Don Quijote Co., Ltd. Annual Report 2004 · Don Quijote Co., Ltd. Annual Report 2004 3 Quijote has...

Don Quijote Co., Ltd.ANNUAL REPORT 2004

Printed in Japan

Don Quijote Co., Ltd.Head Office Address: 4-14-1, Kitakasai, Edogawa-ku,Tokyo 134-0081, JapanTel:+81-3-5667-7511Fax:+81-3-5667-7522URL http://www.donki.com

Annual Report 2004Don Quijote Co., Ltd.

Customer Care

Contents

Dear Fellow Shareholders . . . 2

Employee Empowerment . . . . 6

Store Network Building . . . . 8

Customer Care . . . . . . . . . . . 12

Financial Section . . . . . . . . . 14

Corporate Data . . . . . . . . . . 33

Share Information . . . . . . . . 35

Late-night operation to serve diversifying

lifestyles, a combined display concept and

merchandise mix that provides amusement

through excitement and discovery, a string of

new services that answer customer

requests—creative innovation based on

pursuit of the customer-first principle

distinguishes Don Quijote among

full-line discount store operators.

Perfecting this model will be

the key to the Company's

overwhelming power.

How to accelerate corporate growth with sensibleand efficient store network expansion? Don Quijote’sanswer is three store formats to tailor stores to theneeds of individual locations and a 20-store-per-yearexpansion pace. The deep, accumulatedexpertise on store openings, basedon our area-saturation strategy,gives valuable strength to aflexible and promptstore-opening programthat seeks out andmakes best use offavorable locations.

Store OpeningReaping benefits of scale brought

about by area saturation andnationwide store expansion

Store Network Building

Store FormatsFlexibly responding to trade

area characteristics with threestore formats: Don Quijote, PAW

and Picasso

Mechanisms of Don Quijote’s Distinctive Creativity

and Overwhel ming Power



Don Quijote’s Principle:

The Customer Comes First

The Mechanism for High-Speed Yet Stable StoreNetwork Expansion

Don Quijote Co., Ltd. Annual Report 2004 35

SHARES OF COMMON STOCKAuthorized: 78,000,000Issued: 20,833,929Treasury stock: 2,307

NUMBER OF SHAREHOLDERS4,338

PRINCIPAL SHAREHOLDERS Percentage of Number of total shares in issue

shares held (%)

Takao Yasuda . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,244,000 15.6

La Mancha . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,000,000 14.4The Master Trust Bank of Japan, Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,559,700 7.5Japan Trustee Services Bank, Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,461,900 7.0UBS AG Hong Kong . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 854,000 4.1Lehman Brothers International (Europe) . . . . . . . . . . . . . . . . . . . . . . . . . 583,200 2.8Nomura Securities Co., Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 575,200 2.8

The Chase Manhattan Bank, N.A. London . . . . . . . . . . . . . . . . . . . . . . . . . 452,600 2.2Anryu Shoji Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 430,000 2.1

Morgan Stanley & Company, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 360,000 1.7

SHARE OWNERSHIP BY CATEGORY Percentage of Number of Number of total shares in issue

shareholders shares held (%)

Financial Institutions . . . . . . . . . . . . . . . . . . . . . . . . . . 59 4,685,674 22.5

Securities Companies . . . . . . . . . . . . . . . . . . . . . . . . . 20 901,879 4.3

Other Japanese Corporations . . . . . . . . . . . . . . . . . . . 84 516,300 2.5

Foreign Corporations and Individuals . . . . . . . . . . . . . 189 10,106,168 48.5

Japanese Individuals and Others . . . . . . . . . . . . . . . . . 3,986 4,623,908 22.2

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,338 20,833,929 100.0

TRANSFER AGENTThe Mitsubishi Trust & Banking Corporation1-4-5, Marunouchi, Chiyoda-ku, Tokyo 100-8212, Japan*The transfer agent was changed to the above company from The Chuo Mitsui Trust & Banking Co., Ltd. on September 26, 2003.

STOCK LISTINGSTokyo Stock Exchange, First Section

Share Information (as of June 30, 2004)

The Mechanism for Acquiring LoyalCustomers through Rigorous Pursuit of the Customer-First Principle Along with providing a unique product selection and a display method that offers astonishmentand discovery, Don Quijote addresses an emotional element in the shopping experience withheartfelt services. This determination led to “Customer Care Specialists”—staff assignedspecifically to customer care, including former employees of luxury-class hotels—and to newservices that enhance shopping convenience in our stores.


SalesActive appointment of “Customer

Care Specialists” to increase customer satisfaction

ServicesA successive introduction of new services reflecting the

opinions and wishes of customers

The Mechanism forConstantly Increasing

Amusement andEmployee Motivation

Sweeping delegation of authority increases staffmotivation and keeps store employees brimming

with enthusiasm. Don Quijote offers not only the lowprices customers expect, but also a vast

product selection presented underthe “compression display”high-density shelf-stocking

concept that providesamusement akin to ajungle treasure hunt.

Unique expertisesuch as this adds up

to an unassailableretailing advantage

for Don Quijote.

Sales-floorCreation

Compression display createsexcitement and lengthens time

spent in the store

Don Quijote’s distinctive character was born not

only of a passion for convenience and discounts,

but also from an overriding desire to provide

amusement. Our customers have come to

regard the time spent in our stores and the

fun they have searching for, discovering

and selecting their purchases as a new

form of shopping pleasure.

The Business Concept

Greater Convenience,Greater Discounts andGreater Amusement

Employee Empowerment

Don Quijote’s Creativity ming Power

Don Quijote’s Creativity ming Power

MerchandisingA vast product selection spanningeverything from daily necessities

to home appliances and luxury-brand goods

Don Quijote Co., Ltd. Annual Report 20042

Don Quijote achieved record sales and profits for the fourteenth* consecutive year, with improvement in business results exceeding 20%.

The year under review, the fiscal year ended June 30, 2004, was the final year of the 2x4 Plan, Don

Quijote’s four-year mid-term management plan. We continued efforts to enhance the appeal of our

stores by improving the product mix and presentation, achieving higher sales and profits for the four-

teenth consecutive year. The business grew dramatically during the four years of the 2x4 Plan as a

result of a company-wide effort, and we nearly reached the plan’s highly ambitious numerical targets.

We have established the 7532 Plan as our next goal, and have already begun to implement a number of

specific measures aimed at future business development.

Continued Solid Growth Despite a Harsh Business Environment

In the fiscal year ended June 30, 2004, signs of business recovery at last began to emerge in some sectors of

Japan’s economy owing to increases in exports and capital investment. Although positive signs began to appear in

personal consumption as well, the nascent upturn lacked dynamism and did not become a full-fledged recovery

in consumption.

The retail industry, the sector in which the Company operates, faced an adverse trading environment owing

to factors such as unseasonable weather conditions in the form of a cool summer, mild winter and numerous

rainy days, the intensification of business competition and temporary confusion attendant on the change to

the inclusion of consumption tax in indicated prices.

In these circumstances, the Company put into practice our corporate philosophy The Customer Comes First,

striving to continue to provide enjoyment and astonishment in shopping by offering popular, fast-selling

products and further strengthening our product presentation skills. At the same time, we focused on further

enhancing our service capabilities to add emotional warmth to the shopping experience. To enable a greater

number of customers to experience the attractions of Don Quijote, we accelerated our nationwide store open-

ing program; we opened 24 new stores in the year under review, expanding the total number of stores to 93

from 70 at the previous fiscal year-end (one store was closed).

As a result of these initiatives, consolidated net sales surged to ¥192.8 billion, an increase of 21.6% from the

previous year, operating income was 15.8% higher at ¥10.6 billion and net income rose 21.4% to ¥6.8 billion. Don

Dear Fellow Shareholders

¥73,402 ¥94,706 ¥115,428 ¥158,619 ¥192,839

4,639 6,011 6,916 9,165 10,610

5,874 6,748 7,150 10,095 12,368

2,829 3,353 4,027 5,641 6,846

283 334 401 557 348

Millions of yen

2000 2001 2002 2003 2004

Net sales

Operating income

Income before income taxes

Net income

Earnings per share*(yen)

Summary of Business Results

Takao Yasuda President

*The common stock was split into two shares for one in August 2003.

For the Year ended June 30

*Non-consolidated basis


Quijote has achieved higher sales and profits for the 8 consecutive years since adopting consolidated accounting

and for 14 consecutive years, on a non-consolidated basis—ever since the business was established.

Steady Expansion of Don Quijote’s Unique Appeal BringsHigh Popularity, Name Recognition and Expectations

Don Quijote was formed in 1989 as a retailer that operates full-line discount stores where people can shop late

into the night and which implements the unique business concept of enticing people to spend time in our stores

by delivering the same enjoyment as people receive from browsing at shopping fairs or bazaars. We operate

stores that remain fresh and novel no matter how often people visit. Our vast selection of merchandise spans

everything from daily necessities and food to sundries, apparel, electrical goods and luxury-brand goods. It also

combines nationally known brands with products people have never seen anywhere else, available on a limited

time basis. Moreover, the “compression display” method of presenting this intriguing variety of merchandise has

become widely known as a trademark of Don Quijote. Compression display involves creating the impression of a

jungle by packing every nook and cranny in the store with merchandise displays to deliver the added value of

astonishment and discovery.

To effectively spread awareness of Don Quijote’s distinctive appeal, which is so unlike any other retailer, the

Company has expanded the store network based on an area-saturation strategy that concentrates new store

openings in certain geographical areas. Following implementation of a store-opening program focused in the

greater Tokyo metropolitan area, in 2001 we began to open stores in selected areas across Japan. At the end of

the year under review we operated stores in 18 prefectures.

From the time the first store opened until today, Don Quijote has delivered numerous concrete results, including

expansion of the store network and improvement in business performance. The high popularity, name recognition

and expectations among people all across Japan attained over the years are Don Quijote’s greatest management

resources, and we intend to take full advantage of this strength to deliver additional growth in the coming years.

“2x4” Mid-term Management Plan—A Bold Quest forDramatic Growth

The fiscal year ended June 30, 2004 marked the final year of the 2x4 Plan, Don Quijote’s four-year mid-term

management plan. Announced in 2000, when sales were ¥73 billion and the number of stores totaled 27, this

was an extremely ambitious undertaking aimed at achieving net sales of ¥200 billion, ROE of 20%, establishing

a framework for delivering ordinary income of ¥20 billion and opening 20 new stores each year. True to the

spirit of the name Don Quijote, our stance is to boldly accept challenges and tackle every difficulty, and the

000

50

100

150

200

01 02 03 04

73.4

94.7

115.4

158.6

192.8

Net sales (¥ billions)

0

5

10

15

20

16.6 16.5 16.6

19.218.5

00 01 02 03 04

Return on equity (%)

000

5

10

15

01 02 03 04

5.8

6.97.6

10.1

12.5

Ordinary income (¥ billions)

000

5

15

10

20

25

01 02 03 04

8

6

20

17

24

New store openings

Results of the 2x4 Plan

Don Quijote Co., Ltd. Annual Report 20044 Don Quijote Co., Ltd. Annual Report 20044

employees pulled together as one in a vigorous effort to achieve the targets in the plan. While the results for the

year under review of ¥192.8 billion in net sales, ¥12.5 billion in ordinary income, ROE of 18.5%, and 24 new

stores opened fell slightly short of the plan’s challenging targets, we are confident that the 2x4 Plan contributed

to establishment of a framework and foundation for further growth in the years ahead.

Key Results Achieved by the 2x4 Plan One of the many results we achieved by implementing the 2x4 Plan was the establishment of two new store

formats that complement the Don Quijote format: Picasso small-scale discount stores and PAW shopping

malls, with tenants from other industries. This has greatly increased flexibility in store opening and accelerated

expansion to a nationwide store network.

Our financial structure has grown stronger and more flexible. The opening of the Shinjuku Higashi-guchi Store in

2000 marked the first time we employed asset securitization using a special purpose company (SPC). By continuing

to use this financing approach, we succeeded reducing new store opening costs and curbing excess asset expan-

sion. We have also sought to attain stability of funds procurement and lower cost of funds through such means as

concluding a commitment line agreement with a group of banks and issuing corporate bonds.

We also made great progress with the most important task of all—the enhancement of customer satisfaction.

We greatly improved the service capabilities at our stores by staffing them with dedicated customer-service

personnel and introducing bank ATMs and other automated services. To increase shopping convenience and

institute a service to reward customers through a bonus point program, we began issuing the Club Donpen

Card, a credit card with a cash-advance feature.

In addition to these results, we aggressively worked to reduce the cost of goods sold: we lowered purchase costs

and improved the gross profit margin by consolidating vendors, reviewed trading terms and conditions, and expanded

our lines of OEM and develop-and-import products. We are also strengthening systems for lowering the selling price,

working to cut costs by putting into operation a joint shipping system based on centralized delivery and efficiently

managing merchandise using a new backbone computer system.

Increasingly Important Social Responsibility Initiatives in Line with Corporate Growth

Don Quijote has achieved tremendous corporate growth during the past four years. We are keenly aware that this

growth entails greater responsibility to society and are making every effort to fulfill our corporate social responsibility.

Don Quijote has long engaged in store operation that places deep importance on coexisting harmoniously

with society, engaging in day-to-day volunteer activities and working to deepen communication with the com-

munities we serve. We also believe that our stores, which are open for business at midnight, should be a

dependable place for local residents to turn for assistance when emergencies occur late at night, and have

worked to fulfill that role. Late-night sale through videophone consulting of over-the-counter (OTC) drugs is a

¥34,228 ¥47,483 ¥72,485 ¥93,410 ¥126,774

18,561 22,053 26,562 32,232 41,738

54.2 46.4 36.6 34.5 32.9

6,359 11,133 26,250 37,974 55,493

34.2 50.4 98.8 117.8 132.9

Millions of yen

2000 2001 2002 2003 2004

Total assets

Total shareholders’ equity


Interest-bearing debt

Debt-to-equity ratio (%)

Summary of Financial Position

As of June 30

Don Quijote Co., Ltd. Annual Report 2004 5Don Quijote Co., Ltd. Annual Report 2004 5

concept born of this stance (a pharmacist must be present under Japanese law). Our strong conviction bore fruit

when regulations were relaxed, paving the way for us to provide these medications to customers even late at night.

