Annual Report 2006

The Challenge Begins

EXPAND,
ENHANCE,
BUILD
Annual Report 2006
Year ended February 28, 2006

Corporate Planning Office,East Tower, Gate City Osaki
11-2, Osaki 1-chome, Shinagawa-ku,
Tokyo 141-8643, Japan
http://www.lawson.co.jp/
Published in July 2006.
©1997–2006 LAWSON, INC. All rights Reserved.

B-(2)-060001

This annual report was produced using “Kanbatsu
White,” which contains 70% Japan-made pulp,
including 10% clear-cut lumber.

Printed in Japan

Consolidated Financial Highlights

Corporate Data

LAWSON, INC. and Subsidiaries
Years Ended February 28, 2006, 2005 and February 29, 2004

Millions of Yen

Percent
ChangeThousands of
U.S. Dollars(2)

2006

2005

2004(1)

2006/20052006

For the Year:Net sales of all stores¥1,361,731
Total operating revenues
268,058
Operating income
43,867
Income before income taxes and minority interests
38,723
Net income
22,025¥1,329,077
254,395
42,941
36,04020,435¥1,288,297
245,601
38,08732,923
18,571

2.5%
5.4%
2.2%
7.4%
7.8%

$11,711,800
2,305,479
377,286
333,044
189,430

¥

¥

8.6%
28.6%

$

Per Share Data (yen and dollars):
Net income
Cash dividends

¥

216
90

198
70

176
41

1.85
0.77

ENGLISH 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,

AUTHORIZED SHARESTokyo 141-8643, Japan

409,300,000

Osaka Headquarters:

SHARES ISSUED

9-1, Toyotsu-cho, Suita-shi,

104,600,000

Osaka 564-0051, JapanAt Year-end:
Total assets
Total shareholders’ equity

SHAREHOLDERS¥ 375,107
175,184¥ 356,310
160,282¥ 354,831
154,317

5.3%
9.3%$ 3,226,172
1,506,700

NUMBER OF EMPLOYEES

45,036

3,585 (Consolidated) (As of February 28, 2006)

MAJOR SHAREHOLDERS

Financial Data
Return on equity (ROE)
Payout ratio (Non-consolidated)

13.1%
40.5%

13.0%
35.0%

12.1%
22.8%

BUSINESS ACTIVITIES

0.1
5.5

store franchise chain
Store Network:
Number of stores in Japan
Franchised storesCompany-owned stores

8,366
7,958
408

8,077
7,731
346

7,821
7,472
349

3.6%
2.9%
17.9%

NET SALES OF ALL STORES¥1,361.7 billion (Consolidated) (Fiscal 2005)

Notes: 1. Figures for 2004 include data for SHANGHAI HUALIAN LAWSON CO., LTD.
2. The U.S. dollar amounts represent translations of Japanese yen at the approximate exchange rate at February 28, 2006, of ¥116.27=$1.

NUMBER OF STORES
8,366 (Consolidated) (As of February 28, 2006)

Operating income andOperating income ratio

Net income and ROE

Cash dividends per shareand payout ratio(Non-consolidated)(Millions of Yen)

(Millions of Yen)

(Yen)

50,00025,000OPERATING AREA
All 47 prefectures in Japan; Shanghai, PRC

100(Joint Venture)
40.5
40,00020,000
3.2

80
13.0

3.2

35.0

13.1

12.1

3.0
30,00015,00060

20,00010,00040

Number of
SharesHeld

Development of LAWSON convenience

22.8

Percentage ofTotal Shares
Held

1. Mitsubishi Corporation
32,089,300
2. Japan Trustee Services Bank, Ltd.
(Trust Account)
6,601,200
3. Marubeni Foods Investment Co., Ltd.
5,939,500
4. The Master Trust Bank of Japan, Ltd.
(Trust Account)
4,688,400
5. State Street Bank andTrust Company 505103
2,428,701
6. The Chase Manhattan Bank,
N.A. London
1,782,003
7. Mitsui Asset Trust and Banking Company,
Limited (Account 1)
1,241,000
8. Mitsubishi UFJ Trust and Banking
Corporation (Trust Account)
1,183,300
9. Mellon Bank, N.A., as Agentfor its Client Mellon Omnibus
US Pension
1,160,168
10. BBH Boston Pftc Putnam Intl
Growth Fund
1,072,400

30.7
6.3
5.7
4.5
2.3
1.7
1.2
1.1

1.1
1.0

Note: Excluding 2,313,932 shares that LAWSON, INC owns as of endof February 2006
10,0005,000

20

STOCK EXCHANGE LISTINGSTokyo Stock Exchange (1st Section)0

2004 2005 2006

Operating income
Operating income ratio (%)

02004 2005 2006

Net income
ROE (%)

02004 2005 2006

Cash dividends per share
Payout ratio (%) (Non-consolidated)*Operating income ratio=Operating
income/Net Sales of all stores

Osaka Securities Exchange (1st Section)

STOCK TRANSFER AGENT
Mitsubishi UFJ Trust and Banking Corporation
4-5, Marunouchi, 1-chome, Chiyoda-ku, Tokyo 100-8212, Japan

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 andare 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.

(As of February 28, 2006)

LAWSON, INC.

ANNUAL REPORT 2006

61

Contents

A Message to
LAWSON Stakeholders

EXPANDINGOPERATIONSENHANCING
EARNINGSQUALITY

02

08

10

BUILDING
A RESILIENT
COMPANY

12

14
Corporate Social Responsibility 18
Financial Section
19
Directors, Corporate Auditors
60
and Executive Officers
Corporate Data
61
Corporate Governance

LAWSON, INC. ANNUAL REPORT 2006

01

A Message to LAWSON Stakeholders

Recently, there is a belief that sales at existing stores arelimited due to growing saturation of the convenience store(CVS) sector. This belief is based on a declining birthrate
and aging society in Japan, a decline in the purchasing
power of men in their twenties and thirties, who have supported the CVS sector up to now, and increasing competition
from new openings of conventional convenience stores.
However, I firmly believe that the CVS sector can continue toexpand. I believe that LAWSON can grow by promoting thedevelopment of stores and displays matched to the individual characteristics of each location. And there is room toincrease the number of women, senior and other customers
who haven’t traditionally been our main customers.
We have invested aggressively in the development of two
new formats—NATURAL LAWSON and LAWSON STORE100—
to that end. This has put us a step ahead of our competitors
and gives us a powerful means of expanding our customer
base. While our upfront investments will slow earnings growthduring fiscal 2006, the year ending February 28, 2007, I
believe that these investments will begin making a contribution to earnings in fiscal 2007 and beyond. As outlined in
LAWSON Challenge 2007, our medium-term business plan,we expect an increase in the number of customers stemming from expansion of the customer base to lead to growthin franchise owners’ profits. In turn, this will lead to corporate earnings growth as this winning formula delivers results.
Our targets under LAWSON Challenge 2007 are average
growth in EPS of 10% over the 3 years of the plan, and ROEof 15% at the end of fiscal 2007. As we aim for these goals,
we intend to actively return profits to our shareholders.

TAKESHI NIINAMI
President and Chief Executive Officer

02

LAWSON, INC.

ANNUAL REPORT 2006

Review of fiscal 2005, the first year of
LAWSON Challenge 2007

benchmark unfortunately was only 98.4% of the level of the

In fiscal 2005, we further promoted the enhancement ofber that has scarcely been seen in recent years directly led

quality (Q), service (S), and cleanliness (C) as important

to a decline in the number of customers in the second half.

management measures, by remaining committed to our

However, this is a short-term factor. There are crucial chal-Three Challenge Practices—ensuring merchandise assort-

lenges that I believe we must fundamentally solve that could

ments tailored to individual locations, courteous service andhave a longer term impact on our performance. These arecleanliness. In particular, franchise owners and LAWSON

the declining birthrate and the aging society, as well as astore supervisors worked together to analyse information

decline per store in the number of men aged in their twenties

regarding the commercial areas surrounding individual

and thirties, who are the core customer target of the conven-stores. In this way, we thoroughly promoted Q matched totional CVS. In other words, it is increasingly vital that we

customers living in the vicinity of individual stores. At

expand our customer base by capturing new customers. I

LAWSON, we are evaluating the Q, S and C of stores bybelieve that sustained growth as a CVS operator hinges onusing a “Mystery Shopper” program. According to this QSC

the implementation of initiatives ahead of competitors toevaluation, there has been a striking improvement in service

create new customer bases.

and cleanliness. However, an improvement in quality has*Existing store markups=expected profit (sales minus cost) per existing store

previous period in fiscal 2005. A severe winter from Novem-

been slower than we expected, as highlighted by a decline inexisting store sales reflecting a decrease in the number ofIn fiscal 2005, although our earnings growth slowed from

customers in the second half. Based on this, I believe there

the second half, we achieved our full-year profit target thanks

is an urgent need to adopt measures to minimize opportu-

to a strong first-half result. Nevertheless, we did not achievenity losses in sales.

a satisfactory result in terms of increasing our customer

We regard existing store markups* as an important
indicator for managing the company. Equivalent to assumed

base, which is our greatest aim. A discussion of our operating results can be found on page 21 of this report.

sales minus cost per existing store, this management

Overview of LAWSON Challenge 2007➔➔

EPS growth rate
target: 10% averageover 3 years

Sustainable growth

M&As

➔

➔

FY2006 dividends:¥100 per share(+¥10 YoY)

Growth through net increase in stores over three formats(CVS, other sectors)

LAWSONSTORE100LAWSONROE target:
15% in FY2007

Dividend payout ratio
target: 40%

Growth in existing store markups

NATURALLAWSON

Alliances(NTT DoCoMo, others)

Earnings from subsidiaries and affiliates
LAWSON TICKET

i-Convenience

LAWSON ATM Networks

LAWSON CS Card

SHANGHAI HUALIANLAWSON

BestPractice

Retire treasury stock

LAWSON, INC. ANNUAL REPORT 2006

03

Action plans in fiscal 2006, the second
year of LAWSON Challenge 2007

a process whereby we formulate, execute, and then verify

With continued competition to open new stores from conven-*Store charts are created by franchise owners under the direction of
LAWSON store supervisors. An important tool for making management
decisions, they include analysis of marketing and management on an
individual store basis.

tional CVS operators and competition in the overall retailindustry that transcends business formats, conditions are

assumptions regarding merchandise for each store.

likely to remain tough. However, we see business opportuni-

earnings among CVS operators who previously benefited

Improving merchandise assortments bystrengthening product proposals

from the growth in the overall CVS sector have become

In creating merchandise assortments matched to eachdistinctly apparent due to differences in management

location, I believe that it is essential to improve the productcapabilities and strategies. By implementing the following

categories that haven’t been able to cater to the needs offour action plans in fiscal 2006, we aim to increase thewomen and seniors in the conventional CVS format. These

number of customers, our most important theme. I believecategories include locally targeted products, health-oriented

this will lead to dramatic growth in fiscal 2007 and beyond.

products, and perishable foods. That’s why we have madeties for LAWSON. We are now in an age when disparities insubstantial upfront investments in developing NATURAL

Improving merchandise assortment by
utilizing “store charts”

LAWSON and LAWSON STORE100 to take the lead over our

In fiscal 2005, we developed what we call “store charts”

a more dominant position than other CVS operators with(analysis of individual store information*) for all stores asregard to strengthening product lines aimed at women andthe basis for improving merchandise assortments. In fiscal

seniors. In fiscal 2006, we will promote further advances in2006, by maximizing the use of these charts, we aim to

the NATURAL LAWSON and LAWSON STORE100 formats. At

realize merchandise assortments catering to potential

the same time, we will introduce at our regular LAWSON

customers living in the areas where stores are located. We

stores the expertise we have acquired in product development

aim to enhance ordering precision by thoroughly carrying out

for these formats as well as products such as health-orientedcompetitors. I feel that through this action we have established

A Key Role in Expanding the Customer Base: Applying Know-how
From New Formats to Regular LAWSON Stores➔➔

Value Line products

Convenient accessto perishable-foodproduct lines

Small packs tomaintain quality

Value-added products

Merchandise
assortments
matched tocustomers basedon store charts

Targeted at female
customers

Expand customer base in 3 store formats

04

LAWSON, INC.

ANNUAL REPORT 2006

Health-oriented
products

foods in the NATURAL LAWSON brand and the private brandservices as those of the conventional CVS. In the highly

Value Line of LAWSON STORE100. This will be done as needed

competitive CVS sector, to survive and be a winner we must

based on analysis of store charts. In this way, we aim totake up the challenge of creating new markets by expanding

maximize the effectiveness of our merchandise assortment.

our customer base. Having positioned women and seniors
as new customer bases, I believe we must substantially

Increase in customers through acquisition of
LAWSON PASS memberschange the merchandise assortments to cater to a wider

LAWSON PASS is also a major strength of LAWSON for

itself in accordance with the location and customer needs.

winning customers. As of February 28, 2006, LAWSON PASS

customer profile. We may even have to alter the store format

The NATURAL LAWSON format was launched in July 2001.

had at least 2.1 million members. In fiscal 2006, toIn fiscal 2005, we made preparations to open these storesstrengthen the acquisition of LAWSON PASS members at all

on a full-fledged basis. Product development unique to thestores, we will provide attractive points programs and

NATURAL LAWSON format has progressed steadily. We haveprivileges to members in the hope of creating loyal existing

strengthened our freshly baked bread lineup and improved

customers. Furthermore, we will actively develop our sales

our range of rice dishes and salads that make abundant use

strategy by encouraging the utilization of LAWSON PASS byof healthy ingredients. We also actively forged alliances

new target customers, such as women who have a strong

covering distinctive products such as freshly brewed coffee

interest in point cards.

and fresh vegetables.
The first perishable-food LAWSON STORE100 store

Expand the customer base by utilizing thethree formats

opened in May 2005. We drew on experience in opening

As our original core target shrinks because of the declining

this initiative. For example, in locations where it was difficult

birthrate and the aging society in Japan, we will be unable toto open a conventional CVS and where there were manysurvive if we limit our activities to the same products andcompetitors nearby, we recognized that there was a greater

stores in diverse locations to make an early success out ofStrengthening 3 Formats in Urban Areas and Regular LAWSON Stores in Regional Areas

Regional areas >>➔OTHER CVSOPERATORS➔➔➔LAWSON’s Approach

Urban areas >>Current core customers
and sales area
Males (20s–30s)

Women/seniors(Customer segments)

Expand customer base using 3 formats

LAWSON, INC. ANNUAL REPORT 200605

chance to open a LAWSON STORE100 format store. In

possible to provide merchandise that suits the customers ofaddition, we succeeded in rapidly launching the Value Lineparticular areas at regular LAWSON stores by introducing theprivate brand by making use of the economies of scale andproduct know-how accumulated from our two new formats.

supply chain of the LAWSON Group. The number of stockThrough the effective development of the three formats, I

keeping units (SKU: the minimum unit handled by POS sys-believe we will be able to expand our customer base bytems) for this line amounted to around 140 at the end of fiscal

increasing the number of women and senior customers.

2005, and we are aiming for 400 SKU during fiscal 2006.

operators have aggressively opened conventional conve-

Alliances Based on a Medium- to
Long-term Viewpoint

nience stores in major urban areas. As a result, they have

LAWSON concluded a capital and business alliance with NTT

little room to move in terms of opening stores and are now

DoCoMo, Inc. in March 2006. NTT DoCoMo holds 2% ofturning to openings in regional areas where they have no

LAWSON common stock. We expect this business alliance topresence. In contrast, LAWSON has already developed aproduce the following benefits:nationwide chain ahead of other companies, meaning there

1) Simplification of the payment process and greater cus-

As shown in the diagram on page 5, other major CVS

are still opportunities for us to open stores in major urban

tomer convenience from the introduction of NTT

areas. Furthermore, the development of two new formats

DoCoMo’s iD™* credit card payment service at all storesmeans that we can open any one of three store types to2) More efficient sales promotion to LAWSON PASS mem-

match local customer demographics such as age and genderbers based on the linking of NTT DoCoMo’s iD™ andas well as customer needs. Consequently, we believe there

LAWSON PASS

are sufficient expectations for LAWSON to develop stores in3) The utilization of the advanced mobile phone technology

the Tokyo metropolitan area and other large-city areas where

capabilities possessed by NTT DoCoMo in the infrastruc-there appears to still be plenty of available sites for us toture of next-generation LAWSON storesopen stores. In regional areas as well, we believe it is*iD™ is a registered trademark of NTT DoCoMo.

On the Road to Recovery in FY2007
Growth forecast for existing stores■ Improvement in
operational capabilities■ Creation of individualstore charts

Utilize store charts

Average EPS
over 3 yearsof 10%➔

Invest in sales promotion

Use expertise and products from new formats

Rise in thenumber ofcustomers

Increase in amount spent per customer
by focusing on quality
Shaking off deflation

FY2005 year-end

06

LAWSON, INC.

ANNUAL REPORT 2006

FY2006 year-end

FY2007 year-end

A Turning Point From Defense to Offence

Focused on Our Goals

As I said earlier, to promote management measures more

In fiscal 2007, the final year of LAWSON Challenge 2007, we

effectively, from the first quarter of fiscal 2006, we will actively

aim to achieve our dual targets of a 3-year annual average ofallocate expenditure, such as sales promotion expenses, that

10% EPS growth and ROE of 15%, as a result of various

will lead to an increase in the number of customers.

measures to increase the number of customers and an

Fiscal 2006 will mark a major turning point from defense

improvement in the earnings of the two new format subsidiar-to offence in our policy. During the past several years, we

ies as well as our finance-related subsidiaries and affiliates.

have earnestly undertaken defensive measures for the sakeWe will also hope to return more profits to shareholders. Weof survival, such as cost cutting, in a deflationary environ-are determined to remain a company that is supported by all

ment. However, while competition is intensifying, we can see

our customers, shareholders, business partners, franchisesigns of an improvement in consumer sentiment stemming

owners and store crew (part-time workers), and employees.

from the economy’s emergence from deflation. We see thisFurthermore, as a publicly listed company, we will endeavor to

as a sign that the CVS sector has turned the corner. Under-

further improve our internal control system, as we work topinned by store QSC, which we have improved in a toughraise shareholder value and maintain growth. LAWSON isenvironment, and the two new formats, we plan to allocate

committed to meeting your expectations.

expenditure to advertising and promotion and various sales
promotion campaigns. We will also upgrade products,

July 2006

including improving boxed lunches, and order assistance forstores aimed at improving merchandise assortments basedon “store charts.”

Takeshi Niinami
President and Chief Executive Officer

Toward Achieving the Targets of LAWSON Challenge 2007
Improve net
income ratio(Net income/Net sales of all
stores)ROE 15%(Net income/
Shareholders’equity)Improve total
asset turnover➔➔

Bolster merchandise assortment(Cater to customer needs)

Increase operating
revenue➔➔(Total assets/
Shareholders’ equity)

Average EPS growth 10%(QSC activities, etc.)

