LAWSON, INC. ANNUAL REPORT 2005

ANNUAL REPORT 2005
Year ended February 28, 2005

Toward the Next 30 Years

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LAWSONYears of Growth

The occasion of our 30th anniversary presented an opportunity to reexamine our mission. As a result of
this, we established a new corporate philosophy. To realize the objectives in our new corporate
philosophy, we have pledged to maintain the same, constant values throughout our organization while
formulating a new Code of Conduct based on these values to direct our efforts in all actions we take.

In 2005, LAWSON celebrates its 30th anniversary. Our chain of convenience stores has grown during thisperiod thanks to our unwavering support of customers and our steadfast commitment to providing
convenience. In light of increasingly diverse and complex customer needs, however, we have realized that theconventional convenience store business model is no longer adequate to ensure corporate growth. We areutilizing the occasion of our 30th anniversary as an opportunity to turn a new leaf and evolve into a new anddifferent company that transcends the traditional definition of a convenience store operator.

Corporate Philosophy“Happiness and Harmony in our Community”
Code of Conduct

2002
Sales of Onigiriya
rice balls begin

1996
LAWSON TICKET
sales start

Acting with utmost consideration for others
2004
Gohantei debuts

The key to realize the objectives in our corporate philosophy, “Happiness and Harmony in our Community,” is to act
with the utmost consideration for others. In our relationships with any of our stakeholders—customers, shareholders,
franchise owners, store crew (part-time workers), fellow employees, as well as with society andthe environment—we must consider how our actions can affect our stakeholders in the most positive way possible.

1977
Stores introduce 24-hour
operating hours

1981
Stores introduce
advance sales of movie
theater tickets

1986
Stores commence salesof Karaage-kun crispy
Japanese-style friedchicken

1989
Stores launch third-party
bill settlement services

1996
First overseas store
opens in Shanghai

2001
First NATURALLAWSON store opens

2002
LAWSON Pass
services launch

2004
The 8,000th
LAWSON store
opens

Challenging with innovative ideas and actions
As a leading innovator, we believe in finding new ways to make innovative ideas happen, not in making excuses
for not trying. Even if ideas may not be realized, the experience gained is invaluable for future innovation.

Having a strong will to attain the objectives
Even if we act with the utmost consideration for others, create innovative ideas and take decisive action,
we cannot realize the objectives in our corporate philosophy without a strong will to attain them.

1975
1975
First LAWSON store
opens in Sakurazuka,
Toyonaka, Osaka

1985
1982
Stores begin take-out
sales of oden

Oden: a popular Japanese
hotpot dish that includes daikon
radish, fish cakes, boiled eggs

1995
1992
LAWSON Green
Fund launch

2005
1998
LAWSON obtains
ISO 14001, theinternational standard
for environmental
management
systems

2000
LAWSON lists its
shares on the Tokyo
Stock Exchange andthe Osaka Securities
Exchange

2003
LAWSON ceases useof artificial foodcolorings andpreservatives

2005
LAWSONcelebrates its 30th
anniversary

and konnyaku (devil’s tongue)

1998
All stores install
Loppi terminals

2003
All stores
introduce post
boxes

2005
First STORE100
store opens

We pledge to remain focused and pursue our objectives with persistence and perseverance.

Embarking on
Another Chapter
in LAWSON History

1975 First LAWSON store opens in Sakurazuka, Toyonaka, Osaka

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05 07 28
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30

LAWSONYears of Growth

The occasion of our 30th anniversary presented an opportunity to reexamine our mission. As a result of
this, we established a new corporate philosophy. To realize the objectives in our new corporate
philosophy, we have pledged to maintain the same, constant values throughout our organization while
formulating a new Code of Conduct based on these values to direct our efforts in all actions we take.

In 2005, LAWSON celebrates its 30th anniversary. Our chain of convenience stores has grown during thisperiod thanks to our unwavering support of customers and our steadfast commitment to providing
convenience. In light of increasingly diverse and complex customer needs, however, we have realized that theconventional convenience store business model is no longer adequate to ensure corporate growth. We areutilizing the occasion of our 30th anniversary as an opportunity to turn a new leaf and evolve into a new anddifferent company that transcends the traditional definition of a convenience store operator.

Corporate Philosophy“Happiness and Harmony in our Community”
Code of Conduct

2002
Sales of Onigiriya
rice balls begin

1996
LAWSON TICKET
sales start

Acting with utmost consideration for others
2004
Gohantei debuts

The key to realize the objectives in our corporate philosophy, “Happiness and Harmony in our Community,” is to act
with the utmost consideration for others. In our relationships with any of our stakeholders—customers, shareholders,
franchise owners, store crew (part-time workers), fellow employees, as well as with society andthe environment—we must consider how our actions can affect our stakeholders in the most positive way possible.

1977
Stores introduce 24-hour
operating hours

1981
Stores introduce
advance sales of movie
theater tickets

1986
Stores commence salesof Karaage-kun crispy
Japanese-style friedchicken

1989
Stores launch third-party
bill settlement services

1996
First overseas store
opens in Shanghai

2001
First NATURALLAWSON store opens

2002
LAWSON Pass
services launch

2004
The 8,000th
LAWSON store
opens

Challenging with innovative ideas and actions
As a leading innovator, we believe in finding new ways to make innovative ideas happen, not in making excuses
for not trying. Even if ideas may not be realized, the experience gained is invaluable for future innovation.

Having a strong will to attain the objectives
Even if we act with the utmost consideration for others, create innovative ideas and take decisive action,
we cannot realize the objectives in our corporate philosophy without a strong will to attain them.

1975
1975
First LAWSON store
opens in Sakurazuka,
Toyonaka, Osaka

1985
1982
Stores begin take-out
sales of oden

Oden: a popular Japanese
hotpot dish that includes daikon
radish, fish cakes, boiled eggs

1995
1992
LAWSON Green
Fund launch

2005
1998
LAWSON obtains
ISO 14001, theinternational standard
for environmental
management
systems

2000
LAWSON lists its
shares on the Tokyo
Stock Exchange andthe Osaka Securities
Exchange

2003
LAWSON ceases useof artificial foodcolorings andpreservatives

2005
LAWSONcelebrates its 30th
anniversary

and konnyaku (devil’s tongue)

1998
All stores install
Loppi terminals

2003
All stores
introduce post
boxes

2005
First STORE100
store opens

We pledge to remain focused and pursue our objectives with persistence and perseverance.

Embarking on
Another Chapter
in LAWSON History

1975 First LAWSON store opens in Sakurazuka, Toyonaka, Osaka

折返しB

H2

H3

05 07 28
下版 122285
02

The occasion of our 30th anniversary presented an opportunity to reexamine our mission. As a result of
this, we established a new corporate philosophy. To realize the objectives in our new corporate
philosophy, we have pledged to maintain the same, constant values throughout our organization while
formulating a new Code of Conduct based on these values to direct our efforts in all actions we take.

Corporate Philosophy“Happiness and Harmony in our Community”
Code of Conduct

Acting with utmost consideration for others
The key to realize the objectives in our corporate philosophy, “Happiness and Harmony in our Community,” is to act
with the utmost consideration for others. In our relationships with any of our stakeholders—customers, shareholders,
franchise owners, store crew (part-time workers), fellow employees, as well as with society andthe environment—we must consider how our actions can affect our stakeholders in the most positive way possible.

Challenging with innovative ideas and actions
As a leading innovator, we believe in finding new ways to make innovative ideas happen, not in making excuses
for not trying. Even if ideas may not be realized, the experience gained is invaluable for future innovation.

Having a strong will to attain the objectives
Even if we act with the utmost consideration for others, create innovative ideas and take decisive action,
we cannot realize the objectives in our corporate philosophy without a strong will to attain them.
We pledge to remain focused and pursue our objectives with persistence and perseverance.

Embarking on
Another Chapter
in LAWSON History

A Message to LAWSON Stakeholders

Three years have passed since I assumed the position ofpresident of LAWSON. In this time, I have recognized that the
franchise business is difficult to manage. But I have also come tothe firm conclusion that, while Japan may seem saturated withconvenience stores, the convenience store industry still has roomfor growth if the right strategies are applied.
Under the LAWSON Challenge 2004 three-year business planfrom fiscal 2002 through fiscal 2004, our efforts focused on disposing of unproductive assets, implementing structural reforms
and building bonds of trust with franchise owners, our valued
partners in business. Today, the seeds of these efforts have begun
to sprout and will soon be ready to bloom throughout the
LAWSON store network.

Takeshi Niinami
President and Chief Executive Officer

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LAWSON ANNUAL REPORT 2005

A New Beginning

this conviction, in April 2005 we introduced our next

In 2005, LAWSON celebrates its 30th anniversary.

medium-term business plan, LAWSON Challenge

During our three decades in operation we have

2007, which marks the beginning of a new stage insought to provide consumers with ever-greater

our development.

convenience, in line with our mission as a convenience store chain, while growing our business.
Guided by LAWSON Challenge 2004, a three-

A New Corporate Philosophy
The occasion of our 30th anniversary also

year business plan launched in fiscal 2002, ended

presented an opportunity for all of us at LAWSON to

February 28, 2003, we took decisive steps toreexamine our common raison d’être. As a result of

dispose of unproductive assets, developed products

this, we revamped our corporate philosophy. To

tailored to meet consumers’ needs, formed alliances

realize the objectives implied in our new philosophy,

with companies in other industries and launched new

we pledged to maintain the same, unchanging values

store formats. Our efforts were rewarded withregardless of changes in our operating environment,enhanced customer satisfaction and improvedand established a new Code of Conduct that will

financial results.

direct our efforts to apply these values to everything

In light of increasingly diverse and complex

we do.

customer needs, we have realized that the conventional convenience store business model is no longer
adequate to ensure continued corporate growth. The■ Corporate Philosophy
Happiness and Harmony in our Community

factors behind changing consumer preferences are
numerous, including demographic change due topersistently low birthrates and an increase in thenumber of elderly people, a greater number ofwomen in the workforce, and increasingly varying■ Code of Conduct
Acting with utmost consideration for others
Challenging with innovative ideas and actions
Having a strong will to attain the objectives

consumer preferences in urban and rural areas. To
address the needs of a new marketplace, thereby
encouraging people to visit LAWSON stores, we“Our” in this new philosophy is the LAWSON family—must rethink our merchandising strategy, change ourfranchise owners, crew (part-time workers) andpricing policy and create brand-new store formats.

employees. It is also each one of us, our families andWe will utilize the occasion of our 30th anniver-friends, and of course our customers and businesssary as an opportunity to turn a new leaf and evolve

partners. In a greater sense, it also includes theinto a new and different company that transcends theglobal environment. While we realize that “Happinesstraditional definition of a convenience store operator

and Harmony in our Community” might soundand better reflects our pursuit of innovation. To thissomewhat exalted, and while there may be a gap

end, Head Office will take the lead in determining

between what we are now and what we want to be,effective store formats and product ranges for the

we intend to pursue this ultimate objective. In ourcustomers in each location.

efforts to implement the strategies of LAWSONLAWSON has enjoyed tremendous customer

Challenge 2007, as in all our corporate activities, we

support since its establishment, and we recognize

will be guided by our commitment to realizing this

this as one of our most precious assets. At the samephilosophy.

time, we also recognize that we cannot be satisfied
with the status quo. Sticking to old ideas will hold us

Key Themes of LAWSON Challenge 2007

back; only by seeking new ways to address chal-

LAWSON Challenge 2007 features four key themes,lenges can we ensure future growth. Underscoring

which will guide our efforts to achieve 10% growth in

LAWSON ANNUAL REPORT 20053

earnings per share (EPS) and return on equity (ROE)

an opportunity to reevaluate the roles our stores playof 15%. These themes will also support our efforts

in the community. Going forward, we will continue toto resolve the social and environmental issues

focus on innovation to ensure our ongoing relevanceassociated with the conventional convenience store

to our customers’ lifestyles.

business model, an important prerequisite to fulfillingthe objectives in our new corporate philosophy.

Improving productivity means employees concentrateon tasks that create value.

1. Innovation
2. Customer satisfaction and employee
satisfaction
3. Improved productivity
4. Corporate social responsibility (CSR)

LAWSON’s hourly productivity—that is, its grossprofit per man hour—still has room to improve. We
must focus on tasks that create greater value toachieve this objective. Toward this end, we will seek
to standardize the tasks of our supervisors. We will
also strive to enhance the efficiency of productdevelopment and merchandising by establishing andInnovation means our ability to embrace challenges

promoting projects that involve all sections of theand try innovative ideas and approaches.

company, transcending traditional boundaries.

LAWSON Challenge 2004 prompted innovation in
product development, exemplified by such highly

CSR means that we proactively fulfill our social

successful brands as the Onigiriya series of rice balls

responsibilities—crucial to realizing our corporate

and the Gohantei series of boxed lunches. Throughphilosophy of “Happiness and Harmony in our

LAWSON Challenge 2007, we aim to extend theCommunity.”

scope of innovation still further. We will develop new

The success of our store operations is due to the

products with a focus on dietary health, freshness

support of customers, business partners and theand pricing geared to ensure value for money, as wellpeople of the communities in which we operate. To

as new store formats and breakthrough technologies.

