolve of all of the

been encouraging, with many of

Lawson chain in implementing thethe participants being extremely

Three Challenge
Practices is acceptable.

impressed, saying that the semi-of

The importance I attach to thesecrew. At training centers, innars have improved considerably.
Seeing how participants havebasics of our business is under-

embraced these seminars fills mescored by them being included aswith confidence that LAWSON

an integral part of Lawson Chal-

will definitely get better.

lenge 2004 from the very outset,

Of course, it’s not just franchise

and we have been training store

owners and store crew that aresupervisors and other line person-

being required to be more con-nel to give them the skills theyscious of customer satisfaction.

LAWSON, INC. AR 04

5

I attach great importance to the Three
Challenge Principles.
This is underscored bythem being included as
an integral part ofLawson Challenge
2004 from the very
outset. We have been
training store supervisors and other line
personnel to give themthe skills they needto ensure theseprinciples are realized. In fiscal 2004,
we will take this astep further byholding seminars
on these principles for franchise owners andcrew as well. In
addition to skillsbased training,
we will foster amindset for serving customers in
the right way.

The same, if not greater, demands

I believe that education isare being placed on Head Office

extremely important to LAWSON’s

personnel. Their performance

future and intend to back up thisevaluations depend on it. Qualita-

belief by channeling more re-tively evaluating measures taken

sources into this area. The ben-with respect to customer satisfac-

efits of these investments willtion is an extremely difficult

come in stronger brand equity overproposition, but we are trying to

the medium and long terms.

quantify this with the introductionof a mystery shopper program toConvenient Locations

serve as a way of benchmarking

LAWSON is not preoccupied with

our approach to customer satisfac-

how many stores it has. But we aretion. The mystery shopper program

particular about the profitability of

involves sending a person toindividual stores. That’s why

specific stores to evaluate service

instead of applying uniform

and other aspects of their opera-

standards for all stores across thetions. The key is that this person

person’s visit. This system enables

we focus on
profitability by region and store when
opening new stores. In

us to look objectively at storesfiscal 2003, while we largely

from the customer’s perspective

achieved our goal for the number

and to pinpoint by ourselves areasof stores opened, we didn’t makethat need to be improved.

the progress we wanted in terms ofacts as a customer and the stores
have no prior knowledge of thecountry,

To foster even greater con-new store profitability. So, in fiscal

sciousness among employees of2004 we will step up our focus on

customer satisfaction we hold CS

profitability to eradicate low-profit

sessions at Lawson University, a structured education

store openings. We refuse to be

and training program for employ-goals for store openings. Instead,ees. I believe that greater aware-

our approach will be to conduct

ness of CS among all members ofmore rigorous analysis before

the Lawson family, starting withdeciding to open stores. Raising

employees, will lead to customer

the productivity of Recruit Field

satisfaction.

Counselors (RFCs) is part of this.

drawn in to setting unrealistic

We are trialing a system whereby
responsibility for the various
aspects of store development is

6

LAWSON, INC. AR 04

ous growth that has its roots inously, RFCs handled most aspects

Lawson Challenge
2004—A Direct
Bearing on LAWSON’s
Futureof this process. And so that we

As I mentioned earlier in this letter,

Rapid growth would only put acan more quickly obtain informa-

the overarching goal of Lawson

strain on LAWSON, imposingtion on possible sites for stores,

Challenge 2004 is to realize ourunrealistic demands. That, in my

we are strengthening relationships

vision of “the ‘hot’ station in theopinion, is not the way forward.

with leading local companies

neighborhood.” I believe that our

LAWSON has many stakeholders

throughout Japan.

and our relationships with themto open new stores. Given thisincreased focus on
customers and stores
to improve Lawson has

situation, and without clinging tobeen the correct move. However, if

outlook. And the time to forge

traditional views of what makes aanything, the past two years havethose lasting relationships is now.

good site for a convenience store,

taught me that it will take longer

we are opening our eyes to otherthan I had expected to execute the

LAWSON Will Change

possibilities through alliances withreforms needed to make LAWSONDo the basics right. Do what you

businesses in other industries.

have to do. If everybody in thein fiscal 2003. In association withmore responsive torapidly changing customer needs and thus

Japan Post, Postal Lawson storesdeliver customer satisfaction.

LAWSON will change into an

divided among several people.
More efficient new store development should be the result. Previ-

Competition is intense for sites

Progress was made in this regard

were opened inside some post

Based on our business results inrelationships with franchise storesand the carefully planned education of employees and store crew.

are based on growing together overthe long term, not on a short-term

Lawson family does this day inand day out, I have no doubt
exciting company.

offices. And we jointly opened

fiscal 2003 we decided to down-

stores at Nippon Oil Corporation’s

wardly revise our final-year operat-

the years ahead as we remain

ENEOS self-service stations.

ing income target for Lawson

focused on being “the ‘hot’ station

Stores were also opened at banks,

Challenge 2004 to ¥42.1 billion,in the neighborhood.”in subway concourses, under anfrom the originally announced

alliance with the Tokyo Metro Co.,

¥50.0 billion. We decided that

Ltd. (formerly Teito Rapid Transit

trying to force growth for the sake

Authority), and in association withof satisfying a preoccupation withALBIREX NIIGATA, a professionala goal set in the past could be

football club that plays in the

detrimental to sustainable growthJAPAN PROFESSIONAL FOOT-in the future. At this juncture, we

BALL LEAGUE. We are thus

feel that what’s best for LAWSON is

Takeshi Niinami

opening stores in locations no one

to build a strong base, as a store

President and CEO

has thought of before as we con-and as a company, by first making

tinue to explore the possibilities ofsure that we are doing the basics

convenience stores.

right. Our goal is stable, continu-

Expect to see more change inJune 2004

LAWSON, INC. AR 04

7

Corporate Governance

Basic Policy on
Corporate Governance
LAWSON is endeavoring to maximize corporate value, while safeguarding the interests ofshareholders and all other stakeholders. We believe that it isimportant to upgrade corporate
governance to increase the soundness and transparency of management. This is achieved throughstrict compliance, active disclosure and in other ways.

The Board of
Directors, Executive
Officer System andRemuneration System

partner; and Hiroshi Mino, an

As of May 2004, the Board of

Executive Officer and Senior Vice
President in charge of LAWSON at

Officer (CRO) Katsuhiko Yamasaki.

Mitsubishi Corp. Mr. Furukawa

Moreover, in fiscal 2002, webrings experience in a broad range

introduced the executive officer

Directors had nine members, fiveof fields to the Board of LAWSON,

system to demarcate managementof whom are outside directors. We

having been involved in areas suchsupervision and business execution.

believe that having a majority ofas finance, personnel, and business

As of April 30, 2004, there wereoutside directors on our Board

reforms at Mitsubishi Corp. The

24 executive officers at LAWSON.

brings a wide range of insights

advice of both new appointees will

Also in the name of complianceand opinions to bear on mattersbe effective in devising manage-

we have made around 30% of thethat are important in managing

ment plans to raise LAWSON’s

remuneration of directors andthe company. This enables us tocorporate value further.

executive officers contingent upon

arrive at fairer, more reasoned
judgments.

LAWSON has established various

our business results, thereby clarify-

committees to bolster corporate

ing the link between their roles

At the Ordinary Annual General

governance. One is the Compensa-

and delivering value for LAWSON’s

Meeting of Shareholders held intion Committee, which is made up

shareholders. For managers, inMay 2004, two outside directors

entirely of outside directors. Others

February 2003, we started using

resigned and were replaced by two

are the Private Information Protec-

360-degree evaluations as well as

new directors. The two new ap-

tion Committee, which is chaired

performance-against-target inpointees as outside directors are

by President and CEO Takeshi

personal evaluations.

Koji Furukawa, Senior Executive

Niinami, and the Compliance

Vice President of Mitsubishi

Promotion Committee, which is

Corporation, LAWSON’s leadingheaded by Executive Vice Presi-

shareholder and strategic business

dent and Chief Risk Management(Continued on page 10)

8

LAWSON, INC. AR 04

Expectations of
Niinami’s Reforms
The reforms initiated by Takeshi
Niinami are making steady progress. The
first of these is changing
LAWSON’s corporate culture.
The younger top management team has revitalized theorganization and sparked
greater motivation in employees. The second reform is toensure that strategic thinking
is deeply ingrained. Throughalliances with companies indifferent fields, LAWSON hastapped the resources andoutside expertise it needed totake on challenges in new
business spheres. The thirdreform is earning greater
recognition from the market.
The top management team has
actively communicated its
vision and strategy in the media, establishing a reputation
for LAWSON as an innovative
company. LAWSON’s reforms
can be expected to deliver
results in the coming years.
May 12, 2004

HIROSHI TASAKA
Professor
Graduate School of Tama University(Director)

From the right

TAKESHI NIINAMI
Representative Director, President and CEOTERUO AOKI
Director, Senior Executive Vice President

KATSUHIKO YAMASAKI
Director and Executive Vice President

MASAAKI KOJIMAStanding Corporate Auditor

SADAO SUZUKI
Standing Corporate Auditor

YORIHIKO KOJIMA
Director

EIICHI TANABE
Director and Executive Vice President

YOSHIYUKI SANADA
Corporate Auditor

YUKIO UENO
Director

HIROSHI TASAKA
Director

REIKO OKUTANI
Director

TESTUO OZAWA
Corporate Auditor

MUNEAKI MASUDA
Director(As of April 30, 2004)

LAWSON, INC. AR 04

9

Audit Function

countability requirements. Thisdent and CRO Katsuhiko Yamasaki

LAWSON employs the corporate

stance extends to releasing a

to head corporate compliance andauditor system and three of thebusiness report every month,redoubled our efforts to educate

four members of the Board of

making earnings presentation

employees on compliance. In

Corporate Auditors come frommaterials available on its website,

addition to compliance-related

outside the company. Corporate

video streaming the Ordinary

training for all employees at least

auditors audit the performance ofAnnual General Meeting of Share-

once a year, we have in place

duties by directors, a process that

holders and other investor rela-various mechanisms to continu-

includes attending Board of Direc-

tions activities which underscore

ously check the appropriateness of

tors and other important meetings,

our commitment to dialogue withbusiness activities. This includes

offering opinions from a fair andall LAWSON stakeholders.

using a hot line and counselingobjective viewpoint and surveying

facility, which is also available tolegal and internal controls. In

Compliancepeople outside the company, andprinciple, the Board of Corporate

An incident in June 2003 involv-

Audit Station, which audits the

Auditors meets once a month.

ing the unauthorized disclosure oflegal performance of operations

personal information of one

and responses to risk manage-

Active and Fair
Disclosure

LAWSON PASS cardholder (butment. We are also receiving

not credit information) was a

feedback from business partners

LAWSON aims to actively disclose

source of concern for customers.

through a third-party organization.

information, doing more thanIn the wake of this incident, wemerely fulfilling mandatory ac-

appointed Executive Vice Presi-

Corporate Governance and Internal Control Systems (As of February 29, 2004)
Ordinary General Meeting of Shareholders
Appointment
and dismissal

Appointment
and dismissal

Board of Directors
Outside directors: 5
In-house directors: 4
Total: 9 persons

Appointment
anddismissal

OutsidelawyerCompensation
Committee

ReportProvide guidanceon importantbusiness andaffairs.

Audit
Report andproposal

Handle andreport importantbusiness andaffairs.

Executive officers:
Serving concurrently as director: 4
Senior Vice Presidents: 17
Total executive officers: 21 persons
LAWSON
Branches

10

LAWSON, INC. AR 04

Board of Corporate Auditors
Outside corporate auditors: 3
In-house corporate auditors: 1
Total: 4 persons

Private Information
Protection Committee
Compliance Promotion
Committee

Determine basic
management
guidelines, etc.

Management Council

Audit

Appointment
and dismissal

Audit Station

HandleandreportissuesInstruction
andnotification

CertifiedPublicAccountant

Audit

Headquarters/ Subsidiaries
Station*and Affiliates*In May 2002, LAWSON’s Head Office was positioned as a Support Station thatassists with efforts to realize the vision of “the ‘hot’ station in the neighborhood.”
Some Head Office divisions were renamed “stations” in line with this move.

A Progress Report on Lawson Challenge 2004
Over the past two years, we have steadily executed Lawson Challenge 2004, our
medium-term plan for reforming LAWSON and driving growth. The overarching
aim is to realize our vision of being “the ‘hot’ station in the neighborhood.” Looking back over this period, I am convinced that turning thecompany to focus more on customers and frontline operations was indeed the correct decision. But there is still work to be done. The
speed of change in our markets has sometimes taken us by surprise, and moretime is required for reforms to make LAWSON more responsive tomarket change. I intend to push ahead with various initiatives, placingemphasis on our intangible assets—customer, employee and organizational—that are so vital to the successful completion of these reforms. That’s
because I strongly believe that the creation of an operating base that can deliver
stable growth is the best way to increase enterprise value. Emphasizing franchised store earnings and customer relationships will build brand equity,
ultimately translating into tangible operating results for LAWSON in the future.

Lawson Challenge 2004:

Making All
the Difference
LAWSON, INC. AR 04

11

Lawson Challenge 2004: Two Years on
Looking Back on
Fiscal 2003

convenient for customers. In thisgiven to store owners and crew,

section, we look at progress we

not just LAWSON employees. And

Operating conditions in Japan’s

have made with regard to theseas part of our approach to educa-

retailing industry, LAWSON’s

three themes.

tion, we will use outside special-

operating domain, have become

About the Three
Challenge Practices

management, products and store

tracted deflationary trends, intensifying competition over the past

LAWSON’s Three Challenge

invigorate the organization.

few years that transcends business

Practices

type and model, and the effect of

As in the past, we will continue tothe coolest summer in a decade instress LAWSON’s Three Challenge

Strengthening the
Product Lineup

2003. This is calling into ques-

Practices, as we regard them as an

In our drive to improve quality intions companies’ ability to respond

important aspect of our opera-

respect of products we havequickly and flexibly to the market.

extremely difficult due to pro-12

ists in various fields, such as
development, to stimulate andtions. Not only are they instrumen-

focused in particular on the key

Our approach to these market

tal to increasing the level oflines of bento-boxes and rice balls.

conditions has been to focus on

customer satisfaction, but the

To this end, we have been imple-

increasing customer
satisfaction by raisingdegree to which they are practiced

menting a plan to reduce theis a barometer of that change.

number of vendors and concen-

quality. We have pursued three

Underscoring the importance wetrate production on mega-vendors.

themes in this respect, motivatedattach to them, in fiscal 2003,

This process had largely been

by our desire to realize our vision

when we extended the results-

completed, according to plan, atof being “the ‘hot’ station in thebased performance evaluation

the end of fiscal 2003. And,neighborhood.” The first of thesesystem to all employees, we madeahead of the rest of the country,

themes is the Three Challenge

the quantitative and qualitative

the latest production equipment

Practices: serve customers withmeasurement of the degree tohas been progressively installed atcourtesy, keep stores and sur-which theThree Challenge Practices werefactories in Tokyo, Nagoya androunding areas clean, and create
stores and store layouts that strike

implemented a key performancework for delivering products of ana chord with customers. This also

metric. This has firmly entrenchedeven higher quality. These moves

included enhancing leadership inthem as the main factor for

have been instrumental to thestore management. The second

realizing our vision of being “thedevelopment of thetheme was to use our improved‘hot’ station in the neighborhood.”

product development capabilities

In fiscal 2004, we intend toto quickly develop products under

spotlight people who personify thesafe,healthy and tasty
products customers
can trust that LAWSON isthe banner of safe, healthy andspirit of the Three Challenge

aiming for. One move has been thetasty products customers canPractices and increase opportuni-

elimination of preservatives andtrust. Thirdly, we are developing

ties for people to hone their skills

artificial coloring from Lawson

stores with an emphasis on qual-with respect to these practices.

original products, such as bento-

ity, choosing locations that areThis education and training will beboxes, rice balls and sandwiches.