Expand customer base(Use three formats)Offer value-added products(Initiatives at NATURAL LAWSON)

Improve earnings(Operating revenue/
Total assets)

Utilize financial
leverage

Increase franchise owners’ profits

Offer reasonably priced, fresh products(Initiatives at LAWSON STORE100)

Increase frequency of customer store visits(Benefits of alliances and LAWSON PASS)

Increase return on assets(Store opening strategy, adhere to ROI standard)

Improve management
efficiency

Improve employee skills(LAWSON University, training, etc.)

Improve capital efficiency(Increase dividends, cancellation of treasury stock)

Management quality
Management
Organizational strengths enthusiasm

Governance

CSR

LAWSON, INC. ANNUAL REPORT 2006

07

EXPANDING
OPERATIONS
WIDEN

Widen the Product Lineup

Based on the keyword “innovation,” LAWSON aims to achieve differentiation by
developing original products. Under the Gohantei boxed lunch brand, we developed
healthy products such as Ichiju-Sansai (one soup and three dishes), which
recreates the traditional Japanese meal through the inclusion of a soup in boxedlunch packages, and Yasai-to-Isshoni (accompanied by vegetables), which offers ahealthy serving of vegetables and staple foods. In the counter products category,
we augmented our lineup with the launch of Fried Chicken to join Karaage-kun,
which has been popular with customers since it was launched 20 years ago. Thiswas yet another move designed to differentiate LAWSON by using fryers in storesto prepare freshly cooked food.

Widen Breadth of Product Proposals and Improve Quality(Merchandise Assortment) ➔ Increase Customer Numbers

Onigiriya rice ball

Health-oriented Products

Locally Targeted Products■ Leverage NATURAL LAWSON products■ Increase number of area merchandisers

Reinforce Services/Entertainment

Fresh Products■ Increase convenience for senior customers■ Leverage LAWSON TICKET services■ Utilize LAWSON STORE100 products
and expertise

PRODUCT LINEUPS TAILORED TO LOCAL CUSTOMERS➔TARGET FEMALE AND
SENIORS

Fundamental review ofmerchandise assortments

08

LAWSON, INC.

ANNUAL REPORT 2006

EXPAND CUSTOMER
BASE➔

EMPHASIZE GREATERQUALITYINCREASE
Increase Earnings for Owners

Mystery Shopper QSC Evaluation:
Satisfaction level
C Cleanliness

80

62.9

Av

67.2

Av

S

Service

Q Quality

➔
➔
➔

60

(Merchandise assortment)

Note: Graph based on LAWSONGroup research. As
measurement criteriachanged in March 2005,
figures have been adjusted
using constant standards
to secure fairness andconsistency.

SIGNIFICANT
IMPROVEMENT

40

20

Cleanlinessand Service:

IMPROVEMENT NEEDED0

July 2005

Quality:

Feb 2006

Increasing the earnings of franchise owners
is a cornerstone of LAWSON’s managementbase. Based on our view that earnings will
expand if we increase the number ofcustomers by enhancing customer satisfaction, we have endeavored to improve thelevel of Q, S and C through the “Mystery
Shopper” program, which we initiated infiscal 2004. Service (S) and cleanliness (C),in particular, have improved year by year.
We believe that the way to increase theearnings of franchised store owners now is
to upgrade Q (quality: merchandise
assortment) by stepping up the use of“store charts.”

Improved by focusing on Three Challenge Practices
Failed to curb ordering due to drop in customers andinadequate ordering support from LAWSON branches

EXTEND

Extend the Customer Base

NATURAL LAWSON

To increase visits by women and seniors to stores, we will introduce at our
regular LAWSON stores throughout Japan the expertise in product development
and store displays that we have acquired through the new NATURAL LAWSON
and LAWSON STORE100 formats. In addition, we will bolster our lineup of
locally targeted products, which reflect the preferences of customers inregional areas. Through these initiatives, we aim to expand the customer base,achieving earnings growth from increased customer numbers.
LAWSON STORE100
Moreover, by opening stores in locations that are convenient forcustomers and special locations such as hospitals and subway
concourses, we aim to enhance LAWSON’s name recognition.

YoY Rate on Number of Customers
(%)

105

➔

100

95

Hospital LAWSON

0

03

04

05

06

07 (Target)

Note: Fiscal years from 2002
through 2005 are fiscal
years ended February thefollowing year, while the2007 figure is an estimate
for the fiscal year ending
February 29, 2008.

LAWSON, INC. ANNUAL REPORT 2006

09

ENHANCINGEARNINGSQUALITY
VALUE-ADDED“Kayakuzen” Obento (boxed lunch)

Supply Value-added Products

The NATURAL LAWSON format, which is based on the key words “beauty and health”
and “working women,” has encouraged store visits by women and seniors, thanks tostore design that breaks the conventional convenience store mold. For example, storesemphasize white to convey cleanliness, feature a wood tone, and incorporate an in-store
bakery. We aim to provide merchandise that customers choose to buy, such as
oxygenated mineral water, soap without additives, and organic wine, not just daily
necessities and emergency-use products, which are stalwarts of the conventional CVS
merchandise assortment. As regards rice dishes, which are a mainstay product line, inparticular, we provide high-quality products that take into account nutritional balance andcalories by using ingredients with a strong emphasis on health, such as black rice andbrown rice.

Initiatives at NATURAL LAWSON
Medium-term Targets:Markup:
ROI:

40%
30%

FY2006 year-end target: 150 stores

Accelerate store openings
Further establish earnings model

Develop products in tune
with NATURAL LAWSON approach■ Increase lineup of freshly baked bread■ Use alliances to develop new
products and supply exclusive brands
e.g. Vinos Yamazaki and Ef:■ Use alliances in marketinge.g., tie-up with Hanako Magazine

Open stores in business andresidential areas

Expand franchise network

Accelerate franchise store openings
in 2H

Target health-conscious female customers/seniors

10

LAWSON, INC.

ANNUAL REPORT 2006

OPTIONS
Offer Economic Options

LAWSON STORE100 targets women and seniors and is founded on the concept of a convenience store plus a minisupermarket. This format offers the three perishable foods (meat, seafood and vegetables) and daily products, such as
tofu and natto (fermented soy beans), backed by a total commitment to freshness, in small quantities and conveniently
sized packages in locations that are within convenient walking distance. These stores respond to the demographic change
of a decline in the number of family members in city areas, with senior couples and single people becoming more
predominant. In terms of products, we are promoting the development of the private brand Value Line, which offers
perishable foods produced domestically, beverages, and daily products at a value-for-money price
Initiatives at LAWSON STORE100of ¥100 (¥105 including consumption tax). At
February 28, 2006, the number of stock keeping
FY2006 Targets:
FY2006 year-end target:
units (SKU) for this line had climbed to 140.
Markup:26%
80–100 stores
ROI:

20%

Quickly establish earnings model

Increase opportunities
for new store openings

The private brand Value Line

Locations where CVS and mini supermarkets are usually opened

Value Line products
Experimental introduction at regular
LAWSON stores

FY2006 year-end target:
400 SKUs per branchPrepare for franchise roll out

Aim to begin full-scale
franchising in FY2007

Target female customers (housewives, etc.)/seniors

REPEAT

Attract Repeat Customers

5.8 visits/month
6

600

4

550

2

500

0

Before membership

After membership

0

➔

➔

At February 28, 2006, the number of members of LAWSON PASS, our original membership card, exceeded 2.1 million, making it
one of the largest cardholder bases in the CVS sector. According to a sampling survey, the number of store visits and amount spentper visit by customers who had become LAWSON PASS cardholders had both increased. Going forward, we aim to turn medium-levelcard users into frequent card users and to increase the number of customers by carrying out sales campaigns limited to members,
improving the points program, and reinforcing the merits of advanced reservations linked to LAWSON TICKET.
In March 2006, LAWSON signed a capital andbusiness alliance agreement with NTT DoCoMo, Benefits of LAWSON PASS
Inc. In addition to promoting the introduction ofStore visits
Amount spent per customer
NTT DoCoMo’s iD™ mobile phone payment
10700¥671 /visits
platform at all stores, LAWSON and NTT
8.8 visits/month
DoCoMo announced plans to strengthen acooperative relationship aimed at developing the
8650
mobile phone-based business in the future.

577/visits¥

Before membership

After membership

Note: Based on data for 351 new members

LAWSON PASS encourages more store visits and higher spending per visit

LAWSON, INC.

ANNUAL REPORT 2006

11

BUILDINGA RESILIENT
COMPANY
Note: Fiscal years from 2002 through 2005 arefiscal years ended February the following year,
while the 2007 figure is an estimate for the
fiscal year ending February 29, 2008.

Number of stores(Stores)

Openings

800

Closings
Net Increase (decrease)

600

400

200

0

–200

03

04

05

06

07 (Target)

Under LAWSON Challenge 2004, the medium-term management planthat we implemented over a three-year period from fiscal 2002, weclosed unprofitable stores. From the viewpoint of asset efficiency,
opening highly profitable stores is a key management issue. Thus, when
opening stores, we strictly observe our original store opening standardsof the “no good (NG) line,” “the grid point system (best location)”, and“return on investment (ROI)”. By firmly adhering to the ROI standard, inparticular, we have endeavored to enhance store profitability. Our existing
stores have inevitably suffered a decline in income resulting from changes
in the external environment, such as competing store openings in nearby
areas. However, we are attempting to enhance store earning power by actively relocating
franchised stores based on the premise that the “Mystery Shopper” criteria have been fulfilled.

Improve Asset Efficiency

IMPROVE
12

LAWSON, INC.

ANNUAL REPORT 2006

Regular LAWSONTRAIN

Train a Better Workforce▲

At LAWSON, our objective is to improve customer satisfaction and we believe that the “LAWSON
family” is important as an intangible asset to realize that objective. The LAWSON family comprises
franchise owners, crews (part-time and casual workers), and employees, all of whom support
LAWSON. As we aim to enhance the added value of these unseen assets, that is, humanresources, we are conducting an
LAWSON University
educational program for the LAWSON=Corporate-wide human resource development (stores and head office)family called LAWSON University.
Following the establishment of
NextStore
Promotion of
LAWSON
Training as
SelfJob skills
generation
education
ES/CS
Basic
per job title
enlightentraining centers at all regional
management
ment
education
headquarters in fiscal 2004, we(Selective
opened a learning center near the
training )Tokyo Head Office in fiscal 2005.
Training for
Survey on
Basic
LogicalManagerial
CorresTraining for
opening
employees
knowledge to thinking
training
pondence/
store
LAWSON University offers various
exercise FCclassroomdevelopment
Leader crew
CS session
Management New
business and strategies
type education Merchandiser
candidates
employeekinds of training based on the*ES=Employee retail skills
training
training
Overseas
andtraining
satisfaction
MarketingJob
external
principle of customer satisfaction.
Leader crew
Store
IT
training
Accounting
courseTraining ofexisting store
managers*7 training
centers
throughout
Japan

LAWSON casestudiesPresident
sessionmanagertraining
Store
employeetraining
Training of
new store
managers

seminars
Training
tailored forindividual
needsSupervisor
training

rotation/
evaluation

Group training
e-learning

Employee training

Raise Capital Efficiency

RAISE

LAWSON is earnestly striving to enhance capital efficiency. We are targetingaverage growth in EPS of 10% from fiscal 2005 to fiscal 2007 and ROE of 15%
at the end of fiscal 2007. We have also actively
returned profits to shareholders. For example,
Return on Equity (ROE)
we retired a total of about ¥43.0 billion of(%)
treasury stock during the five-year period tofiscal 2005. In fiscal 2004, we raised the annual
15
cash dividend per share by ¥29, and following afurther increase of ¥20 in fiscal 2005, we are
12planning to introduce another increase of ¥10 infiscal 2006. We will continually aim to enhancecapital efficiency to be an attractive company to9
all our shareholders by seeking an optimalbalance between reinvestment in future earnings
6
growth and shareholder returns.

➔

3
Note: Fiscal years from 2002 through 2005 arefiscal years ended February the following
year, while the 2007 figure is an estimate
for the fiscal year ending February 29, 2008.

0

03

04

05

LAWSON, INC.

06

08 (Target)

ANNUAL REPORT 200613

Corporate Governance

2.

3.

1.

7. REIKO OKUTANIMember of the Board

8. EIICHI TANABE
Member of the Board and CFO

9. KOJI FURUKAWA
Member of the Board

10. HIROSHI KUWATA
Corporate Auditor

7.
11. TAKEHIKO KAKIUCHI

8.

Member of the Board

12. MUNEAKI MASUDA
Member of the Board

13. TORU MORIYAMA
Member of the Board

Basic Policy on Corporate Governance
LAWSON categorizes its stakeholders into seven groups:
customers, shareholders, franchise owners, store crew (parttime workers), business partners, employees and society. We
are engaged in business activities to maximize our corporate
value in order to become a company that has meaning to eachof these stakeholder groups. Consequently, there are now more
outside directors and corporate auditors than internal appointments to these posts, and we have clearly demarcated responsibilities for management execution and supervision andauditing. At the same time, we believe that it is vital to bolster
corporate governance by enhancing the soundness and transparency of management processes. This is achieved throughrigorous compliance and proactive disclosure of information.

14

LAWSON, INC.

ANNUAL REPORT 2006

A diagram illustrating business execution and management
supervision flow and showing internal control systems within theoverall corporate governance structure is shown on page 16.

Corporate Governance-related
Organizations
LAWSON has a Board of Corporate Auditors. At the close of theOrdinary Annual General Meeting of Shareholders on May 26,
2006, there were four corporate auditors, three of whom arefrom outside LAWSON. Corporate auditors attend Board of
Directors’ meetings, Executive Committee meetings and otherimportant meetings, offering objective and fair opinions on
overall management as well as specific issues. In addition, they
audit directors’ execution of duties, such as by verifying legality
and the condition of internal controls. As a rule, the Board of
Corporate Auditors meets once a month.

9.

1. TETSUO OZAWA
Corporate Auditor

2. TAKESHI NIINAMI
President and CEO

3. HIROSHI TASAKA
Member of the Board

4. MUNEHIKO NAKANOStanding Corporate Auditor

5.

6.

5. KENJI YAMAKAWA
Standing Corporate Auditor

6. MANABU ASANO

4.

Member of the Board and CCO

12.
13.

10.
11.

As of May 26, 2006

As of May 26, 2006, the Board of Directors comprised nine
members, five of whom are from outside LAWSON. We believethat this majority representation on the Board provides a wider
range of insights and knowledge on significant issues pertaining
to corporate management, particularly the formulation ofCompany-wide management strategies, and reinforces theBoard’s ability to arrive at fair decisions.
To support the outside directors and outside corporate
auditors, staff distributes discussion agenda in advance ofBoard meetings. Responsible departments also report significant events and incidents immediately to these directors andcorporate auditors.
Mitsubishi Corporation, LAWSON’s strategic partner, holds
31.7% (32,399 thousand shares) of LAWSON’s voting rights,
including indirect holdings. LAWSON is treated as an equitymethod affiliate by Mitsubishi. Two of the five outside directors

and two of the three outside corporate auditors come from
Mitsubishi Corporation.
Since fiscal 2002, LAWSON has maintained an executive
officer system that separates the functions of management
supervision and business execution. As of May 26, 2006,
LAWSON had 18 executive officers, 2 of whom also concurrently
serve as directors.

Compensation for Directors andExecutive Officers
The Compensation Committee, which is made up entirely ofoutside directors and outside corporate auditors, determines
compensation for directors and executive officers. LAWSON has
introduced a system whereby approximately 30% of the annualcompensation of directors and executive officers is dependent

LAWSON, INC.

ANNUAL REPORT 200615

Corporate Governance System (As of May 26, 2006)
General Meeting of Shareholders
Appointment / dismissal

Proposal

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

Board of Directors

Consultation

Compensation
Committee

Appointment / dismissal

Outside directors
In-house directors
Total

Appointment /dismissal /supervision

Operational Organization

5
4
9

Audit

Proposal /reportAudit

Appointment / dismissal

Certified Public
Accountant

Audit

Account auditing

CEO
CFO

Director in charge of audit

Internal Audit Office

CCO

Executive Committee Meeting

Compliance and Risk
Management Committee

Internal audit and guidance
for improvement

Comments

Legal Counsel

Risk management, planning andexecution of compliancemeasures

Executive Officers
Ser ving concurrently as directors 2
Executive officers
16
Total
18
Headquarters

Branches

upon business results. This system more clearly incentivizes
these executives to improve LAWSON’s business results.
Furthermore, the May 27, 2005 Ordinary Annual General
Meeting of Shareholders approved a resolution to abolish theconventional retirement benefit system for directors and replace
it with stock-compensation-type stock options that can be
exercised after a director retires. This is also part of moves by
LAWSON to incentivize directors to improve business results.

Active and Fair Disclosure
LAWSON recognizes its obligation to all stakeholders to accurately and fully explain its performance and business results.
This obligation extends to disclosing information in a way that iseasier to understand. As part of our active efforts to disclose
information, we make our monthly business reports and earnings

16

LAWSON, INC.

ANNUAL REPORT 2006

Subsidiaries andAffiliates

presentation materials available, where possible, on our website immediately upon their release to the media. Furthermore,to the extent possible, we publish important disclosure materials
in English. We also use video streaming (in Japanese only) tobring the Ordinary Annual General Meeting of Shareholders topeople unable to attend the meeting in person, further demonstrating our efforts to conduct investor relations activities thatencourage dialogue with all stakeholders, both in Japan andoverseas. In addition, we have established the LAWSON Customer Center, to handle telephone inquiries from all parties andcreated an online contact point to field any questions stakeholders may have. Together, these and other initiatives constitute aframework for quickly disclosing information and responding tostakeholders.

We promise to make LAWSON a place where:
Franchise owners
can achieveself-fulfillment
and enjoy theirachievements

Communities

Store crew

feel safer
and more secure

can growand develop as
individuals

Customers
feel they candrop in anytime

Shareholders
Business partners

can contribute tosociety indirectly
and achieve theirfinancial goals

can turn their dreams
into reality

Employees
can have pridein their work and besocially aware

LAWSON believes that honoring these commitments to its stakeholders
will translate into higher corporate value.