At the same time, we regard strengthening corporate governance to be an important management task and

are taking measures to ensure observance of corporate ethics and maximize corporate value. In addition to

meetings of the Board of Directors, since June 2003 we have held meetings to consider operational reforms for

addressing important management issues laterally across the entire group and putting in place a structure for

flexible, rapid decision-making. In 2003, we appointed an outside director to increase management transparency

and strengthen corporate supervision.

The 7532 Plan Is a Promise to Achieve the Next Set of Objectives

In August 2004, we announced the 7532 Plan, Don Quijote’s new mid-term management plan. In the past, the

Company implemented the 753 Plan, which aimed for net sales of ¥70 billion, ordinary income of ¥5 billion,

and a network of 30 stores. We achieved those objectives and next embarked on the 2x4 Plan. Now, the 7532

Plan calls for achievement of a ratio of ordinary income to sales greater than 7%, EPS greater than ¥500, sales

higher than ¥300 billion within three years, and double-digit growth of 20%. At a time when the scale of the

business is expanding and corporate responsibility increasing, we believe that in formulating the 7532 Plan, the

targets we set should be tantamount to a firm promise. Compared to the aggressive objectives of the 2x4 Plan,

the new plan is a quota that will be achieved without fail, and I intend to achieve results that exceed the targets.

Specific Measures Already Under Way to Achieve Further Growth

Concurrent with the announcement of the new management plan, various specific measures to achieve the plan

objectives have already been set in motion, such as “Donki Kenkokan,” our healthcare business.

Through our efforts to date to make possible late-night sales of OTC drugs we have come to understand fully

the breadth and depth of people’s healthcare needs. To meet customer expectations, we decided to enter into an

alliance with healthcare management company I’rom Co., Ltd. The alliance aims to fuse I’rom’s expertise and

personnel specializing in the medical care and healthcare field with Don Quijote’s retail experience to make a

full-scale launch into the comprehensive healthcare business. Through cooperation with I’rom, we plan to extend

to all stores the late-night sale of OTC medications that is currently limited to a portion of Don Quijote stores,

establish dedicated healthcare corners at all Don Quijote stores, and commence Internet sales. As the first

initiative in establishing the business, in September 2004 at the Shinjuku Store we opened the Donki Kenkokan,

which offers a selection of medications and healthcare products.

In another development, in August 2004 we entered into an agreement with Seven-Eleven Japan Co., Ltd.

and announced the opening of a Seven-Eleven store in the Don Quijote Niigata-ekinan Store. As these new

initiatives indicate, Don Quijote intends to continue to pursue alliances with various companies, generate

synergies with our high name recognition and ability to draw customers, and bring happiness and progress to

Don Quijote, our business partners and customers.

Even as we direct our attention to the effective utilization of the more extensive management resources

made available to us by business expansion, we will not lose our enthusiasm for exploring new possibilities

and accepting new challenges. We would encourage our shareholders and the investment community to main-

tain high expectations for Don Quijote and request your continued support.

PRESIDENT TAKAO YASUDA

Employee Empowerment

Infinite Shopping Excitement



Top-to-bottom Merit System and Wide Empowerment of Store Staff

Merchandising with an Emphasis onLow Price and Originality

At a Don Quijote store, the excitement of discovery is not unlike a jungle safari.

The Mechanism for Constantly IncreasingAmusement and Employee Motivation

Late-night Operation and Compression Displayfor Amusement-packed Sales Floors

Believing that the people on the front lines know customers the best, we have always delegated substantialauthority to store staff and entrusted them with store management. The area of delegation is deep and narrow,and the effects are seen in stores everywhere, from product procurement and display techniques to hand-writtenpoint-of-purchase advertisements. What’s more, we have adopted a top-to-bottom merit system for evaluatingthe day-to-day job performance of store managers and front-line workers, which creates an environment ofconsistent positive motivation. Furthermore, to support this empowerment and the merit system, the headoffice has put in place rigorous, fair checks and an evaluation system.

The convenience of expanded operation hours that allow customers to shop until late at night is only one of Don Quijote’smany appeals. Other features include “compression display”—the high-density showcasing of merchandise using uniqueknow-how developed within the Company. This involves offering an overwhelming variety of merchandise—everything fromdaily necessities and sundries to electrical goods, jewelry and luxury-brand goods—stocked virtually from floor to ceiling.Compression display creates an atmosphere like that of a jungle inside our stores and makes them highly amusing placesbrimming with the fun of hunting for uncharted bargains and the surprise of new discoveries.

Moreover, compression display minimizes the back stock area and makes it possible to display and efficientlyturnover more than five times the volume of merchandise found at an ordinary store of the same size, resulting in highsales per square meter.

As a full-line discount store operator, Don Quijote offers low prices as a matter of course in combination with a vast selectionof merchandise, ranging from daily necessities to brand name goods. To maintain the enjoyment of shopping and a sense offreshness and novelty in our stores, in addition to low price, about 60% of our merchandise is regularly stocked items, and40% consists of products offered on a limited-availability basis. Regularly stocked merchandise, centered on national brandsincreases the closeness to people’s daily lives, and the constantly changing selection of limited availability products procuredby staff with their unique sensibility provides the discovery and wonder distinctive to the Don Quijote shopping experience.

Wider responsibility forstore operation giveseach employeesignificant motivation.


Expanding the ChainNationwide


Don Quijote Co., Ltd. Annual Report 2004 9Don Quijote Co., Ltd. Annual Report 2004 9

The Mechanism for High-speed Yet StableStore Network Expansion

Three Store Formats to Serve Different Trade Areas and Store Locations

Highly Flexible Procurement of Funds for Store Openings

Low-cost Store Opening and Low-cost OperationIn recent years, aggressive business restructuring activity on the part of Japanese industries has resulted in an environmentin which retail properties in good locations have become available on favorable terms. For Don Quijote, this trend hasspurred new store openings even as we carefully control costs. We are further reducing costs by increasing the store-opening method of adopting vacant retail properties and utilizing existing facilities.

Furthermore, store network expansion has begun to exert a cost-reduction effect in product purchasing and storeoperation. Even as we continue to foster the individuality and uniqueness of each store, we are steadily pursuing efficiencyby taking advantage of benefits of scale.

The unique Don Quijote retailing formats that overturn conventional wisdom in the retail industry have won the support ofcountless customers and led to a steady increase in the number of stores. What’s more, we devised PAW 24-hour shop-ping malls, that feature a Don Quijote store as the anchor tenant and the Picasso format of scaled-down, neighborhoodstores reminiscent of convenience stores. Don Quijote flexibly combines these three formats for large, medium-sized andsmall stores tailored to the requirements of various trade areas and locations and has established a system for opening 20new stores per year.

Since the opening of its first store in 1988, Don Quijote has pursued an area-saturation strategy in the greater Tokyo met-ropolitan area and has implemented a policy of funding store openings within the scope of cash flow. However, as theCompany follows its strategy of extending operations nationwide and opening stores at the pace of 20 stores per year,diversifying of fund procurement methods and improving asset efficiency have become important issues.

The Company was quick to recognize and address these issues and engages in asset securitization using special purposecompanies (SPCs), a scheme used for three stores since 2000, with the opening of the Shinjuku Higashi-guchi Store. InDecember 2001, we concluded a commitment line agreement for ¥10 billion with a group of ten banks. The Company issuedconvertible bonds of ¥8 billion in total in March 2002 and ¥17 billion in January 2004. In this way, we laid a solid foundationfor procuring the funds necessary for growth.

Don Quijote PAW PicassoDon Quijote PAW Picasso

Shopping entertainment stores with1,000 square meters of sales floorspace that offer a full-line selection of40,000 items.

24-hour shopping malls featuring aDon Quijote store as the anchortenant, and sales floors of 4,000 to5,000 square meters.

Scaled-down stores tailored to smalltrade areas, offering 10,000 to20,000 items in sales floors of 300 to500 square meters.

Pursuing Nationwide Benefits of Scale byEstablishing a High-density, High-efficiency Store Network Region by Region

Review of Store Openings in Fiscal 2004During the year under review, we strengthened our presence in the greater Tokyo metropolitan area and steadily

engaged in store network expansion on a nationwide scale. We opened a total of 24 new stores during the term: 9

Don Quijote stores, 14 PAW stores, and 1 Picasso store. We put in place the framework for opening 20 new

stores each year called for in the 2X4 Plan, the Company’s medium-term management plan. The PAW format,

which is attracting attention as a powerful tool to fight the hollowing out of regional cities, has begun to follow a

stable trajectory.

Central-Tokyo Saturation Strategy The year under review was another year of great progress for the store-opening program

in the greater Tokyo area. The simultaneous opening in the spring of 2004 of two stores

in Tokyo’s Ginza district, Japan’s shopping mecca, has been the subject of keen public

attention, and we are confident this move has dramatically increased our area saturation

in central Tokyo. Looking to the future, we plan to increase store density in central Tokyo

and pursue greater efficiencies of store operation.

Accelerating Store Openings in Regional CitiesSince the opening of a store in Fukuoka in 2001, we have expanded our nationwide net-

work of stores in major cities to 18 prefectures, from Hokkaido in the north to Kyushu in

the south. With regard to store openings in regional cities, we plan to take advantage of

the expertise in area saturation gained in the highly competitive greater Tokyo area to

develop a high-density, high-efficiency store-opening program centered on large cities,

such as government-designated cities. Having the Don Quijote, PAW and Picasso store

formats will enhance agility and flexibility in implementing this strategy.

The Ginza Brand-kanStore specializes inupscale, internationalbrand-name items.

The Ginza Honkan Store offers daily consumablegoods, which are hard to find in this fashiondistrict.


Benefits of Scale Derived from Store Network ExpansionNow that the Company has extended the service area to regional cities and the number of

stores has grown to nearly 100, we have begun to engage in the low-cost store operation

necessary to take maximum advantage of benefits of scale.

Regarding merchandise purchasing, we have introduced a centralized negotiation

scheme by which only the head office negotiates with vendors, and each store makes its

own specific purchasing decisions on the basis of terms negotiated by the head office.

With this system, we aim to achieve both product selection that can be tailored to local

characteristics and benefits of scale. The Company is aggressively working to reduce

costs that do not bear directly on customer satisfaction, including costs of construction,

store interiors, fixtures, security and insurance. We are applying these cost reductions to

achieve new store openings at lower expense.

Hokkaido area . . . . . . . . . . 5 stores

Koshinetsu area . . . . . . . . . . 2 stores

Kanto area . . . . 61 storesKansai area . . . 17 stores

Kyushu area . . . 5 stores

Tokai area . . . . 3 stores

Number of stores by format

Number of storesin the Kanto area

Number of storesin regional cities

Number of stores totals93 in 18 prefectures,with 24 new stores.

2004

32stores

2003

16stores

2002

11stores

2004

61stores

2003

54stores

2002

42stores

20020

20

40

60

80

100

2003 2004

45stores

57stores

PAW18stores

4stores

1store

Picasso10stores

9stores

7stores

Total93stores

70stores

53stores

Don Quijote65stores

Customer Care

Offering Services toSatisfy the Heart



New Services to Transform CustomerDissatisfaction and Anxiety intoSatisfaction and Peace of Mind

Improving Stores through Feedback from Store Monitors

The Mechanism for Acquiring LoyalCustomers through Rigorous Pursuit ofthe Customer-first Principle

“Customer Care Specialists” Touch the Hearts of CustomersOver the years, Don Quijote has provided customers with wonder and astonishment through its productmix and display. Now, we are focusing on adding an emotional element to the shopping experience byassigning “Customer Care Specialists” to our stores. An example of this is “Answer Man.” An AnswerMan is a highly experienced mature employee who periodically walks through the store solicitouslyresponding to customer requests and providing advice. During the year under review, we also beganstaffing stores with “Concierges,” employees charged with retention of loyal customers. As experiencedservice-industry professionals with advanced customer-handling skills, they are hired to serve mainlythose customers who frequently purchase luxury-brand goods, jewelry and high-ticket appliances. Thekeen customer-service attitude demonstrated by these specialists serves as a positive role model forother employees and contributes to raising the customer-service level throughout the store.

Don Quijote constantly strives to ascertain what customers want. During the year under review, we introduced a storemonitoring system for conducting anonymous surveys of store conditions. We recruit about five monitors per storeand have them pay unannounced visits to their assigned stores about once a month. They use a four-stage rating scaleto conduct a survey of 17 items, such as customer service and cash register response, and note specific opinions andrequests. We use the findings from these surveys to improve store operations.

Club DonpenCard

As an “Answer Man,” I support the customer’sshopping experience.

To make shopping even more convenient and enjoyable and to increase the appeal of our stores,we are actively introducing value-added services grounded in the customer’s point of view. Toincrease shopping convenience and value, we have begun issuing the Club Donpen Card, a creditcard with a bonus-point program. Considering the strong necessity of the late-night sale of OTCdrugs, which has proved difficult owing to the problem of securing pharmacists, we introduced avideophone system that connects customers remotely with pharmacists. With the aim of offeringcomprehensive personal services, a dental clinic with office hours until 1:00 A.M. has opened in aPAW mall. Other efforts include expanded installation of ATMs and other equipment for customerconvenience, such as cell phone battery recharging.

Installation ofATMs at storesis expanding.