LAWSON, INC. AR 04

Osaka, putting in place a frame-Onigiriya rice balls are made with the finest ingredients and best production
methods. They have continually recorded sales at least 10% above
those in the rice ball category as a whole. And, importantly, the proportion ofcustomers citing taste as the reason for choosing to buy rice balls at Lawson
and not elsewhere has leapt three times since the launch of theOnigiriya series. The Onigiriya series is now firmly established as a representative LAWSON brand. The figure on the next page represents cumulative
sales of Onigiriya rice balls since its launch. Put end to end this would beenough rice balls to circle the globe nearly three times.

Taste
the Difference
LAWSON, INC. AR 04

13

The Pursuit of Safe, Healthy and Tasty Products Customers Can Trust
The Totte Oki Sengenseries of original breads isthe product of joint efforts
with Yamazaki Baking Co.,
Ltd., one of Japan’s top
bakers. Our goal was tocreate bread offering anauthentic taste experience. With Melon Pan
buns, in particular, we
succeeded in creating theideal product, deliciously
soft in the middle but
delicately firm on theoutside without being
sticky, as many
products have beenin the past. This
was achieved byfinding the perfect
mix of flour. Melon
Pan buns have
proved to be a popular addition to our
product lineup,ranking among the
top sellers sincegoing on sale in
September last year.

proposition. During fiscal 2003,

Collaboration With
Specialist
Manufacturers

we experienced a spike in the price

Another element of our strategy toof rice due to the effects of a coolstrengthen our product lineup hassummer in 2003. We struggled

been to collaborate on joint devel-with how best to manage thisopment projects for original prod-

situation, but ultimately decided

ucts with specialist manufacturers.

that LAWSON’s Head Office would

One example of this approach isbasically bear the brunt of thethe Totte Oki Sengen series. Using

increase. We had three otherquality ingredients and a carefully

choices: ask franchise stores tochosen production method in thetake the load, pass the increase on

pursuit of a real taste experience,

to consumers in the form of higher

LAWSON and its development

product prices, or use lower-quality

partner came up with Melon Pan

rice in our products. Motivated bybuns and other hot-selling prod-a desire, first and foremost, not toucts that have won high marks

undermine our relationships withfrom customers. Another productfranchise stores and customers

created through joint development

over a temporary rise in rice prices,is GU-GU-GU, a series of instant

we rejected these options. The

food products that redefines thestrategy we employed was to defer

term instant. The original brandprice increases of existing Onigiryaemphasizes three aspects of the

Ingredients are an importantelement of a product’s value

products made with Niigata

ingredients (gu in Japanese)—the

Koshihikari rice, and to also use

superior taste, size and volume of

650,000,
The total number of rice balls sold at
Lawson stores from the launch of theOnigiriya brand through October 2003.

this high-quality rice in somehelpings. The lineup features

hand-rolled rice balls so as to set

instant noodles, miso soup, cup

the Onigiriya brand part fromsoup and other instant items,

rivals. In fiscal 2004, we plan todeveloped jointly with 12 well-known

leverage the successes of Onigiriya

food manufacturers, each using theas the basis for our product strat-

ingredients and techniques theyegy for other products in ourare most at home with. Joint

lineup, in the process creatingproduct development with a single

popular products that only Lawson

manufacturer is nothing new in the

can deliver.

convenience store industry, but a

project of this magnitude with 12
KAZUYOSHI OHNAKA
Merchandiser
Bakery & Dessert Dept.
Merchandizing & Logistics Division

14

LAWSON, INC. AR 04

companies participating is a first inJapan. The development of original

products created in this way andsuch as the start of a system

unprofitable, as well as opened

reflecting the “voices” of consum-

whereby cardholders can exchange

stores with a focus on quality,

ers will be a continuing theme at

shopping points for shopping

mainly in the Tokyo, Nagoya and

LAWSON.

vouchers. Regrettably, during

Osaka areas. Our efforts were

fiscal 2003, there was an incident

guided by new standards that we

Enhancing Services

involving the unauthorized disclo-

introduced last year for the opening

Various actions on the service

sure of personal information of aof stores, part of our drive tofront are contributing to greater

cardholder from a third-party firm

develop higher quality stores inconvenience for customers, too.

to which LAWSON outsources partconvenient locations for customers.

Take

ATMs. We started a full-of its card services. No credit

These moves have lifted the quality

scale drive to install ATMs at our

information was disclosed how-of our overall chain and also led tostores in October 2001. There are

ever. Recognizing the serious

higher earnings for the franchisenature of this incident, we imme-

owners of stores that were relo-Lawson stores in 17 prefectures

diately launched a committeecated. And stores have been

(as of February 29, 2004), withmade up mostly of outside experts

opened in novel new locations.

the recent addition of this facility

to investigate the reasons for and

These include stores such as

at stores in Kyoto, Hiroshima,

circumstances of this unautho-

Metropia in subway con-

Yamaguchi and Fukuoka prefec-

rized disclosure. At the same time,courses, thanks to an alliance withtures during the fiscal year ended

we are working to establish a

February 29th, 2004. Loppi isstringent in-house system for thealso offering greater convenience.

safeguarding of information,

hybridconvenience storesin banks; Lawson stores

These in-store multimedia termi-

forming a Private Information

operated at ENEOS self-service

nals now allow customers toProtection Committee to spear-

stations in a tie-up with Nippon Oilpurchase “toto” sports promotion

head these efforts. Moving for-

Corporation; andlottery tickets. Through our active

ward, we intend to offer more

Hospital
Lawson shops inside hospital

support of businesses promoting

attractive members-only rewards

grounds such as the Kyorin Univer-sports we are building good

and a shopping points programsity Hospital and Takatsuki Red

relations with local communities.

while ensuring that information

Cross Hospital.

This is part of our approach tosafeguards are followed to the

As a result of these and otherestablish strong relationships withletter so as to continue to enjoy

developments, the Lawson network

LAWSON

the support of cardholders andin Japan numbered 7,821 stores atshareholders.

the end of February 2004, a net

now

3,127 ATMs at000
regional societies.

PASS is another convenientservice for customers. Launched inAugust 2002, and now witharound 1.4 million
cardholders, LAWSONTokyo Metro Co., Ltd.;

year-on-year increase of 196

Quality—the Focus for
Store Development

stores, following the opening of
625 stores and the closing or

During fiscal 2003, we actively

relocation of 429 stores. While the

PASS has steadily won the support

relocated and closed stores with

net increase was largely as planned,of customers with various services,

low daily sales or that werereturn on investment (ROI) at new

LAWSON, INC. AR 04

15

New Format Stores
In January 2003,
mailboxes were installed in all Lawson
stores. Since then,
LAWSON and Japan
Post have developedand expanded a mutually beneficial business alliance. Activities now include thetrial operation of
Postal Lawson stores,
sales of stamps featuring original photographs, and the handling of “Furusato
Kozutsumi” small
parcels. All initiatives
have won the supportof delighted customers. More initiatives
are planned in fiscal
2004. These will
increase conveniencefor customers andcreate additional value
for both Japan Post
and LAWSON.

stores was slightly lower than theprevious year due to the effects ofthe cool summer in 2003 and poor
performances at stores opened inregional areas of Japan. LAWSON
must open higher quality storesfrom the perspectives of new store
earnings and new store ROI. That2

is why we are now reviewing ourstore development system, startingwith the Kanto area. Our aim is toraise the precision of store opening
by dividing responsibilities forcorporate development, ownercandidate development and sales
forecasting, tasks that are crucial
in planning quality stores. Previously, these tasks were performed
almost entirely by Recruit Field
Counselors (RFCs). Lawson’s
Epoch-making Total Strategic
System (LETSS) is a strategic tool
in reducing the ratio of stores withlow daily sales by increasing thepercentage of new store openings
in prime locations in each region
identified by the “grid point”
system. By using its sophisticatedmapping and data analysis
capabilities, LETSS improves theefficiency of surveys and management of land and commercial
districts, such as areas where store

The number of Postal Lawson storesopenings are planned. Aiming foreven higher profits at new stores,

16

LAWSON, INC. AR 04

SATOSHI KATAOKA (Left)
General Manager
Postal Lawson Project Team

we plan to make this system—KAZUYA NODA (Right)
Postal Lawson Project Teamthe country.

and details of its success—available
to our development corps acrossLAWSON is stealing a march on other convenience store
chains with various new format stores. One is Natural
Lawson, which continues to grow in stature as a brand in its
own right. Then there is Hospital Lawson, Postal Lawson,
convenience stores in banks, service station-based Lawson
stores, and Lawson stores in subway concourses. And that is
not to mention regular Lawson stores where customers caneat Sanuki udon in store.

See
the Difference
LAWSON, INC. AR 04

17

“The ‘Hot’ Station in the Neighborhood”
Since 2002, 50 CS (customer satisfaction) sessions have already been
held. Originally, mainly
for directors and managerial employees, thesesessions are now being
extended to encompass
all employees. Discussions at CS sessions
center on how to deal
with others in a warm andkind manner. The desire
to want to satisfy customers is so important, but
customer satisfaction
will be elusive without
a willingness to show
warmth and kindness. We want tobe a company thatvalues all people
who have dealings with
LAWSON: customers, franchiseowners, store crew
and so on.

development of Lawson stores in

About CSR (Corporate
Social Responsibility)

China, too. Shanghai Hualian

LAWSON’s basic philosophy

Lawson Co., Ltd., which is devel-

regarding environmental protection

Shanghai,
had 146 stores as of Febru-

and social contribution activities isary 29, 2004, an increase of 50

activities in harmony with theduring the 2003 fiscal year. This

environment and activities thatcompany is planning to open 100

make a positive contribution to

stores in fiscal 2004 as it advances

society are how we put this phi-

locally both in name and substance.

losophy into action. Based on thisQuality is the focus in theoping stores infounded on co-existence. Businessphilosophy, LAWSON continues

Business Alliances

activities designed to support

LAWSON has been actively promot-

greenification through the Lawson

ing business alliances. October

Green Fund. The number of activi-

2003 saw the launch of a sharedties was increased in fiscal 2003.

shopping rewards program for

As a result, the Lawson GreenTSUTAYA card members of Cul-

Fund has collected

ture Convenience Club Co., Ltd.

¥1,547,362,695 since being

And we are steadily building astarted in 1992. Furthermore, withdeeper relationship with Japanthe aim of upgrading community

Post. In addition to opening Postal

services and promoting industry,

Lawson stores in some post

LAWSON has entered into a

7,967
The number of Lawson stores as ofFebruary 29, 2004
Note: Includes Shanghai Hualian
Lawson stores as of December 31,
2003 because this company has a
December 31 fiscal year-end.

TOMOMI OKADA
Customer Satisfaction
Promotion Office18

LAWSON, INC. AR 04

offices, we started selling stamps

regional joint business alliancecommemorating the victory of the

program with Wakayama Prefecture

Hanshin Tigers professional

and participated in the beautifica-

baseball team and started han-tion activities of the Kobe Citizendling “Furusato Kozutsumi” small

Movement. Through these andparcels at Lawson stores. Throughother activities we are making anthese sorts of alliances, we areeven greater contribution to society

aiming to encourage new custom-

as a responsible member of theers to use our stores and increase

regions in which we are active.

the visits of existing customers,

Another activity is participation inwhich should translate into higher

the Road Safety Station program at

profits for franchised stores.

the request of Regional Development

LAWSON’s vision of “the ‘hot’ station in the neighborhood”
will not be achievable without the efforts, day in and day out,of owners and other frontline members of
Lawson in all of Japan’s 47 prefectures. Most of the newmeasures taken at LAWSON originate from the frontline.
Realizing our vision, however, means consistently making sure
we do the basics right.

Experience
the Difference
LAWSON, INC. AR 04

19Bureaus of the Ministry of Land,profit structure by negotiating

Three Challenge Practices andInfrastructure and Transport. This

reduced IT-related expenditures

upgrading store leadership; (2)program involves Lawson storesand rent for existing stores. With

strengthening the product lineup;along state highways in the Chubu,

respect to the regional headquar-and (3) increasing customer

Chugoku and Shikoku regions

ters system, which was introduced

satisfaction by increasing conve-

informing authorities of any abnor-

in March 2003, in addition tonience. We plan to upgrade

mal road conditions. Beyond that it

linking bonuses to results against

training programs not just foralso encompasses cleaning walk-clear regional headquarter profit

employees but also for store

ways in front of stores and road-targets, we are now better able toowners and crew, whose actions

sides. LAWSON willingly agreed tocontrol costs as a result ofare also key to customer satisfac-

participate because the causedelegating considerable decision-tion on a day-to-day basis. By

matches the thrust of its “Every store can help”

making authority. This, in turn,raising the level of customer

has sparked a heightenedsatisfaction through the allocation

campaign launched in 1997.

awareness of costs. We are alsoof resources to education, we are

gradually seeing the results ofaiming to engineer a transforma-

Cost Reductions

developing products with a re-tion from a retail business that has

LAWSON has undertaken a sweep-

gional flavor.

stressed sales to one that places

ing review of raw materials andsatisfaction. We believe that thisto cut costs, an important theme
at LAWSON. Due to progress madeAmid continuing uncertainty in theat franchise stores and as a resultin cutting costs across the com-economic outlook and with no end

drive up LAWSON’s own earnings.

pany, we are forecasting costin sight for deflation, the Japanese

By promoting human resourcesavings of several billion yen inretailing industry is likely to

education that highlights people,

fiscal 2004. These savings will

experience increasingly intense

one of our key intangible assets,

offset increases in raw material

competition across industries andwe will create a robust organiza-

prices and be used for procuringbusiness models.

tion and establish a stronger

higher-quality raw materials and

20

greater emphasis on customer

Measures in Fiscal
2004

packing with suppliers in an effort

As we aim to realize “the ‘hot’

measure will yield higher earnings

LAWSON brand. Expect to see

increasing purchased products instation in the neighborhood”

some exciting changes at LAWSON

an effort to raise product quality.

vision amid these conditions, wein the years ahead.