“bring fresh ideas,” we must carefully consider the

These efforts will help attract the attention of womenneeds of these various people and translate thisand the elderly—two key customer segments thatconsideration into action. If each LAWSON store

the conventional convenience store format has failed

strives to realize our corporate philosophy, people will

to capture. We will also endeavor to address criticalbe happy they have a LAWSON store in theirsocial problems associated with the conventional

neighborhood. This, in turn, will contribute to theconvenience store model, notably, issues arising fromsuccess of LAWSON stores. There is an old

late-night convenience store operating hours andJapanese saying—“For the seller, for the buyer, forfood waste.

the people”—that effectively sums up the idea that if
the store, the customer and the community are

Ensuring the satisfaction of our customers and oursatisfied, business will be successful. We are

employees is another ongoing objective.

confident that by striving continuously to realize

In today’s changing environment, we must constantly“Happiness and Harmony in our Community,” andask ourselves what we can do to make customers

play a useful role in the lives of our customers,

happy they chose LAWSON. We are confident thatbusiness partners and the communities in which we

as long as customers continue to appreciate ouroperate, we will fulfill our responsibilities to society

stores, we will continue to grow. This depends on ourand continue to grow.

ability to learn from the past and embrace thechallenges of redefining ourselves for the future.
Accordingly, we have used our 30th anniversary as

4

LAWSON ANNUAL REPORT 2005

LAWSON Challenge 2007

Reviewing the LAWSON Challenge 2004

Stronger Product Development Capabilities

Three-Year Business Plan

The debut of Onigiriya, a rice ball series madewith top-quality ingredients and advanced

Establishing a foundation for stable growth overproduction methods, generated considerable

the medium to long term means taking action.

interest in the convenience store industry.

Over the past three years, I have done so,

LAWSON also attracted attention with Gohantei,

working diligently to ensure that the structurala boxed-lunch series that, with all products

reforms illustrated in the chart below were actually

priced at ¥500, reflects our one-coin priceexecuted and not merely left as proposals on a

strategy. The series has enjoyed steady sales

desk gathering dust. Since becoming president ofsince its introduction, proof that customers

LAWSON, I have tirelessly explored the store

appreciate Gohantei’s good value.

network, visiting each location and promoting

To support these new brands, we enhanced

dialogue with franchise owners, our supervisors

our supply chain, a two-year effort that included aand other people working on the front lines.

realignment of our supplier network, to increase

To earn local trust and foster motivation

the efficiency of raw materials procurement.

among store crews, I implemented far-reaching
structural reforms at Head Office and reviewed

Improved Store-Operating Skills

the systems that underpin product innovation,

In March 2003, we introduced a regional

store development and store support.

headquarters system that not only prevents

These efforts revitalized employees’ attitudes

overemphasis on the standardization of chain

to their jobs and created an atmosphere bursting

store operations—a situation that can have awith the kind of innovative spirit that leads to newnegative influence on business—but also fosters

products and new store formats.

individual characteristics in each store matched

Achievements throughLAWSON Challenge 2004

Implement target-based management system
Dispose of unprofitable assets
Optimize value chain (merchandise and distribution)
Revitalize frontline operations
Open stores with emphasis on profitability
Pursue capital tie-ups and business alliances
Human resource development

Fiscal 2002

Fiscal 2003

Fiscal 2004

LAWSON ANNUAL REPORT 2005

5

LAWSON Challenge 2007

to its neighborhood. The system has expedited

Strategies of LAWSON Challenge 2007

decision making at a level closer to and more in
Strategy 1

touch with customers and has afforded greater
flexibility in cooperative efforts among store

Improve Merchandise Assortment

operating, store development and productA wide assortment of merchandise means

divisions to reach overall objectives. As a result,customers always find what they are looking for

LAWSON promotes “Happiness and Harmony inat a LAWSON store. Stores must prioritize quality,

our Community,” with stores and displays thatwhich means the product line itself.

match the individual characteristics of eachlocation.

We believe the most important strategicachievement of LAWSON Challenge 2004 was
the forging of stronger bonds of trust between

Enhanced Support Structure for Stores

franchise owners and LAWSON’s Head Office. As

The ongoing efforts represented by our Threea result, franchise owners are now more receptive

Challenge Practices—a blueprint aimed at ensuring

to Head Office policies and our supervisors’

merchandise assortments tailored to individual

advice, and address outstanding problems withstores, cleanliness and courteous service—arerenewed enthusiasm.

essential if stores are to strengthen their marketing

During LAWSON Challenge 2007, we willcapabilities. To ensure implementation of thesestrive to increase customer satisfaction and,practices,

through this, expand franchise owners’ profits

in fiscal 2004 we initiated the “Mystery Shopper”

with a nonstop focus on the attainment of ever-program, whereby inspectors disguised as ordinary

higher levels of quality, service and cleanliness.

shoppers visit LAWSON stores and from a

Specifically, we will address problems

customer’s perspective evaluate the locations

identified through the Mystery Shopper programon such points as quality, service and cleanliness.

by endeavoring to improve the assortment of

Based on these evaluations, stores found withmerchandise, thereby enhancing the operating

issues are instructed to focus on improving quality,

efficiency of individual stores. We will also strive toservice and cleanliness levels using plans tailored

minimize lost opportunities resulting from stores

to their particular problems. Inspections conducted

selling out of popular items by practicing order-

since the beginning of fiscal 2005 have shown

and-verification processes to improve ordering

noticeable improvements in service and cleanliness

precision.

evaluations.
Strategy 2

To provide support for store franchise owners
and crew—including part-timers and temporary

Promote Three Formats

employees—of stores that have room for improve-

We offer three different store formats to respond

ment based on feedback from a Mystery Shopper

to the increasingly diverse needs of Japaneseinspection, we have established training centers incustomers.

seven locations nationwide, thereby completing

One of the reasons that standard format

our structure for evaluating and improving store

LAWSON stores have become a favorite stop for

management and positioning us to ensure

customers over the past 30 years is that weever-higher levels of service quality.

always strive to enhance convenience. By offering
convenience to customers with only a limited timeto spend in our stores through extended

6

LAWSON ANNUAL REPORT 2005

LAWSON’s
Three Store Formats
Tailored to
local clientele
LAWSON
stores with
eat-in facilities

Beauty andhealthTime
convenience

PostalLAWSON

Hospital
LAWSON

Alliance withJA*

LAWSONin schools

Typicalsupermarket
formatLAWSONin subway
stations

Distance
convenience

Price*JA: National Federation of Agricultural Cooperative Associations

LAWSON
This is the regular LAWSON convenience
store format. LAWSON stores offer a wide
range of daily necessities and convenientservices, as well central locations. In recent
years, we have adapted the LAWSON
format to meet a broad range of needs,
including Postal LAWSON stores, whichhave in-store post offices, and Hospital
LAWSON stores, which are situated in
hospitals. As of June 30, 2005, there weremore than 8,000 LAWSON stores in Japan.

NATURAL LAWSONBased on a development concept thatemphasizes beauty, health and outstanding
added value, NATURAL LAWSON-format
stores provide merchandise and services
suited to modern lifestyles. NATURALLAWSON’s target customers are women
who are concerned with their own healthand that of their families. As of June 30,
2005, there were 28 NATURAL LAWSON
stores in the Tokyo metropolitan area andthe Kinki region.

STORE100
The development concept behind
STORE100 emphasizes “100% customer
satisfaction.” STORE100 stores feature aselection of fresh food and other daily
necessities priced at a uniform ¥100 (¥105
including consumption tax), ensuring top
value for money. STORE100 stores target
housewives and seniors, as well as singles,
and are open daily from 7:00 A.M. to 11:00
P.M. As of June 30, 2005, there were seven
STORE100 stores in the Kanto area.

LAWSON ANNUAL REPORT 2005

7

LAWSON Challenge 2007

operating hours and attractive, efficient displays

years have helped us gain invaluable expertise inof key products, we have been able to expand

merchandising practices that respond to thethe chain to more than 8,000 stores.

needs of women customers and have given us

However, the needs of customers are evolving,

insight into the needs of customers concernedlargely because of a growing number of women

about healthy eating habits. With the knowledge

in the workforce and changing lifestyle dynamics.

base we have built, we will be able to accelerate

Consequently, the products and underlying concept

the opening of NATURAL LAWSON stores inof the conventional convenience store format no

fiscal 2005.

longer adequately reflect prevailing market

Initially, NATURAL LAWSON development

requirements. Accordingly, under LAWSON

efforts were focused on the Tokyo metropolitan

Challenge 2004 we began the adaptation of thisarea, but in March 2005 we began to open

format to the varied needs of modern customers.

NATURAL LAWSON stores in the Kinki region,

Adaptations include Postal LAWSON, a joint effort

comprising Hyogo, Kyoto, Mie, Nara, Osaka,with Japan Post; kiosk-type stores in hospitals,

Shiga and Wakayama prefectures. Our goal is toappropriately named Hospital LAWSON; andpromote NATURAL LAWSON in the Kanto,

regular locations with the added feature of

Kansai and Tokai regions—the three major

corners where customers can eat freshly madeindustrial and commercial centers surrounding

udon (thick wheat flour noodles) and soba (thinTokyo, Osaka and Nagoya, respectively—and to

buckwheat noodles) at their leisure.

establish between 300 and 500 stores in

Our second format, NATURAL LAWSON,

operation by fiscal 2007.

was launched in July 2001 to capitalize on

In May 2005, we introduced our third format,

heightened health consciousness among

STORE100, a brand-new concept in convenience

consumers with the hope of building
this format into a new businessstore design featuring a selection of daily
necessities, particularly fresh fruits and vegetables,

pillar. This project grew into theat prices ensuring one thing: value for money.

biggest undertaking everWhat makes this concept so innovative is that it

tackled by the Next-Genera-

presents a broad spectrum of the public,

tion Format Project Team atincluding housewives and seniors, with reason-

Head Office. In April 2004, theably priced processed foods and fresh foods

project was incorporated,unavailable in conventional convenience store

marking the start of a true

formats.

business presence for

Our three formats—regular LAWSON stores,

NATURAL LAWSON in the

NATURAL LAWSON and STORE100—will enable

convenience store industry. Our

LAWSON to offer the kind of varied product lineup

efforts to develop NATURAL

that satisfies the needs of all customers in the

LAWSON over the past threecommunity. To ensure stable expansion over the
medium to long term, LAWSON will take rapid
strides forward in turningthese formats into solid
pillars of growth.

8

LAWSON ANNUAL REPORT 2005

Growth throughLAWSON Challenge 2007
Growth in EPS
Target: 10%

ROE
Target: 15%

Continuous
growthM&A

Growth in gross margin atexisting stores

Net increase in numberof stores in threedifferent formats

LAWSON
NATURAL LAWSONSTORE100(CVS andothers)R&D expense

Annualdividend
increase in
fiscal 2005

Purchaseof treasury
stock

LAWSON TICKET
Profit growth ofaffiliates

LAWSON ATM Networks
Shanghai Hualian Lawson
i-Convenience(¥70 ¥90/share)

LAWSON CS Card
BestPractice

Strategy 3

flow trends, while placing a high priority on

Three-Year Growth Outlook and Capital Policy

returns to shareholders through dividend

LAWSON’s first priority is to realize higher

payments and the purchase and retirement of

profitability through increased earnings at moretreasury stock. In fiscal 2005, we intend to raise

than 8,000 existing stores, which will be achieved

annual cash dividends to ¥90.00, from ¥70.00

through the joint efforts of our supervisors andper share in fiscal 2004. As a consequence, we

franchise owners. With our three store formats

expect a consolidated dividend payout ratio of

firmly in place, enabling us to meet the needs of aapproximately 43%.

broad spectrum of customers in the community,

We will use our 30th anniversary as awe will be positioned well to attract customers wetouchstone for transformation. We have already

could not reach through the conventionaltaken the first step toward becoming a newconvenience store format. An increase in

LAWSON, and we look forward to the continued

customers in theory means higher profits.

encouragement of all stakeholders as we travel

Supported by enhanced profitability and athis road together.

wider customer base, we aim for stable,
sustainable growth over the medium to long term.

July 2005

We have set specific targets as follows: anaverage of 10% EPS growth annually from fiscal
2005 to fiscal 2007, and ROE of 15% in fiscal
2007.
We will continue to focus on capital efficiency.
In particular, we will pay close attention to cash

Takeshi Niinami
President and Chief Executive Officer

LAWSON ANNUAL REPORT 2005

9

Corporate Governance

Basic Policy on Corporate Governanceformulation of Companywide management strate-

LAWSON regards its stakeholders as important andgies, and reinforces the Board’s ability to arrive at fair

strives to maximize corporate value. For this reason,

decisions.

it is vital that we enrich corporate governance efforts

At the Ordinary Annual General Meeting ofand enhance the soundness and transparency of

Shareholders in May 2005, one external director andmanagement processes through compliance andone internal director resigned and their positions

proactive disclosure. A diagram illustrating the flow ofwere filled by two new external directors, Koichi

activities for business execution and management

Narita and Takehiko Kakiuchi. The new directors

supervision and showing the placement of internalbring to the Board experience acquired in various

control systems within the overall structure is on

areas of business, including finance, personnel andpage 12.

business reforms, at Mitsubishi Corporation,
LAWSON’s top shareholder and strategic business

Board of Directors, Executive Officer System

partner. We expect the counsel of both will be

and Compensation System

instrumental in raising the corporate value of

As of February 28, 2005, the Board of Directors

LAWSON further and that their advice will prove

comprised nine members, with a majority—five—effective in formulating forward-looking managementfrom outside LAWSON. We believe external partici-

plans.

pation on the Board presents us with a wider range

Since fiscal 2002, we have maintained anof insights and knowledge on significant issues

executive officer system that separates the functions

pertaining to corporate management, particularly theof management supervision and business execution.