Financial SectionFive-year Summary (Consolidated data)Years ended June 30

For the year

Net sales

Cost of goods sold

Selling, general and

administrative expenses

Operating income


Net income

At year-end

Total assets

Shareholders’ equity

Per share(*)

Basic earnings

Diluted earnings

Cash dividends

Key ratios

ROA

ROE

Five-year Summary . . . . . . . . . . . . . . . . . . . . . . . . . 14

Management Discussion and Analysis . . . . . . . . . . . . 15

Independent Auditors’ Report . . . . . . . . . . . . . . . . . 19

Consolidated Balance Sheets . . . . . . . . . . . . . . . . . . 20

Consolidated Statements of Income . . . . . . . . . . . . . 22

Consolidated Statements of Shareholders’ Equity . . . 23

Consolidated Statements of Cash Flows . . . . . . . . . . 24

Notes to Consolidated Financial Statements . . . . . . . 25

¥73,402,102 ¥94,706,874 ¥115,428,986 ¥158,619,115 ¥192,839,871 $1,778,145

56,951,004 73,571,274 89,388,264 122,307,605 148,542,703 1,369,688

11,811,613 15,124,082 19,123,731 27,145,874 33,686,628 310,618

4,639,485 6,011,518 6,916,990 9,165,635 10,610,540 97,838

5,874,791 6,748,143 7,150,611 10,095,742 12,368,246 114,045

2,829,465 3,353,197 4,027,264 5,641,698 6,846,475 63,130

¥34,228,974 ¥47,483,788 ¥ 72,485,638 ¥ 93,410,943 ¥126,774,381 $1,168,966

18,561,177 22,053,899 26,562,284 32,232,664 41,738,148 384,860

¥ 283.51 ¥ 334.82 ¥ 401.20 ¥ 557.02 ¥ 348.83 $ 3.21

– 334.39 391.04 513.89 308.68 2.84

5.00 5.00 15.00 15.00 30.00 0.27

17.4 14.8 11.3 10.8 9.6

16.6 16.5 16.6 19.2 18.5

Thousands of Thousands of yen U.S. dollars

2000 2001 2002 2003 2004 2004

Yen U.S. dollars

%

Contents

*The per share data has not been restated to reflect the retroactive effects of stock splits.


Consolidated Business ResultsIn the year ended June 30, 2004 (July 1, 2003 to June 30, 2004), Don Quijote Co., Ltd. and its consolidated

subsidiaries, as in the previous year, achieved double-digit increases in revenue and profits, with consoli-

dated net sales at ¥192.8 billion, 21.6% higher than in the previous year, and operating income at ¥10.6 bil-

lion, a rise of 15.8%. The Company attained higher sales and profits for the 8th consecutive year since the

introduction of consolidated accounting, and for the 14th consecutive year on a non-consolidated basis.

The increase in sales was attributed to 24 new stores opened in the year under review and the full-year

contribution of 17 stores opened during the previous year. The new stores—9 Don Quijote stores, 14 PAW

malls and 1 Picasso store—all got off to a strong start, contributing significantly to operating profits.

Eleven of these new stores were opened in the first half of the year and 13 in the second half (of which, 9

were opened in the final quarter). Despite such short operating periods, recurring profit at the stores open

less than one year averaged 3.9%. Incidentally, one store was closed when its lease contract expired in

August 2003.

Comparable-store sales declined 2.4% from the prior-year figures. The nation’s economy was just

beginning to emerge from a long slump, led by the export sector, and a few bright signs were seen to be

emerging in consumer spending. It seemed that our store sales in the year under review bottomed out, and

the comparable-store spending per customer saw a 0.4% increase. However, the stores had 2.8% fewer

shoppers than in the previous year because of an unseasonable summer and a mild winter, as well as many

rainy days, particularly on weekends. The decline was also attributed in part to a regulatory change that

went into effect last April requiring all stores in the country to display in-store price tags that include the

consumption tax. This changeover disrupted the smooth operation at stores.

By product category, sales of daily sundries and consumables remained almost flat, due to tougher price

competition with rival stores, however, food items posted solid sales, helped by a growing number of

stores carrying alcoholic beverages. The share, in terms of total net sales, of the low-price, high-turnover

merchandise category consisting of the above-mentioned products declined 0.7 percentage point from the

previous year to 41.7%. The sales efforts for high-priced and high-margin goods, such as watches, fashion

goods, sports gear and leisure-related goods, continued to be strengthened, in order to further differentiate

000

50,000

100,000

150,000

200,000

01 02 03 04

73,402

94,706

115,428

158,619

192,839

Net sales (¥ millions)

000

20,000

40,000

60,000

0

5

10

15

20

25

01 02 03 04

22.4 22.3 22.6 22.9 23.0

16,451

21,135

26,040

36,311

44,297

Gross profit (¥ millions)Gross profit margin (%)

Management Discussion and Analysis


Don Quijote from competitors. These items accounted for 33.9% of total net sales, up 0.7 percentage point

from the previous year. The Company is now in a position to enjoy economies of scale particularly with

apparel items, which have contributed significantly to improvement of profitability. On the other hand, sales

of sports and leisure goods, many of them seasonal items, struggled due to unseasonable weather.

Regarding household electrical appliances, those for personal use as well as miscellaneous electrical

goods logged strong sales. These items accounted for 20.3% of total net sales, down 0.8 percentage point

from the previous year. Merchandise sales rose 20.2% year on year to ¥189.3 billion, representing 98.2%

of total net sales.

In addition to merchandise sales, as the opening of PAW shopping malls was accelerated during the year

under review, the Company’s rent revenue from tenants increased by a remarkable 162.0%, to ¥2.8 billion,

for a share of total net sales of 1.5%. In February 2004, the Company formed a wholly-owned subsidiary,

Donki Johokan Co., Ltd. specializing in sales of cellular phones, which it previously categorized as house-

hold electrical appliances. Sales of this business came to ¥0.6 billion.

The gross profit margin improved by 0.1 percentage point from the previous year to 23.0%. With

regard to selling, general and administrative expenses, there were some areas where the Company

enjoyed economies of scale, but the ratio of these expenses to sales increased 0.4 percentage point from

the previous year to 17.5%. This was attributable to the fact that many stores opened in new areas, which

requires more prior investment than in the case of areas where our stores already exist. Operating income

margin declined 0.3 percentage point from the previous year, to 5.5%.

As for other income and expenses, there was increased income from rental fees for the computer sys-

tem as a result of expanded store operations. Gains were recorded from the sale of investment securities,

along with an increase in return on investments in anonymous associations (return on investments in spe-

cial purpose companies (SPCs) that own outlets securitized by the Company), all of which contributed to a

large increase in revenue. Consequently, income before income taxes rose 22.5% to ¥12.3 billion and net

income grew 21.4% to ¥6.8 billion from the previous year. The early adoption of asset impairment account-

ing, which was introduced in the fiscal year under review, did not influence the revenue and expenditures of

the Company.

Number of storesTotal sales floor space (m2)

000

2,000

4,000

6,000

8,000

10,000

12,000

01 02 03 04

4,639

6,011

6,916

9,165

10,610

2,8293,353

4,027

5,641

6,846

Operating income (¥ millions)

Net income (¥ millions)

000

30,000

60,000

90,000

120,000

0

40

80

120

160

01 02 03 04

29,16335,191

56,629

79,588

116,516

2733

53

70

93


Looking ahead to the year ending June 30, 2005, the Company projects net sales of ¥230 billion, an

increase of 19.3% from the previous year, and operating income of ¥13.2 billion, a rise of 24.4%. Ordinary

income for the year is set to grow 19.1% to ¥15 billion and net income to rise 18.3% to ¥8.1 billion, on the

assumption that more than 15 new stores will open during the coming fiscal year.

Financial PositionAs the scale of operations and the store network expanded, total assets rose by ¥33.3 billion from the previous

year to ¥126.7 billion as of June 30, 2004.

Current assets increased by ¥11.4 billion to ¥49.0 billion, due largely to an ¥8.2 billion rise in inventories to

¥35.1 billion. As a result of dedicating efforts to efficiently control the level of inventories by disposing of inven-

tories accumulated over the years and by procuring popular goods that turn over quickly, inventories increased

only 30.7%, while stores’ total sales floor space grew 46.4%. The inventory value per square meter was held to

a satisfactory level of ¥300,000, down 11.0% from the previous year.

The total value of property and equipment rose by ¥14.9 billion to ¥55.6 billion, due to an increase in the

number of newly opened stores and the procurement of land for new stores.

Total liabilities at the fiscal year-end increased by ¥23.8 billion to ¥85.0 billion from the year before. Current

liabilities rose by ¥11.4 billion to ¥44.7 billion. These increases were chiefly attributable to the fact that the

Company issued commercial paper (CP) as a low-cost, short-term source of funds. The outstanding balance of

CP at the fiscal year-end was ¥10 billion. In the meantime, the Company continued to pay back short-term

loans, which decreased by ¥5.2 billion to ¥0.8 billion as of the end of the fiscal year. Long-term liabilities

increased by ¥12.4 billion to ¥40.3 billion. The main reason for the increase was that in January 2004 the

Company issued a euro-denominated convertible bond of ¥17.0 billion with a 2011 maturity date. On the other

hand, the Company continued to repay long-term debts. Furthermore, of all the convertible bonds issued in the

past, ¥2.4 billion in bonds had been converted into the Company’s shares by the end of the year under review,

representing a conversion rate of 31.2%.

000

30,000

80,000

60,000

120,000

150,000

01 02 03 04

34,228

47,483

72,485

93,410

126,774

17.4

14.8

11.3 10.8 9.6

0

60

40

20

Total assets (¥ millions)

Return on assets (%)

000

10,000

30,000

20,000

40,000

50,000

01 02 03 04

18,561

22,053

26,562

32,232

41,738

16.6

16.5 16.619.2 18.5

0

20

60

40

Total shareholders’ equity (¥ millions)



As the convertible bonds issued in 2004 were zero-coupon bonds, the fiscal year-end balance of interest-

bearing debt increased by only ¥0.5 billion, to ¥38.4 billion, and the ratio of interest-bearing debt to total assets

lessened to 30.4% from 40.7% recorded a year earlier, and the debt-to-equity ratio also improved to 92.2%

from 117.8%.

Total shareholders’ equity increased by ¥9.5 billion from the previous year’s figure to ¥41.7 billion, due to

the accumulation of earnings and the conversion of convertible bonds into shares in the year under review. The

shareholders’ equity ratio stood at 32.9%.

Cash FlowsIn the fiscal year ended June 30, 2004, net cash of ¥6.7 billion was generated by operating activities, an

increase of ¥4.7 billion from the previous year. The Company made efforts to hold inventories in check, while

increases were seen in profits, depreciation and amortization and trade accounts payable.

Net cash used in investing activities was ¥24.5 billion, as the Company made aggressive capital investments

for future growth. This was a ¥11.4 billion increase in outflow from the previous year.

Net cash of ¥19.7 billion was provided by financing activities, ¥7.8 billion more than in the previous year.

This rise came from ¥17.0 billion in proceeds from a convertible-bond issue to finance capital investments and

CP issued to procure short-term working funds.

As a result of those developments, the closing balance of cash and cash equivalents rose by ¥1.8 billion

from the previous year to ¥8.9 billion.

Capital InvestmentIn the year to June 30, 2004, the Company’s capital investment grew by ¥10.9 billion to ¥22.4 billion. In the

meantime, free cash flows (net income for the year + depreciation and amortization + extraordinary loss - cash

dividends) increased by ¥1.9 billion from the previous year to ¥9.9 billion. The Company met capital demands

exceeding free cash flows through the issuance of new convertible bonds worth ¥17.0 billion.

The Company plans to open more than 15 stores in the year ending June 30, 2005, and has put in place

fund procurement plans to finance capital investments worth ¥16.0 billion.

Capital expenditure (¥ millions)

000

2,500

5,000

7,500

10,000

01 02 03 04

3,495

4,531

5,817

7,954

9,969

Free cash flow (¥ millions)

000

5,000

15,000

10,000

20,000

25,000

01 02 03 04

7,135

9,078

17,507

11,505

22,437


Independent Auditors’ Report

To the Shareholders and the Board of Directors of Don Quijote Co.,Ltd.

We have audited the accompanying consolidated balance sheets of Don Quijote Co.,Ltd. and its subsidiaries as of

June 30, 2003 and 2004, and the related consolidated statements of income, stockholders’ equity, and cash

flows for each of the two years in the period ended June 30, 2004, all expressed in yen. These consolidated finan-

cial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion

on the consolidated financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in Japan. Those standards

require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements

are free of material misstatement. An audit includes examining on a test basis, evidence supporting the amounts

and disclosures in the financial statements. An audit also includes assessing the accounting principles used and

significant estimates made by management, as well as evaluating the overall financial statement presentation. We

believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above, expressed in yen, present fairly, in all

material respects, the consolidated financial position of Don Quijote Co.,Ltd. and subsidiaries at June 30, 2003

and 2004, and the consolidated results of their operations and their cash flows for each of the two years in the

period ended June 30, 2004, in conformity with generally accepted accounting principles in Japan.

Also, in our opinion, the accompanying consolidated financial statements expressed in yen have been translated

into U.S dollars on the basis set forth in Note 2.

BA Tokyo & Co

MEMBER OF MAZARS

Certified Public Accountants

Tokyo, Japan

September 28, 2004

STATEMENT ON ACCOUNTING PRINCIPLES AND AUDITING STANDARDS

This statement is to remind users that accounting principles and auditing standards and their application in practice may vary among

nations and therefore could affect, possibly materially, the reported financial position and results of operations. The accompanying finan-

cial statements are prepared based on accounting principles generally accepted in Japan, and the auditing standards and their application

in practice are those generally accepted in Japan. Accordingly, the accompanying financial statements and the auditors’ report presented

above are for users familiar with Japanese accounting principles, auditing standards and their application in practice.