With respect to Head Office costs,

will work to raise customer satis-

we have worked to improve ourfaction on three fronts: (1) the

LAWSON, INC. AR 04

Financial Section

Consolidated Five-Year Summary

22Management’s Discussion and Analysis

23

Consolidated Balance Sheets

32

Consolidated Statements of Income

34

Consolidated Statements of Shareholders’ Equity

35

Consolidated Statements of Cash Flows

36

Notes to Consolidated Financial Statements

37

Independent Auditors’ Report

49

LAWSON, INC. AR 04

21

Consolidated Five-Year Summary
LAWSON, INC. and Consolidated Subsidiaries
Years Ended February

Thousands of
U.S. Dollars(4)Millions of Yen
2004

2003

2002

2001

2000

2004

For the year:
Operating revenues
Franchise commission from
franchised stores . . . . . . . . . . . . . . . . . . .
Net sales from company-operated stores . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . .

¥ 153,910
67,47924,212¥ 149,032
80,954
20,348¥ 141,621
101,353
13,142¥ 135,237
132,921
12,060¥ 124,587
149,458
17,808$ 1,404,032
615,572
220,872

Total operating revenues . . . . . . . . . . .

245,601

250,334

256,116

280,218

291,853

2,240,476

Operating income . . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . .
Cash flows from operating activities . . . . . . . .
Cash flows from investing activities . . . . . . . .
Cash flows from financing activities . . . . . . . .
Capital expenditure . . . . . . . . . . . . . . . . . . .
Depreciation and amortization(1) . . . . . . . . . . .

38,087
18,57137,424(40,621)(14,364)
33,96818,49934,107
8,861
33,860(3,787)(7,247)37,712
16,07136,363
16,12344,804(44,031)(58,236)
35,571
16,32841,27916,36852,793(54,696)
18,70732,651
16,02140,18515,011
67,790121,758(92,521)30,70315,017

347,446
169,413341,398(370,563)(131,034)
309,870
168,756

At year-end:
Total assets . . . . . . . . . . . . . . . . . . . . . . . . .
Total shareholders’ equity . . . . . . . . . . . . . . .
Interest-bearing debt . . . . . . . . . . . . . . . . . .
Ratio of interest-bearing debt (%) . . . . . . . . .
Cash and cash equivalents . . . . . . . . . . . . . .
Total number of stores . . . . . . . . . . . . . . . . .
Number of employees (Full-time) . . . . . . . . . .

¥ 354,831
154,317––
76,3897,967
3,148¥ 342,599
151,864––
93,9947,721
3,462¥ 342,934
149,827
3,140
0.9
71,2697,824
3,817¥ 387,236
178,448
23,530
6.1
128,655
7,749
4,170

¥ 339,413
95,932
71,81721.1
111,753
7,432
4,234

$ 3,236,918
1,407,745––
696,853

Yen

Per share data:
Net income(2) . . . . . . . . . . . . . . . . . . . . . . . .
Cash dividends(2) . . . . . . . . . . . . . . . . . . . . .

¥

176
41

¥

82
41

¥

U.S. Dollars

146
41

¥

148
35

¥

143
17

$

1.61
0.37

Financial data:
ROE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ROA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

12.1%
5.3

5.9%
2.6

9.8%
4.4

11.9%
4.5

16.8%
4.0

Net sales of all stores:
Net sales by store category
Franchised stores(3) . . . . . . . . . . . . . . . .
Company-operated stores . . . . . . . . . . . .

¥1,220,819
67,479¥1,213,088
80,954¥1,184,204
101,353¥1,144,717
132,921¥1,073,422
149,458$11,136,827
615,572

Net sales by product category(3)Processed foods . . . . . . . . . . . . . . . . . .
Fast foods . . . . . . . . . . . . . . . . . . . . . . .
Daily delivered foods . . . . . . . . . . . . . . .
Non-food products . . . . . . . . . . . . . . . . .

625,031302,568
139,506
221,192

600,508
303,098
138,353
252,083

583,712
297,030
150,862
253,953

562,777
362,979
90,569261,313528,188
350,70289,248
254,7425,701,797
2,760,153
1,272,633
2,017,806

Net sales of all stores . . . . . . . . . . .

¥1,288,297¥1,294,042¥1,285,557¥1,277,638¥1,222,880$11,752,390

Notes: 1. Including depreciation and amortization of intangible fixed assets.
2. The data has been restated to reflect the 1 to 50 stock split on April 14, 2000.
3. These figures, as reported by franchised stores, are unauditied.
4. The U.S. dollar amounts represent translations of Japanese yen at the approximate exchange rate at February 29, 2004, of ¥109.62=$1.

22

LAWSON, INC. AR 04

Management’s Discussion and Analysis

Overview

CVS Share of the Total
Retail Market(Billions of Yen)(%)

150,000

100,000

5.5
5.3
4.8

5.0

4.5

50,000

0

99

00

01

02

03

Fiscal Year■ Total retail industry annual sales■ CVS industry annual sales
CVS share (%)

Convenience Store (CVS) Share of the Total Retail Market

Share of CVS Market Heldby Top Three Chains(Sales)(Billions of Yen)

62.4

62.7

63.6

64.2

6,000

4,000

(Billions of Yen)

2004

2003

2002

2001

2000

Total retail industry annual sales . .

¥128,871¥130,760¥136,087¥139,132¥141,450

CVS industry annual sales . . . . . .

7,133

6,980

6,846

6,680

6,383

CVS share . . . . . . . . . . . . . . . . .

5.5%

5.3%

5.0%

4.8%

4.5%

Based on data in the “Survey of Commerce” published by the Ministry of Economy, Trade and Industry.

Share of CVS Market Held by Top Three Chains (Sales)(Billions of Yen)

2004

2003

2002

2001

2000

LAWSON . . . . . . . . . . . . . . . . . .

*¥1,285¥1,294¥1,282¥1,275¥1,221Seven-Eleven . . . . . . . . . . . . . . .

2,343

2,213

2,114

2,047

1,964

(%)

8,000

62.2

Amid persistent deflationary trends, retailing industry realignment in Japan has accelerated in recent
years. This has been driven by intensifying competition transcending businesses and business models
in the past few years, and the entry of major foreign retailers to the Japanese market.
Even as the retailing industry as a whole contracts, the Japanese convenience store sector
continues to expand, albeit at a slower pace than in the past. Convenience stores continue toaccount for an increasing share of total retail sales in Japan, with signs of a recovery in year-on-year
decline in same-store sales and other factors. Major convenience store chains have been pushingahead with the closure of unprofitable stores such as those with low daily sales, while at the sametime actively relocating stores.
As the networks of large chains grow, the number of stores at other convenience store companies
is falling. As a result, the leading industry players are accounting for an increasing share of themarket. This trend is expected to continue in the future.
Competition is also expected to escalate in the convenience store industry due to competition
from other industries and business models such as supermarkets, which are extending theiroperating hours, retailers operating around the clock and the restaurant industry. Also fuelingcompetition is an increasing number of stores, the result of expansion of the industry’s largest
players into new areas and other factors.
In this climate, LAWSON will be required to have the flexibility to adroitly respond to the market
and make speedy decisions in response to changing undercurrents in society and customer needs.

FamilyMart . . . . . . . . . . . . . . . .

954

932

899

843

783

Sales of top three companies . .

4,582

4,439

4,295

4,165

3,968

Share of top three companies . .

64.2%

63.6%

62.7%

62.4%

62.2%

CVS industry . . . . . . . . . . . . . . .

7,133

6,980

6,846

6,680

6,383

*The discontinuation of sales of the high-priced Highway Card series reduced earnings by approximately ¥22.0 billion.

2,000

0

99

00

01

02

03

Fiscal Year
■ LAWSON■ Seven-Eleven■ FamilyMart■ CVS industry
Combined share of top three chains (%)

LAWSON, INC. AR 04

23

RISK FACTORS IN THE OPERATING ENVIRONMENT

Total Net Sales(Consolidated)(Billions of Yen)
1,300

1,200

1,100

1,000

900

0

99

00

01

02

03

Fiscal Year

Total Number of Stores(Consolidated)

STORE OPERATION ANALYSISNet Sales(Stores)

Net sales at all Lawson stores edged down 0.4% to ¥1,288,297 million in the fiscal year ended
February 29, 2004. This primarily reflected lower sales during the traditionally busy summer
months due to an extended spell of cool weather and the effect of discontinuing sales of the highpriced Highway Card series.
By product category, sales of processed foods and daily delivered foods increased, while sales offast foods and non-food products decreased.

8,000

6,000

Existing Store Sales

4,000

2,000

0

99

00

01

02

03

Fiscal Year
■ Franchised stores■ Company-operated stores

24

LAWSON believes the following are the five main risk factors in the convenience store industry.
(1) Trends in Japan: Due to Japan’s low birthrate and aging population, the number of people intheir twenties and thirties, the original target market for convenience store operators, isdwindling. This is creating a greater need for convenience stores to attract more middle-aged,
senior citizen and female customers. As the customer mix changes so too do the demands
placed on convenience stores. LAWSON’s inability to respond to customer needs, could result in
lower sales at Lawson stores adversely affecting earnings.
(2) Greater competition: The restaurant industry, drug stores and other types of businesses andbusiness models are fanning competition in the convenience store industry. As a result, it is
becoming more difficult to boost sales with a standard product lineup and by using the samestore operation standards uniformly in all convenience stores nationwide. The inability of LAWSON
to distinguish itself through products tailored to a particular region and on an “individual store”
basis, could result in lower sales at Lawson stores adversely affecting earnings.
(3) Sharp rises in raw material prices: A spike in the price of rice and rising costs of otheringredients due to BSE outbreaks and other problems has affected earnings in mainstay ricedishes, such as rice balls. Sudden rises in the price of ingredients could also adversely affect
LAWSON’s earnings in other product lines.
(4) Deregulation: With supermarkets extending operating hours, more businesses opening for 24hours, and other trends, customers are being handed an increasing number of shopping choices,
undermining one of the strengths of convenience stores, namely, their convenience. The inability
to provide products and services that only LAWSON could offer, could result in lower sales at
Lawson stores adversely affecting earnings.
(5) Weather conditions: LAWSON must source products and take other actions in its business basedon a sufficient understanding of the weather conditions specific to each region in the country.
Furthermore, changes in sales caused by changes in weather patterns, such as a cool summer ormild winter, could adversely affect earnings.

LAWSON, INC. AR 04

Existing store sales declined in the year under review, marking the sixth consecutive year of decline
from the fiscal year ended February 28, 1999. Although consumer spending tended toward recovery, an
extended period of deflation, intense price and value-based competition from the ready-made food andrestaurant industries, changes in the operating environment, such as extended operating hours and thestart of 24-hour operations by supermarkets and other retailers, and regional macroeconomic factors all
contributed to the sales decline. Through a refined infrastructure that concentrates the production ofmainstay rice dishes in a smaller number of vendors, namely mega vendors, LAWSON is attempting todrive sales growth by developing new bento-boxes, rice balls and other products in this category.

Average Number of Customers Sales by Product Category(Per Day) and Average Trans- Sales of processed foods increased 4.0% on growth in sales of LAWSON’s series of ¥100
action Value (Per Customer) confections and tobacco products. Sales of daily delivered foods edged up 0.8% on strong sales in(People)
1,000
614

620

611

609

598

750

the bakery category, particularly of the Totte Oki Sengen series of original breads. Fast foods sales
edged down 0.2% due to lackluster sales of delicatessen items and rice dishes. Nevertheless, total
food sales were up 2.4% year on year. Sales of non-food products dipped 12.3% due to thediscontinuation of the high-priced Highway Card series and weak sales of magazines and otherproducts, despite strong sales of hardcover books.

Breakdown of Net Sales by Product Segment
2004
500

2003

(Millions of Yen)
2002

2001

2000

Processed foods . . . . . . . . . . ¥ 625,031 ¥ 600,508 ¥ 583,712 ¥ 562,777 ¥ 528,188
Fast foods . . . . . . . . . . . . . .

302,568

303,098

297,030

362,979

350,702

Daily delivered foods......

139,506

138,353

150,862

90,56989,248........

1,067,105

1,041,959

1,031,604

1,016,325

968,138

Non-food products . . . . . . . .

221,192

252,083

253,953

261,313254,742250

Total food sales

0

Net sales at all stores . . . . ¥1,288,297 ¥1,294,042 ¥1,285,557 ¥1,277,638 ¥1,222,880
99

00

01

02

03

Fiscal Year
■ Customers
Transaction value per customer (Yen)

Ratio of Net Sales by Product Segment
2003

2002

2001

2000

Processed foods . . . . . . . . . .

48.5%

46.4%

45.4%

44.1%

43.2%

Fast foods . . . . . . . . . . . . . .

23.5

23.4

23.1

28.4

28.7

Daily delivered foods......

10.8

10.7

11.7

7.1

7.3

Total food sales

Existing Store Sales(Compared With Previous
Year)
(%)
100

99.6

(%)

2004

........

82.8

80.5

80.2

79.6

79.2

Non-food products . . . . . . . .

17.2

19.5

19.8

20.4

20.8

Net sales at all stores . . . .

100.0%

100.0%

100.0%

100.0%

100.0%*Effective from the fiscal year ended February 28, 2003, bakery items were reclassified from “fast foods” to “daily
delivered foods,” while some pickles and some delicatessen items were reclassified from “daily delivered foods” to “fastfoods.” Figures for the fiscal year ended February 28, 2002 were restated to conform to the fiscal year ended February
28, 2003 classifications to facilitate comparison.

