LAWSON, INC.

LAWSON, INC.
Tokyo Headquarters:
4-9-25 Shibaura, Minato-ku, Tokyo 108-8563, Japan
Tel +81-3-5476-6800
URL http://www.lawson.co.jp/

ANNUAL REPORT 2003
Year ended February 28, 2003

ANNUAL REPORT 2003

This annual report is printed on recycled paper.

Printed in Japan

A UNIQUEPRESENCE

CORPORATE DATAINVESTOR INFORMATION

Company Name

Established

LAWSON, INC.

April 15, 1975

Address

CapitalTokyo Headquarters:¥58,506,644,000

UNIQUE 01
Onigiriya, Lawson’s new rice ball brand, wasdesigned to achieve two simple goals: makeLawson synonymous with rice balls and be
the best in its product category.

4-9-25 Shibaura, Minato-ku, Tokyo 108-8563, Japan
Tel: +81-3-5476-6800

Authorized Shares
412,300,000

UNIQUE 02
Unique to Lawson, mailboxes are now astandard feature at every store nationwide.
And new format Postal Lawson stores,
located at some post offices, are another
innovative store format in the Lawson chain.

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

Shares Issued

Tel: +81-6-6380-4491

107,600,000

Employees

Shareholders

3,462 (Consolidated)

53,091Business Activities

Major Shareholders

Franchise chain development of
Lawson convenience stores

Net Sales of All Stores¥1,294.0 billion (Consolidated) (Fiscal 2002)

UNIQUE 03

Shareholder

Shareholdings(Shares)

Shareholdings(%)

M.C. Retail Investment Co., Ltd.

32,089,300

29.82(Trust account)

8,618,000

8.01

Marubeni Foods Investment Co., Ltd.

5,939,500

5.52Japan Trustee Services Bank, Ltd.

The Master Trust Bank of Japan, Ltd.

Preferential advance ticket sales and a
shopping rewards program—these are justsome of the many benefits only Lawson
PASS cardholders enjoy.

Number of Stores(Trust account)

4,755,300

4.42

7,721 (Consolidated, as of February 28, 2003)

NOMURA SECURITIES CO., LTD.

3,551,500

3.30

Nintendo Co., Ltd.

3,447,000

3.20

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

The Chuo Mitsui Trust and Banking Company,
Limited (Management securities trust
depository)

3,219,000

2.99

Boston Safe Deposit BSDT Treaty Client Omnibus

2,147,541

2.00

1,557,800

1.45

1,185,000

1.10

The Sumitomo Trust & Banking Co., Ltd.
(Trust account B)(As of February 28, 2003)

Japan Trustee Services Bank, Ltd.
(Retirement benefits trust accountTo Shareholders, Other Investors, Customers,
Franchise Owners, Employees, and Store Crewof The Daiei, Inc.)
2

Corporate Governance10

Lawson Challenge 2004 Report Card

12

Financial Section

23

Directors and Corporate Auditors

52

Corporate Data

53

Investor Information

53

UNIQUE 04
Customers of TSUTAYA and Lawson areboth set to benefit from a shared shopping
points program.

Stock Exchange Lisitngs
Tokyo Stock Exchange (1st Section)
Osaka Securities Exchange (1st Section)

Stock Transfer Agent
The Mitsubishi Trust and Banking Corporation*
1-4-5, Marunouchi, Chiyoda-ku, Tokyo, Japan*Since May 28, 2003, Mitsubishi Trust and Banking Corporation has been Lawson’s stock transfer agent.

(As of February 28, 2003)
LAWSON, INC. AR 03 53

UNIQUE 05

UNIQUE 07

Our tie-up with Studio Ghibli, a leading
animation studio, offers excitement tocustomers, on top of the convenience we
can already provide, in the form of DVDsand videos of the box-office hit Spirited
Away, and exclusive ticket sales for the
Mitaka no Mori Ghibli Museum.

Our stores in hospitals also aspire to be“the ‘hot’ station in the neighborhood.”
Patients and their relatives and friends
enjoy the convenience of “Hospital Lawson”
stores, stocked with products needed for
hospital stays and designed as barrier free,enabling people with disabilities to haveeasy access all parts of the store.

UNIQUE 06
More drivers may soon be able to fill up
and shop at the same time if the recent
alliance with ENEOS proves viable.
Lawson has plans in hand to open moreconvenience stores that double as ENEOS
self-service stations.

Lawson is proud of its corporate philosophy—“Making
life more convenient for customers and contributing tolocal communities by valuing people and seeking innovative approaches.” I think many of Lawson’s past businesssuccesses have stemmed from understanding and closely
following these words. So since my appointment aspresident in 2002, I have worked hard to impress upon
employees, franchise owners, store crew and our business partners, the true meaning and significance ofour philosophy. This is something I continue to do
today. Why? Because I am certain that customers
will value Lawson more if we realize the main
tenets of our philosophy. And I firmly believe thata higher regard from our customers is the vitalelement in achieving sustainable growth over the
medium and long term for your company.
TAKESHI NIINAMI
President and CEO

LAWSON, INC. AR 03

23

TO SHAREHOLDERS, OTHER INVESTORS, CUSTOMERS,FRANCHISE OWNERS, EMPLOYEES AND STORE CREW

Using Communication to Make Lawson “The ‘Hot’ Station in the Neighborhood”
In the past year since my appointment, communication with staff at every level of the company has been,
and will continue to be, a vital part of my approach. I spend a great deal of time communicating with
employees. This includes participating in meetings every Monday at Head Office, and every Tuesday atregional headquarters, where I constantly focus on Lawson’s corporate philosophy and explain thethinking and context behind current management initiatives. Where time allows, I also do the rounds at
Head Office and visit regional headquarters to listen to and talk informally with employees. Having dinnerwith staff once or twice a week also gives me the opportunity to hear their ideas and thoughts about
Lawson in an informal atmosphere.
Why am I telling you this? Because this kind of communication is driving change at Lawson. In thisletter last year in Annual Report 2002, I targeted a long-term Lawson weakness—top-down management
had dominated the Lawson corporate culture for too long. The details of Head Office strategies, and eventhe objectives and backgrounds of the strategies, were not always fully explained. Head Office would use
complex language to express strategy and then somehow expect employees, franchise owners and store
crew to be able to translate it into action. This led to dissatisfaction with Head Office, and front line
Lawson personnel lost their drive. Meanwhile, Head Office employees went about their work the way they
always had: not fully aware of what was happening overall in the company.
Thankfully, this top-down management approach is now history. A new corporate culture of freethinking is taking root, one grounded in our corporate philosophy. This change has profound significance. By fully understanding what drives Lawson, employees throughout the company will be able tobetter express their creativity and satisfy customers.
More specifically, I am trying to create an atmosphere in which employees are encouraged to speak
freely about Head Office strategies and other policies. At first, people held back, unsure how to respondto this new approach. But now, many employees are openly expressing strongly held views, including
doubts or concerns they have about strategy and policy. I make a point of addressing those views one
by one, taking them into account in the formulation of strategy. I would be unwise not to—franchiseowners, store crew and front-line employees have direct contact with customers and can therefore offer
valuable insights into ways of enhancing customer satisfaction. In return, I often tell employees how
proud they can be of their company’s corporate philosophy and encourage them to rediscover andembrace it. At the heart of this philosophy is raising customer convenience and satisfaction, as well as
ensuring that franchise owners, store crew, business partners and every member of the extended
Lawson family are content. I am encouraging our people to ask themselves what they should do torealize this vision and to take pride in their work.
Our people are listening. General managers and other management-level staff are now talking morewith other employees, while all employees are communicating better with each other too. Fostering thiskind of flourishing dialogue is one of the most important management tasks at Lawson. I want it to continue.

2 LAWSON, INC. AR 03

Consolidated Financial Highlights
LAWSON, INC. and Subsidiaries
Years Ended February 2003 and 2002
Millions of Yen

For the Year:Net sales of all stores
Operating income
Income before income taxes and minority interests
Net income
Per Share Data (Yen and dollars):
Net income
Cash dividends
At Year-End:Total assets
Total shareholders’ equity

PercentchangeThousands of
U.S. Dollars(1)

2003

2002

2003/2002

2003¥1,294,042
34,107
17,6038,861¥1,285,557
36,36329,02816,123

0.7%(6.2)(39.4)(45.0)$10,989,741
289,656
149,495
75,253

¥

¥

146
41

(43.8)%—$¥ 342,934
149,827(0.1)%
1.4$ 2,909,546
1,289,715

82
41¥ 342,599
151,8640.70
0.35

Note: The U.S. dollar amounts represent translations of Japanese yen at the approximate exchange rate at February 28, 2003, of ¥117.75=$1.

Communication with franchise owners and store crew is just as important. I use Lawson Seminars
held at eight locations throughout Japan every six months as forums for explaining management
strategy and encouraging my audience to take ownership of Lawson’s Three Challenge Practices andour corporate philosophy. The response from franchise owners and store crew has been so overwhelmingly positive that we now hold twice-yearly seminars at regional headquarters as well. These seminars
are bridging the gap between Head Office and stores, helping us to create better strategies.
I believe that when Head Office and front lines think as one on these crucial issues of philosophy andstrategy, we will be able to realize the Lawson vision of becoming “the ‘hot’ station in the neighborhood”
throughout Japan.

Dealing With Unproductive Assets and Revamping Our Cost Structure
In 2002, I pledged to deal with all the company’s unproductive assets. We did that. Unprofitable
stores were shuttered, around 500 jobs were restructured, and some marketable securities and othernon-performing assets were discarded. These were just some of the bold steps we took to reengineer
our cost structure and to make Lawson a leaner organization. Thanks to these steps, there are nolonger any major barriers standing in the way of future growth.
But that doesn’t mean we are resting on our laurels. If we sit back now, we will soon have otherissues to deal with. So making further improvements to our cost structure must be an ongoing process.
To ensure we stay focused on this goal, we established a Cost-Cutting Committee in the latter half offiscal 2002. This committee has started looking at the company’s entire cost base. No part of thecompany will be exempt from its assessment. Everything, from store and Head Office rent to store
construction expenses through consumables used in stores and office products at Head Office, isalready under the microscope. And the results have already exceeded our expectations. The committee
has now set a bold target for this fiscal year—to drastically cut costs.
In terms of headcount, we expect to see a drop of around 200 through natural attrition of the workforce
this year. We don’t intend to replace these people unless it is necessary for raising productivity. But
even then the increase would only be slight. We will cover the reduction through greater use of IT andrevamping work practices and roles.

LAWSON, INC. AR 03

3

Building on the Success of Onigiriya to Raise Sales
Recently, I have been hearing often, not just from employees and franchise owners, but also fromvendors and acquaintances, that Lawson seems to be undergoing a renaissance. I have no doubt thatthe improved communication I was talking about before is one reason for this. The success of our

Onigiriya rice balls is another.
These rice balls were the brainchild of the Onigiriya Project Team, which brought together members
from different divisions throughout the company. Taking the standpoint of customers, as well as
incorporating views from inside and outside the company, the team set about developing rice balls thattook the Lawson taste to a new level. Up to now the common belief was that only seasoned professionals
could develop new products. But this team of relative novices proved that theory wrong. They succeeded in developing a product with more value—thought to be impossible in terms of cost andproduction methods. Conventional thinking was discarded and a raft of innovative approaches employedto achieve this success. Methods for procuring raw materials were revised, the quality of raw materials
was dramatically improved, the latest production equipment was introduced and marketing surveys
were conducted using the Internet. This approach, and the resulting new value these products offer, hasbeen vindicated by a rise of over 20% in same-store sales of rice balls year-on-year.
Moreover, front-line staff, franchise owners and store crew were given the opportunity to act as taste
testers so they could assess the difference for themselves. No compromises were made in developing
this product. The rice used is the celebrated Koshihikari rice grown in Niigata, for example. The qualityof the product has been a source of pride for everyone at Lawson, leading to greater motivation. The
combination of a wonderful product, a new-found confidence in our product development capabilities,
the pride and motivation to sell the rice balls, as well as the support of effective advertising, resulted ina product that has won high marks from customers.
The Onigiriya Project has been the inspiration for several other cross-company projects that are now
underway. I find it personally gratifying to see project members working so hard—and with suchpassion and enjoyment—on these projects. In addition to rice balls, we are not far away from being
able to bring to market a succession of other products packed with value that we are confident will
exceed customers’ expectations.

First Quarter, Fiscal 2002 (March 1, 2002 to May 31, 2002) ––>April 16, 2002

May 1, 2002

May 10, 2002

Lawson Challenge 2004 medium-term management plan unveiled, targeting growth in earnings

New Loppi multimedia terminals with multimedia
servers (MMS) are installed in all Lawson stores

Ticket sales for latest production from Studio
Ghibli* get underway

MMS enables customers to use Loppi to order awider variety of products, at the same time making
Loppi even faster and more convenient to use

Sale of related goods and success of previous
campaign helped to boost customer footfall

Plan sets out targets of ROE of 15% and consolidated operating income of ¥50 billion in fiscal 2004

4

LAWSON, INC. AR 03*A leading animation studio, famous for its Oscar-winning
production “Spirited Away”

Optimizing Manufacturing, Distribution and Procurement Networks
Tireless efforts and negotiations since 2002 are part of our efforts to rebuild our vendor network forstaple products like main dishes, including rice balls, prepared breads and prepared noodles, all ofwhich are the lifeblood of the convenience store business. Starting in Tokyo, Nagoya and Osaka, we are
gradually narrowing down the number of vendors who make our products. By the end of fiscal 2003, weplan to have in place an organization of various mega-vendors. These mega-vendors are financially strong
and have the ability to make investments in new equipment. This is important because we will becontracting the manufacture of more products to them than before, and so we will be asking them tomake further investments in the latest manufacturing equipment. For Lawson, they will be important
strategic partners. The end result will be higher-quality products. Having a limited number of strategic
partners will also enable better management of product safety and reliability. Supply Chain Management
will also be easier.
The Japanese are taking a greater interest in food safety due to a recent spate of product-quality
incidents. Health consciousness is also rising as the percentage of Japanese population who are elderly
rapidly increases. As a company with a deep sense of social responsibility, we are committed todelivering safe, healthy and high-quality products with value that continually exceeds customer
expectations. The realignment of our vendor network better positions us to fulfill this role.
We have also made moves on other fronts to improve product safety and quality. In May 2003, we
eliminated preservatives from original Lawson products, such as bento-boxes, rice balls, preparedbreads, delicatessen items and salads, sold in the Kanto and Kinki regions. Furthermore, we have set
upper limits on the amount of food additives used in our products. Lawson may not be the firstcompany to eliminate preservatives in the food retail industry in Japan, but we are the first to cap theuse of food additives. We will continuously review the use of food additives to keep customers fully
informed and deliver safety and peace of mind to them. And we will keep customers up to date byexplaining in simple terms our thinking behind the limits and how additives are used.
Natural Lawson, a new Lawson format we launched in 2002, is at the vanguard of our efforts to
identify and respond to customer needs for healthier products. Rice balls and bento-boxes made using
brown or germinated rice, and delicatessen items, such as salads, developed with these needs in mind
have garnered strong support from customers. Showing the benefits of leveraging such successes inSecond Quarter, Fiscal 2002 (June 1, 2002 to August 31, 2002) ––>July 11, 2002

July 29, 2002

August 1, 2002

Stores begin accepting payment by QUO Card

Lawson starts offering Asahi Bank services

Services for LAWSON PASS, a members-only credit
card, launched

Later sold through in-store Loppi multimedia
terminals; cards expected to attract morecustomers and lift sales

Becomes the first convenience store chain to tie up
with all major nationwide banks

With more than 300,000 applications by the end of
July 2002, this card was an effective tool in drawing
in customers

LAWSON, INC. AR 03

5

regular Lawson stores, strong sales have also been recorded in a number of locations and amongcertain customer groups. Going forward, Natural Lawson will continue to be the testing ground for awhole host of innovative products under development.
To raise quality of our products further and better communicate their value to customers, further
investments are required. To date, we have been heavily reliant on external sources when procuring
raw materials for our original Lawson products. Now though, with the establishment of an independent
Raw Materials Procurement Department, we are aiming to buy better-quality products at more competitive prices. Lawson purchases approximately ¥110 billion worth of raw materials every year. So any
efficiency savings made in purchasing could spell significant benefits. The cost savings we generate will
be plowed back into raising product quality, supporting owners’ procurement efforts, and advertisingand promotion activities.