ASSETS 2004 2003 2004

Current assets:

Cash and time deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Note and accounts receivables—trade . . . . . . . . . . . . . . . . . . . . . . . . . .

Less: Allowance for doubtful accounts (Note 4) . . . . . . . . . . . . . . . . . . .

Inventories (Notes 4 and 5) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Prepaid expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Deferred tax assets (Notes 4 and 14) . . . . . . . . . . . . . . . . . . . . . . . . . . .

Other current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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

Investments and advances:

Investment securities (Notes 4 and 7) . . . . . . . . . . . . . . . . . . . . . . . . . .

Advance payment for fixed leasehold deposits . . . . . . . . . . . . . . . . . . . .

Long-term loans receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Less: Allowance for doubtful accounts (Note 4) . . . . . . . . . . . . . . . . . . .

Total investments and advances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Property and equipment, at cost (Notes 3, 4 and 13):

Buildings and structures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Vehicles and delivery equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Less: Accumulated depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Construction in progress . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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

Intangibles (Note 4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Other assets:

Fixed leasehold deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Prepaid expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Deferred tax assets (Notes 4 and 14) . . . . . . . . . . . . . . . . . . . . . . . . . . .

Other non-current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Total other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

The accompanying notes are an integral part of the statements.

Thousands of yen (Note 2)Thousands of

U.S. dollars (Note 2)

¥ 8,903,992

2,016,925

(2,386)

35,114,163

825,368

933,683

1,272,734

49,064,481

4,731,812

868,864

1,172,740

(3,301)

6,770,115

30,880,923

79,672

7,695,308

(8,426,378)

22,574,852

2,806,256

55,610,635

1,502,896

10,796,920

922,638

344,588

1,762,107

13,826,253

¥126,774,381

¥ 7,040,599

1,140,465

(1,539)

26,856,229

576,317

935,917

1,028,691

37,576,682

2,095,348

856,943

1,150,000

(1,725)

4,100,567

19,954,125

73,505

5,293,147

(5,503,154)

19,900,117

957,382

40,675,124

1,231,508

7,119,430

463,478

644,840

1,599,310

9,827,060

¥93,410,943

$ 82,102

18,597

(22)

323,782

7,610

8,609

11,735

452,415

43,631

8,011

10,813

(30)

62,426

284,748

734

70,957

(77,698)

208,159

25,876

512,776

13,857

99,556

8,507

3,177

16,248

127,489

$1,168,966

Consolidated Balance SheetsDon Quijote Co., Ltd, and SubsidiariesAs of June 30, 2004 and 2003


LIABILITIES AND SHAREHOLDERS’ EQUITY 2004 2003 2004

Current liabilities:

Accounts payable—trade . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Short-term loans payable (Notes 8 and 13) . . . . . . . . . . . . . . . . . . . . . . .

Current maturities of long-term debt (Notes 8 and 13) . . . . . . . . . . . . . .

Commercial paper . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Accrued income taxes (Note 14) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Accrued expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Other current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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

Long-term liabilities:

Long-term debt (Notes 8 and 13) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Allowance for retirement benefits for directors (Note 4) . . . . . . . . . . . . .

Other non-current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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

Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Shareholders’ equity (Notes 4 and 11):

Common stock

Authorized:

2003 — 39,000,000 shares

2004 — 78,000,000 shares

Issued and outstanding:

2003 — 10,140,122 shares

2004 — 20,833,929 shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Net unrealized gains (losses) on investment securities . . . . . . . . . . . . . .

Total

Less: Treasury stock, at cost

2003 — 698 shares

2004 — 2,307 shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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

Total liabilities and shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . .




¥20,363,635

848,000

5,702,240

10,000,000

3,109,298

1,603,775

3,108,109

44,735,059

38,943,320

143,058

1,214,795

40,301,173

85,036,233

7,134,414

8,449,169

25,807,914

359,837

41,751,336

(13,188)

41,738,148

¥126,774,381

¥16,470,330

6,100,000

4,702,240

—

3,243,742

1,058,195

1,720,786

33,295,294

27,172,560

94,136

616,288

27,882,984

61,178,279

5,949,875

7,265,028

19,148,534

(123,492)

32,239,945

(7,281)

32,232,664

¥93,410,943

$187,769

7,819

52,579

92,208

28,670

14,788

28,659

412,494

359,090

1,319

11,201

371,610

784,105

65,785

77,908

237,970

3,317

384,982

(121)

384,860

$1,168,966


2004 2003 2004

Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Cost of goods sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Selling, general and administrative expenses (Note 15) . . . . . . . . . . . . . . .

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

Other income (expenses):

Interest and dividend income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Stock issuance cost (Note 4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Bond issuance cost (Note 4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Other income, net (Note 12) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .


Income taxes (Notes 4 and 14):

Current . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Deferred . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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

Amount per share of common stock(*): Yen U.S. dollars (Note 2)

Basic earnings (Notes 4 and 17) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Diluted earnings (Notes 4 and 17) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Cash dividends applicable to the year . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

*The per share data has not been restated to reflect the retroactive effects of stock splits.




¥192,839,871

148,542,703

44,297,168

33,686,628

10,610,540

99,291

(352,792)

(7,963)

(69,751)

2,088,921

12,368,246

5,554,010

(32,238)

¥ 6,846,475

¥348.83

308.68

¥ 30.00

¥158,619,115

122,307,605

36,311,510

27,145,874

9,165,635

47,910

(293,661)

(4,363)

(243,905)

1,424,126

10,095,742

5,003,135

(549,091)

¥ 5,641,698

¥557.02

513.89

¥ 15.00

$1,778,145

1,369,688

408,457

310,618

97,838

915

(3,253)

(73)

(643)

19,261

114,045

51,212

(297)

$ 63,130

$3.21

2.84

$0.27

Consolidated Statements of Income Don Quijote Co., Ltd. and SubsidiariesFor the years ended June 30, 2004 and 2003


2004 2003 2004

Common stock:

Balance at beginning of the year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Exercise of stock options (Note 11) . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Conversion of convertible bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Balance at end of the year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Additional paid-in capital:


Exercise of stock options (Note 11) . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Conversion of convertible bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .


Retained earnings:


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

Cash dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Decrease for exclusion of consolidation . . . . . . . . . . . . . . . . . . . . . . . . .


Net realized gains (losses) on investment securities:


Increase . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .


Treasury stock, at cost:


Increase . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .





¥5,949,875

295,840

888,699

7,134,414

7,265,028

295,840

888,300

8,449,169

19,148,534

6,846,475

(152,091)

(35,003)

25,807,914

(123,492)

483,330

359,837

(7,281)

(5,906)

¥ (13,188)

¥5,815,528

29,348

104,997

5,949,875

7,130,677

29,348

105,002

7,265,028

13,658,355

5,641,698

(151,519)

—

19,148,534

(38,532)

(84,960)

(123,492)

(3,743)

(3,538)

¥ (7,281)

$54,862

2,727

8,194

65,785

66,989

2,727

8,190

77,908

176,565

63,130

(1,402)

(322)

237,970

(1,138)

4,456

3,317

(67)

(54)

$ (121)

Consolidated Statements of Stockholders’ Equity Don Quijote Co., Ltd. and SubsidiariesFor the years ended June 30, 2004 and 2003


2004 2003 2004

Cash flows from operating activities:Income before income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Depreciation and amortization, including prepaid expense . . . . . . . . . . . . . . . . . . . . . .Increase (Reversal) for doubtful accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Provision for retirement benefits for directors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Interest and dividend income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Gain from funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Foreign exchange loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Loss on devaluation of investment securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Gain on sale of investment securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Loss on sale of investment securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Gain on sale of affiliated companies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Loss on sale of affiliated companies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Gain on sale of property and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Loss on sale of property and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Loss on disposal of property and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Loss on close of shops . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Offset rent from deposit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Increase in trade receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Increase in inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Increase in other current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Increase in trade payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Decrease (Increase) in other current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Increase in other non-current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Cash generated from operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Received interest and dividend income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Interest paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Income tax paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Net cash provided by operating activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Cash flows from investing activities:Proceeds from time deposit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Payments for purchase of property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Proceeds from sale of property and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Payments for purchase of intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Increase of loan receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Collection of loan receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Payments for leasehold deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Proceeds from termination of leasehold deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Advance payments for fixed leasehold deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Payments for cash surrender value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Proceeds from cash surrender value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Payments for purchase of investment securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Proceeds from sales of investment securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Proceeds from sales of affiliates’ securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Payments for purchase of affiliates’ securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Other—net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Net cash used in investing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Cash flows from financing activities:Borrowing of short-term bank loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Repayment of short-term bank loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Proceeds from issuance of commercial paper . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Payments for redemption of commercial paper . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Borrowing of long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Repayment of long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Proceeds from issuance of bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Payments for redemption of bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Proceeds from issuance of convertible bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Payments for purchase of treasury stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Issuance of common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Payments of cash dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Net cash provided by financing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Effect of exchange rate exchanges on cash and cash equivalents . . . . . . . . . . . . . . . . .Net increase in cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Cash and cash equivalent at beginning of the year . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Decrease in cash and cash equivalents resulting from elimination of consolidation . . .Cash and cash equivalents at end of the year (Notes 4 and 19) . . . . . . . . . . . . . . . . . . .




¥12,368,246 3,274,078

2,423 48,921

(99,291)(264,541)402,082

2,349 —

(244,261)26,237

—7,000

—153,440

7,436 61,765

265,762 (878,673)

(8,257,934)(474,961)

3,893,305 1,947,678

610,336 12,851,402

47,380 (420,438)

(5,680,979)6,797,363

—(18,537,929)

422,825 (464,480)(49,919)10,708

(2,913,742)1,873,072

(3,152,844)(394,908)227,313

(2,142,751)856,141

—(3,000)

(299,825)(24,569,338)

34,400,000 (39,652,000)37,000,000

(27,000,000)3,000,000

(4,852,240)—

(600,000)17,000,000

(5,906)591,680

(152,091)19,729,442

(2,349)1,955,118 7,040,599

(91,725)¥ 8,903,992

¥10,095,742 2,304,317

(2,448)4,508

(47,910)(104,496)333,794

—130,710

—8,745

(61,574)—

(85,193)4,133

81,018 —

189,218 (149,407)

(8,868,035)(183,732)

2,229,606 (403,765)490,487

5,965,719 4,281

(314,439)(3,602,955)2,052,605

20,180 (12,886,607)

3,457,621 (693,792)(870,000)

80,000 (1,923,129)1,001,698 (971,239)(413,252)248,563

(268,900)58,736

159,480 —

(79,969)(13,080,609)

20,100,000 (20,556,000)

——

6,653,320 (3,962,630)10,000,000

(300,000)—

(3,537)58,697

(151,519)11,838,330

—810,326

6,230,273 —

¥ 7,040,599

$114,045 30,189

22 451

(915)(2,439)3,707

21 —

(2,252)241 —64 —

1,414 68

569 2,450

(8,102)(76,145)(4,379)35,899 17,959 5,627

118,500 436

(3,876)(52,383)62,677

—(170,935)

3,898 (4,282)

(460)98

(26,867)17,271

(29,071)(3,641)2,096

(19,757)7,894

—(27)

(2,764)(226,549)

317,196 (365,624)341,171

(248,962)27,662

(44,741)—

(5,532)156,754

(54)5,455

(1,402)181,922

(21)18,027 64,920

(845)$ 82,102

Consolidated Statements of Cash Flows Don Quijote Co., Ltd. and SubsidiariesFor the years ended June 30, 2004 and 2003


1. NATURE OF OPERATIONSDon Quijote Co., Ltd. (the “Company”) and its subsidiaries, PAWCreation, and Donki Johokan (together the “Group”) have three opera-tions: discount store operations; rental business operations for real prop-erty and operations as agent for cellular phone business.

The discount store operations, which mainly comprise 93 discountretail stores, including small discount retail stores, in Japan, principallysell electronic goods, household goods, food, cosmetics, toiletries,sports goods and etc.

PAW Creation rents part of its floor space to tenants for rental busi-ness operations.

Donki Johokan operates as agent for cellular phone subscriptions and

sells cellular phone subscriptions and cellular phone handsets fromFebruary 2004.

2. BASIS OF PRESENTING CONSOLIDATED FINAN-CIAL STATEMENTS

The consolidated financial statements are prepared in accordance withaccounting principles and practices generally accepted in Japan under therequirements of the Japanese Commercial Code and other applicablerules and regulations for domestic purpose and were filed with the localfinance bureau of the Ministry of Finance (MOF) as required by theSecurities and Exchange Law and its related laws. In preparing thesefinancial statements, certain reclassifications and rearrangements have

BUSINESS RISKSDon Quijote Co., Ltd. (the “Company”) has risks in relation to our businessand others as follows:

We make every effort to avoid these risks and dispose of them if thesewere realized after recognizing a possibility of these risks in the future. Thefollowing risks include the future matters, which are described based onour judgment and consideration from management point of view as of thedate of filing the financial reports to MOF, September 28, 2004.

1. Store expansion and human resourcesThe Company’s strategy is to increase revenue by expanding and prof-itably operating a network of stores in Tokyo and other areas in Japan.

To manage its planned store expansion, the Company must ensurethe continuing adequacy of its existing systems, controls and procedures,including distribution facilities, store management, financial controls andinformation systems. Especially the adequate labor resources must beessential. There can be no assurance that the Company will be able toachieve its planned expansion, that new stores will be effectively integrat-ed into the Company’s existing operations or that such stores will beprofitable.

2. Import and distributionThe Company is importing an increasing portion of its merchandise fromsources outside of Japan. As an importer, the Company’s business issubject to the risks generally associated with doing business abroad,such as foreign governmental regulations, economic disruptions, delaysin shipments, freight cost increases and changes in political or economicconditions in countries in which the Company purchases products.