Gross Profit Ratio by Product Segment
2003

2002

2001

2000

Fast foods . . . . . . . . . . . . . .

35.6%

35.7%

33.7%

34.3%

34.1%

Daily delivered foods

98.3 98.4
98.1
97.5

(%)

2004

......

32.5

32.5

35.0

34.9

34.6

Processed foods . . . . . . . . . .

26.9

27.3

27.3

27.2

27.7

Non-food products . . . . . . . .

33.4

29.9

30.5

29.6

28.8

*The gross profit ratio in the fiscal year ended February 28, 2003 was 30.5%, excluding the effect of the Highway Card series.
*The gross profit ratio in the fiscal year ended February 29, 2004 was 30.2%, excluding the effect of the Highway Card series.
*The gross profit for non-food products includes commissions.
*Tobacco is included in processed foods.

95

99

00

01

02

03

Fiscal YearLAWSON, INC. AR 04

25

Store Network
In the year under review and continuing on from the previous fiscal year, LAWSON engaged in the
pursuit of higher earnings at new stores, placing greater emphasis on returns on investment basedon store opening standards specific to each region. While working to open stores in a manner thatplaces priority on profitability, LAWSON actively closed or relocated low-volume and unprofitable
stores. As a result, there were 625 store openings in the past fiscal year and 429 store closings,
including store relocations. The net increase of 196 in the number of stores meant there were
7,821 Lawson stores in Japan at February 29, 2004.
While LAWSON achieved a net increase in the number of stores in this way, it believes it must
pay even closer attention to profitability when opening stores. Placing emphasis on the quality of
new stores results in an improvement in same-store sales figures in the following year and aconsequential improvement in returns on investment in the Lawson chain as a whole. In the fiscal
year ended February 29, 2004, the profitability of new stores declined slightly in regional areas dueto the effect of a cool summer and other factors.
In the People’s Republic of China, Shanghai Hualian Lawson Co., Ltd. increased its store networkin the Shanghai area by 50 to 146 stores. Including these stores, this gave LAWSON a total networkof 7,967 stores.

Number of Stores in LAWSON Network Years Ended February
2004

2003

2002

2001

2000

Number of stores . . . . . . . . . . . .

7,967

7,721

7,824

7,749

7,432

Openings . . . . . . . . . . . . . . . .

687

519

626

739

718

Closings . . . . . . . . . . . . . . . . .

441

622

551

422

352

246

(103)

75

317

366

Net increase (decrease).......

*Shanghai Hualian Lawson Co., Ltd. has a December 31 balance sheet date.

Third-Party Bill
Settlement Service

Number of Stores by Contract Type(Millions of Yen)
1,000,000
108.4
900,000
100
800,000

Lawson stores are operated under three different types of contract: FC-B, FC-G and FC-C.
Under FC-B-type contracts, the franchise owner provides the store property and operates thestore. The owner is not therefore required to pay LAWSON a guarantee deposit.
Under FC-G and FC-C contracts, LAWSON provides the store property to franchise owners without
property, who operate the store on a contract basis. Franchise owners with an FC-G contract must
pay a guarantee deposit, but franchise commissions are set lower than for FC-C contracts. Details ofeach type of contract are shown in the following table.

Outline of Store Contracts

91.9
82.4

Contract type

FC-G

FC-C

FC-B

700,000

Contract term
70.4

Contract store

600,000

500,000

0

99

00

01

02

10 years from store opening day
Stores already opened
or slated to open

Own property

Franchise fee¥1.5 million (Contract fee ¥0.5 million, training expenses ¥0.5 million,
store opening preparation commission ¥0.5 million)

Investment¥1.5 million (Incl. payment for some merchandise purchasedon behalf of the store)

03

Fiscal Year■ Transaction volume
No. of settlements(Millions of transactions)

26

LAWSON, INC. AR 04

Opening preparation
expenses¥0.5 million(Till cash and application for permission to open, etc.)

Guarantee deposit

Average monthly sales
x 2 months

Not required–

Franchisee income

Gross profit✕55%

Gross profit ✕50%

Gross profit ✕66%

Loppi (Multimedia Terminal)
Transaction Volume(Billions of Yen)
200

160

120

2003

2002

FC-B . . . . . . . . . . . . . . . . . . . . . . . . . .

1,992

2,200

2,412

FC-G . . . . . . . . . . . . . . . . . . . . . . . . . .

2,415

2,446

2,459

(31)

FC-C . . . . . . . . . . . . . . . . . . . . . . . . . .

3,065

2,645

2,308

420

Franchised stores . . . . . . . . . . . . . . . . . . .

7,472

7,291

7,179

181

Company-operated stores . . . . . . . . . . . . .

349

334

555

15

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . .

7,821

7,625

7,734

196

(208)

In the fiscal year ending February 28, 2005, LAWSON’s store openings will continue to be centeredon large metropolitan areas, namely Tokyo, Nagoya and Osaka. Store openings will focus on areas
with demand, with Tokyo being a particular focus. New store profitability and ROI, rather than daily
sales, will be the benchmark for the opening of high-quality stores.

40

99

00

01

02

03

Fiscal Year
■ Concert tickets■ Game software*■ Travel tickets■ Other sales■ Entertainment and other related sales■ Bill settlement■ Others*From fiscal 2002, sales of game software areinclued in entertainmenrt and other related sales.

Breakdown of Selling,
General and
Administrative Expenses(Millions of Yen)

Placement of ATMs in Stores
Since October 2001, LAWSON and subsidiary LAWSON ATM Networks, Inc. have been placing
ATMs in Lawson stores. LAWSON has ATM alliances with city banks, including all four of Japan’smajor banking groups, as well as large regional banks. In the fiscal year ended February 29, 2004,
LAWSON installed ATMs in 17 prefectures, adding Kyoto, Hiroshima, Yamaguchi and Fukuoka.
In the year ending February 28, 2005, LAWSON plans to strengthen alliances with regional banks
and take other actions so as to have around 3,500 ATMs installed in its stores by the end of the
fiscal year.
Since March 2004, holders of postal savings cards have been able to use all ATMs in Lawson
stores, increasing convenience for customers. As of February 29, 2004, a total of 3,127 ATMs wereoperating at Lawson stores.

New Format Stores

160,000

In February 2001, LAWSON launched a new format store called Natural Lawson. Aiming to movefrom an R&D phase to the full-scale opening of multiple stores, LAWSON in April 2004 separated
Natural Lawson from the company to expedite the opening of stores and raise profitability.
LAWSON is also developing what it calls Hospital Lawson, of which there were seven stores atFebruary 29, 2004. Eyeing new business opportunities created by Japan’s ageing society, LAWSON
intends to expand this new format in future years. And through alliances with other companies,
LAWSON is entering other new trading spheres and locations. In an alliance with Japan Post, forexample, LAWSON has opened Postal Lawson stores, and a tie-up with Tokyo Metro Co., Ltd. has
led to the opening of Metropia stores in subway concourses. Furthermore, LAWSON has opened
stores inside the premises of financial institutions and a deal with Nippon Oil Corporation has led tothe establishment of convenience stores at ENEOS self-service stations. LAWSON is determined tocontinue looking for new sites to establish stores as it pursues innovative store development andnew business opportunities.

120,000

80,00040,0000

YoY
Changes

2004

Store Opening Strategy

800Number of Stores by Contract Type Years Ended February

99

00

01

02

03

Fiscal Year
■ Personnel■ Advertising■ Leasing■ Facility leasing■ Depreciation*■ Other*Including depreciation and amortization of
intangible fixed assets.

LAWSON, INC. AR 04

27

INCOME AND EXPENSES

Operating Income

Operating revenues decreased ¥4,733 million, or 1.9%, to ¥245,601 million. There were increases
in franchise commissions due to higher sales at franchised stores and in ATM fees at subsidiary
LAWSON ATM Networks. However, this growth was outweighed by sales decreases resulting from adecline in the number of business days at company-operated stores.
Operating income increased ¥3,980 million, or 11.7%, to ¥38,087 million. This reflected a¥9,831 million decrease in the cost of sales for company-operated stores and LAWSON’s success inholding selling, general and administrative expenses to an increase of ¥1,118 million; this increase
was attributable to higher ATM operating expenses, store rents and other factors.
Income before income taxes and minority interests rose ¥15,320 million, or 87.0%, to ¥32,923
million. This reflected the absence of higher severance benefit payments recorded in the previous
fiscal year and a ¥5,884 million decrease in loss on disposal of property and store equipment due tothe steady progress that has been made since the start of Lawson Challenge 2004 in dealing with
unprofitable assets. Other main factors behind the net result were a ¥1,006 million decrease inequity in losses of associated companies related to LAWSON CS Card, INC. and a ¥11,340 million
decrease in other expenses—net. Net income increased ¥9,710 million, or 109.6%, to ¥18,571
million, and net income per share was ¥176.

(Millions of Yen)
50,00040,00030,00020,00010,000

0

99

00

01

02

03

Regional Headquarters

Fiscal Year
Hokkaido

Tohoku

Kanto

Chubu

Kinki

Chugoku &Shikoku

KyusyuTotal

Total sales(Millions of Yen) . . . .
Share (%).......

¥66,723 ¥101,167 ¥360,560 ¥171,924 ¥293,160 ¥139,468 ¥146,257 ¥1,279,259
5.2%

7.9%

28.2%

13.4%

22.9%

10.9%

11.4%

YoY (%) . . . . . . . . . .

97.8%

98.1%

99.7%

99.6%

97.9%

99.2%

98.7%

99.2%

No. of stores . . . . . . .

485

646

2,108

1,071

1,756

827

900

7,793*

6.2%

8.3%

27.1%

13.7%

22.5%

10.6%

11.5%

Existing store sales

Net Income

Share (%).......

*The 28-store difference from the 7,821 store total at February 29, 2004 represents company-operated stores.
(Millions of Yen)
20,000Subsidiaries

16,000The consolidated financial statements include four consolidated subsidiaries and one equity-method
affiliate. The LAWSON group of companies is primarily engaged in convenience store operations,ticket sales, e-commerce and financial services. The operating results of consolidated subsidiaries
were as follows.

12,000

ProfilesLawson Tickets Co., Ltd. (Consolidated subsidiary)

8,000

Sales of tickets to concerts, sporting events, movies and other events, mainly through Loppi
multimedia terminals at Lawson stores.

4,000

Shanghai Hualian Lawson Co., Ltd. (Consolidated subsidiary)

0

99

00

01

02

03

This consolidated subsidiary is developing a chain of Lawson stores in Shanghai, the People’s
Republic of China. In June 2004, LAWSON sold 21.0% of its 70.0% equity interest in Shanghai
Hualian Lawson Co., Ltd. to Hualian Group Corporation, leaving it with a stake of 49.0%.

Fiscal Year

i-Convenience, Inc. (Consolidated subsidiary)
Operation of the official “iLAWSON” i-mode Internet site, including merchandise sales and theprovision of services and information.

28

LAWSON, INC. AR 04

Interest-bearing Debt, Cashand Cash Equivalents andRatio of Interest-bearing Debt
(Millions of Yen)(%)

LAWSON ATM Networks, Inc. (Consolidated subsidiary)
Placement, management and operation of jointly operated ATMs in Lawson stores; outsourcing ofclerical tasks for partner banks involving financial services such as deposits, withdrawals and fundtransfers performed through these ATMs.

160,000

LAWSON CS Card, INC. (Equity-method affiliate)

21.1

Issues credit cards to Lawson customers and extends card-based services through Loppi terminals
and other channels.

120,000

Operating Results of Group Companies
80,000

6.1
40,000(Millions of Yen)

LawsonTickets
Co., Ltd.

Shanghai
HualianLawsonCo., Ltd.*LAWSON ATM
Networks, Inc.

i-Convenience,
Inc.

LAWSONCS
Card, INC.

Consolidated
subsidiary

Consolidated
subsidiary

Consolidated
subsidiary

Consolidated
subsidiary

Equitymethod
affiliate¥4,514¥2,292

¥

2001
0.9
0

99

00

01

0.0

0.0

02

03

Fiscal Year
■ Interest-bearing debt
■ Cash and cash equivalents
Ratio of interest-bearing debt

Operating revenues . . . . . . . . . . .

–

¥

0

¥

–

Operating income (loss) . . . . . . .

510

(149)

–

(58)

–

Net income (loss) . . . . . . . . . . . .

642

(168)

–

(70)

–

Operating revenues . . . . . . . . . . .

¥5,119¥3,033¥1,248¥ 103

Operating income (loss) . . . . . . .

508

(183)

(303)

(473)

(1)

Net income (loss) . . . . . . . . . . . .

275

(146)

(326)

(470)

(5)

Operating revenues . . . . . . . . . . .

¥5,425¥2,642¥6,718¥ 213

Operating income (loss) . . . . . . .

788

(191)

(529)

(383)

(3,935)

Net income (loss) . . . . . . . . . . . .

387

(190)

(529)

(489)

(3,936)

Operating revenues . . . . . . . . . . .

¥6,187¥2,024¥8,352¥ 333¥ 2,551

Operating income (loss) . . . . . . .

644

(81)

(348)

(241)

(2,255)

Net income (loss) . . . . . . . . . . . .

387

(71)

(350)

(663)

(2,256)

2002
¥

0

2003

Return on Equity
Return on Assets

¥

858

(%)

2004

20
16.8

15
12.1

11.9

*Shanghai Hualian Lawson Co., Ltd. has a December 31 balance sheet date.