The Key Theme for Fiscal 2003—Attracting More Customers
A key theme for fiscal 2003 is attracting more customers to our stores. Thanks partly to Onigiriya,
spending per customer has been rising steadily since the latter half of 2002, helping same-store sales
to remain stable. But, although the number of customers is trending upward, it hasn’t risen as much as
spending per customer or as much as we had hoped for. Customer numbers are still down at existing
stores year–on–year.
I think we can arrest this trend by raising the level of quality of strategic products, as I mentioned
before, and by adhering to Lawson’s Three Challenge Practices: create stores and store layouts thatstrike a chord with customers; keep stores clean; and serve customers with courtesy. We plan toearmark resources for these basic but vitally important approaches to get the results we want. Naturally, other steps will also be taken to attract more customers.
First, we are promoting the LAWSON PASS. Already, 1.1 million cardholders have signed up for thisLawson-branded credit card in just under one year since its launch. What’s also significant, and thedata bears this out, is that the more cardholders a store has, the greater its sales growth. Building on
the early success of LAWSON PASS, we intend to make the shopping rewards program even more
attractive and encourage store staff to sign up even more cardholders.

Third Quarter, Fiscal 2002 (September 1, 2002 to November 30, 2002) ––>September 6, 2002

October 31, 2002

November 5, 2002

Began emphasizing regional-centric stores, using
visual identities matched to locations

Applications for LAWSON PASS exceed the
1-million markBolstered mainstay rice ball lineup

New store in Marunouchi Building opened withcolor scheme to match environment

6 LAWSON, INC. AR 03

Achieved in less than 5 months from launchCommemorative campaign launched on
November 1

Sales of new brand, Onigiriya, begin on
November 5

Next, our recently announced alliance with TSUTAYA, a major chain being developed by Culture
Convenience Club Co., Ltd. (CCC) that sells and rents CDs, DVDs , videos and game software, will also
help to draw in customers with a shared shopping rewards program. From fall 2003, we plan to give
TSUTAYA members points for shopping at our stores when they show their membership card.
TSUTAYA has around 18 million members, of which about 15-20% visit our stores regularly. I believe
the points system will be instrumental in drawing in other TSUTAYA members as well. TSUTAYA is
supporting our efforts through notices throughout their store network and via mobile phone messaging
and e-mail. Apart from a shared points program, we have also agreed to cooperate with CCC in otherareas. These include planning co-sponsored exclusive concerts, selling exclusive tickets and related
goods, using points for rewards and allowing TSUTAYA members to return rentals at Lawson stores.
Campaigns will be another feature of our customer-attraction drive during 2003. These will be timed
to coincide with important seasonal events. In the spring, we targeted Golden Week, when Japanesetraditionally take extended holidays. More campaigns are planned for the summer break, the fallsightseeing season and Christmas.

Two Incidents Refocus Efforts on Building Consumer Trust
Recently, two unrelated incidents in May and June this year threatened to undermine consumer
confidence in Lawson. The first incident concerned the use of ingredients in some Onigiriya rice balls
that were partly different to those labeled, a breach of the JAS Law. The second incident involved theunauthorized disclosure of personal information relating to around 560,000 LAWSON PASS cardholders.
Recognizing the seriousness of these incidents, we moved quickly to disclose all related information
in a timely, proactive manner in both cases. We are now carrying out rigorous investigations todetermine how the incidents could happen and taking all possible countermeasures to prevent areoccurrence. Simultaneously, we plan to redouble our efforts to reinforce our corporate governanceand compliance systems.
These incidents have potentially tarnished the Lawson brand at a crucial time for the company. I wish
to apologize to shareholders and other investors for any concern caused by these incidents. Please be
assured that we are doing our utmost to ensure customer trust and confidence in the Lawson brand.

Fourth Quarter, Fiscal 2002 (December 1, 2002 to February 28, 2003) ––>December 2002

January 1, 2003

January 10, 2003

Sales of year-end gifts and traditional New Year’s
food were strong, supported by Lawson’s tie-up
with Takashimaya

Installation completed of Japan Post in-store
mailboxes in all stores

Tie-up formed with Ski Okoku NAGANO in Nagano
Prefecture

Mail collection service starts on January 1

Includes joint merchandizing for the Nagano tourist
industry

Lawson became the first convenience store chain tosell New Year’s cuisine supplied by a famousdepartment store

LAWSON, INC. AR 03 7

Staying Focused on Opening Profitable Stores for Qualitative Chain GrowthIn fiscal 2002, there was a net decrease of 109 stores as we took resolute actions to deal with storesholding back the chain. I am pleased to report that profitability at new stores was up about 10% year
on year on average. Achieving further gains in the profitability of new stores is an ongoing theme.
In the current fiscal year, we aim to achieve a net 200 increase in the number of stores, by opening
600 new stores and closing 400 others. We are well positioned to achieve this goal for a number ofreasons. One is that we had an adequate pipeline of 284 contracts for stores at the start of fiscal 2003.
Second, general managers of the Store Management Division, managers and store supervisors andeven franchise owners are now feeding back valuable local information to the Store Development
Division. We are also fostering relationships with influential companies in each region that can serve asa valuable source of information for opening new stores by identifying prime sites for stores. Store
instructors, responsible for training store personnel, are also spending more time than before supporting the opening of new stores. Whereas one week was devoted to store openings in the past, they are
now spending an average of three weeks during this key period. This is playing a vital role in making
sure that new stores find their feet quickly and grow. Our new store opening initiative also encompasses
experimenting with new possibilities. Illustrating this are Lawson stores that have been opened in
hospitals, a tie-up with Japan Post to open convenience stores in post offices, and a deal with Nippon
Oil Corporation to operate convenience stores at their ENEOS self-service stations.

Target-Based Management and Human Resource Development Revitalizing theOrganization
The mantra of “valuing people” that is enshrined in our corporate philosophy strikes a personal chordwith me. My personal philosophy is that, as “partners,” people should be rewarded for their cooperation in helping Lawson achieve its goals. That’s why, for example, we have introduced a target-based
management system not just for managers but for all employees. Evaluations are both quantitative andqualitative. People are evaluated on the achievement of targets as well as the degree to which they
understand and adhere to our corporate philosophy. I evaluate people first and foremost by whether
they work according to this philosophy. People that do, as well as deliver results, are given higher
marks. And if these people can also offer leadership skills, then all the better.

First Quarter, Fiscal 2003 (March 1, 2003 to May 31, 2003) ––>March 3, 2003

March 25, 2003

March 27, 2003

Business alliance with Culture Convenience Club
Co., Ltd. (CCC) announced

Two stores based on new Post Shop Lawson
format opened

Launch of a new store format—Convenience Banks

TSUTAYA, a video rental chain run by CCC with
about 18 million members, and Lawson, with 7,600
stores nationwide, will promote shared point
program

8

LAWSON, INC. AR 03

Agreement with Japan Post to trial convenience
stores in post offices

Agreement on development of new store format
combining financial services and convenience store
products and services with The Hokuriku Bank, Ltd.
Plan calls for the opening of experimental stores inTokyo and Toyama City in July 2003

We must give our people more training as well if we expect them to develop the skills to be assessedon a targets basis. To this end, we have decided to encourage education and also established a Lawson
University program. The communication I mentioned earlier in this letter will be a core part of the
program’s curriculum, to foster common understanding of our corporate philosophy and strategy.
Furthermore, we intend to enhance the skills of managers and other employees. Moreover, thedevelopment of leadership skills will be targeted with a special program. Case studies and othertechniques will be used with candidates showing the potential to be president or a general manager inthe future, to get them to think about and debate the future shape of Lawson from a management
standpoint. I intend to participate in this program and debate pressing issues with participants. We will
also improve training sessions for franchise owners and are considering establishing an education
program for store crew to raise the abilities and consciousness of everyone across the board about what
Lawson stands for and what our goals are.
Our commitment to employees’ education, which I think has been insufficient to date, is underscored by
the fact that we are earmarking much more money and other resources to this area in the current year.
One aspect of this is that much of my time will be spent on staff education. Investments in education are
extremely important but they also take time to bear fruit. Over time, however, I am certain that our people
will improve their general ability and aptitude, and many new leaders will emerge. In short, I believe
employee education will contribute directly to our future growth.

Unity Towards Achieving the Lawson Challenge 2004 Goals and Vision
Customers and our partners are both sensing a brighter mood at Lawson as we make smooth progresswith Lawson Challenge 2004, our current management plan launched in 2002. If over the next year
everyone at the company works day in and day out to execute our strategy for fiscal 2003, when I write
my letter next year I will be able to report that Lawson has become an even more powerful presence in
the industry. We will then almost certainly be able to deliver on our Lawson Challenge 2004 targets (aconsolidated operating income of ¥50 billion and ROE of 15%), have established a sound basis forsustainable medium- and long-term growth, and made Lawson the ‘hot’ station. As we go about achieving
our goals, I ask for your continued support and encouragement for everyone in the Lawson family.
June 2003

TAKESHI NIINAMI
President and CEO

LAWSON, INC. AR 03

9

CORPORATE GOVERNANCE

Lawson is implementing corporate governancebrings extensive experience in management

reforms so as to safeguard the interests ofplanning from Mitsubishi Corporation, Lawson’s

shareholders and other stakeholders.

strategic partner. Mr. Ueno will advise on andmonitor progress in attaining the goals of

Re-election of Directors

management plans based on the Plan-Do-Check-

The Board of Directors was increased from eight

Action cycle, to increase Lawson’s corporate

to nine members following approval at thevalue. Muneaki Masuda is president of Culture

Ordinary Annual General Meeting of Shareholders

Convenience Club Co., Ltd. (CCC), which formedon May 27, 2003 and at a Board meeting held

an alliance with Lawson in March 2003. An

immediately afterward. The Board is now madeaccomplished business leader, who was instru-

up of four directors from within Lawson and fivemental in guiding CCC to its listing on the firstoutside directors. Previously, there were fivesection of the Tokyo Stock Exchange, Mr.

internal directors and three outside directors.

Masuda is well-versed in the entertainment

The change in internal directors involved theindustry and franchise businesses. His advice

resignation of two directors and the appointment ofand insight should prove invaluable to the

one new director. The post of chairman is to remain

management team.

vacant and the newly appointed CRO and executive

It is rare in Japan for outside directors tovice president has been appointed as a director.

outnumber internal directors on corporate boards.

The change in outside directors involved theBut we believe that getting approval from outside

appointment of two new directors. Yukio Ueno

directors on important proposals, including

KATSUHIKO YAMASAKITERUO AOKIEIICHI TANABE

Executive Vice President,
General Manager, Line Support
Division, CRO (Chief Risk
Management Officer)

Director,
Senior Executive Vice President,
Representative Director, President,
LAWSON CS Card, INC.

Director, Executive Vice President, Director (Executive Vice
Corporate Station Director andPresident, General Manager,
Chief Financial Officer (CFO)
Corporate Planning Department,
Mitsubishi Corporation)

10 LAWSON, INC. AR 03

YUKIO UENO

TAKESHI NIINAMIMUNEAKI MASUDA

Representative Director,
President and CEO

Director (President andChief Executive Officer,
Culture Convenience Club
Co., Ltd.)nominees for representative director, president

organizational changes are guided by three

and CEO, will ensure the fairness of resolutions

imperatives.

and lead to higher corporate value. Moreover,

1. Facilitate rapid decision-making closer toexpertise from other industries and personal
networks that transcend industry lines are vital for
Lawson to create a new breed of convenience
store. The appointment of more outside directors
provides access to a broader network and indepth knowledge that will benefit Lawson.
In fiscal 2002, Lawson formed the Compensation

customers.
2. Create a company firmly rooted in thecommunities and neighborhoods wherestores are located.
3. Focus the Head Office on back-office work insupport of regional headquarters.
These measures will make us better able toCommittee. The role of this committee is toreact and establish deeper ties with communities.

establish compensation structures that motivate

We hope it will also better support franchise

directors and executive officers to fulfill their duties

stores, revitalizing existing stores.

and achieve targets, and clarify their accountability.

We have carefully chosen personnel who haveextensive experience at the Head Office or on

The New Regional Headquarters
System and Re-election of
Executive Officers

the front lines to serve as general managers andLawson has divided its nationwide organization

authority to facilitate agile operations. At the

into seven regional headquarters. The

same time, general managers have clearly

deputy managers of regional headquarters,
and who have been vested with considerable

defined responsibilities to achieve profit targets.
Lawson will continue its stock option programfor executive officers to provide greater incentive
for them to excel. The conditions for exercisingstock options are set so as to motivate executive
officers to increase Lawson’s corporate value overthe medium and long terms.

Proactive Disclosure
Lawson received the Tokyo Stock Exchange’s
Fiscal 2002 Disclosure Award. Lawson believes
that the openness of disclosure reflects thequality of management. That’s why we arecommitted to engaging in dialogue with all
stakeholders not in a one-sided manner with justshareholders, as is traditionally the case. We aim
to communicate with individual shareholders,customers, employees, franchise owners and allother parties with an interest in Lawson.

HIROSHI TASAKA

REIKO OKUTANIYORIHIKO KOJIMA

Director (President &CEO, Sophia Bank
Limited; Professor,
TAMA University
Graduate School)

Director (Representative Director,
President, The R Co., Ltd)

Director (Senior Executive Vice
President, Group CEO,New Business Initiative Group,
Mitsubishi Corporation)

LAWSON, INC. AR 03 11

Determined to directly confront problems
that have hamstrung growth, Lawson
dealt quickly with unprofitable assets
during the year.

>
01

Disposed of
unproductive assets
in fiscal 2002>>see page 14
Lawson has looked for ways to make its
manufacturing, distribution and purchasing networks more efficient. Cost savings
are being channeled into raising thequality of original Lawson products, suchas rice balls with the Onigiriya brand.

>
02

Made networks more
efficient to improve
products and draw inmore customers

Increased number of supervisors andestablished Franchise Support Stations to
support Supervisors’ activities. Supervisors are now able to spend more time
mentoring stores as a result. Lawson willcontinue to maintain a close relationshipwith the front line and give top priority toactivating them.