Two distribution centers in Saitama and Osaka are operated on behalf ofthe Company by a third-party contractor. Any significant interruption in theoperation of these facilities, failure by the contractor to properly coordinatethe operations of these facilities successfully or any financial difficulties ofthe contractor would have a material adverse effect on the Company’sbusiness, financial condition and results of operations.

3. MerchandisingThe Company’s success depends in part upon the ability of its merchan-dising staff to anticipate customer trends, particularly those in the 20–30age group, and to provide merchandise that appeals to their preferences.The failure of the Company to anticipate, identify or react appropriately tochanges in consumer trends could lead to, among other things, either ashortage of products or excess inventories and higher markdowns andcould have a material adverse effect on the Company’s business, financialcondition and results of operations.

4. Consumer demand, weather and seasonalitySales at the Company’s stores are subject to consumer demand, weatherand seasonal variations. The peak sales periods for the Company are, forexample, the months of August and December. Consequently, if theCompany fails to realize sufficient sales according to its peak points, this

could have a material adverse effect on the Company’s business, financialcondition and results of operation.

5. Regulatory environmentThe Company is subject to Japanese laws and regulations, the LargeScale Retail Store Location Law, in which it can conduct its business afterJune 2000. The purpose of the law is to give local authorities the powerto regulate the development of large stores with a sales floor space ofmore than 1,000 square meters in order to maintain the living environ-ment in the areas surrounding such stores.

The Company has to take measures with establishing extra walls andlawns around car parks to resolve the problem regarding car park noise.If the local communities have special regulations for the stores with asales floor space of less than 1,000 square meters, in particular, theCompany’s financial performance and expansion plans may be adverselyaffected if stores are forced to reduce their operations.

6. ManagementThe Company’s success may depend on the continued service of a keymanagement figure, Takao Yasuda. Takao Yasuda, the Company’sfounder, president, and major shareholder, plays a key role in directingthe Company’s business operations. The Company gives many opportu-nities to challenge goals to other management and key persons, althoughnot anticipated, the loss of Mr. Yasuda’s services without a suitablereplacement could have a material adverse effect on the Company’s abili-ty to implement its business strategy, and no assurance can be made thatany successor(s) would be able to implement the Company’s businessstrategy successfully.

7. Future capital requirementsThe Company has to secure enough finance through use of various finan-cial instruments (including bonds) for the Company’s further expansionplans. To the extent that such funding is not available to the Company inthe future or is only available at very high cost, the Company’s business,financial condition and results of operations are likely to be adverselyaffected.

8. Accounting payable outsourcingThe Company entrusts daily procedures in relation to the Company’saccounting payables to a third-party contractor. Any significant interrup-tion in the procedures, failure by the contractor to properly coordinate theprocedures successfully or any financial difficulties of the contractorwould have a material adverse effect on the Company’s accounting andpayment process.

9. Security of client dataThe Company takes every care for the security of client data. Any leakingproblems regarding these data would have a material adverse effect onthe Company’s business, financial condition and results of operationswhich connect to legal matters.

Notes to Consolidated Financial StatementsFor the years ended June 30, 2004 and 2003


been made to the original financial statements issued domestically inJapan, for the conveniences of readers outside of Japan. The consolidatedfinancial statements are not intended to present the financial position,results of operations and cash flows in accordance with accounting prin-ciples and practices generally accepted in countries and jurisdictionsother than Japan.

In addition, the accompanying notes include information, which is notrequired under generally accepted accounting principles and practices inJapan, but is presented herein as additional information.

Significant differences between the accounting policies followed by theCompany and International Accounting Standards are described in Note 3.

All yen figures are rounded down to the nearest thousand. Accordingly,individual figures may not total up to the sums attributed to them. TheU.S. dollar amounts presented in the accompanying financial statementsare converted solely for convenience at the rate of ¥108.45 to U.S. $1.00,which was the exchange rate prevailing on June 30, 2004. The conven-ience translations should not be construed as representations that theJapanese yen amounts have been, could have been, or could in the futurebe, converted into U.S. dollars at this or any other rate of exchange.

Certain reclassifications have been made in the 2003 financial state-ments to conform to the presentation for 2004.

3. SIGNIFICANT DIFFERENCES BETWEENACCOUNTING POLICIES FOLLOWED BY THECOMPANY AND DOMESTIC SUBSIDIARIES ANDINTERNATIONAL ACCOUNTING STANDARDS

The accompanying consolidated financial statements are prepared in con-formity with accounting principles generally accepted in Japan.Differences from IAS include the following.

Leases (Note 6)The Company has treated finance leases of the Company, where owner-ship does not transfer to the lessees, as not capitalized in the same wayas operating leases under accounting principles generally accepted inJapan, which differ from IAS No. 17.

SPC accountingAccounting for Consolidation-Special Purpose Entities is not required forthe special case under generally accepted accounting principles and prac-tices in Japan, which differ from Interpretation SIC-12.

Amount of significant effects on the consolidated finan-cial statementsHad IAS applied, the significant effects on the accompanying consolidatedfinancial statements would have been as follows:


(Note 2) (Note 2)

2004 2003 2004

Lease (Note 6):Property and equipment . . . . ¥ 146,869 ¥ 191,814 $ 1,354Current liabilities . . . . . . . . . . 46,147 46,147 425Long-term liabilities . . . . . . . . 104,843 150,990 966 SPC (Notes 6 and 10): Land . . . . . . . . . . . . . . . . . . . . ¥8,278,652 ¥8,278,652 $76,336Buildings . . . . . . . . . . . . . . . . 2,735,978 2,735,978 25,228Structures . . . . . . . . . . . . . . . 62,194 62,194 573Current liabilities . . . . . . . . . . 1,433,735 1,490,268 13,220Long-term liabilities . . . . . . . . 5,246,941 6,624,144 48,381

As a result of future revisions of IAS/IFRS or the other effects, there is apossibility that certain differences may arise for the accounting proce-dures that are not discussed above (such as financial instruments).

4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

ConsolidationIn the accompanying consolidated financial statements, the Companyaccounts for its subsidiaries on a consolidated basis. As of June 30,2004, the Parent has seven subsidiaries, including two consolidated asset out in the following table.

Group interest of capital Activity

PAW Creation 100% Operation of multiple tenant shoppingmalls including leasing of real property

Donki 100% Operation as agent for cellular Johokan(*) phone subscriptions and selling of cellular

phone subscriptions and cellular phonehandsets

(*) At the September 13, 2004, the Board of Directors meeting approved to issue common stock.Number of new stock Common stock 1,800 sharesIssued price ¥50,000 ($461)Total amount for issuing new stock ¥90,000 thousand ($829 thousand)

Cash flow equivalentsIn preparing the cash flow statements for the year ended June 30, 2004and 2003, cash is considered to be “cash and cash equivalents,” whichinclude cash on hand, readily available deposits and highly liquid invest-ments with original maturities not exceeding three months.

Translation of foreign currency accountsAccounts and payables denominated in foreign currencies are translated intoJapanese yen at the foreign currency exchange rates in effect at the respec-tive balance sheet dates. Exchange differences are charged to income.

Use of estimatesThe preparation of financial statements requires management to makeestimates and assumptions that affect the reported amounts of assetsand liabilities and disclosure of contingent assets and liabilities at thedate of the financial statements and revenues and expenses during thereporting period. Actual results could differ from those estimates.

Marketable securities and investment securitiesSecurities available-for-sale are securities other than trading securitiesand securities being held to maturity.

Securities available-for-sale are carried at fair value with correspon-ding unrealized gains (losses) recorded directly in a separate componentof stockholders’ equity. Realized gains and losses, which are determinedby the moving-average cost method, are reflected in the statements ofincome when realized. Securities available-for-sale for which fair value isnot readily determinable are carried at moving average cost or amortizedcost determined by the moving average method.

The Company adopted its method of valuation of investments torecord it at market or fair value.

InventoriesThe Parent adopts the principle that inventories are valued at cost deter-mined by the retail method.

Impairment loss on inventories of ¥879 million ($8,105 thousand)and ¥605 million as of June 30, 2004 and 2003 were recorded in “Cost ofgoods sold” respectively.

The subsidiary, Donki Johokan adopts the principle that inventoriesare valued at cost determined by the average method.

Property and equipmentProperty and equipment are carried at cost. Significant renewals andadditions are capitalized: maintenance and repairs, and minor renewalsand improvements, are charged to income as incurred, interest costsrelating to construction of property and equipment are not capitalized.

Property and equipment are computed principally by the decliningbalance method according to the rules based on the JapaneseCorporation Tax Law.


The useful lives of property and equipment for computing deprecia-tion, which are identical with the useful lives stipulated under theJapanese Corporate Tax regulations, are as shown below:

Years

Buildings and structures . . . . . . . . . . . . . . . . . . . . . 3 to 45Equipment and vehicles . . . . . . . . . . . . . . . . . . . . . 2 to 20

In general, when assets are sold or otherwise disposed of, the profitsor losses thereon, computed on the basis of the difference betweendepreciated costs and proceeds, are credited or charged to income in theyear of sale or disposal, and costs and accumulated depreciation areremoved from the accounts.

Long-lived assets are reviewed for impairment and written down tofair value whenever events or changes in circumstances indicate that thecarrying amount of an asset may not be recoverable and an impairmentloss must be recognized. If the sum of the expected future cash flows isthe less than the carrying amount of the assets, an impairment loss isrecognized based on the fair value.

Intangible assetsIn accordance with the provisional rule of the JICPA’s AccountingCommittee Report No. 12 “Practical Guidance for Accounting forResearch and Development Costs, etc.” (the “Report”), the Companyaccounts for software which was included in intangible assets in thesame manner in 2004 as in 2003 and depreciated it using the straight-linemethod over the estimated useful lives (five years).

Identifiable intangibles are reviewed for impairment and written downto fair value whenever events or changes in circumstances indicate thatthe carrying amount of an asset may not be recoverable and an impair-ment loss must be recognized. If the sum of the expected future cashflows is the less than the carrying amount of the assets, an impairmentloss is recognized based on the fair value.

Impairment of fixed assetsThe Group adopt early the new standard for impairment of fixed assets(“Opinion Concerning Establishment of Accounting Standard forImpairment of Fixed Assets” issued by the Business AccountingDeliberation Council on August 9, 2002) and the implementation guid-ance for the accounting standard for impairment of fixed assets (theFinancial Accounting Standards Implementation Guidance No. 6 issuedby the Accounting Standards Board of Japan on October 31, 2003). Thisstandard also applies to a non-capitalized finance leases. And this changehas no impact on the Income before income tax.

Common stock issuance costsCommon stock issuance costs are directly charged to income asincurred. The Japanese Commercial Code prohibits charging such stockissuance costs to capital accounts.

Bond issuance costsBond issuance costs are directly charged to income as incurred.

Allowance for doubtful accountsThe allowance for doubtful receivables is provided in amounts sufficientto cover possible losses on collection. It is determined by adding theuncollectible amounts individually estimated for doubtful receivables to amaximum amount permitted for tax purpose, which is calculated collec-tively, and by adding the uncollectible amounts individually.

Allowance for retirement benefits for directorsThe Company adopted a retirement benefit plan for directors and statutoryauditors. Directors and statutory auditors are entitled to be paid a lump-sum retirement benefit determined on the basis of rules of the Company.

Revenues recognitionThe Company recognizes revenue as “Net sales” at the time sales aremade to customers.

Income taxesIncome taxes are determined by using the liability method, wheredeferred tax assets and liabilities are recognized for temporary differ-ences between tax basis of assets and liabilities and their reportedamounts in the financial statements.

Treasury stock and reversal of statutory reserveEffective April 1, 2002, the Company adopted the new accounting stan-dard for treasury stock and reversal of statutory reserves (AccountingStandards Board Statement No. 1, “Accounting Standard for TreasuryStock and Reversal of Statutory Reserves”, issued by the AccountingStandards Board of Japan on February 21, 2002).

The effect on net income of the adoption of the new accounting stan-dard was not material.

Leased transactionsFinance leases of the Company where ownership does not transfer to thelessees are not capitalized and are accounted for in the same manner asoperating leases (“non-capitalized finance leases”).

Derivatives financial instrumentsHedge accountingThe Company has adopted hedge accounting for its derivative transactions.Gains or losses on changes in the fair values of the hedging instruments,which consist of swap contracts, are recognized in income when therelating hedged items are reflected in income.Purpose of derivative tradingThe Company enters into derivative transactions related to interest swaptransactions in order to reduce their risk exposure arising from fluctua-tions in these rates, based on internal policies.Assessment for the efficiency of their hedgingThe Company omits to control the risk of the transaction by assessing theefficiency of their hedging.

Costs of start-up activitiesAll costs of start-up activities are expensed as incurred.

DividendsDividends are declared by the Board of Directors and approved by theshareholders at meetings held subsequent to the fiscal year to which thedividends are applicable, and shareholders of record as at the end of suchfiscal year are entitled to the subsequently declared dividends. Dividendscharged to retained earnings represent dividends approved by the share-holders and paid during the respective years. Semi-annual interimdividends may also be paid upon resolution of the Board of Directors,subject to certain limitations imposed by the Japanese Commercial Code.

Bonuses to directors and statutory auditorsBonuses to directors and statutory auditors, which are subject to share-holders’ approval at the annual shareholders’ meeting under the JapaneseCommercial Code, are charged to income as incurred.

The Company changed its method of accounting for bonuses to direc-tors and statutory auditors to charge them to income as incurred (PracticalIssues Task Force No. 13, “Accounting Treatment for Bonuses to Directorsand Corporate Auditors,” issued by the Accounting Standards Board ofJapan on March 9, 2004). The change had no effect on net income for thecurrent year.