9.8
10

4.5
5

4.4

5.9

5.3

4.0
2.6

0

99

00

01

02

03

Fiscal Year
Return on Equity
Return on Assets

LAWSON, INC. AR 04

29

SPECIAL FEATURES OF LAWSON’S FINANCIAL STATEMENTS

Total Assets(Millions of Yen)
400,000

300,000

200,000

100,000

0

99

00

01

02

03

Fiscal Year

Shareholders’ Equity andEquity Ratio(Millions of Yen)(%)

200,000
46.1
43.7

44.3

43.5

The following items are special features of LAWSON’s financial statements.
(1) Due From Franchised Stores: LAWSON purchases in bulk products ordered by all franchised
stores and calculates and pays amounts payable for such to the vendors on the stores’ behalf as
the stores’ representative. LAWSON records the cost of the merchandise in the “Accounts
receivable—Due from franchised stores” account since such costs are recovered from franchised
stores. Due from franchised stores represents mainly the obligations of franchised stores to Head
Office for these amounts at the balance sheet date. As of February 29, 2004, this asset accountwas ¥18,628 million, ¥11,589 million higher than a year ago, the result of an increase in unremitted sales and other amounts as the fiscal year-end fell on a Sunday.
(2) Accounts Receivable—Other: This account mainly represents accrued income due from Lawson
Tickets and credit card companies. As of February 29, 2004, this account was ¥18,028 million,¥2,064 million higher than a year ago because of an increase in the volume of transactions andother factors.
(3) Long-Term Loans Receivable: This account mainly represents money paid to landlords to help
with construction and investments and finance from Head Office to franchised stores. As of
February 29, 2004, this account was ¥13,109 million, an increase of ¥4,151 million due to anincrease in money paid to landlords to help with construction.
(4) Lease Deposits: This account represents leasehold deposits equivalent to several months’ rent
under lease agreements at LAWSON. As of February 29, 2004, this account was ¥90,496
million, an increase of ¥997 million due to a net increase of 196 in the number of stores inJapan.
(5) Due to Franchised Stores: This account represents Head Office obligations to franchised
stores. If franchised store remittances of cash proceeds from daily sales to the Company exceed
the balance of “Accounts receivable—Due from franchised stores,” the excess will be shown on
the balance sheet as “Accounts payable—Due to franchised stores.” As of February 29, 2004,
this amount was ¥1,402 million, down ¥3,397 million from a year ago.
(6) Money Held as Agent: This is money held on behalf of third-party companies for which LAWSON
provides bill settlement services. As of February 29, 2004, this account was ¥43,745 million,¥10,715 million higher than a year ago due mainly to the delayed payment of this money tothird-party companies because the fiscal year-end fell on a Sunday.
(7) Guarantee Deposits Received From Franchised Stores: This represents guarantee deposits
received by LAWSON from stores owners operating under FC-G-type contracts. As of February
29, 2004, this account was ¥52,574 million, ¥1,633 million less than a year ago due to a
decline in the number of FC-G-type contract stores.

150,000

FINANCIAL POSITION
28.3
100,000

50,000

0

99

00

01

02

03

Fiscal Year
■ Shareholders’ equity
Equity ratio (%)

30

LAWSON, INC. AR 04

Current assets increased ¥6,714 million, or 5.1%, to ¥137,662 million. There was a ¥6,751 million
decrease in cash and bank deposits due to the repurchase of treasury stock and other factors. On theother hand, there was a ¥11,589 million increase in “Due from franchised stores” due to the fiscal
year-end falling on a Sunday, and the recording of ¥6,250 million as short-term loans receivable.
Property and store equipment increased ¥5,699 million, or 7.3%, to ¥83,272 million, the resultof an ¥11,096 million increase in buildings, which was in line with the increase in the number ofstores. Furniture, fixtures and equipment increased ¥2,772 million, mainly representing purchases of
fixtures.
Investments and other assets decreased ¥181 million to ¥133,897 million. The main reason wasa decrease of ¥2,368 million in software.
Current liabilities increased ¥13,512 million, or 10.5%, to ¥142,598 million. This was due
mainly to a ¥3,397 million decrease in “Due to franchised stores” and a ¥10,715 million increasein money held as agent as the payment of the proceeds of bill settlement services on behalf of thirdparty companies was held over until the following month because the fiscal year-end fell on a Sunday.
Long-term liabilities decreased ¥4,395 million, or 7.4%, to ¥55,024 million. This was mainlydue to a ¥2,642 million decrease in liability for employees’ retirement benefits due to the voluntary
disaffiliation from the Daiei Employees’ Pension Fund and a ¥1,633 million decline in guarantee
deposits received from franchised stores due to a decrease in the number of stores operating underfranchise agreements requiring the payment of a guarantee deposit.
Shareholders’ equity increased ¥2,453 million, or 1.6%, to ¥154,317 million. The repurchase oftreasury stock lowered shareholders’ equity by ¥11,532 million while net income of ¥18,571
million bolstered retained earnings. As a result, the equity ratio decreased by 0.8 of a percentage
point to 43.5%.
In light of a forecast for stable growth and other factors, the company has decided to raise thetotal annual dividend from ¥41 to ¥70 per share. Based on its stance of returning profits toshareholders in a stable manner, the company is targeting a payout ratio of around 35%.
LAWSON will operate a flexible corporate finance policy moving forward, continuing to efficiently
use its strong balance of cash and reducing equity through dividends, retirement of treasury stock
and in other ways from the perspective of returning profits to shareholders.

CAPITAL EXPENDITURE
Capital expenditure in the fiscal year ended February 29, 2004 was ¥33,968 million, ¥3,744 million
less than in the previous fiscal year. In the year under review, LAWSON concentrated its energies on
opening stores in conformity with new standards emphasizing profitability. While this approach
resulted in the decrease in total capital expenditure, investment in new stores increased ¥2,789
million year on year to ¥14,296 million. The main components of capital expenditure are shown in
the following table.

Capital Expenditure

Cash Flows(Millions of Yen)
150,000(Millions of Yen)
2004

2003

2002

2001

2000

New store investments . . . . . . . .

¥14,296¥11,507¥15,807¥21,300¥21,380

Existing store investments . . . . . .

10,432

12,028

8,863

5,919

6,009

Systems-related investments . . . .

2,191

9,133

10,045

4,794

1,925

Investments and advances

.....

6,250

3,550

380

–

–

Other . . . . . . . . . . . . . . . . . . . .

799

1,494

476

638

1,389

Total . . . . . . . . . . . . . . . . . . . . .

¥33,968¥37,712¥35,571¥32,651¥30,703

100,000

CASH FLOWS
50,0000–50,000–100,000

99

00

01

02

Fiscal Year
■ Operating activities■ Investing activities■ Financing activities

03

Net cash provided by operating activities increased ¥3,564 million to ¥37,424 million. While there
was an increase of ¥10,968 million in increase in accounts receivable, income before income taxes
and minority interests increased ¥15,320 million.
Net cash used in investing activities increased ¥36,834 million to ¥40,621 million. There was a¥7,435 million decrease in payments for intangible fixed assets due to lower investments in store systems.
However, the net result of purchase of and proceeds from redemption of marketable securities was a¥28,692 million decrease in cash provided from the previous fiscal year. There was also a ¥8,297
million decrease in proceeds from sale of investment securities, and there were cash outflows of¥25,960 million for the purchase of property and store equipment and intangible fixed assets.
Free cash flows, the sum of operating and investing cash flows, decreased ¥4,578 million to¥602 million, excluding gains on securities.
Net cash used in financing activities increased ¥7,117 million to ¥14,364 million. Proceeds fromminority shareholders increased ¥1,241 million due to an increase in capital via private placement
at consolidated subsidiary Lawson Tickets. This was exceeded by an increase of ¥11,548 million in
cash used for the repurchase of treasury stock.
The net result of these cash flows was a ¥17,605 million decrease in cash and cash equivalents
to ¥76,389 million.
LAWSON, INC. AR 04

31

Consolidated Balance Sheets
LAWSON, INC. and Subsidiaries
February 29, 2004 and February 28, 2003

Thousands of
U.S. Dollars(Note 1)Millions of Yen

ASSETS

2004

2003

2004

¥ 76,389
49,244¥ 93,994
150
5,445$ 696,853
36
84,32818,62818,028
(132)
1,497
6,250
2,818
4,936

7,039
15,964
(93)
1,492
2,445
4,512

169,932
164,459(1,204)
13,65657,01525,70745,028

Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

137,662

130,948

1,255,810

PROPERTY AND STORE EQUIPMENT (Note 4):
Land (Note 6) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Buildings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Furniture, fixtures and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

4,938
99,81257,437

6,178
88,71654,66545,047910,526
523,965

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

162,187(78,915)

149,559(71,986)

1,479,538(719,896)

Net property and store equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

83,272

77,573759,642INVESTMENTS AND OTHER ASSETS:
Investment securities (Note 5) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investments in associated company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-term loans receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Lease deposits (Note 7) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred tax assets (Note 12) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred tax assets for land revaluation (Note 6) . . . . . . . . . . . . . . . . . . . . . . . . . . .
Software . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Allowance for doubtful accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1,064
651
13,10990,496
6,804
4,808
14,2164,500(1,751)

975
1,779
8,958
89,499
8,918
5,009
16,584
3,784(1,428)

9,706
5,939
119,586
825,543
62,06943,861
129,684
41,051(15,973)

CURRENT ASSETS:
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Time deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Marketable securities (Note 5) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts receivable:
Due from franchised stores (Notes 3 and 9) . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Allowance for doubtful accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Short-term loans receivable to associated company (Note 14) . . . . . . . . . . . . . . . . . .
Deferred tax assets (Note 12) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prepaid expenses and other current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Total investments and other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

133,897

134,078

1,221,466..........................................................

¥354,831¥342,599$3,236,918

TOTAL

See notes to consolidated financial statements.

32

LAWSON, INC. AR 04

Thousands of
U.S. Dollars(Note 1)Millions of Yen

LIABILITIES AND SHAREHOLDERS’ EQUITY

2004

2003

CURRENT LIABILITIES:
Accounts payable:
Trade for Company-operated and franchised stores (Note 8) . . . . . . . . . . . . . . . . . .
Due to franchised stores (Note 9) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other (Note 8) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income taxes payable (Note 12) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Money held as agent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued expenses and other current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

¥ 63,322
1,402
19,31810,00943,745
4,802¥ 63,860
4,799
15,348
7,615
33,0304,434

Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

142,598

129,086

1,300,839

LONG-TERM LIABILITIES:
Liability for employees’ retirement benefits (Note 10) . . . . . . . . . . . . . . . . . . . . . . . .
Liability for directors’ and corporate auditors’ retirement benefits . . . . . . . . . . . . . . .
Guarantee deposits received from franchised stores . . . . . . . . . . . . . . . . . . . . . . . . .
Lease deposits from lessees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1,144
218
52,574
799
289

3,786
223
54,207782
421

10,436
1,989
479,602
7,289
2,636

Total long-term liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

55,024

59,419501,952..............................................

2,892

2,230

26,382SHAREHOLDERS’ EQUITY (Notes 11 and 15):
Common stock—authorized, 412,300,000 shares in 2004
and 2003; issued, 107,600,000 shares in 2004 and 2003 . . . . . . . . . . . . . . . . . .
Capital surplus . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Land revaluation difference (Note 6) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net unrealized gain (loss) on available-for-sale securities . . . . . . . . . . . . . . . . . . . . .
Foreign currency translation adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Treasury stock—at cost, 3,283,384 shares in 2004 and 565 shares in 2003 . . . . . .

58,507
41,521
72,769(7,067)53
68(11,534)

58,507
41,52058,608(6,917)
(2)
150
(2)

533,726
378,772
663,830(64,468)483
620(105,218)

MINORITY INTERESTS

TOTAL

2004

$

577,650
12,790176,227
91,306
399,060
43,806

Total shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

154,317

151,864

1,407,745..........................................................

¥354,831¥342,599$3,236,918

LAWSON, INC. AR 04

33

Consolidated Statements of Income
LAWSON, INC. and Subsidiaries
Years Ended February 29, 2004 and February 28, 2003

Thousands of
U.S. Dollars(Note 1)Millions of Yen
2004

2003

2004

OPERATING REVENUES:Franchise commission from franchised stores . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net sales from Company-operated stores . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

¥153,910
67,47924,212¥149,032
80,954
20,348$1,404,032
615,572
220,872

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

245,601

250,334

2,240,476

COST AND OPERATING EXPENSES:
Cost of sales for Company-operated stores (Note 13) . . . . . . . . . . . . . . . . . . . . . . . .
Selling, general and administrative expenses (Notes 10 and 13) . . . . . . . . . . . . . . . .

50,058
157,456

59,889156,338

456,650
1,436,380

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

207,514216,227

1,893,030

Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

38,087

34,107

347,446

282
2

2,573
18
(34,729)(10,290)(4,680)OTHER INCOME (EXPENSES):Interest income—net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gain on sales of investments securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Premium severance benefit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loss on disposal of property and store equipment . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity in losses of associated companies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other—net (Note 10) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(3,807)(1,128)
(513)

200
5,778
(4,322)(9,691)(2,134)(6,335)

Other expenses—net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(5,164)(16,504)(47,108)

INCOME BEFORE INCOME TAXES AND MINORITY INTERESTS . . . . . . . . . . . . . . . . .

32,923

17,603

300,338

INCOME TAXES (Note 12):Current . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

12,992
1,725

7,852
1,339

118,519
15,736

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

14,717

9,191

134,255

MINORITY INTERESTS IN NET INCOME . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

365

449

3,330

NET INCOME . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

¥ 18,571

8,861$ 169,413¥

Yen

U.S. Dollars

2004

PER SHARE OF COMMON STOCK (Notes 2.n and 15):
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
See notes to consolidated financial statements.

34

LAWSON, INC. AR 04

¥

176
41

2003

¥

2004

82
41

$

1.61
0.37

Consolidated Statements of Shareholders’ Equity
LAWSON, INC. and Subsidiaries
Years Ended February 29, 2004 and February 28, 2003

Shares/Millions of Yen

Common Stock
SharesAmountCapitalSurplusRetained
Earnings

BALANCE, MARCH 1, 2002 . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . .
Annual cash dividends, ¥21 per share . . . . .
Interim cash dividends, ¥20 per share . . . . .
Reversal of land revaluation difference . . . . .
Net decrease in unrealized gain
on available-for-sale securities . . . . . . . . . .
Net decrease in foreign currency translation
adjustments . . . . . . . . . . . . . . . . . . . . . . .
Treasury stock—at cost—purchase of treasury stock . . . . . . . . . . . . .

107,600,000¥58,507¥41,520BALANCE, FEBRUARY 28, 2003 . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . .
Annual cash dividends, ¥21 per share . . . . .
Interim cash dividends, ¥20 per share . . . . .
Reversal of land revaluation difference . . . . .
Change of effective tax rate (Note 12) . . . . . .
Net increase in unrealized gain
on available-for-sale securities . . . . . . . . . .
Net decrease in foreign currency translation
adjustments . . . . . . . . . . . . . . . . . . . . . . .
Treasury stock—at cost:
Purchase of treasury stock . . . . . . . . . . . .
Exercise of stock options . . . . . . . . . . . . .

107,600,000

BALANCE, FEBRUARY 29, 2004 . . . . . . . . . .