Internal Control Systems
LAWSON believes that it is important to adopt a proactive
stance toward compliance and risk management. Regarding theinternal control system for ensuring this kind of response,
LAWSON maintains internal control functions through the Boardof Directors and Board of Corporate Auditors, both of which are
made up of a majority of outside directors and outside corporate
auditors. Furthermore, LAWSON has established the Internal
Audit Office as an internal auditing unit. Audits are performed
continuously to ensure that operations are being executed
properly, based on prevailing laws and regulations, and thatbusiness activities, including risk management measures, areappropriate. LAWSON engages Deloitte Touche Tohmatsu as its
independent auditors and has contracts with several law firms toreceive legal advice on corporate management and day-to-day
operations, and maintain a standby system whereby we canobtain counsel whenever necessary to use as reference informing management decisions.
To refine and further strengthen the internal control system,
we formulated a Basic Policy for Maintaining Internal Control
Systems for Fiscal 2006 in February 2006. This policy came into
force on March 1, 2006. In addition to the previously mentioned
control functions, we have appointed a Chief Compliance Officer(CCO) to handle compliance and risk management, under whomthere is full-time staff. At the same time, compliance officers
have been appointed at all headquarters departments and ourseven regional headquarters nationwide to promote complianceand ensure that it is firmly embedded at LAWSON. In addition,
we have a Compliance and Risk Management Committee, which
is headed by the CCO. This committee, which meets monthly, ischarged with developing and promoting strategies for strengthening risk management and compliance.

LAWSON, INC.

ANNUAL REPORT 200617

Corporate Social Responsibility

Roughly three decades have passed since the first convenience
store opened in Japan. During this time, the convenience store
industry has grown to occupy an important place in Japanesesociety as a bona fide industry. At the same time, as its role insociety has increased, so too has scrutiny regarding theindustry’s meaning to society and its corporate social responsibility (CSR) in terms of the environment, ethics and otheraspects of business. Until now, the industry has grown by
pursuing enhanced customer convenience as its single biggest
goal. However, issues about waste, increased energy consumption, nighttime operations and other areas have emerged thatmust be addressed from the standpoint of social responsibility.
LAWSON’s mission is to respond proactively to these issues.
We must do more than other companies to fulfill our corporate
responsibility and only by doing so will we increase our corporate
and shareholder value. Signaling our determination to strengthen
our approach to CSR, we established a CSR Promotion Office inMarch 2005 under the direct control of the president.

Fiscal 2005 Activities
LAWSON’s biggest contribution to society is supporting the livesof customers and other people in regions where it operates
through its chain of about 8,300 stores nationwide. Indeed, we
subscribe to the belief that playing a useful role in people’s lives
is the social responsibility of all companies. In this context,
during fiscal 2005, we worked to address four main themes aspart of our CSR activities: (1) ascertaining and reducing CO2
emissions, (2) reducing and recycling waste, (3) running the
LAWSON Green Fund and fund-raising campaigns for disaster
relief projects, and (4) examining issues relating to late-nightconvenience store operation.
With regard to theme (1), LAWSON took an active part inTeam –6%, a national campaign to help prevent global warming.
Specifically, LAWSON initiated concrete measures, including
installing energy-efficient equipment, in support of Japan’s
efforts to comply with its Kyoto Protocol target of reducing CO2
emissions by 6% between 2008 and 2012 compared with
1990. Progress is being monitored by an ISO 14001-certified
environmental management system. In the convenience store
industry in particular, reducing the amount of electricity used bystores is one of the most effective ways of reducing CO2
emissions. Because of this, as part of energy conservation
measures at existing stores, LAWSON began introducing

New employees participate in a

Ecopack and Ecomonitor systems in fiscal 2005. Ecopack
automatically adjusts and controls freezers, refrigerators, airconditioning units and other equipment to suitable operatinglevels, while Ecomonitor automatically monitors and displays
total CO2 emissions, electricity usage and electricity expenses.
These initiatives have already won kudos in the industry. In
February 2006, LAWSON became the first chain in Japan’s
convenience store industry to be awarded the Minister of
Economy, Trade and Industry Prize for outstanding achievementin the field of energy conservation in fiscal 2005 at a nationalenergy conservation contest sponsored by The Energy Conservation Center, Japan (ECCJ).
To reduce and recycle waste, we implemented an initiative to
reduce the number of plastic bags used in stores by asking
customers whether they need a bag. Other initiatives include
reducing the use of resources by making product packaging
thinner and lighter, recycling used edible oils, and using foodwaste for animal feed and fertilizer. Further, we are trying to
reduce food waste by reviewing production and processing
systems and devising better distribution and sales approaches.
While this will require unprecedented innovation, it will also leadto the creation of a new business model for convenience stores.
In terms of support activities for funds and campaigns, we
continue to operate the LAWSON Green Fund, which we launched in
1992. Not only Head Office Staff but also franchise owners andstore crew participate in the greening activities supported by thisfund, making it a group-wide activity. This is a prime example of
how we are giving tangible form to LAWSON’s corporate philosophyof “Happiness and Harmony in our Community.” LAWSON has also
actively undertaken fund-raising campaigns for disaster relief inareas stricken by earthquakes, typhoons and other natural disasters, as well as activities in support of the restoration of theseareas such as by providing emergency provisions. As of the end of
fiscal 2005, the total amount of money raised by the LAWSONGreen Fund and fund-raising campaigns for disaster relief projects
since fiscal 1992 was around ¥2.8 billion.
Regarding operating hours, and in particular late-night trading,
LAWSON believes that necessity differs from store to store
depending on customer needs. In fiscal 2006, LAWSON willcontinue to examine and make changes to operating hours,
conducting trials and taking other actions that it considers willaddress this issue.

LAWSON Green Fundgreening programThis poster draws attention to
LAWSON’s shopping bag-reduction drive

18

LAWSON, INC.

ANNUAL REPORT 2006

Financial Section

20
Management’s Discussion and Analysis 21
Overview of the CVS Sector
34
Selected Financial Data
35
Consolidated Balance Sheets
38
Consolidated Statements of Income
40
Consolidated Statements of
41
Shareholders’ Equity
Consolidated Statements
42of Cash Flows
Notes to Consolidated
43
Financial Statements
Independent Auditors’ Report
59
Consolidated Five-Year Summary

LAWSON, INC.

ANNUAL REPORT 2006

19

Consolidated Five-Year Summary
LAWSON, INC. and Consolidated Subsidiaries
Years Ended February 28 and 29

2006

For the year:
Operating revenues
Franchise commission
from franchised stores . . . . . .
Net sales from companyoperated stores . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . .

Millions of Yen

Thousands of
U.S. Dollars(1)

2003

2002

2006

¥ 153,910 ¥ 149,032¥ 141,621$ 1,468,866

2005¥ 170,785 ¥ 162,963

2004

66,027
31,24663,802
27,63067,47924,21280,954
20,348101,353
13,142567,876
268,737

Total operating revenues . .

268,058

254,395

245,601

250,334

256,116

2,305,479

Operating income . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . .
Cash flows from operating activities .
Cash flows from investing activities .
Cash flows from financing activities .
Capital expenditure(2) . . . . . . . . . .
Depreciation and amortization(3) . .

43,86722,02546,933(55,282)(7,795)54,417
20,89642,941
20,43547,329(33,297)(13,836)
46,873
19,641

38,087
18,57137,424(40,621)(14,364)
48,303
18,49934,107
8,861
33,860(3,787)(7,247)75,82816,07136,363
16,12344,804(44,031)(58,236)
59,81016,328377,286
189,430
403,655(475,462)(67,042)468,023
179,720

At year-end:
Total assets . . . . . . . . . . . . . . . .
Total shareholders’ equity . . . . . .
Shareholders’ equity ratio . . . . . . .
Interest-bearing debt . . . . . . . . . .
Ratio of interest-bearing debt . . . .
Cash and cash equivalents . . . . . .
Total number of stores(4) . . . . . . .
Number of employees (full-time) . .

¥ 375,107
175,18446.7%––
60,4418,366
3,585¥ 356,310
160,282
45.0%––
76,5858,077
3,391¥ 354,831 ¥ 342,599
154,317
151,864
43.5%
44.3%
–
–
–
–
76,38993,994
7,967
7,721
3,402
3,462

¥ 342,934
149,827
43.7%
3,140
0.9%
71,2697,824
3,817$ 3,226,172
1,506,700

Yen

U.S. dollars

Per share data:
Net income . . . . . . . . . . . . . . . . .
Cash dividends . . . . . . . . . . . . . .
Payout ratio . . . . . . . . . . . . . . . . .

¥

216
90
40.5%

¥

198
70
35.0%

¥

176
41
22.8%

¥

82
41
43.0%

¥

146
41
27.2%

519,833

$

1.85
0.77

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

13.1%
6.0%

13.0%
5.7%

12.1%
5.3%

5.9%
2.6%

Net sales of all stores:
Net sales by store category
Franchised stores(5) . . . . . . . .
Company-operated stores . . .

¥1,295,704
66,027¥1,265,275
63,802¥1,220,819
67,479¥1,213,088
80,954¥1,184,204 $11,143,924
101,353
567,876

Net sales by product category(5)Processed foods . . . . . . . . . .
Fast foods . . . . . . . . . . . . . .
Daily foods . . . . . . . . . . . . . .
Non-food products . . . . . . . . .

¥ 682,006
312,289
150,917
216,519¥ 665,687
297,369
148,134
217,887¥ 625,031
302,568
139,506
221,192¥ 600,508
303,098
138,353
252,083¥ 583,712
297,030
150,862
253,953

Net sales of all stores . .

¥1,361,731¥1,329,077¥1,288,297¥1,294,042¥1,285,557 $11,711,800

9.8%
4.4%

$ 5,865,709
2,685,895
1,297,987
1,862,209

Notes: 1. The U.S. dollar amounts represent translations of Japanese yen at the approximate exchange rate at February 28, 2006, of ¥116.27=$1.
2. Effective from this annual report, the composition of capital expenditure has changed to also include leases, investments and advances, andconstruction assistance guarantees. Please refer to page 30 for details.
3. Including depreciation and amortization of intangible fixed assets.
4. Shanghai stores are not included because SHANGHAI HUALIAN LAWSON CO., LTD. was excluded from the scope of consolidation from April 2005.
5. These figures, as reported by franchised stores, are unaudited.

20

LAWSON, INC.

ANNUAL REPORT 2006

Management’s Discussion and Analysis

Industry Overview
In the Japanese retail industry, the disparity between companies’ earnings has widened based on the quality of management strategies and corporate strength, due to intensifying
competition that has transcended industry borders in thepast several years.
In the convenience store (CVS) sector, major chains arecontinuing to open new stores aggressively, while competition
with other industries and other sectors is also becoming
increasingly fierce. For example, supermarkets are extending
their trading hours or increasingly operating round the clock,and there is heightened competition from restaurants, takeout shops, and drugstores. In addition, convenience storesfeaturing specific merchandise assortments of perishable
food targeting consumers, mainly housewives, in small
commercial areas have been rapidly expanding andencroaching on the conventional CVS market.
Owing to these changes in the environment, if LAWSON
limits its operations to conventional CVS formats, which justprovide merchandise assortments and services predominantly for the core target of young male customers, by only
pursuing the need to save time and the offering of convenience, it will be forced into a war of attrition with otherhomogenized convenience stores. We believe this would
make it increasingly difficult for us to achieve sustained,stable growth as a company.

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

Years ended December 31

2005

2004

2003

2002

2001

...........

¥129,526¥128,093¥128,870¥131,413¥136,808

CVS sector annual sales . . . . . . . . . . . . . . . . .

7,360

7,289

7,096

6,980

6,846

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

5.7%

5.7%

5.5%

5.3%

5.0%

2006

2005

2004

2003

2002

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

¥1,362¥1,329¥1,288¥1,294¥1,286Seven-Eleven Japan . . . . . . . . . . . . . . . . . . . . .

2,499

2,441

2,343

2,213

2,114

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

1,032

998

954

932

899

Circle K . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

505

503

480

485

467

Sunkus . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

394

403

403

406

393

Total retail industry annual sales

Source: “Survey of Commerce,” Ministry of Economy, Trade and Industry

Share of CVS Market Held by Top Five Chains (Sales)
February 28 and 29(Billions of Yen)

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

5,792

5,674

5,468

5,330

5,159

(Share) . . . . . . . . . . . . . . . . . . . . . . . . . . . .

78.7%

77.8%

77.0%

76.4%

75.4%

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

¥7,360¥7,289¥7,096¥6,980¥6,846

Notes: 1. Total figures are for the years ended February 28 and 29.
2. CVS industry figures are for previous calendar years ended December 31.

Management Measures in Fiscal 2005
In this environment, LAWSON inaugurated LAWSON Challenge
2007, a medium-term business plan, which aims to enhancecustomer satisfaction and increase the earnings of franchised store owners. In addition, we implemented thefollowing management measures in fiscal 2005, ended
February 28, 2006:
1. We aimed to enhance customer satisfaction by focusing
on the reinforcement of existing stores and the openingof new stores based on a three-pronged approach:enhancing product development capabilities, strengthening store operation capabilities, and improving store
development capabilities.
2. By developing LAWSON STORE100, a new format, we
endeavored to establish a three-format store system that
also includes LAWSON and NATURAL LAWSON stores.

3. To mark our 30th anniversary, we established a newcorporate philosophy called “Happiness and Harmony in
our Community,” and we took actions aimed at therealization of this corporate philosophy in order to be acompany that is needed not only by customers, but alsosociety as a whole.

Product Overview
Sales by Product Category(consolidated, total net sales)
Sales of processed foods, which account for half of total
sales, struggled, edging up only 2.5%. The rate of growth of
total net sales, the total sum of both Company-operated andfranchised store sales dropped as a result. In the fast foods
category, although sales of rice dishes and cooked noodles
were slightly weak, counter products such as Karaage-kun

LAWSON, INC.

ANNUAL REPORT 2006

21

Sales of energy drinks, health care products, and sanitary
goods were robust, but the termination of sales of the
Highway Card in September 2005 and slower cigarette sales
growth had an adverse impact.

crispy Japanese-style fried chicken performed strongly. As aresult, sales of fast foods rose 5.0% and drove sales. Salesof daily foods rose only 1.9% due to lackluster sales ofbakery items. Sales of non-food products edged down 0.6%.

Net Sales by Product Segment (consolidated, total net sales)
Years ended February 28 and 29(Millions of Yen)

2006

2005

2004

2003

2002

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

¥ 682,006¥ 665,687¥ 625,031¥ 600,508¥ 583,712

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

312,189

297,369

302,568

303,098

297,030

Daily foods . . . . . . . . . . . . . . . . . . . . . . . . . .

150,917

148,134

139,506

138,353

150,862

Total food sales . . . . . . . . . . . . . . . . . . . . . . .

1,145,212

1,111,190

1,067,105

1,041,959

1,031,604

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

216,519

217,887

221,192

252,083

253,953

Net sales at all stores . . . . . . . . . . . . . . . . . .

¥1,361,731¥1,329,077¥1,288,297¥1,294,042¥1,285,557

Breakdown of Net Sales by Product Segment (consolidated, total net sales)
Years ended February 28 and 29

(%)

2006

2005

2004

2003

2002

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

50.1%

50.1%

48.5%

46.4%

45.4%

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

22.9

22.4

23.5

23.4

23.1

Daily foods . . . . . . . . . . . . . . . . . . . . . . . . . .

11.1

11.1

10.8

10.7

11.7

Total food sales . . . . . . . . . . . . . . . . . . . . . . .

84.1

83.6

82.8

80.5

80.2

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

15.9

16.4

17.2

19.5

19.8

Net sales at all stores . . . . . . . . . . . . . . . . . .

100.0%

100.0%

100.0%

100.0%

100.0%

Note: Effective from the fiscal year ended February 28, 2003, bakery items were reclassified from “fast foods” to “daily foods,” while some pickles andsome delicatessen items were reclassified from “daily foods” to “fast foods.” Figures for the fiscal year ended February 28, 2002, were restatedto conform to the fiscal year ended February 28, 2003 classifications to facilitate comparison.

Gross Profit Margin by Product Segment(parent company)

sales growth of low-margin cigarettes and an increase in thesales weighting of high-margin fast foods such as counterproducts contributed to an improvement in the gross margin.
In non-food products, a narrower focus on strong-selling daily
necessities produced an improvement in the terms of tradeand contributed to an improvement in the gross margin,
mainly in the first half.

The overall gross profit margin improved by 0.4 percentage
point, roughly in line with our target. The termination of lowmargin Highway Card sales from mid-September pushed up
the gross profit margin by about 0.2 percentage point on afiscal year basis. As regards the sales mix, a slowdown in

Gross Profit Margin by Product Segment (parent company)
Years ended February 28 and 29

(%)

2006

2005

2004

2003

2002

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

36.8%

36.4%

35.6%

35.7%

33.7%

Daily foods . . . . . . . . . . . . . . . . . . . . . . . . . .

33.6

33.3

32.5

32.5

35.0

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

26.7

26.7

26.9

27.3

27.3

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

35.8

34.0

33.4

29.9

30.5

Notes: 1. Gross profit in the non-food products segment includes commission income.
2. The processed foods category includes cigarettes.

Bill Settlement Services (parent company)
Years ended February 28 and 29

2006

2005

2004

2003

2002

Bill settlements (millions of yen) . . . . . . . . . . . .

1,165,255

1,035,936

919,205

817,656

743,482

No. of transactions (millions) . . . . . . . . . . . . . .

130.6

118.9

108.4

100.0

91.9

No. of companies handled . . . . . . . . . . . . . . . .

349

309

283

245

198

7,507

6,768

6,368

5,990

5,689

Commission income (millions of yen)

22

LAWSON, INC.

........

ANNUAL REPORT 2006

Merchandising Strategy
In the area of merchandising strategy, while aiming to develop
products that suit customer needs, we actively pursued
innovation as we attempted to achieve differentiation fromother retailers. In the case of the Gohantei rice dish brandbased on the concept of “surprise” and “innovation,” which
we launched in 2004, we actively brought out new products at
an average rate of two a month. We developed boxed lunches
made from ingredients with health conscious consumers in
mind, namely, rice steamed with vegetables and steamedbarley rice. Examples included Kani-tama no Kurozuan (crabbowl with black vinegar sauce over steamed rice) and Aburi
Chashu-don (grilled roast pork bowl), which went on sale in
April 2005. In addition, based on the new concept of including
soup in boxed lunches, we launched a new Gohantei series
that resembles traditional Japanese meals of three dishes,
one bowl of soup and a bowl of rice.
Sales in the sushi category, represented by dishes suchas Yakisaba Sushi (grilled mackerel sushi), performed
strongly and were more than 100% higher than a year earlier.
As regards the Onigiriya series of rice balls, which we havebeen marketing for three years, we adopted square packaging for hand-rolled rice balls for the first time in the CVS
sector. This wrapping was used in Shinfukkura Temaki
Onigiri, featuring crispy dried seaweed and fluffy rice. Salesof this product were expanded nationwide in July 2005.
Reflecting calls from working women in their twenties andthirties, who want to eat “a variety of foods in small quantities”
and have “a good nutritional balance of vegetables, meatand other items,” we launched the Deli & Pasta series,
which enables customers to enjoy pasta together with side
dishes, in October 2005.
In the case of counter products, we introduced new friedchicken products, including a new series of Karaage-kun.
This move, in combination with active sales promotion at
our stores, led sales to increase more than 100% from ayear earlier.
In June 2005, we carried out our 30th anniversary commemoration campaign. Based on the concept of “surprise &fun,” we launched products for a limited time such as 30th
anniversary commemoration boxed lunches.