>
03

Revitalized front-line
operations>>see page 14>>see page 16

At the start of fiscal 2002, we took a bold step by launching Lawson Challenge 2004, a radical
reform plan designed to firstly turn around the company, and then propel it to a new stage of
growth. The ultimate objective of the plan is to transform Lawson into “the ‘hot’ station in theneighborhood.” So how has this plan fared? We believe well. We have made steady progress
implementing our strategy in the past year, doing everything we set out to achieve. By opening
channels of communication with employees to realize our vision and by steadily working throughall stages of Lawson Challenge 2004, we believe that our ambitious targets of consolidated
operating income of ¥50 billion and ROE of 15% in fiscal 2004 are possible.

LAWSON CHALLENREPORT CARD
12

LAWSON, INC. AR 03— Progress With the Reform Plan —The newly established Lawson University
will provide systematic education andtraining programs for employees as well
as store owners and crew.

>04

Established Lawson
University to nurture
human resources>>see page 17

Introduced a targetbased management
system for all
employees to reward
individuals who
produce results.

In April 2003, the target-based management system was extended to all
employees. Under this system, almost 20%of the pay of an employee will be linked toperformance. At the same time, executive
officers and managers will have their
management skills carefully assessed. This
will result in fair and rigorous performance
evaluation.

>05

Increasing the
opening of profitable
stores and setting
profit targets thattake into accountregional differences>>see page 18

Daily sales and earnings at new stores
have improved as a result of our renewed
focus on profitability. We are now taking
regional economic differences in Japan’s
47 prefectures into consideration andlooking at new store daily sales on aregional basis, as well as making andmaintaining targets for profits generated
by franchise owners and by Head Office.
This signals an even tighter focus on
profitability in store management.

>
06>>see page 20
We are aiming to give customers morechoice and opportunity. We plan to achieve
this through an alliance with Nippon Oil
Corporation to operate convenience storesat their ENEOS self-service stations, and acollaboration to open stores in post offices
with Japan Post. We are also championing“Convenience Banks,” offering convenience
store and banking services in single locations, with regional banks, who are applying
to the Financial Services Agency for permission to introduce this innovative format.

>
07

Formed equity tieups and businessalliances to deliver
more convenience
to customers

GE 2004>>see page 21

LAWSON, INC. AR 03

13

01

Disposed of unproductive assets in fiscal
2002

02

In the past year, we confronted issues head on,

Made networks more efficient toimprove products and draw in morecustomers

without putting off tough decisions, and worked

Eliminating the lack of uniform quality across ourhard to rid the company of assets that held

range of original products, such as bento-boxes,back growth.

rice balls, prepared breads, prepared noodles,

Initially we had planned on maintaining ourdelicatessen items, salads and desserts, hasstore network at its fiscal 2001 year-end level,

been a pressing issue at Lawson. This is vital

based on new store openings and closures of 500

because these items are the core earners of

apiece. In fact, there was actually a net decrease

Lawson convenience stores. We have gone rightof 109 stores in fiscal 2002. This was the result ofto the crux of the problem by realigning ourconcerted efforts to close or convert to franchisevendor network—the 60 or so manufacturing

operations poorly performing company-operated

partners nationwide will be pared to a handful ofstores, and by closing or relocating sub-par

mega-vendors. We intend to deepen relationships

franchise stores. We had aimed to reduce our 550

mainly with our six mega-vendors because theyor so company-operated stores to around 300

are prepared to make investments in the latest

through closures and conversions, but our focus

production equipment and to enhance foodon franchise stores meant that company-operated

safety. We want partners who are committed tostores at the end of the year stood at around 330.

making improvements in quality, coming up withDuring the year, we launched the “challenge

new ideas, and upgrading hygiene and safety.

owner” system, whereby displaced employees

The realignment process was started in thewere given the opportunity to become franchise

Kanto and Kinki regions in April 2003 and isowners, and offered early voluntary retirement

slated for completion by the end of February

packages, as part of our efforts to deal with

2004. Next on our list is the Chubu region.

surplus manpower arising from the closure of

In other product-related initiatives, we begancompany-operated stores. About 550 employ-eliminating the use of preservatives in original

ees took advantage of these opportunities,

products in the Kanto and Kinki regions in May

resulting in a fiscal year-end workforce of2003, responding to consumer concerns over

3,200 employees, a reduction of 348 personnel

food healthiness and safety in general. Lawson

year on year. We expect the effect of reduced

also became the first company in the foodlabor costs to become apparent in our results

retailing industry to impose proprietary limits

from fiscal 2003 onward.

capping the use of additives in products as we

We also recorded an extraordinary loss on thework to gradually reduce the volume of additives

retirement of hardware and software superseded

we use. As with the vendor reorganization, theseby our next-generation information system LETSS

initiatives will be extended nationwide through-(Lawson’s Epoch-making Total Strategicout fiscal 2003.

Systems), installed in fiscal 2002, as well as on
the write-down of marketable securities.

Changes are also afoot in purchasing. In
October 2002, we established a Raw Materials

In this way, we completed actions to deal with

Procurement Department, which is responsible

unproductive assets. Consequently, we believe infor creating a proprietary purchasing framework.

fiscal 2002 we created an excellent departure

Our aim is to reduce costs by radically reviewing

point on our journey to a new stage of growth.

purchasing across multiple channels to optimize
the procurement of not just food ingredients but
also things like packaging. This comprehensive
review will not be restricted by past businessaffiliations.

14 LAWSON, INC. AR 03

Realizing a Vision
Takeshi Takemura (Store Owner) Nankoku Tochi Park Town Store Kouchi prefecture
My store has been open for five years and is located at the entrance to a new residential development.
Most of my customers live in an area called Park Town and I know their faces well. But that’s why I pay
all the more attention to how I serve them. That includes the children—I want them to have fondmemories of the store so they come back when they’re older. Building customer relationships, that’s
the key to long-term success.

In the past year, good progress was also madein optimizing our distribution network. In January
2003, we completed the reorganization of our dry
distribution network handling products that do
not require any temperature control. Our previous
system consisted of a mix of both DDPs1 used as
temporary transit points and DDCs2, which are
distribution centers with warehousing functions.
This 34-facility system was replaced with a leaner

Eel and Rice Dishes

27-facility network made up entirely of DDCs,

We chose the hottest part of the year to launch ourhelping us to generate new cost savings.

Tokusen Unajyu, a variation on an eel and rice

Fiscal 2002 saw a sea change in productdish traditionally eaten during the summer instrategy: a shift from our low-price strategy in fiscal

Japan to boost stamina. Our direct involvement in2001 to a high value-added strategy emphasizing

the purchasing process, including the actual

product quality. The significance of this is high-sourcing of the eels themselves, played a key partlighted by the fact that around 80% of sales comein significantly improving the quality of thefrom food products. Main dishes are especiallyingredients at competitive prices, and led directly

important. Original products like bento-boxes andto strong sales of the product. Gekkan Konbini, arice balls, which help to distinguish Lawson frommonthly magazine published by THE SHOGYOKAI

its rivals, are vital to our future success.

PUBLISHING CO., LTD. that focuses on the

These original food items were just too

convenience store industry, selected Lawson’s

important to the company for us to wait for theTokusen Unajyu as by far and away the best eel

positive effects of our vendor realignment to start

dish on the market in its September 2002 issue.

showing through. We took the initiative to improve

The Onigiriya Project

quality ourselves through a fundamental review of

The Onigiriya brand, a new line of Lawson rice balls,

existing raw material purchasing methods andwas the driving force behind the year-on-year

product development. Below are just a few of ourincrease in December 2002 existing store sales, theaccomplishments thus far.

first growth recorded in 18 months. We launched
the Onigiriya brand in November 2002 with the1
2

Dry Distribution Points
Dry Distribution Centers

LAWSON, INC. AR 03 15

express aim of making Lawson synonymous withsought to form tie-ups with local media andrice balls. Since then, rice ball sales, both monetary

baseball teams. One example was in the Kinki

and unit volume, have been running at significantly

region, where we joined hands with Yoshimoto

higher levels than in fiscal 2001.

Kogyo Co., Ltd.4 We plan to actively increase these

The secret of this success lies in the way wekinds of relationships in fiscal 2003.

drew people from all corners of the Lawson

In a separate development, we began a tie-up

network to form a product development teamwith Takashimaya Co. Ltd., one of Japan’s leading

characterized by out-of-the-box thinking. Project

department store chains with 18 stores nation-team members included Lawson employees,

wide, in Christmas and New Year food and gifts.

3

franchise owners, store crew and businessPart of this collaboration included developing apartners. Persuading all our manufacturing

range of Christmas cakes created by the re-vendors to introduce new rice ball molding

nowned Japanese chef Hiroyuki Sakai.

machines was also a key step. In the coming

Revitalized front-line operations

product categories to drive sales higher.

We at Lawson are creating stores which satisfy our

Area Ichioshi Bento-Boxes

customers. To achieve this, we follow Lawson’s

November 2002 also saw the launch of new

Three Challenge Practices to ensure every store

bento-boxes that more closely reflect local

becomes “the ‘hot’ station in the neighborhood”.

preferences—Area Ichioshi Bento-Boxes. This

16 LAWSON, INC. AR 03

03

year, we plan to transfer this success to other

The Three Challenge Practices comprise firstly,

concept involved dividing the country up into 10

winning the support of customers of company-

regions and developing one new product a month

operated stores by creating stores that can befor each that reflects local taste preferences andenjoyed by all customers in the catchment area;that differ in price and ingredients. Input fromsecondly, actively working to keep both the store

owners, store crew, supervisors

and the catchment area neat and tidy; andand other area employees is athirdly, instilling in customers the desire to revisit

key ingredient in the planning of

the store.

these products. Strong sales of

The Three Challenge Practices are necessarythese bento-boxes, together withbecause although we have long cited the need to

Onigiriya rice balls, drove amaintain high standards of Quality, Service andturnaround at the Main Dish

Cleanliness (QSC), recently the QSC concept has

Division from November 2002.

become a little clouded. It is clear to us all that

In other efforts to imbue

our Three Challenge Practices are the indispens-

Lawson stores with a moreable foundation of any action to promote cus-

regional feel, we have actively

tomer satisfaction.

Lawson Regional Headquarters
Breakdown of Lawson’s Total of
7,721 Stores

Hokkaido Branch Office
Hokkaido
Tohoku Branch Office
Aomori, Iwate, Akita, Yamagata, Miyagi, Fukushima
Kanto Branch OfficeNiigata, Saitama, Gunma, Ibaraki, Tochigi, Chiba,
Tokyo, Kanagawa
Chubu Branch Office
Aichi, Gifu, Mie, Nagano, Yamanashi, Shizuoka,
Ishikawa, Fukui, Toyama
Kinki Branch Office
Kyoto, Shiga, Hyogo, Nara, Wakayama, Osaka
Chugoku & Shikoku Branch Office
Tottori, Okayama, Shimane, Hiroshima, Yamaguchi,
Kagawa, Tokushima, Ehime, Kouchi
Kyusyu Branch Office
Fukuoka, Nagasaki, Saga, Oita, Kumamoto, Miyazaki,
Kagaoshima, Okinawa(As of February 28, 2003)●

Chugoku

448

Koshinetsu

315

Tottori
Shimane
Okayama
Hiroshima
Yamaguchi

58
55
109
122
104

Niigata
Yamanashi
Nagano113
64
138

Hokuriku

224

ToyamaIshikawa
Fukui

88
67
69

Shikoku

367

Tokushima
KagawaEhime
Kouchi

102
97
124
44

Kyusyu870

Fukuoka
Saga
Nagasaki
Kumamoto
Oita
MiyazakiKagoshima
Okinawa

266
53
78
75
100
79
107
112

● Shanghai

Hokkaido

96(As of December 31, 2002)

Tokai

626

Shizuoka
Aich
Gifu
Mie

167
316
78
65

Tohoku641

Aomori
Iwate
Miyagi
Akita
Fukushima
Yamagata

108
103
166
103
106
55

Kanto
Kinki

1,735

Shiga
Kyoto
Osaka
Hyogo
Nara
Wakayama

104
170
801
445
108
107

475

front-line developments and requests tothe upper levels of the company so they
can be better reflected in Head Officestrategy. Enhancing communication
with the front line will continue to be a
key goal for Lawson going forward.

1,924

IbarakiTochigi
Gunma
Saitama
Chiba
Tokyo
Kanagawa

102
92
63
275
242
703
447

In fact, we have already taken
additional steps to wed this new
management approach more closely to
our local operations by revamping our
regional support framework in March
2003. The main points are as follows:

A key goal for us during fiscal 2002 was to햲 Lawson’s nationwide convenience store chain,revitalize our front line—our stores. We have had

which is based on 20 operating divisions, will bea measure of success. By increasing the number

managed by 7 regional headquarters inof store supervisors and giving them more

Hokkaido, Tohoku, Kanto, Chubu, Kinki,

support with the establishment of Franchise

Chugoku-Shikoku and Kyushu.

Support Stations, we have created an environ-햳 Each regional headquarters will conduct all

ment where store supervisors have more timebusiness activities in its area (store develop-

and resources to help stores. Weekly meetings

ment, operations and merchandising) underthat bring together District Operations Managers

the direct supervision of the regional headquar-(DOMs ), division managers and the president

ters regional manager. Each regional head-

are now a firmly embedded element of ourquarters will also have a Marketing Division6

management approach. This has enhanced

and a Franchise Support Division7. These units

communication, helping to bring front lines andwill work closely with Head Office departments

Head Office closer together. DOMs are also

to assist stores.

5

responsible for communicating the key points ofweekly meetings to store supervisors to ensurethat management thinking reaches every corner3of the organization. Similarly, DOMs pass on

Part-time staff employed at Lawson stores are called“store crew”
4
One of Japan’s largest entertainment companies,
involved in the planning and production of programming for a wide range of media, and the distribution ofother forms of entertainment.
(http://www.yoshimoto.co.jp)
5
Responsible for each of Lawson’s approximately 120
district offices in Japan
6
Supporting sales efforts
7
Supporting back-office processes

LAWSON, INC. AR 03

17

04

Established Lawson University to nurtureassistant supervisors9 and store instructors10. Put

human resources

more simply, if district office targets are not met,

Outside experts in management, merchandisingno incentives are paid. Thanks to the clear

and store development are also being used torelationship between rewards and results, one

galvanize our people and help reenergize the way

benefit is already apparent: a marked improve-

we do business.

ment in front-line employee motivation as they

The newly established Lawson University, astrive to increase franchise owner profits. This

structured education and training program for

preparatory stage was vital for the smooth

employees will help energize operations. Under

introduction of the full target-based management

this program, employees and management will

system now being rolled out.

first take a leadership program.

05

employees, including store supervisors after

Introduced a target-based management system for all employees toreward individuals who produce results.

paving the way for this new system in fiscal 2002

In fiscal 2002, we introduced a target-basedwith a range of temporary incentives. In the past,

management system for executive officers andperformance evaluation had been based on

managers. In April 2003, we extended this systemsales targets. The temporary incentives focusedto all employees.

In April 2003, we began introducing a targetbased management system for all Lawson

on franchise owner profits instead, fundamen-

Our revamped personnel system is based on atally changing how our people look at perfor-

concept that is simple and now more widely held

mance. This system was structured to encour-in Japan: reward should be directly related toage better teamwork at the district office level,

results. We are confident this approach will win

the fundamental building block of Lawson’s

the full support of employees. A weakness of theorganization, by not rewarding

previous system was that performance and ability

individuals but the team

were not truly reflected in pay—performing andperformance—DOMs, chief

non-performing employees were being treatedsupervisors8, store supervisors,

almost exactly the same. Now almost 20% of theRealizing a Vision
Toshikazu Iwashige (Store Owner) Kajiki Kida Store Kagoshima prefecture
Before becoming a Lawson franchise owner, I ran a liquor store, so I was full of confidence about store
management and interacting with customers. In reality though, running a convenience store was much
tougher than I imagined. For a long time, sales remained flat. What helped me turn things aroundthough, was the valuable advice from other store owners, and sheer hard work of course. I focused on
doing the basics well—making sure that the store, both inside and out, was clean. I’m sure that’s one
reason I’ve seen an increase in customer footfall. I believe more customers are coming to my store
because the tidier, cleaner impression we give is the first step on the road to winning their trust.