107,600,000

Land
Revaluation
Difference¥55,649 ¥(8,407)
8,861(2,260)(2,152)(1,490)
1,490

Net Unrealized
Foreign
Gain (Loss) on
Currency
Available-for-sale Translation
Securities
Adjustments¥ 2,323

Treasury Stock
Shares¥236

Amount(171) ¥

(1)

(394)

(1)

(565)

(2)

(3,287,819)
5,000(11,549)
17(2,325)(86)

58,507

41,52058,60818,571(2,260)(2,120)(30)(6,917)

(2)

150

30
(180)
55
(82)

1
¥58,507¥41,521¥72,769¥(7,067)

¥

53

¥ 68

(3,283,384) ¥(11,534)

Thousands of U.S. Dollars (Note 1)

CommonStockCapitalSurplusRetained
Earnings

Land
Revaluation
Difference

BALANCE, FEBRUARY 28, 2003 . . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Annual cash dividends, $0.19 per share . . . . . . . . . . . . . . .
Interim cash dividends, $0.18 per share . . . . . . . . . . . . . . .
Reversal of land revaluation difference . . . . . . . . . . . . . . . .
Change of effective tax rate (Note 12) . . . . . . . . . . . . . . . . .
Net increase in unrealized gain
on available-for-sale securities . . . . . . . . . . . . . . . . . . . . .
Net decrease in foreign currency translation adjustments . . .
Treasury stock—at cost:
Purchase of treasury stock . . . . . . . . . . . . . . . . . . . . . . .
Exercise of stock options . . . . . . . . . . . . . . . . . . . . . . . .

$533,726 $378,763 $534,647 $(63,100)
169,413(20,616)(19,340)(274)
274(1,642)BALANCE, FEBRUARY 29, 2004 . . . . . . . . . . . . . . . . . . . . .

$533,726 $378,772 $663,830 $(64,468)

Net Unrealized
Foreign
Gain (Loss) on
Currency
Available-for-sale Translation
Securities
Adjustments$ (18)$1,368Treasury
Stock

$

(18)

501
(748)
(105,355)
155

9
$483

$ 620

$(105,218)

See notes to consolidated financial statements.

LAWSON, INC. AR 04

35

Consolidated Statements of Cash FlowsLAWSON, INC. and Subsidiaries
Years Ended February 29, 2004 and February 28, 2003

Thousands of
U.S. Dollars(Note 1)Millions of Yen
2004

2003

2004

¥ 32,923¥ 17,603$ 300,338(10,598)
18,499
362
2,603
(2)
1,128
217

(10,782)
16,071
508
7,842(5,778)
2,134
3,897

(96,679)
168,756
3,302
23,746(18)
10,2901,979(14,033)
(15)
(425)
77
10,715236(3,065)
596
753
(493)
5,164
373

(128,015)(137)(3,877)702
97,7472,153(2,647)(1,633)17703(1,599)(67)(24,147)(14,897)
155

Total adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

4,501

16,25741,060OPERATING ACTIVITIES:
Income before income taxes and minority interests . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjustments for:
Income taxes paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision for allowance for doubtful accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loss on disposal of property and store equipment . . . . . . . . . . . . . . . . . . . . . . . . .
Gain on sales of investments securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity in losses of associated companies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other—net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Changes in assets and liabilities:
Increase in accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(Increase) decrease in inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(Increase) decrease in prepaid expenses and other current assets . . . . . . . . . . . .
Increase (decrease) in accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Increase in money held as agent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Increase in accrued expenses and other liabilities . . . . . . . . . . . . . . . . . . . . . . .
(Decrease) increase in employees’, directors’
and corporate auditors’ retirement benefits . . . . . . . . . . . . . . . . . . . . . . . . . . .
Decrease in guarantee deposits received from franchised stores . . . . . . . . . . . . .
Increase (decrease) in lease deposits from lessees . . . . . . . . . . . . . . . . . . . . . . .

Net cash provided by operating activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

37,42433,860341,398

INVESTING ACTIVITIES:
Purchases of marketable securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from redemption of marketable securities . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from sale of investments securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchases of property and store equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Increase in lease deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Increase in short-term loans receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(28,270)
24,471
3(23,832)(1,002)(6,250)(5,741)(25,532)
50,4258,300(22,543)(1,382)(13,055)(257,891)
223,235
27(217,406)(9,141)(57,015)(52,372)

Net cash used in investing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(40,621)(3,787)(370,563)

FINANCING ACTIVITIES:
Repayment of long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash dividends paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
New shares issued to a subsidiary’s minority shareholders . . . . . . . . . . . . . . . . . . . . .
Purchase of treasury stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(4,380)
1,547(11,549)
18

Net cash used in financing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(14,364)(3,140)(4,412)306(1)(7,247)(39,956)
14,112(105,355)
165(131,034)

FOREIGN CURRENCY TRANSLATION ADJUSTMENTS
ON CASH AND CASH EQUIVALENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(44)

(101)

(401)

NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS . . . . . . . . . . . . . . .

(17,605)

22,725(160,600)

CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR......................

93,994

71,269857,453

CASH AND CASH EQUIVALENTS, END OF YEAR . . . . . . . . . . . . . . . . . . . . . . . . . . . .

¥ 76,389¥ 93,994$ 696,853

See notes to consolidated financial statements.

36

LAWSON, INC. AR 04

Notes to Consolidated Financial Statements
LAWSON, INC. and Subsidiaries
Years Ended February 29, 2004 and February 28, 2003

1. Basis of Presenting Consolidated Financial Statements
The accompanying consolidated financial statements have been prepared in accordance with theprovisions set forth in the Japanese Securities and Exchange Law and its related accounting regulations, and in conformity with accounting principles and practices generally accepted in Japan,
which are different from International Financial Reporting Standards in certain respects as to application and disclosure requirements. The consolidated financial statements are not intended topresent the financial position, results of operations and cash flows in accordance with accounting
principles and practices generally accepted in countries and jurisdictions other than Japan.
In preparing these consolidated financial statements, certain reclassifications and rearrangements
have been made to the consolidated financial statements issued domestically in order to present
them in a form which is more familiar to readers outside Japan.
Certain reclassifications have been made in the 2003 financial statements to conform to the2004 presentation.
The consolidated financial statements are stated in Japanese yen, the currency of the country inwhich LAWSON, INC. (the “Company”) is incorporated and operates. The translations of Japanese yenamounts into U.S. dollar amounts are included solely for the convenience of readers outside Japanand have been made at the rate of ¥109.62 to $1, the approximate rate of exchange at February
29, 2004. Such translations should not be construed as representations that the Japanese yenamounts could be converted into U.S. dollars at that or any other rate.
Mitsubishi Corporation (“Mitsubishi”) indirectly owned 32,399 thousand shares of common stockof the Company as of February 29, 2004 which represented 31.1% of the total voting rights of theCompany. Accordingly, Mitsubishi is a principal shareholder.

2. Summary of Significant Accounting Policies
a. Consolidation—The consolidated financial statements include the accounts of the Company andits subsidiaries (together the “Companies”).
Under the control or influence concept, those entities in which the Company, directly or
indirectly, is able to exercise control over operations are fully consolidated, and those entities overwhich the Companies have the ability to exercise significant influence are accounted for by theequity method.
The excess of the cost of the Company’s investments in consolidated subsidiaries and associatedcompanies over the fair value of the net assets at the dates of acquisition is being amortized over a
period of 5 years.
All significant intercompany balances and transactions have been eliminated in consolidation.
All material unrealized profit included in assets resulting from transactions within the Companies
is eliminated.
b. Franchise Agreement and Basis of Recognizing Franchise Commission—The Company operates
principally in a single industry commonly classified as the convenience store business with its own
stores and franchised stores. The Company allows each independent franchisee to operate relatively
small-sized convenience stores using specific designs and the Lawson brand names, and provides
related managerial or technical know-how under a franchise agreement. Under the agreement, allfranchised stores are provided with a variety of services and advice on the operation of convenience
stores from the Company as the franchisor. In return, such franchised stores are required to pay
continuing franchise commissions to the Company based on certain percentages of the respective
franchised store’s annual gross margin. As the franchisor, the Company accounts for franchise commissions on an accrual basis by reference to the annual gross margin earned by each franchised
store and the applicable commission percentage. According to the franchise agreement, a franchised
store may pay additional guarantee deposits twice the average monthly sales amounts of respective
stores and pay a lower commission percentage.

LAWSON, INC. AR 04

37

The term of a franchise agreement is effective for 10 years from the commencement date of a
new store’s operation as a franchised store, and may be extended or renewed upon expiration
subject to renegotiation of contract terms between the Company and the franchisee.
The franchise agreement usually provides that the franchised store shall make a cash payment to
the Company in the amount of ¥3 million upon commencement. Upon receipt of such payment,¥1.5 million is credited to income of the Company as “Operating revenues—franchise commission
from franchised stores” for services related to the opening of the Lawson store. The remaining
amount received by the Company is credited to “Due to franchised stores” account and thenapplied to working capital for purchases of merchandise and supplies for the franchised store.
As part of the contractual obligations of the franchisor under the agreement, the Company
generally provides franchisees with furniture, fixtures and equipment designed for the Lawson stores.
In some cases, franchisees may also be provided with the land or buildings of the stores.
However, the Company does not require the franchisees to make lease payments related to thestores. Instead, a higher percentage applicable to the gross margin would be used as the basis fordetermining the franchise commissions. The portion of franchise commission attributable toproperty and store equipment leases is not separately accounted for by the Company.

c. Cash and Cash Equivalents—Cash and cash equivalents include cash on hand, demand deposits
and short-term investments, which mature or become due within three months of the date ofacquisition and which are readily convertible into cash and are exposed to insignificant risk ofchanges in value.
d. Inventories—Inventories are stated at cost determined by the retail method as generally appliedin the retail industry.
e. Marketable and Investment Securities—Marketable and investment securities are classified andaccounted for, depending on management’s intent, as follows: (1) held-to-maturity debt securities,
which are expected to be held to maturity with the positive intent and ability to hold to maturity, arereported at amortized cost and (2) available-for-sale securities, which are not classified as the aforementioned securities, are stated at fair value based on market quotation. Unrealized gains andlosses with net of applicable taxes are reported in a separate component of shareholders’ equity.
The cost of securities sold is determined based on the moving-average method.
Non-marketable available-for-sale securities are stated at cost determined by the moving-averagemethod. For other than temporary declines in fair value, non-marketable available-for-sale securities
are reduced to net realizable value by a charge to income.
f. Property and Store Equipment—Property and store equipment are stated at cost except for land(see Note 6). Depreciation is computed by the declining-balance method at rates based on the estimated useful lives of the assets. The range of useful lives is principally from 10 to 34 years forbuildings and structures and from 5 to 8 years for furniture, fixtures and equipment.
g. Software—Software used by the Companies is amortized using the straight-line method based on
the estimated useful life (mainly 5 years).
h. Employees’ Retirement Benefits—The Companies accounted for the liability for retirement
benefits based on the projected benefit obligations and plan assets at the balance sheet date.
The Company participated in a Japanese government welfare pension fund program (the Daiei
Employees’ Pension Fund) and also has a lump-sum severance indemnitied plan, both of which aredefined benefit plans. The Company voluntarily disaffiliated from the Daiei Employees’ Pension
Fund as of March 31, 2003 and started a defined contribution plan system from May 2003. For alump-sum severance indemnitied plan, the Company set up a trust fund.

38

LAWSON, INC. AR 04

i. Liability for Directors’ and Corporate Auditors’ Retirement Benefits—The provisions are calculated
to state the liability at 100% of the amount that would be required if all directors and corporate
auditors resigned as of each balance sheet date.
j. Leases— All leases are accounted for as operating leases. Under Japanese accounting standards
for leases, finance leases that deem to transfer ownership of the leased property to the lessee are to
be capitalized, while other finance leases are permitted to be accounted for as operating leasetransactions if certain “as if capitalized” information is disclosed in the notes to the consolidated
financial statements.
k. Income Taxes—The Companies provide for income taxes applicable to all items included in the
consolidated statements of income regardless of when such taxes are payable. Deferred income
taxes are recorded to reflect the impact of temporary differences between assets and liabilities
recognized for financial reporting purposes and such amounts recognized for tax purposes. Thesedeferred taxes are measured by applying currently enacted tax laws to the temporary differences.
l. Appropriations of Retained Earnings—Appropriations of retained earnings at each year-end arereflected in the financial statements for the following year upon shareholders’ approval.
m. Foreign Currency Financial Statements—The balance sheet accounts of the consolidated foreignsubsidiary are translated into Japanese yen at the current exchange rate as of the balance sheet
date except for shareholders’ equity, which is translated at the historical rate. Differences arisingfrom such translation are shown as “Foreign currency translation adjustments” in a separate component of shareholders’ equity. Revenue and expense accounts of the consolidated foreign subsidiary
are translated into yen at the current exchange rate.
n. Per Share Information—Basic net income per share is computed by dividing net income available tocommon shareholders by the weighted-average number of common shares outstanding for the period.
The number of shares used in computing net income per share was 105,651 thousand shares for2004 and 107,600 thousand shares for 2003.
Diluted net income per share for the years ended February 29, 2004 and February 28, 2003 is
not disclosed because the Company did not have stock options which would have resulted in adilutive effect.
Cash dividends per share presented in the accompanying consolidated statements of income are
dividends applicable to the respective years including dividends to be paid after the end of the year.

3. Accounts Receivable—Due From Franchised Stores
Under the franchise agreement, the Company is responsible for providing architectural and designing
services with respect to the franchised stores’ facilities, for training of the franchisees’ personnel,
and for the centralized processing of invoices from suggested vendors of merchandise and subsequent payments of amounts payable to such vendors.
The EDP system of the Company generates a record of merchandise purchased by each franchised store and accumulates the amounts payable to respective vendors. Under the franchise
agreement, the Company, as a representative for all franchised stores, pays amounts payable to thevendors on the stores’ behalf. When the merchandise is received by each franchised store, the Company records the cost of the merchandise in the “Accounts receivable—Due from franchised stores”
account since such costs shall be subsequently recovered from respective franchised stores.
The “Accounts receivable—Due from franchised stores” account represents net amounts recoverable from the franchised stores.

LAWSON, INC. AR 04

39

4. Property and Store Equipment
Property and store equipment as of February 29, 2004 and February 28, 2003, consisted of the following:Thousands of
U.S. Dollars

Millions of Yen
2004

Used by franchised stores:
Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Buildings . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Furniture, fixtures and equipment . . . . . . . . . . . .