Store Development
We put in place a framework to open stores in an optimal
format matched to their location, by making maximum use of
the features of our three formats—LAWSON, NATURALLAWSON, and LAWSON STORE100—which enable us torespond flexibly to the needs of regional customers. It has

become difficult to open only regular LAWSON stores insome locations due to competition with other major CVS
chains, but there is now a greater possibility of opening storesbased on formats that enable differentiation, namely, NATURALLAWSON and LAWSON STORE100, in such locations.
By thoroughly adhering to LAWSON’s store opening standards, the “no good (NG) line” (a standard indicating store
opening is impossible), as well as the grid point system (thebest location), and return on investment (ROI), when opening
stores mainly in large city areas in the Kanto, Kinki, andChubu regions, we strove to develop stores that we expect
to generate high income.
As part of our strategy aimed at opening stores in diverse
locations, we formed a business alliance with Tokyu Corporation in November 2005, and we agreed to develop a new
type of business format involving convenience stores instations, with the aim of opening the first store in thesummer of 2006. Furthermore, based on a businessalliance with Tokyo Metro Co., Ltd. in February 2006, weendeavored to enhance the recognition and establish thebrand image of NATURAL LAWSON by newly opening
NATURAL LAWSON stores, in addition to our existing
regular LAWSON stores, in subway concourses.
During fiscal 2005, we opened 8 Hospital LAWSON stores,
which we expect to generate high income in these special
commercial spaces within hospitals, bringing the total
number of these stores to 20 at the end of the fiscal year.
Anticipating new business opportunities arising from Japan’s
aging population, we intend to further expand this promisingbusiness model. We also steadily implemented measuresrelating to Postal LAWSON stores, based on our alliance withJapan Post, with an eye on business opportunities likely tooccur after privatization. We believe that one of LAWSON’s
strengths lies in the ability to actively form alliances withdiverse partners. Moving forward as well, based on entirely
original concepts that break the mold, we will open stores indiverse locations as we pursue the potential of new business opportunities.
As a result of these measures, domestic store openings
numbered 717 while store closings reached 428, including
relocated stores. At February 28, 2006, LAWSON’s domestic
network comprised 8,366 stores, including 51 NATURALLAWSON and 35 LAWSON STORE100 stores, a net increaseof 289 from a year earlier.
The network of SHANGHAI HUALIAN LAWSON CO., LTD.,an affiliate in the People’s Republic of China accounted forunder the equity method, reached 283 stores, an increaseof 73 stores, as of December 31, 2005.

LAWSON, INC.

ANNUAL REPORT 2006

23

Number of Stores in the LAWSON Network
February 28 and 29

2006

2005

2004

2003

2002

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

8,366

8,077

7,967

7,721

7,824

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

717

711

687

519

626

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

428

455

441

622

551

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

289

256

246

(103)

75

Note: Figures for SHANGHAI HUALIAN LAWSON CO., LTD. are not included in figures from 2005, as the company became an equity-method affiliate infiscal 2004.

Number of Stores by FC Contract Type

February 28 and 29

Net increase(decrease)(from 2005˙
to 2006)

2006

2005

2004

2003

2002

B .........................
Share (%) . . . . . . . . . . . . . . . . .

1,674
20.0

1,836
22.7

1,992
25.4

2,200
28.8

2,412
31.2

(162)

G .........................
Share (%) . . . . . . . . . . . . . . . . .

2,272
27.2

2,335
28.9

2,415
30.9

2,446
32.1

2,459
31.8

(63)

C .........................
Share (%) . . . . . . . . . . . . . . . . .

4,012
48.0

3,560
44.1

3,065
39.2

2,645
34.7

2,308
29.8

452

Franchised stores . . . . . . . . . . . . . .
Share (%) . . . . . . . . . . . . . . . . . . .

7,958
95.1

7,731
95.7

7,472
95.5

7,291
95.6

7,179
92.8

227

Company-operated stores . . . . . . . . .
Share (%) . . . . . . . . . . . . . . . . . . .

408
4.9

346
4.3

349
4.5

334
4.4

555
7.2

62

Total . . . . . . . . . . . . . . . . . . . . . . . .
Share (%) . . . . . . . . . . . . . . . . . . .

8,366
100.0

8,077
100.0

7,821
100.0

7,625
100.0

7,734
100.0

289

Outline of Store Contracts
Contract typeC

G

Contract termB

10 years from store opening day

Owner conditions

At least 20 years old, 2 full-time store workers

Land and buildings

Prepared by LAWSON

Prepared by franchisee

Investment in store construction
and interior decoration expenses

Borne by LAWSON

Borne by franchisee

Signage and business fixtures
Payment by franchisee
at time of contract*

Prepared by LAWSONFranchise fee¥1.5 million (Contract fee, training expenses,
and store opening preparation commission, each ¥500,000)

Investment¥1.5 million (Including payment for some merchandisepurchased on behalf of the store)

Guarantee deposit provided by franchisee
Head Office income**

Not required

Average monthly sales
x 2 months–

Gross profit x 50%

Gross profit x 45%

Gross profit x 34%

Burden of utility expenses
Minimum guarantee (annual)**(thousands of yen)Franchisee
21,00022,20022,200* Above amount is paid by franchisee to Head Office at time of franchising contract. In addition, the franchisee needs to separately prepare a total of¥500,000, including float at time of store opening.
** Head Office income and minimum guarantee are in case of stores operating on a 24-hour basis

24

LAWSON, INC.

ANNUAL REPORT 2006

Scope of Consolidation

NATURAL LAWSON, Inc. (Consolidated Subsidiary)

The consolidated results for fiscal 2005 include the performances of eight members of the LAWSON Group—six
consolidated subsidiaries and two affiliates accounted forunder the equity method—and the parent company. Thesesubsidiaries and affiliates are broadly involved in four categories of business: CVS operations, financial services,other services, and overseas business. The business operations and fiscal results of companies included within thescope of consolidation are presented below.

NATURAL LAWSON is a valued-added CVS format targeting
mainly working women, based on the key words “beauty”
and “health.” The first store was opened in July 2001. In April
2004, one business division within the Head Office wasspun off as NATURAL LAWSON, Inc., a subsidiary of
LAWSON. NATURAL LAWSON, Inc. undertakes the establishment of the business format, product planning and development, and store management guidance for NATURALLAWSON stores under contract for LAWSON. In fiscal 2005,
the company endeavored to achieve further differentiationfrom the conventional CVS business model by reviewing
products handled. In addition, it carried out a radical management review aimed at the full-scale operation of a franchise system, including reform of the management system
based on the introduction of individual store information
analysis. The company will increase its human resources as
it accelerates growth from fiscal 2006 onward.

(1) CVS Operations
LAWSON is developing its new CVS formats through two
subsidiaries: NATURAL LAWSON, Inc. and VALUE LAWSON Inc.

(Millions of Yen)
2006

2005

2004

2003

2002

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

¥(690)¥19¥(0.4)¥ 9¥(0.4)Net income (loss) . . . . . . . . . . . . . . . . . . . . .

(723)

18

5

(1)

5

No. of stores . . . . . . . . . . . . . . . . . . . . . . . . .

51

28

14

13

3

VALUE LAWSON Inc. (Consolidated Subsidiary)and side dishes. VALUE LAWSON Inc. was established in
April 2005 as a wholly owned subsidiary to establish the
LAWSON STORE100 business format, which weds the CVS
and mini-supermarket formats, as well as to perform productplanning and development for these stores. The company
opened its first store in May 2005. The company is actively
developing a private brand called Value Line. As of February
28, 2006, there were approximately 140 stock keeping units(SKUs) in this brand.

This consolidated subsidiary operates LAWSON STORE100
perishable food convenience stores. LAWSON STORE100
stores target women and seniors with a concept of “supportingtime saving, simplicity, and convenience in everyday life.”
These stores provide a wide range of products spanning
processed foods and daily necessities at a uniform price of¥100 (excluding consumption tax). The main products
comprise fresh fruit and vegetables, handy boxed lunches(Millions of Yen)
2006

2005

2004

2003

2002

Operating loss . . . . . . . . . . . . . . . . . . . . . . . .

¥(623)––––Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(709)

–

–

–

–

No. of stores . . . . . . . . . . . . . . . . . . . . . . . . .

35

–

–

–

–

ANNUAL REPORT 2006

25

LAWSON, INC.

(2) Financial Services
LAWSON ATM Networks, Inc (Consolidated Subsidiary)This consolidated subsidiary was established in May 2001
with investments by LAWSON, Mitsubishi Corporation andseveral banks to run ATM-related operations for LAWSON
stores. The company began installing ATMs and started ATM
services at some LAWSON stores from October 2001. The
company’s ATM business installs jointly operated ATMs on aleased basis in LAWSON stores in regions where agreement

has been reached with partner banks. It has formed alliances with the major city bank groups and regional banks;
partner banks currently number 17.
As of February 28, 2006, the number of ATMs installedstood at 3,812 and the number of prefectures where ATMs
are installed was 27, following the addition of Miyagi Prefecture during fiscal 2005. LAWSON held a 59.0% interest in
this company as of February 28, 2006.

Number of ATMs Installed
2006

2005

2004

2003

2002

3,812

3,570

3,127

2,712

1,922

2006

2005

2004

2003

2002

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

¥11,311¥10,003¥8,352¥6,718¥1,248Operating income (loss) . . . . . . . . . . . . . . . . .

654

144

(348)

(529)

(303)

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

675

266

(350)

(529)

(326)

Number of ATMs installed...............

(Millions of Yen)

LAWSON CS Card, INC. (Equity-method Affiliate)This equity-method affiliate was established in February
2002 by Credit Saison Co., Ltd. (30% shareholding),
Mitsubishi Corporation (20% shareholding), and LAWSON(50% shareholding). It issues LAWSON PASS credit cards to
LAWSON customers and provides services through Loppi
multimedia terminals and other channels. As of February 28,

2006, LAWSON PASS, for which services began in August
2002, had a cardholder base exceeding 2.1 million members.
Earnings have improved substantially every year since the
February 2004 fiscal year in line with growth in the
cardholder base.
Credit Saison undertakes card issuance and credit screening for LAWSON PASS on behalf of LAWSON CS Card.
(Millions of Yen)

2006

2005

2004

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

¥7,157¥ 4,261¥ 2,551

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

270(1,230)Net income (loss) . . . . . . . . . . . . . . . . . . . . .

568(1,218)(3) Other Services
LAWSON TICKET INC. (Consolidated Subsidiary)This consolidated subsidiary sells tickets to concerts,
movies, sporting events and other entertainment productions, primarily through Loppi multimedia terminals at
LAWSON stores. It was established as a ticket sales company
in 1992 and changed its name to the current one in 1996.
Having become a subsidiary of LAWSON in 1997, it formed abusiness alliance covering ticket sales with Rakuten, Inc.,

2003

2002

858

¥0

(2,255)(3,935)(1)(2,256)(3,936)(5)¥after accepting capital participation from Rakuten in January
2004. LAWSON TICKET listed on the JASDAQ market in
October 2004. It ranks second in sales in the ticket sales
industry behind PIA Corp. and it is particularly strong in J-POP,
sports and theater-related ticketing. LAWSON held a 50.8%
interest in this company as of February 28, 2006. In fiscal
2005, profits reached a record high, with operating income
surging 13.9% compared to a year earlier.

(Millions of Yen)
2006

2005

2004

2003

2002

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

¥6,259¥6,288¥6,218¥5,425¥5,119Operating income . . . . . . . . . . . . . . . . . . . . . .

821

721

644

788

508

Net income . . . . . . . . . . . . . . . . . . . . . . . . . .

487

411

387

387

275

26

LAWSON, INC.

ANNUAL REPORT 2006

i-Convenience, Inc (Consolidated Subsidiary)

Electric Industrial Co., Ltd. (18%), and NTT DoCoMo, Inc.
(13%). It operates the official “iLAWSON” i-mode Internet
site, and in addition to online merchandise sales and provision of related services and information, it manages the
LAWSON web site.

This consolidated subsidiary was established in October2000 with the aim of expanding business in the e-commerce
sector, based on joint investment by LAWSON (51%shareholding), Mitsubishi Corporation (18%), Matsushita(Millions of Yen)
2006

2005

2004

2003

2002

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

¥ 427

¥ 308

¥ 333

¥ 213

¥ 103

Operating loss . . . . . . . . . . . . . . . . . . . . . . . .

(64)

(114)

(241)

(383)

(473)

Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(137)

(155)

(663)

(489)

(470)

employee with a thorough knowledge of convenience store
operation and merchandise assortments, objectively andquantitatively evaluates LAWSON stores from a customer’s
perspective. The results are fed back to LAWSON’s Head
Office and franchise owners.

BestPractice Inc. (Consolidated Subsidiary)This wholly owned subsidiary implements “Mystery Shopper”
on-site inspections of convenience stores to determine thestatus of operations and offers advice and proposals toimprove LAWSON stores at the operational level. Throughthis program, a disguised researcher who is a company(Millions of Yen)
2006

2005

2004

2003

2002

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

¥892

¥628

–

–

–

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

62

(2)

–

–

–

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

34

(2)

–

–

–

(4) Overseas Businessaffiliate represents LAWSON’s agreement to foster expansion through operation by local partners. Therefore, in May
2004, LAWSON relinquished 21.0% of its 70.0% equity
interest in the company to partner Hualian Group Corporation, leaving LAWSON with a stake of 49.0%. At the end of
December 2005, there were 283 stores in operation, of
which 191 were franchised stores.

SHANGHAI HUALIAN LAWSON CO., LTD. (Equity-method
Affiliate)This company, which became an equity-method affiliate infiscal 2004, is involved in the development of a chain of
LAWSON stores in Shanghai, the People’s Republic of China.
The change from consolidated subsidiary to equity-method(Millions of Yen)

Operating loss . . . . . . . . . . . . . . . . . . . . . . . .

2006

2005

2004

2003

2002

¥ (7)

¥ (13)¥ (81)¥(191)¥(183)Net income (loss) . . . . . . . . . . . . . . . . . . . . .

3

0

(71)

(190)

(146)

No. of stores . . . . . . . . . . . . . . . . . . . . . . . . .

283

210

146

96

90

Note: SHANGHAI HUALIAN LAWSON CO., LTD. closes its accounts in December. It also changed from a consolidated subsidiary to an equity-method
affiliate in 2004.

LAWSON, INC.

ANNUAL REPORT 200627

Overview of Earnings Figures(Consolidated)and daily foods, which suffered stagnant demand for bakery
items, increased only slightly. Sales of non-food products
decreased, reflecting the termination of Highway Card sales.

Total Net Sales
Aggregate net sales of LAWSON stores in fiscal 2005,
ended February 28, 2006, rose 2.5%, to ¥1,361,731
million. In the first half, although new popular Gohantei
products and the June 30th anniversary commemoration
campaign bore fruit, unfavorable weather conditions in July
had an adverse impact, leading only to a 3.8% increase intotal net sales. At the start of the second half, the terminationof Highway Card sales pushed down sales growth by about 1
percentage point, while customer numbers declined sharply
in response to a historically severe winter from November.
Furthermore, sales promotion campaigns by competitors in
the CVS sector also had a negative impact. As a result, total
net sales edged up only 1.1%.
By product category, sales of fast foods grew in response
to sales efforts by store crews and the continued launch of
new products. However, sales of processed foods, which
saw a slump in demand for beverages and instant noodles,

Existing Store Sales
Existing store sales fell for the eighth consecutive year,
marking a steady downward trend since fiscal 1998. Consumers appeared more inclined to spend, but customer
numbers fell due to the severest Japanese winter in 20 years,
according to an announcement by the Japan Meteorological
Agency on March 1, 2006. We believe that existing store
sales were weak due to a number of factors. The opening ofa large number of conventional convenience stores had an
adverse impact, and as we were slow to respond to demographic changes, the declining birthrate and aging of society
also had a negative impact. In addition, sales were depressedby the termination of Highway Card sales, there was competition from department stores and large-scale shopping centerswhen consumer sentiment was recovering, and consumer
spending shifted from the purchase of foods to apparel.

(%)
2006

2005

2004

2003

2002

Existing store sales (year on year) . . . . . . . . . . . . . . .

97.5

99.7

97.5

98.1

98.4

No. of customers and amount spent
per customer (year on year)
No. of customers . . . . . . . . . . . . . . . . . . . . . . . . .

99.1

100.1

99.0

98.2

–

Amount spent per customer . . . . . . . . . . . . . . . . .

98.3

99.7

100.2

99.9

–

Income and Expenses

Selling, General and Administrative (SG&A) Expenses

Operating Revenues

SG&A expenses rose ¥11,259 million, or 6.8%, to¥175,894 million. This increase was mainly due to a¥4,451 million, or 9.5%, rise in store rents associated withan increase in the opening of mainly C-type franchised
stores, and a ¥1,336 million, or 3.9%, increase in personnel
expenses stemming from an increase in personnel associated with more store openings by NATURAL LAWSON, Inc.
and VALUE LAWSON Inc.
Owing to the application of accounting standards for
impairment losses on fixed assets, depreciation and amortization expenses relating to applicable assets decreased¥132 million, which pushed up operating income by anequivalent amount.
In addition, because of the introduction of the pro forma
standard taxation system, SG&A expenses increased ¥741
million compared to the pre-introduction standard, andincome taxes decreased by almost the same amount for thesame reason.

Total operating revenues comprise net sales from Companyoperated stores, franchise commission from franchised
stores, and other operating revenues.
Total operating revenues climbed ¥13,663 million, or
5.4%, to ¥268,058 million. The improvement was largely the
result of higher franchise commission from franchised
stores, arising from a net increase in the number of stores,
and higher ATM fees at consolidated subsidiary LAWSONATM Networks. The rate of total operating revenue growth
was higher than total net sales growth because franchisecommission from franchised stores has tended to rise at afaster pace than growth in the number of stores, as theweighting of Company-operated stores has declined every
year and the share of C-type stores, which pay a high rate of
franchise commissions, among new stores has risen inrecent years.

28

LAWSON, INC.

ANNUAL REPORT 2006

Breakdown of Main SG&A Expenses(Millions of Yen)
2006

2005

2004

2003

2002

Personnel expenses . . . . . . . . . . . . . . . . . . . .

¥ 35,450¥ 34,114¥ 33,803¥ 36,885¥ 39,073

Advertising and promotional expenses . . . . . . .

9,177

9,704

11,18812,505

15,405Store rents . . . . . . . . . . . . . . . . . . . . . . . . . .

51,236

46,78542,67940,03536,731Equipment leasing charges . . . . . . . . . . . . . . .

16,734

16,263

15,726

14,316

7,745

Depreciation and amortization expenses* . . . .

15,85915,05918,49916,071

16,328Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

47,43642,70835,561

36,52629,241

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

¥175,894¥164,635¥157,456¥156,338¥144,523

2006

2005

2004

2003

2002

Personnel expenses . . . . . . . . . . . . . . . . . . . . . . .