18 LAWSON, INC. AR 03

pay of an employee will be linked to performance.

company, demonstrated by the establishment ofPreviously, this was a mere 7%.

an Operation Education & Training Department in

In fiscal 2002, we also introduced a system

October 2002 to enhance leadership skills. And

whereby each executive officer responsible forin a radical departure from the past, we aredivisions or Franchise Support Stations isbringing in outside experts to take overall

entrusted with missions for achieving Lawson’s

responsibility for training programs, helping us to

publicly released targets. From fiscal 2003,

move away from legacy approaches.

managers and employees will also be assigned

The main point of LETSS has been to show

missions based on the missions of their executive

supervisors how they can use the system to refine

officers. The net impact of these reforms will be atheir thinking and skill and, as a result, create

wedding of the interests of Lawson as the fran-better stores. Through the installation of newchiser, with those of its franchisees. The profits ofmachines, we improved the flow and quality offranchise owners are now just as important inproduct and customer data between stores andmeasuring performance as the profits of Head

Head Office. This has given us the capability to

Office. We are confident this will make our front-

tailor product lineups to individual stores, andline activities more dynamic.

ensure we can continue to offer local customers

In addition, executive officers and managers

the merchandise and services they value thewill have their management skills closely

most. The advantages of our new system do notassessed, resulting in fair and rigorous perfor-

end there: thanks to LETSS, we have enhanced

mance evaluation.

usability compared to previous systems, and now
have the tools to improve store operating efficiency

LETSS: Up and Runningand speed up data processing and analysis.

Following on from the successful introduction of

06

powerful system. Using LETSS, we plan to en-

Increasing the opening of profitable
stores and setting profit targets thattake into account regional differences

hance our retailing capabilities, expand new

New Stores, a New Strategy

business, increase the accuracy of our store

At the end of fiscal 2002, Lawson’s network

opening strategy, improve store operations, andconsisted of 7,625 stores in all of Japan’s 47

inject real value into our IT network.

prefectures. This represented a net decline of

LETSS during fiscal 2002, our focus has now
turned to maximizing the full potential of thisKey to this will be store owners, store crew andsupervisors. That’s why training for supervisors
has been identified as a major priority for the8

DOM support role: providing their wealth of front-line
experience to store supervisors through on-the-job
training and other programs.
9
Candidates for store supervisor: working closely withstore supervisors to learn the role.
10
Trainer role: training new owners and store crews.

LAWSON, INC. AR 03 19

109 stores on the 2001 fiscal year-end, the firstsignificantly reduced the number of unprofitable

time since the company was founded in 1975

Company-operated stores. As a result, store

that store closures have outnumbered store

closures were 611, far outnumbering openings.

openings. This was the result of lowering opening

The combined effect of the above measures wastargets by around 100, compared with fiscal

a much stronger store network at the end of the2001, to about 500 stores to ease the pressure

year in terms of quality, and better profits foron our store development corps and give themfranchise owners whose stores were given a new

more time to concentrate on qualitative—profit-

start at a new site.

ability-focused—rather than quantitative network

The Ongoing Challenge of Enhancing Store

expansion. The results are there to be seen—

Profitability

daily sales at new stores improved and store

As part of ongoing efforts to further raise store

earnings recovered. We also eased pressure byprofitability, we plan to more carefully assess the

avoiding the typical burst of store-opening activity

potential performance of new stores, boosting

toward the end of the fiscal year, achieving a

profits through a net increase in stores starting in

more even pace of openings throughout the year.

fiscal 2003.

Using our “grid point” system, which identifies

Although store profitability remains a key issue,

prime store locations using key parameters, we

we are well aware that the strength of theincreased the percentage of new store openings

company is also dependent on the number ofin prime locations in each region. And bystores in our network. So from fiscal 2003, we

employing the latest modeling systems to identify

plan to move back onto the offensive. We are welllikely areas of low daily sales, we were better able

placed to open the 600 new stores we plan to in

to manage our store opening process. The net

fiscal 2003, around 100 more than in fiscal

result was an improvement of about ¥26,000 in

2002. This is being done as we open stores that

average daily sales at new storesare genuinely appreciated by customers for giving

to ¥457,000, and an increase inthem more regional flavor. Because very few

profitability of approximately

closures of Company-operated stores will be

10%. The increase in profitability

required this fiscal year, we can direct ouractually exceeded the rate ofattention to the needs of franchise owners who

increase in average daily sales,

want to relocate.

highlighting how we managed to

Meanwhile, we have great hopes for LETSS.

enhance the quality of our store

Using its mapping system and the vast amountnetwork in the past year.

of data it gathers, we will improve the efficiency

Meanwhile, we put priority onof locating, analyzing and managing promisingaggressive existing store

new store locations. Used in conjunction withrelocations and closures andour “grid point” method, LETSS will also reduce
the likelihood that new stores
generate low daily sales andgreatly contribute to improving the
productivity of Recruit Field
Counselors who are responsible
for new store opening programs.

20 LAWSON, INC. AR 03

Realizing a Vision
Shinichiro Miyawaki (Store Owner) Fujisawa Higashi Yokosuka Store Kanagawa prefecture
My store is in the frontline of the battle in the convenience store market—3 competing stores haveopened up in the area in the last 2 years. When I sat down and thought about how best to take on thiscompetition, I knew instantly the prime focus had to be customers and how our seasoned store crewinteracted with them. Our store crew, calling on all their experience, have changed how they talk withand engage customers. Their friendly and relaxed style has built closer relationships and, I believe, isthe reason for an increase in the number of regular customers. The importance of good customer
contact was vindicated by an increase in year-on-year sales.

Staying One Step Ahead of the Competition
To ensure we obtain a truly accurate picture ofstore network performance, we are adopting
more precise performance benchmarks for new
stores. To start with, this means we will measure
average daily sales and profits at new stores on a
local and even individual store basis rather than

But we are fortunate to have a network thatjust on a nationwide basis, as has been the casegives us access to many different channels ofin the past. This new approach, which takes into

information, notably from strategic partner

consideration differences in regional economies,

Mitsubishi Corporation, which allows us towill allow us to clearly identify profit-generating

identify prime sites ahead of competitors. Thisregions and stores in a network that covers all 47

gives us an advantage in negotiations to put

of Japan’s prefectures, and place more emphasis

stores in pivotal locations.

on franchise owners’ and Head Office profits. We
believe this is a necessary and important
prerequisite for profit-oriented management.
In recent years, we have had to contend with

07

Formed equity tie-ups
and business alliances to deliver moreconvenience to customers

intensifying competition, not just from our

In a mature market, Lawson is actively developing

traditional peers, but also from restaurants,

new convenience store formats to meet the

bento-box chains, 24-hour supermarkets andrapidly shifting and increasingly diverse needs ofother food retailers. These forces are reshaping

customers. We believe the standard convenience

our operating landscape, making it increasingly

store format is no longer capable of meeting thedifficult to find and secure prime sites for newwhole spectrum of customer needs. We are also

stores. And in Japan’s major metropolitan areas,transferring the know-how gleaned from new

there is still a need to close or relocate storesstore formats to our regular stores, thereby

due to massive changes in local operating

enhancing the competitiveness of the entire

environments.

Lawson chain.

LAWSON, INC. AR 03 21

Our so-called “antenna shops” are being usedcounters at certain stores to help patients withto test out new store formats. Natural Lawson istheir shopping. The ultimate aim is to create a

one example, a store format we have beenwarm and welcoming atmosphere so patients anddeveloping since fiscal 2001 based on thetheir relatives can relax and feel at home. The

concept of providing customers with natural,

Hospital Lawson format itself continues to evolve

healthy food. Others include stores located inas we offer an ever-growing range of services,

specific locations to meet a certain demand base.

such as experimental dry-cleaning and video

All ideas are aimed at widening the menu of usefulrental services at stores where customers haveeveryday services that Lawson provides, so as torequested them.

become an integral part of the community itself.

Lawson’s New Potentialities

Hospital Lawson

At Lawson, our perennial challenge is how to

Our hospital-based Lawson stores are all barrier

further enhance convenience for customers. In

free to make them as easy as possible for wheel-rising to this challenge, we are discarding tradi-chair-bound patients to use. This means aisles

tional thinking and seeking new solutions based

are wider, checkouts are lower, automatic doors

on whole new approaches.

are standard, and toilets are designed to accom-

Two examples are a deal with Nippon Oil

modate wheelchairs and other patients. The

Corporation to operate convenience stores at theirproduct lineup is also tailored to the needs of

ENEOS self-service stations, and a tie-up withhospital users and patients, with a full range ofJapan Post to open convenience stores in post

personal care products such as toiletries andoffices. We are also planning to establish “Conve-

slippers, and nursing and hygiene products suchnience Banks,” convenience store and banking

as adult diapers and gauze bandages. We believe

services in single locations, with regional banks.

other services already provided at regular Lawson

These banks are applying to the Financial Ser-

stores will also make the lives of both patients

vices Agency for permission for this new businessand hospital workers much more convenient:model. Also, our alliance with TSUTAYA, a major

24-hour ATM services (for participating banks

chain developed by Culture Convenience Clubonly), public utility bill payment, Loppi

Co., Ltd., enables customers to share a shopping

multimedia terminals to book tickets and orderrewards program.

other services, and the ability to use credit cards

How We Grasped the Nettle in Fiscal 2002

so patients don’t have to carry cash around withIn the past year, we made great strides in trans-them in the hospital. A number of Hospitalforming Lawson’s organizational make up, andLawson stores also have extended opening hours

there is a real spring in our step again—some-so staff on nightshift, emergency outpatients andthing many of our business partners and custom-

their families can benefit from the convenience ofers have already noticed. In fiscal 2003, we willthese stores. Other innovations include hospitality

work even harder to make sure our new initiatives
bed down and ensure our key
measures deliver results. By doing
this, we will put in place a firmbase to ensure the sustainablemedium to long-term growth of thecompany.

22

LAWSON, INC. AR 03

FINANCIAL SECTION

Consolidated Five-Year Summary

24Management’s Discussion and Analysis

25

Consolidated Balance Sheets

34

Consolidated Statements of Income

36

Consolidated Statements of Shareholders’ Equity

37

Consolidated Statements of Cash Flows38

Notes to Consolidated Financial Statements

39

Independent Auditors’ Report

51

Forward-Looking Statements
This annual report contains forward-looking statements about the future plans, strategies, beliefs and performance of Lawson and its subsidiaries. These forward-looking statements are not historical facts. They are expectations, estimates, forecasts and projections based on information
currently available to the company and are subject to a number of risks, uncertainties and assumptions, which, without limitation, include
economic trends, competition in the Japanese convenience store industry, personal consumption, market demand, the tax system and otherlegislation. As such, actual results may differ materially from those projected.
LAWSON, INC. AR 03

23

CONSOLIDATED FIVE-YEAR SUMMARYLAWSON, INC. and Consolidated Subsidiaries
Years Ended February

Thousands of
U.S. Dollars(4)Millions of Yen
2003

2002

2001

2000

1999

2003

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

¥ 149,032¥ 141,621¥ 135,237¥ 124,587¥ 115,087$ 1,265,665

80,954
20,348101,353
13,142

132,921
12,060149,458
17,808

163,707
23,922

687,507
172,807

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

250,334

256,116

280,218

291,853

302,716

2,125,979

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

34,107
8,861
33,860(3,787)(7,247)
34,162
16,07136,363
16,12344,804(44,031)(58,236)
35,191
16,32841,27916,36852,793(54,696)
18,70732,651
16,02140,18515,011
67,790121,758(92,521)30,70315,01737,073
10,67557,868(5,494)(47,539)
23,442
16,039289,656
75,253
287,558(32,161)(61,546)
290,123
136,484

At year-end:
Total assets . . . . . . . . . . . . . . . . . . . . .
Total shareholders’ equity . . . . . . . . . . .
Interest-bearing debt . . . . . . . . . . . . . .
Ratio of Interest-bearing debt . . . . . . . .
Cash and cash equivalents . . . . . . . . . .
Total number of stores . . . . . . . . . . . . .

¥ 342,599
151,864——
93,994
7,721¥ 342,934
149,827
3,140
0.9%
71,2697,824¥ 387,236
178,448
23,530
6.1%
128,655
7,749¥ 339,413
95,932
71,81721.2%
111,753
7,432¥ 411,994
83,124
166,10940.3%
14,767
7,066$ 2,909,546
1,289,715——
798,251

Number of employees (Full-time) . . . . .

3,462

3,817

4,170

4,234

4,418

Yen

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

¥

82
41

¥

146
41

¥

U.S. Dollars

148
35

¥

143
17

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

5.9%
10.0%

9.8%
10.0%

11.9%
11.4%

16.8%
10.7%

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

¥1,213,088
80,954¥1,184,204
101,353¥1,144,717
132,921¥1,073,422
149,458

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

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

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

562,777
362,979
90,569261,313

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

¥1,294,042¥1,285,557¥1,277,638

¥

102
14

$

0.70
0.35

13.7%
8.6%

¥

995,090
163,707$10,302,234
687,507528,188
350,70289,248
254,742494,090
333,580
87,818
243,309

5,099,856
2,574,081
1,174,972
2,140,832¥1,222,880¥1,158,797$10,989,741

Notes: 1. Including depreciation and amortization of intangible fixed assets.
2. The data has been restated to reflect the 1 to 50 stock split on April 14, 2000.
3. These figures, as reported by franchised stores, are unauditied.
4. The U.S. dollar amounts represent translations of Japanese yen at the approximate exchange rate at February 28, 2003, of ¥117.75=$1.

24 LAWSON, INC. AR 03

MANAGEMENT’S DISCUSSION AND ANALYSIS

Economic Overview
During the past fiscal year, there were some encouraging economic trends in Japan as exports rose early inthe year and there was a rebound in industrial activity. However, in the year’s second half, mounting concerns
about the U.S. economy along with falling stock prices held down final demand and kept consumer spending
soft. The result was a further weakening of the Japanese economy.
The Retail Industry in Japan
In the retailing sector, the pace of realignment is accelerating due to the entry of major foreign retailers andother events. Even as the retailing industry in Japan contracts, the convenience store sector continues toexpand, although at a slower pace. Although same-store sales again declined year on year, the convenience
store industry continued to capture a greater share of total retail sales in Japan. The last increase in thenumber of convenience stores in Japan occurred in 2000. In each of the subsequent three years, store
closings by the five largest convenience store operators have exceeded 1,000. The major players are currently
moving quickly to close low-volume stores while conducting large-scale programs to replace them with moreproductive stores. As the store networks of these companies grow, the number of stores at other convenience
store companies is falling. As a result, the leading convenience stores are accounting for an increasing shareof the market, a trend that is expected to continue.
Competition in the retailing industry is expected to become still more heated. One reason is the extended
operating hours of supermarkets and rising competition from restaurants. Another is plans by Seven-Eleven
Japan, the largest convenience store company in Japan, to open more stores in the Nagoya and Osaka regions.
Due to these factors, net sales at all Lawson stores increased 0.7% to ¥1,294,042 million. Operating
revenues decreased 2.3% to ¥250,334 million due to the decline in the number of company-operated stores.
Operating income decreased 6.2% to ¥34,107 million, mainly the result of expenses for a new information
management system. Other significant items affecting earnings were an increase in equity in losses ofaffiliated companies, loss on disposal of property due to the closing of company-operated stores and theprevious information management system, and higher severance benefits associated with a voluntary early
retirement program. The result was a 45.0% decline in net income to ¥8,861 million.
Convenience Store (CVS) Share of the Total Retail Market(Billions of Yen)

2003

2002

2001

2000

1999

Total retail industry annual
sales . . . . . . . . . . . . . . . . . .