¥

2003

2004

1,092
89,946
48,340¥938
79,35844,531$

9,962
820,525
440,978

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated depreciation . . . . . . . . . . . . . . . . .

139,378
67,366

124,827
60,061

1,271,465
614,541

Net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

72,01264,766

656,924

Used by Company-operated stores and other:
Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Buildings . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Furniture, fixtures and equipment . . . . . . . . . . . .

3,846
9,866
9,097

5,240
9,358
10,13435,08590,001
82,987

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated depreciation . . . . . . . . . . . . . . . . .

22,80911,54924,732
11,925208,073
105,355

Net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

11,26012,807102,718

Net property and store equipment—total . . . . . . . .

¥ 83,272¥ 77,573$ 759,642

5. Marketable and Investment Securities
Marketable and investment securities as of February 29, 2004 and February 28, 2003, which
represent carrying amounts, consisted of the following:Thousands of
U.S. Dollars

Millions of Yen

Current—Government and corporate bonds . . . . . . .
Non-current—Marketable and other
equity securities . . . . . . . . . . . . . . . . . . . . . . . . .

2004

2003

2004

¥9,244¥5,445$84,328

1,064

975

9,706

The costs and aggregate fair values of marketable and investment securities at February 29,
2004 and February 28, 2003, were as follows:

Millions of Yen
February 29, 2004

Securities classified as:
Held-to-maturity . . . . . . . . . . . . . . . . . . . . . .
Available-for-sale—equity securities . . . . . . . .

Cost

Unrealized
Gains

Unrealized
LossesFair
Value¥9,244
935

¥91

¥1
2

¥9,243
1,024

5,445
936

1
1

2
3

5,444
934

February 28, 2003

Securities classified as:
Held-to-maturity . . . . . . . . . . . . . . . . . . . . . .
Available-for-sale—equity securities . . . . . . . .

40

LAWSON, INC. AR 04

Thousands of U.S. Dollars

February 29, 2004

Securities classified as:
Held-to-maturity . . . . . . . . . . . . . . . . . . . . . .
Available-for-sale—equity securities . . . . . . . .

Cost

Unrealized
Gains

Unrealized
LossesFair
Value$84,328
8,529

$830

$ 9
18

$84,319
9,341

Available-for-sale securities and held-to-maturity securities whose fair value is not readily determinable as of February 29, 2004 and February 28, 2003, were as follows:
Carrying AmountMillions of Yen

Available-for-sale—equity securities . . . . . . . . . . . . . . . .

2004

2003

¥40

¥41

Thousands of
U.S. Dollars
2004

$365

Proceeds from sales of available-for-sale securities for the years ended February 29, 2004 andFebruary 28, 2003 were ¥3 million ($27 thousand) and ¥8,300 million, respectively. Gross realized
gains and losses on these sales, computed on the moving average cost basis, were ¥2 million($18 thousand) and ¥0 million ($0 thousand), respectively, for the year ended February 29, 2004,and ¥5,764 million and ¥51 million, respectively, for the year ended February 28, 2003.

6. Land Revaluation
Under the “Law of Land Revaluation,” promulgated on March 31, 1998 and revised on March 31,
1999 and 2001, the Company chose a one-time revaluation of its own-use land to a value based onreal estate appraisal information as of February 28, 2002.
The resulting land revaluation difference represents unrealized depreciation of land and is stated,
net of income taxes, as a component of shareholders’ equity. There was no effect on the consolidated statements of income. Continuous readjustment is not permitted unless the land value subsequently declines significantly.
As at February 29, 2004, the carrying amount of the land after the above one-time revaluation
exceeded the market value by ¥1,005 million ($9,168 thousand).

7. Lease Deposits
Under certain circumstances, the Company leases land and/or buildings, as a lessee, for its offices
and Company-operated stores or for franchisees to operate as franchised stores. The leases are
based on long-term, cancelable lease agreements with owners. In connection with such agreements,
the lessor requires leasehold deposits equivalent to approximately several months’ rent, which are
non-interest bearing and refundable only when the leases are terminated.
Lease deposits as of February 29, 2004 and February 28, 2003, consisted of the following:

Millions of Yen

Thousands of
U.S. Dollars

2004

2003

2004

Lease deposits for franchised stores . . . . . . . . . . . .
Lease deposits for Company-operated
stores and other . . . . . . . . . . . . . . . . . . . . . . . . .

¥74,436¥74,525$679,037

16,06014,974

146,506

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

¥90,496¥89,499$825,543

LAWSON, INC. AR 04

41

8. Accounts Payable—Trade for Company-Operated and Franchised Stores and Other
The balances of “Accounts payable—Trade for Company-operated and franchised stores” represent
the amounts payable to vendors for merchandise purchased by Company-operated stores andfranchised stores. The Company centralizes all merchandise purchasing procedures both for
Company-operated stores and franchised stores and makes collective payments to vendors(see Note 3).
Accounts payable—trade for Company-operated and franchised stores and other as of February
29, 2004 and February 28, 2003, were summarized below:

Millions of Yen

Thousands of
U.S. Dollars

2004

2003

2004

Accounts payable—trade for franchised stores . . . .
Accounts payable—trade forCompany-operated stores and other . . . . . . . . . . .

¥60,041¥60,269$547,719

22,59918,939206,158

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

¥82,640¥79,208$753,877

9. Accounts Payable—Due to Franchised Stores
The cost of merchandise supplied to the franchised stores is recorded as “Accounts receivable—
Due from franchised stores” as described in Note 3.
All franchised stores make remittances of cash proceeds from daily sales to the Company.
In certain instances, the remittance from a franchised store exceeds the balance of “Accounts
receivable—Due from franchised stores.” In the accompanying consolidated balance sheets, suchexcess balances are presented as “Accounts payable—Due to franchised stores.”10. Employees’ Retirement Benefits
Prior to March 31, 2003, most of the employees of the Companies were covered by two defined
benefit plans, a Japanese government welfare pension fund program (the Daiei Employees’ PensionFund) and also a lump-sum severance indemnitied plan, both of which are defined benefit plans.
The Company voluntarily disaffiliated from the Daiei Employees’ Pension Fund as of March 31,
2003 and started a defined contribution plan system from May 2003. For a lump-sum severance
indemnitied plan, the Company established a trust fund.
Under most circumstances, employees terminating their employment are entitled to retirement
benefits determined based on the rate of pay at the time of termination, years of service and certain
other factors. Such retirement benefits are made in the form of a lump-sum severance payment
from the Company or from certain subsidiaries and on annuity payment from a trustee. Employees
are entitled to larger payments if the termination is involuntary, by retirement at the mandatory
retirement age, by death, or by voluntary retirement at certain specific ages prior to the mandatory
retirement age.
The funded status of these plans as of February 29, 2004 and February 28, 2003, were as follows:

Millions of Yen

42

LAWSON, INC. AR 04

Thousands of
U.S. Dollars

2004

2003

2004

Projected benefit obligation . . . . . . . . . . . . . . . . . .
Fair value of plan assets . . . . . . . . . . . . . . . . . . . .
Unrecognized prior service cost . . . . . . . . . . . . . . .
Unrecognized actuarial loss . . . . . . . . . . . . . . . . . .

¥ 7,247(5,523)$ 66,110(50,383)(580)¥ 23,535(14,111)955(6,593)Net liability . . . . . . . . . . . . . . . . . . . . . . . . . .

¥ 1,144¥ 3,786$ 10,436(5,291)

The components of net periodic benefit costs for the years ended February 29, 2004 and February 28, 2003, were as follows:

Millions of Yen

Thousands of
U.S. Dollars

2004

2003

Service cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest cost . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected return on plan assets . . . . . . . . . . . . . . .
Amortization of prior service cost . . . . . . . . . . . . . .
Recognized actuarial loss . . . . . . . . . . . . . . . . . . .
Premium severance benefit . . . . . . . . . . . . . . . . . .
Contribution to defined contribution plan . . . . . . . .

¥ 870
126

¥2,521
502
(214)
(106)
555
4,322

$ 7,937
1,149

Net periodic benefit costs . . . . . . . . . . . . . .

¥1,272¥7,580$11,604

71
205

2004

648
1,870

Assumptions used for the years ended February 29, 2004 and February 28, 2003, were set forth
as follows:

Discount rate:
The unfunded retirement benefits plan . . . . . . . . . . . . . . . . . .
The group employees’ pension plan . . . . . . . . . . . . . . . . . . . .
Expected rate of return on plan assets . . . . . . . . . . . . . . . . . . . .
Amortization period of prior service cost . . . . . . . . . . . . . . . . . . .
Recognition period of actuarial gain/loss . . . . . . . . . . . . . . . . . . .

2004

2003

2.0%

2.0%
2.5
4.5
10 years
100
10 years
10

When the Company disaffiliated from the Daiei Employees’ Pension Fund, the Company recorded inother income ¥812 million ($7,407 thousand) by reversing allowance for employees’ retirement benefits,
which was determined after reflecting recognition of all remaining actuarial loss and prior service cost
attributable to this benefit plan, and a special contribution to the Fund for the purpose of disaffiliation.

11. Shareholders’ Equity
Japanese companies are subject to the Japanese Commercial Code (the “Code”) to which various
amendments became effective from October 1, 2001.
The Code was revised whereby common stock par value was eliminated resulting in all shares
being recorded with no par value and at least 50% of the issue price of new shares is required to berecorded as common stock and the remaining net proceeds as additional paid-in capital. The Codepermits Japanese companies, upon approval of the Board of Directors, to issue shares to existing
shareholders without consideration as a stock split. Such issuance of shares generally does not giverise to changes within the shareholders’ accounts.
The revised Code also provides that an amount at least equal to 10% of the aggregate amount ofcash dividends and certain other appropriations of retained earnings associated with cash outlays
applicable to each period shall be appropriated as a legal reserve (a component of retained earnings)
until such reserve and additional paid-in capital equals 25% of common stock. The amount of total
additional paid-in capital and legal reserve that exceeds 25% of the common stock may be available
for dividends by resolution of the shareholders. In addition, the Code permits the transfer of a
portion of additional paid-in capital and legal reserve to the common stock by resolution of theBoard of Directors.

LAWSON, INC. AR 04

43

The revised Code eliminated restrictions on the repurchase and use of treasury stock allowing
Japanese companies to repurchase treasury stock by a resolution of the shareholders at the generalshareholders meeting and dispose of such treasury stock by resolution of the Board of Directors. The
repurchased amount of treasury stock cannot exceed the amount available for future dividends plus
the amount of common stock, additional paid-in capital or legal reserve to be reduced in the casewhere such reduction was resolved at the general shareholders’ meeting.
The amount of retained earnings available for dividends under the Code was ¥57,037 million($520,316 thousand) as of February 29, 2004, based on the amount recorded in the parent
company’s general books of account. In addition to the provision that requires an appropriation for alegal reserve in connection with the cash payment, the Code imposes certain limitations on theamount of retained earnings available for dividends.
Dividends are approved by the shareholders at a meeting held subsequent to the fiscal year towhich the dividends are applicable. Semiannual interim dividends may also be paid upon resolutionof the Board of Directors, subject to certain limitations imposed by the Code.

Stock Option
The Company has stock option plans. The stock option plans which were approved at the generalshareholders’ meetings provide options for purchases of the Company’s common stock for the
directors, executive officers and key employees of the Company.
The date of grant, the outstanding number of shares granted by the options, exercise price andexercisable period were as follows:
Number of Options Granted(Thousands of Shares)

Date of Grant

May 26, 2000
May 29, 2002

May 27, 2003

Exercise Price

The Company’s directors 1,116
and key employees
The Company’s directors,
273
executive officers andkey employees
The Company’s directors
92
and executive officers
Total¥7,500$68.42

3,680

33.57

3,517

32.08

Exercisable Period

From May 27, 2002
to May 25, 2007
From December 1, 2002
to May 31, 2007
From July 3, 2005
to July 2, 2008

1,481

None of the options were exercisable at February 29, 2004 and February 28, 2003.

44

LAWSON, INC. AR 04

12. Income Taxes
The Company and its domestic subsidiaries are subject to a number of different taxes based on
income, which in the aggregate, resulted in a normal effective statutory tax rate of approximately
42.0% for both 2004 and 2003.
The tax effects of significant temporary differences and tax loss carryforwards which resulted indeferred tax assets and liabilities at February 29, 2004 and February 28, 2003, are as follows:
Thousands of
U.S. Dollars

Millions of Yen
2004

Deferred tax assets:
Marketable securities . . . . . . . . . . . . . . . . . . . .
Accrued enterprise tax . . . . . . . . . . . . . . . . . . . .
Accrued employees’ bonuses . . . . . . . . . . . . . . .
Excess of depreciation . . . . . . . . . . . . . . . . . . . .
Excess of amortization of software . . . . . . . . . . .
Employees’ retirement benefits . . . . . . . . . . . . . .
Tax loss carryforward . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less valuation allowance . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred tax liabilities:
Gain on securities contributed to employees’
retirement benefit trusts . . . . . . . . . . . . . . . . . .
Unrealized gain on available-for-sale securities . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

¥

2003

2004

543
936
1,005
1,868
1,059
2,210
1,516
2,049
(1,528)

¥

446
734
928
1,420
1,039
5,752
1,211
1,819
(1,224)$ 4,9538,539
9,168
17,041
9,661
20,161
13,82918,691(13,939)

9,658

12,125

88,104

749
36

328
13

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

36

762

328

Net deferred tax assets . . . . . . . . . . . . . . . . . . . . .