Board of Directors (As of February 28, 2005)(Left to right)
Eiichi Tanabe, Member of the Board and Senior Executive Vice President
Katsuhiko Yamasaki, Member of the Board and Executive Vice President
Reiko Okutani, Member of the Board
Hiroshi Mino, Member of the Board
Masaaki Kojima, Standing Corporate Auditor
Kenji Yamakawa, Standing Corporate Auditor
Tetsuo Ozawa, Corporate Auditor

10

LAWSON ANNUAL REPORT 2005

As of May 31, 2005, LAWSON had 23 executive

as well as specific issues, and verifying legal status

officers, of which one is also concurrently a director.

and the condition of internal controls. In principle, theDetermining compensation for directors is theBoard of Corporate Auditors meets once a month.

responsibility of the Compensation Committee, which

LAWSON acknowledges the importance of CSR

is made up entirely of external directors and auditors.

and respect for laws and regulations, and has

Directors and executive officers are subject to an

established the Internal Audit Office as an internal

evaluation system whereby from approximately 30%

auditing unit. Audits are performed continuously toto 40% of annual compensation is dependent uponensure that operations are being executed properly,business results. This system clarifies the relationshipbased on prevailing laws and regulations, and thatbetween individual roles and the value delivered

these business activities, including risk management

through each role for LAWSON’s stakeholders.

measures, are appropriate. To further reinforce ourinternal auditing function, we have assigned a

Audit Function
LAWSON maintains a corporate auditor system, andthree of the four members of the Board of Corporate

director to oversee related efforts.
We have engaged Tohmatsu & Co. as ourcertified public accountant.

Auditors are from outside LAWSON. Corporate
auditors assess the execution of duties by directors,

Active and Fair Disclosurea process that includes attending Board of Directors

LAWSON recognizes our obligation to all stakehold-meetings and other significant discussions, offering

ers to accurately and fully explain our performance.

fair opinions and statements on overall management

Accordingly, we aim to ensure active disclosure. For(Right to left)
Takeshi Niinami, President and CEO
Hiroshi Tasaka, Member of the Board
Koji Furukawa, Member of the Board
Teruo Aoki, Member of the Board
Muneaki Masuda, Member of the Board
Yoshiyuki Sanada, Corporate Auditor

LAWSON ANNUAL REPORT 2005

11

example, we make our monthly business reports andmanagement processes through proactive risk

earnings presentation materials available on our web

management and compliance practices. Accordingly,site immediately upon their release to the media. We

we have created a Risk Management Committee,

also use video streaming to bring the Ordinary

which is charged with developing strategies for

Annual General Meeting of Shareholders to people

managing risk and enhancing compliance andunable to attend the meeting in person. In addition,

overseeing their implementation.

we have opened online access channels that enable

We have concluded agreements with several law

stakeholders to contact us with questions. This effort

firms for legal advice on corporate management andincludes the LAWSON Customer Center, which

day-to-day operations and maintain a standby

responds to inquiries from all parties.

system whereby we can obtain counsel whenevernecessary to use as reference in forming management decisions.

Risk Management and Compliance Efforts
LAWSON values all stakeholders and believes it isimportant to enrich corporate governance efforts andenhance the soundness and transparency ofCorporate Governance System(As of June 1, 2005)
General Meeting of Shareholders
Appointment / dismissal

Appointment / dismissal

Board of Directors
ProposalCompensation
Committee

Audit

External directors 6
Internal directors 3
Total
9

Appointment / dismissal /supervision

Operational
Organization

Appointment / dismissal

Board of Corporate
Auditors
External auditors 3Internal auditors 1
Total
4

Proposal / report

Certified Public
Accountant

Account
auditing

Audit

CEO
CFO

Director in charge of audit

Internal Audit
OfficeExecutive
Committee Meeting

CRO in charge ofcorporate ethics
Risk Management
Committee

Internal audit

Risk management, planning andexecution of compliance measures

Executive Officers

Headquarters

12

LAWSON ANNUAL REPORT 2005

Serving concurrently as director
Executive officers
Total
Branches1
22
23

Subsidiaries and Affiliates

Comments

Legal
CounselAdding Value tothe LAWSON Brand
At LAWSON, our ultimate goal is always to ensure the satisfaction of ourmany stakeholders, from customers and shareholders to franchiseowners, part-time store workers and LAWSON employees. To this end, we
strive continuously to enhance the LAWSON brand by focusing on threethemes. The first is strengthening product development prowess by using
innovation to increase the competitiveness of our products. The second
is improving store-operating skills by applying the Three Challenge
Practices. The third is reinforcing store development capabilities by
opening stores in locations that customers find convenient. These themes
are described in detail on the following pages.
1. Strengthening Product Development Prowess… Using innovation to increase thecompetitiveness of our products
2. Improving Store-Operating Skills… Applying the Three Challenge Practices
3. Reinforcing Store Development Capabilities… Opening stores in locations thatare convenient for customers

LAWSON ANNUAL REPORT 2005

13

Strengthening
Product
Development
Prowess

14

LAWSON ANNUAL REPORT 2005

Strengthening ProductDevelopment Prowess
The Onigiriya rice ball series contributed to a boom in

Enhancing product quality and marketing approaches

sales of rice balls at convenience stores and spurred

Vendors in the Tokyo metropolitan area and the Tokai

improvements in the quality of rice balls sold throughand Kinki regions that produce rice dishes andconvenience store chains. The success of Onigiriya

delicatessen items for LAWSON are currently

also prompted us to launch a second rice-related

incorporating leading-edge food-processing

project—Gohantei—a new series of boxed lunches inequipment, such as steam convection ovens andour mainstay rice dishes category introduced inblast chillers, into their operations. This investment by

November 2004. The series was launched with three

suppliers enables LAWSON to acquire products thatvarieties based on a concept described by two key

have not typically been offered at conveniencewords: “surprise” and “innovation.”stores. Going forward, we will continue to capitalize

The surprise is that customers get an astonishingly delicious boxed lunch made with quality
ingredients using quality processing techniques for aon advances in food technology to raise the quality ofboxed lunches, rice balls and other rice dishes.
On the marketing front, we are taking advantage

very reasonable ¥500. The innovation is thatof a variety of approaches, including tie-ups withcustomers can eat the feature dish and rice sepa-

various media. A particularly successful effort in fiscal

rately, or empty the feature dish over the rice to2004 involved a tie-up with Yakitate!! Japan, acreate a donburi, a popular dish featuring a bowl of

popular animated series featuring a bakery, whereby

cooked rice with a topping. The concept was an

we timed the debut of four bakery items that appear

immediate hit with customers, with sales reachingin this animated show to the day that the program

two million servings in the first two weeks after

first aired.

Gotantei’s debut. Since then, we have introduced

Aburi Chashu-don
Aburi Chashu-don (grilled roast porkbowl) features tender, succulent
flame-grilled pork with a healthy
complement of vegetables, including
takana (leaf mustard), bok choy andbean sprouts, served over steamedbarley rice.

In comparison with products from specialty

two new additions to Gohantei every month,

shops, boxed lunches and bakery items fromincreasing sales volume and reinforcing customer

convenience stores are often viewed as being

recognition.

unhealthy and of lower quality. Marketing activities

We will continue to develop appealing products

Gohantei series
Kani-don no Kurozuan (crab bowl
with black vinegar sauce oversteamed rice) is a healthy lunch
option featuring a fluffy omelet madewith crab, carrots and bamboo
shoots served over rice that has
been steamed with vegetables andtopped with a rich black vinegarbased sauce.

aimed at eliminating this image will encourage people

incorporating the surprise and innovation concept,

who have never visited a LAWSON store before towith a focus on ingredients, containers and eatingtake that first step through the doors and come again

options.

as a repeat customer.

Yakisaba Sushi
Grilled mackerel sushi from Wakasa,
Fukui, an area noted for its fish. First
launched as a special lunchbox for
travelers at Tokyo’s Haneda Airport,
Yakisaba Sushi was an immediate hit
among LAWSON customers.

■ Yakitate!! JapanLAWSON developed and launched bakery items timed to coincide with thefirst day Yakitate!! Japan, an animated series about baking bread, aired on
TV TOKYO in October 2004. This effort began with the idea of creating edible
versions of bakery items that appeared in the popular Yakitate!! Japan
manga and was realized with the assistance of d-rights, Inc., a subsidiaryof Mitsubishi Corporation; Aniplex Inc., a Sony Group company; animation
producer Sunrise Inc.; and Shogakukan Inc., publisher of the Yakitate!!
Japan manga. Like all other Lawson products, the Yakitate!! Japan series
was created based on the concept of “safe, healthy and tasty,” from theselection of ingredients through to development and production of products.
We are currently planning similar tie-ups with animated television programs. c

Hashiguchi Takashi / Shogakukan Inc.,
Pantasia, TV TOKYO

Melon PanOne of several products offered in
the Totte Oki Sengen series, a
LAWSON original. LAWSON’s Melon
Pan was developed to be crispy on
the outside and moist on the insideand produced to maintain thistexture as long as possible.

LAWSON ANNUAL REPORT 200515

Improving
Store-Operating
Skills16

LAWSON ANNUAL REPORT 2005

Improving Store-Operating Skills

Under LAWSON Challenge 2004, we promoted thework on the front lines. We run a series of group

basics of the convenience store business, which we

sessions fine-tuned to the requirements of personnel

call the Three Challenge Practices—ensuring

at each level.

merchandise assortments are tailored to individual

From fiscal 2005, we are focusing on redefining

stores, promoting cleanliness, and ensuring

the responsibilities of supervisors, thereby encourag-courteous service for our customers—throughout theing greater communication between supervisors and

LAWSON chain.

franchise owners and reinforcing the role of supervi-

In 2003, we introduced seven regional headquarters

sors in providing consulting services tailored to store

to promote sales strategies matched to individual

needs. We are also stepping up efforts to match thestores and geographical districts. It has been two

previous period’s service and cleanliness improve-years since we established this headquarters systemments with advances in merchandise assortment

across Japan, and we are beginning to see positive

and availability—the “quality” factor. In particular, weresults.

are striving to minimize opportunities lost as a result

In fiscal 2004, we strengthened the underlyingof stores selling out of fast-moving items byfoundation of store operations with programs

practicing order-and-verification processes todesigned to narrow any store-to-store discrepancies.

improve ordering precision and product lineup,

The “Mystery Shopper” program is a prime example.

thereby enhancing customer satisfaction. A key

Our supervisors share the results of mystery shopper

strategy here is expansion of the mystery shopper

visits with their respective franchise owners. By

program. In fiscal 2005, mystery shoppers are

discussing issues to be addressed, franchise owners

visiting all stores at least twice a year.

are alerted to problems and can formulate appropri-

Customer relationship management (CRM),

ate strategies for their particular store. This effort has

which hinges on LAWSON PASS cardholders, will

led to noticeable improvements in levels of service

give individual stores an effective means to hone aand cleanliness.

sharper competitive edge. An increase in LAWSONWe also established training centers at each of

Lecture at LAWSON University
LAWSON University offers training formembers of the LAWSON family(franchise owners, crews and employees)
aimed at enhancing customer
satisfaction. Training focuses on,among other things, customer
satisfaction, leadership training andspecific career-related skills.

PASS membership has already generated year-on-

the seven regional headquarters to reinforce ouryear improvements in sales at existing stores, while

district-oriented approach. These centers function as

franchise owners who have stepped up CRM efforts

instruction facilities for store personnel, particularly

have seen profitability gains rise.

the crew leaders and crew leader candidates who■ Mystery Shopper

Through this program, a mystery shopper, who is unknown to the crew of the store being checked,
objectively and quantitatively evaluates quality, service and cleanliness from a customer’s perspective.
The mystery shopper provides an unbiased assessment of real conditions in LAWSON stores, and theresults are used to augment advice from supervisors, which is in itself a key element of convenience
store operations.
Rival convenience stores in the same neighborhoods are also subject to mystery shopper visits sothat the status of the LAWSON store can be compared against that of the other stores and results used
to further improve our competitiveness.

LAWSON ANNUAL REPORT 2005

17

Reinforcing Store
Development
Capabilities

18

LAWSON ANNUAL REPORT 2005

Reinforcing Store Development
Capabilities
To date, LAWSON has pursued a store development

establishment of 711 new stores and the closure ofstrategy hinging on quality, that is, on situating stores

455 stores, including those that were relocated, inin locations that are convenient from the customer’s

Japan. This represented a net increase of 256 storesperspective. By adhering to Company-madesince fiscal 2003. We met our targets in terms ofstandards, namely, “no good (NG) line” criteria, thestore numbers, and per-store profitability. As ofgrid point system, and return on investment (ROI),

February 28, 2005, the total number of stores was

we raise the success rate on store development

8,077.

every year. In fiscal 2004, we emphasized store

The success of new store openings is crucial todevelopment, particularly in the Tokyo, Nagoya andreaching the goals of LAWSON Challenge 2007,

Osaka areas, with a focus on quality and volume. We

so we must focus on new store profits and enhancealso relocated or closed stores with low daily sales

store development efforts.

and impaired profitability.
In regard to mergers and acquisitions, weFirst, we will apply a store development system
introduced on a trial basis in the Kanto region toacquired business rights to a portion of the conve-

regional headquarters nationwide. Specifically, store

nience store chain of TOHOKU SPAR CO., LTD.,

development tasks previously delegated almost

in northeastern Japan. This acquisition has solidified

entirely to field counselors were divided into three

our presence and improved our operating efficiency

categories—proposed site development, ownerin the Tohoku region.

candidate development and sales forecasting—and

We also opened stores in markets previously

LAWSON store at the University ofTokyo

allocated to three individuals. This distribution of

unexplored. These included our first stores on the

responsibilities will lead to greater efficiency in store

campuses of national universities—Kyoto University

development activities and enhance the accuracy ofand the University of Tokyo—and the establishment

decisions on location and possible alliances, therebyof a jointly operated store, named the LAWSON

raising the success rate for store openings.