20.2%

20.7%

21.5%

23.6%

27.0%

Advertising and promotional expenses . . . . . . . . . .

5.2

5.9

7.1

8.0

10.7

Store rents . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

29.1

28.4

27.1

25.6

25.4

Equipment leasing charges . . . . . . . . . . . . . . . . . .

9.5

9.9

10.0

9.2

5.4

*Includes depreciation and amortization of intangible fixed assets.

Composition of SG&A Expenses(%)

Depreciation and amortization expenses* . . . . . . .

9.0

9.1

11.7

10.3

11.3

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

27.0

25.9

22.6

23.4

20.2

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

100.0%

100.0%

100.0%

100.0%

100.0%*Includes depreciation and amortization of intangible fixed assets.

Operating Income

Financial Position (Consolidated)

As a result, operating income rose ¥926 million, or 2.2%, to¥43,867 million. Excluding the impact of the change to pro
forma taxation standards, operating income is estimated tohave increased 3.9%. Existing store sales growth and franchise commission from franchised stores, which accounts forthe majority of total operating revenues, were below target,
but as SG&A expenses were curbed more than projected,
operating income was about ¥167 million above target.

Current Assets

Income Before Income Taxes and Minority Interests
Income before income taxes and minority interests grew
¥2,683 million, or 7.4%, to ¥38,723 million mainly for thefollowing reasons. Owing to improved earnings at equitymethod affiliate LAWSON CS Card, Inc., equity in gains ofassociated companies improved by ¥895 million. In addition, LAWSON posted gains on sales of investment insecurities of ¥989 million, due mainly to the sale of sharesfollowing the public listing of ECONTEXT, INC. and gains on
the sale of shares of Volks Co., Ltd.

Net Income

Total current assets increased ¥1,249 million, or 1.0%, to¥129,842 million, marking almost flat growth.

Property and Store Equipment, Investments andOther Assets
Net property and store equipment rose ¥7,106 million, or
7.7%, to ¥99,272 million. Owing to an increase in the
opening of C-type stores prepared by LAWSON among newly
opened franchised stores, there was a rise of ¥14,843
million in buildings. Investments and other assets increased¥10,442 million to ¥145,993 million, up 7.7% from a year
ago, mainly the result of increases in long-term loans receivable and software. The principal reason for the increase insoftware was higher systems investment to prepare for nextgeneration IT investment.

Current Liabilities
Total current liabilities rose ¥3,310 million, or 2.4%, to¥141,241 million. The main contributing factor was a ¥4,345
million increase in money held as agent.

Net income was ¥22,025 million, an increase of ¥1,590
million, or 7.8%. Net income per share increased 8.6% to¥215.50.

LAWSON, INC.

ANNUAL REPORT 2006

29

Long-term Liabilities
Total long-term liabilities grew ¥252 million, or 0.5%, to¥54,859 million. This was because allowance for employees’
retirement benefits rose ¥1,010 million, whereas guarantee
deposits received from franchised stores declined ¥1,056
million due to a decrease in the number of franchised storesoperating under franchise agreements requiring the paymentof a guarantee deposit.

Shareholders’ Equity
Shareholders’ equity rose ¥14,902 million, or 9.3%, to¥175,184 million. This change mainly came about because
retained earnings grew ¥11,635 million on the back of net
income of ¥22,025 million, which offset outlays of ¥8,174
million used to pay dividends. Consequently, the equity ratio
was 46.7%, up 1.7 percentage points.

Special Account Items on the Balance
Sheet
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 sincesuch costs are recovered from franchised stores. “Duefrom franchised stores” represents mainly the obligations of franchised stores to Head Office for theseamounts at the balance sheet date. As of February 28,
2006, this asset account was ¥10,762 million, ¥430
million higher than a year ago. There was thus no substantial change in this account.
(2) Accounts Receivable—Other: Other accounts receivablesuch as income due from vendors is included in “Other”
in “Accounts receivable” on the balance sheet. The
constituent elements of this item stood at ¥21,578 million
at February 28, 2006, an increase of ¥2,852 million
from a year ago. Accrued income due from vendors andcredit card companies is included in “Prepaid expenses
and other current assets.”(3) Long-Term Loans Receivable: This account mainly
represents money paid to landlords (owners of land andbuildings for stores) to help with construction and investments and finance from Head Office to franchised

30

LAWSON, INC.

ANNUAL REPORT 2006

stores. As of February 28, 2006, this account was¥3,822 million higher than a year ago at ¥20,631 million,
due to an increase in money paid to landlords to help
with construction.
(4) Lease Deposits: This account represents leasehold
deposits paid to landlords equivalent to several months’
rent under store lease agreements at LAWSON. As of
February 28, 2006, this account was ¥89,928 million, adecrease of ¥37 million.
(5) Due to Franchised Stores: This account represents Head
Office obligations to franchised stores. All franchised
stores make remittances of cash proceeds from daily
sales to the Head Office. If franchised store remittancesof cash proceeds from daily sales to the Company
exceed the balance of “Accounts receivable—Due from
franchised stores,” the excess will be shown on thebalance sheet as “Accounts payable—Due to franchised
stores.” As of February 28, 2006, this account was¥3,417 million, down ¥566 million from a year ago.
(6) Money Held as Agent: This account mainly comprises
money held on behalf of third-party companies for which
LAWSON provides bill settlement services, including
public utility charges. There was an increase in money
held as agent due to a rise in the number of transactions
and the number of companies for which settlement
services were provided. As a reflection of this, thebalance of payments to third-party companies increased,leading to a rise of ¥4,345 million to ¥44,615 million inthis account at February 28, 2006.
(7) Guarantee Deposits Received From Franchised Stores:
This represents guarantee deposits received by LAWSON
from store owners operating under FC-G-type contracts.
As of February 28, 2006, this account was ¥50,466
million, ¥1,056 million less than a year ago due to a
decline in the number of FC-G-type contract stores.

Capital Expenditure
In fiscal 2005, capital expenditure totaled ¥54,417 million,
an increase of ¥7,544 million. Investments in new storesrose ¥4,352 million to ¥26,047 million, due to the openingof stores in the new formats, NATURAL LAWSON and
LAWSON STORE100, as well as the aggressive opening of
regular LAWSON stores. Systems-related investments rose
¥6,319 million to ¥9,084 million, mainly due to the fact that
upfront investment at the preparation stage for next-generation
IT systems used cash of approximately ¥6,000 million.

Capital Expenditure(Millions of Yen)
2006

2005

2004

2003

2002

New store investments . . . . . . . . . . . . . . . . . .

¥26,047¥21,695¥19,614¥14,663¥18,651

Existing store investments . . . . . . . . . . . . . . .

6,592

8,175

10,432

12,028

8,863

Systems-related investments . . . . . . . . . . . . .

9,084

2,765

2,191

9,133

10,045

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

1,615

4,186

377

1,149

126

Investments and advances . . . . . . . . . . . . . . .

1,250(1,000)

6,250

3,550

380

Leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

9,829

11,052

9,439

35,305

21,745

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

¥54,417¥46,873¥48,303¥75,828¥59,810

Cash FlowsNet cash provided by operating activities totaled ¥46,933
million, ¥396 million lower than in fiscal 2004. The
decrease is mainly attributable to an increase in paymentsof accounts receivable, accrued income and income taxes
paid, although there were increases in accounts payable andmoney held as agent.
Net cash used in investing activities amounted to¥55,282 million, ¥21,985 million more than in the previous
period. This change is mainly attributable to an increase inoutflows for purchases of property and store equipment,
primarily store-related buildings, an increase in outflows forpurchases of marketable securities (maturity date of morethan three months) for the purpose of short-term funds
investment, and a decrease in proceeds from redemption ofmarketable securities.
As a result of changes in cash flows from operating andinvesting activities, free cash flow—the difference between
the two figures—declined ¥22,381 million, to a negative¥8,349 million. However, this was mainly due to net outflows of ¥11,633 million associated with the purchase of
marketable securities.
Net cash used in financing activities amounted to ¥7,795
million, a decrease of ¥6,041 million from the previous
period. This change is mainly attributable to the Company’s
shareholder return policy in fiscal 2005 of emphasizing
increased dividends rather than the purchase of treasury
stock, as a result of a change in capital policy. Consequently,
while cash dividends paid rose ¥2,413 million, cash applied
to the purchase of treasury stock declined ¥8,796 million.
As a result, cash and cash equivalents at the end of the
fiscal year totaled ¥60,441 million, ¥16,144 million lessthan a year earlier.

Capital Policy: Dividends and Purchase ofTreasury Stock
LAWSON regards returning profits to shareholders as one ofits most important management policies. At the same time,it sees capital efficiency, such as ROE, as an importantmanagement indicator aimed at carrying out business thatcounterbalances high capital costs. Accordingly, we pursue
optimal capital efficiency by looking at a balance between
the distribution of profits through dividends and the purchase and cancellation of treasury stock. At the same time,
we comprehensively take into account financial conditions,profit levels, and dividend payout ratios while securing
internal reserves needed for future business expansion.
During the four-year period from 2002 to fiscal 2005,
LAWSON cancelled approximately ¥43.0 billion of treasury
stock. As regards cash dividends, in fiscal 2004, we
increased the annual cash dividend per share by ¥29 to¥70, and in fiscal 2005 we raised it by ¥20 to ¥90. Thus,
we have actively returned profits to shareholders. In fiscal
2006, we intend to introduce another increase of ¥10,bringing the annual cash dividend per share to ¥100. We aretargeting a dividend payout ratio of around 40%, which is
close to the global standard as we continue to strive toreturn profits to shareholders.

Business Cooperation and Alliances
In January 2000, LAWSON formed a comprehensive tie-up,
including a capital alliance, with Mitsubishi Corporation.
Since then, the two firms have built a cooperative relationship in the areas of personnel resources, store development, new businesses, and product development.
In March 2006, LAWSON also signed a business allianceagreement, including a capital alliance, with NTT DoCoMo,
Inc. The main elements of the alliance are as follows:

LAWSON, INC.

ANNUAL REPORT 2006

31

NTT DoCoMo acquired 2,092,000 shares of LAWSON
common stock owned by LAWSON as treasury stock, or 2%of total issued shares, for about ¥9,000 million. The business alliance comprises:• The introduction of settlement services based on iD™* at
all LAWSON stores* iD™ is a mobile phone-based credit card payment
service enabling shopping, etc., via NTT DoCoMo’s
Osaifu-Keitai® wallet services.
• The introduction of information services utilizing ToruCa™*
at all LAWSON stores* ToruCa™ is a system for capturing information such as
coupons just by holding NTT DoCoMo’s Osaifu-Keitai®
mobile phones over reader/writers at stores.
• Going forward, the two companies will hold regularmeetings to continue discussions regarding future fields
of collaboration* iD™, ToruCa™ and Osaifu-Keitai™ are trademarks orregistered trademarks of NTT DoCoMo.

Outlook
Although the Japanese economy appears to be recoveringmoderately, competition transcending the boundaries of theretail industry is becoming increasingly fierce, and customer
needs are becoming increasingly diverse.
With regard to the CVS sector, if LAWSON focuses only on
the conventional CVS business format, which just provides
merchandise assortments and services centered on the pastcore target of young male customers, by only pursuing theneed to save time and the offering of convenience, it will beforced into a war of attrition with other homogenized CVS
shops in a mature market. Moreover, in an aging society
where the birthrate is also declining, it is expected to become increasingly difficult for companies to achieve sustained, stable growth.
In this environment, we believe that LAWSON needs to
aim to become a more advanced company by pursuinginnovation in all kinds of areas, without being bound by
conventional thinking of the CVS sector, in order to achieve
growth over the medium to long term. Based on this rationale, we initiated the medium-term management plan
LAWSON Challenge 2007 in fiscal 2005. LAWSON Challenge
2007 features four key themes that are the key words of our
medium-term management strategy: 1) driving innovation; 2)
improving customer satisfaction and employee satisfaction;3) improving productivity; and 4) emphasizing corporatesocial responsibility (CSR). We will thoroughly undertakethese four challenges. More specifically, we will pursue
management measures that focus on the following threecore elements:

32

LAWSON, INC.

ANNUAL REPORT 2006

1. Enhancing our product development capabilities mainlyin the area of rice dishes and counter products throughinnovation
2. Strengthening store operation capabilities, chiefly by
reducing lost opportunities to sell hot-selling products,
based on improved order precision from informationcollection and analysis
3. Improving the ability to develop stores with high projected
earnings, by strictly observing our proprietary store opening standards.
In fiscal 2006, in addition to the above measures, we willfurther cement the position of the NATURAL LAWSON and
LAWSON STORE100 formats, which we created to fulfill theneeds of women and seniors. To this end, we will actively open
new stores and develop products that ensure differentiation.
Furthermore, based on the expertise acquired from these
new formats, we will actively introduce products that suit theneeds of women and seniors, as part of merchandise
tailored to individual stores, in the core regular LAWSON
format, which comprises a chain of more than 8,000 stores.
Through these measures, we aim to expand our customer
base and increase customer numbers as a result of anincrease in customer visits by the new target group, namely,
women and seniors.
By strengthening existing stores, developing new storeswith high ROI, establishing new formats and steadily implementing other management measures, we will attempt toenhance customer satisfaction. Our goal is to improve
corporate earnings and expand the earnings of franchised
store owners by expanding the customer base as a result of
these actions.
In fiscal 2006, we estimate that operating income will
increase 3.3% to ¥45.3 billion, and that net income will rise
5.8% to ¥23.3 billion.

Business Risk Factors
The main risks that may impact on LAWSON’s performanceand financial position are described on the following page.
Sufficiently aware that these risks may occur, LAWSON
conducts risk management and is also building and reinforcing an internal control system so as to respond in the bestmanner possible should a risk materialize. Nevertheless,these risks are only within the range of what can be forecast
based on information currently available to the Company,
and we do not believe that they cover all potential risks
relating to LAWSON’s business operations.

(1) Risks relating to changes in the businessenvironment
Because LAWSON’s main business is the operation of
convenience stores, changes in consumer expenditureproduced by changes in the economic environment, business cycle trends, or the social structure in Japan andoverseas countries where the Company operates, as well aschanges in competition with other companies in the CVS
sector or different retail sectors, and deregulation such asrevision of the Large-Scale Retail Store Location Law may
impact LAWSON’s earnings and financial conditions.

(2) Risks relating to food safety and hygiene
management
In the CVS business, LAWSON’s main business, theCompany sells food products to customers. From the manufacturing process to stores, in cooperation with suppliers,
LAWSON strictly observes quality standards by performing
thorough hygiene management and also performs rigorous
hygiene management within stores. However, loss of customer trust in the unlikely event of a serious incident suchas food poisoning or contamination by foreign matter could
have an impact on the Company’s performance and financial
position. Should such an incident occur, the Company
intends to make the utmost effort to minimize the effect on
customers by making a public announcement as quickly as
possible through the mass media and other channels.

(3) Risks relating to handling of personal information
In the process of business operations, LAWSON handles
personal information of customers, suppliers, franchiseowners and other parties. The Company recognizes that theleakage of personal information or improper access topersonal information are serious risks. Consequently, we
have devised the best possible information security measures and formulated a policy to protect personal information. We have also ensured that personnel within the
Company are thoroughly aware of these matters. However,should customer information be leaked or divulged outside
the Company under whatever circumstances, LAWSON’s
performance or financial position may be affected.

(4) Legal and regulatory risks
LAWSON operates numerous stores in various regions
throughout Japan and overseas, and the majority of storesoperate 24 hours a day. Because of this, in operating its
business, the Company must comply with various laws andregulations regarding store development, operating hours,
hygiene management, product transactions, environmental
protection, and other matters in Japan and overseas, andmust obtain various permits and licenses from administrative authorities. Therefore, should events arise such as an
unforeseen change in laws or regulations or a change in theenforcement methods of administrative authorities, newcompliance costs could arise, which could have an impact
on LAWSON’s performance or financial position.

(5) Risks relating to franchise operations
In the CVS business, LAWSON’s main business, theCompany has adopted the franchise system. Based on
franchise agreements concluded with franchised stores,
LAWSON operates a chain of stores via store brand namesthat are owned by LAWSON. Therefore, if the brand image ofthe overall chain is affected by illegal or improper actions at
a franchised store, there may be an impact on LAWSON’s
performance or financial position.
Furthermore, the franchise system is designed to encourage improved business performance for both franchised
stores and the Company, based on a relationship of mutual
trust. If this relationship of trust between LAWSON andfranchised stores is damaged for any reason, and, as aconsequence, many franchise agreements are cancelled,there may be an impact on LAWSON’s performance or
financial position.

(6) Risks relating to unseasonable weather ordisasters
Substantial differences in climate and temperatures fromthe average year could have an impact on LAWSON’s performance. Moreover, as LAWSON is a national chain withstores located throughout Japan’s 47 prefectures and otheradministrative divisions, there is a risk that performance willfluctuate due to natural disasters in regions where snowfalls
are heavy or typhoons often occur.

LAWSON, INC.

ANNUAL REPORT 200633

Overview of the CVS Sector

CVS Share of the Total Retail Market(Billions of Yen,%)150,000
4.8

5.0

5.3

5.5
5.7

5.7

4.5

100,000

50,0000Years ended December 31■ Total retail industry annual sales■ CVS sector annual sales

CVS share (%)

1999

2000

2001

2002

2003

2004

2005

¥141,450¥139,434¥136,808¥131,413¥128,870¥128,093¥129,526

6,383

6,680

6,846

6,980

7,096

7,289

7,360

4.5%

4.8%

5.0%

5.3%

5.5%

5.7%

5.7%

Share of CVS Market Held by Top Five Chains (Sales)(Billions of Yen,%) (Net sales of all stores)

7,500

78.7
77.8
77.0
76.4

5,000

75.4
74.5
73.6

2,500

0

February 28 and 29

2000

2001

2002

2003

2004

2005

2006

■ LAWSON¥1,221¥1,275¥1,286¥1,294¥1,288¥1,329¥1,362■ Seven-Eleven Japan

1,964

2,047

2,114

2,213

2,343

2,441

2,499

■ FamilyMart

783

843

899

932

954

998

1,032

■ Circle K

391

447

467

485

480

503

505

■ Sunkus

342

366

393

406

403

403

394

4,701

4,978

5,159

5,330

5,468

5,674

5,792

Total
(Share) (%)
CVS industry

73.6%

74.5%

75.4%

76.4%

77.0%

77.8%

78.7%

¥6,383¥6,680¥6,846¥6,980¥7,096¥7,289¥7,360

2001

2002

2003

2004

2005

2006

Net Sales of All Stores (Consolidated)(Millions of Yen)

1,500,000

1,000,000

500,000

0

February 28 and 29

2000■ Net sales of all stores (consolidated)

34

LAWSON, INC.