¥ 9,622¥11,363$ 87,776

A reconciliation between the normal effective statutory tax rates and the actual effective tax rates
reflected in the accompanying consolidated statements of income for the years ended February 29,
2004 and February 28, 2003, is as follows:
2004

2003

Normal effective statutory tax rate . . . . . . . . . . . . . . . . . . . . . . . . .
Increase (decrease) in tax rate resulting from:
Permanently nondeductible expenses . . . . . . . . . . . . . . . . . . . . .
Inhabitants’ taxes—per capita . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating losses of certain subsidiaries . . . . . . . . . . . . . . . . . . . .
Equity in losses of associated companies . . . . . . . . . . . . . . . . . . .
Gain on increase in a subsidiary’s net equity resulting fromits allocation of new shares . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Reduction on deferred tax assets based on the change inenterprise tax rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other—net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

42.0%

42.0%

0.6
0.7
1.4
1.4

1.5
1.3
3.1
4.7

0.8
(1.5)

(0.4)

Actual effective tax rates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

44.7%

52.2%

(0.7)

LAWSON, INC. AR 04

45

On March 31, 2003, a tax reform law concerning enterprise tax was enacted in Japan whichchanged the normal effective statutory tax rate from 42% to 40.5%, effective for years beginningon or after April 1, 2004. The effect of this change was a decrease in deferred tax assets (net ofdeferred tax liabilities) by ¥247 million ($2,253 thousand) and a corresponding increase in theprovision for income taxes of ¥248 million ($2,262 thousand), and a decrease in deferred tax assets
for land revaluation and a corresponding decrease in land revaluation difference of ¥180 million($1,642 thousand) in the consolidated financial statements for the year ended February 29, 2004.
The deferred tax assets and liabilities which are realizable on or after March 1, 2005 are measured
at the effective tax rate of 40.5% at February 29, 2004.
As of February 29, 2004, certain subsidiaries have tax loss carryforwards aggregating approximately¥3,382 million ($30,852 thousand) which are available to be offset against taxable income of such
subsidiaries in future years. These tax loss carryforwards, if not utilized, will expire as follows:

Millions of Yen

Thousands of
U.S. Dollars

2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2009 and thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

¥ 181
234
928
1,203
836

$ 1,651
2,135
8,466
10,974
7,626

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

¥3,382$30,852

Year Ending February 28 or 29

13. Leases
The Companies lease certain store facilities, machinery, computer equipment, office space andother assets.
Total lease payments under finance leases for the years ended February 29, 2004 and February
28, 2003, were ¥15,133 million ($138,050 thousand) and ¥13,675 million, respectively.
Pro forma information of leased property such as acquisition cost, accumulated depreciation,
obligations under finance leases, depreciation expense and interest expense for finance leases that
do not transfer ownership of the leased property to the lessee on an “as if capitalized” basis for theyears ended February 29, 2004 and February 28, 2003 was as follows:

Millions of Yen

46

LAWSON, INC. AR 04

Thousands of
U.S. Dollars

2004

2003

2004

Leased to franchised stores:
Furniture, fixtures and equipment:
Acquisition cost . . . . . . . . . . . . . . . . . . . . . . .
Accumulated depreciation . . . . . . . . . . . . . . .

¥63,748
25,654¥63,30321,443$581,536
234,026

Net leased property . . . . . . . . . . . . . . . . . . .

¥38,094¥41,860$347,510

Obligations under finance leases:
Due within one year . . . . . . . . . . . . . . . . . . . .
Due after one year . . . . . . . . . . . . . . . . . . . . .

¥10,825
28,036¥10,401
32,045$ 98,750
255,756

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

¥38,861¥42,446$354,506

Millions of Yen

Thousands of
U.S. Dollars

2004

2003

2004

Used by Company-operated stores and other:
Furniture, fixtures and equipment:
Acquisition cost . . . . . . . . . . . . . . . . . . . . . . .
Accumulated depreciation . . . . . . . . . . . . . . .

¥14,468
5,056¥14,4213,225$131,983
46,123Net leased property . . . . . . . . . . . . . . . . . . .

¥ 9,412¥11,196$ 85,860

Obligation under finance leases:
Due within one year . . . . . . . . . . . . . . . . . . . .
Due after one year . . . . . . . . . . . . . . . . . . . . .

¥ 2,838
6,670¥ 2,698
8,570$ 25,889
60,847

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

¥ 9,508¥11,268$ 86,736

The imputed interest expense portion which is computed using the interest method is excluded
from the above obligations under finance leases.
Depreciation expense, which is not reflected in the accompanying consolidated statements ofincome, computed by the straight-line method was ¥14,186 million ($129,411 thousand) and¥12,775 million for the years ended February 29, 2004 and February 28, 2003, respectively.
Interest expense, which is not reflected in the accompanying consolidated statements of income,computed by the interest method was ¥1,160 million ($10,582 thousand) and ¥1,149 million forthe years ended February 29, 2004 and February 28, 2003, respectively.
The minimum rental commitments under noncancelable operating leases at February 29, 2004
were as follows:

Millions of Yen

Due within one year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Due after one year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Thousands of
U.S. Dollars

2004

2004

736
5,814

$ 6,71453,038¥6,550$59,752¥

LAWSON, INC. AR 04

47

14. Related Party Transactions
Transactions with and balances to LAWSON CS Card, INC. (an associated company) for the year
ended February 29, 2004 were as follows:

Millions of Yen

Short-term loans receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest received . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Thousands of
U.S. Dollars

2004

2004

¥6,25034
6$57,015310
55

15. Subsequent Eventsa. The following appropriation of retained earnings as of February 29, 2004 was approved at thegeneral shareholders’ meeting held on May 28, 2004:

Cash dividends, ¥21 ($0.19) per share . . . . . . . . . . . . . . . . . . . .

Millions of Yen

Thousands of
U.S. Dollars¥2,191$19,987b. At the general shareholders’ meeting held on May 28, 2004, the Company’s shareholders approved
the stock option plan for the Company’s directors and executive officers. The plan provides for
granting options to directors and executive officers to purchase up to 120 thousand shares of theCompany’s common stock in the period from May 28, 2006 to December 31, 2009.

48

LAWSON, INC. AR 04

Independent Auditors’ Report

To the Board of Directors of LAWSON, INC.:
We have audited the accompanying consolidated balance sheets of LAWSON, INC. and subsidiaries
as of February 29, 2004 and February 28, 2003, and the related consolidated statements of income,shareholders’ equity, and cash flows for the years then ended, all expressed in Japanese yen. These
consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards, procedures and practices generally
accepted and applied in Japan. Those standards require that we plan and perform the audit toobtain reasonable assurance about whether the financial statements are free of material misstatement.
An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting principles used andsignificant estimates made by management, as well as evaluating the overall 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 LAWSON, INC. and subsidiaries as of February 29,
2004 and February 28, 2003, and the consolidated results of their operations and their cash flows
for the years then ended in conformity with accounting principles and practices generally acceptedin Japan.
Our audits also comprehended the translation of Japanese yen amounts into U.S. dollar amounts
and, in our opinion, such translation has been made in conformity with the basis stated in Note 1.
Such U.S. dollar amounts are presented solely for the convenience of readers outside Japan.

May 28, 2004

LAWSON, INC. AR 04

49

Directors, Corporate Auditors and Executive Officers

PRESIDENT AND CEO

Takeshi Niinami

MEMBER OF THE BOARD
AND SENIOR EXECUTIVE
VICE PRESIDENT

Eiichi Tanabe

Chief Financial Officer (CFO); in charge of Corporate Planning Office

Katsuhiko Yamasaki

Chief Risk Officer (CRO); General Manager, Line Support Division,

MEMBER OF THE BOARD
AND EXECUTIVE VICE PRESIDENTin charge of Corporate Ethics, in charge of Human Resources

MEMBERS OF THE BOARD

Teruo Aoki

President, LAWSON CS Card, INC.

Hiroshi Tasaka

Professor, Graduate School of Tama University

Reiko Okutani

President, The R Co, Ltd.

Muneaki Masuda

President and CEO, Culture Convenience Club Co., Ltd.

Koji Furukawa

Senior Executive Vice President, Mitsubishi Corporation

Hiroshi Mino

Executive Vice President; General Manager, Consumer Business Division; Lawson
Business Unit; Mitsubishi Corporation

STANDING CORPORATE AUDITORS

Masaaki Kojima
Kenji Yamakawa

CORPORATE AUDITORS

Yoshiyuki Sanada

General Manager, Group Controller, New Business Initiative Group,
Mitsubishi Corporation

EXECUTIVE VICE PRESIDENTS

Tetsuo Ozawa

LawyerSusumu Hasegawa

Chief Information Officer (CIO), General Manager, Information Systems Office, incharge of Overseas Projects Office

SENIOR VICE PRESIDENTS

Taketoshi Kunisaki

General Manager, Line Support Division

Shigeru Kiyota

General Manager, Hokkaido & Tohoku Lawson Branches

Ichiro Okuda

General Manager, Chugoku & Shikoku Lawson Branches

Isamu Ochiai

General Manager, Shanghai Hualian Lawson Co., Ltd.

Yoshio Shinozaki

General Manager, Kinki Lawson Branch

Kiyoteru Suzuki

Postal Lawson Project Team

Sadayuki Nobayashi

General Manager, Kyusyu Lawson Branch

Takatoshi Kawamura

Next-Generation Format Project Team

Manabu Asano

General Manager, Chubu Lawson Branch

Jyosuke Kishimoto

President, LAWSON ATM Networks, Inc.

Shigeaki Kawahara

General Manager, Marketing Division

Tadanao Watanabe

General Manager, Kanto Lawson Branch

Katsuyuki Imada

General Manager, Corporate Planning OfficeKenji Morimoto

General Manager, Finance & Accounting Office, in Charge of Management Services
OfficeHiromichi Ogawa

General Manager, Merchandizing & Logistics Division

Itsuo Iga

General Manager, Quality Control Division

Konoshin Deguchi

Head, Store Development Support, Line Support Division

Satoshi Matsubara

Deputy Head, Merchandizing & Logistics Division

Yukimasa Shimohata

Deputy General Manager, Merchandizing & Logistics Division

Tappei Shimizu

Assistant to CIO and Executive Assistant to CEO(As of May 28, 2004)

50

LAWSON, INC. AR 04

Consolidated Financial Highlights

Corporate Data

LAWSON, INC. and Subsidiaries
Years Ended February 29, 2004 and February 28, 2003 and 2002

For the Year:Net sales of all stores
Total operating revenues
Operating income
Income before income taxes and minority interests
Net income

Millions of Yen

Percent
ChangeThousands of
U.S. Dollars(1)

2004

2003

2002

2004/2003

2004¥1,288,297
245,601
38,08732,923
18,571¥1,294,042
250,334
34,107
17,6038,861¥1,285,557
256,116
36,36329,02816,123(0.4)%
(1.9)
11.7
87.0
109.6

$11,752,390
2,240,476
347,446
300,338
169,413

COMPANY NAMEESTABLISHEDLAWSON, INC.

April 15, 1975

ADDRESSCAPITAL

Tokyo Headquarters:¥58,506,644,000

East Tower, Gate City Osaki
11-2, Osaki 1-chome, Shinagawa-ku, Tokyo 141-8643, JapanAUTHORIZED SHARES
412,300,000

Per Share Data (Yen and dollars):
Net income
Cash dividends
At Year-End:Total assets
Total shareholders’ equity

Osaka Headquarters:

¥

176
41

¥

82
41

¥

146
41

114.6%–¥ 354,831
154,317¥ 342,599
151,864¥ 342,934
149,827

3.6%
1.6

7,821
7,472
349
75.4
3,127

7,625
7,291
334
62.1
2,712

7,734
7,179
555
55.8
1,922

2.6%
2.5
4.5
13.3
15.3

Store Network:
Number of stores(2)Franchised storesCompany-owned stores
Ratio of liquor-licensed stores (%)
Stores with ATMs

$

1.61
0.37

$ 3,236,918
1,407,745

Notes: 1. The U.S. dollar amounts represent translations of Japanese yen at the approximate exchange rate at February 29, 2004, of ¥109.62=$1.
2. The number of stores does not include stores of Shanghai Hualian Lawson Co., Ltd.

9-1, Toyotsu-cho, Suita-shi, Osaka 564-0051, JapanSHARES ISSUED
107,600,000

EMPLOYEESSHAREHOLDERS

3,148 (Consolidated)

48,156

BUSINESS ACTIVITIESMAJOR SHAREHOLDERS

Franchise chain development of

Shareholder

Lawson convenience stores
1. M.C. Retail Investment Co., Ltd.
NET SALES OF ALL STORES¥1,288.2 billion (Consolidated) (Fiscal 2003)

Shareholdings(Shares)

Shareholdings(%)

32,089,300

30.8

8,618,100

9.4

5,939,500

5.7

2. Japan Trustee Services Bank, Ltd.
(Trust account)
3. Marubeni Foods Investment Co., Ltd.
4. The Master Trust Bank of Japan, Ltd.

NUMBER OF STORES
7,821 (Consolidated, as of February 29, 2004)

Contents
OPERATING REGION(Trust account)
5. NOMURA SECURITIES CO., LTD.

5,326,200

5.1

3,607,900

3.5

6. Nintendo Co., Ltd.

3,447,000

3.3

7. BNP Paribas Securities (Japan) Limited

1,570,800

1.5

1,509,500

1.4

8. Mitsui Asset Trust and Banking Company,

To Shareholders, Other Investors,
Customers, Franchise Owners,
Store Crew and Employees

2

Corporate Governance
Expectations of Niinami’s Reforms

8
9

Lawson Challenge 2004: Making All the Difference
A Progress Report on Lawson Challenge 2004
Taste the Difference
See the Difference
Experience the Difference11

Note: The 3,283,384 shares of treasury stock held by Lawson are notincluded in the above table.

13
17
19

STOCK EXCHANGE LISITNGS

Financial Section

21

Osaka Securities Exchange (1st Section)

Directors, Corporate Auditors and Executive Officers

50

Corporate Data

51

All 47 Japanese prefectures; Shanghai,
PRC (joint venture)

Limited (Trust Account)
9. The Chase Manhattan Bank, NA London
Secs Lending Omnibus Account

1,256,800

1.2

10. Mellon Bank Treaty Clients Omnibus

1,252,757

1.2Tokyo Stock Exchange (1st Section)

STOCK TRANSFER AGENT
The Mitsubishi Trust and Banking Corporation
1-4-5, Marunouchi, Chiyoda-ku, Tokyo, Japan(As of February 29, 2004)

Forward-looking Statements
This annual report contains forward-looking statements about the future plans, strategies, beliefs and performance of LAWSON and its subsidiaries. These forwardlooking statements are not historical facts. They are expectations, estimates, forecasts and projections based on information currently available to the company and are
subject to a number of risks, uncertainties and assumptions, which, without limitation, include economic trends, competition in the Japanese convenience store
industry, personal consumption, market demand, the tax system and other legislation. As such, actual results may differ materially from those projected.

LAWSON, INC. AR 04

51

LAWSON, INC.

LAWSON, INC.

ANNUAL REPORT 2004

Tokyo Headquarters:
East Tower, Gate City Osaki
11-2, Osaki 1-chome, Shinagawa-ku,
Tokyo 141-8643, Japan
URL http://www.lawson.co.jp/

The
Difference
Is Here

ANNUAL REPORT 2004

This annual report is printed on recycled paper.

Printed in Japan

Year ended February 29, 2004