Saga Kinryu store, through an alliance with JapanTo determine a potential site for store develop-

Agricultural Cooperative Saga City, a member of thement, we utilize a mapping information system andNational Federation of Agricultural Cooperative

statistical data to expedite surveys of commercial

Associations.

districts surrounding areas where store openings are

Thanks to ongoing efforts to emphasize the

LAWSON Saga Kinryu store

planned. With greater precision in site selection—a

profitability of new stores, we achieved a 3%

capability founded on our database of results—weincrease in average daily sales at new stores in fiscal

raise the percentage of new stores in prime locations

2004, notwithstanding a 5% decrease in related real

identified by the grid point system and, by observing

estate costs. This achievement reflects an enhanced

NG line criteria, raise the percentage of new stores

ability to meet the aforementioned Company-madewith higher daily sales.

standards.
Store development activities culminated in the

LAWSON ANNUAL REPORT 2005

19

Corporate Social Responsibility

Three decades have passed since the first convenience store

line with this belief, we have contributed to the greenification

appeared in Japan. During this time, society has come tomovement through such means as the LAWSON Green Fund, arecognize the convenience store as a full-fledged industry.

tree-planting project maintained since 1992. In November 2004,

Consumers are aware of the role convenience stores play in

our efforts to prevent global warming through this fund weresociety and the social responsibility that chain operators must

recognized with the Environment Minister’s Award. In April 2005,

bear. Convenience stores—including LAWSON—have generated

LAWSON became the first private company to receive the Green

new social issues. We acknowledge the additional obligation to

Culture Prize, presented by the National Land Afforestation

respond proactively to these issues. Positive actions on the social

Promotion Organization. As of February 28, 2005, nearly ¥1.8

front are ultimately tied to higher corporate value.

billion has been donated through our Green Fund donation boxes.

To reinforce our approach to CSR, we established the CSRLAWSON also takes an active role in times of disaster. Fiscal

Promotion Office under the direct control of the president in2004 was characterized by numerous demonstrations of the

March 2005.

awesome power of nature. We worked to get domestic stores inaffected areas back into operation as quickly as possible andEnvironmental Protection Efforts

followed up with efforts to supply daily essentials to those in need.

Convenience stores have has continuously sought to provide

In addition, reaffirming our capacity to be a regional lifeline ingreater convenience to customers against a backdrop oftimes of disaster, we concluded agreements with the Tokyo Fire

increasingly diverse lifestyles. However, we realize that these efforts

Department and municipalities to provide food and sundry items

also have a negative side, notably, greater consumption of power

to people confronted by large-scale devastation or part of aand other resources, noise from nighttime delivery vehicles, andwidespread fire-fighting response.

increased waste. In recent years, the industry has come underIn the event of a large-scale disaster, Green Fund donation

closer watch by the public for adverse environmental and social

boxes placed in LAWSON stores are temporarily converted into

impacts. We have responded with a variety of measures.

disaster relief boxes. Money donated by customers nationwide is

To minimize power requirements, for example, we have replaced

directed toward the victims of disaster via the Japanese Red

electrical systems and equipment with more environment-friendly

Cross Society and other relief agencies. During fiscal 2004, we

alternatives and in many instances rethought operating hours.

undertook fund-raising campaigns for seven disaster relief

To curb waste, we have reduced packaging for products delivered

projects in Japan and overseas, delivering a total of ¥262 million.

to stores and stepped up efforts to separate out recyclable
packaging.
We have also sought to reduce food waste by reassessing
production and processing practices, as well as adjusting
distribution and sales methods. To this end, we have also
reviewed our business model and developed innovative newmodels.

Greening Program in Aomori

We are confident that ongoing efforts to address these
crucial issues will help us realize the objectives implied in our
new corporate philosophy: “Happiness and Harmony in our
Community.”Social Contribution Activities
LAWSON believes that a healthy environment can only be passed
down to successive generations when business activities are
pursued with the potential for environmental impact in mind. In

20

LAWSON ANNUAL REPORT 2005

LAWSON Green Fund donation box

Financial Section

Consolidated Five-Year Summary

22Management’s Discussion and Analysis

23

Consolidated Balance Sheets

32

Consolidated Statements of Income

34

Consolidated Statements of Shareholders’ Equity

35

Consolidated Statements of Cash Flows

36

Notes to Consolidated Financial Statements

37

Independent Auditors’ Report

49

LAWSON ANNUAL REPORT 200521

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

Thousands of
U.S. Dollars(3)Millions of Yen
2005

2004

2003

2002

2001

2005

For the year:
Operating revenues¥162,963¥153,910¥149,032¥141,621¥135,237$1,555,881

Net sales from company-operated stores

63,802

67,47980,954

101,353

132,921609,146

Other

27,63024,212

20,34813,142

12,060263,797

254,395

245,601

250,334

256,116

280,218

2,428,824

Operating income

42,941

38,087

34,10736,363

41,279409,977

Net income

20,435

18,571

8,861

16,123

16,368

195,102

Cash flows from operating activities

47,32937,42433,86044,804

52,793451,871

Cash flows from investing activities(33,297)(40,621)(3,787)(44,031)(54,696)(317,901)

Cash flows from financing activities(13,836)(14,364)(7,247)(58,236)

18,707(132,098)

Capital expenditure

30,54933,96837,71235,571

32,651

291,665

Depreciation and amortization(1)19,641

18,49916,071

16,32816,021

187,521

Total assets¥356,310¥ 354,831¥342,599¥342,934¥387,236$3,401,852

Total shareholders’ equity

160,282

154,317

151,864

149,827

178,448

1,530,285

Interest-bearing debt

—

—

—

3,140

23,530—

Ratio of interest-bearing debt (%)

—

—

—

0.9.

6.1.

—

Cash and cash equivalents

76,58576,38993,994

71,269128,655

731,192

Total number of stores

8,077

7,967

7,721

7,824

7,749

Number of employees (Full-time)

3,391

3,402

3,462

3,817

4,170

Franchise commission from franchised stores

Total operating revenues

At year-end:

Yen

U.S. dollars

Per share data:
Net income

¥198

¥176

¥82

¥146

¥148

$1.89.

70

41

41

41

35

0.67.

ROE

13.0%.

12.1%.

5.9%.

9.8%.

11.9%.

ROA

5.7%.

5.3%.

2.6%.

4.4%.

4.5%.

¥1,265,275¥1,220,819¥1,213,088¥1,184,204¥1,144,717$12,080,151

63,802

67,47980,954

101,353

132,921609,146

Processed foods

665,687

625,031

600,508

583,712562,777

6,355,614

Fast foods

297,369

302,568

303,098

297,030

362,979

2,839,116

Daily delivered foods

148,134

139,506

138,353

150,862

90,5691,414,302

Non-food products

217,887

221,192

252,083

253,953

261,3132,080,265¥1,329,077¥1,288,297¥1,294,042¥1,285,557¥1,277,638$12,689,297

Cash dividends
Financial data:

Net sales of all stores:
Net sales by store category
Franchised stores(2)Company-operated stores
Net sales by product category(2)Net sales of all storesNotes: 1. Including depreciation and amortization of intangible fixed assets.
2. These figures, as reported by franchised stores, are unaudited.
3. The U.S. dollar amounts represent translations of Japanese yen at the approximate exchange rate at February 28, 2005, of ¥104.74=$1.

22

LAWSON ANNUAL REPORT 2005

Management’s Discussion and Analysis■ Industry Overview
In the retail industry, realignment has accelerated in recent years amid lingering deflationary trends, as large chains absorb smaller chains, prominent foreign-owned companies establish a presence in Japan, and heightened competition transcends industry
borders. But even while the retail industry is, on the whole, contracting, the scale of theconvenience store (CVS) sector is expanding, albeit at a slower rate of growth than in
the past.
For major CVS chains, large-scale restructuring efforts to eliminate unprofitable
stores, such as those with low daily sales, are finally winding down and managements
are turning their attention to relocating stores and formulating aggressive store development strategies to stay at the forefront.
As in other sectors of the retail industry, the CVS sector is dominated by an oligopolyof major chains, which account for an increasingly larger share of the market. Heightened competition from supermarkets with extended or round-the-clock operating hours
and restaurants and take-out shops has exacerbated the challenges of an alreadydifficult business environment.
Recent years have also seen rapid development of shops featuring specific lines offreshly prepared dishes for customers in small commercial districts. These shops areencroaching on the CVS domain. Additionally, in the area of products and services, theCVS sector must now vie for the attention of what has traditionally been a secure CVS
customer segment—busy working men. If CVS operators yield territory in this limited,highly standardized market, the prospects for the sector are likely to grow even dimmer.
In this environment, LAWSON continues to enhance the loyalty of customers who
regularly visit its blue-signed stores by ensuring that fast-moving items are always instock. To attract the interest of people who do not usually choose the conventional
convenience store, management is also establishing new store formats spotlighting
products and services especially for health-conscious individuals, women and seniors.
The Company also will focus on raising corporate profitability through a wider customer
base, as well as expanding profits for franchise owners and boosting levels of customer
satisfaction.

CVS Share of the Total Retail Market(Billions of Yen)
150,000
5.0

5.7

(%)
6

4.8

100,000

4

50,000

2

0

00

01

02

03

04

0

(Years ended December 31)

Total retail industry annual sales
CVS sector annual sales
CVS share (%)

Share of CVS Market Held by
Top Three Chains (Sales)(Billions of Yen)
9,000
62.4

(%)
75
62.8

63.6

64.6

65.4

6,000

50

3,000

25

0

01

02

03

04

05

0

(Years ended February 28 and 29)

CVS Share of the Total Retail Market
Years ended December 31

Total retail industry annual sales
CVS sector annual sales
CVS share

5.3

5.5

(Billions of Yen)
2004

2003

2002

2001

2000

¥128,093
7,289
5.7%

¥128,870
7,096
5.5%

¥131,413
6,980
5.3%

¥136,808
6,846
5.0%

¥139,434
6,680
4.8%

LAWSON, INC.
Seven-Eleven Japan Co., Ltd.
FamilyMart Co., Ltd.
CVS industry (For previous calendar years
ended December 31)
Share of top three chains (%)

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

Share of CVS Market Held by Top Three Chains (Sales)
February 28 and 29

LAWSON, INC.
Seven-Eleven Japan Co., Ltd.
FamilyMart Co., Ltd.
Sales of top three companies
Share of top three companies
CVS industry(Billions of Yen)
2005

2004

2003

2002

2001

¥1,329
2,441
998
4,768
65.4%
7,289

¥1,288
2,343
954
4,585
64.6%
7,096

¥1,294
2,213
932
4,439
63.6%
6,980

¥1,286
2,114
899
4,299
62.8%
6,846

¥1,278
2,047
843
4,168
62.4%
6,680

Notes: 1. CVS industry figures are for previous calendar years ended December 31.
2. Sales and share of top three companies are for the years ended February 28 and 29.

LAWSON ANNUAL REPORT 200523

Aggregate Net Sales of Lawson Stores(Millions of Yen)
150,000

100,000

50,000

0

01

02

03

04

05

(Years ended February 28 and 29)

Existing Store Sales
(%)
120

98.3

98.4

98.1

97.5

99.7

80

40

■ Store Operation Analysis
Total Net Sales
Aggregate net sales of LAWSON stores in fiscal 2004, ended February 28, 2005,
climbed 3.2%, to ¥1,329,077 million. This result is largely attributable to three factors:
an extraordinarily hot summer, which kept sales of beverages steady; greater interest in
hot foods, which stores actively promoted to customers; and favorable sales of bakery
items, reflecting the popularity of products linked to Yakitate!! Japan, an animatedtelevision program with a bakery theme.
By product category, sales of processed foods and daily delivered foods were up.
Sales of fast foods were down, owing to slow demand for rice dishes in the first half ofthe fiscal year. Demand for non-food products was sluggish.
Existing Store Sales
Existing store sales fell for the seventh consecutive year, marking a steady downward
trend since fiscal 1998. Consumers appeared more inclined to spend, but the upward
trend did not transform into a full-fledged recovery in the CVS sector, primarily becauseof protracted deflation, the impact of heightened competition from the ready-made foodand restaurant sectors on price and quality fronts, the start of extended operating hours
and round-the-clock operations by supermarkets and other retailers, and a delayed rally
in regional economies.
However, successful efforts to upgrade the operational infrastructure, with a focus on
megavendors for production of mainstay rice dishes, as well as innovation-driven product development, typified by the Onigiriya rice ball and Gohantei boxed lunch series,
precipitated signs of recovery in the rice dishes category in the second half of fiscal
2004.
Sales by Product Category
Sales of processed foods rose 6.5%, to ¥665,687 million, as sales of beverages
received a particularly strong boost from hot summer weather. Sales of fast foods
slipped 1.7%, to ¥297,369 million, as sluggish demand for rice dishes and cooked
noodles overshadowed steady demand for hot foods. Sales of daily delivered foods
climbed 6.2%, to ¥148,134 million, reflecting solid sales of bakery items, especially thetwo pastry series Totte Oki Sengen and Komugibatake no Dengon. Sales of non-foodproducts edged down 1.5%, to ¥217,887 million, owing to lackluster sales ofmagazines and cosmetics.
Net Sales by Product Segment
Years ended February 28 and 29

0

01

02

03

04

(Years ended February 28 and 29)

24

LAWSON ANNUAL REPORT 2005

05

Processed foods
Fast foods
Daily delivered foods
Total food sales
Non-food products
Net sales at all stores(Millions of Yen)
2005