130,760

136,087

139,132

141,450

143,494

CVS industry annual sales . . .

6,980

6,846

6,680

6,383

6,049

CVS share (%) . . . . . . . . . . .

5.3%

5.0%

4.8%

4.5%

4.2%

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

CVS Share of the Total Retail Market

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

(Billions of Yen)

(%)

8,000

150,000
100,000

6,000

75,000
4.2

4.5

4.8

5.0

100

62.2

62.2

62.4

62.7

63.6

75

5.3
4,000

50

2,000

25

50,00025,000
0

98

99

00

01

02

0

98

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

99

00

01

02

0

Fiscal Year

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

LAWSON, INC. AR 03

25

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

2003

2002

2001

2000

1999

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

1,294

1,282

1,275

1,221

1,157

Seven-Eleven . . . . . . . . . .

2,213

2,114

2,047

1,964

1,848

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

932

899

843

783

758

Combined share of top . .

4,439

4,295

4,165

3,968

3,763

three chains (%) . . . . .

63.6%

62.7%

62.4%

62.2%

62.2%

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

6,980

6,846

6,680

6,383

6,049

Store Network
Revision in Standards for New Stores
Until now, Lawson has based decisions on opening new stores largely on estimated average daily sales. Whileretaining this standard, Lawson has adopted a revised system that places more emphasis on returns on
investments. Variations in rents and other operating expenses in different regions of Japan mean that highsales volumes do not always translate into a high return. To reflect these regional differences, Lawson’s
revised system sets sales targets at a level in each region of Japan that is needed to achieve the necessary
return. This stance better enables Lawson to open stores in a manner that places priority on profitability. At
the same time, many low-volume and unprofitable stores have been closed or moved to better locations andcompany-operated stores have been converted to franchised operations. Due to the greater emphasis on thequality of new stores, there has been a steady improvement in returns on investment at new stores. Lawson
will continue to pay close attention to profitability when opening stores, thus further increasing Lawson’s total
return on invested capital.
Number of Stores
Due to the emphasis on opening quality stores, in Japan, there were 502 store openings during the past fiscal
year but 611 store closings, including store relocations. The largest component of store closings was theclosing or relocation of 211 company-operated stores. The result was a net decrease of 109 in the number of
Lawson stores in Japan to 7,625 as of February 28, 2003.
Although Lawson reported the first net decrease in stores in its history, this was a positive action that rid thecompany of most of its unprofitable stores, part of a series of measures aimed at removing unproductive
assets from the balance sheet. The company plans to resume increasing the number of stores from now onwhile retaining its emphasis on quality.

Total Net Sales(Consolidated)

Total Number of Stores(Consolidated)(Billions of Yen)

(Stores)

1,300

8,000

1,200

6 ,0 00

1 ,1004,0 00
1,000
2,000

900
0

98

99

00

01

02

0

98

99

Fiscal Year

■ Franchised stores■ Company-operated stores

26

LAWSON, INC. AR 03

00
Fiscal Year

01

02

In the People’s Republic of China, Shanghai Hualian Lawson Co., Ltd. increased its store network in the
Shanghai area by 6 to 96 locations. This gave Lawson a total network of 7,721 stores, 7,625 in Japan and 96
outside Japan.
Number of Stores in Lawson Network Years Ended February(Stores)

2003

2002

2001

2000

1999

Number of stores . . . . . . .

7,721

7,824

7,749

7,432

7,066

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

519

626

739

718

664

Closures . . . . . . . . . . . .

622

551

422

352

284

Net increase (decrease) . .

(103)

75

317

366

380

New Regional Headquarters System
Lawson introduced a system of regional headquarters in March 2003 for the purpose of offering services thatare even more closely rooted in each locality. Unlike in the previous system where merchandise, operations
and store development tasks were organized in a top-to-bottom fashion, the new system gives each regional
headquarters autonomy in all these areas. By facilitating speedy decision-making, this system will allow stores
to better meet regional needs. Each regional headquarters CEO has been delegated considerable authority,
thus clarifying accountability for meeting performance targets.
The regional headquarters system was first introduced in October 2002 in the Nagoya and Kansai areas. In
both cases, concrete benefits of the new system are already becoming evident.
Placement of ATMs in Stores
Since October 2001, Lawson and subsidiary LAWSON ATM Networks, Inc. have been placing ATMs in
Lawson stores. Lawson has ATM alliances with all four of Japan’s major banking groups as well as large
regional banks. As a result, almost all customers hold an ATM card that is accepted by Lawson ATMs. As of
May 2003, ATMs were placed in Lawson stores in the following prefectures: Hokkaido, Aomori, Niigata,
Nagano, Tokyo, Kanagawa, Saitama, Chiba, Aichi, Nara, Osaka, Hyogo and Nagasaki. Utilization of the ATMs
is rising steadily. Through more ATM alliances, Lawson plans to make this service even more convenient inorder to raise the frequency of customer visits and attract new customers to its stores, thus leading to higher
consolidated earnings. As of February 28, 2003, a total of 2,712 ATMs were operating at Lawson stores.

Average Number of Customers (Per Day) &Average Transaction Value (Per Customer)

Existing Store Sales(Compared with Previous Year)(People, Yen)

(%)

800

100
616

614

620

611

99.0

609

99.6

6 00

400

98.3

98.4

98.1

00

01

02

95

200

0

98

99

00
Fiscal Year

01

02

90

98

99

Fiscal Year

■ Customers
Transaction value per customer (Yen)

LAWSON, INC. AR 03 27

New Lawson Store Formats
As of February 28, 2003, Lawson was operating 12 of its Natural Lawson format stores to gauge market
response. To date, much useful data have been collected. These stores have been used for a number of tests,
such as the sale of bento-boxes that allow customers to select contents and the inclusion of in-store bakeries.
In addition, Natural Lawson corners have been set up in selected Lawson stores, enabling this category to
make an increasing contribution to sales. Regarding other formats, there are currently four Lawson stores
located in hospitals. Lawson views this as an attractive growth opportunity, in part because of Japan’s aging
population, and plans to increase the number of these stores. Lawson will continue to experiment with newstore formats to expand its network in more ways and create new opportunities for growth.
Outlook
The past fiscal year was a period when Lawson took measures required to position the company for long-term
growth in an extremely challenging operating environment. The benefits of these actions are expected to
become evident in the fiscal year ending in February 2004. The company expects earnings per share toincrease approximately twofold. Lawson’s ongoing disposal of negative assets and cost savings from personnel
reductions are expected to be the primary sources of the projected growth in earnings.
One of the most urgent issues at Lawson is increasing the number of customers. Although there was an
upturn in the number of customer visits on a same-store basis late in the past fiscal year, total customer visits
nevertheless were lower for the entire fiscal year. Lawson plans to increase sales and attract more customers
by offering a more appealing merchandise selection, forming more alliances with other companies andthrough other means. Plans further call for a net increase of between 200 and 300 in the number of storeseach year beginning with the fiscal year ending in February 2004. Leasing expenses will increase because
most new stores will be located in the Tokyo, Nagoya and Osaka areas and many new stores will havecontracts requiring the payment of leasing expenses by Lawson. However, this is expected to be offset by
growth in fees paid by store operators.
Earning will be pressured by depreciation expenses resulting from investments to upgrade existing stores.
Furthermore, Lawson foresees an increase in leasing fees and depreciation expenses following the completionof investments in the new LETSS information management system in the past fiscal year. Despite theseincreases, Lawson expects to reduce its total operating expenses in the fiscal year ending in February 2004
primarily through a far-reaching cost-cutting program centered on the procurement of raw materials.
Earnings at group companies are expected to improve. Through the measures outlined here, Lawson will
make a concerted effort to reach its target of consolidated operating income of ¥50 billion in the fiscal year
ending in February 2005. Lawson also plans to raise its ROE to at least 15% in the fiscal year ending February
2004 by raising earnings and using its substantial cash flows to repurchase shares.

Average Daily Sales

Third-Party Bill
Settlement Service(Thousands of Yen)

(Millions of Yen)

500

900,000

100
82.4

800,000

400

91.9

70.4

7 00,000
3 00

58.0
600,000

200
500,000
1 00
0

400,000
98

99

00
Fiscal Year

■ All stores■ New stores

28

LAWSON, INC. AR 03

01

02

0

98

99

00

01

Fiscal Year■ Transaction volume
No. of settlements (Millions of transactions)02

Store Operation Analysis
Net Sales
Net sales at all Lawson stores increased 0.7% to ¥1,294,042 million. This was due mainly to an approximate
10 percentage point improvement in the store operation rate due to a more even rate of store openings. Thiscountered the effect of a net decrease in the number of stores.
By product category, sales of fast foods and processed foods increased while sales of daily delivered foods
and non-food products decreased.

(a) Existing Store Sales
Same-store sales had been declining each year since the fiscal year that ended in February 1999. Persistently
soft consumer spending, an extended period of deflation, intense price and value-based competition from therestaurant and ready-made food industry, and the start of 24-hour operations by supermarkets have allcontributed to the sales decline. Same-store sales have now recovered due to the success of new main dishes
such as Onigiriya rice balls and Area Ichioshi bento-boxes.
(b) Average daily sales
Average daily sales at all Lawson stores was ¥489,000, unchanged from the previous fiscal year. This was the
combination of weak sales at existing stores and higher sales at stores opened in the previous fiscal year.
Average daily sales at new stores was ¥457,000, ¥26,000 higher than in the previous fiscal year. This
improvement was attributable to the concentration of store openings in large urban areas and measures toimprove the quality of new stores, such as by using a more powerful new store sales forecasting system.
Sales by Product Category
Sales of processed foods increased 2.9% because of the popularity of chilled beverages and Lawson’s seriesof ¥100 confections. In fast foods, sales rose 2.0% on the strength of prepared noodle dishes such as
yakisoba and yakiudon. Sales of daily delivered foods were down 8.3% because of weakness in the dessert
and fresh foods categories. As a result, total food sales increased 1.0%. Sales of non-food products
decreased 0.7% as weakness in cosmetics and magazines offset strong sales of DVDs and videotapes of the
popular animated feature Spirited Away.

Loppi (Multimedia Terminal)
Transaction Volume

Breakdown of Selling, Generaland Administrative Expenses(Billions of Yen)

(Millions of Yen)120

1 6 0 ,000

100
120,000
80
80,00060
40

40,000
20
0

98

99

00

01

02

0

Fiscal Year

■ Concert tickets■ Game software*■ Travel tickets■ Other sales■ Entertainment andother related sales■ Bill settlement■ Others*From the year under review, sales of game software areincluded in entertainment and other related sales.

98

99

00

01

02

Fiscal Year

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

LAWSON, INC. AR 03

29

Breakdown of Net Sales by Product Segment Years Ended February(Millions of Yen)

2003

2002

2001

2000

1999

Procesed foods . . . . . . . . .

¥ 600,508¥ 583,712¥ 562,777¥ 528,188¥ 494,090

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

303,098

297,030

362,979

350,702333,580

Daily delivered foods . . . . .

138,353

150,862

90,56989,24887,818Non-food products . . . . . .

252,083

253,953

261,313254,742

243,309

Net sales of all stores . . .

¥1,294,042¥1,285,557¥1,277,638¥1,222,880¥1,158,797

Note: Effective from the fiscal year ended February 28, 2003, bakery items were reclassified from “fast foods” to “daily delivered foods,”
while pickles and some delicatessen items were reclassified from “daily delivered foods” to “fast foods.”

Ratio of Net Sales by Product Segment Years Ended February

(%)

2003

2002

2001

2000

1999

Processed foods . . . . . . . .

46.4

45.4

44.1

43.2

42.6

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

23.4

23.1

28.4

28.7

28.8

Daily delivered foods . . . . .

10.7

11.7

7.1

7.3

7.6

Non-food products . . . . . .

19.5

19.8

20.4

20.8

21.0

Net sales of all stores . . .

100.0

100.0

100.0

100.0

100.0

Bill Settlement Services and Loppi
Bill settlement volume, which mainly represents the processing of utility payments, increased 9.9% to¥817,656 million, generating commissions of ¥5,990 million, an increase of 5.3%.
Sales through Lawson’s Loppi multimedia terminals surged 58.2% to ¥118.7 billion. Driving this growth was
the popularity of Spirited Away DVDs and videos, membership applications for fan clubs of various celebrities,
and growth in photo printing.

Operating Income

Net Income(Millions of Yen)

(Millions of Yen)

50,00020,00040,00016,00030,00012,00020,0008 ,00010,000

4,000

0

98

99

00
Fiscal Year

30 LAWSON, INC. AR 03

01

02

0

98

99

00
Fiscal Year

01

02

Income and Expenses
Operating revenues decreased ¥5,782 million, or 2.3%, to ¥250,334 million. There were increases infranchise commissions due to higher sales at franchised stores and in ATM fees at subsidiary LAWSON ATM
Networks. However, this growth was outweighed by the decline in sales at company-operated stores as manyof these stores were closed or converted to franchised stores.
Operating income decreased ¥2,256 million, or 6.2%, to ¥34,107 million, declining 0.6 percentage point to13.6% of operating revenues. There was a ¥11,815 million increase in selling, general and administrative
expenses because of growth in ATM operating expenses, higher store leasing expenses and an increase inleasing expenses for a new store computer system.
Net income fell ¥7,262 million, or 45.0%, to ¥8,861 million. There were ¥5,778 million in gains on sales ofstock, but losses of ¥4,322 million for higher severance benefits associated with a voluntary early retirement
program and ¥9,691 million on the disposal of property and store equipment resulting from the closing of lowvolume and unprofitable stores. Equity in losses of affiliated companies was ¥2,134 million, primarily the
result of losses resulting from start-up investments at affiliate LAWSON CS Card, INC.
Subsidiaries
The consolidated financial statements include five consolidated subsidiaries and one equity-method affiliate.
The Lawson group of companies is primarily engaged in convenience stores, ticket sales, e-commerce andfinancial services. Please refer to the following page for operating results of the consolidated subsidiaries.
ProfilesLawson Tickets Co., Ltd. (Consolidated subsidiary)
Sales of tickets to sporting events, movies and other events, mainly through Loppi multimedia terminals at
Lawson stores.
Shanghai Hualian Lawson Co., Ltd. (Consolidated subsidiary)
Operation of Lawson store network in the Shanghai area.
LAWSON e-Planning, Inc. (Consolidated subsidiary)
Idea incubation, business planning and promotion, and partnering with companies outside the retailing
sector, alliances and assistance for venture companies, all for the purpose of developing e-business ventures.
This company terminated its operations at the end of August 2002.
i-Convenience, Inc. (Consolidated subsidiary)
Operation of the official “iLAWSON” i-mode Internet site, including merchandise sales and the provision ofservices and information.