Accounting for consumption taxesThe Japanese consumption taxes withheld and consumption taxes paidare not included in the accompanying consolidated statements of income.

Shareholders’ equityThe Japanese Commercial Code requires at least 50% of the issue priceof new shares to be designated as stated capital as determined by resolu-tion of the Board of Directors. Proceeds in excess of amounts designatedas stated capital are credited to additional paid-in capital.


Effective October 1, 2001, the amended Japanese Commercial Codeprovides that an amount of at least 10% of the aggregate amounts ofcash dividends and directors’ and statutory auditors’ bonuses which aremade as an appropriation of retained earnings allocable to each fiscalperiod shall be appropriated and set aside as a legal reserve until suchreserve plus additional paid-in capital equals 25% of stated capital.

The Japanese Commercial Code permits the transfer of the portions ofadditional paid-in capital by the resolution of the Board of Directors. TheJapanese Commercial Code also permits the transfer of portions of inap-propriate retained earnings to stated capital by resolution of shareholders.

Changes in the number of shares issued and outstanding during theyears ended 30 June, 2004 and 2003 are as follows:

Common stock outstanding: 2004 2003

Balance at beginning of year . . . . . . . . . . . 10,140,122 10,101,647Conversion of convertible bonds . . . . . . . . 420,985 24,875Exercise of stock options . . . . . . . . . . . . . . 132,700 13,600Increase of stock splits . . . . . . . . . . . . . . . . 10,140,122 –Balance at end of year . . . . . . . . . . . . . . . . . 20,833,929 10,140,122

The Company purchased its treasury stocks in response to shareholders’requests for purchase of their shares representing less than one unit.

Changes in the number of treasury stocks during the years ended 30June 2004 and 2003 are as follows:

Treasury stock outstanding: 2004 2003

Balance at beginning of year . . . . . . . . . . . . 698 374Increase by the purchase

of treasury stock . . . . . . . . . . . . . . . . . . . . 1,609 324Balance at end of year . . . . . . . . . . . . . . . . . 2,307 698

Per share dataBasic net income per common share is calculated by dividing net incomeby the weighted-average number of shares outstanding during the reportedperiod. The calculation of diluted net income per common share is similarto the calculation of basic net income per share, except that the weighted-average number of shares outstanding includes the additional dilutionfrom potential common stock equivalents such as convertible bonds anddilutive equity securities.

Effective April 1, 2002, the Company adopted the new accountingstandard for earnings per share and related guidance “AccountingStandard for Earnings Per Share” and “Implementation Guidance forAccounting Standard for Earnings Per Share.”

5. INVENTORIESInventories at June 30, 2004, and 2003 were as follows:


(Note 2) (Note 2)

2004 2003 2004

Electronic goods . . . . . . . . . ¥ 8,596,156 ¥ 6,522,856 $ 79,263Merchandises . . . . . . . . . . . 5,591,899 4,267,257 51,562Foods . . . . . . . . . . . . . . . . . 1,719,543 1,165,793 15,855Watches, fashion . . . . . . . . 16,326,059 12,178,206 150,539Sports, leisure goods . . . . . 2,333,469 1,834,435 21,516Others . . . . . . . . . . . . . . . . . 547,035 887,679 5,044Total . . . . . . . . . . . . . . . . . . ¥35,114,163 ¥26,856,229 $323,782

6. LEASE TRANSACTION(1) The Company leases certain equipment under non-

capitalized finance and operating leases. Finance leasesthat do not transfer ownership to lessees are not capi-talized and accounted for the same manner as operatinglease. Certain information for such non-capitalizedfinance and operating lease is as follows:

(a) A summary of assumed amounts of acquisition cost, accumulateddepreciation and net book value on June 30, 2004 and 2003 was asfollows:


(Note 2) (Note 2)

Equipment 2004 2003 2004

Acquisition cost . . . . . . . . . . . ¥228,582 ¥353,954 $2,107 Accumulated depreciation . . . (81,712) (162,139) (753)Net book value . . . . . . . . . . . . ¥146,869 ¥191,814 $1,354

(b) Future minimum lease payments, inclusive of interest, as of June 30,2004 and 2003 were as follows:


(Note 2) (Note 2)

2004 2003 2004

Due within one year . . . . . . . . ¥ 46,147 ¥ 46,147 $ 425Due after one year . . . . . . . . . . 104,843 150,990 966Total . . . . . . . . . . . . . . . . . . . . ¥150,990 ¥197,137 $1,392

(c) Future minimum lease payments under the non-capitalized financeand operating leases on June 30, 2004 and 2003 were as follows:


(Note 2) (Note 2)

2004 2003 2004

Lease payments . . . . . . . . . . . ¥46,147 ¥47,020 $425 Assumed depreciation

charges . . . . . . . . . . . . . . . . 44,944 45,699 414Assumed interest expenses . . 1,768 1,710 16

(d) Assumed depreciation charges are computed using the straight-linemethod over lease terms assuming no residual value.

(e) Assumed interest expenses, which is the difference between totallease payments and assumed acquisition costs of leased property, isallocated each accounting period based on the interest method.

(2) Lease transactions derived from Special PurposeCompany (SPC)

(a) Assumed acquisition cost:Thousands of

Thousands of yen U.S. dollars(Note 2) (Note 2)

2004 2003 2004

Land . . . . . . . . . . . . . . . . . . . . ¥8,278,652 ¥8,278,652 $76,336 Buildings . . . . . . . . . . . . . . . . . 2,735,978 2,735,978 25,228Structures . . . . . . . . . . . . . . . . 62,194 62,194 573

(b) Lease payments:Thousands of


2004 2003 2004

Lease payments . . . . . . . . . . . ¥1,433,735 ¥1,378,189 $13,220

(c) Minimum guarantees for SPC: 75% of the assumed acquisition costto ¥4,572,066 thousand ($42,158 thousand)

(3) Operating leaseFuture minimum lease payments subsequent to on June 30, 2004 and2003 for operating leases were summarized as follows:


(Note 2) (Note 2)

2004 2003 2004

Due within one year . . . . . . . . ¥1,433,735 ¥1,490,268 $13,220Due after one year . . . . . . . . . . 5,246,941 6,624,144 48,381Total . . . . . . . . . . . . . . . . . . . . ¥6,680,677 ¥8,114,412 $61,601


7. MARKETABLE SECURITIES AND INVESTMENTSECURITIES

The Group invests in equity securities and classified its investments inequity securities as available-for-sale.Investment securities consist of equity securities and others carried atfair market value.

(1) Information regarding available-for-sale securities andinvestment securities as of June 30, 2004 and 2003was as follows:

The following table sets forth acquisition cost, fair market value and unre-alized gains (losses) as of June 30, 2004.

Thousands of yen (Note 2)

2004Net unrealized

Acquisition cost Fair market value gains (losses)

Fair market value exceeds acquisition cost:Equity securities . . . . . . . . . . . ¥ 22,928 ¥ 50,236 ¥ 27,308Debt securities . . . . . . . . . . . . – – –Others . . . . . . . . . . . . . . . . . . . 2,209,508 2,850,800 641,291Subtotal . . . . . . . . . . . . . . . . . 2,232,437 2,901,037 668,599Fair market value does not exceed acquisition cost:Equity securities . . . . . . . . . . . 4,030 3,050 (980)Debt securities . . . . . . . . . . . . – – –Others . . . . . . . . . . . . . . . . . . . 583,750 520,900 (62,850)Subtotal . . . . . . . . . . . . . . . . . 587,780 523,950 (63,830)Total . . . . . . . . . . . . . . . . . . . . ¥2,820,217 ¥3,424,987 ¥604,769

The following table sets forth acquisition cost, fair market value and unre-alized gains (losses) as of June 30, 2003.

Thousands of yen (Note 2)

2003Net unrealized


Fair market value exceeds acquisition cost:Equity securities . . . . . . . . . . . ¥ 12,600 ¥ 133,087 ¥ 120,487Debt securities . . . . . . . . . . . . – – –Others . . . . . . . . . . . . . . . . . . . – – –Subtotal . . . . . . . . . . . . . . . . . 12,600 133,087 120,487Fair market value does not exceed acquisition cost:Equity securities(*1) . . . . . . . . . 26,958 23,051 (3,907)Debt securities . . . . . . . . . . . . – – –Others . . . . . . . . . . . . . . . . . . . 1,311,058 981,192 (329,866)Subtotal . . . . . . . . . . . . . . . . . 1,338,017 1,004,243 (333,773)Total . . . . . . . . . . . . . . . . . . . . ¥1,350,617 ¥1,137,331 ¥(213,286)

(*1) Including impairment losses of ¥130,710 thousand ($1,205 thousand) on some equitysecurities.

Thousands of U.S. dollars (Note 2)

2004Net unrealized


Fair market value exceeds acquisition cost:Equity securities . . . . . . . . . . . $ 211 $ 463 $ 251 Debt securities . . . . . . . . . . . . – – –Others . . . . . . . . . . . . . . . . . . . 20,373 26,286 5,913 Subtotal . . . . . . . . . . . . . . . . . 20,584 26,749 6,165Fair market value does not exceed acquisition cost:Equity securities . . . . . . . . . . . 37 28 (9)Debt securities . . . . . . . . . . . . – – –Others . . . . . . . . . . . . . . . . . . . 5,382 4,803 (579)Subtotal . . . . . . . . . . . . . . . . . 5,419 4,831 (588)Total . . . . . . . . . . . . . . . . . . . . $26,004 $31,581 $5,576

(2) Unlisted equity securities as of June 30, 2004 and2003 were as follows:


(Note 2) (Note 2)

2004 2003 2004

Subsidiaries and affiliates . . . ¥ 70,300 ¥4,700 $ 648Unlisted equity securities

(except the equity securities which traded on over-the-counter markets) . . . . . . . . . ¥160,420 ¥167,620 $1,479

The proceeds from sale of investment securities were ¥856,141 thousand($7,894 thousand) and ¥58,736 thousand for the years ended June 30,2004 and 2003 respectively. Gain on sales of available-for-sale securitiescomputed on the moving-average cost basis were ¥244,261 thousand($2,252 thousand) for the year ended June 30, 2004. Loss on sale ofavailable-for-sale securities computed on the moving-average cost basiswere ¥26,237 thousand ($241 thousand) and ¥8,745 thousand for theyears ended June 30, 2004 and 2003 respectively.

8. SHORT-TERM LOANS AND LONG-TERM DEBTShort-term loans are principally comprised of bank loans. The annualaverage of interest rates applicable to such loans was 0.6% as of June30, 2004. And the annual average of interest rates applicable to commer-cial paper was 0.1%.

As is customary in Japan, substantially all loans from banks (includingshort-term loans) are made under general agreements which providethat, at the request of the banks, the borrower is required to providecollateral or guarantors (or additional collateral or guarantors, as appropriate)with respect to such loans, and that all assets pledged as collateral undersuch agreements will be applicable to all present and future indebtednessto the banks concerned.

Long-term debt at June 30, 2004 consisted of the following:Thousands of


Borrowings from banks and insurance companies at interest ranging from 0.860% to 1.950% . . . ¥ 7,942,320 $ 73,234

0.25% unsecured convertible bonds due 2007 (convertible at ¥4,221 ($38) for one common share, redeemable before due date) . . . . . . . . . . . . 5,501,000 50,723

0.00% unsecured convertible bonds due 2011 (convertible at ¥6,750 ($62) for one common share, redeemable before due date)(*) . . . . . . . . . . . 17,000,000 156,754

0.70% unsecured straight bonds due 2007 . . . 3,000,000 27,6620.70% unsecured straight bonds due 2007 . . . 3,000,000 27,6620.77% unsecured straight bonds due 2006 . . . 1,000,000 9,2200.64% unsecured straight bonds due 2007 . . . 500,000 4,610 0.35% unsecured straight bonds due 2007 . . . 1,000,000 9,220Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ¥38,943,320 $359,090

(*) A summary of the exercise rights of the stock acquisition rights (SARs) as of June 30, 2004 isas follows:

Exercise price Total number of Outstanding Number of shares Issued on Exercisable during Yen Dollars SARs to be issued balance of outstanding balance

January February 9, 2004 2,518,51826, 2004 through ¥6,750 $62 3,400 unit 3,400 unit shares

January 11, 2011

Convertible bonds are treated solely as bonds and no value inherent intheir conversion feature is recognized in accordance with accountingprinciples generally accepted in Japan. The total amount of the convert-ible bonds has been included in long-term debt.

Long-term loans are principally comprised of bank loans. The annualaverage of interest rates applicable to such loan was 1.8% as of June 30,2004.


The aggregate annual maturities of the long-term debts subsequent toJune 30, 2004 are as follows:


Fiscal year ending June 30, (Note 2) (Note 2)

2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ¥ 5,702,240 $ 52,5792006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,242,320 48,338 2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,476,000 87,3762008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,225,000 66,6202009 and thereafter . . . . . . . . . . . . . . . . . . . 17,000,000 156,754 Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ¥44,645,560 $411,669

9. FINANCIAL INSTRUMENTSThe Company has entered into interest rate swap contracts to manage itsinterest rate exposures to possible interest rate fluctuation on loanpayable to banks. Derivative transactions entered into by the Companyhave been made in accordance with internal policies, which regulate theauthorization and credit limit amount.

10. USE OF A SPECIAL PURPOSE COMPANY (THE“SPC”) FOR PROPERTY OWNERSHIP

The Company has used a sale and lease back structure to securitize realestate assets pursuant to which an SPC acquires real estate from theCompany and leases it back to the Company. The scheme was used to refi-nance the Shinjuku Higashi-guchi store. This particular SPC structure isrequired to be reviewed after five years and, if it is determined at that timenot to continue with the structure, the real estate will either be repurchasedby the Company or sold by the SPC to a third party. In the latter case,where the market value of the real estate has fallen to less than 75% of theinitial purchase price, the Company is required to pay the shortfall up to75% of the initial purchase price.