2004

2003

2002

2001

¥0,665,687
297,369
148,134
1,111,190
217,887¥1,329,077¥0,625,031
302,568
139,506
1,067,105
221,192¥1,288,297¥0,600,508
303,098
138,353
1,041,959
252,083¥1,294,042¥0,583,712
297,030
150,862
1,031,604
253,953¥1,285,557¥0,562,777
362,979
90,5691,016,325
261,313¥1,277,638

Breakdown of Net Sales by Product Segment

Average Daily Sales

Years ended February 28 and 29

Processed foods
Fast foods
Daily delivered foods
Total food sales
Non-food products
Net sales at all stores

(%)
2005

2004

2003

2002

2001

50.1%
22.4%
11.1%
83.6%
16.4%
100.0%

48.5%
23.5%
10.8%
82.8%
17.2%
100.0%

46.4%
23.4%
10.7%
80.5%
19.5%
100.0%

45.4%
23.1%
11.7%
80.2%
19.8%
100.0%

44.1%
28.4%
7.1%
79.6%
20.4%
100.0%

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

Gross Profit Margin by Product Segment

400

200

0

Years ended February 28 and 29

Fast foods
Daily delivered foods
Processed foods
Non-food products(Thousands of Yen)
600

(%)
2005

2004

2003

2002

2001

36.4%
33.3%
26.7%
34.0%

35.6%
32.5%
26.9%
33.4%

35.7%
32.5%
27.3%
29.9%

33.7%
35.0%
27.3%
30.5%

34.3%
34.9%
27.2%
29.6%

01

02

03

04

05

(Years ended February 28 and 29)

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

■ Store Network
In fiscal 2004, as in the previous fiscal year, LAWSON endeavored to raise new-store
profitability, emphasizing a return on investment (ROI) based on store opening standards
specific to each region. The Company also actively closed or relocated low-volume andunprofitable stores. Consequently, domestic store openings numbered 711 while store
closings reached 455, including relocated stores. At February 28, 2005, LAWSON’s
domestic network comprised 8,077 stores, a net increase of 256 from a year earlier.
While this process did indeed lead to another year of net increase in the number ofstores in its network, LAWSON intends to place greater importance on potential profitability rather than quantity in future store development activities. A perspective on store
development in the year of opening that emphasizes quality should lead to higher sales
from existing stores in the following year, and boost the ROI on the entire chain of
LAWSON stores.
A noteworthy aside in store development is expansion of the chain by Shanghai
Hualian Lawson Co., Ltd., an affiliate in the People’s Republic of China accounted forunder the equity method. The network in the Shanghai area grew by 64 locations, to210 stores, bringing LAWSON’s total network to 8,287 stores.

Number of Stores (Consolidated)(Stores)
9,000

6,000

3,000

0

01

02

03

04

05

(Years ended February 28 and 29)

Franchised stores
Directly operated stores

Number of Stores in the LAWSON Network
February 28 and 29

Number of stores
Openings
Closings
Net increase (decrease)

2005

2004

2003

2002

2001

8,077
711
455
256

7,967
687
441
246

7,721
519
622
(103)

7,824
626
551
75

7,749
739
422
317

Note: Figures for Shanghai Hualian Lawson Co., Ltd., are not included in the figures for 2005, as the company became an equitymethod affiliate in fiscal 2004.

LAWSON ANNUAL REPORT 2005

25

Number of Stores by Contract Type
February 28 and 29

FC-B
FC-G
FC-C
Franchised storesCompany-operated stores
Total

2005

2004

2003

Number ofstoresShare (%)

Number ofstoresShare (%)

Number ofstoresShare (%)

1,836
2,335
3,560
7,731
346
8,077

1,992
2,415
3,065
7,472
349
7,821

2,200
2,446
2,645
7,291
334
7,625

22.7%
28.9%
44.1%
95.7%
4.3%
100.0%

25.4%
30.9%
39.2%
95.5%
4.5%
100.0%

28.8%
32.1%
34.7%
95.6%
4.4%
100.0%Net increase(decrease)(from 2004
to 2005)

(156)
(80)
495
259
(3)
256

Note: Figures for Shanghai Hualian Lawson Co., Ltd., are not included in the figures for 2005, as the company became an equitymethod affiliate in fiscal 2004.

Outline of Store Contracts
Contract type
Contract term
Contract store
Franchise fee
Investment
Store opening reserve fundGuarantee deposit
Franchisee income

FC-G

FC-C

FC-B

10 years from store opening day
Stores already opened or slated to open
Own property¥1.5 million (Contract fee, training expenses, andstore opening preparation commission, each ¥500,000)¥1.5 million (Including payment for some merchandise purchasedon behalf of the store)¥500,000 (Including float and application fee for license to operate)
Average monthly sales
x 2 months
Not required—
Gross profit x 55%
Gross profit x 50%
Gross profit x 66%■ Placement of ATMs in Stores
LAWSON and consolidated subsidiary LAWSON ATM Networks, Inc., marked the startof full-scale ATM services in October 2001 with the installation of automated teller
machines (ATMs) in LAWSON stores. Since then, LAWSON has formed alliances withcity banks, including all four of Japan’s major financial groups, as well as prominent
regional banks.
As of February 28, 2005, the Company had expanded ATM installation to stores innine more prefectures, bringing to 26 the total number of prefectures where LAWSON
customers have access to ATMs. The number of ATMs installed stood at 3,457 at theend of fiscal 2004. In another development, since March 2004 people with postal
savings cards have been able to use any LAWSON store ATM.

26

LAWSON ANNUAL REPORT 2005

■ New Format Stores
In February 2001, LAWSON launched a new format store called NATURAL LAWSON.
To bring this format out of the research and development stage and into a full-scale
multistore development, LAWSON turned this Head Office project into a consolidated
subsidiary, NATURAL LAWSON, Inc., in April 2004.
During fiscal 2004, LAWSON promoted another project, Hospital LAWSON. Thereare currently 12 Hospital LAWSON stores in Japan. Anticipating new business opportunities arising from Japan’s aging population, the Company plans to apply this promisingbusiness model more widely in the coming years.
Through alliances with other companies, LAWSON has entered market domains andgeographical locations previously considered impossible. For example, the Company
worked with Japan Post to create Postal LAWSON stores; allied with Tokyo Metro Co.,
Ltd., to open Metropia stores in subway concourses; set up a presence inside financial
institutions in cooperation with banks, securities firms and other finance-related entities;
and formed an alliance with Nippon Oil Corporation to establish stores at ENEOS gas
stations.
LAWSON remains committed to the search for new store sites that underpin
successful store development and capitalize on new business opportunities.

Loppi (Multimedia Terminal)
Transaction Volume(Billions of Yen)
240

160

80

0

01

02

03

04

05

(Years ended February 28 and 29)

Concert tickets
Game software
Travel tickets
Other sales
Entertainment and other related sales
Bill settlement
Others■ Scope of Consolidation
The consolidated results for fiscal 2004 include the performances of seven members of
the LAWSON Group—five consolidated subsidiaries and two affiliates accounted forunder the equity method—and the parent company. The LAWSON Group is involved inconvenience store operations, ticket sales, e-commerce and financial and consulting
services. The fiscal results of subsidiaries within the scope of consolidation arepresented below.
■ Business Profiles
LAWSON TICKET Inc.
This consolidated subsidiary sells tickets to concerts, movies, sporting events and otherentertainment productions, primarily through Loppi multimedia terminals at LAWSON
stores.

LAWSON ANNUAL REPORT 2005

27

i-Convenience, Inc.
This consolidated subsidiary operates the official “iLAWSON” i-mode Internet site,
including online merchandise sales and provision of related services and information.
LAWSON ATM Networks, Inc.
This consolidated subsidiary installs, maintains and operates jointly operated ATMs at
LAWSON stores and outsources administrative tasks dealing with financial services,such as deposits, withdrawals and fund transfers, performed through these ATMs, forpartner financial institutions.
NATURAL LAWSON, Inc.
In April 2004, subsidiary LAWSON e-Planning, Inc., was renamed and incorporated as
NATURAL LAWSON, Inc. This consolidated subsidiary will promote a business format
for NATURAL LAWSON stores that hinges on the concept of health and will assumeauthority from LAWSON regarding product planning and development and guidance tostore owners.
BestPractice Inc.
This consolidated subsidiary implements “mystery shopper” on-site inspections of convenience stores to determine the status of operations and offers advice and proposals
to improve LAWSON stores.
LAWSON CS Card, Inc.
This equity-method affiliate issues LAWSON PASS credit cards to LAWSON customers
and provides card-based services through Loppi terminals and other channels. As of
February 28, 2005, LAWSON PASS, for which services began in August 2002, had a
cardholder base exceeding 1.8 million members.
Shanghai Hualian Lawson Co., Ltd.
This company, which became an equity-method affiliate in fiscal 2004, is involved in thedevelopment of a chain of LAWSON stores in Shanghai, the People’s Republic of China.
The change from consolidated subsidiary to equity-method affiliate represents
LAWSON’s agreement to foster growth 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 the Company with a stake of 49.0%.

28

LAWSON ANNUAL REPORT 2005

Operating Results of Principal Subsidiaries and Affiliates
Years ended February 28 and 29
LAWSONTICKET
Inc.
Consolidated
subsidiary

2005
Operating revenues¥6,288Operating income (loss)
721
Net income (loss)
411
2004˙
Operating revenues
Operating income (loss)
Net income (loss)(Millions of yen)
LAWSONATM
Networks, Inc.
Consolidated
subsidiaryi-Convenience,
Inc.
Consolidated
subsidiary

LAWSON CS
Card, Inc.
Equity-method
affiliate

Shanghai
Hualian Lawson
Co., Ltd.*
Equity-method
affiliate

¥307
(113)
(155)

¥4,260(1,229)(1,218)¥3,659(13)
0

Breakdown of Selling, Generaland Administrative Expenses(Millions of Yen)
180,000

120,000¥10,003
143
265

60,000

6,218
644
387

8,352
(348)
(350)

333
(241)
(663)

2,551
(2,255)(2,256)

2,024
(81)
(71)

2003
Operating revenues
Operating income (loss)
Net income (loss)

5,425
788
387

6,718
(529)
(529)

213
(383)
(489)

858
(3,935)(3,936)

2,642
(191)
(190)

2002
Operating revenues
Operating income (loss)
Net income (loss)

5,119
508
275

1,248
(303)
(326)

103
(473)
(470)

0
(1)
(5)

3,033
(183)
(146)

0

01

02

03

04

05

(Years ended February 28 and 29)*Since fiscal 2005, Shanghai Hualian Lawson Co., Ltd., has been accounted for using the equity method, and as
a result is not included in fiscal 2005 figures.

■ Income and Expenses
Total operating revenues edged up ¥8,794 million, or 3.6%, to ¥254,395 million. The
improvement was largely the result of higher franchise commissions from franchised
stores, paralleling a greater number of stores in operation, and higher ATM fees at
subsidiary LAWSON ATM Networks.
Operating income rose ¥4,854 million, or 12.7%, to ¥42,941 million, thanks to theaforementioned ¥8,794 million increase in operating revenues, and to successful costcutting efforts, which held selling, general and administrative (SG&A) expenses to anincrease of ¥7,179 million, or 4.6%. The primary components of SG&A expenses were
ATM operating costs and store rents.
Despite a ¥2,182 million provision for the allowance for doubtful accounts, income
before income taxes and minority interests rose ¥3,117 million, or 9.5%, to ¥36,040
million, owing to a ¥519 million decline in equity in losses of associated companies—
in this case, LAWSON CS Card, Inc.
Net income settled at ¥20,435 million, an increase of ¥1,864 million, or 10.0%. Net
income per share was ¥198, compared with ¥176 a year earlier.

Personnel
Advertising
Leasing
Facility leasing
Depreciation*
Others*Including depreciation and amortization of
fixed assets.