Interest-bearing Debt & Cash andCash Equivalents

Return on Equity
Return on Assets(Millions of Yen)

(%)
20

40.3

160,000

16.8

15120,000

11.9

13.7
21.2

10

80,000

10.7

11.4

9.8
10.0

10.0

8.6
5.9
40,000

5

6.1
0.9

0

98

99

00

01

0.0

0

02

Fiscal Year

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

98

99

00

01

02

Fiscal Year

ROE
ROA

LAWSON, INC. AR 03

31

LAWSON ATM Networks, Inc. (Consolidated subsidiary)
Placement, management and operation of jointly operated ATMs in Lawson stores; outsourcing of clericaltasks for partner banks involving financial services such as deposits, withdrawals and fund transfers
performed through these ATMs.
LAWSON CS Card, INC. (Equity-method affiliate)
Issues credit cards to Lawson customers and extends card-based services through Loppi terminals and otherchannels. LAWSON CS Card posted a large loss due to start-up expenses in the fiscal year under review, butplans to clear losses by the year ending February 2005 through a steady increase in cardholders.
Operating Results of Group Companies Years Ended February(Millions of Yen)

LawsonTickets
Co., Ltd.

Shanghai
HualianLawsonCo., Ltd.(1)LAWSONATM
Networks,Inc.

LAWSON
e-Planning,Inc.

i-Convenience,
Inc.

LAWSONCS Card,
INC.

Consolidated
subsidiary

Consolidated
subsidiary

Consolidated
subsidiary

Consolidated
subsidiary

Consolidated
subsidiary

Equity-method
affiliate

2001
Operating revenues . . . . . .
Operating income (loss) . . .
Net income (loss) . . . . . . . .

¥4,514510
642¥2,292
(149)
(168)

¥

—
—
—

¥ 159
20
11

¥

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

¥5,119508
275¥3,033(183)(146)¥1,248
(303)
(326)

¥178
22
5

¥ 103
(473)
(470)

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

¥5,426788
387¥2,642(191)(190)¥6,718
(529)
(529)

¥ 69
9
(1)

¥ 213
(383)
(489)

Note 1: Shanghai Hualian Lawson Co., Ltd. has a December 31 balance sheet date.

Total Assets

Shareholders’ Equity & Equity Ratio(Millions of Yen)

(Millions of Yen)

400,000

200,000

300,000

1 50,000

200,000

1 00,000

1 00,000

50,000

46.1

43.7

44.3

01

02

28.3

20.2

0

98

99

00

01

02

0

98

Fiscal YearLAWSON, INC. AR 03

00
Fiscal Year

■ Shareholders’ equity
Equity ratio (%)

32

99

0
(58)
(70)

¥

—
—
—
0
(1)
(5)

¥

858
(3,935)(3,936)

Financial Position
Current assets declined ¥273 million, or 0.2%, to ¥130,948 million. There was a ¥22,725 million increase in
cash and cash equivalents mainly because of proceeds from bond redemptions and the sale of stock but a¥24,893 million decrease in marketable securities. This caused the current ratio to increase by 0.9
percentage point to 101.4%. Working capital increased ¥1,154 million to ¥1,862 million.
Property and store equipment increased ¥1,137 million, or 1.5%, to ¥77,573 million, primarily reflecting an
increase in buildings and structures. Investments and other assets decreased ¥1,199 million to ¥134,078
million. There was a ¥3,231 million increase in software, mainly resulting from investments in the new store
information system, a ¥1,457 million increase in investments in affiliated companies, and a ¥7,137 million
decrease in investments in securities due to sales.
Current liabilities decreased ¥1,427 million, or 1.1%, to ¥129,086 million. The main components were a¥5,164 million increase in deposits, the result of growth in companies for which Lawson collects bills, a
decrease of ¥1,677 million in accounts payable because of the net decrease in the number of stores, and adecrease of ¥2,931 million in income taxes payable.
Long-term liabilities decreased ¥897 million, or 1.5%, to ¥59,419 million. This was mainly due to a ¥1,666
million decline in guarantee deposits and a ¥780 million increase in liability for employees’ retirement benefits.
Shareholders’ equity increased ¥2,037 million, or 1.4%, to ¥151,864 million. Although there was a net
unrealized loss on available-for-sale securities of ¥2 million, ¥2,325 million less than the prior year’s
unrealized gain, the land revaluation difference improved by ¥1,491 million and retained earnings increased¥2,959 million. This raised the equity ratio from 43.7% to 44.3%.
Cash FlowsNet cash provided by operating activities decreased ¥10,944 million to ¥33,860 million. This was mainly
attributable to lower income before income taxes and minority interest, a decrease in accounts payable andan increase in income taxes paid.
Net cash used in investing activities decreased ¥40,244 million to ¥3,787 million. This decline was mainly
the result of an increase of ¥35,778 million in net purchases of marketable securities compared with the priorfiscal year. Purchases of property and store equipment were largely unchanged at ¥22,543 million as thecompany concentrated on opening productive stores and made investments to relocate and close
unprofitable stores and adopt a new information system.
Free cash flows, the sum of operating and investing cash flows, decreased ¥6,478 million to ¥5,180
million, excluding gains on securities.
Net cash used in financing activities decreased ¥50,989 million to ¥7,247 million. This difference wasmainly attributable to an expenditure of ¥34,675 million for the purchase of treasury stock in the prior fiscal
year. Major uses of cash in the current fiscal year were debt repayments of ¥3,140
million and dividend payments of ¥4,412 million.
The net result of these cash flows was a ¥22,725 million increase in cash and cash
equivalents to ¥93,994 million.

Cash Flows(Millions of Yen)
150,000
100,000
50,0000-50,000-100,000

98

99

00

01

02

Fiscal Year

■ Operating activities■ Investing activities■ Financing activities

LAWSON, INC. AR 03

33

CONSOLIDATED BALANCE SHEETSLAWSON, INC. and Subsidiaries
February 28, 2003 and 2002

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

ASSETS

2003

2002¥ 93,994
150
5,445¥ 71,269
796
30,338

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

6,197
13,396
(40)
2,097
1,881
5,287

59,779135,575(790)
12,671
20,76438,319Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

130,948

131,221

1,112,085

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

6,178
88,71654,665

6,536
82,26779,03652,467753,427
464,246

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

149,559(71,986)

167,839(91,403)

1,270,140(611,346)

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

77,57376,436

658,794

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

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

8,112
322
5,971
91,277
8,060
6,088
13,353
3,067
(973)

8,280
15,10876,076760,076
75,73742,539140,841
32,137(12,127)

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

134,078

135,277

1,138,667

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

¥342,599¥342,934$2,909,546

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

See notes to consolidated financial statements.

34 LAWSON, INC. AR 03

2003

$

798,251
1,274
46,242

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

LIABILITIES AND SHAREHOLDERS’ EQUITY

2003

2002

2003

CURRENT LIABILITIES:Current portion of long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts payable:
Trade for Company-operated and franchised stores (Notes 8 and 14) . . . . . .
Due to franchised stores (Note 9) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other (Note 8) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income taxes payable (Note 12) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Money held as agent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued expenses and other current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . .

¥ 63,860
4,799
15,348
7,615
33,0304,434

62,1804,904
17,450
10,54627,8664,427$ 542,335
40,756130,344
64,671
280,51037,656

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

129,086

130,513

1,096,272

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

3,786
223
54,207
782
421

3,006
300
55,806849
355

32,153
1,894
460,357
6,641
3,575

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

59,41960,316504,620MINORITY INTERESTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2,230

2,278

18,939SHAREHOLDERS’ EQUITY (Notes 11 and 15):
Common stock—authorized, 412,300,000 shares in 2003
and 2002; issued, 107,600,000 shares in 2003 and 2002 . . . . . . . . . . . . . . .
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Land revaluation difference . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net unrealized (loss) gain on available-for-sale securities . . . . . . . . . . . . . . . . . .
Net foreign currency translation adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . .

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

58,507
41,52055,649(8,407)2,323
236

496,875
352,611497,732(58,744)
(17)
1,274

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Treasury stock—at cost, 565 shares in 2003 and 171 shares in 2002 . . . . . . . .

151,866(2)

149,828(1)

1,289,731(16)

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

151,864

149,827

1,289,715

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

¥342,599¥342,934$2,909,546

¥

3,140

LAWSON, INC. AR 03

35

CONSOLIDATED STATEMENTS OF INCOMELAWSON, INC. and Subsidiaries
Years Ended February 28, 2003 and 2002

Thousands of
U.S. Dollars(Note 1)Millions of Yen
2003

2002

2003

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

¥ 149,032
80,954
20,348¥ 141,621
101,353
13,142$1,265,665
687,507
172,807

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

250,334

256,116

2,125,979

COST AND OPERATING EXPENSES:
Cost of sales for Company-operated stores (Notes 13 and 14) . . . . . . . . . . . . . .
Selling, general and administrative expenses (Notes 10 and 13) . . . . . . . . . . . .

59,889156,338

75,230144,523

508,612
1,327,711

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

216,227

219,753

1,836,323

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

34,10736,363289,656

200
5,778

12

1,699
49,070OTHER INCOME (EXPENSES):Interest income—net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gain on sales of investments securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gain on securities contributed to an employees’ retirement benefit trust . . . . . .
Premium severance benefit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loss on disposal of property and store equipment . . . . . . . . . . . . . . . . . . . . . . .
Loss on sales of property and store equipment . . . . . . . . . . . . . . . . . . . . . . . . .
Equity in losses of associated companies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other—net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(4,322)(9,691)(58)(2,134)(6,277)3,857(2,685)(6,017)(1,140)(142)(1,220)(36,705)(82,301)(493)(18,123)(53,308)

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

(16,504)(7,335)(140,161)

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

¥ 17,603¥ 29,028

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

7,852
1,339

13,212
47

66,684
11,371

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

9,191

13,25978,055MINORITY INTERESTS IN NET INCOME . . . . . . . . . . . . . . . . . . . . . . . . . . .

449

354

3,813

8,861

¥ 16,123

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

¥

$

$

Yen

See notes to consolidated financial statements.

36

LAWSON, INC. AR 03

¥

82
41

75,253
U.S. Dollars

2003

PER SHARE OF COMMON STOCK (Notes 2.n and 15):
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

149,495

2002

¥

146
41

2003

$

0.70
0.35

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITYLAWSON, INC. and Subsidiaries
Years Ended February 28, 2003 and 2002

Thousands

Millions of Yen

IssuedNumber ofCommonStockCommonStock

Additional
Paid-in
CapitalBALANCE, MARCH 1, 2001 . . . . . . .
Net income . . . . . . . . . . . . . . . . . .
Annual cash dividends,¥18 per share . . . . . . . . . . . . . . .
Interim cash dividends,¥20 per share . . . . . . . . . . . . . . .
Land revalued . . . . . . . . . . . . . . . .
Net increase in unrealized gain on
available-for-sale securities . . . . .
Net increase in foreign currencytranslation adjustments . . . . . . .
Treasury stock—at cost:
Purchase of treasury stock . . . .
Cancellation of treasury stock . . .
Increase in treasury stock(171 shares) . . . . . . . . . . . . . .

114,900¥ 58,507¥ 41,520

BALANCE, FEBRUARY 28, 2002 . . .
Net income . . . . . . . . . . . . . . . . . .
Annual cash dividends,¥21 per share . . . . . . . . . . . . . . .
Interim cash dividends,¥20 per share . . . . . . . . . . . . . . .
Reversal of land revaluationdifference . . . . . . . . . . . . . . . . . .
Net decrease in unrealized gain
on available-for-sale securities . . .
Net decrease in foreign currencytranslation adjustments . . . . . . . .
Increase in treasury stock(394 shares) . . . . . . . . . . . . . . . .

107,600

Retained
Earnings

Land
Revaluation
Difference

Unrealized
Gain (Loss)on Availablefor-sale
Securities

Net
Foreign
Currency
Translation
Adjustments

TreasuryStock¥ 78,421
16,123(2,068)(2,152)¥ (8,407)¥ 2,323¥ 236(7,300)¥(34,675)
34,675(34,675)(1)

BALANCE, FEBRUARY 28, 2003 . . . 107,600

58,507

41,52055,6498,861(8,407)

2,323

236

(1)

(2,260)(2,152)(1,490)1,490(2,325)(86)(1)¥58,507¥41,520¥58,608¥ (6,917)

¥

(2)

¥150

Land
Revaluation
Difference

Unrealized
Gain (Loss)on Availablefor-sale
Securities

Net
Foreign
Currency
Translation
Adjustments$(71,398)$19,728$2,004¥(2)

Thousands of U.S. Dollars (Note 1)

BALANCE, FEBRUARY 28, 2002 . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . .
Annual cash dividends, $0.18 per share . . . . .
Interim cash dividends, $0.17 per share . . . . .
Reversal of land revaluation difference . . . . . .
Net decrease in unrealized gain on
available-for-sale securities . . . . . . . . . . . . . .
Net decrease in foreign currencytranslation adjustments . . . . . . . . . . . . . . . . .
Increase in treasury stock (394 shares) . . . . . .

CommonStock

Additional
Paid-in
Capital$496,875$352,611

BALANCE, FEBRUARY 28, 2003 . . . . . . . . . . . . $496,875

Retained
Earnings$472,602
75,253(19,193)(18,276)(12,654)

Treasury
Stock

$ (8)

12,654(19,745)(730)(8)$352,611$497,732$(58,744) $(17) $1,274$(16)

See notes to consolidated financial statements.

LAWSON, INC. AR 03

37

CONSOLIDATED STATEMENTS OF CASH FLOWSLAWSON, INC. and Subsidiaries
Years Ended February 28, 2003 and 2002

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

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

2003

2002

2003

¥ 17,603¥ 29,028$ 149,495(10,782)
16,071(8,500)16,328(91,567)
136,484(3,857)
567
4,571
1,140
142
1,267

4,314
66,599493(49,070)
18,12332,603(3,065)
596
753
(493)
5,164
373

(631)
491
408
5,823
3,035
326

(26,030)
5,062
6,395
(4,187)43,856
3,167

703(6,099)5,970(1,599)
(67)

786
(21)

(13,580)(569)

16,257

15,776

138,063

33,86044,804

287,558

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

(25,532)
50,4258,300(22,543)(1,382)(13,055)(44,957)
34,072
2,433(22,249)(2,947)(10,383)(216,832)
428,238
70,488(191,448)(11,737)(110,870)

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

(3,787)(44,031)(32,161)(3,140)(4,412)306(26,667)(37,469)
2,598

Total adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash provided by operating activities

FINANCING ACTIVITIES:
Repayment of long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash dividends paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
New shares issued to minority shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchase of treasury stock for cancellation . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Treasury stock—at cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

508
7,842
58
(5,778)
2,134
3,839

(1)

(20,390)(4,220)1,050(34,675)(1)

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

(7,247)(58,236)(61,546)

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

(101)

77

(857)

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

22,725(57,386)

192,994(8)

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

71,269128,655

605,257

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

¥ 93,994¥ 71,269$ 798,251

See notes to consolidated financial statements.