¥1,222,880 ¥1,277,638 ¥1,285,557 ¥1,294,042

ANNUAL REPORT 2006

¥1,288,297 ¥1,329,077 ¥1,361,731

Selected Financial Data

Breakdown of Net Sales by Product Segment(%)

Year ended February 28, 2006

Breakdown of net sales
by product segment

100.0■ Processed foods

50.1■ Fast foods

22.9■ Daily foods

11.1■ Non-food products

15.9

YoY Rate on Existing Store Sales, Average Number of Customers and Average Purchase Valueper Customer in Existing Stores
(%)

105

100

95

2000

2001

2002

2003

2004

2005

2006

99.6

98.3

98.4

98.1

97.5

99.7

97.5

Number of customers

–

–

–

98.2

99.0

100.1

99.1

Average purchase value per customer

–

–

–

99.9

100.2

99.7

98.3

YoY rate on existing store sales
Average number of customers andaverage purchase value per customer
in existing stores

Average Daily Sales per Store (Non-consolidated)(Thousand of Yen)

600

400

200

0

2000

2001

2002

2003

2004

2005

2006

■ Total stores

¥483

¥486

¥489

¥489

¥484

¥488

¥480

■ New stores

435

421

431

457

436

448

426

LAWSON, INC.

ANNUAL REPORT 2006

35

Number of Stores
450

9,000

283
300

6,000
210
146
3,000
54

66

2000

2001

90

96

2002

2003

150

0

0

2004

2005

2006

Number of stores (Japan)

7,378

7,683

7,734

7,625

7,821

8,077

8,366

■ Franchised stores

6,526

6,972

7,179

7,291

7,472

7,731

7,958

■ Company-operated stores

852

711

555

334

349

346

408

■ Number of overseas stores(Shanghai, China)

54

66

90

96

146

210

283

Operating Income(Millions of Yen)

50,00040,00030,00020,00010,0000■ Operating income

2000

2001

2002

2003

2004

2005

2006

¥40,185¥41,279¥36,363¥34,107¥38,087¥42,941¥43,867

Net Income(Millions of Yen)

25,00020,00015,00010,0005,000

0■ Net income

36

LAWSON, INC.

ANNUAL REPORT 2006

2000

2001

2002

2003

2004

2005

2006

¥15,011¥16,368¥16,123¥8,861¥18,571¥20,435¥22,025

Net Income per Share
(Yen)

250

200

150

100

50

0

■ Net income per share

2000

2001

2002

2003

2004

2005

2006

¥143

¥148

¥146

¥82

¥176

¥198

¥216

Cash Dividends per Share and Payout Ratio (Non-consolidated)(Yen, %)

100

43.0
40.5
35.0

75
27.2
24.0

22.8

50
11.6
25

0

2000

■ Cash dividends per share
Payout ratio (%)

2003

2004

2005

¥17

2001

¥35

2002

¥41

¥41

¥41

¥70

2006

¥90

11.6%

24.0%

27.2%

43.0%

22.8%

35.0%

40.5%

Return on Equity (ROE)
(%)

20.0

15.0

10.0

5.0

0

ROE

2000

2001

2002

2003

2004

2005

2006

16.8%

11.9%

9.8%

5.9%

12.1%

13.0%

13.1%

LAWSON, INC.

ANNUAL REPORT 200637

Consolidated Balance Sheets
LAWSON, INC. and Subsidiaries
February 28, 2006 and 2005

Millions of Yen

Thousands of
U.S. Dollars(Note 1)

2006

2005

2006

¥ 60,441
19,652¥ 76,585
8,019$ 519,833
169,020

10,762
21,578
(81)
1,573
6,250
3,189
6,478

10,332
18,726
(81)
1,376
5,000
3,241
5,395

92,560185,585(697)
13,52953,75427,42855,716

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

129,842

128,593

1,116,728

PROPERTY AND STORE EQUIPMENT (Notes 4 and 6):
Land (Note 7) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Buildings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Furniture, fixtures and equipment (Note 6) . . . . . . . . . . . . . . . . . . . . . . .

5,237
130,108
60,4105,644
115,265
58,12445,042
1,119,016
519,567

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

195,755(96,483)

179,033(86,867)

1,683,625(829,819)

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

99,272

92,166

853,806

INVESTMENTS AND OTHER ASSETS:
Investment securities (Note 5) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investments in associated companies . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-term loans receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Lease deposits (Note 8) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred tax assets (Note 14) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred tax assets for land revaluation (Note 7) . . . . . . . . . . . . . . . . . .
Software (Note 6) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Allowance for doubtful accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1,962
1,087
20,631
89,928
11,0463,331
15,807
6,663(4,462)

1,173
728
16,80989,965
8,291
4,828
12,307
5,588(4,138)16,875
9,349
177,440
773,441
95,00328,649135,951
57,306(38,376)

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

145,993

135,551

1,255,638

TOTAL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

¥375,107¥356,310$3,226,172

ASSETS
CURRENT ASSETS:
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Marketable securities (Note 5) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts receivable:
Due from franchised stores (Notes 3 and 10) . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Allowance for doubtful accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Short-term loan to associated company (Note 16) . . . . . . . . . . . . . . . . . .
Deferred tax assets (Note 14) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prepaid expenses and other current assets . . . . . . . . . . . . . . . . . . . . . .

See notes to consolidated financial statements.

38

LAWSON, INC.

ANNUAL REPORT 2006

Millions of Yen

Thousands of
U.S. Dollars(Note 1)

2006

2005

2006

CURRENT LIABILITIES:
Accounts payable:
Trade (Notes 9 and 16) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Due to franchised stores (Note 10) . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income taxes payable (Note 14) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Money held as agent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued expenses and other current liabilities . . . . . . . . . . . . . . . . . . . .

¥ 63,170
3,417
14,344
10,32444,6155,371¥ 62,554
3,983
14,017
11,71840,2705,389$ 543,304
29,388123,368
88,793
383,719
46,195

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

141,241

137,931

1,214,767

2,817

1,807

24,228318
50,466
870
140
248

305
51,522
813
160

2,735
434,041
7,483
1,204
2,133

................................

54,85954,607

471,824

MINORITY INTERESTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

3,823

3,490

32,881SHAREHOLDERS’ EQUITY (Notes 12 and 19):
Common stock—authorized, 409,300,000 shares in 2006 and 2005;
issued, 104,600,000 shares in 2006 and 2005 . . . . . . . . . . . . . . . . .
Capital surplus . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Land revaluation difference (Note 7) . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net unrealized gain on available-for-sale securities . . . . . . . . . . . . . . . . .
Foreign currency translation adjustments . . . . . . . . . . . . . . . . . . . . . . . .
Treasury stock—at cost, 2,313,932 shares in 2006
and 2,422,809 shares in 2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

58,507
41,52088,356(4,855)696
105

58,507
41,52376,721(7,038)110
34503,199
357,100
759,921(41,756)
5,986
903(9,145)(9,575)(78,653)

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

175,184

160,282

1,506,700

TOTAL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

¥375,107¥356,310$3,226,172

LIABILITIES AND SHAREHOLDERS’ EQUITYLONG-TERM LIABILITIES:Allowance for employees’ retirement benefits (Note 11) . . . . . . . . . . . . .
Allowance for retirement benefits to executive officers
and corporate auditors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Guarantee deposits received from franchised stores . . . . . . . . . . . . . . . .
Lease deposits from lessees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Allowance for impairment loss on leased property (Note 15) . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total long-term liabilities

CONTINGENT LIABILITIES (Note 17)

LAWSON, INC.

ANNUAL REPORT 2006

39

Consolidated Statements of Income
LAWSON, INC. and Subsidiaries
Years Ended February 28, 2006 and 2005

Millions of Yen

Thousands of
U.S. Dollars(Note 1)

2006

2005

2006

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

¥170,785
66,027
31,246¥162,963
63,802
27,630$1,468,866
567,876
268,737

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

268,058

254,395

2,305,479

COST AND OPERATING EXPENSES:
Cost of sales for Company-operated stores . . . . . . . . . . . . . . . . . . . . . .
Selling, general and administrative expenses (Notes 11 and 15) . . . . . . .

48,297
175,894

46,819164,635

415,387
1,512,806

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

224,191

211,454

1,928,193

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

43,86742,941

377,286

386
286
989
263
(3,014)(2,708)

343
(609)

3,320
2,460
8,506
2,262
(25,922)(23,291)

OTHER INCOME (EXPENSES):Interest income—net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity in gains (losses) of associated companies . . . . . . . . . . . . . . . . . .
Gain on sales of investment in securities . . . . . . . . . . . . . . . . . . . . . . . .
Reversal of allowance for doubtful accounts . . . . . . . . . . . . . . . . . . . . . .
Loss on disposal of property and store equipment . . . . . . . . . . . . . . . . .
Impairment of long-lived assets (Note 6) . . . . . . . . . . . . . . . . . . . . . . . .
Provision for allowance for doubtful accounts . . . . . . . . . . . . . . . . . . . . .
Other—net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(1,346)(2,182)(818)(11,577)

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

(5,144)(6,901)(44,242)

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

38,72336,040333,044

INCOME TAXES (Note 14):
Current . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

17,823(1,606)

17,313(1,945)

153,290(13,813)

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

16,217

15,368

139,477

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

(481)

(237)

(4,137)NET INCOME . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

¥ 22,025¥ 20,435$ 189,430

Yen

U.S. Dollars

2006

2005

2006

¥215.50215.46
90.00¥198.47

$1.85
1.85
0.77

PER SHARE OF COMMON STOCK (Notes 2.o and 18):
Net income — basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income — diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
See notes to consolidated financial statements.

40

LAWSON, INC.

ANNUAL REPORT 2006

(3,635)70.00

Consolidated Statements of Shareholders’ Equity
LAWSON, INC. and Subsidiaries
Years Ended Februar y 28, 2006 and 2005

Thousands of Shares/Millions of Yen

Common Stock
SharesAmountCapitalSurplusRetained
Earnings

BALANCE, MARCH 1, 2004 . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . .
Year-end cash dividends, ¥21 per share . . .
Interim cash dividends, ¥35 per share . . . . .
Reversal of land revaluation difference . . . . .
Change in effective tax rate . . . . . . . . . . . . .
Net increase in unrealized gain
on available-for-sale securities . . . . . . . . . .
Net decrease in foreign currencytranslation adjustments . . . . . . . . . . . . . .
Treasury stock—at cost:
Purchase of treasury stock . . . . . . . . . . .
Retirement of treasury stock . . . . . . . . . .
Exercise of stock options . . . . . . . . . . . . .

107,600¥58,507¥41,521¥72,769
20,435(2,191)(3,584)(5)

BALANCE, FEBRUARY 28, 2005 . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . .
Year-end cash dividends, ¥35 per share . . .
Interim cash dividends, ¥45 per share . . . . .
Reversal of land revaluation difference . . . . .
Net increase in unrealized gain
on available-for-sale securities . . . . . . . . . .
Net increase in foreign currencytranslation adjustments . . . . . . . . . . . . . .
Treasury stock—at cost:
Purchase of treasury stock . . . . . . . . . . .
Exercise of stock options . . . . . . . . . . . . .

104,600

BALANCE, FEBRUARY 28, 2006 . . . . . . . . . . .

104,600

Net Unrealized
Gain onLand
AvailableRevaluation
for-saleDifference
Securities¥(7,067)¥ 53

Foreign
Currency
Translation
Adjustments¥ 68

Treasury Stock
SharesAmount(3,283) ¥(11,534)

5
24
57
(34)

(3,000)(10,703)2
58,507

41,52376,721
22,025(3,576)(4,598)(2,183)(7,038)110

34(2,155)3,000
15(8,798)10,70354(2,423)(9,575)

(1)
110

(2)
432

2,183
586
71

¥58,507(3)(33)¥41,520¥88,356¥(4,855)

¥696

¥105

(2,314) ¥ (9,145)

Thousands of U.S. Dollars (Note 1)

CommonStockCapitalSurplusRetained
Earnings

Net Unrealized
Gain onLand
AvailableRevaluation
for-saleDifference
Securities

BALANCE, FEBRUARY 28, 2005 . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Year-end cash dividends, $0.30 per share . . . . . . . . . .
Interim cash dividends, $0.39 per share . . . . . . . . . . .
Reversal of land revaluation difference . . . . . . . . . . . . .
Net increase in unrealized gain
on available-for-sale securities . . . . . . . . . . . . . . . . . .
Net increase in foreign currencytranslation adjustments . . . . . . . . . . . . . . . . . . . . . .
Treasury stock—at cost:
Purchase of treasury stock . . . . . . . . . . . . . . . . . . .
Exercise of stock options . . . . . . . . . . . . . . . . . . . . .

$503,199 $357,126 $659,852 $(60,531)
189,430(30,756)(39,546)(18,775) 18,775

BALANCE, FEBRUARY 28, 2006 . . . . . . . . . . . . . . . . . . .

$503,199 $357,100 $759,921 $(41,756)$ 946

Foreign
Currency
Translation
Adjustments

TreasuryStock$292 $(82,351)

5,040
611

(26)

(17)
3,715

(284)
$5,986$903 $(78,653)

See notes to consolidated financial statements.

LAWSON, INC.

ANNUAL REPORT 2006

41

Consolidated Statements of Cash FlowsLAWSON, INC. and Subsidiaries
Years Ended February 28, 2006 and 2005

Millions of Yen

Thousands of
U.S. Dollars(Note 1)

2006

2005

2006

¥ 38,723¥ 36,040$ 333,044(19,217)
20,896
2,708
324
1,846
(286)
(989)
1,825

(15,605)
19,641(165,279)
179,720
23,291
2,787
15,877(2,460)(8,506)
15,694(2,908)
(588)
(197)
376
4,345
52

7,378
(473)
(2,940)(3,476)267(25,011)(5,057)(1,694)
3,234
37,370
457

1,022

577

8,790

(1,056)57(1,047)13(9,082)490

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

8,210

11,28970,611

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

46,93347,329403,655(44,709)
33,076
1,705(28,631)37(1,250)(3,821)(384,527)
284,476
14,664(246,246)
318(10,751)(32,863)(100,533)

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

2,342
2,447
609
(92)
1,648

INVESTING ACTIVITIES:
Purchases of marketable securities . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from redemption of marketable securities . . . . . . . . . . . . . . . .
Proceeds from sales of investment securities . . . . . . . . . . . . . . . . . . . . .
Purchases of property and store equipment . . . . . . . . . . . . . . . . . . . . . .
Decrease in lease deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(Increase) decrease in short-term loan . . . . . . . . . . . . . . . . . . . . . . . . . .
Increase in long-term loan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Payment for acquisition of goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(11,689)(34,319)
35,545
216(26,710)623
1,250(3,700)(1,685)(4,517)

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

(55,282)(33,297)(475,462)

FINANCING ACTIVITIES:Cash dividends paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from issuance of shares upon exercise of stock option . . . . . . .
Purchase of treasury stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
New shares issued to subsidiary’s minority shareholders . . . . . . . . . . . .

(8,188)395(2)(5,775)56(8,798)681(70,422)
3,397
(17)

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

(7,795)(13,836)(67,042)

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

(16,144)

196(138,849)

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

76,58576,389658,682

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

¥ 60,441¥ 76,585$ 519,833

See notes to consolidated financial statements.

42

LAWSON, INC.

ANNUAL REPORT 2006

Notes to Consolidated Financial Statements
LAWSON, INC. and Subsidiaries
Years Ended February 28, 2006 and 2005

1. Basis of Presenting Consolidated Financial Statements
The accompanying consolidated financial statements have been prepared in accordance withthe provisions set forth in the Japanese Securities and Exchange Law and its related accounting
regulations, and in conformity with accounting principles generally accepted in Japan, which
are different in certain respects as to application and disclosure requirements of International
Financial Reporting Standards.
In preparing these consolidated financial statements, certain reclassifications and rearrangements have been made to the consolidated financial statements issued domestically inorder to present them in a form which is more familiar to readers outside Japan.
Certain reclassifications have been made in the 2005 financial statements to conform to
the 2006 presentation.
The consolidated financial statements are stated in Japanese yen, the currency of thecountry in which LAWSON, INC. (the “Company”) is incorporated and operates. The translationsof Japanese yen amounts into U.S. dollar amounts are included solely for the convenience ofreaders outside Japan and have been made at the rate of ¥116.27 to $1, the approximate
rate of exchange at February 28, 2006. Such translations should not be construed as representations that the Japanese yen amounts could be converted into U.S. dollars at that or any
other rate.
Mitsubishi Corporation (“Mitsubishi”) owned 32,399 thousand shares of common stock of
the Company (including indirect holdings) as of February 28, 2006, which represented 31.7%of the total voting rights of the Company. Accordingly, Mitsubishi is a principal shareholder.

2. Summary of Significant Accounting Policies
a. Consolidation—The consolidated financial statements include the accounts of theCompany and its 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
over which the Companies have the ability to exercise significant influence are accounted forby the equity method.
The excess of the cost of the Company’s investments in consolidated subsidiaries andassociated companies 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 afranchise agreement. Under the agreement, all franchised 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 onan accrual basis by reference to the annual gross margin earned by each franchised store
and the applicable commission percentage. According to the franchise agreement, afranchised store may pay additional guarantee deposits equal to twice the average monthly
sales amounts of the respective store and pay a lower commission percentage.

LAWSON, INC.

ANNUAL REPORT 2006

43

The term of a franchise agreement is effective for 10 years from the commencement date ofa 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 ofsuch 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 the “Due tofranchised stores” account and then applied to working capital for purchases of merchandiseand 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
for the stores. However, the Company does not require the franchisees to make lease
payments related to the stores. Instead, a higher percentage applicable to the gross margin
would be used as the basis for determining the franchise commissions. The portion of
franchise commission attributable to property 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 thedate of acquisition and which are readily convertible into cash and are exposed to insignificant risk of changes in value.
d. Inventories—Inventories are stated at cost determined by the retail method as generally
applied in the retail industry.
e. Marketable and Investment Securities—Marketable and investment securities are classified and accounted 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, are reported 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 and losses net of applicable taxes are reported in a separate
component of shareholders’ equity. The cost of securities sold is determined based on themoving-average method.
Non-marketable available-for-sale securities are stated at cost determined by themoving-average method. For other than temporary declines in fair value, non-marketableavailable-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 forland (see Note 7). Depreciation is computed by the declining-balance method at rates basedon the estimated useful lives of the assets. The range of useful lives is principally from 10 to34 years for buildings and structures and from 5 to 8 years for furniture, fixtures and equipment.
g. Long-lived Assets—In August 2002, the Business Accounting Council (“BAC”) issued aStatement of Opinion, “Accounting for impairment of Fixed Assets,” and in October 2003 the
Accounting Standards Board of Japan (“ASBJ”) issued ASBJ Guidance No. 6, “Guidance for
Accounting Standard for impairment of Fixed Assets.” These new pronouncements were effective for fiscal years beginning on or after April 1, 2005 with early adoption permitted for fiscal
years ending on or after March 31, 2004.
The Companies adopted the new accounting standard for impairment of fixed assets as ofMarch 1, 2005.