Operating Income(Millions of Yen)
48,00032,00016,000

0

01

02

03

04

05

(Years ended February 28 and 29)

Net Income(Millions of Yen)
21,00014,000

7,000

0

01

02

03

04

05

(Years ended February 28 and 29)

LAWSON ANNUAL REPORT 2005

29

Interest-Bearing Debt,
Cash and Cash Equivalents andRatio of Interest-Bearing Debt
(Millions of Yen)
150,000

100,000

(%)
9

6

6.1

50,000

3

0.9
0.0
0

01

02

03

0.0

0.0

04

05

(Years ended February 28 and 29)

Interest-bearing debt
Cash and cash equivalents
Ratio of interest-bearing debt

Return on Equity (ROE) and
Return on Assets (ROA)
(%)
15
13.0
12.1

11.9

9.8

10

5.9

5.3
5

4.5

5.7

4.4
2.6

0

01

02

03

04

05

(Years ended February 28 and 29)

ROE
ROA

Cash Flows(Millions of Yen)
120,000

60,0000–60,000

01

02

03

04

(Years ended February 28 and 29)

Operating activities
Investing activities
Financing activities

30

LAWSON ANNUAL REPORT 2005

05

0

■ Financial Position
Total current assets fell ¥9,069 million, or 6.6%, to ¥128,593 million. This decrease
stems from an ¥8,296 million decline in accounts receivable—due from franchised
stores, as fiscal 2004 ended on a weekday and fiscal 2003 ended on a Sunday.
Net property and store equipment rose ¥8,894 million, or 10.7%, to ¥92,166 million,
chiefly owing to a ¥15,453 million increase in buildings, which reflected store development efforts.
Total current liabilities declined ¥4,667 million, or 3.3%, to ¥137,931 million. Thischange is attributable to the aforementioned fact that fiscal 2004 ended on a weekday,
whereas fiscal 2003 ended on a Sunday. This situation occasioned a ¥2,581 million increase in accounts payable—due to franchised stores and a ¥3,475 million decrease inmoney held as agent.
Total long-term liabilities edged down ¥417 million, or 0.8%, to ¥54,607 million. The
main reason for the drop was a ¥1,052 million decline in guarantee deposits received
from franchised stores, corresponding to a decline in the number of franchised storesoperating under franchise agreements requiring the payment of a guarantee deposit.
Shareholders’ equity rose ¥5,965 million, or 3.9%, to ¥160,282 million. This changecame about because net income of ¥20,435 million buoyed retained earnings and offset
outlays of ¥5,775 million used to pay dividends and ¥8,798 million used to repurchasetreasury stock. Consequently, the equity ratio was 45.0%, up 1.5 percentage points.
LAWSON’s capital policy remains directed toward supporting stable growth andensuring optimum capital efficiency, thereby facilitating returns to shareholders in theform of dividends and the purchase of treasury stock, as well as ensuring a balance
between capital and depreciation.
Cash Flow Analysis
Net cash provided by operating activities totaled ¥47,329 million, ¥9,905 million higher
than in fiscal 2003. The major components of this change were a ¥3,117 million increase in income before income taxes and minority interests, and decreases of ¥7,378
million and ¥1,047 million, respectively, in accounts receivable and guarantee deposits
received from franchised stores, which countered a ¥2,940 million decrease in accounts
payable.
Net cash used in investing activities amounted to ¥33,297 million, ¥7,324 million lessthan in the previous period. This change reflected the application of ¥26,710 million topurchases of property and store equipment, ¥2,878 million more than in fiscal 2003,
which offset an increase of ¥11,074 million in proceeds from redemption of marketablesecurities.
As a result of changes in cash flows from operating and investing activities, free cash
flow—the difference between the two net figures—rebounded to a positive ¥14,031
million, from a negative ¥3,197 million a year earlier.
Net cash used in financing activities amounted to ¥13,836 million, down slightly from
¥14,364 used the previous period. While cash dividends paid totaled ¥5,775 million,¥1,395 million more than in fiscal 2003, cash applied to the purchase of treasury stock
amounted to ¥8,798 million, down ¥2,751 million.
As a result of the Company’s operating, investing and financing activities during theperiod, cash and cash equivalents, end of year, totaled ¥76,585 million, ¥196 million
more than at the same point a year earlier.

Risk Factors in the Operating Environment
LAWSON’s operating environment remains challenging, particularly because of increasingly fierce competition from businesses entering the CVS market from outside thesector over the past few years, a disparity between anticipated sales and actual results
owing to unseasonal temperatures and climate changes, as well as pressure on thecost front from rising prices for food ingredients and packaging materials.
Persistent risk factors in the Company’s operating environment include heightenedcompetition in pricing, product quality and store development; competition from newmarket entrants from outside the traditional CVS sector; fluctuating sales due toinclement weather; and the volatility of prices for food ingredients and packaging
materials. Furthermore, while revision of the Large-Scale Retail Store Location Law andderegulation, including permission to sell pharmaceutical products, should spur new
business opportunities, the market is just as open to CVS operators as it is tocompanies outside the retail industry.

Shareholders’ Equity and Equity Ratio(Millions of Yen)
210,000

(%)
60

46.1

43.7

44.3

43.5

45.0

140,000

40

70,000

20

0

01

02

03

04

05

0

(Years ended February 28 and 29)

Shareholders’ equity
Equity ratio (%)

LAWSON ANNUAL REPORT 200531

Consolidated Balance Sheets
LAWSON, INC. and Subsidiaries
February 28, 2005 and February 29, 2004

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

ASSETS

2005

2004

2005

¥076,585¥076,389$0,731,192

8,019

9,244

76,561

Due from franchised stores (Notes 3 and 9)

10,332

18,62898,644

Other

18,72618,028

178,786

CURRENT ASSETS:
Cash and cash equivalents
Marketable securities (Note 5)
Accounts receivable:

(81)

(132)

(773)

Inventories

Allowance for doubtful accounts

1,376

1,497

13,137

Short-term loan to associated company (Note 14)

5,000

6,250

47,737

Deferred tax assets (Note 12)

3,241

2,818

30,943

Prepaid expenses and other current assets
Total current assets

5,395

4,940

51,508

128,593

137,662

1,227,735

PROPERTY AND STORE EQUIPMENT (Note 4):
Land (Note 6)

5,644

4,938

53,886

Buildings

115,265

99,812

1,100,487

Furniture, fixtures and equipment

58,12457,437554,936

179,033

162,187

1,709,309(86,867)(78,915)(829,359)

92,166

83,272879,950

1,173

1,064

11,199

728

651

6,951

Long-term loans receivable

16,80913,109160,483

Lease deposits (Note 7)

89,96590,496858,936

Deferred tax assets (Note 12)

8,291

6,804

79,158Deferred tax assets for land revaluation (Note 6)

4,828

4,808

46,095

Software12,307

14,216

117,500

Other assets

5,588

4,500

53,352

Allowance for doubtful accounts(4,138)(1,751)(39,507)

135,551

133,897

1,294,167¥356,310¥354,831$3,401,852

Total
Accumulated depreciation
Net property and store equipment

INVESTMENTS AND OTHER ASSETS:
Investment securities (Note 5)
Investments in associated company

Total investments and other assets
TOTAL
See notes to consolidated financial statements.

32

LAWSON ANNUAL REPORT 2005

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

LIABILITIES AND SHAREHOLDERS’ EQUITY

2005

2004

2005

$0,597,231

CURRENT LIABILITIES:
Accounts payable:
Trade (Note 8)¥062,554¥063,322

Due to franchised stores (Note 9)

3,983

1,402

38,027

Other

14,017

19,318133,827

Income taxes payable (Note 12)

11,71810,009111,877

Money held as agent

40,27043,745

384,476

Accrued expenses and other current liabilities

5,389

4,802

51,451

137,931

142,598

1,316,889

1,807

1,144

17,252

305

218

2,912

51,522

52,574491,904

Lease deposits from lessees

813

799

7,762

Other

160

289

1,527

54,60755,024

521,357

3,490

2,892

33,32158,50758,507558,593

Capital surplus

41,523

41,521

396,439

Retained earnings

76,721

72,769732,490

Land revaluation difference (Note 6)(7,038)(7,067)(67,195)

Net unrealized gain on available-for-sale securities

110

53

1,050

Foreign currency translation adjustments

34

68

325

Total current liabilities
LONG-TERM LIABILITIES:
Liability for employees’ retirement benefits (Note 10)
Liability for directors’ and corporate auditors’ retirement benefits
Guarantee deposits received from franchised stores

Total long-term liabilities
MINORITY INTERESTSCONTINGENT LIABILITIES (Note 15)
SHAREHOLDERS’ EQUITY (Notes 11 and 16):
Common stock—authorized, 409,300,000 shares in 2005 and412,300,000 shares in 2004; issued, 104,600,000 sharesin 2005 and 107,600,000 shares in 2004

Treasury stock—at cost, 2,422,809 shares in 2005 and
3,283,384 shares in 2004
Total shareholders’ equity
TOTAL(9,575)(11,534)(91,417)160,282

154,317

1,530,285¥356,310¥354,831$3,401,852

LAWSON ANNUAL REPORT 200533

Consolidated Statements of Income
LAWSON, INC. and Subsidiaries
Years Ended February 28, 2005 and February 29, 2004

Thousands of
U.S. Dollars(Note 1)Millions of Yen
2005

2004

2005

¥162,963¥153,910$1,555,881

Net sales from Company-operated stores

63,802

67,479609,146

Other

27,63024,212

263,797

254,395

245,601

2,428,824

OPERATING REVENUES:Franchise commission from franchised stores

Total
COST AND OPERATING EXPENSES:
Cost of sales for Company-operated stores (Note 13)

46,81950,058447,002

Selling, general and administrative expenses (Notes 10 and 13)

164,635

157,456

1,571,845

Total

211,454

207,5142,018,847

Operating income

42,941

38,087409,977

343

282

3,275

Loss on disposal of property and store equipment(3,635)(3,807)

Provision for allowance for doubtful accounts(2,182)OTHER INCOME (EXPENSES):Interest income—net(34,705)(20,833)

Equity in losses of associated companies(609)(1,128)(5,814)

Other—net

(818)

(511)

(7,810)(6,901)(5,164)(65,887)

36,04032,923344,090

Current

17,313

12,992

165,295

Deferred(1,945)

1,725(18,570)

15,36814,717

146,725

(237)

365

(2,263)¥020,435¥018,571$0,195,102

Other expenses—net
INCOME BEFORE INCOME TAXES AND MINORITY INTERESTSINCOME TAXES (Note 12):Total
MINORITY INTERESTS IN NET INCOME
NET INCOME

Yen

U.S. Dollars

PER SHARE OF COMMON STOCK (Notes 2.n and 16):
Net income
Cash dividends
See notes to consolidated financial statements.

34

LAWSON ANNUAL REPORT 2005

¥198

¥176

$1.89.

70

41

0.67.

Consolidated Statements of Shareholders’ Equity
LAWSON, INC. and Subsidiaries
Years Ended February 28, 2005 and February 29, 2004

Thousands of Shares/Millions of Yen
Common Stock
SharesAmountBALANCE, MARCH 1, 2003
107,600 ¥58,507
Net income
Year end cash dividends, ¥21 per share
Interim cash dividends, ¥20 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
Exercise of stock options
BALANCE, FEBRUARY 29, 2004
107,600
58,507
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(3,000)Exercise of stock options
BALANCE, FEBRUARY 28, 2005
104,600 ¥58,507

CapitalSurplus¥41,520

Retained
Earnings

Net Unrealized
Foreign
Land
Gain (Loss) on
Currency
Revaluation Available-for-Sale Translation
Difference
Securities
Adjustments¥58,608 ¥(6,917)
18,571(2,260)(2,120)
(30)
30
(180)

¥0,(2)

Treasury Stock
Shares¥150

Amount¥00,00(2)

55
(82)

1
41,521

72,76920,435(2,191)(3,584)(5)(7,067)53

68(3,288)5(3,283)(11,549)
17(11,534)

5
24
57
(34)

(10,703)2¥41,523¥76,721¥(7,038)

¥110

¥034

(2,155)(8,798)3,000
10,70315
54(2,423) ¥0(9,575)

Thousands of U.S. Dollars (Note 1)

CommonStock

BALANCE, FEBRUARY 29, 2004
Net income
Year end cash dividends, $0.20 per share
Interim cash dividends, $0.33 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
BALANCE, FEBRUARY 28, 2005

CapitalSurplusRetained
Earnings

Net Unrealized
Foreign
Land
Gain (Loss) on
Currency
Revaluation Available-for-Sale Translation
Difference
Securities
Adjustments$558,593 $396,420 $694,758 $(67,472)
195,102(20,918)(34,219)
(47)
47
230

$0,506$649

TreasuryStock$(110,120)

544
(324)

(102,186)
19$558,593 $396,439 $732,490 $(67,195)$1,050$325(83,998)
102,186515$0(91,417)

See notes to consolidated financial statements.

LAWSON ANNUAL REPORT 200535

Consolidated Statements of Cash FlowsLAWSON, INC. and Subsidiaries
Years Ended February 28, 2005 and February 29, 2004

Thousands of
U.S. Dollars(Note 1)Millions of Yen
2005

2004

2005

¥(36,040¥(32,923$(344,090

Income taxes paid

(15,605)(10,598)(148,988)

Depreciation and amortization

19,641

18,499187,521

Provision for allowance for doubtful accounts

2,342

362

22,360Loss on disposal of property and store equipment

2,447

2,603

23,363

609

1,128

5,814

1,556

215

14,857

Decrease (increase) in accounts receivable

7,378(14,033)

70,441

Increase in prepaid expenses and other current assets

(473)

(440)

(4,516)(Decrease) increase in accounts payable(2,940)77(28,070)(Decrease) increase in money held as agent(3,476)

10,715(33,187)

267

236

2,549

577

(2,647)5,509(1,047)(1,633)(9,996)OPERATING ACTIVITIES:
Income before income taxes and minority interests
Adjustments for:

Equity in losses of associated companies
Other—net
Changes in assets and liabilities:

Increase in accrued expenses and other liabilities
Increase (decrease) in employees’ and directors’
and corporate auditors’ retirement benefits
Decrease in guarantee deposits received from franchised stores
Increase in lease deposits from lessees

13

17

124

Total adjustments

11,2894,501

107,781

Net cash provided by operating activities

47,32937,424

451,871

Purchases of marketable securities(34,319)(28,270)(327,659)

Proceeds from redemption of marketable securities

35,54524,471

339,364

Purchases of property and store equipment(26,710)(23,832)(255,012)

Decrease (increase) in lease deposits

623(1,002)

5,948

Decrease (increase) in short-term loan

1,250

(6,250)11,934

Payment for acquisition of goodwill(1,685)

Other(8,001)(5,738)(76,389)(33,297)(40,621)(317,901)(5,775)(4,380)(55,137)

INVESTING ACTIVITIES:Net cash used in investing activities(16,087)

FINANCING ACTIVITIES:Cash dividends paid
New shares issued to a subsidiary’s minority shareholders
Purchase of treasury stock
Other
Net cash used in financing activities

681

1,547

6,502

(8,798)(11,549)(83,998)

56

18

535

(13,836)(14,364)(132,098)

196(17,605)

1,872

76,38993,994

729,320¥(76,585¥(76,389$(731,192

FOREIGN CURRENCY TRANSLATION ADJUSTMENTS ON
CASH AND CASH EQUIVALENTS
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR
CASH AND CASH EQUIVALENTS, END OF YEAR
See notes to consolidated financial statements.