38 LAWSON, INC. AR 03

NOTES TO CONSOLIDATED FINANCIAL STATEMENTSLAWSON, INC. and Subsidiaries
Years Ended February 28, 2003 and 2002

1. BASIS OF PRESENTINGCONSOLIDATEDFINANCIAL STATEMENTS

2. SUMMARY OF
SIGNIFICANTACCOUNTING POLICIESThe accompanying consolidated financial statements have been prepared in accordance with theprovisions set forth in the Japanese Securities and Exchange Law and its related accounting regulations, and in conformity with accounting principles and practices generally accepted in Japan, which
are different from International Financial Reporting Standards in certain respects as to applicationand disclosure requirements. The consolidated financial statements are not intended to present thefinancial position, results of operations and cash flows in accordance with accounting principles andpractices generally accepted in countries and jurisdictions other than Japan.
In preparing these consolidated financial statements, certain reclassifications and rearrangements
have been made to the consolidated financial statements issued domestically in order to present
them in a form which is more familiar to readers outside Japan.
Certain reclassifications have been made in the 2002 financial statements to conform to the 2003
presentation.
The consolidated financial statements are stated in Japanese yen, the currency of the country inwhich LAWSON, INC. (the “company”) is incorporated and operates. The translations of Japanese
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 ¥117.75 to $1, the approximate rate of exchange at
February 28, 2003. 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”) indirectly owned 32,389 thousand shares of common stockof the Company as of February 28, 2003 which represented 30.1% of the Company’s shares.
Accordingly, Mitsubishi is a principal shareholder.

a. Consolidation—The consolidated financial statements include the accounts of the Company andits subsidiaries (together the “Companies”).
Under the control or influence concept, those entities in which the Company, directly or indirectly,
is able to exercise control over operations are fully consolidated, and those entities over which theCompanies have the ability to exercise significant influence are accounted for by the equity method.
The excess of the cost of the Company’s investments in consolidated subsidiaries and associatedcompanies over the fair value of the net assets at the dates of acquisition is being amortized over a
period of 5 years.
All significant intercompany balances and transactions have been eliminated in consolidation. All material unrealized profit included in assets resulting from transactions within the Companies is eliminated.
b. Franchise Agreement and Basis of Recognizing Franchise Commission—The Company operates
principally in a single industry commonly classified as the convenience store business with its own
stores and franchised stores. The Company allows each independent franchisee to operate relatively
small-sized convenience stores using specific designs and the Lawson brand names, and provides
related managerial or technical know-how under a franchise agreement. Under the agreement, allfranchised stores are provided with a variety of services and advice on the operation of convenience
stores from the Company as the franchisor. In return, such franchised stores are required to pay
continuing franchise commissions to the Company based on certain percentages of the respective
franchised store’s annual gross margin. As the franchisor, the Company accounts for franchisecommissions on an accrual basis by reference to the annual gross margin earned by each franchised store and the applicable commission percentage. According to the franchise agreement, afranchised store may pay additional guarantee deposits twice of the average monthly sales amountsof respective stores and pay a lower commission percentage.
The term of a franchise agreement is effective for 10 years from the commencement date of a
new store’s operation as a franchised store, and may be extended or renewed upon expiration subject to renegotiation of contract terms between the Company and the franchisee.
The franchise agreement usually provides that the franchised store shall make a cash payment to
the Company in the amount of ¥3 million upon commencement. Upon receipt of such payment,¥1.5 million is credited to income of the Company as “Operating revenues—franchise commission
from franchised stores” for services related to the opening of the Lawson store. The remaining
amount received by the Company is credited to “Due to franchised stores” account and then applied
to working capital for purchases of merchandise and supplies for the franchised store.

LAWSON, INC. AR 03 39

As part of the contractual obligations of the franchisor under the agreement, the Company generally provides franchisees with furniture, fixtures and equipment designed for the Lawson stores. In
some cases, franchisees may also be provided with the land or buildings of the stores. However, theCompany does not require the franchisees to make lease payments related to the stores. Instead, ahigher percentage applicable to the gross margin would be used as the basis for determining the
franchise commissions. The portion of franchise commission attributable to property and store
equipment leases is not separately accounted for by the Company.

c. Cash and Cash Equivalents—Cash and cash equivalents include cash on hand, demand deposits
and short-term investments, which mature or become due within three months of the date ofacquisition and which are readily convertible into cash and are exposed to insignificant risk ofchanges in value.
d. Inventories—Inventories are stated at cost determined by the retail method as generally appliedin the retail industry.
e. Marketable and Investment Securities—Marketable and investment securities are classified andaccounted for, depending on management’s intent, as follows: (1) held-to-maturity debt securities,
which are expected to be held to maturity with the positive intent and ability to hold to maturity arereported at amortized cost and (2) available-for-sale securities, which are not classified as the aforementioned securities, are stated at fair value based on market quotation. Unrealized gains andlosses with net of applicable taxes are reported in a separate component of shareholders’ equity.
The cost of securities sold is determined based on the moving-average method.
Non-marketable available-for-sale securities are stated at cost determined by the moving-averagemethod. For other than temporary declines in fair value, non-marketable available-for-sale securities
are reduced to net realizable value by a charge to income.
f. Property and Store Equipment—Property and store equipment are stated at cost except for land(see Note 6). Depreciation is computed by the declining-balance method at rates based on the estimated useful lives of the assets. The range of useful lives is principally from 10 to 34 years for buildings and structures and from 5 to 8 years for furniture, fixtures and equipment.
g. Software—Software used by the Companies is amortized using the straight-line method based on
the estimated useful life (mainly 5 years).
h. Employees’ Retirement Benefits—The Companies participate in a group employees’ welfare pension fund plan and also have unfunded retirement benefit plans for employees, both of which aredefined benefit plans. The Companies accounted for the liability for retirement benefits based on the
projected benefit obligations and plan assets at the balance sheet date.
In March and May 2001, the Company contributed certain cash and available-for-sale securities
to the trusts for employees’ retirement benefit plans, and recognized a non-cash gain of ¥3,857 million for the year ended February 28, 2002.
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 the notes to the consolidated financial
statements.

40

LAWSON, INC. AR 03

k. Income Taxes—The Companies provide for income taxes applicable to all items included in the
consolidated statements of income regardless of when such taxes are payable. Deferred income
taxes are recorded to reflect the impact of temporary differences between assets and liabilities recognized for financial reporting purposes and such amounts recognized for tax purposes. 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 arereflected in the financial statements for the following year upon shareholders’ approval.
m. Foreign Currency Financial Statements—The balance sheet accounts of the consolidated foreign subsidiary 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 were shown as “Foreign currency translation adjustments” in a separate
component of shareholders’ equity. Revenue and expense accounts of consolidated foreign subsidiary are translated into yen at the current exchange rate.
n. Per Share Information—Effective March 1, 2002, the Company adopted a new accounting
standard for earnings per share of common stock issued by the Accounting Standards Board of Japan. Under the new standard, basic net income per share is computed by dividing net income
available to common shareholders, which is more precisely computed than under previous practices, by the weighted average number of common shares outstanding for the period. There was nomaterial impact. The average number of common shares used in the computation were107,600 thousand shares for 2003 and 110,780 thousand shares for 2002.
Fully diluted net income per share is not disclosed because the Company did not have any convertible bonds, bonds with warrants or stock options which would have resulted in a dilutive effect.
Cash dividends per share presented in the accompanying consolidated statements of income are
dividends applicable to the respective years including dividends to be paid after the end of the year.

3. ACCOUNTS RECEIVABLE—DUE FROM FRANCHISEDSTORES

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

LAWSON, INC. AR 03 41

4. PROPERTY AND

Property and store equipment as of February 28, 2003 and 2002 consisted of the following:

STORE EQUIPMENT
Thousands of
U.S. Dollars

Millions of Yen
2003

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

5. MARKETABLE AND

¥

2002

938
79,35844,531

¥

2003

893
70,04964,729$7,966
673,953
378,183

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

124,827
60,061

135,671
74,6001,060,102
510,072

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

64,766

61,071550,030

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

5,240
9,358
10,134

5,643
12,21814,30744,501
79,47386,064

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

24,732
11,92532,16816,803210,038
101,274

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

12,807

15,365

108,764

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

¥ 77,573¥ 76,436$ 658,794

Marketable and investment securities as of February 28, 2003 and 2002 consisted of the following:

INVESTMENT SECURITIESThousands of
U.S. Dollars

Millions of Yen
2003

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

2002

2003

¥ 5,445¥ 30,338

975

8,112

$

46,242
8,280

The carrying amounts and aggregate fair values of marketable and investment securities at February 28, 2003 and 2002 were as follows:
Millions of Yen

February 28, 2003

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

42 LAWSON, INC. AR 03

Cost

Unrealized
Gains

Unrealized
Losses

¥ 936
5,445

¥1
1

¥3
2

Fair Value(CarryingAmount)

¥

934
5,444

Millions of Yen

February 28, 2002

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

Cost

Unrealized
Gains

Unrealized
LossesFair Value(CarryingAmount)¥ 4,047
30,338¥4,7142¥708
13¥ 8,053
30,327

Thousands of U.S. Dollars

February 28, 2003

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

Unrealized
Gains

Cost

$ 7,949
46,242$

Unrealized
LossesFair Value(CarryingAmount)$ 25
16$ 7,932
46,2348
8

Available-for-sale securities and held-to-maturity securities whose fair value is not readily determinable as of February 28, 2003 and 2002 were as follows:
Carrying AmountThousands of
U.S. Dollars

Millions of Yen

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

2003

2002

2003

¥41

¥59

$348

Proceeds from sales of available-for-sale securities for the years ended February 28, 2003 and2002 were ¥8,300 million ($70,488 thousand) and ¥2,433 million, respectively. Gross realized
gains and losses on these sales, computed on the moving average cost basis, were ¥5,764 million($48,951 thousand) and ¥51 million ($433 thousand), respectively for the year ended February 28,
2003, and ¥21 million and ¥105 million, respectively for the year ended February 28, 2002.

6. LAND REVALUATION

Under the “Law of Land Revaluation,” promulgated on March 31, 1998 and revised on March 31,
1999 and 2001, the Company chose a one-time revaluation of its own-use land to a value based onreal estate appraisal information as of February 28, 2002.
The resulting land revaluation difference represents unrealized depreciation of land and is stated,
net of income taxes, as a component of shareholders’ equity. There was no effect on the consolidated statements of income. Continuous readjustment is not permitted unless the land value subsequently declines significantly.
As at February 28, 2003, the carrying amount of the land after the above one-time revaluation exceeded the market value by ¥461 million ($3,915 thousand).

LAWSON, INC. AR 03 43

7. LEASE DEPOSITS

Under certain circumstances, the Company leases land and/or buildings, as a lessee, for its offices
and company-operated stores or for franchisees to operate as franchised stores. The leases are
based on long-term, cancelable lease agreements with owners. In connection with such agreements, the lessor requires leasehold deposits equivalent to approximately several months’ rent,
which are non-interest bearing and refundable only when the leases are terminated.
Lease deposits as of February 28, 2003 and 2002 consisted of the following:Thousands of
U.S. Dollars

Millions of Yen

8. ACCOUNTS PAYABLE—
TRADE FOR COMPANYOPERATED AND
FRANCHISED STORESAND OTHER

2003

2002

2003

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

¥74,525¥72,740$632,909

14,974

18,537

127,167

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

¥89,499¥91,277$760,076

The balances of “Accounts payable—trade for Company-operated and franchised stores” represent
the amounts payable to vendors for merchandise purchased by Company-operated stores and franchised stores. The Company centralizes all merchandise purchasing procedures both for Companyoperated stores and franchised stores and makes collective payments to vendors (see Note 3).
Accounts payable—trade for Company-operated and franchised stores and others as of February
28, 2003 and 2002 were summarized below:
Thousands of
U.S. Dollars

Millions of Yen

9. ACCOUNTS PAYABLE—
DUE TO FRANCHISEDSTORES

44 LAWSON, INC. AR 03

2003

2002

2003

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

¥60,269¥57,702$511,838

18,93921,928160,841

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

¥79,208¥79,630$672,679

The cost of merchandise supplied to the franchised stores is recorded as “Accounts receivable—
due from franchised stores” as described in Note 3.
All franchised stores make remittances of cash proceeds from daily sales to the Company. In certain instances, the remittance from a franchised store exceeds the balance of “Accounts receivable—due from franchised stores.” In the accompanying consolidated balance sheets, such excess
balances are presented as “Accounts payable—due to franchised stores.”10. EMPLOYEES’RETIREMENT BENEFITS

Most of the employees of the Companies are covered by two defined benefit plans, a group employees’ pension plan and unfunded retirement benefit plans.
Under most circumstances, employees terminating their employment are entitled to retirement
benefits determined based on the rate of pay at the time of termination, years of service and certain
other factors. Such retirement benefits are made in the form of a lump-sum severance payment
from the Company or from certain subsidiaries and on annuity payment from a trustee. Employees
are entitled to larger payments if the termination is involuntary, by retirement at the mandatory retirement age, by death, or by voluntary retirement at certain specific ages prior to the mandatory retirement age.
Funded status of these plans as of February 28, 2003 and 2002 are as follows:
Thousands of
U.S. Dollars

Millions of Yen
2003

2002

2003

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

¥ 23,535(14,111)955(6,593)¥ 21,720(14,226)
1,060(5,548)$ 199,873(119,838)
8,110(55,992)

Net liability . . . . . . . . . . . . . . . . . . . . . . . . .

¥ 3,786¥ 3,006$ 32,153

The components of net periodic benefit costs for the years ended February 28, 2003 and 2002
are as follows:
Thousands of
U.S. Dollars

Millions of Yen
2003

2002

2003

Service cost . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest cost . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected return on plan assets . . . . . . . . . . . . . .
Amortization of prior service cost . . . . . . . . . . . .
Recognized actuarial loss . . . . . . . . . . . . . . . . . .
Amortization of transitional obligation . . . . . . . . .
Premium severance benefit . . . . . . . . . . . . . . . .

¥ 2,521
502
(214)
(106)
555

¥ 2,088548(213)$ 21,410
4,263(1,817)
(900)
4,713

4,322

125
2,685

36,705

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

¥ 7,580¥ 5,233$ 64,374

Assumptions used for the years ended February 28, 2003 and 2002 are set forth as follows:

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

2003

2002

2.0%
2.5%
4.5%
10 years
10 years

2.0%
2.5%
4.5%
10 years
10 years

LAWSON, INC. AR 03 45

11. SHAREHOLDERS’ EQUITY

Japanese companies are subject to the Commercial Code of Japan (the “Code”) to which certain
amendments became effective from October 1, 2001.
The Code was revised whereby common stock par value was eliminated resulting in all shares being recorded with no par value and at least 50% of the issue price of new shares is required to berecorded as common stock and the remaining net proceeds as additional paid-in capital. The Codepermits Japanese companies, upon approval of the Board of Directors, to issue shares to existing
shareholders without consideration as a stock split. Such issuance of shares generally does not giverise to changes within the shareholders’ accounts.
The revised Code also provides that an amount at least equal to 10% of the aggregate amount ofcash dividends and certain other appropriations of retained earnings associated with cash outlays
applicable to each period shall be appropriated as a legal reserve (a component of retained earnings) until such reserve and additional paid-in capital equals 25% of common stock. The amount of
total additional paid-in capital and legal reserve that exceeds 25% of the common stock may beavailable for dividends by resolution of the shareholders. In addition, the Code permits the transfer
of a portion of additional paid-in capital and legal reserve to the common stock by resolution of theBoard of Directors.
The revised Code eliminated restrictions on the repurchase and use of treasury stock allowing
Japanese companies to repurchase treasury stock by a resolution of the shareholders at the generalshareholders meeting and dispose of such treasury stock by resolution of the Board of Directors beginning March 1, 2002. The repurchased amount of treasury stock cannot exceed the amountavailable 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.
The amount of retained earnings available for dividends under the Code was ¥54,107 million($459,507 thousand) as of February 28, 2003, based on the amount recorded in the parent
company’s general books of account. In addition to the provision that requires an appropriation for alegal reserve in connection with the cash payment, the Code imposes certain limitations on theamount of retained earnings available for dividends.
Dividends are approved by the shareholders at a meeting held subsequent to the fiscal year towhich the dividends are applicable. Semiannual interim dividends may also be paid upon resolutionof the Board of Directors, subject to certain limitations imposed by the Code.