In order to obtain financing, in February 2002 the Company used theSPC structure in respect of real estate which it owned in Roppongi districtof Tokyo. Under this scheme, the Company entrusted the real estate to atrustee and received beneficial rights/interests. The trustee leases the realestate to the Company, will receive rent from the Company and will pay div-idends under the trust to the SPC. The term of the trust agreement is 6years and the term of the lease agreement is 15 years. At the end of thetrust agreement, the real estate will either be repurchased by the Company,sold to a third party by tender or assigned by the trustee to the SPC.

In order to obtain financing, in September 2002 the Company usedthe SPC structure in respect of real estate for PAW Kawasaki. TheCompany entrusted the real estate to a trustee and sold beneficialrights/interests to improve the financial structure of the Company byreducing interest-bearing debt.

11. STOCK INCENTIVE PLANThe shareholders of the Company approved a stock incentive plan onSeptember 28, 1999. The options may be exercised during the periodfrom October 2, 2001 until October 1, 2004, and the exercise price was¥13,290 ($122). The terms of options are subject to adjustment if thereare stock splits, consolidation of shares or additional shares issued atprice less than the market price per share. The unexercised and outstand-ing balance of SAR (Stock of Acquisition Rights), as of June 30, 2004,was 23,600 shares.

The shareholders of the Company approved a stock incentive plan onSeptember 26, 2000. The options may be exercised during the periodfrom October 2, 2002 until October 1, 2006, and the exercise price was¥5,974 ($55). The terms of options are subject to adjustment if there arestock splits, consolidation of shares or additional shares issued at priceless than the market price per share. The unexercised and outstandingbalance of SAR, as of June 30, 2004, was 158,300 shares.




The shareholders of the Company approved a stock incentive plan onSeptember 28, 2004. The plan provides for the issuance of up to 500,000shares in the form of options to management and employees. Theoptions may be exercised during the period from October 2, 2006 untilOctober 1, 2016, and the exercise price is almost equal to the fair marketvalue on the date of grant. The terms of options are subject to adjustmentif there are stock splits, consolidation of shares or additional sharesissued at price less than the market price per share.

12. OTHER INCOME, NETOther income, net for the years ended 2004 and 2003 were consisted ofother income and other expense. Other income and other expense wereas follows.


(Note 2) (Note 2)

2004 2003 2004

Other income:Rental fee for computer

system . . . . . . . . . . . . . . . . . ¥1,117,543 ¥1,041,583 $10,304 Gain on sale of investment

securities . . . . . . . . . . . . . . . 244,261 – 2,252Gain on sale of fixed asset . . . – 85,193 –Gain on sale of affiliated

companies . . . . . . . . . . . . . . – 61,574 –Reversal of allowance for

doubtful accounts . . . . . . . . – 2,448 –Other . . . . . . . . . . . . . . . . . . . . 1,062,179 535,446 9,794Other income total . . . . . . . . . 2,423,984 1,726,246 22,351Other expense:Loss on sale of fixed

assets . . . . . . . . . . . . . . . . . . 153,440 4,133 1,414Loss on close of shops . . . . . 61,765 – 569Loss on sale of investment

securities . . . . . . . . . . . . . . . 26,237 8,745 241Loss on disposal of fixed

assets . . . . . . . . . . . . . . . . . . 7,436 81,018 68Loss on devaluation of investment

securities . . . . . . . . . . . . . . . – 130,710 –Other . . . . . . . . . . . . . . . . . . . . 86,182 77,510 794Other expense total . . . . . . . . . 335,062 302,118 3,089Other income, net . . . . . . . . . . ¥2,088,921 ¥1,424,126 $19,261


13. PLEDGED ASSETSThe assets pledged as collateral for the Company’s liabilities at June 30,2004 and 2003 were as follows:


(Note 2) (Note 2)

2004 2003 2004

Land . . . . . . . . . . . . . . . . . . . . ¥2,618,902 ¥3,114,479 $24,148Buildings and structures . . . . . 382,789 410,673 3,529Total . . . . . . . . . . . . . . . . . . . . ¥3,001,692 ¥3,525,152 $27,678

Liabilities related with the assets pledged at June 30, 2004 and 2003were as follows:


(Note 2) (Note 2)

2004 2003 2004

Short-term loans . . . . . . . . . . . ¥ 848,000 ¥1,900,000 $ 7,819Current maturities

of long-term debt . . . . . . . . . 1,418,200 618,200 13,076Long-term debt . . . . . . . . . . . . 1,293,850 1,262,050 11,930Total . . . . . . . . . . . . . . . . . . . . ¥3,560,050 ¥3,780,250 $32,826

14. INCOME TAXThe normal effective statutory tax rate in Japan arising out of the aggre-gation of corporate, enterprise and inhabitants taxes was approximately42.1% for 2004 and 2003. (1) The significant components of deferred tax assets and

liabilities for the years ended June 30, 2004 and 2003were as follows:


(Note 2) (Note 2)

2004 2003 2004

Deferred tax assets (current):Provision for enterprise tax . . . ¥ 272,406 ¥289,721 $ 2,511Allowance for bonus . . . . . . . . 23,639 18,946 217Inventories . . . . . . . . . . . . . . . 482,689 570,382 4,450Others . . . . . . . . . . . . . . . . . . . 154,948 56,867 1,428Subtotal . . . . . . . . . . . . . . . . . . 933,683 935,917 8,609Deferred tax assets (non-current) Accrued retirement benefits

for directors . . . . . . . . . . . . . 57,938 38,125 534Depreciation . . . . . . . . . . . . . . 141,694 124,632 1,306Valuation loss of investment

securities . . . . . . . . . . . . . . . 310,294 310,294 2,861Net unrealized losses (gains)

on investment securities . . . (244,931) 89,793 (2,258)Others . . . . . . . . . . . . . . . . . . . 79,591 81,994 733Subtotal . . . . . . . . . . . . . . . . . . 344,588 644,840 3,177 Total . . . . . . . . . . . . . . . . . . . . ¥1,278,271 ¥1,580,758 $11,786

(2) A reconciliation of the difference between the statutorytax rate and the effective income tax rate reflected inthe accompanying statements of operation for theyears ended June 30, 2004 and 2003 was as follows:

2004 2003

Statutory tax rate . . . . . . . . . . . . . . . . . . . 42.1% 42.1%Permanent difference . . . . . . . . . . . . . . . 0.1% 0.2%Flat tax of inhabitant tax . . . . . . . . . . . . . . 1.8% 1.6%Effect of change in effective statutory

tax rates . . . . . . . . . . . . . . . . . . . . . . . . 0.4% 0.2%Others . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.2% –Effective income tax rate . . . . . . . . . . . . . 44.6% 44.1%

15. SELLING, GENERAL AND ADMINISTRATIVEEXPENSES

Major elements of selling, general and administrative expense for 2004and 2003 were summarized as follows:


(Note 2) (Note 2)

2004 2003 2004

Employees’ compensation and benefit . . . . . . . . . . . . . .¥12,471,347 ¥ 9,860,083 $114,996

Occupancy and rental . . . . . . . 5,155,591 4,202,881 47,538Commission . . . . . . . . . . . . . . 3,536,723 3,148,861 32,611Depreciation . . . . . . . . . . . . . . 3,045,240 2,247,977 28,079Provision for retirement

benefits for directors . . . . . . 48,921 4,508 451Other . . . . . . . . . . . . . . . . . . . . 9,428,803 7,681,562 86,941Total . . . . . . . . . . . . . . . . . . . .¥33,686,628 ¥27,145,874 $310,618

16. RELATED PARTY TRANSACTIONSRelated party transactions for the years ended June 30, 2004 and 2003were as follows:


(Note 2) (Note 2)

Description of theRelated party Category Transaction 2004 2003 2004

¥3,600 ¥3,600 $33

(*1) The contract for rental real estate was signed on November 1, 2000.(*2) CEO of the Company, Mr. Takao Yasuda, essentially holds the 100% of voting stocks.

17. EARNINGS PER SHAREEffective April 1, 2002, the Company adopted the new rule of “Earningsper share.”

The following table sets forth the computation of basic and dilutedearnings per share showing the reconciliation of the numerators anddenominators used for the computation.


(Note 2) (Note 2)

2004 2003 2004

Net income . . . . . . . . . . . . . . . ¥6,846,475 ¥5,641,698 $63,130Effective of dilutive securities:0.25% convertible bonds

due 2007 . . . . . . . . . . . . . . . 8,939 10,493 82Diluted net income . . . . . . . . . ¥6,855,414 ¥5,652,192 $63,212

2004 2003

Weighted average number of shares . . . . . . . . . . . . . . . . . 19,627,102 10,128,300

Effective of dilutive securities:Stock options . . . . . . . . . . . . . 60,739 4,2730.25% convertible bonds due

2007 . . . . . . . . . . . . . . . . . . 1,537,221 866,2750.00% convertible bonds due

2011 . . . . . . . . . . . . . . . . . . 984,011 –Diluted weighted average

number of shares . . . . . . . . 22,209,073 10,998,848

Anryu Shoji LTD. (*2)

Company inwhich thedirector ownsthe majorityvotes

Rental realestate (*1)

Brokerage fee


Effective April 1, 2002, the Company adopted the new accounting standardfor earnings per share and related guidance (Accounting Standards BoardStatement No. 2, “Accounting Standard for Earnings Per Share” andFinancial Standards Implementation Guidance No. 4, “ImplementationGuidance for Accounting Standard for Earnings Per Share,” issued by theAccounting Standards Board of Japan on September 25, 2002). As ofJune 30, 2004 and 2003, options issued in connection with the introduc-tion of stock option plans that could potentially diluted earnings per sharewere not included in the composition of dilute earnings per sharebecause of its antidilutive effect for the period.

U.S. dollarsYen (Note 2)

2004 2003* 2004

Shareholders’ equity per share . . . . . . . . . . . . . . . ¥2,003.60 ¥1,589.47 $18.47

Basic earnings per share . . . . 348.83 278.51 3.21 Diluted earnings per share . . . ¥308.68 ¥256.94 $ 2.84 *The Company made a 2-for-1 stock split of common stock on August 20, 2003. Earnings per

share information has been restated to reflect the retroactive effect of the stock split at thebeginning of the year ended June 30, 2003.

18. SUPPLEMENTARY PROFIT AND LOSS INFORMATION

Rental fee for computer systemRental fees for computer system are charged to suppliers for marketinginformation about inventories.

Items included in “Gain on sales of fixed assets” are as follows:Thousands of


2004 2003 2004

Buildings . . . . . . . . . . . . . . . . – ¥69,689 –Structures . . . . . . . . . . . . . . . – 6,048 –Equipment . . . . . . . . . . . . . . . – 9,455 –Total . . . . . . . . . . . . . . . . . . . . – ¥85,193 –

Items included in “Loss on sales of fixed assets” are as follows:Thousands of


2004 2003 2004

Structures . . . . . . . . . . . . . . . ¥ 2,174 – $ 20 Vehicles . . . . . . . . . . . . . . . . . 31 – 0Equipment . . . . . . . . . . . . . . . – 629 –Land . . . . . . . . . . . . . . . . . . . . 151,234 3,504 1,394Total . . . . . . . . . . . . . . . . . . . . ¥153,440 ¥4,133 $1,414

Items included in “Loss on disposal of fixed assets” areas follows:


(Note 2) (Note 2)

2004 2003 2004

Buildings . . . . . . . . . . . . . . . . ¥7,436 – $68Equipment . . . . . . . . . . . . . . . – 81,018 –Total . . . . . . . . . . . . . . . . . . . . ¥7,436 ¥81,018 $68

Major items included in “Loss on close of shops” are as follows:Thousands of


2004 2003 2004

Buildings . . . . . . . . . . . . . . . . ¥24,755 – $228Structures . . . . . . . . . . . . . . . 4,092 – 37Equipment . . . . . . . . . . . . . . . 1,838 – 16Others . . . . . . . . . . . . . . . . . . . 31,080 – 286Total . . . . . . . . . . . . . . . . . . . . ¥61,765 – $569

19. CASH FLOW INFORMATIONCash flow information as of June 30, 2004 and 2003 was summarized asfollows:


(Note 2) (Note 2)

2004 2003 2004

Cash and time deposits . . . . . ¥8,903,992 ¥7,040,599 $82,102 Time deposits excess

three months . . . . . . . . . . . . – – –Cash and cash equivalents . . . ¥8,903,992 ¥7,040,599 $82,102

20. SUBSEQUENT EVENTS(1) Appropriation of retained earningsAppropriation of retained earnings under the Commercial Code of Japan,a plan for appropriation of retained earnings proposed by the Board ofDirectors, must be approved at a shareholders’ meeting to be held withinthree months after the end of the fiscal year. The appropriation ofretained earnings for the year ended June 30, 2004 was approved by theshareholders’ meeting held on September 28, 2004 as follows:


(Note 2) (Note 2)

Cash dividends (¥30.0 ($0.27) per share) . . . ¥624,948 $5,762

The stock incentive plan provides for the issuance of up to 500,000shares in the form of options to management and employees. Theoptions may be exercised during the period from October 2, 2006 untilOctober 1, 2016, and the exercise price was almost equal to the fair mar-ket value on the date of grant.

(2) Issuing new stocks of the Donki Johokan

Group interest of capital Activity

Donki 100% Operation as agent for cellular Johokan(*) phone subscriptions and sell cellular

phone subscriptions and sell cellularphone handsets.

(*) As of September 13, 2004, the Board of Directors meeting approved to issue common stock.Number of new stock Common stock 1,800 sharesIssued price ¥50,000 ($461)Total amount for issuing new stock ¥90,000 thousand ($829 thousand)Investor Hikari Tsushin, Inc.