44

LAWSON, INC.

ANNUAL REPORT 2006

The Company reviews its long-lived assets for impairment whenever events or changes incircumstance indicate the carrying amount of an asset or asset group, mainly by each store,
may not be recoverable. An impairment loss would be recognized if the carrying amount of anasset or asset group exceeds the sum of the undiscounted future cash flows expected to result
from the continued use and eventual disposition of the asset or asset group. The impairment
loss would be measured as the amount by which the carrying amount of the asset exceeds its
recoverable amount, which is the higher of the discounted cash flows from the continued use
and eventual disposition of the assets or the assets or the net selling price at disposition.
The effect of adoption of the new accounting standard for impairment of fixed assets (seeNote 6) was to increase operating income by ¥132 million ($1,135 thousand) and to
decrease income before income taxes by ¥1,854 million ($15,946 thousand) for the year
ended February 28, 2006.

h. Software—Software used by the Companies is amortized using the straight-line method
based on the estimated useful life (mainly 5 years).
i. Employees’ Retirement Benefits—The Company and a certain domestic subsidiary havedefined benefit, lump-sum severance indemnity plans which cover substantially all of theiremployees. The Company established a trust fund for its lump-sum severance indemnity plan.
The Companies account for the liability for retirement benefits based on the projected
benefit obligations and plan assets at the balance sheet date.
In addition to the lump-sum severance indemnity plan, the Company has a defined contribution plan for severance payments. The Company recognizes expenses in the period when thecontribution was called for.
j. Allowance for Retirement Benefits to Executive Officers and Corporate Auditors—The
provisions are calculated to state the liability at 100% of the amount that would be required if
all executive officers and corporate auditors resigned as of each balance sheet date. At thegeneral shareholders’ meeting held on May 27, 2005, the Company abolished the conventional retirement benefit system for directors.
k. 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 lease transactions if certain “as if capitalized” information is disclosed in thenotes to the consolidated financial statements.
l. 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. Deferredincome taxes are recorded to reflect the impact of temporary differences between assets andliabilities recognized for financial reporting purposes and such amounts recognized for tax
purposes. These deferred taxes are measured by applying currently enacted tax laws to thetemporary differences.
m. Appropriations of Retained Earnings—Appropriations of retained earnings at each yearend are reflected in the financial statements for the following year upon shareholders’ approval.
n. Foreign Currency Financial Statements—The balance sheet accounts of an associatedcompany denominated in foreign currencies 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 arising from such translation are shown as “Foreign
currency translation adjustments” in a separate component of shareholders’ equity. Revenue
and expense accounts of an affiliated company denominated in foreign currencies are translated into yen at the current exchange rate.
LAWSON, INC.

ANNUAL REPORT 200645

o. Per Share Information—Basic net income per share is computed by dividing net income
available to common 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 102,202,000 sharesfor 2006 and 102,962,000 shares for 2005.
Diluted net income per share for the year ended February 28, 2006 is computed by using
the weighted-average number of common shares outstanding adjusted to include the potentially dilutive effect of stock options that were outstanding during the year. Diluted net income
per share for the year ended February 28, 2005 is not disclosed because the Company did
not have stock options which would have resulted in a dilutive 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 year.
p. New Accounting Pronouncements
Business combination and business separation
In October 2003, the BAC issued a Statement of Opinion, “Accounting for Business
Combinations,” and on December 27, 2005 the ASBJ issued “Accounting Standard forBusiness Separations” and ASBJ Guidance No. 10, “Guidance for Accounting Standard forBusiness Combinations and Business Separations.” These new accounting pronouncements
are effective for fiscal years beginning on or after April 1, 2006.
The accounting standard for business combinations allows companies to apply the poolingof interests method of accounting only when certain specific criteria are met such that thebusiness combination is essentially regarded as a uniting of interests. These specific criteria
are as follows:(a) the consideration for the business combination consists solely of common shares withvoting rights,(b) the ratio of voting rights of each predecessor shareholder group after the businesscombination is nearly equal, and(c) there are no other factors that would indicate any control exerted by any shareholder groupother than voting rights.
For business combinations that do not meet the uniting-of-interests criteria, the businesscombination is considered to be an acquisition and the purchase method of accounting isrequired. This standard also prescribes the accounting for combinations of entities undercommon control and for joint ventures. Goodwill, including negative goodwill, is to be systematically amortized over 20 years or less, but is also subject to an impairment test.
Under the accounting standard for business separations, in a business separation where
the interests of the investor no longer continue and the investment is settled, the difference
between the fair value of the consideration received for the transferred business and thebook value of net assets transferred to the separated business is recognized as a gain orloss on business separation in the statement of income. In a business separation where theinterests of the investor continue and the investment is not settled, no such gain or loss on
business separation is recognized.
The Company will adopt the new standard for all transactions of business combination/
separation effective March 1, 2007.

46

LAWSON, INC.

ANNUAL REPORT 2006

Stock options
On December 27, 2005, the ASBJ issued “Accounting Standard for Stock Options” andrelated guidance. The new standard and guidance are applicable to stock options newly
granted on and after May 1, 2006.
This standard requires companies to recognize compensation expense for employee stock
options based on the fair value at the date of grant and over the vesting period as consideration
for receiving goods or services. The standard also requires companies to account for stock
options granted to non-employees based on the fair value of either the stock option or the
goods or services received. In the balance sheet, the stock option is presented as a stockacquisition right as a separate component of shareholders’ equity until exercised. The standard
covers equity-settled, share-based payment transactions, but does not cover cash-settled,share-based payment transactions. In addition, the standard allows unlisted companies tomeasure options at their intrinsic value if they cannot reliably estimate fair value.
The Company will adopt the new standard for stock options newly granted after May 1, 2006.
The adoption of this standard is not expected to have a material impact on the consolidated
financial statements in the year ending February 28, 2007.

3. Accounts Receivable—Due From Franchised Stores
Under the franchise agreement, the Company is responsible for providing architectural anddesigning services with respect to the franchised stores’ facilities, for training of the franchisees’ personnel, and for the centralized processing of invoices from suggested vendors ofmerchandise and subsequent payments of amounts payable to such vendors.
The EDP system of the Company generates a record of merchandise purchased by eachfranchised 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 the vendors on the stores’ behalf. When the merchandise is received byeach 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.

ANNUAL REPORT 2006

47

4. Property and Store Equipment
Property and store equipment as of February 28, 2006 and 2005, consisted of the following:

Millions of Yen

Thousands of
U.S. Dollars

2005

2006

1,347
104,908
49,563$ 12,239
1,017,434
442,1092006

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

¥

1,423
118,297
51,404¥

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

171,124
84,850155,81875,888

1,471,782
729,767

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

86,27479,930742,015

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

3,814
11,811
9,006

4,297
10,357
8,561

32,803
101,582
77,458

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

24,631
11,633

23,215
10,979211,843
100,052

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

12,998

12,236

111,791

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

¥ 99,272¥ 92,166$ 853,806

5. Marketable and Investment Securities
Marketable and investment securities as of February 28, 2006 and 2005, consisted of
the following:Thousands of
U.S. Dollars

Millions of Yen

Current—Bonds . . . . . . . . . . . . . . . . . . . . . . . .
Non-current—Marketable and other
equity securities . . . . . . . . . . . . . . . . . . . . . .
Non-current—Bonds . . . . . . . . . . . . . . . . . . . . .

2006

2005

2006

¥19,652¥8,019$169,020

1,464
498

1,173

12,592
4,283

The costs and aggregate fair values of marketable and investment securities at February
28, 2006 and 2005, were as follows:
Millions of Yen
February 28, 2006

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

Cost¥16,012288
4,141

Unrealized
Gains

Unrealized
Losses

Fair
Value

¥
1
1,175

¥3
3

¥16,010
1,463
4,138

¥2
2

¥ 8,017
1,133

February 28, 2005

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

48

LAWSON, INC.

ANNUAL REPORT 2006

¥ 8,019947¥ 188

Thousands of U.S. Dollars
February 28, 2006

Cost

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

$137,714
2,477
35,615

Unrealized
Gains

$

Unrealized
Losses

Fair
Value

$26

$137,697
12,58335,589910,106

26

Available-for-sale securities whose fair value is not readily determinable as of February 28,
2006 and 2005, were as follows:
Carrying Amount

Available-for-sale—Equity securities . . . . . . . . . . . . . .

Millions of Yen

Thousands of
U.S. Dollars

2006

2005

2006

¥1

¥40

$9

Proceeds from sales of available-for-sale securities for the years ended February 28, 2006
and 2005 were ¥1,705 million ($14,664 thousand) and ¥216 million, respectively. Grossrealized gains and losses on these sales, computed on the moving-average cost basis, were¥989 million ($8,506 thousand) and ¥0 million ($0 thousand), respectively, for the year
ended February 28, 2006, and ¥0 million and ¥14 million, respectively, for the year ended
February 28, 2005.

6. Long-lived Assets
The Companies recognized an impairment loss mainly for each store as the smallest cash
generating unit, which declined in value due mainly to continuous operating losses. The carrying
amount of those assets was written down to the recoverable amount and was recorded in
special losses in the statement of income.
The Companies recognized impairment loss on the following asset categories during thisfiscal year:

Millions of Yen

Thousands of
U.S. Dollars

Tokyo . . . . . . . . . . . . . . . . . . .
Osaka . . . . . . . . . . . . . . . . . .
Others . . . . . . . . . . . . . . . . . .
Kyoto, etc. . . . . . . . . . . . . . . . .
Tokyo . . . . . . . . . . . . . . . . . . .

¥ 272
183
1,870
316
67

$ 2,339
1,574
16,084
2,718
576

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

¥2,708$23,291

Category

Related Assets

Location

StoresBuildings andfurniture, fixturesand equipment
Land
Software, etc.

Others

The above assets consist of land of ¥316 million ($2,718 thousand), buildings of ¥1,676
million ($14,415 thousand), leased property of ¥204 million ($1,755 thousand), and other of¥512 million ($4,403 thousand).
The recoverable amounts of those assets were measured based on net selling price orvalue in use. The net selling price of land was calculated based on the appraised value by areal estate appraiser or expected contract price. The value in use was calculated by discounting estimated future cash flows to which the 6.0% discount rate was applied.

LAWSON, INC.

ANNUAL REPORT 2006

49

7. 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 on real estate appraisal information as of February 28, 2002.
The resulting land revaluation difference represents unrealized depreciation of land and isstated, 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 theland value subsequently declines significantly.

8. 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 withsuch 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 28, 2006 and 2005, consisted of the following:

Millions of Yen

Thousands of
U.S. Dollars

2006

2005

2006

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

¥74,856¥74,354$643,812

15,072

15,611

129,629

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

¥89,928¥89,965$773,441

9. Accounts Payable—Trade
The balances of “Accounts payable—trade” represent the amounts payable to vendors formerchandise purchased by Company-operated stores and franchised stores. The Company
centralizes all merchandise purchasing procedures both for Company-operated stores andfranchised stores and makes collective payments to vendors (see Note 3).
Accounts payable—trade as of February 28, 2006 and 2005, were summarized below:

Millions of Yen

Thousands of
U.S. Dollars

2006

2005

2006

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

¥59,795¥59,457$514,277

3,375

3,097

29,027

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

¥63,170¥62,554$543,304

10. 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 consolidatedbalance sheets, such excess balances are presented as “Accounts payable—due tofranchised stores.”

50

LAWSON, INC.

ANNUAL REPORT 2006

11. Employees’ Retirement Benefits
The Company and a certain domestic subsidiary each have defined benefit lump-sum severance indemnity plans.
Under the plans, employees terminating their employment are entitled to retirement benefits
determined based on the rate of pay, years of service and certain other factors at the time oftermination. Such retirement benefits are made in the form of a lump-sum severance payment
from the Company or from certain subsidiaries. Employees are entitled to larger payments if
the termination is involuntary, by retirement at the mandatory retirement age, by death, or byvoluntary retirement at certain specific ages prior to the mandatory retirement age.
The funded status of these plans as of February 28, 2006 and 2005, was as follows:

Millions of Yen

Thousands of
U.S. Dollars

2006

2005

2006

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

¥10,710(5,536)(1,406)(951)¥ 9,898(5,536)(1,582)(973)$ 92,113(47,613)(12,093)(8,179)Net liability . . . . . . . . . . . . . . . . . . . . . .

¥ 2,817¥ 1,807$ 24,228

The components of net periodic benefit costs for the years ended February 28, 2006 and2005, were as follows:

Service cost . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest cost . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of prior service cost . . . . . . . . . . .
Recognized actuarial loss . . . . . . . . . . . . . . . . .
Contribution to defined contribution plan . . . . . .
Net periodic benefit costs . . . . . . . . . . .

Millions of Yen

Thousands of
U.S. Dollars

2006

2005

2006

812
197
176
119
248

¥ 659
175
176
72
245

$ 6,984
1,694
1,514
1,023
2,133

¥1,552¥1,327$13,348¥

Assumptions used for the years ended February 28, 2006 and 2005, were as follows:

Discount rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected rate of return on plan assets . . . . . . . . . . . . . . . . . .
Amortization period of prior service cost . . . . . . . . . . . . . . . . .
Recognition period of actuarial gain/loss . . . . . . . . . . . . . . . . .

2006

2005

2.0%
0%
10 years
10 years

2.0%
0%
10 years
10 years

12. Shareholders’ Equity
Japanese companies are subject to the Japanese Commercial Code (the “Code”).
The Code requires that all shares of common stock be issued with no par value and at
least 50% of the issue price of new shares is required to be recorded as common stock andthe remaining net proceeds are required to be presented as additional paid-in capital, whichis included in capital surplus. The Code permits Japanese companies, upon approval of theBoard of Directors, to issue shares to existing shareholders without consideration by way of astock split. Such issuance of shares generally does not give rise to changes within the shareholders’ accounts.

LAWSON, INC.

ANNUAL REPORT 2006

51

The Code also provides that an amount of 10% or more of the aggregate amount of cash
dividends and certain other appropriations of retained earnings associated with cash outlays
applicable to each period (such as bonuses to directors) shall be appropriated as a legal
reserve (a component of retained earnings) until the total of such reserve and additional
paid-in capital equals 25% of common stock. The amount of total legal reserve and additional
paid-in capital that exceeds 25% of the common stock may be available for dividends by resolution of the shareholders after transferring such excess in accordance with the Code. 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 the Board of Directors.
The Code allows Japanese companies to purchase treasury stock and dispose of suchtreasury stock upon resolution of the Board of Directors. The aggregate purchased amount oftreasury stock cannot exceed the amount available for future dividends plus the amount ofcommon stock, additional paid-in capital or legal reserve that could be transferred to retained
earnings or other capital surplus other than additional paid-in capital upon approval of suchtransfer at the annual general meeting of shareholders.
In addition to the provision that requires an appropriation for a legal reserve in connection
with the cash outlays, the Code also imposes certain limitations on the amount of capitalsurplus and retained earnings available for dividends. The amount of capital surplus andretained earnings available for dividends under the Code was ¥78,054 million($671,317 thousand) as of February 28, 2006, based on the amount recorded in the parent
company’s general books of account.
Dividends are approved by the shareholders at a meeting held subsequent to the end of the
fiscal year to which the dividends are applicable. Semiannual interim dividends may also be paid
upon resolution of the Board of Directors, subject to certain limitations imposed by the Code.
On May 1, 2006, a new corporate law (the “Corporate Law”) became effective, whichreformed and replaced the Code with various revisions that would, for the most part, be applicable to events or transactions which occur on or after May 1, 2006 and for the fiscal years
ending on or after May 1, 2006. The significant changes in the Corporate Law that affectfinancial and accounting matters are summarized below:

a. Dividends
Under the Corporate Law, companies can pay dividends at any time during the fiscal year in
addition to the year-end dividend upon resolution at the shareholders’ meeting. For companies
that meet certain criteria such as: (1) having a Board of Directors (2) having independent
auditors (3) having a Board of Corporate Auditors and (4) the term of service of the directors
is prescribed as one year rather than two years of normal term by its articles of incorporation,
the Board of Directors may declare dividends (except for dividends in kind) if the company hasprescribed so in its articles of incorporation.
The Corporate Law permits companies to distribute dividends-in-kind (non-cash assets) toshareholders subject to a certain limitation and additional requirements.
Semiannual interim dividends may also be paid once a year upon resolution by the Board of
Directors if the articles of incorporation of the company so stipulate. Under the Code, certain
limitations were imposed on the amount of capital surplus and retained earnings available fordividends. The Corporate Law also provides certain limitations on the amounts available fordividends or the purchase of treasury stock. The limitation is defined as the amount available
for distribution to the shareholders, but the amount of net assets after dividends must be
maintained at no less than ¥3 million.

b. Increases/Decreases and Transfer of Common Stock, Reserve and Surplus
The Corporate Law requires that an amount equal to 10% of dividends must be appropriatedas a legal reserve (a component of retained earnings) or as additional paid-in capital (acomponent of capital surplus) depending on the equity account charged upon the payment ofsuch dividends until the total of the aggregate amount of legal reserve and additional paid-in

52

LAWSON, INC.

ANNUAL REPORT 2006

capital equals 25% of the common stock. Under the Code, the aggregate amount of additional
paid-in capital and legal reserve that exceeds 25% of the common stock may be made available for dividends by resolution of the shareholders. Under the Corporate Law, the total
amount of additional paid-in capital and legal reserve may be reversed without limitation of such
threshold. The Corporate Law also provides that common stock, legal reserve, additional paid-in
capital, other capital surplus and retained earnings can be transferred among the accounts
under certain conditions upon resolution of the shareholders.

c. Treasury Stock and Treasury Stock Acquisition Rights
The Corporate Law also provides for companies to purchase treasury stock and dispose ofsuch treasury stock by resolution of the Board of Directors. The amount of treasury stock
purchased cannot exceed the amount available for distribution to the shareholders, which isdetermined by specific formula.
Under the Corporate Law, stock acquisition rights, which were previously presented as aliability, are now presented as a separate component of shareholders’ equity.
The Corporate Law also provides that companies can purchase both treasury stock acquisition rights and treasury stock. Such treasury stock acquisition rights are presented as a separate component of shareholders’ equity or deducted directly from stock acquisition rights.
On December 9, 2005, the ASBJ published a new accounting standard for presentation ofshareholders’ equity. Under this accounting standard, certain items which were previously
presented as liabilities are now presented as components of shareholders’ equity. Suchitems include stock acquisition rights, minority interest, and any deferred gain or loss onderivatives accounted for under hedge accounting. This standard is effective for fiscal years
ending on or after May 1, 2006.