Stock Option
At the general shareholders meeting held on May 26, 2000, the Company’s shareholders approved astock option plan for the Company’s directors and key employees, and the issuance of new sharesfor such stock options. The plan provides for granting options to purchase up to 1,217 thousand
shares of the Company’s common shares in the period from May 27, 2002 to May 25, 2007. The
options will be granted at the price of ¥7,500 ($63.69).
At the general shareholders meeting held on May 29, 2002, the Company’s shareholders approved a stock option plan for the Company’s directors, executive officers and key employees, andthe issuance of new shares for such stock options. The plan provides for granting options to purchase up to 303 thousand shares of the Company’s common shares in the period from December 1,
2002 to May 31, 2007. The options will be granted at the price of ¥3,680 ($31.25).

46 LAWSON, INC. AR 03

12. INCOME TAXESThe Company and its domestic subsidiaries are subject to Japanese national and local income taxes
which, in the aggregate, resulted in a normal effective statutory tax rate of approximately 42% for theyears ended February 28, 2003 and 2002.
The tax effects of significant temporary differences and loss carryforwards which resulted in deferred tax assets as of February 28, 2003 and 2002 were as follows:
Thousands of
U.S. Dollars

Millions of Yen
2003

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

¥

446

2002

2003

734
928
1,420
1,039
5,752
1,211
1,819
(1,224)¥ 2,754
1,168
1,224
437
971
213
5,466
734
1,017
(740)

$

3,788

12,125

13,244

102,972

749

1,620

6,361

13

1,681
2

110

6,234
7,881
12,0598,824
48,84910,285
15,447(10,395)

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

762

3,303

6,471

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

¥11,363¥ 9,941$ 96,501

A reconciliation between the normal effective statutory tax rates and the actual effective tax rates
resulted in the following items being included in the accompanying consolidated statements of income for the years ended February 28, 2003 and 2002 is as follows:
2003

2002

Normal effective statutory tax rate . . . . . . . . . . . . . . . . . . . . . . . . . .
Increase (decrease) in tax rate resulting from:
Permanently nondeductible expenses . . . . . . . . . . . . . . . . . . . . .
Inhabitants taxes—per capita . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating losses of certain subsidiaries . . . . . . . . . . . . . . . . . . . .
Equity in losses of associated companies . . . . . . . . . . . . . . . . . . .
Other—net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

42.0%

42.0%

1.5
1.3
3.1
4.7
(0.4)

0.9
1.1
1.4
0.2
0.1

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

52.2%

45.7%

LAWSON, INC. AR 03 47

As of February 28, 2003, certain subsidiaries have tax loss carryforwards aggregating approximately ¥2,787 million ($23,669 thousand) which are available to be offset against taxable income ofsuch subsidiaries in future years. These tax loss carryforwards, if not utilized, will expire as follows:

Millions of Yen

Thousands of
U.S. Dollars

2004 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2008 and thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

¥ 239
181
234
928
1,205

$ 2,030
1,537
1,987
7,881
10,234

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

¥2,787$23,669

Year Ending February 28 or 29

On March 31, 2003, a new local tax law was enacted and became effective for fiscal years beginning on or after April 1, 2004. The new local tax law decreased the local tax rate and introduced a
new tax levied based on paid-in capital. As a result, the statutory effective tax rate applied on the deferred income taxes and liabilities have been decreased from 42% to 40.5%. This reduction of thestatutory effective tax rate will result in a decrease in deferred tax assets of ¥194 million ($1,648 thousand), decrease in deferred tax assets for revaluation of ¥180 million ($1,529 thousand), and acharge to income taxes of ¥194 million ($1,648 thousand) for the fiscal year ending February 29,
2004, respectively.

13. LEASESThe Companies lease certain store facilities, machinery, computer equipment, office space andother assets.
Total lease payments under finance leases for the years ended February 28, 2003 and 2002 were¥13,675 million ($116,136 thousand) and ¥6,996 million, respectively.
Pro forma information of leased property such as acquisition cost, accumulated depreciation, obligations under finance leases, depreciation expense and interest expense for finance leases that do
not transfer ownership of the leased property to the lessee on an “as if capitalized” basis for theyears ended February 28, 2003 and 2002 was as follows:
Thousands of
U.S. Dollars

Millions of Yen

48 LAWSON, INC. AR 03

2003

2002

2003

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

¥63,30321,443¥39,575
16,395$537,605
182,106

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

¥41,860¥23,180$355,499

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

¥10,401
32,045¥ 6,462
17,174$ 88,331
272,145

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

¥42,446¥23,636$360,476

Thousands of
U.S. Dollars

Millions of Yen
2003

2002

2003

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

¥14,4213,225¥9,304
1,996$122,471
27,388Net leased property . . . . . . . . . . . . . . . . .

¥11,196¥7,308$ 95,083

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

¥ 2,698
8,570¥1,651
5,686$ 22,913
72,781

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

¥11,268¥7,337$ 95,694

The imputed interest expense portion which is computed using the interest method is excluded
from the above obligations under finance leases.
Depreciation expense, which is not reflected in the accompanying consolidated statements ofincome, computed by the straight-line method was ¥12,775 million ($108,493 thousand) and¥6,433 million for the years ended February 28, 2003 and 2002, respectively.
Interest expense, which is not reflected in the accompanying consolidated statements of income,computed by the interest method was ¥1,149 million ($9,758 thousand) and ¥516 million for theyears ended February 28, 2003 and 2002, respectively.
The minimum rental commitments under noncancelable operating leases at February 28, 2003
were as follows:

Millions of Yen

Thousands of
U.S. Dollars

2003

2003

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

¥ 954
6,850

$ 8,10258,174

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

¥7,804$66,276

LAWSON, INC. AR 03 49

14. RELATED PARTY
TRANSACTIONSTransactions with and balances to LAWSON CS Card, Inc. (an affiliated company) for the year ended
February 28, 2003 were as follows:

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

Millions of Yen

Thousands of
U.S. Dollars

2003

2003

¥4,000
4$33,970
34

Transactions with and balances to Mistubishi for the year ended February 28, 2002 were as follows:
Millions of Yen
2002

Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

¥15,166
46,543

The above transactions represent purchases of merchandise delivered on a daily basis, including
those related to the franchised stores, for the period from December 1, 2001 (date of the initialtransaction after Daiei Logistics Systems Inc. transferred its logistics business relating to the convenience store business to Mitsubishi) to February 28, 2002.

15. SUBSEQUENT EVENTS

a. The following appropriation of retained earnings as of February 28, 2003 was approved at thegeneral shareholders meeting held on May 27, 2003:

Cash dividends, ¥21 ($0.18) per share . . . . . . . . . . . . . . . . . . . . . .

Millions of Yen

Thousands of
U.S. Dollars¥2,260$19,193b. At the general shareholders meeting held on May 27, 2003, the Company’s shareholders approved the following stock option plan for the Company’s directors and executive officers, and thepurchase of the Company’s common stock:(1) The plan provides for granting options to directors and executive officers to purchase up to
120 thousand shares of the Company’s common stock in the period from June 1, 2005 to December 31, 2008.
(2) The Company is authorized to purchase up to 10 million shares of the Company’s common
stock (aggregate amount of ¥38 billion ($322,718 thousand)).
c. The Company voluntarily disaffiliated from the Daiei group employees’ welfare pension fund planon March 31, 2003. The possible effects of this event on the results of operations for the next fiscal year are not stated because the computation related to this disaffiliation has not been finalized.

50 LAWSON, INC. AR 03

INDEPENDENT AUDITORS’ REPORTTo the Board of Directors and Shareholders of LAWSON, INC.:
We have examined the consolidated balance sheets of LAWSON, INC. and subsidiaries as of February 28, 2003 and 2002, and the related consolidated statements of income, shareholders’ equity, and cash flows for the years then ended, all expressed in Japanese yen.
Our examinations were made in accordance with auditing standards, procedures and practices generally accepted and applied in Japan
and, accordingly, included such tests of the accounting records and such other auditing procedures as we considered necessary in thecircumstances.
In our opinion, the consolidated financial statements referred to above present fairly the financial position of LAWSON, INC. and subsidiaries as of February 28, 2003 and 2002, and the results of their operations and their cash flows for the years then ended in conformity withaccounting principles and practices generally accepted in Japan.
Our examinations also included the translation of Japanese yen amounts into U.S. dollar amounts and, in our opinion, such translation has
been made in conformity with the basis stated in Note 1. Such U.S. dollar amounts are presented solely for the convenience of readers
outside Japan.

May 27, 2003

LAWSON, INC. AR 03 51

DIRECTORS AND CORPORATE AUDITORS

President and CEO

Takeshi Niinami

Directors

Teruo Aoki

Senior Executive Vice President (President, LAWSON CS Card, INC.)

Eiichi Tanabe

Executive Vice President (Corporate Station Director and Chief Financial Officer(CFO))

Katsuhiko Yamasaki

Executive Vice President (General Manager, Line Support Division, Chief Risk
Management Officer (CRO))

Hiroshi Tasaka(President & CEO, Sophia Bank Limited; Professor,
TAMA University Graduate School)

Reiko Okutani(Representative Director, President, The R Co., Ltd)

Muneaki Masuda(President and Chief Executive Officer, Culture Convenience Club Co., Ltd.)

Yorihiko Kojima(Senior Executive Vice President, Group CEO,New Business Initiative Group, Mitsubishi Corporation)

Yukio Ueno

(Executive Vice President, General Manager,
Corporate Planning Department, Mitsubishi Corporation)

Standing Corporate Auditors

Masaaki Kojima
Sadao Suzuki

Corporate Auditors

Yoshiyuki Sanada

Controller, New Function Group, Mitsubishi Corporation

Tetsuo Ozawa

Vice Chairman

Koji Wada

In charge of overseas operations and store development

Executive Vice President

Susumu Hasegawa

General Manager, Information Systems Office (Chief Information Officer (CIO))

Senior Vice Presidents

Kenji Yamakawa

General Manager, General Affairs Office

Shigeru Kiyota

General Manager, Hokkaido & Tohoku Lawson Branches

Ichiro Okuda

General Manager, Chugoku & Shikoku Lawson Branches

Isamu Ochiai

Senior Accountant, Shanghai Hualian Lawson Co., Ltd.

Yoshio Shinozaki

General Manager, Kinki Lawson Branch

Kiyoteru Suzuki

General Manager, New Business Format Development Department,

Sadayuki Nobayashi

General Manager, Kyusyu Lawson Branch

Takatoshi Kawamura

General Manager, Merchandizing & Logistics Division

Manabu Asano

General Manager, Chubu Lawson Branch

Yoshimitsu Futai

Deputy General Manager, Responsible for SCM, Quality Control, Raw Materials

Deputy General Manager, Marketing Division

Purchasing and Logistics
Minoru Okada

President, Lawson Tickets Co., Ltd.

Jyosuke Kishimoto

President, LAWSON ATM Networks, Inc.

Shigeaki Kawahara

Marketing Division

Tadanao Watanabe

General Manager, Kanto Lawson Branch

Taketoshi Kunisaki

Deputy General Manager, Line Support Division

Konoshin Deguchi

Deputy General Manager, Line Support Division(As of May 27, 2003)

52

LAWSON, INC. AR 03

CORPORATE DATAINVESTOR INFORMATION

Company Name

Established

LAWSON, INC.

April 15, 1975

Address

CapitalTokyo Headquarters:¥58,506,644,000

UNIQUE 01
Onigiriya, Lawson’s new rice ball brand, wasdesigned to achieve two simple goals: makeLawson synonymous with rice balls and be
the best in its product category.

4-9-25 Shibaura, Minato-ku, Tokyo 108-8563, Japan
Tel: +81-3-5476-6800

Authorized Shares
412,300,000

UNIQUE 02
Unique to Lawson, mailboxes are now astandard feature at every store nationwide.
And new format Postal Lawson stores,
located at some post offices, are another
innovative store format in the Lawson chain.

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

Shares Issued

Tel: +81-6-6380-4491

107,600,000

Employees

Shareholders

3,462 (Consolidated)

53,091Business Activities

Major Shareholders

Franchise chain development of
Lawson convenience stores

Net Sales of All Stores¥1,294.0 billion (Consolidated) (Fiscal 2002)

UNIQUE 03

Shareholder

Shareholdings(Shares)

Shareholdings(%)

M.C. Retail Investment Co., Ltd.

32,089,300

29.82(Trust account)

8,618,000

8.01

Marubeni Foods Investment Co., Ltd.

5,939,500

5.52Japan Trustee Services Bank, Ltd.

The Master Trust Bank of Japan, Ltd.

Preferential advance ticket sales and a
shopping rewards program—these are justsome of the many benefits only Lawson
PASS cardholders enjoy.

Number of Stores(Trust account)

4,755,300

4.42

7,721 (Consolidated, as of February 28, 2003)

NOMURA SECURITIES CO., LTD.

3,551,500

3.30

Nintendo Co., Ltd.

3,447,000

3.20

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

The Chuo Mitsui Trust and Banking Company,
Limited (Management securities trust
depository)

3,219,000

2.99

Boston Safe Deposit BSDT Treaty Client Omnibus

2,147,541

2.00

1,557,800

1.45

1,185,000

1.10

The Sumitomo Trust & Banking Co., Ltd.
(Trust account B)(As of February 28, 2003)

Japan Trustee Services Bank, Ltd.
(Retirement benefits trust accountTo Shareholders, Other Investors, Customers,
Franchise Owners, Employees, and Store Crewof The Daiei, Inc.)
2

Corporate Governance10

Lawson Challenge 2004 Report Card

12

Financial Section

23

Directors and Corporate Auditors

52

Corporate Data

53

Investor Information

53

UNIQUE 04
Customers of TSUTAYA and Lawson areboth set to benefit from a shared shopping
points program.

Stock Exchange Lisitngs
Tokyo Stock Exchange (1st Section)
Osaka Securities Exchange (1st Section)

Stock Transfer Agent
The Mitsubishi Trust and Banking Corporation*
1-4-5, Marunouchi, Chiyoda-ku, Tokyo, Japan*Since May 28, 2003, Mitsubishi Trust and Banking Corporation has been Lawson’s stock transfer agent.

(As of February 28, 2003)
LAWSON, INC. AR 03 53

LAWSON, INC.

LAWSON, INC.
Tokyo Headquarters:
4-9-25 Shibaura, Minato-ku, Tokyo 108-8563, Japan
Tel +81-3-5476-6800
URL http://www.lawson.co.jp/

ANNUAL REPORT 2003
Year ended February 28, 2003

ANNUAL REPORT 2003

This annual report is printed on recycled paper.

Printed in Japan

A UNIQUEPRESENCE