36

LAWSON ANNUAL REPORT 2005

(44)

Notes to Consolidated Financial Statements
LAWSON, INC. and Subsidiaries
Years Ended February 28, 2005 and February 29, 2004

1 Basis of Presenting Consolidated Financial Statements
The accompanying consolidated financial statements have been prepared in accordancewith the provisions set forth in the Japanese Securities and Exchange Law and its related
accounting regulations, and in conformity with accounting principles generally accepted inJapan, which are different in certain respects as to application and disclosure requirements ofInternational Financial Reporting Standards.
In preparing these consolidated financial statements, certain reclassifications and rearrangements have been made to the consolidated financial statements issued domesticallyin order to present them in a form which is more familiar to readers outside Japan.
Certain reclassifications have been made in the 2004 financial statements to conform to
the 2005 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 translations of Japanese yen amounts into U.S. dollar amounts are included solely for the convenience of readers outside Japan and have been made at the rate of ¥104.74 to $1, theapproximate rate of exchange at February 28, 2005. 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, 2005, 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 eachindependent franchisee to operate relatively small-sized convenience stores using specificdesigns and the LAWSON brand names, and provides related managerial or technical knowhow under a franchise agreement. Under the agreement, all franchised stores are provided
with a variety of services and advice on the operation of convenience stores from theCompany 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 franchisecommissions on an accrual basis by reference to the annual gross margin earned by eachfranchised store and the applicable commission percentage. According to the franchise

LAWSON ANNUAL REPORT 200537

agreement, a franchised store may pay additional guarantee deposits equal to twice of theaverage monthly sales amounts of the respective store and pay a lower commission
percentage.
The term of a franchise agreement is effective for 10 years from the commencement dateof a new store’s operation as a franchised store, and may be extended or renewed upon
expiration subject to renegotiation of contract terms between the Company and thefranchisee.
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 “Due to franchised 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 ofthe date of acquisition and which are readily convertible into cash and are exposed toinsignificant 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 the movingaverage method. For other than temporary declines in fair value, non-marketable availablefor-sale securities are reduced to net realizable value by a charge to income.
f. Property and Store Equipment—Property and store equipment are stated at cost except
for land (see Note 6). Depreciation is computed by the declining-balance method at rates
based on the estimated useful lives of the assets. The range of useful lives is principally from10 to 34 years for buildings and structures and from 5 to 8 years for furniture, fixtures andequipment.

38

LAWSON ANNUAL REPORT 2005

g. Software—Software used by the Companies is amortized using the straight-line method
based on the estimated useful life (mainly 5 years).
h. Employees’ Retirement Benefits—The Company and 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 the contribution was called for.
i. Liability for Directors’ and Corporate Auditors’ Retirement Benefits—The provisions
are calculated to state the liability at 100% of the amount that would be required if all
directors and corporate auditors resigned as of each balance sheet date.
j. Leases—All leases are accounted for as operating leases. Under Japanese accounting
standards for leases, finance leases that deem to transfer ownership of the leased property
to the lessee are to be capitalized, while other finance leases are permitted to be accounted
for as operating lease transactions if certain “as if capitalized” information is disclosed in thenotes to the consolidated financial statements.
k. Income Taxes—The Companies provide for income taxes applicable to all items includedin the consolidated statements of income regardless of when such taxes are payable.
Deferred income taxes are recorded to reflect the impact of temporary differences between
assets and liabilities recognized for financial reporting purposes and such amounts recognized for tax purposes. These deferred taxes are measured by applying currently enacted
tax laws to the temporary differences.
l. Appropriations of Retained Earnings—Appropriations of retained earnings at each year
end are reflected in the financial statements for the following year upon shareholders’approval.
m. Foreign Currency Financial Statements—The balance sheet accounts of 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 affiliated company denominated in foreign currencies aretranslated into yen at the current exchange rate.
n. Per Share Information—Basic net income per share is computed by dividing net
income available to common shareholders by the weighted-average number of commonshares outstanding for the period.
The number of shares used in computing net income per share was 102,962 thousand
shares for 2005 and 105,651 thousand shares for 2004.

LAWSON ANNUAL REPORT 2005

39

Diluted net income per share for the years ended February 28, 2005 and February 29,
2004, is not disclosed because the Company did not have stock options which would haveresulted in a dilutive effect.
Cash dividends per share presented in the accompanying consolidated statements ofincome are dividends applicable to the respective years including dividends to be paid after
the end of year.
o. New Accounting Pronouncements—In August 2002, the Business Accounting Council
issued a Statement of Opinion, “Accounting for Impairment of Fixed Assets,” and in October2003 the Accounting Standards Board of Japan (“ASB”) issued ASB Guidance No. 6, “Guidance for Accounting Standard for Impairment of Fixed Assets.” These new pronouncements
are effective for the Company for fiscal years beginning on or after March 1, 2006, with early
adoption permitted for fiscal years ending on or after February 28, 2005.
The new accounting standard requires an entity to review its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of anasset or asset group may not be recoverable. An impairment loss would be recognized if thecarrying amount of an asset 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 asset or the net selling
price at disposition.
The Companies expect to adopt these pronouncements as of March 1, 2005, and they
are currently in the process of assessing the effect of adoption of these pronouncements.

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.

40

LAWSON ANNUAL REPORT 2005

4 Property and Store Equipment
Property and store equipment as of February 28, 2005 and February 29, 2004, consisted of
the following:Thousands of
U.S. Dollars

Millions of Yen
2005

2004

2005

Land

¥001,347¥001,092$0,012,861

Buildings

104,908

89,9461,001,604

Furniture, fixture and equipment

49,563

48,340473,200

155,818

139,378

1,487,665

75,88867,366

724,538

79,93072,012

763,127

Land

4,297

3,846

41,025

Buildings

10,357

9,866

98,883

Furniture, fixture and equipment

8,561

9,097

81,73623,21522,809221,644

10,97911,549104,821

12,236

11,260116,823¥092,166¥083,272$0,879,950

Used by franchised stores:

Total
Accumulated depreciation
Net
Used by Company-operated stores and other:

Total
Accumulated depreciation
Net
Net property and store equipment—total

5 Marketable and Investment Securities
Marketable and investment securities as of February 28, 2005 and February 29, 2004,
consisted of the following:Thousands of
U.S. Dollars

Millions of Yen
2005

2004

2005

Current—Bonds¥8,019¥9,244$76,561

Non-current—Marketable and other equity securities

1,173

1,064

11,199The costs and aggregate fair values of marketable and investment securities at February
28, 2005 and February 29, 2004, were as follows:
Millions of Yen
February 28, 2005

Cost

Unrealized
Gains

Unrealized
LossesFair
Value

Securities classified as:
Held-to-maturity
Available-for-sale—equity securities¥8,019
947

¥188

Cost

Unrealized
Gains

¥2

¥8,0172

1,133

Millions of Yen
February 29, 2004

Unrealized
LossesFair
Value

Securities classified as:
Held-to-maturity
Available-for-sale—equity securities¥9,244
935

¥91

¥1

¥9,243

2

1,024

LAWSON ANNUAL REPORT 2005

41

Thousands of U.S. Dollars
February 28, 2005

Unrealized
Gains

Cost

Unrealized
Losses

Fair
Value

$19

$76,542

19

10,817

Securities classified as:
Held-to-maturity
Available-for-sale—equity securities$76,561
9,041$1,795

Available-for-sale securities whose fair value is not readily determinable as of February 28,
2005 and February 29, 2004, were as follows:
Carrying AmountThousands of
U.S. Dollars

Millions of Yen
2005

Available-for-sale—Equity securities

2004

¥40

2005

¥40

$382

Proceeds from sales of available-for-sale securities for the years ended February 28, 2005
and February 29, 2004, were ¥216 million ($2,062 thousand) and ¥3 million, respectively.
Gross realized gains and losses on these sales, computed on the moving average cost basis,
were ¥0 million ($0 thousand) and ¥14 million ($134 thousand), respectively, for the year
ended February 28, 2005, and ¥2 million and ¥0 million, respectively, for the year ended
February 29, 2004.

6 Land Revaluation
Under the “Law of Land Revaluation,” promulgated on March 31, 1998, and revised on
March 31, 1999 and 2001, the Company chose a one-time revaluation of its own-use land
to a value based 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.
As at February 28, 2005, the carrying amount of the land after the above one-timerevaluation exceeded the market value by ¥1,481 million ($14,140 thousand).

7 Lease Deposits
Under certain circumstances, the Company leases land and/or buildings, as a lessee, for its
offices and Company-operated stores or for franchisees to operate as franchised stores. The
leases are based on long-term, cancelable lease agreements with owners. In connection 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, 2005 and February 29, 2004, consisted of thefollowing:
Millions of Yen

Lease deposits for franchised storesThousands of
U.S. Dollars

2005

2004

2005

¥74,354¥74,436$709,891

Lease deposits for Company-operated storesand other
Total

42

LAWSON ANNUAL REPORT 2005

15,611

16,060149,045¥89,965¥90,496$858,936

8 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, 2005 and February 29, 2004, weresummarized below:
Thousands of
U.S. Dollars

Millions of Yen

Accounts payable—trade for franchised stores

2005

2004

2005

¥59,457¥59,548$567,663

Accounts payable—trade for Company-operated
stores
Total

3,097

3,774

29,568¥62,554¥63,322$597,231

9 Accounts Payable—Due to Franchised Stores
The cost of merchandise supplied to the franchised stores is recorded as “Accounts
receivable-due from franchised stores” as described in Note 3.
All franchised stores make remittances of cash proceeds from daily sales to the Company.
In certain instances, the remittance from a franchised store exceeds the balance of“Accounts receivable—due from franchised stores.” In the accompanying consolidatedbalance sheets, such excess balances are presented as “Accounts payable—due tofranchised stores.”

10 Employees’ Retirement Benefits
The Company and certain domestic subsidiary have each of defined benefit lump-sum
severance indemnity plan.
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 thetime of termination. Such retirement benefits are made in the form of a lump-sum severance
payment from the Company or from certain subsidiary. Employees are entitled to larger
payments if the termination is involuntary, by retirement at the mandatory retirement age, bydeath, or by voluntary retirement at certain specific ages prior to the mandatory retirementage.
The funded status of these plans as of February 28, 2005 and February 29, 2004, was asfollows:
Thousands of
U.S. Dollars

Millions of Yen
2005

2004

2005

Projected benefit obligation¥(9,898¥(7,247$(94,501

Fair value of plan assets(5,536)(5,523)

Unrecognized prior service cost

(1,582)

Unrecognized actuarial loss
Net liability(52,855)(15,104)

(973)

(580)

(9,290)¥(1,807¥(1,144$(17,252

LAWSON ANNUAL REPORT 2005

43

The components of net periodic benefit costs for the years ended February 28, 2005 andFebruary 29, 2004, were as follows:
Thousands of
U.S. Dollars

Millions of Yen
2005

2004

2005

Service cost

¥0,659¥0,870$06,292

Interest cost

175

126

Amortization of prior service cost

176

1,671
1,680

Recognized actuarial loss

72

71

687

Contribution to defined contribution plan

245

205

2,339

¥1,327¥1,272$12,669

Net periodic benefit costs

Assumptions used for the years ended February 28, 2005 and February 29, 2004, were as
follows:
Discount rate

2005

2004

2.0%

2.0%

Expected rate of return on plan assets

0%0%

Amortization period of prior service cost

10 years

10 years

Recognition period of actuarial gain/loss

10 years

10 years

11 Shareholders’ Equity
Japanese companies are subject to the Japanese Commercial Code (the “Code”).
The Code requires that all shares of common stock are recorded 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 as additional paid-in capital, which is included in capital surplus.
The Code permits Japanese companies, upon approval of the Board of Directors, to issue
shares to existing shareholders without consideration as a stock split. Such issuance ofshares generally does not give rise to changes within the shareholders’ accounts.
The Code also provides that an amount at least equal to 10% of the aggregate amount ofcash dividends and certain other appropriations of retained earnings associated with cash
outlays applicable to each period shall be appropriated as a legal reserve (a component ofretained earnings) until such reserve and additional paid-in capital equals 25% of common
stock. The amount of total additional paid-in capital and legal reserve that exceeds 25% of
the common stock may be available for dividends by resolution of the shareholders. In addition, the Code permits the transfer of a portion of additional paid-in capital and legal reserveto the common stock by resolution of the Board of Directors.
The Code allows Japanese companies to repurchase treasury stock and dispose of suchtreasury stock by resolution of the Board of Directors. The repurchased amount of treasury
stock cannot exceed the amount available for future dividend plus amount of common stock,
additional paid-in capital or legal reserve to be reduced in the case where such reduction
was resolved at the general shareholders’ meeting.
In addition to the provision that requires an appropriation for a legal reserve in connection
with the cash payment, the Code imposes certain limitations on the amount of retained earnings available for dividends. The amount of retained earnings available for dividends under
the Code was ¥63,127 million ($602,702 thousand) as of February 28, 2005, based on theamount recorded in the Company’s general books of account.
Dividends are approved by the shareholders at a meeting held subsequent to 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.