21. SEGMENT INFORMATIONOperating segment informationThe Group is engaged in discount store operations, rental business opera-tions for real property and operation as agent for cellular phone business.

Such segment information, however, has not been presented, as thepercentages of other activities are not material to the discount storebusiness.

Geographic segment informationSince most of the Group business activities are conducted in Japan, geo-graphic segment information is not presented.

Sales outside JapanThe Group has no sales outside Japan.


Investor Information

COMPANY NAMEDon Quijote Co., Ltd.

SCOPE OF BUSINESSOperation of discount stores, which sell home appliances, dailysundries, foods, watches, fashion merchandise, sporting goods,leisure equipment and other products

HEAD OFFICE4-14-1, Kitakasai, Edogawa-ku, Tokyo 134-0081, JapanTel: +81-3-5667-7511Fax: +81-3-5667-7522

DATE OF ESTABLISHMENTSeptember 5, 1980

PAID-IN CAPITAL¥7,134,414 thousand

NUMBER OF EMPLOYEES1,449

NUMBER OF STORES93

Board of Directors (as of September 28, 2004)

President and representative directorTakao Yasuda

DirectorsMitsuo TakahashiJunji NarusawaKouji OharaSatoshi UedaKiyoshi KubotaSumio InamuraKoji Fusa

Standing statutory auditorIsao Matsuura

Statutory auditorsMutsuo TakahashiHitoshi EharaMasaru Ueno

TOKYO METROPOLITAN AREAFuchu store 2-6-3, Midori-cho, Fuchu

Shinjuku store 1-12-6, Okubo, Shinjuku-ku

Kasai store 4-14-1, Kitakasai, Edogawa-ku

Kanpachi Setagaya store 3-39, Hachimanyama, Setagaya-ku

Kannana Umejima store 5-5-14, Chuohoncho, Adachi-ku

Keihin Kamata store 3-29, Nakarokugo, Ota-ku

Keio Horinouchi store 34-11, Matsugi, Hachioji

Tohachi Mitaka store 1-24, Nozaki, Mitaka

Koganei Koen store 5-3-12, Shin-machi, Nishitokyo

Shibuya store 2-25-8, Dogenzaka, Shibuya-ku

Mejirodai store 586-22, Kunugida-machi, Hachioji

Kannana Honancho store 1-28-3, Honan, Suginami-ku

Shinjuku Higashi-guchi store 1-16-5, Kabuki-cho, Shinjuku-ku

Kodaira store 1-5-23, Ogawahigashi-cho, Kodaira

Roppongi store 3-14-10, Roppongi, Minato-ku

Aoto store 3-1-1, Aoto, Katsushika-ku

Machida-ekimae store 4-2-3, Haramachida, Machida

BIG FUN Heiwajima store 1-1-1, Heiwajima, Ota-ku

Nakano-ekimae store 5-68-5, Nakano, Nakano-ku

Kameido store 1-40-2, Kameido, Koto-ku

Nerima store 2-19-1, Nishiki, Nerima-ku

Ginza Honkan store Ginza Nine No. 3, 8-10, Ginza, Chuo-ku

Ginza Brand-kan store 1-4-5, Shinbashi, Minato-ku

Takenotsuka store 6-11-10, Takenotsuka, Adachi-ku

PAW Kitaikebukuro store 2-7-5, Ikebukuro-honcho, Toshima-ku

Picasso Shinkoiwa store 1-30-2, Shinkoiwa, Katsushika-ku

Picasso Kokubunji store 2-2-8, Hon-cho, Kokubunji

Picasso Ikebukuro Higashi-guchi store 1-2-9, Higashiikebukuro, Toshima-ku

Picasso Sangenjaya store 2-12-12, Sangenjaya, Setagaya-ku

KANAGAWA PREFECTURETomei Kawasaki store 1645, Maginu, Miyamae-ku, Kawasaki

Shin-Yokohama store 7-9-25, Kikuna, Kohoku-ku, Yokohama

Minato Yamashita store 1-2-8, Shinyamashita, Naka-ku, Yokohama

Tomei Sagamihara store 9-47-30, Kamitsurumahonmachi Sagamihara

Yokosuka store 1-22-7, Otsu-cho, Yokosuka

Tomei Yokohama Inter store 5-1-8, Kirigaoka, Midori-ku, Yokohama

Totsuka Harajuku store 4-5-11, Harajuku, Totsuka-ku, Yokohama

Atsugi store 2-8-12, Tsumadaminami, Atsugi

PAW Kawasaki store 1-44-1, Shinmei-cho, Saiwai-ku, Kawasaki

PAW Hiratsuka store 2-7-31, Tamura, Hiratsuka

Picasso Isezakicho store 1-5, Akebono-cho, Naka-ku, Yokohama

Picasso Tsurumi-ekimae 7-12, Toyooka-cho, Tsurumi-ku,store Yokohama

Corporate Data (as of June 30, 2004) Store Network (as of June 30, 2004)


Store Network (as of June 30, 2004)

SAITAMA PREFECTUREOmiya store 2-685, Higashionari-cho, Kita-ku, Saitama

Wako store 3-11-85, Shirako, Wako

Urawa Kagetsu store 260-1, Aza-Fudoya, Oaza-Nakao, Midori-ku, Saitama

Omiya Owada store 1-219-6, Owada-cho, Minuma-ku, Saitama

Kawaguchi Araijuku store 81-1, Minamihara, Nishiaraijuku, Kawaguchi

Warabi store 1-11-11, Nishiki-cho, Warabi

Niiza Nobidome store 4-1-77, Nobidome, Niiza

Picasso Ageo store 1-7-23, Naka-cho, Ageo

CHIBA PREFECTUREKisarazu store 2-2-1, Jozai, Kisarazu

Makuhari store 1-7782-1, Makuhari-cho, Hanamigawa-ku, Chiba

Ichihara store 893, Murata-cho, Chuo-ku, Chiba

Baraki Nishifunabashi store 474-1, Hongo-cho, Funabashi

Chiba Chuo store 3-10-6, Yuko, Chuo-ku, Chiba

PAW Kashiwa store 3-3-2, Tomisato, Kashiwa

Picasso Motoyawata store 4-7-2, Minamiyawata, Ichikawa

Picasso Funabashikeibajo store 9-1-1, Miyamoto, Funabashi

HOKKAIDOTeine store 11-7-10, Maeda gojo, Teine-ku, Sapporo

Hiraoka store 1-1-35, Hiraoka yojo, Kiyota-ku, Sapporo

Sapporo store 3-6, Minami nijo nishi, Chuo-ku, Sapporo

Asahikawa store 4-1-3, Nagayama sanjo, Asahikawa

Atsubetsu store 2-9-1, Atsubetsu-nishiyonjo, Atsubetsu-ku, Sapporo

IBARAKI PREFECTUREPAW Tsuchiurakita store 3993, Higashiwakamatsu-cho, Tsuchiura

TOCHIGI PREFECTUREUtsunomiya store 1590-6, Azaicchoda, Yanaze-cho,

Utsunomiya

GUNMA PREFECTUREPAW Takasaki store 2-4-17, Tonyamachi-nishi, Takagasaki

PAW Isesaki store 73-3, Kamiizumi-cho, Isesaki

NIIGATA PREFECTURENiigata-ekinan store 1-1-1, Minamisasaguchi, Niigata

YAMANASHI PREFECTUREPAW Isawa store 1745, Yokkaichiba, Isawa-cho,

Higashiyatsushiro-gun

SHIZUOKA PREFECTUREPAW SBS-dori store 2-1-11, Fujimidai, Shizuoka

AICHI PREFECTUREPAW Nakagawasanno store 4-5-5, Sanno, Nakagawa-ku, Nagoya

Rakuichigaido Nagoya store 45-1, Aza-Shinmei, Oaza-Nakanogo Nishiharu-machi, Nishikasugai-gun

OSAKA PREFECTUREMinoh store 4-1-30, Makiochi, Minoh

Hirakata store 2-30-10, Ikenomiya, Hirakata

Sayama store 2-950-2, Higashikuminoki, Osakasayama

Uchikan Fukae store 1-13, Fukaekita Higashinari-ku, Osaka

Habikino store 68-2, Kashiyama, Habikino

Juso store 1-6-1, Jusohommachi, Yodogawa-ku, Osaka

Izumi store 65, Tomiaki-cho, Izumi

Yao store 2-11, Minami Uematsu-cho, Yao

PAW Suminoe Koen store 1-1-2, Shinkitajima, Suminoe-ku, Osaka

PAW Uehonmachi store 1-24, Uenomiya-cho, Tennoji-ku, Osaka

PAW Ishikiri store 7-3-46, Nishiishikiri-cho, Higashiosaka

Picasso Namba store 3-8-22, Namba, Chuo-ku, Osaka

KYOTO PREFECTUREKyoto-minami Inter store 1-2, Kamitobakitahanana-cho, Minami-ku,

Kyoto

HYOGO PREFECTUREItami store 7-62-1, Ojika, Itami

Himeji-minami store 2-51, Kamae, Shikama-ku, Himeji

Sannomiya store 2-12-3, Shimoyamatedori, Chuo-ku, Kobe

Paw Nishinomiya store 1-13, Rokutanji-cho, Nishinomiya

FUKUOKA PREFECTURERakuichigaido Hakozaki

store 5-1-8, Hakozaki, Higashi-ku, Fukuoka

Nishijin store 3-4-2, Nishijin, Sawara-ku, Fukuoka

Rakuichirakuza Kurume store 2-2-1, Higashiaikawa, Kurume

KUMAMOTO PREFECTUREPAW Kamikumamoto store 3-3-20, Kamikumamoto, Kumamoto

OITA PREFECTURED•Plaza Oita store 1137, Oaza-Seike, Oita

*The Suginami store was closed on August 24, 2003.

Customer Care

Contents

Dear Fellow Shareholders . . . 2

Employee Empowerment . . . . 6

Store Network Building . . . . 8

Customer Care . . . . . . . . . . . 12

Financial Section . . . . . . . . . 14

Corporate Data . . . . . . . . . . 33

Share Information . . . . . . . . 35

Late-night operation to serve diversifying

lifestyles, a combined display concept and

merchandise mix that provides amusement

through excitement and discovery, a string of

new services that answer customer

requests—creative innovation based on

pursuit of the customer-first principle

distinguishes Don Quijote among

full-line discount store operators.

Perfecting this model will be

the key to the Company's

overwhelming power.

How to accelerate corporate growth with sensibleand efficient store network expansion? Don Quijote’sanswer is three store formats to tailor stores to theneeds of individual locations and a 20-store-per-yearexpansion pace. The deep, accumulatedexpertise on store openings, basedon our area-saturation strategy,gives valuable strength to aflexible and promptstore-opening programthat seeks out andmakes best use offavorable locations.

Store OpeningReaping benefits of scale brought

about by area saturation andnationwide store expansion


Store FormatsFlexibly responding to trade

area characteristics with threestore formats: Don Quijote, PAW

and Picasso





Don Quijote’s Principle:

The Customer Comes First

The Mechanism for High-Speed Yet Stable StoreNetwork Expansion


SHARES OF COMMON STOCKAuthorized: 78,000,000Issued: 20,833,929Treasury stock: 2,307

NUMBER OF SHAREHOLDERS4,338

PRINCIPAL SHAREHOLDERS Percentage of Number of total shares in issue

shares held (%)

Takao Yasuda . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,244,000 15.6

La Mancha . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,000,000 14.4The Master Trust Bank of Japan, Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,559,700 7.5Japan Trustee Services Bank, Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,461,900 7.0UBS AG Hong Kong . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 854,000 4.1Lehman Brothers International (Europe) . . . . . . . . . . . . . . . . . . . . . . . . . 583,200 2.8Nomura Securities Co., Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 575,200 2.8

The Chase Manhattan Bank, N.A. London . . . . . . . . . . . . . . . . . . . . . . . . . 452,600 2.2Anryu Shoji Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 430,000 2.1

Morgan Stanley & Company, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 360,000 1.7

SHARE OWNERSHIP BY CATEGORY Percentage of Number of Number of total shares in issue

shareholders shares held (%)

Financial Institutions . . . . . . . . . . . . . . . . . . . . . . . . . . 59 4,685,674 22.5

Securities Companies . . . . . . . . . . . . . . . . . . . . . . . . . 20 901,879 4.3

Other Japanese Corporations . . . . . . . . . . . . . . . . . . . 84 516,300 2.5

Foreign Corporations and Individuals . . . . . . . . . . . . . 189 10,106,168 48.5

Japanese Individuals and Others . . . . . . . . . . . . . . . . . 3,986 4,623,908 22.2

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,338 20,833,929 100.0

TRANSFER AGENTThe Mitsubishi Trust & Banking Corporation1-4-5, Marunouchi, Chiyoda-ku, Tokyo 100-8212, Japan*The transfer agent was changed to the above company from The Chuo Mitsui Trust & Banking Co., Ltd. on September 26, 2003.

STOCK LISTINGSTokyo Stock Exchange, First Section

Share Information (as of June 30, 2004)

The Mechanism for Acquiring LoyalCustomers through Rigorous Pursuit of the Customer-First Principle Along with providing a unique product selection and a display method that offers astonishmentand discovery, Don Quijote addresses an emotional element in the shopping experience withheartfelt services. This determination led to “Customer Care Specialists”—staff assignedspecifically to customer care, including former employees of luxury-class hotels—and to newservices that enhance shopping convenience in our stores.

Don Quijote Co., Ltd.ANNUAL REPORT 2004

Printed in Japan

Don Quijote Co., Ltd.Head Office Address: 4-14-1, Kitakasai, Edogawa-ku,Tokyo 134-0081, JapanTel:+81-3-5667-7511Fax:+81-3-5667-7522URL http://www.donki.com

Annual Report 2004Don Quijote Co., Ltd.

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