13. Stock Option
The Company has a stock option plan as an incentive plan for directors, executive officers
and selected employees.
In accordance with approval at the general meetings of shareholders on May 26, 2006, theCompany granted stock subscription rights to the Company’s directors and selected employees.
Also, in accordance with approval at the general meeting of shareholders, the Company granted
stock acquisition rights to the Company’s directors, executive officers and selected employees.
A summary of information regarding the Company’s stock option plans is as follows:
Thousands of Shares
Date of
Shareholders’Meeting

Exercise Price

Exercisable Period

Number of Options Granted

2004

OutstandExercised Canceleding ator February
2005
2006
Expired 28, 2006

May 26,
2000¥7,500$64.51 From May 27, 2002
to May 25, 2007

The Company’s
directors andselected employees

1,773

May 29,
2002

3,680

31.65 From December 1, 2002
to May 31, 2007

The Company’s
directors,
executive
officers andselected employees

313

May 27,
2003

3,517

30.25 From July 3, 2005
to July 2, 2008

The Company’s
directors andexecutive officers

92

May 28,
2004

4,320

37.15 From June 10, 2006
to June 9, 2009

The Company’s
directors andexecutive officers

99

99

May 27,
2005

4,160

35.78 From October 12, 2007
to December 31, 2010

The Company’s
directors andexecutive officers

114

114

May 27,2005

1

0.01 From October 13, 2005
to May 31, 2025

The Company’s
directors andexecutive officers

22

22

LAWSON, INC.

5

15

66

756

1,017

103

124

44

ANNUAL REPORT 2006

48

53

14. Income Taxes
The Company and its domestic subsidiaries are subject to a number of different taxes basedon income, which in the aggregate, resulted in normal effective statutory tax rates of approximately 40.7% and 42.0% for the years ended February 28, 2006 and 2005, respectively.
The tax effects of significant temporary differences and tax loss carryforwards which
resulted in deferred tax assets and liabilities at February 28, 2006 and 2005, are as follows:

Millions of Yen

Thousands of
U.S. Dollars

2006

2005

2006

833
1,144
3,320
930
3,255
1,772
1,425
2,197
1,527
(1,690)¥ 1,117
1,249
2,298
975
2,709
1,654
1,108
1,496
(998)

7,164
9,839
28,554
7,999
27,995
15,24012,256
18,89613,134(14,535)

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

14,713

11,608

126,542

Deferred tax liabilities—Unrealized gain
on available-for-sale securities . . . . . . . . . . . .

478

76

4,111

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

478

76

4,111

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

¥14,235¥11,532$122,431

Deferred tax assets:
Accrued enterprise tax . . . . . . . . . . . . . . . . .
Accrued employees’ bonuses . . . . . . . . . . . .
Excess of depreciation . . . . . . . . . . . . . . . . .
Excess of amortization of software . . . . . . . .
Employees’ retirement benefits . . . . . . . . . . .
Allowance for doubtful accounts . . . . . . . . . .
Tax loss carryforward . . . . . . . . . . . . . . . . . .
Impairment loss . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less valuation allowance . . . . . . . . . . . . . . .

¥$As of February 28, 2006, certain subsidiaries have tax loss carryforwards aggregating
approximately ¥3,502 million ($30,120 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

2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2013 and thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

¥ 456
483
415
622
1,526

$ 3,922
4,154
3,569
5,350
13,125

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

¥3,502$30,120

Year Ending February 28 or 29

54

LAWSON, INC.

ANNUAL REPORT 2006

15. Leases
The Companies lease certain store facilities, machinery, computer equipment, office spaceand other assets.
Total lease payments under finance leases for the years ended February 28, 2006 and2005, were ¥16,900 million ($145,351 thousand) and ¥16,133 million, respectively.
For the year ended February 28, 2006, the Companies recorded an impairment loss and a
related allowance for impairment loss on leased property, in the amount of ¥204 million($1,755 thousand) on certain leased property held under finance leases, that do not deem tobe transferred ownership and accounted for as operating lease.
Pro forma information of leased property such as acquisition cost, accumulated
depreciation, accumulated impairment loss, obligations under finance leases, depreciation
expense, interest expense and impairment loss for finance leases that do not transfer ownership of the leased property to the lessee on an “as if capitalized” basis for the years ended
February 28, 2006 and 2005 was as follows:

Millions of Yen

Thousands of
U.S. Dollars

2006

2005

2006

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

¥68,378
38,352
158¥67,597
33,019$588,097
329,853
1,359

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

¥29,868¥34,578$256,885

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

¥11,972
18,898¥11,445
23,992$102,967
162,536

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

¥30,870¥35,437$265,503

Allowance for impairment loss on leased property of ¥126 million ($1,084 thousand) as ofFebruary 28, 2006 is included in obligations under finance leases.
Millions of Yen
2006
Furniture,
Fixtures andEquipment

Software

Total

Used by Company-operated stores and other:
Acquisition cost . . . . . . . . . . . . . . . . . . . . . .
Accumulated depreciation . . . . . . . . . . . . . . .
Accumulated impairment loss . . . . . . . . . . . .

¥17,073
10,311
17

¥734
196

¥17,807
10,50717

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

¥ 6,745¥538¥ 7,283

LAWSON, INC.

ANNUAL REPORT 2006

55

Millions of Yen
2005
Furniture,
Fixtures andEquipment

Software

Total

Used by Company-operated stores and other:
Acquisition cost . . . . . . . . . . . . . . . . . . . . . .
Accumulated depreciation . . . . . . . . . . . . . . .

¥16,604
7,987

¥782
39

¥17,386
8,026

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

¥ 8,617¥743¥ 9,360

Thousands of U.S. Dollars
2006
Furniture,
Fixtures andEquipment

Software

Total

Used by Company-operated stores and other:
Acquisition cost . . . . . . . . . . . . . . . . . . . . . .
Accumulated depreciation . . . . . . . . . . . . . . .
Accumulated impairment loss . . . . . . . . . . . .

$146,839
88,682
145$6,313
1,686$153,152
90,368145

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

$ 58,012$4,627$ 62,639

Millions of Yen

Thousands of
U.S. Dollars

2006

2005

2006

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

¥3,3784,469¥3,461
6,114$29,053
38,436

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

¥7,847¥9,575$67,489

Allowance for impairment loss on leased property of ¥14 million ($120 thousand) as ofFebruary 28, 2006 is included in obligations under finance leases.
The imputed interest expense portion which is computed using the interest method is
excluded from the above obligations under finance leases depreciation expense, interest
expense and other information under finance leases:

Depreciation expense . . . . . . . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . . . . . . . . . .
Reversal of allowance for impairment loss . . . . .
Impairment loss . . . . . . . . . . . . . . . . . . . . . . .

56

LAWSON, INC.

ANNUAL REPORT 2006

Millions of Yen

Thousands of
U.S. Dollars

2006

2005

2006

¥15,782
1,090
37
204

¥15,181
1,063$135,736
9,375
318
1,755

Depreciation expense and interest expense, which are not reflected in the accompanying
consolidated statements of income, are computed by the straight-line method and theinterest method, respectively.
The minimum rental commitments under noncancelable operating leases at February 28,
2006 were as follows:

Millions of Yen

Thousands of
U.S. Dollars

2006

2006

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

¥ 663
5,231

$ 5,70244,990Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

¥5,894$50,692

16. Related Party Transactions
Balances to LAWSON CS Card, INC. (an associated company) as of February 28, 2006 wereas follows:

Millions of Yen

Thousands of
U.S. Dollars

2006

2006

¥6,2509,925$53,754
85,362

Short-term loan receivable . . . . . . . . . . . . . . . . . . . . . . . . . . .
Guarantee for bank loans . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Mitsubishi became a direct principal shareholder when it purchased all shares in the
Company held by their wholly owned subsidiary in December 2004.
Since then, Mitsubishi has been treated as an affiliated company of the Company.
Therefore, the Company discloses transactions with subsidiaries of Mitsubishi, including
those transactions related to the franchised stores.
Balances and transactions with subsidiaries of the principal shareholder as of and for theyear ended February 28, 2006 were as follows:

Millions of Yen

Thousands of
U.S. Dollars

2006

2006

RYOSHOKU LIMITED:
Accounts payable—trade . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Food Service Network Co., Ltd.:
Accounts payable—trade . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

¥

5,569
70,064
15,570211,486$

47,897
602,597
133,912
1,818,921

17. Contingent Liabilities
As of February 28, 2006, the Company guaranteed an associated company’s bank loan in theamount of ¥9,925 million ($85,362 thousand).

LAWSON, INC.

ANNUAL REPORT 2006

57

18. Net Income per Share
Reconciliation of the differences between basic and diluted net income per share (“EPS”) for
the year ended February 28, 2006 is as follows:
Millionsof YenYear Ended February 28, 2006

Basic EPS—Net income available
to common shareholders . . . . . . . . . . . .
Effect of dilutive securities—
Stock options . . . . . . . . . . . . . . . . . . . .
Diluted EPS—Net income for computation . .

NetIncomeThousandsof Shares
Weightedaverage
Shares¥22,025

102,202¥215.50$1.85¥22,025

20
102,222¥215.46

$1.85

Yen

U.S. Dollars

EPS

Diluted net income per share for the year ended February 28, 2005 is not disclosed because
the Company did not have stock options which would have resulted in a dilutive effect.

19. Subsequent Eventsa. The following appropriation of retained earnings was approved at the general shareholders’meeting held on May 26, 2006:

Cash dividends, ¥45 ($0.39) per share . . . . . . . . . . . . . . . . . .

Millions of Yen

Thousands of
U.S. Dollars¥4,603$39,589b. At the general shareholders’ meeting held on May 26, 2006, the Company’s shareholders
approved the stock option plan for the Company’s directors. The plan provides for granting
options to directors to purchase within an upper limit of 50 thousand shares of theCompany’s common stock. The exercisable period of the stock options shall be three years
computed from the day after two years following the date of granting.
c. In addition to b. above, at the general shareholders’ meeting held on May 26, 2006, theCompany’s shareholders approved the stock option plan as compensation for the Company’s
directors.
The Company intends to abolish the conventional retirement benefit system for directors
and instead allocate stock-compensation-type stock options without charge.
The plan provides for granting options to directors to purchase within an upper limit of 27
thousand shares of the Company’s common stock. The exercisable period of the stock
options shall be 20 years computed from the day following the date when the stock
options are granted.
d. As of March 28, 2006, the Company entered into agreements with NTT DoCoMo, Inc.,
regarding a business alliance and a capital alliance. Accordingly, the Company decided totransfer 2,092,000 shares of treasury stock (which corresponds to 2.0% of the total
shares issued and outstanding) at a value of ¥9,021 million ($77,584 thousand).

58

LAWSON, INC.

ANNUAL REPORT 2006

Independent Auditors’ Report

To the Board of Directors of LAWSON, INC.:
We have audited the accompanying consolidated balance sheets of LAWSON, INC. andsubsidiaries (together the “Companies”) as of February 28, 2006 and 2005, and the related
consolidated statements of income, shareholders’ equity, and cash flows for the years thenended, all expressed in Japanese yen. These consolidated financial statements are theresponsibility of the Company’s management. Our responsibility is to express an opinion onthese consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in Japan.
Those standards require that we plan and perform the audit to obtain 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 and significant
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 the Companies as of February 28, 2006 and2005, and the consolidated results of their operations and their cash flows for the years thenended in conformity with accounting principles generally accepted in Japan.
As discussed in Note 2.g to the consolidated financial statements, the Companies adopted the
new accounting standard for impairment of fixed assets as of March 1, 2005.
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 ofreaders outside Japan.

May 26, 2006

LAWSON, INC.

ANNUAL REPORT 200659

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

MEMBER OF THE BOARD
AND SENIOR EXECUTIVE
VICE PRESIDENT

Toru Moriyama

General Manager, Merchandizing & Logistics Division

MEMBER OF THE BOARD
AND SENIOR VICE PRESIDENT Manabu Asano

MEMBERS OF THE BOARD

Hiroshi Tasaka
Reiko Okutani
Muneaki Masuda
Koji Furukawa
Takehiko Kakiuchi

STANDING CORPORATE
AUDITORS

Chief Compliance Officer (CCO); in charge of General
Affairs; in charge of Internal Audit
Professor, Graduate School of Tama University
President, The R Co., Ltd.
President and Representative Director, Culture Convenience
Club Co., Ltd.
Senior Adviser to the President, Mitsubishi Corporation
General Manager, Living Essentials Group CEO Office,Mitsubishi Corporation

Kenji Yamakawa
Munehiko Nakano

CORPORATE AUDITORS
Tetsuo Ozawa
Hiroshi Kuwata

LawyerManager, Risk Management Dept., Mitsubishi Corporation

EXECUTIVE VICE PRESIDENT

Susumu Hasegawa

Chief Information Officer (CIO); General Manager,
Information Systems Station

SENIOR VICE PRESIDENTS

Ichiro Okuda
General Manager, Kinki LAWSON Branch
Takatoshi Kawamura General Manager, Next-Generation Business Development Division
Konoshin Deguchi
General Manager, Store Development Planning Division
Shigeru Niikura
General Manager, Integration Office
Kiyoteru Suzuki
General Manager, Services Development Division
Yoshio Shinozaki
General Manager, CSR Promotion Office
Shigeaki Kawahara Executive Assistant to CEO
Katsuyuki Imada
General Manager, Corporate Planning OfficeKenji Morimoto
General Manager, Finance & Accounting Office;Itsuo Iga
Takaki Mizuno
Norikazu Nishiguchi
Jyun Miyazaki
Masatoshi Okada
Satoshi Matsubara

General Manager, Management Services Office
General Manager, Quality Control Division
General Manager, Chubu LAWSON Branch
General Manager, Kanto LAWSON Branch
General Manager, PR, Corporate Communications Office
President & CEO, NATURAL LAWSON, Inc.
Deputy General Manager, Merchandizing & Logistics Division(As of May 26, 2006)

60

LAWSON, INC.

ANNUAL REPORT 2006

Consolidated Financial Highlights

Corporate Data

LAWSON, INC. and Subsidiaries
Years Ended February 28, 2006, 2005 and February 29, 2004

Millions of Yen

Percent
ChangeThousands of
U.S. Dollars(2)

2006

2005

2004(1)

2006/20052006

For the Year:Net sales of all stores¥1,361,731
Total operating revenues
268,058
Operating income
43,867
Income before income taxes and minority interests
38,723
Net income
22,025¥1,329,077
254,395
42,941
36,04020,435¥1,288,297
245,601
38,08732,923
18,571

2.5%
5.4%
2.2%
7.4%
7.8%

$11,711,800
2,305,479
377,286
333,044
189,430

¥

¥

8.6%
28.6%

$

Per Share Data (yen and dollars):
Net income
Cash dividends

¥

216
90

198
70

176
41

1.85
0.77

ENGLISH 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,

AUTHORIZED SHARESTokyo 141-8643, Japan

409,300,000

Osaka Headquarters:

SHARES ISSUED

9-1, Toyotsu-cho, Suita-shi,

104,600,000

Osaka 564-0051, JapanAt Year-end:
Total assets
Total shareholders’ equity

SHAREHOLDERS¥ 375,107
175,184¥ 356,310
160,282¥ 354,831
154,317

5.3%
9.3%$ 3,226,172
1,506,700

NUMBER OF EMPLOYEES

45,036

3,585 (Consolidated) (As of February 28, 2006)

MAJOR SHAREHOLDERS

Financial Data
Return on equity (ROE)
Payout ratio (Non-consolidated)

13.1%
40.5%

13.0%
35.0%

12.1%
22.8%

BUSINESS ACTIVITIES

0.1
5.5

store franchise chain
Store Network:
Number of stores in Japan
Franchised storesCompany-owned stores

8,366
7,958
408

8,077
7,731
346

7,821
7,472
349

3.6%
2.9%
17.9%

NET SALES OF ALL STORES¥1,361.7 billion (Consolidated) (Fiscal 2005)

Notes: 1. Figures for 2004 include data for SHANGHAI HUALIAN LAWSON CO., LTD.
2. The U.S. dollar amounts represent translations of Japanese yen at the approximate exchange rate at February 28, 2006, of ¥116.27=$1.

NUMBER OF STORES
8,366 (Consolidated) (As of February 28, 2006)

Operating income andOperating income ratio

Net income and ROE

Cash dividends per shareand payout ratio(Non-consolidated)(Millions of Yen)

(Millions of Yen)

(Yen)

50,00025,000OPERATING AREA
All 47 prefectures in Japan; Shanghai, PRC

100(Joint Venture)
40.5
40,00020,000
3.2

80
13.0

3.2

35.0

13.1

12.1

3.0
30,00015,00060

20,00010,00040

Number of
SharesHeld

Development of LAWSON convenience

22.8

Percentage ofTotal Shares
Held

1. Mitsubishi Corporation
32,089,300
2. Japan Trustee Services Bank, Ltd.
(Trust Account)
6,601,200
3. Marubeni Foods Investment Co., Ltd.
5,939,500
4. The Master Trust Bank of Japan, Ltd.
(Trust Account)
4,688,400
5. State Street Bank andTrust Company 505103
2,428,701
6. The Chase Manhattan Bank,
N.A. London
1,782,003
7. Mitsui Asset Trust and Banking Company,
Limited (Account 1)
1,241,000
8. Mitsubishi UFJ Trust and Banking
Corporation (Trust Account)
1,183,300
9. Mellon Bank, N.A., as Agentfor its Client Mellon Omnibus
US Pension
1,160,168
10. BBH Boston Pftc Putnam Intl
Growth Fund
1,072,400

30.7
6.3
5.7
4.5
2.3
1.7
1.2
1.1

1.1
1.0

Note: Excluding 2,313,932 shares that LAWSON, INC owns as of endof February 2006
10,0005,000

20

STOCK EXCHANGE LISTINGSTokyo Stock Exchange (1st Section)0

2004 2005 2006

Operating income
Operating income ratio (%)

02004 2005 2006

Net income
ROE (%)

02004 2005 2006

Cash dividends per share
Payout ratio (%) (Non-consolidated)*Operating income ratio=Operating
income/Net Sales of all stores

Osaka Securities Exchange (1st Section)

STOCK TRANSFER AGENT
Mitsubishi UFJ Trust and Banking Corporation
4-5, Marunouchi, 1-chome, Chiyoda-ku, Tokyo 100-8212, Japan

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 andare 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.

(As of February 28, 2006)

LAWSON, INC.

ANNUAL REPORT 2006

61

Annual Report 2006

The Challenge Begins

EXPAND,
ENHANCE,
BUILD
Annual Report 2006
Year ended February 28, 2006

Corporate Planning Office,East Tower, Gate City Osaki
11-2, Osaki 1-chome, Shinagawa-ku,
Tokyo 141-8643, Japan
http://www.lawson.co.jp/
Published in July 2006.
©1997–2006 LAWSON, INC. All rights Reserved.

B-(2)-060001

This annual report was produced using “Kanbatsu
White,” which contains 70% Japan-made pulp,
including 10% clear-cut lumber.

Printed in Japan