44

LAWSON ANNUAL REPORT 2005

Stock Option
The Company has stock option plans. The stock option plans which were approved at thegeneral shareholders’ meetings provide options for purchases of the Company’s common
stock for the directors, executive officers and key employees of the Company.
The following tables summarize information about option activity under the plans:
Thousands of Shares

Date of Grant

Exercise Price

Exercisable Period

May 26, 2000

¥7,500 $71.61

May 29, 2002

3,600

35.13

From May 27, 2002
to May 25, 2007
From December 1, 2002
to May 31, 2007

May 27, 2003

3,517

33.58

May 28, 2004

4,320

41.24

From July 3, 2005
to July 2, 2008
From June 10, 2006
to June 9, 2009

Exercised
2004
2005

Number of Options Granted

The Company’s directors 1,773
and key employees
The Company’s directors, 313
executive officers andkey employees
The Company’s directors
92
and executive officers
The Company’s directors
99
and executive officers

5

15

Canceled or
ExpiredOutstandingat February 28,
2005

684

1,089

100

193

92
99

12 Income Taxes
The Company and its domestic subsidiaries are subject to a number of different taxes basedon income, which in the aggregate, resulted in a normal effective statutory tax rate of
approximately 42.0% for both 2005 and 2004.
The tax effects of significant temporary differences and tax loss carryforwards which
resulted in deferred tax assets and liabilities at February 28, 2005 and February 29, 2004, areas follows:
Thousands of
U.S. Dollars

Millions of Yen
2005

2004

2005

Marketable securities¥00,310¥0,543$002,960

Accrued enterprise tax

1,117

936

10,665

Accrued employees’ bonuses

1,249

1,005

11,925

Excess of depreciation

2,298

1,868

21,940

975

1,059

9,309

Employees’ retirement benefits

2,709

2,210

25,864

Allowance for doubtful accounts

1,654

720

15,791

Tax loss carryforward

1,108

1,516

10,579

Other

1,186

1,329

11,322Less valuation allowance(998)(1,528)(9,528)

11,608

9,658

110,827

76

36

726

Deferred tax assets:

Excess of amortization of software

Total
Deferred tax liabilities—Unrealized gain
on available-for-sale securities
Total
Net deferred tax assets

76

36

726

¥11,532¥9,622$110,101LAWSON ANNUAL REPORT 200545

As of February 28, 2005, certain subsidiaries have tax loss carryforwards aggregating approximately ¥2,723 million ($25,998 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:Year Ending February 28 or 29

Millions of Yen

Thousands of
U.S. Dollars

2006¥0,066$00,630

2007

612

5,843

2010

1,004

9,586

2011

754

7,199

2012 and thereafter

287

2,740

¥2,723$25,998

Total

13 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, 2005 andFebruary 29, 2004, were ¥16,133 million ($154,029 thousand) and ¥15,133 million,
respectively.
Pro forma information of leased property such as acquisition cost, accumulated depreciation, obligations under finance leases, depreciation expense and interest expense for financeleases that do not transfer ownership of the leased property to the lessee on an “as if capitalized” basis for the years ended February 28, 2005 and February 29, 2004, was as follows:
Leased to franchised stores:
Thousands of
U.S. Dollars

Millions of Yen

Furniture, fixtures and equipment:
Acquisition cost
Accumulated depreciation
Net leased property

2005

2004

2005

¥67,597
33,019¥34,578¥63,748
25,654¥38,094$645,379
315,247$330,132

Obligations under finance leases:
Thousands of
U.S. Dollars

Millions of Yen

Due within one year
Due after one year
Total

2005

2004

2005

¥11,445
23,992¥35,437¥10,825
28,036¥38,861$109,271
229,062$338,333

Used by Company-operated stores and other:
Millions of Yen
2005
Furniture,
Fixtures andEquipment Software

Acquisition cost
Accumulated
depreciation
Net leased property

46

LAWSON ANNUAL REPORT 2005

Thousands of U.S. Dollars
2004

2005

Total

MachineryandEquipment

Furniture,
Fixtures andEquipment

SoftwareTotal¥16,604¥782¥17,386¥14,468$158,526$7,466$165,992

7,987¥08,617

39
¥743

8,026
¥09,360

5,056¥09,41276,256$082,270372$7,094

76,628$089,364

Obligation under finance leases:
Thousands of
U.S. Dollars

Millions of Yen
2005

2004

2005

Due within one year

¥3,461¥2,838$33,044

Due after one year

6,114

6,670

58,373¥9,575¥9,508$91,417Total

The imputed interest expense portion which is computed using the interest method is
excluded from the above obligations under finance leases.
Depreciation expense, which is not reflected in the accompanying consolidated statements of income, computed by the straight-line method was ¥15,181 million ($144,940 thousand) and ¥14,186 million for the years ended February 28, 2005 and February 29, 2004,
respectively.
Interest expense, which is not reflected in the accompanying consolidated statements ofincome, computed by the interest method was ¥1,063 million ($10,149 thousand) and¥1,160 million for the years ended February 28, 2005 and February 29, 2004, respectively.
The minimum rental commitments under noncancelable operating leases at February 28,
2005, were as follows:
Millions of Yen

Thousands of
U.S. Dollars

2005

2005

Due within one year

¥0,733$06,998

Due after one year

5,723

54,640¥6,456$61,638

Total

14 Related Party Transactions
Balances to LAWSON CS Card, Inc. (an associated company) as of February 28, 2005, wereas follows:
Millions of Yen

Thousands of
U.S. Dollars

2005

2005

Short-term loan receivable¥5,000$47,737

Guarantee for bank loans

6,050

57,762250

2,387

The amount accepted for the
additional shares issued on capital

Mitsubishi became a direct principal shareholder when it purchased all shares in the
Company held by its 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, since December
2004, including those transactions related to the franchised stores.

LAWSON ANNUAL REPORT 2005

47

Balances and transactions with subsidiaries of the principal shareholder as of and for theyear ended February 28, 2005, were as follows:
Millions of Yen

Thousands of
U.S. Dollars

2005

2005

Accounts payable—trade¥05,242$050,048

Purchases

16,135

154,048

Accounts payable—trade

15,238145,484

Purchases

47,489453,399

RYOSHOKU LIMITED:

Food Service Network Co., Ltd.:

15 Contingent Liabilities
As of February 28, 2005, the Company guaranteed an associated company’s bank loan in theamount of ¥6,050 million ($57,762 thousand).

16 Subsequent Eventsa. The following appropriation of retained earnings was approved at the general shareholders’meeting held on May 27, 2005:
Millions of Yen

Cash dividends, ¥35 ($0.33) per share¥3,576

Thousands of
U.S. Dollars$34,142b. At the general shareholders’ meeting held on May 27, 2005, the Company’s shareholders
approved the stock option plan for the Company’s directors and executive officers. The plan
provides for granting options to directors and executive officers to purchase within upper limitof 120 thousand shares of the Company’s common stock in the period from May 27, 2006 to
December 31, 2009.
c. In addition to b. above, at the general shareholders’ meeting held on May 27, 2005, 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
but instead allocate stock-compensation-type stock options without charge.
The plan provides for granting options to directors to purchase within upper limit of 25
thousand shares of the Company’s common stock in the period from May 27, 2005 to May
31, 2025.

48

LAWSON ANNUAL REPORT 2005

Independent Auditors’ Report

Deloitte Touche Tohmatsu
MS Shibaura Building
4-13-23 Shibaura
Minato-ku, Tokyo 108-8530
Japan
Tel: +81(3) 3457-7321
Fax: +81(3) 3457-1694
www.deloitte.com/jp

To the Board of Directors of LAWSON, INC.:
We have audited the accompanying consolidated balance sheets of LAWSON, INC.
and subsidiaries as of February 28, 2005 and February 29, 2004, and the related
consolidated statements of income, shareholders’ equity, and cash flows for the years
then ended, all expressed in Japanese yen. These consolidated financial statements
are the responsibility of the Company’s management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally acceptedin 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 theamounts 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, inall material respects, the consolidated financial position of LAWSON, INC. and subsidiaries as of February 28, 2005 and February 29, 2004, and the consolidated resultsof their operations and their cash flows for the years then ended in conformity withaccounting principles generally accepted in Japan.
Our audits also comprehended the translation of Japanese yen amounts into U.S.
dollar amounts and, in our opinion, such translation has been made in conformity withthe basis stated in Note 1. Such U.S. dollar amounts are presented solely for theconvenience of readers outside Japan.

May 27, 2005

LAWSON ANNUAL REPORT 200549

Directors, Corporate Auditors and Executive Officers

President and CEO

Takeshi Niinami

Member of the Board andSenior Executive Vice President

Eiichi Tanabe

Chief Financial Officer (CFO); in charge of Corporate Planning OfficeMember of the Board andExecutive Vice President

Katsuhiko Yamasaki

Chief Risk Management Officer (CRO); in charge of Corporate Ethics; incharge of General Affairs; in charge of Internal Audit

Hiroshi Tasaka
Reiko Okutani
Muneaki Masuda
Koji Furukawa
Koichi Narita

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, Group CEO Office, Living Essentials Group, Mitsubishi
Corporation
General Manager, Planning & Coordination, Investment Administration &Credit Living Essentials Group CEO Office, Mitsubishi Corporation

Members of the Board

Takehiko Kakiuchi

Standing Corporate Auditor(External)

Masaaki Kojima

Standing Corporate Auditor

Kenji Yamakawa

Corporate Auditors (External)

Tetsuo Ozawa
Hiroshi Kuwata

LawyerManager, Investment Administration Team, Controller’s Office, Mitsubishi
Corporation

Executive Vice Presidents

Susumu Hasegawa

Hiromichi Ogawa

Chief Information Officer (CIO); General Manager, Information Systems
OfficeIn charge of Integration Office, General Manager, Marketing Division;
Productivity Enhancement Project Team
General Manager, Merchandizing & Logistics Division

Senior Vice Presidents

Ichiro Okuda
Takatoshi Kawamura
Konoshin Deguchi

General Manager, Kinki LAWSON Branch
General Manager, Next-Generation Business Development Division
General Manager, Store Development Planning Division

Senior Vice Presidents

Isamu Ochiai
Yoshio Shinozaki
Kiyoteru Suzuki
Sadayuki Nobayashi
Manabu Asano
Jyosuke Kishimoto
Katsuyuki Imada
Kenji Morimoto

President, BestPractice Inc.
General Manager, CSR Promotion Office
Postal LAWSON Project Team
General Manager, Kyushu LAWSON Branch
General Manager, Chubu LAWSON BranchPresident, LAWSON ATM Networks, Inc.
General Manager, Corporate Planning Office
General Manager, Finance & Accounting Office; General Manager,
Management Services Office
General Manager, Quality Control Division
General Manager, Productivity Enhancement Project Team
General Manager, Hokkaido LAWSON BranchPresident & CEO, NATURAL LAWSON, INC.
Executive Assistant to CEO
Deputy General Manager, Operations Integration Office
Deputy General Manager, Merchandizing & Logistics Division; CEO, ValueLAWSON Co., Ltd.
Deputy General Manager, Merchandizing & Logistics Division

Taketoshi Kunisaki

Itsuo Iga
Takaki Mizuno
Hisashi Yasuhira
Masatoshi Okada
Shigeaki Kawahara
Tadanao Watanabe
Yukimasa Shimohata
Satoshi Matsubara

50(As of June 1, 2005)

LAWSON ANNUAL REPORT 2005

Corporate Data

(As of February 28, 2005)

English Company NameLAWSON, INC.

Established
April 15, 1975

Address
Tokyo Headquarters:
East Tower, Gate City Osaki,
11-2, Osaki 1-chome, Shinagawa-ku,
Tokyo 141-8643, Japan

Capital¥58,506,644,000

Osaka Headquarters:
9-1, Toyotsu-cho, Suita-shi,
Osaka 564-0051, Japan

Shares Issued
104,600,000

Number of Employees
3,391 (Consolidated) (As of February 28, 2005)

Authorized Shares409,300,000

Shareholders
43,636
Major Shareholders

Business Activities
Development of LAWSON convenience store franchise chain
Net Sales of All Stores¥1,329.1 billion (Consolidated) (Fiscal 2004)
Number of Stores
8,077 (Consolidated) (As of February 28, 2005)
Operating Area
All 47 prefectures in Japan; Shanghai, PRC (Joint Venture)

Shareholder

Number of
Shares Held

Percentage ofTotal Shares
Held

1. Mitsubishi Corporation
32,089,300
2. Japan Trustee Services Bank, Ltd.
(Trust Account)
6,550,000
3. Marubeni Foods Investment Co., Ltd. 5,939,500
4. State Street Bank andTrust Company 505103
4,066,423
5. The Master Trust Bank of Japan, Ltd.
(Trust Account)
3,470,800
6. Nintendo Co., Ltd.
3,447,000
7. NOMURA SECURITIES CO., LTD.
1,998,500
8. Mellon Bank N.A., as Agent for its
Client Mellon Omnibus US Pension
1,706,586
9. Mitsui Asset Trust and Banking
Company, Limited
1,494,800
10. Mellon Bank Treaty Clients Omnibus
1,293,792

31.4
6.4
5.8
4.0
3.4
3.4
2.0
1.7
1.5
1.3

Note: The 2,422,809 shares of treasury stock held by LAWSON are notincluded in the above table.

Stock Exchange Listings
Tokyo Stock Exchange (1st Section)
Osaka Securities Exchange (1st Section)
Stock Transfer Agent
The Mitsubishi Trust and Banking Corporation
4-5, Marunouchi 1-chome, Chiyoda-ku, Tokyo, Japan

Note: Effective October 1, 2005, The Mitsubishi Trust and Banking
Corporation will merge with UFJ Trust Bank Limited.

LAWSON ANNUAL REPORT 2005

51

LAWSON, INC. ANNUAL REPORT 2005

LAWSON, INC.
Corporate Communications Office,East Tower, Gate City Osaki
11-2, Osaki 1-chome, Shinagawa-ku,
Tokyo 141-8643, Japan
http://www.lawson.co.jp/
This annual report is printed on recycled paper.
Printed in Japan.

Published in July 2005.
© 2005 LAWSON, INC. All rights Reserved.

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